(Problems) - Audit of Other Income Statements

PROBLEM 1: The following are changes in all the account balances of MONACO COMPANY during the year ended December 31, 2012, except for retained earnings.

Cash Accounts receivable (net) Inventory Investments Accounts payable Bonds payable Ordinary share capital Share premium

(Increase/Decre ase) P395,000 948,000 (500,0000 (235,000) (255,000) 410,000 300,000 20,000

There were no entries in the retained earnings account except for net income and a dividend of P295,000 which was paid in the current year. What is Monaco’s net income for the current year? A. P428,000 C. P478,000 B. P453,000 D. P133,000 PROBLEM 2: The following selected information pertains to ICELAND COMPANY: Cash balance, January 1, 2012 P65,000 Accounts receivable, January 1, 95,000 2012 Collections from customers in 2012 1,050,000 Capital account balance, January 1, 190,000 2012 Total assets, January 1, 2012 375,000 Additional cash investment, July 1, 25,000 2012 Total assets, December 31, 2012 505,000 Cash balance, December 31, 2012 100,000 Accounts receivable, December 31, 180,000 2012 Withdrawals made during 2012 55,000 Total liabilities December 31, 2012 205,000 How much net income should Iceland report in its income statement for the year ended December 31, 2012? A. P30,000 C, P140,000 B. P80,000 D. P110,000 PROBLEM 3: The following is MACEDONIA COMPANY’s pre-audit income statement for the year ended December 31, 2012: Sales Cost of Goods sold Gross income Operating expenses: Rent expense Salaries expense Utilities expense Advertising expense Warranty expense Other expenses

P2,964,000 1,926,00 0 P1,038,000 P250,0 00 345,00 0 219,00 0 30,000 14,000 35,5 00

893,500

Net income

P144,500

You obtained the following information from the company’s accounting records: a. Some of Macedonia’s customers par for their orders in advance. At December 31, 2012, orders paid for in advance of shipment totaled P15,000. These have been included in the sales figure b. Macedonia’s products are sold with a 30-day money-back guarantee. Customers seldom returned the products during year. Macedonia has not included in the sales figure and in cost of goods sold those products sold within the last 30 days of the current year. The revenue is P98,000 and the cost of the products is P63,700. c. On July 1, 2012, Macedonia prepaid its office space rent for 18 months. The amount paid, P216,000, was recorded as rent expense. d. The amount of P120,000 was paid on July 1, 2012, for general advertising to be completed prior to December 31, 2012. Macedonia’s management believes that the advertising will benefit a 2-year period and, therefore, has decided to charge the costs to the income statement at the rate of P5,000 per month. e. In prior years, Macedonia has estimated warranty expense using a percentage of sales. Future warranty costs relating to 2012 sales are estimated to amount to 2% sales. However, during 2012, Macedonia elected to charge costs to warranty expense as costs were incurred. Macedonia spent P14,000 during 2012 to repair and replace defective products sold in current and prior years. 1. The correct amount of Macedonia’s sales revenue for 2012 is A. P2,964,000 C. P3,047,000 B. P3,062,000 D. P2,983,300 2. Macedonia’s income statement for 2012 should show gross profit of A. P1,121,000 C. P974,300 B. P1,023,000 P1,057,300 3. Macedonia’s total expenses (excluding costs of goods sold) for 2012 should be A. P886,440 C. P872,440 B. P958,440 D. P856,440 4. Macedonia’s net income for 2012 (ignore income tax) should be A. P98,860 C. P184,860 B. P170,860 D. P234,560 5. The prepaid advertising account balance on December 31, 2012, is A. P0 C. P30,000 B. P90,000 D. P120,000 PROBLEM 4: Presented below are the condensed income statements of LATVIA CORPORATION for the years ended December 31, 2012 and 2011: Sales Cost of goods Sold Gross income Operating expenses Operating income Gain on sale of division Income tax expense (30%) Net income

2012 P5,000,000 3,350,000 1,650,000 675,000 975,000 200,000 1,175,000 352,500

2011 P4,900,000 3,300,000 1,600,000 650,000 950,000 ----950,000 285,000

P822,500

P665,000

On October 10, 2012, Latvia entered into an agreement to sell the assets of one of its geographical segments. The geographical segment comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. The segment was sold on December 31, 2012, for P1,750,000. The book value of the segment’s assets was P1,550,000. The segment’s contribution to Latvia’s operating income before tax each year was as follows: 2012 2011

P113,750 loss P81,250 income

Based on the above data, calculate the following: 1. Income from continuing operations in 2011

2. 3. 4. 5.

