May 2018 Crammer's Guide Questions

Short Answer

1. On January 2, 2014, Brand Company received a grant of P60,000,000 to compensate it for costs it
incurred in planting trees over a period of five years. Brand Company will incur such cost in this manner:

Years 2014 2015 2016 2017 2018

Costs 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000

Actual costs incurred in planting the trees showed P2,000,000 and P4,00,000 in years 2014 and 2015,
respectively. However, in 2016 and up to year 2018, the company has stopped planting trees.

Due to the non-fulfillment of its obligation, the government is demanding an immediate repayment of the
grant in the amount of P50,000,000 which is considered reasonable.

What amount should be recognized as an expense related to the repayment of grant?

2. Entity M, an oil production company, has a widely published environmental policy in which it undertakes
to clean up all contamination that it causes. On October 31, 2012, a contamination on a land occurs while
transporting oil to Country A. Based on past incidences of such contamination, a third party contractor is
willing to undertake the cleaning up on behalf of Entity M. It estimates that the cleaning up work will take
about two years to complete and it provides the following price quotation based on current prices:

Year 1 20,000,000
Year 2 15,000,000

Due to general inflation and other price increases, Entity M estimates that the contractor prices would
increase by 4% by the end of Year 1 and 4.5% by the end of Year 2. Payment will be made at the end of
each year. The current one-year and two-year risk-free rates are 5% and 5.5%, respectively. Entity M
considers that a 3% adjustment is required for the risks that the actual outflows would be different from
the estimate.

What amount of provision should Entity M Company recognized on October 31, 2012?

3. Dave Corporation reports on a calendar-year basis. Its 2015 and 2016 financial statements contained the
following errors:

2015 2016
Over (under) statement of ending inventory (10,000) 4,000
Depreciation understatement 4,000 6,000
Failure to accrue salaries at year-end 8,000 12,000

As a result of the above errors, 2016 income would be

4. Machine Parts Supply Company is a distributor of various engine parts. In testing the sales and purchases
cutoff of the company in connection with your audit of its financial statements for the year ended August
31, 20x1, you find the following information:
The company has ceased operation during the physical count on September 2, except for receiving goods
from suppliers and making shipments to essential wholesale customers. On the morning of the physical
count, you noted in your working papers the last shipping document (no. 314 and receiving report (no.
682) issued the previous day.

You observed the client’s counting procedures and performed test counts of selected inventory items. You
found the counts and descriptions to be accurate.

Before leaving the warehouse at the end of the day after all counting is completed, you performed the
following:

1. Examined the receiving reports book. The last number used was 686. The receiving clerk informed you
that all goods received on September 2 were kept in the receiving department with other goods received
during the past tow or three days.

2. Examined the shipping documents book. The last number used was 318.

3. Asked the receiving department to identify all goods received September 1. He told you that receiving
reports 680 through 682 are those goods received on September 1.

4. Asked the shipping department to identify all goods shipped or sold over the counter September 1. He
informed you goods on shipping documents 311 to 313 were shipped September 1.

5. Examined the client’s inventory counts in the receiving department. Inventory had been counted only
for receiving reports 674 to 684.

6. Your examination showed that inventory for all shipments made September 2 were included in the
counts in the department from which the inventory was taken.

During the year-end audit work you obtained selling prices, costs, terms, and recording data for each
receipt and shipment. They are as shown below:

Purchase of inventory
Date Date received August Purchases
RR No. shipped Amount Journal FOB
679 8/29 8/30 25,800 Included Destination
680 8/27 9/1 36,330 Included Origin
681 8/20 9/1 5,790 Included Origin
682 8/27 9/1 140,220 Included Destination
683 8/30 9/2 13,500 Excluded Destination
684 8/30 9/2 3,180 Excluded Origin
685 9/2 9/2 84,000 Excluded Origin
686 8/30 9/2 20,580 Excluded Destination
 Shipments of inventory
Shipping Date shipped Amount August Sales Journal
No.
310 8/31 23,400 Included
311 9/1 1,680 Included
312 9/1 95,820 Included
313 9/1 19,050 Included
314 9/1 5,790 Included
315 9/2 48,630 Excluded
316 9/2 10,350 Excluded
317 9/2 2,340 Excluded
318 9/2 108,330 Excluded

The gross profit percentage is approximately 30%.

The net adjustment to the client’s inventory is

5. On May 1, 2014, Golden Company purchased a short-term, P4,000,000 face value 9% debt instruments
for P3,720,000 excluding the accrued interest and classified it as a investment to profit or loss which is
based on the business model of the entity to buy and sell portfolio of securities and to make profit for
shorter movements in the market rate of interest. Golden Company incurred and paid P20,000 transaction
cost related to the acquisition of the instrument. The debt instruments mature on January 1, 2017, and pay
interest semi-annually on January 1 and July 1. On December 31, the fair market value of the instruments
is P3,880,000. On February 2, 2015, Golden Company sold the debt security for P3,960,000.

What amount should Golden Company report for short-term debt securities on December 31, 2014?

