Financial Accounting Part 1

1.

On January 1, 2017, Mill Company sold a building and received as consideration P1,000,000 cash and a P4,000,000 noninterest bearing note due on January 1, 2013. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type at January 1, 2017, was 10%. The present value of 1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Mill’s 2017 income statement? a. 370,000 b. 400,000 c. 300,000 d. 330,000

2.

The checkbook balance of Dove Company on December 31, 2013 was P4,000,000. Information about certain cash items follows:  A customer check amounting to P200,000 dated January 2, 2014 was included in the December 31, 2013 checkbook balance.  Another customer check for P500,000 deposited on December 22, 2013 was included in its checkbook balance but returned by the bank for insufficiency of fund. This check was redeposited on December 26, 2013 and cleared two days later.  A P400,000 check payable to supplier dated and recorded on December 30, 2013 was mailed on January 16, 2014.  A petty cash fund of P50,000 with the following summary on December 31, 2013: Coin and currencies 5,000 Petty cash vouchers 43,000 Return value of 20 cases of soft drinks 2,000 Total  A check of P43,000 was drawn on December 31, 2013, payable to Petty Cash. What is the “cash” balance on December 31, 2013? a. 4,248,000 b. 4,200,000 c. 4,205,000 d. 3,748,000

3.

Ross Company was organized on January 1, 2017. At December 31, 2017, Ross had the following investment portfolio of marketable equity securities: Trading Available for sale Aggregate cost 3,000,000 4,500,000 Aggregate market value 2,400,000 3,700,000 Net unrealized loss 600,000 800,000 All of the decline are judged to be temporary. What amount of unrealized loss should be shown as component of income and stockholders’ equity? Income Stockholders’ equity Income Stockholders’ equity a. 0 1,400,000 c. 800,000 600,000 b. 600,000 800,000 d. 1,400,000 0

4.

On July 1, 2017, Miller Company purchased 25% of Wall Company’s common stock and no goodwill resulted from the purchase. Miller appropriately carries this investment at equity and the balance in Miller’s investment account was P1,900,000 at December 31, 2017. Wall reported net income of P1,200,000 for the year ended December 31, 2017, and paid dividend tatling P480,000 during 2017. How much did Miller pay its 25% interest in Wall? a. 1,720,000 b. 2,020,000 c. 1,870,000 d. 2,170,000

5.

Koral Company incurred the following costs during 2017: Modification to the formulation of a chemical product 135,000 Trouble-shooting in connection with breakdowns during commercial production 150,000 Design of tools, jigs, molds and dies involving new technology 170,000 Seasonal or other periodic design changes to existing products 185,000 Laboratory research aimed at discovery of new technology 215,000 In its income statement for the year ended December 31, 2017, Koral should report research and development expense of a. 520,000 b. 470,000 c. 385,000 d. 335,000

6.

On January 1, 2017, Beal Company adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, 2015, at an estimated cost of P6,000,000. Beal intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is made on July 1, 2017. Present value and future amount factors are as follows: Present value of 1 at 8% for 5 periods 0.68 Present value of 1 at 8% for 6 periods 0.63 Future amount of ordinary annuity of 1 at 8% for 5 periods 5.87 Future amount of annuity in advance of 1 at 8% for 5 periods 6.34 Beal should make five annual deposits (rounded) of a. 1,022,150 b. 816,000 c. 946,400 d. 756,000

7.

On December 31, 2017, the accounts receivable control account of Honduras Company had a balance analysis of the accounts receivable showed the following: Accounts known to be worthless Advances payments to creditors on purchase orders Advances to affiliated companies Customers’ accounts reporting credit balances arising from sales returns Interest receivable on bonds Other trade accounts receivable – unassigned Subscription receivable for common stock due in 30 days Trade accounts receivable – assigned (Finance Company’s equity in assigned accounts is P500,000 Trade installments receivable due 1 – 18 months, including unearned finance charge of P50,000 Trade accounts receivable from officers, due currently Trade accounts on which postdated checks are held (no entries were made on receipts of checks) Total The correct balance of trade accounts receivable on December 31, 2017 is a. 4,650,000 b. 4,700,000 c. 4,150,000 d. 4,050,000

of P8,200,000. An 100,000 400,000 1,000,000 (600,0000) 400,000 2,000,000 2,200,000 1,500,000 850,000 150,000 200,000 8,200,000

8.

