INTERMEDIATE ACCOUNTING 1 ( Chapters 21- 25 )

EASY
1. The following are exemptions from reclassification of financial statements except:
a. Equity investment measured at FVOCI by irrevocable election cannot be
reclassified simple because the election is irrevocable.
b. Equity investment held for trading or measured at FVPL cannot be reclassified
by reason of the consequential requirements of PFRS 8.
c. Only debt investment can be reclassified because the change in business
model applies appropriately to debt investment.
d. Debt investment measured at FVPL by irrevocable election cannot be
reclassified simple because the election is irrevocable.

2. Examples of investment property:

I. Land held for a currently undetermined use
II. Land held for short-term capital appreciation
a. Both statements are correct
b. Both statements are incorrect
c. Statements I is only correct
d. Statement II is only correct

3. The following are examples of qualifying assets except:

a. Tangible asset
b. Manufacturing plant
c. Investment property
d. Power generation facility

4. In what PAS and paragraph mandates the rules on borrowing cost.

a. PAS 23, paragraph 8
b. PAS 23, paragraph 9
c. PAS 24, paragraph 8
d. PAS 24, paragraph 9

5. I. The nature and extent of government grant recognized in accounting policies

and an indication of other forms of government assistance from which the
entity has directly benefited.
II. Fulfilled conditions and other contingencies attaching to government assistance
that has been recognized.
a. Both statements are incorrect
b. Both statements are correct
c. Statements I is only correct
d. Statements II only is correct

6. The major characteristics of property, plant and equipment are the following
except:
a. Tangible assets, meaning with physical substance.
b. It is probable that future economic benefits associated with the asset will flow
to the entity.
c. Used in business, meaning used in production or supply of goods or services,
for rental purposes and for administrative purposes.
d. Expected to be used over a period of more than one year.
 AVERAGE
Abel company acquired a building on January 1, 2012 for P12,000,000. At the date,
the building gad a useful life of 40 years. On December 31, 2012, the fair value of the
building was P13,000,000 and on December 31, 2013, the fair value is P13,200,000.
The building was classified as an investment property and accounted for under the
cost model.

7. What amount should be carried in the statement of financial position on December

31, 2013 and recognized in profit or loss for 2013?

Carrying Amount Profit or Loss

a. 12,000,000 250,000 expense
b. 11,400,000 No gain/loss
c. 11,400,000 250,000 expense
d. 12,000,000 300,000 gain

Moira Company, a real estate entity, had a building with a carrying amount of
P30,000,000 on December 31, 2018. The building was used as officers of the entity’s
administrative staff.

On December 31, 2018, the entity intended to rent out the building to independent
third parties. The staff will be moved to a new building purchased early in 2018.

On December 31, 2018, the entity also had land that was held for sale in the ordinary
course of business. The land had a carrying amount of P15,000,000 and fair value of
P20,000,000 on December 31, 2018.

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.

8. On December 31, 2018, what amount should be recognized in revaluation surplus

as a result of transfer of the building to investment property?
a. P15,000,000
b. P20,000.000
c. P10,000,000
d. P5,000,000

9. On December 31, 2018, what amount should be recognized in profit or loss as a

result of transfer of the land to investment property?
a. P20,000,000
b. P5,000,000
c. P15,000,000
d. P10,000,000

During the year, Storm Company purchased a new machine. A P500,000 down
payment was made and three monthly installments of P700,000. The cash price would
have been P1,750,000.

The entity paid no installation charges under the monthly payment plan but a P50,000
installation charge would have been incurred with a cash purchase.
10. What amount should be capitalized as cost of the machine?
a. P1,200,000
b. P1,400,000
c. P1,800,000
d. P1,700,000

Lucban Company was constructing an asset that qualified for interest capitalization.
The construction began at the beginning of the current year and was completed at the
end of the current year.

The construction cost totaled P10,000,000 and was incurred evenly during the current
year.

The entity had outstanding notes payable during the entire year of construction
comprising P5,000,000 8% interest and P8,000,000 9% interest. None of the
borrowings were specified for the construction of the qualified asset.

11. What amount of interest should be capitalized?

a. P400,000
b. P810,000
c. P430,000
d. P950,000

12. What amount should be reported as interest expense for the current year?
a. P780,000
b. P950,000
c. P650,000
d. P 0

DIFFICULT

Focus Company acquired a machine with a cash price of P4,000,000.

Down payment P800,000
Note payable in 3 equal annual installations P2,400,000
15,000 shares of Focus Company at fair value P1,600,000

Prior to use, installation cost of P80,000 was incurred. The machine has a residual
value of P120,000.

13. What is the initial measurement of the new machine?

a. P4,050,000
b. P4,080,000
c. P5,050,000
d. P5,080,000

Sakura Company purchased a varnishing machine for P4,000,000 on January 1, 2016.

The entity received a government grant of P350,000 in respect of this asset. The
accounting policy is to depreciate the asset over 4 years on a straight-line basis and to
treat the grant as deferred income.
14. What is the carrying amount of the machine on December 31, 2017?
a. P1,000,000
b. P2,000,000
c. P3,000,000
d. P4,000,000

15. What amount should be reported as deferred grant income on December 31,
2017?
a. P160,000
b. P165,000
c. P170,000
d. P175,000

On January 1, 2016 Orge Company purchased bonds with face amount amounting
P6,000,000. The entity paid P5,500,000 plus transaction cost of 170,600.

