Professional Documents
Culture Documents
PREWEEK MATERIALS
1. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on
January 31 for the oil sold between the previous June 1 and November 30, and on July
31 for oil sold between the previous December 1 and May 31. Production reports show
the following oil sales:
a. $140,000 c. $149,000
b. $144,000 d. $159,000
Explanation:
Choice "c" is correct. Royalty revenue accrued for 1994 is based on 20% of production in
1994.
Research and development services performed by Key Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes and models 200,000
Testing in search for new products or process alternatives 175,000
In its 1993 income statement, what should Orr report as research and development
expense?
a. $150,000 c. $350,000
b. $200,000 d. $525,000
Explanation:
Choice "d" is correct. R&D contracted out to a third party, preproduction prototypes and
models costs, and, costs for searching for new products or new process alternatives are
reported as R&D expense.
3. Frame Co. has an 8% note receivable dated June 30, 1991, in the original amount of
$150,000. Payments of $50,000 in principal plus accrued interest are due annually on
July 1, 1992, 1993, and 1994. In its June 30, 1993, balance sheet, what amount should
Frame report as a current asset for interest on the note receivable?
a. $0 c. $8,000
b. $4,000 d. $12,000
Explanation:
Choice "c" is correct. The current asset for interest receivable on June 30, 1993, is the
interest to be received within one year. Interest to be received on July 1, 1993 is: $100,000
balance of note × 8% = $8,000.
4. Dunne Co. sells equipment service contracts that cover a two-year period. The sales
price of each contract is $600. Dunne's past experience is that, of the total dollars spent
for repairs on service contracts, 40% is incurred evenly during the first contract year
and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly
throughout 1992. In its December 31, 1992, balance sheet, what amount should Dunne
report as deferred service contract revenue?
a. $540,000 c. $360,000
b. $480,000 d. $300,000
Explanation:
Choice "b" is correct. When service contracts are sold, the entire proceeds are reported as
deferred revenue. Revenue is recognized, and deferral reduced as the service is performed.
Since repairs are made evenly (July 1 is average date), only ½ of the 40% of repairs will be
in 1992.
5. Class Corp. maintains its accounting records on the cash basis but restates its financial
statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax
income for 1992. The following information pertains to Class's operations for the years
ended December 31, 1992 and 1991:
1992 1991
Accounts receivable $40,000 $20,000
Accounts payable 15,000 30,000
Under the accrual method, what amount of income before taxes should Class report in its
December 31, 1992, income statement?
a. $25,000 c. $65,000
b. $55,000 d. $95,000
Explanation:
Choice "d" is correct. $95,000 accrual income before taxes in the December 31, 1992,
income statement.
• No salary accrual was made for December 30-31, 1992. Salaries for the two-day period
totaled $3,500.
• 1992 officers' bonuses of $62,500 were paid on January 31, 1993.
In its 1992 income statement, what amount should Dana report as officers' compensation
expense?
a. $290,000 c. $227,500
b. $286,500 d. $224,000
Explanation:
Choice "a" is correct. $290,000 compensation expense for 1992.
Compensation Expense:
7. Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax
return for the year ended November 30, 1990. Additional information is as follows:
Under the accrual basis, Marr should report rental revenue of:
a. $1,920,000 c. $2,440,000
b. $1,980,000 d. $2,500,000
Explanation:
Choice "d" is correct. $2,500,000 rental revenue under the accrual basis.
8. At December 31, 1988, a $1,200,000 note payable was included in Cobb Corp.'s liability
account balances. The note is dated October 1, 1988, bears interest at 15%, and is
payable in three equal annual payments of $400,000. The first interest and principal
payment was made on October 1, 1989. In its December 31, 1989 balance sheet, what
amount should Cobb report as accrued interest payable for this note?
a. $135,000 c. $45,000
b. $90,000 d. $30,000
Explanation:
Choice "d" is correct. $30,000 accrued interest payable at Dec. 31, 1989.
Note Payable:
In its income statement for the year ended December 31, 1992, what amount of gross profit
should Haft report?
a. $450,000 c. $262,500
b. $300,000 d. $150,000
Explanation:
Choice "d" is correct. The gross profit for the percentage-of-completion method is as
follows:
Contract price $3,000,000
Cost to date 1,800,000
Est. cost to complete 600,000
Total cost 2,400,000
Expected gross profit 600,000
Percentage complete (18/24) 75%
Profit to date 450,000
Profit previously recognized (300,000)
1992 profit $ 150,000
10. During 1988, Mitchell Corp. started a construction job with a total contract price of
$600,000. The job was completed on December 15, 1989. Additional data are as
follows:
1988 1989
Actual costs incurred $225,000 $255,000
Estimated remaining costs 225,000 -
Billed to customer 240,000 360,000
Received from customer 200,000 400,000
Under the completed contract method, what amount should Mitchell recognize as gross
profit for 1989?
a. $45,000 c. $80,000
b. $72,000 d. $120,000
Explanation:
Choice "d" is correct. $120,000 gross profit recognized for 1989 under the completed
contract method.
1. For a given year, beginning and ending total liabilities were $8,400 and $10,000,
respectively. At year-end, owners' equity was $26,000 and total assets were $2,000
larger than at the beginning of the year. If new capital stock issued exceeded dividends
by $2,400, net income (loss) for the year was apparently:
a. ($2,800). c. $400.
b. ($2,000). d. $2,800.
ANS: B
2. The following balances have been excerpted from Edwards' balance sheets:
a. $28,000. c. $43,000.
b. $40,000. d. $55,000.
ANS: C PTS: 1
3. HYSTG Company has sustained heavy losses over a period of time and conditions
warrant that HYSTG undergo quasi-reorganization on December 31, 2011.
