Identify The Letter of The Choice That Best Completes The Statement or Answers The Question

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PRACTICAL ACCOUNTING 1 – REVIEW

ACCOUNTING FOR TAXES
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
1. The following differences between financial and taxable income were reported by Dider
Corporation for the current year:
(a) Excess of tax depreciation over book depreciation .... P60,000

(b) Interest revenue on municipal bonds .................. 9,000
(c) Excess of estimated warranty expense over actual
expenditures ......................................... 54,000
(d) Unearned rent received ............................... 12,000
(e) Fines paid ........................................... 30,000
(f) Excess of income reported under percentage-of-completion
accounting for financial reporting over
completed-contract accounting used for tax reporting . 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities .................................... 3,000
(h) Unrealized losses on marketable securities recognized
for financial reporting .............................. 18,000
Assume that Dider Corporation had pretax accounting income [before considering items (a)
through (h)] of P900,000 for the current year. Compute for the taxable income for the
current year.
Assuming current tax rate of 30% and future enacted tax rate of 25%.
2. Anne's Co.'s 2020 income statement reported P90,000 income before provision for income
taxes. To compute the provision for federal income taxes, the following 2020 data are
provided:
Rent received in advance P16,000

Income from exempt municipal bonds 20,000
Depreciation deducted for income tax
purposes in excess of depreciation
reported for financial statement purposes 10,000
Estimated tax payments 0
Enacted corporate income tax rate 30%
What amount of current federal income tax liability should be reported in Anne's December
31, 2020 balance sheet?
a. P18,000
b. P22,800
c. P25,800
d. P28,800
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3. Jostine company at the end of 2020, its first year of operation prepared reconciliation
between pre tax financial Income and taxable income as follows:
Pre tax financial income P 900,000
Estimation litigation expense 500,000
Installment sales ( 400,000)
Taxable income P 1,000,000
The estimate of litigation expense of P500,000 will be deductible in 2021 when it is

expected to be paid. The gross profit from the installment sales will be realized in the
amount of P200,000 in each of the next two years. The estimated liability for litigation is
classified as non-current and the installment accounts receivable are classified as
P200,000 current and P200,000 non-current. The income tax rate is 32% in 2020 enacted
tax law which will be implemented early next year. Tax rate will be 33% for all years.
How much shall be the income tax expense?

a) P 287,000 b) P 288,000 c) P 297,000 d) P 353,000
4. The following information was extracted from the records of Dean Company on December
31, 2020:
Carrying amount Tax base

Accounts Receivable 1,500,000 1,750,000
Motor Vehicle 1,650,000 1,250,000
Provisions for warranty 120,000 0
Deposit received in advance 150,000 0
The depreciation rates for accounting and taxation are 15% and 25% respectively. The
deposits are taxable when received and warranty cost are deductible only when written off
as uncollectible. The tax rate is 30%. Dean Company should report a deferred tax liability
on December 31, 2020 at
a. 120,000 b. 156,000 c. 81,000 d. 36,000
5. Adik Company prepared the following reconciliation of its pretax financial statement income
to taxable income for the year ended December 31, 2020, its first year of operation:
Pretax financial income 1,600,000

Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
Taxable income 1,400,000
1. If income tax is 30%, what amount should Adik report as income tax expense- current
portion in its 2020 income statement?
a. 465,000 b. 420,000 c. 480,000 d. 390,000
2. What amount should be reported as total income tax expense for 2020?
a. 480,000 b. 465,000 c. 420,000 d. 435,000
3. On December 31, 2020, what amount should be reported a deferred tax liability?
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a. 30,000 b. 45,000 c. 75,0000 d. 0
4. What amount should be reported as deferred tax asset on December 31, 2020?
a. 30,000 b. 75,000 c. 45,000 d. 70,000
6. Angel Company reported taxable income of P8,000,000 in its income tax return for the year
ended December 31, 2020, its first year of operations. Temporary differences between
financial income and taxable income for the year are as follows:
Tax depreciation in excess of book depreciation 800,000

Accrual for product liability claim in excess of actual claim 1,200,000
Reported installment sales income in excess of taxable
installment sales income 2,600,000
Income tax rate 30%
1. What is the total income tax expense to be reported in the 2020 income statement?
a. 3,060,000 b. 2,400,000 c. 2,580,000 d. 2,220,000
2. What is the deferred tax asset on December 31, 2020?

a. 240,000 b. 360,000 c. 780,000 d. 0
3. What is the deferred tax expense for the year ended December 31, 2020?
a. 1,380,000 b. 1,020,000 c. 660,000 d. 360,000
7. On December 31, 2020, The accounts of Lol Company have the same basis for accounting
and tax purposes, except the following:
Carrying amount Tax Base Difference
Computer software cost 4,000,000 0 4,000,000
Equipment 15,000,000 12,000,000 3,000,000
Accrued liability-heath care 2,000,000 0 2,000,000
In January 2020, Lol Company incurred cost of P6,000,000 in relation to the
development of a computer software product, this cost was capitalized and amortized over
3 years for accounting purposes using straight line. However, the total amount was
expensed in 2020 for tax purposes.
The equipment was acquired on Jan. 1, 2020 for P 20,000,000. The useful life of the
equipment is 4 years with no residual value. The equipment is depreciated using the
straight line for accounting purposes.
In Jan. 2020, Lol Company entered into an agreement with its employees to provide
health care benefits. The cost of such plan for 2020 was P2,000,000. This amount was
accrued as expense in 2020 for accounting purposes only when actually paid.
The pretax accounting income for 2020 is P13,000,000. the tax rate is 30% and
there are no deferred taxes on Jan. 1, 2020.
1. The December 31, 2020 statement of financial position shall report deferred tax liability
at
a. 2,100,000 b. 1,200,000 c. 1,500,000 d. 2,700,000
2. The December 31, 2020 statement of financial position shall report deferred tax asset at
a. 1,200,000 b. 2,100,000 c. 900,000 d. 600,000
3. What is the 2020 current tax expense?
a. 3,900,000 b. 2,400,000 c. 3,300,000 d. 1,500,000
4. The 2020 income statement shall report total income tax expense at
a. 3,900,000 b. 4,500,000 c. 5,100,000 d. 1,500,000
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5. What is the deferred tax expense for 2020?

a. 2,100,000 b. 2,700,000 c. 1,500,000 d. 600,000
8. Jostine company lease office premises to Fox, Inc. for a 4-year term beginning January 2,
2020.Under the terms of the operating lease, rent for the first year is P216,00 and rent for
years 2 through 4 is P337,500 per annum. However, as an inducement to enter the lease,
Fox was allowed to use the lease asset rent-free for the first three months. Assume tax
rate of 32%.
In its December 31, 2020 balance sheet of Jostine company, what amount should be
reported as deferred tax asset?
a) 0 b) 42,120 c) 51, 840 d) 93,969
9. In 2020, Jostine corporation received interest income of 100,000 on government obligations

and P600,000 in royalties under a licensing agreement. Royalties are reported as taxable
income in the year received, but in the financial statements, royalties are recognized as
income in the year earned and amount to P400,000 for the year ended December 31, 2020
the effective income tax rate of Jostine corporation is 32%.
By what amount would the deferred income tax asset account balance increase?
a)32,000 b)64,000 c)80,000 d)96,000
10. In Year 2, Ajax, Inc. reported taxable income of 400,000 and pretax financial statement
income of 300,000. The difference resulted from 60,000 of nondeductible premiums on
Ajax's officers' life insurance and 40,000 of rental income received in advance. Rental
income is taxable when received. Ajax's effective tax rate is 30%. In its Year 2 income
statement, what amount should Ajax report as income tax expense-current portion?
a. 90,000 b. 102,000 c. 108,000 d. 120,000
11. Lion Co.'s income statement for its first year of operations shows pretax income of
6,000,000. In addition, the following differences existed between Lion's tax return and
records:
Tax Accounting return records
Uncollectible accounts expense 220,000 250,000
Depreciation expense 860,000 570,000
Tax-exempt interest revenue - 50,000
Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What
amount should Lion report as deferred tax expense in its income statement for the year?
a. 148,000 b. 124,000 c. 104,000 d. 78,000
12. At the beginning of 2020, Pitman Co. purchased an asset for 600,000 with an estimated
useful life of 5 years and an estimated residual value of 50,000. For financial reporting
purposes the asset is being depreciated using the straight-line method; for tax purposes the
double-declining-balance method is being used. Pitman Co.’s tax rate is 40% for 2020 and
all future years.
1. At the end of 2020, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. 440,000 310,000
b. 490,000 310,000
c. 490,000 360,000
d. 440,000 360,000
2. At the end of 2020, which of the following deferred tax accounts and balances is
reported on Pitman’s statement of financial position?
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Account _ Balance
a. Deferred tax asset 52,000
b. Deferred tax liability 52,000
c. Deferred tax asset 78,000
d. Deferred tax liability 78,000
13. Mathis Co. at the end of 2020, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income 750,000
The estimated litigation expense of 1,250,000 will be deductible in 2022 when it is expected
to be paid. The gross profit from the installment sales will be realized in the amount of
500,000 in each of the next two years. The estimated liability for litigation is classified as
non-current and the installment accounts receivable are classified as 500,000 current and
500,000 noncurrent. The income tax rate is 30% for all years.
1. The income tax expense is

a. 150,000. b. 225,000. c. 250,000. d. 500,000.
2. The net deferred tax asset to be recognized is

a. 0. b. 150,000. c. 375,000. d. 225,000.
14. In 2020, Krause Company accrued, for financial statement reporting, estimated losses on
disposal of unused plant facilities of 1,500,000. The facilities were sold in March 2021 and
a 1,500,000 loss was recognized for tax purposes. Also in 2020, Krause paid 100,000 in
fines for violation of environmental regulations. Assuming that the enacted tax rate is 30%
in both 2020 and 2021, and that Krause paid 780,000 in income taxes in 2020, the amount
reported as net deferred income taxes on Krause's statement of financial position at
December 31, 2020, should be a
a. 420,000 asset.
b. 360,000 asset.
c. 360,000 liability.
d. 450,000 asset.
15. Munoz Corp.'s books showed pretax financial income of 1,500,000 for the year ended
December 31, 2020. In the computation of income taxes, the following data were
considered:
Gain on an involuntary conversion 650,000
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(Munoz has elected to replace the property within the statutory

period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes 100,000
Estimated tax payments, 2020 125,000
Enacted tax rate, 2020 30%
What amount should Munoz report as its current income tax liability on its December 31,
2020 statement of financial position?
a. 100,000 b. 130,000 c. 225,000 d. 255,000
16. Haag Corp.'s 2020 income statement showed pretax accounting income of 750,000. To
compute the income tax liability, the following 2020 data are provided:
Income from government bonds 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated income tax payments made 150,000
Enacted corporate income tax rate 30%
What amount of current income tax liability should be included in Hagg's December 31,
2020 statement of financial position?
a. 48,000 b. 66,000 c. 75,000 d. 198,000
17. On January 1, 2020, Piper Corp. purchased 40% of the voting common stock of Betz, Inc.
and appropriately accounts for its investment by the equity method. During 2020, Betz
reported earnings of 360,000 and paid dividends of 120,000. Piper assumes that all of
Betz's undistributed earnings will be distributed as dividends in future periods when the
enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current
enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for this
temporary difference is
a. 72,000. b. 60,000. c. 43,200. d. 28,800.
18. Didde Corp. prepared the following reconciliation of income per books with income per tax
return for the year ended December 31, 2020:
Book income before income taxes 1,200,000
Add temporary difference
Construction contract revenue which will reverse in 2021 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable income 720,000
Didde's effective income tax rate is 34% for 2020. What amount should Didde report in its
2020 income statement as the current provision for income taxes?
a. 54,400 b. 244,800 c. 408,000 d. 462,400
19. In its 2020 income statement, Cohen Corp. reported depreciation of 1,110,000 and interest
revenue on government obligations of 210,000. Cohen reported depreciation of 1,650,000
on its 2020 income tax return. The difference in depreciation is the only temporary
difference, and it will reverse equally over the next three years. Cohen's enacted income
tax rates are 35% for 2020, 30% for 2021, and 25% for 2022 and 2023. What amount
should be included in the deferred income tax liability in Hertz's December 31, 2020
statement of financial position?
a. 144,000 b. 186,000 c. 225,000 d. 262,500
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20. For calendar year 2020, Kane Corp. reported depreciation of 1,200,000 in its income
statement. On its 2020 income tax return, Kane reported depreciation of 1,800,000. Kane's
income statement also included 225,000 accrued warranty expense that will be deducted
for tax purposes when paid. Kane's enacted tax rates are 30% for 2020 and 2021, and 24%
for 2022 and 2023. The depreciation difference and warranty expense will reverse over the
next three years as follows:
Depreciation Difference Warranty Expense
2021 240,000 45,000
2022 210,000 75,000
2023 150,000 105,000
600,000 225,000
These were Kane's only temporary differences. In Kane's 2020 income statement, the
deferred portion of its provision for income taxes should be
a. 200,700. b. 112,500. c. 101,700. d. 109,800.
21. On its December 31, year 2 balance sheet, Shin Co. had income taxes payable of 13,000
and a current deferred tax asset of 20,000 before determining the need for a valuation
account. Shin had reported a current deferred tax asset of 15,000 at December 31, year 1.
No estimated tax payments were made during year 2. At December 31, year 2, Shin
determined that it was more likely than not that 10% of the deferred tax asset would not be
realized. In its year 2 income statement, what amount should Shin report as total income
tax expense?
a. 8,000 b. 8,500 c. 10,000 d. 13,000
22. Eckert Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes 3,750,000
Income tax expense
Current 1,035,000
Deferred 90,000 1,125,000
Net income 2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and
accelerated depreciation for tax purposes. The amount charged to depreciation expense on
its books this year was 1,500,000. No other differences existed between book income and
taxable income except for the amount of depreciation. Assuming a 30% tax rate, what
amount was deducted for depreciation on the corporation's tax return for the current year?
a. 1,200,000 b. 1,425,000 c. 1,500,000 d. 1,800,000
23. Kraft Company made the following journal entry in late 2020 for rent on property it leases to
Danford Corporation.
Cash 60,000
Unearned Rent 60,000
The payment represents rent for the years 2021 and 2020, the period covered by the lease.
Kraft Company is a cash basis taxpayer. Kraft has income tax payable of 92,000 at the end
of 2020, and its tax rate is 35%.
1. What amount of income tax expense should Kraft Company report at the end of
2020?
a. 53,000 b. 71,000 c. 81,500 d. 113,000
2. Assuming the taxes payable at the end of 2021 is 102,000, what amount of income
tax expense would Kraft Company record for 2021?
a. 81,000 b. 91,500 c. 112,500 d. 123,000
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24. MARGA Company reports pretax financial income of P750,000 for 2020. The following
caused taxable income to be different than financial income:
 Depreciation on the tax return is greater that depreciation on the income statement
by P150,000.
 Rent collected on the tax return is greater than rent earned on the income statement
by 200,000.
 Fines for pollution appears as expense of P100,000 on the income statement.
Marga’s tax rate is 32% for all years and the company expects to report taxable income in
all future years. There are no deferred taxes at the beginning of 2020
What is the amount of income tax liability for 2020?

a. 240,000 c. 288,000
b. 272,000 d. 256,000
25. Shear, Inc. began operations in year 1. Included in Shear’s year 1 financial statements
were bad debt expenses of 1,400 and profit from an installment sale of 2,600. For tax
purposes, the bad debts will be deducted when written off and the profit from the
installment sale will be recognized in year 2. The enacted tax rates are 30% in year 1 and
25% in year 2. In its year 1 income statement, what amount should Shear report as
deferred income tax expense?
a. 300 b. 360 c. 650 d. 780
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APPLIED AUDITING
CORRECTION OF ERRORS
Multiple Choice
1. John Paul ‘s December 31 year end financial statements had the following errors:
December 31, 2018 December31, 2019
Ending inventory P13,500 understated P19,800 overstated
Depreciation expense 3,600 understated -
Unearned rental 5,000 understated -
Prepaid insurance - 8,000 understated
There were no other errors during the years 2018 or 2019 and no connections have been made for any of
the errors. (ignore income tax considerations).
1. What is the net effect of the errors on John Paul’s 2019 net income?
a. understated by P13,000
b. overstated by P14,800
c. overstated by P20,300
d. overstated by P25,300
2. What is the net effect of the errors in John Paul’s December 31, 2019 accumulated profits
balance?
a. overstated by P11,800
b. overstated by P15,400
c. understated by P20,300
d. overstated by 25,300
3. What is the net effect of the errors in John Paul’s December 31, 2019 working capital?
a. understated by P4,900
b. understated by P8,000
c. overstated by P11,800
d. understated by P20,300
2. The December 31 year end financial statement of Ana co. contained the following errors:
December 31, 2018 December 31, 2019

Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -
An insurance premium of P330,000 was prepaid in 2018 covering the years 2018, 2019, and 2020. The
entire amount was charged to expense in 2018. In addition, on December 31, 2019, a fully depreciated
machinery was sold for P75,000 cash, but the sale was not recorded until 2019. There were no other
errors during 2018 and 2019, and no corrections have been made for any of the errors. Ignore income tax
effects.
1. What is the total effects of the errors on Ana’s 2019 net income?
a. P123,500 overstatement
b. P27,500 overstatement
c. P192,500 understatement
d. P177,500 understatement
2. What is the total effect of the errors on the amount of Ana’s working capital at December 31,
2019?
a. P75,500 overstatement
3. What is the total effect of the errors on the balance of Ana’s retained earnings at December 31,
2019?
a. P156,000 understatement
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3. Steven Inc. has been using the accrual basis of accounting. However an examination of the records
reveals that some expenses and revenues have been handled on a cash basis by the inexperienced
bookkeeper of the company. Income statements prepared by the bookkeeper reported P145,000 net
income for 2018 and P185,000 for 2019. Further review of the records reveals that the following items
were handled improperly.
 Rent of P6,500 was received from a lessee on December 31,2018. It was recorded as income at
that time even though the rentals pertains to 2019.
 Salaries payables on December 31 have been consistently omitted from the records of the date
and have been recorded as expenses when paid in the following year. The salary accruals recorded
in this manner were:
December 31, 2017 P5,500
December 31, 2018 7,500
December 31, 2019 4,700
 Invoices for office supplies purchased have been charged to expense accounts when received.
Inventories of supplies on hand at the end of each year have been ignored and no entry has been
made to them.
December 31, 2017 P6,500
December 31, 2018 3,700
December 31, 2019 7,100
What is the corrected net income for 2018?
a. P133,700 b. P144,200 c. P146,700 d. P139,300
What is the corrected net income for 2019?

a. P184,700 b. P197,700 c. P185,600 d. P190,900
4. Allisson corp. reported the following amounts of net income for the years ended December 31, 2017,
2018, and 2019:
2017 P127,000
2018 150,000
2019 128,500
You are performing the audit for the year ended December 31, 2019. During your examination, you
discover the following errors:
 As a result of errors in the physical count, ending inventories were misstated as follows:
December31, 2018 P14,000 understated
December 31, 2019 23,000 overstated
 On December 29, 2019 Allisson recorded as a purchase, merchandise in transit which cost
P15,000. The merchandise was shipped FOB Destination and had not arrived by
December 31. The merchandise was not included in the ending inventory.
 Allisson records sales on the accrual basis but failed to record sales account made near the
end of each year as follows:
2017 P4,000
2018 5,000
2019 3,500
 The Company failed to record accrued office salaries as follows:

December 31, 2017 P10,000
December 31, 2018 14,000
 On March 1, 2018, a 10% stock dividend was declared and distributed. The par value of
the shares amounted to P10,000 and market value was P13,000. The stock dividend was
recorded as follows:
Miscellaneous expense 13,000
Common stock 10,000
Retained earnings 3,000
 On July 1 2018, Allisson acquired a three-year insurance policy. The three-year premium
of P6,000 was paid on that date, and the entire premium was recorded as insurance
expense.
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 On Jan.1, 2019, Allisson retired bonds with a book value of P120,000 for P106,000. The
gain was incorrectly deferred and is being amortized over 10 years as a reduction of
interest expense on other outstanding obligations.
What is the adjusted net income for the year ended December 31, 2017?
a. 133,000 b. 117,000 c. 121,000 d. 113,000
a. 159,000 b. 187,000 c. 178,000 d. 179,000
a. 129,600 b. 131,000 c. 104,400 d. 139,600
What adjusting entry should be made on December 31, 2019 to correct the error describe in 2nd
transaction?
a. Accounts payable 15,000
Purchases 15,000
b. Purchases 15,000
Accounts Payable 15,000
c. Accounts Payable 15,000
Cash 15,000
d. No adjusting journal entry is necessary
The adjusting entry on December 31, 2018 to correct the error described in the 5th transactions should
include a debit to
a. Common stock for P10,000
b. Retained Earnings for P16,000
c. Additional paid in capital for P3,000
d. Miscellaneous expenses for P3,000
5. Allisson corp. reported pretax incomes of P505,000 and P387,000 for the years ended December 31,
2018 and 2019, respectively. However, the auditor noted that the following errors had been made:
 Sales for 2018 included amounts of P191,000 which had been received in cash during
2018, but for which the related goods were shipped in 2019. Title did not pass to the buyer
until 2019.
 The inventory on December 31, 2018 was understated by P43,200
 The company’s accountant, in recording interest expense entry on an annual basis:
Interest expense 75,000
Cash 75,000
The bonds have a face value of P1,250,000 and pay a nominal interest
rate of 6%. They were issued at a discount of P75,000 on January
1, 2018 to yield an effective interest rate of 7%.
 Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2018 and 2019. Repairs of P42,500 and P47,000 had been incurred in 2018 and
2019, respectively. In determining depreciation charges, Allisson applies a rate of 10% to
the balance in the Equipment account at the end of the year.
What is the corrected pretax income for 2018?

a. 303,200 b. 225,300 c. 311,700 d. 307,450
What is the corrected pretax income for 2019?

a. 488,992 b. 480,042 c. 484,292 d. 575,392
6. The following information pertains to Ana co.’s depreciable assets:
 Machine X was purchased for P150,000 on January 1, 2014. The entire cost was expensed in the
year of acquisition. The estimated useful life of this machine is 15 years with no residual value.
 Machine Y cost P525,000 and was acquired on January 1, 2015. On the acquisition date, the
expected useful life was 12 years with no residual value. The straight line depreciation method
was used. On January 2, 2019, it was estimated that the remaining life of the asset would be 4
years and that there would be a P25,000 residual value.
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 A building was purchased on January 3, 2016, for P3,000,000. The building was expected to have
a useful life of 20 years with no residual value. The straight line depreciation method was used.
On January 1, 2019, a change was made to the sum of the years digit of depreciation. No change
was made to the estimated useful life and residual value of the building.
1. The adjusting entry on January 1, 2019 relative to machine X should include a credit to
a. accumulated depreciation of P60,000
b. retained earnings for P100,000
c. machinery for P150,000
d. no adjusting entry is necessary
2. What is the carrying value of machine Y on January 1, 2019?

a. P350,000 b. P325,000 c. P306,250 d. P525,000
3. What is the depreciation expense on machine Y for 2019?

a. P87,500 b. P77,083 c. P81,250 d. P41,667
4. What is the book value of the building at December 31, 2018?

a. P2,185,714 b. P2,550,000 c. P1,942,857 d. P2,266,667
5. What is the book value of the building at December 31, 2019?

a. P2,185,714 b. P2,550,000 c. P1,942,857 d. P2,266,667
7. Robi Corporation reported profit for the years 2018 and 2019 at P550, 000 and P700.000, respectively.
Your audit of the company’s accounts disclosed the need for adjustments as follows:
2018 2019
Overstatement of ending inventories due P
to error in pricing 29,000 P 33,000
Omission of depreciation on newly-
acquired equipment 15,000 15,000
Understatement of commission
receivable 22,000 18,000
A purchase of merchandise was not
recorded until the following year, and
also was not included in the ending
inventory 60,000
1. The adjusted profit for 2019 was

a. P677,000
b. P700,000
c. P710,000
d. P737,000
2. What is the effect of the foregoing errors on total assets at December 31, 2019?
a. P30,000 overstated
b. P36,000 overstated
c. P45,000 overstated
d. P66,000 overstated
3. What is the effect of the foregoing errors on retained earnings at December 31, 2018?
a. P22,000 overstated
b. P38,000 understated
c. P67,000 overstated
d. P82,000 overstated
8. Ventura Corporation purchased machinery on January 1, 2018 for 630,000. The company used
the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first
two years of its estimated six-year life. In 2020, Ventura changed to the straight-line
depreciation method for this asset. The following facts pertain:
2018 2019
Straight-line 105,000 105,000
Sum-of-the-years’-digits 180,000 150,000
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1. Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on
beginning retained earnings is
a. 135,000 b. 120,000. c. 72,000. d. 0.
2. The amount that Ventura should report for depreciation expense on its 2020 income statement is
a. 120,000. b. 105,000. c. 75,000. d. none of the above.
9. On December 31, 2019 Dean Company changed its method of accounting for inventory from the average
cost method to the FIFO method. This change caused the 2019 beginning inventory to increase by
420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/2019,
assuming a 40% tax rate, is
a. 420,000. b. 252,000. c. 168,000. d. 0.
10. Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be 2%
of sales. Due to a technological advance in production at the beginning of year 3, Oak now believes 1%
of sales to be a better estimate of warranty costs. Warranty costs of 80,000 and 96,000 were reported in
year 1 and year 2, respectively. Sales for year 3 were 5,000,000. What amount should be presented in
Oak’s year 3 financial statements as warranty expense?
a. 50,000 b. 88,000 c. 100,000 d. 138,000
14
AP – QUIZ (LIAB2)
Problem
1. At December 31, 2018, the Core Corporation had the following liability and equity
account balances:
11% Bonds payable, at face value P2,500,000

Premium on bonds payable 176,190
Common stock 4,000,000
Additional paid in capital 1,147,500
Retained earnings 1,232,500
Treasury stock, at cost 162,500
Transactions during 2019 and other information relating to the Corporation’s liability and
equity accounts were as follows:
The bonds were issued on December 31, 2017, for P2,689,000 to yield 10%. The
bonds mature on December 31, 2024. Interest is payable annually on December 31.
The Corporation uses the effective interest method to amortize bond premium.
At December 31, 2018, the corporation had 1,000,000 authorized shares of P10 par
common stock.
On November 2, 2019, the Corporation borrowed P2,000,000 at 9%, evidenced by a

note payable to Premium Bank. The note is payable in five equal annual principal
installments of P400,000. The first principal and interest payment is due on
November 2, 2020.
Questions
1. How much is the bond premium amortization for 2019?
2. What is the carrying value of the bonds payable on December 31, 2019?
3. How much is the 2019 interest expense on bonds payable?
4. What is the treasury stock balance on December 31, 2019?
5. What is the long-term portion of the note payable to bank as of December 31, 2019?
6. What is the 2019 total interest expense?
2. On July 1, 2019, Sherub Co. borrowed P1,000,000 on a 10%, five year note payable.
On December 31, 2019, the fair value of the note is determined to be 795,000 based on
market and interest factors. The entity has a fair value option for reporting the financial
liability.
1. What is the carrying amount of the note payable On December 31, 2019?
2. What should be reported as interest expense for 2019?
3. What is the loss or gain to be recognized in 2019 as a result of the fair value option?
15
3. The Feather Corporation received the following report from its actuary at the end of the
year:
01/01/2019 12/31/2019
Present value of benefit obligation 5,200,000 5,920,000
Fair value of pension plan assets 5,000,000 5,760,000
Remeasurement gain or loss on plan assets ?
Remeasurement gain on obligation 36,000
Settlement rate 12%
Benefits paid during the year 740,000
Contributions made during the year 500,000
1. What is the amount of current service cost?
2. What is the amount of net benefit expense to be charged against income for the year
2019?
3. What is the amount of actual return on plan assets during 2019?
4.What is the net remeasurement gain or loss during 2019?
5. What is the balance of the Accrued pension account as of 2019?
4. Zeff Company prepared the following reconciliation of pretax financial statement income
to taxable income for the first year of operations:
Pretax financial income 1,600,000
Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
Taxable income 1,400,000
1. If the income tax is 30%, what amount should be reported as income tax
expense-current portion in the income statement?
2. What amount should be reported as deferred tax liability at year-end?
3. What amount should be reported as deferred tax asset at year-end?
4. What amount should be reported as total tax expense for the first year?
5. At the beginning of the current year, Joshtin Company leased a machinery with the
following information:
Annual rental payable at the end of each year 1,000,000

Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 300,000
Cost of dismantling and restoring the asset as required
by contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
16
Implicit interest rate 10%

Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68
1. What is the initial lease liability?
2. What is the cost of right use asset?
3. What is the depreciation for current year?
4. What is the lease liability at year-end?
6. At the beginning of current year, Jerome Company sold a machine and immediately
leased it back. The following data pertain to the sale and leaseback transaction:
Sale price at below fair value 4,000,000

Fair value of machine 4,500,000
Carrying amount of machine 3,600,000
Annual rental payable at the end of each year 500,000
Remaining life of machine 10 years
Lease term 3 years
Present value of an ordinary annuity of 1 at 6%
For 3 periods 2.67
1. What is the initial lease liability?
2. What is the cost of right of use asset?
3. What is the gain transferred to the buyer-lessor?
4. What is the net annual rent income of the buyer-lessor?
7. Kaila Corporation is selling audio and video appliances. The company’s fiscal year
ends on March 31. The following information relates to the obligations of the company
as of March 31, 2020:
Notes payable
Kaila has signed several long-term notes with financial institutions. The maturities of
these notes are given below. The total unpaid interest for all of these notes amounts to
P340,000 on March 31, 2020.
Due date Amount

April 31, 2020 P 600,000
July 31, 2020 900,000
September 1, 2020 450,000
February 1, 2021 450,000
April 1, 2021 – March 31, 2022 2,700,000
P 5,100,000
Estimated warranties
17
Kaila has a one-year product warranty on some selected items. The estimated warranty
liability on sales made during the 2018 – 2019 fiscal year and still outstanding as of
March 31, 2019, amounted to P252,000. The warranty costs on sales made from April
1, 2019 to March 31, 2020, are estimated at P630,000. The actual warranty costs
incurred during 2019 – 2020 fiscal year are as follows:
Warranty claims honored on 2018 – 2019 sales P 252,000

Warranty claims honored on 2019 – 2020 sales 285,000
Total P 537,000
Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount
to P560,000 as of March 31, 2020.
Dividends
On March 10, 2020, Kaila’ board of directors declared a cash dividend of P0.30 per
common share and a 10% common stock dividend. Both dividends were to be
distributed on April 5, 2020 to common stockholders on record at the close of business
on March 31, 2020. As of March 31, 2020, Kaila has 5 million, P2 par value, common
shares issued and outstanding.
Bonds payable
Kaila issued P5,000,000, 12% bonds, on October 1, 2014 at 96. The bonds will mature
on October 1, 2024. Interest is paid semi-annually on October 1 and April 1. Kaila uses
the straight line method to amortize bond discount.
QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as
of March 31, 2020:
1. Estimated warranty payable
2. Unamortized bond discount
3. Bond interest payable
4. Total current liabilities
5. Total noncurrent liabilities

18
ASSET
Multiple Choice
1. During 2019, Barney Company purchased marketable equity securities as a short-term

investment and classified them as trading securities. The cost and market value at
December 31, 2019, were as follows:
Market Value
Security Cost December 31, 2019
X 200 shares 8,400 10,200
Y 2,000 shares 51,000 45,900
Z 4,000 shares 94,500 88,500
153,900 144,600
Barney sold 1,000 shares of Company Y stock on March 16, 2020, for 25 per share,
incurring 1,200 in brokerage commissions and taxes. On the sale, Barney should report a
realized gain of
a. 0.
b. 500.
c. 850.
d. 1,700.
2. On January 3, 2020, Lincoln Services, Inc., signed an agreement authorizing Lisa

Company to operate as a franchisee over a 20-year period for an initial franchise fee of
100,000 received when the agreement was signed. Lisa commenced operations on July 1,
2020, at which date all of the initial services required of Lincoln had been performed. The
agreement also provides that Lisa must pay a continuing franchise fee equal to 5% of the
revenue from the franchise annually to Lincoln. Lisa's franchise revenue for 2020 was
800,000. For the year ended December 31, 2020, how much should Lincoln record as
revenue from franchise fees in respect of the Lisa franchise?
a. 140,000
b. 90,000
c. 45,000
d. 42,500
19
3. On November 30, Northrup Company consigned 90 freezers to Watson Company for sale
at 1,600 each and paid 1,200 in transportation costs. A report of sales was received on
December 30 from Watson reporting the sale of 20 freezers, together with a remittance of
the 27,200 balance due. The remittance was net of the agreed 15% commission. How
much, and in what month, should Northrup recognize as consignment sales revenue?
November December
a. 0 32,000
b. 0 27,200
c. 144,000 0
d. 142,800 0
4. Based on its past collection experience, Ace Company provides for bad debts at the rate of
2 percent of net credit sales. On January 1, 2020, the allowance for doubtful accounts
credit balance was 10,000. During 2020, Ace wrote off 18,000 of uncollectible receivables
and recovered 5,000 on accounts written off in prior years. If net credit sales for 1999
totaled 1,000,000, the doubtful accounts expense for 2020 should be
a. 17,000.
b. 20,000.
c. 23,000.
d. 35,000.
5. The following information is available for Hudson Company:
Disbursements for purchases ........................... 290,000

Increase in trade accounts payable .................... 25,000
Decrease in merchandise inventory ..................... 10,000
Cost of goods sold was

a. 325,000.
b. 305,000.
c. 275,000.
d. 255,000.
20
6. Ramos Company had the following bank reconciliation at March 31:
Balance per bank statement, 3/31 ........................ 93,000

Add: Deposit in transit ................................. 20,600
113,600
Less: Outstanding checks ................................ (25,200)
Balance per books, 3/31 ................................. 88,400
Data per bank statement for the month of April follow:
Deposits .............................................. 116,800

Disbursements ......................................... 99,400
All reconciliation items at March 31 cleared through the bank in April. Outstanding checks
at April 30 totaled 15,000. What is the amount of cash disbursements per books in April?
a. 89,200
b. 99,400
c. 109,600
d. 114,400
7. Edwards Company began business in February of 2019. During the year, Edwards
purchased the three trading securities listed below. On its December 31, 2019, balance
sheet, Edwards appropriately reported a 4,000 credit balance in its Market Adjustment--
Trading Securities account. There was no change during 2020 in the composition of
Edward's portfolio of trading securities. Pertinent data are as follows:
Market Value
Security Cost December 31, 2020
A 120,000 126,000
B 90,000 80,000
C 160,000 157,000
370,000 363,000
What amount of loss on these securities should be included in Edward's income statement
for the year ended December 31, 2020?
a. 0
b. 3,000
c. 7,000
d. 11,000
21
8. A company has a petty cash fund of 25. At the end of the month, petty cash includes the
following:
Currency and coins .................................... 1.50

Receipted vouchers for:
Postage ............................................... 6.00
Travel ................................................ 7.50
Donation to charity ................................... 10.00
25.00
Which of the following is the correct entry to simultaneously reimburse the fund and
increase it to 100?
a. Petty Cash..................... 100.00
Cash ........................ 100.00
b. Petty Cash..................... 98.50
Cash ........................ 98.50
c. Postage........................ 6.00
Travel......................... 7.50
Donations...................... 10.00
Cash......................... 23.50
d. Petty Cash..................... 75.00
Postage........................ 6.00
Travel......................... 7.50
Donations...................... 10.00
Cash......................... 98.50
9. Trask Corporation's checkbook balance on December 31, 2019, was 8,000. In addition,
Trask held the following items in its safe on December 31:
Check payable to Trask Corporation, dated January 2, 2020, not

included in December 31 checkbook balance ........... 2,000
Check payable to Trask Corporation, deposited December 20,
and included in December 31 checkbook balance, but returned
by bank on December 30, stamped "NSF." The check was
redeposited January 2, 2020, and cleared January 7 .. 400
Post-dated checks ....................................... 150
Check drawn on Trask Corporation's account, payable to a
vendor, dated and recorded December 31, but not mailed until
1,000
January 15, 2020 ..................................
The proper amount to be shown as cash on Trask's balance sheet at December 31, 2019,
is
a. 7,600.
b. 8,000.
c. 8,600.
22
d. 9,750.
10. Jupiter Company prepares monthly income statements. A physical inventory is taken only
at year-end; hence, month-end inventories must be estimated. All sales are made on
account. The rate of markup on cost is 50 percent. The following information relates to the
month of May:
Accounts receivable, May 1 ............................ 20,000

