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Cannon Ball Review With Exercises Part 2 PDF
Cannon Ball Review With Exercises Part 2 PDF
a) Cash on hand includes: Currency and coins, Checks and money orders held, Petty cash fund and change
fund. Postdated, stale and defective checks are receivables and not cash. The petty cash fund must be fully
reimbursed or updated at balance sheet date.
b) Cash in bank includes: Unrestricted bank deposits at their adjusted balance, restricted bank deposits for cur-
rent use (payroll, dividends and taxes) and restricted bank deposits for liabilities due within 12 mos.
c) Funds to be disbursed for the acquisition of noncurrent assets are always classified as long-term invest-
ments.
d) The adjusted cash in bank will be computed by adding DIT and deducting Outstanding Checks that are net of
certified checks from the bank statement balance and adding CMs and deducting DMs from the balance per
book. Errors shall be added or deducted depending on the error or omission made.
e) Cash equivalents are debt instruments that are short term in nature. Equity instruments shall be excluded
except redeemable preference shares due in 3 months from acquisition.
f) If silent the following are cash equivalents: T-bill, time deposit and certificate of deposit, commercial paper
and money market placements or instruments. Take note other government bonds payable and short-term
debt instruments must be acquired 3 months or less from maturity date.
g) The cash in the Petty Cash Fund shall be the remaining currency and coins plus accommodated checks un-
less the checks are NSF or postdated.
Problems
1. Brianna Company provided the following information with respect to its cash and cash equivalents on Decem-
ber 31, 2017.
Checking account at Security bank ( 100,000)
Checking account at BPI 3,500,000
Payroll account 500,000
Sales tax account 400,000
Sinking fund cash 2,000,000
Employee post-dated check 300,000
Traveler’s check 300,000
NSF check 150,000
Petty cash fund (all reimbursed as of December 31, 2017) 50,000
Money order 200,000
T-bills, 90 days due January 20, 2017 1,000,000
What amount would be reported as unrestricted cash and cash equivalents on the statement of financial posi-
tion?
a. 7,950,000 c. 5,950,000
b. 4,950,000 d. 5,750,000
2. On December 31, 2016, Dolly Company had the following cash balances:
Cash in bank 5,000,000
Petty cash fund (all funds were reimbursed on December 31, 2016) 50,000
Time deposit – 120 days due on January 15, 2017 2,000,000
Savings deposit 500,000
Bond sinking fund 4,000,000
Money market placements 1,000,000
Cash in bank includes P300,000 of compensating balance against short-term borrowing arrangement at De-
cember 31, 2016. The compensating balance is legally restricted as to withdrawal by Dolly. The bond sinking
fund was established three years ago for bonds maturing on June 30, 2017. A check of P200,000 dated Janu-
ary 15, 2017 in payment of accounts payable was recorded and mailed on December 31, 2016 statement of fi-
nancial position, what amount should be reported as “cash and cash equivalents”?
a. 12,550,000 c. 10,450,000
b. 6,450,000 d. 9,450,000
PAGE 2
3. Jimm Company had the following account balances on December 31, 2016.
Petty cash fund 50,000
Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand 600,000
Cash in bank – restricted account for plant additions, expected to
be disbursed in 2017 2,500,000
Commercial paper 2,000,000
The petty cash fund includes unreplenished December 31, 2016 petty cash expense vouchers of P10,000 and
employee IOUs of P20,000. The cash on hand includes a P200,000 check payable to Jimm dated January 15,
2017. In exchange for a guaranteed line of credit, Jimm has agreed to maintain a minimum balance of
P300,000 in its current bank account. What should be reported as “cash and cash equivalents” on December
31, 2016?
a. 8,420,000 c. 8,920,000
b. 6,420,000 d. 7,420,000
4. The ledger account of Shawn Company showed a ledger balance of P1,800,000 on December 31, 2016. The
bank statement as of that date showed a balance of P2,100,000. Upon comparing the statement with the cash
records, the following facts were determined:
a. There were bank service charges for December of P10,000.
b. A bank memo stated that Alex Inc.’s note for P200,000 and interest of P20,000 had been col-
lected on December 29, and the bank has made a charge of P5,000 on the collection. No entry
had been made in Shawn’s books when Alex’ note was sent to the bank for collection.
c. Receipts for December 31 for P550,000 were not deposited until January 2.
d. Checks outstanding on December 31 totaled P325,000.
e. The bank had charged the Shawn’s Company’s account for a customer’s uncollectible check
amounting to P43,000 on December 29.
f. A customer’s check for P900,000 had been entered as P600,000 in the cash receipts journal by
Shawn on December 15.
g. Check no. 777 in the amount of P141,000 had been entered in the cash book as P114,000, and
check no. 799 in the amount of P10,000 had been entered as P100,000. Both checks had been
issued to pay for purchases of equipment.
What is the amount of cash to be shown in the December 31, 2016 statement of financial position?
a. 2,226,000 c. 2,195,000
b. 2,325,000 d. 1,875,000
5. The petty cash fund of Becky Company on December 31, 2016 is composed of the following:
Coins and currencies 16,000
Petty cash vouchers:
Postage stamps 2,000
Supplies 3,000
Cash advances to employees 4,000
Employee’s check returned by bank marked NSF 5,000
Check drawn by the company payable to the order of Ms. Bobadilla,
petty cash custodian, representing her salary 15,000
A sheet of paper with names of employees together with
contribution for a birthday gift of a co-employee in the amount of 5,000
Total 50,000
The petty cash ledger account has an imprest balance of P50,000. What is the correct amount of petty cash on
December 31, 2016?
a. 36,000 c. 31,000
b. 16,000 d. 50,000
ANSWERS: C, C, A, B, C
PAGE 3
II. Receivables and Receivable Financing
Problems
1. The following data were taken from the records of May Company for the year ended December 31, 2016 its first
year of operations:
2. Sarah Company had the following information relating to its accounts receivable for the year 2016:
What is the net realizable value of accounts receivable on December 31, 2016?
