Exam (elaborations) TEST BANK Intermediate Financial Accounting Part 3 ZEUS VERNON B. MILLAN

PRESENTATION OF FINANCIAL STATEMENTS. ………………1 CHAPTER 37: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES)..............1 CHAPTER 37: THEORY OF ACCOUNTS REVIEWER.......................................................................................................8 CHAPTER 37 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS..............................................................54 CHAPTER 38 REVENUE......................................................................................55 CHAPTER 38: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES)...........55 CHAPTER 38: THEORY OF ACCOUNTS REVIEWER.....................................................................................................59 CHAPTER 38 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS..............................................................73 CHAPTER 39 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 74 CHAPTER 39: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES)...........74 CHAPTER 39: THEORY OF ACCOUNTS REVIEWER.....................................................................................................79 CHAPTER 39 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS............................................................100 CHAPTER 40 ACCOUNTING POLICIES, CHANGES IN ESTIMATES AND ERRORS 101 CHAPTER 40: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES)..........101 CHAPTER 40: THEORY OF ACCOUNTS REVIEWER...................................................................................................104 CHAPTER 40 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS....................................................................123 CHAPTER 41 STATEMENT OF CASH FLOWS..............................................124 CHAPTER 41: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES).........124 CHAPTER 41: THEORY OF ACCOUNTS REVIEWER...................................................................................................127 CHAPTER 41 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS....................................................................148 CHAPTER 42 EVENTS AFTER THE REPORTING PERIOD.......................149 CHAPTER 42: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES)...........................149 CHAPTER 42: THEORY OF ACCOUNTS REVIEWER...................................................................................................150 CHAPTER 42 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS............................................................156 CHAPTER 43 RELATED PARTY DISCLOSURES..........................................157 CHAPTER 43: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES)...........................157 CHAPTER 43: THEORY OF ACCOUNTS REVIEWER...................................................................................................157 CHAPTER 43 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS............................................................163 CHAPTER 44 OPERATING SEGMENTS.........................................................164 CHAPTER 44: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES).........164 CHAPTER 44: THEORY OF ACCOUNTS REVIEWER...................................................................................................165 CHAPTER 44 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS............................................................177 CHAPTER 45 INTERIM FINANCIAL REPORTING......................................178 CHAPTER 45: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES).........178 CHAPTER 45: THEORY OF ACCOUNTS REVIEWER...................................................................................................182 CHAPTER 45 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS....................................................................194 CHAPTER 46 DEVELOPMENT STAGE ENTITIES.......................................195 CHAPTER 46: THEORY OF ACCOUNTS REVIEWER.....................................................................................................195 CHAPTER 46 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS....................................................................197 