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Mesmerize Company reported net income of P1,450,000 for the year ended December 31, 2018. Below are some
transactions during 2018 that might affect the entity’s cash flow.
Purchased 100 treasury shares at a cost of P200 per share. These shares were reissued at P250 per share.
Financing Activity: Acquisition and issuance of shares
Sold 100 ordinary shares of Globe Company at P2,000 per share. The acquisition cost of the shares was P1,650 per
share and the carrying amount on disposal date was P1,800 per share. The investment was measured irrevocably at
FVOCI.
Investing Activity: Cash receipt from sale of non-current asset
Revised the estimate for doubtful accounts. Before 2018, the estimate is 1% of net sales. In 2018, it was increase to 2%.
Net sales for 2018 totaled P5,000,000 and accounts receivable at gross amount decreased by P120,000 during 2018.
Issued 500 ordinary shares with P100 par value for a patent. The fair value of the shares on the date of issue was P230
per share.
Depreciation expense for the year 2018 was P390,000.
The entity had 30% of Saint Company’s ordinary shares held as long-term investment. Saint reported net income of
P270,000 for 2018.
Interest paid and dividends received enter the determination of profit or loss, and are, therefore generally classified as operating activities.
Cash dividends paid for the year 2018 totaled P20,000.
Dividends paid are distributions to shareholders, who are considered to be providers of finance. Hence, generally dividends paid are classified as financing activity.
Alternatively, they may be classified as a components of cash flows from operating activities in order to assist users to determine the ability of an enterprise to
pay dividends out of operating cash flows.
Cash Flows from Operating Activities are primarily derived from the principal revenue-producing activities of the enterprise.
Cash Flows from Investing Activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalized
development costs and self-constructed property, plant and equipment;
b. Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets
c. Cash payments to acquire investments in equity or debt instruments of other enterprises
d. Cash advances and loans made to other parties (other than advances and loans made by a financial institution)
e. Cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution)
f. Cash payments for future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing activities.
Number 7 and 8
On November 1, 2018, Constantine Company received P24,000 representing royalty revenue for three months. On February
1, 2019, the entity received P108,000 representing royalty revenue for one year. The entity used the income method and
did not prepare reversing entries.
Cash 24,000
Royalty Revenue 24,000
Cash 108,000
Royalty Revenue 108,000 Royalty Revenue: 116,000
Since there was no reversing entry made prior to the year, the balance of nominal accounts at the beginning of the period is zero.
Number 13
On December 31, 2018, Calm Company appropriately reported P80,000 unrealized loss in OCI for equity securities
measured irrevocably at FVOCI.
What amount of unrealized loss is recognized in the 2019 statement of changes in equity?
a. 200,000
b. 120,000
c. 280,000
d. 0
Cost 4,000,000
Unrealized Loss (80,000)
Carrying Amount, 2018 3,920,000
Fair Value, 2019 3,800,000
Unrealized Gain on FA at FVOCI 120,000
Cost 4,000,000
Fair Value, December 2019 3,800,000
Unrealized loss on financial assets through OCI 200,000
Numbers 14 and 15
Gates Company invested P2,000,000 in Broth Company for 25% interest. Broth paid out 40% of net income in dividends
each year. The investment account showed the following details:
Numbers 16 and 17
The following information was available from the inventory records of Rich Company for January:
Numbers 22 and 23
On January 1, 2018, Kohl Company purchased equipment for P1,200,000 with a useful life of 8 years with no residual value.
On December 31, 2019, new technology was introduced that would accelerate the obsolescence of the equipment. The entity
estimated the present value of the expected future net cash flows on the equipment at P580,000 and the fair value less cost
of disposal at P600,000. The entity determined the recoverable amount of the equipment on December 31, 2020 at
P570,000.
The recoverable amount an asset is the higher of its value in use (present value of the future cash flows expected to be derived by the entity from the asset) and its fair
value less costs to sell (amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal).
Entries for impairment would include a credit to the impaired asset, thus no accumulated depreciation is recorded.
22. What amount of inventory should be reported under the moving average method?
a. 150,000
b. 330,000
c. 300,000
d. 0
23. What amount of gain on reversal of impairment loss should be recognized for the year 2020?
a. 300,000
b. 250,000
c. 70,000
d. 0
Numbers 24 and 25
24. What is the carrying amount of the intangible assets on December 31, 2018?
a. 7,220,000
b. 7,520,000
c. 7,395,000
d. 7,020,000
25. What total amount of expenses should be reported in the income statement for 2018?
a. 3,280,000
b. 1,530,000
c. 1,750,000
d. 2,955,000
On January 1, 2018, Flips Company is authorized to issue 100,000 P100 par value ordinary shares. The following
transactions occurred during 2018:
Number 35
Ortago Company sustained heavy losses for several years and underwent quasi-reorganization on December 31, 2018. The
following information is available:
a. 6,200,000
b. 3,800,000
c. 1,800,000
d. 0
Numbers 41 and 42
Shapiro Company manufactures an X-ray machine and leases it to Capitol Hospital. The entity provided the following
information pertaining to the finance lease agreement:
The machine will revert back to Shapiro on January 1, 2028. The present value of an ordinary annuity and annuity due for
10 periods at 10% are 6.14 and 6.76. The present value of 1 for 10 period at 10% is 0.39.
Numbers 43 and 44
Nielson Company, in its first year of operations, had the following differences between carrying amount and tax base of
assets and liabilities at December 31, 2018:
The warranty liability will be settled in 2019. The difference in equipment will reverse in amounts of P200,000, P200,000
and P100,000 for the years 2019, 2020 and 2021 respectively. The financial income for 2018 is P5,500,000 and the tax rate
is 30% for the years 2018-2020 and 25% for 2021. It is probable that the entity will report taxable income in the future
periods.
Numbers 49 and 50
Accardo Company, an SME, constructed a building at total cost of P10,500,000 that was completed on January 1, 2018. The
useful life of the building is 10 years. Included in the cost was borrowing cost for 2018 amounting to P200,000. Accardo
borrowed P4,000,000 to finance the construction of the building on January 1, 2016 and is due on January 1, 2021. The
annual interest is payable every December 31. The building is to be leased out under an operating lease to unrelated parties
starting 2018 and the entity received rentals of P1,200,000 for 2018. The entity also determined that it can measure the
fair value of the building on an ongoing basis without undue cost and effort. On December 31, 2018, the fair value of the
building is P12,000,000. The entity paid P250,000 and P320,000 of property taxes and maintenance cost respectively for
2018.
Numbers 51 to 70 (Theory)