Inventory with cost of P 6,500,000 was recorded on December 31, 20122 at its
market value of P 6,000,000.
Property, plant and equipment were recorded on December 31, 2011 at P
12,000,000 net of accumulated depreciation. The sound value was P 8,000,000.
On December 31, 2011, the share capital is P 7,000,000 consisting of 700,000
shares with par value of P 10, the share premium is P 1,600,000, and the deficit in
retained earnings is P 900,000.
The par value of the share is to be reduces from P 10 to P5.
a. P 3,300,000 c. P 3,900,000
b. P 3,500,000 d. P 3,700,000
Explanation: Answer D
The inventory is not adjusted anymore because it is already recorded at its market value.
After adjustment, the resulting balances are:
4. On January 1, 2011, PAASA.COM Company classified as held for sale a noncurrent asset
with a carrying amount of P 5,000,000. On this date, the asset is expected to be sold
for P 4,600,000. Reasonable disposal cost to be incurred on sale is expected at P
200,000. By December 31, 2011, the asset had not been sold and management after
considering its options decided to place back the noncurrent asset into operations. On
that date, the entity estimated that the noncurrent asset is expected to be sold at P
4,300,000 with disposal cost of P 50,000. The carrying amount of the noncurrent asset
is P 4,000,000 on December 31, 2011 if the noncurrent asset is not classified as held for
sale.
What is the carrying amount of the asset that should be reported in the Statement of
Financial Position on December 31, 2011?
a. P 5,000,000 c. P 4,400,000
b. P 4,000,000 d. P 4,250,000
Explanation: Answer B
Under PFRS 5, paragraph 27, an entity shall measure a noncurrent asset that ceases to be
classified as held for sale at the lower of the carrying amount on the basis that the asset
had never been classified as held for sale, and its recoverable amount on the date of
decision not to sell.
5. On January 1, 2009, the capital of console company was P1 700 000 and on December
31, 2009, the capital was P2 400 000. During the current year, console withdrew
merchandise costing P100 000 and with sales value of P180 000, and paid a P1 000 000
note payable of the business with interest of 12% for six months with check drawn on
personal checking account. What was the net income or lose on 2009?
Explanation: Answer B
Explanation: ANSWER A
7. Presented below are changes in the accounts of Java Company for the current year.
Increase
(Decrease)
Cash 1 500 000
Accounts receivable (net) 3 500 000
Inventory 3 900 000
Equipment (1 000 000)
Accounts payable (800 000)
Bonds payable 2 000 000
During the year, java sold P100 000 shares with P20 par value for P30 per share and
received cash in full. Dividend of P4 500 000was paid in cash during the year. Java
borrowed P4 000 000 from the bank and maid interest payment of P600 000. Java had no
other loan payable. Interest of P400 000 was payable at December 31. Interest payable at
January 1 was P100 000. Equipment of P2 000 000 was donated by a shareholder during
the year. What was the net income for the current year?
a.9 200 000 c.4 900 000
b.4 800 000 d.4 300 000
Explanation: ANSWER C
Effect on equity
Increase in cash 1 500 000
Increase in A/R 3 500 000
Increase in inventory 3 900 000
Decrease in investment (1 000 000)
Increase in equipment 3 000 000
Decrease in A/P 800 000
Increase in bonds payable (2 000 000)
Increase in bank loan payable (4 000 000)
Increase in accrued interest payable (300 000)
Net increase in equity 5 400 000
Add: dividend paid 4 500 000
Less: increase in share capital (3 000 000)
Increase in donated capital (2 000 000)
Net income 4 900 000
8. Oakwood Company provided the following data for the current year:
a. 1,200,000 c. 1,400,000
b. 1,600,000 d. 1,700,000
Explanation: ANSWER A
9. Charade Company uses the direct method to prepare its statement of flows. Charade
has the following cash flow during 2011:
a. (40,000) c. 80,000
b. 60,000 d. 120,000
Explanation: ANSWER D
Total 460,000
Less: cash payment for:
Wages and other operating expenses 240,000
Insurance 20,000
Taxes 80,000
340,000
Net cash provided by operating activities P120,000
10. Pale Company uses the direct method to prepare its statement of cash flow.
a. 1,530,000 c. 1,880,000
b. 1,670,000 d. 1,950,000
Explanation: ANSWER C
11. 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?
Explanation: ANSWER C
12. Mix Company, a toy retailer sells toy for P 100. A voucher entitling the bearer to a
discount of P50 on a subsequent purchase of the same type of toy is issued with each
sale. The retailer has a historical experience that for every two vouchers issued, one is
redeemed. Mix Company has sold 1, 000 toys and has 1, 000 vouchers as of December
31, 2014. Using the residual method of allocating the proceeds, what of amount revenue
from sale of toys should Mix Company report in its December 31, 2014 profit or loss?
Explanation: ANSWER C
Residual Method:
Total Proceed (1,000x100) P 100, 000
Less: Fair Value of Vouchers (1,000x1/2x50) 25, 000
Fair Value of toys P 75, 000
13. The accounts and balances shown below were gathered from Paynter Corporation's trial
balance on December 31, 2007. All adjusting entries have been made.
The amount that should be reported as current assets on Paynter Corporation's balance
sheet is
a. $151,300. c. $217,300.
b. $164,900. d. $267,300.
ANS: B PTS:
14. The December 31, 2007, balance sheet of Madden Inc., reported total assets of
$1,050,000 and total liabilities of $680,000. The following information relates to the
year 2008:
The stockholders' equity section of the December 31, 2008, balance sheet would report a
balance of:
a. $400,000. c. $685,000.
b. $525,000. d. $835,000.