CHAPTER 47 CASH BASIS TO ACCRUAL BASIS OF ACCOUNTING........198 CHAPTER 47: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES).........198 CHAPTER 47: THEORY OF ACCOUNTS REVIEWER.........................................................ERROR! BOOKMARK NOT DEFINED. CHAPTER 47 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS..................ERROR! BOOKMARK NOT DEFINED. CHAPTER 48 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES 202 CHAPTER 48: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES).........202 CHAPTER 48: THEORY OF ACCOUNTS REVIEWER...................................................................................................210 CHAPTER 48 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS............................................................222 CHAPTER 49 PFRS FOR SMALL AND MEDIUM-SIZED ENTITIES (SMES)223 CHAPTER 49: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES)...........................223 CHAPTER 49: THEORY OF ACCOUNTS REVIEWER (W/ PROBLEMS INCLUDED)..........................................................227 CHAPTER 49 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS............................................................278 Chapter 37 Presentation of Financial Statements Chapter 37: Multiple choice – Computational (SET B) – (For classroom instruction purposes) Current assets 1. The ledger of RELISH TASTE Co. as of December 31, 20x1 includes the following: Assets Cash 20,000 Trade accounts receivable (net of ₱20,000 credit balance in accounts) 80,000 Held for trading securities 160,000 Financial assets designated at FVPL 60,000 Investment in equity securities at FVOCI 140,000 Investment in bonds measured at amortized cost (due in 3 years) 120,000 Prepaid assets 20,000 Deferred tax asset (expected to reverse in 20x2) 24,000 Investment in Associate 72,000 Investment property 92,000 Sinking fund 76,000 Property, plant, and equipment 200,000 Goodwill 56,000 Totals 1,120,000 How much is the total current assets? a. 380,000 b. 500,000 c. 360,000 d. 384,000 Current liabilities 2. The ledger of CONGRUENT HARMONIOUS Co. as of December 31, 20x1 includes the following: Liabilities Bank overdraft 20,000 Trade accounts payable (net of ₱20,000 debit balance in accounts) 80,000 Notes payable (due in 20 semi-annual payments of ₱8,000) 160,000 Interest payable 60,000 Bonds payable (due on March 31, 20x2) 140,000 Discount on bonds payable (60,000) Dividends payable 20,000 Share dividends payable 24,000 Deferred tax liability (expected to reverse in 20x2) 72,000 Income tax payable 88,000 Contingent liability 200,000 Reserve for contingencies 56,000 Totals 860,000 How much is the total current liabilities? a. 384,000 b. 456,000 c. 584,000 d. 364,000 Current and noncurrent liabilities 3. The ledger of COURIER MESSENGER Co. as of December 31, 20x1 includes the following: 10% Note payable 160,000 12% Note payable 240,000 14% Mortgage note payable 120,000 1 Interest payable - Additional information:  COURIER Co.’s financial statements were authorized for issue on April 15, 20x2.  The 10% note payable is due on July 1, 20x2 and pays semi-annual interest every July 1 and December 31. On January 28, 20x2, COURIER Co. entered into a refinancing agreement with a bank to refinance the entire note by issuing a long-term obligation.  The 12% note payable is due on March 31, 20x2 and pays annual interest every March 31. On January 31, 20x2, COURIER Co. extended the maturity of the note to March 31, 20x3 under the existing loan agreement. The extension of maturity date is at the option of COURIER.  The 14% mortgage note is due on December 31, 20x9. Per agreement with the creditor, COURIER is to pay quarterly interests on the note, failure to do so will render the note payable on demand. COURIER failed to pay the 3rd and 4th quarterly interests on the note during 20x1. How much is the total current liabilities? a. 280,000 b. 310,000 c. 316,000 d. 288,400 Current and noncurrent liabilities 4. The ledger of SQUAMOUS SCALY Co. as of December 31, 20x1 includes the following: 15% Note payable 100,000 16% Bonds payable 200,000 18% Serial bonds payable 400,000 Interest payable - Additional information:  SQUAMOUS Co.’s financial statements were authorized for issue on April 15, 20x2.  