ARTS CPA Review

(Academic Review and Training School, Inc.)

2F & 3F Crème Bldg., Abella St., Naga City
Tel No.: (054) 472-9104; E-mail: [email protected].

PREWEEK MATERIALS

PRACTICAL ACCOUNTING I MICHAEL B. BONGALONTA,CPA,MICB,MBA

A. INCOME AND EXPENSE RECOGNITION

1. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on
January 31 for the oil sold between the previous June 1 and November 30, and on July 31
for oil sold between the previous December 1 and May 31. Production reports show the
following oil sales:

June 1, 1993-November 30, 1993 $300,000

December 1, 1993-December 31, 1993 50,000
December 1, 1993-May 31, 1994 400,000
June 1, 1994-November 30, 1994 325,000
December 1, 1994-December 31, 1994 70,000

What amount should Rill report as royalty revenue for 1994?

a. $140,000 c. $149,000
b. $144,000 d. $159,000

Explanation:

Choice "c" is correct. Royalty revenue accrued for 1994 is based on 20% of production in
1994.

Production, Jan. 1 thru May 31 [$400,000 − $50,000] $350,000

June 1 through November 30 production 325,000
Production for December 70,000
Total 1994 production $745,000

Royalty revenue on this production equals $149,000 [20% × $745,000].

2. During 1993, Orr Co. incurred the following costs:

Research and development services performed by Key Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes and models 200,000
Testing in search for new products or process alternatives 175,000

In its 1993 income statement, what should Orr report as research and development
expense?

a. $150,000 c. $350,000
b. $200,000 d. $525,000
Explanation:

Choice "d" is correct. R&D contracted out to a third party, preproduction prototypes and
models costs, and, costs for searching for new products or new process alternatives are
reported as R&D expense.

3. Frame Co. has an 8% note receivable dated June 30, 1991, in the original amount of
$150,000. Payments of $50,000 in principal plus accrued interest are due annually on
July 1, 1992, 1993, and 1994. In its June 30, 1993, balance sheet, what amount should
Frame report as a current asset for interest on the note receivable?

a. $0 c. $8,000
b. $4,000 d. $12,000

Explanation:

Choice "c" is correct. The current asset for interest receivable on June 30, 1993, is the
interest to be received within one year. Interest to be received on July 1, 1993 is: $100,000
balance of note × 8% = $8,000.

4. Dunne Co. sells equipment service contracts that cover a two-year period. The sales
price of each contract is $600. Dunne's past experience is that, of the total dollars spent
for repairs on service contracts, 40% is incurred evenly during the first contract year and
60% evenly during the second contract year. Dunne sold 1,000 contracts evenly
throughout 1992. In its December 31, 1992, balance sheet, what amount should Dunne
report as deferred service contract revenue?

a. $540,000 c. $360,000
b. $480,000 d. $300,000

Explanation:

Choice "b" is correct. When service contracts are sold, the entire proceeds are reported as
deferred revenue. Revenue is recognized, and deferral reduced as the service is performed.
Since repairs are made evenly (July 1 is average date), only ½ of the 40% of repairs will be
in 1992.

1992 deferral ($600 × 1,000) $600,000

Earned in 1992 (600,000 × 40% × 1/2) (120,000)
Deferral 12-31-92 $480,000

5. Class Corp. maintains its accounting records on the cash basis but restates its financial
statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax
income for 1992. The following information pertains to Class's operations for the years
ended December 31, 1992 and 1991:
1992 1991
Accounts receivable $40,000 $20,000
Accounts payable 15,000 30,000

Under the accrual method, what amount of income before taxes should Class report in its
December 31, 1992, income statement?
a. $25,000 c. $65,000
b. $55,000 d. $95,000
Explanation:
Choice "d" is correct. $95,000 accrual income before taxes in the December 31, 1992,
income statement.

Cash-basis pretax income for 1992 $60,000

Increase in accts rec. ($40,000 − $20,000) 20,000
(Cash not received for amounts "receivable")
Reduction in accts pay. ($30,000 − $15,000) 15,000
(Cash used to pay down prior payables)
Accrual-basis pretax income for 1992 $95,000

6. Dana Co.'s officers' compensation expense account had a balance of $224,000 at

December 31, 1992, before any appropriate year-end adjustment relating to the
following:

• No salary accrual was made for December 30-31, 1992. Salaries for the two-day period
totaled $3,500.
• 1992 officers' bonuses of $62,500 were paid on January 31, 1993.

In its 1992 income statement, what amount should Dana report as officers' compensation
expense?
a. $290,000 c. $227,500
b. $286,500 d. $224,000

Explanation:
Choice "a" is correct. $290,000 compensation expense for 1992.

Compensation Expense:

Compensation exp before year-end adjustments 224,000

Add: Salary accrual for Dec. 30-31, 1992 3,500
Add: 1992 bonuses not paid until Jan. 31, 1993 62,500
Compensation exp after year-end adjustments 290,000

7. Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax
return for the year ended November 30, 1990. Additional information is as follows:

Rents receivable - November 30, 1990 $1,060,000

Rents receivable - November 30, 1989 800,000
Uncollectible rents written off during the fiscal year 30,000

Under the accrual basis, Marr should report rental revenue of:

a. $1,920,000 c. $2,440,000
b. $1,980,000 d. $2,500,000

Explanation:

Choice "d" is correct. $2,500,000 rental revenue under the accrual basis.

Rents receivable at begin 11/30/89 $ 800,000

Add: Billings accrued 2,500,000
Subtotal 3,300,000
Less: Cash collections (2,210,000)
Write-offs (30,000)
Rents receivable at end 11/30/90 $ 1,060,000

8. At December 31, 1988, a $1,200,000 note payable was included in Cobb Corp.'s liability
account balances. The note is dated October 1, 1988, bears interest at 15%, and is
payable in three equal annual payments of $400,000. The first interest and principal
payment was made on October 1, 1989. In its December 31, 1989 balance sheet, what
amount should Cobb report as accrued interest payable for this note?

a. $135,000 c. $45,000
b. $90,000 d. $30,000

Explanation:

Choice "d" is correct. $30,000 accrued interest payable at Dec. 31, 1989.
Note Payable:

Note payable balance at Dec. 31, 1988 $1,200,000

Less: First payment made Oct. 1, 1989 (400,000)
Note payable balance at Oct. 1, 1989 800,000
Annual interest rate 15%
Annual interest 120,000
Adjustment factor for 3 mos. From 10-1-89 to 12-31-89 × 3/12
Accrued interest payable at Dec. 31, 1989 $ 30,000

9. Haft Construction Co. has consistently used the percentage-of-completion method. On

January 10, 1991, Haft began work on a $3,000,000 construction contract. At the
inception date, the estimated cost of construction was $2,250,000. The following data
relate to the progress of the contract:

Income recognized at 12/31/91 $ 300,000

Costs incurred 1/10/91 through 12/31/92 1,800,000
Estimated cost to complete at 12/31/92 600,000

In its income statement for the year ended December 31, 1992, what amount of gross profit
should Haft report?
a. $450,000 c. $262,500
b. $300,000 d. $150,000

Explanation:

Choice "d" is correct. The gross profit for the percentage-of-completion method is as follows:

Contract price $3,000,000

Cost to date 1,800,000
Est. cost to complete 600,000
Total cost 2,400,000
Expected gross profit 600,000
Percentage complete (18/24) 75%
Profit to date 450,000
Profit previously recognized (300,000)
1992 profit $ 150,000
10. During 1988, Mitchell Corp. started a construction job with a total contract price of
$600,000. The job was completed on December 15, 1989. Additional data are as follows:
1988 1989
Actual costs incurred $225,000 $255,000
Estimated remaining costs 225,000 -
Billed to customer 240,000 360,000
Received from customer 200,000 400,000

Under the completed contract method, what amount should Mitchell recognize as gross
profit for 1989?
a. $45,000 c. $80,000
b. $72,000 d. $120,000

Explanation:

Choice "d" is correct. $120,000 gross profit recognized for 1989 under the completed
contract method.

Completed contract method:

Total contract sales price $600,000
Less total cost of contract (225,000 + 255,000) = 480,000
Gross profit recognized when contract is completed $120,000

B. FINANCIAL STATEMENT PRESENTATION

1. For a given year, beginning and ending total liabilities were $8,400 and $10,000,
respectively. At year-end, owners' equity was $26,000 and total assets were $2,000
larger than at the beginning of the year. If new capital stock issued exceeded dividends
by $2,400, net income (loss) for the year was apparently:

a. ($2,800). c. $400.
b. ($2,000). d. $2,800.

ANS: B

2. The following balances have been excerpted from Edwards' balance sheets:

December 31, December 31,

2008 2007
Prepaid Insurance $ 6,000 $ 7,500
Interest Receivable 3,700 14,500
Salaries Payable 61,500 53,000

Edwards Company paid or collected during 2004 the following items:

Insurance premiums paid $ 41,500

Interest collected 123,500
Salaries paid 481,000

The insurance expense on the income statement for 2008 was:

a. $28,000. c. $43,000.
b. $40,000. d. $55,000.
ANS: C PTS: 1

3. HYSTG Company has sustained heavy losses over a period of time and conditions
warrant that HYSTG undergo quasi-reorganization on December 31, 2011.

 Inventory with cost of P 6,500,000 was recorded on December 31, 20122 at its
market value of P 6,000,000.
 Property, plant and equipment were recorded on December 31, 2011 at P 12,000,000
net of accumulated depreciation. The sound value was P 8,000,000.
 On December 31, 2011, the share capital is P 7,000,000 consisting of 700,000 shares
with par value of P 10, the share premium is P 1,600,000, and the deficit in retained
earnings is P 900,000.
 The par value of the share is to be reduces from P 10 to P5.

