AFAR Exercises (Problems)

EXERCISES ADVANCED FINANCIAL ACCOUNTING AND REPORTING (Problems) Number 1 On January 1, 2017, Toni, Abbie and JM entered into articles of co-partnership for the operation of TAJ computer shop. Toni contributed investment property with assessed value of P1,700,000 subject to mortgage payable of P500,000 to be assumed by the partnership. Abbie contributed computer equipment with cost of P600,000 with accumulated depreciation of P200,000. The fair market value of the computer equipment is P300,000. On January 2, 2017, the partnership was able to sell the investment property for P2,000,000. How much cash shall be contributed by JM if the articles of co-partnership provide that Toni will have 60% interest in the partnership? a. b. c. d.

500,000 700,000 800,000 600,000

Number 2 On January 1, 2017, Yazzi, Angel and Nadine organized YAN partnership by investing P5M, 2M and P3M for capital interest ratio of 4:5:1 respectively. Nadine has been appointed as managing partner. During year 2017, YAN partnership reported net income of P3,000,000. Their profit/loss distribution and drawing agreement are presented below:     

20% interest on beginning capital P10,000, P20,000 and P50,000 monthly salary, respectively 25% bonus of net income after interest and salary to managing partner The remainder will be divided equally among the partners. The partners must withdraw at the end of the year 50% of their share in net income for the period.

What is the capital balance of Nadine on December 31, 2017? a. b. c. d.

1,410,000 3,410,000 1,610,000 3,610,000

Number 3 On December 31, 2017, the capital balance of partners Cristy, Paula and Ara of CPA Partnership are P1M, P3M and P6M, respectively with profit or loss agreement ratio of 4:1:5. On January 1, 2018, Cristy decided to retire and received P400,000 from the partnership. If the assets of the partnership are not properly valued at the time of retirement, how much is the capital balance of Paula after the retirement of Cristy? a. b. c. d.

2,900,000 2,850,000 3,100,000 3,150,000

Page 2 Numbers 4 and 5 On December 31, 2017, the Statement of Financial Position of DEF with profit or loss ratio of 4:1:5 is presented below: Cash Noncash asset

2M 8M

Liability to third person D, capital E, capital F, capital

4M 3.5M 1.5M 1M

On January 31, 2018, DEF partnership has been subjected to installment liquidation. As of January 31, 2018, the following data concerning liquidation are provided:    

Noncash asset with book value of P6M has been sold at a loss of P2M. Liquidation expense amounting to P400,000 has been incurred for the month of January. P600,000 cash has been withheld for future liquidation expense. P3M liability has been paid.

4. What is F’s share in the maximum possible loss on January 31, 2018? a. 1,300,000 b. 1,000,000 c. 1,500,000 d. 500,000 5. What is the amount received by E on January 31, 2018? a. 300,000 b. 700,000 c. 1,000,000 d. 0 Numbers 6 and 7 During the liquidation, the sale of all the assets of liquidated corporation resulted to net proceeds of P1,000,000. Liquidation expense amounting to P60,000 has been paid at the start of liquidation from the net proceeds of disposal of all assets. Before the liquidation, the following data are provided concerning the financial position of the said financially distressed corporation:  The corporation has total assets with book value of P2,000,000 and deficiency amounting to P340,000.  An investment property with book value of P500,000 and realizable value of P300,000 secured a loan payable amounting to P100,000.  Inventory with book value of P1,000,000 and realizable value of P100,000 secured a note payable amounting to P200,000.  Salaries payable and income tax payable amounted to P100,000 and 40,000, respectively. 6. What is the amount received by partially secured creditor? a. b. c. d.

