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FINANCIAL ACCOUNTING AND REPORTING TEST BANK80102016 - 3PROBLEM 1 – INVESTMENT IN ASSOCIATEOn January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2016, the investee reported net income of P4,000,000 and paid...

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FINANCIAL ACCOUNTING AND REPORTING TEST BANK 80102016 - 3 PROBLEM 1 – INVESTMENT IN ASSOCIATE On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2016, the investee reported net income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2017, 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 2017 and paid dividend of P5,000,000 on December 31, 2017. 1. What amount of investment income should be recognized in 2016? a. b. c. d.

400,000 100,000 500,000 300,000

2. What is the implied goodwill arising from the acquisition on January 1, 2017? a. 3,000,000 b. 2,000,000 c. 2,500,000 d. 0 3. What total amount of income should be recognized by the investor in 2017? a. b. c. d.

2,000,000 2,500,000 2,300,000 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2017? a. b. c. d.

12,550,000 12,350,000 11,950,000 12,750,000

Page 2 SOLUTION - PROBLEM 1 Question 1 Answer B Dividend income (10% x 1,000,000)

100,000

Under cost method, the investment income is based on dividend declared or paid.

Question 2 Answer B Existing 10% interest remeasured at fair value New 15% interest Total cost – January 1, 2017 Net assets acquired (25% x 36,000,000) Excess of cost over carrying amount Excess attributable to equipment whose fair value is greater than carrying amount (25% x 4,000,000) Goodwill

3,500,000 8,500,000 12,000,000 ( 9,000,000) 3,000,000 ( 1,000,000) 2,000,000

Question 3 Answer C Share in net income (25% x 8,000,000) Amortization of excess attributable to equipment (1,000,000 / 5 years) Net investment income Fair value of 10% interest Historical cost Remeasurement gain Net investment income Total income in 2017

2,000,000 ( 200,000) 1,800,000 3,500,000 3,000,000 500,000 1,800,000 2,300,000

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

Question 4 Answer A Total cost 1/1/2017 Net investment income Share in cash dividend (25% x 5,000,000) Carrying amount – 12/31/2017

12,000,000 1,800,000 ( 1,250,000) 12,550,000

Page 3 PROBLEM 2 – PROPERTY, PLANT AND EQUIPMENT January 1, 2016, an entity disclosed the following balances: Land Land improvements Buildings Machinery and equipment

4,000,000 1,300,000 20,000,000 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, 2009 was scrapped on June 30, 2016. 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, 2016. Original cost of the machine sold was P700,000 on January 1, 2013, and it was depreciated on the straight line basis over an estimated useful life of eight years and a residual value of P50,000. 1. What is the total cost of land on December 31, 2016? a. 7,800,000 b. 7,600,000 c. 8,000,000 d. 6,800,000 2. What is the total cost of land improvements on December 31, 2016? a. 1,200,000 b. 3,600,000 c. 1,300,000 d. 2,500,000 3. What is the total cost of buildings on December 31, 2016? a. 28,000,000 b. 25,400,000 c. 27,200,000 d. 27,000,000 4. What is total cost of machinery and equipment on December 31, 2016? a. 12,400,000 b. 11,500,000 c. 11,000,000 d. 11,700,000

Page 4 SOLUTION – PROBLEM 2 Question 1 Answer A Land – January 1 Land acquired for cash Land acquired by issuing shares (2/10 x 9,000,000) Land – December 31

4,000,000 2,000,000 1,800,000 7,800,000

Quoted price of shares issued for land and building (200,000 x P45)

9,000,000

Current appraized value : Land Building Total

2,000,000 8,000,000 10,000,000

The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to the land and building based on the current appraised value.

