Financial Accounting and Reporting Test Bank PDF

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FINANCIAL ACCOUNTING AND REPORTING TEST BANK8152017 – 1PROBLEM 1 – STATEMENT OF FINANCIAL POSITIONThe following trial balance of an entity on December 31, 2017 has been adjusted except for income tax expense.Cash 6,000, Accounts receivable 14,000, Inventory 10,000, Property, plant and equipment 25,0...

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FINANCIAL ACCOUNTING AND REPORTING TEST BANK 8152017 – 1 PROBLEM 1 – STATEMENT OF FINANCIAL POSITION The following trial balance of an entity on December 31, 2017 has been adjusted except for income tax expense. Cash Accounts receivable Inventory Property, plant and equipment Accounts payable Income tax payable Preference share capital Ordinary share capital Share premium Retained earnings – January 1 Net sales and other revenue Cost of goods sold Expenses Income tax expense

6,000,000 14,000,000 10,000,000 25,000,000 9,000,000 6,000,000 3,000,000 15,000,000 4,000,000 9,000,000 80,000,000 48,000,000 12,000,000 11,000,000 126,000,000

__________ 126,000,000

During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax rate is 30% on all types of revenue. Inventory and accounts payable included goods purchased in transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end, costing P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on December 31, 2018. 1. What amount should be reported as current assets on December 31, 2017? a. b. c. d.

29,200,000 29,700,000 29,500,000 30,000,000

2. What amount should be reported as current liabilities on December 31, 2017? a. 14,200,000 b. 17,200,000 c. 12,200,000 d. 9,200,000 3. What is the net income for 2017? a. 20,000,000 b. 14,000,000 c. 23,000,000 d. 9,000,000 4. What amount should be reported as total shareholders’ equity on December 31, 2017? a. b. c. d.

40,000,000 37,000,000 45,000,000 42,000,000

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2

SOLUTION - PROBLEM 1 Question 1 Answer A Cash Accounts receivable Inventory (10,000,000 - 500,000 - 300,000) Total current assets

6,000,000 14,000,000 9,200,000 29,200,000

Question 2 Answer C Net sales and other revenue

80,000,000

Cost of goods sold Expenses Income before tax

( 48,000,000) ( 12,000,000) 20,000,000

Tax expense (30% x 20,000,000) Net income

( 6,000,000) 14,000,000

Tax expense

6,000,000

Payment during year Income tax payable

(5,000,000) 1,000,000

Accounts payable Income tax payable Redeemable preference Total current liabilities

8,200,000 1,000,000 3,000,000 12,200,000

Accounts payable per book

9,000,000

Goods in transit FOB destination Goods held on consignment Adjusted accounts payable

( 500,000) ( 300,000) 8,200,000

Question 3 Answer B Net income

14,000,000

Question 4 Answer D Ordinary share capital Share premium Retained earnings Total shareholders’ equity

15,000,000 4,000,000 23,000,000 42,000,000

Retained earnings – January 1 Net income Total retained earnings

9,000,000 14,000,000 23,000,000

Page 3 PROBLEM 2 - STATEMENT OF FINNACIAL POSITION 3. On December 31, 2017, an entity showed the following current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets

500,000 2,500,000 2,000,000 100,000 5,100,000

Cash on hand including customer postdated check of P20,000 and employee IOU of P10,000 Cash in bank per bank statement (outstanding checks on December 31, 2017, P70,000) Total cash

130,000 370,000 500,000

Customers’ debit balances, net of customer deposit of P50,000 Allowance for doubtful accounts Sale price of goods invoiced to customers at 150% of cost on December 29, 2017 but delivered on January 5, 2018 and excluded from reported inventory Total accounts receivable

1. What is the adjusted cash balance? a. b. c. d.

500,000 470,000 430,000 400,000

2. What is the net realizable value of accounts receivable? .

a. b. c. d.

1,970,000 1,820,000 1,800,000 1,950,000

3. What is the adjusted inventory? a. b. c. d.

2,000,000 2,375,000 2,500,000 2,750,000

4. What total amount of current assets should be reported? a. b. c. d.

4,900,000 4,830,000 4,780,000 4,630,000

1,900,000 (

150,000)

750,000 2,500,000

Page 4 SOLUTION – PROBLEM 2 Question 1 Answer D Cash on hand

130,000

Customer postdated check Employee IOU Adjusted cash on hand Cash in bank per bank statement Outstanding checks Adjusted cash balance

( 20,000) ( 10,000) 100,000 370,000 ( 70,000)

