ARTS CPA Review

(Academic Review and Training School, Inc.)

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Tel No.: (054) 472-9104; E-mail: artscparev@yahoo.com.

PRESENTATION OF FINANCIAL STATEMENTS (PAS 1)

PRACTICAL ACCOUNTING I MICHAEL B.

BONGALONTA,CPA,MICB,MBA

A. STATEMENT OF FINANCIAL POSITION

PROBLEM 1: KPG Company provided the following on December 31, 2011:

 Accounts Payable amounted to P 500,000 and accrued expenses totaled P 300,000

on December 31, 2011.
 On December 15, 2011, KPG Company declared a cash dividend of P7 per share on
100,000 outstanding shares, payable on January 15, 2012.
 On July 1, 2011, KPG Company issued P 5,000,000, 8% bonds for P 4,400,000 to
yield 10%. The bonds mature on June 30, 2016, and pay interest annually every
June 30.
 The pretax financial income was P 8,500,000 and taxable income was P6,000,000.
The difference is due to P 1,000,000 permanent difference and P 1,500,000 of
taxable temporary difference to reverse in 2012. The income tax rate is 30%. KPG
Company made estimated income tax payments during the year of P1,000,000.

What amount should be reported as Total Current Liabilities on December 31, 2011?

a. P 3,500,000 c. P 2,300,000
b. P 2,700,000 d. P 2,500,000

Solution; Answer D

Accounts Payable P 500,000

Accrued Expenses 300,000
Dividends payable (100,000X7) 700,000
Accrued interest Payable (5,000,000X8%X6/12) 200,000
Income Tax Payable 800,000

Total Current Liabilities P 2,500,000

Current Tax Expense (6,000,000X 30%) P 1,800,000

Estimated Tax Payment (1,000,000)

Income Tax Payable P 800,000

PROBLEM 2: 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

Solution; Answer B
Carrying amount- December 31, 2011 P 4,000,000

Fair value less cost to sell- December 31, 2011 P 4,250,000

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.

PROBLEM 3: Below are selected accounts and their balances for the Stonefly
Company as of December 31, 2007:

Accounts Payable ........................................ $ 98,000

Accounts Receivable ..................................... 216,000
Allowance for Doubtful Notes and Accounts ............... 25,000
Cash .................................................... 22,400
Wages Payable ........................................... 10,800
Trademarks .............................................. 45,000
Long-Term Advances to Officers .......................... 150,000
Inventory ............................................... 83,000
Income Taxes Payable .................................... 72,000
Notes Receivable (short-term) ........................... 97,000
Bond Redemption Fund .................................... 180,000
Bonds Payable ........................................... 500,000
Premium on Bonds Payable ................................ 40,000
Treasury Stock .......................................... 57,600

Determine the amount of working capital at December 31, 2007.

ANS:

Stonefly Company
Schedule of Working Capital
December 31, 2007

Current assets:
  Cash ........................... $ 22,400
  Notes receivable ............... $ 97,000
  Accounts receivable ............ 216,000
$313,000
  Less allowance for doubtful
    notes and accounts ...........  25,000 288,000
  Inventory ......................  83,000 $393,400
Current liabilities: .............
  Accounts payable ............... $ 98,000
  Wages payable .................. 10,800
  Income taxes payable ...........  72,000 180,800
Working capital .................. $212,600

PROBLEM 4: Account balances and supplemental information for the Bighorn

Corporation as of December 31, 2007, are given below:
Accounts Payable ....................................... $ 75,900
Accounts Receivable .................................... 141,600
Accumulated Depreciation--Equipment .................... 84,000
Bonds Payable .......................................... 300,000
Cash ................................................... 243,900
Common Stock ........................................... 1,560,000
Deferred Income Tax Liability (noncurrent) ............. 6,900
Dividends Payable ...................................... 45,000
Equipment .............................................. 840,000
Income Taxes Payable ................................... 91,500
Inventory .............................................. 395,100
Investment in Land ..................................... 510,000
Investment in Stock of Subsidiary ...................... 492,000
Note Payable ........................................... 120,000
Notes Receivable ....................................... 150,000
Prepaid Insurance ...................................... 7,200
Retained Earnings ...................................... 453,600
Salaries and Wages Payable ............................. 42,900

(a) $300,000 of 12% bonds were sold on November 1, 2007, at par.

(b) 40,000 shares of $30 par value common stock were sold for
$1,560,000.
(c) All the equipment was purchased on January 2, 2006. The
depreciation rate is 10 percent per year.
(d) 5 percent of accounts receivable are expected to be uncollectible.
(e) A two-year insurance policy was purchased on May 1, 2007, for
$7,200.
(f) Accrued interest on $150,000 of short-term notes receivable from
customers was $5,100 at December 31, 2007.
(g) $120,000 was borrowed from the bank on a 5-year, 10% note
payable dated July 1, 2007. The loan is to be repaid in 10 semiannual
payments of $12,000 plus interest, with the first payment due
January 1, 2008.
Compute the amount of current assets and current liabilities for the year ended
December 31, 2007.