6. As of December 31, 2015, the carrying amount of Jona’s unfunded obligation for long-service leave was
P500,000 of which P200,000 are entitled to take a leave in the twelve months following the end of the
reporting period December 31, 2015. The balance of P300,000 is in respect of leave that employees are
entitled to take only after the end of the next annual reporting period. Jona Company anticipates that only
75% of its employees will take the leave due during the next annual reporting period (approximately
P50,000 of the P200,000) is expected to be carried forward. What amount of current liability for
long-service leave should Jona Company report in its December 31, 2015 statement of financial position?

7. Belle Company undertakes an IPO for the listing and issuance of 700,000 new shares and 300,000
existing shares. In relation to this, the company incurred the following costs:

Documentary stamp tax 25,000

Fairness opinion and valuation report 125,000
Tax opinion 75,000
Newspaper publication 200,000
Listing fee 300,000
Other joint costs 275,000

How much should be recognized immediately in profit or loss?

 8. Jason Company has taken out a foreign loan of $100,000 that is recorded at P4,400,000. At the reporting
date, the carrying value of the loan is P4,000,000. The unrealized exchange gain of P400,000 is included
in the profit or loss, but will be taxable when the gain is realized on the repayment of the loan.

If the current and future tax rates are 34% and 35%, respectively, what amount of deferred tax asset
should the company recognize?

9. At the beginning of Year 1, Larry Corporation grants 100 share options to each of its 200 employees.
Each grant is conditional upon the employee remaining in service over the next three years. The entity
estimates that the fair value of each option is P21. On the basis of a weighted average probability, the
entity estimates that 60 employees will leave during the three-year period and therefore forfeit their rights
to the share options.

Suppose that 15 employees leave during year 1. Also suppose that by the end of Year 1, the entity’s share
price has dropped, and the entity reprices its share options, and that the repriced share options vest at the
end of year 3. The entity estimates that a further 35 employees will leave during years 2 and 3. During
year 2, a further 10 employees leave, and the entity estimates that a further 10 employees will leave during
year 3. During year 3, a total of 8 employees leave.

The entity estimates that, at the date of repricing, the fair value of each of the original share options
granted (ie before taking into account the repricing) is P10 and that the fair value of each repriced share
option is P13.

The amount to be recognized as expense in year 3 is

10. On February 1, 2015, Entity A enters into a contract with Entity B to receive the fair value of P1,000 of
Entity A’s own outstanding ordinary shares as of January 31, 2016 in exchange for a payment of
P104,000 in cash (P104 per share) on January 31, 2016.

Additional information:
Market price per share on February 1, 2015 P100
Market price per share on December 31, 2015 P110
Market price per share on January 31, 2016 P106

Fixed forward price to be paid on January 31, 2016 P104

Present value of forward price on February 1, 2015 P100
Number of shares under forward contract 1,000

Fair value of forward on February 1, 2015 P0

Fair value of forward on December 31, 2015 P6,300
Fair value of forward on January 31, 2016 P2,000

If settlement will be made by delivering a fixed amount of cash and receiving a fixed number of Entity
A’s shares, Entity A shall record a decrease in equity on February 1, 2015 at
11. Roger Company began operations on January 2, 2007. Shown below is the company’s trial balance
prepared by its accountant for December 31, 2015.

Debit Credit
Cash 60
Accounts receivable 150
Inventory 360
Equipment 2,400
Accumulated depreciation - equipment 750
Buildings 3,600
Accumulated depreciation - buildings 1,200
Patent 1,650
Franchise agreement 285
Organization cost 306
Goodwill 1,035
Accounts payable 36
Accrued wages payable 15
Accrued taxes payable 180
Bonds payable 1,500
Premium on bonds payable 105
Preference shares (P100 par value) 300
Ordinary shares (P25 par value) 3,300
Premium on share capital 660
Retained earnings as of January 1 1,200
Sales 2,700
Cost of goods sold 1,200
Selling and administrative expenses 900

As member of the audit team for Roger Company, you have been assigned the audit of the company’s
intangible assets.

Patents
The patents, acquired January 2, 2008, are being amortized over an expected useful life of 14 years.
Improvements made to equipment covered by the patents costing P225,000 were debited to the account in
January 2012. Amortization in 2012-2014 included amortization on the P225,000 for the remaining life of
the relevant patent. It is determined that the P225,000 should have been expensed in 2012. It is further
determined on December 31, 2014, that one f the patents has a remaining life of only 2 years. This patent
was originally assigned a cost of P630,000.

Franchise agreement
A franchise agreement was signed on January 1, 2015. A P150,000 fee was paid, covering a 5-year period,
at the end of which the company may renew the agreement by paying P150,000. A decision on renewal
has not been made as of December 31, 2015. The agreement calls for an annual payment of 5% of
revenue. An entry debiting the account for P135,000 was made at the time of the cash payment for 2015.
 Organization costs
Organization costs include the unamortized portion of amounts paid to promote for services rendered at
the inception of the corporation. These fees have been amortized, since inception, over an estimated
40-year life. The decision is made, as of December 31, 2015, to reduce the total period of amortization of
organization costs to 12 years.

