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 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 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. 29,200,000
b. 29,700,000
c. 29,500,000
d. 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. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000

Page 2
SOLUTION - PROBLEM 1

Question 1 Answer A

Cash 6,000,000
Accounts receivable 14,000,000
Inventory (10,000,000 - 500,000 - 300,000) 9,200,000
Total current assets 29,200,000

Question 2 Answer C

Net sales and other revenue 80,000,000

Cost of goods sold ( 48,000,000)
Expenses ( 12,000,000)
Income before tax 20,000,000
Tax expense (30% x 20,000,000) ( 6,000,000)
Net income 14,000,000

Tax expense 6,000,000

Payment during year (5,000,000)
Income tax payable 1,000,000

Accounts payable 8,200,000

Income tax payable 1,000,000
Redeemable preference 3,000,000
Total current liabilities 12,200,000

Accounts payable per book 9,000,000

Goods in transit FOB destination ( 500,000)
Goods held on consignment ( 300,000)
Adjusted accounts payable 8,200,000

Question 3 Answer B

Net income 14,000,000

Question 4 Answer D

Ordinary share capital 15,000,000

Share premium 4,000,000
Retained earnings 23,000,000
Total shareholders’ equity 42,000,000

Retained earnings – January 1 9,000,000

Net income 14,000,000
Total retained earnings 23,000,000
 Page 3

PROBLEM 2 - STATEMENT OF FINNACIAL POSITION

3. On December 31, 2017, an entity showed the following current assets:

Cash 500,000
Accounts receivable 2,500,000
Inventory 2,000,000
Prepaid expenses 100,000
Total current assets 5,100,000
Cash on hand including customer postdated check of P20,000 and employee
IOU of P10,000 130,000
Cash in bank per bank statement (outstanding checks on December 31,
2017, P70,000) 370,000
Total cash 500,000
Customers’ debit balances, net of customer deposit of P50,000 1,900,000
Allowance for doubtful accounts ( 150,000)
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 750,000
Total accounts receivable 2,500,000

1. What is the adjusted cash balance?

a. 500,000
b. 470,000
c. 430,000
d. 400,000

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

.

a. 1,970,000
b. 1,820,000
c. 1,800,000
d. 1,950,000

3. What is the adjusted inventory?

a. 2,000,000
b. 2,375,000
c. 2,500,000
d. 2,750,000

4. What total amount of current assets should be reported?

a. 4,900,000
b. 4,830,000
c. 4,780,000
d. 4,630,000
 Page 4

SOLUTION – PROBLEM 2

Question 1 Answer D

Cash on hand 130,000

Customer postdated check ( 20,000)
Employee IOU ( 10,000)
Adjusted cash on hand 100,000
Cash in bank per bank statement 370,000
Outstanding checks ( 70,000) 300,000
Adjusted cash balance 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 ( 150,000)
Net realizable value 1,820,000

Question 3 Answer C

Inventory per book 2,000,000

Undelivered goods incorrectly excluded from inventory (750,000 / 150%) 500,000
Adjusted inventory 2,500,000

Question 4 Answer B

Cash 400,000
Accounts receivable, net of allowance 1,820,000
Advances to employee - IOU 10,000
Inventory 2,500,000
Prepaid expenses 100,000
Total current assets 4,830,000
 Page 5

PROBLEM 3 – STATEMENT OF COMPREHENSIVE INCOME

An entity reported the following data for the current year:
Net sales 9,500,000
Cost of goods sold 4,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated as a cash flow hedge 400,000
Increase in projected benefit obligation due to actuarial assumptions 300,000
Foreign translation adjustment – debit 100,000
Revaluation surplus 2,500,000

1. What amount should be reported as income from continuing operations?

a. 3,100,000
b. 2,300,000
c. 1,800,000
d. 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. 3,400,000
b. 2,700,000
c. 3,700,000
d. 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
 Page 6

SOLUTION - PROBLEM 3

Question 1 Answer B

Net sales 9,500,000

Cost of goods sold (4,000,000)
Gross income 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 700,000 2,900,000
Income before tax 3,100,000
Tax expense ( 800,000)
Income from continuing operations 2,300,000