a. 5,850,000
b. 6,300,000
c. 5,800,000
d. 5,900,000
PAGE 4
3. Emily Company uses the net price method of accounting for cash discounts. In one of its transactions on De-
cember 15, 2016, Emily sold merchandise with a list price of P4,000,000 to a client who was given a trade dis-
count of 20% and 10%. Credit terms given by Emily were 5/10, n/30. The goods were shipped FOB destination,
freight collect. Total freight charge paid by the client was P100,000. On December 20, 2016, the client returned
damaged goods originally billed at P400,000. What is the net realizable value of this account receivable on De-
cember 31, 2016?
a. 2,492,000
b. 2,636,000
c. 2,380,000
d. 2,592,000
4. Sammy Company determined that the net realizable value if its accounts receivable at December 31, 2016
based on an aging of accounts receivable was P6,300,000. Additional information for the year 2016 is as fol-
lows:
5. Effective with the year ended December 31, 2016, Jelley Company adopted the aging of accounts receivable
method instead of the old percentage of sales method. The following data are available:
6. The following accounts were abstracted from Jinee Company’s unadjusted trial balance at December 31, 2016:
Debit Credit
Accounts receivable 5,000,000
Allowance for doubtful accounts 150,000
Net credit sales 20,000,000
Jinee estimates that 5% of credit sales will become uncollectible. The allowance for doubtful accounts for the
year ended December 31, 2016 should be
a. 1,000,000
b. 750,000
c. 1,150,000
d. 850,000
ANSWERS: A, A, C, A, C, D
PAGE 5
b) Receivable Financing
• Pledging is a borrowing arrangement where all the accounts receivable is collateralized and therefore only
requires disclosure. Discounted interest is interest computing using simple interest but is deducted in ad-
vance.
• Assignment is the same as pledging but only a portion of the AR is collateralized. This will require the re-
classification through a formal journal entry. Also, at yearend, the difference between the balance of the
loan and the AR that is assigned shall be disclosed as “Equity in the Assigned accounts.
• Factoring is the outright sale of AR. All the risk of uncollectability is transferred to the factor or buyer.
Under a “casual factoring” agreement, the difference between the selling price and NRV is recognized as
a loss on the factoring or sale. Under a “factoring as a continuing agreement”, the factor charges a ser-
vice fee and interest and withholds a portion for sales returns and discounts. The factor only assumes
risk of uncollectibility. The factor’s holdback is part of trade and other receivables.
• Discounting of NR is also a sale. The SP is computed as MV less Discount. The discount is MV x Dis-
count rate x the remaining term or discount period. The difference between the SP and Principal plus Ac-
crued interest at date of discounted is a Loss on Discounting or interest expense if it is a secured borrow-
ing.
• Because discounting is with recourse. A contra receivable account is used for the face value and deduct-
ed from the total notes receivable known as “Notes Receivable Discounted.
Problems
1. Celine Company obtained a one-year loan of P5,000,000 from a bank on October 1, 2016. The loan was dis-
counted at 12%. The company signed a note and pledged its accounts receivable of P5,000,000 as collateral
for the loan. What is the note payable to be reported by Celine in its December 31, 2016 statement of financial
position?
a. 5,000,000
b. 4,400,000
c. 4,550,000
d. 4,600,000
3. On January 1, 2016, Chem Corporation needed cash to meet current operating needs. Stella factored some
P5,000,000 of accounts receivable to HSBC. Stella maintains an allowance for doubtful accounts of 300,000 of
this receivable balance. The bank withheld 10% of the purchase price as protection against sales returns and
allowances and charged a 15% service fee. What is the loss on this casual factoring transaction that Stella will
recognize in its income statement?
a. 450,000
b. 950,000
c. 750,000
d. 500,000
4. Carrie Corporation factored P5,000,000 of accounts receivable to Golden Corporation on October 1, 2016.
Control was surrendered by Carrie. Golden accepted the receivables on a non-recourse basis. Golden as-
sessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Golden
charged 12% interest on the carrying amount of the receivables on a weighted-average time to maturity of the
receivables of 30 days. Answer the following requirements in relation to the factoring of Carrie’s accounts re-
ceivable on October 1, 2016.
PAGE 6
ANSWERS: C, B, A, A, B, B, B, C, C, A
PAGE 7
c) Notes Receivable and Impairment Loss
• If the notes receivable is interest bearing, the face value is equal to the present value.
• If the notes receivable is noninterest bearing but short-term, the face value is higher than the present val-
ue but the difference or what is known as the discount is immaterial hence can be ignored.
• If the note is both long-term and noninterest bearing, the present value shall be computed and presented
as its carrying amount. Interest income using the effective interest method shall be recognized and shall
increase the carrying amount at the end of each amortization period.
• If the note is a term note, the PV of 1 factor shall be used. If the note is due in installment and the install-
ments are equal and made at equal intervals, the PV of an ordinary annuity shall be used unless the first
payment is made in advance. In that case the future installments shall be the only amounts that shall be
discounted.
• If the installments are not equal or not made in equal intervals, each installment is multiplied by its respec-
tive PV of 1.
• Impairment Loss equals the difference of PV of future cash flows and present carrying amount of the loan
receivable plus any accrued interest. The PV of cash flows shall be computed using the original rate only.
Ignore market rates at the time the impairment loss is recognized. Also, in effect the loan becomes a non-
interest bearing loan and amortization of the discount shall be recognized as income using the effective
interest method.
