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Unit Iii Assessment Problems
Unit Iii Assessment Problems
Assessment
Multiple Choice
Directions: Read and analyze each item. Encircle/Highlight the letter of the correct
answer. Please also provide solution for each item. You may also view this exam on
google class. Submit your work in the pigeon boxes which are provided in your
department/college, or to google class on or before the date as reflected in your study
schedule.
Problem:
Western Company has several contingent liabilities on December 31, 2020. The auditor
obtained the following brief description of each liability. In June 2020, Western Company
became involved in litigation. In December 2020, the court assessed a judgement for
P2,000,000 against Western Company. The entity is appealing the amount of the
judgement. The entity’s attorney believed it is probable that they can reduce the
assessment on appeal by 50%.
In August 2020, Pasig City brought action against Western Company for polluting the
river with its waste products. It is probable that Pasig City will be successful but the
amount of damages Western might have to pay should not exceed P3,000,000.
a. 3,000,000
b. 5,000,000
c. 2,000,000
d. 4,000,000
Solution:
Assessment on appeal (2,000,000x50%) 1,000,000
Environmental Cost 3,000,000
Total Provision 4,000,000
Problem:
In August 2020, ABC Company filed suit against CBA Company seeking 4,000,000
damages for patent infringement. A court verdict in November 2020 awarded ABC
Company P2,000,000 in damages, bur CBA’s appeal is not expected to be decided
before 2021. ABC’s counsel believed it is probable that ABC will be successful against
CBA for an estimated amount in the range of 500,000 and 1,500,000, with 1,000,000
considered the most likely amount.
2. What amount should ABC record as income from the lawsuit for the year ended
December 31,2020?
a. Zero
b. 1,000,000
c. 2,000,000
d. 1,500,000
A contingent asset and the related contingent gain are disclosed only where the inflow of economic
benefits is probable.
Problem:
Mercedes Company issued P 10,000,000 face value 12% convertible bonds at 110 on
January 1,2020, maturing on January 1, 2025 and paying interest semiannually on
January 1 and July 1. It is estimated the bonds would sell only 105 without the
conversion feature. Each P1,000 bond is convertible into 10 ordinary shares with P100
par value.
3. What is the increase in shareholders equity arising from the issuance of the
convertible bonds on January 1,2020?
a. 350,000
b. 500,000
c. 1,000,000
d. Zero
Solution:
Issue price of bonds w/ conversion privilege(10mx110) 11,000,000
Market value of bonds w/out conversion(10mx105) (10,500,000)
Share premium – conversion privilege 500,000
4. What would be the entry to record the issuance of the bonds payable?
a. Cash 11,000,000
Bonds Payable 10,000,000
Premium bonds payable 500,000
Share premium-conversion privilege 500,000
b. Cash 11,000,000
Bonds Payable 10,000,000
Premium bonds payable 650,000
Share premium-conversion privilege 350,000
c. Cash 11,000,000
Bonds Payable 10,000,000
Premium bonds payable 350,000
Share premium-conversion privilege 650,000
d. Cash 11,000,000
Bonds Payable 10,000,000
Premium bonds payable 1,000,000
Problem:
Maryland Company purchased equipment for 2,000,000 on January 1,2020 with a useful
life of 5 years and a residual value of 500,000 using the straight-line method for financial
statement purposes. Depreciation was P300,000 for 2020 and P200,000 for 2021 for tax
purposes. Income before tax and depreciation was P3,000,000 during 2021 and the tax
rate was 25%. During 2021 the entity made an estimated tax payment of 200,000.
