FAR

Problem 4 (Net income)

1. An entity reported net income of P7,410,000 for the current year. The auditor raised questions
about the following amounts that had been included in net income:
Unrealized loss on equity investments at fair value through other
comprehensive income ( 540,000 )
Gain on early retirement of bonds payable 2,200,000
Adjustment of profit of prior year for error in depreciation, net of tax effect ( 750,000 )
Loss from fire ( 1,400,000 )
Gain from change in fair value attributable to the credit risk of financial
liability designated at fair value through profit or loss 500,000
What amount should be reported as adjusted net income?
a. 6,500,000
b. 7,200,000
c. 8,200,000
d. 8,700,000

Problem 4 Answer C
Net income per book 7,410,000
Unrealized loss- other comprehensive income erroneously deducted 540,000
Prior period error erroneously deducted 750,000
Gain on credit risk – other comprehensive income erroneously added ( 500,000)
Adjusted net income 8,200,000
The gain on early retirement of bonds payable and the loss from fire are properly included in net
income.

Problem 6 (Cash computation)

2. An entity reported the checkbook balance on December 31, 2015 at P8,000,000. In addition,
the entity held the following items in the safe on that date:
Check payable to the entity, dated January 2, 2016 in payment of a
sale, not included in December 31 check book balance 1,000,000
Check payable to the entity, deposited December 15 and included
in December 31 checkbook balance, but returned by bank on
December 30 stamped “NSF”. The check was redeposited on
January 2, 2016 and cleared on January 5, 2016 3,000,000
Check drawn on the entity’s account, dated and recorded on
December 31, 2015 but not mailed until January 15, 2016 2,500,000
Coins and currencies on hand 800,000
Three-month money market instruments 1,500,000
What is the correct amount of “cash” on December 31, 2015?
a. 7,500,000
b. 9,300,000
c. 8,300,000
d. 9,800,000

Problem 6 Answer C
Checkbook balance 8,000,000
NSF check (3,000,000)
Undelivered check drawn 2,500,000
Coins and currencies 800,000
Total cash 8,300,000
The check payable to the entity is properly not included because it is postdated January 2, 2016.
Technically, the three-month money market instruments are cash equivalents but not cash.

Problem 2 (Total assets)

3. An entity was incorporated on January 1, 2015 with proceeds from the issuance of P7,500,000
in shares and borrowed funds of P1,100,000. During the first year of operations, revenue from
sales and consulting amounted to P820,000, and operating costs and expenses totaled P640,000.
On December 15, the entity declared a P30,000 cash dividend, payable to shareholders on
January 15, 2016. No additional activities affected owners’ equity in 2015. The liabilities
increased to P1,200,000 by December 31, 2015. What amount should be reported as total assets
on December 31, 2015?
a. 8,850,000
b. 8,820,000
c. 7,870,000
d. 8,750,000

Problem 2 Answer A
Liabilities 1,200,000
Share capital 7,500,000
Retained earnings 150,000
Total liabilities and equity 8,850,000
Revenue from sales and consulting 820,000
Operating costs and expenses ( 640,000)
Net income 180,000
Dividend declared ( 30,000)
Retained earnings 150,000

Problem 5 (Retained earnings)

4. An entity provided the following information on December 31, 2015:
Total reported income since incorporation 1,700,000
Total cash dividends paid ( 800,000)
Unrealized holding loss on trading investment ( 120,000)
Total share dividends distributed ( 200,000)
Prior period adjustment recorded January 1, 2015 - credit 75,000
What amount should be reported as retained earnings on December 31, 2015?
a. 655,000
b. 700,000
c. 580,000
d. 775,000

Problem 5 Answer D
Total reported income 1,700,000
Total cash dividends paid ( 800,000)
Total share dividends distributed ( 200,000)
Prior period adjustment – credit 75,000
Retained earnings – December 31, 2015 775,000
The unrealized holding loss on trading investment is ignored because it is already included in the
reported income since incorporation.

Problem 8 (Current net receivables)

5. An entity reported current receivables on December 31, 2015 which consisted of the following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts 20,000
Claim against shipper for goods lost in transit in November 2015 30,000
Selling price of unsold goods sent by the entity on consignment at 130% of cost
and not included in the ending inventory 260,000
Security deposit on lease of warehouse used for storing inventories 300,000
What is the correct total of current net receivables on December 31, 2015?
a. 1,500,000
b. 1,200,000
c. 1,240,000
d. 940,000

Problem 8 Answer D
Trade accounts receivable 930,000
Allowance for uncollectible accounts ( 20,000)
Claim against shipper 30,000
Total current net receivables 940,000
The selling price of unsold goods on consignment should be excluded from accounts receivable
but the cost should be included in inventory.
The security deposit is classified as noncurrent.

