applied auditing - 1 file download

APPLIEDAUDITING

With ComprehensiveReview of Philippine FinancialReporting Standards (PFRSs)

A guide in applying auditing procedures to specificaccounts of the financial statements.

TEACHERS MANUAL

2016Edition

By

DARRELL JOE O. ASUNCION, MBA, CPA

MARK ALYSON B. NGINA, CMA, CPA

RAYMUND FRANCIS A. ESCALA, MBA, CPA

Dear fellow teacher,

This “Teacher’s Manual” should be used solely by theteacher and for classroom purposes only. This manualshould NOT be reproduced either manually (e.g.,printing or photocopy) or electronically (e.g., copying oruploading in the net) without our written consent (or thepublisher’s written authorization).

If you have comments, queries or suggestions, please donot hesitate to contact us at:Telephone: 074-2441894Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286

Mark Alyson B. Ngina – 0915-510-7281Raymund Francis A. Escala – 0917-715-1226

Email ad: [email protected].

Thanks and God bless.

Sincerely,

Darrell Joe O. Asuncion, MBA, CPA

Mark Alyson B. Ngina, CMA, CPA

Raymund Francis A. Escala, MBA, CPA

Table of Contents

CHAPTER 5: CASH TO ACCRUAL................................................................................ 4

CHAPTER 6: CORRECTION OF ERRORS................................................................19

CHAPTER 8: CASH AND CASH EQUIVALENTS ...................................................29

CHAPTER 10: LOANS AND RECEIVABLES ...........................................................52

CHAPTER 12: INVENTORIES .....................................................................................86

CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT

IN EQUITY SECURITIES ............................................................................................117

CHAPTER 15: INVESTMENT IN DEBT SECURITIES ......................................133

CHAPTER 16 INVESTMENT IN ASSOCIATE......................................................142

CHAPTER 18 PROPERTY, PLANT AND EQUIPMENT....................................157

CHAPTER 19 WASTING ASSETS............................................................................183

CHAPTER 20 INVESTMENT PROPERTY ............................................................189

CHAPTER 22 INTANGIBLE ASSETS .....................................................................195

CHAPTER 23 REVALUATION, IMPAIRMENT AND NONCURRENT ASSET

HELD FOR SALE ...........................................................................................................208

CHAPTER 25 INTRODUCTION TO LIABILITIES..............................................225

CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING..239

CHAPTER 27 LEASE ...................................................................................................259

CHAPTER 29 SHAREHOLDERS’ EQUITY............................................................285

CHAPTER 30 BOOK VALUE AND EARNINGS PER SHARE ..........................308

CHAPTER 32 STATEMENT OF FINANCIAL POSITION AND

COMPREHENSIVE INCOME.....................................................................................320

CHAPTER 33 STATEMENT OF CASH FLOWS...................................................339

Chapter 5: Cash to Accrual

4

CHAPTER 5: CASH TO ACCRUAL

PROBLEM 5-1 (Computation of Sales under cash basis)

Accounts receivable/Notes receivable trade/Advances from customers

Beg. balance – AR 200,000 180,000 Balance end - ARBeg. balance – NR 240,000 170,000 Balance end - NRBalance end - Advances 40,000 55,000 Beg. balance - AdvancesSales on account 600,000 4,000 Sales ret. and allowanceRecoveries - 2,000 Sales discounts

666,000Collections includingrecoveries

3,000 Write-off

Total 1,080,000 1,080,000

Suggested answer: A

PROBLEM 5-2 Computation of Bad Debts

Allowance for bad debts

Ending balance 40,000 25,000 Beginning balance

Write-off 8,000 21,000 Bad debts expense

2,000 Recoveries

Total 48,000 48,000

Suggested answer: C

PROBLEM 5-3 (Computation of Purchases)

Accounts Payable / Notes Payable / Advances to Suppliers

Payments 800,000 200,000 Beg. balance - APPurchase ret. and allow. 6,000 400,000 Beg. balance - NPPurchase discount 3,000 68,000 Balance end - AdvancesBeg. balance - Advances 50,000 651,000 Purchases (gross)Balance end – AP 250,000Balance end – NP 210,000

Total 1,319,000 1,319,000

Suggested answer: A


5

PROBLEM 5-4 Computation of Cost of Sales

Accounts Payable (AP) / Notes Payable (NP)

Payments 800,000 200,000 Beg. balance - APPurchase ret. and allow. 6,000 - Beg. balance - NPPurchase discount 3,000 859,000 Purchases (gross)Balance end - AP 250,000Balance end - NP -

Total 1,059,000 1,059,000

Merchandise Inventory

Beginning balance 400,000 210,000 Ending balanceNet purchases 860,000 1,050,000 Cost of sales

Total 1,260,000 1,260,000

Computation of the net purchases:Gross purchases on account 859,000Add cash purchases 10,000Total 869,000Less: Purchase returns and allowances 6,000

Purchase discount 3,000Net purchases 860,000

Suggested answer: B

PROBLEM 5-5 (Computation of Income Other Than Sales)Rent Receivable/Unearned rent income

Beg. Balance - RentReceivable

200,000 250,000 Balance end - RentReceivable

Balance end - Unearnedrent income

30,000 90,000 Beg. Balance – Unearnedrent income

Rent Income (squeeze) 770,000 660,000 Collections

Total 1,000,000 1,000,000

Suggested answer: B

PROBLEM 5-6 (Computation of Expenses in General)Prepaid Rent/Rent payable

Beg. Balance - PrepaidSalaries

200,000 250,000 Balance end - PrepaidRent

Balance end - AccruedSalaries

65,000 80,000 Beg. Balance – Rentpayable

Payments 850,000 785,000 Rent Expense

Total 1,115,000 1,115,000


6

Suggested answer: C

PROBLEM 5-7 (Computation of Cost of Machine Acquired and Sold)

Question No. 1Carrying amount of equipment sold 25,000Add: Accumulated depreciation 15,000Cost 40,000

Question No. 2Equipment

Beg. Balance 100,000 120,000 Balance endCost of PPE acquired(squeeze)

60,000 40,000 Cost of PPE disposed

Total 160,000 160,000

Accumulated depreciation

Balance end 18,000 15,000 Beg. BalanceAccumulated depreciationof PPE disposed 15,000

18,000 Depreciation expense

Total 33,000 33,000

SUMMARY OF ANSWERS:1. D 2. A

PROBLEM 5-8Question No. 1

Prepaid Insurance

Beg. Balance 7,500 6,000 Balance endPayments 41,500 43,000 Expenses (squeeze)

Total 49,000 49,000

Question No. 2Interest Receivable

Beg. Balance 14,500 3,700 Balance endIncome (squeeze) 112,700 123,500 Collections

Total 127,200 127,200


7

Question No. 3Salaries payable

Balance end 61,500 53,000 Beg. BalancePayments 481,000 489,500 Expenses

Total 542,500 542,500

Question No. 4Accounts receivable trade

Beg. Balance 415,000 550,000 Balance endSales 1,980,000 1,845,000 Collections (squeeze)

Total 2,395,000 2,395,000


Beg. Balance 415,000 550,000 Balance endSales 1,980,000 1,820,000 Collections (squeeze)

25,000 Write-off

Total 2,395,000 2,395,000


Beg. Balance 415,000 550,000 Balance endSales 1,980,000 1,840,000 Collections (squeeze)Recoveries 20,000 25,000 Write-off

Total 2,415,000 2,415,000

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. A 5. A 6. B


Accounts/Notes receivable trade

Decrease in A/R 100,000 100,000 Increase in N/RSales on account 4,260,000 10,000 Write-off(squeeze) 4,200,000 Collections

30,000 Sales discounts20,000 Sales ret. and allow.

Total 4,360,000 4,360,000


8

Question No. 2Accounts payable

Cash paid to creditors 2,800,000 200,000 Decrease in Accountspayable

Purchase discounts 40,000 2,650,000 Gross purchases(squeeze)

Purchase returns 10,000

Total 2,850,000 2,850,000

Question No. 3Merchandise inventory

Decrease in Inventory 25,000 40,000 Purchase discountsGross purchases 2,650,000 10,000 Purchase returns

2,625,000 Cost of sales (squeeze)

Total 2,675,000 2,675,000

Question No. 4Rental receivable/Unearned Rent Income

Rental revenue(squeeze)

454,000 14,000 Increase in Rentalreceivable

40,000 Decrease in Unearnedrental

400,000 Collections from tenants

Total 454,000 454,000

Question No. 5Prepaid interest/Interest Payable

Decrease in Prepaidinterest

5,500 114,000 Interest expense(squeeze)

Increase in Interestpayable

8,500

Interest paid 100,000

Total 114,000 114,000

SUMMARY OF ANSWERS:1. D 2. D 3. A 4. A 5. D


9


Accounts Receivable/Notes receivable trade

Beg. Balance – A/R 200,000 250,000 Bal. end – A/RBeg. Balance – N/R 300,000 100,000 Bal. end – N/RSales on account 1,000,000 20,000 Sales ret. and allow.(squeeze) 10,000 Sales discount

1,120,000 Collections

Total 1,500,000 1,500,000

Question No. 2Accounts payable/Notes payable

Balance end – A/P 25,000 50,000 Beg. Balance – A/PBalance end – N/P 75,000 100,000 Beg. Balance – N/PPurchase returns andallow

40,000 650,000 Gross purchases(squeeze)

Purchase discount 10,000Payments 650,000

Total 800,000 800,000

Gross purchases 650,000Less: Purchase ret and allow 40,000

Purchase discounts 10,000 50,000Net Purchases 600,000

Question No. 3Sales 1,000,000Less: Sales ret and allow 20,000

Sales discounts 10,000 30,000Net Sales 970,000Less: Cost of SalesMerchandise inventory beg. 200,000Add: Net PurchasesPurchases 600,000Add: Freight-in -Gross Purchases 650,000Less: Purch. Ret and allow 40,000

Purchase discounts 10,000 600,000Total goods available for sale 800,000Less: Merchandise inventory, end 100,000 700,000

Gross Income / Gross Profit 270,000


10

Question No. 4Prepaid/Accrued Salaries

Beg. Balance -PrepaidSalaries

100,000 125,000 Balance end - PrepaidSalaries

Balance end - AccruedSalaries

50,000 75,000 Beg. Balance - AccruedSalaries

Payments 350,000 300,000 Salaries expense(squeeze)

Total 500,000 500,000

Question No. 5Accrued rent/Unearned rent

Beg. Balance - Accruedrent

70,000 40,000 Balance end - Accruedrent

Balance end - Unearnedrent

40,000 80,000 Beg. Balance - Unearnedrent

Rent income (squeeze) 490,000 300,000 Collection of rent

Total 600,000 600,000

SUMMARY OF ANSWERS:1. A 2. B 3. C 4. B 5. B


Accounts receivable trade

Beg. Balance 200,000 300,000 Balance endRecoveries 8,000 20,000 Sales discountsSales (squeeze) 1,570,000 1,408,000 Collections including

recoveries (1,498,000-80,000+20,00-30,000)

50,000 Accounts written-off

Total 1,778,000 1,778,000

Sales 1,570,000Less: Sales discount 20,000Net Sales 1,550,000

Question No. 2Accounts payable trade

Payment (1,210,000- 150,000 Beg. Balance20,000+30,000) 1,210,000 1,170,000 Purchases (squeeze)

Purchase ret. and allow. 10,000Balance end 100,000


11

Total 1,320,000 1,320,000

Purchases 1,170,000Less: Purchases discount 10,000Net Purchases 1,160,000

Question No. 3Merchandise inventory

Beg. Balance 380,000 330,000 Balance endNet Purchases(1,170,000-10,000)

1,160,000 1,210,000 Cost of Sales (squeeze)

Total 1,540,000 1,540,000

Question No. 4Rent Receivable

Beg. Balance 70,000 80,000 Balance endRent income (squeeze) 130,000 120,000 Collections

Total 200,000 200,000

Question No. 5Allowance for Doubtful accounts

Accounts written off 50,000 20,000 Beg. BalanceBalance end 30,000 52,000 Doubtful account

expense(squeeze)8,000 Recoveries

Total 80,000 80,000

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. A 5. A

PROBLEM 5-12 ComprehensiveQuestion No. 1


Beg. Balance 500,000 750,000 Balance endProfessional fees(squeeze)

5,250,000 5,000,000 Collections

Total 5,750,000 5,750,000


12

Question No. 2Professional Fees (See No. 1) 5,250,000Less: Rent expense (1.2M +100,000) 1,300,000

Supplies expense(800,000+300,000-250,000) 850,000

Other operating expense 750,000Interest expense (1M x 12% x 9/12) 90,000Depreciation expense (2,500,000/10) 250,000 3,240,000

Net income 2,010,000

Question No. 3Cash 1,500,000Accounts Receivable 750,000Supplies 250,000Total Current Assets 2,500,000

Question No. 4Furniture and fixtures 2,500,000Less: Accumulated Depreciation

(125,000 + 250,000) 375,000Total Noncurrent Assets 2,125,000

Question No. 5Total current assets (See No. 3) 2,500,000Total noncurrent assets (See No. 4) 2,125,000Total Assets 4,625,000

Question No. 6Notes Payable 1,000,000Accrued rent 100,000Accrued interest on notes payable

(1,000,000 x 12% x 9/12) 90,000Total Current Liabilities 1,190,000

Question No. 7Total assets (See No. 5) 4,625,000Less: Total liabilities (See No. 6) – all arecurrent 1,190,000Total Owner’s Equity 3,435,000

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. A 5. A 6. C 7. B


13



Beg. Balance 124,000 146,000 Balance endSales on account 13,000 Sales discount(squeeze) 1,535,000 1,500,000 Collections

Total 1,659,000 1,659,000

Sales on account 1,535,000Add: Cash sales 160,000Total sales 1,695,000

Question No. 2Gross sales (see No. 1) 1,695,000Less: Sales discount 13,000Net sales 1,682,000

Question No. 3Accounts Payable

Payments 1,206,000 382,000 Beg. BalanceBalance end 410,000 1,234,000 Purchases (squeeze)

Total 1,616,000 1,616,000

Purchases on account 1,234,000Add: Cash purchases 120,000Total Purchases 1,354,000

Question No. 4Merchandise Inventory

Beg. Balance 186,000 190,000 Balance endNet purchases 1,354,000 1,350,000 Cost of sales (squeeze)

Total 1,540,000 1,540,000

Question No. 5Prepaid G&A/Accrued G&A

Beg. Balance - PrepaidInterest

9,600 8,400 Balance end - PrepaidInterest

Balance end – AccruedInterest

9,000 7,000 Beg. Balance – AccruedInterest

Payments 204,000 207,200 Expenses

Total 222,600 222,600


14

Question No. 6General and administrative expense (see No. 5) 207,200Depreciation expense 84,000Warranty expense 6,400Total operating expense 297,600

Question No. 7Selling price of land 20,000Less: Book value of land 16,000Gain on sale of land 4,000

Question No. 8Selling Price 12,000Less Book value

Cost 25,000Less: Accumulated depreciation 16,000 9,000

Gain on sale of warehouse equipment 3,000

Question No. 9Selling Price 42,000Less: Book value


Gain on sale of boiler 14,000

Question No. 10Net Sales 1,682,000Less: Cost of Sales 1,350,000Gross Profit 332,000Less: Operating expenses 297,600

Gain on sale (14,000+3,000+4,000) 21,000Net income 55,400

SUMMARY OF ANSWERS:1. B 2. C 3. D 4. A 5. B6. A 7. A 8. C 9. B 10. A

PROBLEM 5-14 ComprehensiveQuestion No. 1


Beg. Balance 150,000 200,000 Balance endSales (squeeze) 800,000 10,000 Sales returns

740,000 Collections

Total 950,000 950,000


15

Question No. 2Sales on account 800,000Add: Cash sales 100,000Total sales 900,000Less: Sales returns and allowances 10,000Net sales 890,000Less: Cost of sales (squeeze) 390,000Gross profit (200,000/40%) 500,000

Merchandise inventory

Beg. Balance 190,000 220,000 Balance endNet Purchases (squeeze) 420,000 390,000 Cost of Sales

Total 610,000 610,000

Question No. 3Accounts Payable trade

Payments (squeeze) 470,000 230,000 Beg. Balance - Accountspayable

Purchase returns andallowances

8,000 428,000 Gross purchases(420,000+8,000)

Balance end – Accountspayable

180,000

Total 658,000 658,000

Question No. 4Total payment of Accounts payable and admin expenses 518,000Less: Payment of Accounts payable 470,000Payment of admin expenses 48,000

Question No. 5Payment of admin expenses 48,000Divided by: Percentage of cash expenses to total adminexpense 80%Total admin expenses 60,000Add: Selling expenses 200,000Total selling and administrative expense 260,000

Question No. 6Total administrative expenses 60,000Less: Payment of administrative expense 48,000Non-cash administrative expenses 12,000Less: Depreciation for building

(440,000 x 60% x 5% x 9/12) 9,000


16

Depreciation for furniture and fixtures 3,000Divided by: Number of months used over 12 months 6/12Annual depreciation 6,000Divided by: Depreciation rate 10%Cost of Furniture and Fixtures (no residual value) 60,000

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. A 5. C 6. A

PROBLEM 5-15

Question No. 1Cash Receipts:From customers 360,000From issue of ordinary shares 100,000From bank loan 100,000 560,000

Cash disbursements:Purchase of inventory 300,000Rent 15,000Salaries 30,000Utilities 5,000Insurance 3,000Purchase of equipment and furniture 40,000 393,000

Cash 167,000

Question Nos. 2 and 3Current assetsCash 167,000Inventories 100,000Prepaid rent (1,000 x 3) 3,000Total current assets (No. 2) 270,000Noncurrent assetsProperty, plant and equipment 40,000Less accumulated depreciation 4,000 36,000Total assets (No. 3) 306,000

Question No. 4Accounts payable 20,000Utilities payable 1,000Loans payable 100,000Interest on loans payable (100,000 x 12% x 9/12) 9,000Total current liabilities 130,000


17

Question No. 5Ordinary shares 100,000Retained earnings (net income) 176,000Shareholders’ equity 176,000

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. D 5. A

PROBLEM 5-16

Question No. 1Notes receivable – December 31 210,000Accounts receivable – December 31 950,000Collection of notes and accounts 2,950,000Note receivable discounted 200,000Total 4,310,000Less: Notes receivable – January 1 200,000Accounts receivable – January 1 740,000 940,000Sales on account 3,370,000

Question No. 2Notes payable – December 31 580,000Less: Note payable – bank 300,000Notes payable – trade 280,000Accounts payable – December 31 750,000Payment of notes and accounts 2,100,000Total 3,130,000Less: Notes payable – January 1 750,000Accounts payable – January 1 600,000 1,350,000Purchases on account 1,780,000

Question No. 3Equipment – January 1 1,000,000Add: Acquisition 280,000Total 1,280,000Less: Equipment – December 31 1,200,000Depreciation 80,000

Question No. 4Interest accrued on note issued to bank (300,000 x 12% x 10/12) 30,000Interest expense 30,000

Question No. 5Volks CompanyIncome StatementYear ended December 31, 2016


18

Sales 3,370,000Cost of sales:

Inventory – January 1 1,600,000Purchases 1,780,000Goods available for sale 3,380,000Less: Inventory – December 31 1,500,000 1,880,000

Gross income 1,490,000Expenses:

*Expenses 820,000Depreciation 80,000**Loss on sale of investment 50,000***Loss on note receivable discounted 10,000Interest expense 30,000 990,000

Net income 500,000

*Expenses paid 790,000Add: Prepaid expenses – January 1 120,000

Accrued expenses – December 31 50,000Total 960,000Less: Prepaid expenses – December 31 100,000Accrued expenses – January 1 40,000 140,000Expenses 820,000

**Sales price 250,000Less: Cost of investment sold 300,000Loss on sale of investment ( 50,000)

***Loss on note receivable discounted (200,000 – 190,000) 10,000

ORRetained earnings – December 31 600,000Add: Dividends 400,000Total 1,000,000Less: Retained earnings – January 1 500,000Net income 500,000

SUMMARY OF ANSWERS:1. A 2. A 3. C 4. C 5. D

Chapter 6: Correction of Errors

19

CHAPTER 6: CORRECTION OF ERRORS

PROBLEM 6-1 Income Statement and SFP ErrorsQuestions Nos. 1-6

2016 2017

Netincome

Working capital

RE, endof theyear

Netincome

Working capital

RE, endof theyear

Unadjustedbalances 200,000 180,000 200,000 160,000 260,000 360,0001 - - - - - -2 - - - - - -Adjustedbalances 200,000 180,000 200,000 160,000 260,000 360,000

Questions No. 7Assuming errors were discovered in 2016

ADJUSTING ENTRIES Debit Credit1) Miscellaneous income 25,000

Rent income 25,000

2) Notes payable 28,000

Accounts payable 28,000

Assuming errors were discovered in 2017

ADJUSTING ENTRIES Debit Credit1) No entry

2) No entry

Assuming errors were discovered in 2018

ADJUSTING ENTRIES Debit Credit1) No entry

2) No entry

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. C 5. C 6. C


20

PROBLEM 6-2 Counterbalancing ErrorsQuestions Nos. 1-6

2016 2017Net

incomeWorking capital R/E

Netincome

Working capital R/E

Unadjustedbalances 200,000 180,000 200,000 160,000 260,000 360,0001 (15,000) (15,000) (15,000) 15,000 -2 20,000 20,000 20,000 (20,000) -3 6,000 6,000 6,000 (6,000) -4 (7,500) (7,500) (7,500) 7,500 -Adjustedbalances 203,500 183,500 203,500 156,500 260,000 360,000

Question No. 7A. Errors were discovered in 2016

ADJUSTING ENTRIES Debit Credit1) Interest expense 15,000

Interest payable 15,000

2) Interest receivable 20,000Interest income 20,000

3) Prepaid insurance 6,000Insurance expense 6,000

4) Rent revenue 7,500Unearned rent revenue 7,500

B. Errors were discovered in 2017Assuming errors are discovered when the cash flows related to thetransactions were processed and books are still open

ADJUSTING ENTRIES Debit Credit1) Retained earnings 15,000

Interest expense 15,000

2) Interest income 20,000Retained earnings 20,000

3) Insurance expense 6,000Retained earnings 6,000

4) Retained earnings 7,500Rent revenue 7,500

When books are already closed, no necessary adjusting entries to bemade.

C. Errors were discovered in 2018No necessary adjusting entries to be made.

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. C 5. B 6. C


21

PROBLEM 6-3 Counterbalancing ErrorsQuestions Nos. 1-6

2015 2016Net

incomeWorking capital R/E, end

Netincome

Working capital R/E, end

Unadjustedbalances 200,000 180,000 200,000 160,000 260,000 360,0001 (60,000) (60,000) (60,000) 60,000 - -2 80,000 80,000 80,000 (80,000) - -3 (20,000) (20,000) (20,000) 20,000 - -Adjustedbalances 200,000 180,000 200,000 160,000 260,000 360,000


ADJUSTING ENTRIES Debit Credit1) Purchases 60,000


2) Accounts receivable 80,000Sales 80,000

3) Cost of sales 20,000Inventory 20,000

B. Errors were discovered in 2017Assuming errors are discovered when the cash flows related to thetransactions were processed and books are still open

ADJUSTING ENTRIES Debit Credit1) Retained earnings 60,000

Purchases 60,000

2) Sales 80,000Retained earnings 80,000

3) Retained earnings 20,000Inventory, beginning 20,000

If books are already closed, no necessary adjusting entries to be made.

C. Errors were discovered in 2018No necessary adjusting entries to be made.

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. B 5. C 6. B


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PROBLEM 6-4 Noncounterbalancing ErrorsQuestions Nos. 1-6

2016 2017

Netincome

Working capital

RE, endof theyear

Netincome

Working capital

RE, endof theyear

Unadjustedbalances 200,000 180,000 200,000 160,000 260,000 360,0001. (30,000) (30,000) (30,000) (6,000) (36,000) (36,000)2. 20,000 20,000 20,000 10,000 30,000 30,0003. 12,000 - 12,000 - - 12,0004. 150,000 - 150,000 (50,000) - 100,0005. (12,000) - (12,000) - - (12,000)6. (15,000) - (15,000) 5,000 - (10,000)

Adjustedbalances 325,000 170,000 325,000 119,000 254,000 444,000


ADJUSTING ENTRIES Debit Credit1) Insurance expense 30,000

Prepaid insurance 30,000

2) Unearned rent income 20,000Rent income 20,000

3) Accumulated depreciation 12,000Depreciation expense 12,000

4) Building improvements 200,000Repairs expense 200,000

Depreciation expense 50,000Accumulated depreciation 50,000

5) Other income 20,000Accumulated depreciation 48,000

Gain on sale 8,000Building 60,000

6) Repairs expense 20,000Building 20,000

Accumulated depreciation 5,000Depreciation expense 5,000

B. Errors were discovered in 2017ADJUSTING ENTRIES Debit Credit

1) Retained earnings 30,000Insurance expense 6,000

Prepaid insurance 36,000


23

2) Unearned rent income 30,000Retained earnings 20,000Rent income 10,000

3) Accumulated depreciation 12,000Retained earnings 12,000

4) Building improvements 200,000Retained earnings 200,000

Depreciation expense 50,000Retained earnings 50,000Accumulated depreciation 100,000

5) Retained earnings 12,000Accumulated depreciation 48,000

Building 60,000

6) Retained earnings 20,000Building 20,000

Accumulated depreciation 10,000Retained earnings 5,000Depreciation expense 5,000

C. Errors were discovered in 2018ADJUSTING ENTRIES Debit Credit

1) Retained earnings 36,000Prepaid insurance 36,000

2) Unearned rent income 30,000Retained earnings 30,000

3) Accumulated depreciation 12,000Retained earnings 12,000

4) Building improvements 200,000Retained earnings 200,000

Depreciation expense 50,000Retained earnings 100,000

Accumulated depreciation 150,000

5) Retained earnings 12,000Accumulated depreciation 48,000

Building 60,000

6) Retained earnings 20,000Building 20,000

Accumulated depreciation 10,000Retained earnings 10,000


24

SUMMARY OF ANSWERS:1. E 2. E 3. E 4. E 5. A 6. D

PROBLEM 6-5 ComprehensiveQuestions Nos. 1-3

Effects of error inNet income Working

Capital2015 20161) MI over, NI over 10,000 (10,000)

MI under, NI under (8,000) (8,000)2) Purchases over, NI under (20,000) 20,000

(40,000) (40,000)3) Sales over, NI over 20,000 (20,000)

70,000 70,0004) Expenses over, NI under (80,000)

Depreciation exp under, NI over 20,0005) Other income over 20,000

*Loss under, NI over 5,000Adjustment (45,000) 32,000 22,000

Computation of loss:Selling Price 20,000Less: Book value


Loss on sale (5,000)

Questions No. 4Effect of errors to Retained Earnings in 2016Understatement to 2015 net income 45,000Overstatement to 2016 net income 32,000Net understatement to 2016 retained earnings 13,000

Questions No. 5ADJUSTING ENTRIES Debit Credit

1) Retained earnings, beg 10,000Merchandise inventory, beg 10,000

Merchandise inventory, end 8,000Cost of Sales 8,000

2) Purchases 20,000Retained earnings 20,000

Advances supplier 40,000Purchases 40,000

3) Retained earnings, beg 20,000Sales 20,000


25

Sales 70,000Advances customers 70,000

4) Depreciation expense 20,000Improvements 100,000

Accumulated depreciation 40,000Retained earnings 80,000

5) Accumulated depreciation 15,000Retained earnings, beg 25,000

Equipment 40,000

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. A 5. C

PROBLEM 6-6 ComprehensiveQuestions Nos. 1-5

2015 201612/31/2

016Net

IncomeWorking capital

NetIncome

Working capital R/E

Ending Inventory 2015understated, NIunderstated

(6,000) (6,000) 6,000 - -

Ending Inventory 2016overstated, NI overstated

10,000 10,000 10,000

Depreciation exp. 2015overstated, NIunderstated

(11,000) - - - (11,000)

Depreciation exp. 2016overstated, NIunderstated

(7,000) - (7,000)

Accrued expenseunderstated, NIoverstated 2015

4,500 4,500 (4,500) - -

Accrued expenseunderstated, NIoverstated 2016

7,500 7,500 7,500

Prepaid expenseunderstated, NIunderstated 2015

(5,000) (5,000) 5,000 - -

Prepaid expenseunderstated, NIunderstated 2016

(12,000) (12,000) (12,000)

Accrued revenuesunderstated, NIunderstated 2016

(3,000) (3,000) (3,000)

Deferred revenuesunderstated, NIoverstated 2015

1,200 1,200 (1,200) - -

Total (16,300) 5,300 800 2,500 (15,500)


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SUMMARY OF ANSWERS:1. D 2. D 3. A 4. A 5. C

PROBLEM 6-7Questions Nos. 1, 2 and 4

2014 2015 2016Unadjusted balances 3,000,000 (1,000,000) 3,500,000

1 Overstatement of ending inventory - 2014 (120,000) 120,000

2Understatement of ending inventory -2016 210,000

3 Understatement of accrued expense - 2014 (40,000) 40,0004 Overstatement of accrued exp. 90,0005 Understatement of Depreciation Expense (180,000)6 Overstatement of Depreciation Expense 30,0007 Overstatement of Purchases

2014 30,000 (30,000)

2015 40,000 (40,000)8 Overstatement of other income

Correct gain 20,000Less: Per record 5,000 (15,000)Adjusted balances 2,870,000 (1,025,000) 3,790,000

Computation of correct gain:

Selling Price 20,000

Less: Book value

Cost 40,000

Less: Accumulated depreciation 25,000 15,000

Loss on sale 5,000

Questions Nos. 3 and 5Adjusted net income (loss):2014 2,870,0002015 (1,025,000)Total RE, 12/31/2015 1,845,000 No. 3Adjusted net income 2016 3,790,000Total RE, 12/31/2016 5,635,000 No. 5

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. C 5. D


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PROBLEM 6-8

Question No. 1Unadjusted beginning balance (Cr) 70,000Add: Share premium credited to RE 40,000

Unadjusted RE (Dr) 143,200Unadjusted Net loss (C) 253,200

Question No. 2Unadjusted net loss (253,200)Sales over, NI over (20,000 x 140%) (28,000)EI under, NI over 20,000Gain under, NI under 1,000Repairs expense over, NI under 20,000Depreciation Expense building under, NI over(5% x 500,000) (25,000)Depreciation Expense eqpmt under, NI over (20,100)Bad debts exp under, NI over (2,600)Adjusted net loss (C) (287,900)

Computation of gainNet Selling Price 9,000Less: Carrying amount (10,000-(10,000 x 10% x 2) 8,000Gain on sale 1,000

Computation of depreciation expense equipment:Beg. Balance of the eqpmt. Net of asset disposed(201,000-10,000) 191,000 x 10% 19,100Asset disposed 10,000 x 10% x 6/12 500

Asset acquired 20,000 x 10% x 3/12 500Depreciation expense 20,100

The unadjusted beg. Balance of the equipment is computed as follows:Unadjusted balance end 192,000Add: Amount credited for asset disposed 9,000Unadjusted balance beg 201,000

The adjusted balance end of the equipment isUnadjusted balance beg 201,000Add: Asset acquired 20,000Total 221,000Less: cost of asset disposed 10,000Adjusted balance end 211,000

Computation of bad debtsRequired allowance (240,000-28,000) x 5% 10,600Less: Allowance for BD unadjusted 8,000Additional bad debts exp. 2,600


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Question No. 3ASSETSCash 35,000Accounts Receivable (240,000-28,000) 212,000Less: Allowance for Bad Debts 10,600 201,400Advances to employees 4,800Interest Receivable 3,000Prepaid expenses 16,200Merchandise inventory (180,000 +20,000) 200,000Land 200,000Building 500,000Less: Accumulated Depreciation(150,000+25,000) 175,000 325,000

Equipment 211,000Less: Accumulated Depreciation(59,200+20,100-2,000) 77,300 133,700

Utility deposits 15,000Other Assets 6,000

Total assets (D) 1,140,100

Question No. 4 and 5LIABILITIES AND CAPITALAccounts payable 260,000Advances from customer 10,000Interest payable 18,000Accrued expense 30,000Mortgage Payable, current portion 100,000Total current (A) 418,000MP, noncurrent portion 500,000Total liabilities 918,000Ordinary shares 400,000Share Premium 40,000Retained earnings (deficit)Beg. Balance 70,000Less: Adjusted net loss (287,900) (217,900) 222,100Total liabilities and SHE 1,140,100

SUMMARY OF ANSWERS:1. C 2. C 3. D 4. A 5. A

Chapter 8: Cash and Cash Equivalents

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CHAPTER 8: CASH AND CASH EQUIVALENTS

PROBLEM 8-1 Cash and Cash Equivalents

Traveler’s check 50,000Postal money order 30,000Petty cash fund 4,000Treasury bills, due 3/31/2017 (purchased 12/31/2016) 200,000Current account at Metrobank 2,000,000Payroll account 500,000Treasury warrants 300,000Total cash and cash equivalents 3,084,000

Suggested answer: A

PROBLEM 8-2 Cash and Cash EquivalentsReported cash and cash equivalents 6,325,000Certificate of deposits with maturity of 120 days (500,000)Postdated check (125,000)Compensating balance – legally restricted (500,000)Adjusted cash and cash equivalents P5,200,000

Suggested answer: C

PROBLEM 8-3 Cash and Cash EquivalentsBills and coins on hand P 52,780Traveler’s check 22,400Petty cash excluding paid cash vouchers of P1,650 350Money order 800Checking Account Balance in Bank of Philippine Island 22,000Total P 98,330

Suggested answer: D

PROBLEM 8-4 Cash and Cash EquivalentsCash on hand P 80,000Checking account No. 143 - BPI 200,000Checking account No. 155 - BPI (30,000)*Securities classified as cash equivalents 3,600,000Checking account No. 155 - BPI P 3,850,000


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*Breakdown of securities classified as cash equivalents

Securities:Date

AcquiredMaturity

Date Amount120-day Certificate of Deposit 12/10/2016 01/31/2017 P 600,000BSP-Treasury Bills (No.2) 10/31/2016 01/20/2017 1,000,000Money Market Funds 11/21/2016 02/10/2017 2,000,000

Suggested answer: A

PROBLEM 8-5 Cash and Cash EquivalentsBank cheque account P 58,400Bank savings account (collectible immediately) 23,440Cash 10,000Treasury bonds – maturing in 2 months 8,500Cash and cash equivalents P 100,340

Suggested answer: B

PROBLEM 8-6 Cash and Cash EquivalentsPetty cash fund (70,000-15,000-5,000) 50,000Current account – Metro Bank (4,000,000+100,000) 4,100,000Cash and cash equivalents P4,150,000

Suggested answer: C

PROBLEM 8-7 Effective Interest Rate

Question No. 1Let X = Principal amount of the loanPrincipal XLess: Compensating balance 5%XAdd: Current balance 50,000Amount needed P3,375,000

X-.05X+50,000 = 3,375,000.95X = 3,375,000-50,000

.95X/.95 = 3,325,000/.95X = 3,500,000

Question No. 2Annual interest payment (3,500,000 x 12%) 420,000Interest income on the loan proceeds in thecompensating balance [3.5M-3,375,000) x 4%] 5,000

Net interest 415,000


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Divide by loan proceeds (3,500,000-175,000) 3,375,000Effective interest rate 12.30%

Suggested answers:1. C 2. C

PROBLEM 8-8 Petty Cash FundRequirement No. 1Currencies 3,000Coins 450A check drawn by the company payable to the orderof the petty cash custodian, representing her salary 3,800

Adjusted Petty Cash Fund 7,250

Requirement No. 2Petty cash Accounted:Currencies 3,000Coins 450Petty cash vouchers:Transportation 650Office supplies 160Repair of computer 400Loans to employees 600Miscellaneous expenses 240Postage 200A check drawn by the company payable to theorder of the petty cash custodian, representing hersalary 3,800An employee’s check returned by the bank becauseof insufficient funds 1,200A piece of paper with names of several employeestogether with a contribution for a wedding gift foran employee. Attached to the sheet of paper is acurrency of 500 11,200

Less: Petty Cash AccountabilitiesPCF imprest balance 10,000A piece of paper with names of several employeestogether with a contribution for a wedding giftfor an employee. Attached to the sheet of paperis a currency of 500 10,500

Petty cash overage 700


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Requirement No. 3: Adjusting Entries Debit Credit1) Transportation expense 650

Office supplies expense 160Repairs expense 400Advances to employees 600Miscellaneous expense 240Postage 200

Petty Cash fund 2,250

2) Unused stamps 50Postage 50

3) Petty cash fund 700Miscellaneous Income 700

4) Advances to employees 1,200Petty cash fund 1,200

PROBLEM 8-9 Petty Cash FundCash Accounted ForCurrency 2,585.00Checks 17,600.00Unreplenished Vouchers 425.00IOUs 150.00 20,760.00Cash AccountabilityPetty Cash Fund 5,000.00Collections from customer -check 6,500.00Cash collections 12,150.00 23,650.00Cash Overage (Shortage) (2,890.00)

Quantity Denomination Total50 1 50.0060 0.25 15.003 500 1,500.005 100 500.00

20 20 400.0012 10 120.00

Total currencies and coins 2,585.00

Checks:Al 5,000Rex 6,100Zev, customer 6,500Total 17,600


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Unreplenished vouchers:Transporation 65Office supplies 70Xerox fees 80Postage 150Newspaper 10Freight charges 50Total 425

IOUsRhad 50Andrix 100TOtal 150

Cash collections143 4,000.00144 5,100.00145 3,050.00Total 12,150.00

PROBLEM 8-10 Bank ReconciliationBank Book

Unadjusted balances P126,300 P123,310Outstanding check, net of certified checks (12,300) -Deposit in transit (Undeposited collections) 7,850 -Book error – disbursement for utilities - 360Note charged by the bank, including interest - (6,500)Bank service charge - (240)Erroneous bank credit (5,670) -NSF check - ( 750)Adjusted balance P116,180 P116,180

The following are the adjusting entries to be recorded in the company’sbooks. Note that only book reconciling items are recorded.

ADJUSTING ENTRIES Debit Credit1) Cash 360

Utilities expense 360

2) Notes payable 6,000Interest expense 500Cash 6,500

3) Bank service charge 240Cash 240


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4) Accounts receivable 750Cash 750

PROBLEM 8-11 Bank ReconciliationOct. 31 Receipts Disb Nov. 30

Unadjusted bank bal 18,005 17,709 25,620 10,094Erroneous bank credit (500) (500)DIT: October 1,790 (1,790)

November 3,600 3,600OC: October (6,681) (6,681)

Nov. (760+1,868) 2,628 (2,628)13,114 19,019 21,567 10,566

Unadjusted book bal 11,534 18,269 21,575 8,228Credit memo Oct. 1,600 1,600

Nov. 750 750NSF-Nov 665 (665)BSC: Oct (20) (20)

Nov 22 (22)35 (35)

Check No. 148overstateddisbursement (1,000) 1,000Check No. 150understateddisbursement 270 (270)

13,114 19,019 21,567 10,566

SUMMARY OF ANSWERS:1. B 2. A 3. B 4. D 5. A

PROBLEM 8-12 Deposit in TransitDeposit in transit, beg P 50,000Add: Book debits for the month P 400,000

Less: CM recorded this month 5,000Error – check received (Jan) 36,000Error – check issued (Jan) 27,000

Add: Error – check received (Feb) 16,000 348,000Total 398,000Less: Bank debits for this month P 360,000

Less: CM for this month 6,000Erroneous bank credit - Feb 2,500Erroneous bank charge - Jan 1,000 350,500

Deposit in transit, end P 47,500


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Suggested answer: A

PROBLEM 8-13 Outstanding ChecksOutstanding checks, beg (squeeze) P 12,880Add: Book credits for the month P 85,800

Less: Error in recording 1,800Service charge recorded 30 83,970

Total 96,850Less: Bank debits for this month P 97,650

Less: NSF check returned 2,300DM for this month 3,000 92,350

Outstanding checks, end P 4,500

Suggested answer: A

PROBLEM 8-14 Proof of Cash

Question No. 1Deposit in transit, Jan. 31 9,000Add Deposit made by the companyBook receipts 150,000Credit Memo-Jan 31 (10,000)

Book errors last month corrected this month:Understatement of CROverstatement of CD

Book errors this month:Overstatement of CR

Add: Understatement of CR 140,000Total 149,000Less: Deposit acknowledged by the bankBank receipts 157,700Credit Memo-Feb. 28 (15,000)

Bank errors last month corrected this month:Understatement of CR

Erroneous bank charge-Jan. 31 (3,200)Bank errors this month:Add: Overstatement of CRErroneous bank credit-Feb. 28 (4,000) 135,500Deposit in transit, Feb. 28 13,500

Question No. 2Outstanding checks, Jan. 31 3,000Add: Checks issued by the company this monthBook disbursements 80,000Debit Memo last month


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NSF check (2,000)Book errors last month corrected this month:Understatement of CD last month (1,500)

Overstatement of CRBook errors this month:

Overstatement of CDUnderstatement of CD this month 600 77,100Total 80,100Less: Checks paid by the bank this monthBank disbursements 87,800Debit Memo this monthNSF check (3,000)Error last month corrected this monthErroneous bank credit-last month (6,000)Understatement of CDBank errors this month:Add: Understatement of CDErroneous bank charge-this month (1,400) 77,400Outstanding checks, Feb. 28 2,700

Question Nos 4 to 6

Note to professor: The question in number 5 and 6 should be in February,instead of January.

Jan. 31 Receipts Disb Feb. 28Unadjusted balances-books 200,000 150,000 80,000 270,000Credit Memo-January 10,000 (10,000) - -Credit Memo-February - 15,000 - 15,000NSF check-January (2,000) - (2,000) -NSF check-February - - 3,000 (3,000)Understatement of cashdisbursements-January (1,500) - (1,500) -Understatement of cashdisbursements-February - - 600 (600)

Adjusted balances 206,500 155,000 80,100 281,400

Jan. 31 Receipts Disb Feb. 28Unadjusted balances-bank 203,300 157,700 87,800 273,200Deposit in transit-January 9,000 (9,000) - -Deposit in transit-February - 13,500 - 13,500Outstanding checks-January (3,000) - (3,000) -Outstanding checks-February - - 2,700 (2,700)Erroneous bank credit-January (6,000) - (6,000) -Erroneous bank credit-February - (4,000) - (4,000)Erroneous bank charge-January 3,200 (3,200) - -Erroneous bank charge-February - - (1,400) 1,400


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SUMMARY OF ANSWERS:1. A 2. B 3. B 4. A 5. A 6. B 7. B


Question No. 1Outstanding checks, beg. 50,000Add: Checks issued 1,250,000

Total 1,300,000Less: Checks paid by the bank 1,100,000

Outstanding checks, end 200,000

Question No. 2Deposits in transit, beg 150,000Add: Deposits made 900,000

Total 1,050,000Less: Deposits acknowledged by thebank 800,000

Deposits in transit, end 250,000

31-May Receipts Disb. 30-JunUnadjusted bal-bank 1,300,000 *1,095,000 **1,205,000 1,190,000Deposit in transit-May31 150,000 (150,000)

-June 30 250,000 250,000Outstanding checks-May 31 (50,000) (50,000)

-June 30 200,000 (200,000)Erroneous bank credit (30,000) (30,000)Erroneous bank charge 20,000 (20,000)Adjusted balances 1,390,000 1,175,000 1,325,000 1,240,000

*(800,000+20,000+275,000)**(1,100,000+30,000+25,000+50,000)


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31-May Receipts Disb. 30-JunUnadjusted bal-book 1,095,000 ***1,200,000 1,250,000 1,045,000Bank service charge-May 31 (5,000) (5,000)

-June 30 25,000 (25,000)CM for collection-May31 300,000 (300,000)

-June 30 275,000 275,000NSF checks for June 30 50,000 (50,000)Adjusted balances 1,390,000 1,175,000 1,325,000 1,240,000

***(900,000+300,000)

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. A 5. A


Question No. 2Outstanding checks, beg. 150,000Add Checks issuedBook disb. 1,500,000Less DM last mo 110,000

Error last mo. C T MUnder of CD -Over of CR - 1,390,000

Total 1,540,000Less checks issuedBank disb. 1,300,000less DM this mo 75,000

Error last mo. C T MUnder of CD -Erroneous B Cr-LM 45,000Erroneous B CH-TM 30,000 1,150,000Outstanding checks, end 390,000

Deposits in transit, beg 200,000Add deposits madeBook receipts 1,300,000Less: CM last month 125,000

Error last mo. C T MUnder of CR (21K-12K) 9,000Over of CD 1,166,000

Total 1,366,000


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Less: Deposits acknowledged by the bankBank receipts 1400000Less: CM this month 150,000

Error last mo. C T MUnder of CRErroneous B CH-LM 20,000Erroneous B Cr-TM 17,000 1,213,000Deposits in transit, end 153,000

BANK 31-May Receipts Disb. 30-JunUnadjusted bal-bank 1,250,000 1,400,000 1,300,000 1,350,000Deposit in transit-May 31 200,000 (200,000)

-June 30 153,000 153,000Outstanding checks-May 31 (150,000) (150,000)

-June 30 390,000 (390,000)Erroneous bank credit-May31 (45,000) (45,000)

-June 30 (17,000) (17,000)Erroneous bank charge-May 31 20,000 (20,000)

-June 30 (30,000) 30,000Adjusted balances 1,275,000 1,316,000 1,465,000 1,126,000

BOOK 31-May Receipts Disb. 30-JunUnadjusted bal-book 1,251,000 1,300,000 1,500,000 1,051,000NSF-May 31 (110,000) (110,000)

-June 30 75,000 (75,000)CM for collection-May 31 125,000 (125,000)

-June 30 150,000 150,000Under of CR-May 9,000 (9,000)Adjusted balances 1,275,000 1,316,000 1,465,000 1,126,000

SUMMARY OF ANSWERS:1. C 2. D 3. C 4. D 5. A 6. D

PROBLEM 8-17 Proof of CashQuestion No. 1Beg. Bal., 7/1 P 128,384Add: Cash receipts for July 1,364,858

Cash receipts for Aug. 1,839,744Total P3,332,986Less: Cash disbursement for July 1,330,882

Cash disbursement for Aug. 1,712,892Bank reconciliation item 750

Unadjusted balance P 288,462


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Question No. 2Outstanding check, Aug. 31 P 67,122Add: Checks paid by the bank

Bank debits except serv. charge P1,702,830Less: Erroneous bank charge 1,166

DM on Interest on note 4,950 1,696,714Total P1,763,836Less: Checks issued by the company

this August 1,712,892Outstanding check, July 31 P 50,944

Questions No 3 to 5BANK 31-Jul Receipts Disb. Aug. 31

Unadjusted balances 180,250 1,830,752 *1,702,918 308,084Outstanding checks

July 31 ( 50,944) ( 50,944)August 31 67,122 ( 67,122)

Deposit in transitJuly 31 32,844 ( 32,844)August 31 41,836 41,836

Erroneous bank charge - - ( 1,166) 1,166Adjusted Balances 162,150 1,839,744 1,717,930 283,964(*1,702,830 + 88)

BOOK 31-Jul Receipts Disb. Aug. 31Unadjusted balances P162,360 P1,839,744 **P1,713,642 P288,462Error in recording checkno. 216 taken up asP1,930 but should beP1,390 (1,930-1,390) 540 540DM for int. on note 4,950 ( 4,950)Bank service chargeJuly 31 ( 52) ( 52)August 31 88 ( 88)

NSF for July 31 ( 698) - ( 698) -Adjusted balances P162,150 P1,839,744 P1,717,930 P283,964

**(1,712,892+750)

SUMMARY OF ANSWERS:1. A 2. C 3. A 4. B 5. A


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PROBLEM 8-18 Proof of CashQuestion No 1Outstanding checkCheck Nos. 144 P 1,500

149 8,000150 12,000

Total P 21,500

Alternatively, it may also be computed as follows:Outstanding check, beg P 7,000Add: Checks issued 75,000Total P 82,000Less: Checks paid by the bankBank Debits P 113,000Less: DM for this month

NSF checks (10,000+40,000) 50,000Bank service charge 2,000Error Correction 500 60,500


Question No 2Unadjusted rec. per bank P 171,500Deposit in transit:

November 30 (11,000)December 31 20,000

Error correction (500)NSF check, no entry on the books when returnedand redeposited ( 40,000)

Adjusted balance P 140,000

Question No 3Unadjusted disbursement, per bank P 113,000Outstanding checksNovember 30 (7,000)December 31 21,500

Error correction (500)NSF check, no entry on thebooks on the returned and redeposit ( 40,000)

Adjusted balance P 87,000

Question No 4Unadjusted bank bal. P 127,500Deposit in transit

November 30December 31 20,000

Outstanding checks


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November 30December 31 ( 21,500)

Adjusted bal. P126,000

Question No 5Zero, adjusted bank and book balance on December 31 is the same.

PROOF OF CASHNov. 30 Receipts Disb. Dec. 31

Unadjusted bank balance 69,000 171,500 113,000 *127,500Deposit in transit

November 30 11,000 (11,000)December 31 *20,000 20,000

Outstanding checksNovember 30 (7,000) (7,000)December 31 21,500 (21,500)

Error correction (500) (500)NSF check, no entry on thebooks on the return andredeposit (40,000) (40,000)Adjusted bal. 73,000 140,000 87,000 126,000

* (69,000+171,500-113,000)** (18,000+2,000)

Nov. 30 Receipts Disb. Dec. 31Unadjusted book balance 66,000 113,800 85,000 94,800Credit memo for notecollected

November 30 8,800 (8,800)December 31 35,000 35,000

Bank service chargeNovember 30 (1,800) (1,800)December 31 2,000 (2,000)

Adjusted bal. 73,000 140,000 87,000 126,000

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. B 5. A


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PROBLEM 8-19 Proof of CashQuestion No. 1Beg. Balance, Nov. 30 P 50,900Add: Total Collections from customers on Dec. 165,000

November bank coll. for customer note 8,000Total 223,900Less: Checks drawn for December 98,000

Bank service charges – November 100Unadjusted cash balance, Dec. 31 P 125,800

Question Nos. 2-5December

Nov. 30 Receipts Disb. Dec. 31BANK 90,800 171,272 99,072 163,000Unadjusted bank balanceNSF check, no entry on the booksfor return and redeposit ( 472) ( 472)Erroneous bank charge inDecember ( 1,500) 1,500Undeposited collection

November 30 5,000 ( 5,000)December 31 8,000 8,000

Bank service charge charged toanother client 150 ( 150)Outstanding check

Nov. 30 ( 5,000) ( 5,000)Dec. 31 7,700 ( 7,700)


BOOKUnadjusted balance 50,900 173,000 98,100 125,800NSF check recorded as reductionof cash receipts returned inDecember but also recorded inDecember 1,800 1,800Error in recording check No. 7159entered as P30,000 but should be3,000 27,000 27,000Cancellation of check No. 7767 5,000 5,000Bank service charge

Nov. 30 ( 100) ( 100)Dec. 31 150 ( 150)

Bank collection for customer'snote:

Nov. 30 8,000 (8,000)Dec. 31 7,000 7,000


SUMMARY OF ANSWERS:1. B 2. D 3. D 4. B 5. B


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PROBLEM 8-20 Proof of CashQuestion No. 1Outstanding checks, beg (squeeze) P 8,000Add: Checks issued this monthBook disbursements P 148,000Less: DM recorded this month 2,500 145,500Total 153,500Less: Bank disbursements P 150,000

Add: Paid out in currency 2,000Less: NSF redeposited 3,000

DM for this month 1,500 147,500Outstanding checks, end P 6,000

Question Nos. 2 to 5BANK Sept. 30 Receipts Disb. Oct. 31

Unadj. balance - bank 100,000 200,000 150,000 150,000Undeposited collections:

September 30 5,000 (5,000)October 31 7,000 7,000

Outstanding checks:September 30 (8,000) (8,000)October 31 6,000 (6,000)

Paid out in currency 2,000 2,000Adjusted balances 97,000 201,000 147,000 151,000

BOOK Sept. 30 Receipts Disb. Oct. 31Unadj. balance - book 91,500 196,000 148,000 139,500Customer’s notescollected:

September 30 8,000 (8,000)October 31 13,000 13,000

Bank service charge:September 30 (2,500) (2,500)October 31 1,500 1,500


SUMMARY OF ANSWERS:1. B 2. A 3. A 4. A 5. A


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PROBLEM 8-21 Proof of CashQuestion No. 1Account No. 143: Bank BookUnadjusted balances P1,000,000 P1,099,400Deposit in transit *80,000Misplaced check ( 20,000)Outstanding check (**60,000)Undelivered check 15,000Note charged by the bank - ( 74,400)Adjusted balance P1,020,000 P1,020,000*(100,000 - 20,000, Misplaced check)**(75,000 - 15,000, Undelivered check)

Question No. 2Total Outstanding checks:Account No.143 P 60,000*Account No.144 1,860,000Total outstanding check P 1,920,000

*Outstanding check for Account No. 144 is computed as follows:Outstanding checks, beg P 250,000Add: Checks issued this month

Book Credits P3,500,000Less: BSC November 10,000 3,490,000

Total P 3,740,000Less: Checks paid by the bank

Bank Debits P2,000,000Less: BSC December 20,000

NSF check 100,000 1,880,000Outstanding checks, end P1,860,000

Question Nos. 3 to 4December

Nov. 30 Receipts Disb. Dec. 31Unadjusted bank balance 2,200,000 1,000,000 2,000,000 1,200,000Deposit in transit:

November 30 90,000 (90,000)

December 31**240,00

0 240,000Outstanding check:

November 30 (250,000) (250,000)December 31 1,860,000 (1,860,000)

Erroneous bank charge -November 20,000 (20,000)Adjusted balances 2,060,000 1,130,000 3,610,000 (420,000)


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Unadjusted bookbalance 1,980,000 1,420,000 3,500,000 (100,000)Bank service charge:

November 30 (10,000) (10,000)December 31 20,000 (20,000)

Unrecorded collections -November 30 90,000 (90,000)Uncollected customer'snote already recordedas cash receipt (200,000) (200,000)

NSF - December 31 100,000 (100,000)Adjusted balances 2,060,000 1,130,000 3,610,000 (420,000)

**Deposit in transit, beg P 90,000Add: Deposit made by the co. this month

Book Debits P1,420,000Less: Unrecorded collection 90,000Customer’s note recorded ascash receipts 200,000 1,130,000

Total P1,220,000Less: Deposits acknowledged by the bank

Bank Credits P1,000,000Less: Erroneous bank charge 20,000 980,000


Question No. 5Adjusted balances:

Account No. 143 P1,020,000Account No. 144 ( 420,000)

Total adjusted balances P 600,000

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. B 5. C

PROBLEM 8-22 Proof of CashQuestion No. 1RCBC Account Book BankUnadjusted balance P 165,000 P 125,000Credit memo for note collected 6,000Bank service charge (1,000)Deposit in transit 60,000Outstanding checks (25,000+20,000) (45,000)Unrecorded disbursement ( 30,000) -Adjusted balance P 140,000 P 140,000


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Question Nos. 2-3Equitable PCI Bank Book BankUnadjusted bal. (squeeze) P 62,000 P 93,000Credit memo for note coll. 10,000Bank service charge ( 2,000)Deposit in transit (15,000+20,000+50,000*) 85,000Outstanding checks ( 28,000)Unrecorded transfer (30,000+50,000*) 80,000 -Adjusted balance P 150,000 P150,000*fund transfer No. 4 (Included both as unrecorded transfer and deposit intransit)

Question No. 4Outstanding checks:RCBC Account (25,000+20,000) P 45,000Equitable PCI Bank 28,000Total outstanding checks P 73,000

Question No. 5Fund transfer No. 2 is recorded in the disbursing bank during Decemberwhile it was only recorded in the disbursing book in January. This is anunrecorded disbursement for fund transfer.

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. B 5. B

PROBLEM 8-23 Proof of CashBOOK Jan. 31 Receipts Disb Feb. 28

Unadjusted balances-books 200,000 150,000 80,000 270,000Credit Memo-January 9,000 (9,000) - -Credit Memo-February - 13,000 - 13,000BSC check-January (100) - (100) -BSC check-February - - 150 (150)Check of the company issued inJanuary was mutilated andreturned by the payee. Areplacement check was issued.Both checks were entered in theCheck register but no entry wasmade to cancel the mutilatedcheck, P700.

700 - - 700

The company issued a stoppayment order to the bank inFebruary for check issued inFebruary which was not

- (1,200) (1,200) -


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received by the payee. A newcheck was written and recordedin the Check register inFebruary. The old check waswritten off by a journal entryalso in February, P1,200.Adjusted balances 209,600 152,800 78,850 283,550

BANK Jan. 31 Receipts Disb Feb. 28Unadjusted balances-bank 206,600 159,000 88,650 276,950Deposit in transit-January 10,000 (10,000) - -Deposit in transit-February - 11,000 - 11,000Outstanding checks-January (4,200) - (4,200) -Outstanding checks-February - - 1,800 (1,800)Erroneous bank credit-January (6,000) - (6,000) -Erroneous bank credit-February - (4,000) - (4,000)Erroneous bank charge-January 3,200 (3,200) - -Erroneous bank charge-February

- - (1,400) 1,400


SUMMARY OF ANSWERS:1. D 2. C 3. C 4. A 5. ENote to the professor: The question in #5 should be adjusted cash inbalance on February 28. The answer would have been letter C.

