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Final Grading Exam Key Answers
Final Grading Exam Key Answers
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INTERMEDIATE ACCOUNTING 2
FINAL GRADING EXAMINATION
Alhambra received all initial payments on September 1, 2005, and P3,240 of monthly
fees during the period September 1 through December 31, 2005. In its December 31,
2005 balance sheet, what amount should Alhambra report as deferred revenue?
a. 9,900
b. 3,300
c. 6,600
d. 4,380
2. The following are taken from the records of ABC Co. as of year-end.
Solution:
4. Entity A purchases goods for ₱250,000 under a special credit period of 1 year. The
seller normally sells the goods for ₱220,000 with a credit period of one month or
with a ₱5,000 discount for cash basis (i.e., outright payment in cash). The initial
measurement of the payable is
a. 250,000
b. 220,000
c. 215,000
d. 200,000
How much is the carrying amount of the note on December 31, 20x1?
a. 1,026,296
b. 867,312
c. 528,926
d. 489,762
1,000,00 1,007,54
0 - 3 (7,543) 0.26
= =
1,007,54 (27,98 95
979,558 - 3 5)
The amount computed is added to 6% to derive the effective interest rate. The
effective interest rate is 6.2695% (6% + .2695%).
9. On January 1, 20x1, ABC Co. issued a 3-year, 3%, ₱1,000,000 note payable in
exchange for a machine. Principal is due on January 1, 20x4 but interest is due
annually every January 1. The prevailing interest rate for this type of note is 12%.
How much is the carrying amount of the note on December 31, 20x1?
a. 783,835
b. 883,664
c. 847,895
d. 919,643
10. On December 1 a company borrowed ₱100,000 at 12% per year. The interest
will be paid quarterly, with the first payment due on March 1. What should the
company report on its income statement for December?
a. Interest expense of ₱12,000
b. Interest expense of ₱10,000
c. Interest expense of ₱1,000
d. Nothing
13. For a bond issue which sells for less than its face amount, the market rate of
interest is
a. Dependent on the rate stated on the bond.
b. Equal to rate stated on the bond.
c. Less than rate stated on the bond.
d. Higher than rate stated on the bond.
14. The market price of a bond issued at a discount is the present value of its
principal amount at the market (effective) rate of interest
a. Less the present value of all future interest payments at the market (effective)
rate of interest.
b. Less the present value of all future interest payments at the rate of interest
stated on the bond.
c. Plus the present value of all future interest payments at the market (effective)
rate of interest.
d. Plus the present value of all future interest payments at the rate of interest
stated on the bond.
15. Which of the following is not a relevant consideration when evaluating whether
to derecognize a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether substantially all the risks and rewards of the obligation have been
transferred.
16. What is the effective interest rate of a bond or other debt instrument measured
at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt
instruments (i.e., similar remaining maturity, cash flow pattern, currency, credit
risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash payments or
receipts through the expected life of the debt instrument or, when appropriate,
a shorter period to the net carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government
bond prices.
19. In an “asset swap,” where a liability is settled through the transfer of noncash
asset,
a. the gain or loss on settlement is computed as the difference between the
carrying amount of the liability extinguished and the fair value of the noncash
asset transferred.
b. the gain or loss on settlement is computed as the difference between the
carrying amount of the liability extinguished and the carrying amount of the
noncash asset transferred.
c. the gain or loss on settlement is computed as the difference between the
carrying amount of the liability extinguished and the more clearly determinable
between the fair value of the liability extinguished and the carrying amount of
the noncash asset transferred.
d. no gain or loss is recognized
20. Entity A issues convertible bonds with face amount of ₱2,000,000 for
₱2,600,000. Each ₱1,000 bond is convertible into 10 shares with par value of ₱60
per share. On issuance date, the bonds are selling at 102 without the conversion
option. What is value allocated to the equity component on initial recognition?
a. 2,040,000
b. 540,000
c. 560,000
d. 460,000
Solution:
Issue price 2,600,000
Fair value of debt instrument without equity feature (2M x 102%) (2,040,000)
Equity component 560,000
The court is expected to rule in late December 20x2. There is no indication that the
claimant will settle out of court. A 7% risk adjustment factor to the probability-
weighted expected cash flows is considered appropriate to reflect the uncertainties in
the cash flow estimates. An appropriate discount rate is 10% per year. How much is
the provision for lawsuit at December 31, 20x1?