Problem 11 (Cost of inventory)

6. An entity reported inventory on December 31, 2015 at P6,000,000 based on a physical count at
cost and before any necessary year-end adjustments relating to the following:
 Included in the physical count were goods billed to a customer FOB shipping point on
December 30, 2015. These goods had a cost of P125,000 and were picked up by the carrier on
January 7, 2016.
 Goods shipped FOB shipping point on December 28, 2015 from a vendor to the entity were
received on January 4, 2016. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2015?
a. 5,875,000
b. 6,000,000
c. 6,175,000
d. 6,300,000

Problem 11 Answer D
Physical count 6,000,000
Good in transit purchased FOB shipping point 300,000
Total inventory 6,300,000

The goods billed to a customer are properly included in inventory because the term is FOB
shipping point and the goods are delivered January 7, 2016.

Problem 13 (Retail inventory method)

7. On December 31, 2015, an entity provided the following information:
Cost Retail
Inventory, January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markup 210,000
Sales for the year totaled P5,500,000. Markdown amounted to P100,000. Under the approximate
lower of average cost or NRV retail method, what is the inventory on December 31, 2015?
a. 1,050,000
b. 1,400,000
c. 994,000
d. 980,000
Problem 13 Answer D
Cost Retail
Inventory – January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markup ________ 210,000
Goods available for sale 4,900,000 7,000,000
Conservative cost ratio (4,900,000 / 7,000,000) 70%
Sales (5,500,000)
Markdown ( 100,000)
Ending inventory at retail 1,400,000
At cost (70% x 1,400,000) 980,000
The lower of average cost or NRV retail method is the same as the conservative or conventional
method. Thus, the markdown is ignored in computing the cost ratio.

Problem 15 (Biological assets)

8. An entity provided the following information about assets in forest plantation:
Freestanding trees 5,000,000
Land under trees 900,000
Roads in forest 500,000
Animals related to recreational activities 2,000,000
Rubber trees and grape vines 1,500,000
What total amount should be reported as biological assets?
a. 5,000,000
b. 8,500,000
c. 6,500,000
d. 9,900,000

Problem 15 Answer A
Freestanding trees 5,000,000
The land under trees and roads in forest should be included in property, plant and equipment.
Under IFRS, animals related to recreational activities as in game parks, and bearer plants, such
as rubber trees and grape vines should be accounted for as property, plant and equipment.

Problem 19 (Revaluation)

9. On June 30, 2015, an entity reported the following information:

Equipment at cost 30,000,000
 Accumulated depreciation 10,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over
10-year period. On December 31, 2015, the management decided to change the basis of measuring
the equipment from the cost model to the revaluation model. The equipment was revalued to the
fair value of P27,000,000 with remaining useful life of 5 years. The income tax rate is 30%. What
amount should be reported as revaluation surplus on December 31, 2015?
a. 7,500,000
b. 5,250,000
c. 6,300,000
d. 9,000,000

Problem 19 Answer C
Accumulated depreciation – 6/30/2015 10,500,000
Depreciation from July 1 to December 31, 2015 (30,000,000 / 10 x 6/12) 1,500,000
Accumulated depreciation – 12/31/2015 12,000,000

Cost 30,000,000
Accumulated depreciation ( 12,000,000)
Carrying amount 18,000,000
Fair value 27,000,000
Revaluation surplus 9,000,000
Deferred tax liability (30% x 9,000,000) ( 2,700,000)
Net revaluation surplus 6,300,000

10. Problem 22 (Intangible assets)

On January 1, 2013, an entity purchased patent at a cost of P1,920,000 at which date the remaining
legal life was 16 years. On January 1, 2015, the useful life of the patent was determined to be only
8 years from the date of acquisition. On January 1, 2015, the entity paid P800,000, of which
three-fourths was for a trademark, and one-fourth was for the other entity’s agreement not to
compete for a 5-year period in the line of business covered by the trademark. The entity considered
the life of the trademark indefinite. Moreover, the entity agreed to pay P50,000 to the other entity
as consulting fee each year for 5 years payable every January 1. What is the amortization of
intangible assets for 2015?
a. 320,000
b. 280,000
c. 250,000
d. 370,000

