Chapter 3

The Conceptual Framework for Financial

Reporting

PROBLEM 3-1: TRUE OR FALSE

1. TRUE 6. FALSE
2. TRUE 7. FALSE
3. FALSE 8. FALSE
4. TRUE 9. TRUE
5. TRUE 10. FALSE

PROBLEM 3-2: THEORY & COMPUTATIONAL

1
B B
. C 6. A 11. 16. 21. D*
2
D D
. D 7. A 12. 17. 22. D
3
C D*
. C 8. E 13. 18. 23. C
4
B D*
. A 9. A 14. 19. 24. D
5
C C
. B 10. C 15. 20. 25. C

26. & 27. (see solutions below)

*Explanations:
18. (a) and (b) An asset results from past transactions. In (a) and (b), the
purchase transaction has not yet transcribed; therefore, no asset shall be
recognized.
(c) The loss event may cause derecognition of the asset, not recognition.

19. (a) No liability is recognized because, although there is present obligation,

the expected outflow is not probable.
(b) No liability is recognized because, although there is present obligation that
is probable, the problem did not state a reliable measurement for the amount
of outflow.
(c) No liability is recognized because there is no present obligation as of Dec.
31, 20x1, i.e., the fire broke out on Jan. 2, 20x2.

21. (d) Depreciation is relevant information. However, it needs to be

estimated. Estimation reduces the reliability of information.

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26. Solution:
Net assets
1,848,880 Jan. 1, 20x1
Dividends Additional
357,720 615,120
declared investments
1,767,480 Profit (squeeze)
3,873,76
Dec. 31, 20x1 0

27. Solution:
The net effect of the increases and decreases in assets and liabilities
on net assets or equity is determined first.
Increase in cash 260,000
Decrease in accounts receivable (2,288,000)
Decrease in allowance for bad debts 312,000
Increase in inventory 2,080,000
Increase in investment in associate 1,820,000
Increase in property, plant and equipment 2,860,000
Increase in accumulated depreciation (1,040,000)
Increase in accounts payable (2,340,000)
Decrease in bonds payable 1,820,000
Decrease in discount on bonds payable (390,000)
Net increase in equity 3,094,000

Net assets
- Jan. 1, 20x1
Cash dividends 260,000 2,340,000 Share capital
Treasury shares 208,000 260,000 Share premium
Revaluation
2,340,000
surplus
Loss (squeeze) 1,378,000
Dec. 31, 20x1 3,094,000

PROBLEM 3-3: EXERCISES

1. Solution:
Net assets
600,000 Beg.
Additional
70,000 investments

2
 Dividends 200,000 30,000 Profit (squeeze)
End. 500,000

2. Solution:
Increase/
(Decrease)
Increase in assets 89,000
Increase in liabilities (27,000)
Net increase in net assets 62,000

Net assets
- Beg.
Additional investments (60K +
66,000 6K)
Dividends 13,000 9,000 Profit (squeeze)
End. 62,000

3. Solution:
Increase/(Decrease)
Increase in cash 948,000
Increase in accounts receivable, net 540,000
Increase in inventory 1,524,000
Decrease in investments (564,000)
Decrease in accounts payable 612,000
Increase in bonds payable (980,000)
Net increase in net assets 2,080,000

Net assets
- Beg.
1,660,000 Additional investments (1.5M + 160K)
Dividend
s 230,000 650,000 Profit (squeeze)
End. 2,080,000

PROBLEM 3-4: CLASSROOM ACTIVITY

1. D 6. D 11. D 16. D
2. C 7. D 12. A 17. C
3. C 8. D 13. B 18. C
4. D 9. D 14. D 19. C
5. C 10. D 15. D 20. B

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PROBLEM 3-5: TRUE OR FALSE
1. TRUE
2. FALSE
3. FALSE
4. TRUE
5. FALSE
6. TRUE
7. FALSE
8. TRUE
9. FALSE
10. TRUE

PROBLEM 3-6: MULTIPLE CHOICE - THEORY

1. D 6. B 11. D 16. B
2. D 7. B 12. C 17. B
3. C 8. D 13. C 18. D
4. A 9. D 14. D 19. D
5. D 10. B 15. D 20. C

PROBLEM 3-7: MULTIPLE CHOICE - THEORY

1
. C 6. D 11. B 16. C 21. A
2
. B 7. D 12. B 17. D 22. C
3
. D 8. A 13. B 18. A 23. A
4
. B 9. D 14. B 19. A 24. B
5
. A 10. C 15. C 20. B 25. B

PROBLEM 3-8: MULTIPLE CHOICE - THEORY

1. A 6. D 11. D 16. B 21. C
2. D 7. A 12. D 17. D 22. B
3. D 8. B 13. A 18. D 23. C
4. D 9. B 14. D 19. B 24. C
5. A 10. D 15. A 20. B 25. D*

* Explanation:

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25. D
Assumption #1: Beg. and end. equity = 50,000 and 100,000, respectively.
Share issuance and dividends = 80,000 and 10,000, respectively. Result is
loss of 10,000.

