{SOLUTIONS TO EXAM 3_051920}

MULTIPLE CHOICE

1. LOVE, Inc. bought a patent for P900,000 on January 2, 2015, at which time the
patent had an estimated useful life of ten years. On February 2, 2019, it was
determined that the patent's useful life would expire at the end of 2021. How much
would Love record as amortization expense for this patent for the year ending
December 31, 2019?
a. P200,000
b. P180,000
c. P110,000
d. P90,000

Annual amortization of the patent, before the change in estimate is P90,000 (P900,000 divided
by its useful life of 10 years).

Carrying value of the patent, February 2, 2019 P 540,000

[P900,000 – (P90,000 x 4)]
Divided by: revised useful life 3 years
Revised annual amortization P 180,000

Take note that the change in estimate is accounted for currently and prospectively, which is at
the year of change.

2. The following errors were neither discovered nor corrected by HOPE, Inc.:

 Accrued salaries payable of P17,000 were not recorded at December 31,

2018.
 Office supplies on hand of P8,000 at December 31, 2019 were erroneously
treated as an expense instead of a prepaid asset.

What are the effects of these errors on the net income and retained earnings,
respectively?
a. 2019 net income to be understated by P25,000 and December 31, 2019
retained earnings to be understated by P8,000.
b. 2018 net income and December 31, 2018 retained earnings to be
understated by P17,000 each.
c. 2018 net income to be overstated by P9,000 and 2019 net income to be
understated by P8,000.
d. 2019 net income and December 31, 2019 retained earnings to be
understated by P8,000 each.
If these errors were not corrected:

The 2019 net income will be understated by P17,000 since the accrued salaries payable will
be recorded as expense at the year of payment, instead of the year when it was incurred
(2018). Also, 2019 net income is also understated since expenses were overstated by P8,000
because of prepaid assets that were not adjusted. Therefore, 2019 net income is understated
by P25,000.

As for the retained earnings at December 31, 2019, the effect of the unrecorded accrued
salaries payable has already counterbalanced. Therefore, it will only be understated by
P8,000 due to the unrecorded prepaid assets.
 3. On January 1, 2019, DREAM, Inc. appropriately changed its inventory valuation
method from weighted-average to FIFO for financial statement and income tax
purposes. The change will result in a P1,200,000 increase in the inventory at January
1, 2019. Assume a 30% income tax rate.

Suppose that DREAM presents comparative financial statements for years 2018 and
2019, how much is the adjustment to the opening balance of retained earnings at
January 1, 2018?
a. P0.
b. P360,000.
c. P840,000.
d. P1,200,000.

Cumulative impact is P1,200,000 increase x 70% after-tax impact = P840,000 increase in the
beginning balance of retained earnings at January 1, 2018.

4. On January 1, 2016, FAITH, Inc. purchased an equipment for P357,000. The

equipment is being depreciated over its useful life of 15 years expiring on January 1,
2031. On January 1, 2019, FAITH determined that the economic benefits would not
last longer than ten years from the date of acquisition. How much is the carrying
value of the equipment at December 31, 2019?
a. P214,200.
b. P244,800.
c. P252,000.
d. P261,825.

Annual depreciation for the equipment, before the change in estimate is P23,800 {P375,000
divided by its useful life of 15 years).

Carrying value, January 1, 2019 P 285,600

[P357,000 – (P23,800 x 3 years)]
Divided by: remaining useful life 7 years
Revised annual depreciation P 40,800

Carrying value, December 31, 2019 P 244,800

[P285,600 – P40,800]

Take note that the change in useful life is as of the date of acquisition. So, the 10-year useful
life will have to be reduced by the elapsed time of 3 years, making the remaining useful life of
the equipment to 7 years.

5. On January 1, 2018, SURVIVE, Inc. acquired a machine at a cost of P300,000. It is to

be depreciated using the straight-line method over a five-year period with no residual
value. Because of a bookkeeping error, no depreciation was recognized in
SURVIVE's 2018 financial statements. The oversight was discovered during the
preparation of its 2019 financial statements. Depreciation expense on this machine
for 2019 should be
a. P0.
b. P60,000.
c. P75,000.
d. P120,000.

The correction of a prior period error does not affect the expense to be recorded in the current
year. Therefore, the depreciation expense for the machine in 2019 is P60,000 (P300,000
divided by 5 years useful life).
6. RISE, Inc. trial balance reflected the following account balances at December 31,
2019:

Accounts receivable (net) P 19,000

Accumulated depreciation - equipment 15,000
Cash 11,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held as a future business site 18,000

How much is RISE’s current assets at December 31, 2019?

a. P79,000.
b. P71,000.
c. P66,000.
d. P62,000.
Accounts receivable (net) P 19,000
Cash 11,000
Inventory 30,000
Prepaid expenses 2,000
Total current assets P 62,000

7. RESILIENCE, Inc. reported net income of P420,000 for 2019. Changes in certain
statement of financial position accounts during the year are as follows:

 The cost of equipment increased by P35,000

 The accumulated depreciation on the equipment increased by P56,000
 The notes payable account increased by P42,000.