Problem 22 Answer A
Patent - January 1, 2013 1,920,000
Amortization for 2013 and 2014 (1,920,000 / 16 x 2) ( 240,000)
 Carrying amount – January 1, 2015 1,680,000
Purchase price 800,000
Trademark (3/4 x 800,000) ( 600,000)
Noncompetition agreement 200,000
Patent (1,680,000 / 6 years remaining) 280,000
Noncompetition agreement (200,000 / 5 years) 40,000
Total amortization for 2015 320,000
The patent has a remaining life of 6 years because the revised life is 8 years from the date of
acquisition and two years already expired.
The trademark is not amortized because the life is indefinite.
The annual consulting fee is an outright expense.

11. Problem 24 (Financial asset at fair value through other comprehensive income)

On January 1, 2015, an entity purchased nontrading equity securities which are irrevocably
designated at fair value through other comprehensive income:
Purchase price Transaction cost Market – 12/31/2015
Security A 1,000,000 100,000 1,500,000
Security B 2,000,000 200,000 2,400,000
Security C 4,000,000 400,000 4,700,000
On July 1, 2016, the entity sold Security C for P5,200,000. What amount should be credited to
retained earnings as a result of the sale of the investment in 2016?
a. 800,000
b. 500,000
c. 300,000
d. 0

Problem 24 Answer A
Purchase price of security C 4,000,000
Transaction cost 400,000
Total cost 4,400,000
If the equity investment is measured at fair value through other comprehensive income (FVOCI),
the transaction cost is capitalized
Market value of security C 12/31/2015 4,700,000
Historical cost 4,400,000
Unrealized gain – OCI 12/31/20015 300,000

12. Problem 27 (Finance lease - lessee)

An entity leased equipment for the entire nine-year useful life, agreeing to pay P1,000,000 at the
start of the lease term on January 1, 2015, and P1,000,000 annually on each January 1 for the next
eight years. The present value on January 1, 2015 of the nine lease payments over the lease term
using the rate implicit in the lease which the lessor knows to be 10% was P6,330,000. The January
1, 2015 present value of the lease payments using the incremental borrowing rate of 12% was
P5,970,000. The entity made a timely second lease payment. What amount should be reported as
finance lease liability on December 31, 2016?
a. 5,330,000
b. 4,863,000
c. 4,970,000
d. 4,467,000

Problem 27 Answer B

Date Payment 10% interest Principal Present value

1/1/2015 6,330,000
1/1/2015 1,000,000 - 1,000,000 5,330,000
1/1/2016 1,000,000 533,000 467,000 4,863,000
The relevant present value is the amount computed using the 10% implicit rate.
The first payment on January 1, 2015 is applied all to principal

13. Problem 30 (Employee benefit – IFRS 19R)

An entity provided the following information for the current year:

Current service cost 500,000
Interest on projected benefit obligation 600,000
Interest income on plan assets 350,000
Loss on plan settlement 250,000
Past service cost during the year 300,000
Actual return on plan assets 850,000
Actuarial loss during the year 200,000
Contribution to the plan 1,500,000
What is the employee benefit expense for the current year?
a. 1,300,000
b. 1,050,000
c. 1,500,000
d. 1,100,000

Problem 30 Answer A

Current service cost 500,000

Interest on projected benefit obligation 600,000
 Interest income on plan assets ( 350,000)
Loss on plan settlement 250,000
Past service cost during the year 300,000
Total employee benefit expense 1,300,000

14. Problem 33 (Termination benefits IFRS 19R)

An entity is committed to close a factory in 10 months and shall terminate the employment of all
the remaining employees of the factory. Under the termination plan, an employee leaving before
closure of factory shall receive on termination date a cash payment of P20,000. However, an
employee that renders service until closure of the factory shall receive P60,000. There are 120
employees at the factory. The entity expects 20 employees to leave before closure and 100
employees to render service until closure. What amount should be recognized as termination
benefit?
a. 2,400,000
b. 6,400,000
c. 2,000,000
d. 4,000,000

Problem 33 Answer A

Termination benefit (120 employee x P20,000) 2,400,000

Total payment until closure 60,000

Termination benefit ( 20,000)
Additional benefit considered as short-term benefit 40,000

Short-term benefit (100 employees x 40,000) 4,000,000

Under IFRS, the additional amount paid to employees who render service until closure is no
longer a termination benefit but short-term benefit.

