FINANCIAL ACCOUNTING AND REPORTING

EASY

1. According to the FASB conceptual framework, the objectives of financial reporting for
business enterprises are based on

a. Generally accepted accounting principles.

b. Reporting for regulators.
c. The need for conservatism.
d. The needs of the users of the information.

ANSWER: D

Per SFAC 8, the objectives of financial reporting focus on providing present and
potential investors and creditors with information useful in making investment
decisions. Financial statement users do not have the authority to prescribe the data
they desire. Therefore, they must rely on external financial reporting to satisfy their
information needs, and the objectives
must be based on the needs of those users.

2. What is the underlying concept that supports estimating a fixed asset impairment
charge?

a. Substance over form

b. Consistency
c. Matching
d. Faithful representation

ANSWER: D

An estimate of an impairment charge to a fixed asset can only be a faithful

representation if the entity has applied impairment rules properly, disclosed the
process of arriving at the impairment estimate and disclosed any uncertainties that
affect the impairment estimate. Assuming the above is true, and no other estimate is
better than the derived estimate, then the estimate is comprised of the best
available information. Therefore, it is a faithful representation.

3. According to the FASB conceptual framework, which of the following statements

conforms to the realization concept?

a. Equipment depreciat was assigned to a production department and then to product

unit costs.
b. Depreciated equipment was sold in exchange for a note receivable.
c. Cash was collected on accounts receivable.
d. Product unit costs were assigned to cost of goods sold when the units were sold.

ANSWER: B
 According to SFAC 6, realization is the process of converting noncash resources and
rights into money through the sale of assets for cash or claims to cash. When
equipment is sold for a note receivable, money is realized since a note qualifies as a
claim to cash. Answers (a) and (d) relate to cost allocation. Answer (c) is incorrect
because accounts receivable represents a claim to cash. Realization occurs at the
time of sale rather than when cash is collected.

4. What is the concept that supports the issuance of interim reports?

a. Relevance.
b. Materiality.
c. Consistency.
d. Faithful representation.

ANSWER: A

Relevant financial information is capable of making a difference if it has predictive

value, confirmatory, value, or both. Predictive value requires information to be used
to predict future outcomes. Confirmatory value requires that information either
confirm or change prior expectations. An interim report provides both predictive
value and confirmatory value because it provides a basis to forecast future earnings
and it provides feedback about prior performance expectations. Therefore, interim
reporting is relevant.

5. Which of the following is not an objective of using present value in accounting

measurements?

a. To capture the value of an asset or a liability in the context of a particular entity.

b. To estimate fair value.
c. To capture the economic difference between sets of future cash flows.
d. To capture the elements that taken together would comprise a market price if one
existed.

ANSWER: A

According to SFAC 7, the objective of using present value in an accounting

measurement is to capture, to the extent possible, the economic difference between
sets of future cash flows. The objective of present value, when used in accounting
measurements at initial recognition and fresh start measurements, is to estimate fair
value. Stated differently, present value should attempt to capture the elements that
taken together would comprise a market price, if one existed, that is fair value.
Value-in-use and entity-specific measurements attempt to capture the value of an
asset or liability in the context of a particular entity. An entity-specific measurement
substitutes the entity’s assumptions for those that marketplace participants would
make.
6. On September 1, 2009, Pine Company issued a note payabe to National Bank in the
amount of P1,800,000, bearing interest at 12% and payable in three equal annual
principal payments of P600,000. On this date, the bank’s prime rate was 11%. The
first interest and principal payment was made on September 1, 2010.

