CPA REVIEW SCHOOL OF THE PHILIPPINES

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FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

FIRST PREBOARD EXAMINATION SOLUTIONS

1. Cash in bank (5,000,000 + 500,000) 5,500,000

Notes receivable 4,000,000
Accounts receivable (6,000,000 + 1,500,000) 7,500,000
Inventory (3,000,000 + 300,000) 3,300,000
Sinking fund 3,000,000
Accounts payable – debit balance 1,000,000
Total current assets 24,300,000 D

2. Bank overdraft 500,000

Accounts receivable – credit balance 1,500,000
Accounts payable (7,000,000 + 300,000 + 1,000,000) 8,300,000
Bonds payable 3,000,000
Estimated liability for coupons 600,000
Accrued expenses 2,000,000
Total current liabilities 15,900,000 B

3. Sales 7,750,000
Cost of goods sold (2,400,000)
Gross profit 5,350,000
Interest revenue 450,000
Total income 5,800,000
Administrative expenses (700,000)
Loss on sale of equipment (100,000)
Sales commissions (500,000)
Freight out (150,000)
Loss on early extinguishment of long-term debt (200,000)
Doubtful accounts expense (150,000)
Income before tax 4,000,000
Tax expense (4,000,000 x 25%) (1,000,000)
Income from continuing operations 3,000,000
Loss from discontinued operations
Pretax loss 1,600,000
Tax benefit (1,600,000 x 25%) (400,000) (1,200,000)
Net income 1,800,000 B

4. Cost ratio (20% ÷ 40%) 50%

Income before tax as a percentage of sales (100% - 50% - 20% - 5%) 25%
Sales (3,000,000 / 75% = 4,000,000 / 25%) 16,000,000 D

5. Accounts payable 2,000,000

Short-term borrowings 1,500,000
Bonds payable (3,000,000 + 500,000) 3,500,000
Mortgage payable – current portion 500,000
Bank loan 1,000,000
Total current liabilities 8,500,000 C

6. Adjusting events (1,000,000 + 500,000) 1,500,000 D

7. Key officers’ salaries (750,000 + 500,000) 1,250,000

Loan to officers (1,250,000 + 500,000) 1,750,000
Related party disclosures 3,000,000 D

8. Correct net assets (8,750,000 – 250,000) 8,500,000 A

9. Carrying amount – July 1, 2021 (5,000,000 – 3,000,000) 2,000,000

FVLCOD (1,300,000 – 100,000) 1,200,000
Impairment loss on July 1, 2021 800,000
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FVLCOD – December 31, 2021 (1,500,000 – 50,000) 1,450,000

FVLCOD – July 1, 2021 1,200,000
Gain on reversal of impairment 250,000 B

10. Carrying amount – December 31, 2020 (5,000,000 – 1,000,000) 4,000,000

FVLCOD – December 31, 2020 3,200,000
Impairment loss 800,000

Carrying amount – not held for sale (5,000,000 – 1,500,000) 3,500,000

Recoverable amount (3,800,000 – 200,000) 3,600,000

Measurement (lower between carrying amount not held for sale

and recoverable amount) 3,500,000
Carrying amount per book 3,200,000
Gain on reclassification – 2021 300,000 B

11. Cost – January 1, 2021 3,760,000

Accum. depn. – December 31, 2023 (3,520,000 x 12/15) (2,816,000)
Carrying amount – January 1, 2024 944,000
Residual value (352,000)
Depreciation for 2024 592,000 C

Revised remaining life starting 2024 (4 – 3) 1 year

12. Effect on net income (300,000 + 600,000 = 900,000 x 75%) 675,000 decrease A
The overstatement of 2020 depreciation is a prior period error
and the overstatement of December 31, 2019 is counterbalancing.