15. Problem 35 (Bonds payable)

An entity has outstanding a 7%, ten-year P100,000 facevalue bond. The bonds was originally sold
to yield 6% annual interest. The entity uses the effective interest method to amortize bond premium
and does not elect the fair value option for reporting financial liabilities. On June 30, 2015, the
carrying amount of the outstanding bond was P105,000. What amount of unamortized premium
on bond should be reported on June 30, 2016?
a. 1,050
b. 3,950
c. 4,300
d. 4,500

Problem 35 Answer C
 Interest paid (7% x 100,000) 7,000
Interest expense (6% x 105,000) 6,300
Premium amortization 700

Carrying amount – 6/30/2015 105,000

Face amount 100,000
Premium on bonds payable – 6/30/2015 5,000
Amortization 7/1/2015 to 6/30/2016 ( 700)
Unamortized premium – 6/30/2016 4,300

16. Problem 37 (Retained earnings)

An entity provided the following data for the year ended December 31, 2015:
Retained earnings unappropriated, January 1 200,000
Overdepreciation of 2014 due to prior period error 100,000
Net income for 2015 1,300,000
R Retained earnings appropriated for treasury shares (original balance is P500,000
but reduced by P200,000 by reason of reissuance of the treasury shares) 300,000
Retained earnings appropriated for contingencies (beginning balance P700,000.
but increased by current appropriation of P100,000) 800,000
Cash dividends paid to shareholders 500,000
Change in accounting policy from FIFO to average – credit adjustment 150,000
What is the balance of unappropriated retained earnings on December 31, 2015?
a. 1,150,000
b. 1,350,000
c. 1,950,000
d. 1,750,000

Problem 37 Answer B

Retained earnings – January 1 200,000

Prior period error – overdepreciation 100,000
Net income 1,300,000
Retained earnings appropriated for treasury shares reverted to unappropriated balance 200,000
Increase in retained earnings appropriated for contengencies ( 100,000)
Cash dividends paid ( 500,000)
Change in accounting policy - credit 150,000
Retained earnings unappropriated - December 31 1,350,000

17. Problem 40 (Current cost)

An entity disclosed supplemental information on the effects of changing prices. The entity
computed the increase in current cost of inventory as follows:
Increase in current cost (nominal peso) 1,500,000
 Increase in current cost (constant peso) 1,200,000
What amount should be disclosed as the inflation component of the increase in current cost?
a. 2,700,000
b. 1,500,000
c. 1,200,000
d. 300,000

Problem 40 Answer D

Increase in current cost – nominal 1,500,000

Increase in current cost – constant 1,200,000
Increase in current cost due to inflation 300,000

18. Problem 42 (Accrual basis)

An entity had a balance of P820,000 in the professional fees expense account on December 31,
2015, before considering year-end adjustments relating to the following:
 Consultants were hired for a special project at a total fee not to exceed P650,000. The entity
had recorded P550,000 of this fee based on billings for work performed in 2015.
 The attorney’s letter requested by the auditors dated January 31, 2016, indicated that legal fees
of P60,000 were billed on January 15, 2016 for work performed in November 2015, and
unbilled fees for December 2015 were P70,000.
What amount should be reported for professional fees expense for 2015?
a. 1,050,000
b. 950,000
c. 880,000
d. 820,000

Problem 42 Answer B

Professional fees expense per book 820,000

Accrued legal fees – November 60,000
Accrued legal fees – December 70,000
Adjusted professional fees expense 950,000
The entity already recorded P550,000 out of total consultants’ fee of P650,000. The balance of
P100,000 is not recognized because no work has been performed as yet.