a. 436,360 b. 446,908 c. 326,836 d. 0
C
Solution:
At twenty per cent chance: (800K x 20%) 160,000
At eighty per cent chance: (400K x 80%) 320,000
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Total 480,000
Multiply by: PV of P1 @10%, n=1 0.90909
Total 436,363
Multiply by: Risk adjustment (100% + 7%) 107%
Total 466,909
Multiply by: Probability of settlement (100% - 30%) 70%
Provision for lawsuit – Dec. 31, 20x1 326,836
22. A manufacturer gives warranties at the time of sale to purchasers of its product.
Under the terms of the contract of sale, the manufacturer undertakes to make
good, by repair or replacement, manufacturing defects that become apparent
within one year from the date of sale. On the basis of experience, it is probable (i.e.,
more likely than not) that there will be some claims under the warranties.
At December 31, 20x1 the expenditures for warranty repairs and replacements for the
product sold in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume
for simplicity that all the 20x2 outflows of economic benefits related to the warranty
repairs and replacements take place on June 30, 20x2.
At December 31, 20x1, the appropriate discount factor for cash flows expected to
occur on June 30, 20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor
to reflect the uncertainties in the cash flow estimates is an increment of 6 per cent to
the probability-weighted expected cash flows.
A
Solution:
The amount of the provision is estimated as follows:
Minor repairs (40M x 3% x 10%) 120,000
Major repairs (40M x 2% x 90%) 720,000
Total 840,000
Multiply by: Present value factor (given) 0.95238
Total 800,000
Multiply by: Risk adjustment (100% + 6%) 106%
Total 848,000
Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 424,000
23. As of December 31, 20x1, ROUSE AWAKEN Co. has adopted a detailed formal
plan to close one of its toys divisions and put up a new division to manufacture
warfare weapons. The plan was communicated through a public announcement and
all of those affected by the closure were informed. ROUSE estimates the following
costs in relation to the closure of the division:
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25. How much is the balance of the warranty obligation as of December 31, 20x1?
a. 1,560,000 b. 2,000,000 c. 3,560,000 d. 2,800,000
A
Solution:
Estimated warranty liability
800,000 Jan. 1, 20x1 (given)
Actual warranty costs 1,240,000 2,000,000 Warranty expense
Dec. 31, 20x1 1,560,000
26. PROFUSE EXTRAVAGANT Co. launched a sales promotion in 20x1. For every
ten empty packs returned to PROFUSE plus ₱200, customers will receive a set of
kitchen knives. PROFUSE estimates that 40% of the packs sold will be redeemed.
Information on transactions during the year is as follows:
Units Amount
Sales 500,000 3B
Sets of kitchen knives purchased (₱800 per set) 300,000 240M
Number of packs redeemed 45,000
B
Solution:
The premium expense is computed as follows:
Sales in units 500,000
Multiply by: Estimate of wrappers to be redeemed 40%
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A 4,000,000
28. OBTUSE DULL Co. is involved in a tax dispute. OBTUSE has wrongfully paid
taxes and is claiming for refund of the taxes it has previously paid. As of December
31, 20x1, OBTUSE’s legal counsel was very confident that OBTUSE will be able to
recover the tax refund amounting to ₱40M in the coming year. The entry to
recognize the probable receipt of the tax refund includes
a. a debit to receivable d. a and b
b. a credit to gain e. none of these
c. a debit to prepaid asset
30. Entity A has 20 employees who are each entitled to one day paid vacation leave
for each month of service rendered. Unused vacation leaves are carried forward
and can be used in future periods if the current period’s entitlement is not used in
full. Moreover, employees are entitled to a cash payment for unused entitlement
when they leave the entity. All the employees have rendered service throughout the
current year and have taken a total of 150 days of vacation leaves. The average
daily rate of the employees in the current period is ₱1,000. However, a 5% increase
in the rate is expected to take into effect in the following year. Based on Entity A’s
past experience, the average annual employee turnover rate is 20%. How much will
Entity A accrue at the end of the current year for unused entitlements?
a. 0 c. 90,000
b. 75,600 d. 94,500
[(20 employees x 1 day x 12 months) – 150 days] x ₱1,000 x 105% = 94,500. The 20%
employee turnover rate is irrelevant because the employee benefits are monetized.