The 15% note payable was issued on January 1, 20x1 and is due on January 1, 20x5. The note pays annual interest every year-end. The agreement with the lender provides that SQUAMOUS Co. shall maintain an average current ratio of 2:1. If at any time the current ratio falls below the agreement, the note payable will become due on demand. As of the 3rd quarter in 20x1, SQUAMOUS’s average current ratio is 0.50:1. Immediately, SQUAMOUS informed the lender of the breach of the agreement. On December 31, 20x1, the lender gave SQUAMOUS a grace period ending on December 31, 20x2 to rectify the deficiency in the current ratio. SQUAMOUS promised the creditor to liquidate some of its long-term investments in 20x2 to increase its current ratio.  The 16% bonds are 10-year bonds issued on December 31, 1992. The bonds pay annual interest every year-end.  The 18% serial bonds are issued at face amount and are due in semi-annual installments of ₱40,000 every April 1 and September 30. Interests on the bonds are also due semi-annually. The last installment on the bonds is due on September 30, 20x7. How much is the total current liabilities? a. 218,000 b. 200,000 c. 280,000 d. 298,000 Working capital 5. Below are the account balances prepared by the bookkeeper for REEDY SLENDER Company as of December 31, 20x1: Assets Liabilities Cash 60,000 Accounts payable 80,000 Accounts receivable, net 176,000 Notes payable 400,000 Inventory 160,000 Prepaid income tax 32,000 Prepaid assets 20,000 Investment in subsidiary 40,000 2 Land held for sale 112,000 Property, plant, and equipment 200,000 Totals 800,000 480,000 Additional information:  Cash consists of the following: Petty cash fund (unreplenished petty cash expenses, ₱6,000) 8,000 Cash in bank (40,000) Payroll fund 56,000 Tax fund 28,000 Cash to be contributed to a sinking fund set up for the retirement of bonds maturing on December 31, 20x3 8,000 Total Cash 60,000  Checks amounting to ₱122,000 were written to suppliers and recorded on December 30, 20x1, resulting to a bank overdraft of ₱40,000. The checks were mailed on January 5, 20x2.  Accounts receivable consists of the following: Accounts receivable 160,000 Allowance for uncollectibility ( 20,000) Credit balance in customers’ accounts ( 12,000) Selling price of unsold goods sent on consignment to FRAIL, Inc. at 120% of cost and excluded from REEDY’s inventory 48,000 Accounts receivable, net 176,000  The inventory includes cost of goods amounting to ₱40,000 that are expected to be sold beyond 12 months but within the ordinary course of business. Also, the inventory includes cost of consigned goods received on consignment from WEAK Co. amounting to ₱20,000.  Prepaid income tax represents excess of payments for quarterly corporate income taxes during 20x1 over the actual annual corporate income tax as of December 31, 20x1.  Prepaid assets includes a ₱8,000 security deposit on an operating lease which is expected to expire on March 31, 20x3. The security deposit will be received on lease expiration.  The land qualified for classification as “asset held for sale” under PFRS 5 Non-current Assets Held for Sale and Discontinued Operations as of December 31, 20x1.  Accounts payable is net of ₱24,000 debit balance in suppliers’ accounts. Accounts payable includes the cost of goods held on consignment from WEAK Co. which were included in inventory.  The notes payable are dated July 1, 20x1 and are due on July 1, 20x4. The notes payable bears an annual interest rate of 10%. Interest is payable annually. How much is the adjusted working capital? a. 430,000 b. 406,000 c. 442,000 d. 426,000 Working capital 6. The ledger of NEOPHYTE BEGINNER Co. as of December 31, 20x1 includes the following: Assets 3 Petty cash fund 28,000 Cash in bank – Banco De Oro 60,000 Cash in bank – Metrobank 20,000 Accounts receivable (including ₱60,000 pledged accounts) 140,000 Accounts receivable – assigned 100,000 Equity in assigned receivables 40,000 Notes receivable (including ₱80,000 notes receivable discounted) 180,000 Notes receivable discounted 80,000 Advances to subsidiary 128,000 Held for trading securities 80,000 Inventory 248,000 Deferred charges 72,000 Cash surrender value 24,000 Bond sinking fund 400,000 Total assets 1,600,000 Liabilities Accounts payable 160,000 Estimated warranty liability 56,000 Loans payable related to assigned receivables (due in 12 months) 60,000 Accrued expenses 52,000 Bonds payable (due on December 31, 20x2) 400,000 Premium on bonds payable 32,000 Total liabilities 760,000 Additional information:  Petty cash fund includes IOU’s from employees amounting to ₱8,000. The remaining balance of ₱20,000 represents bills and coins.  