19.
Problem I (Current assets)
An entity provided the following trial balance on June 30, 2015:
Cash overdraft ( 200,000) Property, plant and equipment, net 1,900,000
 Accounts receivable, net 700,000 Accounts payable and accrued expenses 640,000
Inventory 1,200,000 Share capital 3,000,000
Prepaid expenses 200,000 Share premium 500,000
Land held for resale 2,000,000 Retained earnings 1,660,000
Checks amounting to P600,000 were written to vendors and recorded on June 30 resulting in cash
overdraft of P200,000. The checks were mailed on July 9. Land held for resale was sold for cash
on July 15. The financial statements were issued on July 31. On June 30, 2015, what total amount
should be reported as current assets?
a. 4,500,000
b. 4,100,000
c. 4,300,000
d. 2,500,000

Problem 1 Answer A
Cash (600,000 -200,000 overdraft) 400,000
Accounts receivable 700,000
Inventory 1,200,000
Prepaid expenses 200,000
Land held for resale 2,000,000
Total current assets 4,500,000

20. Problem 7 (Impairment of accounts receivable)

An entity reported the following accounts receivable on December 31, 2015:

Customer A 1,000,000
Customer B 1,500,000
Customer C 2,000,000
Customer D 2,500,000
All other accounts receivable not individually significant 3,500,000
The entity determined that Customer A receivable is totally impaired and Customer B receivable
is impaired by P700,000. The other receivables from Customers C and D are not considered
impaired. The entity determined that a composite rate of 10% is appropriate to measure impairment
on the remaining accounts receivable. What is the total impairment loss of accounts receivable for
2015?
a. 2,500,000
b. 2,050,000
c. 1,050,000
d. 2,750,000

Problem 7 Answer A
Customer A 1,000,000
Customer B 700,000
Total other receivables 800,000
Total impairment loss 2,500,000
 Customer C 2,000,000
Customer D 2,500,000
Other accounts receivable 3,500,000
Total other receivables for collective assessment of impairment 8,000,000
Under IFRS significant accounts receivable not impaired should be combined with other
accounts receivable not individually significant for collective assessment of impairment.

21. Problem 29 (Sale and leaseback)

On January 1, 2015, an entity sold a machine for P5,000,000. The fair value of the machine was
P6,500,000 on the date of sale. The machine had a carrying amount of P7,000,000 and remaining
life of 15 years. The entity immediately leased back the machine for 5 years at an annual rental
that was determined to be sufficiently lower than the market rent. What total amount of loss should
be recognized immediately in 2015?
a. 400,000
b. 800,000
c. 500,000
d. 0

Problem 29 Answer B

Fair value of machine 6,500,000

Carrying amount 7,000,000
Impairment loss ( 500,000)

Sale price 5,000,000

Fair value 6,500,000
Deferred loss ( 1,500,000)

Impairment loss 500,000

Amortization of deferred loss (1,500,000 / 5 years) 300,000
Total loss to be recognized in 2015 800,000

If the leaseback is an operating lease and the sale price is below fair value of the asset
compensated by below market rent:

a. The difference between the sale price and the fair value is a deferred loss to be amortized
over the lease term.
b. If the fair value is below the carrying amount, the carrying amount is written down to fair
value and the writedown is recognized immediately as an impairment loss.
22. Problem 34 (Income tax)

An entity reported P9,000,000 income before provision for income tax. The following data are
provided for the current year:
Rent received in advance 1,600,000
Income from exempt municipal bonds 2,000,000
Depreciation deduction for income tax purposes in excess of depreciation
reported for financial reporting purposes 1,000,000
Tax payment during the current year 500,000
Income tax rate 30%
What amount of current income tax liability should be reported at year-end?
a. 1,780,000
b. 2,280,000
c. 2,580,000
d. 2,880,000

Problem 34 Answer A

Financial income 9,000,000

Rent received in advance 1,600,000
Tax exempt income ( 2,000,000)
Tax depreciation in excess of financial depreciation (1,000,000)
Taxable income 7,600,000

Current tax expense (30% x 7,600,000) 2,280,000

Tax payment during the year ( 500,000)
Current tax liability 1,780,000

23. Problem 39 (Cash basis)

An entity had the following beginning and ending balances in prepaid expenses and accrued
liabilities for the current year:
Prepaid expenses Accrued liabilities
Beginning balance 5,000 8,000
Ending balance 10,000 20,000
Debits to operating expenses totaled P100,000. What amount was paid for operating expenses
during the current year?
a. 83,000
b. 93,000
c. 107,000
d. 117,000
Problem 39 Answer B

Operating expenses 100,000

Beginning prepaid expenses ( 5,000)
Ending prepaid expenses 10,000
Beginning accrued liabilities 8,000
Ending accrued liabilities ( 20,000)
Operating expenses paid 93,000