ANS: B
15. The financial statements of Cresent Corporation for 204 and 2009 contained the
following errors:
2008 2009
Ending Inventory $14,000 overstated $20,000 understated
Rent Expense $4,800 understated $6,600 overstated
Assuming that none of the errors were detected or corrected, by what amount will 2008
operating income be overstated or understated?
a. $9,200 overstated c. $18,800 understated
b. $9,200 understated d. $18,800 overstated
ANS: D
1. On December 31, 2011, the cash account of Roel Company showed the following details:
On December 31, 2011, what total amount should be reported as “cash and cash
equivalents”?
a. 2,810,000 c. 2,910,000
b. 2,760,000 d. 2,930,000
ANS: A
ANS: B
Solution:
Checking account at second bank 3,500,000
Payroll account 500,000
Value added tax account 400,000
Traveller’s check 300,000
Petty cash fund 20,000
Money order 180,000
Total unrestricted cash 4,900,000
3. The following data pertain to the cash transactions and bank account of McBride
Company for May of the current year:
a. 2,820,000 c. 3,195,000
b. 3,200,000 d. 3,000,000
ANS: D
Solution:
Balance per book 1,719,000
Service charge ( 10,000)
Debit memo for printed checks ( 12,000)
Proceeds of bank loan 570,000
Proceeds of customer’s note 810,000
NSF check ( 77,000)
4. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50%
of Delta's customers take advantage of the discount. Delta uses the gross method of
recording sales and trade receivables. An analysis of Delta's trade receivables balances at
December 31, 1993, revealed the following:
ANS: A
5. Foster Co. adjusted its allowance for uncollectible accounts at year-end. The general ledger
balances for the accounts receivable and the related allowance account were $1,000,000
and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate its
allowance for uncollectible accounts. Accounts receivable were estimated to be 5%
uncollectible. What amount should Foster record as an adjustment to its allowance for
uncollectible accounts at year-end?
a. $10,000 decrease. c. $50,000 decrease.
b. $10,000 increase. d. $50,000 increase.
ANS: B
Under the percentage-of-receivables method the ending balance in the allowance account is
equal to the total estimated uncollectible amount. Foster Co. would have a balance of
$50,000 ($1,000,000 x 5%) in its allowance for uncollectible accounts at year end. Using
the BASE format the adjustment would equal;
JE for above:
6. On December 31, 2012, Chang Company sold a machine to Door Company in exchange for
noninterest bearing note requiring ten annual payment of P100,000. Door made the first
payment on December 31,2012The market interest rate for similar notes at date of issuance
was 8%. information on present value factor is :
In its December 31,2012 statement of financial position, what amount should Chang report
as notes receivable?
a. 625,000 c. 460,000
b. 400,000 d. 671,000
ANS: A
7. Appari Bank granted loan to a borrower on January 1, 2012. The interest rate on the loan is
10% payable annually starting December 31, 2012. The loan matures in five years on
December 31, 2016. The data related to the loan are:
The effective rate on the loan after considering the direct origination cost and origination fee
received is 12%. What is the carrying amount of the loan receivable on January 1, 2012?
a. 4,000,000 c. 4,411,500
b. 4,650,000 d. 3,711,500
ANS: D
Origination fee received 350,000
Direct origination cost ( 61,500)
Unearned interest income 288,500
8. Easy Company sells directly to retail customers. On Jan. 1, 2009, the balance of the account
receivable was P2,070,000 while the allowance for doubtful accounts was credit off P78,000.
The following data are gathered.
Easy Company should record doubtful accounts expense for 2009 at:
a. 268,000 c. 300,000
b. 310,000 d. 222,000
ANS: C
Credit sales Writeoffs Recoveries
2006 11,100,000 260,000 22,000
2007 12,250,000 295,000 37,000
2008 14,650,000 300,000 36,000
38,000,000 855,000 95,000
9. During 1994, Kam Co. began offering its goods to selected retailers on a consignment basis.
The following information was derived from Kam's 1994 accounting records:
In its 1994 income statement, what amount should Kam report as cost of goods sold?
a. $507,000 c. $527,000
b. $512,000 d. $547,000
ANS: B
Rule: Consignor must include consigned goods (in the hands of the consignee) in his own
inventory, at his cost plus warehousing costs of consignor before goods are transferred to
consignee plus shipping costs to consignee.
Beginning inventory $ 122,000
Add:
Purchases 540,000
Freight in 10,000
Transportation to consignees 5,000
Cost of goods available for sale 677,000
Less: ending inventory
Held by Kam (145,000)
Held by consignees (20,000)
Cost of goods sold $ 512,000
10. Moss Co. has determined its December 31, 1992, inventory on a FIFO basis to be $400,000.
Information pertaining to that inventory follows:
ANS: D
11. A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's
accounting records showed the following:
ANS: A
Choice "a" is correct. The amount of inventory lost in the flood is calculated as
follows: Inventory = Beg inventory + Purchases - Sales reduced to a cost basis
Inventory = $35,000 + $200,000 - ($250,000 x (1-.40)) = $235,000 - $150,000 =
$85,000: Inventory lost in the flood = $85,000 - $30,000 = $55,000
Choice "b" is incorrect. This answer is the total inventory, not the amount of inventory lost
in the flood. Choice "c" is incorrect. This answer is the sales reduced to a cost basis minus
the inventory not lost in the flood, not the amount of inventory lost in the flood. Choice "d"
is incorrect. This answer is the sales reduced to a cost basis, not the amount of inventory
lost in the flood.
12. Gracia Comp. uses the lower of cost or net realizable value method to value inventory. Data
regarding the items in work in process inventory are presented below:
ANS: A
HISTORICAL COST NRV SALE
Markers 240,000 312,000
240,000
Pens 188,000 200,000
188,000
Highlighters 300,000 292,000
292,000
720,000
The measurement at the lower at cost or net realizable value shall be applied on an
individual basis or item by item.