Immediately, after the quasi-reorganization, what is the total shareholder’s equity?

a. P 3,300,000 c. P 3,900,000
b. P 3,500,000 d. P 3,700,000
e.
f. Explanation: Answer D
g.
h. To reduce the property, plant and equipment to sound value:
i. Retained Earnings P 4,500,000
j. Accumulated Depreciation P 4,500,000
k.
l. To reduce the par value of the share:
m. Share Capital (700,000X5) P 3,500,000
n. Share Premium P 3,500,000
o.
p. To eliminate the deficit:
q. Share Premium P 4,900,000
r. Retained Earnings P 4,900,000
s.
t. The inventory is not adjusted anymore because it is already recorded at its
market value. After adjustment, the resulting balances are:
u.
v. Share Capital P3,500,000
w. Share Premium 200,000
x.
y. Total Shareholder’s Equity P3,700,000
z.
4. On January 1, 2011, PAASA.COM Company classified as held for sale a noncurrent asset
with a carrying amount of P 5,000,000. On this date, the asset is expected to be sold for
P 4,600,000. Reasonable disposal cost to be incurred on sale is expected at P 200,000.
By December 31, 2011, the asset had not been sold and management after considering
its options decided to place back the noncurrent asset into operations. On that date, the
entity estimated that the noncurrent asset is expected to be sold at P 4,300,000 with
disposal cost of P 50,000. The carrying amount of the noncurrent asset is P 4,000,000 on
December 31, 2011 if the noncurrent asset is not classified as held for sale.
aa.
ab. What is the carrying amount of the asset that should be reported in the
Statement of Financial Position on December 31, 2011?
a. P 5,000,000 c. P 4,400,000
b. P 4,000,000 d. P 4,250,000
 e.
f. Explanation: Answer B
g.
h.
i. Carrying amount- December 31, 2011 P 4,000,000
j.
k. Fair value less cost to sell- December 31, 2011 P 4,250,000
l.
m. Under PFRS 5, paragraph 27, an entity shall measure a noncurrent asset that ceases
to be classified as held for sale at the lower of the carrying amount on the basis that
the asset had never been classified as held for sale, and its recoverable amount on
the date of decision not to sell.
n.
5. On January 1, 2009, the capital of console company was P1 700 000 and on December
31, 2009, the capital was P2 400 000. During the current year, console withdrew
merchandise costing P100 000 and with sales value of P180 000, and paid a P1 000 000
note payable of the business with interest of 12% for six months with check drawn on
personal checking account. What was the net income or lose on 2009?
o.

a. 260 000 income c. 180 000 income

b. 260 000 loss d. 180 000 loss

e.
f. Explanation: Answer B
g.
h. Capital – December 31 2 400 000
i. Add: withdrawals at cost 100 000
j. Total 2 500 000
k. Less: capital-January 1 1 700 000
l. Additional investment 1 060 000 2 760 000
m. Net loss (260 000)
n.

o. The additional investment is determined as follows:

p. Payment of note payable out of personal checking account 1 000 000

q. Interest (1 000 000 x 12% x 6/ 12) 60 000
r. Total 1 060 000
6. Aubrey Company provided the following data:
s. 12/31/2008
12/31/2009
t. Share capital (P100 par value) 5 000 000 7 000
000
u. Share premium 500 000 1 500
000
v. Retained earnings 3 500 000 4 500
000
w. During 2009, the entity declared and paid cash dividend of P1 000 000 and also
declared and issued a stock dividend. There were no other changes in shares issued
and outstanding during 2009. Net income for 2009 was?
x.
y. a.5 000 000 aa. c.1 000 000
z. b.2000 000 ab. d.4 000 000
ac.
ad.Explanation: ANSWER A
 ae.
af. Increase in share capital (7 000 000-5 000 000) 2 000 000
ag. Increase in share premium (1 500 000-500 000) 1 000 000
ah. Stock dividend 3 000 000
ai. Retained earnings-12/31/2009 4 500 000
aj. Stock dividend 3 000 000
ak. Cash dividend 1 000 000
al. Total 8 500 000
am. Retained earnings-12/31/2008 (3 500
000)
an. Net income 5 000 000
ao.
7. Presented below are changes in the accounts of Java Company for the current year.
ap. Increase
aq. (Decrease)
ar. Cash 1 500 000
as. Accounts receivable (net) 3 500 000
at. Inventory 3 900 000
au. Equipment (1 000 000)
av. Accounts payable (800 000)
aw. Bonds payable 2 000 000
ax. During the year, java sold P100 000 shares with P20 par value for P30 per share and
received cash in full. Dividend of P4 500 000was paid in cash during the year. Java
borrowed P4 000 000 from the bank and maid interest payment of P600 000. Java
had no other loan payable. Interest of P400 000 was payable at December 31.
Interest payable at January 1 was P100 000. Equipment of P2 000 000 was donated
by a shareholder during the year. What was the net income for the current year?
ay. a.9 200 000 ba. c.4 900 000
az. b.4 800 000 bb. d.4 300 000
bc.
bd.
be.Explanation: ANSWER C
bf. Effect on
equity
bg. Increase in cash 1 500 000
bh. Increase in A/R 3 500 000
bi. Increase in inventory 3 900 000
bj. Decrease in investment (1 000 000)
bk. Increase in equipment 3 000 000
bl. Decrease in A/P 800 000
bm. Increase in bonds payable (2 000
000)
bn. Increase in bank loan payable (4 000 000)
bo. Increase in accrued interest payable (300 000)
bp. Net increase in equity 5 400 000
bq. Add: dividend paid 4 500 000
br. Less: increase in share capital (3 000 000)
bs. Increase in donated capital (2 000 000)
bt. Net income 4 900 000
bu.

8. Oakwood Company provided the following data for the current year:
bv.
bw. Cash balance, beginning of the year 1,300,000
bx. Cash flow from financing activities 1,000,000
 by. Total shareholders’ equity, end of year 2,300,000
bz. Cash flow from operating activities 400,000
ca. Cash flow from investing activities (1,500,000)
cb. Total shareholders’ equity, beginning of year 2,000,000
cc.
cd. What is the cash balance at the end of current year?
ce.
a. 1,200,000 c. 1,400,000
b. 1,600,000 d. 1,700,000
cf.
cg. Explanation: ANSWER A
ch.
ci. Cash balance, beginning 1,300,000
cj. Cash flow from financing activities 1,000,000
ck. Cash flow from operating activities 400,000
cl. Cash flow from investing activities (1,500,000)
cm.
cn. Cash balance, ending P1,200,000
co.
9. Charade Company uses the direct method to prepare its statement of flows. Charade has
the following cash flow during 2011:
cp.
cq. Cash receipt from issuance of ordinary shares 800,000
cr. Cash receipt from customer 400,000
cs. Cash receipt from dividends on long term investment 60,000
ct. Cash receipt from repayment of loan made
cu. to another entity 440,000
cv. Cash payment for wages and other operating expenses 240,000
cw. Cash payment for insurance 20,000
cx. Cash payment for dividends 40,000
cy. Cash payment for taxes 80,000
cz. Cash payment to purchase land 160,000
da.
db. What is the net cash provided (used) from operating activities?
dc.
a. (40,000) c. 80,000
b. 60,000 d. 120,000
dd.
de.Explanation: ANSWER D
df.
dg. Cash receipt from customer 400,000
dh. Cash receipt from dividends 60,000
di.
dj. Total 460,000
dk. Less: cash payment for:
dl. Wages and other operating expenses 240,000
dm. Insurance
20,000
dn. Taxes 80,000
do. 340,000
dp. Net cash provided by operating activities P120,000
dq.
dr.
10. Pale Company uses the direct method to prepare its statement of cash flow.
ds.
 dt. Pale had the following cash flows during 2011:
du.
dv. Cash receipt from issuance of bonds 800,000
dw. Cash receipt from issuance of ordinary shares 1,400,000
dx. Cash receipt from customers 700,000
dy. Cash receipt from dividends on
dz. long term investment 105,000
ea. Cash receipt from repayment of loans made
eb. To another company 660,000
ec. Cash payment for wages and other
ed. operating expenses 420,000
ee. Cash payment for reacquisition of treasury shares 250,000
ef. Cash payments for dividends 70,000
eg. Cash payment for taxes 140,000
eh. Cash payment to purchase land 280,000
ei.
ej. What is the net cash provided (used) from financing activities?
ek.
a. 1,530,000 c. 1,880,000
b. 1,670,000 d. 1,950,000
el.
em.
en.Explanation: ANSWER C
eo.
ep. Cash receipt from issuance of bonds 800,000
eq. Cash receipt from issuance of ordinary shares 1,400,000
er. Total 2,200,000
es. Less: cash payment for:
et. Reacquisition of treasury shares 250,000
eu. Dividends 70,000 320,000
ev.
ew. Net cash provided from financing activities
P1,800,000

11. The electricity account of Velvet Company for the year ended June 30, 2015 was as the
following:
ex.
ey. Opening balances for the electricity accrual of July 1, 2014 P 30, 000
ez. Payments made during the year:
fa. 08/01/14- for three months to July 31, 2014 60, 000
fb. 11/01/14- for three months to October 31, 2014 72, 000
fc. 02/01/15- for three months to January 31, 2015 90, 000
fd. 06/30/15- for three months to April 30, 2015 84, 000
fe.

ff. What amount of electricity expense should Velvet Company report in its June 30,
2015 Statement of Comprehensive Income?

a. 306, 000 c. 332, 000

b. 324, 000 d. 342, 000

e.
f. Explanation: ANSWER C
g.
h. Total payment made P 306, 000
 i. Accrued electricity, end balance (84,000x2/3) 56, 000
j. Total P 362, 000
k. Accrued electricity, beginning balance 30, 000
l. Electricity Expense P 332, 000
m.

12. Mix Company, a toy retailer sells toy for P 100. A voucher entitling the bearer to a
discount of P50 on a subsequent purchase of the same type of toy is issued with each
sale. The retailer has a historical experience that for every two vouchers issued, one is
redeemed. Mix Company has sold 1, 000 toys and has 1, 000 vouchers as of December
31, 2014. Using the residual method of allocating the proceeds, what of amount revenue
from sale of toys should Mix Company report in its December 31, 2014 profit or loss?
n.
a. 25, 000 c. 75, 000
b. 50, 000 d. 100, 000
e.
f. Explanation: ANSWER C
g.
h. Residual Method:
i. Total Proceed (1,000x100) P 100, 000
j. Less: Fair Value of Vouchers (1,000x1/2x50) 25, 000
k. Fair Value of toys P 75, 000
l.
13. The accounts and balances shown below were gathered from Paynter Corporation's trial
balance on December 31, 2007. All adjusting entries have been made.
m.
n. Wages Payable ........................................... o. $
2
5
,
6
0
0
p. Cash .................................................... q. 1
7
,
7
0
0
r. Mortgage Payable ........................................ s. 1
5
1
,
6
0
0
t. Dividends Payable ....................................... u. 1
4
,
0
0
0
v. Prepaid Rent ............................................ w. 1
3
,
 6
0
0
x. Inventory ............................................... y. 8
1
,
8
0
0
z. Sinking Fund Assets ..................................... aa. 5
2
,
4
0
0
ab. Short-Term Investments .................................. ac. 1
5
,
2
0
0
ad. Premium on Bonds Payable ................................ ae. 4
,
6
0
0
af. Stock Investment in Subsidiary .......................... ag. 1
0
2
,
4
0
0
ah. Taxes Payable ........................................... ai. 2
2
,
8
0
0
aj. Accounts Payable ........................................ ak. 2
4
,
8
0
0
al. Accounts Receivable ..................................... am.
36,6
0
0
an.
ao. The amount that should be reported as current assets on Paynter Corporation's
balance sheet is
ap. a. $151,300. ar. c. $217,300.
aq. b. $164,900. as. d. $267,300.
at.
 au. ANS: B PTS:
av.

