REVIEW- ASSET TO LIAB

Problem

1. On January 2, year 1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a
$600,000 noninterest-bearing note due January 2, year 4. There was no established exchange price for
the equipment. The prevailing rate of interest for a note of this type at January 2, year 1, was 10%. The
present value of $1 at 10% for three periods is 0.75.

In Emme’s year 1 income statement, what amount should be reported as gain (loss) on sale of
machinery?
a. $(30,000) loss.
b. $ 30,000 gain.
c. $120,000 gain.
d. $270,000 gain.

2. On January 1, 2019, Karla Company Issued its 10%, 6-yr convertible debt instrument with a face
amount of P3,000,000 for P3,500,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt instrument is
convertible into equity from the time of issue until maturity. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 8%.
On December 31, 2020, Karla company converted all the debt instruments by issuing 30,000 ordinary
shares.
What amount should be credited to the share premium account as a result of the conversion?
a. None
b. 198,176
c. 239,052
d. 421,276

3. On January 2, year 4, Lem Corp. bought machinery under a contract that required a down payment of
$10,000, plus twenty-four monthly payments of $5,000 each,
for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The
machinery has an estimated useful life of ten years and estimated salvage value of $5,000. Lem uses
straight-line depreciation. In its year 4 income statement, what amount should Lem report as
depreciation for this machinery?
a. $10,500
b. $11,000
c. $12,500
d. $13,000

4. Due to extreme financial difficulties, Kaila Company has negotiated a restructuring of its 10%
P5,000,000 note payable due on December 31, 2014. the unpaid interest on the note on such date is
P500,000. the creditor has agreed to reduce the face value to P4,000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31, 2014. the
present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at
10% for three periods is 2.49.
Kaila Company should report gain on extinguishment of debt in its 2014 income statement at
a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000
5. On July 2, year 1, Wynn, Inc., purchased as a short-term investment a $1,000,000 face value Kean Co.
8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, year 8, pay
interest annually on January 1, and are classified as trading securities. On December 31, year 1, the
bonds had a market value of $945,000. On February 13, year 2, Wynn sold the bonds for $920,000. In
its December 31, year 1 balance sheet, what amount should Wynn report for short-term investments in
trading debt securities?
a. $910,000
b. $920,000
c. $945,000
d. $950,000

6. In January, 2015, Findley Corporation purchased a patent for a new consumer product for 720,000. At
the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product,
however, the patent was estimated to have a useful life of only ten years. During 2020 the product was
permanently removed from the market under governmental order because of a potential health hazard
present in the product. What amount should Findley charge to expense during 2020, assuming
amortization is recorded at the end of each year?
a. 480,000.
b. 360,000.
c. 72,000.
d. 48,000.

7. Brady Corporation values its inventory at the lower of cost or net realizable
value as required by IFRS. Brady has the following information regarding its inventory:
Historical cost $1,000 Estimated selling price 900 Estimated costs to complete and sell 50 Replacement
cost 800 What is the amount for inventory that Brady should report on the balance sheet under the lower
of cost or net realizable value method?
a. $1,000
b. $ 900
c. $ 850
d. $ 750

8. A company issued 500,000 convertible bonds. Interest is paid annually at a rate of 6% throughout the
10 terms of the bonds. The market rate is 5%. If the bonds were issued without the conversion feature
they would have been sold for 450,000. What value should the conversion feature be valued at on the
balance sheet?
a) 27,217
b) 38,609
c) 50,000
d) 88,609
 9. Ana Company started a new promotional program. For every 10 boxes tops returned to Ana, customers
receive a basketball. Ana estimates that only 60% of the box tops reaching the market will be
redeemed. Additional information is as follows:
Units Amount
Sales of product 100,000 30,000,000
Basketballs purchased 5,500 4,125,000
Basketballs distributed 4,000
What is the amount of year-end estimated liability associated with this promotion?
a. 4,125,000
b. 1,500,000
c. 3,000,000
d. 4,500,000

10. On January 2, year 1, Union Co. purchased a machine for $264,000 and depreciated it by the straight-
line method using an estimated useful life of eight years with no salvage value. On January 2, year 4,
Union determined that the machine had a useful life of six years from the date of acquisition and will
have a salvage value of $24,000. An accounting change was made in year 4 to reflect the additional
data. The accumulated depreciation for this machine should have a balance at December 31, year 4, of
a. $176,000
b. $160,000
c. $154,000
d. $146,000

11. On March 31, year 4, Winn Company traded in an old machine having a carrying amount of $16,800,
and paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The cash
flows from the new machine are expected to be significantly different than the cash flows from the old
machine. On March 31, year 4, what amount of loss should Winn recognize on this exchange?
a. $0
b. $2,300
c. $3,700
d. $6,000

12. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of Delta’s
customers take advantage of the discount. Delta uses the gross method of recording sales and trade
receivables. An analysis of Delta’s trade receivables balances at December 31, year 2, revealed the
following:
Age Amount Collectible 0 - 15 days $100,000 100% 16 - 30 days 60,000 95% 31 - 60 days 5,000 90%
Over 60 days 2,500 $500 $167,500 In its December 31, year 2 balance sheet, what amount should
Delta report for allowance for discounts?
a. $1,000
b. $1,620
c. $1,675
d. $2,000
13. On the December 31, year 2 balance sheet of Mann Co., the current receivables consisted of the
following:
Trade accounts receivable $ 93,000 Allowance for uncollectible accounts (2,000) Claim against shipper
for goods lost in transit (November year 2) 3,000 Selling price of unsold goods sent by Mann on
consignment at 130% of cost (not included in Mann’s ending inventory) 26,000 Security deposit on lease
of warehouse used for storing some inventories 30,000 Total $150,000 At December 31, year 2, the
correct total of Mann’s current net receivables was
a. $ 94,000
b. $120,000
c. $124,000
d. $150,000

14. Vasguez Corporation had a 1/1/2020 balance in the Allowance for Doubtful Accounts of 20,000. During
2020, it wrote off 14,400 of accounts and collected 4,200 on accounts previously written off. The
balance in Accounts Receivable was 400,000 at 1/1 and 480,000 at 12/31. At 12/31/2020, Vasguez
estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for
2020?
a. 4,000.
b. 14,200.
c. 18,400.
d. 24,000.

