Financial Accounting 3 (Midterm Topic Tutorial)

1. The financial records of Hazel Company were destroyed by fire at the end of the current year. However,
certain statistical data related to the income statement are available.
Interest expense 20,000
Cost of goods sold 2,000,000
Sales discount 100,000

The beginning inventory was P400,000 and decreased 20% during the year. Administrative expenses
are 25% of cost of goods sold but only 10% of gross sales. Four-fifths of the operating expenses relate
to sale activities.
Ignoring income tax, what is the net income for the current year? 2,000,000

2. Leo Company reported income before tax of P5,000,000 for the current year. The auditor questioned
the following amounts that had been included in income before tax:
Equity in earnings of Calypso Company- 40% interest 1,600,000
Dividend received from Calypso Company 320,000
Adjustment of profit of prior year for arithmetical
Error in depreciation (1,400,000)
What amount should be reported as income before tax?
6,080,000
3. Nico Company provided the following net of tax figures for the current year:
Net remeasurement loss on defined benefit plan 300,000
Unrealized gain on available for sale securities 1,500,000
Reclassification adjustment for gain on sale of available for sale
securities included in net income 250,000
Share warrants outstanding 400,000
Net income 7,700,000
What is the comprehensive income for the current year?
______________________________________________

4. Coach Company was organized on January 1, 2013. After 2 years of profitable operations, the equity
section of the statement of financial position was as follows:
Share capital, P5 par, 200,000 shares issued and outstanding 1,000,000
Share premium 6,000,000
Retained earnings 2,800,000
Total shareholders equity 9,800,000
During 2011, the following chronological transactions affected shareholders equity:
a. Reacquired 10,000 shares at P30 per share to be held as treasury
b. Declared and issued a 30% stock dividend
c. Declared cash dividend of P10 per share
d. Net income for 2015 amounted to 3,000,000

In addition, land accounted using revaluation model has been sold during 2015. The land has a
carrying amount of P2,000,000 and corresponding revaluation surplus of P500,000 during the time of
sale.

What is the unappropriated balance of retained earnings on December 31, 2015?

_______________________________________________

5. A noncurrent asset or disposal group shall be classified as held for sale when
a. The sale is highly probable
b. The asset is available for immediate sale in the present condition
c. The sale is probable and the asset is available for sale in the present condition
d. The sale is highly probable and the asset is available for immediate sale in the present condition

6. How should the assets and liabilities of a disposal group classified as held for sale be shown in the
statement of financial position?
a. The assets and liabilities should be offset and presented as a single amount
b. The assets of disposal group should be shown separately from other assets and the liabilities should
be shown separately from other liabilities.
c. The assets and liabilities should be offset and presented as a deduction from equity
d. There should be no separate disclosure of assets and liabilities of the disposal group

7. A single amount must be disclosed within the income statement for

a. The post-tax profit or loss on discontinued operation and the pretax gain or loss on disposal of
discontinued operation assets
b. The pretax profit or loss on discontinued operation and the post-tax gain or loss on disposal of
discontinued operation assets
c. The pretax profit or loss on discontinued operation and the pretax gain or loss on disposal of
discontinued operation assets
d. The post-tax profit or loss on discontinued operation and the post-tax gain or loss on disposal of
discontinued operation assets
8. Jason Company is a diversified entity with nationwide interests in commercial real estate development,
banking, mining and food distribution. The food distribution division was deemed to be inconsistent
with the long-term direction of the entity. On October 1, 2015, the board of directors voted to approve
the disposal of the division. The sale is expected to occur in August 2016. The food distribution had the
following revenue and expenses in 2015: January 1 to September 30, revenue of P35,000,000 and
expenses of P25,000,000; October 1 to December 31, revenue of P10,000,000 and expenses of
P12,000,000. The carrying amount of the divisions assets on December 31, 2014 was P55,000,000 and
the recoverable amount was estimated to be P53,500,000. The sale contract required the entity to
terminate certain employees incurring an expected termination cost of P1,000,000 to be paid by
December 15, 2016. The income tax rate is 30%. What amount should be reported as income from
discontinued operation for 2015?
________________________________________________________

9. Piper Company accounted for noncurrent assets using the cost model. On July 1, 2015, the entity
classified an equipment as held for sale. As that date, carrying amount was P5,500,000, the fair value
was estimated at P3,500,000 and the cost of disposal at P100,000. On December 31, 2015, the
equipment was sold for the net proceeds of P2,500,000. What amount should be included as an
impairment loss for 2015?

