AUDITING - 1 File Download

AUDITING 2016 EDITION

SOLUTION GUIDE

CHRISTOPHER T. ESPENILLA, CPA MBA

FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY

REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY,

MANILA

AUDITING (2016 EDITION)

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CHAPTER 1: THE AUDIT PROCESS


PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE

1 D 11 B

2 D 12 C

3 D

4 A

5 D

6 B

7 B

8 A

9 D

10 D

PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY

1 D 11 C

2 D 12 B

3 C 13 B

4 D 14 D

5 D 15 D

6 D 16 B

7 A

8 D

9 C

10 E

PROBLEM 3: INTERNAL CONTROL

1 C 11 E 21 B

2 D 12 B 22 A

3 C 13 D 23 C

4 C 14 C 24 B

5 A 15 C 25 C

6 D 16 C 26 A

7 C 17 C 8 D 18 D 9 D 19 D

10 A 20 A

PROBLEM 4: RISK BASED AUDIT PLANNING

1 D 11 C

2 C 12 B

3 D

4 B

5 B

6 B

7 C

8 A

9 D

10 C


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PROBLEM 5: SUBSTANTIVE TESTING

1 B 21 B

2 A 22 D

3 C 23 B

4 C 24 D

5 C 25 C

6 D 26 C

7 C 27 B

8 D 28 B

9 C 29 B

10 C 30 B

11 A 31 D

12 B 32 A

13 B 33 A

14 A

15 A

16 B

17 A

18 A

19 D

20 A

PROBLEM 6: AUDIT REPORTING

1 C

2 B

3 B

4 B

5 B

6 C

7 A

8 B

9 C

10 C

11 A

12 C


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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

2,250,000

CHAPTER 2: AUDIT OF CASH

DISCUSSION PROBLEMS CHAPTER 2-PROBLEM 1

1 B

2 D

3 A

4 B

5 D

6 D

7 D

8 D

9 D

10 D

11 D

12 B

13 C

14 B

15 B

16 C

17 B

18 D

19 D

20 B

21 C

22 D

23 C

24 D

25 B

AP02-PROBLEM 2: MAPERA CORPORATION

1. Ans. P3,445,000

Current account at Metrobank 3,250,000

Post-dated disbursement check - adjusted to AP 75,000

Undelivered disbursement check - adjusted to AP 120,000

Adjusted current account at Metrobank 3,445,000

2. Ans. P2,250,000

Savings account at Rural Bank 2,750,000

Compensating balance - legally restricted (500,000)

Adjusted savings account at Rural Bank

3. Ans. Zero

The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset, that is the company

has no bank account with BDO.

4. Ans. P738,000.

Undeposited collections, unadjusted balance 1,278,000 Customer stale check - adjusted to AR (180,000)

Customer post-dated check - adjusted to AR (125,000)

Customer DAUD check - Adjusted to AR (155,000)

Officer's NSF check - Adjusted to AR-nontrade (80,000)

Adjusted undeposited collections 738,000

5. Ans. P18,500

Bills and coins

7,000

Replenishment check 11,500

Adjusted petty cash fund as of 12/31/14 18,500

6. Ans. P613,500

Travel fund

50,000

Interest and dividend fund 120,000

Payroll fund 400,000

Change fund 25,000

Petty cash fund 18,500

Adjusted cash fund - Cash and cash equivale 613,500

7. Ans. P900,000

Debt security investment due 3/31/15 purchased 12/31/14 600,000

Preference shares redeemable on 2/28/15 purchased 12/1/14 300,000

Debt and equity securities - Cash and cash equivalent 900,000

8. Ans. P7,946,500

Adjusted current account at Metrobank 3,445,000

Adjusted savings account at Rural Bank 2,250,000

Adjusted undeposited collections 738,000

Adjusted cash fund - Cash and cash equivalent 613,500

Debt and equity securities - Cash and cash equivalent 900,000

Cash and cash equivalents, adjusted balance 7,946,500


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9. Ans. P1,874,500 Customer stale check - adjusted to AR 180,000

Customer post-dated check - adjusted to AR 125,000 Customer DAUD check - Adjusted to AR 155,000 Officer's NSF check - Adjusted to AR-nontrade 80,000 Petty cash fund shortage - Adjusted to AR-custodian 1,500 *alternatively, this can be charged to other expense

Postage stamps - Office supplies 3,000 IOU from a key officer - AR-nontrade 30,000 Investment in debt security due 1/31/15 purchased 1/1/14 900,000 *classified as short-term investment

Ordinary shares - Trading securities/FA at FMV through P&L 400,000 Current assets (other than cash and cash equivalents) 1,874,500

10. Ans. P1,700,000 Rural bank - compensating balance - Adjusted to Other assets 500,000

Pension fund - Adjusted to Long-term Investment 250,000 Bond sinking fund - Adjusted to Long-term Investment 500,000 Cash in closed bank at recoverable value - Adjusted to Other assets 150,000 Ordinary shares - Available-for-sale security/FA at FMV through OCI/L 300,000 Non-current assets 1,700,000

11. Ans. P495,000

Current account at BDO - Bank overdraft 240,000

Post-dated disbursement check - adjusted to AP 75,000

Undelivered disbursement check - adjusted to AP 120,000

Credit memo for a purchase return - adjusted to AP 60,000

Current liabilities 495,000

CHAPTER 2-PROBLEM 3: MANNY CO.

Accountability:

Petty Cash Fund, Imprest balance 40,000 Return of an expense advance (a) 900

Total Accountability 40,900 1. Ans.

Valid supporting items:

Bills and coins

13,400

Unreplenished paid vouchers

Accomodated checks

Dated 12/30

3,700

2,000

Dated 11/30 - marked NSF 1,000 Replenishment check 10,000 30,100

Petty cash fund shortage 10,800 2. Ans.

(a) Should be subsequently deposited to the bank. Cash items as of December 31, 2014

Bills and coins

13,400

Return of excess travel expense advance (a) (900) Unreplenished paid voucher dated 1/2 1,000 Accomodated check 12/30 2,000 Replenishment check 10,000 Adjusted petty cash fund 25,500 3. Ans. (a) Should be subsequently deposited to the bank.

4. Adjusting entries: 1 Transportation expense 500

Repairs and maintenance expense 300 Entertainment, amusement and representation ex 900 Due to employees

Petty cash fund

1,000

2,700

To record unreplenished paid vouchers.

2 Receivable from employee 1,000


To record NSF accomodated check.

3 Receivable from employee 10,800


To record petty cash fund shortage.

Petty cash fund, imprest balance 40,000

AJE 1. (2,700)

AJE 2. (1,000)

AJE 3. (10,800)

Adjusted petty cash fund 25,500


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CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY

Ans. P1,630

Accountability:

Total collections, 10/1-10/11 (per OR)

Total bank credits, 10/1-10/11 (per bank statement)

16,550

28,840

September deposit in transit

(4,500) September bank charge error (corrected in October)

(1,400) 10,650

Undeposited collections as of October 11 18,190


Currency and coins

12,310

Customer collection checks

9/30/14 - Baguio Corp.

2,350

10/3/14 - L. Reyes 1,960 10/4/14 - La. Union Corp. 1,590 5,900

Unused postage (adjusted to supplies) 110 Vouchers paid out of receipt (adjusted to expense)

1,500 19,820

Overage 1,630

CHAPTER 2-PROBLEM 5: BETTY CO.

Accountability

Petty cash fund, imprest balance

10,000

Undeposited collections

Cash collections (per cash sales invoices)

1,670 Customer collection checks (depositable only) 2,500 4,170

Total Accountability 14,170 1. Ans.

Valid supporting items

Currencies and coins

5,980

Customer collection checks (depositable only)

12/30 Errol Corp., Customer

1,300

1/2 R. Rarr, Customer

Accomodated checks (whether depositable or not)

1,200

12/30 D. Dong, Vice President 1,220 1/2 Junior, Employee 312 Unreplenished Vouchers 850 Employee IOU's 700 11,562

Petty Cash Shortage 2,608 2. Ans.

AJEs to the Petty Cash Fund:

(a) Expenses

730

Petty Cash Fund

730 To record unreplenished expense vouchers as of Dec. 31 only.

(b) Receivable from employee 700

Petty Cash fund 700

To record employee .

(c) Receivable from employee 2,608

Petty Cash fund 2,608

To record the petty cash fund shortage.

Imprest balance 10,000 AJE (a) (730)

AJE (b) (700) AJE (c) (2,608) (4,038) 3. Ans.

Adjusted Petty Cash Fund as of Dec. 31 5,962 4. Ans.

CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO.

Bank Reconciliation Statement 10/31/2014

BANK BOOK

Unadjusted Balance, per Bank Statement 144,975 125,245 Unadjusted Balance per Books

Undeposited collections, excluding missapprop. 10,770 8,000 Unrecorded Bank Credits

Oustanding checks (50,550) (2,300) Unrecorded Bank Debits: NSF Check

Bank error (unrecorded bank charge) (1,250) (1,250) Unrecorded Bank Debits: Bank Service Charge

Correct cash in bank balance (2. Ans. ) 103,945 129,695 Adjusted balance per books

(25,750) Cash shortage (1. Ans. )

103,945 Correct cash balance


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3 Adjusting Entries:

(a) Cash in bank

Accounts receivables

8,000 8,000

(b) Accounts receivables

Cash in bank

2,300

2,300

(c) Bank service charge/Other expenses

Cash in bank

1,250

1,250

CHAPTER 2-PROBLEM 7: JADE CORPORATION

Bank Reconciliation 12/31/2014 BANK

BOOK

Unadjusted balance 792,285 726,600 Unadjusted balance

Deposit in transit 10,500 20,000 Unrecorded credit

Outstanding check (75,975) (5,000) Unrecorded debit

Bank error 2,250 31,500 Book errors (audit note a.)

Correct cash balance (1. Ans. ) 729,060 773,100

(44,040) Shortage (3. Ans. )

729,060 Adjusted balance

Unadjusted balance per books

726,600

Correct cash balance 729,060 Net adjustement to cash (12/31) (2,460) 2. Ans.

Accountability as of January 15 180,500 Unrecorded credit as of 12/31

(20,000)

Book errors in Janaury (audit note b and c)

19,500 Adjusted accountability

180,000

January deposits from January collections

Januray bank credits

143,895

Correction of Dec. bank charge error (2,250) Dec. deposit in transit (10,500) 131,145

Cash on hand 10,125 Expense vouchers

1,125 Cash shortage from Jan. 2 - Jan. 15

37,605 Add: Cash shortage as of Dec. 31

44,040

Total cash shortage as of Jan. 15, 2015 81,645 4. Ans.

CHAPTER 2-PROBLEM 8: PIRA CO.

Proof of Cash, 6/30/2014 May 31,

Receipt

Disbursement

June 30,

Unadjusted balances per bank statement 1,836,000 2,496,000 1,224,000 3,108,000

Deposit in transit, May 480,000 (480,000) Deposit in transit, June (SQUEEZE) 4. Ans.

Outstanding checks, May

(1,020,000)

1,317,600

(1,020,000)

1,317,600

Outstanding checks, June (SQUEEZE) 5. Ans.

Bank error, May Overstated disbursement

240,000

(240,000)

2,171,760 (2,171,760)

Adjusted balances 1,536,000 3,093,600 2,375,760 2,253,840

2. Ans.

6. Ans.

Unadjusted balances per book (1. Ans. )

May 31,

538,200

Receipt

4,818,600

Disbursement

2,443,200

June 30,

2,913,600

Unrecorded bank credit: May 600,000 (600,000) Unrecorded bank debits: BSC, May (7,200)

(7,200)

Unrecorded bank debits: BSC, June

9,600 (9,600)

Unrecorded bank debits: NSF Check June

Bank error, May Overstated disbursement

405,000

(405,000)

144,000 (144,000)

Book error, June Overstated collection

(720,000)

(720,000)

Book error, June Overstated disbursement

(213,840) 213,840

Adjusted balances 1,536,000 3,093,600 2,375,760 2,253,840

3. Ans. No shortage.

CHAPTER 2-PROBLEM 9: KRAME INC.

Proof of Cash

Augsut 31:

Receipt

Disbursemen

September 30:

Unadjusted balances, per bank 485,000 1,955,000 1,655,000 785,000

Undeposited collections - Aug 450,000 (450,000) Undeposited collections - Sept

Outstanding checks - Aug

(180,000)

240,000

(180,000)

240,000 2. Ans.

Outstanding checks - Sept

220,000 (220,000) 3. Ans.

Bank error - Aug (80,000)

(80,000)

675,000 1,745,000 1,615,000 805,000

1. Ans.

June 30:

Receipt

Disbursemen

4. Ans.

July 31: Unadjusted balances, per book 640,000 1,795,000 1,800,000 635,000

Unrecorded credit - Aug 200,000 (200,000) Unrecorded credit - Sept

Unrecorded debit - Aug

(120,000)

250,000

(120,000)

250,000

Unrecorded debit - Sept

80,000 (80,000)

Book Error - Aug (45,000)

(45,000) Book Error - Sept /Correction - Sept

(100,000) (100,000)

675,000 1,745,000 1,615,000 805,000 Shortage/Overage -


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50,600

CHAPTER 2-PROBLEM 10: MANGO COMPANY

Proof of Cash, 4/30/2014

March 31,

Receipt

Disbursement

April 30,

Unadjusted balances per bank statement 21,560 220,450 218,970 23,040

Undeposited receipts, March 9,060 (9,060) Undeposited receipts, April

Outstanding checks, March (2,675)

10,120

(2,675)

10,120

Outstanding checks, April (excluding certified check)

1,430 (1,430)

Bank error, April Overstated disbursement

(950) 950

Adjusted balances 27,945 221,510 216,775 32,680

March 31,

Receipt

Disbursement

April 30,

Unadjusted balances per book 16,545 222,190 216,055 22,680

Book receipts used to pay creditors in cash

(1,210) (1,210) Unrecorded bank credit: March

12,150 (12,150)

Unrecorded bank credit: April

Unrecorded bank debits:

NSF check, returned in April recorded in April

11,640

1,040

1,040

11,640

NSF check, returned in April not yet recorded

860

(860)

Unrecorded bank debits: BSC, March

(750)

(750) Unrecorded bank debits: BSC, April

420

(420)

Bank error, April Understated disbursement

360

(360)

Adjusted balances 27,945 221,510 216,775

32,680

1. Ans. 2. Ans. 3. Ans.

4. Ans.

MULTIPLE CHOICE EXERCISES CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY

Unadjusted cash balance 105,600

1. January 5 collection recorded in December (15,000)

2. Undelivered check disbursements 9,300

3. Post-dated customer collection check (7,800)

4. NSF customer collection check (1,500)

5. Cash fund for non-current purpose (40,000) *classifed as LT Fund Investment

Adjusted cash balance - current asset Ans. B.

CHAPTER 2-EXERCISE 2: BIG BROTHER CORP.

Current account at Bank of the Philippine Islands

Current account at Equitable PCI Bank

Payroll account

Foreign bank account – restricted (in USD) **

Postage stamps

Employee’s post dated check

IOU from a key officer

Credit memo from a vendor for a purchase return

Traveler’s check

Customer’s not-sufficient-funds check

Money orders

Petty cash fund, currencies only

Treasury bills, due 3/31/15 (purchased 12/31/14)

Treasury bills, due 1/31/15 (purchased 1/1/14)

Change fund

Bond sinking fund

Equivalent Asset

6,000,000 6,000,000

(300,000) *no right of off-set, classified as current liab

1,500,000 1,500,000

60,000 3,000,000 *Other Asset at current exchang price

3,000 *prepaid expense

12,000 *other receivables

30,000 *other receivables

60,000 *debited to accounts payable

150,000 150,000

45,000 *accounts receivable

90,000 90,000

12,000 12,000

600,000 600,000

900,000 *current investment

10,000 10,000

1,000,000 1,000,000 *LT fund investment

1. Ans .C. 2. Ans. B.

CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY

Accountability:

Petty cash fund, imprest balance 15,000

Undeposited collections

Cash sales invoices (17903-18112) 100,500

Official receipts 39,537

Customer collection check, not yet included 5,707 145,744

Other collections: Return of expense advance 260

Other collections: Contribution for Christmas Party 9,500

Total Accountability 170,504


Bills and coins 105,174

Customer collection checks

12/30 T. Otis 11,920

12/26 R. Eyes 12,505

1/2 O. Liever 5,707

12/21 F. Rancisco 13,350

Accomodated check 310

12/29 O. Camp (return of expense advance) 260

Expense vouchers and IOUs 6,775 156,001

Petty cash shortage

1. Ans. B.

8,362,000 4,000,000

14,503


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11,450

Cash on hand as of January 5, 2015

Bills and coins 105,174 Customer collection checks 43,482 Accomodated check 310 Return of expense advance check 260 149,226

Cash that does not belong to the petty cash fund

Undeposited collections: Collection checks 43,482

Cash collections (100,500+560+1,202) 102,262 (145,744) Return of expense advance (260) Excess collection from Christmas Party (9,500-6,290)

(3,210)

Cash on hand as of January 5, belonging to the Petty Cash 12

Vouchers paid after December 31: 1/2/15, PNR

35 Petty cash fund as of December 31, 2015

47 3. Ans. B.

AJEs:

(a) Office supplies expense (150-80)

70

Unused office supplies 80 Receivable from employee

Petty cash fund

300

450 To record unreplensihed expense vouchers as of December 31.

(b) Receivable from employee 14,503


To record petty cash shortage

Reconciliation:

Petty cash fund, imprest balance

15,000

AJE (a) (450) AJE (b) (14,503) (14,953) 2. ans. B.

Petty cash fund, adjusted balance 47 3. Ans. B.

Notes:

1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be

reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be

regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution).

2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement

was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31.

3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check

the same was also part of the valid supporting items. As an additional audit procedure, return of expense advance shall

be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be

returned back to the general cash of the company.

CHAPTER 2-EXERCISE 4: SILVER COMPANY Bank Reonciliation Statement 12/31/2014

BANK BOOK

Unadjusted balance per Bank Statement 12,300 15,000 Unadjusted balance per books

Undeposited collections (as being reported) 3,000 150 Unrecorded bank credit

Outstanding checks (as per complete list) (850) Correct cash balance per audit (4. Ans. B.) 14,450 15,150 Unadjusted balance per books

(700) Shortage 1. Ans. D.

14,450 Adjusted balance per books

2. Ans. D.

Undeposited collections (as being reported) 3,000

Shortage 700

Accountability for cash on hand

3. Ans. B.

Correct cash balance per audit 14,450

Cash on hand/Undeposited collection (3,000)

Cash in Bank (excluding Cash on Hand)

CHAPTER 2-EXERCISE 5: HOME CORP.

Bank Reconciliation 12/31/2014

BANK

BOOK

Unadjusted balance 1,548,570 1,239,200 Unadjusted balance

Deposit in transit 21,000 200,000 Unrecorded credit

Outstanding check (151,950) (10,000) Unrecorded debit

Bank error 4,500 63,000 Book errors (audit note)

Correct cash balance (16. Ans. D) 1,422,120 1,492,200

(70,080) Shortage (17. Ans. C )

1,422,120 Adjusted balance

Accountability as of January 10

521,000 Unrecorded credit as of 12/31

(200,000)

Book errors in Janaury (audit note a and b)

39,000 Adjusted accountability

360,000 (18. Ans. B.)

January deposits from January collections

Januray bank credits

322,790

Correction of Dec. bank charge error (4,500) Dec. deposit in transit (21,000) 297,290

Cash and Checks on hand (Depositable) 23,475 Expense vouchers

22,250 Cash shortage from Jan. 2 - Jan. 10

16,985 (19. Ans. B)

3,700


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CHAPTER 2-EXERCISE 6: CARRERA INC.

Proof of Cash, July 31, 2014

Unadjusted balances per bank statement

June 30,

172,590

Receipt

751,680

Disbursement

903,390 July 31,

20,880

Deposit in transit, June 18,000 (18,000) Deposit in transit, July (SQUEEZE)

Outstanding checks, June

(52,260)

30,000

(52,260) 30,000 2. Ans. B.

Outstanding checks, July (SQUEEZE)

41,820

(41,820) 1. Ans. C.

Bank error, July Overstated disbursement

(11,880)

11,880


20,940 3. Ans. A.

March 31,

Receipt

Disbursement

April 30,

Unadjusted balances per book 140,330 763,680 654,330 249,680

Unrecorded bank debits, July Payment of AP

31,800

(31,800)

Unrecorded bank debits, July BSC

2,610

(2,610)

Unrecorded bank debits, July Payment of NP

183,000

(183,000)

Unrecorded bank debits, July NSF

9,330

(9,330)


22,940

Cash in bank, shortage June 30 2,000 4. Ans. C.

CHAPTER 2-EXERCISE 7: EDILBERTO INC.

Proof of Cash, December 31, 2014

November 30,

Receipt

Disbursement

December 31,

Unadjusted balances per bank statement 535,410 1,245,540 1,091,865 689,085

Undeposited collections, Nov. 41,005 (41,005) Undeposited collections, Dec.

Outstanding checks, Nov.

(138,590)

64,400

(138,590)

64,400

Outstanding checks, Dec.

150,560 (150,560)

Adjusted balances 437,825 1,268,935 1,103,835 602,925

4. Ans. A. 5. Ans. B. 6. Ans. B.

Unadjusted balances per book

November 30,

82,350

Receipt

1,182,260

Disbursement

1,063,185

December 31,

201,425 1. Ans. B.

2. Ans. B.

Unrecorded bank credit: Note Col., Nov. 359,075 (359,075) Unrecorded bank credit: Note Col., Dec.

Unrecorded bank debits: BSC, Nov.

(3,600)

404,500

(3,600)

404,500

Unrecorded bank debits: BSC, Dec.

3,000 (3,000) NSF Check, return and redeposit, same month*

41,250 41,250


3. Ans. B.

CHAPTER 2-EXERCISE 8: HALALAN CORP.

Proof of Cash, June 30, 2014

May 31,

Receipt

Disbursement

June 30,

Unadjusted balances per bank statement 652,000 88,000 63,200 676,800 3. Ans. A.

Deposit in transit, May 10,000 (10,000) Deposit in transit, June

Outstanding checks, May

(20,000)

70,000

(20,000)

70,000

Outstanding checks, June

17,600 (17,600)

Bank error, June corrected also in June (a)

(1,000) (1,000) Adjusted balances 642,000 148,000 60,800 729,200

1. Ans. B. 2. Ans. D.


May 31,

570,800

Receipt

219,000

Disbursement

57,400

June 30,

732,400 6. Ans. C.

Unrecorded bank credit: May 72,000 (72,000) Unrecorded bank debits: BSC, May (800)

(800)

Unrecorded bank debits: BSC, June

200 (200)

Unrecorded bank debits: NSF, June 13 (b)

1,000 1,000 Unrecorded bank debits: NSF, June 30

3,000 (3,000)


4. Ans. D. 5. Ans. B.

Notes:

(a) the error committed by the bank in June was also corrected in June, thus both receipts and disbursements per bank shall be in excess

by P1,000 if compared to receipts and disbursements per books. To reconcile, the same had been deducted from both receipt and disbursements.

(b) the NSF check on June 13 had been redeposited immediately. No entry had been made by the company to reflect the receipt and redeposit

while on the bank side, the NSF check had been recorded both as disbursement (upon learning that it is NSF) and as receipt (upon redeposit).

Thus, to reconcile, the same has been added to both receipts and disbursements per books.

CHAPTER 2-EXERCISE 9: SALUYOT CORP.

Proof of Cash, September 30, 2014

August 31, Receipt Disbursement September 30,

Unadjusted balances per bank statement 156,000 76,020 29,220 202,800 1. Ans. D.

Deposit in transit, August 2,700 (2,700) Deposit in transit, September

28,200

28,200

Outstanding checks, August (12,000)

(12,000) Outstanding checks, September

10,800 (10,800)

Bank error, Sept. corrected also in Sept.

(300) (300) Bank error, Sept., Overstated receipt

(600)

(600)

Adjusted balances 146,700 100,620 27,720 219,600 5. Ans. B.



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150,000

128,750

377,668

ss: B

August 31, Receipt Disbursement September 30,

Unadjusted balances per book 120,000 127,200 25,380 221,820 4. Ans. A.

Unrecorded bank credit: August 27,000 (27,000) Unrecorded bank debits: BSC, August (300)

(300)

Unrecorded bank debits: BSC, September

1,320 (1,320)

Unrecorded bank debits: NSF, Sept. 12

420 420 Unrecorded bank debits: NSF, Sept. 30

900 (900)


2. Ans. C. 3. Ans. B.

CHAPTER 2-EXERCISE 10: WISE COMPANY 1. Ans. B.

December actual collections from customers

152,500

Deposit credited by bank in Decemeber 145,000 Less: DIT, November (12,500) December collections credited in December (132,500) DIT, December

20,000

2. Ans. B.

November Bank Service Charge 1,500

Decemeber Bank Service Charge 3,250

Bank Service Charge recorded per books in Dec. (2,500)

Unrecorded Bank Service Charge, Dec. 2,250

3. Ans. A.

Actual company collections in December 152,500

Book error, underfooting cash receipts (2,500)

Book receipts, December

4. Ans. C.

Outstanding checks, December 31 12,500

Add: Checks paid by bank in December 130,000

Total 142,500

Less: Outstanding checks, November 30 (16,250)

Checks issued in December 126,250

5. Ans. D.

Checks issued in December (4) 126,250

Add: Bank service charges recorded in 2,500

Book disbursements in December

6. Ans. A.

Book balance, December 31 37,500

Add: Book disbursements in December (5) 128,750

Le Total

ook receipts in December (from number

Book balance, November 30

166,250

(150,000)


November 30. Receipt Disbursement December 31,

Unadjusted balances per bank statement 18,500 145,000 137,000 26,500 (SQUEEZE)

Deposit in transit, November 12,500 (12,500) Deposit in transit, December

Outstanding checks, November

(16,250)

20,000 (16,250)

20,000

Outstanding checks, September

12,500 (12,500)

Bank error, Dec. Overstated Disbursement

(3,750) 3,750


7. Ans. B. 8. Ans. C. 9. Ans D. 10. Ans. B.


November 30.

16,250

Receipt

150,000

Disbursement

128,750

December 31,

37,500

Unrecorded bank debits: BSC, November (1,500)

(1,500) Unrecorded bank debits: BSC, December

2,250 (2,250)

Book error, Dec. Understated Receipt

2,500

2,500


CHAPTER 2-EXERCISE 11: I-BOT INC.

1. Ans. A

Total checks issued and recorded in December 377,632

November BSC recorded in Decemeber 36

Total book disbursements, December

2. Ans. D.

Balance per books, November 30 15,698

Total book receipts, December 371,766

Total book disbursements, December (377,668)

Balance per books, December 31, 9,796

16,250



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3. Ans. C.

Check number 3408

440

Check number 3418 2,814

Check number 3419 5,788

Outstanding checks, December 31, 9,042


November 30.

Receipt

Disbursement

December 31, Unadjusted balances per bank statement 24,298 373,502 380,284 17,516



(11,214)

5,912

(11,214)

5,912


9,042 (9,042)


(480) 480

Bank error, Dec. Understated Disbursement

42 (42)


4. Ans. B.


November 30.

15,698

Receipt

371,766

Disbursement

377,668

December 31,

9,796

Unrecorded bank credits: Note Coll, Dec.

Unrecorded bank debits: BSC, November

(36)

4,000

(36)

4,000

Unrecorded bank debits: BSC, December

42 (42)

Book error, Nov. Over. check 3413 (not yet corr.) 270

270

Book error, Nov. Over. Check 3417 (not yet corr.) 800

800


5. Ans. D. 6. Ans. C. 7. Ans. A.

CHAPTER 2-EXERCISE 12: HALAL CORP.


November 30.

Receipt

Disbursement

December 31,

Unadjusted balances per bank statement 685,180 308,120 356,080 637,220 2. Ans. B (SQUEEZE)



(64,140)

16,140

(64,140)

16,140


Bank error, Nov. Overstated Disbursement


1,500

(1,500)

74,080

(180)

(74,080)

180


4. Ans. C.

6. Ans. B.


November 30.

637,860

Receipt

306,220

Disbursement

367,660

December 31,

576,420 1. Ans. A. (SQUEEZE)

Unrecorded bank credits: Note Coll, Dec.

Unrecorded bank debits: BSC, November

(60)

2,060

(60)

2,060

Book error, December, Overstated Disbursement

(980) 980

Reversal of check (stop-payment)**

(780) (780) Adjusted balances 637,800 307,500 365,840 579,460

3. Ans. D.

5. Ans. A.

7. Ans. D.

Checks issued prior to Dec.(P64,140- P26,140) 38,000 Checks issued in Dec. not yet clearing the bank 36,080 Total outstanding checks, December 31 74,080

**Note that the entry to record the reversal of the dibursement check in which the company released a stop-payment order to the bank

will result both as a credit and debit in the company's books and will never be reflected as debit and credit on the bank records.

Thus, to reconcile, the same has been deducted both in the receipt and disbursement columns per books.


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CHAPTER 3: AUDIT OF RECEIVABLES AND SALES



1 A

2 B.

3 A.

4 A.

5 D.

6 B.

7 D.

8 D.

9 D.

10 D.

11 A.

12 C.

13 B.

14 A.

15 A.

16 D.

17 C.

18 B.

19 B.

20 A.

21 A.

22 D.

CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION

1. Ans. P124,500

January 1, balance (credit balance to be adjusted to Advances) 115,000

Charge sales 1,250,000

Recovery of previous write-offs 5,000

Collections from customers (overpayment credited to Advances) (1,230,000)

Write-off of receivables (7,000)

Sales returnds and allowances (P5,500+P3,000) (8,500)

Gross Accounts Receivable balance 124,500

2. Ans. P107,537

Gross Accounts Receivable 124,500

Allowance for Sales Discount (P124,500*50%*25%)*5%

Alowance for Bad Debts:

60 Days past due (P124,500*30%)*10%

(3,735)

(778)

>120 Days past due (P124,500*20%)*50% (12,450) (16,185)

Amortized cost, 12/31/14 107,537

3. Adjusting Journal Entries:

(a) Accounts receivable-trade

Advances from customers

9,000 9,000

(b) Sales

Accounts receivable-trade

25,000

25,000

(c) Subscriptions receivable (AR-nontrade)


60,000

60,000

(d) Advances from customers


5,000

5,000

(e) Claims receivable (AR-nontrade)


5,000

5,000

(f) Advances to employees (AR-nontrade)


1,000

1,000

(g) Advances to affiliates (Investment)


50,000

50,000

(h) Advances to suppliers


10,000

10,000

(i) Accounts receivable-trade

Advances from customers

10,000

10,000

(j) Accounts receivable-trade

Claims receivable (AR-nontrade)

2,000

2,000


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(k) Accounts receivable-trade 45,000

Subscriptions receivable (AR-nontrade) 45,000

CHAPTER 3-PROBLEM 3: DELL COMPANY

1. Ans. P366,000

Per GL

Per SL

Under 30 d

30-60 d

61-120 d

121-180 d

Over 180 d

Balances 360,000 360,000 240,000 48,000 36,000 24,000 12,000

Accounts definitely uncollectible (6,000) (6,000) (6,000)

Advances from customers 12,000 12,000 12,000 Adjusted balances 366,000 366,000 252,000 48,000 36,000 24,000 6,000

% Uncollectible - 3% 15% 30% 60%

Allowance for Doubtful Accounts 17,640 - 1,440 5,400 7,200 3,600

2. Ans. P22,320; 3. Ans. P17,640

Allowance for Doubtful Accounts, End

17,640

Less: Allowance for Doubtful Accounts, Beginning (1,320)

Add: Write-of off Accounts 6,000

Bad debt expense for the year 22,320

4. Ans. P330,720


Allowance for Doubtful Accounts (17,640)

Allowance for Sales Discounts (P252,000*20%)*10% (5,040)

Allowance for Sales Returns (P252,000*5%) (12,600)

Amortized Cost, 12/31/14 330,720

5. Ans. P25,320

Allowance for Doubtful Accounts, End 17,640

Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance 1,680

Write-of off Accounts 6,000

Bad debt expense for the year 25,320

CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATION

Balances

Per GL

2,270,000

Per SL

2,270,000

Nov-Dec

1,140,000

Jul-Oct

600,000

Jan-Jun

400,000

Prior to Jan

130,000

Accounts definitely uncollectible (30,000) (30,000) (30,000)

Adjusted balances 2,240,000 2,240,000 1,140,000 600,000 400,000 100,000

% Uncollectible 1.5% 8% 35% 70%

Allowance for Doubtful Accounts 275,100 17,100 48,000 140,000 70,000

Per books:

2. Ans. Allowance for DA, Jan. 1 65,000 Add: Interim provisions (P4.5M*2%) 90,000

Recoveries of previous write-off 7,500 Less: Write-off of receivables (45,000)

Additional write-off (30,000) Allowance for DA, Dec. 31 per books 87,500 Allowance for DA, per audit 275,100 Additional DA Expense for the year 187,600

1. Ans. Entry:

Doubtful Accounts Expense

Allowance for DA

187,600

187,600

3. Ans. P1,960,700

Gross Accounts Receivable 2,240,000

Allowance for DA (275,100)

Allowance for Sales Discount (P700,000*30%)*2% (4,200)

Amortized Cost, 12/31/14 1,960,700


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378,500

12,791,500

CHAPTER 3-PROBLEM 5: MAHOGANNY CORP.

Customer Invoice Date Amount Current

Nov-Dec

1-60 d past

Sept-Oct

61-120 d pas >120 d past Credit bal

Jul-Aug June and prior Zulu Inc. 41,993 550,000 550,000

41,974 1,200,000 1,200,000 41,923 950,000 950,000 41,855 420,000 420,000 Whiskey Co. 41,963 2,000,000 2,000,000 41,886 900,000 900,000 41,853 500,000 500,000 Uniform Inc. 41,983 1,750,000 1,750,000 41,916 600,000 600,000 41,825 500,000 500,000 Tango Corp. 41,891 2,600,000 2,600,000 41,830 1,250,000 1,250,000 41,703 900,000 900,000

Romeo Co. 41,974 (500,000) (500,000)

13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)

Reconciliation of GL and SL

Per GL

Per SL

Current

1-60 d past

61-120 d pas >120 d past

Credit bal

Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)

Advances from Reomeo Co.

Posting error

500,000

-

500,000

-

600,000

(600,000)

500,000

Adjsuted balances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 -

Unreconciled difference (1. Ans.) (30,000) Adjusted balance (2. Ans.) 14,120,000 Required allowance for Bad Debt as % 2% 5% 20% 50% Required allowance for Bad Debt 1,328,500 122,000 222,500 534,000 450,000

3. Ans. P378,500

Allowance for BD, ending 1,328,500

Less: Allowance for BD, beg (950,000)

Bad Debt Expense

4. Ans. P12,791,500


Allowance for BD (1,328,500)

Amortized Cost, 12/31/14

CHAPTER 3-PROBLEM 6: BONIFACIO INC.

ADJUSTING ENTRIES:

(a) Credit balance:

Accounts receivable 7,500

Allowance for bad debts 7,500

(b) Customer Aye:

No AJE necessary since the remmittance is still in transit as of December 31, 2014.

(c) Customer Bee: Sales Returns 13,800

Accounts payable 13,800

Accounts receivable (1-60 days) 13,800

Purchases 13,800

(d) Customer See and Dee: (1. Ans.)

Payment of customer See for a 61-120 days receivable has been deducted from customer Dee's 1-60 days receivable.

Posting error only. No AJE necessary.

(e) Customer Eee:

Sales 11,600


Inventory 8,000

Income summary/Cost of sales 8,000

(f) Customer Eff: Sales 18,000


Advances from customers 4,000


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(g) Customer Jeeh:

Sales 6,000


(h) Customer Eych:

Sales returns and allowance 1,200

Accounts receivable (61-120 days) 1,200 Per GL Per SL 1-60 days 61-120 days > 120 days Credit bal.

Unadusted balances 221,250 221,250 110,625 66,375 51,750 (7,500)

(a) Credit balance 7,500 7,500 7,500

(c) Customer Bee (13,800) (13,800) (13,800) (d) Customer See and Dee - 16,600 (16,600) (e) Customer Eee (11,600) (11,600) (11,600) (f) Customer Eff (14,000) (14,000) (14,000) (g) Customer Jeeh (6,000) (6,000) (6,000) (h) Customer Eych (1,200) (1,200) (1,200) Adjusted balances (2. Ans.) 182,150 182,150 81,825 48,575 51,750 -

Required allowance for BD in % 2% 10% 20% Required allowance for BD (3. Ans.) 16,844 1,636.50 4,857.50 10,350.00

4. Ans. P1,844

Allowance for BD, ending 16,844

Less: Allowance for BD, beg. (7,500)

AJE a) Recovery of write-off (7,500)

Bad Debt Expense 1,844

CHAPTER 3-PROBLEM 7: ABC COMPANY

1. Ans. P1,034,711

Principal Amount

1,000,000

Origination cost 57,851

Origination fee (23,140)

FMV of Loan/Initial measurement 1,034,711

2. Ans. P1,018,182

Amortization table: Loans Receivable/Notes Receivable

Correct Int. Nominal Int. Amortization Balance

January 1, 2014: 1,034,711

December 31, 2014: 103,471 120,000 (16,529)

December 31, 2015: 101,818 120,000 (18,182) 1,000,000

3. Ans. P373,944

Carrying value/Amortized cost 12/31/15 1,000,000 1

Accured interest, 12/31/15 120,000 2.48685

Total

Present value of new future cash flows at 10% for

3 periods with annuity P300,000*2.48685

1,120,000

746,056

Impairment loss 12/31/15 373,944

4. Entries 12/31/16 to 12/31/18

Amortization table after impairment loss:

Correct Int. Nominal Int. Amortization Principal Coll. Balance

December 31, 2015: 746,056

December 31, 2016: 74,606 - 74,606 (300,000) 520,661

December 31, 2017: 52,066 - 52,066 (300,000) 272,727

December 31, 2018: 27,273 - 27,273 (300,000) 0

12/31/16: Cash 300,000 Interest income 74,606

Notes receivable/Loans receivable 225,394

12/31/17: Cash 300,000

Interest income

52,066


12/31/18: Cash 300,000

Interest income

27,273


1,018,182


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CHAPTER 3-PROBLEM 8: ABC CORP.

1. Ans. P4,754,134 and P4,908,330

(a) DEF Corp, 10% - Trade receivable, Term, Interest-bearing

CORRECT ENTRIES:

Jan. 1, 2013:

Cash 4,754,134

Loans receivable 4,754,134

Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods)

Principal: (5,000,000*0.704961) 3,524,803 0.704961

Interest: (250,000*4.917324) 1,229,331 4.917324

Total 4,754,134 Amortization table: Loans receivable, DEF Corp. Correct Int. Nominal Int. Amortization Balance

January 1, 2013: 4,754,134

June 30, 2013: 285,248 250,000 35,248 4,789,382

December 31, 2013: 287,363 250,000 37,363 4,826,745

June 30, 2014: 289,605 250,000 39,605 4,866,349

December 31, 2014: 291,981 250,000 41,981 4,908,330

June 30, 2015: 294,500 250,000 44,500 4,952,830

December 31, 2015: 297,170 250,000 47,170 5,000,000

June 30, 2013: June 30, 2014:

Cash 250,000 Cash 250,000

Interest income 250,000 Intrest Income 250,000

Loans receivable 35,248 Loans receivable 39,605 Interest income 35,248 Interest income 39,605

December 31, 2013: December 31, 2014:

Cash 250,000 Cash 250,000

Interest income 250,000 Intrest Income 250,000

Loans receivable 37,363 Loans receivable 41,981 Interest income 37,363 Interest income 41,981

2. Ans. Retroactive adjustement:

Retained earnings, beg 173,255

Loans receiavable

173,255

Face value 5,000,000

Less: Proceeds (4,754,134)

Add: Nominal interest 500,000

Interest income in 2013, per books 745,866

Interest income in 2013, per audit (see amo.) 572,611

Overstatement in interest income in 2013 173,255

3. Ans. P2,000,000 and P2,000,000

(b) GHI, 12% - Non-trade receivable (Advances to associate), Term and Interest-bearing

CORRECT ENTRIES

January 1, 2014:

Cash 2,000,000

Loans receivable-Nontrade 2,000,000

*note that the nominal interest and effective interest are the same thus, the face value is also the proceeds (fmv)

December 31, 2014:

Cash 240,000

Interest income (2M*12%) 240,000

*note that since nominal interest and effective interests are the same and since there are no principal collections yet,

the carrying value/amortized cost at 12/31/14 remains the face value.

4. Ans. P2,483,684 and P3,305,785

(c) KLM - Trade receivable, Term and Non-interest-bearing

CORRECT ENTRIES

Janaury 1, 2012:

Cash 2,483,685


Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods)

Principal: P4,000,000*0.6209213) 2,483,685 0.6209213

Amortization table: Loans receivable, KLM


January 1, 2012: 2,483,685

December 31, 2012: 248,369 - 248,369 2,732,054

December 31, 2013: 273,205 - 273,205 3,005,259

December 31, 2014: 300,526 - 300,526 3,305,785

December 31, 2015: 330,579 - 330,579 3,636,364

December 31, 2016: 363,636 - 363,636 4,000,000


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December 31, 2012:

Loans receivable 248,369

Interest income 248,369

December 31, 2013:



December 31, 2014:



5. Ans. Retroactive adjustement:

Retained earnings, beg 994,741

Loans receivable

994,741

Principal amount 4,000,000

Less: Proceeds (2,483,685)

Interest income rececognized in 2012 1,516,315

Correct interest income in 2012 (see amo.) (248,369)

Correct interest income in 2013 (see amo.) (273,205)

Overstatement in interest income in '12 and '13 994,741

6. Ans. P4,780,007 and P4,350,818

(d) NOP, 10% - Trade, Serial and Interest-bearing

CORRECT ENTRIES

January 1, 2014:

Cash 4,780,007


Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 10 semi-annual periods)

Cash to be collected on:

July 1, 2014:

Principal

500,000

Interest

250,000

Total 750,000

PV factor

0.943396

Present Value

707,547

January 1, 2014: 500,000 225,000 725,000 0.889996 645,247

July 1, 2015: 500,000 200,000 700,000 0.839619 587,733

January 1, 2015: 500,000 175,000 675,000 0.792094 534,663

July 1, 2016: 500,000 150,000 650,000 0.747258 485,718

January 1, 2016: 500,000 125,000 625,000 0.704961 440,600

July 1, 2017: 500,000 100,000 600,000 0.665057 399,034

January 1, 2017: 500,000 75,000 575,000 0.627412 360,762

July 1, 2018: 500,000 50,000 550,000 0.591898 325,544

January 1, 2018: 500,000 25,000 525,000 0.558395 293,157

TOTAL 4,780,007

Amortization table: Loans receivable, NOP

January 1, 2014:

Correct Int. Nominal Int. Amortization Princ. Coll. Balance

4,780,007

July 1, 2014: 286,800 250,000 36,800 (500,000) 4,316,808

January 1, 2015: 259,008 225,000 34,008 (500,000) 3,850,816

July 1, 2015: 231,049 200,000 31,049 (500,000) 3,381,865

January 1, 2016: 202,912 175,000 27,912 (500,000) 2,909,777

July 1, 2016: 174,587 150,000 24,587 (500,000) 2,434,364

January 1, 2017: 146,062 125,000 21,062 (500,000) 1,955,425

July 1, 2017: 117,326 100,000 17,326 (500,000) 1,472,751

January 1, 2018: 88,365 75,000 13,365 (500,000) 986,116

July 1, 2018: 59,167 50,000 9,167 (500,000) 495,283

January 1, 2019: 29,717 25,000 4,717 (500,000) (0)

July 1, 2014:

Loans receivable

Interest income

36,800 36,800

Cash

Interest income

750,000

250,000


December 31, 2014:

Loans receivable

Interest income

34,008 34,008

Interest receivable

Interest income

225,000

225,000


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Proceeds from issue 1/1/14 4,780,007 July 1, 2014 amortization 36,800 July 1, 2014 principal collection (500,000) Dec 31, 2014 amortization 34,008 December 31, amortized cost 4,350,816 *note that the next P500,000 principal collection shall be made on Jan. 1, 2015

SUMMARY

Interest Interest Current Non-current

Income Recevable Loans Rec. Loans Rec.

(a) DEF Corp, 10% - trade 581,586 - 4,908,330

(b) GHI, 12% - nontrade 240,000 - 2,000,000

(c) KLM - trade 300,526 - 3,305,785

(d) NOP - trade 545,809 225,000 4,350,816

Total

6. Ans. 7. Ans. 8. Ans. 9. Ans.

Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus

trade receivables are always current.

CHAPTER 3-PROBLEM 9: DWARF CORP.

(a) Note receivable from sale of plant - nontrade

Dec. 31, 2013 balance 4,500,000

Apr. 1, 2014, principal collection (1,500,000)

Noncurrent Current Int. Receivab Int. Income

Dec. 31, 2104 balance 3,000,000 1,500,000 1,500,000

Int. Receivable: P3,000,000*12%*9/12 270,000

Int. Income: (P4.5M*12%*3/12) + (P3M*12%*9/12) 405,000

(b) Note receivable from officer - nontrade 1,200,000 - -

Int. Income (P1,200,000*10%) 120,000

(c) Note receivable from sale of equipment - nontrade

Apr. 1, 2014 @FMV=PV of future cash flows at 12% for 2 periods

(P600,000*0.797) 478,200 Dec. 31, 2014: Amo. (478,200*12%*9/12) 43,038 43,038

Dec. 31, 2014 amortized cost 521,238 521,238 - -

(d) Note receivable from sale of land - nontrade

Tota

1. Ans. 2. Ans. 3. Ans. 4. Ans.

Note that per PAS 1, a nontrade receivable is current if it is realizable within 12 months after the reporting period or balance sheet date.

o

Interest expense (P3.2M*12%*1/12) 32,000

Loans payable (balance) 1,168,000 3. Ans. P1,152,320

Cash 1,200,000 LOANS PAYABLE

Sales returns 80,000


a

1,667,920 225,000 12,564,932 2,000,000

Jun. 30, bal 4,000,000 1,320,000 Jul. Coll

80,000 Jul Returns

950,000 Aug. Coll

200,000 Aug. Write-

Aug. 31, bal 1,450,000

Jul. Payment

1,168,000

3,200,000 Jun. Loan

Aug. Paymen

879,680

2,032,000 Jul 31. bal

1,152,320 Aug. 31, b

Jul. 1, 2014 @ FMV=Face (Nominal%=Effective%)

Dec. 31, 2014 balance = Face

2,100,000

Current portion:

Periodic payment (on Jul. 1, 2015) 676,875

Interest expense (upto Jul. 1, 2015 231,000

445,875

445,875

Long-term portion: 1,654,125 1,654,125 Interest receivable (P2.1M*11%*6/12)

Interst income (P2.1M*11%*6/12) 115,500

115,500

l 4,875,363 1,945,875 385,500 683,538

CHAPTER 3-PROBLEM 10: WHISKEY INC.

1. JORNAL ENTRIES

(a) Pledging of AR

June 30, 2014:

SUMMARY:

Cash (P4M*80%)-(P4M*5%) 3,000,000 2. Ans. P1,450,000

Interest expense (P4M*5%) 200,000 ACCOUNTS RECEIVABLE

Loans payable (P4M*80%) 3,200,000 July 31, 2014:

Cash

1,200,000 Sales discount

Accounts receivable

120,000 1,320,000


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August 31, 2014:

Cash

900,000

Sales discount

Accounts receivable

50,000 950,000

Interest expense (P2,032K*12%*1/12) 20,320 2,032,000

Loans payable (balance)

Cash

879,680 900,000

Allowance for BD

Accounts receivable

200,000

200,000

(b) Discounting of NR Cash (Proceeds) 2,082,667

Notes receivable 2,000,000

Interest income (P2M*10%*4/12) 66,667

Gain on discounting 16,000

Maturity Value: Principal Amount 2,000,000

Interest (P2M*10%) 200,000 2,200,000

Proceeds: (Maturity value - Discount)

Maturity Value 2,200,000

Less: Discount: (Maturity value*Discount rate*Remaining term)

(P2,200,000*8%*8/12) (117,333)

Proceeds from discounting 2,082,667

4. Ans. 0

Since discounting was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),

the notes receivable has been derecognized/transferred.

5. Ans. P16,000.

o

Cash 600,000

Sales discount 50,000

Accounts receivable-Assigned 650,000 3. Ans. P224,150

Interest expense (P1.5M*12%*1/12) 15,000

Loans payable (balance) 585,000

Cash 600,000

LOANS PAYABLE

Sales returns 60,000 a

Accounts receivable-Assigned 60,000

August 31, 2014:

Cash

700,000

Sales discount

Accounts receivable-Assigned

40,000 740,000

Interest expense (P915K*12%*1/12) 9,150 915,000

Loans payable (balance)

Cash

690,850 700,000

Allowance for BD 80,000

Accounts receivable-Assigned 80,000

Jun. 30, bal 2,000,000 650,000 Jul. Coll

60,000 Jul Returns

740,000 Aug. Coll

80,000 Aug. Write-

Aug. 31, bal 470,000

Jul. Payment

585,000

1,500,000 Jun. Loan

Aug. Paymen

690,850

915,000 Jul 31. bal

224,150 Aug. 31, b

Proceeds from discounting/Sales proceeds

Less: Carrying value of Notes Receivabl

Interest from Jan. 1 to May 1 (4 mo.)

(P2,000,000*10%*4/12)

2,000,000

66,667

2,082,667

2,066,667

Gain on discounting 16,000

CHAPTER 3-PROBLEM 11:VICTORY INC.

1. JORNAL ENTRIES

(a) Assignement of AR

November 1, 2014:

SUMMARY:

Cash (P1.5M*95%) 1,425,000 2. Ans. P470,000.

Interest expense (P1.5M*5%) 75,000 ACCOUNTS RECEIVABLE-ASSIGNED

Loans payable

Accounts receivable-Assigned

Accounts receivable

2,000,000

1,500,000

2,000,000

November 30, 2014:



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1,675,000

(b) Factoring of AR

Cash, net (350,000-10,000) 340,000

Receivable from factor 50,000

Allowance for BD 20,000

Loss on Factoring 90,000


Since factoring was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),

the accounts receivable factored has been derecognized/transferred.