100,000 120,000 140,000 130,000

7. What is the amount received by pure unsecured creditors without priority? a. b. c. d.

600,000 570,000 700,000 800,000

Page 3 Numbers 8, 9, 10 and 11 On January 1, 2017, Ayala Inc. and SM Inc. established MRT7 Inc. for the operation of mass train transportation in Metro Manila. . The contractual arrangement between Ayala and SM provides that the relevant activities of Create Inc. will require unanimous vote of the said parties. The incorporated entity will have ownership over the assets of the operation and will answer for the liabilities of the said operation. The parties will only have right to the net assets of the operation. Ayala Inc. and SM Inc. invested P100M and P150M, respectively, for 40:60 interest in the said established corporation. The financial statements of MRT7 Inc. for the 3 years of operation provided for the following data: Year 2017 2018 2019

Net income/(Net loss) 50,000,000 (300,000,000) 400,000,000

Dividends declared 10,000,000 50,000,000

On December 31, 2019, fair value less cost of disposal of the Investment by Ayala and Investment by SM is determined to be P130,000,000 and P205,000,000 respectively. 8. What is the carrying amount of Investment to be reported by SM Inc. on December 31, 2017? a. b. c. d.

180,000,000 174,000,000 144,000,000 150,000,000

9. What is the investment loss to be reported by Ayala Inc. for the year ended December 31, 2018? a. b. c. d.

120,000,000 116,000,000 124,000,000 100,000,000

10. What is the carrying amount of Investment to be reported by Ayala Inc. on December 31, 2019? a. b. c. d.

130,000,000 136,000,000 140,000,000 120,000,000

11. What is the carrying amount of Investment to be reported by SM Inc. on December 31, 2019? a. b. c. d.

210,000,000 204,000,000 205,000,000 208,000,000

Page 4 Numbers 12, 13, 14 and 15

On January 1, 2017, PKI Inc., a small and medium enterprise, invested P1M in a jointly controlled entity named LIMA Inc. and incurred transaction cost of P100,000. PKI Inc. owned 50% interest in the said corporation. For the year ended December 31, 2017, LIMA Inc. reported net income in the amount of P500,000 and declared dividends in the amount of P200,000. On December 31, 2017, PKI determined that the fair value of its Investment in Lima is P1,500,000. The cost to sell is 20% of the fair value. The value in use of the investment cannot be determined reliably. 12. What is the carrying amount of the Investment on December 31, 2017 to be reported by PKI Inc. under the fair value model? a. b. c. d.

1,500,000 1,200,000 1,100,000 1,500,000

13. What is the carrying amount of the investment on December 31, 2017 under the cost model? a. b. c. d.

1,100,000 1,500,000 1,200,000 1,100,000

14. What is the carrying amount of the investment on December 31, 2017 under the equity method? a. b. c. d.

1,200,000 1,100,000 1,500,000 1,250,000

15. What is the net effect on earnings of PKI Inc. in relation to this investment for the year ended December 31, 2017 under the cost model? a. b. c. d.

100,000 increase 200,000 increase 300,000 increase 250,000 increase

Page 5 Numbers 16, 17, 18 and 19

On January 1, 2017, MDC Inc. entered into a long-term construction contract for the erection of a building at a contract price of P100M. Because of changes in the design of the project, the price increased by P20M on January 1, 2019 The project is completed on December 31, 2020. The following additional data are provided:  Mobilization fee equivalent to 3% of original contract price must be made by the client deductible on the first billing. Billings on the project are made 12%, 20%, 30% of the contract price, respectively, for the first three years of the project.  MDC made cash collection from the customer amounting to P10M and P30M for year 2018 and 2019.  The cost incurred in 2017 is P10M while the estimated cost to complete at the end of 2017 is P40M.  The cumulative cost incurred for 2018 is P70M with percentage of completion of 50% as of the end of 2019.  The cost incurred for 2018 is 20M with percentage of completion of 90% as of the end of 2019. 16. What is the excess of construction in progress over progress billings (excess of progress billings over construction in progress) on December 31, 2017 under the following models? Percentage of completion a. b. c. d.

8,000,000 11,000,000 5,000,000 6,000,000

Cost recovery (2,000,000) 1,000,000 (3,000,000) 0

17. What is the realized gross profit (loss) for the year ended December 31, 2018 under the following models? a. b. c. d.

