CHAPTER 1

STATEMENT OF FINANCIAL POSITION

Basic problems

Problem 1-1 (IFRS)

Darwin Company provided the following information at year-end:
Cash 1,500,000
Accounts receivable 1,200,000
Inventory, including inventory expected in the ordinary
course of operations to be sold beyond 12 months
amounting to P700,000 1,000,000
Financial asset held for trading 300,000
Equity investment at fair value through other comprehensive income 800,000
Equipment held for sale 2,000,000
Deferred tax asset 150,000

What amount should be reported as total current assets at year-end?

a. 6,000,000
b. 4,000,000
c. 6,800,000
d. 4,800,000

Solution 1-1 Answer a

Cash 1,500,000
Accounts receivable 1,200,000
Inventory 1,000,000
Financial asset held for trading 300,000
Equipment held for sale 2,000,000
Total current assets 6,000,000

In the absence of statement to the contrary, equity investment at fair value through other
comprehensive income shall be classified as noncurrent asset.

Under IFRS, deferred tax asset is a noncurrent asset.

Under IFRS, noncurrent asset held for sale is a current asset.
Problem 1-2 (AICPA. Adapted)
Petite Company reported the following current assets on December 31,2018:
Cash 5,000,000
Accounts receivable 2,000,000
Inventory, including goods received on consignment P200,000 800,000
Bond investment at fair value through other comprehensive income 1,000,000
Prepaid expenses, including a deposit of P50,000 made
on inventory to be delivered in 18 months 150,000
Total current assets 8,950,000

Cash in general checking account 3,500,000

Cash fund to be used to retire bonds payable in 2020 1,000,000
Cash held to pay value added taxes 500,000
Total cash 5,000,000

What total amount of current assets should be reported on December 31, 2018?
a. 6,750,000
b. 6,700,000
c. 7,700,000
d. 7,750,000

Solution 1-2 Answer b

Cash (3,500,000 + 500,000) 4,000,000
Accounts receivable 2,000,000
Inventory ( 800,000 - 200,000) 600,000
Prepaid expenses ( 150,000 - 50,000) 100,000
Total current assets 6,700,000

The goods received on consignment should be excluded from inventory.

The cash fund to be used to retire bonds payable in 2020 should be classified as noncurrent
because the bonds mature in more than one year.
The bond investment at fair value through other comprehensive income is a noncurrent asset.

Problem 1-3 (AICPA Adapted)

Rice Company was incorporated on January 1, 2018 with P5,000,000 from the issuance of share
capital and borrowed funds of P1,500,000. During the first year, net income was P2,500,000.
On December 15, the entity paid a P500,000 cash dividend. On December 31, 2018, the liabilities
had increased to P1,800,000.
On December 31, 2018, what amount should be reported as total assets?
a. 6,500,000
b. 9,300,000
c. 8,800,000
d. 6,800,000

Solution 1-3 Answer c

Liabilities 1,800,000
Share capital 5,000,000
Retained earnings (P2,500,000 less dividend P500,000) 2,000,000
Total liabilities and shareholders' equity 8,800,000

Problem 1-4 (AICPA Adapted)

Mirr Company was incorporated on January 1, 2018 with proceeds from the issuance of
P7,500,000 in share capital and borrowed funds of P1,100,000.
During the first year, revenue from sales and consulting amounted to P8,200,000, and operating
costs and expenses totaled P6,400,000.
On December 15, 2018, the entity declared a P300,000 dividend. payable to shareholders on
January 15,2019. The liabilities increased to P2,000,000 by December 31, 2018.

On December 31, 2018, what amount should be reported as total assets?

a. 11,000,000
b. 11,300,000
c. 10,100,000
d. 12,100,000

Solution 1-4 Answer a

Liabilities 2,000,000
Share capital 7,500,000
Retained earnings (8,200,000 -6,400,000 - 300,000) 1,500,000
Total liabilities and shareholders' equity 11,000,000

Problem 1-5 (AICPA Adapted)

Arabian Company reported the following current assets at year-end:
Cash 4,500,000
Accounts receivable 7,900,000
Notes receivable, net of discounted note P500,000 2,000,000
Inventory 4,000,000
Deferred charges 1,000,000
19,400,000

Accounts receivable comprised the following:

Trade accounts receivable 5,000,000
Allowance for doubtful accounts (500,000)
Claim against shipper for goods lost in transit 400,000
Selling price of Arabian Company's unsold goods sent to Tar Company
on consignment at 150% of cost and excluded
from Arabian's ending inventory 3,000,000
7,900,000
What amount should be reported as total current assets at year-end?
a. 17,400,000
b. 17,000,000
c. 18,400,000
d. 15,400,000

Solution 1-5 Answer a

Cash 4,500,000
Accounts receivable 5,000,000
Allowance for doubtful accounts (500,000)
Notes receivable 2,000,000
Claim receivable 400,000
Inventory (4,000,000+ 2,000,000) 6,000,000
Total current assets 17,400,000

The selling price of the unsold goods out on consignment is excluded from accounts receivable
but the cost of the goods should be included in inventory.