300,000 400,000

Question 2 Answer B Customers’ debit balances

1,900,000

Customer deposit erroneously netted

50,000

Customer postdated check

20,000

Accounts receivable Allowance for doubtful accounts Net realizable value

1,970,000 ( 150,000) 1,820,000

Question 3 Answer C Inventory per book Undelivered goods incorrectly excluded from inventory (750,000 / 150%) Adjusted inventory

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

Question 4 Answer B Cash Accounts receivable, net of allowance Advances to employee - IOU Inventory Prepaid expenses Total current assets

400,000 1,820,000 10,000 2,500,000 100,000 4,830,000

Page 5 PROBLEM 3 – STATEMENT OF COMPREHENSIVE INCOME An entity reported the following data for the current year: Net sales Cost of goods sold Selling expenses Administrative expenses Interest expense Gain from expropriation of land Income tax Income from discontinued operations Unrealized gain on equity investment at FVOCI Unrealized loss on futures contract designated as a cash flow hedge Increase in projected benefit obligation due to actuarial assumptions Foreign translation adjustment – debit Revaluation surplus

9,500,000 4,000,000 1,000,000 1,200,000 700,000 500,000 800,000 600,000 900,000 400,000 300,000 100,000 2,500,000

1. What amount should be reported as income from continuing operations? a. b. c. d.

3,100,000 2,300,000 1,800,000 2,900,000

2. What net amount should recognized in other comprehensive income for the year? a. 2,600,000 b. 3,100,000 c. 3,400,000 d. 800,000 3. What net amount in OCI should be presented as “may not be recycled to profit or loss? a. b. c. d.

3,400,000 2,700,000 3,700,000 3,100,000

4. What amount should be reported as net income? a. 2,900,000 b. 2,300,000 c. 3,100,000 d. 2,400,000

5. What amount should be reported as comprehensive income? a. 5,500,000 b. 2,900,000 c. 2,600,000

d.

6,100,000

Page 6 SOLUTION - PROBLEM 3 Question 1 Answer B Net sales

9,500,000

Cost of goods sold Gross income

(4,000,000) 5,500,000

Gain from expropriation of land

500,000

Total income

6,000,000

Selling expenses

1,000,000

Administrative expenses

1,200,000

Interest expense Income before tax Tax expense Income from continuing operations

700,000

2,900,000 3,100,000 ( 800,000) 2,300,000

Question 2 Answer A Unrealized gain on equity investment at FVOCI Unrealized loss – cash flow hedge Actuarial loss – increase in PBO Translation adjustment – debit Revaluation surplus Net gain - OCI

900,000 ( 400,000) ( 300,000) ( 100,000) 2,500,000 2,600,000

Question 3 Answer D Unrealized gain on equity investment at FVOCI

900,000

Actuarial loss on PBO Revaluation surplus

( 300,000) 2,500,000

Net amount of OCI not reclassified to profit or loss

3,100,000

Question 4 Answer A Income from continuing operations Income from discontinued operations

2,300,000 600,000

Net income

2,900,000

Question 5 Answer A Net income Net gain – OCI Comprehensive income

2,900,000 2,600,000 5,500,000

Page 7

PROBLEM 4 – INVESTMENT IN ASSOCIATE On January 1, 2017, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2017, the investee reported net income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2018, 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 2018 and paid dividend of P5,000,000 on December 31, 2018. 1. What amount of investment income should be recognized in 2017? 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, 2018? 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 2018? a. 2,000,000

b. 2,500,000 c. 2,300,000 d. 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2018? a. b. c. d.

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

Page 8 SOLUTION - PROBLEM 4 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

3,500,000

New 15% interest

8,500,000

Total cost – January 1, 2018

12,000,000

Net assets acquired (25% x 36,000,000) Excess of cost over carrying amount

( 9,000,000) 3,000,000

Excess attributable to equipment whose fair value is greater than carrying amount (25% x 4,000,000) Goodwill

( 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

2,000,000 ( 200,000) 1,800,000

Fair value of 10% interest

3,500,000

Historical cost

3,000,000

Remeasurement gain

500,000

Net investment income

1,800,000

Total income in 2018

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 January 1, 2018

12,000,000

Net investment income

1,800,000

Share in cash dividend (25% x 5,000,000) Carrying amount – December 31, 2018

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

Page 9 PROBLEM 5 – INVESTMENT IN ASSOCIATE An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s assets and liabilities at that date were as follows:

Cash Accounts receivable Inventory – FIFO Land Plant and equipment – net Liabilities

Carrying amount

Fair value

1,000,000 4,000,000 8,000,000 5,500,000 14,000,000 7,000,000

1,000,000 4,000,000 9,000,000 7,000,000 22,000,000 7,000,000

The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The entity sold the land in 2018 for P8,000,000 and reported a gain of P2,500,000. The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid P1,000,000 cash dividend on December 31, 2017 and P2,000,000 on December 31, 2018. 1. What is the implied a goodwill arising from the acquisition? a. 200,000

b. 600,000 c. 800,000 d. 400,000 2. What is the investment income for 2017?

a. b. c. d.

