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CANNON BALL REVIEW

I. Balance Sheet or Statement of Financial Position

a) Assets and liabilities shall be presented in the order of liquidity (for financial institutions) or current and cur-
rent and non-current presentation for entities with a clearly identifiable normal operating cycle.
b) Current Assets include: Cash and cash equivalents (elaborated later in the cash section), Accounts re-
ceivable and trade notes receivable, Inventory (Merchandise, FG, WIP and RMI), Non-trade receivable that
are collectible within 12 months, Prepaid expenses, Trading security investments including derivatives, Short
term investments and Noncurrent assets held for resale. ALL OTHER ASSETS SHALL BE CLASSIFIED
AS NONCURRENT.
c) Current Liabilities include: Accounts payable and Trade notes payable, Accrued expenses and Income tax
payable, Nontrade liabilities that are payable on demand and due within 12 months and Liabilities that are
held for trading purposes. ALL OTHER LIABILITIES SHALL BE CLASSIFIED AS NONCURRENT.
d) Non-trade liabilities that are due within 12 months shall be classified as noncurrent if:
• The entity has the unconditional right to defer the settlement within 12 months from the balance sheet
date. (end of the reporting period)
• The liability has been refinanced on or before the balance sheet date.
• The entity has the discretion to refinance the liability on a long-term basis.
e) SHAREHOLDERS’ EQUITY SHALL INCLUDE:
• Share capital, which is both the par value or stated value of issued shares meaning shares that have
been fully paid or the entire consideration from the subscription received.
• Share premium, which includes the excess over par or stated value from issuance, gains on share
transactions and other equity items such as “donated capital, share options outstanding, share warrants
outstanding and share premium on convertible bonds payable”
• Share capital PLUS Share premium equals the contributed capital of an entity. But shall also include
“Subscribed share capital net of subscriptions receivable and share dividends distributable or payable”.
However, if the subscriptions receivable is collectible within 12 months, it shall be presented as part of
current assets under the heading “Trade and other receivables”.
• Retained earnings or Accumulated profits and losses.
• Other comprehensive income – Income and expenses that are not included in Profit or Loss as required
by a standard or an interpretation. (Discussed later in the income statement portion)
• Treasury shares at COST as a deduction from equity.