Net assets
50,00
Beg.
0
80,00 Share
Loss 20,000 0 issuance
Dividends 10,000
100,00
End.
0
Assumption #2: Beg. and end. equity = 50,000 and 100,000, respectively.
Share issuance and dividends = 40,000 and 20,000, respectively. Result is
profit of 30,000.

Net assets
50,00
Beg.
0
40,00 Increase in share
0 capital
30,00
Dividends 20,000 Profit
0
100,00
End.
0

PROBLEM 3-9: COMPUTATIONAL: MULTIPLE CHOICE

1. D
Solution:
Net assets
500,50
Beg.
0
80,00 Additional
0 investments
160,00 60,10
Dividends Profit (squeeze)
0 0
480,60
End.
0

2. B
Solution:

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 Net assets
503,500 Beg.
Additional
Loss (squeeze) 2,850 69,300 investments
Dividends 61,350
End. 508,600

3. C
Solution:
Net assets
780,20
Beg.
0
139,80 Additional
Loss (squeeze)
258,300 0 investments
Dividends 81,300
580,40
End.
0

4. D
Solution:
Assets 560,000
Liabilities (390,000)
Net increase in net assets 170,000

Net assets
- Beg.
168,00 Additional investments (160K +
0 8K)
Dividends 34,000 36,000 Profit (squeeze)
170,00
End.
0

5. A
Solution:
Cash 1,200,000
Accounts receivable (640,000)
Allowance for bad debts 100,000
Inventory 600,000
Investment in XYZ, Inc. (equity method) 900,000
Buildings and equipment 1,200,000
Accumulated depreciation (300,000)
Accounts payable (800,000)
Bonds payable 520,000
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 Discount on bonds payable (120,000)
Net increase in net assets 2,660,000

Net assets
- Beg.
Additional investments (600K +
700,000 100K)
300,000 Revaluation surplus
Dividend 2,460,00
800,000 Profit (squeeze)
s 0
2,660,00
End.
0

6. C
Solution:
A = L + C
34,000 25,600
(3)
beg. = 8,400 (1) + (4)

10,000 26,000
end. 36,000( 2) = (1)
+ (1)

(1)
First step: Place the given amounts in the equations.
(2)
Second step: Squeeze for the ending balance of total assets
(10,000 + 26,000 = 36,000).
(3)
Third step: Compute for the beginning balance of total assets
(36,000 2,000 = 34,000).
(4)
Fourth step: Compute for the beginning balance of equity (34,000
8,400 = 25,600)
(5)
Fifth step: Prepare the T-account for net assets and squeeze for the
profit (loss) for the period. See T-account below.

Net assets
25,600 Beg.
Additional
Loss (squeeze) 2,000 2,400 investments
Dividends -
End. 26,000

7. D

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Solution:
Cash 270,000
Accounts receivable, net 760,000
Financial assets at FVPL 65,000
Inventory 1,780,000
Investment in associate (50,000)
Accounts payable 360,000
Bonds payable (1,200,000)
Premium on bonds payable 25,000
Net increase in equity 2,010,000

Net assets
- Beg.
1,000,00 Increase in share capital
0 (10,000 x 100)
Net increase in share premium
585,000
[(10,000 x 60) - 15,000]
Dividen
230,000 655,000 Profit (squeeze)
ds
2,010,00
End. 0

The unrealized gain is ignored because it is properly recognized in profit or

loss.

8. B
Solution:
Cash 100,000
Accounts receivable (880,000)
Allowance for bad debts 120,000
Inventory 800,000
Investment in associate 700,000
Buildings and equipment 1,100,000
Accumulated depreciation (400,000)
Accounts payable 900,000
Bonds payable (700,000)
Discount on bonds payable 150,000
Net increase in equity 1,890,000

Net assets
- Beg.

8
 900,00
Increase in share capital
0
100,00
0 Increase in share premium
900,00
0 Revaluation surplus
100,00
Dividends 90,000 Profit (squeeze)
0
1,890,00
End.
0

The appropriation of retained earnings is ignored in the computation because

the appropriation does not have an effect on the total stockholders equity. It
has a zero effect on the net increase in equity.

9. D
Solution:
Assets 1,870,000
Liabilities (370,000)
Net increase in equity 1,500,000

Net assets
- Beg.
Decrease in Increase in share
60,000
share capital 470,000 premium
40,000 Revaluation surplus
Decrease in treasury
30,000
stock
Dividends 60,000 1,900,000 Profit (squeeze)
End. 1,500,000

10. D
Solution:
Net assets
- Beg.
Increase in share
80,000
capital
Dividends (squeeze) 35,000 75,000 Profit
End. 120,000