14. The December 31, 2007, balance sheet of Madden Inc., reported total assets of
$1,050,000 and total liabilities of $680,000. The following information relates to the year
2008:
aw.
ax. ay. Madden Inc. issued an additional 5,000 shares of common stock
at $25 per share on July 1, 2008.
az. ba. Madden Inc. paid dividends totaling $80,000.
bb. bc. Net income for 2008 was $110,000.
bd. be. No other changes occurred in stockholders' equity during 2008.
bf.
bg. The stockholders' equity section of the December 31, 2008, balance sheet would
report a balance of:
bh.
bi. a. $400,000. bk. c. $685,000.
bj. b. $525,000. bl. d. $835,000.
bm.
bn. ANS: B
bo.
15. The financial statements of Cresent Corporation for 204 and 2009 contained the
following errors:
bp.
bq. br. 2008 bs. 2009
bt. Ending bu. $14,000 bv. $20,000
Inventory overstated understated
bw. Rent Expense bx. $4,800 by. $6,600
understated overstated
bz.
ca. Assuming that none of the errors were detected or corrected, by what amount will
2008 operating income be overstated or understated?
cb. a. $9,200 overstated cd. c. $18,800 understated
cc. b. $9,200 understated ce. d. $18,800 overstated
cf.
cg. ANS: D
ch.
C. ACCOUNTING FOR ASSETS

1. On December 31, 2011, the cash account of Roel Company showed the following details:
ci.
cj. Undeposited collections
60,000
ck. Cash in bank – PCIB checking account
500,000
cl. Cash in bank – PNB (overdraft)
( 50,000)
cm. Undeposited NSF check receive from customer,
cn. dated December 1, 2011
15,000
co. Undeposited check from a customer, dated January 15, 2012
25,000
cp. Cash in bank – PCIB (fund for payroll)
150,000
 cq. Cash in bank – PCIB (saving deposit)
100,000
cr. Cash in bank –PCIB (money market instrument, 90 days)
2,000,000
cs. Cash in foreign bank (restricted)
100,000
ct. IOUs from officers
30,000
cu. Sinking fund cash
450,000
cv. Listed share held as trading investment
120,000
cw.
cx. On December 31, 2011, what total amount should be reported as “cash and cash
equivalents”?
cy.
a. 2,810,000 c. 2,910,000
b. 2,760,000 d. 2,930,000
e.
f. ANS: A
g.
h. Undeposited collections
60,000
i. PCIB checking account
500,000
j. PCIB payroll fund 150,000
k. PCIB saving deposit
100,000
l. PCIB money market
2,000,000
m. Total cash and cash equivalents
2,810,000
n.
2. The postdated customer check of P70,000 should be reverted to accounts receivable.
o. The outstanding check of P40,000 is deducted from the cash in Allied bank because
the cash balance is per bank statement.
 The bond sinking fund is shown as a noncurrent investment.
 The vouchers paid should be recorded as expenses.
 The IOUs should be shown as advance to employees.
p. Islander Company provided the following information with respect to its cash and
cash equivalents on December 31, 2011
q.
r. Checking account at First Bank
(200,000)
s. Checking account at Second Bank
3,500,000
t. Treasury bounds 1,000,000
u. Payroll account 500,000
v. Value added tax account
400,000
w. Foreign bank account – restricted (in equivalent pesos)
2,000,000
 x. Postage stamps 50,000
y. Employee’s postdated check
300,000
z. IOUs from president’s brother
300,000
aa. Credit memo from a vendor for a purchase return
80,000
ab. Traveler’s check 300,000
ac. Not – sufficient – fund check
150,000
ad. Petty cash fund (P20,000) in currency and expenses
ae. receipt for (P30,000) 50,000
af. money order 180,000
ag.
ah. What amount should be reported as unrestricted cash on December 31, 2011?
ai.
a. 4,800,000 c. 4,090,000
b. 4,900,000 d. 4,930,000
e.
f. ANS: B
g.
h. Solution:
i. Checking account at second bank
3,500,000
j. Payroll account 500,000
k. Value added tax account
400,000
l. Traveller’s check 300,000
m. Petty cash fund 20,000
n. Money order 180,000
o. Total unrestricted cash
4,900,000
p.

3. The following data pertain to the cash transactions and bank account of McBride
Company for May of the current year:
q.
r. Cash balance per accounting record
1,719,000
s. Cash balance per bank statement
3,195,000
t. Bank service charge 10,000
u. Debit memo for the cost of printed checks delivered
v. By the bank; the charge has not been recorded in
w. The accounting record 12,000
x. Outstanding checks 685,000
y. Deposit of May 30 not recorded by bank until June 1
500,000
z. Proceeds of a bank loan on May 30, not recorded in
aa. The accounting record, net of interest of P30,000
570,000
 ab. Proceeds from a customer’s promissory note, principal
ac. Amount P800,000 collected by the bank not taken
ad. Up in the accounting record with interest
810,000
ae. Check No. 1086 issued to a supplier entered in yhe
af. Accounting records as P210,000 but deducted in the
ag. Bank statement at an erroneous amount of
120,000
ah. Stolen check lacking an authorized signature deducted
ai. From Mcbride’s account by the bank in error 80,000
aj. Customer check returned by the bank marked NSF,
ak. Indicating that the customer’s balance was not
al. Adequate to cover the check; no entry has been
am. Made in the accounting record to record the
an. Returned check 77,000
ao.
ap. What is the adjusted cash in bank?
aq.
a. 2,820,000 c. 3,195,000
b. 3,200,000 d. 3,000,000
e.
f. ANS: D
g.
h. Solution:
i. Balance per book 1,719,000
j. Service charge ( 10,000)
k. Debit memo for printed checks ( 12,000)
l. Proceeds of bank loan 570,000
m. Proceeds of customer’s note 810,000
n. NSF check ( 77,000)
o.
p. Adjusted book balance 3,000,000
q.
r. Balance per bank 3,195,000
s. Outstanding checks ( 685,000)
t. Deposit in transit 500,000
u. Bank error in recording check ( 90,000)
v. Stolen check deducted by bank in error
80,000
w.
x. Adjusted bank balance
3,000,000
y.
4. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of
Delta's customers take advantage of the discount. Delta uses the gross method of recording
sales and trade receivables. An analysis of Delta's trade receivables balances at December
31, 1993, revealed the following:
z.
aa. Age Amount Collectible
ab. 0-15 days $100,000 100%
ac. 16-30 days 60,000 95%
ad. 31-60 days 5,000 90%
ae. Over 60 days 2,500 $500
af. $167,500
 ag. In its December 31, 1993, balance sheet, what amount should Delta report for
allowance for discounts?
ah. a. $1,000 aj. c. $1,675
ai. b. $1,620 ak. d. $2,000
al.
am. ANS: A
an.
ao. $1,000 allowance for discounts at 12/31/93.
ap.
aq. Accounts receivable - 0-15 days $100,000
ar. 50% of customers take 2% discount × 1%
as. Allowance for discounts at 12/31/93 $ 1,000
at.
5. Foster Co. adjusted its allowance for uncollectible accounts at year-end. The general ledger
balances for the accounts receivable and the related allowance account were $1,000,000
and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate its
allowance for uncollectible accounts. Accounts receivable were estimated to be 5%
uncollectible. What amount should Foster record as an adjustment to its allowance for
uncollectible accounts at year-end?
au. a. $10,000 decrease. aw. c. $50,000 decrease.
av. b. $10,000 increase. ax. d. $50,000 increase.
ay.
az. ANS: B
ba. Under the percentage-of-receivables method the ending balance in the allowance
account is equal to the total estimated uncollectible amount. Foster Co. would have a
balance of $50,000 ($1,000,000 x 5%) in its allowance for uncollectible accounts at
year end. Using the BASE format the adjustment would equal;
bb.
bc. Allowance for uncollectible accounts:
bd. Beginning balance (given) $40,000
be.Add expense (squeezed) 10,000
bf. Subtotal (added up) 50,000
bg. Subtract write offs (none given) 0
bh. Ending balance (calculated) $50,000
bi.
bj. JE for above:
bk.
bl. Bad debt expense $10,000
bm. Allowance for uncollectible accounts $10,000
bn.
6. On December 31, 2012, Chang Company sold a machine to Door Company in exchange for
noninterest bearing note requiring ten annual payment of P100,000. Door made the first
payment on December 31,2012The market interest rate for similar notes at date of issuance
was 8%. information on present value factor is :

bo. Period Present value of 1 at 8% Present value of ordinary annuity of 1at 8%

bp. 9 0.50 6.25
bq. 10 0.46 6.71
br.
bs. In its December 31,2012 statement of financial position, what amount should Chang
report as notes receivable?

a. 625,000 c. 460,000
b. 400,000 d. 671,000
 e. ANS: A

f. Present value of notes receivable (P100, 000 x 6.25) P625,

000

7. Appari Bank granted loan to a borrower on January 1, 2012. The interest rate on the loan is
10% payable annually starting December 31, 2012. The loan matures in five years on
December 31, 2016. The data related to the loan are:
g.
h. Principal amount 4,000,000
i. Direct origination cost 61,500
j. Origination fee received from borrower 350,000
k.

l. The effective rate on the loan after considering the direct

origination cost and origination fee received is 12%. What is the
carrying amount of the loan receivable on January 1, 2012?

a. 4,000,000 c. 4,411,500
b. 4,650,000 d. 3,711,500

e.
f. ANS: D
g.
h. Origination fee received
350,000
i. Direct origination cost
( 61,500)
j. Unearned interest income 288,500
k.
l. Note receivable 4,000,000
m. Unearned interest income ( 288,500)
n. Carrying amount-January 1,2012 3,711,500

8. Easy Company sells directly to retail customers. On Jan. 1, 2009, the balance of the account
receivable was P2,070,000 while the allowance for doubtful accounts was credit off P78,000.
The following data are gathered.
o.
p. Credit sales Writeoffs Recoveries
q. 2006 11,100,000 260,000 22,000
r. 2007 12,250,000 295,000 37,000
s. 2008 14,650,000 300,000 36,000
t. 2009 15,000,000 310,000 42,000
u.
v. Easy Company should record doubtful accounts expense for 2009 at:
w.
x. a. 268,000 z. c. 300,000
y. b. 310,000 aa. d. 222,000
ab.
ac. ANS: C
ad. Credit sales Writeoffs Recoveries
ae. 2006 11,100,000 260,000 22,000
af. 2007 12,250,000 295,000 37,000
 ag. 2008 14,650,000 300,000 36,000
ah. 38,000,000 855,000 95,000
ai.

