CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

FINAL PREBOARD EXAM

1. Accounts payable 500,000

Accrued expense 300,000
Dividends payable (7 x 100,000) 700,000
Accrued interest on bonds payable (5,000,000 x 8% x 6/12) 200,000
Income tax payable (6,000,000 x 25% = 1,500,000 – 1,000,000) 500,000
Current liabilities 2,200,000 C
2. Legal and audit fees 1,700,000
Rent expense (2,400,000 x ½) 1,200,000
Officers’ salaries 1,500,000
Insurance 850,000
General and administrative expense 5,250,000 A

3. Raw materials purchased 4,300,000

Freight in 250,000
Increase in raw materials inventory (150,000)
Raw materials used 4,400,000
Direct labor 2,000,000
Factory overhead 3,000,000
Total manufacturing cost 9,400,000
Decrease in goods in process 200,000
Cost of goods manufactured 9,600,000 B
4. Total unadjusted current assets (700,000 + 1,200,000 + 600,000) 2,500,000
Selling price of unsold goods (deduction from AR) (260,000)
Cost of unsold goods (260,000 / 1.30) – add back to inventory 200,000
Correct total current assets 2,440,000 A
5. Carrying amount – April 1, 2021 (5,000,000 – 3,750,000) 1,250,000
FVLCOD – April 1, 2021 (500,000 – 50,000) 450,000
Impairment loss on April 1, 2021 800,000
FVLCOD – December 31, 2021 (750,000 – 100,000) 650,000
FVLCOD – April 1, 2021 450,000
Gain on reversal of impairment 200,000 D
6. RE – January 1, 2022 (1,100,000 + 600,000 – 300,000) 1,400,000
Correction of error (650,000)
Corrected RE – January 1, 2022 750,000
Net income for 2022 700,000
Dividend declared in 2022 (150,000)
RE – December 31, 2022 1,300,000 A
7. First Bank – checking account 1,350,000
First Bank – savings account 250,000
Undeposited customer checks 50,000
Currency and coins 40,000
2-month treasury bill 150,000
Cash and cash equivalents 1,840,000 A
8. Unadjusted cash in bank 3,000,000
Undelivered check 100,000
Chris’s postdated check 300,000
Cash receipt for 2022 (window dressing) (200,000)
Correct amount of cash 3,200,000 A
9. Accounts receivable – beginning 860,000
Sales on account (7,900,000 – 2,060,000) 5,840,000
Collection of accounts receivable beyond the discount period (900,000)
Collection of accounts receivable within the discount period (2,400,000)
Sales discount (2,400,000 / 96% = 2,500,000 x 4%) (100,000)
Accounts written off (50,000)
Credit memo issued to credit customers for sales returns and allowance (250,000)
Gross accounts receivable 3,000,000 A
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10. Allowance for doubtful accounts – beginning 80,000

Doubtful accounts expense (squeeze) 100,000 B
Recovery of accounts written off 70,000
Accounts written off (50,000)
Allowance for doubtful accounts per aging 200,000
11. 16 – 30 days (1,400,000 x 5%) 70,000
31 – 60 days (400,000 x 10%) 40,000
Over 60 days (200,000 x 50%) 100,000
Required allowance for doubtful accounts per aging 210,000
Gross accounts receivable 4,000,000
Allowance for doubtful accounts (210,000)
Allowance for sales discount (2,000,000 x 50% x 2%) (20,000)
Net realizable value 3,770,000 C
12. Invoice price (5,000,000 x 70% x 80%) 2,800,000
Sales discount (2,800,000 x 2%) (56,000)
Reimbursement for payment of freight 200,000
Total collection from customer 2,944,000 C
13. Cost 1,200,000
NRV (1,360,000 – 20,000) 1,340,000
LCNRV 1,200,000 A
14. Cash sales 1,000,000
Credit sales (1,200,000 + 7,700,000 – 800,000) 8,100,000
Total sales 9,100,000
Cost of goods available for sale (2,000,000 + 7,000,000) 9,000,000
Cost of goods sold (9,100,000 / 1.4) (6,500,000)
Inventory loss 2,500,000 A
15. Cost 3,240,000
Carrying amount of net assets acquired (8,000,000 x 30%) 2,400,000
Excess cost 840,000
Excess cost attributable to equipment (800,000 x 30%) (240,000)
Goodwill on the purchase 600,000
Share in the net income (1,600,000 x 30%) 480,000
Amortization of excess cost – equipment (240,000 / 6) (40,000)
Investment income for 2021 440,000 B
16. Cost 3,240,000
Investment income 440,000
Dividends received (10,000 x 20) (200,000)
Carrying amount 3,480,000
Recoverable amount (10,000 x 310) 3,100,000
Impairment loss for 2021 380,000 A
17. Cost of the machine (950,000 + 30,000) 980,000 D
18. Carrying amount (5,000,000 – 3,000,000) 2,000,000
Recoverable amount equal to fair value of equipment 1,250,000
Impairment loss 750,000 C
19. PV of interest payments (5,000,000 x 4% = 200,000 x 2.40) 480,000
PV of principal (5,000,000 x 0.71) 3,550,000
Cost of the equipment 4,030,000 B
20. Cost (2,500,000 – 100,000) 2,400,000
2021 depreciation (2,400,000 x 25%) (600,000)
Carrying amount – January 1, 2022 1,800,000
2022 depreciation – (1,800,000 x 25%) (450,000)
Carrying amount – January 1, 2023 1,350,000
2023 depreciation (1,350,000 – 450,000 = 900,000 / 6) 150,000 A
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21. Cost of the land (1,200,000 + 150,000 + 40,000) 1,390,000 A