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31. Under its post-employment benefit plan, Entity A agrees to make annual
contributions of ₱500,000 to a retirement fund. When an employee retires, he or
she is entitled to a lump sum payment and monthly pension payments to be
determined based on the level of contributions and the investment performance of
the fund.
In 20x1, due to cash flow problems, Entity A was only able to contribute half of the
agreed contributions. In 20x2, Entity A contributed ₱900,000 to the fund. How
much retirement benefit expenses should Entity A recognize in 20x1 and 20x2,
respectively?
20x1 20x2
a. 200,000 900,000
b. 200,000 500,000
c. 500,000 600,000
d. 500,000 500,000
32. Entity A has 20 employees who are each entitled to one day paid vacation leave
for each month of service rendered. Unused vacation leaves are carried forward
and can be used in future periods if the current period’s entitlement is not used in
full. However, unutilized entitlements are forfeited when employees leave the
entity. All the employees have rendered service throughout the current year and
have taken a total of 150 days of vacation leaves. The average daily rate of the
employees in the current period is ₱1,000. However, a 5% increase in the rate is
expected to take into effect in the following year. Based on Entity A’s past
experience, the average annual employee turnover rate is 20%. How much will
Entity A accrue at the end of the current year for unused entitlements?
a. 0
b. 90,000
c. 75,600
d. 94,500
Solution: [(20 employees x 1 day x 12 months) – 150 days] x ₱1,000 x 105% x 80%* =
75,600
* The paid absences are non-vesting.
33. Under a profit-sharing plan, Entity A agrees to pay its employees 5% of its
annual profit. The bonus shall be divided among the employees currently employed
as at year-end. Relevant information follows:
If you are an alumnus of Entity A, how much bonus do you expect to receive?
a. 66,667
b. 50,000
c. 57,143
d. 0
Explanation: Only those who are currently employed as at year-end are entitled to
receive the bonus.
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35. How much is the net defined benefit liability (asset) to be presented in Entity A’s
December 31, 20x1 statement of financial position?
a. (300,000) c. (200,000)
b. 300,000 d. 200,000
36. How much is the component of the 20x1 defined benefit cost to be recognized in
profit or loss?
a. 400,000 c.
b. 420,000 d.
B Solution: 400,000 service cost + 20,000 net interest (see computations below) =
420,000
37. How much is the component of the 20x1 defined benefit cost to be recognized in
other comprehensive income – (income)/ loss?
a. (140,000) c. 260,000
b. 140,000 d. (260,000)
C Solution:
Service cost:
(a) Current service cost 400,000
(b) Past service cost -
(c) Any (gain) or loss on settlement -
400,000
Net interest on the net defined benefit liability (asset):
(a) Interest cost on the DBO (2M, beg. x 10%) 200,000
(b) Interest income on plan assets (1.8M, beg. x 10%) (180,000)
(c) Interest on the effect of the asset ceiling -
20,000
Remeasurements of the net defined benefit liability (asset):
(a) Actuarial (gains) and losses 200,000
(b) Difference between interest income on plan assets and
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38. You are the General Manager of Entity A. You have received the actuarial report
for your company’s defined benefit plan. The report shows the following
information:
PV of DBO – Jan. 1, 20x1 1,500,000
FVPA – Jan. 1, 20x1 1,200,000
PV of DBO – Dec. 31, 20x1 1,800,000
FVPA, end. – Dec. 31, 20x1 1,310,000
Actuarial gain 100,000
Return on plan assets 110,000
Discount rate 5%
Solution:
Net defined benefit liability, beg. (1.5M – 1.2M) = 300,000
Net defined benefit liability, end. (1.8M – 1.310M) = 490,000
Increase = 190,000
40. Which of the following is not one of the criteria when determining whether a
contract is or contains a lease?
a. Identified asset
b. Identified liability
c. Right to obtain substantially all of the economic benefits from use of an
identified asset throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use
41. Which of the following statements is correct regarding the accounting for
leases?
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Choice (d) is incorrect. Under a sublease, the lessee is also the lessor of the same
leased asset.
