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AUDITING

2016 EDITION
SOLUTION GUIDE

CHRISTOPHER T. ESPENILLA, CPA MBA


FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY
REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY,
MANILA
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CHAPTER 1: THE AUDIT PROCESS

PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE


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

PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY


1 D 11 C
2 D 12 B
3 C 13 B
4 D 14 D
5 D 15 D
6 D 16 B
7 A
8 D
9 C
10 E

PROBLEM 3: INTERNAL CONTROL


1C 11 E 21 B
2D 12 B 22 A
3C 13 D 23 C
4C 14 C 24 B
5A 15 C 25 C
6D 16 C 26 A
7C 17 C
8D 18 D
9D 19 D
10 A 20 A

PROBLEM 4: RISK BASED AUDIT PLANNING


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

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PROBLEM 5: SUBSTANTIVE TESTING


1 B 21 B
2 A 22 D
3 C 23 B
4 C 24 D
5 C 25 C
6 D 26 C
7 C 27 B
8 D 28 B
9 C 29 B
10 C 30 B
11 A 31 D
12 B 32 A
13 B 33 A
14 A
15 A
16 B
17 A
18 A
19 D
20 A

PROBLEM 6: AUDIT REPORTING


1 C
2 B
3 B
4 B
5 B
6 C
7 A
8 B
9 C
10 C
11 A
12 C

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CHAPTER 2: AUDIT OF CASH

DISCUSSION PROBLEMS
CHAPTER 2-PROBLEM 1
1B
2 D
3 A
4 B
5 D
6 D
7 D
8 D
9 D
10 D
11 D
12 B
13 C
14 B
15 B
16 C
17 B
18 D
19 D
20 B
21 C
22 D
23 C
24 D
25 B

AP02-PROBLEM 2: MAPERA CORPORATION


1. Ans. P3,445,000
Current account at Metrobank 3,250,000
Post-dated disbursement check - adjusted to AP 75,000
Undelivered disbursement check - adjusted to AP 120,000
Adjusted current account at Metrobank 3,445,000

2. Ans. P2,250,000
Savings account at Rural Bank 2,750,000
Compensating balance - legally restricted (500,000)
Adjusted savings account at Rural Bank 2,250,000

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

4. Ans. P738,000.
Undeposited collections, unadjusted balance 1,278,000
Customer stale check - adjusted to AR (180,000)
Customer post-dated check - adjusted to AR (125,000)
Customer DAUD check - Adjusted to AR (155,000)
Officer's NSF check - Adjusted to AR-nontrade (80,000)
Adjusted undeposited collections 738,000

5. Ans. P18,500
Bills and coins 7,000
Replenishment check 11,500
Adjusted petty cash fund as of 12/31/14 18,500

6. Ans. P613,500
Travel fund 50,000
Interest and dividend fund 120,000
Payroll fund 400,000
Change fund 25,000
Petty cash fund 18,500
Adjusted cash fund - Cash and cash equivale 613,500

7. Ans. P900,000
Debt security investment due 3/31/15 purchased 12/31/14 600,000
Preference shares redeemable on 2/28/15 purchased 12/1/14 300,000
Debt and equity securities - Cash and cash equivalent 900,000

8. Ans. P7,946,500
Adjusted current account at Metrobank 3,445,000
Adjusted savings account at Rural Bank 2,250,000
Adjusted undeposited collections 738,000
Adjusted cash fund - Cash and cash equivalent 613,500
Debt and equity securities - Cash and cash equivalent 900,000
Cash and cash equivalents, adjusted balance 7,946,500

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9. Ans. P1,874,500
Customer stale check - adjusted to AR 180,000
Customer post-dated check - adjusted to AR 125,000
Customer DAUD check - Adjusted to AR 155,000
Officer's NSF check - Adjusted to AR-nontrade 80,000
Petty cash fund shortage - Adjusted to AR-custodian 1,500 *alternatively, this can be charged to other expense
Postage stamps - Office supplies 3,000
IOU from a key officer - AR-nontrade 30,000
Investment in debt security due 1/31/15 purchased 1/1/14 900,000 *classified as short-term investment
Ordinary shares - Trading securities/FA at FMV through P&L 400,000
Current assets (other than cash and cash equivalents) 1,874,500

10. Ans. P1,700,000


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

11. Ans. P495,000


Current account at BDO - Bank overdraft 240,000
Post-dated disbursement check - adjusted to AP 75,000
Undelivered disbursement check - adjusted to AP 120,000
Credit memo for a purchase return - adjusted to AP 60,000
Current liabilities 495,000

CHAPTER 2-PROBLEM 3: MANNY CO.


Accountability:
Petty Cash Fund, Imprest balance 40,000
Return of an expense advance (a) 900
Total Accountability 40,900 1. Ans.
Valid supporting items:
Bills and coins 13,400
Unreplenished paid vouchers 3,700
Accomodated checks
Dated 12/30 2,000
Dated 11/30 - marked NSF 1,000
Replenishment check 10,000 30,100
Petty cash fund shortage 10,800 2. Ans.
(a) Should be subsequently deposited to the bank.

Cash items as of December 31, 2014


Bills and coins 13,400
Return of excess travel expense advance (a) (900)
Unreplenished paid voucher dated 1/2 1,000
Accomodated check 12/30 2,000
Replenishment check 10,000
Adjusted petty cash fund 25,500 3. Ans.
(a) Should be subsequently deposited to the bank.

4. Adjusting entries:
1 Transportation expense 500
Repairs and maintenance expense 300
Entertainment, amusement and representation ex 900
Due to employees 1,000
Petty cash fund 2,700
To record unreplenished paid vouchers.

2 Receivable from employee 1,000


Petty cash fund 1,000
To record NSF accomodated check.

3 Receivable from employee 10,800


Petty cash fund 10,800
To record petty cash fund shortage.

Petty cash fund, imprest balance 40,000


AJE 1. (2,700)
AJE 2. (1,000)
AJE 3. (10,800)
Adjusted petty cash fund 25,500

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CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY


Ans. P1,630
Accountability:
Total collections, 10/1-10/11 (per OR) 28,840
Total bank credits, 10/1-10/11 (per bank statement) 16,550
September deposit in transit (4,500)
September bank charge error (corrected in October) (1,400) 10,650
Undeposited collections as of October 11 18,190

Valid supporting items:


Currency and coins 12,310
Customer collection checks
9/30/14 - Baguio Corp. 2,350
10/3/14 - L. Reyes 1,960
10/4/14 - La. Union Corp. 1,590 5,900
Unused postage (adjusted to supplies) 110
Vouchers paid out of receipt (adjusted to expense) 1,500 19,820
Overage 1,630

CHAPTER 2-PROBLEM 5: BETTY CO.


Accountability
Petty cash fund, imprest balance 10,000
Undeposited collections
Cash collections (per cash sales invoices) 1,670
Customer collection checks (depositable only) 2,500 4,170
Total Accountability 14,170 1. Ans.

Valid supporting items


Currencies and coins 5,980
Customer collection checks (depositable only)
12/30 Errol Corp., Customer 1,300
1/2 R. Rarr, Customer 1,200
Accomodated checks (whether depositable or not)
12/30 D. Dong, Vice President 1,220
1/2 Junior, Employee 312
Unreplenished Vouchers 850
Employee IOU's 700 11,562
Petty Cash Shortage 2,608 2. Ans.

AJEs to the Petty Cash Fund:


(a) Expenses 730
Petty Cash Fund 730
To record unreplenished expense vouchers as of Dec. 31 only.

(b) Receivable from employee 700


Petty Cash fund 700
To record employee .

(c) Receivable from employee 2,608


Petty Cash fund 2,608
To record the petty cash fund shortage.

Imprest balance 10,000


AJE (a) (730)
AJE (b) (700)
AJE (c) (2,608) (4,038) 3. Ans.
Adjusted Petty Cash Fund as of Dec. 31 5,962 4. Ans.

CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO.


Bank Reconciliation Statement 10/31/2014
BANK BOOK
Unadjusted Balance, per Bank Statement 144,975 125,245 Unadjusted Balance per Books
Undeposited collections, excluding missapprop. 10,770 8,000 Unrecorded Bank Credits
Oustanding checks (50,550) (2,300) Unrecorded Bank Debits: NSF Check
Bank error (unrecorded bank charge) (1,250) (1,250) Unrecorded Bank Debits: Bank Service Charge
Correct cash in bank balance (2. Ans. ) 103,945 129,695 Adjusted balance per books
(25,750) Cash shortage (1. Ans. )
103,945 Correct cash balance

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3 Adjusting Entries:
(a) Cash in bank 8,000
Accounts receivables 8,000

(b) Accounts receivables 2,300


Cash in bank 2,300

(c) Bank service charge/Other expenses 1,250


Cash in bank 1,250

CHAPTER 2-PROBLEM 7: JADE CORPORATION


Bank Reconciliation 12/31/2014
BANK BOOK
Unadjusted balance 792,285 726,600 Unadjusted balance
Deposit in transit 10,500 20,000 Unrecorded credit
Outstanding check (75,975) (5,000) Unrecorded debit
Bank error 2,250 31,500 Book errors (audit note a.)
Correct cash balance (1. Ans. ) 729,060 773,100
(44,040) Shortage (3. Ans. )
729,060 Adjusted balance

Unadjusted balance per books 726,600


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

Accountability as of January 15 180,500


Unrecorded credit as of 12/31 (20,000)
Book errors in Janaury (audit note b and c) 19,500
Adjusted accountability 180,000

January deposits from January collections


Januray bank credits 143,895
Correction of Dec. bank charge error (2,250)
Dec. deposit in transit (10,500) 131,145
Cash on hand 10,125
Expense vouchers 1,125
Cash shortage from Jan. 2 - Jan. 15 37,605
Add: Cash shortage as of Dec. 31 44,040
Total cash shortage as of Jan. 15, 2015 81,645 4. Ans.

CHAPTER 2-PROBLEM 8: PIRA CO.


Proof of Cash, 6/30/2014
May 31, Receipt Disbursement June 30,
Unadjusted balances per bank statement 1,836,000 2,496,000 1,224,000 3,108,000
Deposit in transit, May 480,000 (480,000)
Deposit in transit, June (SQUEEZE) 4. Ans. 1,317,600 1,317,600
Outstanding checks, May (1,020,000) (1,020,000)
Outstanding checks, June (SQUEEZE) 5. Ans. 2,171,760 (2,171,760)
Bank error, May Overstated disbursement 240,000 (240,000)
Adjusted balances 1,536,000 3,093,600 2,375,760 2,253,840
2. Ans. 6. Ans.

May 31, Receipt Disbursement June 30,


Unadjusted balances per book (1. Ans. ) 538,200 4,818,600 2,443,200 2,913,600
Unrecorded bank credit: May 600,000 (600,000)
Unrecorded bank debits: BSC, May (7,200) (7,200)
Unrecorded bank debits: BSC, June 9,600 (9,600)
Unrecorded bank debits: NSF Check June 144,000 (144,000)
Bank error, May Overstated disbursement 405,000 (405,000)
Book error, June Overstated collection (720,000) (720,000)
Book error, June Overstated disbursement (213,840) 213,840
Adjusted balances 1,536,000 3,093,600 2,375,760 2,253,840

3. Ans. No shortage.

CHAPTER 2-PROBLEM 9: KRAME INC.


Proof of Cash
Augsut 31: Receipt Disbursemen September 30:
Unadjusted balances, per bank 485,000 1,955,000 1,655,000 785,000
Undeposited collections - Aug 450,000 (450,000)
Undeposited collections - Sept 240,000 240,000 2. Ans.
Outstanding checks - Aug (180,000) (180,000)
Outstanding checks - Sept 220,000 (220,000) 3. Ans.
Bank error - Aug (80,000) (80,000)
675,000 1,745,000 1,615,000 805,000
1. Ans. 4. Ans.
June 30: Receipt Disbursemen July 31:
Unadjusted balances, per book 640,000 1,795,000 1,800,000 635,000
Unrecorded credit - Aug 200,000 (200,000)
Unrecorded credit - Sept 250,000 250,000
Unrecorded debit - Aug (120,000) (120,000)
Unrecorded debit - Sept 80,000 (80,000)
Book Error - Aug (45,000) (45,000)
Book Error - Sept /Correction - Sept (100,000) (100,000)
675,000 1,745,000 1,615,000 805,000
Shortage/Overage -

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CHAPTER 2-PROBLEM 10: MANGO COMPANY


Proof of Cash, 4/30/2014
March 31, Receipt Disbursement April 30,
Unadjusted balances per bank statement 21,560 220,450 218,970 23,040
Undeposited receipts, March 9,060 (9,060)
Undeposited receipts, April 10,120 10,120
Outstanding checks, March (2,675) (2,675)
Outstanding checks, April (excluding certified check) 1,430 (1,430)
Bank error, April Overstated disbursement (950) 950
Adjusted balances 27,945 221,510 216,775 32,680

March 31, Receipt Disbursement April 30,


Unadjusted balances per book 16,545 222,190 216,055 22,680
Book receipts used to pay creditors in cash (1,210) (1,210)
Unrecorded bank credit: March 12,150 (12,150)
Unrecorded bank credit: April 11,640 11,640
Unrecorded bank debits:
NSF check, returned in April recorded in April 1,040 1,040
NSF check, returned in April not yet recorded 860 (860)
Unrecorded bank debits: BSC, March (750) (750)
Unrecorded bank debits: BSC, April 420 (420)
Bank error, April Understated disbursement 360 (360)
Adjusted balances 27,945 221,510 216,775 32,680
1. Ans. 2. Ans. 3. Ans. 4. Ans.

MULTIPLE CHOICE EXERCISES


CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY
Unadjusted cash balance 105,600
1. January 5 collection recorded in December (15,000)
2. Undelivered check disbursements 9,300
3. Post-dated customer collection check (7,800)
4. NSF customer collection check (1,500)
5. Cash fund for non-current purpose (40,000) *classifed as LT Fund Investment
Adjusted cash balance - current asset 50,600 Ans. B.

CHAPTER 2-EXERCISE 2: BIG BROTHER CORP.


Equivalent Asset
Current account at Bank of the Philippine Islands 6,000,000 6,000,000
Current account at Equitable PCI Bank (300,000) *no right of off-set, classified as current liab
Payroll account 1,500,000 1,500,000
Foreign bank account – restricted (in USD) ** 60,000 3,000,000 *Other Asset at current exchang price
Postage stamps 3,000 *prepaid expense
Employee’s post dated check 12,000 *other receivables
IOU from a key officer 30,000 *other receivables
Credit memo from a vendor for a purchase return 60,000 *debited to accounts payable
Traveler’s check 150,000 150,000
Customer’s not-sufficient-funds check 45,000 *accounts receivable
Money orders 90,000 90,000
Petty cash fund, currencies only 12,000 12,000
Treasury bills, due 3/31/15 (purchased 12/31/14) 600,000 600,000
Treasury bills, due 1/31/15 (purchased 1/1/14) 900,000 *current investment
Change fund 10,000 10,000
Bond sinking fund 1,000,000 1,000,000 *LT fund investment
8,362,000 4,000,000
1. Ans .C. 2. Ans. B.

CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY


Accountability:
Petty cash fund, imprest balance 15,000
Undeposited collections
Cash sales invoices (17903-18112) 100,500
Official receipts 39,537
Customer collection check, not yet included 5,707 145,744
Other collections: Return of expense advance 260
Other collections: Contribution for Christmas Party 9,500
Total Accountability 170,504

Valid supporting items:


Bills and coins 105,174
Customer collection checks
12/30 T. Otis 11,920
12/26 R. Eyes 12,505
1/2 O. Liever 5,707
12/21 F. Rancisco 13,350
Accomodated check 310
12/29 O. Camp (return of expense advance) 260
Expense vouchers and IOUs 6,775 156,001
Petty cash shortage 14,503 1. Ans. B.

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Cash on hand as of January 5, 2015

Bills and coins 105,174

Customer collection checks 43,482

Accomodated check 310

Return of expense advance check 260 149,226


Cash that does not belong to the petty cash fund
Undeposited collections:
Collection checks 43,482
Cash collections (100,500+560+1,202) 102,262 (145,744)
Return of expense advance (260)
Excess collection from Christmas Party (9,500-6,290) (3,210)
Cash on hand as of January 5, belonging to the Petty Cash 12
Vouchers paid after December 31: 1/2/15, PNR 35
Petty cash fund as of December 31, 2015 47 3. Ans. B.

AJEs:
(a) Office supplies expense (150-80) 70
Unused office supplies 80
Receivable from employee 300
Petty cash fund 450
To record unreplensihed expense vouchers as of December 31.

(b) Receivable from employee 14,503


Petty cash fund 14,503
To record petty cash shortage

Reconciliation:
Petty cash fund, imprest balance 15,000
AJE (a) (450)
AJE (b) (14,503) (14,953) 2. ans. B.
Petty cash fund, adjusted balance 47 3. Ans. B.

Notes:
1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be
reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be
regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution).
2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement
was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31.
3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check
the same was also part of the valid supporting items. As an additional audit procedure, return of expense advance shall
be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be
returned back to the general cash of the company.

CHAPTER 2-EXERCISE 4: SILVER COMPANY


Bank Reonciliation Statement 12/31/2014
BANK BOOK
Unadjusted balance per Bank Statement 12,300 15,000 Unadjusted balance per books
Undeposited collections (as being reported) 3,000 150 Unrecorded bank credit
Outstanding checks (as per complete list) (850)
Correct cash balance per audit (4. Ans. B.) 14,450 15,150 Unadjusted balance per books
(700) Shortage 1. Ans. D.
14,450 Adjusted balance per books

2. Ans. D.
Undeposited collections (as being reported) 3,000
Shortage 700
Accountability for cash on hand 3,700

3. Ans. B.
Correct cash balance per audit 14,450
Cash on hand/Undeposited collection (3,000)
Cash in Bank (excluding Cash on Hand) 11,450

CHAPTER 2-EXERCISE 5: HOME CORP.


Bank Reconciliation 12/31/2014
BANK BOOK
Unadjusted balance 1,548,570 1,239,200 Unadjusted balance
Deposit in transit 21,000 200,000 Unrecorded credit
Outstanding check (151,950) (10,000) Unrecorded debit
Bank error 4,500 63,000 Book errors (audit note)
Correct cash balance (16. Ans. D) 1,422,120 1,492,200
(70,080) Shortage (17. Ans. C )
1,422,120 Adjusted balance

Accountability as of January 10 521,000


Unrecorded credit as of 12/31 (200,000)
Book errors in Janaury (audit note a and b) 39,000
Adjusted accountability 360,000 (18. Ans. B.)

January deposits from January collections


Januray bank credits 322,790
Correction of Dec. bank charge error (4,500)
Dec. deposit in transit (21,000) 297,290
Cash and Checks on hand (Depositable) 23,475
Expense vouchers 22,250
Cash shortage from Jan. 2 - Jan. 10 16,985 (19. Ans. B)

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CHAPTER 2-EXERCISE 6: CARRERA INC.


Proof of Cash, July 31, 2014
June 30, Receipt Disbursement July 31,
Unadjusted balances per bank statement 172,590 751,680 903,390 20,880
Deposit in transit, June 18,000 (18,000)
Deposit in transit, July (SQUEEZE) 30,000 30,000 2. Ans. B.
Outstanding checks, June (52,260) (52,260)
Outstanding checks, July (SQUEEZE) 41,820 (41,820) 1. Ans. C.
Bank error, July Overstated disbursement (11,880) 11,880
Adjusted balances 138,330 763,680 881,070 20,940 3. Ans. A.

March 31, Receipt Disbursement April 30,


Unadjusted balances per book 140,330 763,680 654,330 249,680
Unrecorded bank debits, July Payment of AP 31,800 (31,800)
Unrecorded bank debits, July BSC 2,610 (2,610)
Unrecorded bank debits, July Payment of NP 183,000 (183,000)
Unrecorded bank debits, July NSF 9,330 (9,330)
Adjusted balances 140,330 763,680 881,070 22,940

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

CHAPTER 2-EXERCISE 7: EDILBERTO INC.


Proof of Cash, December 31, 2014
November 30, Receipt Disbursement December 31,
Unadjusted balances per bank statement 535,410 1,245,540 1,091,865 689,085
Undeposited collections, Nov. 41,005 (41,005)
Undeposited collections, Dec. 64,400 64,400
Outstanding checks, Nov. (138,590) (138,590)
Outstanding checks, Dec. 150,560 (150,560)
Adjusted balances 437,825 1,268,935 1,103,835 602,925
4. Ans. A. 5. Ans. B. 6. Ans. B.

November 30, Receipt Disbursement December 31,


Unadjusted balances per book 82,350 1,182,260 1,063,185 201,425 1. Ans. B. 2. Ans. B.
Unrecorded bank credit: Note Col., Nov. 359,075 (359,075)
Unrecorded bank credit: Note Col., Dec. 404,500 404,500
Unrecorded bank debits: BSC, Nov. (3,600) (3,600)
Unrecorded bank debits: BSC, Dec. 3,000 (3,000)
NSF Check, return and redeposit, same month* 41,250 41,250
Adjusted balances 437,825 1,268,935 1,103,835 602,925
3. Ans. B.

CHAPTER 2-EXERCISE 8: HALALAN CORP.


Proof of Cash, June 30, 2014
May 31, Receipt Disbursement June 30,
Unadjusted balances per bank statement 652,000 88,000 63,200 676,800 3. Ans. A.
Deposit in transit, May 10,000 (10,000)
Deposit in transit, June 70,000 70,000
Outstanding checks, May (20,000) (20,000)
Outstanding checks, June 17,600 (17,600)
Bank error, June corrected also in June (a) (1,000) (1,000)
Adjusted balances 642,000 148,000 60,800 729,200
1. Ans. B. 2. Ans. D.

May 31, Receipt Disbursement June 30,


Unadjusted balances per book 570,800 219,000 57,400 732,400 6. Ans. C.
Unrecorded bank credit: May 72,000 (72,000)
Unrecorded bank debits: BSC, May (800) (800)
Unrecorded bank debits: BSC, June 200 (200)
Unrecorded bank debits: NSF, June 13 (b) 1,000 1,000
Unrecorded bank debits: NSF, June 30 3,000 (3,000)
Adjusted balances 642,000 148,000 60,800 729,200
4. Ans. D. 5. Ans. B.
Notes:
(a) the error committed by the bank in June was also corrected in June, thus both receipts and disbursements per bank shall be in excess
by P1,000 if compared to receipts and disbursements per books. To reconcile, the same had been deducted from both receipt and disbursements.
(b) the NSF check on June 13 had been redeposited immediately. No entry had been made by the company to reflect the receipt and redeposit
while on the bank side, the NSF check had been recorded both as disbursement (upon learning that it is NSF) and as receipt (upon redeposit).
Thus, to reconcile, the same has been added to both receipts and disbursements per books.

CHAPTER 2-EXERCISE 9: SALUYOT CORP.


Proof of Cash, September 30, 2014
August 31, Receipt Disbursement September 30,
Unadjusted balances per bank statement 156,000 76,020 29,220 202,800 1. Ans. D.
Deposit in transit, August 2,700 (2,700)
Deposit in transit, September 28,200 28,200
Outstanding checks, August (12,000) (12,000)
Outstanding checks, September 10,800 (10,800)
Bank error, Sept. corrected also in Sept. (300) (300)
Bank error, Sept., Overstated receipt (600) (600)
Adjusted balances 146,700 100,620 27,720 219,600 5. Ans. B.

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August 31, Receipt Disbursement September 30,


Unadjusted balances per book 120,000 127,200 25,380 221,820 4. Ans. A.
Unrecorded bank credit: August 27,000 (27,000)
Unrecorded bank debits: BSC, August (300) (300)
Unrecorded bank debits: BSC, September 1,320 (1,320)
Unrecorded bank debits: NSF, Sept. 12 420 420
Unrecorded bank debits: NSF, Sept. 30 900 (900)
Adjusted balances 146,700 100,620 27,720 219,600
2. Ans. C. 3. Ans. B.

CHAPTER 2-EXERCISE 10: WISE COMPANY


1. Ans. B.
December actual collections from customers 152,500
Deposit credited by bank in Decemeber 145,000
Less: DIT, November (12,500)
December collections credited in December (132,500)
DIT, December 20,000

2. Ans. B.
November Bank Service Charge 1,500
Decemeber Bank Service Charge 3,250
Bank Service Charge recorded per books in Dec. (2,500)
Unrecorded Bank Service Charge, Dec. 2,250

3. Ans. A.
Actual company collections in December 152,500
Book error, underfooting cash receipts (2,500)
Book receipts, December 150,000

4. Ans. C.
Outstanding checks, December 31 12,500
Add: Checks paid by bank in December 130,000
Total 142,500
Less: Outstanding checks, November 30 (16,250)
Checks issued in December 126,250

5. Ans. D.
Checks issued in December (4) 126,250
2,500
Book disbursements in December 128,750

6. Ans. A.
Book balance, December 31 37,500
Add: Book disbursements in December (5) 128,750
Total 166,250
(150,000)
Book balance, November 30 16,250

Proof of Cash, December 31, 2014


November 30. Receipt Disbursement December 31,
Unadjusted balances per bank statement 18,500 145,000 137,000 26,500 (SQUEEZE)
Deposit in transit, November 12,500 (12,500)
Deposit in transit, December 20,000 20,000
Outstanding checks, November (16,250) (16,250)
Outstanding checks, September 12,500 (12,500)
Bank error, Dec. Overstated Disbursement (3,750) 3,750
Adjusted balances 14,750 152,500 129,500 37,750
7. Ans. B. 8. Ans. C. 9. Ans D. 10. Ans. B.

November 30. Receipt Disbursement December 31,


Unadjusted balances per book 16,250 150,000 128,750 37,500
Unrecorded bank debits: BSC, November (1,500) (1,500)
Unrecorded bank debits: BSC, December 2,250 (2,250)
Book error, Dec. Understated Receipt 2,500 2,500
Adjusted balances 14,750 152,500 129,500 37,750

CHAPTER 2-EXERCISE 11: I-BOT INC.


1. Ans. A
Total checks issued and recorded in December 377,632
November BSC recorded in Decemeber 36
Total book disbursements, December 377,668

2. Ans. D.
Balance per books, November 30 15,698
Total book receipts, December 371,766
Total book disbursements, December (377,668)
Balance per books, December 31, 9,796

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3. Ans. C.
Check number 3408 440
Check number 3418 2,814
Check number 3419 5,788
Outstanding checks, December 31, 9,042

Proof of Cash, December 31, 2014


November 30. Receipt Disbursement December 31,
Unadjusted balances per bank statement 24,298 373,502 380,284 17,516
Deposit in transit, November 3,648 (3,648)
Deposit in transit, December 5,912 5,912
Outstanding checks, November (11,214) (11,214)
Outstanding checks, September 9,042 (9,042)
Bank error, Dec. Overstated Disbursement (480) 480
Bank error, Dec. Understated Disbursement 42 (42)
Adjusted balances 16,732 375,766 377,674 14,824
4. Ans. B.

November 30. Receipt Disbursement December 31,


Unadjusted balances per book 15,698 371,766 377,668 9,796
Unrecorded bank credits: Note Coll, Dec. 4,000 4,000
Unrecorded bank debits: BSC, November (36) (36)
Unrecorded bank debits: BSC, December 42 (42)
Book error, Nov. Over. check 3413 (not yet corr.) 270 270
Book error, Nov. Over. Check 3417 (not yet corr.) 800 800
Adjusted balances 16,732 375,766 377,674 14,824
5. Ans. D. 6. Ans. C. 7. Ans. A.

CHAPTER 2-EXERCISE 12: HALAL CORP.


Proof of Cash, December 31, 2014
November 30. Receipt Disbursement December 31,
Unadjusted balances per bank statement 685,180 308,120 356,080 637,220 2. Ans. B (SQUEEZE)
Deposit in transit, November 15,260 (15,260)
Deposit in transit, December 16,140 16,140
Outstanding checks, November (64,140) (64,140)
Outstanding checks, September 74,080 (74,080)
Bank error, Nov. Overstated Disbursement 1,500 (1,500)
Bank error, Dec. Overstated Disbursement (180) 180
Adjusted balances 637,800 307,500 365,840 579,460
4. Ans. C. 6. Ans. B.

November 30. Receipt Disbursement December 31,


Unadjusted balances per book 637,860 306,220 367,660 576,420 1. Ans. A. (SQUEEZE)
Unrecorded bank credits: Note Coll, Dec. 2,060 2,060
Unrecorded bank debits: BSC, November (60) (60)
Book error, December, Overstated Disbursement (980) 980
Reversal of check (stop-payment)** (780) (780)
Adjusted balances 637,800 307,500 365,840 579,460
5. Ans. A. 7. Ans. D.
3. Ans. D.
Checks issued prior to Dec.(P64,140- P26,140) 38,000
Checks issued in Dec. not yet clearing the bank 36,080
Total outstanding checks, December 31 74,080

**Note that the entry to record the reversal of the dibursement check in which the company released a stop-payment order to the bank
will result both as a credit and debit in the company's books and will never be reflected as debit and credit on the bank records.
Thus, to reconcile, the same has been deducted both in the receipt and disbursement columns per books.

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CHAPTER 3: AUDIT OF RECEIVABLES AND SALES

DISCUSSION PROBLEMS
CHAPTER 3-PROBLEM 1
1 A
2 B.
3 A.
4 A.
5 D.
6 B.
7 D.
8 D.
9 D.
10 D.
11 A.
12 C.
13 B.
14 A.
15 A.
16 D.
17 C.
18 B.
19 B.
20 A.
21 A.
22 D.

CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION


1. Ans. P124,500
January 1, balance (credit balance to be adjusted to Advances) 115,000
Charge sales 1,250,000
Recovery of previous write-offs 5,000
Collections from customers (overpayment credited to Advances) (1,230,000)
Write-off of receivables (7,000)
Sales returnds and allowances (P5,500+P3,000) (8,500)
Gross Accounts Receivable balance 124,500

2. Ans. P107,537
Gross Accounts Receivable 124,500
Allowance for Sales Discount (P124,500*50%*25%)*5% (778)
Alowance for Bad Debts:
60 Days past due (P124,500*30%)*10% (3,735)
>120 Days past due (P124,500*20%)*50% (12,450) (16,185)
Amortized cost, 12/31/14 107,537

3. Adjusting Journal Entries:


(a) Accounts receivable-trade 9,000
Advances from customers 9,000

(b) Sales 25,000


Accounts receivable-trade 25,000

(c) Subscriptions receivable (AR-nontrade) 60,000


Accounts receivable-trade 60,000

(d) Advances from customers 5,000


Accounts receivable-trade 5,000

(e) Claims receivable (AR-nontrade) 5,000


Accounts receivable-trade 5,000

(f) Advances to employees (AR-nontrade) 1,000


Accounts receivable-trade 1,000

(g) Advances to affiliates (Investment) 50,000


Accounts receivable-trade 50,000

(h) Advances to suppliers 10,000


Accounts receivable-trade 10,000

(i) Accounts receivable-trade 10,000


Advances from customers 10,000

(j) Accounts receivable-trade 2,000


Claims receivable (AR-nontrade) 2,000

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(k) Accounts receivable-trade 45,000


Subscriptions receivable (AR-nontrade) 45,000

CHAPTER 3-PROBLEM 3: DELL COMPANY


1. Ans. P366,000
Per GL Per SL Under 30 d 30-60 d 61-120 d 121-180 d Over 180 d
Balances 360,000 360,000 240,000 48,000 36,000 24,000 12,000
Accounts definitely uncollectible (6,000) (6,000) (6,000)
Advances from customers 12,000 12,000 12,000
Adjusted balances 366,000 366,000 252,000 48,000 36,000 24,000 6,000
% Uncollectible - 3% 15% 30% 60%
Allowance for Doubtful Accounts 17,640 - 1,440 5,400 7,200 3,600

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


Allowance for Doubtful Accounts, End 17,640
Less: Allowance for Doubtful Accounts, Beginning (1,320)
Add: Write-of off Accounts 6,000
Bad debt expense for the year 22,320

4. Ans. P330,720
Gross Accounts Receivable 366,000
Allowance for Doubtful Accounts (17,640)
Allowance for Sales Discounts (P252,000*20%)*10% (5,040)
Allowance for Sales Returns (P252,000*5%) (12,600)
Amortized Cost, 12/31/14 330,720

5. Ans. P25,320
Allowance for Doubtful Accounts, End 17,640
Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance 1,680
Write-of off Accounts 6,000
Bad debt expense for the year 25,320

CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATION


Per GL Per SL Nov-Dec Jul-Oct Jan-Jun Prior to Jan
Balances 2,270,000 2,270,000 1,140,000 600,000 400,000 130,000
Accounts definitely uncollectible (30,000) (30,000) (30,000)
Adjusted balances 2,240,000 2,240,000 1,140,000 600,000 400,000 100,000
% Uncollectible 1.5% 8% 35% 70%
Allowance for Doubtful Accounts 275,100 17,100 48,000 140,000 70,000
2. Ans.
Per books:
Allowance for DA, Jan. 1 65,000
Add: Interim provisions (P4.5M*2%) 90,000
Recoveries of previous write-off 7,500
Less: Write-off of receivables (45,000)
Additional write-off (30,000)
Allowance for DA, Dec. 31 per books 87,500
Allowance for DA, per audit 275,100
Additional DA Expense for the year 187,600
1. Ans. Entry:
Doubtful Accounts Expense 187,600
Allowance for DA 187,600

3. Ans. P1,960,700
Gross Accounts Receivable 2,240,000
Allowance for DA (275,100)
Allowance for Sales Discount (P700,000*30%)*2% (4,200)
Amortized Cost, 12/31/14 1,960,700

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CHAPTER 3-PROBLEM 5: MAHOGANNY CORP.


Customer Invoice Date Amount Current 1-60 d past 61-120 d pas >120 d past Credit bal
Nov-Dec Sept-Oct Jul-Aug June and prior
Zulu Inc. 41,993 550,000 550,000
41,974 1,200,000 1,200,000
41,923 950,000 950,000
41,855 420,000 420,000
Whiskey Co. 41,963 2,000,000 2,000,000
41,886 900,000 900,000
41,853 500,000 500,000
Uniform Inc. 41,983 1,750,000 1,750,000
41,916 600,000 600,000
41,825 500,000 500,000
Tango Corp. 41,891 2,600,000 2,600,000
41,830 1,250,000 1,250,000
41,703 900,000 900,000
Romeo Co. 41,974 (500,000) (500,000)
13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)

Reconciliation of GL and SL
Per GL Per SL Current 1-60 d past 61-120 d pas >120 d past Credit bal
Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)
Advances from Reomeo Co. 500,000 500,000 500,000
Posting error - - 600,000 (600,000)
Adjsuted balances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 -
Unreconciled difference (1. Ans.) (30,000)
Adjusted balance (2. Ans.) 14,120,000
Required allowance for Bad Debt as % 2% 5% 20% 50%
Required allowance for Bad Debt 1,328,500 122,000 222,500 534,000 450,000

3. Ans. P378,500
Allowance for BD, ending 1,328,500
Less: Allowance for BD, beg (950,000)
Bad Debt Expense 378,500

4. Ans. P12,791,500
Gross Accounts Receivable 14,120,000
Allowance for BD (1,328,500)
Amortized Cost, 12/31/14 12,791,500

CHAPTER 3-PROBLEM 6: BONIFACIO INC.


ADJUSTING ENTRIES:
(a) Credit balance:
Accounts receivable 7,500
Allowance for bad debts 7,500

(b) Customer Aye:


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

(c) Customer Bee:


Sales Returns 13,800
Accounts payable 13,800
Accounts receivable (1-60 days) 13,800
Purchases 13,800

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


Payment of customer See for a 61-120 days receivable has been deducted from customer Dee's 1-60 days receivable.
Posting error only. No AJE necessary.

(e) Customer Eee:


Sales 11,600
Accounts receivable (1-60 days) 11,600

Inventory 8,000
Income summary/Cost of sales 8,000

(f) Customer Eff:


Sales 18,000
Accounts receivable (1-60 days) 14,000
Advances from customers 4,000

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(g) Customer Jeeh:


Sales 6,000
Accounts receivable (1-60 days) 6,000

(h) Customer Eych:


Sales returns and allowance 1,200
Accounts receivable (61-120 days) 1,200

Per GL Per SL 1-60 days 61-120 days > 120 days Credit bal.
Unadusted balances 221,250 221,250 110,625 66,375 51,750 (7,500)
(a) Credit balance 7,500 7,500 7,500
(c) Customer Bee (13,800) (13,800) (13,800)
(d) Customer See and Dee - 16,600 (16,600)
(e) Customer Eee (11,600) (11,600) (11,600)
(f) Customer Eff (14,000) (14,000) (14,000)
(g) Customer Jeeh (6,000) (6,000) (6,000)
(h) Customer Eych (1,200) (1,200) (1,200)
Adjusted balances (2. Ans.) 182,150 182,150 81,825 48,575 51,750 -
Required allowance for BD in % 2% 10% 20%
Required allowance for BD (3. Ans.) 16,844 1,636.50 4,857.50 10,350.00

4. Ans. P1,844
Allowance for BD, ending 16,844
Less: Allowance for BD, beg. (7,500)
AJE a) Recovery of write-off (7,500)
Bad Debt Expense 1,844

CHAPTER 3-PROBLEM 7: ABC COMPANY


1. Ans. P1,034,711
Principal Amount 1,000,000
Origination cost 57,851
Origination fee (23,140)
FMV of Loan/Initial measurement 1,034,711

2. Ans. P1,018,182
Amortization table: Loans Receivable/Notes Receivable
Correct Int. Nominal Int. Amortization Balance
January 1, 2014: 1,034,711
December 31, 2014: 103,471 120,000 (16,529) 1,018,182
December 31, 2015: 101,818 120,000 (18,182) 1,000,000

3. Ans. P373,944
Carrying value/Amortized cost 12/31/15 1,000,000 1
Accured interest, 12/31/15 120,000 2.48685
Total 1,120,000
Present value of new future cash flows at 10% for
3 periods with annuity P300,000*2.48685 746,056
Impairment loss 12/31/15 373,944

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


Amortization table after impairment loss:
Correct Int. Nominal Int. Amortization Principal Coll. Balance
December 31, 2015: 746,056
December 31, 2016: 74,606 - 74,606 (300,000) 520,661
December 31, 2017: 52,066 - 52,066 (300,000) 272,727
December 31, 2018: 27,273 - 27,273 (300,000) 0

12/31/16: Cash 300,000


Interest income 74,606
Notes receivable/Loans receivable 225,394

12/31/17: Cash 300,000


Interest income 52,066
Notes receivable/Loans receivable 247,934

12/31/18: Cash 300,000


Interest income 27,273
Notes receivable/Loans receivable 272,727

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CHAPTER 3-PROBLEM 8: ABC CORP.


1. Ans. P4,754,134 and P4,908,330
(a) DEF Corp, 10% - Trade receivable, Term, Interest-bearing
CORRECT ENTRIES:
Jan. 1, 2013:
Cash 4,754,134
Loans receivable 4,754,134
Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods)
Principal: (5,000,000*0.704961) 3,524,803 0.704961
Interest: (250,000*4.917324) 1,229,331 4.917324
Total 4,754,134
Amortization table: Loans receivable, DEF Corp.
Correct Int. Nominal Int. Amortization Balance
January 1, 2013: 4,754,134
June 30, 2013: 285,248 250,000 35,248 4,789,382
December 31, 2013: 287,363 250,000 37,363 4,826,745
June 30, 2014: 289,605 250,000 39,605 4,866,349
December 31, 2014: 291,981 250,000 41,981 4,908,330
June 30, 2015: 294,500 250,000 44,500 4,952,830
December 31, 2015: 297,170 250,000 47,170 5,000,000

June 30, 2013: June 30, 2014:


Cash 250,000 Cash 250,000
Interest income 250,000 Intrest Income 250,000

Loans receivable 35,248 Loans receivable 39,605


Interest income 35,248 Interest income 39,605

December 31, 2013: December 31, 2014:


Cash 250,000 Cash 250,000
Interest income 250,000 Intrest Income 250,000

Loans receivable 37,363 Loans receivable 41,981


Interest income 37,363 Interest income 41,981

2. Ans. Retroactive adjustement:


Retained earnings, beg 173,255
Loans receiavable 173,255
Face value 5,000,000
Less: Proceeds (4,754,134)
Add: Nominal interest 500,000
Interest income in 2013, per books 745,866
Interest income in 2013, per audit (see amo.) 572,611
Overstatement in interest income in 2013 173,255

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


(b) GHI, 12% - Non-trade receivable (Advances to associate), Term and Interest-bearing
CORRECT ENTRIES
January 1, 2014:
Cash 2,000,000
Loans receivable-Nontrade 2,000,000
*note that the nominal interest and effective interest are the same thus, the face value is also the proceeds (fmv)

December 31, 2014:


Cash 240,000
Interest income (2M*12%) 240,000
*note that since nominal interest and effective interests are the same and since there are no principal collections yet,
the carrying value/amortized cost at 12/31/14 remains the face value.

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


(c) KLM - Trade receivable, Term and Non-interest-bearing
CORRECT ENTRIES
Janaury 1, 2012:
Cash 2,483,685
Loans receivable 2,483,685
Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods)
Principal: P4,000,000*0.6209213) 2,483,685 0.6209213
Amortization table: Loans receivable, KLM
Correct Int. Nominal Int. Amortization Balance
January 1, 2012: 2,483,685
December 31, 2012: 248,369 - 248,369 2,732,054
December 31, 2013: 273,205 - 273,205 3,005,259
December 31, 2014: 300,526 - 300,526 3,305,785
December 31, 2015: 330,579 - 330,579 3,636,364
December 31, 2016: 363,636 - 363,636 4,000,000

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December 31, 2012:


Loans receivable 248,369
Interest income 248,369

December 31, 2013:


Loans receivable 273,205
Interest income 273,205

December 31, 2014:


Loans receivable 300,526
Interest income 300,526

5. Ans. Retroactive adjustement:


Retained earnings, beg 994,741
Loans receivable 994,741
Principal amount 4,000,000
Less: Proceeds (2,483,685)
Interest income rececognized in 2012 1,516,315
Correct interest income in 2012 (see amo.) (248,369)
Correct interest income in 2013 (see amo.) (273,205)
Overstatement in interest income in '12 and '13 994,741

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


(d) NOP, 10% - Trade, Serial and Interest-bearing
CORRECT ENTRIES
January 1, 2014:
Cash 4,780,007
Loans receivable 4,780,007
Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 10 semi-annual periods)
Cash to be collected on:
Principal Interest Total PV factor Present Value
July 1, 2014: 500,000 250,000 750,000 0.943396 707,547
January 1, 2014: 500,000 225,000 725,000 0.889996 645,247
July 1, 2015: 500,000 200,000 700,000 0.839619 587,733
January 1, 2015: 500,000 175,000 675,000 0.792094 534,663
July 1, 2016: 500,000 150,000 650,000 0.747258 485,718
January 1, 2016: 500,000 125,000 625,000 0.704961 440,600
July 1, 2017: 500,000 100,000 600,000 0.665057 399,034
January 1, 2017: 500,000 75,000 575,000 0.627412 360,762
July 1, 2018: 500,000 50,000 550,000 0.591898 325,544
January 1, 2018: 500,000 25,000 525,000 0.558395 293,157
TOTAL 4,780,007

Amortization table: Loans receivable, NOP


Correct Int. Nominal Int. Amortization Princ. Coll. Balance
January 1, 2014: 4,780,007
July 1, 2014: 286,800 250,000 36,800 (500,000) 4,316,808
January 1, 2015: 259,008 225,000 34,008 (500,000) 3,850,816
July 1, 2015: 231,049 200,000 31,049 (500,000) 3,381,865
January 1, 2016: 202,912 175,000 27,912 (500,000) 2,909,777
July 1, 2016: 174,587 150,000 24,587 (500,000) 2,434,364
January 1, 2017: 146,062 125,000 21,062 (500,000) 1,955,425
July 1, 2017: 117,326 100,000 17,326 (500,000) 1,472,751
January 1, 2018: 88,365 75,000 13,365 (500,000) 986,116
July 1, 2018: 59,167 50,000 9,167 (500,000) 495,283
January 1, 2019: 29,717 25,000 4,717 (500,000) (0)

July 1, 2014:
Loans receivable 36,800
Interest income 36,800

Cash 750,000
Interest income 250,000
Loans receivable 500,000

December 31, 2014:


Loans receivable 34,008
Interest income 34,008

Interest receivable 225,000


Interest income 225,000

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Proceeds from issue 1/1/14 4,780,007


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

SUMMARY
Interest Interest Current Non-current
Income Recevable Loans Rec. Loans Rec.
(a) DEF Corp, 10% - trade 581,586 - 4,908,330
(b) GHI, 12% - nontrade 240,000 - 2,000,000
(c) KLM - trade 300,526 - 3,305,785
(d) NOP - trade 545,809 225,000 4,350,816
Total 1,667,920 225,000 12,564,932 2,000,000
6. Ans. 7. Ans. 8. Ans. 9. Ans.
Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus
trade receivables are always current.

CHAPTER 3-PROBLEM 9: DWARF CORP.


Noncurrent Current Int. Receivab Int. Income
(a) Note receivable from sale of plant - nontrade
Dec. 31, 2013 balance 4,500,000
Apr. 1, 2014, principal collection (1,500,000)
Dec. 31, 2104 balance 3,000,000 1,500,000 1,500,000
Int. Receivable: P3,000,000*12%*9/12 270,000
Int. Income: (P4.5M*12%*3/12) + (P3M*12%*9/12) 405,000

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


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

(c) Note receivable from sale of equipment - nontrade


Apr. 1, 2014 @FMV=PV of future cash flows at 12% for 2 periods
(P600,000*0.797) 478,200
Dec. 31, 2014: Amo. (478,200*12%*9/12) 43,038 43,038
Dec. 31, 2014 amortized cost 521,238 521,238 - -

(d) Note receivable from sale of land - nontrade


Jul. 1, 2014 @ FMV=Face (Nominal%=Effective%)
Dec. 31, 2014 balance = Face 2,100,000
Current portion:
Periodic payment (on Jul. 1, 2015) 676,875
Interest expense (upto Jul. 1, 2015 231,000 445,875 445,875
Long-term portion: 1,654,125 1,654,125
Interest receivable (P2.1M*11%*6/12) 115,500
Interst income (P2.1M*11%*6/12) 115,500
Total 4,875,363 1,945,875 385,500 683,538
1. Ans. 2. Ans. 3. Ans. 4. Ans.
Note that per PAS 1, a nontrade receivable is current if it is realizable within 12 months after the reporting period or bala nce sheet date.

CHAPTER 3-PROBLEM 10: WHISKEY INC.


1. JORNAL ENTRIES
(a) Pledging of AR
June 30, 2014: SUMMARY:
Cash (P4M*80%)-(P4M*5%) 3,000,000 2. Ans. P1,450,000
Interest expense (P4M*5%) 200,000 ACCOUNTS RECEIVABLE
Loans payable (P4M*80%) 3,200,000 Jun. 30, bal 4,000,000
1,320,000 Jul. Coll
July 31, 2014: 80,000 Jul Returns
Cash 1,200,000 950,000 Aug. Coll
Sales discount 120,000 200,000 Aug. Write- o
Accounts receivable 1,320,000 Aug. 31, bal 1,450,000

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


Loans payable (balance) 1,168,000 3. Ans. P1,152,320
Cash 1,200,000 LOANS PAYABLE
3,200,000 Jun. Loan
Sales returns 80,000 Jul. Payment 1,168,000
Accounts receivable 80,000 2,032,000 Jul 31. bal
Aug. Paymen 879,680
1,152,320 Aug. 31, ba

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August 31, 2014:


Cash 900,000
Sales discount 50,000
Accounts receivable 950,000

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


Loans payable (balance) 879,680
Cash 900,000

Allowance for BD 200,000


Accounts receivable 200,000

(b) Discounting of NR
Cash (Proceeds) 2,082,667
Notes receivable 2,000,000
Interest income (P2M*10%*4/12) 66,667
Gain on discounting 16,000
Maturity Value:
Principal Amount 2,000,000
Interest (P2M*10%) 200,000 2,200,000

Proceeds: (Maturity value - Discount)


Maturity Value 2,200,000
Less: Discount: (Maturity value*Discount rate*Remaining term)
(P2,200,000*8%*8/12) (117,333)
Proceeds from discounting 2,082,667

4. Ans. 0
Since discounting was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse ba sis),
the notes receivable has been derecognized/transferred.

5. Ans. P16,000.
Proceeds from discounting/Sales proceeds 2,082,667
Less: Carrying value of Notes Receivabl 2,000,000
Interest from Jan. 1 to May 1 (4 mo.)
(P2,000,000*10%*4/12) 66,667 2,066,667
Gain on discounting 16,000

CHAPTER 3-PROBLEM 11:VICTORY INC.


1. JORNAL ENTRIES
(a) Assignement of AR
November 1, 2014: SUMMARY:
Cash (P1.5M*95%) 1,425,000 2. Ans. P470,000.
Interest expense (P1.5M*5%) 75,000 ACCOUNTS RECEIVABLE-ASSIGNED
Loans payable 1,500,000 Jun. 30, bal 2,000,000
650,000 Jul. Coll
Accounts receivable-Assigned 2,000,000 60,000 Jul Returns
Accounts receivable 2,000,000 740,000 Aug. Coll
80,000 Aug. Write- o
November 30, 2014: Aug. 31, bal 470,000
Cash 600,000
Sales discount 50,000
Accounts receivable-Assigned 650,000 3. Ans. P224,150
LOANS PAYABLE
Interest expense (P1.5M*12%*1/12) 15,000 1,500,000 Jun. Loan
Loans payable (balance) 585,000 Jul. Payment 585,000
Cash 600,000 915,000 Jul 31. bal
Aug. Paymen 690,850
Sales returns 60,000 224,150 Aug. 31, ba
Accounts receivable-Assigned 60,000

August 31, 2014:


Cash 700,000
Sales discount 40,000
Accounts receivable-Assigned 740,000

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


Loans payable (balance) 690,850
Cash 700,000

Allowance for BD 80,000


Accounts receivable-Assigned 80,000

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(b) Factoring of AR
Cash, net (350,000-10,000) 340,000
Receivable from factor 50,000
Allowance for BD 20,000
Loss on Factoring 90,000
Accounts receivable 500,000
Since factoring was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the accounts receivable factored has been derecognized/transferred.

4. Ans. (P90,000)
Net proceeds from factoring (350,000-10,000) 340,000
Add: Factor's holdback 50,000
Total/Net Sales proceeds from AR 390,000
Carrying value of AR
Gross Accounts receivable factored 500,000
Allowance for BD (20,000) 480,000
Loss of Factoring (90,000)

MULTIPLE CHOICE EXERCISES


CHAPTER 3-EXERCISE 1: DKNY COMPANY
Trade Other - current Total trade & other
Trade accounts receivable 1,550,000
750,000
12% Trade notes receivable 200,000
Installments receivable, normally due 1 year to two year 600,000
300,000
Claim from insurance company 30,000
Subscription receivable due in 60 days, 600,000
Accrued interest receivable 20,000
3,100,000 950,000 4,050,000
1. Ans. B. 2. Ans. D.
3. Ans. C.
Proceeds from AR factored 250,000
Carrying value of AR factored (300,000)
Loss from factoring (50,000)

Proceeds from NR discounted:


Maturity value: (Principal + Interest)
Principal 300,000
Interest (P300,000*20%*6/12) 30,000 330,000
Less: Discount (MV*disc%*remaining term)
(P330,000*40%*6/12) (66,000)
Proceeds from NR discounted: 264,000
Carrying value of NR (no interest) 300,000
Loss from discounting (36,000)

Total loss from receivable financing (86,000)

Note:
(a) The credit balances from customer accounts at P60,000 and P40,000 shall be presented as advances from customers (current liab.)
unless there is right of offset.
(b) The cash advances to subsidiary amounting to P800,000 shall be presented as an addition to the investment in subsidiary account in
the parent-company financial statements, thus is presented as LT Investment.
(c) The deposit on contract bids amounting to P500,000 shall be presented as Other Assets in the noncurrent asset portion of SFP.
(d) The advances to stockholders amounting to P2,000,000 is a non-trade, noncurrent receivable, thus is presented as Other Asset.

CHAPTER 3-EXERCISE 2: MORGAN INC.


1. Ans. A.
Allowance for DA, Dec. 31, 2014 (per aging) 700,000 3,225,300
Less: Allowance for DA, Jan. 1, 2014 (600,000) (169,000)
Recovery of previously written-off accounts (100,000) 3,056,300
Add: Write-off of accounts during the year 375,000
Correct Bad Debt Expense 375,000

2. Ans. B.
Gross Accounts Receivable 2,375,000
Less: Allowance for DA, Dec. 31, 2014 (per aging) (700,000)
Amortized cost/Carrying value, Dec. 31, 2014 1,675,000

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CHAPTER 3-EXERCISE 3: INUYASHA INC.


1. Ans. C.
Year Current 1 – 30 days PD
2013 1% 6% 9% 23% 55%
2012 2% 8% 10% 18% 60%
2011 1% 4% 11% 16% 45%
2010 3% 5% 12% 22% 45%
2009 3% 2% 8% 21% 45%
Average uncollectible accounts in 2% 5% 10% 20% 50%

2. Ans. C.
Age of accounts Amount Allow in % Required Allow. In Amount
Current 1,686,400 2% 33,728
1 to 30 days past due 922,000 5% 46,100
31 to 60 days past due 384,800 10% 38,480
61 to 90 days past due 153,300 20% 30,660
Over 90 days past due 78,800 50% 39,400
Total 3,225,300 188,368

3. Ans. A.
Gross Accounts Receivable 3,225,300
Allowance for uncollectible accounts (188,368)
Amortized cost/Net realizable value 3,036,932

CHAPTER 3-EXERCISE 4: MEXICAN CORP.


Reconciliation of GL and SL with Aging of AR
Per GL Per SL 0-60 days 61-90 days 91-120 days > 120 days
1,230,000 1,223,000 825,000 220,000 50,000 128,000
Write off of AR (40,000) (40,000) (40,000)
Balance 1,190,000 1,183,000 825,000 220,000 50,000 88,000
Unlocated difference* (7,000)
Adjusted Gross AR 1,183,000
Required Allowance for BD in % 2% 10% 30% 40%
Required Allowance for BD in Amounts 88,700 16,500 22,000 15,000 35,200

1. Ans. C.
*Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail. The adjusting entry shall be:
Sales 7,000
Accounts receivable 7,000

2. Ans. B.
Required allowance for BD, Dec. 31 88,700
Less: Allowance for BD, unadjusted balance (106,000)
Add: Additional write-off per audit 40,000
Additional bad debt expense per audit 22,700
Bad debt expense per books (P12.8M*2%) 256,000
Total bad debt expense per audit 278,700

3. Ans. C.
Gross Accounts Receivable 1,183,000
Less: Allowance for BD (88,700)
Amortized cost/Net realizable value 1,094,300

CHAPTER 3-EXERCISE 5: ROVERS INC. Dec. Nov. Oct. Sept. Aug. and pri
Customer Invoice date Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 days
Gudang 9/12/14 139,200 139,200
Tisoy 12/12/14 153,600 153,600
12/2/14 99,200 99,200
Gusoy 11/17/14 185,120 185,120
10/8/14 176,000 176,000
Naning 12/8/14 160,000 160,000
10/25/14 44,800 44,800
8/20/14 40,000 40,000
Nanong 9/27/14 96,000 96,000
Balong 8/20/14 71,360 71,360
Peejong 12/6/14 112,000 112,000
11/29/14 169,440 169,440
Total 1,446,720 524,800 354,560 220,800 235,200 111,360

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Reconciliation between GL and SL with Aging of AR analysis


Per GL Per SL 0-30 days 31-60 days 61-90 days 91-120 days >120 days
Unadjusted balances 1,466,720 1,446,720 524,800 354,560 220,800 235,200 111,360
(a) Write-off of AR-Balong (71,360) (71,360) (71,360)
(b) Posting error - - (99,200) 99,200
Adjusted balances 1,395,360 1,375,360 425,600 453,760 220,800 235,200 40,000
Unreconciled difference (20,000)
Adjusted balance 1,375,360
Required allowance for BD in % 2% 5% 10% 20% 50%
Required allowanc for BD in amount 120,320 8,512 22,688 22,080 47,040 20,000

1. Ans. D.
Allowance for BD, ending 120,320
Less: Allowance for BD, unadjusted (46,720)
Add: Write off of AR-Balong 71,360
Bad Debt Expense 144,960

2. Ans. C.

3. Ans. C.
Write-off of AR-Balong (71,360)
Unlocated difference (debited to Sales) (20,000)
Total adjustments to AR-GL (91,360)

4. Ans. A.
Gross Accounts Receivable 1,375,360
Allowance for Bad Debts (120,320)
Amortized cost/Carrying value 1,255,040

5. Ans. B.
AJE to record unreconciled difference:
Sales 20,000
Accounts receivable 20,000

CHAPTER 3-EXERCISE 6: NATASHA INC.


Reconciliation between GL and SL with Aging of AR analysis
Per GL Per SL 0-1 Month 1-3 Months 3-6 Months > 6 Months
Unadjusted balances 788,000 792,960 372,960 307,280 88,720 24,000
(b) Additional write-off (GL only) (800)
(c) Additional write-off per aging sched (4,000) (4,000) (4,000)
(d) AR with credit balances 10,000 10,000 8,000 2,000
793,200 798,960 380,960 309,280 88,720 20,000
Unreconciled difference 5,760 8,000 12,000
Adjusted balances (3. Ans. C.) 798,960
Allowance for BD in % 1% 2% 3% 50% 20%
Allowance for BD in Amount (4. Ans. A.) 19,057 3,810 6,186 2,662 4,000.00 2,400.00

Adjusting entries:
(a) Bad debt expense 1,296
Allowance for bad debt 1,296
To adjust the entry made upon recovery of previously written-off account, credited by the client to Bad Debt Expense account.

(b) Allowance for bad debt 800


Accounts receivable 800
To record additional accounts written-off per SL.

(c) Allowance for bad debt 4,000


Accounts receivable 4,000
To record additional accounts written-off per the aging schedule.

(d) Accounts receivable 8,000


Advances from customers 8,000
To reclassify the credit balances in customer accounts at (0-1 mo.) P8,000 and (1-3 mo.) P2,000.

(e) Allowance for bad debts 10,297


Bad debt expense 10,297
Allowance for BD, ending 19,057
Less: Allowance for BD, beginning (15,250)
Recovery of previous write-off (1,296)
Add: Write off of accounts receivable 6,832
Additional write-off per audit 4,000
Bad Debt Expense per audit 13,343 1. Ans. C.
Bad Debt Expense per books 23,640
Overstatement in Bad Debt Expense (10,297)

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


Sales 5,760
To adjust the unlocated difference (SL should prevail over GL).

5. Ans. D.
Gross Accounts Receivable 798,960
Allowance for BD (19,057)
Amortized cost/Carrying value 779,903

CHAPTER 3-EXERCISE 7: SAYOTE INC.


Reconciliation between GL and SL with Aging of AR analysis
Per GL Per SL Under 1 mo. 1-6 mo. Over 6 mo. Credit bal.
Unadjusted balances 1,270,000 1,260,000 540,000 552,000 228,000 (60,000)
Credit balance - Kamote (Advances) 12,000 12,000 12,000
Credit balance - Kutchay (Posting error - - (21,000) 21,000
Credit balance - Kalachuchi (Advances) 27,000 27,000 27,000
Write-off of accounts (72,000) (72,000) (72,000)
1,237,000 1,227,000 540,000 531,000 156,000 -
Unlocated difference (10,000) 36,000 120,000
Adjusted balance (2. Ans. B) 1,227,000
Allowance for BD % 1% 2% 50% 10%
Allowance for BD in Amount (3. Ans A) 46,020 5,400 10,620 18,000 12,000

1. Ans. A.
Sales 10,000
Accounts receivable 10,000
To record the unlocated difference (SL should prevail over GL)

4. Ans. D.
Allowance for BD, ending 46,020
Less: Allowance for BD, beg. (30,000)
Add: Write off of AR 24,000
Additional write-off per audit 72,000
Bad debt expense per audit 112,020
Bad debt expense per books 72,000
Additional bad debt expense per audit 40,020
AJE:
Bad debt expense 40,020
Allowance for bad debt 40,020

5. Ans. C.
Accounts receivable, Gross 1,227,000
Allowance for bad debts (46,020)
Amortized cost/Carrying vallue 1,180,980

CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY


1. Ans. C.
P30,000*20% = P6,000 - Income is overstated by the gross profit on the sales.
2. Ans. A.
The credit memo should be recorded as of December 31, 2014.
3. Ans. B.
Actual number of units sold to Mr Lazo was 320 (P48,000/P150)
4. Ans. D.
(320*P100) – P48,000 = P16,000.
5. Ans. A.
Receivable from Mr. Sia is correctly stated because the goods are considered sold in 2014
16. Ans. D.

CHAPTER 3-EXERCISE 9: MILK CORP. Dec. Nov. Oct. Sept. Aug. and pri
Customer Invoice date Invoice Amount 1-30 days 31-60 days 61-90 days 91-120 days more than 1
Zulu Inc. 12/6/14 42,000 42,000
11/29/14 63,540 63,540
Yankee Co. 9/27/14 36,000 36,000
8/20/14 26,760 26,760
Xylon Inc. 12/30/14 20,000 20,000
12/8/14 40,000 40,000
10/25/14 31,800 31,800
Whiskey Co. 11/17/14 69,420 69,420
10/9/14 66,000 66,000
Victory Corp. 12/12/14 57,600 57,600
8/20/14 37,200 37,200
Uniform Inc. 9/12/14 52,200 52,200
542,520 159,600 132,960 97,800 88,200 63,960

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Reconciliation of GL and SL with Aging of AR analysis


Per GL Per SL 1-30 days 31-60 days 61-90 days 91-120 days more than 1
Unadjusted balances 550,000 542,520 159,600 132,960 97,800 88,200 63,960
Yankee & Victory: Posting error 26,760 (26,760)
Xylon: FOB Destination (20,000) (20,000) (20,000)
Uniform: Write-off (52,200) (52,200) (52,200)
Adjusted balances 477,800 470,320 166,360 132,960 97,800 36,000 37,200
Unreconciled difference (7,480)
Adjusted balance 470,320
Allowance for BD in % 1% 2% 5% 10% 50%
Allowance for BD in Amounts (1. Ans. A.) 31,413 1,664 2,659 4,890 3,600 18,600

2. Ans. D.
Gross Accounts Receivable 470,320
Allowance for BD (31,413)
Amortized cost/Carrying value 438,907

3. Ans. A.
Allowance for BD, end 31,413
Add: Write off 52,200
Debit unadjusted balance 16,500
Bad debt expense 100,113

4. Ans. B.
Sales 7,480
Accounts receiavable 7,480
To adjust the unreconciled difference. (SL should prevail over GL)

CHAPTER 3-EXERCISE 10: BROCOLI CORP.


Adjusting entries
a. Accounts payable 67,500
Cash - METREBANK 67,500

b. Accounts receivable (current) 189,000


Cash - METREBANK 189,000

c. Cash - METREBANK 107,550


Accounts payable 107,550

d. Cash - METREBANK 115,650


Accounts payable 115,650

e. Cash - METREBANK 258,000


Expense 42,000
Loans payable 300,000

f. Accounts receivable (current) 57,900


Cash – BADO 57,900

g. Cash – BADO 3,207,900


Overdraft (Liability) 3,207,900

h. Advances to supplier 60,000


Purchases 60,000

i. Sales 4,500,000
Accounts receivable 4,500,000
(no adjustment to subsidiary- aging)

j. Sales return 225,000


Accounts receivable 225,000
(no adjustment to subsidiary – aging)

k. Bad debt expense 880,763


Allowance for bad debts 880,763
Gen Ledger Subs. Ledger Current Past due
63,219,000 65,045,790 35,550,000 29,495,790
Customer post-dated check (AJE b) 189,000 189,000 189,000
Customer post-dated check (AJE f) 57,900 57,900 57,900
Collections Received on Dec. 31, 2014 (adj to SL only) (2,626,290) (1,000,000) (1,626,290)
Consigned goods to NITZ (adj to SL only) (3,925,500) (3,925,500)
Undelivered sales (adj to GL only/ AJE i) (4,500,000)
Unrecorded sales returns (adj to GL only/AJE j) (225,000)
Adjusted Balances 58,740,900 58,740,900 30,871,400 27,869,500
3. Ans. D.

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Current 30,871,400 2% 617,428


Past Due 27,869,500 7% 1,950,865
Required Allowance, end 2,568,293
Add: Write-offs 521,565
Less: Allowance, beg (1,773,195)
Interim provision/Bad debt per books (435,900)
Additional bad debt expense 880,763

l. Inventory 6,920,400
Cost of sales 6,920,400
(3,925,500+4,500,000+225,000)*80%

1. Ans. D.
Cash, Unadjusted balance (90,000)
(a) (67,500)
(b) (189,000)
(c) 107,550
(d) 115,650
(e) 258,000
(f) (57,900)
(g) 3,207,900
Cash, adjusted balance 3,284,700

2. Ans. C.
Cash in bank, BADO (3,150,000)
(f) (57,900)
Cash in bank, BADO (total overdraf (3,207,900)

4. Ans. C.
Bad debt expense per books 435,900
Additional bad debt expense per audit' 880,763
Bad debt expense per audit 1,316,663

5. Ans. C.
Gross Accounts Receivable 58,740,900
Allowance for bad debt (2,568,293)
Amortized cost/Carrying value 56,172,607

6. Ans. D.
Inventory, unadjusted balance 55,558,140
(l) 6,920,400
Inventory, adjusted balance 62,478,540

CHAPTER 3-EXERCISE 11: MYBAGS INC.


NR - total Recievable-Curr Interest Inco Interest Rec.
(a) NR discounted as a sale - - - -
(b) NR - 30 days 900,000 900,000
(c) NR - 90 days (Subscription Receivable) 500,000
Int. Inc. (P500,000*16%*2/12) 13,333.33 13,333
(d) NR-dishonored (collection w/in 12 months is doubtf - - 16,000 -
(e) NR - 90 days (Advances to Officer) 160,000
(f) NR - 120 days 120,000 120,000
Int. Inc. (P120,000*16%*108/360) 5,760 5,760
Total 1,020,000 1,680,000 35,093 19,093
1. Ans. C. 2. Ans. C. 3. Ans. D. 4. Ans. A.

CHAPTER 3-EXERCISE 12: YZA INC.


1. Ans. A.
Proceeds from the loan (FMV = Present Value of future cash flows at 8% effective rate for 3 periods)
Principal (1,000,000*0.793832) 793,832 0.793832
Interest (60,000*2.577097) 154,626 2.577097
948,458

Principal amount 1,000,000


Add: Origination cost (Squeeze) 28,458
Less: Origination fee (80,000)
Net proceeds/Fair value 948,458

Amortization table: Loans receivable


Correct Int. Nominal Int. Amortization Balance
Janaury 1, 2014: 948,458
December 31, 2014: 75,877 60,000 15,877 964,335
December 31, 2015: 77,147 60,000 17,147 981,481
December 31, 2015: 78,519 60,000 18,519 1,000,000

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2. Ans. C.
Carrying value/Amortized cost (12/31/15) 981,481
Accrued interest (as of 12/31/15) 60,000
Total receivables as of 12/31/15 1,041,481
Present value of new cash flows at original eff. % (8%)
Due 12/2016: P300,000*0.925926 277,778 0.925926
Due 12/2018: P300,000*0.793832 238,150 515,927 0.793832
Impairment loss 525,554

3. Ans. C.

CHAPTER 3-EXERCISE 13: ISIAH COMPANY


Principal amount 4,000,000
Add: Origination cost 248,000
Less: Origination fees (374,000)
Initial amount/Fair value/Proceeds 3,874,000

1. Ans. B.
Amortization table: Loans receivable
Correct Int. Nominal Int. Amortization Balance
December 31, 2013: 3,874,000
December 31, 2014: 358,345 320,000 38,345 3,912,345
December 31, 2015: 361,892 320,000 41,892 3,954,237
December 31, 2016: 365,763 320,000 45,763 4,000,000

2. Ans. D.
Amortized cost/Carrying value (12/31/15) 3,954,237
Accrued interest (12/31/15): 320,000
Total receivables as of 12/31/15 4,274,237
Less: Present value of new future cash flows at 9.25%
Due 12/31/2017: (1.4M*0.837832) 1,172,965 0.915332
Due 12/31/2018: (P1M*0.766895) 766,895 0.837832
Due 12/31/2019 (P600K*0.701963) 421,178 0.766895
Due 12/31/2020: (P400K*0.642529 257,012 2,618,049 0.701963
Impairment loss 1,656,188 0.642529

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


Amortization table: Loans receivable after impairment loss
Correct Int. Nominal Int. Amortization Principal Coll. Balance
December 31, 2015: 2,618,049
December 31, 2016: 242,170 - 242,170 - 2,860,219
December 31, 2017: 264,570 - 264,570 1,400,000 1,724,789
December 31, 2018: 159,543 - 159,543 1,000,000 884,332
December 31, 2019: 81,801 - 81,801 600,000 366,133
December 31, 2020: 33,867 - 33,867 400,000 (0)

CHAPTER 3-EXERCISE 14: VISAGE CORP.


1. Ans. A.
Net cash proceeds from factoring (P350,000-P10,000) 340,000
Factors holdback 50,000
Total/Net sales price of AR factored 390,000
Less: Carrying value of AR (P500,000-P20,000) (480,000)
Loss from factoring (90,000)

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

3. Ans. A.
Accounts receivable-assigned 800,000
May collection with sales discount (P200,000+P5,000) (205,000)
June collection with sales discount (P150,000+P4,000) (154,000)
Sales returns (30,000)
Accounts written-off as worthless (20,000)
Accounts receivable-assigned - June 30 391,000

4. Ans. B.
Payment Interest Principal Balance
(Bal*24%*1/12 (Payment-Int)
Loans payable balance, May 1 500,000
May 31 remittance 200,000 10,000 190,000 310,000
June 31 remittance 150,000 6,200 143,800 166,200

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5. Ans. B.
Proceeds from discounting ** 625,400
Less: Carrying value of Notes (600,000)
Interest receivable up to Oct. 31 (P600K*12%*4/12 (24,000)
Gain on Discounting 1,400
** Proceeds from discounting
Maturity value
Principal amount 600,000
Interest (P600,000*12%*6/12) 36,000 636,000
Discount (P636,000*10%*2/12) (10,600)
Proceeds from discounting 625,400

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CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES

DISCUSSION PROBLEMS
CHAPTER 4-PROBLEM 1
1 B.
2 D.
3 D.
4 C.
5 B.
6
7
1 A
2 D
3 C
4 B
5 A
6 B
7 D
8 D
9 B
10 B
11 D
12 A
13 C

CHAPTER 4-PROBLEM 2: NOKIA CORP.


Inventory Acc. Payable Net Sales Net Purch. Net Income
Unadjusted balances 1,200,000 790,000 6,050,000 3,300,000 610,000
(c) Purch in transit - FOB, Dest. (120,000) (120,000) 120,000
(d) Unrecorded purch. returns/allowance (70,000) (70,000) (70,000) -
(e) "Bill and Hold" Sales (224,000) (224,000)
(f) Goods out on consignment 70,000 (100,000) (30,000)
(g) Sales in transit - FOB, SP (105,000) (105,000)
(h) Goods segregated but not yet sold 98,000 98,000
(i) Purch in transit - FOB, SP 170,000 170,000 (170,000)
(j) Purch in transit - FOB, SP 200,000 200,000
1,169,000 770,000 5,950,000 3,280,000 499,000
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.

CHAPTER 4-PROBLEM 3: INGGO CORP.


Inventory Acc. Payable Sales Net Income
Unadusted balances 3,750,000 3,075,000 27,000,000
(a) Goods held on consignment, recorded as purchases (465,000) (465,000) -
(b) Credit balance - Fox Inc. (Advances to supplier) 25,000
Sale on approval - not yet valid sale 66,000 (84,000) (18,000)
(c) Sales in transit - FOB Seller (FOB, SP) - no adjustment
(d) Goods out on consignment, recorded as sales 630,000 (750,000) (120,000)
(e) Purchase in transit, FOB Seller (FOB, SP) 75,000 75,000 -
(f) Unrecorded freight cost 3,000 6,000 (3,000)
(g) Purchase discount - Beta Corp. (P795,000*2%) (15,900) (15,900) -
(h) Inventory financing - Loan to Hote Inc. (not purch) (100,000) (100,000) -
3,943,100 2,600,100 26,166,000 (141,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans.

CHAPTER 4-PROBLEM 4: TOUR COMPANY


Purchases Inventories
Unadjusted balances 2,543,900 354,500
RR #11204 (7,800)
RR #11210 4,000 4,000
RR #11211 9,700
RR #11212 12,840
RR #11214 25,640 25,640
RR #11215 28,400 28,400
Total/Net Adjustment 72,780 58,040
Adjusted balances 2,616,680 412,540
2. Ans.

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1. Adjusting journal entries:


Purchases 72,780
Accounts payable 72,780

Inventory 58,040
Income summary 58,040

3. Ans. P2,439,140
Inventory, Nov. 1, 2013 235,000
Net Purchases, as adjusted 2,616,680
Cost of goods avaialble for sale 2,851,680
Inventory, Oct. 31, 2014, as adjusted (412,540)
Cost of Sales 2,439,140

CHAPTER 4-PROBLEM 5: ABC CORP.


1. Ans. P156,000.
Merchandise Inventory, Jan. 1 120,000
Purchaes (Jan. 1 to Oct. 31) 830,000
Transportation-in 20,000
Purchase returns and allowances (10,000) 840,000
Actual cost of goods available for sale 960,000
Less: Estimated cost of sale* (756,000)
Estimated inventory, October 31 204,000
Inventory not damaged by fire 48,000
Inventory loss due to fire 156,000

*Estimated cost of sale


Gross Sales 1,096,000
Sales returns (40,000)
Employee discount 24,000 1,080,000
Multiply by cost % (100%-30%) 70%
Estimated cost of sale 756,000

2. Ans. P48,000.
Merchandise Inventory, Jan. 1 120,000
Purchaes (Jan. 1 to Oct. 31) 830,000
Transportation-in 20,000
Purchase returns and allowances (10,000) 840,000
Actual cost of goods available for sale 960,000
Less: Estimated cost of sale* (864,000)
Estimated inventory, October 31 96,000
Inventory not damaged by fire 48,000
Inventory loss due to fire 48,000

*Estimated cost of sale


Gross Sales 1,096,000
Sales returns (40,000)
Employee discount 24,000 1,080,000
Divide by Selling Price % (100%+25%) 125%
Estimated cost of sale 864,000

CHAPTER 4-PROBLEM 6: KAGOME COMPANY


1. Ans. P2,225,000.
Collection on AR 1,825,000
Add: AR, December 31, 270,000
Sales returns 25,000
Sales discounts 30,000
Accounts written-off 20,000
Less: AR, January 1 (295,000)
Gross Sales on account 1,875,000
Gross Cash Sales 350,000
Gross Sales 2,225,000

2. Ans. P1,850,000.
Gross Sales 2,225,000
Less: Sales returns (25,000)
Sales for inventory estimation 2,200,000

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3. Ans. P400,000.
Inventory, December 31, 2013 320,000
Purchases 1,410,000
Unrcorded purchases 10,000
Advances to suppliers recorded as purch. (20,000) 1,400,000
Cost of goods available for sale 1,720,000
Less: Estimated cost of sales (P2.2M*60%) (1,320,000)
Estimated Inventory, December 31, 2014 400,000

4. Ans. P80,000.
Estimated Inventory per audit 400,000
Inventory per books 320,000
Inventory shortage 80,000

CHAPTER 4-PROBLEM 7: JIM CORPORATION


11 Mo. Purch 12 Mo. Purch
Unadjusted balances 675,000 800,000
a) May purchases recorded only in June 7,500
b) Unrecorded purch. returns/allow. (1,000) (1,500)
c) Advances to suppliers (2,000) (2,000)
d) May purch in transit, FOB Dest. (5,500)
Adjusted balances 674,000 796,500

Inventory, July 1, 2013 87,500


Purchases, 11 months as adjusted 674,000
Cost of goods available for sale, 11 months 761,500
Inventory, May 31, 2014 95,000
d) May purch in transit, FOB Dest. (5,500) 89,500
Cost of sales, 11 months 672,000

1. Ans. 20%.
Sales, 11 months 840,000 100%
Cost of sales, 11 months 672,000 80%
Gross profit, 11 months 168,000 20%

2. Ans. P98,000.
Sales, 12 months 960,000
Sales, 11 months (840,000)
Sales for the month of June 120,000
e) Sales in June at 0% GP (10,000)
Sales for June at 20% GP 110,000
Multiply by Cost% 80%
Cost of sales (Sales at 20%GP) 88,000
Add: Cost of sales (Sales at 0%GP) 10,000
Total Cost of Sales for June 98,000

3. Ans. P114,000.
Inventory, July 1, 2013 87,500
Purchases, 12 months 796,500
Cost of goods available for sale, 12 months 884,000
Less: Cost of sales, 12 months (P672,000+P98,000) (770,000)
Estimated Inventory, June 30, 2014 114,000

CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION


1. Ans. P50,750.
Purchases, Jan. 1 - March 31 42,000
Payments to suppliers, Apr. 1 - 15
Cash purchases 2,000
Purchases on account (P8,500-P1,300) 7,200
Purchase returns (450) 8,750
Purchases, Jan. 1 to Aprl 15 50,750

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2. Ans. P105,000.
Sales, Jan 1 - March 31 90,400
Collections from customers, Apr. 1 - 15 10,200
Add: AR, April 15 26,400
Write-off of receivables 5,000
Less: AR, March 31 (27,000) 14,600
Sales, Jan. 1 - Apr. 15 105,000

3. Ans. 45%
Total Sales 2012 and 2013 700,000 100%
Cost of sales 2012 and 2013 385,000 55%
Gross profit 2012 and 2013 315,000 45%

4. Ans. P43,000.
Inventory, Dec. 31, 2013 50,000

Purchases, Jan. 1 - Apr. 15 50,750

Cost of goods available for sale 100,750

Estimated cost of sales (105K*55%) 57,750


Estimated Inventory, Apr. 15 43,000

5. Ans. P39,650.
Estimated Inventory, Apr. 15

NRV of remaining inventory


Inventory Loss

CHAPTER 4-PROBLEM 9: DIOSAH INC.

Inventory, October 1, 2013

Purchases

Transportation in

Purchase return

Purchase allowance

Purchase discounts

Departmental transfer out

Departmental transfer in

Net Mark up (P290,000-40,000)

3,265,540 5,267,000 62% Conservative


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

Cost of goods available for sale at retail 5,024,000


Less: COGAS at retail/Sales
Gross sales 4,872,000
Sales returns (355,000)
Normal breakages 50,500
Discounts to employees 75,500 (4,643,000)
Inventory, End at retail price 381,000

1. Ans. P236,220.
Inventory, End at retail price 381,000
Conservative Cost % 62%
Inventory, End at cost 236,220

2. Ans. P247,645.
Inventory, End at retail price 381,000
Average Cost % 65%
Inventory, End at cost 247,645

2. Ans. P251,460.

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

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CHAPTER 4-PROBLEM 10: GLORIA CORPORATION


1. Ans. P540,000; P527,000; P430,000.
Finished goods Item M Item P Item Q
Cost 550,000 540,000 430,000 1,520,000
NRV: Est. Selling Price - Cost to Sell 540,000 527,000 697,000
Required allowance for write-down 10,000 13,000 - (23,000)
Lower of Cost or NRV 1,497,000

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


Work-in-process Item M Item P Item Q
Cost 240,000 188,000 320,000 748,000
NRV: Est. Selling Price - Cost to Sell - Cost to Compl. 240,000 148,000 550,750
Required allowance for write-down - 40,000 - (40,000)
Lower of Cost or NRV 708,000

3. Ans. P1,105,000.
Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.
A B C
Cost 250,000 500,000 400,000 1,150,000
Current purchase price 250,000 480,000 375,000
Required allowance for write-down - 20,000 25,000 (45,000)
1,105,000

4. Ans. P855,000.
Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.
X Y Z
Cost 400,000 300,000 200,000 900,000
Current purchase price 450,000 275,000 180,000
Required allowance for write-down - 25,000 20,000 (45,000)
855,000

5. Ans. P825,000.
Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down.
D E
Cost 375,000 450,000 825,000

6. Ans. P103,000.
Allowance for WD-FG, ending 23,000
Less: Allowance for WD-FG, beg. (10,000)
Loss on write-down - FG 13,000

Allowance for WD-WIP, ending 40,000


Less: Allowance for WD-WIP, beg. -
Loss on write-down - WIP 40,000

Allowance for WD-RM, ending 90,000


Less: Allowance for WD-RM, beg. (40,000)
Loss on write-down - RM 50,000
Total loss on inventory write-down 103,000

MULTIPLE CHOICE EXERCISES:


CHAPTER 4-EXERCISE 1:
1. Ans. A.
Cost of goods out on consignment at another company’s store 2,400,000
Goods in transit purchased FOB shipping point 360,000
Cost of goods sold with repurchase agreement/Inventory financing 900,000
Freight charges on goods purchased 240,000
Factory labor costs incurred on goods still unsold 150,000
Materials on hand not yet placed into production 1,050,000
Raw materials on which the company has started production 840,000
Factory supplies 60,000
Costs identified with units completed but not yet sold 780,000
Cost of goods in transit sold FOB destination 120,000
Total inventories 6,900,000

CHAPTER 4-EXERCISE 2: SILANG CORP.


Cash Acc. Rec. Merch. Invty Acc. Payable Accrued Exp. Cost of Sales
Unadjusted balances 963,200 2,254,000 6,050,000 4,201,000 60,400
(a) (654,600) 310,000

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(b) 360,000 372,400


(c-1) 275,000 (275,000)
(c-2) 217,500 217,500 -
(c-3) (637,500) 637,500
(c-4) 130,000 (130,000)
(c-5) (175,000) (175,000)
Adusted balances 668,600 2,564,000 6,035,000 4,615,900 60,400 57,500
1. Ans. D. 2. Ans. C. 3. Ans. C. 5. Ans. C. 4. Ans. A.

6. Ans. B.
Current Assets
Cash 668,600
Accounts receivables 2,564,000
Merchandise inventory 6,035,000 9,267,600
Current Liabilities
Accounts payable 4,615,900
Accrued expense 60,400 4,676,300
Working Capital Ratio 1.98

CHAPTER 4-EXERCISE 3: IVY INC.


Inventory AR Sales AP Purchases Net Income
a. Goods out on consignment 100,000 (140,000) (140,000) (40,000)
b. Purch in transit (FOB SP) 33,000 33,000 33,000 -
c. Sales in transit (FOB SP) (40,000) (40,000)
d. Sales in transit (FOB Dest) 16,000 16,000
e. Purch in transit (FOB Dest) (22,000) (22,000) 22,000
f. Goods held on consignemnt (50,000) (50,000)
g. Sales in transit (FOB Dest) (112,000) (112,000) (112,000)
Net adjustments: 59,000 (252,000) (252,000) 11,000 11,000 (204,000)
1. Ans. A. 2. Ans. B. 3. Ans. C. 4. Ans. D.

CHAPTER 4-EXERCISE 4: LONE STAR CORP.


Sales Purchases Inventory Accts Rec. Acc. Payable
2,815,000 1,500,000 300,000 250,000 200,000
SI 1024 (23,000) (23,000)
SI 1025 (34,000) (34,000)
SI 1026 (8,000) (8,000)
RR 1115 9,000 9,000
RR 1118 32,000
SI 1023 (50,000) 40,000 (50,000)
SI 1021 (75,000) 60,000 (75,000)
RR 1119 400,000 400,000 401,000
Adjsuted balance 2,625,000 1,909,000 832,000 60,000 610,000
1. Ans. A. 2. Ans. B. 3. Ans. A. 4. Ans. D. 5. Ans. A.

CHAPTER 4-EXERCISE 5: SOFIA INC.


Invty, end Purchases Cost of Sales Net Income
Unadjusted balance 200,000 3,200,000 3,160,000
Beginning of the year:
a. Dec. purchases recorded in Jan. (50,000) (50,000) 50,000
b. Dec. purchases not included in Invty 26,400 (26,400)
End of the year:
a. Unrecorded Dec. sale 86,000
b. Dec. purchases recorded in Jan. 30,000 30,000 (30,000)
c. Dec. purchases not included in Invty 36,000 (36,000) 36,000
d. Dec. purchases 24,000 24,000 - -
Adjusted balances 260,000 3,204,000 3,130,400 115,600
1. Ans. C. 2. Ans. D. 3. Ans. B. 4. Ans. D.

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CHAPTER 4-EXERCISE 6: BIRD COMPANY


Inventory Accts Payable Net Sales
Unadjusted balances 1,870,000 1,415,000 9,693,400
Adjustments: A (78,500)
B 93,000 93,000
C 27,000
D 49,000 (67,800)
E 17,000
F 31,200
G 36,000
H 8,000 16,000
Adjusted balances 2,095,200 1,560,000 9,547,100
1. Ans. A. 2. Ans. B. 3. Ans. D.

CHAPTER 4-EXERCISE 7:
Accts Receiva Inventories Sales Cost of Sales Gross profit
276,500 425,000 1,320,000 842,000 478,000
December recorded sales:
In-tansit FOB, Dest. (8,680) 7,240 (8,680) (7,240) (1,440)
Sipment to consignee (14,200) 12,500 (14,200) (12,500) (1,700)
In-tansit FOB, Dest. (10,000) (10,000) (10,000)
In-transit FOB, SP (6,100) 6,100 (6,100)
Sipment to consignee (14,000) (14,000) (14,000)
January recorded sales:
In-transit FOB, SP 21,000 (18,200) 21,000 18,200 2,800
Adjusted balance 250,620 420,440 1,294,120 846,560 447,560
1. Ans B. 2. Ans. B. 3. Ans. A. 4. Ans. C. 5. Ans. D.

CHAPTER 4-EXERCISE 8: KAMPT COMPANY


Sales Inventories
December 2014 recorded sales
1) (2,000)
3) (2,000)
4) (6,900)
5) (600)
7) (4,000)
8) (10,000)
January 2015 recorded sales
9) 6,000 (4,000)
12) 8,000 (5,500)
Net Adjustment (8,900) (12,100)
1. Ans. A. 2. Ans. A.

CHAPTER 4-EXERCISE 9: MALAGUKU CO.


Purchases Inventories
Unadjusted balances 1,750,000 175,000
RR No. 631 2,000
RR No. 632 (4,000)
RR No. 633 9,000
RR No. 634 8,000
RR No. 635
RR No. 636 (6,000)
RR No. 638 7,200
RR No. 641 4,100
Adjusted balances 1,751,300 194,000
1. Ans. A. 2. Ans. C

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CHAPTER 4-EXERCISE 10: KULA INC.


Inventories Purchases
27,000 650,000
December 2014 entries
Invoice No. 9176 310
Invoice No. 0010 180
Invoice No. 6609 690
Invoice No. 6610 420
Invoice No. 0481 (750)
Invoice No. 3671 290
Invoice No. 6098 (350)
January 2015, entries
Invoice No. 7711 460 460
Invoice No. 9001 770
Invoice No. 4678 315 315
Invoice No. 9981 595 595
Invoice No. 7263 610 610
Goods held on consignment (750)
Deliveries made to customers after count date (1,900)
Adjsuted balances 28,220 651,650
1. Ans. B. 2. Ans. D.

CHAPTER 4-EXERCISE 11: FLORES COMPANY


1. Ans. D.
Per Count Per GL Per "Tab Run"
Unadjusted balances 342,400 384,900 403,300
1 (500)
2 (23,900)
3 (600)
4 (800) (800)
5 4,400
6 (7,500) (7,500)
7 (900)
8 2,100
9 (1,200) (1,200)
10 700
11 30,000
Adjsuted balances 374,300 374,300 374,300

2. Ans. D.

CHAPTER 4-EXERCISE 12: ALDER PAINTS


RM Inventory, beg 15,000
Purchases 50,000
Freight-in 5,000 55,000
RM available for use 70,000
Less: RM Inventory, end (30,000)
RM used 40,000 2. Ans C.
Direct labor 40,000
Factory overhead (45% of Direct labor) 18,000
Total manufacturing cost 98,000
Add: WIP, beg 50,000
Total goods placed into process 148,000 3. Ans. D.
less: WIP, end (Squeeze) 56,750 4. Ans. A.
Cost of goods manufactured (Squeeze) 91,250 1. Ans. D.
Add: Finished goods, beg. 70,000
Cost of goods available for sale 161,250
less: Finished goods, end (60,000)
Cost of sales (estimated)** 101,250

** Sales 150,000
Multiply by Cost rate (100%-32.5%) 68%
Estimated cost of sales 101,250

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CHAPTER 4-EXERCISE 13: NATURAL CORPORATION


Inventory, Jan. 1 80,000
Purchases 400,000
Less: Purchase discounts (40,000)
Purchase returns and allowance (30,000) 330,000
Cost of goods available for sale 410,000
Estimated cost of sale
Sales 380,000
Less: Sales returns (20,000)
Sales for GP method purposes 360,000
Divide by: Selling price % 120% 300,000
Estimated ending inventory 110,000 1. Ans. C.
Less: Inventory not damaged by fire (in-transit) (40,000)
Inventory loss 70,000 2. Ans. C.

CHAPTER 4-EXERCISE 14: BAGUIO CORP.


1. Ans. C.
2011 2012 2013 Total
Sales 5,008,000 5,640,000 5,440,000
Gross Profit 1,502,400 1,466,400 1,849,600
Gross profit % based on sales 30% 26% 34% 90%
Divide by: 3 years 3
Average gross profit rate 30%

2. Ans. A.
Collections from customers Jan. 1 to Sept. 1 6,030,400
Add: AR, Sept. 1 1,031,120
Less: AR, Jan. 1 (1,044,720)
Gross sales (accrual basis) 6,016,800

3. Ans.
Payments to suppliers Jan. 1 to Sept. 1 3,900,000
Add: AP, Sept. 1 982,800
Less: AP, Jan. 1 (705,120)
Gross purchases (accrual basis) 4,177,680

4. Ans.
Inventory, Jan. 1 1,150,800
Purchases 4,177,680
Cost of goods available for sale 5,328,480
Less: Estimated cost of sales
Sales 6,016,800
Multiply by: Cost % (100%-30%) 70% (4,211,760)
Estimated Inventory, Sept. 1 1,116,720

5. Ans. A.
Estimated Inventory, Sept. 1 1,116,720
Goods out on consignment 390,000
Goods in transit as of Sept. 1 139,000 529,000
Inventory loss 587,720

CHAPTER 4-EXERCISE 15: AB CORP.


1. Ans. B.
Sales for 10 months (Jan to Oct) (a) 4,590,000 100%
Cost of Sales 10 months (Jan to Oct) (b) (2,295,000) 50%
Gross profit 2,295,000 50%

(a) Sales 10 months, unadjusted 4,765,000


Less: Delivery in transit (FOB Dest.) (75,000)
Adjusted Sales 10 months 4,690,000
Less: Sales returns and allowance (300,000)
Add: Employee discounts 150,000
Normal breakages 50,000
Sales 10 months, adjusted (for GP comp only) 4,590,000

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(b) Beg Inventory 450,000


Net purchases (as adjusted:)(c) 2,485,000
Cost of Goods Available for sale (10 months) 2,935,000
Less: Inventory, end (550,00+90,000) (640,000)
Cost of Sales (10 months) 2,295,000

(c) Purchases, unadjusted 2,450,000


Add: Purchase in transit FOB shipping point 90,000
Freight in 60,000
Less: Purchase discount (45,000)
Purchase returns and allowance (70,000)
Net purchases (as adjusted) 2,485,000

2. Ans. A.
Sales (12 months), as adjusted (for GP Method)(d) 6,575,000
Sales (10 months), as adjusted (for GP Method) (4,590,000)
Gross Sales for 2 months (for GP Method) 1,985,000
Less: Sales in Dec. at 10% mark-up on cost (110,000)
Sales in Dec. at normal 50% mark-up 1,875,000
Multiply by normal Cost %, under normal GP% 50%
Cost of sales at normal GP rate 937,500
Add: Cost of sales 10% markup on cost 100,000
Total cost of sales for 2 months 1,037,500

(d) Sales 12 months, unadjusted 6,750,000


Less: Sales returns and allowance (12 months) (375,000)
Add: Employee discounts (12 months) 150,000
Add: Normal breakages (12 months) 50,000
Sales 12 months, adjusted 6,575,000

3. Ans. D.
2,295,000
1,037,500
Total Cost of Sales 3,332,500

4. Ans. B.
Inventory, beginning 450,000
Add: Net Purchases (12 months)
Gross Purchases 3,410,000
Freight in 90,000
Purchase discount (70,000)
Purchase returns and allowance (100,000) 3,330,000
Cost of Goods Available for Sale (12 months) 3,780,000
Cost of Sales 12 months (see number 3 solution) (3,332,500)
Estimated ending inventory 447,500

CHAPTER 4-EXERCISE 16: SURETY CORP.


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

Cost of goods available for sale at Retail 6,405,000


Less: Cost of sales at Retail/Sales
Sales 4,470,000
Sales returns (150,000)
Employee discount 400,000 (4,720,000)
Estimated Inventory at Retail 1,685,000

1. Ans. B.

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Estimated Inventory at Retail 1,685,000


Multiply by Cost % - Conservative 49%
Estimated Inventory at Cost 825,650
Less: Inventory per count (649,600)
Inventory shortage 176,050

2. Ans. C.
Estimated Inventory at Retail 1,685,000
Multiply by Cost % - Conservative 56%
Estimated Inventory at Cost 943,600
Less: Inventory per count (649,600)
Inventory shortage 294,000

3. Ans. C.
Estimated Inventory at Retail 1,685,000
Multiply by Cost % - Conservative 61%
Estimated Inventory at Cost 1,027,850
Less: Inventory per count (649,600)
Inventory shortage 378,250

CHAPTER 4-EXERCISE 17: TITANIUM CORP.


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

Cost of goods available for sale at Retail 21,375,000


Less: Cost of sales at Retail/Sales
Sales 19,800,000
Sales returns (450,000)
Employee discount 300,000
Normal Spoilage 600,000 (20,250,000)
Estimated Inventory at Retail 1,125,000

1. Ans. B.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 58%
Estimated Inventory at Cost 652,500
Less: Inventory per count (400,000)
Inventory shortage 252,500

2. Ans. A.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 62%
Estimated Inventory at Cost 697,500
Less: Inventory per count (400,000)
Inventory shortage 297,500

3. Ans. C.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 63%
Estimated Inventory at Cost 708,750
Less: Inventory per count (400,000)
Invntory shortage 308,750

CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES


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CHAPTER 4-EXERCISE 18: NANCY INC.


1. Ans.A.
Item Quantity Unit Cost NRV Lower of Cost or NRV
Z-01 10,000 20 25 20 200,000
Z-02 15,000 25 22 22 330,000
Z-03 20,000 30 26 26 520,000
Z-04 25,000 32 35 32 800,000
Z-05 30,000 35 30 30 900,000
Y-01 20,000 22 23 22 440,000
Y-02 22,000 28 25 25 550,000
Y-03 28,000 25 30 25 700,000
Y-04 25,000 30 25 25 625,000
Y-05 30,000 15 25 15 450,000
5,515,000
2. Ans.
Total Cost 5,981,000
Lower of Cost or NRV 5,515,000
Loss on inventory write-down 466,000

3. Ans. B.
Class Z: Quantity Unit Cost NRV Total Cost Total NRV LCorNRV
Z-01 10,000 20 25 200,000 250,000
Z-02 15,000 25 22 375,000 330,000
Z-03 20,000 30 26 600,000 520,000
Z-04 25,000 32 35 800,000 875,000
Z-05 30,000 35 30 1,050,000 900,000
3,025,000 2,875,000 2,875,000
Class Y:
Y-01 20,000 22 23 440,000 460,000
Y-02 22,000 28 25 616,000 550,000
Y-03 28,000 25 30 700,000 840,000
Y-04 25,000 30 25 750,000 625,000
Y-05 30,000 15 25 450,000 750,000
2,956,000 3,225,000 2,956,000
5,831,000
2. Ans.
Total Cost 5,981,000
Lower of Cost or NRV 5,831,000
Loss on inventory write-down 150,000

CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION


Markers Pens Pencils
Historical cost 24,000 18,880 30,000
Selling price 36,000 21,800 38,000
Estimated cost to complete (3,000) (2,620) (6,200)
Estimated cost to sell (1,800) (2,180) (3,800)
Net realizable value 31,200 17,000 28,000
Lower of cost or NRV 24,000 17,000 28,000 69,000

1. Ans. B.
Total Cost 72,880
Lower of cost or NRV 69,000
Loss on write-down 3,880

2. Ans. B.
Total Cost 72,880
Lower of cost or NRV 69,000
Allowance for write-down, end 3,880
Allowance for write-down, beg. 2,000
Loss on write-down 1,880

3. Ans. B.
Total Cost 72,880
Lower of cost or NRV 69,000
Allowance for write-down, end 3,880
Allowance for write-down, beg. 5,000
Gain on recovery (1,120)

4. Ans. C.

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CHAPTER 4-EXERCISE 20:OCTOBER INC.


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

2. Ans. B.
Work-in-process Item A Item B Item C
Direct Materials 30,000 45,000 75,000
Direct Labor 50,000 65,000 35,000
Overhead 25,000 40,000 80,000
Total Cost 105,000 150,000 190,000
Selling price upon completion 200,000 250,000 240,000
Cost to complete (50,000) (60,000) (40,000)
Cost to sell (% of Sellin price) (40,000) (75,000) (24,000)
NRV 110,000 115,000 176,000
Lower of cost or NRV 105,000 115,000 176,000 396,000

3. Ans. B.
RM - Item A (FG not written-down, thus RM - Item A shall not be tested anymore.
RM A-01 RM A-02
Cost 120,000 95,000 215,000

RM - Item B RM B-01 RM B-02 RM B-03


Cost 80,000 105,000 110,000
NRV (Replacement cost) 100,000 98,000 100,000
80,000 98,000 100,000 278,000

RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore.
RM C-01 RM C-02
Cost 175,000 40,000 215,000
Total Lower of Cost or NRV 708,000

4. Ans. D.
FG WIP RM
Cost 2,500,000 445,000 725,000
Lower of Cost or NRV 2,350,000 396,000 708,000
Loss on write-down 150,000 49,000 17,000 216,000

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

CHAPTER 4-EXERCISE 21:SOLSONS COMPANY


Quantity Cost NRV Amount at Lower of Cost or NRV
A 360 units 3.60/dozen 3.64/dozen 108.00 - 360/12per dozen*P3.60
B 24 units 4.70 each 4.80 each 112.80
C 28 units 16.50 each 16.50 each 462.00
D 43 units 5.15 each 5.20 each 221.45
E 400 units 9.10 each 8.10 each 3,240.00
F 70 dozens 2.00 each 2.00 each 1,680.00 - 70*12 per dozen*P2
G 95 grosses 144.00/gross 12,540.00
18,364.25 Ans. A.

CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES


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CHAPTER 5: AUDIT OF INVESTMENTS

DISCUSSION PROBLEMS
CHAPTER 5-PROBLEM 1
1D
2 A
3 C
4 C
5 C
6 D
7 A
8 A

CHAPTER 5-PROBLEM 2: KILALA CORP.


CASE 1: FA at Amortized Cost
1. Ans.P1,038,896.
January 1, 2014:
Financial asset at amortized cost 1,038,896
Cash 1,038,896
Quoted price (P1M*95%) 950,000
Transaction cost 88,896
Initial cost 1,038,896

Amortization table: FA at Amortized Cost


Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January 1, 2014: 1,038,896
December 31, 2014: 93,501 100,000 (6,499) 1,032,397
December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:


Cash 100,000
Interest income 100,000

Interest income 6,499


FA at amortized cost 6,499
2. Ans. P93,501.

December 31, 2015:


Cash 100,000
Interest income 100,000

Interest income 7,084


FA at amortized cost 7,084
3. Ans. P92,916.

4. Ans. P1,025,312.

5. Ans. P24,688 gain


Sales proceeds (1/1/16) 1,050,000
Less: Carrying Value/Amortized cost 1,025,312
Realized gain on sale 24,688

CASE 2: FA at FMV through Profit or Loss


1. Ans. P950,000.
January 1, 2014:
FA at FMV (P1M*95%) 950,000
Expense 88,896
Cash 1,038,896

December 31, 2014:


Cash 100,000
Interest Income (P1M*10%) 100,000

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

2. Ans. P261,104.
Transaction cost (Expense) (88,896)
Interest income 100,000
Unrealized holding gain 250,000
Net investment income 261,104

CHAPTER 5: AUDIT OF INVESTMENTS


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December 31, 2015:


Cash 100,000
Interest Income (P1M*10%) 100,000

Unrealized holding loss 150,000


FA at FMV 150,000
Fair Value (12/15): P1M*105% 1,050,000
Carrying value 1,200,000
Unrealized holding loss - P/L (150,000)

3. Ans. (P50,000)
Interest income 100,000
Unrealized holding loss (150,000)
Net investment loss (50,000)

4. Ans. P1,050,000.

5. Ans.0
Sales proceeds (1/1/16) 1,050,000
Less: Carrying Value/FMV, 12/31/15 1,050,000
Realized gain on sale -

CASE 3: AVAILABLE FOR SALE SECURITY


1. Ans.P1,038,896.
January 1, 2014:
Available for sale security 1,038,896
Cash 1,038,896
Quoted price (P1M*95%) 950,000
Transaction cost 88,896
Initial cost 1,038,896

Amortization table: Available for sale security


Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January 1, 2014: 1,038,896
December 31, 2014: 93,501 100,000 (6,499) 1,032,397
December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:


Cash 100,000
Interest income 100,000

Interest income 6,499


Available for sale security 6,499

Available for sale security 167,603


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

2. Ans. P93,501
Interest income - P/L (2014) 93,501

December 31, 2015:


Cash 100,000
Interest income 100,000

Interest income 7,084


Available for sale security 7,084

Unrealized holding loss - OCL of SCI 142,916


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

3. Ans. (P142,916)
Unrealized holding loss - OCL of SCI (201 (142,916)

4. Ans. P24,688.
Unrealized holding gain - SHE, end 24,688

5. Ans. P1,050,000.

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6. Ans. P24,688 gain


Sales proceeds (1/1/16) 1,050,000
Less: Carrying Value/Amortized cost -
Realized gain on sale 1,050,000

CHAPTER 5-PROBLEM 3: SOTA CORPORATION


CASE 1: FA at Amortized Cost
1. Ans. P10,758,157.
January 1, 2014:
Financial asset at amortized cost 10,758,157
Cash 10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921) 6,209,213 0.620921
Interest (P1,200,000*3.790787) 4,548,944 3.790787
Initial cost 10,758,157

Amortization table: FA at Amortized Cost


Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January 1, 2014: 10,758,157
December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973
December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370
June 30, 2016: 524,869 600,000 (75,131) 10,422,239

December 31, 2014:


Cash 1,200,000
Interest income 1,200,000

Interest income 124,184


FA at amortized cost 124,184
2. Ans. P1,075,816.

December 31, 2015:


Cash 1,200,000
Interest income 1,200,000

Interest income 136,603


FA at amortized cost 136,603
3. Ans. P1,063,397.

4. Ans. P10,497,370.

5. Ans. P622,239 loss


Sales proceeds (6/30/16) 10,400,000
Less: Carrying Value/Amortized cost (10,422,239)
Accrued interest (600,000)
Realized loss on sale (622,239)

CASE 2: FA at FMV through Profit or Loss


1. Ans. P10,758,157.
January 1, 2014:
FA at FMV 10,758,157
Cash 10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921) 6,209,213 0.620921
Interest (P1,200,000*3.790787) 4,548,944 3.790787
Initial cost 10,758,157

December 31, 2014:


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

FA at FMV 213,759
Unrealized holding gain 213,759
Fair Value (12/14)** 10,971,916
Carrying value 10,758,157
Unrealized holding gain - P/L 213,759
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425) 7,084,252 0.708425
Interest: (P1,200,000*3.239720) 3,887,664 3.239720
FMV (12/14) 10,971,916

2. Ans. P1,413,759.
Interest income 1,200,000
Unrealized holding gain 213,759
Net investment income 1,413,759

CHAPTER 5: AUDIT OF INVESTMENTS


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December 31, 2015:


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

FA at FMV 58,923
Unrealized holding gain - P/L 58,923
Fair Value (12/15)** 11,030,839
Carrying value 10,971,916
Unrealized holding gain - P/L 58,923
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832) 7,938,322 0.793832
Interest: (P1,200,000*2.577097) 3,092,516 2.577097
FMV (12/15) 11,030,839

3. Ans. P1,258,923.
Interest income 1,200,000
Unrealized holding gain 58,923
Net investment income 1,258,923

4. Ans. P11,030,839.

5. Ans. P1,230,839 loss


Sales proceeds (6/30/16) 10,400,000
Less: Carrying Value/Amortized cost (11,030,839)
Accrued interest (600,000)
Realized loss on sale (1,230,839)

CASE 3: AVAILABLE FOR SALE SECURITY


1. Ans. P10,758,157.
January 1, 2014:
Available for sale security 10,758,157
Cash 10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921) 6,209,213 0.620921
Interest (P1,200,000*3.790787) 4,548,944 3.790787
Initial cost 10,758,157

Amortization table: Available for sale security


Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January 1, 2014: 10,758,157
December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973
December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370

December 31, 2014:


Cash 1,200,000
Interest income 1,200,000

Interest income 124,184


Available for sale security 124,184

Available for sale security 337,943


Unrealized holding gain-OCI 337,943
Fair Value (12/14)** 10,971,916
Amortized cost (12/14) 10,633,973
Unrealized holding gain - OCI of SCI 337,943
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425) 7,084,252 0.708425
Interest: (P1,200,000*3.239720) 3,887,664 3.239720
FMV (12/14) 10,971,916

2. Ans. P1,075,816.
Interest income - P/L (2014) 1,075,816

December 31, 2015:


Cash 1,200,000
Interest income 1,200,000

Interest income 136,603


Available for sale security 136,603

Available for sale security 195,526


Unrealized holding gain-OCI of SCI 195,526
Fair Value (12/15): P1M*105% 11,030,839
Amortized cost (12/15) 10,497,370
Unrealized holding gain - SHE, end 533,468
Unrealized hoding gain - SHE, beg 337,943
Unrealized holding gain - OCI of SCI 195,526
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832) 7,938,322 0.793832
Interest: (P1,200,000*2.577097) 3,092,516 2.577097
FMV (12/15) 11,030,839

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3. Ans. P195,526.
Unrealized holding gain - OCI of SCI (201 195,526

4. Ans. P533,468
Unrealized holding gain - SHE, end 533,468

5. Ans. P11,030,839.

6. Ans. P622,239 loss


Sales proceeds (6/30/16) 10,400,000
Less: Carrying Value/Amortized cost -
Accrued interest (136,603)
Realized loss on sale 10,263,397

CHAPTER 5-PROBLEM 4: ABC COMPANY


1. Ans. P35,479.
FMV (12/31/14) 6,229,862
Carrying value 6,194,383
Unrealized holding gain - P/L 35,479

2. Ans. P6,229,862.

3. Ans. 0.
The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015. Instead what shall be recognized is the
unrealized holding gain or loss from the FA's remeasurement since it will still be treated as FA at FMV at the end of 2015.

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


Unrelized holding loss - P/L 15,870
FA at FMV 15,870

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


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

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


5. Ans. P6,111,111.
Amortization table: FA at Amortized cost at 8% effective rate:
Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ.*nom%) 1 5,144,032.92
December 31, 2015: 6,213,992 2 1,069,958.85
December 31, 2016: 497,119 600,000 (102,881) 6,111,111 6,213,992
December 31, 2017: 488,889 600,000 (111,111) 6,000,000

CHAPTER 5-PROBLEM 5: ABC COMPANY


1. Ans. P6,151,877.
Amortization table: FA at amortized cost at 9%
Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ.*nom%)
January 1, 2014: 6,194,383
December 31, 2014: 557,494 600,000 (42,506) 6,151,877
December 31, 2015: 553,669 600,000 (46,331) 6,105,546

2. Ans. (P138,865)
Proceeds from sale (P5,897,249*4/6) 3,931,499
Carrying value (P6,105,546*4/6) 4,070,364
Realized loss on partial sale (138,865)

3. Ans. 0.
The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015.

4. Ans. P7,345.
Unrealized gain/loss on transfer on Janaury 1, 2016:
FMV of remaining investment (P5,897,249*2/6) 1,965,750
Carrying value of remaining inv. (P6,105,546*2/6) 2,035,182 (69,432)
Unrealized gain/loss on remeasurement on December 31, 2016:
FMV (12/31/16) 1,973,094
CV (FMV at 12/31/15) 1,965,750 7,345
Net unrealized holding gain or loss in the 2016 profit or loss (62,088)

5. Ans. P1,973,094.

CHAPTER 5-PROBLEM 6: BET CO.


Amortization table: FA at amortized cost at 10%.
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
January 1, 2014: 9,241,843
December 31, 2014: 924,184 800,000 124,184 9,366,027
December 31, 2015: 936,603 800,000 136,603 9,502,630

CHAPTER 5: AUDIT OF INVESTMENTS


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1. Ans. P4,667,769.
Amortized cost, December 31, 2015: 9,502,630
Accrued interest, December 31, 2015: 800,000 10,302,630
Present value of new future cash flows at 10%
Principal: (P10M*75%)*0.751315 5,634,861 0.7513148
Impairment loss 4,667,769

2. Ans. P6,198,347.
Amortization table: FA at amortized cost after impairment:
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
December 31, 2015: After Impairment 5,634,861
December 31, 2016: 563,486 - 563,486 6,198,347

3. Ans. P1,239,669.
Amortized cost, December 31, 2016 6,198,347
Present value of revised cash flows at 10%
Principal (P10M*90%)*0.826446 7,438,017 0.826446
Impairment recovery gain 1,239,669

4. Ans. P8,181,818.
Amortization table: FA at amortized cost after impairment recovery:
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
December 31, 2016: After Impairment recovery 7,438,017
December 31, 2017: 743,802 - 743,802 8,181,818

CHAPTER 5-PROBLEM 7: ABC CORPORATION


1. Ans.
FA at FMV 25,000
Unrealized holding gain 25,000
FMV (12/14) CV (excluding transaction cost)
Alpha 300,000 250,000
Beta 475,000 500,000
Total 775,000 750,000
Unrealized holding gain - P&L 25,000

2. Ans.
Unrealized holding loss - OCL of SCI 30,000
FA at FMV through OCI/L 30,000
Charlie, FMV (12/14) 850,000
Carrying value, including transaction cost 880,000
Unrealized holding loss - OCL of SCI (30,000)

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

4. Ans.
FA at FMV 100,000
Unrealized holding gain - P&L 100,000
FMV (12/15) CV (FMV 12/14)
Alpha 350,000 300,000 *reclassification is not allowed, thus Alpha is still
Beta 525,000 475,000 regarded as FA at FMV through OCI/L.
Total 875,000 775,000
Unrealized holding gain - P&L 100,000

5. Ans.
Unrealized holding loss - OCL of SCI 100,000
FA at FMV through OCI/L 100,000
Charlie, FMV (12/15) 750,000
Carrying valuu (FMV 12/14) 850,000
Unrealized holding loss - OCL of SCI (100,000)

6. Ans. P875,000.

7. Ans. P750,000.

8. Ans. P3,260,000.
Delta Securities - Investment in Associate
Acquisition cost, including transaction cost 1,650,000
Share from net income (P2.5M*25%) 625,000
Share from forex loss (P500K*25%) (125,000)
Share from dividends (P200K*25%) (50,000)
Carrying value, 12/31/14 2,100,000
Additional Investment 500,000
Share from net income (P1.9M*30%) 570,000
Share from forex gain (P600K*30%) 180,000
Share from dividends (P300K*30%) (90,000)
Carrying value, 12/31/15 3,260,000

CHAPTER 5: AUDIT OF INVESTMENTS


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CHAPTER 5-PROBLEM 8: ETC INC.


Case 1: PAS 39
1. Ans. P51,000.
FMV (12/13) Cost
Aye Co. 50,000 45,000
Bee Inc. 250,000 300,000
Si Corp. 30,000 36,000
330,000 381,000
Unrealized holding loss - SHE (51,000)

2. Ans. (P30,000)
Proceeds from sale (15,000*P8) 120,000
Original cost (P300,000/30,000)*15,000 150,000
Realized loss on sale (30,000)

3. Ans. (P72,000)
FMV (12/14) Cost
Bee Inc. 90,000 150,000
Si Corp. 24,000 36,000
114,000 186,000
Impairment loss - P&L (72,000)

4. Ans. P15,000.
FMV (12/14) Cost/Impaired value
Aye Co. 60,000 45,000
Bee Inc. 90,000 90,000
Si Corp. 24,000 24,000
174,000 159,000
Unrealized holding gain - SHE 15,000

5. Ans. P174,000.

Case 2: PFRS 9
1. Ans. P51,000.
FMV (12/13) CV
Aye Co. 50,000 45,000
Bee Inc. 250,000 300,000
Si Corp. 30,000 36,000
330,000 381,000
Unrealized holding loss - SHE (51,000)

2. Ans. None.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

3. Ans. None
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.

4. Ans. P15,000.
FMV (12/14) Cost
Aye Co. 60,000 45,000
Bee Inc. 90,000 150,000
Si Corp. 24,000 36,000
174,000 231,000
Unrealized holding loss - SHE (57,000)

5. Ans. P174,000.

CHAPTER 5-PROBLEM 9: ETC INC.


Case 1: PAS 39
1. Ans. None.
Once equity security investment categorized as financial asset through OCI/L has been impaired due to permanent decline,
any recovery from the previous impairment shall not be recognized in the profit or loss, but shall be recognized as unrealized
holding gain in the OCI/L.

2. Ans. P300,000 and P141,000.


FMV (12/15) Cost/Impaired value
Aye Co. 75,000 45,000
Bee Inc. 175,000 90,000
Si Corp. 50,000 24,000
300,000 159,000
Unrealized holding gain - SHE 141,000

Case 2: PFRS 9
1. Ans.
No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding loss
in the OCI/L.

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


FMV (12/15) Cost
Aye Co. 75,000 45,000
Bee Inc. 175,000 150,000
Si Corp. 50,000 36,000
300,000 231,000
Unrealized holding gain - SHE 69,000

CHAPTER 5-PROBLEM 10: SHIPO CO.


1. Ans. P2,000,000.
Acquisition price 14,000,000
Book value of net assets acquired (P48M*25%) (12,000,000)
Total excess 2,000,000
Identifiable asset:
Depreciable asset: (P1.2M*25%) 300,000
Land (P6M*25%) 1,200,000 1,500,000
Unidentifiable asset/Goodwill 500,000
Divide by: 25%
Total Goodwill based on 25% in terest of Shipo 2,000,000

2. Ans. P2,670,000
Share from net income (P10.8M*25%) 2,700,000
Less: Understated Depr (P300,000/10y) (30,000)
Share from net income 2,670,000

3. Ans. P16,345,000.
Initial cost 14,000,000
Share from net income 2,670,000
Share from UHGain-OCI (P800K*25%) 200,000
Share from dividends (P2.1M*25%) (525,000)
Carrying value, 12/31/14 16,345,000

4. Ans. P805,000.
Realized Unrealized Total
Proceeds from portion sold (25,000*40%)*(P680-P5) 6,750,000 6,750,000
Fair value of remaining portion to be reclassified:
(25,000*60%)*P680 10,200,000 10,200,000
Carrying value of Investment in Associate:
Sold (P16,345,000*40%) (6,538,000) (6,538,000)
Reclassified (P16,345,000*60%) (9,807,000) (9,807,000)
Gain on cessation before recycling of OCI/L 212,000 393,000 605,000
Recycling of OCI to P&L
Sold (P200,000*40%) 80,000 80,000
Reclassified (P200,000*60%) 120,000 120,000
Total cessation gain - P&L 292,000 513,000 805,000
5. Ans. 6. Ans.

7. Ans. P171,000.
#shares #shares outs. % interest
Proportionate interest before dilution 25,000 100,000 25%
Proportionate interest after dilution 25,000 125,000 20%
Decrease in interest 5%

Share from increase in capital due to share issuance:


(25,000sh*P680)*20% 3,400,000
Prorated CV of portion deemed sold:
P16,345,000*(5%/25%) (3,269,000)
Gain on dilution before recycling of OCI/OCL 131,000
Recycling of OCI to P&L: P200,000*(5%/25%) 40,000
Gain on dilution 171,000

CHAPTER 5-PROBLEM 11: ANALEN INC.


Case 1: “Cost-Based Approach, with Catch-up Adjustment”:
1. Ans. P110,000.
Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Share from Net Income in 2015 110,000

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2. Ans. P3,176,000.
January 1, 2014 Cost (10%) 700,000
Share from Net Income, 2014 (P400,000*10%) 40,000
Share from Dividends, Oct. 1, 2014 (10,000*P0.90) (9,000)
Carrying value, 12/31/14 had equity method been used 731,000
Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000
Share from Dividends, Apr. 1, 2015 (10,000*P1.10) (11,000)
Additional investment, July 1, 2015 (30%) 2,400,000
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Carrying value, 12/31/2015 3,176,000

Case 2: “Cost-Based Approach, without Catch-up Adjustment”:


1. Ans. P91,000.
Dividends Income, April 1, 2015 (10,000*P1.10) 11,000
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Share from Net Income in 2015 91,000

2. Ans. P3,126,000.
January 1, 2014 Original Cost (10%) 700,000
Additional investment, July 1, 2015 (30%) 2,400,000
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Carrying value, 12/31/2015 3,126,000

Case 3: ““Fair Market Value Approach, without Catch-up Adjustment”


1. Ans. P91,000.
Dividends Income, April 1, 2015 (10,000*P1.10) 11,000
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Share from Net Income in 2015 91,000

2. Ans. P3,226,000.
Original Investment at prevailing FMV on July 1, 2015 (10%)
10,000sh*(P2.4M/30K) 800,000 - the prevailing FMV is based on the current
Additional investment, July 1, 2015 (30%) 2,400,000 selling price of the additional shares.
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Carrying value, 12/31/2015 3,226,000

CHAPTER 5-PROBLEM 12: KIKIO CORPORATION


Case 1: Fair Value Method
1. Ans. P12,500,000.
Fair Market Value 12/31/2014 12,500,000

2. Ans. P2,000,000.
Fair Market Value 12/31/2014 12,500,000
Carrying value (Acquisition cost 1/1/2014 10,500,000
Unrealized holding loss - P&L 2,000,000

3. Ans. P11,000,000.
Fair Market Value 12/31/2015 11,000,000

4. Ans. (P1,500,000)
Fair Market Value 12/31/2015 11,000,000
Carrying value (FMV, 12/31/2014) 12,500,000
Unrealized holding loss - P&L (1,500,000)

5. Ans. P10,000,000.
June 30, 2016 FMV P10,000,000

6. Ans. (P1,000,000)
June 30, 2016 FMV upon reclassification 10,000,000
Carrying value (FMV 12/31/15) 11,000,000
Unrealized holding loss - P&L (1,000,000)

7. Ans. (P1,000,000)
Proceeds from sale 10,000,000
Carrying value (FMV 12/31/15) (11,000,000)
Realized loss from sale (1,000,000)

Case 2: Cost Method


1. Ans. P9,450,000.
Cost 10,500,000
Accum Depr: (P10.5M/10)*1yr (1,050,000)
Carrying value 9,450,000 *lower than FMV, P12.5M, thus not impaired.

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2. Ans. P8,400,000.
Cost 10,500,000
Accum Depr: (P10.5M/10)*2yrs (2,100,000)
Carrying value 8,400,000 *lower than FMV, P10.5M, thus not impaired.

3. Ans. P7,875,000 and None.


Cost 10,500,000
Accum Depr: (P10.5M/10)*2.5yrs (2,625,000)
Carrying value, July 1, 2016 7,875,000 *lower than FMV, P10M, thus not impaired.

4. Ans. P2,125,000.
Proceeds from sale 10,000,000
Carrying value, July 1, 2016 (7,875,000)
Realized gain from sale 2,125,000

CHAPTER 5-PROBLEM 13: PULITZER INC.


January 1, 2010:
Life insurance expense 180,000
Cash 180,000

January 1, 2011:
Life insurance expense 180,000
Cash 180,000

January 1, 2012:
Life insurance expense 180,000
Cash 180,000

December 31, 2012:


Cash surrender value 180,000
Retained earnings (180,000*2/3) 120,000
Life insurance expense 60,000

January 1, 2013:
Life insurance expense 180,000
Cash 180,000

July, 2013:
Cash 5,000
Life insurance expense 5,000

December 31, 2013:


Cash surrender value 60,000
Life insurance expense 60,000
CSV, Dec. 31, 2013 240,000
CSV, Dec. 31, 2012 180,000
Increase in CSV for 2013 60,000

January 1, 2014:
Life insurance expense 180,000
Cash 180,000

August, 2014:
Cash 7,000
Life insurance expense 7,000

September 30, 2014:


Cash surrender value 37,500
Life insurance expense 37,500
CSV, 12/31/2014 290,000
CSV, 12/31/2013 240,000
Increase for the year 50,000
Multiply by: 9months/12months 75%
Increase up to 9/30/14 37,500

December 1, 2014:
Cash 5,000,000
Cash surrender value (9/30/14) 277,500
Life insurance expense (180,000*3/12) 45,000 *unexpired portion as of date of death
Gain on life insurance policy settlement 4,677,500

1. Ans. P180,000; P120,000; P115,000.


2011 2012 2013
Annual insurance premium 180,000 180,000 180,000
Increase in cash surrender value - (60,000) (60,000)
Dividends from CSV (5,000)
Life insurance expense 180,000 120,000 115,000

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2. Ans. P0; P180,000; P240,000

3. Ans. P90,500.
Annual insurance premium 180,000
Unexpired insurance premium as of date of death (45,000)
Dividend from CSV (7,000)
Increasein CSV up to date of death (37,500)
Life insurance expense, 2014 90,500

4a) Ans. P4,677,500


4b) Ans. None.

MULTIPLE CHOICE EXERCISES:


CHAPTER 5-EXERCISE 1:
1. Ans. C.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
profits/losses 100,000
Debt security of another company quoted in an active market. Business
model of the company has an objective to hold debt securities for short-
term profits. 100,000
Total financial asset at FMV through P&L 200,000

2. Ans. A.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
other comprehensive income/losses 150,000

3. Ans. B.
Debt security of another company quoted in an active market. Business
model of the company has an objective of collecting contractual cash-
flows from the bonds which are primarily in the form of interests and 500,000
principal.

4. Ans. B.
20% Equity securities of another company quoted in an active market 500,000

5. Ans. D.
51% Equity securities of another company quoted in an active market 1,400,000

6. Ans. B.
Real property held for speculation purposes 700,000
Real property of a manufacturing business being leased out to another party
under operating lease 900,000
Land held for undetermined future use 800,000
Real property being developed as an investment property 300,000
Total Investment Property 2,700,000

CHAPTER 5-EXERCISE 2: PINAY CORP.


1. Ans. A.
Proceeds (50,000*58) 2,900,000
Carrying Value (50,000*55) 2,750,000
Realized gain 150,000

2. Ans. C.
Proceeds (15,000*59) 885,000
Original Cost (15,000*60) 900,000
Realized loss (15,000)

3. Ans. D.
Proceeds 1,100,000
Accrued interest (50,000)
Carrying Value (P2,035,182/2) (1,017,591) *half of the carrying value which is the fair value on 12.31.13
Realized gain 32,409

FMV=Present value of future cash flows at 9% yield rate


Principal (P2,000,000*0.84168) 1,683,360 2,000,000 0.8416800
Interest (P200,000*1.759111) 351,822 200,000 1.7591112
CV/FMV 12/31/2013 2,035,182

4. Ans. A.
Proceeds 1,100,000
Accrued interest (50,000)
Carrying Value (P1,973,866/2) (986,933) **half of the carrying value which is the amortized cost on 6/30/14
Realized gain 63,067

Amortization table: Correct interst Nominal Inters Amortization Balance


1/1/13: 1,951,126
12/31/13: 214,624 200,000 14,624 1,965,750
6/30/14: 108,116 100,000 8,116 1,973,866

5. Ans A.
Alpha shares (FMV through P/L) - (50,000sh*62) 3,100,000

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6. Ans. B.
Alpha sahres (FMV through P/L) 3,100,000
Delta bonds (FMV through P/L) 982,143 ***
Total Current Investment 4,082,143

FMV=Present value of remaining future cash flows at yield rate 12%


Principal (P1,000,000*0.892857) 892,857 1,000,000 0.892857
Interest (P100,000*0.892857) 89,286 100,000 0.8928571
982,143

CHAPTER 5-EXERCISE 3: BENSHOPPE INC.


1. Ans. C.
2. Ans. C.
FMV 12/14 CV/Cost
Aye Corp. Shares 700,000 540,000 (29.50-2-0.50)*20,000sh
Bee Inc. Shares 1,000,000 1,080,000 (27.50-.50)*40,000sh
See Co. 10%, 2M Bonds* 1,964,948 1,923,000 (1,973,000-50,000)
3,664,948 3,543,000
Unrealized holding gain - IS 121,948
Financial assets at FMV through P&L 3,664,948
See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual prevailing effective rate)
Principal (2M*0.8072) 1,614,433 1
Interest (100,000*3.5052) 350,515
* 1,964,948
3. Ans. C.
Investment in Dee Shares (Associate)
Intial cost (6/30/14) 2,400,000
Share from dividends (250,000)
Share from net income 280,000 (2,240,000*6/12)*25%
Investment in Assoc Balance 2,430,000

4. Ans. B.
Transactions costs - Expense
Aye Corp. Shares (10,000)
Bee Inc. Shares (20,000)
Dividend income - Bee Inc. 120,000
Interest income - See Co. 50,000
Unrealized holding gain - FA 121,948
Share from net income - Dee Corp. 280,000
Total/Net Investment income 541,948

5. Ans. D.
See Co Bonds at amortized cost 1,930,690
Dee Corp. Shares - Assoc. 2,430,000
Total noncurrent investmetns 4,360,690

Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct Int. Nominal Int. Amortization Balance
October 1, 2014: 1,923,000 *excluding accrued interest
December 31, 2014: 57,690 50,000 7,690 1,930,690

Alternative Solution: Financial asset at amortized cost: See Co 10%, 2M Bonds


Amortized cost shall be PV of cash flows using original effetive rate (6% semi-annually)
Principal (2,000,000*0.7921) 1,584,187 0.7921
Interest (100,000*3.4651) 346,511 3.4651
Amortized cost, 12/31/14 1,930,698

6. Ans. D.
Transactions costs - Expense
Aye Corp. Shares (10,000)
Bee Inc. Shares (20,000)
Dividend income - Bee Inc. 120,000
Interest income - See Co. 57,690 *(1,923,000*12%*3/12)
Unrealized holding gain - FA 80,000 UHG from Aye and Bee only
Share from net income - Dee Corp. 280,000
Total/Net Investment income 507,690

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CHAPTER 5-EXERCISE 4: SITAW CORP.


1. Ans. A.
Proceeds from sale of half of SIBUY bonds 51,250,000
Amortized cost October 16, (face value) 50,000,000
Realized gain on sale 1,250,000

2. Ans. B.
FMV Cost
PATATAS (1M*P64) 64,000,000 62,000,000 *reclassification to FA through P&L not allowed.
BAWA (250,000*P74) 18,500,000 20,000,000
82,500,000 82,000,000
Unrealized holding gain - SHE 500,000

3. Ans. C.
Interest from SIBUY bonds (Apr. 15 to Oct. 15): P100M*10%*6/12 5,000,000
Interest from remaining SIBUY bonds (Oct. 15 - Dec. 31): P50M*10%*2.5/12 1,041,667
Cash dividends from PATATAS 1,500,000
Total interest and dividends income, 2013 7,541,667

4. Ans. A.
Proceeds from sale of half of PATATAS (500,000sh*P65) 32,500,000
Original cost (P62,000,000/2) 31,000,000
Realized gain on sale, under PAS 39 1,500,000

5. Ans. D.
Proceeds from sale of all BAWA shares (250,000sh*P78) 19,500,000
Original cost 20,000,000
Realized loss on sale, under PAS 39 (500,000)

CHAPTER 5-EXERCISE 5: MARIAH CORP.


1. Ans. A.
Proceeds from sale (9,000*65) 585,000
Original cost 441,000
Realized gain on sale (PAS 39) 144,000

2. Ans. C.
FMV (12/14) Cost
DEF Corp. Shares 1,140,000 1,080,000
GHI Corp.Shares 348,000 360,000
JKL Shares 323,400 325,400
1,811,400 1,765,400
Unrealized holding gain - SHE 46,000

3. Ans. A.
IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES
FMV (12/14) CV (FMV 12/13)
DEF Corp. Shares 1,140,000 1,050,000
GHI Corp.Shares 348,000 369,600
JKL Shares 323,400 315,000
1,811,400 1,734,600
Unrealized holding gain - SHE 76,800

4. Ans. B.
IF JKL SHARES IS INVESTMENT IN ASSOCIATE:
Initial cost (including transaction cost) 325,400
Share from dividends (0.75*4200) (3,150)
Sahre from net income (450,000*20%*8/12) 60,000
Carrying Value, 12.31.14 382,250

CHAPTER 5-EXERCISE 6: ANGEL CORP.


1. Ans. D. Fair Value
Dec. 31, 2014 Dec. 31, 2014 Total FMV
Uno shares 10,000 160 1,600,000
Dos shares 11,000 105 1,155,000
Tres shares 18,000 140 2,520,000
Quatro bonds 2,000,000 8% yield 2,071,331 *
7,346,331
**FMV=Present value of cash flows at 8% 2,000,000 0.85734
Principal (P2,000,000*0.85734) 1,714,678 200,000 1.783265
Interest (P200,000*1.783265) 356,653
Total Fair Value 2,071,331

Carrying values before year-end remeasurement


# of shares CV Dec. 31,
Uno shares 10,000 145 1,450,000
Dos shares 11,000 72.73 800,000
Tres shares 18,000 100 1,800,000
Quatro bonds 2,000,000 12% yield 1,903,927 **
Total Carrying Value 5,953,927

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**Acquisition cost=Present value of cash flows at 12% 2,000,000 0.85734


Principal (P2,000,000*0.711780) 1,423,560 2,000,000 0.711780 200,000 1.783265
Interest (P200,000*2.401831) 480,366 200,000 2.401831
Total Fair Value 1,903,927
Unrealized holding gain - P&L

2. Ans. B.
Fair market value, Dec. 31, 2014 7,346,331
Carrying value 5,953,927
Unrealized holding gain - P&L 1,392,404

3. Ans. B.
Proceeds from sale:
Dos shares (10,000*P100) 1,000,000
Tres shares (18,000*140) 2,520,000 3,520,000
Carrying value of shares sold:
Dos shares (10,000*80) 800,000
Tres shares (18,000*100) 1,800,000 2,600,000
Realized gain on sale - P&L 920,000

4. Ans. A.
Aggregate Fair Value (12/31/14) Equity Securities only 5,275,000
Original Cost of Equity Securities:
# of shares Cost including
Dec. 31, 2014 Trans. Cost Total cost
Uno shares 10,000 150 1,500,000
Dos shares 11,000 74.55 820,000
Tres shares 18,000 108 1,950,000
Total Cost 4,270,000
Unrealized holding gain - OCI 1,005,000

5. Ans. B.
Amortized cost of Quatro bonds (12/31/12)
Correct Interes Nominal Intere Amortization Balance
1/1/12: Orig Cost (12% yield rate) 1,903,927
12/31/12: 228,471 200,000 28,471 1,932,398

CHAPTER 5-EXERCISE 7: DUMBO INC.


1. Ans. B.
Proceeds from sale plus accrued interest
(P500,000*98%)+(P500,000*12%*11/12) 545,000
Carrying value (Initial cost, excluding accrued interest and transaction cost)
Total cash consideration paid 1,044,258
Accrued interest (P1M*12%*6/12) (60,000)
Transaction cost (rec. as expense) (10,000) 974,258
Prorata: portion sold 50% (487,129)
Accrued interest: (P500,000*12%*11/12) (55,000)
Realized gain on sale 2,871

2. Ans. C.
Proceeds from sale: ABC (15,000*P15) 225,000
XYZ (5,000*P13) 65,000 290,000
Carrying value:
ABC: 15,000*(P21.50-P1.50) 300,000
XYZ: 5,000*(20,000*(P13-P1.50))/23,000 50,000 350,000
Realized loss on sale (60,000)

3. Ans. D.
FMV 12/31/14 CV
ABC (25,000sh*P18) 450,000 416,667 (a)
XYZ (18,000sh*P15) 270,000 180,000 (c)
DEF at 11% yield rate
Principal (P500,000*0.9009009) 450,450 0.9009009
Interest (P60,000*0.9009009) 54,054 504,505 487,129
1,224,505 1,083,796
Unrealized holding gain - P&L 140,709

(a) Initial cost ABC (40,000*P20) 800,000


CV of 15,000 shares sold (300,000)
Effect of cash div. in lieu of stock div. (83,333) (b)
CV ABC, 12/31/14 416,667

(b) CV of ABC before cash div. in lieu of stock div. 500,000


Divide by: # of shares (25,000+5,000) 30,000
CV of ABC after cash div. in lieu of stock div. 16.67
Multiply by: Remaining shares 25,000
Carrying value, 12/31/14 416,667

(c) Initial cost DEF (20,000*P11.50) 230,000


CV of shares sold on 8/5 (50,000)
CV DEF 12/31/14 180,000

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4. Ans. B.
Interest income (6/30 to 12/1): P1,000,000*12%*5/12) 50,000
Interest income (12/1 - 12/31): P500,000*12%*1/12 5,000
Interest income from bond investment 55,000

5. Ans. A.
Stock dividend does not result to dividend income and accounted only through memo entry.
Cash in lieu of share dividends is accounted through the "as if" approach, that is, as if shares were received and were as if
sold for the cash dividend received.

6. Ans. D.
FMV 12/31/14
ABC (25,000sh*P18) 450,000
XYZ (18,000sh*P15) 270,000
DEF at 11% yield rate
Principal (P500,000*0.9009009) 450,450
Interest (P60,000*0.9009009) 54,054 504,505
Total 1,224,505

CHAPTER 5-EXERCISE 8: NYU CORP.


1. Ans. D.
Proceeds from sale on 11/5
SMC: (400sh*P230) 92,000
ABI: (800sh*P325) 260,000 352,000
Original cost:
SMC: (400sh*P260) 104,000
ABI: (800sh*P330) 264,000 368,000
Realized loss on sale, under PAS 39 (16,000)

2. Ans. A.
Proceeds from sale on 12/31 (P300,000*95%) 285,000
Amortized cost (P551,033*3/5) 330,620 *
Realized loss on sale of bonds (45,620)

*Amortized cost: 12/31/14 Correct Int. Nominal Int. Amortization Balance


(Bal*9%) (Princ*12%)
March 31, 2014: 558,345
December 31, 2014: (9months) 37,688 45,000 (7,312) 551,033

3. Ans. B.
FMV 12/31/14 Cost/Amortized cost
SMC (600sh*P275) 165,000 156,000 (600sh*P260)
ABI (1,200sh*P340) 408,000 396,000 (1,200sh*P330)
TDI (P200,000*95%) 190,000 220,413 (P551,033*2/5)
763,000 772,413
Unrealized holding loss-OCI (9,413)

4. Ans. C.

CHAPTER 5-EXERCISE 9: VEGAS CORP.


1. Ans. C.
Proceeds from sale of DEF (4,000sh*P138) 552,000
CV (FMV 12/31/13): 4,000sh*(P1,056,500/8,000sh) 528,250 132
Realized gain on sale 23,750

2. Ans. D.
Proceeds from sale of JKL (4,000sh*P124) 496,000
Cost: 4,000sh*(P1,180,000/10,000) 472,000
Realized gain on sale 24,000

3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

4. Ans. D.
FA at FMV through P&L FMV (12/31/14 CV
ABC (13,000*P153.20) 1,991,600 1,984,000 (P1,525,000+P459,000)
DEF (4,000*P137) 548,000 528,250 (4,000sh*(P1,056,500/8,000sh))
GHI (P500,000*82.22%) 411,100 373,500
PQR (P400,000*98%) 392,000 372,000 (P400,000*93%)
3,342,700 3,257,750
Unrealized holding gain - P&L 84,950

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5. Ans. D.
FA at FMV through OCI/L FMV (12/31/14 Cost
JKL (6,000sh*P110.50) 663,000 708,000 6,000sh*(P1,180,000/10,000sh)
MNO (20,000sh*P44) 880,000 980,000
1,543,000 1,688,000
Unrealized holding loss - SHE (145,000)

CHAPTER 5-EXERCISE 10: JACK CORP.


1. Ans. C.
Proceeds from sale of Wan shares (5,000sh*P60) 300,000
CV: (P1,145,000/20,000sh)*5,000sh 286,250
Realized gain on sale - P&L 13,750

2. Ans. C.
Proceeds from sale of Tri shares (25,000sh*P30) 750,000
Cost: (25,000sh*P35) 875,000
Realized loss on sale, under PAS 39 (125,000)

3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

4. Ans. C.
FMV of Poor shares 800,000
Cost 1,400,000
Impairment loss - P&L (600,000)

5. Ans. D.
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.

6. Ans. C.
Proceeds from sale of Seeks shares (10,000*P45) 450,000
Cost (P1,000,000/20,000sh)*10,000sh 500,000
Realized loss on sale, under PAS 39 (50,000)

7. Ans. A.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

8. Ans. C.
FA at FMV through P&L FMV 12/31/14 CV (FMV 12/31/13)
Wan ordinary shares 825,000 858,750 (P1,145,000/20,000sh)*5,000sh
Too preference shares 650,000 700,000
1,475,000 1,558,750
Unrealized holding loss - P&L (83,750)

9. Ans. C.
FA at FMV through OCI/L, under PAS 39 FMV 12/31/14 COST
Poor preference shares 800,000 800,000 *Impaired value under PAS 39
Five ordinary shares 1,500,000 1,250,000
Seeks ordinary shares 900,000 1,000,000
3,200,000 3,050,000
Unrealized holding gain - SHE 150,000

10. Ans. A.
FA at FMV through OCI/L, under PFRS 9 FMV 12/31/14 COST
Poor preference shares 800,000 1,400,000 *No impairment loss under PFRS 9
Five ordinary shares 1,500,000 1,250,000
Seeks ordinary shares 900,000 1,000,000
3,200,000 3,650,000
Unrealized holding loss - SHE (450,000)

11. Ans. C.

12. Ans. C.

CHAPTER 5-EXERCISE 11: EBC CO.


1. Ans. C.

Fair Market Value, 12/31/2013 P160,300


Fair Market Value last remeasurement date, 12/31/2012 (see 1. below) P57,200
10% BS Treasury bond at cost (purchased in the current year) 103,250 160,450
Unrealized Holding Loss P150
*Cost (P25,250 + 32,450) P57,700
FMV adjustment credit balance (500) 57,200

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2. Ans. B.
Fair Market Value, 12/31/2014 P161,100
Fair Market Value, last remeasurement date 12/31/2013 160,300
Unrealized Holding Loss (800)

3. Ans. A. 2009 2010


Face Value, 10% BS Treasury Bonds P100,000 P100,000
Multiply by: Interest rate 10% 10%
Annual interest 10,000 10,000
Mulitiply by: Months outstanding 2/12 12/12
Interest income P1,667 P10,000

4. Ans. C.
Fair Market Value of the Inv. portfolio, 12/31/2014 P161,100

CHAPTER 5-EXERCISE 12: HART CORP.


1. Ans. C.
July 5 sale
Proceeds from sale (450*1,000) P450,000
CV of shares sold (570,000/2,000)*1,000 (285,000) 165,000
Oct. 11 sale
Proceeds from sale (150*1,000) P150,000
CV of shares sold (285,000/3,000)*1,000 (95,000) 55,000
220,000

2. Ans. C.
June 1 sale
Proceeds from sale (195*20,000) P3,900,000
Cost of shares sold (P3,000,000-P90,000) 2,910,000 990,000
Nov. 20
Proceeds from sale (3,700,000 – 300,000) P3,400,000
Cost of shares sold (7,500,000/50,000)*20,000 3,000,000 400,000
1,390,000

3. Ans. D.
BLACK INC.
FMV (12/31/2014) 2,000*150 300,000
Carrying value (285,000/3,000)*2,000 190,000 110,000
WHITE INC.
FMV (12/31/2014) 30,000*190 5,700,000
Carrying value (7,500,000/50,000)*30,000 4,500,000 1,200,000
UNREALIZED HOLDING GAIN – P&L 1,310,000

4. Ans. D.
BLACK INC.: FMV (12/31/2014) 2,000*150 300,000
WHITE INC.: FMV (12/31/2014) 30,000*190 5,700,000 6,000,000

CHAPTER 5-EXERCISE 13: CSI INC.


1. Ans. B.
Acquisition cost, excluding transaction cost 200,000
Less: Dividends recievable (shares acquired "Div.-on") (20,000)
Initial cost - ABC Shares 180,000

2. Ans. B.
Acquisition cost (1,500sh*P150) 225,000
Add: Transaction cost 30,000
Initial cost - DEF Shares 255,000

3. Ans. D.
No dividend income shall be recognized from the share dividends received from DEF.

4. Ans. B.
# of GHI shares after share split 5,000
Multiply by: cash div. per share 5
Dividend income from cash dividends 25,000

5. Ans. B.
Shares in lieu of cash dividends (4,000sh/4) 1,000
Fair value of shares 55
Dividend income (shares in lieu of cash) 55,000

6. Ans. C.
Financial asset at FMV through P&L FMV, 12/31 CV
ABC (2,000sh*P105) 210,000 180,000
GHI (5,000sh*P75) 375,000 410,000 (P285,000+(5,000sh*P25))
585,000 590,000
Unrealized holding loss - P&L (5,000)

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7. Ans. C.
Financial asset at FMV through OCI/L FMV, 12/31 Cost
DEF (1,500sh+300sh)*P160 288,000 255,000
JKL (4,000sh+1,000sh)*P60 300,000 255,000 (P200,000+(1,000sh*P55)
588,000 510,000
Unrealized holding gain - SHE 78,000

8. Ans. B.
Investment in Associate - MNO shares
Initial cost, January 1, 2014 850,000
Share from net income (P600,000*20%) 120,000
Share from forex loss (P100,000*20%) (20,000)
Share from dividends (10,000sh*P12) (120,000)
Carrying value, 12/31/14 830,000

CHAPTER 5-EXERCISE 14: PRINCE INC.


1. Ans. A.
Dividend income from Queen Corp. in 2014 (300,000*10%) P30,000
*note: Queen shares is only 10% (100,000/1,000,000), thus shall be accounted for as AFS.
Investment income for investment in AFS shall be through dividends declared by Queen.

2. Ans. C.
Share from net income of King Inc. 2013 (650,000*25%) 162,500
Understatement in Depr expense (500,000/5)*25% (25,000)
Share from net income of King Inc. 2013 137,500
*note: King shares is only 25% (250,000/1,000,000), thus shall be accounted for as Associate Investment under equity method.

3. Ans. C.
Fair Value of Queen Corp shares 12/31/2014 (100,000*6.50) P650,000

4. Ans. C.
Acquisition cost (January 1, 2013) (250,000*10) 2,500,000
Share from net income: 2013 137,500
CV of Investment (12/31/13) 2,637,500 vs Rec. Value (FV:250,000*12) P3,000,000 – no imp.
Share from net income: 2014 37,500
Share from dividends: 2014 (100,000*25%) (25,000)
CV of Investment (12/31/14) 2,650,000 vs Rec. Value (FV:250,000*15) P3,750,000 – no imp.

5. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14 (100,000*6.50) P650,000
Fair value of Queen Sahres (AFS), 12/31/13 (100,000*7.00) 700,000
Unrealized Holding Loss – SCI P50,000

6. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14 650,000
Original cost of Queen Shares, 1/1/13 (100,000*5) 500,000
Unrealized Holding Gain (Cumulative)- SHE/BS 150,000

CHAPTER 5-EXERCISE 15: ISUZU CORP.


1. Ans. A.
Acquisition cost 2,592,000
BV of Net Assets acquired (P6.4M*30%) 1,920,000
Total excess of acqusition cost over book value 672,000
Excess attributable to Depreciable asset (P640K*30%) 192,000
Excess attributable to Goodwill 480,000

2. Ans. C.
Share from the net income of associate (P1,280K*30%) 384,000
Understatement in depr: (P192,000/8yrs) (24,000)
Investment Income 360,000

3. Ans. A.
Acquistion cost 2,592,000
Share from dividends (P6*40,000sh) (240,000)
Share from net income 360,000
Carrying value, 12/31/14 2,712,000
Recoverable amount/Fair value less cost to sell:
(40,000shares*P64) 2,560,000
Impairment loss 152,000

4. Ans. B.
Share from net income 360,000
Impairment loss (152,000)
Net amount to be reported in the income statement 208,000

5. Ans. B.
Dividend income (P6*40,000sh) 240,000
Unrealized holding loss - P&L (32,000)
Net amount to be reported in the income statement 208,000
FMV, 12/31/14 (40,000*P64) 2,560,000
Carrying value (Cost) 2,592,000
Unrealized holding loss-P&L (32,000)

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6. Ans. C.

CHAPTER 5-EXERCISE 16: PACQUIAO CORP.


1. Ans. D.
Net income 2,500,000
Less: PS share in net income (10%*P50*100,000) 500,000
OS share in net income 2,000,000
Multiply by: Proportionate interest (50,000sh/200,000sh) 25%
Share from net income before adjustments 500,000
Understatement in Depr: (P4M*25%)/5yrs (200,000)
Adjusted share from Net Income 300,000

2. Ans. D.
Acquisition cost, January, 2014 (50,000sh*P325) 16,250,000
Share from net income in 2014 300,000
Carrying value, Decmeber 31, 2014 16,550,000

3. Ans. C.
Net income 2,500,000
Multiply by: Proportionate interest (50,000sh/200,000sh) 25%
Share from net income before adjustments 625,000
Understatement in Depr: (P4M*25%)/5yrs (200,000)
Adjusted share from Net Income 425,000

4. Ans. C.
Acquisition cost, January, 2014 (50,000sh*P325) 16,250,000
Share from net income in 2014 425,000
Carrying value, Decmeber 31, 2014 16,675,000

CHAPTER 5-EXERCISE 17: IFFY CORP.


1. Ans.
Share from net income (P4.8M*30%) 1,440,000
Understatement depr. (P1.6M/5)*30% (96,000)
Investment Income - P&L 1,344,000

2. Ans. D.
Share from other comp. loss (800,000*30%) (240,000)

3. Ans. C.
Acquisition price 5,000,000
Share from net income (4.8M*30%) 1,440,000
Understatement depr. (1.6M/5)*30% (96,000) 1,344,000
Share from other comp. loss (800,000*30%) (240,000)
Share from dividends (1,500,000*30%) (450,000)
Carrying Value, 12/31/14 5,654,000

4. Ans. B.
CESSATION:
Proceeds from sale (18,000*210) 3,780,000
FMV of remaining share relassified to FA at FMV (12,000*210) 2,520,000
Total 6,300,000
Less: Carrying Value of Investment in Assoc. before cessation 5,654,000
Gain before recycling of OCLoss 646,000
Recycling of OCloss (240,000)
Total cessation loss - IS 406,000

5. Ans. D.

6. Ans. D.
DILUTION:
Before Dilution After Dilution
# shares held 30,000 30,000
# shares outstanding 100,000 125,000
% of interest 30% 24%

Share from increase in Assoc.'s net assets (25,000*210)*24% 1,260,000


Carrying value of Investment as if given up (5,654,000*6/30) (1,130,800)
Gain on dilution before recycling of OCLoss 129,200
Recycling of Ocloss (240,000*6/30) (48,000)
Total cessation loss - IS 81,200

CHAPTER 5-EXERCISE 18: BLACK CORP.


1. Ans. A.
Acquistion cost (300,000sh*P20) 6,000,000
BV of Net Asset (P16M*30%) 4,800,000
Excess of acq. cost over book value 1,200,000
Excess attrib. to identifiable assets
Land (P800,000*30%) 240,000
Building (P1,200,000*30%) 360,000
Excess attrib to Goodwill 600,000

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2. Ans. A.
Share from net income (P2.5M*30%) 750,000
Understatement in Depr: (360,000/5yrs) (72,000)
Investment income - P&L 678,000

3. Ans. D.
Investment income - P&L 678,000
Share from Unrealized holding loss - OCL (P500K*30%) (150,000)
Net amount to be reported in the SCI 528,000

4. Ans. B.
Acquisition cost 6,000,000
Share from dividends (P800,000*30%) (240,000)

Share from net income 678,000

Share from OCL (P500,000*30%) (150,000)

Carrying value, 12/31/14 6,288,000

5. Ans. B.
Before Dil. After Dil. Decrease
Number of shares owned 300,000 300,000
Total outstanding shares 1,000,000 1,200,000
30% 25% 5%

Share from the increase in White's capital as a result of share issue:


(200,000sh*P30)*25% 1,500,000
CV of investment deemed sold:
(P6,228,000*(5%/30%)) (1,048,000)
Dilution gain before recycling of OCL 452,000
Recycling of OCL (P150,000*(5%/30%)) (25,000)
Adjusted dilution gain (True Sale) 427,000

6. Ans. B.
Share from the increase in White's capital as a result of share issue:
(200,000sh*P30)*25% 1,500,000
CV of investment, excluding goodwill deemed sold:
(P6,228,000-P600,000)*(5%/30%) (948,000)
Dilution gain before recycling of OCL 552,000
Recycling of OCL (P150,000*(5%/30%)) (25,000)
Adjusted dilution gain 527,000

7. Ans. C.
Before Cess. After Cess.
Number of shares owned 300,000 180,000
Total outstanding shares 1,000,000 1,000,000
30% 18%

Realized Unrealized Total


Proceeds from poriton sold (120,000shares*P30) 3,600,000 3,600,000
FMV of remaining portion to be reclassified to FA at FMV 5,400,000 5,400,000
Less: CV of portion sold (P6,228,000*120/300) (2,515,200) (2,515,200)
CV of portion reclassified (P6,228,000*180/300) (3,772,800) (3,772,800)
Cessation gain/loss before recycling of OCI/L 1,084,800 1,627,200 2,712,000
Recycling of OCL:
Portion sold (P150,000*120/300) (60,000) (60,000)
Portion reclassified (P150,000*180/300) (90,000) (90,000)
Adjsuted cessation gain 1,024,800 1,537,200 2,562,000

8. Ans. A.

CHAPTER 5-EXERCISE 19: GREENDAY INC.


Case 1: “Cost-Based Approach, with Catch-up Adjustment”:
1. Ans. C.
Share from net income under Equity Method in 2014 (P1,250,000*15%) 187,500
Dividend income recognized under FMV Method in 2014 (P3.50*7,500sh) 26,250
Rertroactive adjustment to RE, beg 2015 161,250

2. Ans. A.
Share from net income (Jan. 1 - June 30, 2015): P700,000*15% 105,000
Share from net incoem (Jul. 1 - Dec. 31, 2015): P800,000*25% 200,000
Total investment income in 2015 305,000

3. Ans. A.
Acquistion cost, January 1, 2014 1,400,000
Share from dividends, Aug. 1, 2014 (P3.50*7,500sh) (26,250)
Share from net income in 2014 (P1,250,000*15%) 187,500
Carrying value, Dec. 31, 2014 (Equity Method) 1,561,250
Share from dividends, Apr. 5, 2015 (P4.50*7,500sh) (33,750)
Share from net income (Jan. 1 - Jun. 30, 2015) 105,000
Acquisition cost, July 1, 2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Carrying value, Dec. 31, 2015 2,763,750

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Case 2: “Cost-Based Approach, without Catch-up Adjustment”:


4. Ans. A.
No retroactive adjustment to RE, beg under the Cost-based approach without catch-up adjustement. Instead, whatever is
the original cost of the original investment before gaining significant influence shall be its deemed cost.

5. Ans. D.
Dividend income, Apr. 5, 2015 (P4.50*7,500) 33,750
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Total investment income in 2015 (Cost-based w/o catch-up adj.) 233,750

6. Ans. D.
Acquistion cost, January 1, 2014 (deemed cost) 1,400,000
Acquisition cost, July 1, 2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Carrying value, Dec. 31, 2015 2,531,250

Case 3: “Fair Market Value Approach, without Catch-up Adjustment”:


7. Ans. A.
No retroactive adjustment to RE, beg under the FMV-based approach without catch-up adjustement. Instead, the original
investment shall be remeasured at prevailing fair value at the date significant influence is gained.

8. Ans. D.
Dividend income, Apr. 5, 2015 (P4.50*7,500) 33,750
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Total investment income in 2015 FMV-based w/o catch-up adj.) 233,750

9. Ans. C.
FMV of original investment, July 1, 2015 (7,500sh*P200) 1,500,000 *
Acquisition cost, July 1, 2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Carrying value, Dec. 31, 2015 2,631,250

*FMV/Acq. Price of new investment (10%) 1,000,000


Divide by: # of shares 5,000
Assumed FMV, July 1, 2015 200

CHAPTER 5-EXERCISE 20: ORION CORP.


1. Ans. C.
Investments in Bonds:
Proceeds (PV of future cash flows, effective rate: 10%)
Principal: (4,000,000*0.6830) 2,732,054 0.6830
Interest: (480,000*3.1699) 1,521,535 3.1699
Intial fair value (1/1/13) 4,253,589

Correct Interes Nominal Intere Amortization


January 1, 2013: 4,253,589
December 31, 2013: 425,359 480,000 (54,641) 4,198,948
December 31, 2014: 419,895 480,000 (60,105) 4,138,843 7. C.
December 31, 2015: 413,884 480,000 (66,116) 4,072,727
December 31, 2016: 407,273 480,000 (72,727) 4,000,000

2. Ans. A.
Face Value of bonds 4,000,000
Consideration given up (FMV) 4,253,589
Debit to/Reduction in interest income per books (253,589)
Nominal interest collected/Credited to interest income 480,000
Interest income in 2013 per books: 226,411
Correct interst income (see amortization table) 425,359
Understatement in interest income in 2013 198,948

3. Ans. A.
FMV of bonds, Dec. 31, 2014 at 9% effective rate: (a) 4,211,093
FMV of bonds, Dec. 31, 2013 at 11% effective rate: (b) 4,097,749
Unrealized holding gain - P&L 113,345
(a) FMV of bonds, Dec. 31, 2014 = PV of remaining cash flows at 9% effective rate for 2 periods.
Principal: P4,000,000*0.841680 3,366,720 0.841680
Interest: P480,000*1.759111 844,373 1.759111
4,211,093
(b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11% effective rate for 23periods.
Principal: P4,000,000*0.731191 2,924,766 0.731191
Interest: P480,000*2.443715 1,172,983 2.443715
4,097,749

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4. Ans. C.
Investment in Associate (20%)
Acquisition cost 5,800,000
BV of net assets acquired (P25M*20%) 5,000,000
Excess of Acquisition cost (Attrib. to Depr. Asset) 800,000 *

September 30, 2013 Acquisition Cost 5,800,000


Share from Dividends, 2013 (80,000)
Share from NI, 2013 (3.8M*20%)*3/12 190,000
*Understatement in Depr (800K/10)*3/12 (20,000) 170,000
December 31, 2013 Carrying Value 5,890,000
Share from Dividends, 2014 (160,000)
Share from NI, 2014 (5.2M*20%) 1,040,000
*Understatemetn in Depr (800K/10) (80,000) 960,000
Share from OCL (400,000*20%) (80,000)
Share from OCI (300,000*20%) 60,000
December 31, 2013 Carrying Value 6,670,000

5. Ans. A.
Dividend income (2*40,000) 80,000
Unrealized holding gain (155-145)*40,000 400,000
Investment income per books in 2013 480,000
Investment income per audit in 2013 (see analysis) 170,000
Retroactive adjustement to RE, beg 310,000

6. Ans. B.
CESSATION: Before Cess. After Cess.
Number of shares owned 40,000 30,000
Number of outstanding shares 200,000 200,000
20% 15%
Realized Unrealized Total
Proceeds from sale (169*10,000) 1,690,000 1,690,000
Fair value of remaining Investment (169*30,000) 5,070,000 5,070,000
CV of investment
Portion sold: (6,670,000*10/40) (1,667,500) (1,667,500)
Portion reclassified: (6,670,000*30/40) (5,002,500) (5,002,500)
Cessation gain, before recycling of OCI/L 22,500 67,500 90,000
Recycling of OCI 15,000 45,000 60,000
Recycling of OCL (20,000) (60,000) (80,000)
Total cessation gain/loss 17,500 52,500 70,000

7. Ans. B.
Fair Value on Reclass date (6/30/14) 3,600,000
Carrying Value/Depreciation Cost (6/30/14) 3,250,000
Revaluation Surplus (OCI) on Reclass 350,000

8. Ans. D.
FMV, Investment property, 12/31/14 3,200,000
CV, (FMV upon reclass on 6/30/2014) 3,600,000
Unrealized holding loss - P&L (400,000)

CHAPTER 5-EXERCISE 21: JUDE CORPORATION


1. Ans. C.
Present value of the installment payments at 12% effective rate:
Downpayament 1 1,000,000
Balance (P4,000,000/4yrs)*3.037349) 3.0373493 3,037,349
Option money related to property acquired 314,779
Property taxes in arrears as of January 1, 2012 147,872
Initial cost of the property 4,500,000

2. Ans. D.; 3. Ans. B.


Cost (Jan. 1, 2012) 4,500,000
Accum depr, Dec. 31, 2013 (4.5M/25yrs)*2yrs. 360,000
Depreciated cost 4,140,000
Recoverable amount/Fair market value 4,100,000
Impairment loss 40,000

4. Ans. A.; 5. Ans. C.


Recoverable amount 12/31/13 4,100,000
Depr 2014: P4.1M/23years (178,261)
Carrying value, before impairment recovery 3,921,739
Carrying value had there been no impairment:
(P4.5M*22/25) 3,960,000
Impairment recovery - P&L 38,261

6. Ans. A.
PPE to IP
If a property is transferred from PPE to IP, and the FMV method is used to value IP, any decrease on the reclassification date shall be
recognized as impairment loss in the profit or loss. Any increase in the value, however, on the reclassification date shall be recognized
in the OCI as Revaluation Surplus, following PAS 16, PPE.'
FMV, 12/31/14 upon reclass to IP 4,300,000
Carrying value (Depr. Cost: P4.5M*22/25) 3,960,000
Revaluation surplus - OCI 340,000

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7. Ans. D.
IP to PPE
If a property is transferred from IP to PPE, and the FMV mehtod is used to value IP, any decrease or increase in the value of the
property on the transfer date shall be recognized in the profit or loss.
FMV, 12/31/14 upon reclass to PPE 4,300,000
Carrying value (FMV 12/31/13) 4,100,000
Gain on the transfer - P&L 200,000

CHAPTER 5-EXERCISE 22: DADO COMPANY


1. Ans. B.
Annual premium, 2014: (P8,000*12mo) 96,000
Less: Increase in CSV for 2014: (P25,200*1/3) (8,400)
Life insurance expense, 2014 87,600

2. Ans. D.
Annual premium, 2015: (P8,000*12mo) 96,000
Less: Increase in CSV for 2015 (P30,000-P25,200) (4,800)
Dividend from CSV (8,000)
Life insurance expense, 2015 83,200

3. Ans. C.
Annual premium, 2016: (P8,000*12mo) 96,000
Less: Increase in CSV for 2016 (P39,600-P30,000) (9,600)
Dividend from CSV (9,600)
Life insurance expense, 2016 76,800

4. Ans. D.
Insurance premium up to date of death (P8,000*10mo) 80,000
Less: Increase in CSV up to date of death (P50,400-P39,600)*10/12 (9,000)
Dividend from CSV in 2017 (11,200)
Life insurance expense, 2017 59,800

5. Ans. A.
Life insurance policy 4,000,000
CV of CSV as of October 31, 2017:
CSV, Dec. 31, 2016 39,600
Increase up to Oct. 31, 2017: 9,000 48,600
Gain on life insurance policy settlement 3,951,400
Observe that since the insurance premium are payable monthly, it is assumed that after death on October 31, 2017, no additional
insurance premium had been paid.

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CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT

DISCUSSION PROBLEMS
CHAPTER 6-PROBLEM 1
1 C.
2 C.
3 D.
4 A.
5 D.
6 C.
7 D.
8 B.
9 A.
10 C.
11 B.
12 A.
13 C.
14 D.
15 C.
16 D.
17 C.
18 C.

CHAPTER 6-PROBLEM 2: BACOLOD INC.


Land Land Impr. Buidling Mach. & Eq.
Purchase of land 15,600,000
Land survey 208,000
Fees for search of title for land 24,000
Building construction permit fee 140,000
Temporary quarters for construction workers 430,000
Payments to tenants of the old building 184,000
Cost of to raze the old building 940,000
Excavation of the land 400,000
Special assessment of the gov. for road projects 80,000
Cost of construction 78,000,000
Cost of paving parking lot, driveway and sidewalks 1,600,000
List price of Machinery and equipment purchased 4,567,000
Trade discount taken on the machinery (127,000)
Cost of freight and handling 50,000
Cost of testing the equipment 125,000
Income from the testing of machinery (65,000)

15,912,000 1,600,000 80,094,000 4,550,000


1. Ans. 2. Ans. 3. Ans. 4. Ans.
Note: (a) The demolition of the old building is preferably capitalized as cost of the new building as per PIC Q&A 2012 -012.
(b) The income from the car park during construction is from an unrelated activity unnecessary for the construction of the building.
The income shall be recognzied as outright income in the P&L and shall not affect the cost of the constructed building.

CHAPTER 6-PROBLEM 3: MIRAM COMPANY


Land Building Adj. to NI
Organization fees - outright expense (120,000)
Land and Building (Prorata)* 1,512,000 378,000
Option payments (P250K-50K)* 160,000 40,000 (50,000)
Broker's fees* 88,320 22,080
Remodelling cost of the building 60,000
Salaries of executives (360,000)
Stock bonus - Organization expense (300,000)
Property taxes - in arrears (P240K*6/12)* 96,000 24,000
Property taxes - 2014 expense (P240K*6/12 ) (120,000)
1,856,320 524,080 (950,000)
1. Ans. 2. Ans. 3. Ans.
*FMV of Land 1,800,000 1
FMV of Building 450,000 0
Total 2,250,000 1

CHAPTER 6-PROBLEM 4: ABC CORPORATION


a. Land
Initial cost, Jan., 2014
Present value of installment payments at 10% effective rate:
Downpayment 2,000,000
Balance: (P8M/5yrs)*3.790787 3.790787 6,065,259
8,065,259 2.a. Ans.

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b. Building
Initial cost, Jan., 2014
FMV of shares issued (100,000sh*P70) 7,000,000
Accum. Depr, Dec. 31, 2014: (P7M*10%) (700,000) 1.a. Ans.
Carrying value, Dec. 31, 2014 6,300,000 2.b. Ans.

c.1. Equipment A
Initial cost, Jan., 2014
Cash price equivalent (P2M*90%) 1,800,000
Accum. Depr., Dec. 31, 2014: (P1.8M-P180K)*5/15 (540,000) 1.b. Ans.
Carrying value, Dec. 31, 2014 1,260,000 2.c. Ans.

c.2. Equipment B
Initial cost, July 1, 2014
Purchase price 4,000,000
Import duties and nonrefundable taxes 250,000
Installation cost 50,000
PV of future retirement cost at 10% effective % for 5 yrs
(P161,051*0.6209213) 100,000 0.6209213
Intial cost, July 1, 2014 4,400,000
Accum. Depr., Dec. 31, 2014: (P4.4M-440K)*5/15*6/12 (660,000) 1.c. Ans.
Carrying value, Dec. 31, 2014 3,740,000 2.d. Ans.

c.3. Equipment C
Initial cost, September 1
Fair value of asset accepted as donation 1,200,000
Accum. Depr., Dec. 31, 2014 (P1.2M-120K)*5/15*4/12 (120,000) 1.d. Ans.
Carrying value, Dec. 31, 2014 1,080,000 2.e. Ans.
*note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is
credited, any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost.

d. Furniture and fixture


Initial cost, Jan., 2014
Cash price upon acquistion 3,200,000
Accum Depr., Dec. 31, 2014 (P3.2M-P320K)/10yrs (288,000) 1.e. Ans.
Carrying value, Dec. 31, 2014 2,912,000 2.f. Ans.

CHAPTER 6-PROBLEM 5:
Case 1: ABC CORP.
1. Ans. P39,792.
Actual borrowing cost (Jul. 1 - Nov. 31): P1M*12%*5/12 50,000
Income from temporary investments (Jul. 1 - Nov. 31)
July: (P1,000,000-P100,000)*5%*1/12 3,750
August: (P1,000,000-P250,000)*5%*1/12 3,125
September (P1,000,000-P550,000)*5%*1/12 1,875
October (P1,000,000-P750,000)*5%*1/12 1,042
November (P1,000,000-P900,000)*5%*1/12 417 (10,208)
Net capitalizable borrowing cost 39,792

2. Ans. P70,000.
Interest expense (Jan. 2 - Jun. 30): P1M*12%*6/12 60,000
Interest expene (Dec. 1 - Dec. 31): P1M*12%*1/12 10,000
Interest expense for 2014 70,000

Case 2: PAN CORP.


1. Ans. P4,856,223.
Actual borrowing cost from Specific Borrowing:
1st Quarter: P34M*12%*3/12 1,020,000
2nd Quarter: (P35.020M*12%*3/12) 1,050,600
3rd Quarter: (P36,070,600*12%*3/12) 1,082,118
4th Quarter: (P37,152,718*12%*3/12) 1,114,582 4,267,300

Borrowing cost from General Borrowing


Weighted average actual expenditure* 39,316,667
Less: Proceeds from specific borrowing (34,000,000)
WAAE financed by general borrowing 5,316,667
Multiply by: Weighted Ave. Gen Borr. %** 11.08% 588,923
Capitalizable borrowing cost 4,856,223

Cost incurred #mo. to 12/31 Peso*Mos.


*January 1 8,000,000 12 96,000,000
April 1 19,000,000 9 171,000,000
July 31 24,400,000 5 122,000,000
October 1 27,600,000 3 82,800,000
December 31 14,000,000 - -
Total 471,800,000

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Divide by: 12 months 12


Weighted average actual expenditure 39,316,667

**Actual General Borrowing Cost


P24,000,000*10% 2,400,000
P28,000,000*12% 3,360,000 5,760,000
Divide by: Proceeds from Gen. Borr. (P24M+P28M) 52,000,000
Weighted average genearl borrowing % 0

2. Ans. P5,171,077.
Actual General Borrowing Cost 5,760,000
Less: Capitalizable Gen. Borr. Cost (588,923)
Gen. Borr. Cost. - Interest Expense 5,171,077
*note that the entire actual borrowing cost from specific borrowing had been entirely capitalized.

3. Ans. P97,856,223.
*January 1 8,000,000
April 1 19,000,000
July 31 24,400,000
October 1 27,600,000
December 31 14,000,000
Capitalizable borrowing cost 4,856,223
Carrying value, 12/31/14 97,856,223

CHAPTER 6-PROBLEM 6: KELSON CORP.


1. Ans. P254,628
Depreciation of Old Buildings (3,600,000-796,200)*6% 168,228
Depreciation of New Building (1,800,000-360,000)*6% 86,400
Depreciation expense – BUILDINGS 254,628

2. Ans. P36,000.
Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12 36,000

3. Ans. P276,000.
Depreciation of Old Machinery (2,325,000/10) 232,500
Depreciation of New Machinery (870,000/10)*6/12 43,500
Depreciation expense – MACHINERY AND EQUIPMENT 276,000

4. Ans. P66,300.
Leasehold improvement carrying value (12/31/2013) 331,500
Divide by: Remaining useful life: 8yrs-3yrs=5yrs
(shorter than the remaining extended lease term: 3yrs+5yrs=8yrs) 5
Depreciation expense – LEASEHOLD IMPROVEMENT 66,300

5. Ans. P43,369.
Delivery Equipment: Book value, Jan. 1, 2014 137,400
Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014 (31,356) *P24,300+P7,056
Balance subject to depreciation 106,044
Multiply by 150% declining rate (1/5)*150% 30%
Depreciation on the Remaining Delivery Equipment 31,813
Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12 4,500
Depn on truck sold on Sept. 30, 7,056
Total Depreciation expense – DELIVERY EQUIPMENT 43,369

CHAPTER 6-PROBLEM 7: GANADO CORPORATION


1.a. P56,214.
Buidling, CV Jan. 1, 2014 936,900
Multiply by: 150%Dbrate over 25 years 6%
Depreciation expense - Building 56,214

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1.b. Ans. P103,775.


Depr. on Disposed Mach.: P23,000/10yrs*3/12 575
Depr. on New Mach.: P310,000/10yrs*6/12 15,500
Depr. on Remaining Mach.: P877,000/10yrs 87,700
Depreciation expense - Mach&Eqpt 103,775

1.c. Ans. P21,000.


Depr. on New Auto: P12,000*4/10 4,800
Depr. on Remaining Auto:**
Depr on Auto had there been no change 18,000
Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10) (1,800) 16,200
Depr Expense - Automotive Equipment 21,000

2.a. Ans. P319,314.


Accum. Depr - Building, Jan. 1, 2014 263,100
Depr for the year 56,214
Accum. Depr - Building, Dec. 31, 2014 319,314

2.b. Ans. P342,275.


Accum. Depr - Mach&Eqpt, Jan. 1, 2014 250,000
Accum. Depr of M&E disposed on Apr 1, (11,500)
Depr for the year 103,775
Accum. Depr - M&E Dec. 31, 2014 342,275

2.c. Ans. P99,300.


Accum. Depr - Auto. Eqpt. Jan. 1, 2014 84,600
Accum. Depr of Auto. Eqpt. Disp. on Jan. 1, (6,300)
Depr for the year 21,000
Accum. Depr - M&E Dec. 31, 2014 99,300

3. Ans. P11,500.
CV on the date of fire (P23,000*5/10) 11,500
Recoverable value -
Impairment loss due to fire 11,500
Note: The reimbursement received from insurance company is recognized as a separate transaction, thus income from insurance
settlement shall be recognized separately.

4. Ans. (P700)
Fair value of asset received 12,000
Cash paid to equalize exchange (10,000)
Assumed fair value of asset given-up 2,000
CV of asset given up 2,700
Loss on trade-in (700)

CHAPTER 6-PROBLEM 8: MALIK CORP.


1.a. Ans. P732,000.
Replacement of wooden roof to brick roof 300,000
Major improvement on electrical wiring system 70,000
Storm windows and screens installation 162,000
Automatic door-opening system installation 200,000
Total amount capitalizable to Building or Building Improvements 732,000

1.b. Ans. P690,000.


Replacement of retired factory equipment 500,000
Rearrangement cost to ensue a more efficient production 120,000
Overhead crane in the assembly department 70,000
Total amount capitalizable to Equipment 690,000

1.c. Ans.
Acquistion of furniture 50,000

2. Ans. P1195,000.
Repainting of building 60,000
Routinary repairs to building 50,000
Replacements of minor gears 20,000
Service contract of office equipment 40,000
Sealing of roof leaks in the factory 25,000
Total repairs and maintenance expense 195,000

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CHAPTER 6-PROBLEM 9: BONBON COMPANY


1. Ans. P3,640,000.
Cost, Jan. 2005 5,200,000
Accum. Depr, Dec. 31, 2014: (P5.2M-P520K)*10/30 (1,560,000)
Carrying value, Dec. 31, 2014 3,640,000

2. Ans. P1,645,700.
Present value of future net cash flows at 10% effective rate for 15 years remaining life:
From continued use: P200,000*7.60608) 7.606080 1,521,216
From eventual disposal: P520,000*0.239392) 124,484
Value in Use 0.239392 1,645,700

3. Ans. P1,645,700.
Value in Use 1,645,700
FMV less Cost to sell 1,560,000
Recoverable value shall be the Value in Use, since it is higher.

4. Ans. P1,994,300.
Carrying value, Dec. 31, 2014 3,640,000
Recoverable amount 1,645,700
Impairment loss 1,994,300

5. Ans. P75,047.
Carrying value, Dec. 31, 2014 after impairment 1,645,700
Less: Salvage value 520,000
Depreciable cost 1,125,700
Divide by: remaining useful life 15
Depreciation expense 75,047

CHAPTER 6-PROBLEM 10: LEGASPI CORP.


1. Ans. P5,518,855.
Present value of future net cash flows at 5% effective rate for 4 years remaining life:
From continued use: 7.606080
2015: (P4,500,000-P1,680,000)*0.952381 2,685,714 0.952381
2016: (P4,800,000-P2,520,000)*0.907029 2,068,027 0.907029
2017: (P3,900,000-P3,300,000)*0.863838 518,303 0.863838
2018: (P1,200,000-P900,000)*0.822702 246,811 0.822702
From eventual disposal: 0 -
Value in Use 0.239392 5,518,855

2. Ans. P5,518,855.
Value in Use 5,518,855
FMV less Cost to sell 5,070,000
Recoverable value shall be the Value in Use, since it is higher.

3. Ans. P1,861,145.
Carrying value, Dec. 31, 2014 7,380,000
Recoverable amount 5,518,855
Impairment loss 1,861,145

CHAPTER 6-PROBLEM 11: NAIA COMPANY


1. Ans. P150,000.
Replacement cost 1,500,000
Mulitply by condition % (7yrs/10yrs) 70%
Fair value/Sound value/Depr. Repl. Cost 1,050,000

Fair value, 12/31/14 1,050,000


Divide by: remaining life 7
Depreciation expense, 2015 150,000

2. Ans. P180,000.
Fair value, 12/31/14 1,050,000
Carrying value, 12/31/14 (P1.2M*7/10) 840,000
Revaluation surplus, 12/31/14 210,000
Transferred to RE in 2015 (210K/7yrs) (30,000)
Revaluation surplus, 12/31/15 180,000

3. Ans. P900,000.
Fair value, 12/31/14 1,050,000
Depr in 2014 (150,000)
Carrying value, 12/31/15 900,000

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4. Ans. P50,000 and P150,000.


Proceeds from sale 800,000
Carrying value, 12/31/16 (P1,050,000*5/7) (750,000)
Gain on sale - P&L 50,000

Revaluation surplus balance, 12/31/16 (210,000*5/7) 150,000

5. Ans. P565,714.
Fair market value, 12/31/14 1,500,000
Carrying value, 12/31/14 840,000
Revaluation surplus, 12/31/14 660,000
Divide by: remaining life 7
Annual transfer to RE 94,286
Revaluation surplus, 12/31/15 565,714

CHAPTER 6-PROBLEM 12: PEPSI CORP.


1. Ans. P2,000,000.
Carrying value, 12/31.2012 (P24M-P8M) 16,000,000 -provide additional depr. for 2012 (P18M/9yrs)
Recoverable amount (higher)* 14,000,000
Impairment loss 2,000,000

Value is use 14,000,000 higher


FMV less cost to sell 13,500,000

2. Ans. P1,750,000.
Carrying value, 1/1/13 after impairment 14,000,000
Divide by: remaining useful life 8
Annual depreciation after impairment 1,750,000

3. Ans. P1,500,000.
Recoverable amount/FMV 15,000,000
Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000
Increase over CV had there been no impariment is ignored under cost method. 3,000,000
Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method.

Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000


Carrying value based on the impaired value: (P14M*6yrs/8yrs) 10,500,000
Gain on impairment recovery - P&L 1,500,000
- whether under cost or FMV method, the gain on impairment recovery is recognized in the P&L.

4. Ans. P2,000,000.
Carrying value had there been no impairment (cost method) 12,000,000
Divide by: remaining useful life 6
Annual depreciation after recovery, cost method 2,000,000

5. Ans. None.
The property had been transferred from PPE to Investment property, where the property is measured under FMV model.
Under the FMV model of valuing investment properties, no depreciation is provided, instead the propety is remeasured at each
balance sheet date at their prevailing FMV. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss.

CHAPTER 6-PROBLEM 13: RAM CORP.


1. Ans. P500,000.
Fair Value/Soud Value, 1/1/2014 4,500,000
Carrying Value, 1/1/2014 (P5M*8yrs/10yrs) 4,000,000
Revaluation Surplus, 1/1/2014 500,000

2. Ans. P562,500.
Carrying value after revaluation, 1/1/14 4,500,000
Divide by: remaining useful life 8
Annual depr. after revaluation 562,500

3. Ans. P700,000.
Carrying value based on revalued amount, 1/1/17 (P4.5M*5yrs/8yrs) 2,812,500
Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000
Reversal of revaluation surplus in the OCI 312,500
Incidentally, this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus
to retained earnings. (P500,000*5yrs/8yrs)

Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000


Recoverable value/FMV, 1/1/17 1,800,000
Impairment loss - P&L 700,000

4. Ans. P360,000.
Carrying value after impairment loss, 1/1/17 1,800,000
Divide by remaining useful life: 5
Revised annual depr. after impairment loss 360,000

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MULTIPLE CHOICE EXERCISES:


CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY
1. Ans. C.; 2. Ans. C.
Land Building
Land and building acquisition price 1,308,000
Property taxes in arrears, Jan. 1, 2014: (P20,000*1yr/2yrs) 10,000
Option payment on property acquired only 15,000
Cost of removal of old buidling 22,000
Partial payment on constructed building 700,000
Legal fees 4,000 1,500
Insurance during construction only: (P24,000*4/12) 8,000
Second payment on constructed building 600,000
General expense - related to construction 12,000
Final payment on constructed building 200,000
1,337,000 1,543,500

2. Ans. D.
Correct cost of Building, July 1, 2014 1,543,500
Divide by: useful life 25
Annual depreciation 61,740
Multiply by: 6months/12 months in 2014 6/12
Depreciation for 2014 30,870

CHAPTER 6-EXERCISE 2: MILDEN COMPANY


1. Ans. C.; 2. Ans. C.
Land Building
Acquisition price 2,500,000
Cost of razing old building 300,000
Proceeds from sale of salvaged materials (30,000)
Title insurance and legal fees to purchase land 150,000
Architect’s fees 600,000
New building construction cost 15,000,000
2,650,000 15,870,000

CHAPTER 6-EXERCISE 3: BOND COMPANY


1. Ans. B.
Actual borrowing cost from Specific Borrowing: P10M*12% 1,200,000
Borrowing cost from General Borrowing
Weighted average actual expenditure* 25,395,167
Less: Proceeds from specific borrowing (10,000,000)
WAAE financed by general borrowing 15,395,167
Multiply by: Weighted Ave. Gen Borr. %** 8.67% 1,334,248
Capitalizable borrowing cost 2,534,248
Actual borrowing cost (P1.2M+P500K+P800K) 2,500,000 lower

Cost incurred #mo. to 12/31 Peso*Mos.


*January 1 18,228,500 12 218,742,000
March 1 7,000,000 10 70,000,000
September 1 4,000,000 4 16,000,000
December 31 5,000,000 - -
Total 304,742,000
Divide by: 12 months 12
Weighted average actual expenditure 25,395,167

**Actual General Borrowing Cost


P5,000,000*10% 500,000
P10,000,000*8% 800,000 1,300,000
Divide by: Proceeds from Gen. Borr. (P10M+P5M) 15,000,000
Weighted average genearl borrowing % 0

2 .Ans. A.
Since actual borrowing cost was fully capitalizable, no borrowing cost shall be recognized as outright expense for 2014.

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3. Ans. B.
January 1 18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Capitalizable borrowing cost 2,500,000
Carrying value, 12/31/14 36,728,500

CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATION


Machine A:
Carrying Value, 1/1/14 (P30,000*80%*80% 19,200
Salvage value (5,000)
Depreciable carrying value 14,200
Divide by: 8 years 8
Depreciation expense 1,775 Ans. B.

Machine B:
Carrying value, 1/1/4/14 (P50,000-P25,000) 25,000
Salvage value (5,000)
Depreciable carrying value 20,000
Divide by: remaining useful life (4yrs+2yrs) 6
Depreciation expense 3,333 Ans. B.

Machine C:
Depreciation expense, 2014 (P20,000*60%*40%) 4,800 Ans. B.

CHAPTER 6-EXERCISE 5: DELITE CORP.


1. Ans. A.
Machinery AB001
Carrying Value 1/1/14 (6M*10/20) 3,000,000
Less: Salvage value (600,000)
Depreciable carrying value 2,400,000
Divide by: Extended remaining life 15
Depreciation expense in 2014 160,000

2. Ans. C.
Machinery DE020
Cost 1/1/12 6,790,000
Less: Salvage value (500,000)
Depreciable cost 6,290,000
Divide by: Useful life 20
Annual Depreciation 314,500

Capitalizable cost on 1/1/14 486,000


Divide by: Remaining life 18
Additional Depreciation 27,000
Total Depreciation in 2014 341,500

3. Ans. C.
Machinery GH033
Cost 7/1/14
Down payment: 1,000,000
Balance: (3M*2.577097) 7,731,291
Initial Cost (Cash Price/Present Value) 8,731,291
Multply by: Double Decl. Bal rate 25%
Multiply by (6months/12months) 1/2
Depreciation in 2014 (6 mo.) 1,091,411

4. Ans. A.
Wasting Asset
Cost 18,000,000
Restoration cost 2,000,000
Salvage value (1,000,000)
Depletable cost 19,000,000
Divide by: Useful life (output) 7,600,000
Depletion rate: 2.50
Mulitply by: Actual production 1,200,000
Total Depletion 3,000,000

5. Ans. B.
Depletion rate: 2.50
Mulitply by: Actual sales 900,000
Depletion expense 2,250,000

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CHAPTER 6-EXERCISE 6: JERSEY CORP.


1. Ans. D.
Cost Salvage Depr. Cost Life in years Depr. Exp.
Building 6,100,000 100,000 6,000,000 20 300,000
Machinery 2,550,000 50,000 2,500,000 5 500,000
Equipment 1,030,000 30,000 1,000,000 10 100,000
Total 9,680,000 9,500,000 900,000

Depreciation expense 900,000


Divide by: Total cost 9,680,000
Composite depreciation rate 9.30%

2. Ans. A.
Depreciable cost 9,500,000
Divide by: Depreciation expense 900,000
Composite life 10.56

3. Ans. B.
Total cost 9,680,000
Multiply by: Composite depr. rate 9.30%
Depreciation expense 900,000

4. Ans. C.
Building 6,100,000
Equipment 1,030,000
Total 7,130,000
Multiply by: Composite depr. rate 9.30%
Depreciation expense 662,913

CHAPTER 6-EXERCISE 7: GRANNY INC.


1. Ans. B.
Tools disposed, 2014 300
Cost of earlier purchase (From beg. Invty) 40
Total 12,000
Less: Proceeds from sale (300*10) (3,000)
Depreciation 9,000

Tools disposed, 2015: 700


Cost of earlier purchases (500*40) 20,000
Cost of next earlier purchase (200*60) 12,000
Less: Proceeds from sale (700*14) (9,800)
Depreciation 22,200

2. Ans. D.
Tools disposed, 2014 300
Cost of later purchase (2006 purchase) 60
Total 18,000
Less: Proceeds from sale (300*10) (3,000)
Depreciation 15,000

Tools disposed, 2015: 700 700


Cost of latest purchases (2015 purchase) 80
Total 56,000
Less: Proceeds from sale (700*14) (9,800)
Depreciation 46,200

3. Ans. C.
2014 2015
Beginning inventory 32,000 40,000
Purchases 24,000 72,000
Cost of tools available for use 56,000 112,000
Ending inventory (40,000) (35,000)
Balance 16,000 77,000
Less: Proceeds from sale (3,000) (9,800)
Depreciation expense 13,000 67,200

CHAPTER 6-EXERCISE 8: COCO COMPANY


1. Ans. A.
Proceeds from sale of Mach. Aye 260,000
Carrying Value as of date of disposal
Original Cost 700,000
**Accum. Depr.: 638,000*(45/55) (522,000) 178,000
Gain on sale 82,000

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2. Ans. A.
Machinery Bee (Cost) 1,020,000
Accum Depr (1/1/14)
(960,000/15,000hrs)*11,000hrs (704,000)
Carrying Value, 1/1/14 316,000

Mach. Bee (Depr Carrying Value): (316,000-36,000) 280,000


Div. by: Revised remaining useful life (18,000-11,000) 7,000
Depreciation rate per hour 40.00
Multiply by: Actual hours used in 2014 2,100
Depreciation Expense in 2014 84,000

3. Ans. B.
Mach. See (Cost) 1,600,000
Accum Depr (1/1/14)
**(1.5M/15)*3yrs (300,000)
Carrying Value (1/1/14) 1,300,000
**as per policy, no depreciation on year of acquisition; full on year of disposal

Mach See (Depr Carrying Value): 1.3M-100,000 1,200,000


Divide by: Revised remaining useful life 10
Depreciation Expense in 2014 120,000

4. Ans. C.
Carrying Value of remaining machineries:
Cost:
Machinery Bee 1,020,000
Machinery See 1,600,000
Machinery Dee 1,600,000
Machinery Eff 440,000 4,660,000
Accum. Depr:
Bee: (704,000+84,000) (788,000)
See: (300,000+120,000) (420,000)
Dee: (1.6M*20%)+(1,280K*20%) (576,000)
Eff: (440K*20%) (88,000) (1,872,000)
Carrying value as of December 31, 2014 2,788,000

CHAPTER 6-EXERCISE 9: PQR CORP.


1. Ans. A.
Building, CV 1/1/14 5,904,900
Multiply by: Double decl. bal. rate (20yrs) 10%
Depreciation expense - Building 590,490

2. Ans. A.
Depreciation - Machinery
Disposed Mach: P2.4M/10yrs*6/12 120,000
New Mach: P1.45M/10yrs*6/12 72,500
Remaining Mach: P12.6M/10yrs 1,260,000
Depreciation expense - Machinery 1,452,500

3. Ans. B.
Depreciation - Furniture and Fixture
Disposed F&F: P1.8M*6/55*2/12 32,727
New F&F: P2.2M*10/55*6/12 200,000
Remaining F&F: P4.2M*6/55 458,182
Depreciation expense - F&F 690,909

Present value of installment price at 8% effective rate:


P2.4M/3yrs*2.577097 2,061,678 2.577097
Freight and handling cost 138,322
Total initial cost of new F&F 2,200,000

4. Ans. D.
Fair market value of asset given-up 1,250,000
Carrying value of asset given-up, 6/30/14
(P2.4M*5.5yrs/10yrs) (1,320,000)
Loss on trade-in (70,000)

5. Ans. D.
Proceeds from sale 400,000
Carrying value of F&F sold, 3/1/14 (654,545)
Loss on sale of F&F (254,545)

Cost 1,800,000
Accum Depr, 12/31/13 (P1.8M*34/55) (1,112,727)
Depr. up to 3/1/14 (P1.8M*6/55*2/12) (32,727)
Carrying value, 3/1/14 654,545

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CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP.


1. Ans. C.
Debit Credit Balance
January 1, 2010 (A, B, C) 409,200 409,200
September 30, (D) (18,000+6,000) 24,000 433,200
October 31, (D) 18,000 451,200
November 30, (D) 18,000 469,200
December 31, (D) 18,000 487,200
December 31, Depreciation (20% of bal) (97,440) 389,760
January 31, 2011 (D) 18,000 407,760
February 28, (D) 18,000 425,760
March 31, (D) 18,000 443,760
April 30, (D) 18,000 461,760
May 31, (D) 18,000 479,760
June 30, (D) 18,000 497,760
June 30, (E) 240,000 737,760
July 31 (D) 18,000 755,760
August 30, (D) 18,000 773,760
December 31, Depreciation (20% of bal) (154,752) 619,008
June 30, 2012 (F) (P279,000-P129,000) 150,000 769,008
December 31, Depreciation (20% of bal) (153,802) 615,206
January 1, 2013: (P75,000-P3,750) (71,250) 543,956
December 31, Depreciation (20% of bal) (108,791) 435,165
October 1, 2014: (24,000) 411,165
December 31, Depreciation (20% of bal) (82,233) 328,932

2. Ans. A.; 6. Ans. C.


Correct cost Date of Acq Date of Disp Cond. % as of CV as of Depr. Exp.
12/31/14: 12/31/14: 2014
Equipment A 157,200 1/1/10: 6/30/12: - - -
Equipment B 120,000 1/1/10: 10/1/14: - - 18,000
Equipment C 132,000 1/1/10: 1/1/13: - - -
Equipment D: Cash price equiv.+Trans. Cost 186,000 9/30/14: - 0.75yrs/5yrs 27,900 37,200
Equipment E: Cash price equiv. (net of disc.) 235,200 6/30/11: - 1.5yrs/5yrs 70,560 47,040
Equipment F: at FMV 279,000 6/30/12: - 2.5yrs/5yrs 139,500 55,800
Correct CV, 12/31/14 237,960 158,040

3. Ans. B.
Proceeds from sale of C, net 71,250
CV of C, 1/1/2013: P132,000*2yrs/5yrs 52,800
Gain on sale of C 18,450

4. Ans. D.
Proceeds from sale of B 24,000
CV of B, 10/1/14: P120,000*0.25yrs/5yrs (6,000)
Gain on sale of B 18,000

5. Ans. C.
FMV of A, (Asset given-up): 129,000
CV of A, 6/30/12: P157,200*2.5yrs/5yrs (78,600)
Gain on trade-in 50,400

CHAPTER 6-EXERCISE 11: ROLLING CORP.


1. Ans. B.
Proceeds 250,000
Carrying Value (1.5M*80%*80%*80%)-64,000** 704,000 **depreciation for 5 months in 2014
Loss on disposal of old Factory equipment (454,000)

2. Ans. A.
Downpayment P1,000,000
PV of Balance, at 10% for four periods:
P250,000*3.169865 792,466
Incidental costs (freight and installation) 120,000
PV of future retirement cost, at 10% for 10 period: 87,534
P227,041*0.385543
Initial cost of new Factory equipment P2,000,000

3. Ans. C
Fair value of asset given up (1,200,000-500,000) 700,000 Cost 1,000,000
*Book value of asset given up 355,000 Accum Depr (3 yrs + 7 mo. 645,000
Gain on trade-in 345,000 Carrying Value 355,000

4. Ans. D.
Building (10,000,000*90%)*12/120 900,000 - building being deprecated on its 4 th year.
Building Improvement (780,000*12/78) 120,000 - over the remaining life of building which is 12 years.
Total Depr. – Building & Improv. 1,020,000

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5. Ans. C.
Disposed: (1,500,000*80%*80%*80%*20%)*5/12) 64,000
New: (2,000,000*20%*7/12) 233,333
Balance: (6,500,000**80%*80%*80%*20%) 665,600
Total Depreciation – Factory Equipment 962,933

6. Ans. C.
Disposed: (1,000,000*90%)/5*7/12 105,000
New: (1,200,000*90%)/5*5/12 90,000
Balance (4,000,000*90%)/5 720,000
Total Depreciation – Automotive 915,000

7. Ans. D.
Cost Accum Depr. CV
Land 5,000,000 5,000,000
Building and Improvements 10,780,000 4,170,000 6,610,000
Factory Equipment 8,500,000 4,070,933 4,429,067
Automotive Equipment 5,200,000 2,970,000 2,230,000
Total 18,269,067

CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY


1. Ans. C.
Equipment per audit: (P100,000*0.92593) 92,593 0.92593
Equipment per books, Feb. 1, 2014 100,000
Adjustment to Equipment account (7,407)

2. Ans. D.
Building per audit: at FMV 650,000
Buidling per books, June 1, 2014 500,000
Adjustment to Building account 150,000

3. Ans A.
Inventory Fixtures Total
Per audit: Prorata based on relative FMV 75,893 49,107 125,000
Per books, Apr. 1, 2015 85,000 55,000 140,000
Adjustement to Inventory and Fixtures (9,107) (5,893) (15,000)

4. Ans. A.
Per audit, Land at FMV 48,500
Per books, September, 2015 -
Adjustment to Land 48,500

5. Ans. B.
Per audit, Machinery at FMV 40,000
Per books, October 12, 2015 45,000
Adjustment to Machinery (5,000)

6. Ans. A.
Equipment, Correct cost (see #1) 92,593
Divide by: Useful life 10
Depreciation expense, 2015 9,259

7. Ans. A.
Building, Correct cost (see #2) 650,000
Divide by: Useful life 25
Depreciation expense, 2015 26,000

8. Ans.A.
Fixtures, Correct cost (see #3) 49,107
Divide by: Useful life 10
Depreciation expense, 2015 4,911

9. Ans. A.
Machinery, Correct cost (see #5) 40,000
Divide by: Useful life 10
Depreciation expense, 2015 4,000

CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY


1. Ans. D.; 2. Ans. C.
Allocation of lump sum price in proportion to fair values:
Land A (135/1,350 x P12,300,000) P1,230,000
Building A (1,215/1,350 x P12,300,000) 11,070,000
Total P12,300,00
0

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3. Ans. B.
Cost of Building A P11,070,000
Less: Salvage value (600,000)
Depreciable cost 10,470,000
Divide by: Annual depreciation 261,750
Estimated life 40 years

4. Ans. A.
Depreciation expense on Building A for the year
Ended September 30, 2016 261,750
Same as prior year because straight-line method is used in depreciating Building A.

5. Ans. D.
Fair value of Land on acquisition date = FMV of shares P1,125,00
*Demolition cost shall be charged to the cost of the new constructed Building.0

6. Ans. D.
Since Builidng B is not yet available for use as of September 30, 2016, no depreciation shall be provided yet.

7. Ans. A.
Donated equipment, at fair value P450,000

8. Ans. D.
Depreciation expense—Donated equipment, for the year ended September 30, 2015:
Cost P450,000
150% declining balance rate (1/10 x 150%) X 15%
Depreciation expense P67,500

9. Ans. C.
Depreciation expense—Donated equipment, for the year ended September 30, 2016:
Book value, Oct. 1, 2015 (P450,000-P67,500) P382,500
150% declining balance rate (1/10 x 150%) X 15%
Depreciation expense P57,375

10. Ans. B.
Total cost as recorded P2,473,500
Less: Normal repairs and maintenance 223,500
Correct cost of Machinery A P2,250,00
0
11. Ans. C.
Depreciation expense—Machinery A for the year ended September 30, 2015:
(P2,250,000-P90,000=P2,160,000 x 8/36) P480,000

12. Ans. A.
Depreciation expense—Machinery A, for the year ended September 30, 2016:
(P2,160,000 x 7/36 x 4/12) P140,000

13. Ans. C.
Down payment P86,000
First installment payment on October 1, 2015 90,000
Present value of succeeding 10 nstallment payments
(P90,000 x 6.710) 603,900
Total cost of Machinery B P780,000

14. Ans. B.
Depreciation expense-Machinery B, for the year ended Septmeber 30, 2016:
(P780,000/20years) 39,000

CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC.


1. Ans. D.
Book value of plant and equipment,
End of 2016 (P120 million x 5/8) P75
million
2. Ans. A.
Book value of purchased technology (Patent)
(P60 million x 3/6) P30 million

3. Ans. D.
Plant and equipment:
Book value P75 million
Recoverable value (FMV) 50 million *cash flow is undiscounted, thus not useful
Impairment loss P25
million
4. Ans. C.
Purchased technology:
Book value P30 million
Recoverable value (FMV) 10 million *cash flow is undiscounted thus not useful
Impairment loss P20
million

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CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION


1. Ans. A.
Factory: (P1,800,000*24/30) 1,440,000
Building: (P10,000,000*14/20) 7,000,000

2. Ans. B.
Present value of future net cash flows from the CGU's:
Continued use: P1,050,000*4.9676 5,215,980

3. Ans. A.
Carrying value of CGU:
Factory: (P1,800,000*24/30) 1,440,000
Building: (P10,000,000*14/20) 7,000,000
Total 8,440,000
Recoverable value/Value in use 5,215,980 *FMV not determinable
Impairment loss 3,224,020

4. Ans. B.
Factory Machinery
Carrying value before impairment loss: 1,440,000 7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020 (550,070)
Building (7,000,000/8,440,000)*P3,224,020 (2,673,950)
Carrying value after impairment loss 889,930 4,326,050

5. Ans. B.
Factory Machinery
Carrying value before impairment loss: 1,440,000 7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020 (550,070)
Building (7,000,000/8,440,000)*P3,224,020 (2,673,950)
Carrying value after impairment loss 889,930 4,326,050 *lower than FMV P4.5M
Additional impairment to Factory (173,950) 173,950
Carrying value after reallocation of impairment loss 715,980 4,500,000
Observe that the carrying value of the individual assets comprising the CGU should not result to an amount that is
lower than the higher between the individual assets' Recoverable Value or Zero.

CHAPTER 6-EXERCISE 16: MARGOT CORPORATION


1. Ans. A.
Cost of machineries 609,000
Accum. Depr. (609,000-49,000)*3yrs/8yrs (210,000)
Carrying values, 12/31/14 399,000

2. Ans. B.
Present value of future net cash flows from:
Use: 2015: P141,000*0.909091 128,182 0.909091
2016: P114,000*0.826446 94,215 0.826446
2017: P30,000*0.751315 22,539 0.751315
2018: P15,000*0.683013 10,245 0.683013
2019: P10,000*0.620921 6,209 261,391 0.620921
Disposal: 2019: P49,000*0.620921 30,425
Value in use 291,816

3. Ans. C.
Value in use 291,816
FMV less cost to sell 300,000 higher

4. Ans. D.
Carrying value 399,000
Recoverable amount (300,000)
Impairment loss 99,000

5. Ans. B.
Value in use 291,816 higher
FMV less cost to sell 275,000

6. Ans. D.
Carrying value 399,000
Recoverable amount (291,816)
Impairment loss 107,184

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CHAPTER 6-EXERCISE 17: REVO CORP.


1. Ans. C.
Land A Land B
Fair Market Value 8,000,000 16,000,000
Cost (10,000,000) (12,000,000)
(Impairment loss)/Revaluation Surplus (2,000,000) 4,000,000
P&L OCI

2. Ans. C.
Land A Land B
Fair Market Value 12,000,000 11,000,000
Cost (10,000,000) (12,000,000)
(Impairment loss)/Revaluation Surplus 2,000,000 (1,000,000)
OCI P&L
Fair Market Value 12,000,000 11,000,000
CV (8,000,000) (16,000,000)
Total increase/decrease in value 4,000,000 (5,000,000)
2,000,000 (4,000,000)
Recovery gain Reversal of RS

Impairment loss from Land B (1,000,000)


Recovery gain from Land A 2,000,000
Net gain from Lands 1,000,000

3. Ans. B.
Land A Land B
Fair Market Value 11,000,000 15,000,000
Cost (10,000,000) (12,000,000)
(Impairment loss)/Revaluation Surplus - 3,000,000
OCI OCI
Fair Market Value 11,000,000 15,000,000
CV (12,000,000) (11,000,000)
Total increase/decrease in value (1,000,000) 4,000,000
(1,000,000) 1,000,000
Reversal of RS Recovery gain

Revaluation surplus from Land B 3,000,000


Reversal of revaluaiton surplus for Land A (1,000,000)
Net OCI for the year 2,000,000

CHAPTER 6-EXERCISE 18: LABANOS CORP.


1. Ans. C.
Carrying value (P500,000-P90,000) 410,000
Recoverable value (338,000)
Impairment loss 72,000

2. Ans. B.
CV after impairment loss 338,000
2014 Depr: (338,000-50,000)/8yrs (36,000)
CV, 12/31/14 302,000

3. Ans. C.
Replacement depreciable cost (P555,000-50,000) 505,000
Multiply by: Condition percent (6yrs/10yrs) 6/10
Depreciable FMV, Depreciable Sound Value 303,000
Salvage value 50,000
Fair value/Sound value 353,000

4. Ans. A.
Fair value/Sound Value 353,000
CV had there been no impairment (P500,000-P180,000) 320,000
Revaluation surplus 33,000

CV had there been no impairment (P500,000-P180,000) 320,000


CV based on impaired value (P338,000-P72,000) 266,000
Recovery gain - P&L 54,000

5. Ans. C.
RS, 12/31/16: (P33,000*7years/8years) 28,875
*note that the remaining life of the asset after revaluation is (12years-4years) 8 years.

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CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS

DISCUSSION PROBLEMS
CHAPTER 7-PROBLEM 1
1 A.
2 B.
3 C.

CHAPTER 7-PROBLEM 2:
Ans. P3,700,000.
Purchase of a franchise 1,200,000
Goodwill acquired in the purchase of a business 640,000
Legal costs incurred in securing a patent 70,000
Cost of purchasing a patent from an inventor 500,000
Cost of purchasing a copyright 900,000
Cost of purchasing a trademark 290,000
100,000
Total Intangible Assets 3,700,000

CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP.


1. Ans.
2008:
Research and development expense 418,000
2009:
Research and development expense 520,000
2010:
Patent ABC amo. (P100,000/20yrs)*9/12 3,750
Research and development expense 125,000 128,750
2011:
Patent ABC amo. (P100,000/20yrs) 5,000
Research and development expense 450,000 455,000
2012:
Patent ABC amo. (P100,000/20yrs) 5,000
Patent DEF amo. (P375,000/12.5yrs) 30,000
Research and development expense 500,000
Legal fees - successful defense 42,600 577,600
2013:
Patent ABC amo. (P100,000/20yrs) 5,000
Patent DEF amo. (P375,000/12.5yrs) 30,000
Patent GHI amo. (P350,000/16yrs)*6/12 10,938 45,938
2014:
Patent ABC amo. (P100,000/20yrs) 5,000
Patent DEF amo. (P375,000/12.5yrs) 30,000
Patent GHI amo. (P350,000/16yrs) 21,875
Research and development expense 360,000 416,875

2. Ans. P680,938.
Condition % CV
Cost Acq. Date 12/31/14: 12/31/14:
Patent ABC 100,000 4/1/2010: 15.75y/20y 78,750
Patent DEF 375,000 12/31/2011: 9.5y/12.5y 285,000
Patent GHI 350,000 7/1/2013: 14.5y/16y 317,188
Total 680,938

CHAPTER 7-PROBLEM 4: GARY INC.


1. Ans.
2011: Amortization (P640,000/10yrs) 64,000
2012: Amortization (P640,000/10yrs) 64,000
2013: Amortization:
Original Patent (P640,000-P128,000)/12 years 42,667
Related Patent (P120,000/12 years) 10,000
Total Amortization 52,667
2014: Amortization:
Original Patent (P640,000-P128,000)/12 years 42,667
Related Patent (P120,000/12 years) 10,000
Total Amortization 52,667

2. Ans. P386,565.; 3. Ans. (P140,102).


Value in use/Present value of future net cash flows at 8% for 3 years.
P150,000*2.577097 386,565 2.577097
Carrying value, 12/31/14
Original and Related patent cost 760,000
Amortization, 12/31/14 (233,333) 526,667
Impairment loss (140,102)

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4. Ans. P128,855.
CV, 1/1/15 after impairment 386,565
Divide by: Remaining life 3
Amortization, 2015 128,855

CHAPTER 7-PROBLEM 5: COLGATE COMPANY


Case 1:
1. Ans. P1,439,756.
Franchise, Jan. 1, 2014
Downpayment 600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712 1,748,227 2,348,227 2.913712
Less: Amo, 2014 (2,348,227/10yrs) (234,823)
Carrying value, 12/31/2014 2,113,405
Value in use/PV of net cash flows at 10% for 9yrs:
P250,000*5.759024 5.759024 1,439,756
Impairment loss 673,649

2. Ans. P476,000.
Patent, Jan., 2014 544,000
Amortization, 2014 (544,000/8yrs) (68,000)
Carrying value, 12/31/14 476,000

3. Ans. P389,474.
Trademark, Jan., 2012 1,000,000
Amortization, 2012 (P1M/10yrs) (100,000)
Carrying value, 12/3/12 900,000
Value in use/PV of net cash flows at 9% for 9yrs:
P200,000*5.995247 5.995247 1,199,049
Impairment loss -

Trademark, Jan., 2013 900,000


Amortization, 2013 (P1M/10yrs) (100,000)
Carrying value, 12/3/13 800,000
Value in use/PV of net cash flows at 9.5% for 8yrs:
P200,000*5.433436 5.433436 1,086,687
Impairment loss -

Trademark, Jan., 2014 800,000


Amortization, 2014 (P1M/10yrs) (100,000)
Carrying value, 12/3/14 700,000
Value in use/PV of net cash flows at 10% for 7yrs:
P80,000*4.868419 4.868419 389,474
Impairment loss 310,526

4. Ans. P2,858,150.
Fanchise:
Amortization 234,823
Impairment loss 673,649
Interest expense (P1,748,227*14%) 244,752
Continuing franchise fee (P18M*5%) 900,000 2,053,223
Patent:
Amortization 68,000
Trademark:
Amortization 100,000
Impairment loss 310,526
Legal fees - successful defense 326,400 736,926
Total expenses 2,858,150

Case 2:
1. Ans. P2,348,227.
Franchise, Jan. 1, 2014
Downpayment 600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712 1,748,227 2,348,227
Carrying value, 12/31/2014 2,348,227
Value in use/PV of net cash flows at 10% for an indefinite period:
P250,000/10% 5.759024 2,500,000
Impairment loss -

2. Ans. P476,000.
Patent, Jan., 2014 544,000
Amortization, 2014 (544,000/8yrs) (68,000)
Carrying value, 12/31/14 476,000

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3. Ans. P800,000.
Trademark, Jan., 2012 1,000,000
Carrying value, 12/3/12 1,000,000
Value in use/PV of net cash flows at 9% for an indefinite period:
P200,000/9% 5.995247 2,222,222
Impairment loss -

Trademark, Jan., 2013 1,000,000


Carrying value, 12/3/13 1,000,000
Value in use/PV of net cash flows at 9.5% for an indefinte period:
P200,000/9.5% 5.433436 2,105,263
Impairment loss -

Trademark, Jan., 2014 1,000,000


Carrying value, 12/3/14 1,000,000
Value in use/PV of net cash flows at 10% for an indefinite period:
P80,000/10% 4.868419 800,000
Impairment loss 200,000

4. Ans. P1,739,152.
Fanchise:
Interest expense (P1,748,227*14%) 244,752
Continuing franchise fee (P18M*5%) 900,000 1,144,752
Patent:
Amortization 68,000
Trademark:
Impairment loss 200,000
Legal fees - successful defense 326,400 526,400
Total expenses 1,739,152

CHAPTER 7-PROBLEM 6: PJ CORP.


1. Ans. P1,500,000.
Acquisition Cost 8,000,000
FMV of Net Assets 6,500,000
Goodwill 1,500,000

2. Ans. P1,950,000; Ans. P8,450,000.


FMV of Net Assets 6,500,000
Excess earnings in % (12%-9%) 3%
Excess earings 195,000

Goodwill (P195,000*10yrs) 1,950,000


FMV of Net Assets 6,500,000
Acquisition cost 8,450,000

3. Ans. P1,625,000; Ans. P8,125,000.


Goodwill (P195,000/12%) 1,625,000
FMV of Net Assets 6,500,000
Acquisition cost 8,125,000

4. Ans. P1,200,000; Ans. P7,800,000.


Average/Normal Earnings of DA Inc. (P6.5M*12%) 780,000
Divide by: Capitalization rate 10%
Acquisition cost 7,800,000
FMV of Net Assets 6,500,000
Goodwill 1,300,000

5. Ans. P1,198,191; Ans. P7,698,191.


Present value of excess earnings at 10% for 10 years:
Goodwill: P195,000*6.144567 1,198,191 6.144567
FMV of Net Assets 6,500,000
Acquisition cost 7,698,191

CHAPTER 7-PROBLEM 7: KAREN CORPORATION


Accumulated profits 2010-2014 1,800,000
Less: Gain on sale of equipment in 2012 (200,000)
Accum. Operating Profits 2010-2014 1,600,000
Divide by: 5
Annual average operating profits 320,000
Add: Annual presidents bonus 50,000
Less: Inrease in depr. exp. (P350,000/5yrs) (70,000)
Projected average operating profits 300,000
Less: Average/Normal earnings of industry (P2.6M*10%) (260,000)
Projected excess earnings 40,000

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FMV BV Difference
Current Asset 700,000 550,000 150,000
Noncurrent Asset (excluding GW)
Land 950,000 950,000 -
Depr. Asset 1,850,000 1,500,000 350,000
Liabilities (900,000) (900,000) -
Net Assets 2,600,000 2,100,000

1. Ans. P200,000; P160,000; P400,000; P151,631.


a) Purchase of excess earnings
Goodwill (P40,000*5yrs) 200,000
b) Capitalization of excess earnings
Goodwill (P40,000/25%) 160,000
c) Capitalzation of average earnings
Projected annual average oper. Profits 300,000
Divide by: Capitalization rate 10%
Acquisition cost/price 3,000,000
Less: FMV of Net Asset (2,600,000)
Goodwill 400,000
d) Present value method
Goodwill: (P40,000*0.3.79079) 151,631 3.79079

2. Ans.
a) Purchase of excess earnings
FMV of Net Assets 2,600,000
Goodwill 200,000
Acquisition cost/price 2,800,000
b) Capitalization of excess earnings
FMV of Net Assets 2,600,000
Goodwill (P40,000/25%) 160,000
Acquisition cost/price 2,760,000
c) Capitalzation of average earnings
Projected annual average oper. Profits 300,000
Divide by: Capitalization rate 10%
Acquisition cost/price 3,000,000
d) Present value method
FMV of Net Assets 2,600,000
Goodwill: (P40,000*0.3.79079) 151,631
Acquisition cost/price 2,751,631

3. Ans. Option d)
For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill.

CHAPTER 7-PROBLEM 8: ABC CORPORATION


1. Ans. P1,000,000.
ABC DEF GHI JKL
Acquisition price 5,000,000
FMV of net assets (4 CGUs) 800,000 1,500,000 700,000 1,000,000 4,000,000
Goodwill (prorated)** 200,000 375,000 175,000 250,000 1,000,000

Before impairment, 12/31/14


Cash* shall be excluded in determining the CV of the CGU (not included in the "other assets" within the scope of PAS 36)
Factory equipment 100,000 240,000 100,000 200,000
Office Equipment 250,000 490,000 120,000 200,000
Building 500,000 900,000 400,000 700,000
Goodwill** 200,000 375,000 175,000 250,000
Carrying value of CGU 1,050,000 2,005,000 795,000 1,350,000
Value in use:
ABC: P149,726*6.144567 920,000 6.144567
DEF: P289,242*7.606080 2,200,000 7.606080
GHI: P76,490*6.144567 470,000 6.813692
JKL: P161,440*6.813692 950,000
Impairment loss 130,000 - 325,000 400,000

CGU-ABC
Impairment loss 130,000
Chargeable to Goodwill-ABC (130,000)

CGU-DEF
Impairment loss -

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CGU-GHI CV, after impairment


Impairment loss 325,000
Chargeable to Goodwill-GHI (175,000) -
Balance to allocated to other assets 150,000
Factory equipment (100,000/620,000) 100,000 (24,194) 75,806
Office equipment (120,000/620,000) 120,000 (29,032) 90,968
Building (400,000/620,000) 400,000 (96,774) 303,226

CGU-JKL CV, after impairment


Impairment loss 400,000
Chargeable to Goodwill-GHI (250,000) -
Balance to allocated to other assets 150,000
Factory Equipment (200,000/1,100,000) 200,000 (27,273) 172,727
Office equipment (200,000/1,100,000) 200,000 (27,273) 172,727
Building (700,000/1,100,000) 700,000 (95,455) 604,545

2. Ans. P395,000.
After impairment, 12/31/14 ABC DEF GHI JKL TOTAL
Cash 50,000 100,000 - - 150,000
Factory equipment 100,000 240,000 75,806 172,727 588,534
Office Equipment 250,000 490,000 90,968 172,727 1,003,695
Building 500,000 900,000 303,226 604,545 2,307,771
Goodwill** 70,000 375,000 - - 445,000
Carrying value of CGU 970,000 2,105,000 470,000 950,000 4,495,000

3. Ans. P605,000.
Goodwill, before impairment 1,000,000
Goodwill, after impairment 445,000
Impairment loss charged to goodwill 555,000

4. Ans. P258,064.

5. Ans. P604,546.

CHAPTER 7-PROBLEM 9: EDD CORP.

1. Ans. P510,000.
2014 Rental expense 480,000
2014 Amortization of leaserights
(P300,000/10yrs) 30,000 510,000

2. Ans. P63,158.
Cost of leasehold improvement 1,200,000
Divide by: Remaining lease term: 9.5yrs 9.50 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs.
Annual depreciation 126,316
Multiply by: 6/12
Depreciation expense, 2014 63,158

3. Ans. P60,150.
Carrying value, 1/1/2019
(P1,200,000*5yrs/9.5yrs) 631,579
Divide by: Remaining useful life 10.50 *remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended
Depreciation expense, 2019 60,150 remaining lease term (10-5yrs+10yrs), 15yrs.

CHAPTER 7-PROBLEM 10: MUSAR CORP.


1. Ans. P139,375.
Salaries of staff working on research project 78,000
Computer program services 17,500
Allocated general expenses (P175,500*25%) 43,875
Total research and development expense 139,375

2. Ans. P2,480.
Patent, initial cost 24,800
Divide by: useful life 10
Amortization expense 2,480

3. Ans. P22,320.
Patent (24,800-2480) 22,320

CHAPTER 7-PROBLEM 11: BITS AND BYTES INC.


1. Ans. P1,253,600.
Salaries and wages of programmers doing research 940,000
Expenses prior to establishment of tech. feasibility 313,600
Total research and development expense 1,253,600

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2. Ans. P330,000.
Expenses after technical feasibility is established 330,000

3. Ans. P100,500.
Amortization of computer software (330,000/3yrs) 110,000
Cost to produce and prepare software for sale 225,000
Cost of goods produced 335,000
Portion of goods remaining on hand 30%
Cost of ending inventory 100,500

4. Ans. P117,000.
Amortization of computer software:
P330,000*(P2,000,000/P4,000,000) 165,000
Cost to produce and prepare software for sale 225,000
Cost of goods produced 390,000
Portion of goods remaining on hand 30%
Cost of ending inventory 117,000

CHAPTER 7-PROBLEM 12: HARRY CORP.


Prepayment Exp.-2014 Miscellaneous
Rent
Security Deposit 50,000 - Receivable
1-year rent 220,000 20,000
Lease bonus 55,000 5,000
Inurance
Fire insurance 12,500 37,500
Property insurance 56,250 18,750
Advertising 25,000 50,000
Office supplier 25,000 90,000
Advances to officers 135,000 - Receivable/Other asset
Idle office equipment 25,000 - Other asset
Bond redemption fund 545,000 - LT Investment
393,750 221,250
2. Ans. 1. Ans.

MULTIPLE CHOICE EXERCISES:


CHAPTER 7-EXERCISE 1:
Purchased recipes and secret formulas 150,000
Licensing, royalty, and stand still agreement 300,000
Operating and broadcast rights 112,000
Goodwill purchased in a business combination 500,000
A license to manufacture a steroid by means of a government grant 150,000
Initial franchise fees paid 175,000
Cost of purchasing a patent from an inventor 137,000
Legal cost in securing a patent 70,000
Cost of purchasing a trademark 250,000
Amount paid to a lessor for the exclusive right to rent a facility under an
operating lease agreement for a period of 10 years 100,000
Total intangibles including goodwill 1,944,000

CHAPTER 7-EXERCISE 2: DOHA CORPORATION


1. Ans. A.
CV, Patent, 12/31/14: P444,000*9yrs/10yrs 399,600

2. Ans. C.
CV, Franchise, 12/31/14: P252,000*6.5yrs/8yrs 204,750

3. Ans. B.
Prepaid rent, 12/31/14: P168,000*0.75yrs/2yrs 63,000

4. Ans. D.
Amortization of franchise, 2013 (P252,000/8yrs)*6/12 15,750
Rent expense, 2013 (P168,000/2yrs)*3/12 21,000
Net loss including organization expense in 2013 96,000
Retroactive adjustment to RE,beg. 2013 132,750

5. Ans. B.
Amortization of franchise, 2014 (P252,000/8yrs) 31,500
Rent expense, 2014 (P168,000/2yrs) 84,000
Amortization of patent, 2014 (P444,000/10yrs) 44,400
Cost to develop a secret formula 450,000
Legal fees - successful defense 75,900
Research and development expense, 2014 960,000
Total expense in 2014 1,645,800

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CHAPTER 7-EXERCISE 3: ALYSSA CORP.


1. Ans. B.
Franchise:
Carrying Value/Cost (no definite life) 1,260,000
Recoverable value/Value in use:
(180,000/12%) 1,500,000
Impairment loss in 2014 - no impairment in 2013

Carrying Value/Cost (no definite life) 1,260,000


Recoverable value/Value in use:
(150,000/12%) 1,250,000
Impairment loss in 2014 10,000

2. Ans. B.
Patent:
Cost (1/1/14) 2,220,000
Amortization: (2,220K/10yrs) (222,000)
Carrying Value (12/14) 1,998,000
Recoverable value/Value in use
(337,822*5.32825) 1,800,000 0 5.328250
Impairment loss 198,000

3. Ans. A.
2013 expenses:
Rent expense (840,000/2)*3/12 105,000
Net loss for the year 480,000
Retroactive adjustment to RE, Beg 585,000

4. Ans. A.
2014 expenses:
Impairment loss on Franchise 10,000
Rent expense for 2014 420,000
Amortization on Patent 222,000
Impairment loss on Patent 198,000
Cost of developing recepe 2,250,000
Legal fees on patent defense 379,500
Total expense 3,479,500

CHAPTER 7-EXERCISE 4: STU CORPORATION


1. Ans. B.
Patent, Correct Cost, 1/2013 3,740,000
Amortization (2013-2014): P3,740,000*2yrs/20yrs (374,000)
Carrying value, 12/31/14 3,366,000

2. Ans. D.
License, Correct Cost, 1/2012 2,160,000 -Training cost is recognized as outright expense.
Amortization (2012-2014): P2,160,000*3yrs/10yrs (648,000)
Carrying value, 12/31/14 1,512,000

3. Ans. B.
Training cost, expense in 2012 per audit 240,000
Amortization expense (2012-2013) per audit: P2,160,000*2yrs/10yrs 432,000
Prior period expense, per audit 672,000
Amortization expnse (2012-2013) per books: P2,400,000*2yrs/10yrs 480,000
Retroactive adjustment, debit, to RE, beg. 2014 192,000

4. Ans. C.;
Trademark, Correct CV, 12/31/14 1,280,000 - Trademark is with indefinite life, thus no amortization.
Recoverable value/Value in use: - Successful defense cost is recognized as outright expense.
PV of Future net cash flows at 9% for an indefinite period:
P90,000/9% 1,000,000
Impairment loss 280,000

5. Ans. C.
Depreciation on the Leasehold Improvement
P900,000/5yrs * 10/12 150,000 - Depr. is over useful life since it is shorter than remaining lease term.
Amortization of Leaserights; P400,000/10yrs 40,000
Total expense 190,000

CHAPTER 7-EXERCISE 5: NICOLE CORP.


1. Ans. D.
Legal and other professional fees to process the patent
application (useful life is 15 years), Jan., 2007 660,000

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2. Ans. B.
CV, Dec. 31, 2007: P660,000*14/15 616,000

3. Ans. C.
Amortization expense 2012:
Original Patent: P660,000/15yrs 44,000
Competing Patent: P220,000/11yrs 20,000
Total amortization, 2012 64,000

4. Ans. A.
Original Patent, CV, Dec. 31, 2011:
P660,000*10/15 440,000
Competing Patent, CV, Dec. 31, 2011:
P220,000*10/11 200,000 640,000

5. Ans. D.
Original Patent, CV, 1/1/2012 440,000
Competing Patent, CV, 1/1/2012 200,000
Related Patent, 1/1/2012 335,000
Total Patent, 1/1/2012 975,000
Divide by: Extended remaining life (10yrs+3yrs) 13
Revised amortization expense, 2012 75,000

6. Ans. B.
CV, 12/31/13 (P975,000*11/13) 825,000

7. Ans. B.
CV, 12/31/14 (P975,000*10/13) 750,000
Recoverable value -
Impairment loss 750,000

CHAPTER 7-EXERCISE 6: DEF CORP.


1. Ans. D.
Patent, 12/31/14 (before amortization), per books 550,000
CV of Repairs cost capitalized in 1/1/2011
P75,000*6yrs/9yrs (50,000)
Patent, 12/31/14 (before amortization), per audit 500,000
CV of Patent with revised useful life:
P210,000*6yrs/14yrs 90,000
CV of remaining Patent with the same useful life 410,000

Amortization of patent with revised life: (P90,000/2yrs) 45,000


Amortization of patent w/o change in life: (P410,000/6yrs) 68,333
Total amortization expense, 2014 113,333

2. Ans. A.
Patent, 12/31/14 (before amortization), per audit 500,000
Correct amortization for 2014 (113,333)
Patent, 12/31/14 after amortization 386,667

3. Ans. B.
The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.

CHAPTER 7-EXERCISE 7: AMFURST CORP.


1. Ans. C. 2. Ans. C.
FRANCHISE: TERM 10 YEARS FRANCHISE: INDEFINITE
Initial franchise fee (PV) Initial franchise fee (PV)
Down payment 600,000 Down payment 600,000
Balance (800,000*2.321632) 1,857,306 1 Balance (800,000*2.321632) 1,857,306
2,457,306 2.321632 2,457,306
Less: Amortization: 245,731 Recoverable amount/Value in use
CV 12/31/14 2,211,575 (400,000/12%) 3,333,333
Recoverable Value/Value in Use Impairment loss -
(400,000*5.32825) 2,131,300 0
Impairment loss 80,275 5.3282498 Amortization -
Impairment loss -
Amortization (2,457,306/10) 245,731 Interest expense (1,857,306*14%) 260,023
Impairment loss 80,275 Continuing franchise fee (12M*5%) 600,000
Interest expense (1,857,306*14%) 260,023 Total expense 860,023
Continuing franchise fee (12M*5%) 600,000
Total expense 1,186,028

3. Ans. B.
PATENT: 8 YEARS:
Cost 1/1/2014 545,000 517,750
Amortization (545,000/8) 68,125
Carrying Value 12/31/2014 476,875
Recoverable value
(120,000*4,563757) 547,651 0
Impairment loss -

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4. Ans. C.
LEASE AGREEMENT:
Rent expense for 2014 200,000
Amortizatin of lease rights (150,000/5yrs) 30,000
Depr of improvement (450,000/4.5yrs)*6/ 50,000
Total expense 280,000

CHAPTER 7-EXERCISE 8: SAHARA CORP.


1. Ans. D.
*No capitalizable internally developed intangible yet since one of criteria for capitalization (i.e. how future economic benefits shall be derived)
has not been met. Under PAS 38, Intangibles, the following criteria should be strictly complied with if to capitalize development cost of
an internally generated intangible:
1. Establishment of technical feasibility
2. Intention to complete the project and to either sell/use the result of the project.
3. Ability to complete the project and to either sell/use the result of the project.
4. Availability of resources to complete the project.
5. How probable future economic benefits can be derived from the intangible.
6. Ability to reliably estimate future cost to be incurred to complete the intangible.

2. Ans D.
Salaries and other employee benefits 7,800,000
Other expenses 3,080,000
Depreciation on Building (11.2M/20yrs) 560,000
Total R&D Expense 11,440,000

3. Ans. B.
Patent cost 3,200,000
Useful life 10
Amortization for 2014 320,000

4. Ans. A
Building cost 11,200,000
Accum Depr (11.2M/20) (560,000)
CV 12/31/14 10,640,000

5. Ans. B.
Patent cost 3,200,000
Amortization in 2013: (3.2M/10yrs)*9/12 (240,000)
Amortization in 2014 (320,000)
CV 12/31/14 2,640,000

CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES


1. Ans. B.
Franchise, CV, 12/31/14 550,000 *No definite life, thus no amortization
*Continuing franchise fee is recgonized as outright expense.
Recoverable value/ Value in use
(P67,500/15%) 450,000 *PV of future net cash flows from continued use at 15% for an indefinite period.
Impairment loss 100,000

2. Ans. 0.
Organization cost is recognized as outright expense.

3. Ans. C.
Excess of cost over net assets of entrprise acquired in 2012 200,000
*No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost.

CHAPTER 7-EXERCISE 10: CAN CORP.


Projected profits for the next four years:
2014: (6M*1.2) 7,200,000
2015: (7.2M*1.2) 8,640,000
2016: (8.64M*1.2) 10,368,000
2017: (10.368M*1.2) 12,441,600
Total 38,649,600
Divide by: 4
Projected average earnings 9,662,400 9,662,400
Average/Normal earnings at industry rate:
Fair market Value of Net Assets
Current Asset (9M+4.8M) 13,800,000
Investments at FMV 9,000,000
PPE, net 24,000,000
Current liabilities (4,800,000)
Noncurrent liabilities (6,000,000)
FMV of net assets 36,000,000
Multiply by: industry rate of return 18%
Average/Normal earnings at industry rate 6,480,000 6,480,000
Projected average excess earnings 3,182,400

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1. Ans. D.
Projected average excess earnings 3,182,400
Divide by: Capitalization rate 18%
Goodwill: 17,680,000
Add: Fair value of net assets 36,000,000
Acquisition price 53,680,000

2. Ans. A.
Projected average excess earnings 3,182,400
Multiply by: # of years 4
Goodwill 12,729,600
Add: Fair value of net assets 36,000,000
Acquisition price 48,729,600

3. Ans. A.
Projected average earnings 9,662,400
Divide by: Capitalization rate 20%
Acquisition price 48,312,000

4. Ans. C.
Projected average excess earnings 3,182,400
Multiply by: PV factor at 15%, 4 periods 3
Goodwill 9,085,683
Add: Fair value of net assets 36,000,000
Acquisition price 45,085,683

CHAPTER 7-EXERCISE 11: T CORPORATION


1. Ans. B.
Total Country A Country B Country C
Acquisition Price, January 1, 2013 10,000,000
FMV of Identifiable Net Asset 8,000,000 2,000,000 1,500,000 4,500,000
Goodwill (Allocated, Prorata: FMV of NA) 2,000,000 500,000 375,000 1,125,000

2. Ans. A.
Value in use=Present value of future net cash flows from CGU Country C:
Estim. Future net cash flows before impairment event 1,500,000
Effect of new legislation (cutting by 40% imports to Country C) 60%
Estim. Future net cash flows after impairment event 900,000
Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.771584
Value in use 4,294,426
*observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal.

3. Ans. A.
Carrying Value of Country C's, Assets
Factory equipment 2,500,000
Store Equipment 1,500,000
Building 2,700,000
Goodwill 1,125,000 **observe that payables is deducted since, estimate of cashflows
Payables (700,000) 7,125,000 also included cash flows related to payable.
Value in use/Recoverable value 4,294,426
Impairment loss 2,830,574

4. Ans. C.; 5. Ans. C.


Impairment loss 2,830,574
Allocation of loss:
Goodwill of Country C (1,125,000)
Balance to other asset, prorata: 1,705,574
Factory equipment 2,500,000 (636,408) 1,863,592 CV after impairment
Store equipment 1,500,000 (381,845) 1,118,155 CV after impairment
Building 2,700,000 (687,321) 2,012,679 CV after impairment
Payables (700,000) (700,000) *liabilities are not impaired.

6. Ans. D.
Impairment loss 2,830,574
Allocation of loss:
Goodwill of Country C (1,125,000)
Balance to other asset, prorata: 1,705,574
Factory equipment 1,800,000 (458,214) 1,341,786
Store Equipment 1,500,000 (381,845) 1,118,155 Should not be lower than its Rec. Value, P1.4M
Building 2,700,000 (687,321) 2,012,679
Payables (700,000) (700,000) *liabilities are not impaired.

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Reallocation of impairment loss:


Impairment loss 2,830,574
Allocation of loss:
Goodwill of Country C (1,125,000)
Balance to other asset, prorata: 1,705,574
Cash 700,000 - 700,000 *no impairment allocated to cash
Factory equipment 1,800,000 (642,230) 1,157,770 CV after impairment
Store Equipment 1,500,000 (100,000) 1,400,000 Should not be lower than its Rec. Value, P1.4M
Building 2,700,000 (963,345) 1,736,655 CV after impairment
Payables (700,000) (700,000) *liabilities are not impaired.

Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable
amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property
and equipment, prorata.

6. Ans. C.
Cash -
Allocation of loss:
Goodwill of Country C (100,000)
Balance to other asset, prorata: (100,000)
Factory equipment 1,800,000 (458,214) 1,341,786
Store Equipment 1,500,000 (381,845) 1,118,155 Not be lower than its Rec. Value, P1M
Building 2,700,000 (687,321) 2,012,679
Payables (700,000) (700,000) *liabilities are not impaired.

CHAPTER 7-EXERCISE 12: ABC CORPORATION


1. Ans. B.
Fair value less cost to sell 5,250,000 higher
Value in use/PV of future net cash flows at 8% for 5 periods:
Use: P1,252,282*3.992710 3.992710 5,000,000

2. Ans. A.
Carrying value of CGU
Factory equipment 1,750,000 included in the determination of the fair value less cost to sell.
Office equipment 1,475,000
Building 2,725,000
Goodwill 500,000 6,450,000
Recoverable value/FMV less cost to sell 5,250,000
Impairment loss 1,200,000

3. Ans. C.
Impairment loss 1,200,000
Allocated to:
Goodwill (500,000)
Balance to other assets, prorata 700,000
Factory equipment 1,750,000 (205,882) 1,544,118
Office equipment 1,475,000 (173,529) 1,301,471
Building 2,725,000 (320,588) 2,404,412

4. Ans. C.
Impairment loss 1,200,000
Allocated to:
Goodwill (500,000)
Balance to other assets, prorata 700,000
Factory equipment 1,750,000 (205,882) 1,544,118 *Should not be lower than 1.6M
Office equipment 1,475,000 (173,529) 1,301,471 *Office Equipment CV should not be lower than P1.4M
Building 2,725,000 (320,588) 2,404,412

Reallocation of Impairment loss


Impairment loss 1,200,000
Allocated to:
Goodwill (500,000)
Balance to other assets, prorata 700,000
Factory equipment 1,750,000 (150,000) 1,600,000
Office equipment 1,475,000 (75,000) 1,400,000
Building 2,725,000 (475,000) 2,250,000

CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY


1. Ans. B.
Cost incurred prior to establishment of capitalization criteria on Nov. 1, 2014 540,000

2. Ans. C.
Capitalizable cost, after Nov. 1, 2014 60,000
Recoverable amount, Dec. 31, 2014 500,000
Impairment loss -

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3. Ans. D.; 4. Ans. C.


Capitalizable cost, after Nov. 1, 2014 60,000
Additional capitalizable cost, 2015 1,200,000
Total cost as of Dec. 31, 2015 1,260,000
Recoverable amount, Dec. 31, 2015 1,140,000
Impairment loss 120,000

CHAPTER 7-EXERCISE 14: LAS VEGAS INC.


1. Ans. C.
Amortization of Patent (600,000/10) P60,000
Amortization of Copyright (1,200,000*1.5M/5M) 360,000
Total amortization (Patent and Copyright) P420,000

2. Ans. A.
Amortization of Software (300,000/240)*100 P125,000
Amortization of Franchise (480,000/10) 48,000
Continuing franchise fee (2,500,000*.05) 125,000
Total expenses related to computer software and franchise P298,000

3. Ans. A.
Total research and development costs (all costs in item f) P433,000

4. Ans. C.
Patent (600,000*9/10) P540,000
Copyright (1,200,000-360,000) 840,000
Tradename 1,050,000
Computer software (300,000-125,000) 175,000
Franchise (480,000*9/10) 432,000
Goodwill 2,700,000
Total carrying value of intangible, 12/31/15 P5,737,000

CHAPTER 7-EXERCISE 15: BOHOL CORPORATION


1. a) Ans. A.; b) Ans. D.; c) Ans. B.; d) Ans. B.
Project 123 is entirely research and development, thus no capitalizable intangible, unless qualified under PAS 38 capitalization criteria.

The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not qualified
yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense.

The second Patent is useful for many projects, thus only the amortization is recognized as R&D Expense. The balance shall be
reflected as Intangible asset.
Patent, CV, June 30, 2014: (P16,200*9/10) 14,580

Copyright: Cost Acq. Date Condition % CV


6/30/2014: 6/30/2014:
Copyright ABC 30,000 1/2/2010: 20.5yrs/25yr 24,600
Copyright XYC 33,000 7/15/2011: 12yrs/15yrs 26,400
51,000

Goodwill
Acquisition cost 1,582,000
FMV, Net Assets acquired 1,560,000
Goodwill, initial recognition 22,000
Note that since there are no indication of GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired.

2. Ans. D.
Salaries of staff doing research 18,500
Patent solely for Project AM123 12,000
Depr. on Equipment for various projects (10,000/5yrs) 2,000
Amo. on Patent for various projects (16,200/10yrs) 1,620
Cost of pilot models 8,950
Total R&D Expense 43,070

3. Ans. A.
Amortization Expense: ABC (30,000/25yrs) 1,200
Amortization Expense: XYC (33,000/15yrs) 2,200
Total amortization expense on copyrights 3,400

4. Ans. A.

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CHAPTER 7-EXERCISE 16: TAILOR CORP.


Searching for applications of new research findings 57,000
Radical modification of the formulation of a glassware production 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 72,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and projects 300,000
Personnel costs of persons involved in research and devt projects 384,000
Indirect costs reasonably allocable to research and devt projects 150,000
Design, construction, and testing of preproduction prototypes and
models 870,000
2,292,000

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CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

DISCUSSION PROBLEMS
CHAPTER 8-PROBLEM 1
1 B.
2 C.
3 B.
4 C.
5 D.
6 C/B.
7 B.
8 D.
9 A.
10 A.
11 B.
12 C.
13 D.
14 D.
15 B.
16 B.
17 B.
18 B.
19 C.

CHAPTER 8-PROBLEM 2: MERMAID COMPANY


Current Noncurrent
Accounts payable, adjusted for the debit balance (Advances to suppliers) 660,000
Note payable - trade only 500,000
Salaries payable 800,000
SSS payable 30,000
Pag-ibig payable 5,000
Medicare payable 15,000
Wittholding taxes payable 60,000
VAT payable 120,000
Advance from customers (AR with credit balances) 50,000
Serial bonds payable, payable P1M, semi-annyally 2,000,000 8,000,000
Accrued interest on bonds payable 300,000
Estimated warranties payable 420,000
Estimated liability for environmenta damages 50,000
Unearned rental income, for 3 years starting Jan. 1, 2015 50,000 100,000
Cash advances from shareholders 200,000
Total 5,060,000 8,300,000
1. Ans. 2. Ans.

CHAPTER 8-PROBLEM 3: JOJO INC.


Current Noncurrent
a) P1M short-term notes payable, due Feb. 7, 2015 1,000,000
b) P500,000 short term debt, due June 1, 2015 500,000
c) P500,000 notes payable, due June 15, 2015 20,000 480,000
d) P1M bonds payable, due Dec. 31, 2018 1,000,000
Interest on the bonds payable P1M*10% 100,000
2,620,000 480,000
1. Ans. 2. Ans.
Notes: For item a, there was no indication that the right to refinance already existed as of the balance sheet date. Thus, while there
was a LT-refinancing agreement completed after the balance sheet date, the liability is still current as of Dec. 31, 2014.
For item b, the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date.
For item c, the right existed already as of the balance sheet date, however, since the amount of the loan to be used to refinance
the currently maturing obligation is expected only at 80% of P600,000, that is P480,000 only P480,000 of the currently
maturing obligation is expected to be refinanced on a long-term basis.
For item d, while the grace period was agreed upon as of the balance sheet date (Dec. 31), the grace period is short-term only.

CHAPTER 8-PROBLEM 4: TARBUCK INC.


Ans. P4,120,000.
Per GL Per SL
Unadjusted balances 4,450,000 4,020,000
Goods received on Dec. 30 (valid purch.) 400,000
Goods in-transit, FOB Dest (not valid purch.) (300,000)
Payments to suppliers, checks released Dec. 30 (valid payment) (520,000)
Payments to suppliers, checks not yet released as of Dec. 31 (not valid) 200,000
Purchase returns (valid Dec. transaction) (50,000)
Credit balance (Advances to suppliers) 40,000
Adjusted balances 4,120,000 4,120,000

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CHAPTER 8-PROBLEM 5: RONNIE COMPANY


Required Estimated Expense (500u*80%*P8,000) 3,200,000
Less: Actual cost incurred (1,250,000)
Estimated warranties payable 1,950,000

1. Ans.:
Warranties expense 1,950,000
Estimated warranties payable 1,950,000

2. Ans. P3,200,000.

3. Ans. P1,950,000.

CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND


Analysis
2014 2015
Estimated warranties payable, beg. 425,000
Required estimated expense:
2014: 5,000units*30%*P500 750,000
2015: 6,000units*30%*P500 900,000
Actual cost incurred for the year (325,000) (650,000)
Estimated warranties payable, end 425,000 675,000

1. Ans.
Audit adjusting entry in 2015:
Retained earnings (add'l exp. in 2014) 425,000
Warranties expense 250,000
Estimated warranties payable 675,000

2. Ans. P750,000.

3. Ans. P900,000.

4. Ans. P425,000.

5. Ans. P675,000.

CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP.


Analysis:
Required estimated expense: VC SF Total
Vacuum Cleaners: (P45M*30%)/P15,000*(P2,250-P500) 1,575,000
Stand Fan: (P45M*40%)/P12,500*(P1,500-P300) 1,728,000 3,303,000
Actual cost incurred/Actual redemption:
Vacuum Cleaners: (1,000u-175u)*(P2,250-P500) (1,443,750)
Stand Fan: (1,500u-125u)*(P1,500-P300) (1,650,000) (3,093,750)
Estimated premiums payable, end 131,250 78,000 209,250

1. Ans. P3,303,000.

2. Ans. P209,250.

CHAPTER 8-PROBLEM 8: NOKIA CORP.


2014 2015 2016 2017
Collection for unearned service contract 400,000
25% earned in the first contract year: 100,000
6 months in 2014 50,000
6 months in 2015 50,000
30% earned in the second contract year: 120,000
6 months in 2015 60,000
6 months in 2016 60,000
45% earned in the third contract year: 180,000
6 months in 2016 90,000
6 months in 2017 90,000
Service contract earned for each year 50,000 110,000 150,000 90,000
Balance unearned at the end of each year: 350,000 240,000 90,000 -
1. Ans. 2. Ans. 3. Ans.

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CHAPTER 8-PROBLEM 9: SAN MIG CORP.


1. Ans. P337,500.
2013 leaves:
55employees*4weeks*5days 1,100 days
25employees*2weeks*5days 250 days
Total 2013 unused leaves: 1,350 days
Multiply by: Salary rate in 2013 250
Liability for compensated absences/Salaries payable 337,500 unaccrued, thus expense in 2013 was understated.

2. Ans. P453,750.
2013 leaves:
55employees*4weeks*5days 1,100 days
25employees*2weeks*5days 250 days
Total 2013 unused leaves: 1,350 days
Less: Exercised in 2014 925 days
Unexercised in 2014, thus forfeited by year-end 2014 425 days

2014 leaves:
30employees*6weeks*5days 900 days
25employees*5weeks*5days 625 days
30employees*3weeks*5days 450 days
10employees*2weeks*5days 100 days
Total cummulative unused leaves by 12/31/2014 2,075 days
Less: Expired unused leaves from 2013: (425)
Unused leaves still exerciseable 1,650
Mulitply by: Current salary rate, 2014 275
Liability for compensated absences/Salaries payable 453,750

2. Ans.

CHAPTER 8-PROBLEM 10: BARO CORP.


1. Ans. B.
Damages occurred in 2014, thus is a present obligation. The outflow of benefits is probable and the most reliable estimate is
P400,000. Since the lawyers estimate that the reasonably possible outflow may be upto P700,000, additional contingent
liabiltiy should be disclosed at P300,000.

2. Ans. C.
The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract
(10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous
as of the balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous.
Entry:
Loss on purchase commitment (P100-P60)*10,000 400,000
Estimated liability on purchase commitment 400,000

3. Ans. D.
The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37) while
virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16)

4. Ans. C.
The contingent asset that is probable is disclosed.

CHAPTER 8-PROBLEM 11: MOATS COMPANY


Proceeds from issue of bonds=PV of future cash flows at 4% semi-annual effective rate for 10 periods:
Principal: P1,000,000*0.675564 675,564 0.675564
Interest: P50,000*8.110896 405,545 8.110896
1,081,109
Amortization tabe: Bonds payable:
Correct Int. Nominal Int. Amortization Balance
(CV*4%) (P1M*5%)
March 1, 2014: 1,081,109
September 1, 2014: 43,244 50,000 (6,756) 1,074,353
March 1, 2015: 42,974 50,000 (7,026) 1,067,327
September 1, 2015: 42,693 50,000 (7,307) 1,060,021
March 1, 2016: 42,401 50,000 (7,599) 1,052,421

Correct entries:
March 1, 2014:
Cash 1,081,109
Bonds payable 1,000,000
Premium on bonds payable 81,109

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September 1, 2014:
Interest expense 50,000
Cash 50,000
Premium on bonds payable 6,756
Interest expense 6,756
December 31, 2014:
Interest expense 33,333
Interest payable 33,333
(P1,000,000*10%*4/12)
Premium on bonds payable 4,684
Interest expense 4,684
Correct interest (P1,074,353*8%*4/12) 28,649
Nominal interest accrued (P1,000,000*10%*4/12) 33,333
Amortization (4,684)

1. Ans: Adjusting Entries:


Bonds payable 81,109
Premium on bonds payable 69,669
Interest expense 11,440
Interest expense 33,333
Interest payable 33,333

2. Ans. P71,894.
Interest expense (Mar. 1 - Sept. 1)
P1,081,109*8%*6/12 43,244
Interst expense (Sept. 1 - Dec. 31)
P1,074,353*8%*4/12 28,649
Interest expense, 2014 71,894

3. Ans. P1,069,669.
Amortized cost, Sept. 1, 2014 (see table) 1,074,353
Amortization up to Dec. 31, 2014 (see entries) (4,684)
Amortized cost, Dec. 31, 2014 1,069,669

4. Ans. P10,021.
Retirement price 1,050,000
Amortized cost, Sept. 30, 2015: (1,058,754)
Accrued interst (P1M*10%*1/12) (1,267)
Gain on retirement of bonds (10,021)

Amortized cost, Sept. 1, 2015 (see table) 1,060,021


Amortization up to Sept. 30:
Correct interest (P1,060,021*8%*1/12) 7,067
Nominal interest (P1,000,000*10%*1/12) (8,333) (1,267)
Amortized cost, Sept. 1, 2015 1,058,754

Entry:
Bonds payable 1,000,000
Premium on bonds payable 58,754
Interest expense 1,267
Cash 1,050,000
Gain on retirement of bonds 10,021

CHAPTER 8-PROBLEM 12: MNO INC.


1. Ans. P1,245,000.
Accounts payable, unadjusted balance 1,240,000
RR 2903 - on consignment (30,000)
RR 2904 - in transit, FOB SP 35,000
Accounts payable, adjusted 1,245,000

2. Ans. P720,000.
Required warranty expense, 2013: (2,500u*40%*P900) 900,000
Actual cost (560,000)
Warranties liability, Dec. 31, 2013 340,000
Required warranty expense, 2014: (3,000u*40%*P900) 1,080,000
Actual cost (700,000)
Warranties liability, Dec. 31, 2014 720,000

3. Ans. P2,099,474.
Proceeds from bond issue/FMV 1/1/13 = PV of future cash flows at 10% for 5 years.
Principal: P2,000,000*0.620921 1,241,843 0.620921
Interest: P240,000*3.790787 909,789 2,151,631 3.790787

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Amortization table: Bonds payable


Correct Int. Nominal Int. Amortization Balance
(Bal*10%) (Face*12%)
January 1, 2013: 2,151,631
December 31, 2013: 215,163 240,000 (24,837) 2,126,795
December 31, 2014: 212,679 240,000 (27,321) 2,099,474

4. Ans. P78,505.
Net income before any adjustments: 1,557,679
Understated accounts payable/purchases (5,000)
Understated warranties payable/warranties expense (380,000)
Overstatement in interest expense in 2014 27,321
Adjusted net income 2014, before bonus 1,200,000

B = 10% (NI - Tx - B); Tx = 30%(NI - B)


B = 10% (1.2M - (30%(1.2M - B) - B)
B = P78,505.

5. Ans. P785,046.
Adjusted net income 2014, before bonus 1,200,000
Less: Bonus (78,505)
Net income before 30% tax 1,121,495
Income tax expense (336,448)
Net Income after tax 785,046

CHAPTER 8-PROBLEM 13: MAMALOLA CORP.


1. Ans. P443,000.
Accounts payable, unadjusted balance 460,000
Shipments from consignor (recorded) (42,000) AJE 1: Accounts Payable 17,000
Shipments-in-transit, FOB Destination (recorded) (30,000) Purchases 17,000
Shipment-in-transit, FOB SP (not yet recorded) 55,000
Accounts payable, adjusted 443,000

2. Ans. P248,700.
Warranty expense in 2013 (1,250*70%)*P350 306,250
Less: Actual warranty cost incurred in 2011 (153,000) AJE 2: Warranties Expense 95,450
Warranties payable, 2013 153,250 Warranties payable 95,450
Warranty expense in 2014 (1,410*70%)*P350 345,450
Less: Actual warranty cost incurred in 2014 (250,000)
Warranties payable, 2012 248,700

3. Ans. P222,750.
2013 unused leaves forwarded to 2015 (625-(700-200))* 125
2014 unused leaves forwarded to 2015 550 AJE 3: Salaries payable 45,750
Total unused leaves that may be forwarded to 2053 675 Salaries expense 45,750
Multiply by current salary rate in 2014: (268,500/895days)*1 330 (268,500-222,750)
Salaries payable (Liab for compensated absences) 222,750
*any unused prior to 2013 leaves are forfieted by the end of 2014

4. Ans. P1,600,000.
*There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probable
proceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.

5. Ans. P130,841.
Unajdusted net income 2,032,700
AJE 1: Overstated purchases 17,000
AJE 2: Understated warranty expense (95,450)
AJE 3: Overstated salaries expense 45,750
Adjusted net income 2,000,000
B = 10% (NI - B - TX)
TX = 30% (NI - B)

B = 10% (2,000,000 - B - 30%(2,000,000 - B))


B = 140,000 - .07B
1.07B = 140,000
Bonus = P130,841

CHAPTER 8-PROBLEM 14: SANTOS CORP.


1. Ans. P402,104.
Proceeds from convertible bond issue (P8M*110%) 8,800,000
Less: FMV of bonds without conversion option = PV of future cash flows
from the bonds at 10% for 3 years:
Principal: P8,000,000*0.751315 6,010,518 0.751315
Interest: P960,000*2.486852 2,387,378 8,397,896 2.4868520
Residual amount/APIC from bond coversion privilege 402,104

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2. Ans. P8,277,686.
Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance
(Bal.*10%) (Face*12%)
January 1, 2014: 8,397,896
December 31, 2014: 839,790 960,000 (120,210) 8,277,686
December 31, 2015: 827,769 960,000 (132,231) 8,145,455
December 31, 2016: 814,545 960,000 (145,455) 8,000,000

3. Ans.
Entry upon conversion:
Alt1 Bonds payable 8,000,000
Premium on bonds payable 277,686
Ordinary shares (8,000*50*P10) 4,000,000
Share premium 4,277,686

Alt2 Bonds payable 8,000,000


Premium on bonds payable 277,686
APIC-Bond conversion privilege 402,104
Ordinary shares (8,000*50*P10) 4,000,000
Share premium 4,679,790

Note: Both alternatives are acceptable under PAS 39.

4. Ans. P65,455.
Total Bonds Payable APIC-BCP
(at FMV, 102) (Residual)
Retirement price 8,320,000 8,080,000 240,000
CV, Bonds payable, 1/1/16 8,145,455
CV, APIC - Bond coversion privilege 402,104
Gain on retirement of convertible bonds 65,455 162,104
to profit/los to APIC
Entry:
Bonds payable 8,000,000
Premium on bonds payable 145,455
APIC - Bond conversion privilege 402,104
Cash 8,320,000
Gain on retirement of bonds (profit/loss) 65,455
APIC/Share premium 162,104

CHAPTER 8-PROBLEM 15: DIRT CORP.


1. Ans. P379,264.
Proceeds from bond with warrants issue 2,250,000
Less: FMV of bonds without conversion option = PV of future cash flows
from the bonds at 5% for 8 semi-annual periods:
Principal: P2,000,000*0.676839 1,353,679 0.676839
Interest: P80,000*6.4632128 517,057 1,870,736 6.4632128
Residual amount/Ordinary Share Warrants Outstanding 379,264

2. Ans. P1,898,486.
Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance
(Bal.*10%) (Face*12%)
January 1, 2014: 1,870,736
July 1, 2014: 93,537 80,000 13,537 1,884,273
January 1, 2015: 94,214 80,000 14,214 1,898,486

3. Ans. P257,559.
Entry upon exericise of warrants:
Cash (2,000*5w)*60%*P55 330,000
Ordinary share warrants outstanding(60%) 227,559
Ordinary shares (6,000shares*P50) 300,000
Share premium 257,559

4. Ans.
Entry upon expiration of remaining warrants:
Ordinary share warrants outstanding(40%) 151,706
Share premium/APIC - Expired warrants 151,706

CHAPTER 8-PROBLEM 16:


CASE 1:
Periodic rentals (March to December); (40,000*10mo) 400,000
Amortization of lease bonus (120,000/5yrs)*10/12 20,000
Rent Expense 420,000

CASE 2:
Annual rental 300,000
Amortization of lease bonus (100,000/8yrs) 12,500
Contingent rental (P2.5M-P2M)*5% 25,000
Rent Expense 337,500

CASE 3:
Total lease payments: P30,000*(60mo - 9mo) 1,530,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 98 of 155

Divide by: 5 years 5


Annual rental expense 306,000
Mulitply by: 11mo/12mo 11/12
Rent expense for 2014 280,500
Less: Amount paid for the year (Nov. and Dec.) (60,000)
Accrued rent expense, 12/31 220,500

CASE 4:
Total lease payments: P40,000*(120mo-3mo 4,680,000
Divide by: 10 years 10
Annual rental expense 468,000
Multiply by: 4mo/12mo 4/12
Rent expense for 2014 156,000

Leasehold improvement cost 300,000


Divide by: 5 years 5
Annual depreciation expense 60,000
Mulitply by: 3mo/12mo 3/12 15,000
Total expense for 2014 171,000

CASE 5:
Total lease collection:
First two years: (P2,000*100*2yrs) 400,000
Last two years: (P3,000*100*2yrs) 600,000 1,000,000
Divide by: 4 years 4
Annual rental income 250,000
Multiply by: 9mo/12mo 9/12
Rent income for the period ended 9/30/14 187,500
Amount collected in 2014 200,000
Unearned rental income (12,500)

CASE 6:
Gross rental income 500,000
Amortization of direct lease expense (150,000/5years) (30,000)
Depreciation expense (120,000)
Property taxes (90,000)
Net rental income 260,000

CHAPTER 8-PROBLEM 17:


CASE 1:
Minimum lease payments in arrears 200,000
Multiply by: PV factor of 1 at 10% for 10 periods in arrears 6.1450
Initial cost of the asset 1,229,000

CASE 2:
Minimum lease payment in advance 96,000
Multiply by: PV factor of 1 at 10% for 8 period in advance 5.8680
Initial cost of the asset 563,328
Divide by: 12 yrs (life since title passes to the lessee) 12
Depreciation expense 46,944

CASE 3:
Minimum lease payment
Periodic payments in advance 400,000
Multiply by: PV factor of 1 at 14% for 10 period in advance 5.9500 2,380,000
Bargain purchase option 200,000
Multiply by: PV factor of 1 at 14% for 10 period without ann 0.2700 54,000
Initial cost of the asset 2,434,000
Less: Depreciation (2,434,000/12 years) (202,833) *
Carrying value as of 12/31/14 2,231,167
*note that the depreciation is based on the useful life since ownership will be transferred to the lessee

CASE 4:
Amortization table:
Periodic Paymen Interest Principal Balance
Dec. 31, 2014: (P3,165,000 - P500,000) 3,165,000
Dec. 31, 2015: 500,000 316,500 183,500 2,981,500
Dec. 31, 2016: 500,000 298,150 201,850 2,779,650

CHAPTER 8-PROBLEM 18: ANGLO INC.


Entries made, under finance lease:
December 31, 2013:
Building* 3,379,512
Cash 500,000
Lease liability 2,879,512
*PV of MLP 10% for 10 years in advance: (lower than FMV of asset)
(P500,000*6.7590238) 0 5.759024 6.7590238

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 99 of 155

Amortization table (per books): Finance Lease


Periodic Paymen Correct Int. Principal Balance
December 31, 2013: 2,879,512
December 31, 2014: 500,000 287,951 212,049 2,667,463

December 31, 2014:


Interest expense 287,951
Lease liability 212,049
Cash 500,000

Depreciation expense 337,951


Accumulated Depreciation 337,951
(P3,379,512/10years)

AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000)
The lease agreement does not qualify as finance, thus should have been accounted for only under operating lease.

Correct entries, under operating lease.


December 31, 2013:
Prepaid rent 500,000
Cash 500,000

January 1, 2014:
Rent expense 500,000
Prepaid rent 500,000

December 31, 2014:


Prepaid rent 500,000
Cash 500,000

1. Ans. P125,902.
Expenses per books
Interest on finance lease liability 287,951
Depreciation expense 337,951 625,902
Expense per audit 500,000
Overstatement in expense/Understatement in NI 125,902

2. Ans. None.

CHAPTER 8-PROBLEM 19: LACTUM INC.


Entries made per books, operating lease:
January 1, 2014:
Rent expense 150,000
Cash 150,000

April 1, 2014:
Rent expense 150,000
Cash 150,000

July 1, 2014:
Rent expense 150,000
Cash 150,000

October 1, 2014:
Rent expense 150,000
Cash 150,000

AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388)
The lease agreement does qualify as finance, thus should have been accounted for only under finance lease.

Correct entries per audit, finance lease


January 1, 2014:
Building* 4,185,388
Cash 150,000
Lease liability 4,035,388
*PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888) 26.9025888 27.9025888
0.4619482
Amortization table: Finance lease liabilty:
Periodic Paymen Correct Int. Principal Balance
January 1, 2014: 4,035,388
April 1, 2014: 150,000 80,708 69,292 3,966,096
July 1, 2014: 150,000 79,322 70,678 3,895,418
October 1, 2014: 150,000 77,908 72,092 3,823,326

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 100 of 155

Janaury 1, 2015: 150,000 76,467 73,533 3,749,793


April 1, 2015: 150,000 74,996 75,004 3,674,789
July 1, 2015: 150,000 73,496 76,504 3,598,285
October 1, 2015: 150,000 71,966 78,034 3,520,250

April 1, 2014:
Interest expense 80,708
Lease liability 69,292
Cash 150,000

July 1, 2014:
Interest expense 79,322
Lease liability 70,678
Cash 150,000

October 1, 2014:
Interest expense 77,908
Lease liability 72,092
Cash 150,000

December 31, 2014:


Interest expense 76,467
Interest payable 76,467

Depreciation expense 418,539


Accumulated depreciation 418,539
(P4,185,388/10years) * no transfer of ownership, thus depr shall be over term.

1. Ans. P132,943.
Expense per books
Rent expense (P150,000*4qtrs) 600,000
Expense per audit:
Interest expense 314,405
Depreciation expense 418,539 732,943
Understatement in Expense/Overstatement Net Income (132,943)

2. Ans. P3,823,326.
Lease liability, 12.31.14 3,823,326
Interest payable, 12.31.14 76,467

3. Ans. P303,076.
Principal due from January 1, 2015 to December 31, 2015 (see amortization table)
Janaury 1, 2015: 73,533
April 1, 2015: 75,004
July 1, 2015: 76,504
October 1, 2015: 78,034
Current portion of lease liability 303,076

CHAPTER 8-PROBLEM 20:


CASE 1:
1. Ans. P60,000.
Sales price 420,000
Fair market value (420,000)
Deferred gain on sale -

Fair market vaue 420,000


Carrying value (360,000)
Realized gain on sale 60,000

2. Ans. 40,000.
Sales price 420,000
Fair market value (380,000)
Deferred gain on sale 40,000

Fair market vaue 380,000


Carrying value (360,000)
Realized gain on sale 20,000

3. Ans. 100,000.
Sales price 420,000
Fair market value (320,000)
Deferred gain on sale 100,000

Fair market vaue 320,000


Carrying value (360,000)
Realized loss on sale (40,000)

4. Ans. 60,000.
Sales price 420,000
Fair market value (450,000)
Ignored (30,000)

Sales price 420,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 101 of 155

Carrying value (360,000)


Realized loss on sale 60,000

CASE 2:
1. Ans. P80,000.
Sales price 400,000
Fair market value (480,000)
Deferred loss on sale (80,000) * since the future rentals is below rent, there is an expected future benefit
from the asset being sold at a loss.
Fair market vaue 480,000
Carrying value (540,000)
Realized loss on sale (60,000)

2. Ans. P40,000.
Sales price 400,000
Fair market value (480,000)
Realized loss on sale (80,000) * since the future rentals is at market rate of rent, there is no expected
future benefit from the asset sold at a loss.
Fair market vaue 480,000
Carrying value (540,000)
Realized loss on sale (60,000)

Total realized loss (140,000)

CASE 3:
1. Ans. 626,667.
Interest expense on finance lease liab (600,000*10%) 60,000
Depreciation on the leased-back asset (600,000/3yrs) 600,000
Amortization of deferred gain on sale (100,000/3yrs) (33,333) - gain on a sale and leaseback (finance) is fully deferred and
Net amount recognized in the profit or loss 626,667 amortized over lease term.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. 141,269
Rent expense 241,269
Realized gain on sale (P600,000 - P500,000) (100,000) *Selling price is at FMV
Net amount recognized in the profit/loss 141,269
*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.

CASE 4:
1. Ans. 115,000.
Interest expense on finance lease liab (150,000*10%) 15,000
Depreciation on the leased-back asset (150,000/3yrs) 50,000
Realized loss on sale 50,000 *loss on sale is fully realized since it is an indication of
Net amount recognized in the profit or loss 115,000 asset impairement.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. P158,205.
Rent expense 58,205
Realized loss on sale (P200,000 - P150,000) 100,000 *Selling price is at FMV (no expected future benefit)
Net amount recognized in the profit/loss 158,205
*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.

CHAPTER 8-PROBLEM 21:


CASE 1:
Minimum lease collections 200,000
Multiply by: PV factor of 1 at 12% for 5 years with annuity 3.604776 1
Present value of minimum lease collection 720,955

Cost of the asset/FMV of asset (Under Direct Finance) 700,000


Add: Direct finance lease cost 20,955
Initial investment on the lease agreeement 720,955

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 12%) 720,955
December 31, 2015: 200,000 86,515 113,485 607,470
December 31, 2016: 200,000 72,896 127,104 480,366
December 31, 2017: 200,000 57,644 142,356 338,010
December 31, 2018: 200,000 40,561 159,439 178,571
December 31, 2019: 200,000 21,429 178,571 (0)

1. Ans. 0.
Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset
since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer.
*Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amount receivable.

Entry upon inception/Sale of asset:


Finance lease receivable 720,955
Asset 700,000
Cash 20,955

2. Ans. 72,896.

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 102 of 155

Entry upon periodic collections:


Dec. 31, 2015:
Cash 200,000
Interest income 86,515
Finance lease receivable 113,485

Dec. 31, 2016:


Cash 200,000
Interest income 72,896
Finance lease receivable 127,104

3. Ans. 480,366.
See amortization table above.

CASE 2:
Minimum lease collections 200,000
Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance 4.169865 1
Present value of minimum lease collection = Sales Price 833,973
Cost of the asset 600,000
Gross profit on sale 233,973

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 10%) 633,973
January 1, 2016: 200,000 63,397 136,603 497,370
January 1, 2017: 200,000 49,737 150,263 347,107
January 1, 2018: 200,000 34,711 165,289 181,818
January 1, 2019: 200,000 18,182 181,818 0

1. Ans. 233,973.
Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the difference
between the Sales Price of the asset and its Cost on the company's books.
*Direct lease costs incurred under sales type lease is recognized as outright expense

Entry upon inception/Sale of asset:


Finance lease receivable 833,973
Sales 833,973

Entry to recognize cost of sales, if perpetual inventory is used:


Cost of sales 600,000
Inventory 600,000

Entry to recognize the direct lease expense:


Expense 20,000
Cash 20,000

2. Ans. 49,737.
Entry upon accrual of interest and periodic collections:
Dec. 31, 2015:
Interest receivable 63,397
Interest income 63,397

Jan. 1, 2016:
Cash 200,000
Interest receivable 63,397
Finance lease receivable 136,603

Dec. 31, 2016:


Interest receivable 49,737
Interest income 49,737

Jan. 1, 2017:
Cash 200,000
Interest receivable 49,737
Finance lease receivable 150,263

3. Ans. 497,370.
See amortization table

CASE 3:
Minimum lease collections 400,000
Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787
Present value of minimum lease collection 1,516,315
Guaranteed residual value 100,000
Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921
Present value of the guaranteed residual value 62,092
Total Sales Price of the asset = Total Lease Receivable 1,578,407

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 10%) 1,578,407
December 31, 2015: 400,000 157,841 242,159 1,336,248
December 31, 2016: 400,000 133,625 266,375 1,069,872

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 103 of 155

December 31, 2017: 400,000 106,987 293,013 776,860


December 31, 2018: 400,000 77,686 322,314 454,545
December 31, 2019: 400,000 45,455 354,545 100,000
December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,578,407.
Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the guaranteed
residual value is added to the total sales price of the asset.
*Direct lease expense under sales type lease is recognized as outright operating expense.

Entry upon inception/Sale of asset:


Finance lease receivable 1,578,407
Sales 1,578,407

2. Ans. P1,000,000.
Entry to recognize cost of sales, if perpetual inventory is used:
Cost of sales 1,000,000
Inventory 1,000,000

Entry to recognize the direct lease expense:


Expense 50,000
Cash 50,000

3. Ans. 578,407.
Total Sales Price of the Asset 1,578,407
Less: Cost of the asset/FMV of asset (1,000,000)
Gross Profit on Sale 578,407

4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash 400,000
Interest income 157,841
Finance lease receivable 242,159

Dec. 31, 2016:


Cash 400,000
Interest income 133,625
Finance lease receivable 266,375

CASE 4:
Minimum lease collections 400,000
Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787
Present value of minimum lease collection = Sales Price of the asset 1,516,315
*Since the residual value is unguaranteed, that portion of the asset is not deemed sold. Thus was not included in the sales price.

Minimum lease collections 400,000


Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787
Present value of minimum lease collection 1,516,315
Guaranteed residual value 100,000
Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921
Present value of the guaranteed residual value 62,092
Total Lease receivable. 1,578,407
*Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership), the unguaranteed residual value
which will be received at the expiration of the lease term is still added to the receivable.

Total cost of the asset 1,000,000


Less: Present value of the unguaranteed residual value (62,092)
Net cost of the asset sold 937,908
*Since the residual value is unguaranteed, that portion of the aset is not deemed sold. The PV of the unguaranteed residual value
is therefore deducted from the cost of the inventory sold.

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 10%) 1,578,407
December 31, 2015: 400,000 157,841 242,159 1,336,248
December 31, 2016: 400,000 133,625 266,375 1,069,872
December 31, 2017: 400,000 106,987 293,013 776,860
December 31, 2018: 400,000 77,686 322,314 454,545
December 31, 2019: 400,000 45,455 354,545 100,000
December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,516,315.
Entry upon inception/Sale of asset:
Finance lease receivable 1,516,315
Sales 1,516,315

2. Ans. P937,908.
Entry to recognize cost of sales, if perpetual inventory is used:
Finance lease recievable 62,092
Cost of sales 937,908
Inventory 1,000,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 104 of 155

Entry to recognize the direct lease expense:


Expense 50,000
Cash 50,000

3. Ans. 578,407.
Total Sales Price of the Asset 1,516,315
Less: Cost of the asset/FMV of asset (937,908)
Gross Profit on Sale 578,407

4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash 400,000
Interest income 157,841
Finance lease receivable 242,159

Dec. 31, 2016:


Cash 400,000
Interest income 133,625
Finance lease receivable 266,375

CHAPTER 8-PROBLEM 22: ABC CO.


Reconciliation:
Net income before any differences 10,000,000
Permanent Differences:
Nondeductible expenses 100,000
Nontaxable income (500,000)
Net income after permanent differences 9,600,000
Temporary Differences:
Future Deductible amounts
Accrued warranties 250,000
Advances from customers 500,000
Provision for probable losses 900,000 1,650,000
Future Taxable Amounts
Prepaid rent 400,000 (400,000)
Taxable income 10,850,000

1. Ans. P4,340,000.
Taxable income 10,850,000
Mulitply by: Current tax rate 40%
Current tax expense 4,340,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 105 of 155

2. Ans. P3,840,000.
Net income after permanent differences 9,600,000
Multiply by: Constant tax rate 40%
Total tax expense 3,840,000

3. Ans. P660,000.
Future deductible amounts 1,650,000
Mulitply by: Constant tax rate 40%
Deferred tax asset 660,000

4. Ans. P160,000.
Future taxable amounts 400,000
Mulitply by: Constant tax rate 40%
Deferred tax liability 160,000

To reconcile:
Current tax expense 4,340,000
Add: Deferred tax expense (FTA) 160,000
Less: Deferred tax benefit (FDA) (660,000)
Total tax expense 3,840,000

5. Ans. P3,902,500.
If tax rate in the future is expected to change (at 35%):
Current tax expense (P10.85M*40%) 4,340,000
Add: Deferred tax expense (FTA:P400,000*35%) 140,000
Less: Deferred tax benefit (FDA:P1,650,000*35%) (577,500)
Total tax expense 3,902,500

6. Ans. P140,000.
Future taxable amounts 400,000
Mulitply by: Futre tax rate 35%
Deferred tax liability 140,000

7. Ans. P577,500.
Future deductible amounts 1,650,000
Mulitply by: Constant tax rate 35%
Deferred tax asset 577,500

CHAPTER 8-PROBLEM 23:XYZ CO.


Reconciliation:
Net income before any differences 5,000,000
Permanent Differences:
Nondeductible expenses 150,000
Nontaxable income (50,000)
Net income after permanent differences 5,100,000
Temporary Differences:
Increase in Future Deductible for the year:
Cummulative FDA, ending 1,600,000
Cummulative FDA, beginning 1,200,000 400,000
Decrease in Future Taxable Amount for the year:
Cummulative FTA, ending 500,000
Cummulative FTA, beginning 800,000 300,000
Taxable income 5,800,000

1. Ans. P2,320,000
Taxable income 5,800,000
Mulitply by: Current tax rate 40%
Current tax expense 2,320,000

2. Ans. P2,040,000.
Net income after permanent differences 5,100,000
Multiply by: Constant tax rate 40%
Total tax expense 2,040,000

3. Ans. P660,000.
Cummulative Future Deductible Amt, end 1,600,000
Mulitply by: Constant tax rate 40%
Deferred tax asset 640,000

4. Ans. P200,000.
Cummulative Future Taxable Amt, end 500,000
Mulitply by: Constant tax rate 40%
Deferred tax liability 200,000

To reconcile:
Current tax expense 2,320,000
Less: Deferred tax benefit ( dec in FTA) (120,000) (decrease in deferred tax liability)
Less: Deferred tax benefit (inc in FDA) (160,000)
Total tax expense 2,040,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 106 of 155

CHAPTER 8-PROBLEM 24: JAPS CORP.


1. Ans. P1,270,000.
Service costs
Current service cost 855,000
Past service cost recognized for the year 120,000
Loss on settlment:
Payments to early retirees 800,000
CV of accrued benefits of early ret. 650,000 150,000 1,125,000
Net interest (income)expense
Interest on ABO (P10,080,000*12%) 1,209,600
Interset on PA (P9,450,000*12%) (1,134,000) 75,600
Pension expense (Profit or loss) 1,200,600 2. Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)


Actuarial gain on PA (a) (216,000)
Actuarial loss on ABO (b) 285,400 69,400 3. Ans.

Total pension expense 1,270,000

(a) Actuarial gain/loss on Plan asset


Plan asset, beginning balance 9,450,000
Add: Contribution for the year 1,200,000
Interest on PA (P9,450,000*12%) 1,134,000
Less: Settlements at scheduled retirement (1,400,000)
Settlements to early retirees (800,000)
Balance 9,584,000
Plan asset, at FMV at the year-end 9,800,000
Actuarial gain on plan asset 216,000

(b) Actuarial gain/loss on Accumulated Benefit Obligation


ABO, beginning balance 10,080,000
Add: Current service cost 855,000
Past service cost for the year 120,000
Interest on ABO (P10,080,000*12%) 1,209,600
Less: Benefits settled, at scheduled ret. (1,400,000)
Benefits settled, early retirees (650,000)
Balance 10,214,600
ABO, present value, ending balance 10,500,000
Actuarial loss on AB0 285,400

4. Ans. P700,000.
To reconcile:
Accrued pension, beg 630,000
Pension expense (total) 1,270,000
Total 1,900,000
Contribution to the plan for the year (1,200,000)
Accrued pension, end 700,000

ABO, end 10,500,000


Plan asset, end (9,800,000)
Accrued pension end 700,000

CHAPTER 8-PROBLEM 25: IRELAND CORP.


1. Ans. P620,000.
Service costs
Current service cost 480,000
Net interest (income)expense
Interest on ABO (P2,980,000*8%) 238,400
Interset on PA (P3,200,000*8%) (256,000) (17,600)
Pension expense (Profit or loss) 462,400 2. Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)


Actuarial loss on PA 80,000
Actuarial loss on ABO 30,000
Effect of ceiling** 47,600 157,600 3. Ans.

Total pension expense 620,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES


AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 107 of 155

Plan asset, beginning balance 3,200,000


Add: Contribution for the year 750,000
Interest on PA (P3,200,000*8%) 256,000
Less: Settlements at scheduled retirement (560,000)
Balance 3,646,000
Less: Actuarial loss on PA (80,000)
Plan asset, FMV, end 3,566,000

ABO, beginning balance 2,980,000


Add: Current service cost 480,000
Interest on ABO (P2,980,000*8%) 238,400
Less: Benefits settled, at scheduled ret. (560,000)
Balance 3,138,400
Add: Actuarial loss on ABO 30,000
ABO, present value, end 3,168,400

Plan asset at fair value, end 3,566,000


ABO at present value, end 3,168,400
Prepaid pension, end 397,600
Asset Ceiling (lower) 350,000
Remeasurement loss/Effect of ceiling 47,600 **

4. Ans. P350,000.
To reconcile:
Prepaid pension, beg (ceiling was higher) (220,000)
Pension expense (total) 620,000
Total 400,000
Contribution to the plan for the year (750,000)
Prepaid pension, end (ceiling is lower) (350,000)

MULTIPLE CHOICE EXERCISES:


CHAPTER 8-EXERCISE 1: PROBE INC.
ITEM
a. Accounts payable – trade, P170,000 + 30,000 P200,000
b. Notes payable – trade, P70,000 70,000
Interest on Notes: 50,000*15%*4/12 2,500
20,000*15%*2/12 500
c. Advance receipts from customers, 100,000
d. Containers deposit 50,000
e. Notes payable – BPI , P200,000/5 40,000 160,000
i. Convertible bonds 1,000,000
j. Notes payable – officers 40,000
k. Salaries and wages (68,000*15/30) 34,000
m. Output VAT, net of Input (246,000 – 164,000) 82,000
n. Accounts receivable, credit balance 12,300
0. Cash in banks (overdraft) 115,000 – (125,000+55,000) 65,000
r. Estimated warranty costs on goods sold 46,000
s. Installment notes payable, P75,000 *1/3 25,000 50,000
t. Provision for losses (25,000 + 75,000) / 2 50,000
u. Deferred tax liability 150,000
TOTAL P817,300 P1,360,000 P2,177,300
1. Ans. C. 2. Ans. B. 3. Ans. A.

CHAPTER 8-EXERCISE 2: CUT INC.

Bonds payable: Noncurrent Current


7/1/2008: (P4,000,000*98%) 3,920,000
Cummulative discount amortization:
P80,000/10yrs*5.75yrs 46,000 3,966,000
Accrued interest on bonds (P4M*7%*3/12) 70,000
Accrued interest on notes payable 90,000
Current portion of notes payable 600,000
Noncurrent portion of notes payabe 2,400,000
Warranties liability (P55,000+P145,000-P130,000) 70,000
Trade payables 325,000
Payroll related items 193,000
Taxes payable 535,000
Other accruals 50,000
Cash dividends payable (P0.40*2,500,000shares) 1,000,000
6,366,000 2,933,000
1. Ans. B. 2. Ans. A.
Note: Stock dividends payable is classifed as capital and not as liability.

CHAPTER 8-EXERCISE 3: RADO INC.


Ans. A.
Estimated Warranties Payable, beginning balance P225,000
Required Estimated Expense (7,250,000-150,000)*5% 355,000
Less: Actual cost incurred for the year (415,500)
Estimated Warranties Payable, ending balance P164,500

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CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT


1. Ans. C.; 2. Ans. B.
Total sales – home furniture 28,800,000
Divide by: 2,000
Total premium distributable 14,400
Multiply by: estimated redemption 60%
Estimated redemption 8,640
Multiply by, net cost of premiums (340-50) 290
Estimated premium expense 2,505,600
Premiums liability, beg 716,000
Total 3,221,600
Actual redemption (9,600,000/2,000)*290 (1,392,000)
Estimated premiums liability, end 1,829,600

3. Ans. B.
Estimated warranty liability, beginning 2,176,000
Total sales – kitchen applicances 86,400,000
Multiply by: 5%
Estimated warranties expense 4,320,000
Actual warranty costs during the year` (2,624,000)
Estimated warranty liability, end 3,872,000

CHAPTER 8-EXERCISE 5: ABRA COMPANY


1. Ans. C.
2013 unused leaves by the end of 2014 (850days-550days) 300
2014 unused leaves by the end of 2014 500
Total unused leaves by the end of 2014 800
Multiply by probable exercise rate 80%
Leaves that will probably materialize 640
Multiply by: 2014 current salary rate 400
Accrued compensated absences per audit 256,000

2. Ans. D.
Unadjusted net income 1,277,500
Understatement in accrued comp. abs./salaries expense (18,000)
Adjusted net income 1,259,500 1,147,608 745,945 111,892

B = 15% (NI - B - Tx); Tx = 35% (NI - B)


B = 15% (NI - B - 35%(NI - B) 818,675 122,801
B = P111,892. 65% 0.09750 1.0975 111,892

CHAPTER 8-EXERCISE 6: ASCOT INC.


Audit notes:
a. Since there is no right of offset, the advances to sppliers should be reclassifed as an asset:
AJE 1:
Advances to suppliers 55,000
Accounts payable 55,000

1. Ans. C.
b. Required premiums expense: (40,000*75%)/5*(P95-P25) 420,000
Actual cost/Actual redemption (5,000-1,250)*(P95-P25) (262,500)
Estimated premiums liability, per audit 157,500
Estimated premiums liabilty, per books 118,750
Net adjustment 38,750
AJE 2:
Premiums expense 38,750
Estimated premiums liability 38,750

2. Ans. A.
c. Cummulative unused leaves 12/31/14 750
Less: 2012 leaves (forfeited (50)
Leaves that can be carried forward to 2015 700
Exercise rate (per past experience) 80%
Cummulative leaves that will probably be exercised 560
Multiply by: 2014 current salary rate 400
Accrued salaries - compensated absences, per audit 224,000
Accrued salaries - compensated absences, per books 300,000
Net adjustment (76,000)
AJE 3:
Accrued salaries 76,000
Salaries expense 76,000

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3. Ans. A.
Unadjusted net income before bonus and tax 1,015,131
AJE 2: Understated premiums expense (38,750)
AJE3: Overstated salaries expense 76,000
Adjusted net income before bonus and tax 1,052,381
B = 15% (NI - Tx - B)
Tx = 30% (NI - B)
B = 15%(NI - 30%(NI - B) - B)
B = 15%(1,052,381 - 30%(1,052,381 - B) - B)
B = 110,500/1.105
B = 100,000
AJE 4:
Accrued salaries 5,540
Salaries expense 5,540
(100,000-96,460)

4. Ans. A.
Net Income before tax (1,052,381 - 100,000) 952,381
Less: Income tax (952,381*30%) (285,714)
Net Income after tax 666,667
AJE 5:
Income tax expense (current) 285,714
Income tax payable 285,714
d. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.
ENTRY:
Income tax expense (deferred) 250,000
Deferred tax liability 250,000

5. Ans. B.
e. The refinancing agreement was completed as of December 31, 2014, thus there is a right to refinance the liablity on a long-term
basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of the
fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis.
The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus will
still be presented as current as of December 31, 2014.

CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC.


1. Ans. A.
Accounts Payable, unadjusted 250,000
Receiving report number 2634 (Unrecorded purchase) 12,500
Receiving report number 2636 (Purchase in transit) 10,000
Accounts Payable, adjusted 272,500

2. Ans. D.
Warranties liability, unadjusted 10,000
Warranty expense, 2014 (10,550,000*6%) 633,000
Total 643,000
Less: Actual warranties paid (310,000)
Warranties liability, adjusted (12/2014) 333,000

3. Ans. A.
Legal services 4,600
Medical services 5,500
Payroll (12/21/ - 12/31) : 14,400 *8/12 9,600
Royalties 3,900
24,000
Total accruals 47,600

4. Ans. A.
Amortization Table: Lease Liability
13.59032634 Payment Principal Balance
Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326) 3,397,582
June 30, 2014: 250,000 135,903 114,097 3,283,485
December 31, 2014: 250,000 131,339 118,661 3,164,824
June 30, 2015: 250,000 126,593 123,407 3,041,417
December 31, 2015: 250,000 121,657 128,343 2,913,074
Current portion Long-term Portion
5. Ans. A.
Amortization Table: Bonds Payable
Nominal Effective Amortization Balance
Balance 851,706
September 30, 2014: 42,585 48,000 (5,415) 846,291
March 31, 2015: 42,315 48,000 (5,685) 840,606

Carrying value as of Dec. 31, 2014:


Balance, September 30, 2014 846,291
Amortization up to 12/31/14: P5,685*3/12: (2,843)
Amortized cost as of December 31, 2014: 843,449

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CHAPTER 8-EXERCISE 8: DETOX INC.


1. Ans. D.
Accounts Payable, unadjusted 534,000
RR# 1015 (purchase in transit – FOB Destination) (35,000)
RR# 1013 (goods received on December 30, 2014) 65,000
RR# 1016 (purchase in transit – FOB Shipping point) 40,000
Accounts payable, adjusted 604,000

2. Ans. C.
Required estimated expense 2013: (50,000/5)*40%*(P160-P50) 440,000
Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50) (198,000)
Estimated premiums payable, 12/31/2013 242,000
Required estimated expense 2014: (60,000/5)*40%*(P160-P50) 528,000
Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50) (561,000)
Estimated premiums payable, 12/31/2014 209,000

3. Ans. D.
Proceeds from issuance of bonds on 1/1/2013 P2,050,000
Fair value of bonds at 12% effective rate* 1,903,927
APIC – Bond Conversion Privilege P146,073
*PV of future cash flows at 12% for 3 periods:
Principal: 2,000,000 * 0.711780 P1,423,560
Interest: 200,000 * 2.40183 480,366
Total present value = Fair value P1,903,927

Amortization table: Bonds payable


Correct Int. Nominal Int. Amortization Balance
Jan. 1, 2013: 1,903,927
Dec. 31, 2103: 228,471 200,000 28,471 1,932,398
Dec. 31, 2014: 231,888 200,000 31,888 1,964,286

4. Ans. A.
Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14:
DR: Bonds payable 1,000,000
DR: APIC – Bond conv. priv. 73,036
CR: Discount on bonds payable 17,857
CR: Ordinary shares (10,000*50) 500,000
CR: Share premium 555,179

5. Ans. B.
Present value of the minimum lease payment at
implicit lease rate, 8% for 5 periods: (600,000*3.9927) P2,395,626
Fair market value of the leased asset at inception of lease 2,400,000 *100%, thus Finance lease

Amortization table: Lease liability


Date Periodic Paymts Interest Principal Balance
Jan. 1, 2014: 2,395,626
Dec. 31, 2014: 600,000 191,650 408,350 1,987,276
Dec. 31, 2015: 600,000 158,982 441,018 1,546,258

6. Ans. C.
Present value of MLP on 1/1/14 P2,395,626
Divide by: Term (no transfer of ownership) 5 years
Depreciation expense in 2014 P479,125

CHAPTER 8-EXERCISE 8: PIPINO CORP.


1. Ans. C.
Amortization table: Notes Payable
Date Correct Interest Amortization Balance
April 1, 2012: P7,195,000
March 31, 2013: 1,079,250 960,000 119,250 7,314,250
March 31, 2014: 1,097,138 960,000 137,138 7,451,388
December 31, 2014: 838,281* 720,000* 118,281* P7,569,669
*9 months only up to December 31, 2014

2. Ans. D.
P2,240,000
4,800,000
P7,040,000

Amortization table: Finance Lease Liability


Date Payment Principal Balance
December 31, 2011: P7,040,000
December 31, 2011: 1,200,000 5,840,000
December 31, 2012: 1,200,000 584,000 616,000 5,224,000
December 31, 2013: 1,200,000 522,400 677,600 4,546,400
December 31, 2014: 1,200,000 545,640 745,360 3,801,040 Liab. balance
December 31, 2015: 1,200,000 380,104 819,896 2,981,144
Current Noncurrent

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3. Ans. C.
Notes payable P7,569,669
Liability under capital lease – Long term** 2,981,144
Deferred tax liability 250,000
Total long term liabilities P10,800,813

4. Ans. B.
Accounts payable, unadjusted balance P1,840,500
RR# 65218, purchase in transit, FOB Destination (19,000)
RR# 65219, purchase in transit, FOB Buyer (Destination) (30,500)
RR# 65220, goods received only after the December 31 (41,000)
Accounts payable, adjusted balance P1,750,000

5. Ans. D.
2014 Sales P31,650,000
8%
Warranties expense in 2014 P2,532,000

6. Ans. B.
Accounts payable 1,750,000
Warranties payable (2,532,000 – 1,950,000) 582,000
Interest payable on notes (8,000,000*12%*9/12) 720,000
Current portion of Long term liability under capital lease 819,896
Total current liabilities P3,871,896

CHAPTER 8-EXERCISE 9: ADELAIDA INC.


1. Ans. D.
Tote bags actually distributed in 2014 19,000
Estimated premiums liability at the end of 2013, in tote bags (7,000)
Estimated premiums liability at the end of 2014, in tote bags 5,000
Estimated premiums expense in 2014, in tote bags 17,000
Multiply by: Net expense per tote bag (P25 – P5) P20
Estimated premiums expense in 2014 P340,000

2. Ans. C.
The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset:
Estimated premiums payable, 2014 (5,000 * P20) P100,000
Multiply by tax rate: 30%
Deferred tax asset (Noncurrent Asset) P30,000

The temporary difference from excess tax depreciation over financial depreciation is future taxable amount
creating Deferred Tax Liability:
Deferred tax liability (Noncurrent Liability): P150,000*30% P45,000

3. Ans. D.
Accounts payable, as adjusted (P540,000 + P50,000) P590,000
Estimated premiums payable, 2014 (5,000 * P20) 100,000
Current liabilities P690,000

4. Ans. A.
Proceeds from bond issuance (the amount credited per entry made) P5,500,000
Fair value of bonds without the conversion option (at 8% effective rate)* 5,399,271
Equity component/ APIC from Bond Conversion Privilege P100,729
Present value of Principal: P8,000,000*0.680583 P3,402,916
Present value of Interest: 500,000*3,99271 1,996,355
Fair value of the bonds without the conv. Option P5,399,271

Amortization Table: Bonds Payable


Correct Int. Nominal Int. Amortization Balance
January 1, 2014: 5,399,271
December 31, 2014: 431,942 500,000 (68,058) 5,331,213
December 31, 2015: 426,497 500,000 (73,503) 5,257,710
Upon assumed conversion: 1/2016:

5. Ans. D.
Carrying value of bonds up to 12/31/2015 5,257,710
APIC- Bond Conversion Priv. 100,729
Total Par Value of Shares (5,000*10*50) (2,500,000)
Share Premium from conversion 2,858,439

6. Ans. B.
Upon assumed retirement: 1/2016:
Carrying value of bonds up to 12/31/2015 5,257,710
Fair value of bonds without the conversion option at 12% effective rate:
Present value of principal: P5,000,000*0.711780 3,558,901
Present value of interest: 500,000*2.401831 1,200,916 4,759,817
Gain on retirement of bonds (profit or loss) 497,893

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CHAPTER 8-EXERCISE 11:


Ans. C.
Case 1:
a. The obligating event is the damages occurring in 2014, thus is present obligation.
b. The outflow of economic benefits is probable.
c. The amount of liability is reliably measurable given a range of amounts without best estimate.
Thus, accrue obligation at the mid-range (P500,000+P1,500,000)/2 = P1,000,000.

Case 2:
a. The obligating event is the guarantee agreement completed in 2014, thus is present obligation.
b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance
sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event.
c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.
Thus, accrue obligation at best estimate P2,000,000.

Case 3:
a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there are
no claims yet.
b. The outflow of economic benefit is probable.
c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However,
since there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be
a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over the
portion to be reimbursed by the insurance company.
Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company will be
reimbursing the company for anything in excess of the deductible clause.

Case 4:
a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no present
obligation yet.
Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event.

CHAPTER 8-EXERCISE 12: LABANDERA INC.


1. Ans. B.
Class A Laundry appliance sales (280,000,000*60%) P168,000,000
Divide by P50
Number of coupons distributed 3,360,000
Multiply by: probable redemption 60%
Coupons that will probably be redeemed 2,016,000
Divide by: number of coupons to acquire 1 premium 400
Estimated number of premiums to be redeemed 5,040
Number of premiums actually redeemed (1,680,000/400) (4,200)
Liability for premiums in units 840
Liability for premium in peso (840*4,100) 3,444,000

2. Ans. D.
Class B Laundry appliance sales (280,000,000*40%) P112,000,000
Multiply by: Estimated warranty cost as % of sales 3%
Estimated warranty expense for 2014 P3,360,000

3. Ans. C.; 4. Ans. A.; 5. Ans. A.


Unadjusted net income 80,164,000
Adjustment for additional premium expense (3,444,000)
Adjustment for additional warranties expense (1,720,000)
Adjusted net income 75,000,000
Less: Bonus (2,480,916)
Income tax (35%) (25,381,679)
Net income 47,137,405

Bonus = 5% (75,000,000 – 35%(75,000,000 – B)) Tax = 35% (75,000,000 -2,480,916)


B = 5% (48,750,000 + .35B) T = 25,381,679
B = 2,437,500 + .0175B
0.9825B = 2,437,500
B = 2,480,916

CHAPTER 8-EXERCISE 13: LUZON COMPANY


1. Ans. B.
Estimated warranty expense (30,000u*60%*P1,500) 27,000,000
Actual cost incurred (19,500,000)
Estimated warranties payable 7,500,000

2. Ans. D.
a. The obligating event is the environmental damages occuring in 2014, thus is present obligation.
b. The outflow of future economic benefits is probable.
c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per
the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event)

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3. Ans. B.
PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776) 3,683,821 4.604776
Fair market value of leased asset at inception: 4,000,000
92% More than 90%, thus Finance
Amortization table: Periodic paymt Interest Exp. Principal Balance
Present value of MLP 3,683,821
January 1, 2012: 800,000 800,000 2,883,821
January 1, 2013: 800,000 346,059 453,941 2,429,879
January 1, 2014: 800,000 291,586 508,414 1,921,465 Liab balance
Janaury 1, 2015: 800,000 230,576 569,424 1,352,041
Accrued interest
4. Ans. B.
PV of MLP, Jan. 1, 2012 (Asset capitalized) 3,683,821
Multiply by condition percent (over term), Dec. 31, 2014: 3/6
Carrying value of leased asset, Dec. 31, 2014 1,841,910

5. Ans. A.
Allocation of issue price on January 1, 2014:
Total issue price 4,250,000
FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods:
Principal: P4,000,000*0.7049605 2,819,842 0.7049605
Interest: P200,000*4.9173243 983,465 3,803,307 4.9173243
Residual amount allocated to APIC-Bond conversion privilege 446,693

Amortization table: Bonds payable


Correct Int. Nominal Int. Amortization Balance
January 1, 2014: 3,803,307
June 30, 2014: 228,198 200,000 28,198 3,831,505
December 31, 2014: 229,890 200,000 29,890 3,861,396

Carrying value of converted bonds, Dec. 31, 2014 (P3,861,396*3/4) 2,896,047


Carrying value of APIC-Bond conversion privilege (P446,693*3/4) 335,020
Less: Par value of issuable shares: (50,000sh*3/4)*P50 (1,875,000)
Share premium/APIC 1,356,067

CHAPTER 8-EXERCISE 14: MNO INC.


1. Ans. B.
Proceeds from issuance of convertible bonds 5,500,000
FMV of bonds w/out conv. option at 5% for 10 semi-annual periods:
PV of Principal: P5,000,000*0.613913 3,069,566
PV of Interest: 300,000*7.721734 2,316,520 5,386,086
Equity portion (APIC -Bond Conv. Priv.) 113,914

2. Ans. C.
Total Bonds @ FV* APIC@Residual
Retirement Price 2,500,000 2,365,267 134,733
Carrying Value** (5,289,319*50%); (113,914*50%) 2,644,659 56,957
P&L Loss/ Cap. Gain (279,392) 77,776
profit/loss APIC/Share premium

*FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods.
PV of Principal 2,500,000*0.62275 1,556,874
PV of Interest: 150,000*5.389289 808,393
Fair value of bonds w/out conv. priv 2,365,267

Amortization Table: Bonds Payable Correct Nominal Amortization Balance


June 30, 2013: 5,386,087
December 31, 2013: 269,304 300,000 (30,696) 5,355,391
June 30, 2014: 267,770 300,000 (32,230) 5,323,161
December 31, 2014: 266,158 300,000 (33,842) 5,289,319 **

3. Ans .C.
Interest from Bonds Payable
from 1/1 - 6/30 (see amortiz.) 267,770
from 7/1 - 12/31 (see amortiz.) 266,158 533,928
Interest from Notes Payable
from 1/1 - 8/31 (2.5M*10%*8/12) 166,667
from 9/1 - 12/31 (2M*10%*4/12) 66,667 233,333
Total interest expense 767,261

4. Ans. B.
Fin. Inc. after permanent diff 1,000,000
FDAAB for the period 100,000
FTALE for the period (500,000)
Taxable income 600,000
Mulitply by tax rate 40%
Current Tax Expense 240,000

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5. Ans. D.
Cum. Temp Diff (FTALE) 1,550,000
Multiply tax rate 40%
Deferred Tax Liability 620,000

6. Ans. D.
Bonds Payable (half - see amor.) 2,644,659
Notes payable - long term 1,500,000
Deferred tax liabilty 620,000
Total noncurrent liability 4,764,659

CHAPTER 8-EXERCISE 15: KURT CORP.


1. Ans. C.
Proceeds from issuance (at face value) 4,000,000
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.772183 3,088,734
PV of Interest: 240,000*2.531295 607,511 3,696,245
Equity component/APIC-Bond Conversion 303,755

2. Ans. D.
Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance
January 1, 2014: (Princ.*6%) (CV*9%) 3,696,245
December 31, 2014: 332,662 240,000 92,662 3,788,907
December 31, 2015: 341,002 240,000 101,002 3,889,908
December 31, 2016: 350,092 240,000 110,092 4,000,000 53. Ans. D.

3. Ans. B.
Bonds Payable, CV at 1/1/2016 (see amortization table) 3,889,908
APIC-Bonds Conversion Privilege 303,755
Total 4,193,663
Multiply by exercise rate: (3,000/4,000) 3/4
Prorated CV of BP and APIC-Bond Conv. Priv. 3,145,247
Less:Par value of issuable shares (3,000*40) *P10 (1,200,000)
Share premium from assumed conversion 1,945,247

4. Ans. A.
Proceeds from issuance (at face value, net of transaction cost) P3,848,531
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.741162 2,964,648
PV of Interest: P240,000*2.465123 591,630 3,556,278
Equity component/APIC-Bond Conversion P292,253

5. Ans. B.
Total Bonds @ FV* APIC (Res. Val.)
Retirement Price P4,000,000 3,889,908 110,092
Carrying Value 3,837,104 292,253
P&L Loss/ Cap. Gain 52,804 (182,161)
retirement loss capital gain
*FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period.
PV of Principal 4,000,000*0.917431 P3,669,725
PV of Interest: 240,000*0.917431 220,183
Fair value of bonds w/out conv. priv P3,889,908

Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance
January 1, 2014: 3,556,278
December 31, 2014: 373,409 240,000 133,409 3,689,687
December 31, 2015: 387,417 240,000 147,417 3,837,104
December 31, 2016: 402,896 240,000 162,896 4,000,000

CHAPTER 8-EXERCISE 16: TRY CORP.


Reconciliation:
Net income before any differences 10,000,000
Permanent Differences:
Nondeductible expenses: Life insurance expense 300,000
Nontaxable income: Dividend income (500,000)
Net income after permanent differences 9,800,000
Temporary Differences:
Future Deductible amounts
Estimated litigation loss 600,000
Unearned retnal income 300,000 900,000
Future Taxable Amounts
Installment receivable 1,200,000 (1,200,000)
Taxable income 9,500,000

1. Ans. A.
Net income after permanent differences 9,800,000
Multiply by: Constant tax rate 33%
Total tax expense 3,234,000

2. Ans. C.
Taxable income 9,500,000
Mulitply by: Current tax rate 33%

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Current tax expense 3,135,000

3. Ans. A.
Future deductible amounts 900,000
Mulitply by: Constant tax rate 33%
Deferred tax asset 297,000

4. Ans. B.
Future taxable amounts 1,200,000
Mulitply by: Constant tax rate 33%
Deferred tax liability 396,000

To reconcile:
Current tax expense 3,135,000
Add: Deferred tax expense (FTA) 396,000
Less: Deferred tax benefit (FDA) (297,000)
Total tax expense 3,234,000

5. Ans. B.
Current tax expense; P9,500,000*33% 3,135,000
Add: Deferred tax expense (FTA): P1,200,000*35% 420,000
Less: Deferred tax benefit (FDA): P900,000*35% (315,000)
Total tax expense 3,240,000

CHAPTER 8-EXERCISE 17: COSINE CORP.


Reconciliation:
Net income before any differences 12,000,000
Permanent Differences:
Nondeductible expenses: Life insurance expense 400,000
Nontaxable income: Dividend income (1,200,000)
Net income after permanent differences 11,200,000
Temporary Differences:
Future Deductible amounts
Warranty provision 600,000 600,000
Future Taxable Amounts
Prepaid advertising 500,000
Excess tax depr. over finanicial depr. 400,000 (900,000)
Taxable income 10,900,000

1. Ans. B.
Taxable income 10,900,000
Mulitply by: Current tax rate 32%
Current tax expense 3,488,000

2. Ans. A.
Future deductible amounts 600,000
Mulitply by: Constant tax rate 33%
Deferred tax asset 198,000

3. Ans. D.
Future taxable amounts 900,000
Mulitply by: Constant tax rate 33%
Deferred tax liability 297,000

4. Ans. D.
To reconcile:
Current tax expense 3,488,000
Add: Deferred tax expense (FTA) 297,000
Less: Deferred tax benefit (FDA) (198,000)
Total tax expense 3,587,000

CHAPTER 8-EXERCISE 18: BONCHON CORP.


Service costs
Current service cost 160,000
Net interest (income)expense
Interest on ABO (P3,000,000*6%) 180,000
Interset on PA (P2,800,000*6%) (168,000) 12,000
Pension expense (Profit or loss) 172,000 2. Ans. B.

Net remeasurement gain/loss (Other comprehensive Income/loss)


Actuarial gain on PA (a) (106,000)
Actuarial loss on ABO (b) 442,000 336,000 3. Ans. C.

Total pension expense 508,000 1. Ans. D.

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(a) Actuarial gain/loss on Plan asset


Plan asset, beginning balance 2,800,000
Add: Contribution for the year 210,000
Interest on PA (P2,800,000*6%) 168,000
Less: Settlements at scheduled retirement (300,000)
Balance 2,878,000
Plan asset, at FMV at the year-end 2,984,000
Actuarial gain on plan asset 106,000

(b) Actuarial gain/loss on Accumulated Benefit Obligation


ABO, beginning balance 3,000,000
Add: Current service cost 160,000
Interest on ABO (P3,000,000*6%) 180,000
Less: Benefits settled, at scheduled ret. (300,000)
Balance 3,040,000
ABO, present value, ending balance 3,482,000
Actuarial loss on AB0 442,000

4. Ans. B.
To reconcile:
Accrued pension, beg 200,000
Pension expense (total) 508,000
Total 708,000
Contribution to the plan for the year (210,000)
Accrued pension, end 498,000

ABO, end 3,482,000


Plan asset, end (2,984,000)
Accrued pension end 498,000

CHAPTER 8-EXERCISE 19: DEE CORP.


Service costs
Current service cost 1,400,000
Settlement gain:
Settlement price other ben. settled 400,000
PV of other benefits settled (500,000) (100,000) 1,300,000
Net interest (income)expense
Interest on ABO (P7,500,000*10%) 750,000
Interset on PA (P7,000,000*10%) (700,000) 50,000
Pension expense (Profit or loss) 1,350,000 2. Ans. A.

Net remeasurement gain/loss (Other comprehensive Income/loss)


Actuarial gain on PA
Actual return on plan asset 840,000
Estimated return (Interest on PA) (700,000) (140,000)
Actuarial gain on ABO (200,000) (340,000) 3. Ans. D.

Total pension expense 1,010,000 1. Ans. D.

4. Ans. B.
Plan asset, beginning balance 7,000,000
Add: Contribution for the year 1,200,000
Interset on PA (P7,000,000*10%) 700,000
Less: Settlements at scheduled retirement (1,500,000)
Settlement price of addl ben. Settled (400,000)
Balance 7,000,000
Less: Actuarial gain on PA 140,000
Plan asset, FMV, end 7,140,000

5. Ans. A.
ABO, beginning balance 7,500,000
Add: Current service cost 1,400,000
Interest on ABO (P7,500,000*10%) 750,000
Less: Benefits settled, at scheduled ret. (1,500,000)
PV of additional benefits settled (500,000)
Balance 7,650,000
Add: Actuarial gain on ABO (200,000)
ABO, present value, end 7,450,000

4. Ans. B.
Plan asset at fair value, end 7,140,000
ABO at present value, end 7,450,000
Accrued pension expense, end (310,000)

To reconcile:
Prepaid pension, beg 500,000
Pension expense (total) 1,010,000
Total 1,510,000
Contribution to the plan for the year (1,200,000)
Accrued pension, end 310,000

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CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY

DISCUSSION PROBLEMS
CHAPTER 9-PROBLEM 1
1A
2 D
3 D
4 B
5 C
6 B

CHAPTER 9-PROBLEM 2: SB CORP.


Correct entries to record transactions in 2013:
(a) Cash (50,000*P150) 7,500,000
Ordinary shares (50,000*P100) 5,000,000
Share premium-OS 2,500,000

(b) Building 1,200,000


Preference shares (20,000*P50) 1,000,000
Share premium-PS 200,000

(c) Income summary 5,540,000


Retained earnings 5,540,000

Correct entries to record transactions in 2014:


(a) Treasury shares (20,000*P160) 3,200,000
Cash 3,200,000

(b) Cash 2,800,000


Ordinary shares (10,000*P100) 1,000,000 *Allocation: FMV (total) Rato Amount Allocated
Share premium-OS (P1,960,000-P1,000,000) 960,000 Ordinary 1,750,000 70% 1,960,000
Preference shares (10,000*P50) 500,000 Preference 750,000 30% 840,000
Share premium-PS (P840,000-P500,000) 340,000 Total 2,500,000 2,800,000

(c) Cash, net (5,000*P85)-P25,000 400,000


Preference shares (5,000*P50) 250,000
Share premium-PS 150,000

(d) Cash 5,000,000


Bonds payable 2,000,000 *Allocation: Amount Allocated
Premium on bonds payable (P2,200,000-P2,000,000) 200,000 Bonds pay. @ Fair value 2,200,000
Ordinary shares (15,000*P100) 1,500,000 Ordinary @ Residual 2,800,000
Share premium-OS (P2,800,000-P1,500,000) 1,300,000 5,000,000

(e) Cash (8,000*P185) 1,480,000


Treasury shares (8,000*P160) 1,280,000
Share premium-TST 200,000

(f) Ordinary shares (7,000*P100) 700,000


Share premium-OS (7,000*P50) 350,000 *share premium from original issuance (P150-P100)
Share premium-TST 70,000
Treasury shares (7,000*160) 1,120,000

(g) Income summary 4,530,000


Retained earnings 4,530,000

(h) Retained earnings 800,000


Retained earnings appropriated for Treasury 800,000

Summary
Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS Sh. Prem-TST RE-unapp RE-app TS
(a) Ordinary share issuance in 2013 5,000,000 2,500,000
(b) Preference share issuance in 2013 1,000,000 200,000
(c) Net income in 2013 5,540,000
(a) Treasury shares reacquired in 2014 (3,200,000)
(b) Ordinary and Preference shares issue 1,000,000 500,000 960,000 340,000
(c) Preference shares issuance in 2014 250,000 150,000
(d) Ordinary shares issued with Bonds 1,500,000 1,300,000
(e) Treasury shares reissuance in 2014 200,000 1,280,000
(f) Treasury shares retirement in 2014 (700,000) (350,000) (70,000) 1,120,000
(g) Net income in 2014 4,530,000
(h) Appropriation for treasury (800,000) 800,000
Adjusted 12/31/14 balances 6,800,000 1,750,000 4,410,000 690,000 130,000 9,270,000 800,000 (800,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 7. Ans.

Share capital:
Ordinary Shares 6,800,000
Preference Shares 1,750,000 8,550,000
Additional paid-in capital:
Share premium-OS 4,410,000
Share premium-PS 690,000
Share premium-TST 130,000 5,230,000 5. Ans.
Total Contributed Capital 13,780,000 6. Ans.
Retained earnings - appropriated 800,000
Retained earnings - unappropriated 9,270,000
Treasury shares at cost (800,000)
Total Stockholders' Equity 23,050,000 8. Ans.

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CHAPTER 9-PROBLEM 3: GLORIETTA INC.


Correct entries to record transactions in 2013:
(a) Land 1,400,000
Ordinary shares (100,000*P10) 1,000,000
Share premium-OS 400,000

(b) Cash (50,000*P50) 2,500,000


Preference shares (50,000*P20) 1,000,000
Share premium-PS 1,500,000

(c) Income summary 540,000


Retained earnings 540,000

Correct entries to record transaction in 2014:


(a) Preference shares (20,000*P20) 400,000
Share premium-PS (20,000*P30) 600,000 *Share premium from the original issuance of preference shares in 2013
Ordinary shares (80,000*P10) 800,000
Share premium-OS 200,000

(b) Building (@fair value) 1,200,000 *Allocation:


Ordinary shares (25,000*P10) 250,000 Ordinary @Fair value (25,000*P25) 625,000
Share premium-OS (P625,000-P250,000) 375,000 Preference @Residual amount 575,000
Preference shares (20,000*P20) 400,000 Fair value of Building 1,200,000
Share premium-PS (P575,000-P400,000) 175,000 Note that the Building's fair value was more clearly determinable that the
fair value of the securities issued, since while the fair value of ordinary shares
(c) Cash, net (5,000*52)-P12,000 248,000 were determinable at P25, the fair value of preference shares is not clearly
Preference shares (5,000*P20) 100,000 determinable since it is highly speculative or volatile.
Share premium-PS 148,000

(d) Treasury shares (10,000*P22) 220,000


Cash 220,000

(e) Cash (2,000*P20) 40,000


Retained earnings 4,000
Treasury shares (2,000*P22) 44,000

(f) Ordinary shares (5,000*P10) 50,000


Share premium-OS 20,000 *Share premium from original issuance computed as:
Retained earnings 40,000 (P400,000/100,000)*5,000
Treasury shares (5,000*P22) 110,000

(g) Income summary 830,000


Retained earnings 830,000

(h) Retained earinings 66,000


Retained earinings appropriated for Treasury 66,000

Summary
Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS RE-unapp RE-app TS
(a) Ordinary share issuance in 2013 1,000,000 400,000
(b) Preference share issuance in 2013 1,000,000 1,500,000
(c) Net income in 2013 540,000
(a) Conversion of PS to OS in 2014 800,000 (400,000) 200,000 (600,000)
(b) Ordinary and Preference shares issue 250,000 400,000 375,000 175,000
(c) Preference shares issuance in 2014 100,000 148,000
(d) Reacquisition of Treasury (220,000)
(e) Treasury shares reissuance in 2014 (4,000) 44,000
(f) Treasury shares retirement in 2014 (50,000) (20,000) (40,000) 110,000
(g) Net income in 2014 830,000
(h) Appropriation for treasury (66,000) 66,000
Adjusted 12/31/14 balances 2,000,000 1,100,000 955,000 1,223,000 1,260,000 66,000 (66,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 7. Ans.

Share capital:
Ordinary Shares 2,000,000
Preference Shares 1,100,000 3,100,000
Additional paid-in capital:
Share premium-OS 955,000
Share premium-PS 1,223,000 2,178,000 5. Ans.
Total Contributed Capital 5,278,000 6. Ans.
Retained earnings - appropriated 66,000
Retained earnings - unappropriated 1,260,000
Treasury shares at cost (66,000)
Total Stockholders' Equity 6,538,000 8. Ans.

CHAPTER 9-PROBLEM 4: BULACAN CO.


Correct entries:
1. Ans. P450,000.
(a) Cash 5,700,000
Bonds payable 5,000,000
Premium on bonds payabe 250,000
Ordinary share warrants outstanding 450,000

(b) Cash (4,000sh*P70) 280,000


Accumulated profits 20,000
Treasury shares (4,000sh*P75) 300,000

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Ordinary shares (1,000*P50) 50,000


Share premium-OS (P250K/50Ksh)*1K 5,000
Accumulated profits 20,000
Treasury shares (1,000sh*P75) 75,000

(c) Memo: 49,000share rights were issued to 49,000 shares outstanding.

2. Ans. P276,000.
(d) Cash (5,000*60%)/5w*P60 36,000
Ordinary share warrants (P450K*60%) 270,000
Ordinary shares (600sh*P50) 30,000
Share premium-OS 276,000

3. Ans. P45,000.
(e) Cash (40,000/10)*P55 220,000
Ordinary shares (4,000*P50) 200,000
Share premium-OS 20,000

(f) Income summary 1,250,000


Accumulated profits 1,250,000

Summary:
Prefence Sh Ordinary Sh APIC/Sh Prem. Accum. Prof. Treasury Total
Balances, January 1, 1,000,000 2,500,000 500,000 2450000 (375,000) 6,075,000
(a) Warrants issuance 450,000 450,000
(b) Treasury reissue (20,000) 300,000 280,000
Tresaury retirement (50,000) (5,000) (20,000) 75,000 -
(c) Share rights issue (memo entry) -
(d) Warrants exercise 30,000 6,000 36,000
(e) Rights exercise 200,000 20,000 220,000
(f) net Income 1,250,000 1,250,000
Balances, December 31, 1,000,000 2,680,000 971,000 3,660,000 - 8,311,000
4. Ans. 5. Ans. 6. Ans.

CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES.


(a) Entry made:
Cash 130,000
Treasury shares 130,000

Correct entry:
Cash 130,000
Share premium-TST 65,000
Treasury shares (P363,000/605)*325 195,000

1. Ans. Adjusting entry:


Share premium-TST 65,000
Treasury shares 65,000

(b) Entry made:


Cash 650,000
Preference shares (6,000sh*50) 300,000
Share premium-PS 350,000

Correct entry:
Cash 650,000 Allocation: Prorata
Preference shares 300,000 Pref. Sh. (6Ksh*P80) 480,000 80%
Share premium-PS (P650K*80%)-PAR 220,000 Warrants (12Kw*P10) 120,000 20%
Ordinary share warrants outstanding (P650K*20%) 130,000 600,000

2. Ans. Adjusting entry:


Share premium-PS 130,000
Ordinary share warrants outstanding 130,000

(c) Entry made:


Cash (700sh*P440)*40% 123,200
Subscription receivable 184,800
Orinary shares subscribed 308,000

Correct entry:
Cash (700sh*P440)*40% 123,200
Subscription receivable 184,800
Ordinary shares subscribed (700sh*P20) 14,000
Share premium-OS 294,000

3. Ans. Adjsuting entry:


Ordinary shares subscribed 294,000
Share premium-OS 294,000

(d) Entry made:


Cash 158,400
Subscriptions receivable 158,400

Correct entry:
Cash 158,400
Subscriptions receivable 158,400

Ordinary shares subscribed (600sh*P20) 12,000


Ordinary shares 12,000

4. Ans. Adjusting entry:


Ordinary shares subscribed 12,000
Ordinary shares 12,000

(e) Entry made:

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Cash (4,000*2sh*P400) 3,200,000


Ordinary shares 3,200,000

Correct entry:
Cash 3,200,000
Ordinary share warrants (P130K*4/12) 43,333
Ordinary shares (4,000*2sh*P20) 160,000
Share premium-OS 3,083,333

5. Ans. Adjusting entry:


Ordinary shares 3,040,000
Ordinary share warrants outstandin 43,333
Share premium-OS 3,083,333

6. Ans.
(f) Correct entry/Adjusting entry
Cash (P184,800-P158,400)+P5,000 31,400
Miscellaneous expense 5,000
Subscription receivable 26,400

Ordinary shares subscribed 2,000


Ordinary shares (100*P20) 2,000

CHAPTER 9-PROBLEM 6: PUNK INC.


1. Ans. P83,333.
FMV of options (100emp*100opt)*P25 250,000 Entry:
Divide by: Vesting period 3 Salaries expense 83,333
Salaries expense, 2014 83,333 Ordinary share options outstanding 83,333

2. Ans. P58,333.
Revised FMV of options (85emp*100opt)*P25 212,500
Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 141,667 Entry:
Less: Prior year's salaries expense (83,333) Salaries expense 58,333
Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333

3. Ans. P33,333.
Final FMV of options (70emp*100opt)*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (141,667) Salaries expense 33,333
Salaries expense, 2016 33,333 Ordinary share options outstanding 33,333

4. Ans. P210,000.
Entry upon exercise of all options:
Cash (7,000sh*P25) 175,000
Ordinary share options oustanding 175,000
Ordinary shares (7,000sh*P20) 140,000
Share premium 210,000

CHAPTER 9-PROBLEM 7: PUNK INC.


1. Ans. P66,667.
Estimated FMV of options (100-20emp)*100opt*P25 200,000 Entry:
Divide by: Vesting period 3 Salaries expense 66,667
Salaries expense, 2014 66,667 Ordinary share options outstanding 66,667

2. Ans. P58,333.
Revised FMV of options (100-25emp)*100opt*P25 187,500
Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 125,000 Entry:
Less: Prior year's salaries expense (66,667) Salaries expense 58,333
Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333

3. Ans. P50,000.
Final FMV of options (70emp*100opt)*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (125,000) Salaries expense 50,000
Salaries expense, 2016 50,000 Ordinary share options outstanding 50,000

4. Ans. P50,000.
Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market based-
condition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the
services were received, thus, salaries expense shall be recognized.
Entry:
Salaries expense 50,000
Ordinary share options outstanding 50,000
Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity.
Entry:
Ordinary share options outstanding 175,000
Retained earnings/APIC-Unexercised options 175,000

5. Ans. P120,833.
Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are
accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 years.
Final FMV of options, Dec. 2015 (75emp*100opt)*P25 187,500
Less: Prior years' cummulative salaries expense (66,667)
Salaries expense, 2015 120,833

CHAPTER 9-PROBLEM 8 : PUNK INC.


1. Ans. P62,500.
Dec. 31, 2014: Is the non-market based condition achievable?
Actual sales, 2014 75,000,000
Multiply by: 120% estimated increase 120%
Projected sales, 2015 90,000,000
Multiply by: 120% estimated increase 120%
Projected sales, 2016 108,000,000

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Minimum required sales 100,000,000 Thus, achievable.


Note that the estimated sales in 2016 is P108M, thus the estimated number of options per employee shall be 100.

Est. FMV of options vested (100-25emp)*100opt.*P25 187,500 Entry:


Divide by: Vesting period 3 Salaries expense 62,500
Salaries expense, 2014 62,500 Ordinary share options outstanding 62,500

2. Ans. P137,500.
Dec. 31, 2015: Is the non-market based condition achievable?
Actual sales, 2015 110,000,000
Multiply by: 120% estimated increase 120%
Projected sales, 2016 132,000,000
Minimum required sales 100,000,000 Thus, achievable.
Note that the estimated sales in 2016 is P132M, thus the estimated number of options per employee shall be 150.

Revised FMV of options (100-20emp)*150opt*P25 300,000


Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 200,000 Entry:
Less: Prior year's salaries expense (62,500) Salaries expense 137,500
Salaries expense, 2015 137,500 Ordinary share options outstanding 137,500

3. Ans. P220,000.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual sales, 2016 150,000,000
Minimum required sales 100,000,000 Thus, achieved, therefore options are exercisable.
Note that the actual sales in 2016 is P150M, thus the final number of options per employee shall be 200.

Final FMV of options (100-16emp)*200opt*P25 420,000 Entry:


Less: Prior years' cummulative salaries expense (200,000) Salaries expense 220,000
Salaries expense, 2016 220,000 Ordinary share options outstanding 220,000

4. Ans. P504,000.
Entry upon exercise of all options:
Cash (16,800sh*P25) 420,000
Ordinary share options outstanding 420,000
Ordinary shares (16,800sh*P20) 336,000
Share premium 504,000

CHAPTER 9-PROBLEM 9 : PUNK INC.


1. Ans. P100,000.
Dec. 31, 2014: Has the non-market based condition been achieved at the end of 2014?
Actual increase in sales, 2014 (P81M-75M)/75M 8%
Minimum required increase in sales, 2014 10% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?


Estimated average increase in sales in 2014 and 2015: (8%+16%)/2 12%
Minimum required average increase in sales (2014 -2015) 12% Thus, achievable, VP is 2 years.

Est. FMV of options vested (10-2emp)*1,000opt.*P25 200,000 Entry:


Divide by: Vesting period 2 Salaries expense 100,000
Salaries expense, 2014 100,000 Ordinary share options outstanding 100,000

2. Ans. P33,333.
Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015?
Actual increase in sales, 2014 (P81M-75M)/75M 8%
Actual inrease in sales, 2015 (P92.23M-81M)/81M 14%
Actual average increase in sales (2014 and 2015) 11%
Minimum required average increase in sales (2014 - 201 12% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?


Estimated average increase in sales in 2014 and 2015: (8%+14%+20%)/3 14%
Minimum required average increase in sales (2014 - 2016) 14% Thus, achievable, VP is 3 years.

Revised FMV of options (10-2emp)*1,000opt*P25 200,000


Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 133,333 Entry:
Less: Prior year's salaries expense (100,000) Salaries expense 33,333
Salaries expense, 2015 33,333 Ordinary share options outstanding 33,333

3. Ans. P41,667.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M 20%
Actual average increase in sales (2014-2016) (8%+14%+20%)/3 14%
Minimum required average increase in sales (2014 - 2016) 14% Thus, the condition has bee achieved.
Options are exercisable.
Final FMV of options (10-3emp)*1,000opt*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (133,333) Salaries expense 41,667
Salaries expense, 2016 41,667 Ordinary share options outstanding 41,667

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4. Ans. P210,000.
Entry upon exercise of all options:
Cash (7,000sh*P25) 175,000
Ordinary share options outstanding 175,000
Ordinary shares (7,000sh*P20) 140,000
Share premium 210,000

CHAPTER 9-PROBLEM 10 : MYX CO.


1. Ans. P603,333.
End of 2014: Is the non-market based condition achievable?
Projected 2016 sales: (P210M*120%*120%) 328,125,000
Minimum required 2016 sales 250,000,000 Achievable, number of SARs is 10,000.

Estimated FMV of SARS, 2014 (10,000sars*P74) 740,000 Entry:


Divide by: Vesting period 3 Salaries expense 246,667
Salaries expense, 2014 246,667 SAR payable 246,667

End of 2015: Is the non-market based condition achievable?


Projected 2016 sales: (P410M*120%) 640,625,000
Minimum required 2016 sales 250,000,000 Achievable, number of SARs is 15,000.

Estimated FMV of SARS, 2015 (15,000sars*P85) 1,275,000


Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 850,000 Entry:
Less: Prior year's salaries expense (246,667) Salaries expense 603,333
Salaries expense, 2015 603,333 SAR payable 603,333

2. Ans. P1,050,000.
End of 2016: Has the non-market based condition been achieved?
Actual 2016 sales 760,000,000
Minimum required 2016 sales 250,000,000 Achieved, number of SARs is 20,000.

Final FMV of SARS (20,000sars*P95) 1,900,000 Entry:


Less: Prior years' cummulative salaries expense (850,000) Salaries expense 1,050,000
Salaries expense, 2016 1,050,000 SAR payable 1,050,000

3. Ans.
Entry upon exercise in 2017 at prevailing FMV P98.
SAR payable 1,900,000
Salaries expense 60,000
Cash (20,000sars*P98) 1,960,000

4. Ans. P1,800,000.
SAR payable at prevaiing FMV (20,000sars*P90) 1,800,000
Entry to remeasure the SAR at the end of 2017:
SAR payable 100,000
Salaries expense/Income from SAR reversal 100,000
(P95 - P90)*20,000SARS

CHAPTER 9-PROBLEM 11 : DARK COMPANY


1. Ans.
Retained earnings (10%*90,000sh)*P14 126,000
Share dividends payable (9,000sh*P10) 90,000
Share premium 36,000

Share dividends payable 90,000


Ordinary shares 90,000

2. Ans.
Retained earnings (25%*99,000sh)*P10 247,500
Share dividends payable (24,750sh*P10) 247,500

Share dividends payable 247,500


Ordinary shares 247,500

3. Ans. P1,337,500.
Ordinary shares, beginning balance 1,000,000
10% share dividends (90,000sh*10%)*P10 90,000
25% share dividends (99,000sh*25%)*P10 247,500
Ordinary shares, ending balance 1,337,500

CHAPTER 9-PROBLEM 12 : CHRIS COMPANY


1. Ans.
Retained earnings (10%*500,000)*P25 2,500,000
Stock dividends payable (50,000sh*P10) 500,000
Share premium 2,000,000

2. Ans.
Stock dividends payable 500,000
Ordinary shares (46,000sh*P10) 460,000
Fractional warrants outstanding (4,000*P10) 40,000

3. Ans.
Fractional warrants outstanding 36,000
Ordinary shares (3,600sh*P10) 36,000

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4. Ans.
Fractional warrants outstanding 4,000
Share premium - Expired fractional warrants 4,000

5. Ans. P1,099,200.
Oustanding shares, beginning 500,000
Ordinary share dividends distributed 46,000
Shares issued from fractional warrants 3,600
Total outstanding shares 549,600
Multiply by: Cash dividends 2
Dividends from earnings 1,099,200

Entry:
Retained earnings 1,099,200
Capital liquidated (549,600*P1) 549,600
Dividends payable 1,648,800
Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE.

CHAPTER 9-PROBLEM 13 : ABC INC.


1. Ans. P900,000.
Declaration:
Retained earnings 900,000
Property dividends payable 900,000

Noncurrent asset held for disposal 720,000


Accum. depr (P800,000*1/10) 80,000
Building (PPE) 800,000

2. Ans. P700,000.
Balance sheet date: December 31, 2014
Property dividends payable 200,000
Retained earnings 200,000
FMV at 12/31/14 700,000
Dividends payable, CV 900,000
Adjustment to RE (200,000)

Loss 20,000
Noncurrent asset held for disposal 20,000
FMV less cost to sell, NCAHFD 700,000
CV, upon reclass 720,000
Loss on remeasurement - P&L (20,000)

3. Ans. None.
Note that the increase or decrease in the property dividends payable is charged to RE.

4. Ans. P100,000.
Distribution:
Retained earnings 100,000
Property dividends payable 100,000
Final FMV, 1/31/2015 800,000
Dividends payable, CV (FMV 12/201 700,000
Adjustment to RE 100,000

Property dividends payable 800,000


Noncurrent asset held for disposal 700,000
Gain on settlement of property dividends - P&L 100,000

CHAPTER 9-PROBLEM 14: JKL CORP.


Correct entries:
(a) Accumulated profits, beg 50,000
Cash 50,000
Preference shares (40,000*P1) 40,000
Ordinary shares (20,000*P0.50) 10,000
Total cash dividends 50,000

(b) Treasury shares (80,000/4,000= P20) 80,000


Cash 80,000

(c) Memo: Share split up 1 is to 2: 1. Ans. NO EFFECT.


From 20,000 shares issued to 40,000 shares issued; From P5 par to P2.50 par
From 4,000 treasury shares to 8,000 treasury shares; From P20 cost per treasury to P10 per treasury

(d) Equipment 50,000


Treasury shares (2,800*P10) 28,000
Share premium-TST 22,000

(e) Cash (10,000*P15) 150,000


Preference shares (10,000*P10) 100,000
Share premium-PS 50,000

(f) Accumulated profits (34,800*10%)*P6 20,880 2. Ans.


Share dividends payable (3,480*P2.50) 8,700
Share premium-OS 12,180

Share dividends payable 8,700


Ordinary shares 8,700

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(g) Accumulated profits 59,570 3. Ans.


Cash dividends payable 59,570
Preference shares (50,000*P1) 50,000
Ordinary shares (38,280*P0.25) 9,570
Total cash dividends 59,570

(h) Income summary 940,000


Accumulated profits 940,000

-- Accumulated profits 52,000


Accumulated profits appropriated for treasury 52,000

Summary: Preference Sh Ordinary Sh Sh. Prem-PS Sh. Prem-OS Sh. Prem-TS Accum. P.-App Accum. Prof Treasury
January 1, 2014 balances 400,000 100,000 192,000 1,200,000
(a) Retroactive adjustment, 2013 dividends (50,000)
(b) Treasury shares reacquisition (80,000)
(c) Share split - No Effect
(d) Treasury shares reissue 22,000 28,000
(e) Preference shares issue 100,000 50,000
(f) 10% stock dividends 8,700 12,180 (20,880)
(g) 2014 cash dividends (59,570)
(h) 2014 net income 940,000
-- Appropriation for treasury 52,000 (52,000)
December 31, 2014 balances 500,000 108,700 50,000 204,180 22,000 52,000 1,957,550 (52,000)
4. Ans.

5. Ans.
Accumulated profits 17,400
Share dividends payable 17,400
Computed as: (34,800*20%*P2.50)

CHAPTER 9-PROBLEM 15: TRUST CORPORATION


CASE 1:
Entries:
a) Retained earnings 100,000
Accum Depr 100,000

b) Retained earnings 50,000


Inventories 50,000

c) Retained earnings 150,000


Accounts payable/Liabilities 150,000

d) Ordinary shares (P5*100,000sh) 500,000


Share premium 500,000

e) Share premium 550,000


Retained earnings 550,000

Assets Liabilities SHE Ordinary Sh. Share Prem. Ret. Earnings


Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)
a) Write-down of PPE (100,000) (100,000) (100,000)
b) Write-down of Inventory (50,000) (50,000) (50,000)
c) Accrual of additional Liability 150,000 (150,000) (150,000)
d) Recapitalization - (500,000) 500,000
e) Write-off of deficit - (550,000) 550,000
Balances, after quasi-reorganization 1,000,000 450,000 550,000 500,000 50,000 -
1. Ans. 2. Ans. 3. Ans. 4. Ans.

CASE 2:
Entries:
a) PPE - Appraisal Increase 1,000,000 Repl. Cost 2,500,000 1,500,000 Cost
Accum Depr - Appraisal Increase 400,000 Repl AD (1,000,000) (600,000) AD
Revaluation surplus 600,000 Sound Value 1,500,000 900,000 Carrying Value

b) Retained earnings 75,000


Inventories 75,000

c) Retained earnings 175,000


Accounts payable/Liabilities 175,000

d) Revaluation surplus 500,000


Retained earnings 500,000

Assets Liabilities SHE Ordinary Sh. Share Prem. Rev. Surplus Ret. Earnings
Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)
a) Write-down of PPE 600,000 600,000 600,000
b) Write-down of Inventory (75,000) (75,000) (75,000)
c) Accrual of additional Liability 175,000 (175,000) (175,000)
d) Write-off of deficit - (500,000) 500,000
Balances, after quasi-reorganization 1,675,000 475,000 1,200,000 1,000,000 100,000 100,000 -
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.

CHAPTER 9-PROBLEM 16: SPURS INC.


1. Ans. Dr. P150,000.
Debit to RE, per books 1,500,000
Debit to RE, per audit (15%*100,000sh)*P110 1,650,000
Adjustment to RE (additional debit) (150,000)

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2. Ans. P9,100,000.
Unadjusted Net Income, per books 9,000,000
Inventory fire loss (150,000)
Impairment loss on PPE (750,000)
Loss on sale of Equipment (200,000)
Gain on retirement of bonds 300,000
Unrealized holding gain on FA 700,000
Increase in beg. Inventory under FIFO (100,000)
Increase in end. Inventory under FIFO 300,000
Adjusted Net Income, per audit 9,100,000

3. Ans. P6,400,000.
Retained earnings, beginning 7,800,000
Correction of prior period error (1,500,000)
Change in policy (Ave to FIFO) 100,000
Retained earnings, beg. as restated 6,400,000

4. Ans. P10,650,000.
Retained earnings, beg. as restated 6,400,000
15% stock dividend declaration (1,650,000)
Loss on retirement of Treasury (P1,050,000-P850,000) (200,000)
Reserve for plant expansion (3,000,000)
Adjusted Net Income 9,100,000
Retained earnings, ending balance 10,650,000

5. Ans. P1,100,000.
Excess over par on share dividends (P1,650,000-P1,500,000) 150,000
Loss on retirement of treasury (850,000)
Excess over par on share issuance 1,000,000
Proceeds from sale of donated shares 800,000
Net/Total adjustment to Additional Paid-in Capital 1,100,000

MULTIPLE CHOICE EXERCISES:


CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC.
1. Ans. A.
Ordinary shares issued (40,000sh*P20) 800,000
Ordinary shares subscribed (5,000sh*P20) 100,000
Preference shares issued (6,000sh*P100) 600,000
Preference shares subscribed (900sh*P100) 90,000
Share premium from ordinar shares
Issued 920,000
Subscribed (P56-P20)*5,000sh 180,000 1,100,000
Share premium from preference shares
Issued 224,000
Subscribed (P140-P100)*900 36,000 260,000
Share premium from treasury shares 8,000
Ordinary share warrants outstanding 40,000
Total contributed capital 2,998,000

2. Ans. A.
Revaluation surplus 240,000
Unrealized holding gain - AFS 6,000
Translation reserves (credit) 100,000
Unrealized capital/Other comprehensive income 346,000

3. Ans. B.
Contributed capital 2,998,000
Accum. other comprehensive income 346,000
Accumulated profits 820,000
Stockholders' equity 4,164,000

CHAPTER 9-EXERCISE 2: ALPHA CORPORATION


1. Ans. D.
Authorized ordinary shares at P10 par value 900,000
Unissued ordinary shares (500,000)
Ordinary shares issued P400,000

2. Ans. D.
Authorized preference shares at P50 par value 400,000
Unissued preference shares 100,000
Preference shares issued P300,000

3. Ans. C.
Additional paid-in capital on ordinary shares 460,000
Additional paid-in capital on preference shares 112,000
Additional paid in capital on sale of treasury shares 4,000
Ordinary share warrants outstanding 20,000
Donated capital 25,000
Total Additional Paid-in Capital P621,000

4. Ans. D.
Ordinary shares issued P400,000
Preference shares issued 300,000
30,000
20,000
15,000 30,000
Total Additional Paid-in Capital 621,000
Total Contributed Capital P1,381,000

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5. Ans. C.
Ordinary shares issued P400,000
Preference shares issued 300,000
Ordinary shares subscribed 50,000
Preference shares subscribed 45,000
Total Legal Capital (Par value of issued and subs.) P795,000

6. Ans. C.
Total Contributed Capital 1,381,000

Unrealized holding gain-AFS 3,000


Revaluation increment in properties 100,000
Accumulated profits:
Accumulated profits – unappropriated 410,000
Reserve for bond sinking fund 220,000
Total Stockholder’s equity P2,114,000

CHAPTER 9-EXERCISE 3: TABUK CORPORATION


Entry Made Correct Entry Adjusting Journal Entry
Cash 900,000 Cash 900,000 Retained Earnings 150,000
O.S. 300,000 O.S. 300,000 Share Prem – PS 117,000
P.S. 450,000 P.S. 450,000 Share Prem – OS 33,000
Retained earnings 150,000 Share Prem – PS 117,000 1. Ans. C.
Share Prem – OS 33,000

Cash 225,000 Cash 225,000 Share Prem. – TS 37,500


Other expense 37,500 Share Prem – TS 37,500 Retained Earnings 37,500
Treasury Stock 262,500 Treasury Stock 262,500 *books are already closed.
2. Ans. D.

O.S. 600,000 O.S. 600,000 Share Prem. – OS 90,000


Treasury Stock 350,000 Share Prem – OS 90,000 Retained Earnings 250,000
Retained Earnings 250,000 Treasury Stock 350,000 Share Premium – TS 340,000
Share Prem – TS 340,000 3. Ans. C.

Cash 425,000 Cash 425,000


Subs Rec. 350,000 Subs Rec. 350,000
Opex 50,000 Retained earnings 75,000
No entry
Interest income 25,000 *books are already closed.
4. Ans. A.

CHAPTER 9-EXERCISE 4: NEVADA SQUARE


1. Ans. D.
Retained earnings, Jan. 1, 2014 P30,000,000
Cash dividends (2,800,000)
Stock dividends (100,000*P68) (a) (6,800,000)
Property dividends (800,000/2)*P25 (b) (10,000,000)
Net income for the year 60,000,000
Retained earnings, Dec. 31, 2014 P16,400,000
(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.
(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.

2. Ans. B.
Ordinary shares, January 1, 2014 P14,000,000
Stock dividends issuance (100,000*20) 2,000,000
Ordinary shares, December 31, 2014 P16,000,000
*share split is accounted through memo entry only, aggregate par value remains the same.

3. Ans. C.
Share premium, January 1, 2014 P8,000,000
Share premium from share dividends
(6,800,000 – 2,000,000) 4,800,000
Share Premium, December 31, 2014 P12,800,000

4. Ans. B.
Preference shares P10,000,000
Ordinary shares 16,000,000
Share premium 12,800,000
Retained earnings 16,400,000
Retained earnings, Dec. 31, 2014 P55,200,000

CHAPTER 9-EXERCISE 5: MISAMIS INC.


1. Ans. B.
Number of options estimated to vest (200opt*100emp) 20,000
Multiply by Market value of Options 30
Total Options Outstanding 600,000
Multiply by (2012 & 2013) 2/3
Total Accum. Comp. Exp. as of 12.31.2013 400,000

2. Ans. D.
Proceeds from exercise of rights (60,000–5,000)/5*130 P1,430,000
Par value of Ordinary shares issued (11,000*100) 1,100,000
Share premium P330,000

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3. Ans. B.
Share premium from ordinary shares P1,000,000
Share premium from exercise of warrants 575,000
Share premium from exercise of rights 330,000 P1,905,000
Ordinary share options outstanding (20,000*30) 600,000
Ordinary share warrants outstanding (750,000*50%) 375,000
Total APIC P2,880,000

4. Ans. D.
Accumulated profits, beginning P3,000,000
Retroactive adjustment to retained earnings (400,000)
Appropriation for dividends (71,000 * 5) (355,000)
Net income, 2014 (2,500,000 – 200,000) 2,300,000
Accumulated profits, end P4,545,000

CHAPTER 9-EXERCISE 6: SANTIAGO INC.


1. Ans. B.
The share options are under a variable option plan with a non-market based condition, thus:
2014:
VP 1 year achieved if 2014 Rev>=15M; Actual 2014 Rev, P14.5M – not achieved.
VP 2 years achievable if 2015 Rev>=18M; Estimated 2014 Rev, (P14.5M*125%) = 18.125M – achievable.
Number of options: (68-8)*500 30,000
Fair value of options on grant date P18
Estimated value of services over 2 years P540,000
Divide by: Vesting period 2 years
Salaries expense, 2014 P270,000

2. Ans. D.
2015:
VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved.
VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable.
Number of options: (65-5)*500 30,000
Fair value of options on grant date P18
Estimated value of services over 3 years P540,000
Multiply by: 2/3 2/3
P360,000
Less: Prior years’ salaries expense (270,000)
Salaries expense, 2015 P90,000

3. Ans. C.
2016:
VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved.
Final number of options: 63*500 31,500
Fair value of options on grant date P18
Final value of services over 3 years P567,000
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P567,000
Less: Prior years’ salaries expense (360,000)
Salaries expense, 2016 P207,000

4. Ans. A.
Final number of options: 63*500 31,500
Options exercised in 2017: 45*500 (22,500)
Options forfeited in 2017 3*500 (1,500)
Remaining options as of 12/31/17 7,500
Multiply by fair value on grant date P18
Carrying value of options outstanding 12/31/17 P135,000

5. Ans. C.
Entry upon exercise of 45*500 = 22,500 options:
Cash (22,500*P35) 787,500
Ordinary share options outstanding
(22,500*18) 405,000
Ordinary shares (22,500*P20) 450,000
Share premium 742,500

CHAPTER 9-EXERCISE 7: PANDORA CORP.


1. Ans. B.
The share options are under a variable option plan with a market based condition, thus the achievability of the condition
is not a matter to consider in determining annual salaries expense:
2014:
Number of options: (600-5-45)*100 55,000
Fair value of options on grant date P5
Estimated value of services over 3 years P275,000
Divide by: Vesting period 3 years
Salaries expense, 2014 91,667

2. Ans. A.; 3. ans. C.


2015:
Number of options: (600-5-20-35)*100 54,000
Fair value of options on grant date P5
Estimated value of services over 3 years P270,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of 2015 P180,000
Less: Prior years’ salaries expense (91,667)
Salaries expense, 2015 P88,333

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4. Ans. A.
2016:
Final number of options: (600-5-20-30)*100 54,500
Fair value of options on grant date P5
Final value of services over 3 years P272,500
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P272,500
Less: Prior years’ salaries expense (180,000)
Salaries expense, 2016 P92,500

CHAPTER 9-EXERCISE 8: JUBEE CORP.


1. Ans. B.
The share options are under a variable option plan with a non-market based condition, thus:
2014:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. 12% – achievable.
Number of options: (100*80%)*200 16,000
Fair value of options on grant date P40
Estimated value of services over 3 years 640,000
Divide by: Vesting period 3 years
Salaries expense, 2014 P213,333

2. Ans. C.
2015:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable.
Number of options: (100*85%)*300 25,500
Fair value of options on grant date P40
Estimated value of services over 3 years 1,020,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of 2015 P680,000
Less: Prior years’ salaries expense (213,333)
Salaries expense, 2015 P466,667

3. Ans. D.
2016:
Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived.
Final number of options: (100-14)*300 25,800
Fair value of options on grant date P40
Final value of services over 3 years P1,032,000
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P1,032,000
Less: Prior years’ salaries expense (680,000.0)
Salaries expense, 2016 P352,000

4. Ans. A.
Entry upon exercise of 60% of the options (25,800*60% = 15,480 options):
Cash (15,480*P120) 1,857,600
Ordinary share options outstanding
(15,480*40) 619,200
Ordinary shares (15,480*P100) 1,548,000
Share premium 928,800

5. Ans. B.
Entry upon expiration of 40% of the options (25,800*40% = 10,320 options):
Ordinary share options outstanding
(10,320*40) 412,800
Share premium – Expired options 412,800

CHAPTER 9-EXERCISE 9: KALINGA CO.


1. Ans. A.
The share appreciation rights are under a variable plan with a non-market based condition, thus:
2014:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable.
Estimated number of SAR: (20-4)*10,000 160,000
Estimated FMV of SAR at year-end P6
Estimated value of services over 3 years P960,000
Divide by: Vesting period 3 years
Salaries expense, 2014 P320,000

2. Ans. D.
2015:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable
Estimated number of SAR: (20-4)*10,000 160,000
Estimated FMV of SAR at year-end P6.75
Estimated value of services over 3 years P1,080,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of 2015 P720,000
Less: Prior years’ salaries expense (320,000)
Salaries expense, 2015 400,000

3. Ans. B; 4 Ans. D.
2016:
Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved.
Final number of SAR 15*20,000 300,000
Fair value of options on grant date P7
Est. value of services over 3 years P2,100,000
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P2,100,000
Less: Prior years’ salaries expense (720,000)
Salaries expense, 2016 P1,380,000

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CHAPTER 9-EXERCISE 10: SANS CORP.


CORRECT ENTRIES:
Land (1.8M*30%) 540,000
Building (1.8M*70%) 1,260,000
Ordinary Shares 500,000
Share premium 1,300,000

Subsription receivable 420,000


Ordinary shares subscribed 200,000
Share premium 220,000

Treasury shares (5,000 sh) 125,000


Cash 125,000

Cash 252,000
Subscription receivable 252,000

Ordinary share subscribed 120,000


Ordinary shares 120,000

MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par
8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price
5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit

Cash 40,000
RE 22,500
Treasury shares (10,000*6.25) 62,500

2. Ans. C.
Compensation expense 84,000
SAR Payable 84,000
(7*4,000*P15)/5years

3. Ans. C.
RE 270,000
Cash Dividends Payable 270,000
Shares Outstanding 238,000
Shares Subscribed 32,000
Total 270,000
Multiply by cash div rate 1
Total Cash dividends 270,000

Income Summary 1,500,000


RE 1,500,000

Summary OS OS-Subs Share Prem. RE TS TOTAL


January 15, 500,000 1,300,000
March 1, 200,000 220,000
June 1, (125,000)
July 15, 120,000 (120,000)
September 2, (22,500) 62,500
December 30, (270,000)
December 31, 1,500,000
Appropriation for TS (62,500)
Adj. Balances 620,000 80,000 1,520,000 1,145,000 (62,500) 3,365,000
1. Ans. B. 4. Ans. C. 5. Ans. C 6. Ans. D.

CHAPTER 9-EXERCISE 11: ROXXY CORP.


1. Ans. D.
Ordinary Sh. Sh Prem - OS Sh Prem- TS Treasury Share Shares Outstanding
Prior to 2013:
A. Share issue for cash 3,800,000 7,980,000 380,000
B. Share issue for land 200,000 680,000 20,000
C. Share subsription/issue 400,000 1,280,000 40,000
D. Cash dividend declaration (Dec. 15, 2012) 440,000

2013 transactions:
A. Cash dividend declaration (June 15, 2013) 440,000
B. Share issue for cash 80,000 288,000 8,000
C. Reacquisition of Treasury Shares 312,000 (8,000)
D. Stock Dividend Declaration 220,000 924,000 22,000
462,000
2014 transaction:
A. Reissue of TS 6,000 (78,000) 2,000
Balances: June 30, 2014 4,700,000 11,152,000 6,000 234,000 464,000

2. Ans. C.
Share premium - OS 11,152,000
Share premium - Treasury-OS 6,000
Total Share premium 11,158,000

3. Ans C.
Retained earnings, June 30, 2013 2,760,000
Net Income for 2014 fiscal year 160,000
Stock Dividends to OS (Dec. 2013)
(440,00sh*5%*P52) (1,144,000)
Cash Dividends to PS (Dec. 2013)
(200,000*P1) (200,000)
Voluntary approp. for sinking fund (200,000)
Legal approp. for treasury shares (equal to cost) (234,000)
Retained earnings, unappropriated June 30, 2014 1,142,000

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4. Ans. A.
Ordinary Shares 4,700,000
Preference Shares 5,000,000
Share Premium - OS 11,152,000
Share Premium - PS 3,800,000
Share Premium - Treasury (OS) 6,000
RE, appropriated 434,000
RE, unappropriated 1,142,000
Treasury Shares at cost (234,000)
Total SHE, June 30, 2014 26,000,000

CHAPTER 9-EXERCISE 12: GLORIA CORPORATION


ENTRIES:
a) OS (30,000*5) 150,000
Share premium - OS 150,000
Treasury shares 270,000
Share premium - TST 30,000

1. Ans. C.
b) RE (10,000*70) 700,000
Property dividends payable 700,000

RE (10,000*5) 50,000
Property dividends payable 50,000

2. Ans. A.
Property dividends payable 750,000
Trading securities @CV 680,000
Gain/Income 70,000

c) Memo: 1M share rights were received; 1 OS: 4 SR plus P11


Cash (840K/4)*11 2,310,000
OS (210K*5) 1,050,000
Share premium - OS 1,260,000

d) RE (100,000*2) 200,000
OSWO 200,000

Cash (80,000*8) 640,000


OSWO (200,000*80%) 160,000
OS (80,000*5) 400,000
Share premium - OS 400,000

e) RE (1.8M*10%) 180,000
Dividends payable 180,000

f) Available for sale securities 110,000


UHGain - OCI (SCI/SHE) 110,000
UHLoss - AFS 12/31/13 245,000
UHLoss - AFS 12/31/14 (135,000)
Decrease in UHL or UHGain for the year 110,000

g) RE, beg 275,000


Income tax expense 225,000
Rent income 500,000

h) Income summary 2,600,000


RE 2,600,000
PS OS APIC UHLoss RE TS
SUMMARY
January 1 balances 1,800,000 5,150,000 3,590,000 (245,000) 4,000,000 (270,000)
a) Treasury shares retirement (150,000) (120,000) 270,000
b) Property dividends (750,000)
c) Stock rights exerise 1,050,000 1,260,000
d) Options (prior period error) 200,000 (200,000)
Options exercise 400,000 240,000
e) Cash dividends (180,000)
f) UHGain - AFS for the year 110,000
g)Prior period error (275,000)
h) Net Income for the year 2,600,000
December 31, balances 1,800,000 6,450,000 5,170,000 (135,000) 5,195,000 -
3. Ans. B. 4. Ans. B. 6. Ans. D.
5. Ans. A; 7. Ans. C.
Preference share 1,800,000
Ordinary shares 6,450,000
APIC 5,170,000
Contributed Capital 13,420,000
Unrealized holding loss – SHE (135,000)
Accumulated profits - Total 5,195,000
Total Stockholders’ Equity P18,480,000

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CHAPTER 9-EXERCISE 13: RAJA CORPORATION


OS Sh. Prem. RE-app RE-unapp TS TOTAL
Beginning balance 4,000,000 1,700,000 6,000,000 11,700,000
Jan. 5 100,000 60,000 160,000
Jan. 16 (164,000) (164,000)
Feb. 20 (1,000,000) (1,000,000)
Feb. 25 200,000 280,000 480,000
Mar. 1 1,140,000 (1,140,000) -
Apr. 1 Split (no entry) -
May. 30 200,000 500,000 700,000
Jul. 1 778,500 2,335,500 (3,114,000) -
Aug. 1 (238,740) (238,740)
Dec. 31 2,150,000 2,150,000
Appropriation for TS (500,000) 500,000 -
Ending balance 6,218,500 4,575,500 2,993,260 500,000 (500,000) 13,787,260
1. Ans. A. 2. Ans. A. 3. Ans. C. 4. Ans. C.

CHAPTER 9-EXERCISE 14: APAYAO CORPORATION


ASSETS
Cash and cash equivalents (325,000 + 75,000) 400,000
Accounts receivable (275,000 + 100,000) 375,000
Marketable securities, at FMV as of 12/31/06 (955,000 – 600,000) 355,000
Prepayments 50,000 1,180,000 1. Ans. B.

Land 900,000
Building (600,000 – 50,000) 550,000
Machinery and equipment (330,000 – 110,000) 220,000 1,670,000
TOTAL 2,850,000 5. Ans. A.
LIABILITIES AND CAPITAL
Current liab. (325,000+75,000+100,000+3,000–50,000–100,000) 353,000 2. Ans. B
Non-current liabilities (250,000 + 50,000) 300,000 653,000

Ordinary shares, (50,000 – 5,000 + 4,000) * 25 1,225,000


Share premium (750,000 – 75,000 + 140,000) 815,000
Contributed capital 2,040,000 3. Ans. A.
Reserve for self insurance 75,000
Reserve for treasury shares (50*5,000) 250,000
Accum.profits (625,000–3,000–100,000–140,000–50,000–250,000) 82,000 4. Ans. D.
Treasury shares (50,000*5,000) (250,000) 2,197,000
TOTAL 2,850,000

CHAPTER 9-EXERCISE 15: WHISPER INC.


#of Shares Ordinary Sh. Retained
Outstanding Issued APIC Earnings
May, 2012 balances 300,000 P3,000,000 P300,000
Net income, 2012 P125,000
July 23, 2013 share issue 500,000 5,000,000 1,250,000
October 2 stock dividends (800,000*5%) 40,000 400,000 40,000 (440,000)
Net income, 2013 350,000
February, 2014 treasury stock (30,000)
June, reissuance of treasury 15,000 45,000
October, issuance of stocks thru rights exercise (250,000*2) 500,000 5.000,000 1,500,000
November, issuance of stacks thru rights exercise (400,000*2) 800,000 8,000,000 2,400,000
December 15, cash dividends: (2,125,000*.30) (637,500) 1. Ans. C.
December 31, retirement of TS (100,000) 10,000
Net income, 2014 800,000
Balances 2,125,000 P21,300,000 P5,545,000 P197,500
2. Ans. A. 3. Ans. C.
4. Ans. A.
Ordinary shares issued P21,300,000
Additional paid-in capital 5,545,000
Retained earnings 197,500
Treasury shares (5,000*9) (45,000)
Total stockholders’ equity P26,997,500

CHAPTER 9-EXERCISE 16: GREY CO.


1. Ans. A.
Contributed capital in excess of par value P18,000
Donated capital (from stockholder) 15,000
Recapitalization (reduction in par value) 1,500,000
Additional paid in capital P1,533,000

2. Ans. D.; 3. Ans. A.


2010 – 2013 Net income P2,400,000
2010 – 2013 Cash dividends (1,560,000)
Correction of error (note 2) 6,000
Refund of prior year’s income tax 27,000
Net income, 2014 510,000
50% share dividend, 2014 (750,000)
Retained earnings, total P633,000
Retained earnings, appropriated (60,000*4) 240,000
Retained earnings, unappropriated P393,000

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CHAPTER 9-EXERCISE 17: SCURBS CORPORATION


ADJUSTING JOURNAL ENTRIES
a. Ordinary shares 180,000 h. PPE 36,000
Share premium 180,000 Retained earnings 36,000

b. Retained earnings 150,000 i. Retained earnings 3,300


Share dividends payable 150,000 Accumulated Depr. 3,300

c. Allowance for bad debt 30,000 j. Depreciation expense 3,300


Bad debt expense 30,000 Accumulated Depr 3,300

d. Marketable securities 9,000 k. Accumulated depr 52,500


Retained earnings 9,000 PPE 45,000
Gain on sale of PPE 7,500
e. Unrealized loss (IS) 57,000
Marketable securities 57,000 l. Prepayment 2,700
Insurance expense 2,700
f. Retained earnings 12,000 Retained earnings 5,400
Income summary 12,000

g. Income summary 18,300


Inventory, end 18,300

SUMMARY:
1. Ans. A.
Total assets, 2014 unadjusted 2,545,200
(c) Decrease in allowance for bad debt 30,000
(d) Increase in value of marketable sec. in 2013 9,000
(e) Decrease in value of marketable sec. in 2014 (57,000)
(g) Decreasein inventory, end 2014 (18,300)
(h) Understatement in PPE in 2013 36,000
(i) Depreciation of PPE in item h, in 2013 (3,300)
(j) Depreciation of PPE in tem h, in 2014 (3,300)
(k) Correction error: PPE disposal in 2014 7,500
(l) Correcrion of error: prepayment 2,700
Total assets, 2014 adjusted 2,548,500

2. Ans. B.; 3. Ans. D.


2013 2014
Unadjusted net income, 585,000 660,000
(c) Decrease in bad debts in 2014 30,000
(d) Increase in value of marketable sec. in 2013 9,000
(e) Decrease in value of marketable sec. in 2014 (57,000)
(f) Overstatement in inventory, end 2013 (12,000) 12,000
(g) Understatement in inventory, end 2014 (18,300)
(h) Overstatement of repairs expense in 2013 36,000
(i) Understatement in depreciation in 2013 (3,300)
(j) Understatement in depreciation in 2014 (3,300)
(k) Understatement in gain on sale of equipment, 2014 7,500
(l) Overstatement of insurance expense, 2013 5,400
Understatement of insruance expense, 2014 (2,700)
Adjusted Net Income 620,100 628,200

4. Ans. D.
Unadjusted Retained Earnings, end 2014 1,401,000
Prior period errors: (P585,000-P620,100) 35,100
Overstatemetn in 2014 Net Income (P660,000-P628,200) (31,800)
Unrecorded dividend declaration (b) (150,000)
Adjusted Retained Earnings, end 2014 1,254,300

CHAPTER 9-EXERCISE 18: GBC INC.


1. Ans. D.
Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends.

2. Ans. B.
Shares issued 100,000
Less: treasury (1,000,000/50) (20,000)
Outstanding shares 80,000
Multiply by 10%
Dividends distributable, small 8,000
Multiply by fair value 42
Appropriation for share dividends 336,000

3. Ans. B.
a. Total net income since incorporation P3,200,000
b. Total cash dividends paid (150,000)
c. Impairment on property declared as dividend (600,000 – 450,000) (150,000)
Appropriation for property dividend at impaired value (450,000)
e. Correct valuation of share dividends (336,000)
h. Appropriated for plant expansion (700,000)
i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000) (140,000)
l. Appropriated for remaining treasury shares at cost P50/share (1,000,000)
Correct Unappropriated Accumulated Profits balance P274,000

4. Ans. A.

5. Ans. D.
d. Proceeds from sale of donated stocks 150,500
e. Share premium from share dividends 136,000
f. Gain on treasury share transaction 375,000
i. Loss on treasury share reissue (debit (375,000)
j. Share premium in excess of par from 215,000
k. Share issuance expense (45,000)
APIC 456,500

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CHAPTER 9-EXERCISE 19: MAMA CORP.


ENTRIES: PROPERTY DIVIDENDS
Declaration: Retained earnings 900,000
Dividends payable 900,000 1. Ans. A.

Noncurrent Asset Held 900,000


Loss 300,000
Equipment 1,200,000

Payment: Retained earnings 100,000


Dividends payable 100,000

Dividends payable 1,000,000


Noncurrent Asset Held for Disposal 900,000
Gain 100,000 2. Ans. D.

ENTRIES STOCK DIVIDENDS


Declaration: Retained earnings
(200,000*10%)*42 840,000 3. Ans. A.
Dividends payable (20,000*25) 500,000
Share premium 340,000

Payment: Dividends payable 500,000


Ordinary shares 500,000

4. Ans. D.
a. Total net income since 2013 6,400,000
b. Cash dividends since 2013 (300,000)
c. Property Dividends (see entries above) (1,000,000)
Adjustments to Net income in relation to the property dividends
Loss on reclassification of Equipment to held for disposal (300,000)
Gain on settlement of the property dividends 100,000
d. Capital loss from treasury shares reissue (300,000-400,000) (100,000)
e. Stock dividends (see entries above) (840,000)
g. Appropriation for plant expansion (700,000)
*Appropriation for treasury stock (30,000*P40) (1,200,000)
Accumulated profits - unappropriated balance 2,060,000

CHAPTER 9-EXERCISE 20: TAR CO.


1. Ans. A.
Net income, unadjusted 300,000
Profit sharing of employees (30,000)
Proceeds from life insurance 150,000
Gain on sale of property 23,000
NET INCOME 443,000

2. Ans. A.
Accumulated profits, beginning 200,000
Correction of prior period error (15,000)
Dividends to ordinary (50,000)
Dividends to preference (40,000)
Appropriation for bond redemption (20,000)
Correct net income 443,000
ACCUM PROFITS, UNAPP. 518,000

3. Ans. A.
APIC, unadjusted 100,000
Gain on sale of treasury, net 3,000
Donation from stockholder 52,000
Gain on sale of own shares 12,000
APIC 167,000

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CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION

DISCUSSION PROBLEMS
CHAPTER 10-PROBLEM 1: ABC CORPORATION
Current Noncurrent Current Noncurrent SHE
Asset Asset Liabilities Liabilities
Cash 800,000 800,000
Accounts receivable 750,000 750,000
Allowance for doubtful accounts 50,000 (50,000)
Dividend receivable (a) 40,000
Prepaid expenses 160,000 160,000
Inventory 1,000,000 1,000,000
Financial assets at fair value (a) 690,000 400,000
Land (b) 525,000
Building in process (b) 5,500,000 4,950,000
Patent 200,000 200,000
Machinery and equipment 1,500,000 1,500,000
Accumulated depreciation 300,000 (300,000)
Discount on bonds payable 200,000 (200,000)
Accounts payable 900,000 900,000
Accrued expenses 150,000 150,000
Note payable, 10% (c) 250,000 250,000
Accrued interest on notes payable (c) 52,500
Bonds payable 2,000,000 2,000,000
Accrued interest on bonds payable (d) 60,000
Share capital 3,000,000 3,000,000
Accumulated profits (b), (c), (d) 4,150,000 4,012,500
Treasury shares (a) (250,000)
Adjusted balances 3,100,000 6,875,000 1,412,500 1,800,000 6,762,500
1. Ans. 2. Ans. 3. Ans. 5. Ans.
Audit notes:
(a) Financial asset at fair value, unadjusted 690,000
Treasury shares (250,000)
Dividend receivable (40,000)
Financial asset at fair value, adjusted 400,000

(b) Building in progress, unadjusted 5,500,000


Land including property taxes in arrears (525,000)
Property tax expense (25,000) *charged to RE
Building in progress, adjusted 4,950,000

(c) Notes payable, principal 250,000

Interest in 2013 (P250,000*10%) 25,000


Interest in 2014 (P275,000*10%) 27,500 *charged to RE
Total interest payable on notes 52,500 *charged to RE

(d) Accrued interest on bonds payable (P2,000,000*12%*3/12) 60,000

4. Ans. P3,762,500.
Accumulated profits, unadjusted 4,150,000
(b) Property taxes for the current year (25,000)
(c) Interest on notes in 2013 (25,000)
Interest on notes in 2014 (27,500)
(d) Unaccrued interest on bonds in 2014 (60,000)
Appropriation for Treasury shares (250,000)
Accum. Profits, unappropriated, adjusted 3,762,500

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CHAPTER 10-PROBLEM 2: RCW CORP. Current Noncurrent Current Noncurrent SHE


Asset Asset Liabilities Liabilities

Cash 400,000 400,000


Accounts receivable 800,000 800,000
Allowance for doubtful accounts 50,000 (50,000)
Inventories at cost (NRV is P900,000) 1,000,000 900,000 (100,000)
Land, plant site 500,000 500,000
Land, for speculation at FMV (Note a) 1,200,000 1,200,000
Building 3,800,000 3,800,000
Accumulated depreciation – building 2,000,000 (2,000,000)
Equipment 3,400,000 3,400,000
Accumulated depreciation – equipment 1,300,000 (1,300,000)
Investment in associate 1,300,000 1,300,000
Prepaid expenses 100,000 100,000
Notes payable 750,000 750,000
Accounts payable 350,000 350,000
Income tax payable 50,000 50,000
Accrued expenses 60,000 60,000
Mortgage payable, P100,000 quarterly 2,000,000 400,000 1,600,000
Estimated liability for damages 140,000 140,000
Retained earnings app. for plant expansion 1,000,000 1,000,000
Retained earnings app. for contingencies 100,000 100,000
Share capital 3,000,000 3,000,000
Share premium 300,000 300,000
Retained earnings, unappropriated 1,350,000 1,350,000
Trademark 150,000 150,000
Secret processes and formulas 200,000 200,000
Bank loan payable – June 30, 2015 (Note b) 500,000 500,000
Def. tax asset, net def. tax liability, P50,000 100,000 150,000 50,000
Adjusted balances 2,150,000 7,400,000 1,750,000 2,150,000 5,650,000
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.

CHAPTER 10-PROBLEM 3: SCR COMPANY


Current Noncurrent Current Noncurrent SHE
Asset Asset Liabilities Liabilities
Unadjusted balances 6,200,000 11,800,000 2,000,000 2,000,000 14,000,000
Restricted foreign deposit (600,000) 600,000
Investment property at cost (1,000,000) 1,000,000
Loss on inventory write-down (200,000) (200,000)
Treasury shares (600,000) (600,000)
Store supplies 100,000 (100,000)
Financial asset at fair value through profit/loss 800,000 (800,000)
Share premium (500,000) 500,000
Unearned leasehold income -current portion 140,000 (140,000)
Stock dividends payable (300,000) 300,000
Serial bonds payable - current portion 100,000 (100,000)
Adjusted balances 4,700,000 12,500,000 1,740,000 1,460,000 14,000,000
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.

CHAPTER 10-PROBLEM 4: ABC COMPANY


Statement of Comprehensive Income (Expenses according to function)
Note #
Net Sales Note 1 12,230,000
Less: Cost of Sales Note 2 (6,560,000)
Gross profit 5,670,000
Share from net income of associate Note 3 170,000
Other income Note 4 210,000
Total income 6,050,000
Less: Operating expenses
Selling expenses Note 5 1,820,000
General and administrative expenses Note 6 850,000
Interest expense 400,000
Unrealized holding loss from financial asset 400,000 (3,470,000)
Net income before tax 2,580,000
Income tax expense (30%) (774,000)
Net income after tax 1,806,000 4. Ans.

Other comprehensive income/loss:


Unrealized holding gain on financial asset, net of tax 140,000
Revaluation surplus, net of tax 350,000
Foreign translation gain, net of tax 70,000 560,000

Total comprehensive income 2,366,000 5. Ans.

Statement of Comprehensive Income (Expenses according to nature)


Note #
Net Sales Note 1 12,230,000
Share from net income of associate Note 3 170,000
Other income Note 4 210,000

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Total income before expenses 12,610,000 3. Ans


Less: Operating expenses
(Increase)Decrease in inventories Note 7 390,000
Net purchases Note 2 5,140,000
Depreciation 1,200,000
Salaries 900,000
Supplies 600,000
Utilities 400,000
Rent 200,000
Advertising 150,000
Freight-out 250,000
Interest expense 400,000
Unrealized holding loss on financial asset 400,000 (10,030,000)
Net income before tax 2,580,000
Income tax expense (30%) (774,000)
Net income after tax 1,806,000 4. Ans.

Other comprehensive income/loss:


Unrealized holding gain on financial asset, net of tax 140,000
Revaluation surplus, net of tax 350,000
Foreign translation gain, net of tax 70,000 560,000

Total comprehensive income 2,366,000 5. Ans.

SUPPLEMENTARY NOTES:
Note 1: Net Sales
Gross sales 13,000,000
Less: Sales returns and allowances (520,000)
Sales discounts (250,000)
Net Sales 12,230,000

Note 2: Cost of Sales


Raw materials inventory, January 1, 1,150,000
Add: Net purchases
Gross purchases 5,400,000
Add: Freight-in 200,000
Less: Purchase returns and allowances (310,000)
Purchase discounts (150,000) 5,140,000
Raw materials available for use 6,290,000
Less: Raw materials, December 31, (800,000)
Raw materials used 5,490,000
Direct labor (P900,000*30%) 270,000
Factory overhead:
Depreciation (P1,200,000*40%) 480,000
Supplies (P600,000*20%) 120,000
Utilities (P400,000*40%) 160,000 760,000
Total manufacturing cost 6,520,000
Add: Work-in process inventory, January 1,. 920,000
Cost of goods placed into process 7,440,000
Less: Work-in process inventory, December 31 (1,100,000)
Cost of goods manufactured 6,340,000
Add: Finished goods inventory, January 1, 1,200,000
Cost of goods available for sale 7,540,000
Less: Finished goods inventory, December 31, (980,000)
Cost of goods sold 6,560,000 1. Ans.

Note 3: Share from Net Income of Associate


XYZ Inc. Net Income for 2014 850,000
Proportionate share 20%
Share from net income of associate 170,000

Note 4: Other income


Rent income 120,000
Royalty income 90,000
Total other income 210,000

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Note 5: Selling Expenses


Depreciation (P1,200,000*35%) 420,000
Salaries (P900,000*40%) 360,000
Supplies (P600,000*50%) 300,000
Utilities (P400,000*35%) 140,000
Rent expense 200,000
Advertising expense 150,000
Freight out 250,000
Total selling expenses 1,820,000 2. Ans.

Note 6: General and Administrative Expenses


Depreciation (P1,200,000*25%) 300,000
Salaries (P900,000*30%) 270,000
Supplies (P600,000*30%) 180,000
Utilities (P400,000*25%) 100,000
Total general and administrative expenses 850,000

Note 7: Increase/Decrease in Inventories


Inventories, January 1:
Raw materials 1,150,000
Work-in process 920,000
Finished goods 1,200,000 3,270,000
Inventories, December 31:
Raw materials 800,000
Work-in process 1,100,000
Finished goods 980,000 2,880,000
Decrase in inventories 390,000

CHAPTER 10-PROBLEM 5: UTV CORP.


