Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

Name: ________________________________

Section: ____________________

FINAL EXAMINATION
Accounting 121
October 1, 2014
GENERAL INSTRUCTIONS. This test is composed of two parts each with their own sets of instruction.
Read them carefully before answering the questions. All answers should be written on the answer sheet
provided. In case of journal entries, write it at the back of answer sheet. Erasures and material alterations
are strictly not allowed. If your answer in multiple choice questions is not in the choices, provide for the
answer. This test is good for three hours. God bless!
MULTIPLE CHOICE. Choose the best statement among the choices. Write the letter corresponding to your choice on
the answer sheet provided with this questionnaire.
1.Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash
to be received in the future, failure to follow this practice usually does not make the balance sheet misleading
because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
2.Which of the following is a generally accepted method of determining the amount of the adjustment to bad debts
expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance
3.At the beginning of 2000, Finney Company received a three-year zero-interest-bearing $1,000 trade note. The
market rate for equivalent notes was 8% at that time. Finney reported this note as a $1,000 trade note receivable
on its 2000 year-end statement of financial position and $1,000 as sales revenue for 2000. What effect did this
accounting for the note have on Finney's net earnings for 2000, 2001, 2002, and its retained earnings at the end of
2002, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these
4.Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a purchase
and included the goods in inventory. The effect of this on its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
5.Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory
should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate projects
c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
d. All of these should be capitalized.
6.Which of the following recording procedures would result in the highest cost of goods sold for 2001?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other
expenses" in the income statement
a. 1
d. Cannot be determined from the information
b. 2
provided.
c. Either 1 or 2 will result in the same cost of
goods sold.
7.If a petty cash fund is established in the amount of P250, and contains P200 in cash and P45 in receipts for
disbursements when it is replenished, the journal entry to record replenishment should include credits to the
following accounts
a. Petty Cash, P45.
b. Petty Cash, P50.

c.
8.Which of
a.
b.
c.
d.

Cash, P45; Cash Over and Short, P5.

d.

Cash, P50.

the following best illustrates the accounting concept of conservatism?

Use of the allowance method to recognize bad debt losses from credit sales
Use of the lower-of-cost-or-market approach in valuing inventories.
Use of the same accounting method from one period to the next in computing depreciation expense
Utilization of a policy of deliberate understatement of asset values in order to present a conservative net
income figure

9.Application of the full disclosure principle

a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b. is violated when important financial information is buried in the notes to the financial statements.
c. is demonstrated by the use of supplementary information presenting the effects of changing prices.
d. requires that the financial statements be consistent and comparable.
10. A callable preference share is:
a. A financial asset.
b. A financial liability.

c.
d.

An equity instrument.
None of the above.

11. An owner occupied property is held by an owner or finance lessee:

A. For use in the production of goods and services
B.
For administrative purposes.
a. Both A and B.
c. B only.
b. A only.
d. Neither A nor B.
12. An investment property is derecognized when:
a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. In all of the above cases.
13. Which of the following additional disclosures must be made when an entity chooses the cost model as its
accounting policy for investment property?
a. Fair value of the property.
c. Value in use of the property.
b. Present value of the property.
d. Net realizable value of the property.
14. Which of the following statements is true concerning property leased to an affiliate?

i. From the perspective of the individual entity that owns it, the property leased to an affiliate is not considered
ii.

an investment property.
From the perspective of the affiliates as a grouo and for purposes of consolidated financial statements, the
property is treated as investment property.
a. Both I and II
c. I only
b. Neither I nor II
d. II only

15. If a sinking fund is used to purchase securities, the sinking fund:

a. Increases when revenue is earned on the securities.
b. Decreases when securities are purchased.
c. Decreases when revenue is earned on the securities.
d. Is not affected by revenue earned on the securities.
16. Which is not a current fund?
a. petty cash fund.
b. insurance fund.

c.
d.

Dividend fund.
Tax fund.

17. Interest in life insurance contract shall be carried at:

a. Nil.
b. Face of policy.

c.
d.

Cash surrender value.

Total amount of insurance premiums paid.

18. Which is not a non-current fund?

a. Tax fund.
b. Plant expansion fund.

c.
d.

Redemption fund.
Sinking fund.

19.General Molding is building a new plant that will take three years to construct. The construction will be financed in
part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and
building permit fees. Which of the following statements are true?
a. Excavation fees are capitalized but building permit fees are not.
b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

20.A company purchases a remote site building for computer operations. The building will be suitable for operations
after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be
replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of
the following statements are true?
a. The cost of the building will not include the repainting and recarpeting costs.
b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional expenditures are all
capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.
21.Interest
a.
b.
c.
d.

may be included in the acquisition cost of a plant asset

during the construction period of a self-constructed asset.
if the asset is purchased on credit.
if the asset acquisition is financed by a long-term note payable.
if it is a part of a lump-sum purchase.

