CPA REVIEW SCHOOL OF THE PHILIPPINES: Manila PRACTICAL ACCOUNTING PROBLEMS i Saturday, February 14, 2015 First Preboard Examination 3:00 p.m. to 6:00 p.m. SETA 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 top much pressure, ERASURES ARE STRICTLY NOT ALLOWED. ‘Questions 1, 2, 3 and 4 are based on the following information: Count Company provided the following selected account balances for the year ended December 31,2015: Retained earnings, January 1 3,000,000 Dividends declared 1,000,000 Sales 8,350,000 Dividend income 100,000 Merchandise inventory, January 1 1,040,000 Purchases 720,000 Salaries 1,540,000 Contribution to employees’ pension fund 280,000 Distribution cost 205,000 Miscellaneous expense 125,000 Doubifuul accounts expense 10,000 Depreciation expense 85,000 Loss on sale of trading securities 40,000 Loss from writedown of obsoiete inventory 150,000 Unrealized toss on equity investment at FVOCI 200,000 Income from discontinued operations, net of tax 500,000 Income tax 105,000, Inventory on December 31 was valued at P850.000 less P1S0,000 writedown of obsolete inventory or P700,000. 1. What is the cost of goods sold? A. 3,910,000 4,060,000 4,210,000 4,760,000 ao 2. What is the amount of total expenses before income x? a 2,285,000 b. 2,005,000 c. 2,390,000 d. 2,485,000 3. What is the net income? 2,000,000 2,500,000 2,700,000 2,780,000 aege 4, What is the balance of retained earnings at year-end? 4,000,000 4,500.00 4,780,000 4,700,000 fogsi Page [ 5. Sick Company reported that the office supplies account had a balance at|the beginning of 2015 of P800,000 before the reversing entry. Payments for purchases of office supplit during 2015 amounted to P5,000,000 and were recorded as expense. A physical count at the id of 2015 revealed suppties costing P950,000 were on hand. Reversing entries are used by Sjok. What was debited in the adjusting entry at the end of 2015? : i ba aj Office supplies expense P150,000 b! Office supplies P150,000 c| Office supplies expense P4,850.000 i i | & thea ‘Company and its segments are engaged solely in manufacturing se following dat pers fo the segments for the year ended December 31, 2015: Segment Profit (loss) 20,000,000 | (10,600,000) (6,000,000) (9,000,000) 3,000,000, f S r ne? moAwp ‘What is the minimum profit or loss of an operating segment to qualify as r a, 2,300,000 4 2,500,000 2,000,000 dl 4,800,000 1 $0% of customers took advantage of the discount besed on past experience. The entity the gross method of recording sales. An analysis of accounts receivable at|December 31, 2615 revealed the following: i 1, hsorere sold good to wholesalers on terms of 3/15, net 30. The entity had no cash sales Age Amount Collectible ~ 15 days 5,000,000 100% ~ 30 days 2,000,000 90% Over 30 days 1,000,000 700,000 at amount shoulld be reported as net realizable value of accounts receivable? 7,875,000 . | b. 7,375,000 | ©. 7,500,000 | i d. 8,000,000 8 Gn December 31, 2015, Bleed Company reported ending inventory of 3,060,000 and an allowance for inventory writedown before any adjustment of P1S0,000. The entity provided the following relevant information on December 31, 2015: Product Cost Replacement Cost Sales Price © NRV Normal profit 1 800,000 900,000 1,200,000 550,000 250,000 2 1,000,000 1,200,000 1,300,000 1,100,000 150,000 3 700,000 1,000,000 1,250,000 950,000 300,000 4 500,000 600,000 1,000,000 350.000 300.000 What amount of loss on writedown is included in 2015 cost of goods sold? a. 50,000 b. 200,000 c. 400,000 d 250,000Page 3 ‘Questions 9, 10, 11 and 12 are based on the following data: On January 1, 2015, Raptors Company purchased 25,000 shares of Game Company which represent a 10% interest for P2,000,000. Raptors used the cost method. Game reported net income of P4,000,000 and paid P1,500,000 cash dividends in 2015. On January 1, 2016, Raptors paid 5,000,000 for 50,000 additional shares of Game Company, It was determined that the fair value of the previous 10% interest was P2,300,000 on Jamuary 1, 2016. The fair values of the identifiable assets of Game Company equal carrying amount of P15,000,000 on purchase date except for land whose fair value exceeded carrying amount by P2,000,000. For the year ended December 31, 2016, Game reported net income of P8,000,000 and paid cash dividends of P20 per share. 