Financial Accounting And Reporting Test Bank

FINANCIAL ACCOUNTING AND REPORTING TEST BANK 8152017 – 1 PROBLEM 1 – STATEMENT OF FINANCIAL POSITION The following trial balance of an entity on December 31, 2017 has been adjusted except for income tax expense. Cash Accounts receivable Inventory Property, plant and equipment Accounts payable Income tax payable Preference share capital Ordinary share capital Share premium Retained earnings – January 1 Net sales and other revenue Cost of goods sold Expenses Income tax expense

6,000,000 14,000,000 10,000,000 25,000,000 9,000,000 6,000,000 3,000,000 15,000,000 4,000,000 9,000,000 80,000,000 48,000,000 12,000,000 11,000,000 126,000,000

__________ 126,000,000

During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax rate is 30% on all types of revenue. Inventory and accounts payable included goods purchased in transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end, costing P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on December 31, 2018. 1. What amount should be reported as current assets on December 31, 2017? a. b. c. d.

29,200,000 29,700,000 29,500,000 30,000,000

2. What amount should be reported as current liabilities on December 31, 2017? a. 14,200,000 b. 17,200,000 c. 12,200,000 d. 9,200,000 3. What is the net income for 2017? a. 20,000,000 b. 14,000,000 c. 23,000,000 d. 9,000,000 4. What amount should be reported as total shareholders’ equity on December 31, 2017? a. b. c. d.

40,000,000 37,000,000 45,000,000 42,000,000

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SOLUTION - PROBLEM 1 Question 1 Answer A Cash Accounts receivable Inventory (10,000,000 - 500,000 - 300,000) Total current assets

6,000,000 14,000,000 9,200,000 29,200,000

Question 2 Answer C Net sales and other revenue

80,000,000

Cost of goods sold Expenses Income before tax

( 48,000,000) ( 12,000,000) 20,000,000

Tax expense (30% x 20,000,000) Net income

( 6,000,000) 14,000,000

Tax expense

6,000,000

Payment during year Income tax payable

(5,000,000) 1,000,000

Accounts payable Income tax payable Redeemable preference Total current liabilities

8,200,000 1,000,000 3,000,000 12,200,000

Accounts payable per book

9,000,000

Goods in transit FOB destination Goods held on consignment Adjusted accounts payable

( 500,000) ( 300,000) 8,200,000

Question 3 Answer B Net income

14,000,000

Question 4 Answer D Ordinary share capital Share premium Retained earnings Total shareholders’ equity

15,000,000 4,000,000 23,000,000 42,000,000

Retained earnings – January 1 Net income Total retained earnings

9,000,000 14,000,000 23,000,000

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PROBLEM 2 - STATEMENT OF FINNACIAL POSITION 3. On December 31, 2017, an entity showed the following current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets

500,000 2,500,000 2,000,000 100,000 5,100,000

Cash on hand including customer postdated check of P20,000 and employee IOU of P10,000 Cash in bank per bank statement (outstanding checks on December 31, 2017, P70,000) Total cash

130,000 370,000 500,000

Customers’ debit balances, net of customer deposit of P50,000 Allowance for doubtful accounts Sale price of goods invoiced to customers at 150% of cost on December 29, 2017 but delivered on January 5, 2018 and excluded from reported inventory Total accounts receivable

1. What is the adjusted cash balance? a. b. c. d.

500,000 470,000 430,000 400,000

2. What is the net realizable value of accounts receivable? .

a. b. c. d.

1,970,000 1,820,000 1,800,000 1,950,000

3. What is the adjusted inventory? a. b. c. d.

2,000,000 2,375,000 2,500,000 2,750,000

4. What total amount of current assets should be reported? a. b. c. d.

4,900,000 4,830,000 4,780,000 4,630,000

1,900,000 (

150,000) 750,000 2,500,000

Page 4 SOLUTION – PROBLEM 2 Question 1 Answer D Cash on hand

130,000

Customer postdated check Employee IOU Adjusted cash on hand Cash in bank per bank statement Outstanding checks Adjusted cash balance

( 20,000) ( 10,000) 100,000 370,000 ( 70,000)

