ACCTG21 PRELIM L6

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. At the beginning of current year, Feld Company traded a delivery truck and paid P100,000 cash for a tow
truck owned by Baker Company. The delivery truck had an original cost P1,400,000, accumulated
depreciation P800,000 and an estimated fair value P900,000. Feld estimated the fair value of Baker’s
tow truck at P1,000,000. The transaction had commercial substrance.

What amount of gain should be recognized by Feld?

a. 300,000 c. 30,000
b. 100,000 d. 0

The book value of the delivery truck is 600,000 (1,400,000 - 800,000). Its fair value is 900,000. A
gain of 300,000 is therefore implied. Cash was paid and the exchange had commercial substance.
Therefore, the gain is fully recognized. If the exchange lacked commercial substance, no gain
would be recognized.

2. Bertz Company exchanged a delivery truck costing P1,000,000 for a parcel of land. The truck had a
carrying amount of P650,000 and a fiar values P500,000. The entity gave P600,000 in cash in addition
to the truck as part of this transaction. It is expected that the cash flows from the assets will be
significantly different. The previous owner of the land had listed the land for sale at P1,200,000.

At what amount should Bertz record the land?

a. 1,100,000 c. 1,150,000
b. 1,250,000 d. 1,200,000

3. Bell Company exchanged an old machine, with a carrying amount of P390,000 and a fair value of
P350,000, and paid P100,000 cash for a similar used machine having a list price of P500,000.
The transaction has commercial substance.

At what amount should the machine acquired in the exchange be recorded?

a. 450,000 c. 490,000
b. 460,000 d. 500,000

4. Alpha SME Company acquired 20,000 shares of Omega Company on January 1, 2015 at P120 per share.
Omega Company had 80,000 shares oustanding with a carrying amount of P8,000,000.

The difference between the carrying amount and fair value of Omega Company on January 1 , 2015 is
attributable to a broadcast license which is an intangible asset.

Omega Company recorded earnings of P3,600,000 and P3,900,000 for 2015 and P2016, respectively, and
 paid per share dividend of P16 in 2015 and P20 in 2016.

Alpha SME Company has a 20 year straight line amortization policy for the broadcast license.
What is the carrying amount of the investment in associate on December 31, 2016 ?

a. 3,515,000 c. 3,555,000
b. 2,400,000 d. 4,275,000

5. On September 1, 2014 , Maghulat Company purchased 30% of the outstanding ordinary shares of Sa
Insaktong Higayon Corporation for P3,000,000 when the book value of net assets of Sa Insaktong
Higayon was P9,000,000 . The fair values of the assets are equal to their carrying values except for a
land which was undervalued by P1,000,000. Sa Insaktong Higayon reported net earnings throughout the
year in the amount of P2,400,000 and paid total dividends of P1,000,000.
What is the maximum amount of income Maghulat Company could include in its 2014 profit or loss as
income from investment ?
a. 207,500 c. 237,500
b. 235,000 d. 240,000
6. Testi fy Company acquired a real property for speculation purposes with the intention of selling it at a
higher price in the long term. The property was acquired at cash price of P3,000,000. The property has
P100,000 unpaid real pty. tax assumed by Testify Company. In addition , the company also paid the
following transaction costs: broker’s commission of P20,000 and registration cost of P35,000. How
much should Testify Company record the Investment Property?
a. 3,155,000 c. 3,055,000
b. 3,100,000 d. 3,000,000

7. On January 1 ,2013 , Promise Keeper Company owned an investment property which had an original cost
of P5,800,000 and useful life of 40 years.
On December 31, 2015 , the fair value was P6,000,000 and on December 31,2016, the fair value was
P5,900,000.
Under the fair value model, what is the expense to be recognized for the year ended December 31,2016 ?
a. 147,500 c. 200,000
b. 100,000 d. 0
 8. King Company made the following expenditures:
Continuing and frequent repairs 400,000
Repainted the plant building 100,000
Major improvements to the electrical wiring system 300,000
Partial replacement of roof tiles 140,000

What amount should be charged to repair and maintenance expense?

a. 960,000 c. 640,000
b. 820,000 d. 540,000

9. Fox Company made the following expenditures:

Renovation of a group of machines to secure greater
efficiency in production over the remaining five-year
useful life 500,000
Continuing, frequent, and low cost repairs 350,000
Replacement of a broken gear on a machine 50,000

What amount should be changed to repair and maintenance expense?

a. 350,000 c. 850,000
b. 400,000 d. 900,000
10. Rona Company provided the following charges to the “repair and maintenance account”
Service contract on office equipment 100,000
Initial desing fee for proposed extension of office building 150,000
New condenser for central air conditioning unit 10,000
Purchase of executive chairs and desks 200,000
Purchase of storm windows and screen and their
installation on all office windows 500,000
Sealing of roof leak in producction area 80,000
Repacement of door to production area 50,000
Installation of automatic door-opening system 200,000
Overhead crane for assembly department to speed
up production 350,000
Replacement of broken gear on machine 60,000
What total amount of expenditures should be capitalized?
a. 1,400,000 c. 1,500,000
b. 1,200,000 d. 1,410,000
11. On July 1, Rudd Company had a delivery van which was destroyed in an accident. On that date, the
carrying amount of the van was P500,000.

On July 15, the entity received and recorded a P140,000 invoice for a new engine installed in the van in
May, and another P100,000 invoice for various repairs.

In August, the entity received P700,000 under an insurance policy on the van, which it plans to use to
replace the van.

What amount should be reported as gain on disposal of the van in the income statement?
a. 200,000 c. 60,000
b. 700,000 d. 0

Carrying Value 500k

New engine 140k
640k

700k
-640k
60k

Note that the 100k invoice should be recorded as repairs expense, and
therefore does not affect the van’s carrying value.