15. The ff. audited balances pertain to Wen Company

Accts. Payable:
Jan.1, 2020 286, 924
Dec.31, 2020 737, 824
Inventory balance:
Jan. 1, 2020 815, 386
Dec.31, 2020 488, 874
Cost of goods sold-2020 1, 859, 082

How much was paid by Wen Company to its supplier in 2020?

a.P1, 081, 670
b.P1, 065, 900
c.P1, 071, 678
d.P1, 097, 000

16. Sun Inc assigns 2,000,000 of its accounts receivables as collateral for a 1 million 8% loan with a bank.
Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be recorded as a gain
(loss) on the transfer of receivables?
a. Loss of 20,000.
b. Loss of 160,000.
c. Loss of 180,000.
d. 0.
17. Hoyle Company traded machinery with a book value of 285,000 and a fair value of 270,000. It received
in exchange from Durler Company a machine with a fair value of 300,000. Hoyle also paid cash of
30,000 in the exchange. Durler’s machine has a book value of 285,000. What amount of gain or loss
should Hoyle recognize on the exchange?
a. 30,000 gain
b. -0-
c. 1,500 loss
d. 15,000 loss

18. Shawn Company sells office equipment service contract agreeing to service contracts agreeing to
service equipment for a two-year period. Cash receipts from contracts are credited to unearned service
contract revenue and service contract costs are charged to service contract expense as incurred.
Revenue from service contracts is recognized as earned over the lives of the contracts. Additional
information for the year ended December 31, 2020 is as follows:
Unearned service contract revenue at January 1 600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000
What amount should Shawn report as unearned service contract revenue at December 31, 2020?
a. 460,000
b. 480,000
c. 490,000
d. 720,000

19. Lyle, Inc. is preparing its financial statements for the year ended December 31, year 2. Accounts
payable amounted to $360,000 before any necessary year-end
adjustment related to the following:
At December 31, year 2, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier,
resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.
Checks in the amount of $100,000 were written to vendors and recorded on December 29, year 2. The
checks were mailed on January 5, year 3.
What amount should Lyle report as accounts payable in its December 31, year 2 balance sheet?
a. $510,000
b. $410,000
c. $310,000
d. $210,000

20. On December 30, year 1, Fort, Inc. issued 1,000 of its 8%, ten-year, $1,000 face value bonds with
detachable stock warrants at 120. Each bond carried a detachable warrant for one share of Fort’s
common stock at a specified option price of $25 per share. Immediately after issuance, the market value
of the bonds without the warrants was $1,080,000 and the market value of the warrants was $120,000.
In its December 31, year 1 balance sheet, what amount should Fort report as bonds payable?
a. $1,000,000
b. $ 975,000
c. $ 900,000
d. $ 1,080,000
21. Duff, Inc. borrowed from Martin Bank under a ten-year loan in the amount of $150,000 with a stated
interest rate of 6%. Payments are due monthly, and are computed to be $1,665. Martin Bank incurs
$4,000 of direct loan origination costs and $2,000 of indirect loan origination costs. In addition, Martin
Bank charges Duff, Inc. a four-point nonrefundable loan origination fee.
Martin Bank, the lender, has a carrying amount of
a. $144,000
b. $148,000
c. $150,000
d. $152,000

22. West, Inc. made the following expenditures relating to Product Y:

Legal costs to file a patent on Product Y—$10,000. Production of the finished product would not have
been undertaken without the patent.
Special equipment to be used solely for development of Product Y—$60,000. The equipment has no
other use and has an estimated useful life of four years.
Labor and material costs incurred in producing a prototype model—$200,000.
Cost of testing the prototype—$80,000.
What is the total amount of costs that will be expensed when incurred?
a. $280,000
b. $295,000
c. $340,000
d. $350,000

23. During year 2, Smith Co. filed suit against West, Inc. seeking damages for patent infringement. At
December 31, year 2, Smith’s legal counsel believed that it was probable that Smith would be
successful against West for an estimated amount in the range of $75,000 to $150,000, with all amounts
in the range considered equally likely. In March year 3, Smith was awarded $100,000 and received full
payment thereof. In its year 2 financial statements, issued in February year 3, how should this award be
reported?
a. As a receivable and revenue of $100,000.
b. As a receivable and deferred revenue of $100,000.
c. As a disclosure of a contingent gain of $100,000.
d. As a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000.

24. Valencia Corporation has the following liabilities at December 31, 2019:
8.9% note payable issued November 1, 2019, maturing
October 31, 2020 €1,150,000
7.25% note payable issued August 1, 2019, payable in twelve equal
annual installments of $90,000 beginning August 1, 2020 1,080,000
Valencia’s December 31, 2019 financial statements were issued on March 19, 2020. On January
23, 2020, the entire €1,150,000 balance of the 8.9% note was refinanced by issuance of a long-
term obligation payable in a lump sum. In addition, on December 29, 2019, Valencia
consummated a non-cancelable agreement with the lender to refinance the 7.25%, €1,080,000
note on a long-term basis. On the December 31, 2019 statement of financial position, the amount
of these notes payable that Valencia should classify as short-term obligations is
a. $0.
b. $1,080,000.
c. $1,150,000.
d. $2,230,000.
25. Black Co. requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. Information for year 2 is as follows:
Customer advances—balance 12/31/Y1 $118,000 Advances received with orders in year 2 184,000
Advances applied to orders shipped in year 2 164,000 Advances applicable to orders cancelled in year 2
50,000 In Black’s December 31, year 2 balance sheet, what amount should be reported as a current
liability for advances from customer?
a. $0
b. $ 88,000
c. $138,000
d. $148,000

26. Hatcher Corporation sold 10,500 dishwashers for £1,100 each during 2020. The dishwashers are under
warranty for one year following the sale. Maintenance on the dishwashers during the warranty period
averages £90 each. Actual warranty costs incurred during 2020 for units sold that year were £296,000.
The statement of financial position at year end will report a related liability of:
a. $296,000.
b. $649,000.
c. $945,000.
d. $1,030,900.

27. During 2013, Kristin Company filed suit against Cleo Company seeking damages for patent
infringement. At December 31, 2013, Kristin’s legal counsel believed that it was probable that Kristin
would be successful against Cleo for an estimated amount of P1,500,000. In March 2014, Kristin was
awarded P1,000,000 and received full payment thereof.

In Kristin’s 2013 financial statements issued February 2014, how should this award be reported?
a. As a receivable and revenue of P 1,000,000.
b. As a receivable and deferred revenue of P1,000,000.
c. As a disclosure of a contingent asset of P1,000,000
d. As a disclosure of a contingent asset of P1,500,000.