42. According to PFRS 16, lease liabilities are presented in the lessee’s statement of
financial position
a. separately from the other liabilities of the lessee.
b. together with other liabilities, with disclosure of the line items that include the
lease liabilities.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s
financial statements
43. According to PFRS 16, right-of-use assets are presented in the lessee’s
statement of financial position
a. separately from the other assets of the lessee.
b. together with other assets as if they were owned, with disclosure of the line
items that include the right-of-use assets.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s
financial statements
44. On December 30, 20x5, Haber Co. leased a new machine from Gregg Corp. The
following data relate to the lease transaction at the inception of the lease:
Lease term 10 years
Annual rental payable at the end of each lease year ₱100,000
Useful life of machine 12 years
Implicit interest rate 10%
The lease has no renewal option, and the possession of the machine reverts to Gregg
when the lease terminates. At the inception of the lease, Haber should record a lease
liability of
a. 0 b. 615,000 c. 630,000 d. 676,000
B
Solution:
Annual rent 100,000
PV of ordinary annuity of 1 @10%, n=10 6.15
PV of minimum lease payments 615,000
45. On January 2, 20x6, Ashe Company entered into a ten-year noncancellable lease
requiring year-end payments of ₱100,000. Ashe's incremental borrowing rate is
12% while the lessor's implicit interest rate, known to Ashe, is 10%. Ownership of
the property remains with the lessor at expiration of the lease. There is no bargain
purchase option. The leased property has an estimated economic life of 12 years.
What amount should Ashe capitalize for this leased property on January 2, 20x6?
a. 1,000,000 b. 614,500 c. 565,000 d. 0
46. Neal Corp. entered into a nine-year lease on a warehouse on December 31,
20x1. Lease payments of ₱52,000, which includes payment for non-lease
component of ₱2,000 (at stand-alone selling price), are due annually, beginning on
December 31, 20x1, and every December 31 thereafter. Neal does not know the
interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. What
amount should Neal report as lease liability at December 31, 20x1?
a. 280,000 b. 291,200 c. 450,000 d. 468,000
A
Solution:
Total consideration 52,000
Less: Payment for non-lease component (2,000)
Lease payments 50,000
Multiply by: PV of annuity due @9%, n=9 6.5348
Total 326,740
First payment due in advance (50,000)
Lease liability – Dec. 31, 20x1 276,740
*Answer choice is rounded-off
47. Robbins, Inc., leased a machine from Ready Leasing Co. The lease requires 10
annual payments of ₱10,000 beginning immediately. The lease specifies an interest
rate of 12% and a purchase option of ₱10,000 at the end of the tenth year, even
though the machine's estimated value on that date is ₱20,000. It is reasonably
certain that Robbins will exercise the purchase option. Robbins' incremental
borrowing rate is 14%. What amount should Robbins record the right-of-use asset
at the beginning of the lease term?
a. 62,160 b. 64,860 c. 66,500 d. 69,720
C
Solution:
Cash flows PV factors PV
Annual rent 10,000 PV annuity due @12%, n=10 6.3282 63,282
PO 10,000 PV of 1 @12%, n=10 0.3220 3,220
66,502
48. On January 1, 20x7, Babson, Inc., leased two automobiles for executive use. The
lease requires Babson to make five annual payments of ₱13,000 beginning January
1, 20x7. At the end of the lease term, Babson guarantees the residual value of the
automobiles will total ₱10,000. The interest rate implicit in the lease is 9%.
Babson's recorded lease liability on initial recognition is
a. 48,620 b. 44,070 c. 35,620 d. 31,070
A
Solution:
Cash flows PV factors PV
Annual rent 13,000 PV annuity due @9%, n=5 4.2397 55,116
Guaranteed RV 10,000 PV of 1 @9%, n=5 0.6499 6,499
Total 61,615
First payment due immediately (13,000)
Lease liability – initial recognition 48,615
49. On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. The
rent in 20x1 is ₱10,000 and shall increase by 10% annually starting on January 1,
20x2. Rentals are payable at the end of each year. ABC Co. pays the lessor a lease
P a g e | 16
bonus of ₱5,000 on January 1, 20x1. ABC Co. opts to use the practical expedient
allowed under PFRS 16 for leases of low value assets. How much is the lease
expense in 20x1?
