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FAR 1 Reviewer (Answers)1.) Young Company holds the following assets at year-end and classifies as cash equivalents everything allowed by professional standards.Treasury bills acquired with less than 3 months before maturity P1,500, Treasury bills acquired with greater than 3 months before maturity ...

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FAR 1 Reviewer (Answers) 1.) Young Company holds the following assets at year-end and classifies as cash equivalents everything allowed by professional standards. Treasury bills acquired with less than 3 months before maturity P1,500,000 Treasury bills acquired with greater than 3 months before maturity 2,000,000 Commercial papers 1,200,000 Investment in marketable equity securities 1,000,000 What would be the total cash equivalents at year-end for Young Company? A. P1,500,000 B. P4,700,000 C. P2,700,000 D. P3,700,000 2.) The cash account in the ledger of K Company shows a balance of P1,652,000 at December 31. The bank statement, however, shows a balance of P2,090,000 at the same date. The only reconciling items consist of bank service charge of P2,000, a large number of outstanding checks totaling P590,000 and a deposit in transit. What is the deposit in transit in the December 31 bank reconciliation? A. 150,000 C. 154,000 B. 440,000 D. 592,000 3.) In the December 31, 2010 statement of financial position of MM Company, the current receivables consisted of the following: Trade accounts receivable P 930,000 Allowance for uncollectible accounts ( 20,000) Claim against shipper for goods lost in transit(November 2010) 30,000 Selling price of unsold goods sent by MM on consignment at 130% of cost (not included in MM’s ending inventory) 260,000 Security deposit on lease of warehouse used for storing some inventories 300,000 Total P1,500,000 At December 31, 2010, the correct total of current net receivables was A. 940,000 C. 1,240,000 B. 1,200,000 D. 1,500,000

4.) Rain Company accepted from a customer a P4,000,000, 90-day, 12% interest-bearing note dated August 31, 2010. On September 30, 2010, Rain discounted the note with recourse at the AA State Bank at 15%. However, the proceeds were not received until October 1, 2010. The discounting with recourse is accounted for as a conditional sale with recognition of a contingent liability. What is the loss on note receivable discounting? A. 40,000 B. 23,000

C. 17,000 D. 20,000

Calasiao Company is a dealer in equipment. On December 31,2009, Calasiao Company sold an equipment in exchange for a noninterest bearing note requiring five annual payments of P500,000. The first payment was made December 31, 2010. The market interest for similar notes was 8%. The relevant present value factors are:

PV of 1 @ 8% for 5 periods PV of an ordinary annuity of 1 @ 8% for 5 years

.68 3.99

5.) In its December 31,2009 statement of financial position, what should Calasiao report as notes receivable? A. 2,500,000 C. 1,700,000 B. 1,995,000 D. 1,495,000 6.) What interest income should be reported for 2010? A. 505,000 C. 159,600 B. 101,000 D. 119,600

7.) In 2008, a company changed from the LIFO method of accounting for inventory to FIFO. The company’s 2007 and 2008 comparative financial statements will reflect which method or methods? 2007 a. LIFO b. FIFO c. LIFO

2008 LIFO FIFO FIFO

8.) The balance in Rey Company’s accounts payable at December 31, 2010 was P4,900,000 before the following information was considered:

 

Goods shipped FOB destination on December 21, 2010 from a vendor to Rey were lost in transit. The invoice cost of P180,000 was not recorded by Rey. On December 28, 2010, Rey notified the vendor of the lost shipment. Goods were in transit from a vendor to Rey on December 31, 2010. The invoice cost was P240,000 and the goods were shipped FOB shipping point on December 28, 2010. Rey received the goods on January 6, 2011.

What amount should Rey report as accounts payable in its December 31, 2010 statement of financial position? A. P5,320,000 C. P5,080,000 B. P5,140,000 D. P4,900,000 9.) Green Company’s accounts payable at December 31, 2010, totaled P4,500,000 before any necessary year-end adjustments relating to the following transactions: 

On December 27, 2010, Green wrote and recorded checks to creditors totaling P2,000,000 causing an overdraft of P500,000 in Green’s bank account at December 31, 2010. The checks were mailed on January 10,2011.



On December 28, 2010, Green purchased and received goods for P750,000, terms 2/10, n/30. Green records purchases and accounts payable at net amount. The invoice was recorded and paid January 3, 2011.



Goods shipped FOB destination on December 20, 2010 from a vendor to Green were received January 2, 2011. The invoice cost was P325,000.