22.Accountants do not attempt to measure the change in a plant asset's market value during ownership because
a. the assets are not held for resale.
b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management's responsibility to determine fair values.
23.Additions and improvements
a. occur frequently during the ownership of a plant asset.
b. normally involve immaterial expenditures.
c. increase the book value of plant assets when incurred.
d. typically only benefit the current accounting period.
24.If a fully
a.
b.
c.
d.

depreciated plant asset is still used by a company, the

estimated remaining useful life must be revised to calculate the correct revised depreciation.
asset is removed from the books.
accumulated depreciation account is removed from the books but the asset account remains.
asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment
until the asset is retired.

25.Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear
down the Emporia Hotel and build a new luxury hotel on the site. The cost of the Emporia Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
26.The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
27.If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a
parking lot, the proper accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.

28.Which

of the following assets do not qualify for capitalization of interest costs incurred during construction of the
assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their intended use.

29.When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if expenditures for asset construction
had not been made.
d. that portion of average accumulated expenditures on which no interest cost was incurred.
30.Which of the following statements is true regarding capitalization of interest?

a.
b.
c.

d.

Interest cost capitalized in connection with the purchase of land to be used as a building site should be
debited to the land account and not to the building account.
The amount of interest cost capitalized during the period should not exceed the actual interest cost
incurred.
When excess borrowed funds not immediately needed for construction are temporarily invested, any
interest earned should be offset against interest cost incurred when determining the amount of interest
cost to be capitalized.
The minimum amount of interest to be capitalized is determined by multiplying a weighted average
interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

31.Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange . The
exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the
disposal of the old asset is indicated, the gain will
a. be reported in the Other Revenues and Gains section of the income statement.
b. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the owner's capital account.
32.A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the
manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. one dollar (since the site cost nothing but should be included in the balance sheet).
d. the value assigned to it by the company's directors.
33.An improvement made to a machine increased its fair market value and its production capacity by 25% without
extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
34. Which of the following statements is true relating to a government grant?
I. Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant
have been or will be fulfilled.
II. Government grant shall not be recognized on a cash basis as this is not consistent with GAAP.
a. I only
c. Both I and II
b. II only
d. Neither I nor II
35. Government grant related to non-depreciable asset that requires fulfillment of certain conditions
a. Should not be recognized as income.
b. Should be recognized as income immediately.
c. Should be recognized as income over 40 years.
d. Should be recognized as income over the periods which bear cost of meeting the conditions.

SHORT PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be written on the
answer sheet provided with this questionnaire. Solutions are to be written on separate sheets of paper to be submitted
along with the answer sheet.
PROBLEM 1: During the year, Jantz Company made an entry to write off a $4,000 uncollectible account. Before this
entry was made, the balance in accounts receivable was $60,000 and the balance in the allowance account was
$4,500.
1. The net realizable value of accounts receivable after the write-off entry was
a. $60,000.
c. $51,500.
b. $59,500.
d. $55,500.
PROBLEM 2: On December 31, 2001, Eller Corporation sold for $70,000 an old machine having an original cost of
$90,000 and a book value of $40,000. The terms of the sale were as follows:
$10,000 down payment
$30,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction.

2.

What should be the amount of the notes receivable net of the unamortized discount on December 31, 2001
rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
a. $52,773.
c. $60,000.
b. $62,773.
d. $105,546.

PROBLEM 3: On June 1, 2001, Vent Corp. loaned Irvin $200,000 on a 12% note, payable in five annual installments of
$40,000 beginning January 2, 2002. In connection with this loan, Irvin was required to deposit $2,000 in a zerointerest-bearing escrow account. The amount held in escrow is to be returned to Irvin after all principal and interest
payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2001. Irvin
made timely payments through November 1, 2001. On January 2, 2002, Vent received payment of the first principal
installment plus all interest due.
3.

At December 31, 2001, Vent's interest receivable on the loan to Irvin should be
a. $0.
c. $4,000.
b. $2,000.
d. $6,000.