Goodwill
The goodwill account includes the following:
P135,000 Legal expenses relative to incorporation. These were assigned to the account in
January 2007.
P600,000 Excess of cost over assigned net asset values of an enterprise acquired in early
2013 expected to be of value for an indefinite period.
P300,000 Paid to an advertising consulting firm in early 2014 for a major advertising
effort expected to be beneficial for an indefinite period.

No amortization has been taken on any amount in the goodwill account.

What is the carrying value of the patents on December 31, 2015?

12. On January 1, 2015 Victor Company, a medium-sized entity, acquired 30% of the ordinary shares that
carry voting rights at a general meeting of shareholders of Maxim Company for P6,000,000 for the year
ended December 31, 2015 Maxim Company recognized a profit of P8,000,000 and paid dividend of
P4,000,000. The fair value of Victor Company investment on December 31, 2015 is P5,800,000. Victor
Company uses the cost less impairment less model of accounting its investment because Maxim Company
shares have no published price quotations. What amount revenue should Victor Company report in its
statement of comprehensive income related to its investment in Maxim Company for the year ended
December 31, 2015?

13. The equity section of Oscar Corporation as of December 31, 2015, was as follows:

Share capital - ordinary, par value P2; authorized 20,000 shares;

issued and outstanding 10,000 shares 20,000
Share premium - ordinary 30,000
Retained earnings 75,000
125,000

On March 1, 2016, the Board of Directors declared a 15% share dividend, and accordingly 1,500
additional shares were issued. On March 1, 2016, the fair value of the share was P6 per share. For the two
months ended February 28, 2016, Oscar sustained a net loss of P10,000.

What amount should Oscar report as retained earnings as of March 1, 2016?

14. During the year ended September 30, 2017, the entity recorded the following transactions:

1. Payment of an annual insurance premium of P12,000. This covered the period to December 31, 2017.

2. Receipt of P6,000 in respect of rent from a tenant covering the three month period to November 30,
2017.
 What is the impact on the profit of making the year end adjustments for prepaid expenditure and unearned
income at September 30, 2017?

15. The Ian Company has a single investment property which had originally cost P580,000 on January 1,
2012. At December 31, 2014 its fair value was P550,000 and at December 31, 2015 it had a fair value of
P510,000. On acquisition the property had a useful life of 40 years. According to PAS 40, Investment
Property, what should be the expense recognized in Ian’s profit or loss for the year ending December 31,
2015 under each of the fair value and the cost model, respectively.

16. On January 30, 2015, Delicate Company, which uses PFRS 9, sold an investment in other comprehensive
income for P1,200,000. This investment was originally purchased at a cost of P800,000. At the time of
disposal, the carrying amount of the investment at fair value was P900,000. The investment has a related
fair value gain of P100,000 that was recognized in the fair value reserve. What amount of unrealized gain
or loss should be transferred to retained earnings immediately after the sale?

17. Christian Company, a public limited company, has granted share options to its employees with a fair
value of P12,000,000. The options vest in three years’ time. The company uses the fair value model to
estimate the fair value of the options, the number of employees that will vest and the revision of estimates
such as the following:

1. Grant date is January 1, 2016 and estimate of employees leaving the company during the vesting period
is 5%.

2. Revision of estimate is January 1, 2017 and estimate of employees leaving the company during the
vesting period is 6%.

3. Actual number of employees leaving the company as of December 31, 2018 is 5%.

What would be the amount of expense charged in the income statement for the year ended December 31,
2018?

18. Joel Company purchased diary cattle at an auction for P300,000 on July 1, 2015. Cost of transporting the
cattle back to the company’s farm was P3,000 and the company would have to incur cost similar
transportation cost if it was to sell the cattle in the auction, in addition an auctioneer’s fee of 2% of sales
price. On December 31, 2015, after taking in to account and location, the fair value of the biological assets
had increased to P500,000 (that is, the market price including the cost of transporting the asset). What
amount of loss on initial recognition should the company recognized related to the biological assets?
19. A portion of the Jonathan Company’s statement of financial position appear as follows:

December 31, 2015 December 31, 2014

Assets:
Cash 353,300 100,000
Notes receivable - 25,000
Inventory ? 199,875
Liabilities
Accounts payable ? 75,000

Jonathan Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2015, cash totaling P471,700 was paid on accounts payable. Operating expenses for 2015 totaled
P220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units per month and
valued by using periodic FIFO. The unit cost of inventory was P32.60 during January 2015 and increased
P0.10 per month during the year. Jonathan sells only one product. All sales are made for P50 per unit. The
ending inventory for 2014 was valued at P32.50 per unit.

Cost of goods sold for the year ended December 31, 2015

20. Rommel Company’s portfolio of trading securities includes the following on December 31, 2015:

Cost Fair Value

15,000 ordinary shares of Tower Company 1,431,000 1,251,000
30,000 ordinary shares of Sutherland 1,638,000 1,710,000
Company
3,069,000 2,961,000

All of the above securities have been purchased in 2015. In 2016, Rommel Company completed the
following securities transactions:

March 1: Sold 15,000 shares of Tower Company ordinary shares at P93, less brokerage commission of
P13,500.