880,000 480,000 400,000 580,000

3. What is the investment income for 2018? a. b. c. d.

1,080,000 2,280,000 1,680,000 2,880,000

4. What is the carrying amount of the investment in associate on December 31, 2018? a. b. c. d.

15,360,000 15,000,000 16,560,000 13,800,000

Page 10 SOLUTION – PROBLEM 5 Question 1 Answer B Cash

1,000,000

Accounts receivable

4,000,000

Inventory

8,000,000

Land

5,500,000

Plant and equipment

14,000,000

Liabilities Net assets at carrying amount

( 7,000,000) 25,500,000

Acquisition cost

15,000,000

Net assets acquired (40% x 25,500,000) Excess of cost

(10,200,000) 4,800,000

Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%)

(

400,000)

Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%) Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%) Implied goodwill s

( 3,200,000) ( 600,000) 600,000

Question 2 Answer B Share in net income for 2017(40% x 3,000,000) Amortization of excess – inventory Amortization of excess – plant and equipment (3,200,000 / 10 years) Investment income for 2017

1,200,000 ( 400,000) ( 320,000) 480,000

Question 3 Answer A Share in net income for 2018 (40% x 5,000,000) Amortization of excess – plant and equipment Amortization of excess – land Investment income for 2018

2,000,000 ( 320,000) ( 600,000) 1,080,000

Question 4 Answer A Acquisition cost

15,000,000

Investment income 2017

480,000

Cash dividend for 2017 (40% x 1,000,000) Investment income for 2018

(

400,000) 1,080,000

Cash dividend for 2018 (40% 2,000,000) Carrying amount – December 31, 2018

( 800,000) 15,360,000

Page 11 PROBLEM 6 – BOND INVESTMENT AT FVOCI An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June 30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The business model for this investment is to collect contractual cash flows and sell the bonds in the open market. On December 31, 2017, the bonds were quoted at 106. 1. What amount of interest income should be reported for 2017?

a. b. c. d.

400,000 200,000 364,560 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2017? a. b. c. d.

5,300,000 5,171,940 5,174,560 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2017? a. 300,000 b. 125,440 c. 128,060 d. 92,000

4. If the entity elected the fair value option, what total amount of income should be recognized for 2017? a. 400,000 b. 492,000 c. 600,000 d. 200,000

Page 12 SOLUTION - PROBLEM 6 Date

Interest received

Jan. 1, 2017 Jan. 30, 2017 Dec. 31, 2017

Question 1 Answer D

200,000 200,000

Interest income

182,280 181,660

Amortization

17,720 18,340

Carrying amount 5,208,000 5,190,280 5,171,940

Interest January to June Interest July to December Interest income for 2017

182,280 181,660 363,940

Question 2 Answer A Market value on December 31, 2017 (5,000,000 x 106)

5,300,000

Question 3 Answer C Market value on December 31, 2017 Carrying amount December 31, 2017 (see table of amortization) Unrealized gain - OCI

5,300,000 5,171,940 128,060

Question 4 Answer C Market value on December 31, 2017 Acquisition cost, excluding transaction cost Gain from change in fair value Interest income (8% x 5,000,000) Total income

5,300,000 5,100,000 200,000 400,000 600,000

Page 13 PROBLEM 7 – PROPERTY, PLANT AND EQUIPMENT January 1, 2017, an entity disclosed the following balances: Land Land improvements Buildings Machinery and equipment During the current year, the following transactions occurred:

4,000,000 1,300,000 20,000,000 8,000,000

* 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 sidewalk 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, 2010 was scrapped on June 30, 2017. 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, 2017. Original cost of the machine sold was P700,000 on January 1, 2014, 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, 2017? b. 7,800,000 c. 7,600,000 d. 8,000,000 e. 6,800,000 2. What is the total cost of land improvements on December 31, 2017? 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, 2017? 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, 2017? a. 12,400,000 b. 11,500,000 c. 11,000,000 d. 11,700,000

Page 14 SOLUTION – PROBLEM 7

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

2,000,000

Building Total

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 sidewalk 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

8,000,000

Machinery and equipment purchased

4,000,000

Freight and unloading

100,000

Installation

300,000

Machinery scrapped Machinery sold Machinery equipment – December 31

( 200,000) ( 700,000) 11,500,000

Page 15 PROBLEM 8 - INCOME TAX An entity had the following financial statement elements for w...