a. 10,000 b. 11,000 c. 11,603 d. 12,853
D Solution:
20x1 10,000
20x2 (10K x 110%) 11,000
20x3 (11K x 110%) 12,100
20x4 (12.1K x 110%) 13,310
Lease bonus 5,000
Total 51,410
Divide by: 4
Annual lease expense 12,853
The lease provides for the transfer of ownership of the equipment to the lessee at the
end of the lease term. The relevant present value factor is as follows:
53. If the current tax expense is less than the income tax expense during the period,
there must be a
a. deferred tax benefit c. income tax payable
b. deferred tax expense d. prepaid income tax
54. Trade receivables have a carrying amount of P4,000. The related revenue has
already been included in taxable profit (tax loss). How much is the tax base of the
asset?
a. 4,000 b. 2,400 c. 1,600 d. 0
55. Dividends receivable from a subsidiary have a carrying amount of P4,000. The
dividends are not taxable. How much is the tax base of the asset?
a. 4,000 b. 2,400 c. 1,600 d. 0
56. Current liabilities include accrued fines and penalties with a carrying amount of
P4,000. Fines and penalties are not deductible for tax purposes. How much is the
tax base of the liability?
a. 4,000 b. 2,400 c. 1,600 d. 0
57. A loan payable has a carrying amount of P4,000. The repayment of the loan will
have no tax consequences. How much is the tax base of the liability?
a. 4,000 b. 2,400 c. 1,600 d. 0
Additional information:
Software development costs after technological feasibility was established were
capitalized for financial reporting. The costs were recognized as outright deductions
for tax purposes.
Straight line method is used in depreciating the machinery while sum-of-the-years’
digits method is used for tax purposes.
Health care benefits are accrued as incurred but are tax deductible only when cash
is actually paid.
Pretax profit for 20x1 is ₱1,000,000. Income tax rate is 30%.
There were no temporary differences as of January 1, 20x1.
58. How much is the deferred tax liability on December 31, 20x1?
a. 400,000
b. 900,000
c. 320,000
d. 270,000
59. How much is the deferred tax asset on December 31, 20x1?
a. 270,000
b. 120,000
c. 90,000
d. 60,000
Multiply by
Description of items Tax rate
Description of items
Pretax income 1,000,000
Permanent differences -
Acctg. profit subj. to tax 1,000,000 30% Income tax expense 300,000
Less: TTD (900,000) 30% Less: DTL (270,000)
Add: DTD 200,000 30% Add: DTA 60,000
Taxable profit 300,000 30% Current tax expense 90,000
62. ABC Co. is determining the amount of its pretax accounting income for the year
by making adjustment to taxable income from the company's year-end income tax
return. The tax return indicates taxable income of ₱100,000, on which a tax liability
of ₱30,000 has been recognized (₱100,000 x 30% = ₱30,000). Additional
information is shown below:
Solution:
Pretax income (squeeze) 86,000
Add: Non-deductible expense:
Goodwill impairment loss not tax deductible 35,000
Less: Interest income subject to final tax (6,000)
Accounting profit subject to tax 115,000
Less: Taxable temporary difference (TTD) 'FI>TI':
Revenues accrued but taxed on cash basis (40,000)
Add: Deductible temporary difference (DTD) 'FI<TI'
Excess of depreciation 10,000
Bad debts recognized under allowance method 15,000
Taxable profit (start) 100,000
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63. Legal capital is the portion of contributed capital that cannot be distributed to
the owners during the lifetime of the corporation unless the corporation is
dissolved and all of its liabilities are settled first. For no-par value shares, legal
capital is
a. the aggregate par value of shares issued and subscribed.
b. the total consideration received or receivable from shares issued or subscribed.
c. the aggregate stated value of shares issued and subscribed.
d. the aggregate market value of shares issued and subscribed.
64. Which of the following is not one of the basic shareholders rights?
a. The right to participate in earnings.
b. The right to maintain one's proportional interest in the corporation.
c. The right to participate in the proceeds of the sale of corporate assets upon
liquidation of the corporation.
d. The right to inspect the accounting records of the corporation.
66. The entry to record the issuance of ordinary shares for fully paid share
subscriptions is
a. a memorandum entry.
b. Dr. Common Stock Subscribed; Cr. Common Stock; Cr. Additional Paid-In
Capital
c. Dr. Subscribed Share Capital; Cr. Subscriptions Receivable
d. Dr. Subscribed Share Capital; Cr. Share Capital
69. Gains and losses on the purchase and resale of treasury stock may be reflected
only in
a. share premium account.
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On January 2, 20X3, Peter purchased and retired 100,000 shares of its stock for
₱1,800,000. Immediately after retirement of these 100,000 shares, the balances in the
share premium and retained earnings accounts should be
Share premium Retained earnings
a. ₱ 900,000 ₱1,300,000
b. ₱1,400,000 ₱ 800,000
c. ₱1,900,000 ₱1,300,000
d. ₱2,400,000 ₱ 800,000
Solution:
Jan. Share capital (100,000 x ₱10) 1,000,000
2, Sh. premium – orig. issuance (2.7M x 100K/900K) 300,000
20x3 Retained earnings 500,000
Cash 1,800,000
71. Asp Co. was organized on January 2, 20x1, with 30,000 authorized shares of ₱10
par ordinary shares. During 20x1 the corporation had the following capital
transactions:
Asp used the cost method to record the purchase and reissuance of the treasury
shares. In its December 31, 20x1, balance sheet, what amount should Asp report as
share premium in excess of par?
a. 100,000
b. 125,000
c. 140,000
d. 115,000
Solution:
Jan. 5, Cash (20,000 x 15) 300,000
20x1
Ordinary share (20,000 x 10) 200,000
Share premium 100,000
July 14, Treasury shares (5,000 x 17) 85,000
20x1
Cash 85,000
Dec. Cash (5,000 x 20) 100,000
27,
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72. In 20x0, Newt Corp. acquired 6,000 shares of its own ₱1 par value ordinary
share at ₱18 per share. In 20x1, Newt issued 3,000 of these shares at ₱25 per
share. Newt uses the cost method to account for its treasury stock transactions.
What accounts and amounts should Newt credit in 20x1 to record the issuance of
the 3,000 shares?
Treasury sh. Sh. premium Retained earnings Ordinary
sh.
a. ₱54,000 ₱21,000
b. ₱54,000 ₱21,000
c. ₱72,000 ₱3,000
d. ₱51,000 ₱21,000 ₱3,000
Solution:
Dec. Cash (3,000 x 25) 75,000
27,
Treasury shares (3,000 x 18) 54,000
20x1
Share premium – Treasury shares 21,000
73. On December 1, 20x1, Line Corp. received a donation of 2,000 shares of its ₱5
par value ordinary shares from a shareholder. On that date, the stock’s market
value was ₱35 per share. The stock was originally issued for ₱25 per share. By
what amount would this donation cause total stockholders’ equity to decrease?
a. 70,000
b. 50,000
c. 20,000
d. 0
75. Nest Co. issued 100,000 shares of common stock (i.e., ordinary shares). Of
these, 5,000 were held as treasury stock at December 31, 20x1. During 20x2,
transactions involving Nest's common stock were as follows:
May 3 - 1,000 shares of treasury stock were sold.
August 6 - 10,000 shares of previously unissued stock were sold.
November 18 - a 2-for-1 stock split took effect.
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Laws in Nest's state of incorporation protect treasury stock from dilution. At December
31, 20x2, how many shares of Nest's common stock were issued and outstanding?
Shares Issued Outstanding
a. 220,000 212,000
b. 220,000 216,000
c. 222,000 214,000
d. 222,000 218,000
Solution:
Issued Outstanding
Issued as of Dec. 31, 20x1 100,000 100,000
Treasury shares as of Dec. 31, 20x1 (5,000)
20x2 transactions:
May 3 - reissuance of treasury shares 1,000
Aug. 6 - issuance of new shares 10,000 10,000
Totals 110,000 106,000
Nov. 18 - 2-for-1 share split 2 2
Ending balances 212,000
220,000
76. At December 31, 20x0 and 20x1, Carr Corp. had outstanding 4,000 shares of
₱100 par value 6% cumulative preferred stock and 20,000 shares of ₱10 par value
common stock (i.e., ordinary shares). At December 31, 20x0, dividends in arrears
on the preferred stock were ₱12,000. Cash dividends declared in 20x1 totaled
₱44,000. Of the ₱44,000, what amounts were payable on each class of stock?
Preference shares Ordinary shares
a. ₱44,000 ₱ 0
b. ₱36,000 ₱ 8,000
c. ₱32,000 ₱12,000
d. ₱24,000 ₱20,000
Solution:
Total cash dividends declared 44,000
Dividends to preference sh. [(4,000 x 100 x
6%) + 12,000] (36,000)
8,0
Dividends to ordinary sh.
00
77. Arp Corp.’s outstanding capital stock at December 15, 20x1, consisted of the
following:
30,000, 5% cumulative preference shares, par value ₱10 per share, fully
participating as to dividends. No dividends were in arrears.
200,000 ordinary shares, par value ₱1 per share.
On December 15, 20x1, Arp declared dividends of ₱100,000. What was the amount of
dividends payable to Arp’s ordinary stockholders?
a. 10,000
b. 34,000
c. 40,000
d. 47,500
Solution:
Total dividends declared 100,000
Allocation:
P a g e | 24
78. The following stock dividends were declared and distributed by Sol Corp.:
Percentage of ordinary shares
outstanding at declaration date Fair value Par value
10 ₱15,000 ₱10,000
28 40,000 30,800
What aggregate amount should be debited to retained earnings for these stock
dividends?
a. 40,800
b. 45,800
c. 50,000
d. 55,000
Solution:
10% ('small' dividend) - at fair
value 15,000
28% ('large' dividend) - at par
value 30,800
Total debit to retained
earnings 45,800
79. Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding
shares of ₱2 par value common stock, which had a fair value of ₱5 per share before
the stock dividend was declared. This stock dividend was distributed 60 days after
the declaration date. By what amount did Ray’s current liabilities increase as a
result of the stock dividend declaration?
a. 0
b. 500
c. 1,000
d. 2,500
82. On February 1, 20x1, Entity A offered its employees share options subject to the
offer being ratified in the shareholders’ general meeting. The share option offer
was approved in the shareholders’ general meeting held on March 1, 20x1. Entity A
issued the share options on April 1, 20x1. The fair value of the share options vary
between these dates. For purposes of PFRS 2, the share options should be valued at
the fair value determined on
a. February 1, 20x1. c. April 1, 20x1.
b. March 1, 20x1. d. any of these
83. On January 1, 20x4, Entity A has granted 600 share options to each of its 100
employees. The options vest in three years’ time. Each share option has a fair value
of ₱100 on grant date. Information on employee departure is as follows:
• January 1, 20x4: estimate of employees leaving the entity during the vesting
period – 4%
• December 31, 20x4: revision of estimate of employees leaving to 5% before
vesting date
• December 31, 20x5: revision of estimate of employees leaving to 6% before
vesting date
• December 31, 20x6: actual employees leaving 5%
C
20x4: (600 x 100 x 100) x 95% x 1/3 = 1,900,000;
20x5: (600 x 100 x 100) x 94% x 2/3 = 3,760,000 - 1,900,000 = 1,860,000
During 20x1, 7 employees left. Entity A revises its estimate to a total of 25% employee
departure over the vesting period.
During 20x2, 9 employees left. Entity A revises its estimate to a total of 28% employee
departure over the vesting period.
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During 20x3, 8 employees left. Therefore, the actual employee departure over the past
three years is 24% [(7 + 9 + 8) ÷ 100].
87. How much is the accrued salaries payable on December 31, 20x2?
a. 4,400
b. 7,500
c. 8,000
d. 8,400
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10% Preference sh., ₱100 par (liquidation value ₱120 per share) 1,000,000
Ordinary shares, ₱100 par 3,000,000
Subscribed share capital - ordinary shares 100,000
Subscription receivable (60,000)
Retained earnings 900,000
Treasury shares (at cost) - 2,000 ordinary shares. (260,000)
Total shareholders' equity 4,680,000
88. The preference shares are cumulative. Dividends are in arrears for three years.
How much is the book value per ordinary share?
a. 150
b. 111.72
c. 112.37
d. 141.38
a
Ordinary shares issued (3M / 100par) 30,000
Subscribed shares (100K / 100par) 1,000
Treasury shares (2,000)
Outstanding ordinary shares 29,000
89. The preference shares are noncumulative. Dividends are in arrears for three
years. How much is the book value per ordinary share?
a. 118.62
b. 112.62
c. 98.87
d. 122.39
P a g e | 28
Solution:
90. The preference shares are cumulative. All dividends are paid up to end of the
current year. How much is the book value per ordinary share?
a. 120.00
b. 119.82
c. 118.62
d. 122.07
Solution:
91. The shareholders' equity of ABC Construction, Inc. on December 31, 20x1
includes the following:
The 8% stock is cumulative and fully participating. The 10% stock is noncumulative
and fully participating. Dividends have not yet been paid for 3 years.
Solution:
93. Entity A had 100,000, ₱10 par, 10% cumulative preference shares outstanding
all throughout 20x1. Entity A reported profit after tax of ₱2,800,000 for the year
ended December 31, 20x1. The movements in the number of ordinary shares are as
follows:
1/1/20x1 Ordinary shares outstanding 120,000
3/1/20x1 Shares issued for cash 42,000
9/30/20x1 Subscribed shares 20,000
11/1/20x1 Reacquisition of treasury shares (12,000)
Outstanding shares at the end of period 170,000
b. 17.09
c. 18.07
d. 16.98
Solution:
94. Entity A had the following instruments outstanding all throughout 20x1:
Profit for the year is ₱800,000. Entity A’s income tax rate is 30%.
Solution:
c. Financial institutions
d. All entities using the PFRSs
96. Which of the following does not result to a retrospective adjustment of prior-
period EPS information?
a. share dividends c. issuance of shares for cash
b. share split d. issuance of stock rights
98. Entity A is computing for its basic earnings per share and has gathered the
following information:
Loss for the year (1,000,000)
Preferred dividends 50,000
Outstanding ordinary shares 100,000
There have been no changes in the number of outstanding ordinary shares during the
period. What is the basic earnings (loss) per share?
a. -10.50 c. -9.50
b. 10.50 d. 9.50
99. Entity A had 200,000 ordinary shares outstanding all throughout 20x1. In 20x2,
the following share issuances occurred:
On April 1, 20,000 shares were issued for cash.
On September 30, a 10% bonus issue (share dividend) was declared.
On November 1, a 2-for-1 share split was issued.
Entity A had the following profits: ₱2,200,000 in 20x2 and ₱1,800,000 in 20x1. What
are the earnings per share to be disclosed in Entity A’s 20x2 comparative financial
statements?
20x2 20x1
a. 4.22 4.02
b. 4.37 4.07
c. 4.65 4.09
d. 4.78 4.12
Solution:
The weighted average number of ordinary shares outstanding are adjusted
retrospectively as follows:
20x1 20x2
1/1 (200,000 x 110% x 2) 440,000 (200,000 x 110% x 2 x 12/12) 440,000
4/1 (20,000 x 110% x 2 x 9/12) 33,000
9/30 -
11/1 -
Weighted average 440,000 473,000
P a g e | 32
20x2 20x1
Profit after tax 2,200,000 1,800,000
Adjusted weighted ave. no. of outstanding sh. 473,000 440,000
Basic EPS 4.65 4.09
100. Entity A has 200,000 ordinary shares outstanding on January 1, 20x1. Entity A
offers rights issue to its existing shareholders that enable them to acquire 1
ordinary share at a subscription price of ₱120 for every 5 rights held. The rights are
exercised on May 1, 20x1. The market price of one ordinary share immediately
before exercise is ₱180. Entity A reported profit after tax of ₱2,900,000 in 20x1.
What is the basic earnings per share in 20x1?
a. 12.58
b. 12.67
c. 11.92
d. 17.67
Solution:
Aggregate mkt. value of shares before exercise of rts.
(200,000 sh. x ₱180) 36,000,000
Add: Proceeds from exercise of rts. [(200,000 rts. ÷ 5) x ₱120] 4,800,000
Total 40,800,000
Divide by: Outstanding shares after exercise of rts.
[200,000 sh. before exercise + (200,000 rts. ÷ 5 rts. per sh.)] 240,000
Theoretical ex-rights fair value per share 170
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