24. Problem 45 (Operating activities)

An entity reported net income of P5,000,000 for the current year. Depreciation expense was
P1,900,000. The following working capital accounts changed:
Accounts receivable 1,100,000
increase
Nontrading equity investment 1,600,000
increase
Inventory 730,000
increase
Nontrade note payable 1,500,000
increase
Accounts payable 1,220,000
increase
Under the indirect method, what net amount of adjustments is required to reconcile net income
to net cash provided by operating activities?
a. 4,950,000
b. 1,050,000
c. 1,290,000
d. 310,000

Problem 45 Answer C

Depreciation 1,900,000
Increase in accounts receivable (1,100,000)
Increase in inventory ( 730,000)
Increase in accounts payable 1,220,000
Net adjustment to net income as an addition 1,290,000
The increase in nontrading equity investment is an investing activity.
The increase in nontrade note payable is a financing activity.
SITUATION PROBLEM 3 – GROSS PROFIT METHOD

On December 31, 2015, a fire damaged the warehouse and factory of an entity completely
destroying the goods in process inventory. There was no damage to the raw materials, finished
goods and factory supplies The physical inventory revealed the following.
January 1 December 31
Raw materials 1,700,000 2,000,000
Goods in process 4,300,000 0
Finished goods 6,000.000 4,500,000
Factory supplies 500,000 400,000
The gross profit margin historically approximated 30% of sales. The sales for the year amounted
to P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for the year
amounted to P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
25. What is the cost of raw materials used?
a. 5,700,000
b. 3,700,000
c. 3,800,000
d. 3,600,000

26. What is the total manufacturing cost?

a. 13,000,000
b. 11,800,000
c. 11,700,000
d. 11,600,000

27. What is the cost of goods sold?

a. 12,000,000
b. 16,000,000
c. 13,000,000
d. 14,000,000

28. What is the cost of goods in process inventory destroyed by fire?

a. 3,500,000
b. 3,800,000
c. 2,500,000
d. 1,500,000

SOLUTION – SITUATION PROBLEM 3

Question 1 Answer B

Raw materials – January 1 1,700,000

Purchases 4,000,000
Raw materials available for use 5,700,000
 Raw materials – December 31 ( 2,000,000)
Raw materials used 3,700,000

Question 2 Answer C

Raw materials used 3,700,000

Direct labor 5,000,000
Manufacturing overhead (60% x 5,000,000) 3,000,000
Total manufacturing cost 11,700,000

The change in the factory supplies is no longer considered because it is already part of the
manufacturing overhead applied.

Question 3 Answer D

Cost of goods sold (70% x 20,000,000) 14,000,000

The cost ratio is 70% because the gross profit rate is 30% on sales.

Question 4 Answer A

Total manufacturing cost 11,700,000

Goods in process – January 1 4,300,000
Total goods in process 16,000,000
Goods in process – December 31 (SQUEEZE) ( 3,500,000)
Cost of goods manufactured 12,500,000
Finished goods – January 1 6,000,000
Goods available for sale 18,500,000
Finished goods – December 31 ( 4,500,000)
Cost of goods sold 14,000,000

The cost of ending goods in process is computed by working back from the cost of goods sold.
SITUATION PROBLEM I – BANK RECONCILIATION

An entity had the following bank reconciliation on June 30, 2015:

Balance per bank statement, June 30 3,000,000
Deposit transit 400,000
Total 3,400,000
Outstanding checks ( 900,000)
Balance per book, June 30 2,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for the depositor entity) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30 cleared through the bank in July. The deposit in transit
amounted to P1,000,000 and the outstanding checks totaled P600,000 on July 31.
29. What is the amount of cash in bank that should be reported on July 31, 2015?
a. 5,000,000
b. 5,400,000
c. 4,550,000
d. 4,900,000

30. What is the cash balance per ledger on July 31, 2015?
a. 5,350,000
b. 5,550,000
c. 4,500,000
d. 5,400,000

31. What is the amount of cash receipts for book for the month of July?
a. 9,800,000
b. 8,600,000
c. 9,400,000
d. 9,600,000

32. What is the amount of cash disbursements per book for the month of July?
a. 7,300,000
b. 6,700,000
c. 6,850,000
d. 6,550,000

SOLUTION – SITUATION PROBLEM I

Question 1 Answer B

Balance per bank – June 30 3,000,000

July bank deposits 9,000,000
 July bank disbursements ( 7,000,000)
Balance per bank – July 31 5,000,000
July deposits in transit 1,000,000
July outstanding checks ( 600,000)
Adjusted bank balance 5,400,000
Question 2 Answer A

Balance per ledger – July 31 (SQUEEZE) 5,350,000

Note collected by bank in July 200,000
NSF check in July ( 140,000)
Service charge in July ( 10,000)
Adjusted book balance 5,400,000

The balance per book on July 31 is “squeezed” by working back from the adjusted balance.

