FAR 2020 Final Preboard Examination PDF

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CPA REVIEW SCHOOL OF THE PHILIPPINESManilaFINANCIAL ACCOUNTING AND REPORTING Sunday, April 19, 2020 Final Preboard Examination 12:00 p. to 3:00 p. SET AMULTIPLE CHOICE: MARK FULLY with Pencil No. 2 the letter of your choice on the answer sheet provided. Make the mark DARK but do not use too much pre...

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila FINANCIAL ACCOUNTING AND REPORTING Final Preboard Examination

Sunday, April 19, 2020 12:00 p.m. to 3:00 p.m.

SET A MULTIPLE CHOICE: MARK FULLY with Pencil No. 2 the letter of your choice on the answer sheet provided. Make the mark DARK but do not use too much pressure. ERASURES ARE STRICTLY NOT ALLOWED.

Numbers 1, 2, 3, 4 and 5 Extreme Company is a dealer in equipment. Extreme leased equipment to Elorde Company on January 1, 2020, for an eight-year period expiring January 1, 2028. Equal annual payments under the lease are due at the end of each year beginning December 31, 2020. The lease agreement includes a guaranteed residual value of P200,000, an interest rate of 10% and that the asset will revert back to Extreme on January 1, 2028. It was determined that the fair value of the asset is P3,000,000, its carrying amount is P2,500,000 and that the present value of the lease payment at the 10% interest rate is P2,759,000. Round present value factors to 2 decimals. Jade Company is experiencing financial difficulties with AA Bank. Jade negotiated with AA and arrived at an agreement to restructure its note payable at the end of the current period. Jade owed the bank a note with principal amount of P4,000,000 and accrued interest of P480,000. Based on the agreement, the bank will accept equipment with a fair value of P800,000 and a note receivable from Jade’s customer with carrying amount of P3,000,000. It was determined that the equipment had been acquired at P1,000,000 and had been 30% depreciated as of the current period. Glow Company declared and distributed a 15% share dividend with fair value of P2,500,000 and par value of P2,000,000 and a 30% share dividend with a fair value of P5,000,000 and par value of P3,500,000. 1. What is the periodic rental that Extreme should charge Elorde? a. b. c. d.

517,636 562,852 500,000 545,216

2. What amount of gross profit should Extreme recognize? a. b. c. d.

500,000 259,000 406,000 165,000

3. Under IFRS, what amount of gain on extinguishment of debt should Jade recognize? a. b. c. d.

480,000 680,000 780,000 300,000

4. If Jade uses US GAAP, what amount of gain or loss on disposal should Jade recognize? a. b. c. d.

100,000 gain 200,000 loss 100,000 loss 200,000 gain

5. What amount of share premium should be recognized by Glow? a. 2,000,000 b. 1,500,000

c. d.

500,000 0

Page 2 Numbers 6, 7, 8, 9, 10 and 11 On January 1, 2020, Staple Company has granted share options to its employees with a fair value of P9,000,000. Options are exercisable on January 1, 2022. In 2020, employees leaving during the vesting period are estimated at 4% In 2021, employees that actually left Staple are 6%. Santiago Company implemented a defined benefit plan for its employees on January 1, 2018. During 2018 and 2019, Santiago’s contributions fully funded the plan. The following data are provided for 2020 and 2021:

Projected benefit obligation, December 31 Fair Value of Plan Assets, December 31

2021

2020

11,250,000 10,950,000

10,500,000 10,050,000

Santiago recognized benefit expense of P1,350,000, actual return, which is also the interest income of P502,500, benefits paid of P250,000 and actuarial gain on its benefit obligation during 2021. Mucho Company declared a property dividend of automobile on October 1, 2020, payable on January 15, 2021. The fair value less cost to distribute of the machinery on October 1, 2020 is P9,000,000 while its carrying amount on such date is P7,000,000. On December 31, 2020, the fair value less cost to distribute was P6,000,000 and P3,500,000 on January 15, 2021. 6. What amount of compensation expense should Staple recognized for the year 2021? a. b. c. d.

