Chapter 1 Basic Concepts of Financial Statement Audit

Chapter 1

Basic Concepts of Financial Statement Audit

1

Multiple Choice

1. B 2. D 3. D 4. B

5. A 6. C 7. C 8. D

9. B 10. C 11. A 12. D

13. C 14. D 15. B 16. C

Problem 1

Cielo Corporation

Audit Adjusting Entries:

Accounts receivable 15,000

Cash in bank 15,000

Doubtful accounts expense 15,650

Allowance for doubtful accounts 15,650

Purchases 50,000

Accounts payable 50,000

Cost of goods sold 2,120,500

Inventory, end (601,200 + 50,000 – 30,000) 621,200

Purchase returns and allowances 36,500

Purchases (2,159,300 + 50,000) 2,209,300

Inventory, beginning 568,900

Accumulated depreciation – equipment *11,000

Gain on sale of equipment 6,000

Furniture and equipment (40,000 – 35,000) 5,000

40,000 x 10% x 2.75 years) = 11,000

32,000/ 80% remaining life at 10/1/13 = 40,000

Depreciation expense – furniture and equipment 64,300

Accumulated depreciation – furniture and equipment 64,300

Furniture and equipment, per client P618,000

Adjustment above ( 5,000)

Furniture and equipment, per audit P613,000

Depreciation expense:

On remaining equipment 613,000 x 10% =P61,300

On equipment sold: 40,000 x 10% x 9/12 3,000

Depreciation for the year P64,300

Prepaid insurance (8,400 x 6/12) 4,200

Insurance expense 4,200

Prepaid rent 130,000 x 1/13 10,000

Rent expense 10,000

Discount on notes payable 11,000

Chapter 1


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Interest expense 11,000

100,000 x 12% x 11/12

Retained earnings 300,000

Goodwill 300,000

CIELO CORPORATION

WORKING TRIAL BALANCE FOR THE YEAR ENDED SEPTEMBER 30, 2016

Trial Balance Adjustments Profit or Loss Financial Position

Debit Credit Debit Credit Debit Credit Debit Credit Cash 225,000 15,000 210,000

Accounts receivable 936,000 15,000 951,000

Allowance for doubtful accounts 31,900 15,650 47,550

Notes receivable 155,000 155,000

Merchandise inventory 568,900 568,900

Furniture and equipment 618,000 5,000 613,000

Accumulated depreciation 187,500 11,000 64,300 240,800

Goodwill 300,000 300,000

Accounts payable 536,000 50,000 586,000

Notes payable 100,000 100,000

Common stock 1,000,000 1,000,000

Retained earnings 552,500 300,000 252,500

Sales 3,728,200 3,728,200

Sales returns and allowances 47,600 47,600

Purchases 2,159,300 50,000 2,209,300

Purchase returns and allowances 36,500 36,500

Advertising expense 96,100 96,100

Sales salaries 288,500 288,500

Commission expense 152,000 152,000

Miscellaneous selling expense 29,900 29,900

Rent expense 130,000 10,000 120,000

Office salaries 197,200 197,200

Light and water 15,000 15,000

Insurance expense 10,800 4,200 6,600

Taxes and licenses 47,800 47,800

General expenses 163,400 163,400

Interest expense 41,200 11,000 30,200

Interest income 9,100 9,100

6,181,700 6,181,700

Doubtful accounts expense 15,650 15,650

Cost of goods sold 2,120,500 2,120,500

Merchandise inventory 621,200 621,200

Gain on sale of equipment 6,000 6,000

Depreciation expense 64,300 64,300

Prepaid insurance 4,200 4,200

Prepaid rent 10,000 10,000

Discount on notes payable 11,000 11,000

3,259,350 3,259,350

3,394,750 3,743,300

Income before income tax 348,550

3,743,300 3,743,300

Income before income tax 348,550

Income tax expense 104,565

Income tax payable 104,565

Profit 243,985 243,985

348,550 348,550 2,575,400 2,575,400

Chapter 1


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Problem 2

Audit adjusting entries:

Inventory, December 31, 2016 (addition) 67,200

Income summary 67,200


Allowance for doubtful accounts 14,920

3% x 522,000 = 15,660

15,660 – 740 = 14,920

Sales salaries and commission 816

Accrued expenses 816

3% x 27,200 = 816

Freight in 1,500

Accounts payable 1,500

Advertising expense 4,200

Prepaid advertising 4,200

Freight out 18,400

Sales 18,400

Depreciation expense – Office Equipment 1,300

Accumulated depreciation – office equipment 1,300

15,600/10 x 10/12

Other operating expenses – Loss from flood 145,200

Extraordinary loss 145,200

Income Tax Expense 50,374

Income Tax Payable 50,374

Chapter 1


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(Function of expense method)

Flawless, Inc.

Statement of Comprehensive Income

For the Year Ended December 31, 2016

Net Sales P984,640

Cost of goods sold 429,650

Gross profit P554,990

Other operating income 52,700

Total income P607,690

Operating expenses

Selling expenses P130,916

General and administrative expenses 154,620

Other operating expenses 145,200

Total operating expenses P430,736

Profit before interest and income tax P176,954


Profit before income tax P167,914

Income tax expense ( 30% x 167,914) 50,374

Profit P117,540

Schedules:

Net Sales

Sales 990,400 + 18,400 P1,008,800

Sales returns and allowances (22,400)

Sales discounts (1,760)

Net sales P984,640

Cost of Goods Sold

Inventory, January 1, 2014 P179,400

Net cost of purchases:

Purchases P346,000

Freight in 12,550 358,550

Total goods available for sale P537,950

Less: inventory, December 31, 2014 108,300

Cost of goods sold P 429,650

Other operating income

Interest revenue P 1,400

Dividend revenue 14,300

Gain on sale of equipment 37,000

Total other operating income P 52,700

Chapter 1


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Selling Exp. Gen. and Adm. Other Operating Exp.

Sales salaries and commissions P 70,816


Legal services P 4,450

Insurance and licenses 17,000

Salesmen’s traveling expenses 7,120

Depreciation expense – delivery

Equipment 12,200

Depreciation expense – office

Equipment 10,900

Utilities expense 12,800

Telephone and postage 2.950

Officers’ salaries 73,200


Freight out 18,400

Miscellaneous selling 4,400

Loss from flood P145,200

Total P130,916 P154,620 P145,200

Flawless, Inc.



Net Sales P984,640

Other operating income 52,700

Total income P1,037,340

Operating expenses

Net cost of purchases P 358,550

Decrease in inventory 71,100

Sales salaries and commissions 70,816


Legal services 4,450

Insurance and licenses 17,000

Salesmen’s traveling expenses 7,120

Depreciation expense – delivery equipment 12,200

Depreciation expense – office equipment 10,900

Utilities expense 12,800

Telephone and postage 2.950

Officers’ salaries 73,200


Freight out 18,400

Miscellaneous selling 4,400

Other expenses - Loss from flood P145,200

Total operating expenses P430,736

Profit before interest and income tax P176,954


Profit before income tax P167,914

Income tax expense ( 30% x 167,914) 50,374

Profit P117,540

Chapter 1


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MULTIPLE CHOICE – Karkits Corporation

Audit adjusting Entries:

1. Advances to officers & employees 3,000

Marketing and administrative expense 4,500

Petty Cash 7,500

2. A. Accounts Receivable 35,000

Cash in Bank 35,000

B. Cash in Bank 40,000

Accounts Receivable 40,000

E. Cash in bank 48,300

Accounts Payable 48,300

3. Trading Securities 20,000

Unrealized gain on Trading Securities 20,000

4. A. Advances to Officers and Employees 120,000


B. Sales 625,000

Inventories 500,000


Cost of good sold 500,000

5. A Inventories 26,000


B. Accounts Payable 35,000


C. Inventories 27,000


D. Cost of good sold 22,350


E. Sales 36,000

Inventories 25,000



* Marketing and Administrative Expense 17,900

Allowance for uncollectible accounts 17,900

6. Marketing and Administrative Expense 6,250

Prepaid Insurance 6,250

Chapter 1


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A. Land 1,720,000

Building 7,750,000

Other income 30,000

Land and Building 8,600,000

Marketing and Administrative Expense 900,000

B. Marketing and Administrative Expense 166,800

Accumulated Depreciation-Building 150,000

Accumulated Depreciation-Leasehold Improvements 16,800


Accumulated Amortization - Franchise 50,000


Licensing Agreement 144,000

Accumulated Amortization - Licensing Agreement 216,000

10. A. Accounts Payable – De la Cruz 126,000

Accounts payable – De Leon 126,000

B. Marketing and Administrative Expense 50,800

Accrued expense 50,800

11. Other Income 130,000

Unearned Revenue 130,000

12. Interest Expense 200,000

Interest Payable 200,000

Mortgage Payable 500,000

Current portion of long term debt 500,000



Discount on Bonds Payable 7,800

14. Income Tax Payable 127,126


1,458,579-1,585,705

Chapter 1


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Karkits Corporation


For the year ended December 31, 2016

Sales P 31,589,000

Cost of Good Sold (17,606,300)

Gross profit 13,982,700

Other Income 40,000

Total income 14,022,700

Marketing and Administrative Expense (8,368,650)

Income before Interest and taxes 5,654,050

Interest expense (792,120)

Profit before Tax 4,861,930

Income Tax (4,861,930 * 32%) (1,555,817)

Profit P 3,306,113

Karkits Corporation

Statement of Financial Position

As of December 31, 2016

Assets Notes

CURRENT ASSETS

Cash and Cash Equivalents 3 P 304,400

Trading Securities, market value 350,000

Accounts receivable, net 4 2,743,100

Inventories 4,976,900

Prepaid Insurance 23,150

CURRENT ASSETS P 8,397,550

NON CURRENT ASSETS

Property, Plant and Equipment 5 P 11,124,700

Intangibles, Net 6 594,000

NON CURRENT ASSETS 11,538,700

Total assets P 19,936,250

Liabilities and Shareholders’ Equity

CURRENT LIABILITIES

Trade And Other Payables 7 P 4,983,020

Unearned Revenues 130,000


CURRENT LIABILITIES P 5,179,259

NON CURRENT LIABILITIES

Mortgage Payable P 1,500,000

Bonds Payable 8 1,885,800

NON CURRENT LIABILTIES 3,385,800

Total liabilities P 8,565,059

SHAREHOLDERS’ EQUITY

Ordinary Share Capital P 5,000,000

Additional Paid-in Capital 1,350,000

Chapter 1


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Retained Earnings 5,021,191

SHAREHOLDERS’ EQUITY 11,371,191

Total Liabilities and Shareholders’ Equity 19,936,250

NOTES

3. Cash

Petty Cash P 7,500

Cash in bank 296,900

Cash and Cash Equivalents P 304,400

4. Trade and other receivables

Accounts receivable, net 2,758,000

Advance to Officers and Employees 123,000

Allowance for uncollectible account (137,900)

Trade and Other Receivables P 2,743,100

5. Property, plant and equipment

Land P 1,720,000

Building P 7,750,000

Accumulated Depreciation - Building (150,000 7,600,000

Furniture and Fixtures P2,177,000

Accumulated depreciation – Furniture and Fixtures (703,500 1,473,500

Leasehold Improvements P 168,00

Accumulated depreciation – Leasehold

Improvements (16,800) 151,200

Total Property, Plant and Equipment, Net P 11,124,700

6. Intangible Assets

Franchise P500,000

Accumulated Amortization – Franchise (50,000) P 450,000

Licensing Agreements P 360,000

Accumulated Amortization – Licensing Agreements (216,000 144,000

Total Intangible Assets P 594,000

7. Trade and Other Payables

Accounts Payable P 2,204,200

Accrued Expense 648,820


Dividends Payable 1,250,000

Current portion of Long Term Debt 500,000

Trade and Other Payables P 4,983,020

8. Amortized cost of bonds payable

Bonds Payable P 2,000,000

Discount on Bonds payable (114,200)

Bonds Payable, Net of Discount P 1,885,80

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Answers:

1. Petty Cash 7,500 c

2. Cash in bank 296,900 a

3. Trading Securities 350,000 b

4. Accounts Receivable 2,758,900 d

5. Allowance for doubtful accounts 137,900 d

6. Advances to Officers & Employees 123,000 d

7. Inventories 4,976,900 d

8. Prepaid Insurance 23,150 c

9. Land 1,720,000 b

10. Building 7,750,000 b

11. Accumulated Depreciation – Building 150,000 b

12. Net book Value of Leasehold Improvement 151,200 c

13. Franchise 500,000 a

14. Licensing agreement, net 144,000 b

15. Accounts Payable 2,204,200 c

16. Accrued Expenses 648,820 c

17. Unearned Revenues 130,000 d

18. Interest Payable 380,000 c

19. Income Taxes Payable 163,477 a

20. Dividends Payable 1,250,000 d

21. Current portion of long term debt 500,000 b

22. Discount on Bonds Payable 114,200 c

23. Ordinary share capital 5,000,000 a

24. Retained Earnings 5,021,191 c

25. Sales 31,589,000 d

26. Cost of Good Sold 17,606,300 c

27. Marketing & administrative expense 8,368,650 c

28. Other income 40,000 a

29. Interest expense 792,120 b

30. Profit 3,306,113 a

Chapter 2

Misstatements in the Financial Statements

11

Problem 1

Nature of error

Under(Over) statement in Profit of Retained

Earnings

2017 Accounts Affected

2015

2016

2017

01/01/15 Account

Dr.

Cr.

Omission of prepaid expenses

12/31/15 29,000 (29,000)

12/31/16 30,000 (30,000) 30,000 Expenses 30,000

12/31/17 34,000 Prepaid expenses 34,000

Expenses 34,000

Omission of unearned revenue:

12/31/15 (20,000) 20,000

12/31/16 (28,000) 28,000 (28,000) Revenue 28,000

12/31/17 (15,000) Revenue 15,000

Unearned revenue 15,000

Omission of accrued expenses:

12/31/15 (27,500) 27,500

12/31/16 (25,000) 25,000 (25,000) Expenses 25,000

12/31/17 (27,000) Expenses 27,000

Accrued expenses 27,000

Omission of accrued revenues

12/31/15 42,500 (42,500)

12/31/16 45,000 (45,000) 45,000 Revenues 45,000

12/31/17 41,000 Accrued revenues 41,000

Revenues 41,000

Net under(over)statement

24,000

( 2,000)

11,000

22,000

Reported profit(loss) 240,000 (120,000) 200,000

Corrected profit(loss) 264,000 (122,000) 211,000

Problem 2

12/31/16 Assets 2016 Profit 12/31/17 Assets 2017 Profit

1. U U U O

2. O O O U

3. U U U O

4. U U U NE

5. U O U O

Problem 3

1. Retained Earnings 160,000 Wages Expense 160,000 2. Interest Income 48,000 Retained Earnings 48,000 3. Insurance Expense 20,000 Prepaid Insurance 20,000 Retained Earnings 40,000

Chapter 2

Correction of Errors

12

4. Supplies Expense 25,000 Retained Earnings 25,000 Unused Supplies 28,000 Supplies Expense 28,000 5. Retained Earnings 80,000 Accumulated Amortization – Development Cost 80,000 Capitalized Development Cost 120,000 Amortization Expense – Development Cost 40,000 6. Retained Earnings 80,000 Service Revenue 40,000 Unearned Service Revenue 40,000 7. Retained Earnings 36,000 Rent Revenue 36,000 8. Office Equipment 1,500,000

Depreciation Expense - Equipment 300,000 Accumulated Depreciation 900,000 Retained Earnings 900,000

Problem 4

(Function of Expense Method) 1. Cost of Goods Sold Retained Earnings 2. Cost of Goods Sold

Inventory

3. Retained Earnings Cost of Goods Sold 4. No entry ( no effect on cost of sales and profit of both 2016 and 2017; as both beginning inventory and purchases

in 2017 had been transferred to cost of sales) 5. Cost of Goods Sold

Retained Earnings

6. Sales Retained Earnings

Chapter 2


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Problem 5 (Dragon Ball Company)

(1) Schedule to compute correct profit:

Under(over)statement in Profit RE, 1/1/15 2015 2016 2017

Omission of accrued wages

12/31/15 (80,000) 80,000

12/31/16 (60,000) 60,000 (60,000)

12/31/17 (78,000)

Omission of unused supplies

12/31/15 32,000 (32,000)

12/31/16 25,000 (25,000) 25,000

12/31/17 22,400

Omission of accrued interest income

12/31/15 18,000 (18,000)

Sale of equipment - Proceeds (25,000) (9,600)

Gain on sale 7,000

Recorded depreciation 4,200 4,200 4,200

Omission of unearned rent (40,000)

Net under(over)statement (43,800) (800) (56,400) (44,600)

Reported Profit 450,000 290,000 440,000

Corrected Profit 406,200 289,200 383,600

(2) Audit adjusting entries:

Retained Earnings 60,000 Wages Expense 60,000 Wages Expense 78,000 Wages Payable 78,000 Supplies Expense 25,000 Retained Earnings 25,000 Unused Supplies 22,400 Supplies Expense 22,400 Retained Earnings 9,600 Accumulated Depreciation 36,600 Equipment 42,000 Depreciation Expense 4,200

(3) Correcting entries in 2018

Retained Earnings 78,000 Wages Expense 78,000 Supplies Expense 22,400 Retained Earnings 22,400 Retained Earnings 5,400 Accumulated Depreciation 36,600 Equipment 42,000

Chapter 2


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Problem 6 (Erasure Company) 1. Accumulated Depreciation 27,500 Depreciation Expense 9,167 Retained Earnings 18,333 2. Retained Earnings 65,000 Salaries Expense 65,000 3. Loss on Damages 585,000 Retained Earnings 585,000 4. Goodwill 24,000 Accumulated Amortization – GW 24,000 Retained Earnings 12,000 Amortization of Goodwill 12,000 Accumulated Amortization – Goodwill 24,000

(Note: SMEs amortize Goodwill over ten years)

5. Sales 340,000 Advances from Customers 340,000 6. Retained Earnings 54,000 Accumulated Depreciation 6,000 Equipment 60.000 Repairs and Maintenance 50,000 Equipment 50,000 Accumulated Depreciation (10% x (60,000+ 50,000) 11,000 Depreciation Expense 11,000 7. Cost of Sales 51,000 Retained Earnings 51,000 Cost of Sales 30,000 Inventory 30,000 8. No entry ( no effect on cost of sales of 2016 and 2017; Cost of sales had been set up; both purchases and beginning inventory for 2017 had been transferred to cost of sales)

Problem 7 (Gloria Company) Audit adjustments to correct 2016 financial statements Audit adjustments to correct 2017 financial statements Other operating income 8,000 Retained earnings 8,000 Unearned commission income 8,000 Other operating income 8,000 Other operating income 6,400 Unearned commission income 6,400 Prepaid rent 16,000 Selling and administrative expenses 16,000

Chapter 2


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Selling and administrative expenses 16,000 Retained earnings 16,000 Prepaid rent 21,000 Selling and administrative expenses 21,000 Interest receivable 8,000 Other operating income 8,000 Other operating income 8,000 Retained earnings 8,000 Interest receivable 12,000 Interest income 12,000 Sales 90,000 Advances from customers 90,000 Cost of sales 15,000 Retained earnings 15,000 Accounts payable 15,000 Cost of sales 15,000 Equipment 20,000 Equipment 20,000 Selling and administrative expenses 20,000 Retained earnings 18,000 Accumulated depreciation 2,000 Selling and administrative expenses 2,000 Selling and administrative expenses 4,000 Accumulated depreciation 2,000 Accumulated depreciation 4,000 (a)

Gloria Company Comparative Statements of Comprehensive Income For the Years Ended December 31, 2017 and 2016

2017 2016

Sales P 910,000 P 720,000

Cost of Sales 585,000 465,000

Gross Profit P 325,000 P 255,000

Other Operating Income 73,600 30,000

Total Income P 398,600 P 285,000 Less: Selling and Administrative Expenses 279,000 156,000

Net Income from Operations P 119,600 P 129,000

Interest Expense 80,000 20,000

Net Income P 39,600 P 109,000

(b) Effect on total assets, December 31, 2016 (see audit adjusting entries for 2016) = 16,000 + 8,000 + 20,000 – 2,000 = P42,000 understated (c) Effect on total assets, December 31, 2017 (see audit adjusting entries for 2017) = 21,000 + 12,000 + 20,000 – 2,000 – 4,000 = P47,000 understated. (d) Effect on total liabilities, December 31, 2017 (see audit adjusting entries for 2017) = 6,400 + 90,000 = 96,400 understated

Chapter 2


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Problem 8 Golden Crest

Particulars 2016 Profit Retained earnings, Dec. 31, 2016

Non- current Assets, 12/31/17

Retained earnings January 1, 2016

Omission of unused supplies 12/31/16 12/31/17

15,000

15,000

Repairs charged to equipment on 1/1/15 (8,500) (68,000) (59,500) (76,500)

AFS securities were measured at cost 50,000

Correct cost of equipment, P746,070 Recorded cost 900,000 Difference 153,930 Difference in depreciation 2016 153,930 x 10% x 3/12 = 3,848 2017 153,930 / 10 = 15,393 Interest expense 2016 P74,607 x 3/12 =

3,848

(18,652)

3,848

(18,652)

(153,930)

3,848 15,393

Net under (overstatement) (6,504) (67,804) (144,189) (76,500)

Present value of the note on October 1, 2016 = 300,000 x 2.4869 = 746,070 Amortization table for the note payable

Date Periodic Payment Applied to Interest Applied to Principal Bal. of Principal

October 1, 2016 746,070

September 30, 2017 300,000 74,607 225,393 520,677

September 30, 2018 300,000 52,068 247,932 272,745

Problem 9 (Golden Harvest Corporation) (a) Computation of correct profit (loss)

Particulars 2016 2017 2018

Omissions of

Accrued expenses, 12/31/16 (20,000) 20,000

12/31/17 (25,000) 25,000

12/31/18 (30,000)

Accrued income 12/31/16 32,000 (32,000)

12/31/17 30,000 (30,000)

12/31/18 26,000

Prepaid expenses 12/31/16 12,000 (12,000)

12/31/17 18,000 (18,000)

12/31/18 24,000

Unearned income 12/31/16 (15,000) 15,000

12/31/17 (10,000) 10,000

12/31/18 (8,000)

Omission in the ending inventory

2017 28,000 (28,000)

2018 64,000

Machine charged to expense on August 31, 2016 80,000

Depreciation on the machine (3,333) (10,000) (10,000)

Net understatement (overstatement) 85,667 22,000 25,000

Reported profit (loss) (250,000) 320,000 380,000

Correct profit (loss) 164,333 342,000 405,000

Chapter 2


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Computation of retained earnings

2016 2017 2018

Balance, January 1 P 0 P(164,333) P117,667

Profit (loss) (164,333) 342,000 405,000

Dividends declared (60,000) (100,000)