The cost of goods out on consignment is P3,000,000 divided by 150% or P2,000,000.

The discounted note receivable is properly netted against the total notes receivable.

The deferred charges are noncurrent because technically they expire in more than one year after
the reporting period.
Problem 1-6 (AICPA Adapted)

East Company reported the following current assets at year end:

Cash 3,200,000
Accounts receivable 3,000,000
Inventory 2,800,000
Prepaid insurance 200,000
Total current assets 9,200,000

The accounts receivable consisted of the following:

Customers' accounts 1,420,000
Employees' account-current 240,000
Advances to subsidiary 260,000
Allowance for uncollectible accounts (120,000)
Subscription receivable, not collectible currently 1,200,000
Total accounts receivable 3,000,000

What total amount should be reported as current assets at year-end?

a. 8,000,000
b. 9,200,000
c. 7,740,000
d. 8,940,000

Solution 1-6 Answer c

Cash 3,200,000
Accounts receivable 1,420,000
Allowance for uncollectible accounts (120,000)
Receivable from employees 240,000
Inventory 2,800,000
Prepaid insurance 200,000
Total current assets 7,740,000

The advances to subsidiary should be classified as noncurrent.

The subscription receivable should be reported as a deduction from subscribed share capital
because it is not collectible currently,
Problem 1-7 (AICPA Adapted)
Ivan Company showed the following current assets at year-end:

Cash 3,200,000
Accounts receivable 2,500,000
Inventory 2,000,000
Total current assets 7,700,000

Cash on hand, including customer postdated check

P100,000 and employee IOU P50,000 500,000
Cash in bank per bank statement (outstanding
check at year-end P200,000) 2,700,000
Total cash 3,200,000

What total amount shouid be reported as current assets?

a. 7,700,000
b. 7,450,000
c. 7,400,000
d. 7,500,000

Solution 1-7 Answer d

Cash on hand ( 500,000 - 100,000 - 50,000) 350,000
Cash in bank 2,500,000
Accounts receivable 2,600,000
Advances to employee 50,000
Inventory 2,000,000
Total current assets 7,500,000

Cash in bank per bank statement 2,700,000

Outstanding check ( 200,000)
Adjusted cash in bank 2,500,000

Accounts receivable 2,500,000

Customer postdated check 100,000
Adjusted balance 2,600,000

The customer check should be reverted to accounts receivable.

Problem 1-8 (AICPA Adapted)
Gar Company reported the following liability account balances on December 31, 2018:

Accounts payable 1,900,000

Bonds payable, due December 31, 2019 3,400,000
Discount on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2020 600,000

On December 31, 2018, what total amount should be reported as current liabilities?
a. 7,100,000
b. 6,700,000
c. 6,500,000
d. 6,900,000

Solution 1-8 Answer c

Accounts payable 1,900,000
Dividends payable 500,000
Income tax payable 900,000
Bonds payable 3,400,000
Discount on bonds payable (200,000)
Total current liabilities 6,500,000

Under IFRS, a deferred tax liability is classified as noncurrent.

The bonds payable minus the discount on bonds payable should be classified as current because
the bonds are due within one year.

The dividends payable and income tax payable are normally classified as current.

The note payable is classified as noncurrent because it matures in more than one year from the
end of reporting period.
Problem 1-9 (AICPA Adapted)
Brite Company provided the following information on December 31. 2018:
Accounts payable 50,000
Note payable, 8% unsecured, due July 1, 2019 4,000,000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Senior bonds payable, 7%, due March 31, 2019 5,000,000

The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the
entity.

The legal counsel expects the suit to be settled in 2019 and has estimated that the entity will be
liable for damages in the range of P450,000 to P750,000.

The deferred tax liability is not related to an asset for financial reporting and is expected to
reverse in 2019.

What total amount should be reported as current liabilities on December 31, 2018?
a. 10,350,000
b. 10,150,000
c. 9,900,000
d. 4,900,000

Solution 1-9 Answer c

Accounts payable 550,000
Note payable 4,000,000
Accrued expenses 350,000
Senior bonds payable 5,000,000
Total current liabilities 9,900,000

The contingent liability is only disclosed because it is a possible loss.