9. During 1994, Kam Co. began offering its goods to selected retailers on a consignment basis.
The following information was derived from Kam's 1994 accounting records:
aj.
ak. Beginning inventory $122,000
al. Purchases 540,000
am. Freight in 10,000
an. Transportation to consignees 5,000
ao. Freight out 35,000
ap. Ending inventory-held by Kam 145,000
aq. Ending inventory-held by consignees 20,000
ar.
as. In its 1994 income statement, what amount should Kam report as cost of goods
sold?
at. a. $507,000 av. c. $527,000
au. b. $512,000 aw. d. $547,000
ax.
ay. ANS: B
az.
ba. Rule: Consignor must include consigned goods (in the hands of the consignee) in
his own inventory, at his cost plus warehousing costs of consignor before goods
are transferred to consignee plus shipping costs to consignee.
bb. Beginning inventory $ 122,000
bc. Add:
bd. Purchases 540,000
be. Freight in 10,000
bf. Transportation to consignees 5,000
bg. Cost of goods available for sale 677,000
bh. Less: ending inventory
bi. Held by Kam (145,000)
bj. Held by consignees (20,000)
bk. Cost of goods sold
$ 512,000

10. Moss Co. has determined its December 31, 1992, inventory on a FIFO basis to be $400,000.
Information pertaining to that inventory follows:
bl.
bm. Estimated selling price $408,000
bn. Estimated cost of disposal 20,000
bo. Normal profit margin 60,000
bp. Current replacement cost 360,000
bq. Moss records losses that result from applying the lower of cost or market rule. At
December 31, 1992, what should be the subsequent valuation of Moss'
inventory?
br. a. $400,000 bt. c. $360,000
bs. b. $388,000 bu. d. $328,000
bv.
bw. ANS: D
bx.
by. LOWER OF NRV OR COST PRINCIPLE.
bz.
ca. Cost (FIFO) $ 400,000
 cb. NRV:
cc.
cd. Est. Selling Price $408,000
ce. Less: Cost of Disposal (20,000)
cf. Floor: Net Selling Price (ceiling) 388,000
cg. Less: Normal profit margin (60,000)
ch.
328,000

11. A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's accounting
records showed the following:
ci.
cj. Inventory, January 1 $ 35,000
ck. Purchases, January 1 through May 1 200,000
cl. Sales, January 1 through May 1 250,000
cm. Inventory not damaged by flood 30,000
cn. Gross profit percentage on sales 40%
co. What amount of inventory was lost in the flood?
cp. a. $55,000 cr. c. $120,000
cq. b. $85,000 cs. d. $150,000
ct.
cu. ANS: A
cv.
cw. Choice "a" is correct. The amount of inventory lost in the flood is
calculated as follows: Inventory = Beg inventory + Purchases - Sales
reduced to a cost basis
cx. Inventory = $35,000 + $200,000 - ($250,000 x (1-.40)) = $235,000 -
$150,000 = $85,000: Inventory lost in the flood = $85,000 - $30,000 =
$55,000
cy.
cz. Choice "b" is incorrect. This answer is the total inventory, not the amount of
inventory lost in the flood. Choice "c" is incorrect. This answer is the sales
reduced to a cost basis minus the inventory not lost in the flood, not the amount
of inventory lost in the flood. Choice "d" is incorrect. This answer is the sales
reduced to a cost basis, not the amount of inventory lost in the flood.
da.
12. Gracia Comp. uses the lower of cost or net realizable value method to value inventory. Data
regarding the items in work in process inventory are presented below:
db.
dc. MARKERS PENS
HIGHLIGHTERS
dd. Historical cost 240,000 188,000 300,000
de. Selling price 360,000 250,000
360,000
df. Estimated cost to complete 48,000 50,000
68,000
dg. Replacement cost 208,000 168,000 318,000
dh. Normal profit margin as a
di. Percentage of selling price 25% 25% 10%
dj.
dk. What is the measurement of the work in process inventory?
a. 720,000 c. 676,000
b. 728,000 d. 694,000
e.
f. ANS: A
 g. HISTORICAL COST NRV SALE
h. Markers 240,000 312,000
240,000
i. Pens 188,000 200,000
188,000
j. Highlighters 300,000 292,000
292,000
k.
720,000
l. The measurement at the lower at cost or net realizable value shall be applied on an
individual basis or item by item.
m.
13. Aman Company provides the following data with respect to its inventory:

n. Items counted in the bodega

4,000,000
o. Items included in the count specifically segregated per sale contract
100,000
p. Items in receiving department, returned by
q. the customer, in good condition
50,000
r. Items ordered and in the receiving department, invoice not receive
400,000
s. Items ordered, invoice received but goods not received.
t. Freight is on account of seller
300,000
u. Items shipped today, invoice mailed, FOB shipping point
250,000
v. Items shipped today, invoice mailed, FOB destination
150,000
w. Items currently being used for window display
200,000
x. Items on counter for sale
800,000
y. Items in receiving department, refused by
z. Aman Company because of damage
180,000
aa. Items include in count, damage and unsalable
50,000
ab. Items in the shipping department
250,000
ac.
ad. What is the correct amount of inventory?
ae.
a. 5,700,000 c. 5,800,000
b. 6,000,000 d. 5,150,000
e.
f. ANS: A
g.
h. Items counted in the bodega
4,000,000
i. Items included in the count specifically segregated per sale contract
(100,000)
j. Items in receiving department, returned
 k. by the customer, in good condition
50,000
l. Items ordered and in the receiving department, invoice not receive
400,000
m. Items currently being used for window display
200,000
n. Items on counter for sale
800,000
o. Items include in count, damage and unsalable
(50,000)
p. Items in the shipping department
250,000
q.
5,700,000
14. Steven Company began operations in 2011. For the year ended December 31, 2011, Steven
made available the following information:
r.
s. Total merchandise purchases for the year 7,000,000
t. Merchandise inventory on December 31 1,400,000
u. Collection from customers 4,000,000
v.
w. All merchandise was marked to sell at 40% above cost. All sales are on a credit basis
and all receivables are collectible. What is the balance of accounts receivable on
December 31, 2011?
x. a. 1,000,000 z. c. 5,000,000
y. b. 3,840,000 aa. d. 5,800,000
ab.
ac. ANS: B
ad.
ae. Purchases 7,000,000
af. Inventory – December 31 (1,400,000)
ag. Cost of goods sold 5,600,000
ah. Markup on cost (40% × 5,600,000) 2,240,000

ai. Sales (140% × 5,600,000) 7,840,000

aj. Collections from customers (4,000,000)
ak. Accounts receivable 3,840,000
al.
15. Union Company uses the FIFO retail method of inventory valuation. The following
information is available:
am.
an. Cost Retail
ao. Beginning inventory 600,000 1,500,000
ap. Purchases 3,000,000 5,500,000
aq. Net additional markups 500,000
ar. Net markdown 1,000,000
as. Sales revenue 4,500,000
at.
au. What is the estimated cost of ending inventory?
 av. a. 1,200,000 ax. c. 1,000,000
aw. b. 1,040,000 ay. d. 960,000
az.
ba. ANS: A
bb. Cost Retail
bc. Beginning inventory 600,000 1,500,000
bd. Purchases 3,000,000 5,500,000
be. Net markups 500,000
bf. Net markdowns (1,000,000)
bg. Net purchases 3,000,000 5,000,000
bh. Cost ratio (3,000,000/5,000,000) 60%
bi. Goods available for sale 3,600,000 6,500,000
bj.
bk. Sales ( 4,500,000)
bl. Ending inventory 2,000,000
bm.
bn. FIFO cost (2,000,000 × 60%) 1,200,000

bo.
16. The following data pertains to Tyne Co.'s investments in marketable equity securities:
bp.
bq. Market value
br. Cost 12/31/X2
12/31/X1
bs. Trading $150,000 $155,000 $100,000
bt. Available-for-sale 150,000 130,000 120,000
bu.
bv. What amount should Tyne report as unrealized gain (loss) in its 20X2 income
statement?
bw. a. $55,000 by. c. $60,000
bx. b. $50,000 bz. d. $65,000
ca.
cb. ANS: A
cc.
cd. Choice "a" is correct, $55,000 unrealized holding gain on trading securities reported
in 1995 income statement:
ce. Trading Portfolio Fair Value
cf. 12/31/X2 $155,000
cg. 12/31/X1 (100,000)
ch. Unrealized gain, reflected in income $ 55,000
ci.
17. The following data pertains to Tyne Co.'s investments in marketable equity securities:
cj. Market value
ck. Cost 12/31/X2 12/31/X1
cl. Trading $150,000 $155,000 $100,000
cm. Available-for-sale 150,000 130,000
120,000
cn.
co. What amount should Tyne report as net unrealized loss on available-for-sale
marketable equity securities at December 31, 20X2, in accumulated other
comprehensive income on the balance sheet?
cp.
 cq. a. $0 cs. c. $15,000
cr. b. $10,000 ct. d. $20,000
cu.
cv. ANS: D
cw.
cx. Choice "d" is correct, $20,000 net unrealized loss on available-for-sale securities
reported as a separate component of other comprehensive income on the statement
of comprehensive income and as a separate component of accumulated other
comprehensive income on the balance sheet:
cy. Available-for-Sale Portfolio
cz. Cost $150,000
da. 12/31/X2 fair value (130,000)
db. Net unrealized loss at 12/31/X2 $ 20,000
dc.
18. At year-end, Rim Co. held several investments with the intent of selling them in the near
term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000,
and equity securities purchased for $35,000. At year-end, the bonds were selling on the
open market for $105,000 and the equity securities had a market value of $50,000. What
amount should Rim report as trading securities in its year-end balance sheet?
dd. a. $50,000 df. c. $142,000
de. b. $127,000 dg. d. $155,000
dh.
di. ANS: D
dj.
dk. Trading securities, both debt and equity, are to be reported at fair value at the end of
the current reporting period.
dl.
dm. Bonds FMV at year end $105,000
dn. Equities FMV at year end 50,000
do. Total reportable amount $155,000
dp.
19. Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 1993.
Grant's 30% interest in South gave Grant the ability to exercise significant influence over
South's operating and financial policies. During 1993, South earned $80,000 and paid
dividends of $50,000. South reported earnings of $100,000 for the six months ended June
30, 1994, and $200,000 for the year ended December 31, 1994. On July 1, 1994, Grant sold
half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1,
1994. In Grant's December 31, 1993, balance sheet, what should be the carrying amount of
this investment?
dq. a. $200,000 ds. c. $224,000
dr. b. $209,000 dt. d. $230,000
du.
dv. ANS: B
dw. Equity interest 100% × 30% = 30%
dx.
dy. Purchase price 1/2/93 $ 200,000
dz. Add: 1993 income 80,000 × 30% = 24,000
ea. Less: 1993 dividends
eb. 50,000 × 30% = (15,000)
ec. Balance at 12/31/93 209,000
ed. Add: 1994 income - 1/2 yr 100,000 × 30% = 30,000
ee. Balance at 6/30/94 239,000
ef. Percentage sold 50%
eg. Cost of half sold 119,500
eh. Selling price 150,000
 ei. Gain on sale $ 30,500
ej.

20. Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock.
Dubro's stock outstanding at December 31, 1993, is as follows:
ek.
el. 10% cumulative preferred stock $100,000
em. Common stock 700,000
en.
eo. Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred
shareholders for the year ended December 31, 1993. How much total revenue should
Moss record due to its investment in Dubro?
ep. a. $22,000 er. c. $70,000
eq. b. $20,000 es. d. $50,000
 et.
eu. ANS: A
ev. Since Moss owns 40% of Dubro's common stock, the equity method is appropriate.
ew. Preferred Stock:
ex. $100,000 x 10% = $10,000 dividends x 20% ownership = $2,000 dividends received
ey. Common Stock:
ez. net income $60,000
fa. less pref’d dividends (10,000)
fb. net income available to common shareholders 50,000
fc. Moss' percentage owned x 40% = $20,000 equity in earnings
fd.
fe. Choice "a" is correct, $20,000 from equity in earnings plus $2,000 from dividend
revenue.