April 1: Bought 1,800 ordinary shares of Icon, Inc. at P135 plus commission, taxes, and other transaction
costs of P4,950.

The Rommel Company portfolio of trading securities appeared as follows on December 31, 2016:

Cost Fair Value

30,000 ordinary shares of Sutherland 1,638,000 1,740,000 (a)
Company
1,800 ordinary shares of Icon, Inc. 247,950 225,000 (b)
1,885,950 1,965,000
(a) net of P19,500 estimated transaction costs that would be incurred on the sale of securities.
(b) net of P4,500 estimated transaction costs that would be incurred on the sale of securities.

What amount should be reported as trading securities in Rommel”s statement of financial position on
December 31, 2016?
21. Antonio Corporation has one of its many departments that perform machining operations on parts that are
sold to contractors. A group of machines have an aggregate book value at the latest balance sheet date
(December 31, 2015) totaling P369,000. It has been determined that this group of machinery constitutes a
cash generating unit for purposes of applying PAS 36. Upon analysis, the following facts about future
expected cash inflows and outflows become apparent based on the diminishing productivity expected of
the machinery as it ages, and the increasing costs that will be incurred to generate output from the
machines.

Year Revenues Costs, excluding depreciation PV of discount rate of 5%

2012 225,000 84,000 .952
2013 240,000 126,000 .907
2014 195,000 165,000 .864
2015 60,000 45,000 .823
Total 720,000 420,000

The fair value less cost to sell of the machinery in this cash generating unit is determined by reference to
use machinery quotation sheets obtained from a prominent dealer. After deducting disposition costs, the
net selling price is calculated as P253,500.

What is the amount of impairment loss to be recognized by Antonio Company on December 31, 2015?

22. An investor in Jameson Company asked you for advice on the propriety of Jameson’ financial reporting
for two of its investments. You obtained the following information related to the investments from
Jameson’s December 31, 2015 financial statements:

1. 20% ownership interest in Rose Company, represented by 200,000 ordinary shares purchased on
January 2, 2015, for P600,000.
2. 20% ownership interest in Butler Company, represented by 20,000 ordinary shares purchased on
January 2, 2015 for P300,000.
3. On January 2, 2015, the carrying values of the acquired shares of both investments equaled their
purchase price.
4. Rose Company reported earnings of P400,000 for the year ended December 31, 2015, and declared and
paid dividends of P100,000 during 2015.
5. Butler Company reported earnings of P350,000 for the year ended December 31, 2015, and declared
and paid dividends of P60,000 during 2015.
6. On December 31, 2015, Rose’s and Butler’s ordinary shares were trading over the counter at P4 and
P20 per share, respectively.
7. The investment in Rose is accounted for using the equity method.
8. The investment in Butler is accounted for as available-for-sale securities.

You recalculated the amounts reported in Bull’s December 31, 2015 financial statements, and determined
that they were correct. Stressing that the information available in the financial statements was limited, you
advised the investor that, assuming Jameson properly applied generally accepted accounting principle,
Jameson may have appropriately use two different method to account for its investments in Rose and
Butler, even though the investment represent equal ownership interests.

What is the income on income statement from Butler investment?

23. Mark Company cultures tiger prawns in one hundred one-acre brackish water ponds in a parcel of
mangrove land in Laguna leased from the government. The grow-out of transformation phase of prawns
takes about four months. As of December 31, 2014, the biological assets of the farm consisted of:

Batch qty by no. of Est. fair value per pond

Age group attribute ponds culture-point of sale costs
One-month culture 20 P5,000
Two-month culture 25 10,000
Three-month culture 25 15,000
Four-month culture 15 20,000
Just harvested 15 -

During the year, three hatches of culture were harvested and sales of prawns for the year totaled
P6,000,000. At December 31, 2015, the biological assets of the farm consisted of:

Batch qty by no. of Est. fair value per pond

Age group attribute ponds culture-point of sale costs
One-month culture 15 P5,000
Two-month culture 25 10,000
Three-month culture 205 15,000
Four-month culture 30 20,000
Just harvested 10 -

What is the amount of net income in 2015 from the aquaculture operations?

24. Bob used the following balances to prepare his final accounts as at April 30, 2017.

Receivables 6,000
Bank loan 3,000
Bank overdraft 2,500
Drawings 4,100
Capital 12,500
Revenue 22,000
Purchases 19,200
Rent 5,400
Bank interest 825
Heat and light 4,475
40,000 40,000

The business does not hold inventory. No further adjustments were required.

What is Bob’s opening capital figure as at May 1, 2017?

25. At the beginning of Year 1, an entity grants to a senior executive 3,000 share options, conditional upon
the executive’s remaining in the entity’s employ until the end of Year 3. The exercise price is P40.
However, the exercise price drops to P30 if the entity’s earnings increase by at least an average of 10%
per year over the three-year period.
 On grant date, the entity estimates that the fair value of the share options, with an exercise price of P30, is
P15 per option. If the exercise price is P40, the entity estimates that the share options have a fair value of
P12 per option.