Question 2 Answer A

Unrealized gain on equity investment at FVOCI 900,000

Unrealized loss – cash flow hedge ( 400,000)
Actuarial loss – increase in PBO ( 300,000)
Translation adjustment – debit ( 100,000)
Revaluation surplus 2,500,000
Net gain - OCI 2,600,000

Question 3 Answer D

Unrealized gain on equity investment at FVOCI 900,000

Actuarial loss on PBO ( 300,000)
Revaluation surplus 2,500,000
Net amount of OCI not reclassified to profit or loss 3,100,000

Question 4 Answer A

Income from continuing operations 2,300,000

Income from discontinued operations 600,000
Net income 2,900,000
Question 5 Answer A

Net income 2,900,000

Net gain – OCI 2,600,000
Comprehensive income 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. 400,000
b. 100,000
c. 500,000
d. 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. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2018?
 a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000

Page 8

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) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
Excess attributable to equipment whose fair value is greater than carrying amount
(25% x 4,000,000) ( 1,000,000)
Goodwill 2,000,000

Question 3 Answer C

Share in net income (25% x 8,000,000) 2,000,000

Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000)
Net investment income 1,800,000

Fair value of 10% interest 3,500,000

Historical cost 3,000,000
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) ( 1,250,000)
Carrying amount – December 31, 2018 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:

Carrying amount Fair value

Cash 1,000,000 1,000,000
Accounts receivable 4,000,000 4,000,000
Inventory – FIFO 8,000,000 9,000,000
Land 5,500,000 7,000,000
Plant and equipment – net 14,000,000 22,000,000
Liabilities 7,000,000 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. 200,000
b. 600,000
c. 800,000
d. 400,000

2. What is the investment income for 2017?

a. 880,000
 b. 480,000
c. 400,000
d. 580,000

3. What is the investment income for 2018?

a. 1,080,000
b. 2,280,000
c. 1,680,000
d. 2,880,000

4. What is the carrying amount of the investment in associate on December 31, 2018?
a. 15,360,000
b. 15,000,000
c. 16,560,000
d. 13,800,000

Page 10

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 ( 7,000,000)
Net assets at carrying amount 25,500,000

Acquisition cost 15,000,000

Net assets acquired (40% x 25,500,000) (10,200,000)
Excess of cost 4,800,000
Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%) ( 400,000)
Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%) ( 3,200,000)
Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%) ( 600,000)
Implied goodwill 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 ( 400,000)
Amortization of excess – plant and equipment (3,200,000 / 10 years) ( 320,000)
Investment income for 2017 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 ( 320,000)
Amortization of excess – land ( 600,000)
Investment income for 2018 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) ( 400,000)
Investment income for 2018 1,080,000
Cash dividend for 2018 (40% 2,000,000) ( 800,000)
Carrying amount – December 31, 2018 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. 400,000
b. 200,000
c. 364,560
d. 363,940
2. What is the adjusted carrying amount of the investment on December 31, 2017?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 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 Interest income Amortization Carrying amount

Jan. 1, 2017 5,208,000

Jan. 30, 2017 200,000 182,280 17,720 5,190,280
Dec. 31, 2017 200,000 181,660 18,340 5,171,940

Question 1 Answer D

Interest January to June 182,280

Interest July to December 181,660
Interest income for 2017 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 5,300,000

Carrying amount December 31, 2017 (see table of amortization) 5,171,940
Unrealized gain - OCI 128,060

Question 4 Answer C

Market value on December 31, 2017 5,300,000

Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value 200,000
Interest income (8% x 5,000,000) 400,000
Total income 600,000

Page 13

PROBLEM 7 – PROPERTY, PLANT AND EQUIPMENT

January 1, 2017, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 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 14

SOLUTION – PROBLEM 7

Question 1 Answer A

Land – January 1 4,000,000

Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land – December 31 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
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 1,300,000

Expenditures for parking lot, street and sidewalk 1,200,000
Balance – December 31 2,500,000

Question 3 Answer C

Buildings – January 1 20,000,000

Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 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 ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 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:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000
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. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000

2. What amount should be reported as total tax expense for 2017?

a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 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 15,000,000

Future taxable amount:
Equipment
Computer software (1,500,000)
Future deductible amount: (2,000,000)
Accrued liability 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 3,500,000
Fair value of plan assets – January 1 2,800,000
Pension benefits paid during the year 250,000
Current service cost for the year 1,750,000
Past service cost for the year (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%
1. What is the employee benefit expense for the current year?
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000