On January 1, 2015, Nobb Corporation signed a 12-year lease for warehouse space. Nobb has an option to renew the lease for an additional 8-year period on or before January 1, 2015. During January 2017, Nobb made substantial improvements to the warehouse. The cost of these improvements was P540,000, with an estimated useful life of 15 years. At December 31, 2017, Nobb intended to exercise the renewal option. Nobb has taken a full year’s depreciation on this leasehold improvement. In the December 31, 2017 balance sheet, the carrying amount of this leasehold improvement should be a. 486,000 b. 504,000 c. 510,000 d. 513,000

9.

On July 1,2017, Hart signed an agreement to operate as a franchisee of Ace Printers for an initial franchise fee of P12,000,000. The same date, Hart paid P4,000,000 and agreed to pay the balance in four equal annual payments of P2,000,000 beginning July 1, 2018. The down payment is not refundable and no future services are required of the franchisor. Hart can borrow at 14% for a loan of this type. Present and future value factors are as follows: Present value of 1 at 14% for 4 periods 0.59 Future amount of 1 at 14% for 4 periods 1.69 Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91 Hart should record the acquisition cost of the franchise on July 1, 2017 at a. 13,520,000 b. 12,000,000 c. 9,820,000 d. 8,720,000

10. The owners of East Company are planning to sell the business to new interests. The cumulative net earnings for the past five years amounted to P5,500,000 including expropriation gain of P500,000. The fair value of net assets of East Company was P7,500,000. Assuming that goodwill is determined by capitalizing average net earnings at 10%, the amount to be paid for goodwill is a. 3,500,000 b. 7,500,000 c. 2,500,000 d. 5,000,000 11. XYZ Company factored P6,000,000 of accounts receivable to ABC Company on October 1, 2017. Control was surrendered by XYZ. ABC accepted the receivables subject to recourse for nonpayment. ABC assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, ABC charged 15% interest computed on a weighted-average time to maturity of the receivables of 54 days. The fair value of the recourse obligation is P90,000. XYZ will receive and record cash of a. 5,296,850 b. 5,386,850 c. 5,476,850 d. 5,556,850 12. Carmel Company provided the following information with respect to its building.  The building was acquired January 1, 2005 at a cost of P7,800,000 with an estimated useful life of 40 years and residual value of P200,000. Yearly depreciation was computed on the straight line method.  The building was renovated on January 1, 2014 at a cost of P760,000. This was considered as improvement. Residual value did not change.  On January 1, 2017, the management decided to change the total life of the building to 30 years. What is the depreciation on the building for 2017? a. 292,400 b. 266,000 c. 334,400 d. 294,000 13. Tatlong Hari Company invested in stocks of Silangan Company acquired as follows: Number of shares Cost 2015 22,500 1,800,000 2016 37,500 3,300,000 In 2017, Tatlong Hari Company received 60,000 rights to purchase Silangan stock at P80 per share. Five rights are required to purchase one share. At issue date, rights had a market value of P4 each and stock was selling ex-right at P96. Tatlong Hari Company used rights to purchase 9,000 additional shares of Silangan Company and allowed the rights not exercised to lapse. In determining the stock rights exercised, assume the use of the first-in, first-out method. The amount to be debited to investment account for the purchase of the 9,000 additional shares is a. 873,000 b. 871,200 c. 720,000 d. 824,000 14. On June 30, 2017, Union Company purchased goodwill of P1,250,000 when it acquired the net assets of Apex Company. During 2017, union incurred additional cost of developing goodwill, by training Apex employees, P500,000 and hiring additional Apex employees, P250,000. The December 31, 2017 balance sheet should report goodwill at a. 2,000,000 b. 1,750,000 c. 1,500,000 d. 1,250,000 15. Imus Company received a two-year variable interest rate loan of P5,000,000 on January 1, 2017. The interest on the loan is payable on December 31 of each year and the principal is to be repaid on December 31, 2018. On January 1, 2017, Imus Company entered into a “receive variable, pay fixed” interest swap agreement with a speculator bank. The interest rate for 2017 is the prevailing interest rate of 10% and the rate in 2018 is equal to the prevailing rate on January 1, 2018. The market rate of interest on January 1, 2018 is 7% and the present value of 1 at 7% for one period is .935. How much should be reported by Imus Company on December 31, 2017 as “interest rate swap payable”? a. 150,000 b. 140,250 c. 100,000 d. 0 16. On January 1, 2013, Huff Company owned a machine having a carrying amount of P2,400,000. The machine was purchased four years earlier for P4,000,000. Huff uses straight-line depreciation. During December 2013 Huff determined that the machine suffered permanent impairment of its operational value and will not be economically useful in its production process after December 31, 2013. Huff sold the machine for P650,000 on January 5, 2014. 21. In its income statement for the year ended December 31, 2013, Huff should recognize a loss of a. 2,000,000 b.1,750,000 c. 1,350,000 d. 0