During Year 1, the entity’s earnings increased by 12%, and the entity expects that earnings will continue
to increase at this rate over the next two years. The entity therefore expects that the earnings target will be
achieved, and hence the share options will have an exercise price of P30. During Year 2, the entity’s
earnings increased by 13%, and the entity continues to expect that the earnings target will be achieved.

During Year 3, the entity’s earnings increased by only 3%, and therefore the earnings target was not
achieved. The executive completes three year’s service, and therefore satisfies the service condition.
Because the earnings target was not achieved, the 3,000 vested share options have an exercise price of
P40.

What is the cumulative compensation expense for Years 1, 2 and 3?

26. The Chill Company owns three properties which are classified as investment properties according to PAS
40, Investment Property. Details of the properties are given below:

Fair value at Fair value at

Initial cost December 31, 2014 December 31, 2015
Property 1 275,000 320,000 350,000
Property 2 305,000 305,000 285,000
Property 3 385,000 385,000 360,000

Each property was acquired in 2011 with a useful life of 50 years. The company’s accounting policy is to
use the fair value model for investment properties. What is the gain or loss to be recognized in Chill’s
profit or loss for the year ending December 31, 2015?

27. Sun Finance granted a 10%, 2 -year, P5,000,000 loan to Duchess Company on January 1, 2015. The
interest is payable every December 31 for each year during the term of the contract. Sun Finance incurred
an origination cost of P328,326 but charge Duchess Company P150,000 as origination fee. The effective
rate is now 8% after considering the origination cost and origination fee. Due to financial difficulty,
Duchess was unable to pay the interest on December 31, 2015, Sun Finance has now considered that the
loan to Duchess Company is now impaired. Reliable estimate shows that the projected cash flows from
the loan are as follows: P2,000,000 on December 31, 2016 and P3,000,000 on December 31, 2017. What
amount of impairment loss on the loan should Sun Finance recognize on December 31, 2015?

28. Caloy Company purchased a machine for P300,000 on January 1, 2013, with the following additional
items paid or incurred:

Separation pay for laborer laid off upon acquisition of new machine 3,600
Loss on sale of machine replaced 3,900
Transportation in 3,000
Installation cost 12,000

The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.

On January 1, 2016, new parts which cost P37,800 were added to the machine so as to reduce its fuel
consumption, but with no change in its estimated life or residual value.
 The annual depreciation charge on the machine for 2016 was

29. Jones Company, an SME, leased equipment for the entire 10-year useful life, agreeing to pay P1,000,000
at the start of the lease term on January 1, 2016 and P1,000,000 annually on each January 1 for the next
nine years. The present value factor using the implicit rate in the lease which is 10% for an annuity due
with ten payments is 6.76 and for an ordinary annuity with ten payments is 6.14. The entity incurred
P400,000 as initial direct costs and depreciated the asset using the straight line method.

What is the carrying value of the leased equipment on December 31, 2016?

30. The accounting staff of Allan Company submitted an inventory list at December 31, 2016 which showed a
total of P5,000,000. The following information which may or may not be relevant to the inventory value
submitted, are given below:

a Excluded from the inventory were merchandise costing P80,000 because they were
transferred to the delivery department for packaging on December 28 to be shipped on
January 2, 2017.
b The bill of lading and their import documents on a merchandise were delivered by the
bank and the trust receipt accepted by the Company on December 26, 2016. Taxes and
duties have been paid on this shipment but the customs brokers has not delivered the
merchandise until January 7, 2017. Delivered cost of shipment totaled P800,000. This
shipment was not included in the inventory on December 2016.
c A review of the company’s purchase orders shows a commitment to buy P100,000
worth of merchandise. This was not included in the inventory because the goods were
received on January 3, 2017.
d Supplier’s invoice for P30,000 worth of merchandise dated December 28, 2016 was
received thru the mails on December 20, 2016 although the goods arrived only January
4, 2017. Shipment term is FOB, seller. This was included on December 31, 2016
inventory by the company.
e Goods valued at P20,000 were received on December 28, 2016 for the approval of
Allan Company. The inventory team included this merchandise in the list but did not
place value on it. On January 4, 2017, the company informed the supplier by long
distance call of the acceptance of the goods and the supplier’s invoice was received on
January 7, 2017.
f On December 27, 2016, an order for P25,000 worth of merchandise was placed. This
was included in the year-end inventory although it was received only on January 5,
2017. Seller shipped goods FOB, buyer.
g The company performed net realizable value testing. The NRV was correctly
determined at P5,880,000.

How much is the adjusted value of inventory on December 31, 2016?