Question 3 Answer C

Deposits per bank statement for July 9,000,000

Note collected by bank in July ( 200,000)
Deposit in transit – June 30 ( 400,000)
Deposit in transit – July 31 1,000,000
Cash receipts per book for July 9,400,000
Question 4 Answer D

Disbursements per bank statement for July 7,000,000

NSF check in July ( 140,000)
Service charge in July ( 10,000)
Outstanding checks – June 30 ( 900,000)
Outstanding checks – July 31 600,000
Cash disbursements per book for July 6,550,000

SITUATION PROBLEM 5 – PROPERTY, PLANT AND EQUIPMENT

January 1, 2015, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000
During the current year, the following transactions occurred:

* A tract of land was acquired for P2,000,000 cash as a building site.

* A plant facility consisting of land and building was acquired in exchange for 200,000 shares
of the entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange.
The plant facility was carried on the seller’s books at P1,600,000 for land and P5,400,000 for
the building at the exchange date. Current appraised values for the land and the building,
respectively, are P2,000,000 and P8,000,000. The building has an expected life of forty years
with a P200,000 residual value.

* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional
costs incurred were freight and unloading P100,000 and installation P300,000. The equipment
has a useful life of ten years with no residual value.

* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the
entity’s various plant locations. These expenditures had an estimated useful life of fifteen
years.

* Research and development costs were P1,100,000 for the year.

* A machine costing P200,000 on January 1, 2008 was scrapped on June 30, 2015. Straight line
depreciation had been recorded on the basis of a 10-year life with no residual value. A machine
was sold for P500,000 on July 1, 2015. Original cost of the machine sold was P700,000 on
January 1, 2012, and it was depreciated on the straight line basis over an estimated useful life
of eight years and a residual value of P50,000.

33. What is the total cost of buildings on December 31, 2015?

a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000

34. What is total cost of machinery and equipment on December 31, 2015?
a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000

SOLUTION – SITUATION PROBLEM 5

Question 3 Answer C

Buildings – January 1 20,000,000

Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 27,200,000
Question 4 Answer B
 Machinery and equipment - January 1 8,000,000
Machinery and equipment purchased 4,000,000
Freight and unloading 100,000
Installation 300,000
Machinery scrapped ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 11,500,000

SITUATION PROBLEM 4 – INVESTMENT IN ASSOCIATE

On January 1, 2015, an entity acquired a 10% interest in an investee for P3,000,000. The
investment was accounted for under the cost method. During 2015, the investee reported net
income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2016, the entity acquired a
further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net
assets of the investee was P36,000,000 and the fair value of the 10% existing interest was
P3,500,000. The fair value of the net assets of the investee is equal to carrying amount except for
an equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had
a remaining life of 5 years. The investee reported net income of P8,000,000 for 2016 and paid
dividend of P5,000,000 on December 31, 2016.

35. What is the goodwill arising from the acquisition on January 1, 2016?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0

36. What total amount of income should be recognized by the investor in 2016?
a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000

SOLUTION – SITUATION PROBLEM 4

Question 2 Answer B

Existing 10% interest remeasured at fair value 3,500,000

New 15% interest 8,500,000
Total cost – January 1, 2016 12,000,000
Net assets acquired (25% x 36,000,000) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
 Excess attributable to equipment whose fair value is greater than carrying
amount (25% x 4,000,000) ( 1,000,000)
Goodwill 2,000,000

Question 3 Answer C

Share in net income (25% x 8,000,000) 2,000,000

Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000)
Net investment income 1,800,000

Fair value of 10% interest 3,500,000

Historical cost 3,000,000
Remeasurement gain 500,000
Net investment income 1,800,000
Total income in 2016 2,300,000

If the investment in associate is achieved in stages the old interest is remeasured at fair value
through profit or loss.