13. Minimum external revenue (20,000,000 x 75%) 15,000,000 B

14. Petty cash fund (50,000 – 5,000 – 5,000) 40,000

Current account 4,000,000
Cash in bank – set aside for payment of bonds 2,000,000
Cash on hand (500,000 – 100,000) 400,000
Treasury bills 1,000,000
Cash and cash equivalents 7,440,000 B

15. Total writeoff (2018 to 2020) 1,700,000

Total recoveries (2018 to 2020) (220,000)
Balance 1,480,000

% uncollectible (1,480,000 ÷ 37,000,000) 4%

Allowance for doubtful accounts – January 1, 2021 1,000,000

Doubtful accounts expense (20,000,000 x 4%) 800,000
Recovery in 2021 150,000
Writeoff in 2021 (650,000)
Allowance for doubtful accounts – December 31, 2021 1,300,000 A

16. Gross amount of AR (1,000,000 x 80% x 90% x 95%) 684,000

Cash discount (684,000 x 4%) (27,360)
Net amount 656,640
Sales return (100,000 x 96%) (96,000)
Gross AR 560,640
Allowance for freight (25,000)
NRV 535,640 C

17. PV of note (6,000,000 x 0.75) 4,500,000

CA of equipment 4,800,000
Loss on disposal (300,000) D
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18. Service fee (750,000 x 2%) 15,000

Interest expense (750,000 x 12% x 51/365) 12,575
Loss on recourse obligation 15,000
Cost of factoring 42,575 D

19. Accounts payable (2,200,000 + 100,000 – 50,000 + 500,000) 2,750,000 A

20. Inventory (2,500,000 – 300,000 + 150,000) 2,350,000 A

21. First note 2,000,000

Second note (2M x 3% x 5 = 300k + 2M = 2,300,000 x 0.68) 1,564,000
Carrying amount of NR 3,564,000 A

22. Cost of goods available for sale 7,100,000

Cost of goods sold (7,280,000 / 1.3) (5,600,000)
Estimated cost of inventory 1,500,000
NRV of usable damaged goods (100,000)
Fire loss 1,400,000 B

23. Cost ratio – average method (5,175,000 ÷ 6,900,000) 75%

Goods available for sale – retail 6,900,000
Shortage (100,000)
Employee discount (200,000)
Sales (4,000,000)
Inventory at retail 2,600,000

Inventory at cost (2,600,000 x 75%) 1,950,000 A

24. Cost 5,800,000

NRV – lower (8,000,000 – 2,500,000) 5,500,000 A

25. Cost of goods sold per book 4,600,000

Inventory losses 200,000
Cost of goods sold - FOB Destination erroneously recorded (300,000)
Loss on writedown (2,500,000 – 1,800,000) 700,000
Cost of goods sold to be reported 5,200,000 D

26. Carrying amount of biological asset to be reported 8,200,000 A

27. Unrealized gain in OCI (5,500,000 – 4,700,000) 800,000 C

28. Shares in lieu of cash dividend from Queen – 15% interest (6k x 150) 900,000
Dividend from Princess Company (8,000,000 x 30%) 2,400,000
Total dividend income 3,300,000 D

29. Fair value of share rights (50,000 x 20) 1,000,000

Cash payment (50,000 / 2 = 25,000 x 90) 2,250,000
Cost of new investment 3,250,000 B

30. Total FV Fraction Allocated cost

Pref. shares (20k x 50) 1,000,000 10/12 1,250,000
Share warrants (20k x 10) 200,000 2/12 250,000
1,200,000 1,500,000

Gain on sale (600,000 – 250,000) 350,000 C

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31. Cost 3,200,000

CA of net assets acquired (6,000,000 x 30%) (1,800,000)
Excess cost 1,400,000
Equipment (3,000,000 x 30%) (900,000)
Goodwill 500,000

Share in adjusted net income (3,400,000 x 30%) 1,020,000

Amortization of excess cost – equipment (900,000 / 5) (180,000)
Investment income 840,000 C

Net income 4,000,000

Unrealized profit on inventory ( 160,000)
Adjusted net income 3,400,000

32. Cost 3,200,000

Investment income 840,000
Share in revaluation surplus (2,000,000 x 30%) 600,000
Share in cash dividend (1,500,000 x 30%) (450,000)
Carrying amount of investment in associate 4,190,000 C

33. Interest received (5,000,000 x 8% x 6/12) 200,000

Discount amortization 18,000
Interest income 218,000 D

34. Carrying amount – January 1, 2021 4,742,000

Discount amortization (379,360 interest income – 300,000 interest received) 79,360
Carrying amount – December 31, 2021 4,821,360