6.

A. P665,000 C. P608,125 B. P721,874 D. P748,126 Income from continuing operations in 2012 A. P902,126 C. P602,874 B. P762,125 D. P822,500 Net income in 2011 A. P695,626 C. P665,000 B. P1,023,077 D. P608,125 Net income in 2012 A. P822,500 C. P682,500 B. P701,751 D. P897,885 Assume that by December 31, 2012, the segment had not yet been sold but was considered held for sale. The fair value of the segment’s assets on December 31, was P1,750,000. The post-tax income (loss) from discontinued operations for 2012 should be A. P(79,625) C. P(122,500) B. P79,274 D. P415,962 Assume that by December 31, 2012, the segment had not yet been sold but was considered held for sale. The fair value of the segment’s assets on December 31 was P1,250,000. The post-tax loss from discontinued operations for 2012 should be A. P56,874 C. P79,626 B. P60,374 D. P289,625

PROBLEM 5: On January 1, 2012, FINLAND CORP. signed a contract to operate as a franchisee of Mc Dodo, for an initial franchise fee of P5,000,000/ the amount of P2,000,000 was paid when the agreement was signed, and the balance is payable in five annual payments of P600,000 each, beginning January 1, 2013. The contract stipulates that payment is not refundable and that no future services are to be rendered by the franchisor. Finland can borrow money at 12% for a loan of this type and the present value of an ordinary annuity of 1 at 12% for five periods is 3.60478. 1. How much should Mc Dodo record as franchise fee revenue on January 1. 2012? A. P4,162,868 C. P2,000,000 B. P5,000,000 D. P2,162,863 2. What entry would be made by Mc Dodo on January 1, 2012, if it has substantial future services that remain to be performed? PROBLEM 6: GREECE CONSTRUCTION CO. has signed a contract to build a sports complex beginning January 1, 2010. It has been estimated that it will take three years to construct the complex and will cost P12,000. The total contract price is P18,000,000. The following information pertains to the construction period. Costs incurred to date Estimated costs to complete Progress billings to date

2010 P5,400,000

2011 P8,400,000

6,600,000 5,400,000

3,600,000 11,000,000

2012 P12,000,0 00

18,000,00 0 Cash collected to date 4,800,000 10,000,000 18,000,00 0 Based on the given data, compute the estimated gross income that would be recognized during each year of the construction period. Use the percentage-of-completion method. 1. 2010 A. P2,700,000 C. P6,000,000 B. P12,000,000 D. P5,400,000 2. 2011 A. P2,700,000 C. P1,500,000 B. P6,000,000 D. P4,200,000 3. 2012 A. P6,000,000 C. P4,200,000 B. P18,000,000 D. P1,800,000 PROBLEM 7:

MULTO ENTERPRISES sells merchandise on the installment basis. Presented below is information pertaining to its sales for the years ended December 31, 2010, 2011, and 2012: 2010 2011 2012 Installment sales P5,000,00 P5,200,000 P5,600,000 0 Cost of installment sales 3,000,000 3,276,000 3,640,000 Gross income P2,000,0 P1,924,00 P1,960,000 00 0 2010 2011 2012 Collections from customers on: 2010 installment sales P1,500,00 P2,000,000 P1,000,000 0 2011 installment sales 2,000,000 2,400,000 2012 installment sales 2,200,000 1. Compute the realized gross income for each of the years 2010, 2011, and 2012 2. Applying the installment method of accounting, prepare the journal entries required in 2012. Ignore interest charges. PROBLEM 8: On January 2, 2012, GERMANY CO. sold a piece of equipment to Tirador Corp. for P3,000,000. On that date, the equipment’s carrying value was P2,000,000. Tirador gave Germany P600,000 cash and a P2,400,000 note, payable in 4 annual installments of P600,000 plus 18% interest. Tirador made the first principal and interest payment of P1,032,000 on December 31, 2012. Germany uses the installment sales method of revenue recognition. What is the amount of realized gross income in 2012? A. P1,200,000 C. P600,000 B. P344,000 D. P400,000 PROBLEM 9: Described below are SATURNINA COMPANY’s sales for the year ended December 31, 2012. a. A sale for P300,000 was made on April 3. As of the reporting date, all work in connection with the sale has been completed. However, the customer is a significant credit risk and the collectability of the cash for the sale is highly uncertain. No collection has been made as of the end of the year. b. A sale for P390,000 was made on July 28. The P390,000 cash for the sale was collected in full on July 28. The work associated with the sale has not yet begun but it expected to be completed early in the upcoming year. c. A sale for P510,000 as made on November 21. No cash has been collected as of the end of the year, but all of the cash is expected to be collected early next year. As of December 31, all of the work associated with the sale has been completed. How much revenue should be recognized be Saturnina for the year ended December 31, 2012? A. P510,000 C. P690,000 B. P390,000 D. P900,000 PROBLEM 10: On January 1, 2012, LUCIA COMPANY signed a one-year rental for a total of P1,200,000, with monthly payments of P100,000 due at the end of each month. In addition, the lessee must pay contingent rent of 5% of all sales in excess of P30,000,000. The contingent rent is payable on December 31, 2012. On January 31, Lucia received the first rental payment. At that time, sales for the lessee had reaced P3,000,000. The same lessee has used the building for the past 5 years, and in each of those years, the lessee reached the contingent rent threshold of P30,000,000 in sales. Accordingly, the accountant of Lucia recognized total rent revenue of P125,000 for January – P100,000 collected in cash and another P25,000 in estimated contingent rent. The contingent rent estimate was based on the excess of sales in January over one month of the P30,000,000 threshold [(3,000,000 – P2,500,000) x 5%]. Sales for February were P2,800,000 and the accountant of Lucia followed the same procedure regarding the contingent rent. Sales for March were P3,500,000. However, in March, the accountant of Lucia learned that contingent rentals should not be estimated, but instead

should be recognized only after the threshold has been reached. The accounting was done correctly in March, and the appropriate entry was made to correct the mistakes made in January and February. Sales by the lessee for the year ended December 31, 2012, totaled P39,900,000. 1. How much rent revenue was recognized by Lucia for the month of February? A. P235,000 C. P100,000 B. P200,000 D. P115,000 2. What entry was made by the accountant to correct the errors in January and February? A. Contingent rent revenue 40,000 Contingent rent receivable 40,000 B. Contingent rent revenue 15,000 Contingent rent receivable 15,000 C. Contingent rent receivable 15,000 Contingent rent revenue 15,000 D. Retained earnings 40,000 Contingent rent receivable 40,000 3. What amount of rent revenue should be reported in Lucia’s income statement for the year ended December 31, 2012? A. P1,200,000 C. P1,655,000 B. P1,685,000 D. P1,735,000 PROBLEM 11: AURELIA, INC. purchased bonds at a discount of P18,400. Subsequently, Aurelia sold these bonds at a premium of P26,500. Bond discount amortization of P3,400 had been recorded during the period that Aurelia held this bond investment. What amount should Aurelia, Inc. report as gain on the sale of these bonds? A. P11,500 C. P44,900 B. P41,500 D. P26,500 PROBLEM 12: On January 1, 2012, MOLESTIA, INC entered into a 10-year noncancelable lease contract for a machine stipulating annual payments of P40,000. The first payment was made on January 1, 2012. This transaction was appropriately treated as a finance lease. The ten annual payments have a present value of P270,000 at January 1, 2012, based on implicit interest rate of 10%. What is the amount of interest expense for the year ended December 31, 2012? A. P4,000 C. P23,000 B. P31,000 D. P27,000 PROBLEM 13: MAHAL CO. leased equipment to Eli Corp. on January 2, 2012, for an 8-year period expiring December 31, 2019. Equal payments under the lease are P1,200,000 and are due on January 2 of each year. The initial payment was made on January 2, 2012. The list selling price of the equipment is P7,040,000 and its carrying value on Eli Corp.’s books is P5,600,000. The lease is properly accounted for as a sales-type lease. The lease payments have a present value of P6,600,000 at an imputed interest rate of 12% How much is the dealer’s profit that should be recognized by Mahal Co. in 2012? A. P4,000,000 C. P0 B. P1,440,000 D. P1,000,000 PROBLEM 14: On January 2, 2012, CHICKS CO. purchased a machine for P2,400,000 for the purpose of leasing it. The machine’s estimated useful life is 10 years, no residual value, and will be depreciated under the straight-line method. The machine was leased to Marita Corp. on March 1, 2012, for a four-year period at a monthly rental of P36,000. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the end of the lease term. Chicks paid P120,000 of commission associated with negotiating the lease in February 2012. 1. What expense should Marita Corp. record for the year ended December 31, 2012? A. Rental expense for P360,000 C. amortization of commission of P25,000 B. Depreciation expense of P240,000 D. rental and depreciation expense of P600,000

