CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS

FIRST PREBOARD EXAMINATION SOLUTIONS

1. Unadjusted current assets 37,000,000

Bond sinking fund (1,000,000)
Selling price of unsold goods (6,000,000)
Cost of unsold goods (3,000,000 / 1.5) 4,000,000
Total current assets 34,000,000 A

2. Unadjusted net income 8,500,000

Liquidating dividend ( 150,000)
Revaluation surplus ( 1,250,000)
Debit adjusted resulting from change in accounting policy 800,000
Loss attributable to credit risk 1,400,000
Correct net income 9,300,000 D

3. Machine 3,150,000
Accumulated depreciation (3M / 10 x 3) 900,000
Income tax payable (3,150,000 – 900,000 = 2,250,000 x 25%) 562,500
Retained earnings 1,687,500 C

4. Carrying amount – December 31, 2025 (20,000,000 – 5,000,000) 15,000,000

FVLCOD – December 31, 2025 (12,000,000 – 200,000) 11,800,000
Impairment loss in 2025 3,200,000

Carrying amount – December 31, 2026 as if not held for sale 13,000,000
Recoverable amount 11,500,000

Measurement of machine when reclassified to PPE (lower) 11,500,000

Carrying amount – December 31, 2026 per books 11,800,000
Loss on reclassification in 2026 ( 300,000) C

5. Pretax loss from discontinued operation (5,600,000 + 1,200,000) 6,800,000

Tax effect (6,800,000 x 25%) ( 1,700,000)
Loss from discontinued operation, net of tax 5,100,000 B

6. Variable expense (8,000,000 x 30%) 2,400,000

Fixed expense incurred in 1st quarter (5,600,000 – 3,200,000 – 1,200,000) 1,200,000
Allocated advertising (3,200,000 / 4) 800,000
Allocated depreciation (1,200,000 / 4) 300,000
Total expense for the first quarter 4,700,000 C

7. Total profit (5,000,000 + 1,400,000 + 340,000) 6,740,000

Total loss (2,200,000 + 1,700,000) 3,900,000

Minimum profit or loss to be reportable segment (6,740,000 x 10%) 674,000 B

8. Undeposited collections 600,000

BPI checking account 4,000,000
BPI fund for payroll 1,000,000
BPI money market instrument 2,000,000
BPI dividend payment account 450,000
Cash and cash equivalents 8,050,000

Recognized as receivable (150,000 + 250,000) 400,000 B

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9. Accounted for (4,000 + 20,000 + 66,000) 90,000

Imprest balance 100,000
Shortage (10,000)

Receivable 20,000
Cash short / over 10,000
Expense 66,000
Petty cash fund 96,000

Adjusted balance of petty cash fund (100,000 – 96,000) 4,000 B

10. 0 – 30 days (10,000,000 x 2%) 200,000

31 – 60 days (4,000,000 x 10%) 400,000
Over 60 days (2,000,000 x 20%) 400,000
Required allowance for doubtful accounts 1,000,000
Allowance for doubtful accounts – debit balance 40,000
Required allowance 1,000,000
Doubtful accounts expense for the year 1,040,000 D

11. Sale of merchandise on account, 2/10, n/30 8,000,000

Collection within the discount period (2,940,000)
Sales discount (2,940,000 / 98% x 2%) ( 60,000)
Collection beyond the discount period (2,000,000)
Sales return granted ( 200,000)
Gross accounts receivable 2,800,000
Allowance for sales return ( 40,000)
Net realizable value 2,760,000 A

12. Accounts receivable on December 31, 2025 (3,000,000 – 1,940,000 – 60,000) 1,000,000
Note payable on December 31, 2025
Note payable – December 1, 2025 2,600,000
Less: principal payment (1,940,000 – (2,600,000 x 12% x 1/12)) ( 1,914,000) ( 686,000)
Entity’s equity in the assigned accounts 314,000 C

13. Maturity value (5,000,000 x 12% x 90 / 360 = 150,000 + 5,000,000) 5,150,000

Discount (5,150,000 x 15% x 60 / 360) ( 128,750)
Proceeds from discounting 5,021,250
Carrying amount of note (5M x 12% x 30 / 360 = 50,000 + 5,000,000) (5,050,000)
Interest expense ( 28,750) C

14. Accounts receivable 1,500,000

Service charge (1,500,000 x 2%) ( 30,000)
Due from factor (1,500,000 x 4%) ( 60,000)
Interest expense (1,500,000 x 12% x 51 / 365) ( 25,151)
Cash receipt from factoring 1,384,849

Initial loss on factoring (30,000 + 25,151 + 40,000) 95,151 A

15. First payment of note 500,000

Present value of succeeding payments of note (500,000 x 5.33) 2,665,000
Present value of note 3,165,000
Carrying amount of equipment 2,000,000
Gain on disposal 1,165,000 D

