Problems

Discontinued operation

5. On January 1, 2003, Deer Corp. met the criteria for discontinuance of a

business component. For the period January 1 through October 15, 2003,
the component had revenues of $500,000 and expenses of $800,000.
The assets of the component were sold on October 15, 2003, at a loss for
which no tax benefit is available. In its income statement for the year
ended December 31, 2003, how should Deer report the component’s
operations from January 1 to October 15, 2003?

a. $500,000 and $800,000 should be included with revenues and

expenses, respectively, as part of continuing operations.

b. $300,000 should be reported as part of the loss on operations and

disposal of a component.

c. $300,000 should be reported as an extraordinary loss.

d. $500,000 should be reported as revenues from operations of a

discontinued component.

6. On November 1, 2003, management of Herron Corporation committed

to a plan to dispose of Timms Company, a major subsidiary. The
disposal meets the requirements for classification as discontinued
operations. The carrying value of Timms Company was $8,000,000 and
management estimated the fair value less costs to sell to be $6,500,000.
For 2003, Timms Company had a loss of $2,000,000. How much should
Herron Corporation present as loss from discontinued operations
before the effect of taxes in its income statement for 2003?

a. $0

b. $1,500,000
c. $2,000,000

d. $3,500,000

7. On December 1, 2003, Greer Co. committed to a plan to dispose of its

Hart business component’s assets. The disposal meets the requirements to
be classified as discontinued operations. On that date, Greer estimated
that the loss from the disposition of the assets would be $700,000 and
Hart’s 2003 operating losses were $200,000. Disregarding income taxes,
what net gain (loss) should be reported for discontinued operations in
Greer’s 2003 income statement?

(900,000)

CPA Review School of the Philippines Practical Accounting 11.On

December 31, 2014, the Board of Directors of Max Company committed to
a plan to discontinue the operations of its Underwear Division. The entity
estimated that Underwear’s 2015 operating loss would be P500,000 and
that the fair value of its facilities wasP300,000 less than carrying
amount. Underwear’s 2014 operating loss was P1,400,000, and the
division was actually sold forP400,000 less than carrying amount in
2015.The effective tax rate is 30%.What amount should be reported as loss
from discontinued operations in 2014?

A.0

B. 980,000

C. 1,190,000

D. 1,400,000

300,000 + 1.4M = 1.7M x .70= 1,190k

3.During the current year, Steel Company retired bonds payable five years
before their scheduled maturity resulting in a P260,000 gain. A steel
forming segment suffered P55,000 in loss due to storm surge damage
during the year. Moreover, a component of Steel’s operations was sold
at a loss of P350,000. What amount of pretax gain or loss should be
reported separately as a component of income from continuing
operations?

A.350,000 loss

B.255,000 loss

C.205,000 gain

D.260,000 gain

260k – 55= 205

Question CPA-00035

On December 2, Year 1, Flint Corp's board of directors voted to discontinue

operations of its frozen food division and to sell the division's assets on the
open market as soon as possible. The division reported net operating
losses of $20,000 in December and $30,000 in January. On February 26,
Year 2, sale of the division's assets resulted in a gain of $90,000. Assuming
that the frozen foods division qualifies as a component of the business and
ignoring income taxes, what amount of gain/loss from discontinued
operations should Flint recognize in its income statement for Year 2?

a. $60,000

b. $40,000

c. $0

d. $90,00

90K-30K= 60K year 2

20K loss  year 1

During January Year 3, Doe Corp. agreed to sell the assets and product
line of its Hart division. The sale was completed on January 15, Year 4 and
resulted in a gain on disposal of $900,000. Hart's operating losses were
$600,000 for Year 3 and $50,000 for the period January 1 through
January 15, Year 4. Disregarding income taxes, what amount of net gain
(loss) should be reported in Doe's comparative Year 4 and Year 3
income statements?

Year 3 Year 4

a. $(600,000) $850,000

b. $(650,000) $900,000

c. $250,000 $0

d. $0 $250,000

Choice "a" is correct. The Year 3 operating losses would be reported in the
Year 3 income statement. The Year 4 operating losses and the gain on
disposal would be netted and reported in the Year 4 income statement.
Each amount would be reported in the period it occurred.