21. Pear Co.'s income statement for the year ended December 31, 1992, as prepared by Pear's
controller, reported income before taxes of $125,000. The auditor questioned the following
amounts that had been included in income before taxes:
ff.
fg. Equity in earnings of Cinn Co. $ 40,000
fh. Dividends received from Cinn 8,000
fi. Adjustments to profits of prior years for arithmetical errors in depreciation
(35,000)
fj.
fk. Pear owns 40% of Cinn's common stock. Pear's December 31, 1992, income
statement should report income before taxes of:
fl. a. $85,000 fn. c. $120,000
fm. b. $117,000 fo. d. $152,000
fp.
fq. ANS: D
fr.
fs. The $40,000 equity in earnings of Cinn is properly included in income. Pear owns 40%
of Cinn and uses the equity method. Thus, equity in earnings is included in the
income statement while dividends received are not. The $35,000 is a prior period
adjustment and should be reported as an adjustment to the opening balance of
retained earnings, not on the current period income.
ft.
fu. Income as reported $ 125,000
fv. Dividends received (8,000)
fw. Prior period adjustment 35,000
fx. Income before taxes $ 152,000

22. In 1990, Neil Co. held the following investments in common stock:
fy. • 25,000 shares of B & K, Inc.'s 100,000 outstanding shares. Neil's level of ownership
gives it the ability to exercise significant influence over the financial and operating
policies of B & K.
fz. • 6,000 shares of Amal Corp.'s 309,000 outstanding shares.
ga.
gb. During 1990, Neil received the following distributions from its common stock
investments:
gc.
gd. November 6 − $30,000 cash dividend from B & K.
ge. November 11 − $1,500 cash dividend from Amal.
gf. December 26 − 3% common stock dividend from Amal.
gg.
gh. The closing price of this stock on a national exchange was $15 per share. What
amount of dividend revenue should Neil report for 1990?
gi. a. $1,500 gk. c. $31,500
gj. b. $4,200 gl. d. $34,200
gm.
gn. ANS: A
go.
gp. Choice "a" is correct, $1,500 dividend revenue should be reported for 1990,
representing the cash dividend from Amal. The $30,000 cash dividend from B & K is a
return of capital as is any dividend under the equity method, since the investment
account is reduced. The 3% stock dividend from Amal means more shares,
representing the same proportional piece of the pie. It is not income.
gq.
23. On January 1, 2011, Alaindog company purchased as a long-terminvestment P5,000,000 face
value of Gaspitoy company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10%
interest. The bonds mature on January 1, 2016 and pay interest annually on December 31.
Alaindog uses the interest method of amortization. What is the carrying amount of the investment
(rounded to nearest P100) on December 31, 2012?

a. 4,680,000 c. 4,618,000
b. 4,662,000 d. 4,562,000

e. ANS: A

f.

24. On January 1, 2011, Venus Company purchased 10% bonds with face value of P5,000,000
plus transaction cost of P101,500 with a yield rate of 8%. The bonds mature on December
31, 2015. And pay interest annually on December 31. The carrying amount of the
investment on December 31, 2011 using the effective interest method is P5,333,620. What
is the initial acquisition cost of the bond investment?

a. 5,401,500 c. 5,198,500
b. 5,300,000 d. 5,398,500

e. ANS: A

f. Carrying amount – December 31, 2011

5,333,620
g. Add: Nominal interest (5,000,000 x 10%)
500,000
h. Total
5,833,000
i. Divide by (100+8%)
108%
j. Total acquisition cost
5,401,500
k.

25. Cart Co. purchased an office building and the land on which it is located for $750,000 cash
and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at
$960,000, 60% of which is allocated to the building. At what amount should Cart record the
building?
l. a. $500,000 n. c. $600,000
m. b. $576,000 o. d. $960,000
p.
q. ANS: C
r.
s. The $1,000,000 total cost ($750,000 cash + $250,000 mortgage) should be allocated
to the building and the land separately. There is no other information with which to
perform this
t. allocation other than the property tax assessment. So, 60% of the $1,000,000, or
$600,000, is allocated to the building.
u.
v. Choice "a" is incorrect. This answer is the $750,000 cash price less the $250,000
mortgage.
w. Choice "b" is incorrect. This answer is computed as 60% of the assessed value of
$960,000. The cost that should be allocated is the total purchase price of the land
and building, not the assessed value.
 x. Choice "d" is incorrect. This answer is the assessed value. Even if the assessed value
were to be allocated, the full assessed value is not allocated to the building. The land
has to be worth something.
y.
26. Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related
to a newly constructed building. The depreciation was computed correctly for tax purposes.
The tax rate for the current year was 40%. What was the impact of the error on Miller's
financial statements for the prior year?
z.
aa. a. Understatement of accumulated depreciation of $24,000.
ab. b. Understatement of accumulated depreciation of $40,000.
ac. c. Understatement of depreciation expense of $24,000.
ad. d. Understatement of net income of $24,000.
ae.
af. ANS:B
ag.
ah. An understatement (failure to report) of depreciation (expense) would certainly
understate accumulated depreciation by the same amount, gross of tax. [Note that
three of the answers listed are net of tax and that only one of them is gross of tax.
Because there can be only one correct answer, an initial thought would be that the
"odd man out" answer is probably correct.
ai.
27. Oak Co., a newly formed corporation, incurred the following expenditures related to land and
building:
aj.
ak. County assessment for sewer lines $
2,500
al. Title search fees
625
am. Cash paid for land with a building to be demolished
135,000
an. Excavation for construction of basement
21,000
ao. Removal of old building $21,000 less salvage of $5,000
16,000
ap.
aq. At what amount should Oak record the land?
ar. a. $138,125 at. c. $154,125
as. b. $153,500 au. d. $175,625
av.
aw. ANS: C
ax.
ay. The cost of land includes all costs to acquire the land and get it ready for use:
az. Cash paid for land $135,000
ba. + Title search fees 625
bb. + County assessment 2,500
bc. + Removal of building 16,000
bd. Total cost of land $154,125

28. In January 1994, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law
to restore the land to its original condition at an estimated cost of $180,000. Vorst believes it
will be able to sell the property afterwards for $300,000. During 1994, Vorst incurred
$360,000 of development costs preparing the mine for production and removed and sold
60,000 tons of ore. In its 1994 income statement, what amount should Vorst report as
depletion?
be. a. $135,000 bg. c. $150,000
bf. b. $144,000 bh. d. $159,000
bi.
bj. ANS: B
bk.
bl. The depletion base equals the purchase price ($2,640,000) plus the development
costs ($360,000) plus the estimated restoration costs ($180,000) less the expected
salvage value ($300,000). Depletion is $2.40 per ton ($2,880,000 / 1,200,000 tons).
Depletion expense is $144,000 ($2.40 per ton × 60,000 tons sold).
bm.
29. Weir Co. uses straight-line depreciation for its property, plant, and equipment, which, stated
at cost, consisted of the following:
bn. 12/31/92 12/31/91
bo. Land $ 25,000 $ 25,000
bp. Buildings 195,000 195,000
bq. Machinery & equipment 695,000 650,000
br. 915,000 870,000
bs. Less accumulated depreciation 400,000 370,000
bt. $515,000 $500,000
bu. Weir's depreciation expense for 1992 and 1991 was $55,000 and $50,000,
respectively. What amount was debited to accumulated depreciation during 1992
because of property, plant, and equipment retirements?
bv. a. $40,000 bx. c. $20,000
bw. b. $25,000 by. d. $10,000
bz.
ca. ANS: B
cb.
cc. Debits to accumulated depreciation can be determined as follows:
cd. Balance 12/31/91 $370,000
ce. Depreciation for 1992 55,000
cf. Balance before retirements 425,000
cg. Balance 12/31/92 (after retirements) 400,000
ch. Debit for retirements $ 25,000

30. On January 1, 2012, Hamlet Company borrowed P6, 000, 000.00 at an annual interest rate of
10% to finance specifically the cost of building an electric generating plant. Construction
commenced on January 1, 2012 with a cost of 6, 000, 000.00. Not all the cash borrowed was
used immediately, so interest income of P80, 000.00 was generated by temporarily investing
some of the borrowed funds prior to use. The project was completed on November 30, 2012.
What is the carrying amount of the plant on November 30, 2012?
ci.
a. 6, 000, 000 c. 6, 520, 000
b. 6, 470, 000 d. 6, 550, 000
e.
f. ANS: B
g.
h. Construction Cost 6, 000, 000
i. Interest (6, 000, 000x10%x10/12) ( 200, 000)
j. 1, 800, 000
31. In 2004, Horton company purchased a tract of land as a possible future plant site. In January,
2012, valuable sulphur deposits were discovered on adjoining property and Horton company
immediately began explorations on its property. In December, 2012 after incurring P400, 000
in explorations costs, which were accumulated in an expense account, Horton discovered
sulphur deposits appraised at P2, 250, 000 more than the value of the land. To record the
discovery of the deposists, Horton should

a Make no entry.
b Debit P400,000 to an asset account
c Debit P2,250,000 to an asset account
d Debit P2,650,000 to an asset account
k. ANS: B

l. Discovery value is generally not recognized.

32. Cool Company owns an equipment costing P5,200,000 with original residual value of
P400,000. The life of the asset is 10 years and was depreciated using the straight line
method. The equipment has a replacement cost of P8,000,000 with residual value of
200,000. The age of the asset is 4 years. The appraisal of the equipment showed a total
revised useful life of 12 years and the entity decided to carry the equipment at revalued
amount. Ignoring the income tax, what amount should Cool Company initially report as
revaluation surplus:
a. 1,600,000 c. 1,680,000
b. 2,600,000 d. 6,680,000
e.
f. ANS: A
g. Cost Replacement Cost
Appreciation
 h. Equipment 5,200,000 8,000,000
2,800,000
i. Residual value ( 250,000) ( 200,000)
-
j.
k. Depreciable amount 5,000,000 7,800,000
2,800,000
l. Accumulated depreciation
m. (40% x 4,800,000) 1,920,000
n. (40% x 7,800,000) 3,120,000
1,200,000
o. Balance 3,080,000 4,680,000 1,600,000
p.
q.
r. Percentage of accumulated depreciation
s. (4 years expired / 20 years)
40%
t.
u. Subsequent annual depreciation (4,680,000/8 years)
585,000
v.
w. Revised useful life 12
years
x. Age of asset 4
y. Remaining revised life
8 years
z.