At December 31, 2010, what amount should Green report as accounts payable? A. P7,575,000 C. P7,235,000 B. P7,250,000 D. P7,553,500 10.) Liane Company is preparing its financial statements for the year ended December 31, 2010. Accounts payable amounted to P3,600,00 before any necessary year-end adjustment related to the following: 

At December 31, 2010, Liane has a P500,000 debit balance in its accounts payable to Rose, a supplier, resulting from a P500,000 advance payment for goods to be manufactured to Liane’s specifications.



Checks in the amount of P1,000,000 were written to vendors and recorded on December 29, 2010. The checks were mailed on January 5, 2011.

What amount should Liane report as accounts payable in its December 31, 2010 statement of financial position? A. P5,100,000 C. P3,100,000 B. P4,100,000 D. P2,100,000

11.)

Kim Company’s accounts payable balance at December 31, 2010, was P2,200,000 before considering the following data: 

Goods shipped to Kim FOB shipping point on December 22, 2010, were lost in transit. The invoice cost of P40,000 was not recorded by Kim. On January 27, 2011, Kim filed a P40,000 claim against the common carrier.



On December 27, 2010, a vendor authorized Kim to return, for full credit, goods shipped and billed at P70,000 on December 3, 2010. The returned goods were shipped by Kim on December 28, 2010. A P70,000 credit memo was received and recorded by Kim on January 5, 2011.

What amount should Kim report as accounts payable in its December 3, 2011 statement of financial position? A. P2,170,000 C. P2,230,000 B. P2,180,000 D. P2,280,000 12.) On January 1, 2009, ABC Company purchased marketable equity securities to be held as “trading” for P5,000,000. The entity also paid commission, taxes and other transaction costs amounting to P200,000. The securities had a market value of P5,500,000 on December 31, 2009. No securities were sold during 2009. What amount of unrealized gain or loss on these securities should be reported in the 2009 income statement? A. 500,000 unrealized gain C. 300,000 unrealized gain B. 500,000 unrealized loss D. 300,000 unrealized loss 13.) On January 2, 2008, Handsome Company acquired an investment property and the initial cost of investment property was P5,000,000. On the date of acquisition, the company chooses the cost model to account for its investment. As of December 31, 2009, it has a carrying value of P4,900,000 and a fair value of P5,100,000. On December 31, 2010, the company decided to transfer the investment property to owner occupied property. On this date of transfer, the fair value of property is P5,000,000 while its carrying value was P4,800,000. What amount of gain or loss on transfer should the company recognize on December 31, 2010? A. B.

No gain or loss P100,000 loss

C. D.

P200,000 loss P300,000 loss

On January 2, 2010, Wishco Company converted its occupied property to investment property

that is to be carried at fair value. The carrying value of the property in the company’s books is P4,000,000. 14.) Assuming the fair value of the property on the date of transfer or conversion is P3,800,000, Wishco Company should recognize A. An impairment loss of P200,000 in the income statement. B. A P200,000 deferred loss as an asset C. A P200,000 unrealized loss in the shareholders’ equity D. A P4,000,000 cost of the investment property 15.) Base on the above, assuming the fair value of the property on the date of transfer or conversion is P4,400,000, Hope Company should recognize A. A P400,000 unrealized gain in the income statement B. A P400,000 revaluation surplus in the shareholders’ equity C. A P400,000 unrealized gain in the liability section D. A P400,000 direct credit to accumulated profits and losses 16.) On January 2, 2009, Joy Corporation acquired a track of land that is to be sold in the ordinary conduct of business. The purchase price of the property of P50,000,000 was paid in cash and a total transaction costs of P500,000 related to the acquisition of the property was also paid at a later date. The land was subdivided into 2,000 lots (200 square meters for every lot) for an additional cost of P5,500,000. On December 31, 2009, the market value of the lot was P1,500 per square meter. As of December 31, 2010, only 20,000 square meters are still unsold and market value of the lot had increased to P1,600 per square meter. On this date, Joy decided to transfer the remaining lots into investment property that is to be carried under the fair value model. There was no additional cost incurred on the change of intention on the property. What amount of gain should Joy Corporation recognize as a result of the transfer? A. P29,200,000 C. P29,475,000 B. P29,225,000 D. P29,500,000 17.) Paperdoll Company owns 20,000 shares of Sanrio Company’s 200,000 shares of P100 par, 6% cumulative, non-participating preference share capital and 10,000 shares representing 2 % ownership of Sanrio’s ordinary share capital. During 2010, Sanrio declared and paid preference dividends of P2,400,000. No dividends had been declared or paid during 2009. In addition, Paperdoll received a 5% stock dividend on ordinary share from Sanrio’s ordinary share was P10.

