Professional Documents
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7. Using IAS 19 effective 2014, what is the amount of past service cost that will be
recognized as part of retirement benefit expense for 2014?
a. P580,000 b. P116,000 c. P 58,000 d. P 16,000
8. Using IAS 19, effective 2014, what amount of actuarial gain shall be recognized
in profit or loss for the year 2014?
a. P0 b. P70,000 c. P94,000 d. P164,000
9. Following IAS 19, effective 2014, how much is the retirement benefit expense for
the year 2014?
a. P1,160,000 b. P1,324,000 c. P1,488,000 d.
P1,780,000
10.How much is the fair value of the plan assets at December 31, 2014?
a. P3,800,000 b. P4,350,000 c. P5,100,000 d.
P5,006,000
11.How much is the defined benefit obligation at December 31, 2014?
a. P5,600,000 b. P6,200,000 c. P6,640,000 d.
P6,710,000
12.What is the amount of overfunding (underfunding) in the retirement cost for
2014?
a. P0 b. P(410,000) c. P(574,000) d. P570,000
13.Defined benefit liability at December 31, 2014 statement of financial position is
a. P1,160,000 b. P1,200,000 c. P1,446,000 d.
P1,610,000
14.The following relates to the defined benefit plan for the McDonald Company:
Accrued benefit obligation, January 1 P4,600,000
Accrued benefit obligation, December 31 5,629,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Net actuarial gains 32,000
Employer contributions 425,000
Benefits paid to retirees 390,000
Discount rate 10%
How much is the service cost for the year?
a. P496,500 b. P956,500 c. P1,000,000 d. P1,043,000
15.How much is the actual return on plan assets for the year?
a. P495,000 b. P503,000 c. P512,000 d. P530,000
16.What is the total retirement benefit cost for the year 2014?
a. P924,000 b. P956,500 c. P989,000 d.P1,460,000
17.On January 1, 2014, Maris Corporation adopted a defined benefit plan. The plans
service cost of P1,500,000 was fully funded at the end of 2014. Past service cost
of P600,000 was funded by a contribution of P240,000 in 2014.
What is the amount of Maris defined benefit liability at December 31, 2014?
a. P 360,000 b. P 600,000 c. P 840,000 d.
P1,860,000
18.On January 1. 2014, C Company has defined benefit obligation of P4,400,000
based on discount rate of 12%. Pension benefit paid to retirees totalled
P600,000. Service cost for 2014 amounted to P1,480,000. Actuarial gains of
P200,000 was recorded in other comprehensive income, of which P150,000
relates to remeasurement of plan assets.
How much is the defined benefit obligation at December 31, 2014?
26.On December 31, 2012, Simon Co. leased a new machine from Junction Co. with
the following pertinent information:
Lease term 6 years; Useful life of machine 6 years
Annual rental payable every December 31 500,000
Incremental Borrowing Rate 15%
Implicit Interest Rate 12%
PV of 1 in advance for 6 periods at 12% 4.61
PV of 1 in advance for 6 periods at 15% 4.35
The machine reverts to Junction at the termination of the lease. The cost of
the machine on Junctions accounting records is 3,755,000
What is the capitalized cost of the asset?
27.What is the lease liability balance at December 31, 2013?
28.Assuming that Simon uses straight-line method of depreciation, how much is the
depreciation expense for year ended December 31, 2014?
29.On December 31, 2013, Lazarus Corporation leased equipment under a finance
lease. Annual lease payments of 200,000 are due December 31 for 10 years. The
equipments useful life is 10 years, and the interest rate implicit in the lease is
10%. The finance lease obligation was recorded on December 31, 2013, at
1,350,000, and the first lease payment was made on that date.
What amount should Lazarus include in current liabilities for this finance lease in
its December 31, 2012, statement of financial position?
30.Dominic Co. leased a new machine from Isidore Co. on May 1, 2013, under a
lease with the following information:
Lease term 10 years; Useful life of machine 12 years
Annual rental payable at beginning of each year 400,000
Implicit interest rate 14%
PV of an annuity of 1 in advance for 10 periods at 14% 5.95
PV of 1 for 10 periods at 14% 0.27
Dominic has the option to purchase the machine on May 1, 2023 by paying
500,000 which approximates the expected fair value of the machine on the
option exercise date. On May 1, 2013, Dominic should record a capitalized leased
asset at?
