Problem Solving

Solve the following problems and show your solution. Encircle/ Highlight the letter of the correct answer. Each question is good for three points.

Government Grant

Paula company purchased a varnishing machine for P6,000,000 on January 1, 2015.

The entity received a government grant of P540,000 in respect of this asset. The

accounting policy is to depreciate the asset over 4 years on a straight-line basis and to

treat the grant as deferred income.

1. What is the carrying amount of the machine on December 31, 2016?

a. 3,000,000

b. 4,500,000

c. 3,270,000

d. 2,730,000

2. What amount should be reported as deferred grant income on December 31,2016?

a. 540,000

b. 270,000

c. 405,000

d. 135,000

Rafael Company purchased a jewel polishing machine for P3,600,000 on January 1,

2015 and received a government grant of P500,000 toward the capital cost. The

accounting policy is to treat the grant as a reduction in the cost of the asset. The

machine is to be depreciated on a straight-line basis over 8 years and estimated to have

a residual value of P100,000 at the end of this period.

3. What is the depreciation of the machine for 2015?

a. 387,500

b. 500,000

c. 437,500

d. 375,000

4. What is the carrying amount of the asset on December 31, 2016?

a. 2,725,000

b. 2,350,000

c. 3,000,000

d. 2,250,000

Borrowing Cost

CAB Company had the following general borrowing during 2015 which were used to

finance the construction of new building

Principal Borrowing Cost

10% bank loan 2,800,000 280,000

10% short-term note 1,600,000 160,000

12% long-term loan 2,000,000 240,000

6,400,000 680,000

The construction began o January 1, 2015 and the building was completed on

December 21, 2015

In the first phase of the construction, there were idle funds which the entity invested and

earned interest income of P100,000

Expenditure on the building were made as follows:

January 1 400,000

March 31 1,000,000

June 30 1,200,000

September 30 1,000,000

December 31 400,000

5. What interest rate should be used to calculate capitalizable borrowing cost?

a. 10.625%

b. 10%

c. 12%

d. 10.67%

6. What is the amount of capitalizable borrowing cost?

a. 212,500

b. 112,500

c. 425,000

d. 150,000

Investment in Associate

On January 1,2015 Melanie Company acquired 25% of the outstanding shares of an

investment at a total cost of P 7,000,000. At the time, the carrying amount of net assets

of the investee totaled P 24,000,000.

The investee owned equipment with 5-year remaining life and with a fair value of

P2,000,000 more than carrying amount. The investee owned land with a fair value of

P1,000,000 more than carrying amount

The investee earned net income of P5,000,000 evenly during the current year. The

investee declared and paid cash dividend of P 3,000,000 to shareholders at year-end.

The fair value of the investment at year-end is P7,500,000.

7. What is the goodwill arising from the investment in associate?

a. 750,000

b. 500,000

c. 250,000

d. 0

8. What is the investment income for 2015?

a. 1,250,000

b. 1,150,000

c. 900,000

d. 650,000

9. What s the carrying amount of the investment on December 31, 2015?

a. 7,400,000

b. 7,500,000

c. 7,000,000

d. 8,150,000

Impairment of assets

An entity determined that the electronic division is a cash generating unit. The entity

calculated the value in use of the division at P8,000,000. The carrying amount of the

assets are building P5,000,000, equipment P3,000,000 and inventory P2,000,000. The

entity also determined that the fair value less cost of disposal of the building is

P4,500,000

10. What is the impairment loss on building?

a. 1,000,000

b. 500,000

c. 750,000

d. 0

11. What is the impairment loss on equipment?

a. 600,000

b. 900,000

c. 450,000

d. 0

12. What is the impairment loss on inventory?

a. 400,000

b. 600,000

c. 300,000

d. 0

Intangible Assets

An entity reported the following assets at year-end:

Franchise 1,000,000

Computer software 1,500,000

Patent 2,500,000

Customer list 500,000

Copyright 700,000

Deposit with advertising agency to promote goodwill 400,000

Excess cost over fair value of identifiable net assets of acquired

associate 1,400,000

Excess of cost over fair value of identifiable net assets of

acquired subsidiary 4,000,000

Trademark 900,000

Research and development 2,000,000

13. What total amount should be reported as intangible assets?

a. 11,100,000

b. 11,500,000

c. 12,500,000

d. 13,100,000

An entity incurred the following research and development cost in the current year:

Materials used in research and development projects 400,000

Equipment acquired that will have alternate future use in

future research and development projects 2,000,000

Depreciation on above equipment 500,000

Personnel costs of persons involved in research and

development projects 1,000,000

Consulting fees paid to outsiders for research and development

projects 100,000

Indirect costs reasonably allocable to research and development

projects 200,000

14. What amount of research and development cost should be expense in the current year?

a. 1,500,000

b. 1,700,000

c. 2,200,000

d. 3,500,000

Investment property

A parent and its subsidiaries provided the following properties owned by the group:

Land held for undetermined future use 1,000,000

Vacant building to be leased out under an operating lease 2,000,000

Property held for use in production 4,000,000

Property held by a subsidiary, a real estate firm, in the ordinary

course of business 3,000,000

Building owned by subsidiary and the subsidiary provides

security and maintenance services to the leases 2,500,000

Land lease to a subsidiary under operating lease 1,500,000

Equipment leased to an unrelated party under an operating

lease 500,000

Building under construction for use as investment property 3,500,000

15. In the consolidated statement of financial position of the parent and its subsidiaries,

what total amount should be reported as investment property?

a. 6,500,000

b. 5,500,000

c. 8,000,000

d. 9,000,000

16. What total amount should be included in property plant and equipment in the

consolidated statement of financial position of parent and its subsidiaries?

a. 9,500,000

b. 4,000,000

c. 6,000,000

d. 4,500,000

17. An entity purchased an investment property on January 1, 2019 at a cost of P4,000,000. The property had a useful life of 20 years and on December 31, 2020 had a fair value of P4,800,000. On December 31, 2020 the property was sold for net proceeds of P4,500,000. The entity used the cost model to account for investment property. What is the gain to be recognized for 2020 regarding the disposal of the property?

a. 900,000

b. 500,000

c. 800,000

d. 700,000

Agriculture

An entity produces milk for local ice cream producers. The entity began operations at the beginning of current year by purchasing milking cows for P5,000,000. The entity

provided the following information at year-end relating to the milking cows:

Carrying amount- beginning of the year 5,000,000

Change in fair value due to growth and price change 2,000,000

Decrease in fair value due to harvest 250,000

Newborn calf at year-end at fair value 400,000

Milk harvested during the year but not yet sold 850,000

18. What amount of gain on biological asset should be reported in the current year?

a. 2,400,000

b. 2,150,000

c. 3,000,000

d. 3,250,000

19. What amount of gain on agricultural produce should be recognized in the current year?

a. 1,250,000

b. 1,000,000

c. 850,000

d. 0

20. What is the carrying amount of the biological asset at year-end?

a. 8,000,000

b. 8,250,000

c. 7,150,000

d. 7,600,000