33. Gei Company determined that, due to obsolescence, equipment with an original cost of
P9,000,000 and accumulated depreciation on January 1, 2011, of P4,200,000 had
suffered permanent impairment, and as a result should have a carrying amount of only
P3,000,000 as of the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 8 years to 3. In its December 31, 2011 statement of
financial position, what amount should Gei report as accumulated depreciation?
a. 1,000,000 c. 6,000,000
b. 5,200,000 d. 7,000,000
e.
f. ANS: D
g.
h. Cost
9,000,000
i. Accumulated depreciation – January 1, 2011
4,200,000
j.
k. Carrying amount – January 1, 2011
4,800,000
l. Expected recoverable amount
3,000,000
m.
n. Impairment loss
1,800,000
o.
p. Impairment loss 1,800,000
q. Accumulated depreciation
1,800,000
r.
s. Adjusted accumulated depreciation,
t. January 1, 2011 (4,200,000 + 1,800,000)
6,000,000
u. Depreciation for 2011 (3,000,000/3)
1,000,000
v.
w. Accumulated depreciation – December 31, 2011
7,000,000
x.
34. On January 02, 2009. Wind company bought a trademark for P500,000. The remaining legal
life at the time of acquisition is 20 years. The company made a reasonable and reliable
 estimated that that this trademark will provide additional cash flows to the enterprise for an
indefinite period. During 2012, Wind company’s net cash flows related to the trademark
have been on a decreasing trend. A as a result of this, the company decided to evaluate the
trademark for possible impairment. On December 31, 2012, reliable estimate showed that
the present value of expected net cash inflows related to the trademark is P240,000. What
amount of impairment loss should the company recognize in 2012?

y. a. none aa. c. P260,000

z. b. P240,000 ab. d. P500,000
ac.
ad. ANS: C

ae. Historical cost of the asset P500,000

af. Fair value on December31, 2012 240,000
ag. Impairment Loss P260,000
ah.
35.Galaxy Company purchased a patent for P357,000 on January 2,2011. The
patent was being amortized over its remaining legal life of fifteen years expiring
on January 2, 2026. Early on January 2, 2014, Galaxy determined that the
economic benefits of the patent would not last longer than ten years from the
date of acquisition.
ai.
aj. What amount should be charged to patent amortization expense for the year
ended December 31, 2014?
a. 21,000 c. 40,800
b. 35,700 d. 71,400
e.
f. ANS: C
g.
h. Original cost P357,000
i. Less: Amortization from Jan.2, 2011 to Jan.2, 2014
j. (357,000 × 3/15) 71,400
k. Carrying value as of January 2, 2014
l. ÷ Remaining new life:
m. New life 10 years
n. Expired life-date of change from
o. Jan.2011 to Jan. 2014 3 years 7 years
p. Amortization expense per year starting
q. From the year of change P 40,800
r.
D. ACCOUNTING FOR LIABILITIES
s.

1. Tom Byers sells televisions with a 2-year warranty. Past experience indicates that 2% of the
units sold will be returned during the warranty period for repairs. The average cost of
repairs under warranty is estimated to be $50 per unit. During 2002, 6,000 units were sold
at an average price of $400. During the year, repairs were made on 35 units at a cost of
$2,000. Compute the amount of warranty expense.
a. 6,000 c. 8,000
b. 4,000 d. 0
e.
f. ANS: A
g. Estimated Warranty Liability 2,000
h. Repair Parts/Wages Payable 2,000
i. (To record cost of honoring 35 warranties)
j.
k. Warranty Expense 6,000
l. Estimated Warranty Liability 6,000
m. (To accrue estimated warranty costs on 120 warranty contracts)
n. Number of units sold 6,000
o. Estimated rate of defective units × 2%
p. Total estimated defective units 120
q. Average warranty repair costs $ 50
r. Estimated Warranty Expense $6,000
 s.
2. December 31st is a Friday. The employees of the company have been paid on Monday,
December 27th for the previous week which ended on Friday, December 24th. The company
employs 20 people who earn $100 per day and 10 people who earn $120 per day. All
employees work 5-day weeks. Based from the information given, compute the amount of
wages payable as of December 31.
a. 16,000 c. 15,000
b. 10,000 d. 6,000
e.
f. ANS: A
g.
h. Wages Expense 16,000
i. Wages Payable 16,000
j. 20 × $100 × 5 = $10,000
k. 10 × $120 × 5 = 6,000
l. $16,000
m.
3. Marr Company sells its products in reusable containers. The costumer is charged a deposit
for each container delivered and receives a refund for each container returned within two
years after the year of delivery. Marr accounts for the container not returned within the time
limit as being retired by sale at the deposit amount. Information for 2011 is as follows:
n. Container deposits at December 31, 2011 from delivers in:
o. 2009 150,000
p. 2010 430,000 580,000
q. Deposits for containers delivered in 2011 780,000
Deposits for containers returned in 2011 from deliveries in:
r. 2009 90,000
s. 2010 250,000
t. 2011 286,000 626,000
u.
v. In Marr’s December 31, 2011 statement of financial position, the liability for deposits
on returnable containers should be:

a. 734,000 c. 430,000
b. 674,000 d. 824,000

e.

f. ANS: B

g. Container deposits on December 31,2010

h. From deliveries in 2010 430,000

i. Deposits for containers delivered in 2011 780,000

j. Total 1,210,000

k. Less: deposits for container returned in 2011 from delivers in:

l. 2010 250,000
m. 2011 286,000 536,000
n. Liability for container deposits, December 31, 2011 674,000
o.
p. Containers deposits on December 31, 2011
q. From deliveries in 2009 150,000
r. Less: Deposits for containers returned in 2011
s. From deliveries in 2009 90,000
t. Expired and no longer refundable 60,000
u.

4. On September 1, 1988, Cobb Co. issued a note payable to National Bank in the amount of
$900,000, bearing interest at 12%, and payable in three equal annual principal payments of
$300,000. On this date, the bank's prime rate was 11%. The first payment for interest and
principal was made on September 1, 1989. At December 31, 1989, Cobb should record
accrued interest payable of:
a. 20,000 c. 24,000
b. 14,000 d. none
 e.
f. ANS: C
g.
h. $24,000 accrued interest payable at 12-31-89.
i. Original note amount at 9-1-88 $900,000
j. Principal payment on 9-1-89 (300,000)
k. Balance 600,000
l. Interest rate and time (12% 4/12) 4%
m. Accrued interest payable at 12-31-89 $ 24,000
n.
5. On August 1, 1991, Vann Corp.'s $500,000, one year, noninterest-bearing note due July
31,1992, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method
of amortizing bond discount. What amount should Vann report for notes payable in its
December 31, 1991, balance sheet?
o. a. $500,000 q. c. $468,500
p. b. $477,500 r. d. $446,000
s.
t. ANS: Choice "c" is correct. $468,500 carrying value of notes payable on the
December 31,1991, balance
u.
v. Face amount of note $500,000
w. Discount (500,000 10.8% 12/12) (54,000)
x. Proceeds at 8/1/91 when discounted 446,000
y. S.L. Amortization of discount for Aug 91 - Dec 91 ($54,000 5/12) 22,500
z. Carrying amount at 12/31/91 $468,500
aa.
6. Gar, Inc.'s trial balance reflected the following liability account balances at December 31,
1990:
ab.
ac. Accounts payable $19,000
ad. Bonds payable, due 1991 34,000
ae. Deferred income tax payable 4,000
af. Discount on bonds payable 2,000
ag. Dividends payable on 2/15/91 5,000
ah. Income tax payable 9,000
ai. Notes payable, due 1/19/92 6,000
aj. The deferred income tax payable is based on temporary differences that will reverse
in 1992 and 1993. In Gar's December 31, 1990, balance sheet, the current liabilities
total was:
ak. a. $71,000 am. c. $67,000
al. b. $69,000 an. d. $65,000
ao.
ap. ANS: Choice "d" is correct. $65,000 total current liabilities.
aq.
ar. The current liabilities consist of all payables due within one year.
as. Accounts payable $19,000
at. Bonds payable, due 1991 34,000
au. Discount on bonds payable (2,000) Tricky!!
av. Dividends payable, due 2/15/91 5,000 D
aw. Income tax payable 9,000
ax. Total current liabilities $65,000
ay. The "deferred income tax payable" of $4,000 is a separate "deferred category" on the
balance sheet, and is not considered a current item. The "notes payable" due 1/19/92
are due after one year and are considered a long-term liability.
az.
7. Howell Corporation purchased $400,000 of its bonds on June 30, 2002, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$367,200. The bonds pay semiannual interest and the interest payment due on June 30,
2002, has been made and recorded. How much is the gain or loss on redemption?
a. 40,800 loss c. 32,800 loss
b. 40,800 gain d. 32,800 gain
e.
f. ANS: A
g.
h. June 30 Bonds Payable 400,000
i. Loss on Redemption 40,800
j. Discount on Bonds Payable 32,800
 k. Cash 408,000
l. ($400,000 – $367,200 = $32,800)
m. ($400,000 × 102% = $408,000)
n.
8. On January 1,2011, Dome Company issued P4,000,000,8% serial bonds to be repaid in the
amount of P 800,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. Dome amortizes the bond discount by the interest method.
The bond proceeds totaled P 3,805,600 based on the present value on Jan. 1,2011 of five
annual payments as follows:
o. Due date Principal Interest PV at 1/1/2011
p. 12/31/2011 800,000 320,000 1,018,000
q. 12/31/2012 800,000 256,000 872,200
r. 12/31/2013 800,000 192,000 745,000
s. 12/31/2014 800,000 128,000 633,800
t. 12/31/2015 800,000 64,000 536,600
u.
v. In December 31,2011 statement of Financial Position, what should be reported as the
carrying amount of the bonds payable?
a. 3,200,000 c. 4,000,000
b. 3,606,160 d. 3,066,160
e.
f. AND: D
g.
h. Discount on bonds payable(Jan.1,2011) P194,400
i. Amortization for 2011 60,560

j. Discount on bonds payable(Dec.31,2011) 133,840

k. Bonds Payable 4,000,000
l. Annual Payment(Dec. 31,2011) (800,000)

m. Face Value-Dec.31,2011 3,200,000

n. Discount on bonds payable (133,840)
o. Carrying Amount-Dec.31,2011 P 3,066,160
p.
9. Brite Company is indebted to Scotch Company under a P1,000,000, 12%, three-year note
dated December 31,2011. Because of Brite’s financial difficulties developing in 2014, Brite
owed accrued interest of P120,000 on the note at December 31,2014. Scotch agreed to
settle the note and accrued interest for a tract of land having a fair market value of
P900,000. Brite’s acquisition cost of land is P950,000. Ignoring income taxes, in its 2014
profit or loss, how much should Brite report as gain or loss on debt extinguishment as a
result of the settlement using US GAAP?
a. 220,000 gain c. 220,000 loss
b. 50,000 loss d. 50,000 gain
e.
f. ANS: A
g.
h. Book value of liability
i. Face value P1,000,000
j. Accrued interest 120,000 P1,120,000
k. Less: Fair value of land 900,000
l. Gain on derecognition of liability P 220,000
m.
n. The gain on the extinguishment of debt would be recorded in the profit or loss under
the finance income, the loss on the disposal of the property would be charged
against operating profits. It would not be appropriate to show a net gain of P170,000
in finance income. The difference between the carrying amount of a financial liability
(or part of a financial liability) extinguished or transferred to another party and the
consideration paid, including any non-cash asset transferred or liabilities assumed,
shall be recognized in profit or loss (PAS 39 paragraph 41).
o.
p. Journal Entry:
q. Notes payable P1,000,000
r. Accrued interest payable 120,000
s. Loss on disposal of land 50,000
t. Land P950,000
u. Gain on extinguishment 220,000
v.
10. In 2011, Bunny Corporation acquired land by paying P300,000 and signing a note with a
maturity value of P4,000,000, on the note’s due date, December 31, 2011. Bunny owed
P320,000 of accrued interest and P4,000,000 principal on the note. Bunny was in financial
difficulty and was unable to make any payments. Bunny and the bank agreed to amend the
note as follows:
A. The P320,000 interest due on December 31, 2011 was forgiven.
B. The principal of the note was reduced by P200,000 and the maturity date was made
payable December 31, 2012.
C. Bunny would be required to make one interest payment totaling P342,000 on
December 31, 2012.
w.
x. On December 31, 2011, the prevailing rate of interest for a similar debt instrument is
9%.
y. As a result of the restructuring of debt, how much should Bunny report as gain,
before income taxes in its 2011 profit or loss?
a. 448,508 c. 463,805
b. 484,508 d. 0
e.
f. ANS: B
g.
h. Carrying value of liability:
i. Face value P4,000,000
j. Accrued interest 320,000 P4,320,000
k. Less: Restructured liability
l. New principal P3,800,000
m. Future interest 342,000
n. Total P4,142,000
o. X PV of 8% after 1 year .926 3,835,492
p. Gain on restructuring P 484,508
q.
r. Journal Entry:
s. Notes payable P 4,000,000
t. Accrued interest payable 320,000
u. Notes payable – new P 3,835,492
v. Gain on restructuring 484,508
w.