4,320,000 4,500,000 8,460,000 4,140,000

7. If no employees exercised the share options on January 1, 2022, Staple should a. b. c. d.

Credit retained earnings for P8,460,000 Credit other income for P8,460,000 Credit share premium for P8,460,000 Credit share premium for P9,000,000

8. What is the discount rate that Santiago applied for the year 2021? a. b. c. d.

4.79% 5.00% 4.59% 4.47%

9. What is the actuarial gain on the projected benefit obligation for the year 2021? a. 750,000 b. 350,000 c. 852,500 d. 0 10. What amount should Santiago contribute in order to report an accrued benefit cost of P300,000 in its December 31, 2021 statement of financial position? a. 647,500 b. 900,000 c. 150,000 d. 1,150,000 11. What amount of impairment loss should Mucho recognize for the year 2020? a. 3,500,000 b. 1,000,000 c. 2,500,000

d. 2,000,000

Page 3 Numbers 12, 13, 14, 15 and 16 AA Company is authorized to issue 150,000 shares of P100 par value 8% cumulative preference shares and 400,000 shares of P50 par value ordinary shares. The preference shares have a call price and liquidation price of P110 and P105 respectively. During the year, 80,000 ordinary shares are issued to the founders of the corporation for land valued by the board of directors at P10,000,000, 5,000 preference shares are sold for cash at P120 per share and 1,000 ordinary shares to its attorneys for costs associated with starting the company. At that time, the ordinary shares were selling at P60 per share. Also 50,000 ordinary shares were subscribed at P70 per share. It was determined that 60% of the subscription price was already paid by the shareholders. The remaining balance is to be collected early next year. The net income for the year is P2,500,000. BB Company has P400,000 of 6% cumulative and fully participating preference shares and P1,600,000 of ordinary shares outstanding, each having a par value of P10. No dividends have been declared for 2018 and 2019. On December 31, 2020, BB declared a total dividend of P408,000 to its preference and ordinary shareholders. After its first year of operations, CC Company recognized pretax accounting income of P11,250,000, total tax expense of P3,375,000 of which P270,000 is deferred tax expense. The entity uses straight-line depreciation for accounting purposes while accelerated method for tax purposes. The accounting depreciation was determined to be P4,500,000 and the income tax rate effective for this year is 30%. 12. What is total shareholder’s equity of AA Company in its financial statements? a. b. c. d.

13,260,000 14,660,000 15,260,000 16,660,000

13. What amount of book value per ordinary share should AA Company present? a. b. c. d.

122.86 122.67 132.39 132.16

14. What amount of dividends should BB Company allocate to its ordinary shareholders? a. b. c. d.

96,000 120,000 288,000 307,200

15. What amount of depreciation did CC Company record for tax purposes? a. 3,600,000 b. 4,500,000 c. 5,400,000 d. 900,000 16. What is the taxable income of CC Company? a. 11,250,000 b. 12,150,000 c. 7,875,000 d. 10,350,000

Page 4 Numbers 17, 18, 19, 20 and 21 Magnum Company granted share options to its employees under a performance-based share option plan on January 1, 2020. The number of share options to be granted is based on the net sales. The plan provided for share options to be awarded to the employees on the following basis: Net sales range Less than P5,000,000 P5,000,000 to P7,999,999 P8,000,000 and above

Options granted 30,000 50,000 80,000

Options become exercisable on December 31, 2022. The option price is P100 while the par value per share is P80. The market prices for the years 2020, 2021, and 2022 were P180, P220 and P240 respectively. The net sales for the years 2020, 2021 and 2022 were P3,500,000, P8,500,000 and P7,500,000 respectively. The fair value of the share options cannot be determined reliably. The options were exercised on December 31, 2022. On December 31, 2020, Chamber Bank has a 5-year loan receivable with a face value of P5,000,000 dated January 1, 2019 that is due on December 31, 2023. Interest is payable annually every December 31 at 9%. The borrower made the required interest payment on December 31, 2019 but informed the bank that interest accrued at 2020 will be paid at maturity. There is a high probability that remaining interest payments will not be paid because of financial di fficulty. The PV of 1 for 3 periods is 0.772 at 9%. Domex Company traded machinery with a carrying amount of P2,800,000 and a fair value of P3,000,000. It received in exchange from Ariel Company a machine with a fair value of P2,700,000 and cash of P300,000. Ariel’s machine has a carrying amount of P2,850,000. The exchange has commercial substance. 17. What is the compensation expense that Magnum should recognize for the year 2021? a. 800,000 b. 5,600,000 c. 6,400,000 d. 9,933,333 18. What is the compensation expense that Magnum should recognize for the year 2022? a. 7,000,000 b. 6,400,000 c. 1,000,000 d. 600,000 19. What amount of share premium should Magnum record on December 31, 2022? a. b. c. d.

