Professional Documents
Culture Documents
Accounting Test Bank 2
Accounting Test Bank 2
The entity has always used a periodic FIFO inventory costing system.
a. 1,354,000
b. 2,400,000
c. 2,826,000
d. 426,000
Using the weighted average method, what is the cost of inventory on February 28?
a. 3,180,000
b. 3,150,000
c. 3,120,000
d. 3,300,000
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During the month of January, Metro Company which used a perpetual inventory system
recorded the following information pertaining to inventory:
Under the moving average method, what amount should Metro report as inventory on January
31?
a. 2,640,000
b. 3,225,000
c. 3,300,000
d. 3,900,000
Problem 36 (IAA)
Yakal Company reported that a flood recently destroyed many of the financial records. The
entity used an average cost inventory valuation system. The entity made a physical count at the
end of each month in order to determine monthly ending inventory value. By examining various
documents, the following data are gathered:
a. 102,500
b. 140,000
c. 76,500
d. 60,000
a. 242,500
b. 140,000
c. 302,500
d. 260,000
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3. What is the cost of the inventory on July 31?
a. 288,000
b. 410,000
c. 312,600
d. 240,000
Elixir Company bought a 10-hectares land in Novaliches to be improved, subdivided into lots
and eventually sold. The purchase price of the land was P5,800,000.
Taxes and documentation expenses on the transfer of the property amounted to P80,000.
Lot class Number of lots Selling price per lot Total clearing cost
A 10 100,000 None
B 20 80,000 100,000
C 40 70,000 300,000
D 50 60,000 800,000
What amount should be allocated as total cost of Class B lots under the relative sales price
method?
a. 1,176,000
b. 1,220,000
c. 1,276,000
d. 1,700,000
Apitong Company manufactures bath towels. The production comprises 60% of “Class A” which
sells for P500 per dozen and 40% of “Class B” which sells for P250 a dozen.
During the current year, 60,000 dozens were produced at an average cost of P360 a dozen.
Using the relative sales value method which management considers as a more equitable basis
of cost distribution, what is the measurement of the inventory?
a. 1,170,000
b. 1,665,000
c. 1,872,000
d. 2,340,000
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Problem 39 (IFRS)
Product X Product Y
At the year-end, the manufacture of items of inventory has been completed but no selling costs
have yet been incurred.
1. What amount should be reported as inventory using the LCNRV individual approach?
a. 3,700,000
b. 3,200,000
c. 3,800,000
d. 3,300,000
2. What amount should be reported as inventory using the LCNRV total approach?
a. 3,300,000
b. 3,200,000
c. 3,700,000
d. 2.450,000
In the absence of any statement to the contrary, the LCNRV should be applied using the
individual approach.
Problem 71 (IFRS)
Galore Company ventured into construction of a condominium in Makati which is rated as the
largest state-of-the-art structure.
The board of directors decided that instead of selling the condominium, the entity would hold
this property for purposes of earning rentals by letting out space to business executives in the
area.
The construction of the condominium was completed and the property was placed in service on
January 1, 2016.
The cost of construction was P50, 000, 000. The useful life of the condominium is 25 years and
the residual value is P5, 000, 000.
An independent valuation expert provided the following fir value at each subsequent year-end:
1. Under the cost mold, what amount should be reported as depreciation of investment
property for 2016?
a. 1, 800, 000
b. 2, 000, 000
c. 2, 200, 000 44
d. 0
2. Under the fair value model, what amount should be recognized as gain from change in
fair value in 2016?
a. 5, 000, 000
b. 3, 000, 000
c. 7, 000, 000
d. 0
Problem 72 (IFRS)
Eragon Company and its subsidiaries own the following properties at year-end:
1. What is the total investment property that should be reported in the consolidated
statement financial position of the parent and its subsidiaries?
Problem 73 (IFRS)
Dayanara Company owned three properties which are classified as investment property.
46
Each property was acquired three years ago with a useful life of 25 years. The accounting policy
is to use the fair value model for investment property.
What is the gain or loss to be recognized for the year ended December 31, 2017?
Problem 74 (IFRS)
On January 1, 2014, Crosswind Company owned an investment property which had an original
cost of P5, 800, 000 and useful life of 40 years.
On December 31, 2016, the fair value was P6, 000, 000 and on December 31, 2017, the fair
value was P5, 900, 000.
1. Under the fair value model, what is the expense to be recognized for the year ended
December 31, 2017?
a. 147, 500
b. 100, 000
c. 200, 000
d. 0
2. Under the cost model, what is the expense to be recognized for the year ended
December 31, 2017?
a. 145, 000
b. 150, 000
c. 147,500
d. 0
Problem 75 (IFRS)
Rhino Company, a real estate entity, had a building with a carrying amount of P20, 000, 000 on
December 31, 2016. The building was used as offices of the entity’s administrative staff.
On December 31, 2016, the entity intended to rent out the building to independent third
parties. The staff will be moved to a new building purchased early in 2016.
On December 31, 2016, the original building had a fair value of P35, 000, 000.
On December 31, 2016, the entity also had land that was held for sale in the ordinary course of
business.
The land had a carrying amount of P10, 000, 000 and fair value of P15, 000, 000 on December
31, 2016.
On such date, the entity decided to hold the land for capital appreciation.
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2. On December 31, 2016, what amount should recognized in profit or loss as a result of
transfer of the land to investment property?
a. 15, 000, 000
b. 10, 000, 000
c. 5, 000, 000
d. 0
Fall Company provided the following information in relation to a bond sinking fund that was
placed in trust as required by the underwriter:
In January 2016, Cameron Company established a sinking fund in connection with an issue of
bonds due in 2018. A bank was appointed as independent trustee of the fund. On December
31, 2016, the trustee held P365, 000 cash in the sinking fund account representing P300, 000 in
annual deposits to the fund, and P65, 000 of interest earned on those deposits.
a. No part of the sinking fund should appear in Cameron’s statement of financial position.
b. P65, 000 should appear as a current asset
c. P365, 000 should appear as a current asset
d. P365, 000 should appear as a noncurrent asset
On March 15, 2016, Ashe Company adopted a plan to accumulate P5, 000, 000 by September 1,
2020. The entity plans to make four equal annual deposits to a fund that will earn interest at
10% compounded annually. The entry made the first deposit on September 1, 2016.
Ball Company purchased a P1, 000, 000 ordinary life insurance policy on its president. Ball
Company is the beneficiary under the life insurance policy. The policy year and the entity’s
accounting year coincide.
a. 17, 000
b. 20, 000
c. 6, 500
d. 9, 500
Chain Company purchased a P1, 000, 000 life insurance on its president, of which Chain
Company is the beneficiary.
The entity provided the following information regarding the policy for the year ended
December 31, 2016:
During 2016, dividend of P6, 000 was applied to increase the cash surrender value of the policy.
a. 40, 000
b. 25, 000
c. 19, 000
d. 13, 000
Problem 80 (IAA)
On January 1, 2016, Pasay Company entered into a two-year P3, 000, 000 variable interest rate
loan at the prevailing rate of 12%.
In 2017, the interest rate is equal to the prevailing interest rate at the beginning of the year.
The principal loan is payable on December 31, 2017 and the interest is payable on December 31
of each year.
On January 1, 2016, Pasay Company entered into a “receive variable, pay fixed” interest swap
agreement with a speculator bank designated as a cash flow hedge.
The prevailing interest rate on January 1, 2017 is 14% and the present value of 1 at 14% for one
period is .877.