31. The Rafa Company included the following in its notes receivables as of December 31, 2015:

Note receivable from sale of land 2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2015 and other information relate to the company’s notes receivable:

1. On January 1, 2015, Rafa Company sold a tract of land to Triple X Company. The land, purchased 10
years ago, was carried on Rafa’s books at P1,500,000. Rafa received a noninterest-bearing note for
P2,640,000 from Triple X. The note is due on December 31, 2016. There was no established exchange
prince for the land. The prevailing interest rate for this note on January 1, 2015 was 10%.

2. On January 1, 2015, Rafa Company received a 5% P3,600,000 promissory note in exchange for the
consultation services rendered. The note will mature on December 31, 2017, with interest receivable every
December 31. The fair value of the services rendered is not readily determinable. The prevailing rate of
interest for a note of this type was 10% on January 1, 2015.

3. On January 1, 2015, Rafa Company sold an old equipment with a carrying amount of P4,800,000,
receiving P7,200,000 note. The note bears an interest rate of 4% and is to be repaid in 3 annual
installments of P2,400,000 (plus interest on the outstanding balance). Rafa received the first payment on
December 31, 2015. There is no established market value for the equipment. The market interest rate for
similar notes was 14% on January 1, 2015.

How much interest income should be recognized in 2015?

32. Miggy Company offer all its 10,000 employees the opportunity to participate in an employee
share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary
shares (par value P1 per share) at a P20 percent discount. The purchase price must be paid immediately
upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on
average 80 shares at P22 share (market price P27.50). Under PFRS, Miggy Company will record

33. Lovely Company leased equipment to Mie Inc. on January 1, 2015. The lease is for an eight-year period.
The first of eight equal annual payments of P900,000 was made on January 1, 2015. Lovely had
purchased the equipment on December 29, 2014, for P4,800,000. The lease is appropriately accounted for
as a sales-type lease by Lovely. Assume that the present value at January 1, 2015, of all rent payments
over the lease term discounted at a 10 percent interest rate was P5,280,000. What amount of interest
income should Lovely record in 2016 as a result of the lease?

34. On June 30, 2016, the Oriental Copper Mines purchased a copper mine for P14,580,000. The estimated
capacity of the mine was 1,620,000 tons. Oriental Copper Mines expects to extract 15,000 tons of ore a
month with an estimated selling price of P50 per ton. Production started immediately after some new
machines costing P1,800,000 were bought on June 30, 2016. These new machines had an estimated useful
life of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted from the
property, at which time the machines will already be useless. Oriental’s books show the following
expenses for 2016:

Depletion expense 1,215,000

Depreciation - machinery 120,000
 Recorded depletion expense was

35. A company does not keep full accounting records. The following details relate to transactions with credit
customers and suppliers for the year ended December 31, 2017:

Trade receivables, January 1, 2017 130,000

Trade payables, January 1, 2017 60,000
Cash received from customers 686,400
Cash paid to suppliers 302,800
Discounts allowed 1,400
Discount received 2,960
Bad debts 4,160
Contra between payable and receivables ledger 2,000
Trade receivables, December 31, 2017 181,000
Trade payables, December 31, 2017 84,000

What figure should appear for purchases in the company’s statement of profit or loss for the year ended
December 31, 2017?

36. Crystal Corporation began operations on January 1, 2015. For financial reporting, Crystal recognizes
revenue from all sales under the accrual method. However, in its income tax returns, Crystal reports
qualifying sales under the installment method. Crystal’s gross profit on these installment sales under each
method was as follows:

Year Accrual method Installment method

2015 1,600,000 600,000
2016 2,600,000 1,400,000

The income tax rate is 30% for 2015 and future years. There are no other temporary or permanent
differences. In its December 31, 2016 balance sheet, what amount should Crystal report as liability for
deferred income taxes?

37. Steve Company’s 2016 income statement reported P90,000 income before provision for income taxes. To
compute the provision for current income tax, the following 2016 data are provided:

Rent received in advance 16,000

Income from exempt municipal bonds 20,000
Depreciation deducted for income tax purposes in excess of
depreciation reported for financial statement purposes 10,000
Enacted corporate income tax rate 30%

What amount of current income tax liability should be reported in Steve’s December 31, 2016 balance
sheet?
38. On June 30, 2017, a flash flood damaged the warehouse and factory of Gil Corporation, completely
destroying the work in process inventory. There was no damage to either the raw materials or finished
goods inventories. A physical inventory taken after the flood revealed the following valuations:

Finished goods 112,000

Work-in-process -
Raw materials 52,000

The inventory on January 1, 2017, consisted of the following:

Finished goods 120,000

Work-in-process 115,000
Raw materials 42,500

A review of the books and records disclosed that the gross profit margin historically approximated 34% of
sales. The sales for the first 6 months of 2017 were P428,000. Raw materials purchases were P96,000.
Direct labor costs for this period were P130,000, and the manufacturing overhead has historically been
applied at 60% of direct labor.

Compute the value of the work in process inventory lost on June 30, 2017.

39. The following pertains to Wild Company’s biological assets:

Fair value based on unobservable inputs for the asset 4,900

Quoted price in an active market for similar asset 5,400
Quoted price in an active market for identical asset 5,300
Selling price in a binding contract to sell 5,600
Estimated commissions to brokers and dealers 500
Estimated transport and other costs necessary to get asset to
the market 300

The entity’s biological assets should be valued at?