9. What is the investment income that should be recognized in 2015? 4,000,000 b. 1,500,000 ©. 400,000 d. 150,000 10. What is the goodwill arising from the acquisition in 2016? a, 3,000,000 b. 2,400,000 g. 2,600,000 4. 0 1L, What total income should be recognized in 20167 a, 2,400,000 b. 2,900,000 ©. 2,300,000 d. 2,000,000 12, What is the carrying amount of the investment on December 31, 20162 a. 7,500,000 b. 9,900,000 ©. 7,800,000 4. 8,400,000 13, Easter Company owned {0,000 ordinary shares of Loko Company. The shares were purchased for P100 per share early in 2015. On October 31, 2015, Loko distributed stock rights to Easter. Easter accounted for these rights separately at fair value and was entitled to buy one new share for P80 and two of these rights. On October 31, 2015, each share had a market value ex-right of P140 and each right had a market value of P20, What is the cost per share of the new investment upon exercise of the rights? a. 140 b. 105 120 dé 100 14. During 2015, Woody Company purchased 20,000 ordinary shares of Home Company for 630,000 as a nontreding investment. Woody irrevocably elected to recognize fair value changes in other comprehensive income. The fair value of these shares was P600,000 at December 31, 2015. Woody sold all of the shares for P34 per share on December 31, 2016. ‘What is included in the journal entry to record the disposal on December 31, 2016? Credit gain on disposal P50,000 Credit gain on disposal P80,000 Credit retained earnings P50,000 Debit unrealized loss - OCI P30,000 epeePage 4 15, On January 1, 2015, Spike Company borrowed P5,000,000 from a bank at a variable rate of interest for 4 years. Interest is payable annually to the bank every December 3] and the principal is due on December 31, 2018. Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and the amount of interest 10 be paid con December 31. In connection with the loan, Spike entered into a “receive variable, pay fixed” interest rate swap agreement with another bank speculator. The agreement was treated as a cash flow hedge and the market interest rates are January 1, 2015 — 10%, January 1, 2016 ~ 14%, January 1, 2017 - 12%, January 1, 2018 — 11%, What amount should be reported as derivative asset or liability on December 31. 2016? a. 169,000 liability b. 169,000 asset ¢. 200,000 liability 4. 200,000 asset 16. During 2015, Road Company constructed assets costing P4,215,000. The weighted average accumulated expenditures on these assets during 2015 totaled P3,900,000. The entity borrowed P2,000,000 at 7.5% on January 1, 2015 to finance the construction. In addition to the construction loan, the entity had two other notes outstanding during the year, a P1,500,000, 10-year, 104 note payable dated October 1, 2013, and @ P1,000,000, 8% note payable dated November 2, 2014, Construction was completed on October 1, 2015. What is the total cost of the building? a. 4,458,600 b. 4,215,000 c. 4,143,600 d. 3,900,000 17. Cane Company acquired equipment by exchanging used equipment with the following data: Equipment 5,000,000 Accumulated depreciation 4,000,000 Fair value of equipment given in exchange 1,200,000 Cash received on exchange 300,000 What is the cost of the new equipment received by Cane? 1,200,000 1,700,000 700,000 500,000 anos 18. Jake Company purchased equipment on January 1, 2015 at an invoice price of P800,000, with credit terms 5/10, 1/30. Freight in costs of P25,000, testing and installation costs of 40,000 and labor costs during regutar production operations of P20,000 were also incurred before the payment of the invoice on January 20, 2015, It was expected that the machine could be used for 10 years, after which the residual value would be zero, The entity intends to use the machine for only 8 years, however, after which it expects to be able to sell it for 50,000. The straight line method is used. What is the carrying amount of this equipment on December 31, 2015? a. 745,625 b. 728,125 c. 742.500 4. 