Philippine Christian University

College of Business and Technology

B.S. Accountancy (BSA)

INTERMEDIATE ACCOUNTING

MIDTERM EXAMINATION

ANSWER THE FOLLOWING QUESTIONS. SHOW YOUR SOLUTIONS.

PROBLEM 1:

Relief Company assesses performance and makes operating decisions using the following information for
reportable segments:

Total revenue 9,250,000

Total profit 830,000

Included in the total profit is interest expense 100,000. In additions, the entity has 15,000 of interest income
for reportable segments that is not included in the reports used internally.

For purposes of segment reporting, what amount should be reported as segment total profit?
_____________________

PROBLEM 2:

Cool Company has three lines of business, each of which was determined to be reportable segment.

The entity sales aggregated 7,500,000 in the current year, of which Segment No. 1 contributed 40%.

Traceable costs were 1,750,000 for Segment No. 1 out of a total of 5,000,000 for the entity as a whole.

For external reporting, the entity allocated common costs of 1,500,000 based on the ratio of a segment’s
income before common costs to be total income before common costs.

In the financial statements for the current year, what amount should be reported as profit for Segment No.
1?
_____________________

PROBLEM 3:

Graffiti Company discloses supplemental operating segment information. The following information is
available for the current year:

Segment Sales Traceable expenses

X 5,000,000 3,000,000
Y 4,000,000 2,500,000
Z 3,000,000 1,500,000
12,000,000 7,000,000
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

Additional expenses are as follows:

Indirect expenses 1,800,000

General corporate expenses 1,200,000
Interest expense 600,000
Income tax expense 400,000

The interest expense and income tax expense are regularly reviewed by the chief operating decision maker
as a measure of profit and loss.

Appropriate common expenses are allocated to segments based on the ration of a segment’s sales to total
sales.

What is Segment Z’s profit for the current year?

_________________

PROBLEM 4:

On January 1, 2017, Reeve Company discovered that it had incorrectly expensed a 2,100,000 machine
purchased on January 1, 2014.

The entity estimated the machine’s original useful life to be 10 years and the residual value at 100,000.

The entity used the straight line method of depreciation and is subject to a 30% income tax rate.

In the December 31, 2017 financial statements, what amount should be reported as a prior period error?
_____________________

PROBLEM 5:

Harbor Company reported the following events during 2017:

 It was decided to write off 800,000 from inventory which was over two years old as it was obsolete.
 Sales of 600,000 had been omitted from the financial statements for the year ended December 31,
2016.

What total amount should be reported as prior period error in the financial statements for the year ended
December 31, 2017? _________________

PROBLEM 6:

Summer Company reported the following events during the year ended December 31, 2018:

 A counting error relating to the inventory on December 31, 2017 was discovered.

This required a reduction in the carrying amount of inventory at that date of 280,000.
 The provision for uncollectible accounts receivable on December 31, 2017 was 300,000.
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

During 2018, 500,000 was written off related to the December 31, 2017 accounts receivable.

What adjustment is required to restate retained earnings on January 1, 2018? _________________

PROBLEM 7: ( 1 pt. each)

7.1. At the beginning of the current year, an entity signed a 5-year contract enabling it to use a patented
manufacturing process beginning in the current year. A royalty is payable for each product produced,
subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the
contract date, the entity prepaid a sum equal to two years’ minimum annual fees. In the current year, only
minimum fees were incurred. The royalty prepayment shall be reported in the current year-end financial
statement as

a. An expense only
b. A current asset and an expense
c. A current asset and noncurrent asset
d. A noncurrent asset

7.2. The premium on a three-year insurance policy expiring on December 31, 202o was paid in total on
January 1, 2018. The original payment was initially debited to a prepaid asset account. The appropriate
adjusting entry has been recorded on December 31, 2018. The balance in the prepaid asset account on
December 31, 2018 should be

a. Zero
b. The same as it would have been if the original payment had been debited initially to an expense account
c. The same as the original account
d. Higher than if the original payment had been debited initially to an expense account.