Additional information during the year:

 During 2019, RESILIENCE sold equipment costing P35,000, with accumulated
depreciation of P16,800, resulting in a gain of P7,000.
 On December 15, 2019, RESILIENCE purchased equipment costing P70,000,
paying P28,000 cash and issuing a 12%, 1-year note payable for the balance.
 Depreciation expense for the year was P72,800.

How much is the net cash used in investing activities on RESILIENCE’s

December 31, 2019 statement of cash flows?
a. P30,800.
b. P16,800.
c. P2,800.
d. P49,000.

Cash proceeds from the sale of equipment P 25,200

[Carrying value of P18,200 + gain on sale of P7,000]
Cash paid for the purchase of equipment ( 28,000)
Net cash used in investing activities (P 2,800)
8. The following information was taken from the 2019 financial statements of
COURAGE, Inc.:

Accounts receivable, January 1, 2019 P 108,000

Accounts receivable, December 31, 2019 152,000
Sales on account during the year 2,190,000
Uncollectible accounts expense 5,000.

No accounts receivable were written off or recovered during the year. If

COURAGE prepares a statement of cash flows using the direct method, what
amount should be reported as collections from customers in 2019?
a. P2,239,000
b. P2,234,000
c. P2,146,000
d. P2,141,000
Accounts receivable, January 1, 2019 P 108,000
Sales on account during the year 2,190,000
Accounts receivable, December 31, 2019 ( 152,000)
Cash collected from customers P 2,146,000

Take note that uncollectible accounts expense affect the “Allowance for uncollectible
accounts” account, not “Accounts Receivable”.

9. UPLIFT, Inc. income statement for the year ended December 31, 2019, reported net
income of P360,000. The financial statements also disclosed the following
information:

Loss on sale of equipment P 20,000

Depreciation expense 60,000
Increase in accounts receivable 140,000
Increase in inventory 48,000
Decrease in accounts payable 76,000
Increase in salaries payable 28,000
Dividends paid 120,000
Purchase of equipment 150,000
Increase in long-term bonds payable 300,000.

How much is the net cash provided by operating activities on UPLIFT’s 2019
statement of cash flows?
a. P84,000.
b. P204,000.
c. P234,000.
d. P324,000.
Net income for the year P 360,000
Add/(deduct): Non-cash adjustments
Loss on sale of equipment 20,000
Depreciation expense 60,000
Operating profit before working capital changes P 440,000
Add/(deduct): Working capital changes
Increase in accounts receivable ( 140,000)
Increase in inventory ( 48,000)
Decrease in accounts payable ( 76,000)
Increase in salaries payable 28,000
Net cash provided by operating activities P 204,000
10. HEALING, Inc. adjusted trial balance at December 31, 2019, includes the following
account balances:

Ordinary Share Capital, P3 par P 360,000

Ordinary Share Premium 480,000
Treasury Shares, at cost 30,000
Cumulative unrealized losses on
investments at FVOCI 12,000
Appropriated Retained Earnings 90,000
Unappropriated Retained Earnings 120,000.

How much is HEALING’s total stockholders' equity on its December 31, 2019
statement of financial position?
a. P1,008,000
b. P1,032,000
c. P1,068,000
d. P1,092,000
Ordinary Share Capital, P3 par P 360,000
Ordinary Share Premium 480,000
Cumulative unrealized losses on
investments at FVOCI 12,000
Appropriated Retained Earnings 90,000
Unappropriated Retained Earnings 120,000
Treasury Shares, at cost ( 30,000)
Total Shareholders’ Equity P 1,032,000

11. BLESSING, Inc.’s trial balance included the following account balances at December
31, 2019:

Accounts Payable P 45,000

Bonds Payable, due 2020 75,000
Discount on Bonds Payable, due 2020 9,000
Dividends Payable 24,000
Notes Payable, due 2023 60,000

How much is BLESSING’s total current liabilities at December 31, 2019?

a. P135,000
b. P153,000
c. P195,000
d. P234,000

Accounts Payable P 45,000

Bonds Payable, due 2020 75,000
Discount on Bonds Payable, due 2020 ( 9,000)
Dividends Payable 24,000
Total current liabilities P 135,000

12. HAPPINESS, Inc. reported the following items on its December 31, 2019, trial
balance:

Accounts Payable P 108,900

Advances to Employees 4,500
Unearned Rent Revenue 28,800
Estimated Liability for Warranties 25,800
Bonds Payable 555,000
Discount on Bonds Payable 22,500
Trademarks 3,900.

How much is HAPPINESS’ total liabilities at December 31, 2019?

a. P696,000.
b. P700,500.
c. P703,500.
d. P741,000.
 Accounts Payable P 108,900
Unearned Rent Revenue 28,800
Estimated Liability for Warranties 25,800
Bonds Payable 555,000
Discount on Bonds Payable ( 22,500)
Total liabilities P 696,000

13. BANGON, Inc. started its operations on January 1, 2019 with P100,000 from the
issuance of ordinary shares and P15,000 from borrowings. Net income for 2019 was
P5,000 and BANGON paid a P400 cash dividend on December 15, 2019. No
additional activities affected owners' equity in 2019. Also, at December 31, 2019,
BANGON’s liabilities had increased to P18,800.

How much is the BANGON’s total assets at December 31, 2019?

a. P119,600.
b. P120,000.
c. P123,400.
d. P138,400.
A = L + E
P 115,000 = P 15,000 P 100,000
3,800 5,000
( 400)
P 123,400 = P 18,800 P 104,600

14. The December 31, 2018, statement of financial position of AHON, Inc., reported total
assets of P1,050,000 and total liabilities of P680,000. The following information
relates to the year 2019:

 AHON issued an additional 5,000 shares of common stock at P25 per share
on July 1, 2019.
 AHON paid dividends totaling P80,000.
 Net income for 2019 was P110,000.

No other changes occurred in stockholders' equity during 2019. How much is

AHON’s total shareholders’ equity at December 31, 2019?
a. P400,000.
b. P685,000.
c. P525,000.
d. P835,000.
Total shareholders’ equity, January 1, 2019 P 370,000
Issuance of shares [5,000 shares x P25] 125,000
Net income during the year 110,000
Dividends declared during the year ( 80,000)
Total shareholders’ equity, December 31, 2019 P 525,000

15. Gross billings for merchandise sold by LABAN, Inc. to its customers for 2019
amounted to P10,720,000. During the year, sales returns and allowances amounted
to P270,000, sales discounts amounted to P175,000, and freight-out incurred
amounted to P140,000.

How much is LABAN’s net sales for 2019?

a. P10,720,000.
b. P10,450,000.
c. P10,275,000.
d. P10,135,000.
ANS: C PTS: 1

Gross sales P 10,720,000

Sales returns and allowances ( 270,000)
Sales discounts ( 175,000)
Net sales P 10,275,000
16. ALAB, Inc.’s accounts receivable balance at December 31, 2019 was P1,500,000,
while its allowance for doubtful accounts, before any year-end adjustment, was
P100,000. During the year, ALAB already recorded a doubtful accounts expense
amounting to P30,000. There were no write-offs or recoveries during the year.
However, at the end of the year, ALAB decided to revise its estimate of providing
doubtful accounts to 10% of outstanding accounts receivable.

How much is ALAB’s adjustment to its retained earnings at January 1, 2019 as a

result of this change?
a. P80,000.
b. P50,000.
c. P150,000.
d. P0.

Changes in accounting estimates are accounted for currently and prospectively. Restatement
of financial statements is not needed.

17. ALAB, Inc.’s accounts receivable balance at December 31, 2019 was P1,500,000,
while its allowance for doubtful accounts, before any year-end adjustment, was
P100,000. During the year, ALAB already recorded a doubtful accounts expense
amounting to P30,000. There were no write-offs or recoveries during the year.
However, at the end of the year, ALAB decided to revise its estimate of providing
doubtful accounts to 10% of outstanding accounts receivable.

How much is the adjustment to the doubtful accounts expense during the year as a
result of this change?
a. P150,000 increase
b. P50,000 increase
c. P80,000 increase
d. P30,000 increase
Allowance for doubtful accounts, December 31, 2019 P 150,000
[P1,500,000 x 10%]
Allowance for doubtful accounts, January 1, 2019
[P100,000 – P30,000] ( 70,000)
Doubtful accounts expense for the year P 80,000
Doubtful accounts expense already recorded ( 30,000)
Increase in doubtful accounts expense for 2019 P 50,000

18. PUSO, Inc.’s net income for 2019 is P250,000. However, it failed to record the
following year-end adjustments: accrued revenues of P12,500, and depreciation
expense of P15,000.

How much is PUSO’s correct net income for 2019?

a. P247,500
b. P252,500
c. P277,500
d. P222,500
Unadjusted net income for 2019 P 250,000
Corrections for the following:
Understatement of accrued revenues 12,500
Understatement of depreciation expense ( 15,000)
Corrected net income for 2019 P 247,500
19. BAYANIHAN Inc.’s cash flows during the year are as follows:

Cash and cash equivalents, January 1 P 250,000

Net cash provided by operating activities 880,000
Net cash used in investing activities 545,000
Net cash provided by financing activities 290,000

How much is BAYANIHAN’s cash and cash equivalents at December 31?

a. P1,965,000
b. P1,385,000
c. P875,000
d. P295,000
Cash and cash equivalents, January 1 P 250,000
Net cash provided by operating activities 880,000
Net cash used in investing activities ( 545,000)
Net cash provided by financing activities 290,000
Cash and cash equivalents, December 31 P 875,000

20. At January 1, 2019, BUHAY, Inc.’s total assets and total liabilities amounted to
P590,000 and P240,000, respectively. At the end of the year, net assets amounted to
P900,000. During the year, additional investments from shareholders amounted to
P300,000, while dividends paid amounted to P180,000.

How much is BUHAY’s net income during the year?

a. P430,000
b. P1,370,000
c. P1,730,000
d. P770,000

Total shareholders’ equity, January 1, 2019 P 350,000

Additional investments during the year 300,000
Net income during the year 430,000
Dividends paid during the year ( 180,000)
Total shareholders’ equity, December 31, 2019 P 900,000