1. What amount should be reported as interest rate swap receivable on December 31,
2016?
a. 60, 000
b. 52, 620
c. 30, 000
d. 0
Problem 81 (IAA)
On January 1, 2016, Aloha Company received a four-year P5, 000 loan with interest payments
occurring at the end of each year and the principal to be repaid on December 31, 2019.
The interest for 2016 is the prevailing market rate of 10% on January 1, 2016, and the market
interest rate every January 1 resets the variable rate of interest for that year. The “underlying”
fixed interest rate is 10%.
In conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate
swap agreement with a financial institution as cash flow hedge. The interest swap payment will
be made on December 31 of each year.
The PV of an ordinary annuity of 1 at 6% for three periods is 2.67 and the PV of an ordinary
annuity of 1 at 8% for two periods is 1.78.
Problem 82 (IAA)
Chavacano Company operates a seafood restaurant. On October 1, 2016, the entity determined
that it will need to purchase 50, 000 kilos of deluxe fish on March 1, 2017.
Because of the volatile fluctuation in the price of deluxe fish, on October 1, 2016, the entity
negotiated a forward contract with a reputable bank to purchase 50, 000 kilos of deluxe fish on
March 1, 2017 at a price of P50 per kilo or P2, 500, 000. This forward contract was designated
as a cash flow hedge. 49
50
The derivative forward contract provides that if the market price of deluxe fish on March 1,
2017 is more than P50, the difference is paid by the bank to the entity.
On the other hand, if the market price on March , 2017 is less than P50 , the entity will pay the
difference to the bank.
On December 31, 2016, the market price per kilo is P60 and on March 1, 2017, the market price
is P58.
The discount rate is 8%. The present value of 1 at 8% for one period is .93.
1. What is the fair value of the derivatives asset or liability on December 31,2016?
2. What is the fair value of the derivative asset or liability on March 1, 2017?
a. 400, 000 asset
b. 400, 000 liability
c. 372, 000 asset
d. 372, 000 liability
Problem 83 (IAA)
Bicol Company uses approximately 200,000 units of raw material in its manufacturing
operations. On December 1, 2016, the entity purchased a call option to buy 200, 000 units of
the raw material on July 1, 2017 at a strike price of P25 per unit.
The entity paid P20, 000 for the call option. The entity designated the call option as a cash flow
hedge against price fluctuation for its July purchase.
The market price of the raw material is P28 on December 31, 2016 and P22 on July 1, 2017.
a. 600, 000
b. 500, 000
c. 580, 000
d. 20, 000
Problem 84 (IAA)
Janina Company regularly hedges purchase requirements and the sale of finished products in
the futures market.
On December 1, 2016, the entity entered into the following three contracts designated as cash
flow hedge:
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Problem 85 (IAA)
Hazel Company entered into a call option contract with a bank on January 1, 2016. This contract
gave the entity the option to purchase 10,000 shares at P100 per share The option expires on
April 30, 2016. The shares are trading at P100 per share on January 1, 2016, at which time the
entity paid P10, 000 for the call option.
The market price per share in P120 on April 30, 2016, and the time value of the option has not
changed.
In order to settle the option contract, what would the entity most likely do?
Problem 86 (IFRS)
Oriental Company has the Philippine peso as the functional currency. The entity expects to
purchase goods from USA for $50, 000 on March 31, 2017.
Accordingly, the entity is exposed to a foreign currency risk. If the dollar increases before the
purchase takes place, the entity will have to pay more pesos to obtain the $50, 000 tht it will
have to pay for the goods.
On October 1, 2016, the entity entered into a foreign currency forward contract with a bank
speculator to purchase $50, 000 in six months for a fixed amount of P2, 050, 000 or P41 to $1.
This forward contract is designated as cash flow hedge of the entity’s exposure to increase in
dollar exchange rate.
On December 31, 2016, the exchange rate is P42 to $1 and on March 31, 2017, the exchange
rate is P44 to $1.
Purchased for P5,400,000, including appraiser fee for of P50,000, a warehouse building
and the land on which it is located.
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The land had an appraised value of P2,000,000 and original cost of P1,400,000. The
building had an appraised value of P3,000,000 and original cost of P2,800,000.
Purchased an office building and the land on which it is located for P7,500,000 cash and
assumes an existing P2,500,000 mortgage.
For realty tax purposes, the property is assessed at P9,600,000.60% of which is allocated
to the building.
a. 6,160,000 c. 6,000,000
b. 5,840,000 d. 5,000,000
a. 8,760,000 c. 9,000,000
b. 9,240,000 d. 7,760,000
Problem 88 (IAA)
The prevailing rate of interest for this type of note at date of issuance was 12%. The
present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65 for ten
periods.
On December 31, 2016, Anxious Company acquired used machinery by issuing the seller
a two-year, noninterest-bearing note for P3,000,000.
In recent borrowing, the entity has paid a 12% interest for this type of note. The present
value of 1 at 12% for 2 years it .80 and the present value of an ordinary annuity of 1 at
12% for years is 1.69.
a. 5,065,000 c. 5,565,000
b. 5,225,000 d. 8,235,000
The first payment was made on December 31, 2016 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%.
Precious Company had the following property acquisitions during the current year:
Acquired a tract of land in exchange for P50,000 shares of Precious Company with P100
par value that had a market price of P120 per share on the date of acquisition. The last
property tax bill indicated assessed value of P2,400,000 for the land.
Received land from a major shareholder as an inducement to locate a plate in the city.
No payment was required but the entity paid P50,000 for legal expenses for land
transfer. The land is fairly valued at P1,200,000.
Figaro Company acquired land and paid in full by issuing P600,000 10 percent bonds payable
and 40,000 ordinary shares with par value od P10. The share was selling at P19 and the bonds
were trading at 102.
Problem 92 (IAA)
Taiwan Company fabricated equipment for office use during the current year. The following
data were taken from the accounting records:
Factory overhead amounted to P1,200,000. Normal production of finished goods is50,000 units.
Due to the fabrication of the office equipment, finished goods produced totalled 35,000 units
only in the current year.
The office equipment is to be charged with the overhead which would have been apportioned
to the 15,000 units which were not produced.
55
What is the total cost of office equipment after the apportionment of factory overhead?
a. 1,100,000 c. 1,460,000
b. 1,400,000 d. 2,300,000
Caine Company exchanged a car from inventory for a computer to be used as a long-term asset.
The following information relates to this exchange:
a. 260,000 c. 200,000
b. 160,000 d. 0
During the current year, Bell Company exchanged an old machine, with a carrying amount of
P390,000 and a fair value of P350,000, and paid P100,000 cash for another used machine
having a list price of P500,000.
a. 450,000 c. 490,000
b. 460,000 d. 500,000
Problem 94 (IFRS)
The building was purchased in January 2016 and is to be depreciated using the straight line
method over 10 years, The tuition costs paid in 2016 amounted to P600,000.
Problem 95 (IFRS)
Peach Company purchased a machine for P7,000,000 on January 1, 2016 and received a
government grant of P1,000,000 toward the capital cost.
The machine is to be depreciated on a straight line basis over 5 years and estimated to have a
residual value of P500,000 at the end of this period. The accounting policy is to treat the grant
as a deferred income.
On January 1, 2016, Easy Company received a grant of P1,500,000 from the government to
subsidize tuition fees for a period of 5 years.
On January 1, 2016, the entity violated certain conditions attached to the grant, and therefore
had to repay fully such grant to the government.
2. What amount should be recognized as loss resulting from the repayment of the grant in
2018?
a. 1,500,000 c. 600,000
b. 900,000 d. 0
Problem 97 (IFRS)
Tarbata Company received a government grant of P2,000,000 related to a factory building that
it bought in January 2016. The entity’s policy is to treat the grant as deferred income.