Problems
1. Jake Company is a dealer in equipment. On January 1, 2016, Darryl Company sold an equipment with a cost
of P3,500,000 in exchange for a noninterest bearing note of P5,000,000 requiring a lump sum payment at the
end of 5 years. The market interest for similar notes was 8%. The relevant present value factors are:
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
PV of an annuity due of 1 at 8% for 5 periods 4.31
1. What is the carrying amount of this note on January 1, 2016?
a. 5,000,000
b. 4,310,000
c. 3,400,000
d. 3,990,000
2. What is the interest income to be recognized for the year ended December 31, 2016?
a. 272,000
b. 293,760
c. 317,261
d. 342,642
2. Darlene Company sold one of its machines on December 31, 2016 to Maggie Company in exchange for a non-
interest bearing note requiring five annual payments of P500,000 or a total of P2,500,000. The machine had a
carrying amount of P1,750,000 in Darlene’s books. The first payment is due on December 31, 2016. The mar-
ket interest for similar notes was 10% and the relevant present value factors are:
PV of a single payment at 10% for 5 periods .621
PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170
1. In its December 31, 2016 statement of financial position, what should Darlene report as notes receivable?
a. 2,500,000
b. 1,895,500
c. 2,000,000
d. 2,085,000
2. In its December 31, 2016 statement of financial position, how much is the current notes receivable?
a. 500,000
b. 310,450
c. 341,495
d. 375,644
PAGE 8
3. Bennet Company borrowed from Solid Bank under a 10-year loan in the amount of P5,000,000 with a stated
rate of 6%. Payments are due monthly, and are computed to be P55,500. Solid bank incurs P200,000 of direct
loan origination costs and P50,000 of indirect loan origination costs. In addition, Solid Bank charges a 5-point
nonrefundable loan origination fee. What is Solid Bank’s carrying amount for the loan?
a. 5,200,000
b. 4,950,000
c. 5,000,000
d. 4,750,000
4. Metro Bank loaned P5,000,000 to Daffy Company on January 1, 2015. The terms of the loan require the princi-
pal payment of P5,000,000 to be made after 5 years on December 31, 2019 and interest at 12% to be paid an-
nually on December 31. The first interest payment is due on December 31, 2015. Daffy Company made the re-
quired interest payment during 2015. However, during 2016 Daffy Company began to experience financial diffi-
culties, which led to the default of the 2016 required interest payment. This caused Metro to reassess the col-
lectibility of the loan. On December 31, 2017, Metro did not continue to accrue interest and determined that
the remaining principal payment will be collected but it is probable that the accrued interest further interest can-
not be collected. The probable timing and amount of collections is determined as follows:
December 31, 2018 500,000
December 31, 2019 1,000,000
December 31, 2020 1,500,000
December 31, 2021 2,000,000
The present value at 12% is as follows
For one period 0.89
For two periods 0.80
For three periods 0.71
For four periods 0.64
1. What is the loan impairment loss on December 31, 2017?
a. 2,010,000
b. 1,410,000
c. 2,610,000
d. 1,560,000
2. What is the interest revenue to be recognized in 2018?
a. 600,000
b. 430,800
c. 422,496
d. 660,000
3. What is the carrying amount of this loan in Dhalia’s books on December 31, 2018?
a. 4,020,800
b. 3,520,800
c. 4,500,000
d. 3,020,800
ANSWERS: C, A, B, B, B, A, B, B
III. INVENTORY
a) Cost of Inventory: Purchase price net of trade discounts and rebates plus import duties and nonrecoverable
taxes, Cost of conversion and other cost to bring inventory to present location and condition.
b) Inventory included: Goods included in the physical count but exclude goods held on consignment, goods
held on a bill and hold sales arrangement, custom made goods that are finished and segregated and goods
held as loan collateral. Goods in transit sold FOB Destination and purchased FOB SP, out on con-
signment, Out on trial sale, Held by others for storage and processing and goods held by salesmen
and agents.
c) Ending inventory and Cost of goods sold shall me measured using Specific Identification (noninterchangea-
ble Items), FIFO and Average.
d) Under FIFO, Periodic and Perpetual will result in the same COGS and EI.
e) Perpetual average is moving average because a new average cost shall be computed once a purchase is
made.
PAGE 9
f) Periodic average means that the average cost is only computed when a physical count is made. This is also
known as the weighted average.
g) Inventories are measured at the LCNRV approach and is computed on an item by item method to get the
lowest value. The difference between the cost of ending inventory and the LCNRV is charged to COGS.
h) NRV is Estimated selling price less cost to complete and cost to sell.
i) Purchase commitment is a contract the specifies the quantity and price for a future purchase. If there is an
intervening balance sheet date and the MV falls below the agreed price, a loss shall be recognized. Howev-
er, the cost of the inventory shall be recognized at the lower of MV or agreed price. This will result into a re-
covery of the loss or an additional loss depending if the MV increases or further decreases.
j) GP Method: The COS is estimated by multiplying the Net Sales (Gross less S R&A or SR only) by the cost
percentage or by dividing NS by 1 plus the GP rate if it is based on cost. This amount is deducted from
TGAS to estimate the ending inventory.
k) Retail Method: The GAS at retail is computed and the following are deducted: Net sales (same as above),
Employee discounts and Normal Losses. The net amount is the EI at retail which is multiplied to 3 types of
cost ratio. Average: GAS at cost / GAS at retail after Net MD, Conservative: GAS at cost / GAS at retail be-
fore Net MD and FIFO: Purchases at cost / Purchases at retail after net markdown.
Problems
6. The unadjusted physical inventory of Edna Company at December 31, 2016 was P6,000,000. Other
information follows:
• Goods were received and recorded on January 2, 2017 with a cost of 700,000. These goods
were shipped by the supplier on December 29, 2016, FOB shipping point.
• Goods in the warehouse costing P1,000,000 were billed to the customer FOB shipping point
on December 30, 2016. The goods were included in inventory because they were shipped
on January 5, 2017.
• A special order, fabricated to specifications of a customer costing 200,000, was finished and
specifically segregated in the back part of the shipping room on December 31, 2016. The cus-
tomer was billed on that date and the machine included in inventory because the customer
accepted delivery on January 6, 2017.