Choice "d" is incorrect. It reports the total projected gains and losses in
Year 4 and nothing in Year 3. Each amount should be reported in the
period it occurred.

Problem 6-7 (IFRS)In reviewing Bituin Company’s draft financial

statementsfor the year ended December 31,2010, management decided
that market conditions were such that the provision for inventory
obsolescence on December 31, 2010 should be increased by
P3,000,000. If the same basis of calculating inventory obsolescence
had been applied on December 31, 2009,the provision would have
been P1,800,000 higher than the amount recognized in the statement
of financial position. What adjustment should be made to the draft profit
for the year ended December 31, 2009 presented as a comparative
figure in the 2010 financial statements? estimate
Draft profit for 2010 Profit for 2009

a.3,000,000 decrease 1,800,000 decrease

b.1,200,000 decrease 1,800,000 decrease

c.0 0

d.3,000,000 decrease 0

Solution 6-7 AnswerD

The increase in the provision for inventory obsolescence on December 31,

2010 ofP3,000,000 is included in the 2010 profit or loss. However, the
increase of P1,800,000 in 2009 is ignored because this is a change in
accounting estimate.Problem 6-8 (IFRS)During the year ended
December 31, 2010, the following events occurred in relation toSamar
Company.

Question CPA-00037

At December 31, Year 2, Off-line Co. changed its method of accounting

for demo costs from writing off the costs over two years to expensing
the costs immediately. Off-line made the change in recognition of an
increasing number of demos placed with customers that did not result in
sales. Off-line had deferred demo costs of $500,000 at December 31,
Year 1, $300,000 of which were to be written off in Year 2 and the
remainder in Year 3. Off-line's income tax rate is 30%. In its Year 3
financial statements, what amount should Off-line report as cumulative
effect of change in accounting principle? principle inseparable to
estimate

a. $0

b. $350,000

c. $500,000

d. $200,000
Choice "a" is correct. A change in method of accounting for demo costs is a
change in accounting principle inseparable from a change in estimate.
When a change in accounting principle is considered inseparable from a
change in estimate, the change is handled as a change in estimate -
prospectively. No cumulative effect adjustment is made.

Choices "d", "b", and "c" are incorrect since no cumulative effect
adjustment is made.

On January 1, 2008, Bray Company purchased for 240,000 a machine with

a useful life of ten years and no salvage value. The machine was
depreciated by the double declining balance method and the carrying
amount of the machine was153,600 on December 31, 2009. Bray changed
retroactively to the straight-line method on January 1, 2010. Bray can
justify the change. What should be the depreciation expense on this
machine for the year ended December 31, 2010?

a.15,360

b.19,200

c.24,000

d.30,720

While preparing its year 3 financial statements, Dek Corp. discovered

computational errors in its year 2 and year I depreciation expense.
These errors resulted in overstatement of each year's income by $25,000,
net of income taxes. The following amounts were reported in the
previously issued financial statements:

year 2 year I

Retained earnings, 1/1 $700,000 $500,000

Net income $150,000 200,000

Retained earnings, 12/31 $850,000 $700,000

Dek's year 3 income is correctly reported at $180,000. Which of the

following amounts should be adjusted to retained earnings and presented
for net income in Dek's year 3 and year 2 comparative financial
statements?

Year Retained earnings net income

a. year 2 150,000

year 3 (50,000) 180,000

b. year 2 (50,000) $150,000

year 3 180,000

c. year 2 (50,000) $125,000

year 3 180,000
INTERIM REPORTING

Yellow Co. received a large worker's compensation claim of $90,000 in

the third quarter for an injury occurring in the third quarter. How should
Yellow account for the transaction in its interim financial report?

a) Recognize $30,000 for each of the first three quarters.

b) Recognize $90,000 in the third quarter.

c) Recognize $22,500 ratably over the four quarters of the year.

d) Disclose the $90,000 in the third quarter and recognize it at year end.

The worker's compensation claim should be reported in the period

incurred, the third quarter. This is a transaction that occurred in the third
quarter and does not impact other quarters.