Balance, December 31 P(164,333) P117,667 422,667

(b) 2018 Audit Adjusting Entries Retained Earnings 25,000 Operating Expenses 25,000 Operating Expenses 30,000 Accrued Expenses 30,000 Income 30,000 Retained Earnings 30,000 Accrued Income 26,000 Income 26,000 Expenses 18,000 Retained Earnings 18,000 Prepaid Expenses 24,000 Expenses 24,000 Retained Earnings 10,000 Income 10,000 Income 8,000 Unearned Income 8,000 Inventory, beginning/Cost of Sales 28,000 Retained Earnings 28,000 Inventory, end 64,000 Income Summary/ Cost of Sales 64,000 Machinery 80,000 Operating Expenses 10,000 Retained Earnings 66,667 Accumulated Depreciation 23,333 Problem 10 (Sukiyaki Corporation)

Audit Adjustments to restate 2016 FS Audit Adjustments to Restate 2017 FS

Allowance for Doubtful Accounts 5,000 Operating Expenses 5,000 32,000 – 37,000 = 5,000

Other Operating Expenses – Unrealized Held for Trading Equity Securities 7,000 Loss on Trading Sec. 3,000 Retained Earnings 3,000

Held for Trading Equity Securities 3,000 Other Operating Income – Unrealized Gain on Trading Sec. 10,000

Chapter 2


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Cost of Sales 8,900 Retained Earnings 8,900 Merchandise Inventory 8,900 Cost of Sales 8,900 Cost of Sales 13,600 Merchandise Inventory 13,600

Equipment 36,000 Equipment 36,000 Operating Expenses 36,000 Retained Earnings 36,000

Operating Expenses 3,000 Retained Earnings 3,000 Accumulated Depreciation 3,000 Operating Expenses 3,000 (36,000 -6,000)/13 Accumulated Depreciation 6,000

Accumulated Depreciation 20,000 Equipment 17,000 Other Operating Income – Gain on Sale of Equipment 3,000 Prepaid Insurance 6,000 Prepaid Insurance 3,000 Operating Expenses 3,000 Operating Expenses 3,000

Retained Earnings 9,000 Retained Earnings 6,000

Sukiyaki Corporation Statement of Comprehensive Income

For the Years Ended December 31, 2017 and 2016 2017 2016

Sales P1,000,000 P900,000 Cost of Sales 434,700 403,900 Gross Profit P 565,300 P 496,100 Gain on Sale of Equipment 3,000 Unrealized Gain on Trading Securities 10,000 ________ Total Income 578,300 496,100 Operating Expenses (351,000) (280,000) Unrealized Loss on Trading Securities (3,000) Profit P227,300 P 213,100

Sukiyaki Corporation

Statement of Financial Position December 31, 2017 and 2016

2017 2016

Current Assets Cash P183,000 P 2,000 Held for Trading Equity Securities 85,000 75,000 Accounts Receivable, net 360,000 278,000 Merchandise Inventory 193,400 193,100 Prepaid Expenses 3,000 6,000 Total Current Assets P 824,400 P554,100 Non-Current Assets Property, Plant and Equipment, net of Acc. Deprn P 78,400 P 96,100 Total Assets P902,800 P650,200

Chapter 2


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Current Liabilities Accounts Payable P121,400 P196,100 Shareholders’ Equity Ordinary Share P260,000 P180,000 Share Premium 20,000 0 Retained Earnings 501,400 274,100 Total Shareholders’ Equity P781,400 P 454,100 Total Liabilities and Shareholders’ Equity P902,800 P650,200

Cash Flow Statement For the Year Ended December 31, 2017

Cash Flow From Operating Activities Collection from customers P904,000 Payment to Suppliers (509,700) Payment for expenses (315,800) Net cash flow from operations P78,500 Cash Flow From Investing Activities Sale of equipment P 3,000 Purchase of equipment ( 500) Net cash flow from investing activities 2,500 Cash Flow From Financing Activities Issue of ordinary share (80,000 + 20,000) 100,000 Increase in cash P181,000 Cash Balance, January 1, 2017 2,000 Cash Balance, December 31, 2017 P183,000

Computations: 2017 2016 Accounts Receivable P392,000 P296,000 Allowance for Uncollectible Accounts 32,000 18,000 AR, Net P360,000 P278,000 Property, Plant and Equipment Cost P186,000 P205,500 Accumulated Depreciation 107,600 109,400 Carrying value P 78,400 P 96,100 Accounts Receivable, beg. P296,000 Sales 1,000,000 Accounts Receivable, end (392,000) Collections from customers P904,000 Inventory, end P193,400 Cost of sales 434,700 Inventory, beg. (193,400) Purchases P434,700 Accounts Payable, beginning 196,100 Accounts Payable, end (121,400) Payment to suppliers P509,700 Accumulated depreciation, end P107,600 Accumulated depreciation of equipment sold 20,000

Chapter 2


20

Accumulated depreciation, beg. (109,400) Depreciation expense P18,200 Operating expenses P351,000 Depreciation ( 18,200) Doubtful accounts expense 32,000 – 18,000 ( 14,000) Decrease in prepaid expenses ( 3,000) Operating expenses paid P315,800 Property, Plant and Equipment, cost, end P186,000 Cost of equipment sold 20,000 Property, plant and equipment, cost, beg. (205,500) Equipment purchased P 500 Problem 11 (Tahoma Corporation) Adjusting Entries – December 31, 2017 Sales 180,000 Retained Earnings 180,000 Accounts Receivable 240,000 Sales 240,000 Retained Earnings 175,000 Purchases 175,000 Purchases 140,000 Accounts Payable 140,000 Sales 20,000 Unearned Revenue 20,000 Retained Earnings 36,000 Sales 36,000 Retained Earnings 35,000 Expenses 35,000 Expenses 50,000 Accrued Expenses 50,000 Inventory, beginning 75,000 Retained Earnings 75,000 Inventory, end 110,000 Income Summary 110,000 Advances to Suppliers 50,000 Purchases 50,000

Chapter 2


21

Retained Earnings 3,333 Expenses 10,000 Accumulated Depreciation – Printing Equipment 13,333 Expenses 37,500 Retained Earnings 12,500 Accumulated Depreciation – Building 50,000 Expenses 24,000 Allowance for Uncollectible Accounts 24,000 Interest Expense (500,000 x 12% x 8/15) 40,000 Retained Earnings (500,000 x 12% x 4/15) 20,000 Operating Expenses 60,000 (Note: 2 semi-annual payments were made in 2017; both were charged to operating expenses, balance of Mortgage

payable before the annual payment in August 2017 is 450,000 + 50,000) Interest Expense 18,000 Interest Payable 18,000 450,000 x 12% x 4/15

Tahoma Company Statement of Comprehensive Income


Sales P 2,076,000

Cost of Sales

Inventory, January 1 75,000

Purchases 915,000

Inventory, Dec. 31 (110,000)

Cost of Sales 880,000

Gross Profit 1,196,000

Selling and Administrative Expenses 776,500

Profit before interest expense 419,500


Profit 361,500

Tahoma Company

Statement of Financial Position December 31, 2017

Assets

Current Assets

Cash P 750,000

Accounts receivable, net of allowance for uncollectible accounts of P24,000 216,000

Advances to suppliers 50,000

Inventory 110,000

Total current assets P1,126,000

Non-current assets

Land P 400,000

Building, net of P50,000 accumulated depreciation 700,000

Printing equipment, net of P13,333 accumulated depreciation 86,667

Total property, plant and equipment P1,186,667

Chapter 2


22

Total assets P2,312,667

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable P 140,000

Accrued expenses 50,000

Current portion of mortgage payable 50,000

Interest payable 18,000

Unearned revenue 20,000

Total current liabilities P278,000

Non-current liabilities

Mortgage payable, net of current portion P 400,000

Total liabilities P 678,000

Shareholders’ Equity

Ordinary share capital P 1,000,000

Retained earnings *634,667

Total shareholders’ equity P 1,634,667

Total liabilities and shareholders’ equity P2,312,667

*Retained earnings, January 1, 2017 before adjustment P 300,000 Correction of prior period errors (26,833) Profit for 2017 361,500 Retained earnings, December 31, 2017 P 634,667

Multiple Choice

1. A 700,000 + 29,000 – 33,000 – 15,000 – 22,000+ 18,000

2. C -33,000 – 15,000 – 15,000 + 18,000 = ( 45,000 )

3. A - 29,000 – 15,000 + 22,000 = (22,000)

4. A 5,000,000 + 200,000 – 250,000 – 300,000 + 100,000 = 4,750,000

5. B (300,000) + (50,000) + 100,000 = (250,000)

6. A - 16,000 – 15,000 – 10,000 + 10,800 = (30,200)

7. A - 15,000 + 10,800 = (4,200)

8. B 5,000,000 – 200,000 – 150,000 = 4,650,000

9. B 2,500,000 – 1,000,000 + 1,500,000 – 500,000 – 200,000 + 600,000 = 2,900,000

10. D 1,500,000 + 600,000 = 2,100,000

11. B 1,000,000 + 500,000 + 200,000 = 1,700,000

12. B 200,000 / 5

13.. C 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000

14. B 3,000,000 – 400,000 = 2,600,000

15. A Profit is understated by 70,000 + 30,000; RE is understated by P30,000; P7,000 has been counterbalanced.

16. D 50,400 / 9 = 5,600

17. C 54,000 – 11,200 = 42,800

18. C

19 A 400,000 + 300,000 + 500,000 – 350,000 = 850,000 net overstatement

20. A -300,000 – 500,000 + 200,000 = 600,000 overstated

Chapter 3

Cash

MULTIPLE CHOICE

Problem 1

1. C 2. A, B, D 3. C. D 4. C, D 5. B, E 6. A, D 7. A, C 8. C 9. A, C, E 10. D, E

Problem 2. Meteor Company

a. Accounts receivable (the check has staled) b. Accounts receivable c. Financial assets at fair value through profit or loss d. Cash (P3,200 only) e. Cash ( if good check, otherwise, Receivable from Employees) f. still included in Cash and Accounts Payable until mailed. g. Notes receivable

Problem 3 Leila Corporation (a) Audit adjustments

Cash Equivalents 3,000,000 Cash 3,000,000 Other Non-current Financial Assets 3,200,000 Cash 3,200,000 Cash 35,000 Accrued Salaries Expense 35,000 Other Non-current Financial Assets 900,000 Cash 900,000 Miscellaneous Expenses 6,800 Advances to Employees 1,200 Cash (Petty Cash Fund) 8,000 Cash 5,300 Accrued Utilities Expense 5,300 Accounts Receivable 25,000 Cash 25,000

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

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

11. B 12. C 13. C 14. D 15. D

16. B

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

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

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Cash

26

(b) Cash and Cash Equivalents Savings account with Metrobank P1,500,000 Checking account with Metrobank 800,000 + 5,300 805,300 Certificates of deposit 3,000,000 Payroll fund 1,200,000 + 35,000 1,235,000 Tax fund 500,000 Petty cash fund 12,000 Undeposited collections 85,000 – 25,000 60,000 Correct cash and cash equivalents P7,112,300

Problem 4 (Sta. Monica, Inc.) Expenses 10,500 Petty Cash Fund 10,500 Correct balance of petty cash fund = P20,000 – P10,500 = P9,500 Problem 5 (Victor Company)

(a) Correct amount of petty cash fund Currencies and coins P6,400

(b) Per count Currencies and coins P 6,400 Paid petty cash vouchers 2,250 Employee’s NSF check 1,200 Wedding gift contribution (with bills) 1,500

Total per count P11,350 Cashier’s accountability: Petty cash fund, per ledger P10,000 Wedding gift contribution 1,500 11,500 Cash shortage P 150 (b) Audit Adjusting Entries Delivery Expense 250 Office Supplies Expense 160 Employees Medicine 240 Transportation Expense 400 Repairs and Maintenance 400 Receivables from Employees 2,000 Cash Shortage (or Misc. Expenses or Receivables fr Employees) 150 Petty Cash Fund 3,600

Chapter 3

Cash

27

Problem 6 (Rainbow Corporation) (a) Total per count P 35,000

Cashier’s Accountability Petty Cash Fund, per ledger P35,000 Unused postage stamps 1,800 Unused office supplies 1,200 Wedding gift contribution 1,000 39,000 Cash shortage P 4,000

(b). Telephone Expense 1,500 Water Expense 1,600 Office Supplies Expense (3,700 – 1,200) 2,500 Postage Expense (2,800 – 1,800) 1,000 Prepaid Expenses (1,200 + 1,800) 3,000 Receivables from Employees (3,900 + 4,000) 7,900 Petty Cash Fund 17,500

(c) Correct amount of petty cash fund = P35,000 – P17,500 = P17,500 Cash items in the petty cash fund: Bills and Coins P 2,500 Replenishment check 15,000 Total P17,500

Problem 7 San Rafael Company

Bills and Coins (show details of denomination and pieces per denomination) P6,717.50 Checks: Date Maker Amount 12-28-17 Urquiola, employee P 3,000.00 12-29-17 Sta. Maria, employee 1,500.00 12-31-17 L. Chua, customer 2,500.00 01-02-18 A. Bobadilla, customer 3,200.00 01-12-18 C. German, employee (check received 12-28-17) 1,500.00 11,700.00 Vouchers Date Voucher No. Particulars Amount 12-15-17 151 Freight out P 500.00 12-28-17 183 Supplies 300.00 12-29-17 184 Freight In 394.20 12-31-17 189 Freight on cabinet 741.10 01-02-18 001 Freight in 244.70 2,180.00 IOUs 12-21-17 S. Dechavez 300.00 Unused office supplies 40.00 Total per count P20,937.50 Cashier’s accountability: Petty cash fund, per ledger P15,000.00 Unremitted cash sales Inv. # 118 December 30 P1,000.40 Inv. # 129 December 31 2,500.00 Inv. # 133 January 2 3,200.00 6,700.40 Unused office supplies 40.00 21,740.40

Chapter 3

Cash

28

Cash shortage P 802.90 Audit Adjusting Entries:

Receivables from Employees (1,500.00 + 300.00) 1,800 Freight out 500 Supplies Expense (100 – 40) 260 Prepaid Expenses 40 Furniture and Equipment 741.10 Freight in 394.20 Cash Shortage (Receivable from Employees) 802.90 Petty Cash Fund 4,538.20 Cash in Bank (1,000.40 + 2,500.00) 3,500.40 Sales 3,500.40 Correct balance of petty cash fund (P15,000 – 4,538.20) P10,461.80 Composed of the following cash items at December 31, 2015 Bills and coins P6,717.50 Checks dated December 7,000.00 Petty cash vouchers dated January (undisbursed as of December 31) 244.70 Total cash items as of December 31 P13,962.20 Unremitted cash sales as of December 31 ( 1,000.40 + 2,500) (3,500.40) Petty cash fund, per audit, December 31 P10,461.80

Problem 8 (Da King Company) Bills and coins 500 x 1 P 500 100 x 8 800 50 x 3 150 10 x 4 40 5 x 2 10 1 x 3 3 P 1,503

Checks: 12/29/17 M. Roxas, employee P2,000 12/30/17 J. Madrigal Company 1.500 01/02/18 J. Estrada Junk Shop 2,450 01/15/18 F. Chavez, employee (received 12/27/15) 1,800 7,750

Paid petty cash vouchers: 12/16/17 Vo. No. 145 Freight on goods bought P500 12/26/17 164 Postage 200 12/29/17 165 Transportation of messenger 50 01/02/18 166 Repairs, completed Dec. 29, 2012 1,500 2,250 IOU Ed Gil, employee 1,200 Postage stamps 10 pcs x P12 120

Total per count P 12,823 Cashier’s accountability Petty cash fund P10,000 Unremitted collections 12/30/17 Refund for merchandise returned P 1,500 01/02/18 Sale of junk and scrap materials 2,450 3,950 Unused postage stamps 120 14,070

Chapter 3

Cash

29

Cash shortage P1,247

Adjusting entries Receivable from Employees (1,800 + 1,200 + shortage of 1,247) 4,247 Freight in/Cost of Goods Sold 500 Transportation Expense 50 Postage Expense (200 – 120) 80 Prepaid Expenses 120 Petty Cash Fund 4,997 Repairs and Maintenance 1,500 Accrued Expenses 1,500 Cash in Bank 1,500 Purchase Returns and Allowances /Cost of Goods Sold 1,500 Correct Petty Cash Fund = P10,000 – P4,997 = P5,003

Cash items as of December 31: Bills and coins P1,503 Checks dated December 3,500 Petty cash voucher dated January 2016 1,500 Cash refund for purchase returns (1,500)

Correct petty cash fund balance P5,003

Problem 9 General Company Per count Currency ........................................................................................................................... P 3,020.00 Checks: 12/29/17 Judith Cruz, Employee...................................................... 1,200.00 12/29/17 Viva Company, Customer ................................................. 2,500.00 12/30/17 Alvin Taipan, Employee .................................................... 1,100.00 1/15/18 Judith Cruz, Employee Cashed, December 30, 2017 .......................................................... 1,380.00 12/31/17 Manila Company, Customer .................................................... 3,500.00 Vouchers: ( All dated on or before 12/31/17) Office Supplies ………………. ...................................................... 390.00 Transportation expense .............................................................. 206.00 Freight on purchases …………………………………………… 220.00 Estimated unused office supplies) .............................................................. 150.00 Total per count .............................................................. P13,666.00 Cashier’s accountability Petty cash fund P 5,000.00 Undeposited collections (2,500 + 3,500) 6,000.00 Unrelieaed payroll 2,600.00 Unused office supplies 150.00 .... 13,750.00 Cash shortage .............................................................. P 84.00 Cash items Currency .............................................................. P3,020.00 Checks dated December .............................................................. 8,300.00 Collections from customers .............................................................. ( 6,000.00) Unreleased payroll .............................................................. ( 2,600.00) Correct petty cash fund, December 31 .............................................................. P 2,720.00

Chapter 3

Cash

30

Adjusting Entries: Receivable from Employees (1,380 + 84) .............................................. 1,464 Office Suplies Expense 390 – 150 ............................................ 240 Prepaid Expenses ........................................... 150 Transportation Expense ........................................... 206 Freight in ............................................ 220 Petty Cash Fund .............................................................. 2,280 Cash .............................................................. 6,000 Accounts Receivable .............................................................. 6,000 Cash .............................................................. 2,600 Salaries Payable .............................................................. 2,600 Problem 10 (Cisco Systems, Inc.) (1) Bank reconciliation:

Per bank Per books

Unadjusted balances P 1,463,212 P1,352,312*

Outstanding checks (140,000)

Undeposited receipts 59,500

Error in recording check issued for rental payment 1,800

Bank charge for payment of loan and interest (45,000)

Bank service charges (1,400)

Deposit of another company (87,500)

Customer’s DAIF check (12,500)

Adjusted balances P1,295,212 P1,295,212

(2) Adjusting entry:

Notes Payable – Bank 40,000 Interest Expense 5,000 Bank Service Charges 1,400 Accounts Receivable 12,500 Rent Expense 1,800 Cash in Bank 57,100

(3) Cash and cash equivalents:

Petty cash fund P 20,000 Cash in bank 1,295,212 Treasury bills maturing in 2 months 500,000 Total cash and cash equivalents P1,815,212

Problem 11 (Sunshine Corporation) 1. Per Bank Per Books Unadjusted Balances P 424,000 P465,000 Outstanding checks (113,000) Undeposited collections 48,000 Customer’s note collected by bank 19,000 Bank service charge (1,500)

Chapter 3

Cash

31

Adjusted balances P359,000 P482,500 Cash shortage (123,500)

Cash balance, December 31, per audit P359,000 P359,000

2. Understated book balance 456,000 – 465,000 P 9,000 Overstated bank balance 424,000 – 454,400 30,400 Omitted outstanding checks 183 4,500 198 12,500 Understated outstanding checks 52,000 – 25000 27,000 9,000 – 900 8,100 25,000 – 15,000 10,000 Overstated undeposited collections 3,000 Omission of bank credit memo 19,000

Total cash shortage P123,500

3. Undeposited collections, December 31 P 48,000 Collections, January 1 – 15 199,000

Total amount available for deposit P247,000 Amount deposited, per deposit slips (110,000)

Undeposited collections, January 15 P137,000 Cash on hand, January 15 (52,000)

Additional cash shortage in January P 85,000

.4. Adjusting Entries Bank Charges 1,500 Receivable from Employees (or Loss) 123,500 Cash 106,000 Notes Receivable 19,000 Problem 12 (Pamela Manufacturing Company)

Nov. 30 Receipts Disbursements. Dec. 31 Unadjusted bank balance 876,750 9,153,760 8,526,550 1,503,960 Outstanding checks November 30

(254,720)

(254,720)

December 31 335,610 (335,610) Deposits in transit November 30 164,220 (164,220) December 31 209,180 209,180 Check of Pamplona Company (5,830) 5,830

Adjusted Balances 786,250 9,198,720 8,601,610 1,383,360

Nov. 30 Receipts Disbursements Dec. 31 Balance per books 821,950 9,198,720 8,613,010 1,407,660 Error in recording check no. 359 2,700 2,700 Bank service charge November (3,500) (3,500) December 2,250 (2,250) NSF check returned in November (34,900) (34,900) Interest charged by the bank 24,750 (24,750)

Adjusted Balances 786,250 9,198,720 8,601,610 1,383,360

Chapter 3

Cash

32

Audit adjusting entries: Cash in Bank 2,700

Office Furniture 2,700 Bank Service Charge 2,250 Cash in Bank 2,250 Interest Expense 24,750 Cash in Bank 24,750

Problem 13 (Golden Bells Company)

Nov. 30 Receipts Disbursements Dec. 31 Unadjusted bank balance 2,500,000 2,300,000 1,700,000 3,100,000 Deposits in transit November 30 58,000 (58,000) December 31 47,000 47,000 Outstanding checks November 30 (97,000) (97,000) December 31 46,000 (46,000) Erroneous bank charges November 30 25,000 (25,000) December 31 (37,000) 37,000 Erroneous bank credit November 30 (45,000) (45,000) December 31 (50,000) (50,000)

Adjusted balances 2,441,000 2,214,000 1,567,000 3,088,000

Nov. 30 Receipts Disbursements Dec. 31 Unadjusted book balances (squeezed) 2,390,000 2,206,000 1,549,000 3,047,000 NSF checks returned by bank November 30 (15,000) (15,000) December 31 25,000 (25,000) Bank service charges November (10,000) (10,000) December 18,000 (18,000) Note collected by bank November 76,000 (76,000) December 84,000 84,000

Adjusted balances 2,441,000 2,214,000 1,567,000 3,088,000

Accounts Receivable 25,000 Cash in Bank 25,000 Bank Service Charges / Miscellaneous Expenses 18,000 Cash in Bank 18,000 Cash in Bank 84,000 Notes Receivable 84,000

Chapter 3

Cash

33

Problem 14 (Starr Company) May 1-31

Apr. 30 Receipts Disb. May 31 Unadjusted bank balance 570,360 883,200 1,320,600 132,960 Deposits in transit April 30 29,360 (29,360)

May 31 (squeezed) 40,560 40,560

Outstanding checks April 30 (144,800) (144,800) May 31 133,600 (133,600)

Adjusted balances 454,920 894,400 1,309,400 39,920

May 1-31

Apr. 30 Receipts Disb. May 31 Unadjusted book balances (squeezed) 463,040 654,400 621,240* 496,200 DAIF checks returned by bank April 30 (8,000) (8,000) May 31 Bank service charges April (120) (120) May 280 (280)

Check issued by the treasurer to himself 696,000 (696,000)