40. The following information pertain to Ricky Corporation’s which started operations on December 31,
2012.

Summarized information about its employees at December 31, 2016 includes:

Number of Salary level for the Percentage wage

Employee employees in 12-month period ending increase effective
Category category June 30, 2017 July 1, 2017
A 9 100,000 5%
B 200 50,000 7%
C 300 25,000 9%

Annual salary increases are expected to continue at the same rates for the foreseeable future.
 In December 2016, with a view to reducing its workforce, the entity made an irrevocable offer to its
employees of a voluntary redundancy package. In accordance with the offer, the entity will compensate
any employee who accepts voluntary redundancy on or before June 30, 2017. The compensation offered is
equal to the employee’s annualized salary for the 12-month period ending June 30, 2017.

At December 31, 2016, the entity’s voluntary redundancy records include:

Number of employees who Number of employees

Employee accepted voluntary redundancy expected to accept voluntary
Category by Dec 31, 2016 redundancy in 2017
A 0 1
B 2 8
C 5 25

Calculate the entity’s liability for termination benefits at December 31, 2016

41. On January 2, 2014, Start Company originates a 10-year 7% P4,000,000. The loan carries an annual
interest rate of 7% and is repayable at par at the end of year 10 (December 31, 2023). Star Company
charges a 1.25% (P50,000) non-refundable loan origination fee to the borrower and also incurs P100,000
in direct origination costs. The contract specifies that the borrower has an option to pre-pay the instrument
at approximately equal to instrument’s amortized cost at each exercise date, and that no penalty will be
charged for pre-payment. But at the inception of the contract, Star Company expects the borrower not to
pre-pay, the amortization period is equal to the instrument’s full term and for that reason the effective
yield rate is determined at 6.823%.

What is the amortized cost of the instrument on December 31, 2015?

42. The Justin Company purchased a varnishing machine for P300,000 last January 2014. The Company
received a government grant of P27,000 in respect of this asset. Company policy was to depreciate the
asset over 4 years on a straight-line basis and to treat the grant as deferred income. Under PAS 20,
Government Grants and Government Assistance, what should be the carrying amounts of the machine and
the deferred income balance at December 31, 2015, respectively?

43. An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant
started operating on January 1, 2013. The plant has a useful life of 40 years. Its initial cost was P120
million, this included an amount for decommission costs of P10 million, which represented estimated cash
flows payable in 40 years discounted at a risk-adjusted rate of 5%. The entity’s financial year ends on
December 31.

The entity adopts the revaluation model on December 31, 2015. A market-based discounted cash flow
valuation of P115 million is obtained at December 31, 2015. It includes an allowance of P11.6 million for
decommission costs, which represents no change to the original estimate, after the unwinding of three
years’ discount.

On December 31, 2016, the decommission liability (before any adjustment) is P12.2 million and the
discount rate has not changed. However, on that date, the entity estimates that, as a result of technological
advances, the present value of the decommission liability has decreased by P5 million.
 The entity decides that a full valuation of the asset is needed at December 31m 2016, in order to ensure
that the carrying amount does not differ materially from fair value. The asset is now valued at P107
million, which is net of an allowance of P7.2 million for the reduced decommissioning obligation that
should be recognized as a separate liability.

The entity does not transfer realized surplus directly to retained earnings.

The entity should report revaluation surplus as of December 31, 2016 at

44. The following information relates to the defined benefit pension plan for the Smart Company for the year
ending December 31, 2014:

Present value (PV) of benefit obligation, January 1 6,700,000

PV of benefit obligation, December 31 7,200,000
Fair value of plan assets, January 1 6,500,000
Fair value of plan assets, December 31 6,900,000
Expected return on plan assets 675,000
Remeasurement loss on benefit obligation 150,000
Employer contribution 300,000
Benefits paid to retirees 600,000
Settlement rate 10%

How much would be the current service cost for the year?

45. Crazy Company has recognized a provision for lawsuit at P400,000 in its statement of financial position at
December 31, 2016. At December 31, 2017, the risk adjusted present value of the best estimate of the
amount required to settle the lawsuit is P900,00 but portion of the increase during 2017 included a 7% that
is attributable to the unwinding of the discount and the remainder of the increase is attributed to better
information becoming available on which to base the estimates. In the statement of comprehensive
income for the year ended December 31, 2017, what amount of loss from the lawsuit Crazy Company
must disclosed?

46. Jay Company is an experienced home appliances dealer. Jay Company also offers a number of services
together with the home appliances that it sells (installation and maintenance). Jay Company sells
dishwashers on a standalone basis, it also sells installation and maintenance service for the dishwashers.