Question 2 Answer D Land improvements – January 1 Expenditures for parking lot, street and sidewalks Balance – December 31

1,300,000 1,200,000 2,500,000

Question 3 Answer C Buildings – January 1 Building acquired by issuing shares (8/10 x 9,000,000) Balance – December 31

20,000,000 7,200,000 27,200,000

Question 4 Answer B Machinery and equipment - January 1 Machinery and equipment purchased Freight and unloading Installation Machinery scrapped Machinery sold Machinery equipment – December 31

8,000,000 4,000,000 100,000 300,000 ( 200,000) ( 700,000) 11,500,000

Page 5 PROBLEM 3 - INCOME TAX An entity had the following financial statement elements for which the December 31, 2016 carrying amount is different from the December 31, 2016 tax basis:

Equipment Accrued liability – health care Computer software cost

Carrying amount

Tax basis

Difference

5,500,000 500,000 2,000,000

4,000,000 0 0

1,500,000 500,000 2,000,000

The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax purposes. The accrued liability is the estimated health care cost that was recognized as expense in 2016 but deductible for tax purposes when actually paid. In January 2016, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was capitalized and amortized over 3 years for accounting purposes. However, the total amount was expensed in 2016 for tax purposes. The pretax accounting income for 2016 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2016. 1. What amount should be reported as current tax expense for 2016? a. b. c. d.

5,400,000 3,600,000 3,300,000 5,700,000

2. What amount should be reported as total tax expense for 2016? a. b. c. d.

4,500,000 4,950,000 4,050,000 3,900,000

3. What amount should be reported as deferred tax liability on December 31, 2016? a. 1,050,000 b. 1,200,000 c. 900,000 d. 150,000 4. What amount should be reported as deferred tax asset on December 31, 2016? .

a. 750,000 b. 600,000 c. 150,000 d. 0

Page 6 SOLUTION – PROBLEM 3 Question 1 Answer B Accounting income Future taxable amount: Equipment Computer software Future deductible amount: Accrued liability Taxable income Current tax expense (30% x 12,000,000)

15,000,000

(1,500,000) (2,000,000) 500,000 12,000,000 3,600,000

Question 2 Answer A Total tax expense (30% x 15,000,000)

4,500,000

Question 3 Answer A Deferred tax liability (30% x 3,500,000)

1,050,000

Question 4 Answer C Deferred tax asset (30% x 500,000)

150,000

Page 7 PROBLEM 4 - BENEFIT COST An entity provided the following pension plan information: Projected benefit obligation – January 1, 2016 Fair value of plan assets – January 1, 2016 Pension benefits paid during the year Current service cost for 2016 Past service cost for 2016 (vesting period 5 years) Actual return on plan assets Contribution to the plan Actuarial loss due to change in assumptions on projected benefit obligation Discount or settlement rate 1. What is the employee benefit expense for the current year? a. b. c. d.

2,245,000 1,905,000 2,525,000 1,750,000

2. What is the net remeasurement loss for the current year? a. b. c. d.

200,000 100,000 300,000 400,000

3. What is the projected benefit obligation on December 31, 2016? a. b. c. d.

5,550,000 5,075,000 5,775,000 5,975,000

4. What is the fair value of plan assets on December 31, 2016? a. b. c. d.

4,480,000 4,230,000 4,300,000 4,050,000

5. What amount should be reported as accrued benefit cost on December 31, 2016? a. 1,745,000 b. 1,750,000 c. 1,045,000 d. 700,000

3,500,000 2,800,000 250,000 1,750,000 425,000 180,000 1,500,000 200,000 10%

Page 8 SOLUTION - PROBLEM 4 Question 1 Answer A Current service cost Past service cost Interest expense (10% x 3,500,000) Interest income (10% x 2,800,000) Employee benefit expense

1,750,000 425,000 350,000 ( 280,000) 2,245,000

Question 2 Answer C Actual return Interest income Remeasurement loss on plan assets Actuarial loss on PBO Net remeasurement loss

180,000 280,000 100,000 200,000 300,000

Question 3 Answer D PBO – January 1 Current service cost Past service cost Interest expense Actuarial loss Benefits paid PBO – December 31

3,500,000 1,750,000 425,000 350,000 200,000 ( 250,000) 5,975,000

Question 4 Answer B FVPA – January 1 Actual return Contribution to the plan Benefits paid FVPA – December 31

2,800,000 180,000 1,500,000 ( 250,000) 4,230,000

Question 5 Answer A FVPA – December 31 PBO – December 31 Prepaid/accrued benefit cost – December 31

4,230,000 (5,975,000) (1,745,000)

Page 9 PROBLEM 5 - SHARE OPTIONS On January 1, 2016, an entity granted the employees option to buy 200,000 shares with P20 par for P30 per share. The employees exercised the options on January 1, 2019. Quoted market prices of shares are as follows. 2016 2017 2018 2019

34 39 42 44

The service period is for two years beginning January 1, 2016. The fair value of the share options cannot be measured reliably. 1. What is the compensation expense for 2016? a. b. c. d.