Accounts receivable, May 31 ........................... 30,000
Collection of accounts receivable during May .......... 50,000
Inventory, May 1 ...................................... 36,000
Purchases of inventory during May ..................... 32,000
The estimated cost of the May 31 inventory is

a. 24,000.
b. 28,000.
c. 38,000.
d. 44,000.
11. Gray Company had an accounts receivable balance of 50,000 on December 31, 2019, and
75,000 on December 31, 2020. The company wrote off 20,000 of accounts receivable
during 2020, and collected 3,000 on an account written off in 2020. Sales for the year 2020
totaled 620,000. All sales were on account. The amount collected from customers on
accounts receivable during 2020 was
a. 575,000.
b. 578,000.
c. 600,000.
d. 595,000.
23
12. On April 1, 2020, Ziba Inc. purchased as a temporary investment 100,000, face amount,
10% U.S. Treasury notes; they pay interest semiannually on January 1 and July 1. The
notes were purchased at 102. Which of the following entries correctly records this
purchase?
a. Trading Securities--10% U.S. Treasury Notes.. 100,000
Interest Receivable.......................... 2,500
Premium on Trading Securities................ 2,000
Cash....................................... 104,500
b. Trading Securities--10% U.S. Treasury Notes.. 102,000
Cash....................................... 104,500
c. Trading Securities--10% U.S. Treasury Notes.. 100,000
Cash....................................... 104,500
d. Trading Securities--10% U.S. Treasury Notes.. 102,000
Cash....................................... 102,000
13. The balance in Master Company's accounts payable account at December 31, 2020, was
1,100,000 before considering the following information:
• Goods shipped FOB shipping point on December 20, 2020, from a

vendor to Master were lost in transit. The invoice cost of 20,000 was
not recorded by Master. On January 6, 2021, Master filed a 20,000
claim against the common carrier.
• On December 27, 2020, a vendor authorized Master to return, for full
credit, goods shipped and billed at 35,000 on December 2, 2020. The
returned goods were shipped by Master on December 27, 2020. A
35,000 credit memo was received and recorded by Master on January
6, 2021.
What amount should Master report as accounts payable in its December 31, 2020, balance
sheet?
a. 1,120,000
b. 1,115,000
c. 1,085,000
d. 1,065,000
24
14. On January 1, 2020, Young Co. paid 500,000 for 20,000 shares of Montana Co.'s common
stock and classified these shares as trading securities. Young does not have the ability to
exercise significant influence over Montana. Montana declared and paid a dividend of .50
a share to its stockholders during 2020. Montana reported net income of 260,000 for the
year ended December 31, 2020. The fair value of Montana Co.'s stock at December 31,
2020, is 27 per share. What is the net asset amount (which includes both investments and
any related market adjustments) attributable to the investment in Montana that will be
included on Young's balance sheet at December 31, 2020?
a. 530,000
b. 540,000
c. 569,000
d. 579,000
15. The August 31 bank statement of Kelvin Inc. showed a balance of 113,000. Deducted in
arriving at this amount was a customer's NSF check for 2,400 that had been returned.
Kelvin had received no prior notice concerning this check. In addition to the bank
statement, other records showed there were deposits in transit totaling 17,200 and that
outstanding checks totaled 10,800. What is the cash balance per books at August 31 (prior
to adjustments)?
a. 121,800
b. 119,400
c. 117,000
d. 115,400
25
16. Tyler Company began operations in 2019. The company's trading securities portfolio, which
did not change in composition during 2020, is as follows:
December 31, 2020

Unrealized
Cost Market Gain (Loss)
Archer, Inc. 100,000 100,000 0
Kelly Company 200,000 150,000 (50,000)
Pelt Company 250,000 260,000 10,000
550,000 510,000 (40,000)
December 31, 2019

Unrealized
Cost Market Gain (Loss)
Archer, Inc. 100,000 135,000 35,000
Kelly Company 200,000 210,000 10,000
Pelt Company 250,000 180,000 (70,000)
550,000 525,000 (25,000)
Ignoring income taxes, what amount should be reported as an unrealized loss on trading
securities in Tyler's 2020 income statement?
a. 0
b. 15,000
c. 25,000
d. 40,000
17. The Ashby Sporting Goods Store uses the retail inventory method. Information relating to
the computation of the inventory at December 31, 2020, is as follows:
Cost Retail
Inventory at January 1, 2020 .............. 32,000 80,000
Sales ..................................... 580,000
Purchases ................................. 270,000 600,000
Freight-in ................................ 7,600
Net markups ............................... 40,000
Net markdowns ............................. 20,000
What is the ending inventory at cost at December 31, 2020, using the retail inventory
method and the lower-of-cost-or-market estimation?
a. 43,000
b. 45,000
c. 51,600
d. 54,000
26
18. Richards Company uses the allowance method of accounting for bad debts. The following
summary schedule was prepared from an aging of accounts receivable outstanding on
December 31 of the current year.
No. of Days Probability

Outstanding Amount of Collection
0-30 days 500,000 .98
31-60 days 200,000 .90
Over 60 days 100,000 .80
The following additional information is available for the current year:
Net credit sales for the year .................. 4,000,000

Allowance for Doubtful Accounts:
Balance, January 1 ............................. 45,000 (cr)
Balance before adjustment, December 31 ......... 2,000 (dr)
If Richards bases its estimate of bad debts on the aging of accounts receivable, doubtful
accounts expense for the current year ending December 31 is
a. 47,000.
b. 48,000.
c. 50,000.
d. 52,000.
19. On October 1, Dennis Company purchased 200,000 face value 12% bonds for 98 plus
accrued interest and brokerage fees and classified them as held-to-maturity securities.
Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction
were 700. At what amount should this acquisition of bonds be recorded?
a. 196,000
b. 196,700
c. 202,000
d. 202,700
20. On January 2, 2019, Reynolds Corporation bought 15 percent of Scorpio Corporation's

capital stock for 60,000 and classified it as available-for-sale securities. Scorpio's net
incomes for the years ended December 31, 2019 and 2020, were 20,000 and 100,000,
respectively. During 2020, Scorpio declared a dividend of 140,000. No dividends were
declared in 2019. On December 31, 2020, the fair value of the Scorpio stock owned by
Reynolds had increased to 90,000. How much should Reynolds show on its 2020 income
statement as income from this investment?
a. 3,150
b. 15,000
c. 21,000
27
d. 51,000
21. The Cartwright Corporation entered into a purchase contract during 2019 to purchase
merchandise inventory in the future for resale. The contract contained no provisions for
cancellation or revision. The total amount payable under the contract was 900,000. At the
end of 2020, the estimated replacement cost of the goods yet to be purchased under the
contract was 825,000. Payment on the contract is due in 2021, and the replacement cost
of 825,000 likely will not increase. As a result of these circumstances, what entry, if any,
should Cartwright Corporation make at the end of 2020 relating to this contract?
a. Estimated loss on purchase contract ........... 75,000
Estimated liability on purchase contract .... 75,000
b. Estimated inventory ........................... 825,000
Estimated purchase contract ................. 825,000
c. Estimated inventory ........................... 825,000
Estimated loss on purchase contract ........... 75,000
Estimated liability on purchase contract ... 900,000
d. No entry should be made until 2021, when the goods are received.
22. In January 2020, Henry Corporation acquired 20 percent of the outstanding common stock
of Davis Company for 1,120,000. This investment gave Henry the ability to exercise
significant influence over Davis. The book value of the acquired shares was 840,000. The
excess of cost over book value was attributed to an identifiable intangible asset that was
undervalued on Davis' balance sheet and that had a remaining useful life of ten years. For
the year ended December 31, 2020, Davis reported net income of 252,000 and paid cash
dividends of 56,000 on its common stock. What is the proper carrying value of Henry's
investment in Davis at December 31, 2020?
a. 1,080,800
b. 1,092,000
c. 1,131,200
d. 1,181,600
23. On January 2, 2020, Adler Co. acquired 2,000 shares of Boxworth Co. common stock for
8,000 and classified these shares as available-for-sale securities. During 2020, Adler
received 6,000 of cash dividends. Adler's share of Boxworth's 2020 earnings (net income)
was 5,000. The fair value of Boxworth's stock on December 31, 2020, was 7 per share.
Adler should report what amount in 2020 related to Boxworth Co.?
a. Revenue of 6,000
b. Revenue of 12,000
c. A 1,000 decrease in the investment account
d. A 1,000 increase in the investment account
28
24. In preparing the bank reconciliation of Crews Company for the month of July, the following
information is available:
Balance per bank statement, 7/31 ..................... 54,075

Deposits in transit, 7/31 ............................ 9,375
Outstanding checks, 7/31 ............................. 8,625
Deposit erroneously recorded by bank to Crews 375
account, 7/18 ......................................
Bank service charges for July ........................ 75
What is the correct cash balance at July 31?

a. 52,875
b. 54,375
c. 54,450
d. 54,825
25. Lakepoint Company recently accepted a donation of land with a fair value of 200,000 from
the city of Dale in return for a promise to build a plant in Dale.
The entry that Lakepoint should use to record this land is:
a. Land.............................. 200,000
Gain from Receipt of Donated Land 200,000
b. Land.............................. 200,000
Gain from Receipt of Donated Land 200,000
c. Land.............................. 200,000
Unrealized Gain from Receipt of
Donated Land.................. 200,000
d. Land.............................. 200,000
Retained Earnings................ 200,000
26. On January 1, 2020, Mets Inc. purchased 30 percent of the outstanding common stock of
Pirates Corporation for 516,000 cash. Mets is accounting for this investment using the
equity method. On the date of acquisition, the fair value of Pirates' net assets was
1,240,000. Mets has determined that the excess of the cost of the investment over its share
of Pirates' net assets is attributable to goodwill, which will be amortized over the maximum
allowable period. Pirates' net income for the year ended December 31, 2020, was 360,000.
During 2020, Pirates declared and paid cash dividends of 40,000. There were no other
transactions between the two companies. On December 31, 2020, the investment in
Pirates should be recorded as
a. 392,400.
b. 608,400.
c. 636,000.
d. 624,000.
29
27. Venus Inc. carries Product A in inventory on December 31 at its unit cost of 22.50.
Because of a sharp decline in demand for the product, the selling price is reduced to 24.00
per unit. Venus' normal profit margin on Product A is 4.80, disposal costs are 3.00 per
unit, and the replacement cost is 15.90. Under the rule of lower of cost or market, Venus'
December 31 inventory of Product A should be valued at a unit cost of
a. 15.90.
b. 16.20.
c. 21.00.
d. 22.50.
Problem
28. Two independent companies, Nance Co. and Olso Co., are in the home building business.
Each owns a tract of land held for development, but each would prefer to build on the
other's land. They agree to exchange their land. An appraiser was hired, and from her
report and the companies' records, the following information was obtained:
Nance's Land Oslo's Land
Cost and book value $ 96,000 $ 60,000
Fair value based upon appraisal 120,000 105,000
The exchange was made, and based on the difference in appraised fair values, Oslo paid
$20,000 to Nance.
1. For financial reporting purposes, Nance should recognize a pre-tax gain on this
exchange of
a. $0.
b. $3,000.
c. $15,000.
d. $24,000.
2. The new land should be recorded on Nance's books at

a. $84,000.
b. $96,000.
c. $105,000.
d. $100,000.
3. The new land should be recorded on Oslo's books at

a. $60,000.
b. $75,000.
c. $125,000.
d. $120,000.
29. At the beginning of the current year, Uptown Company acquired an intangible asset for
P3,000,000. The intangible asset has an estimated useful life of 10 years.
30
At the current, the intangible asset was evaluated to determine whether it was impaired. On
same date, the fair value less cost of disposal of intangible asset is P2,000,000.
The asset is expected to generate future cash flows of P300,000 annually for the remaining
9 years.
The appropriate discount rate is 5%. The present value of an ordinary annuity of 1 at 5% for
nine periods is 7.11.
What is the impairment loss to be recognized for the current year?

a. 700,000
b. 567,000
c. 867,000
d. 0
30. On January 1, 2018, Byword Company signed an eight-year lease for office space. The
entity has an option to renew the lease for an additional 8-year period on or before January
1, 2021.
During January 2020, 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, 2020, the entity intended to exercise the renewal option. The entity has
taken a full year depreciation on this leasehold improvement for 2020.
On December 31, 2020, what is the carrying amount of the leasehold improvement?
a. 486,000
b. 504,000
c. 510,000
d. 513,000
31. 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.
How should the purchase be accounted for?

a. Retained earnings should be credited for P1,000,000.
b. Gain on bargain purchase should be credited for P1,000,000.
c. The current assets should be reported at P3,000,000 and the noncurrent assets at
P5,000,000.
d. Negative goodwill should be credited for P1,000,000.
31
32. Gray Company was granted a patent on January 1, 2017 and appropriately capitalized
P450,000 of related costs. The entity was amortizing the patent over the useful life of 15
years.
During 2020, the entity paid P150,000 in legal costs in successfully defending an attempted
infringement of the patent.
After the legal action was completed, the entity sold the patent to the plaintiff for P750,000.
The policy is to take no amortization in the year of disposal
What amount should be reported as gain from sale of patent in 2020?
a.150,000
b.240,000
c.270,000
d.390,000
33. At the beginning of the current year, Seashore Company signed as agreement to operate
as a franchisee for an initial franchise fee of P6,000,000. On the same date, the entity paid
P2,000,000 and agreed to pay the balance if four equal annual payments of 1,000,000 at
every year end. The down payment is not refundable and no future services are required of
the franchiser. The entity can borrow 14% for a loan of this type. Present Value of 1 at 14%
for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present Value of an ordinary annuity of 1 at 14% for 4 periods 2.91
What is the initial measurement of the franchise?

a.6,760,000
b.6,000,000
c.4,910,000
d.4,360,000
34. On January 1, 2019, Daredevil Company purchased a patent with a cost of P5,800,000 and
useful life of 5 years. The entity used straight line amortization. On December 31, 2020, the
entity determined that impairment indicators are present.
The fair value less cost of disposal of the patent is estimated to be P2,700,000. The value
in use is estimated to be P2,825,000. The remaining useful life of the patent is estimated to
be 2 years.
What should be reported as impairment loss for 2020?

a. 655,000
b. 780,000
32
c. 275,000
d. 0
35. Bronze Company operates a production line which is treated as a cash generating unit. At
year end, the carrying amounts of the noncurrent assets of this cash generating unit are:
Intangible- goodwill 1, 100,000

Tangibles- plant and machinery 2, 200,000
At year end, the recoverable amount of the production line is estimated at

P2, 700,000.
What are the revised carrying amounts of the intangible and tangible noncurrent asset,
respectively?
a. 500,000 and 2, 200,000
b. 900,000 and 1,800,000
c. 1,100,000 and 1,600,000
d. 800,000 and 1,900,000
36. Safehouse Company was granted a patent on a product on January 1, 2010 with 20-year
useful life. To protect the patent, the entity purchased on January 1, 2020 for 4.5M a patent
on competiting product which was orig issued on January , 2015
Because of the unique plant, the entity does not feel the competing patent can be used in
producing a product.
What is the amortization of the competing patent for 2020?

a. 450,000
b. 225,000
c. 300,000
d. 0
e.
37. Grey Company was granted a patent on January 1, 2017 and appropriately capitalized
P450,000 of related costs. The entity was amortizing the patent over the useful life of 15
years.
During 2020, the entity paid P150,000 in legal costs in successfully defending an attempted
infringement of the patent.
After the legal action was completed, the entity sold the patent to the plaintiff for P750,000.
The policy is to take no amortization in the year of disposal.
What amount should be reported as gain from sale of patent in 2020?

a. 150,000
b. 240,000
c. 270,000
33
d. 390,000
38. Robust Company purchased an investment property on January 1, 2018 for a cost of P2,
200,000.
The property had a useful life of 40 years and on December 31, 2020 had a fair value of
P3, 000,000.
On December 31, 2020 the property was sold for net proceeds of P2, 900,000. The entity
used the cost model to account for the investment property.
What is the gain or loss to be recognized for 2020 regarding the disposal of the investment
property?
a. 865,000 gain
b. 810,000 gain
c. 100,000 loss
d. 700,000 gain
39. Considerate Company has a single investment property which had an original cost of
P5,800,000 on January 1, 2018
On December 31, 2020 the fair value was P6,000,000 and on December 31, 2021 the fair
value was P5,900,000.
On acquisition, the property had a useful life of 40 years.
What is the expense recognized in profit or loss for 2021 under the fair value model and
cost model?
Fair value model Cost model

a. 147,500 145,000
b. 100,000 145,000
c. 145,000 100,000
d. 100,000 147,500
40. Paradise Company’s accounting policy with respect to investment properties is to measure
them at fair value at the end of each reporting period. One investment property was
measured at P8,000,000 on December 31,2020.
The property had been acquired on January 1,2020 for a total of P7,600,000 made up of
P6,900,000 paid to the vendor, P300,000 paid to the local authority as a property transfer
tax and P400,000 paid to professional advisers. The useful life of the property is 40 years.
What is the gain to be recognized for 2020 in respect of investment property?
a. 400,000
b. 700,000
34
c. 800,000
d. 590,000
41. The construction of the condominium was completed snd the property was placed in
service on January 1,2020.
The cost of the construction was 40,000,000. The useful life of the condominium is 20
years and the residual value is 4,000,000.
An independent valuation expert provided the following fair value at each subsequent year-
end:
12/31/2020 50,000,000
12/31/2021 43,000,000
12/31/2022 55,000,000
Q1) Under the cost model, what amount should be reported as depreciation of investment
property 2020?
a. 1,800,000
b. 2,000,000
c. 2,200,000
d. 0
Q2) Under the fair value model, what amount should be recognized as gain from change in
fair value in 2020?
a. 7,000,000
b. 10,000,000
c. 12,000,000
d. 0
Q3) Under the fair value model, what amount should be recognized as gain from change in
fair value in 2022?
a. 7,000,000
b. 10,000,000
c. 12,000,000
d. 0
42. During the current year, Javier Company exchanged an old packing machine, which cost
900,000 and was 20% depreciated, for another used machine and paid a cash difference of
125,000.
Thr fair value of the old packing machine was determined to be 500,000.
Q1) What is the cost of the machine acquired in the exchange?

a. 860,000
35
b. 700,000
c. 760,000
d. 375,000*
Q2) What is the gain(loss) on exchange?

a. 320,000 gain
b. 320,000 loss
c. 540,000 gain
d. 540,000 loss
43. Company A is a financial service entity that is involved in real estate development.
Company A has purchased land in Quezon City through the exercise of a purchase option
that had been acquired some years ago. The purchase price was P 20,000,000 and the
land’s fair value as determined by an independent value is P 46,400,000 on December 31,
2020, Company A should report the property as
a. Investment property at its original cost of P 20,000,000
b. Investment property at its fair value of P 46,400,000
c. Inventory at its original cost of P 20,000,000
d. Inventory at its fair value of P 46,400,000
44. Clay Company started construction of a new office building on January 1, year 4, and
moved into the finished building on July 1, year 5. Of the building’s $2,500,000 total cost,
$2,000,000 was incurred in year 4 evenly throughout the year. Clay’s incremental
borrowing rate was 12% throughout year 4, and the total amount of interest incurred by
Clay during year 4 was $102,000. What amount should Clay report as capitalized interest
at December 31, year 4?
a. $102,000
b. $120,000
c. $150,000
d. $240,000
45. On March 31, year 4, Winn Company traded in an old machine having a carrying amount of
$16,800, and paid a cash difference of $6,000 for a new machine having a total cash price
of $20,500. The cash flows from the new machine are expected to be significantly different
than the cash flows from the old machine. On March 31, year 4, what amount of loss
should Winn recognize on this exchange?
a. $0
b. $2,300
c. $3,700
d. $6,000
46. Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of
$20,000 for a truck and $2,500 cash. The cash flows from the new truck are not expected
to be significantly different from the cash flows of the old truck. The fair value of the truck
received was $17,500. At what amount should Amble record the truck received in the
exchange?
36
a. $ 7,000
b. $ 9,500
c. $10,500
d. $17,500
47. On January 2, year 4, Lem Corp. bought machinery under a contract that required a down
payment of $10,000, plus twenty-four monthly payments of $5,000 each,
for total cash payments of $130,000. The cash equivalent price of the machinery was
$110,000. The machinery has an estimated useful life of ten years and estimated salvage
value of $5,000. Lem uses straight-line depreciation. In its year 4 income statement, what
amount should Lem report as depreciation for this machinery?
a. $10,500
b. $11,000
c. $12,500
d. $13,000
48. Rago Company takes a full year’s depreciation expense in the year of an asset’s
acquisition, and no depreciation expense in the year of disposition. Data relating to one of
Rago’s depreciable assets at December 31, year 5, are as follows:
Acquisition year Year 2 Cost $110,000 Residual value 20,000 Accumulated depreciation
72,000 Estimated useful life 5 years Using the same depreciation method as used in year
2, year 3, and year 4, how much depreciation expense should Rago record in year 5 for this
asset?
a. $12,000
b. $18,000
c. $22,000
d. $24,000
49. Dahle Corporation has equipment with a carrying value of $450,000 on December 31, year
4. The following information was available on December 31, year 4:
Expected net cash flows (undiscounted) $420,000 Expected net cash flows discounted at
7% $400,000 Fair value, using the assets with other assets $415,000 Fair value, assuming
the assets are sold stand-alone $428,000 What is the impairment loss that Dahle must
report in its year 4 income statement for this equipment?
a. $50,000
b. $35,000
c. $30,000
d. $22,000
50. Marjorie, Inc. acquired a machine for $320,000 on August 31, year 1. The machine has a
five-year life, a $50,000 salvage value, and was depreciated using the straight-line method.
On May 31, year 4, a test for recoverability reveals that the expected net future
undiscounted cash inflows related to the continued use and eventual disposal of the
machine total $150,000. The machine’s actual fair value on May 31, year 4, is $135,000,
with no salvage value. Assuming a loss on impairment is recognized May 31, year 4, what
is Marjorie’s depreciation expense for June year 4?
37
a. $6,352
b. $5,000
c. $4,500
d. $3,148
51. In January year 4, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law
to restore the land to its original condition at an estimated cost of $220,000. The present
value of the estimated restoration costs is $180,000. Vorst believes it will be able to sell the
property afterwards for $300,000. During year 4, Vorst incurred $360,000 of development
costs preparing the mine for production and removed and sold 60,000 tons of ore. In its
year 4 income statement, what amount should Vorst report as depletion?
a. $135,000
b. $144,000
c. $150,000
d. $159,000
52. Leaf Co. purchased from Oak Co. a $20,000, 8%, five-year note that required five equal
annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf.
At the date of purchase, Leaf recorded the note at its present value of $19,485. Leaf does
not elect the fair value option for reporting its financial liabilities. What should be the total
interest revenue earned by Leaf over the life of this note?
a. $5,045
b. $5,560
c. $8,000
d. $9,000
53. Duff, Inc. borrowed from Martin Bank under a ten-year loan in the amount of $150,000 with
a stated interest rate of 6%. Payments are due monthly, and are computed to be $1,665.
Martin Bank incurs $4,000 of direct loan origination costs and $2,000 of indirect loan
origination costs. In addition, Martin Bank charges Duff, Inc. a four-point nonrefundable
loan origination fee.
Martin Bank, the lender, has a carrying amount of
a. $144,000
b. $148,000
c. $150,000
d. $152,000
54. Martin Bank grants a ten-year loan to Duff, Inc. in the amount of $150,000 with a stated
interest rate of 6%. Payments are due monthly, and are computed to be $1,665. Martin
Bank incurs $4,000 of direct loan origination costs and $2,000 of indirect loan origination
costs. In addition, Martin Bank charges Duff, Inc. a four-point nonrefundable loan
origination fee.
Duff, the borrower, has a carrying amount of
a. $144,000
b. $148,000
38
c. $150,000
d. $152,000
55. On December 1, year 1, Money Co. gave Home Co. a $200,000, 11% loan. Money paid
proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee.
Principal and interest are due in sixty monthly installments of $4,310, beginning January 1,
year 2. The repayments yield an effective interest rate of 11% at a present value of
$200,000 and 12.4% at a present value of $194,000. What amount of income from this loan
should Money report in its year 1 income statement?
a. $0
b. $1,833
c. $2,005
d. $7,833
39
ASSET
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
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22.
23.
24.
25.
26.
27.
PROBLEM
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
41
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
42

BONDS PAYABLE
Multiple Choice
1. On January 1, 2018, Nati Corporation issued 5,000 of its 5-year, P1,000 face value,
11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is
payable each December 31. Nati uses the effective interest method of amortization.
On December 31, 2019, the 3,000 bonds were extinguished early through acquisition in
the open market by Nati for P2,970,000 plus accrued interest.
Based on the above and the result of your audit, determine the following: (Round off
present value factors to four decimal places.)
1. The issue price of the bonds on January 1, 2018 is

a. P5,388,835 c. P5,282,135
b. P4,630,655 d. P5,000,000
2. The carrying amount of the bonds on December 31, 2018 is

a. P4,755,930 c. P5,323,830
b. P5,453,840 d. P5,000,000
3. The gain on early retirement of bonds on December 31, 2019 is

a. P116,442 c. P181,785
b. P266,811 d. P 0
2. On January 2, 2017, the Nati, Inc. issued P2,000,000 of 8% convertible bonds at par.
The bonds will mature on January 1, 2021 and interest is payable annually every
January 1. The bond contract entitles the bondholders to receive 6, P100 par value,
ordinary shares in exchange for each P1,000 bond. On the date of issue, the prevailing
market interest rate for similar debt without the conversion option is 10%.
On January 1, 2021, the holders of the bonds with total face value of P1,000,000
exercised their conversion privilege. On that date, the bonds were selling at 110 and
the ordinary share at P42.
Based on the above and the result of your audit, answer the following: (Round off
present value factors to 4 decimal places)
1. The proceeds from issuance of convertible bonds to be allocated to the liability

component is
a. P1,366,000 c. P1,873,184
b. P1,778,336 d. P2,000,000
2. The proceeds from issuance of convertible bonds to be allocated to the equity

component is
a. P634,000 c. P126,816
b. P221,664 d. P 0
3. The carrying amount of the bonds payable on December 31, 2017 is

a. P2,000,000 c. P1,389,400
b. P1,796,170 d. P1,900,502
4. The interest expense for the year 2018 is

43
a. P160,000 c. P138,940
b. P179,617 d. P190,050
5. The gain to be recognized on conversion of the bonds is

a. P126,816 c. P463,408
b. P400,000 d. P 0
3. Friendly Corporation issued P500,000, 6%, nonconvertible bonds with detachable stock
purchase warrants. Each P1,000 bond carried 20 detachable stock purchase warrants,
each of which called for one share of friendly common stock, par P50, at the specified
option price of P60 per share. The bonds sold at 106, and the detachable stock
purchase warrants were immediately quoted at P1 each on the market.
Questions:
1. The entry to record the issuance of the bonds is

a. Cash 500,000
Bonds payable 500,000
b. Cash 530,000
CS warrants outstanding 10,000
c. Cash 530,000
d. Cash 530,000
CS warrants outstanding 30,000
2. The entry to record the subsequent exercise of the 10,000 stock purchase warrants
is
a. Cash 600,000
Premium on BP 20,000
Additional paid-in capital 120,000
b. Cash 500,000
Common stock 500,000
c. Cash 600,000
d. Cash 600,000
CS warrants
outstn. 10,000
4. On December 31, 2019, Orland Company issued P4,000,000, 8% serial bonds, to be

repaid in the amount of P800,000 each year. Interest is payable annually on December
31. The bonds were issued to yield 10 % a year. Orland amortizes the bond discount
by the interest method.
How much is the proceeds from issuance of bonds?

a. 4,000,000 b. 3,805,600 c. 4,400,000 d. 2,982,000
In its December 31, 2020 statement of financial position, what amount should Orland
report as the carrying value of the bonds payable?
a. 3,005,600 b. 3,066,160 c. 2,982,000 d. 2,787,600
44
In its December 31, 2020 statement of profit and loss, what amount should Orland
report as interest expense on the bonds ?
a. 64,000 b. 256,000 c. 128,000 d. 380,560
5. On January 1, 2020, Ezekiel Company received P1,077,200 for P1,000,000 face

amount 12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually
every January 1 and July 1. The entity has elected the fair value option for measuring
the financial liability.
On December 31, 2020, the fair value of the bonds is determined to be P1, 064,600 due
to market and interest factors.
1. What is the carrying amount of the bonds payable on January 1, 2020?

a. 1,000,000
b. 1,077,000
c. 500,000
d. 538,600
2. What is the interest expense for 2020?

a. 120,000
b. 100,000
c. 107,000
d. 129,264
3. What is the gain or loss from change in fair value of the bonds for 2020?
a. 64,600
b. 64,600
c. 12,600
d. 13,200
4. What is the carrying amount of the bonds payable on December 31, 2020?
a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920
6. On December 1, 2018, the Lawrz Corporation issued five-year, non-convertible

P5,000,000 face value 12% bonds for P5,386,072, a price that yields 10%. Interest is
payable semi-annually on June 1 and December 1. On August 1, 2021, the Lawrz
Corporation retired P3,000,000 of the bonds at 105 plus interest. The Accounting period
for the Lawrz Corporation is the calendar year.
Q1. What is the carrying value of the bonds on December 31, 2019?
a. 5,306,515
b. 5,309,000
c. 5,309,010
d. 5,317,505
Q2. What is the carrying value of the bonds retired on August 1, 2021?
a. 3,125,172
b. 3,127,008
c. 3,129,355
d. 3,200,061
45
e. 3,122,038
Q3. What is the gain or loss on redemption of the bonds on August 1, 2021?
a. 24,828 loss
b. 24,848 loss
c. 24,828 gain
d. 24,848 gain
e. 27,962 loss
7. On December 31, 2019, Moses Company issued P5,000,000 face value, 5-year bonds
at 109. Each P1,000 bond was issued with 50 detachable stock warrants, each of
which entitled the bondholder to purchase one share of P5 par value common at P25.
Immediately after issuance, the market value of each warrant was P5. The stated
interest rate on the bonds is 11% payable annually every December 31. However, the
prevailing market rate of interest for similar bonds without warrants is 12%. The present
value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1
at 12% for 5 periods is 3.60. On December 31, 2019, what amount should Moses
record as discount or premium on bonds payable?
a. 170,000 discount b. 450,000 premium
c. 450,000 discount d. 800,000 premium
8. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2019. The bonds
have a four-year term with a stated rate of interest of 6 percent, and are issued at par
with a face value of 1,000 per bond (the total proceeds received from issuance of the
bonds are 1,000,000). Interest is payable annually at December 31. Each bond is
convertible into 250 ordinary shares with a par value of 1. The market rate of interest on
similar non-convertible debt is 9 percent. Assume that at the issuance date, 97,187 was
credited to Share Premium—Conversion Equity. The bonds were not converted at
maturity and Mae Jong pays off the convertible debt holders. What amount will Mae
Jong record as a gain or a loss on this transaction?
a. -0- b.97,187 c. 24,297 d. 250,000
9. On May 1, 2019, Marly Co. issued P500,000 of 7% bonds at 103, which are due on
April 30, 2027. Twenty detachable stock warrants entitling the holder to purchase for
P40 one share of Marly’s ordinary shares P15 par value, were attached to each P1,000
bond. The bonds without the warrants would sell at 96. On May 1, 2019, the fair value of
Marly’s shares was P35 per share and of the warrants was P2.
1. On May 1, 2019, the carrying amount of bonds payable is?

a. P515,000. b. P500,000. c. P480,000. d. P494,400.
2. On May 1, 2019, Marly should credit Share Premium–Share Warrants for

a. P20,600 b. P35,000 c. P20,000 d. P15,000
3. Assuming the warrants were exercise on May 1, 2020, how much is the increase
in contributed capital as a result of the exercise of warrants?
10. Lovely Corp. had P600,000 convertible 8% bonds outstanding at June 30, 2019. Each
P1,000 bond was convertible into 10 shares of Lovely's P50 par value ordinary share.
On July 1, 2020, the interest was paid to bondholders, and the bonds were converted
into ordinary share, which had a fair market value of P75 per share. The unamortized
premium on these bonds wasP12,000 at the date of conversion. Under the book value
method, this conversion increased the following elements of the stockholders' equity
section by
Ordinary share Share premium

a. P300,000 P312,000
b. P306,000 P306,000
c. P450,000 P162,000
46
d. P600,000 P 12,000
11. Feller Company issues 20,000,000 of 10-year, 9% bonds on March 1, 2018 at 97 plus
accrued interest. The bonds are dated January 1, 2018, and pay interest on June 30
and December 31.
What is the total cash received on the issue date?

a. 19,400,000 b. 20,450,000 c. 19,700,000
d.19,100,000
12. The 12% bonds payable of Nyman Co. had a carrying amount of 832,000 on
December 31, 2019. The bonds, which had a face value of 800,000, were issued at a
premium to yield 10%. Nyman uses the effective-interest method of amortization.
Interest is paid on June 30 and December 31. On June 30, 2020, several years before
their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on
retirement, ignoring taxes, is
a. 0. b. 6,400. c. 9,920. d. 32,000.
13. On November 1, 2019, Jerome Company issued P8,000,000 of its 10-year, 8% term
bonds dated October 1, 2019. The bonds were sold to yield 10% with total proceeds of
P7,000,000 plus accrued interest. Interest is paid every April 1 and October 1. What
should Jerome report for interest payable in its December 31, 2019 balance sheet?
a. 175,000 b. 160,000 c. 116,667 d. 106,667
14. On June 30, 2019, Jerome Company issued at 99, five thousand of its 8%, P1,000 face
value bonds. The bonds were issued through an underwriter to whom Jerome paid
bond issue cost of P425,000. On June 30, 2019, Jerome should report the bond liability
at
a. 4,525,000 b. 4,950,000 c. 5,000,000 d. 4,575,000
15. Pat Co. has 3,000,000 of 8% convertible bonds outstanding. Each 1,000 bond is
convertible into 30 no-par value common shares with a stated rate of 25. The bonds pay
interest on January 31 and July 31. On July 31, 2019, the holders of 900,000 bonds
exercised the conversion privilege. On that date, the market price of the bonds was 105,
the market price of the common shares was 36, the carrying value of the common
shares was 18, and the contributed capital: bond conversion rights was 450,000. The
total unamortized bond premium at the date of conversion was 210,000.
Using the book value method, what amount will Pat record as a result of this
conversion?
a. A loss of 9,000 b. An extraordinary loss of 9,000
c. A gain of 18,000 d. No gain or loss
16. A company issued 500,000, 12% (interest payable annually on May 1), 5-year bonds.
At year end, the company had the following account balances:
Bonds payable 500,000 Cr
Discount on bonds 9,500 Dr
Interest payable 10,000 Cr
Conversion rights on convertible bonds 36,000 Cr
Interest expense 10,300 Dr
What amount of proceeds from the bond issue would be shown under the financing
activities section of the year-end cash flow statement?
a. 490,200 b. 526,200 c. 526,500 d. 545,800
17. During year 1, Lake Co. issued 3,000 of its 9%, 1,000 face value bonds at 101 1/2. In
connection with the sale of these bonds, Lake paid the following expenses:
47
Promotion costs 20,000