300,000 400,000

Question 2 Answer B Customers’ debit balances

1,900,000

Customer deposit erroneously netted

50,000

Customer postdated check

20,000

Accounts receivable

1,970,000

Allowance for doubtful accounts Net realizable value

( 150,000) 1,820,000

Question 3 Answer C Inventory per book Undelivered goods incorrectly excluded from inventory (750,000 / 150%) Adjusted inventory

2,000,000 500,000 2,500,000

Question 4 Answer B Cash Accounts receivable, net of allowance Advances to employee - IOU Inventory Prepaid expenses Total current assets

400,000 1,820,000 10,000 2,500,000 100,000 4,830,000

Page 5 PROBLEM 3 – STATEMENT OF COMPREHENSIVE INCOME An entity reported the following data for the current year: Net sales Cost of goods sold Selling expenses Administrative expenses Interest expense Gain from expropriation of land Income tax Income from discontinued operations Unrealized gain on equity investment at FVOCI Unrealized loss on futures contract designated as a cash flow hedge Increase in projected benefit obligation due to actuarial assumptions Foreign translation adjustment – debit Revaluation surplus

9,500,000 4,000,000 1,000,000 1,200,000 700,000 500,000 800,000 600,000 900,000 400,000 300,000 100,000 2,500,000

1. What amount should be reported as income from continuing operations? a. b. c. d.

3,100,000 2,300,000 1,800,000 2,900,000

2. What net amount should recognized in other comprehensive income for the year? a. 2,600,000 b. 3,100,000 c. 3,400,000 d. 800,000 3. What net amount in OCI should be presented as “may not be recycled to profit or loss? a. b. c. d.

3,400,000 2,700,000 3,700,000 3,100,000

4. What amount should be reported as net income? a. 2,900,000 b. 2,300,000 c. 3,100,000 d. 2,400,000 5. What amount should be reported as comprehensive income? a. 5,500,000 b. 2,900,000 c. 2,600,000

d.

6,100,000

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SOLUTION - PROBLEM 3 Question 1 Answer B Net sales

9,500,000

Cost of goods sold Gross income

(4,000,000) 5,500,000

Gain from expropriation of land

500,000

Total income

6,000,000

Selling expenses

1,000,000

Administrative expenses

1,200,000

Interest expense Income before tax Tax expense Income from continuing operations

700,000

2,900,000 3,100,000 ( 800,000) 2,300,000

Question 2 Answer A Unrealized gain on equity investment at FVOCI Unrealized loss – cash flow hedge Actuarial loss – increase in PBO Translation adjustment – debit Revaluation surplus Net gain - OCI

900,000 ( 400,000) ( 300,000) ( 100,000) 2,500,000 2,600,000

Question 3 Answer D Unrealized gain on equity investment at FVOCI Actuarial loss on PBO Revaluation surplus Net amount of OCI not reclassified to profit or loss

900,000 ( 300,000) 2,500,000 3,100,000

Question 4 Answer A Income from continuing operations Income from discontinued operations

2,300,000 600,000

Net income

2,900,000

Question 5 Answer A Net income Net gain – OCI Comprehensive income

2,900,000 2,600,000 5,500,000

Page 7 PROBLEM 4 – INVESTMENT IN ASSOCIATE On January 1, 2017, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2017, the investee reported net income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2018, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000. The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years. The investee reported net income of P8,000,000 for 2018 and paid dividend of P5,000,000 on December 31, 2018. 1. What amount of investment income should be recognized in 2017? a. b. c. d.

400,000 100,000 500,000 300,000

2. What is the implied goodwill arising from the acquisition on January 1, 2018? a. 3,000,000 b. 2,000,000 c. 2,500,000 d. 0 3. What total amount of income should be recognized by the investor in 2018? a. b. c. d.

2,000,000 2,500,000 2,300,000 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2018? a. b. c. d.

12,550,000 12,350,000 11,950,000 12,750,000

Page SOLUTION - PROBLEM 4 Question 1 Answer B Dividend income (10% x 1,000,000)

100,000

Under cost method, the investment income is based on dividend declared or paid.