2. What amount of income before income taxes should Chicks record for the year ended December 31, 2012? A. P360,000 C. P95,000 B. P110,000 D. P120,000 PROBLEM 15: IRELAND CO., a lessor of office equipment, purchased a new equipment for P1,000,000 on December 31, 2011. The equipment was delivered the same day to Gilbert Co., the lessee. The following information relates to the lease transaction: a. The leased asset has an estimated useful life of seven years, which is also the lease term b. At the expiration of the lease, the equipment will revert to Ireland, at which time it is expected to have a residual value of P120,000 (none of which is guaranteed). c. Ireland’s implicit interest rate is 12%, which is known by Gilbert. d. Gilbert’s incremental borrowing rate is 14% at December 31, 2011 e. Lease rentals consist of seven equal annual payments, the first of which was paid on December 31, 2011 f. Ireland properly accounts for this lease as a direct financing lease and as a finance lease by Gilbert. Both lessor and lessee are calendar year corporations and depreciate all property, plant, and equipment on the straight-line basis. The present value tables show the following present value factors: Present value of 1 for seven periods at 12% Present value of 1 for seven periods at 14% Present value of an annuity due for seven periods at 12% Present value of an annuity due for seven periods at 14%

0.4523 0.3996 5.1114 4.8887

1. How much is the annual lease payments A. P195,641.12 C. P135,103.43 B. P185,022.50 D. P142,857.14 2. How much unearned interest income should be recognized by Ireland at the inception of the lease? A. P65,724.00 C. P120,000.00 B. P0 D. P415,157.50 3. What is the amount of depreciation expense that Gilbert should record for 2012? A. P142,857.14 C. P185,022.50 B. P135,103.43 D. P0 4. The amount of interest expense that should be recorded by Gilbert for 2012 is A. P76,070.15 C. P91,284.18 B. P100,000 D. P113,487 PROBLEM 16: On July 1, 2012, LITHUANIN CO. purchased Michael Co. ten-year, 8% bonds with a face amount of P1,000,000 for P840,000. The bonds mature on June 30, 2017 and pay interest semiannually on June 30 and December 31. For the six months ended December 31, 2012, Lithuanin recorded bond discount amortization of P3,600 using the effective interest method. What is the amount of interest income to be recognized for the year ended December 31, 2012, from this long-term investment? A. P83,600 C. P40,000 B. P36,400 D. P43,600 PROBLEM 17: BELASSUS CO. licensed its trademark to Rene, Inc. for royalties of 10% of sales of the items treademarked. The agreement provides for the following royalty payment terms: For sales in July − December of the prior year, royalties are payable on March 15. For sales in January – June, royalties are payable on September 15 of the same year. The following royalties were received from Rene, Inc.: March September 15 15 2011 P45,000 P53,000 2012 57,000 49,000 Trademarked items sold from July – December 2012 totaled P800,000.