28. On December 31, year 3, Bit Co. had capitalized costs for a new computer software product with an
economic life of five years. Sales for year 4 were 30% of expected total sales of the software. At
December 31, year 4, the software had a net realizable value equal to 90% of the capitalized cost. What
percentage of the original
capitalized cost should be reported as the net amount on Bit’s December 31, year 4 balance sheet?
a. 70%
b. 72%
c. 80%
d. 90%

29. On January 1, year 2, London Corporation borrowed $500,000 on a 8%,

noninterest-bearing note due in four years. The present value of the note on January 1, year 2, was
$367,500. London Corporation elects the fair value method for reporting its financial liabilities. On
December 31, year 2, it is determined the fair value of the note is $408,150. At what amount should the
discount on notes payable be presented on the balance sheet on December 31, year 2?
a. $132,500
b. $103,100
c. $ 91,850
d. $0
30. On January 1, year 1, Glen Co. leased a building to Dix Corp. under an operating lease for a ten-year
term at an annual rental of $50,000. At inception of the lease, Glen received $200,000 covering the first
two years’ rent of $100,000 and a security deposit of $100,000. This deposit will not be returned to Dix
upon expiration of the lease but will be applied to payment of rent for the last two years of the lease.
What portion of the $200,000 should be shown as a current and long-term liability, respectively, in Glen’s
December 31, year 1 balance sheet?
Current liability Long-term liability
a. $0 $200,000
b. $ 50,000 $100,000
c. $100,000 $100,000
d. $100,000 $ 50,000

31. In January year 4, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore estimated at
1,200,000 tons. After it has extracted all the ore, Vorst will be required by law to restore the land to its
original condition at an estimated cost of $220,000. The present value of the estimated restoration costs
is $180,000. Vorst believes it will be able to sell the property afterwards for $300,000. During year 4,
Vorst incurred $360,000 of development costs preparing the mine for production and removed and sold
60,000 tons of ore. In its year 4 income statement, what amount should Vorst report as depletion?
a. $135,000
b. $144,000
c. $150,000
d. $159,000

32. Dart Company’s accounting records indicated the following information:

Inventory, 1/1/Y2 $ 500,000 Purchases during year 2 2,500,000 Sales during year 2 3,200,000 A
physical inventory taken on December 31, year 2, resulted in an ending inventory of $575,000. Dart’s
gross profit on sales has remained constant at 25% in recent years. Dart suspects some inventory may
have been taken by a new employee. At December 31, year 2, what is the estimated cost of missing
inventory?
a. $ 25,000
b. $100,000
c. $175,000
d. $225,000

33. Sutherland Company purchased machinery for 320,000 on January 1, 2016. Straight-line depreciation
has been recorded based on a 20,000 salvage value and a 5-year useful life. The machinery was sold
on May 1, 2020 at a gain of 6,000. How much cash did Sutherland receive from the sale of the
machinery?
a. 46,000.
b. 54,000.
c. 66,000.
d. 86,000.
34. Emerson Co., a lessee, records a finance lease of machinery on January 1, 2019. The seven annual
lease payment of 200,000 are made at the end of each year. The present value of the lease payments at
10% is 973,700. Emerson uses the interest method of amortization and sum of the year’s digit
depreciation (no residual value).

What is the carrying value of the liability and the amount of depreciation, respectively, on December 31,
2020?

a. 0 and 0
b. 758,177 and 208,650
c. 758,177 and 243,425
d. 871,070 and 278,200

35. On January 2, year 4, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of
$200,000. During the first quarter of year 4, Paye spent an additional $80,000 on expenditures designed
to maintain goodwill. In its December 31, year 4 balance sheet, what amount should Paye report as
goodwill?
a. $180,000
b. $200,000
c. $252,000
d. $280,000

36. On January 1 2020, Cypress Industries purchased 25% of the ordinary shares of Shane, Inc. The
investment enables Cypress to exert significant influence over Shane, Inc. During the year, Shane
earned net income of £160,000 and paid dividends of £40,000 and Cypress Industries earned net
income of £280,000. At December 31, 2020, shares of Shane, Inc. were trading for £40 per share, and
the value in the investment account on the books of Cypress was £395,000. What amount did Cypress
Industries pay for its investment in Shane on January 1, 2020?
a. £365,000
b. £425,000
c. £325,000
d. £335,000

37. Nance Company estimates its annual warranty expense as 4% of annual net sales. The following data
relate to the calendar year 2020:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2020 $10,000 debit before adjustment
Balance, Dec. 31, 2020 50,000 credit after adjustment

Which one of the following entries was made to record the 2020 estimated warranty expense?
a. Warranty Expense .............................................................. 60,000
Retained Earnings (prior-period adjustment) ............ 10,000
Warranty Liability ...................................................... 50,000
b. Warranty Expense .............................................................. 50,000
Retained Earnings (prior-period adjustment) ...................... 10,000
Warranty Liability ...................................................... 60,000
c. Warranty Expense .............................................................. 40,000
Warranty Liability ...................................................... 40,000
 d. Warranty Expense .............................................................. 60,000
Warranty Liability ...................................................... 60,000

38. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops
from Palmer Frosted Flakes boxes and $1.00. The company estimates that 60% of the boxtops will be
redeemed. In 2020, the company sold 675,000 boxes of Frosted Flakes and customers redeemed
330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $2.50 each, how much
liability for outstanding premiums should be recorded at the end of 2020?
a. $25,000
b. $37,500
c. $62,500
d. $87,500

39. Brill Co. made the following expenditures during year 4:

Costs to develop computer software for internal use in Brill’s general management information system
$100,000 Costs of market research activities 75,000 What amount of these expenditures should Brill
report in its year 4 income statement as research and development expenses?
a. $175,000
b. $100,000
c. $ 75,000
d. $0

40. In year 2, a contract dispute between Dollis Co. and Brooks Co. was submitted to binding arbitration. In
year 2, each party’s attorney indicated privately that the probable award in Dollis’ favor could be
reasonably estimated. In year 3, the arbitrator decided in favor of Dollis. When should Dollis and Brooks
recognize their respective gain and loss?
Dollis’ gain Brooks’ loss
a. Year 2 Year 2
b. Year 2 Year 3
c. Year 3 Year 2
d. Year 3 Year 3

41. Rivera Company purchased a tooling machine on January 3, 2013 for $500,000. The machine was
being depreciated on the straight-line method over an estimated useful life of 10 years, with no residual
value. At the beginning of 2020, the company paid $125,000 to overhaul the machine. As a result of this
improvement, the company estimated that the useful life of the machine would be extended an
additional 5 years (15 years total). What should be the depreciation expense recorded for the machine in
2020?
a. $34,375
b. $41,667
c. $50,000
d. $55,000

42. Cole Co. began constructing a building for its own use in January year 4. During year 4, Cole incurred
interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed
on the weighted-average amount of accumulated expenditures for the building during year 4 was
$40,000. What amount of interest cost should Cole capitalize?
a. $20,000
b. $40,000
c. $50,000
d. $70,000
43. On January 1, 2020, W. Poon Inc. purchased equipment with a cost of HK$4,668,000 a useful life of 12
years and no salvage value. The company uses straight-line depreciation. At December 31, 2020, the
company determines that impairment indicators are present. The fair value less cost to sell the asset is
estimated to be Hk$4,620,000. The asset’s value-in-use is estimated to be HK$4,305,000. There is no
change in the asset’s useful life or salvage value. The 2020 income statement will report Loss on
Impairment of
a. HK$0.
b. HK$26,000.
c. HK$48,000.
d. HK$341,000.