Question 2 Answer B Existing 10% interest remeasured at fair value

3,500,000

New 15% interest

8,500,000

Total cost – January 1, 2018

12,000,000

Net assets acquired (25% x 36,000,000) Excess of cost over carrying amount

( 9,000,000) 3,000,000

Excess attributable to equipment whose fair value is greater than carrying amount (25% x 4,000,000) Goodwill

( 1,000,000) 2,000,000

Question 3 Answer C Share in net income (25% x 8,000,000) Amortization of excess attributable to equipment (1,000,000 / 5 years) Net investment income

2,000,000 ( 200,000) 1,800,000

Fair value of 10% interest

3,500,000

Historical cost

3,000,000

8

Remeasurement gain

500,000

Net investment income

1,800,000

Total income in 2018

2,300,000

If the investment in associate is achieved in stages the old interest is remeasured at fair value through profit or loss.

Question 4 Answer A Total cost January 1, 2018

12,000,000

Net investment income

1,800,000

Share in cash dividend (25% x 5,000,000) Carrying amount – December 31, 2018

( 1,250,000) 12,550,000

Page 9 PROBLEM 5 – INVESTMENT IN ASSOCIATE An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s assets and liabilities at that date were as follows:

Cash Accounts receivable Inventory – FIFO Land Plant and equipment – net Liabilities

Carrying amount

Fair value

1,000,000 4,000,000 8,000,000 5,500,000 14,000,000 7,000,000

1,000,000 4,000,000 9,000,000 7,000,000 22,000,000 7,000,000

The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The entity sold the land in 2018 for P8,000,000 and reported a gain of P2,500,000. The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid P1,000,000 cash dividend on December 31, 2017 and P2,000,000 on December 31, 2018. 1. What is the implied a goodwill arising from the acquisition? a. b. c. d.

200,000 600,000 800,000 400,000

2. What is the investment income for 2017?

a. b. c. d.

880,000 480,000 400,000 580,000

3. What is the investment income for 2018? a. b. c. d.

1,080,000 2,280,000 1,680,000 2,880,000

4. What is the carrying amount of the investment in associate on December 31, 2018? a. b. c. d.

15,360,000 15,000,000 16,560,000 13,800,000

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SOLUTION – PROBLEM 5 Question 1 Answer B Cash

1,000,000

Accounts receivable

4,000,000

Inventory

8,000,000

Land

5,500,000

Plant and equipment

14,000,000

Liabilities Net assets at carrying amount

( 7,000,000) 25,500,000

Acquisition cost

15,000,000

Net assets acquired (40% x 25,500,000) Excess of cost

(10,200,000) 4,800,000

Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%) Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%) Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%) Implied goodwill

( 400,000) ( 3,200,000) ( 600,000) 600,000

s

Question 2 Answer B Share in net income for 2017(40% x 3,000,000)

1,200,000

Amortization of excess – inventory Amortization of excess – plant and equipment (3,200,000 / 10 years) Investment income for 2017

( 400,000) ( 320,000) 480,000

Question 3 Answer A Share in net income for 2018 (40% x 5,000,000)

2,000,000

Amortization of excess – plant and equipment Amortization of excess – land Investment income for 2018

( 320,000) ( 600,000) 1,080,000

Question 4 Answer A Acquisition cost

15,000,000

Investment income 2017

480,000

Cash dividend for 2017 (40% x 1,000,000) Investment income for 2018

(

400,000) 1,080,000

Cash dividend for 2018 (40% 2,000,000) Carrying amount – December 31, 2018

( 800,000) 15,360,000

Page 11 PROBLEM 6 – BOND INVESTMENT AT FVOCI An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June 30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The business model for this investment is to collect contractual cash flows and sell the bonds in the open market. On December 31, 2017, the bonds were quoted at 106. 1. What amount of interest income should be reported for 2017? a. b. c. d.

400,000 200,000 364,560 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2017? a. b. c. d.