ANS:

Bighorn Corporation
Balance Sheet
December 31, 2007

Assets
Current assets:
  Cash ....................................... $243,900
  Notes receivable ........................... 150,000
  Accounts receivable, less allowance for
   doubtful accounts of $7,080 .............. 134,520
  Interest receivable ........................ 5,100
  Inventory .................................. 395,100
  Prepaid insurance ..........................    4,800 $ 933,420
 Investments:
  Investment in land ......................... $510,000
  Investment in stock of subsidiary ..........  492,000 1,002,000
Equipment .................................... $840,000
Less accumulated depreciation--equipment .....  168,000    672,000
Total assets ................................. $2,607,420

Liabilities:
Current liabilities:
  Accounts payable ........................... $ 75,900
  Dividends payable .......................... 45,000
  Income taxes payable ....................... 91,500
  Salaries and wages payable ................. 42,900
  Interest payable ........................... 6,000
  Current portion of long-term note payable ..   24,000 $ 285,300

Noncurrent liabilities:
  Long-term debt:
    Note payable ............................. $ 96,000
    Bonds payable ............................ 300,000
  Deferred income tax liability ..............    6,900    402,900
Total liabilities ............................ $688,200

Owners' Equity:
Contributed capital:
  Common stock, $30 par ...................... $1,200,000
  Additional paid-in capital ................. 360,000
Retained earnings ($453,600 - $7,080 + $5,100    359,220  1,919,220
- $2,400 - $84,000 - $6,000 = $359,220) ....
Total liabilities and owners' equity ......... $2,607,420

PTS: 1 DIF: Medium OBJ: LO 1 TOP: AICPA FN-Reporting

MSC: AACSB Analytic

PROBLEM 5 : The following totals are taken from the December 31, 2007, balance
sheet of Streamer Company:

Current assets ....................................... $350,000

Long-term assets ..................................... 800,000
Current liabilities .................................. 240,000
Long-term liabilities ................................ 270,000

Additional information:

(a) Cash of $38,000 has been placed in a fund for the retirement of long-term
debt. The cash and long-term debt have been offset and are not reflected
in the financial statements.
(b) Long-term assets include $50,000 in treasury stock.
(c) Cash of $14,000 has been set aside to pay taxes due. The cash and taxes
payable have been offset and do not appear in the financial statements.

(d) Advances on salespersons' commissions in the amount of $21,000 have

been made. Also, sales commissions payable total $24,000. The net
liability of $3,000 is included in Current Liabilities.

After making any necessary changes, what are the totals for Streamer's current
assets and current liabilities?
ANS:

Current Current
Assets Liabilities
Beginning ............................... $350,000 $240,000
 (a) No adjustment .....................
 (b) No adjustment .....................
 (c) Offsetting cash and taxes payable . 14,000 14,000
Netting commission advances and
 (d) 21,000 21,000
commissions payable .............
Totals ............................ $385,000 $275,000

PROBLEM 6 : The following totals are taken from the December 31, 2007, balance
sheet of Bartholomew Company:

Current assets ....................................... $350,000

Long-term assets ..................................... 800,000
Current liabilities .................................. 240,000
Long-term liabilities ................................ 270,000

Additional information:

(a) A building costing $100,000 was purchased by taking out a $100,000 mortgage.
Since the building serves as collateral on the mortgage loan, both have been
excluded from the financial statements.

(b) Cash in the amount of $45,000 is in a restricted fund for the purchase of
equipment. This cash has been included in Current Assets.

(c) Long-term liabilities include a bank loan of $80,000. Of this loan, $15,000 must
be repaid within the coming year.
(d) Investment securities totaling $27,000 are included in Current Assets. These
securities represent stock purchases made as a long-term equity investment in
a major supplier.
After making any necessary changes, what are the totals for Bartholomew's long-
term assets and long-term liabilities?

ANS:

Long-Term Long-Term
Assets Liabilities
Beginning ............................... $800,000 $270,000
 (a) Offsetting building and mortgage .. 100,000 100,000
 (b) Restricted fund ................... 45,000
 (c) Current portion of long-term debt . (15,000)
 (d) Long-term investment .............. 27,000         
Totals ............................ $972,000 $355,000

PROBLEM 7: 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:

• Madden Inc. issued an additional 5,000 shares of common stock at $25

per share on July 1, 2008.
• Madden Inc. paid dividends totaling $80,000.
• Net income for 2008 was $110,000.
• No other changes occurred in stockholders' equity during 2008.