Proceeds of loan granted by bank May 240,000 240,000

Adjusted balances 454,920 894,400 1,309,400 39,920

*621,240 = 613,120 + 8,000 + 120 (a) 1. P463,040 2. P40,560 3. P696,000 4. P39,920 (b) Adjusting entries: Bank Service Charges 280 Cash in Bank 280 Loss from Theft/Receivable from Officers 696,000 Cash in Bank 696,000 Cash in Bank 240,000 Notes Payable – Bank 240,000

Chapter 3

Cash

34

Problem 15 Barry Company

(1) Deposits in transit Deposits in transit, beginning P 60,000 Deposits made 2,520,000 Deposits recorded by bank (2,500,000) Deposits in transit, June 30 P 80,000 (2) Outstanding checks Outstanding checks, beginning P 175,000 Checks recorded by Barry 2,380,000 Unrecorded check issued 100,000 Checks cleared (2,354,600 – 39,600) (2,315,000) Outstanding checks, June 30 P 340,000

Bank Books

Unadjusted balances, June 30 P 270,900 P 805,000

Deposits in transit 80,000

Outstanding checks (340,000)

Check of another company 39,600

NSF check (36,000)

Bank service charge (8,500)

Unrecorded check issued (100,000)

Direct payment of bank loan (610,000)

Adjusted balances P 50,500 P 50,500

Audit adjustments: Accounts receivable 36,000 Cash 36,000 Miscellaneous Expenses 8,500 Cash 8,500 Purchases 100,000 Cash 100,000 Notes Payable – Bank 595,000 Interest Expense 15,000 Cash 610,000 Problem 16 (Rocky Mountain High) Nov. 30 Receipts Disbursements Dec. 6 Unadjusted bank balance P888,800 P555,500 P666,600 777,700 Deposits in transit

November 30 148,900 (148,900)

December 6 (102,000 – 12,000) 90,000 90,000 Payment from collections 12,000 12,000 Outstanding checks

November 30 (116,200) (116,200)

December 6 = 62,000 + 105,000 + 30,000 + 40,000

237,000

(237,000)

Adjusted balances 921,500 508,600 799,400 630,700

Chapter 3

Cash

35

Nov. 30 Receipts Disbursements Dec. 6 Unadjusted book balances (squeezed) 921,500 508,600 559,400 870,700 Payment from receipts 12,000 (12,000) Bank charges in December (200,000 + 28,000) 228,000 (228,000)


Answers:

(a) P148,900 (b) P116,200 (c) P921,500 (d) P630,700

Problem 17

1. A,D 6. M, P 11. D, F 16. I, L

2. C, G. 7. I, L 12. A, D 17. Not a reconciling item

3. B, F 8. K, O 13. F, G 18. J, N

4. E, H 9. D, H 14. D, F 19. L, N

5. J, N 10. B, F 15. J, N 20. N, O

Problem 18 (Contronics Company)

Petty Cash

Fund Purchasing

Fund Cash in Bank Total

Balances, per ledger P 15,000 P 35,000 P134,500 P184,500 Disbursed in 2015 (6,000) (20,000) (26,000) Bank credit memo 58,000 58,000

Balances per audit P9,000 P15,000 192,500 P216,500

Adjusting entries Gasoline Expense 4,500 Miscellaneous Expenses 500 Transportation Expense 1,000 Petty Cash Fund 6,000 Purchases or Inventory 20,000 Purchasing Fund 20,000 Cash in Bank 58,000 Notes Receivable 58,000 Problem 19 (Fortune Company) (a) Audit Adjustments Sales 285,200 Cash 285,200 Cash 19,300 Utilities Payable 19,300 Accounts Receivable 57,800 Cash 57,800

Chapter 3

Cash

36

Accounts Receivable 32,500 Cash 32,500 No entry, dividend fund is part of cash. Accounts Receivable 3,500 Cash 3,500 Cash Shortage/ Receivable from Employees 550 Cash 550 No entry, payroll fund is part of cash. Cash Shortage / Receivable from Employees 300 Miscellaneous Expenses 5,500 Cash 5,800 Cash 13,500 Miscellaneous Income 13,500 (b) Correct amount of cash Cash balance, per ledger P1,640,000 Cash sales of 2018 (285,200) Unreleased check for utilities 19,300 Postdated checks received (57,800) Customers’ NSF checks (32,500) Stale check (3,500) Shortage in the change fund (550) 2017 vouchers in petty cash fund (5,500) Cash shortage in the petty cash fund (300) Unrecorded deposits (sale of scrap) 13,500

Cash balance, per audit 1,287,450

Summary of Answers:

1. 308.40 2. 4,606.60 3. no shortage 4. 35,000 5. 800 6. 5,700 7. 400 8. 5,300 9. 53,800 10. 838,600 11. 157,950 12. 780,650 or 761,650 (NSF checks may be treated as deduction from receipts) 13. 625,700 or 606,700 (NSF checks may be treated as deduction from receipts) 14. 3,000 15. 92,000 16. 145,600 17. 71,950 18. 1,828,212 19. imprest system – deposit of collections intact to the bank 20. segregation of duties of custodial function and bookkeeping function 21. 125,250

Chapter 3

Cash

37

22. 194,550 23. 255,700 24. 55,000

SUPPORTING COMPUTATIONS

A. 1. Total per count P 10,761.60 Cashier’s accountability Petty cash fund P 10,500 Postage stamps 220 Other collections 350 11,070

Cash shortage P308.40

2. Correct petty cash fund = 1,156.60 + 3,450 P4,606.60

B. 3. Total per count P 53,500 Cashier’s accountability Petty cash fund P 45,000 Check payable to Meralco 3,500 Birthday gift contribution 4,500 Unused postage 500 53,500 Cash shortage P 0 4. Correct petty cash fund = P17,000 + P18,000 P35,000 C. 5. Total per count P19,700 Cashier’s accountability Petty cash fund P 15,000.00 Undeposited collections 5,500.00 20,500

Cash shortage P 800

6. Bills and coins P6,400 Customers’ checks 4,800 Undeposited collections (5,500)

Petty cash fund, per audit P5,700

D. 7. Total per count (exclude the unsigned pay envelope with no contents) P 19,600 Cashier’s accountability Petty cash fund P15,000 Unreleased payroll 5,000 20,000

Cash shortage P 400

8. Bills and coins P7,300 Vouchers with January 2018 dates 200 Employee’s check dated December 2017 2,800 Total cash items as of December 31 P10,300 Unreleased payroll (5,000)

Correct petty cash balance on December 31 P5,300

Chapter 3

Cash

38

E. Bank Books

9. Unadjusted balances P850,000 P750,500 Bank credit memo 150,000 Bank debit memo (4,500) Outstanding checks (120,400) Check of Kin 21,000 Error in recording check (3,600) Cash on hand 88,000

Balances before cash shortage P838,600 P892,400 Cash shortage ( 53,800)

10. Cash balance, per audit P838,600 P838,600

F. January 31 Receipts Disbursements Feb. 28

Unadjusted balances per bank 13,500 790,450 647,700 156,250 Outstanding checks January 31 (65,000) (65,000) February 28 43,000 (43,000) Deposits in transit January 31 54,500 (54,500) February 28 44,700 44,700


January 31 Receipts Disbursements Feb. 28

Unadjusted balances, per books (92,250) 805,350 630,300 82,800 Bank credit memo January 123,500 (123,500) February 98,800 98,800 Bank service charges January (3,250) (3,250) February 4,650 (4,650) NSF checks returned by bank January (25,000) (25,000) February 19,000 (19,000)


G. December Disbursements

Per bank Per books 15. Unadjusted disbursements P195,000 P190,400 Outstanding checks, November 30 (90,000) Customers’ NSF checks November (6,000) December 12,000 Bank service charges November (2,400) December 3,000

Balances before outstanding checks, December 31 P105,000 P197,000 105,000

Outstanding checks, December 31 P92,000

Chapter 3

Cash

39

H. June Receipts

Per bank Per books 16. Unadjusted receipts in June P310,000 420,000 Collections made directly by bank in May (30,300) Deposits in transit, May 31 (15,000) Loans granted by bank in June 50,000 Error in recording deposit 900

Balances before deposits in transit, June 30 P295,000 P440,600

295,000

Deposits in transit, June 30 P145,600

I. Per bank Per books Unadjusted balances 1,555,000 1,890,162 Credit memo for collections by bank 10,000 Outstanding checks (106,229) Undeposited receipts 379,441

Balances before shortage P1,828,212 P1,900,162 17. Amount stolen (71,950)

18. Actual cash existing P1,828,212 P1,828,212

19. and 20. Features of internal control missing: Imprest system and segregation of duties J. Per bank Per books Unadjusted balances P350,000 P293,500 Erroneous bank credit (25,000)

22. Outstanding checks (246,750 – 15,000 – 37,200) (194,550)

Unreleased checks 15,000 Postdated checks issued and recorded as disbursements 37,200 Customer’s postdated check (50,000)

21. Deposits in transit (175,250 – 50,000) 125,250

Note collected by bank 15,000

Balances before cash shortage P255,700 P310,700

24. Cash shortage (55,000)

23. Actual cash existing P255,700 P255,700

Chapter 4

Receivables and Related Revenues

38

MULTIPLE CHOICE – THEORY

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

6. D 7. D 8. B 9. B 10. A

11. D 12. B

Problem 1

1. A 2. E 3. B, E 4. A,C,D 5. A,C,D 6. A,C 7. D 8. C,D 9. D 10. D 11. D 12. A,B,C 13. D 14. E 15. E

Problem 2 (Fontana Blue)

a. Cost of Sales 20,000 Inventory 20,000 b. Cost of Sales 18,000 Inventory 18,000 c. No adjustment d. Sales 40,000 Accounts Receivable 40,000 e. Sales 60,000 Accounts Receivable 60,000 Inventory 33,600 Cost of Sales 33,600 f. Sales 120,000 Accounts Receivable 120,000 g. Accounts Receivable 60,000 Sales 60,000 h. No adjustment i. Accounts Receivable 80,000 Sales 80,000 Cost of Sales 55,000 Inventory 55,000

Chapter 4 Receivables and Related Revenues

39

j. Accounts Receivable 90,000 Sales 90,000 Problem 3 (Magnolia Company)

1. Accounts Payable – B 74,000 Accounts Receivable - B 74,000 2. Accounts Receivable – L 16,200 Accounts Receivable – C 16,200 3. No disposition yet (Customer D) 4. Sales 24,000 Accounts Receivable – E 24,000 5. Inventory 16,500 Cost of Sales 16,500 6. Sales 60,000 Accounts Receivable - F 15,000 Advances from Customers 45,000 7. Sales 85,000 Accounts Receivable – G 85,000 Inventory 59,000 Cost of Sales 59,000 8. Sales 2,500 Accounts Receivable – H 2,500 10,000 / 200 x (200 – 150) = 2,500 9. Sales 180,000 Accounts Receivable – I 180,000 10. Inventory 120,000 Cost of Sales 120,000 11. Sales Returns and Allowances 5,000 Sales 5,000


40

Problem 4 (Blooms Company)

Account Per client Adjustment Per audit Not due 1-60 days Past due

61-120 days past due

Over 120 days past

due

1 14,000 14,000 3,000 8,000 3,000

2 25,000 25,000 25,000

3 98,000 (98,000) 0

4 44,000 44,000 24,000 20,000

5 68,000 68,000 8,000 60,000

6 15,000 15,000 15,000

Total 264,000 (98,000) 166,000 36,000 83,000 27,000 20,000

Age Classification Balance per audit % Uncollectible Required Allowance

Not due 36,000 1% 360

1-60 days past due 83,000 2% 1,660

61-120 days past due 27,000 5% 1,350

Over 120 days past due 20,000 50% 10,000

Total P13,370

Notes Receivable 100,000 Interest Income 2,000 Accounts Receivable (customer 3) 98,000 Interest Receivable 750 Interest Income 750 Uncollectible Accounts Expense 5,370 Allowance for Doubtful Accounts 5,375 13,370 – 8,000 = 5,370 Problem 5 (Balimbing, Inc.)

Age Per Client Adjustment Per Audit % Uncollectible Required Allowance

Under 60 days 175,000 175,000 1% 1,750.00

61- 90 days 80,000 4,800 84,800 3% 2,544.00

91 – 120 days 42,000 (2,740) 39,260 6% 2,355.60

Over 120 days 24,000 (4,200) 19,800 25% 4,950.00

Total P321,000 (2,100) 318,860 11,599.00

Required Allowance P11,599 Balance of allowance before final adjustment 22,060 – 4,200 17,860 Adjustment P 6,261 (a) Adjusting entries: 1. Uncollectible Accounts Expense 2,740 Accounts Receivable – 91 – 120 days 2,740


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2. Allowance for Doubtful Accounts 4,200 Accounts Receivable – Over 120 days 4,200 3. Accounts Receivable – 61-90 days 4,800 Advances from Customers 4,800 4. Allowance for Uncollectible Accounts 6,261 Uncollectible Accounts Expense 6,261 (b) Correct balance of Accounts Receivable P318,860 (c) Correct balance of Uncollectible Accounts Expense Per Client ( P16,050 – 2,740) P13,310 Adjustment No. 1 2,740 No. 4 (6,261) Per audit P 9,789 Problem 6 (Esau Industries, Inc.) (a) Correct balance of Trade Accounts Receivable

General Ledger Subsidiary Ledger

Balances per client P 10,536,500 P 5,635,700

Undelivered sales (2,732,900)

Goods consigned to Automatic, Trinoma, etc. (3,260,700)

Collections received from Cebu and Davao branches (1,092,800)

Write off (168,000) (168,000)

Per audit P4,374,900 P4,374,900

(b) Correct balance of Allowance for Uncollectible Accounts

Age Before Adjustments

Adjustment Per Audit % Uncollectible Required Allowance

Current P 4,067,320 (1,092,800) 2,974,520 2% P 59,490

31-60 days 402,440 402,440 5% 20,122

61-90 days 267,320 267,320 10% 26,732

90 days 898,620 (168,000) 730,620 30% 219,186

P 325,530

Allowance for Uncollectible Accounts, Per Client P281,255 Additional write off ( 168,000) Additional provision 212,275* Balance per audit P325,530 (c) Correct balance of Uncollectible Accounts Expense: Per client P3,425,625 Additional provisions as a result of audit 212,275 Per Audit P3,637,900 Audit Adjustments: Sales 2,732,900 Accounts Receivable 2,732,900 Sales 3,260,700 Accounts Receivable 3,260,700


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Allowance for Uncollectible Accounts 168,000 Accounts Receivable 168,000 Uncollectible Accounts Expense 212,275 Allowance for Uncollectible Accounts 212,275 Problem 7 (a) Retained Earnings 20,000 Allowance for Uncollectible Accounts 20,000 Percentage of uncollectible accounts = Net wiriteoffs up to 2016 Net credit sales up to 2016 = 160,000 / 10,000,000 = 1.6% Required allowance, beginning of 2017 = 1.6% x 1,250,000 = 20,000 (b) Allowance for uncollectible accounts, beginning P 20,000 Write off (83,000) Recoveries 5,000 Balance before yearend adjustment P58,000 debit balance Required allowance: Rate = 238,000/ 14,000,000 = 1.7% 1.7% x 1,460,000 24,820 Uncollectible Accounts Expense, 2017 P82,820 Problem 8 (Smith, Inc.)

(a) Schedule of Trade Notes Receivable

Maker Due Date Per Client Adjustment Per Audit # of Days Accrued

Interest Rate Accrued Interest

Avon Co. 3/30/18 P100,000 (100,000) --

Sara Lee 1/30/18 250,000 (250,000) -- 60 8% P 3,333.

Triumph 7/2//17 60,000 (60,000) -- 60 6% 600

President 01/31/18 800,000 (800,000) --

Mondragon 1/12/18 60,000 -- 60,000 108 9% 1,620

Elizabeth 8/31/19 200,000 (200,000) -- --

Total P770,000 (710,000) P60,000 P5,553

(b) Adjusting Entries: Liability on Discounted Notes 100,577 Trade Notes Receivable 100,000 Gain on Sale of Notes Receivable 577

Principal P100,000 Interest for the entire term 3,333 Discount (103,333 x 8% x 4/12) ( 2,756) Proceeds from discounting P 100,577 Carrying value, date of discounting 100,000 Gain on sale of notes P 577 Subscription Receivable – Preference Share 250,000 Trade Notes Receivable 250,000


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Accounts Receivable 60,600 Trade Notes Receivable 60,000 Interest Income 600 Receivable from Officers 800,000 Compensation Expense 66,055 Trade Notes Receivable 800,000 Discount on Notes Receivable from Officers 66,055 Discount on Notes Receivable from Officers (66,055 x 11/12) 60,550 Interest Income 60,550 Depreciation Expense – Equipment 26,667 Accumulated Depreciation – Equipment 26,667 10% x P400,000 x 8/12

Accumulated Depreciation – Equipment 186,667 Notes Receivable – Non-current 200,000 Loss on Sale of Equipment 53,893 Discount on Notes Receivable 40,560 Equipment (400,000 – 250,000) 200,000 Trade Notes Receivable 200,000 Face P200,000 PV = 200,000 x .7972 159,440 Discount P 40,560

Discount on Notes Receivable 6,378 Interest Income (159,440 x 12% x 4/12) 6,378 Interest Receivable 4,953 Interest Income 4,953 (5,553 – 600 interest income recorded in audit adj. no. 3)

Problem 9 (Glowing Candles) (a) Non-current Portion of Long-Term Receivables

Notes Receivable from Sale of Division P1,000,000 Notes Receivable from Sale of Patents Face P2,000,000 Less: Discount on Notes Receivable (285,400 – 34.292) 251.108 1,748,892 Notes Receivable from Sale of Land 11,236,748 Total P16,557,854

(b) Current Portion of Long-term Receivables: Notes Receivable from Sale of Division, including interest Receivable of P135,000 P1,135,000 Notes Receivable from Sale of Land, including interest Receivable of P746,667 (2763,252 + 746,667) 3,509,919 Total P4,069,919


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(c) Interest Income from Long-term Receivables On NR from Sale of Division January 1, 2017 – March 31, 2017 P3,000,000 x 9% x 3/12 P67,500 April 1, 2017 – December 31, 2017 P2,000,000 x 9% x 9/12 135,000 Total P202,500

On NR from Officer P6,000,000 x 9% P540,000 On NR from Sale of Patents P1,714,600 x 8% x 3/12 P 34,292 On NR from Sale of Land P2,240,000 x 4/12 P746,667 Total interest income P1,523,459

(c) Gain on Sale of land (P20,000,000 – P15,000,000) P 5,000,000 Gain on Sale of Patents Selling Price P2,000,000 x .8573 P1,714,600 Carrying value of the patents on 10/01/14 Carrying value 1/01/14 P1,800,000 Amortization up to 10/01/14 450,000 x 9/12 (337,500) 1,462,500 Gain on sale of patents P 252,100

Note Receivable from Sale of Land

Date Periodic Payment Payment Applied to Interest Principal

Balance of Principal, end

09/01/17 P 14,000,000

09/01/18 P5,003,252 P 2,240,000 P 2,763,252 11,236,748

09/01/19 5,003,252 1,797,880 3,205,372 8,031,376

Problem 10 (Goliath Company) Notes Receivable from Company B Initial amortized cost = 3,000,000 x .7513 = P2,253,900 Face P3,000,000 Less: Discount on Notes Receivable Initial discount P3,000,000 – P2,253,900 = P746,100 Interest earned P2,253,900 x 10% x 8/12 = 150,260 595,840 Carrying value, 12/31/14 P2,404,160 Notes Receivable from Company C Face P1,000,000 Interest Receivable 1,000,000 x 10% x 3/12 25,000 Carrying value of the note P1,025,000 (a) Audit Adjustments: Interest Receivable 200,000 Interest Income 200,000 Impairment Loss ( Bad Debts) 456,555 Restructured Notes Receivable 1,743,445 Interest Receivable 200,000 Notes Receivable – Company A 2,000,000


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Gain on Sale of Land (400,000 -346,100) 400,000 Loss on Sale of Land 346,100 Discount on Notes Receivable 746,100

Discount on Notes Receivable 150,260

Interest Income 150,260 2,253,900 x 10% x 8/12 Interest Receivable 25,000 Interest Income 25,000 (b) Carrying value of notes: Current Assets: Note Receivable from Company A P550,000 – (P1,743,445 x 10%) P119,345 Note Receivable from Company C, including Accrued interest of P25,000 325,000 Total P444,345 Non-current Assets: Note Receivable from Company A (P1,743,445 – P119,345) P1,624,100 Note Receivable from Company B 2,404,160 Total Non-current Receivables P4,028,260

(d) Impairment Loss Notes Receivable from Company A

Face P2,000,000 Interest Receivable (still unrecorded) P2,000,000 x 10% 200,000 Carrying value of note P2,200,000 PV of future cash flows P550,000 x 3.1699 1,743,445 Impairment loss P 456,555 Interest Income: From Company A P200,000 From Company B 150,260 From Company C 25,000 Total P375,260

Problem 11 (MARINA CORPORATION ) Corrections: Info # 7: On December 1, the corporation received payment from Germany Company for one of the P15,000 notes (instead of P8,000).

(1) Audit Adjustments: a. Interest Expense 625 Trade Notes Receivable - Balanga 625 Balanga Company’s note b. Accounts Receivable 48,000 Impairment Loss – Notes Receivable (or Uncollectible Accounts Expense) 32,000


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Trade Notes Receivable – Caloocan 80,000 c. Notes Receivable – Officers 75,000 Trade Notes Receivable – Tomas Dee 75,000 Interest Receivable 300 Interest Revenue 300 75,000 x 8% x 138/360 = 2,300 2,300 – 2,000 = 300 d. Accounts Receivable 51,000 Interest Expense 340 Trade Notes Receivable – Eager Corp. 50,000 Interest Revenue 1,000 Interest Receivable 340 e. Trade Notes Receivable – Felicity 38,000 Notes Payable 38,000 Interest Receivable 507 Interest Revenue 507 48,000 x 8% x 60/360 = 640 640 – 133 = 507 Interest Expense 317 Interest Payable 38,000 x 10% x 30/360 317 f. Accounts Receivable 15,150 Trade Notes Receivable – Germany Company 15,000 Interest Revenue 150 Interest Revenue 300 Interest Receivable 300 45,000 x 12% x 60/360 = 900 1,200 – 900 =300 Trade Notes Receivable Interest Receivable Per Client P 275,625 P3,673 Adjustments: (a) (625) (b) ( 80,000) (c) (75,000) 300 (d) (50,000) (340) (e) 38,000 507 (f) (15,000) (300) Per Audit P 93,000 P3,840 Trade Notes Receivable: Felicity Ltd. P48,000 Germany Co. 45,000 Total P93,000 Interest Receivable: Tomas Dee = 75,000 x 8% x 133/360 = P 2,300 Felicity Ltd. = 48,000 x 8% x 60/360= 640


47

Germany Company = 45,000 x 12% x 60/360 900 Total P 3,840

MULTIPLE CHOICE - PROBLEMS

1. C 5. C 9. D 13. D 17. C 21. A

2. B 6. A 10. B 14. B 18. A 22. A

3. B 7. C 11. A 15. B 19. A 23. B

4. A 8. A 12. A 16. B 20. D 24. D

Computations

1. P523,000 + P224,000 + P75,000 + P27,000 = P849,000

2 - 5 2. Accounts Receivable 3. Inventories 4. Sales 5. Cost of Sales

Per Client P276,500 P425,000 P1,320,000 P842,000

Adjustments : ( 8,680) 7,240 (8,680) (7,240)

(14,200) 12,500 (14,200) (12,500)

(10,000) (10,000)

(6,100) 6,100

(14,000) (14,000)

21,000 (18,200) 21,000 18,200

Per Audit P250,620 P420,440 P1,294,120 P846,560

6.