PROBLEM 4: Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2002 and 2001
contained errors as follows:
2002
2001
Ending inventory
$4,000 overstated
$7,000 overstated
Depreciation expense
$2,000 understated
$8,000 overstated
Assume that the proper correcting entries were made at December 31, 2001.
4. By how much will 2002 income before taxes be overstated or understated?
a. $2,000 understated
c. $4,000 overstated
b. $2,000 overstated
d. $6,000 overstated
PROBLEM 5: Carney Company has been using the LIFO method of inventory valuation for 10 years, since it began
operations. Its 2001 ending inventory was $30,000, but it would have been $60,000 if FIFO had been used.
5. Thus, if FIFO had been used, Carney's income before income taxes would have been
a. $30,000 greater over the 10-year period.
b. $30,000 less over the 10-year period.
c. $30,000 greater in 2001.
d. $30,000 less in 2001.
PROBLEM 6: Transactions for the month of June were:
Purchases
June 1
(balance)
400 @ $3.20
3
1,100 @ 3.10
7
600 @ 3.30
15
900 @ 3.40
22
250 @ 3.50

6.

June 2
6
9
10
18
25

Sales
300
800
500
200
700
150

@
@
@
@
@
@

$5.50
5.50
5.50
6.00
6.00
6.00

Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-cost
basis, rounded to the nearest dollar, is
a. $1,980.
c. $1,970.
b. $1,956.
d. $1,995.

PROBLEM 7: Tanner, Inc.s checkbook balance on December 31, 2001 was P24,200. In addition, Tanner held the
following items in its safe on December 31.
(1) A check for P450 from Peters, Inc. received December 30, 2001, which was not included in the
checkbook balance.
(2) An NSF check from Garner Company in the amount of P700 that had been deposited at the bank, but
was returned for lack of sufficient funds on December 29. The check was to be redeposited on January
3, 2002. The original deposit has been included in the December 31 checkbook balance.
(3) Coin and currency on hand amounted to P1,450.
7.

The proper amount to be reported on Tanner's balance sheet for cash at December 31, 2001 is
a. P24,500.
c. P25,400.
b. P23,950.
d. P24,950.

PROBLEM 8: Trent Co. uses the retail inventory method. The following information is available for the current year.
Cost
Retail
Beginning inventory
$117,000
$183,000
Purchases
442,000
623,000
Freight-in
8,000

Employee discounts

3,000
Net markups

22,000
Net Markdowns

30,000
Sales

585,000

8.

If the ending inventory is to be valued at approximately lower of average cost or market, the calculation of the
cost ratio should be based on cost and retail of
a. $450,000 and $645,000.
c. $559,000 and $825,000.
b. $450,000 and $642,000.
d. $567,000 and $828,000.

PROBLEM 9: Sandy, Inc. had the following bank reconciliation at March 31, 2001:
Balance per bank statement, 3/31/01
Add: Deposit in transit
Less: Outstanding checks
Balance per books, 3/31/01

P37,200
10,300
47,500
12,600
P34,900

Data per bank for the month of April 2001 follow:

Deposits
P47,700
Disbursements
49,700
All reconciling items at March 31, 2001 cleared the bank in April. Outstanding checks at April 30, 2001 totaled
P5,000. There were no deposits in transit at April 30, 2001.
9. What is the cash balance per books at April 30, 2001?
a. P30,200
c. P35,200
b. P32,900
d. P40,500
PROBLEM 10: On October 1, 2001, Keane Co. purchased to hold to maturity, 500, P1,000, 9% bonds for P520,000. An
additional P15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the
bonds mature on December 1, 2005. Keane uses straight-line amortization.
10. Ignoring income taxes, the amount reported in Keane's 2001 income statement from this investment should be
a. P11,250.
c. P12,450.
b. P10,050.
d. P13,650.
PROBLEM 11: Gomez Corporation issued P6,000,000 of 9%, ten-year convertible bonds on July 1, 2001 at 96.1 plus
accrued interest. The bonds were dated April 1, 2001 with interest payable April 1 and October 1. Bond discount is
amortized semiannually on a straight-line basis. On April 1, 2002, P1,200,000 of these bonds were converted into 500
shares of P20 par value common stock. Accrued interest was paid in cash at the time of conversion.
11. What should be the amount of the unamortized bond discount on April 1, 2002 relating to the bonds
converted?
a. P46,800.
c. P23,400.
b. P43,200.
d. P44,400.
PROBLEM 12: On January 1, 2010. Mylene Company purchased 50,000 shares of another entity for P3, 600,000. On
October 1, 2010, Mylene received 50,000 stock rights from the investee. Each right entitles the shareholders to
acquire one share for P85. The market price of the investees share was P100 immediately before the rights were
issued and P90 immediately after the rights were issued. On December 1, 2010, Mylene exercised all stock rights. On
December 31, 2010, Mylene sold 25,000 shares at P90 per share. The stock rights are not a accounted for separately.
12. If the average approach is used, what is the gain on sale of investments that should be recognized in 2010?
a. P450,000.
c. P287,500.
b. P700,000.
d. P125,000.
PROBLEM 13: Grant, Inc. acquired 30% of South Co.s voting stock for P200,000 on January 2, 2012. Grants 30%
interest in South gave Grant the ability to exercise significant influence over Souths operating and financial policies.
During 2012, South earned P80,000 and paid dividends of P50,000. South reported earnings of P100,000 for the six
months ended June 30, 2013, and P200,000 for the year ended December 31, 2013. On July 1, 2013, Grant sold half of
its stock in South for P150,000 cash. South paid dividends of P60,000 on October 1, 2013.
13. Before income taxes, what amount should Grant include in its 2012 income statement as a result of the
investment?
a. P15,000.
c. P50,000.
b. P24,000.
d. P80,000.
PROBLEM 14: On January 1, 2010, Dell Company paid P18,000,000 for 50,000 ordinary shares of Case which
represent a 25% interest in the net assets of Case. The acquisition cost equal to the book value of the net assets
acquired. Dell has the ability to exercise significant influence over Case. Dell received a dividend of P35per share from
Case in 2010. Case reported net income of P9,600,000 for the year ended December 31,2010.
14. In the December 31, 2010 statement of financial position, what should be reported as investment in Case
Company?
a. P22,150,000.
c. P18,650,000.
b. P20,400,000.
d. P18,000,000..
PROBLEM 15: On January 1, 2009, Adam Company purchased as a long-term investment 100,000 ordinary share of
Mill Company for P40 a share. On December 31, 2009, the market price of Mills share was P35, reflecting temporary
decline in market price. On December 28, 2010, Adam sold 80,000 shares of Mill Company for P30 a share.
15. For the year ended December 31, 2010, what should be reported as loss on disposal of long-term investment?
a. P1,000,000.
b. P900,000.

c.

P800,000.

d.

P400,000.

PROBLEM 16: Alpha Company is considering the appropriate classification of the following items in its December 31,
2013 statement of financial position:
P
Land held for long term capital appreciation
3,000,000
Land held for currently undetermined future use
2,500,000
Building leased out under an operating lease
300,000
Building leased out under a finance lease
450,000
Vacant building held to be leased out under an operating lease
3,120,000
Property held for use in the production or supply of goods or services
Property held by Beta, Inc., a real estate company and a subsidiary of Alpha, in the
ordinary course of business
Property held for administrative purposes
Property held for sale in the ordinary course of business

2,750,000
1,350,000
2,400,000
750,000

Property held in the process of construction or development for sale

Building owned by Beta, Inc. and for which it provides security and maintenance
services to the lessees.
Property being constructed or developed on behalf of third parties

2,000,000

Property held for future use as owner occupied property

Land leased to Beta, Inc. under a finance lease and is leased out by Beta to Gamma
Corporation under an operating lease
Property held for future development and subsequent use as owner occupied
property
Property occupied by employees

1,075,000

Building leased to Beta, Inc. under an operating lease

Owner occupied property awaiting disposal

1,250,000
5,000,000

1,000,000
250,000

1,835,000
3,050,000
875,000

Property that is being constructed or developed for use as an investment property

Existing investment property that is being redeveloped for continuing use as
investment property

865,000

Machinery leased out under an operating lease

Building held for administrative purposes (40%) and leased out under an operating
lease (60%)
Building leased out under an operating lease where Alpha supplies security and
maintenance services to the lessees

125,000

Land leased out under an operating lease by Beta, Inc.

550,000

2,000,000
450,000
150,000

16. How much would be presented as investment property in the consolidated financial statements of Alpha
Company and Beta, Inc., its subsidiary?
PROBLEM 17: Alaminos, Inc. completed the construction of a building at the end of 2005 for a total cost of P100
million. The building is estimated to be economically useful for 25 years. The building was constructed for the purpose
of earning rentals under operating leases. The tenants began occupying the building after its completion. The
company opted to use the fair value model to measure the building. An independent valuation expert was used by the
company to estimate the fair value of the building on an annual basis. According to the expert the fair values of the
building at the end of 2005, 2006 and 2007 were P105 million, P120 million and P118 million, respectively.
17. The depreciation expense in 2006.
PROBLEM 18: On January 1, 2011, Upsilon, Inc. entered into an operating lease with Omega Leasing Company for a
building. The building will be subleased under various operating leases. Annual rental is P200,000 for 10 years. On
January 1, 2011, Upsilon decided to classify the property interest in the operating lease as investment property. It was
determined that the present value of the minimum lease payments is P1,600,000 which is equal to the fair value of the
property interest on that date. Upsilon uses the cost model to measure its investment property. The carrying amounts
and fair values of the other investment properties are:
Carrying amount
Fair value at
1/1/2011
1/1/2011
Land
P 1,000,000
P 1,200,000
Building
400,000
600,000
The building was purchased 10 years ago and is 50% depreciated. On December 31, 2011, the properties had the
following fair values:
P
1,220,00
Land
0
Building
550,000
Property interest in the operating lease
1,640,000
18. What total amount would be reported as investment property on December 31, 2011?
PROBLEM 19: The Zeta Company owns three properties which are classified as investment properties according to
PAS 40. Details of the property are given below:

Initial
Cost

Fair value
at
12/31/201
0

Fair value
at
12/31/201
1

Property A
Property B
Property C

P 540,000
690,000
660,000

P 640,000
610,000
770,000

P 700,000
570,000
720,000

Each property was acquired in 2007 with a useful life of 50 years. Costs to sell each property are estimated at P20,000
and P25,000 on December 31, 2010 and December 31, 2011, respectively. On June 6, 2012, when its fair value was
estimated at P580,000, Property B was sold for P600,000, net of P30,000 selling costs.
Suppose Zeta Company adopts the fair value model to account for its investment properties, answer the following
questions:
19. What is the gain or loss to be recognized in profit or loss for the year ending December 31, 2012 regarding the
disposal of Property 2?
PROBLEM 20: On December 31, 2011, Iota, Inc. decided to reclassify a building previously used as owner-occupied
property to investment property. Iota determined the following:
P
4,500,00
Historical cost
0
Accumulated depreciation, 12/31/2011
3,000,000
Carrying amount, 12/31/2011
1,500,000
Carrying amount had no impairment loss
been recognized, 12/31/2011
1,800,000
Fair value, 12/31/2011
2,400,000
Iota, Inc. uses the fair value model for investment property.
20. How much should be recognized in the 2011 profit or loss as a result of the transfer from owner occupied to
investment property?
PROBLEM 21: The transactions given below relate to a sinking fund for retirement of long-term bonds of Alberta
Company:
2011
Jan.
1
In accordance with the terms of the bond indenture, cash
in the amount of P3,000,000 is transferred at the end of
the first year from the regular cash account to the sinking
fund. The entity administers the fund.
Jan.
2
The sinking fund cash is used to acquire AB Company 12%
bonds of P750,000 face value, maturing in five years, for
P675,000.
Jan.
2
The sinking fund cash is used to acquire 10%, P150 par
value CD, 5,000 preference shares, at P120 per share.
Dec.
31
Annual interest is received on the AB bonds. The discount
on the bonds is amortized accordingly using the straight
line method.
Dec.
31
Sinking fund expenses of P30,000 are paid from the
sinking fund cash.
Dec.
31
Annual dividends are received on the CD preference
shares.
Dec.
31
Retained earnings are appropriated in an amount equal to
the sinking fund balance.
2012
Apr.
1
The sinking fund cash is used to acquire EF Company,
10% bonds of P600,000 face value, maturing in 4 years for
P600,000 plus accrued interest of P15,000.
July
1
Interest is received on the EF bonds, P30,000 including the
accrued interest at the time of purchase.
Dec.
31
All EF bonds are sold for P675,000. No interest is accrued
at the time of sale.
Dec.
31
Annual interest on the AB bonds and the annual dividends
on the CD preference shares are received.
Dec.
31
Sinking fund expenses of P22,500 are paid from the
sinking fund cash.
Dec.
31
Retained earnings are appropriated in an amount equal to
the sinking fund balance.
21. What is the balance of the sinking fund on December 31, 2012?
PROBLEM 22: Following are the selected transactions in chronological order of British Columbia Company and its
trustee in connection with a sinking fund.
A. Cash contribution to the sinking fund, P1,000,000.
B. Acquisition of securities at par by the trustee, P700,000.
C. The trustee receives interest on the securities, P60,000.
D. The trustee pays expenses of P30,000.
E. The trustee sells the securities for P800,000 plus accrued interest of P10,000.
F. The trustee pays bond payable of P1,000,000 and interest of P100,000.

G. The trustee remits the remaining cash to British Columbia Company.

22. How much was remitted by the trustee to British Columbia Company?
PROBLEM 23: On January 1, 2010, Manitoba Company is currently planning the purchase of a building in January 1,
2015. It wants to establish a fund, by depositing in a bank, which should equal the cost of construction of the building
by January 1, 2015. Data regarding the fund follows:
Cost of the building
P10,000,0
00
Compound interest rate on bank
12%
deposits
Mr. Val Ang, the companys controller suggested to contribute five equal annual amounts with the first deposit to be
made on January 1, 2010 and every December 31 thereafter but with the interest compounded semi-annually.
23. What is the annual deposit to the fund?
PROBLEM 24: Newfoundland Company insures the life of its president for P2,000,000, the entity being the beneficiary
of an ordinary life policy. The annual premium paid in advance is P60,000. The policy is dated April 1, 2011 and carries
the following cash surrender values:
End of policy year
Cash surrender value
April 1, 2012
Nil
April 1, 2013
Nil
April 1, 2014
P 60,000
April 1, 2015
84,000
April 1, 2016
116,000
Newfoundland follows the calendar year as its accounting period. The president dies on June 30, 2015 and the policy is
collected on July 31, 2015.
24. What is the gain on life insurance settlement of Newfoundland Company in 2015?
PROBLEM 25: The following accounts are found under current assets in the December 31, 2011 statement of financial
position of Saskatchewan Company:
Cash surrender value
P 90,000
Less: Policy loan from insurance company
50,000
40,000
Dividend receivable from insurance company
2,000
The above accounts are the only ones in the statement of financial position which pertain to the insurance policy or
the loan. Upon investigation, the following data are gathered:
A. The cash surrender value reported in the statement of financial position is for June 30, 2012. The cash
surrender value was P80,000 on June 30, 2011.
B. On June 30, 2011, the entity paid the annual premium of P30,000 minus the dividend declared of P2,000.
C. The loan from the insurance company is a one-year note dated April 1, 2011. The 12% interest is payable on
the date of maturity.
D. The dividend declared was recorded by debiting dividend receivable and crediting dividend income.
25. The cash surrender value should be reported on December 31, 2011 at:
PROBLEM 26: During 2013, Alexandrite Company purchased machinery for P500,000 cash. Additional costs incurred
by Alexandrite include commission paid to brokers for the purchase of the equipment, P5,000; import duties of
P25,000; non-refundable purchase taxes of P10,000; transportation costs of P1,000; assembling and installation costs
of P2,000; administration and other general overhead costs of P4,200; costs of trial runs of P5,000 and advertisement
and promotion costs of the new product to be produced by the equipment, P3,800. The samples generated from
testing the equipment were sold at P500.
During the same year, Alexandrite purchased several assets of a small company. The lump sum price amounted to
P10,575,000 including P100,000 appraisers fee and P75,000 interest expense in connection with the financing of
these assets. Relevant information on these assets follows:
Current
Assessed
Vendors
Valuation
Original Cost
Land
P 2,500,000
P 2,000,000
Machinery
4,000,000
3,000,000
Building
6,000,000
3,500,000
26. What is the increase in the balance of the machinery account as a result of these acquisitions?
PROBLEM 27: Opal, Inc. exchanged equipment with Jade Company. Pertinent data are shown below:
Opal
Jade
P
P
Equipment
1,000,000
2,000,000
Accumulated depreciation
200,000
800,000
Cash paid by Opal to Jade
150,000
150,000
The exchange of equipment by Opal and Jade is deemed to have commercial substance.
Suppose the fair value of Opals equipment is P950,000 and thatof Jades equipment is P1,100,000, answer the
following questions:
27. What would be recognized as gain (loss) on the exchange by Opal?