5. What is the income tax payable on December 31,2021?
a. 640,000
b. 500,000
c. 450,000
d. 675,000
Solution:
Financial Income 3,000,000
Depreciation – tax purposes (200,000)
Taxable Income 2,800,000
Tax rate 25%
Income Tax Payable 700,000
Tax Paid – 2021 (200,000)
Income Tax Payable 500,000
6. What would be the total amount of income tax expense that is reported in the 2021
income statement?
a. 675,000
b. 500,00
c. 475,000
d. 640,000
Solution:
Financial Income 3,000,000
Depreciation (300,000)
Financial Income subject to tax 2,700,000
Tax rate 25%
Income Tax Expense 675,000
Problem:
The following are the balances related to a defined benefit plan of Sheraton Company on
January 1, 2020.
Projected benefit obligation 7,000,000
Fair value of plan asset 6,250,000
The actuary provided the following data for the current year:
Solution:
Current Service Cost 600,000
Interest Expense on PBO (7mx10%) 700,000
Interest Income on FVPA (6,250,000x10%) (625,000)
Employee Benefit Expense 675,000
Solution:
Actual Return on PA 700,000
Interest Income on FVPA (625,000)
Remeasurement Gain on PA 75,000
Solution:
Employee Benefit Expense 675,000
Remeasurement Gain on PA (75,000)
Defined Benefit Cost 600,000
Contribution 900,000
Overfunding – prepaid 300,000
Solution:
Fair Value of Plant Asset 6,250,000
Projected benefit obligation 7,000,000
Accrued benefit cost – Jan 1 (credit) (750,000)
Debit Adjustment 300,000
Accrued benefit cost – Dec 31 (credit) (450,000)
Problem:
Globe Company reported profit before tax of P 6,000,000 and income tax expense of
P1,000,000 for the current year. In addition, the entity paid during the year an ordinary
dividend of P500,000 and a preference dividend of P500,000 on the redeemable
preference shares. The entity had P2,000,000 of P10 par value ordinary shares in issue.
11. What amount should be reported as basic earnings per share for the year?
a. 25
b. 21.50
c. 20
d. 23.5
Solution: Profit before tax 6,000,000 Ordinary share outstanding (2M/10)200,000
Income Tax Expense 1,000,000 Basic earnings per share (5M/200k) 25
Net Income 5,000,000
*since the preference shares are redeemable, the preference dividend is ignored and
considered as financial liability.
*preference dividend of 500,000 is already deducted from the net income as a finance
cost
Problem:
Color Unite Company reported the following on December 31, 2020:
8% cumulative preference share capital, P50 par value 4,500,000
Ordinary share capital, P1 par, 10,000,000 shares 10,000,000
Share Premium 20,000,000
Retained earnings, January 1, 2020 132,000,000
Net Income for 2020 35,000,000
12. The net income included an expropriation loss of P8,000,000. What amount should
be reported as basic earnings per share?
a. 3.46
b. 4.04
c. 4.63
d. 3.67
Solution: Net Income 35,000,000
Preference Dividend (8%x4.5m) (360,000)
Net Income – Ordinary 34,640,000
Problem:
During 2020, Innovative Company had outstanding 500,000 ordinary shares and 30,000
cumulative preference shares with a P10 per share dividend. Each preference share is
convertible into four ordinary shares. The entity had a P 5,000,000 net loss for 2020. No
dividends were paid or declared.
13. What amount should be reported as basic loss per share?
a. 10.6
b. 10
c. 9.4
d. 8.06
Solution:
Net loss 5,000,000
Preference dividend (30,000x10) 300,000
Total Loss – ordinary 5,300,000
BEPS = 5,300,000/500,000 = 10.6
Problem:
Blossom Company reported the following liabilities in the statement
Accounts payable 1,000,000
Bonds payable 3,000,000
Accrued expense 500,000
Finance lease liability 4,000,000
Advances from customer 1,200,000
Unearned revenue 300,000
Deferred tax liability 400,000
Estimated warranty liability 200,000
Problem:
Alibaba Company reported the following assets in the statement of financial position:
Cash in bank 2,000,000
Patent 1,000,000
Accounts receivable 4,000,000
Advances to employees 200,000
Inventory 1,500,000