Under IFRS, the deferred tax liability is classified as noncurrent regardless of the reversal period.
Problem 1-10 (PHILCPA Adapted)
Burma Company disclosed the following information:

Accounts payable, after deducting debit balances in suppliers'

accounts amounting to P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers' accounts 500,000
Share dividend payable 1,000,000
Claims for increase in wages and allowance by employees
of the entity, covered in a pending lawsuit 400,000
Estimated expenses in redeeming prize coupons 600,000

What amount should be reported as total current liabilities?

a. 6,700,000
b. 6,600,000
c. 7,100,000
d. 7,700,000

Solution 1-10 Answer a

Accounts payable (4,000,000 + 100,000) 4,100,000
Accrued expenses 1,500,000
Credit balances in customers' accounts 500,000
Estimated liability for coupons 600,000
Total current liabilities 6,700,000

Accounts payable 4,000,000

Debit balances in suppliers accounts 100,000
Adjusted accounts payable 4,100,000

The debit balances in suppliers' accounts are not "netted” against accounts payable but should
be reported as current asset.

The share dividend payable is not an accounting liability but presented as part of shareholders'
equity as an addition to share capital.

The claims for increase in wages and allowance should be disclosed as contingent liability.
Problem 1-11 (AICPA Adapted)
Mazda Company reported the following liability balances on December 31,2018:

10% note payable issued on October 1, 2017, maturing October 1, 2019 2,000,000
12% note payable issued on March 1, 2017, maturing on March 1, 2019 4,000,000

The 2018 financial statements were issued on March 31, 2019.

Under the loan agreement for the 10% note payable, the entity has the discretion to refinance
the obligation for at least twelve months after December 31, 2018.

On March 1, 2019, the entire P4,000,000 balance of the 12% note payable was refinanced
through issuance of a long-term obligation payable lump sum.

What amount of the notes payable should be classified as current on December 31, 2018?
a. 6,000,000
b. 4,000,000
c. 2,000,000
d. 0

Solution 1-11 Answer b

The 10% note payable is classified as noncurrent.

PAS 1, paragraph 73, provides that if an entity has the discretion to refinance or roll over an
obligation for at least twelve months after the reporting period under an existing loan facility, the
obligation shall be classified as noncurrent, even if it would otherwise be due within a shorter
period.

The 12% note payable is classified as current.

PAS 1, paragraph 72, provides that an obligation that matures within one year from the end of
reporting period is classified as current even if it is refinanced on a long-term basis after the
reporting period and before issuance of the financial statements.

The 12% note payable is refinanced on March 1, 2019 after the end or r eporting period on
December 31, 2018 and therefore classified as current.
Problem 1-12 (AICPA Adapted)
Willem Company reported the following liabilities on December 31, 2018:

Accounts payable 2,000,000

Short-term borrowings 1,500,000
Bonds payable due 2019 3,000,000
Premium on bonds payable 500,000
Mortgage payable, current portion P500,000 3,500,000
Bank loan, due June 30, 2019 1,000,000

The P1,000,000 bank loan was refinanced with a 5-year loan on December 31,2018. The financial
statements were issued March 1, 2019.

What total amount should be reported as current liabilities on December 31, 2018?
a. 7,500,000
b. 5,000,000
c. 8,500,000
d. 4,000,000

Solution 1-12 Answer a

Accounts payable 2,000,000
Short-term borrowings 1,500,000
Bonds payable 3,000,000
Premium on bonds payable 500,000
Mortgage payable -- current portion 500,000
Total current liabilities 7,500,000

The bank loan is classified as noncurrent because it is refinanced on December 31, 2018, the end
of reporting period.

The bonds payable plus the premium on bonds payable should be classified as noncurrent
because the bonds are due in more than one year from the end of reporting period.

Problem 1-13 (AICPA Adapted)

Ronna Company provided the following information on December 31, 2018:
Accounts payable, net of creditors' debit balances P200,000 2,000,000
Accrued expenses 800,000
Bonds payable due December 31, 2020 4,500,000
Premium on bonds payable 500,000
Deferred tax liability 500,000
Income tax payable 1,100,000
Cash dividend payable 600,000
Share dividend payable 400,000
Note payable -6%, due March 1, 2019 1,500,000
Note payable - 8%, due October 1, 2019 1,000,000

The financial statements for 2018 were issued on March 31, 2019.

On December 31, 2018, the 6% note payable was refinanced on a long-term basis.