28. After the exchange, the carrying amount of the property, plant and equipment of Jade would have increased
(decreased) by:
PROBLEM 28: Charmy Company acquired items of property, plant and equipment in 2011 as follows:
A. A machinery is a acquired at a cash price of P300,000. In addition to cash payment, the entity pays for the
following costs in connection with the machinery: transportation, P20,000; installation cost, P10,000; and cost
of trial runs, P5,000.
B. An equipment is purchased on account for P100,000, 2/10, n/30.
C. A machinery is purchased at an installment price of P350,000. The terms are P50,000 down and the balance in
three equal annual installments. The cash price of the machinery is P290,000. A promissory note is issued for
the installment balance of P300,000.
D. A piece of land is acquired by issuing 20,000 shares with par value of P50. At the time acquisition, the fair
value of the land is P1,600,000 and the share is quoted at P90 per share.
E. A certain equipment was donated by a shareholder to the entity. An independent appraisal of the equipment
placed the fair value at P1,000,000 and the residual value at P100,000. Attorneys fees and other legal
expenses amounted to P25,000. An installation cost is also incurred amounting to P58,000
F. An asset is constructed and the following costs are incurred: Materials (normal, P1,000,000) P1,300,000; Labor
(normal, P800,000) P1,000,000; manufacturing overhead P900,000.
29. What is the total cost of items of property, plant and equipment?
PROBLEM 29: The Moonstone Furniture Manufacturing Company fabricated furniture and fixtures for its use in the
companys plant during 2011. The following data were taken from the companys records:
Direct
Materials
labor
Finished goods
P 100,800
P 151,200
Office furniture and
fixtures
67,200
50,500
Factory overhead amounted to P134,000. Normal production of finished goods results to 420 units. Due to fabrication
of office furniture and fixtures, finished goods produced totaled 294 units only in 2011. The assets would have been
apportioned to the 126 units which were not produced.
30. What is the total cost of office furniture and fixtures?
PROBLEM 30: On January 1, 2011, Carmona Company received a grant of P45 million from the British government in
order to defray safety and environmental costs within the area where the enterprise is located. The safety and
environmental costs are expected to be incurred over four years, respectively, P6 million, P12 million, P18 million and
P24 million. Carmona opts not to present the grant as other income in the income statement.
31. How much safety and environmental costs did Carmona recognize in 2012? 3,000,000
PROBLEM 31: Lively, Inc. received a consolidated grant of P60 million. Three fourths of the grant is to be utilized to
purchase a college building for students from underdeveloped or developing countries. The balance of the grant is for
subsidizing the tuition costs of those students for four years from the date of grant. The college building, which costs
P50 million, will be depreciated using the straight line method over 10 years. The tuition subsidy will be offered evenly
over the period of 4 years.
32. The amount that should be recognized as income at the end of the fifth year is:
PROBLEM 32: On January 1, 2011, Spratlys Corporation received cash of P4 million from the Chinese government in
order to defray safety and other hazard related costs over a five year period. It was estimated that such costs will
accumulate to P8 million over the next five years. In 2011 and 2012, actual costs of safety and other hazard related
costs amounted to P1 million and P1.2 million, respectively. On January 1, 2013, the Chinese government demanded
repayment of the P4,000,000 given as grant in 2011.
33. How much is the loss on repayment of government grant?
PROBLEM 33: Tiger Company received a government grant related to a depreciable asset five years ago on January
1, 2006 in the amount of P1,000,000. This grant was deducted from the capital cost of the asset purchased at a total
amount of P6,000,000 on the same date with a useful life of 10 years and 50,000 residual value. On January 1, 2011,
the entire P1,000,000 became repayable due to lack of compliance with the conditions attached to the grant.
34. What is the depreciation expense to be recognized for 2011?
PROBLEM 34: At the end of January2013, the city government provided Hesington Company a zero interest,
P30,000,000 3-year loan used by the Company in acquiring a building on the same date. The prevailing market rate of
interest for this type of loan is 8%. The government imposes that the building must be used for social housing for ten
years. The company estimated that there is reasonable assurance that it will meet the terms of the grant. The
company will classify the building as owner occupied property after the socialized housing project. The company opted
to use the cost model of accounting the building with a 15-year life from the date of acquisition.
35. Applying provisions of PAS 20, what is the amount recognized as deferred income from the grant as of
December 31, 2013?
PROBLEM 35: On January 1, 2013, Divine Company took out a 12%, P10,000,000 loan to finance the construction of a
building. The key dates are as follows:

01/01/2013
02/01/2013
03/01/2013
04/01/2013
11/01/2013

12/01/2013

Loan interest relating to the project starts to be

incurred
Technical site planning commences
Expenditures on the project start to be incurred
Construction work commences
Substantially all of the activities necessary to
prepare the asset for its intended use are
complete
Building brought into use