11. Millcroft Inc. computed a pretax financial income of $40,000 for the first year of its
operations ended December 31, 2008. Analysis of the tax and book basis of its liabilities
disclosed $360,000 in unearned rent revenue on the books that had been recognized as
taxable income in 2008 when the cash was received.
x.
y. The unearned rent is expected to be recognized on the books in the following pattern:
z.
aa. 2009 .................................................... ab. $
90,0
00
ac. 2010 .................................................... ad. 160,
000
ae. 2011 .................................................... af. 70,0
00
ag. 2012 .................................................... ah. 40,
000
ai. aj. $36
0,00
0
ak.
al. The enacted tax rates for this year and the next four years are as follows:
am.
an. 2008 .................................................... ao. 40
%
ap. 2009 .................................................... aq. 36
%
ar. 2010 .................................................... as. 33
%
at. 2011 .................................................... au. 30
%
 av. 2012 .................................................... aw. 32
%
ax.

ay. Compute the income tax payable and tax expense.

a. 160,000;41,000 c. 40,000;160,000
b. 160,000;160,000 d. 40,000;40,000

e.
f. ANS: A

g. (1) h. i. j. k. l.
m. n. Reversal Years
o. p. 20 q. 200 r. 201 s. 20 t. 20
08 9 0 11 12
u. Taxable v. x. z. ab. ad.
financial w. y. $ aa. $ ac. $ ae. $
income $4 0 0 0 0
0,
00
0
af. Temporary ag. ah. ai. aj. ak.
difference:
al. Unearned rent am. an. ao. ap. aq.
revenue 360,0
00
ar. Rent revenue as. at. au. (16 av. (7 aw. (4
earned 0 (90, 0,0 0,0 0,0
000 00) 00 00
) ) )
ax. Taxable income ay. $4 az. $(9 ba. $(1 bb. $( bc. $(
(loss) 00 0,0 60, 70, 40,
,0 00) 000 00 00
00 ) 0) 0)
bd. be. bf. bg. bh. bi.
bj. Enacted tax bk. 0. bl. 0.3 bm. bn. 0.3 bo. 0.3
rate 4 6 0.33 0 2
bp. Income taxes bq. 16 br. bs. bt. bu.
payable 0,
00
0
bv. Reversal of dta bw. bx. (32, by. (52, bz. (2 ca. (1
400 800 1,0 2,8
) ) 00 00
) )
cb. cc. cd. curr ce. non cf. no cg. no
ent curr nc nc
dta . urr urr
dta . .
dt dt
a a
ch.
ci. (2) cj. ck.
cl. Income Tax Expense......................... cm. cn.
41,000
co. Deferred Tax Asset--Current ............... cp. 32,4 cq.
00
cr. Deferred Tax Asset--Noncurrent ............ cs. 86,6 ct.
00
cu. IncomeTaxPayable................ cv. cw. 160,
000
cx. cy. cz.
da. (3) db. dc.
dd. 2008 Income Statement Presentation: de. df.
dg. Income from continuing operations before dh. di.
dj. income taxes ............................... dk. dl. $40,
 000
dm. Less income taxes: dn. do.
dp. Current provision ........................... dq. 160, dr.
000
ds. Deferred benefit ............................ dt. du.
119, 41,0
000 00
dv. Income from continuing operations ........... dw. dx. $(1,
000)
dy.
12. The 2014 tax return of Harmony Company indicates taxable income of P950,000, on which a
tax liability of P304,000 has been recognized (tax rate is 32%). The company is determining
the amount of its pretax financial income for 2014 by making adjustments to taxable income
from its 2014 income tax return. The list of items that may be required to determine taxable
financial income from the amount of taxable income follows: Accelerated depreciation for
income tax purposes was P335,000; straight line depreciation on these assets is p200,000.
The P112,500 goodwill impairment was excluded as a deduction in the tax return, but may
be deducted in the income statement. Several expenses were included in the income tax
return on an estimated basis. These items will be shown in the income statement at the
same amount but are subject to change if new information in the future indicates that the
original estimates were inaccurate. Interest on treasury bills was excluded in the tax return.
During the year, P61,750 was received on these investments. How should Harmony’s
taxable financial income?
a. 950,000 c. 1,085,000
b. 1,034,250 d. 1,285,000
e.
f. ANS: C
g. Financial
Taxation
h. Net income before timing & permanent
i. differences P1,285,000 P1,285,000
j. Timing differences depreciation ( 200,000)
( 335,000)
k. Net income before permanent differences P1,085,000
950,000
l. Permanent differences
m. Interest income 61,750
n. Goodwill impairment ( 112,500) __________
o. Reported net income P1,034,250 P
950,000
p.
13. Easter Company leased equipment to Faye Company on January 1, 2011. The lease is for an
eight-year period expiring December 31, 2018. The first of eight equal annual payments of
P900,000 was made on January 1, 2011. Easter had purchased the equipment on December
29, 2010 for P4,800,000. The lease is appropriately accounted for as a sales type lease by
Easter. The present value at January 1, 2011 of all rent payments over the lease term
discounted at a 10% interest rate was P5,280,000. What is the gross profit on sale for 2011?

a. 400,000 c. 380,000
b. 320,000 d. 480,000

e. ANS: D

f. Present value of rentals- sales revenue

5,280,000
g. Cost of sales
4,800,000
h. Gross profit on sale
480,000
i. Final answer: P480, 000
j.
14. On January 1, 2011, Gallant Company entered into a lease agreement with Blacksheep
Company or a machine which was carried on the accounting records of Gallant of
P2,000,000. Total payments under the lease which expires on December 31, 2020,
aggregate P3,550,800 of which P2,400,000 represents cost of the machine to Blacksheep.
 The interest rate of 10% which was stipulated in the lease is considered fair and adequate
compensation to Gallant for the use of its funds. Blacksheep expects the machine to have a
10year life, no residual value and be depreciated on a straight line basis. The lease is
conceived as sales type lease. What should be the total income before income tax derived
by Gallant from the lease for the year ended December 31, 2011?

a. 604,492 c. 204,492
b. 400,000 d. none

e. ANS: A

f. Present value of rentals

2,400,000
g. First payments on January 1, 2011 all
h. applicable to principal
355,080
i. Lease receivable- January 1, 2011
2,044,920
j. Interest income for 2011 (2,044,920x 10%)
204,492
k. Present value of rentals- cost to blacksheep (lessee)
2,400,000
l. Cost of asset to Gallant (lessor)
2,000,000
m. Gross profit on sale
400,000
n. Interest income for 2011
204,492
o. Total income of Gallant for 2011
604,492
p.
15. On January 1, 2003, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and
a remaining useful life of ten years, to Maco Drilling for $150,000. Hooks immediately leased
the equipment back under a ten-year capital lease with a present value of $150,000 and will
depreciate the equipment using the straight-line method. Hooks made vthe first annual
lease payment of $24,412 in December 2003. In Hooks’ December 31, 2003 balance sheet,
the unearned gain on equipment sale should be
q. a. $50,000 s. c. $25,588
r. b. $45,000 t. d. $0
 u.
v. ANS: B
w.
x. Sale-leaseback transactions are treated as though two transactions were a single
financing transaction, if the lease qualifies as a capital lease. Any gain on the sale is
deferred and amortized over the lease term (if possession reverts to the lessor) or the
economic life
y. (if ownership transfers to the lessee); both are ten years in this case. Since this is a
capital lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/03.
At 12/31/03, an adjusting entry must be prepared to amortize 1/10 of the unearned
gain (1/10 x $50,000 = $5,000), because the lease covers ten years. Therefore, the
unearned gain at 12/31/03 is $45,000 ($50,000 – $5,000).
z.
E. ACCOUNTING FOR STOCKHOLDERS’ EQUITY