44. Louie Company, a real estate entity, has a building with a carrying amount of P20,000,000 on
December 31, 2020. The building is used as offices of the entity’s administrative staff. On December 31,
2020, the entity intended to rent out the building to independent third parties. The staff will be moved to a
new building purchased early in 2020. On December 31, 2020, the original building had a fair value of
P35,000,000. On December 31, 2020, the entity also had land that was held in the ordinary course of
business. The land had a carrying amount of P10,000,000 and fair value of P15,000,000 on December
31, 2020. On such date, the entity decided to hold the land for capital appreciation. The accounting
policy is to carry all investment property at fair value. On December 31, 2020, what amount should be
recognized in revaluation surplus and profit or loss, respectively?

a. 5,000,000 and 15,000,000

b. 15,000,000 and 0
c. 15,000,000 and 5,000,000
d. 5,000,000 and 0

45. Tokyo Enterprises has four divisions. It acquired on of them, Green Products, on January 1, 2020 for
¥480,000,000, and recorded goodwill of ¥60,900 as a result of that purchase. At December 31, 2020,
Green Products had a recoverable amount of ¥444,000,000. The carrying value of the Company’s net
assets at December 31, 2020 was ¥426,000,000(including goodwill). What amount of loss on
impairment of goodwill should Tokyo record in 2020?
a. ¥ -0-
b. ¥18,000,000
c. ¥36,000,000
d. ¥54,000,000

46. Blitz Corporation, a manufacturer of cleaning products, is preparing annual financial statements at
December 31, 2020. Because of a recently proven health hazard in one of its cleaning products, the
U.K. government has clearly indicated its intentional of having Blitz recall all cans of this paint sold in the
last three months. The management of Ortiz estimates that this recall would cost £5,800,000. What
accounting recognition, if any, should be accorded this situation?
a. No recognition.
b. Note disclosure only.
c. Expense of £5,800,000 and liability of £5,800,000.
d. Expense of £5,800,000, and retained earnings restriction of £5,800,000.
47. Case Cereal Co. frequently distributes coupons to promote new products. On October 1, year 2, Case
mailed 1,000,000 coupons for $.45 off each box of cereal purchased. Case expects 120,000 of these
coupons to be redeemed before the December 31, year 2, expiration date. It takes thirty days from the
redemption date for Case to receive the coupons from the retailers. Case reimburses the retailers an
additional $.05 for each coupon redeemed. As of December 31, year 2, Case had paid retailers $25,000
related to these coupons and had 50,000 coupons on hand that had not been processed for payment.
What amount should Case report as a liability for coupons in its December 31, year 2 balance sheet?
a. $35,000
b. $29,000
c. $25,000
d. $22,500

48. The following items were included in Opal Co.’s inventory account at December 31, year 2:
Merchandise out on consignment, at sales price, including 40% markup on selling price $40,000 Goods
purchased, in transit, shipped FOB shipping point 36,000 Goods held on consignment by Opal 27,000
By what amount should Opal’s inventory account at December 31, year 2, be reduced?
a. $103,000
b. $ 67,000
c. $ 51,000
d. $ 43,000

49. Omar Company is a dealer in machinery. On January 1, 2020 machinery was leased to another
enterprise with the following provisions:

Annual rental payable at the end of each year 3,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value-unguaranteed 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

At the end of the lease term on December 31, 2020, the machinery will revert to Omar. The perpetual
inventory system is used. Omar incurred initial direct cost of P300,000 in finalizing the lease agreement.
What is the total financial revenue from the lease?
a. 4,630,000
b. 4,200,000
c. 5,200,000
d. 3,630,000

50. On January 1, 2015, Valla Company acquired a building at a cost of P5,000,000. The building has been
depreciated on the basis of a 20-year life. On January 1, 2020, an appraisal of the building showed its
replacement cost at P8,000,000 with no change in useful life.

1. Ignoring income tax, what amount should be credited to revaluation surplus on January 1, 2020?
a. 3,000,000
b. 2,250,000
c. 4,250,000
d. 6,000,000
 2. What us the depreciation for 2020?
a. 250,000
b. 150,000
c. 400,000
d. 300,000

3. What is the revaluation surplus that should be reported in the December 31, 2020 statement of
financial position?
a. 2,100,000
b. 2,250,000
c. 1,850,000
d. 2,800,000

51. An entity purchases a trademark and incurs the following costs in connection with the trademark:
One-time trademark purchase price $100,000 Nonrefundable VAT taxes 5,000 Training sales personnel
on the use of the new trademark 7,000 Research expenditures associated with the purchase of the new
trademark 24,000 Legal costs incurred to register the trademark 10,500 Salaries of the administrative
personnel 12,000 Applying IFRS and assuming that the trademark meets all of the applicable initial
asset recognition criteria, the entity should recognize an asset in the amount of
a. $100,000
b. $115,500
c. $146,500
d. $158,500

52. The following information pertains to Deal Corp.’s year 2 cost of goods sold:
Inventory, 12/31/Y1 $ 90,000 Year 2 purchases 124,000 Year 2 write-off of obsolete inventory 34,000
Inventory, 12/31/Y2 30,000 The inventory written off became obsolete due to an unexpected and
unusual technological advance by a competitor. In its year 2 income statement, what amount should
Deal report as cost of goods sold?
a. $218,000
b. $184,000
c. $150,000
d. $124,000

53. Burr Company had the following account balances at December 31, year 2:
Cash in banks $2,250,000 Cash on hand 125,000 Cash legally restricted for additions to plant (expected
to be disbursed in year 3) 1,600,000 Cash in banks includes $600,000 of compensating balances
against short-term borrowing arrangements. The compensating balances are not legally restricted as to
withdrawal by Burr. In the current assets section of Burr’s December 31, year 2 balance sheet, total cash
should be reported at
a. $1,775,000
b. $2,250,000
c. $2,375,000
d. $3,975,000
54. On July 1, year 1, York Co. purchased as a held-to-maturity investment $1,000,000 of Park, Inc.’s 8%
bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10%
interest. The bonds mature on January 1, year 8, and pay interest annually on January 1. York uses the
effective interest method of amortization. In its December 31, year 1 balance sheet, what amount should
York report as investment in bonds?
a. $911,300
b. $916,600
c. $953,300
d. $960,600

55. Denisse Company reported an impairment loss of P2,000,000 in its income statement for 2019. This
loss was related to an item of property, plant and equipment which was acquired on January 1, 2018
with cost of P10,000,000, useful life of 10 years and no residual value. On December 31, 2019 Denisse
reported this asset at P6,000,000 which is the fair value on such date. On December 31, 2020, Denisse
determined that the fair value of its impaired asset had increased to P7,500,000. The straight line
method is used on recording depreciation of this asset.