Classification Balance per audit % Uncollectible Required Allowance

Nov-Dec 2014 P1,080,000 2% P21,600

July – October 2014 650,000 10% 65,000

January – June 2014 420,000 25% 105,000

Prior to 1/01/14 90,000* 70% 63,000

Total P2,240,000 P254,600

Existing allowance = 154,000 – 95,000 + 15,000 + 180,000 – 60,000 194,000

Additional uncollectible accounts expense P 60,600

7. Total uncollectible accounts expense = P 180,000 + 60,600 = P240,600 8. Accounts receivable, net = P2,240,000 – 254,600 = P1,985,400

9. Carrying value of the receivable P4,480,000

Present value of future cash inflow = 1,120,000 x 3.0373 = 3,401,776 Impairment loss P1,078,224 10. No impairment loss shall be recognized, the loss évent is a non-adjusting évent, which présents condition different

from that as of the end of the reporting period. 11. No impairment loss shall be recognized on Company Y’s note. The interest to be collected during the extended term

equals the original interest rate of the loan ; the présent value of future cash inflow shall be equal to the loan’s carrying value.

12. Carrying value of the receivable P1,120,000 PV of future cash inflow = 120,000 + (1,100,000 X .8929) 1,102,190 Impairment loss P 17,810 13. The non-adjusting évent requires disclosure, because even when taken alone, the loss would have a material effect on

the financial condition of 5-6.


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14. Sales = (1,900,000 – 350,000) x 150% = P2,325,000

Collections from customers (1,830,000) Write off (15,000 – 8,000) ( 7,000) Gross accounts receivable P 488,000

15. Past due after write off 400,000 – 80,000 P 320,000 Allowance after write off 250,000 – 80,000 170,000 Additional uncollectible accounts expense P 150,000

16. Current assets = P506,370 – 30,000 selling price of unsold goods + 20,000 cost of unsold goods = P496,370 17. Additional allowance required : 120,000 – (65,000 +120,000 – 80,000) = 15,000

Total uncollectible accounts expense = 120,000 + 15,000 = P135,000

18. Accounts receivable = P1,300,000 + 50,000 + 15,000 = P1,365,000 19. Required allowance = 1,365,000 x .015 = P 20,475 20. Uncollectible accounts expense = 20,475 + 8,000 = P 28,475 21. Accounts receivable = 735,000 + 4,500,000 – 4,200,000 + 16,000 – 20,200 - 250,000 = P780,800 22. (780,800 – 100,800) x 2% = P13, 600 23. 16,200 + 16,000 – 20,200 = P12,000 24. (100,800 x 10%) + (680,000 x 2%) = P 23,680

MEEMEE, Inc. Adjusting Entries: 1. Miscellaneous Expenses 1,260 Receivables from Officers and Employees 500 Cash – Petty Cash Fund 1,760 2. Other Non-Current Financial Assets 400,625 Cash in Bank 400,000 Interest Income 625 Reclassified Security Bank SA 3. Cash in Bank – BPI SA 394 Interest Income 394 4. Accounts Receivable – 31 – 60 days overdue 12,800 Cash in Bank – BPI SA 12,800 5. Accounts Receivable – Dishonored Notes 5,500 Cash in Bank – BPI SA 5,500 Notes Receivable Discounted 5,000 Notes Receivable 5,000


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6. Cash in Bank – BPI CA Payroll 15,600 Accrued Payroll 15,600 5,200 + 10,400 7. Miscellaneous Expenses 150 Cash in Bank – BPI CA Payroll 150 8. Cash in Bank – BPI CA General 45,200 Accounts Payable 45,200 9. Accounts Payable 900 Miscellaneous Expenses 150 Cash in Bank _ BPI CA General 1,050 10. Accounts Receivable – Current 9,000 Accounts Receivable – 31- 60 days overdue 4,800 Customers’ Credit Balances 13,800 11. Receivables from Officers and Employees 2,000 Accounts Receivable – Current 2,000 12. Allowance for Bad Debts 5,000 Accounts Receivable – over 90 days 5,000 13. Accounts Receivable – Overdue Notes 15,250 Notes Receivable 15,000 Interest Income 250 14. Receivable from Officers and Employees 6,800 Notes Receivable 6,800 15. Interest Receivable 517 Interest Income 517 Creative: P10,000 x 24% x 64/360 = 427 President: P 6,800 x 25% x 19/360 = 90 Total 517 16. Allowance for Bad Debts 4,543 Bad Debts Expense 4,543

ANALYSIS OF ACCOUNTS RECEIVABLE

Age Class Per Client Adjustment Per Audit % Uncollectible Required Allowance

Current P362,412 9,000 (2,000)

369,412 ½ % 1,847

1-30 days past due

202,895 4,550 207.445 1% 2,074

31 – 60 days past due

130,480 12,800 4,800

148,080 3% 4,442

61 – 90 days past due

17,500 -- 17,500 10% 1,750

Over 90 days past due

11,387 (5,000) 6,387 50% 3,194

Dishonored notes

-- 5,500 15,250

20,750 20% 4,150


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Total required allowance P17,457

Balance of allowance 22,000

Adjustment (4,543)

Answers: (a) Petty Cash P8,240 (b) BPI SA depository 257,794 (c) BPI CA Payroll 76,250 (d) BPI CA Gen Disb. 214,150 (e) Security Bank SA 400,625 (f) Cash 556,434 (g) Accounts Receivable (Gross) 769,574 (h) Allowance for Bad Debts 17,457 (i) Bad Debts Expense 19,457 (j) Notes Receivable 18,000 (k) Liability on Discounted Notes 8,000 (l) Interest Receivable 517 (m) Interest Income 4,586 (n) Receivables from Officers and Employees 9,700 (o) Customer Credit Balances 13,800

Chapter 5

Inventories and Related Expenses

7MULTIPLE CHOICE – THEORY

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

6. D 7. A 8. A 9. D 10. D

11. B

Problem 1

1. A,C,D 2. A,C 3. E 4. B, E 5. D

6. A, B 7. D 8. C 9. B,C,E 10. C

11. C 12. D 13. C 14. C 15. D

16. D

Problem 2 (Goodwill Company) Inventories 88,800 Cost of Sales 88,800 16,000 + 13,200 + 26,100 + 19,200 + 14,300 = 88,800 Accounts Payable 15,920 Cost of Sales 15,920 Inventories 13,500 Cost of Sales 13,500 Cost of Sales 13,500 Accounts Payable 13,500 Cost of Sales 4,200 Accounts Payable 4,200 Inventories 22,200 Accounts Payable 22,200 16,000 + 6,200 = 22,200 or two separate entries for purchases and inclusion in ending inventory Cost of Sales 85,000 Inventories 85,000 Sales 80,000 Accounts Receivable 80,000 Inventories 60,000 Cost of Sales 60,000 Cost of Sales 60,000 Inventories 60,000 Problem 3 (Victory Enterprises)

Inventory, per client P 441,800

Goods shipped to customer on Dec 31, 2017 (presumed in transit), FOB destination

38,000

Goods in transit, shipped by a supplier FOB shipping point 51,000

Correct inventory amount, December 31 P 530,800

Chapter 5


50

Inventories 89,000 Cost of Sales 89,000 Problem 4 (Raindrops Company) (a) Correct inventory, November 30 55,000 Purchases in November 12,000 + 14,000 26,000 Units sold (50,000 – 4,000) (46,000) Correct inventory level, December 31 35,000 (b) Adjusting entries: Cost of Sales (unrecorded purchases) 1,260,000 Accounts Payable 1,260,000 14,000 x 90 = P1,120,000 Sales (4,000 x 125) 500,000 Accounts Receivable 500,000 Inventories (18,000 x 90) 1,620,000 Cost of Sales 1,620,000 Inventories, November 30 55,000 Received in December 12,000 Shipped out (50,000) Goods reported 17,000 Correct inventory level 35,000 Understatement in units 18,000 Problem 5 (Bulls Company)

(a) Net adjustment to Inventory = 21,096 net debit (See audit adjustments) Inventory, per count P98,000 Net adjustment to inventory 21,096 Inventory, per audit P119,096 (b) Adjusting entries Sales 15,773 Accounts Receivable 15,773 5,841 + 7,922 + 2,010 Cost of Sales / Purchases 2,183 Accounts Payable 2,183 Inventory 8,120 Cost of Sales / Income Summary 8,120 Inventory (12,700 /125%) 10,160 Cost of Sales / Income Summary 10,160

Chapter 5


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Sales 19,270 Accounts Receivable 19,270 Inventory (19,270/125%) 15,416 Cost of Sales 15,416 Miscellaneous Receivables (from Carrier) 12,600 Inventory 11,250 + 1,350 12,600 Problem 6 George Michael Company

Inventory Accts Payable Net Sales

Initial amounts 2,400,000 800,000 10,150,000

Adjustments:

a. (60,000)

b. 65,000 65,000

c. 50,000

d. 32,000 (45,000)

e. 61,000

f. 27,000

g. 56,000

h. 4,000 8,000

Net adjustment 239,000 129,000 (105,000)

Corrected balances P2,639,000 P929,000 P10,045,000

a. Sales 60,000 Accounts Receivable 60,000 b. Inventory 65,000 Accounts Payable 65,000 c. Inventory 50,000 Cost of Sales 50,000 d. Sales Returns and Allowances 45,000 Accounts Receivable 45,000 Inventory 32,000 Cost of Sales 32,000 e. Inventory 61,000 Cost of Sales 61,000 f. Inventory 27,000 Cost of Sales 27,000 g. Cost of Sales 56,000 Accounts Payable 56,000 h. Cost of Sales 4,000 Inventory 4,000 Accounts Payable 8,000

Chapter 5


52

Problem 7 (Firenze Fashions)

General Ledger Physical Count

Unadjusted balances P 221,020 P 212,820

Goods held on consignment ( 66,000)

Goods purchased FOB shipping point, in transit 12,000

Goods shipped out FOB destination, in transit 24,000 24,000

Goods purchased and received, but not yet recorded 27,300

Goods sold, still unrecorded (63,000)

Unsalable goods (26,500)

Balance per audit P 182,820 P 182,820

Audit Adjustments Sales 39,000 Accounts Receivable 39,000 Inventory 24,000 Cost of Sales 24,000 Inventory 27,300 Accounts Payable 27,300 Accounts Receivable 96,000 Sales 96,000 Cost of Sales 63,000 Inventory 63,000 Loss from Inventory Obsolescence 26,500 Inventory 26,500 Problem 8

No entry on the P100,000 shipment Inventory (75% x 80,000) 60,000 Cost of Sales 60,000 Accounts Receivable 60,000 Sales 60,000 Sales 40,000 Accounts Receivable 40,000 Inventory 30,000 Cost of Sales 30,000

Chapter 5


53

Problem 9 (Maligaya Corporation) Overall Gross Profit Ratio Inventory, January 1, 2016 P 660,000 Net Purchases 2016 and 2017 (2,800,000 + 2,350,000) 5,150,000 Goods available for sale P5,810,000 Less: inventory, December 31, 2017 750,000 Cost of goods sold, 2016 and 2017 P5,060,000 Sales – 2016 and 2017 (5,300,000 + 3,900,000) P9,200,000 Less: Cost of goods sold 5,060,000 Gross Profit P4,140,000 Gross Profit Ratio = 4,140,000/ 9,200,000 45% Inventory Fire Loss Inventory, January 1, 2018 P 750,000 Add: Purchases January 1 to April 15, 2018 January 1 to March 31 P 520,000 April 1 to 15 Paid 34,000 Unpaid 106,000 Purchase returns ( 9,500) 650,500 Total goods available for sale P1,400,500 Less; Cost of goods sold, January 1 to April 15 Accounts Receivable, April 15 P 360,000 Write off 80,000 Collections (129,500 – 9,500) 120,000 Accounts Receivable, March 31 ( 400,000) Sales, April 1 to 15 P 160,000 Sales, January 1 to March 31 1,350,000 Sales, January 1 to April 15 P1,510,000 Cost ratio (100% - 45% ) 55% 830,500 Inventory, April 15, before the fire P 570,000 Less: undamaged goods (in transit) P 23,000 Proceeds from sale of damaged goods (lower than cost) 30,000 53,000 Inventory fire loss P 517,000 Problem 10 (Billy Corporation)

11 months ended May 31

Year ended June 30

Purchases per client P 6,750,000 P 8,000,000

Shipments received in May but recorded in June 75,000

Credit memoranda not recorded (10,000) (15,000)

Deposit for July purchases recorded as April purchases (20,000) (20,000)

Deposit in May, recorded as purchases (55,000) 55,000

Purchases, per audit P6,740,000 P8,020,000

(a) Inventory, July 1, 2016 P 875,000 Purchases, July 1, 2016 to May 31, 2017 6,740,000 Total goods available for sale P7,615,000 Less: Inventory, May 31, 2017 (950,000 – 55,000) 895,000 Cost of goods sold July 1, 2016 to May 31, 2017 P6,720,000

Chapter 5


54

Gross profit 8,400,000 – 6,720,000 = 1,680,000 Gross profit ratio = 1,680,000/ 8,400,000 20% (b) Sales in June at normal selling price (P9,600,000 – 8,400,000) – 100,000 P1,100,000 Cost ratio 80% Cost of goods sold in June at normal selling price P 880,000 Cost of merchandise sold at cost 100,000 Cost of goods sold in June P980,000 (c) Inventory, May 31. 2017 P895,000 Purchases in June (8,020,000 – 6,740,000) 1,280,000 Goods available for sale 2,175,000 Cost of goods sold in June 980,000 Inventory, June 30, 2017 1,195,000 Inventory, July 1, 2016 875,000 Purchases July 1, 2016– June 30, 2017 8,020,000 Total goods available for sale 8,895,000 Cost of goods sold (9,600,000 – 100,000) x 80% =7,600,000 100,000 7,700,000 Inventory, June 30, 2017 1,195,000 Problem 11 (Verde Manufacturing Company) (a) Inventory, November 30, 2017

Stock Cards Physical Count

Materials Work in Process

Inventory, November 30, 2015 P100,000 P497,000 P601,000

November purchases recorded in December 8,000

Obsolete materials (4,000)

Adjusted November 30, 2017 inventories P104,000 P497,000 P601,000

Correct December purchases (250,000 – 8,000) 242,000 242,000

Direct labor incurred 120,000 120,000

Materials issued to production (200,000) 200,000

Factory overhead applied to production 300,000 300,000

Cost of goods sold (786,000) (786,000)

Inventories, December 31, 2017 P 146,000 P331,000 477,000

Problem 12 (Magalang Corporation)

Inventory, beginning Purchases Inventory, end

Per client P300,000 P3,000,000 P420,000

July 1, 2016 adjustments

(a) 50,000

(b) (24,000)

June 30, 2017 adjustments

(a) 63,000 63,000

(b) 20,000

(c) 23,000

Per audit P350,000 P3,062,000 P503,000

Chapter 5


55

Inventory, July 1, 2016 P350,000

Purchases 3,062,000

Total goods available for sale 3,412,000

Inventory, June 30, 2017 503,000

Cost of goods sold P2,909,000

Audit Adjustments: Inventory, beg. 50,000 Retained Earnings 50,000 Retained Earnings 24,000 Purchases 24,000 Purchases 63,000 Accounts Payable 63,000 Inventory, end 63,000 Income Summary 63,000 Inventory, end 20,000 Income Summary 20,000 Purchases 23,000 Accounts Payable 23,000 Accounts Receivable 30,000 Sales 30,000 Problem 13 (Chi Fi Fai) Audit Adjusting Entries: Accounts Receivable 50,000 Sales 50,000 Cost of Sales (50,000 x 80/120) 33,333 Inventory 33,333 Other Operating Expenses – Loss from Inventory Contamination 800,000 Cost of Sales 800,000 Cost of Sales 36,000 Accounts Payable 36,000 (The company credited Cost of Sales on December 29 to adjust the stock cards inventory to inventory list, per physical count.) Decline in Net Realizable Value of Inventory 90,000 Allowance to Reduce Inventory to Net Realizable Value 90,000 Cost of Sales (400,000 – 80,000) 320,000 Accounts Payable 320,000

Chapter 5


56

(1.) Inventory is overstated by P33,333 as a result of goods out on consignment. (2.) The Accounts Receivable is understated by P50,000, as a result of goods out on consignment. (3.) The net income is understated by P16,667, as a result of goods out on consignment. (4.) The accounts payable shall be increased by P320,000. (5.) The gross profit is increased by P80,000, which in effect is the commission income. (6.) Inventory at cost, per audit = P890,000 – P33,333 = P856,667. (7.) The inventory shall be presented at P766,667, which is the cost of P856,667 reduced by the allowance for decline in

net realizable value of P90,000. Problem 14 (Global Company) Audit Adjustments Selling and Administrative Expenses 16,000 Receivables from Employees 1,500 Petty Cash Fund 17,500 Cash in Banks – BDO 32,000 Value Added Tax Payable 32,000 Notes Payable – Bank 50,000 Interest Expense 18,000 Cash in Banks – Asian Bank 68,000 Cash in Bank – Asian Bank 62,000 Accounts Payable 62,000 Selling and Administrative Expenses 250 Cash in Banks – BPI 250 Equipment Acquisition Fund 1,100,000 Cash in Banks – PNB 1,100,000 Allowance for Doubtful Accounts 168,000 Accounts Receivable (70% x 240,000) 168,000 Finished Goods Inventory 60,000 Cost of Sales 60,000 200,000 x 60% x 50% = 60,000 Sales 75,000 Accounts Receivable 60,000 / 80% 75,000 Inventory of Spoiled Goods and Scrap Materials 42,000 Cost of Sales 38,000 Work in Process Inventory 80,000 Inventory of Spoiled Goods and Scrap Materials 55,000 Cost of Sales 55,000 Selling and Administrative Expenses 152,250 Allowance for Doubtful Accounts 152,250 Accounts receivable, per client P3,400,000 Adjustments ( 168,000)

Chapter 5


57

( 75,000) Balance per audit P3,157,000 Account of Blue Ridge 240,000 – 168,000 ( 72,000) Remaining accounts P3,085,000 Provision rate on remaining 5% Required Allowance for D. A. P 154,250 Balance of allowance 170,000 – 168,000 ( 2,000) Additional doubtful accounts expense P 152,250

(1) Petty Cash Fund = P2,500 (2) Cash on deposits with Asian Bank = 400,000 – 68,000 + 62,000 P394,000 (3) Cash on deposits with Security Bank = 350,000 – 50,000 P300,000 (4) Cash on deposits with Banco de Oro = (12,000) + 32,000 P 20,000 (5) Cash on deposits with BPI = 200,000 – 250 P199,750 (6) Cash on deposits with PNB P1,100,000 (7) Total Cash in Bank – Current Assets = 394,000 + 300,000 + 20,000 + 199,750 = P913,750 (8) Accounts Receivable P3,157,000 (9) Allowance for Uncollectible Accounts P154,250 (10) Uncollectible Accounts Expense = 80,000 + 152,250 P232,250 (11) Finished Goods Inventory = 600,000 + 60,000 P660,000 (12) Work in Process Inventory = 1,000,000 – 80,000 P920,000 (13) Raw Materials Inventory = P400,000 (14) Inventory of Spoiled Goods and Scrap Materials = 80,000 + 42,000 + 55,000 P177,000 (15) Sales = 6.000,000 – 75,000 P5,925,000 (16) Cost of Sales = 4,200,000 – 60,000 + 38,000 – 55,000 P4,123,000 (17) Selling and Administrative Expenses = 500,000 + 16,000 + 250 + 152,250 P668,500 (18) Other Operating Income P120,000 (19) Interest Expense and Finance Costs = 200,000 + 18,000 P218,000


1. A 7. B 13. C 19. C

2. C 8. B 14. B 20. C

3. C 9. C 15. A 21. D

4. C 10. C 16. C 22. A

5. A 11. D 17. B 23. B

6. C 12. A 18. A

Solutions: 1. Cash = 240,800 – 163,650 + 90,000 P167,150 2. Accounts Receivable = 563,500 + 77,500 P641,000 3. Inventory = 1,512,500 + 68,750 + 54,375 – 159,375 + 32,500 P1,508,750 4. Accounts Payable = 1,050,250 + 93,100 + 54,375 – 43,750 P1,153,975 5. Inventory, January 1 P 450,000

Chapter 5


58

Purchases 3,150,000 Goods available for sale P3,600,000 Cost of goods sold (4,000,000 x 70%) 2,800,000 Inventory, based on gross profit test P 800,000 Inventory, per count 750,000 Missing inventory P 50,000 6. Cost Retail Inventory, January 1 P142,000 P204,000 Purchases 313,000 520,000 Additional markup 20,000 Markdown (44,000) Goods available for sale P455,00 P700,000 Cost ratio = 455,000 / 700,000 = 65% Sales 620,000 Ending inventory at retail P 80,000 Cost ratio 65% Inventory, December 31 P52,000 7. Inventory, December 31, 2016 P 320,000 Purchases 1,410,000 + 10,000 – 20,000 1,400,000 Goods available for sale P1,720,000 Cost of goods sold Accounts receivable, December 31, 2017 P 300,000 Collections 1,800,000 Accounts receivable, January 1 ( 250,000) Sales on account P1,850,000 Cash sales 350,000 Total sales P2,200,000 Cost ratio 60% 1,320,000 Ending inventory before shortage P400,000 Inventory, per count 360,000 Inventory shortage P 40,000 Items 8 and 9 Per audit: Per client Adjustment Overhead = 25% x P900,000 = P225,000 P225,000 P 0 Direct labor cost = P225,000/75% 300,000 275,000 25,000 Direct materials 900,000 – 225,000 – 300,000 375,000 400,000 (25,000) Total manufacturing cost P900,000 Let x be the ending work in process inventory .6 x is the beginning inventory .6x + 900,000 – x = 800,000 100,000 = .4x x = 250,000 10. Sales per client P2,300,000 Returned goods ( 50,000) Goods shipped in December 80,000 Goods shipped in January ( 100,000) Correct sales P2,230,000

Chapter 5


59

Items 11 through 14

Inventory Accounts Payable Sales Effect on Cost of Sales

Per client 1,250,000 1,000,000 9,000,000

Parts held on consignment, recorded as purchases and included in inventory

(155,000) (155,000) ---

Parts sold still included in inventory (22,000) 22,000

Parts sold FOB shipping point 40,000

Goods out on consignment 210,000 (210,000)

Goods purchased in transit, FOB shipping point

25,000 25,000

Freight bill, unrecorded, relating to unsold goods

2,000 2,000

Cash discounts available (5,300) (5,300)

Per audit 1,304,700 866,700 9,040,000 (188,000)

Items 15 through 18

Inventory Purchases Sales Net income

March purchases recorded in Apr P 17,940 P(17,940)

Shipments in April (31,380) (31,380)

Goods shipped on March 31 (12,150) (12,150)

Goods not counted 18,200 18,200

Understate (overstatement) P6,050 P17,940 P(31,380) P(7,390)

19. Cash balance, December 31, 2017 P353,300 Payment on accounts payable 474,700 Payment for operating expenses 220,000 Total cash available P1,048,000 Cash balance, December 31, 2016 (100,000) Collection on notes receivable ( 25,000) Sales P923,000 Unit sales price P 50 Units sold 18,460 20. Average cost of purchases 32.60 + 32.60 x 0.10 (11 months) P 33.15 2 Accounts payable, Beginning P 75,000 Purchases 1,500 x 12 months x P33.15 596,700 Payments on accounts payable (474,700) Accounts payable, ending P197,000 21. Units in the beginning inventory 199,875 / 32.50 6,150 Units purchased 1,500 x 12 18,000 Units sold (18,460) 22. Units in the ending inventory 5,690 Ending inventory valued as follows 1,500 x 33.70 P50,550 1,500 x 33.60 50,400 1,500 x 33.50 50,250 1,190 x 33.40 39,746 Inventory, December 31, 2015 P190,946

Chapter 5


60

23. Selling price of damaged goods (80%) (210,000/70%) P240,000 Cost to sell 25% x P240,000 (60,000) Net realizable value P180,000 Cost 210,000 Decline in NRV P 30,000 Total cost of inventory 1,000,000 Inventory value, September 30 P 970,000

TIGER CORPORATION

Per count of petty cash fund

Coins and currencies P4,700

Checks 4,200

Petty cash vouchers

December 2017 P1,900

January 2018 500 2,400

Advances to Officers and Employees

December 2017 P 900

January 2018 300 1,200

Total per count P12,500

Cashier’s accountability

Petty cash fund P10,000

Collections

December collection P1,500

January 2018 collection 2,700 4,200 14,200

Cash shortage P1,700

Cash in Bank

Per Bank Per Books

Unadjusted Balances P252,742 P247,820

Deposits in transit 10,700

Unrecorded and undeposited collections (see above) 1,500 1,500

Unreleased checks 5,750

Stale checks 4,280

Outstanding checks (22,630 – 5,750 – 4,280) (12,600)

Uncollected note from Sergio Garcia

Principal P3,600

Interest 108 (3,708)

DAIF Check from customer (2,850)

Service charges ( 450)

Adjusted balances P252,342 P252,342

Adjusting entries


Receivable from Officers and Employees (900 + 1,700) 2,600

Petty Cash Fund 4,500

Chapter 5


61

Cash in Bank 11,530


Accounts Payable (5,750 + 4,280) 10,030

Accounts Receivable (3,708 + 2,850) 6,558

Selling and Administrative Expenses 450

Cash in Bank 7,008

Sales 8,000


Inventories 7,500

Cost of Sales 7,500

Sales 10,000



Sales 12,000


Inventories 10,200

Allowance for Doubtful Accounts 47

Selling and Administrative Expenses 47

Accounts Receivable

Per client P328,300

Adjustments ( 1,500)

6,558

(8,000)

(10,000)

12,000

Per Audit P327,358

Provision rate for uncollectibles 5%

Required allowance P 16,368

Existing allowance 16,415

Deductions from uncollectible accounts expense P ( 47)

Notes Receivable 10,000

Notes Payable 10,000

Interest Expense 183

Interest Payable 183

10,000 x 22% x 30/360 = 183

Interest Receivable 1,415

Interest Income 1,415

20,000 x 18% x 77/360 = P770

15,000 x 20% x 59/360 = 492

8,000 x 15% x 46/360 = 153

Chapter 5


62

Total P1,415



35,065 – 32,135 = 3,127

Answers:

1. Petty Cash P5,500 2. Cash in bank 252.342 3. Accounts receivable 327,358 4. Allowance for doubtful accounts 16,368 5. Notes receivable 43,000 6. Interest receivable 1,415 7. Merchandise inventory 221,300 8. Receivables from officers and Employees 12,840 9. Accounts payable 397,030 10. Notes payable 73,070 11. Interest Payable 11,363 12. Income tax payable 10,162 13. Sales 1,869,000 14. Cost of sales 1,184,700 15. Selling and administrative expenses 530,300 16. Bad debts expense 12,553 17. Interest income 9,820 18. Interest expense and bank charges 56,703 19. Profit 72,838 20. Total assets 2,224,430

CHAPTER 6 – INVESTMENTS IN FINANCIAL INSTRUMENTS

Multiple Choice – Theories

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

6. A 7. B 8. C 9. B 10. D

Problem 1

1. A 2. C 3. B, E 4. C, D 5. C, D

6. A, C, D 7. D 8. D, E 9. D 10. A, B, C, D

Problem 2 ESAU CORPORATION

A Corporation B Corporation C Corporation D Corporation E Corporation

Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount

Jan 3 1,000 54,000

8 1,000 60,000

Apr 5 (500) (27,000)

8 1,000 30,000 1,000 36,000

July 15 500 20,000

Dec 8 50

Bal.

before

adj to

FV

500

27,000

1,000

60,000

1.000

30,000

1,000

36,000

550

20,000

Adj 500 (6,000) 2,000 3,000 900

Per

audit

500

27,500

1,000

54,000

1,000

32,000

1,000

39,000

550

20,900

(a) Audit Adjusting Entries:

Financial Assets at FV through P&L 1,000

Dividend Income 1,000


Gain on Sale of FVPL 1,000

Treasury Shares 33,000



Treasury Shares 16,500

Paid in Capital from Treasury Shares 3,500



SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS

63



Dividend Receivable 5,000


Financial Assets at FV through P&L 400

Unrealized Gain on FVPL 400

(b) (1) Carrying amount of FVPL (see worksheet above) P173,400

(2) Gain on sale of FVPL = 28,000 – 27,000 = P 1,000

(3) Dividend Income = 1,000 + 1,200 + 5,000 = P 7,200

(4) Unrealized gain or loss on FVPL P 400

Problem 3 HONEY COMPANY

1. Selling price on July 3 P130,000

Dividends included in the selling price 1,000 x 5 (5,000)

Carrying value of shares sold 600,000 x 1000/5,500 shares (109,091)

Gain on Shares sold P15,909

2. Proceeds from sale P140,000

Carrying value of shares sold = 490,909 x 1,000/4,500 (109,091)

Gain on December 4 sale P 30,909

3. Dividend revenue for the year 2017:

November dividends 500 shares x P 5 P22,500

On July 10 sale 1,000 x 5 5,000

Dividends accrued on December 31 ( 3,500 x P5) 35,000

Total dividend income P62,500

4. Adjusted balance of the investment account

shares Peso balance

Market value, January 1 5,000 P600,000

May 31 bonus issue 500

July 10 sale (1,000) (109,091)

Dec 4 sale (1,000) (109,091)

Balances before adjustment to fair value 3,500 381,818

Adjustment to market (84,318)

Balance, December 31, at fair value 3,500 P297,500

Adjusting Entries


Trading Securities 12,000


64


Gain on Sale of Trading Securities 20,909



Dividends Receivable 35,000


Unrealized Loss on Trading Securities 84,318

Unrealized Gain on Trading Securities 12,466

Problem 4 MYRA COMPANY

Shares At cost Unrealized

gains

(losses)

Jan. 1 balances adjusted to Fair value

3,000 @ 80 3,000 P240,000 60,000

8,000 @ 100 8,000 800,000 ---

May 31 4,000 x (120-5) 4,000 460,000

Oct. 31 Sold 5,000 shares (3,000) (240,000)

(2,000) (200,000) 50,000

31 Realized gain transferred to RE (110,000)

Dec. 22 Sold 2,000 shares (2,000) (200,000) 80,000

22 Realized gain transferred to RE (80,000)

31 Adjustment to FV 276,000

Dec. 31 Per Audit 8,000 P 860,000 P 276,000

Investment in Ivan Company 60,000

Unrealized Gain /Loss on Equity Investments–

Other Comprehensive Income

60,000

11,000 x (105 – 5)* = 1,100,000

1,100,000 – 1,040,000 = 60,000

*105 is FV dividends-on


Retained Earnings 55,000

Dividends accrued last year.


Investment in Ivan 20,000

Dividends included in the purchase price

of March 5 acquisition, acquired

dividends-on. 4,000 x 5 = 20,000


65

Investment in Adams

Dividend Income

Property dividends should be recorded

at fair value

9,000

9,000

Investments in Ivan 50,000

Unrealized Gain/Loss on Equity Investments

- OCI

50,000

Selling price P550,000

Previous carrying value =

fair value on January 1

5,000 x 100 500,000

Unrealized gain – OCI P 50,000

*Unrealized Gain/Loss on Equity Investments – OCI 110,000


3,000 (110 – 80) + 2,000 (110-100) =110,000

Investment in Ivan 80,000


- OCI

80,000

Selling price = FV 2,000 x 140 = 280,000

Previous CV = FV, Jan. 1 = 200,000

Unrealized Gain 80,000

Miscellaneous Receivables 280,000

Investment in Ivan (2,000 x 140) 280,000

*Unrealized Gain/Loss on Equity Investments - OCI 80,000


2,000 ( 140 – 100) = 30,000

Investments in Ivan 276,000


- OCI

276,000

FV, 12/31/15 = 8,000 x 142 = 1,136,000

Previous CV :

Old = FV, Jan. 1

= 4,000 x 100 = 400,000

New=4,000 x 115 = 460,000 860,000

Unrealized Gain – OCI 276,000

Investments in Adams 1,500

Unrealized Gain/Loss on Equity

Investments – OCI (17 – 16) x 1,500

500


66

Note to the Teacher: At the date of sale, the investments at fair value through other comprehensive income are

adjusted to fair value (presumed to be equal to the selling price on the date of sale). Thus, no gain or loss on sale is

recognized in profit or loss. The entry transferring the cumulative unrealized gain or loss (equity account) to the

retained earnings account is optional.

Problem 5 White Corporation

Financial Assets at FV through Profit or Loss

Red Corp Preference Red Corp. Ordinary Blue Ordinary Yellow Ordinary

Shares Peso amt Shares Peso amt Shares Peso amt Shares Peso amt

1/1/15 1,000 450,000 6,000 650,000 2,000 550,000

1/17 (2,500) (270,833)

2/15 200

6/01 (500) (125,000)

10/01 (500) (225,000) 1,500 240,000

Before adj. 500 225,000 1,500 240,000 3,500 379,167 1,700 425,000

Adj to FV 5,500

5,583 (34,000)

MV 12/31 500 230,000 1,500 240,000 3,500 385,000 1,700 391,000

Non-Current Investments

Investment in Associate – Green Company

Acquisition cost P16,000,000

Dividends received 100,000 x P0.50 x 4 (1,000,000)

Income from associate 25% x P10,000,000 2,500,000

Investment in Associate , 12/31/2012 P17,500,000

Gains and losses

On sale of Blue on January 17


Carrying value (P65,000 x 2,500/6,000 270,833

Gain on sale P 54,167

On sale of Yellow

Selling price 500 x P210 P105,000

Carrying value (P550,000 x 500/2200) 125,000

Loss on sale P 20,000

On conversion of Red Preference to Red Ordinary

Market value 1,500 x P160 P240,000

Carrying value P450,000 x 500/1000 225,000

Gain on exchange P 7,500

Dividend Income

On Red preference


67

April 6 1,000 x 10% x P200 x 1/2 P10,000

Oct, 6 1,000 x 10% x P200 x 1/2 10,000

On Blue ordinary

June 30 3,500 x P5 17,500

P37,500

Unrealized gains on FVPL (see above working papaer)

P5,500 + 583 – 5,100 = P 983

Income from Associate (Green Company)

25% x P10,000,000 P 2,500,000

Problem 6 Epson Company

(a) Interest Revenue for 2014

P400,000 x 9% x 8/12 = P24,000

Interest Revenue for 2015

P400,000 x 9% x 9/12 P27,000

P300,000 x 9% x 2/12 4,500

P180,000 x 9% x 1/12 1,350

Total for 2014 P 32,850

(b) Unrealized Gains and Losses:

2016: Fair value 12/31/15 107% x 400,000 P428,000

Purchase price

440,000 – (400,000 x 9% x 4/12) 428,000

Unrealized gain P 0

2017: Debt Investments

Fair value 12/31/17 P180,000 x 108% P194,400

Fair value 12/31/16 180,000 x 107% 192,600

Unrealized Gain P 1,800

Equity Investments:

Fair value, 12/31/17 1,000 x 143 P143,000

Initial cost 1,000 x 140 140,000

Unrealized Gain P 3,000

(c) Gains and Losses on Disposal

2015: Oct 1 Proceeds P109,000

Accrued interest

100,000 x 9% x 3/12 ( 2,250)


Carrying value P100,000 x 107% 107,000

Loss on sale P 250


68

Nov. 30 Fair value of the ordinary sharesP140,000

Carrying value of bond investment

120,000 x 107% 128,400

Gain on exchange P 11,600

Net gain on sale for the year P11,350

(d) Carrying value of the investment

December 31, 2016= P400,000 x 107% P428,000

December 31, 2017 : P180,000 x 108% P194,400

+ 1,000 x 143 143,000

Total carrying value of debt and equity inv. P 337,400

Problem 7

Total amount paid P547,778

Accrued interest 500,000 x 10% x 2/12 8,333

Initial measurement P539,445

Amortization Table

Date Nominal Interest(5%) Effective Interest (4%) Premium

Amortization

Carrying Value, end

08/1/16 P539,445

11/30/16 P16,667 P14,385 P2,282 537,163

05/31/17 25,000 21,487 3,513 533,650

11/30/17 25,000 21,346 3,654 529,996

05/31/18 25,000 21,200 3,800 526,196

(a) Interest Revenue:

2016: P14,385 + 1/6(P21,487) = P17,966

2017: 5/6(21,487) + 21,346 + 1/6(21,200) = P42,785

(b) Interest Receivable, December 31, 2015

P500,000 x 8% x 1/12 = P4,167

(c) Carrying value

Dec. 31, 2016: P537,163 – 1/6(3,513) = P536,577

Dec. 31, 2017: P529,996 – 1/6(3,800) = P529,363


69

Problem 8

Entries that should have been made:

Jan. 21 Investment in Pearl 510,000


Cash 516,250

Mar. 1 Cash 106,000

Investment in Pearl (510,000 x 100/500) 102,000

Interest Income (100,000 x 9% x 3/12) 2,250

Gain (Loss) on Sale of Trading Securities 1,750

June 1 Cash 18,000


Nov. 1 Cash 104,750

Gain (Loss) on Sale of Trading Securities 1,000

Investment in Pearl (510,000 x 100/500) 102,000

Interest Income (100,000 x 9% x 5/12) 3,750

Dec. 1 Cash 13,500


300,000 x 9% x 6/12

31 Interest Receivable 6,750


300,000 x 9% x 1/12

31 Investment in Pearl 3,000

Unrealized Gains on Trading Securities 3,000

(300,000 x 1.03) – 306,000

Audit Adjustments


Investment in Pearl 6,250



Gain on Sale of TS 1,750




Loss on Sale of TS 1,000




70


Dividend Receivable 6,750



Unrealized Gains on TS 3,000

Problem 9

Amortization Table

Date Nominal Interest(3%) Effective Interest (4%) Discount

Amortization

Carrying Value, end

January 2, 2017 P1,815,000

June 30, 2017 P60,000 P72,600 P12,600 1,827,600

December 31, 2017 60,000 73,104 13,104 1,840,704

(a) Entries that should have been made:

Jan. 2 Debt Investments – Fulfilled Dreams 6% Bonds 1,815,000

Cash 1,815,000

June 30 Debt Investments – Fulfilled Dreams 6% Bonds 12,600

Cash 60,000

Interest Revenue 72,600

Dec. 31 Debt Investments – Fulfilled Dreams 6% Bonds 13,104

Cash 60,000


31 Debt Investments – Fulfilled Dreams 9% Bonds 109,296

Unrealized Gains/Losses on Debt Investments 109,296

*97.5% x 2,000,000 = 1,950,000

Amortized Cost 1,840,704

Unrealized gain P 109,296

*FV = 195,000/200,000 = 97.5%

Dec. 31 Cash 195,000


Debt Investments – Fulfilled Dreams 6% Bonds 195,000

Gain on Sale of Debt Investments 10,930

(b) Audit Adjustments


71

Debt Investments- Fulfilled Dreams 6% Bonds 145,704


Debt Investments- Fulfilled Dreams 6% Bonds 109,296



Gain on Sale of Debt Investments 10,930

SUPPLY THE REQUIRED INFORMATION

1. P12 per share

2. 2,500

3. P0

4. 6,500

5. 350

6. 15,800

7. 55,200

8. 1,600

9. 376,400

10. 3,776,400

11. 0

12. 48,279

13. 2,097,928

14. 365,668

15. 360,000

16. 160,000

17. 35,000 loss

18. 1,970,000

19. 50,000 gain

20. 0

21. 30,000

22. 0

23. 0

24. 15,000 credit

25. 116,000

26. 0

27. 1,816,000

28. 3,333

29. 1,000 gain

30. 500 gain

31. 200 gain

32. 10,600

33. 77,100


72

34. 55,000

35. 4,125

36. 111,000

37. 2,293,500

38. 316,500

39. 31,500

40. 4,125

41. 136,300

42. 0

43. 52,900

44. 7,500

45. 758,600

46. 3,133

Final Answers Computations

1. P36,000 or P12 per share

2. P0 Net selling price: (1,000 x 8) - 500 = P7,500

Cost of shares sold P 30,000 x 1,000/6,000 5,000


This gain is not taken to P and L (no recycling).

3. P0 Selling price 1,000 x 8.50 P8,500

Cost of shares sold 5.000

Unrealized Gain taken to OCI P3,500

None of the gain or loss shall be transferred to P and L.

4. P6,500 Property dividends 5,000/5 x P2.50 P2,500

Cash dividends 5,000 x 0.80 4,000

Total dividend income P6,500

5. P350 500 (3.20 – 2.50) P 350

6. P15,800

OCI- Unrealized Gain or Loss on Equity Investments

01-01 Balance P6,000

03-17 1,000/6,000 x P6,000 (1,000)

11-30 1,000/6,000 x 6,000 (1,000)

12-31 Fair value

6,000 x P 9.20 = P55,200


73

Cost (See WP below) 35,400

Cumulative Unrealized Gain 19,800

Balance before adjustment to FV

6,000 – 1,000 – 1,000 4,000

Unrealized gain this year in OCI 15,800 (ITEM #6)

Cumulative balance in equity, Dec. 31 P19,800

7. P55,200 6,000 x 9.20 P55,200

8. P1,600 500 X 3.20 P 1,600

Equity Investments at FV through OCI– Y Company Ordinary

Date Shares Total Cost Gain(loss) Dividend Income

01-01-17 3,000 P30,000

01-12-17 3,000

03-17-17 (1,000) (5,000) P2,500

06-30-17 1,000 x P2.50 = P2,500

10-01-17 2,000 15,400*

10-20-17 5,000 x 0.80= 4,000

11-30-17 (1,000) (5,000) 3,500

12-31-17 Balances

6,000

P35,400

P6,000

P6,500

2,000 (8.50 - .80 dividends on) = 15,400

FVPL – B Co. Ordinary

Date Shares Total CV Gain(loss) Dividend Income

06-30-14 1,000 P2,500

9-10-14 (500) (1,250) 150

12-31-14 UGL

500 x (3.20 – 2.50)

350

12-31-14 balances 500 shares P1,600

Unrealized Gain or Loss on Equity Investments at Fair Value through Other Comprehensive Income

01/01/17 Balance P6,000

03-17 1,000/6,000 x P6,000 (1,000)

11-30 1,000/6,000 x 6,000 (1,000)

12-31 Fair value

6,000 x P 9.20 = P55,200

Cost 35,400

Cumulative Unrealized Gain 19,800

Balance before adjustment to FV

6,000 – 1,000 – 1,000 4,000

Unrealized gain this year in OCI 15,800

Cumulative balance in equity, Dec. 31 P19,800


74

Items 9 through 14:

Kristine Company

Interest Date

9%Interest Paid

10%Effective

Interest

Discount

Amortization

Amortized Cost,

End

Jan. 2, 2016 P3,760,000

June 30, 2016 P180,000 188,000 P8,000 3,768,000

Dec. 31, 2016 P180,000 188,400 8,400 3,776,400

June 30, 2017 P180,000 188,820 8,820 3,785,220

Dec. 31, 2017 P180,000 189,261 9,261 3,794,481

June 30, 2018 P180,000 189,724 9,724 3,804,205

Dec. 31, 2018 P180,000 190,210 10,210 3,814,415

Final Answers Computations

9. P376,400 P188,000 + 188,400 = P376,400

10. P3,776,400

11. P0

12. P48,279 Selling price on November 30, 2014 (1.8M x 98%) P1,764,000

Carrying amount

June 30, 2014 3,804,205 x 1.8/4 = P1,711,892

Amortization June 30 – Nov 30

10,210 x 1.8/4 x 5/6 = 3,829 1,715,721

Gain on sale on November 30 P 48,279

13. P2,097,928 P2,200,000/4,000,000 x 3,814,415 = P2,097,928

The reclassification shall be treated in the first reporting period

subsequent to the change in the business model.

14. P365,668 Interest income for 2018

January 1 to June 30 P189,724

July 1 to November 30 190,210 x 5/6 = 158,508

December 1 to 31 P190,210 x 2.2/4 x 1/6 17,436

Total interest income P 365,668

Items 15 through 19

15. P360,000 P4,000,000 x 9% = P360,000

16. P160,000 (98% x P4,000,000) – 3,760,000 = P160,000

17. P35,000 loss

Total proceeds P1,960,000

Accrued interest 2,000,000 x 9% x 5/12 ( 75,000)

Selling price P1,885,000

CV 96% x 2,000,000 1,920,000

Loss on sale of FVPL P 35,000


75

18. P1,970,000 2M x .985 = P1,970,000

19. P50,000

Fair value, 12/31/18 P1,970,000

Fair value, 12/31/17 2,000,000 x .96 1,920,000

Unrealized gain for 2018 P 50,000

Items 20 through 22

Power Cast Company

Cost of investment P1,800,000

Underlying equity 20% x P6,000,000 1,200,000

Excess of cost P 600,000

Undervaluation in land 20% x 750,000 (150,000)

Undervaluation in equipment 20% x 200,000 (40,000)

Undervaluation in inventory 20% x 30,000 ( 6,000)

Goodwill P 404,000_

25. P116,000 Income from Associate

Initial share (800,000 – 160,000) x 20% P128,000

Amortization

Depreciation on Equipment 40,000/5 x 9/12 ( 6,000)

Inventory ( 6,000)

Income from Associate P116,000

26. P0 Dividends received from associate should be credited to the Investment account.

27. P1,816,000 Cost of investment P1,800,000

Dividends received ( 100,000)

Income from Associate 116,000

Carrying value of investment P1,816,000

Items 23 through 28

Boracay Co. ordinary Bohol Company ordinary 8% treasury bonds

# of shares Amount # of shares Amount Face Amount

1/1/12 bal. 1,000 P 25,000 3,000 P18,000 P50,000 P50,000

1/31 (200) ( 5,000)

6/30 600

7/8 (300) (1,500)

8/1 (20,000) (20,000)

12/31 bal.

before Fair

Value adj.

800

P20,000

3,300

P16,500

30,000

P30,000

Adj to FV 4,000 6,600


76

12/31 per

audit

800 shares

P24,000

3,300

P23,100

P30,000

P30,000

23. P3,333 Interest Income

January 1 to July 31 P50,000 x 8% x 7/12 = P2,333

August 1 to Dec. 31 P30,000 x 8% x 5?12 = 1,000

Total interest income for 2017 P3,333

24. P1,000 gain Net selling price P6,000

Carrying value P25,000 x 200/1,000 (5,000)


25. P18,300 gain Selling price P 2,000

Carrying value P18,000 x 300/3,600 ( 1,500)

Gain on sale P 500

26. P200 gain Cash received P21,000

Interest for 6 months (20,000 x 8% x 6/12) ( 800)


Carrying value 20,000

Gain on sale P 200

27. P10,600 See above worksheet: P4,000 + P6,600 P10,600

28. P77,100 See above worksheet: P24,000 PP23,100 + P30,000 = P77,100

Items 29 through 34

29. P55,000 P1,040,000 – P985,000 = P55,000

30. P4,125 From Alaska: 5,500 x P0.75 = P4,125

31. P111,000 P370,000 x 30% = P111,000

32. P2,293,500 Fair value of old 25,000 shares: P1,520,000 x 25,000/50.000 = P760,000

Purchase price of new 50,000 shares 1,520,000

Initial cost of 75,000 shares P2,280,000

Income from associate 111,000

Dividends received (75,000 x 1.30) ( 97,500)

Carrying value, December 31, 2013 P2.293,500

38. P316,500 Alaska 5,500 x 23 P126,500

Bahamas 10,000 x 19 190,000

Total fair value P316,500

33. P31,500 Fair value P316,500

Cost : 125,000 + 160,000 285,000


77

Cumulative balance of UGL P 31,500

34. P115,125 P111,000 + P4,125 = P115,125

Items 35 through 40

Financial Assets at Fair Value through Profit or Loss

Seattle Ordinary Grunge Preference Cobain Ordinary

Shares Amount Shares Amount Shares Amount

1/1/17 2,000 P28,400 1,200 P78,000

20% bonus 400

Sale (400) (4,733)

Purchase 1,500 P31,500

12/31 bal.

before adj to

FV

2,000

P23,667

1,200

P78,000

1,500

P31,500

Unrealized

Gains (Losses)

4,333

(1,200)

Per audit 2,000 P28,000 1,200 P76,800 1,500 P31,500

41. P136,300 28,000 + 76,800 + 31,500 = 136,300

42. P0 Cash dividend from Grunge should have been recorded as income in 2011.

43. P52,900 Cost (800 x P50) + P5,400 = P45,400

Share in profit 50,000 x 20% x 9/12 7,500

Investment in Associate, Dec. 31 P52,900

44. P7,500 50,000 x 20% x 9/12 = P 7,500

45. 758,600 764,000 – 5,400 = P758,600

46. 3,133 See above worksheet : 4,333 – 1,200 P 3,133

A-MAGS CORPORATION


78


Advances to Officers and Employees 1,500

Cash – Petty cash fund 3,500

Other Assets 130,000

Cash in Bank 130,000

Cash in Bank – PCI Bank – Current 5,000


Cash in Bank 45,000

Other Current Liabilities (Bank Overdraft) 45,000

Accounts Receivable – Past Due 20,000

Cash in Bank – PCI Bank 20,000


Customer Credit Balances 15,000

Allowance for Doubtful Accounts 10,250

Accounts Receivable – Past due 10,250

Advances to Officers and Employees 3,500


Sales 30,000

Discount on Notes Receivable 30,000

Notes Receivable – Non-Current 120,000


Notes Receivable 120,000

Discount on Notes Receivable – Non- current 24,337

Discount on Notes Receivable (30,000 x 5/12) 12,500

Discount on Notes Receivable – Non-current (95,663 x 12% x 10/12) 9,566


Interest Receivable 4,057


40,000 x 16% x 36/360 = 640

75,000 x 20% x 82/360 = 3,417

Total 4,057

Inventories 22,500


Sales 80,000


79

Advances from Customers 24,000

Accounts Receivable – Not yet due 56,000

Accounts Receivable – not yet due (182,000 x 60% x 125%) 136,500

Sales 136,500

Inventories ( 182,000 x 40%) 72,800



Accrued Expenses 182,000 x 60% x 5%) 5,460

Other Current Assets (80% x 28,000) 22,400

Loss due to Flood 5,600

Inventories 28,000

Equipment 15,000

Cost of sales 15,000


Accumulated Depreciation (15,000/5 x 6/12) 1,500

AR – Total AR – Not due

Per client P424,000 P187,000

Adjustments 20,000

15,000

(10,250)

(3,500)

(56,000) (56,000)

136,500 136,500

P525,750 P267,500

Operating Expenses 363

Allowance for Doubtful Accounts 363

Total Accounts Receivable P525,750

Accounts Receivable not yet due (267,500)

Accounts Receivable past due P258,250

Provision rate for past due accounts 5%

Required allowance P 12,913

Existing allowance ( 22,800 – 10,250) 12,550

Additional doubtful accounts expense P 363

Investments in Associate – Johnny Walker 280,000

Equity Investments – FVPL 89,000

Investment in Equity Securities 369,000

Investment in Associate – Johnny Walker 150,000

Income from Associate 150,000


80


Investments in Equity Securities 12,000

Investment in Equity Securities 16,800

Equity Investments – FV (43,200 x 400/1,200) 14,400

Gain on Sale of Equity Investments 2,400

Treasury Stock 45,000

Investments in Equity Securities 45,000


Investment in Associate 30,000

Equity Investments – FVPL 18,000

Unrealized Gain on FVPL 18,000

December 31 Fair values:

San Miguel 500 x 50 P 25,000

Asia Brewery 800 x 38 30,400

La Tondena 1,200 x 31 37,200 P92,600

Previous carrying value

San Miguel P28,000

Asia Brewery 43,200 – 14,400 28,800

La Tondena 17,800 74,600

Unrealized gain P 18,000

1. P491,500

2. P92,600

3. P525,750

4. P12,913

5. P6,500

6. P295,000

7. P12,500

8. P4,057

9. P5,000

10. P1,347,300

11. P5,500

12. P0

13. P400,000

14. P213,500

15. P257,629

16. P399,500

17. P275,000

18. P15,000

19. P24,000

20. P153,450


81

21. P122,960

22. P52,500

23. P490,873

24. P55,000

25. P0

26. P4,677,163

27. P3,682,361

28. P643,126

29. P9,000

30. P35,923

31. P18,000

32. P14,400

33. P0

34. P5,600

35. P150,000

36. 157,980

37. P368,619

38. 363

39. 9,566

40. 5612,724

Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS

81

MULTIPLE CHOICE - THEORIES

1. B 2. B 3. A 4. B 5. D 6. A 7. A 8. C 9. D 10. A

Problem 1 (Pretzy/ Pine Company)

Correct cost Recorded Cost Difference Land 25.8M x 8.4/28 P7,740,000 P7,000,000 P 740,000 Building 25.8M x 14/28 12,900,000 9,000,000 3,900,000 Equipment 25.8M x 5.6/28 5,160,000 4,000,000 1,160,000 Adjusting Entries: 1. Land 740,000 Building 3,900,000 Equipment 1,160,000 Other Operating Expenses 5,000,000 Salaries and Commission Expense 800,000 2. Depreciation Expense – Building 130,000

Depreciation Expense – Equipment 77,333 Accumulated Depreciation – Building 116,667 Accumulated Depreciation – Equipment 77,333 5% x 3,900,000 x 8/1 2 = P130,000 10% x 1,160,000 x 8/12 = 77,333 Problem 2 (Gay Company)

Discount on Notes Payable (5% x 850,000) 42,500 Equipment 42,500 Problem 3 Dionella Company

a. Machinery Machinery Tools Raw materials used in construction P176,000 – 4,000 P172,000 Labor 50,000 Cost of installation 10,000 Materials spoiled in trial runs 5,000 Incremental overhead due to machine construction 25,000 Decommissioning cost 40,000 x .56447 22,579 Purchase of machine tools P15,000 Correct Cost P284,579 P15,000 b. Adjusting entries: Machinery 1,579 Loss on Disposal of Old Machine 3,000 Purchase Discounts 4,000 Profit on Construction 24,000 Machinery Tools 15,000 Accumulated Depreciation – Machinery (old) 120,000 Factory Overhead Control 25,000 Provision for Machine Dismantling 22,579 Machinery (old) 120,000 Depreciation Expense – Machinery 158 Accumulated Depreciation – Machinery 158 (284,579 x 10%) – 28,300 = 158


82

Problem 6 Flames Company

Accumulated Depreciation – Machine (40,000/10 x 6) 24,000 Loss on Replacement of Machine Parts 16,000 Machinery 40,000 Machinery 50,000 Repairs Expense 50,000 Accumulated Depreciation 5,750 Depreciation Expense 5,750 Cost P200,000 Removed part ( 40,000) Replacement 50,000 Revised gross cost P210,000 Accumulated depreciation, 12/31/11 200,000/10 x 6 120,000 Removed accumulated depreciation ( 24,000) (96,000)

Carrying value after overhaul P114,000

2017 depreciation 114000/(10-6+4) P 14,240 Recorded depreciaition 20,000 Adjustment P 5,750 Problem 5 Ethan Corporation

Land Building Others Organization Fees P50,000 Org’n Exp. Land site and old building P8,150,000 Corporate organization costs 30,000 Org’n Exp Title clearance fees 25,000 Cost of razing old building 220,000 Sale of scrap ( 25,000) Salaries 300,000 Salaries Exp Stock bonus to corporate promoters 100,000 Org’n Exp. (or –

APIC) Real estate tax 25,000 Taxes Expense Cost of construction P18,000,000 Total correct cost P8,175,000 P18,195,000

Adjusting Entries Land 8,175,000 Building 18,195,000 Organization Expenses 180,000 Taxes Expense 25,000 Miscellaneous Revenues 25,000 Administrative Salaries 300,000 Land, Buildings and Equipment 26,900,000

(NOTE TO THE TEACHER: The Philippine Interpretations Committee’s Interpretation on the demolition cost of the building is applied. The net demolition cost is capitalized and charged to the building account, since demolition is preparatory to construction of the building.


83

Problem 6 Electro Corporation

Correct cost: Down payment P50,000 PV of future payments P100,000 x 3.6048 360,480 Total cost P410,480 Correct Depreciation 410,480 / 15 x ½ P13,683 Adjusting Entries: Discount on Notes Payable (500,000 – 360,480) 139,520 Machine 139,520 Interest Expense 36,048 Discount on Notes Payable 36,048 360,480 x 12% x 10/12 Accumulated Depreciation 4,650 Depreciation Expense 4,650 13,683 – 18,333 Problem 7 Silver Company

Equipment Accumulated Depreciation Balance, 1/01/17 P 750,000 P300,000 6/01/17 Purchase of Asset 16 P200,000 + 7,000 207,000 10/01/17 Sold Asset 10 ( 150,000) 150,000 x 10% x 5 ( 75,000) Depreciation for 2015 807,000 x 10% ___ __ 80,700 Balances, December 31, 2017 P807,000 P 305,700 Adjusting Entries: Accumulated Depreciation 75,000 Loss on Sale of Equipment 57,000 Equipment 8,000 – (1,000 - 400) 132,000 Net proceeds P20,000 – 2,000 P 18,000 Carrying value P150,000 – 75,000 75,000 Loss on sale P 57,000 Equipment 7,000 Repairs and Maintenance 4,000 Freight In 3,000 Accumulated Depreciation – Equipment 12,500 Depreciation Expense – Equipment 12,500 80,700 – 93,200


84

Problem 8 Conquer Company

Equipment Accumulated Depreciation January 1 Balances P 500,000 P 225,000 May 1 Acquisition (P160,000 x .98)+5,000 161,800 Oct. 1 Sale (100,000) 100,000 x 10% x 4 ( 40,000) Dec. 31 Depreciation (500,000 – 100,000) x 10% P40,000 100,000 x 10% x ½ 5,000 161,800 x 10% x ½ 8,090 ___ 53,090 December 31, 2017 Balances P561,800 P 238,090 Adjusting Entries Equipment 1,800 Discounts Lost 3,200 Repairs and Maintenance 5,000 Loss on Sale of Equipment 30,000 Accumulated Depreciation 40,000 Equipment 70,000 Accumulated Depreciation 9,910 Depreciation Expense 9,910 63,000 – 53,090

Problem 9 Berol Giant Corporation Note that IAS 17 is still applied in the solution, as IFRS 16 Leasing shall apply

effective 2019. Audit Adjusting Entries Rent Expense (50,000 x 9/12) 375,000 Prepaid Rent 125,000 Finance Lease Liability 3,540,000 Machinery and Equipment 4,040,000 Profit on Construction 150,000 Building 150,000 Land Improvement 500,000 Land 500,000 Accumulated Depreciation – Machinery and Equipment 2,880,000 Gain on Sale of Machinery 680,000 Machinery and Equipment 4,800,000 – 2,600,000 2,200,000 Cost P4,800,000 Accumulated depreciation 480,000/10 x 6 2,880,000 Carrying value P1,920,000 Proceeds 2,600,000 Gain on Sale of M and E P 680,000 Land 6,000,000 Building 24,000,000 Unearned Income from Government Grant 30,000,000 Depreciation Expense – Building 511,667 Accumulated Depreciation – Building 511,667


85

Correct depreciation Old P12,000,000/ 25 P480,000 Improvement 1,600,000/12 x ½ 66,667 Donated 24,000,000/25 x ½ 480,000 Correct depreciation P1,026,667 Per client 515,000 Adjustment P 511,667 Unearned Income from Government Grant 600,000 Income from Government Grant 600,000 30,000,000/25 x ½ Accumulated Depreciation – Machinery and Equipment 312,000 Depreciation Expense – Machinery and Equipment 312,000 Correct depreciation – Machinery and Equipment (38,500,000 – 4,800,000)/10 = P3,370,000 4,800,000 / 10 x ½ 240,000 Total P3,610,000 Per client 3,922,000 Adjustment P 312,000 Depreciation Expense – Land Improvements 25,000 Accumulated Depreciation – Land Improvements 25,000 500,000 / 10 x ½ = 25,000 b. Adjusted balances: 1. Land P48,250,000 2. Land Improvements 500,000 3. Accumulated Depreciation – Land Improvements 25,000 4. Buildings 37,600,000 5. Accumulated Depreciation – Buildings 7,026,667 6. Machinery and Equipment 33,700,000 7. Accumulated Depreciation – Machinery and Equipment 18,055,000 8. Unearned Income from Government Grant 29,400,000 9. Depreciation Expense – Land Improvements 25,000 10. Depreciation Expense – Buildings 1,026,667 11. Depreciation Expense – Machinery and Equipment 3,610,000 12. Amortized Income from Government Grant 600,000 Problem 10 Malabon Company

Schedule of Depreciation Expense

A. Building Method – 150% declining balance Depreciation rate = 1.5/25 = 6% Old (P12,000,000 – P2,654,000) x 6% P560,760 New P12,800,000 x 6% 768,000 2017 Depreciation – Building P1,328,760 B. Machinery and Equipment Method – straight-line Useful life – 10 years Old including scrapped in December P7,750,000/10 P775,000 New P290,000/10 x 6/12 14,500 2017 Depreciation – Machinery P789,500


86

C. Automobiles and Trucks Method - 150% declining balance Depreciation rate = 1.5/5 = 30% Old (not sold) (P13,200,000 – P8,620,000) = P4,580,000 P4,580,000 – (P810,000 + 235,200) x 30% P1,060,440 Sold 235,200 New P650,000 x 30% x 4/12 65,000 2017 Depreciation – Automobiles and Trucks P1,360,640 D. Leasehold Improvements Method – straight line Useful life – 8 years Lease term : original 6 years upon completion of the improvement Remaining useful life = 8 – 3 = 5 years Remaining lease term = 6 – 3 + 4 = 7 years 2017 Depreciation: (P2,210,000 – 1,105,000) / 5 = P 221,000 E. Land Improvements Method – straight-line Useful life – 12 years 2017 Depreciation: P1,920,000 / 12 x 9/12 P 120,000

b. Adjusted Balances: 1. Land P16,200,000 2. Land Improvements 1,920,000 3. Accumulated Depreciation – Land Improvements 120,000 4. Building 24,800,000 5. Accumulated Depreciation – Buildings 3,892,760 6. Machinery and Equipment 7,870,000 7. Accumulated Depreciation – Machinery and Equipment 2,611,250 8. Automobiles and Trucks 5,258,750 9. Accumulated Depreciation – Automobiles and Trucks 3,059,360 10. Leasehold Improvements 2,210,000 11. Accumulated Depreciation – Leasehold Improvements 1,326,000 Problem 11

Adjusting Entries

a. Depreciation Expense – Machine A 15,750 Accumulated Depreciation 15,750 Cost P105,000 Acc. Depreciation 1/1/12 105,000 / 12 x 3 ( 26,250) Carrying amount 1/1/12 P 78,750 78,750 / 5 = P 15,750 b. Depreciation Expense – Machine B 40,000 Accumulated Depreciation – Machine B 40,000 P240,000 / 6 = P 40,000 Impairment Loss 15,000 Accumulated Depreciation – Machine B 15,000 Carrying value 12/31/17 P240,000 x 3.5/6 P140,000 Recoverable amount 125,000 Impairment loss P 15,000


87

c. Depreciation Expense – Building A 590,625 Accumulated Depreciation – Building A 590,625 Carrying value 1/1/17 P6,300,000 x 15/20 = P4,725,000 2017 Depreciation = P4,725,000 x 15/120 = P 590,625 d. Retained Earnings 175,000 Accumulated Depreciation – Building B 175,000 Carrying value 12/31/16 P5,250,000 x 7/10 = P3,675,000 Recoverable amount 3,500,000 Impairment loss in 2016 P 175,000 Depreciation Expense – Building B 500,000 Accumulated Depreciation – Building B 500,000 3,500,000 / 7 = P 500,000 Accumulated Depreciation – Building B 100,000 Gain - Recovery of Previous Impairment 100,000 Carrying value, 12/31/17 3,500,000 – 500,000 = P3,000,000 Recoverable amount 3,100,000 Increase in value P 100,000 Limit on recovery 175,000 x 6/7 P 150,000

e. Depreciation Expense – Building 300,000

Accumulated Depreciation – Building 300,000 12,000,000 / 20 x 6/12

Investment Property – Land 8,000,000 Investment Property – Building 12,000,000 Accumulated Depreciation – Building (PPE) (12M/20 x 4.5)2,700,000 Land 6,500,000 Building 12,000,000 Revaluation Surplus 4,200,000 Investment Property – Land 500,000 Investment Property – Building 400,000 Fair Value Gain on Investment Property 900,000

Problem 12 Gotham Company

As of December 31, 2016 Based on Cost Based on

Revalued Amt. Balance of Revaluation Surplus

Land P15,000,000 P20,000,000 P5,000,000 Building, net of accumulated depreciation

14,000,000

20,000,000

6,000,000

(a) Depreciation expense on the building for the year 2017: P20,000,000 / 20 years = P1,000,000 (b) Revaluation surplus transferred to Retained Earnings = P6,000,000 / 20 = P300,000 (c) Balance of revaluation surplus at December 31, 2017 statement of financial position =

Based on Previous Revaluation

Based on New Revalued Amt.

Difference

Land P20,000,000 P22,000,000 P2,000,000 Building, net of accumulated


88

depreciation 19,000,000 21,850,000 2,850,000

Balance of Revaluation Surplus at December 31, 2017 statement of financial position: 12/31/16 Balance Realized in 2017 New Revaluation 12/31/17 Final

Pertaining to land P5,000,000 ---------- P2,000,000 P7,000,000 Pertaining to building 6,000,000 (300,000) 2,850,000 8,550,000 Total P11,000,000 P(300,000) P4,850,000 P15,550,000

Problem 13 (Ecstacy Company)

Adjusting Entries Franchise 420,000 Prepaid Rent 280,000 Retained Earnings (54,000 + 150,000) 204,000 Patents 750,000 Research and Development Expense (1,000,000 – 90,000) 910,000 Formula (or Patent) 90,000 Legal Fees 80,000 Intangible Assets 2,734,000 Retained Earnings (3/24 x 280,000) 35,000 Rent Expense (1/2 x 280,000) 140,000 Prepaid Rent 175,000 Retained Earnings (6/60 x 420,000) 42,000 Amortization Expense – Franchise 84,000 Accumulated Amortization – Franchise 126,000

Amortization Expense – Patents 62,500

Accumulated Amortization – Patents 62,500 750,000 /10 x 10/12

Problem 14 (Cheryl Corporation) Adjusting Entries Research and Development Expense 940,000 Patents 75,000 Rent Expense (91,000 x 5/7) 110,000 Prepaid Rent (91,000 – 65,000) 130,000 General and Administrative Expense 36,000 Discount on Bonds Payable 84,000 Advertising and Promotions Expenses 90,000 Other Operating Expenses 240,000 Share Premium – Ordinary Share 250,000 Intangible Assets 1,455,000 Amortization of Patents 7,500 Accumulated Amortization – Patents 7,500


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Problem 15 (Kookabar Enterprises) Retained Earnings 525,000 Patents 525,000 750,000 x 7/10 = 525,000 Patents 4,975,000 Accumulated Amortization – Patents 4,975,000 To reinstate the gross cost of the patents and related Accumulated Amortization (5,500,000 – 525,000) ÷ 7/14 Total cost is therefore P9,950,000 Accumulated amortization = 9,950,000 x 7/14 = P4,975,000 Cost of Goods Sold 910,714 Accumulated Amortization – Patents 910,714 (P2,100,000 – 1,050,000) / 3 years =P 350,000 (P9,95,000 – 2,100,000) / 14 years = 560,714 2017 Amortization P 910,714 Selling and Administrative Expenses 450,000 Franchise Agreement 450,000 Selling and Administrative Expenses 100,000 Accumulated Amortization – Franchise Agreement 100,000 50,000 /5 = 10,000 Retained Earnings 440,000 Organization Costs 440,000 Retained Earnings (45,000 + 100,000) 145,000 Goodwill 145,000 Problem 16 (Yuka Sato Corporation)

Equipment 34,700 Patents 34,700 Cost of Goods Sold 5,500 Accumulated Amortization – Patents 5,500 93,500 / 17 = 5,500 Impairment Loss – Licensing Agreement No. 1 42,000 Accumulated Impairment – Licensing Agreement 1 42,000 70% x 60,000 = 42,000 Licensing Agreement No. 2 4,000 Unearned Revenue 4,000 Selling and Administrative Expenses 6,000 Accumulated Amortization – Licensing Agreement No. 2 6,000 60,000 / 10 = 6,000 Retained Earnings 30,000 Goodwill 30,000 Equipment 15,000 Miscellaneous Receivables 6,100 Leasehold Improvements 21,100


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Retained Earnings 1,500 Cost of Goods Sold 1,500 Accumulated Depreciation – Leasehold Improvements 3,000 15,000/ 10 = 1,500 Retained Earnings 32,000 Organization Costs 32,000

Problem 17 Genuine Company (1) Audit Adjusting Entries

Patents 200,000 Accumulated Amortization – Patents 200,000 Professional Fees and Other Legal Expenses 120,000 Patents 120,000 Amortization of Patents 100,000 Accumulated Amortization – Patents 100,000 Impairment Loss – Patents 169,288 Accumulated Amortization – Patents 169,288 Carrying value before impairment P700,000 Value in use = 140,000 x 3.7908 = 530,712 Impairment loss P169,288

Professional Fees and Other Legal Expenses 70,000 Trademarks 70,000 Amortization of Trademarks (150,000/2) 75,000 Accumulated Amortization – Trademarks 75,000 Discount on Notes Payable 166,020 Franchise 166,020 Face value of the note P800,000 Present value when issued 200,000 x 3.1699 633,980 Initial discount P166,020 Retained Earnings 63,398 Interest Expense 49,738 113,136 Discount on Notes Payable Date Periodic Payment Interest Principal Bal. of Principal 1/1/16 P633,980 12/31/16 P200,000 P63,398 P136,602 497,378 12/31/17 200,000 49,738 150,262 347,116 Franchise 16,602 Retained Earnings 16,602 Franchise 83,398 Accumulated Amortization 83,398


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Amortization of Franchise 83,398 Accumulated Amortization – Franchise 83,398 Correct cost of franchise = 200,000 + 633,980 = 833,980 Recorded amortization ( 10 year life) 100,000 Correct amortization 833,980/10 83,398 Adjustment 16,602 Retained Earnings 40,000 Organization Costs 40,000 Goodwill (285,000/ 19 ) 15,000 Retained Earnings 15,000 Advertising Expense 165,000 Goodwill 165,000 (2.) Adjusted Balances

(a) Gross cost of patents ……………………………………………………………………….P1,000,000 (b) Carrying value of patents, December 31, 2016…………………………………….. 800,000 (c) Amortization of patents for 2017………………………………………………………. 100,000 (d) Impairment loss on patents – 2017…………………………………………………… 169,288 (e) Amortization of patents for the year 2018 = 530,712/5 ……………………….. 106,142 (f) Total expenses relating to the Trademark = 70,000 + (1/2 x 150,000) ………………………………………….……………… 145,000 (g) Correct cost of the franchise……………………………………………………………… 833,980 (h) Interest expense for 2017 relating to the Notes Payable………………………. 49,738 (i) Discount on notes payable, 12/31/17 = 166,020 – 113,136…………………… 52,884 (j) Carrying value of the Franchise, 12/31/17 (833,980 – 166,796)……………… 667,184 (k) Initial cost of goodwill 285,000 ÷ 19/20 ………………………………………… 300,000 (l) Goodwill on December 31, 2017………………………………………………………… 300,000 (m) Net adjustment to Retained Earnings, 1/1/17……………………………………… 71,796 dr.

Problem 18 Amortization of Patents (1,200,000/12) 100,000 Accumulated Amortization – Patents 100,000 Amortization of Copyrights (1,400,000/10) 140,000 Accumulated Amortization – Copyrights 140,000 Amortization of Computer Software (400,000/10 x 6/12) 40,000 Accumulated Amortization – Software 40,000 Share Premium 2,000,000 Intellectual Capital 2,000,000 Retained Earnings 90,000 Amortization of Goodwill 90,000 Accumulated Amortization – Goodwill 180,000

Multiple Choice

1. B 23. B 2. A 24. C 3. C 25. D 4. A 26. D 5. C 27. A 6. B 28. B 7. B 29. A 8. P16,830,000 30. D


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9. P14,499,000 31. B 10. P144,990 32. C 11. D 33. C 12. B 34. C 13. D 35. B 14. D 36. A 15. C 37. B 16. C 38. C 17. B 39. C 18. C 40. B 19. B 41. B 20. C 42. D 21 C 43. A 22 B 44. C 45. D 46. C Supporting computations: 1. B P300,000/10 x 7/12 = P17,500 (300,000 x 6/10) + 36,000 x 5/12 8 11,250 Depreciation expense for 2016 P 28,750 2. A Carrying value as of August 1, 2017 P180,000 Overhaul costs 36,000 Depreciation – Aug. 1 – Dec. 31, 2017 ( 11,250)

- January 1 – June 30, 2018 216,000 / 8 x 6/12 ( 13,500)

Carrying value, June 30, 2018 P191,250 Proceeds from sale 185,000 Loss from sale P 6,250 3. C Correct depletion for 2017

P4,860,000 / 1,620,000 x (15,000 tons x 6 months) = P270,000 Recorded depletion 405,000 Overstatement in depletion P135,000

4. A Estimated useful life in years = 15 years Estimated mining period = 1,620,000 / 15,000 = 108 months or 9 years Use unit of output method, since mining period is shorter than life in years Correct depreciation = (P600,000 x 90%) / 1,620,000 x 90,000 tons P 30,000 Recorded depreciation 40,000 Overstatement in depreciation P 10,000 5. C Remaining machines at December 31, 2017 = Machines 2 and 4 only Cost allocated to Machine 2 P1,200,000 x 500,000/1,500,000 P 400,000 Accumulated Depreciation of Machines 2 and 4 Machine 2 400,000 x 5/10 = P200,000 Machine 4 500,000 / 10 x 6/12 = 25,000 Total P225,000

6. B Depreciation Expense for 2017: Machine 2 P400,000/10 P40,000 Machine 3 P480,000/10 x 6/12 24,000 Machine 4 P500,000/10 x 6/12 25,000 2014 Depreciation P 89,000


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7. B Fair value of Machine 3 P500,000 – 200,000 P300,000 Carrying value of machine 3 Cost P480,000 Accumulated depreciation 48,000 x 4.5 216,000 264,000 Gain on sale P 36,000 8. Land Building Cash paid P12,000,000 FV of shares issued 40,000 x 107 4,280,000 Cost of removal of old buildings P 320,000 Legal cost to obtain title 150,000 Legal work for construction contract 159,000 Insurance premium during period of construction 240,000 x 2/24 20,000 Special tax assessment 400,000 Construction costs (6,000,000 + 4,o00,000 + 4,000,000) ________ 14.000,000 Correct cost P16,830,000 P 14,499,000 9. Correct cost of building P14,499,000 10. Depreciation for 2015 = P14,499,000 / 50 x 6/12 P 144,990 11 through 14 Audit Adjusting Entries: Buildings and Equipment 10,000 Accumulated Depreciation – Buildings and Equipment 30,000 Gain on Exchange of Buildings and Equipment 10,000 Buildings and Equipment 50,000 Buildings and Equipment 10,000 Accumulated Depreciation – Buildings and Equipment 60,000 Buildings and Equipment 70,000 Buildings and Equipment 240,000 Loss on Exchange of Buildings and Equipment 80,000 Buildings and Equipment 320,000 11. D Net decrease in cost of buildings and equipment P180,000 12. B Net decrease in accumulated depreciation P 90,000 13. D Cost assigned to equipment received P20,000 carrying value + cash paid of P10,000 = P 30,000 14. D Net gain on exchange (see audit adjustments) P830,000 15. C Land as Property, Plant and Equipment P8,000,000 + 4,000,000 + 7,000,000 = P19,000,000 16. C Building as Property, Plant and Equipment P12,000,000 + P16,000,000 = P28,000,000 17. B Depreciation Expense – Investment Property (P8,000,000 / 20) x ½ = P 200,000 18. C Equipment P24,000,000 – 800,000 = P23,200,000 19. B Accumulated Depreciation – Equipment P8,000,000 – 320,000 = P 7,680,000


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20. C Investment Property Land of P6,000,000 + Building, P7,800,000 = P13,800,000

21. C 7,500,000 + 8,500,000 = P16,000,000 22. B Carrying value

Cost P800,000 Accumulated depreciation (P320,000 – P20,000) 300,000 Carrying value P500,000

Fair value less cost to sell (520,000 – 50,000) P 470,000 Hence, the assets held for sale shall be measured at the lower amt. P470,000 23. B Impairment loss 500,000 – 470,000 = P 30,000 24. C 1,500,000 + 1,800,000 P3,300,000 25. D 860,000 + 5,000,000 = P5,860,000

26. D 3,000,000 + 2,000,000 + 2,500,000 + 540,000 = P8,040,000

27. A Eggs P100,000 P 100,000

28. B Machinery, December 31, 2015

12/31/14 P9,100,000 01/03/2015 5,920,000 08/28/2015 ( 4,300,000) Balance 12/31/15 P10,720,000

29. A Accumulated Depreciation – Machinery 12/31/2015

12/31/14 P4,820,000 08/28/15 (3,172,500) 12/31/15 Depreciation for 2015 2,394,000 12/31/15 Balance P 4,041,500

30. D Vehicles 12/31/2015 12/31/2014 P 4,680,000 06/22/15 1,620,000 12/31/2015 P 6,300,000

31. C Accumulated Depreciation – Vehicles

12/31/2014 P 1,965,600 12/31/2014 Depreciation for 2015 On beg. Bal. not sold (4,680,000 – 1965,600) x 40% = P 1,085,760 New = 1,620,000 x 40% x 6/12 324,000 1,409,760 P3,375,360

32. C Depreciation Expense – Machinery (2015) Machine 1 ( P4,300,000 – 250,000) / 5 x 8/12 = P 540,000 Machine 2 (4,800,000 – 300,000) / 6 = 750,000 Machine 3 (5,920,000 – 400,000 ) / 5 = 1,104,000 Total depreciation expense, machinery for 2015 P2,394,000

33. C Gain or loss on vehicle sold on May 25, 2016 Cost of vehicle sold P2,340,000 Accumulated depreciation 12/31/2014 P982,800 2015 depreciation 1,085,800 / 2 = 542,900 2016 depreciation 814,300 x 40% x 5/12 135,700 1,661,400 Carrying value P 678,600 Selling price 660,000 Loss on sale P 18,600


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34. C Accum. Depreciation – Building, Dec. 31, 2015

12/31/2014 P2,861,400 2015 and 2016 depreciation 903,600 x 2 years 1,807,200 Accumulated depreciation, building 12/31/2016 P4,668,600

35. B Depreciation Expense – Machine 2 (2017) Cost of Machine 2 P4,800,000 Accumulated depreciation – 12/31/2016 (4,800,000 – 300,000) / x 59 months/ 72 months = 3,687,500 Carrying value 12/31/16 P1,112,500 Overhaul cost 1,200,000 Carrying value after overhaul P2,312,500 Depreciation expense – 2017 (P2,312,500 – 500,000) / 4 = P453,125

36. A Carrying value of land, December 31, 2017 P8,100,000

37. B Accumulated Depreciation – Land Improvements, Dec. 31, 2017 (550,000/10) x 1.5 = P 82,500

38. C (100,000 X 98%) + 5,000 = P103,000

39. C Carrying value = 180,000 – 180,000 x 10% x 7.5 P 45,000 Selling price 54,000 Gain on sale P 9,000

40. B 2015 Depreciation

(500,000 – 180,000) x 10% = P 32,000 180,000 x 10% x 9/12 = 13,500 103,000 x 10% x 9/12 = 7,725 Total P 53,225

41. B 500,000 – 180,000 + 103,000 P423,000

42. D 2,000,000 x 9/10 x 1/5 = P 360,000 43. A 42,000 + 100,000 + 102,000 = P 244,000

44. C Cost = 180,000 + (336,000/112%) = P480,000

(P480,000 /10 ) ( 48,000) Carrying value of franchise, 12/31/2017 P432,000

45. D 125,000 + 48,000 + 27,000 = P200,000 46. C 300,000 + (36,000 x 9/12 ) = P 327,000


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Summative Exercise

Elegant Builders

Audit Adjustments:

Other Receivables 5,600

Representation and Advertising 5,200

Supplies Expense 3,054

Repairs and Maintenance 6,500

Petty Cash Fund 20,354

Accounts Receivable – Current 84,200

Bank Charges 2,100

Cash 600

Trade Payables 86,900



Sales 35,000

Accounts Receivable – current 35,000

Sales 20,000



Advances from Customers 14,000

Other Non-current Financial Assets 120,000


Sales 145,000


Purchases 60,000

Trade Payables 60,000

Doubtful Accounts Expense 162,364


Inventory, end 2,693,200\

Cost of goods sold 5,887,200

Net Purchases 6,555,000

Inventory, beginning 2,025,400

Other Operating Income 86,400

Trading Securities – PS Bank 86,400

Trading Securities – SM 8,000


Trading Securities – PS Bank 93,600

Trading Securities – SM 50,000


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Unrealized Gains on Trading Securities 143,600

Equipment 14,600

Transportation Expense 3,600


Depreciation and Amortization 1,825

Accumulated Depreciation – Equipment 1,825

14,600 / 8 = 1,825

Accumulated Depreciation – Leasehold Improvements 19,333

Depreciation and Amortization 19,333

Utilities Expense 44,400

Salaries Expense 26,350


Trade Payables and Accrued Expenses 74,570

Interest Expense 12,205


Other Operating Income 1,040,000

Additional Paid in Capital 1,000,000

Land 40,000

Retained Earnings 1,650,000

Dividends Payable 1,650,000


Income Tax Payable 142,354 1. D 375,250 – 84,200 = 291,050 2. A 546,750 – 226,000 – 900 = 319,850 3. A 4. D 6 years which is 12 – 6; shorter than 10 – 6 + 6 5. B see audit adjustments Answer

6. Petty cash fund 4,646

7. Cash in bank 3,471,200

8. Trading securities, at cost 650,000

9. Trading securities, at market 793,600

10. Unrealized gain or loss on trading securities 143,600 gain

11. Accounts receivable 4,614,200

12. Allowance for doubtful accounts 352,284

13. Other Receivables – current 30,600

14. Merchandise inventory 2,693,200

15. Prepaid expenses 60,920

16. Land 5,960,000

17. Equipment 934,600

18. Accumulated Depreciation – Equipment 691,825

19. Net book value of leasehold improvements 193,333

20. Other Non-current Financial Assets 120,000

21. Trade Payables and Accrued Expenses 1,681.475

22. Notes Payable and Accrued Interest 912,205

23. Dividends Payable 1,650,000

24. Income Tax Payable 142,354

25. Additional Paid in Capital 1,950,000

26. Retained Earnings 482,161

27 Net Sales 9,000,000

28 Net Purchases 5,887,200


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29. Salaries and Commissions 1,226,350

30. Repairs and Maintenance 59,320

31. Supplies Expense 73,054

32. Bank Charges 14,100


34 Other Operating Income 151,600

35 Transportation Expense 1,400

36 Depreciation and Amortization 135,492

37 Doubtful Accounts Expense 162,364

38. Representation & Advertising 325,200

39. Ordinary Share Capital 11,000,000

40. Profit 332,161

Solutions – Chapter 8 Liabilities

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1. D 2. D 3. B 4. C 5. A 6. C 7. B 8. A 9. C 10. A

Problem 1

1. A 2. D 3. A 4. A,B,C,D 5. B,C 6. C, D 7. B, C,E 8. C,E 9. C,D 10. B,C,E 11. D,E 12. D, E

Problem 2 Jade Corporation

A. Transaction Entries April 1 Truck 6,000,000 Cash 1,000,000 Notes Payable 5,000,000 May 1 Cash 18,760,000 Notes Payable 18,760,000 Aug. 1 Retained Earnings 300,000 Dividends Payable 300,000 Sept. 10 Dividends Payable 300,000 Cash 300,000 Dec. 15 Purchases 1,470,000 Accounts Payable 1,470,000 Dec. 1 – 31 Cash/Accounts Receivable 6,832,000 Sales 6,100,000 Output VAT (VAT Payable) 732,000 B. Adjusting Entries Dec. 31 Interest Expense 450,000 Interest Payable 450,000 5,000,000 x 12% x 9/12 = 270,000

31 Interest Expense 1,250,667 Interest Payable 1,250,667 18,760,000 x 10% x 8/12 31 Discounts Lost 30,000



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Current Liab. Non-Current Liab Accounts Payable P 1,500,000 12% Notes Payable 5,000,000 10% Notes Payable 2,000,000 – 1,876,000 124,000 18,760,000 – 124,000 18,636,000 Interest Payable 450,000 + 1,250,667 1,700,667 VAT Payable 732,000 Total P9,056,667 P18,636,000

Problem 3 Hannah Corporation

(a) Interest Payable

2,000,000 x 8% x 4/12 P 53,333 6,000,000 x 10% x 3/12 150,000 6,150,000 x 10% x 2/12 102,500 4,500,000 x 12% x 8/12 360,000 10,000,000 x 8% x 6/12 400,000 Total Interest Payable P 1,065,833

(b)

Current Liabilities Accounts Payable P 1.650,000 Notes Payable – trade 1,200,000 Notes Payable – Bank 2,000,000 10% Mortgage Note Payable (with notes to FS) 6,000,000 Bonds Payable 10,000,000 Interest Payable 1,065,833 Wages and Salaries Payable 350,000 Total Current Liabilities P 22,265,833 Non-Current Liabilities Refinanced Note Payable, due in 2015 (with note to FS) P6,000,000 12% Mortgage Notes Payable, due in 2023 4,500,000 Total Non-Current Liabilities P10,500,000 Total Non-Current Liabilities P32,765,833 Notes to FS

The 10% Mortgage Note Payable was issued November 1, 2009, with a term of 10years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a quarterly interest payment within 10 days of the date the payment is due. As of December 31, 2014, the entity is already two months behind in paying its required interest payment. Hence, the note is reclassified as a current liability.

The P6,000,000 Note Payable, was originally due on January 2, 2015. On December 30, 2014, The entity negotiated a written agreement with the First Bank to replace this note with a 2-year P6,000,000 10% note, which was issued on January 2, 2015.


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Problem 4 (Charity, Inc.)

Premium Expense (2,000,000 x 30%)/10 x P5 = P300,000 Inventory of Premiums ( 36,000 – 28,000) x P5 = P 40,000 Estimated Premium Claims Outstanding Expected distribution (2,000,0000 x 30%)/10 60,000 Actual distribution (28,000) Still to be distributed 32,000 Cost of each premium x P5 Premium Claims Outstanding P160,000 Audit Adjustment: Inventory of Premiums 40,000 Premium Expense ( 300,000 – 180,000) 120,000 Estimated Premium Claims Outstanding 160,000 Problem 5 (Evergreen)

Audit Adjustments: Loss on Damages 1,200,000 Provision for Construction Damages 1,200,000 Loss on Pending Lawsuit 1,800,000 Provision for Damage on Pending Lawsuit 1,800,000 Loss on Product Defects 1,500,000 Provision for Cost of Product Withdrawal 1,500,000 (1,800,000 + 1,200,000) / 2 Warranty Expense 800,000 Provision for Warranties 800,000 P1,000,000 x 30% = P300,000 5,000,000 x 10% = 500,000 0 x 60% 0 Total P800,000


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Problem 6 SM Department Store

Correct balance of Unearned Revenue for Gift Certificates Outstanding P300,000 – P15,000 – P200,000 = P85,000 Adjusting entry Unearned Revenue for Gift Certificates Outstanding 215,000 Sales 200,000 Miscellaneous Income – Expired Gift Certificates 15,000 Problem 7 Glorietta Company

Date Effective Interest

(7%) Nominal Interest

(6%) Discount

Amortization Amortized cost,

end Jan. 2, 2014 P4,470,303 July 1, 2014 P 312,921 300,000 12,921 4,483,224 Jan. 1, 2015 313,826 300,000 13,826 4,497,050 July 1, 2015 314,794 300,000 14,794 4,511,844 Jan. 1, 2016 315,829 300,000 15,829 4,527,673 July 1, 2016 316,937 300,000 16,937 4,544,610 Jan. 1, 2017 318,123 300,000 18,123 4,562,733 July 1, 2017 319,391 300,000 19,391 4,582,124 Jan. 1, 2018 320,749 300,000 20,749 4,602,873

1. Bonds Payable per client P5,000,000 Bonds Payable redeemed 1,000,000* Bonds Payable, per audit P4,000,000 *Cash payments = Redemption price + Accrued interest 1,110,000 = 1.08Face + ( Face x 12% x 3/12) 1,110,000 = 1.08Face + (.03Face) Face = 1,110,000/1.10 Face of bonds redeemed = P1,000,000 2. Carrying value of P4M bonds on December 31, 2017 P4,602,873 x 4M/5M = P3,682,298 Face value of bonds still outstanding 4,000,000 Bond Discount, per audit P 317,702 3. Bond Interest Expense for the year 2017 January 1 to June 30 P319,391 July 1 to October 1 P 320,749 x 3/6 160,375 October 1 to December 31 P320,749 x 4M/5M x 3/6 128,300 Interest Expense for 2014 P608,066


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4. Carrying value of P1M bonds on July 1, 2017 P4,582,124 x 1M/5M P 916,425 Discount amortized, July 1 to October 1 P20,749 x 1M/5M x 3/6 2,075 Carrying value of bonds redeemed P918,500 Retirement price P1,000,000 x 108% 1,080,000 Loss on bond retirement P161,500 5. Balance of Interest Payable on December 31, 2017 P4,000,000 x 12% x 6/12 P240,000

Audit Adjusting Entry Bonds Payable 1,000,000 Interest Expense 8,065 Loss on Bond Redemption 161,500 Retained Earnings 392,430 Bonds Payable Redeemed 1,110,000 Bond Discount 211,995 Interest Payable 240,000 Charge to Retained Earnings Interest Paid before 2017 P1,500,000 Correct interest expense in periods prior to 2017 1,892,430 Effect of prior period errors P 392,430

Problem 8 (Lucky Corporation)

(a) Audit Adjusting entries Land 8,009,700 Discount on Notes Payable 2,490,300 Accrued Liabilities – Land Purchase 1,500,000 Notes Payable (3,000,000 x 4) 12,000,000 Interest Expense 237,743 Discount on Notes Payable 237,743 9,509,700 x 10% x 3/12 (b) Correct Cost of Land Down payment P2,000,000 PV of 4 future payments = P2,633,875 x 3.037351 8,000,000 Cost of land P10,000,000 (c) Current Liab. Non-Current Liab Notes Payable P3,000,000 P9,000,000 Discount on Notes Payable (713,227) (1,539,330) Amortized Cost P2,286,773 P7,460,670


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(d) Correct Interest Expense for 2017 P9,509,700 x 10% x 3/12 P 237,743

Problem 9 (Refresh Mint Company)

Cost of the leased asset: 300,000 x 7.2469 = P2,174,070 Amortization Table Date Periodic

Payment Applied to Interest (8%)

Applied to Principal

Balance of Principal

May 1, 2016 P2,174,070 May 1, 2016 P300,000 P300,000 1,874,070 May 1, 2017 300,000 149,926 150,074 1,723,996 May 1, 2018 300,000 137,920 162,080 1,561,916

2016 2017 Interest Expense 149,926 x 8/12 P99,951 149,926 – 99,951 P49,975 137,920 x 8/12 91,947 Depreciation Expense (2,174,070 – 20,000)/ 12 = 179,506 Annual 119,671 179,506 Taxes and Insurance 13,333 20,000 Total Correct Expense P232,955 Recorded Expense 320,000 Adjustment to Retained Earnings P87,045

(a) Audit Adjustments Leased Equipment 2,174,070 Prepaid Taxes and Insurance 6,667 Finance Lease Liability 1,874,070 Accumulated Depreciation 119,671 Interest Payable 99,951 Retained Earnings 87,045 To establish correct beginning balances Finance Lease Liability 150,074 Interest Payable 99,951 Interest Expense 49,975 Taxes and Insurance Expense (20,000 x 9/12) 20,000 Rent Expense 320,000


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Depreciation Expense – Leased Equipment 179,506 Accumulated Depreciation – Leased Equipment 179,506 Interest Expense 91,947 Interest Payable 91,947

(b) Current Liabilities and Non-current Liabilities Current Non-cuurent Principal P162,080 P1,561,916 Interest Payable 91,947 0 Total P254,027 P1,561,916

Problem 10 Timex Company

(a) 1. Interest payable = P5,000,000 x 8% x 6/12 P 200,000 2. Income Tax Expense: Current P6,000,000 x 30% P1,800,000 Deferred: Increase in deferred tax liability P1,500,000 x 30% 450,000 Total income tax expense P2,250,000 3. Deferred Tax Liability = P4,500,000 x 30% P1,350,000 (b) Current Liabilities: Accounts Payable P 350,000 Dividends Payable 500,000 Current Portion of Finance Lease Liability 620,920 Interest Payable on Bonds 200,000 Income Tax Payable 6,000,000 x 30% 1,800,000 Total Current Liabilities P3,470,920 (c) Non-current Liabilities: Non-current Portion of Finance Lease Liability P3,169,880 Bonds Payable, net of discount of P348,002 4,651,998 Deferred Tax Liability 1,350,000 Total Non-current Liabilities P9,171,878 MULTIPLE CHOICE 1. D 2. D 3. A 4. C 5. A 6. D


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7. B 8. D 9. C 10. B 11. B 12. C 13. C 14. B 15. B 16. D 17. D 18. B 19. B 20. B 1. D 550,000 + 4,700,000 + 5,000,000 + 4,000,000 = 14,250,000 Total issue price P5,500,000 Issue price attributable to the debt P5,000,000 x 0.6209 = P3,104,500 400,000 x 3.7908= 1,516,320 4,620,820 Issue price attributable to the conversion privilege P 879,180 2. D Issue price attributable to the debt P4,620,820

Date Effective Interest (10%)

Nominal Interest (8%)

Discount Amortization

Amortized cost, end

Jan. 2, 2015 P4,620,820 Dec. 31, 2015 P462,082 P400,000 P 62,082 4,682,902 Dec. 31, 2016 468,290 400,000 68,290 4,751,192 Dec. 31, 2017 475,119 400,000 75,119 4,826,311 3. A Carrying value of the bonds on December 31, 2015 P4,682,902 4. C Interest expense for 2016 = P 468,290 5. A Conversion of P2,000,000 on January 1, 2017 Bonds Payable 2,000,000 Paid in Capital from Bond Conversion Privilege (879,180 x 2/5) 351,672 Discount on Bonds Payable (248,808 x 2/5) 99,523 Ordinary Share Capital (P2,000,000/P1,000 x 8 x 100) 1,600,000 Share Premium 652,149 6. D Retirement price P2,000,000 x 105% P2,100,000 Carrying value of P2,000,000 bonds 4,751,192 x 2/5 1,900,477 Loss in profit or loss P 199,523 7 B Interest expense for 2012 if P2,000,000 bonds were retired P475,119 x 3/5 = P 285,072


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Items 8 through 11 8. D Annual rate = 70,000/500,000 = 14% 9. C Carrying value on January 1, 2017 = 555,738 + 1,562 = 557,300 Effective interest, January 1 to June 30 = 35,000 – 1,562 = 33,438 Effective semiannual rate = 33,438 / 557,300 = 6% Effective annual rate = 6% x 2 = 12% 10. B Premium amortization – July 1 to Dec. 31, 2017 Nominal P35,000 Effective = 6% x 555,738 33,344 Amortization P 1,656 Premium amortization – January 1 to Dec. 31 1,562 Total amortization for 2017 P 3,218 11. B Interest expense for 2017 = 33,438 + 33,344 = P66,782 12. C 1,500,000 x 12% = P180,000 2,500,000 x 12% x 6/12 = 150,000 Total Interest Expense recorded P330,000 13. C 1,500,000 x 12% x 10/12 = P150,000 2,500,000 x 12% x 6/12 = 150,000 1,000,000 x 12% x 8/12 = 80,000 Total P380,000 14. B Face P1,000,000 Interest payable 1,000,000 x 12% x 8/12 = 80,000 Total P1,080,000 Items 15 through 20 15. B Accounts payable, per client P5,000,000 Debit balance in suppliers’ account 200,000 Shipments from cruise 300,000 Goods held on consignment ( 90,000) Accounts payable, per audit P5,410,000 16. D 70,642 x 1/2 = P 35,321


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17. D Total proceeds P1,100,000 Accrued interest 1,000,000 x 11% x 6/12 ( 55,000) Retirement price P1,045,000 Carrying value As of 12/31/09 2,101,506 x ½ P1,050,753 Amortization 30,864 x 1M/2M x 6/12 ( 7,716) 1,043,037 Loss P 1,963 18. B P4,000,000 x .75131 = P3,005,240 Date Interest Expense Carrying Value 9/30/15 P 3,005,240 9/30/16 300,524 3,305,764 9/30/17 330,576 3,636,340 9/30/18 363,660 4,000,000 Carrying value as of 9/30/17 P3,636,340 Amortization 363,660 x 3/12 90,915 Carrying value 12/31/2017 P3,727,255 19. B P240,000 20. B 5,000,000 (10%) + 2,000,000 (25%) = P1,000,000 21 – 25

Interest Date

Interest Paid

Effective Interest

Premium

Amortization

Amortized Cost, End

March 31, 2015 P10,772,144

Sept. 30, 2015 600,000 538,607 61,393 10,710,751

March 31, 2016 600,000 535,538 64,462 10,646,289

Sept. 30, 2016 600,000 532,314 67,686 10,578,603

March 31, 2017 600,000 528,930 71,070 10,507,533

Sept. 30, 2017 600,000 525,377 74,623 10,432,910

March 31, 2018 600,000 521,646 78,354 10,354,556

21. D P10,000,000 – P3,000,000 = P7,000,000 22. D Carrying value of remaining bonds, 9/30/2017 P10,432,910 x 7/10 P7,303,037 Amortization of premium 9/30 to 12/31/2017 P78,354 x 7M/10M x 3/6 ( 27,424) Carrying value of remaining bonds 12/31/2017 P7,275,613 Face value or remaining bonds 7,000,000 Premium on bonds payable, 12/31/17 P 275,613 23. C P7,000,000 x 12% x 3/14 P 210,000


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24. B January 1 to March 31 P528,930 x 3/6 P264,465 April 1 to September 30 525,377 October 1 to Dec. 31 521,646 x 7/10 x 3/6 182,576 Total interest expense for 2017 P972,418 25. A Carrying value of bonds retired: As of Sept. 30, 2014 P10,432,910 x 3/10 P3,129,873 Retirement price P3,000,000 x 102% 3,060,000 Gain on retirement of bonds P 69,873

CHAPTER 9 - SHAREHOLDERS’ EQUITY


1. B 2. D 3. D 4. B 5. B 6. A 7. C 8. B

PROBLEMS Problem 1 Imation Company Audit Adjusting Entries: Treasury Shares 12,000 Share Premium 12,000 2,400 (140-135) = 12,000 Retained Earnings (687,280 – 497,600 207,680 Ordinary Shares 479,600 Ordinary Share Dividend Distributable 484,000 Share Premium _ Excess over Stated Value 203,280 4,840 x 142 = 687,280 4,840 x 100 = 484,000 Retained Earnings (Income Tax Expense) 300,000 Income Tax Payable 300,000 Problem 2 Cebu Trading Company Total income since incorporation P630,000 Cash dividends paid ( 195,000) Total value of bonus issue distributed ( 45,000) Correct balance of retained earnings P 390,000 Problem 3 Emem Corporation Balance, January 1 P1,590,000 Profit for the year 860,000 Dividends ( 750,000) Retained Earnings, December 31 P1,700,000 Appropriated for Plant Expansion P 150,000 Unappropriated 1,550,000 Total Retained Earnings P 1,700,000

Chapter 9 – Shareholders’ Equity

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Problem 4 Pathways Corporation Contributed Capital Preference Share, P100 par, 10,000 shares authorized, 4,000 shares issued P400,000 Ordinary Share, P50 par, 15,000 shares authorized, 8,000 shares issued, 7,700 shares outstanding 400,000 Share Premium 118,000 Total Contributed Capital P918,000 Retained Earnings Appropriated For Treasury Shares P19,800 For General Contingencies 75,000 Unappropriated 160,400 235,400 Total P1,153,400 Less: Treasury Shares, at cost (300 shares) ( 19,800) Cumulative Other Comprehensive Income Unrealized Gain on Available for Sale Securities 50,000 Total Shareholders’ Equity P 1,183,600 Share premium : 7,000 x P7 P49,000 1,000 x 12 12,000 4,000 x 13 52,000 Reissue of treasury shares – preference 5,000 Total additional paid in capital P118,000 Retained earnings: Accumulated profit P610,000 Cash dividends paid ( 312,600) Bonus issue ( 1,000 x 62) ( 62,000) Total Retained Earnings P235,400


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Problem 5 Moreno Corporation Date

Preference Share Ordinary Share APIC

Retained Earnings

Treasury Shares Shares Amount Shares Amount Shares Amount

1/1/17 15,000 300,000 4,160,000 1,100,000 4,000 150,000 1/15/17 800 40,000 4,000 2/1/17 1,500 30,000 33,000

3/15/17 (18,750) 4/15/17 200 8,600 4/30/17 10,000 200,000 200,000

5/1/17 2,230 44,600 78,050 (122,650) 5/31/17 41,100 (43,220) (2,150) (81,450) 9/15/17 ( 39,995)

12/31/17 500,000 12/31/17

balances

800

40,000

28,730

574,600

4,516,150

1,415,380

2,050

77,150

Supporting Computations and Entries March 15 dividends (16,500 – 4,000) x 1.50 = P18,750 Apr. 30 entry Share Options Outstanding (APIC 10,000 x 6) 60,000 Cash (10,000 x 40) 400,000 Ordinary Share (10,000 x 20) 200,000 Share Premium – Ordinary 260,000 Net increase in APIC = 260,000 – 60,000 = 200,000 May 1 bonus issue: Ordinary shares issued 26,500 Treasury ( 4,200) Outstanding shares 22,300 Charge to Retained Earnings 2,230 x P55= P122,650 Par value of bonus issue 2,230 x 20 = ( 44,600) Credit to additional paid in capital P 78,050 May 31 Sale of Treasury Shares Selling price 2,150 shares x P57 P122,550 Cost of treasury shares sold: 150 @ P43 P6,450 2,000 shares 75,000 81,450 Additional paid in capital from this sale P 41,100 September 15 dividends: On ordinary share : (28,730 - 2,050) x P1.50 = P40,020 On preference share: 8% x 40,000 = 3,200 Total P43,220


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Problem 6 Ghette Company Entries for the quasi-reorganization: Retained Earnings 180,000 Inventory (215,000 – 190,000) 25,000 Property, Plant and Equipment (875,000 – 720,000) 155,000 Cash 600,000 Share Premium 600,000 Ordinary Share Capital, P25 par 2,500,000 Ordinary Share Capital, P15 par 1,500,000 Share Premium 1,000,000 Share Premium 930,000 Retained Earnings (750,000 + 180,000) 930,000

Shareholders’ Equity Ordinary Share Capital, P15 par, 100,000 shares P1,500,000 Share Premium (1,750,000 + 600,000 + 1,000,000 - 930,000) 2,420,000 Total Shareholders’ Equity P3,920,000 Problem 7 LTC Company

LTC Company Statement of Comprehensive Income

For the Years Ended December 31, 2017 and 2016

2017 2016 Sales P3,000,000 P2,540,000 Cost of goods sold 1,420,000 1,150,000 Gross profit P1,580,000 P1,390,000 Selling expenses (350,000) (210,000) General and administrative expenses (260,000) (220,000) Profit before income tax P 970,000 960,000 Income tax expense 291,000 336,500 Profit P 679,000 P 623,500


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2016 Cost of Goods Sold – weighted average Cost of goods sold under FIFO P1,140,000 Difference in beginning inventory 30,000 Difference in ending inventory ( 20,000) Cost of goods sold as restated P 1,150,000 2016 income tax expense Before restatement P 339,500 Adjustment due to change in inventory costing procedure (1,150,000 – 1,140,000) x 30% ( 3,000) 2013 income tax expense as restated P 336,500

LTC Company Statement of Changes in Equity

For the Years Ended December 31, 2017 and 2016

Ordinary Share Retained Earnings

Total

Balances, January 1, 2016 P 1,000,000 P600,000 P1,600,000 Cumulative effect of changing from FIFO costing to weighted average, net of applicable income tax of P9,000 (30,000 x 70%)

21,000

21,000 Dividends (400,000) (400,000) Profit for the year 623,500 623,500 Balance, December 31, 2016 P1,000,000 P 844,500 P

1,844,500 Profit for the year 2017 679,000 679,000 Balances, December 31, 2017 P1,000,000 P1,523,500 P2,523,500

Problem 8 Northwest Corporation Reported profit P120,000 Loss from fire ( 2,625) Write off of goodwill ( 26,250) Loss on sale of equipment ( 24,150) Gain on early retirement of bonds 7,525 Gain on insurance policy settlement 5,250 Corrected profit P 79,750 Retained Earnings, January 1 P263,200 Stock dividends ( 70,000) Loss on retirement of preference shares ( 35,000) Officers’ compensation in prior period ( 162,750) Other correction of errors 25,025 Corrected profit (see above) 79,750 Corrected retained earnings, Dec. 31 P100,225


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Items 1 through 5 1. B Balance, December 31, 2017 P 750,000 Mar. 31 4,500 x 3 13,500 June 30 ( 250,000 + 4,500 – 6,000) / 10 = 24,850 shares 24,850 shares x P3 74,550 Sept. 30 P2,000,000/P1,000 x 2 shares = 4,000 shares 4,000 shares x P3 12,000 Balance, Dec. 31 P 850,050 2. C RE, January 1, 2017 P 480,000 Profit 600,000 Understatement in depreciation 40,000 x 65% ( 26,000) Balance, December 31, 2017 P 1,054,000 3. B Issue price P2,000,000 Attributable to the debt PV of face = P2,000,000 x 0.32197 = P 643,940 PV of interest = P200,000 x 5.65022 1,130,044 1,773,984 Amount credited to equity P 226,016 4. B Interest expense for 2017 = 1,773,984 x 12% x 9/12 = P 159,659 5. C Effective interest for 2017 P159,659 Nominal interest 200,000 x 9/12 150,000 Amortization P 9,659 Carrying value, April 1 1,773,984 Carrying value, Dec. 31 P1,783,645 6. A Correct balance of Retained Earnings 485,000 – 200,000 + 324,000 – 300,000 + 451,000 = P760,000 7. C Total share premium 150,000 + 100,000 = P 250,000 8. D Ordinary share P2,000,000 Additional paid in capital 250,000 Retained earnings 760,000 Revaluation surplus (appraisal increase) 300,000 Total shareholders’ equity P3,310,000 9. A Preference share = P6,000,000 – (4,000 x P200) = P5,200,000 10. C Ordinary share = 200,000 shares x P25 par = P5,000,000


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11. B APIC, January 1, 2017 P3,300,000 Cancelled upon retirement of preference P1,800,000 / 30,000 x 4,000 ( 240,000) From sale of treasury shares 6,000 x (45 – 37.50) 45,000 Sale of donated shares 2,000 x 48 96,000 APIC, December 31, 2015 P3,201,000 12. C Ordinary shares outstanding Issued = 100,000 x 2 200,000 Treasury (8,000 x 2) – 6,000 + 4,000 – 2,000 = 12,000 Outstanding 188,000 13. C Retained Earnings January 1, 2017 P2,200,000 Excess of retirement price over issue price 280 – (200 + 60 share premium per share) x 4,000 ( 80,000) Profit 1,850,000 Balance, December 31, 2017 P3,970,000 There is no number 14 15. D Ordinary shares issued: January 1, 2017 90,000 Mar. 6 – 20 1,400 Nov. 3 55 x 10 shares 550 Total shares issued 91,950 Par value per share P 2 December 31, 2015 balance P183,900 16. D Share premium January 1, 2017 balance P1,820,00 Mar. 6 1,400 x 42 58,800 Nov. 3 (see entry below) 24,200 Dec. 31 balance P1,903,000 Issue price of bonds 90,000 x 103% P 92,700 Issue price of debt 90,000 x 97% = 87,300 Value assigned to 90 share warrants P 5,400 Entry upon exercise of 55 warrants Share warrants issued (5,400 x 55/90) 3,300 Cash 550 x 40 22,000 Ordinary share (550 x 2) 1,100 Share premium 24,200


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17. D Paid in capital from treasury shares Sales price 650 x P40 P 26,000 Cost = P72,600/1,210 x 650 39,000 Deduction from previous APIC from treasury shares P 13,000 Previous balance of APIC 22,500 APIC from Treasury shares P 9,500 18. C Ordinary Share Warrants Outstanding Issue Price of bonds and warrants P90,000 x 103% P92,700 Fair value of bonds ex-warrants 87,300 Value initially assigned to warrants P 5,400 Value of warrants exercised (5,400 x 55/90) ( 3,300) Value of remaining warrants P 2,100 19. A Cost of remaining treasury shares Cost of 1,210 treasury shares originally held P 72,600 Cost of treasury shares sold ( 72,600 x 650 / 1,210) ( 39,000) Cost of remaining treasury shares P 33,600 20 – 28 See worksheet 20. D 21. D 22. B 23. C 24. A 25. B 26. C 27. A 28. D


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Date

Preference Share Ordinary Share APIC

Retained Earnings

Treasury Shares Shares Amount Shares Amount Shares Amount

1/1/17 9,000 P900,000 600,000 P600,000 P1,200,000 P3,198,000 1/6/17 22,500 22,500 348,750 1/31 40,500 2/22 7,500 P180,000 2/28 21,000 21,000 525,000 4/30 – 5/31

(920,000)

8/31 (12,000) (3,000) (72,000) 9/14 450 450 (1,350)

5,400

11/30 (1,278,900) 12/15 ( 54,000) 12/31 (42,000) 12/31 1,800,000 12/31 bal.

9,000 P900,000 643,950 P643,950 P2,118,300 P2,691,100 4,500 P108,000

January 31: Value assigned to warrants 1,350,000 x (98% - 95%) = P40,500 (classified as APIC) Entry on Sept. 15 Cash (450 x 10) 4,500 Share Warrants Outstanding (APIC) 1,350 Ordinary Share 450 Share Premium – Ordinary Share 5,400 SUMMATIVE EXERCISE – CONQUEST MOTORS CORPORATION Correction: Fair values given for Amity, Bold and Courteous should have been on December 31, 2017 instead of 12/31/15. Operating Expenses 2,200 Petty Cash Fund 2,200 Materials Inventory 9,000 Cash - Materials Acquisition Fund 9,000 Other Financial Assets 350,000 Cash (in Bank) 350,000 Cash (in Bank) 12,000 Salaries Payable 12,000 Goods in Process Inventory 900 Cash 900 Operating Expenses 1,000


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Cash 1,000 Notes Payable 300,000 Interest Expense 18,000 Cash 318,000 Other Income (Dividend Revenue) 6,600 Trading Securities 6,600 Dividend Receivable 2,000 Other Income 2,000 Trading Securities 12,800 Unrealized Gain on Trading Securities 12,800 Repossessed Inventory (Finished Goods Inventory) 69,000 Impairment Loss – Installment Receivable 69,000 Materials Inventory 18,000 Accounts Payable 18,000 Goods in Process Inventory 69,600 Applied Factory Overhead 69,600 Factory Overhead Control 30,000 Operating Expenses 20,000 Accumulated Depreciation – Building 50,000 (Discount on) Notes Payable 12,000 Equipment 10,800 Operating Expenses 1,200 Interest Expense 67,500 Operating Expenses 67,500 Interest Expense 22,500 Interest Payable 22,500 Share Capital 80,000 Retained Earnings 80,000 Share Capital 250,000 Share Premium 250,000 Retained Earnings 348,000 Dividends Payable 348,000


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Operating Expenses 115,000 Accrued Operating Expenses 115,000 Applied Factory Overhead 747,600 Overapplied Factory Overhead 11,600 Factory Overhead Control 736,000 Overapplied Factory Overhead 11,600 Cost of Goods Sold 11,600 Income Statement Correct Balances: Sales P3,476,000 Cost of goods sold 2,344,900 Gross profit P 1,131,100 Operating Expenses ( 609,500) Impairment Loss – Receivable ( 61,000) Other Income 55,400 Unrealized Gains on Trading Securities 12,800 Other Expenses and Losses ( 36,500) Income before interest and taxes P 492,300 Interest expense 108,000 Income before income tax P 384,300 Income tax expense 115,290 Profit P 269,010 Balance sheet accounts Current Assets Cash P1,015,900 Trading Securities 214,800 Installment Accounts Receivable 340,000 Dividend receivable 2,000 Receivable from officers 54,000 Inventories 485,500 Prepaid expenses 40,000 Total current assets P2,152,200 Non-current Assets Property, Plant and Equipment, at cost P5,409,200 Accumulated Depreciation 186,000 Net carrying value P5,223,200 Other Non-Current Financial Assets 512,000 Total Non-current assets 5,735,200 Total Assets P7,887,400 Current Liabilities Accounts payable P 508,000


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Salaries payable 12,000 Notes payable 538,000 Accrued expenses 115,000 Dividends payable 348,000

Interest payable 22,500 Income tax payable 115,290 Total current liabilities P1,658,790 Non-current liabilities Notes payable 1,000,000 Total liabilities P2,658,790 Shareholders’ Equity Share Capital P2,900,000 Share Premium 1,450,000 Retained Earnings 878,610 5,228,610 Total Liabilities and Shareholders’ Equity P7,887,400


1. B 2. D 3. B 4. B 5. A 6. D

7. D 8. B

PROBLEM 1

A B C D

1. Accounts Receivable 531,000 590,000 690,000 790,000

2. Allowance for Uncollectible Accounts 53,100 59,000 69,000 79,000

3. Prepaid Insurance 14,850 17,250 19,950 24,450

4. Prepaid Rent 180,000 120,000 60,000 40,000

5. Interest Receivable 63,000 31,500 26,250 21,000

6. Trading Securities 693,000 700,000 707,000 726,250

7. Plant and Equipment at cost 860,000 1,560,000 2,300,000 3,860,000

8. Accumulated Depreciation 386,000 459,000 533,400 607,400

9. Total current liabilities 1,145,700 245,700 215,700 155,700

10. Cost of sales 1,576,200 1,730,250 1,620,200 1,483,000

11. Selling and Administrative Expenses

1,065,350 1,060,250 1,085,750 1,138,750

Chapter 1 Basic Concepts of Financial Statement Audit

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