What amount should Paperdoll report as dividend income in its 2010 income statement? A. P120,000 C. P240,000 B. P125,000 D. P245,000 . 18.) On March 1, 2010, Rose Company purchased 10,000 ordinary shares of Cherry Company at P80 per share. On September 30, 2010, Rose received 10,000 stock rights to purchase an additional 10,000 shares at P90 per share. The stock rights had an expiration date of February 1, 2011. On September 30, 2010, Cherry’s share had a market value ex-right of P95 and the stock right had a market value of P5. What amount should Rose report in its September 30, 2010 statement of financial position for investment in stock rights? A. P 40,000 C. P100,000 B. P50,000 D. P150,000 19.)

During 2009, Mayon Company bought the shares of Lava Company as follows:

June 1 December 1

20,000 shares @ P100 30,000 shares @ P120

P2,000,000 3,600,000 P5,600,000

The transactions for 2010 are: January 10 Received cash dividend at P10 per share. January 20 Received 20% stock dividend. December 10 Sold 30,000 shares at P125 per share. The gain on sale of the shares assuming the FIFO approach is A. P1,150,000 C. P150,000 B. P 950,000 D. P550,000 20.) May Company owns 20,000 shares of April Company’s 200,000 shares of P100 par, 6% cumulative, non-participating preference share capital and 10,000 shares representing 2% ownership of April’s ordinary share capital. During 2010, April declared and paid preference dividends of P2,400,000. No dividends had been declared or paid during 2009. In addition, May received a 5% stock dividend on ordinary share from April when the quoted market price of April’s ordinary share was P10. What amount should May report as dividend income in its 2010 income statement? A. 120,000 C. 240,000 B. 125,000 D. 245,000

21.) . Food Company owns 30,000 ordinary shares of Beverages Company acquired on July 31, 2010, at a total cost of P1,100,000. On December 1, 2010, Food received 30,000 stock rights from Beverages. Each right entitles the holder to acquire one share at P45. The market price of Beverages’s share on this date, ex-right, was P50 and the market price of each right was P5. Food sold its rights the same date at P5 a right less a P10,000 commission. The gain from the sale of the rights should be reported by Food at A. P150,000 C. P50,000 B. P140,000 D. P40,000 22.) Apple Company owns 50,000 ordinary shares of Orange Company, which has several hundred thousand shares publicly traded. These 50,000 shares were purchased by Apple in 2008 for P100 per share. On August 30, 2010, Orange distributed 50,000 stock rights to Apple. Apple was entitled to buy one new share of Orange for P90 cash and two of these rights. On August 30, 2010, each share had a market value of P132 ex-right, and each right had a market value of P18. What cost should be recorded for each new share that Apple acquired by exercising the rights? A. P 90 C. P126 B. 114 D. P132 23.) In January 2010, Jenny Company acquired 20% of the outstanding voting ordinary shares of Lyn Company for P2,800,000. This investment enabled Jenny to exercise significant influence over Lyn. The book value of the acquired shares was P2,100,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued in Lyn’s statement of financial position and that had a remaining useful life of 10 years. For the year ended December 31, 2010, Lyn reported income of P630,000 and paid cash dividend of P140,000 on its ordinary shares. What is the proper carrying value of Jenny’s investment Lyn at December 31, 2010? A. P2,700,000 B. P2,730,000 C. P2,800,000 D. P2,828,000

24.) On January 1, 2010, Dry Company paid P18,000,000 for 50,000 ordinary shares of Rain Company which represent a 25% interest in the net assets of Rain. The acquisition cost is equal to the book value of the net assets acquired. Dry has the ability to exercise significant

influence over Rain. Dry received a dividend of P35 per share from Rain in 2009, Rain reported net income of P9,600,000 for the year ended December 31, 2010. In its December 31, 2010 statement of financial position, Dry should report the investment in Rain Company at A. P22,150,000 C. P18,650,000 B. P20,400,000 D. P18,000,000 25.) On January 1, 2010, Moon Company purchased 10% of Light Company’s outstanding ordinary shares for P4,000,000. Moon is the largest single shareholder in Light and Moon’s officers are a majority of Light’s board of directors. Light reported net income of P5,000,000 for 2010 and paid dividends of P1,500,000. In its December 31, 2010 statement of financial position, what amount should Moon report s investment in Light? A. P4,500,000 C. P4,000,000 B. P4,350,000 D. P3,850,000 26.) Red Company owns 30% of the outstanding ordinary shares and 100% of the outstanding noncumulative nonvoting preference shares of White Company. In 2010, White declared dividend of P1,000,000 on its ordinary share capital and P600,000 on its preference share capital. What amount of dividend revenue should Red report in its income statement for the year ended December 31, 2010? A. P900,000 C. P600,000 B. P300,000 D. 0 27.) Chest Company owns 20% of Nut Company’s preference share capital and 80% of its ordinary share capital. Nut’s share capital outstanding at December 31, 2010 is as follows: 10% cumulative preference share capital Ordinary share capital