17. During December 2013, Bubba Company determined that there had been a significant decrease in market value of its equipment used in its manufacturing process. At December 31, 2013, Bubba compiled the information below: Original cost of equipment 5,000,000 Accumulated depreciation 3,000,000 Expected undiscounted net future cash inflows related to the continued use and eventual disposal of the equipment 1,750,000 Fair value of equipment 1,250,000 What is the amount of impairment loss that should be reported on Bubba’s income statement for the year ended December 31, 2013? a. 3,250,000 b. 3,750,000 c. 750,000 d. 250,000

18. In 2015, Lepanto Mining Company purchased property with natural resources for P28,000,000. The property had a residual value of P5,000,000. However, the company is required to restore the property to its original condition for P2,000,000.In 2015, Lepanto spent P1,000,000 in development cost and P3,000,000 in building on the property. Lepanto does not anticipate that the building will have utility after the natural resources are removed. In 2016, an amount of P1,000,000 was spent for additional development on the mine. The tonnage mined and estimated remaining tons for years 2015 to 2017 are as follows: 2015 2016 2017

Tons extracted 0 3,000,000 3,500,000

Tons remaining 10,000,000 7,000,000 2,500,000

The company should recognize depletion for 2017 at a. 10,150,000 b. 11,025,000 c. 15,750,000

d. 9,450,000

19. On January 1, 2016, Mankayan Company purchased land with valuable natural ore deposits for P10,000,000. The residual value of the land was P2,000,000. At the time of purchase, a geological survey estimated a recoverable output of 4,000,000 tons. Early in 2016, roads were constructed on the land to aid in the extraction and transportation of the mined ore at a cost of P1,600,000. In 2016, 500,000 tons were mined. A new survey at the end of 2017 estimated 4,200,000 tons of ore available for mining. In 2017, 800,000 tons were mined. Assuming all the ore mined was sold, how much was the 2017 depletion expense? a. 1,344,000 b. 1,920,000 c. 1,200,000 d. 1,600,000 20. A schedule of machinery owned by Lester Company is presented below: Total cost Estimated salvage value Estimated life in years Machine A 5,500,000 500,000 20 Machine B 2,000,000 200,000 15 Machine C 400,000 5 Lester computes depreciation on the straight-line method. Based upon the information presented, the composite life of these assets should be a. 13.3 b. 16.0 c. 18.0 d. 19.8 21. Fairmont Company, a public company, issued 5,000 shares of its P1,000 par value common stock for a building. The following information relates to the exchange: Net book value of building 17,500,000 The building is insured for 25,000,000 Current quoted price of stock 4,400/share The building should be recorded at a. 5,000,000 b. 17,000,000 c. 22,000,000 d. 25,000,000 22. Anxious Company acquired two items of machinery as follows:  On December 30, 2017, Anxious Company purchased a machine in exchange for a noninterest bearing note requiring ten payments of P500,000. The first payment was made on December 30, 2018, and the others are due annually on December 30. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65 for ten periods.  On January 1, 2017, Anxious Company acquired used machinery by issuing the seller a two-year, noninterest-bearing note for P3,000,000. In recent borrowing, Anxious has paid a 12% interest for this type of note. The present value of 1 at 12% for 2 years is 0.80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69. What is the total cost of the machinery? a. 5,065,000 b. 5,225,000 c. 5,565,000 d. 8,235,000 23. During 2016 Garr Company purchased marketable equity securities as a trading investment. For the year ended December 31, 2016, the company recognized an unrealized loss of P230,000. There were no security transactions during 2017. Pertinent information at December 31, 2017 is as follows: Security Cost Market value A 2,450,000 2,300,000 B 1,800,000 1,820,000 4,250,000 4,120,000 In its 2017 income statement, Garr should report a. Unrealized gain of P100,000 c. Unrealized loss of P130,000 b. Unrealized loss of P100,000 d. Unrealized gain of P130,000 24. Grant Company acquired 30% of South Company’s voting stock for P2,000,000 on January 1, 2017. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 2017, South earned P800,000 and paid dividend of P500,000. South reported earnings of P1,000,000 for the 6 months ended June 30, 2018. On July 1, 2018, Grant sold half of its stock in South for P1,500,000 cash. South paid dividend of P600,000 on October 1, 2018. Before income tax, what amount should Grant include in its 2017 income statement as a result of the investment? a. 150,000 b. 240,000 c. 500,000 d. 800,000 25. On January 1, 2015, Bart Company acquired as a long term investment for P7,000,000, a 40% common stock interest in Hall Company when the fair value of Hall’s net assets was P17,500,000. Hall Company reported the following net assets: 2014 2015 2016 2017