760.500Page 5 19, On January 1, 2015, Lebron Company purchased rights to a mine, The total purchase price was P60,000,000 of which P20,000,000 was allocated to the land, Estimated mineral deposits made through a geological survey were 5,000,000 tons. ‘The entity extracts and sells 100,000 tons per month. Simultaneous with the purchase of the mine, delivery equipment ‘was acquired at a total cost of P25.000,000 with no residual value at the end of the 10-year usefull life. The delivery equipment will be of no use when all the mineral deposits are extracted. What total amount is recognized in profit or loss for the year 2015? a. 9,600,000 b. 6,000,000 &., 12,100,000 15,600,000 20, On June 30, 2015, Lourdes Company reported the following balances: Machinery at cost 30,000,000 Accumulated depreciation 10,500,000 ‘The equipment was measured using the cost model and depreciated on a straight-line basis ‘over @ 10-year period. On December 31, 2015, the directors of Lourdes decided to change the basis of measuring the machinery from the cost model to the revaluation model. The machinery was revalued to the fair value of P27.000,000 with an expected remaining life of 5 years. The income tax rate is 30%, What amount should be recognized as revaluation surplus on December 31, 2015? a. 9,000,000 ~b. 6,300,000 c. 7,500,000 d. 5,250,000 21. On January 1, 2015, Mace Company purchased a patent at a cost P1,880,000 and 2 useful life of 4 years. At December 31, 2015 and December 31, 2016, the entity determined that impairment indicators were present. The entity provided the following information for impairment testing at year end: 12/31/2015, 1231/2016 Fair value less cost of disposal 1,430,000, 840,000 Value in use 1.500.000 890,000 No changes were made in the asset's remaining lif. What should be reported in the 2016 income statement? a. Amortization expense P470,000 Amortization expense P470,000 and impairment loss P50,000 ¢. Amortization expense P470,000 and gain on reversal on impairment P90,000 d, Impairment loss P50,000 22. Sam Company included one coupon in each package of cereal sold. A towel is offered as a premium to customers who send in 10 coupons. 2015 2016 Packages of cereals sold 500,000 800,000 Number of towels acquired at P40 per towel 30,000 60,000 ‘Number of towels distributed as premium 20,000 $0,000 Number of towels to be distributed as premium next period 5,000 3,000 ‘What amount should be reported as premium expense in 2016? af 2,400,000 b. 2,000,000 ©. 2,120,000 d. 1,920,000,Page 6 23. Motorboat Company had a 12% bonds payable with carrying amount of P8,320,000 on December 31, 2015, The bonds, which had a face value of P8,000,000, were issued at a premium to yield 10%. The entity used the offective-interest method of amortization, Interest ‘was paid on June 30 and December 31. On June 30, 2016, several years before their maturity, the entity retired the bonds at 105 plus accrued interest. What is the loss on retirement i 2016? a, 208,000 A 144,000 ‘c. 104,000 4. 400,000 24, On December 31, 2015, Brenda Company leased 2 building under a finance lease for 10 ‘years. It contracted to pay P2,500,000 annual rent on December 31, 2015 and on December 31 thereafter for the next nine years, The finance lease liability was recorded at P15,000,000 ‘on December 31, 2015 before the first payment was made, The equipment's useful life is 12 years. The rate implicit in the lease, which Brenda knows, is 9% and Brenda’s incremental borrowing rate is 10%. The straight fine method of depreciation is used. The building is reverted to the lessor upon expiration of the lease term, What total amount of expense should be recognized in Brenda's 2016 income statement as a result of the finance lease? a. 1,500,000 . 2,750,000 be 2,625,000 4. 2,375,000 - 25. Kelly Company is engaged in leasing equipment. Such equipment was delivered to a lessee on January 1, 2015 under a direct financing lease with the following terms and conditions: Cost of the equipinent 5,089,200 Residual value (unguaranteed) 300,000 Useful life and lease term 8 years Implicit interest rate 12% Present value of an ordinary annuity of } for 8 years at 12% 4.968 Present value of | for 8 years at 12% 404 ‘The annual rental is P1,000,000 payable at the end of each year. The equipment will revert to the lessor upon the lease expiration. What is the total financial revenue? a, 3,210,800 b. 3,332,000 c. 2,910,800 . 3,032,000 26. On January 1, 2015, Danish Company sotd equipment with remaining useful life of 10 years to Bubbles Company. At the same time, Danish leased back the equipment for 4 years at an annual rent of P200,000 which is considered below market rent. The entity provided the following information regarding this sale and leaseback transaction: Sale price 20,000,000 Fair value 23,000,600 Carrying amount 25,000,000 What total amount should be reported in the income statement for 2015? a. 2,000,000 b. 2,200,000 ce. 2,750,000 . 