Multiple Choice - Theoretical ACCOUNTING 502 - QUIZ 2

1 B 16 B Suggested Answers
2 B 17 C
3 A 18 B 1 105,375.00
4 D 19 A 2 16,135.00
5 B 20 C 3 1,500.00
6 D 21 A 4 16,500.00
7 D 22 B 5 81,255,150.00
8 A 23 B 6 2,999,608.33
9 C 24 B 7 6,935,774.00
10 A 25 B 8 3,594,245.00
11 A 26 B
12 D 27 B
13 D 28 B
14 D 29 C
15 D 30 B

Multiple Choice - Computational (Solution)

16 Answer: B AA1001 CZ4225 ZG2184
Purchase price 4,000,000.00 1,800,000.00 2,400,000.00
Freight charges 50,000.00
Installation costs 10,000.00
Cost of testing 15,000.00
Proceeds from testing (2,300.00)
Dismantling cost (PV) 13,900.00
Discount (48,000.00)
Total cost 4,086,600.00 1,800,000.00 2,352,000.00 8,238,600.00

17 Answer: C
Equipment - AA1001
Year Cost - SV Fraction Depreciation Accum. Dep. Carrying Amt.
Acquisition Cost 4,086,600.00
2017 4,046,600.00 10/55 735,745.45 735,745.45 3,350,854.55
2018 4,046,600.00 9/55 662,170.91 1,397,916.36 2,688,683.64
2019 4,046,600.00 8/55 588,596.36 1,986,512.73 2,100,087.27

Equipment - CZ4225
Initial cost 1,800,000.00
Salvage value (10,000.00)
Depreciable cost 1,790,000.00
Divided by: 5.00
Annual depreciation 358,000.00
Multiplied by: 2/3
Depreciation Expense 238,666.67

Depreciation - AA1001 735,745.45

Depreciation - CZ4225 238,666.67
Total Depreciation Expense 974,412.12
18 Answer: C
Total depreciation expense 974,412.12
Interest on note (1,500,000 x 9% x 8/12) 90,000.00
Amortization of dismantling cost 1,112.00
Total expenses 1,065,524.12

19 Answer: A
Date Depreciation Accum. Dep. Carrying Amt.
01/01/17 4,639,400.00
12/31/17 579,925.00 579,925.00 4,059,475.00
12/31/18 579,925.00 1,159,850.00 3,479,550.00

20 Answer: C
Date Interest Exp. Interest Paid Balance
01/01/17 4,639,400.00
12/31/17 556,728.00 500,000.00 4,696,128.00
12/31/18 563,535.36 500,000.00 4,759,663.36

21 Answer: A Effect to R/E

Understatement of interest expense - 2017 (56,728.00)
Understatement of interest expense - 2018 (63,535.36)
Overstatement of depreciation expense - 2017 45,075.00
Overstatement of depreciation expense - 2018 45,075.00
Net overstatement of Retained Earnings (30,113.36)

22 Answer: B
Should be entry:
Notes Receivable 3,852,360.00
Accumulated Depreciation (13.25 yrs) 1,325,000.00
Building 5,000,000.00
Gain on disposal of building 177,360.00

Computation of PV of Note:
PV of Note (4,000,000 x 0.5935) 2,374,000.00
PV of Interest (400,000 x 3.6959) 1,478,360.00
Total Present Value 3,852,360.00

23 Answer: B
Interest Income (3,852,360 x 11% x 9/12) 317,819.70

24 Answer: B
Date Interest Inc. Interest Rec. Balance
04/01/16 3,852,360.00
12/31/16 317,819.70 300,000.00 3,870,179.70
12/31/17 425,719.77 400,000.00 3,895,899.47

25 Answer: B Effect to NI
Gain on disposal - overstated (122,640.00)
Depreciation expense - understated (25,000.00)
Interest income - understated 17,819.70
 Net overstatement in net income (129,820.30)

26 Answer: B Principal Interest

Loan from BPI 30,000,000.00 3,300,000.00
Loan from PNB 15,000,000.00 1,275,000.00
Total 45,000,000.00 4,575,000.00

Average capitalization rate 10.17%

Date Expenditures Fraction Balance

Jan. 2 9,000,000.00 12/12 9,000,000.00
Mar. 31 8,700,000.00 9/12 6,525,000.00
Jun. 30 4,300,000.00 6/12 2,150,000.00
Jul. 31 24,000,000.00 5/12 10,000,000.00
Dec. 31 4,000,000.00 - 0.00
Average Expenditures 27,675,000.00

Specific borrowing:
Actual borrowing cost (20,000,000 x 10%) 2,000,000.00
General borrowing:
Average expenditures 27,675,000.00
Amount related to specific bor. (20,000,000.00)
Amount related to general bor. 7,675,000.00
Multiplied by: cap. rate 10.17% 780,547.50
Total capitalizable borrowing cost 2,780,547.50

27 Answer: B
Actual expenditures 50,000,000.00
Total capitalizable borrowing cost 2,780,547.50
Total cost of building 52,780,547.50

28 Answer: B
Total cost of building 52,780,547.50
Divided by: useful life 20.00
Depreciation expense 2,639,027.38

29 Answer: C
Total cost of building 52,780,547.50
Accumulated depreciation (2,639,027 x 3 years) (7,917,082.13)
Carrying value of building - 2017 44,863,465.38

30 Answer: B
Depreciation expense - understated for 3 years
[(2,639,027 - 2,500,000) x 3] (417,082.13)
Interest expense - overstated 2,780,547.50
Net understatement of Retained Earnings 2,363,465.38

Problem Solving
1 Journal entry to record the exchange:
 Office Furniture* 117,000.00
Cash 18,000.00
Accumulated Depreciation 317,250.00
Machine 430,000.00
Gain on exchange 22,250.00

*Fair value of the asset given minus cash received

Initial cost of the Office Furniture 117,000.00

Residual Value (5,400.00)
Depreciable Cost 111,600.00
Divided by: useful life 8.00
Annual Depreciation 13,950.00
Multiply by: 10/12
Depreciation Expense 11,625.00

Initial cost of the Office Furniture 117,000.00

Accumulated Depreciation (11,625.00)
Carrying Value, 12/31/2016 105,375.00

2 Depreciation expense on the office furniture 11,625.00

Depreciation expense on the old machine:
Original cost of the machine 430,000.00
Book value of the machine (317,250.00)
Accumulated depreciation 112,750.00
Divide by: (1/1/12 - 3/1/16) 50.00
Monthly depreciation 2,255.00
Multiply by: 2.00 4,510.00
Total depreciation expense 16,135.00

3 Proceeds from the sale of Machine B 87,000.00

Carrying value as of July 1, 2016:
Carrying value as of 1/1/2017 114,000.00
Depreciation for 6 months
(P114,000/2 x 6/12) (28,500.00) (85,500.00)
Gain on sale of Machine B 1,500.00

4 Machine A
Carrying value, 12/31/2016 189,000.00
Fair value (168,000.00)
Revaluation decrease 21,000.00

Machine C
Carrying value, 12/31/2016 (P240,000 x 3.5/4) 210,000.00
Fair value (205,500.00)
Revaluationd decrease 4,500.00

Revaluation loss for 2016

Machine A (P21,000 - P9,000*) 12,000.00
 Machine C 4,500.00
Total 16,500.00

*Revaluation surplus, 12/31/2015 12,000.00

Piecemeal realization in 2016
(P12,000 x 1/4) (3,000.00)
Balance as of 12/31/2016 9,000.00

Solution for items 5 to 8:

Principal Interest
11% - The Main Bank 20,000,000.00 2,200,000.00
8.5% - The Other Bank 30,000,000.00 2,550,000.00
50,000,000.00 4,750,000.00
Average Capitalization Rate 9.50%

Date Expenditures Fraction Balance

Jan. 2 7,600,000.00 12/12 7,600,000.00
Feb. 1 4,900,000.00 11/12 4,491,666.67
Apr. 30 10,000,000.00 8/12 6,666,666.67
Jul. 1 8,400,000.00 6/12 4,200,000.00
Aug. 1 6,900,000.00 5/12 2,875,000.00
Nov. 30 3,500,000.00 1/12 291,666.67
Dec. 31 700,000.00 - 0.00
Total 42,000,000.00 26,125,000.00

Specific Borrowing:
Actual Interest (P15,000,000 x 10%) 1,500,000.00
General Borrowings:
Average expenditures 26,125,000.00
Amount related to specific bor. (15,000,000.00)
Amount related to general bor. 11,125,000.00
Multiply by: 9.50% 1,056,875.00
Total Capitalizable Borrowing Cost 2,556,875.00

Building B:
Cost to construct Building B 42,000,000.00
Capitalizable Borrowing Cost 2,556,875.00
Initial Cost of Building B 44,556,875.00

Land and Building A:

Land at fair value 35,000,000.00

Building A at fair value (P80,000,000 - P35,000,000) 45,000,000.00

Cost to remodel and renovate building 1,500,000.00
Initial Cost of Building A 46,500,000.00

Date Depreciation Accum. Depn. Carrying Amt.

Jan. 2, 2012 46,500,000.00
Dec. 31, 2012 1,550,000.00 1,550,000.00 44,950,000.00
 Dec. 31, 2013 1,550,000.00 3,100,000.00 43,400,000.00
Dec. 31, 2014 1,550,000.00 4,650,000.00 41,850,000.00
Dec. 31, 2015 1,550,000.00 6,200,000.00 40,300,000.00
Dec. 31, 2016 1,550,000.00 7,750,000.00 38,750,000.00
Dec. 31, 2017 1,550,000.00 9,300,000.00 37,200,000.00

Equipment A:
Invoice cost of Equipment 7,000,000.00
Discount (taken or not) (350,000.00)
Installation costs 100,000.00
Cost of testing the equipment 85,000.00
Proceeds from the initial run (25,000.00)
Initial Cost of Equipment A 6,810,000.00

Date Depreciation Accum. Depn. Carrying Amt.

Mar. 31, 2012 6,810,000.00
Dec. 31, 2012 502,500.00 502,500.00 6,307,500.00
Dec. 31, 2013 670,000.00 1,172,500.00 5,637,500.00
Dec. 31, 2014 670,000.00 1,842,500.00 4,967,500.00
Dec. 31, 2015 670,000.00 2,512,500.00 4,297,500.00
Dec. 31, 2016 670,000.00 3,182,500.00 3,627,500.00
Dec. 31, 2017 670,000.00 3,852,500.00 2,957,500.00

Equipment B:
Purchase price of equipment 5,000,000.00
Installation costs 150,000.00
Cost to dismantle equipment (PV) 20,200.00
Initial Cost of Equipment B 5,170,200.00

Date Depreciation Accum. Depn. Carrying Amt.

Jan. 2, 2015 5,170,200.00
Dec. 31, 2015 646,275.00 646,275.00 4,523,925.00
Dec. 31, 2016 646,275.00 1,292,550.00 3,877,650.00
Dec. 31, 2017 646,275.00 1,938,825.00 3,231,375.00

Machine A:
Purchase price of machine 850,000.00
Cost of testing the machine 15,000.00
Initial Cost of Machine A 865,000.00

Date Dep. Cost Factor Depreciation Carrying Amt.

Jul. 1, 2017 865,000.00
7/1/17 - 12/31/17 800,000.00 5/15 133,333.33 731,666.67
1/1/18 - 6/30/18 800,000.00 5/15 133,333.33 598,333.33
7/1/18 - 12/31/18 800,000.00 4/15 106,666.67 491,666.67
1/1/19 - 6/30/19 800,000.00 4/15 106,666.67 385,000.00

Year 2016 Year 2017

5 Land 35,000,000.00 35,000,000.00
Building A 38,750,000.00 37,200,000.00
 Building B 44,556,875.00
Equipment A 3,627,500.00 2,957,500.00
Equipment B 3,877,650.00 3,231,375.00
Machine A 731,666.67
Carrying Value of PPE - 12/31/2016 81,255,150.00 123,677,416.67

6 Year 2016 Year 2017

Land 0.00 0.00
Building A 1,550,000.00 1,550,000.00
Building B 0.00 0.00
Equipment A 670,000.00 670,000.00
Equipment B 646,275.00 646,275.00
Machine A 0.00 133,333.33
Total Depreciation Expense - 2017 2,866,275.00 2,999,608.33

7 Total Depreciation Expense 2,999,608.33

Interest expense:
Specific borrowing 1,500,000.00
General Borrowings 4,750,000.00
Total 6,250,000.00
Capitalizable borrowing cost (2,556,875.00) 3,693,125.00
Interest expense on note payable 240,000.00
Amortization of dismantling cost (P25,338.88 x 12%)* 3,040.67
Total expenses for 2017 6,935,774.00

* Date Interest Expense Amortization Present Value

Jan. 2, 2015 20,200.00
Dec. 31, 2015 2,424.00 2,424.00 22,624.00
Dec. 31, 2016 2,714.88 2,714.88 25,338.88
Dec. 31, 2017 3,040.67 3,040.67 28,379.55

8 Effect to R/E
Cost to remodel and renovate building charged to expense 1,500,000.00
Depreciation on Building A - understatement (6 yrs.) (300,000.00)
Purchase discount lost on Equipment A (350,000.00)
Proceeds from initial testing of Equipment A charged to income (25,000.00)
Depreciation on Equipment A - overstatement (6 yrs.) 215,625.00
Depreciation on Equipment B - understatement (3 yrs.) (7,575.00)
Interest expense - overstatement due to borrowing cost 2,556,875.00
Amortization of dismantling cost - unrecognized for 3 years (8,180.00)
Cost of testing Machine A charged to expense 15,000.00
Depreciation on Machine A - understatement (2,500.00)
Net understatement of Retained Earnings in 2017 3,594,245.00