22. Cost of the building (80,000 + 50,000 + 3,250,000) 3,380,000 B

23. Cost of the machine (850,000 + 30,000 + 10,000 + 20,000) 910,000 C

24. Research and development expense (2,500,000 + 4,000,000) 6,500,000 B

25. 8,000,000 x 10% 800,000

10,000,000 x 5.5% 550,000
Total borrowing cost incurred 1,350,000

Average capitalization rate (1,350,000 / 18,000,000) 7.50% D

26. Cost 4,200,000

Total amortization from 2018 to 2020 (4,200,000 / 10 x 2.5) (1,050,000)
Carrying amount – January 1, 2021 3,150,000

Amortization for 2021 (3,150,000 / 5) 630,000 C

27. Carrying amount – December 31, 2021 (10,000,000 – 2,000,000) 8,000,000

Recoverable amount – December 31, 2021 7,200,000
Impairment loss for 2021 800,000 A

28. Depreciation for 2022 (7,200,000 / 4) 1,800,000

Carrying amount – December 31, 2022 as if no impairment (10M – 4M) 6,000,000

Recoverable amount 6,600,000

Measurement (lower) 6,000,000

Carrying amount per book (7,200,000 – 1,800,000) 5,400,000
Gain on reversal of impairment for 2022 600,000 C

29. Total rent receipts (600,000 x 56 months) 33,600,000

Rent income for 2021 (33,600,000 / 5 = 6,720,000 x 7/12) 3,920,000 B

30. Stand-alone selling price per coupon (20 x 80%) 16

Product (15,000 x 80) 1,200,000 1,200 / 1,440 1,000,000 B

Coupons (15,000 x 16) 240,000 240 / 1,440 200,000
Total 1,440,000 1,200,000

31. Stand-alone selling price per coupon (200 x 75%) 150

Product (30,000 x 200) 6,000,000 6,000 / 7,500 4,800,000

Coupons (30,000 x 150) 1,500,000 1,500 / 7,500 1,200,000
Total 7,500,000 6,000,000

Revenue from initial sale 4,800,000

Revenue from delivery of free product (1,200,000 / 10,000 x 6,000) 720,000
Total revenue 5,520,000 D

32. Face amount of bonds converted 5,000,000

Unamortized discount (500,000 x 5,000,000 / 10,000,000) (250,000)
Carrying amount of bonds converted 4,750,000
Share premium – conversion privilege (2,000,000 x 5M / 10M) 1,000,000
Par value of shares issued (5,000 x 50 x 20) (5,000,000)
Balance 750,000
Conversion cost (share issue cost) (200,000)
Share premium as a result of conversion 550,000 D
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33. Carrying amount – January 1, 2021 (8,000,000 – 640,000) 7,360,000

Discount amortization (January 1 to June 30)
Interest expense (7,360,000 x 10% x 6/12) 368,000
Interest paid (8,000,000 x 9% x 6/12) 360,000 8,000
Carrying amount – December 31, 2021 7,368,000

Carrying amount retired (7,368,000 x 2,000,000 / 8,000,000) 1,842,000

Retirement price (2,000,000 x 1.03) 2,060,000
Loss on retirement (218,000) A

34. Remaining carrying amount – June 30, 2021 (7,368,000 – 1,842,000) 5,526,000
Discount amortization (June 30 to December 31)
Interest expense (5,526,000 x 10% x 6 / 12) 276,300
Interest paid (6,000,000 x 9% x 6/12) 270,000 6,300
Carrying amount – December 31, 2021 5,532,300 B

35. PV of interest (6,000,000 x 8% = 480,000 x 2.40) 1,152,000

PV of principal (6,000,000 x 0.71) 4,260,000
PV of the new liability based on 12% 5,412,000
Arrangement fee 150,000
PV of the new liability and arrangement fee based on 12% 5,562,000

Difference (8,000,000 + 960,000 = 8,960,000 – 5,562,000) 3,398,000

Difference is 37.92% (3,398,000 / 8,960,000) of the carrying amount of the old liability
and therefore, there is substantial modification.