4. Ans. (P90,000)

Net proceeds from factoring (350,000-10,000) 340,000

Add: Factor's holdback 50,000

Total/Net Sales proceeds from AR

Carrying value of AR

Gross Accounts receivable factored 500,000

Allowance for BD (20,000)

390,000

480,000

Loss of Factoring (90,000)

MULTIPLE CHOICE EXERCISES CHAPTER 3-EXERCISE 1: DKNY COMPANY

Trade Other - current Total trade & other

Trade accounts receivable 1,550,000

Trade accounts receivable, assigned 750,000

12% Trade notes receivable 200,000 Installments receivable, normally due 1 year to two year

Advance payments for purchase of 600,000

300,000

Claim from insurance company 30,000

Subscription receivable due in 60 days, 600,000

Accrued interest receivable 20,000

3,100,000 950,000 4,050,000

1. Ans. B. 2. Ans. D.

3. Ans. C.

Proceeds from AR factored 250,000

Carrying value of AR factored (300,000)

Loss from factoring (50,000)

Proceeds from NR discounted:

Maturity value: (Principal + Interest)

Principal 300,000

Interest (P300,000*20%*6/12) 30,000 330,000

Less: Discount (MV*disc%*remaining term)

(P330,000*40%*6/12) (66,000)

Proceeds from NR discounted: 264,000

Carrying value of NR (no interest) 300,000

Loss from discounting (36,000)

Total loss from receivable financing

Note:

(a) The credit balances from customer accounts at P60,000 and P40,000 shall be presented as advances from customers (current liab.)

unless there is right of offset.

(b) The cash advances to subsidiary amounting to P800,000 shall be presented as an addition to the investment in subsidiary account in

the parent-company financial statements, thus is presented as LT Investment.

(c) The deposit on contract bids amounting to P500,000 shall be presented as Other Assets in the noncurrent asset portion of SFP.

(d) The advances to stockholders amounting to P2,000,000 is a non-trade, noncurrent receivable, thus is presented as Other Asset.

CHAPTER 3-EXERCISE 2: MORGAN INC.

1. Ans. A.

Allowance for DA, Dec. 31, 2014 (per aging) 700,000 3,225,300

Less: Allowance for DA, Jan. 1, 2014 (600,000) (169,000)

Recovery of previously written-off accounts (100,000) 3,056,300

Add: Write-off of accounts during the year 375,000 Correct Bad Debt Expense 375,000

2. Ans. B.


Less: Allowance for DA, Dec. 31, 2014 (per aging) (700,000)

Amortized cost/Carrying value, Dec. 31, 2014

(86,000)



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3,036,932

1,094,300

CHAPTER 3-EXERCISE 3: INUYASHA INC.

1. Ans. C.

Year 2013

Current 1%

1 – 30 days PD 6% 9% 23% 55%

2012 2% 8% 10% 18% 60%

2011 1% 4% 11% 16% 45%

2010 3% 5% 12% 22% 45%

2009 3% 2% 8% 21% 45%

Average uncollectible accounts in 2% 5% 10% 20% 50%

2. Ans. C.

Age of accounts Amount Allow in %

Required Allow. In Amount

Current 1,686,400 2% 33,728

1 to 30 days past due 922,000 5% 46,100

31 to 60 days past due 384,800 10% 38,480

61 to 90 days past due 153,300 20% 30,660

Over 90 days past due 78,800 50% 39,400

Total 3,225,300 188,368

3. Ans. A.


Allowance for uncollectible accounts (188,368)

Amortized cost/Net realizable value

CHAPTER 3-EXERCISE 4: MEXICAN CORP.

Reconciliation of GL and SL with Aging of AR

Per GL

1,230,000

Per SL

1,223,000

0-60 days

825,000

61-90 days

220,000

91-120 days

50,000

> 120 days

128,000

Write off of AR (40,000) (40,000) (40,000)

Balance 1,190,000 1,183,000 825,000 220,000 50,000 88,000

Unlocated difference* (7,000) Adjusted Gross AR 1,183,000 Required Allowance for BD in % 2% 10% 30% 40%

Required Allowance for BD in Amounts 88,700 16,500 22,000 15,000 35,200

1. Ans. C.

*Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail. The adjusting entry shall be:

Sales 7,000


2. Ans. B.

Required allowance for BD, Dec. 31 88,700

Less: Allowance for BD, unadjusted balance (106,000)

Add: Additional write-off per audit 40,000

Additional bad debt expense per audit 22,700

Bad debt expense per books (P12.8M*2%) 256,000

Total bad debt expense per audit 278,700

3. Ans. C.


Less: Allowance for BD (88,700)

Amortized cost/Net realizable value

CHAPTER 3-EXERCISE 5: ROVERS INC. Dec. Nov. Oct. Sept. Aug. and pri

Customer Invoice date Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 days

Gudang 9/12/14 139,200 139,200

Tisoy 12/12/14 153,600 153,600

12/2/14 99,200 99,200

Gusoy 11/17/14 185,120 185,120

10/8/14 176,000 176,000

Naning 12/8/14 160,000 160,000

10/25/14 44,800 44,800

8/20/14 40,000 40,000

Nanong 9/27/14 96,000 96,000

Balong 8/20/14 71,360 71,360

Peejong 12/6/14 112,000 112,000

11/29/14 169,440 169,440

Total 1,446,720 524,800 354,560 220,800 235,200 111,360



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(91,360)

1,255,040

Reconciliation between GL and SL with Aging of AR analysis

Unadjusted balances

Per GL

1,466,720

Per SL

1,446,720

0-30 days

524,800

31-60 days

354,560

61-90 days

220,800

91-120 days

235,200

>120 days

111,360

(a) Write-off of AR-Balong

(b) Posting error

(71,360)

-

(71,360)

-

(99,200)

99,200

(71,360)

Adjusted balances 1,395,360 1,375,360 425,600 453,760 220,800 235,200 40,000

Unreconciled difference (20,000) Adjusted balance 1,375,360 Required allowance for BD in % 2% 5% 10% 20% 50%

Required allowanc for BD in amount 120,320 8,512 22,688 22,080 47,040 20,000

1. Ans. D.

Allowance for BD, ending 120,320

Less: Allowance for BD, unadjusted (46,720)

Add: Write off of AR-Balong 71,360

Bad Debt Expense 144,960

2. Ans. C.

3. Ans. C.

Write-off of AR-Balong (71,360)

Unlocated difference (debited to Sales) (20,000)

Total adjustments to AR-GL

4. Ans. A.


Allowance for Bad Debts (120,320)

Amortized cost/Carrying value

5. Ans. B.

AJE to record unreconciled difference:

Sales 20,000


CHAPTER 3-EXERCISE 6: NATASHA INC.


Per GL Per SL 0-1 Month 1-3 Months 3-6 Months > 6 Months Unadjusted balances 788,000 792,960 372,960 307,280 88,720 24,000

(b) Additional write-off (GL only) (800) (c) Additional write-off per aging sched (4,000) (4,000) (4,000)

(d) AR with credit balances 10,000 10,000 8,000 2,000 793,200 798,960 380,960 309,280 88,720 20,000

Unreconciled difference 5,760 8,000 12,000

Adjusted balances (3. Ans. C.) 798,960 Allowance for BD in % 1% 2% 3% 50% 20%

Allowance for BD in Amount (4. Ans. A.) 19,057 3,810 6,186 2,662 4,000.00 2,400.00

Adjusting entries:

(a) Bad debt expense 1,296

Allowance for bad debt 1,296

To adjust the entry made upon recovery of previously written-off account, credited by the client to Bad Debt Expense account.

(b) Allowance for bad debt 800

Accounts receivable 800

To record additional accounts written-off per SL.

(c) Allowance for bad debt 4,000


To record additional accounts written-off per the aging schedule.

(d) Accounts receivable 8,000

Advances from customers 8,000

To reclassify the credit balances in customer accounts at (0-1 mo.) P8,000 and (1-3 mo.) P2,000.

(e) Allowance for bad debts 10,297 Bad debt expense 10,297

Allowance for BD, ending 19,057 Less: Allowance for BD, beginning (15,250) Recovery of previous write-off (1,296) Add: Write off of accounts receivable 6,832 Additional write-off per audit 4,000

Bad Debt Expense per audit 13,343 1. Ans. C.

Bad Debt Expense per books 23,640

Overstatement in Bad Debt Expense (10,297)



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779,903

(f) Accounts receivable 5,760 2. Ans. B.

Sales 5,760

To adjust the unlocated difference (SL should prevail over GL).

5. Ans. D.




CHAPTER 3-EXERCISE 7: SAYOTE INC.


Per GL Per SL Under 1 mo. 1-6 mo. Over 6 mo. Credit bal.

Unadjusted balances 1,270,000 1,260,000 540,000 552,000 228,000 (60,000)

Credit balance - Kamote (Advances) 12,000 12,000 12,000

Credit balance - Kutchay (Posting error - - (21,000) 21,000

Credit balance - Kalachuchi (Advances) 27,000 27,000 27,000

Write-off of accounts (72,000) (72,000) (72,000) 1,237,000 1,227,000 540,000 531,000 156,000 -

Unlocated difference (10,000) 36,000 120,000

Adjusted balance (2. Ans. B) 1,227,000 Allowance for BD % 1% 2% 50% 10%

Allowance for BD in Amount (3. Ans A) 46,020 5,400 10,620 18,000 12,000

1. Ans. A.

Sales 10,000


To record the unlocated difference (SL should prevail over GL)

4. Ans. D.

Allowance for BD, ending 46,020 Less: Allowance for BD, beg. (30,000) Add: Write off of AR 24,000

Additional write-off per audit 72,000 Bad debt expense per audit 112,020 Bad debt expense per books 72,000 Additional bad debt expense per audit 40,020 AJE:

Bad debt expense

40,020

Allowance for bad debt 40,020

5. Ans. C.

Accounts receivable, Gross 1,227,000

Allowance for bad debts (46,020)

Amortized cost/Carrying vallue 1,180,980

CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY

1. Ans. C.

P30,000*20% = P6,000 - Income is overstated by the gross profit on the sales.

2. Ans. A.

The credit memo should be recorded as of December 31, 2014.

3. Ans. B.

Actual number of units sold to Mr Lazo was 320 (P48,000/P150)

4. Ans. D.

(320*P100) – P48,000 = P16,000.

5. Ans. A.

Receivable from Mr. Sia is correctly stated because the goods are considered sold in 2014

16. Ans. D.

CHAPTER 3-EXERCISE 9: MILK CORP. Dec. Nov. Oct. Sept. Aug. and pri

Customer Invoice date Invoice Amount 1-30 days 31-60 days 61-90 days 91-120 days more than 1

Zulu Inc. 12/6/14 42,000 42,000 11/29/14 63,540 63,540

Yankee Co. 9/27/14 36,000 36,000 8/20/14 26,760 26,760

Xylon Inc. 12/30/14 20,000 20,000 12/8/14 40,000 40,000 10/25/14 31,800 31,800

Whiskey Co. 11/17/14 69,420 69,420 10/9/14 66,000 66,000

Victory Corp. 12/12/14 57,600 57,600 8/20/14 37,200 37,200

Uniform Inc. 9/12/14 52,200 52,200

542,520 159,600 132,960 97,800 88,200 63,960



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438,907

Reconciliation of GL and SL with Aging of AR analysis

Per GL

Per SL

1-30 days

31-60 days

61-90 days

91-120 days

more than 1

Unadjusted balances 550,000 542,520 159,600 132,960 97,800 88,200 63,960

Yankee & Victory: Posting error 26,760 (26,760)

Xylon: FOB Destination (20,000) (20,000) (20,000) Uniform: Write-off (52,200) (52,200) (52,200) Adjusted balances 477,800

Unreconciled difference (7,480)

470,320 166,360 132,960 97,800 36,000 37,200

Adjusted balance 470,320 Allowance for BD in % 1% 2% 5% 10% 50%

Allowance for BD in Amounts (1. Ans. A.) 31,413 1,664 2,659 4,890 3,600 18,600

2. Ans. D.




3. Ans. A.

Allowance for BD, end 31,413

Add: Write off 52,200

Debit unadjusted balance 16,500

Bad debt expense 100,113

4. Ans. B.

Sales 7,480

Accounts receiavable 7,480

To adjust the unreconciled difference. (SL should prevail over GL)

CHAPTER 3-EXERCISE 10: BROCOLI CORP.

Adjusting entries

a. Accounts payable

Cash - METREBANK

67,500 67,500

b. Accounts receivable (current)

Cash - METREBANK

189,000

189,000

c. Cash - METREBANK

Accounts payable

107,550

107,550

d. Cash - METREBANK

Accounts payable

115,650

115,650

e. Cash - METREBANK 258,000 Expense

Loans payable

42,000 300,000

f. Accounts receivable (current)

Cash – BADO

57,900

57,900

g. Cash – BADO

Overdraft (Liability)

3,207,900

3,207,900

h. Advances to supplier

Purchases

60,000

60,000

i. Sales

Accounts receivable

(no adjustment to subsidiary- aging)

4,500,000

4,500,000

j. Sales return

Accounts receivable

(no adjustment to subsidiary – aging)

225,000

225,000

k. Bad debt expense

Allowance for bad debts

880,763

880,763

Gen Ledger

63,219,000

Subs. Ledger

65,045,790

Current

35,550,000

Past due

29,495,790

Customer post-dated check (AJE b) 189,000 189,000 189,000 Customer post-dated check (AJE f) 57,900 57,900 57,900 Collections Received on Dec. 31, 2014 (adj to SL only) (2,626,290) (1,000,000) (1,626,290)

Consigned goods to NITZ (adj to SL only)

Undelivered sales (adj to GL only/ AJE i)

(4,500,000)

(3,925,500) (3,925,500) Unrecorded sales returns (adj to GL only/AJE j) (225,000) Adjusted Balances 58,740,900 58,740,900 30,871,400 27,869,500

3. Ans. D.



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(3,207,900)

1,316,663

56,172,607

62,478,540

Current 30,871,400 2% 617,428

Past Due 27,869,500 7% 1,950,865

Required Allowance, end 2,568,293

Add: Write-offs 521,565

Less: Allowance, beg (1,773,195)

Interim provision/Bad debt per books (435,900)

Additional bad debt expense 880,763

l. Inventory

Cost of sales

6,920,400

6,920,400

(3,925,500+4,500,000+225,000)*80%

1. Ans. D.

Cash, Unadjusted balance (90,000)

(a) (67,500)

(b) (189,000)

(c) 107,550

(d) 115,650

(e) 258,000

(f) (57,900)

(g) 3,207,900

Cash, adjusted balance 3,284,700

2. Ans. C.

Cash in bank, BADO (3,150,000)

(f) (57,900)

Cash in bank, BADO (total overdraf

4. Ans. C.

Bad debt expense per books 435,900

Additional bad debt expense per audit' 880,763

Bad debt expense per audit

5. Ans. C.


Allowance for bad debt (2,568,293)


6. Ans. D.

Inventory, unadjusted balance 55,558,140

(l) 6,920,400

Inventory, adjusted balance

CHAPTER 3-EXERCISE 11: MYBAGS INC.

NR - total Recievable-Curr Interest Inco Interest Rec.

(a) NR discounted as a sale - - - -

(b) NR - 30 days 900,000 900,000 (c) NR - 90 days (Subscription Receivable) 500,000

Int. Inc. (P500,000*16%*2/12) 13,333.33 13,333

(d) NR-dishonored (collection w/in 12 months is doubtf - - 16,000 -

(e) NR - 90 days (Advances to Officer) 160,000 (f) NR - 120 days 120,000 120,000

Int. Inc. (P120,000*16%*108/360) 5,760 5,760

Total 1. Ans. C. 2. Ans. C. 3. Ans. D. 4. Ans. A.

CHAPTER 3-EXERCISE 12: YZA INC.

1. Ans. A.

Proceeds from the loan (FMV = Present Value of future cash flows at 8% effective rate for 3 periods)

Principal (1,000,000*0.793832) 793,832 0.793832

Interest (60,000*2.577097) 154,626 2.577097

948,458 Principal amount 1,000,000 Add: Origination cost (Squeeze) 28,458 Less: Origination fee (80,000) Net proceeds/Fair value 948,458 Amortization table: Loans receivable

Correct Int.

Nominal Int.

Amortization

Balance

Janaury 1, 2014: 948,458

December 31, 2014: 75,877 60,000 15,877 964,335

December 31, 2015: 77,147 60,000 17,147 981,481

December 31, 2015: 78,519 60,000 18,519 1,000,000

1,020,000 1,680,000 35,093 19,093



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2. Ans. C.

Carrying value/Amortized cost (12/31/15) 981,481 Accrued interest (as of 12/31/15) 60,000

Total receivables as of 12/31/15

Present value of new cash flows at original eff. % (8%)

Due 12/2016: P300,000*0.925926 277,778

1,041,481

0.925926

Due 12/2018: P300,000*0.793832 238,150 515,927 0.793832

Impairment loss 525,554

3. Ans. C.

CHAPTER 3-EXERCISE 13: ISIAH COMPANY

Principal amount 4,000,000

Add: Origination cost 248,000

Less: Origination fees (374,000)

Initial amount/Fair value/Proceeds 3,874,000

1. Ans. B.

Amortization table: Loans receivable Correct Int.

Nominal Int.

Amortization

Balance

December 31, 2013: 3,874,000

December 31, 2014: 358,345 320,000 38,345 3,912,345

December 31, 2015: 361,892 320,000 41,892 3,954,237

December 31, 2016: 365,763 320,000 45,763 4,000,000

2. Ans. D.

Amortized cost/Carrying value (12/31/15) 3,954,237 Accrued interest (12/31/15): 320,000

Total receivables as of 12/31/15

Less: Present value of new future cash flows at 9.25%

Due 12/31/2017: (1.4M*0.837832) 1,172,965

4,274,237

0.915332

Due 12/31/2018: (P1M*0.766895) 766,895 0.837832

Due 12/31/2019 (P600K*0.701963) 421,178 0.766895

Due 12/31/2020: (P400K*0.642529 257,012 2,618,049 0.701963

Impairment loss 1,656,188 0.642529

3. Ans. B.; 4. Ans. C.

Amortization table: Loans receivable after impairment loss

Correct Int.

Nominal Int. Amortization

Principal Coll. Balance

December 31, 2015: 2,618,049

December 31, 2016: 242,170 - 242,170 - 2,860,219

December 31, 2017: 264,570 - 264,570 1,400,000 1,724,789

December 31, 2018: 159,543 - 159,543 1,000,000 884,332

December 31, 2019: 81,801 - 81,801 600,000 366,133

December 31, 2020: 33,867 - 33,867 400,000 (0)

CHAPTER 3-EXERCISE 14: VISAGE CORP.

1. Ans. A.

Net cash proceeds from factoring (P350,000-P10,000) 340,000

Factors holdback 50,000

Total/Net sales price of AR factored 390,000

Less: Carrying value of AR (P500,000-P20,000) (480,000)

Loss from factoring (90,000)

2. Ans. D.

Assignment is only a loan transaction, thus there is no transfer of receivable.

3. Ans. A.

Accounts receivable-assigned 800,000

May collection with sales discount (P200,000+P5,000) (205,000)

June collection with sales discount (P150,000+P4,000) (154,000)

Sales returns (30,000)

Accounts written-off as worthless (20,000)

Accounts receivable-assigned - June 30 391,000

4. Ans. B.

Payment Interest Principal Balance

(Bal*24%*1/12 (Payment-Int)

Loans payable balance, May 1 500,000

May 31 remittance 200,000 10,000 190,000 310,000

June 31 remittance 150,000 6,200 143,800 166,200



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5. Ans. B.

Proceeds from discounting ** 625,400

Less: Carrying value of Notes (600,000)

Interest receivable up to Oct. 31 (P600K*12%*4/12 (24,000)

Gain on Discounting 1,400

** Proceeds from discounting

Maturity value

Principal amount 600,000

Interest (P600,000*12%*6/12) 36,000

636,000

Discount (P636,000*10%*2/12) (10,600)

Proceeds from discounting 625,400


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CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES



1 B.

2 D.

3 D.

4 C.

5 B.

6

7

1 A

2 D

3 C

4 B

5 A

6 B

7 D

8 D

9 B

10 B

11 D

12 A

13 C

CHAPTER 4-PROBLEM 2: NOKIA CORP.

Inventory

Acc. Payable

Net Sales

Net Purch.

Net Income

Unadjusted balances 1,200,000 790,000 6,050,000 3,300,000 610,000

(c) Purch in transit - FOB, Dest. (120,000) (120,000) 120,000

(d) Unrecorded purch. returns/allowance (70,000)

(e) "Bill and Hold" Sales (224,000)

(70,000) (70,000) -

(224,000)

(f) Goods out on consignment 70,000 (100,000) (30,000)

(g) Sales in transit - FOB, SP (105,000) (105,000)

(h) Goods segregated but not yet sold 98,000 98,000

(i) Purch in transit - FOB, SP 170,000 170,000 (170,000)

(j) Purch in transit - FOB, SP 200,000 200,000

1,169,000 770,000 5,950,000 3,280,000 499,000

1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.

CHAPTER 4-PROBLEM 3: INGGO CORP.

Inventory

Acc. Payable

Sales

Net Income

Unadusted balances 3,750,000 3,075,000 27,000,000 (a) Goods held on consignment, recorded as purchases (465,000) (465,000) -

(b) Credit balance - Fox Inc. (Advances to supplier)

Sale on approval - not yet valid sale

66,000

25,000 (84,000)

(18,000)

(c) Sales in transit - FOB Seller (FOB, SP) - no adjustment

(d) Goods out on consignment, recorded as sales

630,000

(750,000)

(120,000)

(e) Purchase in transit, FOB Seller (FOB, SP) 75,000 75,000 -

(f) Unrecorded freight cost 3,000 6,000 (3,000)

(g) Purchase discount - Beta Corp. (P795,000*2%) (15,900) (15,900) -

(h) Inventory financing - Loan to Hote Inc. (not purch) (100,000) (100,000) -

3,943,100 2,600,100 26,166,000 (141,000)

1. Ans. 2. Ans. 3. Ans. 4. Ans.

CHAPTER 4-PROBLEM 4: TOUR COMPANY

Purchases

Inventories

Unadjusted balances 2,543,900 354,500 RR #11204 (7,800)

RR #11210 4,000

4,000

RR #11211 9,700

RR #11212 12,840

RR #11214 25,640

25,640

RR #11215 28,400 28,400 Total/Net Adjustment 72,780 58,040 Adjusted balances 2,616,680 412,540

2. Ans.


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1. Adjusting journal entries:

Purchases 72,780


Inventory 58,040

Income summary 58,040

3. Ans. P2,439,140

Inventory, Nov. 1, 2013 235,000

Net Purchases, as adjusted 2,616,680

Cost of goods avaialble for sale 2,851,680

Inventory, Oct. 31, 2014, as adjusted (412,540)

Cost of Sales 2,439,140

CHAPTER 4-PROBLEM 5: ABC CORP.

1. Ans. P156,000.

Merchandise Inventory, Jan. 1

Purchaes (Jan. 1 to Oct. 31)

830,000

120,000

Transportation-in 20,000 Purchase returns and allowances (10,000) 840,000

Actual cost of goods available for sale 960,000

Less: Estimated cost of sale* (756,000)

Estimated inventory, October 31 204,000

Inventory not damaged by fire 48,000

Inventory loss due to fire 156,000

*Estimated cost of sale

Gross Sales

1,096,000

Sales returns (40,000) Employee discount 24,000 1,080,000

Multiply by cost % (100%-30%) 70%

Estimated cost of sale 756,000

2. Ans. P48,000.

Merchandise Inventory, Jan. 1

Purchaes (Jan. 1 to Oct. 31)

830,000

120,000

Transportation-in 20,000 Purchase returns and allowances (10,000) 840,000

Actual cost of goods available for sale 960,000

Less: Estimated cost of sale* (864,000)

Estimated inventory, October 31 96,000

Inventory not damaged by fire 48,000

Inventory loss due to fire 48,000

*Estimated cost of sale

Gross Sales

1,096,000

Sales returns (40,000) Employee discount 24,000 1,080,000

Divide by Selling Price % (100%+25%) 125%

Estimated cost of sale 864,000

CHAPTER 4-PROBLEM 6: KAGOME COMPANY

1. Ans. P2,225,000.

Collection on AR

1,825,000

Add: AR, December 31, 270,000

Sales returns 25,000

Sales discounts 30,000

Accounts written-off 20,000

Less: AR, January 1 (295,000)

Gross Sales on account 1,875,000

Gross Cash Sales 350,000

Gross Sales 2,225,000

2. Ans. P1,850,000.

Gross Sales

2,225,000

Less: Sales returns (25,000)

Sales for inventory estimation 2,200,000



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3. Ans. P400,000.

Inventory, December 31, 2013

Purchases 1,410,000

320,000

Unrcorded purchases 10,000 Advances to suppliers recorded as purch. (20,000) 1,400,000

Cost of goods available for sale 1,720,000

Less: Estimated cost of sales (P2.2M*60%) (1,320,000)

Estimated Inventory, December 31, 2014 400,000

4. Ans. P80,000.

Estimated Inventory per audit 400,000

Inventory per books 320,000

Inventory shortage 80,000

CHAPTER 4-PROBLEM 7: JIM CORPORATION

11 Mo. Purch

12 Mo. Purch

Unadjusted balances 675,000 800,000

a) May purchases recorded only in June 7,500 b) Unrecorded purch. returns/allow. (1,000) (1,500)

c) Advances to suppliers (2,000) (2,000)

d) May purch in transit, FOB Dest. (5,500) Adjusted balances 674,000 796,500

Inventory, July 1, 2013

87,500

Purchases, 11 months as adjusted 674,000

Cost of goods available for sale, 11 months

Inventory, May 31, 2014

95,000

761,500

d) May purch in transit, FOB Dest. (5,500) 89,500

Cost of sales, 11 months 672,000

1. Ans. 20%.

Sales, 11 months 840,000 100%

Cost of sales, 11 months 672,000 80%

Gross profit, 11 months 168,000 20%

2. Ans. P98,000.

Sales, 12 months 960,000

Sales, 11 months (840,000)

Sales for the month of June 120,000

e) Sales in June at 0% GP (10,000)

Sales for June at 20% GP 110,000

Multiply by Cost% 80%

Cost of sales (Sales at 20%GP) 88,000

Add: Cost of sales (Sales at 0%GP) 10,000

Total Cost of Sales for June 98,000

3. Ans. P114,000.

Inventory, July 1, 2013 87,500

Purchases, 12 months 796,500

Cost of goods available for sale, 12 months 884,000

Less: Cost of sales, 12 months (P672,000+P98,000) (770,000)

Estimated Inventory, June 30, 2014 114,000

CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION

1. Ans. P50,750.

Purchases, Jan. 1 - March 31

Payments to suppliers, Apr. 1 - 15

Cash purchases

2,000

42,000

Purchases on account (P8,500-P1,300) 7,200 Purchase returns (450) 8,750

Purchases, Jan. 1 to Aprl 15 50,750



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2. Ans. P105,000.

Sales, Jan 1 - March 31

Collections from customers, Apr. 1 - 15

10,200

90,400

Add: AR, April 15 26,400 Write-off of receivables 5,000

Less: AR, March 31 (27,000) 14,600

Sales, Jan. 1 - Apr. 15 105,000

3. Ans. 45%

Total Sales 2012 and 2013 700,000 100%

Cost of sales 2012 and 2013 385,000 55%

Gross profit 2012 and 2013 315,000 45%

4. Ans. P43,000.

Inventory, Dec. 31, 2013 50,000 Purchases, Jan. 1 - Apr. 15 50,750 Cost of goods available for sale 100,750 Estimated cost of sales (105K*55%) 57,750 Estimated Inventory, Apr. 15 43,000

5. Ans. P39,650.

Estimated Inventory, Apr. 15 43,000 NRV of remaining inventory (3,350) Inventory Loss 39,650

CHAPTER 4-PROBLEM 9: DIOSAH INC.

Cost

Inventory, October 1, 2013 372,000 Purchases 2,910,000 Transportation in 55,000 Purchase return (27,000) Purchase allowance (18,500) Purchase discounts (15,960) Departmental transfer out (135,500) Departmental transfer in 125,500 Net Mark up (P290,000-40,000)

3,265,540 5,267,000 62% Conservative Net Mark down (P283,000-P40,000) (243,000) Cost of goods available for sale 3,265,540 5,024,000 65% Average Less: Inventory, October 1, 2013 (372,000) (620,000) COGAS - Inventory, Beg 2,893,540 4,404,000 66% FIFO Retail

Cost of goods available for sale at retail

Less: COGAS at retail/Sales

Gross sales

4,872,000

5,024,000

Sales returns (355,000) Normal breakages 50,500 Discounts to employees 75,500 (4,643,000)

Inventory, End at retail price 381,000 1. Ans. P236,220.

Inventory, End at retail price 381,000 Conservative Cost % 62% Inventory, End at cost 236,220

2. Ans. P247,645.

Inventory, End at retail price 381,000 Average Cost % 65% Inventory, End at cost 247,645

2. Ans. P251,460.

Inventory, End at retail price 381,000 FIFO Retail Cost % 66% Inventory, End at cost 251,460



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CHAPTER 4-PROBLEM 10: GLORIA CORPORATION

1. Ans. P540,000; P527,000; P430,000.

Finished goods Item M Item P Item Q Cost 550,000 540,000 430,000 1,520,000

NRV: Est. Selling Price - Cost to Sell 540,000 527,000 697,000 Required allowance for write-down 10,000 13,000 - (23,000)

Lower of Cost or NRV 1,497,000

2. Ans. P240,000; P148,000; P320,000.

Work-in-process Item M Item P Item Q Cost 240,000 188,000 320,000 748,000

NRV: Est. Selling Price - Cost to Sell - Cost to Compl. 240,000 148,000 550,750 Required allowance for write-down - 40,000 - (40,000)

Lower of Cost or NRV 708,000

3. Ans. P1,105,000.

Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.

A B C Cost 250,000 500,000 400,000 1,150,000

Current purchase price 250,000 480,000 375,000 Required allowance for write-down - 20,000 25,000 (45,000)

1,105,000

4. Ans. P855,000.

Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.

X Y Z Cost 400,000 300,000 200,000 900,000

Current purchase price 450,000 275,000 180,000 Required allowance for write-down - 25,000 20,000 (45,000)

855,000

5. Ans. P825,000.

Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down.

D E

Cost 375,000 450,000 825,000

6. Ans. P103,000.

Allowance for WD-FG, ending 23,000 Less: Allowance for WD-FG, beg. (10,000)

Loss on write-down - FG 13,000

Allowance for WD-WIP, ending

Less: Allowance for WD-WIP, beg.

40,000

-

Loss on write-down - WIP 40,000

Allowance for WD-RM, ending 90,000 Less: Allowance for WD-RM, beg. (40,000) Loss on write-down - RM 50,000

Total loss on inventory write-down 103,000

MULTIPLE CHOICE EXERCISES: CHAPTER 4-EXERCISE 1:

1. Ans. A.

Cost of goods out on consignment at another company’s store 2,400,000

Goods in transit purchased FOB shipping point 360,000

Cost of goods sold with repurchase agreement/Inventory financing 900,000

Freight charges on goods purchased 240,000

Factory labor costs incurred on goods still unsold 150,000

Materials on hand not yet placed into production 1,050,000

Raw materials on which the company has started production 840,000

Factory supplies 60,000

Costs identified with units completed but not yet sold 780,000

Cost of goods in transit sold FOB destination 120,000

Total inventories 6,900,000

CHAPTER 4-EXERCISE 2: SILANG CORP.

Cash Acc. Rec. Merch. Invty Acc. Payable Accrued Exp. Cost of Sales

Unadjusted balances 963,200 2,254,000 6,050,000 4,201,000 60,400

(a) (654,600) 310,000



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(b) 360,000 372,400 (c-1) 275,000 (275,000)

(c-2) 217,500 217,500 -

(c-3) (637,500) 637,500

(c-4) 130,000 (130,000)

(c-5) (175,000) (175,000)

Adusted balances 668,600 2,564,000 6,035,000 4,615,900 60,400 57,500

1. Ans. D. 2. Ans. C. 3. Ans. C. 5. Ans. C. 4. Ans. A.

6. Ans. B.

Current Assets

Cash 668,600 Accounts receivables 2,564,000

Merchandise inventory 6,035,000 9,267,600

Current Liabilities

Accounts payable

4,615,900

Accrued expense 60,400 4,676,300

Working Capital Ratio 1.98

CHAPTER 4-EXERCISE 3: IVY INC.

Inventory AR Sales AP Purchases Net Income

a. Goods out on consignment 100,000 (140,000) (140,000) (40,000)

b. Purch in transit (FOB SP) 33,000 33,000 33,000 -

c. Sales in transit (FOB SP) (40,000) (40,000)

d. Sales in transit (FOB Dest) 16,000 16,000

e. Purch in transit (FOB Dest) (22,000) (22,000) 22,000

f. Goods held on consignemnt (50,000) (50,000)

g. Sales in transit (FOB Dest) (112,000) (112,000) (112,000)

Net adjustments: 59,000 (252,000) (252,000) 11,000 11,000 (204,000)

1. Ans. A. 2. Ans. B. 3. Ans. C. 4. Ans. D.

CHAPTER 4-EXERCISE 4: LONE STAR CORP. Sales Purchases Inventory Accts Rec. Acc. Payable

2,815,000 1,500,000 300,000 250,000 200,000

SI 1024 (23,000) (23,000)

SI 1025 (34,000) (34,000)

SI 1026 (8,000) (8,000)

RR 1115 9,000 9,000

RR 1118 32,000

SI 1023 (50,000) 40,000 (50,000)

SI 1021 (75,000) 60,000 (75,000)

RR 1119 400,000 400,000 401,000

Adjsuted balance

1. Ans. A. 2. Ans. B. 3. Ans. A. 4. Ans. D. 5. Ans. A.

CHAPTER 4-EXERCISE 5: SOFIA INC.

Invty, end Purchases Cost of Sales Net Income

Unadjusted balance 200,000 3,200,000 3,160,000

Beginning of the year: a. Dec. purchases recorded in Jan. (50,000) (50,000) 50,000

b. Dec. purchases not included in Invty 26,400 (26,400)

End of the year: a. Unrecorded Dec. sale 86,000

b. Dec. purchases recorded in Jan. 30,000 30,000 (30,000)

c. Dec. purchases not included in Invty 36,000 (36,000) 36,000

d. Dec. purchases 24,000 24,000 - -


1. Ans. C. 2. Ans. D. 3. Ans. B. 4. Ans. D.

2,625,000 1,909,000 832,000 60,000 610,000



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CHAPTER 4-EXERCISE 6: BIRD COMPANY Inventory Accts Payable Net Sales

Unadjusted balances 1,870,000 1,415,000 9,693,400

Adjustments: A (78,500)

B 93,000 93,000 C 27,000 D 49,000 (67,800)

E 17,000 F 31,200 G 36,000 H 8,000 16,000

Adjusted balances 1. Ans. A. 2. Ans. B. 3. Ans. D.

CHAPTER 4-EXERCISE 7:

Accts Receiva Inventories Sales Cost of Sales Gross profit

276,500 425,000 1,320,000 842,000 478,000

December recorded sales: In-tansit FOB, Dest. (8,680) 7,240 (8,680) (7,240) (1,440)

Sipment to consignee (14,200) 12,500 (14,200) (12,500) (1,700)

In-tansit FOB, Dest. (10,000) (10,000) (10,000)

In-transit FOB, SP (6,100) 6,100 (6,100)

Sipment to consignee (14,000) (14,000) (14,000)

January recorded sales: In-transit FOB, SP 21,000 (18,200) 21,000 18,200 2,800

Adjusted balance 250,620 420,440 1,294,120 846,560 447,560

1. Ans B. 2. Ans. B. 3. Ans. A. 4. Ans. C. 5. Ans. D.

CHAPTER 4-EXERCISE 8: KAMPT COMPANY

December 2014 recorded sales

Sales Inventories

1) (2,000)

3) (2,000)

4) (6,900)

5) (600)

7) (4,000)

8) (10,000)

January 2015 recorded sales

9) 6,000 (4,000)

12) 8,000 (5,500)

Net Adjustment (8,900) (12,100)

1. Ans. A. 2. Ans. A.

CHAPTER 4-EXERCISE 9: MALAGUKU CO.

Purchases

Inventories

Unadjusted balances 1,750,000 175,000

RR No. 631

RR No. 632

RR No. 633

(4,000)

2,000

9,000

RR No. 634

RR No. 635

RR No. 636

(6,000)

8,000

RR No. 638 7,200 RR No. 641 4,100 Adjusted balances 1,751,300 194,000

1. Ans. A. 2. Ans. C

2,095,200 1,560,000 9,547,100



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CHAPTER 4-EXERCISE 10: KULA INC. Inventories Purchases

27,000 650,000

December 2014 entries Invoice No. 9176 310 Invoice No. 0010 180 Invoice No. 6609 690 Invoice No. 6610 420 Invoice No. 0481 (750)

Invoice No. 3671 290 Invoice No. 6098 (350)

January 2015, entries Invoice No. 7711 460 460

Invoice No. 9001 770

Invoice No. 4678 315 315

Invoice No. 9981 595 595

Invoice No. 7263 610 610

Goods held on consignment (750) Deliveries made to customers after count date (1,900) Adjsuted balances 28,220 651,650

1. Ans. B. 2. Ans. D.

CHAPTER 4-EXERCISE 11: FLORES COMPANY

1. Ans. D.

Per Count Per GL Per "Tab Run"

Unadjusted balances 342,400 384,900 403,300

1 (500) 2 (23,900)

3 (600) 4 (800) (800)

5 4,400

6 (7,500) (7,500)

7 (900) 8 2,100 9 (1,200) (1,200)

10 700 11 30,000

Adjsuted balances

2. Ans. D.

CHAPTER 4-EXERCISE 12: ALDER PAINTS

RM Inventory, beg

Purchases

50,000

15,000

Freight-in 5,000 55,000

RM available for use 70,000

Less: RM Inventory, end (30,000)

RM used 40,000 2. Ans C. Direct labor 40,000 Factory overhead (45% of Direct labor) 18,000 Total manufacturing cost 98,000 Add: WIP, beg 50,000 Total goods placed into process 148,000 3. Ans. D. less: WIP, end (Squeeze) 56,750 4. Ans. A.

Cost of goods manufactured (Squeeze) 91,250 1. Ans. D. Add: Finished goods, beg. 70,000 Cost of goods available for sale 161,250 less: Finished goods, end (60,000) Cost of sales (estimated)** 101,250

** Sales

150,000

Multiply by Cost rate (100%-32.5%) 68% Estimated cost of sales 101,250

374,300 374,300 374,300



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CHAPTER 4-EXERCISE 13: NATURAL CORPORATION

Inventory, Jan. 1

Purchases 400,000

80,000

Less: Purchase discounts (40,000) Purchase returns and allowance (30,000) 330,000

Cost of goods available for sale

Estimated cost of sale

Sales

380,000

410,000

Less: Sales returns (20,000) Sales for GP method purposes 360,000 Divide by: Selling price % 120% 300,000

Estimated ending inventory 110,000 1. Ans. C.

Less: Inventory not damaged by fire (in-transit) (40,000) Inventory loss 70,000 2. Ans. C.

CHAPTER 4-EXERCISE 14: BAGUIO CORP.

1. Ans. C.

2011 2012 2013 Total

Sales 5,008,000 5,640,000 5,440,000

Gross Profit 1,502,400 1,466,400 1,849,600

Gross profit % based on sales 30% 26% 34% 90%

Divide by: 3 years 3

Average gross profit rate

2. Ans. A.

3. Ans.

4. Ans.

Inventory, Jan. 1 1,150,800

Purchases 4,177,680

Cost of goods available for sale

Less: Estimated cost of sales

Sales

6,016,800

5,328,480

Multiply by: Cost % (100%-30%) 70% (4,211,760)

Estimated Inventory, Sept. 1 1,116,720

5. Ans. A.

Estimated Inventory, Sept. 1

Goods out on consignment

390,000

1,116,720

Goods in transit as of Sept. 1 139,000 529,000

Inventory loss 587,720

CHAPTER 4-EXERCISE 15: AB CORP.

1. Ans. B.

Sales for 10 months (Jan to Oct) (a) 4,590,000 100%

Cost of Sales 10 months (Jan to Oct) (b) (2,295,000) 50%

Gross profit 2,295,000 50%

(a) Sales 10 months, unadjusted

4,765,000

Less: Delivery in transit (FOB Dest.) (75,000)

Adjusted Sales 10 months 4,690,000

Less: Sales returns and allowance (300,000)

Add: Employee discounts 150,000

Normal breakages 50,000

Sales 10 months, adjusted (for GP comp only) 4,590,000

30%

Collections from customers Jan. 1 to Sept. 1 6,030,400

Add: AR, Sept. 1 1,031,120

Less: AR, Jan. 1 (1,044,720)

Gross sales (accrual basis) 6,016,800

Payments to suppliers Jan. 1 to Sept. 1 3,900,000

Add: AP, Sept. 1 982,800

Less: AP, Jan. 1 (705,120)

Gross purchases (accrual basis) 4,177,680



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(b) Beg Inventory 450,000

Net purchases (as adjusted:)(c) 2,485,000

Cost of Goods Available for sale (10 months) 2,935,000

Less: Inventory, end (550,00+90,000) (640,000)

Cost of Sales (10 months) 2,295,000

(c) Purchases, unadjusted

2,450,000

Add: Purchase in transit FOB shipping point 90,000

Freight in 60,000

Less: Purchase discount (45,000)

Purchase returns and allowance (70,000)

Net purchases (as adjusted) 2,485,000

2. Ans. A.

Sales (12 months), as adjusted (for GP Method)(d) 6,575,000

Sales (10 months), as adjusted (for GP Method) (4,590,000)

Gross Sales for 2 months (for GP Method) 1,985,000

Less: Sales in Dec. at 10% mark-up on cost (110,000)

Sales in Dec. at normal 50% mark-up 1,875,000

Multiply by normal Cost %, under normal GP% 50%

Cost of sales at normal GP rate 937,500

Add: Cost of sales 10% markup on cost 100,000

Total cost of sales for 2 months 1,037,500

(d) Sales 12 months, unadjusted

6,750,000

Less: Sales returns and allowance (12 months) (375,000)

Add: Employee discounts (12 months) 150,000

Add: Normal breakages (12 months) 50,000

Sales 12 months, adjusted 6,575,000

3. Ans. D.

Cost of Sales (10 months, see number 1 2,295,000

Cost of Sales (2 months, see number 2 1,037,500

Total Cost of Sales

4. Ans. B.

Inventory, beginning

Add: Net Purchases (12 months)

Gross Purchases

3,410,000

450,000

Freight in 90,000 Purchase discount (70,000) Purchase returns and allowance (100,000) 3,330,000

Cost of Goods Available for Sale (12 months) 3,780,000

Cost of Sales 12 months (see number 3 solution) (3,332,500)

Estimated ending inventory 447,500

CHAPTER 4-EXERCISE 16: SURETY CORP.

Cost

Retail

Cost %

Beginning inventory 598,400 1,500,000 Purchases 3,048,400 5,500,000 Freight in 80,000 Purchase returns (140,000) (180,000) Mark-ups 600,000 Mark-up cancellations (100,000) Cost of goods available for sale - Conserv. 3,586,800 7,320,000 49% Mark-downs (1,300,000) Mark-down cancellations 385,000 Cost of goods available for sale - Average 3,586,800 6,405,000 56% Less: Beginning inventory (598,400) (1,500,000) Purchases - FIFO Retail 2,988,400 4,905,000 61%

Cost of goods available for sale at Retail

Less: Cost of sales at Retail/Sales

Sales

4,470,000

6,405,000

Sales returns (150,000) Employee discount 400,000 (4,720,000)

Estimated Inventory at Retail 1,685,000

1. Ans. B.

3,332,500



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Multiply by Cost % - Conservative 49%

Estimated Inventory at Cost 825,650

Less: Inventory per count (649,600)


2. Ans. C.






3. Ans. C.



Estimated Inventory at Cost 1,027,850



CHAPTER 4-EXERCISE 17: TITANIUM CORP.

Cost

Retail

Cost %

Beginning inventory 1,020,000 1,920,000 Purchases 13,072,500 22,155,000 Freight in 300,000 Purchase returns (450,000) (750,000) Purchase allowance (270,000) Departmental transfer debit 300,000 425,000 Departmental transfer credit (600,000) (1,200,000) Abnormal spoilages and breakages (120,000) (200,000) Net markup 450,000 Cost of goods available for sale - Conserv. 13,252,500 22,800,000 58% Net markdown (1,425,000) Cost of goods available for sale - Average 13,252,500 21,375,000 62% Less: Beginning inventory (1,020,000) (1,920,000) Purchases - FIFO Retail 12,232,500 19,455,000 63%

Cost of goods available for sale at Retail

Less: Cost of sales at Retail/Sales

Sales

19,800,000

21,375,000

Sales returns (450,000) Employee discount 300,000 Normal Spoilage 600,000 (20,250,000)


1. Ans. B.






2. Ans. A.






3. Ans. C.





Invntory shortage 308,750



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CHAPTER 4-EXERCISE 18: NANCY INC.

1. Ans.A.

Item Quantity Unit Cost NRV Lower of Cost or NRV

Z-01 10,000 20 25 20 200,000

Z-02 15,000 25 22 22 330,000

Z-03 20,000 30 26 26 520,000

Z-04 25,000 32 35 32 800,000

Z-05 30,000 35 30 30 900,000

Y-01 20,000 22 23 22 440,000

Y-02 22,000 28 25 25 550,000

Y-03 28,000 25 30 25 700,000

Y-04 25,000 30 25 25 625,000

Y-05 30,000 15 25 15 450,000

5,515,000

2. Ans.

Total Cost 5,981,000


Loss on inventory write-down 466,000

3. Ans. B.

Class Z:

Z-01

Quantity

10,000

Unit Cost 20

NRV 25

Total Cost

200,000

Total NRV

250,000

LCorNRV

Z-02 15,000 25 22 375,000 330,000 Z-03 20,000 30 26 600,000 520,000 Z-04 25,000 32 35 800,000 875,000 Z-05 30,000 35 30 1,050,000 900,000

3,025,000 2,875,000 2,875,000

Class Y:

Y-01

20,000

22

23

440,000

460,000

Y-02 22,000 28 25 616,000 550,000 Y-03 28,000 25 30 700,000 840,000 Y-04 25,000 30 25 750,000 625,000 Y-05 30,000 15 25 450,000 750,000

2,956,000 3,225,000 2,956,000

2. Ans.

Total Cost 5,981,000


Loss on inventory write-down 150,000

CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION

Historical cost

Markers

24,000

Pens

18,880

Pencils

30,000

Selling price 36,000 21,800 38,000 Estimated cost to complete (3,000) (2,620) (6,200) Estimated cost to sell (1,800) (2,180) (3,800) Net realizable value 31,200 17,000 28,000 Lower of cost or NRV 24,000 17,000 28,000 69,000

1. Ans. B.

Total Cost 72,880

Lower of cost or NRV 69,000

Loss on write-down 3,880

2. Ans. B.

Total Cost 72,880


Allowance for write-down, end 3,880

Allowance for write-down, beg. 2,000

Loss on write-down 1,880

3. Ans. B.

Total Cost 72,880


Allowance for write-down, end 3,880

Allowance for write-down, beg. 5,000

Gain on recovery (1,120)

4. Ans. C.

5,831,000



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CHAPTER 4-EXERCISE 20:OCTOBER INC.

1. Ans. B.

Finished goods Item A Item B Item C Cost 500,000 1,200,000 800,000 NRV (Selling price - Cost to sell) 800,000 1,050,000 1,080,000 Lower of Cost or NRV 500,000 1,050,000 800,000 2,350,000

2. Ans. B.

Work-in-process

Direct Materials

Item A

30,000

Item B

45,000

Item C

75,000

Direct Labor 50,000 65,000 35,000 Overhead 25,000 40,000 80,000 Total Cost 105,000 150,000 190,000 Selling price upon completion 200,000 250,000 240,000 Cost to complete (50,000) (60,000) (40,000) Cost to sell (% of Sellin price) (40,000) (75,000) (24,000) NRV 110,000 115,000 176,000 Lower of cost or NRV 105,000 115,000 176,000 396,000

3. Ans. B.

RM - Item A (FG not written-down, thus RM - Item A shall not be tested anymore.

Cost

RM A-01

120,000

RM A-02

95,000

215,000

RM - Item B

Cost

RM B-01

80,000

RM B-02

105,000

RM B-03

110,000

NRV (Replacement cost) 100,000 98,000 100,000 80,000 98,000 100,000 278,000

RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore.

Cost

RM C-01

175,000

RM C-02

40,000

215,000

Total Lower of Cost or NRV 708,000

4. Ans. D.

FG WIP RM Cost 2,500,000 445,000 725,000

Lower of Cost or NRV 2,350,000 396,000 708,000 Loss on write-down 150,000 49,000 17,000 216,000

5. Ans. B.

Cost 2,500,000 445,000 725,000 Lower of Cost or NRV 2,350,000 396,000 708,000 Allowance for WD, ending 150,000 49,000 17,000 Allowance for WD, beginning 60,000 70,000 - Loss on WD(Recovery gain) 90,000 (21,000) 17,000 86,000

CHAPTER 4-EXERCISE 21:SOLSONS COMPANY

Quantity Cost NRV Amount at Lower of Cost or NRV

A 360 units 3.60/dozen 3.64/dozen 108.00 - 360/12per dozen*P3.60

B 24 units 4.70 each 4.80 each 112.80

C 28 units 16.50 each 16.50 each 462.00

D 43 units 5.15 each 5.20 each 221.45

E 400 units 9.10 each 8.10 each 3,240.00

F 70 dozens 2.00 each 2.00 each 1,680.00 - 70*12 per dozen*P2

G 95 grosses 144.00/gross 12,540.00

Ans. A. 18,364.25


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CHAPTER 5: AUDIT OF INVESTMENTS

24,688



1 D

2 A

3 C

4 C

5 C

6 D

7 A

8 A

CHAPTER 5-PROBLEM 2: KILALA CORP.