On December 31, 2010, what should be reported as accrued interest?

a. 44 000
b. 48 000
c. 66 000
d. 72 000

ANSWER: B

Note Payable, September 1, 2009 1 800 000

Payment on September 1,2010 (600 000)

Balance, September 1, 2010 P 1, 200, 000

Accrued Interest Payable from Sept.1 to Dec.31, 2010

( 1 200 000 x 12% x 4/12) P48 000

Incidentally, the interest expense for 2010 is computed as follows:

Jan.1- Aug 31, 2010 ( 1 800 000 x 12% x 8/12) 144 000

Sept.1- Dec. 31, 2010 48 000

Total Interest Expense 192 000

7. Mann Company’s liability account balances at June 30, 2009, included a 10% note
payable in the amount of P3 600 000. The note is dated October 1, 2008 and is
payable in three equal annual payments of P1 200 000 plus interest. The first interest
and principal payment was made on October 1, 2009.

In Mann’s June 30, 2010 Statement of Financial Position, what amount should be
reported as accrued interest payable?

a. 270 000
b. 180 000
c. 90 000
d. 60 000
 ANSWER: B

Note payable, Oct. 1, 2008 3 600 000

Payment on Oct. 1, 2009 (1 200 000)

Balance, October 1, 2009 P2 400 000

Accrued Interest Payable from Oct.1, 2009 to June 30, 2010

(2 400 000 x 10% x 9/12) P180 000

8. Loob Company frequently borrows from the bank in order to maintain sufficient
operating cash. The following loans were at a 12% interest rate, with interest payable
at maturity. Loob repaid each load on its scheduled maturity date.

Date of Loan Amount Maturity Date Term of Loan

11/1/2009 P500 000 10/31/2010 1 year
2/1/2010 P 1 500 000 7/31/2010 6 months
5/1/2010 P800 000 1/31/2010 9 months

Loob records interest expense when the loans are repaid. As a result, interest
expense of P150 000 was recorded in 2010.

If no correction is made, by what amount would 2010 interest expense be

understated?

A. 54 000
B. 62 000
C. 64 000
D. 72 000

ANSWER: A

January 1-October 31, 2010 (500 000 x 12% x 10/12) 50 000

February 1- July 31, 2010 (1 500 000 x 12% x 6/12) 90 000

May 1-December 31, 2010 (800 000 x 12% x 8/12) 64 000

Total Interest Expense of 2010 204 000

Less: Recorded Interest Expense 150 000

Understatement of Interest Expense P54 000

9. On December 31, 2010, Roth Company issued a P1 000 000 face value note payable
to Wake Company in exchange for services rendered to Roth. The note, made as
 usual trade terms, is due in nine months and bears interest, payable at maturity, at
the annual rate of 3%. The market interest rate is 8%. The compound interest factor
of 1 due in nine months at 8% is .944

At what amount should the note payable be reported in the December 31, 2010
Statement of Financial Position?

A. 1 030 000
B. 1 000 000
C. 965 200
D. 944 000

Answer: B

Note Payable P 1 000 000

Although the interest on the note is lower than the prevailing market rate, the note
payable is shown at face value because it is short term and made in usual trade
terms.

10. On December 1, 2010, Boston Company purchased a machine from Helix Company in
exchange for a noninterest bearing note requiring eight payments of P200 000. The
first payment was made on December 31, 2010, and the others are due annually on
December 31. At the date of issuance, the prevailing rate of interest for this type of
note was 11%. Present value factors are as follows:

PV of an ordinary annuity of 1 at 11% for 8 periods 5.146

PV of an annuity of 1 in advance at 11% for 8 periods 5.712

On December 31, 2010, what should be reported as carrying amount of the note
payable?

A. 1 142 400

B. 1 029 200

C. 1 046 200

D. 942 400

Answer: D

PV of note payable (200 000 x 5.712) 1 142 400

Payment on December 31, 2010 ( 200 000)

PV of note payable- December 31, 2010 P942 400

 The PV of an annuity of 1 in advance is used because the date of the purchase is
December 31, 2010 and the first payment is made on same date, December 31,
2010.

AVERAGE

1. Which of the following is not an objective of using present value in accounting

measurements?

a. To capture the value of an asset or a liability in the context of a particular entity.

b. To estimate fair value.
c. To capture the economic difference between sets of future cash flows.
d. To capture the elements that taken together would comprise a market price if one
existed.