PV of interest (6,000,000 x 8% = 480,000 x 2.49) 1,195,200

PV of principal (6,000,000 x 0.75) 4,500,000
PV of the new liability based on 10% 5,695,200

Carrying amount of old liability 8,960,000

FV of new liability 5,695,200
Total gain 3,264,800
Arrangement fee (150,000)
Gain on extinguishment 3,114,800 A

36. Gross profit for 2021(3,520,000 – 2,800,000) 720,000 B

37. Interest income for 2021 (3,520,000 – 600,000 = 2,920,000 x 10% x 6/12) 146,000 B
38. Projected benefit obligation – beginning 5,000,000
Current service cost 2,000,000
Past service cost 500,000
Interest cost (5,000,000 x 10%) 500,000
Actuarial gain (300,000)
Benefits paid (1,000,000)
Projected benefit obligation – ending 6,700,000 C

39. FV of plan assets – beginning 4,000,000

Contribution to the plan 1,400,000
Actual return 900,000
Benefits paid (1,000,000)
FV of plan assets – ending 5,300,000 A
40. Future taxable amount for the year (200,000 / 25%) 800,000
Accounting depreciation 1,500,000
Tax depreciation 2,300,000 A
41. Pretax financial accounting 9,000,000
Nontaxable interest received (1,000,000)
Long-term accrual loss in excess of deductible amount 1,500,000
Tax depreciation in excess of accounting depreciation (2,000,000)
Taxable income 7,500,000
Current tax expense (7,500,000 x 25%) 1,875,000 B
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42. Current tax expense 1,875,000

Deferred tax expense (benefit)
Increase in deferred tax liability (2,000,000 x 25%) 500,000
Increase in deferred tax asset (1,500,000 x 25%) (375,000) 125,000
Total tax expense 2,000,000 A

Journal entries for numbers 43 to 45:

Carrying amount of the preference shares (4,000,000 + 2,000,000 = 6,000,000 / 400,000 ) 15 per share

Preference share capital (50,000 x 10) 500,000

Share premium – preference (50,000 x (15 – 10)) 250,000
Retained earnings (balancing) 500,000
Cash (50,000 x 25) 1,250,000

Treasury shares (10,000 x 120) 1,200,000

Cash 1,200,000

Cash (5,000 x 100) 500,000

Treasury shares (5,000 x 60) 300,000
Share premium – treasury 200,000

Income summary 4,000,000

Retained earnings 4,000,000

Retained earnings (3,500,000 x 10%) 350,000

Cash 350,000

Retained earnings (85,000 x 20) 1,700,000

Cash 1,700,000

Retained earnings 900,000

Appropriated RE – treasury shares 900,000
43. Share premium – preference shares (2,000,000 – 250,000) 1,750,000
Share premium – ordinary shares 1,500,000
Share premium – treasury shares 200,000
Share premium to be reported 3,450,000 A
44. Unapprop. RE (3M – 500k + 4M – 350k – 1.7M – 900k) 3,550,000 A

45. Preference share capital 3,500,000

Ordinary share capital 5,000,000
Share premium 3,450,000
Total retained earnings (3,550,000 + 900,000) 4,450,000
Treasury shares (900,000)
Shareholders’ equity 15,500,000 C
46. January 1 (800,000 x 1.1 x 12/12) 880,000
May 1 (60,000 x 1.1 x 8/12) 44,000
July 1 (100,000 x 1.1 x 6/12) (55,000)
Weighted average ordinary shares outstanding 869,000
Basic EPS (9,500,000 / 869,000) 10.93 B

47. Net income 9,500,000

After tax interest actually paid
on convertible bonds (5,000,000 x 12% x 6/12 x 75%) 225,000
Adjusted net income 9,725,000
Weighted average ordinary shares outstanding 869,000
Weighted average potential ordinary shares (400,000 x 1.1 x 6/12) 220,000
Balance 1,089,000
Diluted EPS (9,725,000 / 1,089,000) 8.93 C
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48. Prepaid royalties at year-end (650,000 + 250,000) 900,000 D

49. Net increase in borrowings (2,500,000 – 800,000) 1,700,000

Acquisition of property through financing (200,000)
Net increase in borrowings involving cash 1,500,000
Issue of share capital 1,500,000
Dividends paid (700,000)
Net cash flow provided by financing activities 2,300,000 D

50. Year Cumulative Expense

2021 (200,000 x 6 x 1/3) 400,000 400,000

2022 (180,000 x 6 x 2/3) 720,000 320,000
2023 (180,000 x 6 x 3/3) 1,080,000 360,000

Proceeds from issue of shares (180,000 x 15 x 80%) 2,160,000

Share options outstanding 1,080,000
Par value of shares issued (180,000 x 10) (1,800,000)
Share premium from issue of shares 1,440,000 A

51. C 56. C 61. B 66. C

52. B 57. B 62. B 67. B
53. A 58. C 63. A 68. D
54. A 59. A 64. D 69. A
55. B 60. D 65. B 70. B

END