The stockholders' equity section of the December 31, 2008, balance sheet would report a
balance of:
 ANS: 1,050,000-680,000=370,000 + (5000X25)-80,000+110,000=$525,000.

B. STATEMENT OF FINANCIAL PERFORMANCE

PROBLEM 8: Canal Company reported the following net income:

2008 6,000,000
2009 6,500,000

In the determination of the net income, the following items are ignored:

2008 2009

Prepaid insurance 100,000 150,000

Accrued salaries 50,000 200,000
Unearned rental income 250,000 450,000
Accrued interest receivable 300,000 400,000

The corrected net income for 2009 should be

a. 6,100,000 c. 6,400,000
b. 6,300,000 d. 6,500,000

Solution 11-7 Answer b

2008 2009

Net income per book 6,000,000 6,500,000

Omission of prepaid insurance
2008 100,000 ( 100,000)
2009 150,000
Omission of accrued salaries
2008 ( 50,000) 50,000
2009 ( 200,000)
Omission of unearned rental income
2008 ( 250,000) 250,000
2009 ( 450,000)
Omission of accrued interest receivable
2008 300,000 ( 300,000)
2009 400,000_

Corrected net income 6,100,000 6,300,000

PROBLEM 9: MacShine Company had the following balances:

Sales P 120, 000

Cost of Goods Sold 60, 000
Salary Expenses 10, 000
Depreciation Expense 20, 000
Dividend Revenue 4, 000
Utilities Expense 8, 000
Rental Revenue 20, 000
Interest Expense 12, 000
Sales Returns 11, 000
Advertising Expense 13, 000

What would MacShine report as total expenses if the company uses the natural
presentation?
a. P 63, 000 c. P 127, 000
b. P 123, 000 d. P 134, 000
Solution: Answer B
Cost of Sales P 60, 000
Salary Expenses P 10, 000
Depreciation Expense P 20, 000
Utilities Expense P 8, 000
Rental Expense P 20, 000
Advertising Expense P 13, 000
Total P 123, 000

PROBLEM 10: Happy Company keeps limited record. Its assets and liabilities at the
beginning and end if the current year are as follows:

Beginning Ending
Cash in Bank P 30, 000 P 50, 000
Account Receivable, net 50, 000 70, 000
Merchandise Inventory 100, 000 80, 000
Accounts Payable 40, 000 20, 000
Notes Payable- bank 20, 000 25, 000
Equipment, net 80, 000 60, 000

During the year, the owner withdraws cash of P 120, 000, and made additional
investment of P 50, 000.

How much is the net income/loss for the year?

a. 35, 000 c. 120, 000

b. 85, 000 d. 135, 000

Solution: Answer B

Beginning Ending
Cash in Bank P 30, 000 P 50, 000
Account Receivable, net 50, 000 70, 000
Merchandise Inventory 100, 000 80, 000
Accounts Payable 40, 000 20, 000
Notes Payable- bank 20, 000 25, 000
Equipment, net 80, 000 60, 000
Capital P200, 000 P215, 000

Capital, end P 215, 000

Add: Withdrawal 120, 000
Total P 335, 000
Less: Capital, beginning P 200, 000
Additional Investment 50, 000 250, 000
Net Income P 85, 000

PROBLEM 11: The net sale of Grass Manufacturing Company in 2014 is P 580, 000. The
cost of goods manufactured is P 480, 000. The beginning inventories of Goods Process and
Finished Goods are 82, 000 and 65, 000 respectively. The ending inventories are: Goods in
Process – 75, 000, Finished Goods- 55, 000. The selling expenses and general and
administrative expenses are 5% and 2.5% cost of sales respectively.

How much would be net profit before tax in the year 2014?

a. 45, 725
b. 53, 250
c. 83, 000
d. 90, 000

Solution: Answer B
Net Sales P 580, 000
 Less: Cost of Goods Sold
Finished Goods, beg P 65, 000
Cost of Goods manufactured 480, 000
Goods Available for Sale P545, 000
Less: Finished goods, end 55, 000 490, 000
Gross Profit P 90, 000
Less: Operating Expenses
Selling Expenses (5%x490, 000) 24, 000
General & Administrative Expenses 12, 250 P 36, 750
Net Income P 53, 250

PROBLEM 12: The following information was taken from the accounting records of Gomez
Company for the year ended December 31, 2014:

Decrease in finished goods inventory P 700, 000

Increase in raw materials inventory 300, 000
Freight- out 900, 000
Factory overhead 6, 000, 000
Direct labor 4, 000, 000
Raw materials purchased 8, 600, 000

There was no work in process inventory at the beginning or at the end of the year.