7.3 Prior to the current year, an entity used the cash basis of accounting. At the current year-end, the
entity changed to the accrual basis. The entity cannot determine the beginning balance of supplies
inventory.

What is the effect of the inability to determine beginning supplies inventory on the accrual basis net
income and year-end accrual basis owners’ equity.

Net income Owners’ equity

a. No effect No effect
b. No effect Overstated
c. Overstated No effect
d. Overstated Overstated

PROBLEM 8

8.1 The effect of recording a 100% share dividend would be to

a. Decrease the current ratio, decrease working capital and decrease book value per share.
b. Leave inventory turnover unaffected, increase earnings per share and increase book value per share.
c. Leave working capital unaffected, decrease earnings per share and decrease book value per share.
d. Leave working capital unaffected, decrease earnings per share and decrease the debt to equity ratio.
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

8.2 Which of the following shareholder rights is most commonly enhanced in an issue of preference
shares?

a. The right to vote for the board of directors.

b. The right to maintain proportional interest in the entity.
c. The right to receive a full cash dividend before dividends are paid to ordinary shares
d. The right to vote on major corporate issues

8.3 Which feature of preference share would most likely be opposed by ordinary shareholders?
a. Convertible
b. Callable
c. Redeemable
d. Participating

PROBLEM 9

9.1. Noncash investing and financing activities are

a. Reported in the statement of cash flows only if the direct method is used.
b. Reported in the statement of cash flows only if the indirect method is used.
c. Disclosed in a note or separate schedule accompanying the statement of cash flows.
d. Not reported.

9.2 The cumulative feature of preference shares

a. Limits the amount of cumulative dividends to the par value of the preference shaeres.
b. Requires that dividends not paid in any years must be made up in a later year before dividends are
distributed to ordinary shareholders.
c. Means that the shareholder can accumulate preference shares equal to the par value of ordinary
shares at which time the preference shares can be converted into ordinary shares.
d. Enables a preference shareholder to accumulate dividends equal to the par value of the shares.

9.3 The primary purpose of a statement of cash flows is to provide relevant information about

a. Differences between net income and associated cash receipts and disbursements
b. An entity’s ability to generate positive net cash flows
c. The cash receipts and cash disbursements of an entity during a period.
d. An entity’s ability to meet cash operating cycle.

PROBLEM 10

Aryya Company and its divisions provided the following information for the current year:

Sales to unaffiliated customers 20,000,000

Intersegment sales of products similar to those
sold to unaffiliated customers 6,000,000
Interest earned on loans to other operating segments 400,000

Aryya Company and all of its divisions are engaged solely in manufacturing operations.
What is the minimum amount of segment revenue in order that a division can be considered a reportable
segment? ________________________
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

PROBLEM 11

Clarita Company purchased equipment for 5,000,000 on January 1, 2017 with a useful life of 10 years and no
residual value.

On December 31, 2018, the entity classified the equipment as held for sale. The fair value of the equipment
on December 31, 2018 was 3,300,000 and the cost of disposal 100,000.

On December 31, 2019, the fair value of the equipment was 3,800,000 and the cost of disposal 200,000. The
value in use was determined to be 3,300,000.

On December 31, 2019, the entity believed that the criteria for classification as held for sale can no longer
be met.

Accordingly, the entity decided not to sell the asset but to continue to use it.

What is the impairment loss to be recognized on December 31, 2018? ___________________

PROBLEM 12

Apple Company purchased an equipment for 5,000,000 on January 1, 2017. The equipment had a useful life
of 5 years with no residual value.

On December 31, 2017, the entity classified the equipment as held for sale. On such date, the fair value less
cost of disposal of the equipment was 3,500,000.

On December 31, 2018, the entity believed that the criteria for classification as held for sale can no longer
be met. Accordingly, the entity decided not to sell the equipment but continue to use it.