The entity required the building from an industrialist identified by the government. If the entity
did not purchase the building, which was located in the slums of the city, it would have been
repossessed by the government agency.
The entity purchased the building for P12,000,000. The useful life of the building is 10 years
with no residual value.
On January 1, 2018, the entire amount of the government grant became repayable by reaon of
noncompliance with conditions attached to the grant.
What is the loss to be recognized resulting from the repayment of the grant in 2018?
a. 1,200,000 c. 1,400,000
b. 2,000,000 d. 400,000
Problem 98 (IAA)
On January 1, 2016, Batangas City agreed to provide Probity Company with a P5,000,000 three-
year, zero-interest bearing loan evidenced by promissory note.
The prevailing rate of interest for a loan of this type is 10% and the present value of 1 at 10%
for three years is .75
1. What is included in the journal entry to record the loan and grant?
a. Debit discount on note payable P1,250,000
b. Credit deferred grant income P1,250,000
c. Credit note payable P5,000,000
d. All of these
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a. 500,000 c. 125,000
b. 375,000 d. 750,000
a. 1,250,000 c. 500,000
b. 875,000 d. 375,000
4. What is the carrying amount of the note payable on December 31, 2017?
a. 5,000,000 c. 4,125,000
b. 4,250,000 d. 4,537,500
Problem 98 (PHILCPA Adapted)
Biliran Company incurred the following costs at the beginning of the current year:
a. 4,500,000 c. 4,800,000
b. 4,740,000 d. 4,940,000
An old building on the land was demolished and construction started on a new building that
was completed at the end of current year.
a. 3,550,000 c. 3,360,000
b. 3,750,000 d. 3,660,000
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2. What is the cost of new building?
a. 9,400,000 c. 9,590,000
b. 9,200,000 d. 9,290,000
At the beginning of the current year, Rock Company reported the following balances:
Land 2,200,000
Building 6,500,000
To be able to acquire the land, P175,000 was paid to a real estate agent, and P50,000
was incurred to clear the land.
During the course of clearing the land, timber and gravel were recovered and sold for
P25,000
The appraiser valued the land at P2,000,000 and the building at P1,000,000.
A new building was constructed at a cost of P5,000,000 plus excavation fee P50,000,
architect fee P80,000 and building permit P70,000.
A third piece of land was acquired for P2,000,000 and was held for undetermined use.
1. What total cost of land should be reported in the statement of financial position under
property, plant and equipment?
a. 8,500,000 c. 7,100,000
b. 7,000,000 d. 8,600,000
a. 5,200,000 c. 6,800,000
b. 5,300,000 d. 8,600,000
Isabela Company incurred the following cost during the current year:
Rolex Company incurred the following expenditures related to land and building.
a. 1,145,000 c. 1,130,000
b. 1,215,000 d. 1,080,000
Altitude Company purchased a plot of land for P2,000,000 as a plant site. There was a small
office building on the plot with fair value of P700,000 which the entity will continue to use with
some modification and renovation.
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The entity decided to construct a factory building and incurred the following costs:
a. 1,310,000 c. 1,350,000
b. 1,300,000 d. 1,410,000
a. 1,050,000 c. 700,000
b. 900,000 d. 850,00
a. 5,720,000 c. 5,800,000
b. 5,920,000 d. 5,600,000
a. 2,120,000 c. 1,895,000
b. 1,920,000 d. 1,845,000
a. 8,555,000 c. 8,540,000
b. 8,525,000 d. 8,530,000
a. 300,000 c. 100,000
b. 115,000 d. 0
Excelsior Company was incorporated on January 1, 2016 but began activities on 0July 1, 2016.
The land and building account of December 31, 2016 was as follows:
January 31 Land and an old building 1,600,000
February 28 Cost of removal of old building 90,000
May 1 Partial payment on new construction 700,000
June 1 Second payment on new construction 400,000
June 1 Insurance premium 480,000
June 1 Special tax assessment 60,000
June 30 General expenses 320,000
July 1 Final payment on new construction 900,000
To acquire land and building, the entity paid P800,000 cash and issued 8,000 preference shares
with par value of P100 and fair value of P150.
The old building with insignificant fair value was demolished to make room for the construction
of a new building.
Legal fees covered organization cost P15,000, title examination of land purchased P10,000, and
legal work P25,000 in connection with construction contract.
Insurance premium covered the building for a two-year term beginning May 1, 2016.
The special tax assessment was for street improvements that are permanent in nature.
General expenses included the president’s salary of P220,000 and the plant superitendent’s
salary of P100,000.
a. 2,070,000 c. 2,000,000
b. 2,160,000 d. 2,100,000
a. 2,155,000 c. 2,395,000
b. 2,065,000 d. 2,305,000
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Problem 105 (AICPA Adapted)
On January 1, 2016, Melancholy Company reported the following property, plant and
equipment:
Land 3,500,000
Land Improvements 900,000
Building 6,000,000
Machinery 1,500,000
A tract of land was acquired for P1,250,000 and intended definitely for use as future
building site.
A plant facility consisting of land and building was acquired in exchange for 100,000
Melancholy Company’s shares.
On the acquisition date, the share had a closing market price of P45 on a stock
exchange.
The plant facility was carried at P1,000,000 for land and P3,000,000 for the building at
the exchange date.
Current appraised values for the land and building, respectively, are P1,200,000 and
P2,400,000.
Expenditure totalling P750,000 were made in January For new parking lot, street and
sidewalk at the entity’s various plant locations. These expenditures had an estimated
useful life of fifteen years.
A machine was sold for P175,000 on July 1, 2016. Original cost of machine was P500,000
on January 1, 2014 and it was depreciated on the straight line basis over an estimated
useful life of five years and no residual value.
a. 6,250,000 c. 5,750,000
b. 5,950,000 d. 9,250,000
a. 8,400,000
b. 9,000,000
c. 8,250,000
d. 8,500,000
3. What is the total cost of land improvements at year-end?
a. 1,650,000
b. 900,000
c. 750,000
d. 800,000
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4. What is the total cost of machinery at year-end?
a. 4,600,000
b. 3,400,000
c. 4,900,000
d. 4,400,000
a. 1,135,000 c. 1,200,000
b. 1,231,000 d. 1,150,000
The entity’s chief engineer spent two-thirds of his time during trial run of the new machine. The
monthly salary is P60,000.
The entity requested an allowance from the supplier because the machine proved to be of less
than standard performance capability. The supplier granted a cash allowance of P100,000.
The cost of removing the old machine before the new machine was installed amount to
P10,000.
The operator of the old machine who was laid off due to the acquisition of the new machine
was paid a granuity of P30,000.
Rona Company provided the following charges to the “repair and maintenance account”.
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Service contract on office equipment 100,000
Initial design fee for proposed extension of office building 150,000
New condenser for central air conditioning unit 10,000
Purchase of executive chairs and desks 200,000
Purchase of storm windows and screens and their installation
on all office windows 500,000
Sealing of roof leaks in production area 80,000
Replacement of door to production area 50,000
Installation of automatic door-opening system 200,000
Overhead crane for assembly department to speed up production 350,000
Replacement of broken gear on machine 60,000
On January 1, 2016, Hamlet Company borrowed P6,000,000 at an annual interest rate of 10% to
finance specifically the cost of building an electricity generating plant. Construction
commenced on January 1, 2016 with a cost P6,000,000.
Not all the cash borrowed was used immediately, so interest income of P80,000 was generated
by temporarily investing some of the borrowed funds prior to use. The project was completed
on November 30,2016?