On January 16, Tree Co. paid $60,000 in property taxes on its factory for
the current calendar year. On April 2, Tree paid $240,000 for
unanticipated major repairs to its factory equipment. The repairs will
benefit operations for the remainder of the calendar year. What amount of
these expenses should Tree include in its third quarter interim financial
statements for the three months ended September 30?

a) $0

b) $15,000

c) $75,000

d) $95,000
Interim reporting treats each interim period as an integral part of the annual
period. The two expenditures, in this problem, benefit more than one
quarter. Thus, the expenses are recognized in the periods benefited, rather
than only in the period of expenditure. The property taxes benefit all four
quarters; therefore, $15,000 ($60,000/4) is recognized each quarter. The
repair benefits three quarters; therefore, $80,000 ($240,000/3) is
recognized each quarter. The sum of the two amounts is $95,000 to be
recognized in quarter three

Bard Co., a calendar-year corporation, reported income before income

tax expense of $10,000 and income tax expense of $1,500 in its interim
income statement for the first quarter of the year. Bard had income
before income tax expense of $20,000 for the second quarter and an
estimated effective annual rate of 25%. What amount should Bard report
as income tax expense in its interim income statement for the second
quarter?

a) $3,500

b) $5,000

c) $6,000

d) $7,500

Interim income tax expense equals the difference between (1) the total
income tax through the end of the interim period at the estimated annual
tax rate, and (2) the income tax expense recognized in previous interim
periods of the same year. For the second quarter, income tax expense
therefore is computed as ($10,000 + $20,000)(.25) − $1,500 = $6,000
An inventory loss from a permanent market decline of $360,000
occurred in May Year 1. Cox Co. appropriately recorded this loss in May
Year 1 after its March 31, Year 1, quarterly report was issued.

What amount of inventory loss should be reported in Cox's quarterly

income statement for the three months ended June 30, Year 1?

a) $0

b) $90,000

c) $180,000

d) $360,000

Unless temporary, declines in the market value of inventory should be

recognized in full in the interim period in which they occur.

They should not be deferred to a later period. In this way, the quarterly
financial statement reports a significant event for that quarter.

This is an example of an exception to the overall view adopted by the APB

with regard to interim reports: that interim reports should be an integral part
of the annual period.
On June 30, 20X5, Mill Corp. incurred a $100,000 net loss from disposal
of a business segment. Also, on June 30, 20X5, Mill paid $40,000 for
property taxes assessed for the calendar year 20X5.

What amount of the foregoing items should be included in the

determination of Mill's net income or loss for the six-month interim period
ended June 30, 20X5?

a) $140,000

b) $120,000

c) $90,000

d) $70,000

The disposal loss cannot be allocated to interim periods. It does not relate
to any interim period other than the one in which it occurred. Thus, it is
recognized completely in the earnings for the six month period ended June
30.

The property tax is allocated to interim periods based on time expired. The
$40,000 tax relates to the entire year of 20X5. With half of the year elapsed
at June 30, half of the tax should be recognized in expense. The sum of
the amounts to be recognized at June 30 is $120,000 ($100,000 +
$20,000)

An inventory loss from a market price decline occurred in the first

quarter, and the decline was not expected to reverse during the fiscal
year.
 Operating Segment

Hyde Corp. has three manufacturing divisions, each of which has been
determined to be a reportable operating segment. In Year 4, Clay division
had sales of $3 million, which was 25% of Hyde’s total sales, and had
traceable operating costs of $1.9 million. In Year 4, Hyde incurred
operating costs of $500,000 that were not directly traceable to any of the
divisions. In addition, Hyde incurred interest expense of $300,000 in Year
4. The calculation of the measure of segment profit or loss reviewed
by Hyde’s chief operating decision maker does not include an
allocation of interest expense incurred by Hyde. However, it does
include traceable costs. It also includes nontraceable operating costs
allocated based on the ratio of divisional sales to aggregate sales. In
reporting segment information, what amount should be shown as Clay’s
operating profit for Year 4?

The amount of a segment item reported, such as profit or loss, is the

measure reported to the chief operating decision maker for purposes of
making resource allocation and performance evaluation decisions
regarding the segment. However, the FASB does not stipulate the
specific items included in the calculation of that measure.
Consequently, allocation of revenues, expenses, gains, and losses
are included in the determination of reported segment profit or loss
only if they are included in the measure of segment profit or loss
reviewed by the chief operating decision maker. Given that this
measure for Clay reflects traceable costs and an allocation of nontraceable
operating costs, the profit is calculated by subtracting the $1,900,000
traceable costs and the $125,000 ($500,000 × 25%) of the allocated costs
from the division’s sales of $3,000,000. The profit for the division is
$975,000.