On December 31, 2018, the fair value less cost of disposal of the equipment was 2,700,000.

What is the carrying amount of the equipment on December 31, 2017 before classification as held for sale?

___________________

PROBLEM 13

Dean Company accounted for noncurrent assets using the cost model. On October 1, 2017, the entity
classified a noncurrent asset as held for sale.

At that date, the carrying amount was 3,200,000, the fair value was estimated at 2,200,000 and the cost of
disposal at 200,000.

On December 15, 2017, the asset was sold for net proceeds of 1,850,000.

What amount should be included as an impairment loss in the statement of comprehensive income for the
year ended December 31, 2017? __________________
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

PROBLEM 14

On January 1, 2017, Ranchelle Company purchased land at a cost of 6,000,000. The entity used the
revaluation model for this asset.

The fair value of the land was 7,000,000 on December 31, 2017 and 8,500,000 on December 31, 2018.

On July 1, 2019, the entity decided to sell the land and therefore classified the asset as held for sale.

The fair value of the land on this date is 7,600,000. The estimated cost of disposal is very minimal.

On December 31, 2019, the land was sold for 8,000,000.

What amount in OCI should be recognized in the statement of comprehensive income for the year ended
December 31, 2018? ____________________.

PROBLEM 15

So Real Company accounted for noncurrent assets using the revaluation model. On October 1, 2017, the
entity classified a land as held for sale.

At that date, the carrying amount of the land was 5,000,000 and the balance in the revaluation surplus was
1,500,000.

At same date, the fair value of the land was estimated at 5,500,000 and the cost of disposal at 100,000.

On December 31, 2017, the fair value less cost of disposal of the land did not change. The land was sold
on January 31, 2018 for 6,000,000.

What is the impairment loss in 2017? _______________________

PROBLEM 16

On April 1, 2017, Brandie Company had a machine with a cost of 5,000,000 and accumulated depreciation
of 3,750,000.

On April 1, 2017, the entity classified the machine as held for sale and decided to sell the machine within
one year.

On April 1, 2017, the machine had an estimated selling price of 500,000 and a remaining useful life of 2 years.

It is estimated that selling cost associated with the disposal of the machine will be 50,000.

On December 31, 2017, the estimate selling price of the machine had increased to 750,000 with estimated
selling cost of 100,000.

What amount should be recognized as gain on reversal of impairment on December 31, 2017?
_________________
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

PROBLEM 17

Harry Company incurred an inventory loss from market decline of 840,000 on June 30, 2017.

What amount of the inventory loss should be recognized in the quarterly income statement for the three
months ended June 30, 2017? _______________

PROBLEM 18

On June 30, 2017, Miles Company incurred a 1,000,000 net loss from disposal of a business segment. Also,
on June 30, 2017, the entity paid 400,000 for property taxes assessed for the calendar year 2017.

What total amount should be included in the determination of the net income or loss for the six-month
period ended June 30, 2017? ______________

PROBLEM 19

Ford Company has historically reported bad debt expense of 5% of sales in each quarter. For the current
year, the entity followed the same procedure in the three quarters of the year.

However, in the fourth quarter, the entity determined that bad debt expense for the entire year should be
450,000.

Sales in each quarter of the year were first quarter 2,000,000, second quarter 1,500,000, third quarter
2,500,000 and fourth quarter 4,000,000.

What amount of bade debt expense should be recognized for the fourth quarter? _____________

PROBLEM 20

Kelly Company reported 950,000 net income for the quarter ended September 30, 2017 which included the
following after tax items:

 A 600,000 expropriation gain, realized on April 30, 2017, was allocated equally to the second, third,
and fourth quarters of 2017.
 A 160,000 cumulative-effect loss resulting from a change in inventory valuation method was
recognized on August 1, 2017.

In addition, the entity paid 480,000 on February 1, 2017, for 2017 calendar-year property taxes. Of this
amount, 120,000 was allocated to the third quarter of 2017.