PROBLEM 8-24 Computation of Cash Shortage

Question No. 1Unadjusted bank bal. P 225,400Less: Outstanding checks (8,434+4,300+

6,524+ 9,551.50+4,577+5,961) (39,347.50)Add: Undeposited receipts 35,000Adjusted bank balance P221,052.50

Question No. 2Unadjusted book bal. P242,310.50Credit memo for notes collection 30,000Credit memo for int. 900Balance (cash accountability) P273,210.50

Question No. 3Adjusted bank bal. (Cash accounted) P221,052.50Less: Cash in bank bal. (cash accountability) 273,210.50


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Shortage (P52,158.00)

SUMMARY OF ANSWERS:1. B 2. D 3. B

PROBLEM 8-25 Computation of Cash ShortageQuestion No. 1Unadjusted bank bal. P 42,400Outstanding checks ( 11,500)Undeposited collections 5,000Adjusted bank balance P 35,900

Question No. 2Unadjusted book bal. P 46,500Credit memo proceeds clean draft 900Debit memo for bank service charge ( 100)Balance (cash accountability) P 47,300

Question No. 3Adjusted bank bal. (Cash accounted) P 35,900Cash in bank bal. (cash accountability) 47,300Shortage as of June 30 (P11,400)

Question No. 4Additional cash shortage from July 1-15July collection per duplicate O.R. P 18,800Less: collections in July that were depositedin July

Collection per duplicate slips P 11,000Less :Undeposited collection, June 30 5,000 6,000

Cash that should be on hand on July 15 P 12,800Less: Actual cash on hand on July 15 4,800Cash shortage from July 1-15 P 8,000

Question No. 5Understatement of cash in bank per books (46,500-45,600) P 900Overstatement of cash in bank per bank (44,000-42,400) 1,600Understatement of outstanding checks (11,500-3600) 7,900Overstatement of undeposited collections (5,100-5,000) 100Non-recording of credit memo-proceeds of clean draft 900Cash shortage as of June 30 P11,400

SUMMARY OF ANSWERS:1. C 2. D 3. B 4. D 5. D


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PROBLEM 8-26 Computation of Cash ShortageQuestion No. 1Deposit in transit, unadjusted bal. P 350,500Less: customer's Post-dated check 100,000Adjusted Deposit in transit P 250,500

Question No. 2Outstanding checks, unadjusted balance P 493,500Less: Unreleased check ( 29,500)

Company's post-dated check ( 74,420)Adjusted Outstanding checks P 389,580

Question No. 3Unadjusted bal. per bank P 700,000Add: Deposit in transit (No. 1) 250,500Less: Outstanding checks (No. 2) (389,580)

Erroneous bank credit ( 60,000)Adjusted cash in bank bal. P 500,920

Question No. 4Unadjusted bal. per books P 587,000Add: Credit memo for note coll. 30,000

Unreleased check 29,500Company's post-dated check 74,420

Total P 720,920Less: Customer's post-dated check (100,000)Cash in bank per books bal. P 620,920Less: Adjusted cash in bank balance 500,920Cash shortage (P120,000)

Question No. 5Unadjusted bal. per books P587,000Less: Adjusted cash in bank balance 500,920Net adjustments P 86,080

SUMMARY OF ANSWERS:1. B 2. D 3. B 4. C 5. A

PROBLEM 8-27 Computation of Cash ShortageQuestion No. 1Purchases (squeeze) P 81,160Less: Merchandise inventory, end 23,480Cost of Sales (80,752/140%) P 57,680


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Purchases P 81,160Less: Accounts payable, end 11,571Total payment of Accounts payable P 69,589

Question No. 2Sales on account P 80,752Less: Accounts receivable, end 21,345Collection to customers P 59,407

Question No. 3Receipts:Proceeds of issuance of stocks P 80,000Collection from customers 59,407Loan proceeds 28,000 P 167,407

Disbursements:Payment of real property P 50,000Payment of furniture and equipment(7,250-1,500) 5,750Payment of AP 69,589Payment of operating expenses 15,189 140,528

Cash accountability P 26,879

Question No. 4Unadjusted bank bal. P 6,582Outstanding checks ( 463)Undeposited collections 1,285Adjusted cash in bank bal. P 7,404

Question No. 5Adjusted cash in bank bal. P 7,404Less Cash accountability 26,879Cash shortage (P19,475)

SUMMARY OF ANSWERS:1. C 2. B 3. A 4. B 5. A

Chapter 10: Loans and Receivables

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CHAPTER 10: LOANS AND RECEIVABLES

PROBLEM 10-1 Trade and other receivablesTrade

ReceivablesTrade and other

receivablesNoncurrent

Asset1 277,000 277,000 -2 150,000 150,000 -3 - 10,000 -4 - 30,000 -5 - - 110,0006 - 15,000 -7 70,000 70,000 -8 - 80,000 220,0009 100,000 100,000 -

Adjusted bal. 597,000 1. C 732,000 2. C 330,000

PROBLEM 10-2 Different Freight termsQuestion No. 1FOB Destination, freight prepaidInvoice price of merchandise sold 300,000Less: Invoice price of merchandise returned -Net invoice price 300,000Less: Sales discount (300,000 x 2%) 6,000Collection before freight 294,000Less: Freight payment - FOB Destination, freight collect -Add: Freight payment - FOB shipping point, freight prepaid -Total Net Cash Collection (B) 294,000

Question No. 2FOB Destination, freight collectInvoice price of merchandise sold 300,000Less: Invoice price of merchandise returned -Net invoice price 300,000Less: Sales discount (300,000 x 2%) 6,000Net Payment before freight 294,000Less: Freight payment - FOB Destination, freight collect 5,000Add: Freight payment - FOB shipping point, freight prepaid -Total Net Cash Collection (A) 289,000

Question No. 3FOB Shipping point, freight prepaidInvoice price of merchandise sold 300,000Less: Invoice price of merchandise returned -Net invoice price 300,000Less: Sales discount (300,000 x 2%) 6,000


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Net Receipt before freight 294,000Less: Freight payment - FOB Destination, freight collect -Add: Freight payment - FOB shipping point, freight prepaid 5,000Total Net Cash Collection (C) 299,000

Question No. 4FOB Shipping point, freight prepaidInvoice price of merchandise sold 300,000Less: Invoice price of merchandise returned -Net invoice price 300,000Less: Sales discount (300,000 x 2%) 6,000Collection before freight 294,000Less: Freight payment - FOB Destination, freight collect -Add: Freight payment - FOB shipping point, freight prepaid -Total Net Cash Collection (B) 294,000

SUMMARY OF ANSWERS:1. B 2. A 3. C 4. B

PROBLEM 10-3 Gross method and Net methodList price P 100,000Less: Trade discounts

15%: (100,000 x 15%) 15,00020%: (100,000 – 15,000) x 20% 17,000 32,000

Invoice price, gross of discount (C) 68,000Less: Sales discount (68,000 x 3%) 2,040Invoice price, net of discount (D) P 65,960

SUMMARY OF ANSWERS:1. C 2. D

PROBLEM 10-4 Computation of Percentage of Bad Debts Expense

Note to professor: All the year in the questions should be 2017 instead of2016.

CASE 1Credit Sales Accounts written off Recoveries

2013 ₱ 1,500,000 ₱ 20,000 ₱ 15,000 2014 2,000,000 40,000 20,0002015 3,500,000 270,000 15,000

7,000,000 330,000 50,0002016 2,000,000 65,000 30,000

9,000,000 395,000 80,0002017 3,000,000 85,000 40,000


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12,000,000 480,000 120,000

Question No. 1

Percentage =Accounts written off minus Recoveries

Total credit sales

Total years from 2013 to 2017:

Percentage =₱480,000 - ₱120,000

₱12,000,000

Percentage = 3.00 %

Question No. 2Bad debts expense = 3% x ₱3,000,000

= ₱90,000

Question No. 3Allowance for Bad debts

Write off 85,000 400,000 Beg. BalanceBalance end (squeeze) 445,000 90,000 Bad debts exp

40,000 Recovery520,000 520,000

CASE 2Question No.4


Total credit sales

Total years from 2013 to 2015 (years should exclude the last two years):

Percentage =₱330,000 - ₱50,000

₱7,000,000

Percentage = 4 %

Question No. 5Bad debts expense = 4% x P3,000,000

= ₱120,000

Question No. 6Credit Sales BD exp Recoveries Write-off Net AB

2016 2,000,000 80,000 65,000 30,000 115,0002017 3,000,000 120,000 85,000 40,000 165,000

Allowance for BD (E) 280,000


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CASE 3Question No. 7Percentage of bad

debts to AR=

Accounts written off minus RecoveriesTotal credit sales

Total years from 2013 to 2016:Percentage of bad

debts to AR=

₱395,000 - ₱80,0009,000,000

Percentage = 3.5%

Percentage of baddebts to AR

=Accounts written off minus Recoveries

Total credit sales

Total years from 2013 to 2017:Percentage of bad

debts to AR=

₱480,000 - ₱120,000₱12,000,000

Percentage = 3 %

Question Nos. 8 and 9Allowance for Bad debts

Balance end(3,400,000 x 3%) 102,000 105,000

Beg. Balance(3,000,000 x 3.5%)

Write off 85,000 (E) 42,000 Bad debts exp (squeeze)40,000 Recovery

187,000 187,000

SUMMARY OF ANSWERS:Case 11. B2. B3. B

Case 24. D5. D6. E

Case 37. C8. E9. C

PROBLEM 10-5 Aging Based on Outstanding Receivables

Question No. 1

Categories(No. of Days)

BalanceUncollectible

Percent Amount0-30 days 500,000 2% 10,00031-60 days 600,000 3% 18,00061-90 days 750,000 5% 37,500over 91 days 300,000 10% 30,000Totals 2,150,000 95,500


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Allowance for Bad debtsBalance end(see above table) 95,500 40,000 Beg. balanceWrite off 12,000 Recoveries(23,000+100,000) 123,000 166,500 Bad debts exp (squeeze)

218,500 218,500

Question No. 2Accounts receivable, end (see above table) 2,150,000Less: Allowance for doubtful accounts, end 95,500Net Realizable Value 2,054,500

SUMMARY OF ANSWERS:1. A 2. A

PROBLEM 10-6 Aging Based On Days Past DueQuestion No. 1Overdue accounts % uncollectible Balance Allowance

For less than 31 days 5.00% 300,000 15,000From 31-60 days 6.00% 220,000 13,200From 61-90 days 8.00% 150,000 12,000From 91-120 days 15.00% 60,000 9,000For over 121 days 20.00% -Required allowance for doubtful accounts 49,200

Question No. 2Allowance for Bad debts

Balance end 49,200 20,000 Beg. balance29,200 Bad debts exp (squeeze)

158,000 158,000


PROBLEM 10-7 Interest-bearing Note with Realistic Interest Rate

Requirement No. 1*Selling price P 100,000Less: Carrying amount of machinery


Loss on sale (P 50,000)


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*Note: The selling price is equal to the face amount, which is likewise equal tothe present value of the note since the note bears an annual interest rate that issimilar with the market rate.

Requirement No. 2Interest income = (100,000 x 10%) = P10,000

Requirement No. 3Zero. The principal amount is collectible beyond one year from the reportingdate and thus, reported as non-current.

Requirement No. 4P100,000. The entire principal amount of notes receivable is treated asnoncurrent asset since it is collectible beyond one year from the reporting date.

Journal entries are as follows:01/01/2016 Notes receivable 100,000

Accumulated depreciation 350,000Loss on sale 50,000

Machinery 500,000\

12/31/2016 Cash 10,000Interest income 10,000

PROBLEM 10-8 Interest-bearing Note with Unrealistic Interest Rate,Interest Is Payable Annually, One-Time Collection of Principal

Question No. 1Present value of principal (2,000,000 x 0.7118) P 1,423,600Add: Present value of interest payments

(2,000,000 x 10% x 2.4018) 480,366Total present value / Selling price 1,903,966Less: Carrying amount of machinery

Cost 1,000,000Less: Accumulated depreciation 150,000 850,000

Gain on sale P1,053,966

Question Nos. 2 to 5Amortization table

Date InterestCollections

InterestIncome

DiscountAmortization

Carryingamount

01/01/2016 1,903,96012/31/2016 200,000 228,475 28,475 1,932,43512/31/2017 200,000 231,892 31,892 1,964,32712/31/2018 200,000 235,704 35,672 2,000,000


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The total amount of 1,932,435 is reported as noncurrent receivable since it isdue to be collected beyond twelve months from the end of the reporting period.

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. A 5. C

PROBLEM 10-9 Interest-bearing Note with Unrealistic Interest Rate,Interest Is Payable Semi-Annually, One-Time Collection of Principal

Question No. 1Present value of principal (2,000,000 x 0.7050) P 1,410,000Add: Present value of interest payments

(2,000,000 x 5% x 4.9173) 491,730Total present value / Selling price 1,901,730Less: Carrying amount of machinery


Gain on sale P1,051,730

Amortization tableDate Interest

CollectionsInterestIncome


Carryingamount

01/01/2016 1,901,73007/31/2016 100,000 114,104 14,104 1,915,83412/31/2016 100,000 114,950 14,950 1,930,78407/31/2017 100,000 115,847 15,815 1,946,59912/31/2017 100,000 116,796 16,796 1,963,39507/31/2018 100,000 117,804 17,804 1,981,19812/31/2018 100,000 118,602 18,802 2,000,000

Question No. 2Interest income up to 07/31/2016 114,104Interest income up to 12/31/2016 114,950Total interest income 229,054

Question No. 31,930,784. See amortization table above.

Question No.s 4 and 5The total amount of 1,932,435 is reported as noncurrent receivable since it isdue to be collected beyond twelve months from the end of the reporting period.

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. A 5. D


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PROBLEM 10-10 Interest-bearing Note with Unrealistic Interest Rate,Uniform Collection of Principal

Question No. 1Computation of present value of all payments:

Presentvalue factor

PrincipalInterest

collectionsTotal

collectionsTotal PV

0.8929 600,000 180,000 780,000 696,4620.7972 600,000 120,000 720,000 573,9840.7118 600,000 60,000 660,000 469,788

Total present value 1,740,234

Total present value / Selling price 1,740,234Less: Carrying amount of machinery


Gain on sale P890,234

Amortization table

DateInterest

CollectionsInterestIncome

Amortization

Principalcollections

Carryingamount

01/01/16 1,740,23412/31/16 180,000 208,828 28,828 600,000 1,169,06212/31/17 120,000 140,287 20,287 600,000 589,35012/31/18 60,000 70,651 10,651 600,000 -

Question No. 2208,828. See amortization table above.


Question No. 4

Principal collections – 2017 600,000Less: Amortization – 2017 20,287Current portion – 12/31/2016 579,713

Question No. 4

Carrying value – 12/31/2016 1,169,062Less: Current portion – 12/31/2016 579,713Non-current portion – 12/31/2016 589,350

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. B 5. A


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PROBLEM 10-11 Non-interest-bearing Note with Unrealistic Interest Rate,Non-Uniform Collection of Principal

Question No. 1Computation of present value of all payments:

PV factorTotal

collections Total PV0.8929 1,000,000 892,9000.7972 600,000 478,3200.7118 200,000 142,360

Total present value of the notes 1,513,580

Total present value / Selling price 1,513,580Less: Carrying amount of machinery




DateInterestincome

Amortization

PrincipalCollections

Carryingamount

01/01/16 1,513,58012/31/16 181,630 181,630 1,000,000 695,21012/31/17 83,425 83,425 600,000 178,63512/31/18 21,382 21,365 200,000 -



Question No. 4

Principal collections – 2017 600,000Less: Amortization – 2017 83,425Current portion – 12/31/2016 516,575

Question No. 5

Carrying value – 12/31/2016 695,210Less: Current portion – 12/31/2016 516,575Non-current portion – 12/31/2016 178,635

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. B 5. D


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PROBLEM 10-12 Noninterest-bearing Note, One-Time Collection ofPrincipal

Question No. 1Total present value (1,800,000 x 0.7118) 1,281,240Less: Carrying amount of machinery



Amortization tableDate Interest Income Amortization Carrying amount

01/01/16 1,281,24012/31/16 153,749 153,749 1,434,98912/31/17 172,199 172,199 1,607,18712/31/18 192,812 192,812 1,800,000



Question No. 4 and 5

The total amount of 1,434,989 is reported as noncurrent receivable since it isdue to be collected beyond twelve months from the end of the reporting period.


PROBLEM 10-13 Computation of Annual Payment or Collection

CASE 1: Based on the original dataRequirement No. 1

Annual collection =Present value of the notes

Present value of ordinary annuity for 3 periods

Annual collection =1,500,000

2.4018

Annual collection = P624,532

Requirement No. 2Interest income (1,500,000 x 12%) = P180,000


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CASE 2Requirement No. 1

Annual collection =Present value of the notes

Present value of annuity due for 3 periods

Annual collection =1,500,000

2. 6901

Annual collection = P557,600

Requirement No. 2Interest income (1,500,000 – 557,600) x 12% = P113,088

PROBLEM 10-14 Impairment of Receivable, Principal is Collectible EveryYear

Question No. 1Principal (unpaid) 960,000Add: Accrued interest receivable 96,000 1,056,000Less: *Present value of expected cash flows 770,528Loan impairment (B) 285,472

*Computation of present value of all payments:PV factor Total collections Total PV

0.9091 160,000 145,4560.8264 320,000 264,4480.7513 480,000 360,624

Total present value of the notes 770,528


Date CollectionsInterestIncome Amortization

Carryingamount

12/31/2016 770,52812/31/2017 160,000 77,053 82,947 687,58112/31/2018 320,000 68,758 251,242 436,33912/31/2019 480,000 43,634 436,339 -

SUMMARY OF ANSWERS:1. B 2. B 3. B


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PROBLEM 10-15 Impairment of Receivable, One-time Collection ofPrincipal

CASE NO. 1Question No. 1Principal 16,000,000Add: Accrued interest receivable 1,600,000 17,600,000Less: *Present value of expected cash flows 7,705,280Loan impairment (A) 9,894,720

*Computation of present value of all payments:PV factor Total collections Total PV

0.9091 1,600,000 1,454,5600.8264 3,200,000 2,644,4800.7513 4,800,000 3,606,240

Total present value of the notes 7,705,280



Carryingamount

12/31/2015 7,705,28012/31/2016 1,600,000 770,528 829,472 6,875,80812/31/2017 3,200,000 687,581 2,512,419 4,363,38912/31/2018 4,800,000 436,339 4,363,389 -

CASE NO. 2Question No. 4Carrying value – 12/31/2015 (see table below) 15,458,634Less: *Present value of expected cash flows 7,705,280Loan impairment (E) 9,894,720

Amortization table

Date

InterestReceived

Or AccruedInterestIncome Amortization

Carryingamount

01/01/2013 ₱14,846,08012/31/2013 1,600,000 1,781,530 181,530 15,027,61012/31/2014 1,600,000 1,803,313 203,313 15,230,92312/31/2015 1,600,000* 1,827,711 227,710 15,458,634

*Interest accrued.

12/31/2015 Accrued interest receivable 1,600,000Interest income 1,600,000

Unearned interest income 227,710Interest income 227,710


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Amortization table

Date

InterestReceived


Carryingamount

01/01/2013 ₱14,846,08012/31/2013 1,600,000 1,781,530 181,530 15,027,61012/31/2014 1,600,000 1,803,313 203,313 15,230,92312/31/2015 1,827,711 1,827,711 17,058,634

12/31/2015 Unearned interest income 1,827,711Interest income 1,827,711


Amortization table

Date

InterestReceived


Carryingamount

01/01/2013 ₱14,846,08012/31/2013 1,600,000 1,781,530 181,530 15,027,61012/31/2014 1,600,000 1,803,313 203,313 15,230,92312/31/2015 1,600,000 1,827,711 227,710 15,458,634

12/31/2015 Cash 1,600,000Interest income 1,600,000

Unearned interest income 227,710Interest income 227,710

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. E 5. E 6. E


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PROBLEM 10-16 Reversal of Impairment LossQuestion No. 1Present value of expected cash flows P 654,552vs. Would have been present value if there was noimpairment 600,000Lower 600,000Less: Actual amortized cost 396,681Gain on reversal of impairment loss P 203,319

Question No. 2Interest income (600,000 x 10%) P 60,000

SUMMARY OF ANSWERS:1. A 2. B

PROBLEM 10-17 Pledge of Receivable

Principal amount borrowed P 900,000Less: One year interest deducted in advance (900,000 x 10%) ( 90,000)Cash received on December 1 (B) P810,000

PROBLEM 10-18 Assignment of ReceivableEntries to record transactions

Date Accounts Debit Credit10/1/2016 Cash 395,000

Finance charge expense 5,000Notes payable 400,000

12/31/2016 Cash 300,000Accounts receivable 300,000

Interest expense (400,000 x 12% x 3/12) 12,000Notes payable 300,000

Cash 312,000


PROBLEM 10-19 Assignment of Accounts ReceivableQuestion No. 1Principal amount borrowed P 150,000Less: Finance fee (150,000 x 5%) ( 7,500)Cash received on December 1 (D) P142,500


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Question No. 2Notes payable P150,000Less: Principal payment

Remittance 95,000Less: Interest (150,000 x 12% x 3/12) ( 1,500) 93,500

Notes payable – December 31 (C) P 56,500

Question No. 3Accounts receivable – assigned (200,000 – 100,000) P 100,000Less: Notes payable ( 56,500)Equity in assigned account (C) P 43,500

SUMMARY OF ANSWERS:1. D 2. C 3. C

PROBLEM 10-20 Factoring of ReceivablesEntries to record transactionsOption Accounts Debit Credit

One Cash (400,000 x 90%) 360,000Receivable from factor

(25,000 – [5% x 400,000]) 5,000

Loss on sale of receivables (squeeze) 35,000

Notes payable 400,000

Two Cash (400,000 x 90%) 360,000Receivable from factor

(25,000 – [4% x 400,000]) 9,000

Loss on sale of receivables (squeeze) 34,000


Estimated recourse liability 3,000

SUMMARY OF ANSWERS:1. B 2. C

PROBLEM 10-21 Factoring

Sales price P 265,000Less: Carrying amount of accounts receivable (300,000 – 12,500) ( 287,500)Loss on factoring (B) P 22,500


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PROBLEM 10-22 Notes Receivable Discounting and Notes ReceivableDishonored

CASE NO. 1Question No. 1Principal P 600,000.00Add: Interest over full credit period (600,000 x 9% x 90/360) 13,500.00Maturity value 613,500.00Less: Discount (613,500 x 12% x 65/360) 13,292.50Net proceeds from discounting (C) P 600,207.50

Question No. 2Net proceeds from discounting P 600,207.50Less: Carrying amount on date of discounting

Principal 600,000.00Add: Interest (600,000 x 9% x 25/360) 3,750.00 603,750.00

Loss on notes receivable discounting (A) (P 3,542.50)

CASE NO. 2Question No. 3Loss of P3,524.50. The amount of loss to be recognized is computed in asimilar way as to that of discounted note without recourse. (A)

Question No. 4Maturity value of the note P 613,500Add: Protest fee and other bank charges 5,000Cash received on December 1 (C) P618,500

CASE NO. 3Question No. 5Interest expense of P3,524.50. The amount of interest expense is computedin a similar way as to that of discounted note without recourse or conditionalsale. (A)

Question No. 6Maturity value of the note P 613,500Add: Protest fee and other bank charges 5,000Cash received on December 1 (C) P618,500

SUMMARY OF ANSWERS:1. C 2. A 3. A 4. C 5. A 6. C

PROBLEM 10-23 Discounting “Own” NoteQuestion No. 1Note payable P 250,000Less: Discount on note payable (250,000 x 12%) ( 30,000)Carrying amount – Date of issuance P 220,000


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Effective interest rate = Discount/Net proceeds= 30,000/220,000= 13.60% (D)

Question No. 2Entry to record transaction

Cash 220,000

Discount on notes payable 30,000


SUMMARY OF ANSWERS:1. D 2. B

COMPREHENSIVE PROBLEMSPROBLEM 10-24Question No. 1

Allowance for Doubtful accounts

Accounts written off 164,000 212,000 Beg. BalanceBalance end (squeeze) 200,000 152,000 DA expense (7.6M x 2%)

Total 364,000 364,000

Question No. 2Age Group Amount Percent Uncollectible Allowance

0 - 60 days P 1,650,000 2% 33,00061 - 90 days 440,000 10% 44,00091 - 120 days 100,000 30% 30,000Over 120 days 256,000 40% 102,400Total P 2,446,000 209,400


Accounts written off 164,000 212,000 Beg. BalanceBalance end 209,400 161,400 DA expense (squeeze)

Total 373,400 373,400

Question No. 4Accounts receivable, December 31, 2016 2,446,000Less Allowance for doubtful accounts, December 31, 2016 209,400Net realizable value 2,236,600


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Beg. Balance 2,500,000 2,446,000 Balance endSales 7,600,000 164,000 Write-off

7,490,000 Collections (squeeze)

Total 10,100,000 10,100,000

SUMMARY OF ANSWERS:1. A 2. C 3. D 4. B 5. D


Credit Sales Accounts written off Recoveries2013 2,220,000 52,000 4,3002014 2,450,000 59,000 7,5002015 2,930,000 60,000 7,200

7,600,000 171,000 19,000


Total credit salesTotal years from 2013 to 2015:

Percentage =171,000 - 19,000

7,600,000

Percentage = 0.02 or 2%

Question No. 2Doubtful accounts expense (3,000,000 x 2%) = P60,000

Question No. 3Reported doubtful account expense (bad debts written off) P 62,000Less: Correct doubtful account expense (see No. 2) ( 60,000)Overstatement in doubtful account expenses P 2,000


Beg. Balance 418,000 645,600 Balance endSales on account 3,000,000 62,000 Write-off

2,710,400 Collections excludingadvance from customers

Total 3,418,000 3,418,000


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Accounts written off 62,000 15,200 Beg. BalanceBalance end 21,600 60,000 Doubtful accounts expense

8,400 Recoveries

Total 83,600 83,600

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. B 5. A

PROBLEM 10-26Question No. 1Unadjusted accounts receivable, Dec. 1 (squeeze) P 21,800Add: Adjusted net sales 255,000Total 276,800Less: Collections, net of discounts 156,800

Estimated uncollectible accounts charged to AR in Dec. 30,000Unadjusted accounts receivable, Dec. 31 P 90,000

Subsidiary ledger balance, Dec. 1 P 59,000Less: AR controlling account, Dec. 1 (see above) 21,800

Add: Estimated uncollectible accountcharged to AR in Dec. 6,000 27,800

Customers’ credit balance (D) P31,200

Question No. 2Collection, net of discount P 156,800Divide by: (100%-2%) 98%Total credit to AR for collection (A) P160,000

Question No. 3Customer credit balance, Dec. 1 P 31,200Less: sale to customer with credit balance 10,000Customer Credit balance, Dec. 31 (A) P 21,200

Question No. 4Unadjusted Sales, balance P 260,000b) Sales, FOB shipping pt., not yet recorded 10,000c) Sales, FOB destination ( 15,000)Adjusted Sales balance (A) P 255,000


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Question No. 5Subsidiary ledger, balance, 12/1 P 59,000Add: Adjusted Sales in December 255,000

Freight prepaid by the company 1,000Total P 315,000Less: total credit to AR for coll. 160,000Adjusted accounts receivable in Dec. (B) P 155,000

SUMMARY OF ANSWERS:1. D 2. A 3. A 4. A 5. B

PROBLEM 10-27Question Nos. 1 to 3

Total 0-31 days 31-60 61-90 91-120 Over 120Rose P 87,950 35,000 52,950Gerry 52,300 30,000 22,300Ram 50,000 50,000Ria 84,350 57,850 26,500Mar 79,000 31,000 48,000Sun 43,500 43,500West -

P 397,100 116,000 110,800 74,500 73,500 22,3000.01 0.015 0.04 0.10 0.60

1,160 1,662 2,980 7,350 13,380

Question No. 4Allowance for doubtful accounts, end:(P1,160 + P1,662 + P2,980 + P7,350 + P13,380) P 26,532


Accounts written off 15,000 22,450 Beg. BalanceBalance end 26,532 19,082 Doubtful accounts expense

Total 41,532 41,532

SUMMARY OF ANSWERS:1. A 2. C 3. C 4. C 5. C


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Balance AccountsDec. 31 Not due 1-60 days 61-120 days Over 120

1 12,000 3,000 8,000 1,0002 22,000 22,0004 20,000 10,000 10,0005 55,000 2,220 52,7806 7,500 7,500

116,500 27,220 68,280 11,000 10,000

Multiply by: 0.50% 2% 5% 50%

136.10 1,365.60 550 5,000.00

Question Nos. 2 and 3Required balance (P136.10+P1,365.60+P550+P5,000) P 7,051.70Less: Allowance for doubtful accounts, beginning 5,000.00Doubtful accounts expense P 2,051.70

Question Nos. 4 and 5

Interest incomeInterestincome

Accrued interestincome

(120,000 X 6% X 2/12) P 1,200 P -

(100,000 X 6% X 1/12) 500 500

Interest income P 1,700 P 500

SUMMARY OF ANSWERS:1. D 2. C 3. B 4. D 5. A

PROBLEM 10-29Question No. 1Principal 4,000,000Origination fees received (342,100)Direct origination cost incurred 150,020Initial Carrying amount of the loan 3,807,920

Question No. 2By trial and error, 12% interest rate will have a present value equal to theinitial carrying amount of the loan.Present value of Prin. (4,000,000 x .7118) 2,847,200Present value of Int. (4M x 10% x 2.4018) 960,720Present value of Loan Receivable 3,807,920


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Question Nos. 3 and 4


Carryingamount

01/01/2016 3,807,920

31/12/2016 400,000 456,950 56,950 3,864,870

31/12/2017 400,000 463,784 63,784 3,928,655

31/12/2018 400,000 471,439 71,346 4,000,000

Question No. 5Zero, As of December 31, 2016, the entire loan proceeds will be collectible onDecember 31, 2018, that is two years from the reporting date.

SUMMARY OF ANSWERS:1. A 2. C 3. B 4. A 5. A

PROBLEM 10-30Question Nos. 1 and 3Carrying amount of the loan, December 31, 2016 8,277,606Less Carrying amount of the loan, December 31, 2017 8,145,367Amortization in 2017 132,239Less Interest collection in 2017 960,000Interest income in 2016 (3) 827,761Divide by Carrying amount of the loan, 12/31/2016 8,277,606Effective interest rate (1) 10%

Question No. 2Carrying amount of the loan, January 1, 2016 8,397,824Multiply by: Effective interest rate 10%Interest income in 2016 839,782

Question No. 3Carrying amount of the loan, 12/31/2016 8,277,606Multiply by: Effective interest rate 10%Interest income in 2016 827,761

Question No. 4Carrying amount of the loan, December 31, 2016 8,277,606Add: Interest collection (8M x 12%) 960,000Total 9,237,606Divide by: 100% plus effective rate 1.10Carrying amount of the loan, January 1, 2016 8,397,824


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Question No. 5Carrying amount of the loan, January 1, 2016 8,397,824Direct origination fees received 100,000Principal 8,000,000Direct origination cost incurred 497,824


Carryingamount

01/01/2016 8,397,82412/31/2016 960,000 839,782 120,218 8,277,60612/31/2017 960,000 827,761 132,239 8,145,36712/31/2018 960,000 814,537 145,367 8,000,000

SUMMARY OF ANSWERS:1. B 2. B 3. C 4. D 5. D

PROBLEM 10-31Question No. 1Principal 4,000,000Origination fees received (282,100)Direct origination cost incurred 39,020Initial Carrying amount of the loan 3,756,920

Question Nos. 2 and 3By trial and error, 12% interest rate will have a present value equal to theinitial carrying amount of the loan.

Present value of Prin. (4,000,000 x .6355) 2,542,000Present value of Int. (4M x 10% x 3.0373) 1,214,920Present value of Loan Receivable 3,756,920

Amortization table


Carryingamount

01/01/2015 3,756,920

31/12/2015 400,000 450,830 50,830 3,807,750

31/12/2016 400,000 456,930 56,930 3,864,680

31/12/2017 400,000 463,762 63,762 3,928,442

Question No. 4Carrying Amount (see above amortization table) 3,864,680Less: *Present value of expected cash flows 3,201,620Loan Impairment 663,060


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*Computation of present value of expected cash flowsDate Cash flow PV factor at 12% Present value12/31/2017 1,800,000 0.8929 1,607,22012/31/2018 2,000,000 0.7972 1,594,400

3,201,620

Question No. 5


Carryingvalue

12/31/2016 3.201,620

12/31/2017 1,800,000 384,194 1,415,806 1,785,814

12/31/2018 2,000,000 214,298 1,785,814 -

SUMMARY OF ANSWERS:1. B 2. C 3. B 4. B 5. B


Annual Cash PVDate flows factor Amount

Dec. 31, 2015 P1,750,000 0.9091 P 1,590,925Dec. 31, 2016 2,000,000 0.8264 1,652,800Dec. 31, 2017 1,750,000 0.7513 1,314,775

Total P 4,558,500

Question No. 2Carrying amount of the loan P 5,500,000Less: Present value of the loan 4,558,500Impairment loss P 941,500

Question Nos. 3 to 5

Date PaymentInterestIncome

Reduction toPrincipal

Carryingamount

12/31/2014 P4,558,50012/31/2015 P1,750,000 P455,850 P1,294,150 3,264,35012/31/2016 2,000,000 326,435 1,673,565 1,590,78512/31/2017 1,750,000 159,079 1,590,785 -

SUMMARY OF ANSWERS:1. C 2. A 3. B 4. A 5. C


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AccountsReceivable

Allow Mdse.Inventory

NetSales

Cost offor DA Sales

Unadjusted balances 300,000 3,000 400,000 1,000,000 800,0002) Sale return (30,000) (30,000)

Cost of returnMerchandise

(30,000 x 80%) 24,000 (24,000)3)Sales FOB shippingpointnot recorded asSale 40,000 40,000

Cost of mdse sold(40,000 x 80%) (32,000) 32,0004) Goods shippedFOBDestination recordedas sale (50,000) (50,000)Cost of goods(50,000 x 80%) 40,000 (40,000)

6) Doubtful accts exp (12,000)Adjusted bal. 260,000 15,000 432,000 960,000 768,000

Question No. 5Accounts receivable P 260,000Less: Allowance for doubtful accounts ( 15,000)Net realizable value P245,000

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. B 5. C


Classification BalanceEstimated

Percentage Amount1-60 days P 1,000,000 1% P 10,00061-120 days 400,000 5% 20,000121-180 days 300,000 10% 30,000181-360 days 200,000 25% 50,000More than one year 60,000 80% 48,000Totals P 1,960,000 P 158,000

Question No. 2Accounts receivable, adjusted (see no. 1) P 1,960,000Less: Allowance for doubtful accounts, end (see no. 1) 158,000Net realizable value P1,802,000


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Question No. 3Doubtful accounts per books (9,000,000 x 2%) P 180,000Less: *Adjusted doubtful accounts expense 188,000Understatement of doubtful accounts (P 8,000)

*Adjusted doubtful account expenseAllowance for Doubtful accounts

Write off (100,000+40,000) 140,000 90,000 Beg. BalanceBalance end (required) 158,000 20,00 Recoveries

188,000 Doubtful account expense

Total 298,000 298,000

Question No. 4Total carrying value P3,000,000Less: **Present value of the loan 2,790,000Impairment loss P 210,000

*Computation of present valueAnnual Cash flow PV factor TotalP1,000,000 1.00 P 1,000,0001,000,000 0.93 930,0001,000,000 0.86 860,000Total Present value of the loan P 2,790,000

Question No. 5

Date CollectionsInterestIncome

Amortization

Carryingamount

01/01/2016 2,790,00012/31/2016 1,000,000 1,000,000 1,790,00012/31/2017 1,000,000 143,200 856,800 933,200

SUMMARY OF ANSWERS:1. A 2. B 3. D 4. B 5. B

PROBLEM 10-35

Question Nos. 1 to 4Accounts Merchandise Net Sales Cost of

receivable Inventory SalesUnadjusted bal. 200,000 300,000 1,000,000 600,0001 (14,800)3 (47,400) 32,600 (47,400) (32,600)4 (30,000) (90,000)


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5 (8,000) (8,000)6 (36,000) 24,000 (36,000) (24,000)7 (1,200) (1,200)

62,600 356,600 817,400 543,400

Question No. 5Original bill (P200 x 100) P 20,000Divided by: Selling price per unit 200Number of units sold 100

Question No. 6Item Accounts Debit Credit

B Accounts payable 14,800Accounts receivable 14,800

C Accounts receivable – D 32,400Accounts receivable – C 32,400

E Sales 47,400Accounts receivable 47,400

Merchandise inventory 32,600Cost of sales 32,600

F Sales 90,000Accounts receivable 30,000Customers’ deposit on orders 60,000

H Sales *8,000Accounts receivable 8,000

I Sales 36,000Accounts receivable 36,000

Merchandise inventory 24,000Cost of sales 24,000

J Sales returns and allowances 1,200Accounts receivable 1,200

*Computation of overstatement of sales for item HOriginal bill (P200 x 100) P 20,000Per audit: (P120 x 100) 12,000Overstatement P 8,000

SUMMARY OF ANSWERS:1. A 2. A 3. D 4. B 5. B


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PROBLEM 10-36

Question No. 1Accounts receivable, unadjusted balancePer subsidiary ledger P1,660,000Note receivable included in the AR (200,000)Factored Accounts receivable (160,000)Sales FOB shipping point 100,000Adjusted AR balance P1,400,000

Question No. 2Allowance for doubtful accts, beg. P 100,000Add: Doubtful accounts (P15,000,000 + P100,000) x 1% 151,000Total P 251,000Less: Accounts written off 28,000Allowance for doubtful accts, end P 223,000

Question No. 3Unadjusted Net Sales P15,000,000Add: Sales, FOB shipping point 100,000Total Sales P 15,100,000Multiply by: rate 1%Doubtful accounts P 151,000

Question No. 4No effect. The audit adjustments did not result to any changes to inventoryaccount.

Question No. 5Sales, FOB shipping point P 100,000

SUMMARY OF ANSWERS:1. D 2. A 3. D 4. D 5. A

PROBLEM 10-37Question No. 1Accounts receivable factored P 400,000Less: Service charge (400,000 x 5%) 20,000

Receivable from factor (400,000 x 20%) 80,000 100,000Customers’ credit balance P300,000

Question No. 2Principal P 300,000Add: Interest over full credit period (300,000 x 12% x 6/12) 18,000Maturity value 318,000Less: Discount (318,000 x 12% x 3/12) 11,925Net proceeds from discounting P 306,075


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Question No. 3Maturity value of the notes (see item in No. 2) 318,000Add: Protest fee 12,000Total cash paid/Amount to be debited to AR P 330,000

Question No. 4Note payable (80% x P600,000) 480,000Less: Service fee (5% x P600,00) 30,000Cash received P 450,000

Question No. 5Total Cash paid (see No. 3) 330,000Add: Interest income (P330,000 x 12% x 2/12) 6,600Cash received P 336,600

Question No. 6Accounts receivable-unassigned

(2,000,000-3000,000-400,000-600,000) P 700,000Add: Accounts receivable assigned 600,000Total 1,300,000Less: Less: Allowance for doubtful accounts (1,300,000 x 5%) 65,000Net realizable value P1,235,000

SUMMARY OF ANSWERS:1. B 2. C 3. A 4. B 5. D 6. D

PROBLEM 10-38

Question No. 1 Noncurrent portionNote receivable from sale of plant (due beyond 12 months) 2,500,000Note receivable from officer 2,000,000Note receivable from Never Quit Co. (826,000 + 61,950) 887,950Note receivable from Persistent Co. (2,800,000 – 603,320) 2,196,680Total noncurrent receivables (C) 7,584,630

Amortization table – Persistent Company

Date CollectionsInterestIncome

Amortization

Carryingamount

06/01/2016 4,000,00006/01/2016 1,200,000 1,200,000 2,800,00006/01/2017 883,320 280,000 603,320 2,196,680


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Question No. 2 Current receivablesNote receivable from sale of plant (due within 12 months) 2,500,000Note receivable from Persistent Co. (883,320 – 280,000) 603,320Total current receivables (C) 3,103,320

Question No. 3 Accrued interest receivableAccrued interest receivable – note receivable from sale of plant(5,000,000 x 9% x 8/12) 300,000Accrued interest from sale of land (2,800,000 x 10% x 6/12) 140,000Total accrued interest (C) 440,000

Question No. 4 Interest incomeInterest income from sale of plant [(7,500,000 x 9% x 4/12) +(5,000,000 x 9% x 8/12)] 525,000Interest income from officer (2,000,000 x 8%) 160,000Interest income from Never Quit Co. (826,000 x 10% x 9/12) 61,950Interest income from Persistent Co. [(4,000,000 – 1,200,000) x10% x 6/12)] 140,000Total interest income (C) 886,950

Question No. 5Present value of future cash flows (1M x .826) 826,000Less: Carrying amount of equipment 380,000Gain on sale of equipment 446,000

SP (Cash price equivalent) 4,000,000Less: Carrying amount of land 3,000,000Gain on sale of land 1,000,000Total gain (D) 1,446,000

SUMMARY OF ANSWERS:1. C 2. C 3. C 4. C 5. D


Total60 days and

below61 to 90

daysOver 90

daysUnadjusted Balance,12/31/2016 1,900,000 1,000,000 500,000 400,000Adjustments:Write Off (40,000) (40,000)Unrecorded sale 50,000 50,000NSF Check 20,000 20,000In transit shipment – (45,000) (45,000)


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FOB DestinationConsignment (45,000) (45,000)Erroneous unit price (7,500) (7,500)Adjusted balance,12/31/2016 1,832,500 930,000 492,500 410,000Percentage of Uncollectibility 4% 5% 10%Required allowance,12/31/2016 108,825 37,200 24,625 41,000


Write off 40,000 100,000 Beg. BalanceBalance end (required) 102,825 - Recoveries

42,825 Doubtful account expense(squeeze)

Total 142,825 142,825

Item Accounts Debit Credit1 Allowance for bad debts 40,000

Accounts receivable 40,000

2 Accounts receivable 50,000Sales 50,000

3 Accounts receivable 20,000Cash in bank 20,000

4 Sales 45,000Accounts receivable 45,000



SUMMARY OF ANSWERS:1. C 2. D 3. D 4. D 5. C

PROBLEM 10-40Question Nos. 1 and 3Adjusting entries for Accounts receivableItem Accounts Debit Credit

1 Accounts receivable 20,000Allowance for doubtful accounts 20,000


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2 Sales discount 16,000Accounts receivable 16,000



Miscellaneous income 30,000Accounts receivable 30,000

Accounts receivable

Beg. Balance(20,000+200,000)

220,000 2,720,000 Balance end

Sales 4,000,000 30,00 RecoveriesRecoveries 30,000 *1,500,000 Collections, gross of

discount

Total 4,250,000 4,250,000

*Collections from customers excluding recoveriesCollections without discount 700,000Add: Collections with discount 784,000

Cash discount availed (784,000/98% x 2%) 16,000Total collections excluding recoveries P 1,500,000

Allowance for Doubtful accounts

20,000 Beg. BalanceBalance end 170,000 30,000 Recoveries

120,000 Doubtful account expense

Total 170,000 170,000

Accounts receivable 2,720,000Less: Allowance for bad debts 170,000Net realizable value P 2,550,000

Question Nos. 2, 4 and 5Adjusting entries for Loans receivableItem Accounts Debit Credit

1 Loan Receivable 400,000Interest income 400,000

2 Unearned interest income 45,382Interest income 45,382


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Principal 4,000,000Direct origination cost incurred 11,520Direct origination fees received (300,000)Initial carrying amount 3,711,520

Amortization table at 12% Effective Rate


Carryingamount

01/01/2015 3,711,52012/31/2015 400,000 445,382 45,382 3,756,90212/31/2016 400,000 450,828 50,828 3,807,73112/31/2017 400,000 456,928 56,928 3,864,65812/31/2018 400,000 463,759 63,759 3,928,41712/31/2019 400,000 471,410 71,583 4,000,000

SUMMARY OF ANSWERS:1. B 2. C 3. D 4. D 5. A

PROBLEM 10-41

Note to professor: The due date of receivable from sale of equipment is 2020,instead of April 1, 2019.

Question No. 1Unrecorded gain on sale of machinery – 2015 (see below) 90,183Unrecorded interest income – receivable from sale of machinery(240,183 x 12%) 28,822Unrecorded accrued interest – receivable from sale of plant(1,500,000 x 12% x 9/12) 135,000Net adjustment to R/E – 01/01/16 (B) 254,005

Cash consideration 200,000Add: Present value of future cash flows (2.4018 x 100,000) 240,183Total selling price 440,183Less: Carrying value of machine (800,000 – 450,000) 350,000Gain on sale of machine 90,183

Amortization table (receivable from sale of machinery):


Carryingamount

01/01/2015 240,18312/31/2015 100,000 28,822 71,178 169,00512/31/2016 100,000 20,281 79,719 89,28612/31/2017 100,000 10,714 89,286 -


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Question No. 2Interest income from note receivable:Sale of machinery (169,005 x 12%) 20,281Sale of plant [(1,500,000 x 12% 3/12) + (1M x 12% x 9/12) 135,000Sale of equipment (170,750 x 10% x 9/12) 12,806

Total interest income (C) 168,087

Question No. 3Current portion of note receivable from:Sale of machinery (see amortization table above) 89,286Sale of plant 500,000

Total current portion (B) 589,286

Question No. 4Non-current portion of note receivable from:Sale of plant 500,000Sale of equipment (170,750 + 12,806) 183,556

Total non-current portion (D) 683,556

Question No. 5Interest income from sale of machine 20,281Interest income from sale of plant (180,000 – 135,000) (45,000)Interest income from sale of equipment 12,806Net overstatement of income (E) (11,912)

SUMMARY OF ANSWERS:1. B 2. C 3. B 4. D 5. E

Chapter 12: Inventories

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CHAPTER 12: INVENTORIES

PROBLEM 12-1 Cost of Purchase

Purchase price based on vendors’ invoices 1,250,000Brokerage commission paid to agents for arranging imports 50,000Import duties 100,000Freight and insurance on purchases 250,000Other handling costs relating to imports 25,000Total cost of purchase (B) P1,675,000

Note that the trade discount was already deducted in arriving at the vendor’sinvoice.

PROBLEM 12-2 Inventoriable CostMaterials ₱ 350,000Irrecoverable purchase taxes 30,000Labor 120,000Variable production overhead 50,000Fixed production costs 40,000Cartage in 8,000Total (C) ₱598,000

PROBLEM 12-3 Rebates

Question No. 1Invoice price (no VAT is charged on these goods) ₱ 850,000Less: Rebate offered to the entity by the supplier 10,000Inventoriable cost (B) ₱ 840,000

Question No. 2Inventoriable cost (C) ₱ 850,000

PROBLEM 12-4 FREIGHT TERMS & FOREIGN EXCHANGE

Question No. 1 Free on BoardCost of inventory ($100,000 x ₱45) ₱4,500,000ForEx loss (₱46.875 - ₱45) x 100,000 (A) 187,500

Question No. 2 Cost, Insurance and FreightCost of inventory ($100,000 x ₱45.625) ₱4,562,500ForEx loss (₱46.875 - ₱45.625) x 100,000 (D) 125,000


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PROBLEM 12-5 MANUFACTURING COST

Question No. 1Variable cost:Direct labor (₱3 x 3 DLH x 100,000 units) ₱ 900,000Direct materials (₱2 excluding VAT x 100,000 units) 200,000

Fixed Cost (₱100,000 / 100,000 normal capacity) x 100,000 actual 100,000Total cost (C) ₱1,200,000

Question No. 2Variable cost:Direct labor (₱3 x 3 DLH x 120,000 units) ₱1,080,000Direct materials (₱2 excluding VAT x 120,000 units) 200,000

Fixed Cost (₱100,000 / 120,000 actual capacity) x 100,000 actual 100,000Total cost (E) ₱1,420,000

Question No. 3Variable cost:Direct labor (₱3 x 3 DLH x 80,000 units) ₱ 720,000Direct materials (₱2 excluding VAT x 80,000 units) 160,000

Fixed Cost (₱100,000 / 100,000 normal capacity) x 80,000 actual 80,000Total cost (E) ₱ 960,000

PROBLEM 12-6 Items to be Included in the Inventory1 Items in the warehouse during the count P1,090,0002 Items out on consignment at another company's store 70,000

4Items purchased FOB shipping point that are in transit atDecember 31 500,000

5 Freight charges on goods purchased above 13,000

7

Items sold to another company, for which our companyhas signed an agreement to repurchase at a set price thatcovers all costs related to the inventory. Total cost ofmerchandise is 200,000

10Items sold FOB destination that are in transit at December31, at cost 75,000

14 Items currently being used for window display 100,00015 Items on counter for sale 400,00017 Items included in the count, damaged and unsalable (150,000)

18Items in receiving dept., returned by customer, in goodcondition (not included in the count) 50,000

19 Merchandise inventories out on approval, at cost 100,000

20Finished special article goods, made to order (included inthe count) (78,000)Total (A) P2,370,000


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The following items would not be reported as inventory:3 Cost of goods sold in the income statement 40,0006 Not reported in the financial statements 300,0008 Cost of goods sold in the income statement 30,0009 Cost of goods sold in the income statement 50,00011 Advertising exp. In the income statement 10,00012 Not reported in the financial statements 100,00013 Temporary investments in the current

assets section of the balance sheet 125,00016 Not reported in the financial statements 360,00021 Office supplies in the current asset

section of the balance sheet 40,000

PROBLEM 12-7 Accounts Payable

Unadjusted balance 1,800,000Goods acquired in transit, FOB shipping point 100,000Goods lost in transit 50,000Adjusted Accounts Payable (A) P1,950,000

The journal entry on item 2 would include the following:Purchases / Inventory 50,000

Accounts Payable 50,000To record the purchase on December 20.

Query: For F/S presentation on December 31, is the goods lost in transit bepresented as part of inventory?

Answer: No, since the inventories were lost in transit and it is improper toreport inventories that is not existing (i.e. it violates the existence assertion).Thus the journal entry at December 31 if no claim was filed and the commoncarrier has yet to acknowledge the claim may include a:

Loss on goods lost in transit (preferably presented asother expense and not as cost of goods sold)

50,000

Inventory / Purchases 50,000

And on the next year (January 5), when the claim was filed and acknowledgedby the common carrier, the journal entry will be:Claims from common carrier 50,000

Gain on reimbursement of lost inventory 50,000To record the claim against common carrier on January 5.


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PROBLEM 12-8 Consigned Goods

Inventory shipped on consignment to Lomasoc 360,000Freight by Desiree to Lomasoc 18,000Total Inventoriable cost (D) P 378,000

PROBLEM 12-9 Items to Be Included In the Inventory

Note to the professor: Use the following guide questions in answering thisquestion:1. Was there a valid sale?2. Was the sale recorded?3. Were the inventories EXCLUDED in the count?

Guide Sales InventoriesUnadjusted balances Questions 700,000 150,000

100 Yes, Yes, Yes - -101 No, No, Yes - 2,000102 No, Yes, Yes (1,800) 1,200103 Yes, Yes, Yes - -104 Yes, No, Yes 9,200 -105 No, Yes, No (6,500) -106 No, No, No - -107 Yes, No, Yes 3,900 -108 No, Yes, No (8,600) -109 No, No, No - -

Adjusted balances 696,200 153,200

(A) (A)


PROBLEM 12-10 Gross method vs. Net method

CASE NO 1: Gross methodDate Accounts Debit Credit

01/02 Purchases (100,000 x [1-20%]) 80,000Accounts payable 80,000

01/12 Accounts payable 80,000Cash (80,000 x [1-98%]) 78,400Purchase discount 1,600

01/14 Accounts payable 80,000Cash 80,000


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CASE NO 2: Net methodDate Accounts Debit Credit

01/02 Purchases (100,000 x [1-20%]x [1-2%]) 78,400


01/12 Accounts payable 78,400

Cash (80,000 x [1-98%]) 78,400

01/14 Accounts payable 78,400

Purchase discount lost 1,600

Cash 80,000

SUMMARY OF ANSWERS:CASE NO. 11. B2. C3. D4. A

CASE NO. 25. C6. C7. A8. D

PROBLEM 12-11 Cost Formulas - Different Methods

Note to professor: The unit cost on April 28 should be P16.75 and not P17.

Question Nos. 1 and 2Weighted averageWeighted average

unit cost=

Total goods available for sale (in peso value)Total goods available for sale (in units)

Weighted averageunit cost

=1,105,000

85,000

Weighted average unit cost = P13/unit

Inventory end (40,000 x 13) = P520,000 (C)Cost of goods sold (20,000+5,000+21,000–1,000) x 13 = P585,000 (C)

Question Nos. 3 and 4Moving average

Units Unit cost Total costApril 1 balance 20,000 10 200,000Apr. 2 Purchase 30,000 12 360,000Balance 50,000 11 560,000Apr. 4 Sale (25,000) 11 (280,000)Balance 25,000 11 280,000Apr. 10 Purchase 15,000 14 210,000Balance 40,000 12 490,000Apr. 15 Sales (21,000) 12 (257,250)Balance 19,000 12 232,750


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Apr. 17 Sales return 1,000 12 12,250Apr. 28 Balance 20,000 245,000Apr. 28 Purchase 20,000 16.75 335,000

Balance 40,000 15 580,000

Inventory end = P580,000 (A)Cost of goods sold (280,000 + 257,250 – 12,250) = P525,000 (A)

Question Nos. 5 and 6FIFO

Units Unit cost Total costApril 1 balance 20,000 10 200,000Apr. 2 Purchase 30,000 12 360,000Apr. 4 (25,000 units sold) From Apr. 1 (20,000) 10 (200,000)

From Apr. 2 (5,000) 12 (60,000)Balance from Apr. 2 25,000 12 300,000Apr. 10 Purchase 15,000 14 210,000Apr. 15 (21,000 units sold) From Apr. 2 (21,000) 12 (252,000)Balance from April 2 4,000 12 48,000Balance from April 10 15,000 14 210,000Apr. 17 Sales return 1,000 12 12,000BalanceBalance from April 2 5,000 12 60,000Balance from April 10 15,000 14 210,000Apr. 28 Purchase 20,000 17 335,000Total Balance 40,000 605,000

Inventory end = P605,000 (B)Cost of goods sold (200,000 + 60,000 + 252,000 – 12,000) = P500,000 (B)

Question Nos. 7 and 8Note that inventory and cost of goods sold under FIFO periodic and perpetual isthe same.

SUMMARY OF ANSWERS:1. C 2. C 3. A 4. A 5. B 6. B 7. B 8. B

PROBLEM 12-12 Lower of Cost or Net Realizable Value

Question Nos. 1 to 3Markers Pens Highlighters

Historical cost 120,000 94,400 150,000

Selling price 180,000 180,000 180,000Less: Estimated cost to complete 24,000 24,000 34,000Net realizable value 156,000 156,000 146,000

Lower of cost-or-NRV 120,000 94,400 146,000

SUMMARY OF ANSWERS:1. C 2. D 3. B


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PROBLEM 12-13 Lower of Cost or Net Realizable Value

Question No. 1 Raw MaterialsSupply of steel (used for motorbikes) Write-downCost ₱ 40,000More profitable (as is) 25,000 ₱ 15,000

Supply of aluminum (used for bicycles)Cost ₱ 60,000More profitable (completed product) 50,000 10,000

Total write-down (C) ₱ 25,000

Question No. 2 Work-in-processIncomplete motorbikes Write-downCost ₱ 30,000More profitable (completed product) 25,000 ₱ 5,000

Incomplete bicyclesCost ₱ 50,000More profitable (as is) 60,000 -

Total write-down (D) ₱ 5,000

Question No. 3 Finished goodsMotorbikes Write-downCost ₱ 80,000More profitable (completed product) 60,000 ₱ 20,000

BicyclesCost ₱ 80,000More profitable (completed product) 110,000 -

Total write-down (C) ₱ 20,000

Question No. 4 Adjusted COGSCost of goods sold before write-down ₱450,000Add: Write-downRaw materials 25,000Work-in-process 5,000Finished goods 20,000

Adjusted cost of goods sold (C) ₱500,000

PROBLEM 12-14 Purchase Commitment

CASE NO. 1Date Accounts Debit Credit

11/15 No entry

12/31 Loss on purchase commitment (20,000 x [25-20]) 100,000Estimated liability for purchase commitment 100,000


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03/15 Purchases (25,000 x 25) 500,000Estimated liability for purchase commitment 100,000

Accounts payable/Cash 500,000Gain on purchase commitment 100,000

CASE NO. 2Date Accounts Debit Credit

11/15 No entry

12/31 No entry

03/15 Purchases (25,000 x 25) 500,000Accounts payable/Cash 500,000


Date Accounts Debit Credit3/31 No entry

12/31 Loss on purchase commitment (1,200,000-1,000,000) 200,000Estimated liability for purchase commitment 200,000

04/30 Purchases 1,200,000Estimated liability for purchase commitment 200,000

Accounts payable/Cash 1,200,000Gain on purchase commitment 200,000

SUMMARY OF ANSWERS:1. B 2. A


Gain on purchase commitment [50,000 x (55 - 40)] = P750,000 (A)

To record the actual purchase on March 31, 2016:Purchases (50,000 x 55) 2,750,000Estimated liability for purchase commitment 750,000

Accounts payable/Cash 2,750,000Gain on purchase commitment 750,000

The gain to be recognized is limited to the loss on purchase commitmentpreviously recorded.