What amount of gain on reversal of impairment should Denisse report in its 2020 income statement?
a. 2,250,000
b. 1,750,000
c. 1,500,000
d. 0

56. Electronics4U manufactures high-end whole home electronic systems. The company provides a one-
year warranty for all products sold. The company estimates that the warranty cost is $200 per unit sold
and reported a liability for estimated warranty costs $6.5 million at the beginning of this year. If during
the current year, the company sold 50,000 units for a total of $243 million and paid warranty claims of
$7,500,000 on current and prior year sales, what amount of liability would the company report on its
statement of financial position at the end of the current year?
a. $2,500,000.
b. $3,500,000.
c. $9,000,000.
d. $10,000,000.

57. Kelsey Company acquired an investment property with an installment price of $2,400,000. The
acquisition of the property requires a down payment of 20% and a non-interest bearing note payable at
the end of each year for five years. The prevailing market rate interest for similar instrument is 12%. The
present value of factor of annuity of 12% for four peri9ds is 3.605. Usher company incurred transaction
cost amounting to $50,000 for the property. What is the cost of acquiring property?

a. $1,862,400

b. $1,914,320

c. $2,400,000

d. $2,450,000
58. On December 31, 2020, Arlene Company issued P5,000,000 face value, 5-year bonds at 109. Each
P1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to
purchase one share of P5 par value common at P25. Immediately after issuance, the market value of
each warrant was P5. The stated interest rate on the bonds is 11% payable annually every December
31. However, the prevailing market rate of interest for similar bonds without warrants is 12%. The
present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12%
for 5 periods is 3.60. On December 31, 2020, what amount should Arlene record as discount or
premium on bonds payable?
A. 170,000 discount
B. 450,000 premium
C. 450,000 discount
D. 800,000 premium

59. Puff Co. acquired 40% of Straw, Inc.’s voting common stock on January 2, year 1, for $400,000. The
carrying amount of Straw’s net assets at the purchase date totaled $900,000. Fair values equaled
carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by
$100.000. The equipment has a five-year life. During year 1, Straw reported net income of $150,000.
What amount of income from this investment should Puff report in its year 1 income statement if Puff
uses the equity method to account for the investment?
a. $40,000
b. $52,000
c. $56,000
d. $60,000

60. Blue Corp.’s December 31, year 1 balance sheet contained the following items in the long-term liabilities
section:
9 3/4% registered debentures, callable in year 12, due in year 17 $700,000 9 1/2% collateral trust
bonds, convertible into common stock beginning in year 10 due in year 20 600,000 10% subordinated
debentures ($30,000 maturing annually beginning in year 7) 300,000
What is the total amount of Blue’s term bonds?
a. $ 600,000
b. $ 700,000
c. $1,000,000
d. $1,300,000

61. Trans Co. had the following balances at December 31, year 2:
Cash in checking account $ 35,000 Cash in money market account 75,000 US Treasury bill, purchased
11/1/year 2, maturing 1/31/year 3 350,000 US Treasury bill, purchased 12/1/year 2, maturing 3/31/year 3
400,000 Trans’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three
months or less when purchased. What amount should Trans report as cash and cash equivalents in its
December 31, year 2 balance sheet?
a. $110,000
b. $385,000
c. $460,000
d. $860,000
62. Brand Co. incurred the following research and development project costs at the beginning of the current
year:
Equipment purchased for current and future projects $100,000
Equipment purchased for current projects only 200,000
Research and development salaries for current project 400,000
Equipment has a five-year life and is depreciated using the straight-line method. What amount should
Brand record as depreciation for research and development projects at December 31?
a. $0
b. $ 20,000
c. $ 60,000
d. $ 140,000

63. On December 31, 2020, April’s investment in real property has carrying value of P1,600,000 under the
fair value model before considering market value adjustment. If the fair market value at December 31,
2020 is P1,000,000, how much should be the gain or loss on transfer if April Company would shift to
cost model?

a. Gain of P600,000 reported as other comprehensive income

b. Loss of P600,00 reported as other loss in the income statement

c. Loss of P600,000 reported in equity as decrease in revaluation surplus

d. Zero

64. In May year 1 Caso Co. filed suit against Wayne, Inc. seeking $1,900,000 damages for patent
infringement. A court verdict in November year 5 awarded Caso $1,500,000 in damages, but Wayne’s
appeal is not expected to be decided before year 7. Caso’s counsel believes it is probable that Caso will
be successful against Wayne for an estimated amount in the range between $800,000 and $1,100,000,
with $1,000,000 considered the most likely amount. What amount should Caso record as income from
the lawsuit in the year ended December 31, year 5?
a. $0
b. $ 800,000
c. $1,000,000
d. $1,500,000
REVIEW- ASSET TO LIAB
Answer Section

PROBLEM

1. (a) The $600,000 noninterest-bearing note should be recorded at its present value of $450,000
($600,000 × .75). The journal entry is
The loss is recognized because the fair value of the note received ($450,000) is $30,000 less than the
carrying amount of the equipment sold ($480,000).

2. D
Carrying value of debt as of December 31, 2009 P3,198,176
Less: par value of ordinary shares (30,000 x 100) 3,000,000
Credit to share premium on conversion date P 198,176
Transfer of the equity component 223,100
Total credit to share premium on conversion P 421,276

3. (a) Machinery is recorded at its historical cost, which is measured by the cash or cash equivalent price
of obtaining the machine and preparing it for use. The journal entry to record this acquisition would be
Machinery 110,000 (cash equiv.) Discount on N.P. 20,000 ($130,000 - $110,000) Notes payable 120,000
(24 × $5,000) Cash 10,000 The $20,000 discount represents future interest expense (the cost
associated with paying for the asset over two years instead of immediately) rather than part of the cost
of the machine. Straight-line depreciation for year 4 is computed as follows:

4. A

PAS 39, paragraph 40, provides that a substantial modification of terms of an existing financial liability
shall be accounted for as an extinguishment of the old liability and the recognition of a new liability.
Under Application Guidance 2 of PAS 39, there is substantial modification of terms if the gain or loss on
extinguishment is a least 10% of the total old liability.
The difference between the old liability and the present value of the new liability which is discounted
using the old effective rate shall be accounted for as gain or loss on extinguishment.