CASE 1: FA at Amortized Cost

1. Ans.P1,038,896.

January 1, 2014:

Financial asset at amortized cost 1,038,896 Cash 1,038,896

Quoted price (P1M*95%) 950,000 Transaction cost 88,896 Initial cost 1,038,896

Amortization table: FA at Amortized Cost


(Bal*eff%) (Princ*nom%)

January 1, 2014: 1,038,896

December 31, 2014: 93,501 100,000 (6,499) 1,032,397

December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:

Cash 100,000



FA at amortized cost 6,499

2. Ans. P93,501.

December 31, 2015:

Cash 100,000




3. Ans. P92,916.

4. Ans. P1,025,312.

5. Ans. P24,688 gain

Sales proceeds (1/1/16) 1,050,000

Less: Carrying Value/Amortized cost 1,025,312

Realized gain on sale

CASE 2: FA at FMV through Profit or Loss

1. Ans. P950,000.

January 1, 2014:

FA at FMV (P1M*95%) 950,000

Expense 88,896

Cash 1,038,896

December 31, 2014:

Cash

Interest Income (P1M*10%)

FA at FMV

Unrealized holding gain

100,000

250,000

100,000

250,000

Fair Value (12/14): P1M*120% 1,200,000 Carrying value 950,000 Unrealized holding gain - P/L 250,000

2. Ans. P261,104.

Transaction cost (Expense) (88,896)


Unrealized holding gain 250,000

Net investment income 261,104


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-

December 31, 2015:

Cash 100,000

Interest Income (P1M*10%) 100,000

Unrealized holding loss

FA at FMV

Fair Value (12/15): P1M*105%

150,000

1,050,000

150,000

Carrying value 1,200,000 Unrealized holding loss - P/L (150,000)

3. Ans. (P50,000)

Interest income

100,000

Unrealized holding loss (150,000) Net investment loss (50,000)

4. Ans. P1,050,000.

5. Ans.0

Sales proceeds (1/1/16) 1,050,000

Less: Carrying Value/FMV, 12/31/15 1,050,000


CASE 3: AVAILABLE FOR SALE SECURITY

1. Ans.P1,038,896.

January 1, 2014:

Available for sale security 1,038,896 Cash 1,038,896

Quoted price (P1M*95%) 950,000 Transaction cost 88,896 Initial cost 1,038,896

Amortization table: Available for sale security



January 1, 2014: 1,038,896

December 31, 2014: 93,501 100,000 (6,499) 1,032,397

December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:

Cash 100,000



Available for sale security 6,499

Available for sale security

Unrealized holding gain-OCI

167,603

167,603

Fair Value (12/14): P1M*120% 1,200,000 Amortized cost (12/14) 1,032,397 Unrealized holding gain - OCI of SCI 167,603

2. Ans. P93,501

Interest income - P/L (2014) 93,501

December 31, 2015:

Cash 100,000




Unrealized holding loss - OCL of SCI


142,916

142,916

Fair Value (12/15): P1M*105% 1,050,000 Amortized cost (12/15) 1,025,312 Unrealized holding gain - SHE, end 24,688 Unrealized hoding gain - SHE, beg 167,603 Unrealized holding loss - OCL of SCI (142,916)

3. Ans. (P142,916)

Unrealized holding loss - OCL of SCI (201 (142,916)

4. Ans. P24,688.

Unrealized holding gain - SHE, end 24,688

5. Ans. P1,050,000.


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1,050,000

6. Ans. P24,688 gain

Sales proceeds (1/1/16) 1,050,000

Less: Carrying Value/Amortized cost -


CHAPTER 5-PROBLEM 3: SOTA CORPORATION

CASE 1: FA at Amortized Cost

1. Ans. P10,758,157.

January 1, 2014:

Financial asset at amortized cost 10,758,157 Cash 10,758,157

FMV = Present value of future cash flows at 10% effective rate for 5 periods. Principal (P10,000,000*0.620921) 6,209,213 0.620921

Interest (P1,200,000*3.790787) 4,548,944 3.790787

Initial cost 10,758,157

Amortization table: FA at Amortized Cost



January 1, 2014:

10,758,157

December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973

December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370

June 30, 2016: 524,869 600,000 (75,131) 10,422,239

December 31, 2014:

Cash 1,200,000

Interest income 1,200,000



2. Ans. P1,075,816.

December 31, 2015:

Cash 1,200,000




3. Ans. P1,063,397.

4. Ans. P10,497,370.

5. Ans. P622,239 loss

Sales proceeds (6/30/16) 10,400,000

Less: Carrying Value/Amortized cost (10,422,239)

Accrued interest (600,000)

Realized loss on sale (622,239)

CASE 2: FA at FMV through Profit or Loss

1. Ans. P10,758,157.

January 1, 2014:

FA at FMV 10,758,157

Cash 10,758,157

FMV = Present value of future cash flows at 10% effective rate for 5 periods.

Principal (P10,000,000*0.620921) 6,209,213

0.620921

Interest (P1,200,000*3.790787) 4,548,944 3.790787

Initial cost 10,758,157 December 31, 2014:

Cash

1,200,000

Interest Income (P10M*12%) 1,200,000 FA at FMV


Fair Value (12/14)**

213,759

10,971,916

213,759

Carrying value 10,758,157 Unrealized holding gain - P/L 213,759 **FMV = Present value of remaining cash flows at 9% for 4 periods.

Principal: (P10,000,000*0.708425) 7,084,252 0.708425

Interest: (P1,200,000*3.239720) 3,887,664 3.239720

FMV (12/14) 10,971,916 2. Ans. P1,413,759.

Interest income

1,200,000

Unrealized holding gain 213,759 Net investment income 1,413,759


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December 31, 2015:

Cash 1,200,000

Interest Income (P10M*12%) 1,200,000

FA at FMV

Unrealized holding gain - P/L

58,923

58,923

Fair Value (12/15)** 11,030,839 Carrying value 10,971,916 Unrealized holding gain - P/L 58,923 **FMV = Present value of remaining cash flows at 8% for 3 periods.

Principal: (P10,000,000*0.793832) 7,938,322 0.793832

Interest: (P1,200,000*2.577097) 3,092,516 2.577097

FMV (12/15) 11,030,839 3. Ans. P1,258,923.

Interest income

1,200,000

Unrealized holding gain 58,923 Net investment income 1,258,923

4. Ans. P11,030,839.

5. Ans. P1,230,839 loss

Sales proceeds (6/30/16) 10,400,000

Less: Carrying Value/Amortized cost (11,030,839)


Realized loss on sale (1,230,839)

CASE 3: AVAILABLE FOR SALE SECURITY

1. Ans. P10,758,157.

January 1, 2014:

Available for sale security 10,758,157

Cash 10,758,157

FMV = Present value of future cash flows at 10% effective rate for 5 periods.

Principal (P10,000,000*0.620921) 6,209,213 0.620921

Interest (P1,200,000*3.790787) 4,548,944 3.790787

Initial cost 10,758,157 Amortization table: Available for sale security



January 1, 2014: 10,758,157

December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973

December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370

December 31, 2014:

Cash 1,200,000





Unrealized holding gain-OCI

337,943

337,943

Fair Value (12/14)** 10,971,916 Amortized cost (12/14) 10,633,973 Unrealized holding gain - OCI of SCI 337,943 **FMV = Present value of remaining cash flows at 9% for 4 periods.

Principal: (P10,000,000*0.708425) 7,084,252 0.708425

Interest: (P1,200,000*3.239720) 3,887,664 3.239720

FMV (12/14) 10,971,916 2. Ans. P1,075,816.

Interest income - P/L (2014) 1,075,816

December 31, 2015:

Cash 1,200,000





Unrealized holding gain-OCI of SCI

Fair Value (12/15): P1M*105%

195,526

11,030,839

195,526

Amortized cost (12/15) 10,497,370 Unrealized holding gain - SHE, end 533,468 Unrealized hoding gain - SHE, beg 337,943 Unrealized holding gain - OCI of SCI 195,526 **FMV = Present value of remaining cash flows at 8% for 3 periods.

Principal: (P10,000,000*0.793832) 7,938,322 0.793832

Interest: (P1,200,000*2.577097) 3,092,516 2.577097

FMV (12/15) 11,030,839


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35,479

(138,865)

3. Ans. P195,526.

Unrealized holding gain - OCI of SCI (201 195,526

4. Ans. P533,468

Unrealized holding gain - SHE, end 533,468

5. Ans. P11,030,839.

6. Ans. P622,239 loss

Sales proceeds (6/30/16) 10,400,000

Less: Carrying Value/Amortized cost -


Realized loss on sale 10,263,397


1. Ans. P35,479.

FMV (12/31/14) 6,229,862

Carrying value 6,194,383

Unrealized holding gain - P/L

2. Ans. P6,229,862.

3. Ans. 0.

The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period.

Thus, there shall be no gain or loss resulting from transfer on December 31, 2015. Instead what shall be recognized is the

unrealized holding gain or loss from the FA's remeasurement since it will still be treated as FA at FMV at the end of 2015.

December 31, 2015: Entry upon remeasurement as FA at FMV

Unrelized holding loss - P/L 15,870

FA at FMV 15,870

January 1, 2016: Entry upon transfer to FA at Amortized Cost

FA at amortized cost (FMV 12/15) 6,213,992

FA at FMV (CV) 6,213,992

4. Ans. P6,213,992. (As FA at FMV)

5. Ans. P6,111,111.

Amortization table: FA at Amortized cost at 8% effective rate:

Correct Int. Nominal Int. Amortization Balance (Bal*eff%) (Princ.*nom%) 1 5,144,032.92

December 31, 2015:

6,213,992 2 1,069,958.85

December 31, 2016: 497,119 600,000 (102,881) 6,111,111 6,213,992

December 31, 2017: 488,889 600,000 (111,111) 6,000,000


1. Ans. P6,151,877.

Amortization table: FA at amortized cost at 9%


(Bal*eff%) (Princ.*nom%)

January 1, 2014: 6,194,383

December 31, 2014: 557,494 600,000 (42,506) 6,151,877

December 31, 2015: 553,669 600,000 (46,331) 6,105,546

2. Ans. (P138,865)

Proceeds from sale (P5,897,249*4/6) 3,931,499

Carrying value (P6,105,546*4/6) 4,070,364

Realized loss on partial sale

3. Ans. 0.

The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period.

Thus, there shall be no gain or loss resulting from transfer on December 31, 2015.

4. Ans. P7,345.

Unrealized gain/loss on transfer on Janaury 1, 2016: FMV of remaining investment (P5,897,249*2/6) 1,965,750

Carrying value of remaining inv. (P6,105,546*2/6) 2,035,182 (69,432)

Unrealized gain/loss on remeasurement on December 31, 2016:

FMV (12/31/16) 1,973,094 CV (FMV at 12/31/15) 1,965,750 7,345

Net unrealized holding gain or loss in the 2016 profit or loss (62,088)

5. Ans. P1,973,094.

CHAPTER 5-PROBLEM 6: BET CO.

Amortization table: FA at amortized cost at 10%.


(Bal.*Eff%) (Princ*Nom%)

January 1, 2014: 9,241,843

December 31, 2014: 924,184 800,000 124,184 9,366,027

December 31, 2015: 936,603 800,000 136,603 9,502,630


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1. Ans. P4,667,769.

Amortized cost, December 31, 2015: 9,502,630 Accrued interest, December 31, 2015: 800,000 10,302,630

Present value of new future cash flows at 10%

Principal: (P10M*75%)*0.751315 5,634,861 0.7513148

Impairment loss 4,667,769

2. Ans. P6,198,347.

Amortization table: FA at amortized cost after impairment:



December 31, 2015: After Impairment 5,634,861

December 31, 2016: 563,486 - 563,486 6,198,347

3. Ans. P1,239,669.

Amortized cost, December 31, 2016

Present value of revised cash flows at 10%

6,198,347

Principal (P10M*90%)*0.826446 7,438,017 0.826446

Impairment recovery gain 1,239,669 4. Ans. P8,181,818.

Amortization table: FA at amortized cost after impairment recovery:



December 31, 2016: After Impairment recovery 7,438,017

December 31, 2017: 743,802 - 743,802 8,181,818

CHAPTER 5-PROBLEM 7: ABC CORPORATION

1. Ans.

FA at FMV


25,000

FMV (12/14)

25,000

CV (excluding transaction cost)

Alpha 300,000 250,000

Beta 475,000 500,000

Total 775,000 750,000

Unrealized holding gain - P&L 25,000 2. Ans.

Unrealized holding loss - OCL of SCI 30,000 FA at FMV through OCI/L 30,000

Charlie, FMV (12/14) 850,000 Carrying value, including transaction cost 880,000 Unrealized holding loss - OCL of SCI (30,000)

3. Ans.

No entry to remeasure investment in associate to FMV since Investment in Assoc. is accounted for under equity method.

4. Ans.

FA at FMV 100,000

Unrealized holding gain - P&L 100,000

FMV (12/15) CV (FMV 12/14)

Alpha 350,000 300,000 *reclassification is not allowed, thus Alpha is still

Beta 525,000 475,000 regarded as FA at FMV through OCI/L.

Total 875,000 775,000 Unrealized holding gain - P&L 100,000 5. Ans.

Unrealized holding loss - OCL of SCI

FA at FMV through OCI/L

Charlie, FMV (12/15)

100,000

750,000

100,000

Carrying valuu (FMV 12/14) 850,000 Unrealized holding loss - OCL of SCI (100,000)

6. Ans. P875,000.

7. Ans. P750,000.

8. Ans. P3,260,000.

Delta Securities - Investment in Associate

Acquisition cost, including transaction cost

1,650,000

Share from net income (P2.5M*25%) 625,000

Share from forex loss (P500K*25%) (125,000)

Share from dividends (P200K*25%) (50,000)

Carrying value, 12/31/14 2,100,000

Additional Investment 500,000


Share from forex gain (P600K*30%) 180,000

Share from dividends (P300K*30%) (90,000)

Carrying value, 12/31/15 3,260,000


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(51,000)

CHAPTER 5-PROBLEM 8: ETC INC.

Case 1: PAS 39

1. Ans. P51,000.

FMV (12/13) Cost

Aye Co. 50,000 45,000

Bee Inc. 250,000 300,000

Si Corp. 30,000 36,000

330,000 381,000

Unrealized holding loss - SHE

2. Ans. (P30,000)

Proceeds from sale (15,000*P8) 120,000 Original cost (P300,000/30,000)*15,000 150,000


3. Ans. (P72,000)

FMV (12/14)

Cost

Bee Inc. 90,000 150,000

Si Corp. 24,000 36,000

114,000 186,000

Impairment loss - P&L (72,000) 4. Ans. P15,000.

FMV (12/14)

Cost/Impaired value

Aye Co. 60,000 45,000

Bee Inc. 90,000 90,000

Si Corp. 24,000 24,000

174,000 159,000

Unrealized holding gain - SHE 15,000 5. Ans. P174,000.

Case 2: PFRS 9

1. Ans. P51,000.

FMV (12/13)

CV

Aye Co. 50,000 45,000

Bee Inc. 250,000 300,000

Si Corp. 30,000 36,000

330,000 381,000

Unrealized holding loss - SHE (51,000) 2. Ans. None.

There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be

remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal

to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold

investment shall be transferred directly to RE.

3. Ans. None

No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether

permanent or temporary shall be recognized in the OCI/L.

4. Ans. P15,000. FMV (12/14) Cost Aye Co. 60,000 45,000

Bee Inc. 90,000 150,000

Si Corp. 24,000 36,000

174,000 231,000

Unrealized holding loss - SHE (57,000) 5. Ans. P174,000.

CHAPTER 5-PROBLEM 9: ETC INC.

Case 1: PAS 39

1. Ans. None.

Once equity security investment categorized as financial asset through OCI/L has been impaired due to permanent decline,

any recovery from the previous impairment shall not be recognized in the profit or loss, but shall be recognized as unrealized

holding gain in the OCI/L.

2. Ans. P300,000 and P141,000. FMV (12/15) Cost/Impaired value

Aye Co. 75,000 45,000

Bee Inc. 175,000 90,000

Si Corp. 50,000 24,000

300,000 159,000

Unrealized holding gain - SHE 141,000

Case 2: PFRS 9

1. Ans.

No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding loss

in the OCI/L.


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2. Ans. P300,000 and P69,000.

Aye Co.

FMV (12/15)

75,000

Cost 45,000

Bee Inc. 175,000 150,000

Si Corp. 50,000 36,000

300,000 231,000


CHAPTER 5-PROBLEM 10: SHIPO CO.

1. Ans. P2,000,000.

Acquisition price

14,000,000

Book value of net assets acquired (P48M*25%) (12,000,000)

Total excess

Identifiable asset:

Depreciable asset: (P1.2M*25%)

300,000

2,000,000

Land (P6M*25%) 1,200,000 1,500,000

Unidentifiable asset/Goodwill 500,000

Divide by: 25%

Total Goodwill based on 25% interest of Shipo 2,000,000

2. Ans. P2,670,000

Share from net income (P10.8M*25%) 2,700,000 Less: Understated Depr (P300,000/10y) (30,000)

Share from net income 2,670,000 3. Ans. P16,345,000.

Initial cost 14,000,000

Share from net income 2,670,000

Share from UHGain-OCI (P800K*25%) 200,000

Share from dividends (P2.1M*25%) (525,000)

Carrying value, 12/31/14 16,345,000

4. Ans. P805,000.

Realized Unrealized Total

Proceeds from portion sold (25,000*40%)*(P680-P5) 6,750,000 6,750,000

Fair value of remaining portion to be reclassified:

(25,000*60%)*P680 10,200,000 10,200,000

Carrying value of Investment in Associate:

Sold (P16,345,000*40%) (6,538,000)

(6,538,000)

Reclassified (P16,345,000*60%) (9,807,000) (9,807,000)

Gain on cessation before recycling of OCI/L

Recycling of OCI to P&L

Sold (P200,000*40%)

212,000

80,000

393,000 605,000

80,000

Reclassified (P200,000*60%) 120,000 120,000

Total cessation gain - P&L 5. Ans. 6. Ans.

7. Ans. P171,000.

#shares #shares outs. % interest

Proportionate interest before dilution 25,000 100,000 25%

Proportionate interest after dilution 25,000 125,000 20%

Decrease in interest 5%

Share from increase in capital due to share issuance:

(25,000sh*P680)*20% 3,400,000

Prorated CV of portion deemed sold:

P16,345,000*(5%/25%) (3,269,000)

Gain on dilution before recycling of OCI/OCL 131,000

Recycling of OCI to P&L: P200,000*(5%/25%) 40,000

Gain on dilution 171,000

CHAPTER 5-PROBLEM 11: ANALEN INC.

Case 1: “Cost-Based Approach, with Catch-up Adjustment”:

1. Ans. P110,000.

Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000

Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000

Share from Net Income in 2015 110,000

292,000 513,000 805,000


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2,000,000

9,450,000

2. Ans. P3,176,000.

January 1, 2014 Cost (10%) 700,000

Share from Net Income, 2014 (P400,000*10%) 40,000

Share from Dividends, Oct. 1, 2014 (10,000*P0.90) (9,000)

Carrying value, 12/31/14 had equity method been used 731,000

Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000

Share from Dividends, Apr. 1, 2015 (10,000*P1.10) (11,000)

Additional investment, July 1, 2015 (30%) 2,400,000



Carrying value, 12/31/2015 3,176,000

Case 2: “Cost-Based Approach, without Catch-up Adjustment”:

1. Ans. P91,000.

Dividends Income, April 1, 2015 (10,000*P1.10) 11,000


Share from Net Income in 2015

2. Ans. P3,126,000.

January 1, 2014 Original Cost (10%) 700,000

Additional investment, July 1, 2015 (30%) 2,400,000



Carrying value, 12/31/2015 3,126,000

Case 3: ““Fair Market Value Approach, without Catch-up Adjustment”

1. Ans. P91,000.

Dividends Income, April 1, 2015 (10,000*P1.10) 11,000


Share from Net Income in 2015

2. Ans. P3,226,000.

Original Investment at prevailing FMV on July 1, 2015 (10%)

10,000sh*(P2.4M/30K) 800,000 - the prevailing FMV is based on the current

Additional investment, July 1, 2015 (30%) 2,400,000 selling price of the additional shares.

Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Carrying value, 12/31/2015 3,226,000

CHAPTER 5-PROBLEM 12: KIKIO CORPORATION

Case 1: Fair Value Method

1. Ans. P12,500,000.

Fair Market Value 12/31/2014 12,500,000

2. Ans. P2,000,000.


Carrying value (Acquisition cost 1/1/2014 10,500,000

Unrealized holding loss - P&L

3. Ans. P11,000,000.


4. Ans. (P1,500,000)


Carrying value (FMV, 12/31/2014) 12,500,000

Unrealized holding loss - P&L (1,500,000)

5. Ans. P10,000,000.

June 30, 2016 FMV

P10,000,000

6. Ans. (P1,000,000)

June 30, 2016 FMV upon reclassification

10,000,000

Carrying value (FMV 12/31/15) 11,000,000

Unrealized holding loss - P&L (1,000,000)

7. Ans. (P1,000,000)

Proceeds from sale

10,000,000

Carrying value (FMV 12/31/15) (11,000,000)

Realized loss from sale (1,000,000)

Case 2: Cost Method

1. Ans. P9,450,000.

Cost 10,500,000

Accum Depr: (P10.5M/10)*1yr (1,050,000)

Carrying value

*lower than FMV, P12.5M, thus not impaired.

91,000

91,000



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50 of 155

8,400,000

2. Ans. P8,400,000.

Cost 10,500,000

Accum Depr: (P10.5M/10)*2yrs (2,100,000)

Carrying value

*lower than FMV, P10.5M, thus not impaired.

3. Ans. P7,875,000 and None.

Cost 10,500,000 Accum Depr: (P10.5M/10)*2.5yrs (2,625,000)

Carrying value, July 1, 2016 7,875,000 *lower than FMV, P10M, thus not impaired.

4. Ans. P2,125,000.

Proceeds from sale

10,000,000

Carrying value, July 1, 2016 (7,875,000) Realized gain from sale 2,125,000

CHAPTER 5-PROBLEM 13: PULITZER INC.

January 1, 2010:

Life insurance expense

Cash

180,000 180,000

January 1, 2011:


180,000

Cash 180,000

January 1, 2012:


180,000

Cash 180,000

December 31, 2012:

Cash surrender value

Retained earnings (180,000*2/3)

180,000

120,000

Life insurance expense 60,000

January 1, 2013:


Cash

180,000

180,000

July, 2013:

Cash 5,000


December 31, 2013:



CSV, Dec. 31, 2013

60,000

240,000

60,000

CSV, Dec. 31, 2012 180,000 Increase in CSV for 2013 60,000

January 1, 2014:


Cash

180,000

180,000

August, 2014:

Cash

7,000


September 30, 2014:



CSV, 12/31/2014

37,500

290,000

37,500

CSV, 12/31/2013 240,000 Increase for the year 50,000 Multiply by: 9months/12months 75% Increase up to 9/30/14 37,500

December 1, 2014:

Cash

Cash surrender value (9/30/14)

5,000,000 277,500

Life insurance expense (180,000*3/12) 45,000 *unexpired portion as of date of death

Gain on life insurance policy settlement 4,677,500 1. Ans. P180,000; P120,000; P115,000.

2011

2012

2013

Annual insurance premium 180,000 180,000 180,000 Increase in cash surrender value - (60,000) (60,000) Dividends from CSV (5,000) Life insurance expense 180,000 120,000 115,000



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SOLUTIONS GUIDE

51 of 155

2. Ans. P0; P180,000; P240,000

3. Ans. P90,500.

Annual insurance premium 180,000

Unexpired insurance premium as of date of death (45,000)

Dividend from CSV (7,000)

Increasein CSV up to date of death (37,500)

Life insurance expense, 2014 90,500

4a) Ans. P4,677,500

4b) Ans. None.


1. Ans. C.

Equity securities of another company where no control nor significant

influence exist. The company elected to report gains or losses in the

profits/losses 100,000

Debt security of another company quoted in an active market. Business

model of the company has an objective to hold debt securities for short- term profits. 100,000

Total financial asset at FMV through P&L

2. Ans. A.

Equity securities of another company where no control nor significant

influence exist. The company elected to report gains or losses in the

other comprehensive income/losses

3. Ans. B.

Debt security of another company quoted in an active market. Business

model of the company has an objective of collecting contractual cash-

flows from the bonds which are primarily in the form of interests and

principal.

4. Ans. B.

20% Equity securities of another company quoted in an active market

5. Ans. D.

51% Equity securities of another company quoted in an active market

6. Ans. B.

Real property held for speculation purposes 700,000

Real property of a manufacturing business being leased out to another party under operating lease 900,000

Land held for undetermined future use 800,000

Real property being developed as an investment property 300,000

Total Investment Property 2,700,000

CHAPTER 5-EXERCISE 2: PINAY CORP.

1. Ans. A.

Proceeds (50,000*58) 2,900,000

Carrying Value (50,000*55) 2,750,000

Realized gain 150,000

2. Ans. C.

Proceeds (15,000*59) 885,000

Original Cost (15,000*60) 900,000

Realized loss (15,000)

3. Ans. D.

Proceeds 1,100,000


Carrying Value (P2,035,182/2) (1,017,591) *half of the carrying value which is the fair value on 12.31.13


FMV=Present value of future cash flows at 9% yield rate

Principal (P2,000,000*0.84168) 1,683,360 2,000,000 0.8416800

Interest (P200,000*1.759111) 351,822 200,000 1.7591112

CV/FMV 12/31/2013 2,035,182 4. Ans. A.

Proceeds 1,100,000


Carrying Value (P1,973,866/2) (986,933) **half of the carrying value which is the amortized cost on 6/30/14


Amortization table:

Correct interst Nominal Inters Amortization Balance

1/1/13: 1,951,126

12/31/13: 214,624 200,000 14,624 1,965,750

6/30/14: 108,116 100,000 8,116 1,973,866

5. Ans A.

Alpha shares (FMV through P/L) - (50,000sh*62) 3,100,000

200,000

150,000

500,000

500,000

1,400,000



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52 of 155

6. Ans. B.

Alpha sahres (FMV through P/L) 3,100,000

Delta bonds (FMV through P/L) 982,143 ***

Total Current Investment 4,082,143

FMV=Present value of remaining future cash flows at yield rate 12%

Principal (P1,000,000*0.892857) 892,857 1,000,000 0.892857

Interest (P100,000*0.892857) 89,286 100,000 0.8928571

982,143

CHAPTER 5-EXERCISE 3: BENSHOPPE INC.

1. Ans. C.

2. Ans. C.

FMV 12/14 CV/Cost

Aye Corp. Shares 700,000 540,000 (29.50-2-0.50)*20,000sh

Bee Inc. Shares 1,000,000 1,080,000 (27.50-.50)*40,000sh

See Co. 10%, 2M Bonds* 1,964,948 1,923,000 (1,973,000-50,000)

3,664,948 3,543,000 Unrealized holding gain - IS 121,948 Financial assets at FMV through P&L 3,664,948 See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual prevailing effective rate) Principal (2M*0.8072) 1,614,433 1

Interest (100,000*3.5052) 350,515 * 1,964,948 3. Ans. C.

Investment in Dee Shares (Associate)

Intial cost (6/30/14)

2,400,000

Share from dividends

Share from net income

(250,000)

280,000

(2,240,000*6/12)*25%

Investment in Assoc Balance 2,430,000 4. Ans. B.

Transactions costs - Expense

Aye Corp. Shares (10,000)

Bee Inc. Shares (20,000)

Dividend income - Bee Inc. 120,000

Interest income - See Co. 50,000

Unrealized holding gain - FA 121,948

Share from net income - Dee Corp. 280,000

Total/Net Investment income 541,948

5. Ans. D.

See Co Bonds at amortized cost 1,930,690

Dee Corp. Shares - Assoc. 2,430,000

Total noncurrent investmetns 4,360,690

Amortization table: Financial asset at amortized cost, See Co at effective rate 10%


October 1, 2014: 1,923,000 *excluding accrued interest

December 31, 2014: 57,690 50,000 7,690 1,930,690

Alternative Solution: Financial asset at amortized cost: See Co 10%, 2M Bonds

Amortized cost shall be PV of cash flows using original effetive rate (6% semi-annually)

Principal (2,000,000*0.7921) 1,584,187 0.7921

Interest (100,000*3.4651) 346,511 3.4651

Amortized cost, 12/31/14 1,930,698 6. Ans. D.

Transactions costs - Expense

Aye Corp. Shares (10,000)

Bee Inc. Shares (20,000)

Dividend income - Bee Inc. 120,000

Interest income - See Co. 57,690 *(1,923,000*12%*3/12)

Unrealized holding gain - FA 80,000 UHG from Aye and Bee only

Share from net income - Dee Corp. 280,000

Total/Net Investment income 507,690



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53 of 155

1,250,000

1,500,000

(500,000)

CHAPTER 5-EXERCISE 4: SITAW CORP.

1. Ans. A.

Proceeds from sale of half of SIBUY bonds 51,250,000

Amortized cost October 16, (face value) 50,000,000


2. Ans. B.

PATATAS (1M*P64)

FMV

64,000,000

Cost

62,000,000 *reclassification to FA through P&L not allowed.

BAWA (250,000*P74) 18,500,000 20,000,000

82,500,000 82,000,000

Unrealized holding gain - SHE 500,000 3. Ans. C.

Interest from SIBUY bonds (Apr. 15 to Oct. 15): P100M*10%*6/12 5,000,000

Interest from remaining SIBUY bonds (Oct. 15 - Dec. 31): P50M*10%*2.5/12 1,041,667

Cash dividends from PATATAS 1,500,000

Total interest and dividends income, 2013 7,541,667

4. Ans. A.

Proceeds from sale of half of PATATAS (500,000sh*P65) 32,500,000

Original cost (P62,000,000/2) 31,000,000

Realized gain on sale, under PAS 39

5. Ans. D.

Proceeds from sale of all BAWA shares (250,000sh*P78) 19,500,000

Original cost 20,000,000

Realized loss on sale, under PAS 39

CHAPTER 5-EXERCISE 5: MARIAH CORP.

1. Ans. A.

Proceeds from sale (9,000*65) 585,000

Original cost 441,000

Realized gain on sale (PAS 39) 144,000

2. Ans. C.

DEF Corp. Shares

FMV (12/14)

1,140,000

Cost

1,080,000

GHI Corp.Shares 348,000 360,000

JKL Shares 323,400 325,400

1,811,400 1,765,400

Unrealized holding gain - SHE 46,000 3. Ans. A.

IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES

FMV (12/14) CV (FMV 12/13)

DEF Corp. Shares 1,140,000 1,050,000

GHI Corp.Shares 348,000 369,600

JKL Shares 323,400 315,000

1,811,400 1,734,600

Unrealized holding gain - SHE 76,800 4. Ans. B.

IF JKL SHARES IS INVESTMENT IN ASSOCIATE: Initial cost (including transaction cost) 325,400

Share from dividends (0.75*4200) (3,150)

Sahre from net income (450,000*20%*8/12) 60,000

Carrying Value, 12.31.14 382,250

CHAPTER 5-EXERCISE 6: ANGEL CORP. 1. Ans. D. Fair Value Dec. 31, 2014 Dec. 31, 2014 Total FMV Uno shares 10,000 160 1,600,000 Dos shares 11,000 105 1,155,000 Tres shares 18,000 140 2,520,000 Quatro bonds 2,000,000 8% yield 2,071,331 *

7,346,331 **FMV=Present value of cash flows at 8% 2,000,000 0.85734

Principal (P2,000,000*0.85734) 1,714,678 200,000 1.783265

Interest (P200,000*1.783265) 356,653 Total Fair Value 2,071,331

Carrying values before year-end remeasurement

# of shares CV Dec. 31,

Uno shares 10,000 145 1,450,000 Dos shares 11,000 72.73 800,000 Tres shares 18,000 100 1,800,000 Quatro bonds 2,000,000 12% yield 1,903,927 **

Total Carrying Value 5,953,927



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SOLUTIONS GUIDE

54 of 155

1,392,404

140,709

**Acquisition cost=Present value of cash flows at 12% 2,000,000 0.85734

Principal (P2,000,000*0.711780) 1,423,560 2,000,000 0.711780 200,000 1.783265

Interest (P200,000*2.401831) 480,366 200,000 2.401831 Total Fair Value 1,903,927 Unrealized holding gain - P&L

2. Ans. B.

Fair market value, Dec. 31, 2014 7,346,331

Carrying value 5,953,927

Unrealized holding gain - P&L

3. Ans. B.

Proceeds from sale:

Dos shares (10,000*P100)

1,000,000

Tres shares (18,000*140) 2,520,000 3,520,000

Carrying value of shares sold:

Dos shares (10,000*80)

800,000

Tres shares (18,000*100) 1,800,000 2,600,000

Realized gain on sale - P&L 920,000

4. Ans. A.

Aggregate Fair Value (12/31/14) Equity Securities only

5,275,000

Original Cost of Equity Securities: # of shares

Cost including

Uno shares

Dec. 31, 2014

10,000

Trans. Cost

150

Total cost

1,500,000 Dos shares 11,000 74.55 820,000 Tres shares 18,000 108 1,950,000 Total Cost 4,270,000

Unrealized holding gain - OCI 1,005,000

5. Ans. B.

Amortized cost of Quatro bonds (12/31/12)

Correct Interes Nominal Intere Amortization Balance

1/1/12: Orig Cost (12% yield rate) 1,903,927

12/31/12: 228,471 200,000 28,471 1,932,398

CHAPTER 5-EXERCISE 7: DUMBO INC.

1. Ans. B.

Proceeds from sale plus accrued interest

(P500,000*98%)+(P500,000*12%*11/12) 545,000

Carrying value (Initial cost, excluding accrued interest and transaction cost)

Total cash consideration paid 1,044,258 Accrued interest (P1M*12%*6/12) (60,000) Transaction cost (rec. as expense) (10,000) 974,258

Prorata: portion sold 50% (487,129)

Accrued interest: (P500,000*12%*11/12) (55,000)

Realized gain on sale 2,871

2. Ans. C.

Proceeds from sale: ABC (15,000*P15) 225,000 XYZ (5,000*P13) 65,000 290,000

Carrying value: ABC: 15,000*(P21.50-P1.50) 300,000 XYZ: 5,000*(20,000*(P13-P1.50))/23,000 50,000 350,000


3. Ans. D.

FMV 12/31/14 CV

ABC (25,000sh*P18) 450,000 416,667 (a)

XYZ (18,000sh*P15) 270,000 180,000 (c)

DEF at 11% yield rate

Principal (P500,000*0.9009009) 450,450 0.9009009

Interest (P60,000*0.9009009) 54,054 504,505 487,129

1,224,505 1,083,796


(a) Initial cost ABC (40,000*P20) 800,000

CV of 15,000 shares sold (300,000)

Effect of cash div. in lieu of stock div. (83,333) (b)

CV ABC, 12/31/14 416,667

(b) CV of ABC before cash div. in lieu of stock div.

500,000

Divide by: # of shares (25,000+5,000) 30,000

CV of ABC after cash div. in lieu of stock div. 16.67

Multiply by: Remaining shares 25,000

Carrying value, 12/31/14 416,667

(c) Initial cost DEF (20,000*P11.50)

230,000

CV of shares sold on 8/5 (50,000) CV DEF 12/31/14 180,000



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55 of 155

55,000

(45,620)

23,750

24,000

4. Ans. B.

Interest income (6/30 to 12/1): P1,000,000*12%*5/12) 50,000

Interest income (12/1 - 12/31): P500,000*12%*1/12 5,000

Interest income from bond investment

5. Ans. A.

Stock dividend does not result to dividend income and accounted only through memo entry.

Cash in lieu of share dividends is accounted through the "as if" approach, that is, as if shares were received and were as if

sold for the cash dividend received.

6. Ans. D. FMV 12/31/14

ABC (25,000sh*P18) 450,000

XYZ (18,000sh*P15) 270,000

DEF at 11% yield rate Principal (P500,000*0.9009009) 450,450 Interest (P60,000*0.9009009) 54,054 504,505

Total 1,224,505

CHAPTER 5-EXERCISE 8: NYU CORP.

1. Ans. D.

Proceeds from sale on 11/5

SMC: (400sh*P230) 92,000 ABI: (800sh*P325) 260,000 352,000

Original cost:

SMC: (400sh*P260)

104,000

ABI: (800sh*P330) 264,000 368,000

Realized loss on sale, under PAS 39 (16,000)

2. Ans. A.

Proceeds from sale on 12/31 (P300,000*95%) 285,000

Amortized cost (P551,033*3/5) 330,620 *

Realized loss on sale of bonds

*Amortized cost: 12/31/14 Correct Int. Nominal Int. Amortization Balance

(Bal*9%) (Princ*12%)

March 31, 2014: 558,345

December 31, 2014: (9months) 37,688 45,000 (7,312) 551,033

3. Ans. B.

FMV 12/31/14 Cost/Amortized cost

SMC (600sh*P275) 165,000 156,000 (600sh*P260)

ABI (1,200sh*P340) 408,000 396,000 (1,200sh*P330)

TDI (P200,000*95%) 190,000 220,413 (P551,033*2/5)

763,000 772,413 Unrealized holding loss-OCI (9,413) 4. Ans. C.

CHAPTER 5-EXERCISE 9: VEGAS CORP.

1. Ans. C.

Proceeds from sale of DEF (4,000sh*P138) 552,000

CV (FMV 12/31/13): 4,000sh*(P1,056,500/8,000sh) 528,250 132


2. Ans. D.

Proceeds from sale of JKL (4,000sh*P124) 496,000

Cost: 4,000sh*(P1,180,000/10,000) 472,000


3. Ans. D.





4. Ans. D.

FA at FMV through P&L FMV (12/31/14 CV ABC (13,000*P153.20) 1,991,600 1,984,000 (P1,525,000+P459,000)

DEF (4,000*P137) 548,000 528,250 (4,000sh*(P1,056,500/8,000sh))

GHI (P500,000*82.22%) 411,100 373,500 PQR (P400,000*98%) 392,000 372,000 (P400,000*93%)

3,342,700 3,257,750 Unrealized holding gain - P&L 84,950



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SOLUTIONS GUIDE

56 of 155

(145,000)

13,750

(125,000)

(600,000)

(50,000)

5. Ans. D.

FA at FMV through OCI/L FMV (12/31/14 Cost

JKL (6,000sh*P110.50) 663,000 708,000 6,000sh*(P1,180,000/10,000sh)

MNO (20,000sh*P44) 880,000 980,000

1,543,000 1,688,000

Unrealized holding loss - SHE

CHAPTER 5-EXERCISE 10: JACK CORP.

1. Ans. C.

Proceeds from sale of Wan shares (5,000sh*P60) 300,000

CV: (P1,145,000/20,000sh)*5,000sh 286,250

Realized gain on sale - P&L

2. Ans. C.

Proceeds from sale of Tri shares (25,000sh*P30) 750,000

Cost: (25,000sh*P35) 875,000


3. Ans. D.





4. Ans. C.

FMV of Poor shares 800,000

Cost 1,400,000

Impairment loss - P&L

5. Ans. D.

No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether

permanent or temporary shall be recognized in the OCI/L.

6. Ans. C.

Proceeds from sale of Seeks shares (10,000*P45) 450,000

Cost (P1,000,000/20,000sh)*10,000sh 500,000


7. Ans. A.





8. Ans. C.

FA at FMV through P&L FMV 12/31/14 CV (FMV 12/31/13)

Wan ordinary shares 825,000 858,750 (P1,145,000/20,000sh)*5,000sh

Too preference shares 650,000 700,000 1,475,000 1,558,750 Unrealized holding loss - P&L (83,750)

9. Ans. C.

FA at FMV through OCI/L, under PAS 39

Poor preference shares

FMV 12/31/14

800,000

COST

800,000

*Impaired value under PAS 39

Five ordinary shares 1,500,000 1,250,000 Seeks ordinary shares 900,000 1,000,000 3,200,000 3,050,000 Unrealized holding gain - SHE 150,000

10. Ans. A.

FA at FMV through OCI/L, under PFRS 9

Poor preference shares

FMV 12/31/14

800,000

COST

1,400,000

*No impairment loss under PFRS 9

Five ordinary shares 1,500,000 1,250,000 Seeks ordinary shares 900,000 1,000,000 3,200,000 3,650,000 Unrealized holding loss - SHE (450,000)

11. Ans. C.

12. Ans. C.

CHAPTER 5-EXERCISE 11: EBC CO.

1. Ans. C.

Fair Market Value, 12/31/2013

Fair Market Value last remeasurement date, 12/31/2012 (see 1. below)

10% BS Treasury bond at cost (purchased in the current year)

P57,200

103,250

P160,300

160,450

Unrealized Holding Loss P150

*Cost (P25,250 + 32,450) P57,700

FMV adjustment credit balance (500) 57,200



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57 of 155

180,000

255,000

2. Ans. B.

Fair Market Value, 12/31/2014 P161,100

Fair Market Value, last remeasurement date 12/31/2013 160,300

Unrealized Holding Loss

3. Ans. A.

Face Value, 10% BS Treasury Bonds

Multiply by: Interest rate

2009

P100,000

10%

2010

P100,000

10%

Annual interest 10,000 10,000

Mulitiply by: Months outstanding 2/12 12/12

Interest income P1,667 P10,000

4. Ans. C.

Fair Market Value of the Inv. portfolio, 12/31/2014 P161,100

CHAPTER 5-EXERCISE 12: HART CORP.

1. Ans. C.

July 5 sale

Proceeds from sale (450*1,000)

P450,000

CV of shares sold (570,000/2,000)*1,000 (285,000) 165,000

Oct. 11 sale


P150,000

CV of shares sold (285,000/3,000)*1,000 (95,000) 55,000 TOTAL GAIN FROM SALE OF BLACK

220,000

2. Ans. C.

June 1 sale

Proceeds from sale (195*20,000) P3,900,000

Cost of shares sold (P3,000,000-P90,000) 2,910,000 990,000

Nov. 20

Proceeds from sale (3,700,000 – 300,000) P3,400,000

Cost of shares sold (7,500,000/50,000)*20,000 3,000,000 400,000 TOTAL GAIN FROM SALE OF WHITE

1,390,000

3. Ans. D.

BLACK INC.

FMV (12/31/2014) 2,000*150 300,000

Carrying value (285,000/3,000)*2,000 190,000 110,000

WHITE INC.

FMV (12/31/2014) 30,000*190 5,700,000

Carrying value (7,500,000/50,000)*30,000 4,500,000 1,200,000

UNREALIZED HOLDING GAIN – P&L 1,310,000

4. Ans. D.

BLACK INC.: FMV (12/31/2014) 2,000*150 300,000 WHITE INC.: FMV (12/31/2014) 30,000*190 5,700,000 6,000,000

CHAPTER 5-EXERCISE 13: CSI INC.

1. Ans. B.

Acquisition cost, excluding transaction cost 200,000

Less: Dividends recievable (shares acquired "Div.-on") (20,000)

Initial cost - ABC Shares

2. Ans. B.

Acquisition cost (1,500sh*P150) 225,000

Add: Transaction cost 30,000

Initial cost - DEF Shares

3. Ans. D.

No dividend income shall be recognized from the share dividends received from DEF.

4. Ans. B.

# of GHI shares after share split 5,000

Multiply by: cash div. per share 5

Dividend income from cash dividends

5. Ans. B.

Shares in lieu of cash dividends (4,000sh/4) 1,000

Fair value of shares 55

Dividend income (shares in lieu of cash)

6. Ans. C.

Financial asset at FMV through P&L FMV, 12/31 CV

ABC (2,000sh*P105) 210,000 180,000

GHI (5,000sh*P75) 375,000 410,000 (P285,000+(5,000sh*P25))

585,000 590,000

Unrealized holding loss - P&L (5,000)

(800)

25,000

55,000



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SOLUTIONS GUIDE

58 of 155

137,500

150,000

360,000

208,000

7. Ans. C.

Financial asset at FMV through OCI/L FMV, 12/31 Cost

DEF (1,500sh+300sh)*P160 288,000 255,000

JKL (4,000sh+1,000sh)*P60 300,000 255,000 (P200,000+(1,000sh*P55)

588,000 510,000


8. Ans. B.

Investment in Associate - MNO shares Initial cost, January 1, 2014 850,000

Share from net income (P600,000*20%) 120,000

Share from forex loss (P100,000*20%) (20,000)

Share from dividends (10,000sh*P12) (120,000)


CHAPTER 5-EXERCISE 14: PRINCE INC.

1. Ans. A.

Dividend income from Queen Corp. in 2014 (300,000*10%)

*note: Queen shares is only 10% (100,000/1,000,000), thus shall be accounted for as AFS.

Investment income for investment in AFS shall be through dividends declared by Queen.

2. Ans. C.

Share from net income of King Inc. 2013 (650,000*25%) 162,500

Understatement in Depr expense (500,000/5)*25% (25,000)

Share from net income of King Inc. 2013

*note: King shares is only 25% (250,000/1,000,000), thus shall be accounted for as Associate Investment under equity method.

3. Ans. C.

Fair Value of Queen Corp shares 12/31/2014 (100,000*6.50)

4. Ans. C.

Acquisition cost (January 1, 2013) (250,000*10) 2,500,000 Share from net income: 2013 137,500

CV of Investment (12/31/13) 2,637,500 vs Rec. Value (FV:250,000*12) P3,000,000 – no imp.

Share from net income: 2014 37,500 Share from dividends: 2014 (100,000*25%) (25,000) CV of Investment (12/31/14) 2,650,000 vs Rec. Value (FV:250,000*15) P3,750,000 – no imp.

5. Ans. C.

Fair value of Queen Shares (AFS), 12/31/14 (100,000*6.50) P650,000

Fair value of Queen Sahres (AFS), 12/31/13 (100,000*7.00) 700,000

Unrealized Holding Loss – SCI

6. Ans. C.

Fair value of Queen Shares (AFS), 12/31/14 650,000

Original cost of Queen Shares, 1/1/13 (100,000*5) 500,000

Unrealized Holding Gain (Cumulative)- SHE/BS

CHAPTER 5-EXERCISE 15: ISUZU CORP.

1. Ans. A.

Acquisition cost 2,592,000

BV of Net Assets acquired (P6.4M*30%) 1,920,000

Total excess of acqusition cost over book value 672,000

Excess attributable to Depreciable asset (P640K*30%) 192,000

Excess attributable to Goodwill 480,000

2. Ans. C.

Share from the net income of associate (P1,280K*30%) 384,000

Understatement in depr: (P192,000/8yrs) (24,000)

Investment Income

3. Ans. A.

Acquistion cost 2,592,000

Share from dividends (P6*40,000sh) (240,000)

Share from net income 360,000

Carrying value, 12/31/14

Recoverable amount/Fair value less cost to sell:

(40,000shares*P64)

2,712,000

2,560,000


4. Ans. B.


Impairment loss (152,000)

Net amount to be reported in the income statement

5. Ans. B.

Dividend income (P6*40,000sh) 240,000

Unrealized holding loss - P&L (32,000)

Net amount to be reported in the income statement 208,000

FMV, 12/31/14 (40,000*P64) 2,560,000 Carrying value (Cost) 2,592,000 Unrealized holding loss-P&L (32,000)

P30,000

P650,000

P50,000



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16,550,000

16,675,000

1,344,000

6. Ans. C.

CHAPTER 5-EXERCISE 16: PACQUIAO CORP.

1. Ans. D.

Net income 2,500,000

Less: PS share in net income (10%*P50*100,000) 500,000

OS share in net income 2,000,000

Multiply by: Proportionate interest (50,000sh/200,000sh) 25%

Share from net income before adjustments 500,000

Understatement in Depr: (P4M*25%)/5yrs (200,000)

Adjusted share from Net Income 300,000

2. Ans. D.

Acquisition cost, January, 2014 (50,000sh*P325) 16,250,000

Share from net income in 2014 300,000

Carrying value, Decmeber 31, 2014

3. Ans. C.


Multiply by: Proportionate interest (50,000sh/200,000sh) 25%

Share from net income before adjustments 625,000

Understatement in Depr: (P4M*25%)/5yrs (200,000)

Adjusted share from Net Income 425,000

4. Ans. C.

Acquisition cost, January, 2014 (50,000sh*P325) 16,250,000

Share from net income in 2014 425,000

Carrying value, Decmeber 31, 2014

CHAPTER 5-EXERCISE 17: IFFY CORP.

1. Ans.

Share from net income (P4.8M*30%) 1,440,000

Understatement depr. (P1.6M/5)*30% (96,000)

Investment Income - P&L

2. Ans. D.

Share from other comp. loss (800,000*30%)

3. Ans. C.

Acquisition price

Share from net income (4.8M*30%)

1,440,000

5,000,000

Understatement depr. (1.6M/5)*30% (96,000) 1,344,000

Share from other comp. loss (800,000*30%) (240,000)

Share from dividends (1,500,000*30%) (450,000)

Carrying Value, 12/31/14 5,654,000

4. Ans. B.

CESSATION:

Proceeds from sale (18,000*210)

3,780,000

FMV of remaining share relassified to FA at FMV (12,000*210) 2,520,000

Total 6,300,000

Less: Carrying Value of Investment in Assoc. before cessation 5,654,000

Gain before recycling of OCLoss 646,000

Recycling of OCloss (240,000)

Total cessation loss - IS 406,000

5. Ans. D.

6. Ans. D.

DILUTION:

Before Dilution After Dilution

# shares held 30,000 30,000

# shares outstanding 100,000 125,000

% of interest 30% 24%

Share from increase in Assoc.'s net assets (25,000*210)*24% 1,260,000

Carrying value of Investment as if given up (5,654,000*6/30) (1,130,800)

Gain on dilution before recycling of OCLoss 129,200

Recycling of Ocloss (240,000*6/30) (48,000)

Total cessation loss - IS 81,200

CHAPTER 5-EXERCISE 18: BLACK CORP.

1. Ans. A.

Acquistion cost (300,000sh*P20) 6,000,000

BV of Net Asset (P16M*30%) 4,800,000

Excess of acq. cost over book value

Excess attrib. to identifiable assets

Land (P800,000*30%)

1,200,000

240,000

Building (P1,200,000*30%) 360,000

Excess attrib to Goodwill 600,000

(240,000)



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678,000

528,000

161,250

2. Ans. A.


Understatement in Depr: (360,000/5yrs) (72,000)

Investment income - P&L

3. Ans. D.

Investment income - P&L 678,000

Share from Unrealized holding loss - OCL (P500K*30%) (150,000)

Net amount to be reported in the SCI

4. Ans. B.


Share from dividends (P800,000*30%) (240,000)


Share from OCL (P500,000*30%) (150,000)

Carrying value, 12/31/14 6,288,000

5. Ans. B.

Before Dil. After Dil. Decrease

Number of shares owned 300,000 300,000

Total outstanding shares 1,000,000 1,200,000

30% 25% 5%

Share from the increase in White's capital as a result of share issue:

(200,000sh*P30)*25%

CV of investment deemed sold:

1,500,000

(P6,228,000*(5%/30%)) (1,048,000)

Dilution gain before recycling of OCL 452,000

Recycling of OCL (P150,000*(5%/30%)) (25,000)

Adjusted dilution gain (True Sale) 427,000

6. Ans. B.

Share from the increase in White's capital as a result of share issue:

(200,000sh*P30)*25% 1,500,000

CV of investment, excluding goodwill deemed sold:

(P6,228,000-P600,000)*(5%/30%) (948,000)

Dilution gain before recycling of OCL 552,000

Recycling of OCL (P150,000*(5%/30%)) (25,000)

Adjusted dilution gain 527,000

7. Ans. C.

Number of shares owned

Before Cess.

300,000

After Cess.

180,000 Total outstanding shares 1,000,000 1,000,000

30% 18%

Proceeds from poriton sold (120,000shares*P30)

Realized

3,600,000

Unrealized

Total

3,600,000

FMV of remaining portion to be reclassified to FA at FMV 5,400,000 5,400,000

Less: CV of portion sold (P6,228,000*120/300) (2,515,200) (2,515,200)

CV of portion reclassified (P6,228,000*180/300) (3,772,800) (3,772,800)

Cessation gain/loss before recycling of OCI/L

Recycling of OCL:

Portion sold (P150,000*120/300)

1,084,800

(60,000)

1,627,200 2,712,000

(60,000)

Portion reclassified (P150,000*180/300) (90,000) (90,000)

Adjsuted cessation gain 8. Ans. A.

CHAPTER 5-EXERCISE 19: GREENDAY INC.

Case 1: “Cost-Based Approach, with Catch-up Adjustment”:

1. Ans. C.

Share from net income under Equity Method in 2014 (P1,250,000*15%) 187,500

Dividend income recognized under FMV Method in 2014 (P3.50*7,500sh) 26,250

Rertroactive adjustment to RE, beg 2015

2. Ans. A.

Share from net income (Jan. 1 - June 30, 2015): P700,000*15% 105,000

Share from net incoem (Jul. 1 - Dec. 31, 2015): P800,000*25% 200,000

Total investment income in 2015

3. Ans. A.

Acquistion cost, January 1, 2014 1,400,000

Share from dividends, Aug. 1, 2014 (P3.50*7,500sh) (26,250)

Share from net income in 2014 (P1,250,000*15%) 187,500

Carrying value, Dec. 31, 2014 (Equity Method) 1,561,250

Share from dividends, Apr. 5, 2015 (P4.50*7,500sh) (33,750)

Share from net income (Jan. 1 - Jun. 30, 2015) 105,000

Acquisition cost, July 1, 2015 1,000,000

Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)

Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000

Carrying value, Dec. 31, 2015 2,763,750

305,000

1,024,800 1,537,200 2,562,000



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Case 2: “Cost-Based Approach, without Catch-up Adjustment”:

4. Ans. A.

No retroactive adjustment to RE, beg under the Cost-based approach without catch-up adjustement. Instead, whatever is

the original cost of the original investment before gaining significant influence shall be its deemed cost.

5. Ans. D.

Dividend income, Apr. 5, 2015 (P4.50*7,500) 33,750


Total investment income in 2015 (Cost-based w/o catch-up adj.)

6. Ans. D.

Acquistion cost, January 1, 2014 (deemed cost) 1,400,000

Acquisition cost, July 1, 2015 1,000,000

Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)



Case 3: “Fair Market Value Approach, without Catch-up Adjustment”:

7. Ans. A.

No retroactive adjustment to RE, beg under the FMV-based approach without catch-up adjustement. Instead, the original

investment shall be remeasured at prevailing fair value at the date significant influence is gained.

8. Ans. D.

Dividend income, Apr. 5, 2015 (P4.50*7,500) 33,750


Total investment income in 2015 FMV-based w/o catch-up adj.)

9. Ans. C.

FMV of original investment, July 1, 2015 (7,500sh*P200) 1,500,000 *

Acquisition cost, July 1, 2015 1,000,000 Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750) Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000 Carrying value, Dec. 31, 2015 2,631,250 *FMV/Acq. Price of new investment (10%)

1,000,000

Divide by: # of shares 5,000 Assumed FMV, July 1, 2015 200

CHAPTER 5-EXERCISE 20: ORION CORP.

1. Ans. C.

Investments in Bonds:

Proceeds (PV of future cash flows, effective rate: 10%)

Principal: (4,000,000*0.6830) 2,732,054 0.6830

Interest: (480,000*3.1699) 1,521,535 3.1699

Intial fair value (1/1/13) 4,253,589 Correct Interes Nominal Intere Amortization

January 1, 2013:

4,253,589 December 31, 2013: 425,359 480,000 (54,641) 4,198,948

December 31, 2014: 419,895 480,000 (60,105) 4,138,843 7. C.

December 31, 2015: 413,884 480,000 (66,116) 4,072,727 December 31, 2016: 407,273 480,000 (72,727) 4,000,000 2. Ans. A.

Face Value of bonds 4,000,000

Consideration given up (FMV) 4,253,589

Debit to/Reduction in interest income per books (253,589)

Nominal interest collected/Credited to interest income 480,000

Interest income in 2013 per books: 226,411

Correct interst income (see amortization table) 425,359

Understatement in interest income in 2013 198,948

3. Ans. A.

FMV of bonds, Dec. 31, 2014 at 9% effective rate: (a) 4,211,093

FMV of bonds, Dec. 31, 2013 at 11% effective rate: (b) 4,097,749


(a) FMV of bonds, Dec. 31, 2014 = PV of remaining cash flows at 9% effective rate for 2 periods.

Principal: P4,000,000*0.841680 3,366,720 0.841680

Interest: P480,000*1.759111 844,373 1.759111

4,211,093

(b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11% effective rate for 23periods.

Principal: P4,000,000*0.731191 2,924,766 0.731191

Interest: P480,000*2.443715 1,172,983 2.443715

4,097,749

233,750

233,750

113,345



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(400,000)

4. Ans. C.

Investment in Associate (20%)

Acquisition cost

5,800,000

BV of net assets acquired (P25M*20%) 5,000,000

Excess of Acquisition cost (Attrib. to Depr. Asset) 800,000 *

September 30, 2013 Acquisition Cost

5,800,000

Share from Dividends, 2013

Share from NI, 2013 (3.8M*20%)*3/12

190,000

(80,000)

*Understatement in Depr (800K/10)*3/12 (20,000) 170,000

December 31, 2013 Carrying Value 5,890,000

Share from Dividends, 2014

Share from NI, 2014 (5.2M*20%)

1,040,000

(160,000)

*Understatemetn in Depr (800K/10) (80,000) 960,000

Share from OCL (400,000*20%) (80,000)

Share from OCI (300,000*20%) 60,000

December 31, 2013 Carrying Value 6,670,000

5. Ans. A.

Dividend income (2*40,000) 80,000

Unrealized holding gain (155-145)*40,000 400,000

Investment income per books in 2013 480,000

Investment income per audit in 2013 (see analysis) 170,000

Retroactive adjustement to RE, beg 310,000

6. Ans. B.

CESSATION: Before Cess.

Number of shares owned 40,000

After Cess.

30,000 Number of outstanding shares 200,000 200,000

20% 15%


Realized

1,690,000

Unrealized Total

1,690,000

Fair value of remaining Investment (169*30,000)

CV of investment

Portion sold: (6,670,000*10/40)

(1,667,500)

5,070,000 5,070,000

(1,667,500)

Portion reclassified: (6,670,000*30/40) (5,002,500) (5,002,500)

Cessation gain, before recycling of OCI/L 22,500 67,500 90,000

Recycling of OCI 15,000 45,000 60,000

Recycling of OCL (20,000) (60,000) (80,000)

Total cessation gain/loss 17,500 52,500 70,000

7. Ans. B.

Fair Value on Reclass date (6/30/14) 3,600,000

Carrying Value/Depreciation Cost (6/30/14) 3,250,000

Revaluation Surplus (OCI) on Reclass 350,000

8. Ans. D.

FMV, Investment property, 12/31/14 3,200,000

CV, (FMV upon reclass on 6/30/2014) 3,600,000

Unrealized holding loss - P&L

CHAPTER 5-EXERCISE 21: JUDE CORPORATION

1. Ans. C.

Present value of the installment payments at 12% effective rate:

Downpayament 1 1,000,000

Balance (P4,000,000/4yrs)*3.037349) 3.0373493 3,037,349

Option money related to property acquired 314,779

Property taxes in arrears as of January 1, 2012 147,872

Initial cost of the property 4,500,000

2. Ans. D.; 3. Ans. B.

Cost (Jan. 1, 2012)

4,500,000

Accum depr, Dec. 31, 2013 (4.5M/25yrs)*2yrs. 360,000

Depreciated cost 4,140,000

Recoverable amount/Fair market value 4,100,000


4. Ans. A.; 5. Ans. C.

Recoverable amount 12/31/13

4,100,000

Depr 2014: P4.1M/23years (178,261)

Carrying value, before impairment recovery

Carrying value had there been no impairment:

(P4.5M*22/25)

3,921,739

3,960,000

Impairment recovery - P&L 38,261

6. Ans. A.

PPE to IP

If a property is transferred from PPE to IP, and the FMV method is used to value IP, any decrease on the reclassification date shall be

recognized as impairment loss in the profit or loss. Any increase in the value, however, on the reclassification date shall be recognized

in the OCI as Revaluation Surplus, following PAS 16, PPE.'

FMV, 12/31/14 upon reclass to IP 4,300,000

Carrying value (Depr. Cost: P4.5M*22/25) 3,960,000

Revaluation surplus - OCI 340,000



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200,000

87,600

7. Ans. D.

IP to PPE

If a property is transferred from IP to PPE, and the FMV mehtod is used to value IP, any decrease or increase in the value of the

property on the transfer date shall be recognized in the profit or loss.

FMV, 12/31/14 upon reclass to PPE 4,300,000

Carrying value (FMV 12/31/13) 4,100,000

Gain on the transfer - P&L

CHAPTER 5-EXERCISE 22: DADO COMPANY

1. Ans. B.

Annual premium, 2014: (P8,000*12mo) 96,000

Less: Increase in CSV for 2014: (P25,200*1/3) (8,400)

Life insurance expense, 2014

2. Ans. D.


Less: Increase in CSV for 2015 (P30,000-P25,200) (4,800)



3. Ans. C.


Less: Increase in CSV for 2016 (P39,600-P30,000) (9,600)



4. Ans. D.

Insurance premium up to date of death (P8,000*10mo) 80,000

Less: Increase in CSV up to date of death (P50,400-P39,600)*10/12 (9,000)

Dividend from CSV in 2017 (11,200)


5. Ans. A.

Life insurance policy

4,000,000

CV of CSV as of October 31, 2017: CSV, Dec. 31, 2016 39,600 Increase up to Oct. 31, 2017: 9,000 48,600

Gain on life insurance policy settlement 3,951,400

Observe that since the insurance premium are payable monthly, it is assumed that after death on October 31, 2017, no additional

insurance premium had been paid.


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CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT



1 C.

2 C.

3 D.

4 A.

5 D.

6 C.

7 D.

8 B.

9 A.

10 C.

11 B.

12 A.

13 C.

14 D.

15 C.

16 D.

17 C.

18 C.

CHAPTER 6-PROBLEM 2: BACOLOD INC.

Land Land Impr. Buidling Mach. & Eq.

Purchase of land 15,600,000

Land survey 208,000

Fees for search of title for land 24,000

Building construction permit fee 140,000

Temporary quarters for construction workers 430,000

Payments to tenants of the old building 184,000

Cost of to raze the old building 940,000

Excavation of the land 400,000

Special assessment of the gov. for road projects 80,000

Cost of construction 78,000,000

Cost of paving parking lot, driveway and sidewalks 1,600,000

List price of Machinery and equipment purchased 4,567,000

Trade discount taken on the machinery (127,000)

Cost of freight and handling 50,000

Cost of testing the equipment 125,000

Income from the testing of machinery (65,000)

15,912,000 1,600,000 80,094,000 4,550,000

1. Ans. 2. Ans. 3. Ans. 4. Ans.

Note: (a) The demolition of the old building is preferably capitalized as cost of the new building as per PIC Q&A 2012-012.

(b) The income from the car park during construction is from an unrelated activity unnecessary for the construction of the building.

The income shall be recognzied as outright income in the P&L and shall not affect the cost of the constructed building.

CHAPTER 6-PROBLEM 3: MIRAM COMPANY Land Building Adj. to NI

Organization fees - outright expense (120,000)

Land and Building (Prorata)* 1,512,000 378,000 Option payments (P250K-50K)* 160,000 40,000 (50,000)

Broker's fees* 88,320 22,080 Remodelling cost of the building 60,000 Salaries of executives (360,000)

Stock bonus - Organization expense (300,000)

Property taxes - in arrears (P240K*6/12)* 96,000 24,000 Property taxes - 2014 expense (P240K*6/12 ) (120,000)

1,856,320 524,080 (950,000)

1. Ans. 2. Ans. 3. Ans.

*FMV of Land 1,800,000 1 FMV of Building 450,000 0 Total 2,250,000 1

CHAPTER 6-PROBLEM 4: ABC CORPORATION

a. Land

Initial cost, Jan., 2014

Present value of installment payments at 10% effective rate:

Downpayment 2,000,000

Balance: (P8M/5yrs)*3.790787 3.790787 6,065,259

2.a. Ans. 8,065,259


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70,000

b. Building


FMV of shares issued (100,000sh*P70)

7,000,000

Accum. Depr, Dec. 31, 2014: (P7M*10%) (700,000) 1.a. Ans.

Carrying value, Dec. 31, 2014 6,300,000 2.b. Ans.

c.1. Equipment A


Cash price equivalent (P2M*90%)

1,800,000

Accum. Depr., Dec. 31, 2014: (P1.8M-P180K)*5/15 (540,000) 1.b. Ans.

Carrying value, Dec. 31, 2014 1,260,000 2.c. Ans.

c.2. Equipment B

Initial cost, July 1, 2014

Purchase price

4,000,000

Import duties and nonrefundable taxes 250,000

Installation cost

PV of future retirement cost at 10% effective % for 5 yrs

(P161,051*0.6209213)

50,000

100,000

0.6209213

Intial cost, July 1, 2014 4,400,000 Accum. Depr., Dec. 31, 2014: (P4.4M-440K)*5/15*6/12 (660,000) 1.c. Ans.

Carrying value, Dec. 31, 2014 3,740,000 2.d. Ans.

c.3. Equipment C

Initial cost, September 1

Fair value of asset accepted as donation

1,200,000

Accum. Depr., Dec. 31, 2014 (P1.2M-120K)*5/15*4/12 (120,000) 1.d. Ans.

Carrying value, Dec. 31, 2014 1,080,000 2.e. Ans.

*note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is

credited, any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost.

d. Furniture and fixture


Cash price upon acquistion

3,200,000

Accum Depr., Dec. 31, 2014 (P3.2M-P320K)/10yrs (288,000) 1.e. Ans.

Carrying value, Dec. 31, 2014 2,912,000 2.f. Ans.

CHAPTER 6-PROBLEM 5:

Case 1: ABC CORP.

1. Ans. P39,792.

Actual borrowing cost (Jul. 1 - Nov. 31): P1M*12%*5/12

Income from temporary investments (Jul. 1 - Nov. 31) 50,000

July: (P1,000,000-P100,000)*5%*1/12 3,750 August: (P1,000,000-P250,000)*5%*1/12 3,125 September (P1,000,000-P550,000)*5%*1/12 1,875 October (P1,000,000-P750,000)*5%*1/12 1,042 November (P1,000,000-P900,000)*5%*1/12 417 (10,208)

Net capitalizable borrowing cost 39,792

2. Ans. P70,000.

Interest expense (Jan. 2 - Jun. 30): P1M*12%*6/12 60,000

Interest expene (Dec. 1 - Dec. 31): P1M*12%*1/12 10,000

Interest expense for 2014

Case 2: PAN CORP.

1. Ans. P4,856,223.

Actual borrowing cost from Specific Borrowing:

1st Quarter: P34M*12%*3/12

1,020,000

2nd Quarter: (P35.020M*12%*3/12) 1,050,600 3rd Quarter: (P36,070,600*12%*3/12) 1,082,118 4th Quarter: (P37,152,718*12%*3/12) 1,114,582 4,267,300 Borrowing cost from General Borrowing

Weighted average actual expenditure*

39,316,667

Less: Proceeds from specific borrowing (34,000,000) WAAE financed by general borrowing 5,316,667 Multiply by: Weighted Ave. Gen Borr. %** 11.08% 588,923 Capitalizable borrowing cost 4,856,223

Cost incurred #mo. to 12/31 Peso*Mos.

*January 1 8,000,000 12 96,000,000

April 1 19,000,000 9 171,000,000

July 31 24,400,000 5 122,000,000

October 1 27,600,000 3 82,800,000

December 31 14,000,000 - -

Total 471,800,000


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5,171,077

254,628

276,000

66,300

56,214

Divide by: 12 months 12

Weighted average actual expenditure 39,316,667

**Actual General Borrowing Cost

P24,000,000*10% 2,400,000

P28,000,000*12% 3,360,000 5,760,000

Divide by: Proceeds from Gen. Borr. (P24M+P28M) 52,000,000

Weighted average genearl borrowing % 0

2. Ans. P5,171,077.

Actual General Borrowing Cost 5,760,000

Less: Capitalizable Gen. Borr. Cost (588,923)

Gen. Borr. Cost. - Interest Expense

*note that the entire actual borrowing cost from specific borrowing had been entirely capitalized.

3. Ans. P97,856,223. *January 1 8,000,000

April 1 19,000,000

July 31 24,400,000

October 1 27,600,000

December 31 14,000,000

Capitalizable borrowing cost 4,856,223

Carrying value, 12/31/14 97,856,223

CHAPTER 6-PROBLEM 6: KELSON CORP.

1. Ans. P254,628

Depreciation of Old Buildings (3,600,000-796,200)*6% 168,228

Depreciation of New Building (1,800,000-360,000)*6% 86,400

Depreciation expense – BUILDINGS

2. Ans. P36,000.

Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12

3. Ans. P276,000.

Depreciation of Old Machinery (2,325,000/10) 232,500

Depreciation of New Machinery (870,000/10)*6/12 43,500

Depreciation expense – MACHINERY AND EQUIPMENT

4. Ans. P66,300.

Leasehold improvement carrying value (12/31/2013) 331,500

Divide by: Remaining useful life: 8yrs-3yrs=5yrs

(shorter than the remaining extended lease term: 3yrs+5yrs=8yrs) 5

Depreciation expense – LEASEHOLD IMPROVEMENT

5. Ans. P43,369.

Delivery Equipment: Book value, Jan. 1, 2014

Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014

137,400

(31,356) *P24,300+P7,056

Balance subject to depreciation 106,044

Multiply by 150% declining rate (1/5)*150% 30%

Depreciation on the Remaining Delivery Equipment 31,813

Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12 4,500

Depn on truck sold on Sept. 30, 7,056

Total Depreciation expense – DELIVERY EQUIPMENT 43,369

CHAPTER 6-PROBLEM 7: GANADO CORPORATION

1.a. P56,214.

Buidling, CV Jan. 1, 2014 936,900

Multiply by: 150%Dbrate over 25 years 6%

Depreciation expense - Building

36,000


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319,314

11,500

1.b. Ans. P103,775.

Depr. on Disposed Mach.: P23,000/10yrs*3/12 575

Depr. on New Mach.: P310,000/10yrs*6/12 15,500

Depr. on Remaining Mach.: P877,000/10yrs 87,700

Depreciation expense - Mach&Eqpt 103,775

1.c. Ans. P21,000.

Depr. on New Auto: P12,000*4/10

Depr. on Remaining Auto:**

Depr on Auto had there been no change

18,000

4,800

Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10) (1,800) 16,200

Depr Expense - Automotive Equipment 21,000

2.a. Ans. P319,314.

Accum. Depr - Building, Jan. 1, 2014 263,100

Depr for the year 56,214

Accum. Depr - Building, Dec. 31, 2014

2.b. Ans. P342,275.

Accum. Depr - Mach&Eqpt, Jan. 1, 2014 250,000

Accum. Depr of M&E disposed on Apr 1, (11,500)


Accum. Depr - M&E Dec. 31, 2014 342,275

2.c. Ans. P99,300.

Accum. Depr - Auto. Eqpt. Jan. 1, 2014 84,600

Accum. Depr of Auto. Eqpt. Disp. on Jan. 1, (6,300)


Accum. Depr - M&E Dec. 31, 2014 99,300

3. Ans. P11,500.

CV on the date of fire (P23,000*5/10) 11,500

Recoverable value -

Impairment loss due to fire

Note: The reimbursement received from insurance company is recognized as a separate transaction, thus income from insurance

settlement shall be recognized separately.

4. Ans. (P700)

Fair value of asset received 12,000

Cash paid to equalize exchange (10,000)

Assumed fair value of asset given-up 2,000

CV of asset given up 2,700

Loss on trade-in (700)

CHAPTER 6-PROBLEM 8: MALIK CORP.

1.a. Ans. P732,000.

Replacement of wooden roof to brick roof 300,000

Major improvement on electrical wiring system 70,000

Storm windows and screens installation 162,000

Automatic door-opening system installation 200,000

Total amount capitalizable to Building or Building Improvements 732,000

1.b. Ans. P690,000.

Replacement of retired factory equipment 500,000

Rearrangement cost to ensue a more efficient production 120,000

Overhead crane in the assembly department 70,000

Total amount capitalizable to Equipment 690,000

1.c. Ans.

Acquistion of furniture

2. Ans. P1195,000.

Repainting of building 60,000

Routinary repairs to building 50,000

Replacements of minor gears 20,000

Service contract of office equipment 40,000

Sealing of roof leaks in the factory 25,000

Total repairs and maintenance expense 195,000

50,000


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3,640,000

1,994,300

1,861,145

900,000

CHAPTER 6-PROBLEM 9: BONBON COMPANY

1. Ans. P3,640,000.

Cost, Jan. 2005 5,200,000

Accum. Depr, Dec. 31, 2014: (P5.2M-P520K)*10/30 (1,560,000)

Carrying value, Dec. 31, 2014

2. Ans. P1,645,700.

Present value of future net cash flows at 10% effective rate for 15 years remaining life:

From continued use: P200,000*7.60608) 7.606080 1,521,216

From eventual disposal: P520,000*0.239392) 124,484

Value in Use 0.239392 1,645,700

3. Ans. P1,645,700.

Value in Use 1,645,700

FMV less Cost to sell 1,560,000

Recoverable value shall be the Value in Use, since it is higher.

4. Ans. P1,994,300.


Recoverable amount 1,645,700

Impairment loss

5. Ans. P75,047.

Carrying value, Dec. 31, 2014 after impairment 1,645,700

Less: Salvage value 520,000

Depreciable cost 1,125,700

Divide by: remaining useful life 15

Depreciation expense 75,047

CHAPTER 6-PROBLEM 10: LEGASPI CORP.

1. Ans. P5,518,855.

Present value of future net cash flows at 5% effective rate for 4 years remaining life:

From continued use: 7.606080 2015: (P4,500,000-P1,680,000)*0.952381 2,685,714 0.952381

2016: (P4,800,000-P2,520,000)*0.907029 2,068,027 0.907029

2017: (P3,900,000-P3,300,000)*0.863838 518,303 0.863838

2018: (P1,200,000-P900,000)*0.822702 246,811 0.822702

From eventual disposal: 0 - Value in Use 0.239392 5,518,855

2. Ans. P5,518,855.

Value in Use 5,518,855

FMV less Cost to sell 5,070,000

Recoverable value shall be the Value in Use, since it is higher.

3. Ans. P1,861,145.


Recoverable amount 5,518,855

Impairment loss

CHAPTER 6-PROBLEM 11: NAIA COMPANY

1. Ans. P150,000.

Replacement cost 1,500,000

Mulitply by condition % (7yrs/10yrs) 70%

Fair value/Sound value/Depr. Repl. Cost 1,050,000

Fair value, 12/31/14

1,050,000

Divide by: remaining life 7

Depreciation expense, 2015 150,000

2. Ans. P180,000.

Fair value, 12/31/14 1,050,000

Carrying value, 12/31/14 (P1.2M*7/10) 840,000

Revaluation surplus, 12/31/14 210,000

Transferred to RE in 2015 (210K/7yrs) (30,000)


3. Ans. P900,000.

Fair value, 12/31/14 1,050,000

Depr in 2014 (150,000)



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50,000

1,750,000

2,000,000

500,000

562,500

360,000

150,000

4. Ans. P50,000 and P150,000.

Proceeds from sale 800,000

Carrying value, 12/31/16 (P1,050,000*5/7) (750,000)

Gain on sale - P&L

Revaluation surplus balance, 12/31/16 (210,000*5/7)

5. Ans. P565,714.

Fair market value, 12/31/14 1,500,000



Divide by: remaining life 7

Annual transfer to RE 94,286


CHAPTER 6-PROBLEM 12: PEPSI CORP.

1. Ans. P2,000,000.

Carrying value, 12/31.2012 (P24M-P8M) 16,000,000 -provide additional depr. for 2012 (P18M/9yrs)

Recoverable amount (higher)* 14,000,000 Impairment loss 2,000,000 Value is use

14,000,000

higher

FMV less cost to sell 13,500,000 2. Ans. P1,750,000.

Carrying value, 1/1/13 after impairment 14,000,000


Annual depreciation after impairment

3. Ans. P1,500,000.

Recoverable amount/FMV 15,000,000

Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000

Increase over CV had there been no impariment is ignored under cost method. 3,000,000

Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method.

Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000

Carrying value based on the impaired value: (P14M*6yrs/8yrs) 10,500,000

Gain on impairment recovery - P&L 1,500,000

- whether under cost or FMV method, the gain on impairment recovery is recognized in the P&L.

4. Ans. P2,000,000.

Carrying value had there been no impairment (cost method) 12,000,000


Annual depreciation after recovery, cost method

5. Ans. None.

The property had been transferred from PPE to Investment property, where the property is measured under FMV model.

Under the FMV model of valuing investment properties, no depreciation is provided, instead the propety is remeasured at each

balance sheet date at their prevailing FMV. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss.

CHAPTER 6-PROBLEM 13: RAM CORP.

1. Ans. P500,000.

Fair Value/Soud Value, 1/1/2014 4,500,000

Carrying Value, 1/1/2014 (P5M*8yrs/10yrs) 4,000,000

Revaluation Surplus, 1/1/2014

2. Ans. P562,500.

Carrying value after revaluation, 1/1/14 4,500,000


Annual depr. after revaluation

3. Ans. P700,000.

Carrying value based on revalued amount, 1/1/17 (P4.5M*5yrs/8yrs) 2,812,500

Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000

Reversal of revaluation surplus in the OCI 312,500

Incidentally, this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus

to retained earnings. (P500,000*5yrs/8yrs)

Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000

Recoverable value/FMV, 1/1/17 1,800,000

Impairment loss - P&L 700,000

4. Ans. P360,000.

Carrying value after impairment loss, 1/1/17 1,800,000

Divide by remaining useful life: 5

Revised annual depr. after impairment loss



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MULTIPLE CHOICE EXERCISES: CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY

1. Ans. C.; 2. Ans. C.

Land and building acquisition price

Land

1,308,000

Building

Property taxes in arrears, Jan. 1, 2014: (P20,000*1yr/2yrs) 10,000 Option payment on property acquired only 15,000 Cost of removal of old buidling 22,000

Partial payment on constructed building 700,000

Legal fees 4,000 1,500

Insurance during construction only: (P24,000*4/12) 8,000

Second payment on constructed building 600,000

General expense - related to construction 12,000

Final payment on constructed building 200,000

1,337,000 1,543,500

2. Ans. D.

Correct cost of Building, July 1, 2014 1,543,500

Divide by: useful life 25

Annual depreciation 61,740

Multiply by: 6months/12 months in 2014 6/12

Depreciation for 2014 30,870

CHAPTER 6-EXERCISE 2: MILDEN COMPANY

1. Ans. C.; 2. Ans. C.

Land

Building

Acquisition price

Cost of razing old building

2,500,000 300,000

Proceeds from sale of salvaged materials

Title insurance and legal fees to purchase land

Architect’s fees

150,000

(30,000)

600,000

New building construction cost 15,000,000

2,650,000 15,870,000

CHAPTER 6-EXERCISE 3: BOND COMPANY

1. Ans. B.

Actual borrowing cost from Specific Borrowing: P10M*12%

1,200,000

Borrowing cost from General Borrowing

Weighted average actual expenditure* 25,395,167

Less: Proceeds from specific borrowing (10,000,000)

WAAE financed by general borrowing 15,395,167

Multiply by: Weighted Ave. Gen Borr. %** 8.67%

1,334,248

Capitalizable borrowing cost 2,534,248 Actual borrowing cost (P1.2M+P500K+P800K) 2,500,000 lower

Cost incurred #mo. to 12/31 Peso*Mos.

*January 1 18,228,500 12 218,742,000

March 1 7,000,000 10 70,000,000

September 1 4,000,000 4 16,000,000

December 31 5,000,000 - -

Total 304,742,000

Divide by: 12 months 12

Weighted average actual expenditure 25,395,167

**Actual General Borrowing Cost

P5,000,000*10% 500,000

P10,000,000*8% 800,000 1,300,000

Divide by: Proceeds from Gen. Borr. (P10M+P5M) 15,000,000 Weighted average genearl borrowing % 0

2 .Ans. A.

Since actual borrowing cost was fully capitalizable, no borrowing cost shall be recognized as outright expense for 2014.



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1,775

3,333

3. Ans. B.

January 1 18,228,500

March 1 7,000,000

September 1 4,000,000

December 31 5,000,000

Capitalizable borrowing cost 2,500,000

Carrying value, 12/31/14 36,728,500

CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATION

Machine A:

Carrying Value, 1/1/14 (P30,000*80%*80% 19,200

Salvage value (5,000)

Depreciable carrying value 14,200


Depreciation expense

Ans. B.

Machine B:

Carrying value, 1/1/4/14 (P50,000-P25,000) 25,000

Salvage value (5,000)

Depreciable carrying value 20,000

Divide by: remaining useful life (4yrs+2yrs) 6

Depreciation expense Ans. B.

Machine C:

Depreciation expense, 2014 (P20,000*60%*40%) Ans. B.

CHAPTER 6-EXERCISE 5: DELITE CORP.

1. Ans. A.

Machinery AB001

Carrying Value 1/1/14 (6M*10/20)

3,000,000

Less: Salvage value (600,000)

Depreciable carrying value 2,400,000

Divide by: Extended remaining life 15

Depreciation expense in 2014 160,000

2. Ans. C.

Machinery DE020

Cost 1/1/12

6,790,000

Less: Salvage value (500,000)


Divide by: Useful life 20

Annual Depreciation 314,500

Capitalizable cost on 1/1/14

486,000

Divide by: Remaining life 18

Additional Depreciation 27,000

Total Depreciation in 2014 341,500

3. Ans. C.

Machinery GH033

Cost 7/1/14

Down payment:

1,000,000

Balance: (3M*2.577097) 7,731,291

Initial Cost (Cash Price/Present Value) 8,731,291

Multply by: Double Decl. Bal rate 25%

Multiply by (6months/12months) 1/2

Depreciation in 2014 (6 mo.) 1,091,411

4. Ans. A.

Wasting Asset

Cost

18,000,000

Restoration cost 2,000,000

Salvage value (1,000,000)

Depletable cost 19,000,000

Divide by: Useful life (output) 7,600,000

Depletion rate: 2.50

Mulitply by: Actual production 1,200,000

Total Depletion 3,000,000

5. Ans. B.

Depletion rate: 2.50

Mulitply by: Actual sales 900,000

Depletion expense 2,250,000

4,800



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CHAPTER 6-EXERCISE 6: JERSEY CORP.

1. Ans. D.

Cost

Salvage

Depr. Cost

Life in years

Depr. Exp.

Building 6,100,000 100,000 6,000,000 20 300,000

Machinery 2,550,000 50,000 2,500,000 5 500,000

Equipment 1,030,000 30,000 1,000,000 10 100,000

Total 9,680,000 9,500,000 900,000


900,000

Divide by: Total cost 9,680,000 Composite depreciation rate 9.30%

2. Ans. A.


Divide by: Depreciation expense 900,000 Composite life 10.56

3. Ans. B.

Total cost 9,680,000

Multiply by: Composite depr. rate 9.30% Depreciation expense 900,000

4. Ans. C.

Building 6,100,000

Equipment 1,030,000 Total 7,130,000

Multiply by: Composite depr. rate 9.30% Depreciation expense 662,913

CHAPTER 6-EXERCISE 7: GRANNY INC.

1. Ans. B.

Tools disposed, 2014 300

Cost of earlier purchase (From beg. Invty) 40

Total 12,000

Less: Proceeds from sale (300*10) (3,000)

Depreciation 9,000

Tools disposed, 2015: 700

Cost of earlier purchases (500*40)

20,000

Cost of next earlier purchase (200*60) 12,000


Depreciation 22,200

2. Ans. D.

Tools disposed, 2014 300

Cost of later purchase (2006 purchase) 60

Total 18,000


Depreciation 15,000

Tools disposed, 2015: 700

700

Cost of latest purchases (2015 purchase) 80

Total 56,000


Depreciation 46,200

3. Ans. C.

2014 2015

Beginning inventory 32,000 40,000

Purchases 24,000 72,000

Cost of tools available for use 56,000 112,000

Ending inventory (40,000) (35,000)

Balance 16,000 77,000

Less: Proceeds from sale (3,000) (9,800)

Depreciation expense 13,000 67,200

CHAPTER 6-EXERCISE 8: COCO COMPANY

1. Ans. A.

Proceeds from sale of Mach. Aye

Carrying Value as of date of disposal

Original Cost

700,000

260,000

**Accum. Depr.: 638,000*(45/55) (522,000) 178,000

Gain on sale 82,000



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590,490

(70,000)

2. Ans. A.

Machinery Bee (Cost)

Accum Depr (1/1/14)

(960,000/15,000hrs)*11,000hrs

1,020,000

(704,000)

Carrying Value, 1/1/14 316,000 Mach. Bee (Depr Carrying Value): (316,000-36,000)

280,000

Div. by: Revised remaining useful life (18,000-11,000) 7,000

Depreciation rate per hour 40.00

Multiply by: Actual hours used in 2014 2,100

Depreciation Expense in 2014 84,000

3. Ans. B.

Mach. See (Cost) 1,600,000

Accum Depr (1/1/14)

**(1.5M/15)*3yrs (300,000)

Carrying Value (1/1/14) 1,300,000

**as per policy, no depreciation on year of acquisition; full on year of disposal

Mach See (Depr Carrying Value): 1.3M-100,000 1,200,000

Divide by: Revised remaining useful life 10

Depreciation Expense in 2014 120,000

4. Ans. C.

Carrying Value of remaining machineries:

Cost:

Machinery Bee

1,020,000

Machinery See 1,600,000

Machinery Dee 1,600,000

Machinery Eff 440,000 4,660,000

Accum. Depr:

Bee: (704,000+84,000)

(788,000)

See: (300,000+120,000) (420,000) Dee: (1.6M*20%)+(1,280K*20%) (576,000) Eff: (440K*20%) (88,000) (1,872,000)

Carrying value as of December 31, 2014 2,788,000

CHAPTER 6-EXERCISE 9: PQR CORP.

1. Ans. A.

Building, CV 1/1/14 5,904,900

Multiply by: Double decl. bal. rate (20yrs) 10%

Depreciation expense - Building

2. Ans. A.

Depreciation - Machinery Disposed Mach: P2.4M/10yrs*6/12 120,000

New Mach: P1.45M/10yrs*6/12 72,500

Remaining Mach: P12.6M/10yrs 1,260,000

Depreciation expense - Machinery 1,452,500

3. Ans. B.

Depreciation - Furniture and Fixture Disposed F&F: P1.8M*6/55*2/12 32,727

New F&F: P2.2M*10/55*6/12 200,000

Remaining F&F: P4.2M*6/55 458,182

Depreciation expense - F&F 690,909

Present value of installment price at 8% effective rate:

P2.4M/3yrs*2.577097 2,061,678 2.577097

Freight and handling cost 138,322

Total initial cost of new F&F 2,200,000

4. Ans. D.

Fair market value of asset given-up 1,250,000

Carrying value of asset given-up, 6/30/14

(P2.4M*5.5yrs/10yrs) (1,320,000)

Loss on trade-in

5. Ans. D.

Proceeds from sale 400,000

Carrying value of F&F sold, 3/1/14 (654,545)

Loss on sale of F&F (254,545)

Cost 1,800,000

Accum Depr, 12/31/13 (P1.8M*34/55) (1,112,727)

Depr. up to 3/1/14 (P1.8M*6/55*2/12) (32,727)




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18,450

18,000

50,400

(454,000)

CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP.

1. Ans. C.

January 1, 2010 (A, B, C)

Debit 409,200

Credit Balance

409,200

September 30, (D) (18,000+6,000) 24,000 433,200

October 31, (D) 18,000 451,200

November 30, (D) 18,000 469,200

December 31, (D) 18,000 487,200

December 31, Depreciation (20% of bal) (97,440) 389,760

January 31, 2011 (D) 18,000 407,760

February 28, (D) 18,000 425,760

March 31, (D) 18,000 443,760

April 30, (D) 18,000 461,760

May 31, (D) 18,000 479,760

June 30, (D) 18,000 497,760

June 30, (E) 240,000 737,760

July 31 (D) 18,000 755,760

August 30, (D) 18,000 773,760


June 30, 2012 (F) (P279,000-P129,000) 150,000 769,008


January 1, 2013: (P75,000-P3,750) (71,250) 543,956


October 1, 2014: (24,000) 411,165


2. Ans. A.; 6. Ans. C.

Correct cost Date of Acq Date of Disp Cond. % as of CV as of Depr. Exp.

12/31/14: 12/31/14: 2014

Equipment A 157,200 1/1/10: 6/30/12: - - -

Equipment B 120,000 1/1/10: 10/1/14: - - 18,000

Equipment C 132,000 1/1/10: 1/1/13: - - -

Equipment D: Cash price equiv.+Trans. Cost 186,000 9/30/14: - 0.75yrs/5yrs 27,900 37,200

Equipment E: Cash price equiv. (net of disc.) 235,200 6/30/11: - 1.5yrs/5yrs 70,560 47,040

Equipment F: at FMV 279,000 6/30/12: - 2.5yrs/5yrs 139,500 55,800

Correct CV, 12/31/14 237,960 158,040

3. Ans. B.

Proceeds from sale of C, net 71,250

CV of C, 1/1/2013: P132,000*2yrs/5yrs 52,800

Gain on sale of C

4. Ans. D.

Proceeds from sale of B 24,000

CV of B, 10/1/14: P120,000*0.25yrs/5yrs (6,000)

Gain on sale of B

5. Ans. C.

FMV of A, (Asset given-up): 129,000

CV of A, 6/30/12: P157,200*2.5yrs/5yrs (78,600)

Gain on trade-in

CHAPTER 6-EXERCISE 11: ROLLING CORP.

1. Ans. B.

Proceeds 250,000

Carrying Value (1.5M*80%*80%*80%)-64,000** 704,000 **depreciation for 5 months in 2014

Loss on disposal of old Factory equipment

2. Ans. A.

Downpayment

PV of Balance, at 10% for four periods:

P1,000,000

P250,000*3.169865 792,466

Incidental costs (freight and installation) 120,000

PV of future retirement cost, at 10% for 10 period: 87,534

P227,041*0.385543 Initial cost of new Factory equipment P2,000,000

3. Ans. C

Fair value of asset given up (1,200,000-500,000) 700,000 Cost 1,000,000

*Book value of asset given up 355,000 Accum Depr (3 yrs + 7 mo. 645,000

Gain on trade-in 345,000 Carrying Value 355,000

4. Ans. D.

Building (10,000,000*90%)*12/120 900,000 - building being deprecated on its 4th year.

Building Improvement (780,000*12/78) 120,000 - over the remaining life of building which is 12 years.

Total Depr. – Building & Improv. 1,020,000



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(7,407)

150,000

(5,000)

9,259

26,000

4,911

4,000

P12,300,000

5. Ans. C.

Disposed: (1,500,000*80%*80%*80%*20%)*5/12) 64,000

New: (2,000,000*20%*7/12) 233,333

Balance: (6,500,000**80%*80%*80%*20%) 665,600

Total Depreciation – Factory Equipment

6. Ans. C.

Disposed: (1,000,000*90%)/5*7/12 105,000 New: (1,200,000*90%)/5*5/12 90,000

Balance (4,000,000*90%)/5 720,000

Total Depreciation – Automotive 915,000

7. Ans. D.

Cost

Accum Depr.

CV

Land 5,000,000 5,000,000

Building and Improvements 10,780,000 4,170,000 6,610,000

Factory Equipment 8,500,000 4,070,933 4,429,067

Automotive Equipment 5,200,000 2,970,000 2,230,000

Total 18,269,067

CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY

1. Ans. C.

Equipment per audit: (P100,000*0.92593) 92,593 0.92593

Equipment per books, Feb. 1, 2014 100,000

Adjustment to Equipment account

2. Ans. D.

Building per audit: at FMV 650,000

Buidling per books, June 1, 2014 500,000

Adjustment to Building account

3. Ans A.

Inventory Fixtures Total

Per audit: Prorata based on relative FMV 75,893 49,107 125,000

Per books, Apr. 1, 2015 85,000 55,000 140,000

Adjustement to Inventory and Fixtures

4. Ans. A.

Per audit, Land at FMV 48,500

Per books, September, 2015 -

Adjustment to Land

5. Ans. B.

Per audit, Machinery at FMV 40,000

Per books, October 12, 2015 45,000

Adjustment to Machinery

6. Ans. A.

Equipment, Correct cost (see #1) 92,593


Depreciation expense, 2015

7. Ans. A.

Building, Correct cost (see #2) 650,000



8. Ans.A.

Fixtures, Correct cost (see #3) 49,107



9. Ans. A.

Machinery, Correct cost (see #5) 40,000



CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY

1. Ans. D.; 2. Ans. C.

Allocation of lump sum price in proportion to fair values:

Land A (135/1,350 x P12,300,000)

Building A (1,215/1,350 x P12,300,000)

Total

P1,230,000

11,070,000

962,933

48,500

(9,107) (5,893) (15,000)



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P67,500

P57,375

P2,250,000

39,000

3. Ans. B.

Cost of Building A

Less: Salvage value

Depreciable cost

Divide by: Annual depreciation

Estimated life

P11,070,000

(600,000)

10,470,000

261,750

4. Ans. A.

Depreciation expense on Building A for the year

Ended September 30, 2016

Same as prior year because straight-line method is used in depreciating Building A.

5. Ans. D.

Fair value of Land on acquisition date = FMV of shares

*Demolition cost shall be charged to the cost of the new constructed Building.

6. Ans. D.

Since Builidng B is not yet available for use as of September 30, 2016, no depreciation shall be provided yet.

7. Ans. A.

Donated equipment, at fair value

8. Ans. D.

Depreciation expense—Donated equipment, for the year ended September 30, 2015:

Cost

150% declining balance rate (1/10 x 150%)


P450,000

X 15%

9. Ans. C.

Depreciation expense—Donated equipment, for the year ended September 30, 2016:

Book value, Oct. 1, 2015 (P450,000-P67,500)

150% declining balance rate (1/10 x 150%)


P382,500

X 15%

10. Ans. B.

Total cost as recorded

Less: Normal repairs and maintenance

Correct cost of Machinery A

P2,473,500

223,500

11. Ans. C.

Depreciation expense—Machinery A for the year ended September 30, 2015:

(P2,250,000-P90,000=P2,160,000 x 8/36)

12. Ans. A.

Depreciation expense—Machinery A, for the year ended September 30, 2016:

(P2,160,000 x 7/36 x 4/12)

13. Ans. C.

Down payment

First installment payment on October 1, 2015

Present value of succeeding 10 nstallment payments

(P90,000 x 6.710)

Total cost of Machinery B

P86,000

90,000

603,900

P780,000

14. Ans. B.

Depreciation expense-Machinery B, for the year ended Septmeber 30, 2016:

(P780,000/20years)

CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC.

1. Ans. D.

Book value of plant and equipment,

End of 2016 (P120 million x 5/8)

2. Ans. A.

Book value of purchased technology (Patent)

(P60 million x 3/6) P30 million

3. Ans. D.

Plant and equipment:

Book value P75 million

Recoverable value (FMV) 50 million *cash flow is undiscounted, thus not useful

Impairment loss

4. Ans. C.

Purchased technology:

Book value P30 million

Recoverable value (FMV) 10 million *cash flow is undiscounted thus not useful

Impairment loss

40 years

261,750

P1,125,000

P450,000

P480,000

P140,000

P75 million

P25 million

P20 million



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889,930 4,326,050

99,000

107,184

5,215,980

CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION

1. Ans. A.

Factory: (P1,800,000*24/30) 1,440,000

Building: (P10,000,000*14/20) 7,000,000

2. Ans. B.

Present value of future net cash flows from the CGU's:

Continued use: P1,050,000*4.9676

3. Ans. A.

Carrying value of CGU:

Factory: (P1,800,000*24/30)

1,440,000

Building: (P10,000,000*14/20) 7,000,000

Total 8,440,000

Recoverable value/Value in use 5,215,980 *FMV not determinable

Impairment loss 3,224,020

4. Ans. B.

Factory Machinery

Carrying value before impairment loss: 1,440,000 7,000,000

Impairment allocated, prorata (relative book value before impairment)

Factory (1,440,000/8,440,000)*P3,224,020 (550,070)

Building (7,000,000/8,440,000)*P3,224,020 (2,673,950)

Carrying value after impairment loss

5. Ans. B.

Factory Machinery

Carrying value before impairment loss: 1,440,000 7,000,000

Impairment allocated, prorata (relative book value before impairment)

Factory (1,440,000/8,440,000)*P3,224,020

Building (7,000,000/8,440,000)*P3,224,020

(550,070) (2,673,950)

Carrying value after impairment loss 889,930 4,326,050 *lower than FMV P4.5M

Additional impairment to Factory (173,950) 173,950

Carrying value after reallocation of impairment loss 715,980 4,500,000

Observe that the carrying value of the individual assets comprising the CGU should not result to an amount that is

lower than the higher between the individual assets' Recoverable Value or Zero.

CHAPTER 6-EXERCISE 16: MARGOT CORPORATION

1. Ans. A.

Cost of machineries 609,000

Accum. Depr. (609,000-49,000)*3yrs/8yrs (210,000)

Carrying values, 12/31/14 399,000

2. Ans. B.

Present value of future net cash flows from: Use: 2015: P141,000*0.909091 128,182 0.909091

2016: P114,000*0.826446 94,215 0.826446

2017: P30,000*0.751315 22,539 0.751315

2018: P15,000*0.683013 10,245 0.683013

2019: P10,000*0.620921 6,209 261,391 0.620921

Disposal: 2019: P49,000*0.620921 30,425 Value in use 291,816

3. Ans. C.

Value in use 291,816

FMV less cost to sell 300,000 higher

4. Ans. D.

Carrying value 399,000

Recoverable amount (300,000)

Impairment loss

5. Ans. B.

Value in use 291,816 higher

FMV less cost to sell 275,000

6. Ans. D.

Carrying value 399,000

Recoverable amount (291,816)

Impairment loss



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72,000

302,000

2,000,000

CHAPTER 6-EXERCISE 17: REVO CORP. 1. Ans. C.

Land A Land B

Fair Market Value 8,000,000 16,000,000

Cost (10,000,000) (12,000,000)

(Impairment loss)/Revaluation Surplus (2,000,000) 4,000,000

P&L OCI

2. Ans. C.

Land A Land B


Cost (10,000,000) (12,000,000)

(Impairment loss)/Revaluation Surplus 2,000,000 (1,000,000)

OCI P&L


CV (8,000,000) (16,000,000)

Total increase/decrease in value 4,000,000 (5,000,000)

2,000,000 (4,000,000)

Recovery gain Reversal of RS

Impairment loss from Land B (1,000,000)

Recovery gain from Land A 2,000,000

Net gain from Lands 1,000,000

3. Ans. B.

Land A Land B


Cost (10,000,000) (12,000,000)

(Impairment loss)/Revaluation Surplus - 3,000,000

OCI OCI


CV (12,000,000) (11,000,000)

Total increase/decrease in value (1,000,000) 4,000,000

(1,000,000) 1,000,000

Reversal of RS Recovery gain

Revaluation surplus from Land B 3,000,000

Reversal of revaluaiton surplus for Land A (1,000,000)

Net OCI for the year

CHAPTER 6-EXERCISE 18: LABANOS CORP.

1. Ans. C.

Carrying value (P500,000-P90,000) 410,000

Recoverable value (338,000)

Impairment loss

2. Ans. B.

CV after impairment loss 338,000

2014 Depr: (338,000-50,000)/8yrs (36,000)

CV, 12/31/14

3. Ans. C.

Replacement depreciable cost (P555,000-50,000) 505,000

Multiply by: Condition percent (6yrs/10yrs) 6/10

Depreciable FMV, Depreciable Sound Value 303,000

Salvage value 50,000

Fair value/Sound value 353,000

4. Ans. A.

Fair value/Sound Value 353,000

CV had there been no impairment (P500,000-P180,000) 320,000

Revaluation surplus 33,000

CV had there been no impairment (P500,000-P180,000)

320,000

CV based on impaired value (P338,000-P72,000) 266,000

Recovery gain - P&L 54,000

5. Ans. C.

RS, 12/31/16: (P33,000*7years/8years) 28,875

*note that the remaining life of the asset after revaluation is (12years-4years) 8 years.


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CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS



1 A.

2 B.

3 C.


Ans. P3,700,000.

Purchase of a franchise 1,200,000

Goodwill acquired in the purchase of a business 640,000

Legal costs incurred in securing a patent 70,000

Cost of purchasing a patent from an inventor 500,000

Cost of purchasing a copyright 900,000

Cost of purchasing a trademark 290,000 Stand-alone application computer

100,000

Total Intangible Assets 3,700,000

CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP.

1. Ans.

2008:

Research and development expense

418,000

2009: Research and development expense 520,000

2010: Patent ABC amo. (P100,000/20yrs)*9/12 3,750 Research and development expense 125,000 128,750

2011: Patent ABC amo. (P100,000/20yrs) 5,000 Research and development expense 450,000 455,000

2012: Patent ABC amo. (P100,000/20yrs) 5,000 Patent DEF amo. (P375,000/12.5yrs) 30,000 Research and development expense 500,000 Legal fees - successful defense 42,600 577,600

2013: Patent ABC amo. (P100,000/20yrs) 5,000 Patent DEF amo. (P375,000/12.5yrs) 30,000 Patent GHI amo. (P350,000/16yrs)*6/12 10,938 45,938

2014: Patent ABC amo. (P100,000/20yrs) 5,000 Patent DEF amo. (P375,000/12.5yrs) 30,000 Patent GHI amo. (P350,000/16yrs) 21,875 Research and development expense 360,000 416,875

2. Ans. P680,938.

Condition % CV

Cost Acq. Date 12/31/14: 12/31/14:

Patent ABC 100,000 4/1/2010: 15.75y/20y 78,750

Patent DEF 375,000 12/31/2011: 9.5y/12.5y 285,000

Patent GHI 350,000 7/1/2013: 14.5y/16y 317,188

Total 680,938

CHAPTER 7-PROBLEM 4: GARY INC.

1. Ans.

2011: Amortization (P640,000/10yrs) 64,000

2012: Amortization (P640,000/10yrs) 64,000

2013: Amortization:

Original Patent (P640,000-P128,000)/12 years

42,667

Related Patent (P120,000/12 years) 10,000

Total Amortization 52,667

2014: Amortization: Original Patent (P640,000-P128,000)/12 years 42,667

Related Patent (P120,000/12 years) 10,000

Total Amortization 52,667

2. Ans. P386,565.; 3. Ans. (P140,102).

Value in use/Present value of future net cash flows at 8% for 3 years.

P150,000*2.577097


Original and Related patent cost

760,000

386,565 2.577097

Amortization, 12/31/14 (233,333) 526,667 Impairment loss (140,102)



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128,855

4. Ans. P128,855.

CV, 1/1/15 after impairment 386,565

Divide by: Remaining life 3

Amortization, 2015

CHAPTER 7-PROBLEM 5: COLGATE COMPANY

Case 1:

1. Ans. P1,439,756.

Franchise, Jan. 1, 2014

Downpayment 600,000

PV of Balance a 14% for 4 periods. P2.4M/4yrs*2.913712 1,748,227 2,348,227 2.913712

Less: Amo, 2014 (2,348,227/10yrs) (234,823) Carrying value, 12/31/2014

Value in use/PV of net cash flows at 10% for 9yrs:

P250,000*5.759024 5.759024

2,113,405

1,439,756

Impairment loss 673,649 2. Ans. P476,000.

Patent, Jan., 2014 544,000

Amortization, 2014 (544,000/8yrs) (68,000) Carrying value, 12/31/14 476,000

3. Ans. P389,474.

Trademark, Jan., 2012 1,000,000

Amortization, 2012 (P1M/10yrs) (100,000)


Value in use/PV of net cash flows at 9% for 9yrs: P200,000*5.995247 5.995247 1,199,049

Impairment loss -

Trademark, Jan., 2013

900,000



Value in use/PV of net cash flows at 9.5% for 8yrs: P200,000*5.433436 5.433436 1,086,687

Impairment loss -


800,000



Value in use/PV of net cash flows at 10% for 7yrs: P80,000*4.868419 4.868419 389,474


4. Ans. P2,858,150.

Fanchise: Amortization 234,823

Impairment loss 673,649 Interest expense (P1,748,227*14%) 244,752 Continuing franchise fee (P18M*5%) 900,000 2,053,223

Patent:

Amortization 68,000

Trademark:

Amortization 100,000 Impairment loss 310,526

Legal fees - successful defense 326,400 736,926

Total expenses 2,858,150

Case 2:

1. Ans. P2,348,227.

Franchise, Jan. 1, 2014

Downpayment

PV of Balance a 14% for 4 periods.

600,000

P2.4M/4yrs*2.913712 1,748,227 2,348,227

Carrying value, 12/31/2014 2,348,227

Value in use/PV of net cash flows at 10% for an indefinite period: P250,000/10% 5.759024 2,500,000

Impairment loss -

2. Ans. P476,000.

Patent, Jan., 2014

544,000

Amortization, 2014 (544,000/8yrs) (68,000) Carrying value, 12/31/14 476,000



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7,698,191

3. Ans. P800,000.

Trademark, Jan., 2012 1,000,000


Value in use/PV of net cash flows at 9% for an indefinite period:

P200,000/9% 5.995247

1,000,000

2,222,222

Impairment loss -


1,000,000

Carrying value, 12/3/13 1,000,000

Value in use/PV of net cash flows at 9.5% for an indefinte period: P200,000/9.5% 5.433436 2,105,263

Impairment loss -

Trademark, Jan., 2014 1,000,000

Carrying value, 12/3/14 1,000,000

Value in use/PV of net cash flows at 10% for an indefinite period:

P80,000/10% 4.868419 800,000


4. Ans. P1,739,152.

Fanchise:

Interest expense (P1,748,227*14%) 244,752 Continuing franchise fee (P18M*5%) 900,000 1,144,752

Patent:

Amortization 68,000

Trademark:


Legal fees - successful defense 326,400 526,400

Total expenses

CHAPTER 7-PROBLEM 6: PJ CORP.

1. Ans. P1,500,000.

Acquisition Cost

8,000,000

FMV of Net Assets 6,500,000

Goodwill 1,500,000

2. Ans. P1,950,000; Ans. P8,450,000.


Excess earnings in % (12%-9%) 3%

Excess earings 195,000

Goodwill (P195,000*10yrs)

1,950,000



3. Ans. P1,625,000; Ans. P8,125,000.

Goodwill (P195,000/12%) 1,625,000



4. Ans. P1,200,000; Ans. P7,800,000.

Average/Normal Earnings of DA Inc. (P6.5M*12%) 780,000

Divide by: Capitalization rate 10%



Goodwill 1,300,000

5. Ans. P1,198,191; Ans. P7,698,191.

Present value of excess earnings at 10% for 10 years:

Goodwill: P195,000*6.144567 1,198,191 6.144567


Acquisition cost

CHAPTER 7-PROBLEM 7: KAREN CORPORATION

Accumulated profits 2010-2014 1,800,000

Less: Gain on sale of equipment in 2012 (200,000)

Accum. Operating Profits 2010-2014 1,600,000

Divide by: 5

Annual average operating profits 320,000

Add: Annual presidents bonus 50,000

Less: Inrease in depr. exp. (P350,000/5yrs) (70,000)

Projected average operating profits 300,000

Less: Average/Normal earnings of industry (P2.6M*10%) (260,000)

Projected excess earnings 40,000

1,739,152



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Current Asset

FMV

700,000

BV

550,000

Difference

150,000

Noncurrent Asset (excluding GW) Land 950,000 950,000 -

Depr. Asset 1,850,000 1,500,000 350,000

Liabilities (900,000) (900,000) -

Net Assets 2,600,000 2,100,000

1. Ans. P200,000; P160,000; P400,000; P151,631.

a) Purchase of excess earnings

Goodwill (P40,000*5yrs) 200,000

b) Capitalization of excess earnings

Goodwill (P40,000/25%) 160,000

c) Capitalzation of average earnings

Projected annual average oper. Profits 300,000


Acquisition cost/price 3,000,000

Less: FMV of Net Asset (2,600,000)

Goodwill 400,000

d) Present value method

Goodwill: (P40,000*0.3.79079) 151,631 3.79079

2. Ans.

a) Purchase of excess earnings


Goodwill 200,000


b) Capitalization of excess earnings

FMV of Net Assets

2,600,000

Goodwill (P40,000/25%) 160,000


c) Capitalzation of average earnings Projected annual average oper. Profits 300,000



d) Present value method

FMV of Net Assets

2,600,000

Goodwill: (P40,000*0.3.79079) 151,631


3. Ans. Option d)

For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill.

CHAPTER 7-PROBLEM 8: ABC CORPORATION 1. Ans. P1,000,000.

ABC

DEF

GHI

JKL Acquisition price 5,000,000

FMV of net assets (4 CGUs) 800,000 1,500,000 700,000 1,000,000 4,000,000

Goodwill (prorated)** 200,000 375,000 175,000 250,000 1,000,000

Before impairment, 12/31/14

Cash* shall be excluded in determining the CV of the CGU (not included in the "other assets" within the scope of PAS 36)

Factory equipment 100,000 240,000 100,000 200,000 Office Equipment 250,000 490,000 120,000 200,000

Building 500,000 900,000 400,000 700,000

Goodwill** 200,000 375,000 175,000 250,000

Carrying value of CGU 1,050,000 2,005,000 795,000 1,350,000

Value in use: ABC: P149,726*6.144567 920,000 6.144567

DEF: P289,242*7.606080 2,200,000 7.606080

GHI: P76,490*6.144567 470,000 6.813692

JKL: P161,440*6.813692 950,000 Impairment loss 130,000 - 325,000 400,000 CGU-ABC

Impairment loss 130,000 Chargeable to Goodwill-ABC (130,000) CGU-DEF

Impairment loss -



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555,000

2,480

1,253,600

60,150

CGU-GHI

Impairment loss

325,000

CV, after impairment

Chargeable to Goodwill-GHI (175,000) -

Balance to allocated to other assets 150,000 Factory equipment (100,000/620,000) 100,000 (24,194) 75,806

Office equipment (120,000/620,000) 120,000 (29,032) 90,968

Building (400,000/620,000) 400,000 (96,774) 303,226

CGU-JKL CV, after impairment

Impairment loss 400,000 Chargeable to Goodwill-GHI (250,000) -

Balance to allocated to other assets 150,000 Factory Equipment (200,000/1,100,000) 200,000 (27,273) 172,727

Office equipment (200,000/1,100,000) 200,000 (27,273) 172,727

Building (700,000/1,100,000) 700,000 (95,455) 604,545

2. Ans. P395,000.

After impairment, 12/31/14 ABC DEF GHI JKL TOTAL

Cash 50,000 100,000 - - 150,000

Factory equipment 100,000 240,000 75,806 172,727 588,534

Office Equipment 250,000 490,000 90,968 172,727 1,003,695

Building 500,000 900,000 303,226 604,545 2,307,771

Goodwill** 70,000 375,000 - - 445,000

Carrying value of CGU 970,000 2,105,000 470,000 950,000 4,495,000

3. Ans. P605,000.

Goodwill, before impairment 1,000,000

Goodwill, after impairment 445,000

Impairment loss charged to goodwill

4. Ans. P258,064.

5. Ans. P604,546.

CHAPTER 7-PROBLEM 9: EDD CORP.

1. Ans. P510,000.

2014 Rental expense 480,000

2014 Amortization of leaserights

(P300,000/10yrs)

2. Ans. P63,158.

Cost of leasehold improvement 1,200,000

Divide by: Remaining lease term: 9.5yrs 9.50 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs.

Annual depreciation 126,316

Multiply by: 6/12


3. Ans. P60,150.


(P1,200,000*5yrs/9.5yrs) 631,579

Divide by: Remaining useful life 10.50 *remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended

Depreciation expense, 2019 remaining lease term (10-5yrs+10yrs), 15yrs.

CHAPTER 7-PROBLEM 10: MUSAR CORP.

1. Ans. P139,375.

Salaries of staff working on research project 78,000

Computer program services 17,500

Allocated general expenses (P175,500*25%) 43,875

Total research and development expense 139,375

2. Ans. P2,480.

Patent, initial cost 24,800

Divide by: useful life 10

Amortization expense

3. Ans. P22,320.

Patent (24,800-2480)

CHAPTER 7-PROBLEM 11: BITS AND BYTES INC.

1. Ans. P1,253,600.

Salaries and wages of programmers doing research 940,000

Expenses prior to establishment of tech. feasibility 313,600

Total research and development expense

30,000 510,000

22,320

63,158



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2. Ans. P330,000.

Expenses after technical feasibility is established

3. Ans. P100,500.

Amortization of computer software (330,000/3yrs) 110,000

Cost to produce and prepare software for sale 225,000

Cost of goods produced 335,000

Portion of goods remaining on hand 30%

Cost of ending inventory 100,500

4. Ans. P117,000.

Amortization of computer software:

P330,000*(P2,000,000/P4,000,000) 165,000

Cost to produce and prepare software for sale 225,000

Cost of goods produced 390,000

Portion of goods remaining on hand 30%

Cost of ending inventory 117,000

CHAPTER 7-PROBLEM 12: HARRY CORP.

Rent

Prepayment Exp.-2014 Miscellaneous

Security Deposit 50,000 - Receivable

1-year rent 220,000 20,000

Lease bonus 55,000 5,000

Inurance

Fire insurance 12,500 37,500 Property insurance 56,250 18,750

Advertising 25,000 50,000

Office supplier 25,000 90,000

Advances to officers 135,000 - Receivable/Other asset

Idle office equipment 25,000 - Other asset

Bond redemption fund 545,000 - LT Investment

393,750 221,250 2. Ans. 1. Ans.


Purchased recipes and secret formulas 150,000

Licensing, royalty, and stand still agreement 300,000

Operating and broadcast rights 112,000

Goodwill purchased in a business combination 500,000

A license to manufacture a steroid by means of a government grant 150,000

Initial franchise fees paid 175,000

Cost of purchasing a patent from an inventor 137,000

Legal cost in securing a patent 70,000

Cost of purchasing a trademark 250,000

Amount paid to a lessor for the exclusive right to rent a facility under an operating lease agreement for a period of 10 years 100,000

Total intangibles including goodwill 1,944,000

CHAPTER 7-EXERCISE 2: DOHA CORPORATION

1. Ans. A.

CV, Patent, 12/31/14: P444,000*9yrs/10yrs

2. Ans. C.

CV, Franchise, 12/31/14: P252,000*6.5yrs/8yrs

3. Ans. B.

Prepaid rent, 12/31/14: P168,000*0.75yrs/2yrs 63,000

4. Ans. D.

Amortization of franchise, 2013 (P252,000/8yrs)*6/12 15,750

Rent expense, 2013 (P168,000/2yrs)*3/12 21,000

Net loss including organization expense in 2013 96,000

Retroactive adjustment to RE,beg. 2013

5. Ans. B.

Amortization of franchise, 2014 (P252,000/8yrs) 31,500

Rent expense, 2014 (P168,000/2yrs) 84,000

Amortization of patent, 2014 (P444,000/10yrs) 44,400

Cost to develop a secret formula 450,000

Legal fees - successful defense 75,900

Research and development expense, 2014 960,000

Total expense in 2014 1,645,800

330,000

399,600

204,750

132,750



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3,366,000

1,512,000

190,000

CHAPTER 7-EXERCISE 3: ALYSSA CORP.

1. Ans. B.

Franchise:

Carrying Value/Cost (no definite life)

1,260,000

Recoverable value/Value in use:

(180,000/12%)

1,500,000

Impairment loss in 2014 - no impairment in 2013

Carrying Value/Cost (no definite life)

Recoverable value/Value in use:

(150,000/12%)

1,260,000

1,250,000

Impairment loss in 2014 10,000

2. Ans. B.

Patent:

Cost (1/1/14)

2,220,000 Amortization: (2,220K/10yrs) (222,000)

Carrying Value (12/14)

Recoverable value/Value in use

(337,822*5.32825)

1,998,000

1,800,000

0

5.328250


3. Ans. A.

2013 expenses:

Rent expense (840,000/2)*3/12 105,000

Net loss for the year 480,000

Retroactive adjustment to RE, Beg 585,000

4. Ans. A.

2014 expenses: Impairment loss on Franchise 10,000

Rent expense for 2014 420,000

Amortization on Patent 222,000

Impairment loss on Patent 198,000

Cost of developing recepe 2,250,000

Legal fees on patent defense 379,500

Total expense 3,479,500

CHAPTER 7-EXERCISE 4: STU CORPORATION

1. Ans. B.

Patent, Correct Cost, 1/2013 3,740,000

Amortization (2013-2014): P3,740,000*2yrs/20yrs (374,000)


2. Ans. D.

License, Correct Cost, 1/2012 2,160,000 -Training cost is recognized as outright expense.

Amortization (2012-2014): P2,160,000*3yrs/10yrs (648,000)


3. Ans. B.

Training cost, expense in 2012 per audit 240,000

Amortization expense (2012-2013) per audit: P2,160,000*2yrs/10yrs 432,000

Prior period expense, per audit 672,000

Amortization expnse (2012-2013) per books: P2,400,000*2yrs/10yrs 480,000

Retroactive adjustment, debit, to RE, beg. 2014 192,000

4. Ans. C.;

Trademark, Correct CV, 12/31/14 1,280,000 - Trademark is with indefinite life, thus no amortization.

Recoverable value/Value in use: - Successful defense cost is recognized as outright expense.

PV of Future net cash flows at 9% for an indefinite period:

P90,000/9% 1,000,000


5. Ans. C.

Depreciation on the Leasehold Improvement

P900,000/5yrs * 10/12 150,000 - Depr. is over useful life since it is shorter than remaining lease term.

Amortization of Leaserights; P400,000/10yrs 40,000

Total expense

CHAPTER 7-EXERCISE 5: NICOLE CORP.

1. Ans. D.

Legal and other professional fees to process the patent

application (useful life is 15 years), Jan., 2007 660,000



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64,000

750,000

386,667

2. Ans. B.

CV, Dec. 31, 2007: P660,000*14/15

3. Ans. C.

Amortization expense 2012:

Original Patent: P660,000/15yrs 44,000

Competing Patent: P220,000/11yrs 20,000

Total amortization, 2012

4. Ans. A.

Original Patent, CV, Dec. 31, 2011:

P660,000*10/15 440,000

Competing Patent, CV, Dec. 31, 2011:

P220,000*10/11

5. Ans. D.

Original Patent, CV, 1/1/2012 440,000

Competing Patent, CV, 1/1/2012 200,000

Related Patent, 1/1/2012 335,000

Total Patent, 1/1/2012 975,000

Divide by: Extended remaining life (10yrs+3yrs) 13

Revised amortization expense, 2012 75,000

6. Ans. B.

CV, 12/31/13 (P975,000*11/13) 825,000

7. Ans. B.

CV, 12/31/14 (P975,000*10/13) 750,000

Recoverable value -

Impairment loss

CHAPTER 7-EXERCISE 6: DEF CORP.

1. Ans. D.

Patent, 12/31/14 (before amortization), per books

CV of Repairs cost capitalized in 1/1/2011

550,000

P75,000*6yrs/9yrs (50,000)

Patent, 12/31/14 (before amortization), per audit

CV of Patent with revised useful life:

P210,000*6yrs/14yrs

500,000

90,000

CV of remaining Patent with the same useful life 410,000

Amortization of patent with revised life: (P90,000/2yrs)

45,000

Amortization of patent w/o change in life: (P410,000/6yrs) 68,333

Total amortization expense, 2014 113,333

2. Ans. A.

Patent, 12/31/14 (before amortization), per audit 500,000

Correct amortization for 2014 (113,333)

Patent, 12/31/14 after amortization

3. Ans. B.

The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.

CHAPTER 7-EXERCISE 7: AMFURST CORP.

1. Ans. C.

2. Ans. C.

FRANCHISE: TERM 10 YEARS

Initial franchise fee (PV)

Down payment

600,000

FRANCHISE: INDEFINITE

Initial franchise fee (PV)

Down payment

600,000

Balance (800,000*2.321632) 1,857,306 1 Balance (800,000*2.321632) 1,857,306

2,457,306 2.321632 2,457,306

Less: Amortization: 245,731 Recoverable amount/Value in use CV 12/31/14 2,211,575 (400,000/12%) 3,333,333

Recoverable Value/Value in Use Impairment loss -

(400,000*5.32825) 2,131,300 0 Impairment loss 80,275 5.3282498 Amortization -

Amortization (2,457,306/10)

245,731 Impairment loss

Interest expense (1,857,306*14%)

-

260,023 Impairment loss 80,275 Continuing franchise fee (12M*5%) 600,000

Interest expense (1,857,306*14%) 260,023 Total expense 860,023

Continuing franchise fee (12M*5%) 600,000 Total expense 1,186,028

3. Ans. B.

PATENT: 8 YEARS:

Cost 1/1/2014

545,000

517,750

Amortization (545,000/8) 68,125 Carrying Value 12/31/2014

Recoverable value

(120,000*4,563757)

476,875

547,651

0

Impairment loss -

616,000

200,000



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320,000

10,640,000

4. Ans. C.

LEASE AGREEMENT: Rent expense for 2014 200,000

Amortizatin of lease rights (150,000/5yrs) 30,000

Depr of improvement (450,000/4.5yrs)*6/ 50,000

Total expense 280,000

CHAPTER 7-EXERCISE 8: SAHARA CORP.

1. Ans. D.

*No capitalizable internally developed intangible yet since one of criteria for capitalization (i.e. how future economic benefits shall be derived)

has not been met. Under PAS 38, Intangibles, the following criteria should be strictly complied with if to capitalize development cost of

an internally generated intangible:

1. Establishment of technical feasibility

2. Intention to complete the project and to either sell/use the result of the project.

3. Ability to complete the project and to either sell/use the result of the project.

4. Availability of resources to complete the project.

5. How probable future economic benefits can be derived from the intangible.

6. Ability to reliably estimate future cost to be incurred to complete the intangible.

2. Ans D.

Salaries and other employee benefits 7,800,000

Other expenses 3,080,000

Depreciation on Building (11.2M/20yrs) 560,000

Total R&D Expense 11,440,000

3. Ans. B.

Patent cost 3,200,000

Useful life 10

Amortization for 2014

4. Ans. A

Building cost 11,200,000

Accum Depr (11.2M/20) (560,000)

CV 12/31/14

5. Ans. B.

Patent cost 3,200,000

Amortization in 2013: (3.2M/10yrs)*9/12 (240,000)

Amortization in 2014 (320,000)

CV 12/31/14 2,640,000

CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES

1. Ans. B.

Franchise, CV, 12/31/14

Recoverable value/ Value in use

550,000 *No definite life, thus no amortization

*Continuing franchise fee is recgonized as outright expense.

(P67,500/15%) 450,000 *PV of future net cash flows from continued use at 15% for an indefinite period.


2. Ans. 0.

Organization cost is recognized as outright expense.

3. Ans. C.

Excess of cost over net assets of entrprise acquired in 2012 200,000

*No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost.

CHAPTER 7-EXERCISE 10: CAN CORP.

Projected profits for the next four years:

2014: (6M*1.2) 7,200,000 2015: (7.2M*1.2) 8,640,000

2016: (8.64M*1.2) 10,368,000

2017: (10.368M*1.2) 12,441,600

Total 38,649,600

Divide by: 4

Projected average earnings 9,662,400 9,662,400

Average/Normal earnings at industry rate:

Fair market Value of Net Assets

Current Asset (9M+4.8M) 13,800,000 Investments at FMV 9,000,000 PPE, net 24,000,000 Current liabilities (4,800,000) Noncurrent liabilities (6,000,000)

FMV of net assets 36,000,000 Multiply by: industry rate of return 18% Average/Normal earnings at industry rate 6,480,000 6,480,000

Projected average excess earnings 3,182,400



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48,312,000

1. Ans. D.



Goodwill: 17,680,000

Add: Fair value of net assets 36,000,000

Acquisition price 53,680,000

2. Ans. A.


Multiply by: # of years 4

Goodwill 12,729,600



3. Ans. A.

Projected average earnings 9,662,400


Acquisition price

4. Ans. C.


Multiply by: PV factor at 15%, 4 periods 3

Goodwill 9,085,683



CHAPTER 7-EXERCISE 11: T CORPORATION

1. Ans. B.

Acquisition Price, January 1, 2013

Total

10,000,000

Country A Country B Country C

FMV of Identifiable Net Asset 8,000,000 2,000,000 1,500,000 4,500,000

Goodwill (Allocated, Prorata: FMV of NA) 2,000,000 500,000 375,000 1,125,000

2. Ans. A.

Value in use=Present value of future net cash flows from CGU Country C:

Estim. Future net cash flows before impairment event 1,500,000

Effect of new legislation (cutting by 40% imports to Country C) 60%

Estim. Future net cash flows after impairment event 900,000

Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.771584

Value in use 4,294,426

*observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal.

3. Ans. A.

Carrying Value of Country C's, Assets

Factory equipment 2,500,000 Store Equipment 1,500,000

Building 2,700,000

Goodwill 1,125,000 **observe that payables is deducted since, estimate of cashflows

Payables (700,000) 7,125,000 also included cash flows related to payable.

Value in use/Recoverable value 4,294,426 Impairment loss 2,830,574

4. Ans. C.; 5. Ans. C.

Impairment loss

2,830,574

Allocation of loss:

Goodwill of Country C (1,125,000)

Balance to other asset, prorata: 1,705,574 Factory equipment 2,500,000 (636,408) 1,863,592 CV after impairment

Store equipment 1,500,000 (381,845) 1,118,155 CV after impairment

Building 2,700,000 (687,321) 2,012,679 CV after impairment

Payables (700,000) (700,000) *liabilities are not impaired.

6. Ans. D.

Impairment loss

Allocation of loss:

Goodwill of Country C

2,830,574

(1,125,000)

Balance to other asset, prorata: 1,705,574 Factory equipment 1,800,000 (458,214) 1,341,786 Store Equipment 1,500,000 (381,845) 1,118,155 Should not be lower than its Rec. Value, P1.4M

Building 2,700,000 (687,321) 2,012,679 Payables (700,000) (700,000) *liabilities are not impaired.



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Reallocation of impairment loss:

Impairment loss

2,830,574

Allocation of loss:

Goodwill of Country C (1,125,000)

Balance to other asset, prorata:

Cash

700,000

1,705,574

-

700,000

*no impairment allocated to cash

Factory equipment 1,800,000 (642,230) 1,157,770 CV after impairment

Store Equipment 1,500,000 (100,000) 1,400,000 Should not be lower than its Rec. Value, P1.4M

Building 2,700,000 (963,345) 1,736,655 CV after impairment


Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable

amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property

and equipment, prorata.

6. Ans. C.

Cash -

Allocation of loss:

Goodwill of Country C

(100,000)

Balance to other asset, prorata: (100,000)

Factory equipment 1,800,000 (458,214) 1,341,786

Store Equipment 1,500,000 (381,845) 1,118,155 Not be lower than its Rec. Value, P1M

Building 2,700,000 (687,321) 2,012,679


CHAPTER 7-EXERCISE 12: ABC CORPORATION

1. Ans. B.

Fair value less cost to sell 5,250,000 higher

Value in use/PV of future net cash flows at 8% for 5 periods:

Use: P1,252,282*3.992710 3.992710 5,000,000

2. Ans. A.

Carrying value of CGU Factory equipment 1,750,000 included in the determination of the fair value less cost to sell.

Office equipment 1,475,000 Building 2,725,000 Goodwill 500,000 6,450,000 Recoverable value/FMV less cost to sell 5,250,000 Impairment loss 1,200,000

3. Ans. C.

Impairment loss

Allocated to: 1,200,000

Goodwill (500,000)

Balance to other assets, prorata 700,000

Factory equipment 1,750,000 (205,882) 1,544,118

Office equipment 1,475,000 (173,529) 1,301,471

Building 2,725,000 (320,588) 2,404,412

4. Ans. C.

Impairment loss

Allocated to: 1,200,000

Goodwill (500,000)

Balance to other assets, prorata 700,000

Factory equipment 1,750,000 (205,882) 1,544,118 *Should not be lower than 1.6M

Office equipment 1,475,000 (173,529) 1,301,471 *Office Equipment CV should not be lower than P1.4M

Building 2,725,000 (320,588) 2,404,412 Reallocation of Impairment loss

Impairment loss

1,200,000

Allocated to:

Goodwill (500,000)

Balance to other assets, prorata 700,000 Factory equipment 1,750,000 (150,000) 1,600,000

Office equipment 1,475,000 (75,000) 1,400,000

Building 2,725,000 (475,000) 2,250,000

CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY

1. Ans. B.

Cost incurred prior to establishment of capitalization criteria on Nov. 1, 2014

2. Ans. C.

Capitalizable cost, after Nov. 1, 2014 60,000

Recoverable amount, Dec. 31, 2014 500,000

Impairment loss -

540,000



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14,580

3. Ans. D.; 4. Ans. C.

Capitalizable cost, after Nov. 1, 2014 60,000

Additional capitalizable cost, 2015 1,200,000

Total cost as of Dec. 31, 2015 1,260,000

Recoverable amount, Dec. 31, 2015 1,140,000


CHAPTER 7-EXERCISE 14: LAS VEGAS INC.

1. Ans. C.

Amortization of Patent (600,000/10) P60,000

Amortization of Copyright (1,200,000*1.5M/5M) 360,000

Total amortization (Patent and Copyright) P420,000

2. Ans. A.

Amortization of Software (300,000/240)*100 P125,000

Amortization of Franchise (480,000/10) 48,000

Continuing franchise fee (2,500,000*.05) 125,000

Total expenses related to computer software and franchise P298,000

3. Ans. A.

Total research and development costs (all costs in item f)

4. Ans. C.

Patent (600,000*9/10) P540,000

Copyright (1,200,000-360,000) 840,000

Tradename 1,050,000

Computer software (300,000-125,000) 175,000

Franchise (480,000*9/10) 432,000

Goodwill 2,700,000

Total carrying value of intangible, 12/31/15 P5,737,000

CHAPTER 7-EXERCISE 15: BOHOL CORPORATION

1. a) Ans. A.; b) Ans. D.; c) Ans. B.; d) Ans. B.

Project 123 is entirely research and development, thus no capitalizable intangible, unless qualified under PAS 38 capitalization criteria.

The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not qualified

yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense.

The second Patent is useful for many projects, thus only the amortization is recognized as R&D Expense. The balance shall be

reflected as Intangible asset.

Patent, CV, June 30, 2014: (P16,200*9/10)

Copyright:

Copyright ABC

Cost

30,000

Acq. Date

1/2/2010:

Condition %

6/30/2014:

20.5yrs/25yr

CV

6/30/2014:

24,600

Copyright XYC 33,000 7/15/2011: 12yrs/15yrs 26,400

51,000

Goodwill

Acquisition cost

1,582,000

FMV, Net Assets acquired 1,560,000

Goodwill, initial recognition 22,000

Note that since there are no indication of GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired.

2. Ans. D.

Salaries of staff doing research 18,500

Patent solely for Project AM123 12,000

Depr. on Equipment for various projects (10,000/5yrs) 2,000

Amo. on Patent for various projects (16,200/10yrs) 1,620

Cost of pilot models 8,950

Total R&D Expense 43,070

3. Ans. A.

Amortization Expense: ABC (30,000/25yrs) 1,200

Amortization Expense: XYC (33,000/15yrs) 2,200

Total amortization expense on copyrights

4. Ans. A.

P433,000

3,400



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otal res

CHAPTER 7-EXERCISE 16: TAILOR CORP.

Searching for applications of new research findings 57,000

Radical modification of the formulation of a glassware production 78,000

Laboratory research aimed at discovery of new knowledge 204,000

Testing for evaluation of new products 72,000

Materials consumed in research and development projects 177,000

Consulting fees paid to outsiders for research and projects 300,000

Personnel costs of persons involved in research and devt projects 384,000

Indirect costs reasonably allocable to research and devt projects 150,000

Design, construction, and testing of preproduction prototypes and T

models earch and developmnet

870,000

2,292,000


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CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES



1 B.

2 C.

3 B.

4 C.

5 D.

6 C/B.

7 B.

8 D.

9 A.

10 A.

11 B.

12 C.

13 D.

14 D.

15 B.

16 B.

17 B.

18 B.

19 C.

CHAPTER 8-PROBLEM 2: MERMAID COMPANY

Accounts payable, adjusted for the debit balance (Advances to suppliers)

Current

660,000

Noncurrent

Note payable - trade only 500,000 Salaries payable 800,000 SSS payable 30,000 Pag-ibig payable 5,000 Medicare payable 15,000 Wittholding taxes payable 60,000 VAT payable 120,000 Advance from customers (AR with credit balances) 50,000 Serial bonds payable, payable P1M, semi-annyally 2,000,000 8,000,000

Accrued interest on bonds payable 300,000 Estimated warranties payable 420,000 Estimated liability for environmenta damages 50,000 Unearned rental income, for 3 years starting Jan. 1, 2015 50,000 100,000

Cash advances from shareholders 200,000

Total 5,060,000 8,300,000

1. Ans. 2. Ans.

CHAPTER 8-PROBLEM 3: JOJO INC.

Current Noncurrent

a) P1M short-term notes payable, due Feb. 7, 2015 1,000,000

b) P500,000 short term debt, due June 1, 2015 500,000

c) P500,000 notes payable, due June 15, 2015 20,000 480,000

d) P1M bonds payable, due Dec. 31, 2018 1,000,000

Interest on the bonds payable P1M*10% 100,000

2,620,000 480,000

1. Ans. 2. Ans.

Notes: For item a, there was no indication that the right to refinance already existed as of the balance sheet date. Thus, while there

was a LT-refinancing agreement completed after the balance sheet date, the liability is still current as of Dec. 31, 2014.

For item b, the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date.

For item c, the right existed already as of the balance sheet date, however, since the amount of the loan to be used to refinance

the currently maturing obligation is expected only at 80% of P600,000, that is P480,000 only P480,000 of the currently

maturing obligation is expected to be refinanced on a long-term basis.

For item d, while the grace period was agreed upon as of the balance sheet date (Dec. 31), the grace period is short-term only.

CHAPTER 8-PROBLEM 4: TARBUCK INC. Ans. P4,120,000.

Per GL Per SL

Unadjusted balances 4,450,000 4,020,000

Goods received on Dec. 30 (valid purch.) 400,000

Goods in-transit, FOB Dest (not valid purch.) (300,000)

Payments to suppliers, checks released Dec. 30 (valid payment) (520,000) Payments to suppliers, checks not yet released as of Dec. 31 (not valid) 200,000 Purchase returns (valid Dec. transaction) (50,000) Credit balance (Advances to suppliers) 40,000 Adjusted balances 4,120,000 4,120,000


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CHAPTER 8-PROBLEM 5: RONNIE COMPANY

Required Estimated Expense (500u*80%*P8,000) 3,200,000

Less: Actual cost incurred (1,250,000)

Estimated warranties payable 1,950,000

1. Ans.:

Warranties expense 1,950,000

Estimated warranties payable 1,950,000

2. Ans. P3,200,000.

3. Ans. P1,950,000.

CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND

Analysis

2014 2015

Estimated warranties payable, beg. 425,000

Required estimated expense: 2014: 5,000units*30%*P500 750,000 2015: 6,000units*30%*P500 900,000

Actual cost incurred for the year (325,000) (650,000)

Estimated warranties payable, end 425,000 675,000

1. Ans.

Audit adjusting entry in 2015:

Retained earnings (add'l exp. in 2014) 425,000

Warranties expense 250,000

Estimated warranties payable 675,000

2. Ans. P750,000.

3. Ans. P900,000.

4. Ans. P425,000.

5. Ans. P675,000.

CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP.

Analysis:

Required estimated expense: VC SF Total

Vacuum Cleaners: (P45M*30%)/P15,000*(P2,250-P500) 1,575,000

Stand Fan: (P45M*40%)/P12,500*(P1,500-P300) 1,728,000 3,303,000

Actual cost incurred/Actual redemption:

Vacuum Cleaners: (1,000u-175u)*(P2,250-P500) (1,443,750)

Stand Fan: (1,500u-125u)*(P1,500-P300) (1,650,000) (3,093,750)

Estimated premiums payable, end

1. Ans. P3,303,000.

2. Ans. P209,250.

CHAPTER 8-PROBLEM 8: NOKIA CORP.

Collection for unearned service contract 400,000

25% earned in the first contract year: 100,000

2014 2015 2016 2017

6 months in 2014 50,000

6 months in 2015 50,000

30% earned in the second contract year: 120,000

6 months in 2015 60,000

6 months in 2016 60,000

45% earned in the third contract year: 180,000

6 months in 2016 90,000

6 months in 2017 90,000

Service contract earned for each year 50,000 110,000 150,000 90,000

Balance unearned at the end of each year: 350,000 240,000 90,000 -

1. Ans. 2. Ans. 3. Ans.

131,250 78,000 209,250


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CHAPTER 8-PROBLEM 9: SAN MIG CORP.

1. Ans. P337,500.

2013 leaves:

55employees*4weeks*5days 1,100 days

25employees*2weeks*5days 250 days

Total 2013 unused leaves: 1,350 days

Multiply by: Salary rate in 2013 250 Liability for compensated absences/Salaries payable 337,500 unaccrued, thus expense in 2013 was understated.

2. Ans. P453,750.

2013 leaves:

55employees*4weeks*5days 1,100 days


Total 2013 unused leaves: 1,350 days

Less: Exercised in 2014 925 days

Unexercised in 2014, thus forfeited by year-end 2014 425 days

2014 leaves:

30employees*6weeks*5days

900

days




Total cummulative unused leaves by 12/31/2014 2,075 days

Less: Expired unused leaves from 2013: (425) Unused leaves still exerciseable 1,650 Mulitply by: Current salary rate, 2014 275 Liability for compensated absences/Salaries payable 453,750

2. Ans.

CHAPTER 8-PROBLEM 10: BARO CORP.

1. Ans. B.

Damages occurred in 2014, thus is a present obligation. The outflow of benefits is probable and the most reliable estimate is

P400,000. Since the lawyers estimate that the reasonably possible outflow may be upto P700,000, additional contingent

liabiltiy should be disclosed at P300,000.

2. Ans. C.

The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract

(10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous

as of the balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous.

Entry:

Loss on purchase commitment (P100-P60)*10,000 400,000

Estimated liability on purchase commitment 400,000

3. Ans. D.

The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37) while

virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16)

4. Ans. C.

The contingent asset that is probable is disclosed.

CHAPTER 8-PROBLEM 11: MOATS COMPANY

Proceeds from issue of bonds=PV of future cash flows at 4% semi-annual effective rate for 10 periods:

Principal: P1,000,000*0.675564 675,564

0.675564 Interest: P50,000*8.110896 405,545 8.110896

1,081,109 Amortization tabe: Bonds payable:

Correct Int. Nominal Int.

Amortization

Balance

March 1, 2014:

(CV*4%) (P1M*5%) 1,081,109

September 1, 2014: 43,244 50,000 (6,756) 1,074,353

March 1, 2015: 42,974 50,000 (7,026) 1,067,327

September 1, 2015: 42,693 50,000 (7,307) 1,060,021

March 1, 2016: 42,401 50,000 (7,599) 1,052,421

Correct entries:

March 1, 2014:

Cash

1,081,109

Bonds payable 1,000,000

Premium on bonds payable 81,109


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1,069,669

September 1, 2014:

Interest expense

50,000

Cash

Premium on bonds payable

Interest expense

December 31, 2014:

Interest expense

6,756

33,333

50,000

6,756

Interest payable

(P1,000,000*10%*4/12) 33,333


Interest expense

4,684

4,684

Correct interest (P1,074,353*8%*4/12) 28,649

Nominal interest accrued (P1,000,000*10%*4/12) 33,333

Amortization (4,684)

1. Ans: Adjusting Entries:

Bonds payable


81,109

69,669

Interest expense

Interest expense

Interest payable

33,333

11,440

33,333

2. Ans. P71,894.

Interest expense (Mar. 1 - Sept. 1)

P1,081,109*8%*6/12 43,244

Interst expense (Sept. 1 - Dec. 31)

P1,074,353*8%*4/12 28,649

Interest expense, 2014

3. Ans. P1,069,669.

Amortized cost, Sept. 1, 2014 (see table) 1,074,353

Amortization up to Dec. 31, 2014 (see entries) (4,684)

Amortized cost, Dec. 31, 2014

4. Ans. P10,021.

Retirement price 1,050,000 Amortized cost, Sept. 30, 2015: (1,058,754)

Accrued interst (P1M*10%*1/12) (1,267)

Gain on retirement of bonds (10,021)

Amortized cost, Sept. 1, 2015 (see table)

Amortization up to Sept. 30:

Correct interest (P1,060,021*8%*1/12)

7,067

1,060,021

Nominal interest (P1,000,000*10%*1/12) (8,333) (1,267)

Amortized cost, Sept. 1, 2015 1,058,754

Entry:

Bonds payable

1,000,000

Premium on bonds payable 58,754 Interest expense

Cash

1,267 1,050,000

Gain on retirement of bonds 10,021

CHAPTER 8-PROBLEM 12: MNO INC.

1. Ans. P1,245,000.

Accounts payable, unadjusted balance 1,240,000

RR 2903 - on consignment (30,000)

RR 2904 - in transit, FOB SP 35,000

Accounts payable, adjusted 1,245,000

2. Ans. P720,000.

Required warranty expense, 2013: (2,500u*40%*P900) 900,000

Actual cost (560,000)

Warranties liability, Dec. 31, 2013 340,000

Required warranty expense, 2014: (3,000u*40%*P900) 1,080,000

Actual cost (700,000)

Warranties liability, Dec. 31, 2014 720,000

3. Ans. P2,099,474.

Proceeds from bond issue/FMV 1/1/13 = PV of future cash flows at 10% for 5 years.

Principal: P2,000,000*0.620921 1,241,843

0.620921

Interest: P240,000*3.790787 909,789 2,151,631 3.790787

71,894


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Amortization table: Bonds payable


(Bal*10%) (Face*12%)

January 1, 2013: 2,151,631

December 31, 2013: 215,163 240,000 (24,837) 2,126,795

December 31, 2014: 212,679 240,000 (27,321) 2,099,474

4. Ans. P78,505.

Net income before any adjustments: 1,557,679

Understated accounts payable/purchases (5,000)

Understated warranties payable/warranties expense (380,000)

Overstatement in interest expense in 2014 27,321

Adjusted net income 2014, before bonus 1,200,000

B = 10% (NI - Tx - B); Tx = 30%(NI - B)

B = 10% (1.2M - (30%(1.2M - B) - B)

B = P78,505.

5. Ans. P785,046.

Adjusted net income 2014, before bonus 1,200,000

Less: Bonus (78,505)

Net income before 30% tax 1,121,495

Income tax expense (336,448)

Net Income after tax 785,046

CHAPTER 8-PROBLEM 13: MAMALOLA CORP.

1. Ans. P443,000.

Accounts payable, unadjusted balance 460,000 Shipments from consignor (recorded) (42,000) AJE 1: Accounts Payable 17,000 Shipments-in-transit, FOB Destination (recorded) (30,000) Purchases 17,000

Shipment-in-transit, FOB SP (not yet recorded) 55,000 Accounts payable, adjusted 443,000

2. Ans. P248,700.

Warranty expense in 2013 (1,250*70%)*P350 306,250 Less: Actual warranty cost incurred in 2011 (153,000) AJE 2: Warranties Expense 95,450

Warranties payable, 2013 153,250 Warranties payable 95,450

Warranty expense in 2014 (1,410*70%)*P350 345,450 Less: Actual warranty cost incurred in 2014 (250,000)

Warranties payable, 2012 248,700

3. Ans. P222,750.

2013 unused leaves forwarded to 2015 (625-(700-200))* 125

2014 unused leaves forwarded to 2015 550 AJE 3: Salaries payable 45,750

Total unused leaves that may be forwarded to 2053 675 Salaries expense 45,750

Multiply by current salary rate in 2014: (268,500/895days)*1 330 (268,500-222,750)

Salaries payable (Liab for compensated absences) 222,750

*any unused prior to 2013 leaves are forfieted by the end of 2014

4. Ans. P1,600,000.

*There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probable

proceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.

5. Ans. P130,841.

Unajdusted net income 2,032,700

AJE 1: Overstated purchases 17,000

AJE 2: Understated warranty expense (95,450)

AJE 3: Overstated salaries expense 45,750

Adjusted net income 2,000,000

B = 10% (NI - B - TX)

TX = 30% (NI - B)

B = 10% (2,000,000 - B - 30%(2,000,000 - B))

B = 140,000 - .07B

1.07B = 140,000

Bonus = P130,841

CHAPTER 8-PROBLEM 14: SANTOS CORP.

1. Ans. P402,104.

Proceeds from convertible bond issue (P8M*110%) 8,800,000

Less: FMV of bonds without conversion option = PV of future cash flows

from the bonds at 10% for 3 years:

Principal: P8,000,000*0.751315 6,010,518

0.751315

Interest: P960,000*2.486852 2,387,378 8,397,896 2.4868520

Residual amount/APIC from bond coversion privilege 402,104


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420,000

2. Ans. P8,277,686.

Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance

(Bal.*10%) (Face*12%) January 1, 2014: 8,397,896

December 31, 2014: 839,790 960,000 (120,210) 8,277,686

December 31, 2015: 827,769 960,000 (132,231) 8,145,455

December 31, 2016: 814,545 960,000 (145,455) 8,000,000

3. Ans.

Entry upon conversion:

Alt1 Bonds payable 8,000,000 Premium on bonds payable

Ordinary shares (8,000*50*P10)

277,686 4,000,000

Share premium 4,277,686

Alt2 Bonds payable 8,000,000 Premium on bonds payable 277,686 APIC-Bond conversion privilege

Ordinary shares (8,000*50*P10)

402,104 4,000,000


Note: Both alternatives are acceptable under PAS 39.

4. Ans. P65,455.

Total

Bonds Payable

APIC-BCP

Retirement price

8,320,000

(at FMV, 102)

8,080,000

(Residual)

240,000

CV, Bonds payable, 1/1/16

CV, APIC - Bond coversion privilege 8,145,455 402,104

Gain on retirement of convertible bonds 65,455 162,104

Entry:

to profit/los to APIC

Bonds payable 8,000,000 Premium on bonds payable 145,455 APIC - Bond conversion privilege

Cash

402,104 8,320,000

Gain on retirement of bonds (profit/loss) 65,455 APIC/Share premium 162,104

CHAPTER 8-PROBLEM 15: DIRT CORP.

1. Ans. P379,264.

Proceeds from bond with warrants issue 2,250,000

Less: FMV of bonds without conversion option = PV of future cash flows

from the bonds at 5% for 8 semi-annual periods:

Principal: P2,000,000*0.676839 1,353,679

0.676839

Interest: P80,000*6.4632128 517,057 1,870,736 6.4632128

Residual amount/Ordinary Share Warrants Outstanding 379,264

2. Ans. P1,898,486.

Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance

(Bal.*10%) (Face*12%)

January 1, 2014: 1,870,736

July 1, 2014: 93,537 80,000 13,537 1,884,273

January 1, 2015: 94,214 80,000 14,214 1,898,486

3. Ans. P257,559.

Entry upon exericise of warrants: Cash (2,000*5w)*60%*P55 330,000

Ordinary share warrants outstanding(60%) 227,559

Ordinary shares (6,000shares*P50) 300,000

Share premium 257,559

4. Ans.

Entry upon expiration of remaining warrants:

Ordinary share warrants outstanding(40%) 151,706

Share premium/APIC - Expired warrants 151,706


CASE 1:

Periodic rentals (March to December); (40,000*10mo) 400,000

Amortization of lease bonus (120,000/5yrs)*10/12 20,000

Rent Expense

CASE 2:

Annual rental 300,000

Amortization of lease bonus (100,000/8yrs) 12,500

Contingent rental (P2.5M-P2M)*5% 25,000

Rent Expense 337,500

CASE 3:

Total lease payments: P30,000*(60mo - 9mo) 1,530,000


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1,229,000


Annual rental expense 306,000

Mulitply by: 11mo/12mo 11/12


Less: Amount paid for the year (Nov. and Dec.) (60,000)

Accrued rent expense, 12/31 220,500

CASE 4:

Total lease payments: P40,000*(120mo-3mo 4,680,000 Divide by: 10 years 10

Annual rental expense 468,000

Multiply by: 4mo/12mo 4/12


Leasehold improvement cost 300,000 Divide by: 5 years 5 Annual depreciation expense 60,000 Mulitply by: 3mo/12mo 3/12 15,000

Total expense for 2014 171,000

CASE 5:

Total lease collection:

First two years: (P2,000*100*2yrs)

400,000

Last two years: (P3,000*100*2yrs) 600,000 1,000,000


Annual rental income 250,000

Multiply by: 9mo/12mo 9/12

Rent income for the period ended 9/30/14 187,500

Amount collected in 2014 200,000

Unearned rental income (12,500)

CASE 6:

Gross rental income 500,000

Amortization of direct lease expense (150,000/5years) (30,000)

Depreciation expense (120,000)

Property taxes (90,000)

Net rental income 260,000


CASE 1:

Minimum lease payments in arrears 200,000

Multiply by: PV factor of 1 at 10% for 10 periods in arrears 6.1450

Initial cost of the asset

CASE 2:

CASE 3:

Minimum lease payment

Periodic payments in advance 400,000 Multiply by: PV factor of 1 at 14% for 10 period in advance 5.9500 2,380,000

Bargain purchase option 200,000 Multiply by: PV factor of 1 at 14% for 10 period without ann 0.2700 54,000

Initial cost of the asset

Less: Depreciation (2,434,000/12 years) 2,434,000

(202,833) *

Carrying value as of 12/31/14 2,231,167

*note that the depreciation is based on the useful life since ownership will be transferred to the lessee

CASE 4:

Amortization table:

Periodic Paymen Interest Principal Balance

Dec. 31, 2014: (P3,165,000 - P500,000)

3,165,000

Dec. 31, 2015: 500,000 316,500 183,500 2,981,500

Dec. 31, 2016: 500,000 298,150 201,850 2,779,650

CHAPTER 8-PROBLEM 18: ANGLO INC.

Entries made, under finance lease:

December 31, 2013:

Building* 3,379,512

Cash 500,000

Lease liability 2,879,512

*PV of MLP 10% for 10 years in advance: (lower than FMV of asset)

(P500,000*6.7590238) 0 5.759024 6.7590238

Minimum lease payment in advance 96,000

Multiply by: PV factor of 1 at 10% for 8 period in advance 5.8680

Initial cost of the asset 563,328

Divide by: 12 yrs (life since title passes to the lessee) 12



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Amortization table (per books): Finance Lease

Periodic Paymen Correct Int. Principal Balance

December 31, 2013:

2,879,512

December 31, 2014: 500,000 287,951 212,049 2,667,463

December 31, 2014:

Interest expense

287,951

Lease liability

Cash

212,049 500,000


Accumulated Depreciation

(P3,379,512/10years)

337,951

337,951

AUDIT ANALYSIS:

1. There is no transfer of ownership.

2. There is no bargain purchase option.

3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.

4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000)

The lease agreement does not qualify as finance, thus should have been accounted for only under operating lease.

Correct entries, under operating lease.

December 31, 2013:

Prepaid rent

500,000

Cash 500,000

January 1, 2014:

Rent expense

500,000

Prepaid rent 500,000

December 31, 2014:

Prepaid rent

500,000

Cash 500,000

1. Ans. P125,902.

Expenses per books

Interest on finance lease liability 287,951 Depreciation expense 337,951 625,902

Expense per audit 500,000

Overstatement in expense/Understatement in NI 125,902

2. Ans. None.

CHAPTER 8-PROBLEM 19: LACTUM INC.

Entries made per books, operating lease:

January 1, 2014:

Rent expense 150,000

Cash 150,000

April 1, 2014:


Cash 150,000

July 1, 2014:


Cash 150,000

October 1, 2014:


Cash 150,000

AUDIT ANALYSIS:

1. There is no transfer of ownership.

2. There is no bargain purchase option.

3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.

4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388)

The lease agreement does qualify as finance, thus should have been accounted for only under finance lease.

Correct entries per audit, finance lease

January 1, 2014: Building* 4,185,388

Cash 150,000

Lease liability 4,035,388

*PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888) 26.9025888 27.9025888

0.4619482 Amortization table: Finance lease liabilty: Periodic Paymen Correct Int. Principal Balance

January 1, 2014: 4,035,388

April 1, 2014: 150,000 80,708 69,292 3,966,096

July 1, 2014: 150,000 79,322 70,678 3,895,418

October 1, 2014: 150,000 77,908 72,092 3,823,326



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Janaury 1, 2015: 150,000 76,467 73,533 3,749,793

April 1, 2015: 150,000 74,996 75,004 3,674,789

July 1, 2015: 150,000 73,496 76,504 3,598,285

October 1, 2015: 150,000 71,966 78,034 3,520,250

April 1, 2014:

Interest expense 80,708 Lease liability

Cash

69,292 150,000

July 1, 2014:

Interest expense

79,322

Lease liability

Cash

70,678 150,000

October 1, 2014:

Interest expense

77,908

Lease liability

Cash

72,092 150,000

December 31, 2014:

Interest expense

76,467

Interest payable 76,467


Accumulated depreciation

418,539

418,539

(P4,185,388/10years) * no transfer of ownership, thus depr shall be over term.

1. Ans. P132,943.

Expense per books

Rent expense (P150,000*4qtrs)

Expense per audit:

Interest expense

314,405

600,000

Depreciation expense 418,539 732,943

Understatement in Expense/Overstatement Net Income (132,943)

2. Ans. P3,823,326.

Lease liability, 12.31.14 3,823,326

Interest payable, 12.31.14 76,467

3. Ans. P303,076.

Principal due from January 1, 2015 to December 31, 2015 (see amortization table)

Janaury 1, 2015: 73,533

April 1, 2015: 75,004

July 1, 2015: 76,504

October 1, 2015: 78,034

Current portion of lease liability 303,076


CASE 1:

1. Ans. P60,000.

Sales price 420,000

Fair market value (420,000)

Deferred gain on sale -

Fair market vaue

420,000

Carrying value (360,000)


2. Ans. 40,000.

Sales price

420,000


Deferred gain on sale 40,000

Fair market vaue

380,000



3. Ans. 100,000.

Sales price 420,000


Deferred gain on sale 100,000

Fair market vaue

320,000



4. Ans. 60,000.

Sales price

420,000


Ignored (30,000)

Sales price

420,000



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60,000

626,667

115,000


Realized loss on sale

CASE 2:

1. Ans. P80,000.

Sales price 400,000 Fair market value (480,000)

Deferred loss on sale (80,000) * since the future rentals is below rent, there is an expected future benefit

Fair market vaue

480,000

from the asset being sold at a loss.

Carrying value (540,000) Realized loss on sale (60,000)

2. Ans. P40,000.

Sales price 400,000 Fair market value (480,000)

Realized loss on sale (80,000) * since the future rentals is at market rate of rent, there is no expected

Fair market vaue

480,000

future benefit from the asset sold at a loss.

Carrying value (540,000) Realized loss on sale (60,000) Total realized loss (140,000)

CASE 3:

1. Ans. 626,667.

Interest expense on finance lease liab (600,000*10%) 60,000

Depreciation on the leased-back asset (600,000/3yrs) 600,000

Amortization of deferred gain on sale (100,000/3yrs) (33,333) - gain on a sale and leaseback (finance) is fully deferred and

Net amount recognized in the profit or loss amortized over lease term.

*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. 141,269


Realized gain on sale (P600,000 - P500,000) (100,000) *Selling price is at FMV

Net amount recognized in the profit/loss

*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.

CASE 4:

1. Ans. 115,000.

Interest expense on finance lease liab (150,000*10%) 15,000

Depreciation on the leased-back asset (150,000/3yrs) 50,000

Realized loss on sale 50,000 *loss on sale is fully realized since it is an indication of

Net amount recognized in the profit or loss asset impairement.

*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. P158,205.

Rent expense 58,205

Realized loss on sale (P200,000 - P150,000) 100,000 *Selling price is at FMV (no expected future benefit)

Net amount recognized in the profit/loss

*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.


CASE 1:

Minimum lease collections 200,000 Multiply by: PV factor of 1 at 12% for 5 years with annuity 3.604776 1

Present value of minimum lease collection 720,955 Cost of the asset/FMV of asset (Under Direct Finance)

700,000

Add: Direct finance lease cost 20,955 Initial investment on the lease agreeement 720,955 Amortization table:

Periodic Coll. Interest Inc. Principal Balance

January 1, 2015:

(CV * 12%)

720,955

December 31, 2015: 200,000 86,515 113,485 607,470

December 31, 2016: 200,000 72,896 127,104 480,366

December 31, 2017: 200,000 57,644 142,356 338,010

December 31, 2018: 200,000 40,561 159,439 178,571

December 31, 2019: 200,000 21,429 178,571 (0)

1. Ans. 0.

Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset

since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer.

*Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amount receivable.

Entry upon inception/Sale of asset:

Finance lease receivable 720,955

Asset 700,000

Cash 20,955

2. Ans. 72,896.

141,269

158,205



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Entry upon periodic collections:

Dec. 31, 2015:

Cash

200,000



Dec. 31, 2016:

Cash

200,000



3. Ans. 480,366.

See amortization table above.

CASE 2:

Minimum lease collections 200,000 Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance 4.169865 1

Present value of minimum lease collection = Sales Price 833,973 Cost of the asset 600,000 Gross profit on sale 233,973 Amortization table:

Periodic Coll. Interest Inc. Principal Balance

January 1, 2015:

(CV * 10%)

633,973

January 1, 2016: 200,000 63,397 136,603 497,370

January 1, 2017: 200,000 49,737 150,263 347,107

January 1, 2018: 200,000 34,711 165,289 181,818

January 1, 2019: 200,000 18,182 181,818 0

1. Ans. 233,973.

Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the difference

between the Sales Price of the asset and its Cost on the company's books.

*Direct lease costs incurred under sales type lease is recognized as outright expense



Sales 833,973

Entry to recognize cost of sales, if perpetual inventory is used:

Cost of sales 600,000

Inventory 600,000

Entry to recognize the direct lease expense:

Expense 20,000

Cash 20,000

2. Ans. 49,737.

Entry upon accrual of interest and periodic collections:

Dec. 31, 2015:

Interest receivable 63,397


Jan. 1, 2016:

Cash 200,000



Dec. 31, 2016:



Jan. 1, 2017:

Cash 200,000



3. Ans. 497,370.

See amortization table

CASE 3:

Minimum lease collections 400,000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787

Present value of minimum lease collection

Guaranteed residual value

100,000

1,516,315

Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921 Present value of the guaranteed residual value 62,092

Total Sales Price of the asset = Total Lease Receivable 1,578,407

Amortization table:

Periodic Coll.

Interest Inc.

Principal

Balance

January 1, 2015: (CV * 10%) 1,578,407

December 31, 2015: 400,000 157,841 242,159 1,336,248

December 31, 2016: 400,000 133,625 266,375 1,069,872



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1,516,315

December 31, 2017: 400,000 106,987 293,013 776,860

December 31, 2018: 400,000 77,686 322,314 454,545

December 31, 2019: 400,000 45,455 354,545 100,000

December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,578,407.

Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the guaranteed

residual value is added to the total sales price of the asset.

*Direct lease expense under sales type lease is recognized as outright operating expense.


Finance lease receivable

1,578,407

Sales 1,578,407

2. Ans. P1,000,000. Entry to recognize cost of sales, if perpetual inventory is used:

Cost of sales

Inventory

1,000,000

1,000,000


Expense 50,000

Cash 50,000

3. Ans. 578,407.

Total Sales Price of the Asset 1,578,407

Less: Cost of the asset/FMV of asset (1,000,000)

Gross Profit on Sale 578,407

4. Ans. P133,625.


Dec. 31, 2015:

Cash

400,000



Dec. 31, 2016:

Cash

400,000



CASE 4:

Minimum lease collections 400,000

Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787

Present value of minimum lease collection = Sales Price of the asset

*Since the residual value is unguaranteed, that portion of the asset is not deemed sold. Thus was not included in the sales price.

Minimum lease collections 400,000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787

Present value of minimum lease collection

Guaranteed residual value

100,000

1,516,315

Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921 Present value of the guaranteed residual value 62,092

Total Lease receivable. 1,578,407

*Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership), the unguaranteed residual value

which will be received at the expiration of the lease term is still added to the receivable.

Total cost of the asset 1,000,000

Less: Present value of the unguaranteed residual value (62,092)

Net cost of the asset sold 937,908

*Since the residual value is unguaranteed, that portion of the aset is not deemed sold. The PV of the unguaranteed residual value

is therefore deducted from the cost of the inventory sold.

Amortization table:

Periodic Coll.

Interest Inc.

Principal

Balance

January 1, 2015: (CV * 10%) 1,578,407

December 31, 2015: 400,000 157,841 242,159 1,336,248

December 31, 2016: 400,000 133,625 266,375 1,069,872

December 31, 2017: 400,000 106,987 293,013 776,860

December 31, 2018: 400,000 77,686 322,314 454,545

December 31, 2019: 400,000 45,455 354,545 100,000

December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,516,315.


Finance lease receivable 1,516,315

Sales 1,516,315

2. Ans. P937,908.

Entry to recognize cost of sales, if perpetual inventory is used:

Finance lease recievable 62,092


Inventory 1,000,000



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Expense 50,000

Cash 50,000

3. Ans. 578,407.

Total Sales Price of the Asset 1,516,315

Less: Cost of the asset/FMV of asset (937,908)

Gross Profit on Sale 578,407

4. Ans. P133,625.


Dec. 31, 2015:

Cash

400,000



Dec. 31, 2016:

Cash

400,000



CHAPTER 8-PROBLEM 22: ABC CO.

Reconciliation:

Net income before any differences

Permanent Differences:

Nondeductible expenses

10,000,000

100,000

Nontaxable income (500,000)

Net income after permanent differences

Temporary Differences:

Future Deductible amounts

Accrued warranties

250,000

9,600,000

Advances from customers 500,000 Provision for probable losses 900,000 1,650,000

Future Taxable Amounts Prepaid rent 400,000 (400,000)

Taxable income 10,850,000

1. Ans. P4,340,000.

Taxable income

10,850,000

Mulitply by: Current tax rate 40% Current tax expense 4,340,000



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3,840,000

660,000

160,000

140,000

577,500

2. Ans. P3,840,000.

Net income after permanent differences 9,600,000

Multiply by: Constant tax rate 40%

Total tax expense

3. Ans. P660,000.

Future deductible amounts 1,650,000

Mulitply by: Constant tax rate 40%

Deferred tax asset

4. Ans. P160,000.

Future taxable amounts 400,000


Deferred tax liability

To reconcile:

Current tax expense 4,340,000

Add: Deferred tax expense (FTA) 160,000

Less: Deferred tax benefit (FDA) (660,000)

Total tax expense 3,840,000

5. Ans. P3,902,500.

If tax rate in the future is expected to change (at 35%):

Current tax expense (P10.85M*40%) 4,340,000

Add: Deferred tax expense (FTA:P400,000*35%) 140,000

Less: Deferred tax benefit (FDA:P1,650,000*35%) (577,500)


6. Ans. P140,000.


Mulitply by: Futre tax rate 35%


7. Ans. P577,500.

Future deductible amounts 1,650,000


Deferred tax asset

CHAPTER 8-PROBLEM 23:XYZ CO.

Reconciliation:



Nondeductible expenses

5,000,000

150,000

Nontaxable income (50,000)


Temporary Differences: Increase in Future Deductible for the year: Cummulative FDA, ending 1,600,000 Cummulative FDA, beginning 1,200,000 400,000

Decrease in Future Taxable Amount for the year: Cummulative FTA, ending 500,000

Cummulative FTA, beginning 800,000 300,000


1. Ans. P2,320,000

Taxable income 5,800,000 Mulitply by: Current tax rate 40% Current tax expense 2,320,000

2. Ans. P2,040,000.


Multiply by: Constant tax rate 40% Total tax expense 2,040,000

3. Ans. P660,000.

Cummulative Future Deductible Amt, end 1,600,000

Mulitply by: Constant tax rate 40% Deferred tax asset 640,000

4. Ans. P200,000.

Cummulative Future Taxable Amt, end 500,000

Mulitply by: Constant tax rate 40% Deferred tax liability 200,000

To reconcile:


Less: Deferred tax benefit ( dec in FTA) (120,000) (decrease in deferred tax liability)

Less: Deferred tax benefit (inc in FDA) (160,000) Total tax expense 2,040,000



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CHAPTER 8-PROBLEM 24: JAPS CORP.

1. Ans. P1,270,000.

Service costs Current service cost

855,000 Past service cost recognized for the year

Loss on settlment:

Payments to early retirees

800,000

120,000

CV of accrued benefits of early ret. 650,000 150,000 1,125,000

Net interest (income)expense Interest on ABO (P10,080,000*12%) 1,209,600 Interset on PA (P9,450,000*12%) (1,134,000) 75,600

Pension expense (Profit or loss) 1,200,600 2. Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)

Actuarial gain on PA (a) (216,000)

Actuarial loss on ABO (b) 285,400 69,400 3. Ans.

Total pension expense 1,270,000 (a) Actuarial gain/loss on Plan asset

Plan asset, beginning balance 9,450,000

Add: Contribution for the year 1,200,000

(b) Actuarial gain/loss on Accumulated Benefit Obligation

ABO, beginning balance 10,080,000

Add: Current service cost 855,000

Past service cost for the year 120,000

Interest on ABO (P10,080,000*12%) 1,209,600

Less: Benefits settled, at scheduled ret. (1,400,000)

Benefits settled, early retirees (650,000)

Balance 10,214,600

ABO, present value, ending balance 10,500,000

Actuarial loss on AB0 285,400

4. Ans. P700,000.

To reconcile:

Accrued pension, beg

630,000

Pension expense (total) 1,270,000

Total 1,900,000

Contribution to the plan for the year (1,200,000)

Accrued pension, end 700,000

ABO, end

10,500,000

Plan asset, end (9,800,000)

Accrued pension end 700,000

CHAPTER 8-PROBLEM 25: IRELAND CORP.

1. Ans. P620,000.

Service costs

Current service cost 480,000

Net interest (income)expense

Interest on ABO (P2,980,000*8%) 238,400 Interset on PA (P3,200,000*8%) (256,000) (17,600)

Pension expense (Profit or loss) 462,400 2. Ans.


Actuarial loss on PA

80,000

Actuarial loss on ABO 30,000 Effect of ceiling** 47,600 157,600 3. Ans.

Total pension expense 620,000

Interest on PA (P9,450,000*12%) 1,134,000

Less: Settlements at scheduled retirement (1,400,000)

Settlements to early retirees (800,000)

Balance 9,584,000

Plan asset, at FMV at the year-end 9,800,000

Actuarial gain on plan asset 216,000



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Plan asset, beginning balance 3,200,000 Add: Contribution for the year 750,000 Interest on PA (P3,200,000*8%) 256,000 Less: Settlements at scheduled retirement (560,000) Balance 3,646,000 Less: Actuarial loss on PA (80,000) Plan asset, FMV, end 3,566,000 ABO, beginning balance

2,980,000

Add: Current service cost 480,000 Interest on ABO (P2,980,000*8%) 238,400 Less: Benefits settled, at scheduled ret. (560,000) Balance 3,138,400 Add: Actuarial loss on ABO 30,000 ABO, present value, end 3,168,400 Plan asset at fair value, end

3,566,000

ABO at present value, end 3,168,400 Prepaid pension, end 397,600 Asset Ceiling (lower) 350,000 Remeasurement loss/Effect of ceiling 47,600 **

4. Ans. P350,000.

To reconcile:

Prepaid pension, beg (ceiling was higher)

(220,000)

Pension expense (total) 620,000

Total 400,000

Contribution to the plan for the year (750,000)

Prepaid pension, end (ceiling is lower) (350,000)

MULTIPLE CHOICE EXERCISES:

CHAPTER 8-EXERCISE 1: PROBE INC.

ITEM Current Noncurrent

a. Accounts payable – trade, P170,000 + 30,000 P200,000 b. Notes payable – trade, P70,000 70,000 Interest on Notes: 50,000*15%*4/12 2,500 20,000*15%*2/12 500 c. Advance receipts from customers, 100,000 d. Containers deposit 50,000 e. Notes payable – BPI , P200,000/5 40,000 160,000

i. Convertible bonds 1,000,000

j. Notes payable – officers 40,000 k. Salaries and wages (68,000*15/30) 34,000 m. Output VAT, net of Input (246,000 – 164,000) 82,000 n. Accounts receivable, credit balance 12,300 0. Cash in banks (overdraft) 115,000 – (125,000+55,000) 65,000 r. Estimated warranty costs on goods sold 46,000 s. Installment notes payable, P75,000 *1/3 25,000 50,000

t. Provision for losses (25,000 + 75,000) / 2 50,000 u. Deferred tax liability 150,000

TOTAL P817,300 P1,360,000 P2,177,300

1. Ans. C. 2. Ans. B. 3. Ans. A.

CHAPTER 8-EXERCISE 2: CUT INC.

Bonds payable: Noncurrent Current

7/1/2008: (P4,000,000*98%) 3,920,000 Cummulative discount amortization: P80,000/10yrs*5.75yrs 46,000 3,966,000 Accrued interest on bonds (P4M*7%*3/12) 70,000

Accrued interest on notes payable 90,000

Current portion of notes payable 600,000

Noncurrent portion of notes payabe 2,400,000 Warranties liability (P55,000+P145,000-P130,000) 70,000

Trade payables 325,000

Payroll related items 193,000

Taxes payable 535,000

Other accruals 50,000

Cash dividends payable (P0.40*2,500,000shares) 1,000,000

6,366,000 2,933,000

1. Ans. B. 2. Ans. A.

Note: Stock dividends payable is classifed as capital and not as liability.

CHAPTER 8-EXERCISE 3: RADO INC.

Ans. A.

Estimated Warranties Payable, beginning balance P225,000

Required Estimated Expense (7,250,000-150,000)*5% 355,000

Less: Actual cost incurred for the year (415,500)

Estimated Warranties Payable, ending balance P164,500



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CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT

1. Ans. C.; 2. Ans. B.

Total sales – home furniture 28,800,000

Divide by: 2,000

Total premium distributable 14,400

Multiply by: estimated redemption 60%

Estimated redemption 8,640

Multiply by, net cost of premiums (340-50) 290

Estimated premium expense 2,505,600

Premiums liability, beg 716,000

Total 3,221,600

Actual redemption (9,600,000/2,000)*290 (1,392,000)

Estimated premiums liability, end 1,829,600

3. Ans. B.

Estimated warranty liability, beginning

Total sales – kitchen applicances

86,400,000

2,176,000

Multiply by: 5% Estimated warranties expense 4,320,000

Actual warranty costs during the year` (2,624,000)

Estimated warranty liability, end 3,872,000

CHAPTER 8-EXERCISE 5: ABRA COMPANY

1. Ans. C.

2013 unused leaves by the end of 2014 (850days-550days) 300

2014 unused leaves by the end of 2014 500

Total unused leaves by the end of 2014 800

Multiply by probable exercise rate 80%

Leaves that will probably materialize 640

Multiply by: 2014 current salary rate 400

Accrued compensated absences per audit 256,000

2. Ans. D.

Unadjusted net income 1,277,500

Understatement in accrued comp. abs./salaries expense (18,000)

Adjusted net income 1,259,500 1,147,608 745,945 111,892

B = 15% (NI - B - Tx); Tx = 35% (NI - B)

B = 15% (NI - B - 35%(NI - B) 818,675 122,801

B = P111,892. 65% 0.09750 1.0975 111,892

CHAPTER 8-EXERCISE 6: ASCOT INC.

Audit notes:

a. Since there is no right of offset, the advances to sppliers should be reclassifed as an asset:

AJE 1:

Advances to suppliers 55,000


1. Ans. C.

b. Required premiums expense: (40,000*75%)/5*(P95-P25)

420,000

Actual cost/Actual redemption (5,000-1,250)*(P95-P25) (262,500)

Estimated premiums liability, per audit 157,500

Estimated premiums liabilty, per books 118,750

Net adjustment 38,750

AJE 2:

Premiums expense 38,750

Estimated premiums liability 38,750

2. Ans. A.

c. Cummulative unused leaves 12/31/14

750

Less: 2012 leaves (forfeited (50)

Leaves that can be carried forward to 2015 700

Exercise rate (per past experience) 80%

Cummulative leaves that will probably be exercised 560

Multiply by: 2014 current salary rate 400

Accrued salaries - compensated absences, per audit 224,000

Accrued salaries - compensated absences, per books 300,000

Net adjustment (76,000)

AJE 3:

Accrued salaries 76,000

Salaries expense 76,000



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3. Ans. A.

Unadjusted net income before bonus and tax 1,015,131

AJE 2: Understated premiums expense (38,750)

AJE3: Overstated salaries expense 76,000

Adjusted net income before bonus and tax 1,052,381

B = 15% (NI - Tx - B)

Tx = 30% (NI - B)

B = 15%(NI - 30%(NI - B) - B)

B = 15%(1,052,381 - 30%(1,052,381 - B) - B)

B = 110,500/1.105

B = 100,000

AJE 4:

Accrued salaries 5,540


(100,000-96,460)

4. Ans. A.

Net Income before tax (1,052,381 - 100,000) 952,381

Less: Income tax (952,381*30%) (285,714)

Net Income after tax 666,667

AJE 5:

Income tax expense (current) 285,714

Income tax payable 285,714

d. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.

ENTRY:

Income tax expense (deferred) 250,000

Deferred tax liability 250,000

5. Ans. B.

e. The refinancing agreement was completed as of December 31, 2014, thus there is a right to refinance the liablity on a long-term

basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of the

fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis.

The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus will

still be presented as current as of December 31, 2014.

CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC.

1. Ans. A.

Accounts Payable, unadjusted 250,000

Receiving report number 2634 (Unrecorded purchase) 12,500

Receiving report number 2636 (Purchase in transit) 10,000

Accounts Payable, adjusted 272,500

2. Ans. D.

Warranties liability, unadjusted 10,000

Warranty expense, 2014 (10,550,000*6%) 633,000

Total 643,000

Less: Actual warranties paid (310,000)

Warranties liability, adjusted (12/2014) 333,000

3. Ans. A.

Legal services 4,600

Medical services 5,500

Payroll (12/21/ - 12/31) : 14,400 *8/12 9,600

Royalties 3,900 Accrued interest on Bond Liability

24,000

Total accruals 47,600

4. Ans. A.

Amortization Table: Lease Liability

13.59032634 Payment Interest

Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326)

Principal Balance

3,397,582 June 30, 2014: 250,000 135,903 114,097 3,283,485

December 31, 2014: 250,000 131,339 118,661 3,164,824

June 30, 2015: 250,000 126,593 123,407 3,041,417

December 31, 2015: 250,000 121,657 128,343 2,913,074

5. Ans. A.

Current portion Long-term Portion

Amortization Table: Bonds Payable Nominal

Effective

Amortization

Balance

Balance 851,706

September 30, 2014: 42,585 48,000 (5,415) 846,291

March 31, 2015: 42,315 48,000 (5,685) 840,606

Carrying value as of Dec. 31, 2014:

Balance, September 30, 2014

846,291

Amortization up to 12/31/14: P5,685*3/12: (2,843) Amortized cost as of December 31, 2014: 843,449



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P479,125

CHAPTER 8-EXERCISE 8: DETOX INC.

1. Ans. D.

Accounts Payable, unadjusted 534,000

RR# 1015 (purchase in transit – FOB Destination) (35,000)

RR# 1013 (goods received on December 30, 2014) 65,000

RR# 1016 (purchase in transit – FOB Shipping point) 40,000

Accounts payable, adjusted 604,000

2. Ans. C.

Required estimated expense 2013: (50,000/5)*40%*(P160-P50) 440,000

Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50) (198,000)

Estimated premiums payable, 12/31/2013 242,000

Required estimated expense 2014: (60,000/5)*40%*(P160-P50) 528,000

Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50) (561,000)

Estimated premiums payable, 12/31/2014 209,000

3. Ans. D.

Proceeds from issuance of bonds on 1/1/2013

Fair value of bonds at 12% effective rate*

P2,050,000

1,903,927 APIC – Bond Conversion Privilege P146,073

*PV of future cash flows at 12% for 3 periods:

Principal: 2,000,000 * 0.711780

P1,423,560

Interest: 200,000 * 2.40183 480,366

Total present value = Fair value P1,903,927


Correct Int.

Nominal Int.

Amortization

Balance

Jan. 1, 2013: 1,903,927

Dec. 31, 2103: 228,471 200,000 28,471 1,932,398

Dec. 31, 2014: 231,888 200,000 31,888 1,964,286

4. Ans. A.

Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14:

DR: Bonds payable 1,000,000

DR: APIC – Bond conv. priv. 73,036

CR: Discount on bonds payable 17,857

CR: Ordinary shares (10,000*50) 500,000

CR: Share premium 555,179

5. Ans. B.

Present value of the minimum lease payment at

implicit lease rate, 8% for 5 periods: (600,000*3.9927) P2,395,626

Fair market value of the leased asset at inception of lease 2,400,000 *100%, thus Finance lease

Amortization table: Lease liability

Date

Periodic Paymts

Interest

Principal

Balance

Jan. 1, 2014: 2,395,626

Dec. 31, 2014: 600,000 191,650 408,350 1,987,276

Dec. 31, 2015: 600,000 158,982 441,018 1,546,258

6. Ans. C.

Present value of MLP on 1/1/14 P2,395,626

Divide by: Term (no transfer of ownership) 5 years

Depreciation expense in 2014

CHAPTER 8-EXERCISE 8: PIPINO CORP.

1. Ans. C.

Amortization table: Notes Payable

*9 months only up to December 31, 2014

2. Ans. D.

Lease liability balance per books, P2,240,000

Debits to the account for the periodic 4,800,000

Amounts initially capitalized on

P7,040,000 Amortization table: Finance Lease Liability

Date Payment

Effective Principal Balance

December 31, 2011: P7,040,000

December 31, 2011: 1,200,000 5,840,000

December 31, 2012: 1,200,000 584,000 616,000 5,224,000

December 31, 2013: 1,200,000 522,400 677,600 4,546,400

December 31, 2014: 1,200,000 545,640 745,360 3,801,040 Liab. balance

December 31, 2015: 1,200,000 380,104 819,896 2,981,144

Current Noncurrent

Date Correct Interest Nominal

Amortization Balance

April 1, 2012: P7,195,000

March 31, 2013: 1,079,250 960,000 119,250 7,314,250

March 31, 2014: 1,097,138 960,000 137,138 7,451,388

December 31, 2014: 838,281* 720,000* 118,281* P7,569,669



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P1,750,000

P45,000

P690,000

P100,729

3. Ans. C.

Notes payable P7,569,669

Liability under capital lease – Long term** 2,981,144

Deferred tax liability 250,000

Total long term liabilities

4. Ans. B.

Accounts payable, unadjusted balance P1,840,500

RR# 65218, purchase in transit, FOB Destination (19,000)

RR# 65219, purchase in transit, FOB Buyer (Destination) (30,500)

RR# 65220, goods received only after the December 31 (41,000)

Accounts payable, adjusted balance

5. Ans. D.

2014 Sales P31,650,000

Multiply by estimated warranty cost as % of 8%

Warranties expense in 2014

6. Ans. B.

Accounts payable 1,750,000

Warranties payable (2,532,000 – 1,950,000) 582,000

Interest payable on notes (8,000,000*12%*9/12) 720,000

Current portion of Long term liability under capital lease 819,896

Total current liabilities P3,871,896

CHAPTER 8-EXERCISE 9: ADELAIDA INC.

1. Ans. D.

Tote bags actually distributed in 2014 19,000

Estimated premiums liability at the end of 2013, in tote bags (7,000)

Estimated premiums liability at the end of 2014, in tote bags 5,000

Estimated premiums expense in 2014, in tote bags 17,000

Multiply by: Net expense per tote bag (P25 – P5) P20

Estimated premiums expense in 2014

2. Ans. C.

The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset:

Estimated premiums payable, 2014 (5,000 * P20) P100,000

Multiply by tax rate: 30%

Deferred tax asset (Noncurrent Asset) P30,000

The temporary difference from excess tax depreciation over financial depreciation is future taxable amount

creating Deferred Tax Liability:

Deferred tax liability (Noncurrent Liability): P150,000*30%

3. Ans. D.

Accounts payable, as adjusted (P540,000 + P50,000) P590,000

Estimated premiums payable, 2014 (5,000 * P20) 100,000

Current liabilities

4. Ans. A.

Proceeds from bond issuance (the amount credited per entry made)

Fair value of bonds without the conversion option (at 8% effective rate)*

Equity component/ APIC from Bond Conversion Privilege

Present value of Principal: P8,000,000*0.680583 P3,402,916

Present value of Interest: 500,000*3,99271 1,996,355

Fair value of the bonds without the conv. Option P5,399,271

P5,500,000

5,399,271

Amortization Table: Bonds Payable

Correct Int.

Nominal Int.

Amortization

Balance

January 1, 2014: 5,399,271

December 31, 2014: 431,942 500,000 (68,058) 5,331,213

December 31, 2015: 426,497 500,000 (73,503) 5,257,710

Upon assumed conversion: 1/2016: 5. Ans. D.

Carrying value of bonds up to 12/31/2015 5,257,710

APIC- Bond Conversion Priv. 100,729

Total Par Value of Shares (5,000*10*50) (2,500,000)

Share Premium from conversion 2,858,439

6. Ans. B.

Upon assumed retirement: 1/2016:

Carrying value of bonds up to 12/31/2015

5,257,710

Fair value of bonds without the conversion option at 12% effective rate: Present value of principal: P5,000,000*0.711780 3,558,901 Present value of interest: 500,000*2.401831 1,200,916 4,759,817

Gain on retirement of bonds (profit or loss) 497,893

P10,800,813

P2,532,000

P340,000



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7,500,000

P3,360,000

CHAPTER 8-EXERCISE 11:

Ans. C.

Case 1:

a. The obligating event is the damages occurring in 2014, thus is present obligation.

b. The outflow of economic benefits is probable.

c. The amount of liability is reliably measurable given a range of amounts without best estimate.

Thus, accrue obligation at the mid-range (P500,000+P1,500,000)/2 = P1,000,000.

Case 2:

a. The obligating event is the guarantee agreement completed in 2014, thus is present obligation.

b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance

sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event.

c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.

Thus, accrue obligation at best estimate P2,000,000.

Case 3:

a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there are

no claims yet.

b. The outflow of economic benefit is probable.

c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However,

since there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be

a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over the

portion to be reimbursed by the insurance company.

Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company will be

reimbursing the company for anything in excess of the deductible clause.

Case 4:

a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no present

obligation yet.

Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event.

CHAPTER 8-EXERCISE 12: LABANDERA INC.

1. Ans. B.

Class A Laundry appliance sales (280,000,000*60%)

Divide by

P168,000,000

P50

Number of coupons distributed 3,360,000

Multiply by: probable redemption 60%

Coupons that will probably be redeemed 2,016,000

Divide by: number of coupons to acquire 1 premium 400

Estimated number of premiums to be redeemed 5,040

Number of premiums actually redeemed (1,680,000/400) (4,200)

Liability for premiums in units 840

Liability for premium in peso (840*4,100) 3,444,000

2. Ans. D.

Class B Laundry appliance sales (280,000,000*40%) P112,000,000

Multiply by: Estimated warranty cost as % of sales 3%

Estimated warranty expense for 2014

3. Ans. C.; 4. Ans. A.; 5. Ans. A.

Unadjusted net income

80,164,000

Adjustment for additional premium expense (3,444,000)

Adjustment for additional warranties expense (1,720,000)

Adjusted net income 75,000,000

Less: Bonus (2,480,916)

Income tax (35%) (25,381,679)


Bonus = 5% (75,000,000 – 35%(75,000,000 – B)) Tax = 35% (75,000,000 -2,480,916)

B = 5% (48,750,000 + .35B) T = 25,381,679

B = 2,437,500 + .0175B

0.9825B = 2,437,500

B = 2,480,916

CHAPTER 8-EXERCISE 13: LUZON COMPANY

1. Ans. B.

Estimated warranty expense (30,000u*60%*P1,500) 27,000,000

Actual cost incurred (19,500,000)

Estimated warranties payable

2. Ans. D.

a. The obligating event is the environmental damages occuring in 2014, thus is present obligation.

b. The outflow of future economic benefits is probable.

c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per

the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event)



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113 of 155

1,841,910

(279,392) 77,776

3. Ans. B.

PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776) 3,683,821 4.604776

Fair market value of leased asset at inception: 4,000,000

92% More than 90%, thus Finance

Amortization table: Periodic paymt Interest Exp. Principal Balance

Present value of MLP 3,683,821

January 1, 2012: 800,000 800,000 2,883,821

January 1, 2013: 800,000 346,059 453,941 2,429,879

January 1, 2014: 800,000 291,586 508,414 1,921,465 Liab balance

Janaury 1, 2015: 800,000 230,576 569,424 1,352,041

Accrued interest

4. Ans. B.

PV of MLP, Jan. 1, 2012 (Asset capitalized) 3,683,821

Multiply by condition percent (over term), Dec. 31, 2014: 3/6

Carrying value of leased asset, Dec. 31, 2014

5. Ans. A.

Allocation of issue price on January 1, 2014:

Total issue price

4,250,000

FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods: Principal: P4,000,000*0.7049605 2,819,842 0.7049605

Interest: P200,000*4.9173243 983,465 3,803,307 4.9173243

Residual amount allocated to APIC-Bond conversion privilege 446,693



January 1, 2014: 3,803,307

June 30, 2014: 228,198 200,000 28,198 3,831,505

December 31, 2014: 229,890 200,000 29,890 3,861,396

Carrying value of converted bonds, Dec. 31, 2014 (P3,861,396*3/4) 2,896,047

Carrying value of APIC-Bond conversion privilege (P446,693*3/4) 335,020

Less: Par value of issuable shares: (50,000sh*3/4)*P50 (1,875,000)

Share premium/APIC 1,356,067

CHAPTER 8-EXERCISE 14: MNO INC.

1. Ans. B.

Proceeds from issuance of convertible bonds

FMV of bonds w/out conv. option at 5% for 10 semi-annual periods:

5,500,000

PV of Principal: P5,000,000*0.613913 3,069,566 PV of Interest: 300,000*7.721734 2,316,520 5,386,086

Equity portion (APIC -Bond Conv. Priv.) 113,914

2. Ans. C.

Total Bonds @ FV* APIC@Residual

Retirement Price 2,500,000 2,365,267 134,733

Carrying Value** (5,289,319*50%); (113,914*50%) 2,644,659 56,957

P&L Loss/ Cap. Gain

profit/loss APIC/Share premium

*FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods.

PV of Principal 2,500,000*0.62275 1,556,874 PV of Interest: 150,000*5.389289 808,393

Fair value of bonds w/out conv. priv 2,365,267

Amortization Table: Bonds Payable

June 30, 2013:

Correct

Nominal

Amortization

Balance

5,386,087

December 31, 2013: 269,304 300,000 (30,696) 5,355,391

June 30, 2014: 267,770 300,000 (32,230) 5,323,161

December 31, 2014: 266,158 300,000 (33,842) 5,289,319 **

3. Ans .C.

Interest from Bonds Payable

from 1/1 - 6/30 (see amortiz.) 267,770 from 7/1 - 12/31 (see amortiz.) 266,158 533,928

Interest from Notes Payable

from 1/1 - 8/31 (2.5M*10%*8/12)

166,667

from 9/1 - 12/31 (2M*10%*4/12) 66,667 233,333

Total interest expense 767,261

4. Ans. B.

Fin. Inc. after permanent diff 1,000,000

FDAAB for the period 100,000

FTALE for the period (500,000)

Taxable income 600,000

Mulitply by tax rate 40%

Current Tax Expense 240,000



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114 of 155

620,000

P292,253

3,234,000

52,804

5. Ans. D.

Cum. Temp Diff (FTALE) 1,550,000

Multiply tax rate 40%

Deferred Tax Liability

6. Ans. D.

Bonds Payable (half - see amor.) 2,644,659

Notes payable - long term 1,500,000

Deferred tax liabilty 620,000

Total noncurrent liability 4,764,659

CHAPTER 8-EXERCISE 15: KURT CORP.

1. Ans. C.

Proceeds from issuance (at face value)

Fair value of bonds at effective rate 9% for 3 periods

4,000,000

PV of Principal: P4,000,000*0.772183 3,088,734 PV of Interest: 240,000*2.531295 607,511 3,696,245

Equity component/APIC-Bond Conversion 303,755

2. Ans. D.

Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance

January 1, 2014: (Princ.*6%) (CV*9%) 3,696,245

December 31, 2014: 332,662 240,000 92,662 3,788,907

December 31, 2015: 341,002 240,000 101,002 3,889,908

December 31, 2016: 350,092 240,000 110,092 4,000,000 53. Ans. D.

3. Ans. B.

Bonds Payable, CV at 1/1/2016 (see amortization table) 3,889,908

APIC-Bonds Conversion Privilege 303,755

Total 4,193,663

Multiply by exercise rate: (3,000/4,000) 3/4

Prorated CV of BP and APIC-Bond Conv. Priv. 3,145,247

Less:Par value of issuable shares (3,000*40) *P10 (1,200,000)

Share premium from assumed conversion 1,945,247

4. Ans. A.

Proceeds from issuance (at face value, net of transaction cost) P3,848,531

Fair value of bonds at effective rate 9% for 3 periods

PV of Principal: P4,000,000*0.741162 2,964,648

PV of Interest: P240,000*2.465123 591,630 3,556,278

Equity component/APIC-Bond Conversion

5. Ans. B.

Total Bonds @ FV* APIC (Res. Val.)

Retirement Price P4,000,000 3,889,908 110,092

Carrying Value 3,837,104 292,253

P&L Loss/ Cap. Gain (182,161)

retirement loss capital gain

*FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period.

PV of Principal 4,000,000*0.917431 P3,669,725

PV of Interest: 240,000*0.917431 220,183

Fair value of bonds w/out conv. priv P3,889,908

Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance

January 1, 2014: 3,556,278

December 31, 2014: 373,409 240,000 133,409 3,689,687

December 31, 2015: 387,417 240,000 147,417 3,837,104

December 31, 2016: 402,896 240,000 162,896 4,000,000

CHAPTER 8-EXERCISE 16: TRY CORP.

Reconciliation:



Nondeductible expenses: Life insurance expense

10,000,000

300,000

Nontaxable income: Dividend income (500,000)




Estimated litigation loss

600,000

9,800,000

Unearned retnal income 300,000 900,000

Future Taxable Amounts

Installment receivable

1,200,000

(1,200,000)


1. Ans. A.


Multiply by: Constant tax rate 33%

Total tax expense

2. Ans. C.


Mulitply by: Current tax rate 33%



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115 of 155

297,000

396,000

3,488,000

198,000

297,000

Current tax expense

3. Ans. A.

Future deductible amounts 900,000


Deferred tax asset

4. Ans. B.

Future taxable amounts 1,200,000



To reconcile:





5. Ans. B.

Current tax expense; P9,500,000*33% 3,135,000

Add: Deferred tax expense (FTA): P1,200,000*35% 420,000

Less: Deferred tax benefit (FDA): P900,000*35% (315,000)


CHAPTER 8-EXERCISE 17: COSINE CORP.

Reconciliation:



Nondeductible expenses: Life insurance expense

12,000,000

400,000

Nontaxable income: Dividend income (1,200,000)




Warranty provision

600,000

11,200,000

600,000

Future Taxable Amounts

Prepaid advertising

500,000

Excess tax depr. over finanicial depr. 400,000 (900,000)


1. Ans. B.


Mulitply by: Current tax rate 32%

Current tax expense

2. Ans. A.

Future deductible amounts 600,000


Deferred tax asset

3. Ans. D.




4. Ans. D.

To reconcile:





CHAPTER 8-EXERCISE 18: BONCHON CORP.

Service costs

Current service cost 160,000

Net interest (income)expense

Interest on ABO (P3,000,000*6%) 180,000 Interset on PA (P2,800,000*6%) (168,000) 12,000

Pension expense (Profit or loss) 172,000 2. Ans. B.


Actuarial gain on PA (a)

(106,000)

Actuarial loss on ABO (b) 442,000 336,000 3. Ans. C.

Total pension expense 508,000 1. Ans. D.

3,135,000



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(a) Actuarial gain/loss on Plan asset

Plan asset, beginning balance

2,800,000

Add: Contribution for the year 210,000

Interest on PA (P2,800,000*6%) 168,000

Less: Settlements at scheduled retirement (300,000)

Balance 2,878,000

Plan asset, at FMV at the year-end 2,984,000

Actuarial gain on plan asset 106,000

(b) Actuarial gain/loss on Accumulated Benefit Obligation


Add: Current service cost 160,000

Interest on ABO (P3,000,000*6%) 180,000

Less: Benefits settled, at scheduled ret. (300,000)

Balance 3,040,000

ABO, present value, ending balance 3,482,000

Actuarial loss on AB0 442,000

4. Ans. B.

To reconcile:

Accrued pension, beg

200,000

Pension expense (total) 508,000

Total 708,000

Contribution to the plan for the year (210,000)


ABO, end

3,482,000

Plan asset, end (2,984,000)

Accrued pension end 498,000

CHAPTER 8-EXERCISE 19: DEE CORP.

Service costs

Current service cost

Settlement gain:

Settlement price other ben. settled

400,000

1,400,000

PV of other benefits settled (500,000) (100,000) 1,300,000

Net interest (income)expense Interest on ABO (P7,500,000*10%) 750,000 Interset on PA (P7,000,000*10%) (700,000) 50,000

Pension expense (Profit or loss) 1,350,000 2. Ans. A.


Actuarial gain on PA

Actual return on plan asset 840,000

Estimated return (Interest on PA) (700,000)

(140,000)

Actuarial gain on ABO (200,000) (340,000) 3. Ans. D.

Total pension expense 1,010,000 1. Ans. D.

4. Ans. B.

Plan asset, beginning balance 7,000,000

Add: Contribution for the year 1,200,000

Interset on PA (P7,000,000*10%) 700,000

Less: Settlements at scheduled retirement (1,500,000)

Settlement price of addl ben. Settled (400,000)

Balance 7,000,000

Less: Actuarial gain on PA 140,000

Plan asset, FMV, end 7,140,000

5. Ans. A.


Add: Current service cost 1,400,000

Interest on ABO (P7,500,000*10%) 750,000

Less: Benefits settled, at scheduled ret. (1,500,000)

PV of additional benefits settled (500,000)

Balance 7,650,000

Add: Actuarial gain on ABO (200,000)

ABO, present value, end 7,450,000

4. Ans. B.

Plan asset at fair value, end 7,140,000

ABO at present value, end 7,450,000

Accrued pension expense, end (310,000)

To reconcile:

Prepaid pension, beg

500,000

Pension expense (total) 1,010,000

Total 1,510,000

Contribution to the plan for the year (1,200,000)



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CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY



1 A

2 D

3 D

4 B

5 C

6 B

CHAPTER 9-PROBLEM 2: SB CORP.

Correct entries to record transactions in 2013:

(a) Cash (50,000*P150) 7,500,000

Ordinary shares (50,000*P100) 5,000,000

Share premium-OS 2,500,000

(b) Building 1,200,000

Preference shares (20,000*P50) 1,000,000

Share premium-PS 200,000

(c) Income summary 5,540,000

Retained earnings 5,540,000


(a) Treasury shares (20,000*P160) 3,200,000

Cash 3,200,000

(b) Cash 2,800,000

Ordinary shares (10,000*P100) 1,000,000 *Allocation: FMV (total) Rato

Amount Allocated

Share premium-OS (P1,960,000-P1,000,000) 960,000 Ordinary 1,750,000

70% 1,960,000

Preference shares (10,000*P50) 500,000 Preference 750,000

30% 840,000

Share premium-PS (P840,000-P500,000) 340,000 Total 2,500,000

2,800,000

(c) Cash, net (5,000*P85)-P25,000 400,000

Preference shares (5,000*P50) 250,000


(d) Cash 5,000,000

Bonds payable 2,000,000 *Allocation: Amount Allocated

Premium on bonds payable (P2,200,000-P2,000,000) 200,000 Bonds pay. @ Fair value 2,200,000

Ordinary shares (15,000*P100) 1,500,000 Ordinary @ Residual 2,800,000

Share premium-OS (P2,800,000-P1,500,000) 1,300,000

5,000,000

(e) Cash (8,000*P185) 1,480,000

Treasury shares (8,000*P160) 1,280,000

Share premium-TST 200,000

(f) Ordinary shares (7,000*P100) 700,000

Share premium-OS (7,000*P50) 350,000 *share premium from original issuance (P150-P100)


Treasury shares (7,000*160) 1,120,000

(g) Income summary 4,530,000


(h) Retained earnings 800,000

Retained earnings appropriated for Treasury 800,000

Summary

Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS Sh. Prem-TST RE-unapp RE-app TS

(a) Ordinary share issuance in 2013 5,000,000

2,500,000 (b) Preference share issuance in 2013

1,000,000

200,000

(c) Net income in 2013

5,540,000 (a) Treasury shares reacquired in 2014

(3,200,000)

(b) Ordinary and Preference shares issue 1,000,000 500,000 960,000 340,000 (c) Preference shares issuance in 2014

250,000

150,000

(d) Ordinary shares issued with Bonds 1,500,000

1,300,000 (e) Treasury shares reissuance in 2014

200,000

1,280,000

(f) Treasury shares retirement in 2014 (700,000)

(350,000)

(70,000)

1,120,000

(g) Net income in 2014

4,530,000 (h) Appropriation for treasury

(800,000) 800,000

Adjusted 12/31/14 balances 6,800,000 1,750,000 4,410,000 690,000 130,000 9,270,000 800,000 (800,000)

1. Ans. 2. Ans. 3. Ans. 4. Ans.

7. Ans.

Share capital:

Ordinary Shares 6,800,000

Preference Shares 1,750,000 8,550,000

Additional paid-in capital: Share premium-OS 4,410,000

Share premium-PS 690,000 Share premium-TST 130,000 5,230,000 5. Ans.

Total Contributed Capital

13,780,000 6. Ans. Retained earnings - appropriated

800,000

Retained earnings - unappropriated

9,270,000 Treasury shares at cost

(800,000)

Total Stockholders' Equity 23,050,000 8. Ans.


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CHAPTER 9-PROBLEM 3: GLORIETTA INC.


(a) Land 1,400,000

Ordinary shares (100,000*P10) 1,000,000

Share premium-OS 400,000

(b) Cash (50,000*P50) 2,500,000

Preference shares (50,000*P20) 1,000,000

Share premium-PS 1,500,000

(c) Income summary 540,000

Retained earnings 540,000

Correct entries to record transaction in 2014:

(a) Preference shares (20,000*P20) 400,000

Share premium-PS (20,000*P30) 600,000 *Share premium from the original issuance of preference shares in 2013

Ordinary shares (80,000*P10) 800,000


(b) Building (@fair value) 1,200,000 *Allocation:

Ordinary shares (25,000*P10) 250,000 Ordinary @Fair value (25,000*P25) 625,000

Share premium-OS (P625,000-P250,000) 375,000 Preference @Residual amount 575,000

Preference shares (20,000*P20) 400,000 Fair value of Building 1,200,000

Share premium-PS (P575,000-P400,000) 175,000 Note that the Building's fair value was more clearly determinable that the

fair value of the securities issued, since while the fair value of ordinary shares

(c) Cash, net (5,000*52)-P12,000 248,000 were determinable at P25, the fair value of preference shares is not clearly

Preference shares (5,000*P20) 100,000 determinable since it is highly speculative or volatile.


(d) Treasury shares (10,000*P22) 220,000

Cash 220,000

(e) Cash (2,000*P20) 40,000


Treasury shares (2,000*P22) 44,000

(f) Ordinary shares (5,000*P10) 50,000

Share premium-OS 20,000 *Share premium from original issuance computed as:

Retained earnings 40,000 (P400,000/100,000)*5,000

Treasury shares (5,000*P22) 110,000

(g) Income summary 830,000


(h) Retained earinings 66,000

Retained earinings appropriated for Treasury 66,000

Summary

Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS RE-unapp RE-app TS

(a) Ordinary share issuance in 2013 1,000,000

400,000

(b) Preference share issuance in 2013

1,000,000

1,500,000 (c) Net income in 2013

540,000

(a) Conversion of PS to OS in 2014 800,000 (400,000) 200,000 (600,000) (b) Ordinary and Preference shares issue 250,000 400,000 375,000 175,000 (c) Preference shares issuance in 2014

100,000

148,000

(d) Reacquisition of Treasury

(220,000)

(e) Treasury shares reissuance in 2014

(4,000)

44,000

(f) Treasury shares retirement in 2014 (50,000)

(20,000)

(40,000)

110,000

(g) Net income in 2014

830,000 (h) Appropriation for treasury

(66,000) 66,000

Adjusted 12/31/14 balances 2,000,000 1,100,000 955,000 1,223,000 1,260,000 66,000 (66,000)


Share capital:


Preference Shares 1,100,000 3,100,000

Additional paid-in capital:


Share premium-PS 1,223,000 2,178,000 5. Ans.


5,278,000 6. Ans. Retained earnings - appropriated

66,000

Retained earnings - unappropriated

1,260,000 Treasury shares at cost

(66,000)

Total Stockholders' Equity 6,538,000 8. Ans.

CHAPTER 9-PROBLEM 4: BULACAN CO.

Correct entries:

1. Ans. P450,000.

(a) Cash 5,700,000

Bonds payable 5,000,000

Premium on bonds payabe 250,000

Ordinary share warrants outstanding 450,000

(b) Cash (4,000sh*P70) 280,000

Accumulated profits 20,000

Treasury shares (4,000sh*P75) 300,000


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Share premium-OS (P250K/50Ksh)*1K 5,000


Treasury shares (1,000sh*P75) 75,000

(c) Memo: 49,000share rights were issued to 49,000 shares outstanding.

2. Ans. P276,000.

(d) Cash (5,000*60%)/5w*P60 36,000

Ordinary share warrants (P450K*60%) 270,000

Ordinary shares (600sh*P50) 30,000


3. Ans. P45,000.

(e) Cash (40,000/10)*P55 220,000



(f) Income summary 1,250,000

Accumulated profits 1,250,000

Summary:

Prefence Sh Ordinary Sh APIC/Sh Prem. Accum. Prof. Treasury Total

Balances, January 1, 1,000,000 2,500,000 500,000 2450000 (375,000) 6,075,000

(a) Warrants issuance

450,000

450,000

(b) Treasury reissue

(20,000) 300,000 280,000

Tresaury retirement (50,000) (5,000) (20,000) 75,000 -

(c) Share rights issue (memo entry)

-

(d) Warrants exercise

30,000 6,000

36,000

(e) Rights exercise

200,000 20,000

220,000

(f) net Income

1,250,000

1,250,000

Balances, December 31, 1,000,000 2,680,000 971,000 3,660,000 - 8,311,000

4. Ans. 5. Ans. 6. Ans.

CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES.

(a) Entry made:

Cash 130,000

Treasury shares 130,000

Correct entry:

Cash 130,000


Treasury shares (P363,000/605)*325 195,000

1. Ans. Adjusting entry:


Treasury shares 65,000

(b) Entry made:

Cash 650,000

Preference shares (6,000sh*50) 300,000


Correct entry:

Cash 650,000

Allocation: Prorata

Preference shares 300,000 Pref. Sh. (6Ksh*P80) 480,000 80%

Share premium-PS (P650K*80%)-PAR 220,000 Warrants (12Kw*P10) 120,000 20%

Ordinary share warrants outstanding (P650K*20%) 130,000

600,000




(c) Entry made:

Cash (700sh*P440)*40% 123,200

Subscription receivable 184,800

Orinary shares subscribed 308,000

Correct entry:

Cash (700sh*P440)*40% 123,200

Subscription receivable 184,800

Ordinary shares subscribed (700sh*P20) 14,000


3. Ans. Adjsuting entry:

Ordinary shares subscribed 294,000


(d) Entry made:

Cash 158,400

Subscriptions receivable 158,400

Correct entry:

Cash 158,400

Subscriptions receivable 158,400

Ordinary shares subscribed (600sh*P20) 12,000

Ordinary shares 12,000




(e) Entry made:



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83,333

33,333

66,667

50,000

120,833

Cash (4,000*2sh*P400)

Ordinary shares

Correct entry:

3,200,000

3,200,000

Cash 3,200,000 Ordinary share warrants (P130K*4/12)

Ordinary shares (4,000*2sh*P20)

43,333 160,000

Share premium-OS

3,083,333


Ordinary shares

3,040,000

Ordinary share warrants outstandin

Share premium-OS

43,333 3,083,333

6. Ans.

(f) Correct entry/Adjusting entry

Cash (P184,800-P158,400)+P5,000

Miscellaneous expense

31,400 5,000

Subscription receivable

26,400

Ordinary shares subscribed

Ordinary shares (100*P20)

2,000

2,000

CHAPTER 9-PROBLEM 6: PUNK INC.

1. Ans. P83,333.

FMV of options (100emp*100opt)*P25 250,000 Entry:

Divide by: Vesting period 3 Salaries expense 83,333

Salaries expense, 2014 Ordinary share options outstanding 83,333

2. Ans. P58,333.

Revised FMV of options (85emp*100opt)*P25 212,500

Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec. 31, 2015

Less: Prior year's salaries expense

141,667 Entry:

(83,333) Salaries expense 58,333 Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333

3. Ans. P33,333.

Final FMV of options (70emp*100opt)*P25 175,000 Entry:

Less: Prior years' cummulative salaries expense (141,667) Salaries expense 33,333


4. Ans. P210,000.

Entry upon exercise of all options:

Cash (7,000sh*P25) 175,000

Ordinary share options oustanding 175,000

Ordinary shares (7,000sh*P20)

140,000

Share premium

210,000

CHAPTER 9-PROBLEM 7: PUNK INC.

1. Ans. P66,667.

Estimated FMV of options (100-20emp)*100opt*P25 200,000 Entry:



2. Ans. P58,333.

Revised FMV of options (100-25emp)*100opt*P25 187,500

Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec. 31, 2015

Less: Prior year's salaries expense

125,000 Entry:

(66,667) Salaries expense 58,333 Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333

3. Ans. P50,000.

Final FMV of options (70emp*100opt)*P25 175,000 Entry:



4. Ans. P50,000.

Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market based-

condition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the

services were received, thus, salaries expense shall be recognized.

Entry:


Ordinary share options outstanding 50,000

Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity.

Entry:


Retained earnings/APIC-Unexercised options 175,000

5. Ans. P120,833.

Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are

accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 years.

Final FMV of options, Dec. 2015 (75emp*100opt)*P25 187,500

Less: Prior years' cummulative salaries expense (66,667)

Salaries expense, 2015

CHAPTER 9-PROBLEM 8 : PUNK INC.

1. Ans. P62,500.

Dec. 31, 2014: Is the non-market based condition achievable?

Actual sales, 2014 75,000,000

Multiply by: 120% estimated increase 120%

Projected sales, 2015 90,000,000





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121 of 155

41,667

137,500

33,333

Minimum required sales 100,000,000 Thus, achievable.

Note that the estimated sales in 2016 is P108M, thus the estimated number of options per employee shall be 100.

62,500

2. Ans. P137,500.

Dec. 31, 2015: Is the non-market based condition achievable?

Actual sales, 2015 110,000,000



Minimum required sales 100,000,000 Thus, achievable.

Note that the estimated sales in 2016 is P132M, thus the estimated number of options per employee shall be 150.

Revised FMV of options (100-20emp)*150opt*P25 300,000

Multiply by: 2years/3 years 2/3

Cummulative salaries expense as of Dec. 31, 2015 200,000 Entry:

Less: Prior year's salaries expense (62,500) Salaries expense 137,500


3. Ans. P220,000.

Dec. 31, 2016: Has the non-market based condition been achieved?

Actual sales, 2016 150,000,000

Minimum required sales 100,000,000 Thus, achieved, therefore options are exercisable.

Note that the actual sales in 2016 is P150M, thus the final number of options per employee shall be 200.

Final FMV of options (100-16emp)*200opt*P25

Less: Prior years' cummulative salaries expense

420,000 Entry:

(200,000) Salaries expense 220,000

Salaries expense, 2016 220,000 Ordinary share options outstanding 220,000

4. Ans. P504,000.


Cash (16,800sh*P25) 420,000



336,000

Share premium

504,000

CHAPTER 9-PROBLEM 9 : PUNK INC.

1. Ans. P100,000.

Dec. 31, 2014: Has the non-market based condition been achieved at the end of 2014?

Actual increase in sales, 2014 (P81M-75M)/75M 8%

Minimum required increase in sales, 2014 10% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?

Estimated average increase in sales in 2014 and 2015: (8%+16%)/2 12%

Minimum required average increase in sales (2014 -2015) 12% Thus, achievable, VP is 2 years.

100,000

2. Ans. P33,333.

Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015?

Actual increase in sales, 2014 (P81M-75M)/75M 8%

Actual inrease in sales, 2015 (P92.23M-81M)/81M 14%

Actual average increase in sales (2014 and 2015) 11%

Minimum required average increase in sales (2014 - 201 12% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?

Estimated average increase in sales in 2014 and 2015: (8%+14%+20%)/3 14%

Minimum required average increase in sales (2014 - 2016) 14% Thus, achievable, VP is 3 years.

Revised FMV of options (10-2emp)*1,000opt*P25 200,000





3. Ans. P41,667.

Dec. 31, 2016: Has the non-market based condition been achieved?

Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M 20%

Actual average increase in sales (2014-2016) (8%+14%+20%)/3 14%

Minimum required average increase in sales (2014 - 2016) 14% Thus, the condition has bee achieved.

Options are exercisable.

Final FMV of options (10-3emp)*1,000opt*P25 175,000 Entry:



Est. FMV of options vested (100-25emp)*100opt.*P25 187,500 Entry: Divide by: Vesting period 3 Salaries expense 62,500

Salaries expense, 2014 62,500 Ordinary share options outstanding

Est. FMV of options vested (10-2emp)*1,000opt.*P25 200,000 Entry: Divide by: Vesting period 2 Salaries expense 100,000

Salaries expense, 2014 100,000 Ordinary share options outstanding



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603,333

4. Ans. P210,000.


Cash (7,000sh*P25) 175,000



140,000

Share premium

210,000

CHAPTER 9-PROBLEM 10 : MYX CO.

1. Ans. P603,333.

End of 2014: Is the non-market based condition achievable?

Projected 2016 sales: (P210M*120%*120%) 328,125,000

Minimum required 2016 sales 250,000,000 Achievable, number of SARs is 10,000.

Estimated FMV of SARS, 2014 (10,000sars*P74) 740,000 Entry:


Salaries expense, 2014 246,667 SAR payable 246,667

End of 2015: Is the non-market based condition achievable?

Projected 2016 sales: (P410M*120%) 640,625,000

Minimum required 2016 sales 250,000,000 Achievable, number of SARs is 15,000.

Estimated FMV of SARS, 2015 (15,000sars*P85) 1,275,000




Salaries expense, 2015 SAR payable 603,333

2. Ans. P1,050,000.

End of 2016: Has the non-market based condition been achieved?

Actual 2016 sales 760,000,000

Minimum required 2016 sales 250,000,000 Achieved, number of SARs is 20,000.

Final FMV of SARS (20,000sars*P95) 1,900,000 Entry:

Less: Prior years' cummulative salaries expense (850,000) Salaries expense 1,050,000

Salaries expense, 2016 1,050,000 SAR payable

1,050,000

3. Ans.

Entry upon exercise in 2017 at prevailing FMV P98.

SAR payable 1,900,000


Cash (20,000sars*P98) 1,960,000

4. Ans. P1,800,000.

SAR payable at prevaiing FMV (20,000sars*P90)

Entry to remeasure the SAR at the end of 2017:

SAR payable 100,000

Salaries expense/Income from SAR reversal 100,000

(P95 - P90)*20,000SARS

CHAPTER 9-PROBLEM 11 : DARK COMPANY

1. Ans.

Retained earnings (10%*90,000sh)*P14 126,000

Share dividends payable (9,000sh*P10) 90,000


Share dividends payable 90,000


2. Ans.

Retained earnings (25%*99,000sh)*P10

Share dividends payable (24,750sh*P10)

Share dividends payable

Ordinary shares

247,500

247,500

247,500

247,500

3. Ans. P1,337,500.

Ordinary shares, beginning balance

1,000,000

10% share dividends (90,000sh*10%)*P10

90,000

25% share dividends (99,000sh*25%)*P10

247,500

Ordinary shares, ending balance

1,337,500

CHAPTER 9-PROBLEM 12 : CHRIS COMPANY

1. Ans.

Retained earnings (10%*500,000)*P25 2,500,000

Stock dividends payable (50,000sh*P10) 500,000


2. Ans.

Stock dividends payable 500,000

Ordinary shares (46,000sh*P10) 460,000

Fractional warrants outstanding (4,000*P10) 40,000

3. Ans.

Fractional warrants outstanding 36,000

Ordinary shares (3,600sh*P10) 36,000

1,800,000



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4. Ans.

Fractional warrants outstanding 4,000

Share premium - Expired fractional warrants 4,000

5. Ans. P1,099,200.

Oustanding shares, beginning 500,000

Ordinary share dividends distributed 46,000 Shares issued from fractional warrants 3,600 Total outstanding shares 549,600 Multiply by: Cash dividends 2 Dividends from earnings 1,099,200

Entry:

Retained earnings

1,099,200

Capital liquidated (549,600*P1)

Dividends payable

549,600 1,648,800

Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE.

CHAPTER 9-PROBLEM 13 : ABC INC.

1. Ans. P900,000.

Declaration:

Retained earnings

900,000

Property dividends payable

900,000

Noncurrent asset held for disposal 720,000 Accum. depr (P800,000*1/10)

Building (PPE)

80,000 800,000

2. Ans. P700,000.

Balance sheet date: December 31, 2014


200,000

Retained earnings

FMV at 12/31/14

700,000

200,000

Dividends payable, CV 900,000 Adjustment to RE (200,000)

Loss

Noncurrent asset held for disposal

FMV less cost to sell, NCAHFD

20,000

700,000

20,000

CV, upon reclass 720,000 Loss on remeasurement - P&L (20,000)

3. Ans. None.

Note that the increase or decrease in the property dividends payable is charged to RE.

4. Ans. P100,000.

Distribution:

Retained earnings

100,000


100,000

Final FMV, 1/31/2015 800,000 Dividends payable, CV (FMV 12/201 700,000 Adjustment to RE 100,000


800,000

Noncurrent asset held for disposal 700,000

Gain on settlement of property dividends - P&L 100,000

CHAPTER 9-PROBLEM 14: JKL CORP. Correct entries:

(a) Accumulated profits, beg 50,000

Cash

50,000

Preference shares (40,000*P1) 40,000 Ordinary shares (20,000*P0.50) 10,000 Total cash dividends 50,000

(b) Treasury shares (80,000/4,000= P20) 80,000

Cash 80,000

(c) Memo: Share split up 1 is to 2: 1. Ans. NO EFFECT.

From 20,000 shares issued to 40,000 shares issued; From P5 par to P2.50 par

From 4,000 treasury shares to 8,000 treasury shares; From P20 cost per treasury to P10 per treasury

(d) Equipment

Treasury shares (2,800*P10)

50,000

28,000

Share premium-TST

22,000

(e) Cash (10,000*P15)

Preference shares (10,000*P10)

150,000

100,000

Share premium-PS

50,000

(f) Accumulated profits (34,800*10%)*P6 20,880 2. Ans.

Share dividends payable (3,480*P2.50) 8,700






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(150,000)

(g) Accumulated profits 59,570 3. Ans.

Cash dividends payable 59,570

Preference shares (50,000*P1) 50,000

Ordinary shares (38,280*P0.25) 9,570

Total cash dividends 59,570

(h) Income summary 940,000


-- Accumulated profits 52,000

Accumulated profits appropriated for treasury 52,000

Summary: Preference Sh Ordinary Sh Sh. Prem-PS Sh. Prem-OS Sh. Prem-TS Accum. P.-App Accum. Prof Treasury

January 1, 2014 balances 400,000 100,000 192,000 1,200,000

(a) Retroactive adjustment, 2013 dividends (50,000)

(b) Treasury shares reacquisition

(80,000)

(c) Share split - No Effect (d) Treasury shares reissue

22,000

28,000

(e) Preference shares issue 100,000

50,000 (f) 10% stock dividends

8,700

12,180

(20,880)

(g) 2014 cash dividends

(59,570) (h) 2014 net income

940,000

-- Appropriation for treasury

52,000 (52,000) December 31, 2014 balances 500,000 108,700 50,000 204,180 22,000 52,000 1,957,550 (52,000)

4. Ans.

5. Ans.



Computed as: (34,800*20%*P2.50)

CHAPTER 9-PROBLEM 15: TRUST CORPORATION

CASE 1:

Entries:

a) Retained earnings

Accum Depr

100,000 100,000

b) Retained earnings

Inventories

50,000

50,000

c) Retained earnings

Accounts payable/Liabilities

150,000

150,000

d) Ordinary shares (P5*100,000sh) 500,000 Share premium 500,000

e) Share premium 550,000


Assets Liabilities SHE Ordinary Sh. Share Prem. Ret. Earnings

Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)

a) Write-down of PPE (100,000)

(100,000)

(100,000)

b) Write-down of Inventory (50,000)

(50,000)

(50,000)

c) Accrual of additional Liability

150,000 (150,000)

(150,000)

d) Recapitalization

- (500,000) 500,000 e) Write-off of deficit

-

(550,000) 550,000

Balances, after quasi-reorganization 1,000,000 450,000 550,000 500,000 50,000 -

1. Ans. 2. Ans. 3. Ans. 4. Ans.

CASE 2:

Entries:

a) PPE - Appraisal Increase

Accum Depr - Appraisal Increase

Revaluation surplus 600,000 Sound Value 1,500,000 900,000 Carrying Value

b) Retained earnings 75,000

Inventories 75,000

c) Retained earnings 175,000

Accounts payable/Liabilities 175,000

d) Revaluation surplus 500,000


Assets Liabilities SHE Ordinary Sh. Share Prem. Rev. Surplus Ret. Earnings

Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000

(250,000)

a) Write-down of PPE 600,000

600,000

600,000 b) Write-down of Inventory (75,000)

(75,000)

(75,000)

c) Accrual of additional Liability

175,000 (175,000)

(175,000)

d) Write-off of deficit

-

(500,000) 500,000

Balances, after quasi-reorganization 1,675,000 475,000 1,200,000 1,000,000 100,000 100,000 -


CHAPTER 9-PROBLEM 16: SPURS INC.

1. Ans. Dr. P150,000.

Debit to RE, per books 1,500,000

Debit to RE, per audit (15%*100,000sh)*P110 1,650,000

Adjustment to RE (additional debit)

1,000,000

Repl. Cost 2,500,000 1,500,000 Cost

400,000 Repl AD (1,000,000) (600,000) AD


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2. Ans. P9,100,000.

Unadjusted Net Income, per books 9,000,000

Inventory fire loss (150,000)

Impairment loss on PPE (750,000)

Loss on sale of Equipment (200,000)

Gain on retirement of bonds 300,000

Unrealized holding gain on FA 700,000

Increase in beg. Inventory under FIFO (100,000)

Increase in end. Inventory under FIFO 300,000

Adjusted Net Income, per audit 9,100,000

3. Ans. P6,400,000.

Retained earnings, beginning 7,800,000

Correction of prior period error (1,500,000)

Change in policy (Ave to FIFO) 100,000

Retained earnings, beg. as restated 6,400,000

4. Ans. P10,650,000.

Retained earnings, beg. as restated 6,400,000

15% stock dividend declaration (1,650,000)

Loss on retirement of Treasury (P1,050,000-P850,000) (200,000)

Reserve for plant expansion (3,000,000)

Adjusted Net Income 9,100,000

Retained earnings, ending balance 10,650,000

5. Ans. P1,100,000.

Excess over par on share dividends (P1,650,000-P1,500,000) 150,000

Loss on retirement of treasury (850,000)

Excess over par on share issuance 1,000,000

Proceeds from sale of donated shares 800,000

Net/Total adjustment to Additional Paid-in Capital 1,100,000

MULTIPLE CHOICE EXERCISES: CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC.

1. Ans. A.

Ordinary shares issued (40,000sh*P20)

800,000

Ordinary shares subscribed (5,000sh*P20)

100,000

Preference shares issued (6,000sh*P100)

600,000

Preference shares subscribed (900sh*P100)

90,000

Share premium from ordinar shares Issued 920,000

Subscribed (P56-P20)*5,000sh 180,000 1,100,000

Share premium from preference shares Issued 224,000

Subscribed (P140-P100)*900 36,000 260,000

Share premium from treasury shares

8,000

Ordinary share warrants outstanding

40,000

Total contributed capital

2,998,000

2. Ans. A.

Revaluation surplus 240,000

Unrealized holding gain - AFS 6,000

Translation reserves (credit) 100,000

Unrealized capital/Other comprehensive income 346,000

3. Ans. B.

Contributed capital 2,998,000

Accum. other comprehensive income 346,000


Stockholders' equity 4,164,000

CHAPTER 9-EXERCISE 2: ALPHA CORPORATION

1. Ans. D.

Authorized ordinary shares at P10 par value

900,000

Unissued ordinary shares (500,000)

Ordinary shares issued

2. Ans. D.

Authorized preference shares at P50 par value

400,000

Unissued preference shares 100,000

Preference shares issued

3. Ans. C.

Additional paid-in capital on ordinary shares 460,000

Additional paid-in capital on preference shares 112,000

Additional paid in capital on sale of treasury shares 4,000


Donated capital 25,000

Total Additional Paid-in Capital P621,000

4. Ans. D.

Ordinary shares issued P400,000 Preference shares issued 300,000 Ordinary shares subscribed, net of subs. receivable,

Preference shares subscribed, net of subs. receivable, 30,000

30,000

Total Additional Paid-in Capital 621,000


P400,000

P300,000

P1,381,000


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P16,400,000

P330,000

5. Ans. C.

Ordinary shares issued P400,000

Preference shares issued 300,000


Preference shares subscribed 45,000

Total Legal Capital (Par value of issued and subs.)

6. Ans. C.

Total Contributed Capital 1,381,000 Accumulated other comprehensive

Unrealized holding gain-AFS 3,000

Revaluation increment in properties 100,000

Accumulated profits:

Accumulated profits – unappropriated 410,000

Reserve for bond sinking fund 220,000

Total Stockholder’s equity

CHAPTER 9-EXERCISE 3: TABUK CORPORATION

Entry Made Correct Entry Adjusting Journal Entry

Cash 900,000

O.S. 300,000

P.S. 450,000


Cash 900,000

O.S. 300,000

P.S. 450,000

Share Prem – PS 117,000

Share Prem – OS 33,000

Retained Earnings 150,000

Share Prem – PS 117,000


1. Ans. C.

Cash 225,000

Other expense 37,500

Treasury Stock 262,500

Cash 225,000

Share Prem – TS 37,500


Share Prem. – TS 37,500


*books are already closed.

2. Ans. D.

O.S. 600,000



O.S. 600,000



Share Prem – TS 340,000

Share Prem. – OS 90,000


Share Premium – TS 340,000

3. Ans. C.

No entry

Cash 425,000

Subs Rec. 350,000

Opex 50,000


Cash 425,000

Subs Rec. 350,000


*books are already closed.

4. Ans. A.

CHAPTER 9-EXERCISE 4: NEVADA SQUARE

1. Ans. D.

Retained earnings, Jan. 1, 2014 P30,000,000

Cash dividends (2,800,000)

Stock dividends (100,000*P68) (a) (6,800,000)

Property dividends (800,000/2)*P25 (b) (10,000,000)

Net income for the year 60,000,000

Retained earnings, Dec. 31, 2014

(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.

(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.

2. Ans. B.

Ordinary shares, January 1, 2014 P14,000,000

Stock dividends issuance (100,000*20) 2,000,000

Ordinary shares, December 31, 2014

*share split is accounted through memo entry only, aggregate par value remains the same.

3. Ans. C.

Share premium, January 1, 2014 P8,000,000

Share premium from share dividends

(6,800,000 – 2,000,000) 4,800,000

Share Premium, December 31, 2014

4. Ans. B.

Preference shares P10,000,000

Ordinary shares 16,000,000



Retained earnings, Dec. 31, 2014

CHAPTER 9-EXERCISE 5: MISAMIS INC.

1. Ans. B.

Number of options estimated to vest (200opt*100emp) 20,000

Multiply by Market value of Options 30

Total Options Outstanding 600,000

Multiply by (2012 & 2013) 2/3

Total Accum. Comp. Exp. as of 12.31.2013 400,000

2. Ans. D.

Proceeds from exercise of rights (60,000–5,000)/5*130 P1,430,000

Par value of Ordinary shares issued (11,000*100) 1,100,000

Share premium

P795,000

P2,114,000

P16,000,000

P12,800,000

P55,200,000


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P270,000

3. Ans. B.

Share premium from ordinary shares P1,000,000

Share premium from exercise of warrants 575,000

Share premium from exercise of rights 330,000 P1,905,000

Ordinary share options outstanding (20,000*30) 600,000

Ordinary share warrants outstanding (750,000*50%) 375,000

Total APIC

4. Ans. D.

Accumulated profits, beginning P3,000,000

Retroactive adjustment to retained earnings (400,000)

Appropriation for dividends (71,000 * 5) (355,000)

Net income, 2014 (2,500,000 – 200,000) 2,300,000

Accumulated profits, end

CHAPTER 9-EXERCISE 6: SANTIAGO INC.

1. Ans. B.

The share options are under a variable option plan with a non-market based condition, thus:

2014:

VP 1 year achieved if 2014 Rev>=15M; Actual 2014 Rev, P14.5M – not achieved.

VP 2 years achievable if 2015 Rev>=18M; Estimated 2014 Rev, (P14.5M*125%) = 18.125M – achievable.

Number of options: (68-8)*500 30,000

Fair value of options on grant date P18

Estimated value of services over 2 years P540,000

Divide by: Vesting period 2 years


2. Ans. D.

2015:

VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved.

VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable.

Number of options: (65-5)*500 30,000


Estimated value of services over 3 years P540,000 Multiply by: 2/3 2/3

Accumulated salaries expense as of P360,000

Less: Prior years’ salaries expense (270,000)


3. Ans. C.

2016:

VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved.

Final number of options: 63*500 31,500


Final value of services over 3 years P567,000

Multiply by: 3/3 3/3

Accumulated salaries expense as of 2016 P567,000


Salaries expense, 2016 P207,000

4. Ans. A.

Final number of options: 63*500 31,500

Options exercised in 2017: 45*500 (22,500)

Options forfeited in 2017 3*500 (1,500)

Remaining options as of 12/31/17 7,500

Multiply by fair value on grant date P18

Carrying value of options outstanding 12/31/17

5. Ans. C.

Entry upon exercise of 45*500 = 22,500 options:

Cash (22,500*P35)

Ordinary share options outstanding

787,500

(22,500*18) 405,000

Ordinary shares (22,500*P20)

450,000

Share premium

742,500

CHAPTER 9-EXERCISE 7: PANDORA CORP.

1. Ans. B.

The share options are under a variable option plan with a market based condition, thus the achievability of the condition

is not a matter to consider in determining annual salaries expense:

2014:

Number of options: (600-5-45)*100 55,000





2. Ans. A.; 3. ans. C.

2015:

Number of options: (600-5-20-35)*100 54,000







P2,880,000

P4,545,000

P90,000

P135,000

91,667

P88,333



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4. Ans. A.

2016:

Final number of options: (600-5-20-30)*100 54,500


Final value of services over 3 years P272,500




Salaries expense, 2016 P92,500

CHAPTER 9-EXERCISE 8: JUBEE CORP.

1. Ans. B.

The share options are under a variable option plan with a non-market based condition, thus:

2014:

Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. 12% – achievable.

Number of options: (100*80%)*200 16,000


Estimated value of services over 3 years 640,000



2. Ans. C.

2015:

Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable.

Number of options: (100*85%)*300 25,500


Estimated value of services over 3 years 1,020,000





3. Ans. D.

2016:

Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived.

Final number of options: (100-14)*300 25,800


Final value of services over 3 years P1,032,000


Accumulated salaries expense as of 2016 P1,032,000

Less: Prior years’ salaries expense (680,000.0)


4. Ans. A.

Entry upon exercise of 60% of the options (25,800*60% = 15,480 options):

Cash (15,480*P120)


1,857,600

(15,480*40) 619,200

Ordinary shares (15,480*P100)

1,548,000

Share premium

928,800

5. Ans. B.

Entry upon expiration of 40% of the options (25,800*40% = 10,320 options):


(10,320*40) 412,800

Share premium – Expired options 412,800

CHAPTER 9-EXERCISE 9: KALINGA CO.

1. Ans. A.

The share appreciation rights are under a variable plan with a non-market based condition, thus:

2014:

Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable.

Estimated number of SAR: (20-4)*10,000 160,000

Estimated FMV of SAR at year-end P6




2. Ans. D.

2015:

Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable

Estimated number of SAR: (20-4)*10,000 160,000

Estimated FMV of SAR at year-end P6.75

Estimated value of services over 3 years P1,080,000





3. Ans. B; 4 Ans. D.

2016:

Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved.

Final number of SAR 15*20,000 300,000


Est. value of services over 3 years P2,100,000


Accumulated salaries expense as of 2016 P2,100,000



P213,333

P466,667

P352,000

P320,000

400,000

P1,380,000



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270,000

11,158,000

CHAPTER 9-EXERCISE 10: SANS CORP.

CORRECT ENTRIES:

Land (1.8M*30%)

540,000

Building (1.8M*70%)

Ordinary Shares

1,260,000 500,000

Share premium

1,300,000

Subsription receivable

Ordinary shares subscribed

420,000

200,000

Share premium

220,000

Treasury shares (5,000 sh)

Cash

125,000

125,000

Cash

Subscription receivable

252,000

252,000

Ordinary share subscribed

Ordinary shares

120,000

120,000

MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par

8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price

5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit

Cash 40,000

RE 22,500

Treasury shares (10,000*6.25) 62,500

2. Ans. C.

Compensation expense 84,000

SAR Payable 84,000

(7*4,000*P15)/5years

3. Ans. C.

RE 270,000

Cash Dividends Payable 270,000

Shares Outstanding 238,000

Shares Subscribed 32,000

Total 270,000

Multiply by cash div rate 1

Total Cash dividends

Income Summary 1,500,000

RE 1,500,000

Summary OS OS-Subs Share Prem. RE TS TOTAL

January 15, 500,000 1,300,000

March 1, 200,000 220,000

June 1, (125,000)

July 15, 120,000 (120,000)

September 2, (22,500) 62,500

December 30, (270,000)

December 31, 1,500,000

Appropriation for TS (62,500)

Adj. Balances 620,000 80,000 1,520,000 1,145,000 (62,500) 3,365,000

1. Ans. B. 4. Ans. C. 5. Ans. C 6. Ans. D.

CHAPTER 9-EXERCISE 11: ROXXY CORP.

1. Ans. D.

Prior to 2013:

Ordinary Sh. Sh Prem - OS Sh Prem- TS Treasury Share Shares Outstanding

A. Share issue for cash 3,800,000 7,980,000 380,000

B. Share issue for land 200,000 680,000 20,000

C. Share subsription/issue 400,000 1,280,000 40,000

D. Cash dividend declaration (Dec. 15, 2012) 440,000

2013 transactions:

A. Cash dividend declaration (June 15, 2013) 440,000

B. Share issue for cash 80,000 288,000 8,000

C. Reacquisition of Treasury Shares 312,000 (8,000)

D. Stock Dividend Declaration 220,000 924,000 22,000

462,000

2014 transaction:

A. Reissue of TS 6,000 (78,000) 2,000

Balances: June 30, 2014 4,700,000 11,152,000 6,000 234,000 464,000

2. Ans. C.

Share premium - OS 11,152,000

Share premium - Treasury-OS 6,000

Total Share premium

3. Ans C.

Retained earnings, June 30, 2013 2,760,000

Net Income for 2014 fiscal year 160,000

Stock Dividends to OS (Dec. 2013) (440,00sh*5%*P52) (1,144,000)

Cash Dividends to PS (Dec. 2013) (200,000*P1) (200,000)

Voluntary approp. for sinking fund (200,000)

Legal approp. for treasury shares (equal to cost) (234,000)

Retained earnings, unappropriated June 30, 2014 1,142,000



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4. Ans. A.


Preference Shares 5,000,000

Share Premium - OS 11,152,000

Share Premium - PS 3,800,000

Share Premium - Treasury (OS) 6,000

RE, appropriated 434,000

RE, unappropriated 1,142,000

Treasury Shares at cost (234,000)

Total SHE, June 30, 2014 26,000,000

CHAPTER 9-EXERCISE 12: GLORIA CORPORATION

ENTRIES:

a) OS (30,000*5) 150,000

Share premium - OS 150,000

Treasury shares

270,000

Share premium - TST

30,000

1. Ans. C.

b) RE (10,000*70) 700,000


700,000

RE (10,000*5) 50,000

Property dividends payable 50,000

2. Ans. A.


Trading securities @CV

750,000 680,000

Gain/Income

70,000

c) Memo: 1M share rights were received; 1 OS: 4 SR plus P11

Cash (840K/4)*11

OS (210K*5)

2,310,000 1,050,000

Share premium - OS

1,260,000

d) RE (100,000*2)

OSWO

200,000

200,000

Cash (80,000*8) 640,000 OSWO (200,000*80%)

OS (80,000*5)

160,000 400,000

Share premium - OS

400,000

e) RE (1.8M*10%)

Dividends payable

180,000

180,000

f) Available for sale securities

UHGain - OCI (SCI/SHE)

110,000

110,000

UHLoss - AFS 12/31/13

245,000

UHLoss - AFS 12/31/14

(135,000)

Decrease in UHL or UHGain for the year 110,000

g) RE, beg 275,000 Income tax expense

Rent income

225,000 500,000

h) Income summary

RE

2,600,000

2,600,000

SUMMARY

January 1 balances

PS

1,800,000

OS

5,150,000

APIC

3,590,000

UHLoss

(245,000)

RE

4,000,000

TS

(270,000)

a) Treasury shares retirement

b) Property dividends

c) Stock rights exerise

(150,000)

1,050,000

(120,000)

1,260,000

(750,000)

270,000

d) Options (prior period error)

200,000

(200,000) Options exercise

e) Cash dividends

f) UHGain - AFS for the year

g)Prior period error

400,000 240,000

110,000

(180,000)

(275,000)

h) Net Income for the year

2,600,000 December 31, balances 1,800,000 6,450,000 5,170,000 (135,000) 5,195,000 -

5. Ans. A; 7. Ans. C.

3. Ans. B. 4. Ans. B.

6. Ans. D.

Preference share 1,800,000

Ordinary shares 6,450,000 APIC 5,170,000 Contributed Capital 13,420,000

Unrealized holding loss – SHE (135,000) Accumulated profits - Total 5,195,000 Total Stockholders’ Equity P18,480,000



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CHAPTER 9-EXERCISE 13: RAJA CORPORATION

OS

Sh. Prem. RE-app RE-unapp TS TOTAL

Beginning balance

4,000,000 1,700,000 6,000,000

11,700,000

Jan. 5

100,000 60,000

160,000

Jan. 16

(164,000)

(164,000)

Feb. 20

(1,000,000) (1,000,000)

Feb. 25

200,000 280,000

480,000

Mar. 1

1,140,000

(1,140,000)

-

Apr. 1 Split (no entry)

-

May. 30

200,000

500,000 700,000

Jul. 1

778,500 2,335,500 (3,114,000)

-

Aug. 1

(238,740)

(238,740)

Dec. 31

2,150,000

2,150,000

Appropriation for TS

(500,000) 500,000

-

Ending balance 6,218,500 4,575,500 2,993,260 500,000 (500,000) 13,787,260

1. Ans. A. 2. Ans. A. 3. Ans. C.

4. Ans. C.

CHAPTER 9-EXERCISE 14: APAYAO CORPORATION

ASSETS

Cash and cash equivalents (325,000 + 75,000) 400,000

Accounts receivable (275,000 + 100,000) 375,000

Marketable securities, at FMV as of 12/31/06 (955,000 – 600,000) 355,000

Prepayments 50,000 1,180,000 1. Ans. B.

LIABILITIES AND CAPITAL

Treasury shares (50,000*5,000) (250,000) 2,197,000

TOTAL 2,850,000

CHAPTER 9-EXERCISE 15: WHISPER INC.

#of Shares Ordinary Sh. Retained

Outstanding Issued APIC Earnings

May, 2012 balances 300,000 P3,000,000 P300,000

Net income, 2012 P125,000

July 23, 2013 share issue 500,000 5,000,000 1,250,000

October 2 stock dividends (800,000*5%) 40,000 400,000 40,000 (440,000)

Net income, 2013 350,000

February, 2014 treasury stock (30,000)

June, reissuance of treasury 15,000 45,000

October, issuance of stocks thru rights exercise (250,000*2) 500,000 5.000,000 1,500,000

November, issuance of stacks thru rights exercise (400,000*2) 800,000 8,000,000 2,400,000

December 15, cash dividends: (2,125,000*.30) (637,500) 1. Ans. C.

December 31, retirement of TS (100,000) 10,000

Net income, 2014 800,000

Balances 2,125,000 P21,300,000 P5,545,000 P197,500

2. Ans. A. 3. Ans. C.

4. Ans. A.

Ordinary shares issued P21,300,000

Additional paid-in capital 5,545,000


Treasury shares (5,000*9) (45,000)

Total stockholders’ equity

CHAPTER 9-EXERCISE 16: GREY CO.

1. Ans. A.

Contributed capital in excess of par value P18,000

Donated capital (from stockholder) 15,000

Recapitalization (reduction in par value) 1,500,000

Additional paid in capital

2. Ans. D.; 3. Ans. A.

2010 – 2013 Net income P2,400,000

2010 – 2013 Cash dividends (1,560,000)

Correction of error (note 2) 6,000

Refund of prior year’s income tax 27,000

Net income, 2014 510,000

50% share dividend, 2014 (750,000)

Retained earnings, total P633,000

Retained earnings, appropriated (60,000*4) 240,000

Retained earnings, unappropriated P393,000

P26,997,500

P1,533,000

Land 900,000

Building (600,000 – 50,000) 550,000

Machinery and equipment (330,000 – 110,000) 220,000 1,670,000

TOTAL 2,850,000 5. Ans. A.

Current liab. (325,000+75,000+100,000+3,000–50,000–100,000) 353,000 2. Ans. B

Non-current liabilities (250,000 + 50,000) 300,000 653,000

Ordinary shares, (50,000 – 5,000 + 4,000) * 25 1,225,000 Share premium (750,000 – 75,000 + 140,000)

Contributed capital

815,000 2,040,000

3. Ans. A.

Reserve for self insurance 75,000 Reserve for treasury shares (50*5,000) 250,000 Accum.profits (625,000–3,000–100,000–140,000–50,000–250,000) 82,000

4. Ans. D.



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CHAPTER 9-EXERCISE 17: SCURBS CORPORATION

ADJUSTING JOURNAL ENTRIES

a. Ordinary shares

Share premium

180,000 180,000

h. PPE

Retained earnings

36,000 36,000

b. Retained earnings

Share dividends payable

150,000

150,000

i. Retained earnings

Accumulated Depr.

3,300

3,300

c. Allowance for bad debt

Bad debt expense

30,000

30,000

j. Depreciation expense

Accumulated Depr

3,300

3,300

d. Marketable securities 9,000 k. Accumulated depr 52,500

Retained earnings 9,000 PPE 45,000

Gain on sale of PPE 7,500

e. Unrealized loss (IS) 57,000

Marketable securities 57,000 l. Prepayment 2,700

Insurance expense 2,700

f. Retained earnings 12,000 Retained earnings 5,400

Income summary 12,000

g. Income summary 18,300

Inventory, end 18,300

SUMMARY:

1. Ans. A.

Total assets, 2014 unadjusted 2,545,200

(c) Decrease in allowance for bad debt 30,000

(d) Increase in value of marketable sec. in 2013 9,000

(e) Decrease in value of marketable sec. in 2014 (57,000)

(g) Decreasein inventory, end 2014 (18,300)

(h) Understatement in PPE in 2013 36,000

(i) Depreciation of PPE in item h, in 2013 (3,300)

(j) Depreciation of PPE in tem h, in 2014 (3,300)

(k) Correction error: PPE disposal in 2014 7,500

(l) Correcrion of error: prepayment 2,700

Total assets, 2014 adjusted 2,548,500

2. Ans. B.; 3. Ans. D.

2013 2014

Unadjusted net income, 585,000 660,000

(c) Decrease in bad debts in 2014

30,000

(d) Increase in value of marketable sec. in 2013 9,000 (e) Decrease in value of marketable sec. in 2014

(57,000)

(f) Overstatement in inventory, end 2013 (12,000) 12,000

(g) Understatement in inventory, end 2014

(18,300)

(h) Overstatement of repairs expense in 2013 36,000 (i) Understatement in depreciation in 2013 (3,300) (j) Understatement in depreciation in 2014

(3,300)

(k) Understatement in gain on sale of equipment, 2014

7,500

(l) Overstatement of insurance expense, 2013 5,400 Understatement of insruance expense, 2014

(2,700)

Adjusted Net Income 620,100 628,200

4. Ans. D.

Unadjusted Retained Earnings, end 2014 1,401,000

Prior period errors: (P585,000-P620,100) 35,100

Overstatemetn in 2014 Net Income (P660,000-P628,200) (31,800)

Unrecorded dividend declaration (b) (150,000)

Adjusted Retained Earnings, end 2014 1,254,300

CHAPTER 9-EXERCISE 18: GBC INC.

1. Ans. D.

Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends.

2. Ans. B.

Shares issued 100,000

Less: treasury (1,000,000/50) (20,000)

Outstanding shares 80,000

Multiply by 10%

Dividends distributable, small 8,000

Multiply by fair value 42

Appropriation for share dividends 336,000

3. Ans. B.

a. Total net income since incorporation P3,200,000

b. Total cash dividends paid (150,000)

c. Impairment on property declared as dividend (600,000 – 450,000) (150,000)

Appropriation for property dividend at impaired value (450,000)

e. Correct valuation of share dividends (336,000)

h. Appropriated for plant expansion (700,000)

i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000) (140,000)

l. Appropriated for remaining treasury shares at cost P50/share (1,000,000)

Correct Unappropriated Accumulated Profits balance P274,000

4. Ans. A.

5. Ans. D.

d. Proceeds from sale of donated stocks 150,500

e. Share premium from share dividends 136,000

f. Gain on treasury share transaction 375,000

i. Loss on treasury share reissue (debit (375,000)

j. Share premium in excess of par from 215,000

k. Share issuance expense (45,000)

APIC 456,500



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CHAPTER 9-EXERCISE 19: MAMA CORP.

ENTRIES: PROPERTY DIVIDENDS

Declaration: Retained earnings

Dividends payable

900,000 900,000

1. Ans. A.

Noncurrent Asset Held 900,000 Loss

Equipment

300,000 1,200,000

Payment: Retained earnings

Dividends payable

100,000

100,000

Dividends payable

Noncurrent Asset Held

1,000,000

for Disposal

900,000

Gain

100,000 2. Ans. D.

ENTRIES STOCK DIVIDENDS

Declaration: Retained earnings

(200,000*10%)*42 840,000 3. Ans. A.

Dividends payable (20,000*25) 500,000


Payment: Dividends payable 500,000


4. Ans. D.

a. Total net income since 2013 6,400,000

b. Cash dividends since 2013 (300,000)

c. Property Dividends (see entries above) (1,000,000)

Adjustments to Net income in relation to the property dividends Loss on reclassification of Equipment to held for disposal (300,000)

Gain on settlement of the property dividends 100,000

d. Capital loss from treasury shares reissue (300,000-400,000) (100,000)

e. Stock dividends (see entries above) (840,000)

g. Appropriation for plant expansion (700,000)

*Appropriation for treasury stock (30,000*P40) (1,200,000)

Accumulated profits - unappropriated balance 2,060,000

CHAPTER 9-EXERCISE 20: TAR CO.

1. Ans. A.

Net income, unadjusted 300,000

Profit sharing of employees (30,000)

Proceeds from life insurance 150,000

Gain on sale of property 23,000

NET INCOME 443,000

2. Ans. A.

Accumulated profits, beginning 200,000

Correction of prior period error (15,000)

Dividends to ordinary (50,000)

Dividends to preference (40,000)

Appropriation for bond redemption (20,000)

Correct net income 443,000

ACCUM PROFITS, UNAPP. 518,000

3. Ans. A.

APIC, unadjusted 100,000

Gain on sale of treasury, net 3,000

Donation from stockholder 52,000

Gain on sale of own shares 12,000

APIC 167,000


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CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION


DISCUSSION PROBLEMS CHAPTER 10-PROBLEM 1: ABC CORPORATION

Cash

800,000

Current

Asset

800,000

Noncurrent

Asset

Current

Liabilities

Noncurrent

Liabilities

SHE

Accounts receivable 750,000 750,000 Allowance for doubtful accounts 50,000 (50,000) Dividend receivable (a) 40,000 Prepaid expenses 160,000 160,000 Inventory 1,000,000 1,000,000 Financial assets at fair value (a)

Land (b)

690,000 400,000 525,000

Building in process (b) 5,500,000 4,950,000 Patent 200,000 200,000 Machinery and equipment 1,500,000 1,500,000 Accumulated depreciation 300,000 (300,000) Discount on bonds payable 200,000 (200,000) Accounts payable 900,000 900,000 Accrued expenses 150,000 150,000 Note payable, 10% (c) 250,000 250,000 Accrued interest on notes payable (c)

Bonds payable

2,000,000 52,500

2,000,000 Accrued interest on bonds payable (d)

Share capital

3,000,000 60,000

3,000,000

Accumulated profits (b), (c), (d) 4,150,000 4,012,500

Treasury shares (a) (250,000)

Adjusted balances 3,100,000 6,875,000 1,412,500 1,800,000 6,762,500

Audit notes:

1. Ans. 2. Ans. 3. Ans. 5. Ans.

(a) Financial asset at fair value, unadjusted 690,000 Treasury shares (250,000) Dividend receivable (40,000) Financial asset at fair value, adjusted 400,000

(b) Building in progress, unadjusted 5,500,000

Land including property taxes in arrears (525,000)

Property tax expense (25,000)

*charged to RE

Building in progress, adjusted 4,950,000 (c) Notes payable, principal 250,000

Interest in 2013 (P250,000*10%) 25,000

Interest in 2014 (P275,000*10%) 27,500

*charged to RE

Total interest payable on notes 52,500 *charged to RE (d) Accrued interest on bonds payable (P2,000,000*12%*3/12)

60,000

4. Ans. P3,762,500.

Accumulated profits, unadjusted

4,150,000

(b) Property taxes for the current year (25,000) (c) Interest on notes in 2013 (25,000) Interest on notes in 2014 (27,500) (d) Unaccrued interest on bonds in 2014 (60,000) Appropriation for Treasury shares (250,000) Accum. Profits, unappropriated, adjusted 3,762,500


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CHAPTER 10-PROBLEM 2: RCW CORP. Current Noncurrent Current Noncurrent SHE

Asset Asset Liabilities Liabilities

Cash 400,000 400,000 Accounts receivable 800,000 800,000 Allowance for doubtful accounts 50,000 (50,000) Inventories at cost (NRV is P900,000) 1,000,000 900,000 (100,000)

Land, plant site 500,000 500,000 Land, for speculation at FMV (Note a) 1,200,000 1,200,000 Building 3,800,000 3,800,000 Accumulated depreciation – building 2,000,000 (2,000,000) Equipment 3,400,000 3,400,000 Accumulated depreciation – equipment 1,300,000 (1,300,000) Investment in associate 1,300,000 1,300,000 Prepaid expenses 100,000 100,000 Notes payable 750,000 750,000 Accounts payable 350,000 350,000 Income tax payable 50,000 50,000 Accrued expenses 60,000 60,000 Mortgage payable, P100,000 quarterly 2,000,000 400,000 1,600,000 Estimated liability for damages 140,000 140,000 Retained earnings app. for plant expansion 1,000,000 1,000,000

Retained earnings app. for contingencies 100,000 100,000

Share capital 3,000,000 3,000,000

Share premium 300,000 300,000

Retained earnings, unappropriated 1,350,000 1,350,000

Trademark 150,000 150,000 Secret processes and formulas 200,000 200,000 Bank loan payable – June 30, 2015 (Note b) 500,000 500,000 Def. tax asset, net def. tax liability, P50,000 100,000 150,000 50,000 Adjusted balances 2,150,000 7,400,000 1,750,000 2,150,000 5,650,000


CHAPTER 10-PROBLEM 3: SCR COMPANY

Current

Noncurrent

Current

Noncurrent

SHE

Unadjusted balances

Asset

6,200,000

Asset

11,800,000

Liabilities

2,000,000

Liabilities

2,000,000

14,000,000

Restricted foreign deposit (600,000) 600,000 Investment property at cost (1,000,000) 1,000,000 Loss on inventory write-down (200,000) (200,000) Treasury shares (600,000) (600,000) Store supplies 100,000 (100,000) Financial asset at fair value through profit/loss

Share premium

800,000 (800,000) (500,000)

500,000

Unearned leasehold income -current portion 140,000 (140,000) Stock dividends payable (300,000) 300,000 Serial bonds payable - current portion 100,000 (100,000) Adjusted balances 4,700,000 12,500,000 1,740,000 1,460,000 14,000,000



Statement of Comprehensive Income (Expenses according to function)

Note #

Net Sales Note 1

12,230,000 Less: Cost of Sales Note 2 (6,560,000)

Gross profit 5,670,000

Share from net income of associate Note 3 170,000

Other income Note 4 210,000

Total income

Less: Operating expenses

Selling expenses

Note 5

1,820,000

6,050,000

General and administrative expenses Note 6 850,000 Interest expense 400,000 Unrealized holding loss from financial asset 400,000 (3,470,000)

Net income before tax 2,580,000

Income tax expense (30%) (774,000)

Net income after tax 1,806,000 4. Ans.

Other comprehensive income/loss:

Unrealized holding gain on financial asset, net of tax

140,000

Revaluation surplus, net of tax 350,000 Foreign translation gain, net of tax 70,000 560,000 Total comprehensive income

2,366,000

5. Ans.

Statement of Comprehensive Income (Expenses according to nature)

Note # Net Sales Note 1 12,230,000

Share from net income of associate Note 3 170,000

Other income Note 4 210,000


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Total income before expenses

Less: Operating expenses

(Increase)Decrease in inventories

Note 7

390,000

12,610,000 3. Ans

Net purchases Note 2 5,140,000 Depreciation 1,200,000 Salaries 900,000 Supplies 600,000 Utilities 400,000 Rent 200,000 Advertising 150,000 Freight-out 250,000 Interest expense 400,000 Unrealized holding loss on financial asset 400,000 (10,030,000) Net income before tax 2,580,000 Income tax expense (30%) (774,000) Net income after tax 1,806,000 4. Ans.

Other comprehensive income/loss:

Unrealized holding gain on financial asset, net of tax

140,000

Revaluation surplus, net of tax 350,000 Foreign translation gain, net of tax 70,000 560,000

Total comprehensive income

2,366,000

5. Ans.

SUPPLEMENTARY NOTES:

Note 1: Net Sales

Gross sales

13,000,000

Less: Sales returns and allowances (520,000) Sales discounts (250,000) Net Sales 12,230,000

Note 2: Cost of Sales

Raw materials inventory, January 1,

1,150,000

Add: Net purchases

Gross purchases

5,400,000

Add: Freight-in 200,000 Less: Purchase returns and allowances (310,000) Purchase discounts (150,000) 5,140,000 Raw materials available for use 6,290,000 Less: Raw materials, December 31, (800,000) Raw materials used 5,490,000 Direct labor (P900,000*30%)

Factory overhead:

Depreciation (P1,200,000*40%)

480,000

270,000

Supplies (P600,000*20%) 120,000 Utilities (P400,000*40%) 160,000 760,000 Total manufacturing cost 6,520,000 Add: Work-in process inventory, January 1,. 920,000 Cost of goods placed into process 7,440,000 Less: Work-in process inventory, December 31 (1,100,000) Cost of goods manufactured 6,340,000 Add: Finished goods inventory, January 1, 1,200,000 Cost of goods available for sale 7,540,000 Less: Finished goods inventory, December 31, (980,000) Cost of goods sold 6,560,000 1. Ans.

Note 3: Share from Net Income of Associate

XYZ Inc. Net Income for 2014

850,000

Proportionate share 20% Share from net income of associate 170,000

Note 4: Other income

Rent income

120,000

Royalty income 90,000 Total other income 210,000


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Note 5: Selling Expenses


420,000

Salaries (P900,000*40%) 360,000

Supplies (P600,000*50%) 300,000

Utilities (P400,000*35%) 140,000


Advertising expense 150,000

Freight out 250,000

Total selling expenses 1,820,000 2. Ans.

Note 6: General and Administrative Expenses


300,000

Salaries (P900,000*30%) 270,000 Supplies (P600,000*30%) 180,000 Utilities (P400,000*25%) 100,000 Total general and administrative expenses 850,000

Note 7: Increase/Decrease in Inventories

Inventories, January 1:

Raw materials

1,150,000

Work-in process 920,000 Finished goods 1,200,000 3,270,000

Inventories, December 31:

Raw materials

800,000

Work-in process 1,100,000 Finished goods 980,000 2,880,000

Decrase in inventories 390,000

CHAPTER 10-PROBLEM 5: UTV CORP.

Noncurrent Current Noncurrent

Current Asset Assets Liabilities Liabilities

Cash and cash equivalents 400,000 400,000 Bank overdraft 100,000 100,000 Accounts receivable 900,000 900,000 Allowance for doubtful accounts 40,000 (40,000) Raw materials 560,000 560,000 Goods in process 600,000 600,000 Finished goods 1,400,000 1,400,000 Financial assets at fair value through OCI 2,500,000 2,500,000 Land, at fair market value 12/31/14 1,000,000 1,000,000 Building 6,000,000 6,000,000 Accumulated depreciation – building 1,600,000 (1,600,000) Plant and equipment 2,400,000 2,400,000 Accumulated depreciation – Plant and Eqpt. 400,000 (400,000) Patent 800,000 800,000 Goodwill, recognized in Jan. 2013 1,400,000 1,400,000 Note payable, bank – due June 30, 2015 1,300,000 1,300,000 Note payable, bank – due June 30, 2016 2,100,000 2,100,000

Accounts payable 1,000,000 1,000,000 Employee benefit provisions 180,000 180,000 Warranty liabilities 80,000 80,000 Income tax payable 120,000 120,000 Deferred tax liability 280,000 280,000

Accumulated profits, January 1, 2014 3,600,000 Revaluation surplus on Land, January 1, 2014 360,000 Unrealized gain on financial assets, 1/1/14 280,000 Share capital 5,000,000 Share premium, 1,000,000 Sales 10,000,000 Revaluation surplus on Land during the year 140,000 Unrealized gain on financial asset for the year 100,000 Cost of sales 6,000,000 Selling expenses 1,960,000 Administrative expenses 500,000 Finance cost 100,000 Income tax expense 160,000 Dividend declared and paid Balances 3,820,000 12,100,000 2,780,000 2,380,000

Net Income 1. Ans. 2. Ans. 3. Ans. 4. Ans.


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Continued… Total Compre. Net Income Income Accum. Profits SHE

Cash and cash equivalents Bank overdraft Accounts receivable Allowance for doubtful accounts Raw materials Goods in process Finished goods Financial assets at fair value through OCI Land, at fair market value 12/31/14 Building Accumulated depreciation – building Plant and equipment Accumulated depreciation – Plant and Eqpt. Patent Goodwill, recognized in Jan. 2013 Note payable, bank – due June 30, 2015 Note payable, bank – due June 30, 2016 Accounts payable Employee benefit provisions Warranty liabilities Income tax payable Deferred tax liability Accumulated profits, January 1, 2014 3,600,000 Revaluation surplus on Land, January 1, 2014 360,000

Unrealized gain on financial assets, 1/1/14 280,000

Share capital 5,000,000

Share premium, 1,000,000

Sales 10,000,000 Revaluation surplus on Land during the year 140,000 140,000

Unrealized gain on financial asset for the year 100,000 100,000

Cost of sales (6,000,000) Selling expenses (1,960,000) Administrative expenses (500,000) Finance cost (100,000) Income tax expense (160,000) Dividend declared and paid (1,000,000) Balances Net Income 1,280,000 1,280,000 1,280,000 Total Comprehensive Income 1,520,000 Accumulated Profits 3,880,000 3,880,000

Stockholders' Equity 10,760,000

5. Ans. 6. Ans. 7. Ans.

CHAPTER 10-PROBLEM 6: THEODORE COMPANY

1. Ans. P7,485,000.

Sales revenue P7,935,000

Increase in accounts receivable (P1,800,000-P1,350,000) (450,000)

Collections from customers P7,485,000

2. Ans. P2,025,000.

Cost of goods sold P1,800,000

Increase in inventory (P2,700,00-P1,575,000) 1,125,000

Purchases 2,925,000

Increase in accounts payable (P2,250,000-P1,350,000) (900,000)

Cash disbursed for purchases P2,025,000

Operating expenses P1,500,000

Increase in accrued expenses payable (225,000)

Cash paid for operating expenses P1,275,000

3. Ans. P4,185,000.

Collections from customers P7,485,000

Cash disbursed for purchases (2,025,000)

Cash paid for operating expenses (1,275,000)

Cash provided by operating activities P4,185,000

4. Ans. P2,160,000.

Purchase of equipment (P2,700,000)1

Sale of land 495,000

Sale of equipment 45,000

Cash used in investing activities (P2,160,000)

Increase in equipment (P8,550,000- P1,800,000

Add: Cost of equipment sold 900,000

Purchase of equipment P2,700,000


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Increase in lease-liability—Land P450,000 Less: Increase in land (P2,025,000-

225,000

Carrying value of land sold 225,000

Add: Gain on sale of land 270,000

Proceeds from sale of land P495,000

Carrying value of equipment sold P90,000

Less: Loss on sale of equipment 45,000

Proceeds from sale of equipment 45,000

5. Ans. P1,350,000.

Cash used in financing activities-cash

CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY

1. Ans. P920,000.

Net income 790,000

Adj: Non-operating (gain)/loss

Gain on sale of LT investment (P135,000-P100,000) (35,000)

Adj: Non-cash (income)/expenses


Adj: Decrease/(Increase) in Working Capital

Inventory, increase (80,000)

Accounts payable and accrued liabilities, decrease (5,000)

Cash provided by operating activities

2. Ans. P1,005,000.

Proceeds from sale of Building 350,000

Proceeds from sale of LT Investment 135,000

Purchase of Plant assets (P700,000+600,000-110,000) (1,190,000)

Purchase of Available for sale securities (300,000)

Cash used in investing activities (1,005,000)

3. Ans. P205,000.

Proceeds from share issuance 220,000

Proceeds from short-term bank debt 325,000

Payment of dividends (P500,000-160,000) (340,000)

Cash provided by financing activities 205,000

Summary:

Cash provided by operating activities

920,000

Cash used in investing activities (1,005,000)

Cash provided by financing activities 205,000

Increase in cash for the year 120,000

Appropriations:

Comprehensive income

Net income 1,200,000 1,200,000

Other comprehensive income (200,000) (200,000)

December 31, balances

1. Ans. 2. Ans. 3. Ans. 4. Ans.

(P1,350,000)

920,000

4,550,000 2,900,000 3,676,000 (180,000) 10,946,000

CHAPTER 10-PROBLEM 8: ABC CORP. STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE

Profits-Unapp Shares January 1, balances 3,000,000 2,540,000 4,000,000 9,540,000

Share issuance 1,000,000 1,000,000

Treasury shares reaquisition (300,000) (300,000)

Treasury shares retirement

Dividends declaration:

Share dividends (20%*65,000sh)*P50

(100,000)

650,000

(20,000)

(650,000)

120,000 -

-

Cash dividends (P12*5,000)+(P3*78,000) (294,000) (294,000)

Plant expansion 400,000 (400,000) -

Treasury shares 180,000 (180,000) -



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P341,875

CHAPTER 10-PROBLEM 9: GLORIA CORPORATION

STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated

Profits-Unapp

Treasury

Shares

Total SHE

January 1, balances 6,950,000 3,615,000 3,730,000 (270,000) 14,025,000

Prior period adjustment: Unrecorded 2011-2013 options 200,000 (200,000) -

Overstatement in rent income in 2013 (275,000) (275,000)

Share issuance from exercise of rights 1,050,000 1,260,000 2,310,000

Share issuance from exercise of options 400,000 240,000 640,000

Treasury shares retirement (150,000) (120,000) 270,000 -

Dividends declaration: Property dividends (10,000sh*P75) (750,000) (750,000)

Cash dividends (P10%*P100*18,000sh) (180,000) (180,000)

Reversal of appropriation

Treasury shares (270,000) 270,000 -

Comprehensive income

Net income 2,600,000 2,600,000

Other comprehensive income 110,000 110,000

December 31, balances

1. Ans. 2. Ans. 3. Ans.

MULTIPLE CHOICE EXERCISES: CHAPTER 10-EXERCISE 1: KALAMANSI INC.

1. Ans. A.

Cash (184,920 – 101,920) P83,000

Accounts receivable (84,480 – 4,125) 80,355

Inventory at NRV (90,000*80%) 72,000

Prepaid Insurance 12,000

Total current assets

2. Ans. A.

Land P167,000

Building, net (375,000 – 45,000) 330,000

Furniture and fixtures, net (114,600 – 34,600) 80,000

Total PPE

3. Ans. C.

Accounts payable P23,595

Interest payable 8,405

Advances 12,000

Short term portion of serial bonds 50,000

Total Current liabilities P94,000

9. c. 4. Ans. C.

Unappropriated retained earnings P295,000

Adjustment (inventory LCNRV) (3,125)

Appropriated for bond treatment 50,000

Total retained earnings

5. Ans. B.

Share capital (4,000*10) P40,000

Paid-in capital in excess of par 430,00

Total retained earnings 341,875

Total SHE P811,875

CHAPTER 10-EXERCISE 2:ETT INC. Current Asset Assets Liabilities Liabilities SHE Accum. Profits

Unadjusted balances 8,000,000 3,600,000 3,000,000 200,000 8,400,000 2,000,000

Bank overdraft 200,000 200,000 Allowance for bad debts/bad debt expense (260,000) (260,000) (260,000)

Increase in FMV of financial asset at fair value 150,000 150,000 150,000

Inventory write-down (to NRV which is lower) (100,000) (100,000) (100,000)

Goodwill (200,000) 200,000 Salaries payable/Salaries expense 500,000 (500,000) (500,000)

Mortgage payable 4,000,000 4,000,000 Interest payable 400,000 400,000 Accumulated depreciation on the building (600,000) (600,000) (600,000)

Current tax payable 200,000 (200,000) Adjusted balances 7,790,000 7,600,000 4,300,000 4,000,000 7,090,000 690,000

1. Ans. D. 2. Ans. B. 3. Ans. D. 4. Ans. B. 5. Ans. C. 6. Ans. C.

P247,355

P577,000

8,250,000 5,035,000 5,195,000 - 18,480,000



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1,830,000

CHAPTER 10-EXERCISE 3: JACOB CORPORATION

ASSETS

Cash and cash equivalents (325,000+75,000) 400,000

Accounts receivable (275,000+100,000) 375,000

Marketable securities (955,000-600,000) 355,000

Prepayments 50,000

TOTAL CURRENT ASSETS P1,180,000 1. Ans. B.

Land 900,000 Building 600,000 Reserve for depreciation – Building (50,000) Machinery and equipment 330,000 Reserve for depreciation – Machinery and equipment (110,000) TOTAL NONCURRENT ASSETS 1,670,000 TOTAL ASSETS 2,850,000 2. Ans. A.

LIABILITIES AND CAPITAL Current liabilities (325,000+75,000+100,000+3,000-50,000-100,000) 353,000 3. Ans. B.

Non-current liabilities (250,000+50,000) 300,000 4. Ans. C.

TOTAL LIABILITIES P653,000 Ordinary shares, P25 par, 45,000 shares issued (1,250,000-125,000) 1,125,000 Share dividends payable (4,000sh*25) 100,000 Share premium (750,000+(4,000sh*(60-25))-((750,000/50,000)*5,000sh) 815,000 TOTAL CONTRIBUTED CAPITAL 2,040,000 Reserve for self insurance 75,000 Reserve for treasury shares 250,000 Accumulated profits (625,000-3,000-100,000-140,000-50,000-250,000) 82,000 Treasury shares (500,000-250,000) (250,000) TOTAL SHE 2,197,000 5. Ans. A.

TOTAL 2,850,000

CHAPTER 10-EXERCISE 4: REESE CORP.

1. Ans. B. Cash 775,000

Accounts receivable (net) 2,695,000

Inventory 2,085,000

Total current assets 5,555,000

Note that the installment receivable from customer is classified as current since it is a trade payable.

2. Ans. A.

Accounts payable and accrued liabilities 1,701,000

Income taxes payable (654,000-525,000) 129,000

Total current liabilities

3. Ans. C.

Retained earnings, 1/1/14

3,450,000

Net sales and other revenues 13,360,000 Costs and expenses 11,180,000 Net income before tax 2,180,000 Income tax expense (30%) (654,000) Net Income for the year 1,526,000

Retained earnings, 12/31/14 4,976,000

CHAPTER 10-EXERCISE 5: TORRES COMPANY

Current Non-current

Cash 1,765,000

Compensating balance (300,000)

300,000 Other Assets

Bond retirement (600,000) 600,000 LT Investment

Contingency fund (500,000) 365,000 1. Ans. D. 500,000 LT Investment

Account receivable

930,007

Credit balance 45,000 Advances to officers (past due) (600,000) Current portion of past due: 2015: (P100,000 x .917431)) 91,743 Non-current portion: 2016:(P200,000 × .84168) 168,336 Other Assets

2017: (P300,000 × .77218) 231,654 Other Assets

Mdse. sent on consignment: (P100,000 × 125%) (125,000) Due from consignee:

(P75,000 ×125% × 92% - P3,000) 83,250 425,000 2. Ans. A.

Inventory 750,000

On consignment (P100,000 × 25%) 25,000 775,000

Investment 763,000

Financial Asset at Fair value through P&L 170,000 3. Ans B. (150,000)

Prepaid expense 30,000 (30,000)

Increase in value of AFS 50,000 633,000 LT Investment

Total 1,765,000 2,432,990

4. Ans. B. 5. Ans. D.



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CHAPTER 10-EXERCISE 6: KATZ CORP.

400,000

Gain on early extinguishment of long-term 500,000 500,000

Foreign translation adjustment, net of income 1,250,000 1,250,000

Revaluation surplus for the period, net of 700,000 700,000 Unrealized loss on financial assets at fair

value through other comprehensive income or

CHAPTER 10-EXERCISE 7: NAM COMPANY

1. Ans. B.

Net income

Depreciation (see note below)

P925,000

375,000

Gain on sale of equipment (P100,000-P87,500) (12,500)

Share from net income of associate (P300,000*25%) (75,000)

Decrease in accounts receivable 100,000

Increase in inventories (337,500)

Increase in accounts payable 150,000

Decrease in income taxes payable (50,000)

Net cash provided by operating activities P1,075,000

Increase in accumulated depreciation (2,912,500-2,600,000)

312,500

Accumulated depreciation of equipment sold (150,000-87,500) 62,500

Depreciation for 2014 P375,000

2. Ans. D.

Proceeds from sale of equipment P100,000

Loan to Ari Co. (750,000)

Principal collection of loan receivable 93,750

Net cash used in investing activities P556,250

3. Ans. A.

Net cash used in financing activities (Dividends paid)

CHAPTER 10-EXERCISE 8:RAVEN CORPORATION

1. Ans. D. Sales 10,776,000

Cost of goods sold (6,468,000)


Gain on sale of trading securities 144,000

Total 4,452,000

Selling and administrative expenses (3,444,000)

Unrealized holding loss on trading securities (48,000)

Loss on sale of equipment (12,000)

Net income before tax 948,000

Income taxes (420,000)

Net income after tax 528,000

2. Ans. A.

Accumulated profits, unapp., Jan 1, 2014 1,344,000

Less: Increase in appropriations for expansion (180,000)

Stock dividends declaration (237,600*30%)*P10 (712,800)

Accumulated profits, unapp. Dec. 31 (943,200)

Less: Net income for the year 528,000

Reversal of approp for Treasury 60,000

Cash dividend declaration 96,000

(P250,000)

Other Comp. Total Com. Accumulated

Cost of Sales Net Income Income Income Profits

Sales 53,000,000 53,000,000

Purchases 32,000,000 32,000,000 Sales discount 2,000,000 (2,000,000)

Purchase discount 1,200,000 (1,200,000) Sales returns and allowance 1,000,000 (1,000,000)

Purchase returns and allowance 800,000 (800,000) Correction of merchandise inventory, beginning error, net of income tax – credit 400,000 Merchandise Inventory, January 1 (adjusted) 3,400,000 3,400,000 Merchandise Inventory, December 31 3,500,000 (3,500,000) Distribution costs 5,000,000 (5,000,000)

General and administrative expenses 4,000,000 (4,000,000)

Interest expense 2,000,000 (2,000,000)

550,000

(550,000)

Investment income – equity method 3,000,000 3,000,000 Gain on expropriation of asset 2,000,000 2,000,000 Income tax expense 5,000,000 (5,000,000) Proceeds from sale of land with a carrying 4,800,000 (500,000) Dividends declared 1,300,000 (1,300,000)

Accumulated profits, January 1, 2014 4,200,000 4,200,000

Cost of Sales 29,900,000 (29,900,000) Net Income 1. Ans. B. 9,100,000 9,100,000 9,100,000

Other Comprehensive Income 2. Ans. B. 1,400,000 1,400,000 Total Comprehensive Income 3. Ans. B. 10,500,000 Accumulated Profits, Dec. 31, 2014 4. Ans. C. 12,400,000



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96,000

3. Ans. C.

Share capital, Dec. 31, 2014 4,312,800

Share premium, Dec. 31, 2014 1,392,000

Total

Less:

Share capital, Dec. 31, 2013

5,704,800

2,400,000

Share premium, Dec. 31, 2013 60,000

2,460,000

Increase in Share capital and share premium 3,244,800

Share dividends (237,600*30%)*10 (712,800)

Share premium from treasury shares reissue (12,000)

Proceeds from issuance of shares 2,520,000

4. Ans. B.

Decrease in Trading securities 360,000

Add:Gain on sale of Trading securities 144,000

Unrealized loss on trading securities (48,000)

Proceeds from sale of Trading securities 456,000

5. Ans. C.

Proceeds from sale of equipment 84,000

Add: Loss on sale of equipment 12,000

Carrying Value of eqiupment sold

6. Ans. D.

Equipment, end 3,732,000

Equipment, beg 2,040,000

Increase in equipment 1,692,000

Add: Cost of disposed equipment 180,000

Total equipment acquired during the year 1,872,000

Equipment acquired through note issuance (600,000)

Overhaul on equipment (72,000)

Total cash payment made for equipment acquisition] 1,200,000

7. Ans. A.

Decrase in treasury shares (120,000 - 60,000) 60,000

Share premium on treasury shares reissue 12,000

Proceeds from treasury shares reissue 72,000

8. Ans. C.

Net Income 528,000

Non cash expenses/income Depreciation expense - Bldg 45,000

Depreciaiton expense - Equipment 303,000

Bad debt expense 36,000

Amortization of bond discount 6,000

Income tax benefit (Decrease in Def. tax liab) (75,600)

Non operating income/expense Loss on sale of equipment 12,000

Changes in working capital Trading security 360,000

Accounts receivable (576,000)

Inventories 108,000

Prepaid Insurance (6,000)

Accounts payable (60,000)

Accrued expenses 111,600

Income tax payable 300,000

Unearned Income (96,000)

Net cash provided by operating activities 996,000

9. Ans. B.

Purchase of equipment (1,200,000)

Overhaul of equipment (72,000)

Sale of equipment 84,000

(1,188,000)

10. Ans. A.

Payment of serial notes payable

(240,000)

Share issuance 2,520,000

Treasury shares reissuance 72,000

Payment of dividends (96,000)

2,256,000


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CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY

CHAPTER 11: ERROR CORRECTION AND CASH;ACCRUAL

DISCUSSION PROBLEMS CHAPTER 11-PROBLEM 1: SAFARI COMPANY

2012 NI

A. Accrued expense, under 2012 (15,000)

2013 NI

15,000

2014 NI 2014 RE, BEG 2014 RE, END 2014 WC

Accrued expense, under 2013 (7,000) 7,000 (7,000) Accrued expense, under 2014

B. Accrued income, under 2012 8,000

(8,000)

(22,000) (22,000) (22,000)

Accrued income, under 2013 9,000 (9,000) 9,000 Accrued income, under 2014

C. Prepaid expense, under 2012 16,000

(16,000)

5,000 5,000 5,000

Prepaid expense, under 2013 12,000 (12,000) 12,000 Prepaid expense, under 2014

D. Unearned income, under 2012 (11,000)

11,000

6,000 6,000 6,000

Unearned income, under 2013 (13,000) 13,000 (13,000) Unearned income, under 2014 (10,000) (10,000) (10,000)

EFFECT OF ERRORS (2,000) 3,000 (22,000) 1,000 (21,000) (21,000)

1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 2: MASIGLA COMPANY

2012 NI

2013 NI

2014 NI

2014 RE, BEG

2014 RE, END

2014 WC

A. Ending Inventory, over 2012 (50,000) 50,000 Ending Inventory, over 2013 (30,000) 30,000 (30,000) Ending Inventory, over 2014

B. Ending Invenotry, under 2012 12,000

(12,000)

(40,000) (40,000) (40,000)

Ending Invenotry, under 2013 14,000 (14,000) 14,000 Ending Invenotry, under 2014

C. AR/Sales, under 2012 25,000

(25,000)

8,000 8,000 8,000

AR/Sales, under 2013 22,000 (22,000) 22,000 AR/Sales, under 2014

D. AP/Purchases, under 2012 (15,000)

15,000

16,000 16,000 16,000

AP/Purchases, under 2013 (12,000) 12,000 (12,000) AP/Purchases, under 2014 (10,000) (10,000) (10,000)

E. Equipment, under/Expense, over per year 200,000 240,000 220,000 440,000 660,000 Depr Expense, under (2012 Equipment) (20,000) (20,000) (20,000) (40,000) (60,000) Depr Expense, under (2013 Equipment) (24,000) (24,000) (24,000) (48,000) Depr Expense, under (2014 Equipment) (22,000) (22,000)

EFFECT OF ERRORS 152,000 218,000 134,000 370,000 504,000 (26,000)

1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 3: AMICI COMPANY

2013 NI

2014 NI

2014 RE, BEG

2014 WC

Unadjusted balances 245,000 310,000 A. Salaries payable, under 2013 (12,000) 12,000 (12,000)

Salaries payable, under 2014 (5,000) (5,000) Accrued interest income, under 2013 4,000 (4,000) 4,000 Accrued interest income, under 2014 3,000 3,000 Unearned rental income, under 2013 (14,000) 14,000 (14,000) Unearned rental income, under 2014 (15,000) (15,000) Prepaid insurance, under 2013 3,000 (3,000) 3,000 Prepaid insurance, under 2014 5,000 5,000

B. Advances from customers, under 2013 (31,000) 31,000 (31,000) Advances from customers, under 2014 (25,000) (25,000)

C. Advances to suppliers, under 2013 10,000 (10,000) 10,000 Advances to suppliers, under 2014 7,000 7,000

D. Equipment, over/Expense under (each year (60,000) (80,000) (60,000) Depr Expense, over (on 2013 Equipment) 12,000 12,000 12,000 Depr Expense, over (on 2014 Equipment) 16,000

ADJUSTED BALANCES/EFFECT OF ERRORS 157,000 268,000 (88,000) (30,000) 1. Ans. 2. Ans. 3. Ans. 5. Ans.


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Retained earnings, beg 2013

Adjusted NI, 2013

-

157,000

Dividends declared and paid in 2013 (75,000) Retained earnings, end 2013 82,000 Adjusted NI, 2014 268,000 Dividends declared and paid in 2014 (75,000) Retained earnings, end 2014 275,000 6. Ans.

CHAPTER 11-PROBLEM 4: SOLID COMPANY

1. Ans. P2,255,000.

Cash basis sales

1,980,000

Add: AR, ending balance 550,000


Sales returns, no refund 60,000

Total 2,670,000

Less: AR, beginning balances (415,000)

Accrual basis gross sales 2,255,000

2. Ans. P2,260,000.

Cash basis sales

1,980,000

Add: AR, ending balance 550,000


Sales returns, no refund 60,000

Write-off of AR 25,000

Total 2,695,000

Less: AR, beginning balances (415,000)

Recovery of previous write-off (20,000)


CHAPTER 11-PROBLEM 5: DEISEL CORP.

1. Ans. P2,800,000.

Cash basis purchases 2,500,000

Add: AP, ending balance 800,000

Purchase discounts 45,000

Purchase returns, no refund 55,000

Total 3,400,000

Less: AP, beginning balance (600,000)

Accrual basis gross purchases 2,800,000

2. Ans. P2,600,000.

Gross purchases 2,800,000

Less: Purchase discount (45,000)

Purchase returns (80,000)

Net purchases 2,675,000

Add: Inventory, beginning 250,000

Cost of goods available for sale 2,925,000

Less: Inventory, end (325,000)

Cost of sales 2,600,000

CHAPTER 11-PROBLEM 6: BECKER COMPANY

Ans. P215,000

Cash basis royalty income 200,000

Add: Royalty receivables, ending 85,000

Unearned royalties, beginning 60,000

Total 345,000

Less: Royalty receivables, beginning (90,000)

Unearned royalties, ending (40,000)

Accrual basis royalty income 215,000

CHAPTER 11-PROBLEM 7: XYZ COMPANY

Ans. P305,000

Cash basis royalty expense 300,000

Add: Royalty payables, ending 75,000

Prepaid royalties, beginning 55,000

Total 430,000

Less: Royalty payables, beginning (80,000)

Prepaid royalties, ending (45,000)

Accrual basis royalty income 305,000


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CHAPTER 11-PROBLEM 8: BACOLOD CORP.

1. P10,550,000.

Total collections from charge customers 2,550,000 Allowance for BD, beg 125,000

Add: AR, ending balance 1,200,000 Add: Bad debt expense 100,000

AR written-off 75,000 Recovery of write-off 25,000

Total 3,825,000 Total 250,000 Less: AR, beginning balance (750,000) Less: AR write-off (SQZ) (75,000)

Recovery of previous write-off (25,000) Accrual basis gross sales 3,050,000 Allowance for BD, end 175,000

Add: gross cash sales 7,500,000 Total gross sales/Net sales 10,550,000

*Note that since there are no sales discounts or sales returns and allowances, gross sales is also net sales.

2. Ans. P5,670,000.

Cash purchases

5,100,000

Credit purchases 1,200,000

Total gross purchases 6,300,000

Less: Purchase discounts (210,000)

Purchase returns (120,000)

Net purchases 5,970,000

Add: Inventory, beginning 1,500,000

COGAS 7,470,000

Less: Inventory, ending (1,800,000)

Cost of Sales 5,670,000

3. Ans. P345,600.

CV, 1/1/14: (P3M*90%*80%*80%)

1,728,000

Multiply by: Ddbal rate 20%

Depreciation expense, 2014 345,600

4. Ans. P2,304,400.

Net Sales 10,550,000

Cost of sales (5,670,000)


Interest income (a) 90,000

Total income 4,970,000

Operating expenses (b) (2,220,000)

Depreciation expense (345,600)

Bad debt expense (100,000)


(a) Interest collected

120,000

Less: Accrued interest income, Beg (30,000)

Interest income, accrual basis 90,000

(b) Operating expenses, cash basis

2,250,000

Add: Accrued expense, ending 60,000

Less: Prepaid expense, ending (90,000)

Operating expense, accrual basis 2,220,000

CHAPTER 11-PROBLEM 9: CUTTING EDGE. Cash collections from customer on account 6,000,000

Add: AR, increase 1,480,000

Sales discount 80,000

Sales returns, without refund 120,000

AR written-off 240,000

Less: NR-trade, decrease (800,000)

Recovery of previous write-off (72,000)

Gross Sales on Account 7,048,000 1. Ans.

Gross cash sales 1,200,000 Gross Sales 8,248,000 2. Ans.

Less: Sales discounts (80,000) Sales returns (Total) (320,000)

Net Sales 7,848,000 3. Ans.


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Cash paid to suppliers on account 4,800,000 Add: Notes payable-trade increase 800,000

Purchase discount 140,000

Purchase returns, without refund 200,000

Less: Accounts payable, decrease (600,000)

Gross Purchases on Account 5,340,000 4. Ans.

Gross cash purchases 1,000,000 Gross Purchases 6,340,000 5. Ans.

Less; Purchase discount (140,000) Purchase returns (total) (320,000)

Net Purchases 5,880,000 6. Ans.

CHAPTER 11-PROBLEM 10: GLASS CO.

1. Ans. P251,636.

Cost of sales (P340,000 total sales * 60%) P204,000

Add: Merchandise Inventory, November 15 93,920

Purchases P297,920

Less: Accounts payable – trade, November 15 46,284

Payments for purchases

2. Ans. P254,620

Sales P340,000

Less: Accounts receivable – trade, November 15 85,380

Collections from sales

3. Ans. P121,612.

CASH ACCOUNTABILITY:

RECEIPTS

Issuance of ordinary shares (P300,000 + P20,000)

Mortgage payable P320,000

80,000

Note payable – bank 32,000

Collections from sale (from number 2) 254,620

Total 686,620

DISBURSEMENTS

Real property

P200,000

Furniture and Fixtures (P29,000 – P6,000) 23,000

Expenses 60,756

Purchases (from number 1) 251,636

Total P535,392

CASH BALANCE

CASH AS ACCOUNTED:

Bank balance, November 15

P26,328

P151,228

Add: Undeposited collections 5,140 Total

Less: Outstanding checks

P31,468

1,852

29,616

CASH SHORTAGE as of November 15, 2014 P121,612

CHAPTER 11-PROBLEM 11: EDU COMPANY

1. Ans. P11,430,000.

Total deposits per bank statement 12,600,000

Cash receipts from share issuance (1,800,000)

Proceeds of bank loan, directly credited to account (1,800,000)

Deposits from cash collections from customers

Collections from customers which were used to

pay directly disbursements

9,000,000

Utilities 360,000 Salaries 360,000 Supplies 720,000 Dividends 540,000 1,980,000

Undeposited collections on hand 450,000

Total collections from customers 11,430,000

2. Ans. P14,535,000.

Cash collections from customers 11,430,000

Add: AR, ending 3,240,000

Less: Advances from customers, ending (135,000)


P251,636

P254,620


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3. Ans. P9,738,000.

Total deposits per bank statement 12,600,000

Cash in bank, end per bank statement (900,000)

Total disbursements per bank statement 11,700,000

Add: Outstanding checks 180,000

Less: Payments of bank loan and interest (540,000)

Payments of installment due on equipment (1,602,000)

Total cash payments made to suppliers 9,738,000

4. Ans. P10,998,999.

Cash payments to suppliers 9,738,000

Add: Accounts payable, ending 1,260,000

Accrual basis gross purchases 10,998,000

5. Ans. P8,280,000

Gross purchases/Net purchases 10,998,000 Inventory, end (2,718,000)


6. Ans. P3,070,000.

Gross sales/Net sales 14,535,000

Cost of sales (8,280,000)


Operating expenses Utilities (P360,000+40,000) 400,000 Salaries (P360,000+25,000) 385,000 Supplies (P720,000-150,000) 570,000 Depreciation - Bldg (P16.2M/15yrs) 1,080,000 Depreciation - Eqpt (P1.44M/5yrs) 288,000 Bad debt expense 180,000 Interest expense - loan (P90,000+30,000) 120,000 Interst expense, instal. (P1.602M-P1.44M) 162,000 (3,185,000)

Net Income 3,070,000

MULTIPLE CHOICE EXERCISES: CHAPTER 11-EXERCISE 1: BEE CO.

1. Ans. C.

Depreciation per books: P250,000/8yrs (a) 31,250

Additional depreciation on capitalizable

major repairs (220,000/11yrs) (b) 20,000

Depreciation expense per audit

(a) The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years, thus on 12/31/14

the expired life is (5+3), 8 years. Depreciation per books is computed as: Accum Depr/Expired Life

(b) The major repairs cost should have been capitalized on 1/1/12 and depreciated over the remaining

useful life of the related asset. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books),

P500,000/31,250 = 16 years.

Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years.

Unadjusted balances

NI 2012

P100,000

NI 2013

P145,000

NI 2014

P185,000

RE, beg 2014 WC, 2014

a. Unearned rent income, under 2014 (6,500) (6,500)

b. Salaries payable, under 2011 2,500 - Salaries payable, under 2012 (5,500) 5,500 - Salaries payable, under 2013 (7,500) 7,500 (7,500) Salaries payable, under 2014 (4,700) (4,700)

c. Unused supplies, under 2011 (3,500) Unused supplies, under 2012 6,500 (6,500) Unused supplies, under 2013 3,700 (3,700) 3,700 Unused supplies, under 2014 7,100 7,100

d. Repairs expense, over 2012 220,000 220,000 Depreciation expense, under 2012-2014 (20,000) (20,000) (20,000) (40,000)

Adjusted balances 2. Ans D. 3. Ans B. 4. Ans D. 5. Ans A. 6. Ans B.

P51,250

P300,000 P120,200 P164,700 P176,200 (P4,100)


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(48,000)

CHAPTER 11-EXERCISE 2: LOG CORP.

2013 2014

Unadjusted pretax income P4,545,000 P3,483,000

a. 2013 sales overstatement (1,719,000) 1,719,000

b. 2013 inventory understatement 388,800 (388,800)

2014 inventory overstatement (255,000)

c. Understatement in interest expense due to amortization of bond discount: (a)

2013: 10,640,250*7% = 744,818 Less: 11,250,000*6% = 675,000 (69,818)

2014: 10,710,068*7% = 749,705 Less: 11,250,000*6% = 675,000 (74,705)

d. Ordinary repairs (382,500) (423,000)

Overstatement in depreciation: Amount capitalized in 2013: 382,500*20% 76,500 Balance of amt. cap. in 2013: 306,000*20% 61,200

Amount capitalized in 2015: 423,000*20% 84,600

ADJUSTED PRETAX INCOME P2,838,982 P4,206,295

1. Ans. C. 2. Ans. A.

(a) The loan was originated on 1/1/12 at P10,575,000 (11,250,000-675,000). Discount amo. by 12/31/12 therefore shall be:

Correct interest (10,575,000*7%) 740,250

Less: Nominal interest (11,250,000*6%) 675,000

2012 Amortization: 65,250

Carrying value of Bonds, 12/31/12 (10,575,000+65,250), P10,640,250

CHAPTER 11-EXERCISE 3: LOT INC.

1. Ans. B.

2.

3. Ans. D.

Carrying value, 1/1/2014: 4,500,000*17/20 3,825,000

Less: Salvage value 50,000


Multiply by: SYD rate 12/78

DEPRECIATION EXPENSE 580,769

Carrying value, 1/1/2014 3,825,000

Depreciation for 2014 580,769

BUILDING CARRYING VALUE 12/2014

CHAPTER 11-EXERCISE 4: INSULAR CORP.

a. IGNORED (COUNTERBALANCED)

Retained earnin Net income (2014)

b. AR/Sales, under 2013 (over in 2014) 120,000 (120,000)

c. Insurance expense, under 2013 & 2014 (57,600) (86,400)

d. Accrued interest expense, under 2013 7,200 (7,200)

e. Depreciation, under 2013 & 2014 (117,600) (117,600)

Net adjustments (331,200)

Unadjusted Net Income 1,750,000

Adjusted 2014 net income 1,418,800

1. Ans. D. 2. Ans. D.

3,244,231

Accumulated depreciation per books (Machine XYZ): 400,000*3/10 120,000 Less: Accumulated depreciation per audit : 450,000*3/10 (135,000)

Adjustment related to the under depn for 3 years (2011 to 2014) 15,000 credit Add: Debit to accum depn attributed to old equipment traded in (2011) 150,000 debit

NET ADJUSTMENT TO ACCUM DEPN ACCOUNT 135,000 debit

Depreciation expense for the period: Cost

450,000

Accum depn, adjusted 135,000 Carrying value

Divide by: Revised remaining useful life

315,000

5 years

DEPRECIATION FOR THE YEAR (Mach XYZ) 63,000 Ans. A.

Carrying value, 1/1/2014: 393,750*10/12 328,125 Multiply by: 150% declining balance rate: (1/6)*150% 25% DEPRECIATION EXPENSE (Mach UVW) 82,031



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CHAPTER 11-EXERCISE 5: KUTING CORP.

2013 2014 2014

(NET INCOME) (NET INCOME) WORKING

CAPITAL

2014

RETAINED

EARNINGS Omitted prepayments, 2013 256,000 (256,000) Omitted prepayments, 2014 205,200 205,200 205,200

Salaries and wages, 2013 (582,400) 582,400 Salaries and wages, 2014 (520,000) (520,000) (520,000)

Accrued interest income, 2013 172,800 (172,800) Accrued interest income, 2014 142,000 142,000 142,000

Advances from customers, 2013 (313,600) 313,600 Advances from customers, 2014 (374,000) (374,000) (374,00)

Capital expenditure, 2013 376,000 376,000

Depn on cap. ex. in 2013 (18,800) (37,600) (56,400)

Capital expenditure, 2014 348,000 348,000

Depn on cap ex in. 2014 (17,400) (17,400)

Total under (overstatement) (110,000) 213,400 (546,800) 103,400

1. Ans C. 2. Ans D. 3. Ans A.

CHAPTER 11-EXERCISE 6: GHI INC. 2013 NI 2014 NI 2015 RE, Beg

Unadjusted balances 1,750,000 2,000,000

a. Salaries payable, under 2013 (100,000) 100,000

Salaires payable, under 2014 (140,000) (140,000)

b. Inventory, over 2013 (190,000) 190,000

c. Prepaid insurance, under 2014 120,000 120,000

d. Interest receivable, under 2014 20,000 20,000

e. Overstatement in gain on eqpt sale, 2014 (160,000) (160,000)

f. Overstatement in expense in 2013 100,000 100,000

Depr, under 2013 (1.3M/10yrs) (130,000) (130,000)

Depr, under 2014 (1.3M/10yrs) (130,000) (130,000)

Inc. from grant, under 2013 (1.2M/10) 120,000 120,000

Inc. from grant, under 2013 (1.2M/10) 120,000 120,000

Adjusted balances 1. Ans. A. 2. Ans. A. 3. Ans. A.

4. Ans. D.

Correct cost of Building (P1.2M+100K+200K) 1,500,000

Accum depr: (P1.5M*2/10) (300,000)

Correct carrying value of Building 12/31/14 1,200,000

CHAPTER 11-EXERCISE 7: BABY INC. 2012 2013 2014 2014 2014 2014

Net Income Net Income Net Income RE, Beg RE, End WC

Balance 600,000 750,000 300,000 2,000,000 a. 2012 Accured expense understated (90,000) 90,000

2013 Accrued expense understated (110,000) 110,000 (110,000) 2014 Accrued expense understated (98,000) (98,000) (98,000)

2012 Accrued rental income understate 40,000 (40,000) 2013 Accrued rental income understated 45,000 (45,000) 45,000 2014 Accrued rental income understated 50,000 50,000 50,000

2012 Prepaid expense understated 20,000 (20,000) 2013 Prepaid expense understated 30,000 (30,000) 30,000 2014 Prepaid expense understated 35,000 35,000 35,000

b. 2012 Equipment charged to expense 400,000 400,000 400,000 2012/2013/2014 Depreciation understa (80,000) (80,000) (80,000) (160,000) (240,000) 2014 Equipment charged to expense 550,000 550,000 2014 Depreciation understated (110,000) (110,000)

c. Cash dividends charged to other expens 100,000 150,000 200,000 *Land accepted as a donation from a stockholder (APIC) (400,000) (400,000)

* Loss on inventory due to flood (50,000)

990,000 815,000 832,000 (195,000) 2,187,000 (13,000)

1. Ans. C. 2. Ans. B. 3. Ans. D. 4. Ans. A. 5. Ans. A.

1,550,000 2,120,000 (80,000)



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CHAPTER 11-EXERCISE 8: ROXAS INC.

1. Ans. C.

Depreciable cost, Old bulding

Divide by: Total Useful Life

P3,000,000

20 *

Depreciation Expense, Old building P150,000 Depreciable cost, Extension (Addition) P750,000 Divide by: Remaining life (20 – 5) 15 50,000

Total Depreciation expense P200,000

Accumulated Depreciation, 12/31/200

P1,125,000

Divide by, Expired life as of 12/31/2010 (5 +2.5) 7.5

Annual Depreciation P150,000

Depreciable cost, Building

P3,000,000

Divide by: Annual Depreciation 150,000

Total useful life 20 years *

2012 2013

2014

Unadjusted net income P1,500,000 1,750,000 2,000,000

a. Salary Accruals: 2011 95,000 Salary accruals, 2012 (110,000) 110,000 Salary accruals, 2013 (100,000) 100,000

Salary accruals, 2014 (140,000)

b. Inventory, 12/13 overstatement (190,000) 190,000

c. Inventory, 12/14 understatement (150,000)

Purchases, 12/14 understatement 150,000

d. Prepaid insurance: 2011 (75,000) Prepaid insurance, 2012 100,000 (100,000) Prepaid insurance, 2013 115,000 (115,000)

Prepaid insurance, 2014 120,000

e. Interest receivable: 2012 20,000 (20,000) Interest receivable, 2013 25,000 (25,000)

Interest receivable, 2014 30,000

CHAPTER 11-EXERCISE 9: GKNB CORP

2012 NET

INCOME

2013 NET

INCOME

2014 NET

INCOME

Unadjusted balances 381,000 450,000 385,500

a. Understatement of ending inventory, 12/31/2013 42,000 -42,000

Overstatement of ending inventory, 12/31/2014 -69,000

b. Overstatement in 2014 purchases 45,000

c. Understatement of sales, 2012 12,000 -12,000 Understatement of sales, 2013 15,000 -15,000

Understatement of sales, 2014 10,500

d. Understatement of salaries expense, 2012 -30,000 30,000 Understatement of salaries expense, 2013 -42,000 42,000

e. 2013 stock dividend charge to expense 30,000 f. Overstatement in rent expense, 2013 15,000

Understatement in rent expense, 2014 -6,000

g. Understatement in gain on retirement of bonds (a) 37,800

Adjusted balances P363,000 528,000 388,800

1. Ans. B. 2. Ans. C. 3. Ans. B.

(a) Gain on the retirement of bonds should be an outright income or loss. Total gain on retirement is

(P360,000-P318,000), P42,000. The client recognized only 1/10 of the amount as an amortization

over 10 years deducted from interest. Thus effectively, only 9/10 of the amount needs to be added to current net income.

4. Ans. A.

Net income, 2012 per books 381,000 Net income, 2013 per books 450,000

Total accumulated profits, 1/1/2014, per books

Net income, 2012 per audit

363,000

831,000

Net income, 2013 per audit

Total accumulated profits, 1/1/2014 per audit

528,000

891,000

Understatement of accumulated profits, 1/1/2014 60,000

Correct appropriation of accum profits for share div in item e (39,000)

Net adjustment (increase/credit) 21,000

5. Ans. C.

Entry made for item e:

f. Gain on sale of equipment in 2014, overstatement

g. Capitalizable cost in 2012

750,000 (160,000)

Understatement in depreciation 2012-2014 (25,000) (50,000) (50,000)

Adjusted Net Income P2,255,000 P1,540,000 P1,950,000

2. Ans. C. 3. Ans. A. 4. Ans. D.



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Other expense

Ordinary shares

30,000

30,000

Correct entry:

Accumulated profits

39,000


Share premium 9,000

Adjusting entry:

Accumulated profits

9,000

Share premium 9,000

CHAPTER 11-EXERCISE 10: WWEE COMPANY

2013 net income 2014 net

income

RE,beg 2014 RE, end 2014

Unadjusted bal. 300,000 1,700,000 1,150,000 2,350,000

a. Policy change: Inventory 2013 100,000 -100,000 100,000 Inventory 2014 90,000 90,000

b. Overstatement in depn in 2014 (a) 10,000 10,000

c. Error correction – Borrowing Cost 25,000 75,000 25,000 100,000

Adjusted balances P425,000 P1,775,000 P1,275,000 P2,550,000

1. Ans. A. 2. Ans. C. 3. Ans. D. 4 . Ans. C.

(a)Depreciation per books (2014), Double Decl.

Depreciation per audit, Straight line

CV, 1/1/14: (P350,000/20%)

P1,750,000

P350,000

Less: Salvage (50,000) Depreciable cost

Divide By: remaining life

P1,700,000

5 yrs

340,000

Overstatement in Depreciation P10,000

5. Ans. C.

CHAPTER 11-EXERCISE 11: KRIS COMPANY

1. Ans. A.

Sales, accrual basis 10,350,000

Add: Decrease in accounts receivable 540,000

Cash received from customers 10,890,000

2. Ans. C.


Less: Decrease in inventory 450,000

Purchases, accrual basis 6,600,00

Add: Decrease in accounts payable 412,500

Cash paid to suppliers 7,012,500

3. Ans. D.

Total operating expense, accrual basis 1,725,000

Add: Increase in prepaid expense 255,000

Decrease in accrued expense 150,000

Total 2,130,000

Less: Depreciation expense (non-cash expense) 90,000

Cash payments for operating expenses 2,040,000

4. Ans. B.

Cash received from customers 10,890,000

Cash paid to suppliers (7,012,500)

Cash paid for operating expenses (2,040,000)

Cash provided by Operating activities 1,837,500



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CHAPTER 11-EXERCISE 12: PROTER COMPANY

1. Ans. B.

Excess of cash receipts over cash disbursements 136,500

Adjustments: a) Depreciation -31,500

b) Prepaid insurance (5,400*2/3) 3,600

c) Unearned rent income -21,000

d) Salaries payable -8,400

e) Interest receivable 9,510

f) Accrued accounting fees -1,500

ACCRUAL NET INCOME 87,210,

2. Ans. D.

c) Unearned rent income 21,000

d) Salaries payable 8,400

f) Accrued accounting fees 1,500

TOTAL LIABILITIES 30,900

CHAPTER 11-EXERCISE 13: UKG INC.

1. Ans. A.

COST OF SALES

Beginning

Purchases

invty

(sqz)

186,000

348,000

174,000 Ending invty


ACCOUNTS PAYABLE

2. Ans. C. ACCOUNTS RECEIVABLE

AR, beginning 96,000

Sales on account 600,000

AR, ending balance 110,000

3. Ans. A.

Present value of principal (200,000*0.456387)

Present value of interest, semiannual (10,000*13.59032)

P91,277

135,903

P227,180

Amortization, June 30, 2014 (227,180*4%) – 10,000 (913) Amortization, December 31, 2014 (226,267*4%) – 10,000 (949)

Carrying value, December 31, 2014 P225,318

4. Ans. D. Effective interest as of 6/30/14

(227,180*4%) 9,087

Effective interest 12/31/14 (226,267*4%) 9,051

Total interest expense

5. Ans. B.

Unadjusted net income 25,000

Overstatement in other expenses ** 2,000

Overstatement in interest expense (20,000 – 18,138) 1,862

Correct net income P28,862

**Other Expenses Accrual basis 164,000

Increase in prepayments 4,000 2,000 Increase in accrued utilities

Cash basis 166,000

CHAPTER 11-EXERCISE 14: WOWIE CORP.

1. Ans. C.

Cash collected from customers 10,000,000

Add: AR, ending 4,000,000

Deduct: AR, beginning 6,400,000

Sales Accrual basis 7,600,000

116,000 AP, beginning

348,000 Purchases

120,000 AP, ending

P18,138


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2. Ans. A.

Total payments to suppliers 13,618,000

Deduct: payments to suppliers for 2013 invoices 4,632,000

Balance: payments to suppliers for 2014 invoices 8,986,000

Add: Accounts payable, ending balance 2,621,000

Purchases, accrual basis 11,607,000

3. Ans. B.

Wages paid 3,050,000

Add: Wages payable, ending balance 125,000

Deduct: Wages payable, beginning bal. 85,000

Wages expense, accrual basis 3,090,000

4. Ans. B.

Advertising expenses paid 300,000

Add: Advertising supplies, beg bal. 35,000

Accrued advertising, ending bal. 40,000

Deduct: Advertising supplies, end. bal. 75,000

Accrued advertising, beg. Bal. 14,250

Advertising expense, accrual basis 285,750

5. Ans. B.

Insurance premium paid 125,000

Add: Prepaid insurance, beg bal. 25,000

Less: Unexpired insurance, ending bal. 41,000

Insurance expense, accrual basis 109,000

CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION

1. Ans. A.

Cash sales 3,000,000 Collections from accounts receivable 30,000,000

Collections from trade notes receivable 2,400,000 35,400,000

Add: Sales returns and allowances (no refund) 800,000 Increase in Accounts receivable 1,400,000

Total 37,600,000

Less: Decrease in Notes receivable (600,000)

Gross Sales

Less: Sales returns (total) P37,000,000

(1,200,000)

Net sales, per audit 35,800,000

2. Ans. C.; 3. Ans. B.

Cash purchases 1,000,000 Payments of accounts payable 16,500,000 17,500,000

Add: Purchase returns and allowances (no refund) 300,000 Increase in Accounts payable 400,000

Gross Purchases 18,200,000

Less: Purchase returns and allowances (total) (800,000)

Net purchases, per audit 17,400,000

Add: Decrease in inventory 1,000,000

Cost of Sales, per audit 18,400,000

4. Ans. C.; 5. Ans. A.

Net sales, per audit

Less: Cost of Sales, per audit P35,800,000

(18,400,000)

Gross Profit P17,400,000


Total P17,600,000

Less: Expense Insurance (700,000-200,000) 500,000

Salaries(10,000,000-300,000) 9,700,000 Depreciation (100,000+800,000) 900,000 Other expenses 1,500,000 (12,600,000)

Net income P5,000,000

CHAPTER 11-EXERCISE 16: ALASKA INC.

1. Ans. D.

Sales, accrual basis 2014 4,849,200

Add: Accounts receivable, beg. 270,000

Less: Accounts receivable, end (297,000)

AR written-off during the year (43,200)

Cash collections from customers 4,779,000



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2. Ans. B.

Cost of sales, accrual basis 2014 2,250,000

Add: Inventory, end 279,000

Less: Inventory, beg (423,000)

Purchases, accrual basis 2014 2,106,000

Add: Accounts payable, beg. 139,500

Less: Accounts payable, end (225,000)

Cash payments to suppliers 2,020,500

3. Ans. A.

Interest expense, accrual basis 2014 38,700

Less: Amortization of bond discount (4,500)

Cash payments for ineterest 34,200

4. Ans. D.

Selling expense, accrual basis 2014

Less: 1/3 of depreciation expense

1,273,500

(13,500*1/3) (4,500)

Bad debt expense (45,000)

Cash payments for selling expense 1,224,000

CHAPTER 11-EXERCISE 17: ALAMAT COMPANY

1. Ans. B.

Cash sales 4,400,000 Add: Accounts receivable, end 100,000

Total 4,500,000

Less: Advances from customers, end (25,000)

Gross/Net Sales 4,475,000

2. Ans. B.; 3. Ans. B.

Cash purchases

4,200,000

Add: Accounts payable, end 80,000

Total 4,280,000

Less: Purchase for president (adj to advances) (10,000)

Gross/Net Purchases 4,270,000

Less: Inventory, end (500,000)

Cost of Sales, per audit 3,770,000

4. Ans. A.

Net sales, per audit 4,475,000

Less: Cost of Sales, per audit (3,770,000)

Gross Profit

Less: Expense

560,000

705,000

Add: Accrued expense, end 20,000 Deduct, supplies, end (5,000)

Prepaid insurance, end (15,000) Equipment (100,000) (460,000)

Depreciation (100,000/10)*6/12 (5,000) Interest expense (100,000*12%*4/12) (4,000)

Net income P236,000

CHAPTER 11-EXERCISE 18: TITANIUM COMPANY

Cash, Jan. 1 balance

Collections from customers:'

Sales on Account

17,628,510

Less: AR, April 16 (1,327,650)

Sales allowances (54,990)

Add: AR, Jan. 1 678,690 16,924,560 2. Ans. A.

Payments of merchandise to suppliers:

Merchandise purchases

10,845,780

Less: AP, April 16 (621,900) Add: AP, Jan. 1 344,160 (10,568,040) 1. Ans. C. Purchase of furniture (9,000) Expenses paid (5,597,490) Cash dividends paid (120,000) Total disbursements (16,294,530) 3. Ans. C.

Total accountability 728,040 4. Ans. A. Less: Cash in bank, net of outstanding check (296,490) Cash shortage 431,550 Less: Chargeable against the bank (for encashing the obviou (300,000) Cash shortage chargeable against the cashier 131,550 5. Ans. B.


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