Clay Company started construction of a new office building on January 1, 2016, and moved into
the finished building on July 1, 2017. Of theP25,000,000 total cost, P20,000,000 was incurred in
2016 evenly throughout the year. The incremental borrowing rate was 12% throughout 2016,
and the total amount of interest incurred was P1,020,000
Moses Company borrowed P4,000,000 on a 10% note payable to finance a new warehouse
which the entity is constructing for own use. The only other debt of the entity is a P6,000,000,
12% mortgage payable on an office building. At the end of the current year, average
accumulated expenditures on the new warehouse totalled P4,750,000.
The third year of a construction project of Jilliane Company began with a P3,000,000 balance in
construction in progress.
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Included in that figure is P600,000 of interest capitalized in the first two years.
Construction expenditures during the third year were P8,000,000 which were incurred evenly
throughout the entire year.
The entity had P30,000,000 in interest –bearing debt outstanding in the third year at an interest
rate of 9%.
1. What amount of interest for the third year is capitalized?
a. 360,000 c. 936,000
b. 630,000 d. 990,000
2. What amount should be reported as interest expense for the third year?
2,700,000 c. 1,980,000
a. 2,070,000 d. 1,350,000
During 2016, Joshua Company constructed asset costing P5,000,000. The weighted average
expenditures totalled P3,000,000. To help pay for construction, P2,200,000 was borrowed at
10% on January, 2016?
Funds not needed for construction were temporarily invested in short-term securities yielding
P45,000 in interest revenue.
Other than the construction funds borrowed, the only other debt outstanding P250,000 2.
The expenditures for the building, which was finished late in 2016, were incurred evenly during
the year.
10% note to finance specifically the construction, dated January 1, 2016, P10,000,000.
This note is unpaid on December 31, 2016.
Investments were made on the proceeds from this loan and income of P100,000 was
realized in 2016.
a. 1,550,000 c. 1,400,000
b. 1,450,000 d. 1,500,000
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Problem 115 (IAA)
During 2016, Israel Company constructed asset costing P4,215,000. The weighted average
expenditures during 2016 amounted to P3,900,000.
The entity borrowed P2,000,000 at 7,5% on January 1, 2016. Funds not needed for construction
were temporarily invested in short-term securities and earned P59,000 in interest revenue.
In addition to the construction loan, the entity had two other notes outstanding during the
year, a P1,500,000, 10-year, 10% note payable dated October 1, 2015, and a P1,000,000, 8% 5-
year note payable dated November 1, 2015.
a. 324,800 c. 273,000
b. 297,500 d. 265,800
Congo Company commenced construction of a new plant on February 1, 2016 and was funded
from existing general borrowings . The construction was completed on September 30, 2016.
Bank A – 6% 8,000,000
Bank B – 6.6.% 10,000,000
Bank C – 7% 30,000,000
What is the amount of borrowing cost that should be capitalized in relation to the plant?
a. 1,215,000 c. 911,250
b. 810,000 d. 0
In the first phase of the construction of the tunnel, there were idle funds of P10,000,000 which
the entity invested for a period of six months. Income from the investment was P500,000.
What amount of borrowing cost should be capitalized as cost of the asset upon completion?
a. 4,100,000 c. 3,200,000
b. 3,280,000 d. 2,780,000
67
Problem 118 (IAA)
The entity began the self-construction of a building on January 1, 2016 and the building was
completed on December 31, 2016. The following expenditures were made during the year.
January 1 1,000,000
July 1 2,000,000
November 1 3,000,000
a. 6,000,000 c. 6,300,000
b. 6,280,000 d. 6,250,000
Molave Company had the following outstanding loans during 2016 and 2017.
Specific construction loan 3,000,000 10%
General loan 25,000,000 12%
The entity began the self-construction of a new building on January 1, 2016 and the building
was completed on June 30,2017. The following expenditures were made in 2016 and 2017:
a. 12,000,000 c. 12,300,000
b. 12,900,000 d. 12,600,000
a. 18,000,000 c. 20,868,000
b. 19,884,000 d. 19,377,000
a. 3,000,000 c. 2,016,000
b. 2,166,000 d. 666,000
On June 30, 2017, the entity sold for P2,300,000 a machine acquired in 2014 for P4,200,000.
The residual value was P600,000.
a. 13.3 c. 18.0
b. 16.0 d. 19.8
a. 6.25% c. 2.50%
b. 5.70% d. 7.50%
2017 2016
The straight line method of depreciation is used. The residual value is 10% of asset cost.
a. 20.00 c. 5.00
b. 22.22 d. 6.45
In January 20116, the entity purchased an equipment for P2, 500,000 with no residual value.
69
At the end of 2016, the entity sold and equipment with an original cost of P1,00,000 and a
residual value of P200,000 for P350,000. This asset was acquired on January 1, 2014.
a. 1,625,000 c. 1,125,000
b. 1,875,000 d. 975,000
2. What is the gain or loss from the derecognition of the asset on December 31, 2016?
Jade Company acquired a new milling machine on April 1, 2010. The machine has a special
component that required replacement before the end of the useful life. The asset was originally
recorded in two accounts, one representing the main unit and the other for the special
component. Depreciation is recorded by the straight line method and residual value is
disregarded.
On April 1, 2016, the special component is scrapped and is replaced with a similar component.
This new component is expected to have a residual value of approximately 20% of cost at the
end of the useful life of the main unit, and because of materiality, the residual value will be
considered in calculating depreciation.
a. 1,100,000 c. 1,350,000
b. 1,087,500 d. 1,175,000
Canada Company purchased a machine at an invoice price of P4,500,000 with terms 2/10, n/30.
The entity paid the required amount for the machine beyond the discount period.
The entity paid P80,000 for delivery of the machine and P310,000 for installation and testing.
The machine was ready for use on January 1, 2016.
It was estimated that the machine would have a useful life of 5 years and a residual value of
P800,000.
70
Engineering estimate indicated that the useful life in productive units was 200,000.
Units actually produced during the first two years were 30,000 in 2016 and 48,000 in 2017. The
entity decided to use the output method of depreciation.
Leonard Company acquired a machine on July 1, 2016 and paid P5,200,000 including freight
P50,000 and installation P150,000. The estimated life of the machine is 8 years or a total of
100,000 working hours with no residual value. The operating hours of the machine totalled
5,000 hours in 2016 and 12,000 hours in 2017. The entity followed the working hours method
of depreciation.
On April 1, 2016, Kew Company purchased new machinery for P3,300,000. The machinery has
an estimated useful life of five years with residual value of P300,000. Depreciation is computed
by the sum of the years’ digits method.
1. What is the depreciation for 2016?
a. 1,000,000 c. 900,000
b. 750,000 d. 600,000
Rapp Company purchased a machine on July 1, 2016 for P6,000,000. The machine has an
estimated useful life of five years and a residual value of P800,000. The machine is being
depreciated by the 150% declining balance method.
For the year ended December 31, 2017, what amount should be recorder as depreciation
expense on the machine?
a. 1,530,000 c. 1,040,000
b. 1,326,000 d. 1,800,000
71
On January 1, 2016, Tania Company acquired an equipment with useful life of 8 years and
residual value of P300,000. The depreciation applicable to the equipment was P900,000 for
2017 using the double declining balance method.