PV of principal (4,000,000 x .75) 3,000,000

PV of annual interest payments (320,000 x 2.49) 796,800
Total present value of new liability 3,796,800

Note payable – old 5,000,000

Accrued interest payable 500,000
Total old liability 5,500,000
PV of new liability 3,796,800
Gain on extinguishment of debt 1,703,200

Note payable – new 4,000,000

PV of new liability 3,796,800
Discount on note payable 203,200
 The entry to record the extinguishment of the old liability and recognition of new liability on December
31, 2010 is:

Note payable – old 5,000,000

Accrued interest payable 500,000
Discount on note payable 203,200
Note payable – new 4,000,000
Gain on extinguishment of debt 1,703,200

5. (c) Debt and equity securities that are classified as trading securities are reported at fair market value,
with unrealized gains and losses included in earnings. Therefore, at 12/31/Y1 Wynn would recognize an
unrealized holding gain of $35,000 ($945,000 – $910,000) on the income statement, and report the
securities at their fair market value of $945,000. Securities classified as trading securities are reported at
fair market value on the balance sheet.

6. b ( 720,000 ÷ 10) × 5 = 360,000.

7. (c) The requirement is to calculate the amount that should be presented for inventory. Answer (c) is
correct because the lower of cost or net realizable value method requires net realizable value to be
calculated as the estimated selling price less estimated costs of completion and estimated costs to sell.
Therefore, the NRV is $850 ($900 – $50). The lower of cost or net realizable value is determined by
comparing the cost of $1,000 to the NRV of $850, and using the lower amount. Inventory should be
reported at $850.

8. D
PV of the bonds = 538,609; value of bonds without feature = 450,000; difference is the value of
the conversion = 88,609.

9. B

Basketballs to be distributed (100,000 x 60% / 10) 6,000

Basketball distributed 4,000
Balance 2,000
Multiply by cost of basketball (4,125,000 / 5,500) 750
Estimated liability 1,500,000

10. (d) From 1/2/Y1 to 12/31/Y3, depreciation was recorded using an eight-year life. Yearly depreciation was
$33,000 ($264,000 ÷ 8), and accumulated depreciation at 12/31/Y3 was $99,000 (3 × $33,000). In year
4, the estimated useful life was changed to six years total with a salvage value of $24,000. Therefore,
the 12/31/Y3 book value ($264,000 - $99,000 = $165,000) is depreciated down to the $24,000 salvage
value over a remaining useful life of three years (6 years total - 3 years already recorded). The year 4
depreciation expense is $47,000 [($165,000 - $24,000) ÷ 3], increasing accumulated depreciation to
$146,000 ($99,000 + $47,000).

11. (b) The cash price of the new machine represents its fair market value (FMV). The FMV of the old
machine can be determined by subtracting the cash portion of the purchase price ($6,000) from the total
cost of the new machine: $20,500 - $6,000 = $14,500. Since the book value of the machine ($16,800)
exceeds its FMV on the date of the trade-in ($14,500), the difference of $2,300 must be recognized as a
loss.
12. (a) If material, an allowance for discounts must be reported at year-end in order to match the discounts
with the related sales and to report receivables at their collectible amount. At 12/31/Y2, $100,000 of the
accounts receivable have the potential to be discounted by 2% because they are less than fifteen days
old (terms 2/15, net 30). Since 50% of the customers are expected to take advantage of the 2%
discount, the allowance for discounts should be $1,000 [($100,000 × 50%) × 2%]. None of the other
categories require a discount allowance because they are older than the maximum age of fifteen days to
receive the 2% discount.

13. (a) The 12/31/Y2 current net receivables would include the trade receivables, net of the allowance
account ($93,000 – $2,000 = $91,000). The claim against a shipper for goods lost in transit ($3,000) is
also a valid receivable at year-end. Therefore, the total current net receivables are $94,000 ($91,000 +
$3,000). The unsold goods on consignment do not represent a receivable until sold. Therefore, the
$26,000 should be removed from receivables and sales and the cost ($26,000 ÷ 130% = $20,000)
should be removed from cost of goods sold and reported as ending inventory. The security deposit
($30,000) should be reported as a long-term receivable.

14. b 480,000 × .05 – [ 20,000 – ( 14,400 – 4,200)] = 14,200.

15. Solution: A
Cost of goods sold p1, 859, 082
Less: Decrease in inventory (P815, 386-p488, 874) 326, 512
Purchases 1, 532, 570
Less: Increase in accts. Payable (P737, 824-p286, 924) 450, 900
Amount paid to supplier in 2013 p1, 081, 670

16. D

17. d 270,000 – 285,000 = ( 15,000).

18. D

Unearned revenue – 1/1 600,000

Cash receipts from service contracts sold 980,000
Total 1,580,000
Less: Service contract revenue recognized 860,000
Unearned service contract revenue – 12/31 720,000

19. (a) Before adjustment, the balance in the Accounts Payable account is $360,000. This amount is net of a
$50,000 debit balance in Lyle’s account payable to Ross resulting from a $50,000 advance payment for
goods to be manufactured to Lyle’s specifications. The $50,000 should be reclassified as a current
asset, Advance to Suppliers. The checks recorded on 12/29/Y2 incorrectly reduced the accounts
payable balance by $100,000. The $100,000 reduction should not have been recorded until the checks
were mailed on 1/5/Y3. The 12/31/Y2 accounts payable must be increased by $100,000. Therefore, the
corrected 12/31/Y2 accounts payable is $510,000.
Unadjusted AP $360,000 Reclassification of advance 50,000 Error correction 100,000 $510,000

20. (c) The proceeds of bonds issued with detachable warrants are allocated between the bonds and the
warrants based upon their relative fair value at the time of issuance. In this case, the portion allocated to
the bonds is $900,000, calculated as follows:
Therefore, the bonds payable are reported at $900,000 (face value $1,000,000 less discount $100,000).
21. (b) The lender’s carrying amount of the loan is calculated by adding the direct loan origination costs to
the principal and deducting the loan origination fee charged to the borrower. Indirect loan origination
costs are charged to expense as incurred, and are not considered when calculating the carrying amount
of the loan. Therefore, Martin Bank has a carrying amount of $148,000 [$150,000 principal plus $4,000
direct loan origination costs minus $6,000 ($150,000 × 0.04) nonrefundable loan origination fee]. The
$2,000 indirect loan origination costs are expensed in the period incurred.

22. (c) All R&D costs are to be charged to expense when incurred. Specifically R&D costs include designing,
constructing, and testing preproduction prototypes, and the cost of R&D equipment (unless it has
alternative future uses). Therefore, $340,000 ($60,000 + $200,000 + $80,000) is classified as R&D costs
and expensed. The legal costs incurred to obtain a patent ($10,000) are capitalized in the patents
account.

23. (d) Gain contingencies are not reflected in the accounts until realized. Since the case was unresolved at
12/31/Y2, none of this contingent gain can be recorded as a receivable and/or revenue in year 2. Since
the contingency is probable, it should be disclosed along with the 12/31/Y2 estimate of a range of
$75,000 to $150,000. A gain contingency would not be accrued as a receivable. The amount disclosed
should be the range because all amounts within the range are considered equally likely.

