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Mohi-ud-Din Islamic University, AJK • FINANCE •

FINANCE 50502552 • juliejuls02 • 4/3/2017 •
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a. 879,166
b. 740,278
c. 800,000
d. 500,000

Solution:

Cost of the Asset: 3,165,000

PV of Unguaranteed Residual Value: 285,000
(500,000*0.57)

PV of Minimum Lease Payments: 2,880,000

PV Factor 3.60

Annual Rental Payment: 800,000

17. In 2014, ARUTRO COMPANY purchased property with natural resources for P28,000,000.
The property had a residual value of P5,000,000. However, the entity is required to restore
the property to the original condition at discounted amount of P2,000,000. In 2014, the entity
spent P1,000,000 in development costs and P3,000,000 in building. In 2015, the amount of
P4,000,000 was spent for additional development on the mine. Production began in 2015
and tons extracted totaled 3,000,000 in 2015 and 2,500,000 in 2016. The remaining tons
totaled 7,000,000 and 3,500,000, respectively on December 31, 2015 and December 31,
2016. What amount of depletion should be recognized in 2016?

a. 10,500,000
b. 12,250,000
c. 9,000,000
d. 8,750,000

Solution:

Purchase price 28,000,000 Depletable amount

30,000,000
Restoration cost 2,000,000 Depletion in 2015 9,000,000
Development cost – 2014 1,000,000 Carrying value 21,000,000
Development cost – 2015 4,000,000
Total cost 35,000,000
Residual value ( 5,000,000 )
Depletable amount 30,000,000

Tons extracted in 2015 3,000,000 Tons extracted in 2016 2,500,000

Tons remaining on 2015 7,000,000 Tons remaining on 2016 3,500,000
Total no. of tons available 10,000,000 Total no. of tons available 6,000,000

Rate in 2015 (30,000,000/10,000,000) 3.00 Rate in

2016 (21,000,000/6,000,000) 3.50

Depletion in 2015 (3,000,000 * 3.00) 9,000,000 Depletion in 2016 (2,500,000 * 3.50) 8,750,000

18. CARLO COMPANY reported the following information for 2015:

Inventory, January 1 5,000,000

Purchases 26,000,000
Freight in 2,000,000
Purchases returns and allowances 3,500,000
Purchase discounts 1,500,000
Sales 30,000,000
Sales returns 3,000,000
Sales discounts 1,000,000

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Solution:

Principal 2,000,000 Principal 2,000,000

Interest (2,000,000*3%*9/12) 45,000 Interest (2,000,000*3%*5) 300,000
Maturity value 2,045,000 Maturity value 2,300,000
PV factor 0.944 PV factor 0.68
PV of Notes receivable 1,930,480 PV of Notes receivable 1,564,000

Total carrying amount (1,930,400+1,564,000) 3,494,480

20. Hazzel Company was organized on January 1, 2014. On that date, the entity issued
200,000 shares with P10 par value at P15 per share. During the period January 1, 2014
through December 31, 2015, the entity reported net income of P2,000,000 and paid cash
dividends of P500,000. On January 5, 2015, the entity purchased 10,000 shares at P20 per
share to be held as treasury. On December 31, 2015, 5,000 treasury shares were sold at
P30 per share and the remaining treasury shares were retired. What is the total
shareholders’ equity on December 31, 2015?

a. 4,450,000
b. 4,350,000
c. 4,400,000
d. 4,950,000

Solution:

Equity – January 1, 2014 3,000,000

Net income 2,000,000
Dividends paid ( 500,000 )
Purchase of treasury shares (10,000*20) ( 200,000 )
Reissuance of treasury shares (5,000*30) 150,000
Total shareholder’s equity – December 31, 2015 4,450,000

21. Pearl Company revealed the following changes in the accounts for 2014:

Increase
(Decrease)
Cash 1,000,000
Accounts receivable, net of allowance 1,900,000
Inventory 2,200,000
Equipment (1,500,000)
Accounts payable 500,000
Bonds payable (2,000,000)

During the current year, the entity issued 10,000 ordinary shares of P100 par value for
P150 per share. Dividend of P4,000,000 was paid in cash during the year. The entity
borrowed P3,000,000 from the bank and made interest payment of P200,000. The bank
loan is unpaid on December 31, 2014 and the interest payable on December 31, 2014
was P100,000. There is no interest payable on January 1, 2014. Equipment with fair
value of P500,000 was donated by a shareholder during the year. What is the net
income for the current year?
a. 2,000,000
b. 6,000,000
c. 4,500,000
d. 4,000,000

Solution:
Increase (Decrease)
Cash 1,000,000
Accounts receivable, net of allowance 1,900,000
Inventory 2,200,000
Equipment (1,500,000)
Accounts payable 500,000
Bonds payable (2,000,000)
Loan payable 3,000,000
Interest payable 100,000
Net increase (decrease) 2,000,000

Share capital (10,000*100) 1,000,000

Additional paid-in capital (10,000*50) 500,000
Dividends paid (4,000,000)
Donated capital (equipment) 500,000
Equity (2,000,000)

Net income (2,000,000+2,000,000) 4,000,000

22. On January 1, 2015, AURALENE COMPANY purchased a new machine for P6,000,000
for the purpose of leasing it. The machine has an estimated 10-year life. On April 1, 2015,
the entity leased the machine to a lessee for three years at a monthly rental of P400,000.
The lessee paid the rental for one year of P4,800,000 on April 1, 2015 and additionally paid
P900,000 to the lessor as a lease bonus to obtain the three-year lease. On April 1, 2015, the
entity paid P300,000 to a broker as a finder fee. What is the net rental income for 2015?

a. 3,150,000
b. 4,350,000
c. 3,200,000
d. 4,400,000

Solution:

Rental income – 4/1/2015-12/31/2015 (400,000*9 months) 3,600,000

Depreciation expense – 4/1/2015-12/31/2015
(6,000,000/10 years * 9/12) ( 450,000 )
Net rental income for 2015 3,150,000

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