2. What is the net remeasurement loss for the current year?

a. 200,000
b. 100,000
c. 300,000
d. 400,000

3. What is the projected benefit obligation on December 31?

a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000

4. What is the fair value of plan assets on December 31?

a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 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) ( 280,000)
Employee benefit expense 2,245,000

Question 2 Answer C

Actual return 180,000

Interest income 280,000
Remeasurement loss on plan assets 100,000
Actuarial loss on PBO 200,000
Net remeasurement loss 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 ( 250,000)
PBO – December 31 5,975,000

Question 4 Answer B

FVPA – January 1 2,800,000

Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid ( 250,000)
FVPA – December 31 4,230,000

Question 5 Answer A

FVPA – December 31 4,230,000

PBO – December 31 (5,975,000)
Prepaid/accrued benefit cost – December 31 (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 3,500,000

Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2016

1. What is the gross investment in the lease?

a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000

2. What is the net investment in the lease?

a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 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. 600,480
b. 492,480
c. 536,760
d. 521,280

5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000
 Page 20

SOLUTION – PROBLEM 10

Question 1 Answer A

Gross rentals (900,000 x 8) 7,200,000

Residual value 600,000
Gross investment 7,800,000

Question 2 Answer B

PV of rentals (900,000 x 5.56) 5,004,000

PV of residual value (600,000 x .40) 240,000
Net investment 5,244,000

Question 3 Answer C

Gross investment 7,800,000

Not investment 5,244,000
Total financial revenue 2,556,000

Question 4 Answer D

Net investment – January 1, 2017 5,244,000

Advance payment on January 1, 2017 ( 900,000)
Balance – January 1, 2017 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 ( 240,000)
Initial direct cost 200,000
Cost of goods sold 3,460,000

Sales, excluding present value of unguaranteed residual value 5,004,000

Cost of goods sold 3,460,000
Gross profit on sale 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 8,000,000

Preference share capital, P50 par, 50,000 shares 2,500,000
12% Bonds payable 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 Issued 60,000 ordinary shares at P25 per share.

July 1 Purchased 100,000 ordinary shares at P15 to be held as treasury.
Oct. 1 Converted bonds with face amount of P2,000,000.
Dec. 31 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. 6.02
b. 5.26
c. 5.72
d. 5.42

2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a. 530,000
b. 500,000
c. 590,000
d. 560,000

3. What is the amount of diluted earnings per share?

a. 5.52
b. 4.20
c. 4.07
d. 3.97
 Page 22

SOLUTION - PROBLEM 11

Question 1 Answer C

Net income 5,000,000

Preference dividend (10% x 2,500,000) ( 250,000)
Net income - ordinary 4,750,000

January 1 (800,000 x 12/12) 800,000

May 1 ( 60,000 x 8/12) 40,000
July 1 (100,000 x 6/12) ( 50,000)
October 1 ( 2,000 x 80 x 3/12) 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) ( 60,000)
Incremental ordinary shares from share options 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%) 252,000

Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%) 126,000
Total interest expense 378,000

Incremental EPS on bonds (378,000 /400,000) .94

Net income Shares EPS

Basic EPS 4,750,000 830,000 5.72
Share options 30,000
Diluted EPS 4,750,000 860,000 5.52
Bonds payable 378,000 360,000
Diluted EPS 5,128,000 1,220,000 4.20
Preference shares 250,000 100,000
Diluted EPS 5,378,000 1,320,000 4.07
Potential ordinary shares – bonds 400,000
Reported in basic EPS (40,000)
Reported in diluted EPS 360,000

Page 23

PROBLEM 12 – STATEMENT OF CASH FLOWS

An entity presented the following comparative financial information:

2018 2017
Property, plant and equipment 2,190,000 1,440,000
Accumulated depreciation 450,000 270,000
Long-term investments 225,000 -
Prepaid expenses 351,000 315,000
Merchandise inventory 1,950,000 1,260,000
Accounts receivable, net of allowance 1,560,000 1,080,000
Cash 690,000 640,000
Share capital-ordinary 3,000,000 2,400,000
Retained earnings 906,000 688,000
Long-term note payable 1,275,000 1,095,000
Accounts payable 309,000 282,000
Dividend payable 201,000 -
Accrued expenses 825,000 -