2,950,000Page 7 27. Jose Company is engaged in dairy livestock. The entity provided the following information for the current year: Carrying amount of biological asset on January | 5,060,000 Increase due to purchase 2,000,000 Total gain from change in fair value less cost of disposal of biological asset 1,000,000 Gain attributable to physical change of biological asset 600,000 Gain attributable to price change of biological asset 490,000 Milk produced during the year but unsold at year end. 100,000 ‘What total amount should be recognized in profit or loss for 2015? a. 1,700,000 +b. 2,100,000 1,100,000 4. 3,100,000 28. Lori Company failed to accrue warranty cost of P500,000 on December 31, 2015. In addition, a change from straight line to double declining depreciation method made at the beginning of 2016 resulted in a cumulative effect of P400,000. What amount should be reported as prior period errors in the 2016 statement of retained earnings? a, 400,000 7500.00 e. 900,000 a 0 29. On January 1, 2015, Great Company changed the inventory method from weighted average to FIFO for both financial and income tax reporting. The change resulted in a P600,000 increase in the January 1, 2015 inventory balance, The income tax rate is 30%. What is included in the journal entry to effect this accounting change? a. Credit retained carmings P600.000 b. Credit deferred tax liability P180.000 c. Debit inventory P420,000 d, Credit income tax payable P180,000 30.On December 31, 2015, Eli Bank has a 5-year foan receivable with a face value of 6,000,000 dated January 1, 2014 that is due on December 31, 2018. Interest is payable annually every December 31 at 9%. The borrower made the required interest payment on December 31, 2014 but informed the bank that interest accrued at 2015 will be paid on December 31, 2017, There is « high probability that remaining interest payments will not be paid because of financial difficulty. The bank did not continue accruing interest from 2016. The prevailing market interest rate on December 31, 2015 is 10%. What is the loan impairment loss on December 31, 2015? (Round PV factors to 2 dgcimals) a. 1,380,000 b. 1,504,200 £. 1,466,400 4. 926,400 31, On September 15, 2015, Lab Company entered into a noncancelable purchase commitment to acquire $0,000 units at P60 per unit on April 1, 2016. On December 31, 2015, the market price had decreased to P56 per unit. On April 1, 2016, the market price had falten to P50 per unit, How much is foss on purchase commitment that should be recognized in 2016? a, 200,000 > 300,000 c. 500,000 a. 0Page 8 32. Ace Company was involved in titigation regarding a faulty product sold in a prior year. The entity consulted with an attomey and determined that itis possible that it may lose the case. The attomey estimated that there is a 50% chance of losing, ff this is the case, the attorney estimated that the amount of any payment would be P500,000. What is the required journal entry as a result of this litigation? Debit Litigation Expense and credit Litigation liability P500,000, No journal entry is required bur disclosure is necessary. Debit Litigation Expense and credit Litigation Liability P250,000. No journal entry and disclosure are required. ae ee 33.1n April 30, 2015, Dole Company approved a pian to dispose of a component of its business. For the period January 1 through April 30, 2015, the component had revenues of P500,000 and expenses of P800,000. The assets of the component were sold on October 15, 2015 at a loss of 200,000, In the income statement for the year ended December 31, 2015, how should Dole report the component's operations? , P300,000 loss as part of continuing operation 'b, P200,000 loss as part of discontinued operation +c, P500,000 loss as part of continuing operation 4, PS00,000 loss as part of discontinued operation 34. On June 30, 2015, Viva Company incurred a P100,000 net joss from disposal of a business segment, Also on June 30, 2015, the entity paid P40,000 for property taxes assessed for calendar year 2015. The entity has estimated that total depreciation expense for the year ending December 31, 2015 will amount to P60,000 and that 2015 year-end bonuses to employees will total P120,000. In the interim income statement for six months ended June 30, 2015, what total amount of expenses relating to the foregoing items should be reported? LAC 210,000 b. 110,000 c. 320,000 d. 160,000 35. Jen Company received from a customer a one-year, P5,000,000 note bearing annual interest of 9%, After holding the note for four months, the entity discounted without recourse the note at a bank at a 12% effective interest. What is the loss on note receivable discounting? a, 436,000 b. 136,000 ©. 