The cost of goods sold is:

a. 17,600, 000
b. 18, 200, 000
c. 18, 400, 000
d. 19, 000, 000

Solution: Answer D

Raw materials used:

Raw materials purchased P8, 600, 000
Less: Increase in raw materials inventor 100, 000 8. 300, 000
Direct labor 4, 000, 000
Factory overhead 6, 000, 000
Factory cost/cost of goods manufactured P18, 300,000
Add: decrease in finished goods inventory 700, 000
Cost of goods sold P19, 000, 000

PROBLEM 13: The changes in account balances of the Clearwater Corporation during 2008
are presented below:

Increase
Assets ............................................... $133,500
Liabilities .......................................... (40,500)
Common Stock ....................................... (90,000)
Additional Paid-In Capital ........................... (9,000)

Assuming there are no changes in retained earnings except for net income and a dividend
payment of $19,500, the net income for 2008 should be ANS:
: $13,500.
PROBLEM 14: The financial records or Ronalyn Company were destroyed by fire at the end
of the current year. However, certain statistical data related to the income statement are
available.

Interest expense 20,000

Cost of goods sold 2,000,000
Sales discount 100,000
 The beginning inventory was P400,000 and decreased 20% during the year. Administrative
expenses are 25% of cost of goods sold but only 10% of gross sales. Four-fifths of the
operating expenses relate to sale activities. Ignoring income tax, how much was the net
income for the current year?

ANS:

Gross sales** 5,000,000

Sales discount (100,000)
Net sales 4,900,000
Cost of goods sold (2,000,000)
Gross income 2,900,000
Administrative expenses* 500,000
Sales expenses*** 2,000,000
Operating income 400,000
Finance cost (interest expense) (20,000)
Net income 380,000

*P2,000,000 x 25%
**P500,000 / 10%
***P500,000 / 25%

C. STATEMENT OF CASH FLOW

PROBLEM 15: Capiz Company provided the following for the current year:

Increase in long-term debt 5,000,000

Purchase of treasury shares 1,000,000
Depreciation and amortization 1,500,000
Gain on sale of equipment 500,000
Proceeds from issuance of share capital 4,500,000
Purchase of equipment for cash 7,000,000
Proceed from sale of equipment 2,000,000
Payment of cash dividend 2,500,000
Net income 8,000,000
Increase (decrease) in working capital accounts:
Accounts receivable 2,000,000
Inventory (3,500,000)
Trade accounts and notes payable 4,000,000
Income tax payable (4,500,000)
Cash balance, January 1 6,000,000

1. What is the net cash provided by operating activities?

a. 10,000,000 c. 7,500,000
b. 11,000,000 d. 8,500,000

2. What is the net cash used in investing activities?

a. 7,000,000 c. 9,000,000
b. 5,000,000 d. 2,000,000
3. What is the net cash provided by financing activities?
a. 9,000,000 c. 5,500,000
b. 8,000,000 d, 2,500,000

Solution problem 7
Question 1 answer a

Net income 8,000,000

Increase in accounts receivable (2,000,000)
Decrease in inventory 3,500,000
Increase in accounts and notes payable 4,000,000
Decrease in income tax payable (4,500,000)
Depreciation and amortization 1,500,000
Gain on sale of equipment (500,000)
Net cash provided-operating P10,000,000

Question 2 answer b

Purchase of equipment for cash (7,000,000)

Proceeds from sale of equipment 2,000,000

Net cash used-investing (P5,000,000)

Question 3 answer c

Increase in long term debt 5,000,000

Purchase of treasury shares (1,000,000)
Proceeds from issuance of share capital 4,000,000
Payment of cash dividend (2,500,000)

Net cash provided-financing P5,500,000

PROBLEM 16: Darwin Company provided the following relevant information involving its
operating activities for the year ended December 31, 2011.
12.31.10 12.31.11
Accrued interest payable recognized 40,000 50,000
Depreciation recognized 72,800 75,600
Prepaid expenses recognized 3,100 4,940

For the year ended December 31, 2011, Darwin Company reported a net income after tax of
P648,000.
What is the net cash flow from operating activities that would be shown in the cash flows
statement?

a. 637,000 c. 731,760
b. 637,080 d. 735,440

Solution problem 10
Answer c

Net income for 2011 648,000

Adjustments:
Depreciation expense, 2011 75,600
Increase in accrued interest (50,000-40,000) 10,000
Increase in prepaid expenses (4,940-3,100) (1,840)

Cash provided by operating activities P731,760

PROBLEM 17: During 2011, Search Company which uses the allowance method of
accounting for doubtful accounts, recorded a provision for doubtful accounts expense of
P30,000 and in addition, it wrote off as uncollectible accounts receivable of P12,000.