5,300,000 5,171,940 5,174,560 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2017? a. 300,000 b. 125,440 c. 128,060 d. 92,000 4. If the entity elected the fair value option, what total amount of income should be recognized for 2017? a. 400,000 b. 492,000 c. 600,000 d. 200,000

Page 12 SOLUTION - PROBLEM 6 Date

Interest received

Jan. 1, 2017 Jan. 30, 2017 Dec. 31, 2017

200,000 200,000

Interest income 182,280 181,660

Amortization 17,720 18,340

Carrying amount 5,208,000 5,190,280 5,171,940

Question 1 Answer D Interest January to June Interest July to December Interest income for 2017

182,280 181,660 363,940

Question 2 Answer A Market value on December 31, 2017 (5,000,000 x 106)

5,300,000

Question 3 Answer C Market value on December 31, 2017 Carrying amount December 31, 2017 (see table of amortization) Unrealized gain - OCI

5,300,000 5,171,940 128,060

Question 4 Answer C Market value on December 31, 2017 Acquisition cost, excluding transaction cost Gain from change in fair value Interest income (8% x 5,000,000) Total income

5,300,000 5,100,000 200,000 400,000 600,000

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PROBLEM 7 – PROPERTY, PLANT AND EQUIPMENT January 1, 2017, an entity disclosed the following balances: Land Land improvements Buildings Machinery and equipment

4,000,000 1,300,000 20,000,000 8,000,000

During the current year, the following transactions occurred: * A tract of land was acquired for P2,000,000 cash as a building site. * A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange. The

plant facility was carried on the seller’s books at P1,600,000 for land and P5,400,000 for the building at the exchange date. Current appraised values for the land and the building, respectively, are P2,000,000 and P8,000,000. The building has an expected life of forty years with a P200,000 residual value. *

Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred were freight and unloading P100,000 and installation P300,000. The equipment has a useful life of ten years with no residual value.

* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalk at the entity’s various plant locations. These expenditures had an estimated useful life of fifteen years. *

Research and development costs were P1,100,000 for the year.

*

A machine costing P200,000 on January 1, 2010 was scrapped on June 30, 2017. Straight line depreciation had been recorded on the basis of a 10-year life with no residual value.

* A machine was sold for P500,000 on July 1, 2017. Original cost of the machine sold was P700,000 on January 1, 2014, and it was depreciated on the straight line basis over an estimated useful life of eight years and a residual value of P50,000. 1. What is the total cost of land on December 31, 2017? b. 7,800,000 c. 7,600,000 d. 8,000,000 e. 6,800,000 2. What is the total cost of land improvements on December 31, 2017? a. 1,200,000 b. 3,600,000 c. 1,300,000 d. 2,500,000 3. What is the total cost of buildings on December 31, 2017? a. 28,000,000 b. 25,400,000 c. 27,200,000 d. 27,000,000 4. What is total cost of machinery and equipment on December 31, 2017? a. 12,400,000 b. 11,500,000 c. 11,000,000 d. 11,700,000

Page SOLUTION – PROBLEM 7 Question 1 Answer A Land – January 1 Land acquired for cash Land acquired by issuing shares (2/10 x 9,000,000) Land – December 31

4,000,000 2,000,000 1,800,000 7,800,000

Quoted price of shares issued for land and building (200,000 x P45)

9,000,000

Current appraized value : Land

2,000,000

14

Building

8,000,000

Total

10,000,000

The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to the land and building based on the current appraised value.

Question 2 Answer D Land improvements – January 1 Expenditures for parking lot, street and sidewalk Balance – December 31

1,300,000 1,200,000 2,500,000

Question 3 Answer C Buildings – January 1 Building acquired by issuing shares (8/10 x 9,000,000) Balance – December 31

20,000,000 7,200,000 27,200,000

Question 4 Answer B Machinery and equipment - January 1

8,000,000

Machinery and equipment purchased

4,000,000

Freight and unloading

100,000

Installation

300,000

Machinery scrapped Machinery sold Machinery equipment – December 31

( 200,000) ( 700,000) 11,500,000

Page 15 PROBLEM 8 - INCOME TAX An entity had the following financial statement elements for which the December 31, 2017 carrying amount is different from the December 31, 2017 tax basis:

Equipment Accrued liability – health care

Carrying amount

Tax basis

Difference

5,500,000 500,000

4,000,000 0

1,500,000 500,000

Computer software cost

2,000,000

0

2,000,000

The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax purposes. The accrued liability is the estimated health care cost that was recognized as expense in 2017 but deductible for tax purposes when actually paid. In January 2017, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was capitalized and amortized over 3 years for accounting purposes. However, the total amount was expensed in 2017 for tax purposes. The pretax accounting income for 2017 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2017. 1. What amount should be reported as current tax expense for 2017? a. b. c. d.