Sales: $3,000,000

Traceable costs: (1,900,000)

Allocated costs (25%): (125,000)

Profit: $975,000

Correction of Error

1. On November 1, 2006, Rosete Company paid P10,800 to renew its

insurance policy for 3 years. On December 31, 2006, Rosete’s unadjusted
trial balance showed a balance of P270 for prepaid insurance and
P13,230 for insurance expense. What amounts should be reported for
prepaid insurance and insurance expense in Rosete’s December 31, 2006
financial statements?

Prepaid Insurance Insurance Expense

a. P 9,900 P 3,600

b. P 10,200 P 3,600

c. P 10,200 P 3,300

d. P 10,200 P 3,030

2. An analysis of Palmes Corporation’s unadjusted prepaid expense

account at December 31, 2006 revealed the following:

 An opening balance at P6,000 for Palmes comprehensive insurance

policy. Palmes had paid an annual premium of P12,000 on July 1, 2005.

 A P12,800 annual insurance premium payment made July 1, 2006.

 A P8,000 advance rental payment for a warehouse Palmes leased for 1

year beginning January 1, 2006.

In its December 31, 2006 balance sheet, what amount should Palmes
report as prepaid expenses?

a. P 20,400 b. P 14,400 c. P 8,000 d. P 6,400

Questions 21 and 22 are based on the following information.

An audit of Angelina Company has revealed the following four errors that
have occurred but have not been corrected:

 Inventory at December 31, 2005-P40,000, understated

 Inventory at December 31, 2006-P15,000, overstated

 Depreciation for 2005-P7,000, understated

 Accrued expenses at December 31, 2006-P10,000, understated

21. The errors cause the reported net income for the year ending
December 31, 2006 to be

a. Overstated by P72,000 c. Understated by P28,000

b. Overstated by P65,000 d. Understated by P45,000

22. The errors cause the reported retained earnings at December 31,
2006 to be

a. Overstated by P65,000 c. Overstated by P25,000

b. Overstated by P32,000 d. Understated by P18,000

23.Collection of notes receivable of P50,000 plus interest of P500 was

recorded as debit to cash of P50,500 and notes receivable of P50,500.
This error will

a. Overstate the expenses by P500

b. Understate the liability by P500

c. Understate assets by P500 and understate revenue by P500

d. Understate revenue by P500

24.Accounts payable of P32,000 was paid and erroneously recorded as

debit to accounts payable and credit to cash for P23,000. The working
capital

a. Has no effect c. Is understated by P9,000

b. Is overstated by P9,000 d. Is understated by P23,000

25. The beginning accumulated depreciation per record was P100,000.

During the year, the firm sold one of its machines recorded as follows:

Cash 270,000

Accumulated depreciation - machine 30,000

Machine 300,000

If the actual cash proceeds is P300,000, the correcting entry would be:

a. Cash 300,000

Machine 300,000

b. Cash 30,000

Gain on sale of machine 30,000

c. Accumulated depreciation - machine 30,000

Gain on sale of machine 30,000

d. Cash 300,000

Machine 270,000

Gain on sale of machine 30,000

26. Based on no. 25, assume that the nominal accounts had been
closed. The effect of the error to the accounting elements, if not
corrected, is

a. P30,000 understatement of the net income.

b. P30,000 understatement of asset and P30,000 understatement of net

income.

c. P30,000 understatement of asset and P30,000 understatement of

owner’s equity. RE

d. P30,000 understatement of asset and P30,000 overstatement of owner’s

equity.