As a result of these transactions, net cash flow from operating activities would be calculated
(indirect method) by adjusting net income with a (an)

a. 12,000 increase c. 18,000 increase

b. 18,000 decrease d. 30,000 increase

Solution problem 14
Answer d

The write-off of an account receivable under the allowance method does not affect cash flow
from operating activities but the amount of bad debts, which is a non-cash expense, should
be added back to the net income to arrive at the cash flow from operating activities.
PROBLEM 18: The Sage Corporation prepared, for 2008 and 2007, the following balance
sheet data:

December 31
2008 2007
Cash .................................... $ 87,375  $ 63,750
Available-for-sale securities (not cash 17,250 105,000
equivalents) ..........................
Accounts receivable ..................... 90,000 86,250
Merchandise inventory ................... 187,500 163,500
Prepaid insurance ....................... 1,125 1,500
Land, buildings, and equipment .......... 1,378,875 1,087,500
Accumulated depreciation ................ (558,750) (498,750)
  Total ................................. $1,203,375  $1,008,750

Accounts payable ........................ $ 153,375  $ 236,250

Salaries payable ........................ 18,750  26,250
Notes payable--bank (current) ........... 37,500  150,000
Bonds payable ........................... 375,000  0
Common stock ............................ 600,000  600,000
Retained earnings (deficit) ............. 18,750  (3,750)
  Total ................................. $1,203,375  $1,008,750
 Additional information:
(a) Sold available-for-sale securities (not cash equivalents) costing $87,750
for $90,000.
(b) Equipment costing $18,750 with a book value of $3,750 was sold for
$4,500.
(c) Issued 8% bonds payable at par, $375,000.
(d) Purchased new equipment for cash, $310,125.
(e) Paid cash dividends of $22,500 during the year.
(f) Net income for 2005 was $45,000.
(g) Proceeds from the notes payable were used for operating purposes.

Compute the net cash flow provided by operating ,investing and financing activities for the
year ended December 31, 2008.

ANS:

Sage Corporation
Statement of Cash Flows
For the Year Ended December 31, 2008

Cash flows from operating activities:

Net income .............................. $ 45,000 
Adjustments:
- Gain on sale of available-for-sale $ (2,250)
securities ........................
- Gain on sale of equipment ........... (750)
+ Depreciation expense ................ 75,000 
- Increase in accounts receivable ..... (3,750)
- Increase in merchandise inventory ... (24,000)
+ Decrease in prepaid insurance ....... 375 
- Decrease in accounts payable ........ (82,875)
- Decrease in salaries payable ........ (7,500)
- Decrease in notes payable ........... (112,500) (158,250)
Net cash used in operating activities ... $(113,250)
Cash flows from investing activities:
  Sale of available-for-sale securities . $ 90,000 
  Sale of equipment ..................... 4,500 
  Purchase of equipment ................. (310,125)
Net cash used in investing activities ... (215,625)
Cash flows from financing activities:
  Proceeds from bond issue .............. $375,000 
  Payment of cash dividends ............. (22,500)
Net cash provided by financing activities   352,500 
Net increase in cash .................... $ 23,625 
Cash at beginning of year ...............    63,750 
Cash at end of year ..................... $ 87,375 

PROBLEM 19: The general ledger of Lopez Company provides the following information:
End of Year Beginning of Year
Accounts Receivable $ 60,000 $ 94,000
Inventory 350,000 230,000
Accounts Payable 40,000 65,000

The company's net sales for the year was $1,000,000 and cost of goods sold amounted to
$700,000.

Instructions

Compute the following:

(a) Cash receipts from customers.

(b) Cash payments to suppliers.
 Solution 122 (8-12 min.)
(a) Cash receipts from customers
Sales + Decrease in Accounts Receivable
$1,000,000 + $34,000 = $1,034,000
(b) Cash payments to suppliers
First calculate the amount of purchases:
Beginning inventory $ 230,000
Add: Purchases ?
?
Less: Ending Inventory 350,000
Cost of goods sold $700,000

$230,000 + Purchases – $350,000 = $700,000

Purchases = $820,000

Amount of cash payments to suppliers= Purchases + Decrease in accounts payable

= $820,000 + $25,000 = $845,000

PROBLEM 20: Alpha Company had the following activities during the current year:

 Acquired 2,000 shares of Maybel Company for P2,600,000.