31.On January 2, 2013, Raphael Mining Company (lessee) entered into a 5-year
lease for drilling equipment. Raphael accounted for the acquisition as a finance
lease for 2,400,000, which includes a 100,000 bargain purchase option. At the
end of the lease, Raphael expects to exercise the bargain purchase option.
Raphael estimates that the equipments fair value will be 200,000 at the end of
its 8-year life. Raphael regularly uses straight-line depreciation on similar
equipment. For the year ended December 31, 2013, what amount should
Raphael recognize as depreciation expense on the leased asset?
32.On January 1, 2013, Bello Enterprises acquired a machine signing a four-year
lease. Annual rentals of 1,742,174 are payable at the beginning of each year
starting January 1, 2013. Bello guarantees the residual value of 1,200,000 at the
end of the lease term. The assets useful life is 5 years, at the end of which, the
assets scrap value is expected to be 80,000. Bello uses straight-line method to
depreciate this asset. The lessors implicit interest rate is 10%, which is known to
Bello.
PV of 1 discounted at 10% for 4 periods is 0.68301
PV of 1 discounted at 10% for 5 periods is 0.62092
PV of annuity due of 1 for 4 periods discounted at 10% is 3.48685
40.What is the interest revenue reported on Michaels income statement for year
ended December 31, 2013?
41.On January 1, 2013, Thelma Industries leased equipment to Trician Company for
a four-year period ending December 31, 2016. The equipment cost 300,000 and
has an expected useful life of 5 years. Annual payments are 118,951, including
10,000 executory costs. The equipments fair value is 400,000. The lessee
guarantees the residual value of 80,000. Lease payment is due every December
31 and Trician made the first payment on December 31, 2013. Tricians implicit
interest rate is 10%.
Thelma incurred 15,000 costs to consummate the lease contract.
PV of 1 discounted at 10% for 4 periods is 0.68301
PV of annuity due of 1 discounted at 10% for 4 periods is 3.48685
PV of ordinary annuity of 1 at 10% for 4 periods is 3.16987
How much profit, inclusive of interest revenue, should Thelma report from this
lease for the year ended December 31, 2013?
42.How much should Thelma report as net investment in lease on December 31,
2013 statement of financial position?
43.Glade Co. leases computer equipment to customers under direct financing lease.
The equipment has no residual value at the end of the lease and the leases do
not contain bargain purchase options. Glade wishes to earn 8% interest on a
five-year lease of equipment with a fair value of 323,400. The present value of
an annuity due of 1 at 8% for 5 years is 4.312. What is the total amount of
interest revenue that Glade will earn over the life of the lease?
44.Louis Company leased a machine from Millennium Company on January 1, 2012.
The first annual payment was made on January 1, 2013. The machine has an
economic life of 6 years. The lease agreement requires four annual payments of
33,000, including 3,000 annual payments for repairs and maintenance. The
machine will be returned to Millennium Company at the end of the lease term
and Louis Company guarantees a residual value of 5,000. Interest implicit in the
lease is 10%, which is known to Louis. For the year ended December 31, 2013,
what would Louis Company record in relation to the lease?
45.How much annual depreciation expense should Louis Company record?
46.In its notes to the financial statements at December 31, 2014, Louis Company
would disclose minimum lease payments of?
47.If Millennium Company recorded the net investment in lease higher than the
liability initially recorded by Louis Company, the variance could be due to?
48.Assume that on January 1, 2015 lease payment included an amount of 5,000 for
exceeding a limit for machine usage hours specified in the lease agreement.
Louis Company would account for this charge as
49.On December 31, 2013, Stephen, Inc. sold equipment to Noli and simultaneously
leased it back for 5 years. Pertinent information at this date is as follows:
Sales Price 550,000
Carrying Amount 400,000
Estimated Economic life 15 years
At December 31, 2013, how much should Stephen report as deferred gain from
the sale of the equipment?
50.On July 1, 2013, PC Options sold equipment to PC Madness and simultaneously
leased it back for 12 years. Pertinent information at this date is as follows:
Sales Price 4,800,000
Carrying Amount 3,600,000
a. 0 P190,000
b. 0 P200,000
c. P60,000 P140,000
d. P70,000 P120,000
62.Maple Company reported the following results for the year ended December 31,
2013, its first year of operation.