For the quarter ended September 30, 2017, what amount should be reported as net income?
______________

PROBLEM 21

Flavier Company has two divisions, North and South. Both qualify as business components.
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

In 2017, the entity decided to dispose of the assets and liabilities of division South and it is probable that the
disposal will be completed early next year.

The revenue and expenses of Flavier Company are as follows:

2017 2016
Sales –North 5,000,000 4,600,000
Total nontax expenses – North 4,400,000 4,100,000
Sales – South 3,500,000 5,100,000
Total nontax expenses – South 3,900,000 4,500,000

During the later part of 2017, the entity disposed of a portion of division South and recognized a pretax loss
of 2,000,000 on the disposal.

The income tax rate is 30%.

What amount should be reported as loss from discontinued operation in 2017? ________________

PROBLEM 22

Wisdom Company committed to sell the comic book division, a component of the business, on September
1, 2017.

The carrying amount of the division ws 4,000,000 and the fair value was 3,500,000.

The disposal date is expected on June 1, 2018. The division reported an operating loss of 200,000 for the
year ended December 31, 2017.

Before income tax, what amount should be reported as loss from discontinued operation in 2017?
_______________

PROBLEM 23

Aron Company decided on August 1, 2017 to dispose of a component of business. The component was sold
on November 30, 2017.

The net income for the current year included income of 5,000,000 form operating the discontinued segment
from January 1 to the date of disposal. The entity incurred a loss on the November 30 sale of 4,500,000.

What amount should be reported as pretax income or loss from discontinued operation for 2017?
(State whether income or loss) ____________________

PROBLEM 24

On September 30, 2017, when the carrying amount of the net assets of a business segment was 70,000,000,
Old Company signed a legally binding contract to sell the business segment.

The sale is expected to be completed by January 31, 2018 at a sale price of 60,000,000.
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

In addition, prior to January 31, 2018, the sale contract obliged Old Company to terminate the employment
of certain employees of the business segment incurring an expected termination cost of 2,000,000 to be paid
on June 30, 2018.

The segment revenue and expenses for 2017 were 40,000,000 and 45,000,000, respectively.

Before income tax, what amount should be reported as loss from discontinued operation for 2017?
_______________

PROBLEM 25

On December 1, 2017, Greek Company committed to a plan to dispose of a business component’s assets.
The disposal met the requirements to be classified as discontinued operation.

On that date, the entity estimated that the loss from the dispositions of the assets would be 700,000 and the
component’s operating loss was 200,000.

Before income tax, what amount of loss should be reported for discontinued operation for 2017?

PROBLEM 26

Savior Company purchased a machinery on January 1, 2014 for 7,200,000.

The machinery had a useful life of 10 years with no residual value and was depreciated using the straight line
method.

In 2017, a decision was to change the depreciation method from straight line to sum of years’ digits method.
The useful life and residual value remained unchanged.

What is depreciation for 2017? ___________________

PROBLEM 27

Red Company purchased a machine on January 1, 2014 for 6,000,000. At the date of acquisition, the machine
had a life of six years with no residual value. The machine was depreciated on a straight line basis.

On January 1, 2017, the entity determined that the machine had a useful life of eight years from the date of
acquisition with no residual value.

What is the depreciation of the machine for 2017? _________________

PROBLEM 28

Cute Company was incorporated on January 1, 2014. In preparing the financial statements for the year ended
December 31, 2016, the entity used the following original cost and useful life for the property, plant and
equipment:
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

Original cost Useful life

Building 15,000,000 15 yrs
Machinery 10,500,000 10 yrs
Furniture 3,500,000 7 yrs

On January 1, 2017, the entity determined that the remaining useful life is 10 years for the building, 7 years
for the machinery and 5 years for the furniture.

The entity used the straight line method of depreciation with no residual value.

What is the total depreciation for 2017? __________________

PROBLEM 29

On January 1, 2015, Brazilia Company purchased for 4,800,000 a machine with a useful life of ten years and
a residual value of 200,000.