Problems

1. Jenna Company’s December 31, 2016 statement of financial position reported the following current assets:
Cash (net of an overdraft of P500,000 in another bank) 3,500,000
Accounts receivable 7,500,000
Inventory 3,000,000
Prepaid expenses 1,200,000
Deferred tax asset 500,000
Land classified as “held for sale” 2,000,000
18,200,000
An analysis of the accounts receivable disclosed that accounts receivable comprised the following:
Trade accounts receivable (net of a P300,000 credit balance in
a customer’s account) 5,000,000
Allowance for doubtful accounts (500,000)
Selling price of Jenna Company’s unsold goods sent to Baguio Company on
consignment at 150% of cost and excluded from Jenna’s ending inventory 3,000,000
7,500,000
What is the total current assets at December 31, 2016?
a. 17,200,000 c. 14,500,000
b. 14,700,000 d. 17,000,000
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2. The following data are available for the financial position of Jake Company on December 31, 2016:
Cash, including sinking fund of P800,000 2,000,000
Notes receivable (P500,000 pledged) 1,500,000
Accounts receivable-unassigned 200,000
Accounts receivable-assigned 400,000
Notes receivable discounted 300,000
Equity in assigned accounts 50,000
Inventory, including P200,000 cost of goods in transit purchased
FOB shipping point. The goods were received on January 5, 2017 4,000,000
Allowance for doubtful accounts 150,000
Financial Assets held for trading (Cost P800,000) 1,000,000
How much of the current assets should be shown in the statement of financial position as of December 31,
2016?
a. 7,850,000
b. 7,650,000
c. 7,900,000
d. 8,150,000
3. Included in Stephan Corporation’s liability account balances at December 31, 2016 were the following:
12% note payable issued on April 15, 2013 maturing on April 15, 2017 10,000,000
10% note payable issued on February 1, 2014 maturing
on January 31, 2020 5,000,000
Stephan’s December 31, 2016 financial statements were issued on April 10, 2017. As of December 22, 2016,
the lender of the P10,000,000 has agreed to postpone payment until January 1, 2018. The 10% note payable
maturing on January 31, 2017 includes a loan covenant. The term of the note gives the lender to demand
payment if Stephan fails to make a monthly interest payment. As of December 31, 2016, Stephan is three
months behind in paying the required interest. However, the holder has agreed as of December 30, 2016 not
to demand payment in 2017 and for Stephan to rectify the breach with in 2017. What is the total amount to be
presented as noncurrent liability relating to these notes?
a. 10,000,000
b. 5,000,000
c. 15,000,000
d. 0
4. Jay Company provided the following information on December 31, 2016:
Accounts payable, net of debit balances of P100,000 in creditors’ accounts 1,900,000
Accrued expenses 500,000
Bonds payable due December 31, 2017 3,000,000
Discount on bonds payable 200,000
Deferred tax liability 400,000
Income tax payable 700,000
Cash dividend payable 800,000
Stock dividend payable 300,000
Note payable – 6%, due March 1, 2017 1,500,000
Note payable – 8%, due October 1, 2017 1,000,000
The 2016 financial statements were issued on March 31, 2017. On March 1, 2017, the 6% note payable was
refinanced on a long-term basis. Under the loan agreement for the 8% note payable, the entity has the discre-
tion to refinance the obligation for at least twelve months after December 31, 2016. The deferred tax liability is
based on temporary differences that will reverse in 2017. A sinking fund of P3,000,000 was set aside to pay the
bonds payable upon maturity. What amount should be reported as total current liabilities on December 31,
2016?
a. 8,300,000
b. 9,300,000
c. 9,000,000
d. 5,500,000

ANSWERS: D, A, C, A
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II. Income Statement and Statement of Comprehensive Income

a) Income encompasses both revenue and gains. Examples include: Revenue from the sale of goods and ser-
vices, investment income (equity method), dividend income, interest income, gains on sale, unrealized gain
on FA at FVPL.
b) Expenses encompasses both expenses and losses. Examples include: Cost of sales, Selling expenses or
distribution cost, General and administrative expenses and other expenses. These are the classification of
expenses under the “function” of expense approach. The other presentation of expenses is the “Nature” of
expenses where expenses are not reallocated to the functions that have been enumerated.
c) Under the “nature” of expense approach, there is no cost of sales instead the amount of inventory purchases
is presented and the increase or decrease in inventory is also presented.
d) Income less expenses is the “income before taxes”. After deducting income tax expense this will amount to
the entity’s net income unless the entity has “discontinued operations”. If the entity has DO, the net amount
is what is known as “income from continuing operations”.
e) After adding or deducting the amount of income or loss from discontinued operations, this is the only time
that the entity will now present its NET INCOME OR LOSS.
f) Single Statement Approach: The OCI items shall now be added or deducted from the net income to com-
pute for the “Comprehensive Income”
g) Two Statement Approach: The Net income from the income statement is transferred as the first line item in
the statement of comprehensive income, then from that point the OCI items are added or deducted from net
income to also compute for the “Comprehensive Income”.
h) There are two types of OCI items, those that are reclassified to profit or loss (RA) and those that are reclassi-
fied to Retained Earnings (RE). OCI includes the following
• Unrealized gain or loss on equity investments measured at FVOCI (RE)
• Unrealized gain or loss on debt investments measured at FVOCI (RA)
• Unrealized gain or loss from derivative contracts designated as cash flow hedge (RA)
• Revaluation Surplus (RE)
• Remeasurement Gains and losses for defined benefit plans (RE)
• Change in fair value arising from credit risk for financial liabilities measured at FVPL (RE)
• Translation gains and losses of foreign operations (RA)