Percentage of completion

Cost recovery

50,000,000 50,000,000 40,000,000 10,000,000

(40,000,000) (50,000,000) (40,000,000) 0

18. What is the balance of construction in progress under the following models on December 31, 2019? Percentage of completion a. b. c. d.

108,000,000 90,000,000 100,000,000 120,000,000

Cost recovery 90,000,000 100,000,000 98,000,000 100,000,000

19. What is the amount of accounts receivable to be reported by MDC on December 31, 2019? a. b. c. d.

15,000,000 28,000,000 25,000,000 18,000,000 Page 6

Numbers 20, 21, 22 and 23 On January 1, 2017, Red Cross Inc., a non-profit organization, received P10M cash donation from Richy Rich who stipulated that the amount should be invested indefinitely in revenue producing investment. The deed of donation also provides that the dividend income shall be used for the acquisition of computers of the NPO. On December 31, 2017, Red Cross Inc. received P200,000 cash as dividend income from the investment of the fund. On January 1, 2018, Red Cross Inc. acquired a personal computer at a cost of P50,000 with a useful life of 5 years without residual value. 20. How shall the transactions be reported in NPO’s Statement of Activities for the year ended December 31, 2017? a. There shall be increase in unrestricted net asset by P50,000. b. There shall be decrease in temporary restricted net asset by P200,000. c. There shall be increase in permanently restricted net asset by P10M and increase in temporary restricted net asset by P200,000. d. There shall be increase in unrestricted net asset by P10,200,000. 21. How shall the transactions be reported in NPO’s Statement of Activities for the year ended December 31, 2018? a. There shall be increase in unrestricted net asset by P50,000. b. There shall be decrease in temporary restricted net asset by P200,000. c. There shall be decrease in temporary restricted net asset by P50,000 and increase in unrestricted net asset by P40,000. d. There shall be no effect in total net asset. 22. How shall the cash flows be reported in NPO’s Statement of Cash Flows for the year ended December 31, 2017? a. b. c. d.

Cash receipts from operating activities by P200,000. Cash receipts from financing activities by P10,200,000. Cash disbursements for investing activities by P50,000. Cash disbursements for financing activities by P10,000,000.

23. How shall the cash flows be reported in NPO’s Statement of Cash Flows for the year ended December 31, 2017? a. b. c. d.

Cash receipts from operating activities by P200,000. Cash receipts from financing activities by P10,200,000. Cash disbursements for investing activities by P50,000. Cash disbursements for financing activities by P10,000,000.

Page 7 Number 24 On January 1, 2017, the Department of Public Works and Highways (DPWH) received a P10,000,000 appropriation from the national government for the acquisition of construction

machinery. On February 1, 2017, DPWH received the allotment from the Department of Budget and Management. On March 1, 2017, DPWH entered into a contract with CAT Inc. for the acquisition of the machinery with a price of P8,000,000. On April 1, 2017, DPWH received the Notice of Cash Allocation from Department of Budget and Management net of 1% withholding tax for income tax of supplier and 5% withholding of Final Tax on VAT of supplier. On May 1, 2017, CAT Inc. delivered the machinery to DPWH. On June 1, 2017, DPWH paid the obligation to CAT Inc. On July 1, 2017, DPWH remitted the withheld income tax and final VAT to BIR. What is the journal entry on July 1, 2017? a. Debit Cash-MDS, Regularly P7,520,000 and Credit Subsidy Income from National Government P7,520,000. b. Debit Machinery P8,000,000 and Credit Accounts Payable P8,000,000 c. Debit Accounts Payable P8,000,000 and Credit Due to BIR P480,000 and Cash-MDS, Regular P7,520,000. d. Debit Due to BIR P480,000 and Credit Subsidy Income from National Government P480,000.