2018 2017
Net credit sales 7,020,000 3,753,000
Cost of goods sold (3,915,000) (1,881,000)
Gross profit 3,105,000 1,872,000
Expenses, including income tax (2,586,000) (1,374,000)
Net income 519,000 498,000

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. 750,000
b. 225,000
c. 975,000
d. 750,000

3. What amount should be reported as net cash provided by financing activities in 2018?
a. 600,000
b. 780,000
c. 750,000
d. 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 ( 36,000)
Increase in inventory (690,000)
Increase in accounts receivable (480,000)
Increase in accounts payable 27,000
Increase in accrued expenses 825,000
Net cash provided - operating 345,000

Question 2 Answer C

Increase in PPE (750,000)

Increase in long-term investments (225,000)
Net cash used - investing (975,000)

Question 3 Answer D

Dividend paid in 2018 (100,000)

Proceeds from share capital 600,000
Proceeds from note payable 180,000
Net cash provides - financing 680,000

Retained earnings - 2017 688,000

Net income - 2018 519,000
Total 1,207,000
Retained earnings - 2018 ( 906,000)
Dividend declared in 2018 301,000
Dividend payable – 2018 ( 201,000)
Dividend paid in 2018 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 80,000
Long-term investments (100,000)
Plant assets 700,000
Accumulated depreciation -
Accounts payable ( 5,000)
Dividend payable 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 26

SOLUTION – PROBLEM 13

Question 1 Answer C

Net income 790,000

Increase in inventory ( 80,000)
Gain on sale of long-term investment ( 35,000)
Depreciation 250,000
Decrease in accounts payable ( 5,000)
Net cash provided – operating 920,000

Question 2 Answer A

Sale price of investment 135,000

Cost of investment sold – decrease in long-term investment (100,000)
Gain on sale of long-term investment 35,000
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 ( 110,000)
Cash payment for plant assets 1,190,000

Cash payment for plant assets (1,190,000)

Cash payment for available for sale securities ( 300,000)
Sale price of investment 135,000
Sale of building 350,000
Net cash used - investing (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 (340,000)
Net cash provided – financing 205,000

Dividend declared 500,000

Dividend payable (160,000)
Dividend paid 340,000

Proof

Net cash provided - operating 920,000

Net cash used – investing (1,005,000)
Net cash provided – financing 205,000
Increase in cash and cash equivalents 120,000

Page 27

PROBLEM 14 – STATEMENT OF CASH FLOWS

An entity provided the following data:

December 31, 2017 December 31, 2018

Trade accounts receivable, net of allowance 840,000 780,000
Inventory 1,500,000 1,400,000
Accounts payable 950,000 980,000

 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. 12,010,000
b. 12,060,000
c. 11,960,000
d. 11,890,000

2. What is the amount of purchases for 2018?

a. 9,800,000
b. 8,300,000
c. 8,500,000
d. 8,400,000

3. What is the cash disbursed for purchases during 2018?

a. 8,500,000
b. 8,270,000
c. 8,300,000
d. 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. 500,000
b. 650,000
c. 600,000
d. 500,000

Page 28
SOLUTION – PROBLEM 14

Question 1 Answer A

AR – December 31, 2017 840,000

Total sales – 2018 12,000,000
Total 12,840,000
AR – December 31, 2018 ( 780,000)
Bad debt writeoff ( 50,000)
Collections from customers – 2018 12,010,000 A

Question 2 Answer B

Inventory – December 31, 2017 1,500,000

Purchases 2018 (SQUEEZE) 8,300,000 B
Goods available for sale 9,800,000
Inventory – December 31, 2018 (1,400,000)
Cost of goods sold - 2018 8,400,000

Question 3 Answer B

Accounts payable – December 31, 2017 950,000

Purchases 2018 8,300,000
Total 9,250,000
Accounts payable – December 31, 2017 ( 980,000)
Cash disbursed for purchases 2018 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) 550,000

Variable expenses 2018 paid in 2018 (50% x 1,200,000) 600,000
Variable expenses paid in 2018 1,150,000 A

Question 5 Answer C

Fixed expenses each year 1,000,000

Depreciation ( 350,000)
Bad debt expense ( 50,000)
Cash disbursed for fixed expenses in 2018 600,000 C

END