Problems

1. The income statement accounts of Gringo Company for the year 2016 included the following:

Net sales 9,500,000

Cost of goods sold 4,000,000
Distribution cost 600,000
Administrative expenses 1,200,000
Interest expense 700,000
Other expense 400,000
Interest income 200,000
Gain from expropriation 100,000
Investment income 200,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain FA at FVTOCI 1,100,000
Foreign currency translation adjustment loss 200,000
Revaluation surplus 2,500,000
Dividends declared 1,000,000
Investments by stockholders 400,000
Correction of an error-debit 3,000,000

1. The 2016 statement of comprehensive income should report income before income taxes at what amount?
a. 3,000,000
b. 3,100,000
c. 2,300,000
d. 3,500,000
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2. The 2016 statement of comprehensive income should report income from continuing operations at what
amount?
a. 3,200,000
b. 3,100,000
c. 2,300,000
d. 2,900,000
3. The 2016 statement of comprehensive income should report net income at what amount?
a. 3,400,000
b. 3,100,000
c. 2,300,000
d. 2,900,000
4. The 2016 statement of comprehensive income should report comprehensive income at what amount?
a. 5,700,000
b. 6,300,000
c. 5,900,000
d. 6,500,000
2. The following information was taken from Ozz Company’s accounting records for the year ended December 31,
2016:
Sales 10,000,000
Decrease in goods in process inventory 200,000
Decrease in raw materials inventory 350,000
Increase in finished goods inventory 500,000
Raw materials purchased 2,100,000
Direct labor payroll 1,000,000
Factory overhead 800,000
Freight in 300,000
Freight out 900,000
General and administrative expenses 1,600,000
How much is Ozz Company’s income before tax?
a. 4,150,000
b. 4,000,000
c. 3,250,000
d. 3,750,000
3. Mark Company provided the following information for the current year:
Income from continuing operations 5,000,000
Income from discontinued operation 1,300,000
Unrealized gain on financial asset at FVTPL 2,500,000
Unrealized gain on financial asset at FVTOCI 1,500,000
Unrealized gain on futures contract designated as a cash flow hedge 500,000
Actuarial loss during the year due to increase in PBO 400,000
Foreign translation adjustment – debit 100,000
Revaluation surplus during the year 2,000,000
Loss on credit risk of financial liability designated at FVPL 300,000
What amount should be reported as comprehensive income for the year?
a. 3,500,000
b. 1,500,000
c. 6,000,000
d. 9,500,000

ANSWERS: B, C, D, B, C, D
 PAGE 5
III. ACCOUNTING CHANGES AND ERRORS
a) Change in Accounting Policies:
• Change from one acceptable to another acceptable accounting method.
• Required by a standard or interpretation or voluntary because will result in info that is more relevant and
reliable.
• Follow the transitional provision or adjust retroactively by adjusting the beginning balance of RE (Retro-
spective Application)
b) Chang in Accounting Estimate:
• Change in the useful life, residual value and depreciation method of assets, rates for doubtful accounts
expense and method of estimating the allowance for doubtful accounts and the rate used for warranties.
• Results in the availability of new information or more experience.
• Treated prospectively by recognizing the effect in profit or loss.
c) Prior Period Errors:
• Errors in prior period financial statements as a result of omissions and other misstatements including
mathematical errors and misapplication of accounting policies.
• Also retrospectively adjust the beginning balance of retained earnings and the affected asset or liability
(Retrospective Restatement)

Problems

1. During 2016, King Company decided to change from the FIFO method of inventory valuation to the weighted
average method. Inventory balances under each method were:

FIFO Average
December 31, 2014 9,000,000 8,500,000
December 31, 2015 8,000,000 8,600,000
December 31, 2016 7,000,000 7,900,000