Numbers 25 and 26 On January 1, 2018, PNB and Allied Bank entered into a contract of merger wherein PNB will issue 100,000 ordinary shares with par value of P10 and quoted price of P20 to the existing shareholders of Allied in exchange for the net assets of Allied Bank. PNB paid acquisition related cost of business combination amounting to P100,000 and stock issuance cost amounting to P200,000. As of December 31, 2017, PNB has total assets with book value of P50M and fair market value of P60M while Allied Bank has total assets with book value of P5M and fair market value of P4M. The amount net assets of Allied Bank on December 31, 2017 is P2.6M. 25. What is the amount of total assets of PNB on January 1, 2018 after the merger? a. b. c. d.

54,100,000 64,100,000 55,100,000 65,100,000

26. What is the goodwill/(gain on bargain purchase) arising from business combination? a. (600,000) b. 800,000 c. 600,000 d. 400,000

Page 8 Numbers 27, 28, 29 and 30 On July 1, 2017, SM acquired 80% of outstanding shares of BDO in exchange for P4M cash and 100,000 preferred shares with par value of P100 and quoted price of P200. On the acquisition date, the net assets of BDO has book value of P39M but a building with remaining useful life of 10 years is overstated by P4M. On October 1, 2017, BDO sold an equipment to SM at a gain of

P200,000. On the date of sale, the equipment has remaining life of 5 years. For the year ended December 31, 2017, BDO reported net income of P900,000 and declared dividends of P100,000 on December 30, 2017. On the other hand, SM reported net income of P2M on its separate income statement and declared dividends of P1,000,000. The retained earnings balance of SM on December 31, 2016 is P10,000,000. 27. What is SM’s consolidated net income for the year ended December 31, 2017? a. b. c. d.

6,830,000 7,130,000 6,380,000 7,120,000

28. What is SM’s consolidated net income attributable to parent’s shareholders for the year ended December 31, 2017? a. b. c. d.

6,288,000 6,648,000 6,448,000 6,288,000

29. What is noncontrolling interest in net assets on December 31, 2017? a. b. c. d.

7,072,000 7,112,000 6,092,000 6,112,000

30. What is the consolidated retained earnings on December 31, 2017? a. b. c. d.

16,120,000 15,288,000 17,130,000 15,480,000

Page 9 Numbers 31 and 32 On January 1, 2017, Ayala acquired 90% of outstanding ordinary shares of Globe Inc. The following data are provided: 

On year 2017, Ayala sold inventory at a price of P1,000,000 with gross profit rate of 20% based on sale to Globe. 40% remained in ending inventory of Globe on December 31, 2017. These inventories are eventually sold on year 2018 to third persons by Globe.





During 2018, Globe sold inventory at a price of P500,000 with gross profit of 40% based on sale to Ayala of which 10% remained in ending inventory of SM on December 31, 2018. During 2018, Ayala reported sales of P10M while Globe reported sales of P4M. In the same year, Ayala reported gross profit of P3M while Globe reported gross profit of P2M.

31. What is the amount of Ayala’s consolidated sales for the year ended December 31, 2018? a. b. c. d.

12,500,000 14,000,000 13,000,000 13,500,000

32. What is Ayala’s consolidated gross profit for the year ended December 31, 2018? a. b. c. d.

5,060,000 4,940,000 4,980,000 5,080,000

Numbers 33, 34 and 35 On January 1, 2017, Metro Inc. acquired 70% of outstanding shares of PS Inc. at a price of P1M. Metro incurred P200,000 cost related to acquisition. At acquisition date, the book value of net assets of PS is P2,500,000 but building with useful life of 10 years is overstated by P500,000. For the year ended December 31, 2017, PS Inc. reported net income of P350,000 and declared dividend in the amount of P100,000. The fair value of the Investment in PS Inc. is measured at P1,700,000 on December 31, 2017 33. In the separate financial statement of Metro, the Investment in PS Inc. shall be reported on December 31, 2017 at what amount under equity method? a. b. c. d.

1,610,000 1,410,000 1,210,000 1,000,000

34. In the separate financial statements of Metro, the investment shall be reported on December 31, 2017 at what amount under the cost model? a. b. c. d.