12. On June 30, 2015, a fine in Pine Company’s plant caused a total loss to a production machine. The
machine was depreciated at P200,000 annually and had a carrying amount of P1,600,000 on January
1, 2015.

On the date of the fire, the fair value of the machine was P2,200,000, and the entity received insurance
proceeds of P2,000,000.

What amount should be recognized as gain on disposal?

a. 500,000 c. 400,000
b. 700,000 d. 600,000

Carrying amount, December 31. 2009 1,600,000

Less: depreciation from January 1 to
June 30, 2010 (200,000) x 6/12) 100,000
Carrying amount. June 30, 2015 1,500,000
2M
-1.5M
500k
 13. Parke Company replaced on old boilder with a more efficient one.
Purchase price of a new boiler 6,000,000
Carrying amount of old boiler 500,000
Fair value of old boiler 200,000
Installation cost of new boiler 800,000

What amount should be capitalized a cost of the new boiler?

a. 6,000,000 c. 6,300,000
b. 6,600,000 d. 6,800,000

Purchase price of a new boiler 6,000,000

Installation cost of new boiler 800,000
6,800,000

14. On December 31, 2015, a building owned by Pink Company was totally destroyed by fire. The building
had fire insurance coverage up to P5,000,000.

Other pertinent information on December 31, 2015

Building, carrying amount 5,200,000
Buidling, fair value 5,700,000
Removal and clean-up cost 100,000

During January 2016, before the 2015 financial statements were issued, the entity received insurance
proceeds of P5,000,000.

What amount should be reported as gain or loss on involuntary conversion?

a. 300,000 loss c. 500,000 gain
b. 200,000 loss d. 400,000 loss

The sum of the carrying value (5,200,000) and removal/cleanup cost (100,000) is the amount to compare
to the insurance proceeds when computing the loss. The fire caused the latter costs to be incurred;
therefore, the cleanup costs should be included in the loss.
The fair value of the property would not figure into the recorded loss because the building account does
not reflect this amount.

Building, carrying amount 5,200,000

Removal and clean-up cost 100,000
5,300,000
Less insurance received - 5,000,000
300,000 loss since the actual expenditures outweigh the insurance received
 15. Cory Company owned a parcel of real estate condemned by the city government.

The entity received P7,500,000 for this property which had a carrying amount of P5,750,000. The following

costs were incurred as a result of the condemnation:

Appraisal fee to support a P7,500,000 value 25,000
Attorney fee for the closing with the city governmern 35,000
Attorney fee to review contract to acquire
replacement property 30,000
Title insurance on replacement property 40,000

What amount should be reported as gain on the condemnation?

a. 1,690,000 c. 1,620,000
b. 1,750,000 d. 1,680,000
Carrying amount 5,750,000
Plus appraisal fees to support a 7,500,000 value 25,000
Plus attorney fees for the closing with the state 35,000
Equals total cost to compare to 7,500,000 received from state 5,810,000
`
Property 7,500,000
(5,810,000)
1,690,000

16. Alpha SME Company acquired 20,000 shares of Omega Company on January 1, 2015 at P120 per share.
Omega Company had 80,000 shares oustanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of Omega Company on January 1 , 2015 is
attributable to a broadcast license which is an intangible asset.
Omega Company recorded earnings of P3,600,000 and P3,900,000 for 2015 and P2016, respectively, and
paid per share dividend of P16 in 2015 and P20 in 2016.
Alpha SME Company has a 20 year straight line amortization policy for the broadcast license.
What is the carrying amount of the investment in associate on December 31, 2015 ? Using Equity method.
a. 2,960,000 c. 2,980,000
b. 3,300,000 d. 2,060,000
 17. Alpha SME Company acquired 20,000 shares of Omega Company on January 1, 2015 at P120 per share.
Omega Company had 80,000 shares oustanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of Omega Company on January 1 , 2015 is
attributable to a broadcast license which is an intangible asset.
Omega Company recorded earnings of P3,600,000 and P3,900,000 for 2015 and P2016, respectively, and
paid per share dividend of P16 in 2015 and P20 in 2016.
Alpha SME Company has a 20 year straight line amortization policy for the broadcast license.
What is the carrying amount of the investment in associate on December 31, 2015 ? Using Equity
method. What is the investment income 2016 ?
a. 975,000 c. 995,000
b. 955,000 d. 935,000

Completion
Complete each statement.

18. Alpha SME Company acquired 20,000 shares of Omega Company on January 1, 2015 at P120 per share.
Omega Company had 80,000 shares oustanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of Omega Company on January 1 , 2015 is
attributable to a broadcast license which is an intangible asset.
Omega Company recorded earnings of P3,600,000 and P3,900,000 for 2015 and P2016, respectively, and
paid per share dividend of P16 in 2015 and P20 in 2016.
Alpha SME Company has a 20 year straight line amortization policy for the broadcast license.
What is the carrying amount of the investment in associate on December 31, 2015 ? Using Cost method.
19.
Alpha SME Company acquired 20,000 shares of Omega Company on January 1, 2015 at P120 per share.
Omega Company had 80,000 shares oustanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of Omega Company on January 1 , 2015 is
attributable to a broadcast license which is an intangible asset.
Omega Company recorded earnings of P3,600,000 and P3,900,000 for 2015 and P2016, respectively, and
paid per share dividend of P16 in 2015 and P20 in 2016. The FV of Omega’s share at the end of year is
P100 per share.
Alpha SME Company has a 20 year straight line amortization policy for the broadcast license.
What is the carrying amount of the investment in associate on December 31, 2015 ? Using FV method.