Unrealized gain in OCI (5,250,000 – 4,821,360) 428,640 C

35. Purchase sugar (20,000 x 15) 300,000 asset

Purchase milk (50,000 x 9) (450,000) liability
Sell ice cream (30,000 x 25) 750,000 asset
Fair value of derivative 600,000 asset B

36. Cash paid for land and dilapidated building 3,000,000

Fee for title search 50,000
Assessment by city for drainage project 100,000
Cost of grading, leveling and landfill 250,000
Cost of the land 3,400,000 A
37. Removal of old building 200,000
Payment to tenants for vacating old building 150,000
Architect fee for new building 200,000
Building permit for new construction 50,000
New building constructed 7,000,000
Driveway and walk as part of building plan 400,000
Temporary quarters for construction crew 200,000
Temporary building to house tools and materials 150,000
Cost of changes during construction 350,000
Cost of the building 8,700,000 A

38. First piece of land (1,600,000 + 175,000 + 50,000 – 25,000) 1,800,000

Second piece of land (4,500,000 x 2/3) 3,000,000
Cost of land as PPE 4,800,000 B

The third piece of land of P2,000,000 held for undetermined use

is an investment property.

39. Cost of the equipment 4,300,000 A

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40. United Bank (10,000,000 x 6%) 600,000

Global Bank (15,000,000 x 8%) 1,200,000
Asian Bank (25,000,000 x 10%) 2,500,000
Total borrowing cost incurred 4,300,000
Average capitalization rate (4,300,000 / 50,000,000) 8.6%
Capitalized borrowing cost (40,000,000 x 8.6% x 9/12) 2,580,000 A
41. Interest expense (4,300,000 – 2,580,000) 1,720,000 A
42. January 1 (3,000,000 x 12/12) 3,000,000
July 1 (6,000,000 x 6/12) 3,000,000
November 1 (9,000,000 x 2/12) 1,500,000
Weighted average expenditures 7,500,000
Specific borrowing (5,000,000 x 8%) 400,000
General borrowing (2,500,000 x 10%) 250,000
Capitalized borrowing cost 650,000
Actual expenditures 18,000,000
Cost of the building – December 31, 2021 18,650,000 C

43. Cost – January 1, 2021 7,200,000

Accum. depn. – December 31, 2023 (7,200,000 / 10 x 3) (2,160,000)
Carrying amount – January 1, 2024 5,040,000

Depreciation for 2024 (5,040,000 x 7/28) 1,260,000 A

SYD (1 + 2 + 3 + 4 + 5 + 6 + 7) = 28

44. Acquisition cost 5,000,000

Development cost 3,000,000
Restoration cost at present value (2,000,000 x 0.68) 1,360,000
Cost of wasting asset 9,360,000
Residual value (1,000,000)
Depletion base 8,360,000

Depletion in cost of goods sold (8,360 / 4,000 = 2.09 x 500,000) 1,045,000 A

45. Carrying amount of CGU 13,000,000

Recoverable amount 8,500,000
Impairment loss 4,500,000
Allocated to goodwill (1,000,000)
Allocated to noncash assets 3,500,000

Land 2,500,000 25/100 875,000

PPE 7,500,000 75/100 2,625,000 C
10,000,000 3,500,000

The inventory is not impaired because the fair value less cost of disposal
was greater than carrying amount.

46. Initial measurement of goodwill (44,000,000 – 35,000,000) 9,000,000

Impairment loss to goodwill (41,000,000 – 37,000,000) (4,000,000)
Carrying amount of goodwill 5,000,000 C

47. Impairment loss in 2021 (3,000,000 – 2,700,000) 300,000

Reversal of impairment in 2022 (2,820,000 – 2,700,000) 120,000 A

48. Cost of the trademark (1,000,000 + 50,000 + 105,000) 1,155,000 B

49. Start-up costs (400,000 + 1,200,000) 1,600,000 B

50. Research and development expense 2,650,000 A

(1,000,000 + 200,000 + 400,000 + 150,000 + 600,000 + 300,000)
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THEORY

51. D 56. D 61. B 66. B

52. C 57. D 62. B 67. C
53. D 58. A 63. A 68. C
54. B 59. A 64. D 69. B
55. C 60. C 65. D 70. A

END