Noncurrent Current Noncurrent
Current Asset Assets Liabilities Liabilities
Cash and cash equivalents 400,000 400,000
Bank overdraft 100,000 100,000
Accounts receivable 900,000 900,000
Allowance for doubtful accounts 40,000 (40,000)
Raw materials 560,000 560,000
Goods in process 600,000 600,000
Finished goods 1,400,000 1,400,000
Financial assets at fair value through OCI 2,500,000 2,500,000
Land, at fair market value 12/31/14 1,000,000 1,000,000
Building 6,000,000 6,000,000
Accumulated depreciation – building 1,600,000 (1,600,000)
Plant and equipment 2,400,000 2,400,000
Accumulated depreciation – Plant and Eqpt. 400,000 (400,000)
Patent 800,000 800,000
Goodwill, recognized in Jan. 2013 1,400,000 1,400,000
Note payable, bank – due June 30, 2015 1,300,000 1,300,000
Note payable, bank – due June 30, 2016 2,100,000 2,100,000
Accounts payable 1,000,000 1,000,000
Employee benefit provisions 180,000 180,000
Warranty liabilities 80,000 80,000
Income tax payable 120,000 120,000
Deferred tax liability 280,000 280,000
Accumulated profits, January 1, 2014 3,600,000
Revaluation surplus on Land, January 1, 2014 360,000
Unrealized gain on financial assets, 1/1/14 280,000
Share capital 5,000,000
Share premium, 1,000,000
Sales 10,000,000
Revaluation surplus on Land during the year 140,000
Unrealized gain on financial asset for the year 100,000
Cost of sales 6,000,000
Selling expenses 1,960,000
Administrative expenses 500,000
Finance cost 100,000
Income tax expense 160,000
Dividend declared and paid
Balances 3,820,000 12,100,000 2,780,000 2,380,000
Net Income 1. Ans. 2. Ans. 3. Ans. 4. Ans.

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Continued… Total Compre.


Net Income Income Accum. Profits SHE
Cash and cash equivalents
Bank overdraft
Accounts receivable
Allowance for doubtful accounts
Raw materials
Goods in process
Finished goods
Financial assets at fair value through OCI
Land, at fair market value 12/31/14
Building
Accumulated depreciation – building
Plant and equipment
Accumulated depreciation – Plant and Eqpt.
Patent
Goodwill, recognized in Jan. 2013
Note payable, bank – due June 30, 2015
Note payable, bank – due June 30, 2016
Accounts payable
Employee benefit provisions
Warranty liabilities
Income tax payable
Deferred tax liability
Accumulated profits, January 1, 2014 3,600,000
Revaluation surplus on Land, January 1, 2014 360,000
Unrealized gain on financial assets, 1/1/14 280,000
Share capital 5,000,000
Share premium, 1,000,000
Sales 10,000,000
Revaluation surplus on Land during the year 140,000 140,000
Unrealized gain on financial asset for the year 100,000 100,000
Cost of sales (6,000,000)
Selling expenses (1,960,000)
Administrative expenses (500,000)
Finance cost (100,000)
Income tax expense (160,000)
Dividend declared and paid (1,000,000)
Balances
Net Income 1,280,000 1,280,000 1,280,000
Total Comprehensive Income 1,520,000
Accumulated Profits 3,880,000 3,880,000
Stockholders' Equity 10,760,000
5. Ans. 6. Ans. 7. Ans.

CHAPTER 10-PROBLEM 6: THEODORE COMPANY


1. Ans. P7,485,000.
Sales revenue P7,935,000
Increase in accounts receivable (P1,800,000-P1,350,000) (450,000)
Collections from customers P7,485,000

2. Ans. P2,025,000.
Cost of goods sold P1,800,000
Increase in inventory (P2,700,00-P1,575,000) 1,125,000
Purchases 2,925,000
Increase in accounts payable (P2,250,000-P1,350,000) (900,000)
Cash disbursed for purchases P2,025,000

Operating expenses P1,500,000


(225,000)
Cash paid for operating expenses P1,275,000

3. Ans. P4,185,000.
Collections from customers P7,485,000
Cash disbursed for purchases (2,025,000)
Cash paid for operating expenses (1,275,000)
Cash provided by operating activities P4,185,000

4. Ans. P2,160,000.
Purchase of equipment (P2,700,000)1
Sale of land 495,000
Sale of equipment 45,000
Cash used in investing activities (P2,160,000)

P1,800,000
Add: Cost of equipment sold 900,000
Purchase of equipment P2,700,000

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Increase in lease-liability—Land P450,000


225,000
Carrying value of land sold 225,000
Add: Gain on sale of land 270,000
Proceeds from sale of land P495,000

P90,000
Less: Loss on sale of equipment 45,000
Proceeds from sale of equipment 45,000

5. Ans. P1,350,000.
(P1,350,000)

CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY


1. Ans. P920,000.
Net income 790,000
Adj: Non-operating (gain)/loss
Gain on sale of LT investment (P135,000-P100,000) (35,000)
Adj: Non-cash (income)/expenses
Depreciation expense 250,000
Adj: Decrease/(Increase) in Working Capital
Inventory, increase (80,000)
Accounts payable and accrued liabilities, decrease (5,000)
Cash provided by operating activities 920,000

2. Ans. P1,005,000.
Proceeds from sale of Building 350,000
Proceeds from sale of LT Investment 135,000
Purchase of Plant assets (P700,000+600,000-110,000) (1,190,000)
Purchase of Available for sale securities (300,000)
Cash used in investing activities (1,005,000)

3. Ans. P205,000.
Proceeds from share issuance 220,000
Proceeds from short-term bank debt 325,000
Payment of dividends (P500,000-160,000) (340,000)
Cash provided by financing activities 205,000

Summary:
Cash provided by operating activities 920,000
Cash used in investing activities (1,005,000)
Cash provided by financing activities 205,000
Increase in cash for the year 120,000

CHAPTER 10-PROBLEM 8: ABC CORP.


STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE
Profits-Unapp Shares
January 1, balances 3,000,000 2,540,000 4,000,000 9,540,000
Share issuance 1,000,000 1,000,000
Treasury shares reaquisition (300,000) (300,000)
Treasury shares retirement (100,000) (20,000) 120,000 -
Dividends declaration:
Share dividends (20%*65,000sh)*P50 650,000 (650,000) -
Cash dividends (P12*5,000)+(P3*78,000) (294,000) (294,000)
Appropriations:
Plant expansion 400,000 (400,000) -
Treasury shares 180,000 (180,000) -
Comprehensive income
Net income 1,200,000 1,200,000
Other comprehensive income (200,000) (200,000)
December 31, balances 4,550,000 2,900,000 3,676,000 (180,000) 10,946,000
1. Ans. 2. Ans. 3. Ans. 4. Ans.

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CHAPTER 10-PROBLEM 9: GLORIA CORPORATION


STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE
Profits-Unapp Shares
January 1, balances 6,950,000 3,615,000 3,730,000 (270,000) 14,025,000
Prior period adjustment:
Unrecorded 2011-2013 options 200,000 (200,000) -
Overstatement in rent income in 2013 (275,000) (275,000)
Share issuance from exercise of rights 1,050,000 1,260,000 2,310,000
Share issuance from exercise of options 400,000 240,000 640,000
Treasury shares retirement (150,000) (120,000) 270,000 -
Dividends declaration:
Property dividends (10,000sh*P75) (750,000) (750,000)
Cash dividends (P10%*P100*18,000sh) (180,000) (180,000)
Reversal of appropriation
Treasury shares (270,000) 270,000 -
Comprehensive income
Net income 2,600,000 2,600,000
Other comprehensive income 110,000 110,000
December 31, balances 8,250,000 5,035,000 5,195,000 - 18,480,000
1. Ans. 2. Ans. 3. Ans.

MULTIPLE CHOICE EXERCISES:


CHAPTER 10-EXERCISE 1: KALAMANSI INC.
1. Ans. A.
Cash (184,920 – 101,920) P83,000
Accounts receivable (84,480 – 4,125) 80,355
Inventory at NRV (90,000*80%) 72,000
Prepaid Insurance 12,000
Total current assets P247,355

2. Ans. A.
Land P167,000
Building, net (375,000 – 45,000) 330,000
Furniture and fixtures, net (114,600 – 34,600) 80,000
Total PPE P577,000

3. Ans. C.
Accounts payable P23,595
Interest payable 8,405
Advances 12,000
Short term portion of serial bonds 50,000
Total Current liabilities P94,000
9. c.

4. Ans. C.
Unappropriated retained earnings P295,000
(3,125)
Appropriated for bond treatment 50,000
Total retained earnings P341,875

5. Ans. B.
Share capital (4,000*10) P40,000
Paid-in capital in excess of par 430,00
Total retained earnings 341,875
Total SHE P811,875

CHAPTER 10-EXERCISE 2:ETT INC.


Current Asset Assets Liabilities Liabilities SHE Accum. Profits
Unadjusted balances 8,000,000 3,600,000 3,000,000 200,000 8,400,000 2,000,000
Bank overdraft 200,000 200,000
Allowance for bad debts/bad debt expense (260,000) (260,000) (260,000)
Increase in FMV of financial asset at fair value 150,000 150,000 150,000
Inventory write-down (to NRV which is lower) (100,000) (100,000) (100,000)
Goodwill (200,000) 200,000
Salaries payable/Salaries expense 500,000 (500,000) (500,000)
Mortgage payable 4,000,000 4,000,000
Interest payable 400,000 400,000
Accumulated depreciation on the building (600,000) (600,000) (600,000)
Current tax payable 200,000 (200,000)
Adjusted balances 7,790,000 7,600,000 4,300,000 4,000,000 7,090,000 690,000
1. Ans. D. 2. Ans. B. 3. Ans. D. 4. Ans. B. 5. Ans. C. 6. Ans. C.

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CHAPTER 10-EXERCISE 3: JACOB CORPORATION


ASSETS
Cash and cash equivalents (325,000+75,000) 400,000
Accounts receivable (275,000+100,000) 375,000
Marketable securities (955,000-600,000) 355,000
Prepayments 50,000
TOTAL CURRENT ASSETS P1,180,000 1. Ans. B.
Land 900,000
Building 600,000
Reserve for depreciation – Building (50,000)
Machinery and equipment 330,000
Reserve for depreciation – Machinery and equipment (110,000)
TOTAL NONCURRENT ASSETS 1,670,000
TOTAL ASSETS 2,850,000 2. Ans. A.
LIABILITIES AND CAPITAL
Current liabilities (325,000+75,000+100,000+3,000-50,000-100,000) 353,000 3. Ans. B.
Non-current liabilities (250,000+50,000) 300,000 4. Ans. C.
TOTAL LIABILITIES P653,000
Ordinary shares, P25 par, 45,000 shares issued (1,250,000-125,000) 1,125,000
Share dividends payable (4,000sh*25) 100,000
Share premium (750,000+(4,000sh*(60-25))-((750,000/50,000)*5,000sh) 815,000
TOTAL CONTRIBUTED CAPITAL 2,040,000
Reserve for self insurance 75,000
Reserve for treasury shares 250,000
Accumulated profits (625,000-3,000-100,000-140,000-50,000-250,000) 82,000
Treasury shares (500,000-250,000) (250,000)
TOTAL SHE 2,197,000 5. Ans. A.
TOTAL 2,850,000

CHAPTER 10-EXERCISE 4: REESE CORP.


1. Ans. B.
Cash 775,000
Accounts receivable (net) 2,695,000
Inventory 2,085,000
Total current assets 5,555,000
Note that the installment receivable from customer is classified as current since it is a trade payable.

2. Ans. A.
Accounts payable and accrued liabilities 1,701,000
Income taxes payable (654,000-525,000) 129,000
Total current liabilities 1,830,000

3. Ans. C.
Retained earnings, 1/1/14 3,450,000
Net sales and other revenues 13,360,000
Costs and expenses 11,180,000
Net income before tax 2,180,000
Income tax expense (30%) (654,000)
Net Income for the year 1,526,000
Retained earnings, 12/31/14 4,976,000

CHAPTER 10-EXERCISE 5: TORRES COMPANY


Current Non-current
Cash 1,765,000
Compensating balance (300,000) 300,000 Other Assets
Bond retirement (600,000) 600,000 LT Investment
Contingency fund (500,000) 365,000 1. Ans. D. 500,000 LT Investment

Account receivable 930,007


Credit balance 45,000
Advances to officers (past due) (600,000)
Current portion of past due:
2015: (P100,000 x .917431)) 91,743
Non-current portion:
2016:(P200,000 × .84168) 168,336 Other Assets
2017: (P300,000 × .77218) 231,654 Other Assets
Mdse. sent on consignment:
(P100,000 × 125%) (125,000)
Due from consignee:
(P75,000 ×125% × 92% - P3,000) 83,250 425,000 2. Ans. A.

Inventory 750,000
On consignment (P100,000 × 25%) 25,000 775,000

Investment 763,000
Financial Asset at Fair value through P&L 170,000 3. Ans B. (150,000)
Prepaid expense 30,000 (30,000)
Increase in value of AFS 50,000 633,000 LT Investment
Total 1,765,000 2,432,990
4. Ans. B. 5. Ans. D.

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CHAPTER 10-EXERCISE 6: KATZ CORP. Other Comp. Total Com. Accumulated


Cost of Sales Net Income Income Income Profits
Sales 53,000,000 53,000,000
Purchases 32,000,000 32,000,000
Sales discount 2,000,000 (2,000,000)
Purchase discount 1,200,000 (1,200,000)
Sales returns and allowance 1,000,000 (1,000,000)
Purchase returns and allowance 800,000 (800,000)
Correction of merchandise inventory,
beginning error, net of income tax – credit 400,000 400,000
Merchandise Inventory, January 1 (adjusted) 3,400,000 3,400,000
Merchandise Inventory, December 31 3,500,000 (3,500,000)
Distribution costs 5,000,000 (5,000,000)
General and administrative expenses 4,000,000 (4,000,000)
Interest expense 2,000,000 (2,000,000)
500,000 500,000
1,250,000 1,250,000
700,000 700,000

value through other comprehensive income or


550,000 (550,000)
losses, net of income tax
Investment income – equity method 3,000,000 3,000,000
Gain on expropriation of asset 2,000,000 2,000,000
Income tax expense 5,000,000 (5,000,000)
4,800,000 (500,000)
Dividends declared 1,300,000 (1,300,000)
Accumulated profits, January 1, 2014 4,200,000 4,200,000
Cost of Sales 29,900,000 (29,900,000)
Net Income 1. Ans. B. 9,100,000 9,100,000 9,100,000
Other Comprehensive Income 2. Ans. B. 1,400,000 1,400,000
Total Comprehensive Income 3. Ans. B. 10,500,000
Accumulated Profits, Dec. 31, 2014 4. Ans. C. 12,400,000

CHAPTER 10-EXERCISE 7: NAM COMPANY


1. Ans. B.
Net income P925,000
Depreciation (see note below) 375,000
Gain on sale of equipment (P100,000-P87,500) (12,500)
Share from net income of associate (P300,000*25%) (75,000)
Decrease in accounts receivable 100,000
Increase in inventories (337,500)
Increase in accounts payable 150,000
Decrease in income taxes payable (50,000)
Net cash provided by operating activities P1,075,000

Increase in accumulated depreciation (2,912,500-2,600,000) 312,500


Accumulated depreciation of equipment sold (150,000-87,500) 62,500
Depreciation for 2014 P375,000

2. Ans. D.
Proceeds from sale of equipment P100,000
Loan to Ari Co. (750,000)
Principal collection of loan receivable 93,750
Net cash used in investing activities P556,250

3. Ans. A.
Net cash used in financing activities (Dividends paid) (P250,000)

CHAPTER 10-EXERCISE 8:RAVEN CORPORATION


1. Ans. D.
Sales 10,776,000
Cost of goods sold (6,468,000)
Gross profit 4,308,000
Gain on sale of trading securities 144,000
Total 4,452,000
Selling and administrative expenses (3,444,000)
Unrealized holding loss on trading securities (48,000)
Loss on sale of equipment (12,000)
Net income before tax 948,000
Income taxes (420,000)
Net income after tax 528,000

2. Ans. A.
Accumulated profits, unapp., Jan 1, 2014 1,344,000
Less: Increase in appropriations for expansion (180,000)
Stock dividends declaration (237,600*30%)*P10 (712,800)
Accumulated profits, unapp. Dec. 31 (943,200)
Less: Net income for the year 528,000
Reversal of approp for Treasury 60,000
Cash dividend declaration 96,000

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3. Ans. C.
Share capital, Dec. 31, 2014 4,312,800
Share premium, Dec. 31, 2014 1,392,000
Total 5,704,800
Less:
Share capital, Dec. 31, 2013 2,400,000
Share premium, Dec. 31, 2013 60,000
2,460,000
Increase in Share capital and share premium 3,244,800
Share dividends (237,600*30%)*10 (712,800)
Share premium from treasury shares reissue (12,000)
Proceeds from issuance of shares 2,520,000

4. Ans. B.
Decrease in Trading securities 360,000
Add:Gain on sale of Trading securities 144,000
Unrealized loss on trading securities (48,000)
Proceeds from sale of Trading securities 456,000

5. Ans. C.
Proceeds from sale of equipment 84,000
Add: Loss on sale of equipment 12,000
Carrying Value of eqiupment sold 96,000

6. Ans. D.
Equipment, end 3,732,000
Equipment, beg 2,040,000
Increase in equipment 1,692,000
Add: Cost of disposed equipment 180,000
Total equipment acquired during the year 1,872,000
Equipment acquired through note issuance (600,000)
Overhaul on equipment (72,000)
Total cash payment made for equipment acquisition] 1,200,000

7. Ans. A.
Decrase in treasury shares (120,000 - 60,000) 60,000
Share premium on treasury shares reissue 12,000
Proceeds from treasury shares reissue 72,000

8. Ans. C.
Net Income 528,000
Non cash expenses/income
Depreciation expense - Bldg 45,000
Depreciaiton expense - Equipment 303,000
Bad debt expense 36,000
Amortization of bond discount 6,000
Income tax benefit (Decrease in Def. tax liab) (75,600)
Non operating income/expense
Loss on sale of equipment 12,000
Changes in working capital
Trading security 360,000
Accounts receivable (576,000)
Inventories 108,000
Prepaid Insurance (6,000)
Accounts payable (60,000)
Accrued expenses 111,600
Income tax payable 300,000
Unearned Income (96,000)
Net cash provided by operating activities 996,000

9. Ans. B.
Purchase of equipment (1,200,000)
Overhaul of equipment (72,000)
Sale of equipment 84,000
(1,188,000)

10. Ans. A.
Payment of serial notes payable (240,000)
Share issuance 2,520,000
Treasury shares reissuance 72,000
Payment of dividends (96,000)
2,256,000

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CHAPTER 11: ERROR CORRECTION AND CASH;ACCRUAL

DISCUSSION PROBLEMS
CHAPTER 11-PROBLEM 1: SAFARI COMPANY
2012 NI 2013 NI 2014 NI 2014 RE, BEG 2014 RE, END 2014 WC
A. Accrued expense, under 2012 (15,000) 15,000
Accrued expense, under 2013 (7,000) 7,000 (7,000)
Accrued expense, under 2014 (22,000) (22,000) (22,000)
B. Accrued income, under 2012 8,000 (8,000)
Accrued income, under 2013 9,000 (9,000) 9,000
Accrued income, under 2014 5,000 5,000 5,000
C. Prepaid expense, under 2012 16,000 (16,000)
Prepaid expense, under 2013 12,000 (12,000) 12,000
Prepaid expense, under 2014 6,000 6,000 6,000
D. Unearned income, under 2012 (11,000) 11,000
Unearned income, under 2013 (13,000) 13,000 (13,000)
Unearned income, under 2014 (10,000) (10,000) (10,000)
EFFECT OF ERRORS (2,000) 3,000 (22,000) 1,000 (21,000) (21,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 2: MASIGLA COMPANY


2012 NI 2013 NI 2014 NI 2014 RE, BEG 2014 RE, END 2014 WC
A.Ending Inventory, over 2012 (50,000) 50,000
Ending Inventory, over 2013 (30,000) 30,000 (30,000)
Ending Inventory, over 2014 (40,000) (40,000) (40,000)
B. Ending Invenotry, under 2012 12,000 (12,000)
Ending Invenotry, under 2013 14,000 (14,000) 14,000
Ending Invenotry, under 2014 8,000 8,000 8,000
C. AR/Sales, under 2012 25,000 (25,000)
AR/Sales, under 2013 22,000 (22,000) 22,000
AR/Sales, under 2014 16,000 16,000 16,000
D. AP/Purchases, under 2012 (15,000) 15,000
AP/Purchases, under 2013 (12,000) 12,000 (12,000)
AP/Purchases, under 2014 (10,000) (10,000) (10,000)
E. Equipment, under/Expense, over per year 200,000 240,000 220,000 440,000 660,000
Depr Expense, under (2012 Equipment) (20,000) (20,000) (20,000) (40,000) (60,000)
Depr Expense, under (2013 Equipment) (24,000) (24,000) (24,000) (48,000)
Depr Expense, under (2014 Equipment) (22,000) (22,000)
EFFECT OF ERRORS 152,000 218,000 134,000 370,000 504,000 (26,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 3: AMICI COMPANY


2013 NI 2014 NI 2014 RE, BEG 2014 WC
Unadjusted balances 245,000 310,000
A. Salaries payable, under 2013 (12,000) 12,000 (12,000)
Salaries payable, under 2014 (5,000) (5,000)
Accrued interest income, under 2013 4,000 (4,000) 4,000
Accrued interest income, under 2014 3,000 3,000
Unearned rental income, under 2013 (14,000) 14,000 (14,000)
Unearned rental income, under 2014 (15,000) (15,000)
Prepaid insurance, under 2013 3,000 (3,000) 3,000
Prepaid insurance, under 2014 5,000 5,000
B. Advances from customers, under 2013 (31,000) 31,000 (31,000)
Advances from customers, under 2014 (25,000) (25,000)
C. Advances to suppliers, under 2013 10,000 (10,000) 10,000
Advances to suppliers, under 2014 7,000 7,000
D. Equipment, over/Expense under (each year (60,000) (80,000) (60,000)
Depr Expense, over (on 2013 Equipment) 12,000 12,000 12,000
Depr Expense, over (on 2014 Equipment) 16,000
ADJUSTED BALANCES/EFFECT OF ERRORS 157,000 268,000 (88,000) (30,000)
1. Ans. 2. Ans. 3. Ans. 5. Ans.

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Retained earnings, beg 2013 -


Adjusted NI, 2013 157,000
Dividends declared and paid in 2013 (75,000)
Retained earnings, end 2013 82,000
Adjusted NI, 2014 268,000
Dividends declared and paid in 2014 (75,000)
Retained earnings, end 2014 275,000 6. Ans.

CHAPTER 11-PROBLEM 4: SOLID COMPANY


1. Ans. P2,255,000.
Cash basis sales 1,980,000
Add: AR, ending balance 550,000
Sales discounts 80,000
Sales returns, no refund 60,000
Total 2,670,000
Less: AR, beginning balances (415,000)
Accrual basis gross sales 2,255,000

2. Ans. P2,260,000.
Cash basis sales 1,980,000
Add: AR, ending balance 550,000
Sales discounts 80,000
Sales returns, no refund 60,000
Write-off of AR 25,000
Total 2,695,000
Less: AR, beginning balances (415,000)
Recovery of previous write-off (20,000)
Accrual basis gross sales 2,260,000

CHAPTER 11-PROBLEM 5: DEISEL CORP.


1. Ans. P2,800,000.
Cash basis purchases 2,500,000
Add: AP, ending balance 800,000
Purchase discounts 45,000
Purchase returns, no refund 55,000
Total 3,400,000
Less: AP, beginning balance (600,000)
Accrual basis gross purchases 2,800,000

2. Ans. P2,600,000.
Gross purchases 2,800,000
Less: Purchase discount (45,000)
Purchase returns (80,000)
Net purchases 2,675,000
Add: Inventory, beginning 250,000
Cost of goods available for sale 2,925,000
Less: Inventory, end (325,000)
Cost of sales 2,600,000

CHAPTER 11-PROBLEM 6: BECKER COMPANY


Ans. P215,000
Cash basis royalty income 200,000
Add: Royalty receivables, ending 85,000
Unearned royalties, beginning 60,000
Total 345,000
Less: Royalty receivables, beginning (90,000)
Unearned royalties, ending (40,000)
Accrual basis royalty income 215,000

CHAPTER 11-PROBLEM 7: XYZ COMPANY


Ans. P305,000
Cash basis royalty expense 300,000
Add: Royalty payables, ending 75,000
Prepaid royalties, beginning 55,000
Total 430,000
Less: Royalty payables, beginning (80,000)
Prepaid royalties, ending (45,000)
Accrual basis royalty income 305,000

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CHAPTER 11-PROBLEM 8: BACOLOD CORP.


1. P10,550,000.
Total collections from charge customers 2,550,000 Allowance for BD, beg 125,000
Add: AR, ending balance 1,200,000 Add: Bad debt expense 100,000
AR written-off 75,000 Recovery of write-off 25,000
Total 3,825,000 Total 250,000
Less: AR, beginning balance (750,000) Less: AR write-off (SQZ) (75,000)
Recovery of previous write-off (25,000)
Accrual basis gross sales 3,050,000 Allowance for BD, end 175,000
Add: gross cash sales 7,500,000
Total gross sales/Net sales 10,550,000
*Note that since there are no sales discounts or sales returns and allowances, gross sales is also net sales.

2. Ans. P5,670,000.
Cash purchases 5,100,000
Credit purchases 1,200,000
Total gross purchases 6,300,000
Less: Purchase discounts (210,000)
Purchase returns (120,000)
Net purchases 5,970,000
Add: Inventory, beginning 1,500,000
COGAS 7,470,000
Less: Inventory, ending (1,800,000)
Cost of Sales 5,670,000

3. Ans. P345,600.
CV, 1/1/14: (P3M*90%*80%*80%) 1,728,000
Multiply by: Ddbal rate 20%
Depreciation expense, 2014 345,600

4. Ans. P2,304,400.
Net Sales 10,550,000
Cost of sales (5,670,000)
Gross profit 4,880,000
Interest income (a) 90,000
Total income 4,970,000
Operating expenses (b) (2,220,000)
Depreciation expense (345,600)
Bad debt expense (100,000)
Net income 2,304,400

(a) Interest collected 120,000


Less: Accrued interest income, Beg (30,000)
Interest income, accrual basis 90,000

(b) Operating expenses, cash basis 2,250,000


Add: Accrued expense, ending 60,000
Less: Prepaid expense, ending (90,000)
Operating expense, accrual basis 2,220,000

CHAPTER 11-PROBLEM 9: CUTTING EDGE.


Cash collections from customer on account 6,000,000
Add: AR, increase 1,480,000
Sales discount 80,000
Sales returns, without refund 120,000
AR written-off 240,000
Less: NR-trade, decrease (800,000)
Recovery of previous write-off (72,000)
Gross Sales on Account 7,048,000 1. Ans.
Gross cash sales 1,200,000
Gross Sales 8,248,000 2. Ans.
Less: Sales discounts (80,000)
Sales returns (Total) (320,000)
Net Sales 7,848,000 3. Ans.

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Cash paid to suppliers on account 4,800,000


Add: Notes payable-trade increase 800,000
Purchase discount 140,000
Purchase returns, without refund 200,000
Less: Accounts payable, decrease (600,000)
Gross Purchases on Account 5,340,000 4. Ans.
Gross cash purchases 1,000,000
Gross Purchases 6,340,000 5. Ans.
Less; Purchase discount (140,000)
Purchase returns (total) (320,000)
Net Purchases 5,880,000 6. Ans.

CHAPTER 11-PROBLEM 10: GLASS CO.


1. Ans. P251,636.
Cost of sales (P340,000 total sales * 60%) P204,000
Add: Merchandise Inventory, November 15 93,920
Purchases P297,920
Less: Accounts payable – trade, November 15 46,284
Payments for purchases P251,636

2. Ans. P254,620
Sales P340,000
Less: Accounts receivable – trade, November 15 85,380
Collections from sales P254,620

3. Ans. P121,612.
CASH ACCOUNTABILITY:
RECEIPTS
Issuance of ordinary shares (P300,000 + P20,000) P320,000
Mortgage payable 80,000
Note payable – bank 32,000
Collections from sale (from number 2) 254,620
Total 686,620
DISBURSEMENTS
Real property P200,000
Furniture and Fixtures (P29,000 – P6,000) 23,000
Expenses 60,756
Purchases (from number 1) 251,636
Total P535,392
CASH BALANCE P151,228
CASH AS ACCOUNTED:
Bank balance, November 15 P26,328
Add: Undeposited collections 5,140
Total P31,468
Less: Outstanding checks 1,852 29,616
CASH SHORTAGE as of November 15, 2014 P121,612

CHAPTER 11-PROBLEM 11: EDU COMPANY


1. Ans. P11,430,000.
Total deposits per bank statement 12,600,000
Cash receipts from share issuance (1,800,000)
Proceeds of bank loan, directly credited to account (1,800,000)
Deposits from cash collections from customers 9,000,000
Collections from customers which were used to
pay directly disbursements
Utilities 360,000
Salaries 360,000
Supplies 720,000
Dividends 540,000 1,980,000
Undeposited collections on hand 450,000
Total collections from customers 11,430,000

2. Ans. P14,535,000.
Cash collections from customers 11,430,000
Add: AR, ending 3,240,000
Less: Advances from customers, ending (135,000)
Accrual basis gross sales 14,535,000

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3. Ans. P9,738,000.
Total deposits per bank statement 12,600,000
Cash in bank, end per bank statement (900,000)
Total disbursements per bank statement 11,700,000
Add: Outstanding checks 180,000
Less: Payments of bank loan and interest (540,000)
Payments of installment due on equipment (1,602,000)
Total cash payments made to suppliers 9,738,000

4. Ans. P10,998,999.
Cash payments to suppliers 9,738,000
Add: Accounts payable, ending 1,260,000
Accrual basis gross purchases 10,998,000

5. Ans. P8,280,000
Gross purchases/Net purchases 10,998,000
Inventory, end (2,718,000)
Cost of sales 8,280,000

6. Ans. P3,070,000.
Gross sales/Net sales 14,535,000
Cost of sales (8,280,000)
Gross profit 6,255,000
Operating expenses
Utilities (P360,000+40,000) 400,000
Salaries (P360,000+25,000) 385,000
Supplies (P720,000-150,000) 570,000
Depreciation - Bldg (P16.2M/15yrs) 1,080,000
Depreciation - Eqpt (P1.44M/5yrs) 288,000
Bad debt expense 180,000
Interest expense - loan (P90,000+30,000) 120,000
Interst expense, instal. (P1.602M-P1.44M) 162,000 (3,185,000)
Net Income 3,070,000

MULTIPLE CHOICE EXERCISES:


CHAPTER 11-EXERCISE 1: BEE CO.
1. Ans. C.
Depreciation per books: P250,000/8yrs (a) 31,250
Additional depreciation on capitalizable
major repairs (220,000/11yrs) (b) 20,000
Depreciation expense per audit P51,250
(a) The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years, thus on 12/31/14
the expired life is (5+3), 8 years. Depreciation per books is computed as: Accum Depr/Expired Life
(b) The major repairs cost should have been capitalized on 1/1/12 and depreciated over the remaining
useful life of the related asset. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books),
P500,000/31,250 = 16 years.
Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years.

NI 2012 NI 2013 NI 2014 RE, beg 2014 WC, 2014


Unadjusted balances P100,000 P145,000 P185,000
a. Unearned rent income, under 2014 (6,500) (6,500)
b. Salaries payable, under 2011 2,500 -
Salaries payable, under 2012 (5,500) 5,500 -
Salaries payable, under 2013 (7,500) 7,500 (7,500)
Salaries payable, under 2014 (4,700) (4,700)
c. Unused supplies, under 2011 (3,500)
Unused supplies, under 2012 6,500 (6,500)
Unused supplies, under 2013 3,700 (3,700) 3,700
Unused supplies, under 2014 7,100 7,100
d. Repairs expense, over 2012 220,000 220,000
Depreciation expense, under 2012-2014 (20,000) (20,000) (20,000) (40,000)
Adjusted balances P300,000 P120,200 P164,700 P176,200 (P4,100)
2. Ans D. 3. Ans B. 4. Ans D. 5. Ans A. 6. Ans B.

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CHAPTER 11-EXERCISE 2: LOG CORP.


2013 2014
Unadjusted pretax income P4,545,000 P3,483,000
a. 2013 sales overstatement (1,719,000) 1,719,000
b. 2013 inventory understatement 388,800 (388,800)
2014 inventory overstatement (255,000)
c. Understatement in interest expense due to amortization of bond discount: (a)
2013: 10,640,250*7% = 744,818
Less: 11,250,000*6% = 675,000 (69,818)
2014: 10,710,068*7% = 749,705
Less: 11,250,000*6% = 675,000 (74,705)
d. Ordinary repairs (382,500) (423,000)
Overstatement in depreciation:
Amount capitalized in 2013: 382,500*20% 76,500
Balance of amt. cap. in 2013: 306,000*20% 61,200
Amount capitalized in 2015: 423,000*20% 84,600
ADJUSTED PRETAX INCOME P2,838,982 P4,206,295
1. Ans. C. 2. Ans. A.
(a) The loan was originated on 1/1/12 at P10,575,000 (11,250,000-675,000). Discount amo. by 12/31/12 therefore shall be:
Correct interest (10,575,000*7%) 740,250
Less: Nominal interest (11,250,000*6%) 675,000
2012 Amortization: 65,250
Carrying value of Bonds, 12/31/12 (10,575,000+65,250), P10,640,250

CHAPTER 11-EXERCISE 3: LOT INC.


1. Ans. B.
Accumulated depreciation per books (Machine XYZ): 400,000*3/10 120,000
Less: Accumulated depreciation per audit : 450,000*3/10 (135,000)
Adjustment related to the under depn for 3 years (2011 to 2014) 15,000 credit
Add: Debit to accum depn attributed to old equipment traded in (2011) 150,000 debit
NET ADJUSTMENT TO ACCUM DEPN ACCOUNT 135,000 debit

Depreciation expense for the period: Cost 450,000


Accum depn, adjusted 135,000
Carrying value 315,000
Divide by: Revised remaining useful life 5 years
DEPRECIATION FOR THE YEAR (Mach XYZ) 63,000

2. Ans. A.
Carrying value, 1/1/2014: 393,750*10/12 328,125
Multiply by: 150% declining balance rate: (1/6)*150% 25%
DEPRECIATION EXPENSE (Mach UVW) 82,031

3. Ans. D.
Carrying value, 1/1/2014: 4,500,000*17/20 3,825,000
Less: Salvage value 50,000
Depreciable cost 3,775,000
Multiply by: SYD rate 12/78
DEPRECIATION EXPENSE 580,769

Carrying value, 1/1/2014 3,825,000


Depreciation for 2014 580,769
BUILDING CARRYING VALUE 12/2014 3,244,231

CHAPTER 11-EXERCISE 4: INSULAR CORP.


Retained earnin Net income (2014)
a. IGNORED (COUNTERBALANCED)
b. AR/Sales, under 2013 (over in 2014) 120,000 (120,000)
c. Insurance expense, under 2013 & 2014 (57,600) (86,400)
d. Accrued interest expense, under 2013 7,200 (7,200)
e. Depreciation, under 2013 & 2014 (117,600) (117,600)
Net adjustments (48,000) (331,200)
Unadjusted Net Income 1,750,000
Adjusted 2014 net income 1,418,800
1. Ans. D. 2. Ans. D.

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CHAPTER 11-EXERCISE 5: KUTING CORP.


2013 2014 2014 2014
WORKING RETAINED
(NET INCOME) (NET INCOME)
CAPITAL EARNINGS
Omitted prepayments, 2013 256,000 (256,000)
Omitted prepayments, 2014 205,200 205,200 205,200
Salaries and wages, 2013 (582,400) 582,400
Salaries and wages, 2014 (520,000) (520,000) (520,000)
Accrued interest income, 2013 172,800 (172,800)
Accrued interest income, 2014 142,000 142,000 142,000
Advances from customers, 2013 (313,600) 313,600
Advances from customers, 2014 (374,000) (374,000) (374,00)
Capital expenditure, 2013 376,000 376,000
Depn on cap. ex. in 2013 (18,800) (37,600) (56,400)
Capital expenditure, 2014 348,000 348,000
Depn on cap ex in. 2014 (17,400) (17,400)
Total under (overstatement) (110,000) 213,400 (546,800) 103,400
1. Ans C. 2. Ans D. 3. Ans A.

CHAPTER 11-EXERCISE 6: GHI INC.


2013 NI 2014 NI 2015 RE, Beg
Unadjusted balances 1,750,000 2,000,000
a. Salaries payable, under 2013 (100,000) 100,000
Salaires payable, under 2014 (140,000) (140,000)
b. Inventory, over 2013 (190,000) 190,000
c. Prepaid insurance, under 2014 120,000 120,000
d. Interest receivable, under 2014 20,000 20,000
e. Overstatement in gain on eqpt sale, 2014 (160,000) (160,000)
f. Overstatement in expense in 2013 100,000 100,000
Depr, under 2013 (1.3M/10yrs) (130,000) (130,000)
Depr, under 2014 (1.3M/10yrs) (130,000) (130,000)
Inc. from grant, under 2013 (1.2M/10) 120,000 120,000
Inc. from grant, under 2013 (1.2M/10) 120,000 120,000
Adjusted balances 1,550,000 2,120,000 (80,000)
1. Ans. A. 2. Ans. A. 3. Ans. A.

4. Ans. D.
Correct cost of Building (P1.2M+100K+200K) 1,500,000
Accum depr: (P1.5M*2/10) (300,000)
Correct carrying value of Building 12/31/14 1,200,000

CHAPTER 11-EXERCISE 7: BABY INC.


2012 2013 2014 2014 2014 2014
Net Income Net Income Net Income RE, Beg RE, End WC
Balance 600,000 750,000 300,000 2,000,000
a. 2012 Accured expense understated (90,000) 90,000
2013 Accrued expense understated (110,000) 110,000 (110,000)
2014 Accrued expense understated (98,000) (98,000) (98,000)
2012 Accrued rental income understate 40,000 (40,000)
2013 Accrued rental income understated 45,000 (45,000) 45,000
2014 Accrued rental income understated 50,000 50,000 50,000
2012 Prepaid expense understated 20,000 (20,000)
2013 Prepaid expense understated 30,000 (30,000) 30,000
2014 Prepaid expense understated 35,000 35,000 35,000
b. 2012 Equipment charged to expense 400,000 400,000 400,000
2012/2013/2014 Depreciation understa (80,000) (80,000) (80,000) (160,000) (240,000)
2014 Equipment charged to expense 550,000 550,000
2014 Depreciation understated (110,000) (110,000)
c. Cash dividends charged to other expens 100,000 150,000 200,000
*Land accepted as a donation from a stockholder (APIC) (400,000) (400,000)
* Loss on inventory due to flood (50,000)
990,000 815,000 832,000 (195,000) 2,187,000 (13,000)
1. Ans. C. 2. Ans. B. 3. Ans. D. 4. Ans. A. 5. Ans. A.

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CHAPTER 11-EXERCISE 8: ROXAS INC.


1. Ans. C.
Depreciable cost, Old bulding P3,000,000
Divide by: Total Useful Life 20 *
Depreciation Expense, Old building P150,000
Depreciable cost, Extension (Addition) P750,000
Divide by: Remaining life (20 – 5) 15 50,000
Total Depreciation expense P200,000

Accumulated Depreciation, 12/31/200 P1,125,000


Divide by, Expired life as of 12/31/2010 (5 +2.5) 7.5
Annual Depreciation P150,000

Depreciable cost, Building P3,000,000


Divide by: Annual Depreciation 150,000
Total useful life 20 years *

2012 2013 2014


Unadjusted net income P1,500,000 1,750,000 2,000,000
a. Salary Accruals: 2011 95,000
Salary accruals, 2012 (110,000) 110,000
Salary accruals, 2013 (100,000) 100,000
Salary accruals, 2014 (140,000)
b. Inventory, 12/13 overstatement (190,000) 190,000
c. Inventory, 12/14 understatement (150,000)
Purchases, 12/14 understatement 150,000
d. Prepaid insurance: 2011 (75,000)
Prepaid insurance, 2012 100,000 (100,000)
Prepaid insurance, 2013 115,000 (115,000)
Prepaid insurance, 2014 120,000
e. Interest receivable: 2012 20,000 (20,000)
Interest receivable, 2013 25,000 (25,000)
Interest receivable, 2014 30,000
f. Gain on sale of equipment in 2014, overstatement (160,000)
g. Capitalizable cost in 2012 750,000
Understatement in depreciation 2012-2014 (25,000) (50,000) (50,000)
Adjusted Net Income P2,255,000 P1,540,000 P1,950,000
2. Ans. C. 3. Ans. A. 4. Ans. D.

CHAPTER 11-EXERCISE 9: GKNB CORP


2012 NET 2013 NET 2014 NET
INCOME INCOME INCOME
Unadjusted balances 381,000 450,000 385,500
a. Understatement of ending inventory, 12/31/2013 42,000 -42,000
Overstatement of ending inventory, 12/31/2014 -69,000
b. Overstatement in 2014 purchases 45,000
c. Understatement of sales, 2012 12,000 -12,000
Understatement of sales, 2013 15,000 -15,000
Understatement of sales, 2014 10,500
d. Understatement of salaries expense, 2012 -30,000 30,000
Understatement of salaries expense, 2013 -42,000 42,000
e. 2013 stock dividend charge to expense 30,000
f. Overstatement in rent expense, 2013 15,000
Understatement in rent expense, 2014 -6,000
g. Understatement in gain on retirement of bonds (a) 37,800
Adjusted balances P363,000 528,000 388,800
1. Ans. B. 2. Ans. C. 3. Ans. B.
(a) Gain on the retirement of bonds should be an outright income or loss. Total gain on retirement is
(P360,000-P318,000), P42,000. The client recognized only 1/10 of the amount as an amortization
over 10 years deducted from interest. Thus effectively, only 9/10 of the amount needs to be added to current net income.

4. Ans. A.
Net income, 2012 per books 381,000
Net income, 2013 per books 450,000
Total accumulated profits, 1/1/2014, per books 831,000
Net income, 2012 per audit 363,000
Net income, 2013 per audit 528,000
Total accumulated profits, 1/1/2014 per audit 891,000
Understatement of accumulated profits, 1/1/2014 60,000
Correct appropriation of accum profits for share div in item e (39,000)
Net adjustment (increase/credit) 21,000

5. Ans. C.
Entry made for item e:

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Other expense 30,000


Ordinary shares 30,000

Correct entry:
Accumulated profits 39,000
Ordinary shares 30,000
Share premium 9,000

Adjusting entry:
Accumulated profits 9,000
Share premium 9,000

CHAPTER 11-EXERCISE 10: WWEE COMPANY

2014 net
2013 net income RE,beg 2014 RE, end 2014
income
Unadjusted bal. 300,000 1,700,000 1,150,000 2,350,000
a. Policy change: Inventory 2013 100,000 -100,000 100,000
Inventory 2014 90,000 90,000
b. Overstatement in depn in 2014 (a) 10,000 10,000
c. Error correction – Borrowing Cost 25,000 75,000 25,000 100,000
Adjusted balances P425,000 P1,775,000 P1,275,000 P2,550,000
1. Ans. A. 2. Ans. C. 3. Ans. D. 4 . Ans. C.

(a)Depreciation per books (2014), Double Decl. P350,000


Depreciation per audit, Straight line
CV, 1/1/14: (P350,000/20%) P1,750,000
Less: Salvage (50,000)
Depreciable cost P1,700,000
Divide By: remaining life 5 yrs 340,000
Overstatement in Depreciation P10,000

5. Ans. C.

CHAPTER 11-EXERCISE 11: KRIS COMPANY


1. Ans. A.
Sales, accrual basis 10,350,000
Add: Decrease in accounts receivable 540,000
Cash received from customers 10,890,000

2. Ans. C.
Cost of sales 7,050,000
Less: Decrease in inventory 450,000
Purchases, accrual basis 6,600,00
Add: Decrease in accounts payable 412,500
Cash paid to suppliers 7,012,500

3. Ans. D.
Total operating expense, accrual basis 1,725,000
Add: Increase in prepaid expense 255,000
Decrease in accrued expense 150,000
Total 2,130,000
Less: Depreciation expense (non-cash expense) 90,000
Cash payments for operating expenses 2,040,000

4. Ans. B.
Cash received from customers 10,890,000
Cash paid to suppliers (7,012,500)
Cash paid for operating expenses (2,040,000)
Cash provided by Operating activities 1,837,500

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CHAPTER 11-EXERCISE 12: PROTER COMPANY


1. Ans. B.
Excess of cash receipts over cash disbursements 136,500
Adjustments: a) Depreciation -31,500
b) Prepaid insurance (5,400*2/3) 3,600
c) Unearned rent income -21,000
d) Salaries payable -8,400
e) Interest receivable 9,510
f) Accrued accounting fees -1,500
ACCRUAL NET INCOME 87,210,

2. Ans. D.
c) Unearned rent income 21,000
d) Salaries payable 8,400
f) Accrued accounting fees 1,500
TOTAL LIABILITIES 30,900

CHAPTER 11-EXERCISE 13: UKG INC.


1. Ans. A. COST OF SALES
Beginning invty 186,000
Purchases (sqz) 348,000 174,000 Ending invty
Cost of sales 360,000

ACCOUNTS PAYABLE
116,000 AP, beginning
348,000 Purchases
120,000 AP, ending

2. Ans. C. ACCOUNTS RECEIVABLE


AR, beginning 96,000
Sales on account 600,000
AR, ending balance 110,000

3. Ans. A.
Present value of principal (200,000*0.456387) P91,277
Present value of interest, semiannual (10,000*13.59032) 135,903 P227,180
Amortization, June 30, 2014 (227,180*4%) – 10,000 (913)
Amortization, December 31, 2014 (226,267*4%) – 10,000 (949)
Carrying value, December 31, 2014 P225,318

4. Ans. D.
Effective interest as of 6/30/14
9,087
(227,180*4%)
Effective interest 12/31/14 (226,267*4%) 9,051
Total interest expense P18,138

5. Ans. B.
Unadjusted net income 25,000
Overstatement in other expenses ** 2,000
Overstatement in interest expense (20,000 – 18,138) 1,862
Correct net income P28,862

**Other Expenses
Accrual basis 164,000
Increase in prepayments 4,000 2,000 Increase in accrued utilities
Cash basis 166,000

CHAPTER 11-EXERCISE 14: WOWIE CORP.


1. Ans. C.
Cash collected from customers 10,000,000
Add: AR, ending 4,000,000
Deduct: AR, beginning 6,400,000
Sales Accrual basis 7,600,000

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2. Ans. A.
Total payments to suppliers 13,618,000
Deduct: payments to suppliers for 2013 invoices 4,632,000
Balance: payments to suppliers for 2014 invoices 8,986,000
Add: Accounts payable, ending balance 2,621,000
Purchases, accrual basis 11,607,000

3. Ans. B.
Wages paid 3,050,000
Add: Wages payable, ending balance 125,000
Deduct: Wages payable, beginning bal. 85,000
Wages expense, accrual basis 3,090,000

4. Ans. B.
Advertising expenses paid 300,000
Add: Advertising supplies, beg bal. 35,000
Accrued advertising, ending bal. 40,000
Deduct: Advertising supplies, end. bal. 75,000
Accrued advertising, beg. Bal. 14,250
Advertising expense, accrual basis 285,750

5. Ans. B.
Insurance premium paid 125,000
Add: Prepaid insurance, beg bal. 25,000
Less: Unexpired insurance, ending bal. 41,000
Insurance expense, accrual basis 109,000

CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION


1. Ans. A.
Cash sales 3,000,000
Collections from accounts receivable 30,000,000
Collections from trade notes receivable 2,400,000 35,400,000
Add: Sales returns and allowances (no refund) 800,000
Increase in Accounts receivable 1,400,000
Total 37,600,000
Less: Decrease in Notes receivable (600,000)
Gross Sales P37,000,000
Less: Sales returns (total) (1,200,000)
Net sales, per audit 35,800,000

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


Cash purchases 1,000,000
Payments of accounts payable 16,500,000 17,500,000
Add: Purchase returns and allowances (no refund) 300,000
Increase in Accounts payable 400,000
Gross Purchases 18,200,000
Less: Purchase returns and allowances (total) (800,000)
Net purchases, per audit 17,400,000
Add: Decrease in inventory 1,000,000
Cost of Sales, per audit 18,400,000

4. Ans. C.; 5. Ans. A.


Net sales, per audit P35,800,000
Less: Cost of Sales, per audit (18,400,000)
Gross Profit P17,400,000
Interest income 200,000
Total P17,600,000
Less: Expense
Insurance (700,000-200,000) 500,000
Salaries(10,000,000-300,000) 9,700,000
Depreciation (100,000+800,000) 900,000
Other expenses 1,500,000 (12,600,000)
Net income P5,000,000

CHAPTER 11-EXERCISE 16: ALASKA INC.


1. Ans. D.
Sales, accrual basis 2014 4,849,200
Add: Accounts receivable, beg. 270,000
Less: Accounts receivable, end (297,000)
AR written-off during the year (43,200)
Cash collections from customers 4,779,000

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2. Ans. B.
Cost of sales, accrual basis 2014 2,250,000
Add: Inventory, end 279,000
Less: Inventory, beg (423,000)
Purchases, accrual basis 2014 2,106,000
Add: Accounts payable, beg. 139,500
Less: Accounts payable, end (225,000)
Cash payments to suppliers 2,020,500

3. Ans. A.
Interest expense, accrual basis 2014 38,700
Less: Amortization of bond discount (4,500)
Cash payments for ineterest 34,200

4. Ans. D.
Selling expense, accrual basis 2014 1,273,500
Less: 1/3 of depreciation expense
(13,500*1/3) (4,500)
Bad debt expense (45,000)
Cash payments for selling expense 1,224,000

CHAPTER 11-EXERCISE 17: ALAMAT COMPANY


1. Ans. B.
Cash sales 4,400,000
Add: Accounts receivable, end 100,000
Total 4,500,000
Less: Advances from customers, end (25,000)
Gross/Net Sales 4,475,000

2. Ans. B.; 3. Ans. B.


Cash purchases 4,200,000
Add: Accounts payable, end 80,000
Total 4,280,000
Less: Purchase for president (adj to advances) (10,000)
Gross/Net Purchases 4,270,000
Less: Inventory, end (500,000)
Cost of Sales, per audit 3,770,000

4. Ans. A.
Net sales, per audit 4,475,000
Less: Cost of Sales, per audit (3,770,000)
Gross Profit 705,000
Less: Expense 560,000
Add: Accrued expense, end 20,000
Deduct, supplies, end (5,000)
Prepaid insurance, end (15,000)
Equipment (100,000) (460,000)
Depreciation (100,000/10)*6/12 (5,000)
Interest expense (100,000*12%*4/12) (4,000)
Net income P236,000

CHAPTER 11-EXERCISE 18: TITANIUM COMPANY


Cash, Jan. 1 balance
Collections from customers:'
Sales on Account 17,628,510
Less: AR, April 16 (1,327,650)
Sales allowances (54,990)
Add: AR, Jan. 1 678,690 16,924,560 2. Ans. A.
Payments of merchandise to suppliers:
Merchandise purchases 10,845,780
Less: AP, April 16 (621,900)
Add: AP, Jan. 1 344,160
(10,568,040) 1. Ans. C.
Purchase of furniture (9,000)
Expenses paid (5,597,490)
Cash dividends paid (120,000)
Total disbursements (16,294,530) 3. Ans. C.
Total accountability 728,040 4. Ans. A.
Less: Cash in bank, net of outstanding check (296,490)
Cash shortage 431,550
Less: Chargeable against the bank (for encashing the obviou (300,000)
Cash shortage chargeable against the cashier 131,550 5. Ans. B.

CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY