CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS

FIRST PREBOARD EXAMINATION SOLUTIONS

1. Cash (1,500,000 – 500,000) 1,000,000

Accounts receivable – assigned 3,000,000
Accounts receivable – unassigned 1,400,000
Inventory 1,200,000
Land held for sale 2,000,000
Bond investment held for trading 300,000
Total current assets 8,900,000
Bond sinking fund 500,000
Equity investment at FVOCI 900,000
Cash surrender value 250,000
Deferred tax asset 150,000
Total noncurrent assets 1,800,000 A
2. Accounts payable (550,000 + 250,000) 800,000
Accrued expense 400,000
Bonds payable (5,000,000 + 300,000) 5,300,000
Total current liabilities 6,500,000 A
3. Unadjusted net income 8,000,000
Investment income 1,300,000
Gain on sale of debt investment 1,200,000
Loss from fire ( 1,400,000)
Unrealized gain on held for trading investment 500,000
Correct net income 9,600,000 C
4. Cost 5,500,000
Depreciation for 2024 (5,500,000 x 10/55) ( 1,000,000)
Depreciation for 2025 (5,500,000 x 9/55) ( 900,000)
Carrying amount – December 31, 2025 3,600,000
Accounting changes include change in accounting policy and change in accounting estimate.
Depreciation for 2026 (3,600,000 – 200,000 / 8) 425,000 D
5. Carrying amount – December 31, 2025 (8,000,000 – 3,200,000) 4,800,000
FVLCOD – December 31, 2025 4,500,000
Impairment loss in 2025 300,000
Carrying amount – December 31, 2026 as if never HFS (8M – 4.8M) 3,200,000
Recoverable amount 4,000,000
Measurement (lower) 3,200,000
Carrying amount – December 31, 2026 per books 4,500,000
Loss on reclassification (1,300,000)
Highly probable
Abandoned noncurrent asset shall not be classified as held for sale D
6. Income from continuing operation 4,300,000
Loss from discontinued operation
Pretax loss (700,000 + 200,000) 900,000
Tax benefit (900,000 x 25%) (225,000) ( 675,000)
Net income 3,625,000 B
7. Variable expense (5,000,000 x 20%) 1,000,000
Fixed expense excluding depreciation (5M x 80% = 4M – 900k) 3,100,000
Allocated depreciation (900,000 x 3/12) 225,000
Total expense for the first quarter ending March 31 4,325,000 B
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8. Current account (6,500,000 – 500,000) 6,000,000

Payroll account 1,700,000
Cash on hand (500,000 – 150,000) 350,000
Commercial papers 1,200,000
Cash and cash equivalents 9,250,000
“from the date of purchase” C
9. Items accounted for (82,000 + 10,000 + 3,000) 95,000
Accountability ( 100,000)
Shortage ( 5,000)
Expense 10,000
Receivable 3,000
Cash short / over 5,000
Petty cash fund 18,000 B
10. 3,000,000 x 10% 300,000
1,000,000 x 20% 200,000
750,000 x 30% 225,000
200,000 x 50% 100,000
Required allowance for doubtful accounts 825,000
Allowance for DA – January 1 500,000
Doubtful accounts expense – reported (SQUEEZE) 450,000
Recovery of accounts previously written off 25,000
Accounts written off (100,000 + 50,000) ( 150,000)
Required allowance 825,000
Doubtful accounts expense – reported 450,000
Doubtful accounts expense – recorded (10,000,000 x 2%) ( 200,000)
Increase in expense 250,000
NRV of AR (4,950,000 – 825,000) 4,125,000
Accounts written off have no effect on working capital A
11. Required allowance for doubtful accounts (3,000,000 x 10%) 300,000
Allowance for doubtful accounts before adjustment (debit balance) 50,000
Doubtful accounts expense for the current year 350,000 C
12. Accounts receivable 1,600,000
Service charge (1,600,000 x 5%) ( 80,000)
Due from factor (1,600,000 x 8%) ( 128,000)
Interest expense (1,600,000 x 10% x 146 / 365) ( 64,000)
Cash received 1,328,000
Total loss (80,000 + 64,000) 144,000 D
13. Maturity value (3,000,000 x 9% x 6/12 = 135,000 + 3,000,000) 3,135,000
Discount (3,135,000 x 12% x 4/12) ( 125,400)
Proceeds from discounting 3,009,600
Carrying amount of NR (3,000,000 x 9% x 2/12 = 45,000 + 3,000,000) (3,045,000)
Loss from discounting ( 35,400)
Total accounts receivable (3,135,000 + 80,000) 3,215,000
Interest income (3,215,000 x 12% x 4/12) 128,600
Collection from customer 3,343,600
Notes Receivable Discounted is a contra Note Receivable account B
14. Long-term NR with unrealistic interest rate shall be initially measured at present value.
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Total face amount (2,000,000 x 4% x 6 = 480,000 + 2,000,000) 2,480,000
Carrying amount on January 1, 2024 (2,480,000 x 0.60) 1,488,000
Interest income (1,488,000 x 9%) 133,920
Carrying amount on December 31, 2024 1,621,920 A
15. Carrying amount of loan – December 31, 2025 6,000,000
PV of expected cash flows – December 31, 2025 (3,600,000 x 0.71) 2,556,000
Expected credit loss 3,444,000
Probability of default x 30%
Required allowance for impairment – December 31, 2025 1,033,200
Allowance for impairment – January 1, 2025 240,175
Impairment loss for 2025 793,025
Interest income for 2025 (6,000,000 x 7%) 420,000 D
16. Unadjusted inventory balance 4,410,000
Merchandise in transit, sold FOB Destination 330,000
Merchandise in transit, purchased FOB Shipping Point 510,000
Correct inventory balance 5,250,000
Goods sold in transit, FOB Destination shall be included in inventory C
17. Unadjusted inventory balance 2,200,000
Merchandise in transit, purchased FOB Shipping Point 138,000
Goods purchased on December 31, 2024 (350,000 x 80% x 90%) 252,000
Correct inventory balance 2,590,000 A
18. Purchase on December 10 (2,000,000 x 98%) 1,960,000
Purchase on December 11 (1,500,000 x 99%) 1,485,000
Payment of December 10 purchase within the discount period (1,960,000)
Purchase on December 24 (1,150,000 x 98%) 1,127,000
Purchase discount lost on December 11 purchase (1,500,000 x 1%) 15,000
Accounts payable 2,627,000 D
19. Units on hand on March 31 (4,000 – 3,000 + 6,000 – 5,900 + 4,000) 5,100
March 28 purchase (4,000 x 300) 1,200,000
March 12 purchase (1,100 x 250) 275,000
Cost of inventory using FIFO 1,475,000
Beginning inventory (4,000 x 200) 800,000
March 12 purchase (6,000 x 250) 1,500,000
March 28 purchase (4,000 x 300) 1,200,000
Cost of goods available for sale 3,500,000

Average unit cost – weighted average periodic (3,500,000 / 14,000) 250

Date Units Unit Cost Total Cost
March 1 4,000 200 800,000
March 10 (3,000) 200 ( 600,000)
March 12 6,000 250 1,500,000
Balance 7,000 242.86 1,700,000
March 20 (5,900) 242.86 (1,432,874)
March 28 4,000 300 1,200,000
Balance 5,100 287.67 1,467,126 B
20. Cost 4,080,000
LCNRV – applied on an item by item basis
Product A 560,000
Product B 848,000
Product C 1,120,000
Product D 1,400,000 3,928,000
Required allowance on December 31, 2024 152,000
Allowance before adjustment ( 275,000)
Decrease in allowance for 2024 – gain on reversal of writedown ( 123,000) B
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21. Loss on purchase commitment 200,000
Estimated liability on purchase commitment 200,000 C
22. Sales of milk inventory 850,000
Cost of goods sold ( 700,000)
Gross profit 150,000
Gain from change in FVLCOD – cows (450,000 – 230,000) 220,000
Gain from change in FVLCOD – milk when harvested 700,000
Net income 1,070,000
Biological assets on December 31, 2024 (3,500,000 + 220,000) 3,720,000
Bearer plants are classified as property, plant and equipment. A
23. Inventory – January 1 1,600,000
Net purchase (6,400,000 + 300,000 – 120,000) 6,580,000
Cost of goods available for sale 8,180,000
Cost of goods sold (9,300,000 x 75%) (6,975,000)
Cost of inventory – GP rate based on sales 1,205,000
Cost of goods available for sale 8,180,000
Cost of goods sold (9,300,000 / 1.25) (7,440,000)
Cost of inventory – GP rate based on cost 740,000 C
24. Cost of goods available for sale (1,900,000 + 4,500,000) 6,400,000
Cost of goods sold (5,600,000 x 70%) (3,920,000)
Estimated ending inventory 2,480,000
Cost of inventory owned (1,525,000 – 300,000) (1,225,000)
Insurance claim 1,255,000 D
25. Cost Retail
Beginning inventory 200,000 280,000
Purchases 1,425,000 2,140,000
Net markups (95,000 – 15,000) 80,000
Goods available for sale – conventional 1,625,000 2,500,000
Net markdowns (35,000 – 5,000) ( 30,000)
Goods available for sale – average 1,625,000 2,470,000
Sales (2,000,000)
Ending inventory 470,000
Cost of ending inventory – conventional (1,625 / 2,500 = 65% x 470,000) 305,500
Cost ratio – average (1,625,000 / 2,470,000) 65.79% C
26. Gain on sale of B shares (1,450,000 – 1,100,000) 350,000
Unrealized gain of A and C shares (4,400,000 – 4,300,000) 100,000
Trading equity investments are measured at FVPL. B
27. Dividend income is profit or loss (500,000 x 10%) 50,000
Unrealized gain in OCI (180 – 150 = 30 x 40,000) 1,200,000 A
28. Cost 7,000,000
Carrying amount of net assets acquired (15,000,000 x 30%) (4,500,000)
Excess cost 2,500,000
Excess cost allocated to inventory (2,500,000 x 30%) ( 750,000)
Goodwill 1,750,000
Cost 7,000,000
Share in net income of investee (8,500,000 x 30%) 2,550,000
Share in revaluation surplus of investee (1,500,000 x 30%) 450,000
Dividend received (2,500,000 x 30%) ( 750,000)
Carrying amount of investment at year-end 9,250,000 A
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29. Cost 2,000,000
Share in the net income (1,100,000 x 25%) 275,000
Cash dividend (300,000 x 25%) ( 75,000)
Unrealized profit from sale of inventory (150,000 x 25%) ( 37,500)
Carrying amount of investment 2,162,500 D
30. Dividend income in 2024 (1,200,000 x 15%) 180,000
Share in net income under equity method (4,500,000 x 40%) 1,800,000 B
31. Carrying amount – December 31, 2024 1,078,000
Share in the net income in 2025 (2,400,000 x 25% x 8/12) 400,000
Carrying amount – September 1, 2025 1,478,000
Fair value of remaining interest 700,000
Carrying amount of remaining interest (1,478,000 x 40%) (591,200)
Gain on remeasurement 108,800 B
32. Interest income (5,379,100 x 10%) 537,910
Interest income if fair value option is elected (5,000,000 x 12%) 600,000 C
33. Interest received (8,000,000 x 6%) 480,000
Discount amortization in 2025 (7,384,786 – 7,215,400) 169,386
Interest income for 2025 649,386
Fair value – December 31, 2025 8,100,000
Carrying amount (amortized cost) – December 31, 2025 7,384,786
Cumulative unrealized gain in OCI – December 31, 2025 715,214
Unrealized gain – OCI in 2024 (7,900,000 – 7,215,400) ( 684,600)
Unrealized gain – OCI in 2025 30,614 B
34. Life insurance expense (120,000 – 12,000 – 25,000) 83,000 D
35. Gain from change in fair value in 2024 (7,000,000 – 6,000,000) 1,000,000
Gain from change in fair value in 2025 (7,800,000 – 7,000,000) 800,000
The land is reclassified to property, plant and equipment on January 1, 2026. D
36. Lump sum purchase 6,800,000
Equipment B (20,000 + 230,000) 250,000
Equipment C (400,000 x 98%) 392,000
Warehouse 6,000,000
Total cost of assets 13,442,000 A
37. Cost of the new machine (450,000 + 70,000 + 15,000) 535,000
Loss on exchange (450,000 – 560,000) 110,000 C
38. Grant income (25,000,000 / 20) 1,250,000 C
39. Title search 52,000
Cash paid for land and old building 9,200,000
Special assessment 160,000
Cost of the land 9,412,000
Architect’s fee 317,000
Demolition cost of old building 1,450,000
Interest on loans during construction 740,000
Excavation before construction 1,900,000
Construction cost of new building 48,500,000
Cost of the new building 52,907,000
Cost of landscaping is classified as land improvement. A
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40. January 1 (1,000,000 x 12/12) 1,000,000
April 1 (1,500,000 x 9/12) 1,125,000
July 1 (2,000,000 x 6/12) 1,000,000
October 1 (700,000 x 3/12) 175,000
Weighted average expenditures 3,300,000
Specific borrowing (2,000,000 x 12% x 12/12 = 240,000 – 20,000) 220,000
General borrowing (1,300,000 x 13%* x 12/12) 169,000
Capitalized borrowing cost 389,000 B
*(160,000 + 178,000 = 338,000 / 2,600,000)
41. Denominator (8 x 9 = 72 / 2) 36
2024 depreciation (900,000 x 8/36) 200,000
2025 depreciation (900,000 x 7/36) 175,000
2026 depreciation (900,000 x 6/36) 150,000
2027 depreciation (900,000 x 5/36) 125,000
2028 depreciation (900,000 x 4/36) 100,000
The numerator is the remaining life in years. A
42. Depreciation of tires (120,000 / 2) 60,000
Depreciation of transmission (200,000 / 5) 40,000
Depreciation of remaining cost of tractor (680,000 /10) 68,000
Depreciation in 2024 168,000 C
43. Depletion (4,500,000 – 150,000 = 4,350,000 / 1,200,000 = 3.625 x 60,000) 217,500
Depreciation (180,000 / 1,200,000 = 0.15 x 60,000) 9,000 D
44. Carrying amount (8,100,000 – 900,000) 7,200,000
Recoverable amount (higher of value in use and FVLCOD) 6,300,000
Impairment loss in 2024 900,000
Depreciation for 2025 (6,300,000 / 4) 1,575,000
Recoverable amount 5,000,000
Carrying amount – December 31, 2025 as if not impaired (7.2M – 1.8M) 5,400,000
Increased carrying amount (lower) 5,000,000
Carrying amount – December 31, 2025 with impairment (6.3M – 1.575M) 4,725,000
Gain on reversal of impairment in 2025 275,000 B
45. Revalued amount – January 1, 2026 4,680,000
Carrying amount – January 1, 2026 (5,000,000 – 1,000,000) 4,000,000
Revaluation surplus – January 1, 2026 680,000
Realized to retained earnings in 2026 (680,000 / 8) ( 85,000)
Revaluation surplus – December 31, 2026 595,000
Proceeds from disposal 3,400,000
Carrying amount – December 31, 2028 (4,680,000 – 1,755,000) 2,925,000
Gain on disposal 475,000
Upon disposal, any amount of revaluation surplus is transferred to retained earnings. C
46. Cost of franchise 7,000,000
Cost of license 3,000,000
Total cost 10,000,000
Amortization of franchise (7,000,000 / 10) ( 700,000)
Carrying amount – December 31, 2024 9,300,000 C
47. Research and development expense (330,000 + 400,000) 730,000 D
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48. Premium expense (150,000 x 60% = 90,000 / 10 = 9,000 x 65) 585,000

Cost of premiums distributed (40,000 / 10 = 4,000 x 65) (260,000)
Liability for premiums – December 31, 2024 325,000 D

49. January 1 2024 sales (7,500,000 x 6/12) 3,750,000

First contract year – January 1, 2024 to December 31, 2024 (3.75M x 3%) 112,500
Second contract year – January 1, 2025 to December 31, 2025 (3.75M x 5%) 187,500

July 1, 2024 sales (7,500,000 x 6/12) 3,750,000

First contract year – July 1, 2024 to June 30, 2025 112,500

Second contract year – July 1, 2025 to June 30, 2026 187,500

Products still under warranty on December 31, 2024

Second contract year – January 1, 2025 to December 31, 2025 187,500

First contract year – January 1, 2025 to June 30, 2025 (112,500 x 6/12) 56,250
Second contract year – July 1, 2025 to June 30, 2026 187,500
Adjusted warranty liability – December 31, 2024 431,250 A

50. Provision 12,000,000

Deductible clause (loss) ( 1,000,000)
Reimbursement asset 11,000,000 B

51. B 61. B
52. B 62. C
53. A 63. B
54. C 64. B
55. C 65. D
56. D 66. A
57. D 67. D
58. B 68. C
59. C 69. C
60. A 70. C

END