 Sold an investment in Rate Motors for P3,500,000 when the carrying value was
P3,300,000.
 Acquired a P5,000,000, 4-year certificate of deposit from a bank. During the year,
interest of P375,000 was paid to Alpha.
 Collected dividends of P120,000 on share investment

In the statement of cash flows, what amount should be reported as net cash used in
investing activities?

a. 3,725,000 c. 3,980,000
b. 3,805,000 d. 4,100,000

Solution problem 2
Answer d

Purchase of investment (2,600,000)

Sale of investment 3,500,000
Acquisition of 4-year certificate of deposit (5,000,000)

Net cash used in investing activities (P4,000,000)

As a simple guide, cash effect of transactions involving non-operating assets are investing
activities.

The interest received of P175,000 and the dividend received of P120,000 shall be classified
as cash flow from operating activities.

D. NOTES TO FINANCIAL STATEMENT

1. Contingencies and Events after balance sheet date

PROBLEM 21: Czarina Company carried a provision of P2,000,000 in its draft financial
statements on December 31, 2012 in relation to an unresolved court case. On January 31,
2013, when the financial statements on December 31, 2012 had not been yet authorized for
issue, the case settled and the court decided the final total damages payable by Czarina to
be P2,800,000. What amount should be adjusted on December 31, 2012 in relation to this
event?

Answer:

Actual liability 2,800,000

 Provision already recognized 2,000,000
Increase in liability 800,000

PROBLEM 22: Jaja Company’s draft financial statements showed the profit before tax of
the year ended December 31, 2012 at P9,000,000. The board of directors authorized the
financial statements for issue on March 20, 2013. A fire occurred at one of Jaja’s sites on
January 15, 2013 with resulting damage costing P7,000,000, only P4,000,000 of which is
covered by insurance. The repairs will take place and be paid for in April 2013. The
P4,000,000 claim from the insurance entity will however be received on February 14, 2013.
What amount should be reported as profit before tax in Jaja’s financial statements?

Answer:

The profit remains P9,000,000. The fire occurring on January 15, 2013 is a non adjusting
event on December 31, 2012.

PROBLEM 23: Jejasa Company provided the following events that occurred after
December 31, 2012:

1/15/2013 P3,000,000 of accounts receivable was written off due to

bankruptcy of a major customer.

2/14/2013 A shipping vessel of Jejasa with carrying amount of P5,000,000

was completely lost at sea because of a hurricane.

3/11/2013 A court case involving Jejasa as the defendant was settled and
the entity was obligated to pay the plaintiff P1,500,000. Jejasa
previously has not recognized a liability for the suit because
management deemed it possible that the entity will lose the
case.

4/15/2013 One of Jejasa’s factories with a carrying amount of P4,000,000

was completely razed by forest fires that erupted in its vicinity.

The management completed the draft of the financial statements for2012 on

February 10, 2013. On March 20, 2013, the board of directors authorized the
financial statements for issue. Jejasa announced its profit and other selected
information on March 22, 2013. The financial statements were approved by
shareholders on April 2, 2013 and filed with the SEC the very next day. What total
amount should be reported as “adjusting events” on December 31, 2012?

a. 4,500,000 c. 8,500,000
b. 9,000,000 d. 9,500,000

Answer: A

Accounts written off 3,000,000

Provision for lawsuit 1,500,000
Total adjusting events 4,500,000

PROBLEM 24: Simple Company is completely the preparation of its draft financial
statements for the year ended December 31, 2012. The financial statements are
authorized for issue on March 31, 2013. On March 15, 2013, a dividend of
P1,750,000 was declared and a contractual profit share payment of P350,000 was
made, both based on the profit for the year ended December 31, 2012. On February
1, 2013, a customer went into liquidation having owed the entity P340,000 for the
past 5 months. No allowance had been made against this debt in the draft financial
statements. On March 20, 2013, a manufacturing plant was destroyed by fire
resulting in a financial loss of P2,600,000.

What total amount should be recognized in profit or loss for the year ended
December 31, 2012 to reflect adjusting events after the end of reporting period?

a. 2,600,000 b. 3,290,000
 c. 690,000 d. 1,750,000

Answer: C

Contractual profit share payment 350,000

Bad debt loss 340,000
Total adjusting events 690,000

PROBLEM 25: The following data are provided by S3PD Company. The end of reporting
period is December 31, 2012 and the financial statements are authorized for issue
on March 15, 2013.

 On December 31, 2011, S3PD Company had a receivable of P400,000 from a

customer that is due 60 days after the end of reporting period. On January 15,
2012, a receiver was appointed for the said customer. The receiver informed
S3PD that the P400,000 would be paid fully by June 30, 2013.

 S3PD Company measures its investments in listed shares as held for trading at
fair value through profit r loss. On December 31, 2012, these investments were
recorded at the market value of P5,000,000. During the period up to February
15, 2013, in the portfolio, and on February 15, 2013, the market value had fallen
to P2,000,000.