2. What is the accumulated depreciation on December 31, 2017 using the double
declining balance method?
a. 1,200,000 c. 1,600,000
b. 1,600,000 d. 3,200,000
3. What is the accumulated depreciation on December 31, 2018 using the miles driven ?
a. 2,000,000 c. 800,000
b. 2,600,000 d. 600,000
During 2016, a machine costing P1,250,000 was sold for P605,000 cash. The transaction
resulted in a loss of P40,000. No other asset was disposed of during the year.
a. 855,000 c. 250,000
b. 935,000 d. 605,000
Problem 133 (AICPA Adapted)
Turtle Company purchased equipment on January 1, 2014 for P5,000,000. The equipment had
an estimated 5-year service life.
72
The depreciation policy for 5-year assets is to use the 200% double declining balance method
for the first two years and then switch to the straight line depreciation method.
On December 31, 2016, what amount should be reported as accumulated depreciation for the
equipment?
a. 3,000,000 c. 3,920,000
b. 3,800,000 d. 4,200,000
On January 1, 2016, London Company purchased a large quantity of personal computers. The
cost of these computers was P6,000,000.
On the date of purchase, the management estimated that the computers would last
approximately 4 years and would have a residual value at that time of P600,000. The entity
used the double declining balance method.
During January 2017, the management realized that technological advancements had made the
computers virtually obsolete and that they would have to be replaced. Management proposed
changing the remaining useful life of computers to 2 years.
a. 3,000,000 c. 1,500,000
b. 2,400,000 d. 1,200,000
On January 1, 2016, Kent Company purchased a machine for P5,000,000. The entity paid
shipping expenses P50,000 as well as installation cost of P120,000.
The machine was estimated to have a useful life of 10 years, an estimated residual value of
P300,000 and the straight line method is used.
In January 2017, additions costing P360,000 were made to the machine in order to comply with
pollution control ordinances. These additions neither prolonged the life of the machine nor did
they have any residual value.
What amount should be recorded as depreciation expense for 2017?
a. 557,000 c. 487,000
b. 517,000 d. 527,000
The building was acquired January 1, 2011 at a cost of P7,800,000 with an estimated
useful life of 40 years and residual value od P200,000. Yearly depreciation was
computed on the straight line method.
The building was renovated on January 1, 2013 at a cost of P760,000. This was
considered as improvement. Residual value did not change.
On January 1, 2016, the management decided to change the total life of the building to
30 years.
At the beginning of current year, Huff mining Company purchased a mineral mine for
P36,000,000 with removal ore estimated by geological survey at 2,160,000 tons.
The property has an estimated value of P3,600,000 after the ore has been extracted.
The entity incurred P10,800,000 of development cost preparing the property for the extractions
of ore.
During the current year, 270,000 tons were removed and 240,000 tons were sold.
What amount of depletion should be included in cost of goods sold for the current year?
a. 3,600,000 c. 4,800,000
b. 4,050,000 d. 5,400,000
June Company acquired for P9,000,000 property which is believed to include mineral deposit.
Geological estimates indicate that approximately 1,000,000 tons of mineral may be extracted.
It is further estimated that the property can be sold for P2,500,000 following mineral
extraction.
After initial acquisition, the following costs were incurred:
The entity is legally required to restore the land to a condition appropriate for resale at a
discounted amount of P800,000.
The entity is legally required to restore the land to a condition appropriate for resale at a
discounted amount of P800,000.
The entity extracted 50,000 tons of the mineral in the current year.
a. 825,000 c. 700,000
b. 930,000 d. 785,000
In 2015, Newton Company paid P1,000,000 to purchase land containing total estimated
160,000 tons of extractable mineral deposits. The estimated value of the property after the
mineral has been removed is P200,000.
Extraction activities began in 2016, and by the end of the year, 20,000 tons had been recovered
and sold.
In 2017, geological studies indicated that the total amount of mineral deposits had been
underestimated by 25,000 tons.
74
During 2017, 30,000 tons were extracted and 28,000 tons were sold.
a. 4.24 c. 4.85
b. 4.32 d. 5.19
Geological survey indicated that the recoverable reserves would be 2,500,000 tons and that the
extraction will be completed in five years.
Land 9,000,000
Exploration and development cost 1,000,000
Expected cash flow for restoration cost 1,500,000
Credit-adjusted risk free interest rate 10%
PV of 1 at 10% for 5 periods 0.62
On July 1, 2016, Lam Company, a calendar year corporation, purchased the rights to a mine.
The total purchase price was P16,400,000, of which O2,000,000 was allocable to the land.
Estimated reserves were 1,800,000 tons. The entity expects to extract and sell 25,000 tons per
month.
The entity purchased new equivalent on July 1, 2016 for P7,500,000. The equipment had a
useful life of 8 years.
However, after all the resource is removed, the equipment would be of no use and could be
sold for P300,000.
a. 1,200,000 c. 1,366,500
b. 2,400,000 d. 2,733,000
2. What amount should be recorded as depreciation of the mining equipment for 2016?
a. 450,000 c. 600,000
b. 900,000 d. 300,000
O January 1, 2016, Mankayan Company purchased land with valuable natural ore deposits for
P10,000,000. The residual value of the land was P2,000,000. At the time of purchase, a
geological survey estimated a recoverable output of 4,000,000 tons.
Early in 2016, roads were constructed on the land to aid in the extraction and transportation of
the mined ore at a cost of P1,600,000. In 2016, 500,000 tons were mined and sold.
A new survey at the end of 2017 estimated 4,200,000 tones of ore available for mining. In 2017,
800,000 tons were mined and sold.
In 2015, Lepanto Mining Company purchased property with natural resources for P28,000,000.
The property had a residual value of P5,000,000.
However, the entity is required to restore the property to the original condition at a discounted
amount of P2,000,000.
In 2015, the entity spent P1,000,000 in development cost and P3,000,000 in building on the
property.
The entity does not anticipate that the building will have utility after the natural resources are
removed.
In 2016, an amount of P1,000,000 was spent for additional development on the mine.
The tonnage mined and estimated remaining tons for years 2015 to 2017 are as follows:
2015 0 10,000,000
2016 3,000,000 7,000,000
2017 3,500,000 2,500,000
a. 6,900,000 c. 8,100,000
b. 9,600,000 d. 8,400,000
a. 10,150,000 c. 15,750,000
b. 11,025,000 d. 9,450,000 76
Toledo Mining Company constructed a building costing P2,800,000 on the mine property. The
estimated residual value will not benefit the entity and will be ignored for purposes of
computing depreciation.
The building has an estimated life of 10 years. The total estimated recoverable output from the
mine is 500,000 tons. The production of the first four years of operations was:
a. 490,000 c. 210,000
b. 560,000 d. 336,000
What is the maximum dividend that can be declared at the end of current year?
a. 14,000,000 c. 10,000,000
b. 30,000,000 d. 15,000,000
Seaside Company applied revaluation accounting to plant asset with carrying amount of
P4,000,000 on January 1, 2016, useful life of 4 years, and no residual value, Depreciation is
calculated on the straight line basis.
On December 31, 2016, independent appraisers determined that the asset has a fair value of
P3,750,000.
2. What is the journal entry to record the revaluation on December 31, 2016?
3. The financial statements for 2016 shall include which of the following information?
a. Accumulated depreciation P1,000,000.
b. Depreciation P250,000.
c. Plant asset P3,750,000.
d. Revaluation surplus P250,000.
The equipment was measured using the cost model and depreciated on a straight line basis
over a 10-year period.
On December 31, 2016, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model.
The equipment had a fair value of P4,550,000 with remaining useful life of 5 years on December
a. 1,050,000 c. 1,500,000
b. 1,300,000 D. 2,000,000
a. 500,000 c. 455,000
b. 910,000 d. 650,000
a. 1,170,000 c. 390,000
b. 1,040,000 d. 845,000
Cycle company provided the following account balances relating to property, plant and
equipment on January 1, 2016.