1. The corporate charter of Gordon Corporation allows the issuance of a maximum of 2,000,000
shares of $1 par value common stock. During its first three years of operation, Gordon
issued 1,200,000 shares at $15 per share. It later acquired 30,000 of these shares as
treasury stock for $20 per share.
aa. Based on the above information, answer the following questions:
ab. (a) How many shares were authorized?
ac. (b) How many shares were issued?
ad. (c) How many shares are outstanding?
ae. (d) What is the balance of the Common Stock account?
af. (e) What is the balance of the Treasury Stock account?
ag.
ah.ANSWERS:
ai.
aj. (a) 2,000,000 shares are authorized.
ak. (b) 1,200,000 shares were issued.
al. (c) 1,170,000 shares are outstanding (1,200,000 issued less 30,000 in treasury).
am. (d) The balance of the Common Stock account is $1,200,000 ($1 ×
1,200,000 shares = $1,200,000).
an. (e) The balance of the Treasury Stock account is $600,000 ($20 × 30,000 shares
= $600,000).
ao. 2. The N Corporation is authorized to issue 100,000 ordinary shares, P17 par value.
At the beginning of 2010, 18,000 ordinary shares were issued and outstanding.
These shares had been issued at P24. During 2010, the company entered into the
following transactions:
ap. Jan. 16 - Issued 1,300 ordinary shares at P25 per share.
aq. Mar. 21 - Exchanged 12,000 ordinary shares for a building. The ordinary shares were
selling at P27 per share.
ar. May 7 - Reacquired 500 ordinary shares at P26 per share to be held in treasury.
as. July 1 - Accepted subscriptions to 1,000 ordinary shares at P28 per share. The
contract called for 10% down payment with the balance due on December 1.
at. Sept. 20 - Sold 500 treasury shares at P29 per share.
au. Dec. 1 - Collected the balance due on July 1 subscriptions and issued the shares.
av.
aw. Total contributed capital for December 31, 2010 is:
ax. a. P615,000 c. P613,500
ay. b. P818,000 d. P816,500
az.
ba.ANS: B:
bb. Contributed capital, 1/1
bc. (18,000 x P24) P432,000
bd. January 16 (1,300 x P25) 32,500
be. March 21 (12,000 x P27) 324,000
bf. May 7 -
bg. July1/Dec. 1 (1,000 x P28) 28,000
bh. Sept. 20 [500 x (P29-P26)] 1,500
bi. Contributed capital, 12/31 P818,000
bj.
3. Cerritos Corporation began operations on January 1, 2007. During its first three years of
operations, Cerritos reported net income and declared dividends as follows:
bk.
bl. bm. bn. Dividends
Net declared
 inco
me
bo. 200 bp. P bq. P 0
7 80,
000
br. 200 bs. 250 bt. 100,000
8 ,00
0
bu. 200 bv. 300 bw. 100,000
9 ,00
0
bx.
by.
bz. The following information related to 2010:
ca.
cb. Income before income tax cc. P480,0
00
cd. Prior period adjustment: understatement of ce.
2008 depreciation expense (before taxes) cf.
cg. 40,000
ch. Cumulative decrease in income from change ci.
in inventory methods (before taxes) cj.
ck. 70,000
cl. Dividends declared (of this amount, P50,000 cm.
will be paid on January 15, 2011) cn.
co. 200,00
0
cp. Effective tax rate cq. 35%
cr.
cs. As at December 31, 2010, the retained earnings of Cerritos Corporation is:
ct. a. P520,500 c. P430,000
cu. b. P484,500 d. P470,500
cv.
cw. ANS: D
cx.
cy. Net income (2007-2009) P630,000
cz. Dividends declared (2007-2009) (200,000)
da. Retained earnings, 12/31/09 430,000
db. Net income – 2010
dc. (P480,000 x .65) 312,000
dd. Prior period error
de. (P40,000 x .65) ( 26,000)
df. Change in policy effect
dg. (P70,000 x .65) ( 45,500)
dh. Dividends declared-2010 ( 200,000)
di. Retained earnings, 12/31/10 P470,500
dj.
4. At December 31, 2010, the equity accounts of Batch Corporation were as follows:
dk.
dl. Preference share capital (P100 par, 12% participating and dm.
cumulative, 100,000 shares)
dn.
do. P10,
000,
000
dp. Preference share capital (P100 par, 10% nonparticipating, dq.
noncumulative, 50,000 shares) dr.
ds.
5,00
0,00
0
dt. Ordinary share capital (P10 par, 1,000,000 shares) du.
dv. 10,0
00,0
00
dw. Retained earnings dx. 9,50
0,00
 0
dy.
dz. Batch has never paid cash or share dividend. The capital accounts have not changed
since Batch began operations on January 1, 2006. If the maximum amount available
for cash dividend is declared on December 31, 2010, how much dividend is payable
to the ordinary shareholders?
ea. a. P2,100,000 c. P1,200,000
eb. b. P1,920,000 d. P4,500,000
ec.
ed. ANS: A
ee.
ef. eg. 1 eh. 1 ei. O ej. Total
2 0 S
% %
P P
S S
ek. Basic el. 6 em. en. 1 eo. 7.7M
M .5M .
2
M
ep. Particip eq. er. es. . et. 1.8M
ation 9
M
eu. Total ev. ew. ex. 2 ey. 9.5M
.
1
M
5. Maria Lourdes, controller at Garcia Pharmaceutical Industries, a public company, is currently
preparing the calculation for basic and diluted earnings per share and the related disclosure
for Garcia's external financial statements. Below is selected financial information for the
year ended December 31, 2010.
EZ.
fa. Long-term debt FB.
fc. Notes payable, 10% fd. P
1,00
0,00
0
fe. 7% convertible bonds ff. 5,00
payable 0,00
0
fg. 10% bonds payable FH. 6,0
00,0
00
fi. Total long-term debt FJ. P12,
000,
000
fk. Shareholders' equity fl.
fm. Preference share capital, fn.
8.5% cumulative, P50 par fo.
value, 100,000 shares fp.
authorized, 25,000 shares fq.
issued and outstanding fr. P
1,25
0,00
0
fs. Ordinary share capital, P1 ft.
par, 2,000,000 shares fu.
authorized, 1,000,000 fv.
shares issued and fw. 1,00
outstanding 0,00
0
fx. Share premium fy. 4,00
0,00
0
 fz. Retained earnings ga. 6,0
00,0
00
gb. Total shareholders' equity gc. P12,
250,
000
gd.
ge. The following transactions have also occurred at Garcia.
A. Options were granted in 2008 to purchase 100,000 shares at P15 per share.
Although no options were exercised during 2010, the average price per ordinary
share during year 2010 was P20 per share. The market price per ordinary share on
December 31, 2010 was P25.
B. Each bond was issued at face value. The 7% convertible debenture will convert into
50 ordinary shares per P1,000 bond. It is exercisable after 5 years and was issued in
2009.
C. The 8.5% preference shares were issued in 2008.
D. No preference share dividends were declared in 2009 and 2010.
E. The 1,000,000 ordinary shares were outstanding for the during 2010.
F. Profit for the year 2010 was P1,500,000, and the average income tax rate is 40%.
gf.
gg. For the year ended December 31, 2010, calculate the diluted earnings per share for
Garcia Pharmaceutical Industries.
gh. a. P1.37 c. P1.26
gi. b. P1.32 d. P1.24
gj.
gk. ANS: C
gl. gm. gn. WA Outs. OS go. EPS
Profit to
OS
gp. Basic gq. P1,393 gr. 1,000,000 gs. P1.39
,750
gt. Exercise of gv. gx. gz.
gu. options gw. gy. 25,000
-
ha. hb. 1,393, hc. 1,025,000 hd. 1.36
750
he. Bond hg. 210, hh. 250,000 hi.
hf. conversion 000
hj. hk. 1,603, hl. 1,275,000 hm. 1.
750 26

6. Younger Corporation has the following stockholders' equity accounts on January 1, 2002:
hn.
ho. Common Stock, $10 par value $1,500,000
hp. Paid-in Capital in Excess of Par 200,000
hq. Retained Earnings 500,000
hr. Total Stockholders' Equity $2,200,000
hs.
ht. The company uses the cost method to account for treasury stock transactions. During
2002, the following treasury stock transactions occurred:
hu. April 1 Purchased 6,000 shares at $14 per share.
hv. August 1 Sold 2,000 shares at $18 per share.
hw. October 1 Sold 2,000 shares at $13 per share.
hx.
hy. Instructions
hz. (a) Journalize the treasury stock transactions for 2002.
ia. (b) Prepare the Stockholders' Equity section of the balance sheet for Younger
Corporation at December 31, 2002. Assume net income was $80,000 for 2002.
ib.
ic. ANSWERS:
id.
ie. (a) Apr. 1 Treasury Stock 84,000
if. Cash 84,000
ig. (To record purchase of treasury stock)
 ih.
ii. Aug. 1 Cash 36,000
ij. Treasury Stock (2,000 × $14) 28,000
ik. Paid-in Capital from Treasury Stock (2,000 × $4)
8,000
il. (To record sale of treasury stock)
im.
in. Oct. 1 Cash 26,000
io. Paid-in Capital from Treasury Stock (2,000 × $1) 2,000
ip. Treasury Stock (2,000 × $14) 28,000
iq. (To record sale of treasury stock)
ir.
is. (b) Stockholders' equity
it. Paid-in capital
iu. Capital Stock
iv. Common stock, $10 par $1,500,000
iw. Additional paid-in capital
ix. In excess of par value $200,000
iy. From treasury stock 3,000 203,000
iz. Total paid-in capital 1,703,000
ja. Retained earnings ($500,000 + $80,000) 580,000
jb. Total paid-in capital and retained earnings
2,283,000
jc. Less: Treasury stock (2,000 shares) (28,000)
jd. Total stockholders' equity
$2,255,000
je.
7. An inexperienced accountant for Lane Corporation made the following entries.
jf.
jg. July 1 Cash 180,000
jh. Common Stock 180,000
ji. (Issued 12,000 shares of no-par common stock,
jj. stated value $10 per share)
jk.
jl. Sept. 1 Common Stock 45,000
jm. Retained Earnings 9,000
jn. Cash 54,000
jo. (Purchased 3,000 shares issued on July 1 for the
jp. treasury at $18 per share)
jq.
jr. Dec. 1 Cash 20,000
js. Common Stock 15,000
jt. Gain on Sale of Stock 5,000
ju. (Sold 1,000 shares of the treasury stock at $20 per
jv. share)
jw.
jx. Instructions
jy. (a) On the basis of the explanation for each entry, prepare the entry that should
have been made for the transactions. (Omit explanations.)
jz. (b) Prepare the correcting entries that should be made to correct the accounts of
Lane Corporation. (Do not reverse the original entry.)
ka.
kb.ANSWERS:
kc.
kd. (a) July 1 Cash 180,000
ke. Common Stock 120,000
kf. Paid-in Capital in Excess of Stated Value
60,000
kg.
kh. Sept. 1 Treasury Stock 54,000
ki. Cash 54,000
kj.
kk. Dec. 1 Cash 20,000
kl. Treasury Stock 18,000
km. Paid-in Capital from Treasury Stock
2,000
kn.
 ko. (b) July 1 Common Stock 60,000
kp. Paid-in Capital in Excess of Stated Value
60,000
kq.
kr. Sept. 1 Treasury Stock 54,000
ks. Common Stock 45,000
kt. Retained Earnings 9,000
ku.
kv. Dec. 1 Common Stock 15,000
kw. Gain on Sale of Stock 5,000
kx. Treasury Stock 18,000
ky. Paid-in Capital from Treasury Stock 2,000
kz.

8. The stockholders' equity section of Dole Corporation at December 31, 2001, included the
following:
la.
lb. 6% preferred stock, $100 par value, cumulative,
lc. 10,000 shares authorized, 8,000 shares issued and outstanding $ 800,000
ld.
le. Common stock, $10 par value, 250,000 shares authorized,
lf. 200,000 shares issued and outstanding $2,000,000
lg.
lh. Dividends were not declared on the preferred stock in 2001 and are in arrears. On
September 15, 2002, the board of directors of Dole Corporation declared dividends
on the preferred stock for 2001 and 2002, to stockholders of record on October 1,
2002, payable on October 15, 2002. On November 1, 2002, the board of directors
declared a $1.00 per share dividend on the common stock, payable November 30,
2002, to stockholders of record on November 15, 2002.
li.
lj. Instructions
lk. Prepare the journal entries that should be made by Dole Corporation on the dates
indicated below:
ll. September 15, 2002 November 1, 2002
lm. October 1, 2002 November 15, 2002
ln. October 15, 2002 November 30, 2002
lo.
lp. ANSWERS:
lq.
lr. 9/15/02 Retained Earnings 96,000
ls. Preferred Dividends Payable 96,000
lt. (To record declaration of dividends in arrears and
lu. the current year's preferred dividend)
lv.
lw. 10/1/02 (No entry required.)
lx.
ly. 10/15/02 Preferred Dividends Payable 96,000
lz. Cash 96,000
ma. (To record payment of cash preferred dividend)
mb.
mc. 11/1/02 Retained Earnings 200,000
md. Common Dividends Payable 200,000
me. (To record declaration of cash dividend on common
mf. stock)
mg.
mh. 11/15/02 (No entry required.)
mi.
mj. 11/30/02 Common Dividends Payable 200,000
mk. Cash 200,000
ml. (To record payment of common cash dividends)
mm.

mn.
mo.