 S3PD Company had reported a contingent liability on December 31, 2012 related
to a court case in which S3PD was the defendant. The case was nt heard until the
first week of February 2013. On February 11, 2013, the judge handed down a
decision against S3PD Company. The judge determined that S3PD Company was
liable to pay damages and costs totaling P3,000,000.

 On December 31, 2012, S3PD Company had a receivable from a large customer
in the amount of P3,500,000. On January 31, 2013, S3PD Company was advised
in writing by the liquidator of the said customer that the customer was insolvent
and that only 10% of the receivable will be paid on April 30, 2013.

What total amount should be reported as “adjusting events” on December 31, 2012?

a. 6,150,000 c. 9,150,000
b. 6,500,000 d. 9,550,000

Answer: A

Litigation loss 3,000,000

Bad debt expense (3,500,000 x 90%) 3,150,000
Total amount of adjusting events 6,150,000

The receivable of P400,000 is nonadjusting event because the amount is still

collectible although a longer term has been given but not so long as to cause it to be
reclassifies as noncurrent.

The investments in trading securities are measured at fair value which must be
determined at the end of each reporting period. The change in the fair value on
February 15, 2013 shall be recognized in the next reporting period, not on December
31, 2012.

2. Accounting Policies and Estimates

PROBLEM 26: On Jan. 1, 2008, Clan Company Purchased a Machine for 5,280,000 and
depreciated it by the straight line method using an estimated useful life of eight years with
no residual value. On Jan. 1, 2011, Clan determined that machine had a useful life of six
years from the date of acquisition and will have a residual value of 480,000. An accounting
change was made in 2011 to reflect these additional data. What is the accumulated
depreciation for the machine on Dec. 31, 2011?

Answer: Solution:
Acquisition cost- Jan. 1, 2008 5,280,000
 Accumulated Depreciation for 2008-2010
(5,280,000/8x3) 1,980,000
Carrying amount-Jan. 1, 2011 3,300,000

Accumulated Depreciation-Jan. 1, 2011 1,980,000

Depreciation for 2011(3,300,000-480,000/3) 940,000
Accumulated Depreciation –December 31, 2011 2,920,000

Revised life 6 years

Years expired 3 years
Remaining Revised Life 3 years

PROBLEM 27: During 2011, Mar Company determined that machinery previously
depreciated over seven-year life had a total estimated useful life of only five years. An
accounting change was made in 2011 to reflect the change in estimate. If the change had
been made in 2010, accumulated depreciation would have been 800,000 on Dec. 31, 2010,
instead of 600,000. As a result of this change, the 2011 depreciation expense was 50,000
greater. The income tax rate was 30 %. What amount should be reported in Mar’s income
statement for the year ended Dec. 31, 2011 as the cumulative effect on prior years of
changing the estimated useful life of the machinery?

Solution: 0
Explanation: The change in estimated useful life is a change in accounting estimate.
Accordingly, there is no cumulative effect.

PROBLEM 28: On Jan. 2011, Cris Company change from average cost method to the FIFO
method to account for its inventory. Ending inventory for each method was as follows:
2010 2011
Average cost 500,000 900,000
FIFO Cost 700,000 1,400,000
The income statement information calculated by the average cost method was as follows:
2010 2011
Sales 10,000,000 13,000,000
Cost of goods sold 7,000,000 9,000,000
Operating expenses 1,500,000 2,000,000
Tax Expense 450,000 600,000

Cris Company accrues tax expense on Dec. 31 of each year and pays tax in April of the
following year. The income tax rate is 30 %. What is the net income to be reported in 2011
after the change to the FIFO inventory method?

Answer: Solution:
Income before tax for 2011-Average 2,000,000
Understatement of Beg. Inventory (200,000)
Understatement of Ending Inventory 500,000
Income before Tax for 2011- FIFO 2,300,000
Income Tax- 30% (690,000)
Net Income for 2011-FIFO 1,610,000

3. Related Party Transactions

PROBLEM 29: During 2012, Jean Company engaged in the following transactions:

Key management personnel compensation 1,000,000

Sales to affiliated entities 3,000,000

What total amount should be included as related party disclosures in Jean’s 2012
financial statements?

Answer: 4,000,000
 PAS 24, paragraph 1, requires disclosure of key management personnel
compensation. The sales to affiliated entities shall be disclosed in Jean’s separate
financial statements but eliminated in consolidated financial statements.

PROBLEM 30: Gabriel Company is part of a major industrial group and is known to
accurately disclose related party transactions in its financial statements. Remuneration and
other payments made to the entity’s chief executive officer during 2012 were:

Annual salary 2,000,000

Share options and other share-based payments 1,000,000
Contributions to retirement benefit plan 500,000
Reimbursement of travel expenses for business trips 1,200,000

What is the total amount that should be disclosed as “compensation” to key management
personnel to conform with the related party disclosure required by PAS 24?