Land 2,000,000
Building 15,000,000
Accumulated depreciation 3,750,000
Machinery 3,000,000
Accumulated depreciation 1,500,000
78
Assets have been carried at cost since their acquisition. All assets were acquired on January 1,
2006. The straight line method is used.
On January 1, 2016, the entity revalued the property, plant and equipment. On such date,
competent, appraisers submitted the following:
Replacement cost
Land 5,000,000
Building 25,000,000
Machinery 5,000,000
a. 15,000,000 c. 30,000,000
b. 11,500,000 d. 8,500,000
a. 531,250 c. 525,000
b. 875,000 d. 625,000
a. 11,075,000 c. 11,050000
b. 11,150,000 d. 10,850,000
Land 50,000,000
Building 300,000,000 90,000,000
The land and building were revalued on January 1, 2016 and the revaluation revealed the
following sound value:
Land 70,000,000
Building 315,000,000
There were no additions or disposals during 2016. Depreciation is computed on the straight
line. The estimated life of the building is 20 years.
1. Before income tax, what amount should be recognized as revaluation surplus on January
1, 2016?
a. 125,000,000 c. 385,000,000
b. 105,000,000 d. 315,000,000
a. 22,500,000 c. 15,750,000
b. 15,000,000 d. 27,500,000
Kibungan Company provided the following information on January 1, 2016 relating to property,
plant and equipment.
Land 30,000,000
Building 300,000,000
Accumulated depreciation – building (37,500,0000)
Machinery 400,000,000
Accumulated depreciation – machinery (100,000,000)
There were no additions or disposals during 2016. Depreciation is computed using straight line
over 20 years for building and 10 years for machinery.
On June 30, 2016, all of the property, plant and equipment were revalued.
a. 355,000,000 c. 345,000,000
b. 920,000,000 d. 327,500,000
a. 72,500,000 c. 55,000,000
b. 90,000,000 d. 66,750,000
a. 337,500,000 c. 345,000,000
b. 355,000,000 d. 327,500,000
Divine Company provided the following information relating to the revaluation of an equipment
on January 1, 2016.
a. 2,700,000 c. 2,500,000 80
b. 2,200,000 d. 2,000,000
a. 530,000 c. 750,000
b. 900,000 d. 220,000
a. 2,200,000 c. 2,430,000
b. 2,250,000 d. 1,980,000
a. 1,050,000 c. 3,230,000
b. 3,030,000 d. 300,000
London Company owned a building on January 1, 2016 with historical cost of P40,000,000. The
property is depreciated over 40 years on a straight line basis with no residual value.
The entity adopted a policy of revaluation of property. The building has so far been revalued
twice at fair value as follows:
a. 7,800,000 c. 5,800,000
b. 6,800,000 d. 4,800,000
a. 15,500,000 c. 8,700,000
b. 11,100,000 d. 9,900,000
3. What is the revaluation surplus to be reported in the statement of changes in equity for
the year ended December 31, 2019?
a. 18,200,000 c. 18,900,000
b. 18,000,000 d. 18,500,000
At year-end , Zee Company has an equipment with the following cost and accumulated
depreciation:
Equipment 9,000,000
Accumulated depreciation 3,000,000
Due to obsolescence and physical damage, the equipment is found to be impaired.
At the year-end, the entry had determined the following information related to the equipment:
81
Fair value less cost of disposal 4,500,000
Value in use or discounted, net cash inflows 4,000,000
a. 1,500,000 c. 500,000
b. 2,000,000 d. 0
Zambia Company purchased four convenience store buildings on January 1, 2010 for a total of
P25,000,000. The buildings have been depreciated using the straight-line method with a 20-
year useful life and 10% residual value.
On January 1, 2016, the entity has converted the buildings into a hotel and restaurant. Because
of the change in the use of the buildings, the entity is evaluating the buildings for possible
impairment.
The entity estimated that the building have a remaining useful life of 10 years, that their
residual value will be zero, that undiscounted net cash inflows from the buildings will total
P1,500,00 per year, and that the current fair value of the four building totals P10,000,000.
The appropriate discount rate is 12%. The present value of an ordinary annuity of 1 at 12% for
10 periods is 5.65.
a. 8,250,000 c. 7,500,000
b. 9,775,000 d. 0
a. 1,000,000 c. 847,500
b. 900,000 d. 762,750
Trademark 6,000,000
Patent 3,000,000
The trademark has 8 years remaining in the legal life. However, it is anticipated that the
trademark will be routinely renewed in the future.
The appropriate discount rate is 10%. Mathematically, the discounted value of a stream of
indefinite annual cash flows is simply computed by dividing the annual cash flow by the
discount rate.
The patent has a remaining economic life of 5 years. It is expected that the patent will generate
cash flows of P500,000 per year.
The appropriate discount rate is also 10%. The present value of an ordinary annuity of 1 at 10%
for 5 periods is 3.79.
82
What total amount should be recognized as impairment loss for the year?
a. 1,105,000 c. 4,000,000
b. 5,105,000 d. 0
Lobo Company reported an impairment loss of P2,000,000 in 2015. This loss was related to an
item of property, plant and equipment which was acquired on January 1, 2014 with cost of
P10,000,000, useful life of 10 years and no residual value. The straight line method is used in
recording depreciation.
On December 31, 2015, the entity reported this asset at P6,000,000 which is the fair value om
such date.
On December 31, 2016, the entity determined that the fair value of the impaired asset had
increase to P7,500,000.
What amount of gain on reversal of impairment should be reported in the income statement
for 2016?
a. 2,250,000 c. 1,500,000
b. 1,750,000 d. 0
Tausug Company reported the following calculation relating to an impairment loss suffered on
December 31, 2016:
Goodwill Net assets
Has been a favourable change in the estimate of the recoverable amount of the net assets. The
recoverable amount is now P8,000,000 on December 31, 2017.
The carrying amount of the net assets would have been P7,200,000 on December 31, 2017 if
there ws no impairment loss recognized on December 31, 2016. Assets are depreciated at 20%
of reducing balance.
a. 1,000,000 c. 1,600,000
b. 2,400,000 d. 0
On January 1, 2016, Elite Company purchased equipment with cost of P11,000,000, useful life
of 10 years and no residual value. The entity used straight line depreciation.
On December 31, 2016 and December 31, 2017, the entity determined that impairment
indicators are present. There is no change in the useful life or residual value.
a. 1,800,000 c.2,450,000
b. 1,350,000 d. 0
In January 2015, Winn Company purchased equipment at a cost of P5,000,000. The equipment
had an estimated residual value of P1,000,000, an estimated 8-year useful life, and was being
depreciated by the straight line method.
Two year later, it became apparent that this equipment suffered a permanent impairment of
value.
In January 2017, management determined the carrying amount should be only P1,750,000 with
a 2-year remaining useful life, and the residual value should be reduced to P250,000.
a. 4,000,000 c. 2,250,000
b. 3,250,000 d. 0
a. 3,500,000 c. 1,500,000
b. 1,750,000 d. 1,000,000
Scarbrough Company had purchased equipment for P5,600,000 on January 1, 2013. The
equipment had an 8-year life and residual value of P800,000. The entity depreciated the
equipment using the straight line method.
In August 2016, the entity questioned the recoverability of the carrying amount of this
equipment.
On August 31, 2016, the discounted expected net future cash inflows related to the continued
use and eventual disposal of the equipment amounted to P3,500,000. The fair value of the
equipment on same date is P3,000,000.
