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. 400,000
b. 100,000
c. 500,000
d. 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. 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, 2017?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
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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 3,500,000

New 15% interest 8,500,000
Total cost – January 1, 2017 12,000,000
Net assets acquired (25% x 36,000,000) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
Excess attributable to equipment whose fair value is greater than carrying amount
(25% x 4,000,000) ( 1,000,000)
Goodwill 2,000,000

Question 3 Answer C

Share in net income (25% x 8,000,000) 2,000,000

Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000)
Net investment income 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 2017 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 12,000,000

Net investment income 1,800,000
Share in cash dividend (25% x 5,000,000) ( 1,250,000)
Carrying amount – 12/31/2017 12,550,000
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PROBLEM 2 – PROPERTY, PLANT AND EQUIPMENT
January 1, 2016, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 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
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SOLUTION – PROBLEM 5

Question 1 Answer A

Land – January 1 4,000,000

Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land – December 31 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 8,000,000
Total 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 1,300,000

Expenditures for parking lot, street and sidewalks 1,200,000
Balance – December 31 2,500,000

Question 3 Answer C

Buildings – January 1 20,000,000

Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 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 ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 11,500,000
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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:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 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. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000

2. What amount should be reported as total tax expense for 2016?

a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 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
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SOLUTION – PROBLEM 3

Question 1 Answer B

Accounting income 15,000,000

Future taxable amount:
Equipment
Computer software (1,500,000)
Future deductible amount: (2,000,000)
Accrued liability 500,000
Taxable income 12,000,000

Current tax expense (30% x 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

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PROBLEM 4 - BENEFIT COST

An entity provided the following pension plan information:

Projected benefit obligation – January 1, 2016 3,500,000
Fair value of plan assets – January 1, 2016 2,800,000
Pension benefits paid during the year 250,000
Current service cost for 2016 1,750,000
Past service cost for 2016 (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%
1. What is the employee benefit expense for the current year?
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000

2. What is the net remeasurement loss for the current year?

a. 200,000
b. 100,000
c. 300,000
d. 400,000

3. What is the projected benefit obligation on December 31, 2016?

a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000

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

a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 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
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SOLUTION - PROBLEM 4

Question 1 Answer A

Current service cost 1,750,000

Past service cost 425,000
Interest expense (10% x 3,500,000) 350,000
Interest income (10% x 2,800,000) ( 280,000)
Employee benefit expense 2,245,000

Question 2 Answer C

Actual return 180,000

Interest income 280,000
Remeasurement loss on plan assets 100,000
Actuarial loss on PBO 200,000
Net remeasurement loss 300,000

Question 3 Answer D

PBO – January 1 3,500,000

Current service cost 1,750,000
Past service cost 425,000
Interest expense 350,000
Actuarial loss 200,000
Benefits paid ( 250,000)
PBO – December 31 5,975,000

Question 4 Answer B

FVPA – January 1 2,800,000

Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid ( 250,000)
FVPA – December 31 4,230,000

Question 5 Answer A

FVPA – December 31 4,230,000

PBO – December 31 (5,975,000)
Prepaid/accrued benefit cost – December 31 (1,745,000)
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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 34
2017 39
2018 42
2019 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. 400,000
b. 200,000
c. 300,000
d. 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
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SOLUTION - PROBLEM 5

Question 1 Answer A

Question 2 Answer C

Question 3 Answer B

Quoted price Option price Intrinsic value

2016 34 30 4
2017 39 30 9

Cumulative Expense
2016 (200,000 x 4/2) 400,000 400,000
2017 (200,000 x 9) 1,800,000 1,400,000
2018 (200,000 x 3) 600,000
2,400,000

Quoted price - 2018 42

Quoted price - 2017 39
Increase in market price in 2018 3

Question 4 Answer B

Option price (200,000 x 30) 6,000,000

Share options outstanding 2,400,000
Total consideration 8,400,000
Par value (200,000 x 20) 4,000,000
Share premium 4,400,000