13. Aman Company provides the following data with respect to its inventory:
ANS: A
All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all
receivables are collectible. What is the balance of accounts receivable on December 31,
2011?
a. 1,000,000 c. 5,000,000
b. 3,840,000 d. 5,800,000
ANS: B
Purchases 7,000,000
Inventory – December 31 (1,400,000)
Cost of goods sold 5,600,000
Markup on cost (40% × 5,600,000) 2,240,000
Sales (140% × 5,600,000) 7,840,000
Collections from customers (4,000,000)
Accounts receivable 3,840,000
15. Union Company uses the FIFO retail method of inventory valuation. The following
information is available:
Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markups 500,000
Net markdown 1,000,000
Sales revenue 4,500,000
What is the estimated cost of ending inventory?
a. 1,200,000 c. 1,000,000
b. 1,040,000 d. 960,000
ANS: A
Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio (3,000,000/5,000,000) 60%
Goods available for sale 3,600,000 6,500,000
Sales ( 4,500,000)
Ending inventory 2,000,000
16. The following data pertains to Tyne Co.'s investments in marketable equity securities:
Market value
Cost 12/31/X2 12/31/X1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000
What amount should Tyne report as unrealized gain (loss) in its 20X2 income statement?
a. $55,000 c. $60,000
b. $50,000 d. $65,000
ANS: A
Choice "a" is correct, $55,000 unrealized holding gain on trading securities reported in 1995
income statement:
Trading Portfolio Fair Value
12/31/X2 $155,000
12/31/X1 (100,000)
Unrealized gain, reflected in income $ 55,000
17. The following data pertains to Tyne Co.'s investments in marketable equity securities:
Market value
Cost 12/31/X2 12/31/X1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000
What amount should Tyne report as net unrealized loss on available-for-sale marketable
equity securities at December 31, 20X2, in accumulated other comprehensive income on the
balance sheet?
a. $0 c. $15,000
b. $10,000 d. $20,000
ANS: D
Choice "d" is correct, $20,000 net unrealized loss on available-for-sale securities reported as
a separate component of other comprehensive income on the statement of comprehensive
income and as a separate component of accumulated other comprehensive income on the
balance sheet:
Available-for-Sale Portfolio
Cost $150,000
12/31/X2 fair value (130,000)
Net unrealized loss at 12/31/X2 $ 20,000
18. At year-end, Rim Co. held several investments with the intent of selling them in the near
term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000,
and equity securities purchased for $35,000. At year-end, the bonds were selling on the
open market for $105,000 and the equity securities had a market value of $50,000. What
amount should Rim report as trading securities in its year-end balance sheet?
a. $50,000 c. $142,000
b. $127,000 d. $155,000
ANS: D
Trading securities, both debt and equity, are to be reported at fair value at the end of the
current reporting period.
19. Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 1993.
Grant's 30% interest in South gave Grant the ability to exercise significant influence over
South's operating and financial policies. During 1993, South earned $80,000 and paid
dividends of $50,000. South reported earnings of $100,000 for the six months ended June
30, 1994, and $200,000 for the year ended December 31, 1994. On July 1, 1994, Grant
sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on
October 1, 1994. In Grant's December 31, 1993, balance sheet, what should be the
carrying amount of this investment?
a. $200,000 c. $224,000
b. $209,000 d. $230,000
ANS: B
Equity interest 100% × 30% = 30%
20. Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock.
Dubro's stock outstanding at December 31, 1993, is as follows:
Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred
shareholders for the year ended December 31, 1993. How much total revenue should Moss
record due to its investment in Dubro?
a. $22,000
b. $20,000
c. $70,000
d. $50,000
ANS: A
Since Moss owns 40% of Dubro's common stock, the equity method is appropriate.
Preferred Stock:
$100,000 x 10% = $10,000 dividends x 20% ownership = $2,000 dividends received
Common Stock:
net income $60,000
less pref’d dividends (10,000)
net income available to common shareholders 50,000
Moss' percentage owned x 40% = $20,000 equity in earnings
Choice "a" is correct, $20,000 from equity in earnings plus $2,000 from dividend revenue.
21. Pear Co.'s income statement for the year ended December 31, 1992, as prepared by Pear's
controller, reported income before taxes of $125,000. The auditor questioned the following
amounts that had been included in income before taxes:
Pear owns 40% of Cinn's common stock. Pear's December 31, 1992, income statement
should report income before taxes of:
a. $85,000 c. $120,000
b. $117,000 d. $152,000
ANS: D
The $40,000 equity in earnings of Cinn is properly included in income. Pear owns 40% of
Cinn and uses the equity method. Thus, equity in earnings is included in the income
statement while dividends received are not. The $35,000 is a prior period adjustment and
should be reported as an adjustment to the opening balance of retained earnings, not on
the current period income.
22. In 1990, Neil Co. held the following investments in common stock:
• 25,000 shares of B & K, Inc.'s 100,000 outstanding shares. Neil's level of ownership gives
it the ability to exercise significant influence over the financial and operating policies of B &
K.
• 6,000 shares of Amal Corp.'s 309,000 outstanding shares.
During 1990, Neil received the following distributions from its common stock investments:
The closing price of this stock on a national exchange was $15 per share. What amount of
dividend revenue should Neil report for 1990?
a. $1,500 c. $31,500
b. $4,200 d. $34,200
ANS: A
Choice "a" is correct, $1,500 dividend revenue should be reported for 1990, representing
the cash dividend from Amal. The $30,000 cash dividend from B & K is a return of capital as
is any dividend under the equity method, since the investment account is reduced. The 3%
stock dividend from Amal means more shares, representing the same proportional piece of
the pie. It is not income.