_________________________________________________________

Journal Entries:

10. Percy Company accounted for noncurrent assets using the revaluation model. On September 1, 2015,
the entity classified a land as held for sale. At that date, the carrying amount of the land was
P6,000,000 and the balance in the revaluation surplus was P1,500,000. At the same date, the fair value
of the land was estimated at P7,500,000 and the cost of disposal at P150,000. On December 31, 2015,
the fair value less cost of disposal of the land did not change. The land was sold on January 31, 2016
for P6,000,000.
a. What amount of impairment loss recognized in 2015?
___________________________________________
b. What amount should be reported as gain (loss) on disposal of land in 2016?
______________________________________________________________

Journal Enries:

11. Annabeth Company purchased an equipment for P6,250,000 on January 1, 2013. The equipment had a
useful life for 5 years with no residual value. Straight line method is used in accounting depreciation.
On December 31, 2014, the entity classified the asset as held for sale. On such date, the fair value less
cost to sell of the equipment was P3,500,000. On December 31, 2015, the entity believed that the
criteria for classification as held for sale can no longer be met. Accordingly, the entity decided not to
sell the asset but to continue to use it. On December 31, 2015, the fair value less cost to sell of the
equipment was P2,700,000.
a. What amount of impairment loss should be recognized in 2014?
___________________________________
b. What is the carrying amount of Equipment held for sale after classification?
________________________________
c. What amount should be included in profit or loss in 2015 as a result of the reclassification of the
equipment to PPE?
_________________________________
d. What is the depreciation expense for 2016?
_________________________________

Journal Entries: (up to reclassification)

12. Which of the following is not classified as an accounting change?
a. Change in accounting policy
b. Change in accounting estimate
c. Error in the financial statements
d. All of these

13. A change in accounting policy requires that the cumulative effect of the change for prior periods be
shown as an adjustment to
a. Beginning retained earnings for the earliest period presented
b. Net income for the period in which the change occurred
c. Comprehensive income for the earliest period presented
d. Shareholders equity for the period in which change occurred

14. Reyna Corporation failed to accrue warranty costs of P50,000 in its December 31, 2015 financial
statements. In addition, a change from straight line to accelerated depreciation made at the beginning
of 2016 resulted in a cumulative effect of P30,000 on Reynas retained earnings. Both the P50,000 and
P30,000 are net of related income taxes. What amount should be reported as prior period adjustments
in 2016 to be adjusted at retained earnings?
__________________________________________

15. During 2015, Octavian Company decided to change from FIFO method of inventory valuation to the
weighted average method. Inventory balances under each method were as follows:

FIFO Weighted Average

January 1 7,100,000 7,700,000

December 31 7,900,000 8,300,000

In its 2015 statement of retained earnings, what amount should Octavian report as the cumulative
effect of this accounting change?
_____________________________________________

16. Frank Company reported P950,000 net income for the quarter ended September 31, 2015 which
included the following after tax-items:
A P600,000 expropriation gain realized in June 2015 was allocated equally to the second, third and
fourth quarters of 2015.
A P600,000 cumulative effect loss resulting from a change in inventory valuation method was
recognized on July 31, 2015.

In addition, the entity paid P500,000 on February 1, 2015, for 2015 calendar year real property tax. Of
this amount, P125,000 was allocated to the third quarter of 2015.

What is the net income for the quarter ended September 31, 2015?

_________________________________

17. Hedge Company, a calendar-year corporation, had the following income before tax provision and
estimated effective annual tax rates for the first three quarters:
Quarter Income before income tax Effective annual tax rate
First 6,000,000 40%
Second 7,000,000 40%
Third 4,000,000 45%
What is the income tax provision in the interim income statement for the third quarter?
_____________________________________________