7,000,000 8,000,000 1,000,000 5,000,000

20. What amount of impairment loss should Chamber recognize in 2020? a. 1,242,600 b. 792,600 c. 378,666 d. 0 21. What is the cost of the new machine to Domex? a. 3,000,000 b. 3,300,000 c. 2,700,000

d. 2,500,000

Page 5 Numbers 22, 23, 24, 25 and 26 Maxi Company constructed a building at a cost of P20,000,000. Average accumulated expenditures were P8,000,000, actual interest was P1,200,000, and avoidable interest was P600,000 during the year. Bandai Company plans to acquire an additional machine on January 1, 2020. Hasbro Company offers to provide the machine to Bandai using either of the options listed below (each option gives Bandai the same machine and gives Hasbro the same present value cash equivalent at 10%). Option 1 Option 2

Cash purchases of P8,000,000. Installment purchases requiring 15 annual payments of P1,051,790 due December 31 each year.

The useful life of this machine is 15 years and the residual value is estimated to be P500,000. Bandai uses SYD method of depreciation. On December 31, 2020, DD Company paid P7,000,000 to acquire all of the ordinary shares of EE Company, which became a division of DD. In the books of EE, the net assets are recorded at P5,000,000. It was determined that the fair value of the identifiable net assets of EE is P5,600,000. On December 31, 2021, EE Company reported current assets and noncurrent assets of P1,600,000 and P4,800,000 respectively. The noncurrent assets included the amount of goodwill. EE Company was tested for any impairment loss. The value in use of EE Company was P3,800,000. Riley Company incurred the following costs during 2020: Significant modification to the formulation of a chemical product Troubleshooting in connection with breakdowns during commercial production Cost of exploration of new formulas Seasonal or other periodic design changes to existing products Laboratory research aimed at discovery of new technology 22. What is the cost of the new building to Maxi Company? a. 21,200,000 b. 20,600,000 c. 9,200,000 d. 8,600,000 23. What is the total expense to Bandai under Option 2? a. b. c. d.

3,487,291 1,909,606 1,989,290 1,737,500

24. What is the goodwill on the acquisition of EE Company? a. 1,400,000 b. 2,000,000 c. 600,000 d. 0 25. What amount of impairment loss is allocated to goodwill of EE Company? a. 2,600,000 b. 1,400,000 c. 2,000,000 d. 568,750 26. What amount of research and development expense should Riley recognize? a. 7,350,000 b. 5,850,000 c. 9,200,000

1,600,000 1,500,000 2,000,000 1,850,000 2,250,000

d. 7,700,000

Page 6 Numbers 27, 28, 29, 30, 31 and 32 On October 1, 2020, accounts receivable in the amount of P1,000,000 were assigned to a bank by Jade Company as security for a loan of P800,000. The bank charged a 3% commission on the accounts. The interest rate on the note is 12%. During the month, Jade collected P300,000 on assigned accounts after deducting P50,000 of discounts. Jade wrote off a P53,000 assigned account. Jade paid to the bank the amount collected plus one month's interest on the note. On October 31, 2020, Jade estimated that 8% of the assigned accounts is doubtful in collection. On June 1, 2020, Emerald Company factored P600,000 of accounts receivable with Finance Company without recourse. Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales returns and allowances. It was agreed that the factor’s holdback should always be equal to 2% of the account receivable balance after any collection by Finance. Any amount in excess of the required balance should be returned to Emerald. During the month, Finance collected P350,000 from Emerald’s customers. On December 20, 2020, Mile Company purchased merchandise on credit for P3,000,000 with terms 2/10, n/30. 80% of the gross liability was paid within the discount period. The remainder was paid on January 15, 2021. On December 31, 2020, 90% of the merchandise had been sold and 10% remained in inventory. Mile uses the net method. 27. What is the balance of accounts receivable of Jade Company on October 31, 2020? a. b. c. d.

597,000 647,000 105,000 155,000

28. What is the doubtful account expense to be recognized by Jade Company? a. 47,760 b. 51,760 c. 104,760 d. 100,760 29. What amount of loss on factoring should Emerald Company recognize? a. b. c. d.

48,000 12,000 36,000 41,000

30. What amount should Finance return to Emerald to satisfy the required holdback balance? a. 12,000 b. 5,000 c. 7,000 d. 0 31. What amount of purchase discount lost should Mile recognize on December 31, 2020? a. 12,000 b. 60,000 c. 48,000 d. 0 32. What amount of cost of goods sold should Mile recognize on December 31, 2020? a. b. c. d.

2,700,000 2,646,000 2,658,000 2,652,000...