Question No. 1Remaining contract – minimum of 500 units each year2016 (500 x 100) P 50,0002017 (500 x 100) 50,000Total P 100,000


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Less: Estimated realizable value (1,000 x 20) 20,000Probable loss from purchase commitment (C) P 80,000

Question No. 2A loss in inventory writedown should also be recognized on December 31, 2011in the amount of P100,000 (1,250 units x [P100-P20]). (B)

SUMMARY OF ANSWERS:1. C 2. B

PROBLEM 12-18 Inventory Estimation - Gross Profit Rate Method

Sales 3,400,000Less: Sales returns (30,000)Net Sales excluding Sales discount 3,370,000Multiply by: Cost ratio (1-30%) 70%Cost of Goods sold 2,359,000

Inventory, January 1 650,000Add: Net Purchases

Purchases 2,300,000Add: Freight-in 60,000Less: Purchase returns (80,000) 2,280,000

Total Goods available for sale 2,930,000Less: Cost of goods sold (2,359,000)Merchandise inventory that should be on hand 571,000Less: Actual merchandise inventory on hand (420,000)Cost of Missing inventory (A) 151,000

PROBLEM 12-19 Inventory Estimation - Gross Profit Rate Method

CASE NO. 1Sales 1,552,000Divide by: Sales ratio 125.00%Cost of Sales 1,241,600

Inventory, January 1 160,000Purchases, January 1 through April 19 1,120,000Total goods available for sale 1,280,000Less: Cost of sales 1,241,600Cost of Missing inventory P 38,400 (A)

CASE NO. 2Sales 1,552,000Multiply by: Cost ratio 75%Cost of Sales 1,164,000


95

Inventory, January 1 160,000Purchases, January 1 through April 19 1,120,000Total goods available for sale 1,280,000Less: Cost of sales 1,164,000Cost of Missing inventory P 116,000 (D)

SUMMARY OF ANSWERS:1. A 2. D

PROBLEM 12-20 Inventory Estimation: LCM - Retail Method

Computation of cost ratio:Cost Retail

Inventory at January 1 640,000 1,600,000Purchases 1,100,000 2,000,000Freight-in 152,000 -Net markups - 800,000Totals 1,892,000 4,400,000

Cost ratio (1,892,000 / 4,400,000) = 43%

Computation of Inventory end at retailBalance up to markups (see above computation) 4,400,000Less: Markdowns 400,000

Sales 1,600,000Inventory end at retail P2,400,000Multiply: Cost ratio 43%Inventory end at cost (C) P1,032,000

PROBLEM 12-21 Inventory Estimation: Average Method - Retail Method


Inventory at January 1 250,000 375,000Purchases 1,325,000 1,750,000Net markups - 200,000Net markdowns - (75,000)Totals 1,575,000 2,250,000

Cost ratio (1,575,000 / 2,250,000) = 70%

Computation of Inventory end at retailBalance up to markdowns (see above computation) 2,250,000Less: Sales 1,500,000

Estimated normal shrinkage (1,500,000 x 5%) 75,000Estimated normal shoplifting losses 50,000


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Inventory end at retail P 625,000

Computation of Cost of goods soldTotal goods available for sale at cost 1,575,000Less: Inventory end at cost (625,000 x 70%) 437,500Cost of Sales (B) 1,137,500

PROBLEM 12-22 Inventory Estimation: FIFO Method - Retail Method


Purchases 292,500 400,000Net markups - 75,000Net markdowns - (25,000)Totals 292,500 450,000

Cost ratio (292,500 / 450,000) = 65%

Computation of Inventory end at retailBalance up to markdowns (see above computation) 450,000Add: Inventory beginning 100,000Less: Sales 375,000Inventory end at retail P 175,000Multiply: Cost ratio 65%Inventory end at cost (A) P113,750

PROBLEM 12-23

Question No. 1Direct materials inventory

Beg. Balance 9,000 7,000 Balance endDM purchased (squeeze) 70,000 72,000 Direct materials used

(B)

Total 79,000 79,000

Question No. 2Total cost added to work in process (72,000+80,000+24,000) = P176,000 (C)

Question No. 3Applied overhead to job 3 (24,000/10,000 x 120 hours) = P288 (D)


97

Question No. 4Work in process inventory

Beg. Balance 17,000 31,000 Balance endDM used 72,000 162,000 Cost of goodsDirect labor 80,000 (B) manufactureFactory overhead 24,000 (squeeze)

Total 193,000 193,000

SUMMARY OF ANSWERS:1. B 2. C 3. D 4. B

PROBLEM 12-24

Question No. 1A EI over (P129-P119) x 4,000 40,000B EI under (70,000)C EI over 100,000

Overstatement of ending inventory 70,000 (C)

Question No. 2D. Ending inventory understated (140,000) (B)

Question Nos. 3 and 42015 2016

Unadjusted balance 1,000,000 1,200,000A. EI over, NI over (P129-P119) x 4,000 (40,000) 40,000B. EI under, NI under 70,000 (70,000)C. EI over, NI over (100,000) 100,000D. EI under, NI under 140,000

Adjusted balances 930,000 1,410,000

(A) (C)

Question No. 5Unadjusted net income (1,000,000+1,200,000) 2,200,000Less: Adjusted net income (930,000+1,410,000) 2,340,000Net adjustment to income-understated (140,000) (D)

SUMMARY OF ANSWERS:1. C 2. B 3. A 4. C 5. D


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PROBLEM 12-25

Question Nos. 1 and 2Ledger

BalancePhysical

CountBalances prior to adjustment P 314,800 P 293,600Add: Goods in transit sold, FOB destination 3,200 3,200Less: unrecorded sale ( 8,400) -Less: unrecorded purchase returns ( 6,000) -Less: goods held on consignment - ( 8,800)Add: unrecorded purchase 3,640- -Add: Goods in transit purchased, FOB shipping point 1,600Add: Goods out on consignment - 14,800Adjusted balances P 307,240 P 304,400

(A) (C)

Question No. 3Adjusted balances, per ledger P 307,240Adjusted balances, physical count 304,400Inventory shortage P 2,840 (B)

SUMMARY OF ANSWERS:1. A 2. C 3. B

PROBLEM 12-26Accounts

Inventory Payable SalesUnadjusted balances P 800,000 P335,000 P5,000,000

1 Parts held on consignment ( 18,000) ( 18,000)2 Parts sold included in the count ( 30,000)3 Parts in transit to customers,

FOB shipping pt. 22,0004 Parts on conditional sale - - -5 Goods out on consignment 100,0006 Parts in transit purchased,

FOB shipping pt. 16,000 16,0007 Mdse. Hold for shipping inst.

excluded in the count 160,0008 Finished special article, incl.

in the count and sale not rec. ( 30,000) - 50,000Adjusted balances P1,020,000 P333,000 P5,050,000

(A) (A) (B)

SUMMARY OF ANSWERS:1. A 2. A 3. B


99

PROBLEM 12-27

Note to the professor: Use the following guide questions in answering thisquestion:1. Accounts Payable and related accounts

Was there a valid purchase?Was the purchase recorded?Were the inventories INCLUDED in the count?

2. Accounts Receivable and related accountsWas there a valid sale?Was the sale recorded?Were the inventories EXCLUDED in the count?

SOLUTION:Ending

Inventory Sales Purchases APNet

IncomeUnadjusted balances 550,000 1,000,000 600,000 450,000 120,000

679680681682 Purch over, COS over, NI

under (46,740) (46,740) (46,740)EI over, COS under, NIover (46,740) 46,740

683 EI over, COS under, NIover (4,500) (4,500)

684 Purch under, NI over 1,060 1,060 (1,060)685 No, No, No686 No, No, No310 Yes, Yes, Yes311 Sales over, NI over (560) (560)

EI under, NI under (560 x70%) 392 392

312 Sales over, NI over (31,940) (31,940)EI under, NI under (31,940x 70%) 22,358 22,358

313 Sales over, NI over (6,350) (6,350)EI under, NI under (6,350x 70%) 4,445 4,445

314 Sales over, NI over (1,930) (1,930)315 No, No, No316 No, No, No317 No, No, No318

Net adjustment (24,045) (40,780) (45,680) (45,680) (19,145)Adjusted balances 525,955 959,220 554,320 404,320 100,855

(A) (A) (A) (A) (D)

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. A 5. D


100

PROBLEM 12-28

Endinginventory

Accountsreceivable

Accountspayable Sales Net income

Unadjustedbalance P220,000 P104,000 P138,000 P1,010,000 P180,400

A (20,000) 20,000B (10,000) (10,000)C 50,000 (64,000) (64,000) (14,000)D 14,000 (16,000) (16,000) (2,000)E ( 24,000) ( 24,000)

Adjusted P 250,000 P24,000 P108,000 P930,000 P160,400

(A) (C) (D) (D) (A)

SUMMARY OF ANSWERS:1. A 2. C 3. D 4. D 5. A

PROBLEM 12-29

InventoryAccountspayable

AccountsReceivable Net Sales

NetPurchases Net income

Unadjustedbalances 250,000 400,000 1,000,000 4,000,000 2,500,000 600,000A - - - - - -B 35,000 - - - - 35,000C 4,000 4,000 - - 4,000 -D (25,000) - 40,000 40,000 - 15,000E 10,000 - - - - 10,000F - - (30,000) (30,000) - (30,000)G 34,000 - (68,000) (68,000) - (34,000)H - - (10,000) (10,000) - (10,000)I - - - (90,000) - (90,000)J 60,000 60,000 - - 60,000 -

Adjustedbalances 368,000 464,000 932,000 3,842,000 2,564,000 496,000

SUMMARY OF ANSWERS:1. C 2. C 3. A 4. A 5. D 6. D

PROBLEM 12-30

InventoryAccounts

payableAccounts

Receivable Net SalesNet

PurchasesNet

incomeUnadj.bal 500,000 800,000 2,000,000 8,000,000 5,000,000 1,200,000A -B 25,000 25,000C 80,000 80,000 90,000

10,000 10,000D 60,000 60,000E (5,000) 5,000


101

F 400,000 400,000 400,000 -(50,000) 50,000

G (100,000) (100,000) (100,000)H (60,000) (60,000)Total 1,075,000 1,225,000 1,900,000 7,840,000 5,490,000 1,190,000

1. A 2. (E) 3. A 4. B 5. A 6. (E)

SUMMARY OF ANSWERS:1. A 2. E 3. A 4. B 5. A 6. E

PROBLEM 12-31

Unadj.Inventory

AccountsReceivable Sales Purchases

Cost ofgoods sold

bal 560,000 300,000 2,500,000 1,100,000 840,000a (10,000) 10,000b 880 (2,000) (2,000) (880)

*(1,200)c (5,000) (5,000) -d (20,000) (20,000) -e (50,000) (50,000) -f 30,000 30,000 -g -h (27,500) 40,000 40,000 27,500Add'l 2 (75,000) (75,000)

523,380 291,800 2,493,000 1,025,000 801,620

1. A 2. D 3. D 4. A 5. C*Commission [(₱200 x 40) - ₱6,800 remittance]

SUMMARY OF ANSWERS:1. A 2. D 3. D 4. A 5. C

PROBLEM 12-32

Questions No. 1 to 5R/E Sales EI A/P CGS

2016 Purchases under, CGSunder, NI over, RE over

36,000

2017 Purchases over, CGSover

36,000

2016 EI under, NI under, REunder

(32,000)

2017 BI under, CGS under (32,000)Sales under (20,000)Purchases under, CGS under (24,000) (24,000)EI under, CGS over (8,000) 8,000


102

Purchases under, CGS under (4,000) (4,000)EI under, CGS over (4,000) 4,000Total 4,000 (20,000) (12,000) (28,000) (12,000)

Legend:BI - Beginning inventoryEI - Ending inventoryNI - Net IncomeCGS - Cost of goods soldRE - Retained earnings – 12/31/2016 or 01/01/20174,000 – overstated(4,000) – understated

Note: The effect of errors on December 2016 and January 2017 has no effect onthe ending balance of the accounts payable on December 31, 2017 since thepayable is expected to be settled before the end of the year.

SUMMARY OF ANSWERS:1. C 2. B 3. B 4. D 5. C

PROBLEM 12-33

Question No. 1Sales (475,000/80%) P593,750 100%Less: Cost of sales 475,000 80%Gross profit 118,750 20%

Inventory (in units)

Beg. Balance (60,000/P3) 20,000 25,000 Balance end (squeeze) or(125,000/5)

Purchases 100,000 95,000 Cost of sales (475,000/5)

Total 120,000 120,000

Inventory (in peso amount)

Beg. Balance (squeeze) 60,000 125,000 Balance end (squeeze)Purchases 540,000 475,000 Cost of sales

Total 600,000 600,000

Weighted average unit cost = TGAS (peso) / TGAS (units)

Weighted average unit cost (P600,000/120,000) = P5/unit

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. A 5. B


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PROBLEM 12-34

Question No. 1The cumulative effect on change in accounting policy on January 1, 2016 orDecember 31, 2015 Retained Earnings is understatement of 100,000, which isthe understatement of Ending Inventory on December 31, 2015. (B)

Question No. 2Net income – weighted average P3,250,000Beginning inventory under, CGS under, Net income over (150,000)Ending inventory under, CGS over, Net income under 100,000Adjusted net income – FIFO (B) P3,200,000

Question No. 3Computation of units sold:Beginning inventory – units 10,000Add: Total purchases – units 100,000Total goods available for sale – units 110,000Less: Units sold (P6,400,000 / P80/unit) 80,000Ending inventory in units 30,000

The 30,000 ending inventory comes from the last two purchases as follows:Units Unit cost Total cost

From 4th quarter purchases 10,000 68 680,000From 3rd quarter purchases 20,000 66 1,320,000Total 30,000 (B) 2,000,000

Question No. 4Cost (refer to no. 3) 2,000,000Net realizable value [(P70 – P5) x 30,000] 1,950,000Loss on inventory write-down (B) 50,000

Question No. 5Beginning inventory – FIFO 500,000Add: Net Purchases (P6,480,000 – 980,000) 5,500,000Total goods available for sale 6,100,000Less: Ending inventory at cost (see no. 3) 2,000,000Cost of goods sold at cost 4,100,000Add: Loss on inventory write-down (see no. 4) 50,000Cost of goods sold after inventory write-down (A) 4,150,000

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. B 5. A


104

PROBLEM 12-35

Question No. 1Marked price including VAT 605,000Less: VAT (605,000/1.14 x 14%) 74,298Marked price excluding VAT 530,702Less: Trade discount (8% x 530,702) 42,456Less: Settlement discounts 4,200Total cost of Raw Materials 484,086Multiply by: Unused portion 20%Raw materials, end (A) 96,809

Question No. 2Work in process beginning 0Raw materials used (484,086 x 80%) 387,269Salaries and wages (500,000 x 55%) 275,000Variable overheads (100,000 x 70%) 70,000Fixed manufacturing overhead (1,100 x P151.278)* 166,406Packing materials (685,000/7 x 9 x 75%) 660,536Less: Work in process ending 0Cost of goods manufactured (B) 1,559,179

Fixed manufacturing overheadRent and insurance – factory (140,000 / 12) 11,667Rent – warehouse 30,000Other fixed manufacturing overhead (285,000 x 65%) 185,250Total actual FMO for January 226,917Divide by; Normal units per month (18,000 / 12) 1,500Fixed manufacturing overhead per unit 151.278

Question No. 3 and 4Beginning finished goods 0Add: Cost of goods manufactured 1,559,179Less: Finished goods ending (1,559,179 x 20%) (B) 311,836Cost of goods sold (A) 1,247,343

Question No. 5Cost 311,836Net realizable value (400,000 – 90,000 – 15,000) 295,000Loss on inventory write-down (B) 16,436

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. A 5. B


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PROBLEM 12-36

Question No. 1(10,500 - 1,000 + 3,000) = 12,000 units

No. of units Unit cost Total3,000 14 P 42,0002,000 13 26,0004,000 15 60,0003,000 16 48,000

12,000 P 176,000 (A)

Question No. 2(4,500+700+600)=5,800 units

No. of units Unit cost Total1,800 19 P 34,2001,800 20 36,0001,200 21 25,2001,000 22 22,0005,800 P 117,400 (A)

Question No. 3T-shirts:Net realizable value NRV Cost Lower(12,000 x (P16-(10% x P16)) P172,800 P176,000 P 172,800Jackets:(5,800 x (P22-(10%xP22) 114,840 117,400 114,840Lower of cost or NRV P287,640 P 293,400 P 287,640

Question No. 4Total cost (see no. 3) P 293,400Less: Lower of cost or NRV (see no. 3) 287,640Loss on inventory write-down (B) P 5,760

Question No. 5Beginning inventories:T-shirts (9,000 x P11) P 99,000Jackets (5,000 x P15) 75,000 P 174,000Add:*Total purchases (299,500 + 183,900) 483,400Total goods available for sale P 657,400Less: Merchandise inventory at cost 293,400Cost of sales before inventory write-down P 364,000Add: Loss on inventory write-down 5,760Cost of sales after inventory write-down (B) P369,760

*T-shirts4,000 P12 P 48,0003,000 12 36,0002,500 13 32,500


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3,500 14 49,0002,000 13 26,0004,000 15 60,0003,000 16 48,000

22,000 P 299,500

Jackets900 P16 P 14,400

1,100 18 19,8001,500 19 28,5002,000 19 38,0001,800 20 36,0001,200 21 25,2001,000 22 22,0009,500 P 183,900

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. B 5. B

PROBLEM 12-37

This T-Account of Raw Materials will be the same under the three differentcases:

Raw Materials

Beginning balance 600,000 1,200,000 Balance endNet Purchases 2,200,000 1,600,000 Direct materials used

Total 2,800,000 2,800,000

CASE NO. 1Question No. 1

GP Rate: 2013 2014 2015 2016Gross Profit 2,000,000 3,500,000 4,000,000Divide by: Sales 1,700,000 2,800,000 3,000,000Gross Profit Rate 0.15 0.20 0.25 0.30

The trend of gross profit for the past three years increases by 5% each year;thus, if the trend continues, the gross profit for 2016 will be 30%. The cost ratiothen would be 70% (100% - 30%). Therefore, the cost of goods sold iscomputed as follows:

Sales 6,000,000Multiply by: Cost Ratio 0.70Cost of goods sold 4,200,000 (B)


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Question No. 2Finished Goods

Beginning balance 2,800,000 2,000,000 Balance endCost of goodsmanufactured 3,400,000

4,200,000 Cost of goods sold

Total 6,200,000 6,200,000

Work in Process

Beginning balance 2,000,000 2,600,000 Balance end (A)Direct materials used 1,600,000 Cost of goodsDirect labor 1,600,000 3,400,000 manufacturedFactory overhead 800,000

Total 6,000,000 6,000,000

Computation of factory overhead:Direct labor cost 1,600,000Multiply by: Predetermined rate 50%Factory overhead 800,000

CASE NO. 2:Question No. 3

GP Rate: 2013 2014 2015 2016Gross Profit 340,000 630,000 1,000,000Divide by: Sales 2,000,000 3,500,000 4,000,000Gross Profit Rate 0.17 0.18 0.25 0.20

The GP rate in 2016 is computed as follows:

Gross Profit Rate =16% + 18% + 25%

3= 20%

The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goodssold is computed as follows:

Sales 6,000,000Multiply by: Cost Ratio 0.80Cost of goods sold 4,800,000 (B)




Total 6,800,000 6,800,000


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Work in Process


Total 6,000,000 6,000,000

CASE NO. 3:Question No. 5The gross profit for 2016 is computed based on the overall gross profit for 2014and 2015:

Gross Profit Rate =800,000 + 1,000,000

3,500,000 + 4,000,000

=1,800,0007,500,000

Gross Profit Rate = 24%

The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goodssold is computed as follows:

Sales 6,000,000Multiply by: Cost Ratio 0.76Cost of goods sold 4,560,000 (A)




Total 6,560,000 6,560,000

Work in Process


Total 6,000,000 6,000,000

SUMMARY OF ANSWERS:1. B 2. A 3. B 4. A 5. A 6. A


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PROBLEM 12-38

Question No. 1Accounts payable

Balance end 250,000 555,000 Beg. BalancePurchase ret. and allow. 70,000 3,000,000 PurchasesPurchase discounts 80,000 100,000 Freight-inPayments to supplier(squeeze)

3,255,000

Total 3,655,000 3,655,000

Question No. 2Direct materials inventory

Beg. Balance 200,000 320,000 Balance endNet purchases 2,950,000 2,830,000 Direct materials used

Total 3,150,000 3,150,000

Purchases 3,000,000Add: Freight-in 100,000Gross Purchases 3,100,000Less: Purchase returns and allow 70,000

Purchase discounts 80,000Net Purchases 2,950,000

Question No. 3Work in process

Beg. Balance 250,000 280,000 Balance endDirect materials used 2,950,000 4,375,000 Cost of goodsDirect labor 900,000 manufacturedFactory overhead 675,000

Total 4,655,000 4,655,000

Question No. 4Sales P5,100,000 120%Less: Cost of sales (5,000,000/120%) 4,250,000 100%Gross profit 850,000 20%

Note: Do not deduct sales discount from the gross sales since sales discountdoes not constitute actual return of merchandise.

Question No. 5Finished goods

Beg. Balance 400,000 525,000 Balance endCost of goods 4,375,000 4,250,000 Cost of goods sold


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manufactured

Total 4,775,000 4,775,000

Estimated finished goods 525,000Less: Cost of goods out on consignment 20,000

Salvage value 10,000Inventory fire loss 495,000

Question No. 6Cost of goods sold (80% x P5,100,000) = P4,080,000

Question No. 7Sales (5,100,000-100,000) P5,000,000 100%Less: Cost of sales (80% x P5,100,000) 4,080,000 80%Gross profit 1,000,000 20%

Finished goods

Beg. Balance 400,000 695,000 Balance endCost of goods 4,375,000 4,080,000 Cost of goods soldmanufactured

Total 4,775,000 4,775,000

Estimated finished goods 695,000Less: Cost of goods out on consignment 20,000

Salvage value 10,000Inventory fire loss 665,000

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. B 5. B 6. A 7. A

PROBLEM 12-39

Question No. 1Accounts payable, March 31 2,370,000Less: Payment in April 300,000Total 2,070,000Accounts payable for April PurchasesTotal purchases 600,000Less: Payment in April 200,000 400,000Total (B) 2,470,000

Question No. 2Purchases, as of March 31 4,200,000Add: Purchases in April 600,000


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Gross purchases 4,800,000Less: Purchase returns 12,000Net purchases (B) 4,788,000

Question No. 3Accounts receivable

Beg. Balance 2,700,000 3,000,000 Bal. end

Sales on account 1,488,000 938,000Collections includingrecoveries

Recoveries 0 250,000 Writeoff0 Sales returns

4,188,000 4,188,000

Net SalesSales as of March 31 9,040,000April Sales 1,488,000Less: Sales return 100,000 1,388,000Net Sales (C) 10,428,000

Question No. 4Net Sales 10,428,000Multiply by: Cost ratio 60%Cost of Sales (C) 6,256,800

Cost of Sales 9,000,000 10,500,000Divide by: Gross Profit 9,000,000 4,500,000

50.000% 30.000%

Average gross profit = (50%+30%)/2 = 40%Cost ratio = 100% - 40% = 60%

Question No. 5Estimated inventory 3,031,200Less: Shipment in transit 40,000

Undamaged goods at cost 120,000Salvage value 25,000

Inventory fire loss (C) 2,846,200

SUMMARY OF ANSWERS:1. B 2. B 3. C 4. C 5. C


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PROBLEM 12-40

Questions No. 1 and 2Purchases ending11 mos 12 mos

Unadjusted balance 1,350,000 1,600,000Shipment in Nov. included in December purchases 15,000 -Unsalable shipments received (2,000) (3,000)Deposits in October shipped February (4,000) (4,000)Deposits made vendor in November (11,000) -Adjusted balance 1,348,000 1,593,000

1. (D) 2. (D)

Question No. 3Beginning inventory – January 1, 2015 175,000Add: Purchases for 11 months (see No. 1) 1,348,000Less: Ending inventory – Nov. 30, 2015 (180,000-11,000 + 10,000)

179,000

Cost of sales 1,344,000 (A)

Cost ratio (2,688,000 / 3,360,000) = 80%

Question No. 4Sales ending December 31, 2015 1,920,000Less: Sales ending Nov. 30, 2015 (1.7M-20,000) 1,680,000Sales – December 2015 240,000Less: Sales at cost 20,000Sales in December 2015 made at a profit 220,000Multiply: Cost ratio (2,688,000 / 3,360,000) 80%Cost of sales made at profit 176,000Add: Cost of sales made at cost 20,000Total Cost of Sales -December 196,000 (A)

Question No. 5Beginning inventory – Nov. 30, 2015 179,000Add: Purchases for December (1,593,000 – 1,348,000) 245,000Less: Cost of Sales – December 196,000Ending inventory – December 31, 2015 228,000 (A)

SUMMARY OF ANSWERS:1. D 2. D 3. A 4. A 5. A


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PROBLEM 12-41

Cost RetailInventory, Jan 1 300,000 1,200,000Purchases 6,000,000 8,500,000Purchase returns (400,000) (800,000)Purchase discounts (150,000) -Purchase allowance (50,000) -Freight-in 20,000 -Departmental Transfer-In 600,000 1,100,000Departmental Transfer-Out (560,000) (1,334,000)Totals 5,760,000 8,666,000

Basis of computation of cost ratiosTotals 5,760,000 8,666,000Markups 600,000Markup cancellations (50,000)Basis of computation (conservative) 5,760,000 9,216,000Markdown (316,000)Markdown cancellations 100,000Basis of computation (average) 5,760,000 9,000,000

Cost ratios:Conservative

Cost ratio =5,760,0009,216,000

Cost ratio = 62,50%

Average

Cost ratio =5,760,0009,000,000

Cost ratio = 64%

FIFO

Cost ratio =5,760,000 – 300,000

9,000,000 – 1,200,000Cost ratio = 70%

Estimated ending inventory @ retail – for all methodsTGAS @ retail under average method 9,000,000Sales (7,000,000)Sale returns 700,000Normal Shrinkage (500,000)Estimated ending inventory @ retail 2,200,000


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Question Nos. 1 to 6

Cost methodEnding inventory at cost(EI @ retail x cost ratio)

Cost of goods sold(TGAS @cost – EI @cost)

Conservative (62.5%) P 1,375,000 4,385,000FIFO (70%) 1,540,000 4,220,000Average (64%) 1,408,000 4,352,000

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. C 5. C 6. D

PROBLEM 12-42

Question No. 1Subsidiary General

Ledger LedgerUnadjusted bal. P 760,000 P 1,020,000Undelivered sales ( 100,000)Valid Sales 60,000Sales FOB destination ( 100,000)NSF check 50,000 50,000Collection by the bank ( 60,000) ( 60,000)Sales in 2015 recorded in 2016 DR No. 38740 3,360 3,360Receivable ins. Co DR No. 38741 ( 10,080) ( 10,080)Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200) ( 19,200)Adjusted balance (D) P 784,080 P 784,080

Question No. 2Current:Unadjusted beginning Balance 97,500Add: Valid Sales in 2015 (60,000 + 3,360) 63,360Total 160,860Less: Receivable ins. Co (DR # 38741) 10,080

Sales in 2016 recorded in 2015 (DR # 38743) 19,200Current Accounts Receivable balance 131,580

Past Due:Adjusted Accounts Receivable balance (see no. 1) 784,080Less: Current Accounts Receivable balance 131,580Past due Accounts Receivable *652,500

*or (662,500+50,000-60,000)

Age classification Amount Percentage Total

Current 131,580 6 7,894.80Past due 652,500 10 65,250.00

Allowance for doubtful accounts (A) 73,144.80


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Question No. 3Allowance for doubtful accounts, beginning 7,000.00Less: Accounts written off -Less: Allowance for doubtful accounts, ending 73,144.80Doubtful accounts expense (A) 66,144.80

Question No. 4Unadjusted Merchandise Inventory, ending 316,000Add: Cost of merchandise sold of DR # 38743(19,200/120%) 16,000Doubtful accounts expense (B) 332,000

Question No. 5Unadjusted Net Sales balance P 3,000,000Undelivered sales ( 100,000)Sales FOB destination ( 100,000)Sales in 2015 recorded in 2016 DR No. 38740 3,360Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200)Adjusted balance (B) P 2,784,160

SUMMARY OF ANSWERS:1. D 2. A 3. A 4. B 5. B

PROBLEM 12-43

Cash AR, netMdse.invty

Pre-payments

Accountspayable

Notespayable

Unadj.Bal. 150,000 228,000 380,000 42,000 220,000 250,0001 - - 60,000 - 60,000 -2 - - 4,000 - 4,000 -3 - 28,000 - - - -4 - (68,000) 34,000 - - -5 (40,000) 40,000 - - - -6 50,000 (50,000) - - - -7 65,000 - - - 65,000 -8 - - - (8,500) - -9 - (26,000) 20,000 - - -10 - (40,000) - - - -

Adj.Bal. 225,000 112,000 498,000 33,500 349,000 250,000

1. D 2. A 3. D 4. D


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Question No. 5Cash 225,000Accounts receivable, net 112,000Merchandise inventory 498,000Prepayments 33,500Total current assets 868,500Accounts payable 349,000Notes payable 250,000Working capital (E) 269,500

SUMMARY OF ANSWERS:1. D 2. A 3. D 4. D 5. E

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

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CHAPTER 14: INTRODUCTION TO FINANCIAL ASSETAND INVESTMENT IN EQUITY SECURITIES

PROBLEM 14-1 Financial Assets and Financial LiabilitiesFA NFA FL NFL

Share dividends payableProperty dividends payable - - - -Cash and cash equivalents - - - 18,500Accounts receivable 70,000 - - -Allowance for bad debts 100,000 - - -Investment in associate (10,000) - - -Stock appreciation rightspayable (SARs Payable) 45,000 - - -Investment in equityinstruments - - 120,000 -Investment in subsidiary 125,000 - - -Investment in bonds 70,000 - - -Cash surrender value 170,000 - - -Sinking fund 60,000 - - -Share Premium 40,000 - - -Unearned interest onreceivables - - - -Income taxes payable - - - 5,000SSS contributions payable - - - 9,000Intangible assets - - - 5,000Prepaid rent - 30,000 - -Treasury shares - 20,000 - -Claims for tax refund - - - -Deferred tax assets - 45,000 - -Accounts payable - 60,000 - -Utilities payable - - 150,000 -Accrued interest expense - - 250,000 -Cash dividends payable - - 18,000 -Finance lease liability - - 27,000 -Bonds payable - - 45,000 -Discount on bonds payable - - 120,000 -Security deposit - - (15,000) -Advances from customers - - 30,000 -Unearned rent income - - - 16,000Merchandise inventories - - - 8,000Biological assets - 133,000 - -Accumulated depreciation - 120,000 - -Warranty obligations - (50,000) - -PHILHEALTH contributionspayable - - - 13,000


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Deferred tax liabilities - - - 6,000Accumulated Profits-appropriated for plantexpansion - - - 19,000Accumulated Profits-unappropriated - - - -Issued redeemable preferenceshares (with mandatoryredemption) - - - -Issued Preference shares capital - - 100,000 -

- - -

670,000 358,000 845,000 99,500

Legend: FA – Financial Asset NFA – Non-Financial AssetFL – Financial Liabilities NFL – Non-Financial LiabilitiesSHE: Shareholders equity

SUMMARY OF ANSWERS:1. D 2. C 3. D 4. D

PROBLEM 14-2 Acquisition of Investment

Journal entries are:1) FVTPL

2) FVTOCI

The difference between FVTPL and FVTOCI is the treatment of transaction cost.

1/5/2016 Financial Asset at FVTPL 1,600,000Brokerage fee 10,000Commission Expense 5,000

Cash 1,615,000

1/10/2016 Dividend receivable 32,000Dividend income 32,000

2/14/2016 Cash 32,000Dividend receivable 32,000

1/5/2016 Financial Asset at FVTOCI 1,615,000Cash 1,615,000

1/10/2016 Dividend receivable 32,000Dividend income 32,000



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PROBLEM 14-3 Basic Journal Entries- Acquisitions in Between Dates ofDeclaration and Record

1) Trading securities

2) Fair Value through Other Comprehensive Income securities

PROBLEM 14-4 Derecognition of Financial Assets - Sale of Investment

CASE NO. 1: FVTPLQuestion No. 1Nil, since the above securities are FVTPL unrealized gain or loss is recognized inthe profit or loss. (A)

Question No. 2Consideration received 375,000Less: Brokerage and commission 10,000Net Selling Price 365,000Less: Carrying value (800,000 x ½) 400,000Realized loss on sale – P&L (B) (35,000)

1/5/2016 Financial Asset at FVTPL (Squeeze) 1,584,000Dividends receivable 16,000Brokerage expense 10,000Commission Expense 5,000

Cash 1,615,000


12/31/2016 Unrealized Loss – PL 64,000Financial Asset at FVTPL 64,000

12/31/2017 Financial Asset at FVTPL 400,000Unrealized gain – PL 400,000

1/5/2016 FVTOCI securities 1,599,000Dividend receivable 16,000

Cash 1,615,000


12/31/2016 Unrealized loss - equity 79,000FVTOCI securities 79,000

12/31/2017 FVTOCI securities 400,000Unrealized loss – equity 79,000Unrealized gain – equity 321,000


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CASE NO. 2: FVTOCIQuestion No. 3Fair value, 12/31/2015 800,000Less: Cost 750,000Unrealized gain - P&L (B) 50,000

Question No. 4Consideration received 375,000Less: Brokerage and commission 10,000Net Selling Price 365,000Less: Carrying value (800,000 x ½) 400,000Realized loss on sale – P&L (B) (35,000)

Question No. 5Journal entries for the sale are:1) FVTPL12/31/2015 FVTPL 50,000

Unrealized gain-P&L 50,000

1/2/2016 Cash 365,000Loss on sale 35,000

FVPTL 400,000To record the sale

2) FVTOCI12/31/2015 FVTOCI 50,000

Unrealized gain-OCI 50,000

1/2/2016 Cash 365,000Loss on sale (if any) 35,000

FVTOCI 400,000To record the sale

Unrealized Gain (50,000 X ½) 25,000Retained earnings 25,000

To record transfer of unrealized gain to Retained earnings

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. B

PROBLEM 14-5 Purchase: Trade Date vs. Settlement Date Accounting

SUMMARY OF ANSWERS:1. B 2. D


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PROBLEM 14-6 Sale: Trade Date vs. Settlement Date Accounting


PROBLEM 14-7 Share Dividends

1. Memo entry: Received 1,500 ordinary sharesfrom Pulsate Company.

2. Investment in Preference shares - FVTOCI 88,235Investment in Ordinary shares - FVTOCI 88,235

Allocation: TotalFair value

Fraction Allocatedcost

Pref. shares (1,000 x P100) 100,000 10/85 88,235Ordinary shares (15,000 x P50) 750,000 75/85 661,765Total 850,000 750,000

Share dividends is not regarded as an income., however different type ofshares received from the shares held is allocated using the relative fairvalue.

Comments on share dividends:Accounting treatment for share dividends is actually a gray area, no clearcut rules is provided under PFRS or other accounting standard settingbody. However, the authors believe that share dividends will only beaccounted as an increase in number of shares held and a decrease on theprice per unit.

PROBLEM 14-8 Cash Dividends

Question No. 1The dividend income to be recognized in 2016 is P60,000 (15,000 x P4). (B)

Question No. 2December 1 Dividend Receivable (15,000 x P4) 60,000

Dividend income 60,000

December 15 No formal accounting entry

December 31 Cash 60,000Dividend Receivable 60,000


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PROBLEM 14-9 Property Dividends

Question No. 1Property dividends are as income at fair value at date of declaration (500,000 x15%) = P75,000. (B)

Question No. 2November 1 Dividend Receivable (500,000 x 15%) 75,000


December 31 No journal entry

February 15 Noncash Asset 75,000Dividend Receivable 75,000

PROBLEM 14-10 Cash Received in Lieu of Share dividends

Question No. 1Nil. The share dividend is not considered an income. (A)

Question No. 2Net Selling Price (2,250 x P18) 40,500Less: Carrying amount of the investment sold(P172,500/(15,000+(15% x 15,000) x 2,250 22,500Gain (or loss) on sale (D) 18,000

Question No. 3October 1 Memo entry

October 31 Cash 45,000Gain on sale 18,000FA at FVTOCI 22,500

PROBLEM 14-11 Shares Received in Lieu of Cash Dividends

Question No. 1Shares received in lieu of cash dividends are in effect recorded at the fair valueof shares received on date of payment. Since the date of declaration and date ofpayment is within the same period, the dividend income is computed as follows:

(15,000/5 X P22) = P66,000 (C)

Question No. 2Journal entries are:October 1 Dividend Receivable (15,000 x P4) 60,000


October 31 FA at FVTOCI (15,000/5 x P22) 66,000Dividend receivable 60,000Dividend income 6,000


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PROBLEM 14-12 Dividends Out Of Capital

Questions No. 1 and 2Cash (P100 x 15% x 10,000) 150,000

Investment 150,000

Questions No. 3 and 4Cash 150,000Loss on liquidation 70,000

Investment 220,000

SUMMARY OF ANSWERS:1. A 2. D 3. B 4. C

PROBLEM 14-13 Stock Split and Special Assessment

Question No. 1Date No. of

sharesCost per

shareTotalCost

1/1 10,000 P21 P210,0003/1 stock split 15,000Total (10,000 x 5/2) 25,000 P8.40 P210,00011/1 Special assessment (P1.60 x25,000) 40,000Total 25,000 P10 250,000

(D)

Question No. 2Fair value (P15 x 25,000) P375,000Less: Carrying value 250,000Unrealized gain-OCI P125,000 (D)

Questions No. 3 and 4Journal entries are:1/1 Financial Asset at FVTOCI 210,000 (B)

Cash 210,000

3/1 Received `5,000 shares as a result of 5for 2 share split.

10/1 Financial Asset at FVTOCI 60,000Cash (P1.60 x 25,000) 60,000

12/31 Financial Asset at FVTOCI 125,000Unrealized gain – OCI

[(P25 x 25,000) – P250,000](C) 125,000


124

SUMMARY OF ANSWERS:1. D 2. D 3. B 4. C

PROBLEM 14-14 Stock Right

Question No. 1Nil. The company will only make a memo entry to record the receipt of stockright on a financial asset at FVTPL. (A)

Question No. 2The stock right should be initially recorded at fair values as follows:

(P20 x 10,000) = P200,000. (B)

Question No. 3The cost of the investment will only include the subscription price of P400,000(5,000 x P80). (B)

Question No. 4The cost of the investment will include the subscription price of P400,000 andcost of stock rights exercised of P200,000 = P600,000. (C)

The journal entries under the two classifications are as follows:Fair Value through profit and loss securitiesJune 15 Memo entry (Received 10,000 stock

rights)

July 15 FVTPL (P80 x 10,000/2) 400,000Cash 400,000

Fair Value Through Other Comprehensive IncomeJune 15 Stock rights (P20 x 10,000) 200,000

Unrealized gain - P/L 200,000

July 15 FVTOCI (P80 x 10,000/2)+ 200,000 600,000Cash 400,000Stock rights 200,000

PROBLEM 14-15 Theoretical Value of Rights

Question No. 1When the stock is selling right-on

Value of one right =P160 – P100

5+1= P10

Question No. 2When the stock is selling ex-right

Value of one right =P160 – P100

5


125

= P12


PROBLEM 14-16 Dividend IncomeCash dividend 1,500,000Shares in lieu of cash dividends (5,000 x P150) 750,000Total dividend income (C) 2,250,000

PROBLEM 14-17 Dividend Income

The dividend income to be recorded is equal to P2,400,000 (300,000 /1,000,000 x P8,000,000). The base is on actual dividends declared. A sharedividend is not regarded as an income. (A)

PROBLEM 14-18 Exchange of One Financial Asset into Another FinancialAsset

Question No. 1Fair value- Ordinary Shares (6,000 x P80) 480,000Less: Carrying value- Pref. Shares (P850,000/8,000 x 4,000) 425,000Gain on exchange (C) 55,000

Question No. 2Journal entry would be:Investment in Trading- Ordinary Shares (6,000 x P80) 480,000

Gain on exchange 55,000Investment in Trading- Pref. Shares (P800,000/8,000 x 4,000) 425,000


PROBLEM 14-19 Exchange of a PPE for Financial Asset

Question No. 1Fair value of the financial asset 820,000Less: Carrying value of the land 600,000Gain on exchange 220,000 (B)


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Question No. 2Journal entries are:March 31 Financial asset at FVTOCI 820,000

Land 600,000Gain on exchange (820,000-600,000) 220,000

SUMMARY OF ANSWERS:1. B 2. B

PROBLEM 14-20 Exchange of a Financial Asset for PPE

Question No. 1Fair value of the financial asset 650,000Less: Carrying value of the financial asset 600,000Gain on exchange 50,000 (B)

Question No. 2Journal entries are:March 31 Land (at fair value of the asset given up) 650,000

FVTOCI 600,000Gain on exchange (650,000-600,000) 50,000

Retained earnings 25,000Unrealized loss (625,000-600,000) 25,000


PROBLEM 14-21 Reclassifications of Investments in Equity Securities

Question No. 1Not allowed. The only allowed reclassification is from Financial Asset atAmortized Cost (FAAC) to held for trading Financial Asset at Fair Value ThroughProfit or Loss debt securities (FVTPL), or vice versa. Therefore the securitiesremain as FVTPL. Since reclassification is not allowed, there is noreclassification gain or loss. (A)

Question No. 2Not allowed (see discussion on no. 1). Therefore the securities remain asFVTOCI. Since reclassification is not allowed, there is no reclassification gain orloss. (A)


127

PROBLEM 14-22 Trading Securities

Question No. 1(A) The cost of investment is P880,000. The brokerage fee and commission ofP10,000 and P10,000 respectively is charged to expense since the investmentacquired is a trading security. The investments are also acquired prior to thedeclaration of dividends on January 10, 2016 so they are not purchaseddividend on.

Question No. 2Dividend income (P2 x 6,000 + P16,000) = P28,000 (A)

Question No. 3Selling price P50,000Less: Commission and taxes 5,000Net selling price 45,000Less: Carrying value [2,500x(P90,000/6,000)] 37,500Gain on sale (C) P7,500

Question No. 4EDA Corp. shares [P50 – (P30,000/1,000)] x 1,000 = P20,000DJOA, Inc. [P15 – (P90,000/6,000)] x 3,500 = -RVFE, Co. [P45 – (P80,000/2,000)] x 2,000 = 10,000ARP, Co. [P100 – (P880,000/8,000)] x 8,000 = ( 80,000)Loss chargeable to income statement (B) (P50,000)

Question No. 5EDA Corporation shares P50 x 1,000 = P50,000DJOA, Inc. P15 x 3,500 = 52,500RVFE, Co. P45 x 2,000 = 90,000ARP, Co. P100 x 8,000 = 800,000Total balance of financial asset at profit or loss (A) P992,500

(Note: Reclassification of equity securities are not allowed.)

SUMMARY OF ANSWERS:1. A 2. A 3. C 4. B 5. A

PROBLEM 14-23 Fair Value through Other Comprehensive Income

Question No. 11/1/2016 Book Value P 880,000Brokerage fee 10,000Commission 10,000Dividends receivable ( 16,000)Cost of FVTOCI P 884,000 (C)


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Question No. 2Dividend income (P2 x 6,000) = P12,000 (D)

Question No. 3Proceeds (P35 x 500) P 17,500Carrying value (P500 x (P88,000/(2,000 x 110%)) ( 20,000)Loss on sale P (2,500)

Net Proceeds (P40,000 – P5,000) P 35,000Carrying value (2,500 x (P90,000/6,000)) ( 37,500)Dividends on stocks sold (P2 x 2,500) ( 5,000)*Loss on sale P (7,500)

Total loss on sale (P2,500 + P7,500) P (10,000) (D)

*This was sold dividend-on.

Question No. 4March 31 (65,000-50,000) 15,000June 15 (50,000-20,000) 30,000Gain/(Loss) on Exchange (A) 45,000

Question No. 5EDA Corporation preference shares (500 x P50) P 25,000DJOA, Inc. (3,500 x P15) 52,500RVFE Co. ((2,000 x 110% - 500) x P45) 76,500ARP Co. (8,000 x P100) 800,000LCC (1,000 x 60) 60,000Adjusted balance P 1,014,000 (D)

SUMMARY OF ANSWERS:1. C 2. D 3. D 4. A 5. D

PROBLEM 14-24

Question No. 1Stock rights (11,000 x P6) P 66,000 (D)

Question No. 2Cash paid (P90 x (10,000/5)) P 180,000Cost of stock rights used (P4 x 10,000) 40,000Total investment cost P 220,000 (B)

Question No. 3Proceeds (P5.5 x 1,000) P 5,500Cost of stock rights (P4 x 1,000) 4,000Gain on sale of stock rights P 1,500 (C)


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Question No. 4Proceeds P 440,000Cost of shares sold (P76 ** x 4,000) 304,000Gain on sale of stocks P 136,000 (D)

Question No. 5Original investment cost P 880,000Cost allocated to stock rights* ( 44,000)Additional investment ** 220,000Sale of investment ( 304,000)Adjusted cost of investment P 752,000 (D)

SUMMARY OF ANSWERS:1. D 2. B 3. C 4. D 5. D

PROBLEM 14-25

Question No. 1Cash paid (400K+20K) 420,000Less: dividends 10,000Correct cost 410,000 (D)

Question No. 2Feb. 10 30,000Nov. 2(10,000+(11,000/5) x 1 13,200Total dividend income 43,200 (C)

Question No. 3Fair value of new FA (10,000 x 40) 400,000Less: Carrying value (975,000/15K x5K) 325,000Gain on conversion 75,000 (C)

Question No. 4Consideration received (2,000 x 70) 140,000Less: Dividends (2,000 x P1) 2,000Net Selling Price 138,000Less: Carrying value 99,000Gain on sale 39,000 (C)

SharesCarrying

value10000 451,000

10-Feb 1,000 -


130

Total 11,000 451,0001-May(11,000/5) 2,200 202,400Total 13,200 653,40015-Nov (2,000) (99,000)Total 11,200 554,400

Cost of stocks on May 1Subs. Price (11,000/5 x P62) 136,400Add cost of stock rights (6 x 11,000) 66,000Cost of stocks on May 1 202,400

Shares Cost10000 550,000

10-Feb 1,000 -Total 11,000 550,0001-May(11,000/5) 2,200 202,400Total 13,200 752,40015-Nov (2,000) (114,000)Total 11,200 638,400

Question No. 5Fair values Cost Difference

Gerrit-PS (70 x 10,000) 700,000 600,000 (900,000/15K x 10K)-OS (45 x 10,000) 450,000 400,000

Loesch (72 x 11,200) 806,400 638,400Barr (20 x 20,000) 400,000 410,000

2,356,400 2,048,400 308,000 (A)

Note: Use bid price on asset held, asked price for asset to be purchased.

SUMMARY OF ANSWERS:1. D 2. C 3. A 4. B 5. A

PROBLEM 14-26Question No. 1FVTOCI Portfolio – 12/31/2015

Coloma Company 3,070,000Soliman 2,737,500Villanueva Company 1,871,000 7,678,500

Less: FVTOCI Portfolio – 01/01/2015Coloma Company 3,050,000Soliman 2,725,000Villanueva Company 1,875,000 7,650,000


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Unrealized gain – SFP (C) 28,500

Question No. 2Fair value of shares 2,797,500Less: Carrying amount of Soliman portfolio 2,737,500Gain on exchange 60,000 (B)

Note that the carrying amount is equal to the fair value previousremeasurement date (12/31/2015).

Question No. 3Proceeds from sale of Aquino shares 2,590,000Less: Carrying amount of Aquino portfolio 2,600,000Loss on sale (10,000) (B)

Question No. 4FVTOCI Portfolio – 12/31/2016

Coloma Company 3,080,000Villanueva Company 1,867,500 4,947,500

Less: FVTOCI Portfolio – 01/01/2015Coloma Company 3,050,000Villanueva Company 1,875,000 4,925,000

Unrealized gain – SFP (cumulative) (C) 22,500

SUMMARY OF ANSWERS:1. C 2. B 3. B 4. C

PROBLEM 14-27

Question No. 1Adjusted balance (5,000 – 4,000) x P50 = P200,000 (A)

Question No. 2Type ofstocks # shares

Fairvalue

Total fairvalue

Allocatedcost

Ordinary 10,000 P30 P300,000 P234,375Preference 2,000 10 20,000 15,625 (B)Total cost P320,000 P250,000

Question No. 3Allocate part of the investment cost to the preference shares.

Question No. 4Proceeds (1,000 x P17) P 17,000Carrying amount [(P15,625/(10,000/5)) x 1,000)( 7,812.50)Gain on sale P 9,187.50 (C)


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Question No. 5Proceeds, exclusive of interest P 280,000Carrying amount (250 x 1,000 x 110%) ( 275,000)Gain on sale P 5,000 (A)

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. C 5. A

PROBLEM 14-28

Question No. 1Net Selling price 250,000Less: Carrying value (740,000/40,000 x 5,000) 92,500Gain on sale (D) 157,500

Question No. 2Consideration received 270,000Less:Dividend income of the investment sold (6,000 x *P20 x 20%) 24,000Net Selling price 248,000Less: Carrying value (740,000/40,000 x 6,000) 111,000Gain on sale (D) 137,000

*The par value after 2 for 1 share split is equal to P40 x ½= P20

Question No. 36/1/2016 (35,000 x 4) 140,00012/1/2016 (35,000 x 20% x P20) 140,000Total dividend income (A) 280,000

Question Nos. 4 and 5Fair value (29,000 x P43) 1,247,000 4. (D)Less: Cost (700,000/40,000 x 29,000) 507,500Unrealized gain 739,500 5. (D)

SUMMARY OF ANSWERS:1. D 2. D 3. A 4. D 5. D

Chapter 15: Investment in Debt Securities

133

CHAPTER 15: INVESTMENT IN DEBT SECURITIES

PROBLEM 15-1 (Initial and Subsequent measurement, Derecognition andReclassification of Trading Debt Securities)

Question No. 1Face value 5,000,000Multiply by: Nominal rate 12%Multiply by: Months outstanding 12/12Interest Income (C) 600,000

Question No. 2Fair value of the bonds (5M X 104) 5,200,000Less: Carrying value 5,379,079Unrealized gain (or loss)-P&L (B) (179,079)

Question No. 3

Net Selling Price (5M x ½ x 105) 2,625,000Less: Carrying value (5M x ½ x 104) 2,600,000Gain (or loss) on sale (B) 25,000

Question No. 4Face value (5M x ½) 2,500,000Multiply by: Nominal rate 12%Multiply by: Months outstanding 12/12Interest Income (B) 300,000

Note that interest income is computed for the whole year even though thebusiness model was changed on July 1, 2016 since reclassification date will beon the first day of the next reporting period (January 1, 2017). The investmenttherefore would be continued to be reported as held for trading on December31, 2016.

Question No. 5Fair value of the bonds on thereclassification date, 1/1/17 (2.5M X 104)

2,600,000

Less: Carrying value (2.5M X 102) 2,550,000Unrealized gain (or loss)-P&L (C) 50,000

SUMMARY OF ANSWERS:1. C 2. B 3. B 4. B 5. C


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PROBLEM 15-2 (Initial and Subsequent measurement, Derecognition andReclassification of FAAC Securities)Question No. 1Face value 5,379,079Multiply by: Nominal rate 10%Multiply by: Months outstanding 12/12Interest Income (B) 537,908

The present value of the bonds is computed as follows:Present value of Principal (5,000,000 x 0.6209 ) 3,104,607Add: Present Value of interest payments (600,000 X 3.7908) 2,274,472Present value of the investment bonds 5,379,079

(Please carry all the decimal places in the computation)

Amortization table (original):

DateInterest

CollectionInterestIncome

PremiumAmortization

Presentvalue

01/01/2015 5,379,07912/31/2015 600,000 537,908 (C) 62,092 5,316,98712/31/2016 600,000 531,699 68,301 5,248,68512/31/2017 600,000 524,869 75,131 5,173,55412/31/2018 600,000 517,355 82,645 5,090,90912/31/2019 600,000 509,091 90,909 5,000,000

Question No. 2Nil. No unrealized gain or loss is recognized if the financial asset is classified asfinancial asset at amortized cost. (A)

Question No. 3Net Selling Price (5M x ½ x 105) 2,625,000Less: Carrying value (see amortizationtable) (5,316,987 x ½)

2,658,494

Gain (or loss) on sale (C) (33,494)

Question No. 4Carrying value, 12/31/16 (5,316,987 x ½) 2,658,494Multiply by: Nominal rate 10%Multiply by: Months outstanding 12/12Interest Income (A) 265,849

Note that interest income is computed for the whole year even though thebusiness model was changed on July 1, 2016 since reclassification date will beon the first day of the next reporting period (January 1, 2017). The investmenttherefore would be continued to be reported as Financial Assets at AmortizedCost on December 31, 2016.


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Question No. 5Fair value of the bonds on thereclassification date, 1/1/17 (2.5M X 104)

2,600,000

Less: Carrying value (2,658,494 X 1.10-300,000)

2,624,343

Unrealized gain (or loss)-P&L (B) (24,343)

SUMMARY OF ANSWERS:1. B 2. A 3. C 4. A 5. B

PROBLEM 15-3 Acquisition of FAAC Term Bonds on Interest Date

Question No. 1Present value of Principal (1200000 x 0.6355 ) 762,600Add: Present Value of interest payments (120000 x 3.0373 ) 364,476Present value of the investment bonds (C) 1,127,076

Question No. 2Amortization table:

DateInterest


PremiumAmortization

Presentvalue

01/01/2015 1,127,07612/31/2015 120,000 (B) 135,249 15,249 1,142,325

PROBLEM 15-4 Acquisition of FAAC Term Bonds in Between Interest Dates

Question No. 1Present value of the investment bonds 1,878,460Add: Discount amortization

Effective interest 56,354Nominal interest 50,000 6,354

Present value of the investment bonds, April 1 1,884,814Add Accrued interest 50,000Total Present value of the bonds (D) 1,934,814

Question No. 2Amortization table:

DateInterest



Presentvalue

01/01/2015 1,878,46012/31/2015 200,000 225,415 25,415 1,903,875

Total interest income (P225,425 x 9/12) = P169,061 (B)


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PROBLEM 15-5 Interpolation of Effective Interest Rate of FAAC - TermBonds and Computation of Interest Income

Purchase price P1,100,000Add: Transaction cost 44,752Initial carrying amount P1,144,752

Since there is transaction cost incurred, effective rate must be computed. Theeffective rate therefore is computed at 11.5% (refer to page 530 and 531 of thetextbook for example of interpolation).

Interest income (11.5% x P1,144,752) = 131,646 (B)

PROBLEM 15-6 Acquisition of FAAC - Serial Bonds

Question No. 1

PrincipalInterest

CollectionTotal

CollectionPresent

Value FactorTotal Present

Value450,000 180,000 630,000 0.8929 562,527450,000 135,000 585,000 0.7972 466,362450,000 90,000 540,000 0.7118 384,372450,000 45,000 495,000 0.6355 314,573

Total Present Value of the serial bonds (C) 1,727,834

Question No. 2Interest income (1,727,834 x 12%) = 207,340 (B)

PROBLEM 15-7 Impairment of Financial Asset at Amortized CostSOLUTION:

Question No. 1Carrying amount of the investment – 12/31/2015 3,864,680Less: Present value of expected cash flows (get the present valuecomputed using original effective rate) 3,188,800Impairment loss (B) 675,880

Question No. 2Interest income (3,188,800 x 12%) = 382,560 (D)

PROBLEM 15-8 Reversal of Impairment on Financial Asset at AmortizedCost

Present Value of Principal (5,000,000 x 0.8929) 4,464,500Add: Present Value of interest payments (500,000 x 2 x 0.8929) 892,900Present value of the investment bonds 5,357,400


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Present value expected cash flows, date of reversal 5,357,400Would have been present value had there been no impairment 4,910,521

Lower of the two above 4,910,521Less: Actual amortized cost (P3,986,000 x 1.12) 4,464,320Gain on reversal of impairment (D) 446,201

COMPREHENSIVE PROBLEMSPROBLEM 15-9

Question No. 1Cost of investment – Jan. 21(P2,000,000 x 102%) = P2,040,000 (A)

Question No. 2Proceeds P1,060,000Less: Accrued interest (P1,000,000 x 9% x 3/12) 22,500Net Proceeds 1,037,500Less: Carrying amount (P2,000,000 x 102%) 1,020,000Gain on sale (A) P 17,500

Question No. 3Proceeds P 419,000Less: Accrued interest (P400,000 x 9% x 5/12) 15,000Net proceeds 404,000Carrying amount (P400,000 x 102%) 408,000Loss on sale (A) ( 4,000)

Question No. 4Sold bonds:

P1,000,000 x 9% x 38/360 P 9,500P400,000 x 9% x 280/360 28,000

Outstanding bonds:P600,000 x 9% x 340/360 51,000

Total interest income (A) P 88,500

Question No. 5Carrying value – 12/31/2016 (P600,000 x 102%) = P612,000 (A)The market value is equal to its cost.