P5,000,000 7,000,000

Nut reported net income P3,000,000 for the year ended December 31, 2010. What amount should Chest record as equity in earnings of Nut for the year ended December 1, 2010? A. P2,000,000 C. P2,100,000 B. P2,400,000 D. P2,300,000 28.) On July 1, 2010, Wonderful Company purchased as trading investment a P2,000,000 face value

Bright Company 8% bond for P1,850,000 plus accrued interest to yield 10%. The bonds mature on January 1, 2015, and pay interest annually on December 31. On December 31, 2010, the bonds had a market value of P1,890,000. On February 15, 2011, Wonderful sold the bonds for P1,900,000. In its December 31, 2010 statement of financial position, what amount should Wonderful report for investment in trading securities? A. P1,850,000 C. P1,890,000 B. P1,875,000 D. P1,900,000

29.) On October 1, 2010, Micro Company purchased 4,000 of the P1,000 face value,10% bonds of Bac Company for P4,400,000 which includes accrued interest of P100,000. The bonds, which mature on January 1, 2017, pay interest semiannually on January 1 and July 1. Micro uses the straight line method of amortization and appropriately recorded the bonds as held to maturity. The bonds should be shown in Micro’s December 31, 2010 statement of financial position at A. P4,284,000 C. P4,300,000 B. P4,288,000 D. P4,400,000 30.) . Sun Company purchased bonds at a discount of P100,000. Subsequently, Sun sold these bonds at a premium of P140,000. During the period hat Sun held this held for maturity investment, amortization of the discount amounted to P20,000. What amount should Sun report as gain on the sale of bonds? A. P120,000 C. P240000 B. P220,000 D. P260,000 31.) On January 1, 2010, Mini Company purchased ten-year bonds with a face value of P1,000,000 and a stated interest rate of 8% per year payable semiannually July 1 and January 1. The bonds were acquired to yield 10%. Present value factors are as follows: Present value of 1 for 10 periods at 10% Present value of 1 for 20 periods at 5% Present value of an annuity of 1 for 10 periods at 10% Present value of an annuity of 1 for 20 periods at 5% The purchase price of the bonds is A. P1,124,620 B. P1,100,000

C. D.

.386 .377 6.145 12.462

P1,000,000 P 875,380

32.) Dream Company owns three properties which are classified as investment properties. Details of the properties are as follows:

Initial cost Fair value at 12/31/2009 Fair value at 1/31/2010 Property 1 2,700,000 3,200,000 3,500,000 Property 2 3,450,000 3,050,000 2,850,000 Property 3 3,300,000 3,850,000 3,600,000 Each property was acquired in 2006 with a useful life of 25 years. The entity’s accounting policy is to use the fair value model for investment properties. What is the gain or loss to be recognized for the year ended December 31,2010? A. P189,000 loss C. P300,000 gain B. P150,000 loss D. P450,000 loss

33.) In January 2010 Cool Company established a sinking fund in connection with its issue of bonds due in 2012. A bank was appointed as independent trustee of the fund. On December 31, 2010, the trustee held P364,000 cash in the sinking fund account representing P300,000 in annual deposits to the fund, and P64,000 of interest earned on those deposits. How should the sinking fund be reported in Cool’s statement of financial position at December 31,2010? A. No part of the sinking fund should appear in Cool’s statement of financial position B. P64,000 should appear as a current asset C. P364,000 should appear as a current asset D. P364,000 should appear as a noncurrent asset

34.) In October of the current year, Everest Company exchanged an old packing machine, which cost P1,200,000 and was 50% depreciated, for another used machine and paid a cash difference of P160,000. The fair value of the old packaging machine was determined to be P700,000. What is the cost of the machine acquired in the exchange on the books of Everest Company? A. P860,000 C. P760,000 B. P700,000 D. P540,000

On December 31, 2010, the property, plant and equipment account of Pure Company includes the details below: Plant assets acquired from Zip Company Repairs made on building prior to occupancy Special Tax assessment Construction of platform for machinery Remodeling of office space in building including new partitions

P7,500,000 200,000 30,000 70,000

and walls Purchase of new machinery Total property, plant and equipment

400,000 800,000 P9,000,000

In exchange for the plant assets of Zip company, Pure Company issued 50,000 shares with P100 par value. On the date of purchase, the share had a quoted price of P150 and the plant assets had the following fair value: Land P 500,000 Building 4,000,000 Machinery 1,500,000 The Land should be reported at A. P530,000 B P500,000 35.)

36.)

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