Ignoring income tax, in its 2016 statement of changes in shareholders’ equity, what amount should King report
as an adjustment to retained earnings as a result of this accounting change?
a. 100,000 increase
b. 100,000 decrease
c. 600,000 increase
d. 600,000 decrease

2. On January 1, 2013, Lyle Company purchased for P5,000,000 a machine with a useful life of ten years with no
residual. The machine was depreciated by the straight-line method of depreciation. On January 1, 2016 the en-
tity determined that the residual value of this equipment at the end of its useful life is P500,000 and the total life
of the asset from acquisition was 15 years. What amount should be reported as depreciation for 2016?
a. 250,000
b. 500,000
c. 292,000
d. 200,000

3. On January 1, 2014, Wesley Company purchased for P6,000,000 a machine with a useful life of 5 years and a
residual value of P600,000. The machine was depreciated by the double declining balance method and the
accumulated depreciation of the machine was P3,840,000 on December 31, 2015. Wesley changed to the
straight-line method on January 1, 2016 and the residual value did not change. In its 2016 statement of finan-
cial position, what amount should Wesley report as accumulated depreciation for this machine?
a. 4,360,000
b. 4,560,000
c. 4,704,000
d. 3,840,000
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4. While preparing its financial statements for 2016, June Company discovered computational errors in its 2015
and 2014 depreciation expense. These errors resulted in overstatement of each year’s income by P25,000, net
of income taxes. The following amounts were reported in the previously issued financial statements:

2015 2014
Retained earnings, January 1 700,000 500,000
Net income 150,000 200,000
Retained earnings, December 31 850,000 700,000

June’s net income for the year 2016 is correctly reported at P500,000 and dividends of P100,000 were de-
clared. What is the balance of retained earnings on December 31, 2016?
a. 1,200,000
b. 1,250,000
c. 1,300,000
d. 1,225,000

5. Rubio Company failed to accrue warranty costs of P200,000 in its December 31, 2016 financial statements. In
addition, a change from straight-line to accelerated depreciation made at the beginning of 2017 resulted in a
cumulative effect of P400,000. Both the P200,000 and the P400,000 are before cumulative effect of taxes
amounts. What amount before tax should Rubio report as prior period error in the 2017 statement of retained
earnings?
a. 200,000 c. 400,000
b. 600,000 d. 0

ANSWERS: C, A, A, A, A

IV. EVENTS AFTER THE REPORTING PERIOD

a) An event, which could be favorable or unfavorable, that occurs between the reporting period and
the date that the financial statements are authorized for issue.
b) Adjusting event: An event after the reporting period that provides further evidence of conditions
that existed at the end of the reporting period, including an event that indicates that the going
concern assumption in relation to the whole or part of the enterprise is not appropriate.
c) Non-adjusting event: An event after the reporting period that is indicative of a condition that
arose after the reporting period.
Problem

1. The audit of Atomic Company for the year ended December 31, 2016 was completed on March 1, 2017. The
financial statements were signed by the managing director on March 15, 2017 and approved by the sharehold-
ers on March 31, 2017. The next events have occurred.
* On January 15, 2017, a customer owing P900,000 to Atomic filed for bankruptcy. The financial statements
include an allowance for doubtful debts pertaining to this customer of P100,000
* Specialized equipment costing P525,000 purchased on September 1, 2016 was destroyed by fire on De-
cember 15, 2016. Atomic Company has booked a receivable of P400,000 from the insurance company.
After the insurance company completed its investigation on February 1, 2017, it was discovered that the
fire took place due to the negligence of the machine operator. As a result, the insurer’s liability was zero on
this claim.
* Atomic Company’s issued capital comprised 100,000 equity shares with P100 par value. The company is-
sued additional 25,000 shares on March 1, 2017.
Atomic Company should report a net amount of “adjusting events” on December 31, 2016 at
a. 1,300,000
b. 1,200,000
c. 3,800,000
d. 3,700,000

ANSWER: B
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V. DISCONTINUED OPERATION AND NONCURRENT ASSET HELD FOR SALE

a) Discontinued operation is a major line of business or geographical area of operations that has been disposed
of or “classified as held for sale” or a subsidiary acquired with the exclusive intention to sell.
b) The Income or Loss from Discontinued Operation to be presented as ONE line item below income from con-
tinuing operations and NET of TAX shall include the Net Operating Income, Gain or loss on disposal of as-
sets, Impairment Loss for the remeasurement to FV less Cost of Disposal and the Termination cost to be ac-
crued.
c) The assets and liabilities are also presented separately from the assets and liabilities from continuing opera-
tions and presented as CURRENT ASSETS AND CURRENT LIABILITIES.

Problems
1. Russel Company is a diversified company with nationwide interests in commercial real estate developments,
banking, mining and food distribution. The food distribution division was deemed to be inconsistent with the
long-term direction of the company. On October 1, 2016 the board of directors voted to approve the disposal of
this division. The sale is expected to occur in November 2017. The food distribution had the following revenue
and expenses in 2016: January 1 to September 30, revenue of P50,000,000 and expenses of P30,000,000;
October 1 to December 31, revenue of P12,000,000 and expenses of P10,000,000. The carrying amount of
the division’s assets at December 31, 2016 was P50,000,000 and the recoverable amount was estimated to be
P45,000,000. The sale contract requires Russel to terminate certain employees incurring an expected termina-
tion cost of P2,000,000 to be paid by June 30, 2016. During 2016, Russel sold a portion of the food distribu-
tion’s assets at a pretax loss of P3,000,000. The income tax rate is 30%. What is Russel Company’s income
from discounted operations in it’s income statement for the year ended December 31, 2016?
a. 12,000,000
b. 8,400,000
c. 17,000,000
d. 11,050,000
2. On May 1, 2016, Aqua Company approved a plan to dispose of a business segment. It is expected that the
sale will occur on March 31, 2017. On December 31, 2016, the carrying amount of the net assets of the seg-
ment was P2,000,000 and the fair value was P1,800,000. During 2016, the company paid employee severance
and relocation costs of P100,000 as a direct result of the discontinued operation. The revenues and expenses
of the discontinued segment during 2016 were:
Revenues Expenses
January 1 to April 30 1,500,000 2,000,000
May 1 to December 31 700,000 900,000
How much will be reported as loss from discontinued segment for the year 2016?
a. 1,000,000
b. 500,000
c. 700,000
d. 800,000

ANSWERS: B, A

d) NCA held for sale are PPE that are intended for sale and the sale is highly probable meaning expected to
be sold within one year for the date of classifying it as held for sale.
e) Remeasured at Lower of CA and FV less Cost to Sell. But always depreciate first if using the cost model or
revaluate if using the revaluation method before reclassifying.
f) If the FV less Cost to sell increases at balance sheet date, recognize the gain but the loss should not exceed
the impairment loss recognized at reclassification.
g) If put back in operations, and classified again as PPE, remeasure at the lower of Recoverable Amount (take
note: higher of FV-C2S and Value in Use) and CA if the asset was not reclassified as held for sale.
 PAGE 8
Problems

1. Purple Company accounted for noncurrent assets using the cost model. On July 1, 2016, the entity classified
equipment as held for sale. At that date, carrying amount was P5,000,000, the fair value was estimated at
P3,500,000 and the cost of disposal at P100,000. The fair value less cost of disposal on December 31, 2016
increased to P3,800,000. On January 31, 2017, the equipment was sold for net proceeds of P3,000,000.
1. What amount should be included as an impairment loss on the date of reclassification?
a. 1,600,000
b. 2,500,000
c. 1,500,000
d. 900,000
2. What amount of gain from remeasurement shall be recognized on December 31, 2016?
a. 300,000
b. 400,000
c. 700,000
d. 0
3. What is the loss on disposal recognized in 2017?
a. 800,000
b. 400,000
c. 500,000
d. 0
2. Lavender Company accounted for noncurrent assets using the revaluation model. On October 1, 2016, the
entity classified a land as held for sale. At that date, the carrying amount of the land was P6,000,000 and the
balance in the revaluation surplus was P2,000,000. At same date, the fair value of the land was estimated at
P7,500,000 and the cost of disposal at P200,000. The land was sold on January 31, 2017 for P8,000,000.
1. What amount should be included as an impairment loss on the date of reclassification?
a. 200,000
b. 500,000
c. 0
d. 600,000
2. What is the carrying amount of the NCA on December 31, 2016?
a. 7,500,000
b. 6,000,000
c. 8,000,000
d. 7,300,000
3. What amount should be reported as gain on disposal of land in 2017?
a. 1,000,000
b. 2,000,000
c. 500,000
d. 700,000
3. Indigo Company purchased an equipment for P5,000,000 on January 1, 2016. The equipment had a useful life
of 5 years with no residual value. On December 31, 2016, the entity classified the asset as held for sale. On
such date, the fair value less cost of disposal of the equipment was P3,500,000.
On December 31, 2017, 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. On December 31, 2017, the
fair value less cost of disposal of the equipment was P2,700,000, while the value in use was 2,500,000.
1. What amount of impairment loss should be recognized in 2016?
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
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2. What amount should be included in profit or loss in 2017 as a result of the reclassification of the equipment
to property, plant and equipment?
a. 800,000 gain
b. 800,000 loss
c. 300,000 gain
d. 300,000 loss
3. What is the depreciation for 2018?
a. 1,000,000
b. 875,000
c. 900,000
d. 675,000
ANSWERS: A, B, A, A, D, D, C, B, C

VI. OPERATING SEGMENTS

a) An operating segment is reportable if it meets at least 10% of one of the QUANTITATIVE THRESHOLDS.
b) The Revenue Test is based on the total revenue of all the operating segments whether from intersegment
sales or sales to external segments.
c) The Profit or loss Test is based on the greater value whether profit or loss when the total profit is combined
or the total losses are combined.
d) The Asset Test is based on the total assets of all the operating segment.
e) The upper limit is 10 reportable segments. Management also has the final decision if a segment is
Reportable even if it does not meet any of the QT.
f) The reportable segments identified using the QT must report at least 75% of the external revenue. If not,
other segments shall become reportable until the 75% requirement is met.
g) A Major customer is an EXTERNAL Customer that provides at least 10% of the external revenue. The
identity of the segment and amount of revenue to the EC shall be disclosed.

1. Athena Company and its divisions are engaged solely in manufacturing operations. Athena identified its oper-
ating segments for the year ended 2016. The following data pertain to the industries in which operations were
conducted for the year ended December 31, 2016.

Segments Total Revenue Operating Profit Identifiable Assets

A 13,000,000 4,000,000 25,000,000
B 8,500,000 2,000,000 29,000,000
C 10,000,000 1,500,000 7,000,000
D 3,000,000 800,000 8,000,000
E 3,500,000 1,000,000 5,000,000
F 2,000,000 700,000 6,000,000
40,000,000 10,000,000 80,000,000

In its segment information for 2016, how many reportable segments does Athena have?
a. Six
b. Three
c. Four
d. Five

2. Kanye Corporation and its divisions are engaged solely in manufacturing. The following data pertain to the in-
dustries in which operations were conducted for the year ended December 31, 2016:

Operating Profit (Loss)

Division A 30,000,000
B 10,000,000
C (8,000,000)
D (2,000,000)
E 5,000,000
 PAGE 10
In its 2016 financial statements, Kanye Corporation should disclose an operating segment if operating profit or
loss is at least
a. 1,000,000
b. 4,500,000
c. 3,500,000
d. 5,500,000
3. Cannon Company, a publicly owned corporation, is subject to the requirements for segment reporting. In its
income statement for the year ended December 31, 2016, Cannon reported revenue of P60,000,000, operating
expenses of P45,000,000 and net income of P15,000,000. Operating expenses include payroll costs of
P5,000,000. Cannon’s combined identifiable assets of all industry segments at December 31, 2016 were
P32,000,000. Total segment revenue was determined to be P70,000,000.
1. What is the minimum amount of external revenue that must be reported by the reportable operating seg-
ments?
a. 52,500,000
b. 42,750,000
c. 35,000,000
d. 45,000,000
2. What is the minimum amount an external customer to be regarded as a major customer?
a. 7,000,000
b. 4,000,000
c. 4,500,000
d. 6,000,000
ANSWERS: D, B, D, D

VII.INTERIM REPORTING

a) Interim reports are financial statements prepared for an interim period, meaning shorter than a full year.
b) A complete set may be prepared or condensed financial statements.
c) Revenues shall be recognized using the same methods for the year.
d) Expenses that generated the revenue shall be matched against the revenues reported.
e) Expenses that are not directly associated are allocated or recognized as incurred.
f) Gains and losses including losses on inventory writedown are not allocated but recognized immediately.
g) Effects of changes in estimated and tax rates are recognized in the following interim period.

Problems
1. The following transactions for Angelina Enterprises occurred during the second quarter of 2016:
• Sales amounted to P5,000,000 and related cost of goods sold was P3,000,000
• Selling expenses for the given period was P250,000
• Depreciation is usually recorded by Angelina at annual amount of P1,200,000.
• Real property taxes for the year in the amount of P600,000 were paid on April 1, 2016.
• An inventory loss arising from a temporary market decline of P400,000 had occurred on June 30, 2016.
Ignoring income taxes, what is the net income for the second quarter ending June 30, 2016?
a. 1,150,000
b. 900,000
c. 1,300,000
d. 750,000
2. Adelaide Company had the following transactions during the quarter ended March 31 2016:
Loss from hurricane 500,000
Payment of the fire insurance premium for the year 2016 400,000
What is the total expenses should be included in the income statement for the quarter ended March 31, 2016?
a. 900,000
b. 633,333
c. 600,000
d. 525,000
 PAGE 11
3. Anne Company’s P4,000,000 net income for the quarter ended September 30, 2016 included the following af-
ter-tax items:
➢ A P1,200,000 gain realized on April 30, 2016 was allocated equally to the second, third and fourth quar-
ters of 2016.
➢ A P200,000 cumulative effect loss resulting from a change in inventory valuation method was recognized
on August 31, 2016.
➢ A casualty loss suffered by the Company on September 11, 2016 in the amount of P600,000 was allo-
cated to the last two quarters of the calendar year.
➢ Anne paid P400,000 on February 1, 2016, for 2016 calendar-year real property tax. Of this amount,
P100,000 was allocated to the third quarter of 2016.
On December 31, 2016, Anne paid it’s employees year-end bonuses totaling P2,000,000. From this amount,
none was recorded in computing for the 3rd quarter net income. What is Anne Company’s correct net income
for the quarter ended September 30, 2016?
a. 3,000,000
b. 3,100,000
c. 4,000,000
d. 4,200,000
4. Salonika Company has historically reported bad debts expense of 5% of sales in each quarter. For the current
year, the company allowed the same procedure in the three quarters of the year. However, in the fourth quar-
ter, the company, in consultation with its auditor, determined that bad debt expense for the year should be
P4,500,000. Sales in each quarter of the year were as follows: first quarter, P20,000,000; second quarter,
P15,000,000; third quarter, P25,000,00; fourth quarter, P40,000,000. How much bad debts expense should be
recognized for the fourth quarter?
a. 2,000,000
b. 1,500,000
c. 3,000,000
d. 4,000,000
ANSWERS: B, B, A, B

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