2013
Income per books before income taxes P 750,000
Taxable Income 1,200,000
The disparity between book income and taxable income is attributable to a
temporary difference, which will reverse in 2014.
What should Maple record as a net deferred tax asset or liability as of December 31,
2013, assuming that the enacted tax rates in effect are 30% in 2013 and 35% in
2014? Assume that the company has an enforceable right to set off deferred tax
liability against deferred tax asset.
a. P135,000 deferred tax asset c. P135,000 deferred tax liability
b. P157,500 deferred tax asset d. P157,500 deferred tax liability
63.At the end of 2013, its first year of operations, Glow Company prepared a
reconciliation between pretax financial income and taxable income as follows:
Pretax financial income P 4,500,000
Estimated litigation expenses 6,000,000
Excess depreciation for taxes (9,000,000)
Taxable income P 1,500,000
The estimated litigation expense of P6,000,000 will be deductible in 2014 when it is
expected to be paid. Use of the depreciable assets will result in taxable amounts of
P3,000,000 in each of the next three years. The income tax rate is 30% for all years.
Assuming no payment yet has been paid for income taxes, what is the income tax
payable at the end of 2013?
a. P 0 b. P 450,000 c. P 900,000 d. P
1,350,000
64.What is the amount of deferred tax asset recorded at December 31, 2013?
a. P 450,000 b. P 900,000 c. P 1,350,000 d. P
1,800,000
65.What is the amount of current and non-current deferred tax liability reported at
December 31, 2013?
a. P 900,000; P 1,800,000 b. P 0; P900,000 c. P 0; P 2,700,000 d. P0 and P
2,250,000
66.The following information is taken from Panay Corporations 2013 statement of
comprehensive income:
Profit before income taxes P 1,500,000
Income tax expense
Current P 564,000
Deferred 42,000 606,000
Profit P 894,000
Panays first year of operations was 2013. The company has a 30% tax rate and the
management decided to use accelerated depreciation for tax purposes and the
straight-line method for financial reporting purposes. The amount charged to
depreciation expense in 2013 was P 600,000. Assuming no other temporary
differences existed between book income and taxable income, what amount did
Panay deduct for depreciation on its tax return for 2013?
2013 of P900,000 relating to 2012 profit. What amount should general report as
income tax payable at December 31, 2013?
a. P2,250,000 b. P1,950,000 c. P1,350,000 d.
P1,050,000
73.Prudential Company began operations in 2013. Included in Prudentials 2013
financial statements were bad debt expense of P1, 400,000 and profit from an
installment sale of P2, 600,000. For tax purposes, the bad debts will be deducted
and the profit from the installment sale will be recognized in 2014. The enacted
tax rates are 35% in 2013 and 38% in 2014. In its 2013 statement of
comprehensive income, what amount should Prudential report as deferred
portion of income tax expense?
a. P1, 400,000 b. P1, 520,000 c. P 456,000
d. P 420,000
74.At December 31, 2013, the income tax effects of Olive Companys temporary
differences were recognized as follows:
Deferred Tax Related
Asset
Assets (Liabilities)
Classification
SHAREHOLDERS EQUITY
1. In 2013, Inna Corporation acquired 6,000 shares of its P10 par value ordinary share capital
at P36 per share. During 2013, Inna issued 3,000 of these shares at P50 per share. Inna
uses the cost method to account for its treasury share transactions. What accounts and
amounts should Inna credit in 2013 to record the issuance of the 3,000 shares?
3. The Shareholders equity of May Co. revealed the following on June 30, 2013:
Preference Share, P100 par value P230,000
Share Premium-Preference 80,000
Ordinary Share, P15 par value 525,000
Share Premium- Ordinary 275,000
Subscribed Ordinary Share 5,000
Retained Earnings 190,000
Notes Payable 400,000
Subscription Receivable-Ordinary 40,000
How much is the legal Capital of the Company?