Cash in bank – Banco de Oro represents the balance per bank statement. As of December 31, 20x1, deposits in transit amounted to ₱40,000 while outstanding checks amounted to ₱12,000. Included in the bank statement as of December 31, 20x1 is an NSF check amounting to ₱32,000.  Cash in bank – Metrobank represents the balance per ledger. As of December 31, 20x1, deposits in transit amounted to ₱8,000 while outstanding checks amounted to ₱4,000.  Accounts receivable (unassigned) includes uncollectible past due accounts of ₱16,000 which need to be written-off.  Also included in accounts receivable (unassigned) is a ₱20,000 receivable from a customer which was given a special credit term. Under the special credit term, the customer shall pay the ₱20,000 receivable in equal quarterly installments of ₱2,500. The last payment is due on December 31, 20x3.  The held for trading securities include the reacquisition cost of NEOPHYTE Co.’s shares amounting to ₱16,000.  Inventory includes ₱120,000 goods in transit purchased FOB Destination but excludes ₱48,000 goods in transit purchased FOB Shipping point. How much is the working capital? a. 394,000 b. 420,000 c. 349,000 d. 402,000 Reconstruction of financial statement Use the following information for the next three questions: The ledger of NAÏVE UNAFFECTEDLY SIMPLE Co. in 20x1 includes the following: Jan. 1, 20x1 Dec. 31, 20x1 Current assets 2,400,000 ? Noncurrent assets 8,000,000 ? Current liabilities 1,800,000 2,000,000 4 Noncurrent liabilities ? 6,000,000 Additional information:  NAÏVE’s working capital as of December 31, 20x1 is twice as much as the working capital as of January 1, 20x1.  Total equity as of January 1, 20x1 is ₱3,400,000. Profit for the year is ₱4,800,000 while dividends declared amounted to ₱2,000,000. There were no other changes in equity during the year. 7. How much is the noncurrent liabilities as of January 1, 20x1? a. 5,000,000 b. 5,200,000 c. 5,300,000 d. 5,400,000 8. How much is the current assets as of December 31, 20x1? a. 3,200,000 b. 3,400,000 c. 3,600,000 d. 4,200,000 9. How much is the noncurrent assets as of December 31, 20x1? a. 9,000,000 b. 11,000,000 c. 8,000,000 d. 12,000,000 Reconstruction of financial statements 10. The ledger of LOQUACIOUS TALKATIVE Co. in 20x1 includes the following: Cash 400,000 Accounts receivable 800,000 Inventory 2,000,00 0 Accounts payable 600,000 Note payable 200,000 During the audit of LOQUACIOUS’s 20x1 financial statements, the following were noted by the auditor:  Cash sales in 20x2 amounting to ₱40,000 were inadvertently included as sales in 20x1. LOQUACIOUS recognized gross profit of ₱12,000 on the sales.  A collection of an ₱80,000 accounts receivable in 20x2 was recorded as collection in 20x1. A cash discount of ₱4,000 was given to the customer.  During January 20x2, a short-term bank loan of ₱100,000 obtained in 20x1 was paid together with ₱10,000 interest accruing in January 20x2. The payment transaction in 20x2 was inadvertently included as a 20x1 transaction. How much is the adjusted working capital as of December 31, 20x1? a. 2,420,000 b. 2,482,000 c. 2,342,000 d. 2,402,000 Reclassification adjustment Use the following information for the next two questions: In 20x1, LUSTROUS BRIGHT Co. disposed of a foreign operation for which a cumulative translation gain of ₱400,000 is recognized in equity. LUSTROUS Co. is subject to a 30% tax rate. 11. How much is the net of tax reclassification adjustment to other comprehensive income in 20x1? a. 280,000 b. (280,000) c. 120,000 d. (120,000) 12. How much is the gross of tax effect of the reclassification adjustment to profit or loss in 20x1? a. 280,000 b. (280,000) c. 400,000 d. (400,000) Comprehensive income Use the following information for the next two questions: 5 The following items were presented for the purpose of determining comprehensive income. Profit for the year 4,000 Increase in revaluation surplus 2,000 Remeasurements of the net defined benefit liability (asset) - loss (400) Net change in translation of foreign