What is the amount of royalty income to be recognized for the year ended December 31, 2012: A. P129,000 C. P102,000 B. P106,000 D. P94,000 PROBLEM 18: On January 3, 2009, NETHERLANDS CORP. purchased a patent for a new consumer product for P450,000. At the time of purchase, the patent was valid for 13 years. However, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2012, the product was permanently withdrawn from the market under governmental order because of a potential health hazard in the product. What is the amount that should be charged against income during 2012, assuming amortization is recorded at the end of each year? A. P450,000 C. P45,000 B. P315,000 D. P270,000 PROBLEM 19: The balance of LUXEMBOURG COMPANY’s advertising expense account at December 31, 2012, was P264,000 before any necessary year-end adjustment relating to the following: 1. Included in the P264,000 is the P75,000 cost of product posters for a sales promotional campaign in January 2013. 2. Radio advertisements broadcast during December 2012 were billed to Luxembourg on January 3, 2013. Luxembourg paid the P30,000 invoice on January 15, 2013. What is the amount of advertising expense that should be reported by Luxembourg in its December 31, 2013, income statement? A. P309,000 C. P219,000 B. P294,000 D. P264,000 PROBLEM 20: The following information was obtained from the statement of financial position of NORWAY, INC. on December 31, 2011: 6% convertible 10-year bonds at par

P2,000,0 00 Ordinary share capital, P20 par, 110,000 shares issued and 2,200,00 outstanding 0 Retained earnings 950,000 Each P1,000 bond can be converted into 40 ordinary shares. On September 30, 2012, the bonds were all converted into ordinary shares. Norway reported net income of P600,000 in 2012. The income tax rate is 30%. 1. What is Norway’s basic earnings per share for 2012? A. P3.16 C. P5.07 B. P4.62 D. P5.45 2. What is Norway’s diluted earnings per share for 2012? A. P2.83 C. P3.16 B. P3.63 D. P3.49 PROBLEM 21: Presented below is the shareholders’ equity section of the comparative statements of financial position of POLAN COMPANY on December 31, 2012 and 2011:

12% Preference shares, P100 par Share premium – preference Ordinary shares, P10 par* Share premium – ordinary Share premium – treasury shares Retained Earnings

Dec. 31, 2012 P165,000

Dec. 31, 2011 P135,000

26,800 821,200 128,600 3,600

18,400 799,200 117,600 1,600

942,400

792,920

Total shareholders’ equity

P2,087,600

P1,864,720

*Par value after June 1, 2012, stock split Poland had 32,500 ordinary shares outstanding at December 31, 2012. The following shareholders’ equity transactions were recorded in 2011 and 2012: May 1 Sold 4,500 ordinary shares for P24, par value P20 June 3 Sold 350 preference shares for P124, par value P100 0 August 1 Issued an 8% share dividend on ordinary shares. The market value was P30 per share Septemb 1 Declared cash dividend of 12% on preference shares and P3 on er ordinary shares Decembe 3 Net income for the year is P632,400 r 1 2012 January May June

3 1 1 1

Septemb er October

1

Novembe r

1

1

Sold 1,100 ordinary shares for P30 Sold 300 preference shares for P128 Issued a 2-for-1 split of ordinary shares. The par value of ordinary shares was reduced to P10 per share Purchased 500 ordinary shares for P18 to be held as treasury shares Declared cash dividend of 12% on preference shares and P4 per share on outstanding ordinary shares Sold 500 treasury shares for P22

1. What is Poland’s basic earnings per share for 2011? A. P8.25 C. P16.07 B. P8.04 D. P16.49 2. What is Poland’s net income for 2012? A. P475,960 C. P497,760 B. P456,160 D. P495,760 3. What is Poland’s basic earnings per share for 2012? A. P5.81 C. P5.82 B. P6.06 D. P6.05 PROBLEM 22: The following information was obtained from the audited financial statements of CALIFORNIA, INC. for the year ended December 31, 2012: Operating income P3,500,000 Selling, administrative, and other operating 1,800,000 expenses Finance cost 250,000 10% Non convertible bonds 2,500,000 Income tax rate 30% Additional data: a. There were 35,000 ordinary shares outstanding throughout the year. b. On January 1, 2012, there were options outstanding to purchase 20,000 ordinary shares at P30 per share. The average market price during the year was P40 per share. 1. What is California’s basic earnings per share for 2012? A. P29.00 C. P23.56 B. P31,57 D. P31.42 2. What is California’s diluted earnings per share for 2012? A. P26.93 C. P17.14 B. P25.38 D. P31.42