a. P1.3055 M b. P1.115 M c. P0.760 M d. P0.755 M
4. March 2, 2013, Nanette Corporation issued 4,000 shares of 6% cumulative P100 par value
preference share for P480,000. Each preference share carried one detachable share
warrant which the holder to acquired at P35, one share of Nanettes P10 par ordinary share
capital. On March 2,2013, the market price of the preference share without the warrants
was P110 per share and the market price of the share warrants was P10 per warrant. What
6. DIFFICULT MC31 The Powerpoint Corporation has two classes of share capital
outstanding: 9%, P20 par Preference and P70 par Ordinary. During the fiscal year
ending December 31, 2013, the company had the following equity transactions in
chronological order:
No. of shares Price per share
Issue of preference share 10,000
P28
Issue of ordinary share 35,000
70
Reacquisition and retirement of preference 2,000 30
Purchase of treasury ordinary share 5,000 80
Share split 2-for-1
Reissue of treasury ordinary share 5,000 52
Balances of the accounts in the shareholders equity section of the
December 31, 2012 statement of financial position were:
Preference Share Capital, 50,000 shares P
1,000,000
Ordinary Share Capital, 100,000 shares 7,000,000
Share Premium Preference
400,000
Share Premium Ordinary
1,200,000
Retained Earnings 550,000
FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 13
JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa
Dividends were paid at the end of the fiscal year on the ordinary share at P1.20 per
share and on the preference at the preference rate. Profit for the year was P 850,000.
How much should be the amount of Preference Share Capital to be shown on the
December 31, 2013 statement of financial position?
a. P1,220,000 b. P1,160,000 c. P1,140,000 d. P1,116,000
7. Use the same information given in MC31. How much should be the amount of
Ordinary Share Capital to be shown on the December 31, 2013 statement of
financial position?
a. P9,450,000 b. P9,310,000 c. P9,130,000 d. P4,725,000
8. Use the same information given in MC31. The retirement of the 2,000 preference
shares would decrease Share Premium Preference by
a. P0 b. P16,000 c. P20,000 d. P60,000
9. Use the same information given in MC31. After the split, the par value per share of
the ordinary share capital
a. Remained at P70. b. was increased by P70 c. was reduced by P35 d. was
reduced by P14
10. Use the same information given in MC31. What is the total cost of the remaining
treasury shares?
a. P0 b. P200,000 c. P260,000 d. P400,000
11. The Mike Corporations statement of financial position shows total shareholders equity of
P3, 150,000 as of December 31, 2013. What is the book value per share, assuming that the
company has only one class of share capital outstanding consisting of 50,000, P10 par
ordinary shares?
a. P10.00 b. P63.00 c. 70.20 d. 73.00
12. Use the same information given in MC56. What is the book value per ordinary share
assuming that the company has two classes of share capital outstanding consisting the
following: 5,000, P100 par value preference shares with a liquidation value of P120 per
share and 50,000, P10 par value ordinary shares?
a. P10.00 b. P51.00 c. P53.00 d. P63.00
13. The Meg Company began operations in January 2011 and reported the following results for
each of its three years of operations. 2011- P520, 000 loss; 2012- P80, 000 loss; 2013- P1,
600,000 profit; At December 31, 2013, Meg Companys capital accounts were as follows:
8% Cumulative Preference Share Capital,
P100 par; 50, 000 shares authorized,
issued and outstanding P5,000,000
Ordinary Share Capital, P10 par;
1,000,000 shares authorized;
750,000 shares and outstanding P7,500,000
Meg Company has never paid a cash or bonus issue and there has been no change in its
capital accounts since it began operations in 2011. The corporation law permits dividends
only from retained earnings. What is the book value of the ordinary share at December 31,
2013?
FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 14
JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa
14. Use the same information given in MC58. What is the book value of the ordinary share at
December 31, 2013 assuming that the preference share has a liquidating value of P160 per
share?
a. P10.80 b. P10.00 c. P9.60 d. P9.33
15. ABC Corporations performance during the last three years had not been favorable resulting
to a deficit of P950, 000 at December 31, 2013. The company with the approval of the
shareholders, decided to eliminate the deficit through a quasi-reorganization which would be
effected as follows: The Companys 200,000, P20 par ordinary share capital originally
issued at an average price of P22 would be reissued with the par value of P15. Immediately
after the quasi-reorganization, what would be the balance of additional paid in capital?
a. P1,400,000 b. P1,000,000 c. P600,000 d. P450,000
Problem 1
On January 1, 2013 Ruby Red Company granted to each of its four executives the right
to choose either 1,000 ordinary shares or to receive cash payment equal to 900 shares.