1,200,000 1,100,000 1,000,000 1,150,000

35. In the separate financial statements of Metro, the investment shall be reported on December 31, 2017 at what amount under the fair value model? a. b. c. d.

1,700,000 1,200,000 1,410,000 1,510,000 Page 10

Numbers 36, 37 and 38 On November 1, 2017, Noypi Inc., which is operating in the Philippines, purchased investment property in USA at a price of $10,000 payable on January 31, 2018. In order to hedge this exposed foreign currency denominated accounts payable, Noypi entered into a forward contract with BDO for the purchase of $10,000 to be collected on January 31, 2018. Noypi Inc. accounts for its investment property using fair value model. On December 31, 2017, the fair market value of the investment property is $12,000. The following direct exchange rates are provided by the bank:

Buying spot Selling spot Buying forward-30 days Selling forward-30 days Buying forward-60 days Selling forward-60 days Buying forward-90 days Selling forward-90 days

11/1/2017 P40 P45 P38 P34 P43 P40 P42 P43

12/31/2017 P37 P50 P32 P41 P35 P41 P40 P40

1/31/2018 P38 P47 P35 P36 P46 P43 P38 P36

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

444,000 600,000 480,000 400,000

37. What is the gain (loss) on changes in fair market value of investment property exclusive of foreign currency gain for the year ended December 31, 2017? a. 90,000 b. 150,000 c. 60,000 d. 100,000 38. What is the foreign currency gain or (loss) in relation to investment property translation for the year ended December 31, 2017? a. 90,000 b. 150,000 c. 60,000 d. 100,000

Page 11 Numbers 39 and 40 BPI US is a subsidiary of BPI Philippines. The functional currency of BPI US is US$ while its presentation currency is Phil. Peso. The following items are translated: Accounts receivable Inventory Sales

Transaction rate

Closing rate

2,000,000 5,000,000 10,000,000

3,000,000 4,000,000 15,000,000

39. In the consolidated financial statements of BPI Philippines, the following items shall be presented at what amount?

Accounts receivable

Inventory

Sales

3,000,000 3,000,000 3,000,000 2,000,000

4,000,000 4,000,000 5,000,000 5,000,000

15,000,000 10,000,000 16,000,000 10,000,000

a. b. c. d.

40. Assuming the economy of US is experiencing hyperinflation, the following items shall be presented in the consolidated financial statements of BPI Philippines at what amount? Accounts receivable

Inventory

Sales

3,000,000 3,000,000 3,000,000 2,000,000

4,000,000 4,000,000 5,000,000 5,000,000

15,000,000 10,000,000 10,000,000 10,000,000

a. b. c. d.

Numbers 41, 42 and 43 ABC Company has a cycle of 3 days, uses a Raw and In Process Account and charges all conversion costs to cost of goods sold. At the end of each month, all inventories are counted, their conversion costs components are estimated, and inventory account balances are adjusted. Raw material cost is backflushed from RIP to finished goods. The following information is provided for the month of June. Beg. Bal. of RIP account, including P1,000 conversion cost Beg. Bal. of finished goods accounting including P6,000 conversion cost Raw materials received on credit Direct labor cost P300,000; Factory overhead applied P500,000 Ending RIP inventory per physical count, including P7,000 conversion cost Ending finished goods inventory per physical count, including P4,000 conversion cost

5,000 10,000 400,000 800,000 20,000 6,000

41. What is the amount of conversion cost in units sold in June? a. b. c. d.

802,000 796,000 794,000 800,000

42. What is the amount of direct materials backflushed from RIP to finished goods? a. b. c. d.

391,000 404,000 387,000 395,000

43. What is the amount of direct materials backflushed from finished goods to cost of goods sold? a. b. c. d.

395,000 400,000 393,000 389,000 Page 12

Number 44 ABC Inc. previously is choosing between traditional costing and activity-based costing. The following data are provided: Activity center Cost driver Amount of activity Center cost Material handling Kilos handled 100,000 kg. P 200,000 Painting Units painted 50,000 units 300,000 Assembly Machine hours 10,000 hours 500,000 Traditional Labor hours 100,000 hours 1,000,000 Job 1 contains 3,000 units. It weights 10,000 kilos and uses 300 machine hours. The direct labor hours on the job is 7,000 hours. What is the applied overhead under traditional costing and ABC costing?