ANSWER: A

According to SFAC 7, the objective of using present value in an accounting

measurement is to capture, to the extent possible, the economic difference between
sets of future cash flows. The objective of present value, when used in accounting
measurements at initial recognition and fresh start measurements, is to estimate fair
value. Stated differently, present value should attempt to capture the elements that
taken together would comprise a market price, if one existed, that is fair value.
Value-in-use and entity-specific measurements attempt to capture the value of an
asset or liability in the context of a particular entity. An entity-specific measurement
substitutes the entity’s assumptions for those that marketplace participants would
make.

2. The milestone method of revenue recognition provides that if a substantive milestone

is achieved, what amount of revenue is recognized?

a. Revenue is recognized up to the amount of cash collected.

b. A provisions rata share of revenue based upon the percentage delivered to date.
c. Contingent revenue is recognized in its entirety.
d. A percentage of total revenue based on the separate units delivered.

ANSWER: C

The requirement is to identify the amount of revenue recognized under the milestone
method. Answer (c) is correct because contingent revenue may be recognized in its
entirety in the period the milestone is achieved.

3. On July 1, year 2, a company decided to adopt IFRS. The company’s first IFRS
reporting period is as of and for the year ended December 31, year 2. The company
will present one year of comparative information. What is the company’s date of
transition to IFRS?
a. January 1, year 1.
b. January 1, year 2.
c. July 1, year 2.
d. December 31, year 2.

ANSWER: A

The requirement is to identify the transition date. Answer (a) is correct because the
“date of transition to IFRS” is defined as the beginning of the earliest period for
which an entity presents full comparative information under IFRS.

4. How should a first-time adopter of IFRS recognize the adjustments required to

present its opening IFRS statement of financial position?

a. All of the adjustments should be recognized in profit or loss.

b. Adjustments that are capital in nature should be recognized in retained earnings
and adjustments that are revenue in nature should be recognized in profit or loss.
c. Current adjustments should be recognized in profit or loss and noncurrent
adjustments should be recognized in retained earnings.
d. All of the adjustments should be recognized directly in retained earnings or, if
appropriate, in another category of equity.

ANSWER: D

The requirement is to identify how adjustments are reflected upon adoption of IFRS.
Answer (d) is correct because upon first-time adoption of IFRS, any adjustments
required to present the opening balances of the statement of financial position
should be recognized directly in retained earnings or, if appropriate, in another
category of equity.

5. The effects of a change in accounting principle should be recorded on a

prospective basis when the change is from the

a. Cash basis of accounting for vacation pay to the accrual basis.

b. Straight-line method of depreciation for previously recorded assets to the double-

declining balance method.

c. Presentation of statements of individual companies to their inclusion in

consolidated statements.

d. Completed-contract method of accounting for longterm construction-type

contracts to the percentage-ofcompletion method.
ANSWER: B

The requirement is to determine which accounting change should be reported on a

prospective basis. A change in depreciation method is a change in principle that is
not distinguishable from a change in estimate, and is accounted for as a change in
estimate. The change is reported on a prospective basis in the current year and
future years. A change from the cash basis to the accrual basis of accounting is a
change from non-GAAP to GAAP accounted for as the correction of an error. A change
in reporting entity requires retrospective application to the earliest year presented if
practicable. A change in the method of accounting for long-term contracts requires
retrospective application to the earliest year presented if practicable.

6. In an effort to increase sales, Mills Company inaugurated a sales promotional

campaign on June 31, 2011. Mills placed a coupon redeemable for a premium on
each package of cereal sold. Each premium cost Mills P20 and five coupons must
be presented by a customer to receive a premium. Mills estimated that only 60%
of the coupons issued will be redeemed. For the six months ended December 31,
2011, the following information is available:
Premiums purchased Coupons redeemed
Packages of cereal
sold
160,000 12,000 40,000

What is the estimated liability for premiums on December 31, 2011?

a. 160,000
b. 224,000
c. 288,000
d. 384,000

Answer: B
96,000
Coupons to be redeemed (160,000 x 60%)
Less: Coupons redeemed 40,000
Balance 56,000

Number of Premiums (56,000/5) 11,200

Estimated liability (11, 200 x 20) 224,000

7. During 2011, Day Company sold 500,000 boxes of cake mix under a new sales
promotional program. Each box contains one coupon, which entitles the customer
to a baking pan upon remittance of P40. Day pays P50 per pan and P5 for
handling and shipping. Day estimates that 80% of the coupons will be redeemed,
even though only 300,000 coupons had been processed during 2011. What
amount should Day report as a liability for unredeemed coupons on December 31,
2011?

a. 1, 000, 000
b. 1, 500, 000
c. 3, 000, 000
 d. 5, 000, 000

Answer: B
50
Cost of baking pan
Handling and Shipping 5
Total 55
Less: Remittance from customer 40
Net premium expense 15

Coupons to be redeemed (80% x 500,000) 400,000

Less: Coupons redeemed 300,000
Coupons Outstanding 100,000

Liability for unredeemed coupons (100,000 x 15) 1,500,000

3.
8. Humanizer Company gives warranties at the time of sale to purchases of its
product. Under the terms of the sale, the entity undertakes to make good, by
repair or replacement, manufacturing defects that become apparent within one
year from the date of sale.

On December 31, 2011, the entity appropriately recognized P50,000 warranty

provision. The entity incurred and charged P140,000 against the warranty provision in
2012. Out of the P140,000, an amount of P80,000 related to warranties for sales
made in 2012. The increase during 2012 in the discounted amount recognized as a
provision on December 31, 2011 arising from the passage of time is P2,000.

On December 31, 2012, the entity estimated that it would incur expenditures in 2013
to meet its warranty obligations on December 31, 2012 as follows:

5% probability of P400,000
20% probability of P200,000
50% probability of P80,000
25% probability of P20,000

Assume for simplicity that the 2013 cash flows for warranty repairs and replacements
take place on June 30, 2013.

An appropriate discount rate is 10% per year. The PV of 1 at 10% for one year is 0.91
and the PV of 1 at 10% for 6 months is 0.95. An appropriate risk adjustment factor to
reflect uncertainties in the cash flow estimates is an increment of 8% to the
probability-weighted expected cash flows.

What is the warranty expense to be recognized in 2012?

a. 107,730
b. 195,730
c. 187,730
d. 185,000

Answer: B

2011
Warranty Expense 50,000
Warranty Liability 50,000
2012
Warranty Liability 50,000
Finance Cost 2,000
Warranty Expense 88,000
Cash 140,000

Warranty Expense related to 2012 sales 80,000

Warranty Expense related to 2011 sales (60,000 – 52,000) 8,000
Total warranty expense 88,000

Warranty Expense 107,730

Warranty Liability 107,730

Weighted probabilities:
5% x 400,000 20,000
20% x 200,000 40,000
50% x 80,000 40,000
25% x 20,000 5,000
Expected cash flows 105,000
Multiply by risk adjustment factor (100% + 8%) 1.08
Adjusted cash flows 113,400
Multiply by PV of 1 at 10% for 6 months .95
Present Value of cash flows 107,730

Warranty cost paid related to 2012 sales 88,000

Warranty liability related to 2012 sales 107,730
Total warranty expense in 2012 195,730

9. Bizarre Company gives warranties at the time of sale to purchasers of its product.
The entity undertakes to make good, by repair or replacement, manufacturing
defects that become apparent within one year from the date of sale. Sales of
P10,000,000 were made evenly throughout 2011. The expenditures for warranty
repairs and replacements for the products sold in 2011 are expected to be made
50% in 2011 and 50% in 2012. The 2012 outflows of economic benefits related to
the warranty will take place on June 30, 2012.

Experience indicates that 95% of products sold require no warranty repairs, 3% of

products sold requires minor warranty repairs costing 10% of the sales price, and 2%
of products sold require major repairs or replacement costing 90% of sales price.

The appropriate discount factor for cash flows expected to occur on June 30, 2012 is
0.95. An appropriate risk adjustment factor to reflect uncertainties in the cash flow
estimates is an increment of 6% to the probability-weighted expected cash flows.
What is the warranty provision on December 31, 2011?

a. 210,000
b. 222,600
c. 111,300
d. 105,735

Answer: D
30,000
Minor repairs (3% x 10,000,000 = 300,000 x 10%)
 Major repairs (2% x 10,000,000 = 200,000 x 90%) 180,000
Weighted probabilities 210,000
Multiply by risk adjustment factor (6% increase) 1.06
Adjusted cash flows 222,600
Paid in 2011 (50%) (111,300)
Balance – December 31, 2011 111,300
Multiply by PV factor .95
Warranty provision – December 31, 2011 105,735

10. Lovie Company offers three payment plans on its twelve-month contracts.
Information on the three plans and number of children enrolled in each plan for
September 1, 2011 through August 31, 2012 contract year follows:

Initial payment per child Monthly fee per child Number of children
#1 50,000 - 15
#2 20,000 3,000 12
#3 - 5,000 9

Lovie Company received P990,000 of initial payments on September 1, 2011, and

P324,000 of monthly fees during the period September 1 through December 31,
2011. On December 31, 2011, what amount should be reported as deferred revenue?

a. 330,000
b. 438,000
c. 660,000
d. 990,000

Answer: C

Plan #1 (50,000 x 15) 750,000

Plan #2 (20,000 x 12) 240,000
Total initial payments 990,000

Deferred revenue – December 31, 2011 (990,000 x 8/12) 660,000

Plan #2 (3,000 x 12 x 4) 144,000

Plan #3 (5,000 x 9 x 4) 180,000
Total monthly fees – already earned 324,000

DIFFICULT

1. The effect of a change in accounting principle that is inseparable from the effect
of a change in accounting estimate should be reported

a. By restating the financial statements of all prior periods presented.

b. As a correction of an error.
c. As a component of income from continuing operations, in the period of change
and future periods if the change affects both.
d. As a separate disclosure after income from continuing operations, in the period of
change and future periods if the change affects both.
ANSWER: C

The effect of a change in accounting principle which is inseparable from the effect of
a change in accounting estimate should be accounted for as a change in accounting
estimate. Changes in estimate should be accounted for in the period of change and
also in any affected future periods as a component of income from continuing
operations. Financial statements are only restated for changes due to an error. Errors
include mathematical mistakes, mistakes in applying accounting principles,
oversights or misuse of available facts, and changes from unacceptable accounting
principles to GAAP. The situation described in this question does not meet the
description of an error.

2. If the cumulative effect of applying an accounting change can be determined but

the period-specific effects on all periods cannot be determined, the cumulative
effect of the change should be applied to

a. The end balance of retained earnings of the earliest period presented.

b. Net income of the current year.
c. Retained earnings of the current year.
d. The carrying value of the assets and liabilities at the beginning of the earliest
period to which it can be applied.

ANSWER: D

If the cumulative effect of applying an accounting change can be determined, but the
period-specific effects on all periods cannot be determined, the cumulative effect of
the change should be applied to the carrying value of the assets and liabilities at the
beginning of the earliest period to which it can be determined.

3. A company has included in its consolidated financial statements this year a

subsidiary acquired several years ago that was appropriately excluded from
consolidation last year. This should be reported as

a. An accounting change that should be reported prospectively.

b. An accounting change that should be reported retrospectively.
c. A correction of an error.
d. Neither an accounting change nor a correction of an error.

ANSWER: B
An accounting change that is a change in reporting entity is given retrospective
application to the earliest period presented, if practicable. The term “restatement”
refers only to correction of errors in previously issued financial statements.

4. Which of the following statements is correct regarding accounting changes that

result in financial statements that are, in effect, the statements of a different
reporting entity?

a. Cumulative-effect adjustments should be reported as separate items on the

financial statements pertaining to the year of change.
b. No restatements or adjustments are required if the changes involve consolidated
methods of accounting for subsidiaries.
c. No restatements or adjustments are required if the changes involve the cost or
equity methods of accounting for investments.
d. The financial statements of all prior periods presented are adjusted
retrospectively.

ANSWER: D

An accounting change that is a change in reporting entity is given retrospective

application to the earliest period presented, if practicable. The term “restatement”
refers only to correction of errors in previously issued financial statements.

5. Under IFRS, a voluntary change in accounting method may only be made by a

company if

a. A new standard mandates the change in method.

b. Management prefers the new method.
c. The new method provides reliable and more relevant information.
d. There is no prohibition of the method in the standards.

ANSWER: C

The requirement is to identify the circumstances that may justify a voluntary change
in accounting method. Answer (c) is correct because the new method must provide
reliable and more relevant information.

6. (IAA) On January 1, 2010, Accord Company sold a building with a book value of
P4,200,000 to another entity for P4,050,000. Accord Company immediately
entered into a leasing agreement wherein Accord would lease the building back
for an annual payment of P640,000. The term of the lease is 10 years, the
expected remaining useful life of the building.
The first annual lease payment is to be made immediately, and future payment
will be made on January 1 of each succeeding year. The lessor’s implicit interest
rate is 12%. How much loss on sale and leaseback should be recognized for 2010?
a. 150,000
b. 135,000
c. 15,000
d. 0

Answer: A

Sales price 4,050,000

Carrying amount of building 4,200,000

Loss on sale and leaseback 150,000

7. (IFRS) Sensible Company sold an item of plant and machinery on January 1, 2010
for P2,500,000, its fair value, when its carrying amount was P2,000,000. Sensible
Company leased the item back on that date for 5 years, th item’s remaining
useful life. Lease payments are P700,000 on January 1 each year.

What is the total finance charge over the lease term?

a. 1,500,000
b. 1,000,000
c. 500,000
d. 0

Answer: B

Gross rentals (700,000 x 5) 3,500,000

Present value of rentals equal to fair value of asset 2,500,000

Total finance charge 1,000,000

8. (IFRS) In an attempt to alleviate its liquidity problems, Banco Company entered

into an arrangement on January 1, 2010 to sell its processing plant to another
entity for P3,500,000 which is the fair value of the plant. At the date of sale, the
plant had a carrying amount of P2,750,000. Banco Company immediately leased
the processing plant back from the buyer. The terms of the lease agreement
were:

Annual payment in arrears, commencing

December 31, 2010 700,000
Reimbursement to the lessor for maintenance cost
Include in the annual payment 35,000
Lease term 6
years
Economic life of plant 8 years

What is the deferred gain on the sale and leaseback on December 31, 2010?

a. 750,000
b. 625,000
c. 656,250
d. 0

Answer: B

Sales price 3,500,000

Carrying amount 2,750,000

Deferred gain – January 1, 2010 750,000

Realized gain in 2010 (750,000/6) (125,000)

Deferred gain – December 31, 2010 625,000

9. (AICPA Adapted) On December 31, 2010, Bain Company sold a machine to Ryan
and simultaneously leased it back for one year. Pertinent information at this date
follows:

Sales price 360,000

Carrying amount 330,000
Present value of reasonable lease rentals
(P3,000 for 12 months @ 12%) 34,100
Estimated remaining useful life 12 years

In the 2010 income statement, what amount of revenue from the sale of the machine
should be reported?
a. 34,100
b. 30,000
c. 4,100
d. 0

Answer: B

Sales price 360,000

Carrying amount 330,000

Gain on sale and leaseback 30,000

10. (ACP) On December 31, 2010, Mae Company sold an equipment with an
estimated remaining useful life of 10 years. At the same time, Mae leased back
the equipment for 2 years. The leaseback is an operating lease.

Sales price 7,500,000

Carrying amount 5,000,000
Fair of equipment on date of sale 6,000,000

In the 2010 income statement, what amount should be reported by Mae Company as
gain?

a. 2,500,000
 b. 1,500,000
c. 1,000,000
d. 1,750,000

Answer: C

Fair value of equipment

6,000,000
Carrying amount 5,000,000

Outright gain 1,000,000

Sales price 7,500,000

Fair value 6,000,000

Deferred gain – December 31, 2010 1,500,000

CLINCHER

1. When a component of a business has been discontinued during the year, this
component’s operating losses of the current period should be included in the

a. Income statement as part of revenues and expenses.

b. Income statement as part of the loss on disposal of the discontinued component.
c. Income statement as part of the income (loss) from continuing operations.
d. Retained earnings statement as a direct decrease in retained earnings.

ANSWER: B

The requirement is to determine how a discontinued component’s operating losses

for the current period should be classified in the financial statements. The “income
(loss) from
operations” is combined with the loss on disposal.

2. Assume a company does not elect the fair value option for reporting financial
assets and liabilities. Which of the following is not classified as other
comprehensive income?

a. An adjustment to pension liability to record the funded status of the plan.

b. Subsequent decreases of the fair value of availablefor- sale securities that have
been previously written down as impaired.
c. Decreases in the fair value of held-to-maturity securities.
d. None of the above.

ANSWER: C

If the fair value option is not elected, held-to maturity securities are reported at
amortized cost. Any decreases or increases in fair value are reported neither in
net income nor as part of other comprehensive income. Answers (a) and (b) are
incorrect because an adjustment to pension liability to record the funded status
 of the plan, and subsequent decreases of the fair value of available-for-sale
securities that have been previously written down as impaired are included in
other comprehensive income. Answer (d) is incorrect because decreases in the
fair value of held-to-maturity securities are not part of other comprehensive
income.

3. (IFRS) On December 31, 2010, Thunder Company sold land with a cost of
P1,500,000 to Victoria Company for P2,300,000 when the land’s fair value was
P2,150,000. Thunder Company immediately entered into a cancelable lease
agreement to use the land for 2 years at an annual rental of P20,00. How much
profit would Thunder record on the sale of land for 2010?

a. 150,000
b. 800,000
c. 650,000
d. 725,000

Answer: C

Fair value of land 2,150,000

Cost of land 1,500,000

Outright gain in 2010 650,000

Sales price 2,300,000

Fair value of land 2,150,000

Deferred gain – December 31, 2010 150,000

4. (AICPA Adapted) On June 31, 2010, Lee Company sold equipment to an

unaffiliated entity for P5,500,000. The equipment had a carrying amount of
P5,000,000 and a remaining life of 10 years. That same day, Lee leased back the
equipment at P15,000 per month for 2 years with no option to renew the lease or
repurchase the equipment. The present value of the lease payments using the
appropriate interest rate wa P318,650 on June 30, 2010

What is the equipment rent expense for the year ended December 31, 2010?
a. 110,000
b. 90,000
c. 50,000
d. 40,000

Answer: B

Rent expense – July to December 2010 (15,000 x 6) 90,000

Sales price 5,500,000

Carrying amount 5,000,000
Outright gain 500,000

5. On December 31, 2010, Albocaster Company purchased a tractor from Cheliff

Company. Simultaneous with the sale , Cheliff leased back the tractor for 12 years
for its use in the new farm that it is developing. The sales price of the tractor was
P7,800,000, while its carrying amount in the books of Cheliff as of the date of the
sale was P5,850,000. Cheliff’s engineers have estimated that the remaining
economic life of the tractor is 15years. Cheliff is a wholly-owned subsidiary of a
US entity. It is required to follow US generally accepted accounting principles in its
reporting package for consolidation. What is the amount that Cheliff should report
as deferred gain from the sale of the tractor on December 31, 2010 in its
reporting package for use in consolidation with the Head Office accounts?
a. 1,950,000
b. 1,820,000
c. 1,787,500
d. 0

Answer: A

Sales price 7,800,000

Carrying amount 5,850,000

Deferred gain – December 31, 2010 1,950,000