24. c

25. (b) To determine the 12/31/Y2 balance of the liability for customer advances, the solutions approach is to
set up a T-account for the liability.
When advances are received ($184,000), cash is debited and the liability account is credited. When
advances are applied to orders shipped ($164,000), the liability account is debited and sales is credited.
When an order is cancelled ($50,000), the liability account is debited and a revenue account is credited,
since the advance payments are nonrefundable. Thus, the customer advances balance on 12/31/Y2 is
$88,000.

26. b (10,500) (£90) = £945,000 – £296,000 = $649,000.

27. D

The contingent asset is disclosed only because the case is unresolved on December 31, 2010. The
issue is what amount of gain will be disclosed. Since the case is settled in March 2011 after the
issuance of the 2010 financial statements in February 2011, the estimated amount of P1,500,000 shall
be disclosed. However, id the case is settled before the issuance of the statements, the actual award of
P1,000,000 shall be disclosed.

28. (a) The annual amortization of capitalized software costs shall be the greater of
1. The ratio of the software’s current sales to its expected total sales, or 2. The straight-line method over
the economic life of the product. In this case, the ratio of current to expected total sales is 30% (given).
The annual straight-line rate is 20% per year (1 ÷ economic life of five years). The 30% amortization
should be recorded in year 4, since it is the higher of the two. The unamortized cost on the 12/31/Y4
balance sheet should, therefore, be 70% (100% - 30% amortization). Note that the unamortized cost of
capitalized software products must be compared to the net realizable value of those assets at each
balance sheet date. Any excess of the amortized cost over the net realizable value must be written off.
In this case, the net realizable value (90%) was above the unamortized cost (70%), so no additional
write-off was required.
29. (d) The requirement is to determine the amount to be presented on the balance sheet. When the fair
value option is elected, any effects of discounts or premiums are removed from the financial statements,
and the accounting rules for reporting discounts and premiums no longer apply.

30. (b) At 1/1/Y1, Glen would record as a current liability unearned rent of $50,000, and as a long-term
liability unearned rent of $150,000. During year 1, the current portion of unearned rent was earned and
would be recognized as revenue. At 12/31/Y1, the portion of the long-term liability representing the
second year’s rent ($50,000) would be reclassified as current, leaving as a long-term liability the
$100,000 representing the last two years’ rent.

31. (b) The depletion charge per unit is the depletion base (net cost of the resource) divided by the
estimated units of the resource. Vorst’s depletion base is $2,880,000, as computed below.
Cost of mine $2,640,000 Development cost 360,000 Restoration cost 180,000 Residual value (300,000)
$2,880,000 Note that the present value of the restoration costs are recorded. The depletion charge is
$2.40 per ton ($2,880,000 ÷ 1,200,000 tons). Since 60,000 tons were removed and sold, depletion of
$144,000 (60,000 × $2.40) is included in Vorst’s year 4 income statement. Note that the amount of
depletion included in the income statement depends on the tons sold. If more tons were removed than
sold, part of the depletion would be included in the cost of ending inventory rather than in the income
statement.

32. (a) The gross profit method can be used to estimate the cost of missing inventory. The first step is to
compute the cost of goods available for sale.
Beginning inventory $ 500,000 Purchases 2,500,000 Cost of goods available for sale $3,000,000 The
second step is to estimate cost of goods sold based on the gross profit percentage.
Sales $3,200,000 Estimated gross profit ($3,200,000 × 25%) (800,000) Cost of goods sold ($3,200,000
× 75%) $2,400,000 Note that a shortcut is to realize that if gross
profit is 25% of sales, cost of goods sold must be 75% of sales. The third step is to compute estimated
ending inventory.
Cost of goods available for sale $ 3,000,000 Estimated cost of goods sold (2,400,000) Estimated ending
inventory $ 600,000 Since the actual count of ending inventory at December 31 was only $575,000, the
estimated shortage in inventory is $25,000 ($600,000 – $575,000).

33. c [( 320,000 – 20,000) ÷ 5] × 4 1/3 = 260,000

( 320,000 – 260,000) + 6,000 = 66,000.

34. B. 10%
Periodic Interest Principal Lease
Date Payments Payments Payments Obligations
Jan. 1,2007 P973,700
Dec.31,2007 P200,000 P97,370 P102,630 871,070
Dec.31,2008 200,000 87,107 112,893 758,177

Depreciation in 2008 (2nd year) = 6/28 x 973,700 = P208,650

Sum of years = 7 (7 + 1) = 28
2
35. (b) A company should record as an asset the cost of intangible assets such as goodwill acquired from
other entities. Costs of developing intangible assets such as goodwill “which are not specifically
identifiable, have indeterminate lives, or are inherent in a continuing business and related to an entity as
a whole” should be expensed when incurred. Therefore, only the $200,000 (and not the additional
$80,000) should be
capitalized as goodwill. Goodwill should not be amortized.

36. a £395,000 – [(£160,000 – £40,000)  .25] = £365,000.

37. d $1,500,000 × .04 = $60,000.

38. b {[(675,000 × .60) – 330,000] ÷ 3} × $1.50 = $37,500.

39. (d) The FASB excludes from its definitions of research and development expense the acquisition,
development, or improvement of a product or process for use in its selling or administrative activities.
Both costs given in this problem relate to selling or administrative activities, so the expenditures of
$175,000 would not be reported as research and development expense.

40. (c) An estimated loss from a loss contingency shall be accrued by a charge to income if both of the
following conditions are met:
1. Information available indicates that it is probable that an asset has been impaired or a liability has
been incurred. 2. The amount of the loss can be reasonably estimated. However, gain contingencies are
only recognized when a specific event actually occurs, not prior to the event, because to do so would
recognize the gain prior to its
realization. Therefore, Brooks should recognize the loss in year 2 due to the fact that the event is
probable and can be reasonably estimated. Dollis, on the other hand, cannot recognize the gain until
year 3, the year they receive the actual award.

41. a [($500,000 ÷ 10) × 7] – $125,000 = $225,000 new (AD)

$500,000 – $225,000 = $275,000; $275,000 ÷ 8 = $34,375 per year.

42. (b) The amount of interest cost which should be capitalized during building construction is the lower of
avoidable interest or actual interest. Avoidable interest equals the interest computed on the weighted-
average amount of accumulated expenditures on the building ($40,000). Since actual interest is $70,000
($50,000 + $20,000), the amount capitalized should be $40,000.

43. a CV > recoverable amount so no impairment has occurred.