After any loss on impairment has been recognized, what is the carrying amount of the
equipment?
a. 3,500,000 c. 3,000,000
b. 3,400,000 d. 2,600,000
85
Problem 163 (IFRS)
At the beginning of current year, Jolo Company acquired all the assets and liabilities of another
entity. The acquiree of operating divisions, including one whose major industry is the
manufacture of toy train. The toy train division is regarded as a cash generating unit.
In paying P20,000,000 for the assets of the acquiree, Jolo calculated that it had acquired
goodwill of P2,400,000. The goodwill was allocated to each of the divisions, and the assets and
Liabilities acquired are measured at fair value at acquisition date. At year-end, the carrying
amounts of the assets of the toy train division were:
Building 2,000,000
Inventory 1,500,000
Trademark 1,000,000
Goodwill 500,000
There is a declining interest in toy train because of the aggressive marketing of computer-based
toys.
The entity measured the value in use of the toy train division at year-end at P3,600,000.
a. 140,000 c. 500,000
b. 250,000 d. 0
a. 400,000 c. 900,000
b. 500,000 d. 300,000
Palawan Company determined that the electronics division is a cash generating unit. The entity
calculated the value in use of the division to be P8,000,000.
The assets of the cash generating unit at carrying amount are as follows:
Building 5,000,000
Equipment 3,000,000
Inventory 2,000,000
10,000,000
The entity also determined that the fair value less cost of disposal of the building is P4,500,000.
a. 2,000,000 c. 3,000,000
b. 4,000,000 d. 0
a. 1,000,000 c. 750,000
b. 500,000 d. 0
86
3. What is the impairment loss allocated to equipment?
a. 600,000 c. 900,000
b. 850,000 d. 0
a. 400,000 c. 600,000
b. 200,000 d. 0
Telecommunication Networking
1. After properly adjusting the goodwill for impairment, what is the adjusted amount of
goodwill for the reporting unit telecommunication?
a. 400,000 c. 500,000
b. 800,000 d. 0
2. After properly adjusting the goodwill for impairment, what is the adjusted amount of
goodwill for the reporting unit networking?
a. 500,000 c. 300,000
b. 200,000 d. 0
One of the cash generating units of Sanmig Company if the production of liquor. The entity
believed that the assets of the cash generating unit (CGU) are impaired based on an analysis of
economic indicators. The assets and liabilities of the cash generating unit at carrying amount at
year-end are:
Cash 4,000,000
Accounts receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000
The entity determined that the value in use of the cash generating unit is P30,000,000. The
accounts receivable are considered collectible, except those considered doubtful.
87
1. What is the impairment loss of goodwill?
a. 3,000,000 c. 2,000,000
b. 1,500,000 d. 0
a. 3,500,000 c. 1,120,000
b. 1,000,000 d. 0
a. 4,000,000 c. 2,400,000
b. 2,880,000 d. 4,200,000
Problem 167 (AICPA - Adapted)
During the current year, Nicole Company acquired Jones Company in a business combination.
As a result og the combination, the following amounts of goodwill were recorded for each of
the three reporting units of the acquired entity.
Retailing 300,000
Service 200,000
Financing 400,000
Near the year-end, a new major competitor entered the entity’s market and the entity was
concerned that this might cause a significant decline in the value of goodwill.
Accordingly, the entity computed the implied value of the goodwill for the three major
reporting units at year-end as follows:
Retailing 250,000
Service 100,000
Financing 600,000
What amount of goodwill impairment should be recorded for the current year?
a. 100,000 c. 150,000
b. 250,000 d. 0
On December 31, 2016, Zemice Company acquired the following three intangible assets:
A trademark for P3,000,000. The trademark has 4 years remaining in its illegal life. It is
anticipated that the trademark will be renewed in the future indefinitely.
A customer list for P2,100,000. By contract, the entity has exclusive use of the list for
five years. However, it is expected that the list will have an economic life of 3 years.
On December 31, 2017, before any adjusting entries for the year were made, the following
information was assembled:
a. Because of a decline in the economy, the trademark is now expected to generate cash
flows of just P105,000 per year.
88
b. The cash flow expected to be generated by the cash generating unit to which the
goodwill is related is P200,000 per year for the next 20 years. The carrying amounts of
the assets and liabilities of the cash generating unit are:
Identifiable 3,500,000
Goodwill 500,000
Liabilities 1,100,000
It is reliably determined that the cash flows of the cash generating unit cannot be
computed without consideration of the liabilities.
c. The cash flows expected to be generated by the customer list are P800,000 in 2018 and
P500,000 in 2019.
d. The appropriate discount rate is 6%. The present value of 1 at’ 10% is .94 for one period
and .89 for two periods. The present value of an ordinary annuity of 1 at 10% for 20
periods is 11.45.
a. 3,000,000 c. 1,250,000
b. 1,750,000 d. 0
a. 610,000 c. 110,000
b. 500,000 d. 0
Copyright 500,000
Deposit with advertising agency used to promote goodwill 400,000
Bond sinking fund 1,000,000
Excess of cost over fair value of identifiable net
Assets of acquired subsidiary 4,000,000
Trademark 900,000
a. 1,400,000 c. 5,400,000
b. 4,500,000 d. 5,800,000
Problem 170 (IAA)
Alcaraz Company paid P5,000,000 to purchase intangible assets with the following fair value:
In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in the
local community.
What amount should be recognized as cost of the in-process research and development?
89
a. 2,400,000 c. 2,800,000
b. 2,000,000 d. 0
Tobin Company incurred P1,600,000 of research and development costs to develop a product
Legal fee and other costs associated with registration of the patent totalled P300,000. At the
year-end, the entity paid P450,000 for legal fees in a successful defense of the patent.
What is the total amount that should be capitalized for the patent at year-end?
a. 750,000 c. 2,050,000
b. 300,000 d. 2,350,000
Harmonious Company acquired a patent for a drug with a remaining legal and useful life of six
years on January 1,2014 for P5,400,000.
On January 1, 2016, a new patent is received for an improved version of the same drug. The
new patent has a legal and useful life of twenty years.
a. 900,000 c. 180,000
b. 200,000 d. 300,000
Problem 173 (IAA)
Golden Company developed a new machine for manufacturing baseballs. Because the machine
is considered very valuable, the entity had it patented.
The following expenditures were incurred in developing and patenting the machine:
a. 240,000 c. 740,000
b. 540,000 d. 200,000
2. What amount of research and development cost should be expensed in the current
year?
a. 2,250,000 c. 2,490,000
b. 2,000,000 d. 1,800,000
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Problem 174 (AICPA Adapted)
On January 1, 2016, Boracay Company bought a trademark from Lamitan Company for
P3,000,000. The entity retained an independent consultant who estimated the trademark’s life
to be indefinite. The carrying amount of the trademark was P1,500,000 on the books of Lamitan
Company.
a. 3,000,000 c. 2,850,000
b. 1,500,000 d. 0
On January 1, 2016, the useful life of the patent was determined to be only 8 years from the
date of acquisition.
On January 1, 2016, in connection with the purchase of a trademark from Cat Company, the
parties entered into a noncompetition agreement and a consulting contract.
Aim Company paid Cat Company P800,000, of which three-fourths was for the trademark, and
one-fourth was for the Cat Company’s agreement not to compete for a five-year period in the
line of business covered by the trademark. Aim Company considered the life of the trademark
to be indefinite.
Moreover, Aim Company agreed to pay Cat Company P50,000 annually on January 1 of each
year for 5 years.
a. 2,280,000 c. 1,880,000
b. 2,480,000 d. 1,680,000
a. 280,000 c. 320,000
b. 440,000 d. 160,000
The same date, Hart Company paid P4,000,000 and agreed to pay the balance in four equal
annual payments of P2,000,000 beginning January 1, 2017.