Under the loan agreement for the 8% note payable, the entity has the discretion to refinance the
obligation for at least twelve months after December 31, 2018.

1. What amount should be reported as total current liabilities?

a. 7,200,000
b. 4,700,000
c. 6,200,000
d. 5,100,000

2. What amount should be reported as total noncurrent liabilities?

a. 8,400,000
b. 5,500,000
c. 8,000,000
d. 7.500.000

Solution 1-13
Question 1 Answer b
Accounts payable 2,200,000
Accrued expenses 800,000
Income tax payable 1,100,000
Cash dividend payable 600,000
Total current liabilities 4,700,000

Accounts payable 2,000,000

Debit balances of creditors 200,000
Adjusted accounts payables 2,200,000
The creditors' debit balances are not netted against accounts payable but should be reported as
current asset.

The share dividend payable is part of shareholders' equity as an addition to share capital.

Question 2 Answer c

Bonds payable 4,500,000

Premium on bonds payable 500,000
Deferred tax liability 500,000
Note payable - 6% 1,500,000
Note payable -- 8% 1,000,000
Total noncurrent liabilities 8,000,000

The 6%note payable is classified as noncurrent because it is refinanced at the end of reporting
period on December 31, 2018,

The 8% note payable is also classified as noncurrent because the entity bas discret ion to
refinance.

Problem 1-14 (IAA)

Manchester Company provided the following information on December 31, 2018:

Employee income taxes withheld 900,000

Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%,
payable in semiannual installments of P500,000 due
April 1 and October 1 of each year, the last bond to
be paid on October 1, 2024. Interest is also paid
semiannually. 5,000,000

What amount should be reported as total current liabilities on Decernber 31, 2018?
a. 8,100,000
b. 7,950,000
c. 9,100,000
d. 7,350,000

Solution 2-14 Answer a

Employee income taxes withheld 900,000

Cash overdraft 1,300,000
Accounts receivable with credit balance 750,000
Estimated warranty liability 500,000
Estimated damages payable 1,500,000
Accounts payable 3,000,000
Accrued interest on bonds payable from October 1 to
December 31, 2018 (5,000,000 x 12% x 3/12) 150,000
Total current liabilities 8,100,000

The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last
bond will be paid on October 1, 2024, the first bond will be paid on April 1, 2020.

Accordingly, there is no currently maturing bond in 2018.

Problem 1-15(AICPA Adapted)

Charice Company provided the following information on December 31, 2018:
 Accounts payable amounted to P500,000 and accrued expenses totaled P300,000 on
December 31, 2018.
 On December 15, 2018, the entity declared a cash dividend of P7 per share on 100,000
outstanding shares, payable on January 19, 2019.
 On July 1, 2018, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%. The
bonds mature on June 30, 2023, and pay interest annually every June 30.
 The pretax financial income was P8,500,000 and taxable income was P6,000,000. The
difference is due to P1,000,000 permanent difference and P1,500,000 of taxable
temporary difference to reverse in 2019.
 The income tax rate is 30%. The entity made estimated income tax payments during the
year of P1,000,000.

What amount should be reported as total current liabilities on December 31, 2018?
a. 3,500,000
b. 2,700,000
c. 2,300,000
d. 2,500,000

Solution 1-15 Answer d

Accounts payable 500,000
Accrued expenses 300,000
Dividends payable (100,000 shares x 7) 700,000
Accrued interest payable (5,000,000 x 8% x 6/12) 200,000
Income tax payable 800,000
Total current liabilities 2,500,000

Current tax expense (6,000,000 x 30%) 1,800,000

Estimated tax payment (1,000,000)
Income tax payable 800,000

The interest on the bonds payable is payable annually on June 30. Thus, there is an accrued
interest payable from July 1 to December 31, 2018 or six months.

Problem 1-16 (AICPA Adapted)

United Company provided the following current assets and shareholders' equity at year-end:
Cash 600,000
Financial assets at fair value through profit or loss, including cost
of P300,000 of United Company shares 1,000,000
Accounts receivable 3,500,000
Inventory 1,500,000
Total current assets 6,600,000

Share capital 5,000,000

Share premium 2,000,000
Retained earnings 500,000
Total shareholders' equity 7,500,000

What amount should be reported as total shareholders' equity?

a. 7,200,000
b. 7,500,000
c. 7,800,000
d. 5,200,000
Solution 1-16 Answer a
Share capital 5,000,000
Share premium 2,000,000
Retained earnings 500,000
Treasury shares, at cost (300,000)
Total shareholders' equity 7,200,000

The treasury shares are excluded from financial assets at fair value through profit or loss but
should be reported as a deduction from shareholders' equity.

