FINANCIAL ACCOUNTING AND REPORTING TESTBANK

FINANCIAL ACCOUNTING AND REPORTING TEST BANK PROBLEM 1 – INVESTMENT IN ASSOCIATE On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2016, the investee reported net income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2017, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000. The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years. The investee reported net income of P8,000,000 for 2017 and paid dividend of P5,000,000 on December 31, 2017. 1. What amount of investment income should be recognized in 2016? a. 400,000 b. 100,000 c. 500,000 d. 300,000 2. What is the implied goodwill arising from the acquisition on January 1, 2017? a. 3,000,000 b. 2,000,000 c. 2,500,000 d. 0 3. What total amount of income should be recognized by the investor in 2017? a. 2,000,000 b. 2,500,000 c. 2,300,000 d. 1,800,000 4. What is the carrying amount of the investment in associate on December 31, 2017? a. 12,550,000 b. 12,350,000 c. 11,950,000 d. 12,750,000 SOLUTION - PROBLEM 1 Question 1 Answer B Dividend income (10% x 1,000,000) 100,000 Under cost method, the investment income is based on dividend declared or paid. Question 2 Answer B Existing 10% interest remeasured at fair value 3,500,000 New 15% interest 8,500,000 Total cost – January 1, 2017 12,000,000 Net assets acquired (25% x 36,000,000) ( 9,000,000) Excess of cost over carrying amount 3,000,000 Excess attributable to equipment whose fair value is greater than carrying amount (25% x 4,000,000) ( 1,000,000) Goodwill 2,000,000 Question 3 Answer C Share in net income (25% x 8,000,000) 2,000,000 Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000) Net investment income 1,800,000 Fair value of 10% interest 3,500,000 Historical cost 3,000,000 Remeasurement gain 500,000 Net investment income 1,800,000 Total income in 2017 2,300,000 If the investment in associate is achieved in stages the old interest is remeasured at fair value through profit or loss. Question 4 Answer A Total cost 1/1/2017 12,000,000 Net investment income 1,800,000 Share in cash dividend (25% x 5,000,000) ( 1,250,000) Carrying amount – 12/31/2017 12,550,000 PROBLEM 2 – PROPERTY, PLANT AND EQUIPMENT January 1, 2016, an entity disclosed the following balances: Land 4,000,000 Land improvements 1,300,000 Buildings 20,000,000 Machinery and equipment 8,000,000 During the current year, the following transactions occurred: * A tract of land was acquired for P2,000,000 cash as a building site. * A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange. The plant facility was carried on the seller’s books at P1,600,000 for land and P5,400,000 for the building at the exchange date. Current appraised values for the land and the building, respectively, are P2,000,000 and P8,000,000. The building has an expected life of forty years with a P200,000 residual value. * Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred were freight and unloading P100,000 and installation P300,000. The equipment has a useful life of ten years with no residual value. * Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the entity’s various plant locations. These expenditures had an estimated useful life of fifteen years. * Research and development costs were P1,100,000 for the year. * A machine costing P200,000 on January 1, 2009 was scrapped on June 30, 2016. Straight line depreciation had been recorded on the basis of a 10-year life with no residual value. * A machine was sold for P500,000 on July 1, 2016. Original cost of the machine sold was P700,000 on January 1, 2013, and it was depreciated on the straight line basis over an estimated useful life of eight years and a residual value of P50,000. 1. What is the total cost of land on December 31, 2016? a. 7,800,000 b. 7,600,000 c. 8,000,000 d. 6,800,000 2. What is the total cost of land improvements on December 31, 2016? a. 1,200,000 b. 3,600,000 c. 1,300,000 d. 2,500,000 3. What is the total cost of buildings on December 31, 2016? a. 28,000,000 b. 25,400,000 c. 27,200,000 d. 27,000,000 4. What is total cost of machinery and equipment on December 31, 2016? a. 12,400,000 b. 11,500,000 c. 11,000,000 d. 11,700,000 SOLUTION – PROBLEM 5 Question 1 Answer A Land – January 1 4,000,000 Land acquired for cash 2,000,000 Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000 Land – December 31 7,800,000 Quoted price of shares issued for land and building (200,000 x P45) 9,000,000 Current appraized value : Land 2,000,000 Building 8,000,000 Total 10,000,000 The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to the land and building based on the current appraised value. Question 2 Answer D Land improvements – January 1 1,300,000 Expenditures for parking lot, street and sidewalks 1,200,000 Balance – December 31 2,500,000 Question 3 Answer C Buildings – January 1 20,000,000 Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000 Balance – December 31 27,200,000 Question 4 Answer B Machinery and equipment - January 1 8,000,000 Machinery and equipment purchased 4,000,000 Freight and unloading 100,000 Installation 300,000 Machinery scrapped ( 200,000) Machinery sold ( 700,000) Machinery equipment – December 31 11,500,000