36. What amount of interest should Divine capitalize for the current year?
PROBLEM 36: Aries Company started construction on a building on January 1 of this year and completed construction
on December 31 of the same year. Aries had only two interest notes outstanding during the year and both of these
notes were outstanding for all 12 months of the year. The following information is available:
Average accumulated expenditures
P 250,000
Ending balance in construction in progress before
capitalization of interest
360,000
6% note incurred specifically for the project
150,000
9% long-term note
500,000
37. What is the amount of interest that Aries should capitalize for the current year?
PROBLEM 37: Maragondon Company had the following borrowings during 2011. The borrowings were made for
general purposes but the proceeds were used in part to finance the construction of a new building:
Principal
Interest
12% bank loan
P 10,000,000
P 1,200,000
15% long-term loan
20,000,000
3,000,000
10% construction loan
5,000,0000
500,000
The construction began on January 1, 2011 and was completed on December 31, 2011. Expenditures on the building
were made as follows:
P
January 1
2,000,000
June 30
2,000,000
December 31
1,000,000
38. What is the carrying amount of the new building on December 31, 2011?
Assuming the construction of the new building was not finished until July 31, 2013 and the following additional
expenditures were made:
P
January 1
2,000,000
September 30
4,000,000
April 1
1,000,000
39. What is the total capitalizable borrowing cost for 2012?
40. What is the carrying amount of the new building on July 31, 2013?
PROBLEM 38: At the beginning of the current year, Amethyst Company purchased a parcel of land as a factory site
for P3,200,000 in addition to the assumption of mortgage on the land of P1,000,000 inclusive of 8% interest. To be able
to acquire the land, P90,000 was paid to a real estate agent and a P20,000 option fee was paid, P10,000 of which
relates to the acquired land. An old building on the property was demolished and construction started on a new
building that was completed at the end of the current year. Costs incurred on the construction project are as follows:
Cost of destroying the old building on the land (P30,000 worth of
salvaged materials used in new building)
300,000
Architect fee
50,000
Legal fee for title investigation
40,000
Construction cost
8,500,000
Imputed cost on stock financing
140,000
Landfill for new building
190,000
Clearing of trees from building site (P10,000 worth of timbers from
clearing were sold)
35,000
Superintendent fee
100,000
Temporary building used for construction activities
50,000
Land survey
40,000
Driveways, parking bays and safety lighting (part of building plan)
150,000
Excavation for basement
130,000
Payment of delinquent property taxes
50,000
Building permit
25,000
Payments to tenants for vacating old building
120,000
Premiums paid on insurance during construction
60,000
Safety fence around construction site
50,000
Safety inspection on building
25,000
Cost of changes during construction to make new building more energy
efficient
250,000
Assessment by city for drainage project
30,000
Payment of medical bills of employees injured during construction
10,000
Removal of safety fence after completion
20,000
Cost of trees, shrubs and other landscaping
70,000

Cost of windows broken by vandal

New fence surrounding the factory
Cost of open house party to celebrate the opening of the new building

5,000
140,000
20,000

41. Compute for the cost of the land.

42. Compute for the cost of the new building
PROBLEM 39: Ruby Company purchased a plot of land for P2,000,000 as a plant site. There was a small office
building on the plant, conservatively appraised at P700,000 which the entity will continue to use with some
modification and renovation. The entity decided to construct a factory building and incurred the following costs:
P
Materials and supplies
3,000,000
Excavation
100,000
Labor on construction
2,500,000
Cost of remodeling office building
200,000
Legal cost of conveying land
10,000
Imputed interest on entitys own money used during construction
120,000
Cash discounts on material purchased, not taken
60,000
Supervision by management
70,000
Compensation insurance premium for workers
20,000
Clerical and other expenses related to construction
30,000
Paving of streets and sidewalks
40,000
Plans and specifications
140,000
Payment for claim for injuries not covered by insurance
25,000
Legal cost of injury claim
15,000
Savings on construction
200,000
Cost of elevator system installed on the new building after completion
500,000
43. Determine the total depreciable property of Ruby Company.
PROBLEM 40: Tourmaline, Inc. was organized in June of 2011. The land and building account revealed the following
details:
6/1
Organization fees paid to the state
P 150,000
6/30
Land site and old building
3,000,000
6/30
Corporate organization cost
300,000
7/1
Title clearance fee
50,000
8/31
Cost of razing old building
100,000
9/1
Salaries of Tourmaline, Inc. executives
600,000
12/31
Real estate tax
90,000
12/31
Cost of new building completed and occupied
on this date
8,000,000
Additional relevant information were provided as follow:
A. The building acquired on June 30, 2011 was valued at P300,000.
B. The entity paid P100,000 for the demolition of the old building and then sold the scrap for P10,000 and
credited the proceeds to miscellaneous revenue.
C. The entity executives did not participate in the construction of the new building.
D. The real estate tax was for the 6 month period ended December 31, 2011 and was assessed on the land.
44. What is the adjusted cost of the land of Tourmaline?
PROBLEM 41: Turquoise Corporation uses many kinds of machines in operations. The entity acquires some machines
from others and constructs some machines itself. The following information pertains to a machine constructed by
Turquoise:
Cost of material to construct
P 700,000
Labor cost
430,000
Allocated overhead costs electricity, factory space and other similar
costs
220,000
Allocated interest costs of financing machine
100,000
Cost of installation
120,000
Insurance for one year
20,000
Profit saved by self-construction
150,000
Safety inspection cost prior to use
40,000
45. What is the total amount that should be capitalized as cost of the machine?