44. C

45. b ¥444,000,000 – ¥426,000,000 = ¥18,000,000

46. C

47. (a) Case expects 120,000 coupons to be redeemed at a total cost of $.50 per coupon ($.45 + $.05).
Therefore, total expected redemptions are $60,000 (120,000 × $.50). By 12/31/Y2, $25,000 has been
paid on coupon redemptions, so a liability of $35,000 must be established ($60,000 - $25,000). Note that
this liability would include both payments due for the 50,000 coupons on hand, and payments due on
coupons to be received within the first thirty days after the expiration date.
48. (d) No adjustment is necessary for the goods in transit ($36,000). The goods were shipped FOB
shipping point, which means the buyer (Opal) owns the goods while in transit. Therefore, Opal properly
included these goods in 12/31/Y2 inventory. The merchandise out on consignment is owned by the
consignor (Opal) and should be included in Opal’s inventory at cost [$40,000 – (40% × $40,000) =
$24,000]. Therefore, inventory must be reduced by $16,000 for this item ($40,000 – $24,000). The
goods held on consignment ($27,000) are owned by the consignor, not Opal; therefore, inventory must
be reduced $27,000 for this item. The total reduction in inventory is $43,000 ($16,000 + $27,000).

49. A

Gross rentals (3,000,000 x 5) 15,000,000

Residual value – unguaranteed 1,000,000
Total 16,000,000

Present value:
Rentals (3,000,000 x 3.60) 10,800,000
Residual value (1,000,000 x .57) 570,000 11,370,000
Total unearned financial revenue 4,630,000

Note that whether the residual value is guaranteed or unguaranteed the unearned financial revenue is
the same.

50. 1. B
Cost Replacement cost Appreciation
Building 5,000,000 8,000,000 3,000,000
Accumulated depreciation(25%) 1,250,000 2,000,000 750,000
CA/ SV/ RS 3,750,000 6,000,000 2,250,000

2. C
Depreciation (600,000/15 years remaining) 400,000

3. A
Revaluation surplus - January 1, 2020 2,250,000
Piecemeal realization in 2020 (2,250,000/15) (150,000)
Revaluation surplus - December 31, 2020 2,100,000

51. (b) The requirement is to determine the amount that should be recognized in the financial statements for
the trademark. Answer (b) is correct because the trademark amount should include the purchase price
($100,000) plus the VAT taxes ($5,000) plus the legal cost incurred to register the trademark ($10,500),
which is equal to $115,500. The research expenditures, training costs, and salaries should be expensed.

52. (c) To compute cost of goods sold, the solutions approach is to set up a T-account for inventory
Purchases increase inventory, while the write-off and cost of goods sold decrease inventory. Cost of
goods sold can be computed as $150,000 using the T-account. An alternate solutions approach is to use
the CGS computation

53. (c) Cash on hand ($125,000) and cash in banks ($2,250,000) are both reported as cash in the current
asset section of the balance sheet because they are both unrestricted and readily available for use.
Cash legally restricted for additions to plant ($1,600,000) is not available to meet current operating
needs, and therefore should be excluded from current assets. Instead, it should be shown in the long-
term asset section of the balance sheet as an investment.
54. (a) When using the interest method of amortization, interest revenue is computed as follows:
The initial BV is the total amount paid less the accrued interest ($946,000 – $40,000 = $906,000). The
amount of interest receivable for the six months is computed below.
The discount amortized at 12/31/Y1 is the difference in these two amounts ($45,300 – $40,000 =
$5,300). This increases the book value of the investment to $911,300 ($906,000 + $5,300).

55. B

FV- January 1, 2020 6,000,000

Depreciation for 2020 (6M/8) 750,000
CA - 13/31/2020 with impairment 5,250,000

Cost- January 1, 2018 10,000,000

Accumulated depreciation- 12/31/2020 (10M/10x3) 3,000,000
CA- 12/31/2020 - assuming no impairment 7,000,000
CA- 12/31/2020 - with impairment 5,250,000
Gain on reversal of impairment 1,750,000

56. c $6,500,000 + (50,000 × $200) – $7,500,000 = $9,000,000.

57. Ans: B $480,000+$ 1,384,320+$50,000

58. A

PV of principal (5,000,000 x .57) 2,850,000

PV of annual interest payments (550,000 x 3.60) 1,980,000
Total present value 4,830,000

Bonds payable 5,000,000

Present value of bonds 4,830,000
Discount on bonds payable 170,000

59. (b) The investment should be accounted for on the equity basis and the calculation of Puff’s income from
the investment is shown below.
Straw’s net income $150,000 × 40% Puff’s share of Straw’s net income $ 60,000 Less: Puff’s
depreciation of excess value of equipment Excess cost $100,000 × 40% Puff’s share $ 40,000
Remaining useful life ÷ 5 Puff’s share of excess depreciation for year 1 (8,000) Income from investment
on the equity basis $ 52,000

60. (d) Term bonds are bond issues that mature on a single date, as opposed to serial bonds, which mature
in installments. In this case, the 9 3/4% bonds and the 9 1/2% bonds are term bonds ($700,000 +
$600,000 = $1,300,000), while the 10% bonds are serial bonds ($300,000).
61. (c) The definition of cash includes both cash (cash on hand and demand deposits) and cash equivalents
(short-term, highly liquid investments). Cash equivalents have to be readily convertible into cash and so
near maturity that they carry little risk of changing in value due to interest rate changes. This will include
only those investments with original maturities of three months or less from the date of purchase by the
enterprise. Common examples of cash equivalents include treasury bills, commercial paper, and money
market funds. Trans should report a total of $460,000 ($35,000 + $75,000 + $350,000) on its December
31, year 2 balance sheet. The US treasury bill purchased on 12/1/Y2 is not included in the calculation
because its original maturity is not within three months or less from the date of purchase.

62. (b) Materials, equipment, facilities, or intangibles that are acquired for a current R&D project and have
no alternative future use in other R&D projects should be expensed in the period in which acquired. If
alternative future uses are expected, whether in other R&D activities or in normal operations, these
items should be recorded as assets and the cost should be amortized over their useful lives by periodic
charges to R&D expense. If, at any point, these assets are no longer deemed to have alternative future
uses, the remaining unamortized cost is charged to R&D expense for the period. Depreciation expense
would be $20,000 ($100,000 / 5 years).

63. Ans: D Standard prohibits an enterprise to transfer from fair value model to cost model. Therefore, the
entity should continue to measure its investment property at fair value of P1,000,000 and recognized
loss of P600,000 as a decline in value of investment not as a loss on transfer from fair value to cost
model.

64. (a) Gain contingencies are not reflected in the accounts until realized. Since the case is unresolved at
12/31/Y5, none of this contingent gain should be recorded as income in year 5. Adequate disclosure
should be made of the gain contingency, but care should be taken to avoid misleading implications as to
the likelihood of realization.