Answer: All, except reimbursement of travel expenses.

4. Related Party Transactions

PROBLEM31: Operating profit and loss figures for the seven segments of Helium
Company are as follows:
Segments Amount
K P13,000,000
L 1,200,000
M 7,800,000
N (2,400,000)
O ( 600,000)
P 600,000
Q ( 1,800,000)
P 17,800,000

What segments are reportable based on the operating profit or loss criterion?
a). segments k,l,m and p c). segments n,o and q
b). segments k,m, and n d). none is reportable

Answer : B
Operating Profit Operating loss
K P13,000,000
L 1,200,000
M 7,800,000
N (2,400,000)
O ( 600,000)
P 600,000
Q ( 1,800,000)
Total P22,600,000 (P4,800,000)

As to the operating Profit or Loss Criterion:

A segment is considered reportable or significant when its profit or loss is

10% or more of the higher combined profits or losses of all industry segments. In
the problem above, the combined profit is P22,600,000 while the combined loss is
P4,800,000. The minimum amount of profit or loss is P2,260,000 ( 10% x
22,600,000) for a segment to be reportable. Only segments K, M and N meet the
above criterion.

PROBLEM32: The following information pertains to the White Company and its division
for the year ended December 31,2014:

Sale to unaffiliated Customers P10,000,000

Intersegment sales of product similar to those sold to
 Unaffiliated customers 2,000,000

White Company and all of its division are engaged solely in manufacturing operations.
What has a reportable segment‘s revenue is-

Answer: D
Sale to unaffiliated Customers P10,000,000
Intersegment sales 2,000,000
Total P12,000,000
Multiply by 10%
Minimum revenue 1,200,000

PROBLEM33: Horn Company discloses supplemental industry segment information. The

following information is available for year 2014:
Segments Sales Traceable
Operating Expenses
B P 4,000,000 P2,000,000
C 3,000,000 2,000,000
D 2,400,000 1,400,000
P 9,600,000 P5,400,000
Additional expenses not included above are as follows:

Indirect operating expenses 1,440,000

General and Administrative expenses 960,000

Appropriate common expenses are allocated to segments based on the ratio of segment
sales to total sales. Segment D’s operating profit was:

Answer :
Revenue P2,400,000
Traceable Operating Expenses ( 1,400,000)
Indirect costs ( 360,000)
Operating profit P 640,000

General and Administrative expenses do not constitute expenses of segment.

PROBLEM34: Congo Company does business in several different industries. The income
statement for 2011 is as follows:

Sales 60,000,000
Cost of goods sold (28,000,000)

Gross income 32,000,000

Expenses (14,000,000)
Depreciation ( 4,000,000)
Income tax expense ( 4,000,000)

Net income 10,000,000

Congo has two major reportable segments X and Y. An analysis reveals that P 1,000,000 of
the total Depreciation expense and P 2,000,000 of the expense are related to general
corporate activities. The remaining expenses are directly allocable to segment activities
according to the following percentage:

Segment X Segment Y Others

Sales 40% 45% 15%
Cost of goods sold 35% 50 15
Expense 40 40 20
Depreciation 40 45 15

Solution: ANSWER a
Sales 24,000,000
Cost of goods sold ( 9,800,000)

Gross income 32,000,000

Expenses (14,000,000)
Depreciation ( 4,000,000)
Income tax expense ( 4,000,000)
Net income 10,000,000

What amount should Congo Company disclose as profit of Segment X?

a).P 8,200,000 c). P 7,000,000
b).P 6,600,000 d). P5,400,000
Solution: Answer a
Sales ( 40% x 60,000,000) P 24,000,000
Cost of goods sold ( 35% x 28,000,000) (9,800,000)
Gross income 14,200,000
Expense ( 40% x 12,000,000) ( 4,800,000)
Depreciation ( 40% x 3,000,000) ( 1,200,000)
Segment profit- Segment X 8,200,000

PROBLEM35: Grum Company a publicly owned entity is subject to the requirements of

PFRS 8. In its Income Statement For the year ended December 31,2011, Grum reported
revenue of P 50,000,000 , excluding intersegment sales of P 10,000,000, expenses of P
47,000,000 and net income of 3,000,000. Expenses include payroll costs of P 15,000,000.
Grum’s combined identifiable assets of all operating segments on December 31,2011
totalled p 40,000,000. External revenue of reportable segments must be at least:
a). 22,000,000 b). 30,000,000
c). 33,700,000 d). 37,500,000
Solution : Answer d
75%x 50,000,000 37,500,000
Under PFRS ,8 paragraph 15 , the total external revenue attributable to reportable operating
segments must be at least 75% of the total entity external revenue.