How much should Edna report as inventory on its December 31, 2016 statement of financial position?
a. 5,700,000
b. 6,700,000
c. 6,500,000
d. 7,700,000
7. During January, Eleanor Company recorded the following information regarding its inventory:
Cost Retail
Inventory, January 1 1,000,000 1,500,000
Purchases 5,300,000 7,000,000
Net markup 800,000
Net markdown 300,000
Sales 7,000,000
Estimated normal shoplifting losses 200,000
Estimated normal shrinkage and spoilage 300,000
What is Femme’s estimated cost of goods sold for 2016?
a. 5,250,000
b. 5,000,000
c. 4,900,000
d. 5,400,000
20. Hartley Company uses the retail method of inventory valuation. The following information is available:
Cost Retail
Beginning inventory 1,250,000 2,000,000
Purchases 6,750,000 8,000,000
Net markup 1,500,000
Net markdown 500,000
Sales 7,700,000
1. What would be the estimated cost of the ending inventory using FIFO retail?
a. 2,475,000
b. 2,300,000
c. 2,545,000
d. 2,225,000
2. What would be the estimated cost of the ending inventory using LIFO retail?
a. 2,475,000
b. 2,300,000
c. 2,545,000
d. 2,225,000
ANSWERS: C, C, C, C, B, C, A, A, D, A, A, B, B, C, A, B, A, C, A, C, B, A, A, A, D
IV. AGRICULTURE
a) Biological assets should be measured on initial recognition and at subsequent reporting dates at fair value
less costs of disposal, unless fair value cannot be reliably measured.
b) Agricultural produce should be measured at fair value less costs of disposal at the point of harvest. Be-
cause harvested produce is a marketable commodity, there is no 'measurement reliability' exception for
produce. Agricultural produce become inventory under IAS 2.
c) The gain on initial recognition of biological assets at fair value, and changes in fair value of biological as-
sets during a period, are reported in net profit or loss.
d) A gain on initial recognition of agricultural produce at fair value should be included in net profit or loss for
the period in which it arises.
e) All costs related to biological assets that are measured at fair value are recognized as expenses when in-
curred, other than costs to purchase biological assets.
f) Bearer plants are accounted for under PAS 16 using the cost model, or the revaluation model. Before
bearer plants are able to bear agricultural produce (i.e. before maturity), they are accounted for as self-
constructed items of property, plant and equipment. The agricultural produce of the bearer plant remains
within the scope of PAS 41 and is therefore accounted for at fair value.
PAGE 15
Problems
1. Eagles Company provided the following balances for the year 2016 and 2017:
Value of biological asset at cost on December 31, 2016 (date of purchase) 1,250,000
Fair valuation surplus on initial recognition at fair value on December 31, 2016 50,000
Change in fair value on December 31, 2017 due to growth and price fluctuation 300,000
Decrease in 2017 fair value due to harvest 50,000
Newborn biological asset at yearend at fair value 200,000
Agricultural produce harvested from the biological asset during the year
at fair value less cost of disposal 90,000
1. What is the gain from fair value change that should be recognized in 2016 (date of purchase)?
a. 50,000 c. 90,000
b. 100,000 d. 0
2. What is the gain on biological assets that shall be reported in the current year?
a. 250,000 c. 450,000
b. 500,000 d. 200,000
3. What is the carrying amount of the biological assets on December 31, 2017?
a. 1,300,000 c. 1,750,000
b. 1,600,000 d. 1,700,000
4. What is the gain on agricultural produce that shall be reported in the current year?
a. 250,000 c. 90,000
b. 200,000 d. 100,000
2. Browns Company is a grower of coffee beans and a producer of ground coffee. On July 20, 2016, the entity
harvested coffee beans. Because of a long aging and production process after harvest, the harvested coffee
beans are still on hand on December 31, 2016. The following information is available for 2016:
Production cost 1,800,000
Fair value less cost to sell on July 20, 2016 2,500,000
Net realizable value on July 20, 2016 2,200,000
Fair value less cost to sell on December 31, 2016 3,000,000
Net realizable value on December 31, 2016 2,350,000
What is the measurement of the coffee beans inventory on December 31, 2016?
a. 2,500,000 c. 3,000,000
b. 2,200,000 d. 2,350,000
4. Bernadette Company reclassified certain assets as biological assets. The total value of the assets is
P8,750,000 which comprised the following:
Freestanding trees 6,000,000
Land under trees 600,000
Mature bearer plants 400,000
Bearer plants not yet able to bear agricultural produce 100,000
Bearer animal 1,000,000
Roads in forest 400,000
Animals related to recreational activities 250,000
1. What is the total amount of the assets that should be classified as biological assets?
a. 6,900,000
b. 7,100,000
c. 8,000,000
d. 7,000,000
2. What is the total amount of the assets that should be classified as property, plant and equipment?
a. 1,650,000
b. 1,250,000
c. 1,000,000
d. 1,750,000
ANSWER: A, C, C, C, D, D, D
PAGE 16
V. INVESTMENTS
a) Equity Instruments
• FVPL:
a) Both held for trading and nontrading.
b) Purchase price is capitalized, direct transaction cost is expensed
c) Changes in FV in P/L.
d) Dividend income is recognized.
e) Selling price less CA in P/L.
• FVOCI
a) Nontrading only and irrevocable option at FVOCI is used.
b) Purchase price plus direct transaction cost.
c) Changes in FV in OCI
d) Dividend income is recognized.
e) Permanent market decline or impairments are recognized in OCI.
f) Selling price less total cost is recognized in RE including cumulative OCI.
b) Debt Instruments
• FVPL:
a) Held for trading or does not meet business model or cash flow test or FV option is used.
b) Purchase price is capitalized, direct transaction cost is expensed
c) Changes in FV in P/L.
d) Interest income at NOMINAL is recognized.
e) Selling price less CA in P/L.
• FVOCI
a) Both to sell and held to maturity and cash flows are principal and interest only
b) Purchase price plus direct transaction cost.
c) Interest income at EFFECTIVE is recognized and any discount or premium is amortized
d) Changes in FV in OCI
e) Selling price less total amortized cost is recognized in P/L.
f) Cumulative OCI is reclassified in P/L.
• Amortized Cost
a) Held to maturity only and cash flows are principal and interest only
b) Purchase price plus direct transaction cost.
c) Interest income at EFFECTIVE is recognized and any discount or premium is amortized
d) Changes in FV is ignored
• Please refer to original notes for reclassification of financial assets due to a change in business model.