600,000 4, 200,000 36, Rue Company reported an allowance for uncollectible accounts with a credit balance of 120,000 on December 31, 2015. During 2016, the entity wrote off uncollectible accounts of 480,000. The aging of accounts receivable indicated that P500,000 allowance for uncollectible accounts was required on December 31, 2016. What amount of uncollectible accounts expense should be reported for 2016? 860,000 500,000 480,000 600,000 peepPage 9 37. Cook Company had the following balances on December 31, 2015: Cash in checking account 350,000 ‘Cash in money market account 250,000 Treasury bill, purchased 12/1/2015 maturing 2/28/2016 800,000 ‘Treasury bond, purchased 3/1/2015 maturing 2/28/2016 500,000 Cook's policy is to treat as cash equivalents all highly liquid investments with @ maturity of thee months or less when purchased. What amount should be reported es cash and cash equivalents on December 31, 2015? 1,400,000 b. 1,150,000 ¢, 1,900,000 dé. 600,000 38, Mavde Company introduced a new product that carried a 2-year warranty against defects. vie cuiimated warranty cost related to sales is 3% in the yeas of sale and 5% in the year after sale, Sales are P4,000,000 for 2045 and P5,000,000 for 2016. Actual warranty expenditures fre P100,000 for 2015 and P350,000 for 2076. What amount should be reported as estimated warranty liability on December 31, 20167 a, 370,000 120,000 _ ©." 270,000 a. 20,000 39, Willem Company reported the following liabilities on December 31, 2015: Accounts payable 750,000 Short-term borrowings 400,000 Mortgage payable, current portion P 100,000 3,500,000 Other bank loan, due une 30, 2016 1,000,000 “The P1,000,000 bark loan was refinanced with a 5-year loan’on January 15, 2016, with the fist annual principal payment due January 15, 2017. The financial statements were issued February 28, 2016. What amount should be reported as current liabilities on December 31, 20157 a. 1,150,000 bY 2,250,000 ©. 1,250,000 4 850,000 40. On the December 31, 2015. Stat Company reported the following current assets: Cash 700,000 ‘Accounts receivable 1,200,000 Inventory 600,000 ‘An examination of the accounts receivable revealed the following items: ‘Trade accounts 930,000 Allowance for uncollectible accounts ( 20,000) Claim against shipper for goods lost in transit 30,000 Selling price of unsold goods sent by Stat on consignment at 130% of cost and 260,000 not included in ending inventory 1,200,000 ‘What is the correct amount of current assets on December 31, 2015? a 2,440,000 b, 2,210,000 ¢. 2,500,000 d. 2,240,000Page 10 41. Acme Company reported accounts payable of P850,000 on December 31, 2015 before necessary year-end adjustments related to the following information: ‘On December 31, 2015, Acme has a P50,000 debit balance in accounts payable resulting from a payment to « supplier for goods to be manufactured to Acme’s specifications. Goods shipped FOB destination on December 20, 2015 were received and recorded by Acme on January 2, 2016. The invoice cost was P45,000. ‘On December 31, 2015, what amount should be reported as accounts payable? a. 945,000 b, 850,000 fc. 900,000 d. 895,000 42, During the current year, Beta Compeny incurred the following costs related to a new solar-powered car: Salaries of laboratory employees researching how to build the new car 2,500,000 Legal fees for the patent application for the new car 200,000 Engineering follow-up during the early stages of commercial production 500,000 ‘and the follow up occurred during the current year Marketing research to promote the new car 300,000 Design, testing and construction of a prototype 4,000,000 ‘What amount should be reported as research and development expense for the current year? a. 7,500,000 =>: 6.500.000 ©. 