Engraving and printing 25,000
Underwriters’ commissions 200,000
What amount should Lake record as bond issue costs to be amortized over the term of
the bonds?
a. 0 b. 220,000 c. 225,000 d. 245,000
18. Grim Corporation reports under IFRS. Grim issued 2,000 1,000 convertible bonds at
par, with an annual interest rate of 6% when the market was 8%. The bonds are due in
5 years and each 1,000 bond is convertible into 3 shares of common stock. At what
amount would Grim record the liability component of the bond?
a. 479,125 b. 1,840,285 c. 2,000,000 d. 2,006,000
19. On January 1, 2019, Southern Corporation received 107,720 for a 100,000 face
amount, 12% bond, a price that yields 10%. The bonds pay interest semiannually.
Southern elects the fair value option for valuing its financial liabilities. On December 31,
2019, the fair value of the bond is determined to be 106,460. Southern recognized
interest expense of 12,000 in its 2019 income statement. What was the gain or loss
recognized on the 2019 income statement to report this bond at fair value?
a. 1,260 gain b. 6,460 gain c. 12,000 loss d. 13,260 loss
20. Bonds with a face value of 1,000,000 were retired prior to maturity, when their book
value was 987,000. The amount (excluding interest) paid to retire the bonds was
950,000. What would the entry to record the retirement include?
a) Dr. bonds payable 987,000 b) Cr. cash 1,000,000
c) Cr. discount 13,000 d) Dr. loss on bond retirement 37,000
21. On January 2, Vole Co. issued bonds with a face value of 480,000 at a discount to yield
10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of
14,400. After Vole recorded amortization of the bond discount of 3,600, the bonds had a
carrying amount of 363,600. What amount did Vole receive upon issuing the bonds?
a. 360,000 b. 367,200 c. 476,400 d. 480,000
22. On December 31, 2019, MS Company issued 10-year convertible bonds with a face
value of
2,000,000 and a stated rate of 10%, paid semi-annually. The bonds are convertible at
the investor’s option. The bonds were issued to provide an effective yield of 9% for
proceeds of 2,130,080. If these bonds did not have a conversion feature, the company
would have issued the bonds for 1,880,496 to yield 11%.
Which of the following is true with respect to the reporting of this financial instrument?
a) The liability portion of this financial instrument would be 2,130,080 at December 31,
2019
b) The liability portion of this financial instrument would be 2,000,000 at December 31,
2019
c) The interest expense for the first half of 2020 would be 95,854 .
d) The interest expense for the first half of 2020 would be 103,427.
48
23. The 10% bonds payable of Nixon Company had a net carrying amount of 570,000 on
December 31, 2019. The bonds, which had a face value of 600,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2020, several years before their maturity, Nixon retired the bonds at 102. The
interest payment on July 1, 2020 was made as scheduled. What is the loss that Nixon
should record on the early retirement of the bonds on July 2, 2020? Ignore taxes.
a. 12,000. b. 37,800. c. 33,600. d. 42,000.
24. On January 2, year 1, West Co. issued 9% bonds in the amount of 500,000, which
mature on January 2, year 11. The bonds were issued for 469,500 to yield 10%. Interest
is payable annually on December 31. West uses the interest method of amortizing bond
discount and does not elect the fair value option for reporting financial liabilities. In its
June 30, year 1 balance sheet, what amount should West report as bonds payable?
a. 469,500 b. 470,475 c. 471,025 d. 500,000
25. Webb Co. has outstanding a 7%, ten-year 100,000 face-value bond. The bond was
originally sold to yield 6% annual interest. Webb uses the effective interest rate method
to amortize bond premium, and does not elect the fair value option for reporting financial
liabilities. On June 30, year 1, the carrying amount of the outstanding bond was
105,000. What amount of unamortized premium on bond should Webb report in its June
30, year 2 balance sheet?
a. 1,050 b. 3,950 c. 4,300 d. 4,500
49
P1/AP – REVIEW
Cash to Accrual & Single Entry
Multiple Choice
1. During 2020 Jerome Company, a service organization, had P200,000 in cash sales and
P3,000,000 in credit sales. The accounts receivable balances were P400,000 and
P485,000 at December 31, 2019 and 2020, respectively.
If Jerome desires to prepare a cash basis income statement, how much should be
reported as sales for 2020 on a cash basis?
a. 3,285,000
b. 3,200,000
c. 3,115,000
d. 2,915,000
2. Jerome Company, which began operations on January 1, 2019, has elected to use cash
basis accounting for tax purposes and accrual basis accounting for its financial
statements. Jerome reported sales of P1,750,000 and P800,000 in its tax returns for the
years ended December 31, 2020 and 2019, respectively. Jerome reported accounts
receivable of P300,000 and P500,000 in its balance sheets as of December 31, 2020
and 2019, respectively.
What amount should Jerome report as sales in its income statement for the year ended
December 31, 2020?
a. 1,450,000
b. 1,550,000
c. 1,950,000
d. 2,050,000
3. John Paul, a consultant, keeps his accounting records on a cash basis. During 2020,
John Paul collected P2,000,000 in fees from clients. At December 31, 2019, John Paul
had accounts receivable of P400,000. At December 31, 2020, John Paul had accounts
receivable of P600,000 and unearned fees of P50,000.
On an accrual basis, what was John Paul’s service revenue for 2020?
a. 1,750,000
b. 1,800,000
c. 2,150,000
d. 2,250,000
4. John Paul Company borrows money under various loan agreements involving notes
discounted and notes requiring interest payments at maturity. During the year ended
December 31, 2020, John Paul paid interest totaling P100,000. John Paul’s December
31 balance sheets included the following information:
2019 2020
Prepaid interest 23,500 18,000
Interest payable 45,000 53,500
How much interest expense should John Paul report for 2020?
a. 86,000
b. 97,000
c. 103,000
d. 114,000
50
5. John Paul Company acquires patent right from other enterprises and pays advance
royalties in some cases, and in others, royalties are paid within 90 days after year end.
The following data are included in John Paul’s December 31 balance sheet:
2019 2020
Prepaid royalties 550,000 450,000
Royalties payable 800,000 750,000
During 2020, John Paul remitted royalties of P3,000,000.
In its income statement for the year ended December 31, 2020, John Paul should report
royalty expense of
a. 2,950,000
b. 3,050,000
c. 3,100,000
d. 3,300,000
6. Jostin Company owns an office building and leases the offices under a variety of rental
agreements involving rent paid in advance monthly or annually. Not all tenants make
timely payments of their rent. Jostin’s balance sheet contained the following data:
2019 2020
Rentals receivable 960,000 1,240,000
Unearned rentals 3,200,000 2,400,000
During 2020, Jostin received P8,000,000 cash from tenants.
What amount of rental revenue should Jostin record for 2020?
a. 9,080,000
b. 8,520,000
c. 7,480,000
d. 6,920,000
7. Jostin Company reported rental revenue of P2,210,000 in its cash basis income tax
return for the year ended November 30, 2020. Additional information is as follows:
Rent receivable- November 30, 2020 1,060,000
Rent receivable-November 30, 2019 800,000
Uncollectible rent written off during the fiscal year 30,000
Under the accrual basis, Jostin should report rental revenue of
a. 1,920,000
b. 1,980,000
c. 2,440,000
d. 2,500,000
8. Jostin Company kept its records on a cash basis. At the end of 2020, the accountant
prepared the following cash basis income statement.
Revenue 1,910,000
Expenses 809,000
Net income 1,101,000
In preparing the income statement, the following amounts of accrued, prepaid
and unearned items were ignored at the end of 2019 and 2020:
2019 2020
Accrued revenue 91,000 73,000
Unearned revenue 66,000 108,000
Accrued expenses 49,000 65,000
Prepaid expenses 46,000 56,000
The net income on the accrual basis for 2020 should be

a. 1,035,000
b. 1,051,000
51
c. 1,201,000
d. 1,135,000
9. The income statement of Arlene Corporation for 2020 included the following items:
Interest income P2,101,000
Salaries expense 1,650,000
Insurance expense 277,200
The following balances have been excerpted from Arlene Corporation's statements of
financial position:
12/31/2019 12/31/2020
Accrued interest receivable P165,000 P200,200
Accrued salaries payable 92,400 195,800
Prepaid insurance 33,000 24,200
Based on the above and the result of your audit, determine the following:
1. The cash received for interest during 2020 was
a. P1,900,800 c. P2,065,800
b. P2,101,000 d. P2,136,200
2. The cash paid for salaries during 2020 was
a. P1,753,400 c. P1,546,600
b. P1,557,600 d. P1,845,800
3. The cash paid for insurance premiums during 2020 was
a. P253,000 c. P244,200
b. P286,000 d. P268,400
10. Ana & Associates maintains its records on the cash basis. You have been engaged to
convert its cash basis income statement to the accrual basis. The cash basis income
statement, along with additional information, follows:
Ana & Associates
Income Statement (Cash Basis)
For the Year Ended December 31, 2020
Cash receipts from P2,800,000
customers
Cash payments:
Wages P1,200,00
0
Taxes 520,000
Insurance 320,000
Interest 200,000 2,240,000
Net profit P 560,000
Additional information:
12/31/2019 12/31/2020
Accounts receivable P240,000 P400,000
Wages payable 160,000 120,000
Taxes payable 152,000 112,000
Prepaid insurance 32,000 64,000
Accumulated depreciation 600,000 760,000
No plant assets were sold during 2020.
How much is the profit under the accrual basis of accounting?

a. P880,000 c. P720,000
b. P816,000 d. P656,000
11. We were given the following information which were obtained from the single-entry
records of Jeff:
52
January 1 June 30
Interest receivable P 12,000 P
9,600
Accounts receivable 540,000 1,056,000
Notes receivable 180,000 144,000
Merchandise inventory 456,000 120,000
Store and office equipment (net) 390,000 360,000
Prepaid operating expenses 30,000 26,400
Accounts payable 420,000 300,000
Notes payable 120,000 144,000
Accrued operating expenses 32,400 60,000
An analysis of the cashbook shows the following:
Balance, January 1 P180,000

Receipts:
Interest income P 24,000
Accounts receivable 432,000
Notes receivable (trade) 180,000
Investment by Arthur 72,000 708,000
888,000
Disbursements:
Interest expense P 18,000
Accounts payable 624,000
Notes payable (trade) 96,000
Operating expenses 204,000 942,000
Balance, June 30 – bank overdraft (P
54,000)
Based on the above and the result of your audit, determine the following for the six
months ended June 30, 2019:
1. Sales
a. P948,000 c. P1,092,000
b. P132,000 d. P1,164,000
2. Purchases
a. P624,000 c. P816,000
b. P576,000 d. P504,000
3. Operating expenses, excluding depreciation

a. P172,800 c. P228,000
b. P231,600 d. P235,200
4. Net loss
a. P 4,800 c. P 152,400
b. P132,000 d. P1,221,600
12. On January 1, 2019, the statement of financial position of Shawn Company showed
total assets of P5,000,000, total liabilities of P2,000,000 and contributed capital of
P2,000,000. During the current year, the corporation issued share capital of P500,000
par value at a premium of P300,000. Dividend of P250,000 was paid on December 31,
2019. The statement of financial position on December 31, 2019 showed total assets of
P7,500,000 and total liabilities of P3,200,000. What was the net income for the current
year?
a. 1,750,000
53
b. 1,000,000
c. 750,000
d. 500,000
13.The following changes in Steven Company’s account balances occurred during the current
year:
Increase
Assets 8,900,000
Liabilities 2,700,000
Share capital 6,000,000
Share premium 600,000
Except for a P1,300,000 dividend payment and the year’s earnings, there were no
changes in retained earnings for the year. What was Steven’s net income for the
current year?
a. 400,000
b. 900,000
c. 1,300,000
d. 1,700,000
14. An analysis of the records of Steven Company disclosed changes in account balances
for 2020 and the supplementary data listed below.
Cash 480,000 decrease

Accounts receivable 300,000 increase
Merchandise inventory 3,100,000 increase
Accounts payable 420,000 increase
During the year, Steven borrowed P4,000,000 in notes from the bank and paid
off notes of P3,000,000 and interest of P240,000. Interest of P100,000 is
accrued on December 31, 2020. There was no interest payable at the end of
2019. In 2020, Steven transferred certain trading securities to the business and
these were sold for P1,500,000 to finance purchase of merchandise. Steven
made weekly withdrawals in 2020 of P10,000.
What was the net income for 2020?

a. 1,520,000 b. 1,920,000 c. 1,400,000 d. 420,000
15. Presented below are changes in all the account balances of Jeff Company for the
current year, except for retained earnings.
Increase
(Decrease)
Cash 790,000
Accounts receivable, net 240,000
Inventory 1,270,000
Investments (470,000)
Accounts payable (380,000)
Share capital 1,250,000
There were no entries in the retained earnings account except for net income and a
dividend declaration of P190,000 which was paid in the current year. What was the net
income for the current year?
a. 1,200,000 b. 1,190,000 c. 200,000 d. 10,000
16. Presented below are changes in the accounts of Jeff Company for 2020.
54
Increase
(Decrease
Cash 1,500,000
Accounts receivable (net) 3,500,000
Inventory 3,900,000
Investments (1,000,000)
Equipment 3,000,000
Accounts payable (800,000)
Bonds payable 2,000,000
During 2020, Jeff sold 100,000 shares of its P20 par stock for P30 per share and
received cash in full. Dividend of P4,500,000 was paid in cash during the year.
Jeff borrowed P4,000,000 from the bank and made interest payment of P600,000.
Jeff had no other loan payable. Interest of P400,000 was payable at December
31, 2020. Interest payable at December 31, 2019 was P100,000. Equipment of
P2,000,000 was donated by a shareholder during the year.
What was the net income for the year 2020?

a. 9,200,000 b. 4,800,000 c. 4,900,000 d. 4,300,000
17. Following data are selected information for Jeff Company for the current year:
Cash balance, January 1 130,000

Accounts receivable, January 1 190,000
Collections from customers 2,100,000
Shareholders’ equity, January 1 380,000
Total assets, January 1 750,000
Total assets, December 31 880,000
Cash balance, December 31 160,000
Accounts receivable, December 31 360,000
Total liabilities, December 31 390,000
The net income for the current year is

a. 490,000 b. 150,000 c. 110,000 d. 70,000
55

CURRENT LIABILITIES
Multiple Choice
1. In the audit of the John Paul Corporation’s financial statements at December 31,
2018, the chief accountant of the said corporation provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000
due 500,000
on June 30, 2019; P100,000 due on Dec. 31, 2019
Arising from advances by officers, due June 30, 2019 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2020 1,000,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000
On March 1, 2019, the P400,000 note payable was replaced by an 18-month note for
the same amount. John Paul is considering similar action on the P100,000 note
payable due on December 31, 2019. The 2018 financial statements were issued on
March 31, 2019.
On December 1, 2018, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. John Paul’ attorneys believe that the suit is without merit. No court date has
been set.
56
On January 15, 2019, the BIR assessed John Paul an additional income tax of
P300,000 for the 2016 tax year. John Paul’ attorneys and tax accountants have stated
that it is likely that the BIR will agree to a P200,000 settlement.
Based on the above and the result of your audit, compute for the following as of
December 31, 2018:
1. Total current liabilities

a. P2,500,000 b. P2,100,000 c. P2,300,000 d. P2,400,000
2. Total noncurrent liabilities

a. P3,300,000 b. P2,900,000 c. P3,000,000 d. P3,400,000
3. Total liabilities
a. P5,200,000 b. P5,000,000 c. P5,400,000 d. P5,800,000
2. The following information relates to Felipe Company as of December 31, 2019.

Answer the following questions relating to each of the independent situations as
requested.
1. Beginning 2019, Felipe Company began marketing a new beer called “Red Colt.”
To help promote the product, the management is offering a special beer mug to
each customer for every 20 specially marked bottle caps of Red Colt. Felipe
estimates that out of the 300,000 bottles of Red Colt sold during 2018, only 50%
of the marked bottle caps will be redeemed. For the year 2019, 8,000 mugs
were ordered by the company at a total cost of P360,000. A total of 4,500 mugs
were already distributed to customers.
What is the amount of the liability that Felipe Company should report on its
December 31, 2019 statement of financial position?
a. P135,000 c. P337,500
b. P202,500 d. P360,000
2. On January 2, 2017, Felipe Company introduced a new line of products that carry a
three-year warranty against factory defects. Estimated warranty costs related to
peso sales are as follows: 1% of sales in the year of sale, 2% in the year after sales
and 3% in the second year after sale.
Sales and actual warranty expenditures for the period 2017 to 2019 were as follows:
Sales Actual Warranty Expenditures

2017 P100,000 P 750
2018 250,000 3,750
2019 350,000 11,250
P700,000 P15,750
What amount should Felipe report as warranty expense in 2019?

a. P 3,500 c. P11,500
b. P11,250 d. P21,000
57
3. During 2019, Felipe Company guaranteed a supplier’s P500,000 loan from a bank.
On October 1, 2019, Felipe was notified that the supplier had defaulted on the loan
and filed for bankruptcy protection. Counsel believes Felipe will probably have to
pay between P250,000 and P450,000 under its guarantee. As a result of the
supplier’s bankruptcy, Felipe entered into a contract in December 2019 to retool its
machines so that Felipe could accept parts from other suppliers. Retooling costs are
estimated to be P300,000. What amount should Felipe report as a liability in its
December 31, 2019, statement of financial position?
a. P250,000 c. P350,000
b. P450,000 d. P650,000
4. A court case decided on 21 December 2019 awarded damages against Felipe. The
judge has announced that the amount of damages will be set at a future date,
expected to be in March 2019. Felipe has received advice from its lawyers that the
amount of the damages could be anything between P20,000 and P7,000,000. As of
December 31, 2019, how much should be recognized in the statement of financial
position regarding this court case?
a. P 20,000 c. P7,000,000
b. P3,510,000 d. P 0
3. Vista newspapers sold 4,000 of annual subscriptions at P125 each on September 1.

How much unearned revenue will exist as of December 31?
a. P0. b. P333,333. c. P166,667. d. P500,000.
4. Jenkins Corporation has P2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 75,000 ordinary shares. If the shares are sold for P20 per share
subsequent to the statement of financial position date, but before the statement of
financial position is issued, what amount of short-term debt could be excluded from
current liabilities?
a. P1,500,000 b. P2,500,000 c. P1,000,000 d. P0
5. Warranty4U provides extended service contracts on electronic equipment sold through

major retailers. The standard contract is for three years. During the current year,
Warranty4U provided 21,000 such warranty contracts at an average price of P81 each.
Related to these contracts, the company spent P200,000 servicing the contracts during
the current year and expects to spend P1,050,000 more in the future. What is the net
profit that the company will recognize in the current year related to these contracts?
a. P451,000. b. P1,501,000. c. P150,333. d.
P367,000.
6. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send
in 3 boxtops from Palmer Frosted Flakes boxes and P1.00. The company estimates that
60% of the boxtops will be redeemed. In 2019, the company sold 675,000 boxes of
Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If
the bowls cost Palmer Company P2.50 each, how much liability for outstanding
premiums should be recorded at the end of 2019?
a. P25,000 b. P37,500 c. P62,500 d. P87,500
7. Fuller Food Company distributes to consumers’ coupons which may be presented (on
or before a stated expiration date) to grocers for discounts on certain products of Fuller.
The grocers are reimbursed when they send the coupons to Fuller. In Fuller's
experience, 50% of such coupons are redeemed, and generally one month elapses
between the date a grocer receives a coupon from a consumer and the date Fuller
receives it. During 2018 Fuller issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/2019
58
1/1/2019 P375,000 6/30/2019 P177,000

7/1/2019 540,000 12/31/2019 225,000
The only journal entries to date recorded debits to coupon expense and credits to cash
of P536,000. The December 31, 2019 statement of financial position should include a
liability for unredeemed coupons of
a. P0. b. P45,000. c. P93,000. d. P270,000.
8. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year.
The company has consulted with its attorney and determined that it is possible that they
may lose the case. The attorneys estimated that there is a 40% chance of losing. If this
is the case, their attorney estimated that the amount of any payment would be
P500,000. What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for P500,000 and credit Litigation liability for
P500,000.
b. No journal entry is required.
c. Debit Litigation Expense for P200,000 and credit Litigation Liability for
P200,000.
d. Debit Litigation Expense for P300,000 and credit Litigation Liability for
P300,000.
9. On January 3, 2019, Boyer Corp. owned a machine that had cost P200,000. The
accumulated depreciation was P120,000, estimated salvage value was P12,000, and
fair value was P320,000. On January 4, 2019, this machine was irreparably damaged
by Pine Corp. and became worthless. In October 2019, a court awarded damages of
P320,000 against Pine in favor of Boyer. At December 31, 2019, the final outcome of
this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of
Boyer’s attorney, Pine’s appeal will be denied. At December 31, 2019, what amount
should Boyer accrue for this contingent asset?
a. P320,000. b. P260,000. c. P200,000. d. P0.
10. Lyle, Inc. is preparing its financial statements for the year ended December 31, year 2.
Accounts payable amounted to 360,000 before any necessary year-end adjustment
related to the following:
At December 31, year 2, Lyle has a 50,000 debit balance in its accounts payable to
Ross, a supplier, resulting from a 50,000 advance payment for goods to be
manufactured to Lyle’s specifications.
Checks in the amount of 100,000 were written to vendors and recorded on December
29, year 2. The checks were mailed on January 5, year 3.
What amount should Lyle report as accounts payable in its December 31, year 2
balance sheet?
a. 510,000 b. 410,000 c. 310,000 d. 210,000
11. Black Co. requires advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable. Information for year 2 is
as follows:
Customer advances—balance 12/31/Y1 118,000

Advances received with orders in year 2 184,000
Advances applied to orders shipped in year 2 164,000
Advances applicable to orders cancelled in year 2 50,000
In Black’s December 31, year 2 balance sheet, what amount should be reported as a
current liability for advances from customer?
a. 0 b. 88,000 c. 138,000 d. 148,000
59
12. During year 2, Smith Co. filed suit against West, Inc. seeking damages for patent
infringement. At December 31, year 2, Smith’s legal counsel believed that it was
probable that Smith would be successful against West for an estimated amount in the
range of 75,000 to 150,000, with all amounts in the range considered equally likely. In
March year 3, Smith was awarded 100,000 and received full payment thereof. In its year
2 financial statements, issued in February year 3, how should this award be reported?
a. As a receivable and revenue of 100,000.
b. As a receivable and deferred revenue of 100,000.
c. As a disclosure of a contingent gain of 100,000.
d. As a disclosure of a contingent gain of an undetermined amount in the range of
75,000 to 150,000.
13. Valencia Corporation has the following liabilities at December 31, 2019:
8.9% note payable issued November 1, 2019, maturing
October 31, 2020 1,150,000
7.25% note payable issued August 1, 2019, payable in twelve equal
annual installments of 90,000 beginning August 1, 2020
1,080,000
Valencia’s December 31, 2019 financial statements were issued on March 19, 2020. On
January 23, 2020, the entire 1,150,000 balance of the 8.9% note was refinanced by
issuance of a long-term obligation payable in a lump sum. In addition, on December 29,
2019, Valencia consummated a non-cancelable agreement with the lender to refinance
the 7.25%, 1,080,000 note on a long-term basis, on readily determinable terms. On the
December 31, 2019 statement of financial position, the amount of these notes payable
that Valencia should classify as short-term obligations is
a. 0. b. 1,080,000. c. 1,150,000. d. 2,230,000.
14. Rowan’s Hardware experienced serious flood damage to its premises and inventory in
May 2019. Rowan’s does not have flood insurance. However, the company has sued
the province for damages as a result of the province’s decision to divert water from the
Hemog River, which was the cause of Rowan’s flood damage, in an attempt to minimize
total flood damage in the province. Rowan’s lawyer is confident that the company will
win the case and be awarded damages of at least 200,000. Rowan’s November 30,
2019 financial statements will show which of the following with respect to the lawsuit?
a) A contingent asset of 200,000 will be recorded and the lawsuit will not be disclosed in
the notes to the financial statements.
b) A contingent asset of 200,000 will not be recorded and the lawsuit will be disclosed in
the notes to the financial statements.
c) A contingent asset of 200,000 will not be recorded and the lawsuit will not be
disclosed in the notes to the financial statements.
d) A contingent asset of 200,000 will be recorded and the lawsuit will be disclosed in the
notes to the financial statements.
15. A company offers a cash rebate of 1 on each 4 package of batteries sold during 2019.
Historically, 10% of customers’ mail in the rebate form. During 2018, 6,000,000
packages of batteries are sold, and 210,000 1 rebates are mailed to customers. What is
the rebate expense and liability, respectively, shown on the 2019 financial statements
dated December 31?
a. 600,000; 600,000
b. 600,000; 390,000
c. 390,000; 390,000
d. 210,000; 390,000
60
16. Acme Co.'s accounts payable balance at December 31 was 850,000 before necessary
year-end adjustments, if any, related to the following information:
At December 31, Acme has a 50,000 debit balance in its accounts payable resulting
from a payment to a supplier for goods to be manufactured to Acme's specifications.
Goods shipped F.O.B. destination on December 20 were received and recorded by
Acme on January 2, the invoice cost was 45,000.
In its December 31 balance sheet, what amount should Acme report as accounts
payable?
a. 850,000 b. 895,000 c. 900,000 d. 945,000
17. Willem Co. reported the following liabilities at December 31, Year 1:
Accounts payable-trade 750,000
Short-term borrowings 400,000
Mortgage payable, current portion 100,000 3,500,000
Other bank loan, matures June 30, Year 2 1,000,000
The 1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2,
with the first principal payment due January 15, Year 3. Willem's audited financial
statements were issued February 28, Year 2. What amount should Willem report as
current liabilities at December 31, Year 1?
a. 850,000 b. 1,150,000 c. 1,250,000 d. 2,250,000
18. After three profitable years, Dodd Co. decided to offer a bonus to its branch manager,
Cone, of 25% of income over 100,000 earned by his branch. For year 4, income for
Cone's branch was 160,000 before income taxes and Cone's bonus. Cone's bonus is
computed on income in excess of 100,000 after deducting the bonus, but before
deducting taxes. What is Cone's bonus for year 4?
a. 12,000 b. 15,000 c. 25,000 d. 32,000
19.You were able to obtain the following from the accountant for Alah Corp. related to the
company’s liabilities as of December 31, 2019.
Accounts payable P 650,000

Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000
The following additional information pertains to these liabilities.

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a. All trade notes payable are due within six months from the end of the reporting
period.
b. Bank notes-payable include two separate notes payable to Allied Bank.

(1) A P300,000, 8% note issued March 1, 2017, payable on demand. Interest is
payable every six months.
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2019. On December 30,
2019, Alah negotiated a written agreement with Allied Bank to replace the note
with a 2-year, P500,000, 10% note to be issued January 2, 2020. The interest
was paid on December 31, 2019.
c. The 10% mortgage note was issued October 1, 2016, with a term of 10 years.
Terms of the note give the holder the right to demand immediate payment if the
company fails to make a monthly interest payment within 10 days of the date the
payment is due. As of December 31, 2019, Alah is three months behind in paying its
required interest payment.
d. The 12% mortgage note was issued May 1, 2011, with a term of 20 years. The
current principal amount due is P1,500,000. Principal and interest payable annually
on April 30. A payment of P220,000 is due April 30, 2020. The payment includes
interest of P180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2010. Interest is payable
semi-annually every June 30 and December 31.
Based on the above data, answer the following:
1. Interest payable as of December 31, 2019 is

a. P155,000 c. P143,000
b. P203,000 d. P215,000
2. The portion of the Note Payable-bank to be reported under current liabilities as of

December 31, 2019 is
a. P300,000 c. P500,000
b. P800,000 d. P 0
3. Total current liabilities as of December 31, 2019 is

a. P3,950,000 c. P4,138,000
b. P3,938,000 d. P3,998,000
4. Total noncurrent liabilities as of December 31, 2019 is

a. P1,760,000 c. P2,560,000
b. P3,960,000 d. P1,960,000
20. Rico Music Emporium carries a wide variety of music promotion techniques - warranties
and premiums – to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past
experience, is 2% of sales.
62
The premium is offered on the recorded and sheet music. Customers receive a coupon
for each peso spent on recorded music or sheet music. Customers may exchange 200
coupons and P20 for an AM/FM radio. Dolores pays P34 for each radio and estimates
that 60% of the coupons given to customers will be redeemed.
Rico total sales for 2019 were P57,600,000 – P43,200,000 from musical instrument and
sound reproduction equipment and P14,400,000 from recorded music and sheet music.
Replacement parts and labor for warranty work totaled P1,312,000 during 2019. A total
of 52,000 AM/FM radio used in the premium program were purchased during the year
and there were 9,600,000 coupons redeemed in 2019.
The accrual method is used by Dolores to account for the warranty and premium costs
for financial reporting purposes. The balance in the accounts related to warranties and
premiums on January 1, 2019, were as shown below:
Inventory of Premium AM/FM radio P 319,600

Estimated Premium Claims Outstanding 358,400
Estimated Liability from Warranties 1,088,000
Based on the above and the result of your audit, determine the amounts that will be
shown on the 2019 financial statements for the following:
1. Warranty expense
a. P 864,000 c. P1,312,000
b. P1,152,000 d. P 640,000
2. Estimated liability from warranties

a. P 864,000 c. P1,088,000
b. P1,312,000 d. P 640,000
3. Premium expense
a. P 604,800 c. P 864,000
b. P1,468,800 d. P1,008,000
4. Inventory of AM/FM radio

a. P375,600 c. P618,800
b. P319,600 d. P455,600
5. Estimated liability for premiums

a. P604,800 c. P507,600
b. P291,200 d. P358,400
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INTANGIBLES
Multiple Choice
1. The following are items that could be included in the Intangible Assets:
1. Investment in a subsidiary company P1,500,000

2. Timberland 2,000,000
3. Cost of engineering activity required to advance
the design of a product to the manufacturing stage 120,000
4. Lease prepayments (6 months’ rent paid in 60,000
advance)
5. Cost of equipment obtained under finance lease 700,000
6. Internally generated publishing title 230,000
7. Costs incurred in the formation of the corporation 90,000
8. Operating losses incurred in the start-up of the 560,000
business
9. Training costs incurred in start-up operations 80,000
10. Purchase of a franchise 1,200,000
11. Goodwill internally generated 300,000
12. Cost of testing in search for product alternatives 65,000
13. Goodwill acquired in the purchase of a business 640,000
14. Cost of developing a patent 140,000
15. Cost of purchasing a patent from an inventor 500,000
16. Legal costs incurred in securing a patent 70,000
17. Costs of a successful legal suit to protect the 230,000
patent
18. Cost of conceptual formulation of possible product
alternatives 160,000
19. Cost of purchasing a copyright 900,000
20. Research and development costs 340,000
21. Long-term receivables 310,000
22. Cost of developing a trademark 61,000
23. Cost of purchasing a trademark 290,000
24. Computer software for a computer-controlled
machine that cannot operate without that specific 130,000
software
25. Operating system of a computer 10,000
1.How much could be recognized as Intangible Assets?

a. P3,600,000 c. P5,830,000
b. P3,740,000 d. P3,530,000
2. An entity purchases a trademark and incurs the following costs in connection with the
trademark:
One-time trademark purchase price 100,000 Nonrefundable VAT taxes 5,000 Training
sales personnel on the use of the new trademark 7,000 Research expenditures
associated with the purchase of the new trademark 24,000 Legal costs incurred to
register the trademark 10,500 Salaries of the administrative personnel 12,000 Applying
PFRS and assuming that the trademark meets all of the applicable initial asset
recognition criteria, the entity should recognize an asset in the amount of
a. 100,000 b. 115,500 c. 146,500 d. 158,500
64
3. On January 1, 2016, Coffee Prince Café’ bought a trademark for P400,000, having an
estimated remaining useful life of 16 years. After 16 years, revenues expected from the
intangibles will be zero. In January 2020, Coffee Prince Café’ paid P 60,000 for legal
fees in a successful defense of the trademark. What amount of expense should Coffee
Prince Café’ recognize and charge against income during 2020?
a. P15,000 b. P25,000 c. P30,000 d. P85,000
4. On January 2, 2018, Abeleda purchased a franchise with a useful life of ten years for
P100,000. An additional franchise fee of 3% of franchise operation revenues must be
paid each year to the franchisor. Revenues from franchise operations amounted to
P800,000 during 2018. In its December 31, 2020 balance sheet, what amount should
Abeleda report as intangibles asset-franchise?
a. P70,000 b. P87,600 c. P90,000 d. P100,000
5. On January 1, 2018, Dennis Corporation signed a 12-year lease for warehouse space.
Dennis has an option to renew the lease for an additional 8-year. During January 2020,
Dennis made substantial improvements to the warehouse. The cost of these
improvements was P540,000, with an estimated useful life of 15 years. At December
31, 2020, Dennis intended to exercise the renewal option. Dennis has taken a full year’s
depreciation on this leasehold improvement.
In the December 31, 2020 balance sheet, the carrying amount of this leasehold improvement
should be
a. 486,000 c. 504,000
b. 510,000 d. 513,000
6. On December 31, 2019 Byte Co. has capitalized software costs of P600,000 with an
economic life of four years. Sales for 2020 were 10% of expected total sales of the
software. At December 31, 2020 the software had a net realizable value of P480,000.
On it’s December 31, 2020 balance sheet, what amount should Byte report as net
capitalized cost of computer software?
a. P432,000 b. P450,000 c. P480,000 d. P540,000
7. Northern Airline purchased airline gate rights at Newark international Airport for
P2,000,000 with a legal life of 5 years. However, Northern has the ability to extend the
right every ten years for an indefinite period of time. Over what period of time should
Northern amortize the gate rights?
a. 5 years b. 15 years c. 40 years d. The rights should not be amortized
8. On January 2, 2018, Jerome Inc. purchased a patent for a new consumer product for
P90,000. At the time of purchase, the patent was valid for 15 years; however, the
patent’s useful life was estimated to be only ten years due to the competitive nature of
the product. On December 31, 2021, the product was permanently withdrawn from sale
under governmental order because of a potential health hazard in the product. What
amount should Jerome charge against income during 2021, assuming amortization was
recorded at the end of each year?
a. P9,000 b. P54,000 c. P63,000 d. P72,000
9. On January 2, 2020, Dave Company paid P500,000 to acquire a patent with a

remaining economic life of 15 years. Dave Company expects to use the patent for 5
years and intends to sell it after 5 years. Jerome Company has committed to buy the
patent for 40% of the cost to Dave Company.
In December 31, 2020, what amount of patent amortization should Dave Company
report its profit or loss?
a. 40,000 c. 100,000
65
b. 60,000 d. 200,000
10. Jerold Company purchased a patent on January 1, 2018 for P428,400. The patent was
being amortized over its remaining legal life of 15 years. Early 2021, Jerold determined
that the economic benefits of the patent would not last longer than 10 years from the
date of acquisition.
What amount should be reported in the statement of financial position as patent, net of
accumulated amortization at December 31, 2021?
a. 257,040 c. 302,400
b. 293,760 d. 314,160
11. Sang Company has broadcasting license that will expire in 5 years. As of January 1,
2020 the license has a carrying amount of P2,000,000. The license is renewable and
has already been renewed twice in the past. There are no factors to suggest that the
license will not be renewed again and the entity has the intention to do so. The license
is expected to contribute to the entity’s cash flow indefinitely.
In the December 31, 2020 statement of financial position, how much should be
reported as the carrying value of the broadcasting license?
a. none c. 1,900,000
c. 1,600,000 d. 2,000,000
12. On January 1, 2021, JP Corp. incurred organization costs of P24,000. What portion of
the organization costs will JP defer to years subsequent to 2021?
a. P23,400 b. P19,200 c. P4,800 d. P0
13. In connection with Ramil Corporation’s financial statements for the year 2021 you noted
the following items relative to the company’s Intangible assets.
 A patent was purchased from Maica Company for P4,000,000 on January 2, 2020.
Ramil estimated that the remaining useful life of the patent to be 10 years. The
patent was carried in Maica’s accounting records at a carrying value of P4,000,000
when Maica sold it to Ramil.
 During 2021, a franchise was purchased from Gloria Company for P960,000. In
addition, 5% of the revenue from the franchise must be paid to Gloria. Revenue
from the franchise for 2021 was P5,000,000. Ramil estimates the useful life of the
franchise to be 10 years and takes full year’s amortization in the year of purchase.
 Ramil incurred research and development costs of P866,000 in 2021. Ramil

estimates that these costs will be recouped by December 31, 2023.
 On January 1, 2021, Ramil, because of the recent events in the industry, estimates
that the remaining life of the patent purchased on January 2, 2020, is only 5 years
from January 1, 2021.
1. Amortization of patent for 2021

a. P900,000 c. P720,000
b. P800,000 d. P400,000
2. Carrying amount of patent as of December 31, 2021

a. P2,880,000 c. P2,700,000
b. P2,400,000 d. P3,200,000
66
3. Carrying amount of intangible assets as of December 31, 2021

a. P3,264,000 c. P3,564,000
b. P4,610,000 d. P3,744,000
4. Total amount that should be charged against income in 2021

a. P2,112,000 c. P2,012,000
b. P1,066,000 d. P1,932,000
14. You gathered the following information related to the Patents account of the Gloria
Cookie Corporation in connection with your audit of the company’s financial statements
for the year 2021.
In 2020, Gloria developed a new machine that reduces the time required to insert the
fortunes into its fortune cookies. Because the process is considered very valuable to
the fortune cookie industry, Gloria patented the machine. The following expenses were
incurred in developing and patenting the machine:
Research and development laboratory expenses P1,000,000

Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Legal expenses to obtain patent 480,000
Wages paid for the employees’ work on the
research, development, and building of the
machine (60% of the time was spent in
actually building the machine) 1,200,000
Expense of drawing required by the patent office
to be submitted with the patent application 68,000
Fees paid to the government patent office to
process application 100,000
During 2021, Gloria paid P150,000 in legal fees to successfully defend the patent
against an infringement suit by Cookie Monster Corporation.
It is the company’s policy to take full year amortization in the year of acquisition.
1. Cost of patent
a. P580,000 c. P1,128,000
b. P648,000 d. P 798,000
2. Cost of machine
a. P1,236,000 c. P1,040,000
b. P1,648,000 d. P1,168,000
3. Amount that should charged to expense when incurred in connection with the
development of the patented machine
a. P1,480,000 c. P1,608,000
b. P1,000,000 d. P 0

a. P522,000 c. P1,015,200
b. P583,200 d. P 837,900
15. Presented below are five unrelated situations. For each situation compute the amount
that will be classified and expensed as research and development.
67
1. Mcmoud Company incurred the following costs during 2020:
Quality control during commercial production,

including routine testing of products P460,000
Laboratory research aimed at discovery of new
knowledge 540,000
Engineering follow-through in an early phase of
commercial production 120,000
Adaptation of existing capability to a particular
requirement or customer’s need as part of
continuing commercial activity 110,000
Trouble-shooting in connection with breakdowns
during commercial production 230,000
Searching for applications of new research 150,000
findings
a. P690,000 c. P1,150,000
b. P540,000 d. P1,610,000
2. Valla Company incurred the following costs during 2020 in connection with its
research and development activities:
Cost of equipment acquired that will have

alternative uses in future research and
development projects over the next 5 years P1,400,000
Materials consumed in research and
development projects 295,000
Consulting fees paid to outsiders for research
and development projects 500,000
Personnel costs of persons involved in research
Indirect costs reasonably allocable to research
Materials purchased for future research and
development 170,000
a. P1,685,000 c. P1,465,000
b. P2,135,000 d. P1,965,000
3. During 2020, Dayrit Company incurred the following costs:
Research and development services performed

by Cerds Company for Dayrit P700,000
Testing for evaluation of new products 600,000
knowledge 850,000
a. P1,450,000 c. P2,150,000
b. P 850,000 d. P1,550,000
4. Tina Company incurred the following costs during the year ended December 31,
2020:
Design, construction, and testing of

preproduction prototypes and models P435,000
Routine, on-going efforts to refine, enrich, or
otherwise improve upon the qualities of an
68
existing product 375,000