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. A 5. A

PROBLEM 15-10 Impairment and Reversal of Impairment LossNote to the Professor: The present value of the future cash flows based on existing current rate of

11% is ₱3,655,957 not ₱3,055,957.


138

The present value of expected cash flows for the remaining period using10% is ₱5,619,835 not ₱5,19,835.

Question No. 1Present value of Principal (5,000,000 x 0.6209 ) 3,104,607Add: Present Value of interest payments (600,000 X 3.7908) 2,274,472Present value of the investment bonds (D) 5,379,079

(Please carry all the decimal places in the computation)

Question No. 2Amortization table (original):

DateInterest


PremiumAmortization

Presentvalue

01/01/2015 5,379,07912/31/2015 600,000 537,908 (C) 62,092 5,316,98712/31/2016 600,000 531,699 68,301 5,248,68512/31/2017 600,000 524,869 75,131 5,173,55412/31/2018 600,000 517,355 82,645 5,090,90912/31/2019 600,000 509,091 90,909 5,000,000

Question No. 3Carrying amount of the investment 12/31/2016 (see table above) 5,248,685Less: Present value of expected cash flows 3.756,574Impairment loss (B) 1,492,111

Present value of Principal (5,000,000 x 0.7513 ) 3,756,574Add: PV of interest payments (No interest will be recovered) -Present value of the investment bonds 3,756,574

Question No. 4Interest income (P3,756,574 x 10%) = 375,657 (A)

The interest income was computed using the original effective rate and theimpaired value as of 12/31/2016.

Question No. 5Present value expected cash flows, date of reversal 5,619,835Would have been present value had there been no impairment(see original amortization table)

5,173,554

Lower of the two above 5,173,554Less: Actual amortized cost (P3,756,574 x 1.10) 4,132,231Gain on reversal of impairment (D) 1,041,322

Present value of Principal (5,000,000 x 0.8264 ) 4,132,231Add: Present value of interest payments (600,000 x 3 x 0.8264) 1,487,603Present value of the investment bonds 5,619,835


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SUMMARY OF ANSWERS:1. D 2. C 3. B 4. A 5. D

PROBLEM 15-11

Question No. 1Proceeds P 204,000Less: Carrying amount [(P432,000/24,000) x 12,000) 216,000Loss on sale (B) (12,000)

Question No. 2Cost, 1/1/2015 P5,311,400Less: Amortized cost, 12/31/2015 5,242,540Premium amortization 68,860Less: Nominal interest (5,000,000 x 12%) 600,000Interest Income 531,140

Effective interest (P531,400/5,311,140) = 10%

Interest income (P5,242,540 x 10%) = P524,254 (B)

Question No. 32015 discount amortization (P1,903,150 – P1,881,000) P 22,500Nominal interest (P2,000,000 x 13%) 260,000Effective interest P 282,500Divide by: 1/1/2015 amortized cost P1,881,000Effective interest rate 15%

2016 Interest Income = 12/31/2015 amortized cost x Effective interest rate= P1,903,150 x 15% = P285,472.50 (C)

Question No. 4Fair value, 1/1/2017 (2,000,000 x 101) P2,020,000Less: Amortized cost – 01/01/2017Book value, 12/31/2015 P 1,903,150Add: Discount amortization

Nominal interest 260,000Less: Effective interest 282,473 22,473 1,928,623

Gain on reclassification (C) P 91,377

Question No. 5Trading securities:

Panaghoy, Inc. (14,400 x P22) P 316,800Lamentation, Inc. [(24,000 – 12,000) x P15] 180,000

Total P 496,800


140

FVTOCI:Genesis bonds P 5,166,794Exodus bonds 1,928,263

Total P 7,095,417

Genesis Bonds

DateInterest


PremiumAmortization

Presentvalue

01/01/2015 5,311,40012/31/2015 600,000 531,140 68,860 5,242,54012/31/2016 600,000 524,254 75,746 5,166,794

Exodus Bonds

DateInterest



Presentvalue

01/01/2015 1,881,00012/31/2015 260,000 282,150 22,150 1,903,15012/31/2016 260,000 285,473 25,473 1,928,623

PROBLEM 15-12 Reclassification from FAAC to FVTPL

Question No. 1Present value of Principal (P5,000,000 x .621) 3,105,000Add: PV of interest payments (P5,000,000 x 12% x 3.791) 2,274,600Present value of the investment bonds – 01/01/2016 5,379,600Amortization up to 7/1/2016P5,379,600 x 10% 6/12 P 268,980P5,000,000 x 12% 6/12 ( 300,000) (31,020)

Accrued interest up to 7/1/2016 (P5,000,000 x 12% 6/12 ) 300,000Purchase price – 7/1/2016 (C) 5,648,580

Question No. 2Interest income – 2016 (P5,379,600 x 10% x 6/12) = P268,980 (B)

Question No. 3Fair value date of reclassification 5,121,400Less: Carrying amount 12/31/2017 or 01/01/2017 5,249,316Loss on reclassification (B) (127,916)

Question No. 4Dividend income (cash dividend) = P40,000 (A)

Question No. 5Investment in Sta. Ana (20,000 x 110% x P40) = P880,000 (C)


141

SUMMARY OF ANSWERS:1. C 2. B 3. B 4. A 5. C

PROBLEM 15-13 Investment in Associate - Change from Equity Method toFair Value Method and Impairment of Financial Assets at Amortized Cost

Question No. 1Acquisition cost 2,140,000Share in the Net income in 2015 (1.7M x 25%) 425,000Share in the dividend (25% x 320,000) (80,000)Understatement of depreciation (160,000/4 years) (40,000)Balance end, 12/31/2015 (A) 2,445,000

Understatement of Plant and equipment 640,000x Percent of interest 25%Understatement of Net asset acquired 160,000

Question No. 2Fair value of investment, date of date of transfer (25,000 x P120) 3,000,000Less: Carrying value of investment - 12/31/2015 2,445,000Unrealized gain – P&L (C) 555,000

Question No. 3 and 4(See Amortization table below):

DateInterest



Presentvalue

01/01/2015 4,621,00612/31/2015 400,000 462,101 (B) 62,101 4,683,10712/31/2016 400,000 468,311 (C) 68,311 4,751,41812/31/2017 400,000 475,142 75,142 4,826,560

Question No. 5Present value of the principal (5M x .751) 3,755,000Add: Present value of interest payments (only principal will berecovered) -Total Present value of future cash inflows 3,755,000Less: Amortized cost - 12/31/2016(see amortization table) 4,751,418Impairment loss (C) (996,418)

SUMMARY OF ANSWERS:1. A 2. C 3. B 4. C 5. C

Chapter 16: Investment in Associate

142

CHAPTER 16: INVESTMENT IN ASSOCIATE

PROBLEM 16-1 Investment securities and equity method investmentscompared

Question No. 1Cost of Investment 30,000,000Less: Book value of net asset acquired (P120M x 20%) 24,000,000Excess of cost over book value 6,000,000Less: Overvalued depreciable asset (P6M x 20%) 1,200,000Goodwill (A) 4,800,000

Question No. 2Dividends declared and paid 5,000,000Multiply by: Percentage of ownership 20%Dividends Revenue (C) 1,000,000

Question No. 3Share in net income (P8M x 20%) 1,600,000Less: Amortization of Undervalued valued asset (see below) 200,000Adjusted net investment income (A) 1,400,000

Amortization of Undervalued assetDepreciable Asset 1,200,000Divide by: Average remaining useful life 6Amortization of Undervalued valued asset 200,000

Question No. 4Cost of Investment 30,000,000Add: Net investment income (see no. 3) 1,400,000Less: Dividends received (P1 x 1M shares) 1,000,000Carrying value – 12/31/2015 (B) 30,400,000

Question No. 5Investment using Fair Value (₱32 x 1,000,000) = ₱32,000,000 (D)

SUMMARY OF ANSWERS:1. A 2. C 3. A 4. B 5. D

PROBLEM 16-2

Question No. 1Cost of Investment 5,000,000Less: Book value of net asset acquired (P10M x 30%) 3,000,000Excess of cost over book value 2,000,000


143

Over or (under)valued asset:Inventory [(P900,000 – P800,000) x 30%] (30,000)Machinery [(P2,200,000 – P2,500,000) x 30%] 90,000

Goodwill (C) 2,060,000

Question No. 2Share in net income (P2M x 30%) 600,000Less: Amortization of undervalued valued asset (see below) 30,000Add: amortization of overvalued asset 18,000Adjusted net investment income (A) 588,000

Amortization of asset: 2016 2017Inventory (30,000)

Machinery 90,000 90,000Divide by: Remaining life 5 5Amortization of overvalued machinery 18,000 18,000

2016 2017Net income of the associate 2,000,000 4,500,000Multiply by: Percentage of ownership 30% 30%Share in the net income 600,000 1,350,000

Dividends declared and paid 800,000 1,600,000Multiply by: Percentage of ownership 30% 30%Dividends received 240,000 480,000

Question No. 3Cost of Investment 5,000,000Add: Net investment income (see no. 2) 588,000Less: Dividends received (P800,000 x 30%) 240,000Carrying value – 12/31/2016 (A) 5,348,000

Question No. 4Share in net income (P4.5M x 30%) 1,350,000Add: Amortization of Overvalued valued asset (see no. 2) 18,000Adjusted net investment income (C) 1,368,000

Question No. 5Carrying value – 01/01/2017 5,348,000Add: Net investment income (see no. 4) 1,368,000Less: Dividends received (P1.6M x 30%) 480,000Carrying value – 12/31/2017 (A) 6,236,000

SUMMARY OF ANSWERS:1. C 2. A 3. A 4. C 5. A


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PROBLEM 16-3 Investment in Associate with Inventories, Machinery andLand - Land Was Subsequently Sold

Question No. 1Cost of Investment 5,000,000Less: Book value of net asset acquired (P12M x 20%) 2,400,000Excess of cost over book value 2,600,000Over or (under)valued asset

Inventory ((P50,000) x 20%) (10,000)Machinery ((P500,000) x 20%) (100,000)Land (P300,000 x 20%) 60,000

Goodwill (A) 2,550,000

Amortization of Over (Under) valued asset 2016 2017Inventory (10,000)

Machinery (100,000) (100,000)Divide by: Remaining life 10 10Amortization of Under (over) valued asset (10,000) (10,000)

Land - 60,000

2016 2017Net income of the associate 8,000,000 10,000,000Multiply by: Percentage of ownership 20% 20%Share in the net income 1,600,000 2,000,000

Dividends declared and paid 2,000,000 3,000,000Multiply by: Percentage of ownership 20% 20%Dividends received 400,000 600,000

Question No. 2Share in net income (P8M x 20%) 1,600,000Less: Amortization of Undervalued valued asset (see tableabove)

20,000

Adjusted net investment income (A) 1,580,000

Question No. 3Cost of Investment 6,000,000Add: Net investment income (see no. 2) 1,580,000Less: Dividends received (P2M x 20%) 400,000Carrying value – 12/31/2016 (A) 6,180,000

Question No. 4Share in net income (P10M x 20%) 2,000,000Less: Amortization of Undervalued valued asset (see tableabove)

10,000

Add: amortization of overvalued asset 60,000


145

Adjusted net investment income (C) 2,050,000

Question No. 5Carrying value – 01/01/2017 6,180,000Add: Net investment income (see no. 4) 2,050,000Less: Dividends received (P3M x 20%) 600,000Carrying value – 12/31/2017 (A) 7,630,000

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. C 5. A

PROBLEM 16-4 Associate with Outstanding Cumulative Preference Shares

When an investee has outstanding cumulative preference share capital, aninvestor should compute its share of earnings after deducting the investee’spreference dividends, whether or not such dividends are declared.

Net income 600,000Less: Preference dividend (10% x ₱1,000,000) ( 100,000)Net income to ordinary shares 500,000

Share in net income – ordinary shares (80% x ₱500,000) (A) 400,000

PROBLEM 16-5 Associate with Outstanding Preference SharesCASE NO. 1

Question No. 1Net income P2,500,000Less: Total preference dividends (₱3,000,000 x 10%) 300,000Net income to ordinary shares P2,200,000Multiply by: Percentage of ownership 30%Share in the net income of associate 660,000Less: Amortization of undervalued asset (₱1,000,000/8) 125,000Net investment income (B) 535,000

Question No. 2Cost of Investment 6,000,000Add: Net investment income (see no. 1) 535,000Less: Dividends received -Carrying value – 12/31/2016 (B) 6,535,000

CASE NO. 2Question No. 1Net income P2,500,000Less: Total actual preference dividends declared 450,000Net income to ordinary shares P2,050,000


146

Multiply by: Percentage of ownership 30%Share in the net income of associate 615,000Less: Amortization of undervalued asset (1,000,000/8) 125,000Net investment income (A) 490,000

Question No. 2Cost of Investment 6,000,000Add: Net investment income (see no. 1) 490,000Less: Dividends received -Carrying value – 12/31/2016 (A) 6,490,000

CASE NO. 3Question No. 1Net income P2,500,000Multiply by: Percentage of ownership 30%Share in the net income of associate 750,000Less: Amortization of undervalued asset (₱1,000,000/8) 125,000Net investment income (C) 625,000

Although the answer should be ₱400,000, the next best possible answer is₱500,000.

Question No. 2Cost of Investment 6,000,000Add: Net investment income (see no. 1) 625,000Less: Dividends received -Carrying value – 12/31/2016 (C) 6,625,000

SUMMARY OF ANSWERS:CASE NO. 1 CASE NO. 2 CASE NO. 3

1. B 2. B 1. A 2. A 1. C 2. C

PROBLEM 16-6 Change From Fair Value through Profit or Loss to EquityMethod - Step Acquisition

Question No. 1Fair value – 12/31/2017 3,600,000Less: Carrying value (Fair value – 12/31/2016) (3,900,000)Unrealized loss – P&L (B) (300,000)

Question No. 2Investment income (₱550,000 x 15%) (C) 82,500


147

Question No. 3Nil. No catch-up adjustment on retained earnings. (A)

Fair value of previously held interest 3,600,000Acquisition cost 3,600,000Total cost of investment 7,200,000Less: Book value of net asset acquired (12.5m x 30%) 3,750,000Excess of attributable to machinery 3,450,000Divide by: Remaining life 10Amortization of Undervalued asset 345,000

Net income of the associate - 2018 1,600,000Multiply by: Percentage of ownership (15% + 15%) 30%Share in the net income 480,000

Dividends declared and paid 700,000Multiply by: Percentage of ownership 30%Dividends received 210,000

Question No. 4Share in net income 480,000Less: Amortization of Undervalued asset (see table above) 345,000Adjusted net investment income (A) 135,000

Question No. 5Cost of Investment 7,200,000Add: Net investment income (see no. 4) 135,000Less: Dividends received 210,000Carrying value – 12/31/2018 (A) 7,125,000

SUMMARY OF ANSWERS:1. B 2. C 3. A 4. A 5. B

PROBLEM 16-7 Cost To Equity Method

Question No. 1Consideration received (40,000 x 65) P2,600,000Less: Dividend income (5 x 40,000) 200,000Net selling price 2,400,000Less: Carrying value (5,000,000) 5,000,000Loss on sale (E) (P2,600,000)

(Assuming FIFO Method)

Question No. 2Consideration received P5,200,000Less: Dividend income (5 x 40,000) 200,000Net selling price 5,000,000


148

Less: Carrying value [12M-(P5 x 100,000)/100,000] x 40,000) 4,600,000Gain on sale (B) P400,000

Question No. 3Fair value (P70 x 60,000) (E) P4,200,000

Question No. 4Cost of Investment – 01/01/2015 2,400,000Add: Net investment income - 2015 (5,000,000 x 30%) 1,500,000Less: Dividends received -2015 (30% x 2,000,000) 600,000Carrying value – 12/31/2015 3,300,000Add: Net investment income - 2016 (6,000,000 x 30%) 1,800,000Less: Dividends received -2016 (30% x 3,200,000) 960,000Carrying value – 12/31/2016 4,140,000

Net selling price 2,400,000Less Carrying amount (P4,140,000 x ½) 2,070,000Gain on sale (B) P330,000

Question No. 5Investment in Kababain – FVTOCI:Fair value (P75 x 15,000) 1,125,000Less: Carrying amount 2,070,000 (945,000)Investment in Passing Rate – FVTOCI:Fair value (P70 x 60,000) 4,200,000Less Cost (12M-(5 x 100,000))/100,000 x 60,000) 6,900,000 (2,700,000)Total Unrealized Gain –OCI to SFP(E) P3,645,000

SUMMARY OF ANSWERS:1. E 2. B 3. E 4. B 5. E

PROBLEM 16-8 Change From Equity to Cost Method

Question No. 1Cost of Investment 4,000,000Add: Net investment income [(1.8M-840,000) x 20%] 192,000Less: Dividends received (P100,000 + P100,000) 200,000Carrying value – 12/31/2015 (B) 3,992,000

Note: The dividend received on August 1, 2015 need not be prorated even though

the investment was acquired on July 1, 2015 since dividends is consideredwhen the investor has the right to receive payment (i.e. date of declaration).

The P1.8M net income was for a period of 12 months ending December 31.

Question No. 2


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Sales price (P25 x 50,000) 1,250,000Carrying value of shares (P3,992,000 x 50,000/200,000) 998,000Gain on sale of investment (B) 252,000

Question No. 3Fair value of retained investment (P25 x 150, 000) 3,750,000Less: Carrying amount of retained investment (P3,992,000 x150,000/200,000) 2,994,000Gain on reclassification to P&L (C) 756,000

Question No. 4Fair value, Dec. 31, 2016 (P30 x 150,000) 4,500,000Fair value, Jan. 1, 2016 (P25 x 150,000) 3,750,000Unrealized gain, Dec. 31, 2016 (B) 750,000

Question No. 5Fair value, Dec. 31, 2016 (P30 x 150,000) (A) 4,500,000

SUMMARY OF ANSWERS:1. B 2. B 3. C 4. B 5. A

PROBLEM 16-9: Discontinuance of Equity Method

Question No. 1Cost (300,000x100) 30,000,000Add: Income (4,000,000x .3) 1,200,000Less: Dividends (2,500,000x .3) (750,000)Carrying Amount - 2015 (C) 30,450,000

Question No. 2Net proceeds (160,000x120) 19,200,000Less: Carrying amount (30,450,000x(160,000/300,000)) (16,240,000)Gain on Sale (C) 2,960,000

Question No. 3FVTOCI (140000x120) 17,080,000Less: Carrying amount (30,450,000x(140,000/300,000) 14,210,000Gain on Reclassification (B) 2,870,000

Question No. 4Dividend Income (2,000,000x .14) (A) 280,000

Question No. 5Investment in FVTOCI (140,000x125) (B) 17,500,000


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SUMMARY OF ANSWERS:1. C 2. C 3. B 4. A 5. B

PROBLEM 16-10 Associate Having Heavy Losses

Original cost 1,400,000Cash advances 400,000Total interest 1,800,000Net loss from 2015 to 2017 (40% x 4,000,000) (1,600,000)Carrying amount of investment – 12/31/2017 200,000Share in net loss of 2018 (40% x 800,000) 320,000Loss to be reported in 2018 should be equal to the investmentbalance only (C) 200,000

PAS 28, paragraph 29, provides that if under equity method an investor’s shareof losses of an associate equals or exceeds the carrying amount of aninvestment, the investor discontinues recognizing its share of further losses.The investment is reported at NIL or zero value.

PROBLEM 16-11 Downstream Sale of Inventory2015 2016

Net income 1,000,000 1,500,000Multiply by: Percentage of ownership 25% 25%Share in the net income before adjustment 250,000 375,000Less: Unrealized profit on downstream sale ofinventory (30,000) 30,000Share in the net income after adjustment 220,000 405,000

(B) (D)

PROBLEM 16-12 Upstream Sale of Inventory2015 2016

Net income 1,000,000 1,500,000Multiply by: Percentage of ownership 25% 25%Share in the net income before adjustment 250,000 375,000Less: Unrealized profit on upstream sale ofinventory (9,000) 9,000Share in the net income after adjustment 241,000 384,000

(B) (D)


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PROBLEM 16-13 Downstream Sale of Depreciable Asset2015 2016

Net income 1,000,000 1,500,000Multiply by: Percentage of ownership 25% 25%Share in the net income before adjustment 250,000 375,000Less: Unrealized gain on downstream sale of PPE (160,000) 40,000Share in the net income after adjustment 90,000 415,000

(B) (D)

PROBLEM 16-14 Upstream Sale of Depreciable Asset2015 2016

Net income 1,000,000 1,500,000Multiply by: Percentage of ownership 25% 25%Share in the net income before adjustment 250,000 375,000Less: Unrealized gain on upstream sale of PPE (40,000) 10,000Share in the net income after adjustment 210,000 385,000

(B) (D)

COMPREHENSIVE PROBLEMSPROBLEM 16-15Question Nos. 1 and 2

2015 2016Net income of the associate 2,500,000 4,000,000Multiply by: Percentage of ownership 30% 30%Share in NI 750,000 1,200,000Less: Gain on sale of equipment (100,000)Add: Depreciation of Excess 20,000 20,000Gain on sale of inventory (upstream) (50,000x .3) (15,000) 15,000Less: Gain on sale of inventory (Downstream) (150,000)Net share in NI 655,000 1,085,000

1. (B) 2. (B)

Question No. 3Cost 5,000,000Add: Investment Income 2015 655,000Less: Dividends (900,000x .3) 270,000Carrying amount 2015 (A) 5,385,000

Question No. 4Carrying amount 01/01/2016 5,385,000Add: Income 1,085,000Less: Dividends (2,000,000x .3) 600,000Carrying Amount - 2015 (B) 5,870,000


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Question No. 5Carrying amount 01/01/2016 5,385,000Add: Income 1,085,000Less: Dividends (2,000,000x .3) 600,000Less: Amortization of goodwill (400,000 x 2/10) 80,000Carrying Amount - 2015 (A) 5,790,000

Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized overtheir useful life. If an entity cannot determine reliably the useful life, it isassumed to be 10 years.


PROBLEM 16-16

Question No. 1Cost P1,700,000Less: Equity in net assets 1,400,000Implied goodwill (D) 300,000

Question No. 2Proceeds (2,500 x P13) P 32,500Less: Carrying amount [(P60,000/6,000) x 2,500] 25,000Gain on sale (C) 7,500

Question No. 3Proceeds (500 x P21) P 10,500Less: Carrying amount [(P66,000/(2,000 x 110%)) x 500] 15,000Loss on sale (D) 4,500

Question No. 4FV of financial asset received (1,500 x P21) P 31,500Less: Carrying amount [(P45,000/1,000) x 500] 22,500Gain on conversion (A) 9,000

Question No. 5Investment in Roque Corporation:3/9 1,000 x P1.2 1,2009/9 1,000 x P1.2 1,200

Investment in Ocampo Corporation:6/30 (6,000 – 2,500) x P1 3,500

Total dividend income (D) 5,900


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Question No. 61/2/2016 Acquisition Cost 1,700,000Add: Share in net income of associate (P1,200,000 x 30%) 360,000Less: Dividends (P.50 x 4 x 100,000) 200,00012/31/2016 carrying amount (D) P1,860,000

Question No. 7Roque pref. (1,000 – 500) x P56 28,000Roque ordinary (1,500 x P20) 30,000Ocampo (6,000 -2,500) x P11 38,500Dagumboy Co. (2,000 x 110% -500) x P22 37,40012/31/2016 FVTOCI Balance (C) 133,900

SUMMARY OF ANSWERS:1. D 2. C 3. D 4. A 5. D 6. D 7. C

PROBLEM 16-17

Question No. 1Solano (264,500-250,000) 14,500Castaneda (280,000-320,000) (40,000)

(70,000-195,000) (125,000)Unrealized G/(L) (C) (150,500)

Question No. 2Zero, gain or loss on reclassification is NOT allowed (A)

Question No. 3Fair value previously held interest (50,000 x 30) 1,500,000Less: Carrying value 1,350,000Gain on reclassification-P&L (C) 150,000

Question No. 4Net investment income = July 1- Dec. 31 (30% x 900,000) (D) 270,000

Question No. 5Fair value previously held interest (50,000 x 30) 1,500,000Add: Acquisition cost 3,000,000Initial carrying amount – investment in associate 4,500,000Add: Net investment income (see No. 4) 270,000Less: Dividends declared (P2 x 150,000) 300,000Investment balance end (C) 4,470,000


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SUMMARY OF ANSWERS:1. C 2. A 3. C 4. D 5. C

PROBLEM 16-18

Question No. 1Consideration received (P230 x 4,000) 920,000Less: Dividend of the investment sold (P8 x 4,000) 32,000Net Selling Price 888,000Less: Carrying value of the investment sold (*1,970,000/10,000x 4,000) 788,000Gain on sale (B) 100,000

*(10,000 x P200)-(P8 x 10,000) + P50,000

The dividend that was paid and sold is not classified as dividend income sincethe company did not own the shares when the dividend was declared.

Question No. 2Net Selling Price (P450 x 50,000 x 1/2) 11,250,000Less: Carrying value of the investment sold (P20,800,000 x 1/2) 10,400,000Gain on sale (C) 850,000

Beg. Balance of Investment in Associate 18,000,000Add: Share in the net income of associate (25% x P20M) 5,000,000Total 23,000,000Less: Amortization (P2,000,000/10) 200,000

Dividends received (P40 x 50,000) 2,000,000Ending balance of investment in associate – 12/31/2016 20,800,000

Question No. 3Nil. (A) The dividend that was paid and sold in Boy-ot shares is not classified as

dividend income since the company did not own the shares when thedividend was declared.

The dividend received in Cleo Shares is not regarded as income, but as adeduction of the initial carrying amount of the investment in associate.

Question Nos. 4 and 5Fair value Cost (UL) / UG

Rodolfo (P46 x 20,000) 920,000 1,000,000 (80,000)Boy-ot (P192 x 6,000) 1,152,000 *1,182,000 (30,000)Gene (P28 x 40,000) 1,120,000 1,280,000 (160,000)Cleo (P450 x 25,000) 11,250,000 11,250,000 -Total 14,442,000 14,712,000 (270,000)

(C) (C)


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* (1,970,000/10,000 x 6,000)

SUMMARY OF ANSWERS:1. B 2. C 3. A 4. C 5. C

PROBLEM 16-19 Impairment losses recognized by an associate or jointventure

Question No. 1In accounting for its associate, Mark Co. should recognize impairment loss.However, it is generally not acceptable to simply multiply the amount ofimpairment recognized in the investee’s own books by the investor’s percentageof ownership, because the investor should initially measure its interest in anassociate’s identifiable net ownership at fair value at the date of acquisition ofan associate. Accordingly, appropriate adjustments based on those fair valuesare made for impairment losses recognized by the associate.

Carrying amountreflecting fair

values made byMark Co.

Recoverableamount (40%)

Impairmentloss

CGU A ₱ 140,000 ₱ 120,000 ₱ 20,000CGU B 100,000 180,000 n/aCGU C 320,000 160,000 160,000Net assets 560,000 460,000 180,000

(A)

Question No. 2The carrying amount reflecting fair values made by Mark Co. after impairment:CGU A ₱ 120,000CGU B 100,000CGU C 160,000Net assets 380,000Goodwill 40,000Investment in associate ₱ 420,000 (A)

PROBLEM 16-20: PFRS for SME: Jointly Controlled Entity

CASE NO. 1Question No. 1 Cost modelTotal dividend paid by Entity Z’s ₱150,000Multiply by: Percentage 30%Dividend income – P&L to SCI (B) ₱ 45,000

Question No. 2 Cost modelCarrying amount (D) ₱300,000


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CASE NO. 2Question No. 3 Fair value modelFair value – December 31 ₱425,000Less: Acquisition cost 300,000Gain on change in fair value – P&L to SCI ₱125,000Add: Dividend income (₱150,000 x 30%) 45,000Total to P&L (A) ₱170,000

Question No. 4 Fair value modelCarrying amount = Fair value Dec. 31 (A) ₱425,000

CASE NO. 3Question No. 5 Equity methodEntity Z’s reported profit ₱400,000Multiply by: Percentage 30%Share in net income (C) ₱120,000

Question No. 6 Equity methodAcquisition cost ₱300,000Add: Share in net income 120,000Less: Dividends received ((₱150,000 x 30%) 45,000Carrying value – December 31 (B) ₱375,000

Chapter 18: Property, Plant and Equipment

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CHAPTER 18: PROPERTY, PLANT AND EQUIPMENT

PROBLEM 18-1 Capitalizable Cost of MachineryMachinery Others

Purchase price including VAT (1,568,000/1.12) 1,400,000 -Cost of water device to keep machine cool. 8,000 -Cost of safety rail and platform surrounding machine 12,000 -Installation cost, including site preparation andassembling. 20,000 -Fees paid to consultants for advice on acquisition ofthe machinery. 13,000 -PV of estimated dismantling cost of the new machine 10,000 -Repair cost of the machine damaged while in theprocess of installation - 5,000Loss on premature retirement-old machine - 18,000Other nonrefundable sales tax 13,000 -Cost of training for personnel who will use themachine - 25,000Adjusted balances (A) 1,476,000 48,000

PROBLEM 18-2 Capitalizable Cost of Land, Building and LandImprovements

Question No. 1Purchase Price 925,000Title Insurance 7,500Legal fees to purchase land 5,000Property taxes, January 1, 2016 -June 30, 2016 15,000Cost of grading and filling building site 45,000Total Cost of the land (A) 997,500

Question No. 2Cost of building construction 3,100,000Interest on construction loan 60,000Cost of razing old building on lot 42,500Proceeds from sale of salvageable materials (6,000)Total cost of the building (A) 3,196,500

Question No. 3Cost of constructing driveway 400,000Cost of parking lot and fencing 60,000Total cost of the land improvements (B) 460,000


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PROBLEM 18-3 Acquisition on Cash Basis

Question No. 1Cash paid 800,000Commissions paid to brokers 80,000Non-refundable sales taxes 40,000Total cost 920,000Multiply by: Ratio (200,000 / 500,000) 0.40Allocated cost of the land (B) 368,000

Question No. 2Total cost 920,000Multiply by: Ratio (300,000 / 500,000) 0.60Allocated purchase price 552,000Renovation cost 100,000Demolition cost 60,000Proceeds from sale of demolition scrap (15,000)Total cost of the building (A) 697,000

PROBLEM 18-4 Acquisition on Account

Invoice Price 500,000Multiply by: (1 - discount rate) 97%Net invoice price 485,000Additional cost:Freight and insurance 15,000Cost of testing and trial runs 12,000

Cost of the equipment (B) 512,000

PROBLEM 18-5 Acquisition on Account

Invoice Price 500,000Multiply by: (1 - discount rate) 0.97Net invoice price 485,000

Additional cost:Installation cost 50,000Present value of estd. decommissioning and restoration cost 62,090

Total cost of the equipment (B) 597,090

Estimated decommissioning and restoration cost 100,000Multiply by: Present value of 1 0.6209Present value of estd. decommissioning and restoration cost 62,090


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PROBLEM 18-6 Deferred Settlement Terms (With or Without Cash PriceEquivalent)

Question No. 1Cash price equivalent (A) 800,000

Question No. 2Principal 1,000,000Multiply by: Present value of 1 0.7972Cost of the equipment (B) 797,200

PROBLEM 18-7 Exchange (With or Without Commercial Substance)

Question No. 1Fair value of the asset given 1,200,000Add: Cash payment 200,000Cost of equipment (D) 1,400,000

Question No. 2Fair value of the asset given 1,200,000Less: Carrying amount 800,000Gain on exchange (B) 400,000

Question No. 3Carrying amount of the asset given 800,000Add: Cash payment 200,000Cost of equipment (B) 1,000,000

Question No. 4Zero, the transaction lacks commercial substance. (A)

PROBLEM 18-8 Trade–in

Question No. 1Cash price without trade in (A) 340,000

Question No. 2Cash price without trade in 340,000Less: Cash price with trade in 270,000Trade in value 70,000Less: Carrying amount 230,000Loss on trade in (B) (160,000)


160

PROBLEM 18-9 Acquisition through Issuance of Equity Instrument

Question No. 1Fair value of the equipment received (D) 4,000,000

Question No. 2Zero, the difference between the fair value and its par value is recognized asshare premium in the equity. (A)

PROBLEM 18-10 Acquisition through Issuance of Bonds Payable

Question No. 1Fair value of the bonds (10,200 x 500) (C) 5,100,000

Question No. 2Zero, the difference between the fair value and its par value is recognized aspremium on bonds payable. (A)

PROBLEM 18-11 Acquisition by Donation

Question No. 1Fair value 4,000,000Add: Direct cost 40,000Total cost (B) 4,040,000

Question No. 2Fair value (C) 4,000,000

The registration and transfer of title is charged to Donated Capital / SharePremium.

PROBLEM 18-12 Capitalizable Cost of Land

Question No. 1Purchase price 400,000Demolition of existing building on site 75,000Legal and other fees to close escrow 12,000Less: Proceeds from sale of demolition scrap 10,000Total cost (C) 477,000

Question No. 2Purchase price 400,000Legal and other fees to close escrow 12,000Total cost (A) 412,000


161

PROBLEM 18-13 Subsequent Expenditure on PPE

Question No. 1Beginning balance – Jan 1 790,000Add: Overhaul – June 30 60,000Total cost of motor vehicle (C) 850,000

Question No. 2Beginning balance – Jan 1 1,900,000Add: Rearrangement and installation – March 2 45,000

Improvement that extend the life – December 60,000Total cost of machine (B) 2,005,000

Question No. 3Beginning balance – Jan 1 600,000Add: Unloading and set up cost 48,000Total cost of precision machine (C) 648,000

Question No. 4Beginning balance – Jan 1 4,100,000Add: Installation of sprinkler system – part of blue print 130,000Add: Cost of attic 500,000Total cost of building (B) 4,730,000

Question No. 3Routine repairs and maintenance (D) 26,000

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. B 5. D

PROBLEM 18-14

Question No. 1Interest paid(2,000,000 x 14% x 12/12) 280,000Less: Investment income1,400,000 x 10% x 6/12 70,000200,000 x 10% x 2/12 3,333

Capitalizable borrowing cost 206,667

Note that capitalization of borrowing costs does not cease during a temporarydelay in construction.

Question No. 2Interest paid (2,000,000 x 14% x 12/12) 280,000Less: Capitalized borrowing cost 206,667Interest expense 73,333


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Note that the interest paid and investment income is used to compute for thecapitalizable borrowing cost. However, the amount recognized as an interestexpense is the difference between the total interest paid and capitalizableborrowing cost. Also, the amount recognized as interest income is 73,333.

Question No. 3Total progress payments 20,000,000Add: Capitalized borrowing cost 206,667Total cost of the stadium 20,206,667

PROBLEM 18-15

Question No. 1Interest expense under effective interest method (5,000,000 x.176319 x 11/12)

808,129

Less: Investment income (250,000 x 11/12) 229,167Capitalizable borrowing cost 578,962

Question No. 2Interest expense under effective interest method (5,000,000 x.176319 x 12/12)

881,595

Less: Capitalized borrowing cost 578,962Interest expense 302,633

Question No. 3Total expenditures 2,700,000Add: Capitalized borrowing cost 578,962Total cost of the building 3,278,962

Question No. 3Total cost of the building 3,278,962Less: Residual value 1,000,000Depreciable amount 2,278,962Divide by: Useful life 10Multiply by: Months 1/12Depreciation - 2016 18,991

Note depreciation will start when the asset is available for use.


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PROBLEM 18-16

Question No. 1Rate Principal Interest15% 4,000,000 600,00020% 2,000,000 400,000Total 6,000,000 1,000,000

Capitalization Rate (P1,000,000 / P6,000,000) = 16.67%

January 1 (600,000 + 2,100,000) 2,700,000 x 12/12 2,700,000July 1 1,200,000 x 6/12 600,000December 1 240,000 x 1/12 20,000Average accumulated expenditure 3,320,000Multiply by: Rate 16.67%Capitalizable borrowing cost 553,334

Note that investment income is not considered since the two loans areconsidered general borrowings.

Question No. 2Total interest expense 1,000,000Less: Capitalized borrowing cost 553,334Interest expense 446,667

Question No. 3Expenditures capitalized – previous period 600,000Add: Expenditures during the current year 3,540,000Add: Capitalized borrowing cost 553,334Total cost of the factory building 4,693,334

PROBLEM 18-17 Specific and General Borrowings

Questions No. 1 & 2January 1, 2015 200,000 x 12/12 200,000September 1, 2015 300,000 x 4/12 100,000December 31, 2015 300,000 x 0/12 0Average accumulated expenditure 1. (A) 300,000Multiply by: Rate 12%Capitalizable borrowing cost 2. (D) P36,000

Since the average accumulated expenditure did not exceed the principal of thespecific borrowing, the specific rate was used in determining the capitalizableborrowing cost.


164

Question No. 3 & 4Accumulated expenditures –12/31/2015 (P800,000 + 36,000)

836,000 x 9/9 836,000

March 31, 2016 300,000 x 6/9 200,000September 30, 2016 200,000 x 0/12 0Average accumulated expenditure 3. (D) 1,036,000Less: Specific borrowing 750,000Excess attributable to general borrowing 286,000Multiply by: Rate 9%Multiply by: Months outstanding 9/12Capitalizable borrowing cost – general borrowings 19,305Add: Specific borrowings (750,000 x 12% x 9/12) 67,500Total capitalizable borrowing cost 4. (B) 86,805

PROBLEM 18-18 Specific Borrowing Used For General Purposes

Total expenditures 6,000,000Divide by 2Total 3,000,000Less: Investment income (50,000 x 3/12) 12,500Weighted average expenditures 2,987,500Multiply by: Rate 10%Capitalizable borrowing cost (A) 298,750

PROBLEM 18-19 Different Depreciation Methods

Cost P3,300,000Less: Residual value 300,000Depreciable amount P3,000,000

Requirement No. 1 Straight Line2016 (P3,000,000 / 5 x 12/12) 600,000

2017 (P3,000,000 / 5 x 12/12) 600,000

Requirement No. 2 Service Hours

Depreciation rate per hour (P3,000,000 / 60,000 hours) = P50/hour

2016 (P50/hour x 3,000 hours) 150,000

2017 (P50/hour x 3,500 hours) 175,000

Requirement No. 3 Units of Output Method

Depreciation rate per unit (P3,000,000 / 50,000 units) = P60/unit


165

2016 (P60/unit x 5,000 units) 300,000

2017 (P60/unit x 4,500 units) 270,000

Requirement No. 4 Sum-of the Years’ Digits

Sum-of-years-digits [5 x ((5+1)/2)] = 15

2016 (P3,000,000 x 5/15) 1,000,000

2017 (P3,000,000 x 4/15) 800,000

Requirement No. 5 Sum-of the Years’ Digits


2016 (P3,000,000 x 5/15 x 3/12) 250,000

2017 (P3,000,000 x 5/15 x 9/12) + (P3,000,000 x 4/15 x 9/12) 950,000

Requirement No. 6 Double-declining balance

Double declining rate (2/5) = 40%

2016 (P3,300,000 x 40%) 1,820,000

2017 [(P3,300,000 – 1,820,000) x 40%] 792,000

Requirement No. 7 Double-declining balance


2016 (P3,300,000 x 40% x 3/12) 990,000

2017 [(P3,300,000 – 990,000) x 40% x 12/12)] 924,000

Requirement No. 8 150% declining balance

150% declining rate (1.5/5) = 30%

2016 (P3,300,000 x 30%) 990,000

2017 [(P3,300,000 – 990,000) x 30% x 12/12)] 693,000

PROBLEM 18-20 Straight-Line

Cost – 01/01/2013 102,750Less: Accumulated depreciation – 12/31/2014

[(P102,750 – P6,750) / 6 x 2) 32,000Carrying value – 01/01/2015 70,750Less: Revised residual value 4,500Depreciable amount 66,250


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Divide by: Remaining useful life (7-2) 5Depreciation expense (B) 13,250

PROBLEM 18-21 Straight-Line

Cost (P300,000 + P8,000) P308,000Less: Residual value 10,000Depreciable amount 298,000Divide by: Useful life 10Depreciation expense (A) 29,800

PROBLEM 18-22 Composite Method

CostSalvageValue

DepreciableAmount

Estd.Life

AnnualDepreciation

Machine A 275,000 25,000 250,000 20 12,500Machine B 100,000 10,000 90,000 15 6,000Machine C 20,000 - 20,000 5 4,000Total 395,000 35,000 360,000 22,500

Composite Life = (Depreciable amount / Total annual depreciation)= P360,000 / P22,500= 16 years (B)

PROBLEM 18-23

The balancing figure is accumulated depreciation under the group method ofdepreciation. (D)

PROBLEM 18-24 Units of Output Method

Depreciation rate per unit [(P600,000 – P60,000) / 200,000 units) = P2.7/unit

2016 (P2.7/unit x 30,000 units) (C) 81,000

PROBLEM 18-25 Working Hours Method

Depreciation rate per hour [(P600,000 – P60,000) / 100,000 hours) =P5.4/hour

2016 (P5.4/hour x 15,000 hours) (C) 81,000


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PROBLEM 18-26 Double Declining Balance

Depreciation rate (2/4) = 50%

Cost 18,000Less: Accumulated depreciation

2015 (P18,000 x 50%) 9,0002016 (P18,000 – 9,000 – P4,700) * 4,300

Book value – 12/31/2016 (B) 4,700

*Maximum depreciation. The carrying amount should not be reduced below itsresidual value.

PROBLEM 18-27 Double Declining Balance


2015 [(P480,000 x 20% x 12/12] 96,000

2016 [(P480,000 – P90,000) x 20% x 12/12] (B) 76,800

PROBLEM 18-28 150% Declining Balance

150% declining rate (1.5/5) = 30%

2015 (P1,000,000 x 30%) 300,0002016 [(P1,000,000 – 300,000) x 30%] 210,000Accumulated depreciation – 12/31/2016 (D) 510,000

PROBLEM 18-29 Sum of the Years’ Digits


2016 [(P50,000 + 100,000) x 4/15 x 12/12) (C) 36,000

PROBLEM 18-30 Component Depreciation

Residual Depreciable Useful Dep’nComponent Cost value cost Life expense

A 550,000 50,000 500,000 10 50,000B 420,000 20,000 400,000 9 44,444C 360,000 10,000 350,000 8 43,750D 190,000 30,000 160,000 7 22,857E 235,000 40,000 195,000 6 32,500

Total 1,755,000 150,000 1,605,000 (B) 193,551


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PROBLEM 18-31 Change in Estimate

Cost 8,000Less: Depreciation – first year (8,000 / 4) 2,000Carrying value – end of first year 6,000Divided by: Revised remaining useful life (5 – 1) 4Depreciation – 2nd year (C) 1,500

PROBLEM 18-32 Retirement Method

Original cost 5,000Less: Salvage proceeds 600Depreciation (B) 4,400


Cost 3,300,000Less: Accumulated depreciation – 12/31/2016

[(P3,300,000 – P300,000) / 8 x 4] 1,500,000Carrying value – 12/31/2016 1,800,000

CASE NO. 1Requirement No. 1Carrying value – 12/31/2015 1,800,000Less: Residual value 300,000Depreciable amount 1,500,000Divided by: Revised remaining useful life 2Depreciation – 2016 750,000

Requirement No. 2Carrying value – 12/31/2015 1,800,000Less: Depreciation – 2016 750,000Carrying value – 12/31/2016 1,050,000

CASE NO. 2Requirement No. 1Carrying value – 12/31/2015 1,800,000Less: Residual value 150,000Depreciable amount 1,650,000Divided by: Remaining useful life ( 8 – 4) 4Depreciation – 2016 412,500

Requirement No. 2Carrying value – 12/31/2015 1,800,000Less: Depreciation – 2016 412,500


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Carrying value – 12/31/2016 1,387,500

CASE NO. 3Requirement No. 1Carrying value – 12/31/2015 1,800,000Less: Residual value 300,000Depreciable amount 1,500,000Multiply by: Fraction (SYD = 10) 4/10Depreciation – 2016 600,000

Requirement No. 2Carrying value – 12/31/2015 1,800,000Less: Depreciation – 2016 600,000Carrying value – 12/31/2016 1,200,000

PROBLEM 18-34 Replacement Method

Replacement cost 6,000Less: Salvage proceeds 600Depreciation (C) 5,400

PROBLEM 18-35 Fixed Asset Turnover

Let X = Net Fixed Asset at the end of 2016

Fixed asset turnover =Sales

Average Fixed Asset

4 =P1,480,000

.5 (P320,000 + X)

4 =P1,480,000

P160,000 + .5xP1,480,000 = P640,000 + 2x

X = P420,000 (C)

PROBLEM 18-36 Derecognition of PPE

Insurance Proceeds 200,000Less: Carrying value [P160,000 – (P20,000 x 6/12)] 150,000Gain on disposal (D) 50,000


170


Question No. 1Beg. Balance of the Land P 700,000Cash paid 2,500,000Mortgage assumed 4,000,000Realtor's commission 300,000Legal fees, realty taxes and documentation expenses 50,000Amount paid to relocate persons squatting on the property 100,000Total Cost of the Land (B) P7,650,000

Question No. 2Beginning balance of the Land Improvement P 10,000Cost of fencing property 110,000Total cost of Land Improvement (A) P 120,000

Question No. 3Beg. Balance of the Building P 900,000Amount recovered from salvage of building (150,000)Cost of tearing down an old building 120,000Amount paid to contractor 2,000,000Building permit 20,000Excavation expenses 50,000Architects' fees 50,000Total cost of building (A) P2,990,000

Question No. 4Beg. Balance of the Machinery P 980,000Invoice cost of machinery 2,000,000Freight, unloading 60,000Customs duties 140,000Allowances during installations 400,000Total cost of machinery (B) P3,580,000

Question No. 5Total cost of Land Improvement P 120,000Total cost of building 2,990,000Total cost of machinery 3,580,000Total depreciable property (A) P6,690,000

Royalty payment on machines purchased in the amount of P120,000 should beincluded as part of manufacturing overhead in the company’s income statement,if the same is based on units produced. However, if royalty payment is based onunits produced and sold, it should be treated as a selling expense.

SUMMARY OF ANSWERS:1. B 2. A 3. A 4. B 5. A


171

PROBLEM 18-38 Specific and General Borrowings

Question No. 1 and 2WEIGHTED AVERAGE IN 2014

Date ExpendituresMonths

outstanding Average01/01/2015 3,000,000 12 36,000,00007/01/2015 7,000,000 6 42,000,00011/01/2015 6,000,000 2 12,000,000Total 16,000,000 90,000,000

Divide by 12Weighted average carrying amount 7,500,000

Specific borrowings (2,000,000 x 10%) 200,000

General borrowings:Rate Principal Interest14% 2,000,000 280,00012% 18,000,000 2,160,000Total 20,000,000 2,440,000

Capitalization Rate (P2,440,000 / P20,000,000) = 12.20%

Weighted average borrowing cost:Specific borrowingsActual borrowing cost 200,000Less: Investment income 13,000 187,000

General borrowings:Weighted average carrying amount 7,500,000Less: Principal amount of Specific borrowings 2,000,000Weighted average related to General borrowings 5,500,000Multiply by: Capitalization rate 12.20%Multiply by: Months/12 1 671,000Weighted average borrowing cost: 858,000vs. Actual borrowing cost 2,640,000Capitalizable borrowing cost (lower) (A) 858,000

WEIGHTED AVERAGE IN 2015


outstanding Average01/01/2016 *16,858,000 8 134,864,00007/01/2016 1,000,000 2 2,000,00008/01/2016 2,000,000 1 2,000,000Total 19,858,000 138,864,000


*Total expenditures in 2015 plus capitalized borrowing cost in 2015.


172

Weighted average borrowing cost:Specific borrowingsActual borrowing cost (P2,000,000 x 10% x 8/12) 133,333Less: Investment income - 133,333

General borrowings:Weighted average carrying amount 17,358,000Less: Principal amount of Specific borrowings 2,000,000Weighted average related to General borrowings 15,358,000Multiply by: Capitalization rate 12.20%Multiply by: Months/12 8/12 1,249,117Weighted average borrowing cost: 1,382,451vs. Actual borrowing cost (2,640,000 x 8/12) 1,760,000Capitalizable borrowing cost (lower) (B) 1,382,451

Question No. 3Actual borrowing cost - 2015 2,640,000Less: Capitalizable borrowing cost - 2015 858,000Interest expense (C) 1,782,000

Question No. 4Actual borrowing cost - 2016 2,640,000Less: Capitalizable borrowing cost - 2016 1,382,451Interest expense (C) 1,257,550

Question No. 5Total cost, 2015 16,858,000Expenditures in 2016 3,000,000Add: Capitalizable borrowing cost - 2016 1,382,451Total cost of the building (B) 21,240,451

SUMMARY OF ANSWERS:1. A 2. B 3. C 4. C 5. B

PROBLEM 18-39

Question No. 1The computation of the income from government grant is as follows:Total cash received 20,000,000Divide by: Useful life of the building 20Income from government grant 1,000,000

Question No. 2Cost of building 24,000,000Divide by: Useful life of the building 20Depreciation 1,200,000


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Question No. 3Cost of building 24,000,000Less: Government grant 20,000,000Total 4,000,000Divide by: Useful life of the building 20Depreciation 200,000

Question No. 4Cost of building 24,000,000Less: Depreciation – 2016 1,200,000Carrying amount – 12/31/2016 22,800,000

Question No. 5Net cost of building 4,000,000Less: Depreciation – 2016 200,000Carrying amount – 12/31/2016 3,800,000

PROBLEM 18-40 Grants Related to Nondepreciable Assets

Question No. 1The computation of the income from government grant is as follows:Total fair value of the land 10,000,000Divide by useful life of the building 10Income from government grant 1,000,000

Question No. 2Cost of factory building 15,000,000Divide by: Useful life of the building 10Depreciation 1,500,000

Question No. 3Cost of factory building 15,000,000Less: Government grant 10,000,000Total 5,000,000Divide by: Useful life of the building 10Depreciation 500,000

Question No. 4Cost of factory building 15,000,000Less: Depreciation – 2016 1,500,000Carrying amount – 12/31/2016 13,500,000

Question No. 5Net cost of factory building 5,000,000Less: Depreciation – 2016 500,000


174

Carrying amount – 12/31/2016 4,500,000

PROBLEM 18-41

Question No. 1Cost of land and old building P1,200,000Real estate broker's commission 72,000Legal fees 12,000Title insurance 36,000Cost of land (C) P1,320,000

Question No. 2


outstanding AverageJanuary 1, 2015 1,000,000 12 12,000,000April 1, 2015 500,000 9 4,500,000October 1, 2015 800,000 3 2,400,000December 31, 2015 900,000 0 -Total 3,200,000 18,900,000


Capitalization Rate (P840,000 / P8,000,000) = 10.50%

Weighted average borrowing cost:Specific borrowingsActual borrowing cost (P1M x 12% x 12/12) 120,000Less: Investment income - 120,000

General borrowings:Weighted average carrying amount 1,575,000Less: Principal amount of Specific borrowings 1,000,000Weighted average related to General borrowings 575,000Multiply by: Capitalization rate 10.50%%Multiply by: Months/12 12/12 60,375Weighted average borrowing cost: 180,375vs. Actual borrowing cost (P120,000 + P840,000) 960,000Capitalizable borrowing cost (lower) (A) 180,375

Question No. 3


outstanding AverageJanuary 1, 2016 *4,380,375 8 35,043,000May 1, 2016 600,000 4 2,400,000September 1, 2016 1,200,000 - -Total 3,200,000 37,443,000

Divide by 8


175

Weighted average carrying amount 4,680,375

*(3,200,000+180,375+1,000,000)

Weighted average borrowing cost:Specific borrowingsActual borrowing cost (P1,000,000 x 12% x 8/12) 80,000Less: Investment income - 80,000

General borrowings:Weighted average carrying amount 4,680,375Less: Principal amount of Specific borrowings 1,000,000Weighted average related to General borrowings 3,680,375Multiply by: Capitalization rate 10.50%%Multiply by: Months/12 8/12 257,626Weighted average borrowing cost: 337,626vs. Actual borrowing cost (P960,000 x 8 / 12) 640,000Capitalizable borrowing cost (lower) (A) 337,626

Question No. 4Fixed construction contract price P6,000,000Plans, specifications, and blueprints 42,000Architects' fees 164,000Removal of old building 108,000Interest capitalized during 2015 180,375Interest capitalized during 2016 337,626Cost of building (C) P6,832,001

Question No. 5Interest cost in 2016:Specific borrowing P 120,000General borrowing 840,000

Total interest P 960,000Less: Capitalizable borrowing cost in 2016 337,626.25Interest expense in 2016 (C) P622,373.75

Question No. 6Depreciation rate (150%/40 years) = 3.75%

Total depreciation expense (6,832,001.25 x 3.75% x 4/12) = (B) P 84,500

SUMMARY OF ANSWERS:1. C 2. A 3. A 4. C 5. C


176

PROBLEM 18-42

Question No. 1Cost (800,000+45,000-5,000) 840,000Less Residual Value 40,000Depreciable cost 800,000Divide by 5Depreciation (B) 160,000

Question No. 2Cost (800,000+45,000-5,000) 840,000Less Accumulated Depreciation (160,000 x 3) 320,000Carrying amount 520,000Less new residual value 70,000Depreciable cost 450,000Divide by remaining useful life (5-2) 3Depreciation (A) 150,000

Question No. 3Cost 270,000Less Accumulated depreciation (270,000/4 x 8/12) 45,000Total 225,000Carrying amount of old tires (12,000-(12,000/4 x 8/12) (10,000)Cost of new tires 24,000Total 239,000

DepreciationMotor vehicle:Sept. 1-May 30, 2019 (270,000/4 x 8/12) 45,000June 1-Sept. 30 (215,000/4 x 12 mos-8 mos x 4 mos) 21,500Tyres from June 1- Sept 30 (24,000/24 mos x 4 mos) 4,000Depreciation expense (D) 70,500

Question No. 4

CostResidualValue

Depreciablecost

DividebyUsefullife

Depreciationexp

Airframe800,000 0

800,000 10years

80.000

Interior100,000 0

100,000 10years

10,000

Engines androtary blades 400,000 30,000

370,0005 years

74,000

Inspection 240,000 0 240,000 3 years 80,000Total 244,000


177

Question No. 5Cost 280,000Less Residual Value 40,000Depreciable cost 240,000Divide by 3Multiply by 8/12Depreciation (B) 53,333

SUMMARY OF ANSWERS:1. B 2. A 3. D 4. D 5. B

PROBLEM 18-43

Note to the professor: Additional information no. 2. On December 31, it wasdetermined that Asset R had been used 2,100 hours during 2016 not 2015.

Question No. 1Selling Price P 52,000Less Book valueCost P140,000Less: Accumulated DepreciationUp to 1/1 P 92,800From Jan. 1-May 1[(140,000 -12,400) x 5/55]* 11,600 (104,400) 35,600

Gain on sale of machinery D (A) P 16,400

Note: No depreciation is recorded in the year an asset is purchased, and fullyear depreciation is provided in the year an asset is disposed of

Question No. 2Accumulated depreciation, R Jan 1 P 140,800Add: Depreciation expense [(204,000-12,000)/15,000 x 2,100] 26,880Accumulated depreciation, R Dec. 31 (B) P 167,680

Question No. 3Accumulated depreciation, I Jan 1 P 60,000Add: Depreciation expense [(320,000-60,000-20,000)/10] 24,000Accumulated depreciation, I Dec. 31 (C) P 84,000

Question No. 4Accumulated depreciation, A Jan 1 P 64,000Add: Depreciation expense (320,000-64,000) x 20% 51,200Accumulated depreciation, A Dec. 31 (A) P 115,200


178

Question No. 5Depreciation expense on Machinery:D (see computation in no. 1) P 11,600R (see computation in no. 2) 26,880I (see computation in no. 3) 24,000A (see computation in no. 4) 51,200N (88,000/20%) 17,600Total depreciation expense (D) P 131,280

SUMMARY OF ANSWERS:1. A 2. B 3. C 4. A 5. D

PROBLEM 18-44 Component Depreciation

Question No. 1Purchase of bottling plant P1,500,000Delivery and installation (750,000 x 1/3) 250,000Testing (33,000/3) 11,000Total cost of engine (C) P1,761,000

Question No. 2Purchase of bottling plant P2,000,000Delivery and installation (750,000 x 1/3) 250,000Testing (33,000/3) 11,000Total cost of conveyor belt and fittings (C) P2,261,000

Question No. 3Purchase of bottling plant P 800,000Delivery and installation (750,000 x 1/3) 250,000Testing (33,000/3) 11,000Total cost of outer structure (C) P1,061,000

Question No. 4Depreciation of component of plant:

Engine = (1,500,000 + 250,000 + 11,000 – 500,000) / 5 years x11/12 231,183Conveyor belt etc = (2,000,000 + 250,000 + 11,000 – 0) / 8

years x 11/12 259,073Outer structure = (800,000 + 250,000 + 11,000 – 50,000) / 3

years x 11/12 308,917Total depreciation of plant (A) P 799,173

Depreciation starts from the date that the asset was available for use: February1, 2016.