Problems
1. On January 1, 2016, Simmons Company purchased bonds with face value of P5,000,000 for P4,500,000 plus
transaction costs of P139,522 with the business model of collecting contractual cash flows that are solely
payments of principal and interest. Simmons does not elect the fair value option in measuring financial as-
sets. The bonds mature on December 31, 2020 and pay interest of 10% annually every December 31 with a
12% effective yield. The fair value of the financial asset and effective rate at the end of 2016 and each suc-
ceeding year is as follows:
2. What amount of unrealized gain on the financial asset should be reported on the 2016 income statement?
a. 205,355
b. 29,672
c. 148,613
d. 0
3. What amount of unrealized gain on the financial asset should be reported on the 2017 income statement?
a. 218,135
b. 487,042
c. 281,687
d. 311,359
4. On January 1, 2016, Jude Company purchased marketable equity securities held for non trading purposes at
its market value of P5,000,000, while the company also paid commission, taxes and other transaction costs
amounting to P200,000. The securities had the following market values on these dates:
December 31, 2016 4,700,000
December 31, 2017 5,300,000
1. No securities were sold during 2016 and 2017. What amount of unrealized gain on these securities should
be reported in the 2017 income statement if the securities were classified as “financial assets at fair val-
ue through profit or loss”?
a. 300,000
b. 600,000
c. 100,000
d. 700,000
PAGE 19
2. Assuming these securities were classified as “financial assets at fair value through other comprehen-
sive income”, what amount of unrealized gain or (loss) will be reported in shareholders’ equity on Decem-
ber 31, 2017?
a. (500,000)
b. 200,000
c. 100,000
d. 600,000
5. On January 1, 2016 Alta Company purchased “trading” equity securities. The cost and market value on De-
cember 31, 2016 were:
Cost_ Market
Security A 1,000,000 1,200,000
Security B 2,000,000 1,500,000
Security C 3,000,000 3,100,000
On July 1, 2017, Alta Company sold Security A for P1,500,000, incurring P100,000 in brokerage commission
and taxes. What amount should be reported as gain on sale of trading securities in the 2017 income state-
ment?
a. 250,000
b. 300,000
c. 100,000
d. 200,000
6. On January 1, 2016, Lillian Company purchased non-trading equity securities. On December 31, 2016, the
cost and market value were:
Cost Market
Security A 1,000,000 1,200,000
Security B 2,000,000 1,400,000
Security C 3,500,000 3,000,000
On July 1, 2017, the entity sold Security C for P3,800,000 incurring P100,000 in brokerage commission and
taxes. What amount of gain on sale should be recognized in 2017 if the securities are designated as meas-
ured at FVTOCI (PFRS 9)?
a. 700,000
b. 800,000
c. 200,000
d. 0
7. On January 1, 2014, Grace Company acquired a nontrading equity investment for P5,000,000. On December
31, 2014, the market value of the investment was P4,000,000. On December 31, 2016, the issuer of the equity
instrument was in severe financial difficulty and the fair value of the equity investment had fallen to P2,300,000.
1. What amount of cumulative loss should be reported in the statement of changes in equity for 2016 as com-
ponent of other comprehensive income if the investment is designated as measured at FVTOCI (PFRS
9)?
a. 1,000,000
b. 2,700,000
c. 1,700,000
d. 0
2. What amount of cumulative loss should be reported in the statement of changes in equity for 2016 as com-
ponent of other comprehensive income if the investment is classified as available for sale (PAS 39)?
a. 1,000,000
b. 2,700,000
c. 1,700,000
d. 0
ANSWERS: A, C, C, A, A, C, C, C, C, A, A, C, C, C, B, C, D, D, B, D
PAGE 20
VI. INVESTMENTS - ASSOCIATES
Identification of Associates
• A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influ-
ence unless it can be clearly demonstrated otherwise.
• If the holding is less than 20%, the investor will be presumed not to have significant influence unless
such influence can be clearly demonstrated.
• The existence of significant influence by an investor is usually evidenced in one or more of the following
ways:
a) Representation on the board of directors or equivalent governing body of the investee;
b) Participation in the policy-making process;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) Provision of essential technical information.
1. Basic principle – The equity investment is initially recorded at cost and is subsequently adjusted to re-
flect the investor's share of the net profit or loss of the associate.
2. Distributions and other adjustments to carrying amount - Distributions received from the investee re-
duce the carrying amount of the investment. Adjustments to the carrying amount may also be required aris-
ing from OTHER changes in the investee's equity (revaluation surplus and translation gains and losses.
6. Discontinuing the equity method - Use of the equity method should cease from the date that significant
influence ceases.
➢ The difference between the selling price and carrying amount of the investment sold shall be recog-
nized in profit or loss.
➢ The “retained investment” shall be accounted for under PFRS 9 and shall be remeasured to fair value
on the date significant influence ceases and recognized in profit or loss.
Q5. What is the gain on sale to be reported from the sale of half of Lipton’s investment in Associate?
a. 860,000
b. 750,000
c. 900,000
d. 720,000
Q6. What is the total amount to be recognized in income from the investment in 2018?
a. 2,370,000 c. 2,520,000
b. 1,510,000 d. 1,360,000
PAGE 22
7. Application of the equity method achieved in stages
➢ The previously held interest that was accounted for under the cost or fair value method shall be re-
measured to fair value on the date the investor gains significant influence.
➢ The difference between the fair value and the carrying amount of the previously held investment shall
be recognized in profit or loss.
➢ The total of the fair value of the previously held investment and the new acquisition cost shall be re-
garded as the total cost of the investment classified as “associate”.
➢ If the FVOCI was used to account for the previously held investment, any cumulative unrealized gain or
loss as OCI shall be reclassified to retained earnings.
Problem 3
Ira Company purchased 10% of Cherrie Company’s 500,000 outstanding shares of ordinary shares on January 1,
2016 for P1,000,000 and appropriately classified this investment at FVOCI. The market value of this investment on
December 31, 2016 is P1,200,000. On January 1, 2017, Ira purchased an additional 100,000 shares of Cherrie for
P3,000,000. The book value of the net assets of Cherrie on that date was P12,000,000. The fair value of the net
assets of the investee is equal to the carrying amount except for land and equipment whose fair value exceeded
the carrying amount by P300,000 and P400,000, respectively. The remaining life of the equipment is 4 years.