The grant is conditional upon the completion of three years of service. The entity
estimates that the value of the share alternative on January 1, 2013 is P150 per share.
Emeralds ordinary share capital has par value of P100. The following table shows the
fair value of Ruby Reds ordinary share:
Problem 2
On October 31, 2013, Red Ball Corporation declared dividends to its 100,000 ordinary shares
payable in the form of Tivoli Company ordinary. One share of Tivoli Company ordinary is
distributable for each 10 shares of Red Ball Corporation ordinary. The dividends are
distributable on February 28, 2014. The market value of Tivoli Company ordinary was P15 on
October 31, 2013, P17 on December 31, 2013 and P20 on February 28, 2014.
Give the entries to record the foregoing, including any adjustments at December 31, 2013. The
Tivoli Company ordinary was carried in the books of Red Ball Corporation on October 31, 2013
at P14 per share. Red Ball classifies Tivoli ordinary shares as financial assets at fair value
through profit or loss.
Problem 3
Red Heart Corporation was organized at the beginning of 2011 with 300,000 authorized shares
of P100 par value ordinary share capital. At December 31, 2011, the shareholders equity
section of Red Heart was as follows:
Ordinary Share Capital, P100 par,
30,000 shares issued P3, 000,000
Share Premium 300,000
Retained Earnings 450,000
Total Shareholders Equity P3, 750,000
On June 15, 2012, Red Heart issued 50,000 ordinary shares for P6, 000,000. A 5% bonus issue
was declared on September 30, 2012 and issued on November 10, 2012 to shareholders of
record on October 31, 2012. The market value of the ordinary share was P110 each on the
declaration date. The profit of Red Heart for the year ended December 31, 2012 was P1,
175,000.
Problem 4
The Red Fox Corporation granted 100 share options to each of its 200 employees on January 1,
2013. The option plan entitles the employees to buy a share of the entitys P200 par ordinary
share capital at P220 per share. Based on an option pricing model used by Red Fox, the fair
value of the option on January 1, 2013 was determined to be P32. The plan further provides that
the employees should be in the service of the company until at least December 31, 2015. The
options are exercisable starting January 1, 2016 and expire on December 31, 2017. At January
1, 2013, it was estimated that 15% of the employees who received the options would resign
during the next three years. During 2013, 10 employees left the company. At December 31,
2013, 15 employees were expected to leave before December 31, 2015. During 2014, 12 more
employees left, and at the end of the year, it was expected that 5 more will resign before
December 31, 2015; although 8 employees left during 2015. 140 employees exercised their
options during 2016; another 10 employees exercised their options during 2017. The rest of the
options expired.
FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 16
JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa
(a) Compute the compensation expense resulting from share options for the years 2013, 2014
and 2015.
(b) Prepare the entries for the years 2016 and 2017.
Problem 5
The Red Santa company began 2013 with P13,000,000 retained earnings account balanced, of
which P4,000,000 is appropriated for plant expansion. During the year 2013, the following
events occurred:
1.) A material error was discovered in the financial statements for the year 2012, which
caused depreciation of 2012 to be understated by P200,000. The company's income tax
rate is 30%. Cash dividends of P5 per share on the 300,000 P100 par ordinary shares
outstanding were declared and distributed, after paying the required annual dividends on
its 200,000 shares of 8% P100 par preference share.
2.) 10,000 shares of preference share capital were retired at P150 per share. These shares
were originally issued at P130 per share.
3.) The company completed its plant expansion project and released the retained earnings
previously appropriated for this purpose.
4.) A bonus issue of 45,000 shares of ordinary share capital was distributed to
shareholders. The shares sell at P150 per share on date of declaration and P140 per
share on the date of distribution. There were 300,000 shares issued and outstanding
before the bonus issue.
5.) During 2013, the company issued P20,000,000 10 - year 12% bonds. The bond
indenture provides that Red Santa shall restrict P 2,000,000 of retained earnings
annually for the accumulation of enough funds for this indebtedness.
6.) Profit for the year was P 3,000,000.
REQUIRED:
(a) Compute the retained earnings balance that will be shown in the statement of financial
position at December 31,2013. How much of this balance is unavailable for further
distribution of dividends?