5,000,000 7,000,000 8,000,000 4,000,000

On January 1, 2016, Bart Company made cash advances of P2,000,000 to Hall Company. On December 31, 2017, it is not expected that Bart Company will provide further financial support for Hall Company. Bart Company should report in 2017 a loss from investment of a. 1,600,000 b. 4,000,000 c. 1,000,000 d. 600,000 26. Moss Company has determined its December 31, 2017, inventory on a FIFO basis to be P4,000,000. Information pertaining to that inventory follows: Estimated selling price 4,080,000

Estimated cost of disposal 200,000 Normal profit margin 600,000 Current replacement cost 3,600,0000 Moss records losses that result from applying the lower of cost or market rule. At December 31, 2017, what should be the net carrying value of Moss’ inventory? a. 4,000,000 b. 3,880,000 c. 3,600,000 d. 3,280,000 27. On November 15, 2017 Damascus Company entered into a commitment to purchase 100,000 barrels of aviation fuel for P55 per barrel on March 31, 2018. the company entered into this purchase commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2017 the purchase price of aviation fuel had fallen to P40 per barrel. However, by March 2018, when the company took delivery of these 100,000 barrels the price of aviation fuel had risen to P60 per barrel. How much should be recognized as gain on purchase commitment for the year 2018? a. 1,500,000 b. 2,000,000 c. 500,000 d. 0 28. The inventory on hand at December 31, 2017 for Fair Company is valued at a cost of P950,000. The following items were not included in this inventory amount: Item 1: Purchased goods in transit, shipped FOB destination, invoice price P30,000 which includes freight charge of P1,500. Item 2: Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission of 20% of the sales price. Item 3: Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500 which includes P1,000 freight charge to deliver the goods. Goods are in transit. The company’s selling price is 140% of cost. Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000, freight cost, P2,500. Item 5: Goods out on consignment to Manila Company, sales price P35,000, shipping cost of P2,000. What is the adjusted cost of the inventory on December 31, 2017 a. 1,042,000 b. 1,043,000 c. 1,040,000 d. 1,073,500 29. Hungary Company uses the net price method of accounting for cash discounts. In one of its transactions on October 15, 2017, Hungary sold merchandise with a list price of P2,000,000 to a customer who was given trade discount of 20% and 15%. Credit terms were 2/10, n/30. The goods were shipped FOB destination, freight collect. Total freight charge paid by the customer was P20,000. On October 20, 2017, the customer returned damaged goods originally billed at P60,000. What is the net realizable value of this account receivable on October 31, 2017? a. 1,280,000 b. 1,300,000 c. 1,170,000 d. 1,320,000 30. Lee Company’s current liabilities at December 31, 2017, totaled P6,000,000 before any necessary year-end adjustment relating to the following: On December 23, 2017, a vendor authorized Lee to return, for full credit, goods shipped and billed at P180,000 on December 10, 2017. The returned goods were shipped by Lee on December 29, 2017. A P180,000 credit memo was received and recorded by Lee on January 7, 2018. During December 2017, Lee received P300,000 from Marr, a customer, as an advance payment for a bottling machine which Lee will construct to Marr’s specifications. From this transaction, Lee has a P300,000 credit balance in its account receivable from Marr at December 31, 2017. At December 31, 2017, what amount should Lee report as total current liabilities? a. 5,820,000 b. 5,880,000 c. 6,120,000 d. 6,300,000 31. Lewis Company’s usual sales terms are net 60days, F.O.B. shipping point. Sales, net of returns and allowances, totaled P9,200,000 for the year ended December 31, 2017, before year-end adjustments. Additional data are as follows:  On December 27, 2017, Lewis authorized a customer to return, for full credit, goods shipped and billed at P200,000 on December 15, 2017. The returned goods were received by Lewis on January 4, 2018, and a P200,000 credit memo was issued and recorded on the same date.  Goods with an invoice amount of P300,000 were billed and recorded on January 3, 2018. The goods were shipped on December 30, 2017.  Goods with an invoice amount of P400,00 were billed and recorded on December 30, 2017. The goods were shipped on January 3, 2018. Lewis adjusted net sales for 2017 should be a. 9,300,000 b. 9,100,000 c. 9,000,000 d. 8,900,000 32. On January 1, 2017, Dell Company contracted with the City of Manila to provide custom built desks for the city schools. The contract made Dell the city’s sole supplier and required Dell to supply no less than 4,000 desks and no more than 5,500 desks per year for two years. In turn, the City of Manila agreed to pay a fixed price of P550 per desk. During 2017, Dell produced 5,000 desks for the City of Manila. At December 31, 2017, 500 of these desks were segregated from the regular inventory and were accepted and awaiting pickup by the City of Manila. The city of Manila paid Dell P2,250,000 during 2017. What amount should Dell recognize as contract revenue in 2017? a. 2,250,000 b. 2,475,000 c. 2,750,000 d. 3,025,000 33. Lin Company’s distributor of machinery, bought a machine from the manufacturer in November 2017 for P500,000. On December 30, 2017, Lin sold this machine to Zee Hardware for P750,000, under the following terms: 2% discount if paid within 30 days, 1% discount if paid after 30 days but within 60 days, or payable in full within 90 days if not paid within the discount periods. However, Zee had the right to return this machine to Lin if Zee was unable to resell the machine before expiration of the 90-day payment period, in which case Zee’s obligation to Lin would be canceled. In Lin’s net sales for the year ended December 31, 2017, how much should be included for the sale of this machine to Zee? a. 735,000 b. 742,500 c. 750,000 d. 0 34. Ilocos Farms produced 80,000 kilos of tobacco during the 2017 season. Ilocos sells all of its tobacco to XYZ Company which has agreed to purchase the entire production at the prevailing market price. Recent legislation assures that the market price will not fall below P100 per kilo during the next two years. The costs of selling and distributing the tobacco are immaterial and can be reasonably estimated. Ilocos reports its inventory at expected exit value. During 2017, Ilocos sold and delivered to XYZ 60,000 kilos at the market price of P100. Ilocos sold the remaining 20,000 kilos during 2018 at the market price of P150. What amount of revenue should Ilocos recognize in 2017? a. 6,000,000 b. 3,000,000 c. 8,000,000 d. 9,000,000