5,400,000 3,600,000 3,300,000 5,700,000

2. What amount should be reported as total tax expense for 2017? a. b. c. d.

4,500,000 4,950,000 4,050,000 3,900,000

3. What amount should be reported as deferred tax liability on December 31, 2017? a. 1,050,000 b. 1,200,000 c. 900,000 d. 150,000 4. What amount should be reported as deferred tax asset on December 31, 2017? .

a. 750,000 b. 600,000 c. 150,000 d. 0

Page 16 SOLUTION – PROBLEM 8 Question 1 Answer B Accounting income Future taxable amount: Equipment

15,000,000

Computer software

(1,500,000)

Future deductible amount: Accrued liability

(2,000,000) 500,000

Taxable income

12,000,000

Current tax expense (30% x 12,000,000)

3,600,000

Question 2 Answer A Total tax expense (30% x 15,000,000)

4,500,000

Question 3 Answer A Deferred tax liability (30% x 3,500,000)

1,050,000

Question 4 Answer C Deferred tax asset (30% x 500,000)

150,000

Page 17 PROBLEM 9 - BENEFIT COST

An entity provided the following pension plan information: Projected benefit obligation – January 1 Fair value of plan assets – January 1 Pension benefits paid during the year Current service cost for the year Past service cost for the year (vesting period 5 years) Actual return on plan assets Contribution to the plan Actuarial loss due to change in assumptions on projected benefit obligation Discount or settlement rate

3,500,000 2,800,000 250,000 1,750,000 425,000 180,000 1,500,000 200,000 10%

1. What is the employee benefit expense for the current year? a. b. c. d.

2,245,000 1,905,000 2,525,000 1,750,000

2. What is the net remeasurement loss for the current year? a. b. c. d.

200,000 100,000 300,000 400,000

3. What is the projected benefit obligation on December 31? a. b. c. d.

5,550,000 5,075,000 5,775,000 5,975,000

4. What is the fair value of plan assets on December 31? a. b. c. d.

4,480,000 4,230,000 4,300,000 4,050,000

1. What amount should be reported as accrued benefit cost on December 31? a. 1,745,000 b. 1,750,000 c. 1,045,000 d. 700,000

Page 18 SOLUTION - PROBLEM 9

Question 1 Answer A Current service cost

1,750,000

Past service cost

425,000

Interest expense (10% x 3,500,000)

350,000

Interest income (10% x 2,800,000) Employee benefit expense

( 280,000) 2,245,000

Question 2 Answer C Actual return Interest income Remeasurement loss on plan assets Actuarial loss on PBO Net remeasurement loss

180,000 280,000 100,000 200,000 300,000

Question 3 Answer D PBO – January 1

3,500,000

Current service cost

1,750,000

Past service cost

425,000

Interest expense

350,000

Actuarial loss

200,000

Benefits paid PBO – December 31

( 250,000) 5,975,000

Question 4 Answer B FVPA – January 1 Actual return Contribution to the plan Benefits paid FVPA – December 31

2,800,000 180,000 1,500,000 ( 250,000) 4,230,000

Question 5 Answer A FVPA – December 31 PBO – December 31 Prepaid/accrued benefit cost – December 31

4,230,000 (5,975,000) (1,745,000)

Page 19 PROBLEM 10 - SALES TYPE LEASE An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor. On January 1, 2017, an equipment is leased to a lessee with the following information: Cost of equipment to the entity Fair value of equipment Residual value – unguaranteed Initial direct cost Annual rental payable in advance Useful life and lease term Implicit interest rate PV of 1 at 12% for 8 periods PV of an ordinary annuity of 1 at 12% for 8 periods PV of an annuity due of 1 at 12% for 8 periods First lease payment

3,500,000 5,500,000 600,000 200,000 900,000 8 years 12% 0.40 4.97 5.56 January 1, 2016

1. What is the gross investment in the lease? a. b. c. d.

7,800,000 7,200,000 6,600,000 6,900,000

2. What is the net investment in the lease? a. b. c. d.

5,004,000 5,244,000 5,500,000 5,740,000

3. What is the total financial revenue? a. 2,196,000 b. 2,796,000 c. 2,556,000 d. 1,956,000 4. What amount should be recognized as interest income for 2017? a. b. c. d.