Traditional costing a. 70,000 b. 60,000 c. 80,000 d. 50,000

ABC Costing 53,000 56,000 45,000 43,000

Numbers 45 and 46 Proc Inc. employs process costing for its inventory. Conversion costs are added uniformly at the end of the period while direct materials are added 100% at the start of the production process. The following data are provided: Beginning WIP Inventory Units started Ending WIP Inventory   

20,000 units (20% completed as to conversion) 80,000 units 10,000 (60% incomplete as to conversion)

There is no spoilage during the period. The cost of beginning inventory is P500,000 consisting of P200,000 direct materials and P300,000 conversion costs. The total manufacturing cost is P2,200,000 consisting of P400,000 direct materials and P1,800,000 conversion costs.

45. What is the cost per unit for direct materials under FIFO process costing? a. 5.00 b. 4.00 c. 6.00 d. 7.50 46. What is the conversion cost per unit for Average process costing? a. 20.00 b. 23.33 c. 22.34 d. 19.15 Numbers 47 The Philippine Government and Heaven’s Path Inc. entered into a concession arrangement for the construction and operation of Skyway 4 connecting Tawi-tawi and Batanes. On December 31, 2017, the concession operator constructed the Skyway 4 at a cost of P100M. Heaven’s Path Inc. has a right or license to charge users over the term of the arrangement of 50 years. The amounts to be received by the concession operator are contingent on the extent that the public uses the Skyway 4. What is the carrying amount of infrastructure asset on December 31, 2019? a. 100,000,000 b. 98,000,000 c. 96,000,000 d. 94,000,000 Page 13 Numbers 48 and 49 ABC Co. established a branch in Lipa City. On December 31, 2017, the reciprocal accounts are balanced. On December 31, 2018, the home office account has an unadjusted balance of P100,000. The following reconciling items are discovered by the home ABC Co.: a. Lipa branch collected the receivables of Ibaan branch worth P20,000 but failed to inform the home office. b. The home office paid Lipa’s payables worth P10,000 but failed to inform the branch. c. Inventory worth P30,000 intended to be delivered to San Jose Branch was delivered to Lipa branch which was retained by the latter. d. Inventory worth P40,000 intended to be delivered to Lipa Branch was delivered to Ibaan branch which was retained by the latter. e. The branch received credit memo from home office amounting to P10,000 which was credited twice by the branch.

f. The branch’s net loss amounting to P20,000 was debited by the Home office to investment in branch. 48. What is the adjusted balance of reciprocal account on December 31, 2018? a. 80,000 b. 90,000 c. 110,000 d. 120,000 49. What is the unadjusted balance of Investment in Branch on December 31, 2018? a. b. c. d.

70,000 90,000 110,000 120,000

Number 50 The following data were provided by the accountants of the Home Office and Branch for the year ended December 31, 2017: Home Office Book Branch Book Net sales to outside customer P1,000,000 P800,000 Beginning Inventory 300,000 140,000 Net purchase from outside supplier 800,000 250,000 Shipment to branch 400,000 Shipment from Home Office 500,000 Ending Inventory 100,000 200,000 Operating expense 200,000 100,000  It is the policy of the whole company to use FIFO for its inventories.  For the year ended December 31, 2016, the Home Office bills its branch with a gross profit rate of 40% based on cost.  Half of the beginning inventory of the branch was acquired from outside suppliers while ¾ of the ending inventory of the branch was acquired from the home office. What is the combined net income to be presented by the Home Office in its General Purpose Income Statement for the year ended December 31, 2017? a. b. c. d.

270,000 300,000 290,000 320,000

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