400,000 200,000 300,000 800,000

2. What is the compensation expense for 2017? a. 1,800,000 b. 1,000,000 c. 1,400,000 d. 400,000 3. What is the compensation expense for 2018? a. 200,000 b. 600,000 c. 400,000 d. 0 4. What amount should be credited to share premium upon exercise of the share options on January 1, 2019? a. 3,800,000 b. 4,400,000 c. 4,800,000 d. 0

Page 10 SOLUTION - PROBLEM 5 Question 1 Answer A Question 2 Answer C Question 3 Answer B

2016 2017

2016 2017 2018

(200,000 x 4/2) (200,000 x 9) (200,000 x 3)

Quoted price - 2018 Quoted price - 2017 Increase in market price in 2018

Quoted price

Option price

34 39

30 30

4 9

Cumulative

Expense

400,000 1,800,000

400,000 1,400,000 600,000 2,400,000

42 39 3

Question 4 Answer B Option price (200,000 x 30) Share options outstanding Total consideration Par value (200,000 x 20) Share premium

Intrinsic value

6,000,000 2,400,000 8,400,000 4,000,000 4,400,000

Page 11 PROBLEM 6 – EARNINGS PER SHARE An entity reported the following information on January 1, 2016: Ordinary share capital, P10 par, 800,000 shares Preference share capital, P50 par, 50,000 shares 12% Bonds payable

8,000,000 2,500,000 5,000,000

The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends on preference shares are in arrears for two years. The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond. Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the beginning and ending of 2016. The average market price of the ordinary share was P30 per share and the market price on December 31, 2016 was P40 per share. May

1

Issued 60,000 ordinary shares at P25 per share.

July

1

Purchased 100,000 ordinary shares at P15 to be held as treasury.

Oct.

1

Converted bonds with face amount of P2,000,000.

Dec. 31

The net income for 2016 was P5,000,000. The tax rate is 30%.

1. What is the amount of basic earnings per share? a. b. c. d.

6.02 5.26 5.72 5.42

2. What is the total number of potentially dilutive ordinary shares at the beginning of year? a. b. c. d.

530,000 500,000 590,000 560,000

3. What is the amount of diluted earnings per share? a. b. c. d.

5.52 4.20 4.07 3.97

Page 12 SOLUTION - PROBLEM 6 Question 1 Answer C Net income Preference dividend (10% x 2,500,000) Net income - ordinary

5,000,000 ( 250,000) 4,750,000

January 1 (800,000 x 12/12) May 1 ( 60,000 x 8/12) July 1 (100,000 x 6/12) October 1 ( 2,000 x 80 x 3/12) Average shares outstanding

800,000 40,000 ( 50,000) 40,000 830,000

Basic EPS (4,750,000 / 830,000)

5.72

Question 2 Answer A Share options Treasury shares (1,800,000 / 30) Incremental ordinary shares from share options Ordinary shares from conversion of preference shares Ordinary shares from conversion of bonds payable (5,000 x 80) Potential ordinary shares

90,000 ( 60,000) 30,000 100,000 400,000 530,000

Question 3 Answer C Incremental EPS on Preference shares (250,000 / 100,000)

2.50

Interest on bonds not converted (3,000,000 x 12% x 70%) Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%) Total interest expense

252,000 126,000 378,000

Incremental EPS on bonds (378,000 /400,000)

Basic EPS Share options Diluted EPS Bonds payable Diluted EPS Preference shares Diluted EPS