16. Interest income for 2026 (4,000,000 x 9%) 360,000

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Carrying amount of loan – 12/31/2026 4,000,000

Present value of expected cash flows (4,000,000 x 70% x 0.77) 2,156,000
Expected credit loss 1,844,000
Multiply by probability of default 35%
Required allowance for impairment – 12/31/2026 645,400
Allowance for impairment – 12/31/2025 (172,800)
Impairment loss for the year 2026 472,600 B

17. Gross purchase 10,000,000

Purchase return ( 1,000,000)
Purchase discount (10M – 1M = 9,000,000 x 2%) ( 180,000)
Net purchase 8,820,000 B

18. Correct amount of inventory (5,000,000 + 380,000 + 510,000) 5,890,000 C

19. February 22 purchase (20,000 x 43) 860,000

February 17 purchase (10,000 x 45) 450,000
Cost of inventory on February 28 1,310,000 C

20.
A B
Cost 3,000,000 3,600,000
NRV 2,800,000 4,600,000
Lower 2,800,000 3,600,000

Cost (3,000,000 + 3,600,000) 6,600,000

Inventory to be reported – LCNRV (2.8M + 3.6M) 6,400,000
Required allowance for inventory writedown 200,000
Allowance for writedown – beginning balance ( 450,000)
Gain on reversal of writedown ( 250,000) D

21. Cost of goods available for sale (7,000,000 + 11,000,000) 18,000,000

Cost of goods sold (22M – 1.5M = 20,500,000 x 70%) (14,350,000)
Estimated ending inventory 3,650,000
Goods out on consignment ( 500,000)
Fire loss 3,150,000 A

22. FVLCOD of llamas (2,960,000 + 188,000 – 23,500) 3,124,500

Gain from harvest of wool 360,000 D

23. Cost ratio – conservative (5,320,000 / 7,600,000) 70%

Cost ratio – average (5,320,000 / 7,000,000) 76%

Cost of inventory – conservative (1,500,000 x 70%) 1,050,000

Cost of inventory – average (1,500,000 x 76%) 1,140,000 C

24. Unrealized loss in profit or loss (4,800,000 – 5,000,000) 200,000

Gain on disposal in 2026 (1,800,000 – 1,600,000) 200,000 C

25.
Date Interest income Interest received Premium amort. Carrying amount
1/1/2025 8,412,000
12/31/2025 672,960 800,000 127,040 8,284,960
12/31/2026 662,796 800,000 137,204 8,147,756
Fair value – December 31, 2025 (8,000,000 x 95%) 7,600,000
Carrying amount – December 31, 2025 per amortization schedule 8,284,960
Unrealized loss in OCI for 2025 684,960
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Fair value – December 31, 2026 (8,000,000 x 90%) 7,200,000

Carrying amount – December 31, 2026 per amortization schedule 8,147,756
Cumulative unrealized loss in OCI as of December 31, 2026 947,756
Unrealized loss in OCI for 2025 ( 684,960)
Unrealized loss in OCI for 2026 262,796 B

26. Interest income (5,000,000 x 12%) 600,000

Gain from change in fair value (5M x 120% = 6,000,000 – 5,380,000) 620,000 A

27. Cost of investment (20,000 x 240) 4,800,000

Carrying amount and fair value of net assets acquired (16M x 25%) (4,000,000)
Broadcast license 800,000
Share in the net income of associate (7,200,000 x 25%) 1,800,000
Amortization of excess – broadcast license (800,000 / 20) ( 40,000)
Investment income 1,760,000

Cost 4,800,000
Investment income 1,760,000
Dividend received (20,000 x 32) ( 640,000)
Carrying amount – December 31, 2025 5,920,000 D

28. Investment income in 2026 (4,000,000 + 300,000 = 4,300,000 x 20%) 860,000 B

29. Revaluation surplus (4,600,000 – 3,000,000) 1,600,000 A

30. Purchase price 4,800,000

Legal fee 30,000
Title insurance 20,000
Special assessment 60,000
Cost of the land 4,910,000

Demolition cost 480,000

Architect fee 250,000
Liability insurance 50,000
Excavation cost 80,000
Payment to contractor 17,600,000
Interest cost – specific borrowing 600,000
Cost of the building 19,060,000 A

31. Cost of material to construct the machine 1,400,000

Labor cost 860,000
Allocated overhead cost 440,000
Cost of installation 240,000
Safety inspection prior to use 80,000
Cost of testing and trial run 200,000
Cost of the machine 3,220,000

Profit from sale of sample goods (120,000 – 80,000) 40,000 D

32. Machine X (50,000 x 120) 6,000,000

Machine Y (3,000,000 x 95% = 2,850,000 + 50,000 + 200,000) 3,100,000
Machine Z (200,000 x 5.146) 1,029,200 D