Pricing for dishwashers is as follows:

Dishwasher only 1,600
Dishwasher with installation services 1,700
Dishwasher with maintenance services 1,950
Dishwasher with installation and maintenance services 2,000

In cases where maintenance services are provided, the maintenance service is separately priced within the
arrangement at P350. Dishwashers are sold subject to a general right of return. If a customer purchases a
dishwasher with installation and/or maintenance services, in the event Jay Company does not complete
the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds
P1,600. On January 1, 2012, Jay Company sells 100 dishwashers to Condo Complex, a developer of
high-rise condos. The dishwashers are installed and Condo Complex purchases the dishwashers with the
installation and maintenance services. The total price for the 100 dishwashers is P190,000.
 How much revenue should Jay Company allocate to the installation?

47. The Jet Company accounts for non-current assets using the revaluation model. On June 30, 2017, Jet
Company classified two items of non-current assets as held for sale in accordance with PFRS 5. The
following information relates to these assets:

Asset 1 Asset 2
Carrying amount before classification as held for sale 400,000 300,000
Revaluation surplus before classification as held for sale 60,000 30,000
Fair value, June 30, 2017 450,000 260,000
Estimated costs to sell 20,000 12,000

The balance of revaluation surplus as of June 30, 2017 after classification of the assets as held for sale is

48. On January 1, 2016, Ben Company purchased bonds with face value of P4,000,000 for P3,500,000 plus
transaction costs of P211,618 with the business model of collecting contractual cash flows that are solely
payments of principal and interest and to sell financial assets. The entity does not elect the fair value
option in measuring financial assets. The bonds mature on December 31, 2020 and pay interest of 10%
annually every December 31 with a 12% effective yield. The entity changed its business model for
managing financial assets on December 31, 2017 to only collect contractual cash flows. The fair value of
the financial asset and effective rate at the end of 2016 and each succeeding year are:

Date Fair Value Effective Rate

December 31, 2016 3,875,902 11%
December 31, 2017 4,101,252 9%
December 31, 2018 4,293,343 6%
December 31, 2019 4,112,150 7%
December 31, 2020 4,000,000 10%

What is the carrying amount of the financial asset on December 31, 2018?

49. V Corporation is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered into
an agreement on January 1, 2017 to sell its processing plant to BTS Corporation for P467,100. At the date
of sale, the plant had a carrying amount of P400,000 and a future useful life of five years. BTS
Corporation immediately leased the processing plant back to V Corporation. BTS Corporation
immediately leased the processing plant back to V Corporation. The terms of the lease agreement were:

The lease is cancelable, but only with the permission of the lessor. At the end of the lease term, the plant
is to be returned to BTS Corporation. In setting up the lease agreement, BTS Corporation incurred P9,414
of initial direct costs. The annual rental payment includes P15,000 to reimburse the lessor for maintenance
costs incurred on behalf of the lessee.

The carrying amount of the finance lease receivable to be reported by the lessor as of December 31, 2017
is
50. In line with your audit of Len Corporation’s investment accounts as of December 31, 2015, you
ascertained the following information:

Investment type Carrying value per books

Investment in bonds 8,000,000
Investment in stocks 6,200,000
Investment property 3,500,000

1. The investment in bonds which shall mature on December 31, 2017 were acquired in January 1, 2013
when the prevailing market rate of interest was at 12%. Interest at 10% is collectible from the bonds every
December 31. The acquisition was recorded by the client as a debit to Investment in bonds at face value
with the difference between the face value and the total consideration given up to interest income. Interest
collected from 2013 to 2015 were appropriately recorded. No other entry relating to the investment was
made by the client. Further investigation revealed that the company business model with regard debt
security investment has an objective of collecting contractual cash flows. The prevailing market rate of
interest was at 11%, 9% and 9.5% at the end of 2013, 2014 and 2015, respectively.

2. The investment in stocks is for 40,000 shares of Telecom Corporation’s ordinary shares acquired in
September 30, 2014. The shares were originally acquired at P145 per share. The book value of the net
assets of Telecom Corporation on this date was at P20 million and its total outstanding shares was at
P160,000. Telecom’s depreciable assets with average remaining life of 10 years were understated on this
date.

The fair value of Telecom’s shares were at P155 per share at the end of 2014. The company recorded the
remeasurement (from the acquisition cost to fair value) of the investment at the end of 2014 and
recognized the same as unrealized holding gain in the 2015 profit/loss. The only other entry made by the
client related to the investment was the receipt of P2 per share dividend by the end of 2014 and P4 per
share dividend in 2015 as dividend income.

Further investigation revealed the following relevant information:

Telecom Corporation 2014 2015

Net income for the year 3,800,000 5,200,000
Foreign exchange loss - OCL - 400,000
Unrealized holding gain - - 300,000
OCI
Fair value 155 per share 169 per share

3. The investment property was a building-factory converted on June 30, 2015 as a property for lease
since the company decided to discontinue its production segment. The factory was originally acquired at
P6 million on January 1, 2010 and was depreciated using the straight-line method over a 10 year useful
life. The company elected to use the fair value method in measuring its investment property. The fair
value of the building on June 30, 2015 was at P3.2 million. On December 31, 2015, the fair value of the
building is at P3 million.

What is the retroactive adjustment to the retained earnings, beginning as a result of your audit if
investment in stocks?