The bonds mature on December 31, 2019 and pay 6% interest annually on December
31 of each year with 8% effective yield.

The bonds are quoted at 105 on December 31, 2016 and 110 on December 31, 2017.

The business model in managing the financial asset is to collect contractual cash
flows and also to sell the bonds in the open market.

The entity has no elected the fair value option.

On December 31, 2017, the entity changed the business model to collect only
contractual cash flows.

On December 31, 2018, the bonds are quoted at 115 and the market rate of interest is
15%.

Required:
16. Prepare table of amortization using the effective interest method.
17. Compute the unrealized gain for 2016.
18. Compute the unrealized gain for 2017.
19. Prepare journal entries for 2016, 2017, and 2018.

20. At the beginning of current year, Giga Company purchased a machine for
P8,000,000 and received a government grant of P2,000,000 toward the capital cost.

The machine is to be depreciated on a straight line basis over 10 years and estimated
to have a residual value of P500,000 at the end of this period.

Required:
Prepare journal entries for the current year assuming the grant is accounted for a
deferred income and deduction from asset.
ANSWER KEYS:

EASY
1. b 4. b
2. c 5. a
3. a 6. b

AVERAGE
7. c
Solution:
Cost 12,000,000
Accum.Depreciation (12M/40x) 600,000
Carrying Amount - 12/31/2013 11,400,000

Dep.Expense for 2013 (10M/40) 250,000

8. a
Solution:
Fair value of building (30M+15M) 45,000,000
Carrying amount of building 30,000,000
Revaluation Surplus 15,000,000

9. b
Solution:
Fair value of land 20,000,000
Carrying amount of land 15,000,000
Gain on reclassification 5,000,000

10. c
Solution:
Cash Price 1,750,000
Directly attributable cost 50,000
Capitalized cost of the machine 1,800,000

11. c
Solution: Principal Interest
8% notes payable (8% x 5M) 5,000,000 400,000
9% notes payable (9% x 8M) 9,000,000 800,000
Total 14,000,000 1,210,000

Average interest rate (1,210,000/14M) 8.60%

Average expenditures (10M/2) 5,000,000
Capitalizable interest (5M x 8.6%) 430,000

12. a
Solution: Principal Interest
Total interest incurred 1,210,000
Capitalized interest (430,000)
Interest expense for the year 780,000
DIFFICULT
13. b
Solution:
Cash Price 4,000,000
Installation Cost 80,000
Total Cost 4,080,000

14. b
Solution:
Property, plant and equipment 4,000,000 = 1,000,000
Useful life of PPE 4 years
2016 and 2017 2 years
Accum.Depreciation 2,000,000

Property, plant and equipment 4,000,000

Accum. Depreciation (2,000,000)
Carrying Amount of PPE 2,000,000

15. d
Solution:
Deferred grant income 350,000
Less: Grant income for 2016 and 2017
(350,000/4 x 2) (175,000)
Deferred grant income
12/32/2017 175,000

16.
Solution:
Date Interest Received Interest Income Discount Amort. Carrying Amount
1/1/2016 5,670,600
12/31/2016 360,000 453,648 93,648 5,764,248
12/31/2017 360,000 461,140 101,140 5,865,388
12/31/2018 360,000 469,231 109,231 5,974,619
12/31/2019 360,000 477,970 117,970 6,000,000

17.
Solution:
Fair value - 12/31/2016 (6M X105) 6,300,000
Carrying amount- 12/31/2016 5,764,248
Unrealized gain OCI for 2016 535,752

18.
Solution:
Fair value - 12/21/2017 (6M x115%) 6,900,000
Carrying amount - 12/31 2017 5,865,388
Cumulative unrealized gain - 12/31/2018 6,314,612
Unrealized gain for 2016 535,752
Unrealized gain for 2017 5,778,860
19.
Solution
2016
Jan. 1 Financial asset - FVOCI 5,670,600
Cash 5,670,600

Dec.31 Cash 360,000

Interest Income 360,000

31 Financial asset - FVOCI 453,648

Interest Income 453,648

31 Financial asset - FVOCI 535,752

Unrealized gain - OCI 535,752

2017
Dec.31 Cash 360,000
Interest Income 360,000

31 Financial asset - FVOCI 461, 140

Interest Income 461,140

31 Financial asset - FVOCI 5,778,860

Unrealized gain - OCI 5,778,860

2018
Jan. 1 Investment in bonds 6,900,000
Financial asset - FVOCI 6,900,000

1 Unrealized gain - OCI 6,314,612

Investment in bonds 6,314,612

Dec.31 Cash 360,000

Interest Income 360,000

31 Financial asset 109,231

Interest Income 109,231

20.
Solution:
Deferred Income Approach

Machinery 8,000,000
Cash 8,000,000

Cash 2,000,000
Deferred grant income 2,000,000

Depreciation Expense 750,000

 Accum. Depreciation 750,000
Deferred grant income 200,000
Grant income 200,000

Deduction from Asset Approach:

Machinery 8,000,000
Cash 8,000,000

Cash 2,000,000
Machinery 2,000,000

Depreciation Expense 550,000

Accum. Depreciation 550,000