600,480 492,480 536,760 521,280

5. What amount of cost of goods sold should be recognized in recording the lease? a. b. c. d.

3,260,000 3,500,000 3,740,000 3,460,000

Page 20 SOLUTION – PROBLEM 10 Question 1 Answer A Gross rentals (900,000 x 8) Residual value Gross investment

7,200,000 600,000 7,800,000

Question 2 Answer B PV of rentals (900,000 x 5.56) PV of residual value (600,000 x .40) Net investment

5,004,000 240,000 5,244,000

Question 3 Answer C Gross investment Not investment Total financial revenue

7,800,000 5,244,000 2,556,000

Question 4 Answer D Net investment – January 1, 2017

5,244,000

Advance payment on January 1, 2017 Balance – January 1, 2017

( 900,000) 4,344,000

Interest income for 2017 (12% x 4,344,000)

521,280

Question 5 Answer D Cost of equipment

3,500,000

PV of unguaranteed residual value Initial direct cost

( 240,000) 200,000

Cost of goods sold

3,460,000

Sales, excluding present value of unguaranteed residual value Cost of goods sold Gross profit on sale

5,004,000 3,460,000 1,544,000

Page 21 PROBLEM 11 – EARNINGS PER SHARE An entity reported the following information on January 1, 2017: Ordinary share capital, P10 par, 800,000 shares Preference share capital, P50 par, 50,000 shares 12% Bonds payable

8,000,000 2,500,000 5,000,000

The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends on preference shares are in arrears for two years. The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond. Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the beginning and ending of 2017. The average market price of the ordinary share was P30 per share and the market price on December 31, 2017 was P40 per share. May 1 July 1 Oct. 1 Dec. 31

Issued 60,000 ordinary shares at P25 per share. Purchased 100,000 ordinary shares at P15 to be held as treasury. Converted bonds with face amount of P2,000,000. The net income for 2017 was P5,000,000. The tax rate is 30%.

1. What is the amount of basic earnings per share? a. b. c. d.

6.02 5.26 5.72 5.42

2. What is the total number of potentially dilutive ordinary shares at the beginning of year? a. b. c. d.

530,000 500,000 590,000 560,000

3. What is the amount of diluted earnings per share? a. b. c. d.

5.52 4.20 4.07 3.97

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SOLUTION - PROBLEM 11 Question 1 Answer C Net income

5,000,000

Preference dividend (10% x 2,500,000) Net income - ordinary

( 250,000) 4,750,000

January 1

(800,000 x 12/12)

800,000

May

( 60,000 x 8/12)

40,000

1

July 1 October 1

(100,000 x 6/12) ( 2,000 x 80 x 3/12)

( 50,000) 40,000

Average shares outstanding

830,000

Basic EPS (4,750,000 / 830,000)

5.72

Question 2 Answer A Share options

90,000

Treasury shares (1,800,000 / 30) Incremental ordinary shares from share options

( 60,000) 30,000

Ordinary shares from conversion of preference shares

100,000

Ordinary shares from conversion of bonds payable (5,000 x 80)

400,000

Potential ordinary shares

530,000

Question 3 Answer C Incremental EPS on Preference shares (250,000 / 100,000)

2.50

Interest on bonds not converted (3,000,000 x 12% x 70%) Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%) Total interest expense

252,000 126,000 378,000

Incremental EPS on bonds (378,000 /400,000)

Basic EPS Share options Diluted EPS Bonds payable Diluted EPS

.94 Net income

Shares

EPS

4,750,000

830,000 30,000 860,000 360,000 1,220,000

5.72

4,750,000 378,000 5,128,000

5.52 4.20

Preference shares Diluted EPS

250,000 5,378,000

100,000 1,320,000

4.07

Potential ordinary shares – bonds

400,000

Reported in basic EPS Reported in diluted EPS

(40,000) 360,000

Page 23 PROBLEM 12 – STATEMENT OF CASH FLOWS An entity presented the following comparative financial information:

Property, plant and equipment Accumulated depreciation Long-term investments Prepaid expenses Merchandise inventory Accounts receivable, net of allowance Cash Share capital-ordinary Retained earnings Long-term note payable Accounts payable Dividend payable Accrued expenses

2018

2017

2,190,000 450,000 225,000 351,000 1,950,000 1,560,000 690,000 3,000,000 906,000 1,275,000 309,000 201,000 825,000

1,440,000 270,000 315,000 1,260,000 1,080,000 640,000 2,400,000 688,000 1,095,000 282,000 -

2018

2017

Net credit sales

7,020,000

3,753,000

Cost of goods sold Gross profit

(3,915,000) 3,105,000

(1,881,000) 1,872,000

Expenses, including income tax Net income

(2,586,000) 519,000

(1,374,000) 498,000

Accounts receivable and accounts payable relate to merchandise for sale in the normal course of business. The allowance for bad debts was the same at the end of 2018 and 2017 and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period. The proceeds from the note payable were used to finance the acquisition of property, plant and equipment. Ordinary shares were sold to provide additional working capital. 1. What amount should be reported as net cash provided by operating activities in 2018? a. 345,000 b. 165,000 c. 546,000

d. 510,000 2. What amount should be reported as net cash used in investing activities in 2018? a. b. c. d.

750,000 225,000 975,000 750,000

3. What amount should be reported as net cash provided by financing activities in 2018? a. b. c. d.

600,000 780,000 750,000 680,000

Page 24 SOLUTION – PROBLEM 12 Question 1 Answer A Net income

519,000

Depreciation (450,000 - 27,000)

180,000

Increase in prepaid expenses Increase in inventory Increase in accounts receivable Increase in accounts payable

( 36,000) (690,000) (480,000) 27,000

Increase in accrued expenses

825,000

Net cash provided - operating

345,000

Question 2 Answer C Increase in PPE Increase in long-term investments Net cash used - investing

(750,000) (225,000) (975,000)

Question 3 Answer D Dividend paid in 2018 Proceeds from share capital Proceeds from note payable Net cash provides - financing

(100,000) 600,000 180,000 680,000

Retained earnings - 2017

688,000

Net income - 2018

519,000

Total Retained earnings - 2018

1,207,000 (

906,000)

Dividend declared in 2018

301,000

Dividend payable – 2018 Dividend paid in 2018

( 201,000) 100,000

Page

25

PROBLEM 13 – STATEMENT OF CASH FLOWS 1. An entity provided the following increases (decreases) in the statement of financial position accounts. Cash and cash equivalents

120,000

Available for sale securities

300,000

Accounts receivable, net Inventory Long-term investments Plant assets Accumulated depreciation

80,000 (100,000) 700,000 -

Accounts payable Dividend payable

( 5,000) 160,000

Short-term bank debt

325,000

Long-term debt

110,000

Share capital, P10 par

100,000

Share premium

120,000

Retained earnings

290,000



Net income for the current year was P790,000.



Cash dividend of P500,000 was declared.



Building costing P600,000 and with carrying amount of P350,000 was sold for P350,000.



Equipment costing P110,000 was acquired through issuance of long-term debt.



A long-term investment was sold for P135,000. There were no other transactions affecting long-term investment.



The shares were issued for cash.