Cherrie reported earnings of P3,000,000 for 2017 and paid dividends of P1,000,000.
Q1. What is the goodwill from the acquisition on January 1, 2017 under the “fair value approach”?
a. 390,000
b. 190,000
c. 150,000
d. 0
Q2. What amount should Ira report as investment in Cherrie Company for the year ended December 31, 2017?
a. 4,570,000
b. 4,200,000
c. 4,770,000
d. 4,390,000
Q3. If the investment was originally classified using the “cost method”, what is the total amount of income for
the year ended December 31, 2017?
a. 870,000
b. 900,000
c. 1,070,000
d. 1,100,000
Problem 4
On January 1, 2016, Pamela Company acquired 40% of the ordinary shares of an associate. On such date, assets
and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of P1,000,000
was acquired. The investee reported net income of P8,000,000 for 2016.
In December 2016, the investee sold inventory costing P3,000,000 to Pamela Company for P5,000,000. The inven-
tory remained unsold by Pamela Company on December 31, 2016.
On January 1, 2016, the investee sold an equipment to Pamela Company with carrying amount of P2,500,000 for
P4,000,000. The remaining life of the equipment is 5 years.
Q1. What amount of investment income should be reported by Pamela Company for 2016?
a. 1,920,000 c. 3,200,000
b. 1,800,000 d. 2,400,000
PAGE 23
9. Losses in excess of investment
• The investor’s share in the associates losses cannot exceed the “interest in the associate” and shall
discontinue the application of the equity method is this is the case.
• After the investor's interest is reduced to zero, additional losses are recognized by a provision (liability)
only to the extent that the investor has incurred legal or constructive obligations or made payments on
behalf of the associate.
• If the associate subsequently reports profits, the investor resumes recognizing its share of those profits
only after its share of the profits equals the share of losses not recognized.
Problem 5
On January 1, 2014, Durant Company acquired as a long-term investment for P7,000,000, a 40% interest in Anto-
nio Corporation when the fair value of Antonio’s net assets was P17,500,000. Antonio Corporation reported the
following net losses:
2014 5,000,000
2015 7,000,000
2016 8,000,000
2017 4,000,000
On January 1, 2016, Durant Corporation made cash advances of P2,000,000 to Antonio Corporation. On Decem-
ber 31, 2017, it is not expected that Durant Company will provide further financial support for Antonio Corporation.
Q1. What is the loss from the investment to be reported in 2017?
a. 1,600,000
b. 1,200,000
c. 1,000,000
d. 1,800,000
Q2. If Antonio reports a profit of 3,000,000 in 2018, what amount of investment income will be recognized by
Durant?
a. 1,000,000
b. 600,000
c. 400,000
d. 0
ANSWERS: C, B, C, C, B, B, A, A, A, C, C, A, C,C
a) Dividends are recognized as income at the date of declaration by the investee and is measured as follows:
• Cash dividends are income at the amount of declaration (example: amount of dividend per share)
regardless whether from post or pre-acquisition retained earnings.
• Property dividends are income at fair value.
• Share or stock dividends are not income but instead recognized as a memorandum entry. Also, the cost
per share of the investment will decrease. However, stocks in lieu of cash shall be treated as property
dividends. At the same time, the receipt of a different class of shares shall require the allocation of the
original cost of the investment using the relative fair value method.
• Lastly if the investment is sold “dividend on”, meaning sold before the date of record. The entity also sells
the right to receive the dividends at the date of payment. Hence, the amount of gain on sale is reduced.
b) Stock rights represent the preemptive right of the investor to acquire additional shares to maintain the original
ownership ratio when new shares are authorized to be issued. They can be exercised at a lower price but
only for a specific period. After which the investee shall issue the shares to the public.
• Stock rights are separated from the original investment at fair value if “accounted for separately”.
Meaning the original investment’s cost is reduced.
• The cost of the stock rights exercised plus the exercise price is the cost of the new investment.
• If not exercised and if the stock rights expire, the cost of the investment in the stock right is written off as a
loss.
• If sold, the difference between the selling price and cost of stock rights is a gain or loss on sale.
• If FV of the stock right is not provided, apply the following formulas:
PAGE 24
Theoretical Value of Stock Rights
RIGHT-ON EX-RIGHT
Market value of share less Exercise Price Market value of share less Exercise Price
Number of rights to purchase one share + 1 Number of rights to purchase one share
Problems
P1. On January 1. 2015, Timmy Company purchased 10% of Star Company’s ordinary shares for P2,000,000. The
investment is classified as a nonmarketable security and accounted for appropriately under the cost method.
The following data pertain to Star’s operations for 2015 and 2015.
2015 2016
Net income 1,000,000 3,000,000
Dividend paid None 5,000,000
Timmy Company should report dividend income in 2016 of
a. 500,000 c. 400,000
b. 600,000 d. 300,000
P2. Berto Company received dividends from its ordinary share investments during the year 2016 as follows:
• A stock dividend of 10,000 shares from Volvo Company when the market price of Volvo’s shares
was P10 per share.
• A cash dividend of P1,000,000 from Opel Company in which Berto owns a 10% interest.
• 5,000 shares of ordinary shares of Astra Company in lieu of cash dividend of P20 per share. The
market price of Astra Company’s shares was P150. Berto holds originally 50,000 shares of Astra
Company ordinary shares. Berto owns 5% interest in Astra Company.
What amount of dividend revenue should Berto report in its 2016 income statement?
a. 2,000,000 c. 1,100,000
b. 2,750,000 d. 1,750,000
P3. Data pertaining to dividends from David Company’s ordinary shares investments for the year 2016 follow:
• On October 1, 2016, David received P500,000 liquidating dividend from A Company.
David owns a 10% interest in A Company.