179

Question No. 5Depreciation of component of plant:

Engine = (1,500,000 + 250,000 + 11,000 – 500,000) / 5 years 252,200Conveyor belt etc = (2,000,000 + 250,000 + 11,000 – 0) / 8

years 282,625Outer structure = (800,000 + 250,000 + 11,000 – 50,000) / 3

years 337,000Total depreciation of plant (A) P 871,825

SUMMARY OF ANSWERS:1. C 2. C 3. C 4. A 5. B

PROBLEM 18-45

Question No. 1Fair value 1,400,000Legal fees 50,000Remodeling cost 100,000Total cost of building (C) 1,550,000

Question No. 2Fair value of the asset received 1,200,000Less: Cash paid 400,000Fair value of the asset given 800,000Less: Book value of the asset givenCost 1,000,000Less: Accumulated depreciation (1M/10 x 3.5) 350,000 650000

Gain on exchange (A) 150,000

Question No. 3Office building No. 1 (940,000/7) 135,000Office building No. 2 (1,000,000/10 x 6/12) 50,000Office building No. 3 (1,200,000/4 x 6/12) 150,000Factory building (1,550,000/10) 155,000Total Depreciation expense (C) 490,000

Cost of office building No. 1 1,000,000Less: Accumulated Depreciation 300,000Book value 700,000Add: Major improvements 245,000Total 945,000

Question No. 4Income from government grant (1,400,000/10) (A) 140,000


180

Question No. 5Total depreciable cost 945,000Less: Subsequent depreciation 135,000Book value (A) 810,000

SUMMARY OF ANSWERS:1. C 2. A 3. C 4. A 5. A

PROBLEM 18-46

Question No. 1


outstanding AverageJanuary 1, 2015 2,000,000 12 24,000,000July 1, 2015 4,000,000 6 24,000,000November 1, 2015 3,000,000 2 6,000,000Total 9,000,000 54,000,000


Weighted average borrowing cost:Specific borrowingsActual borrowing cost (2M x 10% x 12/12) 200,000Less: Investment income - 200,000

General borrowings:Weighted average carrying amount 4,500,000Less: Principal amount of Specific borrowings 2,000,000Weighted average related to General borrowings 2,500,000Multiply by: Capitalization rate 12%Multiply by: Months/12 12/12 300,000Weighted average borrowing cost: 500,000vs. Actual borrowing cost 2,000,000Capitalizable borrowing cost (lower) (D) 500,000

Question No. 2Total expenditures – 2015 9,000,000Total expenditures - 2016 1,000,000Capitalized borrowing cost - 2015 500,000Capitalized borrowing cost – 2016 (see computation below) 1,160,000Total cost of building (C) 11,660,000


181


outstanding AverageJanuary 1, 2016 *9,500,000 12 114,000,000July 1, 2016 1,000,000 6 6,000,000Total 10,500,000 120,000,000


Total of expenditure in 2015 of P9M and capitalized borrowing cost ofP500,000.

Weighted average borrowing cost:Specific borrowingsActual borrowing cost (2M x 10% x 12/12) 200,000Less: Investment income - 200,000

General borrowings:Weighted average carrying amount 10,000,000Less: Principal amount of Specific borrowings 2,000,000Weighted average related to General borrowings 8,000,000Multiply by: Capitalization rate 12%Multiply by: Months/12 12/12 960,000Weighted average borrowing cost: 1,160,000vs. Actual borrowing cost 2,000,000Capitalizable borrowing cost (lower) 1,160,000

Question No. 3Total expenditures – 2015 9,000,000Total expenditures - 2016 1,000,000Total cost of building (A) 10,000,000

Borrowing cost under PFRS for SME is expensed outright.

Question No. 4Cost of Machinery and Equipment 3,000,000Multiply by: Fraction 3/15Depreciation (A) 600,000

SYD is 15 years and useful life is 5 years.

Question No. 5Depreciation – remaining delivery truck (see below) 114,000Depreciation – overhauled delivery truck (see below) 30,000Depreciation – new delivery truck (see below) 24,000Total depreciation on delivery truck (B) 168,000


182

Delivery truck:Cost 1,152,000Less: Accumulated depreciation 432,000Carrying value – 12/31/2015 720,000Less: Carrying value of overhauled truck 150,000Balance 570,000Divide by: Remaining useful life (8-3) 5Depreciation on remaining delivery truck 114,000

Overhauled delivery truck:Cost P240,000Less: Accumulated depreciation (P240,000 / 8 x 3) 90,000Carrying value – 12/31/2015 150,000Add: Overhauling cost 60,000Adjusted carrying value – 01/01/2016 210,000Divide by: Revised remaining useful life (5 + 2) 7Depreciation on overhauled delivery truck 30,000

New Delivery truck:Invoice cost 400,000Freight 20,800Installation and testing 40,000Total cost of new delivery truck 460,800Divide by: Useful life 8Annual depreciation 57,600Multiply by: Number of months used (July 26 to December 31) 5/12Depreciation on remaining delivery truck 24,000

Question No. 6Beginning balance 1,152,000Add: Overhauling cost 60,000Add: Cost of new delivery truck 460,800Adjusted cost of delivery truck 1,672,800Less: Accumulated depreciation (432,000 + 168,000) 600,000Carrying value – 12/31/2016 (C) 1,072,800

SUMMARY OF ANSWERS:1. D 2. C 3. A 4. A 5. B 6. C

Chapter 19: Wasting Assets

183

CHAPTER 19: WASTING ASSETS

PROBLEM 19-1 Depletion with Change in Estimate

Question No. 1Acquisition cost P164,000Less: Estimated residual value -Depletable cost of the natural resource P164,000Divide by: Tons estimated to be extracted 20,000Depletion per ton P8.20Multiply by: Tons extracted - 2015 4,000Depletion – 2015 (B) P32,800

Question No. 2Acquisition cost P164,000Less: Accumulated depletion – 12/31/2015 32,800Carrying value – 01/01/2016 131,200Divide by: Tons estimated to be extracted 20,000Depletion per unit P6.56Multiply by: Tons extracted – 2016 8,000Depletion – 2016 (C) P52,480

PROBLEM 19-2 Depletion with Change in Estimate

Acquisition cost 20,000,000Exploration cost. 15,000,000Intangible development cost 4,000,000Total cost of the natural resources 39,000,000less estimated residual value 1,000,000Total depletable cost of the natural resources 38,000,000divide by units est. to be extracted 2,000,000Depletion per unit 19.00x units extracted 500,000Depletion from 2015 to 2017 9,500,000

Question No. 1Cost of natural resource 39,000,000Accumulated depletion 9,500,000Carrying amount, 12/31/2017 29,500,000Residual value 600,000Depletable cost 28,900,000Divide by revised remaining units 400,000Depletion rate per unit 72.25Multiply by: Units extracted 200,000Depletion (D) 14,450,000


184

Question No. 2Cost of natural resource 39,000,000Accumulated depletion 23,950,000Carrying amount, 12/31/2018 (D) 15,050,000

PROBLEM 19-3 Depreciation of Movable and Immovable Equipment –Useful Life of the Immovable Equipment is Shorter

Question No. 1Acquisition cost 8,000,000Exploration cost. 12,000,000Intangible development cost 5,000,000Total cost of the natural resources 25,000,000less estimated residual value -Total depletable cost of the natural resources 25,000,000divide by units est. to be extracted 2,000,000Depletion per unit 12.50Multiply by: Units extracted 500,000Depletion (D) 6,250,000

Question No. 2Cost of the movable equipment 4,000,000Divide by: Useful life 10Depreciation (A) 400,000

Question No. 3Cost of the movable equipment 2,000,000Divide by: Useful life (shorter) 4Depreciation (B) 500,000

PROBLEM 19-4 Depreciation of Movable and Immovable Equipment - Lifeof the Wasting Asset is Shorter

Question No. 1Acquisition cost 8,000,000Exploration cost. 12,000,000Intangible development cost 5,000,000Total cost of the natural resources 25,000,000less estimated residual value -Total depletable cost of the natural resources 25,000,000divide by units est. to be extracted 2,000,000Depletion per unit 12.50x units extracted 500,000Depletion (D) 6,250,000


185

Question No. 2cost of the movable equipment 4,000,000divide by units est. to be extracted 20Depreciation (A) 200,000

Question No. 3Cost of the movable equipment P2,000,000Divide by: Units estimated to be extracted (shorter)* 2,000,000Depreciation rate per unit P1Multiply by: Actual units extracted 500,000Depreciation - 2016 (B) 500,000

*Estimated useful life using output method (2,000,000 / 500,000) = 4 years

PROBLEM 19-5 Depreciation –No Production

Cost of immovable equipment 4,000,000Divide by: Units est. to be extracted 2,000,000Depreciation per unit 2.00x units extracted 500,000Accum. Depreciation 1,000,000

Question No. 1Cost of immovable equipment 4,000,000Less: Accumulated depreciation 1,000,000Book value, Dec. 31, 2017 3,000,000Divide by: Units est. to be extracted 12Depreciation in 2018 (B) 250,000

Question No. 2Cost of immovable equipment 4,000,000Less: Accumulated depreciation 1,250,000Book value, Dec. 31, 2018 2,750,000Divide by: Remaining units to be extracted 1,500,000Depreciation per unit 1.83Multiply by: Units extracted 100,000Depletion (A) 183,333

PROBLEM 19-6 Liquidating DividendsAccumulated profits -unappropriated 9,000,000Accumulated depletion 4,000,000Total 13,000,000less: Capital liquidated 850,000


186

Depletion in the ending inventory(150,000 units X4 ) 600,000 1,450,000Maximum Dividend (C ) 11,550,000

PROBLEM 19-7

Question No. 1Acquisition cost P9,075,000Divide by: Tons estimated to be extracted 1,100,000Depletion per ton P8.25Multiply by: Actual tons extracted – 2016 100,000Depletion - 2016 (D) 825,000

Question No. 2Cost of Installation 1,925,000Divide by: Tons estimated to be extracted 1,100,000Depreciation per ton 1.75Multiply by: Actual tons extracted – 2016 100,000Depreciation - 2016 (B) 175,000

Question No. 3Cost of mining equipment 4,400,000Divide by: Useful life 8Depreciation – 2016 (A) 550,000

Question No. 4Acquisition cost P9,075,000Less: Accumulated Depletion 825,000Carrying value – 12/31/2016 P8,250,000Add: Additional development cost - 2017 750,000Remaining depletable cost P9,000,000Divide by: Estimated tons to be extracted 1,000,000Depletion per ton P 9Multiply by: Tons extracted – 2017 150,000Depletion - 2017 (C) P1,350,000

Question No. 5Installation ((P1,925,000/1.1M) x 150,000 tons) P 262,500Mining equipment (P4,400,000/8) 550,000Total depreciation expense (C) P 812,500

SUMMARY OF ANSWERS:1. D 2. B 3. A 4. C 5. C


187

PROBLEM 19-8 Cost Of Wasting Asset with Estimated Restoration Cost,Depletion, Depreciation of Movable and Immovable Equipment

Question No. 1Acquisition cost of the wasting assets 200,000,000Exploration and intangible devt. Cost 10,000,000Estimated decommissioning and restoration costs-at PV 1,542,173Initial cost (C ) 211,542,173

Estimated restoration cost P 4,000,000Multiply by: Present value of 1 for four periods 0.385543289Present value of the restoration cost P 1,542,173

Question No. 2Total cost of the wasting assets 211,542,173divide by 10,000,000Depletion per unit 21.15x units extracted 2,000,000Depletion expense (C ) 42,308,435

Question No. 3Cost of the movable equipment 8,000,000Divide by: Useful life 16Depreciation (A) 500,000

Question No. 4Cost of the movable equipment 9,000,000Divide by: Useful life (shorter) 8Depreciation (E ) 1,125,000

*Estimated useful life using output method (10,000,000 / 1,000,000) = 10 years

Question No. 5Date Interest expense Present value

01/01/2016 1,542,17312/31/2016 154,217 (B) 1,696,390

SUMMARY OF ANSWERS:1. C 2. C 3. A 4. E 5. B


188

PROBLEM 19-8 Cost Of Wasting Asset with Estimated Restoration Cost,Depletion, Depreciation of Movable and Immovable Equipment

Question No. 1Acquisition cost of the wasting assets 200,000,000Exploration and intangible devt. Cost 40,000,000Estimated decommissioning and restoration costs-at PV 1,542,173Initial cost (C ) 241,542,173

Estimated restoration cost P 4,000,000Multiply by: Present value of 1 for four periods 0.385543289Present value of the restoration cost P 1,542,173

Question No. 2Total cost of the wasting assets 241,542,173Divide by: Total units estimated to be extracted 15,000,000Depletion per unit 16.10Multiply by: Units extracted 2,000,000Depletion expense (B) 32,205,623

Question No. 3Cost of the movable equipment 8,000,000Divide by: Useful life 6Depreciation (C ) 1,333,333

Question No. 4Cost of the movable equipment 9,000,000Divide by: Useful life 5Depreciation – 2016 (D) 1,800,000

Question No. 5Date Interest expense Present value

01/01/2016 1,542,17312/31/2016 154,217 (B) 1,696,390

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. D 5. B

Chapter 20: Investment Property

189

CHAPTER 20: INVESTMENT PROPERTY

PROBLEM 20-1: Classification Issue

Item Owner-occupiedproperty

InvestmentProperty Inventory Others Remarks

1) ₱ 800,0002) ₱1,260,000 Covered by PAS 113) 1,000,000 Covered by PAS 114) ₱450,0005) ₱240,0006) 1,110,000 Derecognized since

it is leased outunder a financelease

7) 430,000 1,290,0008) 960,0009) 2,100,000 IP in the separate

FS10) 530,000 Cannot qualify as

IP since it is notland or building

11) 420,000 Not reported sinceit is leased underoperating lease

12) 1,100,00013) 1,300,00014) 1,150,000

2,160,000 7,740,000 450,000

1. (A) 2. (C) 3. (C)

PROBLEM 20-2: Property held for mixed use

Question No. 1 (B) Question No. 2 (D)

PROBLEM 20-3: Ancillary services

Question No. 1 (C) Question No. 2 (D)

PROBLEM 20-4: Intracompany rentals

Question No. 1 (B) Question No. 2 (D)


190

PROBLEM 20-5: Initial measurement - Investment property leased underfinance lease

Lower of fair value or present value of minimum lease payments.

Suggested answer: (B)

PROBLEM 20-6: Subsequent measurement: Cost model vs Fair value model

SUMMARY OF ANSWERS:1. D 2. B 3. D 4. B 5. D 6. A

PROBLEM 20-7: Transfer under Cost model – PPE to IP

Question No. 1 (D) Question No. 2 (C)

PROBLEM 20-8: Transfer from PPE to Investment Property – Fair value vsCost model

Question No. 1 (D)No gain or loss is recognized if the transfer is made at cost model.


Question No. 3 and 4Fair value date of transfer ₱86,000,000Less: Carrying value – 12/31/2016 (₱100 / 25 x 20) 80,000,000Revaluation surplus – OCI 6,000,000Less: Transfer of revaluation surplus to R/E as a result ofreclassification 6,000,000Gain (loss) on transfer (D) ₱ 0

SUMMARY OF ANSWERS:1. D 2. D 3. D 4. D

PROBLEM 20-9: Transfer from inventory to investment property – Fairvalue vs Cost model

Question No. 1 (B)Cost ₱2,600,000Net realizable value (₱2,800,000 - ₱100,000) 2,700,000

Lower of cost and net realizable value ₱2,600,000


191

Question No. 2 (B)The initial carrying amount under the new classification is the previous carryingamount of ₱2,600,000.


Question No. 4 (A)₱2,880,000. Fair value at the date of transfer. Don’t deduct cost to sell.

Question No. 5 (A)Fair value at the date of transfer ₱2,880,000Less: Carrying value 2,600,000Gain on transfer ₱ 280,000

PROBLEM 20-10: Derecognition of investment property – Fair value vsCost Model

Question No. 1Gross selling price ₱2,990,000Less: Disposal cost 120,000Net selling price 2,870,000Less: Carrying value – 12/31/2015 (₱3,000,000 / 20 x 18) 2,700,000Gain on sale (D) ₱ 170,000

Question No. 2Gross selling price ₱2,990,000Less: Disposal cost 120,000Net selling price 2,870,000Less: Carrying value – 12/31/2015 (fair value) 2,450,000Gain on sale (C) ₱ 420,000

PROBLEM 20-11

Question No. 1Cost ₱14,000,000Less: Residual value 1,000,000Depreciable cost 13,000,000Divided by: Useful life 10 yearsAnnual depreciation 1,300,000Multiply by: Months outstanding 8/12Depreciation – 2010 (D) ₱ 866,667


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Question No. 2Depreciation [(₱14M – ₱1M) / 10 years] ₱1,300,000Impairment loss 480,000Total amount to SCI (A) ₱1,780,000

Question No. 3Cost ₱14,000,000Accumulated depreciation 3,466,667Carrying value, before impairment 10,533,333Impairment loss 480,000Carrying value, after impairment - 12/31/2012 10,053,333Less: Residual value 1,000,000Depreciable amount 9,053,333Divide by: Remaining useful life (120 – 32) 88 monthsMultiply by: Number of months 12Depreciation – 2013 (to SCI) (B) 1,234,545

Question No. 4Cost ₱14,000,000Accumulated depreciation 3,466,667Carrying value, before impairment 10,533,333Impairment loss 480,000Carrying value, after impairment - 12/31/2012 10,053,333Depreciation - 2013[(₱10,053,333- ₱1,000,000)/88*12] 1,234,545Depreciation – 2014 [(₱10,053,333- ₱1,000,000)/88*10] 1,028,788Carrying value, 10/31/2014 ₱7,790,000

Depreciation – 2014 [(₱10,053,333- ₱1,000,000)/88*10] 1,028,788Gain on transfer (₱10,050,000 - ₱7,790,000) 2,260,000Unrealized gain - change in fair value(₱11,000,000 -₱10,050,000)

950,000

Total amount to SCI (A) ₱4,238,788

Question No. 5Fair value - 12/31/2015 ₱11,450,000Fair value - 12/31/2014 11,000,000Gain on change in fair value (B) ₱ 450,000

Question No. 6Reclassification loss:Fair value - 05/01/2016 ₱ 9,500,000Carrying value, 05/01/2016 11,450,000 ₱1,950,000

Depreciation - 2016 [(₱11,450,000- ₱1,000,000)/54*12] 2,322,222Total (A) ₱4,272,222


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PROBLEM 20-12 Various investments

DateNo. of

sharesCost per

shareTotalCost

1/1 10,000 ₱21 ₱ 210,0003/1 stock split 15,000 -Total (10,000 x 5/2) 25,000 ₱8.4 ₱ 210,00011/1 Special assessment (₱1.60 x25,000) 40,000Total 25,000 ₱10 ₱ 250,000

Question No. 1Fair value (₱15 x 25,000) ₱375,000Less: Carrying value 250,000Unrealized gain-OCI (D) ₱125,000

Question No. 2Broker’s expense over, net income under (₱10,000)Operating expense over, NI under (₱1.60 x 25,000 shares) (40,000)Net income understated (B) (₱50,000)

Question No. 3Net income of associate ₱3,000,000Multiply by: Percentage of ownership 30%Share in the net income before adjustment 900,000Less: Unrealized gain on downstream sale of PPE[(₱800,000 - ₱400,000) x 4/5]

320,000

Less: Unrealized profit on upstream sale of inventory(₱100,000 x 30%) 30,000Share in the net income after adjustment (C) ₱ 550,000

Question No. 4Cost of Investment – 01/01/2016 ₱4,000,000Add: Net investment income - 2016 (see No. 3) 550,000Less: Dividends received -2016 (30% x ₱800,000) 240,000Add: Share in the translation gain (30% x ₱1,000,000) 300,000Carrying value – 12/31/2016 (B) ₱4,610,000

Question No. 5Cost of Investment – 01/01/2016 ₱4,000,000Add: Net investment income - 2016 (see No. 3) 550,000Less: Dividends received -2016 (30% x ₱800,000) 240,000Add: Share in the translation gain (30% x ₱1,000,000) 300,000Less: Amortization of goodwill (₱200,000/10) 20,000Carrying value – 12/31/2016 (C) ₱4,590,000


194

Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized overtheir useful life. If an entity cannot determine reliably the useful life, it isassumed to be 10 years.

Question No. 6Fair value of building A ₱1,500,000Less: Carrying value 1,000,000Unrealized gain - P&L (B) ₱ 500,000

SUMMARY OF ANSWERS:1. D 2. B 3. C 4. B 5. C 6. B

Chapter 22: Intangible Assets

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CHAPTER 22: INTANGIBLE ASSETS

PROBLEM 22-1 Research and Development Cost

R&D OthersCost of activities aimed at obtaining newknowledge ₱700,000 -Marketing research to study consumer tastes - ₱16,000Cost of developing and producing a prototypemodel 23,000 -Cost of testing the prototype model for safety andenvironmental friendliness 80,000 -Cost revising designs for flaws in the prototypemodel 15,000 -Salaries of employees, consultants, and techniciansinvolved in R&D 120,000 -Amount paid for conference for the introduction ofthe newly developed product including fee of amodel hired as endorser - 102,000Advertising to establish recognition of the newlydeveloped product - 43,000Cost incurred on search for alternatives formaterials, devices, products, processes, systems orservices 30,000 -Cost of final selection of possible alternatives for anew process 96,000 -Periodic or routine design changes to existingproducts - 2,500Modification of design for a specific customer - 10,000Cost of design, construction and operation of a pilotplant that is not of a scale economically feasible forcommercial production 5,000 -Cost of routine, seasonal, and periodic design oftools, jigs, molds and dies - 18,000Cost of quality control during commercialproduction - 32,000Cost of purchased building to be used in variousR&D projects - 1,000,000Depreciation on the building described above 100,000 -Personnel costs of persons involved in researchand development projects 41,200 -Design, construction, and testing of preproductionprototypes and models 96,000 -Adjusted balances ₱1,306,200 ₱1,223,500

(A)


196

PROBLEM 22-2 Research and Development2014 2015 2016

Cost (cumulative) ₱ 40,000* ₱140,000 ₱240,000Recoverable amount 90,000 110,000 250,000Impairment loss - ₱ 30,000 -

*₱120,000 x 4/12

Under PAS 36, intangible assets that are not yet brought to use should be testedfor impairment annually. Therefore, the carrying value of the intangible assetafter impairment is as follows:

2014 2015 2016Cost (cumulative) ₱ 40,000 ₱110,000 ₱240,000 (C)

PROBLEM 22-3 Research and Development

Question No. 1Subsequent expenditure on research ₱200,000Development expenditures not qualifying for recognition(₱480,000 x 5/12) 200,000Research and development expense (A) ₱400,000

Question No. 2Acquisition cost of research and development ₱400,000Development expenditures qualifying for recognition(₱480,000 x 7/12) 280,000Intangible Asset under Development (E) ₱680,000

In-process research and development acquired is recorded as intangible asset atcost. Subsequent expenditure on an in-process research and developmentproject recognized as usually done: research is expensed and development costscapitalized only if all criteria for capitalization of development costs are met.

PROBLEM 22-4 Issuance of Treasury Shares

Issuance of treasury shares in exchange for non-cash asset is simply recordedjust like an issuance from unissued shares. Hence, the transaction should beaccounted in the following order of priority:

1. Fair value of asset received2. Fair value of shares (i.e., treasury shares) issued3. Cost of treasury shares

Cost (₱110 x 2,000) = ₱220,000 (D)


197


Cost of the Patent ₱ 300,000Less: Amortization, 12/31/2015 (₱300,000/15 x 2) 40,000Carrying value, 1/1/2016 ₱ 260,000Divided by: Remaining useful life (10 – 2) 8Amortization – 2015 (A) ₱ 32,500

PROBLEM 22-6 Trademark

Since the trademark is considered to have an indefinite useful life, it is onlysubject to impairment and not amortized. Hence the amount to be reported inits December 31, 2016 SFP is ₱500,000. (A)

PROBLEM 22-7 Franchise

Downpayment ₱2,000,000Present value of installment receivable (*2.91x ₱1,000,000) 2,910,000Total cost of franchise (D) ₱4,910,000

*The present value factor is the present value of ordinary annuity using 14% for4 periods.

PROBLEM 22-8 Leasehold Improvement

Cost of the improvement ₱2,250,000Less: Accumulated depreciation (₱2,250,000 / 10*) 225,000Carrying value – 12/31/2016 (B) ₱2,025,000

*Shorter of useful life of 10 years and extended lease term (12 – 3 + 6) = 15.

PROBLEM 22-9 Goodwill

Net income Net assets2014 ₱1,000,000 ₱ 3,900,0002015 1,250,000 4,350,0002016 1,950,000 4,500,000Total ₱4,200,000 ₱12,750,000Divide by: Number of periods 3 3Average ₱1,400,000 ₱ 4,250,000

Average earnings (see table above) ₱1,400,000Less: Normal earnings (₱4,250,000 x 20%) 850,000Average excess earnings 550,000Divide by: Capitalization rate 25%


198

Goodwill 2,200,000Add: Fair value of net asset acquired 4,500,000Purchase price (A) ₱6,700,000

PROBLEM 22-10 Internally Developed Computer Software Cost

Question No. 1Other coding costs after establishment of technological

feasibility ₱1,000,000Other testing costs after establishment of technological

feasibility 750,000Costs of producing product masters 1,250,000Total Software Cost (A) ₱3,000,000

Question No. 2Duplication of computer software and training materials from

product master ₱1,500,000Packaging product 250,000Total Inventoriable Cost (A) ₱1,750,000

Question No. 3Total Software Cost ₱3,000,000Multiply by: (₱10M / ₱40M) 25%Amortization (A) ₱ 750,000

SUMMARY OF ANSWERS:1. A 2. A 3. A

PROBLEM 22-11 Purchased computer software

Purchase price excluding refundable purchase tax ₱550,000Add: Customization cost (₱120,000 + ₱15,000) 135,000

Testing cost (₱21,000 + ₱11,000 + ₱5,000) 37,000Amortization (D) ₱ 722,000

PROBLEM 22-12 Website Cost

Question No. 1Zero. All costs are charged to expense. (A)

Question No. 2Obtaining a domain name ₱ 32,000Installing developed applications on the web server 80,000Stress testing 12,000


199

Designing the appearance (e.g. layout and color) of web pages 160,000Creating, purchasing, preparing (e.g. creating links and

identifying tags), and uploading information 60,000Updating graphics and revising content 32,000Adding new functions, features and content 12,000Reviewing security access 36,000Total intangible asset (B) ₱424,000

PROBLEM 22-13 Renewable Rights

Question No. 1As the costs associated with the renewal are insignificant, the asset must beamortized over the 10 year useful life. The entity intends to renew the licenseand the government intends to re-issue the license to Bangus Co., and thereforeit must be treated as an asset with a 10 year useful life.

Amortization (₱200,000 / 10) = ₱20,000 (D)

Question No. 2As the costs associated with the renewal are significant, and almost equaling theinitial cost of the license, the asset must be amortized over the 5 year useful life.Although the entity intends to renew the license, the renewed license, when it isacquired, must be treated a separate asset and amortized over a useful life of 5years.

Amortization (₱200,000 / 5) = ₱40,000 (C)

COMPREHENSIVE PROBLEMSPROBLEM 22-14 Goodwill Computation

Current Assets (₱6,000,000 + ₱800,000) ₱6,800,000Investments 2,000,000PPE (₱13,000,000 + ₱1,850,000) 14,850,000Current liabilities (3,500,000)Noncurrent liabilities (2,500,000)Fair value of net asset acquired ₱17,650,000

Fair value of net asset acquired ₱17,650,000Multiply by: Normal rate of return 10%Normal earnings ₱1,765,000

Total earnings ₱9,000,000Loss on sale (or Gain) on sale (100,000)Bonus (₱150,000 x 4years) 600,000Operating income ₱9,500,000Divide by: No. of years 4Average earnings ₱2,375,000


200

Question No. 1Average earnings ₱ 2,375,000Less: Normal earning 1,765,000Average excess earnings 610,000Multiply by: Capitalization period 4Goodwill (A) 2,440,000Add: Fair value of net asset acquired 17,650,000Purchase price (A) ₱20,090,000

Question No. 2Average earnings ₱2,375,000Less: Normal earning 1,765,000Average excess earnings 610,000Divide by: Capitalization rate 10%Goodwill (B) 6,100,000Add: Fair value of net asset acquired 17,650,000Purchase price (B) ₱23,750,000

Question No. 3Average earnings ₱2,375,000Divide by: Capitalization rate 8%Purchase price (B) 29,687,500Less: Fair value of net asset 17,650,000Goodwill (B) ₱12,037,500

Question No. 4Average earnings ₱2,375,000Less: Normal earning 1,765,000Average excess earnings 610,000Multiply by: Present value of ordinary annuity 3.0373Goodwill (C) 1,852,753Add: Fair value of net asset acquired 17,650,000Purchase price (C) ₱19,502,753

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. C

PROBLEM 22-15

Question No. 1Net Patent, January 1 ₱336,000Divide by: Remaining life (8years -2 years) 6Amortization (A) ₱ 56,000


201

Question No. 2None, the trademark has an indefinite life. (B)

Question No. 3Cost of noncompetition agreement (1,600,000 x 1/4) 400,000Divide by: Useful life 5Amortization expense (A) 80,000

Question No. 4Purchase price 2,400,000Less: Fair value of net assets acquired 1,600,000Goodwill (carrying amount) (A) 800,000

The goodwill shall not be amortized because its useful life is indefinite.However, goodwill shall be tested for impairment at least annually, or morefrequently if events or changes in circumstances indicate a possible impairment.

Question No. 5Cost-Patent 384,000Less: Accumulated Amortization (48,000 + 56,000) 104,000 280,000Cost - Trademark (no amortization) (1.6M x 3/4) 1,200,000Cost - Noncompetition agreement 400,000Less: Accumulated Amortization (see no. 3) 80,000 320,000Total carrying amount of the Intangible assets (B) 1,800,000

Note: Goodwill should not be reported as part of intangible asset since it is notidentifiable.

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. A 5. B

PROBLEM 22-16

Question No. 1Legal cost 7,000Payment of licenses to author excluding refundable purchasetaxes (100,000-10,000) 90,000Total cost of intangible assets (D) 97,000

Question No’s 2, 3 and 5Cost 97,000Less: Amortization in 2016 (97,000/5 x 6/12) 9,700 No. 2 (C)Carrying value, 12/31/ 2016 87,300 No. 3 (C)Less: Amortization in 2017 (97,000/5 ) 19,400Carrying value, 12/31/ 2017 67,900 No. 5 (D)


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Question No. 4General start-up cost 1,500Amortization 9,700Cost of printing 100Advertising expense (20,000 x 6/12) 10,000Total Expense (B) 21,300

SUMMARY OF ANSWERS:1. D 2. C 3. C 4. B 5. D

PROBLEM 22-17 Patent, Competitive, Related Patent

Question No. 1Cost 500,000Divide by: Remaining useful life 10Amortization (C) 50,000

Question No. 2Cost of the old Patent 500,000Less: Accumulated Amortization (500,000 / 10 x 2) 100,000Carrying value, 1/1/2014 400,000Competitive Patent 240,000Total 640,000Divide by: Remaining life 8Amortization (D) 80,000

Question No. 3Carrying value, 1/1/2014 640,000Less: Amortization 2014 80,000Carrying value, 12/31/2014 (D) 560,000

Question No. 4Carrying value, 12/31/2014 560,000Add: Related patent 200,000Total Carrying value, 1/1/2015 760,000Divide by: Extended life 20Amortization (A) 38,000

Question No. 5Total Carrying value, 1/1/2015 760,000Less: Amortization, 2015 38,000Carrying value, 1/1/2016 = Loss (A) 722,000

SUMMARY OF ANSWERS:1. C 2. D 3. D 4. A 5. APROBLEM 22-18 Comprehensive

Question No. 1Acquisition cost 600,000


203

Costs of employee benefits arising directly from bringing theasset to its intended condition 60,000

Professional fees arising directly from bringing the asset to itsintended condition 13,000

Total cost of the trademark (C) 673,000

Question No. 2None, the trademark has an indefinite life and is not subject to amortization.

(A)

Question No. 3Amortization - Trademark -Amortization - Customer list 60,000Total amortization (B) 60,000

Question No. 4Amortization - Trademark -Amortization - Customer list 60,000Amortization - Franchise 165,416Total amortization (A) 225,416

Downpayment 400,000Add: Present Value of notes payable (600,000 x .7118) 427,080Cost of franchise 827,080

Question No. 5Cost of trademark 673,000Cost of customer list 300,000Less: Accumulated Amortization 120,000 180,000Cost of franchise 827,080Less: Accumulated Amortization 165,416 661,664Total carrying value (A) 1,514,664

SUMMARY OF ANSWERS:1. C 2. A 3. B 4. A 5. A

PROBLEM 22-19

Question No. 1Zero, organization cost is treated as outright expense.(A)


204

Question No. 2Design costs 3,000,000Add: Legal fees 300,000

Registration fee with Patent office 100,000Total cost of trademark (B) 3,400,000

Question No. 3Cash 400,000Add Present value of the note (200,000 x 2.91) 582,000Cost of Franchise (B) 982,000

Question No. 4Cost (see no. 3) 982,000Less: Amortization (982,000/20) 49,100Carrying value, 12/31/2016 (A) 932,900

Question No. 5Amortization of the franchise P49,100 (D)

The trademark has no amortization because it has an indefinite life. It is onlytested for possible impairment.

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. A 5. D

PROBLEM 22-20

Question No. 1Cost-Patent 136,000Less: Amortization for the year (136,000/20) 6,800Carrying value of the Patent (C) 129,200

Question No. 2Licensing agreement No. 1Unadjusted balance 100,000Less: Amortization for 2 years (100,000/20 x 2) 10,000Total 90,000Less: Reduction in value (90,000 x 60%) 54,000Carrying value (B) 36,000

Question No. 3Unadjusted balance 118,000Add: Amount credited for advance collection 2,000Total cost 120,000Less: Amortization (120,000/10) 12,000


205

Carrying value - Licensing agreement No. 2 (C) 108,000

Question No. 4Carrying values:

Patent (see no. 1) 129,200Licensing Agreement No. 1 (No. 2) 36,000Licensing Agreement No. 2 (No. 3) 108,000

Total carrying value (C) 273,200

The P16,000 cost incurred for advertising and the P32,000 legal expenses forincorporation should be charged to expense when it were incurred.

Question No. 5Nonamortization of Licensing Agreement No 1 (100,000/20 x 1) 5,000Expenses capitalized:Goodwill (16,000+32,000) 48,000Organization cost 58,000

Overstatement of Retained earnings (A) 111,000

All the expenses above were understated thereby overstating the net incomeand retained earnings.

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. C 5. A

PROBLEM 22-21

Question No. 1Unadjusted balance 550,000Less: Unamortized portion of improvements debited

Cost P75,000Less: Amortization (P75,000 / 10 x 3) 22,500 52,500

Adjusted balance – 01/01/2016 497,500Less: Amortization 2016 (P52,500 + P56,071) – see below 108,571Carrying value – 12/31/2016 (A) 388,929

Computation of amortization:Adjusted balance – 01/01/2016 497,500Less: CV of Patent with remaining UL of 2 years – 01/01/2016

Cost 210,000Less: Accumulated amortization 01/01/2016

(P210,000 / 14 x 7) 105,000 105,000CV of Patent with remaining UL of 7 years – 01/01/2016 392,500

Amortization of:Patent with remaining UL of 2 years (105,000 / 2) 52,500Patent with remaining UL of 7 years (392,500 / 7) 56,071

Total Amortization 108,571


206

Question No. 2Franchise cost 50,000Less: Amortization (50,000 / 5) 10,000Carrying value 12/31/2016 (A) 40,000

Question No. 3The amount to be reported as goodwill is the excess of cost over the fair value ofnet asset acquired. Goodwill is not amortized but only subject to impairmenttesting. Therefore, the amount to be reported is P200,000. (A)

Question No. 4Other coding costs after establishment of technologicalfeasibility 240,000

Other testing costs after establishment of technologicalfeasibility 200,000

Costs of producing master for training materials 150,000Total Software Cost (A) 590,000

Question No. 5Completion of detailed program design 130,000Costs incurred for coding and testing to establish technologicalfeasibility 100,000

Total Cost charged to Expense (A) 230,000

Question No. 6Amortization:Patent (see No. 1) 108,571Franchise (see No. 2) 10,000Software cost – none yet -

Total Cost charged to Expense (C) 118,571

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. A 5. A 6. C

PROBLEM 22-22 Inventories, PPE and Intangible Assets

Question No. 1Unadjusted balance 4,300,000Add: Goods purchased FOB Shipping Point 40,000Adjusted balance (B) 4,340,000

Question No. 2Total acquisition cost 4,000,000Add: Mortgage assumed 800,000


207

Total cost of land and building 4,800,000Multiply by: Percentage allocated to building 80%Total Purchase Price allocated to Building 3,840,000Add: Remodeling Cost (300,000 – 20,000) 280,000Total Cost of Building (A) 4,120,000

Question No. 3Cost of improvement 500,000Less: Accumulated depreciation (500,000/8 x 9/12) 46,875Carrying value (B) 453,125

Question No. 4Carrying value – 01/01/2016 432,000Less: Amortization 2016 (432,000 / 3 years remaining UL) 144,000Carrying value (C) 288,000

Question No. 5Building (4,120,000-120,000)/50 80,000Leasehold Improvements (500,000/8 x 9/12) 46,875Furniture and Fixtures 150,000Franchise (500,000 / 10) 50,000Licensing agreement 144,000Total depreciation and amortization expense (A) P470,875

SUMMARY OF ANSWERS:1. B 2. A 3. B 4. C 5. A

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

208

CHAPTER 23: REVALUATION, IMPAIRMENT ANDNONCURRENT ASSET HELD FOR SALE

PROBLEM 23-1 Revaluation, No Change in Estimate

Question No. 1Historical Replacement

Cost Cost IncreaseMachinery 8,000,000 15,000,000 7,000,000Accumulated depreciation (25%) 2,000,000 3,750,000 1,750,000CA/DRC/RS 6,000,000 12,250,000 5,250,000

(C)

Carrying amount/Depreciated Replacement Cost/Revaluation Surplus

Question No. 2Depreciated Replacement cost 11,250,000Divide by: Remaining useful life (20 – 5) 15Depreciation Expense – 2017 (C) 750,000

Question No. 3Revaluation surplus, beginning 5,250,000Less: Piecemeal realization – 2017 (5,250,000 / 15) 350,000Remaining revaluation surplus end of 2017 (B) 4,900,000

Question No. 4Net Selling Price 10,000,000Less: Carrying amount – 01/02/2018Depreciated Replacement Cost, date of revaluation 11,250,000Less: Subsequent depreciation (P750,000 x 2years)

1,500,000 9,750,000

Gain on sale (A) 250,000

Question No. 5Revaluation surplus, beginning 5,250,000Less: Piecemeal realization for two years (5,250,000/ 15 x 2) 700,000Remaining revaluation surplus to R/E (B) 4,550,000

SUMMARY OF ANSWERS:1. C 2. C 3. B 4. A 5. B


209

PROBLEM 23-2 Revaluation, With Change in Useful Life

Question No. 1Replacement

Cost Cost IncreaseMachinery 12,000,000 14,000,000 2,000,000Accumulated depreciation (25%) 2,400,000 2,800,000 400,000CA/DRC/RS 9,600,000 11,200,000 1,600,000

(B)


Question No. 2Depreciated Replacement cost 11,200,000Divide by: Remaining useful life 25

Depreciation Expense – 2016 (B) 448,000

Question No. 3Revaluation surplus, 01/01/2016 1,600,000Less: Piecemeal realization – 2016 (1,600,000/ 25) 64,000Remaining revaluation surplus end of 2016 (C) 1,536,000

Question No. 4Net Selling Price 10,000,000Less: Carrying amount – 01/02/2017Depreciated Replacement Cost, date of revaluation 11,200,000Less: Subsequent depreciation (P11.2M / 25 x 2) 896,000 10,304,000Gain on sale (A) (304,000)

Question No. 5Revaluation surplus, beginning 1,600,000Less: Piecemeal realization for two years (1,600,000 / 25 x 2) 128,000Remaining revaluation surplus to R/E (B) 1,472,000

SUMMARY OF ANSWERS:1. B 2. B 3. C 4. A 5. B

PROBLEM 23-3 Revaluation, With Change in Useful Life and Residual Value

ReplacementCost Cost Increase

Machinery 4,550,000 9,100,000 4,550,000Less: Accumulated depreciation *1,125,000 **2,250,000 1,125,000CA/DRC/RS 3,425,000 6,850,000 3,425,000

(C)


210


*This amount should be the actual amount of accumulated depreciation (i.e.using the original residual value)** (9,100,000 – 100,000) / 20 x 5. This is computed using the revised residualvalue.

Question No. 2Depreciated Replacement cost 6,850,000Less: Revised residual value 100,000Depreciable amount 6,7500,000Divide by: Remaining useful life 25Depreciation Expense – 2016 (B) 270,000

Question No. 3Revaluation surplus, 01/01/2016 3,425,000Less: Piecemeal realization – 2016 (3,425,000 / 25) 137,000Remaining revaluation surplus end of 2016 (B) 3,288,000

Question No. 4Net Selling Price 7,000,000Less: Carrying amount – 01/02/2018Depreciated Replacement Cost, date of revaluation 6,850,000Less: Subsequent depreciation (P540,000 x 2) 540,000 6,310,000Gain on sale (C) 690,000

Question No. 5Revaluation surplus, beginning 3,425,000Less: Piecemeal realization for two years (P274,000 x 2) 274,000Remaining revaluation surplus to R/E (B) 3,151,000

SUMMARY OF ANSWERS:1. C 2. B 3. B 4. C 5. B

PROBLEM 23-4 Impairment and Revaluation of PPE

CASE NO. 1 COST MODELQuestion No. 1Cost 2,200,000Less: Residual value 200,000Depreciable amount 2,000,000Divide by: Estimated useful life 10Depreciation - 2016 (B) 200,000


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Question No. 2Zero. The company is using the cost model.(A)

Question No. 3Cost 2,200,000Less: Accumulated depreciation 200,000Carrying amount 2,000,000Less: Revised residual value 290,000Depreciable amount 1,710,000Divide by: Remaining useful life 9Depreciation - 2017 (E) 190,000

Question No. 4Cost 2,200,000Less: Accumulated Depreciation (200,000 + 190,000 + 190,000) 1,620,000Carrying amount – 12/31/2019 1,620,000Less: Recoverable amount, date of impairment 939,500Impairment loss (C) 680,500

Question No. 5Recoverable amount 939,500Less: Revised residual value 40,000Depreciable amount 899,500Divide by: Remaining useful life 7Depreciation (B) 128,500

SUMMARY OF ANSWERS:1. B 2. A 3. E 4. C 5. B

CASE NO. 2 REVALUATION MODELQuestion No. 1Cost 2,200,000Less: Residual value 200,000Depreciable amount 2,000,000Divide by: Estimated useful life 10Depreciation - 2016 (B) 200,000

Question No. 2Recoverable amount/fair value 2,990,000Less: Carrying amountMachinery at cost 2,200,000Less: Accumulated depreciation 200,000 2,000,000Revaluation surplus (D) 990,000


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Question No. 3Recoverable amount/fair value 2,990,000Less: Revised residual value 290,000Depreciable amount 2,700,000Divide by: Remaining useful life 9Depreciation (C) 300,000

Question No. 4Recoverable amount, date of revaluation 2,990,000Less: Subsequent depreciation for 2 years 600,000Carrying amount 2,390,000Less: Recoverable amount, date of impairment 939,500Decrease in value 1,450,500Less: Remaining revaluationRevaluation surplus, date of revaluation 990,000Less: Piecemeal realization for two years 220,000 770,000Impairment loss (C) 680,500

Question No. 5Recoverable amount 939,500Less: Revised residual value 40,000Depreciable amount 899,500Divide by: Remaining useful life 7Depreciation-2019 (B) 128,500

PROBLEM 23-5 Impairment and Revaluation of PPE

CASE NO. 1 COST MODELQuestion No. 1Cost 2,300,000Less: Residual value 200,000Depreciable amount 2,100,000Divide by: Estimated useful life 10Depreciation - 2016 (C) 210,000

Question No. 2Cost 2,300,000Less: Accumulated Depreciation 210,000Carrying amount – 12/31/2017 2,090,000Less: Recoverable amount, date of impairment 1,850,000Impairment loss (C) 240,000


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Question No. 3Recoverable amount 1,850,000Less: Revised residual value 50,000Depreciable amount 1,800,000Divide by: Remaining useful life 9Depreciation (B) 200,000

Question No. 4Recoverable amount – 01/01/2017 1,850,000Less: Accumulated Depreciation – 12/31/2018 400,000Carrying amount – 12/31/2018 1,450,000Lower of:Would have been carrying amount no impairment 2,300,000Less: Recoverable amount – 01/01/2019 630,000 1,670,000

Gain on impairment recovery – P&L 49,400

The increase in fair value is recognized in P&L. (A)

Would have been carrying amount had been there no impairment:Cost 2,300,000Less: Depreciation

2016 210,0002017 210,0002018 210,000

Would have been carrying value – 12/31/2018 1,670,000

Question No. 5Lower between Recoverable amount and would have been bookvalue – 01/01/2019

1,499,400

Less: New residual value 0Depreciable amount 1,499,400Divide by: Remaining useful life (10 – 3) 7Depreciation (D) 214,200

SUMMARY OF ANSWERS:1. C 2. C 3. B 4. A 5. D

CASE NO. 2 REVALUATION MODELQuestion No. 1Cost 2,300,000Less: Residual value 200,000Depreciable amount 2,100,000Divide by: Estimated useful life 10Depreciation - 2016 (C) 210,000


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Question No. 2Cost 2,300,000Less: Accumulated Depreciation 210,000Carrying amount – 12/31/2017 2,090,000Less: Recoverable amount, date of impairment 1,850,000Impairment loss (C) 240,000

Question No. 3Recoverable amount 1,850,000Less: Revised residual value 50,000Depreciable amount 1,800,000Divide by: Remaining useful life 9Depreciation (B) 200,000

Question No. 4Recoverable amount – 01/01/2017 1,850,000Less: Accumulated Depreciation – 12/31/2018 400,000Carrying amount – 12/31/2018 1,450,000Lower of:Would have been carrying amount no impairment 2,300,000Less: Recoverable amount – 01/01/2019 630,000 1,670,000

Gain on impairment recovery – P&L 49,400

The increase in fair value is recognized in P&L. (A)

Would have been carrying amount had been there no impairment:Cost 2,300,000Less: Depreciation

2016 210,0002017 210,0002018 210,000

Would have been carrying value – 12/31/2018 1,670,000

Zero, since recoverable amount is lower than the would have been bookvalue if there is no impairment loss.

Question No. 5Recoverable amount – 01/01/2019 1,499,400Less: Revised residual value -Depreciable amount 1,499,400Divide by: Remaining useful life (10 – 3) 7Depreciation (D) 214,200

SUMMARY OF ANSWERS:1. C 2. C 3. B 4. A 5. D


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PROBLEM 23-6 Impairment of Intangible Assets

Question No. 1Patent (200,000 / 10) 20,000Computer software (100,000 x 60/120) 50,000Total amortization (A) 70,000

The copyright and tradename is not amortized because they have indefiniteuseful life.

Question No. 2Copyright:Carrying value 400,000Less: Recoverable amount (80,000 / .05) 160,000 240,000

Tradename:Carrying value 350,000Less: Recoverable amount (15,000 / .05) 300,000 50,000

Goodwill:Carrying value of reporting unit 3,000,000Less: Recoverable amount (200,000 x 14.0939) 2,818,780 181,220

Total impairment loss (C) 471,220

Question No. 3Carrying value of goodwill – 12/31/2015 900,000Less: Allocated impairment loss of reporting unit 181,220Carrying value of goodwill – 12/31/2016 (B) 718,780

Question No. 4Patent (P200,000 – P20,000) 180,000Copyright (recoverable amount) 160,000Tradename (recoverable amount) 300,000Computer software (100,000 – 50,000) 50,000Carrying value of intangible assets – 12/31/2016 (A) 690,000

Note that goodwill is not reported as an intangible asset.

SUMMARY OF ANSWERS:1. A 2. C 3. B 4. A


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PROBLEM 23-7Amortization and Impairment of Intangible Assets

Questions 1 and 2Trademark - Unadjusted balance 1,430,000Less: Unamortized cost of improvementthat should have been expensedCost 150,000Less: Accum. amortization (150,000/10 x 2) 30,000 120,000

Total 1,310,000Add: Competitive patent debited to expense

Cost 135,000Less: Accum. amortization (135,000/9 x 1) 15,000 120,000

Adjusted balance, January 1. 2016 1,430,000Less: Amortization during the yearPatent with remaining life of 4 years *(160,000/4) 40,000 (1) ARemaining patent (1,430,000-160,000)/15-7) 158,750 198,750

Carrying value of the Patent, 12/31/2016 (2) A 1,231,250

Computation of the P160,000:Original cost 300,000Less: Accumulated amortization (300,000/15) x 7 years)) 140,000Remaining carrying value, 1/1/2016 160,000

The 7 years age is from January 1, 2009 to January 1, 2016.

Questions 3Carrying value of the trademark (no amortization) 800,000Less: Recoverable amount (P75,000/10%) 750,000Impairment loss (B) 50,000

Questions 4Adjusted carrying value of the trademark is equal to its recoverable amount ofP750,000. (See no. 3) (B)

Questions 5Downpayment 500,000Add: Present value of the note 874,000Total cost of the franchise 1,374,000Divide by: Useful life 10Amortization expense (D) 137,400

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. B 5. D


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PROBLEM 23-8 Impairment of Cash Generating Unit

Question No. 1Total carrying amount before impairment 72,000,000Less: Fair value less costs to sell 60,000,000Impairment loss 12,000,000Less: Impairment loss allocated to Goodwill (D) 2,000,000Impairment loss allocated to other assets 10,000,000

Questions No. 2 and 3 (A)Other assets in this case would include only PPE and Patent. Impairment ofinventories (i.e. write-down to NRV) is covered by PAS 2 while impairment ofFA at FVTOCI will be covered by PAS 39 / PFRS 9.

Questions No. 4 and 5Carrying amount Allocated

before impairment Ratio Impairment lossPPE (at cost model) 30,000,000 0.75 7,500,000 (D)Patent 10,000,000 0.25 2,500,000 (D)Total 40,000,000 10,000,000 (D)

SUMMARY OF ANSWERS:1. D 2. A 3. A 4. D 5. D

PROBLEM 23-9 Impairment and Reversal of Impairment of CashGenerating Unit

Cash 100,000Inventory 800,000Accounts receivable 1,200,000Plant and equipment 24,000,000Less: Accumulated depreciation 10,400,000Trademark 2,550,000Patent 850,000Goodwill 400,000Total Carrying amount of CGU 19,500,000Less: Value in use 16,300,000Impairment loss 3,200,000Less: Impairment allocated to goodwill 400,000Impairment loss allocated to other asset 2,800,000


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Balancebefore Impairment

Balanceafter

Impairment Fraction Loss ImpairmentPlant and equipment 13,600,000 13.6/17 (2,240,000) 11,360,000Trademark 2,550,000 2.55/17 (420,000) 2,130,000Patent 850,000 .85/17 (140,000) 710,000Total 17,000,000 2,800,000 14,200,000

Balanceafter

Balanceafter

Impairment Reallocation ReallocationPlant and equipment 11,360,000 (40,000) 11,320,000 1. (B)Trademark 2,130,000 (7,500) 2,122,500 2. (B)Patent 710,000 47,500 757,500 3. (B)Total 14,200,000 - 3,520,000

Plant and Equipment:Would have been BV, no impairmentCost 24,000,000Less: Accumulated depreciation (2.6M +300,000) 11,600,000 12,400,000

Actual Book valueImpaired value 11,320,000Less: Subsequent depreciation 1,000,000 10,320,000

Maximum gain on reversal of impairment 2,080,000

Trademark:Would have been BV, no impairmentCost 2,550,000Less: Subsequent amortization 120,000 2,430,000

Actual Book valueImpaired value 2,122,500Less: Subsequent depreciation 112,000 2,010,500

Maximum gain on reversal of impairment 419,500

Patent:Would have been BV, no impairmentCost 850,000Less: Subsequent amortization 80,000 770,000

Actual Book valueImpaired value 757,500Less: Subsequent depreciation 60,000 697,500

Maximum gain on reversal of impairment 72,500


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Balancebefore Allocated

Reversal Fraction Gain Max gainPlant and equipment 10,320,000 10320/13028 1,901,136 1,901,136Trademark 2,010,500 2010.5/13028 370,372 370,372Patent 697,500 697.5/13028 128,492 72,500Total 13,028,000 2,400,000 2,344,008

BalanceBalance

afterMax gain bef. Reall Reallocation reallocation

Plant and equipment 1,901,136 12,221,136 46,863 12,267,999Trademark 370,372 2,380,872 9,130 2,390,001Patent 72,500 825,992 (55,992) 770,000Total 2,344,008 15,428,000 - 15,428,000

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. C 5. C 6. A

PROBLEM 23-10 Noncurrent Assets Held for Sale -Single Asset

Question No. 1Cost 1,200,000Less: Accumulated depreciation 480,000Carrying amount 720,000Less: Initial amount recognized– lower of:

Carrying amount 720,000Fair value less cost to sell 600,000 600,000

Impairment loss (C) 120,000

Question No. 2Zero. Non-current asset held for sale should not be depreciated. (A)

Question No. 3Lower of:Carrying amount 720,000FVLCTS 790,000 720,000

Less: Carrying amount at initial recognition 600,000Gain on reversal – P&L (C) 120,000

Question No. 4Net Selling Price (1,800,000 – 50,000) 750,000Less: Carrying amount 720,000Gain on sale (B) 30,000


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Question No. 5Cost 1,200,000Accumulated depreciation 480,000Carrying amount 720,000Less: Initial amount recognized– lower of:

Carrying amount 720,000Fair value less cost to sell 800,000 720,000

Impairment loss (A) -

SUMMARY OF ANSWERS:1. C 2. A 3. C 4. B 5. A

PROBLEM 23-11 Noncurrent Assets held for Sale- Disposal Group

Question No. 1C P8,800,000.

Question No. 2(E) P6,000,000.

Question No. 3Total carrying amount before impairment 59,600,000Less: Fair value less costs to sell 52,000,000Impairment loss 7,600,000Less: Impairment loss allocated to Goodwill (B) 6,000,000Impairment loss allocated to other assets 1,600,000

Questions No. 4 & 5Carrying

amount asremeasured

AllocatedDecrease

Revaluationsurplus

PPE (at cost model) 22,800,000 0.59 940,206 -PPE (at revaluation model) 16,000,000 0.41 659,794 400,000Total 38,800,000 1,600,000 1,000,000

Revaluationsurplus

Impairmentloss

Carryingamount

afterimpairment

PPE (at cost model) - 940,206 21,859,794PPE (at revaluation model) 400,000 259,794 15,340,206Total 400,000 1,200,000 37,200,000

Remaining revaluation surplus is(P3,000,000 minus (P32M-P30M) P1,000,000


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Decrease in value of the PPE (at revaluation model) is allocated to1. First, remaining revaluation surplus2. Balance to impairment loss.

SUMMARY OF ANSWERS:1. C 2. E 3. D 4. B 5. A

PROBLEM 23-12 Noncurrent Assets held for Sale – Investment in Associate

Question No. 1Share in net income (900,000 x 30%) 270,000Less: Amortization of undervalued asset 10,000Net investment income (B) 260,000

Question No. 2Beginning balance – 01/01/2016 5,000,000Add: Net investment income (see No. 1) 260,000Less: Dividends received (150,000 x 30%) 45,000Carrying amount – 12/31/2016 (A) 5,215,000

Question No. 3Carrying amount – 12/31/2016 5,215,000Less: Initial amount recognized– lower of:

Carrying amount 5,215,000Fair value less cost to sell 4,900,000 4,900,000

Impairment loss (B) 315,000

Question No. 4Zero. No Share in the profit or loss and amortization shall be recognized whenthe investment in associate is classified as noncurrent held for sale. The cashdividend shall be recognized as income. (A)

Question No. 5Net Selling Price (P4,900,000 – P100,000) 4,800,000Less: Carrying amount 4,900,000Loss on sale (D) (100,000)

SUMMARY OF ANSWERS:1. B 2. A 3. B 4. A 5. D


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PROBLEM 23-13

Question No. 1Irrigation Equipment P 740,000Freight in 10,000Installation cost 192,000Total Machinery and Equipment, end (A) P 942,000

Question No. 2Trade in allowance 400,000Book Value:

Cost 1,300,000Less: Accum. Depreciation (P660,000+ P165,000) 825,000 475,000

Loss on trade in (B) 75,000

Question No. 3Before addition [(P3,100,000 – P100,000)/20 x 3/12) 37,500After addition: [(P3,100,000 – (P562,500 + P37,500) + 980,000P200,000)/20) x 9/12) 123,000Depreciation expense (B) 160,500

Remaining life (20 – 4 + 4) = 20 years

Question No. 4Turf cutter [{(P1,300,000 – P200,000)/5} x 9/12] +

{(P800,000 – P50,000)/6 x 3/12)}] P 196,250Water desalinator [(P3,780,000 – P270,000)/10] 351,000Irrigation equipment [(942,000/4) x 6/12] 117,750Office building 160,500Total Depreciation expense (B) P 825,500

Question No. 5Fair value on initial revaluation P 3,780,000Book value on initial revaluation:

Cost P 4,000,000Accumulated depreciation[(P4,000,000 – P200,000)/10 x 2) ( 760,000) 3,240,000

12/31/2016 Revaluation Surplus P 540,000Less: Piecemeal realization in 2017 (P540,000/10) 54,00012/31/2017 Revaluation surplus P 486,000

12/31/2017 Fair value P 3,400,00012/31/2017 Book value:

Adjusted cost P 3,780,000Accumulated Depreciation[(P3,780,000 – P270,000)/10] ( 351,000) 3,429,000

Revaluation decrease – charged to Revaluation Surplus (A) P 29,000


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SUMMARY OF ANSWERS:1. A 2. B 3. B 4. B 5. A

PROBLEM 23-14

Question Nos. 1 and 2Cost-beginning balance 126,000Less Accumulated depreciation, beginning 144.375Held for sale-carrying amount 8,200Total 232,425Depreciation charge for the yearHeld for sale (8,200 x 20% x 6/12) 820 1. (A)Remaining balance (232,425 x 20%) 46,845 47,305Classified as held for sale:Depreciation for the year 820Carrying amount 185,940

(A)

Question No. 3Carrying amount at 1 Oct 2015 372,000Less valuation at 1 October 2015 449,500Revaluation surplus 77,500

Valuation at 1 October 2015 449,500Less Depreciation expense (449,500/(40-9) 14,500Revaluation surplus (B) 435,000

Question No. 4Carrying amount at 1 Oct 2015 1,080,000Less valuation at 1 October 2015 600,000Decrease in value 480,000

Valuation at 1 October 2015 600,000Less Depreciation expense (600,000/(50-20) 20,000Revaluation surplus (B) 580,000

Question No. 5 CCarrying amount at 1 Oct 2015 1,080,000Less valuation at 1 October 2015 600,000Decrease in value 480,000Less remaining revaluation surplus 456,000Impairment loss-Property B 24,000Impairment loss-held for sale(8,200-820)-6,500 880


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Total impairment loss (C) 24,880

Question No. 6Depreciation expense based on revalued amount 14,500Less depreciation expense based on historical cost (400,000/40) 10,000Piecemeal realization (D) 4,500

OrRevaluation surplus, beginning (Prop. A) 62,000Add revaluation surplus, Oct. 1, 2015 77,500Total revaluation surplus 139,500Divide by remaining life 31Piecemeal realization (D) 4,500

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. B 5. C 6. D

Chapter 25: Introduction to Liabilities

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CHAPTER 25: INTRODUCTION TO LIABILITIES

PROBLEM 25-1 Total LiabilitiesTotal liabilities

CurrentAccounts payable P 1,000,000Loan payable – current portion 1,000,000Unearned rent income 300,000Income tax payable 250,000Dividends payable 100,000Total current liabilities P 2,650,000

Non-currentBonds payable P 5,000,000Discount on bonds payable ( 500,000)Loan payable – non-current portion 1,500,000Deferred tax liability 15,000Total non-current liabilities P 6,015,000

Total liabilities ( B ) P 8,665,000

Below items shall be presented as part of entity’s assets:Current assetAdvances to employees P 45,000

Non-current assetCash surrender value of officers’ life insurance 75,000Patent 50,000

Below item shall be presented in the shareholder’s equity:Share dividends payable P 150,000

Below item shall be disclosed in the notes to financial statements:Contingent liability – guarantee to James P 500,000

The bank overdraft, which is part of cash management, is offset to any bankbalance with positive balance as provided under PAS 7.

PROBLEM 25-2 Current LiabilitiesCurrent liabilities

Accounts payable – unadjusted P 4,000,000Add/(Deduct): Adjustments

Debit balances in suppliers’ accounts 100,000Postdated checks of 50,000

Accounts payable – adjusted P 4,150,000Credit balances in customers’ accounts 500,000


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Premiums payable 600,000Accrued expenses 150,000Total current liabilities ( A ) P 5,400,000

Below items shall be presented as part of entity’s non-current liabilities:Bonds payable 1,000,000Premium on bonds payable 100,000Mortgage payable 850,000Deferred tax liability 200,000Deferred revenue 175,000

Below item shall be presented as part of shareholders’ equity:Stock dividends payable 750,000

PROBLEM 25-3 RefinancingCurrent liabilities10% note payable, maturing 03/3 1/2015 P10,000,000Annual sinking fund requirement 500,000Total current liabilities ( C ) 10,500,000

Below items shall be presented as part of entity’s non-current liabilities:12% note payable, maturing 06/30/2015 6,000,0007% guaranteed debentures, due 2018 2,000,000

PROBLEM 25-4 Refinancing(A) The amount to be reported as current liabilities in 2014 is P2,000,000 sincethe refinancing agreement was completed after the reporting date.

PROBLEM 25-5 Refinancing(A) The amount to be reported as current liabilities in 2014 is P2,000,000 sincethe grace period was granted after the reporting date.

PROBLEM 25-6 Accounts payableAccounts payableAccounts payable – unadjusted P 8,000,000Cost of goods lost in transit 500,000Cost of returned goods ( 200,000)Accounts payable – adjusted ( B ) P 8,300,000


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PROBLEM 25-7 Accounts payableAmount of cash to eliminate accounts payableAccounts payable from:*Purchases through March 15 (gross)(P4,900,000 / 98%) P 5,000,000Merchandise inventory at cost(P1,500,000 / 150%) 1,000,000Accounts payable ( B ) P 6,000,000

*The amount was grossed-up since the entity is no longer entitled to cashdiscount. The liability as of March 15, 2015 has been outstanding for more than10 days.

PROBLEM 25-8 Bonus payableAmount of bonus

Net income before bonus and income tax P 2,200,000Less: Required income to earn bonus 880,000Basis of bonus P 1,320,000Multiply by: Bonus rate 10%Total current liabilities ( C ) P 132,000

PROBLEM 25-9 Bonus payableAmount of bonus

Net income before bonus and income tax P 1,600,000Less: Required income to earn bonus 1,000,000Amount of income subject to bonus (125%) P 600,000Less: Bonus (25%) (squeeze) ( D ) 120,000Basis of bonus (100%) (P600,000/125%) P 480,000

PROBLEM 25-10 Unearned RevenueUnearned revenue – gift certificates

Unearned revenue1,500,000 Balance, Beg.

Gift certificateredeemed 4,000,000 5,000,000

Cash receipts fromgift certificate sold

Expired giftcertificate 300,000

4,300,000 6,500,000Balance, End (B) 2,200,000

6,500,000 6,500,000


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PROBLEM 25-11 Advances from CustomersUnearned revenue – Advances from customers

Unearned revenue1,100,000 Balance, Beg.

Advances applied toshipments 1,600,000 1,800,000

Advancesreceived

Orders cancelled 100,0001,700,000 2,900,000

Balance, End (C) 1,200,0002,900,000 2,900,000

PROBLEM 25-12 Escrow LiabilityDeposits received – Escrow account

Escrow liability600,000 Balance, Beg.

Cash payments ninemonths 4,200,000 4,500,000

Cash receipts fornine months

4,200,000 5,100,000Balance, End (C) 900,000

5,100,000 5,100,000

PROBLEM 25-13 Container’s DepositsDeposits received – Escrow account

Liability for Deposits100,000 Balance, Beg.

Cash refunds forcontainer returned in2014 92,000 100,000

Cash depositsfrom deliveries

92,000 200,000Balance, End (C) 108,000

200,000 200,000

PROBLEM 25-14 VAT payableProvision - VAT payable

VAT Payable- Balance, Beg.

Payment made 120,000 120,000 For October84,000 For November96,000 For December

120,000 300,000Balance, End (A) 180,000

300,000 300,000


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PROBLEM 25-15 Provision: Continuous range of outcome(D) A range between ₱10,000 and ₱4,000,000 means that the contingencycannot be reliably estimated, hence no provision is recognized.

PROBLEM 25-16 Provision: Expected value with adjustment factor

70% chance that outcome will occur × 20% × ₱200,000 ₱ 28,00070% chance that outcome will occur × 80% × ₱100,000 56,000Expected value 84,000Multiply by: Risk adjustment 1.07Risk adjusted expected value 89,880Multiply by: Present value factor 89,000Provision (D) ₱ 81,709

PROBLEM 25-17 Restructuring Provisions

Wages of retrenched employees ₱1,000,000Salary (₱50,000 x 60%) 30,000Retrenchment package 150,000Restructuring provision (D) ₱1,180,000

Note that 60% (administering the closure and transfer of employees of FactoryA) is only included in computing the restructuring provision since it is directlyrelated to the restructuring.

PROBLEM 25-18 Contingencies(C) Since the outcome of the lawsuit remains uncertain, disclosure of thecontingency in the notes to financial statements would be the necessary.

PROBLEM 25-19 Contingencies(B) Since it is probable that Derick will be liable to pay the ₱3,000,000 assupported by Rose’s filing of a petition for bankruptcy, Derick should accrue anddisclose the provision for guarantee on a loan of ₱3,000,000.

PROBLEM 25-20 Premiums PayableProvision – Premiums liability

Premiums liability- Balance, Beg.

**Coupons redeemed 50,000 80,000 *Premiums expense50,000 80,000

Balance, End (D) 30,000

80,000 80,000


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*(20,000 x 80%)/5 x (P30 + P5 - P10)**(10,000/5) x (P30 + P5 - P10)

PROBLEM 25-21 PremiumsPremiums liability (2015)

**Balance, End 200,000 - Balance, Beg.

*Couponsredeemed 800,000 1,000,000

Premiumsexpense(squeeze)

1,000,000 1,000,000

Premiums liability (2016)**Balance, End 120,000 200,000 Balance, Beg.

*Couponsredeemed 2,000,000 1,920,000

Premiumsexpense(squeeze) (D)

2,120,000 2,120,000

*Number of towels distributed x net cost of P40**Number of towels yet to be distributed x net cost of P40

The beginning balance of the 5,000 towels is included as part of the 50,000towels distributed in 2016. If the actual towels distributed from 2016 isdifferent from that was recorded as of the end of 2015, this is considered as achange in accounting estimate which should be taken into account during 2016and for the succeeding accounting period.

PROBLEM 25-22 Warranty LiabilityWarranties liability (2015)

- Balance, Beg.Actual expenditures 150,000 500,000 *Warranties expense

150,000 500,000Balance, End 350,000

500,000 500,000

Warranties liability (2016)350,000 Balance, Beg.

Actual expenditures 550,000 600,000 *Warranties expense550,000 950,000

Balance, End (A) 400,000950,000 950,000

*Sales x Total estimated warranty cost of 10%


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PROBLEM 25-23 Warranty Liability

Warranties liability- Balance, Beg.

Actual expenditures 140,000 480,000 Warranties expense140,000 480,000

Balance, End (C) 340,000480,000 480,000

PROBLEM 25-24 Warranty - Sales are Made Evenly

Pattern of Realized Revenues:2015 SALESFrom sales in: 2015 2016 2017 2018 Total1st (40% x ½) 0.20 0.20 0.402nd (36% x ½) 0.18 0.18 0.363rd (24% x ½) 0.12 0.12 0.24Total 0.20 0.38 0.30 0.12 1

2016 SALESFrom sales in: 2016 2017 2018 2019 Total1st (40% x ½) 0.20 0.20 0.402nd (36% x ½ 0.18 0.18 0.363rd (24% x ½) 0.12 0.12 0.24Total 0.20 0.38 0.30 0.12 1

Requirement No. 1 (A)Warranty Sales in 2015 earned in 2016 (38% x 1,000 x P1,500) 570,000Warranty Sales in 2016 earned in 2016 (20% x 1,200 x P1,500) 360,000Total warranty sales revenue earned in 2016 930,000

Notes: The 38% represents the realized revenue in 2016 from 2015 Sales. The 20% represents the realized revenue in 2016 from 2016 Sales.

Requirement No. 2 (B)Total warranty sales revenue earned in 2016 (see No. 1) 930,000Expenses relating to computer warranties 60,000Profit from sales warranty 870,000

Requirement No. 3 (A)Unearned sales warranty from 2015 [(30% + 12% x 1,000 xP1,500)]

630,000

Unearned sales warranty from 2016 [(100%-20%) x 1,200 xP1,500)]

1,440,000

Total unearned sales warranty 2,070,000


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Notes: The 30% and 12% represent the unrealized revenues in 2016 from 2015

Sales.

The 20% represents the realized revenue in 2016 from 2016 Sales. So

100% minus 20% realized is equal to 80% unrealized revenue in 2016 from

2016 Sales.

SUMMARY OF ANSWERS:1. A 2. B 3. A

PROBLEM 25-25 Refinancing1. P2,000,000 (Letter B). The entire amount is payable within one year from

the reporting date thus presented as current liability.2. Nil (Letter A). Since both parties are financially capable of honoring the

agreement’s provisions and the debtor has the discretion to refinance orroll over the loan for at least twelve months from December 31, 2014 theentire amount is treated as Noncurrent liability.

3. Nil (Letter A). Since the company entered into a refinancing agreementwith a bank to refinance the loan on a long-term basis before the reportingdate, the entire amount of liability is treated as noncurrent.

4. P2,000,000 (Letter B). Since the company entered into a refinancingagreement with a bank to refinance the loan on a long-term basis after thereporting date, the entire amount of liability is treated as current.

PROBLEM 25-26 Obligations Payable on Demand, Breach of LoanAgreement1. P2,000,000 (Letter C). Only if an enforceable promise is received by the

end of the reporting period from the creditor not to demand payment for atleast 12 months from the end of the reporting period that the note may beclassified as noncurrent.

2. Nil (Letter A). The entire amount of loan is noncurrent liability since therewas an agreement on the reporting date not to demand payment in orderfor the debtor to rectify the breach with 12 months from the reporting date.

3. P2,000,000 (Letter B). The entire amount of loan is current liability sincethe agreement not to demand payment happened after the reportingperiod.

PROBLEM 25-27 Contingencies1. A2. D3. B4. B


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5. A (Amount of accrual is P2,040,000 using expected value method which iscalculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%)

6. A (Amount of accrual is P2,250,000 using midpoint of the range which iscalculated as (P1.5M+3M)/2)

PROBLEM 25-28 Contingencies1. A2. B (Disclose an amount of P1,500,000)3. B (Disclose an amount of P1,500,000)4. B (Disclose an amount of P1,000,000)5. D6. A (It is virtually certain that the company will be receiving the

P1,5000,000.)

PROBLEM 25-29 Bonus Computation

1. Net income before bonus but before tax

B = NY x BR= 3,090,000 x 20%= 618,000

2. Net income after bonus but before tax

B = BR xNY

100% + BR= 20% x 3,090,000

100% + 20%= 515,000

3. Net income after bonus and tax

B = BR X (NY – B – T)

B = 20% x (3,090,000-B-(927,000-3.B)

B = 20% x (3,090,000-B-927,000+.3B)

B = 618,000-.2B-185,400+.06B

1B+.2B-.06B = 618,000-185,400

1.14B = 432,600

1.14 1.14

B = 379,474

T = 30% X (3,090,000 – B)

= 927,000-.3B

OR

B =BR x [NY x (1-TR)]

1 + [BR x (1-TR)]


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= 20% x (3,090,000 x (1-30%)

1+[20% x (1-30%)]= 20% x (3,090,000 x 70%)

1+(20% x 70%)= 20% x (2,163,000)

1.14= 379,474

Where:NY = Net income before bonus and taxB = BonusBR = Bonus RateT = TaxTR = Tax Rate

SUMMARY OF ANSWERS:1. D 2. B 3. C

PROBLEM 25-30Question Nos. 1 and 2

Estimated liability from Warranties

Disbursement forwarranties 164,000

44,800 Beginning balance

Balance end 212,000 240,000 Warranty expense.

Total 376,000

Warranty expense 240,000Divide by % age of warranty 4%Sales from musical instruments and soundreproduction equipment (Question No. 1) 6,000,000

Question No. 3Premiumexpense= P2,000,000 X 1 coupon x 90% P34-P20

P2200 coupons

= P63,000


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Question No. 4Inventory of Premium

Beg. Balance 39,950 56,950 Balance endNet Purchases (6,500 xP34)

221,000 Cost of issued premium

204,000 (1.2M coupons.200 couponsx P34

Total 260,950

Question No. 5Estimated liability for Premiums

Disbursement for premiums(1.2M coupons/200 couponsx P(34-P20) 84,000


Balance end 23,800 63,000 Premium expense.

Total 107,800

SUMMARY OF ANSWERS:1. A 2. A 3. C 4. D 5. D

PROBLEM 25-31 Refinancing of Loan, Notes Payable Interest and Non-Interest BearingNote to the Professor: This problem should be discussed after the discussionin Chapter 26.

Question No. 1 (A)Periodic payment-NP Delivery equipment(P2M/4) 500,000Multiply by PV of ordinary annuity 3.0373Present value of NP-delivery equipment 1,518,650

Amortization table:

DatePayment Interest

ExpenseDiscount

AmortizationPresent

value01/01/2015 1,518,65012/31/2015 500,000 182,238 317,762 1,200,88812/31/2016 500,000 144,107 355,893 844,995

Question Nos. 2 and 3Noncurrent Current

12% Note payable 1,400,000 700,00010% note payable 2,000,000Note payable-del. 844,995 355,893


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EquipmentTotal 4,244,995 1,055,893

Question No. 4Accrued interest payable-12% Note payable=P2,100,000 x 12% x 8/12=P168,000

Question No. 5Interest expense:12% Note payable

1/1-5/1 (2.8M x 12% x 4/12) 112,0005/1-12/31 (2.1M x 12% x 8/12) 168,000

10% Note payable (2M x 10%) 200,000Note payable - Delivery. Equipment(see amortization table) 182,238Total 662,238

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. B 5. C

PROBLEM 25-32 Warranty, Premiums and Bonus

Question No. 1Warranty expense (P150 x 1,200) 180,000Less: Warranty paid 85,000Estimated Premiums payable (A) 95,000

Question No. 2Premium expense(P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) 45,000Less: Net cost of redeemed coupons(500,000/400)x( P45-P20) 31,250Estimated Premiums payable (C) 13,750

Question No. 3Unadjusted net income 1,935,000Warranty expense under, Net income over (P180,000-P85,000) (95,000)Premium expense over, Net income under (P270,000-P45,000) 225,000Adjusted Net income (C) 2,065,000

Question No. 4Net income after bonus but before tax

B = BR xNY

100% + BR= 20% x 2,065,000

100% + 20%


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= 344,167 (B)

Question No. 5Net income after bonus and tax

B = BR x (NY – B – T)

T = TR x (NY – B)

OR


1 + [BR x (1-TR)]

Net income after bonus and tax

B = BR X (NY – B – T)

B = 20% x (2,065,000-B-(9619,500-3.B)

B = 20% x (2,065,000-B-619,500+.3B)

B = 413,000-.2B-123,900+.06B

1B+.2B-.06B = 413,000-123,900

1.14B = 289,100

1.14 1.14

B = 253,596 (C)

T = 30% X (2,065,000 – B)

= 619,500-.3B

OR


1 + [BR x (1-TR)]= 20% x (2,065,000 x (1-30%)

1+[20% x (1-30%)]= 20% x (2,065,000 x 70%)

1+(20% x 70%)= 20% x (1,445,500)

1.14= 253,596

Where:NY = Net income before bonus and taxB = BonusBR = Bonus RateT = TaxTR = Tax Rate

SUMMARY OF ANSWERS:1. A 2. C 3. C 4. B 5. C


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PROBLEM 25-33 ComprehensiveQuestion No. 1SSS Payable 10,000Philhealth payable 9,000Estimated liabilities under guarantee agreement 110,000Estimated warranties on goods sold 120,000Utilities payable 6,000Trade payables (170,000+30,000+20,000+12,000-8,000) 224,000Notes payable arising from purchase of goods 200,000Convertible bonds payable due July 1, 2014 1,000,000Serial bonds payable (40,000 x 2) 80,000Accrued interest expense 4,000Advances from customers 25,000Unearned rent income 36,000Unearned interest on receivables 3,500Income taxes payables 45,000Cash dividends payable 100,000Property dividends payable 120,000Credit balance of notes payable 40,000Overdraft with PNB 80,000Container's deposit 45,000Loans payable-12% 270,000Financial liability designated as FVTPL 200,000Current liabilities (B) 2,727,500

Question No. 2Deferred tax liability 40,000Notes payableArising from 4-year bank loan 400,000Arising from advances by officers, dune in 3 years 300,000Serial bonds payable (800,000 minus (40,000 x 2) 720,000Security deposit received from lessee 89,000Loans payable-10% 150,000Total noncurrent liabilities (A) 1,699,000

Question No. 3Total liabilitiesCurrent liabilities 2,727,500Total noncurrent liabilities 1,699,000Total liabilities (B) 4,426,500

SUMMARY OF ANSWERS:1. B 2. A 3. B

Chapter 26: Financial Liabilities and Debt Restructuring

239

CHAPTER 26 FINANCIAL LIABILITIES AND DEBTRESTRUCTURING

BONDS PAYABLEPROBLEM 26-1 Financial Liabilities at FVTPL (Interest Expense andUnrealized gains or losses)

Question No. 1Face value 3,000,000Multiply by: nominal rate 8%Multiply by: months outstanding/12 12/12Interest expense (A) P240,000

Question No. 2Fair value of the bonds 3,090,000Less: Carrying value 2,850,756Unrealized loss (or gain)-P&L (B) 239,244

Question No. 3Retirement Price (3M x 104) 3,120,000Less: Carrying value (3M x 103) 3,090,000Realized loss on derecognition-P&L (D) 30,000

SUMMARY OF ANSWERS:1. A 2. B 3. D

PROBLEM 26-2 Unrealized Gain or Loss of FVTPL with Change Due ToCredit Risk

Question No. 1Market price of the liability, end of the period 2,159,740Less: Fair value of liability using the sum observed interest rateand instrument specific IRR 2,077,740Unrealized loss (or gain)-OCI (B) 82,000

Internal rate of return at the start of the period - yield oreffective rate 10%Less: Observed (benchmark) interest rate, date of inception 7%Instrument specific IRR 3%

Observed (benchmark) interest rate, end of period 6.00%Add: Instrument specific-IRR 3%Discount rate 9.00%


240

Question No. 2Market price of the liability, end of the period 2,159,740Less: Carrying amount of FVTPL 2,000,000Increase (or decrease) in FVTPL 159,740Less: Unrealized loss (or gain) in the OCI 82,000Unrealized loss (or gain) in the P&L (C) 77,740

Present value market rate of 8%Present value of Principal (2,000,000 X 0.6806 ) 1,361,200Add: Present value of interest payments (2,000,000 x 10% x3.9927) 798,540Market price of the liability, end of the period 2,159,740

Present value using 9%Present value of Principal (2,000,000 X 0.6499 ) 1,299,800Add: Present value of interest payments (2,000,000 x 10% x3.8897 ) 777,940Fair value of liability using the sum observed interest rate andinstrument specific IRR 2,077,740

Journal entry end of the period is:Unrealized loss-OCI 82,000Unrealized loss-P&L 77,740

Financial liability at FVTPL(Increase in FV of the liability)

159,740


PROBLEM 26-3 Financial Liabilities at Amortized Cost-Term Bonds

Question No. 1Present value of Principal (1,200,000 X 0.7513 ) 901,560Add: PV of interest payments (96,000 X 2.4869 ) 238,742Present value of the investment bonds (C) 1,140,302

Question No. 2Amortization Table

DateInterestpayment

Interestexpense

PremiumAmortization

Presentvalue

01/01/2016 1,140,30212/31/2016 96,000 114,030 (B) 18,030 1,158,33312/31/2017 96,000 115,833 19,833 1,178,16612/31/2018 96,000 117,867 21,835 1,200,000



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PROBLEM 26-4 Financial Liabilities at Amortized Cost-Serial Bonds

Question No. 1

PrincipalInterestpayment

Totalpayment

Preset valuefactor Total PV

400,000 96,000 496,000 0.9091 450,914400,000 64,000 464,000 0.8264 383,450400,000 32,000 432,000 0.7513 324,562Total PV of the bonds (A) P1,158,925

Question No. 2

DateInterestPayment

InterestExpense


Princi-pal

Presentvalue

01/01/2016 1,158,92512/31/2016 96,000 115,892 19,892 400,000 778,81712/31/2017 64,000 77,882 13,882 400,000 392,69912/31/2018 32,000 39,301 7,301 400,000 -


PROBLEM 26-5 Financial Liabilities at Amortized Cost-Term Bonds

Issue Price (110% x 5,000 x P1,000) 5,500,000Less: Bond issue cost 300,000Net cash received from issuance (D) P5,200,000

PROBLEM 26-6 Financial Liabilities at Amortized Cost - Term Bonds withTransaction Costs

Issue Price (5,000,000 x 98%) 4,900,000Less: Bond issue cost 140,000Present value on January 1, 2015 4,760,000Add: Discount amortizationNominal interest (5M x 10%) 500,000Effective interest (4,760,000 x 12%) 571,200 71,200

Carrying value – 12/31/2015 (D) 4,831,200


242

PROBLEM 26-7 Financial Liabilities at Amortized Cost - Term Bonds withTransaction Costs

Issue Price (5,000,000 x 110%) 5.500,000Less: Bond issue cost 80,000Present value on January 1, 2015 5,420,000Less: Premium amortizationNominal interest (5M x 8%) 400,000Effective interest (5,420,000 x 6%) 325,200 74,800

Carrying value – 12/31/2016 (B) 5,345,200

PROBLEM 26-8 Bonds payable with warrants

Market value of the bonds without the warrants (B) 4,800,000

PROBLEM 26-9 Bonds Payable with Warrants

Present value of principal (8M x .61) 4,880,000Add: Present value of interest (8M x 6% x 7.72) 3,705,600Net cash received from issuance – initial carrying amount (B) P8,585,600

PROBLEM 26-10 Issuance of Convertible Bonds

Total Proceeds (5M X 110%) 5,500,000Less: Present value of the bonds without conversion optionPresent value of Principal (5M x. 77) 3,850,000Add: Present value of int. payments

(5M x 6% x 2.53) 759,000 4,609,000Residual amount allocated to Equity component (B) 891,000


Carrying amount of the bonds 6,000,000Less: Par value of issued shares (50,000 x P50) 2,500,000

Share issue cost 100,000Total 3,400,000Add: Share Premium - conversion option 1,500,000Total Share Premium (C) 4,900,000


243


Question No. 1Total Proceeds (P1,000 x 1,000) 1,000,000Less: Fair value of the bonds without conversion privilege 900,000Total Share Premium (A) 100,000

Using 7.48%Present value of Principal (1,000,000 x 0.7 ) 700,000Add: Present value of interest payments (50,000 x 4 ) 200,000Total present value 900,000

Question No. 2 See amortization table below.

Amortization Table

DateInterestPayment

InterestExpense


Presentvalue

01/01/2065 900,00012/31/2016 50,000 67,320 17,320 917,320


PROBLEM 26-13 Retirement of Bonds Payable

Retirement price (₱5,000,000 x .98) 4,900,000Less: Carrying value (₱5,000,000 - ₱500,000 - ₱300,000) 4,200,000Loss on retirement (A) 700,000

PROBLEM 26-14 Conversion of Convertible Bonds

Question No. 1 – Case No. 1Nil. (A) No gain or loss on conversion of convertible bonds unless theconversion is induced by the company. The journal entry to record thetransaction would then be:Bonds payable 1,500,000Share premium-conversion option 60,000Premium on bonds payable 52,049

Ordinary shares (20000 X 50 ) 1,000,000Share Premium 612,049

Question No. 2 - Case No. 2Fair value of liability 1,600,000Less: Carrying amount of the bonds payable 1,552,049Loss on settlement (conversion) of liability (B) 47,951


244

Fair value of liability 1,600,000Less: Total par value of the shares issued 1,000,000Share Premium 600,000

The journal entry to record the transaction would then be:Bonds payable 1,500,000Loss on settlement of liability 47,951Premium on bonds payable 52,049

Ordinary shares (20,000 X 50 ) 1,000,000Share Premium 600,000


PROBLEM 26-15 Induced Conversion

Face amount of debt securities converted 1,500,000Divide by: New conversion price 20Number of shares issued upon conversion 75,000Multiply by: Fair value of shares on the conversion date 30Fair value of shares converted 2,250,000

Face amount of debt securities converted 1,500,000Divide by: Old conversion price 25Number of shares issued under original conversion 60,000Multiply by: Fair value of shares on the conversion date 30Fair value of shares under original conversion 1,800,000

Fair value of shares converted 2,250,000Less: Fair value of shares under original conversion 1,800,000Debt conversion expense or loss on induced conversion (B) 450,000

Journal entry is:Bonds payable 1,500,000Debt conversion expense or loss on

induced conversion 450,000Premium on bonds payable 52,049

Ordinary shares (75,000 x 10 ) 750,000Share premium 1,252,049

PROBLEM 26-16 Interest-Bearing Note

Accrued interest 2015 (₱5,000,000 x 12% x 9/12) 450,000Accrued interest 2016 (₱5,450,000 x 12% x 12/12) 654,000Total accrued interest (C) 1,104,000


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PROBLEM 26-17 Non-Interest Bearing Note

Principal 2,000,000Less: Discount on notes payable(2M x 10.8% x 12/12)

216,000

Amortization (216,000/12 x 5) (90,000) 126,000Carrying amount of the note payable (B) 1,874,000


Accrued interest [(₱1,350,000 - ₱450,000) x 12% x 4/12] (B) ₱ 36,000


Accrued interest 2015 (₱10,000 x 12% x 10/12) 1,000Accrued interest 2016 (₱11,000 x 12% x 12/12) 1,320Total accrued interest (A) 2,320

PROBLEM 26-20 Loans Payable

Principal 1,500,000Less: Direct origination fees paid (1.5M x 4%) 60,000Initial carrying amount of the loans payable (D) 1,440,000

PROBLEM 26-21 Debt Restructuring

Carrying value of liability (₱6,000,000 + ₱600,000) 6,600,000Less: Cost or carrying value of land 3,500,000Gain on extinguishment (D) 3,100,000


Fair value of equity securities (₱70 x 50,000) 3,500,000Less: Par value (₱50 x 50,000) 2,500,000Share premium (D) 1,000,000


Question No. 1Present value of Principal (₱4,000,000 x 0.75) 3,000,000Add: Present value of interest payments (320,000 x 2.49) 796,800Present value of the notes payable 3,796,800Less: Carrying value of the notes (₱5,000,000 + ₱500,000) 5,500,000


246

Gain on extinguishment (B) 1,203,200

The gain is recognized since the restructuring results in a substantialmodification (i.e., 21.88% = 1,203,200 / 5,500,000)

Question No. 2Interest expense (3,796,800 x 10%) (B) 379,680



Principal P6,000,000Add: Accrued interest – January 1, 2015 600,000

Accrued interest – 2015 600,000Carrying amount of old liability 7,200,000Less: Present value of new liability

Present value of principal (P5M x .6209) 3,104,500Present value of interest (P5M x .08 x 3.7908) 1,516,320 4,620,820

Gain on extinguishment of liability (A) 2,579,180

COMPREHENSIVE PROBLEMSPROBLEM 26-25 Interest-Bearing Note – Lump Sum

Question No. 1Present value of Principal (1,200,000 x 0.7118 ) 854,160Add: Present value of interest payments (36,000 x 2.4018 ) 86,465Present value of the notes payable (A) 940,625

Amortization Table:

DateInterestPayment

InterestExpense


Presentvalue

01/01/2016 940,62512/31/2016 36,000 112,875 76,875 1,017,50012/31/2017 36,000 122,100 86,100 1,103,60012/31/2018 36,000 132,432 96,400 1,200,000

Question No. 2Interest Expense (940,625 x .12) = P112,875 (B)

Question No. 3P1,017,500. See amortization table above. (A)

Question No. 4Nil. (A) The entire note payable is noncurrent liability.


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Question No. 5

Nil. (A) The entire note payable is current liability.

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. A 5. A

PROBLEM 26-26 interest-bearing note – non-uniform installments

Question No. 1


Totalpayment

Preset valuefactor

PresentValue

1,200,000 60,000 1,260,000 0.8929 1,125,054400,000 24,000 424,000 0.7972 338,013400,000 12,000 412,000 0.7118 293,262

Total PV of notes payable (D) 1,756,328

Amortization TableDate

DateInterestExpense

Discounton N/P

PrincipalPayment

PresentValue

01/01/2016 1,756,32812/31/2016 60,000 210,759 150,759 1,200,000 707,08812/31/2017 24,000 84,851 60,851 400,000 367,93812/31/2018 12,000 44,079 32,062 400,000 -

Question No. 2Interest expense (1,756,328 x .12) P210,759 (D)

Question No. 3Carrying amount – December 31, 2016 P707,088 (C)

Question No. 4Principal payable Dec. 31, 2017 P400,000Less: Discount on notes payable 60,851Carrying amount-current liability (C) P339,149

Question No. 5Principal payable Dec. 31, 2018 P400,000Less: Discount on notes payable 32,062Carrying amount-noncurrent liability (C) P367,938

SUMMARY OF ANSWERS:1. D 2. D 3. C 4. C 5. C


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PROBLEM 26-27 Interest-Bearing Note –Uniform Installments

Question No. 1


Totalpayment

Preset valuefactor

PresentValue

400,000 36,000 436,000 0.8929 389,304400,000 24,000 424,000 0.7972 338,013400,000 12,000 412,000 0.7118 293,262

Total PV of notes payable (A) 1,020,579

Amortization Table

DateInterestPayment

InterestExpense Discount

PrincipalPayment

PresentValue

01/01/2016 1,020,57912/31/2016 36,000 122,469 86,469 400,000 707,04812/31/2017 24,000 84,846 60,846 400,000 367,89412/31/2018 12,000 44,106 32,106 400,000 -

Question No. 2Interest expense (1,020,579 x .12) P122,469 (B)

Question No. 3Carrying amount – December 31, 2016 707,048 (A)

Question No. 4Principal (payable Dec. 31, 2017 P400,000Less: Discount on notes payable 60,846Carrying amount-current liability (B) P339,154

Question No. 5Principal (payable Dec. 31, 2018 P400,000Less: Discount on notes payable 32,106Carrying amount-noncurrent liability (A) P367,894

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. B 5. A

PROBLEM 26-28 Noninterest-Bearing Note – With Cash Price Equivalent

Question No. 1The carrying amount of the note on initial recognition is equal to its cash priceequivalent of P994,760. (C)

Coincidentally, the effective rate using the cash price equivalent is 12% and theamortization table is as follows:


249

Amortization Table at 12%

DatePrincipalpayment

Interestexpense Amortization

Presentvalue

01/01/2016 994,76012/31/2016 400,000 99,476 300,524 694,23612/31/2017 400,000 69,424 330,576 363,66012/31/2018 400,000 36,340 363,660 -

Question No. 2Interest expense (994,760x .12) P99,476 (A)

Question No. 3Carrying amount – December 31, 2016 P694,236 (A)


Question No. 5Principal (payable Dec. 31, 2018 P400,000Less: Discount on notes payable 36,340Carrying amount-noncurrent liability (C) P363,660

SUMMARY OF ANSWERS:1. C 2. A 3. A 4. B 5. C

PROBLEM 26-29 Noninterest-Bearing Note – Lump Sum

Question No. 1Present value of Principal (1,200,000 x 0.7118 ) (B) 854,160

Amortization TableDate Interest expense Present value01/01/2016 854,16012/31/2016 102,499 956,65912/31/2017 114,799 1,071,45812/31/2018 128,542 1,200,000

Question No. 2Interest expense (854,160 x .12) P102,499 (B)

Question No. 3Carrying amount – December 31, 2016 P956,659 (A)


250

Question No. 4Nil. The entire note payable is noncurrent liability since it is due beyond 12months from the reporting date. (B)

Question No. 5The total entire carrying amount of note payable is presented as noncurrentliability. See Question No. 4. (A)


PROBLEM 26-30 Noninterest-Bearing Note – Installments

Question No. 1Present value of Principal (400,000 X 2.4018 ) (D) 960,720

Amortization TableDate Interest

PaymentInterestexpense Amortization

Presentvalue

01/01/2016 960,72012/31/2016 400,000 115,286 284,714 676,00612/31/2017 400,000 81,121 318,879 357,12712/31/2018 400,000 42,873 357,127 -

Question No. 2P115,286. See amortization table above. (A)

Question No. 3P676,006. See amortization table above. (A)


Question No. 5Principal (payable Dec. 31, 2018 P400,000Less: Discount on notes payable 42,873Carrying amount-noncurrent liability (C) P357,127

SUMMARY OF ANSWERS:1. D 2. A 3. A 4. B 5. C


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PROBLEM 26-31 Issuance, Retirement and Conversion of Non-ConvertibleBonds

Question No. 1Present value of Principal (3,000,000 X 0.6499 ) 1,949,794Add: Present value of interest payments(3,000,000 x 12% x 3.8897 ) 1,400,274

Present value of the bonds payable (B) 3,350,068


paymentInterestexpense


Presentvalue

01/01/2014 3,350,06812/31/2014 360,000 301,506 58,494 3,291,57412/31/2015 360,000 296,242 63,758 3,227,816

Question No. 2Retirement Price 1,900,000Less: Carrying amount (3,227,816 x 1/2) 1,613,908Loss on retirement (B) 286,092

Question No. 3 (B)Amortization table:

DateInterestpayment

Interestexpense Amortization

Presentvalue

12/31/2015 1,613,90812/31/2016 180,000 145,252 34,748 1,579,160

Question No. 4Fair value of the ordinary shares issued (460 x 5,000) P2,300,000Less: Carrying amount of the liability 1,579,160Loss on conversion (D) P720,840*

Or P720,839*

Question No. 5Fair value of the ordinary shares issued (460 x 5,000) P2,300,000Less: Total par value of the shares issued (40 x 5,000) 200,000Share Premium (D) P2,100,000

SUMMARY OF ANSWERS:1. B 2. B 3. B 4. D 5. D


252

PROBLEM 26-32 Issuance, Retirement and Conversion of ConvertibleBonds

Note to the professor: On January 1, 2014, Tagbilaran Co. issued its 10%, 5-year, ₱3,000,000 convertible bonds for the face amount of ₱3,000,000 not₱5,000,000.

Question No. 1Total Proceeds P3,000,000Less: Present value of the bonds without theconversion optionPresent value of Principal (3,000,000 x 0.5674 ) 1,702,281Present value of interest payments (300,000 x

3.6048 )1,081,433

2,783,713Residual amount to equity (B) 216,287


paymentInterestexpense


Presentvalue

01/01/2015 2,783,71312/31/2015 300,000 334,046 (34,046) 2,817,75912/31/2016 300,000 338,131 (38,131) 2,855,890

Question No. 2Fair value of liability using current rate 1,537,969Less: Carrying amount (2,817,759 x ½) 1,427,945Loss on settlement of liability (B) 110,024

Present value using 9% for 3 periodsPresent value of Principal (1,500,000 X 0.7722) 1,158,275Add: Present value of interest payments (150,000 X 2.5313) 379,694Present value of the bonds payable 1,537,969

Question No. 3Retirement Price 1,600,000Less: Fair value of liability using current rate 1,537,969Decrease in equity (E) 62,031

Question No. 4Interest expense is P338,131 based on the amortization table above. (D)

Question No. 5Shares to be issued based on amended terms (1.5M/400) 3,750Less: Shares to be issued based on original terms (1.5M/500) 3,000Incremental shares 750Multiply by: Fair value 420Debt settlement expense (C) 315,000


253

SUMMARY OF ANSWERS:1. B 2. B 3. E 4. D 5. C

PROBLEM 26-33 Redeemable Preference Shares and Debentures

Present value of the redeemable preference sharesPresent value of Principal (15,000 x 1.05 x 0.72161 ) 11,365Add: Present value of interest payments (1,500 x 2.42308 ) 3,635Present value of the preference shares 15,000

Amortization table:Date Interest

PaymentInterestExpense Amortization

Presentvalue

01/01/2016 15,00012/31/2016 1,500 1,723 223 15,22312/31/2017 1,500 1,749 249 15,47212/31/2018 1,500 1,778 246 15,718

Question No. 1P1,723. See amortization table above. (B)

Question No. 2P1,749. See amortization table above. (C)

Question No. 3P1,778. See amortization table above. (D)

Present value of the debenturesPresent value of Principal (20,000 x 1.02 x 0.53884 ) 10,992Add: Present value of interest payments (2400 x 3.5032 ) 8,408Present value of bonds payable 19,400



Presentvalue

12/31/2018 19,40012/31/2019 2,400 2,554 (154) 19,554




254

SUMMARY OF ANSWERS:1. B 2. C 3. D 4. B 5. B

PROBLEM 26-34

Question No. 1Accounts payable, unadjusted P1,350,000Good in transit FOB shipping point 75,000Undelivered check 60,000Accounts payable, adjusted (D) P1,485,000

Question No. 214% Note payable (1,250,000 x 14%) P175,00016% Note payable (3,000,000 x 16%) 480,00010% Note payable (2,000,000 x 10% x 6/12) 100,000Interest expense (D) P755,000

Question No. 314% Note payable (1,250,000 x 14% x 3/12) P43,75016% Note payable (3,000,000 x 16% x 9/12) 360,00010% Note payable (2,000,000 x 10% x 6/12) 100,000Interest expense (C) P503,750

Question Nos. 4 and 5Current Noncurrent

Accounts payable 1,485,00014% Note payable 1,250,00016% Note payable 3,000,00010% Note payable 2,000,000Accrued interest payable 503,750Total P3,238,750 P5,000,000

(C) (C)

SUMMARY OF ANSWERS:1. D 2. D 3. C 4. C 5. C

PROBLEM 26-35 (Comprehensive)

Question No. 1Present value of Principal (10,000,000 X 0.3118 ) 3,118,000Add: Present value of interest payments (500,000 X 11.46992 ) 5,734,960Present value of the bonds payable (A) 8,852,960


255

Question No. 2April 1, 2016 P 400,000July 1, 2016 600,000October 1, 2016 300,000January 1, 2017 300,000Notes payable-current liability (B) P1,600,000

Question Nos. 3 and 4Estimated liability from Warranties

Disbursement forwarranties 358,000


Balance end (A) 342,000 520,000 Warranty expense (C)

Total 700,000

Question No. 5(a) (b) ( c) d=b x c E=d-a

Fixedsalary Net Sales

Comm.Rate

Comm.Expense

AccruedSalariesPayable

A 10,000 200,000 4% 8,000 0B 14,000 400,000 6% 24,000 10,000C 18,000 600,000 6% 36,000 18,000Total (C) P28,000

Question Nos. 6 and 7Current Noncurrent

Int. payable - Bonds (10M x 10% x 3/12) 250,000Int. payable - Note payable 600,000Notes payable 1,600,000 5,400,000*Estimated warranties payable 342,000Trade payable 740,000Sales commissions payable 28,000Cash dividends payable (6M x P.2) 1,200,000Bonds payable 8,970,751Total P4,760,000 P14,370,751**

(B) (C)

*(P7M-1.6M)** or P14,370,783 which is the same as P8,952,185 x 100% +(Effective rate xmonths outstanding/12) minus payment

Or [(P8,952,185 x 103%) - P250,000]


256

Amortization Table

DateInterestPayment

InterestExpense Amortization

Presentvalue

07/01/2014 8,852,96001/01/2015 500,000 531,178 31,178 8,884,13807/01/2015 500,000 533,048 33,048 8,917,18601/01/2016 500,000 535,031 34,999 8,952,18503/31/2016 250,000 268,566 18,566 8,970,751(8,952,185 x 12% x 3/12)

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. C 5. C 6 B 7 C

PROBLEM 26-36 Financial liabilities, Investment in associate and researchand development cost

Question No. 1Total proceeds (P100 x 2M) 200,000,000Less: Present value of the convertible debt (see No. 2) 181,635,200Share premium – conversion privilege 18,364,800Less: Share issuance cost 4,000,000Net amount allocated to equity (C) 14,364,800

Question No. 2Present value of convertible debt without conversion option at 11.81%Present value of Principal (200M x .7154) 143,080,000Add: Present value of interest payments (200M x .08 x 2.4097) 38,555,200Present value of the convertible debt (B) 181,635,200

Question No. 3Interest expense (181,635,200 x .1181) (D) 21,451,117

Question No. 4Net asset of GL 380,000,000Less: Recoverable amount 370,000,000Impairment loss of GL 10,000,000Multiply by: Percentage share 20%Impairment loss (C) 2,000,000

Question No. 51. Research on size of potential market ₱ 800,0006. Staff training costs 600,0007. Advertisement costs 3,400,000

Total amount expensed (B) ₱4,800,000


257

Question No. 62. Products designing 1,500,0003. Labor costs in refinement of products 950,0004. Development work undertaken to finalize the

product design 11,000,000Total Development cost capitalized (C) 13,450,000

SUMMARY OF ANSWERS:1. C 2. B 3. D 4. C 5. B 6 C

PROBLEM 26-37 Financial Liability at FVTPL vs. FLAC

CASE NO. 1

Question No. 1Initial carrying amount is fair value or issuance price of ₱1,898,205.Transaction cost is expensed outright. (D)

Question No. 2Interest expense (₱2,000,000 x 8%)= ₱ 160,000 (A)

Question No. 3Fair value 12/31/2015 (1.02 x ₱2,000,000) ₱2,040,000Less: Initial carrying amount 1,898,205Unrealized loss (C) ₱ 141,795

Question No. 4Carrying value (₱2,000,000 x .98)= ₱ 1,960,000 (C)

Question No. 5Fair value 12/31/2017 (.99 x ₱2,000,000) ₱1,980,000Less: Carrying value (.98 x ₱2,000,000) 1,960,000Unrealized loss (D) ₱ 20,000

Question No. 6Retirement price (1.05 x ₱2,000,000) ₱2,100,000Add: Transaction cost 20,000Total retirement price 2,120,000Less: Carrying value (.98 x ₱2,000,000) 1,980,000Loss on derecognition (A) ₱ 140,000

SUMMARY OF ANSWERS:1. D 2. A 3. C 4. C 5. D 6. A


258

CASE NO. 2

Question No. 7Issue price ₱1,898,205Less: Transaction cost 25,000Initial carrying amount (C) ₱ 1,873,205

Question No. 8Effective interest rate = 10% (B)Please refer to discussion on interpolation.

Question No. 9Interest expense (₱1,873,205 x 10%)= ₱ 187,321 (B)

Question No. 10No gain or loss due to change in fair value is not recognized. (D)

Question No. 11Carrying value 12/31/2016 (A) ₱1,930,579

Question No. 12Retirement price (1.05 x ₱2,000,000) ₱2,100,000Add: Transaction cost 20,000Total retirement price 2,120,000Less: Carrying value – 01/01/2018 1,963,636Loss on derecognition (B) ₱ 156,364

SUMMARY OF ANSWERS:7. C 8. B 9. B 10. D 11. A 12. B

Chapter 27 – Lease

259

CHAPTER 27: LEASE

PROBLEM 27-1 Unequal rental payments

2014 20,0002015 18,0002016 16,0002017 14,000Total rent 68,000Divide by: Number of years 4Rent expense per year (C) 17,000

PROBLEM 27-2 Operating Lease - Unequal rental payments

07/01/2014 to 06/30/2015 60,00007/01/2015 to 06/30/2016 90,00007/01/2016 to 06/30/2017 210,000Total 360,000Divide by: Lease term 3Rent income per year 120,000

Rent income to date (120,000 x 2) 240,000Less: Collection to date (60,000 +90,000) 150,000Rent receivable (A) 90,000

PROBLEM 27-3 Operating Lease - Comprehensive

CASE NO. 1Question No. 1Periodic rent-one year (₱25,000 x 12) (B) 300,000

CASE NO. 2Question No. 2Periodic rent-one year 300,000Amortization of lease bonus (180,000 / 3 ) 60,000Rent expense (C) 360,000

CASE NO. 3Question No. 3Total lease payments [(3 x 12) – 6) x 25,000] 750,000Divide by: Lease term 3Rent expense per year (D) 250,000


260

Question No. 4Total payments to date, 2016 (6 x 25,000 ) 150,000Less: Total expense to date, 2016 250,000Accrued rent payable (E) 100,000

CASE NO. 4Question No. 5Total lease payments(25,000 x 2 x 12 ) 600,000(30,000 x 1 x 12 ) 360,000 960,000Divide by: Lease term 3Rent expense per year (A) 320,000

Question No. 6Total payments to date, 2016 300,000Less: Total expense to date, 2016 320,000Accrued rent payable (D) (20,000)

CASE NO. 5Question No. 7Rent Revenue 300,000Less: Amortization of Direct Cost (120,000 / 3) 40,000

Insurance and property tax expense onleased asset

40,000

Depreciation of the leased asset 30,000Net income (A) 190,000

CASE NO. 6Question No. 8Period rent for one year 300,000Add: Contingent rent1st [(2,500,000 – 1,500,000) x 10%] 100,0002nd [(6,000,000 – 2,500,000) x 8%] 280,000 380,000Total rent expense (A) 680,000

SUMMARY OF ANSWERS:1. B 2. C 3. D 4. (E) 5. A6. D 7. A 8. A

PROBLEM 27-4 Finance Lease - Lease Liability

(A) The capitalized lease liability should be the annual lease payments less theexecutory cost (real estate taxes) times the present value factor for an ordinaryannuity of 1 for nine years at 9%. The calculation would be: (P26,000 - 1,000) ×6.0 = P150,000. The real estate taxes are a period cost and should be charged toexpense.


261

PROBLEM 27-5 Finance Lease with Bargain Purchase Option

Question No. 1 (A)Present value of periodic payment (120,000 x 3.4018) 408,220Add: Present value of bargain purchase option (20,000 x 0.6355) 12,710Present value of minimum lease payments 420,926

Amortization Table

DateAnnual

paymentInterestexpense Amortization

Presentvalue

12/31/2016 420,92612/31/2016 120,000 - 120,000 300,92612/31/2017 120,000 36,111 83,889 217,03712/31/2018 120,000 26,044 93,956 123,08212/31/2019 120,000 14,770 105,230 17,85112/31/2020 20,000 2,142 17,858 (6)

Question No. 2 (B)P36,111. See amortization table above.

Question No. 3 (C)P83,889. See amortization table above.


SUMMARY OF ANSWERS:1. A 2. B 3. C 4. B

PROBLEM 27-6 With Guaranteed Residual Value And Initial Direct Cost

CASE NO. 1Question No. 1Present value of periodic payment (130,000 x 3.4869) 453,297Add: Present value of guaranteed residual value (50,000 x 0.683) 34,150Present value of minimum lease payments 487,447Add: Initial direct cost 40,000Cost of the Machinery (C) 527,447

Amortization Table

DateAnnual


Presentvalue

12/31/2016 487,44712/31/2016 130,000 - 130,000 357,44712/31/2017 130,000 35,745 94,255 263,19212/31/2018 130,000 26,319 103,681 159,51112/31/2019 130,000 15,951 114,049 45,46212/31/2020 50,000 4,538 45,462 0


262




CASE NO. 2Question No. 5Present value of periodic payment (130,000 x 3.4226) 444,938Add: Present value of guaranteed residual value (50,000 x 0.647) 32,350Present value of minimum lease payments = Fair value 477,288Add: Initial direct cost 40,000Cost of the Machinery (D) 517,288

Amortization Table: Effective rate = 11.50%

DateAnnual


Presentvalue

12/31/2016 477,28812/31/2016 130,000 - 130,000 347,28812/31/2017 130,000 39,938 90,062 257,22612/31/2018 130,000 29,581 100,419 156,80712/31/2019 130,000 18,033 111,967 44,84012/31/2020 50,000 5,160 44,840 (0)

Question No. 6 (D)P39,938. See amortization table above.

Question No. 7 (A)P90,062. See amortization table above.


SUMMARY OF ANSWERS:1. C 2. B 3. C 4. B 5. D 6. D 7. A 8. D


263

PROBLEM 27-7 Finance Lease - Depreciation

Question No. 1Cost of the lease asset 487,447Less: Estimated residual value end of the useful life of the asset 60,000Depreciable cost 427,447Divide by: Useful life 8Depreciation (A) 53,431

Question No. 2Cost of the lease asset 487,447Less: Gross amount of guaranteed residual value 50,000Depreciable amount 437,447Divide by: Lease term 4Depreciation (B) 109,362

PROBLEM 27-8 Computation of Periodic Lease Payments

Fair value 800,000Less: Present Value of Guaranteed Residual Value 59,630Total 740,370Divide by: Present value of Annuity Due 4.8897Periodic lease payments (B) 151,414

PROBLEM 27-9 Direct Financing Lease - Lessor

Question No. 1Gross Investment:Total Periodic Lease Payment (261,692 x 4) *1,046,775Add: Unguaranteed Residual value (URV) 150,000 1,196,775Less: Cost of the equipment 1,000,000Unearned interest income (C) 196,775

*1,046,770 OR 1,046,775

Amortization Table

DateAnnual

CollectionInterestIncome Amortization

Presentvalue

12/31/2016 1,000,00012/31/2016 261,692 - 261,692 738,30812/31/2017 261,692 81,214 180,479 557,82912/31/2018 261,692 61,361 200,331 357,49812/31/2019 261,692 39,325 222,368 135,13012/31/2020 150,000 14,864 135,136 (6)


264



SUMMARY OF ANSWERS:1. C 2. C 3. A

PROBLEM 27-10 Direct Financing Lease - With Initial Direct Cost

Question No. 1Gross Investment:Total Periodic Lease Payment (251,600 X 4) *1,006,402Add Unguaranteed Residual value (URV) - 1,006,402Less: Cost of the equipment 924,128Unearned interest income (A) 82,273

*4,796,278 OR *4,796,280

Cost of the equipment 900,000Add: Initial direct cost 24,128Net cost of investment 924,128

Amortization Table

DateAnnual


Presentvalue

12/31/2016 900,00012/31/2016 251,600 - 251,600 648,40012/31/2017 251,600 51,872 199,728 448,67112/31/2018 251,600 35,894 215,707 232,96412/31/2019 251,600 18,637 232,963 1



SUMMARY OF ANSWERS:1. A 2. A 3. B


265

PROBLEM 27-11 Direct Financing Lease - Sale Of Leased Asset

CASE NO. 1Question No. 1Gross Investment:Total periodic lease payments (300,000 x 4) 1,200,000Add: Residual Value 50,000 1,250,000

Present value of the leased assetPresent value of minimum lease payments(300,000 x 3.3121) 993,630Add: Present value of residual value (50,000 x.735) 36,750 1,030,380Unearned interest income (A) 219,620

Amortization Table

DateAnnual


Presentvalue

01/01/2016 1,030,38012/31/2016 300,000 82,430 217,570 812,81012/31/2017 300,000 65,025 234,975 577,83512/31/2018 300,000 46,227 253,773 324,06212/31/2019 350,000 25,906 324,094 (32)

Question No. 2P82,430. See amortization table above.

Question No. 3: GuaranteedSales 1,030,380Less: Cost of goods sold 900,000

Initial direct cost 10,000Dealer's profit (B) 120,380

Question No. 4Nil. (A)

The journal entry is:Inventory 44,000Cash 6,000

Lease receivable 50,000

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. A


266

CASE NO. 2Question No. 1Gross Investment:Total periodic lease payments (300,000 x 4) 1,200,000Add: Residual Value 50,000 1,250,000

Present value of the leased assetPresent value of minimum lease payments(300,000 x 3.3121) 993,630Add: Present value of residual value (50,000 x.735) 36,750 1,030,380Unearned interest income (A) 219,620

Question No. 2 (B)Amortization Table

DateAnnual


Presentvalue

01/01/2016 1,030,38012/31/2016 300,000 82,430 217,570 812,81012/31/2017 300,000 65,025 234,975 577,83512/31/2018 300,000 46,227 253,773 324,06212/31/2019 350,000 25,906 324,094 (32)

Question No. 3: UnguaranteedSales 993,630Less: Net costCost of goods sold 900,000Less: Present value of URV 36,750 863,250

Initial direct cost 10,000Dealer's profit (B) 120,380

Question No. 4 (B)P6,000.

The journal entry is:Inventory 44,000Loss on sales type 6,000

Lease receivable 50,000

SUMMARY OF ANSWERS:1. A 2. B 3. B 4. B

PROBLEM 27-12 Sales-Type Lease

Net Selling Price 400,000Less: Present value of lease receivable 150,000Gain on sale (D) 250,000


267

PROBLEM 27-13 Sale and Leaseback as Finance Lease

Question No. 1Sales Price 993,630Less: Carrying amount 1,100,000Loss on sale and leaseback (B) (106,370)

Question No. 2Sales Price 993,630Less: Carrying amount 900,000Deferred gain on sale and leaseback 93,630Divide by: Lease term 4Gain on sale and leaseback (D) 23,408

PROBLEM 27-14 Sale and Leaseback as Operating Lease - Treatment ofGain

Question No. 1 (B)Sales Price = Fair value 800,000Less: Carrying amount 500,000Gain on sale - recognize immediately 300,000

Question No. 2 (B)Sales price 800,000Less: Carrying amount 1,000,000Loss on sale - recognize immediately (200,000)

Question No. 3Sales price 800,000Less: Fair value 600,000Deferred Gain 200,000

Fair value 600,000Less: Carrying amount 450,000Outright gain (D) 150,000

Question No. 4 (B)Sales Price = Fair value 800,000Less: Carrying amount 400,000Gain on sale - recognize immediately 400,000

Question No. 5 (B)Sales Price = Fair value 800,000Less: Carrying amount 880,000Loss on sale and leaseback (80,000)


268

Question No. 6Note to the Professor: The question should be what amount of loss on sale andleaseback should Beegees Co. recognized immediately and not GAIN on sale andleaseback.

Nil. The loss is compensated by future lease rental below the market rate.

SUMMARY OF ANSWERS:1. B 2. D 3. D 4. B 5. B 6. A


CASE NO. 1Question No. 1 (A)“Substantially all” testPresent value of Periodic Payment (200,000 x 6.75902) 1,351,805

% age 1,351,805 =68%

2,000,000

Not substantially all.

Major part test

% age 10 =50%

20

The lease term does not amount to major part of the economic life of the asset.

Answer: Nil. The lease do not classify as finance lease.

Question No. 2 (B)Rent expense P200,000

Question No. 3 (A)Nil.

Question No. 4 (A)Nil.

Question No. 5 (D)Depreciation expense overstated, net income understated (115,181)Interest expense overstated, net income understated (135,181)Rent expense understated, net income overstated 200,000Net income understated (50,362)

SUMMARY OF ANSWERS – CASE NO. 1:1. A 2. B 3. A 4. A 5. D


269

CASE NO. 2Question No. 1 (B)“Substantially all” test% age 1,351,805 =90%

1,500,000

The lease is a finance lease. The cost of the leased asset is lower between thefair value and the present value of minimum lease payment which isP1,351,805.

Amortization Table

DateAnnual


Presentvalue

01/01/2015 1,351,80512/31/2015 200,000 - 200,000 1,151,80512/31/2016 200,000 115,181 84,819 1,066,98612/31/2017 200,000 106,699 93,301 973,68412/31/2018 200,000 97,368 102,632 871,052

Question No. 2 (D)Depreciation expense (1,351,805/10) 135,181Interest expense 115,181Total lease- related expenses 250,362


Question No. 4 (B)P1,066,986. See amortization table above.

Question No. 5 (A)Nil. The company did not commit any error.

SUMMARY OF ANSWERS – CASE NO. 2:1. B 2. D 3. C 4. B 5. A

PROBLEM 27-17

Question No. 1 (B)Lease is a finance lease thus any gain should be deferred and amortize over thelease term.

Selling Price 379,695Less: Carrying amount 350,000Deferred gain on sale and leaseback 29,695Less: Amortization in 2014 (29,695/10) 2,970Deferred gain on sale and leaseback, end 26,725


270

Question No. 2 (D)Interest expense 38,363Depreciation expense (379,695/10) 37,970Rent expense (5,000 x 12) 60,000Total lease related expenses 136,333

Amortization Table

DateAnnual


Presentvalue

01/02/2016 379,69501/02/2016 60,000 - 60,000 319,69501/02/2017 60,000 38,363 21,637 298,058

Question No. 3 (C)Sale and leaseback as finance leaseLease liability, 01/02/2016 319,695Add: Accrued interest 38,363Total lease-related liability 358,058

Question No. 4 (B)Amortization of deferred gain on sale and leaseback (see No. 1) 2,970Add: Gain on sale and leaseback as operating lease (P400,000-P350,000)

50,000

Total gain on sale and leaseback 52,970

Question No. 5 (B)The deferred gain on sale and leaseback should be recognized immediately.

SUMMARY OF ANSWERS:1. B 2. D 3. C 4. B 5. B

PROBLEM 27-18

Question No. 1 (C)Present value of Periodic Payment (50,000 x 4.0373) - LOWER 201,865Fair Value of the leased asset P213,213

PAR. 20 OF PAS 17 States that: At the commencement of the lease term, lesseesshall recognise finance leases as assets and liabilities in their balance sheets atamounts equal to the fair value of the leased property or, if lower, the presentvalue of the minimum lease payments, each determined at the inception of thelease. The discount rate to be used in calculating the present value of theminimum lease payments is the interest rate implicit in the lease, if this ispracticable to determine; if not, the lessee’s incremental borrowing rate shall beused. Any initial direct costs of the lessee are added to the amount recognized asan asset.


271

Question Nos. 2-4Amortization Table

DateAnnual


Presentvalue

12/31/2015 201,86512/31/2015 50,000 50,000 151,86512/31/2016 50,000 18,224 31,776 120,08912/31/2017 50,000 14,411 35,589 84,49912/31/2018 50,000 10,140 39,860 44,63912/31/2019 50,000 5,361 44,639 0




Question No. 5 (A)Depreciation expense (201,865/5) P40,373

SUMMARY OF ANSWERS:1. C 2. D 3. C 4. C 5. A

PROBLEM 27-19

Question No. 1 (A)

Annual lease payments =Fair market value – Present value of

Unguaranteed Residual ValueAnnuity due

=286,420 - (.5066 X 20,000)

4.6048Annual lease payments = 60,000

Question No. 2 (C)Total minimum lease payments(60,000 x 6) 360,000Add: Unguaranteed residual value 20,000Total lease receivable 380,000Less: Fair market value of the leased asset 286,420Total Financial revenue 93,580


272

Question No. 3 (A)Amortization Table

DateAnnual


Presentvalue

01/01/2016 286,42001/01/2016 60,000 60,000 226,42012/31/2016 60,000 27,170 32,830 193,590

Question No. 4 (C)Present value of periodic lease payments (60,000 x 4.6048) P 276,288

Amortization Table

DateAnnual


Presentvalue

01/01/2015 276,28801/01/2015 60,000 60,000 216,28812/31/2015 60,000 25,955 34,045 182,243

Depreciation expense (276,288/6) 46,048Add: Interest expense 25,955Total expenses 72,003

Question No. 5 (C)P182,243. See amortization table in No. 4.

SUMMARY OF ANSWERS:1. A 2. C 3. A 4. C 5. C

PROBLEM 27-20

Question No. 1 (B)Periodic rent (12,000 x 12) 144,000Amortization of lease bonus (300,000/6) 50,000Rent expense 194,000

Question No. 2 (C)Periodic rent 480,000Contingent rent:1st (4M x 4%) 160,0002nd (6M-4M) x 5%) 100,000 260,000

Amortization of lease bonus (500,000/5) 100,000Total rent expense 840,000


273

Question No. 3 (B)

Rent expense =[(3 x 12)-6] x 10,000

3Rent expense = 100,000

Question No. 4 (B)Lease No. 1 (Rent expense overstated, asset understated)(P444,000-P194,000) (250,000)Lease No. 2 (Rent expense overstated, asset understated) (400,000)Asset understated (650,000)

Rent expense per year-Lease 3 100,000Less: Payment (10,000 x 6 months) 60,000Accrued rent payable under, Liability understated (40,000)

Question No. 5 (C)Lease no. 1 (Rent expense overstated, net income understated) (250,000)Lease No. 2 (Rent expense overstated, net income understated) (400,000)Lease No. 3 (Rent expense understated, net income overstated)(100,000-60,000)

40,000

Net income understated (610,000)

SUMMARY OF ANSWERS:1. B 2. C 3. B 4. B 5. C

PROBLEM 27-21

Question No. 1 (B)The present value of annuity due of 12% for 10 periods can be computed as:[1 – (1+12%)-9] + 1 = 6.33

12%

Annual rentals P1,440,000Executory costs (49,410)Minimum lease payment P1,390,590Multiply by: Present value of annuity due 6.33Present value of minimum lease payments P8,802,438

Fair value of the property P8,800,000(The difference is immaterial, implicit rate is 12% at P8.8M)

Question No. 2 (D)[12/31/2015 balance x (1+Effective rate)] – annual payments = 12/31/15balance

[(P8,800,000 – P1,390,590) x 1.12%] - P1,390,590 = P6,907,949

The current portion as of 12/31/2016 can be computed as:(P6,907,949 - P1,390,590) x 12% = P561,636


274

Question No. 3 (B)12/31/2016 balance – current portion(no.2) = Non-current portion

= P6,907,949 - P561,636 = P6,346,313

Question No. 4 (A)P8,800,000/10 = P880,000

Question No. 5 (A)Depreciation expense P 880,000Interest expense (P8,800,000 – P1,390,590) x 12 889,129Executory costs 49,410Total lease-related expenses P1,818,539

SUMMARY OF ANSWERS:1. B 2. D 3. B 4. B 5. A

PROBLEM 27-22

Question No. 1 (B)07/01/2015 to 06/30/2016 60,00007/01/2016 to 06/30/2017 90,00007/01/2017 to 06/30/2018 210,000Total 360,000Divide by: Number of years 3Rent expense per year 120,000

Rent expense to date (120,000 x 1) 120,000Less: Payment to date 60,000Accrued rent payable 60,000

Question No. 2 (B)Present value of Periodic Payment (400,000 x 5.9500) 2,380,000Fair value of leased asset P2,380,000

Cost is equal to P2,380,000 (Fair value which is the same as the Present value ofminimum lease payments.)

Amortization Table

DateAnnual


Presentvalue

06/30/2016 2,380,00006/30/2016 400,000 - 400,000 1,980,00006/30/2017 400,000 277,200 122,800 1,857,200


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Question No. 3 (A)First lease (See No. 1) 60,000Second lease (see amortization table) 122,800Current liabilities 182,800

Question No. 4 (A)Rent expense (First lease) 120,000Interest expense 277,200Depreciation expense (2,380,000/10) 238,000Total lease-related expenses 635,200

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. A

PROBLEM 27-23 Exercise of Guaranteed Residual Value

Question No. 1 (C)Present value of periodic payment (120,000 x 3.4437) 413,244Add: Present value of bargain purchase option (30,000 x 0.6587) 19,761Present value of minimum lease payments 433,005Add: Initial direct cost 20,000Cost of the Machinery 453,005

Question No. 2 (B)Interest expense 34,431Executory cost 20,000Depreciation 105,751Total lease-related expenses 160,182

Question Nos. 3 to 4Amortization Table

DateAnnual


Presentvalue

12/31/2016 433,00512/31/2016 120,000 - 120,000 313,00512/31/2017 120,000 34,431 85,569 227,43612/31/2018 120,000 25,018 94,982 132,45312/31/2019 120,000 14,570 105,430 27,02312/31/2020 30,000 2,977 27,023 (0)




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Question No. 5 (B)Gross amount of guaranteed residual value 30,000Less: Fair value 25,000Loss on finance lease 5,000

Question No. 6 (A)Zero

Question No. 7 (C)Cost of leased asset 453,005Less: Accumulated depreciation 211,503Carrying amount 241,503Add: Cash payment 200,000Total consideration 441,503Less: Lease liability 227,436Cost of equipment purchased 214,067

SUMMARY OF ANSWERS:1. C 2. B 3. C 4. B 5. B 6. A 7. C

PROBLEM 27-24 Direct Financing Lease

Question No. 1 (C)Annual payment = P3,224,000 = P750,000

4.312

Total interest to be earned = [(P750,000 x 5) – P3,234,000] = P516,000

Question No. 2 (B)(P3,234,000 – P750,000) x 8% = P198,720

Question No. 3 (A)The PV annuity due of 12% over 8 years can be computed as:[1 – (1+12%) -7] + 1= 5.5638

12%The present value of 12% for 8 years can also be computed as:(1+12%)-8 = 0.4039

The total interest revenue is the difference the lease receivable and the presentvalue of the minimum lease payments.

Lease receivable (P959,500 x 8 + P400,000) P 8,076,000Present value of the lease

Unguaranteed residual value(P400,000 x 0.4039) P 161,560

Present value of lease payments(P959,500 x 5.5638) 5,338,466 5,499,966

Total interest over the lease term P2,576,034*


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Since the lease is a direct financing lease (meaning, present value of theminimum lease payments approximates the value of the property upon thecommencement of the lease), this can be solved alternatively as:[(P959,500 x 8 + P400,000) – P5,500,000)] = P2,576,000

Question No. 4 (B)(P5,500,000 – P959,500) x 12% = P544,860

SUMMARY OF ANSWERS:1. C 2. B 3. A 4. B

PROBLEM 27-25 Sales-Type Lease

Question No. 1 (A)Lease receivable (P3,000,000 x 5 + P1,000,000) P16,000,000Present value of minimum lease payments:

Rental (3.60 x P3,000,000) P10,800,000Unguaranteed residual value

(0.57 x P1,000,000) 570,000 (11,370,000)Total unearned interest income P 4,630,000

Question No. 2 (B)Present value of minimum lease payments 11,370,000Cost of goods sold (P8,000,000 + P300,000) (8,300,000)

P3,070,000Question No. 3 (A)P11,370,000 x 12% = P1,364,400

Question No. 4 (B)Selling price P 7,040,000Book value ( 5,600,000)Gain on sale P 1,440,000

Question No. 5 (B)P7,040,000 x 10% x 6/12 = P352,000

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. B 5. B


278

PROBLEM 27-26 Financial Liability, Sale and Leaseback, Impairment losson PPE and Investment in Associate

Note to the professor: Question should be - How much is the overstatement orunderstatement (please disregard the sign ( ) for understatement.

Question No. 1 (B)Interest cost paid (50M x 12%) 6,000,000Less: Interest expense for the year (47,078,000 x 14%) 6,590,920Understated finance cost (590,920)

Rounded off to P591,000

Question No. 2 (C)Profit accounted for on disposal of plant 10,000,000Profit to be booked (10M/5 X .5) 1,000,000Overstated profit on sale and leaseback 9,000,000

Question No. 3 (C)Depreciation per book (30M/15) 2,000,000Depreciation to be booked Apr. 1, 2015 to Sept. 30,2015 (30M/15 X .5) 1,000,000Depreciation to be booked Oct. 1, 2015 to March 31, 2016(16M/5 X .5) 1,600,000 2,600,000Understated depreciation (600,000)

Question No. 4 (C)Carrying value as of October 1, 2015 (30M/15 X 10.5) 21,000,000Recoverable amount 16,000,000Impairment loss 5,000,000

Question No. 5 (C)Acquisition cost 6,000,000Dividend income (P20 x 50,000) (1,000,000)Share in the net income (P10M x 25%) 2,500,000Share in the comprehensive income (P2M x 25%) 500,000Investment in associate 8,000,000

SUMMARY OF ANSWERS:1. B 2. C 3. C 4. C 5. C


279

PROBLEM 27-27 Investment Property

Question No. 1 (A)Nil, since the property should be investment property and not property, plantand equipment.

Present value of periodic payment (500,000 x 4.97) 2,485,000Add: Present value of bargain purchase option (400,000 x 0.40) 160,000Present value of Minimum lease payments 2,645,000

Present value of minimum lease payments 2,645,000Less: Fair value of the land at the inception of the lease 200,000Cost of the building as investment property 2,445,000

Amortization Table

DateAnnual


Presentvalue

01/01/2016 2,645,00012/31/2016 500,000 317,400 182,600 2,462,40012/31/2017 500,000 295,488 204,512 2,257,888



Question No. 4 (C)P2,257,888. See amortization table above.

Question No. 5 and 6Total rent income (40,000 x 24) + (50,000 x 24) x 20 43,200,000Divide by: Number of years 4Rent income per year 10,800,000

Periodic rent 10,800,000Add: Amortization of lease bonus (30,000 x 20)/4 150,000Gross Rental income (No. 5) (A) 10,950,000Less: Expenses

Amortization of initial direct cost (5,000 x 20)/4 25,000Annual maintenance cost 40,000Interest expense 317,400Depreciation *(2,645,000-200,000/10) 244,500

Net rental income (B) 10,323,100

SUMMARY OF ANSWERS:1. A 2. C 3. C 4. C 5. A 6. B


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PROBLEM 27-28

Question No. 1 (D)(900,000+50,000+25,000) P 975,000

Question No. 2 (D)Total warranty expense (1.4M x 12%) P 168,000Less: Total actual expenditures 63,000Warranty liability end of 2015 P 105,000

Question No. 3 (C)Legal services P 4,600Add: Medical services 5,500

Payroll (14,400/12 x 8) 9,600Royalties 3,900

Total accrual P 23,600

Question No. 4 (D)Fair value (equal to present value MLP) P 490,000Less: First payment 70,000Total 420,000Add: Interest accrued (420,000 x 9%) 37,800Total lease liability P 457,800

Question No. 5 (A)(3,875,902 x 111%)-400,000 P 3,902,251

SUMMARY OF ANSWERS:1. D 2. D 3. C 4. D 5. A

PROBLEM 27-29

Question No. 1 (C)Unadjusted balance – Accounts Payable 450,0002 60,0003 45,000Adjusted balance 555,000

Question No. 2 (A)Units sold:October 32,000November 28,000December 40,000

Total 100,000Multiply by 2%Total failures expected 2,000


281

Less: Failures already recorded:October sales 640November sales 360December sales 180 1,180

Expected future failures 820Multiply by 150Estimated cost 123,000

Warranty expense 123,000Estimated warranty liability 123,000

Question No. 3 (C)Notes payable is (200,000 x 3.6048) = 720,960

Amortization Table

DateAnnual


Presentvalue

01/01/2016 720,96012/31/2016 200,000 86,515 113,485 607,47512/31/2017 200,000 72,897 127,103 480,372

Question No. 4 (A)Present value of principal (4M x .6830) 2,732,000Present value of interest payments (480,000 x 3.1699) 1,521,552Total Present value 4,253,552

Amortization Table

DateInterestPayment

InterestExpense

PremiumAmortization

Presentvalue

01/01/2016 4,253,55212/31/2016 480,000 425,355 54,645 4,198,907

Question No. 5 (D)

Present value of minimum lease payments (200,000 x 6.759) P1,351,800

Amortization Table

DateAnnual


Presentvalue

01/01/2016 1,351,80001/01/2016 200,000 - 200,000 1,151,80012/31/2016 115,180 1,266,980

SUMMARY OF ANSWERS:1. C 2. A 3. C 4. A 5. D


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PROBLEM 27-30

Question No. 1 (D)Zero, the two notes payable should be presented as noncurrent liabilities.

Question No. 2 (D)FINANCE LEASE: Amortization Table

DateAnnual


Presentvalue

12/31/2015 379,69212/31/2015 60,000 - 60,000 319,69212/31/2016 60,000 38,363 21,637 298,05512/31/2017 60,000 35,767 24,233 273,822

Answer: P273,822. Refer to amortization table above.

Question No. 3 (B)Answer: P38,363. Refer to amortization table above.

Question No. 4 (E)

Annual rent expense=P720,000/3=P240,000

Operating leaseDate Expense Expense Payment Accrued rent

To date to date (Prepaid)1/1-12/31/16 240,000 240,000 120,000 120,0001/1-12/31/17 240,000 480,000 300,000 180,0001/1-12/31/18 240,000 720,000 720,000 -

Question No. 5 (C)CONTINGENCIESAnswer: P400,000 (P200,000+P200,000)

1. Only a disclosure is necessary because it is not probable that the companywill be liable, although the amount can be measured reliably.

2. Retained earnings 200,000Estimated liability for income tax 200,000

3. Accounts receivable – Innova 120,000Loss on guaranty 80,000

Note payable – bank 200,000

SUMMARY OF ANSWERS:1. D 2. D 3. B 4. (E) 5. C


283

PROBLEM 27-31

Question No. 1Date Finance cost Present Value

04/01/2011 19,000,00003/31/2012 1,900,000 20,900,00003/31/2013 2,090,000 22,990,00003/31/2014 2,299,000 25,289,00003/31/2015 2,528,900 27,817,90003/31/2016 2,781,790 30,599,690

RevisedDate Finance cost Present Value

04/01/2016 25,000,00009/30/2016 1,250,000

10/1/2016 to 3/31/2016 (2,781,790 x 6/12) 1,390,89504/01/2016 to 9/30/2016 (25,000,000 x 10% x 6/12 1,250,000Finance cost (C) 2,640,895

Question No. 3Cost of the plant 130,000,000Add: Present value of decommissioning cost 19,000,000Total 149,000,000Less: Accumulated depreciation (149M/20 x 5) 37,250,000Carrying value, 3/31/2016 111,750,000Less: Decrease due to revision of decom liabilityPresent value of decommissioning liability 30,599,690Less: Revised estimate 25,000,000 5,599,690Total 106,150,310Less: Depreciation April to Sept 2016(106,160,310/15 x 6/12)

3,538,344

Carrying value, 9/30/2016 (B) 102,611,966

Question No. 2Depreciation October 1 to March 31 3,725,000Depreciation April to Sept 2016 (106,160,310/15 x 6/12) 3,538,344Total depreciation (B) 7,263,344

Question No. 42016 6,000,0002017 6,300,0002018 6,615,000Total 18,915,000Divide by: Total semi-annual payments 6Semi-annual income (B) 3,152,500


284

Question No. 5Total income to date 3,152,500Less: Total collection to date 3,000,000Rent receivable (B) 152,500

SUMMARY OF ANSWERS:1. C 2. B 3. B 4. B 5. B

Chapter 29 – Shareholders’ Equity

285

CHAPTER 29: SHAREHOLDERS’ EQUITY

PROBLEM 29-1

Question No. 1 (A)Authorized ordinary shares at P10 stated value 1,200,000Less: Unissued ordinary shares 650,000Ordinary Shares issued 550,000

Question No. 2 (B)Authorized preference shares at P50 par value 800,000Less: Unissued preference shares 150,000Preference Shares issued 650,000

Question No. 3 (D)Share Premium on ordinary shares 300,000Share Premium conversion option-bonds payable 40,000Share premium on preference shares 150,000Gain on sale of treasury shares 60,000Ordinary share warrants outstanding 35,000Donated capital 40,000Ordinary shares options outstanding 25,000Total Share Premium 650,000

Question No. 4 (D)Ordinary Shares issued 550,000Preference Shares issued 650,000Subscribed Ordinary shares 200,000Subscription receivable – ordinary shares (20,000)Subscribed Preference shares 50,000Subscription receivable – preference (15,000)Total Share Premium 650,000Contributed Capital 2,075,000

Question No. 5 (C)Preference Shares issued 650,000Subscribed Preference shares 60,000Ordinary Shares issued 550,000Subscribed Ordinary shares 200,000Share Premium on ordinary shares 300,000Total Legal Capital 1,760,000


286

Question No. 6 (D)Contributed Capital 2,075,000Accumulated profits – unappropriated 500,000Unrealized increase in value of FVTOCI securities 10,000Reserve for bond sinking fund 320,000Revaluation surplus 130,000Total Shareholders' Equity 3,035,000

SUMMARY OF ANSWERS:1. A 2. B 3. D 4. D 5. C 6. D

PROBLEM 29-2

1. Cash (3,000 x ₱100) 300,000Share capital 300,000

To record share issuance at a premium

2. Cash (5,000 x ₱110) 550,000Share capital (5,000 x ₱100) 500,000Share premium 50,000

To record share issuance at a premium

Share premium 50,000Retained earnings 10,000

Cash 60,000To record payment of share issue cost

3. Cash (4,000 x ₱90) 360,000Discount on share capital 40,000

Share capital (4,000 x ₱100) 400,000To record share issuance at a discount

PROBLEM 29-3

1. Machinery 280,000Share capital (2,500 x ₱100) 250,000Share premium 30,000

To record share issuance for machinery

2. Patent (1,000 x ₱105) 105,000Share capital (1,000 x ₱100) 100,000Share premium 5,000

To record share issuance for patent

3. Organization expense 60,000Share capital (500 x ₱100) 50,000Share premium 10,000

To record share issuance for organization services.


287

PROBLEM 29-4

Loans payable – bank 250,000Loss on extinguishment of liability* 30,000

Share capital (2,000 x ₱100) 200,000Share premium** 80,000

To record issuance of shares for liability

*Computation of loss on extinguishment of liabilityFair value of equity instruments issued (or if not reliablydeterminable, use the fair value of liability) (2,000 x ₱140)

280,000

Less: Carrying amount of liability 250,000Loss (or Gain) on extinguishment of liability 30,000

**Computation of increase in share premiumFair value of equity instruments issued (or if not reliablydeterminable, use the fair value of liability) (2,000 x ₱140)

280,000

Less: Total par or stated value of equity issued (2,000 x ₱100) 200,000Share premium (or Discount) 80,000

PROBLEM 29-5

1. Cash (5,000 x ₱220) 1,100,000Preference shares (5,000 x ₱200) 1,000,000Share premium-pref. share 100,000

To record issuance of preference shares

2. Cash (1,000 x ₱120) 120,000Ordinary shares (1,000 x ₱100) 100,000Share premium - ordinary shares 20,000

To record issuance of ordinary shares

PROBLEM 29-6

Allocation of the lump-sum price:Total Fair

value FractionAllocated

costPreference shares (1,000 x ₱240) 240,000 24/60 400,000Ordinary shares (2,000 x ₱180) 360,000 36/60 600,000Total 600,000 1,000,000

The transaction will then be recorded as follows:Cash 1,000,000

Preference shares (1,000 x ₱200) 200,000Share premium-preference share (400,000-200,000) 200,000Ordinary shares (2,000 x ₱100) 200,000Share premium - ordinary share (600,000-200,000) 400,000


288

PROBLEM 29-7

Allocation of the lump-sum price:Total proceeds 1,000,000Less: Total fair value of pref. shares (1,000 x ₱240) 240,000Amount allocated to the other securities 760,000

The transaction will then be recorded as follows:Cash 1,000,000

Preference shares (1,000 x ₱200) 200,000Share premium-preference share (240,000-200,000) 40,000Ordinary shares (2,000 x ₱100) 200,000Share premium-ordinary share (760,000-200,000) 560,000

To record issuance of preference and ordinary shares

PROBLEM 29-8

1. Subscriptions receivable (5,000 x ₱110) 550,000Subscribed ordinary shares (5,000 x ₱100) 500,000Share premium-ordinary share 50,000

To record subscriptions of 5,000 shares at ₱110

2. Cash (550,000 x 40%) 220,000Subscriptions receivable 220,000

To record receipt of cash for subscriptions


To record receipt of the remaining balance

Subscribed ordinary shares 500,000Ordinary shares 500,000

To record issuance of certificate of stocks

PROBLEM 29-9

1. Subscriptions receivable (10,000 x ₱110) 1,100,000Subscribed ordinary shares (10,000 x ₱100) 1,000,000Share premium-ordinary share 100,000

To record subscriptions of 10,000 shares at ₱110

2. Cash (1,100,000 x 40%) 440,000Subscriptions receivable 440,000

To record receipt of cash for subscriptions

3. Subscribed ordinary shares (10,000 x ₱100) 1,000,000Share premium-ordinary share 100,000

Subscriptions receivable (1,100,000 x 60%) 660,000Share premium forfeited down-payment 440,000


289

PROBLEM 29-10


To record subscriptions of 6,000 shares at ₱110.


To record receipt of cash for subscriptions.

3. Receivable from highest bidder 20,000Cash 20,000

To record cost of ₱20,000.

4. Cash 416,000Receivable from highest bidder 20,000Subscriptions receivable 396,000

To record the collection from highest bidder.

5. Subscribed ordinary shares (6,000 x ₱100) 600,000Share capital 600,000

To record the issuance of share capital.

PROBLEM 29-11


To record subscriptions of 6,000 shares at ₱110.


To record receipt of cash for subscriptions.

3. Receivable from highest bidder 20,000Cash 20,000

To record cost of ₱20,000.

4. Treasury shares 416,000Receivable from highest bidder 20,000Subscriptions receivable 396,000

To record the collection from highest bidder.


290

PROBLEM 29-12

a. Treasury shares (5,000 x ₱160) 800,000Cash 800,000

b. Cash (2,000 x ₱180) 360,000Treasury shares (2,000 x ₱160) 320,000Share premium-Treasury shares 40,000

c. Cash (1,000 x ₱150) 150,000Share premium-Treasury shares 10,000

Treasury shares (1,000 x ₱160) 160,000

d. Ordinary shares (2,000 x ₱100) 200,000Share premium (200,000/50,000) x 2,000 8,000Share premium-Treasury shares (40,000-10,000) 30,000Retained earnings 82,000

Treasury shares (2,000 x ₱160) 320,000

e. Memo entry: Received 5,000 shares from astockholder as a donation.Cash (2,000 x ₱180) 360,000

Donated capital 360,000

PROBLEM 29-13

a. Preference shares (4,000 x ₱100) 400,000Share Premium on Preference shares[(400,000/40,000) x 4,000] 40,000Accumulated profits (balancing figure) 80,000

Cash (130 x 4,000) 520,000

b. Preference shares (4,000 x ₱100) 400,000Share Premium on Preference shares(400,000/40,000) x 4,000 40,000

Cash (90 x 4,000) 360,000Share premium retirement of shares (balancing figure) 80,000

PROBLEM 29-14

1) Preference shares (4,000 x ₱100) 400,000Share Premium on Preference shares[(400,000/40,000) x 4,000] 40,000

Ordinary shares (4,000 x 1/1 x ₱50) 200,000Share premium-ordinary shares 240,000

2) Preference shares (4,000 x ₱100) 400,000Share Premium on Preference shares[(400,000/40,000) x 4,000] 40,000


291

Accumulated profits 360,000Ordinary shares (4,000 x 4/1 x ₱50) 800,000

PROBLEM 29-15

1a. Ordinary shares (100,000 x ₱50) 5,000,000Share Premium on Ordinary shares 1,000,000

Ordinary shares (100,000 x ₱50) 5,000,000Share premium-recapitalization 1,000,000

1b. Ordinary shares (100,000 x ₱50) 5,000,000Share Premium on Ordinary shares 1,000,000Accumulated profits 9,000,000

Ordinary shares (100,000 x ₱150) 15,000,000

2. Ordinary shares (₱50-₱40) x 100,000 1,000,000Share premium-recapitalization 1,000,000

3. Share splitBefore Multiply by After

Ordinary Share capital issued 100,000 5/1 500,000Subscribed share capital - 5/1 -Total 100,000 5/1 500,000Less: Treasury shares - 5/1 -Outstanding shares 100,000 5/1 500,000

Before multiply by AfterPar value per share ₱50 1/5 ₱10

Memo entry: Issued 500,000 ordinary shares as a result of a 5 for 1 share split,reducing the par value to ₱10.

PROBLEM 29-16

CASE NO. 1Total Fair

valueFraction Allocated cost

Preference shares (4,000 x ₱90) 360,000 36/40 540,000Warrants (4,000 x ₱10) 40,000 4/40 60,000Total 400,000 600,000**(150 x 4,000)

Cash 600,000Preference Share capital (4,000 x ₱50) 200,000Share Premium (540,000-200,000) 340,000Ordinary share warrants outstanding 60,000


292

When the warrants are exercised:Cash (2,000 x 70% x P45) 63,000Ordinary share warrants outstanding (60,000 x 70%) 42,000

Ordinary Share capital (2,000 x 70% x ₱20) 28,000Share Premium –ordinary share 77,000

CASE NO. 2Total proceeds 600,000Less: Total fair value of the preference shares (4,000 x ₱90) 360,000Value of the warrants 240,000


CASE NO. 3Market value of ordinary shares ₱ 50Less: Option price/exercise price 45Intrinsic value of warrant 5Multiply: # of ordinary shares claimable under warrants 2,000Market value of share warrants ₱ 10,000

Total proceeds 600,000Less: Value of Share warrants 10,000Value assigned to Preference Share 590,000


PROBLEM 29-17

Computation of outstanding shares:Ordinary shares issued 10,000Less: Treasury shares 1,000Outstanding shares 9,000

a. Retained earnings (9,000 x ₱2) 18,000Dividends payable 18,000

b. No formal accounting entry

c. Dividends payable 18,000Cash 18,000


293

PROBLEM 29-18 Cash dividends for Preference Shares-Semi-annualPayment

July 1: Retained Earnings 38,000Dividends Payable (19,000 x P50 x 8% x 6/12) 38,000

Dec. 31: Retained Earnings

Dividends Payable (20,000 x P50 x 8% x 6/12) 40,000

40,000Computation of outstanding shares:July 1 December 31Preference shares issued 20,000 Preference shares issued 20,000Less: Treasury shares 1,000 Less: Treasury shares -Outstanding shares 19,000 Outstanding shares 20,000

PROBLEM 29-19

Nov. 1, Retained earnings 600,0002016 Dividends payable 600,000

Dec. 31, Retained earnings 200,0002016 Dividends payable 200,000

Fair value ₱800,000Less: Previous Fair value 600,000Increase in dividends payable ₱200,000

Feb. 15, Dividends payable 20,0002017 Retained earnings 20,000

Fair value ₱780,000Less: Previous Fair value 800,000Decrease in dividends payable ₱(20,000)

Dividends payable 780,000Inventory 700,000Gain on distribution - prop. dividends 80,000

Carrying amount of dividend payable = Fairvalue ₱780,000Less: Carrying amount of noncash assets 700,000Gain on distribution of prop. Dividends ₱ 80,000


294

PROBLEM 29-20

Nov. 1, Retained earnings 600,0002016 Dividends payable 600,000

Equipment-noncurrent asset fordistribution* 600,000Impairment loss (₱700,000 - ₱600,000) 100,000

Equipment 700,000

Dec. 31, Retained earnings 200,0002016 Dividends payable 200,000

Fair value ₱800,000Less: Previous Fair value 600,000Increase in dividends payable ₱200,000

Equipment-noncurrent asset fordistribution** 100,000

Gain on recovery of impairment loss 100,000

Feb. 15, Dividends payable 20,0002017 Retained earnings 20,000

Fair value ₱780,000Less: Previous Fair value 800,000Decrease in dividends payable ₱(20,000)

Dividends payable 780,000Equipment-noncurrent asset for distribution 700,000Gain on distribution of prop. Dividends 80,000

Carrying amount of dividend payable = Fairvalue ₱780,000Less: Carrying amount of noncash assets 700,000Gain on distribution of prop. Dividends ₱ 80,000

*(Lower of ₱700,000 and ₱600,000)**(₱800,000 minus ₱600,000) but the gain shall not exceed the amount ofimpairment loss of ₱100,000.

Computation of the impairment loss is as follows:Original carrying amount ₱700,000Less: Lower between these twoamounts

FVLCTD 600,000Original carrying amount 700,000 600,000

Impairment loss ₱100,000


295

Computation of the gain on reversal of the impairment loss is as follows:Lower between subsequent FVLTCD and original carrying amount

Original carrying amount ₱700,000FVLCTD 800,000 ₱700,000

Carrying amount at initial recognition 800,000Gain on reversal 100,000

Note: FVLCTD – Fair Value less Cost to Distribute.

PROBLEM 29-21

Retained earnings P 197,000Dividends payable P 197,000

Supporting computation:Cash alternative (20 x 70% x P10,000) P 140,000Non-cash alternative (20 x 30% x P9,500) 57,000Total dividends P 197,000

Date of payment:If the shareholders opted to receive cash, the journal entry is:a. Dividends payable 197,000

Loss on distribution (balancing figure) 3,000Cash (20 x 10,000) 200,000

If the shareholders opted to receive noncash, the journal entry is:b. Dividends payable 197,000

Noncash (20 x 9,500) 190,000Retained earnings (balancing figure) 7,000

PROBLEM 29-22

1) Accumulated Profits[(105,000-5,000) x 10% x ₱130]

1,300,000

Share dividends payable [(105,000-5,000) x 10% x ₱50] 500,000Share premium on Ordinary shares 800,000

2) Accumulated Profits[(105,000-5,000) x 20% x ₱50]

1,000,000

Share dividends payable [(105,000-5,000) x 20% x ₱50] 1,000,000

3) Capital Liquidated (₱2 x 100,000 shares) 200,000Cash 200,000

4) Accumulated Profits 300,000Share dividends payable - Treasury shares 300,000


296

PROBLEM 29-23 Fractional Share rights

1. Date of declaration of share dividendsRetained earnings (100,000 x 30% x ₱50) 1,500,000

Share dividends payable 1,500,000

2. Issuance of full share dividends and the fractional share warrants or rightsShare dividends payable 1,500,000

Share capital (27,000 x ₱50) 1,350,000Fractional warrants outstanding 150,000

3. Issuance of full shares as a result of the exercise of the fractional sharewarrants

Fractional warrants outstanding 150,000Share capital (2,800 x ₱50) 140,000Share premium-unexercised warrants 10,000

PROBLEM 29-24 Comprehensive Problem

Questions 1 to 3Date Ordinary

sharesPreference

sharesA. Jan. 2, 2012 20,000 10,000B. Jan. 3, 2013 (10,000/50 x 2) 400C. May 1, 2014 10,000BAL Dec. 31, 2014 1. (D) 30,400 10,000D. Jan. 1, 2015 [(30,400/2 x 3) - 30,400] 15,200BAL Dec. 31, 2015 2. (B) 45,600 10,000

Jan. 1, 2016 [(45,600/1 x 2) - 45,600] 45,600E. July 1, 2016 (10,000 x 2 x 20%) 4,000 (10,000)BAL Dec. 31, 2016 3. (A) 95,200 -

Question No. 4June 30 (₱1.50 x 45,600) 68,400Dec. 31 (₱2.50 x 45,600) 114,000Total Dividends (A) 182,400

Question No. 5June 30 (₱1.25 x 91,200) 114,000Dec. 31 (₱1.00 x 95,200) 95,200Total Dividends (D) 209,200

SUMMARY OF ANSWERS:1. D 2. B 3. A 4. A 5. D


297

PROBLEM 29-25Questions 1 to 3

*in ‘000sPref.shares

Ord.shares

TotalSharePremium

Retainedearnings

Treasuryshares

Subs.Ord.share

Subs.Receivable

Beginning 1,400 3,500 1,925 4,500Jan. 5 600 60 (20)

(60)Jan. 28 1,000Feb. 2 MemoFeb. 14 50 (500)

880Jul. 15 800 100 200Oct. 15 2,250 1,500 3,750Nov. 15 (1,500)Nov. 27 1,000 (1,000) (1,500)Dec. 31 1,000Total 2,200 5,200 5,305 5,480 500 500 750

1. (B) 2. (C) 3. (C)

Question No. 4 (C)Retained earnings, total P 5,480,000Outstanding balance of treasury stocks ( 500,000)Retained earnings – unappropriated P 4,980,000

Question No. 5 (B)Preference shares P 2,200,000Ordinary shares 5,200,000Subscribed ordinary shares 500,000Subscriptions receivable (750,000)Share premium 5,305,000Retained Earnings 5,480,000Treasury stocks ( 500,000)Total P17,435,000

SUMMARY OF ANSWERS:1. B 2. C 3. C 4. C 5. B


298

PROBLEM 29-26

Pref.shares

Ord.shares

SharePrem

Retainedearnings

Treasuryshares

Beg.Balances

400,000 200,000 250,000 900,000

2.) 200,0003.) 20,000 (80,000)4.) 400,000 80,0005.) 6,000 30,0006.) 38,200 (38,200)8.) 2,400,0009.) (80,000)

(91,680)Total 800,000 244,200 380,000 3,090,120 120,000

1. (C) 2. (D) 4. (D)

Number of SharesOrdinary Preference

Beginning balance 40,000 4,0002. Treasury shares (5,000)3. Reissuance of treasury shares 2,0004. Issuance of P/S 4,0005. Exercise of warrants 1,2006. Share dividends 7,640Balance 45,840 8,000Dividend per share x 2 x 10Dividends 91,680 80,000

Question No. 3 (D)Retained earnings (see table above) P 3,090,120Less: Treasury shares 120,000Retained earnings - unappropriated P 2,970,120

Question No. 5 (A)Preference shares P 800,000Ordinary shares 244,200Share premium 380,000Retained earnings-total 3,090,120Treasury shares (120,000)Total shareholder’s equity P 4,394,320

SUMMARY OF ANSWERS:1. C 2. D 3. D 4. D 5. A


299

PROBLEM 29-27

Pref.Shares

Ord.Shares

Subscribed

shareCapital

Subscription

Receivable

TotalShare

Premium

Retained

Earnings

Treasury

Shares

Beg. 4,000 840 100 52 968 15,000 441.) 80 (100) (52) 9.62.) (200) 40 1603.) 1,350 6754.) 27 (33)5.) 2806.) 2,5007.) (1,217)Total 3,800 2,310 0 0 1,839.6 16,563 11

1. (D) 2. (C) 3. (C)

OrdinaryShares

Beginning balance - issued 84,000Beginning balance - treasury (4,000)1.) February 1, 2016 Issuance of shares 8,0002.) March 1, 2016 Conversion of preference shares 4,0003.) April 1, 2016 Exercise of stock rights (67,500 x 2) 135,000Balance – April 30 227,0004. ) September 30, 2016 Reissuance of treasury shares 3,000Balance – October 31 230,000

PreferenceShares

Beginning balance – issued and outstanding 40,0002.) March 1, 2016 Conversion into ordinary shares (2,000)Balance – April 30 & October 31 38,000

Computation of dividends:Ordinary shares:April 30 (227,000 x P1) 227,000October 31 (230,000 x P1) 230,000

Preference shares:April 30 (38,000 x P100 x 10%) 380,000October 31 (38,000 x P100 x 10%) 380,000

Total dividends 1,217,000

Question No. 4 (E)Retained earnings (see table above) P16,563,000Less: Treasury shares 11,000Retained earnings - unappropriated P16,552,000


300

Question No. 5 (E)

Preference shares 3,800,000Ordinary Shares 2,310,000Share Premium 1,839,600Retained Earnings - Unappropriated 16,552,000Retained Earnings - Appropriated 11,000Less: Treasury Shares 11,000Shareholder’s Equity 24,501,600

SUMMARY OF ANSWERS:1. D 2. C 3. C 4. (E) 5. (E)

PROBLEM 29-28

PreferenceShares

OrdinaryShares

TotalShare

PremiumRetainedEarnings

TreasuryShares

Beginning 840,000 420,000 15,000,000 44,000A.) 13,500 (16,500)B.) SPLIT 2 for 1C.) (650,000)D.) 200,000 340,000

60,000E.) 8,000 16,000F.) (10,000) (5,000) (25,000)G.) (650,400)H.) 2,400,000Total 200,000 838,000 844,500 16,074,600 27,500

1. (C) 2. (D) 3. (C)

Computation of cash dividends: OrdinaryShares

Beginning balance - issued 84,000Beginning balance - treasury (4,000)a. Jan 15 Reissuance of treasury shares 1,500Balance 81,500b. March 1 2 for 1 share split 81,500e. October 1 Exercise of warrants (80% x 2,000) 1,600f. November 2 Retirement of shares (2,000)Balance – December 31 162,600Multiply: Dividend per share P4Total dividends 650,400

Question No. 4 (A)Retained earnings (see table above) P16,074,600Less: Treasury shares 27,500Retained earnings - unappropriated P16,047,100


301

Question No. 5 (A)Preference shares 200,000Ordinary Shares 838,000Share Premium 844,500Retained earnings -unappropriated 16,047,100Retained earnings - appropriated 27,500Less: Treasury Shares 27,500Shareholders’ Equity 17,929,600

SUMMARY OF ANSWERS:1. C 2. D 3. C 4. A 5. A

PROBLEM 29-29

Preference Shares

OrdinaryShares

TotalShare

PremiumRetainedEarnings OCI

TreasuryShares

Beg. 1,200,000 1,800,000 4,116,000 2,300,000 61,740 420,000Jan. 4 300,000 750,000Mar. 2 400,000 500,000May 7 18,000 (126,000)

Jun. 152-for-1

splitJul. 2 98,000 274,400 (274,400)Oct. 1 61,740 (61,740)Oct. 1 (329,280)Oct. 15 400,000 5,000 800,000Nov. 1 (82,320)Dec. 31 (825,200)

(224,000)2,250,000

Total 2,000,000 2,203,000 6,458,400 2,876,540 0 294,000

1. (D) 2. (C) 3. (B)

OrdinaryShares

Beginning balance - issued 180,000Beginning balance - treasury (20,000)Jan. 4 Issuance of shares 30,000Balance – January 30 190,000May 7 Reissuance of treasury shares 6,000Balance before share split 196,000Add: Share split – 2 for 1 196,000Balance 392,000July 2 5% share dividends 19,600Oct. 15 Issuance of shares 1,000Balance – December 31 412,600


302

PreferenceShares

Beginning balance – issued and outstanding 12,000Mar. 2 Issuance of shares 4,000October 15 Issuance of shares 4,000Balance – December 31 20,000

Computation of cash dividends:Ordinary shares:Dec 31 (P2 x 412,600) 825,200

Preference shares:Dec 31 (8% x P2,800,000) 224,000

Total dividends 1049,200

Question No. 4 (E)Retained earnings-total 2,876,540Less: Appropriated for Treasury shares 294,000Retained earnings-unappropriated ₱2,582,540

Question No. 5 (E)Preference share 2,000,000Ordinary share 2,203,000Total share premium 6,458,400Retained earnings - unappropriated 2,582,540Retained earnings – appropriated 294,000Less: Treasury Shares 294,000Total Shareholders’ equity 13,243,940

SUMMARY OF ANSWERS:1. D 2. C 3. B 4. (E) 5. (E)

PROBLEM 29-30

Jan. 1 Land 340,000Organization expense 140,000Ordinary shares (1,000 x P100 10,000Share Premium-O/S 470,000

Feb. 23 Cash (20,000 x 150)-150,000 2,850,000Preference shares (20,000 x P100) 2,000,000Share premium-PS 850,000

Mar. 10 Cash (6,000 x 390)-50,000 2,290,000Ordinary shares (6,000 x P10) 60,000Share premium-OS 2,230,000


303

Apr. 10 Subscriptions receivable (8,000 x P450) 3,600,000Subs. Ordinary shares (8,000 x P10) 80,000Share premium-OS 3,520,000

July 14 Building 1,080,000Preference shares (2,800 x P100) 280,000Share Premium-PS (460,000-280,000) 180,000Ordinary shares (1,400 x P10) 14,000Share premium-OS (560,000-14,000) 546,000

Fair value of the building 1,020,000Less: Fair value of the ordinary shares(480,000/1,200 x 1,400)

560,000

Value of the pref. shares 460,000

July 14 Cash 480,000Ordinary shares (1,200 x P10) 12,000Share Premium-OS 468,000

Aug. 3 Cash 2,800,000Subscriptions receivable 2,800,000

Subs. Ordinary shares (8,000 x ½ x P10) 40,000Ordinary shares 40,000

Dec. 1 Retained earnings 580,000Dividends payable 580,000

Pref. dividends (2,280,000 x 10%) 228,000

OS Issued (136,000/10) 13,600Add: Subscribed OS 4,000Outstanding shares 17,600Multiply by: Dividend per share 20 352,000Total dividends 580,000

Dec. 31 Dividends payable 228,000Cash 228,000


304

P/S SP – P/SOrdinary Shares SP – O/S

Subscribed O/S

Subs.Receiv

able R/E1/1 P - P - P10 P 470 P - P -2/23 2,000 850 - - - -3/10 60 2,2304/10 3,520 80 3,6007/14 280 180 14 5467/14 12 4688/3 40 (40) (2,800)12/1 (228)

(352)50 1,280

Total P2,280 P 1,030 P 136 P 7,234 P 40 P800 P700

1. (B) 2. (C) 3. (C) 4. (C) 5. (B)

Question No. 6 (C)Preference shares 2,280,000

Ordinary shares 136,000

Subscribed ordinary shares 40,000

Less: Subscriptions receivable 800,000 (760,000)

Paid in capital-Pref. shares 1,030,000

Paid in capital-Ordinary shares 7,234,000

Retained earnings 700,000

Total shareholders’ equity 10,620,000

Note:

Sec. 43 of the Corporation Code of the Philippines states that “ The board of

directors of a stock corporation may declare dividends out of the unrestricted retained

earnings which shall be payable in cash, in property, or in stock to all stockholders on the

basis of outstanding stock held by them: Provided, That any cash dividends due on

delinquent stock shall first be applied to the unpaid balance on the subscription plus

costs and expenses, while stock dividends shall be withheld from the delinquent

stockholder until his unpaid subscription is fully paid”

Thus, the dividend on the subscribed share capital is paid to that shareholder because he

was not yet declared delinquent by corporation.

SUMMARY OF ANSWERS:1. B 2. C 3. C 4. C 5. B 6. C


305

PROBLEM 29-31

Question No. 1 (C)Preference shares, beg. P 800,000Additional issue (20,000 x P10) 200,000Total P 1,000,000

Question No. 2 (A)Ordinary shares, beg. P 200,000Stock dividend (3,480 shares x P5)* 17,400Total P 217,400

Outstanding shares, beginning 40,000Treasury shares acquisition (8,000)Treasury shares re-issue 2,800Total outstanding shares 34,800Multiplied by: 10%Dividend shares 3,480

Question No. 3 (A)Share premium, beg. P 384,000Premium on treasury share re-issue (100,000 – (2,800 x P20) 44,000Premium on preference share issue (P15 – P10) x 20,000 shares 100,000Premium on stock dividends (P12 – P5) x 3,480 shares 24,360Total share premium, end P 552,360

Question No. 4 (D)Retained earnings, beg. P 2,400,000Add: Net Income

Unadjusted Net Income P 1,780,000Overstatement in operating expenses 100,000 1,880,000

Less: DividendsStock dividends (3,480 x P12) P 41,760Cash dividends* 119,140 (160,900)

Retained earnings, adjusted P 4,119,100Retained earnings, appropriated for treasury shares (104,000)Retained earnings, appropriated for plant expansion (1,200,000)Retained earnings, unappropriated P 2,815,100

* Cash dividendsPreferred stock dividends (80,000 + 20,000) x P1 P 100,000Ordinary shares (34,800 + 3,480) x P.50 19,140Total cash dividends P 119,140

Question No. 5 (B)Treasury shares acquired (8,000 x P20) P 160,000Treasury shares reissued (2,800 x P20) ( 56,000)Treasury shares, end P 104,000


306

* Computation of the Cash dividendsPreferred stock dividends (80,000 + 20,000) x P1 P 100,000Ordinary shares (34,800 + 3,480) x P.50 19,140Total cash dividends P 119,140

Computation of the net income:Net Income

Unadjusted Net Income P 1,780,000Overstatement in operating expenses 100,000

Adjusted net income P 1,880,000

SUMMARY OF ANSWERS:1. C 2. A 3. A 4. D 5. B

ADJUSTING JOURNAL ENTRIES:Entries Made Should be entries Adjusting entries

a.

Otheroperatingexpense

100 Dividendspayable

100 Dividendspayable

100

Cash 100 Cash 100 Otheroperationexp

100

b.

Ordinaryshares

160 Treasuryshares

160 Treasuryshares

160

Cash 160 Cash 160 Ordinaryshares

160

c.

Equipment 100 Equipment 100 Ordinaryshares

14

Ordinaryshares(2,800 x P5)

14 Treasuryshares(2,800 x 20)

56 SharePremium

86

SharePremium

86 SharePremium-TS

44 Treasuryshares(2,800 x 20)

56

SharePremium-TS

44

d.

Cash 300 Cash 300 Preferenceshares

100

Preferenceshares

300 Preferenceshares(20,000 xP10)

200 SharePremium-PS

100

SharePremium-PS

100

e.

Memo entry Retainedearnings(40K-5,200)x 10% xP12)

41,760

Retainedearnings(40K-5,200)x 10% xP12)

41,760

Share div.payable(34,800 x10% x P5)

17.4 Share div.payable(34,800 x10% x P5)

17.4


307

Sharepremium

24.36

Sharepremium

24.36

f. SharePremium

17.4 Share div.payable

17.4 Share div.payable

17.4

Ordinaryshares

17.4 Ordinaryshares

17.4 SharePremium

17.4

g.

No journalentry

Retained*earnings

119.14

Retainedearnings

119.14

Dividendspayable

119.14

Dividendspayable

119.14

h.

Retainedearnings-unappropriated

1,200

Same NO AJE

Retainedearningsappropriated for plantexpansion

1,200

No journalentry


104 Retainedearnings-unappropriated

104

Retainedearningsappropriated forTreasuryshares

104 Retainedearningsappropriated forTreasuryshares

104

i. No journalentry

Incomesummary

1,880

Incomesummary

1,880


1,880


1,880

* Computation of the Cash dividendsPreferred stock dividends

(80,000 + 20,000) x P1 P 100,000Ordinary shares

(34,800 + 3,480) x P.50 19,140Total cash dividends P 119,140

Computation of the net income:Net Income

Unadjusted Net Income P 1,780,000Overstatement inoperating expenses 100,000

Adjusted net income P 1,880,000

Chapter 30 – Book Value and Earnings Per Share

308

CHAPTER 30: BOOK VALUE AND EARNINGS PERSHARE

PROBLEM 30-1 One Class of Shares

Total shareholders' equity 16,220,000Add: Subscription receivable 1,200,000Total SHE excluding subscription receivable 17,420,000Divided by: Ordinary shares outstanding* 200,000Book value per share (A) 87.10

Shares issued 200,000Add: Subscribed shares (P1,000,000 / P50 par) 20,000Less: Treasury shares 20,000Ordinary shares outstanding 200,000

PROBLEM 30-2 Two Classes of Shares - Preference and Ordinary Shares

Preference shares: SharesTotal

par valuePreference share capital issued 12,500 P5,000,000Add: Subscribed preference shares - -Total 12,500 P5,000,000Less: Treasury shares at par - -Shares outstanding and total par value 12,500 P5,000,000

Ordinary shares: SharesTotal

par valueOrdinary share capital issued 75,000 P3,000,000Add: Subscribed ordinary shares - -Total 75,000 P3,000,000Less: Treasury shares at par - -Shares outstanding and total par value 75,000 P3,000,000

Total shareholders' equity 15,000,000Less: Par value of outstanding preference shares 5,000,000

Par value of outstanding ordinary shares 3,000,000Excess over par 7,000,000

CASE NO. 1Question No. 1 & 2

Excessover par

Preferenceshares

Ordinaryshares

Balances P7,000,000 P5,000,000 P3,000,000Preference dividend(5,000,000 x 8% x 4) (1,600,000) 1,600,000

Balance to ordinary shares 5,400,000 5,400,000


309

Total shareholders’ equity 6,600,000 8,400,000Divide by: Outstanding shares 12,500 75,000Book value per share P528.00 P112.00


Excessover par

Preferenceshares

Ordinaryshares


Liquidation premium [(P420-P400) x 12,500] (250,000) 250,000Balance to ordinary shares 5,150,000 5,150,000Total shareholders’ equity 6,850,000 8,150,000Divide by: Outstanding shares 12,500 75,000Book value per share P548.00 P108.67


Excessover par

Preferenceshares

Ordinaryshares

Balances P7,000,000 P5,000,000 P3,000,000Preference dividend(5,000,000 x 8% x 1) (400,000) 400,000

Balance to ordinary shares 6,600,000 6,600,000Total shareholders’ equity 5,400,000 9,600,000Divide by: Outstanding shares 12,500 75,000Book value per share P432.00 P128.00


Excessover par

Preferenceshares

Ordinaryshares


Ordinary dividend(3,000,000 x 8% x 1) (240,000) 240,000

Balance for participation 5,160,000Preference (5/8 x 5,160,000) (3,225,000) 3,225,000Balance to ordinary shares 1,935,000 1,935,000Total shareholders’ equity 9,825,000 5,175,000Divide by: Outstanding shares 12,500 75,000Book value per share P786.00 P69.00

SUMMARY OF ANSWERS:1. A 2. A 3. B 4. D 5. C 6. B 7. D 8. C


310

PROBLEM 30-3 Book Value per Share

Preference shares: SharesTotal

par valuePreference share capital issued 40,000 P4,000,000Add: Subscribed preference shares - -Total 40,000 P4,000,000Less: Treasury shares at par - -Shares outstanding and total par value 40,000 P4,000,000

Ordinary shares: SharesTotal

par valueOrdinary share capital issued 26,000 P1,040,000Add: Subscribed ordinary shares - -Total 26,000 P1,040,000Less: Treasury shares at par 1,000 40,000Shares outstanding and total par value 25,000 P1,000,000

Total shareholders' equity 11,970,000Less: Par value of outstanding preference shares 4,000,000

Par value of outstanding ordinary shares 1,000,000Excess over par 6,970,000


Excessover par

Preferenceshares

Ordinaryshares




Excessover par

Preferenceshares

Ordinaryshares


Liquidation premium[(P105-P100) x 40,000] (200,000) 200,000



311


Excessover par

Preferenceshares

Ordinaryshares




Excessover par

Preferenceshares

Ordinaryshares



Excessover par

Preferenceshares

Ordinaryshares


Ordinary dividend(1,000,000 x 8% x 1) (80,000) 80,000

Balance for participation 6,570,000Preference (4/5 x 6,570,000) (5,256,000) 5,256,000Balance to ordinary shares 1,314,000 1,314,000Total shareholders’ equity 9,576,000 2,394,000Divide by: Outstanding shares 40,000 25,000Book value per share P239.40 P95.76

SUMMARY OF ANSWERS:1. B 2. C 3. B 4. B 5. C 6. A 7. D 8. D


312

PROBLEM 30-4 Weighted Average with Bonus Issue

DateOutstanding

Shares Fraction Average01/01/2015 200,000 x 120% 240,000 12/12 240,00003/01/2015 15,000 x 120% 18,000 10/12 15,00007/01/2015 (10,000) (10,000) 6/12 (5,000)10/01/2015 4,000 4,000 3/12 1,000

Weighted average outstanding shares (A) 251,000

PROBLEM 30-5 Weighted Average with Share Split

DateOutstanding

Shares Fraction Average01/01/2015 220,000 x 4/1 880,000 12/12 880,00003/01/2015 12,000 x 4/1 48,000 10/12 40,00004/01/2015 9,000 9,000 9/12 6,75010/01/2015 6,000 6,000 3/12 1,500

Weighted average outstanding shares (A) 928,250

PROBLEM 30-6 Basic Earnings per Share

Question No. 1 (B)Basic EPS = [P3,000,000 / 40,000] = P75 per share

Question No. 2 (C)Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share

Question No. 3 (C)Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share

PROBLEM 30-7 Basic Loss per Share

Question No. 1 (B)Basic LPS = [P2,000,000 / 30,000] = P66.67 per share

Question No. 2 (C)Basic LPS = [P2,000,000 + (5,000 x 10% x P100)]/30,000= 68.33 per share

Question No. 3 (D)Basic LPS = [P2,000,000 + (60,000)]/30,000= P68.67 per share

PROBLEM 30-8 Basic and Diluted EPS with Convertible Bonds Payable

Question No. 1Basic EPS = P3,000,000 / 120,000 = P25 per share


313

Question No. 2Diluted

EPS=

P3,000,000 + [(P1,800,000 x 10%) x (1 – 30%)]129,000 shares *

Diluted EPS = P24.23 per share

Weighted average of actual ordinary shares 120,000Add: Weighted average of potential ordinaryshares from assumed conversion (1,800 x 5 x 12/12) 9,000

Total weighted average of ordinary shares 129,000

Question No. 3Diluted

EPS=

P3,000,000 + [(P1,800,000 x 10% 8/12) x (1 – 30%)]126,000 shares *

Diluted EPS = P24.48 per share

Weighted average of actual ordinary shares 120,000Add: Weighted average of potential ordinaryshares from assumed conversion (1,800 x 5 x 8/12) 6,000

Total weighted average of ordinary shares 126,000

Question No. 4

Basic EPS =P3,000,000

123,750*= P24.24

Weighted average of actual ordinary shares 120,000Add: Issuance of shares related to conversion

(1,800 x 5 x 5/12) 3,750Total weighted average of actual ordinary shares issued 123,750Add: Assumed converted ordinary shares x months

outstanding (1,800 x 5 x 7/12) 5,250Total weighted average outstanding ordinary shares 129,000

Question No. 5

Diluted EPS =P3,000,000 + [(P1,800,000 x 10% x 7/12) x (1 – 30%)]

129,000 shares *Diluted EPS = P23.83 per share

SUMMARY OF ANSWERS:1. A 2. D 3. B 4. D 5. B

PROBLEM 30-9 Basic and Diluted EPS with Convertible Bonds Payable



314

Question No. 2

Diluted EPS =P4,000,000 + [(P1,123,910 x 10% x 8/12) x (1 – 30%)]

210,000 shares*Diluted EPS = P19.30 per share

Weighted average of actual ordinary shares 200,000Add: Weighted average of potential ordinary shares from

assumed conversion(15,000 x 8/12) 10,000Total weighted average of ordinary shares 210,000

PROBLEM 30-10 Basic and Diluted EPS with Convertible Preference Shares

Question No. 1

Basic EPS =P4,000,000 - [5,000 x P100 x 10%]

200,000 sharesBasic EPS = P19.75 per share

Question No. 2

Diluted EPS =P4,000,000

225,000 shares*Diluted EPS = P17.78 per share

*[200,000 + (5 x 5,000 x 12/12)]

Question No. 3


218,750 sharesDiluted EPS = P18.29 per share

*[200,000 + (5 x 5,000 x 9/12)]

Question No. 4

Basic EPS =P4,000,000 – (5,000 x P100 x 10% x 9/12)]

206,250 sharesBasic EPS = P19.21 per share

*[200,000 + (5 x 5,000 x 3/12)]

Question No. 5


225,000 sharesDiluted EPS = P17.78 per share

*[200,000 + (5 x 5,000 x 3/12) + (5 x 5,000 x 9/12)]

SUMMARY OF ANSWERS:1. A 2. D 3. C 4. C 5. D


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PROBLEM 30-11 Basic and Diluted EPS with Warrants and Options


Question No. 2



Weighted average of actual ordinary shares 100,000Add: Weighted average of incremental shares

from assumed exercise of options (1,200 x 12/12) 1,200Total weighted average of ordinary shares 101,200

Note: Months outstanding for assumed exercise of options is 12 months, whichis from date of issuance up to the reporting date.