Quality control during commercial production
including routine testing of products 450,000
knowledge 630,000
a. P 630,000 c. P1,440,000
b. P1,065,000 d. P1,005,000
5. Gloria, Inc. incurred the following costs during the year ended December 31, 2020:

knowledge P300,000
Radical modification to the formulation of a
chemical product 217,500
Research and development costs reimbursable
under a contract to perform research and
development for Court Corporation 525,000
Testing for evaluation of new products 337,500
a. P 855,000 c. P300,000
b. P1,380,000 d. P637,500
16. A license is acquired July 1, 2018, for P450,000; while it has a legal life of 15 years, due
to rapidly changing environment, management estimates a useful life of only 5 years.
Straight-line amortization will be used. At January 1, 2019, management estimated that
the recoverable amount of the license is only P135,000. Amortization will be taken over
3 years from that point.
On January 1, 2021, due to the change in general economic situations, the license now
has a fair value of P540,000. The entity adopted the revaluation model to measure the
license starting January 1, 2021. The estimated remaining useful life is now believed to
be 5 years.
1. How much is the loss on impairment on January 1, 2019?

a. P270,000 c. P225,000
b. P300,000 d. P 0
2. How much can be recognized as gain on impairment recovery in 2021?

a. P270,000 c. P495,000
b. P180,000 d. P315,000
3. How much will be recognized as revaluation surplus on January 1, 2021?

a. P270,000 c. P495,000
b. P180,000 d. P315,000
17. A company acquires a patent for a drug with a remaining legal and useful life of six
years on January 1, 2019 for 1,800,000. The company uses straight-line amortization
for patents. On January 2, 2021, a new patent is received for a timed-release version of
the same drug. The new patent has a legal and useful life of twenty years. The least
amount of amortization that could be recorded in 2021 is
a. 300,000. b. 60,000. c. 81,818. d. 69,000.
69
18. During 2021, Bond Company purchased the net assets of May Corporation for
1,000,000. On the date of the transaction, May had 300,000 of liabilities. The fair value
of May's assets when acquired were as follows:
Current assets 540,000
Noncurrent assets 1,260,000
1,800,000
How should the 500,000 difference between the fair value of the net assets acquired
( 1,500,000) and the cost ( 1,000,000) be accounted for by Bond?
a. The 500,000 difference should be credited to retained earnings.
b. The 500,000 difference should be recognized as a gain.
c. The current assets should be recorded at 540,000 and the noncurrent assets
should be recorded at 760,000.
d. A deferred credit of 500,000 should be set up and then amortized to income
over a period not to exceed forty years.
19. On January 1, 2019, Bingham Inc. purchased a patent with a cost 1,160,000, a useful
life of 5 years. The company uses straight-line depreciation. At December 31, 2020, the
company determines that impairment indicators are present. The fair value less cost to
sell the patent is estimated to be 540,000. The patent's value-in-use is estimated to be
565,000. The asset's remaining useful life is estimated to be 2 years.
1. Bingham's 2020 income statement will report Loss on Impairment of

a. 0. b. 131,000. c. 156,000. d. 595,000.
2. The company's 2021 income statement will report amortization expense for the
patent of
a. 188,333. b. 232,000. c. 282,500. d. 595,000
20. Nikko Co. purchased two machines of P250,000 each on January 2, 2021. The
machines were put into use immediately. Machine A has useful life of five years and can
only be used in one research project. Machine B will be used for two years on a
research and development project and then used by the production division for an
additional eight years. Nikko uses straight line method of depreciation.
What should Nikko include in 2021 research and development expense?

a. P 75,000 c. P375,000
b. P275,000 d. P500,000
21. A patent right is acquired on January 2019, for P500,000 while it has a legal life of 15
years, due to rapidly changing technology, management estimates a useful life of 5
years. At January 1, 2020, management is uncertain that the process can actually be
made economically feasible, and decides to write-down the patent to an estimated
market value of P150,000 with no change in its remaining useful life. On January 1,
2021, having perfected the related production process, the asset is now appraised at a
sound value of P600,000.
Q1. Under the revaluation model, what amount should be reported in the shareholders
equity as a result of revaluation?
a. none b. P187,500 c. P250,000 d. P300,000
Q2. Under the revaluation model, what amount should be reported in the current year
income statement as a result of revaluation on January 1, 2021?
a. none b. P187,500 c. P250,000 d. P300,000
70
22. An intangible asset costs P300,000 on January 1, 2020. On January 1, 2021, the asset
was evaluated to determine if it was impaired. As of January 1, 2021, the asset was
expected to generate future cash flows of P25,000 per year (at the end of each year).
The appropriate discount rate is 5%.
What total amount should be charged against income in 2021, assuming that the asset
had a total useful life of 10 years from date of acquisition?
a. P30,000 b. P92,304 c. P112,048 d. P122,304
What total amount should be charged against income in 2021 assuming that as of
January 1, 2020, the asset was assumed to have an indefinite useful life and that as of
January 1, 2021, the remaining life was still indefinite?
a. 0 b. P30,000 c. P92,304 d. P122,304
23. On December 31, 2021, Mark Company showed the following intangible assets:
Trademark 6,000,000
Patent 3,000,000
The trademark has 8 years remaining in its legal life. However, it is anticipated that the
trademark will be routinely renewed in the future. Thus, the trademark is considered to
have an indefinite life.
Because of an inflationary economy, the trademark is expected to generate cash flows
of P200,000 per year. The appropriate discount rate is 10%. Mathematically, the
discounted value of a stream of indefinite annual cash flow is simply computed by
dividing the annual cash flow by the discount rate.
The patent has an economic life of just 5 years because of market conditions. 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
Mark Company shall recognize in 2021 total impairment loss at

a. 1,105,000 c. 5,105,000
b. 4,000,000 d. 0
24. Kelly Company is negotiating to acquire Emerson Company. Kelly manufactures and
sells wood-burning stoves, and Emerson Company produces parts that are required to
manufacture the stoves. Emerson Company enjoys an exceptional reputation, and Kelly
management believes it can continue Emerson’s current level of income and satisfy its
own need for parts. Under the contemplated arrangement, Kelly Company will negotiate
for the acquisition of the net assets of Emerson Company. The following information has
been developed to determine the appropriate price.
Recorded amounts and estimated values of Emerson Company’s assets and liabilities
are as follows:
Recorded amount Current value
Assets to be received 16,000,000 19,500,000
Liabilities to be assumed 6,000,000 5,500,000
10,000,000 14,000,000
========== =========
Emerson Company’s earnings for the past five years averaged P2,000,000. This is
believed to be a reasonable estimate of future income. The level of income normally
experienced by companies similar to Emerson Company is 10%.
Kelly Company and Emerson Company agreed to capitalize average excess earnings at
25% in estimating the value of goodwill.
How much should Kelly Company pay in acquiring Emerson Company?

a. 16,400,000 c. 14,200,000
71
b. 18,000,000 d. 16,000,000
25. You noted the following items relative to the company’s Intangible assets in connection
with Maica Corporation’s financial statements for the year 2020.
 On January 1, 2020, Maica signed an agreement to operate as franchisee of Clear

Copy Service, Inc. for an initial franchise of P680,000. Of this amount, P200,000
was paid when the agreement was signed and the balance was payable in four
annual payments of P120,000 each, beginning January 1, 2021. The agreement
provides that the down payment is not refundable and no future services are
required of the franchisor. The implicit rate for loan of this type is 14%. The
agreement also provides the 5% of the revenue from the franchise must be paid to
the franchisor annually. Maica’s revenue from the franchise for 2020 was
P8,000,000. Maica estimates that the useful life of the franchise to be ten years.
 Maica incurred P624,000 of experimental and development costs in its laboratory to

develop a patent which was granted on January 2, 2020. Legal fees and another
costs associated with the registration of the patent totaled P131,200. Maica
estimates that the useful life of the patent will be eight years.
 A trademark was purchased from Gloria Company for P320,000 on July 1, 2017.
Expenditures for successful litigation in defense of the trademark totaling P80,000
were paid on July 1, 2020. Maica estimates that the trademark’s useful life will be
indefinite.
Based on the above information, determine the following: (Round off present value
factors to 4 decimal places)
1. Total expenses related to franchise in 2020

a. P503,914 c. P448,950
b. P535,200 d. P454,964
2. Carrying amount of franchise as of December 31, 2020

a. P549,644 c. P538,733
b. P494,680 d. P612,000

a. P131,200 c. P124,640
b. P114,800 d. P123,482
4. Carrying amount of trademark as of December 31, 2020

a. P320,000 c. P304,000
b. P288,000 d. P400,000
5. Carrying amount of intangible assets as of December 31, 2020

a. P1,046,800 c. P1,009,480
b. P 984,444 d. P 929,480
72

INVENTORIES
Multiple Choice
1. Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 statement of financial position.
1. Goods out on consignment at another company’s P800,000

store
2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in
transit at December 31 120,000
4. Goods purchased f.o.b. destination that are in
transit at December 31 200,000
5. Goods sold to another company, for which our
company has signed an agreement to repurchase
at a set price that covers all costs related to the 300,000
inventory
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit
December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are
routinely manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started
production, but which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet 260,000
sold
18. Goods sold f.o.b. destination that are in transit at
December 31 40,000
19. Temporary investment in stocks and bonds that will
be resold in the near future 500,000
How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 c. P2,260,000
b. P2,000,000 d. P2,220,000
2. In connection with your review of the Rosalina Manufacturing Company, you reviewed its
inventory as of December 31, 2020 and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it was
marked “Hold for shipping instructions.” The customer’s order was dated December 18, but
the case was shipped and the costumer billed on January 10, 2021.
73
(b) Merchandise costing P600,000 was received on December 28, 2020, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.
(c) Merchandise received on January 6, 2021, costing P700,000 was entered in purchase
register on January 7. The invoice showed shipment was made FOB shipping point on
December 31, 2020. Because it was not on hand during the inventory count, it was not
included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was
finished in the shipping room on December 30. The customer was billed for P300,000 on
that date and the machine was excluded from inventory although it was shipped January 4,
2021.
(e) Merchandise costing P200,000 was received on January 6, 2021, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December
29, 2020, FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The
customer took possession of the goods on that date. The merchandise was included in
inventory because Rosalina still holds legal title. Historical experience suggests that full
payment on installment sale is received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were
included in the inventory because the sale was accompanied by a purchase agreement
requiring Rosalina to buy back the inventory in February 2021.
Based on the above information, how much of these items should be included in the inventory
balance at December 31, 2020?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000
3. Davion Company is a manufacturing entity. The cost of an inventory is shown on its card as
follows:
Material 300,000
Production Labor 100,000
Production Overhead 50,000
General Administration 233,000
Marketing cost 212,000
What is the correct inventory value of the product?

a 500,000
b 450,000
c 300,000
d 1,000,000
4. On December 28, year 2, Kerr Manufacturing Co. purchased goods costing 50,000. The terms
were FOB destination. Some of the costs incurred in connection with the sale and delivery of
the goods were as follows:
Packaging for shipment 1,000 Shipping 1,500 Special handling charges 2,000 These goods
were received on December 31, year 2. In Kerr’s December 31, year 2 balance sheet, what
amount of cost for these goods should be included in inventory?
a. 54,500
b. 53,500
c. 52,000
d. 50,000
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5. Jerome Co. has the following data related to an item of inventory:

Inventory, March 1 100 units @ 4.20
Purchase, March 7 350 units @ 4.40
Purchase, March 16 70 units @ 4.50
Inventory, March 31 130 units
The value assigned to cost of goods sold if Jerome uses FIFO is

a. 579.
b. 552.
c. 1,723.
d. 1,696.
6. The following information was available from the inventory records of Moen Company for
January:
Units Unit Cost Total Cost
Balance at January 1 3,000 9.77 29,310
Purchases:
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917
Sales:
January 7 (2,500)
January 31 (3,200)
Balance at January 31 2,000
1. Assuming that Moen does not maintain perpetual inventory records, what should be the
inventory at January 31, using the weighted-average inventory method, rounded to the
nearest peso?
a. 21,010.
b. 20,474.
c. 20,520.
d. 20,720.
2. Assuming that Moen maintains perpetual inventory records, what should be the inventory
at January 31, using the moving-average inventory method, rounded to the nearest
peso?
a. 21,010.
b. 20,474.
c. 20,520.
d. 20,720.
7. Muckenthaler Company sells product 2005WSC for 25 per unit. The cost of one unit of
2005WSC is 18. The estimated cost to complete a unit is 4, and the estimated cost to sell is
6. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-net
realizable value?
a. 20.
b. 15.
c. 18.
d. 19.
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8. Shawn Company started its operations in 2020. The following data are abstracted from the
company’s purchases and sales records:
2020 2021 2022
Number of units purchased 160,000 155,000 135,000
Number of units sold 100,000 145,000 130,000
Unit cost 4.00 5.00 6.00
Sales revenue 800,000 1,200,000 1,300,000
The inventory value is calculated in terms of FIFO. How much is gross profit for the year 2022?
a. 590,000
b. 520,000
c. 530,000
d. 470,000
9. Jerome Company provided the following data for the current year:
Inventory – January
Cost 3,000,000
Net realizable value 2,800,000
Net purchases 8,000,000
Inventory – December 31;
Cost 4,000,000
Net realizable value 3,700,000
Under the LCM rule, what should be reported as cost of goods sold?
a. 7,000,000
b. 7,100,000
c. 7,300,000
d. 7,200,000
10. On November 17, 2020, Matet Airways entered into a noncancelable commitment to purchase
3,000 barrels of aviation fuel for P9,000,000 on March 31, 2021. Matet entered into this
purchase commitment to protect itself against the volatility in the aviation fuel market. By
December 31, 2020, the purchase price of aviation fuel had fallen to P2,200 per barrel.
However, by March 31, 2021, when Matet took delivery of the 3,000 barrels, the price of
aviation fuel had risen to P3,100 per barrel.
Based on the above and the result of your audit, answer the following:
1. The loss on purchase commitment on December 31, 2020 is

a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0
2. The gain on purchase commitment on March 31, 2021 is

a. P2,700,000 c. P2,400,000
b. P 300,000 d. P 0
11. During the prior fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase
commitment with its primary supplier to purchase 2.5 million of raw materials. Jeremiah paid
the 2.5 million to acquire the raw materials when the raw materials were only worth 2.2 million.
Assume that the purchase commitment was properly recorded. What is the journal entry to
record the purchase?
a. Debit Inventory for 2,200,000, and credit Cash for 2,200,000.
b. Debit Inventory for 2,200,000, debit Unrealized Holding Loss for 300,000, and credit
Cash for 2,500,000.
c. Debit Inventory for 2,200,000, debit Purchase Commitment Liability for 300,000 and
credit Cash for 2,500,000.
d. Debit Inventory for 2,500,000, and credit Cash for 2,500,000.
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12. On August 31, a hurricane destroyed a retail location of Vinny's Clothier including the entire
inventory on hand at the location. The inventory on hand as of June 30 totaled 320,000. From
June 30 until the time of the hurricane, the company made purchases of 85,000 and had sales
of 250,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate
value of the inventory that was destroyed?
a. 320,000.
b. 181,500.
c. 205,000.
d. 255,000.
13. On September 30, 2020, a fire at Brock Company’s only warehouse caused severe damage to
its entire inventory. Based on recent history, Brock has a gross profit of 30% on cost. The
following information is available from Brocks records for the nine months ended September’
30, 2020
Inventory at 1/1 1,100,000
Purchases 6,000,000
Net sales 7,280,000
A physical inventory disclosed usable damaged goods which Brock estimates can be sold to a
jobber for P100,000. Using the gross profit method, the estimated cost of goods sold for the
nine months ended September 30, 2020 should be
a. 5,500,000
b. 4,970,000
c. 5,096,000
d. 5,600,000
14. Mavis, Inc., owner of a trading company, engaged your services as auditor. There is a
discrepancy between the company’s income and the sales volume. The owner suspects that
the staff is committing theft. You are to determine whether or not this is true. Your
investigations revealed the following.
1. Physical inventory, taken December 31, 2020 under your observation showed that cost was
P265,000 and net realizable value (NRV), P244,000. The inventory on January 1, 2020
showed cost of P390,000 and net realizable value of P375,000. It is the corporation’s
practice to value inventory at “lower of cost or NRV.” Any loss between cost and NRV is
included in “Other expenses.”
2. The average gross profit rate was 40% of net sales.
3. The accounts receivable as of January 1, 2020 were P135,000. During 2020, accounts
receivable written off during the year amounted to P10,000. Accounts receivable as of
December 31, 2020 were P375,000.
4. Outstanding purchase invoices amounted to P300,000 at the end of 2020. At the beginning
of 2020 they were P375,000.
5. Receipts from customers during 2020 amounted to P3,000,000.

77
6. Disbursements to merchandise creditors amounted to P2,000,000.
1. The total sales in 2020 is

a. P3,240,000 c. P3,250,000
b. P3,230,000 d. P2,770,000
2. The total purchases in 2020 is

a. P2,000,000 c. P1,950,000
b. P2,075,000 d. P1,925,000
3. The amount of inventory shortage as of December 31, 2020 is

a. P106,000 c. P100,000
b. P175,000 d. P 0
15. Dundas Mart uses the average retail inventory method. The following information is available
for the current year:
Cost Retail
Beginning inventory P 1,100,000 P 2,200,000
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net markups 600,000
Net markdowns 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000
1. The cost ratio using the average retail inventory method is

a. 58.13% c. 62.00%
b. 61.07% d. 60.00%
2. The estimated ending inventory at retail is

a. P3,000,000 c. P2,800,000
b. P3,600,000 d. P3,650,000
3. The estimated ending inventory at cost is

a. P1,743,945 c. P1,832,143
b. P2,198,571 d. P1,800,000
4. The estimated cost of goods sold is

a. P15,267,857 c. P15,000,000
b. P14,901,429 d. P15,056,055
5. If the inventory at retail based on physical count at December 31, 2020 is P1,700,000, the
estimated inventory shortage is
a. P780,000 c. P755,709
b. P793,929 d. P 0
78
16. Fortune Farms produces 45,000 kilos of tobacco during the 2020 season. Company sells all of
its tobacco to Philip which has agreed to purchase the entire production at the prevailing market
rate. Recent legislation assures market will not fall below 70 per kilo during the next 2 years.
During 2020, Fortune delivered 30,000 kilos at market price of 70 to Philip and sold the
remaining 15,000 kilos in 2021 at the maket price of 72.
What amount of revenue should Fortune recognize in 2020?

a. 2,100,000
b. 2,160,000
c. 3,150,000
d. 3,240,000
17. A public limited company, Windsor Dairy Products, produces milk on its farms. As of January 1,
2020 Windsor has a stock of 1,050 cows (average age, 2 years old) and 150 heifers (average
age, 1 year old).
Additional information:
 Windsor purchased 375 heifers, average age 1 year, on July 1, 2020. No animals were
born or sold during the year.
 The Company produced milk with a fair value of P660,000 (that is determined at the time of
milking) in the year ended 31 December 2020. The Company also estimated the following
costs:
Commissions to brokers and dealers 20,000

Transport and other costs necessary to get
milk to a market 10,000
 The fair values less costs to sell were
1 - year old animal at December 31, 2020 P3,200

2 - year old animal at December 31, 2020 4,500
1.5 - year old animal at December 31, 2020 3,600
3 - year old animal at December 31, 2020 5,000
1 - year old animal at January 1, 2020 and July 1, 3,000
2020
2 - year old animal at January 1, 2020 4,000
1. The milk should be valued at

a. P660,000 c. P650,000
b. P640,000 d. P630,000
2. The increase in value of biological assets in 2020 due to price change?

a. P460,000 c. P 630,000
b. P555,000 d. P1,500,000
3. The increase in value of biological assets in 2020 due to physical change?

a. P870,000 c. P590,000
b. P720,000 d. P780,000
4. The carrying amount of the biological assets as of January 1, 2020 is

a. P4,650,000 c. P5,150,000
79
b. P5,205,000 d. P3,150,000
5. The carrying amount of the biological assets as of December 31, 2020 is

a. P6,150,000 c. P7,325,000
b. P6,825,000 d. P7,275,000
18. On October 1, 2020, Fabulous Company entered into a 6-month, P5,200,000 purchase
commitment for a supply of a special product on March 31, 2021, On December 31, 2020, the
market value of this material had fallen to P5,000,000. On March 31, 2021, the market value of
the purchase commitment is P4,900,000. What is the loss on purchase commitment that should
be recognized on March 31, 2021?
a. 200,000
b. 100,000
c. 300,000
d. 0
19. On January 1, year 2, Dell, Inc. contracted with the city of Little to provide custom built desks for
the city schools. The contract made Dell the city’s sole supplier and required Dell to supply no
less than 4,000 desks and no more than 5,500 desks per year for two years. In turn, Little
agreed to pay a fixed price of 110 per desk. During year 2, Dell produced 5,000 desks for Little.
At December 31, year 2, 500 of these desks were segregated from the regular inventory and
were accepted and awaiting pickup by Little. Little paid Dell 450,000 during year 2. What
amount should Dell recognize as contract revenue in year 2?
a. 450,000
b. 495,000
c. 550,000
d. 605,000
20. Kauf Co. had the following amounts related to the sale of consignment inventory:
Cost of merchandise shipped to consignee 72,000

Sales value for two-thirds of inventory sold by consignee 80,000
Freight cost for merchandise shipped 7,500
Advertising paid for by consignee, to be reimbursed 4,500
10% commission due the consignee for the sale 8,000
What amount should Kauf report as net profit(loss) from this transaction for the year?
a. (12,000)
b. 8,000
c. 14,500
d. 32,000
21. Joseph Company has the following information pertaining to its merchandise inventory as of
December 31, 2020:
Inventory on hand (including merchandise received on consignment of 20,000) 200,000

Inventory purchased with buy back agreement 100,000
Merchandise purchased in transit, FOB, shipping point including
freight of 5,000 155,000
Merchandise purchased in transit, Free alongside, including
delivery cost alongside the vessel of 6,000 but excluding
cost of shipment of 3,000 250,000
Merchandise purchased in transit, CIF, including insurance and
freight of 8,000 175,000
What amount should Joseph Company report as value of its inventory in its 2020 statement of
financial position?
80
a. 749,000
b. 757,000
c. 763,000
d. 857,000
22. The closing inventory of a company under your audit amounted to 284,000 at December 31,
2020. The inventory includes two inventory items about which the inventory taker is uncertain.
Item 1. 500 items which had cost 15 each and which were included at 7,500. These items
were found to have been defective. Remedial work after the financial statement date cost 1,800
and they were sold for 20 each. Selling expenses were 400.
Item 2. 100 items that had cost 10 each but after the financial statement date were sold for 8
each with selling expenses of 150.
At what amount should the inventory be reported at 2020 financial statement?

a. 283,650
b. 283,950
c. 284,000
d. 284,300
23. Kris manufacturers and sells paper envelopes. The stock of envelopes was included in the
closing inventory as of December 31, 2020, at a cost of 50 each per pack. During the final
audit, the auditors noted that the subsequent sale price for the inventory at Juanuary15, 2021,
was 40 each per pack. Furthermore, inquiry reveals that during the physical stock take, a
water leakage has created damages to the paper and the glue. Accordingly, in the following
week, Kris has spent a total of 15 per pack for repairing and reapplying glue to the envelopes.
The net realizable value and inventory write-down (loss) amount to
a) 40 and 10 respectively
b) 45 and 10 respectively
c) 25 and 25 respectively
d) 35 and 25 respectively
e) 30 and 15 respectively
24. Milford Company had 500 units of “Tank” in its inventory at a cost of 4 each. It purchased, for
2,800, 300 more units of “Tank”. Milford then sold 400 units at a selling price of 10 each,
resulting in a gross profit of 1,600. The cost flow assumption used by Johnson
a. is FIFO.
b. is specific identification.
c. is weighted average.
d. cannot be determined from the information given.
25. A group of twenty 2-year old cattle was held at January 1, 2020. Five 2-year old cattle were
purchased on January 2, 2020 fo r P12,000 each and 5 calves were born on January 2, 2020.
No cows or calves were disposed of during the period. Per unit fair values less cost to sell were
follows:
January 1, 2020
2-year old cattle P12,000
New born cattle 4,000
December 31, 2020
2-year old cattle 13,000
New born cattle 5,000
81
The Company records separately the increase in fair value due to physical change and change
in fair value due to price change.
Q1. How much shall be taken to income statement as a gain arising physical change?
a. P30,000
b. P60,000
c. P80,000
d. P110,000
Q2. How much shall be taken to income statement as a gain arising from change in fair value
due to price change?
a. P30,000
b. P60,000
c. P90,000
d. P110,00
82

INVESTMENT PROPERTY
Multiple Choice
1. Joshtin Company venture into construction of a condominium in Manila which is

rated as the largest state-of-the-art structure. The entity’s 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 place in
service on January 1, 2018. The cost of the construction was 50,000,000. The useful
life of the condominium is 25 years and its residual value is 5,000,000. An
independent valuation expert provided the following fair value at each subsequent
year-end:
December 31, 2018 55,000,000

December 31, 2019 53,000,000
December 31, 2020 60,000,000
1. Under the cost model, Joshtin Company should report depreciation of investment
property
for 2018 at
a. 1,800,000 c. 2,000,000
b. 2,200,000 d. 0
2. Under the fair value model, Joshtin Company should recognize gain from change
in
fair value in 2018 at
a. 5,000,000 c. 3,000,000
b. 7,000,000 d. 0
3. Under the fair value model how much is the depreciation for 2018
a. 1,800,000 c. 2,000,000
b. 2,200,000 d. 0
4. How gain or loss should be recognize in 2019

a. (1,800,000) c. (2,000,000)
b. 2,200,000 d. 0
5. How much gain or loss should be recognize in 2020

a. 7,000,000 c. 2,000,000
b. 2,200,000 d. 0
2. JP Company and its subsidiaries own the following properties:
Land held for undetermined use 5,000,000

A vacant building to be leased out under operating lease 3,000,000
Property held by a subsidiary of JP, a real estate firm,
in the ordinary course of business 2,000,000
Property held for use in production 4,000,000
Building owned by a subsidiary of JP and for which the
subsidiary provides security and maintenance services
to the lessee 1,500,000
83
Land leased by JP to a subsidiary under an operating lease 2,500,000

Property under construction for use as investment property 6,000,000
Land held for future factory site 3,500,000
Machinery leased out to an unrelated party under an
operating lease 1,000,000
What is the total investment property that should be shown in the consolidated
financial position of the parent and its subsidiaries?
a. 12,000,000 c. 10,500,000
b. 15,500,000 d. 9,500,000
3. Kaila Company owns three properties which are classified as investment properties.
Details of the properties are as follows:
Initial Fair value at Fair value at
Cost 12/31/2020 12/31/2021
A 2,700,000 3,200,000 3,500,000
B 3,450,000 3,050,000 2,850,000
C 3,300,000 3,850,000 3,600,000
Each property was acquired in 2017 with a useful life of 25 years. The entity’s
accounting policy is to use the fair value model for investment properties. What is
the gain or loss to be recognized for the year ended December 31, 2021?
a. 189,000 loss b. 150,000 loss c. 300,000 gain d. 450,000 loss
4. JP Company has an investment property which had an original cost of 5,800,000 on

January 1, 2018. At December 31, 2020 its fair value was 6,000,000 and at December
31, 2021, it had a fair value of 5,900,000. On acquisition the property had a useful life
of 40 years.
What should be the expense recognized in the profit or loss for the year ended
December 31, 2021 under the fair value model and cost model?
Fair Value Model Cost Model
a. 147,500 145,000
b. 100,000 145,000
c. 145,000 100,000
d. 100,000 147,500
5. JP’s investment property has a historical cost of 2,400,000. On December 31, 2021,
the fair value of this investment property is 2,800,000.
Under the fair value model, the Company should

a. recognize a 400,000 unrealized gain in the shareholders’ equity
b. recognize a 400,000 unrealized gain in the profit or loss.
c. recognize a revaluation surplus of 400,000.
d. ignore the increase in value of 400,000.
6. (Investment property to owner occupied)

On January 1, 2019, JP Company acquired an investment property at a cost of
5,000,000. At December 31, 2019, the carrying value of the property is 6,000,000.
On December 31, 2020, JP Company decided to use the property and immediately
reclassified as plant asset.(owner-occupied)
Q1. What would be the initial cost of plant asset if the fair value is 6,500,000 at
conversion date?
a. 5,000,000 b. 5,500,000 c. 6,000,000 d. 6,500,000
84
Q2. What amount of revaluation surplus JP Company would recognize at the time of
conversion?
a. none b. 500,000 c. 1,000,000 d. 1,500,000
7. (Investment property to Inventory)

On January 2, 2019, Kris Corporation has an investment property that was carried at
fair value with carrying amount of 2,500,000 and historical cost of 2,400,000. As of
December 31, 2019, the fair value of the property is 2,600,000, and fair value of
2,800,00 on December 31, 2020. On December 31, 2020 the Corporation decided to
transfer the property to inventory.
On date of transfer, what amount should the inventory be valued?

a. 2,400,000 b. 2,500,000 c. 2,600,000 d. 2,800,000
8. DMC, Inc. completed the construction of a shopping mall at the end of 2019 for a
total cost of P100 million. The mall has an estimated economic life of 25 years. The
mall was constructed for the purpose of earning rentals by letting out space in the
shopping mall to tenants. The company opted to use the fair value model to measure
the shopping mall. An independent valuation expert was used by the company to fair
value the shopping mall on an annual basis. According to the fair valuation expert
the fair values of the shopping mall at the end of 2020 and 2021 were P120 million
and P115 million, respectively.
1. How much should be recognized in profit or loss in 2021 as a result of the fair
value changes?
a. P23,000,000 c. P5,000,000
b. P15,000,000 d. P 0
2. How much is the carrying amount of the shopping mall on December 31, 2021 if
DMC used the cost model?
a. P100,000,000 c. P96,000,000
b. P115,000,000 d. P92,000,000
9. DEL, Inc., a real estate company, has a property included in its inventory with a cost
of P10,000,000 and net realizable value of P8,000,000 on December 31, 2020. Because
of the decline in the real estate industry, the company decided to lease out the
property to a tenant under an operating lease in 2021 when the fair value of the
property was P7,000,000.
1. If the company will use the cost model to measure the investment property, how
much should be recognized in the 2021 profit or loss as a result of the transfer from
inventory to investment property?
a. P3,000,000 c. P2,000,000
b. P1,000,000 d. P 0
2. If the company will use the fair value model to measure the investment property,
how much should be recognized in the 2021 profit or loss as a result of the transfer
from inventory to investment property?
a. P3,000,000 c. P2,000,000
b. P1,000,000 d. P 0
85
10. Maxime, Inc. completed the construction of a building at the end of 2019 for a total
cost of P100 million. The building is estimated to be economically useful for 25
years. The building was constructed for the purpose of earning rentals under
operating leases. The tenants began occupying the building after its completion. The
company opted to use the fair value model to measure the building. An independent
valuation expert was used by the company to estimate the fair value of the building
on an annual basis. According to the expert the fair values of the building at the end
of 2019, 2020 and 2021 were P104 million, P118 million and 116 million, respectively.
The company’s business expanded in 2020. As a result, the company started to use
the building in its operations on January 1, 2021. Because of the change in use, the
company reclassified the building from investment property to property, plant and
equipment.
1. How much should be recognized in profit or loss in 2019 as a result of the

completion of the building at the end of 2019?
a. P18,000,000 c. P4,000,000
b. P16,000,000 d. P 0
2. The depreciation expense in 2020 is

a. P4,000,000 c. P4,160,000
b. P4,720,000 d. P 0
3. How much should be recognized in profit or loss in 2020 as a result of the fair
value changes?
a. P18,000,000 c. P14,000,000
b. P12,000,000 d. P 0
4. How much is the carrying amount of the building on December 31, 2021?
a. P118,000,000 c. P113,083,333
b. P116,000,000 d. P113,280,000
86

INVESTMENTS
Multiple Choice
1. On January 1, 2020, Mae Company purchased marketable equity securities to be held

as “trading” for P3,700,000. The entity also paid commission, taxes and other
transaction cost amounting to P250, 000. The securities had market value of 4,000,000
on December 31, 2020 and the transaction cost that would be incurred on sale is
estimated at 150,000. No securities were sold during 2020. What amount of unrealized
gain or loss on these securities should be reported in the 2020 income statement?
a.P450,450 c.P300,000
b.P555,000 d.P250,000
2. During 2020, Mel Company purchased marketable equity securities as a trading

investment. For the year ended December 31, 2020, the entity recognized an
unrealized loss of P150, 000. There were no security transactions during 2021. The
information on December 31, 2021 is as follows:
Security Cost Market value
A 3,000,000 2,000,000
B 2,000,000 2,500,000
In the 2021 income statement, what amount should be reported as unrealized gain or
loss?
a. Unrealized gain ofP350, 000 c. Unrealized loss of P500, 000
b. Unrealized loss of P350, 000 d. Unrealized gain of P500, 000
3. Lara Company purchased the following securities during 2020:

Classification cost Market Value 12/31/2020
Security a trading 900,000 1,500,000
Security b trading 1,000,000 2,000,000
On July 31, 2021, the entity sold all the shares of Security B for a total of 1,700,000. On
December 31, 2021, the shares of Security A had market value of 600,000. What is the
gain or loss on the sale of Security B on July 31, 2021?
a.P300, 000 gain c.P100, 000 gain
b.P300, 000 loss d.P100, 000 loss
4. Carla Company acquired a financial instrument for 3,000,000 on March 31, 2021. The
financial instrument is classified as financial asset at fair value through other
comprehensive income. The direct acquisition cost incurred amounted to 500,000. On
December 31, 2021, the fair value of instrument was 5,600,000. What gain should be
recognized in other comprehensive income for the year-ended December 31, 2021?
a.P1,780,000 c.P2,100,000
b.P2,400,000 d.P0
5. During 2020, Gil Company purchased marketable equity securities to be measured at

fair value through other comprehensive income. On December 31, 2020, the balance in
the unrealized loss on these securities was P200,000. There were no security
transactions during 2021. Pertinent data on December 31, 2021 are as follows:
Security Cost Market Value
X 2,100,000 1,600,000
Y 1,850,000 2,000,000
Z 1,050,000 900,000
87
In the statement of changes in equity for 2021, what amount should be included as
cumulative unrealized loss as component of other comprehensive income?
a. 500,000 b. 300,000 c. 200,000 d. 0
6. During 2020, Toronto Company purchased marketable equity securities as short-term

investment to be measured at fair value through other comprehensive income. The cost
and market value on December 31, 2020 were as follows:
1,000 shares - A 300,000 350,000

10,000 shares- B 1,700,000 1,550,000
20,000 shares- C 3,150,000 2,950,000
The entity sold 10,000 shares of B on January 5, 2021 for P150 per share and incurred
P50,000 in brokerage commission and taxes. What amount should be reported as loss
on sale of equity securities in 2021?
a. 200,000 b. 100,000 c. 250,000 d. 50,000 e. 0
7. During 2020, Jerome Company bought the shares of another entity classified as long
term investment at cost:
June 1 20,000 shares @P100 2,000,000
December 1 30,000 shares @P120 3,600,000
5,600,000
The transactions for 2021 are:
January 10 Received cash dividend at P10 per share.
January 20 Received 20% stock dividend
December 10 Sold 30,000 shares at P125 per share
What is the gain on the sale of the investment assuming the FIFO approach?
a. 1,150,000 b. 950,000 c. 150,000 d. 550,000 e. 0
8. On January 1, 2020 Santos Company purchased 100,000 ordinary shares at P80 per
share. On September 30, 2020 the entity received 100,000 stock rights to purchase an
additional 100,000 shares at P90 per share. The stock rights had an expiration date of
February 1, 2021. On September 30, 2020, each share had a market value of P114
and the stock right had a market value of P8. What amount should be reported on
September 30, 2020 as investment in stock rights?
a. 800,000 b. 400,000 c. 100,000 d. 600,000
9. On July 1, 2021, Slave Company paid P1,198,000 for 10% bonds with a face amount of
P1,000,000 to be held as financial assets at amortized cost. Interest is paid on June 30
and December 31. The bonds were purchased to yield 8%. The entity uses the
effective interest method. What is the carrying amount of the bond investment on
December 31, 2021?
a. 1,207,900 b. 1,198,000 c. 1,195,920 d. 1,193,050
10. The Jerome Company purchases 20,000 of bonds. The asset has been designated as
one at fair value through profit and loss. One year later, 10% of the bonds are sold for
4,000. Total cumulative gains previously recognized in Jerome's financial statements in
respect of the asset are 1,000. What is the amount of the gain on disposal to be
recognized in profit or loss?
a. 1,900 b. 900 c. 2,000 d. 1,000
88
11. On April 1, 2021, Joshtin Company purchased 30% of the outstanding ordinary shares
of an associate for P4,000,000. On this date, the investee’s net assets totaled
P8,000,000 and Joshtin Company cannot attribute the excess of cost of the investment
over the equity in the investee’s net assets to any particular factor. The investee
reported net income of P1,000,000 for 2021.
What is the maximum amount which could be included in Joshtin Company’s 2021
income before tax to reflect its equity earnings of the investee?
a. 275,000 b. 225,000 c. 300,000 d. 405,000
12. On January 1, 2021, Joshtin Company purchased 40% of the outstanding ordinary
shares of an investee paying P2,560,000 when the carrying amount of the net assets of
the investee equaled P5,000,000. The difference was attributed to equipment which had
a carrying amount of P1,200,000 and a fair market value of P2,000,000, and to building
with a carrying amount of P1,000,000 and a fair market value of P1,600,000. The
remaining useful life of the equipment and building was 4 years and 12 years,
respectively. During 2021, the investee reported net income of P1,600,000 and paid
dividends of P1,000,000.
What is the carrying amount of the investment in associate on December 31, 2021?
a. 2,550,000 b. 2,700,000 c. 2,800,000 d. 3,050,000
13. Moss Corp. owns 20% of Dubro Corp.’s preferred stock and 80% of its common stock.
Dubro’s stock outstanding at December 31, year 1, is as follows:
10% cumulative preferred stock 100,000 Common stock 700,000 Dubro reported net
income of 60,000 for the year ended December 31, year 1. What amount should Moss
record as equity in earnings of Dubro for the year ended December 31, year 1?
a. 42,000 b. 48,000 c. 48,400 d. 50,000
14. Wood Co. owns 2,000 shares of Arlo, Inc.’s 20,000 shares of 100 par, 6% cumulative,
nonparticipating preferred stock and 1,000 shares (2%) of Arlo’s common stock. During
year 2, Arlo declared and paid dividends of 240,000 on preferred stock. No dividends
had been declared or paid during year 1. In addition, Wood received a 5% common
stock dividend from Arlo when the quoted market price of Arlo’s common stock was 10
per share. What amount should Wood report as dividend income in its year 2 income
statement?
a. 12,000 b. 12,500 c. 24,000 d. 24,500
15. Carsen Company purchased 200,000 of 10% bonds of Garrison Co. on January 1,
2021, paying 211,950. The bonds mature January 1, 2028; interest is payable each
July 1 and January 1. The discount of 11,950 provides an effective yield of 9%.
Carsen’s objective is to hold the bonds to collect the contractual cash flows. Carsen
Company uses the effective interest method.
1. On July 1, 2021, Carsen Company should decrease its Held-for-collection Debt

Investments account for the Garrison Co. bonds by:
a. 462. b. 808. c. 924. d. 1,598.
2. For the year ended December 31, 2021, Carsen Company should report interest
revenue from the Garrison Co. bonds at:
a. 20,000. b. 19,037. c. 19,055. d. 19,076.
89
16. Bear Co. purchased 500,000 of bonds at par. Bear management has an active trading
business model for this investment. At December 31, Bear received annual interest of
20,000, and the fair value of the bonds was 470,400. In Bear Co.’s year-end statement
of financial position what amount will be reported for the bond investment and how
much total income/loss will be reported on its income statement?
Statement of financial position Income statement
a. 500,000 20,000
b. 470,400 20,000
c. 470,400 ( 9,600)
d. 470,400 49,600
17. Polska, Inc. purchased 400 ordinary shares of Millay Manufacturing as a trading
investment for 26,400. During the year, Millay Manufacturing paid a cash dividend of
6.50 per share. At year-end, Milay Manufacturing shares were selling for 69.00 per
share. On the income statement for the year ended December 31, what is the total
amount of unrealized gain/loss and dividend revenue reported by Polska, Inc.?
a. 2,600 b. 1,200 c. 1,400 d. 3,800
18. On its December 31, 2020 balance sheet, Calhoun Company appropriately reported a
10,000 debit balance in its Securities Fair Value Adjustment account. There was no
change during 2021 in the composition of Calhoun’s portfolio of equity securities held as
available-for-sale securities. The following information pertains to that portfolio:
Security Cost Fair value at 12/31/2021
X 125,000 160,000
Y 100,000 95,000
Z 175,000 125,000
400,000 380,000
1. What amount of unrealized loss on these securities should be included in

Calhoun's equity section of the statement of financial position at December 31,
2021?
a. 30,000. b. 20,000. c. 10,000. d. 0.
2. The amount of unrealized loss to appear as a component of comprehensive

income for the year ending December 31, 2021 is
a. 30,000. b. 20,000. c. 10,000. d. 0.
19. Blanco Company purchased 200 of the 1,000 outstanding ordinary shares of Darby
Company's for 300,000 on January 2, 2021. During 2021, Darby Company declared
dividends of 50,000 and reported earnings for the year of 200,000.
1. If Blanco Company used the fair value method of accounting for its investment in
Darby Company, its Equity Investments account on December 31, 2021 should
be
a. 290,000. b. 330,000. c. 300,000. d. 340,000.
2. If Blanco Company uses the equity method of accounting for its investment in
Darby Company, its Equity Investments account at December 31, 2021 should
be
a. 290,000. b. 300,000. c. 330,000. d. 340,000.
90
20. Jeffrey Company bought 20% of Cooper Corporation’s ordinary shares on January 1,
2021 for P11,400,000. Carrying amount of Cooper’s net assets at purchase date
totaled P50,000,000. Fair value and carrying amounts were the same for all items
except for plant and inventory, for which fair values exceed their carrying amounts by
P10,000,000 and P2,000,000 respectively. The plant has a 5-year life. All inventory
was sold during 2021. During 2021, Cooper reported profit of P30,000,000 and paid a
P10,000,000 cash dividend.
Based on the above information, answer the following:
1. What amount should Jeffrey report as net income related to this investment in 2021?
a. P5,200,000 c. P5,400,000
b. P6,200,000 d. P4,200,000
2. The carrying amount of Investment in Cooper Corporation as of December 31, 2021

a. P14,600,000 c. P13,600,000
b. P14,800,000 d. P15,600,000
21. On January 2, 2021, Jerome Company purchased 40,000 shares of Jostine stock at
P100 per share. Brokerage fees amounted to P120,000. A P5 dividend per share of
Jostine stock had been declared on December 15, 2020, to be paid on March 31, 2021
to stockholders of record on January 31, 2021. No other transactions occurred in 2021
affecting the investment in Jostine stock.
The cost of the investment is
a. 4,120,000 b. 4,000,000 c. 3,920,000 d. 3,800,000
22. Grant, Inc. acquired 30% of South Co.’s voting stock for 200,000 on January 2, year 1.
Grant’s 30% interest in South gave Grant the ability to exercise significant influence
over South’s operating and financial policies. During year 1, South earned 80,000 and
paid dividends of 50,000. South reported earnings of 100,000 for the six months ended
June 30, year 2, and 200,000 for the year ended December 31, year 2. On July 1, year
2, Grant sold half of its stock in South for 150,000 cash. South paid dividends of 60,000
on October 1, year 2. Grant does not elect the fair value option to report this investment.
Q1. Before income taxes, what amount should Grant include in its year 1 income
statement as a result of the investment?
a. 15,000 b. 24,000 c. 50,000 d. 80,000
Q2. In Grant’s December 31, year 1 balance sheet, what should be the carrying amount
of this investment?
a. 200,000 b. 209,000 c. 224,000 d. 230,000
Q3. In its year 2 income statement, what amount should Grant report as gain from the
sale of half of its investment?
a. 24,500 b. 30,500 c. 35,000 d. 45,500
23. On March 4, year 1, Evan Co. purchased 1,000 shares of LVC common stock at 80 per
share. On September 26, year 1, Evan received 1,000 stock rights to purchase an
additional 1,000 shares at 90 per share. The stock rights had an expiration date of
February 1, year 2. On September 30, year 1, LVC’s common stock had a market value,
ex-rights, of 95 per share and the stock rights had a market value of 5 each. What
amount should Evan report on its September 30, year 1 balance sheet as the cost of its
investment in stock rights?
a. 4,000 b. 5,000 c. 10,000 d. 15,000
91
24. Kaila Company purchased 50,000 shares on January 15, 2021 representing 5%
ownership interest. The entity received a stock dividend of 30% on March 31, 2021
when the market price of the share is 50. The investee paid a cash dividend of 5 on
December 15, 2021. What amount should be reported as dividend income for 2021?
a. 0 b. 175,000 c. 300,000 d. 325,000
25. On January 1, 2021 Raine Company purchased 10,000 ordinary shares at P90 per
share. On December 31, 2021, the entity received 4,000 shares of the investee in lieu of
cash dividend of P10 per share. On this date, the investee’s share has a quoted market
price of P50 per share. What amount should be reported as dividend income for 2021?
a. 120,000 b. 200,000 c. 20,000 d. 0
26. During 2020, Shawn Company purchased 9,000 ordinary shares of Hurontario
Company for P16 per share, 6,000 ordinary shares of Eglinton Company for P33 per
share and P120,000 of treasury notes at 101. These investments are intended to be
held as ready sources of cash and are classified as held for trading.
Also in 2020, Shawn purchased 10,500 ordinary shares of Dundas Company for P29
per share. The securities are classified as available for sale.
During 2020, Shawn received the following interest and dividend payment on its
investments:
Hurontario Company P1 per share dividend

Eglinton Company P3 per share dividend
Dundas Company P2 per share dividend
Treasury notes 6% annual interest earned for 6 months
Fair values of the securities at December 31, 2020, were as follows:
Hurontario Company P20 per share

Eglinton Company P22 per share
Dundas Company P26 per share
Treasury notes 102
On March 23, 2021, the 6,000 ordinary shares of Eglinton were sold for P17 per share.
On June 30, 2021, the treasury notes were sold 100.5 plus accrued interest.
Fair values of remaining securities at December 31, 2021, are as follows:
Hurontario Company P20 per share

Dundas Company P33 per share
1. Total dividend income in 2020

a. P48,000 c. P27,000
b. P21,000 d. P 0
2. Carrying amount of Trading Securities as of December 31, 2020

a. P434,400 c. P463,200
b. P342,000 d. P717,900
3. Unrealized loss to be recognized in 2020 profit or loss

a. P49,800 c. P27,600
b. P28,800 d. P 0
92
4. Total realized loss on sale of securities in 2021

a. P96,600 c. P29,400
b. P 5,400 d. P31,800
5. Net unrealized gain in accumulated other comprehensive income in equity as of

December 31, 2021
a. P42,000 c. P63,000
b. P73,500 d. P 0
27. On June 1, 2019, Edna Corporation purchased as a long term investment 4,000 of the P1,000 face value,
8% bonds of Mayet Corporation. The bonds were purchased to yield 10% interest. Interest is payable
semi-annually on December 1 and June 1. The bonds mature on June 1, 2025. Edna uses the effective
interest method of amortization. On November 1, 2020, Edna sold the bonds for a total consideration of
P3,925,000. Edna intended to hold these bonds until they matured, so year-to-year market fluctuations
were ignored in accounting for bonds.
Based on the above and the result of your audit, answer the following: (Round off present value factors to
four decimal places)
1. The purchase price of the bonds on June 1, 2019 is

a. P3,645,328 c. P3,696,736
b. P3,691,132 d. P3,624,596
2. The interest income for the year 2019 is

a. P215,850 c. P212,829
b. P215,521 d. P211,612
3. The carrying amount of the investment in bonds as of December 31, 2019 is

a. P3,725,919 c. P3,719,986
b. P3,649,541 d. P3,671,491
4. The interest income for the year 2020 is

a. P306,608 c. P311,218
b. P310,715 d. P304,748
5. The gain on sale of investment in bonds on November 1, 2020 is

a. P21,196 c. P 27,632
b. P80,235 d. P104,045
93

NOTES PAYABLE & DEBT RESTRUCTURING
Multiple Choice
1. Jeffrey Company is indebted to Apex under a P5,000,000, 12% three-year note date
December 31, 2016. Because of Jeffrey’s financial difficulties developing in 2018, Jeffrey
owed accrued interest of P600,000 on the note at December 31, 2018. Under a debt
restructuring on December 31, 2018, Apex agreed to settle the note and accrued interest
for a tract of land having a fair value of P4,500,000. Jeffrey’s acquisition cost of the land is
P3,600,000. Ignoring income tax, in its 2018 income statement,
What amount of gain on extinguishment should Jeffrey report as component of income from
continuing operations?
a. 2,000,000 b. 1,400,000 c. 1,100,000 d. 900,000
2. The following information pertains to the transfer of real estate pursuant to a debt
restructuring by Kaila Company to Mene Company in full liquidation of Kaila’s liability to
Mene:
Carrying amount of liability liquidated 1,500,000
Carrying amount of real estate transferred 1,000,000
Fair value of real estate transferred 1,200,000
What amount of pretax gain should Kaila report as component of income from continuing
operations?
a. 300,000 b. 500,000 c. 200,000 d. 0
3. Kaila Company is experiencing financial difficulty and is negotiating debt restructuring with
its creditors to relieve ifs financial stress. Kaila has a P2,500,000 note payable to United
Bank. The bank is considering acceptance of an equity interest in Kaila Company in the
form of 200,000 shares of common stock valued at P12 per share. The par value of the
common is P10 per share.
How much additional paid in capital should be recognized from the debt restructuring?
a. 500,000 b. 100,000 c. 400,000 d 0
4. Due to extreme financial difficulties, Kaila Company has negotiated a restructuring of its
10% P5,000,000 note payable due on December 31, 2017. the unpaid interest on the note
on such date is P500,000. the creditor has agreed to reduce the face value to P4,000,000,
forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three
years from December 31, 2017. the present value of 1 at 10% for three periods is 0.75 and
the present value of an ordinary annuity of 1 at 10% for three periods is 2.49.
Kaila Company should report gain on extinguishment of debt in its 2017 income statement
at
a. 1,703,200 b. 1,203,200 c. 2,000,000 d. 540,000
5. Giselle Company has an overdue 8% note payable to First Bank at P8,000,000 and
accrued interest of P640,000. As a result of a restructuring agreement on January 1, 2017,
First Bank agreed to the following provisions:
 The principal obligation is reduced to P7,000,000.
 The accrued interest of P640,000 is forgiven
 The date of maturity is extended to December 31, 2020
 Annual interest of 10% is to be paid for 4 years every December 31.
The present value of 1 at 8% for 4 periods is 0.735 and the present value of an ordinary
annuity of 1 at 8% for 4 periods is 3.31.
94
What is the gain on extinguishment to be recognized for the year 2017?

a. 1,000,000 b. 1,178,000 c. 1,640,000 d. 538,000
6. Due to adverse economic circumstances and poor management, Giselle Highlands

Company has negotiated a restructuring of its 9% P6,000,000 note payable to Second
Bank due on January 1, 2017. There is no accrued interest on the note.
The bank has reduced the principal obligation from P6,000,000 to P5,000,000 and extend
the maturity to 3 years or on December 31, 2017. However, the new interest rate is 13%
payable annually every December 31. The present value of 1 at 9% for three periods is .77
and the present value of an ordinary annuity of 1 at 9% for three periods is 2.53.
What is the gain on extinguishment to be recognized for 2017?

a. 1,000,000 b. 350,000 c. 505,500 d. 0
7. During 2017 Joseph Company experienced financial difficulties and is likely to default on a
P5,000,000, 15% three-year note date January 1, 2013, payable to Summit Bank. On
December 31, 2017, the bank agreed to settle the note and unpaid interest of P750,000 for
P4,100,000 cash payable on January 31, 2018.
What amount should Joseph report as gain from debt extinguishment in its 2017 income
statement?
a. 1,650,000 b. 900,000 c. 750,000 d. 0
8. On December 31, 2015, Melvin Company acquired a piece of equipment from Mary
Company by issuing a P1,200,000 note, payable in full on December 31, 2019. Melvin’s
credit rating permits it to borrow funds from several lines of credit at 10%. The equipment
is expected to have a 5-year life and a P150,000 salvage value. The present value of 1 at
10% for 4 periods is 0.68301.
1. What is the equipment’s book value on December 31, 2017?
a. P551,767 c. P491,767
b. P630,000 d. P341,767
2. What is the carrying value of the note at December 31, 2017?

a. P1,090,903 c. P1,200,000
b. P991,730 d. P819,612
9. Kris Company purchased machinery on December 31, 2017, paying P80,000 down and
agreeing to pay the balance in four equal installments of P60,000 payable each December
31. Implicit in the purchase price is an assumed interest of 12%.
The following data are abstracted from the present value tables:
Present value of an ordinary annuity of 1 at 12%
for 4 periods 3.03735
1. What is the cost of the machinery purchased on December 31, 2017?

a. P233,083 c. P262,241
b. P320,000 d. P290,842
2. How much interest expense should be reported on Kris’s income statement for the
year ended December 31, 2018?
a. P38,131 c. P17,293
b. P21,869 d. P42,707
3. What is the carrying value of the note at December 31, 2019?

a. P120,000 c. P99,310
b. P144,110 d. P101,403
95
10. On December 31, 2019, Nolte Co. is in financial difficulty and cannot pay a note due that
day. It is a 600,000 note with 60,000 accrued interest payable to Piper, Inc. Piper agrees to
accept from Nolte a building that has a fair value of 590,000, an original cost of 530,000,
and accumulated depreciation of 130,000.
Nolte should recognize a gain on the settlement of the debt of

a. 0. b. 10,000. c. 60,000. d. 260,000.
11. Colt, Inc. is indebted to Kent under an 800,000, 10%, four-year note dated December 31,
year 1. Annual interest of 80,000 was paid on December 31, year 2 and year 3. During year
4, Colt experienced financial difficulties and is likely to default unless concessions are
made. On December 31, year 4, Kent agreed to restructure the debt as follows:
Interest of 80,000 for year 4, due December 31, year 4, was made payable December 31,
year 5.
Interest for year 5 was waived.
The principal amount was reduced to 700,000.
How much should Colt report as a gain in its income statement for the year ended
December 31, year 4?
a. 0 b. 100,000 c. 60,000 d. 120,000
12. On December 31, year 1, Marsh Company entered into a debt restructuring agreement with
Saxe Company, which was experiencing financial difficulties. Marsh restructured a 100,000
notes receivable as follows:
Reduced the principal obligation to 70,000.

Forgave 12,000 of accrued interest.
Extend the maturity date from December 31, year 1 to December 31, year 3.
Reduced the interest rate from 12% to 8%.
Interest is payable annually on December 31, year 2 and year 3.
Present value factors:

Single sum, two years @ 8% .85734 Single sum, two years @ 12% .79719 Ordinary
annuity, two years @ 8% 1.78326 Ordinary annuity, two years @ 12% 1.69006 In
accordance with the agreement, Saxe made payments to Marsh on December 31, year 2
and year 3. Marsh does not elect the fair value option for reporting the modification of debt.
How much interest income should Marsh report for the year ended December 31, year 3?
a. 0 b. 5,600 c. 8,100 d. 11,200
EMPLOYEE BENEFITS
Multiple Choice
1. JP Company provided the following information for the current year:

Projected benefit obligation, January 1 5,600,000
Fair value of plan assets, January 1 5,000,000
Current service cost 1,110,000
Actual return on plan assets 450,000
Actuarial gain during the year 150,000
Employer contribution 425,000
Benefits paid to retirees 390,000
Settlement rate 10%
What is the total defined benefit cost?
a. 1,120,000 b. 1,100,000 c. 1,170,000 d. 1,070,000
96
2. JP Company provided the following information pertaining to the defined benefit plan for the current
year:
Interest income on plan assets 400,000
Past service cost during the year 50,000
Annual interest on pension liability 500,000
What is the total defined benefit cost?
a. 2,150,000 b. 1,700,000 c. 1,800,000 d. 1,750,000
3. Shawn Company provided the following information for the current year:
Current service cost 520,000
Interest expense on PBO 590,000
Interest income on plan assets 350,000
Loss on plan settlement 240,000
Contribution to the plan 1,500,000
Q1. What is the employee benefit expense for the current year?
a. 1,710,000 b. 1,470,000 c. 1,350,000 d. 1,360,000
Q2. What is the remeasurement gain or loss?
a. 460,000 loss b. 460,000 gain c. 220,000 loss d. 220,000 gain
Q3. What is the total defined benefit cost?
a. 1,820,000 b. 900,000 c. 740,000 d. 960,000
Q4. What is the prepaid or accrued benefit cost for the year?
a. 600,000 accrued b. 600,000 prepaid c. 140,000 accrued d. 140,000 prepaid
4. On January 1, 2020, Shawn Company reported the fair value of plan assets at P6,700,000 and
projected benefit obligation at P7,600,000. The entity revealed the following for the current year:
Past service cost 300,000
Discount rate 10%
Q1. What is the employee benefit expense?

a. 1,840,000 b. 1,540,000 c. 2,510,000 d. 1,750,000
Q2. What is the remeasurement gain or loss on plan assets?
a. 170,000 gain b. 170,000 loss c. 670,000 gain d. 670,000 loss
Q3. What is the fair value of plan assets on December 31?
a. 8,070,000 b. 7,400,000 c. 7,900,000 d. 8,200,000
Q4. What is the projected benefit obligation on December 31?
a. 8,250,000 b. 9,050,000 c. 9,010,000 d. 9,310,000
5. On January 1, 2020, Steven Company reported fair value of plan assets at P6,500,000 and projected
benefit obligation at P7,500,000. During the current year, the entity determined that the current
service cost was P1,200,000 and the discount rate is 10%. The actual return on plan assets was
P800,000 during the year. Other information during the year related to the defined benefit plan is as
follows:
Benefits paid to retires 1,500,000
Decrease in projected benefit obligation due
to change in actuarial assumptions 200,000

a. 1,300,000 b. 1,950,000 c. 1,200,000 d. 1,100,000
97
Q2. What is the total remeasurement gain?

a. 350,000 b. 150,000 c. 200,000 d. 800,000
a. 7,000,000 b. 8,500,000 c. 8,350,000 d. 7,550,000
a. 7,750,000 b. 8,700,000 c. 9,250,000 d. 7,950,000
6. On January 1, 2020, Steven Company reported the fair value of plan assets at P6,000,000 and
projected benefit obligation at P8,000,000. During the year, the entity made a lump sum payment to
certain plan participants in exchange for their rights to receive specified postemployment benefits.
The lump sum payment was P800,000 and the present value of the defined benefit obligation settled
was P1,000,000. In addition, the following data are gathered during the current year:
Contribution to the plan 700,000
Discount rate 12%

a. 1,140,000 b. 1,860,000 c. 900,000 d. 940,000
a. 7,500,000 b. 6,700,000 c. 6,000,000 d. 5,900,000
a. 8,900,000 b. 8,860,000 c. 9,680,000 d. 9,060,000
Q4. What is the accrued benefit cost on December 31?
a. 2,160,000 b. 2,000,000 c. 3,160,000 d. 2,240,000
7. Ana Company provided the following information on January 1, 2020 prior to the adoption of PAS
19R:
Fair value of plan assets 4,750,000
Unamortized past service cost 1,250,000
Projected benefit obligation 5,500,000
Unrecognized actuarial gain 850,000
The transactions for the current year are as follows:
Discount rate 6%
Increase in projected benefit obligation due to
change in actuarial assumptions 150,000

a. 1,255,000 b. 1,540,000 c. 970,000 d.925,000
Q2. What is the net remeasurement gain?
a. 200,000 b. 150,000 c. 350,000 d. 50,000
Q3. What is the prepaid/accrued benefit cost on December 31?
a. 480,000 prepaid b. 480,000 accrued c. 320,000 prepaid d. 320,000 accrued
8. Ana Company provided the following information during 2020:
January 1 December 31
Fair value of plan assets 6,000,000 7,900,000
Projected benefit obligation 5,000,000 5,900,000
Prepaid/accrued benefit cost- surplus 1,000,000 2,000,000
Asset ceiling 700,000 1,200,000
Effect of asset ceiling 300,000 800,000
During the current year, the following data are gathered:
Past service cost 200,000
98
Decrease in projected benefit obligation due

change in actuarial assumptions 500,000
Discount rate 10%

a. 830,000 b. 900,000 c. 800,000 d. 870,000
Q2. What is the net remeasurement gain?
a. 330,000 b. 800,000 c. 300,000 d. 500,000
9. On January 1, 2020, Kris Company had a projected benefit obligation of P10,000,000 and a pension
fund with a fair value of P9,200,000. The entity provided the following information during the
current year:
Actual return on pension fund 250,000
Benefits paid to retirees 1,100,000
Contribution to pension fund 1,050,000
Discount rate 9%
Expected return on pension fund 10%
Q1. What is the pension expense for the current year?

a. 1,272,000 b. 2,100,000 c. 1,850,000 d. 1,050,000
Q2. What is the fair value of pension fund on December 31?
a. 9,400,000 b. 9,450,000 c. 8,350,000 d. 9,150,000
a. 11,000,000 b. 12,100,000 c. 11,200,000 d. 10,100,000
Q4. What is the remeasurement gain or loss on December 31?
Q5. What is the pension asset or liability on December 31?
a. 1,600,000 liability b. 1,600,000 asset c. 800,000 liability d. 800,000 asset
10. Kelly Company provided the following information related to a defined benefit plan for the year
ended December 3, 2020:
Benefits paid 31,000
Contribution to the fund 21,000
Fair value of plan assets:

January 1 2,100,000
December 31 2,400,000
Projected benefit obligation

January 1 2,200,000
December 31 2,500,000
Past service cost the current year 115,000
On January 1, 2020, the discount rate and expected rate of return are 5% and 7% respectively. On
January 1, 2019, the discount rate and expected rate of return are 6% and 8% respectively.
Q1. What amount should be recognized as employee benefit expense for the current year?
a. 150,000 b. 145,000 c. 115,000 d. 140,000
Q2. What is the actual return on plan assets?
a. 310,000 b. 147,000 c. 163,000 d. 341,000
Q3. What is the actuarial loss arising from the increase I projected benefit obligation?
a. 191,000 b. 300,000 c. 185,000 d. 76,000
Q4. What is the net measurement gain or loss on December 31, 2020?
Q5. What amount should be reported as prepaid or accrued benefit cost on December 31, 2020
99
a. 150,000 accrued b. 150,000 prepaid c. 100,000 accrued d. 100,000 prepaid

11. Kelly Company provided the following information for 2020:
January 1 December 31
Prepaid/accrued benefit cost-surplus 600,000 900,000
Asset ceiling 200,000 300,000
Effect of asset ceiling 400,000 600,000
Benefits paid 150,000
Discount rate 10%
Q1. What is the actual return on plan assets for the current year?
a. 200,000 b. 350,000 c. 150,000 d. 260,000
Q2. What is the actuarial gain due to decrease in PBO?
a. 50,000 b. 40,000 c. 30,000 d. 0
Q3. What is the employee benefit expense for 2020?
a. 200,000 b. 100,000 c. 80,000 d. 40,000
Q4. What is the net remeasurement loss in 2020?
a. 110,000 b. 220,000 c. 270,000 d. 170,000
12. Kimberly Company provided the following information pertaining to the pension plan for the current
year:
Projected benefit obligation on January 1 7,200,000
Assumed discount rate 10%
Service cost 1,800,000
Pension benefits paid 1,500,000
If no change in actuarial estimate occurred in the current year, what is the projected obligation on
December 31?
a. 6,420,000 b. 7,500,000 c. 7,920,000 d. 8,220,000
13. Kimberly Company provided the following plan information for the current year:
January 1 Projected benefit obligation 3,500,000
Accumulated benefit obligation 2,800,000
During the year Pension benefits paid to retired
employees 250,000
December 31 Projected benefit obligation 4,200,000
Discount or settlement rate 10%
There is no change in actuarial assumptions during the year. What is the current service cost for the
current year?
a. 600,000 b. 950,000 c. 250,000 d. 270,000
14.Ivan Company provided the following information:

January1 December 31
Market related value of plan assets 2,800,000 2,900,000
What is the actual return on plan assets for the current year?
a. 400,000 b. 370,000 c. 430,000 d. 100,000
15. Anna Company amended the pension plan at the beginning of the current year.
Before amendment After amendment
Accumulated benefit obligation 950,000 1,425,000
100
What is the total amount of past service cost as a result of the amendment?
a. 950,000 b. 600,000 c. 475,000 d. 125,000
16. On January 1, 2020, Ivan Company established a noncontributory defined benefit plan covering all
employees and contributed P1,000,000 to the plan . On December 31,2020, the entity determined
that the current service cost and interest expense on the benefit obligation totaled P620,000. The
discount rate was 10%. There was no remeasurement gain or loss during the year. What amount
should be reported on December 31,2020 as prepaid pension cost?
a. 280,000 b. 380,000 c. 480,000 d. 620,000
17. On January 1, 2020, Ivan Company adopted a defined benefit plan. The current service cost of
P750,000 was fully funded at the end of 2020. Past service cost was funded by a contribution of
P300,000 in 2020. Past service cost was P120,000 for 2020. What is the prepaid pension cost on
December 31, 2020?
a. 180,000 b. 300,000 c. 420,000 d. 540,000
18. Cleo Company had the following balances relating to the defined benefit plan on December 31,
2020:
Asset ceiling 2,500,000
What is the prepaid benefit cost on December 31, 2020?

a. 4,000,000 b. 1,500,000 c. 2,500,000 d. 0
What is the effect on asset ceiling?
a. 4,000,000 b. 1,500,000 c. 2,500,000 d. 0
19. On December 31, 2020, Cleo Company provided the following information:
What is the accrued liability on December 31, 2020?

a. 5,700,000
b 2,250,000
c. 1,400,000
d. 850,000
20. Cleo Company provided the following information pertaining to the defined benefit pension plan for
the current year:
Prepaid pension cost, January 1 20,000
Interest expense on PBO 380,000
Interest income and actual return on plan assets 400,000
Employer contribution 400,000
What is the accrued pension cost at year-end?

a. 250,000 b. 290,000 c. 270,000 d. 400,000
101
NOTES TO LEASES
PROBLEM
1. FOCUS NOTES - LEASE (IFRS 16)
LESSEE - OPERATING LEASE

- Lessee may elect the use of operating lease under 2 exceptions:
1. Short-term lease (12 mos. or less)
2. Low value lease - (value of asset under lease is of low value
compared to a new one)
- lease payment shall be recog. as expense on a straight line basis or

another systematic basis
FINANCE LEASE:
- as a rule all leases shall be recog. as finance lease by the lessee
ASSET LEASE LIAB.

MLP + +
Payment to obtain lease(bonus) +
Initial direct cost +
Restoration cost +
Incentive(moving cost) -
Executory cost - Exp
Contingent rent - Exp
DEPR’N = COST-(SV/GRV)
LIFE/LT
LEASE WITH EXTENSION OPTION

- The lessee shall remeasure the lease liability and carrying amount of ASSET
upon excercise of extention option using the new effective rate upon extension.
Example:
Original term 5 years
Annual rental 500,000
Implicit rate 10%
Extention option 5 years
New implicit rate 8%
Option to extent made after 3 years
Steps:
1. Recompute for the MLP on the remainning orignal term using the new effective rate
Annual rental x A1(remainning 2 years) xxx
2. Compute for the MLP during the extension period
Annual rental x A1(5 yrs.) xxx
Multiply by PV1(2 yrs remaining period) .xx
PV of extention period XXX
102
3. Add 1& 2 less C.A. of lease liability on original term after 3 years.
MLP on orig. using new implicit rate xxx
PV of MLP on extension period xxx
New C.A. of lease liability xxx
Less: Remainning C.A. of L. Liab (xxx)
Adjustment to Asset and L.liab xxx
4. Note: a. Deprn shall be base on remaining C.A. after adjustment
b. New C.A. of lease liab shall be amort. using the new effective rate
FINANCE LEASE WITH VARIABLE PAYMENTS:

Example:
lease term 8 years
Rent for the first 3 years 300,000
Rent for the next 5 years 400,000
Implicit rate 10%
Steps:
1. Compute for the MLP for the first 3 years
Annual Rental 300,000 x A1(3 yrs) xxxx
2. Compute for the MLP for the next 5 yrs. at PV (after 3 yrs)
Annual rental 400,000 x A1( 5 yrs.) xxx
Muliply by PV1 after 3 yrs . xxx
MLP for the next 5 yrs. xxx
3. Add 1 & 2
MLP for the first 3 yrs. xxx
Add: PV of MLP for the next 5 yrs. XXX
Lease liability xxx
LESSOR
Under IFRS 16 the old standard applies to the lessor
OPERATING LEASE
Rent - Income (SL or other systematic basis)
IDC - capitalized (amort. as exp. over the lease term on the same basis as income)
Security deposit - liability
Lease bonus - unearned revenue ( amort. as income over the LT)
Executory cost - Expense
Incentive - reduction to income
Finance lease:
DIRECT FINANCING
Gross Invest: : Annual Rental x Term xx
Residual value(GRV/URV) xx xx
103
Net Investment: Cost of asset xx

IDC xx xx
Unearned interest xx
Example:
Cost of Machinery 1,518,650
Lease term 4 yrs.
Useful life 4 yrs
IDC 66,300
Implicit rate 12%
Gross Investment: Annual rental 500,000 x 4 2,000,000

Net invest: Cost 1,518,6650
IDC 666,300 1,584,950
Unearned Interest 415,050
Note: Because od the IDC implicit rate will decrease and

the original implicit rate will not be used, the new
implicit can be determined through interpolation,
used trial and error using lower rate 11%, 10% or
9%.
Computation of annual Rental:

Ex. Cost of Machine 3,194,410
Residual value 500,000
Useful life/LT 4 yrs.
Implicit rate 10%
1. Asset reverts to lessor

Cost 3,194,410
Less: PV of RV(500,000 x ..683) ( 341,500)
Total 2,852,910
Divide by A1 / 3.1699
2. Asset reverts to lessee
Cost 3,194,410
Divide by A1 / 3.1699
Annual rental 1,007,732
SALES TYPE
1. When the asset reverts to the lessor

Computation of Unearned Interest:(whether guaranteed or unguaranteed)
Gross invest = gross rec. + res.value XX
104
Net invest. = PV of MLP + PV of res. value (XX)also = cost

Unearned Interst XX
Computation of profit - if res. value is guarannteed:

Sales = (PV of MLP + PV of res. value) xx
CS = (cost + IDC) (xx)
Gross profit xx
- if res. value is unguarannteed:
Sales = PV of MLP only xx
Cost = cost - pv of res. value + IDC (xx)
Gross profit xx
2. If asset will revert to the lessee - ignore the res.value
Note: Int. Income = net investment x implicit rate
Sale and Leaseback:

Seller/Lessee
Transfer is a Sale: SP = FV
1. measure ROUA in proportion to C.A. of Asset that relates to
the ROU retained by the seller/lessee.
ROUA = C.A. of asset x P.V. lease payment

F.V. of Asset
2. recog. gain or loss in proportion to the rights transferred to the

buyer/lessor.
Ex. F.V. of Bldg 1,000,000
C.A. of Bldg 800,000
Life 10 years
Annual Rental 100,000
Implicit rate 12%
Term 5 years
LEASE LIAB. = (100,000 X 3.60478)

= 360,478
ROUA = 800,000 X (360,478)/800,000 = 288,382
C.A. of Asset 800,000

ROUA retained by seller/lessee (288,382)
Rights transferred
to buyer/lessor 511,618
S.P 1,000,000
C.A. 800,000
Total gain 200,000
Recog. gain = Gain x % of rights transferred to buyer

105
% of rights transferred = rights transferred / C.A. of asset

or
Recog. gain = Total gain x rights transferred to buyer/lessor
C.A of Asset
200,000 x 360,478
800,000
Recog. gain = 127,904
S.P. above F.V. S.P. 1,100,000

- the xcess S.P. shall be accounted for as additional financing
MLP(PV of lease payment100,000 x 3.60478) 360,478

Additional Financing (100,000)
MLP net of financing 260,478
ROUA = CA of ASSET X MLP(net)

FV of ASSET
= 800,000 X 260,478/1,000,000
= 208,382
CA of asset 800,000
ROU retained by seller/lessee (208,382)
Rights transferred to buyer/lessor 591,618
Recog. gain = Gain x Rights transferred to buyer/lessor

CA of Asset
= 200,000 x 591,618 / 800,000
= 147, 904
Entry:
Cash 1,100,000
ROUA 208,382
Bldg 800,000
Lease liab 260,478
Financial liability 100,000
Gain 147,904
lessor:
Bldg(FV) 1,000,000
Financial Asset 100,000
Cash 1,100,000
Subsequent Payment shall be allocated to lease liab and financing as follows:

Lease liab. 100,000 x (260,478/360,478) 72,279
Financing 100,000 x (100,000/360,478) 27,741
Total 100,000
SP is less than FV (1,000,000 - 900,000)

- the difference shall be treated as prepayments.
MLP (100,000 x 3.60478) 360,478

Prepayments 100,000
Total PV of Leased Payments 460,478
ROUA = CA of Asset x PV of lease payments/FV of asset

= 800,000 x 460,478 / 1,000,000
106
= 368,382
CA of Asset 800,000
ROU retained by seller/lessee (368,382)
Rights transferred to buyer/lessor 431, 618
Recog. gain = Gain x Rights transferred to buyer/lessor / CA of Asset

= 200,000 x 431,618 / 800,000
= 107,904
Entry: Seller/Lessee
Cash 900,000
ROUA 368,382
Bldg 800,000
Lease Liab 360,478
Gain 107,904
Buyer/ lessor:
Bldg 1,000,000
Cash 900,000
Unearned rent 100,000
Note:
1. SP > FV excess SP is deducted from PV of lease payment and
treated additional financing
2. SP < FV excess FV is added to PV of lease payments and treated as
prepayments.
107

PROPERTY, PLANT & EQUIPMENT
Multiple Choice
1. The following items relate to the acquisition of a new machine by Kris Corporation in 2020:
Invoice price of machinery P2,000,000

Cash discount not taken 40,000
Freight on new machine 10,000
Cost of removing the old machine 12,000
Loss on disposal of the old machine 150,000
Gratuity paid to operator of the old machine
who was laid off 70,000
Installation cost of new machine 60,000
Repair cost of new machine damaged in the
process of installation 8,000
Testing costs before machine was put into 15,000
regular operation
Salary of engineer for the duration of the trial 40,000
run
Operating cost during first month of regular 250,000
use
Cash allowance granted because the new
machine proved to be of inferior quality 100,000
How much should be recognized as cost of the new machine?

a. P1,985,000 c. P1,930,000
b. P1,993,000 d. P2,025,000
2. Joshtin Company incurred the following costs at the beginning of the current year:
 Cost of land 10,000,000
 Cost of building 11,500,000
 Remodeling and repairs prior to occupancy 600,000
 Escrow fee 300,000
 Property tax for period prior to acquisition 150,000
 Real estate commission 70,000
What is the cost of the building?

a.)12,378,140 c.)12,620,000
b.)12,260,000 d.)12,100,000
3. Alden Company provided the following information about property, plant and equipment at year-
end:
Plant assets acquired from Aldub Company 7,500,000

Repairs made on building prior to occupancy 200,000
Special tax assessment 30,000
Construction of platform for machinery 70,000
Remodeling of office space in building 400,000
Purchase of new machinery 800,000
Total property, plant and equipment 9,000,000
108
In exchange for the plant assets of Aldub Company, Alden Company issued 50,000 shares with
P100 par value.
On the date of purchase, the share had quoted price of P150 and the plant assets had the
following fair value:
Land 500,000
Building 4,000,000
Machinery 1,500,000
What is the cost of land, building and machinery respectively?

1. Cost of Land
a) 250,000 b) 530,000 c) 459,000 d) 350,000
2. Cost of Building
a) 4,500,000 b) 4,600,000 c) 4,620,000 d) 4,250,000
3. Cost of Machinery
a) 2,120,000 b) 2,370,000 c) 2,477,000 d) 2,465,000
4. Patrick Company incurred the following costs during the current year in relation to property,
plant and equipment:
Cash paid for purchase of land 3,500,000

Mortgage assumed on the land purchased, including
interest accrued 1,400,000
Realtor commission 500,000
Legal fees, realty taxes and documentation expenses 40,000
Amount paid to relocate persons squatting on the property 150,000
Cost of tearing down an old building on the land to
make room for construction of new building 350,000
Salvage value of the old building demolished 50,000
Cost of fencing the property 110,000
Amount paid to contractor for the building constructed 4,500,000
Building permit fee 40,000
Excavation 45,000
Architect Fee 200,000
Interest that would have been earned had the money used
during the period of construction been invested 150,000
Invoice cost of machine acquired 2,500,000
Freight, unloading and delivery charges 60,000
Custom duties and other charges 140,000
Allowances and hotel accommodation, paid to foreign
technicians during installation and test run of machine 500,000
1. What amount should be capitalized as cost of land?

a. 5,450,000 c. 5,440,000
b. 5,590,000 d. 5,550,000
2. What amount should be capitalized as cost of building?

a. 5,000,000 c. 5,235,000
b. 5,085,000 d. 4,885,000
3. What amount should be capitalized as cost of machine?

a. 3,060,000 c.3,140,000
b. 3,200,000 d.3,000,000
109
5. Coco Company incurred the following expenditures related to the construction of a new home
office:
Cost of Land, which included usable old apartment

building with fair value of P200,000 3,000,000
Legal fees, including fee for title search 20,000
Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 30,000
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Premium for insurance on building during construction 22,000
Cost of open house party to celebrate opening of building 80,000
1. What is the cost of land?

a. 2,720,000 c. 3,205,000
b. 2,915,000 d. 2,950,000
2. What is the cost of building?

a. 7,517,000 c. 7,495,000
b. 7,537,000 d. 7,525,000
3. What is the cost of land improvement?

a. 200,000 c. 143,000
b. 203,000 d. 0
6. John Company is constructing a building. Construction began on January 1 and was

completed on December 31. Expenditures were 2,400,000 on March 1, 1,980,000 on June
1, and 3,000,000 on December 31. John Company borrowed 1,200,000 on January 1 on a
5-year, 12% note to help finance construction of the building. In addition, the company had
outstanding all year a 10%, 3-year, 2,400,000 note payable and an 11%, 4-year, 4,500,000
note payable.
1. What are the weighted-average accumulated expenditures?

a. 4,380,000 b. 3,155,000 c. 7,380,000 d. 3,690,000
110
2. What is the weighted-average interest rate used for interest capitalization purposes?
a. 11% b. 10.85% c. 10.5% d. 10.65%
3. What is the avoidable interest for John Company?

a. 144,000 b. 463,808 c. 164,281 d. 352,208
4. What is the actual interest for John Company?

a. 879,000 b. 891,000 c. 735,000 d. 352,208
5. What amount of interest should be charged to expense?

a. 382,792 b. 735,000 c. 526,792 d. 415,192
7. Two independent companies, Hager Co. and Shaw Co., are in the home building business.
Each owns a tract of land held for development, but each would prefer to build on the other's
land. They agree to exchange their land. An appraiser was hired, and from her report and the
companies' records, the following information was obtained:
Hager's Land Shaw's Land
Cost and book value 192,000 120,000
Fair value based upon appraisal 220,000 210,000
The exchange was made, and based on the difference in appraised fair values, Shaw paid
10,000 to Hager. The exchange has commercial substance.
1. For financial reporting purposes, Hager should recognize a gain on this exchange of
a. 0. b. 28,000. c. 10,000. d. 90,000.
2. The new land should be recorded on Hager's books at

a. 210,000. b. 192,000. c. 240,000. d. 168,000.
3. The new land should be recorded on Shaw's books at

a. 120,000. b. 220,000. c. 150,000. d. 210,000.
8. Gabrielle Inc. and Lucci Company have an exchange with no commercial substance. The asset
given up by Gabrielle has a book value of 120,000 and a fair value of 135,000. The asset given
up by Lucci has a book value of 220,000 and a fair value of 200,000. Boot of 65,000 is received
by Lucci.
1. What amount should Gabrielle record for the asset received?

a. 110,000 b. 135,000 c. 185,000 d. 200,000
2. The journal entry made by Lucci to record the exchange will include
a. a debit to Gain on Exchange for 20,000.
b. a debit to Cash for 65,000.
c. a credit to Equipment for 200,000.
d. a debit to Loss Exchange for 20,000.
9. On January 2, 2020, Rapid Delivery Company traded in an old delivery truck for a newer model.
Data relative to the old and new trucks follow:
Old Truck
Original cost 24,000
Accumulated depreciation as of January 2, 2020 16,000
111
Average published retail value 7,000

New Truck
List price 40,000
Cash price without trade-in 36,000
Cash paid with trade-in 30,000
What should be the cost of the new truck for financial accounting purposes?
a. 30,000. b. 36,000. c. 38,000. d. 40,000.
10.Lee Company received an HK 1,800,000 subsidy from the government to purchase manufacturing
equipment on January, 2, 2020. The equipment has a cost of HK 3,000,000, a useful life a six
years, and no salvage value. Lee depreciates the equipment on a straight-line basis.
1. If Lee chooses to account for the grant as deferred revenue, the grant revenue
recognized will be:
a. Zero in the first year of the grant's life.
b. HK 300,000 per year for the years 2020-2023.
c. HK 500,000 per year for the years 2020-2023.
d. HK1,800,000 in 2020.
2. If Lee chooses to account for the grant as deferred revenue, the amount of depreciation
expense recorded in 2020 will be:
a. HK 0. b. HK 200,000. c. HK 300,000. d. HK500,000.
3. If Lee chooses to account for the grant as an adjustment to the asset, the amount of
depreciation expense recorded in 2020 will be:
a. HK 0. b. HK 200,000. c. HK 300,000. d. HK500,000.
4. If Lee chooses to account for the grant as an adjustment to the asset, the book value of
the asset on the 2021 statement of financial position will be:
a. HK 800,000. b. HK 1,200,000. c. HK 2,800,000. d. HK2,400,000.
5. Whether Lee chooses to account for the grant as deferred revenue or as an adjustment
to the asset, the combined impact of deferred grant revenue recognition and/ or
depreciation expense recorded per year will be:
a. decrease to net income of HK 200,000.
b. decrease to net income of HK 300,000.
c. increase to net income of HK 500,000.
d. increase to net income of HK 100,000.
112
11. On March 31, year 4, Winn Company traded in an old machine having a carrying amount of
16,800, and paid a cash difference of 6,000 for a new machine having a total cash price of
20,500. The cash flows from the new machine are expected to be significantly different than the
cash flows from the old machine. On March 31, year 4, what amount of loss should Winn
recognize on this exchange?
a. 0 b. 2,300 c. 3,700 d. 6,000
12. On January 2, year 4, Lem Corp. bought machinery under a contract that required a down
payment of 10,000, plus twenty-four monthly payments of 5,000 each, for total cash payments
of 130,000. The cash equivalent price of the machinery was 110,000. The machinery has an
estimated useful life of ten years and estimated salvage value of 5,000. Lem uses straight-line
depreciation. In its year 4 income statement, what amount should Lem report as depreciation
for this machinery?
a. 10,500 b. 11,000 c. 12,500 d. 13,000
13. On January 2, year 1, Union Co. purchased a machine for 264,000 and depreciated it by the
straight-line method using an estimated useful life of eight years with no salvage value. On
January 2, year 4, Union determined that the machine had a useful life of six years from the
date of acquisition and will have a salvage value of 24,000. An accounting change was made in
year 4 to reflect the additional data. The accumulated depreciation for this machine should have
a balance at December 31, year 4, of
a. 176,000 b. 160,000 c. 154,000 d. 146,000
14. During year 4, King Company made the following expenditures relating to its plant building:
Continuing and frequent repairs 40,000 Repainted the plant building 10,000 Major
improvements to the electrical wiring system 32,000 Partial replacement of roof tiles 14,000
How much should be charged to repair and maintenance expense in year 4?
a. 96,000 b. 82,000 c. 64,000 d. 54,000
15. On June 18, year 4, Dell Printing Co. incurred the following costs for one of its printing presses:
Purchase of collating and stapling attachment 84,000 Installation of attachment 36,000
Replacement parts for overhaul of press 26,000 Labor and overhead in connection with
overhaul 14,000 The overhaul resulted in a significant increase in production. Neither the
attachment nor the overhaul increased the estimated useful life of the press. What amount of
the above costs should be capitalized?
a. 0 b. 84,000 c. 120,000 d. 160,000
16. Orton Corporation, which has a calendar year accounting period, purchased a new machine for
40,000 on April 1, 2015. At that time Orton expected to use the machine for nine years and then
sell it for 4,000. The machine was sold for 22,000 on Sept. 30, 2020. Assuming straight-line
depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the
year of retirement, the gain to be recognized at the time of sale would be
a. 4,000. b. 3,000. c. 2,000. d. 0.
17. On January 1, 2020, the Accumulated Depreciation—Machinery account of a particular

company showed a balance f 370,000. At the end of 2020, after the adjusting entries were
posted, it showed a balance of 395,000. During 2020, one of the machines which cost 125,000
was sold for 60,500 cash. This resulted in a loss of 4,000. Assuming that no other assets were
disposed of during the year, how much was depreciation expense for 2020?
a. 85,500 b. 93,500 c. 25,000 d. 60,500
18. Archer Company purchased equipment in January of 2010 for 90,000. The equipment was
being depreciated on the straight-line method over an estimated useful life of 20 years, with no
residual value. At the beginning of 2020, when the equipment had been in use for 10 years, the
company paid 15,000 to overhaul the equipment. As a result of this improvement, the company
estimated that the useful life of the equipment would be extended an additional 5 years. What
should be the depreciation expense recorded for this equipment in 2020?
a. 3,000 b. 4,000 c. 4,500 d. 5,500
113
19. On January 1, 2019, Fredrichs Inc. purchased equipment with a cost of 3,060,000, a useful life
of 12 years and no salvage value. The company uses straight-line depreciation. At December
31, 2019, the company determines that impairment indicators are present. The fair value less
cost to sell the asset is estimated to be 2,600,000. The asset’s value-in-use is estimated to be
2,365,000. There is no change in the asset’s useful life or salvage value
1. The 2019 income statement will report Loss on Impairment of

a. 0. b. 205,000. c. 440,000. d. 460,000.
2. The 2020 (second year) income statement will report depreciation expense for the
equipment of
a. 216,667. b. 236,364. c. 255,000. d. 260,000.
20. Percy Resources Company acquired a tract of land containing an extractable mineral resource.
Percy is required by its purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the mineral resource. Geological surveys estimate that
the recoverable reserves will be 2,000,000 tons, and that the land will have a value of
1,200,000 after restoration. Relevant cost information follows:
Land 9,000,000
Estimated restoration costs 1,800,000
If Percy maintains no inventories of extracted material, what should be the charge to depletion
expense per ton of extracted material?
a. 3.90 b. 4.50 c. 4.80 d. 5.40
21. Bells company acquired a machine on January 1, 2018, at a cost of P120,000. It was expected
to have a useful life of 10 years. Bells uses the straight line method in depreciating its
machinery and equipment and reports on a calendar year basis. On December 31, 2020, the
machine was appraised as having a gross replacement cost of P150,000. Bells applies the
revaluation model in valuing this class of property, plant and equipment after its initial
recognition.
How much should be credited to revaluation surplus on December
31,2020?
a. P30,000 c. P21,000
b. P105,000 d. P 9,000
22. A machinery was acquired on January 1, 2010 at a cost of P6,000,000. Depreciation of the
machinery is computed on a straight line basis and the annual depreciation is 150,000. On
December 31, 2018, the machinery is appraised at a fair market value of 5,550,000 with a new
total useful life of 30 years.
What amount should be debited to Revaluation Surplus at December 31, 2019?

a. 20,177.50
b. 29,032.26
c. 27, 435.74
d. no answer
23. On January 2, 2019, Q. Tong Inc. purchased equipment with a cost of HK10,440,000, a useful
life of 10 years and no salvage value. The company uses straight-line depreciation. At
December 31, 2019 and December 31, 2020, the company determines that impairment
indicators are present. The following information is available for impairment testing at each year
end:
12/31/2019 12/31/2020
114
Fair value less costs to sell HK9,315,000 Hk8,850,000

Value-in-use HK9,350,000 HK8,915,000
There is no change in the asset’s useful life or salvage value. The 2020 income statement will
report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of HK435,000.
c. Recovery of Impairment Loss of HK40,889.
d. Recovery of Impairment Loss of HK603,889.
24. In March, 2020, Maley Mines Co. purchased a coal mine for 6,000,000. Removable coal is
estimated at 1,500,000 tons. Maley is required to restore the land at an estimated cost of
720,000, and the land should have a value of 630,000. The company incurred 1,500,000 of
development costs preparing the mine for production. During 2020, 450,000 tons were removed
and 300,000 tons were sold. The total amount of depletion that Maley should record for 2020 is
a. 1,374,000. b. 1,518,000. c. 2,061,000. d. 2,277,000.
25. Istandul Enterprise constructed a building at a cost of 24,000,000. Average accumulated

expenditures were 17,000,000, actual interest was 2,120,000, and avoidable interest was
1,600,000. If the salvage value is 4,600,000, and the useful life is 30 years, depreciation
expense for the first full year using the straight-line method is
\a. 700,000. b. 717,733. c. 800,000. d. 870,667.
26. On December 1, Miser Corporation exchanged 2,000 shares of its 25 par value ordinary
shares held in treasury for a parcel of land to be held for a future plant site. The treasury shares
were acquired by Miser at a cost of 40 per share, and on the exchange date the ordinary
shares of Miser had a fair value of 50 per share. Miser received 6,000 for selling scrap when
an existing building on the property was removed from the site. Based on these facts, the land
should be capitalized at
a. 74,000. b. 80,000. c. 94,000. d. 100,000.
27. Horner Company buys a delivery van with a list price of 30,000. The dealer grants a 15%
reduction in list price and an additional 2% cash discount on the net price if payment is made in
30 days. Sales taxes amount to 400 and the company paid an extra 300 to have a special
horn installed. What should be the recorded cost of the van?
a. 24,990. b. 25,645. c. 25,690. d. 25,390.
28. On June 1, 2020, Gold Mining Corp. acquired the rights to a coal mine containing an estimated
reserves of 2,000,000 tons of coal. The company estimated that 25,000 tons of coal would be
extracted and sold each month. Cost allocable to coal was P7,000,000.
Also on June 1, 2020, the company purchased an equipment to be used in the production,
costing P190,000 which has an estimated useful life of 10 years. The equipment was expected
to become obsolete after all the coal deposits had been extracted from the mine and only
P10,000 selling price of the equipment could be expected. Production was in full blast since
June 2, 2020.
1. What would be the depletion expense for the year ended December 31, 2020?
a. P1,050,000 c. P306,250
b. P 525,000 d. P612,500
2. What would be the depreciation expense on the new equipment for the year ended
December 31, 2020?
a. P18,000 c. P15,750
b. P 9,000 d. P16,625
115
29. On December 31, 2019, the statement of financial position of Dundas Company showed the
following property and equipment after charging depreciation:
Building P3,000,00
0
Accumulated depreciation (1,000,000 P2,000,00
) 0
Equipment 1,200,000
Accumulated depreciation (400,000 800,000
)
The company has adopted the revaluation model for the valuation of property and equipment.
This has resulted in the recognition in prior periods of an asset revaluation surplus for the
building of P150,000. On December 31, 2019, an independent valuation assessed the fair
value of the building to be P1,600,000 and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as
of December 31, 2019.
Based on the above information, determine the following: (Ignore deferred tax consequence)
1. Revaluation surplus as of December 31, 2019, after recording the revaluation

a. P250,000 c. P100,000
b. P150,000 d. P 0
2. Amount to be recognized in 2019 profit or loss related to the revaluation of property and
equipment
a. P400,000 c. P250,000
b. P300,000 d. P150,000
3. Total depreciation in 2020

a. P289,000 c. P100,000
b. P625,000 d. P420,000
4. Carrying amount of property and equipment as of December 31, 2020

a. P2,500,000 c. P2,080,000
b. P2,400,000 d. P2,211,000
5. Revaluation surplus as of December 31, 2020

a. P100,000 c. P144,000
b. P 75,000 d. P 0
30. Clause Co. purchased a varnishing machine for P4,000,000 on January 1,2020. The entity
received a government grant of P840,000 in respect of this asset. The accounting policy is to
depreciate the asset over 4 years on a straight line method basis and to treat the grant as
deferred income.
i. What amount should be reported as deferred grant income on December 31, 2021?
a. 420,000
b. 720,000
c. 840,000
d. 120,000
ii. What is the carrying amount of the machine on December 31, 2021?
a. 2,000,000
116
b. 3,000,000
c. 2,420,009
d. 3,160,000
117
INVTY TO PPE
Problem
1. On Nov. 26, year 3, GIC enterprise Co. purchased goods costs 80,000. Terms were
FOB destination. The following information below was costs incurred with the
sale and delivery of the goods:
Packaging for shipment 2,000 Shipping 1,400 Handling charges 2,000
In GiC’s December 31, year 3 balance sheet, what amount of cost for these goods
should be included in inventory?
A. 80,000
B. 85,400
C. 83,400
D. 84,000
2. Dragun Company provided the following information for the year ended December
31, 2020:
Cash 500,000
Trade and Other Receivables 1,500,000
Inventories 100,000
Dairy Livestock-Immature 50,000
Dairy Livestock-Mature 400,000
Trade and other payable 520,000
Note Payable – long term 1,500,000
Share Capital 1,000,000
Fair Value of milk produced 600,000
What is the fair value of the biological assets on December 31, 2020?
a. 550,000
b. 450,000
c. 360,000
d. 250,000
118
3. A physical count of inventory at December 31, 2020 revealed that Victory Enterprises
had inventory on hand at that date with a cost of P441,800. The annual audit
identified that the following items were excluded from this amount:
 Merchandise inventory of P61,000 is held by Victory on consignment.

The consignor is Genesis Company.
 Merchandise costing P38,000 was shipped by Victory Enterprises FOB

Destination to a customer on December 31,2020.
 Merchandise costing P46,000 was shipped by Victory FOB Shipping

point to a customer on December 29,2021. The customer was scheduled
to receive the goods on January 6,2021.
 Merchandise costing P83,000 shipped by a vendor FOB Destination on

December 31,2020 was received by Victory on January 4,2021.
 Merchandise costing P51,000 purchased FOB shipping point was

shipped by the supplier on December 31,2020 and received by Victory
on January 5,2021.
What amount if inventory should be recorded in the December 31, 2020 statement of
financial position of Victory enterprises?
a. P545,000 c. P540,400
b. P530,800 d.P645,000
4. A fire destroyed ASA company's inventor on October 31. On January 1, the inventory
had a cost of 3,500,000. During the period January 32 to October 31, the entity had
net purchases of 8,500,000 and net sales of 17,000,000. Undamaged inventory at the
date of fire had a cost of 170,000. The mark up on cost is 66 2/3%. What was the cost
of inventory destroyed by fire?
a. 1,630,000
b. 1,970,000
c. 1,550,000
d. 5,170,000
119
5. On January 1, 2021, an entity paid commission, taxes and other transaction costs of
300,000 related to their purchase of trading securities amounting to 4,500,000.
The securities had market value of 4,800,000 on December 31, 2021and sales
transaction cost estimated 40,000. What amount of unrealized gain or loss on these
securities should be reported in the 2021 income statement?
A. 300,000
B. 40,000
C. 550,000
D. 650,000
6. Bond paper company, purchased bonds and designated as one at fair value through
profit or loss amounted to 35,000. 1 year later, the company decided to sell
15% of the bonds for 6,500. Total cumulative gains previously recognized in the
company’s financial statements in respect of the asset are 3,000. What amount of the
gain on disposal to be recognized on profit or loss?
A. 800
B. 3,500
C. 1,250
D. 0
7. Bubbles Company purchased financial instrument on January 1, 2021 for 2,000,000

with direct acquisition cost of 400,000. Bubbles classified the asset as
financial asset at fair value through comprehensive income. On December 31, 2021,
market value of the said asset raised to 3,500,000. What gain should be recognized in
other comprehensive income for the year-ended December 31, 2021?
A. 1,500,000
B. 1,100,000
C. 1,900,000
D. 0
8. At the beginning of the current year, Jumbo Company purchased 10% of Race
Company’s outstanding ordinary shares for 4,000,000
Jumbo Company is the largest single shareholder in Race and Jumbo’s officers are
a majority of Race’s board of directors.
The investee reported net income of 5,000,000 for the current year and paid cash
dividend of 1,500,000
What amount should be reported as investment in Race Company at year end?

a. 4,500,000
120
b. 4,350,000
c. 4,000,000
d. 3,850,000
9. On August 1, 2019, Renfro Co. purchased to hold for collection, 1,000, $1,000, 9%
bonds for $940,000 (a 10% effective interest rate). The bonds, which mature on
August 1, 2026, pay interest semiannually on February 1 and August 1. Renfro uses
the effective interest method of amortization. The bonds should be reported in the
December 31, 2019 statement of financial position at a carrying value of
a. $943,333 b. $941,667.
c. $940,000. d. $942,000
10. On January 1, 2018, Joy Company purchased marketable equity securities to be held
as “trading” for P6,000,000. The entity also paid commission, taxes and other
transaction costs amounting to P500,000. The securities had a market value of
P6,500,000 on December 31, 2018 and the transaction costs that would be incurred
on sale are estimated of P200,000. No securities were sold during 2018. What amount
of unrealized gain or loss on these securities should be reported in 2018 income
statement?
A) 500,000 unrealized .gain
B) 500,000 unrealized loss
C) 300,000 unrealized gain
D) 300,000 unrealized loss
11. February 3, year 3, A company traded their old equipment for a new equipment. Old
equipment had a carrying amount of 15,000, the company paid 4,000 cash
difference for new equipment having total cash price of 20,000. The cash flows from
the new equipment are expected to be significantly different than the cash flows
from the old equipment. On February 3, year 3, what amount of gain or loss
should this company recognize on this exchange?
A. 5,000 loss
B 5,000 gain.
C. 1,000 loss
D 1,000 gain
12. On January 1, 2020, Fried Inc. purchased equipment with useful life of 10 years
costing 2,550,000, no salvage value. Fried uses straight-line depreciation. At
the end of the year, the company determines some impairment; the fair value less
cost to sell the asset is estimated to be 2,000,000. The asset’s value-in-use is
estimated to be 1,800,000. No change in asset’s useful life or salvage value is
present.
121
1. The 2020 income statement will report loss on impairment of

A. 0
B. 200,000
C. 295,000
D. 495,000
2. The 2021 income statement will report depreciation expense for the equipment of
A. 222, 222
B. 200,000
C. 283,333
D 255,000
13. Ben Inc. and Laila Company had an exchange with no commercial substance. The
asset given up by Ben has a book value of 160,000 and fair value of 190,000. The
asset given up by Laila has a book value of 220,000 and a fair value of 200,000. Boot
of 65,000 is received by Laila. What amount should Ben record for the asset
received?
a. 155,000
b. 95,000
c. 225,000
d. 200,000
14. On January 1, 2019, Primera Company traded in an old delivery truck for a newer
model. The following data is relative to the old and new trucks:
Old Truck
Original Cost 48,000
Accumulated Depreciation as of Jan 1, 2019 32,000
Average Published Retail Value 14,000
New Truck
List Price 80,000
Cash Price w/o trade-in 72,000
Cash paid with Trade-in 60,000
What should be recorded as loss?

a. 4,000
b. 12,000
c. 32,000
d. none
122
15. On January 1, 2019, Graham Company purchased a new machine for $2,100,000. The
new machine has an estimated useful life of nine years and the salvage value was
estimated to be $75,000. Depreciation was computed on the sum-of-the-years'-digits
method. What amount should be shown in Graham's balance sheet at December 31,
2020, net of accumulated depreciation, for this machine?
a. $1,695,000
b. $1,335,000.
c. $1,306,666
d. $1,244,250
123
Quizzer - invty
1. Raptors Factory started operations in 2019. Raptors manufactures bath towels. 60% of the
production are “Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250
per dozen. During 2019, 6,000 dozens were produced at an average cost of P360 per dozen. The
inventory at the end of the year was as follows:
220 dozens “Class A” @ P360 P 79,200

300 dozens “Class B” @ P360 108,000
P187,200
Using the relative sales value method, which management considers as a more equitable basis of cost
distribution, answer the following:
1. How much of the total cost should be allocated to “Class A”?
a. P1,296,000 c. P1,284,324
b. P1,620,000 d. P 925,714
2. How much of the total cost should be allocated to “Class B”?
a. P540,000 c. P 864,000
b. P875,676 d. P1,234,286
3. How much is the value of inventory as of December 31, 2019?

a. P187,200 c. P117,000
b. P187,946 d. P166,500
4. How much is the cost of sales for the year 2019?
a. P1,972,800 c. P2,043,000
b. P1,993,500 d. P1,972,054
5. How much is the gross profit for the year 2019?
a. P242,200 c. P221,500
b. P406,500 d. P242,946
2. Joseph Sales Company uses the first-in, first-out method in calculating cost of goods sold for the three products
that the company handles. Inventories and purchase information concerning the three products are given for
the month of October.
Product C Product P Product A

Oct. 1 Inventory 50,000 units at 30,000 units 65,000 units at
P6.00 at P10.00 P0.90
Oct. 1-15 Purchases 70,000 units at 45,000 units 30,000 units at
P6.50 at P10.50 P1.25
Oct. 16-31 Purchases 30,000 units at
P8.00
Oct. 1-31 Sales 105,000 units 50,000 units 45,000 units
Oct. 31 Sales price P8.00/unit P11.00/unit P2.00/unit
124
On October 31, the company’s suppliers reduced their prices from the most recent purchase prices by the
following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Joseph decided to reduce
its sales prices on all items by 10%, effective November 1. Joseph’s selling cost is 10% of sales price.
Products C and P have a normal profit (after selling costs) of 30% on sales prices, while the normal profit on
product A (after selling cost) is 15% of sales price.
1. Total cost of Inventory at October 31 is

a. P565,000 c. P557,310
b. P655,500 d. P617,500
2. The amount of Inventory to be reported on the company’s statement of financial position at October 31 is
a. P569,850 c. P559,350
b. P543,810 d. P595,350
3. The Allowance for inventory write down at October 31 is

a. P 5,650 c. P85,650
b. P13,500 d. P60,150
4. The cost of sales after loss on inventory write down for the month of October is
a. P1,298,500 c. P1,022,260
b. P1,290,650 d. P1,208,000
125
P1/AP – REVIEW
RE/BVPS/EPS

Multiple Choice
1. East Company, a calendar year company, had sufficient retained earnings in 2018 as a basis for dividends but was
temporarily short of cash. East declared a dividend of P1,000,000 on April 1, 2018, and issued promissory notes to
its stockholders in lieu of cash. The notes, which were dated April 1, 2018, had a maturity date of March 31, 2019
and a 10% interest rate.
How should East account for the scrip dividend and related interest?
a. Debit retained earnings for P1,100,000 on April 1, 2018
b. Debit retained earnings for P1,100,000 on March 31, 2019.
c. Debit retained earnings for P1,000,000 on April 1, 2018 and debit interest expense for P100,000 on March
31, 2019.
d. Debit retained earnings for P1,000,000 on April 1, 2018 and debit interest expense for P75,000 on
December 31, 2018.
2. Bossing Vic co. paid dividends of P200,000 and P300,000 at the end of 2018 and 2019, respectively. The
corporation has not paid any other dividends since its organization on January 4, 2018. The outstanding shares are
20,000, 12% preference shares, par P100 and 30,000 ordinary shares, par P100.
If a preference share is non-cumulative and nonparticipating, how much would be received in 2018 by the preference
and ordinary shareholders, respectively?
a. 100,000 and 100,000
b. 150,000 and 50,000
c. 160,000 and 40,000
d. 200,000 and 0
If preference shares were cumulative and nonparticipating, how much would the preference and ordinary
shareholders, respectively, receive in 2019?
a. 150,000 and 150,000
b. 240,000 and 60,000
c. 280,000 and 20,000
d. 300,000 and 0
3. The shareholder’s equity of Jerome co. on January 1, 2019 is as follows:
Ordinary shares, P20 par, 60,000 shares authorized,

30,000 shares issued and outstanding 600,000
Accumulated profits 325,000
On June 1, 2019 the company declared and issued a 15% share dividend. The market value of the share on June 1
is P26 per share. No additional shares of ordinary were issued between January 1 and June 1, 2019.
How much is the total contributed capital after the share dividend?
a. 780,000 b. 790,000 c. 817,000 d. 924,000
4. Jeffrey Company’s stockholders’ equity is comprised of 100,000 shares of P20 par ordinary share, P4,000,000 of
Share premium on ordinary share, and retained earnings of P6,000,000. If a 40% stock dividend is declared when
the stock is selling for P50 per share. What amount should be transferred from the retained earnings account to
Share premium account?
a. 2,000,000 b. 1,200,000 c. 800,000 d. 0
126
5. Dix Company's stockholders' equity at December 31, 2019, consisted of the following:
8% cumulative preferred stock, P50 par; liquidating value P55 per share; 1,000,000
authorized, issued and outstanding 20,000 shares
Common stock, 25 par; 200,000 shares authorized; 100,00 share issued and 2,500,000
outstanding
Dividend on preferred stock have been paid through 2017 but have not been declared for 2018 and 2019.
At December 31, 2019, Dix's book value per common share was
a. 25.00 b. 27.20 c. 26.40 d. 29.00
6. Jerome Company's stockholders' equity at December 31, 2019 consisted of the following:
Preferred stock - 12%, P50 par, 20,000 shares issued 1,000,000
Common stock, P25par, 100,000 shares issued 2,500,000
Additional paid in capital 200,000
Retained earnings appropriated 100,000
Revaluation surplus 300,000
Dividends on preferred stock have not been paid since 2017. The preferred stock has a liquidating value of P55 per
share and a call price of P58 per share.
What is the book value per share of preferred stock?
a. 61 b. 56 c. 55 d. 58
7. You are auditing the financial statements of Toronto Raptors franchise as of December 31, 2019. The company’s
general ledger shows the following liability and equity accounts at the balance sheet date.
Accounts payable P530,000

Accrued expenses 41,600
Reserve for bond retirement 320,000
Preferred stock, 6% cumulative, P100 par;
6,000 shares authorized; 4,000 shares issued;
3,700 shares outstanding
(P110 liquidation value per share) 400,000
Common stock, P10 par; 200,000 shares
authorized; 80,000 shares issued and outstanding 800,000
Additional paid in capital 154,600
Treasury preferred stock, at cost 36,000
What is book value of the preferred stock on December 31, 2019?

a. 116 b. 115 c. 110 d. 122
What is the book value of the common stock on December 31, 2019?
a. 18.47 b. 18.68 c. 18.36 d. 18.40
8. Ozz Company had the following capital structure during 2018 and 2019:
Preferred stock, P10 par, 4% cumulative, 25,000 shares issued and outstanding
250,000
Common stock, P5par, 200,000 shares issued and outstanding 1,000,000
Ozz reported net income of P500,000 for the year ended December 31, 2019. Ozz paid no preferred dividends
during 2018 and paid P16,000 in preferred dividends during 2019. In its 2019 income statement,
What amount should Ozz report as basic earnings per share?

a. 2.42 b. 2.45 c. 2.48 d. 2.50
127
9. Mc Donald had 120,000 of ordinary shares issued and outstanding at January 1,2019. On January 2 of the same
year, the company issued 80,000 preference shares. During the year, the company declared and paid P420,000
cash dividend on the ordinary shares and P240,000 on the preference shares. Net income for the year was
P1,500,000. What should be the basic earnings per share on 2019?
a.P9.00 b. P10.50 c. P12.50 d. P15.75
10. On January 1, 2019, ABS Corporation had 187,500 shares of its P2 par value common stock outstanding. On March
1, ABS sold an additional 375,000 shares on the open market at P20 per share. ABS issued a 20% stock dividend
on May 1. On August 1, ABS purchased 210,000 shares and immediately retired the stock. On November 1, 300,000
shares were sold for P25 per share. What is the weighted-average number of shares outstanding for 2019?
a. 765,000 b. 562,500 c. 358,333 d. 258,333
11. Cool Co. had 2,000,000 shares of common stock outstanding on January 1 and December 31, 2019. In connection
with the acquisition of a subsidiary company in June 2018, Royce is required to issue 200,000 additional shares of
its common stock on July 1, 2019, to the former owners of the subsidiary. Royce paid 240,000 in preferred stock
dividends in 2019, and reported net income of 2,800,000 for the year. Royce's diluted earnings per share for 2019
should be
a. 1.38. b. 1.32. c. 1.26. d. 1.22.
12. Helen Inc., had 620,000 shares of common stock issued and outstanding at December 31, 2018. On July 1, 2019,
an additional 50,000 shares of common stock were issued for cash. Helen also had unexercised stock options to
purchase 32,000 shares of common stock at P15 per share outstanding at the beginning and end of 2019. The
average market price of Helen's common stock was P20 during 2019. What is the number of shares that should be
used in computing diluted earnings per share for the year ended December 31, 2019?
a. 578,000 b. 589,000 c. 653,000 d. 658,000
13. Norkis Co. has 4,000,000 shares of common stock outstanding on December 31, 2018. An additional 200,000
shares are issued on April 1, 2019, and 480,000 more on September 1. On October 1, Lemke issued 6,000,000 of
9% convertible bonds. Each P1, 000 bonds are convertible into 40 shares of common stock. No bonds have been
converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share
on December 31, 2019 is
a. 4,310,000 and 4,310,000.
b. 4,310,000 and 4,370,000.
c. 4,310,000 and 4,550,000.
d. 5,080,000 and 5,320,000.
14. At December 31, 2018, Quirk Company had 3,000,000 shares of common stock outstanding. On January 1, 2019,
Quirk issued 500,000 shares of preferred stock which were convertible into 500,000 shares of common stock. During
2019, Quirk declared and paid 1,500,000 cash dividends on the common stock and 500,000 cash dividends on the
preferred stock. Net income for the year ended December 31, 2019, was 5,000,000. Assuming an income tax rate of
30%, what should be diluted earnings per share for the year ended December 31, 2019? (Round to the nearest
penny)
a. 1.43 b. 1.50 c. 2.67 d. 2.80
15. Presented below is the stockholder’s equity of the comparative balance sheet of Pembo Co. on December 31, 2020
and 2019:
Dec. 31, 2020 Dec. 31, 2019
12% Preferred stock, P100 par P 165,000 P 135,000

Paid in capital in excess of par – preferred 26,800 18,400
Common stock, P10 par* 821,200 799,200
128
Paid in capital in excess of par – common 128,600 117,600

Paid in capital from treasury stock 3,600 1,600
Retained earnings 942,400 792,920
Total stockholder’s equity P 2,087,600 P 1,864,720
*Par value after June 1, 2020 stock split

Pembo had 32,500 common stock outstanding at December 31, 2018.
The following stockholders’ equity transactions were recorded in 2019 and 2020:
2019
May 1 Sold 4,500 common shares for P24 par value P20
June 30 Sold 350 preferred shares for P124, par value P100
Aug. 1 Issued an 8% stock dividend on common stock. The market
value of the stock was P30 per share.
Sept. 1 Declared cash dividends of 12% on preferred stock
and P3 on common stock
Dec. 31 Net income for the year is P632,400
2020
Jan. 31 Sold 1,100 common shares for P30
May 1 Sold 300 preferred shares for P128
June 1 Issued a 2-for-1 split of common stock. The par value of
common stock was reduced t oP10 per share
Sept. 1 Purchased 500 common shares for P18 to be held as treasury stock.
Oct. 1 Declared cash dividends of 12% on preferred stock and P4
per share on outstanding common stock
Nov. 1 Sold 500 shares of treasury stock for P22
What is Pembo’s basic earnings per share for 2019?