• David owns a 5% interest in B Company which declared a P5,000,000 cash dividend
on November 15, 2016 to stockholders of record on December 15, 2016 payable on
January 15, 2017. David does not have ability to exercise significant influence over B
Company.
• On December 1, 2016, David received from C Company a dividend in kind of one share
D Company ordinary shares for every 4 C Company ordinary shares held. David holds
100,000 C Company shares, which have a market price of P50 per share on December
1, 2016. The market price of D Company ordinary is P30 per share.
What amount should David report as dividend income in its 2016 income statement?
a. 500,000 c. 1,000,000
b. 1,500,000 d. 2,000,000
P4. On July 1, 2016, Bobby Company purchased as a long-term investment 50,000 shares of Asia Corporation or-
dinary shares for P80 per share. This purchase represents a 2% interest in Asia. On August 1, 2016, Asia
Corporation declared its annual dividend on its ordinary shares of P10 per share payable on September 10 to
shareholders of record at August 31, 2016. A retirement of an issue of Bobby’s serial bonds payable on August
25, 2016 required additional working capital and Bobby sold all 50,000 shares of Asia’s stock for P5,200,000
including the accrued dividend. What is the gain on disposal to be reported by Bobby on this transaction for the
year ended December 31, 2016?
a. 700,000
b. 200,000
c. 500,000
d. 1,200,000
PAGE 25
P5. On January 1, 2016, Kirstin Company acquired 50,000 shares of David Company ordinary shares for a total
consideration of P6,000,000 as a non-trading investment. On October 1, 2016, Kirstin received from David a
preference shares dividend of one share for every 5 ordinary shares held. On this date, the market price of
David’s ordinary shares is P140 per share and the preference is P100 per share. What is the balance of Kirstin
Company’s investment in David Company preference shares?
a. 1,000,000
b. 750,000
c. 500,000
d. 0
P6. Jessica Company owns 60,000 shares of the outstanding ordinary shares of Chris Company. These 60,000
shares were originally purchased for P100 per share. On December 1, 2016, Chris Company distributed
60,000 rights to Jessica. Jessica was entitled to buy one new share of Chris’ ordinary shares for P120 and five
of these rights. On December 1, 2016, each share has a market value of P150 and each right had market val-
ue of P10. The stock rights are accounted for separately and measured initially at fair value. On December
31, 2016, Jessica exercised all rights. What total cost should be recorded for the new shares that Jessica ac-
quired by exercising the rights?
a. 1,440,000
b. 2,040,000
c. 1,560,000
d. 1,840,000
P7. Jensen Company invested in stock of Alma Company in 2015, 150,000 shares at a total cost of P13,500,000
and in 2016, 100,000 shares at a total cost of P10,000,000. Jensen Company received 250,000 rights in 2016 to
purchase Alma stock at P80 per share. Five rights are required to purchase one share. At issue date, the rights
had a market value of P5 each and the stock was selling ex-right at P95. The stock rights are not accounted
for separately. Jensen used the rights to purchase 40,000 additional shares of Alma Company and allowed the
remaining rights to lapse. In 2016, Jensen sold 200,000 shares of Alma Company at 105 per share. What is the
gain on sale to be reported by Jensen in the 2016 statement of comprehensive income?
a. 2,200,000
b. 2,000,000
c. 2,600,000
d. 2,500,000
ANSWERS: A, D, C, A, B, B, D
a) Derivatives are measured at fair value. Fair value is the difference of the price, interest rate or exchange
rate from a predetermined value (strike price or rate) and multiplied by a notional amount. Therefore, if there
is no change or difference the fair value is zero.
b) The change in the fair value is recognized in profit or loss if it is a non-hedging derivative or a fair value
hedge. However, the change in fair value is deferred as OCI until the primary contract or the hedged item is
settled, which at that time the OCI is reclassified in profit or loss.
c) Only the “OPTION” derivative is the most unique one because it requires and investment and therefore the
entire fair value which is usually the gain shall not be realized because of the investment that is required.
However, the advantage of the Option is that favorable price movements will be taken advantage of because
no liability shall arise and the amount of the investment shall simply be recognized as a loss.
d) Investment property is land and or building or both held for investment purposes. Meaning for capital
appreciation or rental to others. Investment property is recognized at cost which is the purchase price,
construction cost and direct cost plus the direct transaction cost.
e) The FV method is usually applied with changes in fair value recognized in profit or loss. If the FV cannot be
measured on a continuing basis, the cost model shall be applied similar to PPE.
f) Changes in the USE of the property shall require reclassification to inventory or PPE and vice versa.
g) Cash Surrender Value is the amount that shall be received if an ordinary life insurance policy is cancelled or
discontinued. It is classified as other investments.
h) Life insurance expense equals premium less increase in CSV and dividends received.
i) Gain on settlement equals proceeds less unused premiums and the balance of the updated CSV at time of
death.
PAGE 26
Problems
1. Jelly Company requires 50,000 pounds of copper each month in its operations. To eliminate the price risk as-
sociated with copper purchases, on December 1, 2016. Jelly entered into a futures contract as a cash flow
hedge to buy 50,000 pounds of copper on March 1, 2017. The futures strike price is P100 per pound.
The futures contract is managed through an exchange, so Jelly does not know the other party on the other
side of the contract. As with most derivative contracts, this futures contract is settled by an exchange of cash
on March 1, 2017 based on the price of copper on that date.
The price of copper on December 31, 2016 is P110 per pound, while the price of copper on the date of delivery
is P115.