35. On December 30, 2017, Chang Company sold a machine to Door Company in exchange for a noninterest bearing note requiring ten annual payments of P100,000. Door made the first payment on December 30, 2017. The market interest rate for similar notes at date of issuance was 8%. Information on present value factors is: Present value Present value of ordinary annuity of Period of 1 at 8% 1 at 8% 9 0.50 6.25 10 0.46 6.71 In its December 31, 2017 balance sheet, what amount should Chang report as note receivable? a. 450,000 b. 460,000 c. 625,000 d. 671,000 36. National Bank grants a 10-year loan to Abbo Company in the amount of P1,500,000 with a stated interest rate of 6%. Payments are due monthly and are computed to be P16,650. National Bank incurs P40,000 of direct loan origination cost and P20,000 of indirect loan origination cost. In addition, National Bank charges Abbo a 4-point nonrefundable loan origination fee. National Bank, the lender, has a carrying amount of a. 1,440,000 b. 1,480,000 c. 1,500,000 d. 1,520,000 37. Abbo, the borrower, has a carrying amount of a. 1,440,000 b.1,480,000

c. 1,500,000

d. 1,520,000

38. Effective with the year ended December 31, 2017, Hall Company adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging of accounts receivable. The following data are available: Allowance for doubtful accounts, 1/1 250,000 Provision for doubtful accounts during 2017 (2% of credit sales of P10,000,000) 200,000 Accounts written off 205,000 Estimated uncollectible accounts per aging 12/31 220,000 After year-end adjustment, the doubtful accounts expense of 2017 should be a. 220,000 b. 205,000 c. 200,000 d. 175,000 39. The December 31, 2016 trial balance of Yasmin Company includes the following accounts: Petty cash fund Current account – First Bank Current account – Second Bank (overdraft) Money market placement – Third Bank Time deposit – Fourth Bank   

50,000 4,000,000 (250,000) 1,000,000 2,000,000

The petty cash fund includes unreplenished December 2016 petty cash expense vouchers for P15,000 and an employee check for P5,000 dated January 31, 2017. A check for P100,000 was drawn against First Bank current account dated and recorded December 29, 2016 but delivered to payee on January 15, 2017. The fourth bank time deposit is set aside for land acquisition in early January 2017.

The December 31, 2016 Statement of Financial Position should report “cash and cash equivalents” at a. 5,130,000 b.5,150,000 c.4,130,000 d.4,880,000 40. On December 31, 2016, Bitter Company had capitalized cost of P5,000,000 for a new computer software product with an economic life 5 years. Sales for 2017 to P3,000,000. The total sales of software over its economic life are expected to be P10,000,000. The pattern of future sales cannot be measured reliably. On December 31, 2017, the software had a net realizable value of P4,500,000. What net amount of the capitalized software cost should be reported on December 31, 2017 balance sheet? a. 5,000,000 b.3,500,000 c.4,500,000 d.4,000,000

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