2.500.000 4. 7,200,000 43. Mark Company bought a franchise on January 1, 2015 for P2,040,000. An independent consultant estimated that the remaining useful life of the franchise was 50 years. The unamortized cost on the seller's books on January 1, 2015 was P680,000, The entity has decided to amortize the franchise over the maximum period allowed. What amount should be recorded as amortization of franchise for 2015? B 40,800 b. 13,600 51,000 d. 0 44. On January 1, 2015, Dorr Company borrowed P2,000,000 form a major customer, Pine Company, evidenced by a note payable in 3 years. The promissory note did not bear interest. Dorr agreed to supply Pine's inventory needs for the loan period at favorable prices. The going rate of interest for this type of loan is 14%, The present value at the going rate of interest of the P2,000,000 note is P1,350,000 on January 1, 2015. What amount of interest expense should be included in the 2015 income statement? a. 140,000 b. 280,000 189,000 a oPage 1 45. Myra Company was incorporated on January 1, 2015 with proceeds from the issuance of 7,500,000 in share capital and borrowed funds of P1,100,000. During the first year, revenue from sales and consulting amounted to P8,200,000, and operating costs and expenses totaled 6,400,000. On December 15. 2015, the entity declared @ P300,000 dividend, payable to shareholders on January 15, 2016. The liabilities increased to P2,000,000 by December 31, 2015. On December 31, 2015, what amount should be reported as total assets? “ 11,000,060 4 11,300,000 cc. 10,160,000 4. 12,100,000 46. Penelope Company reported net income of P7,410,000 for the current year. The auditor raised questions about the following amounts that had been included in net income: Unrealized toss on foreign currency translation (540,000) Gain on early retirement of bonds payable 2,200,000 ‘Adjustment of profit of prior year for error in depreciation, net of tax (750,000) Loss from fire (1,400,000) What amount should be reported as adjusted net income? a. 6.500.000 b. 6,610,000 c. 8,160,000 4° 8,700,000 47. On December 31, 2015, Beauty Company purchased a machine in exchange for a noninterest bearing note requiring eight payments of P200,000. The first payment was made on December 31, 2015, and the others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note was 11%, Present value factors are as follows: PV of an ordinary annuity of | at 11% for 8 periods 5.146 PV of an annuity of | in advance at 11% for 8 periods 5.712 ‘What amount should be recorded as initial cost of the machine? a. 1,600,000 b. 1,029,200 fe. 1,400,000 wd 1,142,400 48, Bona Company purchased a P4,000,000 tract of land for a factory site. The entity razed an old building on the property to make room for the construction of new building and sold the materials salvaged from the demolition, The entity incurred additional costs and realized salvage proceeds as follows: Demolition of old building 200,000 Proceeds from sale of salvaged materials 20,000 Legal fees for purchase contract and recording ownership 150,000 Title guarantee insurance 50,000 ‘What is the initial carrying amount of the land? a. 4,200,000 be 4,150,000 fe, 4,050,000 4. 4,400,000Page 12 49. On January 1, 2013, Pam Company acquired equipment to be used in the manufacturing operations. The equipment has on estimated useful life of 10 years and an estimated residual value of P50,000. The depreciation applicable to this equipment was P240,000 for 2015 computed under the sum of years’ digits method, What was the acquisition cost of the equipment? a, 1,650,000 b. 1,700,000 ©. 2,400,000 d. 2,450,000 50, At year-end , Claire Company purchased for P4,000,000 cash all of the outstanding ordinary shares of an acquiree when the acquiree’s statement of financial position showed net asscts of 3,200,000. The acquiree’s assets and liabilities had fair value different from the carrying amount as follows: Carrying amount Fair value Property, plant and equipment, net 5,000,000 5,750,000 Other assets 300,000 0 Long-term debt 3,000,000 2,800,000 What amount should be reported as goodwill in the year-end consolidated statement of financial position of Claire Company and its wholly-owned subsidiary? a, 350,000 b. 250,000 57 750,000 4. 800,000