1. What is the net cash provided by operating activities? a. 1,160,000 b. 1,040,000 c. 920,000 d. 705,000 2. What is the net cash used in investing activities? a. 1,005,000 b. 1,190,000 c. 1,275,000 d. 1,600,000 3. What is the net cash provided by financing activities? a. 205,000 b. 150,000 c. 45,000 d. 20,000

Page SOLUTION – PROBLEM 13 Question 1 Answer C Net income

790,000

Increase in inventory Gain on sale of long-term investment Depreciation Decrease in accounts payable Net cash provided – operating

( 80,000) ( 35,000) 250,000 ( 5,000) 920,000

Question 2 Answer A

Sale price of investment

135,000

Cost of investment sold – decrease in long-term investment Gain on sale of long-term investment

(100,000) 35,000

26

Net increase in accumulated depreciation

-

Add accumulated depreciation on building sold (600,000 – 350,000)

250,000

Depreciation for the year

250,000

Net increase in plant assets

700,000

Add cost of building sold

600,000

Total acquisition during year

1,300,000

Equipment acquired by issuing long-term debt Cash payment for plant assets

( 110,000) 1,190,000

Cash payment for plant assets Cash payment for available for sale securities Sale price of investment

(1,190,000) ( 300,000) 135,000

Sale of building Net cash used - investing

350,000 (1,005,000)

Question 3 Answer A Increase in share capital

100,000

Increase in share premium

120,000

Cash received from issue of shares

220,000

Proceeds from short-term debt

325,000

Dividend paid Net cash provided – financing

(340,000) 205,000

Dividend declared

500,000

Dividend payable Dividend paid

(160,000) 340,000

Proof Net cash provided - operating Net cash used – investing Net cash provided – financing Increase in cash and cash equivalents

920,000 (1,005,000) 205,000 120,000

Page

27

PROBLEM 14 – STATEMENT OF CASH FLOWS An entity provided the following data:

Trade accounts receivable, net of allowance Inventory Accounts payable

December 31, 2017

December 31, 2018

840,000 1,500,000 950,000

780,000 1,400,000 980,000



Total sales were P12,000,000 for 2018 and P11,000,000 for 2017. Cash sales were 20% of total sales each year. Cost of goods sold was P8,400,000 for 2018.



Variable expenses for 2018 amounted to P1,200,000 and varied in proportion to sales. Variable expenses had been paid 50% in the year incurred and 50% the following year.



Fixed expenses, including P350,000 depreciation and P50,000 bad debt expense, totaled P1,000,000 each year. Eighty percent of fixed expenses involving cash were paid in the year incurred and 20% the following year. Each year there was a P50,000 bad debt estimate and a P50,000 writeoff.

1. What is the cash collected from customers during 2018? a. b. c. d.

12,010,000 12,060,000 11,960,000 11,890,000

2. What is the amount of purchases for 2018? a. b. c. d.

9,800,000 8,300,000 8,500,000 8,400,000

3. What is the cash disbursed for purchases during 2018? a. b. c. d.

8,500,000 8,270,000 8,300,000 8,200,000

4. What amount of cash was disbursed for variable expenses during 2018? a. 1,150,000 b. 1,200,000 c. 1,100,000 d. 600,000 5. What amount of cash was disbursed for fixed expenses during 2018? a. b. c. d.

500,000 650,000 600,000 500,000

Page 28

SOLUTION – PROBLEM 14 Question 1 Answer A AR – December 31, 2017 Total sales – 2018 Total AR – December 31, 2018 Bad debt writeoff Collections from customers – 2018

840,000 12,000,000 12,840,000 ( 780,000) ( 50,000) 12,010,000

A

Question 2 Answer B Inventory – December 31, 2017 Purchases 2018 (SQUEEZE) Goods available for sale Inventory – December 31, 2018 Cost of goods sold - 2018

1,500,000 8,300,000 9,800,000 (1,400,000) 8,400,000

B

Question 3 Answer B Accounts payable – December 31, 2017 Purchases 2018 Total Accounts payable – December 31, 2017 Cash disbursed for purchases 2018

950,000 8,300,000 9,250,000 ( 980,000) 8,270,000

B

Question 4 Answer A Variable cost ratio (1,200,000 / 12,000,000)

10%

Variable expenses – 2017 (10% x 11,000,000)

1,100,000

Variable expenses 2017 paid in 2018 (50% x 1,100,000) Variable expenses 2018 paid in 2018 (50% x 1,200,000) Variable expenses paid in 2018

550,000 600,000 1,150,000

A

1,000,000 ( 350,000) ( 50,000) 600,000

C

Question 5 Answer C Fixed expenses each year Depreciation Bad debt expense Cash disbursed for fixed expenses in 2018

END