CPA REVIEW SCHOOL OF THE PHILIPPINES

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FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

FIRST PREBOARD EXAMINATION SOLUTIONS

1. Income before tax (3,600,000 – 2,600,000) 1,000,000

Tax expense (1,000,000 x 25%) 250,000

Cash 850,000
Accounts receivable (1,650,000 – 250,000) 1,400,000
Prepaid tax (600,000 – 250,000) 350,000
Current assets 2,600,000 A

2. Accounts payable 550,000

Accrued expense 350,000
Carrying amount of bonds payable (5,000,000 + 500,000) 5,500,000
Current liabilities 6,400,000 C

3. Compensation (2,000,000 + 1,000,000 + 500,000) 3,500,000 A

4. Share capital 5,000,000

Retained earnings (2,500,000 – 500,000) 2,000,000
Total shareholders’ equity 7,000,000
Total liabilities 1,800,000
Total assets 8,800,000 C

5. Net income per book 7,400,000

Dividend received from associate ( 400,000)
Loss on sale of equity investment at FVOCI 550,000
Debit adjustment of profit of prior year error 750,000
Correct net income 8,300,000 A

6. Doubtful accounts expense (900,000 – 100,000) 800,000

Reversal of insurance claim 400,000
Total adjusting events 1,200,000 B

7. Carrying amount on December 31, 2022 (5,000,000 – 1,000,000) 4,000,000

Fair value less cost of disposal 3,500,000
Impairment loss in 2022 500,000

Carrying amount on December 31, 2023 if not held for sale (5M – 2M) 3,000,000
Recoverable amount 2,700,000

Measurement (lower between carrying amount on December 31, 2023 and recoverable amount) 2,700,000
Carrying amount on December 31, 2023 per book 3,500,000
Loss on reclassification ( 800,000) B

8. Impairment loss in 2022 300,000

Operating loss in 2022 1,400,000
Pretax loss 1,700,000
Tax effect (1,700,000 x 25%) ( 425,000)
Loss from discontinued operation in 2022 1,275,000 B

9. Retained earnings – December 31, 2021 3,400,000

Correction of error (underdepreciation for 2020 and 2021) ( 200,000)
Correct retained earnings on January 1, 2022 3,200,000
Net income for the year 2022 700,000
Retained earnings – December 31, 2022 3,900,000 A
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10. Division sales 8,000,000

Traceable costs ( 4,800,000)
Interest expense incurred by Delta division ( 680,000)
Allocated indirect costs (800,000 x 40%) ( 320,000)
Profit of Delta Division 2,200,000 D

11. Unadjusted checkbook balance 8,000,000

Customer’s post-dated check ( 500,000)
NSF check (3,000,000)
Undelivered check 2,500,000
Correct cash 7,000,000 A

12. Cash in bank – current account (5,000,000 – 500,000) 4,500,000

Cash in bank – VAT 1,000,000
Cash on hand 500,000
Time deposit 2,000,000
Cash and cash equivalents 8,000,000 C

13. Doubtful account (6,000,000 x 10%) 600,000

Doubtful account (2,000,000 x 20%) 400,000
Doubtful account (1,500,000 x 30%) 450,000
Doubtful account (500,000 – 100,000 = 400,000 x 50%) 200,000
Required allowance for doubtful accounts 1,650,000

Allowance for doubtful accounts – January 1, 2022 1,000,000

Required doubtful accounts expense (SQUEEZE) 900,000 C
Recovery of accounts 50,000
Accounts written off (200,000 + 100,000) ( 300,000)
Required allowance for doubtful accounts – December 31, 2022 1,650,000

14. Net realizable value (9,900,000 – 1,650,000) 8,250,000 B

15. Accounts receivable 5,000,000
Service charge (5,000,000 x 6%) ( 300,000)
Due from factor (5,000,000 x 10%) ( 500,000)
Interest expense (5,000,000 x 12% x 60/365) ( 98,630)
Cash received from factoring 4,101,370
Initial loss on factoring (300,000 + 98,630 + 250,000) 648,630 C
16. Maturity value (5,000,000 x 9% x 180/360 = 225,000 + 5,000,000) 5,225,000
Discount (5,225,000 x 12% x 120/360) ( 209,000)
Proceeds from discounting 5,016,000
Carrying amount of note
Principal 5,000,000
Accrued interest (5,000,000 x 9% x 60/360) 75,000 (5,075,000)
Loss on discounting ( 59,000) A
17. Sales and initial carrying amount of note (600,000 x 5.36) 3,216,000
First payment on January 1, 2022 ( 600,000)
Carrying amount of note – January 1, 2022 2,616,000
Interest income for 2022 (2,616,600 x 10%) 261,600 A
18. Accounts receivable before cash discount (8,000,000 x 80% x 90% x 95%) 5,472,000
Cash discount (5,472,000 x 2%) ( 109,440)
Invoice amount 5,362,560
Sales return (500,000 x 98%) ( 490,000)
Accounts receivable on December 31, 2022 4,872,560
Allowance for freight charge ( 200,000)
Net realizable value 4,672,560 A
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19. Correct inventory (3,250,000 + 300,000 + 380,000 + 120,000) 4,050,000 D

20. Correct accounts payable (3,600,000 + 500,000 + 1,000,000 + 450,000) 5,550,000 A

21.
Date Units Unit cost Total cost
January 1 10,000 100.00 1,000,000
January 15 6,000 300.00 1,800,000
Balance 16,000 175.00 2,800,000
January 20 (9,000) 175.00 (1,575,000)
January 25 4,000 200.00 2,000,000
Balance 11,000 293.18 3,225,000
January 26 (1,000) 500.00 (500,000)
Balance 10,000 272.50 2,725,000 A

22. Units available for sale 150,000

Units sold (15,000,000 / 150) ( 100,000)
Units on hand 50,000

Fourth quarter (10,000 x 80) 800,000

Third quarter (40,000 x 75) 3,000,000
Cost of inventory at year end 3,800,000
NRV at year end (50,000 x 72) 3,600,000
Loss on inventory writedown 200,000

Goods available for sale (1,200,000 + 9,300,000 – 400,000) 10,100,000

Cost of inventory at year end ( 3,800,000)
Cost of goods sold before LCNRV 6,300,000
Loss on inventory writedown 200,000
Cost of goods sold reported in the income statement 6,500,000 A

23. Gain from biological asset (2,500,000 – 250,000) 2,250,000

Gain from agricultural produce 400,000 C

24. Cost of goods available for sale (500,000 + 4,000,000 – 200,000) 4,300,000
Cost of goods sold (5,600,000 – 400,000 = 5,200,000 x 75%) ( 3,900,000)
Cost of inventory damaged by flood 400,000 B

25. Goods available for sale at retail – average (9,200,000 + 400,000 – 600,000) 9,000,000
Cost ratio – average (6,000,000 / 9,000,000) 66 and 2/3%

Cost of goods available for sale 6,000,000

Inventory at cost (9,000,000 – 7,800,000 = 1,200,000 x 66 and 2/3%) ( 800,000)
Cost of goods sold 5,200,000 C

26. Fair value – December 31, 2023 3,300,000

Carrying amount – December 31, 2022 (3,700,000 – 100,000) (3,600,000)
Unrealized loss in 2023 ( 300,000) B

27. Proceeds from disposal 2,500,000

Historical cost of Security 1 (2,000,000)
Net credit adjustment to retained earnings 500,000 A

28. Dividend from Arlo (2,400,000 x 10%) 240,000

Dividend from Amal 150,000
Dividend income 390,000 A
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29. Assume FIFO

“June 1” shares 24,000 2,000,000

“December 1” shares (3,600,000 x 6,000 / 36,000) 6,000 600,000
Carrying amount of shares sold 2,600,000

Gain on sale (30,000 x 150 = 4,500,000 – 2,600,000) 1,900,000

Dividend income (50,000 x 1.20 = 60,000 x 20) 1,200,000 A

30. Total FV Fraction Allocated cost

Pref. shares (30,000 x 150) 4,500,000 45 / 60 3,750,000
Share warrants (30,000 x 50) 1,500,000 15 / 60 1,250,000 B
6,000,000 5,000,000

31. Cost of investment 5,000,000

Carrying amount of net assets acquired (10,000,000 x 40%) (4,000,000)
Excess cost 1,000,000
Land (2,000,000 x 40%) ( 800,000)
Inventory (1,500,000 x 40%) ( 600,000)
Excess fair value ( 400,000)

Share in net income (8,000,000 x 40%) 3,200,000

Excess fair value 400,000
Amortization of excess cost – land ( 800,000)
Investment income 2,800,000 B

32. Cost of investment 1,700,000

Carrying amount and fair value of net asset acquired (4M x 40%) (1,600,000)
Goodwill 100,000

Cost of investment 1,700,000

Share in net income (700,000 x 40%) 280,000
Share in revaluation surplus (2,000,000 x 40%) 800,000
Dividend received (200,000 x 40%) ( 80,000)
Carrying amount of investment – December 31, 2022 2,700,000 A

33. Carrying amount – July 1, 2022 (946,000 – 40,000) 906,000

Discount amortization
Interest income (906,000 x 10% x 6/12) 45,300
Interest received (1,000,000 x 8% x 6/12) 40,000 5,300
Carrying amount – December 31, 2022 911,300 A

34. Interest income for 2022 (4,760,000x 12%) 571,200 A

Interest received (5,000,000 x 10%) 500,000
Discount amortization 71,200

35. Fair value – December 31, 2022 (5,000,000 x 105%) 5,250,000

Carrying amount – December 31, 2022 (4,760,000 + 71,200) 4,831,200
Unrealized gain – OCI for 2022 418,800 A

36. Dollar value of yen – November 1, 2022 (47,850,000 / 110) 435,000

Dollar value of yen – December 31, 2022 (47,850,000 / 120) 398,750
Derivative asset – December 31, 2022 36,250 C

37. Derivative asset – December 31, 2023 (12% - 8% = 4% x 6M = 240,000 x 2.4) 576,000 C

38. Cost model (9,000,000 – 600,000) 8,400,000

Fair value model 9,900,000 B
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39. Cash paid for land 2,500,000

Mortgage assumed including interest accrued 1,000,000
Realtor commission 300,000
Legal fees, taxes and documentation 50,000
Amount paid to relocate squatters 100,000
Cost of the land 3,950,000 A

40. Demolition cost 200,000

Salvage value of old building demolished ( 50,000)
Payment to contractor 5,000,000
Building permit 50,000
Excavation 50,000
Architect fee 200,000
Cost of the building 5,450,000 C

41. Invoice price 1,400,000

Cash discount not taken ( 20,000)
Freight 40,000
Installation cost 50,000
Testing cost 30,000
Cost of the machine 1,500,000 A

42. Cost of the new truck (2,000,000 – 200,000) 1,800,000 D

43. Deferred grant income – January 1, 2022 2,000,000

Grant income in 2022 (2,000,000 x 40%) ( 800,000)
Deferred grant income – December 31, 2022 1,200,000 C

44. 1,500,000 x 10% 150,000

1,000,000 x 8% 80,000
Total borrowing cost incurred on general borrowings 230,000

Average capitalization rate (230,000 / 2,500,000) 9.20%

Specific borrowing cost capitalized (2M x 7.5% = 150,000 – 59,000) 91,000

General borrowing cost capitalized (1,900,000 x 9.2%) 174,800
Capitalized borrowing cost 265,800 D

45. January 1 (4,000,000 x 12/12) 4,000,000

July 1 (7,000,000 x 6/12) 3,500,000
November 1 (3,000,000 x 2/12) 500,000
Weighted average expenditures 8,000,000

Specific borrowing cost capitalized (5,000,000 x 12%) 600,000

General borrowing cost capitalized (3,000,000 x 10%) 300,000
Actual expenditures (4,000,000 + 7,000,000 + 3,000,000) 14,000,000
Capitalized borrowing cost 14,900,000 B

46. Cost 7,200,000

Accum. Depn. – January 1, 2025 (7,200,000 / 10 x 3) (2,160,000)
Carrying amount – January 1, 2025 5,040,000

Denominator of fraction (7 + 6 + 5 + 4 + 3 + 2 + 1) 28

Depreciation for 2025 (5,040,000 x 7/28) 1,260,000 A

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47. Purchase price of property 26,400,000

Present value of restoration cost 1,800,000
Exploration cost 2,000,000
Development cost 1,600,000
Cost of wasting asset 31,800,000

Depletion rate (31,800,000 – 3,000,000 = 28,800,000 / 1,200,000) 24.00

Depletion in cost of goods sold (90,000 x 24) 2,160,000 B

48. Cost 5,600,000

Accum. depn. – August 31, 2022 (5,600,000 / 96 x 44) (2,200,000)
Carrying amount – August 31, 2022 3,400,000 B
Recoverable amount 3,500,000
Impairment loss 0

49. Revaluation surplus of land on January 1 (5,000,000 – 2,000,000) 3,000,000

Revaluation surplus of building on January 1 (18,750,000 – 11,250,000) 7,500,000
Balance 10,500,000
Realized to retained earnings (7,500,000 / 30) ( 250,000)
Pretax revaluation surplus on December 31 10,250,000 C

Building is 25% depreciated (3,750,000 / 15,000,000)

Sound value (25,000,000 x 75%) 18,750,000

Total life (10 years expired / 25%) 40

Expired life (10)
Remaining life 30

50. Cost 7,140,000

Total amortization – 2019 to 2021 (7,140,000 / 15 x 3) (1,428,000)
Carrying amount – January 1, 2022 5,712,000
Amortization for 2022 (5,712,000 / 7) ( 816,000)
Carrying amount – December 31, 2022 4,896,000 B

Theory
51. C 61. B
52. C 62. C
53. D 63. C
54. D 64. C
55. C 65. D
56. B 66. C
57. D 67. B
58. D 68. C
59. B 69. B
60. C 70. D

END