Cash 600,000
Financial at assets at fair value (1,000,000 – 300,000) 700,000
Accounts receivable 3,500,000
Inventory 1,500,000
Total current assets 6,300,000

Problem 1-17 (AICPA Adapted)

Kalinga Company provided the following information at year-end:
Share capital 15,000,000
Share premium 5,000,000
Treasury shares, at cost 2,000,000
Actuarial loss on defined benefit plan 1,000,000
Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Revaluation surplus 4,000,000
Cumulative translation adjustment - credit 1,500,000

What amount should be reported as total shareholders' equity?

a. 31,500,000
b. 32,500,000
c. 28,500,000
d. 25,500,000

Solution 1-17 Answer a

Share capital 15,000,000
Share premium 5,000,000
Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Revaluation surplus 4,000,000
Cumulative translation adjustment-credit 1,500,000
Actuarial loss on defined benefit plan (1,000,000)
Treasury shares, at cost (2,000,000)
Total shareholders' equity 31,500,000

The actuarial loss on defined benefit plan is reported as component of other comprehensive
income.

The credit in the cumulative translation adjustment account is a translation gain reported as
component of other comprehensive income.

If the cumulative translation adjustment account has debit balance, it is a translation loss.

Problem 1-18 (IAA)

Silver Company provided the following information at year-end:

Share premium 1,000,000

Accounts payable 1,100,000
Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Sales 10,000,000
Total expenses 7,800,000
Treasury shares at cost - ordinary 500,000
Dividends 700,000
Retained earnings - beginning 1,000,000

What total shareholders' equity should be reported at year-end?

a. 8,000,000
b. 8,500,000
c. 5,800,000
d. 8,700,000

Solution 1-18 Answer a

Sales 10,000,000
Total expenses (7,800,000)
Net income 2,200,000
Retained earnings - January 1 1,000,000
Dividends (700,000)
Retained earnings - December 31 2,500,000

Preference share capital 2,000,000

Ordinary share capital 3,000,000
Share premium 1,000,000
Retained earnings 2,500,000
Treasury shares at cost (500,000)
Total shareholders' equity 8,000,000

Problem 1-19 (AICPA Adapted)

Mont Company reported net assets totaling P8,750,000 at yearend which included the following:

Treasury shares of Mont Company at cost 250,000

Idle machinery 100,000
Trademark 150,000
Allowance for inventory writedown 200,000

What amount should be reported as net assets at year-end?

a. 8,500,000
b. 8,400,000
c. 8,300,000
d. 8,200,000

Solution 1-19 Answer a

Reported net assets 8,750,000
Treasury shares (250,000)
Adjusted net assets 8,500,000

The treasury shares are not assets but should be deducted from total shareholders' equity.

The idle machinery, trademark and allowance for inventory writedown are properly included in
the computation of net assets.
Problem 1-20 (AICPA Adapted)
Puzzle Company provided the following information at year-end:

Cash and cash equivalents 500,000

Accounts receivable, net of allowance P100,000 2,000,000
Inventory 6,000,000
Property, plant, and equipment at carrying amount 12,000,000
Accounts payable 4,400,000
Wages payable 1,500,000
Share capital 6,000,000
Share premium 4,000,000

The only asset not listed is short-term investment.

The only liabilities not listed are a P3,000,000 note payable due in two years and related accrued
interest of P100,000 due in four months.

The current ratio at year-end is 1.5 to 1.00.

1. What is the amount of current liabilities?

a. 5,900,000
b. 6,000,000
c. 9,000,000
d. 8,900,000

2. What is the amount of short-term investment?

a. 700,000
b. 400,000
c. 500,000
d. 0

3. What is the balance of retained earnings at year-end?

a. 2,000,000
b. 6,000,000
c. 5,000,000
d. 1,500,000
Solution 1-20
Question 1 Answer b
Accounts payable 4,400,000
Wages payable 1,500,000
Accrued interest payable 100,000
Total current liabilities 6,000,000

Question 2 Answer c
Current liabilities 6,000,000
Multiply by current ratio 1.50

Total current assets 9,000,000

Cash and cash equivalents (500,000)
Accounts receivable (2,000,000)
Inventory (6,000,000)
Short-term investment 500,000

Question 3 Answer a
Current assets 9,000,000
Property, plant and equipment 12,000,000
Total assets 21,000,000
Current liabilities (6,000,000)
Note payable - noncurrent (3,000,000)
Share capital (6,000,000)
Share premium (4,000,000)
Retained earnings 2,000,000