33. Depreciation with effect of government grant (5,000,000 / 10) 500,000

Cumulative additional depreciation in absence of grant (1,000,000 / 10 x 3) 300,000
Depreciation for 2027 800,000 C
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34. Interest on bank loan (3,000,000 x 12%) 360,000

Interest on long-term loan (5,000,000 x 8%) 400,000
Total interest 760,000
Average capitalization rate (760,000 / 8,000,000) 9.5%
January 1 (2,000,000 x 12/12) 2,000,000
June 30 (2,000,000 x 6/12) 1,000,000
December 31 (1,000,000 x 0/12) 0
Weighted average expenditures 3,000,000
Capitalized borrowing cost (3,000,000 x 9.5%) 285,000 B

35. Cost 5,500,000

2025 depreciation (5,500,000 x 20%) ( 1,100,000)
Carrying amount – December 31, 2025 4,400,000
2026 depreciation (4,400,000 x 20%) ( 880,000)
Carrying amount – December 31, 2026 3,520,000

2027 depreciation (3,520,000 / 8) 440,000 A

36. Purchase price of property 15,000,000

Development cost 9,000,000
Present value of restoration cost (6,000,000 x 0.68) 4,080,000
Cost of mineral property (wasting asset) 28,080,000

Depletion rate (28,080,000 – 3,000,000 = 25,080,000 / 12,000,000) 2.09

Depletion in cost of goods sold (2.09 x 450,000) 940,500 B

37. Depreciation for the first year (1,800,000 / 1,200,000 = 1.5 x 60,000) 90,000 C

38. Carrying amount – January 1, 2025 (25,000,000 – 6,750,000) 18,250,000

Recoverable amount – higher of FVLCOD and value in use 16,950,000
Impairment loss 1,300,000 D

39. Intersegment sales 15,000,000

External revenue (3,000,000 / 10%) 30,000,000
Segment revenue 45,000,000 A

40. Accounts payable 2,800,000

Short-term borrowings 2,100,000
Mortgage payable, current portion 700,000
Bank loan, due June 30, 2026 1,400,000
Current liabilities 7,000,000

Carrying amount of bonds payable (4,200,000 – 700,000) 3,500,000

Mortgage payable, noncurrent portion (4,900,000 – 700,000) 4,200,000
Noncurrent liabilities 7,700,000 A

41. Total adjusting events (2,000,000 + 1,000,000) 3,000,000 D

42. Unrealized gain on bond investment – FVOCI 2,400,000

Unrealized gain on forward contract designated as cash flow hedge 800,000
Translation loss on foreign operations ( 400,000)
Net unrealized gain in OCI – may be recycled to profit or loss 2,800,000 A
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43. Revenue 1,000,000

Expenses (1,600,000)
Operating loss (600,000)
Loss on disposal (200,000)
Pretax loss (800,000)
Tax effect (600,000 x 25%) 200,000
Loss from discontinued operations (600,000) B

44. Petty cash fund (100,000 – 10,000 – 10,000) 80,000

Current account 8,000,000
Cash in bank – set aside for payment of bonds 4,000,000
Cash on hand (1,000,000 – 200,000) 800,000
Treasury bills 2,000,000
Cash and cash equivalents 14,880,000 B

45. Allowance for doubtful accounts before adjustment 100,000

Doubtful accounts expense (5,000,000 x 75% x 4%) 150,000
Recovery of accounts previously written off 15,000
Accounts written off ( 75,000)
Allowance for doubtful accounts after adjustment 190,000 D

46. Loss on purchase commitment in 2025 (2,500,000 – 2,600,000) 100,000

Increase in market value in 2026 (3,000,000 – 2,500,000) 500,000

Gain to be recognized in 2026 – limited to the loss only 100,000 C

47. Cost of goods available for sale 14,200,000

Cost of goods sold (16,000,000 / 1.25) (12,800,000)
Estimated cost of inventory 1,400,000
NRV of usable damaged goods ( 200,000)
Fire loss 1,200,000 C

48. Unrealized gain in OCI for 2025 (3,000,000 – 2,680,000) 320,000

Unrealized gain in OCI for 2026 (3,300,000 – 3,000,000) 300,000
Net credit adjustment to retained earnings (3,100,000 – 2,680,000) 420,000 B

49. Entity A’s gain on exchange (4,200,000 – 3,000,000) 1,200,000

Entity A’s cost of new land (4,200,000 + 1,500,000) 5,700,000
Entity B’s gain on exchange (5,700,000 – 5,400,000) 300,000
Entity B’s cost of new land (5,700,000 – 1,500,000) 4,200,000 B

50. Dividend income from Prompt Company (300,000 / 1,000,000 = 30% x 8M) 2,400,000 A

51. D 61. B
52. D 62. D
53. A 63. B
54. C 64. C
55. B 65. B
56. D 66. C
57. C 67. D
58. C 68. D
59. C 69. B
60. A 70. B

END