Option shares 9,000Multiply by: Total exercise price (120+10) 130Proceeds from assumed exercise of options 1,170,000Divided by: Average market price during the year 150Assumed treasury shares 7,800

Option shares 9,000Less: Assumed treasury shares 7,800Incremental shares 1,200

Question No. 3



Weighted average of actual ordinary shares 100,000Add: Weighted average of incremental shares

from assumed exercise of options (1,200 x 9/12) 900Total weighted average of ordinary shares 100,900

Question No. 4



Weighted average of actual beginning ordinary shares 100,000Add: Weighted average number of shares from issuance of

share options (9,000 x 4/12) 3,000Total weighted average of actual ordinary shares issued 103,000Add: Weighted average of incremental shares

from assumed exercise of options (2,500 x 8/12) 1,667Total weighted average outstanding ordinary shares 104,667


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Option shares 9,000Multiply by: Total exercise price (120+10) 130Proceeds from assumed exercise of options 1,170,000Divided by: Market price at exercise date 180Assumed treasury shares 6,500

Option shares 9,000Less: Assumed treasury shares 6,500Incremental shares 2,500

SUMMARY OF ANSWERS:1. A 2. C 3. B 4. D

PROBLEM 30-12 Multiple Potential Dilutive Securities

Question No. 1 (A)

Basic EPS =P2,360,000 – (60,000 x P100 x 6%)

200,000Basic EPS = P10 per share

Question No. 21) Check for initial test of dilution

a. OptionsDilutive. The exercise price (P50) is less than the average market price(P100).

b. Convertible preference sharesProbably dilutive. The incremental EPS (P1.2) is less than the basicEPS (P10).

Incremental EPS =(P6,000,000 x 6%)

(60,000 x 5)Incremental EPS = P1.2 per share

c. Convertible bondsProbably dilutive. The incremental EPS (P.84) is less than the basicEPS (P10).

Incremental EPS =(P2,000,000 x 12%) x (1-30%)

(P2,000,000/P1,000) x 100Incremental EPS = P.84 per share

`

2) Rank the dilutive potential diluters from the most dilutive to the leastdilutive.

1st Options2nd Convertible bonds (incremental EPS of P.84 per share)3rd Convertible preference share (incremental EPS of P1.2 per share)

3) Include potentially dilutive convertible securities one by one. Every time anitem is included, calculate new earnings per share or new loss per shareamount as follows:


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ProfitOrdinary

shares EPSBasic EPS from continuingoperations

*2,000,000 200,000 10

Options 0 10,000Total 2,000,000 210,000 9.52Convertible Bonds payable 168,000 200,000Total 2,168,000 410,000 5.29Convertible Preference share 360,000 300,000Total 2,528,000 710,000 3.56

*Net Income less preference dividends [(P2,360,000 –(60,000 x P100 x12%)]

Answer: The final diluted EPS would be P3.56 per share. (D)

Question No. 3 (B)

Basic EPS =P500,000200,000

Basic EPS = P2.5 per share

Question No. 4 (C)

Diluted EPS =P500,000710,000

Diluted EPS = P.70 per share

SUMMARY OF ANSWERS:1. A 2. D 3. B 4. C

PROBLEM 30-13 Rights Issue

Fair value per share – right on P 150Less: Theoretical value of one right* 22Theoretical ex-rights fair value per share P 128

*Value of one right =150 –40

= 224* + 1

Adjustment factor (150/128) 1.17

Question No. 12014:Weighted average outstanding shares (40,000 x 1.17 x 12/12) 46,800

Basic EPS (P562,500 /46,800) (D) P12.02 / share


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Question No. 22015:Weighted average outstanding shares

(40,000 x 1.17 x 3/12) 11,700[(40,000 + 10,000) x 9/12] 37,500 49,200

Basic EPS (P800,000/49,200) (B) P16.26 / share

Question No. 32016:Weighted average outstanding shares[(40,000 + 10,000) x 12/12] 50,000

Basic EPS (P1,000,000 /50,000) (A) P20 per share

PROBLEM 30-14 Written Put Options (C)

Incremental shares =(P350 – P280) x 10,000

= 2,500 sharesP280

PROBLEM 30-15 Comprehensive Problem

Item Net IncomeRetainedEarnings

2015 2016 12/31/16Unadjusted **1,300,000 *500,000 1,800,000

1) (50,000) 50,000 -2) - (30,000) (30,000)3) 45,000 (45,000) -4) ***28,000 (28,000) -5) 5,000 (5,000) -6) (20,000) (20,000)7) - - -8) - - -9) - - -

Adjusted 1,328,000 422,000 1,750,000

* (P5 EPS x P1,000,000 / P10 par)** (1,800,000 – 500,000 2015 net income)*** (P48,000 / 12 x 7 months)

Question No. 1 (D)Refer to table above. Adjusted Net Income in 2015 is P422,000.

Question No. 2 (C)Refer to table above.


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Question No. 3 (C)EPS 2015 (P422,000 / 100,000 shares) = P4.22

Question No. 4 (B)Ordinary share capital, P10 par 1,000,000Share premium 500,000Retained earnings, 12/31/2015 (as adjusted) 1,750,000Total shareholders' equity 3,250,000

Question No. 5 (B)BVPS (P3,250,000 / 100,000) = P32.50

SUMMARY OF ANSWERS:1. D 2. C 3. C 4. B 5. B

Chapter 32 – Statement of Financial Position and Comprehensive Income

320

CHAPTER 32: STATEMENT OF FINANCIAL POSITIONAND COMPREHENSIVE INCOME

PROBLEM 32-1 Current and Noncurrent Assets

Question No. 1Cash 400,000Trade receivables 1,500,000Inventory, including inventory expected in the ordinary course ofoperations to be sold beyond 12 months amounting to P800,000

1,200,000

Prepaid insurance 240,000Financial assets at fair value through profit or loss 300,000Noncurrent Assets held for sale building 650,000Total Current Assets (D) 4,290,000

Question No. 2Financial assets at fair value through other comprehensive income 600,000Financial assets at amortized cost 1,000,000Deferred tax asset 150,000Machinery 800,000Accumulated depreciation (200,000)Land used as a plant site 920,000Total Noncurrent Assets (C) 3,270,000

PROBLEM 32-2 Current and Noncurrent Assets

Question No. 1Cash (1M+300,000+100,000-50,000-280,000) 1,070,000Accounts receivable (3M-200,000+50,000) 2,850,000Investments securities held for trading (1.8M-500,000) 1,300,000Inventories (800,000-200,000+(450,000/125%) 960,000Prepaid Expenses (only the prepaid insurance) 48,000Total Current Assets (A) 6,228,000

Question No. 2Cash in sinking fund 280,000Long-term investments 500,000Deposit to supplier for inventories to be delivered in 16 months 23,000Cash surrender value 20,000Property, plant and equipment 5,000,000Total noncurrent Assets (A) 5,823,000


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PROBLEM 32-3 Current and Noncurrent Liabilities

Question No. 1Bank overdraft 300,000Accounts payable (1M+25,000+100,000) 1,125,000Property dividends payable 400,000Income tax payable 300,000Note payable, due January 31, 2016 500,000Cash dividends payable 80,000Financial liabilities at fair value through profit or loss 130,000Estimated expenses of meeting warranties 335,000Estimated damages as a result of unsatisfactory performance ona contract

268,000

Loans payable-current 100,000Total current liabilities (A) 3,538,000

Question No. 2Bonds payable 3,400,000Premium on bonds payable 200,000Deferred tax liability 400,000Mortgage payable 1,000,000Loans payable-noncurrent 400,000Total noncurrent liabilities (C) 5,400,000

PROBLEM 32-4 Shareholders’ Equity

Ordinary share capital 10,000,000Share premium 1,000,000Subscribed ordinary share 100,000Subscriptions receivable (120,000)Retained earnings unappropriated (6M-2M cost of treasury) 4,000,000Reserves:Retained earnings appropriated for treasury shares 2,000,000Reserve for contingencies 3,000,000Unrealized gain on FVTOCI 1,000,000Revaluation surplus 4,000,000Cumulative translation adjustment – debit (1,500,000)Total 23,480,000Less: Treasury shares 2,000,000Total Shareholders' Equity (C) 21,480,000


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PROBLEM 32-5 Adjusting and Nonadjusting events

Loss on expropriation 100,000Impairment loss on Accounts Receivable 600,000Litigation loss 1,000,000Total adjusting events (A) 1,700,000

All other data are nonadjusting events.

PROBLEM 32-6: Related Party Relationship

Requirement No. 1The following companies are considered to be related parties of Frozen ThroneCompany in accordance with PAS 24 Related Party Disclosures:

Name Description1) Sand King Co. Post-employment benefit plan established by

Frozen Throne2) Shadow Fiend Co. Associate4) Harbringer Co. Subsidiary5) Night Crawler Co. Subsidiary of Harbringer6) Disruptor Co. Associate of Harbringer7) Geomancer Co. Parent8) Jakiro Co. Parent of Geomancer9) Rylai Co. Sister company of Frozen Throne Company10) Medusa Co. Key Management personnel of Frozen Throne

Company.11) Barathrum Co. Bank16) Pudge Co. Joint venturer of Frozen Throne Company17) Invoker Co. Joint venture of Frozen Throne Company

Requirement No. 2Regardless of whether there have been transactions between a parent and asubsidiary, an entity must disclose the name of its parent and, if different, theultimate controlling party. Therefore, Frozen Throne Company should discloseJakiro Co., its ultimate parent or controlling party.

PROBLEM 32-7 (Distribution costs and general and administrativeexpenses)

Question No. 1Advertising 500,000Delivery expense 300,000Rent for office space (500,000 X 1/2) 250,000Sales commissions 1,075,000Depreciation on delivery truck 14,000Total distribution costs (B) 2,139,000


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Question No. 2Auditing and Accounting fees 300,000Officers’ salaries 625,000Rent for office space (500,000 X 1/2) 250,000Insurance 200,000Depreciation on office equipment 15,000Total general and administrative expenses(D) 1,390,000

PROBLEM 32-8 Comprehensive Income

Net Sales 4,000,000Cost of goods sold 2,500,000Gross income 1,500,000Other income 30,000Share of profit of associate 125,000Total income 1,655,000Expenses:

Distribution costs 60,000Administrative expenses 120,000Finance cost 35,000Other expense 50,000 265,000

Income before income tax 1,390,000Income tax expense 408,000Income from continuing operations 982,000Income from discontinued operations 100,000Net Income 1,082,000Other comprehensive income:

Revaluation surplus 300,000Translation gain 50,000Unrealized gain on FVTOCI securities 200,000 550,000

Comprehensive income (C) 1,632,000

Other income:Interest income 30,000

Other expense:Loss on sale of equipment 50,000


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CurrentAsset

Non-current

asset Total AssetUnadjusted balance 44,300 158,400 202,700

1. Notes receivable – maturitydate July 1, 2018

(10,000) 10,000 -

Land (12,000) 12,000 -2. FVTOCI 4,600 (4,600) -3. Inventory 30,500 (30,500) -4. Treasury shares (1,800) (1,800)5. Prepaid insurance 2,900 (2,900) -10. Accumulated depreciation

– Building(21,000) (21,000)

Accumulated depreciation– Equipment

(13,000) (13,000)

Allowance for bad debts (700) (700)Adjusted balance 59,600 106,600 166,200

1. (E) 2. (E)

CurrentLiabilities

Non-current

liabilities EquityUnadjusted balance 66,600 24,100 112,000

4. Treasury shares (1,800)6. Bonds payable (40,000) 40,0007. Accrued wages 4,100 (4,100)8. Mortgage – current portion 4,000 (4,000)9. Premium on bonds payable 4,300 (4,300)10. Allowance for bad debts (700)

Accumulated depreciation– Building

(21,000) (21,000)

Accumulated depreciation– Equipment

(13,000) (13,000)

Adjusted balance 34,700 60,300 71,200

3. (A) 4. (B) 5. (A)

SUMMARY OF ANSWERS:1. (E) 2. (E) 3. A 4. B 5. A


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PROBLEM 32-10

Cash inbank Inventory

Accts.Receivable PPE

Accum.Depr

Depre-ciation

Unadjustedbalances

100 1,800 2,500 1,000 400 -

1 - 4 - - - -2 - (15) - - - -3 (14) - - - - -4 20 - - - - -5 (5) - 5 - - -6 - - - - - -7 - - - 500 112.5 112.58 - - - - - -9 - 60 - - - -10 - - - (20) (4) (4)11 - - - - - -Adjustedbalances

1011. (B)

1,849 2,505 1,480 508.5 108.5

Continuation…Advances

fromcustomers

Accountspayable

Interestpayable

Bondspayable Discount

Amorti-zation

Unadjustedbalances

- 320 1,924,144 - -

1 - 4 - - - -2 - - - - - -3 - 14 - - - -4 - 20 - - - -5 - - - - - -6 - - - - - -7 - - - - - -8 5 (5) - - - -9 - 60 - - - -10 - - - - - -11 - - 180 75,856 63.442 12.414Adjustedbalances

5 4132. (B)

180 1,936,558 63.442 12,414

*000

Current Assets:Cash in bank 101,000Inventory 1,849,000Accounts Receivable 2,505,000 4,455,000 3. (A)

Noncurrent assets:PPE 1,480,000Less: Accumulated Depreciation 508,500 971,500 4. (B)

Total assets 5,426,500


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Current liabilities:Advances from customers 5,000Accounts payable 413,000Interest payable 180,000 598,000 5. (B)

Noncurrent liabilities:Bonds payable 2,000,000Discount on bonds payable 63,442 1,936,558 6. (C)

Total liabilities 2,534,558

SUMMARY OF ANSWERS:1. B 2. B 3. A 4. B 5. B 6. C

PROBLEM 32-11

2015Sales COS EI OPEX

1. EI over, COS under 385,000 157,600 98,500 69,3002015 6,200 (6,200)20162. Salaries expense under2015 14,60020163. Sales overstated2015 (1,700)20164. Expense overstated2015 (180)20165. Purch. Over, COS over2015 (3,200)20166. Sales under2015 2,50020167. Bad debt under2015 (32.4+2.5) x 2% 6982016 (66.1+4) x 2%-6988. Dep. Expense under2015 14,5002016Adjusted bal. 385,800 160,600 92,300 98,918


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2016Sales COS EI OPEX

1. EI over, COS under 420,000 203,800 164,900 76,7002015 (6,200)2016 8,500 (8,500)2. Salaries expense under2015 (14,600)2016 17,3003. Sales overstated2015 1,7002016 (800)4. Expense overstated2015 1802016 (200)5. Purch. Over, COS over2015 3,2002016 (4,600)6. Sales under2015 (2,500)2016 4,0007. Bad debt under2015 (32.4+2.5) x 2%2016 (66.1+4) x 2%-698 7048. Dep. Expense under20152016 14,500Adjusted bal. 422,400 204,700 156,400 94,584

Question No. 6 (A)Sales 385,800Less Cost of sales 160,600Gross Profit 225,200Less Operating expenses 98,918Add Other income 2,100Net profit 128,382Add: Retained earnings, beginning 23,400Retained earnings, December 31, 2015) 151,782

Question No. 7 (C)Cost 145,000Less Accumulated depreciation (14,500 x 2) 29,000Book value of machinery, December 31, 2016 116,000


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Question No. 9 (B)

Accounts receivable, 2015 (32,400+2,500) 34,900

Less: Allowance for bad debts (32,400+2,500) * 2% 698

Net realizable value 34,202

Question No. 10 (B)

Sales 2016 422,400Less: Cost of sales 204,700Gross Profit 217,700Less: Operating expenses 94,584Add: Other income 1100Net income 124,216

SUMMARY OF ANSWERS:1. C 2. C 3. D 4. A 5. C6. A 7. C 8. B 9. B 10. B

PROBLEM 32-12

Question No. 1Unadjusted sales 4,323,600Less: Advances 132,000Adjusted Sales (A) 4,191,600

Question No. 2Carrying value (100,000 x 70%^4*) 24,010Less: Recoverable amount (higher) 23,000Impairment loss (B) 1,010

*future value after 4 periods = carrying value after 4 periods.

Question No. 3Sales 4,191,600Add: Increase in raw materials (75,800 – 56,800) 19,000

Increase in finished goods (130,700 – 105,800) 24,900Less: Purchase of raw materials (2,056,500)

Other expenses (see below) (522,100)Wages and salaries (890,400 + 33,000) (923,400)Amortization of development cost (648,000 / 3 x 4/12) (72,000)Impairment loss (1,010)Depreciation [(567,000 – 402,000) x 30%] (49,500)Tax expense (52,000 + 35,000 – 30,000) (57,000)

Net income (A) 553,990


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Unadjusted Other Expense 569,900Add: Rent expense [10,000 + (4,000/4)**] 11,000

Increase in accrued expense (26,700 - 17,000) 9,700Less: Tax settlement (35,000)

Increase in prepaid expense (45,000 – 11,500) (33,500)Adjusted Other Expense 522,100

**Since the deposit is non-refundable, this is recognized as additional expenseover the lease term.

Questions No. 4 to No. 7Current assets:Cash in bank (41,850 – 33,000) 8,850Trade receivables and other receivables 245,800Raw materials 75,800Finished goods 130,700Prepaid expense 45,000 506,150

4. (B)Non-current assets:Intangible asset (648,000 – 72,000) 576,000Plant (567,000 – 402,000 – 49,500 – 1,010) 114,490Lease deposit (4,000 – 1,000) 3,000 693,490

Total assets 5. (C) 1,199,640

Current liabilities:Trade and other payables 156,700Income tax payable 52,000Advances from customers 132,000Accrued purchases 26,700 367,400

6. (C)Non-current liabilities:None - -

Total liabilities 367,400

Equity:Ordinary shares 300,000Retained earnings (553,990 – 1,750 deficit –

20,000) 532,2407. (A)

832,240Total liabilities and shareholders’ equity 1,199,640

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. B 5. C 6. C 7. A


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PROBLEM 32-13

Question Nos. 1 and 22015 2016

Unadjusted net income 195,000 220,0001) BD expense under, NI over (392,000 x 10% )-

27,000 (2,200)2) Unreal. Gain (Loss) (81,000-78,000) and

(62,000-81,000) 3,000 (19,000)3) EI overstated, NI over (4,000) 4,000

EI overstated, NI over (6,100)4) *Expense over, NI under 10,900

Depreciation expense under, NI over (1,100)**Gain on sale under, NI under 2,500

5) Exp. Over 1,800 (900)Adjusted net income 206,700 197,200

1. (B) 2. (B)

*(Expenses recorded P12,000 should be (12,000-1,000)/10=12,000-1,000)**Net Selling Price 2,500Less carrying amountCost 17,500Less Accumulated depreciation 17,500 0

Gain on sale 2,500

Question No. 3Cash 82,000Accounts receivable (296,000-18,000) 278,000Trading securities at Fair value 81,000Merchandise inventory (202,000-4,000) 198,000Prepaid insurance (2,700-1,800) 900Total current assets (C) 639,900

Question No. 4Cash 163,000Accounts receivable (392,000 x 90%) 352,800Trading securities at Fair value 62,000Merchandise inventory (207,000-6,100) 200,900Prepaid insurance 900Total current assets 779,600Property, plant and equipment(169,500+12,000-17,500) 164,000Less: Accumulated. Depreciation(121,600+1,100+1,100-17,500) 106,300Net Book value 57,700Total Assets (B) 837,300


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Question No. 5Share capital (20,000 x P10) 200,000Share premium 60,000Retained earnings (206,700+197,200+*52,000) 455,900Adjusted Shareholders' equity (A) 715,900

*(247,000-195,000)

SUMMARY OF ANSWERS:1. B 2. B 3. C 4. B 5. A

PROBLEM 32-14

Question No. 1Unadjusted sales 550,000Less: Sale with a repurchase agreement (selling price) (10,000)Adjusted Sales (B) 540,000

Note: The transaction should be reported as a financing arrangement, ratherthan sale. Hence, the company will instead report a liability and interest. Also,the cost should be included as part of inventory.

Question No. 2Unadjusted cost of sales 411,500Less: Sale with a repurchase agreement (cost) (7,0000Add: Depreciation on Plant (see below) 13,600

Depreciation on Building (35,000 / 14) 2,500Adjusted cost of sales (D) 420,600

Depreciation of plant asset is computed as follows:Plant asset classified as held for sale [(9,000 – 5,000) x 20% x6/12] 400Remaining plant asset [(70,000 – 4,000) x 20%] 13,200Total plant asset depreciation 13,600

Non-current asset held for sale:Fair value less cost to sell 4,200Carrying value date of classification (4,000 – 400) 3,600Initial carrying amount - LOWER 3,600

Question No. 3Sales 540,000Less: Cost of sales 420,600Gross profit 119,400Less: Distribution cost (21,500)

Administrative expenses (30,900)Interest [(700 + (10,000 x 10% x 6/12*)] (1,200)


332

Provision for bonus (540,000 x 1%) (5,400)Tax expense (increase in DTL and CTL) – (27,200 + 9,400

– 1,200 – 6,200) (29,200)Net income (A) 31,200

Question No. 4Net income 31,200Add: Revaluation surplus (see computation below) 7,000Total comprehensive income (B) 38,200

Land:Appraised value 12,000Carrying amount 10,000 2,000

Building:Appraised value 35,000Less: Carrying amount (50,000 – 20,000) 30,000 5,000

Total revaluation surplus 7,000

Questions No. 4 to No. 9Current assets:Trade receivables 42,200Inventory (43,700 + 7,000) 50,700Non-current asset held for sale 3,600 96,500

5. (D)Non-current assets:Land 12,000Building (35,000 – 2,500) 32,500 6. (C)Plant (66,000 – 13,200) 52,800 97,300

Total assets 193,800

Current liabilities:Trade payables 35,100Bank overdraft 6,800Current tax liability 27,200Provision – bonus 5,400 74,500

7. (C)Non-current liabilities:Deferred tax liability 9,400 -Bank loan 10,000 8. (D)Interest payable 500 19,900


Equity:Equity shares 50,000Share premium 20,000Revaluation surplus 7,000


333

Retained earnings (11,200 + 31,200 – 20,000) 22,4009. (B)

99,400Total liabilities and shareholders’ equity 1,199,640

Question No. 10Net income 31,200Divided by: Weighted average shares (see below) 96,739Earnings per share (A) ₱.3225

April 1 to July 1 (80,000* x 2 / 1.84** x 3/12) 21,739July 1 to March 31 (100,000 x 9/12) 75,000Weighted average number of shares 96,739

*The number of shares before the exercise of the rights may be computedby dividing the (₱50,000 / 50 centavos) by 125% (100% + ¼ rights).**Adjustment factor.

Value of one right =Fair value per share – right on minus exercise price

Number of rights to purchase one share plus 1

Value of one right =₱2 - ₱1.20

4 + 1= ₱.16

Fair value per share – right on ₱2.00Less: Theoretical value of one right .16Theoretical ex-rights fair value per share ₱1.84

SUMMARY OF ANSWERS:1. B 2. D 3. A 4. B 5. D6. C 7. C 8. D 9. B 10. A

PROBLEM 32-15

Note to professor: Insert this sentence to additional information # 2.On April 1, 2016 Athena Co. decided to sell one of its machines which had acarrying amount of ₱8,200 on September 30, 2015.

Question No. 1Inventories at 30 September 2015 31,800Add: Purchases 344,000Less: Inventories at 30 September 2016 27,300Add: Depreciation – plant and machinery (see below) 46,485Add: Depreciation – machine classified as held for sale (8,200 x20% x 6/12) 820Add: Impairment loss – noncurrent asset held for sale [(8,200 –820) – 6,500] 880Adjusted Cost of Sales (E) 396,685


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Plant and MachineryCost – balance forward 385,000Less: Accumulated depreciation – balance forward 144,375Less: Held for sale asset – carrying amount 8,200Balance 232,425Less: Depreciation during the year (232,425 x 20%) 46,485Carrying amount – year end 185,940

Question No. 2Trial balance 216,200Add: Depreciation – Property (14,500 + 30,000) - see below 34,500Add: Downward Valuation (480,000 – 456,000) 24,000Adjusted Admin Expense (C) 274,700

Property ValuationsProperty A Property B

Carrying amount – October 1, 2015 372,000 1,080,000Valuation – October 1, 2015 (449,500) (600,000)Revaluation (gain)/loss (77,500) 480,000

Valuation – October 1, 2015 449,500 600,000Less: Depreciation (Property A: 31 years;Property B: 30 years) (14,500) (20,000)Carrying amount – October 1, 2016 435,000 580,000

Question No. 3Trial balance 86,900Add: Provision charge (see below) 33,600Add: Lease expense (see below) 27,600Adjusted Other Operating Costs (C) 148,100

Provision – Onerous LeaseCurrent liabilities [(3,000 – 2,300) x 12] 8,400Non-current liabilities (8,4000 x 3 years) 25,200Total 33,600

Operating LeaseTotal Payments [(18,000 x 7 years) + (36,000 x 8 years)] 414,000Divided by: 15 yearsOperating lease expense per year 27,600

Question No. 4Revenue 1,057,000Less: Cost of sales 396,685Gross profit 660,315Less: Administrative expenses ( see No. 2) 274,700


335

Other operating costs (see No. 3) 148,100Profit before tax 237,515Less: Tax 56,000Profit after tax (A) 181,815

Questions No. 4 to No. 8Current assets:Inventories 27,300Trade and other receivables 61,500Cash in bank 5,100

93,900Non-current asset held for sale 6,500 100,400

5. (D)Non-current assets:PPE (185,940 + 400,000 + 435,000 + 580,000) 1,600,940 1,600,940

Total assets 6. (D) 1,701,340

Current liabilities:Trade and other payables 199,800Income tax payable 56,000Provisions 8,400 264,200

7. (A)Non-current liabilities:Lease liability (27,600 – 18,000) 9,600 -Provision 25,200 34,800


Equity:Ordinary share capital 672,600Revaluation surplus 135,000 8. (B)Retained earnings 594,740 1,402,340

Total liabilities and shareholders’ equity 1,701,340

RetainedEarnings

RevaluationSurplus

Beginning balance 576,875 518,000Total comprehensive income for the year(77,500 – 456,000)

181,515 (378,500)

Dividend on ordinary shares (168,150)Piecemeal realization of revaluation surplus 4,500 (4,500)Ending balance 594,740 135,000

SUMMARY OF ANSWERS:1. E 2. C 3. D 4. A 5. D 6. D 7. A 8. B


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PROBLEM 32-16

SUPPORTING COMPUTATIONS:Cost of Sales:Unadjusted balance 298,700Add: Amortization of leased property [36,000 / (12 – 4)] 4,500Add: Amortization of leased plant (25,000 / 5) 5,000Add: Depreciation of other plant and equipment [(47,500 –33,500) x 20%] 2,800Adjusted Cost of Sales 311,000

Leased Property:Carrying amount – April 1, 2015 (48,000 – 16,000) 32,000Add: Revaluation surplus (36,000 – 32,000) 4,000Revalued amount – April 1, 2015 36,000Less: Amortization (36,000 / remaining life 8 years) (4,500)Carrying amount – March 31, 2016 311,000

Leased Liability:Amortization Table:

DatePrincipalPayment


Presentvalue

April 1, 2015 25,000April 1, 2015 2,000 - 2,000 23,000March 31, 2016 6,000 2,300 3,700 19,300March 31, 2017 6,000 1,930 4,070 15,230

Leased Plant:Fair value – April 1, 2015 25,000Less: Amortization (25,000 / 5 years) 5,000Carrying amount – March 31, 2016 20,000

Deferred Tax:Deferred tax liability – March 31, 2016 (12,000 x 25%) 3,000Deferred tax liability – April 1, 2015 3,200Decrease in deferred tax liability 200

Question No. 1Revenue 350,000Less: Cost of sales 311,000Gross profit 39,000Less: Distribution costs 16,100

Administrative expense (26,900 + 3,000 fraud) 29,900Finance cost (300 + 2,300 interest in the lease) 2,600

Loss before tax (9,600)Income tax benefit [(9,600 x 25%) + 200 – 800] 1,800Loss after tax (D) (7,800)


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Questions No. 2 to 5Current assets:Inventory 25,200Trade receivables (28,500 – 4,000) 24,500Current tax refund (9,600 x 25%) 2,400 52,100

Non-current assets:Leased property 31,500Leased plant (25,000 – 5,000) 20,000Owned plant (47,500 – 33,500 – 2,800) 11,200 62,700

Total assets 114,800

Current liabilities:Trade payables 27,300Bank overdraft 1,400Finance lease liability – current 4,070 32,770

Non-current liabilities:Finance lease liability – noncurrent 15,230Deferred tax liability 3,000 18,230


Equity:Share capital 54,000Reserves:

Share premium 9,500Revaluation surplus 3,500Retained earnings (3,200) 9,800

Total shareholders’ equity 63,800

Statement of Changes in Equity:Share

CapitalShare

PremiumRevaluation

SurplusRetainedEarnings

Beg bal 45,000 5,000 - 5,100Prior period adjustment– fraud (1,000)Restated balance 4,100Rights issue (see below) 9,000 4,500Net loss (7,800)Revaluation surplus 4,000Piecemeal realization ofR/S . . (500) 500Ending bal. 54,000 9,500 3,500 (3,200)

The rights issue was 18 million shares (45,000/50 cents each x 1/5) at 75 cents= ₱13·5 million. This equates to the balance on the suspense account. Thisshould be recorded as ₱9 million equity shares (18,000 x 50 cents) and ₱4.5million share premium (18,000 x (75 cents – 50 cents)).


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The discovery of the fraud represents an error part of which is a prior periodadjustment (₱1 million) in accordance with PAS 8 Accounting policies, changesin accounting estimates and errors.

Question No. 6Loss after tax 7,800Divided by: Weighted average shares (see below) 99,000Loss per share (B) ₱.0788

April 1 to December 31 (90,000 x 1.20 / 1.125* x 9/12) 72,000January 1 to March 31 (108,000 x 3/12) 27,000Weighted average number of shares 99,000

*Adjustment factor.

Value of one right =Fair value per share – right on minus exercise price

Number of rights to purchase one share plus 1

Value of one right =₱1.25 - . ₱75

5 + 1= ₱.075

Fair value per share – right on ₱1.20Less: Theoretical value of one right .075Theoretical ex-rights fair value per share ₱1.125

SUMMARY OF ANSWERS:1. D 2. D 3. B 4. A 5. B 6. B

Chapter 33 – Statement of Cash Flows

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CHAPTER 33: STATEMENT OF CASH FLOWS

PROBLEM 33-1 Cash flows and non-cash activities1) Sale of common stock F2) Sale of land I3) Purchase of treasury stock F4) Merchandise sales O5) Issuance of long-term note payable F6) Purchase of merchandise O7) Repayment of note payable F8) Receipts from sale of half of investment in associate I9) Employee salaries O10) Sale of equipment at a gain I11) Issuance of bonds F12) Acquisition of bond of another corporation I13) Acquisition of a 60-day treasury bills Not

reported**14) Purchase of building I15) Acquisition of a land under a finance lease NC16) Collection of nontrade note receivable (principal amount) I17) Loan to another firm I18) Declaration of cash dividend NC19) Retirement of common stock F20) Income taxes paid O21) Issuance of short-term note payable to a supplier NC22) Sale of a copyright I23) Purchase of a treasury share of another corporation I24) Payment of cash dividends F25) Receipt of dividends O26) Payment for the acquisition of additional 10% interest in a

subsidiaryF**

27) Payment of semiannual interest on bonds payable F28) Receipt of interest O29) Increase in shareholders’ equity from a dividend

reinvestment planNC

30) Declaration of share dividend NC31) Interest paid capitalized under PAS 23 I*Acquisition of 60-day treasury bills is transaction reclassifying cash to cashequivalent.**PFRS 10.23 Changes in a parent’s ownership interest in a subsidiary that donot result in the parent losing control of the subsidiary are equity transactions(ie transactions with owners in their capacity as owners). PAS 7 par 42A Cashflows arising from changes in ownership interests in a subsidiary that do not


340

result in a loss of control shall be classified as cash flows from financingactivities.

PROBLEM 33-2 Indirect Method - Operating Activities

Net income 668,000Decrease in accounts receivable 96,000Increase in accounts payable 44,000Depreciation expense 20,000Net cash provided by operating activities (A) 828,000

PROBLEM 33-3 Indirect Method - Operating Activities

Net income 292,000Increase in accounts receivable (40,000)Decrease in prepaid expenses 12,000Increase in accumulated depreciation-depreciation expense 64,000Decrease in accounts payable (16,000)Net cash provided by operating activities (A) 312,000

PROBLEM 33-4 Investing Activities

Cash acquisition of fair value through other comprehensivesecurities (100,000)Proceeds from sale of the company’s used equipment 1,000,000Purchase of equipment (560,000)Net cash provided by investing activities (B) 340,000

PROBLEM 33-5 Financing Activities

Issuance of shares of the company’s own ordinary shares 680,000Dividends paid to the company’s own shareholders (28,000)Repayment of principal on the company’s own bonds (160,000)Net cash provided by financing activities (A) 492,000

PROBLEM 33-6

Question No. 1Cash receipts from receivable (216 + 800 – 324) 692Cash payment for purchases [(321 + 300 – 425) + 117 – 210] (103)Cash disbursement – insurance (66 + 40 – 88) (18)Cash disbursement – salaries (93 + 120 – 102) (111)Cash disbursement – interest (50 – 10) (40)Cash disbursement –tax (78 + 52 – 60) (70)Net cash provided by operating activities (D) 350


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Question No. 2Net Income 88Depreciation 123Gain on sale of building (11)Loss on sale of machinery 12Increase in A/R (108)Decrease in Inventory 104Decrease in prepaid insurance 22Increase in Accounts Payable 93Increase in salaries payable 9Increase in DTL 8Bond discount amortization 10Net cash provided by operating activities (D) 350

Note that cash flows for operating activities using direct or indirect methodis the same.


Question No. 1 (B)Accounts receivable

Beg. balance – AR 125,0000 135,000 Balance end - ARSales on account 1,000,000 - Sales returns and

allowance*Recoveries - - Sales discounts

990,000 Collections (squeeze)- Write-off

Total 1,125,000 1,125,000

Question No. 2 (C)Accounts Payable Trade

Payments (squeezed) 525,000 190,000 Beg. balance – APPurchase returns andallow.

0 485,000 Purchases

Purchase discounts 0Balance end – AP 150,000

Total 675,000

Merchandise Inventory

Beg. Balance 175,000 160,000 Balance endNet Purchases (squeeze) 485,000 500,000 Cost of Sales

Total 660,000


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Question No. 3 (D)Deferred income taxes

Payments (squeezed) 190,000 175,000 Beg. balance100,000 Income tax expense

Balance end 85,000

Total 275,000

Question No. 4 (D)Collection of accounts receivable 990,000Payment of accounts payable (525,000)Payment of income taxes* (190,000)Payment of operating expenses (180,000)Net cash provided by (or used in) Operating activities 95,000

*Computation of Payment of income taxes

Prepaid insurance

Beg. Balance 25,000 40,000 Balance endPayment (squeezed) 180,000 165,000 Operating expenses

excluding depreciation(260,000-95,000)

Total 205,000

Depreciation expense=245,000-150,000=95,000

Question No. 5Receipt of cash from note payable-bank (200,000-160,000) 40,000Issuance for cash of ordinary shares(225,000-200,000) 25,000Dividends paid (75,000)Net cash provided used in Financing activities (A) (10,000)

Question No. 6*Proceeds from Sale of investment 20,000Cash acquisition of PPE (540,000-460,000) (80,000)Net cash provided used in investing activities (B) (60,000)

Cost of investment sold (190,000-180,000) 10,000Add: Gain on sale 10,000Proceeds from sale of investment 20,000

SUMMARY OF ANSWERS:1. B 2. C 3. D 4. D 5. A 6. B


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PROBLEM 33-8

Question No. 1 (A)Accounts receivable

Beg. Balance 600,000 1,250,000 Bal. endSales on account 5,000,000 4,330,000 Collections

20,000 Write-off5,600,000 5,600,000

Question No. 2 (B)Accounts payable

Bal. end 4,800,000 4,500,000 Beg. BalancePayment 1,900,000 2,200,000 Net purchases

6,700,000 6,700,000

Merchandise inventoryBeg. Balance 2,000,000 2,200,000 Bal. endNet purchases 2,200,000 2,000,000 Cost of goods sold

4,200,000 4,200,000

Question No. 3 (A)Net income 700,000Amortization of premium of Investment in Bonds 60,109Depreciation 900,000Gain on sale of equipment (220,000)Amortization of franchise 100,000Decrease (or increase) in Trading securities (450,000)Decrease (or increase) in Net AR (530,000)Decrease (or increase) in Inventories (200,000)Increase (or decrease) in AP 300,000Increase (or decrease) in DTL 200,000Net cash provided by (or used in) Operating activities 860,109

Computation of accumulated depreciation:Beg. Balance 3,200,000Add: Depreciation expense 900,000Less: Accumulated depreciation of asset sold 200,000Balance end 3,900,000

Gain or (loss) on saleNet Selling Price 500,000Less: Carrying amount

Cost 480,000Less: Accumulated Depreciation 200,000 280,000

Gain on sale 220,000


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Amortization table:

DateInterest


PremiumAmortization

Presentvalue

01/01/2015 4,253,55212/31/2015 480,000 425,355 54,645 4,198,90712/31/2016 480,000 419,891 60,109 4,138,798

Question No. 4 (B)Acquisition of PPE (1,000,000)Sale of PPE 500,000Net cash provided by (or used in) investing activities (500,000)

Question No. 5 (D)Dividends paid (300,000)Cash receipts-issuance of OS (10,000 x 120) 1,200,000Cash paid for Treasury shares (500,000)Net cash provided by (or used in) Financing activities 400,000

SUMMARY OF ANSWERS:1. A 2. B 3. A 4. B 5. D

PROBLEM 33-9

Question No. 1 (D)Accounts payable


5,300,000 5,300,000


3,800,000 3,800,000

Question No. 2 (B)Income tax payable/Deferred tax liability

Bal. end-ITP 150,000 200,000 Beg. Balance-ITPBal. end-DTL 700,000 500,000 Beg. Balance-DTLPayment 150,000 300,000 Income tax expense

1,000,000 1,000,000

Question No. 3 (A)Net income 700,000Share in the net income of associate (1,024,000)Cash dividends from associate 280,000


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Depreciation 200,000Loss on sale of equipment 100,000Amortization of franchise 100,000Decrease (or increase) in Trading securitiesDecrease (or increase) in Net AR (90,000)Decrease (or increase) in Inventories 200,000Increase (or decrease) in AP (100,000)Increase (or decrease) in ITP (50,000)Increase (or decrease) in DTL 200,000Net cash provided by (or used in) Operating activities 516,000

Year of AcquisitionPercentage of ownership 20%

Cost of Investment 4,000,000Less: Book value of net asset acquired 2,400,000Excess of cost over book value 1,600,000Over or (under)valued assetInventory (40,000)Machinery 240,000Land -

Goodwill 1,800,000

Amortization of Over (Under) valued asset 2015 2016Inventory 40,000

Machinery (240,000)Divide by: Remaining life 10Amortization of Under (over) valued asset (24,000) (24,000)No of months divide by 12 (1st year) 1 1Amortization of Under (over) valued asset (24,000) (24,000)

2015 2016Net income of the associate 4,000,000 5,000,000Dividends declared and paid 1,000,000 1,400,000

2015 2016Net income of the associate 4,000,000 5,000,000Multiply by: Percentage of ownership 20% 20%Share in the net income 800,000 1,000,000

Dividends declared and paid 1,000,000 1,400,000Multiply by: Percentage of ownership 20% 20%Dividends received 200,000 280,000

2016 Investment IncomeShare in the Net Income 1,000,000Add: Amortization of overvalued machinery 24,000Net investment income - 2016 1,024,000

Investment in Associate


346

Beg. Balance 4,584,000Add: Net investment income 1,024,000Less: Dividends received 280,000Balance end 5,328,000

Question No. 4 (B)Cash receipt from loan receivable 120,000Acquisition of PPE (2,000,000)Sale of PPE 500,000Net cash provided by (or used in) investing activities (1,380,000)

Question No. 5 (D)Dividends paid (350,000)Cash receipts-issuance of Ordinary shares 1,120,000Cash receipts-reissuance of Treasury shares 105,000Net cash provided by (or used in) Financing activities 875,000

SUMMARY OF ANSWERS:1. D 2. B 3. A 4. B 5. D

PROBLEM 33-10

Question No. 1 (D)Accounts payable


5,700,000 5,700,000


3,700,000 3,700,000

Question No. 2 (B)Income tax payable/Deferred tax liability

Bal. end-ITP 150,000 200,000 Beg. Balance-ITPBal. end-DTL 700,000 500,000 Beg. Balance-DTLPayment 270,000 420,000 Income tax expense

1,120,000 1,120,000

Question No. 3 (A)Net income 980,000Share in the net income of associate (630,000)Cash dividends from associate 225,000Depreciation 200,000


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Loss on sale of equipment 150,000Amortization of franchise 100,000Amortization of disc on investment in bonds (12,708)Decrease (or increase) in Net Accounts Receivable (90,000)Decrease (or increase) in Inventories (200,000)Increase (or decrease) in Accounts Payable 500,000Increase (or decrease) in Income Tax Payable (50,000)Increase (or decrease) in Deferred Tax Liability 200,000Net cash provided by (or used in) Operating activities 1,372,292

Amortization table:

DateInterest


PremiumAmortization

Presentvalue

01/01/2016 939,23012/31/2016 100,000 112,708 12,708 951,93812/31/2017 100,000 114,233 14,233 966,170

Year of AcquisitionPercentage of ownership 25%

Cost of Investment 3,500,000Less: Book value of net asset acquired 2,500,000Excess of cost over book value 1,000,000Over or (under)valued assetInventory (50,000)Machinery 300,000Land -

Goodwill 1,250,000

Amortization of Over (Under) valued asset 2015 2016Inventory 50,000

Machinery (300,000)Divide by: Remaining life 10Amortization of Under (over) valued asset (30,000) (30,000)No of months divide by 12 (1st year) 1 1Amortization of Under (over) valued asset (30,000) (30,000)

2015 2016Net income of the associate 2,000,000 2,400,000Dividends declared and paid 800,000 900,000

2015 2016Net income of the associate 2,000,000 2,400,000Multiply by: Percentage of ownership 25% 25%Share in the net income 500,000 600,000

Dividends declared and paid 800,000 900,000Multiply by: Percentage of ownership 25% 25%Dividends received 200,000 225,000

2015 Investment Income


348

Share in the Net Income 500,000Add: Amortization of overvalued machinery 30,000Less: Undervaluation of inventory 50,000Net investment income - 2015 480,000

Investment in AssociateCost of investment 3,500,000Add: Net investment income 480,000Less: Dividends received 200,000Balance end, 12/31/2015 3,780,000

2016 Investment IncomeShare in the Net Income 600,000Add: Amortization of overvalued machinery 30,000Net investment income - 2016 630,000

Investment in AssociateBeginning balance, 01/01/2016 3,780,000Add: Net investment income 630,000Less: Dividends received 225,000Balance end, 12/31/2016 4,185,000

Property, Plant and EquipmentBeg. Balance 9,000,000 900,000 Cost of equipment soldAcquisition cost 600,000 9,069,180 bal. endPresent value of MLP 369,180

9,969,180 9,969,180

Accumulated depreciationBal. end 3,000,000 3,200,000 Beg. BalanceAccumulated depreciationof asset sold 400,000 200,000 Depreciation expense

3,400,000 3,400,000

Net Selling Price 350,000Less: Carrying amount


Loss on sale (150,000)

Question No. 4 (B)Cash acquisition of Investment in Bonds (939,230)Acquisition of PPE (600,000)Sale of PPE 350,000Net cash provided by (or used in) investing activities (1,189,230)

Present Value of Periodic Payment (100,000 x 3.4869) 348,690Add: Present Value of Bargain Purchase option(30,000 x 0.683) 20,490


349

Present Value of Minimum lease payments 369,180

Amortization table:

DateInterestPayment


Presentvalue

12/31/2016 369,18012/31/2016 100,000 - 100,000 269,18012/31/2017 100,000 26,918 73,082 196,098

Question No. 5 (D)Payment of principal finance lease liability (100,000)Dividends paid (350,000)Cash receipts-issuance of Ordinary Shares 720,000Net cash provided by (or used in) Financing activities 270,000

Share CapitalBeginning balance 10,000,000Issuance for cash 600,000Issuance thru SDP 1,910,000Balance end 12,510,000

Share PremiumBeginning balance 1,000,000Issuance for cash 120,000Balance end 1,120,000

Retained EarningsBeginning balance 3,740,000Add: Net income 980,000Less: Dividends declared-cash 350,000Less: Share dividend 1,910,000Balance end 2,460,000

SUMMARY OF ANSWERS:1. D 2. B 3. A 4. B 5. D

PROBLEM 33-11

Question No. 1Collection from customers (202M + 410M – 200M – 6M) 406MProceeds from investment income (4M + 5M – 6M) 3MProceeds from sale of cash equivalent 2MPayment of purchases [(205M + 180M -200M) + 65M – 50M] (200M)Payment of insurance (4M + 7M - 8M) (3M)Payment of salaries (11M + 65M – 6M) (70M)Payment of interest (4M + 25M – 8M) (21M)Payment of tax (14M + 8M + 36M – 12M – 11M) (35M)


350

Net cash provided from operating activities (C) 82M

Question No. 2Purchase of land (196M – 150M) (46M)Proceeds from sale of major components of machine 17MPurchase of long-term investment (25M)Proceeds from sale of long-term investment 23MNet cash used from investing activities (C) (31M)

Long-term InvestmentBeg. Balance 125M 156M Bal. endInvestment income(associate) 6M 23M DisposalAcquisition (Tory) 48MTotal 179M 179M

Question No. 3Retirement of bonds (60M)Proceeds from issuance of preferred stock 75MAcquisition of treasury shares (9M)Dividends paid (22M)Net cash used from financing activities (A) (16M)

Retained EarningsBalance end 242M 227M Beg. BalanceDividends 52M 67M Net incomeTotal 294M 294M

Total dividends 52MLess: Stock dividends – small (4M shares x ₱7.50 fair value) 30MCash dividends paid 22M

SUMMARY OF ANSWERS:1. C 2. C 3. A

PROBLEM 33-11

Question No. 1Overdraft – end 110Add: Bank, beginning 120Net cash outflow (A) (230)

Question No. 2Profit for the year 135


351

Depreciation 115Amortization 25Increase in inventory (200 – 110) (90)Increase in trade receivable (195 – 75) (120)Increase in trade payable (210 – 160) 50Decrease in current tax payable (80 – 110) (30)Net cash from operating activities (D) 85

Question No. 3Acquisition of PPE (see computation below) (305)Acquisition of intangible assets (see computation below) (125)Acquisition of investment (230)Net cash used in investing activities (A) (660)

PPE, netBalance beginning 410 680 Ending balanceAcquisition 305 - DisposalRevaluation 80 115 DepreciationTotal 795 795

Intangible asset, netBalance beginning 200 300 Ending balanceAcquisition 125 - DisposalRevaluation - 25 AmortizationTotal 325 325

Question No. 410% secured loan notes 300Issuance of shares 100Dividends paid (see computation below) (55)Net cash from financing activities (C) 345

Retained EarningsBalance end 375 295 Beg. BalanceDividends 55 135 Net incomeTotal 430 430

SUMMARY OF ANSWERS:1. A 2. D 3. A 4. C


352

PROBLEM 33-13

Question No. 1Cash 5,639,900Accounts receivable 1,000,000Allowance for doubtful accounts (180,000)Inventories 2,200,000Total current assets (A) 8,659,900

Question No. 2Investment in bonds - FA at amortized cost 3,861,105Property plant and equipment 9,520,000Accumulated depreciation (3,900,000)Franchise - net 500,000Total noncurrent assets (A) 9,981,105

Total assets 18,641,005

Question No. 3Liabilities and equityAccounts payable 4,800,000Dividends payable 400,000Total current liabilities (A) 5,200,000

Question No. 4Deferred tax liability 700,000Total noncurrent liabilities (C) 700,000

Total liabilities 5,900,000

Question No. 5Ordinary shares, P100 par value 11,000,000Share Premium 1,200,000Treasury shares at cost (500,000)Retained earnings 1,041,005Total shareholders' equity (C) 12,741,005

Total liabilities and equity 18,641,005

Accounts receivableBeg. Balance 600,000 1,000,000 Bal. endSales on account 5,000,000 4,600,000 Collections

- Write-off5,600,000 5,600,000

Allowance for doubtful accountsBal. end 180,000 40,000 Beg. BalanceWrite-off - 140,000 Bad debts

180,000 180,000


353


4,200,000 4,200,000

Accounts payableBal. end 4,800,000 4,500,000 Beg. BalancePayment 1,900,000 2,200,000 Net purchases

6,700,000 6,700,000

Amortization table:

DateInterest



Presentvalue

01/01/2015 3,746,36812/31/2015 320,000 374,637 54,637 3,801,00512/31/2016 320,000 380,100 60,100 3,861,10512/31/2017 320,000 386,111 66,079 3,927,18412/31/2018 320,000 392,816 72,816 4,000,000

Property, Plant and EquipmentBeg. Balance 9,000,000 480,000 Cost of equipment soldAcquisition cost 1,000,000 9,520,000 bal. endPresent value of MLP -

10,000,000 10,000,000

Accumulated depreciationBal. end 3,900,000 3,200,000 Beg. BalanceAccumulated depreciationof asset sold 200,000 900,000 Depreciation expense

4,100,000 4,100,000

Net Selling Price 500,000Less: Carrying amount


Gain on sale 220,000

Ordinary sharesBeginning balance 10,000,000Issuance for cash 1,000,000Balance end 11,000,000

Share PremiumBeginning balance 1,000,000Issuance for cash 200,000


354

Balance end 1,20,000

Retained EarningsBeginning balance 461,005Add: Net income 980,000Less: Dividends declared-cash 400,000Balance end 1,041,005

SUMMARY OF ANSWERS:1. A 2. A 3. A 4. C 5. C

PROBLEM 33-14

Question No. 1 (C)Income tax payable

Ending balance 143,700 65,000 Beg. BalancePayment 76,000 154,700 Income tax expenseTotal 219,700 219,700

Question No. 2 (C)PPE, net

Balance beginning 791,500 805,300 Ending balanceAcquired – cash 50,000 - DisposalAcquired – lease 12,130 153,330 DepreciationAcquired – businesscombination 105,000Total 958,630 958,630

Question No. 3 (A)Profit for the year 471,440Depreciation 153,330Amortization 8,200Share in profit of associate (24,700)Increase in inventory (57,300 – 46,900) (10,400)Increase in trade and other receivables (excluding receivablefrom business combination) – (75,900 – 51,930 – 6,450)

(17,520)

Decrease in trade and other payables (excluding receivable frombusiness combination) – (82,600 + 9,950 – 48,792)

(43,758)

Increase in income tax payable 87,800Net cash provided by operating activities 615,292

Question No. 4 (C)Proceeds from sale of license (see computation below) 21,600Acquisition of PPE (50,000)Acquisition of Hey Jude (10,000)


355

Acquisition of Yesterday (58,800)Cash and cash equivalents acquired in business combination 8,700Net cash used by investing activities (88,500)

Intangible asset, netBalance beginning 33,450 28,800 Ending balanceAcquisition - 8,200 AmortizationGoodwill* 25,150 21,600 DisposalTotal 58,600 58,600

Consideration transferred [(58,500 + (35,000 x 1.4)] 107,800Less: FVNAA (110,200 x 75) 82,650Goodwill 25,150

Question No. 5 ()

PROBLEM 33-15

Question No. 1 (A)Interest receivable – investing

Beg. Balance 10,500 12,500 Ending balanceInterest income 52,000 50,000 CollectionTotal 62,500 62,500

Question No. 2 (A)Income tax payable

Ending balance 170,000 130,000 Beg. BalancePayment 140,000 180,000 Income tax expenseTotal 310,000 310,000

Question No. 3 (B)Increase in cash and cash equivalents (12,500 – 400) 12,100Add: Decrease in bank overdraft 3,500Net cash inflows 15,600

Net income 834,900Depreciation 560,000Gain on sale (450,000 – 324,500) (125,500)Interest income – investing activities (52,000)Decrease in inventory 56,400Decrease in trade and other receivables (excluding interestrelated to investing) – (495,100 – 415,600)

79,500

Decrease in trade and other payables (122,600)Decrease in warranty (30,000)


356

Increase in income tax payable 40,000Net cash provided by operating activities 1,240,700

Question No. 4 (A)Interest collected – investing activity 50,000Proceeds from sale of machinery 450,000Proceeds from sale of factory building 340,000Loans to unrelated parties (1,000,000 – 850,000) (150,000)Acquisition of PPE (see computation below) (2,022,500)Net cash used by investing activities (1,332,5000

PPE, netBalance beginning 1,594,400 2,567,400 Ending balanceAcquisition 2,022,500 324,500 Disposal - MachineryRevaluation 220,000 340,000 Disused factory

560,000 DepreciationTotal 3,791,900 3,791,900

Revaluation surplusEnding balance 350,000 250,000 Balance beginningTransfer to R/E 120,000 220,000 R/S – current periodTotal 470,000 470,000

Question No. 5 (C)Dividends paid (see computation below) (42,600)Proceeds from issuance of shares (100,000 x 1.50) 150,000Net cash provided from financing activities 107,400

Retained EarningsBalance end 1,478,300 876,000 Beg. BalanceBonus issue* 310,000 834,900 Net incomeTransfer to R/E 120,000Dividends 42,600Total 1,830,900 1,830,900

*Total increase in share capital and share premium 460,000Less: Issuance of share for cash 150,000Bonus issue 310,000

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