2. Kingston Company makes colorful 10% cotton shirts that are very popular among sophisticated business exec-
utives. Kingston uses 50,000 pounds of cotton each month in its production process. On December 1, 2016,
Kingston purchased a call option as a cash flow hedge to buy 50,000 pounds of cotton on March 1, 2017. The
option exercise price is P50 per pound. Kingston paid P50,000 for the call option. This derivative option con-
tract means that if the market price is higher than P50, Kingston can exercise the option and buy the asset at
the fixed option price of P50. If the market price is lower than P50 Kingston can throw away the option and buy
the asset at the cheaper price. As the most derivative contracts, this option contract will be settled by an ex-
change of cash on March 1, 2017 based on the price of cotton on that date. If the price of cotton on December
31, 2016 is P65 per pound and P70 on March 1, 2017, Kingston will recognize the following amounts:
5. Merylin Company has the Philippine peso as its functional currency. On October 1, 2017, the company expects
to purchase goods from the USA for $50,000 on March 31, 2018. Accordingly, the company is exposed to a
foreign currency risk. If the dollar increases before the purchase takes place, the company will have to pay
more pesos to obtain the $50,000 that it will have to pay for the goods. On October 1, 2017, Merylin entered in-
to a foreign currency forward contract with a bank speculator to purchase $50,000 in six months for a fixed
amount of P2,500,000 or P50 to $1. This forward currency contract is designated as a cash flow hedge of the
company’s exposure to increase in dollar exchange rate. On December 31, 2017, the exchange rate is P52 to
$1 and on March 31, 2018, the exchange rate is P53 to $1. What is the derivative asset to be reported by Mer-
ylin Company on December 31, 2017?
a. 50,000
b. 150,000
c. 100,000
d. 0
6. Joffrey Company is a golf course developer that constructs approximately 5 courses each year. On July 1,
2016, Joffrey has agreed to buy 5,000 trees on March 1, 2017 to be planted in the courses it intends to build.
In recent years, the price of trees has fluctuated wildly.
To protect itself from the variability of the market price of trees, Joffrey Company entered into a forward con-
tract as a cash flow hedge with a reputable bank for the purchase of 5,000 trees on March 1, 2017 at a strike
price of P1,500 per tree.
If the market price on March 1, 2017 is more than P1,500, the difference is paid by the bank to Joffrey. On the
other hand, if the market price is less than P1,500, Joffrey will pay the difference to the bank. The market pric-
es of the trees on December 31, 2016 and March 1, 2017 are P1,700 and P1,800 respectively.
1. What is the forward contract receivable or payable to be recognized on December 31, 2016?
a. 1,000,000 receivable
b. 1,000,000 payable
c. 1,500,000 receivable
d. 1,500,000 payable
2. What was the total amount exchange by Joffrey on March 1, 2017?
a. 1,000,000 receipt
b. 1,000,000 payment
c. 1,500,000 receipt
d. 1,500,000 payment
PAGE 28
7. Richard Company and its subsidiaries provided the following properties owned by the group:
Land held by Richard for undetermined future use 2,000,000
Vacant building owned by Richard to be leased out under an operating lease 3,000,000
Property held by a division of Richard, engaged in real estate firm,
on the ordinary course of business 5,000,000
Property held by Richard for use in production 4,000,000
Building used as head office but majority of the building being leased
out tenants under operating leases 2,500,000
Office of the building owned by a subsidiary of Richard and for which
the subsidiary provides security and maintenance services to the lessees 1,000,000
Equipment leased by Richard to a subsidiary 1,500,000
Property being constructed on behalf of another party 500,000
Real estate held for capital appreciation 3,500,000
Property being constructed as an investment property 1,000,000
In the consolidated statement of financial position of Richard Company and its subsidiaries, what total amount
should be shown as investment property?
a. 12,000,000
b. 10,000,000
c. 13,000,000
d. 7,500,000
8. Molly Company owned three investment properties. Details of the properties are as follows:
Initial cost Fair value 12/31/16 Fair value 12/31/17
Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,000,000 2,800,000
Property 3 3,300,000 3,900,000 3,400,000
Each property had an estimated useful life of 50 years. The accounting policy is to use the fair value model for
investment property. What is the gain or loss to be recognized for the year ended December 31, 2017?
a. 250,000 loss
b. 400,000 loss
c. 300,000 gain
d. 700,000 loss
9. Ricola Company is engaged in both real estate development and leasing of real property. On June 30, 2016,
Ricola transferred inventory and land and building held as owner occupied property to investment property to be
carried at fair value. The following is information is available on January 1, 2016:
January 1, 2016
13. In 2012 Janna Corporation purchased P5,000,000 life insurance policy on its president and chief executive of-
ficer, of which Janna is the beneficiary. Information regarding the policy for 2017 is
Cash surrender value- January 1 100,000
Annual premium paid on January 1, 2017 90,000
Dividends 10,000
The dividends were applied to increase the cash surrender value. The cash surrender value reported by
Janna in on December 31, 2017 was P120,000, what is the cash surrender value on December 31, 2017?
a. 60,000
b. 70,000
c. 90,000
d. 50,000
PAGE 30
14 Jaden Company provided the following information related to a noncurrent investment placed in trust as re-
quired by the underwriter of the bonds:
Bond sinking fund – January 1, 2017 900,000
2017 additional investment 90,000
Dividends on investment 15,000
Interest revenue 30,000
Administration costs 5,000
Carrying amount of bonds payable 1,200,000
What is the bond sinking fund on December 31, 2017?
a. 1,035,000
b. 1,030,000
c. 1,000,000
d. 1,200,000
15. Jeanine Company made an investment of P5,000,000 at 10% per annum compounded annually for 6 years.
What is the amount of the investment on the date of maturity?
a. 8,860,000
b. 8,000,000
c. 9,745,000
d. 5,500,000
16. On January 1, 2017, Jett Company adopted a plan to accumulate funds for a new building to be constructed
beginning January 1, 2022 at an estimated cost of P20,000,000. Jett Company intends to make four equal an-
nual deposits in a fund beginning December 31, 2017 that will earn interest at 12% compounded annually. Fu-
ture value factors at 12% for 4 periods are:
17. Jaycee Company made investment for 5 years at 12% per annum compounded semiannually to equal
P7,164,000 on the date of maturity. What amount must be deposited now at the compound interest to provide
the desired sum? Round off future value factors to three decimal places.
a. 4,000,000
b. 4,065,835
c. 1,432,800
d. 2,306,505
ANSWERS: B, C, A, C, A, A, B, A, C, A, C, C, B, B, C, A, A, D, B, B, A, C, A
- - END - -