Potential ordinary shares – bonds Reported in basic EPS Reported in diluted EPS

.94

Net income

Shares

EPS

4,750,000

830,000 30,000 860,000 360,000 1,220,000 100,000 1,320,000

5.72

4,750,000 378,000 5,128,000 250,000 5,378,000

5.52 4.20 4.07

400,000 (40,000) 360,000

Page 13 PROBLEM 7 – STATEMENT OF CASH FLOWS An entity presented the following comparative financial information:

Property, plant and equipment Accumulated depreciation Long-term investments Prepaid expenses Merchandise inventory Accounts receivable, net of allowance Cash Share capital-ordinary Retained earnings Long-term note payable Accounts payable Dividend payable Accrued expenses

2017

2016

2,190,000 450,000 225,000 351,000 1,950,000 1,560,000 690,000 3,000,000 906,000 1,275,000 309,000 201,000 825,000

1,440,000 270,000 315,000 1,260,000 1,080,000 640,000 2,400,000 688,000 1,095,000 282,000 -

2017 Net credit sales Cost of goods sold Gross profit Expenses, including income tax Net income

7,020,000 (3,915,000) 3,105,000 (2,586,000) 519,000

2016 3,753,000 (1,881,000) 1,872,000 (1,374,000) 498,000

Accounts receivable and accounts payable relate to merchandise for sale in the normal course of business. The allowance for bad debts was the same at the end of 2017 and 2016 and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period. The proceeds from the note payable were used to finance the acquisition of property, plant and equipment. Ordinary shares were sold to provide additional working capital. 1. What amount should be reported as net cash provided by operating activities in 2017? a. b. c. d.

345,000 165,000 546,000 510,000

2. What amount should be reported as net cash used in investing activities in 2017? a. b. c. d.

750,000 225,000 975,000 750,000

3. What amount should be reported as net cash provided by financing activities in 2017? a. b. c. d.

600,000 780,000 750,000 680,000

Page 14 SOLUTION – PROBLEM 7 Question 1 Answer A Net income Depreciation (450,000 - 27,000) Increase in prepaid expenses Increase in inventory Increase in accounts receivable Increase in accounts payable Increase in accrued expenses Net cash provided - operating

519,000 180,000 ( 36,000) (690,000) (480,000) 27,000 825,000 345,000

Question 2 Answer C Increase in PPE Increase in long-term investments Net cash used - investing

(750,000) (225,000) (975,000)

Question 3 Answer D Dividend paid in 2017 Proceeds from share capital Proceeds from note payable Net cash provides - financing Retained earnings - 2016 Net income - 2017 Total Retained earnings - 2017 Dividend declared in 2017 Dividend payable – 2017 Dividend paid in 2017

(100,000) 600,000 180,000 680,000 688,000 519,000 1,207,000 ( 906,000) 301,000 ( 201,000) 100,000

Page 15 PROBLEM 8 – ACCOUNTS RECEIVABLE An entity began operations on January 1, 2013. From 2013 to 2015, the entity provided for doubtful accounts based on 5% of annual credit sales. On January 1, 2016, the entity changed the method of determining the allowance for doubtful accounts using an aging schedule. In addition, the entity writes off all accounts receivable that are over 1 year old. The following information relates to the years ended December 31, 2013, 2014, 2015 and 2016:

Credit sales Collections excluding recovery Accounts written off during year Recovery of accounts written off

2016

2015

2014

2013

15,000,000 11,700,000 200,000 90,000

9,500,000 8,200,000 120,000 40,000

8,000,000 6,700,000 80,000 25,000

6,000,000 4,500,000 None None

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days Between 16 and 50 days Between 51 and 100 days Between 101 and 200 days Between 201 and 365 days Over 365 days – to be written off

3,000,000 1,500,000 1,200,000 800,000 400,000 100,000

98% 80% 75% 50% 20% 0%

1. What was the allowance for doubtful accounts on January 1, 2016? a. 1,175,000 b. 1,040,000 c. 1,240,000 d. 975,000

2. What amount should be reported as allowance for doubtful accounts on December 31, 2016? a. b. c. d.

1,380,000 1,480,000 2,420,000 1,060,000

3. What amount should be reported as doubtful accounts expense for 2016? a. b. c. d.

550,000 750,000 450,000 200,000

4. What is the net realizable value of accounts receivable on December 31,2016? a. b. c. d.
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