23. On January 1, 2011, Alaindog company purchased as a long-terminvestment P5,000,000 face
value of Gaspitoy company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10%
interest. The bonds mature on January 1, 2016 and pay interest annually on December 31.
Alaindog uses the interest method of amortization. What is the carrying amount of the
investment (rounded to nearest P100) on December 31, 2012?
a. 4,680,000 c. 4,618,000
b. 4,662,000 d. 4,562,000
ANS: A
C a r r y in g a m o u n t - J a n u a r y 1 , 2 0 1 1 4 ,5 6 2 ,0 0 0
A m o r t iz a t io n o f d is c o u n t f o r 2 0 1 1
I n t e r e s t in c o m e ( 4 , 5 6 2 , 0 0 0 x 1 0 % ) 4 5 6 ,2 0 0
I n t e r e s t r e c ie v e d ( 5 , 0 0 0 , 0 0 0 x 8 % ) 4 0 0 ,0 0 0 5 6 ,2 0 0
C a r r y in g a m o u n t - D e c e m b e r 3 1 , 2 0 1 1 4 ,6 1 8 ,2 0 0
A m o r t iz a t io n o f d is c o u n t f o r 2 0 1 2
I n t e r e s t in c o m e ( 4 , 6 1 8 , 2 0 0 x 1 0 % ) 4 6 1 ,8 0 0
I n t e r e s t r e c ie v e d ( 5 , 0 0 0 , 0 0 0 x 8 % ) 4 0 0 ,0 0 0 6 1 ,8 2 0
C a r r y in g a m o u n t - D e c e m b e r 3 1 , 2 0 1 2 4 ,6 8 0 ,0 2 0
24. On January 1, 2011, Venus Company purchased 10% bonds with face value of P5,000,000
plus transaction cost of P101,500 with a yield rate of 8%. The bonds mature on December
31, 2015. And pay interest annually on December 31. The carrying amount of the
investment on December 31, 2011 using the effective interest method is P5,333,620. What
is the initial acquisition cost of the bond investment?
a. 5,401,500 c. 5,198,500
b. 5,300,000 d. 5,398,500
ANS: A
25. Cart Co. purchased an office building and the land on which it is located for $750,000 cash
and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at
$960,000, 60% of which is allocated to the building. At what amount should Cart record the
building?
a. $500,000 c. $600,000
b. $576,000 d. $960,000
ANS: C
The $1,000,000 total cost ($750,000 cash + $250,000 mortgage) should be allocated to the
building and the land separately. There is no other information with which to perform this
allocation other than the property tax assessment. So, 60% of the $1,000,000, or
$600,000, is allocated to the building.
Choice "a" is incorrect. This answer is the $750,000 cash price less the $250,000 mortgage.
Choice "b" is incorrect. This answer is computed as 60% of the assessed value of $960,000.
The cost that should be allocated is the total purchase price of the land and building, not
the assessed value.
Choice "d" is incorrect. This answer is the assessed value. Even if the assessed value were
to be allocated, the full assessed value is not allocated to the building. The land has to be
worth something.
26. Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related
to a newly constructed building. The depreciation was computed correctly for tax purposes.
The tax rate for the current year was 40%. What was the impact of the error on Miller's
financial statements for the prior year?
ANS:B
27. Oak Co., a newly formed corporation, incurred the following expenditures related to land
and building:
ANS: C
The cost of land includes all costs to acquire the land and get it ready for use:
Cash paid for land $135,000
+ Title search fees 625
+ County assessment 2,500
+ Removal of building 16,000
Total cost of land $154,125
28. In January 1994, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law
to restore the land to its original condition at an estimated cost of $180,000. Vorst believes
it will be able to sell the property afterwards for $300,000. During 1994, Vorst incurred
$360,000 of development costs preparing the mine for production and removed and sold
60,000 tons of ore. In its 1994 income statement, what amount should Vorst report as
depletion?
a. $135,000 c. $150,000
b. $144,000 d. $159,000
ANS: B
The depletion base equals the purchase price ($2,640,000) plus the development costs
($360,000) plus the estimated restoration costs ($180,000) less the expected salvage value
($300,000). Depletion is $2.40 per ton ($2,880,000 / 1,200,000 tons). Depletion expense is
$144,000 ($2.40 per ton × 60,000 tons sold).
29. Weir Co. uses straight-line depreciation for its property, plant, and equipment, which, stated
at cost, consisted of the following:
12/31/92 12/31/91
Land $ 25,000 $ 25,000
Buildings 195,000 195,000
Machinery & equipment 695,000 650,000
915,000 870,000
Less accumulated depreciation 400,000 370,000
$515,000 $500,000
Weir's depreciation expense for 1992 and 1991 was $55,000 and $50,000, respectively.
What amount was debited to accumulated depreciation during 1992 because of property,
plant, and equipment retirements?
a. $40,000 c. $20,000
b. $25,000 d. $10,000
ANS: B
30. On January 1, 2012, Hamlet Company borrowed P6, 000, 000.00 at an annual interest rate
of 10% to finance specifically the cost of building an electric generating plant. Construction
commenced on January 1, 2012 with a cost of 6, 000, 000.00. Not all the cash borrowed
was used immediately, so interest income of P80, 000.00 was generated by temporarily
investing some of the borrowed funds prior to use. The project was completed on November
30, 2012. What is the carrying amount of the plant on November 30, 2012?