The machine was depreciated by the double declining balance and the carrying amount of the machine was
3,072,000 on December 31, 2016.

The entity changed to the straight line method on January 1, 2017. The residual value did not change.

What is the depreciation expense on this machine for 2017? __________________

PROBLEM 30

On January 1, 2017, Canon Company decided to decrease the estimated useful life of an existing patent from
10 years to 8 years.

The patent was purchased on January 1, 2012 for 3,000,000. The estimated residual value is zero.

The entity decided on January 1, 2017 to change the depreciation method from an accelerated method to the
straight line method.

On January 1, 2017, the cost of an equipment is 8,000,000 and the accumulated depreciation is 3,400,000.

The remaining useful life of the equipment on January 1, 2017 is 10 years and the residual value is 200,000.

What is the total charge against income for 2017 as a result of the accounting changes? ______________

PROBLEM 31

During 2017, Build Company changed from the cost recovery method to the percentage of completion
method. The tax rate is 30%. Gross profit figures are:

2015 2016 2017

Cost recovery method 950,000 1,250,000 1,400,000
Percentage of completion 1,600,000 1,900,000 2,100,000
 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

How should this accounting change be reported in 2017? _____________ increase in ______________

PROBLEM 32

Banko Mabuhay used the cost recovery method of accounting since it began operations in 2014. In 2017,
management decided to adopt the percentage of completion method.

2014 2015 2016

Revenue from completed contracts 25,000,000 42,000,000 40,000,000
Cost of completed contracts 18,000,000 29,000,000 28,000,000
Income from operations 7,000,000 13,000,000 12,000,000
Casualty loss 0 0 (2,000,000)
Income 7,000,000 13,000,000 10,000,000

Analysis of the accounting records disclosed the following income by contracts using the percentage of
completion method.

2014 2015 2016

Contract 1 7,000,000
Contract 2 5,000,000 8,000,000
Contract 3 3,000,000 7,000,000 2,000,000
Contract 4 1,000,000 6,000,000
Contract 5 (1,000,000)

Before income tax, what is the cumulative effect of change in accounting policy that should be reported in
the statement of retained earnings for 2017? _______________________

PROBLEM 33

During 2017, Oro Company decided to change from the FIFO method of inventory valuation to the
weighted average method.

FIFO Weighted average

January 1 inventory 7,100,000 7,700,000
December 31 inventory 7,900,000 8,300,000

In the statement of retained earnings for 2017, what amount should be reported as the pretax cumulative
effect of this accounting change? _____________ (state whether addition or deduction)

PROBLEM 34

Goddard Company had used the FIFO method of inventory valuation since it began operations in 2014.
The entity decided to change to the weighted average method for measuring inventory at the beginning of
2017.

The following schedule shows year-end inventory balances:

 Philippine Christian University
College of Business and Technology
B.S. Accountancy (BSA)

Year FIFO Weighted average

2014 4,500,000 5,400,000
2015 7,800,000 7,100,000
2016 8,300,000 7,800,000

What pretax amount should be reported in the statement of retained earnings for 2017 as the cumulative
effect of the change in accounting policy? ___________________ (state whether decrease or increase)

PROBLEM 35

On January 1, 2017, Folk Company changed from the average cost method to the FIFO method to account
for inventory. The entity provided the following ending inventory for each method:

2016 2017
Average cost 500,000 900,000
FIFO cost 700,000 1,400,000

The entity reported the following income statement using the average cost method:

2016 2017
Sales 10,000,000 13,000,000
Cost of goods sold 7,000,000 9,000,000
Operating expenses 1,500,000 2,000,000
Income before tax 1,500,000 2,000,000
Tax expense 450,000 600,000

The entity accrued tax expense on December 31 of each year and paid the tax in April of the following year.
The income tax rate is 30%.

What amount of net income should be reported in 2017 after the change to the FIFO inventory method?
_____________________