a. 8.25
b. 8.04
c. 16.07
d. 16.49
What is Pembo’s net income for 2020?

a. 475,960
b. 456,160
c. 497,760
d. 495,760
What is Pembo’s basic earnings per share for 2020?

a. 5.81
b. 6.06
c. 5.82
d. 6.05
16. The year-end audit of the records of Kaila Farms disclosed a shortage in cash amounting to P600,000. The
treasurer had concealed the fraud by increasing inventories by P300,000, land by P100,000 and accounts receivable
by P200,000.
Faced with prosecution, the treasurer offered to surrender 6,000 Kaila Farms shares owned by him. The board of
directors accepted the offer, with the agreement that the treasurer would pay any deficiency between the shortage
and the book value of the shares, after adjusting for the fraud. The corporation would in turn pay the excess, if any,
of the book value over the shortage.
As of December 31, 2020, there were 40,000 ordinary shares issued and outstanding with a par value of P100;
Retained earnings as of January 1, 2020 was P1,600,000 and net income from 2020 operations was P1,400,000.
129
REQUIRED:
Considering the above information, answer the following:
1. What would be the book value per share for purposes of the agreement?
a. P175 b. P206 c. P150 d. None of these
2. How much would the company pay the treasurer, if any?

a. P450,000 b. P300,000 c. P636,000 d. None of these
3. Assuming further the company distributes the 6,000 shares as dividend to the remaining stockholders, what
would be the balance of the Retained earnings as of December 31, 2020?
a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these
130

RECEIVABLES
Multiple Choice
Identify athe letter of the choice that best completes the statement or answers the question.
1. On December 31, 2020, the accounts receivable control account of Kaila Company had a
balance of P2,865,000. An analysis of the accounts receivable account showed the following:
Accounts known to be worthless P 37,500

Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances
arising from sales return (225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable – unassigned 750,000
Subscriptions receivable due in 30 days 825,000
Trade accounts receivable - assigned (Kaila
company’s equity in assigned accounts is 375,000
P150,000)
Trade installment receivable due 1 – 18 months,
including unearned finance charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are
held (no entries were made on receipts of 75,000
checks)
P2,865,000
Based on the above information, determine the adjusted balance of following:
1. The trade accounts receivable as of December 31, 2020 is

a. P1,147,500 c. P1,485,000
b. P1,522,500 d. P1,447,500
2. The net current trade and other receivables as of December 31, 2020 is
a. P2,647,500 c. P2,272,500
b. P2,610,000 d. P1,822,500
3. How much of the foregoing will be presented under noncurrent assets as of December 31,
2020?
a. P1,200,000 c. P525,000
b. P 375,000 d. P 0
2. Presented below are a series of unrelated situations. Answer the following questions relating to
each of the independent situations as requested.
1. Kaila Company’s unadjusted trial balance at December 31, 2020, included the following
accounts:
Debit Credit
Accounts receivable P1,000,000
Allowance for doubtful accounts 40,000
Sales P15,000,000
Sales returns and allowances 700,000
131
Kaila Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad
debt expense for 2020.
a. P225,000 c. P214,500
b. P254,500 d. P 55,000
2. An analysis and aging of Connie Corp. accounts receivable at December 31, 2020,
disclosed the following:
Amounts estimated to be uncollectible P 1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per 1,250,000
books)
What is the net realizable value of Connie’ receivables at December 31, 2020?
a. P15,700,000 c. P16,250,000
b. P17,500,000 d. P14,450,000
3. Connie Company provides for doubtful accounts based 3% of credit sales. The following
data are available for 2020.
Credit sales during 2020 P21,000,000

Allowance for doubtful accounts 1/1/2020 170,000
Collection of accounts written off in prior years
(Customer credit was reestablished) 80,000
Customer accounts written off as uncollectible
during 2020 300,000
What is the balance in allowance for doubtful accounts at December 31, 2020?
a. P630,000 c. P500,000
b. P420,000 d. P580,000
4. At the end of its first year of operations, December 31, 2020, Joseph, Inc. reported the
Accounts receivable, net of allowance for

doubtful accounts P9,500,000
Customer accounts written off as uncollectible
during 2020 240,000
Bad debts expense for 2020 840,000
What should be the balance in accounts receivable at December 31, 2020, before
subtracting the allowance for doubtful accounts?
a. P10,100,000 c. P 9,740,000
b. P10,340,000 d. P10,580,000
5. The following accounts were taken from Joseph Inc.’s statement of financial position at
December 31, 2020.
Debit Credit
Allowance for doubtful accounts 100,000
Net credit sales P7,500,000
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be
reported for 2020.
a. P123,000 c. P223,000
b. P 23,000 d. P225,000
132
3. Joseph Company’s statement of financial position shows the accounts receivable balance at
December 31, 2019 as follows:

Allowance for doubtful 72,000
accounts
P3,528,000
During 2020, transactions relating to the accounts were as follows:
 Sales on account, P38,400,000.
 Cash received from collection of current receivable totaled P31,360,000, after discount of
P640,000 were allowed for prompt payment.
 Customers’ accounts of P160,000 were ascertained to be worthless and were written off.
 Bad accounts previously written off prior to 2020 amounting to P40,000 were recovered.
 The company decided to provide P184,000 for doubtful accounts by journal entry at the end
of the year.
 Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of

P3,200,000. Collections of P1,200,000 were made on these receivables (not included in the
collections previously given) and applied as partial payment to the loan.
1. The accounts receivable as of December 31, 2020 is

a. P8,680,000 c. P4,240,000
b. P9,840,000 d. P8,640,000
2. The allowance for doubtful accounts as of December 31, 2020 is

a. P 8,000 c. P184,000
b. P136,000 d. P176,000
3. The net realizable value of accounts receivable as of December 31, 2020 is

a. P8,544,000 c. P8,504,000
b. P8,456,000 d. P4,104,000
4. If receivables are hypothecated against borrowings, the amount of receivables involved

should be
133
a. Disclosed in the statements or notes

b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face
value and the amount of borrowings
4.For the year ended December 31, 2020, Kaila Corporation revealed that the Accounts Receivable
account consists of the following:
Trade accounts receivable (current) P3,440,000

Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments – at cost
The consignee sold goods costing P96,000 for
P160,000. A 10% commission was charged by
the consignee and remitted the balance to
Kaila. The cash was received in January, 2021. 320,000
Total P4,688,000
The balance of the allowance for doubtful accounts before audit adjustment is a credit of
P80,000. It is estimated that an allowance should be maintained to equal 5% of trade
receivables, net of amount due from the consignee who is bonded. The company has not
provided yet for the 2020 bad debt expense.
Based on the above information, determine the adjusted balance of following:
1. Trade accounts receivable

a. P4,080,000 c. P4,464,000
b. P3,440,000 d. P3,584,000
2. Allowance for doubtful accounts

a. P204,000 c. P172,000
b. P216,000 d. P179,200
3. Doubtful accounts expense

a. P264,000 c. P252,000
b. P220,000 d. P227,200
5. Jerome Company was organized in 2020. For the year ended December 31, 2020, Jerome
made available the following information:
134
Total merchandise purchases for the year 7,000,000

Merchandise inventory at December 31 1,400,000
Collection from customers 4,000,000
All merchandise was marked to sell at 40% above cost. Assuming that all sales are on credit
basis and all receivables are collectible, what should be the balance in accounts receivable at
December 31, 2020?
a. 1,000,000
b. 3,840,000
c. 5,000,000
d. 5,800,000
6. Joseph Company provided some information on their financial records on December 31, 2020:
Accounts receivable, January 1 P1,920,000

Collections of account receivable 6,240,000
Bad debts 200,000
Inventory, January 1 2,880,000
Inventory, December 31 2,640,000
Accounts payable, January 1 1,000,000
Accounts payable, December 31 1,500,000
Cash sales 1,200,000
Purchases 4,800,000
Gross Profit on Sales 2,160,000
What is the ending balance of accounts receivable on December 31, 2020?

a. 10,68000
b. 2,880,000
c. 3,120,000
d. 4,080,000
7. Leaf Co. purchased from Oak Co. a 20,000, 8%, five-year note that required five equal annual
year-end payments of 5,009. The note was discounted to yield a 9% rate to Leaf. At the date of
purchase, Leaf recorded the note at its present value of 19,485. What should be the total
interest revenue earned by Leaf over the life of this note?
a. 5,045
b. 5,560
c. 8,000
d. 9,000
8. On January 1, 2020, JP Co. sells its equipment with a carrying value of P160,000. The
company receives a non-interest bearing note due in 3 years with a face amount of P200,000.
There is no established market value for the equipment. The prevailing interest rate for a note
of this type is 12%. The following are the present value factors of 1 at 12%:
Present value of 1 for 3 periods 0.71178

Present value of an ordinary annuity of 1 for 3 periods 2.40183
Q1. What is the gain or loss to be recognized on the sale of the equipment?
a. 17,644 loss
b. 122 gain
c. 17,644 gain
d. 40,000 gain
Q2. The discount on note receivable on January 1, 2020, is

a. 57,644
135
b. 0
c. 40,000
d. 17,644
Q3. The discount amortization at the end of the third year using the effective interest method is
a. 13,333
b. 19,215
c. 21,428
d. 0
9. Jason Co. assigned 1,000,000 of accounts receivable to Quick Finance Co. as security for a
loan of 840,000. Quick charged a 2% commission on the amount of the loan; the interest rate
on the note was 10%. During the first month, Jason collected 220,000 on assigned accounts
after deducting 760 of discounts. Jason accepted returns worth 2,700 and wrote off assigned
accounts totaling 7,400.
Q1. The amount of cash Jason received from Quick at the time of the transfer was
a. 756,000.
b. 820,000.
c. 823,200.
d. 840,000.
Q2. Entries during the first month would include a

a. debit to Cash of 220,760.
b. debit to Bad Debt Expense of 7,400.
c. debit to Allowance for Doubtful Accounts of 7,400.
d. debit to Accounts Receivable of 230,860.
10. On December 1, 2020, Hero Company assigned P400,000 of accounts receivable in

consideration for a loan of 335,000 to Halo Company charged a 2% commission on the amount
of the loan; the interest rate on the note was 10%. During December, Hero collected P110,000
on assigned accounts after deducting P380 of discounts. Hero accepted returns worth P1,350
and wrote off assigned accounts of P2,980.
Question 1:
How much cash did Hero receive from Halo at the time of the transfer?
a) P301,500 c) P328,300
b) P327,000 d) P335,000
Question 2:
What is the carrying value of the account receivable assigned as of December 31, 2020?
a) None c) P289,620
b) P285,290 d) P335,000
11. On the February 1, 2020, New York Corporation factored receivables with a carrying of
P2,000,000 to Chicago Corporation. New York Corporation assesses a a finance charge of 3%
of the receivables and retains 5% of the receivables.
Question 1:
If the factoring is treated as a sale, what amount of loss from sale should the company report in
its 2020 statement of comprehensive income for the year 2020?
a) none c) P100,000
136
b) P60,000 d) P160,000
Question 2:
Assume that New York Company retained significant amount of risk and rewards of ownership
and had a continuing involvement on the factored financial asset, what amount of loss from
factoring should the company recognize?
a) none c)P100,000
b) P60,000 d)P160,000
12. Carla Received from a customer a one-year, P375,000 note bearing annual interest of 8%.After
holding the note for six months, Carla discounted the note at I-Bank at an effective interest rate
of 10%.
Q1. How much should Carla receive from the bank?

a. 371,428.50
b. 384,750.00
c. 392,857.50
d. 405,000.00
Q2. If the discounting is treated as a sale, what amount of loss on discounting should Carla
recognize?
a. 0
b. 5,250
c. 9,750
d. 20,250
13. Pink Bank granted a 10-year loan to Blue Company in the amount of P1,500,000 with a stated
interest rate of 6%. Payments are due monthly and are computed to be P16,650. Pink Bank
incurred P40,000 of direct loan origination cost and P20,000 of indirect loan origination cost. In
addition, the bank charged Blue Company a 4% nonrefundable loan origination fee.
Q1. Pink Bank, the lender, has a carrying amount of

a. 1,440,000
b, 1,480,000
c. 1,500,000
d. 1,520,000
Q2. Blue Company, the borrower, has carrying amount of

a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000
14. PNB Bank granted a loan to a borrower in the amount of P5,000,000 on January 1, 2020. The
interest rate on the loan is 10% payable annually starting December 31, 2020. The loan
matures in five years on December 31, 2022. PNB Bank incurs P39,400 of direct loan
origination cost and P10,000 of indirect loan origination cost. In addition, PNB Bank charges
the borrower an 8-point nonrefundable loan origination fee.
Based on the above information, answer the following: (Round off present value factors to four
decimal places)
1. The carrying amount of the loan as of January 1, 2020 is

a. P5,000,000 c. P5,039,400
b. P4,639,400 d. P4,649,400
2. The effective interest rate of the loan is

137
a. 10.00% c. 12.00%
b. 11.94% d. 9.80%
3. The interest income to be recognized in 2020 is

a. P500,000 c. P493,861
b. P555,138 d. P556,728
4. The carrying amount of the loan as of December 31, 2020 is

a. P5,000,000 c. P5,033,261
b. P4,696,128 d. P4,704,538
15. On January 1, 2019, Omar Company loaned Alex Company amounting to P2,000,000 and
received a two-year, 6%, P2,000,000 note. The note calls for annual interest to be paid each
December 31. Omar collected the 2019 interest on schedule. However, on December 31,
2020, based on the Alex’s recent financial difficulties, Omar expects that the 2020 interest,
which was recorded in the books, will not be collected and that only P1,200,000 of the principal
will be recovered. The P1,200,000 principal amount is expected to be collected in two equal
installments on December 31, 2022 and December 31, 2024. The prevailing interest rate for
similar type of note as of December 31, 2020 is 8%.
Based on the above information, answer the following: (Round off present value factors to four
decimal places)
1. The present value of the expected future cash flows as of December 31, 2020 is
a. P 955,380 c. P1,009,260
b. P2,079,060 d. P 950,920
2. The loan impairment loss in 2020 is

a. P1,164,620 c. P1,110,740
b. P 990,740 d. P 40,940
3. How much is the interest income for the year 2021?

a. P 60,556 c. P57,323
b. P124,744 d. P 0
4. Carrying amount of the loan as of December 31, 2022 is

a. P473,465 c. P1,736,032
b. P534,005 d. P1,134,005
16. At December 31, 2020, Josh Co. had a receivable from A Company of 400,000 that has been
outstanding for quite some time. Further investigation revealed that F Company is taking over to
run and operate the business affairs of A Company. However F Company is more than willing
to assume only 75% of A company’s obligation and pay by the end of 2021. At the time the
receivable was recognized the prevailing rate of interest for similar financial asset is 14%.
Q1. What amount should Josh report its receivable on December 31, 2020 statement of
financial position?
a. 136,843
b. 263,157
c. 300,000
d. 400,000
Q2. How much impairment loss should be recognize related to its accounts receivable in
2020?
a. 136,843
b. 263,157
138
c. 300,000
d. 400,000
17. On December 31, 2020, general ledger of Martin Company’s account receivable showed a
balance of P1,400,000. Because of continuing decrease in expected cash flows on its financial
assets. Martin Company has decided to estimate the cash flow of the outstanding receivables.
The estimates are based on the expected peso amount to be received on the outstanding
receivables: the category (age) which also includes the length and period of collectibility and
time factor for similar borrowers.
Category Amount Time Factor

A P400,000 .909
B 300,000 .826
C 250,000 .751
D 150,000 .683
Question 1: How much should Martin Company report its account receivable in its December
31, 2020 statement of financial position?
a) P799,150 c) P1,200,000
b) P901,600 d) P1,400,000
Question 2: What amount of loss impairment on receivable should Martin Company recognize
in its December 31, 2020 statement of comprehensive income?
a)P200,000 c)P300,850
b)P300,000 d)P498,400
18. Rosalie Corporation is located in Los Angeles but does business throughout Europe. The
company builds and sells equipment used in manufacturing pharmaceuticals. On December 31,
2020, Rosalie's accounts receivable are as follows:
Individually significant receivables

Finley Company 80,000
Rios, Inc. 200,000
Rafael Co. 120,000
Hunter, Inc. 100,000
All other receivables 500,000
Total 1,000,000
Rosalie Corporation determines that Finley Company's receivable is impaired by 40,000 and
Hunter, Inc.'s receivable is totally impaired. The other receivables from Rafael and Rios are not
considered impaired. Rosalie determines that a composite rate of 2% is appropriate to measure
impairment on all other receivables. What is the total impairment of receivables for Rosalie
Corporation for 2020?
a. 156,400
b. 140,000
c. 150,000
d. 123,600
19. Sun Inc. factors 2,000,000 of its accounts receivables with guarantee (recourse) for a finance
charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable
for possible adjustments. What would be recorded as a gain (loss) on the transfer of
receivables?
a. Gain of 60,000.
b. Loss of 60,000.
c. Loss of 260,000.
d. 0.
139
20. Sun Inc. assigns 2,000,000 of its accounts receivables as collateral for a 1 million 8% loan with
a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be
recorded as a gain (loss) on the transfer of receivables?
a. Loss of 20,000.
b. Loss of 160,000.
c. Loss of 180,000.
d. 0.
21. Moon Inc. assigns 1,500,000 of its accounts receivables as collateral for a 1 million loan with a
bank. The bank assesses a 3% finance fee and charges interest on the note at 6%. What would
be the journal entry to record this transaction?
a. Debit Cash for 970,000, debit Finance Charge for 30,000, and credit Notes payable
for 1,000,000.
b. Debit Cash for 970,000, debit Finance Charge for 30,000, and credit Accounts
Receivable for 1,000,000.
c. Debit Cash for 970,000, debit Finance Charge for 30,000, debit Due from Bank for
500,000, and credit Accounts Receivable for 1,500,000.
d. Debit Cash for 910,000, debit Finance Charge for 90,000, and credit Notes Payable
for 1,000,000.
22. Fenn Stores, Inc. had sales of 1,000,000 during December, 2020. Experience have shown that
merchandise equaling 7% of sales will be returned within thirty days an additional 3% will be
returned within ninety days. Returned merchandise is readily resalable. In addition,
merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater
value. What amount should Fenn report for net sales in its income statement for the month of
December 2020?
a. 900,000
b. 850,000
c. 780,000
d. 750,000
23. On October 31, 2020, Bundle Company engaged in the following transactions.
Obtained a P500,000, six-month loans from City Bank, discounted at 12%. The company
pledged P500,000 of accounts receivables as security for the loan.
Factored P1,000,000 of accounts receivable without recourse on a non notification basis with
Help Company . Help charged a factoring fee of 2% of the amount of receivable factored and
withheld 10% of the amount factored.
What is the total cash received from the financing of receivables?

a) P1,320,000 c) P1,380,000
b) P1,350,000 d) P1,470,000
24. On December 28, 2020, Legend Company sells a loan portfolio that has a carrying amount of
300,000 for 290,000 and provides the buyer with guarantee to compensate for any impairment
losses.
What amount of financial asset Legend Company should continue to recognize in its December
31, 2020 statement of financial position?
a. none
b. 10,000
c. 290,000
d. 300,000
140
25. The statement of financial position of Cleo Corporation reported the following long-term
receivables as of December 31, 2019:
Note receivable from sale of P9,000,000
plant
Note receivable from officer 2,400,000
In connection with your audit, you were able to gather the following transactions during 2020
and other information pertaining to the company’s long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is
payable in 3 annual installments of P3,000,000 plus interest on the unpaid balance every
April 1. The initial principal and interest payment was made on April 1, 2020.
b. The note receivable from officer is dated December 31, 2019, earns interest at 10% per
annum, and is due on December 31, 2022. The 2020 interest was received on December
31, 2020.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2020, in exchange for an
P1,200,000 non-interest bearing note due on April 1, 2022. The note had no ready market,
and there was no established exchange price for the equipment. The prevailing interest rate
for a note of this type at April 1, 2020, was 12%. The present value factor of 1 for two
periods at 12% is 0.797 while the present value factor of ordinary annuity of 1 for two
periods at 12% is 1.690.
d. A tract of land was sold by the corporation to No Co. on July 1, 2020, for P6,000,000 under
an installment sale contract. No Co. signed a 4-year 11% note for P4,200,000 on July 1,
2020, in addition to the down payment of P1,800,000. The equal annual payments of
principal and interest on the note will be P1,353,750 payable on July 1, 2021, 2022,
2023,and 2024. The land had an established cash price of P6,000,000, and its cost to the
corporation was P4,500,000. The collection of the installments on this note is reasonably
assured.
1. Noncurrent notes receivable as of December 31, 2020

a. P13,556,400 c. P10,556,400
b. P 9,664,650 d. P 9,750,726
2. Current portion of long-term notes receivable as of December 31, 2020

a. P3,891,750 c. P3,000,000
b. P4,353,750 d. P 0
3. Accrued interest receivable as of December 31, 2020

a. P771,000 c. P 540,000
b. P857,076 d. P1,011,000
4. Interest income for the year 2020

a. P1,281,000 c. P1,367,076
b. P1,637,076 d. P1,512,000
141
REVIEW- ASSET TO LIAB
Problem
1. The following information relate to the Lily Co. postretirement benefits plan for 2020:
Service cost P250,000

Discount rate 9%
PBO, January 1, 2020 P1,500,000
ABO, January 1, 2020 P2,000,000
Benefit payments to employees P115,000
The amount of postretirement expense for 2020 is

a. P385,000
b. P305,000.
c. P350,000.
d. P420,000.
2. Angel Corporation has the following liabilities at December 31, 2019:

8.9% note payable issued November 1, 2019, maturing
October 31, 2020 €1,150,000
7.25% note payable issued August 1, 2019, payable in twelve equal
annual installments of $90,000 beginning August 1, 2020 1,080,000
Angel’s December 31, 2019 financial statements were issued on March 19, 2020. On
January 23, 2020, the entire €1,150,000 balance of the 8.9% note was refinanced by
issuance of a long-term obligation payable in a lump sum. In addition, on December 29,
2019, Angel consummated a non-cancelable agreement with the lender to refinance the
7.25%, €1,080,000 note on a long-term basis. On the December 31, 2019 statement of
financial position, the amount of these notes payable that Angel should classify as
short-term obligations is
a. $0.
b. $1,080,000.
c. $1,150,000.
d. $2,230,000.
3. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send
in 3 boxtops from Palmer Frosted Flakes boxes and $1.00. The company estimates that
60% of the boxtops will be redeemed. In 2020, the company sold 675,000 boxes of
Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If
the bowls cost Palmer Company $2.50 each, how much liability for outstanding
premiums should be recorded at the end of 2020?
a. $25,000
b. $37,500
c. $62,500
d. $87,500
4. At the beginning of current year, Panorama Company leased a building from a lessor
with the following pertinent information:
142

Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonable certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10 %
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
Present value of 1 for 5 periods at 10% 0.62
What is the cost of right of use asset?

a. 4,500,000
b. 4,400,000
c. 4,700,000
d. 4,600,000
5. Brand Co. incurred the following research and development project costs at the
beginning of the current year:
Equipment purchased for current and future projects $100,000
Equipment purchased for current projects only 200,000
Research and development salaries for current project 400,000
Equipment has a five-year life and is depreciated using the straight-line method. What
amount should Brand record as depreciation for research and development projects at
December 31?
a. $0
b. $ 20,000
c. $ 60,000
d. $ 140,000
6. On January 2, year 1, Union Co. purchased a machine for $264,000 and depreciated it
by the straight-line method using an estimated useful life of eight years with no salvage
value. On January 2, year 4, Union determined that the machine had a useful life of six
years from the date of acquisition and will have a salvage value of $24,000. An
accounting change was made in year 4 to reflect the additional data. The accumulated
depreciation for this machine should have a balance at December 31, year 4, of
a. $176,000
b. $160,000
c. $154,000
d. $146,000
7. Sutherland Company purchased machinery for 320,000 on January 1, 2016. Straight-

line depreciation has been recorded based on a 20,000 salvage value and a 5-year
useful life. The machinery was sold on May 1, 2020 at a gain of 6,000. How much cash
did Sutherland receive from the sale of the machinery?
a. 46,000.
b. 54,000.
c. 66,000.
d. 86,000.
8. In year 2, a contract dispute between Dollis Co. and Brooks Co. was submitted to
binding arbitration. In year 2, each party’s attorney indicated privately that the probable
award in Dollis’ favor could be reasonably estimated. In year 3, the arbitrator decided in
favor of Dollis. When should Dollis and Brooks recognize their respective gain and loss?
Dollis’ gain Brooks’ loss
a. Year 2 Year 2
143
b. Year 2 Year 3
c. Year 3 Year 2
d. Year 3 Year 3
9. The ff. audited balances pertain to Wen Company

Accts. Payable:
Jan.1, 2020 286, 924
Dec.31, 2020 737, 824
Inventory balance:
Jan. 1, 2020 815, 386
Dec.31, 2020 488, 874
Cost of goods sold-2020 1, 859, 082
How much was paid by Wen Company to its supplier in 2020?

a.P1, 081, 670
b.P1, 065, 900
c.P1, 071, 678
d.P1, 097, 000
10. On January 2, year 4, Paye Co. purchased Shef Co. at a cost that resulted in
recognition of goodwill of $200,000. During the first quarter of year 4, Paye spent an
additional $80,000 on expenditures designed to maintain goodwill. In its December 31,
year 4 balance sheet, what amount should Paye report as goodwill?
a. $180,000
b. $200,000
c. $252,000
d. $280,000
11. Truppe Company leased a new machine to Byong Company on January 1, 2019. The
lease expires on January 1, 2023. The annual rental is P1,150,000. Additionally, on
January 1, 2019, Byong Company paid P680,000 to Truppe Company as a lease
bonus and 200,000 as a security deposit to be refunded upon expiration of the lease.
What amount of rental revenue should be reported for 2019?

a. 1,320,000
b. 1,500,000
c. 1,150,000
d. 1,200,000
12. Burr Company had the following account balances at December 31, year 2:
Cash in banks $2,250,000 Cash on hand 125,000 Cash legally restricted for additions to
plant (expected to be disbursed in year 3) 1,600,000 Cash in banks includes $600,000
of compensating balances against short-term borrowing arrangements. The
compensating balances are not legally restricted as to withdrawal by Burr. In the current
assets section of Burr’s December 31, year 2 balance sheet, total cash should be
reported at
a. $1,775,000
b. $2,250,000
c. $2,375,000
d. $3,975,000
13. At the beginning of the current year, Ramirez Company leased a machinery with the
144

Lease term 4 years
What is the lease liability at year-end?

a. 2,510,000
b. 3,159,000
c. 2,861,000
d. 3,620,000
14. At the end of the current year, Khite Company sold a machine with 12 year useful life to
another entity and simultaneously leased it back for 1 year.
Sale Price 500,000
Carrying Amount 420,000
Present Value of a reasonable lease rentals
(P5,000 for 12 months @ 11%) 56,300
What amount of gain on right transferred should be reported at the current year?
a. 56,300
b. 50,000
c. 20,000
d. 80,000
15. Hoyle Company traded machinery with a book value of 285,000 and a fair value of
270,000. It received in exchange from Durler Company a machine with a fair value of
300,000. Hoyle also paid cash of 30,000 in the exchange. Durler’s machine has a book
value of 285,000. What amount of gain or loss should Hoyle recognize on the
exchange?
a. 30,000 gain
b. -0-
c. 1,500 loss
d. 15,000 loss
16. An entity is a dealer in equipment and uses leases to facilitate the sale of its product.
The entity expects a 12% return. At the end of the lease term, the equipment will revert
to the lessor.
145
On January 1, 2019, an equipment is leased to a lessee with the following information:
Cost of equipment to the entity 3,500,000

Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2019
What is the total financial revenue?

a. 2,196,000
b. 2,796,000
c. 2,556,000
d. 1,956,000
17. On December 31, 2020, Arlene Company issued P5,000,000 face value, 5-year bonds
at 109. Each P1,000 bond was issued with 50 detachable stock warrants, each of
which entitled the bondholder to purchase one share of P5 par value common at P25.
Immediately after issuance, the market value of each warrant was P5. The stated
interest rate on the bonds is 11% payable annually every December 31. However, the
prevailing market rate of interest for similar bonds without warrants is 12%. The present
value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1
at 12% for 5 periods is 3.60. On December 31, 2020, what amount should Arlene
record as discount or premium on bonds payable?
A. 170,000 discount
B. 450,000 premium
C. 450,000 discount
D. 800,000 premium
18. In January, 2015, Findley Corporation purchased a patent for a new consumer product
for 720,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful
life of only ten years. During 2020 the product was permanently removed from the
market under governmental order because of a potential health hazard present in the
product. What amount should Findley charge to expense during 2020, assuming
amortization is recorded at the end of each year?
a. 480,000.
b. 360,000.
c. 72,000.
d. 48,000.
19. On January 1, year 2, London Corporation borrowed $500,000 on a 8%,

noninterest-bearing note due in four years. The present value of the note on January 1,
year 2, was $367,500. London Corporation elects the fair value method for reporting its
financial liabilities. On December 31, year 2, it is determined the fair value of the note is
$408,150. At what amount should the discount on notes payable be presented on the
balance sheet on December 31, year 2?
a. $132,500
b. $103,100
c. $ 91,850
d. $0
146
20. In May year 1 Caso Co. filed suit against Wayne, Inc. seeking $1,900,000 damages for
patent infringement. A court verdict in November year 5 awarded Caso $1,500,000 in
damages, but Wayne’s appeal is not expected to be decided before year 7. Caso’s
counsel believes it is probable that Caso will be successful against Wayne for an
estimated amount in the range between $800,000 and $1,100,000, with $1,000,000
considered the most likely amount. What amount should Caso record as income from
the lawsuit in the year ended December 31, year 5?
a. $0
b. $ 800,000
c. $1,000,000
d. $1,500,000
21. On January 1, 2020 Angelika Company had the following balances related to a defined
benefit plan:
Fair Value of Plan Asset 8,710,500

Projected Benefit Obligation 10,500,500
Angelika provided the following data for the current year:

Settlement discount rate 8%
Actual Return on Plan assets 850,000
Contribution to the Plan 999,000
What is the remeasurement gain on plan assets?

a. 700,000
b. 125,000
c. 575,000
d. 153,160
22. Black Co. requires advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable. Information for year 2 is
as follows:
Customer advances—balance 12/31/Y1 $118,000 Advances received with orders in
year 2 184,000 Advances applied to orders shipped in year 2 164,000 Advances
applicable to orders cancelled in year 2 50,000 In Black’s December 31, year 2 balance
sheet, what amount should be reported as a current liability for advances from
customer?
a. $0
b. $ 88,000
c. $138,000
d. $148,000
23. The following items were included in Opal Co.’s inventory account at December 31,
year 2:
147
Merchandise out on consignment, at sales price, including 40% markup on selling price
$40,000 Goods purchased, in transit, shipped FOB shipping point 36,000 Goods held
on consignment by Opal 27,000 By what amount should Opal’s inventory account at
December 31, year 2, be reduced?
a. $103,000
b. $ 67,000
c. $ 51,000
d. $ 43,000
24. Dart Company’s accounting records indicated the following information:

Inventory, 1/1/Y2 $ 500,000 Purchases during year 2 2,500,000 Sales during year 2
3,200,000 A physical inventory taken on December 31, year 2, resulted in an ending
inventory of $575,000. Dart’s gross profit on sales has remained constant at 25% in
recent years. Dart suspects some inventory may have been taken by a new employee.
At December 31, year 2, what is the estimated cost of missing inventory?
a. $ 25,000
b. $100,000
c. $175,000
d. $225,000
to the lessor.

What is the gross investment in the lease?
a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000
26. Denisse Company reported an impairment loss of P2,000,000 in its income statement
for 2019. This loss was related to an item of property, plant and equipment which was
acquired on January 1, 2018 with cost of P10,000,000, useful life of 10 years and no
residual value. On December 31, 2019 Denisse reported this asset at P6,000,000 which
is the fair value on such date. On December 31, 2020, Denisse determined that the fair
value of its impaired asset had increased to P7,500,000. The straight line method is
used on recording depreciation of this asset.
What amount of gain on reversal of impairment should Denisse report in its 2020
income statement?
a. 2,250,000
b. 1,750,000
c. 1,500,000
d. 0
148
27. On January 2, year 4, Lem Corp. bought machinery under a contract that required a
down payment of $10,000, plus twenty-four monthly payments of $5,000 each,
for total cash payments of $130,000. The cash equivalent price of the machinery was
$110,000. The machinery has an estimated useful life of ten years and estimated
salvage value of $5,000. Lem uses straight-line depreciation. In its year 4 income
statement, what amount should Lem report as depreciation for this machinery?
a. $10,500
b. $11,000
c. $12,500
d. $13,000
28. The following information is made available involving the defined benefit pension plan of
Cheska Company for the year 2021:
Fair value of plan asset, 1/1/2021 3,500,000
PV of benefit obligation, 1/1/2021 3,750,000
Actual return on plan asset 420,000
Decrease in the present value of benefit obligation due
PV of defined benefit obligation settled 250,000
Settlement price of defined benefit obligation 200,000
Discount rate 10%
4. What is the present value of benefit obligation as of December 31, 2021?

a. 3,725,000
b. 3,825,000
c. 3,925,000
d. 4,825,000

Lease term 4 years
What is the initial lease liability?

a. 3,510,000
b. 3,170,000
c. 4,010,000
d. 4,000,000
149
30. Lyons Company deducts insurance expense of $84,000 for tax purposes in 2020, but
the expense is not yet recognized for accounting purposes. In 2021, 2022, and 2023, no
insurance expense will be deducted for tax purposes, but $28,000 of insurance expense
will be reported for accounting purposes in each of these years. Lyons Company has a
tax rate of 40% and income taxes payable of $72,000 at the end of 2020. There were no
deferred taxes at the beginning of 2020.
What is the amount of the deferred tax liability at the end of 2020?
a. $33,600
b. $28,800
c. $12,000
d. $0
Discount rate 10%
What amount employee benefit cost should be reported in the profit or loss?
a. 675,000
b.725,000
c. 1,025,000
d. 1,075,000
32. Omar Company is a dealer in machinery. On January 1, 2020 machinery was leased to
another enterprise with the following provisions:

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value-unguaranteed 1,000,000
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
At the end of the lease term the machinery will revert to Omar. The perpetual inventory
system is used. Omar incurred initial direct cost of P300,000 in finalizing the lease
agreement.
What is the total financial revenue from the lease?

a. 4,630,000
b. 4,200,000
c. 5,200,000
150
d. 3,630,000
33. Duff, Inc. borrowed from Martin Bank under a ten-year loan in the amount of $150,000
with a stated interest rate of 6%. Payments are due monthly, and are computed to be
$1,665. Martin Bank incurs $4,000 of direct loan origination costs and $2,000 of indirect
loan origination costs. In addition, Martin Bank charges Duff, Inc. a four-point
nonrefundable loan origination fee.
Martin Bank, the lender, has a carrying amount of
a. $144,000
b. $148,000
c. $150,000
d. $152,000

Lease term 4 years
What is the depreciation for current year?

a. 462,500
b. 925,000
c. 850,000
d. 965,000
35. Vasguez Corporation had a 1/1/2020 balance in the Allowance for Doubtful Accounts of
20,000. During 2020, it wrote off 14,400 of accounts and collected 4,200 on accounts
previously written off. The balance in Accounts Receivable was 400,000 at 1/1 and
480,000 at 12/31. At 12/31/2020, Vasguez estimates that 5% of accounts receivable will
prove to be uncollectible. What is Bad Debt Expense for 2020?
a. 4,000.
b. 14,200.
c. 18,400.
d. 24,000.
36. On January 1, 2015, Valla Company acquired a building at a cost of P5,000,000. The
building has been depreciated on the basis of a 20-year life. On January 1, 2020, an
appraisal of the building showed its replacement cost at P8,000,000 with no change in
useful life.
151
Ignoring income tax, what amount should be credited to revaluation surplus on January
1, 2020?
a. 3,000,000
b. 2,250,000
c. 4,250,000
d. 6,000,000
37. West, Inc. made the following expenditures relating to Product Y:

Legal costs to file a patent on Product Y—$10,000. Production of the finished product
would not have been undertaken without the patent.
Special equipment to be used solely for development of Product Y—$60,000. The
equipment has no other use and has an estimated useful life of four years.
Labor and material costs incurred in producing a prototype model—$200,000.
Cost of testing the prototype—$80,000.
What is the total amount of costs that will be expensed when incurred?
a. $280,000
b. $295,000
c. $340,000
d. $350,000
38. Neal Company entered into a nine-year lease on a warehouse on December 31, 2019.
Lease payment of P520,000 which included executory cost of P20,000 is due annually,
beginning on December 31, 2020 and every December 31 thereafter.
The cost of restoring the underlying asset to its original condition as required by the
contract is estimated at the present value of P200,000.
The interest rate implicit in the lease is 9% . The present value of an ordinary annuity of
1 for nine years at 9% is 5.6.
What is the cost of the right of use asset?

a. 2,800,000
b. 3,000,000
c. 3,112,000
d. 4,700,000
39. Brill Co. made the following expenditures during year 4:

Costs to develop computer software for internal use in Brill’s general management
information system $100,000 Costs of market research activities 75,000 What amount
of these expenditures should Brill report in its year 4 income statement as research and
development expenses?
a. $175,000
b. $100,000
c. $ 75,000
d. $0
40. A company issued 500,000 convertible bonds. Interest is paid annually at a rate of 6%
throughout the 10 terms of the bonds. The market rate is 5%. If the bonds were issued
without the conversion feature they would have been sold for 450,000. What value
should the conversion feature be valued at on the balance sheet?
a) 27,217
b) 38,609
152
c) 50,000
d) 88,609
41. On March 31, year 4, Winn Company traded in an old machine having a carrying
amount of $16,800, and paid a cash difference of $6,000 for a new machine having a
total cash price of $20,500. The cash flows from the new machine are expected to be
significantly different than the cash flows from the old machine. On March 31, year 4,
what amount of loss should Winn recognize on this exchange?
a. $0
b. $2,300
c. $3,700
d. $6,000
42. On December 31, year 3, Bit Co. had capitalized costs for a new computer software
product with an economic life of five years. Sales for year 4 were 30% of expected total
sales of the software. At December 31, year 4, the software had a net realizable value
equal to 90% of the capitalized cost. What percentage of the original
capitalized cost should be reported as the net amount on Bit’s December 31, year 4
balance sheet?
a. 70%
b. 72%
c. 80%
d. 90%
43. Cole Co. began constructing a building for its own use in January year 4. During year 4,
Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other
borrowings. Interest computed on the weighted-average amount of accumulated
expenditures for the building during year 4 was $40,000. What amount of interest cost
should Cole capitalize?
a. $20,000
b. $40,000
c. $50,000
d. $70,000
44. Watson Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2020 $1,200,000
Tax exempt interest (100,000)
Originating temporary difference (300,000)
Taxable income $800,000
The temporary difference will reverse evenly over the next two years at an enacted tax
rate of 40%. The enacted tax rate for 2020 is 28%. What amount should be reported in
its 2020 income statement as the current portion of its provision for income taxes?
a. $224,000
b. $320,000
c. $336,000
d. $480,000
45. Blitz Corporation, a manufacturer of cleaning products, is preparing annual financial

statements at December 31, 2020. Because of a recently proven health hazard in one
of its cleaning products, the U.K. government has clearly indicated its intentional of
having Blitz recall all cans of this paint sold in the last three months. The management
of Ortiz estimates that this recall would cost £5,800,000. What accounting recognition, if
any, should be accorded this situation?
a. No recognition.
b. Note disclosure only.
c. Expense of £5,800,000 and liability of £5,800,000.
d. Expense of £5,800,000, and retained earnings restriction of £5,800,000.
153
46. On January 2, year 1, Emme Co. sold equipment with a carrying amount of $480,000 in
exchange for a $600,000 noninterest-bearing note due January 2, year 4. There was no
established exchange price for the equipment. The prevailing rate of interest for a note
of this type at January 2, year 1, was 10%. The present value of $1 at 10% for three
periods is 0.75.
In Emme’s year 1 income statement, what amount should be reported as gain (loss) on
sale of machinery?
a. $(30,000) loss.
b. $ 30,000 gain.
c. $120,000 gain.
d. $270,000 gain.
47. Louie Company, a real estate entity, has a building with a carrying amount of
P20,000,000 on December 31, 2020. The building is used as offices of the entity’s
administrative staff. On December 31, 2020, the entity intended to rent out the building
to independent third parties. The staff will be moved to a new building purchased early
in 2020. On December 31, 2020, the original building had a fair value of P35,000,000.
On December 31, 2020, the entity also had land that was held 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, 2020. On such date, the entity decided to hold the land
for capital appreciation. The accounting policy is to carry all investment property at fair
value. On December 31, 2020, what amount should be recognized in revaluation
surplus and profit or loss, respectively?
a. 5,000,000 and 15,000,000

b. 15,000,000 and 0
c. 15,000,000 and 5,000,000
d. 5,000,000 and 0
to the lessor.

154

What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000
49. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but
50% of Delta’s customers take advantage of the discount. Delta uses the gross method
of recording sales and trade receivables. An analysis of Delta’s trade receivables
balances at December 31, year 2, revealed the following:
Age Amount Collectible 0 - 15 days $100,000 100% 16 - 30 days 60,000 95% 31 - 60
days 5,000 90% Over 60 days 2,500 $500 $167,500 In its December 31, year 2 balance
sheet, what amount should Delta report for allowance for discounts?
a. $1,000
b. $1,620
c. $1,675
d. $2,000
50. During 2020, Kristin Company filed suit against Cleo Company seeking damages for
patent infringement. At December 31, 2020, Kristin’s legal counsel believed that it was
probable that Kristin would be successful against Cleo for an estimated amount of
P1,500,000. In March 2021, Kristin was awarded P1,000,000 and received full payment
thereof.
In Kristin’s 2020 financial statements issued February 2021, how should this award be
reported?
a. As a receivable and revenue of P 1,000,000.
b. As a receivable and deferred revenue of P1,000,000.
c. As a disclosure of a contingent asset of P1,000,000
d. As a disclosure of a contingent asset of P1,500,000.
51. On December 31, 2020, April’s investment in real property has carrying value of
P1,600,000 under the fair value model before considering market value adjustment. If
the fair market value at December 31, 2020 is P1,000,000, how much should be the
gain or loss on transfer if April Company would shift to cost model?
a. Gain of P600,000 reported as other comprehensive income

b. Loss of P600,00 reported as other loss in the income statement
c. Loss of P600,000 reported in equity as decrease in revaluation surplus
d. Zero
52. On January 1, 2020, W. Poon Inc. purchased equipment with a cost of HK$4,668,000 a
useful life of 12 years and no salvage value. The company uses straight-line
depreciation. At December 31, 2020, the company determines that impairment
indicators are present. The fair value less cost to sell the asset is estimated to be
Hk$4,620,000. The asset’s value-in-use is estimated to be HK$4,305,000. There is no
change in the asset’s useful life or salvage value. The 2020 income statement will report
Loss on Impairment of
155
a. HK$0.
b. HK$26,000.
c. HK$48,000.
d. HK$341,000.
Discount rate 10%
What is the net amount of remeasurements for the year 2021?

a. 50,000
b. 75,000
c. 100,000
d. 170,000
54. Emerson Co., a lessee, records a finance lease of machinery on January 1, 2019. The
seven annual lease payment of 200,000 are made at the end of each year. The present
value of the lease payments at 10% is 973,700. Emerson uses the interest method of
amortization and sum of the year’s digit depreciation (no residual value).
What is the carrying value of the liability and the amount of depreciation, respectively,
on December 31, 2020?
a. 0 and 0
b. 758,177 and 208,650
c. 758,177 and 243,425
d. 871,070 and 278,200
55. On December 30, year 1, Fort, Inc. issued 1,000 of its 8%, ten-year, $1,000 face value
bonds with detachable stock warrants at par. Each bond carried a detachable warrant
for one share of Fort’s common stock at a specified option price of $25 per share.
Immediately after issuance, the market value of the bonds without the warrants was
$1,080,000 and the market value of the warrants was $120,000. In its December 31,
year 1 balance sheet, what amount should Fort report as bonds payable?
a. $1,000,000
b. $ 975,000
c. $ 900,000
d. $ 880,000
56. An entity entered in to a finance lease on January 1, 2019. A third party guaranteed the
residual value of the asset under the lease estimated to be P1,200,000 on January 1,
2024, the end of the lease term. Annual lease payments are P1,000,000 due each
December 31, beginning December 31, 2019. The last payment is due December 31,
2023. The remaining useful life of the asset was six years at the commencement of the
lease.
156
Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5
periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79.
What is the net lease receivable of the lessor at the commencement date of the lease?
a. 4,534,000
b. 3,790,000
c. 4,990,000
d. 2,590,000
57. At the beginning of current year, Lessee Company leased a machinery with the

By contract at present value 390,000
Lease term 4 years
Present value of an ordinary annuity of 1 at 10% for 4 periods
3.17
What is the initial lease liability?

a. 3,510,000
b. 3,170,000
c. 4,010,000
d. 4,000,000
58. Mathis Co. at the end of 2020, its first year of operations, prepared a reconciliation
between pretax financial income and taxable income as follows:
Pretax financial income $ 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income $ 750,000
The estimated litigation expense of $1,250,000 will be deductible in 2022 when it is

expected to be paid. The gross profit from the installment sales will be realized in the
amount of $500,000 in each of the next two years. The estimated liability for litigation is
classified as non-current and the installment accounts receivable are classified as
$500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years.
The income tax expense is

a. $150,000.
b. $225,000.
c. $250,000.
d. $500,000.
59. On January 1, 2019, Karla Company Issued its 10%, 6-yr convertible debt instrument
with a face amount of P3,000,000 for P3,500,000. Interest is payable every December
31 of each year. The debt instrument is convertible into 30,000 ordinary shares with a
par value of P100. The debt instrument is convertible into equity from the time of issue
until maturity. When the debt instruments were issued, the prevailing market rate of
interest for similar debt without conversion option is 8%.
157
On December 31, 2020, Karla company converted all the debt instruments by issuing
30,000 ordinary shares.
What amount should be credited to the share premium account as a result of the
conversion?
a. None
b. 198,176
c. 239,052
d. 421,276
60. Tokyo Enterprises has four divisions. It acquired on of them, Green Products, on
January 1, 2020 for ¥480,000,000, and recorded goodwill of ¥60,900 as a result of that
purchase. At December 31, 2020, Green Products had a recoverable amount of
¥444,000,000. The carrying value of the Company’s net assets at December 31, 2020
was ¥426,000,000(including goodwill). What amount of loss on impairment of goodwill
should Tokyo record in 2020?
a. ¥ -0-
b. ¥18,000,000
c. ¥36,000,000
d. ¥54,000,000
158
REVIEW( cash - investments)
1. Lay Company purchased a P20,000, 8%, five-year note that required five equal annual
year-end payments of P6,000. The note was discounted to yield a 9% rate to Judicious
Company. At the date of purchase, the entity recorded the note at its present value of
P25,000. What is the total interest revenue earned by the entity over the life of this
note?
a. 5,045
b. 5,560
c. 5,000
d. 9,000
2. The cash account shows a balance of $45,000 before reconciliation. The bank
statement does not include a deposit of $2,300 made on the last day of the month. The
bank statement shows a collection by the bank of $940 and a customer's check for $320
was returned because it was NSF. A customer's check for $450 was recorded on the
books as $540, and a check written for $79 was recorded as $97. The correct balance
in the cash account was
a. $45,512.
b. $45,548.
c. $45,728.
d. $47,848.
3. Dub Dairy produces milk to sell to local and national ice cream producers. Dub Dairy
began operations on January 1, 2021 by purchasing 840 milk cows for 1,176,000. The
company controller had the following information available at year end relating to the
cows:
Milking cows
Carrying value, January1, 2021 1,176,000
Change in fair value due to growth and price changes 365,000
Decrease in fair value due to harvest (42,000)
Milk harvested during 2021 but not yet sold 54,000
On Dub Dairy’s income statement for the year ending December 31, 2021, what amount
of unrealized gain on biological assets will be reported?
a. -0-
b. 365,000
c. 323,000
d. 54,600
4. Loire Corporation purchased 1,600 ordinary shares of Comma Co. for 52,800. During
the year, Comma paid a cash dividend of 13 per share. At year-end, Comma shares
were selling for 38 per share. Loire Corporation purchased the shares to meet a non-
trading regulatory requirement. What amount of total income will Loire Corporation
report in its income statement for the year?
a. -0-
b. 20,800
c. 8,000
d. 28,800
5. Hong Company had the following account balances on December 31, 2019:
Cash on hand and in bank 3,000,000

Time deposit 3,000,000
159
Saving deposit set aside for dividend payable on

December 31, 2020 1,000,000
What total amount should be reported as “cash” on December 31, 2019?

a. 6,000,000
b. 5,000,000
c. 4,000,000
d. 7,000,000
7. Kennison Company has cash in bank of $10,000, restricted cash in a separate account
of $3,000, and a bank overdraft in an account at another bank of $1,000. Kennison
should report cash of
a. $9,000.
b. $10,000.
c. $12,000.
d. $13,000.
8. Instrument Corp. has the following investments which were held throughout 2020–2021:
Fair Value
Cost 12/31/2020 12/31/2021
Trading 300,000 400,000 380,000
Non-trading 300,000 320,000 360,000
1. What amount of gain or loss would Instrument Corp. report in its income
statement for the year ended December 31, 2021 related to its investments?
a. 20,000 gain.
b. 20,000 loss.
c. 140,000 gain.
d. 80,000 gain.
2. What amount would be reported as accumulated other comprehensive income

related to investments in Instrument Corp.’s statement of financial position at
December 31, 2020?
a. 40,000 gain.
b. 60,000 gain.
c. 20,000 gain.
d. 120,000 gain.
9.On December 31, 2020, Invoker Company received its bank statement. A bank reconciliation is
prepared from the following available information:
Book Balance 1,650,000

Receivable collected by the bank 500,000
Interest earned on note 50,000
Outstanding Check 202,000
Check issued by Kael Company charged to Invoker Company 10,000
What amount should be reported in the cash balance per bank statement?
a. 2,392,000
b. 1,988,000
c. 2, 150, 00
d. 1,650,000
160
10. On August 1, 2020, Renfro Co. purchased to hold for collection, 1,000, 1,000, 9%
bonds for 940,000 (a 10% effective interest rate). The bonds, which mature on August
1, 2030, pay interest semiannually on February 1 and August 1. Renfro uses the
effective interest method of amortization. The bonds should be reported in the
December 31, 2020 statement of financial position at a carrying value of
a. 943,333.
b. 941,667.
c. 940,000.
d. 942,000.
11. On April 1, 2019, Mirror Company established an imprest petty cash fund for P10,000
by writing a check drawn against its checking account. On April 30, 2019, the fund
contained the following:
Currency and coins 3,000

Receipts for office supplies 4,000
Receipts for postage still unused 3,000
Receipts for transportation 800
On April 30, 2019, the entity wrote a check to replenish the fund. What is the amount of
replenishment under the imprest fund system?
a. 8,200
b. 6,600
c. 7,000
d. 3,000
12. Lenny’s Llamas purchased 1,500 llamas on January 1, 2021. These llamas will be
sheared semiannually and their wool sold to specialty clothing manufacturers. The
llamas were purchased for 222,000. During 2021 the change in fair value due to growth
and price changes is 14,100, the wool harvested but not yet sold is valued at net
realizable value of 27,000, and the change in fair value due to harvest is ( 1,750). What
is the value of the llamas on Lenny’s Llamas statement of financial position on June 30,
2021?
a. 234,350
b. 222,000
c. 220,250
d. 193,250
13. The cash account shows a balance of $45,000 before reconciliation. The bank
statement does not include a deposit of $2,300 made on the last day of the month. The
bank statement shows a collection by the bank of $940 and a customer's check for $320
was returned because it was NSF. A customer's check for $450 was recorded on the
books as $540, and a check written for $79 was recorded as $97. The correct balance
in the cash account was
a. $45,512.
b. $45,548.
c. $45,728.
d. $47,848.
14. Harrison Co. owns 20,000 of the 50,000 outstanding ordinary shares of Taylor, Inc.
During 2021, Taylor earns 800,000 and pays cash dividends of 640,000.
Harrison should report investment revenue for 2021 of

a. 320,000.
b. 256,000.
c. 64,000.
d. 0.
161
15. Sun Inc. assigns 2,000,000 of its accounts receivables as collateral for a 1 million 8%
loan with a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront.
What would be recorded as a gain (loss) on the transfer of receivables?
a. Loss of 20,000.
b. Loss of 160,000.
c. Loss of 180,000.
d. 0.
cows:
Milking cows
Milk harvested during 2021 but not yet sold 54,000
On Dub Dairy’s income statement for the year ending December 31, 2021, what amount
of unrealized gain on harvested milk will be reported?
a. No gain is reported until the milk is sold.
b. 12,000
c. 54,000
d. 311,000
17. On February 1, 2020, Henson Company factored receivables with a carrying amount of
300,000 to Agee Company. Agee Company assesses a finance charge of 3% of the
receivables and retains 5% of the receivables. Relative to this transaction, you are to
determine the amount of loss on sale to be reported in the income statement of Henson
Company for February.
1.Assume that Henson factors the receivables on a without guarantee (recourse) basis.
The loss to be reported is
a. 0.
b. 9,000.
c. 15,000.
d. 24,000.
2.Assume that Henson factors the receivables on a with guarantee (recourse) basis.
The amount of cash received is
a. 285,000.
b. 276,000.
c. 291,000.
d. 300,000.
162
18. At December 31, 2021, Atlanta Co. has a share portfolio valued at 40,000. Its cost was
33,000. If the Securities Fair Value Adjustment account has a debit balance of 2,000,
which of the following journal entries is required at December 31, 2021?
a. Securities Fair Value Adjustment 7,000
Unrealized Holding Gain or Loss-Equity 7,000
b. Securities Fair Value Adjustment 5,000
Unrealized Holding Gain or Loss-Equity 5,000
c. Unrealized Holding Gain or Loss-Equity 7,000
Securities Fair Value Adjustment 7,000
d. Unrealized Holding Gain or Loss-Equity 5,000
Securities Fair Value Adjustment 5,000
19. Kramer Company's trading investments portfolio which is appropriately included in

current assets is as follows:
December 31, 2020
Fair Unrealized
Cost Value Gain (Loss)
Catlett Corp. 250,000 200,000 (50,000)
Lyman, Inc. 245,000 265,000 20,000
495,000 465,000 (30,000)
Ignoring income taxes, what amount should be reported as a charge against income in
Kramer's 2020 income statement if 2020 is Kramer's first year of operation?
a. 0.
b. 20,000.
c. 30,000.
d. 50,000.
20. Crane Sales Company uses the retail inventory method to value its merchandise
inventory. The following information is available for the current year:
Cost Retail
Beginning inventory 30,000 50,000
Purchases 145,000 200,000
Freight-in 2,500 —
Net markups — 8,500
Net markdowns — 10,000
Employee discounts — 1,000
Sales — 205,000
If the ending inventory is to be valued at the lower-of-cost-or-net realizable value, what
is the cost to retail ratio?
a. 177,500 ÷ 250,000
b. 177,500 ÷ 258,500
c. 175,000 ÷ 260,000
d. 177,500 ÷ 248,500
163
21. Sycamore, Inc. purchased €100,000 of 8 percent bonds of Alvarado Industries on

January 1, 2020, at a discount, paying €92,278. The bonds mature January 1, 2025,
and yield 10 percent; interest is payable each July 1 and January 1. Sycamore has a
business model whose objective is to hold assets in order to collect contractual cash
flows and the contractual terms of the financial asset provides specified dates with
regard to cash flows that are solely payments of principal and interest. On December
31, 2020, when the market rate of interest is 12%, and the fair value of the bonds is
€89,934, Sycamore will record interest revenue of
a. €5,396
b. €4,645
c. €4,497
d. €4,614
e. €9,259
22. The following information is available for Murphy Company:

Allowance for doubtful accounts at December 31, 2009 8,000
Credit sales during 2010 400,000
Accounts receivable deemed worthless and written off during 2010 9,000
As a result of a review and aging of accounts receivable in early January 2011,
however, it has been determined that an allowance for doubtful accounts of 5,500 is
needed at December 31, 2010. What amount should Murphy record as "bad debt
expense" for the year ended December 31, 2010?
a. 4,500
b. 5,500
c. 6,500
d. 13,500
23. Reyes Company had a gross profit of 360,000, total purchases of 420,000, and an
ending inventory of 240,000 in its first year of operations as a retailer. Reyes’s sales in
its first year must have been
a. 540,000.
b. 660,000.
c. 180,000.
d. 600,000.
24. In preparing its bank reconciliation for the month of April 2020, Henke, Inc. has available
the following information.
Balance per bank statement, 4/30/10 $39,140
NSF check returned with 4/30/10 bank statement 450
Deposits in transit, 4/30/10 5,000
Outstanding checks, 4/30/10 5,200
Bank service charges for April 20
What should be the correct balance of cash at April 30, 2020?
a. $39,370
b. $38,940
c. $38,490
d. $38,470
25. Fenn Stores, Inc. had sales of $1,000,000 during December, year 2. Experience has
shown that merchandise equaling 7% of sales will be returned within thirty days and an
additional 3% will be returned within ninety days. Returned merchandise is readily
resalable. In addition, merchandise equaling 15% of sales will be exchanged for
merchandise of equal or greater value. What amount should Fenn report for net sales in
its income statement for the month of December year 2?
a. $900,000
164
b. $850,000
c. $780,000
d. $750,000
26. Bell Inc. took a physical inventory at the end of the year and determined that 650,000 of
goods were on hand. In addition, Bell, Inc. determined that 50,000 of goods that were
in transit that were shipped f.o.b. shipping were actually received two days after the
inventory count and that the company had 75,000 of goods out on consignment. What
amount should Bell report as inventory at the end of the year?
a. 650,000.
b. 700,000.
c. 725,000.
d. 775,000.
27. Daniel Padilla Company sold for P3,000,000 an old equipment having an original cost of
P5,400,000 and carrying mount of P2,400,000 on December 31, 2021. The terms of the
sale were P600,000 down payment and P1,200,000 payable each year on December
31 of the next 2 years. The sale agreement made no mention of interest. However, 9%
would be a fair rate for this type of transaction. The present value of an ordinary annuity
of 1 @ 9% for 2 years is 1.76. What is the interest income in 2022?
a. 216,000
b. 190,080
c. 108,000
d. 106,000
28. Sun Inc. factors 2,000,000 of its accounts receivables without guarantee (recourse) for
a finance charge of 5%. The finance company retains an amount equal to 10% of the
accounts receivable for possible adjustments. What would be recorded as a gain (loss)
on the transfer of receivables?
a. Loss of 100,000
b. Gain of 100,000.
c. Loss of 300,000.
d. Loss of 200,000.
29. Given the historical cost of product Z is 150, the selling price of product Z is 190, costs
to sell product Z are 21, and the cost to complete product Z is 30, what is the net
realizable value that should be used in the lower-of-cost-or-net realizable value
comparison?
a. 160.
b. 169.
c. 139.
d. 150.
30. Robertson Corporation acquired two inventory items at a lump-sum cost of 40,000. The
acquisition included 3,000 units of product CF, and 7,000 units of product 3B. CF
normally sells for 12 per unit, and 3B for 4 per unit. If Robertson sells 1,000 units of
CF, what amount of gross profit should it recognize?
a. 1,500.
b. 4,500.
c. 8,000.
d. 9,500.
31. Yoyubukai Company has a following account balance on December 31,2020
Time Deposit 500,000

Cash on hand 1,000,000
Petty Cash Fund 2,000,000
165
Cash in bank 1,500,000

Commercial paper with maturity of 2mos. 600,000
Post stamps unused 1,000,000
Postdated Check 4,000,000
What total amount would be reported as Cash and Cash Equivalent in December 31,
2020?
a. 10,600,000
b. 6,600,000
c. 5,600,000
d. 5,000,000
32. If the month-end bank statement shows a balance of $36,000, outstanding checks are
$12,000, a deposit of $4,000 was in transit at month end, and a check for $500 was
erroneously charged by the bank against the account, the correct balance in the bank
account at month end is
a. $27,500.
b. $28,500.
c. $20,500.
d. $43,500.
33. Lexington Company sells product 1976NLC for 45 per unit. The cost of one unit of
1976NLC is 36. The estimated cost to complete a unit is 8, and the estimated cost to
sell is 5. At what amount per unit should product 1976NLC be reported, applying lower-
of-cost-or-net realizable value?
a. 36.
b. 32.
c. 37.
d. 40.
34. On its December 31, 2020, statement of financial position, Trump Co. reported its
investment in non-trading securities, which had cost 600,000, at fair value of 550,000.
At December 31, 2021, the fair value of the securities was 585,000. What should
Trump report on its 2021 income statement as a result of the increase in fair value of
the investments in 2021?
a. 0.
b. Unrealized loss of 15,000.
c. Realized gain of 35,000.
d. Unrealized gain of 35,000.
35. Lenny’s Llamas purchased 1,000 llamas on January 1, 2021. These llamas will be
realizable value of 27,000, and the change in fair value due to harvest is ( 1,750). On
Lenny’s Llamas income statement for the year ending December 31, 2021, what
amount of unrealized gain on biological assets will be reported?
a. 39,350
b. 41,100
c. 14,100
d. 12,350
36. Finster Company was providing the following information at the end of the year
comprising its cash account:
Cash in bank 1,000,000

Cash on Hand 500,000
166
Cash in sinking fund 300,000

Vouchers paid out of collections, not yet recorded 100,000
Total 1,900,000
What total cash must be reported in the financial statement?

a. 1,900,000
b. 1,800,000
c. 1,500,000
d. 1,000,000
37. Boxer Inc. uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were 65,500 ( 99,000), purchases
during the current year at cost (retail) were 568,000 ( 865,600), freight-in on these
purchases totaled 26,500, sales during the current year totaled 811,000, and net
markups were 69,000. What is the ending inventory value at cost?
a. 222,600.
b. 174,366.
c. 142,241.
d. 152,308.
38. Dumar Corporation purchased 800 ordinary shares of Viking Industries as a trading
investment for 14,880. During the year, Viking Industries paid a cash dividend of 3.20
per share. At year-end, Viking’s shares were selling for 17.40 per share. On the income
statement for the year ended December 31, what is the total amount of unrealized
gain/loss and dividend revenue reported by Dumar Corporation?
a. 1,600
b. 2,560
c. 960
d. 3,250
39. Bell Inc. took a physical inventory at the end of the year and determined that 475,000 of
goods were on hand. In addition, the following items were not included in the physical
count. Bell, Inc. determined that 60,000 of goods were in transit that were shipped f.o.b.
destination (goods were actually received by the company three days after the inventory
count).The company sold 25,000 worth of inventory f.o.b. destination. What amount
should Bell report as inventory at the end of the year?
a. 475,000.
b. 535,000.
c. 500,000.
d. 560,000.
40.During 2020, Gil Company purchased marketable equity securities to be measured at fair value
through other comprehensive income. On December 31, 2020, the balance in the
unrealized loss on these securities was P200,000. There were no security transactions
during 2021. Pertinent data on December 31, 2021 are as follows:
Security Cost Market Value
X 2,100,000 1,600,000
Y 1,850,000 2,000,000
Z 1,050,000 900,000
In the statement of changes in equity for 2021, what amount should be included as
cumulative unrealized loss as component of other comprehensive income?
a. 500,000
b. 300,000
c. 200,000
d. 0
167
41.PHINEAS AND FERB Company shows the following account balances in their financial
records as of December 31, 2019
Checking account at BPI P(20,000)
Checking account at Land Bank 500,000
Payroll account- National Bank 100,000
Foreign bank account-restricted 750,000
Postage stamps 22,000
Employees’ postdated checks 30,000
I.O.U from president’s brother 75,000
Traveler’s check 50,000
NSF check 18,000
Petty cash fund (16,000 in currency & expenses receipts for 84,000)
100,000
Cashier’s check 36,000
What is the correct cash balance to be reported in the statement of financial position of
Phineas and Ferb Company of December 31, 2019
a. 582,000
b. 686,000
c. 702,000
d. 704,000
42. On January 2, 2020 Pod Company purchased 25% of the outstanding ordinary shares
of Jobs, Inc. and subsequently used the equity method to account for the investment.
During 2020 Jobs, Inc. reported net income of 420,000 and distributed dividends of
180,000. The ending balance in the Equity Investments account at December 31, 2020
was 320,000 after applying the equity method during 2020. What was the purchase
price Pod Company paid for its investment in Jobs, Inc.?
a. 170,000
b. 260,000
c. 380,000
d. 470,000
43. Bin Corporation had the following information relating to its accounts receivable:
Accounts receivable, 12/31/2021 2,000,000

Credit sales for 2022 7,100,000
Collections from customers for 2022 6,500,000
Accounts written off, August 30, 2022 250,000
Estimated uncollectible receivables per
aging of receivables, 12/31/2022 355,000
In the December 31, 2022 statement of financial position, what is the amortized cost of
the receivable?
a. 2,000,000
b. 7,100,000
168
c. 1,995,000
d. 2,350,000
44. Dicer uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were 130,000 ( 198,000), purchases
during the current year at cost (retail) were 685,000 ( 1,100,000), freight-in on these
purchases totaled 43,000, sales during the current year totaled 1,050,000, and net
markups (markdowns) were 24,000 ( 36,000). What is the ending inventory value at
cost?
a. 153,164.
b. 156,165.
c. 157,412.
d. 236,000.
45. Miguel Bank granted a loan to a borrower on January 1, 2019. The interest rate on the
loan is 10% payable annually starting December 31, 2019. The loan mature in five
years on December 31, 2023. The date related to the loan are:
Principal amount P4,000,000
Direct origination cost 61, 500
Origination fee received from borrower 350,000
The effective rate on the loan after consideration the direct origination cost and
origination fee received is 12%.
Q1. What is the carrying amount of the loan receivable on January 1, 2019?
A. 4,000,000
B. 4,650,000
C. 3, 711, 500
D. 4, 411, 500
Q2. What is the interest income for 2019?
A. 445, 380
B. 400,000
C. 529, 000
D. 588, 000
46. Wood Co. owns 2,000 shares of Arlo, Inc.’s 20,000 shares of $100 par, 6% cumulative,
nonparticipating preferred stock and 1,000 shares (2%) of Arlo’s common stock. During
year 2, Arlo declared and paid dividends of $240,000 on preferred stock. No dividends
had been declared or paid during year 1. In addition, Wood received a 5% common
stock dividend from Arlo when the quoted market price of Arlo’s common stock was $10
per share. What amount should Wood report as dividend income in its year 2 income
statement?
a. $12,000
b. $12,500
c. $24,000
d. $24,500
47. Magnolia Corporation invested its excess cash in equity securities during 2020. The
business model for these investments is to profit from trading on price changes.
(a) As of December 31, 2020 the equity investment portfolio consisted of the
following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000Shares 45,000 63,000
169
Polland Co. 2,000Shares 120,000 126,000

Alabang Corp. 2,000Shares 216,000 180,000
Totals 381,000 369,000
Q1. In the December 31, 2020, statement of financial position, what should be reported
as carrying amount of the investment?
a. 369,000 c. 381,000
b. 345,000 d. 405,000
Q2. In the 2020 income statement, what amount should be reported as unrealized gain
or loss?
a. Unrealized gain of 12,000
b. Unrealized loss of 12,000
c. Unrealized loss of 36,000
d. Unrealized gain of 24,000
48. On January 1, year 2, Card Corp. signed a three-year noncancelable purchase

contract, which allows Card to purchase up to 500,000 units of a computer part annually
from Hart Supply Co. at $.10 per unit and guarantees a minimum annual purchase of
100,000 units. During year 2, the part unexpectedly became obsolete. Card had
250,000 units of this inventory at December 31, year 2, and believes these parts can be
sold as scrap for $.02 per unit. What amount of probable loss from the purchase
commitment should Card report in its year 2 income statement?
a. $24,000
b. $20,000
c. $16,000
d. $ 8,000
49. During 2021, Mel Company purchased marketable equity securities as a trading
investment. For the year ended December 31, 2021, the entity recognized an
unrealized loss of P150, 000. There were no security transactions during 2022. The
information on December 31, 2022 is as follows:
A 3,000,000 2,000,000
B 2,000,000 2,500,000
In the 2022 income statement, what amount should be reported as unrealized gain or
loss?
a. Unrealized gain ofP350, 000 c. Unrealized loss ofP500, 000
b. Unrealized loss of P350, 000 d. Unrealized gain ofP500, 000
50. Charmaine Company sold equipment with a carrying amount of P4,800,000 for a
P6,000,000
non interest bearing note due January 1,2024. There was no established exchange
price for the equipment. The prevailing rate of interest for a note of this type on January
1, 2021 was 10% for three periods. The present value of 1at 10% for 3 periods is 0.75.in
the 2021 income statement, what should be reported as gain or loss on sale of
equipment?
a. 300,000 loss
b. 300,000 gain
c. 1,200,000 gain
d. 2,700,000 gain
170
51. On January 2, year 1, Well Co. purchased 10% of Rea, Inc.’s outstanding common
shares for $400,000. Well is the largest single shareholder in Rea, and Well’s officers
are a majority on Rea’s board of directors. Rea reported net income of $500,000 for
year 1, and paid dividends of $150,000. Well does not elect the fair value option to
report its investment in Rea. In its December 31, year 1 balance sheet, what amount
should Well report as investment in Rea?
a. $450,000
b. $435,000
c. $400,000
d. $385,000
52. Dart Company’s accounting records indicated the following information:

Inventory, 1/1/Y2 $ 500,000 Purchases during year 2 2,500,000 Sales during year 2
3,200,000 A physical inventory taken on December 31, year 2, resulted in an ending
inventory of $575,000. Dart’s gross profit on sales has remained constant at 25% in
recent years. Dart suspects some inventory may have been taken by a new employee.
At December 31, year 2, what is the estimated cost of missing inventory?
a. $ 25,000
b. $100,000
c. $175,000
d. $225,000
53.On January 2, year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this
date, Pod’s stockholders’ equity was $500,000. The carrying amounts of Pod’s
identifiable net assets approximated their fair values, except for land whose fair value
exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for
year 1, and paid no dividends. Kean accounts for this investment using the equity
method. In its December 31, year 1 balance sheet, what amount should Kean report as
investment in subsidiary?
a. $210,000
b. $220,000
c. $270,000
d. $280,000
54. Lucy’s Llamas purchased 1,000 llamas on January 1, 2021. These llamas will be
realizable value of 18,000, and the change in fair value due to harvest is ( 1,150). What
is the value of the llamas on Lucy’s Llamas statement of financial position on June 30,
2021?
a. 156,250
b. 148,000
c. 146,850
d. 128,850
55. The cash account of Academe Company showed a balance of P6,500,000. The bank
statement did not include a deposit of P230,000 made on the last day of the month. The
bank statement showed a collection by the bank of P34,000 and a customer’s check for
P62,000 returned because it was NSF.
A customer’s check for P35,000 was recorded on the books asP74,000.and a check
written for P79,000 was recorded as P97,000. What is the correct balance in the cash
account?
a. 6,500,000
171
b. 6,451,000
c. 6,539,000
d. 6,662,000
cows:
Milking cows
Milk harvested during 2021 54,000
At December 31, 2021, what is the value of the milking cows on Dub Dairy’s statement
of financial position?
a. 1,176,000
b. 1,541,000
c. 1,134,000
d. 1,499,000

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1

PRACTICAL ACCOUNTING 1 – REVIEW

PROF. U.C. VALLADOLID

(a) Excess of tax depreciation over book depreciation .... P60,000

Rent received in advance P16,000

The estimate of litigation expense of P500,000 will be deductible in 2021 when it is

How much shall be the income tax expense?

Carrying amount Tax base

Pretax financial income 1,600,000

a. 30,000 b. 45,000 c. 75,0000 d. 0

Tax depreciation in excess of book depreciation 800,000

2. What is the deferred tax asset on December 31, 2020?

5. What is the deferred tax expense for 2020?

9. In 2020, Jostine corporation received interest income of 100,000 on government obligations

1. The income tax expense is

2. The net deferred tax asset to be recognized is

(Munoz has elected to replace the property within the statutory

What is the amount of income tax liability for 2020?

December 31, 2018 December 31, 2019

What is the corrected net income for 2019?

 The Company failed to record accrued office salaries as follows:

What is the corrected pretax income for 2018?

What is the corrected pretax income for 2019?

2. What is the carrying value of machine Y on January 1, 2019?

3. What is the depreciation expense on machine Y for 2019?

4. What is the book value of the building at December 31, 2018?

5. What is the book value of the building at December 31, 2019?

1. The adjusted profit for 2019 was

11% Bonds payable, at face value P2,500,000

On November 2, 2019, the Corporation borrowed P2,000,000 at 9%, evidenced by a

3. How much is the 2019 interest expense on bonds payable?

4. What is the treasury stock balance on December 31, 2019?

6. What is the 2019 total interest expense?

1. What is the amount of current service cost?

3. What is the amount of actual return on plan assets during 2019?

4.What is the net remeasurement gain or loss during 2019?

5. What is the balance of the Accrued pension account as of 2019?

2. What amount should be reported as deferred tax liability at year-end?

3. What amount should be reported as deferred tax asset at year-end?

Annual rental payable at the end of each year 1,000,000

Implicit interest rate 10%

1. What is the initial lease liability?

2. What is the cost of right use asset?

3. What is the depreciation for current year?

4. What is the lease liability at year-end?

Sale price at below fair value 4,000,000

1. What is the initial lease liability?

2. What is the cost of right of use asset?

3. What is the gain transferred to the buyer-lessor?

4. What is the net annual rent income of the buyer-lessor?

Due date Amount

Warranty claims honored on 2018 – 2019 sales P 252,000

1. Estimated warranty payable

2. Unamortized bond discount

3. Bond interest payable

4. Total current liabilities

5. Total noncurrent liabilities

1. During 2019, Barney Company purchased marketable equity securities as a short-term

2. On January 3, 2020, Lincoln Services, Inc., signed an agreement authorizing Lisa

5. The following information is available for Hudson Company:

Disbursements for purchases ........................... 290,000

Cost of goods sold was