Problem 18 (Depletion)

37. In 2015, an entity purchased property with natural resources for P28,000,000. The property
had a residual value of P5,000,000. However, the entity is required to restore the property to the
original condition at a discounted amount of P2,000,000. In 2015, the entity spent P1,000,000 in
development cost and P3,000,000 in building. In 2016, an amount of P4,000,000 was spent for
additional development on the mine. Production began in 2016 and the tons extracted totaled
3,000,000 in 2016 and 2,500,000 in 2017. The remaining tons totaled 7,000,000 and 3,500,000,
respectively on December 31, 2016 and December 31, 2017. What amount of depletion should
recognized in 2017?
a. 10,500,000
b. 12,250,000
c. 9,000,000
d. 8,750,000

Problem 18 Answer D
Purchase price 28,000,000
Development cost – 2015 1,000,000
Development cost – 2016 4,000,000
Estimated restoration cost 2,000,000
Total cost 35,000,000
Residual value ( 5,000,000)
Depletable amount 30,000,000

Production in 2016 3,000,000

Remaining estimate – December 31, 2016 7,000,000
 Total estimate – January 1, 2016 10,000,000

Rate per unit (30,000,000 / 10,000,000) 3.00

Depletion for 2016 (3,000,000 x 3) 9,000,000

Production in 2017 2,500,000

Remaining estimate – December 31, 2017 3,500,000
Total estimate – January 1, 2017 6,000,000

Depletable amount 30,000,000

Depletion 2016 ( 9,000,000)
Remaining depletable amount 21,000,000

New rate (21,000,000 / 6,000,000) 3.50

Depletion 2017 (2,500,000 x 3.50) 8,750,000

Problem 20 (Computer software)

38. During the current year, an entity incurred the following costs to develop and produce a
routine, low-risk computer software product:
Completion of detailed program design or working model 1,300,000
Cost incurred for coding and testing to establish technological feasibility 1,000,000
Other coding costs after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and training materials from product master 2,500,000
Packaging product 900,000
What amount should be capitalized initially as software cost?
a. 5,400,000
b. 3,700,000
c. 5,900,000
d. 6,900,000

Problem 20 Answer C
Other coding cost after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters 1,500,000
Total capitalized cost of computer software 5,900,000

The completion of detailed program design and the cost incurred to establish technological
feasibility should be expensed immediately.

The duplication of computer software and packaging product should be charged to inventory.
Problem 23 (Goodwill)

39. On December 31, 2015, an entity purchased for P40,000,000 cash all of the outstanding
ordinary shares of another entity when the subsidiary’s statement of financial position showed net
assets of P32,000,000. The subsidiary’s assets and liabilities had fair value different from the
carrying amount as follows:
Carrying amount Fair value
Property, plant and equipment, net 50,000,000 57,500,000
Other assets 5,000,000 0
Long-term debt 30,000,000 28,000,000
What amount should be reported as goodwill in the December 31, 2015 consolidated statement of
financial position of the acquirer and its wholly-owned subsidiary?
a. 3,500,000
b. 2,500,000
c. 7,500,000
d. 8,000,000

Problem 23 Answer A
Net assets per book 32,000,000
Fair value of property, plant and equipment greater 7,500,000
Fair value of other assets zero ( 5,000,000)
Fair value of long-term debt lower 2,000,000
Net assets at fair value 36,500,000
Acquisition cost 40,000,000
Goodwill 3,500,000
The net assets should be recognized at fair value in a business combination.

Problem 31 (Actual return on plan assets)

40. An entity provided the following data related to the pension plan.
December 31, 2015 December 31, 2016
Defined benefit obligation 8,400,000 11,100,000
Plan assets at fair value 9,000,000 9,900,000
Net actuarial loss 1,440,000 1,500,000
Discount rate 10% 9%
Expected rate of return 8% 7%
The contribution was P1,260,000 in 2016 and benefits paid totaled P1,125,000. What was the
actual return on plan assets in 2016?
a. 900,000
b. 765,000
c. 600,000
d. 465,000

Problem 31 Answer B

Plan assets at fair value – 12/21/2015 9,000,000

Contribution to plan 2016 1,260,000
Actual return on plan assets (SQUEEZE) 765,000
Total 11,025,000
Benefits paid in 2016 ( 1,125,000)
Plan assets at fair value – 12/31/2016 9,900,000

The actual return or plan assets is “squeezed” by working back from ending plan assets at fair
value.

41-50 THEORIES