27.A cash purchase of P5,200 was recorded as P2,500. The error had
been discovered whennominal accounts were already closed to income
summary, but not yet closed to the capital account. The correcting entry
will require a

a. P2,700 debit to accounts receivable

b. P2,700 debit to purchases

c. P2,700 credit to purchases

d. P2,700 credit to accounts payable

28. Under the periodic inventory system, the ending inventory of P65,000
was erroneously recorded as P56,000. The error had been discovered
when all nominal and temporary accounts were already closed to the real
account. The correcting entry would require a

a. Debit to capital account c. Credit to cost of sale

b. Debit to income summary account d. Credit to owner’s capital

29.A sales discount of P5,000 was recorded as purchase discount. The
error had been discovered when nominal accounts were still open. The
correcting entry would require a

a. P5,000 debit to purchase discount c. P5,000 credit to sales discount

b. P5,000 credit to purchase discount d. P5,000 credit to accounts

payable

30.An owner’s withdrawal amounting to P20,000 was erroneously recorded

as salaries expense. The error had been discovered when all temporary
accounts were already closed to the capital account. The correcting entry
will require a

a. P20,000 debit to owner’s capital c. P20,000 debit to salaries

expense

b. P20,000 debit to owner’s drawings d. No correcting entry is

necessary

31.A payment of P20,000 rent was recorded as a debit to rent income. The
error had been discovered when nominal accounts were already closed.
The correcting entry would require a

a. P20,000 debit to rent expense c. P40,000 credit to rent income

b. P20,000 debit to rent income d. No adjustment entry is necessary

32.A cash collection of P5,000 from customer’s open account was recorded
as P500. The error had been discovered when nominal accounts were still
open. The correcting entry would require a

a. P4,500 debit to accounts receivable c. P500 credit to accounts

receivable

b. P4,500 debit to cash d. P500 credit to cash

33. A sale of merchandise on account of P3,200 was recorded as P2,300.
The error had been discovered when nominal accounts were already
closed. The correcting would require a

a. P900 debit to cash. c. P900 debit to sale

b. P900 debit to accounts receivable d. P900 credit to accounts

receivable

34. A collection of P5,000 notes receivable, plus P500 interest income was
recorded as debit to cash P5,500 and credit to notes receivable P5,500.
The error had been discovered when nominal accounts were still open. The
correcting entry would require a

a. P500 debit to cash. c. P500 credit to cash

b. P500 debit to accounts receivable d. P500 credit to interest income

The first audit of the books of Luzon Company was made for the year
ended December 31,2006. In examining the books, the auditor found that
certain items had been overlooked or incorrectly handled in the last 3
years. These items are:

a. At the beginning of 2004, the company purchased a machine for

P1,020,000 (salvage value of P102,000) that had a useful life of 6 years.
The bookkeeper used straight-line depreciation, but failed to deduct the
salvage value in computing the depreciation base for the 3 years.

Recorded Dep. Exp. Is 170,000 x 3 = 510,000

Should be Dep. Exp. Is 153,000 x 3 = 459,000

Dep Exp. Overstated  Add back to RE

Accumulated Depreciation 51,000

Dep. Expense 17,000

Retained earnings 34,000

b. At the end of 2005, the company failed to accrue sales salaries of

P90,000.

Counterbalancing effect to net income in 2005 is overstated and 2006

is understated

Retained earnings 90,000

Salaries expense 90,000

c. A tax lawsuit that involved the year 2004 was settled late in 2006. It was
determined that the company owed an additional P170,000 in taxes
related to 2004. The company did not record a liability in 2004 or 2005
because the possibility of loss was considered remote, and charged the
P170,000 to a loss account in 2006.

No adjustment
d. Luzon Company purchased another company early in 2004 and
recorded goodwill of P900,000. Luzon had not amortized goodwill because
its value had not diminished. The estimated economic life of the goodwill is
20 years.

No adjustment since no provision for impairment.

e. In 2006, the company wrote off P174,000 of inventory considered to be

obsolete; this loss was charged directly to Retained Earnings.

Loss on obsolete 174,000

Retained earnings 174,000

f. Year-end wages payable of P6,800 were not recorded because the

bookkeeper though that “they were immaterial.”

Salaries expense 6,800

Accrued salaries payable 6,800

g. Insurance for a 12-month period purchased on November 1 of this year

was charged to insurance expense in the amount of P5,280 because “the
amount of the check is about the same every year.

Prepaid insurance 4,400

Insurance expense 4,400

3. Net income of 2005 is overstated by:

a. P 460,400 b. P 318,400 c. P 107,000 d. P 73,000

4. Net income of 2006 is overstated by:

a. P 367,000 b. P 312,000 c. P 103,400 d. P 69,400

2004 2005 2006

17,000 17,000 17,000

(90,000) 90,000

(174,000)

(6,800)

4,400

(73,000) (69,400)