ANS: B
ANS: B
32. Cool Company owns an equipment costing P5,200,000 with original residual value of
P400,000. The life of the asset is 10 years and was depreciated using the straight line
method. The equipment has a replacement cost of P8,000,000 with residual value of
200,000. The age of the asset is 4 years. The appraisal of the equipment showed a total
revised useful life of 12 years and the entity decided to carry the equipment at revalued
amount. Ignoring the income tax, what amount should Cool Company initially report as
revaluation surplus:
a. 1,600,000 c. 1,680,000
b. 2,600,000 d. 6,680,000
ANS: A
Cost Replacement Cost Appreciation
Equipment 5,200,000 8,000,000 2,800,000
Residual value ( 250,000) ( 200,000)
-
33. Gei Company determined that, due to obsolescence, equipment with an original cost of
P9,000,000 and accumulated depreciation on January 1, 2011, of P4,200,000 had
suffered permanent impairment, and as a result should have a carrying amount of only
P3,000,000 as of the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 8 years to 3. In its December 31, 2011 statement of
financial position, what amount should Gei report as accumulated depreciation?
a. 1,000,000 c. 6,000,000
b. 5,200,000 d. 7,000,000
ANS: D
Cost 9,000,000
Accumulated depreciation – January 1, 2011 4,200,000
34. On January 02, 2009. Wind company bought a trademark for P500,000. The remaining legal
life at the time of acquisition is 20 years. The company made a reasonable and reliable
estimated that that this trademark will provide additional cash flows to the enterprise for an
indefinite period. During 2012, Wind company’s net cash flows related to the trademark
have been on a decreasing trend. A as a result of this, the company decided to evaluate the
trademark for possible impairment. On December 31, 2012, reliable estimate showed that
the present value of expected net cash inflows related to the trademark is P240,000. What
amount of impairment loss should the company recognize in 2012?
a. none c. P260,000
b. P240,000 d. P500,000
ANS: C
What amount should be charged to patent amortization expense for the year ended
December 31, 2014?
a. 21,000 c. 40,800
b. 35,700 d. 71,400
ANS: C
1. Tom Byers sells televisions with a 2-year warranty. Past experience indicates that 2% of
the units sold will be returned during the warranty period for repairs. The average cost of
repairs under warranty is estimated to be $50 per unit. During 2002, 6,000 units were sold
at an average price of $400. During the year, repairs were made on 35 units at a cost of
$2,000. Compute the amount of warranty expense.
a. 6,000 c. 8,000
b. 4,000 d. 0
ANS: A
Estimated Warranty Liability 2,000
Repair Parts/Wages Payable 2,000
(To record cost of honoring 35 warranties)
2. December 31st is a Friday. The employees of the company have been paid on Monday,
December 27th for the previous week which ended on Friday, December 24th. The
company employs 20 people who earn $100 per day and 10 people who earn $120 per day.
All employees work 5-day weeks. Based from the information given, compute the amount
of wages payable as of December 31.
a. 16,000 c. 15,000
b. 10,000 d. 6,000
ANS: A
3. Marr Company sells its products in reusable containers. The costumer is charged a deposit
for each container delivered and receives a refund for each container returned within two
years after the year of delivery. Marr accounts for the container not returned within the time
limit as being retired by sale at the deposit amount. Information for 2011 is as follows:
Container deposits at December 31, 2011 from delivers in:
2009 150,000
2010 430,000 580,000
Deposits for containers delivered in 2011 780,000
Deposits for containers returned in 2011 from deliveries in:
2009 90,000
2010 250,000
2011 286,000 626,000
In Marr’s December 31, 2011 statement of financial position, the liability for deposits on
returnable containers should be:
a. 734,000 c. 430,000
b. 674,000 d. 824,000
ANS: B
Total 1,210,000
4. On September 1, 1988, Cobb Co. issued a note payable to National Bank in the amount of
$900,000, bearing interest at 12%, and payable in three equal annual principal payments of
$300,000. On this date, the bank's prime rate was 11%. The first payment for interest and
principal was made on September 1, 1989. At December 31, 1989, Cobb should record
accrued interest payable of:
a. 20,000 c. 24,000
b. 14,000 d. none
ANS: C
5. On August 1, 1991, Vann Corp.'s $500,000, one year, noninterest-bearing note due July
31,1992, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method
of amortizing bond discount. What amount should Vann report for notes payable in its
December 31, 1991, balance sheet?
a. $500,000 c. $468,500
b. $477,500 d. $446,000
ANS: Choice "c" is correct. $468,500 carrying value of notes payable on the December
31,1991, balance
6. Gar, Inc.'s trial balance reflected the following liability account balances at December 31,
1990:
The current liabilities consist of all payables due within one year.
Accounts payable $19,000
Bonds payable, due 1991 34,000
Discount on bonds payable (2,000) Tricky!!
Dividends payable, due 2/15/91 5,000 D
Income tax payable 9,000
Total current liabilities $65,000
The "deferred income tax payable" of $4,000 is a separate "deferred category" on the
balance sheet, and is not considered a current item. The "notes payable" due 1/19/92 are
due after one year and are considered a long-term liability.
7. Howell Corporation purchased $400,000 of its bonds on June 30, 2002, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$367,200. The bonds pay semiannual interest and the interest payment due on June 30,
2002, has been made and recorded. How much is the gain or loss on redemption?
a. 40,800 loss c. 32,800 loss
b. 40,800 gain d. 32,800 gain
ANS: A
8. On January 1,2011, Dome Company issued P4,000,000,8% serial bonds to be repaid in the
amount of P 800,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. Dome amortizes the bond discount by the interest
method. The bond proceeds totaled P 3,805,600 based on the present value on Jan. 1,2011
of five annual payments as follows:
Due date Principal Interest PV at 1/1/2011
12/31/2011 800,000 320,000 1,018,000
12/31/2012 800,000 256,000 872,200
12/31/2013 800,000 192,000 745,000
12/31/2014 800,000 128,000 633,800
12/31/2015 800,000 64,000 536,600
AND: D
9. Brite Company is indebted to Scotch Company under a P1,000,000, 12%, three-year note
dated December 31,2011. Because of Brite’s financial difficulties developing in 2014, Brite
owed accrued interest of P120,000 on the note at December 31,2014. Scotch agreed to
settle the note and accrued interest for a tract of land having a fair market value of
P900,000. Brite’s acquisition cost of land is P950,000. Ignoring income taxes, in its 2014
profit or loss, how much should Brite report as gain or loss on debt extinguishment as a
result of the settlement using US GAAP?
a. 220,000 gain c. 220,000 loss
b. 50,000 loss d. 50,000 gain
ANS: A
The gain on the extinguishment of debt would be recorded in the profit or loss under the
finance income, the loss on the disposal of the property would be charged against operating
profits. It would not be appropriate to show a net gain of P170,000 in finance income. The
difference between the carrying amount of a financial liability (or part of a financial liability)
extinguished or transferred to another party and the consideration paid, including any non-
cash asset transferred or liabilities assumed, shall be recognized in profit or loss (PAS 39
paragraph 41).
Journal Entry:
Notes payable P1,000,000
Accrued interest payable 120,000
Loss on disposal of land 50,000
Land P950,000
Gain on extinguishment 220,000
10. In 2011, Bunny Corporation acquired land by paying P300,000 and signing a note with a
maturity value of P4,000,000, on the note’s due date, December 31, 2011. Bunny owed
P320,000 of accrued interest and P4,000,000 principal on the note. Bunny was in financial
difficulty and was unable to make any payments. Bunny and the bank agreed to amend the
note as follows:
A. The P320,000 interest due on December 31, 2011 was forgiven.
B. The principal of the note was reduced by P200,000 and the maturity date was made
payable December 31, 2012.
C. Bunny would be required to make one interest payment totaling P342,000 on
December 31, 2012.
On December 31, 2011, the prevailing rate of interest for a similar debt instrument is 9%.
As a result of the restructuring of debt, how much should Bunny report as gain, before
income taxes in its 2011 profit or loss?
a. 448,508 c. 463,805
b. 484,508 d. 0
ANS: B
Journal Entry:
Notes payable P 4,000,000
Accrued interest payable 320,000
Notes payable – new P 3,835,492
Gain on restructuring 484,508
11. Millcroft Inc. computed a pretax financial income of $40,000 for the first year of its
operations ended December 31, 2008. Analysis of the tax and book basis of its liabilities
disclosed $360,000 in unearned rent revenue on the books that had been recognized as
taxable income in 2008 when the cash was received.
The unearned rent is expected to be recognized on the books in the following pattern:
The enacted tax rates for this year and the next four years are as follows:
a. 160,000;41,000 c. 40,000;160,000
b. 160,000;160,000 d. 40,000;40,000
ANS: A
(1)
Reversal Years
2008 2009 2010 2011 2012
Taxable financial
income $40,000 $ 0 $ 0 $ 0 $ 0
Temporary difference:
Unearned rent 360,000
revenue
Rent revenue earned 0 (90,000) (160,000) (70,000) (40,000)
Taxable income (loss) $400,000 $(90,000) $(160,000) $(70,000) $(40,000)
(2)
Income Tax Expense......................... 41,000
Deferred Tax Asset--Current ............... 32,400
Deferred Tax Asset--Noncurrent ............ 86,600
IncomeTaxPayable................ 160,000
(3)
2008 Income Statement Presentation:
Income from continuing operations before
income taxes ............................... $40,000
Less income taxes:
Current provision ........................... 160,000
Deferred benefit ............................ 119,000 41,000
Income from continuing operations ........... $(1,000)
12. The 2014 tax return of Harmony Company indicates taxable income of P950,000, on which
a tax liability of P304,000 has been recognized (tax rate is 32%). The company is
determining the amount of its pretax financial income for 2014 by making adjustments to
taxable income from its 2014 income tax return. The list of items that may be required to
determine taxable financial income from the amount of taxable income follows: Accelerated
depreciation for income tax purposes was P335,000; straight line depreciation on these
assets is p200,000. The P112,500 goodwill impairment was excluded as a deduction in the
tax return, but may be deducted in the income statement. Several expenses were included
in the income tax return on an estimated basis. These items will be shown in the income
statement at the same amount but are subject to change if new information in the future
indicates that the original estimates were inaccurate. Interest on treasury bills was excluded
in the tax return. During the year, P61,750 was received on these investments. How should
Harmony’s taxable financial income?
a. 950,000 c. 1,085,000
b. 1,034,250 d. 1,285,000
ANS: C
Financial
Taxation
Net income before timing & permanent
differences P1,285,000 P1,285,000
Timing differences depreciation ( 200,000) ( 335,000)
Net income before permanent differences P1,085,000 950,000
Permanent differences
Interest income 61,750
Goodwill impairment ( 112,500) __________
Reported net income P1,034,250 P 950,000
13. Easter Company leased equipment to Faye Company on January 1, 2011. The lease is for an
eight-year period expiring December 31, 2018. The first of eight equal annual payments of
P900,000 was made on January 1, 2011. Easter had purchased the equipment on December
29, 2010 for P4,800,000. The lease is appropriately accounted for as a sales type lease by
Easter. The present value at January 1, 2011 of all rent payments over the lease term
discounted at a 10% interest rate was P5,280,000. What is the gross profit on sale for
2011?
a. 400,000 b. 320,000
c. 380,000 d. 480,000
ANS: D
14. On January 1, 2011, Gallant Company entered into a lease agreement with Blacksheep
Company or a machine which was carried on the accounting records of Gallant of
P2,000,000. Total payments under the lease which expires on December 31, 2020,
aggregate P3,550,800 of which P2,400,000 represents cost of the machine to Blacksheep.
The interest rate of 10% which was stipulated in the lease is considered fair and adequate
compensation to Gallant for the use of its funds. Blacksheep expects the machine to have a
10year life, no residual value and be depreciated on a straight line basis. The lease is
conceived as sales type lease. What should be the total income before income tax derived
by Gallant from the lease for the year ended December 31, 2011?
a. 604,492 c. 204,492
b. 400,000 d. none
ANS: A
15. On January 1, 2003, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and
a remaining useful life of ten years, to Maco Drilling for $150,000. Hooks immediately
leased the equipment back under a ten-year capital lease with a present value of $150,000
and will depreciate the equipment using the straight-line method. Hooks made vthe first
annual lease payment of $24,412 in December 2003. In Hooks’ December 31, 2003 balance
sheet, the unearned gain on equipment sale should be
a. $50,000 c. $25,588
b. $45,000 d. $0
ANS: B
Sale-leaseback transactions are treated as though two transactions were a single financing
transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and
amortized over the lease term (if possession reverts to the lessor) or the economic life
(if ownership transfers to the lessee); both are ten years in this case. Since this is a capital
lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/03. At 12/31/03,
an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 x
$50,000 = $5,000), because the lease covers ten years. Therefore, the unearned gain at
12/31/03 is $45,000 ($50,000 – $5,000).
ANSWERS:
2. The N Corporation is authorized to issue 100,000 ordinary shares, P17 par value. At the
beginning of 2010, 18,000 ordinary shares were issued and outstanding. These shares had
been issued at P24. During 2010, the company entered into the following transactions:
Jan. 16 - Issued 1,300 ordinary shares at P25 per share.
Mar. 21 - Exchanged 12,000 ordinary shares for a building. The ordinary shares were
selling at P27 per share.
May 7 - Reacquired 500 ordinary shares at P26 per share to be held in treasury.
July 1 - Accepted subscriptions to 1,000 ordinary shares at P28 per share. The contract
called for 10% down payment with the balance due on December 1.
Sept. 20 - Sold 500 treasury shares at P29 per share.
Dec. 1 - Collected the balance due on July 1 subscriptions and issued the shares.
ANS: B:
Contributed capital, 1/1
(18,000 x P24) P432,000
January 16 (1,300 x P25) 32,500
March 21 (12,000 x P27) 324,000
May 7 -
July1/Dec. 1 (1,000 x P28) 28,000
Sept. 20 [500 x (P29-P26)] 1,500
Contributed capital, 12/31 P818,000
3. Cerritos Corporation began operations on January 1, 2007. During its first three years of
operations, Cerritos reported net income and declared dividends as follows:
ANS: D
4. At December 31, 2010, the equity accounts of Batch Corporation were as follows:
Batch has never paid cash or share dividend. The capital accounts have not changed since
Batch began operations on January 1, 2006. If the maximum amount available for cash
dividend is declared on December 31, 2010, how much dividend is payable to the ordinary
shareholders?
a. P2,100,000 c. P1,200,000
b. P1,920,000 d. P4,500,000
ANS: A
Long-term debt
Notes payable, 10% P
1,000,000
7% convertible bonds payable 5,000,000
10% bonds payable 6,000,000
Total long-term debt P12,000,000
Shareholders' equity
Preference share capital, 8.5%
cumulative, P50 par value,
100,000 shares authorized,
25,000 shares issued and
outstanding P 1,250,000
Ordinary share capital, P1 par,
2,000,000 shares authorized,
1,000,000 shares issued and
outstanding 1,000,000
Share premium 4,000,000
Retained earnings 6,000,000
Total shareholders' equity P12,250,000
For the year ended December 31, 2010, calculate the diluted earnings per share for Garcia
Pharmaceutical Industries.
a. P1.37 c. P1.26
b. P1.32 d. P1.24
ANS: C
Profit to OS WA Outs. OS EPS
Exercise of
options - 25,000
6. Younger Corporation has the following stockholders' equity accounts on January 1, 2002:
The company uses the cost method to account for treasury stock transactions. During 2002,
the following treasury stock transactions occurred:
April 1 Purchased 6,000 shares at $14 per share.
August 1 Sold 2,000 shares at $18 per share.
October 1 Sold 2,000 shares at $13 per share.
Instructions
(a) Journalize the treasury stock transactions for 2002.
(b) Prepare the Stockholders' Equity section of the balance sheet for Younger
Corporation at December 31, 2002. Assume net income was $80,000 for 2002.
ANSWERS:
Instructions
(a) On the basis of the explanation for each entry, prepare the entry that should have
been made for the transactions. (Omit explanations.)
(b) Prepare the correcting entries that should be made to correct the accounts of Lane
Corporation. (Do not reverse the original entry.)
ANSWERS:
8. The stockholders' equity section of Dole Corporation at December 31, 2001, included the
following:
Dividends were not declared on the preferred stock in 2001 and are in arrears. On
September 15, 2002, the board of directors of Dole Corporation declared dividends on the
preferred stock for 2001 and 2002, to stockholders of record on October 1, 2002, payable
on October 15, 2002. On November 1, 2002, the board of directors declared a $1.00 per
share dividend on the common stock, payable November 30, 2002, to stockholders of
record on November 15, 2002.
Instructions
Prepare the journal entries that should be made by Dole Corporation on the dates indicated
below:
September 15, 2002 November 1, 2002
October 1, 2002 November 15, 2002
October 15, 2002 November 30, 2002
ANSWERS: