CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING PREWEEK LECTURE
MAY 2022 CPALE BATCH 91
1. Capella Company reported pretax income of P6,000,000 in the income statement for the current year. The
tax rate is 25%.
Tax return Accounting record
Rent received in advance TD 800,000 0
Depreciation TD 1,500,000 1,000,000
Payment of penalty PD 0 250,000
Premiums on officers’ life insurance PD 0 150,000
Doubtful accounts expense TD 200,000 300,000
Warranty cost TD 400,000 600,000
1. What amount should be reported as current provision for income tax for the current year?
a. 1,750,000
b. 1,850,000
c. 1,875,000
d. 2,000,000
2. What amount should be reported as total tax expense for the current year?
a. 1,500,000
b. 1,600,000
c. 1,400,000
d. 1,537,500
2. Ursa Company prepared the following reconciliation of financial income and taxable income for 2022:
Pretax financial income 6,000,000
Permanent difference ( 500,000)
Temporary difference-capitalized interest for book and expensed for tax ( 400,000)
Taxable income 5,100,000
Cumulative temporary differences amounted to P300,000 and P700,000, respectively on December 31,
2021 and December 31, 2022. The income tax rate is 25%. What amount should be reported as deferred
tax liability on December 31, 2022?
a. 175,000
b. 106,000
c. 250,000
d. 225,000
3. At the end of 2022, Castor Company had a deferred tax asset of P2,000,000 attributable to a temporary
book-tax difference of P8,000,000 in a liability for estimated expenses. At the end of 2023, the temporary
difference is P7,000,000. The entity had no other temporary differences. Taxable income for 2023 is
P20,000,000 and the tax rate is 25%. At the beginning of 2023, the entity had a valuation allowance
P150,000 for the deferred tax asset. At the end of 2023, it was determined that it is more likely than not
that the deferred tax asset will be realized. What amount should be reported as total tax expense for 2023?
a. 5,250,000
b. 5,100,000
c. 5,000,000
d. 5,400,000
4. Pollux Company had outstanding share capital with par value of P50,000,000 and a 12% convertible bonds
payable in the face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and
December 31. The conversion clause in the bond indenture entitled the bondholders to receive 40 shares
of P20 par value in exchange for each P1,000 bond. On June 30, 2022, the holders of bonds with face
amount of P5,000,000 exercised the conversion privilege. The market price of the bonds on that date was
P1,100 per bond and the market price of the share was P30. The unamortized bond discount at the date of
conversion was P500,000. The share premium from conversion privilege had a balance of P2,000,000 on
June 30, 2022. What amount of share premium should be recognized by reason of the conversion of bonds
payable?
a. 2,000,000
b. 2,750,000
c. 3,500,000
d. 1,750,000
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5. An entity issued on January 1, 2022 20-year bonds of P5,000,000 for P5,426,000 to yield 10%. Interest is
payable annually on December 31 at 11%. On June 30, 2023, the entity retired 2,000 bonds with P1,000
face amount per bond at 96 plus accrued interest. The accounting period is the calendar year.
1. What amount should be reported as gain or loss on retirement of bonds in 2023?
a. 245,812 gain
b. 245,812 loss
c. 80,000 gain
d. 80,000 loss
2. What is the carrying amount of the remaining bonds on December 31, 2023?
a. 3,255,600
b. 3,246,276
c. 3,251,160
d. 3,000,000
6. At the beginning of the year, Polaris Company reported the fair value of plan assets at P6,700,000 and
projected benefit obligation at P7,600,000. The entity revealed the following data for the current year.
Current service cost 1,450,000
Past service cost 300,000
Actual return on plan assets 500,000
Loss on plan settlement before normal retirement date 200,000
Contribution to the plan 1,500,000
Benefits paid to retirees 800,000
Discount rate 10%
What amount should be reported as employee benefit expense?
a. 2,040,000
b. 1,640,000
c. 1,840,000
d. 1,750,000
7. Casiopeia Company provided the following information for the current year:
January 1 Projected benefit obligation 3,500,000
During the year Pension benefits paid to retired employees 250,000
Past service cost 500,000
Actuarial loss 200,000
Current service cost 700,000
Discount rate 10%
What amount should be reported as projected benefit obligation on December 31?
a. 4,600,000
b. 5,000,000
c. 4,250,000
d. 4,650,000
8. Perseus Company provided the following information during the current year:
Fair value of plan assets – January 1 3,500,000
Market related value of plan assets 2,800,000
Contribution to the plan 280,000
Actual return on plan assets 370,000
Benefits paid to retirees 250,000
Discount rate 10%
What amount should be reported as fair value of plan assets on December 31?
a. 3,200,000
b. 3,900,000
c. 4,250,000
d. 3,550,000

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9. Amaze Company reported the following information at year-end:

2022 2021
Ordinary shares outstanding 360,000 300,000
Nonconvertible preference shares outstanding 10,000 10,000
10% convertible bonds payable – face amount 1,000,000 1,000,000
* On September 1, 2022, the entity sold 60,000 additional ordinary shares.
* Net income for the year ended December 31, 2022 was P6,700,000. The income tax rate is 25%.
* During 2022, the entity paid dividends of P30 per share on the nonconvertible preference shares.
* The 10% convertible bonds are convertible into 40 ordinary shares for each P1,000 bond.
* Unexercised share options to purchase 30,000 ordinary shares at P20 per share were outstanding
at the beginning and end of 2022. The average market price of ordinary share was P30 during the
current year. The market price was P40 on December 31, 2022.
* Warrants to purchase 20,000 ordinary shares at P45 per share were attached to the preference shares at
the time of issuance. The warrants, which expire on December 31, 2024, were outstanding on December
31, 2022.
1. What amount should be reported as basic earnings per share?
a. 20.00
b. 20.94
c. 17.78
d. 18.61
2. What amount should be reported as diluted earnings per share?
a. 17.57
b. 17.03
c. 17.50
d. 17.09
10. On January 1, 2022, Winchester Company had 200,000 ordinary shares outstanding. The following
transactions occurred during the year:
March 1 120,000 ordinary shares were issued.
May 1 6,000 ordinary shares were reacquired as treasury.
October 1 100,000 cumulative preference shares were issued. Each preference shares can be
converted into 3 ordinary shares. The preference dividend per share is P5.
November 1 A 10% bonus issue on the ordinary shares was distributed.
December 31 Net income for the year is P3,500,000.
1. What amount of basic EPS should be presented on December 31, 2022?
a. 10.71
b. 10.13
c. 8.69
d. 9.21
2. What amount of diluted EPS should be presented on December 31, 2022?
a. 7.35
b. 8.58
c. 8.74
d. 5.34
11. Mercia Company had retained earnings of P3,300,000 at the beginning of 2022. Throughout 2022, the
entity had 20,000 ordinary shares of P100 par value that are issued and outstanding. During 2022, the entity
reported net income of P5,500,000, purchased treasury shares for P600,000, declared cash dividends of
P1,800,000, reissued all treasury shares at a gain of P150,000, and declared and issued a 10% ordinary
share bonus issue when the market value was P150 per share. What amount should be reported as retained
earnings on December 31, 2022?
a. 7,150,000
b. 6,750,000
c. 6,800,000
d. 6,700,000

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12. Durham Company had two classes of shares outstanding, 10% P100 par preference share capital and P10
par ordinary share capital. During the fiscal year ending June 30, 2022, the entity had the following
transactions affecting shareholders’ equity:
Number of shares Price per share
Issue of preference shares 5,000 P140
Issue of ordinary shares 20,000 70
Retirement of preference shares 1,000 150
Purchase of treasury ordinary shares 5,000 80
Share split, par value reduced to P5 2 for 1
Reissue of treasury ordinary shares 5,000 52
The balances of the accounts in the shareholders’ equity on June 30, 2021 were:
Preference share capital, 30,000 shares, P3,000,000; Ordinary share capital, 100,000 shares, P1,000,000;
Preference share premium, P1,200,000; Ordinary share premium, P8,000,000; and Retained earnings,
P2,550,000. Dividends were paid at the end of the current fiscal year on the ordinary shares at P6 per share
and on the preference shares at the preference rate. Net income for the year is P750,000.
1. What amount should be reported as additional paid in capital on June 30, 2022?
a. 10,620,000
b. 10,600,000
c. 9,200,000
d. 2,620,000
2. What amount should be reported as retained earnings on June 30, 2022?
a. 3,300,000
b. 1,540,000
c. 1,560,000
d. 1,550,000
13. Nam Company reported the following shareholders’ equity on January 1, 2022:
Preference share capital P150 par value, 20,000 shares 3,000,000
Ordinary share capital P50 par value, 100,000 shares 5,000,000
Share premium 6,000,000
Retained earnings 4,500,000
On January 1, 2022, the entity purchased 20,000 ordinary shares for P90 per share to be held as treasury.
Late in 2022, it was learned that because of mathematical error, an overstatement of depreciation expense
by P600,000 had occurred in 2021. The entity reported net income of P4,000,000 for 2022. The entity
declared cash dividend of P1,000,000 on preference shares and P2,000,000 on ordinary shares in 2022.
The income tax rate is 25%. What amount should be reported as unappropriated retained earnings on
December 31, 2022?
a. 5,950,000
b. 6,100,000
c. 4,300,000
d. 4,150,000
14. On January 1, 2022, Exeter Company issued share appreciation rights to its president exercisable for one
year beginning January 1, 2024 provided that the president is still in the employ of the company at that
date of exercise. Each right provides for a cash payment equal to the excess of the entity’s share price over
P50. The equivalent number of shares for share appreciation rights will be based on the level of sales at
the date of exercise. The number of equivalent shares is 20,000 if the level of sales is P4,000,000 to
P6,000,000 and 30,000 shares if the level of sales is over P6,000,000. The actual sales achieved totaled
P5,000,000 in 2022 and P7,000,000 in 2023. The share prices are P90 in 2022 and P85 in 2023. What
amount should be reported as compensation expense for 2023?
a. 250,000
b. 650,000
c. 525,000
d. 850,000

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15. On December 31, 2022, Ashe Company had a P1,500,000 balance in the advertising expense account
before any year-end adjustments.
• Radio and television advertising spots broadcast during December 2022 were billed to Ashe on January
4, 2023. The invoice cost of P200,000 was paid on January 15, 2023.
• Included in the P1,500,000 is P300,000 for newspaper advertising for a January 2023 sales
promotional campaign.
What amount should be reported as advertising expense for 2022?
a. 1,500,000
b. 1,400,000
c. 1,700,000
d. 2,000,000
16. Otis Company acquired rights to a patent under a licensing agreement that required an advance royalty
payment when the agreement was signed. The entity remitted royalties earned and due under the agreement
on October 31 each year. Additionally, the entity paid in advance estimated royalties for the next year. The
entity did not prepare reversing entry. Prepaid royalties are adjusted at year end. The entity provided the
following information for the year ended December 31:
Jan. 1 Prepaid royalties 650,000
Oct. 31 Royalty payment charged to royalty expense 1,000,000
Dec. 31 Year-end credit adjustment to expense 250,000
What amount should be reported as prepaid royalties on December 31?
a. 250,000
b. 400,000
c. 850,000
d. 900,000

17. At the beginning of current year, Denver Company entered into a 4-year licensing agreement with Akins
Company allowing Akins to use Denver’s cartoon characters on all the lunchboxes that Akins
manufactures. Akins is required to pay Denver royalties equal to 10% of annual sales. Akins guaranteed
Denver a P900,000 minimum royalty over the life of the agreement and paid Denver the minimum
amount at the beginning of current year. Akins’ sales totaled P5,000,000 for the current year. What amount
of royalty income should Denver report for the current year?
a. 300,000
b. 500,000
c. 800,000
d. 900,000

18. On January 1, 2019, SME acquired a trademark of a line herbal products for P450,000. The SME expects
to continue marketing the products using the trademark indefinitely. An analysis provides evidence that
the line of trademark products may generate net cash inflows for an indefinite period. An estimate of the
useful life of the trademark is not possible. A competitor developed a technological breakthrough in 2022
expected to result in a product that will reverse the demand for SME’s patented product line. At December
31, 2022, the recoverable amount of the trademark was P80,000. It is expected that the demand for SME’s
product line will remain until December 31, 2024, when the competitor launches the new product. The
SME intended to continue manufacturing the patented products until December 31, 2024. What amount
should be recorded as amortization of trademark for 2019 and 2022, respectively?
a. 45,000 and 105,000
b. 105,000 and 45,000
c. 45,000 and 31,500
d. 150,000 and 0

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19. Zoe Company provided the following data:

December 31, 2021 December 31, 2022
Accounts receivable 840,000 780,000
Inventory 1,500,000 1,400,000
Accounts payable 950,000 980,000
Total sales were P12,000,000 for 2022 and P11,000,000 for 2021. Cash sales were 20% of total sales each
year. Cost of goods sold was P8,400,000 for 2022. Variable general and administrative expenses for 2022
were P1,200,000. The variable expenses have varied in proportion to sales. Variable expenses have been
paid 50% in the year incurred and 50% the following year. Fixed expenses, including P350,000
depreciation and P50,000 bad debt expense, totaled P1,000,000 each year. Eighty percent of fixed expenses
involving cash were paid in the year incurred and 20% the following year. Each year there was a P50,000
bad debt estimate and a P50,000 writeoff.
1. What amount was collected by Zoe Company from customers during 2022?
a. 12,010,000
b. 12,060,000
c. 11,960,000
d. 11,890,000
2. What amount was disbursed by Zoe Company for purchases during 2022?
a. 8,500,000
b. 8,270,000
c. 8,300,000
d. 8,200,000
3. What total amount was disbursed by Zoe Company for fixed and variable expenses during 2022?
a. 2,200,000
b. 2,500,000
c. 1,750,000
d. 2,250,000
20. Stonewall Company provided the following comparative statement of financial position at year-end:
2022 2021
Cash 1,550,000 400,000
Accounts receivable 1,400,000 950,000
Investments, at cost 200,000 350,000
Property, plant and equipment 1,800,000 1,300,000
Accumulated depreciation ( 600,000) ( 450,000)
Accounts payable 950,000 750,000
Share capital 2,500,000 1,000,000
Retained earnings 900,000 800,000
An investment was sold for P250,000 during the current year. There was no disposal of property, plant and
equipment during the current year. The net income for the current year was P600,000. A dividend of
P500,000 was paid on December 31, 2022.
1. What amount should be reported as net cash provided by operating activities?
a. 700,000
b. 500,000
c. 400,000
d. 600,000
2. What amount should be reported as net cash used in investing activities?
a. 500,000
b. 750,000
c. 250,000
d. 400,000
3. What amount should be reported as net cash provided by financing activities?
a. 1,500,000
b. 2,000,000
c. 2,500,000
d. 1,000,000
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21. On January 1, 2022, World Bank loaned P6,000,000 to a client. The loan has a 10% interest rate and is due
on December 31, 2024. Interest is payable annually every December 31.
The bank estimated the following credit risk and expected credit loss that would result from default on
January 1, 2022, December 31, 2022 and December 31, 2023:
January 1, 2022
Expected credit loss from default 2,500,000
Credit risk for 12 months 2%
Lifetime credit risk for 36 months 10%
December 31, 2022
Expected credit loss from default 2,100,000
Credit risk for 12 months 3%
Lifetime credit risk for 36 months 15%
December 31, 2023
Expected credit loss from default 1,500,000
Credit risk for 12 months 1%
Lifetime credit risk for 36 months 6%

On January 1, 2022, the bank appropriately recognized a 12-month expected credit loss.
On December 31, 2022, the lifetime credit risk has increased from 10% to 15%. The bank concluded that
the increase of 5% is considered significant.
On December 31, 2023, the lifetime credit risk decreased from 15% to 6%. The bank concluded that there
is an improvement in the credit risk and reverts back to recognizing 12-month expected credit loss.
On December 31, 2024, the bank collected from the borrower P5,500,000 in full settlement of the loan.
The balance of P500,000 on the loan was deemed uncollectible. The interest for the year 2024 was unlikely
to be collected.
1. What amount should be recognized as impairment loss on January 1, 2022?
a. 250,000
b. 125,000
c. 50,000
d. 25,000

2. What amount should be recognized as impairment loss on December 31, 2022?

a. 315,000
b. 265,000
c. 190,000
d. 328,000

3. What amount should be recognized as gain on reversal of impairment loss on December 31, 2023?
a. 265,000
b. 300,000
c. 90,000
d. 75,000

4. What amount should be recognized as loss from default on December 31, 2024?
a. 1,100,000
b. 1,085,000
c. 485,000
d. 500,000

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22. On January 1, 2022, an investor acquired 40% interest in the ordinary shares of an associate for
P6,000,000. No goodwill nor excess fair value resulted in the purchase. During 2022, the investor sold
inventory costing P1,500,000 to the associate for P2,000,000 cash. The inventory remained unsold by the
associate on December 31, 2022 but the inventory was sold during 2023. The investor used the perpetual
inventory system. The associate reported net income of P3,500,000 for 2022 and P5,000,000 for 2023. No
dividends were paid by the associate during 2022 and 2023.
1. What amount should be reported as investment income for 2022?
a. 1,400,000
b. 1,200,000
c. 1,600,000
d. 3,500,000
2. What is the carrying amount of the investment in associate on December 31, 2022?
a. 7,400,000
b. 7,200,000
c. 7,600,000
d. 6,000,000
3. What amount should be reported as investment income for 2023?
a. 2,000,000
b. 2,200,000
c. 1,800,000
d. 5,000,000
4. What is the carrying amount of the investment in associate on December 31, 2023?
a. 9,000,000
b. 9,400,000
c. 9,000,000
d. 8,000,000
Computation
The unrealized profit from inventory is recorded as a deduction from investment in associate.
Investment in associate 6.000.000
Investment income for 2022 1,400,000
Unrealized profit from inventory in 2022 ( 200,000)
Carrying amount – December 31, 2022 7,200,000
The realized profit from inventory in 2023 is recorded as an addition to the investment in associate.
\

Investment in associate – December 31, 2022 7,200,000

Investment income for 2023 2,000,000
Realized profit from inventory for 2023 200,000
Carrying amount – December 31, 2023 9,400,000
Upstream Downstream
Investment in associate
December 31, 2022 7,200,000 7,200,000
December 31, 2023 9,400,000 9,400,000
Investment income
2022 1,200,000 1,400,000
2023 2,200,000 2,000,000
Quite obviously, the carrying amount of the investment in associate must be the same whether upstream or
downstream. However, there is a difference in the reported investment income between upstream and
downstream. Actually, the difference is the unrealized profit of P200,000 in 2022 which is realized in 2023.

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SOME COMPUTATIONS
PROBLEM 5

Bonds retired (2,000 / 5,000 x 5,426,000) 2,170,400

(11%) (10%)
Date Interest paid Interest expense Amortization Carrying amount
1/1/22 2,170,400
12/31/22 220,000 217,040 2,960 2,167,440
6/30/22 110,000 108,372 1,628 2,165,812

Remaining bonds (3,000 / 5,000 x 5,426,000)

(11%) (10%)
Date Interest paid Interest expense Amortization Carrying amount
1/1/22 3,255,600
12/31/22 330,000 325,560 4,440 3,251,160
12/31/23 330,000 325,116 4,884 3,246,276

Problem 10
Jan. 1 (200,000 x 1.10) 220,000
Mar. 1 (120,000 x 1.10 x 10/12) 110,000
May 1 (6,000 x 1.10 x 8/12) ( 4,400)
Average shares – basis EPS 325,600
Oct. 1 (300,000 x 1.10 x 3/12) 82,500
Average shares – diluted EPS 408,100

Problem 12 – Journal entries

1. Cash (5,000 x 140) 700,000
Preference shares 500,000
Share premium – preference 200,000
2. Cash (20,000 x 70) 1,400,000
Ordinary shares (20,000 x 10) 200,000
Share premium – ordinary 1,200,000
3. Preference shares (1,000 x 100) 100,000
Share premium – preference (1,000 x 40) 40,000
Retained earnings 10,000
Cash (1,000 x 150) 150,000
4. Treasury shares (5,000 x 80) 400,000
Cash 400,000
5. Issued (100,000 + 20,000 x 2) 240,000
Treasury shares (5,000 x 2) ( 10,000)
Outstanding ordinary shares 230,000
6. Cash (5,000 x 52) 260,000
Treasury shares (5,000 x 40) 200,000
Share premium – treasury 60,000
7. Income summary 750,000
Retained earnings 750,000
8. Retained earnings 1,750,000
Cash 1,750,000
Preference (3,400,000 x 10%) 340,000
Ordinary (235,000 outstanding shares x 6) 1,410,000
Total dividends paid 1,750,000

E n d
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