Hart Company can barrow at 14% for a loan of this type. The present value factors at 14% are as
follows:
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What is the acquisition cost of the franchise?
a. 13,520,000 c. 9,820,000
b. 12,000,000 d. 8,720,000
Carr Company recently acquired that now has remaining legal life of 40 years. The copyright
initially had a 30-year useful life. An analysis of market trend and consumer habit indicated that
the copyrighted material will generate positive cash flows for approximately 25 years.
What is the remaining useful life over which the entity can amortize the copyright?
a. 25 c. 40
b. 30 d. 0
Java Company purchased an entity for P6,000,000 cash at the beginning of the current year.
The carrying amount and fair value of the assets of the acquire on the date of the acquisitions
are as follows:
In addition, the acquitee had liabilities totalling P2,000,000 at the time of acquisition. The
acquire had no other separately identifiable intangible assets.
a. 2,700,000 c. 4,450,000
b. 2,450,000 d. 700,000
The fair value associated with the acquired entity’s government contract is not based on any
legal or contractual relationship. 92
In addition, for obvious reason, there is no open market trading for an intangible of this sort.
a. 3,000,000 c. 4,000,000
b. 3,600,000 d. 0
Clever Company purchased for P4,000,000 cash all of the outstanding ordinary shares of Sun
Company when Sun’s statement of financial position showed net assets of P3,200,000.
On the date of acquisition, Sun’s assets and liabilities had fair value different from the carrying
amount as follows:
a. 350,000 c. 750,000
b. 250,000 d. 800,000
Darwin manufactures and sells a cleaning cloth called the “Superswipe” which was developed
by Darwin’s highly trained staff.
The unique nature of the coating used on the “Superswipe” has resulted in Darwin Company a
significant share of the South African market.
As a result of the takeover, Brisbane Company acquired the following assets at fair value:
In addition, Darwin Company owned, but had not recognized, the following:
Patent – Formula for the special coating with fair valuew3 of P5000,000.
a. 2,300,000 c. 1,800,000
b. 1,300,000 d. 800,000
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Problem 182 (IAA)
At year-end, Bliss Company purchased the net assets of another entity for P6,000,000. On the
date of the transaction, the acquire had P2,000,000 of liabilities.
The assets of the acquire at fair value were P3,000,000 for current assets and P6,000,000 for
noncurrent assets.
East Company is planning to sell the business to new interest. The cumulative net earnings for
the past five years amounted to P5,500,00 including expropriation gain of P500,000.
The fair value of net assets of East Company was P7,500,000. The goodwill is determined by
capitalizing average net earnings at 10%.
a. 10,000,000 c. 15,000,000
b. 12,500,000 d. 7,500,000
a. 3,500,000 c. 2,500,000
b. 7,500,000 d. 5,000,000
On January 1, 2014, Wayne Company signed an eight-year lease for office space. The entity has
the option to renew the lease for an additional four-year period on or before January 1, 2021.
During January 2016, two years after occupying the leased premises, the entity made general
improvement costing P3,600,000 and having a useful life of ten years.
On December 31, 2016, the entity’s intention as to exercise of the renewal option is uncertain.
a. 300,000 c. 450,000
b. 360,000 d. 600,000
On January 1, 2016, Ames Company signed an eight-year lease for office space. The entity has
the option to renew the leave for an additional four-year period on or before January 1, 2023.
P1,200,000 for general improvement to the leased premises with an estimated useful
life of ten years. 94
P500,000 for office furniture and equipment with an estimated useful life of ten years.
P400,000 for moveable assembly line equipment with useful life of 5 years.
On December 31, 2016, the entity’s intention as to exercise of the renewal option is uncertain.
On January 1, 2014, Nobb Company signed a 12-year lease for warehouse space. The entity has
an option to renew the lease for an additional 8-year period on or before January 1, 2018.
During January 2016, the entity made substantial improvement to the warehouse. The cost of
the improvement was P540,000 with an estimated useful life of 15 years.
On December 31, 2016, the entity intended to exercise the renewal option.
On December 31, 2016, what is the carrying amount of the leasehold improvement?
a. 486,000 c. 510,000
b. 504,000 d. 513,000
Problem 187 (AICPA Adapted)
On January 1, 2015, Bay Company acquired a land lease for 21 years with no option to renew.
The lease required the lessec to construct a building in lieu of rent.
The building, completed on January 1, 2016, at a cost of P8,400,000, is depreciated using the
straight line method.
At the end of the lease, the building’s estimated fair value is P4,200,000. The useful life of the
building is 25 years.
What is the carrying amount of the building on December 31, 2016? ANSWER: A
a. 7,980,000 c. 8,190,000
b. 8,064,000 d. 8,232,000
On same date, the entity paid P2,400,000 representing rental for the first year and an advance
rental for one year which will be applied for the last year of the lease contract.
Moreover, the entity paid P2,000,000 upon signing of the contract to obtain right to the lease.
a. 1,200,000 c. 3,600,000
b. 2,400,000 d. 1,800,000 95
a. 500,000 c. 200,000
b. 400,000 d. 0
a. 500,000 c. 100,000
b. 900,000 d. 0
At the beginning of the current year, Alpha Company signed a contract whereby the entity was
to pay P3,000,000 cash plus P300,000 per month rent for an office building.
The contract is for 10 year and renewable for another 10 years at a monthly rental od
P400,000.
In addition, the parking lot was improved, new pavement and lighting were made at a cost of
P400,000. It is estimated that such improvement will be usable for 5 years.
Ward Company incurred the following research and development costs in the current year:
What total amount of research and development costs should be recognized as expense for the
current year?
a. 850,000 c. 1,235,000
b. 1,085,000 d. 1,825,000
a. 1,650,000 c. 3,000,000
b. 2,220,000 d. 3,420,000
Metal Company incurred the following costs during the current year:
What amount of research and development expense should be reported in the current year?
a. 1,200,000 c. 1,870,000
b. 1,500,000 d. 2,170,000
Brunson Company, a major winery, begun construction of a new facility in Mindanao. The
following costs are incurred in conjunction with the with the start-up activities of the new
facility.
a. 9,750,000 c. 1,390,000
b. 1,600,000 d. 0
During the current year , Pitt Company incurred the following costs to develop and produce a
computer software product:
a. 2,500,000 c. 4,000,000
b. 3,400,000 d. 4,900,000
a. 8,200,000 c. 6,700,000
b. 2,300,000 d. 4,400,000
a. 5,400,000 c. 5,900,000
b. 5,700,000 d. 6,900,000
Yellow Company spent P12,000,000 during the current year developing a new software
package. Of this amount, P4,000,000 was spent before it was at the application development
stage and the package was only to be used internally.
The package was completed during the year and expected to have a four-year useful life. The
entity has a policy of taking a full year amortization in the first year.
After the development stage, an amount of P50,000 was spent on training employees to use
the program.
What total amount should be reported as an expense for the current year?
a. 6,012,500 c. 1,600,000
b. 6,050,000 d. 2,000,000
On January 1, 2016, Bitter Company had capitalized cost of P5,000,000 for a new computer
software product with an economic life 5 years. Sales for 2016 amounted to P3,000,000.
The total sales of software over the economic life are expected to be P10,000,000. The pattern
of future sales cannot be measured reliably.
On December 31,2016, the software had a fair value less cost of disposal of P4,500,000.
What is the carrying amount of the computer software on December 31, 2016?
a. 5,000,000 c. 4,500,000
b. 3,500,000 d. 4,000,000
98