Applied Auditing Asuncion

APPLIED AUDITING With Comprehensive Review of Philippine Financial Reporting Standards (PFRSs) A guide in applying auditing procedures to specific accounts of the financial statements.

TEACHERS MANUAL 2016 Edition 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 the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization). If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Mark Alyson B. Ngina – 0915-510-7281 Raymund 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

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 - AR Beg. balance – NR 240,000 170,000 Balance end - NR Balance end - Advances 40,000 55,000 Beg. balance - Advances Sales on account 600,000 4,000 Sales ret. and allowance Recoveries 2,000 Sales discounts Collections including 666,000 recoveries 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 Write-off

40,000 8,000

25,000 21,000 2,000

Total

48,000

48,000

Beginning balance Bad debts expense Recoveries

Suggested answer: C PROBLEM 5-3 (Computation of Purchases) Accounts Payable / Notes Payable / Advances to Suppliers Payments 800,000 200,000 Beg. balance - AP Purchase ret. and allow. 6,000 400,000 Beg. balance - NP Purchase discount 3,000 68,000 Balance end - Advances Beg. balance - Advances 50,000 651,000 Purchases (gross) Balance end – AP 250,000 Balance end – NP 210,000 Total 1,319,000 1,319,000 Suggested answer: A

4


PROBLEM 5-4 Computation of Cost of Sales Accounts Payable (AP) / Notes Payable (NP) Payments 800,000 200,000 Beg. balance - AP Purchase ret. and allow. 6,000 - Beg. balance - NP Purchase discount 3,000 859,000 Purchases (gross) Balance end - AP 250,000 Balance end - NP Total 1,059,000 1,059,000

Beginning balance Net purchases Total

Merchandise Inventory 400,000 210,000 Ending balance 860,000 1,050,000 Cost of sales 1,260,000 1,260,000

Computation of the net purchases: Gross purchases on account Add cash purchases Total Less: Purchase returns and allowances Purchase discount Net purchases

859,000 10,000 869,000 6,000 3,000 860,000

Suggested answer: B PROBLEM 5-5 (Computation of Income Other Than Sales) Rent Receivable/Unearned rent income Beg. Balance - Rent Receivable Balance end - Unearned rent income Rent Income (squeeze) Total

200,000

250,000

30,000

90,000

770,000

660,000

1,000,000

Balance end - Rent Receivable Beg. Balance – Unearned rent income Collections

1,000,000

Suggested answer: B PROBLEM 5-6 (Computation of Expenses in General) Prepaid Rent/Rent payable Beg. Balance - Prepaid Salaries Balance end - Accrued Salaries Payments Total

200,000

250,000

65,000

80,000

850,000

785,000

1,115,000

1,115,000

5

Balance end - Prepaid Rent Beg. Balance – Rent payable Rent Expense


Suggested answer: C PROBLEM 5-7 (Computation of Cost of Machine Acquired and Sold) Question No. 1 Carrying amount of equipment sold Add: Accumulated depreciation Cost Question No. 2

25,000 15,000 40,000

Equipment

Beg. Balance Cost of PPE acquired (squeeze)

100,000 60,000

120,000 40,000

Total

160,000

160,000

Balance end Cost of PPE disposed

Accumulated depreciation Balance end Accumulated depreciation of PPE disposed

18,000

Total

33,000

15,000 18,000

Beg. Balance Depreciation expense

15,000 33,000

SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 5-8 Question No. 1 Prepaid Insurance Beg. Balance Payments

7,500 41,500

6,000 43,000

Total

49,000

49,000

Balance end Expenses (squeeze)

Question No. 2 Interest Receivable Beg. Balance Income (squeeze)

14,500 112,700

3,700 123,500

Total

127,200

127,200

6

Balance end Collections


Question No. 3 Salaries payable Balance end Payments

61,500 481,000

53,000 489,500

Total

542,500

542,500

Question No. 4

Beg. Balance Expenses

Accounts receivable trade

Beg. Balance Sales

415,000 1,980,000

550,000 1,845,000

Total

2,395,000

2,395,000

Balance end Collections (squeeze)

Question No. 5 Accounts receivable trade Beg. Balance Sales

415,000 1,980,000

550,000 1,820,000 25,000

Total

2,395,000

2,395,000

Balance end Collections (squeeze) Write-off

Question No. 6 Accounts receivable trade Beg. Balance Sales Recoveries

415,000 1,980,000 20,000

550,000 1,840,000 25,000

Total

2,415,000

2,415,000

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

4.

A

5.

Balance end Collections (squeeze) Write-off

A

6.

B

PROBLEM 5-9 Question No. 1 Accounts/Notes receivable trade Decrease in A/R Sales on account (squeeze)

Total

100,000 4,260,000

100,000 10,000 4,200,000 30,000 20,000

4,360,000

4,360,000

7

Increase in N/R Write-off Collections Sales discounts Sales ret. and allow.


Question No. 2 Accounts payable Cash paid to creditors

2,800,000

200,000

Purchase discounts

40,000

2,650,000

Purchase returns

10,000

Total

2,850,000

Decrease in Accounts payable Gross purchases (squeeze)

2,850,000

Question No. 3 Merchandise inventory Decrease in Inventory Gross purchases

25,000 2,650,000

40,000 10,000 2,625,000

Total

2,675,000

2,675,000

Purchase discounts Purchase returns Cost of sales (squeeze)

Question No. 4 Rental receivable/Unearned Rent Income Rental (squeeze)

revenue

454,000

14,000 40,000 400,000

Total

454,000

Increase in Rental receivable Decrease in Unearned rental Collections from tenants

454,000

Question No. 5 Prepaid interest/Interest Payable Decrease in interest Increase in payable Interest paid Total

Prepaid

5,500

Interest

8,500

114,000

Interest (squeeze)

100,000 114,000

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

4.

114,000 A

8

5.

D

expense


PROBLEM 5-10 Question No. 1

Accounts Receivable/Notes receivable trade

Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze)

200,000 300,000 1,000,000

250,000 100,000 20,000 10,000 1,120,000

1,500,000

1,500,000

Total

Bal. end – A/R Bal. end – N/R Sales ret. and allow. Sales discount Collections

Question No. 2 Accounts payable/Notes payable Balance end – A/P Balance end – N/P Purchase returns allow Purchase discount Payments

and

Total

25,000 75,000 40,000

50,000 100,000 650,000

Beg. Balance – A/P Beg. Balance – N/P Gross purchases (squeeze)

10,000 650,000 800,000

800,000

Gross purchases Less: Purchase ret and allow Purchase discounts Net Purchases

650,000 40,000 10,000

Question No. 3 Sales Less: Sales ret and allow Sales discounts Net Sales Less: Cost of Sales Merchandise inventory beg. Add: Net Purchases Purchases Add: Freight-in Gross Purchases Less: Purch. Ret and allow Purchase discounts Total goods available for sale Less: Merchandise inventory, end Gross Income / Gross Profit

50,000 600,000

20,000 10,000

1,000,000 30,000 970,000

200,000 600,000 650,000 40,000 10,000

9

600,000 800,000 100,000

700,000 270,000


Question No. 4 Prepaid/Accrued Salaries Beg. Balance -Prepaid Salaries Balance end - Accrued Salaries Payments

100,000

125,000

50,000

75,000

350,000

300,000

Total

500,000

500,000

Question No. 5

Balance end - Prepaid Salaries Beg. Balance - Accrued Salaries Salaries expense (squeeze)

Accrued rent/Unearned rent

Beg. Balance - Accrued rent Balance end - Unearned rent Rent income (squeeze) Total SUMMARY OF ANSWERS: 1. A 2. B 3. C

70,000

40,000

40,000

80,000

490,000

300,000

600,000

600,000

4.

B

5.

Balance end - Accrued rent Beg. Balance - Unearned rent Collection of rent

B

PROBLEM 5-11 Question No. 1 Accounts receivable trade Beg. Balance Recoveries Sales (squeeze)

200,000 8,000 1,570,000

300,000 20,000 1,408,000 50,000

Total Sales Less: Sales discount Net Sales

1,778,000

Balance end Sales discounts Collections including recoveries (1,498,00080,000+20,00-30,000) Accounts written-off

1,778,000

1,570,000 20,000 1,550,000

Question No. 2 Accounts payable trade Payment (1,210,00020,000+30,000) Purchase ret. and allow. Balance end

1,210,000 10,000 100,000

10

150,000 1,170,000

Beg. Balance Purchases (squeeze)


Total

1,320,000

Purchases Less: Purchases discount Net Purchases

1,320,000

1,170,000 10,000 1,160,000

Question No. 3 Merchandise inventory Beg. Balance Net Purchases (1,170,000-10,000)

380,000 1,160,000

330,000 1,210,000

Total

1,540,000

1,540,000

Balance end Cost of Sales (squeeze)

Question No. 4 Rent Receivable Beg. Balance Rent income (squeeze)

70,000 130,000

80,000 120,000

Total

200,000

200,000


Question No. 5 Allowance for Doubtful accounts Accounts written off Balance end

50,000 30,000

20,000 52,000 8,000

Total

80,000

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

Beg. Balance Doubtful account expense(squeeze) Recoveries

80,000

4.

A

5.

A

PROBLEM 5-12 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Professional (squeeze) Total

fees

500,000 5,250,000

750,000 5,000,000

5,750,000

5,750,000

11



Question No. 2 Professional Fees (See No. 1) Less: Rent expense (1.2M +100,000) Supplies expense (800,000+300,000-250,000) Other operating expense Interest expense (1M x 12% x 9/12) Depreciation expense (2,500,000/10) Net income Question No. 3 Cash Accounts Receivable Supplies Total Current Assets

1,300,000 850,000 750,000 90,000 250,000

3,240,000 2,010,000

1,500,000 750,000 250,000 2,500,000

Question No. 4 Furniture and fixtures Less: Accumulated Depreciation (125,000 + 250,000) Total Noncurrent Assets

375,000 2,125,000

Question No. 5 Total current assets (See No. 3) Total noncurrent assets (See No. 4) Total Assets

2,500,000 2,125,000 4,625,000

2,500,000

Question No. 6 Notes Payable Accrued rent Accrued interest on notes payable (1,000,000 x 12% x 9/12) Total Current Liabilities

1,000,000 100,000 90,000 1,190,000

Question No. 7 Total assets (See No. 5) Less: Total liabilities (See No. 6) – all are current Total Owner’s Equity SUMMARY OF ANSWERS: 1. B 2. B 3. A

5,250,000

4.

A

12

4,625,000 1,190,000 3,435,000

5.

A

6.

C

7.

B


PROBLEM 5-13 Question No. 1


Beg. Balance Sales on account (squeeze)

124,000 1,535,000

146,000 13,000 1,500,000

Total

1,659,000

1,659,000

Balance end Sales discount Collections

Sales on account Add: Cash sales Total sales

1,535,000 160,000 1,695,000

Question No. 2 Gross sales (see No. 1) Less: Sales discount Net sales

1,695,000 13,000 1,682,000

Question No. 3 Accounts Payable Payments Balance end

1,206,000 410,000

382,000 1,234,000

Total

1,616,000

1,616,000

Purchases on account Add: Cash purchases Total Purchases

Beg. Balance Purchases (squeeze)

1,234,000 120,000 1,354,000

Question No. 4 Merchandise Inventory Beg. Balance Net purchases

186,000 1,354,000

190,000 1,350,000

Total

1,540,000

1,540,000

Question No. 5

Balance end Cost of sales (squeeze)

Prepaid G&A/Accrued G&A

Beg. Balance - Prepaid Interest Balance end – Accrued Interest Payments Total

9,600

8,400

9,000

7,000

204,000

207,200

222,600

222,600

13

Balance end - Prepaid Interest Beg. Balance – Accrued Interest Expenses


Question No. 6 General and administrative expense (see No. 5) Depreciation expense Warranty expense Total operating expense

207,200 84,000 6,400 297,600

Question No. 7 Selling price of land Less: Book value of land Gain on sale of land

20,000 16,000 4,000

Question No. 8 Selling Price Less Book value Cost Less: Accumulated depreciation Gain on sale of warehouse equipment

12,000 25,000 16,000

Question No. 9 Selling Price Less: Book value Cost Less: Accumulated depreciation Gain on sale of boiler

42,000 48,000 20,000

Question No. 10 Net Sales Less: Cost of Sales Gross Profit Less: Operating expenses Gain on sale (14,000+3,000+4,000) Net income SUMMARY OF ANSWERS: 1. B 2. C 3. D 6. A 7. A 8. C

9,000 3,000

4. 9.

A B

28,000 14,000 1,682,000 1,350,000 332,000 297,600 21,000 55,400

5. 10.

B A

PROBLEM 5-14 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Sales (squeeze)

150,000 800,000

200,000 10,000 740,000

Total

950,000

950,000

14

Balance end Sales returns Collections


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

800,000 100,000 900,000 10,000 890,000 390,000 500,000

Merchandise inventory Beg. Balance Net Purchases (squeeze)

190,000 420,000

220,000 390,000

Total

610,000

610,000

Balance end Cost of Sales

Question No. 3 Accounts Payable trade Payments (squeeze) Purchase returns and allowances Balance end – Accounts payable Total

470,000

230,000

8,000

428,000

Beg. Balance - Accounts payable Gross purchases (420,000+8,000)

180,000 658,000

658,000

Question No. 4 Total payment of Accounts payable and admin expenses Less: Payment of Accounts payable Payment of admin expenses Question No. 5 Payment of admin expenses Divided by: Percentage of cash expenses to total admin expense Total admin expenses Add: Selling expenses Total selling and administrative expense Question No. 6 Total administrative expenses Less: Payment of administrative expense Non-cash administrative expenses Less: Depreciation for building (440,000 x 60% x 5% x 9/12)

15

518,000 470,000 48,000

48,000 80% 60,000 200,000 260,000

60,000 48,000 12,000 9,000


Depreciation for furniture and fixtures Divided by: Number of months used over 12 months Annual depreciation Divided by: Depreciation rate Cost of Furniture and Fixtures (no residual value) SUMMARY OF ANSWERS: 1. A 2. A 3.

B

4.

A

3,000 6/12 6,000 10% 60,000

5.

C

6.

PROBLEM 5-15 Question No. 1 Cash Receipts: From customers From issue of ordinary shares From bank loan Cash disbursements: Purchase of inventory Rent Salaries Utilities Insurance Purchase of equipment and furniture Cash

360,000 100,000 100,000 300,000 15,000 30,000 5,000 3,000 40,000

Question Nos. 2 and 3 Current assets Cash Inventories Prepaid rent (1,000 x 3) Total current assets (No. 2) Noncurrent assets Property, plant and equipment Less accumulated depreciation Total assets (No. 3)

560,000

393,000 167,000

167,000 100,000 3,000 270,000 40,000 4,000

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

16

36,000 306,000

20,000 1,000 100,000 9,000 130,000

A


Question No. 5 Ordinary shares Retained earnings (net income) Shareholders’ equity SUMMARY OF ANSWERS: 1. B 2. B 3.

100,000 176,000 176,000 A

4.

D

5.

A

PROBLEM 5-16 Question No. 1 Notes receivable – December 31 Accounts receivable – December 31 Collection of notes and accounts Note receivable discounted Total Less: Notes receivable – January 1 Accounts receivable – January 1 Sales on account

210,000 950,000 2,950,000 200,000 4,310,000 200,000 740,000

Question No. 2 Notes payable – December 31 Less: Note payable – bank Notes payable – trade Accounts payable – December 31 Payment of notes and accounts Total Less: Notes payable – January 1 Accounts payable – January 1 Purchases on account

750,000 600,000

Question No. 3 Equipment – January 1 Add: Acquisition Total Less: Equipment – December 31 Depreciation

940,000 3,370,000 580,000 300,000 280,000 750,000 2,100,000 3,130,000 1,350,000 1,780,000 1,000,000 280,000 1,280,000 1,200,000 80,000

Question No. 4 Interest accrued on note issued to bank (300,000 x 12% x 10/12) Interest expense Question No. 5 Volks Company Income Statement Year ended December 31, 2016

17

30,000 30,000


Sales Cost of sales: Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Gross income Expenses: *Expenses Depreciation **Loss on sale of investment ***Loss on note receivable discounted Interest expense Net income

3,370,000 1,600,000 1,780,000 3,380,000 1,500,000

1,880,000 1,490,000

820,000 80,000 50,000 10,000 30,000

*Expenses paid Add: Prepaid expenses – January 1 Accrued expenses – December 31 Total Less: Prepaid expenses – December 31 Accrued expenses – January 1 Expenses

990,000 500,000 790,000 120,000 50,000 960,000

100,000 40,000 140,000 820,000

**Sales price Less: Cost of investment sold Loss on sale of investment

250,000 300,000 ( 50,000)

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

10,000

OR Retained earnings – December 31 Add: Dividends Total Less: Retained earnings – January 1 Net income SUMMARY OF ANSWERS: 1. A 2. A 3.

C

600,000 400,000 1,000,000 500,000 500,000 4.

18

C

5.

D

Chapter 6: Correction of Errors

CHAPTER 6: CORRECTION OF ERRORS PROBLEM 6-1 Income Statement and SFP Errors Questions Nos. 1-6 2016

Unadjusted balances 1 2 Adjusted balances

2017

Net income

Workin g capital

RE, end of the year

Net income

Workin g capital

RE, end of the year

200,000 -

180,000 -

200,000 -

160,000 -

260,000 -

360,000 -

200,000

180,000

200,000

160,000

260,000

360,000

Questions No. 7 Assuming errors were discovered in 2016 ADJUSTING ENTRIES Debit 1) Miscellaneous income 25,000 Rent income 2)

Notes payable Accounts payable

28,000 Credit

No entry

Assuming errors were discovered in 2018 ADJUSTING ENTRIES Debit 1) No entry 2)

25,000

28,000

Assuming errors were discovered in 2017 ADJUSTING ENTRIES Debit 1) No entry 2)

Credit

Credit

No entry

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

4.

C

19

5.

C

6.

C


PROBLEM 6-2 Counterbalancing Errors Questions Nos. 1-6

Unadjusted balances 1 2 3 4 Adjusted balances

Net income

2016 Workin g capital

R/E

Net income


200,000 (15,000) 20,000 6,000 (7,500)

180,000 (15,000) 20,000 6,000 (7,500)

200,000 (15,000) 20,000 6,000 (7,500)

160,000 15,000 (20,000) (6,000) 7,500

260,000 -

360,000

203,500

183,500

203,500

156,500

260,000

360,000

Question No. 7 A. Errors were discovered in 2016 ADJUSTING ENTRIES 1) Interest expense Interest payable 2)

Debit 15,000

R/E

Credit 15,000

Interest receivable Interest income

20,000

3)

Prepaid insurance Insurance expense

6,000

4)

Rent revenue Unearned rent revenue

7,500

20,000 6,000 7,500

B. Errors were discovered in 2017 Assuming errors are discovered when the cash flows related to the transactions were processed and books are still open ADJUSTING ENTRIES Debit Credit 1) Retained earnings 15,000 Interest expense 15,000 2) 3) 4)

Interest income Retained earnings

20,000

Insurance expense Retained earnings

6,000

Retained earnings Rent revenue

7,500

20,000 6,000 7,500

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

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


4.

C

20

5.

B

6.

C


PROBLEM 6-3 Counterbalancing Errors Questions Nos. 1-6

Unadjusted balances 1 2 3 Adjusted balances

Net income


R/E, end

Net income


R/E, end

200,000 (60,000) 80,000 (20,000)

180,000 (60,000) 80,000 (20,000)

200,000 (60,000) 80,000 (20,000)

160,000 60,000 (80,000) 20,000

260,000 -

360,000 -

200,000

180,000

200,000

160,000

260,000

360,000

Question No. 7 A. Errors were discovered in 2016 ADJUSTING ENTRIES 1) Purchases Accounts payable 2) 3)

Debit 60,000

Accounts receivable Sales

80,000

Cost of sales Inventory

20,000

Credit 60,000 80,000 20,000

B. Errors were discovered in 2017 Assuming errors are discovered when the cash flows related to the transactions were processed and books are still open ADJUSTING ENTRIES Debit Credit 1) Retained earnings 60,000 Purchases 60,000 2) 3)

Sales Retained earnings

80,000

Retained earnings Inventory, beginning

20,000

80,000 20,000

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

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


4.

B

21

5.

C

6.

B


PROBLEM 6-4 Noncounterbalancing Errors Questions Nos. 1-6 2016

2017

Net income

Workin g capital

RE, end of the year

Unadjusted balances 1. 2. 3. 4. 5. 6.

200,000 (30,000) 20,000 12,000 150,000 (12,000) (15,000)

180,000 (30,000) 20,000 -

200,000 (30,000) 20,000 12,000 150,000 (12,000) (15,000)

160,000 (6,000) 10,000 (50,000) 5,000

260,000 (36,000) 30,000 -

360,000 (36,000) 30,000 12,000 100,000 (12,000) (10,000)

Adjusted balances

325,000

170,000

325,000

119,000

254,000

444,000

Question No. 7 A. Errors were discovered in 2016 ADJUSTING ENTRIES 1) Insurance expense Prepaid insurance 2)

Net income

Workin g capital

RE, end of the year

Debit 30,000

30,000

Unearned rent income Rent income

20,000

3)

Accumulated depreciation Depreciation expense

12,000

4)

Building improvements Repairs expense

5)

6)

Credit

20,000 12,000

200,000 200,000

Depreciation expense Accumulated depreciation

50,000

Other income Accumulated depreciation Gain on sale Building

20,000 48,000

Repairs expense Building

20,000

50,000

8,000 60,000 20,000

Accumulated depreciation Depreciation expense

5,000 5,000

B. Errors were discovered in 2017 ADJUSTING ENTRIES 1) Retained earnings Insurance expense Prepaid insurance

Debit 30,000 6,000

22

Credit 36,000


2)

Unearned rent income Retained earnings Rent income

30,000

3)

Accumulated depreciation Retained earnings

12,000

4)

Building improvements Retained earnings

5)

6)

C.

20,000 10,000

200,000 200,000

Depreciation expense Retained earnings Accumulated depreciation

50,000 50,000

Retained earnings Accumulated depreciation Building

12,000 48,000

Retained earnings Building

20,000

Accumulated depreciation Retained earnings Depreciation expense

10,000

100,000

60,000 20,000 5,000 5,000

Errors were discovered in 2018 ADJUSTING ENTRIES 1) Retained earnings Prepaid insurance

Debit 36,000

2)

Unearned rent income Retained earnings

30,000


12,000

3) 4)

5)

6)

12,000

Credit 36,000 30,000 12,000

Building improvements Retained earnings

200,000

Depreciation expense Retained earnings Accumulated depreciation

50,000 100,000

200,000

150,000

Retained earnings Accumulated depreciation Building

12,000 48,000

Retained earnings Building

20,000


10,000

60,000 20,000 10,000

23


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

4.

E

5.

A

6.

D

PROBLEM 6-5 Comprehensive Questions Nos. 1-3 Effects of error in Net income Working 2015 2016 Capital 10,000 (10,000) (8,000) (8,000) (20,000) 20,000 (40,000) (40,000) 20,000 (20,000) 70,000 70,000 (80,000) 20,000 20,000 5,000 (45,000) 32,000 22,000

1) MI over, NI over MI under, NI under 2) Purchases over, NI under 3) Sales over, NI over 4) Expenses over, NI under Depreciation exp under, NI over 5) Other income over *Loss under, NI over Adjustment Computation of loss: Selling Price Less: Book value Cost Less: Accumulated depreciation Loss on sale

20,000 40,000 15,000

Questions No. 4 Effect of errors to Retained Earnings in 2016 Understatement to 2015 net income Overstatement to 2016 net income Net understatement to 2016 retained earnings Questions No. 5 ADJUSTING ENTRIES 1) Retained earnings, beg Merchandise inventory, beg Merchandise inventory, end Cost of Sales 2)

3)

25,000 (5,000)

45,000 32,000 13,000 Debit 10,000

Credit 10,000

8,000

Purchases Retained earnings Advances supplier Purchases

20,000

Retained earnings, beg Sales

20,000

40,000

8,000 20,000 40,000 20,000

24


Sales Advances customers 4)

5)

70,000 70,000

Depreciation expense Improvements Accumulated depreciation Retained earnings

20,000 100,000 40,000 80,000

Accumulated depreciation Retained earnings, beg Equipment

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

15,000 25,000

4.

A

5.

40,000

C

PROBLEM 6-6 Comprehensive Questions Nos. 1-5 2015 Net Workin Income g capital Ending Inventory 2015 understated, NI understated Ending Inventory 2016 overstated, NI overstated Depreciation exp. 2015 overstated, NI understated Depreciation exp. 2016 overstated, NI understated Accrued expense understated, NI overstated 2015 Accrued expense understated, NI overstated 2016 Prepaid expense understated, NI understated 2015 Prepaid expense understated, NI understated 2016 Accrued revenues understated, NI understated 2016 Deferred revenues understated, NI overstated 2015 Total

(6,000)

(6,000)

(11,000)

4,500

(5,000)

-

4,500

(5,000)

2016 Net Workin Income g capital

12/31/2 016 R/E

6,000

-

-

10,000

10,000

10,000

-

-

(11,000)

(7,000)

-

(7,000)

(4,500)

-

-

7,500

7,500

7,500

5,000

-

-

(12,000)

(12,000)

(12,000)

(3,000)

(3,000)

(3,000)

1,200

1,200

(1,200)

-

-

(16,300)

5,300

800

2,500

(15,500)

25


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

4.

A

5.

C

PROBLEM 6-7 Questions Nos. 1, 2 and 4 1 2 3 4 5 6 7

8

Unadjusted balances Overstatement of ending inventory - 2014 Understatement of ending inventory 2016 Understatement of accrued expense - 2014 Overstatement of accrued exp. Understatement of Depreciation Expense Overstatement of Depreciation Expense Overstatement of Purchases 2014 2015 Overstatement of other income Correct gain 20,000 Less: Per record 5,000 Adjusted balances

2014 3,000,000 (120,000)

2015 (1,000,000) 120,000

(40,000)

40,000

210,000 90,000 (180,000) 30,000 30,000

2,870,000

Computation of correct gain: Selling Price Less: Book value Cost Less: Accumulated depreciation Loss on sale


(30,000) 40,000

(40,000)

(15,000) (1,025,000)

3,790,000

20,000 40,000 25,000

Questions Nos. 3 and 5 Adjusted net income (loss): 2014 2015 Total RE, 12/31/2015 Adjusted net income 2016 Total RE, 12/31/2016

2,870,000 (1,025,000) 1,845,000 3,790,000 5,635,000

4.

C

26

2016 3,500,000

5.

D

15,000 5,000

No. 3 No. 5


PROBLEM 6-8 Question No. 1 Unadjusted beginning balance (Cr) Add: Share premium credited to RE Unadjusted RE (Dr) Unadjusted Net loss (C)

70,000 40,000 143,200 253,200

Question No. 2 Unadjusted net loss Sales over, NI over (20,000 x 140%) EI under, NI over Gain under, NI under Repairs expense over, NI under Depreciation Expense building under, NI over (5% x 500,000) Depreciation Expense eqpmt under, NI over Bad debts exp under, NI over Adjusted net loss (C) Computation of gain Net Selling Price Less: Carrying amount (10,000-(10,000 x 10% x 2) Gain on sale Computation of depreciation expense equipment: Beg. Balance of the eqpmt. Net of asset disposed (201,000-10,000) 191,000 Asset disposed 10,000 Asset acquired 20,000 Depreciation expense

(253,200) (28,000) 20,000 1,000 20,000 (25,000) (20,100) (2,600) (287,900) 9,000 8,000 1,000

x 10% x 10% x 6/12 x 10% x 3/12

19,100 500 500 20,100

The unadjusted beg. Balance of the equipment is computed as follows: Unadjusted balance end 192,000 Add: Amount credited for asset disposed 9,000 Unadjusted balance beg 201,000 The adjusted balance end of the equipment is Unadjusted balance beg Add: Asset acquired Total Less: cost of asset disposed Adjusted balance end Computation of bad debts Required allowance (240,000-28,000) x 5% Less: Allowance for BD unadjusted Additional bad debts exp.

27

201,000 20,000 221,000 10,000 211,000 10,600 8,000 2,600


Question No. 3 ASSETS Cash Accounts Receivable (240,000-28,000) Less: Allowance for Bad Debts Advances to employees Interest Receivable Prepaid expenses Merchandise inventory (180,000 +20,000) Land Building Less: Accumulated Depreciation (150,000+25,000) Equipment Less: Accumulated Depreciation (59,200+20,100-2,000) Utility deposits Other Assets Total assets (D) Question No. 4 and 5 LIABILITIES AND CAPITAL Accounts payable Advances from customer Interest payable Accrued expense Mortgage Payable, current portion Total current (A) MP, noncurrent portion Total liabilities Ordinary shares Share Premium Retained earnings (deficit) Beg. Balance Less: Adjusted net loss Total liabilities and SHE SUMMARY OF ANSWERS: 1. C 2. C 3. D

4.

35,000 212,000 10,600

201,400 4,800 3,000 16,200 200,000 200,000

500,000 175,000 211,000

325,000

77,300

133,700 15,000 6,000 1,140,100

260,000 10,000 18,000 30,000 100,000 418,000 500,000 918,000 400,000 40,000 70,000 (287,900)

A

28

5.

(217,900)

A

222,100 1,140,100

Chapter 8: Cash and Cash Equivalents

CHAPTER 8: CASH AND CASH EQUIVALENTS PROBLEM 8-1 Cash and Cash Equivalents Traveler’s check 50,000 Postal money order 30,000 Petty cash fund 4,000 Treasury bills, due 3/31/2017 (purchased 12/31/2016) 200,000 Current account at Metrobank 2,000,000 Payroll account 500,000 Treasury warrants 300,000

Total cash and cash equivalents

3,084,000

Suggested answer: A PROBLEM 8-2 Cash and Cash Equivalents Reported cash and cash equivalents Certificate of deposits with maturity of 120 days Postdated check Compensating balance – legally restricted Adjusted cash and cash equivalents

6,325,000 (500,000) (125,000) (500,000) P5,200,000

Suggested answer: C PROBLEM 8-3 Cash and Cash Equivalents Bills and coins on hand Traveler’s check Petty cash excluding paid cash vouchers of P1,650 Money order Checking Account Balance in Bank of Philippine Island Total

P 52,780 22,400 350 800 22,000 P 98,330

Suggested answer: D PROBLEM 8-4 Cash and Cash Equivalents Cash on hand Checking account No. 143 - BPI Checking account No. 155 - BPI *Securities classified as cash equivalents Checking account No. 155 - BPI

29

P

80,000 200,000 (30,000) 3,600,000 P 3,850,000


*Breakdown of securities classified as cash equivalents Date Maturity Securities: Acquired Date 120-day Certificate of Deposit 12/10/2016 01/31/2017 BSP-Treasury Bills (No.2) 10/31/2016 01/20/2017 Money Market Funds 11/21/2016 02/10/2017

Amount P 600,000 1,000,000 2,000,000

Suggested answer: A PROBLEM 8-5 Cash and Cash Equivalents Bank cheque account Bank savings account (collectible immediately) Cash Treasury bonds – maturing in 2 months Cash and cash equivalents

P

P

58,400 23,440 10,000 8,500 100,340

Suggested answer: B PROBLEM 8-6 Cash and Cash Equivalents Petty cash fund (70,000-15,000-5,000) Current account – Metro Bank (4,000,000+100,000) Cash and cash equivalents

50,000 4,100,000 P4,150,000

Suggested answer: C PROBLEM 8-7 Effective Interest Rate Question No. 1 Let X = Principal amount of the loan Principal X Less: Compensating balance 5%X Add: Current balance 50,000 Amount needed P3,375,000 X-.05X+50,000 .95X .95X/.95 X

= = = =

3,375,000 3,375,000-50,000 3,325,000/.95 3,500,000

Question No. 2 Annual interest payment (3,500,000 x 12%) Interest income on the loan proceeds in the compensating balance [3.5M-3,375,000) x 4%] Net interest 30

420,000 5,000 415,000


Divide by loan proceeds (3,500,000-175,000) Effective interest rate Suggested answers: 1. C

3,375,000 12.30%

2. C

PROBLEM 8-8 Petty Cash Fund Requirement No. 1 Currencies Coins A check drawn by the company payable to the order of the petty cash custodian, representing her salary Adjusted Petty Cash Fund Requirement No. 2 Petty cash Accounted: Currencies Coins Petty cash vouchers: Transportation Office supplies Repair of computer Loans to employees Miscellaneous expenses Postage A check drawn by the company payable to the order of the petty cash custodian, representing her salary An employee’s check returned by the bank because of insufficient funds A piece of paper with names of several employees together with a contribution for a wedding gift for an employee. Attached to the sheet of paper is a currency of Less: Petty Cash Accountabilities PCF imprest balance A piece of paper with names of several employees together with a contribution for a wedding gift for an employee. Attached to the sheet of paper is a currency of Petty cash overage

31

3,000 450 3,800 7,250

3,000 450 650 160 400 600 240 200 3,800 1,200

500

11,200

10,000

500

10,500 700


Requirement No. 3: Adjusting Entries 1) Transportation expense Office supplies expense Repairs expense Advances to employees Miscellaneous expense Postage Petty Cash fund

Debit 650 160 400 600 240 200

2)

Unused stamps Postage

50

3)

Petty cash fund Miscellaneous Income

700

4)

Advances to employees Petty cash fund

1,200

PROBLEM 8-9 Petty Cash Fund Cash Accounted For Currency Checks Unreplenished Vouchers IOUs Cash Accountability Petty Cash Fund Collections from customer -check Cash collections Cash Overage (Shortage) Quantity Denomination 50 1 60 0.25 3 500 5 100 20 20 12 10 Total currencies and coins Checks: Al Rex Zev, customer Total

2,585.00 17,600.00 425.00 150.00 5,000.00 6,500.00 12,150.00

Total 50.00 15.00 1,500.00 500.00 400.00 120.00 2,585.00 5,000 6,100 6,500 17,600

32

20,760.00

23,650.00 (2,890.00)

Credit

2,250 50 700 1,200


Unreplenished vouchers: Transporation Office supplies Xerox fees Postage Newspaper Freight charges Total

65 70 80 150 10 50 425

IOUs Rhad Andrix TOtal

50 100 150

Cash collections 143 144 145 Total

4,000.00 5,100.00 3,050.00 12,150.00

PROBLEM 8-10 Bank Reconciliation Unadjusted balances Outstanding check, net of certified checks Deposit in transit (Undeposited collections) Book error – disbursement for utilities Note charged by the bank, including interest Bank service charge Erroneous bank credit NSF check Adjusted balance

Bank P126,300 (12,300) 7,850 (5,670) P116,180

Book P123,310 360 (6,500) (240) ( 750) P116,180

The following are the adjusting entries to be recorded in the company’s books. Note that only book reconciling items are recorded. ADJUSTING ENTRIES Debit Credit 1) Cash 360 Utilities expense 360 2)

3)

Notes payable Interest expense Cash

6,000 500 6,500

Bank service charge Cash

240 240

33


4)

Accounts receivable Cash

750 750

PROBLEM 8-11 Bank Reconciliation Unadjusted bank bal Erroneous bank credit DIT: October November OC: October Nov. (760+1,868) Unadjusted book bal Credit memo Oct. Nov. NSF-Nov BSC: Oct Nov Check No. overstated disbursement Check No. understated disbursement

Oct. 31 18,005 1,790

Receipts 17,709 (500) (1,790) 3,600

Disb 25,620

Nov. 30 10,094 (500) 3,600

(6,681) 13,114

19,019

(6,681) 2,628 21,567

11,534 1,600

18,269

21,575

(2,628) 10,566

22 35

8,228 1,600 750 (665) (20) (22) (35)

(1,000)

1,000

270 21,567

(270) 10,566

750 665

(20)

148 150 13,114

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

4.

19,019

D

PROBLEM 8-12 Deposit in Transit Deposit in transit, beg Add: Book debits for the month Less: CM recorded this month Error – check received (Jan) Error – check issued (Jan) Add: Error – check received (Feb) Total Less: Bank debits for this month Less: CM for this month Erroneous bank credit - Feb Erroneous bank charge - Jan Deposit in transit, end 34

5.

A

P 400,000 5,000 36,000 27,000 16,000 P 360,000 6,000 2,500 1,000

P 50,000

348,000 398,000

350,500 P 47,500


Suggested answer: A PROBLEM 8-13 Outstanding Checks Outstanding checks, beg (squeeze) Add: Book credits for the month Less: Error in recording Service charge recorded Total Less: Bank debits for this month Less: NSF check returned DM for this month Outstanding checks, end

P 85,800 1,800 30 P 97,650 2,300 3,000

P 12,880 83,970 96,850 92,350 P 4,500

Suggested answer: A PROBLEM 8-14 Proof of Cash Question No. 1 Deposit in transit, Jan. 31 Add Deposit made by the company Book receipts 150,000 Credit Memo-Jan 31 (10,000) Book errors last month corrected this month: Understatement of CR Overstatement of CD Book errors this month: Overstatement of CR Add: Understatement of CR Total Less: Deposit acknowledged by the bank Bank receipts 157,700 Credit 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 CR Erroneous bank credit-Feb. 28 (4,000) Deposit in transit, Feb. 28 Question No. 2 Outstanding checks, Jan. 31 Add: Checks issued by the company this month Book disbursements Debit Memo last month

35

9,000

140,000 149,000

135,500 13,500

3,000 80,000


NSF check Book errors last month corrected this month: Understatement of CD last month Overstatement of CR Book errors this month: Overstatement of CD Understatement of CD this month Total Less: Checks paid by the bank this month Bank disbursements Debit Memo this month NSF check Error last month corrected this month Erroneous bank credit-last month Understatement of CD Bank errors this month: Add: Understatement of CD Erroneous bank charge-this month Outstanding checks, Feb. 28

(2,000) (1,500)

600

77,100 80,100

87,800 (3,000) (6,000)

(1,400)

77,400 2,700

Question Nos 4 to 6 Note to professor: The question in number 5 and 6 instead of January. Jan. 31 Receipts Unadjusted balances-books 200,000 150,000 Credit Memo-January 10,000 (10,000) Credit Memo-February 15,000 NSF check-January (2,000) NSF check-February Understatement of cash disbursements-January (1,500) Understatement of cash disbursements-February -

should be in February, Disb 80,000 (2,000) 3,000

Feb. 28 270,000 15,000 (3,000)

(1,500)

-

600

(600)

Adjusted balances

206,500

155,000

80,100

281,400

Unadjusted balances-bank Deposit in transit-January Deposit in transit-February Outstanding checks-January Outstanding checks-February Erroneous bank credit-January Erroneous bank credit-February Erroneous bank charge-January Erroneous bank charge-February

Jan. 31 203,300 9,000 (3,000) (6,000) 3,200 -

Receipts 157,700 (9,000) 13,500 (4,000) (3,200) -

Disb 87,800 (3,000) 2,700 (6,000) (1,400)

Feb. 28 273,200 13,500 (2,700) (4,000) 1,400

36


Adjusted balances

206,500

155,000

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

4.

5.

A

80,100

A

6.

281,400

B

7.

PROBLEM 8-15 Proof of Cash Question No. 1 Outstanding checks, beg. Add: Checks issued Total Less: Checks paid by the bank Outstanding checks, end

50,000 1,250,000 1,300,000 1,100,000 200,000

Question No. 2 Deposits in transit, beg Add: Deposits made Total Less: Deposits acknowledged by the bank Deposits in transit, end Unadjusted bal-bank Deposit in transit-May 31 -June 30 Outstanding checksMay 31 -June 30 Erroneous bank credit Erroneous bank charge Adjusted balances

150,000 900,000 1,050,000 800,000 250,000

31-May 1,300,000

Receipts *1,095,000

150,000

(150,000) 250,000

(50,000) (30,000) 20,000 1,390,000

(20,000) 1,175,000

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

37

Disb. **1,205,000

30-Jun 1,190,000 250,000

(50,000) 200,000 (30,000)

(200,000)

1,325,000

1,240,000

B


Unadjusted bal-book Bank service chargeMay 31 -June 30 CM for collection-May 31 -June 30 NSF checks for June 30 Adjusted balances

31-May 1,095,000

Receipts ***1,200,000

Disb. 1,250,000

30-Jun 1,045,000

25,000

(5,000) (25,000)

50,000 1,325,000

275,000 (50,000) 1,240,000

(5,000) 300,000

(300,000) 275,000

1,390,000

1,175,000

***(900,000+300,000) SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

A

5.

A

PROBLEM 8-16 Proof of Cash Question No. 2 Outstanding checks, beg. Add Checks issued Book disb. Less DM last mo Error last mo. C T M Under of CD Over of CR Total Less checks issued Bank disb. less DM this mo Error last mo. C T M Under of CD Erroneous B Cr-LM Erroneous B CH-TM Outstanding checks, end Deposits in transit, beg Add deposits made Book receipts Less: CM last month Error last mo. C T M Under of CR (21K-12K) Over of CD Total

150,000 1,500,000 110,000 -

1,390,000 1,540,000

1,300,000 75,000 45,000 30,000

1,150,000 390,000 200,000

1,300,000 125,000 9,000

38

1,166,000 1,366,000


Less: Deposits acknowledged by the bank Bank receipts 1400000 Less: CM this month 150,000 Error last mo. C T M Under of CR Erroneous B CH-LM 20,000 Erroneous B Cr-TM 17,000 Deposits in transit, end BANK Unadjusted bal-bank Deposit in transit-May 31 -June 30 Outstanding checks-May 31 -June 30 Erroneous bank credit-May 31 -June 30 Erroneous bank chargeMay 31 -June 30 Adjusted balances BOOK Unadjusted bal-book NSF-May 31 -June 30 CM for collection-May 31 -June 30 Under of CR-May Adjusted balances

31-May 1,250,000 200,000

1,213,000 153,000

Receipts 1,400,000 (200,000) 153,000

Disb. 1,300,000

30-Jun 1,350,000 153,000

(150,000)

(150,000) 390,000

(45,000)

(390,000)

(45,000) (17,000)

(17,000)

20,000

(20,000)

1,275,000 31-May 1,251,000 (110,000)

1,316,000 Receipts 1,300,000

125,000

(125,000) 150,000 (9,000) 1,316,000

1,465,000

5.

6.

9,000 1,275,000

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

4.

D

PROBLEM 8-17 Proof of Cash Question No. 1 Beg. Bal., 7/1 Add: Cash receipts for July Cash receipts for Aug. Total Less: Cash disbursement for July Cash disbursement for Aug. Bank reconciliation item Unadjusted balance

(30,000) 1,465,000 Disb. 1,500,000 (110,000) 75,000

A

30,000 1,126,000 30-Jun 1,051,000 (75,000) 150,000 1,126,000

D

P 128,384 1,364,858 1,839,744 P3,332,986 1,330,882 1,712,892 750 P 288,462

39


Question No. 2 Outstanding check, Aug. 31 Add: Checks paid by the bank Bank debits except serv. charge Less: Erroneous bank charge DM on Interest on note Total Less: Checks issued by the company this August Outstanding check, July 31

P P1,702,830 1,166 4,950

67,122

1,696,714 P1,763,836 1,712,892 P 50,944

Questions No 3 to 5 BANK Unadjusted balances Outstanding checks July 31 August 31 Deposit in transit July 31 August 31 Erroneous bank charge Adjusted Balances (*1,702,830 + 88) BOOK Unadjusted balances Error in recording check no. 216 taken up as P1,930 but should be P1,390 (1,930-1,390) DM for int. on note Bank service charge July 31 August 31 NSF for July 31 Adjusted balances

**(1,712,892+750)

31-Jul 180,250

Receipts 1,830,752

Disb. *1,702,918

Aug. 31 308,084

( 50,944) 67,122

( 67,122)

( 1,166) 1,717,930

41,836 1,166 283,964

Disb. **P1,713,642

Aug. 31 P288,462

( 50,944) 32,844 162,150 31-Jul P162,360

( 32,844) 41,836 1,839,744 Receipts P1,839,744

540 4,950 (

52)

( 698) P162,150

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

4.

(

52) 88 ( 698) P1,717,930

P1,839,744

B

40

5.

A

( (

540 4,950)

88) P283,964


PROBLEM 8-18 Proof of Cash Question No 1 Outstanding check Check Nos. 144 P 1,500 149 8,000 150 12,000 Total P 21,500 Alternatively, it may also be computed as follows: Outstanding check, beg Add: Checks issued Total Less: Checks paid by the bank Bank Debits P 113,000 Less: DM for this month NSF checks (10,000+40,000) 50,000 Bank service charge 2,000 Error Correction 500 Outstanding checks, end Question No 2 Unadjusted rec. per bank Deposit in transit: November 30 December 31 Error correction NSF check, no entry on the books when returned and redeposited Adjusted balance Question No 3 Unadjusted disbursement, per bank Outstanding checks November 30 December 31 Error correction NSF check, no entry on the books on the returned and redeposit Adjusted balance Question No 4 Unadjusted bank bal. Deposit in transit November 30 December 31 Outstanding checks

P

7,000 75,000 P 82,000

60,500 P 21,500 P 171,500 (11,000) 20,000 (500) ( 40,000) P 140,000 P 113,000 (7,000) 21,500 (500) ( 40,000) P 87,000 P 127,500 20,000

41


November 30 December 31 Adjusted bal.

( 21,500) P126,000

Question No 5 Zero, adjusted bank and book balance on December 31 is the same. PROOF OF CASH Unadjusted bank balance Deposit in transit November 30 December 31 Outstanding checks November 30 December 31 Error correction NSF check, no entry on the books on the return and redeposit Adjusted bal. * (69,000+171,500-113,000) ** (18,000+2,000) Unadjusted book balance Credit memo for note collected November 30 December 31 Bank service charge November 30 December 31 Adjusted bal.

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

Nov. 30 69,000

Receipts 171,500

11,000

(11,000) *20,000

(7,000)

Disb. 113,000

Dec. 31 *127,500 20,000

(500)

(7,000) 21,500 (500)

73,000

(40,000) 140,000

(40,000) 87,000

126,000

Nov. 30 66,000

Receipts 113,800

Disb. 85,000

Dec. 31 94,800

8,800

(8,800) 35,000

35,000

(1,800) 73,000

4.

B

42

140,000

5.

A

(21,500)

2,000 87,000

(1,800) (2,000) 126,000


PROBLEM 8-19 Proof of Cash Question No. 1 Beg. Balance, Nov. 30 Add: Total Collections from customers on Dec. November bank coll. for customer note Total Less: Checks drawn for December Bank service charges – November Unadjusted cash balance, Dec. 31 Question Nos. 2-5 BANK Unadjusted bank balance NSF check, no entry on the books for return and redeposit Erroneous bank charge in December Undeposited collection November 30 December 31 Bank service charge charged to another client Outstanding check Nov. 30 Dec. 31 Adjusted balances BOOK Unadjusted balance NSF check recorded as reduction of cash receipts returned in December but also recorded in December Error in recording check No. 7159 entered as P30,000 but should be 3,000 Cancellation of check No. 7767 Bank service charge Nov. 30 Dec. 31 Bank collection for customer's note: Nov. 30 Dec. 31 Adjusted balances

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

Nov. 30 90,800

P 50,900 165,000 8,000 223,900 98,000 100 P 125,800

December Receipts Disb. 171,272 99,072 (

472)

Dec. 31 163,000

( 472) ( 1,500)

5,000

1,500

( 5,000) 8,000

( 5,000)

8,000 150

( 150) ( 7,700) 164,650

125,800

90,800

173,800

( 5,000) 7,700 99,950

50,900

173,000

98,100

1,800

1,800

27,000 5,000

27,000 5,000

( 100)

8,000 90,800

4.

B

43

( 100) 150 (8,000) 7,000 173,800

5.

B

99,950

(

150)

7,000 164,650


PROBLEM 8-20 Proof of Cash Question No. 1 Outstanding checks, beg (squeeze) Add: Checks issued this month Book disbursements Less: DM recorded this month Total Less: Bank disbursements Add: Paid out in currency Less: NSF redeposited DM for this month Outstanding checks, end

P 8,000 P 148,000 2,500 P 150,000 2,000 3,000 1,500

145,500 153,500

147,500 P 6,000

Question Nos. 2 to 5 BANK Unadj. balance - bank Undeposited collections: September 30 October 31 Outstanding checks: September 30 October 31 Paid out in currency Adjusted balances

Sept. 30 100,000

Receipts 200,000

5,000

(5,000) 7,000

BOOK Unadj. balance - book Customer’s notes collected: September 30 October 31 Bank service charge: September 30 October 31 Adjusted balances

(8,000)

Disb. 150,000

Oct. 31 150,000 7,000

97,000

2,000 201,000

(8,000) 6,000 2,000 147,000

151,000

Sept. 30 91,500

Receipts 196,000

Disb. 148,000

Oct. 31 139,500

8,000

(8,000) 13,000

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

(2,500) 97,000

4.

201,000

A

44

5.

A

(6,000)

13,000 (2,500) 1,500 147,000

1,500 151,000


PROBLEM 8-21 Proof of Cash Question No. 1 Account No. 143: Unadjusted balances Deposit in transit Misplaced check Outstanding check Undelivered check Note charged by the bank Adjusted balance *(100,000 - 20,000, Misplaced check) **(75,000 - 15,000, Undelivered check)

Question No. 2 Total Outstanding checks: Account No.143 *Account No.144 Total outstanding check

Bank P1,000,000 *80,000

Book P1,099,400 ( 20,000)

(**60,000) P1,020,000

15,000 ( 74,400) P1,020,000

P

60,000 1,860,000 P 1,920,000

*Outstanding check for Account No. 144 is computed as follows: Outstanding checks, beg P 250,000 Add: Checks issued this month Book Credits P3,500,000 Less: BSC November 10,000 3,490,000 Total P 3,740,000 Less: Checks paid by the bank Bank Debits P2,000,000 Less: BSC December 20,000 NSF check 100,000 1,880,000 Outstanding checks, end P1,860,000 Question Nos. 3 to 4 Unadjusted bank balance Deposit in transit: November 30 December 31 Outstanding check: November 30 December 31 Erroneous bank charge November Adjusted balances

Nov. 30 2,200,000

December Receipts Disb. 1,000,000 2,000,000

90,000

(90,000) **240,00 0

(250,000) 20,000 2,060,000

(20,000) 1,130,000

45

Dec. 31 1,200,000

240,000 (250,000) 1,860,000

(1,860,000)

3,610,000

(420,000)


Unadjusted book balance Bank service charge: November 30 December 31 Unrecorded collections November 30 Uncollected customer's note already recorded as cash receipt NSF - December 31 Adjusted balances

1,980,000

1,420,000

3,500,000

(100,000)

(10,000) 20,000

(20,000)

(200,000) 100,000 3,610,000

(100,000) (420,000)

(10,000) 90,000

(90,000)

(200,000) 2,060,000

1,130,000

**Deposit in transit, beg Add: Deposit made by the co. this month Book Debits P1,420,000 Less: Unrecorded collection 90,000 Customer’s note recorded as cash receipts 200,000 Total Less: Deposits acknowledged by the bank Bank Credits P1,000,000 Less: Erroneous bank charge 20,000 Outstanding checks, end Question No. 5 Adjusted balances: Account No. 143 Account No. 144 Total adjusted balances SUMMARY OF ANSWERS: 1. A 2. A 3. B

P

90,000

1,130,000 P1,220,000 980,000 P 240,000

P1,020,000 ( 420,000) P 600,000 4.

B

PROBLEM 8-22 Proof of Cash Question No. 1 RCBC Account Unadjusted balance Credit memo for note collected Bank service charge Deposit in transit Outstanding checks (25,000+20,000) Unrecorded disbursement Adjusted balance 46

5.

C

Book P 165,000 6,000 (1,000) ( 30,000) P 140,000

Bank P 125,000 60,000 (45,000) P 140,000


Question Nos. 2-3 Equitable PCI Bank Book Bank Unadjusted bal. (squeeze) P 62,000 P 93,000 Credit memo for note coll. 10,000 Bank service charge ( 2,000) Deposit in transit (15,000+20,000+50,000*) 85,000 Outstanding 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 in transit) Question No. 4 Outstanding checks: RCBC Account (25,000+20,000) Equitable PCI Bank Total outstanding checks

P 45,000 28,000 P 73,000

Question No. 5 Fund transfer No. 2 is recorded in the disbursing bank during December while it was only recorded in the disbursing book in January. This is an unrecorded disbursement for fund transfer. SUMMARY OF ANSWERS: 1. A 2. A 3. B PROBLEM 8-23 Proof of Cash BOOK Unadjusted balances-books Credit Memo-January Credit Memo-February BSC check-January BSC check-February Check of the company issued in January was mutilated and returned by the payee. A replacement check was issued. Both checks were entered in the Check register but no entry was made to cancel the mutilated check, P700. The company issued a stop payment order to the bank in February for check issued in February which was not

4.

B

5.

B

Jan. 31 200,000 9,000 (100) 700

Receipts 150,000 (9,000) 13,000 -

Disb 80,000 (100) 150 -

Feb. 28 270,000 13,000 (150) 700

-

(1,200)

(1,200)

-

47


received by the payee. A new check was written and recorded in the Check register in February. The old check was written off by a journal entry also in February, P1,200. Adjusted balances BANK Unadjusted balances-bank Deposit in transit-January Deposit in transit-February Outstanding checks-January Outstanding checks-February Erroneous bank credit-January Erroneous bank credit-February Erroneous bank charge-January Erroneous bank chargeFebruary Adjusted balances

209,600

152,800

78,850

283,550

Jan. 31 206,600 10,000 (4,200) (6,000) 3,200 -

Receipts 159,000 (10,000) 11,000 (4,000) (3,200) -

Disb 88,650 (4,200) 1,800 (6,000) (1,400)

Feb. 28 276,950 11,000 (1,800) (4,000) 1,400

209,600

152,800

78,850

283,550

SUMMARY OF ANSWERS: 1. D 2. C 3. C 4. A 5. E Note to the professor: The question in #5 should be adjusted cash in balance on February 28. The answer would have been letter C. PROBLEM 8-24 Computation of Cash Shortage Question No. 1 Unadjusted bank bal. Less: Outstanding checks (8,434+4,300+ 6,524+ 9,551.50+4,577+5,961) Add: Undeposited receipts Adjusted bank balance

P

225,400

(39,347.50) 35,000 P221,052.50

Question No. 2 Unadjusted book bal. Credit memo for notes collection Credit memo for int. Balance (cash accountability)

P242,310.50 30,000 900 P273,210.50

Question No. 3 Adjusted bank bal. (Cash accounted) Less: Cash in bank bal. (cash accountability)

P221,052.50 273,210.50

48


Shortage

(P52,158.00)

SUMMARY OF ANSWERS: 1. B 2. D 3. B PROBLEM 8-25 Computation of Cash Shortage Question No. 1 Unadjusted bank bal. Outstanding checks Undeposited collections Adjusted bank balance

P 42,400 ( 11,500) 5,000 P 35,900

Question No. 2 Unadjusted book bal. Credit memo proceeds clean draft Debit memo for bank service charge Balance (cash accountability)

P 46,500 900 ( 100) P 47,300

Question No. 3 Adjusted bank bal. (Cash accounted) Cash in bank bal. (cash accountability) Shortage as of June 30

P 35,900 47,300 (P11,400)

Question No. 4 Additional cash shortage from July 1-15 July collection per duplicate O.R. Less: collections in July that were deposited in July Collection per duplicate slips Less :Undeposited collection, June 30 Cash that should be on hand on July 15 Less: Actual cash on hand on July 15 Cash shortage from July 1-15

P 18,800 P 11,000 5,000

Question No. 5 Understatement of cash in bank per books (46,500-45,600) Overstatement of cash in bank per bank (44,000-42,400) Understatement of outstanding checks (11,500-3600) Overstatement of undeposited collections (5,100-5,000) Non-recording of credit memo-proceeds of clean draft Cash shortage as of June 30 SUMMARY OF ANSWERS: 1. C 2. D 3. B

4.

D

49

5.

D

6,000 P 12,800 4,800 P 8,000 P

900 1,600 7,900 100 900 P11,400


PROBLEM 8-26 Computation of Cash Shortage Question No. 1 Deposit in transit, unadjusted bal. Less: customer's Post-dated check Adjusted Deposit in transit

P 350,500 100,000 P 250,500

Question No. 2 Outstanding checks, unadjusted balance Less: Unreleased check Company's post-dated check Adjusted Outstanding checks

P 493,500 ( 29,500) ( 74,420) P 389,580

Question No. 3 Unadjusted bal. per bank Add: Deposit in transit (No. 1) Less: Outstanding checks (No. 2) Erroneous bank credit Adjusted cash in bank bal.

P 700,000 250,500 (389,580) ( 60,000) P 500,920

Question No. 4 Unadjusted bal. per books Add: Credit memo for note coll. Unreleased check Company's post-dated check Total Less: Customer's post-dated check Cash in bank per books bal. Less: Adjusted cash in bank balance Cash shortage

P 587,000 30,000 29,500 74,420 P 720,920 (100,000) P 620,920 500,920 (P120,000)

Question No. 5 Unadjusted bal. per books Less: Adjusted cash in bank balance Net adjustments

P587,000 500,920 P 86,080

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

4.

C

5.

A

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

50


Purchases Less: Accounts payable, end Total payment of Accounts payable

P 81,160 11,571 P 69,589

Question No. 2 Sales on account Less: Accounts receivable, end Collection to customers

P 80,752 21,345 P 59,407

Question No. 3 Receipts: Proceeds of issuance of stocks Collection from customers Loan proceeds Disbursements: Payment of real property Payment of furniture and equipment (7,250-1,500) Payment of AP Payment of operating expenses Cash accountability

P 80,000 59,407 28,000 P 50,000 5,750 69,589 15,189

Question No. 4 Unadjusted bank bal. Outstanding checks Undeposited collections Adjusted cash in bank bal.

140,528 P 26,879 P ( P

Question No. 5 Adjusted cash in bank bal. Less Cash accountability Cash shortage SUMMARY OF ANSWERS: 1. C 2. B 3. A

P 167,407

P

6,582 463) 1,285 7,404

7,404 26,879 (P19,475) 4.

B

51

5.

A

Chapter 10: Loans and Receivables

CHAPTER 10: LOANS AND RECEIVABLES PROBLEM 10-1 Trade and other receivables Trade Trade and other Receivables receivables 1 277,000 277,000 2 150,000 150,000 3 10,000 4 30,000 5 6 15,000 7 70,000 70,000 8 80,000 9 100,000 100,000 Adjusted bal. 597,000 1. C 732,000 2. C PROBLEM 10-2 Different Freight terms Question No. 1 FOB Destination, freight prepaid Invoice price of merchandise sold Less: Invoice price of merchandise returned Net invoice price Less: Sales discount (300,000 x 2%) Collection before freight Less: Freight payment - FOB Destination, freight collect Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash Collection (B)

Noncurrent Asset 110,000 220,000 330,000

300,000 300,000 6,000 294,000 294,000

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

300,000 300,000 6,000 294,000 5,000 289,000

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

300,000 300,000 6,000

52


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

294,000 5,000 299,000

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

300,000 300,000 6,000 294,000 294,000

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

4.

B

PROBLEM 10-3 Gross method and Net method List price Less: Trade discounts 15%: (100,000 x 15%) 15,000 20%: (100,000 – 15,000) x 20% 17,000 Invoice price, gross of discount (C) Less: Sales discount (68,000 x 3%) Invoice price, net of discount (D)

P 100,000 32,000 68,000 2,040 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 of 2016.

2013 2014 2015 2016 2017

Credit Sales ₱ 1,500,000 2,000,000 3,500,000 7,000,000 2,000,000 9,000,000 3,000,000

CASE 1 Accounts written off ₱ 20,000 40,000 270,000 330,000 65,000 395,000 85,000

53

Recoveries ₱ 15,000 20,000 15,000 50,000 30,000 80,000 40,000


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. 2 Bad debts expense

= 3% x ₱3,000,000 = ₱90,000

Question No. 3 Allowance for Bad debts 85,000 400,000 445,000 90,000 40,000 520,000 520,000

Write off Balance end (squeeze)

Beg. Balance Bad debts exp Recovery

CASE 2 Question No.4 Percentage


=

Total years from 2013 to 2015 (years should exclude the last two years): ₱330,000 - ₱50,000 Percentage = ₱7,000,000 Percentage = 4 % Question No. 5 Bad debts expense

= 4% x P3,000,000 = ₱120,000

Question No. 6 Credit Sales 2016 2,000,000 2017 3,000,000

BD exp 80,000 120,000

Recoveries Write-off 65,000 30,000 85,000 40,000 Allowance for BD (E)

54

Net AB 115,000 165,000 280,000


CASE 3 Question No. 7 Percentage of bad debts to AR


=

Total years from 2013 to 2016: Percentage of bad = debts to AR

₱395,000 - ₱80,000 9,000,000

Percentage = 3.5% Percentage of bad debts to AR


=

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 9 Allowance for Bad debts Balance end (3,400,000 x 3%) 102,000 105,000 Write off 85,000 (E) 42,000 40,000 187,000 187,000 SUMMARY OF ANSWERS: Case 1 1. B 2. B 3. B

Beg. Balance (3,000,000 x 3.5%) Bad debts exp (squeeze) Recovery

Case 2 4. D 5. D 6. E

PROBLEM 10-5 Aging Based on Outstanding Receivables Question No. 1 Categories Balance (No. of Days) 0-30 days 500,000 31-60 days 600,000 61-90 days 750,000 over 91 days 300,000 Totals 2,150,000

Uncollectible Percent Amount 2% 10,000 3% 18,000 5% 37,500 10% 30,000 95,500

55

Case 3 7. C 8. E 9. C


Allowance for Bad debts Balance end (see above table) Write off (23,000+100,000)

95,500 123,000 218,500

40,000 12,000 166,500 218,500

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

Beg. balance Recoveries Bad debts exp (squeeze)

2,150,000 95,500 2,054,500

SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 10-6 Aging Based On Days Past Due Question No. 1 Overdue accounts % uncollectible Balance For less than 31 days 5.00% 300,000 From 31-60 days 6.00% 220,000 From 61-90 days 8.00% 150,000 From 91-120 days 15.00% 60,000 For over 121 days 20.00% Required allowance for doubtful accounts

Allowance 15,000 13,200 12,000 9,000 49,200

Question No. 2 Balance end

Allowance for Bad debts 49,200 20,000 29,200 158,000 158,000

Beg. balance Bad debts exp (squeeze)

SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 10-7 Interest-bearing Note with Realistic Interest Rate Requirement No. 1 *Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Loss on sale

P 100,000 500,000 350,000

56

150,000 (P 50,000)


*Note: The selling price is equal to the face amount, which is likewise equal to the present value of the note since the note bears an annual interest rate that is similar with the market rate. Requirement No. 2 Interest income = (100,000 x 10%) = P10,000 Requirement No. 3 Zero. The principal amount is collectible beyond one year from the reporting date and thus, reported as non-current. Requirement No. 4 P100,000. The entire principal amount of notes receivable is treated as noncurrent asset since it is collectible beyond one year from the reporting date. Journal entries are as follows: 01/01/2016 Notes receivable Accumulated depreciation Loss on sale Machinery \

12/31/2016

100,000 350,000 50,000 500,000

Cash Interest income

10,000 10,000

PROBLEM 10-8 Interest-bearing Note with Unrealistic Interest Rate, Interest Is Payable Annually, One-Time Collection of Principal Question No. 1 Present value of principal (2,000,000 x 0.7118) Add: Present value of interest payments (2,000,000 x 10% x 2.4018) Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Question Nos. 2 to 5 Amortization table Date Interest Collections 01/01/2016 12/31/2016 200,000 12/31/2017 200,000 12/31/2018 200,000

P 1,423,600 480,366 1,903,966 1,000,000 150,000

Interest Income

Discount Amortization

228,475 231,892 235,704

28,475 31,892 35,672

57

850,000 P1,053,966

Carrying amount 1,903,960 1,932,435 1,964,327 2,000,000


The total amount of 1,932,435 is reported as noncurrent receivable since it is due 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. 1 Present value of principal (2,000,000 x 0.7050) Add: Present value of interest payments (2,000,000 x 5% x 4.9173) Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Amortization table Date Interest Collections 01/01/2016 07/31/2016 100,000 12/31/2016 100,000 07/31/2017 100,000 12/31/2017 100,000 07/31/2018 100,000 12/31/2018 100,000

P 1,410,000 491,730 1,901,730 1,000,000 150,000

Interest Income


114,104 114,950 115,847 116,796 117,804 118,602

14,104 14,950 15,815 16,796 17,804 18,802

Question No. 2 Interest income up to 07/31/2016 Interest income up to 12/31/2016 Total interest income

850,000 P1,051,730 Carrying amount 1,901,730 1,915,834 1,930,784 1,946,599 1,963,395 1,981,198 2,000,000

114,104 114,950 229,054

Question No. 3 1,930,784. See amortization table above. Question No.s 4 and 5 The total amount of 1,932,435 is reported as noncurrent receivable since it is due to be collected beyond twelve months from the end of the reporting period. SUMMARY OF ANSWERS: 1. B 2. B 3. B

4.

A

58

5.

D


PROBLEM 10-10 Interest-bearing Note with Unrealistic Interest Rate, Uniform Collection of Principal Question No. 1 Computation of present value of all payments: Present Interest Principal value factor collections 0.8929 600,000 180,000 0.7972 600,000 120,000 0.7118 600,000 60,000 Total present value Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Amortization table Interest Date Collections 01/01/16 12/31/16 180,000 12/31/17 120,000 12/31/18 60,000

Total collections 780,000 720,000 660,000

1,000,000 150,000

850,000 P890,234

Amortizatio n

Principal collections

208,828 140,287 70,651

28,828 20,287 10,651

600,000 600,000 600,000

Question No. 2 208,828. See amortization table above. Question No. 3 1,169,062. See amortization table above. Question No. 4 Principal collections – 2017 Less: Amortization – 2017 Current portion – 12/31/2016

600,000 20,287 579,713

Question No. 4 Carrying value – 12/31/2016 Less: Current portion – 12/31/2016 Non-current portion – 12/31/2016

4.

696,462 573,984 469,788 1,740,234

1,740,234

Interest Income

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

Total PV

1,169,062 579,713 589,350

B

59

5.

A

Carrying amount 1,740,234 1,169,062 589,350 -


PROBLEM 10-11 Non-interest-bearing Note with Unrealistic Interest Rate, Non-Uniform Collection of Principal Question No. 1 Computation of present value of all payments: Total PV factor collections 0.8929 1,000,000 0.7972 600,000 0.7118 200,000 Total present value of the notes Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Question Nos. 2 to 5 Amortization table Interest Date income 01/01/16 12/31/16 181,630 12/31/17 83,425 12/31/18 21,382

Total PV 892,900 478,320 142,360 1,513,580 1,513,580

1,000,000 150,000

Amortizatio n

850,000 P663,580

Principal Collections

181,630 83,425 21,365

1,000,000 600,000 200,000

Question No. 2 181,630. See amortization table above. Question No. 3 695,210. See amortization table above. Question No. 4 Principal collections – 2017 Less: Amortization – 2017 Current portion – 12/31/2016

600,000 83,425 516,575

Question No. 5 Carrying value – 12/31/2016 Less: Current portion – 12/31/2016 Non-current portion – 12/31/2016

695,210 516,575 178,635


4.

B

60

5.

D

Carrying amount 1,513,580 695,210 178,635 -


PROBLEM 10-12 Noninterest-bearing Note, One-Time Collection of Principal Question No. 1 Total present value (1,800,000 x 0.7118) Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Amortization table Date Interest Income 01/01/16 12/31/16 153,749 12/31/17 172,199 12/31/18 192,812

1,281,240 1,000,000 150,000

Amortization

850,000 P431,240

Carrying amount 1,281,240 1,434,989 1,607,187 1,800,000

153,749 172,199 192,812

Question No. 2 153,749. See amortization table above. Question No. 3 1,434,989. See amortization table above. Question No. 4 and 5 The total amount of 1,434,989 is reported as noncurrent receivable since it is due to be collected beyond twelve months from the end of the reporting period. SUMMARY OF ANSWERS: 1. B 2. B 3. A

4.

B

5.

A

PROBLEM 10-13 Computation of Annual Payment or Collection Requirement No. 1

CASE 1: Based on the original data

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. 2 Interest income (1,500,000 x 12%)

= P180,000

61


CASE 2 Requirement 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. 2 Interest income (1,500,000 – 557,600) x 12%

= P113,088

PROBLEM 10-14 Impairment of Receivable, Principal is Collectible Every Year Question No. 1 Principal (unpaid) 960,000 Add: Accrued interest receivable 96,000 Less: *Present value of expected cash flows Loan impairment (B)

1,056,000 770,528 285,472

*Computation of present value of all payments: PV factor Total collections Total PV 0.9091 160,000 145,456 0.8264 320,000 264,448 0.7513 480,000 360,624 Total present value of the notes 770,528 Question Nos. 2 to 3 Amortization table Date 12/31/2016 12/31/2017 12/31/2018 12/31/2019

Collections

Interest Income

Amortization

160,000 320,000 480,000

77,053 68,758 43,634

82,947 251,242 436,339


62

Carrying amount 770,528 687,581 436,339 -


PROBLEM 10-15 Impairment of Receivable, One-time Collection of Principal CASE NO. 1 Question No. 1 Principal 16,000,000 Add: Accrued interest receivable 1,600,000 Less: *Present value of expected cash flows Loan impairment (A)

17,600,000 7,705,280 9,894,720

*Computation of present value of all payments: PV factor Total collections Total PV 0.9091 1,600,000 1,454,560 0.8264 3,200,000 2,644,480 0.7513 4,800,000 3,606,240 Total present value of the notes 7,705,280 Question Nos. 2 to 3 Amortization table Date 12/31/2015 12/31/2016 12/31/2017 12/31/2018

Collections

Interest Income

Amortization

1,600,000 3,200,000 4,800,000

770,528 687,581 436,339

829,472 2,512,419 4,363,389

CASE NO. 2 Question No. 4 Carrying value – 12/31/2015 (see table below) Less: *Present value of expected cash flows Loan impairment (E) Amortization table Interest Received Date Or Accrued 01/01/2013 12/31/2013 1,600,000 12/31/2014 1,600,000 12/31/2015 1,600,000* *Interest accrued. 12/31/2015

15,458,634 7,705,280 9,894,720

Interest Income

Amortization

1,781,530 1,803,313 1,827,711

181,530 203,313 227,710

Accrued interest receivable Interest income Unearned interest income Interest income

63

Carrying amount 7,705,280 6,875,808 4,363,389 -

Carrying amount ₱14,846,080 15,027,610 15,230,923 15,458,634

1,600,000 1,600,000 227,710 227,710


CASE NO. 3 Question No. 5 Carrying value – 12/31/2015 (see table below) Less: *Present value of expected cash flows Loan impairment (E) Amortization table Interest Received Date Or Accrued 01/01/2013 12/31/2013 1,600,000 12/31/2014 1,600,000 12/31/2015 12/31/2015

17,058,634 7,705,280 9,353,354

Interest Income

Amortization

1,781,530 1,803,313 1,827,711

181,530 203,313 1,827,711

Unearned interest income Interest income

1,827,711 1,827,711

CASE NO. 4 Question No. 6 Carrying value – 12/31/2015 (see table below) Less: *Present value of expected cash flows Loan impairment (E) Amortization table Interest Received Date Or Accrued 01/01/2013 12/31/2013 1,600,000 12/31/2014 1,600,000 12/31/2015 1,600,000 12/31/2015

15,458,634 7,705,280 9,894,720

Interest Income

Amortization

1,781,530 1,803,313 1,827,711

181,530 203,313 227,710

Cash Interest income

Carrying amount ₱14,846,080 15,027,610 15,230,923 15,458,634

1,600,000 1,600,000

Unearned interest income Interest income SUMMARY OF ANSWERS: 1. A 2. B 3. B

Carrying amount ₱14,846,080 15,027,610 15,230,923 17,058,634

4.

E

64

227,710

5.

E

6.

227,710 E


PROBLEM 10-16 Reversal of Impairment Loss Question No. 1 Present value of expected cash flows vs. Would have been present value if there was no impairment Lower Less: Actual amortized cost Gain on reversal of impairment loss

600,000 600,000 396,681 P 203,319

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

P

P 654,552

60,000

SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 10-17 Pledge of Receivable Principal amount borrowed Less: One year interest deducted in advance (900,000 x 10%) Cash received on December 1 (B) PROBLEM 10-18 Assignment of Receivable Entries to record transactions Date Accounts 10/1/2016 Cash Finance charge expense Notes payable 12/31/2016

P 900,000 ( 90,000) P810,000

Debit 395,000 5,000

400,000

Cash Accounts receivable

300,000

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

12,000 300,000

SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 10-19 Assignment of Accounts Receivable Question No. 1 Principal amount borrowed Less: Finance fee (150,000 x 5%) Cash received on December 1 (D)

65

Credit

P 150,000 ( 7,500) P142,500

300,000

312,000


Question No. 2 Notes payable Less: Principal payment Remittance Less: Interest (150,000 x 12% x 3/12) Notes payable – December 31 (C)

P150,000 95,000 ( 1,500)

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

93,500 P 56,500 P 100,000 ( 56,500) P 43,500

SUMMARY OF ANSWERS: 1. D 2. C 3. C PROBLEM 10-20 Factoring of Receivables Entries to record transactions Option Accounts One Cash (400,000 x 90%) Receivable from factor (25,000 – [5% x 400,000]) Loss on sale of receivables (squeeze) Notes payable Two

Cash (400,000 x 90%) Receivable from factor (25,000 – [4% x 400,000]) Loss on sale of receivables (squeeze) Notes payable Estimated recourse liability

Debit 360,000

Credit

5,000 35,000 400,000 360,000 9,000 34,000 400,000 3,000

SUMMARY OF ANSWERS: 1. B 2. C PROBLEM 10-21 Factoring Sales price Less: Carrying amount of accounts receivable (300,000 – 12,500) Loss on factoring (B)

66

P 265,000 ( 287,500) P 22,500


PROBLEM 10-22 Notes Receivable Discounting and Notes Receivable Dishonored CASE NO. 1 Question No. 1 Principal P 600,000.00 Add: Interest over full credit period (600,000 x 9% x 90/360) 13,500.00 Maturity value 613,500.00 Less: Discount (613,500 x 12% x 65/360) 13,292.50 Net proceeds from discounting (C) P 600,207.50 Question No. 2 Net proceeds from discounting Less: Carrying amount on date of discounting Principal Add: Interest (600,000 x 9% x 25/360) Loss on notes receivable discounting (A)

P 600,207.50 600,000.00 3,750.00

603,750.00 (P 3,542.50)

CASE NO. 2 Question No. 3 Loss of P3,524.50. The amount of loss to be recognized is computed in a similar way as to that of discounted note without recourse. (A) Question No. 4 Maturity value of the note Add: Protest fee and other bank charges Cash received on December 1 (C)

P 613,500 5,000 P618,500

CASE NO. 3 Question No. 5 Interest expense of P3,524.50. The amount of interest expense is computed in a similar way as to that of discounted note without recourse or conditional sale. (A) Question No. 6 Maturity value of the note Add: Protest fee and other bank charges Cash received on December 1 (C) SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

P 613,500 5,000 P618,500 C

5.

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

67

A

6.

C

P 250,000 ( 30,000) P 220,000


Effective interest rate

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

Question No. 2 Entry to record transaction Cash 220,000 Discount on notes payable 30,000 Notes payable

250,000

SUMMARY OF ANSWERS: 1. D 2. B COMPREHENSIVE PROBLEMS PROBLEM 10-24 Question No. 1

Allowance for Doubtful accounts

Accounts written off Balance end (squeeze)

164,000 200,000

212,000 152,000

Total

364,000

364,000

Question No. 2 Age Group Amount 0 - 60 days P 1,650,000 61 - 90 days 440,000 91 - 120 days 100,000 Over 120 days 256,000 Total P 2,446,000

Beg. Balance DA expense (7.6M x 2%)

Percent Uncollectible 2% 10% 30% 40%

Allowance 33,000 44,000 30,000 102,400 209,400


164,000 209,400

212,000 161,400

Total

373,400

373,400

Beg. Balance DA expense (squeeze)

Question No. 4 Accounts receivable, December 31, 2016 Less Allowance for doubtful accounts, December 31, 2016 Net realizable value

68

2,446,000 209,400 2,236,600


Question No. 5 Accounts receivable trade Beg. Balance Sales Total

2,500,000 7,600,000

2,446,000 164,000 7,490,000

10,100,000

10,100,000

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

PROBLEM 10-25 Question No. 1 Credit Sales 2013 2,220,000 2014 2,450,000 2015 2,930,000 7,600,000 Percentage

4.

B

Accounts written off 52,000 59,000 60,000 171,000

D

Recoveries 4,300 7,500 7,200 19,000


=

Total years from 2013 to 2015: Percentage

5.

Balance end Write-off Collections (squeeze)

171,000 - 19,000 7,600,000

=

Percentage = 0.02 or 2% Question No. 2 Doubtful accounts expense (3,000,000 x 2%) = P60,000 Question No. 3 Reported doubtful account expense (bad debts written off) Less: Correct doubtful account expense (see No. 2) Overstatement in doubtful account expenses Question No. 4

P 62,000 ( 60,000) P 2,000


Beg. Balance Sales on account

418,000 3,000,000

645,600 62,000 2,710,400

Total

3,418,000

3,418,000

69

Balance end Write-off Collections excluding advance from customers



62,000 21,600

15,200 60,000 8,400

Total

83,600

83,600


4.

Beg. Balance Doubtful accounts expense Recoveries

B

5.

A

PROBLEM 10-26 Question No. 1 Unadjusted accounts receivable, Dec. 1 (squeeze) Add: Adjusted net sales Total Less: Collections, net of discounts Estimated uncollectible accounts charged to AR in Dec. Unadjusted accounts receivable, Dec. 31 Subsidiary ledger balance, Dec. 1 Less: AR controlling account, Dec. 1 (see above) Add: Estimated uncollectible account charged to AR in Dec. Customers’ credit balance (D) Question No. 2 Collection, net of discount Divide by: (100%-2%) Total credit to AR for collection

P 59,000 21,800 6,000

P 156,800 98% P160,000

(A)

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

P 31,200 10,000 P 21,200

Question No. 4 Unadjusted Sales, balance b) Sales, FOB shipping pt., not yet recorded c) Sales, FOB destination Adjusted Sales balance (A)

P 260,000 10,000 ( 15,000) P 255,000

70

P 21,800 255,000 276,800 156,800 30,000 P 90,000

27,800 P31,200


Question No. 5 Subsidiary ledger, balance, 12/1 Add: Adjusted Sales in December Freight prepaid by the company Total Less: total credit to AR for coll. Adjusted accounts receivable in Dec. (B) SUMMARY OF ANSWERS: 1. D 2. A 3. A

4.

P 59,000 255,000 1,000 P 315,000 160,000 P 155,000 A

5.

B

PROBLEM 10-27 Question Nos. 1 to 3 Total 0-31 days 31-60 61-90 91-120 Rose P 87,950 35,000 52,950 Gerry 52,300 30,000 Ram 50,000 50,000 Ria 84,350 57,850 26,500 Mar 79,000 31,000 48,000 Sun 43,500 43,500 West P 397,100 116,000 110,800 74,500 73,500 0.01 0.015 0.04 0.10 1,160 1,662 2,980 7,350 Question No. 4 Allowance for doubtful accounts, end: (P1,160 + P1,662 + P2,980 + P7,350 + P13,380) P 26,532 Question No. 5

Over 120 22,300

22,300 0.60 13,380

Allowance for Doubtful accounts

Accounts written off Balance end

15,000 26,532

22,450 19,082

Total

41,532

41,532

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

4.

C

71

5.

Beg. Balance Doubtful accounts expense

C


PROBLEM 10-28 Question No. 1 Balance Accounts Dec. 31 Not due 1-60 days 61-120 days Over 120 1 12,000 3,000 8,000 1,000 2 22,000 22,000 4 20,000 10,000 10,000 5 55,000 2,220 52,780 6 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 3 Required balance (P136.10+P1,365.60+P550+P5,000) Less: Allowance for doubtful accounts, beginning Doubtful accounts expense

P 7,051.70 5,000.00 P 2,051.70

Question Nos. 4 and 5 Interest income (120,000 X 6% X 2/12) (100,000 X 6% X 1/12) Interest income

Interest income P 1,200 500 P 1,700

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

4.

D

PROBLEM 10-29 Question No. 1 Principal Origination fees received Direct origination cost incurred Initial Carrying amount of the loan

Accrued interest income P 500 P 500 5.

A

4,000,000 (342,100) 150,020 3,807,920

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

72


Question Nos. 3 and 4 Date 01/01/2016 31/12/2016 31/12/2017 31/12/2018

Collections

Interest Income

Amortization

400,000 400,000 400,000

456,950 463,784 471,439

56,950 63,784 71,346

Carrying amount 3,807,920 3,864,870 3,928,655 4,000,000

Question No. 5 Zero, As of December 31, 2016, the entire loan proceeds will be collectible on December 31, 2018, that is two years from the reporting date. SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

A

5.

A

PROBLEM 10-30 Question Nos. 1 and 3 Carrying amount of the loan, December 31, 2016 Less Carrying amount of the loan, December 31, 2017 Amortization in 2017 Less Interest collection in 2017 Interest income in 2016 (3) Divide by Carrying amount of the loan, 12/31/2016 Effective interest rate (1)

8,277,606 8,145,367 132,239 960,000 827,761 8,277,606 10%

Question No. 2 Carrying amount of the loan, January 1, 2016 Multiply by: Effective interest rate Interest income in 2016

8,397,824 10% 839,782

Question No. 3 Carrying amount of the loan, 12/31/2016 Multiply by: Effective interest rate Interest income in 2016

8,277,606 10% 827,761

Question No. 4 Carrying amount of the loan, December 31, 2016 Add: Interest collection (8M x 12%) Total Divide by: 100% plus effective rate Carrying amount of the loan, January 1, 2016

73

8,277,606 960,000 9,237,606 1.10 8,397,824


Question No. 5 Carrying amount of the loan, January 1, 2016 Direct origination fees received Principal Direct origination cost incurred Date 01/01/2016 12/31/2016 12/31/2017 12/31/2018

8,397,824 100,000 8,000,000 497,824

Collections

Interest Income

Amortization

960,000 960,000 960,000

839,782 827,761 814,537

120,218 132,239 145,367

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

4.

D

PROBLEM 10-31 Question No. 1 Principal Origination fees received Direct origination cost incurred Initial Carrying amount of the loan

5.

Carrying amount 8,397,824 8,277,606 8,145,367 8,000,000

D

4,000,000 (282,100) 39,020 3,756,920

Question Nos. 2 and 3 By trial and error, 12% interest rate will have a present value equal to the initial carrying amount of the loan. Present value of Prin. (4,000,000 x .6355) 2,542,000 Present value of Int. (4M x 10% x 3.0373) 1,214,920 Present value of Loan Receivable 3,756,920 Amortization table Date 01/01/2015 31/12/2015 31/12/2016 31/12/2017

Collections

Interest Income

Amortization

400,000 400,000 400,000

450,830 456,930 463,762

50,830 56,930 63,762

Question No. 4 Carrying Amount (see above amortization table) Less: *Present value of expected cash flows Loan Impairment

74

3,864,680 3,201,620 663,060

Carrying amount 3,756,920 3,807,750 3,864,680 3,928,442


*Computation of present value of expected cash flows Date Cash flow PV factor at 12% Present value 12/31/2017 1,800,000 0.8929 1,607,220 12/31/2018 2,000,000 0.7972 1,594,400 3,201,620 Question No. 5 Date 12/31/2016 12/31/2017 12/31/2018

Collections

Interest Income

Amortization

1,800,000 2,000,000

384,194 214,298

1,415,806 1,785,814

SUMMARY OF ANSWERS: 1. B 2. C 3. B PROBLEM 10-32 Question No. 1 Annual Cash Date flows Dec. 31, 2015 P1,750,000 Dec. 31, 2016 2,000,000 Dec. 31, 2017 1,750,000 Total

4.

B

PV factor 0.9091 0.8264 0.7513

5.

Carrying value 3.201,620 1,785,814 -

B

Amount P 1,590,925 1,652,800 1,314,775 P 4,558,500

Question No. 2 Carrying amount of the loan Less: Present value of the loan Impairment loss

P 5,500,000 4,558,500 P 941,500

Question Nos. 3 to 5 Date 12/31/2014 12/31/2015 12/31/2016 12/31/2017

Payment

Interest Income

P1,750,000 2,000,000 1,750,000

P455,850 326,435 159,079

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

B

4.

75

Reduction to Principal

A

P1,294,150 1,673,565 1,590,785 5.

C

Carrying amount P4,558,500 3,264,350 1,590,785 -


PROBLEM 10-33 Question Nos. 1 to 4 Unadjusted balances 2) Sale return Cost of return Merchandise (30,000 x 80%) 3)Sales FOB shipping point not recorded as Sale Cost of mdse sold (40,000 x 80%) 4) Goods shipped FOB Destination recorded as sale Cost of goods (50,000 x 80%) 6) Doubtful accts exp Adjusted bal.

Accounts Receivable 300,000 (30,000)

Allow for DA 3,000

Mdse. Inventory 400,000

Net Sales 1,000,000 (30,000)

24,000

40,000

Cost of Sales 800,000

(24,000)

40,000 (32,000)

(50,000)

32,000

(50,000) 40,000

260,000

(12,000) 15,000

432,000

Question No. 5 Accounts receivable Less: Allowance for doubtful accounts Net realizable value

P 260,000 ( 15,000) P245,000


B

4.

5.

(40,000) 960,000

768,000

C

PROBLEM 10-34 Question No. 1 Classification

Balance

1-60 days 61-120 days 121-180 days 181-360 days More than one year Totals

P 1,000,000 400,000 300,000 200,000 60,000 P 1,960,000

Estimated Percentage Amount 1% P 10,000 5% 20,000 10% 30,000 25% 50,000 80% 48,000 P 158,000

Question No. 2 Accounts receivable, adjusted (see no. 1) Less: Allowance for doubtful accounts, end (see no. 1) Net realizable value

76

P 1,960,000 158,000 P1,802,000


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

P 180,000 188,000 (P 8,000)

*Adjusted doubtful account expense Allowance for Doubtful accounts Write off (100,000+40,000) Balance end (required)

140,000 158,000

90,000 20,00 188,000

Total

298,000

298,000

Question No. 4 Total carrying value Less: **Present value of the loan Impairment loss *Computation of present value Annual Cash flow PV factor P1,000,000 1.00 1,000,000 0.93 1,000,000 0.86 Total Present value of the loan

Beg. Balance Recoveries Doubtful account expense

P3,000,000 2,790,000 P 210,000 Total P 1,000,000 930,000 860,000 P 2,790,000

Question No. 5 Date 01/01/2016 12/31/2016 12/31/2017

Collections

Interest Income

Amortizatio n

1,000,000 1,000,000

143,200

1,000,000 856,800

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

4.

B

5.

Carrying amount 2,790,000 1,790,000 933,200

B

PROBLEM 10-35 Question Nos. 1 to 4 Accounts receivable Unadjusted bal. 200,000 1 (14,800) 3 (47,400) 4 (30,000)

Merchandise Inventory 300,000 32,600

77

Net Sales 1,000,000 (47,400) (90,000)

Cost of Sales 600,000 (32,600)


5 6 7

(8,000) (36,000) (1,200) 62,600

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

(8,000) (36,000) (1,200) 817,400

24,000 356,600

Debit 14,800

Accounts receivable – D Accounts receivable – C

32,400

E

Sales Accounts receivable

47,400

Merchandise inventory Cost of sales

32,600

Sales Accounts receivable Customers’ deposit on orders

90,000


*8,000


36,000

Merchandise inventory Cost of sales

24,000

I

Credit 14,800

C

H

543,400

P 20,000 200 100

Question No. 6 Item Accounts B Accounts payable Accounts receivable

F

(24,000)

32,400 47,400 32,600 30,000 60,000 8,000 36,000

Sales returns and allowances 1,200 Accounts receivable *Computation of overstatement of sales for item H Original bill (P200 x 100) P 20,000 Per audit: (P120 x 100) 12,000 Overstatement P 8,000

24,000

J

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

4.

B

78

5.

B

1,200


PROBLEM 10-36 Question No. 1 Accounts receivable, unadjusted balance Per subsidiary ledger Note receivable included in the AR Factored Accounts receivable Sales FOB shipping point Adjusted AR balance

P1,660,000 (200,000) (160,000) 100,000 P1,400,000

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

P 100,000 151,000 P 251,000 28,000 P 223,000

Question No. 3 Unadjusted Net Sales Add: Sales, FOB shipping point Total Sales Multiply by: rate Doubtful accounts

P15,000,000 100,000 P 15,100,000 1% P 151,000

Question No. 4 No effect. The audit adjustments did not result to any changes to inventory account. Question No. 5 Sales, FOB shipping point SUMMARY OF ANSWERS: 1. D 2. A 3. D

P 100,000 4.

D

PROBLEM 10-37 Question No. 1 Accounts receivable factored Less: Service charge (400,000 x 5%) Receivable from factor (400,000 x 20%) Customers’ credit balance

5.

A

P 400,000 20,000 80,000

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

79

100,000 P300,000 P 300,000 18,000 318,000 11,925 P 306,075


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

318,000 12,000 P 330,000

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

480,000 30,000 P 450,000

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

330,000 6,600 P 336,600

Question No. 6 Accounts receivable-unassigned (2,000,000-3000,000-400,000-600,000) Add: Accounts receivable assigned Total Less: Less: Allowance for doubtful accounts (1,300,000 x 5%) Net realizable value

P 700,000 600,000 1,300,000 65,000 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 portion Note receivable from sale of plant (due beyond 12 months) Note receivable from officer Note receivable from Never Quit Co. (826,000 + 61,950) Note receivable from Persistent Co. (2,800,000 – 603,320) Total noncurrent receivables (C) Amortization table – Persistent Company Interest Date Collections Income 06/01/2016 06/01/2016 1,200,000 06/01/2017 883,320 280,000

80

Amortizatio n 1,200,000 603,320

2,500,000 2,000,000 887,950 2,196,680 7,584,630

Carrying amount 4,000,000 2,800,000 2,196,680


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

2,500,000 603,320 3,103,320

Question No. 3 Accrued interest receivable Accrued interest receivable – note receivable from sale of plant (5,000,000 x 9% x 8/12) Accrued interest from sale of land (2,800,000 x 10% x 6/12) Total accrued interest (C) Question No. 4 Interest income Interest income from sale of plant [(7,500,000 x 9% x 4/12) + (5,000,000 x 9% x 8/12)] Interest income from officer (2,000,000 x 8%) Interest income from Never Quit Co. (826,000 x 10% x 9/12) Interest income from Persistent Co. [(4,000,000 – 1,200,000) x 10% x 6/12)] Total interest income (C) Question No. 5 Present value of future cash flows (1M x .826) Less: Carrying amount of equipment Gain on sale of equipment SP (Cash price equivalent) Less: Carrying amount of land Gain on sale of land Total gain

(D)

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

4.

300,000 140,000 440,000

525,000 160,000 61,950 140,000 886,950

826,000 380,000 446,000 4,000,000 3,000,000 1,000,000 1,446,000

C

5.

D

PROBLEM 10-39 Question Nos. 1 to 3 Total Unadjusted Balance, 12/31/2016 Adjustments: Write Off Unrecorded sale NSF Check In transit shipment –

60 days and below

61 to 90 days

1,000,000

500,000

1,900,000 (40,000) 50,000 20,000 (45,000)

Over 90 days 400,000 (40,000) 50,000

20,000 (45,000)

81


FOB Destination Consignment (45,000) Erroneous unit price (7,500) Adjusted balance, 12/31/2016 1,832,500 Percentage of Uncollectibility Required allowance, 12/31/2016 108,825

(45,000) (7,500) 930,000 4%

492,500 5%

410,000 10%

37,200

24,625

41,000

Question No. 4 Allowance for Doubtful accounts Write off Balance end (required)

40,000 102,825

100,000 42,825

Total

142,825

142,825

Item 1

Beg. Balance Recoveries Doubtful account expense (squeeze)

Accounts Allowance for bad debts Accounts receivable

Debit 40,000

Accounts receivable Sales

50,000

3

Accounts receivable Cash in bank

20,000

4


45,000


45,000


7,500

2

5 6

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

Credit 40,000 50,000 20,000 45,000 45,000 7,500

4.

D

PROBLEM 10-40 Question Nos. 1 and 3 Adjusting entries for Accounts receivable Item Accounts 1 Accounts receivable Allowance for doubtful accounts

82

5.

C

Debit 20,000

Credit 20,000


2 3 4

Sales discount Accounts receivable

16,000 16,000

Accounts receivable Allowance for doubtful accounts

120,000

Accounts receivable Allowance for doubtful accounts

30,000

Miscellaneous income Accounts receivable

30,000

120,000 30,000 30,000

Accounts receivable Beg. Balance (20,000+200,000) Sales Recoveries

220,000

2,720,000

4,000,000 30,000

30,00 *1,500,000

Total

4,250,000

4,250,000

*Collections from customers excluding recoveries Collections without discount Add: Collections with discount Cash discount availed (784,000/98% x 2%) Total collections excluding recoveries

Balance end Recoveries Collections, gross of discount

700,000 784,000 16,000 P 1,500,000

Allowance for Doubtful accounts Balance end

170,000

20,000 30,000 120,000

Total

170,000

170,000

Accounts receivable Less: Allowance for bad debts Net realizable value

2,720,000 170,000 P 2,550,000

Question Nos. 2, 4 and 5 Adjusting entries for Loans receivable Item Accounts Debit 1 Loan Receivable 400,000 Interest income 2

Beg. Balance Recoveries Doubtful account expense

Unearned interest income Interest income

Credit 400,000

45,382 45,382

83


Principal Direct origination cost incurred Direct origination fees received Initial carrying amount

4,000,000 11,520 (300,000) 3,711,520

Amortization table at 12% Effective Rate Interest Date Collections Income 01/01/2015 12/31/2015 400,000 445,382 12/31/2016 400,000 450,828 12/31/2017 400,000 456,928 12/31/2018 400,000 463,759 12/31/2019 400,000 471,410 SUMMARY OF ANSWERS: 1. B 2. C 3. D

4.

D

Amortization 45,382 50,828 56,928 63,759 71,583 5.

Carrying amount 3,711,520 3,756,902 3,807,731 3,864,658 3,928,417 4,000,000

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. 1 Unrecorded gain on sale of machinery – 2015 (see below) Unrecorded interest income – receivable from sale of machinery (240,183 x 12%) Unrecorded accrued interest – receivable from sale of plant (1,500,000 x 12% x 9/12) Net adjustment to R/E – 01/01/16 (B)

135,000 254,005

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

200,000 240,183 440,183 350,000 90,183

Amortization table (receivable from sale of machinery): Interest Date Collections Income Amortization 01/01/2015 12/31/2015 100,000 28,822 71,178 12/31/2016 100,000 20,281 79,719 12/31/2017 100,000 10,714 89,286

84

90,183 28,822

Carrying amount 240,183 169,005 89,286 -


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

20,281 135,000 12,806 168,087

Question No. 3 Current portion of note receivable from: Sale of machinery (see amortization table above) Sale of plant Total current portion (B)

89,286 500,000 589,286

Question No. 4 Non-current portion of note receivable from: Sale of plant Sale of equipment (170,750 + 12,806) Total non-current portion (D)

500,000 183,556 683,556

Question No. 5 Interest income from sale of machine Interest income from sale of plant (180,000 – 135,000) Interest income from sale of equipment Net overstatement of income (E)

20,281 (45,000) 12,806 (11,912)

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

4.

D

85

5.

E

Chapter 12: Inventories

CHAPTER 12: INVENTORIES PROBLEM 12-1 Cost of Purchase Purchase price based on vendors’ invoices Brokerage commission paid to agents for arranging imports Import duties Freight and insurance on purchases Other handling costs relating to imports Total cost of purchase (B)

1,250,000 50,000 100,000 250,000 25,000 P1,675,000

Note that the trade discount was already deducted in arriving at the vendor’s invoice. PROBLEM 12-2 Inventoriable Cost Materials Irrecoverable purchase taxes Labor Variable production overhead Fixed production costs Cartage in Total

(C)

₱ 350,000 30,000 120,000 50,000 40,000 8,000 ₱598,000

PROBLEM 12-3 Rebates Question No. 1 Invoice price (no VAT is charged on these goods) Less: Rebate offered to the entity by the supplier Inventoriable cost (B)

₱ 850,000 10,000 ₱ 840,000

Question No. 2 Inventoriable cost

₱ 850,000

(C)

PROBLEM 12-4 FREIGHT TERMS & FOREIGN EXCHANGE Question No. 1 Free on Board Cost of inventory ($100,000 x ₱45) ForEx loss (₱46.875 - ₱45) x 100,000

(A)

₱4,500,000 187,500

Question No. 2 Cost, Insurance and Freight Cost of inventory ($100,000 x ₱45.625) ForEx loss (₱46.875 - ₱45.625) x 100,000 (D)

₱4,562,500 125,000

86


PROBLEM 12-5 MANUFACTURING COST Question No. 1 Variable cost: Direct labor (₱3 x 3 DLH x 100,000 units) Direct materials (₱2 excluding VAT x 100,000 units) Fixed Cost (₱100,000 / 100,000 normal capacity) x 100,000 actual Total cost (C)

₱ 900,000 200,000 100,000 ₱1,200,000

Question No. 2 Variable cost: Direct labor (₱3 x 3 DLH x 120,000 units) Direct materials (₱2 excluding VAT x 120,000 units) Fixed Cost (₱100,000 / 120,000 actual capacity) x 100,000 actual Total cost (E)

₱1,080,000 200,000 100,000 ₱1,420,000

Question No. 3 Variable cost: Direct labor (₱3 x 3 DLH x 80,000 units) Direct materials (₱2 excluding VAT x 80,000 units) Fixed Cost (₱100,000 / 100,000 normal capacity) x 80,000 actual Total cost (E)

₱ 720,000 160,000 80,000 ₱ 960,000

PROBLEM 12-6 Items to be Included in the Inventory 1 Items in the warehouse during the count 2 Items out on consignment at another company's store Items purchased FOB shipping point that are in transit at 4 December 31 5 Freight charges on goods purchased above Items sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory. Total cost of 7 merchandise is Items sold FOB destination that are in transit at December 10 31, at cost 14 Items currently being used for window display 15 Items on counter for sale 17 Items included in the count, damaged and unsalable Items in receiving dept., returned by customer, in good 18 condition (not included in the count) 19 Merchandise inventories out on approval, at cost Finished special article goods, made to order (included in 20 the count) Total (A)

87

P1,090,000 70,000 500,000 13,000

200,000 75,000 100,000 400,000 (150,000) 50,000 100,000 (78,000) P2,370,000


The following items would not be reported as inventory: 3 Cost of goods sold in the income statement 6 Not reported in the financial statements 8 Cost of goods sold in the income statement 9 Cost of goods sold in the income statement 11 Advertising exp. In the income statement 12 Not reported in the financial statements 13 Temporary investments in the current assets section of the balance sheet 16 Not reported in the financial statements 21 Office supplies in the current asset section of the balance sheet

40,000 300,000 30,000 50,000 10,000 100,000 125,000 360,000 40,000

PROBLEM 12-7 Accounts Payable Unadjusted balance Goods acquired in transit, FOB shipping point Goods lost in transit Adjusted Accounts Payable (A) The journal entry on item 2 would include the following: Purchases / Inventory Accounts Payable To record the purchase on December 20.

1,800,000 100,000 50,000 P1,950,000 50,000 50,000

Query: For F/S presentation on December 31, is the goods lost in transit be presented as part of inventory? Answer: No, since the inventories were lost in transit and it is improper to report 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 common carrier has yet to acknowledge the claim may include a: Loss on goods lost in transit (preferably presented as other expense and not as cost of goods sold) Inventory / Purchases

50,000 50,000

And on the next year (January 5), when the claim was filed and acknowledged by the common carrier, the journal entry will be: Claims from common carrier 50,000 Gain on reimbursement of lost inventory 50,000 To record the claim against common carrier on January 5.

88


PROBLEM 12-8 Consigned Goods Inventory shipped on consignment to Lomasoc Freight by Desiree to Lomasoc Total Inventoriable cost (D)

360,000 18,000 P 378,000

PROBLEM 12-9 Items to Be Included In the Inventory Note to the professor: Use the following guide questions in answering this question: 1. Was there a valid sale? 2. Was the sale recorded? 3. Were the inventories EXCLUDED in the count? Unadjusted balances 100 101 102 103 104 105 106 107 108 109 Adjusted balances

Guide Questions

Yes, Yes, Yes No, No, Yes No, Yes, Yes Yes, Yes, Yes Yes, No, Yes No, Yes, No No, No, No Yes, No, Yes No, Yes, No No, No, No

Sales 700,000 (1,800) 9,200 (6,500) 3,900 (8,600) 696,200 (A)

Inventories 150,000 2,000 1,200 153,200 (A)

SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 12-10 Gross method vs. Net method Date 01/02

CASE NO 1: Gross method Accounts Purchases (100,000 x [1-20%]) Accounts payable

Debit 80,000

80,000

01/12

Accounts payable Cash (80,000 x [1-98%]) Purchase discount

80,000

01/14

Accounts payable Cash

80,000

89

Credit

78,400 1,600 80,000


Date 01/02

01/12 01/14

CASE NO 2: Net method Accounts Purchases (100,000 x [1-20%] x [1-2%]) Accounts payable

Debit

Credit

78,400 78,400

Accounts payable Cash (80,000 x [1-98%])

78,400

Accounts payable Purchase discount lost Cash

78,400 1,600

78,400

80,000

SUMMARY OF ANSWERS: CASE NO. 1 1. B 2. C 3. D 4. A

CASE NO. 2 5. C 6. C 7. A 8. 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 2 Weighted average Weighted average = unit cost Weighted average unit cost

Total goods available for sale (in peso value) Total goods available for sale (in units) 1,105,000 85,000

=

Weighted average unit cost = P13/unit Inventory end (40,000 x 13) Cost of goods sold (20,000+5,000+21,000–1,000) x 13 Question Nos. 3 and 4 Moving average April 1 balance Apr. 2 Balance Apr. 4 Balance Apr. 10 Balance Apr. 15 Balance

Purchase Sale Purchase Sales

Units 20,000 30,000 50,000 (25,000) 25,000 15,000 40,000 (21,000) 19,000

90

Unit cost 10 12 11 11 11 14 12 12 12

= P520,000 = P585,000

Total cost 200,000 360,000 560,000 (280,000) 280,000 210,000 490,000 (257,250) 232,750

(C) (C)


Apr. 17 Apr. 28 Apr. 28

Sales return Balance Purchase Balance

1,000 20,000 20,000 40,000

12

12,250 245,000 335,000 580,000

16.75 15

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

= P580,000 = P525,000

(A) (A)

Question Nos. 5 and 6 FIFO April 1 balance Apr. 2 Apr. 4 (25,000 units sold) Balance from Apr. 2 Apr. 10 Apr. 15 (21,000 units sold) Balance from April 2 Balance from April 10 Apr. 17 Balance Balance from April 2 Balance from April 10 Apr. 28 Total

Units 20,000 30,000 (20,000) (5,000) 25,000 15,000 (21,000) 4,000 15,000 1,000

Purchase From Apr. 1 From Apr. 2 Purchase From Apr. 2 Sales return

Unit cost 10 12 10 12 12 14 12 12 14 12

5,000 15,000 20,000 40,000

Purchase Balance

Total cost 200,000 360,000 (200,000) (60,000) 300,000 210,000 (252,000) 48,000 210,000 12,000

12 14 17

60,000 210,000 335,000 605,000

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

(B) (B)

Question Nos. 7 and 8 Note that inventory and cost of goods sold under FIFO periodic and perpetual is the 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 3 Markers 120,000

Pens 94,400

Highlighters 150,000

Selling price Less: Estimated cost to complete Net realizable value

180,000 24,000 156,000

180,000 24,000 156,000

180,000 34,000 146,000

Lower of cost-or-NRV

120,000

94,400

146,000

Historical cost

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

91


PROBLEM 12-13 Lower of Cost or Net Realizable Value Question No. 1 Raw Materials Supply of steel (used for motorbikes) Cost More profitable (as is)

Write-down

Supply of aluminum (used for bicycles) Cost More profitable (completed product) Total write-down

₱ 40,000 25,000

₱ 15,000

₱ 60,000 50,000 (C)

10,000 ₱ 25,000

Question No. 2 Work-in-process Incomplete motorbikes Cost More profitable (completed product)

Write-down ₱ 30,000 25,000

Incomplete bicycles Cost More profitable (as is) Total write-down

₱ 50,000 60,000 (D)

Question No. 3 Finished goods Motorbikes Cost More profitable (completed product)

₱ 80,000 60,000

Bicycles Cost More profitable (completed product) Total write-down

₱ 80,000 110,000 (C)

Question No. 4 Adjusted COGS Cost of goods sold before write-down Add: Write-down Raw materials Work-in-process Finished goods Adjusted cost of goods sold

₱ 5,000

₱

5,000

Write-down ₱ 20,000

₱ 20,000 ₱450,000

(C)

25,000 5,000 20,000 ₱500,000

PROBLEM 12-14 Purchase Commitment Date 11/15 12/31

CASE NO. 1

Accounts

Debit

Credit

No entry Loss on purchase commitment (20,000 x [25-20]) Estimated liability for purchase commitment

92

100,000 100,000


03/15

Purchases (25,000 x 25) Estimated liability for purchase commitment Accounts payable/Cash Gain on purchase commitment

500,000 100,000 500,000 100,000

CASE NO. 2

Date 11/15

Accounts No entry

12/31

No entry

03/15

Purchases (25,000 x 25) Accounts payable/Cash

Debit

Credit

500,000 500,000

PROBLEM 12-15 Purchase Commitment Date 3/31 12/31 04/30

Accounts

Debit

Credit

No entry Loss on purchase commitment (1,200,000-1,000,000) Estimated liability for purchase commitment Purchases Estimated liability for purchase commitment Accounts payable/Cash Gain on purchase commitment

200,000 200,000 1,200,000 200,000 1,200,000 200,000

SUMMARY OF ANSWERS: 1. B 2. A PROBLEM 12-16 Purchase Commitment Gain on purchase commitment [50,000 x (55 - 40)] To record the actual purchase on March 31, 2016: Purchases (50,000 x 55) Estimated liability for purchase commitment Accounts payable/Cash Gain on purchase commitment

= P750,000 2,750,000 750,000

(A)

2,750,000 750,000

The gain to be recognized is limited to the loss on purchase commitment previously recorded. PROBLEM 12-17 Purchase Commitment Question No. 1 Remaining contract – minimum of 500 units each year 2016 (500 x 100) 2017 (500 x 100) Total

93

P 50,000 50,000 P 100,000


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

20,000 P 80,000

(C)

Question No. 2 A loss in inventory writedown should also be recognized on December 31, 2011 in 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 Less: Sales returns Net Sales excluding Sales discount Multiply by: Cost ratio (1-30%) Cost of Goods sold

3,400,000 (30,000) 3,370,000 70% 2,359,000

Inventory, January 1 Add: Net Purchases Purchases Add: Freight-in Less: Purchase returns Total Goods available for sale Less: Cost of goods sold Merchandise inventory that should be on hand Less: Actual merchandise inventory on hand Cost of Missing inventory

650,000 2,300,000 60,000 (80,000)

(A)

2,280,000 2,930,000 (2,359,000) 571,000 (420,000) 151,000

PROBLEM 12-19 Inventory Estimation - Gross Profit Rate Method Sales Divide by: Sales ratio Cost of Sales

CASE NO. 1 1,552,000 125.00% 1,241,600

Inventory, January 1 Purchases, January 1 through April 19 Total goods available for sale Less: Cost of sales Cost of Missing inventory Sales Multiply by: Cost ratio Cost of Sales

160,000 1,120,000 1,280,000 1,241,600 P 38,400

CASE NO. 2 1,552,000 75% 1,164,000

94

(A)


Inventory, January 1 Purchases, January 1 through April 19 Total goods available for sale Less: Cost of sales Cost of Missing inventory

160,000 1,120,000 1,280,000 1,164,000 P 116,000

(D)

SUMMARY OF ANSWERS: 1. A 2. D PROBLEM 12-20 Inventory Estimation: LCM - Retail Method Computation of cost ratio:

Cost 640,000 1,100,000 152,000 1,892,000

Inventory at January 1 Purchases Freight-in Net markups Totals

Retail 1,600,000 2,000,000 800,000 4,400,000

Cost ratio (1,892,000 / 4,400,000) = 43% Computation of Inventory end at retail Balance up to markups (see above computation) Less: Markdowns Sales Inventory end at retail Multiply: Cost ratio Inventory end at cost (C)

4,400,000 400,000 1,600,000 P2,400,000 43% P1,032,000

PROBLEM 12-21 Inventory Estimation: Average Method - Retail Method Computation of cost ratio: Cost 250,000 1,325,000 1,575,000

Inventory at January 1 Purchases Net markups Net markdowns Totals

Retail 375,000 1,750,000 200,000 (75,000) 2,250,000

Cost ratio (1,575,000 / 2,250,000) = 70% Computation of Inventory end at retail Balance up to markdowns (see above computation) Less: Sales Estimated normal shrinkage (1,500,000 x 5%) Estimated normal shoplifting losses

95

2,250,000 1,500,000 75,000 50,000


Inventory end at retail

P 625,000

Computation of Cost of goods sold Total goods available for sale at cost Less: Inventory end at cost (625,000 x 70%) Cost of Sales (B)

1,575,000 437,500 1,137,500

PROBLEM 12-22 Inventory Estimation: FIFO Method - Retail Method Computation of cost ratio: Cost 292,500 292,500

Purchases Net markups Net markdowns Totals

Retail 400,000 75,000 (25,000) 450,000

Cost ratio (292,500 / 450,000) = 65% Computation of Inventory end at retail Balance up to markdowns (see above computation) Add: Inventory beginning Less: Sales Inventory end at retail Multiply: Cost ratio Inventory end at cost (A)

450,000 100,000 375,000 P 175,000 65% P113,750

PROBLEM 12-23 Question No. 1 Direct materials inventory Beg. Balance DM purchased (squeeze)

9,000 70,000 (B)

7,000 72,000

Total

79,000

79,000

Balance end Direct materials used

Question No. 2 Total cost added to work in process (72,000+80,000+24,000) = P176,000 (C) Question No. 3 Applied overhead to job 3 (24,000/10,000 x 120 hours) = P288

96

(D)


Question No. 4 Work in process inventory Beg. Balance DM used Direct labor Factory overhead

17,000 72,000 80,000 24,000

31,000 162,000 (B)

Total

193,000

193,000

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

4.

Balance end Cost of goods manufacture (squeeze)

B

PROBLEM 12-24 Question No. 1 A EI over (P129-P119) x 4,000 B EI under C EI over Overstatement of ending inventory Question No. 2 D. Ending inventory understated

40,000 (70,000) 100,000 70,000

(C)

(140,000)

(B)

Question Nos. 3 and 4 A. B. C. D.

2015 1,000,000 (40,000) 70,000 (100,000)

Unadjusted balance EI over, NI over (P129-P119) x 4,000 EI under, NI under EI over, NI over EI under, NI under Adjusted balances

Question No. 5 Unadjusted net income (1,000,000+1,200,000) Less: Adjusted net income (930,000+1,410,000) Net adjustment to income-understated SUMMARY OF ANSWERS: 1. C 2. B 3. A

4.

C

97

5.

D

930,000 (A)

2016 1,200,000 40,000 (70,000) 100,000 140,000 1,410,000 (C)

2,200,000 2,340,000 (140,000)

(D)


PROBLEM 12-25 Question Nos. 1 and 2 Balances prior to adjustment Add: Goods in transit sold, FOB destination Less: unrecorded sale Less: unrecorded purchase returns Less: goods held on consignment Add: unrecorded purchase Add: Goods in transit purchased, FOB shipping point Add: Goods out on consignment Adjusted balances Question No. 3 Adjusted balances, per ledger Adjusted balances, physical count Inventory shortage

Ledger Balance P 314,800 3,200 ( 8,400) ( 6,000) 3,640P 307,240 (A)

Physical Count P 293,600 3,200 ( 8,800) 1,600 14,800 P 304,400 (C)

P 307,240 304,400 P 2,840

(B)

SUMMARY OF ANSWERS: 1. A 2. C 3. B PROBLEM 12-26

1 2 3 4 5 6 7 8

Unadjusted balances Parts held on consignment Parts sold included in the count Parts in transit to customers, FOB shipping pt. Parts on conditional sale Goods out on consignment Parts in transit purchased, FOB shipping pt. Mdse. Hold for shipping inst. excluded in the count Finished special article, incl. in the count and sale not rec. Adjusted balances

Accounts Payable P335,000 ( 18,000)

Sales P5,000,000

22,000 100,000

-

-

16,000

16,000

Inventory P 800,000 ( 18,000) ( 30,000)

160,000 ( 30,000) P1,020,000 (A)


98

P333,000 (A)

50,000 P5,050,000 (B)


PROBLEM 12-27 Note to the professor: Use the following guide questions in answering this question: 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 accounts Was there a valid sale? Was the sale recorded? Were the inventories EXCLUDED in the count? SOLUTION:

679 680 681 682

683 684 685 686 310 311 312 313 314 315 316 317 318

Unadjusted balances

Ending Inventory 550,000

Purch over, COS over, NI under EI over, COS under, NI over EI over, COS under, NI over Purch under, NI over No, No, No No, No, No Yes, Yes, Yes Sales over, NI over EI under, NI under (560 x 70%) Sales over, NI over EI under, NI under (31,940 x 70%) Sales over, NI over EI under, NI under (6,350 x 70%) Sales over, NI over No, No, No No, No, No No, No, No Net adjustment Adjusted balances


Sales 1,000,000

Purchases 600,000

AP 450,000

Net Income 120,000

(46,740)

(46,740)

(46,740)

(46,740)

46,740

(4,500)

1,060

392 22,358 4,445

(24,045) 525,955 (A)

4.

99

(4,500) (1,060)

(560)

(560)

(31,940)

392 (31,940)

(6,350)

22,358 (6,350)

(1,930)

4,445 (1,930)

(40,780) 959,220 (A)

A

1,060

5.

(45,680) 554,320 (A)

D

(45,680) 404,320 (A)

(19,145) 100,855 (D)


PROBLEM 12-28 Ending inventory Unadjusted balance A B C D E Adjusted

Accounts receivable

P220,000

Accounts payable

P104,000

(10,000) 50,000 14,000 ( 24,000) P 250,000 (A)

Sales

P138,000 (20,000) (10,000)

(64,000) (16,000) P24,000 (C)

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

4.

P108,000 (D)

D

5.

Net income

P1,010,000

P180,400 20,000

(64,000) (16,000)

(14,000) (2,000) ( 24,000) P160,400 (A)

P930,000 (D)

A

PROBLEM 12-29 Unadjusted balances A B C D E F G H I J Adjusted balances

Inventory

Accounts payable

Accounts Receivable

250,000 35,000 4,000 (25,000) 10,000 34,000 60,000

400,000 4,000 60,000

1,000,000 40,000 (30,000) (68,000) (10,000) -

4,000,000 40,000 (30,000) (68,000) (10,000) (90,000) -

2,500,000 4,000 60,000

600,000 35,000 15,000 10,000 (30,000) (34,000) (10,000) (90,000) -

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

Net Sales

5.

D

Net Purchases

6.

Net income

D

PROBLEM 12-30

Unadj. bal A B C D E

Inventory

Accounts payable

Accounts Receivable

Net Sales

Net Purchases

Net income

500,000

800,000

2,000,000

8,000,000

5,000,000

1,200,000 25,000

25,000 80,000 10,000 60,000

80,000

90,000 10,000 60,000 5,000

(5,000)

100


F G H Total

400,000

400,000 (50,000)

400,000 (100,000)

1,075,000 1. A

1,225,000 2. (E)

1,900,000 3. A

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

4.

B

(100,000) (60,000) 7,840,000 4. B

5.

5,490,000 5. A

A

6.

50,000 (100,000) (60,000) 1,190,000 6. (E)

E

PROBLEM 12-31 Unadj. bal a b c d e f g h Add'l 2

Inventory 560,000 (10,000) 880

Accounts Receivable 300,000

(27,500)

Sales 2,500,000

(2,000) *(1,200) (5,000) (20,000) (50,000) 30,000

(5,000) (20,000) (50,000) 30,000

40,000

40,000

(2,000)

523,380 291,800 2,493,000 1. A 2. D 3. D *Commission [(₱200 x 40) - ₱6,800 remittance] SUMMARY OF ANSWERS: 1. A 2. D 3. D

Purchases 1,100,000

4.

A

Cost of goods sold 840,000 10,000 (880) 27,500 (75,000) 801,620 5. C

(75,000) 1,025,000 4. A

5.

C

PROBLEM 12-32 Questions No. 1 to 5 2016 Purchases under, CGS under, NI over, RE over 2017 Purchases over, CGS over 2016 EI under, NI under, RE under 2017 BI under, CGS under Sales under Purchases under, CGS under EI under, CGS over

R/E 36,000

Sales

EI

A/P

CGS 36,000

(32,000) (32,000) (20,000) (24,000) (8,000)

101

(24,000) 8,000


Purchases under, CGS under EI under, CGS over Total

(4,000) 4,000

(20,000)

(4,000) (12,000)

(28,000)

(4,000) 4,000 (12,000)

Legend: BI - Beginning inventory EI - Ending inventory NI - Net Income CGS - Cost of goods sold RE - Retained earnings – 12/31/2016 or 01/01/2017 4,000 – overstated (4,000) – understated Note: The effect of errors on December 2016 and January 2017 has no effect on the ending balance of the accounts payable on December 31, 2017 since the payable 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. 1 Sales (475,000/80%) Less: Cost of sales Gross profit

P593,750 475,000 118,750

100% 80% 20%

Inventory (in units) Beg. Balance (60,000/P3)

20,000

25,000

Purchases

100,000

95,000

Total

120,000

120,000

Balance end (squeeze) or (125,000/5) Cost of sales (475,000/5)

Inventory (in peso amount) Beg. Balance (squeeze) Purchases

60,000 540,000

125,000 475,000

Total

600,000

600,000

Balance end (squeeze) Cost of sales

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

102

5.

B


PROBLEM 12-34 Question No. 1 The cumulative effect on change in accounting policy on January 1, 2016 or December 31, 2015 Retained Earnings is understatement of 100,000, which is the understatement of Ending Inventory on December 31, 2015. (B) Question No. 2 Net income – weighted average Beginning inventory under, CGS under, Net income over Ending inventory under, CGS over, Net income under Adjusted net income – FIFO

(B)

Question No. 3 Computation of units sold: Beginning inventory – units Add: Total purchases – units Total goods available for sale – units Less: Units sold (P6,400,000 / P80/unit) Ending inventory in units

P3,250,000 (150,000) 100,000 P3,200,000

10,000 100,000 110,000 80,000 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 68 680,000 From 3rd quarter purchases 20,000 66 1,320,000 Total 30,000 (B) 2,000,000 Question No. 4 Cost (refer to no. 3) Net realizable value [(P70 – P5) x 30,000] Loss on inventory write-down Question No. 5 Beginning inventory – FIFO Add: Net Purchases (P6,480,000 – 980,000) Total goods available for sale Less: Ending inventory at cost (see no. 3) Cost of goods sold at cost Add: Loss on inventory write-down (see no. 4) Cost of goods sold after inventory write-down SUMMARY OF ANSWERS: 1. B 2. B 3. B

4.

B

103

5.

A

(B)

2,000,000 1,950,000 50,000

(A)

500,000 5,500,000 6,100,000 2,000,000 4,100,000 50,000 4,150,000


PROBLEM 12-35 Question No. 1 Marked price including VAT Less: VAT (605,000/1.14 x 14%) Marked price excluding VAT Less: Trade discount (8% x 530,702) Less: Settlement discounts Total cost of Raw Materials Multiply by: Unused portion Raw materials, end (A)

605,000 74,298 530,702 42,456 4,200 484,086 20% 96,809

Question No. 2 Work in process beginning Raw materials used (484,086 x 80%) Salaries and wages (500,000 x 55%) Variable overheads (100,000 x 70%) Fixed manufacturing overhead (1,100 x P151.278)* Packing materials (685,000/7 x 9 x 75%) Less: Work in process ending Cost of goods manufactured (B)

0 387,269 275,000 70,000 166,406 660,536 0 1,559,179

Fixed manufacturing overhead Rent and insurance – factory (140,000 / 12) Rent – warehouse Other fixed manufacturing overhead (285,000 x 65%) Total actual FMO for January Divide by; Normal units per month (18,000 / 12) Fixed manufacturing overhead per unit Question No. 3 and 4 Beginning finished goods Add: Cost of goods manufactured Less: Finished goods ending (1,559,179 x 20%) Cost of goods sold (A)

(B)

Question No. 5 Cost Net realizable value (400,000 – 90,000 – 15,000) Loss on inventory write-down (B) SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

A

104

5.

11,667 30,000 185,250 226,917 1,500 151.278

0 1,559,179 311,836 1,247,343

311,836 295,000 16,436

B


PROBLEM 12-36 Question No. 1 (10,500 - 1,000 + 3,000) = 12,000 units No. of units 3,000 2,000 4,000 3,000 12,000

Unit cost 14 13 15 16

Total P 42,000 26,000 60,000 48,000 P 176,000

(A)

Question No. 2 (4,500+700+600)=5,800 units No. of units 1,800 1,800 1,200 1,000 5,800

Unit cost 19 20 21 22

Total P 34,200 36,000 25,200 22,000 P 117,400

Question No. 3 T-shirts: Net realizable value (12,000 x (P16-(10% x P16)) Jackets: (5,800 x (P22-(10%xP22) Lower of cost or NRV

(A)

NRV P172,800

Cost P176,000

Lower P 172,800

114,840 P287,640

117,400 P 293,400

114,840 P 287,640

Question No. 4 Total cost (see no. 3) Less: Lower of cost or NRV (see no. 3) Loss on inventory write-down

(B)

Question No. 5 Beginning inventories: T-shirts (9,000 x P11) P 99,000 Jackets (5,000 x P15) 75,000 Add:*Total purchases (299,500 + 183,900) Total goods available for sale Less: Merchandise inventory at cost Cost of sales before inventory write-down Add: Loss on inventory write-down Cost of sales after inventory write-down (B) *T-shirts 4,000 3,000 2,500

P12 12 13

P 48,000 36,000 32,500

105

P 293,400 287,640 P 5,760

P 174,000 483,400 P 657,400 293,400 P 364,000 5,760 P369,760


3,500 2,000 4,000 3,000 22,000 Jackets 900 1,100 1,500 2,000 1,800 1,200 1,000 9,500

14 13 15 16

49,000 26,000 60,000 48,000 P 299,500

P16 18 19 19 20 21 22

P 14,400 19,800 28,500 38,000 36,000 25,200 22,000 P 183,900


4.

B

5.

B

PROBLEM 12-37 This T-Account of Raw Materials will be the same under the three different cases: Raw Materials Beginning balance Net Purchases

600,000 2,200,000

1,200,000 1,600,000

Total

2,800,000

2,800,000

Question No. 1 GP Rate: Gross Profit Divide by: Sales Gross Profit Rate


CASE NO. 1 2013 2,000,000 1,700,000 0.15

2014 3,500,000 2,800,000 0.20

2015 4,000,000 3,000,000 0.25

2016 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 ratio then would be 70% (100% - 30%). Therefore, the cost of goods sold is computed as follows: Sales Multiply by: Cost Ratio Cost of goods sold

6,000,000 0.70 4,200,000

106

(B)


Question No. 2 Finished Goods Beginning balance Cost of goods manufactured

2,800,000

Total

6,200,000

3,400,000

2,000,000 4,200,000

Balance end Cost of goods sold

6,200,000

Work in Process Beginning balance Direct materials used Direct labor Factory overhead

2,000,000 1,600,000 1,600,000 800,000

2,600,000

Total

6,000,000

6,000,000

Computation of factory overhead: Direct labor cost Multiply by: Predetermined rate Factory overhead

3,400,000

Balance end Cost of goods manufactured

(A)

2015 1,000,000 4,000,000 0.25

2016

1,600,000 50% 800,000 CASE NO. 2:

Question No. 3 GP Rate: Gross Profit Divide by: Sales Gross Profit Rate

2013 340,000 2,000,000 0.17

2014 630,000 3,500,000 0.18

0.20

The GP rate in 2016 is computed as follows: 16% + 18% + 25% Gross Profit Rate = 3 = 20% The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goods sold is computed as follows: Sales Multiply by: Cost Ratio Cost of goods sold

6,000,000 0.80 4,800,000

(B)


2,800,000

Total

6,800,000

2,000,000 4,800,000

4,000,000

107

6,800,000




2,000,000 1,600,000 1,600,000 800,000

2,000,000

Total

6,000,000

6,000,000

4,000,000


(A)

CASE NO. 3: Question No. 5 The gross profit for 2016 is computed based on the overall gross profit for 2014 and 2015: 800,000 + 1,000,000 Gross Profit Rate = 3,500,000 + 4,000,000 1,800,000 = 7,500,000 Gross Profit Rate = 24% The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goods sold is computed as follows: Sales Multiply by: Cost Ratio Cost of goods sold

6,000,000 0.76 4,560,000

(A)


2,800,000

Total

6,560,000

2,000,000 4,560,000

3,760,000


6,560,000


2,000,000 1,600,000 1,600,000 800,000

2,240,000

Total

6,000,000

6,000,000


4.

3,760,000

A

108

5.

A


6.

A

(A)


PROBLEM 12-38 Question No. 1 Balance end Purchase ret. and allow. Purchase discounts Payments to supplier (squeeze) Total

Accounts payable 250,000 70,000 80,000 3,255,000

555,000 3,000,000 100,000

3,655,000

3,655,000

Beg. Balance Purchases Freight-in

Question No. 2 Direct materials inventory Beg. Balance Net purchases

200,000 2,950,000

320,000 2,830,000

Total

3,150,000

3,150,000

Purchases Add: Freight-in Gross Purchases Less: Purchase returns and allow Purchase discounts Net Purchases


3,000,000 100,000 3,100,000 70,000 80,000 2,950,000

Question No. 3 Work in process Beg. Balance Direct materials used Direct labor Factory overhead

250,000 2,950,000 900,000 675,000

280,000 4,375,000

Total

4,655,000

4,655,000

Question No. 4 Sales Less: Cost of sales (5,000,000/120%) Gross profit

P5,100,000 4,250,000 850,000


120% 100% 20%

Note: Do not deduct sales discount from the gross sales since sales discount does not constitute actual return of merchandise. Question No. 5 Finished goods Beg. Balance Cost of goods

400,000 4,375,000

109

525,000 4,250,000



manufactured Total

4,775,000

4,775,000

Estimated finished goods Less: Cost of goods out on consignment Salvage value Inventory fire loss

525,000 20,000 10,000 495,000

Question No. 6 Cost of goods sold (80% x P5,100,000)

= P4,080,000

Question No. 7 Sales (5,100,000-100,000) Less: Cost of sales (80% x P5,100,000) Gross profit

P5,000,000 4,080,000 1,000,000

100% 80% 20%

Finished goods Beg. Balance Cost of goods manufactured

400,000 4,375,000

695,000 4,080,000

Total

4,775,000

4,775,000

Estimated finished goods Less: Cost of goods out on consignment Salvage value Inventory fire loss SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

B


695,000 20,000 10,000 665,000

5.

B

6.

A

7.

A

PROBLEM 12-39 Question No. 1 Accounts payable, March 31 Less: Payment in April Total Accounts payable for April Purchases Total purchases Less: Payment in April Total (B)

2,370,000 300,000 2,070,000 600,000 200,000

Question No. 2 Purchases, as of March 31 Add: Purchases in April

4,200,000 600,000

110

400,000 2,470,000


Gross purchases Less: Purchase returns Net purchases Question No. 3

4,800,000 12,000 4,788,000

(B)

Beg. Balance

Accounts receivable 2,700,000 3,000,000

Sales on account Recoveries

1,488,000 0

938,000 250,000 0 4,188,000

4,188,000 Net Sales Sales as of March 31 April Sales Less: Sales return Net Sales

Bal. end Collections including recoveries Writeoff Sales returns

9,040,000 1,488,000 100,000 (C)

Question No. 4 Net Sales Multiply by: Cost ratio Cost of Sales

10,428,000 60% 6,256,800

(C)

Cost of Sales Divide by: Gross Profit

1,388,000 10,428,000

9,000,000 9,000,000 50.000%

10,500,000 4,500,000 30.000%

Average gross profit = (50%+30%)/2 = 40% Cost ratio = 100% - 40% = 60% Question No. 5 Estimated inventory Less: Shipment in transit Undamaged goods at cost Salvage value Inventory fire loss SUMMARY OF ANSWERS: 1. B 2. B 3. C

4.

3,031,200 40,000 120,000 25,000 2,846,200

(C)

C

5.

111

C


PROBLEM 12-40 Questions No. 1 and 2

Purchases ending 11 mos 12 mos 1,350,000 1,600,000 15,000 (2,000) (3,000) (4,000) (4,000) (11,000) 1,348,000 1,593,000 1. (D) 2. (D)

Unadjusted balance Shipment in Nov. included in December purchases Unsalable shipments received Deposits in October shipped February Deposits made vendor in November Adjusted balance

Question No. 3 Beginning inventory – January 1, 2015 Add: Purchases for 11 months (see No. 1) Less: Ending inventory – Nov. 30, 2015 (180,00011,000 + 10,000) Cost of sales

175,000 1,348,000 179,000 1,344,000

(A)

1,920,000 1,680,000 240,000 20,000 220,000 80% 176,000 20,000 196,000

(A)

179,000 245,000 196,000 228,000

(A)

Cost ratio (2,688,000 / 3,360,000) = 80% Question No. 4 Sales ending December 31, 2015 Less: Sales ending Nov. 30, 2015 (1.7M-20,000) Sales – December 2015 Less: Sales at cost Sales in December 2015 made at a profit Multiply: Cost ratio (2,688,000 / 3,360,000) Cost of sales made at profit Add: Cost of sales made at cost Total Cost of Sales -December Question No. 5 Beginning inventory – Nov. 30, 2015 Add: Purchases for December (1,593,000 – 1,348,000) Less: Cost of Sales – December Ending inventory – December 31, 2015 SUMMARY OF ANSWERS: 1. D 2. D 3. A

4.

A

112

5.

A


PROBLEM 12-41 Inventory, Jan 1 Purchases Purchase returns Purchase discounts Purchase allowance Freight-in Departmental Transfer-In Departmental Transfer-Out Totals Basis of computation of cost ratios Totals Markups Markup cancellations Basis of computation (conservative) Markdown Markdown cancellations Basis of computation (average)

Cost 300,000 6,000,000 (400,000) (150,000) (50,000) 20,000 600,000 (560,000) 5,760,000

Retail 1,200,000 8,500,000 (800,000) 1,100,000 (1,334,000) 8,666,000

5,760,000

8,666,000 600,000 (50,000) 9,216,000 (316,000) 100,000 9,000,000

5,760,000 5,760,000

Cost ratios: Conservative Cost ratio Cost ratio

5,760,000 9,216,000 = 62,50% =

Average Cost ratio Cost ratio

5,760,000 9,000,000 = 64% =

FIFO Cost ratio Cost ratio

5,760,000 – 300,000 9,000,000 – 1,200,000 = 70% =

Estimated ending inventory @ retail – for all methods TGAS @ retail under average method 9,000,000 Sales (7,000,000) Sale returns 700,000 Normal Shrinkage (500,000) Estimated ending inventory @ retail 2,200,000

113


Question Nos. 1 to 6 Cost method Conservative (62.5%) FIFO (70%) Average (64%)

Ending inventory at cost (EI @ retail x cost ratio) P 1,375,000 1,540,000 1,408,000


4.

C

5.

C

Cost of goods sold (TGAS @cost – EI @cost) 4,385,000 4,220,000 4,352,000

6.

D

PROBLEM 12-42 Question No. 1 Unadjusted bal. Undelivered sales Valid Sales Sales FOB destination NSF check Collection by the bank Sales in 2015 recorded in 2016 DR No. 38740 Receivable ins. Co DR No. 38741 Sales in 2016 recorded in 2015 DR No. 38743 Adjusted balance (D)

Subsidiary Ledger P 760,000 60,000 ( ( ( P

50,000 60,000) 3,360 10,080) 19,200) 784,080

Question No. 2 Current: Unadjusted beginning Balance Add: Valid Sales in 2015 (60,000 + 3,360) Total Less: Receivable ins. Co (DR # 38741) Sales in 2016 recorded in 2015 (DR # 38743) Current Accounts Receivable balance

Amount

(

100,000) 50,000 ( 60,000) 3,360 ( 10,080) ( 19,200) P 784,080

97,500 63,360 160,860 10,080 19,200 131,580

Past Due: Adjusted Accounts Receivable balance (see no. 1) Less: Current Accounts Receivable balance Past due Accounts Receivable *or (662,500+50,000-60,000) Age classification

General Ledger P 1,020,000 ( 100,000)

784,080 131,580 *652,500

Percentage

Total

6 10

7,894.80 65,250.00 73,144.80

Current 131,580 Past due 652,500 Allowance for doubtful accounts

(A)

114


Question No. 3 Allowance for doubtful accounts, beginning Less: Accounts written off Less: Allowance for doubtful accounts, ending Doubtful accounts expense

7,000.00 73,144.80 66,144.80

(A)

Question No. 4 Unadjusted Merchandise Inventory, ending Add: Cost of merchandise sold of DR # 38743(19,200/120%) Doubtful accounts expense (B) Question No. 5 Unadjusted Net Sales balance Undelivered sales Sales FOB destination Sales in 2015 recorded in 2016 DR No. 38740 Sales in 2016 recorded in 2015 DR No. 38743 Adjusted balance SUMMARY OF ANSWERS: 1. D 2. A 3. A PROBLEM 12-43 Unadj. Bal. 1 2 3 4 5 6 7 8 9 10 Adj. Bal.

Cash

AR, net

150,000 (40,000) 50,000 65,000 -

228,000 28,000 (68,000) 40,000 (50,000) (26,000) (40,000)

225,000 1. D

112,000 2. A

4.

B

5.

Mdse. invty

316,000 16,000 332,000 P 3,000,000 100,000) 100,000) 3,360 ( 19,200) P 2,784,160

( ( (B)

B

Prepayments

Accounts payable

Notes payable

380,000 60,000 4,000 34,000 20,000 -

42,000 (8,500) -

220,000 60,000 4,000 65,000 -

250,000 -

498,000 3. D

33,500

349,000 4. D

250,000

115


Question No. 5 Cash Accounts receivable, net Merchandise inventory Prepayments Total current assets Accounts payable Notes payable Working capital SUMMARY OF ANSWERS: 1. D 2. A 3. D

225,000 112,000 498,000 33,500 868,500 349,000 250,000 269,500

(E)

4.

D

116

5.

E

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES PROBLEM 14-1 Financial Assets and Financial Liabilities FA NFA FL Share dividends payable Property dividends payable Cash and cash equivalents Accounts receivable 70,000 Allowance for bad debts 100,000 Investment in associate (10,000) Stock appreciation rights payable (SARs Payable) 45,000 Investment in equity instruments - 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 on receivables Income taxes payable SSS contributions payable Intangible assets Prepaid 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 Merchandise inventories Biological assets - 133,000 Accumulated depreciation - 120,000 Warranty obligations - (50,000) PHILHEALTH contributions payable -

117

NFL 18,500 5,000 9,000 5,000 16,000 8,000 13,000


Deferred tax liabilities Accumulated Profitsappropriated for plant expansion Accumulated Profitsunappropriated Issued redeemable preference shares (with mandatory redemption) Issued Preference shares capital

-

-

-

6,000

-

-

-

19,000

-

-

-

-

670,000

358,000

100,000 845,000

99,500

Legend: FA – Financial Asset NFA – Non-Financial Asset FL – Financial Liabilities NFL – Non-Financial Liabilities SHE: Shareholders equity SUMMARY OF ANSWERS: 1. D 2. C 3. D

4.

D

PROBLEM 14-2 Acquisition of Investment Journal entries are: 1) FVTPL 1/5/2016 Financial Asset at FVTPL Brokerage fee Commission Expense Cash 1/10/2016 2/14/2016 2) FVTOCI 1/5/2016 1/10/2016 2/14/2016

1,600,000 10,000 5,000 1,615,000

Dividend receivable Dividend income

32,000

Cash Dividend receivable

32,000

32,000 32,000

Financial Asset at FVTOCI Cash

1,615,000 1,615,000

Dividend receivable Dividend income

32,000


32,000

32,000 32,000

The difference between FVTPL and FVTOCI is the treatment of transaction cost.

118


PROBLEM 14-3 Basic Journal Entries- Acquisitions in Between Dates of Declaration and Record 1) Trading securities 1/5/2016 Financial Asset at FVTPL (Squeeze) Dividends receivable Brokerage expense Commission Expense Cash 2/14/2016 12/31/2016 12/31/2017

1,584,000 16,000 10,000 5,000 1,615,000


16,000

Unrealized Loss – PL Financial Asset at FVTPL

64,000

Financial Asset at FVTPL Unrealized gain – PL

400,000

16,000 64,000 400,000

2) Fair Value through Other Comprehensive Income securities 1/5/2016 FVTOCI securities 1,599,000 Dividend receivable 16,000 Cash 2/14/2016 12/31/2016 12/31/2017


16,000

Unrealized loss - equity FVTOCI securities

79,000

1,615,000 16,000 79,000

FVTOCI securities Unrealized loss – equity Unrealized gain – equity

400,000 79,000 321,000

PROBLEM 14-4 Derecognition of Financial Assets - Sale of Investment CASE NO. 1: FVTPL Question No. 1 Nil, since the above securities are FVTPL unrealized gain or loss is recognized in the profit or loss. (A) Question No. 2 Consideration received Less: Brokerage and commission Net Selling Price Less: Carrying value (800,000 x ½) Realized loss on sale – P&L

(B)

119

375,000 10,000 365,000 400,000 (35,000)


CASE NO. 2: FVTOCI Question No. 3 Fair value, 12/31/2015 Less: Cost Unrealized gain - P&L Question No. 4 Consideration received Less: Brokerage and commission Net Selling Price Less: Carrying value (800,000 x ½) Realized loss on sale – P&L Question No. 5 Journal entries for the sale are: 1) FVTPL 12/31/2015 FVTPL Unrealized gain-P&L 1/2/2016

2) FVTOCI 12/31/2015 1/2/2016

(B)

800,000 750,000 50,000

(B)

375,000 10,000 365,000 400,000 (35,000)

50,000

Cash Loss on sale FVPTL To record the sale

365,000 35,000

FVTOCI Unrealized gain-OCI

50,000

400,000

50,000 50,000

Cash Loss on sale (if any) FVTOCI To record the sale

365,000 35,000 400,000

Unrealized Gain (50,000 X ½) 25,000 Retained 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

120


PROBLEM 14-6 Sale: Trade Date vs. Settlement Date Accounting SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 14-7 Share Dividends 1.

Memo entry: Received 1,500 ordinary shares from Pulsate Company.

2.

Investment in Preference shares - FVTOCI Investment in Ordinary shares - FVTOCI Allocation:

Total Fair value 100,000 750,000 850,000

Pref. shares (1,000 x P100) Ordinary shares (15,000 x P50) Total

88,235 88,235 Fraction 10/85 75/85

Allocated cost 88,235 661,765 750,000

Share dividends is not regarded as an income., however different type of shares received from the shares held is allocated using the relative fair value. Comments on share dividends: Accounting treatment for share dividends is actually a gray area, no clear cut rules is provided under PFRS or other accounting standard setting body. However, the authors believe that share dividends will only be accounted as an increase in number of shares held and a decrease on the price per unit. PROBLEM 14-8 Cash Dividends Question No. 1 The dividend income to be recognized in 2016 is P60,000 (15,000 x P4). Question No. 2 December 1 Dividend Receivable (15,000 x P4) Dividend income December 15

No formal accounting entry

December 31

Cash Dividend Receivable

121

(B)

60,000 60,000 60,000 60,000


PROBLEM 14-9 Property Dividends Question No. 1 Property dividends are as income at fair value at date of declaration (500,000 x 15%) = P75,000. (B) Question No. 2 November 1 Dividend Receivable (500,000 x 15%) Dividend income December 31

No journal entry

February 15

Noncash Asset Dividend Receivable

75,000 75,000 75,000 75,000

PROBLEM 14-10 Cash Received in Lieu of Share dividends Question No. 1 Nil. The share dividend is not considered an income. Question No. 2 Net Selling Price (2,250 x P18) Less: Carrying amount of the investment sold (P172,500/(15,000+(15% x 15,000) x 2,250 Gain (or loss) on sale

(A) 40,500 22,500 18,000

(D)

Question No. 3 October 1 Memo entry October 31

Cash Gain on sale FA at FVTOCI

45,000

18,000 22,500

PROBLEM 14-11 Shares Received in Lieu of Cash Dividends Question No. 1 Shares received in lieu of cash dividends are in effect recorded at the fair value of shares received on date of payment. Since the date of declaration and date of payment is within the same period, the dividend income is computed as follows: (15,000/5 X P22) = P66,000 (C) Question No. 2 Journal entries are: October 1 Dividend Receivable (15,000 x P4) Dividend income October 31

FA at FVTOCI (15,000/5 x P22) Dividend receivable Dividend income

122

60,000 60,000 66,000

60,000 6,000


PROBLEM 14-12 Dividends Out Of Capital Questions No. 1 and 2 Cash (P100 x 15% x 10,000) Investment

150,000

Questions No. 3 and 4 Cash Loss on liquidation Investment

150,000 70,000

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

150,000

4.

220,000

C

PROBLEM 14-13 Stock Split and Special Assessment Question No. 1 Date 1/1 3/1 stock split Total (10,000 x 5/2) 11/1 Special assessment (P1.60 x 25,000) Total

Question No. 2 Fair value (P15 x 25,000) Less: Carrying value Unrealized gain-OCI

No. of shares 10,000 15,000 25,000

Cost per share P21

Total Cost P210,000

P8.40

P210,000

25,000 (D)

P10

40,000 250,000

P375,000 250,000 P125,000

Questions No. 3 and 4 Journal entries are: 1/1 Financial Asset at FVTOCI Cash 3/1

Received `5,000 shares as a result of 5 for 2 share split.

10/1

Financial Asset at FVTOCI Cash (P1.60 x 25,000)

12/31

Financial Asset at FVTOCI Unrealized gain – OCI [(P25 x 25,000) – P250,000]

123

(D)

210,000

60,000 125,000 (C)

(B) 210,000

60,000 125,000


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

4.

C

PROBLEM 14-14 Stock Right Question No. 1 Nil. The company will only make a memo entry to record the receipt of stock right on a financial asset at FVTPL. (A) Question No. 2 The stock right should be initially recorded at fair values as follows: (P20 x 10,000) = P200,000. (B) Question No. 3 The cost of the investment will only include the subscription price of P400,000 (5,000 x P80). (B) Question No. 4 The cost of the investment will include the subscription price of P400,000 and cost 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 securities June 15 Memo entry (Received 10,000 stock rights) July 15

FVTPL (P80 x 10,000/2) Cash

400,000

Fair Value Through Other Comprehensive Income June 15 Stock rights (P20 x 10,000) Unrealized gain - P/L

200,000

July 15

600,000

FVTOCI (P80 x 10,000/2)+ 200,000 Cash Stock rights

PROBLEM 14-15 Theoretical Value of Rights Question No. 1 When the stock is selling right-on

Value of one right

= =

P160 – P100 5+1 P10

Question No. 2 When the stock is selling ex-right

Value of one right

=

P160 – P100 5

124

400,000

200,000 400,000 200,000


=

P12

SUMMARY OF ANSWERS: 1. B 2. C PROBLEM 14-16 Dividend Income Cash dividend Shares in lieu of cash dividends (5,000 x P150) Total dividend income

1,500,000 750,000 2,250,000

(C)

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 share dividend is not regarded as an income. (A) PROBLEM 14-18 Exchange of One Financial Asset into Another Financial Asset Question No. 1 Fair value- Ordinary Shares (6,000 x P80) Less: Carrying value- Pref. Shares (P850,000/8,000 x 4,000) Gain on exchange (C) Question No. 2 Journal entry would be: Investment in Trading- Ordinary Shares (6,000 x P80) 480,000 Gain on exchange Investment in Trading- Pref. Shares (P800,000/8,000 x 4,000)

480,000 425,000 55,000

55,000 425,000

SUMMARY OF ANSWERS: 1. C 2. B PROBLEM 14-19 Exchange of a PPE for Financial Asset Question No. 1 Fair value of the financial asset Less: Carrying value of the land Gain on exchange

820,000 600,000 220,000

125

(B)


Question No. 2 Journal entries are: March 31 Financial asset at FVTOCI Land Gain on exchange (820,000-600,000)

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. 1 Fair value of the financial asset Less: Carrying value of the financial asset Gain on exchange Question No. 2 Journal entries are: March 31 Land (at fair value of the asset given up) FVTOCI Gain on exchange (650,000-600,000) Retained earnings Unrealized loss (625,000-600,000)

650,000 600,000 50,000

(B)

650,000 600,000 50,000 25,000 25,000

SUMMARY OF ANSWERS: 1. B 2. B PROBLEM 14-21 Reclassifications of Investments in Equity Securities Question No. 1 Not allowed. The only allowed reclassification is from Financial Asset at Amortized Cost (FAAC) to held for trading Financial Asset at Fair Value Through Profit or Loss debt securities (FVTPL), or vice versa. Therefore the securities remain as FVTPL. Since reclassification is not allowed, there is no reclassification gain or loss. (A) Question No. 2 Not allowed (see discussion on no. 1). Therefore the securities remain as FVTOCI. Since reclassification is not allowed, there is no reclassification gain or loss. (A)

126


PROBLEM 14-22 Trading Securities Question No. 1 (A) The cost of investment is P880,000. The brokerage fee and commission of P10,000 and P10,000 respectively is charged to expense since the investment acquired is a trading security. The investments are also acquired prior to the declaration of dividends on January 10, 2016 so they are not purchased dividend on. Question No. 2 Dividend income (P2 x 6,000 + P16,000) = P28,000

(A)

Question No. 3 Selling price Less: Commission and taxes Net selling price Less: Carrying value [2,500x(P90,000/6,000)] Gain on sale

(C)

Question No. 4 EDA Corp. shares [P50 – (P30,000/1,000)] DJOA, Inc. [P15 – (P90,000/6,000)] RVFE, Co. [P45 – (P80,000/2,000)] ARP, Co. [P100 – (P880,000/8,000)] Loss chargeable to income statement

x 1,000 x 3,500 x 2,000 x 8,000 (B)

Question No. 5 EDA Corporation shares P50 x DJOA, Inc. P15 x RVFE, Co. P45 x ARP, Co. P100 x Total balance of financial asset at profit or loss

1,000 3,500 2,000 8,000 (A)

P50,000 5,000 45,000 37,500 P7,500 = = = =

= = = =

P20,000 10,000 ( 80,000) (P50,000) P50,000 52,500 90,000 800,000 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. 1 1/1/2016 Book Value Brokerage fee Commission Dividends receivable Cost of FVTOCI

P (

127

P

880,000 10,000 10,000 16,000) 884,000

(C)


Question No. 2 Dividend income (P2 x 6,000) = P12,000 (D) Question No. 3 Proceeds (P35 x 500) P Carrying value (P500 x (P88,000/(2,000 x 110%)) ( Loss on sale P

17,500 20,000) (2,500)

Net Proceeds (P40,000 – P5,000) Carrying value (2,500 x (P90,000/6,000)) Dividends on stocks sold (P2 x 2,500) Loss on sale

P

35,000 37,500) 5,000)* (7,500)

P

(10,000) (D)

( (

Total loss on sale (P2,500 + P7,500)

P

*This was sold dividend-on. Question No. 4 March 31 June 15 Gain/(Loss) on Exchange

(65,000-50,000) (50,000-20,000) (A)

15,000 30,000 45,000

Question No. 5 EDA Corporation preference shares (500 x P50) P 25,000 DJOA, Inc. (3,500 x P15) 52,500 RVFE Co. ((2,000 x 110% - 500) x P45) 76,500 ARP Co. (8,000 x P100) 800,000 LCC (1,000 x 60) 60,000 Adjusted balance P 1,014,000 SUMMARY OF ANSWERS: 1. C 2. D 3. D

4.

A

5.

(D)

D

PROBLEM 14-24 Question No. 1 Stock rights (11,000 x P6) Question No. 2 Cash paid (P90 x (10,000/5)) Cost of stock rights used (P4 x 10,000) Total investment cost Question No. 3 Proceeds (P5.5 x 1,000) Cost of stock rights (P4 x 1,000) Gain on sale of stock rights

P

66,000

(D)

P

180,000 40,000 220,000

(B)

5,500 4,000 1,500

(C)

P P P

128


Question No. 4 Proceeds Cost of shares sold (P76 ** x 4,000) Gain on sale of stocks

P P

Question No. 5 Original investment cost Cost allocated to stock rights* Additional investment ** Sale of investment Adjusted cost of investment SUMMARY OF ANSWERS: 1. D 2. B 3. C

440,000 304,000 136,000

P 880,000 44,000) 220,000 ( 304,000) P 752,000 (

4.

D

5.

D

PROBLEM 14-25 Question No. 1 Cash paid (400K+20K) Less: dividends Correct cost

420,000 10,000 410,000

Question No. 2 Feb. 10 Nov. 2 (10,000+(11,000/5) x 1 Total dividend income

13,200 43,200

Question No. 4 Consideration received (2,000 x 70) Less: Dividends (2,000 x P1) Net Selling Price Less: Carrying value Gain on sale

10-Feb

(D)

30,000

Question No. 3 Fair value of new FA (10,000 x 40) Less: Carrying value (975,000/15K x 5K) Gain on conversion

Shares 10000 1,000

(D)

Carrying value 451,000 -

129

(C)

400,000 325,000 75,000

(C)

140,000 2,000 138,000 99,000 39,000

(C)

(D)


Total 1-May (11,000/5) Total 15-Nov Total

11,000

451,000

2,200 13,200 (2,000) 11,200

202,400 653,400 (99,000) 554,400

Cost of stocks on May 1 Subs. Price (11,000/5 x P62) Add cost of stock rights (6 x 11,000) Cost of stocks on May 1

10-Feb Total 1-May (11,000/5) Total 15-Nov Total

136,400 66,000 202,400

Shares 10000 1,000 11,000

Cost 550,000 550,000

2,200 13,200 (2,000) 11,200

202,400 752,400 (114,000) 638,400

Question No. 5 Gerrit-PS (70 x 10,000) -OS (45 x 10,000) Loesch (72 x 11,200) Barr (20 x 20,000)

Fair values 700,000 450,000 806,400 400,000 2,356,400

Cost 600,000 400,000 638,400 410,000 2,048,400

Difference (900,000/15K x 10K)

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

PROBLEM 14-26 Question No. 1 FVTOCI Portfolio – 12/31/2015 Coloma Company Soliman Villanueva Company Less: FVTOCI Portfolio – 01/01/2015 Coloma Company Soliman Villanueva Company

130

5.

A

3,070,000 2,737,500 1,871,000

7,678,500

3,050,000 2,725,000 1,875,000

7,650,000


Unrealized gain – SFP

(C)

Question No. 2 Fair value of shares Less: Carrying amount of Soliman portfolio Gain on exchange

28,500

2,797,500 2,737,500 60,000

(B)

Note that the carrying amount is equal to the fair value previous remeasurement date (12/31/2015). Question No. 3 Proceeds from sale of Aquino shares Less: Carrying amount of Aquino portfolio Loss on sale Question No. 4 FVTOCI Portfolio – 12/31/2016 Coloma Company Villanueva Company Less: FVTOCI Portfolio – 01/01/2015 Coloma Company Villanueva Company Unrealized gain – SFP (cumulative) SUMMARY OF ANSWERS: 1. C 2. B 3. B

4.

2,590,000 2,600,000 (10,000)

(B)

3,080,000 1,867,500

4,947,500

3,050,000 1,875,000 (C)

4,925,000 22,500

C

PROBLEM 14-27 Question No. 1 Adjusted balance (5,000 – 4,000) x P50 = P200,000 Question No. 2 Type of stocks # shares Ordinary 10,000 Preference 2,000 Total cost

Fair value P30 10

Total fair value P300,000 20,000 P320,000

(A) Allocated cost P234,375 15,625 P250,000

(B)

Question No. 3 Allocate part of the investment cost to the preference shares. Question No. 4 Proceeds (1,000 x P17) P Carrying amount [(P15,625/(10,000/5)) x 1,000)( Gain on sale P

131

17,000 7,812.50) 9,187.50

(C)


Question No. 5 Proceeds, exclusive of interest Carrying amount (250 x 1,000 x 110%) Gain on sale SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

(

P P

C

5.

280,000 275,000) 5,000

(A)

A

PROBLEM 14-28 Question No. 1 Net Selling price Less: Carrying value (740,000/40,000 x 5,000) Gain on sale

(D)

Question No. 2 Consideration received Less: Dividend income of the investment sold (6,000 x *P20 x 20%) Net Selling price Less: Carrying value (740,000/40,000 x 6,000) Gain on sale (D)

250,000 92,500 157,500

270,000 24,000 248,000 111,000 137,000

*The par value after 2 for 1 share split is equal to P40 x ½= P20 Question No. 3 6/1/2016 (35,000 x 4) 12/1/2016 (35,000 x 20% x P20) Total dividend income

(A)

Question Nos. 4 and 5 Fair value (29,000 x P43) Less: Cost (700,000/40,000 x 29,000) Unrealized gain SUMMARY OF ANSWERS: 1. D 2. D 3. A

4.

1,247,000 507,500 739,500

D

132

5.

D

140,000 140,000 280,000

4. (D) 5. (D)

Chapter 15: Investment in Debt Securities

CHAPTER 15: INVESTMENT IN DEBT SECURITIES PROBLEM 15-1 (Initial and Subsequent measurement, Derecognition and Reclassification of Trading Debt Securities) Question No. 1 Face value Multiply by: Nominal rate Multiply by: Months outstanding Interest Income (C)

5,000,000 12% 12/12 600,000

Question No. 2 Fair value of the bonds (5M X 104) Less: Carrying value Unrealized gain (or loss)-P&L (B)

5,200,000 5,379,079 (179,079)

Question No. 3 Net Selling Price (5M x ½ x 105) Less: Carrying value (5M x ½ x 104) Gain (or loss) on sale (B)

2,625,000 2,600,000 25,000

Question No. 4 Face value (5M x ½) Multiply by: Nominal rate Multiply by: Months outstanding Interest Income (B)

2,500,000 12% 12/12 300,000

Note that interest income is computed for the whole year even though the business model was changed on July 1, 2016 since reclassification date will be on the first day of the next reporting period (January 1, 2017). The investment therefore would be continued to be reported as held for trading on December 31, 2016. Question No. 5 Fair value of the bonds on the reclassification date, 1/1/17 (2.5M X 104) Less: Carrying value (2.5M X 102) Unrealized gain (or loss)-P&L (C) SUMMARY OF ANSWERS: 1. C 2. B 3. B

4.

B

133

2,600,000 2,550,000 50,000

5.

C


PROBLEM 15-2 (Initial and Subsequent measurement, Derecognition and Reclassification of FAAC Securities) Question No. 1 Face value 5,379,079 Multiply by: Nominal rate 10% Multiply by: Months outstanding 12/12 Interest Income (B) 537,908 The present value of the bonds is computed as follows: Present value of Principal (5,000,000 x 0.6209 ) Add: Present Value of interest payments (600,000 X 3.7908) Present value of the investment bonds

3,104,607 2,274,472 5,379,079

(Please carry all the decimal places in the computation) Amortization table (original): Interest Interest Date Collection Income 01/01/2015 12/31/2015 600,000 537,908 (C) 12/31/2016 600,000 531,699 12/31/2017 600,000 524,869 12/31/2018 600,000 517,355 12/31/2019 600,000 509,091

Premium Amortization 62,092 68,301 75,131 82,645 90,909

Present value 5,379,079 5,316,987 5,248,685 5,173,554 5,090,909 5,000,000

Question No. 2 Nil. No unrealized gain or loss is recognized if the financial asset is classified as financial asset at amortized cost. (A) Question No. 3 Net Selling Price (5M x ½ x 105) Less: Carrying value (see amortization table) (5,316,987 x ½) Gain (or loss) on sale (C) Question No. 4 Carrying value, 12/31/16 (5,316,987 x ½) Multiply by: Nominal rate Multiply by: Months outstanding Interest Income (A)

2,625,000 2,658,494 (33,494)

2,658,494 10% 12/12 265,849

Note that interest income is computed for the whole year even though the business model was changed on July 1, 2016 since reclassification date will be on the first day of the next reporting period (January 1, 2017). The investment therefore would be continued to be reported as Financial Assets at Amortized Cost on December 31, 2016.

134


Question No. 5 Fair value of the bonds on the reclassification date, 1/1/17 (2.5M X 104) Less: Carrying value (2,658,494 X 1.10300,000) Unrealized gain (or loss)-P&L (B) SUMMARY OF ANSWERS: 1. B 2. A 3. C

4.

A

2,600,000 2,624,343 (24,343)

5.

B

PROBLEM 15-3 Acquisition of FAAC Term Bonds on Interest Date Question No. 1 Present value of Principal (1200000 x 0.6355 ) Add: Present Value of interest payments (120000 x 3.0373 ) Present value of the investment bonds (C) Question No. 2 Amortization table: Interest Date Collection 01/01/2015 12/31/2015 120,000

Interest Income

Premium Amortization

(B) 135,249

15,249

762,600 364,476 1,127,076

Present value 1,127,076 1,142,325

PROBLEM 15-4 Acquisition of FAAC Term Bonds in Between Interest Dates Question No. 1 Present value of the investment bonds Add: Discount amortization Effective interest Nominal interest Present value of the investment bonds, April 1 Add Accrued interest Total Present value of the bonds Question No. 2 Amortization table: Interest Date Collection 01/01/2015 12/31/2015 200,000

1,878,460 56,354 50,000 (D)

Interest Income


225,415

25,415

Total interest income (P225,425 x 9/12) = P169,061

135

(B)

6,354 1,884,814 50,000 1,934,814

Present value 1,878,460 1,903,875


PROBLEM 15-5 Interpolation of Effective Interest Rate of FAAC - Term Bonds and Computation of Interest Income Purchase price Add: Transaction cost Initial carrying amount

P1,100,000 44,752 P1,144,752

Since there is transaction cost incurred, effective rate must be computed. The effective rate therefore is computed at 11.5% (refer to page 530 and 531 of the textbook 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 Interest Total Principal Collection Collection 450,000 180,000 630,000 450,000 135,000 585,000 450,000 90,000 540,000 450,000 45,000 495,000 Total Present Value of the serial bonds Question No. 2 Interest income (1,727,834 x 12%) = 207,340

Present Value Factor 0.8929 0.7972 0.7118 0.6355 (C)

Total Present Value 562,527 466,362 384,372 314,573 1,727,834

(B)

PROBLEM 15-7 Impairment of Financial Asset at Amortized Cost SOLUTION: Question No. 1 Carrying amount of the investment – 12/31/2015 Less: Present value of expected cash flows (get the present value computed using original effective rate) Impairment loss (B) Question No. 2 Interest income (3,188,800 x 12%) = 382,560

3,864,680 3,188,800 675,880

(D)

PROBLEM 15-8 Reversal of Impairment on Financial Asset at Amortized Cost Present Value of Principal (5,000,000 x 0.8929) Add: Present Value of interest payments (500,000 x 2 x 0.8929) Present value of the investment bonds

136

4,464,500 892,900 5,357,400


Present value expected cash flows, date of reversal Would have been present value had there been no impairment

5,357,400 4,910,521

Lower of the two above Less: Actual amortized cost (P3,986,000 x 1.12) Gain on reversal of impairment

4,910,521 4,464,320 446,201

(D)

COMPREHENSIVE PROBLEMS PROBLEM 15-9 Question No. 1 Cost of investment – Jan. 21(P2,000,000 x 102%) = P2,040,000 Question No. 2 Proceeds Less: Accrued interest (P1,000,000 x 9% x 3/12) Net Proceeds Less: Carrying amount (P2,000,000 x 102%) Gain on sale Question No. 3 Proceeds Less: Accrued interest (P400,000 x 9% x 5/12) Net proceeds Carrying amount (P400,000 x 102%) Loss on sale Question No. 4 Sold bonds: P1,000,000 x 9% x 38/360 P400,000 x 9% x 280/360 Outstanding bonds: P600,000 x 9% x 340/360 Total interest income

(A)

P1,060,000 22,500 1,037,500 1,020,000 P 17,500

(A)

P 419,000 15,000 404,000 408,000 ( 4,000)

P

(A)

Question No. 5 Carrying value – 12/31/2016 (P600,000 x 102%) = P612,000 The market value is equal to its cost. SUMMARY OF ANSWERS: 1. A 2. A 3. A

(A)

4.

A

5.

P

9,500 28,000 51,000 88,500

(A)

A

PROBLEM 15-10 Impairment and Reversal of Impairment Loss Note 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.

137




The present value of expected cash flows for the remaining period using 10% is ₱5,619,835 not ₱5,19,835.

Question No. 1 Present value of Principal (5,000,000 x 0.6209 ) Add: Present Value of interest payments (600,000 X 3.7908) Present value of the investment bonds (D)

3,104,607 2,274,472 5,379,079

(Please carry all the decimal places in the computation) Question No. 2 Amortization table (original): Interest Interest Date Collection Income 01/01/2015 12/31/2015 600,000 537,908 (C) 12/31/2016 600,000 531,699 12/31/2017 600,000 524,869 12/31/2018 600,000 517,355 12/31/2019 600,000 509,091

Premium Amortization 62,092 68,301 75,131 82,645 90,909

Present value 5,379,079 5,316,987 5,248,685 5,173,554 5,090,909 5,000,000

Question No. 3 Carrying amount of the investment 12/31/2016 (see table above) Less: Present value of expected cash flows Impairment loss (B)

5,248,685 3.756,574 1,492,111

Present value of Principal (5,000,000 x 0.7513 ) Add: PV of interest payments (No interest will be recovered) Present value of the investment bonds

3,756,574 3,756,574

Question No. 4 Interest income (P3,756,574 x 10%) = 375,657

(A)

The interest income was computed using the original effective rate and the impaired value as of 12/31/2016. Question No. 5 Present value expected cash flows, date of reversal Would have been present value had there been no impairment (see original amortization table)

5,619,835 5,173,554

Lower of the two above Less: Actual amortized cost (P3,756,574 x 1.10) Gain on reversal of impairment

(D)

5,173,554 4,132,231 1,041,322

Present value of Principal (5,000,000 x 0.8264 ) Add: Present value of interest payments (600,000 x 3 x 0.8264) Present value of the investment bonds

4,132,231 1,487,603 5,619,835

138



4.

A

5.

D

PROBLEM 15-11 Question No. 1 Proceeds Less: Carrying amount [(P432,000/24,000) x 12,000) Loss on sale (B) Question No. 2 Cost, 1/1/2015 Less: Amortized cost, 12/31/2015 Premium amortization Less: Nominal interest (5,000,000 x 12%) Interest Income

P 204,000 216,000 (12,000)

P5,311,400 5,242,540 68,860 600,000 531,140

Effective interest (P531,400/5,311,140) = 10% Interest income (P5,242,540 x 10%) = P524,254 (B) Question No. 3 2015 discount amortization (P1,903,150 – P1,881,000) Nominal interest (P2,000,000 x 13%) Effective interest Divide by: 1/1/2015 amortized cost Effective interest rate

P

22,500 260,000 P 282,500 P1,881,000 15%

2016 Interest Income = 12/31/2015 amortized cost x Effective interest rate = P1,903,150 x 15% = P285,472.50 (C) Question No. 4 Fair value, 1/1/2017 (2,000,000 x 101) Less: Amortized cost – 01/01/2017 Book value, 12/31/2015 P 1,903,150 Add: Discount amortization Nominal interest 260,000 Less: Effective interest 282,473 22,473 Gain on reclassification (C) Question No. 5 Trading securities: Panaghoy, Inc. (14,400 x P22) Lamentation, Inc. [(24,000 – 12,000) x P15] Total

139

P 316,800 180,000 P 496,800

P2,020,000

P

1,928,623 91,377


FVTOCI: Genesis bonds Exodus bonds Total

P 5,166,794 1,928,263 P 7,095,417

Genesis Bonds Date 01/01/2015 12/31/2015 12/31/2016

Interest Collection

Interest Income


600,000 600,000

531,140 524,254

68,860 75,746

Interest Collection

Interest Income


260,000 260,000

282,150 285,473

22,150 25,473

Present value 5,311,400 5,242,540 5,166,794

Exodus Bonds Date 01/01/2015 12/31/2015 12/31/2016

Present value 1,881,000 1,903,150 1,928,623

PROBLEM 15-12 Reclassification from FAAC to FVTPL Question No. 1 Present value of Principal (P5,000,000 x .621) Add: PV of interest payments (P5,000,000 x 12% x 3.791) Present value of the investment bonds – 01/01/2016 Amortization up to 7/1/2016 P5,379,600 x 10% 6/12 P 268,980 P5,000,000 x 12% 6/12 ( 300,000) Accrued interest up to 7/1/2016 (P5,000,000 x 12% 6/12 ) Purchase price – 7/1/2016 (C) Question No. 2 Interest income – 2016 (P5,379,600 x 10% x 6/12) = P268,980 Question No. 3 Fair value date of reclassification Less: Carrying amount 12/31/2017 or 01/01/2017 Loss on reclassification (B) Question No. 4 Dividend income (cash dividend) = P40,000

(A)

Question No. 5 Investment in Sta. Ana (20,000 x 110% x P40) = P880,000 (C)

140

3,105,000 2,274,600 5,379,600 (31,020) 300,000 5,648,580

(B) 5,121,400 5,249,316 (127,916)


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

4.

A

5.

C

PROBLEM 15-13 Investment in Associate - Change from Equity Method to Fair Value Method and Impairment of Financial Assets at Amortized Cost Question No. 1 Acquisition cost Share in the Net income in 2015 (1.7M x 25%) Share in the dividend (25% x 320,000) Understatement of depreciation (160,000/4 years) Balance end, 12/31/2015 (A) Understatement of Plant and equipment x Percent of interest Understatement of Net asset acquired

640,000 25% 160,000

Question No. 2 Fair value of investment, date of date of transfer (25,000 x P120) Less: Carrying value of investment - 12/31/2015 Unrealized gain – P&L (C) Question No. 3 and 4 (See Amortization table below): Interest Interest Date Collection Income 01/01/2015 12/31/2015 400,000 462,101 (B) 12/31/2016 400,000 468,311 (C) 12/31/2017 400,000 475,142

Discount Amortization 62,101 68,311 75,142

Question No. 5 Present value of the principal (5M x .751) Add: Present value of interest payments (only principal will be recovered) Total Present value of future cash inflows Less: Amortized cost - 12/31/2016(see amortization table) Impairment loss (C) SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

2,140,000 425,000 (80,000) (40,000) 2,445,000

C

141

5.

C

3,000,000 2,445,000 555,000

Present value 4,621,006 4,683,107 4,751,418 4,826,560 3,755,000 3,755,000 4,751,418 (996,418)

Chapter 16: Investment in Associate

CHAPTER 16: INVESTMENT IN ASSOCIATE PROBLEM 16-1 Investment securities and equity method investments compared Question No. 1 Cost of Investment Less: Book value of net asset acquired (P120M x 20%) Excess of cost over book value Less: Overvalued depreciable asset (P6M x 20%) Goodwill (A) Question No. 2 Dividends declared and paid Multiply by: Percentage of ownership Dividends Revenue

30,000,000 24,000,000 6,000,000 1,200,000 4,800,000

5,000,000 20% 1,000,000

(C)

Question No. 3 Share in net income (P8M x 20%) Less: Amortization of Undervalued valued asset (see below) Adjusted net investment income (A)

1,600,000 200,000 1,400,000

Amortization of Undervalued asset Depreciable Asset Divide by: Average remaining useful life Amortization of Undervalued valued asset

1,200,000 6 200,000

Question No. 4 Cost of Investment Add: Net investment income (see no. 3) Less: Dividends received (P1 x 1M shares) Carrying value – 12/31/2015

30,000,000 1,400,000 1,000,000 30,400,000

(B)

Question No. 5 Investment using Fair Value (₱32 x 1,000,000) = ₱32,000,000 SUMMARY OF ANSWERS: 1. A 2. C 3. A

4.

B

5.

(D)

D

PROBLEM 16-2 Question No. 1 Cost of Investment Less: Book value of net asset acquired (P10M x 30%) Excess of cost over book value

142

5,000,000 3,000,000 2,000,000


Over or (under)valued asset: Inventory [(P900,000 – P800,000) x 30%] Machinery [(P2,200,000 – P2,500,000) x 30%] Goodwill

(30,000) 90,000 2,060,000

(C)

Question No. 2 Share in net income (P2M x 30%) Less: Amortization of undervalued valued asset (see below) Add: amortization of overvalued asset Adjusted net investment income (A) Amortization of asset: Inventory

2016 (30,000)

2017

90,000 5 18,000

90,000 5 18,000

2016 2,000,000 30% 600,000 800,000 30% 240,000

2017 4,500,000 30% 1,350,000 1,600,000 30% 480,000

Machinery Divide by: Remaining life Amortization of overvalued machinery Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received Question No. 3 Cost of Investment Add: Net investment income (see no. 2) Less: Dividends received (P800,000 x 30%) Carrying value – 12/31/2016

600,000 30,000 18,000 588,000

(A)

5,000,000 588,000 240,000 5,348,000

Question No. 4 Share in net income (P4.5M x 30%) Add: Amortization of Overvalued valued asset (see no. 2) Adjusted net investment income (C)

1,350,000 18,000 1,368,000

Question No. 5 Carrying value – 01/01/2017 Add: Net investment income (see no. 4) Less: Dividends received (P1.6M x 30%) Carrying value – 12/31/2017

5,348,000 1,368,000 480,000 6,236,000

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

4.

(A)

C

143

5.

A


PROBLEM 16-3 Investment in Associate with Inventories, Machinery and Land - Land Was Subsequently Sold Question No. 1 Cost of Investment Less: Book value of net asset acquired (P12M x 20%) Excess of cost over book value Over or (under)valued asset Inventory ((P50,000) x 20%) Machinery ((P500,000) x 20%) Land (P300,000 x 20%) Goodwill (A)

5,000,000 2,400,000 2,600,000 (10,000) (100,000) 60,000 2,550,000

Amortization of Over (Under) valued asset Inventory

2016 (10,000)

2017

Machinery Divide by: Remaining life Amortization of Under (over) valued asset

(100,000) 10 (10,000)

(100,000) 10 (10,000)

-

60,000

2016 8,000,000 20% 1,600,000 2,000,000 20% 400,000

2017 10,000,000 20% 2,000,000 3,000,000 20% 600,000

Land Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received

Question No. 2 Share in net income (P8M x 20%) Less: Amortization of Undervalued valued asset (see table above) Adjusted net investment income (A) Question No. 3 Cost of Investment Add: Net investment income (see no. 2) Less: Dividends received (P2M x 20%) Carrying value – 12/31/2016

(A)

Question No. 4 Share in net income (P10M x 20%) Less: Amortization of Undervalued valued asset (see table above) Add: amortization of overvalued asset

144

1,600,000 20,000 1,580,000

6,000,000 1,580,000 400,000 6,180,000

2,000,000 10,000 60,000


Adjusted net investment income Question No. 5 Carrying value – 01/01/2017 Add: Net investment income (see no. 4) Less: Dividends received (P3M x 20%) Carrying value – 12/31/2017 SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

C

5.

(C)

2,050,000

(A)

6,180,000 2,050,000 600,000 7,630,000

A

PROBLEM 16-4 Associate with Outstanding Cumulative Preference Shares When an investee has outstanding cumulative preference share capital, an investor should compute its share of earnings after deducting the investee’s preference dividends, whether or not such dividends are declared. Net income Less: Preference dividend (10% x ₱1,000,000) Net income to ordinary shares

600,000 ( 100,000) 500,000

Share in net income – ordinary shares (80% x ₱500,000)

(A)

400,000

PROBLEM 16-5 Associate with Outstanding Preference Shares CASE NO. 1 Question No. 1 Net income P2,500,000 Less: Total preference dividends (₱3,000,000 x 10%) 300,000 Net income to ordinary shares P2,200,000 Multiply by: Percentage of ownership 30% Share in the net income of associate 660,000 Less: Amortization of undervalued asset (₱1,000,000/8) 125,000 Net investment income (B) 535,000 Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less: Dividends received Carrying value – 12/31/2016 CASE NO. 2 Question No. 1 Net income Less: Total actual preference dividends declared Net income to ordinary shares

145

(B)

6,000,000 535,000 6,535,000

P2,500,000 450,000 P2,050,000


Multiply by: Percentage of ownership Share in the net income of associate Less: Amortization of undervalued asset (1,000,000/8) Net investment income (A) Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less: Dividends received Carrying value – 12/31/2016

(A)

CASE NO. 3 Question No. 1 Net income Multiply by: Percentage of ownership Share in the net income of associate Less: Amortization of undervalued asset (₱1,000,000/8) Net investment income (C)

30% 615,000 125,000 490,000

6,000,000 490,000 6,490,000

P2,500,000 30% 750,000 125,000 625,000

Although the answer should be ₱400,000, the next best possible answer is ₱500,000. Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less: Dividends received Carrying value – 12/31/2016 SUMMARY OF ANSWERS: CASE NO. 1 CASE NO. 2 1. B 2. B 1. A 2. A

(C)

1.

6,000,000 625,000 6,625,000

CASE NO. 3 C 2. C

PROBLEM 16-6 Change From Fair Value through Profit or Loss to Equity Method - Step Acquisition Question No. 1 Fair value – 12/31/2017 Less: Carrying value (Fair value – 12/31/2016) Unrealized loss – P&L

(B)

Question No. 2 Investment income (₱550,000 x 15%)

(C)

146

3,600,000 (3,900,000) (300,000)

82,500


Question No. 3 Nil. No catch-up adjustment on retained earnings. (A) Fair value of previously held interest Acquisition cost Total cost of investment Less: Book value of net asset acquired (12.5m x 30%) Excess of attributable to machinery Divide by: Remaining life Amortization of Undervalued asset

3,600,000 3,600,000 7,200,000 3,750,000 3,450,000 10 345,000

Net income of the associate - 2018 Multiply by: Percentage of ownership (15% + 15%) Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received

1,600,000 30% 480,000 700,000 30% 210,000

Question No. 4 Share in net income Less: Amortization of Undervalued asset (see table above) Adjusted net investment income (A) Question No. 5 Cost of Investment Add: Net investment income (see no. 4) Less: Dividends received Carrying value – 12/31/2018 SUMMARY OF ANSWERS: 1. B 2. C 3. A

4.

(A)

A

5.

480,000 345,000 135,000

7,200,000 135,000 210,000 7,125,000

B

PROBLEM 16-7 Cost To Equity Method Question No. 1 Consideration received (40,000 x 65) Less: Dividend income (5 x 40,000) Net selling price Less: Carrying value (5,000,000) Loss on sale (Assuming FIFO Method)

(E)

Question No. 2 Consideration received Less: Dividend income (5 x 40,000) Net selling price

P2,600,000 200,000 2,400,000 5,000,000 (P2,600,000)

P5,200,000 200,000 5,000,000

147


Less: Carrying value [12M-(P5 x 100,000)/100,000] x 40,000) Gain on sale (B) Question No. 3 Fair value (P70 x 60,000)

(E)

4,600,000 P400,000 P4,200,000

Question No. 4 Cost of Investment – 01/01/2015 Add: Net investment income - 2015 (5,000,000 x 30%) Less: Dividends received -2015 (30% x 2,000,000) Carrying value – 12/31/2015 Add: Net investment income - 2016 (6,000,000 x 30%) Less: Dividends received -2016 (30% x 3,200,000) Carrying value – 12/31/2016

2,400,000 1,500,000 600,000 3,300,000 1,800,000 960,000 4,140,000

Net selling price Less Carrying amount (P4,140,000 x ½) Gain on sale

2,400,000 2,070,000 P330,000

(B)

Question No. 5 Investment in Kababain – FVTOCI: Fair value (P75 x 15,000) Less: Carrying amount Investment in Passing Rate – FVTOCI: Fair value (P70 x 60,000) Less Cost (12M-(5 x 100,000))/100,000 x 60,000) Total Unrealized Gain –OCI to SFP (E) SUMMARY OF ANSWERS: 1. E 2. B 3. E

4.

B

5.

1,125,000 2,070,000

(945,000)

4,200,000 6,900,000

(2,700,000) P3,645,000

E

PROBLEM 16-8 Change From Equity to Cost Method Question No. 1 Cost of Investment Add: Net investment income [(1.8M-840,000) x 20%] Less: Dividends received (P100,000 + P100,000) Carrying value – 12/31/2015 (B)

4,000,000 192,000 200,000 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 considered when 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

148


Sales price (P25 x 50,000) Carrying value of shares (P3,992,000 x 50,000/200,000) Gain on sale of investment (B)

1,250,000 998,000 252,000

Question No. 3 Fair value of retained investment (P25 x 150, 000) Less: Carrying amount of retained investment (P3,992,000 x 150,000/200,000) Gain on reclassification to P&L (C)

3,750,000 2,994,000 756,000

Question No. 4 Fair value, Dec. 31, 2016 (P30 x 150,000) Fair value, Jan. 1, 2016 (P25 x 150,000) Unrealized gain, Dec. 31, 2016

(B)

4,500,000 3,750,000 750,000

Question No. 5 Fair 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. 1 Cost (300,000x100) Add: Income (4,000,000x .3) Less: Dividends (2,500,000x .3) Carrying Amount - 2015

(C)

30,000,000 1,200,000 (750,000) 30,450,000

Question No. 2 Net proceeds (160,000x120) Less: Carrying amount (30,450,000x(160,000/300,000)) Gain on Sale (C)

19,200,000 (16,240,000) 2,960,000

Question No. 3 FVTOCI (140000x120) Less: Carrying amount (30,450,000x(140,000/300,000) Gain on Reclassification (B)

17,080,000 14,210,000 2,870,000

Question No. 4 Dividend Income (2,000,000x .14)

(A)

280,000

Question No. 5 Investment in FVTOCI (140,000x125)

(B)

17,500,000

149


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

4.

A

5.

B

PROBLEM 16-10 Associate Having Heavy Losses Original cost Cash advances Total interest Net loss from 2015 to 2017 (40% x 4,000,000) Carrying amount of investment – 12/31/2017 Share in net loss of 2018 (40% x 800,000) Loss to be reported in 2018 should be equal to the investment balance only (C)

1,400,000 400,000 1,800,000 (1,600,000) 200,000 320,000 200,000

PAS 28, paragraph 29, provides that if under equity method an investor’s share of losses of an associate equals or exceeds the carrying amount of an investment, the investor discontinues recognizing its share of further losses. The investment is reported at NIL or zero value. PROBLEM 16-11 Downstream Sale of Inventory Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized profit on downstream sale of inventory Share in the net income after adjustment

2015 1,000,000 25% 250,000

2016 1,500,000 25% 375,000

(30,000) 220,000 (B)

30,000 405,000 (D)

2015 1,000,000 25% 250,000

2016 1,500,000 25% 375,000

(9,000) 241,000 (B)

9,000 384,000 (D)

PROBLEM 16-12 Upstream Sale of Inventory Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized profit on upstream sale of inventory Share in the net income after adjustment

150


PROBLEM 16-13 Downstream Sale of Depreciable Asset 2015 Net income 1,000,000 Multiply by: Percentage of ownership 25% Share in the net income before adjustment 250,000 Less: Unrealized gain on downstream sale of PPE (160,000) Share in the net income after adjustment 90,000 (B) PROBLEM 16-14 Upstream Sale of Depreciable Asset Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized gain on upstream sale of PPE Share in the net income after adjustment

PROBLEM 16-15 Question Nos. 1 and 2

2015 1,000,000 25% 250,000 (40,000) 210,000 (B)

2016 1,500,000 25% 375,000 40,000 415,000 (D)

2016 1,500,000 25% 375,000 10,000 385,000 (D)

COMPREHENSIVE PROBLEMS

Net income of the associate Multiply by: Percentage of ownership Share in NI Less: Gain on sale of equipment Add: Depreciation of Excess Gain on sale of inventory (upstream) (50,000x .3) Less: Gain on sale of inventory (Downstream) Net share in NI

Question No. 3 Cost Add: Investment Income 2015 Less: Dividends (900,000x .3) Carrying amount 2015 Question No. 4 Carrying amount 01/01/2016 Add: Income Less: Dividends (2,000,000x .3) Carrying Amount - 2015

151

2015 2,500,000 30% 750,000 (100,000) 20,000 (15,000) 655,000 1. (B)

2016 4,000,000 30% 1,200,000 20,000 15,000 (150,000) 1,085,000 2. (B)

(A)

5,000,000 655,000 270,000 5,385,000

(B)

5,385,000 1,085,000 600,000 5,870,000


Question No. 5 Carrying amount 01/01/2016 Add: Income Less: Dividends (2,000,000x .3) Less: Amortization of goodwill (400,000 x 2/10) Carrying Amount - 2015 (A)

5,385,000 1,085,000 600,000 80,000 5,790,000

Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized over their useful life. If an entity cannot determine reliably the useful life, it is assumed to be 10 years. SUMMARY OF ANSWERS: 1. B 2. B 3. A

4.

B

5.

A

PROBLEM 16-16 Question No. 1 Cost Less: Equity in net assets Implied goodwill

(D)

P1,700,000 1,400,000 300,000

Question No. 2 Proceeds (2,500 x P13) Less: Carrying amount [(P60,000/6,000) x 2,500] Gain on sale (C)

P 32,500 25,000 7,500

Question No. 3 Proceeds (500 x P21) Less: Carrying amount [(P66,000/(2,000 x 110%)) x 500] Loss on sale (D)

P 10,500 15,000 4,500

Question No. 4 FV of financial asset received (1,500 x P21) Less: Carrying amount [(P45,000/1,000) x 500] Gain on conversion

P 31,500 22,500 9,000

Question No. 5 Investment in Roque Corporation: 3/9 1,000 x P1.2 9/9 1,000 x P1.2 Investment in Ocampo Corporation: 6/30 (6,000 – 2,500) x P1 Total dividend income

(A)

1,200 1,200 (D)

152

3,500 5,900


Question No. 6 1/2/2016 Acquisition Cost Add: Share in net income of associate (P1,200,000 x 30%) Less: Dividends (P.50 x 4 x 100,000) 12/31/2016 carrying amount (D) Question No. 7 Roque pref. (1,000 – 500) x P56 Roque ordinary (1,500 x P20) Ocampo (6,000 -2,500) x P11 Dagumboy Co. (2,000 x 110% -500) x P22 12/31/2016 FVTOCI Balance SUMMARY OF ANSWERS: 1. D 2. C 3. D

4.

A

1,700,000 360,000 200,000 P1,860,000

28,000 30,000 38,500 37,400 133,900

(C)

5.

D

6.

D

7.

C

PROBLEM 16-17 Question No. 1 Solano (264,500-250,000) Castaneda (280,000-320,000) (70,000-195,000) Unrealized G/(L)

14,500 (40,000) (125,000) (150,500)

(C)

Question No. 2 Zero, gain or loss on reclassification is NOT allowed Question No. 3 Fair value previously held interest (50,000 x 30) Less: Carrying value Gain on reclassification-P&L

(A)

(C)

1,500,000 1,350,000 150,000

Question No. 4 Net investment income = July 1- Dec. 31 (30% x 900,000) (D)

270,000

Question No. 5 Fair value previously held interest (50,000 x 30) Add: Acquisition cost Initial carrying amount – investment in associate Add: Net investment income (see No. 4) Less: Dividends declared (P2 x 150,000) Investment balance end (C)

1,500,000 3,000,000 4,500,000 270,000 300,000 4,470,000

153


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

C

4.

D

5.

C

PROBLEM 16-18 Question No. 1 Consideration received (P230 x 4,000) Less: Dividend of the investment sold (P8 x 4,000) Net Selling Price Less: Carrying value of the investment sold (*1,970,000/10,000 x 4,000) Gain on sale (B)

920,000 32,000 888,000 788,000 100,000

*(10,000 x P200)-(P8 x 10,000) + P50,000 The dividend that was paid and sold is not classified as dividend income since the company did not own the shares when the dividend was declared. Question No. 2 Net Selling Price (P450 x 50,000 x 1/2) Less: Carrying value of the investment sold (P20,800,000 x 1/2) Gain on sale (C)

11,250,000 10,400,000 850,000

Beg. Balance of Investment in Associate Add: Share in the net income of associate (25% x P20M) Total Less: Amortization (P2,000,000/10) Dividends received (P40 x 50,000) Ending balance of investment in associate – 12/31/2016

18,000,000 5,000,000 23,000,000 200,000 2,000,000 20,800,000

Question No. 3 Nil. (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 the dividend was declared.  The dividend received in Cleo Shares is not regarded as income, but as a deduction of the initial carrying amount of the investment in associate. Question Nos. 4 and 5 Rodolfo (P46 x 20,000) Boy-ot (P192 x 6,000) Gene (P28 x 40,000) Cleo (P450 x 25,000) Total

Fair value 920,000 1,152,000 1,120,000 11,250,000 14,442,000 (C)

154

Cost 1,000,000 *1,182,000 1,280,000 11,250,000 14,712,000

(UL) / UG (80,000) (30,000) (160,000) (270,000) (C)


* (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 joint venture Question No. 1 In accounting for its associate, Mark Co. should recognize impairment loss. However, it is generally not acceptable to simply multiply the amount of impairment recognized in the investee’s own books by the investor’s percentage of ownership, because the investor should initially measure its interest in an associate’s identifiable net ownership at fair value at the date of acquisition of an associate. Accordingly, appropriate adjustments based on those fair values are made for impairment losses recognized by the associate.

CGU A CGU B CGU C Net assets

Carrying amount reflecting fair values made by Mark Co. ₱ 140,000 100,000 320,000 560,000

Recoverable amount (40%) ₱ 120,000 180,000 160,000 460,000

Impairment loss ₱ 20,000 n/a 160,000 180,000 (A)

Question No. 2 The carrying amount reflecting fair values made by Mark Co. after impairment: CGU A ₱ 120,000 CGU B 100,000 CGU C 160,000 Net assets 380,000 Goodwill 40,000 Investment in associate ₱ 420,000 (A) PROBLEM 16-20: PFRS for SME: Jointly Controlled Entity Question No. 1 Cost model Total dividend paid by Entity Z’s Multiply by: Percentage Dividend income – P&L to SCI

CASE NO. 1

Question No. 2 Cost model Carrying amount

155

(B)

₱150,000 30% ₱ 45,000

(D)

₱300,000


CASE NO. 2 Question No. 3 Fair value model Fair value – December 31 Less: Acquisition cost Gain on change in fair value – P&L to SCI Add: Dividend income (₱150,000 x 30%) Total to P&L (A)

₱425,000 300,000 ₱125,000 45,000 ₱170,000

Question No. 4 Fair value model Carrying amount = Fair value Dec. 31

₱425,000

(A)

CASE NO. 3 Question No. 5 Equity method Entity Z’s reported profit Multiply by: Percentage Share in net income

(C)

₱400,000 30% ₱120,000

Question No. 6 Equity method Acquisition cost Add: Share in net income Less: Dividends received ((₱150,000 x 30%) Carrying value – December 31 (B)

₱300,000 120,000 45,000 ₱375,000

156

Chapter 18: Property, Plant and Equipment

CHAPTER 18: PROPERTY, PLANT AND EQUIPMENT PROBLEM 18-1 Capitalizable Cost of Machinery Purchase price including VAT (1,568,000/1.12) Cost of water device to keep machine cool. Cost of safety rail and platform surrounding machine Installation cost, including site preparation and assembling. Fees paid to consultants for advice on acquisition of the machinery. PV of estimated dismantling cost of the new machine Repair cost of the machine damaged while in the process of installation Loss on premature retirement-old machine Other nonrefundable sales tax Cost of training for personnel who will use the machine Adjusted balances (A)

PROBLEM 18-2 Improvements

Capitalizable

Cost

of

Question No. 1 Purchase Price Title Insurance Legal fees to purchase land Property taxes, January 1, 2016 -June 30, 2016 Cost of grading and filling building site Total Cost of the land Question No. 2 Cost of building construction Interest on construction loan Cost of razing old building on lot Proceeds from sale of salvageable materials Total cost of the building Question No. 3 Cost of constructing driveway Cost of parking lot and fencing Total cost of the land improvements

157

Land,

Machinery 1,400,000 8,000 12,000

Others -

20,000

-

13,000 10,000

-

13,000

5,000 18,000 -

1,476,000

25,000 48,000

Building

and

Land

(A)

925,000 7,500 5,000 15,000 45,000 997,500

(A)

3,100,000 60,000 42,500 (6,000) 3,196,500

(B)

400,000 60,000 460,000


PROBLEM 18-3 Acquisition on Cash Basis Question No. 1 Cash paid Commissions paid to brokers Non-refundable sales taxes Total cost Multiply by: Ratio (200,000 / 500,000) Allocated cost of the land Question No. 2 Total cost Multiply by: Ratio (300,000 / 500,000) Allocated purchase price Renovation cost Demolition cost Proceeds from sale of demolition scrap Total cost of the building

(B)

800,000 80,000 40,000 920,000 0.40 368,000

(A)

920,000 0.60 552,000 100,000 60,000 (15,000) 697,000

PROBLEM 18-4 Acquisition on Account Invoice Price Multiply by: (1 - discount rate) Net invoice price Additional cost: Freight and insurance Cost of testing and trial runs Cost of the equipment

500,000 97% 485,000

(B)

15,000 12,000 512,000

PROBLEM 18-5 Acquisition on Account Invoice Price Multiply by: (1 - discount rate) Net invoice price Additional cost: Installation cost Present value of estd. decommissioning and restoration cost Total cost of the equipment (B)

500,000 0.97 485,000

Estimated decommissioning and restoration cost Multiply by: Present value of 1 Present value of estd. decommissioning and restoration cost

100,000 0.6209 62,090

158

50,000 62,090 597,090


PROBLEM 18-6 Deferred Settlement Terms (With or Without Cash Price Equivalent) Question No. 1 Cash price equivalent Question No. 2 Principal Multiply by: Present value of 1 Cost of the equipment

(A)

800,000

(B)

1,000,000 0.7972 797,200

PROBLEM 18-7 Exchange (With or Without Commercial Substance) Question No. 1 Fair value of the asset given Add: Cash payment Cost of equipment Question No. 2 Fair value of the asset given Less: Carrying amount Gain on exchange Question No. 3 Carrying amount of the asset given Add: Cash payment Cost of equipment

(D)

1,200,000 200,000 1,400,000

(B)

1,200,000 800,000 400,000

(B)

800,000 200,000 1,000,000

Question No. 4 Zero, the transaction lacks commercial substance. (A) PROBLEM 18-8 Trade–in Question No. 1 Cash price without trade in Question No. 2 Cash price without trade in Less: Cash price with trade in Trade in value Less: Carrying amount Loss on trade in

159

(A)

340,000

(B)

340,000 270,000 70,000 230,000 (160,000)


PROBLEM 18-9 Acquisition through Issuance of Equity Instrument Question No. 1 Fair value of the equipment received

(D)

4,000,000

Question No. 2 Zero, the difference between the fair value and its par value is recognized as share premium in the equity. (A) PROBLEM 18-10 Acquisition through Issuance of Bonds Payable Question No. 1 Fair value of the bonds (10,200 x 500)

(C)

5,100,000

Question No. 2 Zero, the difference between the fair value and its par value is recognized as premium on bonds payable. (A) PROBLEM 18-11 Acquisition by Donation Question No. 1 Fair value Add: Direct cost Total cost

(B)

4,000,000 40,000 4,040,000

Question No. 2 Fair value

(C)

4,000,000

The registration and transfer of title is charged to Donated Capital / Share Premium. PROBLEM 18-12 Capitalizable Cost of Land Question No. 1 Purchase price Demolition of existing building on site Legal and other fees to close escrow Less: Proceeds from sale of demolition scrap Total cost Question No. 2 Purchase price Legal and other fees to close escrow Total cost

160

(C)

400,000 75,000 12,000 10,000 477,000

(A)

400,000 12,000 412,000


PROBLEM 18-13 Subsequent Expenditure on PPE Question No. 1 Beginning balance – Jan 1 Add: Overhaul – June 30 Total cost of motor vehicle

(C)

790,000 60,000 850,000

Question No. 2 Beginning balance – Jan 1 Add: Rearrangement and installation – March 2 Improvement that extend the life – December Total cost of machine (B)

1,900,000 45,000 60,000 2,005,000

Question No. 3 Beginning balance – Jan 1 Add: Unloading and set up cost Total cost of precision machine

(C)

Question No. 4 Beginning balance – Jan 1 Add: Installation of sprinkler system – part of blue print Add: Cost of attic Total cost of building (B) Question No. 3 Routine repairs and maintenance SUMMARY OF ANSWERS: 1. C 2. B 3. C

(D)

4.

B

5.

600,000 48,000 648,000

4,100,000 130,000 500,000 4,730,000

26,000

D

PROBLEM 18-14 Question No. 1 Interest paid(2,000,000 x 14% x 12/12) Less: Investment income 1,400,000 x 10% x 6/12 200,000 x 10% x 2/12 Capitalizable borrowing cost

280,000 70,000 3,333 206,667

Note that capitalization of borrowing costs does not cease during a temporary delay in construction. Question No. 2 Interest paid (2,000,000 x 14% x 12/12) Less: Capitalized borrowing cost Interest expense

161

280,000 206,667 73,333


Note that the interest paid and investment income is used to compute for the capitalizable borrowing cost. However, the amount recognized as an interest expense is the difference between the total interest paid and capitalizable borrowing cost. Also, the amount recognized as interest income is 73,333. Question No. 3 Total progress payments Add: Capitalized borrowing cost Total cost of the stadium

20,000,000 206,667 20,206,667

PROBLEM 18-15 Question No. 1 Interest expense under effective interest method (5,000,000 x .176319 x 11/12) Less: Investment income (250,000 x 11/12) Capitalizable borrowing cost Question No. 2 Interest expense under effective interest method (5,000,000 x .176319 x 12/12) Less: Capitalized borrowing cost Interest expense

808,129 229,167 578,962

881,595 578,962 302,633

Question No. 3 Total expenditures Add: Capitalized borrowing cost Total cost of the building

2,700,000 578,962 3,278,962

Question No. 3 Total cost of the building Less: Residual value Depreciable amount Divide by: Useful life Multiply by: Months Depreciation - 2016

3,278,962 1,000,000 2,278,962 10 1/12 18,991

Note depreciation will start when the asset is available for use.

162


PROBLEM 18-16 Question No. 1 Rate 15% 20% Total

Principal 4,000,000 2,000,000 6,000,000

Interest 600,000 400,000 1,000,000

Capitalization Rate (P1,000,000 / P6,000,000) = 16.67% January 1 (600,000 + 2,100,000) July 1 December 1 Average accumulated expenditure Multiply by: Rate Capitalizable borrowing cost

2,700,000 1,200,000 240,000

x 12/12 x 6/12 x 1/12

2,700,000 600,000 20,000 3,320,000 16.67% 553,334

Note that investment income is not considered since the two loans are considered general borrowings. Question No. 2 Total interest expense Less: Capitalized borrowing cost Interest expense

1,000,000 553,334 446,667

Question No. 3 Expenditures capitalized – previous period Add: Expenditures during the current year Add: Capitalized borrowing cost Total cost of the factory building

600,000 3,540,000 553,334 4,693,334

PROBLEM 18-17 Specific and General Borrowings Questions No. 1 & 2 January 1, 2015 September 1, 2015 December 31, 2015 Average accumulated expenditure Multiply by: Rate Capitalizable borrowing cost

200,000 300,000 300,000

x 12/12 x 4/12 x 0/12 1. (A) 2. (D)

200,000 100,000 0 300,000 12% P36,000

Since the average accumulated expenditure did not exceed the principal of the specific borrowing, the specific rate was used in determining the capitalizable borrowing cost.

163


Question No. 3 & 4 Accumulated expenditures – 836,000 12/31/2015 (P800,000 + 36,000) March 31, 2016 300,000 September 30, 2016 200,000 Average accumulated expenditure Less: Specific borrowing Excess attributable to general borrowing Multiply by: Rate Multiply by: Months outstanding Capitalizable borrowing cost – general borrowings Add: Specific borrowings (750,000 x 12% x 9/12) Total capitalizable borrowing cost

x 9/9

836,000

x 6/9 x 0/12 3. (D)

200,000 0 1,036,000 750,000 286,000 9% 9/12 19,305 67,500 86,805

4. (B)

PROBLEM 18-18 Specific Borrowing Used For General Purposes Total expenditures Divide by Total Less: Investment income (50,000 x 3/12) Weighted average expenditures Multiply by: Rate Capitalizable borrowing cost

(A)

6,000,000 2 3,000,000 12,500 2,987,500 10% 298,750

PROBLEM 18-19 Different Depreciation Methods Cost Less: Residual value Depreciable amount

P3,300,000 300,000 P3,000,000

Requirement No. 1 Straight Line 2016 (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

164


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 Sum-of-years-digits [5 x ((5+1)/2)] = 15 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 Double declining rate (2/5) = 40% 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 Less: Accumulated depreciation – 12/31/2014 [(P102,750 – P6,750) / 6 x 2) Carrying value – 01/01/2015 Less: Revised residual value Depreciable amount

165

102,750 32,000 70,750 4,500 66,250


Divide by: Remaining useful life (7-2) Depreciation expense

(B)

5 13,250

(A)

P308,000 10,000 298,000 10 29,800

PROBLEM 18-21 Straight-Line Cost (P300,000 + P8,000) Less: Residual value Depreciable amount Divide by: Useful life Depreciation expense

PROBLEM 18-22 Composite Method

Machine A Machine B Machine C Total

Cost 275,000 100,000 20,000 395,000

Salvage Value 25,000 10,000 35,000

Depreciable Amount 250,000 90,000 20,000 360,000

Estd. Life 20 15 5

Annual Depreciation 12,500 6,000 4,000 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 of depreciation. (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)

166

81,000


PROBLEM 18-26 Double Declining Balance Depreciation rate (2/4) = 50% Cost Less: Accumulated depreciation 2015 (P18,000 x 50%) 2016 (P18,000 – 9,000 – P4,700) * Book value – 12/31/2016

18,000 9,000 4,300 4,700

(B)

*Maximum depreciation. The carrying amount should not be reduced below its residual value. PROBLEM 18-27 Double Declining Balance Double declining rate (2/10) = 20% 2015 [(P480,000 x 20% x 12/12]

96,000

2016 [(P480,000 – P90,000) x 20% x 12/12]

(B)

76,800

(D)

300,000 210,000 510,000

(C)

36,000

PROBLEM 18-28 150% Declining Balance 150% declining rate (1.5/5) = 30% 2015 (P1,000,000 x 30%) 2016 [(P1,000,000 – 300,000) x 30%] Accumulated depreciation – 12/31/2016 PROBLEM 18-29 Sum of the Years’ Digits Sum-of-years-digits [5 x ((5+1)/2)] = 15 2016 [(P50,000 + 100,000) x 4/15 x 12/12)

PROBLEM 18-30 Component Depreciation Component A B C D E Total

Cost 550,000 420,000 360,000 190,000 235,000 1,755,000

Residual value 50,000 20,000 10,000 30,000 40,000 150,000

167

Depreciable cost 500,000 400,000 350,000 160,000 195,000 1,605,000

Useful Life 10 9 8 7 6 (B)

Dep’n expense 50,000 44,444 43,750 22,857 32,500 193,551


PROBLEM 18-31 Change in Estimate Cost Less: Depreciation – first year (8,000 / 4) Carrying value – end of first year Divided by: Revised remaining useful life (5 – 1) Depreciation – 2nd year

(C)

8,000 2,000 6,000 4 1,500

(B)

5,000 600 4,400

PROBLEM 18-32 Retirement Method Original cost Less: Salvage proceeds Depreciation

PROBLEM 18-33 Change in Estimate Cost Less: Accumulated depreciation – 12/31/2016 [(P3,300,000 – P300,000) / 8 x 4] Carrying value – 12/31/2016

3,300,000 1,500,000 1,800,000

CASE NO. 1 Requirement No. 1 Carrying value – 12/31/2015 Less: Residual value Depreciable amount Divided by: Revised remaining useful life Depreciation – 2016

1,800,000 300,000 1,500,000 2 750,000

Requirement No. 2 Carrying value – 12/31/2015 Less: Depreciation – 2016 Carrying value – 12/31/2016

1,800,000 750,000 1,050,000

CASE NO. 2 Requirement No. 1 Carrying value – 12/31/2015 Less: Residual value Depreciable amount Divided by: Remaining useful life ( 8 – 4) Depreciation – 2016

1,800,000 150,000 1,650,000 4 412,500

Requirement No. 2 Carrying value – 12/31/2015 Less: Depreciation – 2016

1,800,000 412,500

168


Carrying value – 12/31/2016

1,387,500 CASE NO. 3

Requirement No. 1 Carrying value – 12/31/2015 Less: Residual value Depreciable amount Multiply by: Fraction (SYD = 10) Depreciation – 2016

1,800,000 300,000 1,500,000 4/10 600,000

Requirement No. 2 Carrying value – 12/31/2015 Less: Depreciation – 2016 Carrying value – 12/31/2016

1,800,000 600,000 1,200,000

PROBLEM 18-34 Replacement Method Replacement cost Less: Salvage proceeds Depreciation

(C)

6,000 600 5,400

PROBLEM 18-35 Fixed Asset Turnover Let X = Net Fixed Asset at the end of 2016

Fixed asset turnover = 4= 4= P1,480,000 = X=

Sales Average Fixed Asset P1,480,000 .5 (P320,000 + X) P1,480,000 P160,000 + .5x P640,000 + 2x P420,000 (C)

PROBLEM 18-36 Derecognition of PPE Insurance Proceeds Less: Carrying value [P160,000 – (P20,000 x 6/12)] Gain on disposal (D)

169

200,000 150,000 50,000


COMPREHENSIVE PROBLEMS PROBLEM 18-37 Question No. 1 Beg. Balance of the Land Cash paid Mortgage assumed Realtor's commission Legal fees, realty taxes and documentation expenses Amount paid to relocate persons squatting on the property Total Cost of the Land (B)

P 700,000 2,500,000 4,000,000 300,000 50,000 100,000 P7,650,000

Question No. 2 Beginning balance of the Land Improvement Cost of fencing property Total cost of Land Improvement

(A)

P 10,000 110,000 P 120,000

(A)

P 900,000 (150,000) 120,000 2,000,000 20,000 50,000 50,000 P2,990,000

(B)

P 980,000 2,000,000 60,000 140,000 400,000 P3,580,000

(A)

P 120,000 2,990,000 3,580,000 P6,690,000

Question No. 3 Beg. Balance of the Building Amount recovered from salvage of building Cost of tearing down an old building Amount paid to contractor Building permit Excavation expenses Architects' fees Total cost of building Question No. 4 Beg. Balance of the Machinery Invoice cost of machinery Freight, unloading Customs duties Allowances during installations Total cost of machinery Question No. 5 Total cost of Land Improvement Total cost of building Total cost of machinery Total depreciable property

Royalty payment on machines purchased in the amount of P120,000 should be included 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 on units produced and sold, it should be treated as a selling expense. SUMMARY OF ANSWERS: 1. B 2. A 3. A

4.

B

170

5.

A


PROBLEM 18-38 Specific and General Borrowings Question No. 1 and 2

WEIGHTED AVERAGE IN 2014 Months Expenditures outstanding 3,000,000 12 7,000,000 6 6,000,000 2 16,000,000

Date 01/01/2015 07/01/2015 11/01/2015 Total Divide by Weighted average carrying amount

Specific borrowings (2,000,000 x 10%) General borrowings: Rate 14% 12% Total

Principal 2,000,000 18,000,000 20,000,000

Average 36,000,000 42,000,000 12,000,000 90,000,000 12 7,500,000

200,000 Interest 280,000 2,160,000 2,440,000

Capitalization Rate (P2,440,000 / P20,000,000) = 12.20% Weighted average borrowing cost: Specific borrowings Actual borrowing cost Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost Capitalizable borrowing cost (lower)

200,000 13,000 7,500,000 2,000,000 5,500,000 12.20% 1 (A)

WEIGHTED AVERAGE IN 2015 Months Expenditures outstanding *16,858,000 8 1,000,000 2 2,000,000 1 19,858,000

Date 01/01/2016 07/01/2016 08/01/2016 Total Divide by Weighted average carrying amount

187,000

671,000 858,000 2,640,000 858,000

Average 134,864,000 2,000,000 2,000,000 138,864,000 8 17,358,000

*Total expenditures in 2015 plus capitalized borrowing cost in 2015.

171


Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P2,000,000 x 10% x 8/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost (2,640,000 x 8/12) Capitalizable borrowing cost (lower) Question No. 3 Actual borrowing cost - 2015 Less: Capitalizable borrowing cost - 2015 Interest expense Question No. 4 Actual borrowing cost - 2016 Less: Capitalizable borrowing cost - 2016 Interest expense Question No. 5 Total cost, 2015 Expenditures in 2016 Add: Capitalizable borrowing cost - 2016 Total cost of the building SUMMARY OF ANSWERS: 1. A 2. B 3. C

4.

C

5.

133,333 17,358,000 2,000,000 15,358,000 12.20% 8/12 (B)

133,333

1,249,117 1,382,451 1,760,000 1,382,451

(C)

2,640,000 858,000 1,782,000

(C)

2,640,000 1,382,451 1,257,550

(B)

16,858,000 3,000,000 1,382,451 21,240,451

B

PROBLEM 18-39 Question No. 1 The computation of the income from government grant is as follows: Total cash received 20,000,000 Divide by: Useful life of the building 20 Income from government grant 1,000,000 Question No. 2 Cost of building Divide by: Useful life of the building Depreciation

24,000,000 20 1,200,000

172


Question No. 3 Cost of building Less: Government grant Total Divide by: Useful life of the building Depreciation

24,000,000 20,000,000 4,000,000 20 200,000

Question No. 4 Cost of building Less: Depreciation – 2016 Carrying amount – 12/31/2016

24,000,000 1,200,000 22,800,000

Question No. 5 Net cost of building Less: Depreciation – 2016 Carrying amount – 12/31/2016

4,000,000 200,000 3,800,000

PROBLEM 18-40 Grants Related to Nondepreciable Assets Question No. 1 The computation of the income from government grant is as follows: Total fair value of the land 10,000,000 Divide by useful life of the building 10 Income from government grant 1,000,000 Question No. 2 Cost of factory building Divide by: Useful life of the building Depreciation

15,000,000 10 1,500,000

Question No. 3 Cost of factory building Less: Government grant Total Divide by: Useful life of the building Depreciation

15,000,000 10,000,000 5,000,000 10 500,000

Question No. 4 Cost of factory building Less: Depreciation – 2016 Carrying amount – 12/31/2016

15,000,000 1,500,000 13,500,000

Question No. 5 Net cost of factory building Less: Depreciation – 2016

5,000,000 500,000

173


Carrying amount – 12/31/2016

4,500,000

PROBLEM 18-41 Question No. 1 Cost of land and old building Real estate broker's commission Legal fees Title insurance Cost of land

P1,200,000 72,000 12,000 36,000 P1,320,000

(C)

Question No. 2 Date Expenditures January 1, 2015 1,000,000 April 1, 2015 500,000 October 1, 2015 800,000 December 31, 2015 900,000 Total 3,200,000 Divide by Weighted average carrying amount

Months outstanding 12 9 3 0

Average 12,000,000 4,500,000 2,400,000 18,900,000 12 1,575,000

Capitalization Rate (P840,000 / P8,000,000) = 10.50% Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P1M x 12% x 12/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost (P120,000 + P840,000) Capitalizable borrowing cost (lower) Question No. 3 Date January 1, 2016 May 1, 2016 September 1, 2016 Total Divide by

Expenditures *4,380,375 600,000 1,200,000 3,200,000

174

120,000 1,575,000 1,000,000 575,000 10.50%% 12/12 (A)

Months outstanding 8 4 -

120,000

60,375 180,375 960,000 180,375

Average 35,043,000 2,400,000 37,443,000 8


Weighted average carrying amount

4,680,375

*(3,200,000+180,375+1,000,000) Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P1,000,000 x 12% x 8/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost (P960,000 x 8 / 12) Capitalizable borrowing cost (lower) Question No. 4 Fixed construction contract price Plans, specifications, and blueprints Architects' fees Removal of old building Interest capitalized during 2015 Interest capitalized during 2016 Cost of building

80,000 4,680,375 1,000,000 3,680,375 10.50%% 8/12

257,626 337,626 640,000 337,626

(A)

(C)

Question No. 5 Interest cost in 2016: Specific borrowing General borrowing Total interest Less: Capitalizable borrowing cost in 2016 Interest expense in 2016

80,000

P6,000,000 42,000 164,000 108,000 180,375 337,626 P6,832,001

P

(C)

120,000 840,000 P 960,000 337,626.25 P622,373.75

Question No. 6 Depreciation rate (150%/40 years) = 3.75% Total depreciation expense (6,832,001.25 x 3.75% x 4/12) = (B) SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

C

175

5.

C

P

84,500


PROBLEM 18-42 Question No. 1 Cost (800,000+45,000-5,000) Less Residual Value Depreciable cost Divide by Depreciation

(B)

840,000 40,000 800,000 5 160,000

Question No. 2 Cost (800,000+45,000-5,000) Less Accumulated Depreciation (160,000 x 3) Carrying amount Less new residual value Depreciable cost Divide by remaining useful life (5-2) Depreciation (A)

840,000 320,000 520,000 70,000 450,000 3 150,000

Question No. 3 Cost Less Accumulated depreciation (270,000/4 x 8/12) Total Carrying amount of old tires (12,000-(12,000/4 x 8/12) Cost of new tires Total

270,000 45,000 225,000 (10,000) 24,000 239,000

Depreciation Motor vehicle: Sept. 1-May 30, 2019 (270,000/4 x 8/12) June 1-Sept. 30 (215,000/4 x 12 mos-8 mos x 4 mos) Tyres from June 1- Sept 30 (24,000/24 mos x 4 mos) Depreciation expense (D)

45,000 21,500 4,000 70,500

Question No. 4 Depreciable cost Cost

Residual Value

800,000

0

100,000

0

400,000 240,000

30,000 0

Airframe

800,000

Interior Engines and rotary blades Inspection Total

100,000

Divide by Useful life 10 years 10 years

370,000 240,000

176

Depreciation exp 80.000 10,000 74,000

5 years 3 years

80,000 244,000


Question No. 5 Cost Less Residual Value Depreciable cost Divide by Multiply by Depreciation SUMMARY OF ANSWERS: 1. B 2. A 3. D

(B)

4.

D

5.

280,000 40,000 240,000 3 8/12 53,333

B

PROBLEM 18-43 Note to the professor: Additional information no. 2. On December 31, it was determined that Asset R had been used 2,100 hours during 2016 not 2015. Question No. 1 Selling Price Less Book value Cost Less: Accumulated Depreciation Up to 1/1 From Jan. 1-May 1 [(140,000 -12,400) x 5/55]* Gain on sale of machinery D

P 52,000 P140,000 P 92,800 11,600 (A)

(104,400)

35,600 P 16,400

Note: No depreciation is recorded in the year an asset is purchased, and full year depreciation is provided in the year an asset is disposed of Question No. 2 Accumulated depreciation, R Jan 1 Add: Depreciation expense [(204,000-12,000)/15,000 x 2,100] Accumulated depreciation, R Dec. 31 (B) Question No. 3 Accumulated depreciation, I Jan 1 Add: Depreciation expense [(320,000-60,000-20,000)/10] Accumulated depreciation, I Dec. 31 (C) Question No. 4 Accumulated depreciation, A Jan 1 Add: Depreciation expense (320,000-64,000) x 20% Accumulated depreciation, A Dec. 31 (A)

177

P 140,800 26,880 P 167,680 P 60,000 24,000 P 84,000 P 64,000 51,200 P 115,200


Question No. 5 Depreciation expense on Machinery: D (see computation in no. 1) R (see computation in no. 2) I (see computation in no. 3) A (see computation in no. 4) N (88,000/20%) Total depreciation expense SUMMARY OF ANSWERS: 1. A 2. B 3. C

4.

(D) A

5.

P 11,600 26,880 24,000 51,200 17,600 P 131,280

D

PROBLEM 18-44 Component Depreciation Question No. 1 Purchase of bottling plant Delivery and installation (750,000 x 1/3) Testing (33,000/3) Total cost of engine (C)

P1,500,000 250,000 11,000 P1,761,000

Question No. 2 Purchase of bottling plant Delivery and installation (750,000 x 1/3) Testing (33,000/3) Total cost of conveyor belt and fittings (C)

P2,000,000 250,000 11,000 P2,261,000

Question No. 3 Purchase of bottling plant Delivery and installation (750,000 x 1/3) Testing (33,000/3) Total cost of outer structure (C)

P 800,000 250,000 11,000 P1,061,000

Question No. 4 Depreciation of component of plant: Engine = (1,500,000 + 250,000 + 11,000 – 500,000) / 5 years x 11/12 Conveyor belt etc = (2,000,000 + 250,000 + 11,000 – 0) / 8 years x 11/12 Outer structure = (800,000 + 250,000 + 11,000 – 50,000) / 3 years x 11/12 Total depreciation of plant (A)

231,183 259,073 308,917 P 799,173

Depreciation starts from the date that the asset was available for use: February 1, 2016.

178


Question No. 5 Depreciation of component of plant: Engine = (1,500,000 + 250,000 + 11,000 – 500,000) / 5 years Conveyor belt etc = (2,000,000 + 250,000 + 11,000 – 0) / 8 years Outer structure = (800,000 + 250,000 + 11,000 – 50,000) / 3 years Total depreciation of plant (A) SUMMARY OF ANSWERS: 1. C 2. C 3. C

4.

A

5.

252,200 282,625 337,000 P 871,825

B

PROBLEM 18-45 Question No. 1 Fair value Legal fees Remodeling cost Total cost of building

1,400,000 50,000 100,000 1,550,000

(C)

Question No. 2 Fair value of the asset received Less: Cash paid Fair value of the asset given Less: Book value of the asset given Cost Less: Accumulated depreciation (1M/10 x 3.5) Gain on exchange Question No. 3 Office building No. 1 (940,000/7) Office building No. 2 (1,000,000/10 x 6/12) Office building No. 3 (1,200,000/4 x 6/12) Factory building (1,550,000/10) Total Depreciation expense

1,200,000 400,000 800,000 1,000,000 350,000 (A)

135,000 50,000 150,000 155,000 490,000

(C)

Cost of office building No. 1 Less: Accumulated Depreciation Book value Add: Major improvements Total

650000 150,000

1,000,000 300,000 700,000 245,000 945,000

Question No. 4 Income from government grant (1,400,000/10)

179

(A)

140,000


Question No. 5 Total depreciable cost Less: Subsequent depreciation Book value SUMMARY OF ANSWERS: 1. C 2. A 3. C

945,000 135,000 810,000

(A)

4.

A

5.

A

PROBLEM 18-46 Question No. 1 Date Expenditures January 1, 2015 2,000,000 July 1, 2015 4,000,000 November 1, 2015 3,000,000 Total 9,000,000 Divide by Weighted average carrying amount Weighted average borrowing cost: Specific borrowings Actual borrowing cost (2M x 10% x 12/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost Capitalizable borrowing cost (lower)

Months outstanding 12 6 2

200,000 4,500,000 2,000,000 2,500,000 12% 12/12 (D)

Question No. 2 Total expenditures – 2015 Total expenditures - 2016 Capitalized borrowing cost - 2015 Capitalized borrowing cost – 2016 (see computation below) Total cost of building (C)

180

Average 24,000,000 24,000,000 6,000,000 54,000,000 8 4,500,000

200,000

300,000 500,000 2,000,000 500,000

9,000,000 1,000,000 500,000 1,160,000 11,660,000


Date Expenditures January 1, 2016 *9,500,000 July 1, 2016 1,000,000 Total 10,500,000 Divide by Weighted average carrying amount

Months outstanding 12 6

Average 114,000,000 6,000,000 120,000,000 12 10,000,000

Total of expenditure in 2015 of P9M and capitalized borrowing cost of P500,000. Weighted average borrowing cost: Specific borrowings Actual borrowing cost (2M x 10% x 12/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost Capitalizable borrowing cost (lower) Question No. 3 Total expenditures – 2015 Total expenditures - 2016 Total cost of building

200,000 10,000,000 2,000,000 8,000,000 12% 12/12

(A)

200,000

960,000 1,160,000 2,000,000 1,160,000

9,000,000 1,000,000 10,000,000

Borrowing cost under PFRS for SME is expensed outright. Question No. 4 Cost of Machinery and Equipment Multiply by: Fraction Depreciation

(A)

3,000,000 3/15 600,000

Question No. 5 Depreciation – remaining delivery truck (see below) Depreciation – overhauled delivery truck (see below) Depreciation – new delivery truck (see below) Total depreciation on delivery truck (B)

114,000 30,000 24,000 168,000

SYD is 15 years and useful life is 5 years.

181


Delivery truck: Cost Less: Accumulated depreciation Carrying value – 12/31/2015 Less: Carrying value of overhauled truck Balance Divide by: Remaining useful life (8-3) Depreciation on remaining delivery truck

1,152,000 432,000 720,000 150,000 570,000 5 114,000

Overhauled delivery truck: Cost Less: Accumulated depreciation (P240,000 / 8 x 3) Carrying value – 12/31/2015 Add: Overhauling cost Adjusted carrying value – 01/01/2016 Divide by: Revised remaining useful life (5 + 2) Depreciation on overhauled delivery truck

P240,000 90,000 150,000 60,000 210,000 7 30,000

New Delivery truck: Invoice cost Freight Installation and testing Total cost of new delivery truck Divide by: Useful life Annual depreciation Multiply by: Number of months used (July 26 to December 31) Depreciation on remaining delivery truck

400,000 20,800 40,000 460,800 8 57,600 5/12 24,000

Question No. 6 Beginning balance Add: Overhauling cost Add: Cost of new delivery truck Adjusted cost of delivery truck Less: Accumulated depreciation (432,000 + 168,000) Carrying value – 12/31/2016 (C) SUMMARY OF ANSWERS: 1. D 2. C 3. A

4.

A

182

5.

B

1,152,000 60,000 460,800 1,672,800 600,000 1,072,800

6.

C

Chapter 19: Wasting Assets

CHAPTER 19: WASTING ASSETS PROBLEM 19-1 Depletion with Change in Estimate Question No. 1 Acquisition cost Less: Estimated residual value Depletable cost of the natural resource Divide by: Tons estimated to be extracted Depletion per ton Multiply by: Tons extracted - 2015 Depletion – 2015 Question No. 2 Acquisition cost Less: Accumulated depletion – 12/31/2015 Carrying value – 01/01/2016 Divide by: Tons estimated to be extracted Depletion per unit Multiply by: Tons extracted – 2016 Depletion – 2016

(B)

P164,000 P164,000 20,000 P8.20 4,000 P32,800

(C)

P164,000 32,800 131,200 20,000 P6.56 8,000 P52,480

PROBLEM 19-2 Depletion with Change in Estimate Acquisition cost Exploration cost. Intangible development cost Total cost of the natural resources less estimated residual value Total depletable cost of the natural resources divide by units est. to be extracted Depletion per unit x units extracted Depletion from 2015 to 2017 Question No. 1 Cost of natural resource Accumulated depletion Carrying amount, 12/31/2017 Residual value Depletable cost Divide by revised remaining units Depletion rate per unit Multiply by: Units extracted Depletion

(D)

183

20,000,000 15,000,000 4,000,000 39,000,000 1,000,000 38,000,000 2,000,000 19.00 500,000 9,500,000

39,000,000 9,500,000 29,500,000 600,000 28,900,000 400,000 72.25 200,000 14,450,000


Question No. 2 Cost of natural resource Accumulated depletion Carrying amount, 12/31/2018

(D)

39,000,000 23,950,000 15,050,000

PROBLEM 19-3 Depreciation of Movable and Immovable Equipment – Useful Life of the Immovable Equipment is Shorter Question No. 1 Acquisition cost Exploration cost. Intangible development cost Total cost of the natural resources less estimated residual value Total depletable cost of the natural resources divide by units est. to be extracted Depletion per unit Multiply by: Units extracted Depletion (D) Question No. 2 Cost of the movable equipment Divide by: Useful life Depreciation Question No. 3 Cost of the movable equipment Divide by: Useful life (shorter) Depreciation

8,000,000 12,000,000 5,000,000 25,000,000 25,000,000 2,000,000 12.50 500,000 6,250,000

(A)

4,000,000 10 400,000

(B)

2,000,000 4 500,000

PROBLEM 19-4 Depreciation of Movable and Immovable Equipment - Life of the Wasting Asset is Shorter Question No. 1 Acquisition cost Exploration cost. Intangible development cost Total cost of the natural resources less estimated residual value Total depletable cost of the natural resources divide by units est. to be extracted Depletion per unit x units extracted Depletion (D)

184

8,000,000 12,000,000 5,000,000 25,000,000 25,000,000 2,000,000 12.50 500,000 6,250,000


Question No. 2 cost of the movable equipment divide by units est. to be extracted Depreciation

(A)

Question No. 3 Cost of the movable equipment Divide by: Units estimated to be extracted (shorter)* Depreciation rate per unit Multiply by: Actual units extracted Depreciation - 2016 (B)

4,000,000 20 200,000

P2,000,000 2,000,000 P1 500,000 500,000

*Estimated useful life using output method (2,000,000 / 500,000) = 4 years PROBLEM 19-5 Depreciation –No Production Cost of immovable equipment Divide by: Units est. to be extracted Depreciation per unit x units extracted Accum. Depreciation

4,000,000 2,000,000 2.00 500,000 1,000,000

Question No. 1 Cost of immovable equipment Less: Accumulated depreciation Book value, Dec. 31, 2017 Divide by: Units est. to be extracted Depreciation in 2018

(B)

4,000,000 1,000,000 3,000,000 12 250,000

Question No. 2 Cost of immovable equipment Less: Accumulated depreciation Book value, Dec. 31, 2018 Divide by: Remaining units to be extracted Depreciation per unit Multiply by: Units extracted Depletion (A)

4,000,000 1,250,000 2,750,000 1,500,000 1.83 100,000 183,333

PROBLEM 19-6 Liquidating Dividends Accumulated profits -unappropriated 9,000,000 Accumulated depletion 4,000,000 Total 13,000,000 less: Capital liquidated 850,000

185


Depletion in the ending inventory (150,000 units X4 ) 600,000 1,450,000 Maximum Dividend (C ) 11,550,000

PROBLEM 19-7 Question No. 1 Acquisition cost Divide by: Tons estimated to be extracted Depletion per ton Multiply by: Actual tons extracted – 2016 Depletion - 2016

(D)

P9,075,000 1,100,000 P8.25 100,000 825,000

(B)

1,925,000 1,100,000 1.75 100,000 175,000

(A)

4,400,000 8 550,000

(C)

P9,075,000 825,000 P8,250,000 750,000 P9,000,000 1,000,000 P 9 150,000 P1,350,000

Question No. 5 Installation ((P1,925,000/1.1M) x 150,000 tons) Mining equipment (P4,400,000/8) Total depreciation expense (C)

P 262,500 550,000 P 812,500

Question No. 2 Cost of Installation Divide by: Tons estimated to be extracted Depreciation per ton Multiply by: Actual tons extracted – 2016 Depreciation - 2016 Question No. 3 Cost of mining equipment Divide by: Useful life Depreciation – 2016 Question No. 4 Acquisition cost Less: Accumulated Depletion Carrying value – 12/31/2016 Add: Additional development cost - 2017 Remaining depletable cost Divide by: Estimated tons to be extracted Depletion per ton Multiply by: Tons extracted – 2017 Depletion - 2017

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

4.

C

186

5.

C


PROBLEM 19-8 Cost Of Wasting Asset with Estimated Restoration Cost, Depletion, Depreciation of Movable and Immovable Equipment Question No. 1 Acquisition cost of the wasting assets Exploration and intangible devt. Cost Estimated decommissioning and restoration costs-at PV Initial cost (C )

200,000,000 10,000,000 1,542,173 211,542,173

Estimated restoration cost Multiply by: Present value of 1 for four periods Present value of the restoration cost

P 4,000,000 0.385543289 P 1,542,173

Question No. 2 Total cost of the wasting assets divide by Depletion per unit x units extracted Depletion expense

(C )

211,542,173 10,000,000 21.15 2,000,000 42,308,435

(A)

8,000,000 16 500,000

(E )

9,000,000 8 1,125,000

Question No. 3 Cost of the movable equipment Divide by: Useful life Depreciation Question No. 4 Cost of the movable equipment Divide by: Useful life (shorter) Depreciation

*Estimated useful life using output method (10,000,000 / 1,000,000) = 10 years Question No. 5 Date Interest expense 01/01/2016 12/31/2016 154,217 (B)

Present value 1,542,173 1,696,390

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

E

4.

187

5.

B


PROBLEM 19-8 Cost Of Wasting Asset with Estimated Restoration Cost, Depletion, Depreciation of Movable and Immovable Equipment Question No. 1 Acquisition cost of the wasting assets Exploration and intangible devt. Cost Estimated decommissioning and restoration costs-at PV Initial cost (C )

200,000,000 40,000,000 1,542,173 241,542,173

Estimated restoration cost Multiply by: Present value of 1 for four periods Present value of the restoration cost

P 4,000,000 0.385543289 P 1,542,173

Question No. 2 Total cost of the wasting assets Divide by: Total units estimated to be extracted Depletion per unit Multiply by: Units extracted Depletion expense (B)

241,542,173 15,000,000 16.10 2,000,000 32,205,623

Question No. 3 Cost of the movable equipment Divide by: Useful life Depreciation

8,000,000 6 1,333,333

(C )

Question No. 4 Cost of the movable equipment Divide by: Useful life Depreciation – 2016

9,000,000 5 1,800,000

(D)

Question No. 5 Date Interest expense 01/01/2016 12/31/2016 154,217 (B)

Present value 1,542,173 1,696,390


D

4.

188

5.

B

Chapter 20: Investment Property

CHAPTER 20: INVESTMENT PROPERTY PROBLEM 20-1: Classification Issue Item 1) 2) 3) 4) 5) 6)

Owneroccupied property

Investment Property ₱ 800,000

Inventory

Others

Remarks

₱1,260,000 1,000,000

Covered by PAS 11 Covered by PAS 11

1,110,000

Derecognized since it is leased out under a finance lease

₱450,000 ₱240,000

7) 8) 9)

430,000 960,000

10)

530,000

1,290,000 2,100,000

11)

420,000

12) 13) 14) 2,160,000

1. (A)

1,100,000 1,300,000 1,150,000 7,740,000

IP in the separate FS Cannot qualify as IP since it is not land or building Not reported since it is leased under operating lease

450,000

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

189

(D)


PROBLEM 20-5: Initial measurement - Investment property leased under finance 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 vs Cost model Question No. 1 (D) No gain or loss is recognized if the transfer is made at cost model. Question No. 2 (D) No gain or loss is recognized if the transfer is made at cost model. Question No. 3 and 4 Fair value date of transfer Less: Carrying value – 12/31/2016 (₱100 / 25 x 20) Revaluation surplus – OCI Less: Transfer of revaluation surplus to R/E as a result of reclassification Gain (loss) on transfer (D) SUMMARY OF ANSWERS: 1. D 2. D 3. D

4.

₱86,000,000 80,000,000 6,000,000 ₱

6,000,000 0

D

PROBLEM 20-9: Transfer from inventory to investment property – Fair value vs Cost model Question No. 1 (B) Cost Net realizable value (₱2,800,000 - ₱100,000)

₱2,600,000 2,700,000

Lower of cost and net realizable value

₱2,600,000

190


Question No. 2 (B) The initial carrying amount under the new classification is the previous carrying amount of ₱2,600,000. Question No. 3 (D) No gain or loss is recognized if the transfer is made at cost model. 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 Less: Carrying value Gain on transfer

₱2,880,000 2,600,000 ₱ 280,000

PROBLEM 20-10: Derecognition of investment property – Fair value vs Cost Model Question No. 1 Gross selling price Less: Disposal cost Net selling price Less: Carrying value – 12/31/2015 (₱3,000,000 / 20 x 18) Gain on sale (D)

₱2,990,000 120,000 2,870,000 2,700,000 ₱ 170,000

Question No. 2 Gross selling price Less: Disposal cost Net selling price Less: Carrying value – 12/31/2015 (fair value) Gain on sale (C)

₱2,990,000 120,000 2,870,000 2,450,000 ₱ 420,000

PROBLEM 20-11 Question No. 1 Cost Less: Residual value Depreciable cost Divided by: Useful life Annual depreciation Multiply by: Months outstanding Depreciation – 2010 (D)

₱14,000,000 1,000,000 13,000,000 10 years 1,300,000 8/12 ₱ 866,667

191


Question No. 2 Depreciation [(₱14M – ₱1M) / 10 years] Impairment loss Total amount to SCI (A)

₱1,300,000 480,000 ₱1,780,000

Question No. 3 Cost Accumulated depreciation Carrying value, before impairment Impairment loss Carrying value, after impairment - 12/31/2012 Less: Residual value Depreciable amount Divide by: Remaining useful life (120 – 32) Multiply by: Number of months Depreciation – 2013 (to SCI) (B)

₱14,000,000 3,466,667 10,533,333 480,000 10,053,333 1,000,000 9,053,333 88 months 12 1,234,545

Question No. 4 Cost Accumulated depreciation Carrying value, before impairment Impairment loss Carrying value, after impairment - 12/31/2012 Depreciation - 2013[(₱10,053,333- ₱1,000,000)/88*12] Depreciation – 2014 [(₱10,053,333- ₱1,000,000)/88*10] Carrying value, 10/31/2014

₱14,000,000 3,466,667 10,533,333 480,000 10,053,333 1,234,545 1,028,788 ₱7,790,000

Depreciation – 2014 [(₱10,053,333- ₱1,000,000)/88*10] Gain on transfer (₱10,050,000 - ₱7,790,000) Unrealized gain - change in fair value(₱11,000,000 ₱10,050,000) Total amount to SCI (A) Question No. 5 Fair value - 12/31/2015 Fair value - 12/31/2014 Gain on change in fair value

1,028,788 2,260,000 950,000 ₱4,238,788

₱11,450,000 11,000,000 ₱ 450,000

(B)

Question No. 6 Reclassification loss: Fair value - 05/01/2016 ₱ 9,500,000 Carrying value, 05/01/2016 11,450,000 Depreciation - 2016 [(₱11,450,000- ₱1,000,000)/54*12] Total (A)

192

₱1,950,000 2,322,222 ₱4,272,222


PROBLEM 20-12 Various investments No. of shares 10,000 15,000 25,000

Date 1/1 3/1 stock split Total (10,000 x 5/2) 11/1 Special assessment 25,000) Total

(₱1.60

Cost per share ₱21 ₱8.4

Total Cost ₱ 210,000 ₱ 210,000

₱10

40,000 ₱ 250,000

x 25,000

Question No. 1 Fair value (₱15 x 25,000) Less: Carrying value Unrealized gain-OCI

(D)

Question No. 2 Broker’s expense over, net income under Operating expense over, NI under (₱1.60 x 25,000 shares) Net income understated (B) Question No. 3 Net income of associate Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized gain on downstream sale of PPE [(₱800,000 - ₱400,000) x 4/5] Less: Unrealized profit on upstream sale of inventory (₱100,000 x 30%) Share in the net income after adjustment (C)

₱375,000 250,000 ₱125,000

(₱10,000) (40,000) (₱50,000)

₱3,000,000 30% 900,000 320,000 30,000 ₱ 550,000

Question No. 4 Cost of Investment – 01/01/2016 Add: Net investment income - 2016 (see No. 3) Less: Dividends received -2016 (30% x ₱800,000) Add: Share in the translation gain (30% x ₱1,000,000) Carrying value – 12/31/2016 (B)

₱4,000,000 550,000 240,000 300,000 ₱4,610,000

Question No. 5 Cost of Investment – 01/01/2016 Add: Net investment income - 2016 (see No. 3) Less: Dividends received -2016 (30% x ₱800,000) Add: Share in the translation gain (30% x ₱1,000,000) Less: Amortization of goodwill (₱200,000/10) Carrying value – 12/31/2016 (C)

₱4,000,000 550,000 240,000 300,000 20,000 ₱4,590,000

193


Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized over their useful life. If an entity cannot determine reliably the useful life, it is assumed to be 10 years. Question No. 6 Fair value of building A Less: Carrying value Unrealized gain - P&L SUMMARY OF ANSWERS: 1. D 2. B 3. C

₱1,500,000 1,000,000 ₱ 500,000

(B)

4.

B

194

5.

C

6.

B

Chapter 22: Intangible Assets

CHAPTER 22: INTANGIBLE ASSETS PROBLEM 22-1 Research and Development Cost R&D Cost of activities aimed at obtaining new knowledge Marketing research to study consumer tastes Cost of developing and producing a prototype model Cost of testing the prototype model for safety and environmental friendliness Cost revising designs for flaws in the prototype model Salaries of employees, consultants, and technicians involved in R&D Amount paid for conference for the introduction of the newly developed product including fee of a model hired as endorser Advertising to establish recognition of the newly developed product Cost incurred on search for alternatives for materials, devices, products, processes, systems or services Cost of final selection of possible alternatives for a new process Periodic or routine design changes to existing products Modification of design for a specific customer Cost of design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production Cost of routine, seasonal, and periodic design of tools, jigs, molds and dies Cost of quality control during commercial production Cost of purchased building to be used in various R&D projects Depreciation on the building described above Personnel costs of persons involved in research and development projects Design, construction, and testing of preproduction prototypes and models Adjusted balances

195

Others

₱700,000 -

₱16,000

23,000

-

80,000

-

15,000

-

120,000

-

-

102,000

-

43,000

30,000

-

96,000

-

-

2,500 10,000

5,000

-

-

18,000

-

32,000

100,000

1,000,000 -

41,200

-

96,000 ₱1,306,200 (A)

₱1,223,500


PROBLEM 22-2 Research and Development 2014 2015 Cost (cumulative) ₱ 40,000* ₱140,000 Recoverable amount 90,000 110,000 Impairment loss ₱ 30,000

2016 ₱240,000 250,000 -

*₱120,000 x 4/12 Under PAS 36, intangible assets that are not yet brought to use should be tested for impairment annually. Therefore, the carrying value of the intangible asset after impairment is as follows: 2014 2015 2016 Cost (cumulative) ₱ 40,000 ₱110,000 ₱240,000 (C)

PROBLEM 22-3 Research and Development Question No. 1 Subsequent expenditure on research Development expenditures not qualifying for recognition (₱480,000 x 5/12) Research and development expense (A) Question No. 2 Acquisition cost of research and development Development expenditures qualifying for recognition (₱480,000 x 7/12) Intangible Asset under Development (E)

₱200,000 200,000 ₱400,000

₱400,000 280,000 ₱680,000

In-process research and development acquired is recorded as intangible asset at cost. Subsequent expenditure on an in-process research and development project recognized as usually done: research is expensed and development costs capitalized 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 recorded just like an issuance from unissued shares. Hence, the transaction should be accounted in the following order of priority: 1. Fair value of asset received 2. Fair value of shares (i.e., treasury shares) issued 3. Cost of treasury shares Cost (₱110 x 2,000) = ₱220,000

(D)

196


PROBLEM 22-5 Change in Estimate Cost of the Patent Less: Amortization, 12/31/2015 (₱300,000/15 x 2) Carrying value, 1/1/2016 Divided by: Remaining useful life (10 – 2) Amortization – 2015 (A)

₱ 300,000 40,000 ₱ 260,000 8 ₱ 32,500

PROBLEM 22-6 Trademark Since the trademark is considered to have an indefinite useful life, it is only subject to impairment and not amortized. Hence the amount to be reported in its December 31, 2016 SFP is ₱500,000. (A) PROBLEM 22-7 Franchise Downpayment Present value of installment receivable (*2.91x ₱1,000,000) Total cost of franchise (D)

₱2,000,000 2,910,000 ₱4,910,000

*The present value factor is the present value of ordinary annuity using 14% for 4 periods. PROBLEM 22-8 Leasehold Improvement Cost of the improvement Less: Accumulated depreciation (₱2,250,000 / 10*) Carrying value – 12/31/2016 (B)

₱2,250,000 225,000 ₱2,025,000

*Shorter of useful life of 10 years and extended lease term (12 – 3 + 6) = 15. PROBLEM 22-9 Goodwill 2014 2015 2016 Total Divide by: Number of periods Average

Net income ₱1,000,000 1,250,000 1,950,000 ₱4,200,000 3 ₱1,400,000

Average earnings (see table above) Less: Normal earnings (₱4,250,000 x 20%) Average excess earnings Divide by: Capitalization rate

197

Net assets ₱ 3,900,000 4,350,000 4,500,000 ₱12,750,000 3 ₱ 4,250,000 ₱1,400,000 850,000 550,000 25%


Goodwill Add: Fair value of net asset acquired Purchase price

(A)

2,200,000 4,500,000 ₱6,700,000

PROBLEM 22-10 Internally Developed Computer Software Cost Question No. 1 Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing product masters Total Software Cost (A)

₱1,000,000 750,000 1,250,000 ₱3,000,000

Question No. 2 Duplication of computer software and training materials from product master Packaging product Total Inventoriable Cost (A)

₱1,500,000 250,000 ₱1,750,000

Question No. 3 Total Software Cost Multiply by: (₱10M / ₱40M) Amortization

(A)

₱3,000,000 25% ₱ 750,000

Purchase price excluding refundable purchase tax Add: Customization cost (₱120,000 + ₱15,000) Testing cost (₱21,000 + ₱11,000 + ₱5,000) Amortization (D)

₱550,000 135,000 37,000 ₱ 722,000

SUMMARY OF ANSWERS: 1. A 2. A 3. A PROBLEM 22-11 Purchased computer software

PROBLEM 22-12 Website Cost Question No. 1 Zero. All costs are charged to expense.

(A)

Question No. 2 Obtaining a domain name Installing developed applications on the web server Stress testing

198

₱ 32,000 80,000 12,000


Designing the appearance (e.g. layout and color) of web pages Creating, purchasing, preparing (e.g. creating links and identifying tags), and uploading information Updating graphics and revising content Adding new functions, features and content Reviewing security access Total intangible asset (B)

160,000 60,000 32,000 12,000 36,000 ₱424,000

PROBLEM 22-13 Renewable Rights Question No. 1 As the costs associated with the renewal are insignificant, the asset must be amortized over the 10 year useful life. The entity intends to renew the license and the government intends to re-issue the license to Bangus Co., and therefore it must be treated as an asset with a 10 year useful life. Amortization (₱200,000 / 10) = ₱20,000

(D)

Question No. 2 As the costs associated with the renewal are significant, and almost equaling the initial 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 is acquired, must be treated a separate asset and amortized over a useful life of 5 years. Amortization (₱200,000 / 5) = ₱40,000

(C)

COMPREHENSIVE PROBLEMS PROBLEM 22-14 Goodwill Computation Current Assets (₱6,000,000 + ₱800,000) Investments PPE (₱13,000,000 + ₱1,850,000) Current liabilities Noncurrent liabilities Fair value of net asset acquired

₱6,800,000 2,000,000 14,850,000 (3,500,000) (2,500,000) ₱17,650,000

Fair value of net asset acquired Multiply by: Normal rate of return Normal earnings

₱17,650,000 10% ₱1,765,000

Total earnings Loss on sale (or Gain) on sale Bonus (₱150,000 x 4years) Operating income Divide by: No. of years Average earnings

₱9,000,000 (100,000) 600,000 ₱9,500,000 4 ₱2,375,000

199


Question No. 1 Average earnings Less: Normal earning Average excess earnings Multiply by: Capitalization period Goodwill Add: Fair value of net asset acquired Purchase price

(A) (A)

Question No. 2 Average earnings Less: Normal earning Average excess earnings Divide by: Capitalization rate Goodwill Add: Fair value of net asset acquired Purchase price

(B) (B)

Question No. 3 Average earnings Divide by: Capitalization rate Purchase price Less: Fair value of net asset Goodwill

(B) (B)

Question No. 4 Average earnings Less: Normal earning Average excess earnings Multiply by: Present value of ordinary annuity Goodwill Add: Fair value of net asset acquired Purchase price SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

₱ 2,375,000 1,765,000 610,000 4 2,440,000 17,650,000 ₱20,090,000

₱2,375,000 1,765,000 610,000 10% 6,100,000 17,650,000 ₱23,750,000

₱2,375,000 8% 29,687,500 17,650,000 ₱12,037,500

(C)

₱2,375,000 1,765,000 610,000 3.0373 1,852,753 17,650,000 ₱19,502,753

(A)

₱336,000 6 ₱ 56,000

(C)

C

PROBLEM 22-15 Question No. 1 Net Patent, January 1 Divide by: Remaining life (8years -2 years) Amortization

200


Question No. 2 None, the trademark has an indefinite life.

(B)

Question No. 3 Cost of noncompetition agreement (1,600,000 x 1/4) Divide by: Useful life Amortization expense (A) Question No. 4 Purchase price Less: Fair value of net assets acquired Goodwill (carrying amount)

400,000 5 80,000

2,400,000 1,600,000 800,000

(A)

The goodwill shall not be amortized because its useful life is indefinite. However, goodwill shall be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate a possible impairment. Question No. 5 Cost-Patent Less: Accumulated Amortization (48,000 + 56,000) Cost - Trademark (no amortization) (1.6M x 3/4) Cost - Noncompetition agreement Less: Accumulated Amortization (see no. 3) Total carrying amount of the Intangible assets

384,000 104,000 400,000 80,000 (B)

280,000 1,200,000 320,000 1,800,000

Note: Goodwill should not be reported as part of intangible asset since it is not identifiable. SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

A

5.

B

PROBLEM 22-16 Question No. 1 Legal cost Payment of licenses to author excluding refundable purchase taxes (100,000-10,000) Total cost of intangible assets (D) Question No’s 2, 3 and 5 Cost Less: Amortization in 2016 (97,000/5 x 6/12) Carrying value, 12/31/ 2016 Less: Amortization in 2017 (97,000/5 ) Carrying value, 12/31/ 2017

201

97,000 9,700 87,300 19,400 67,900

7,000 90,000 97,000

No. 2 (C) No. 3 (C) No. 5 (D)


Question No. 4 General start-up cost Amortization Cost of printing Advertising expense (20,000 x 6/12) Total Expense SUMMARY OF ANSWERS: 1. D 2. C 3. C

4.

(B) B

5.

1,500 9,700 100 10,000 21,300

D

PROBLEM 22-17 Patent, Competitive, Related Patent Question No. 1 Cost Divide by: Remaining useful life Amortization (C) Question No. 2 Cost of the old Patent Less: Accumulated Amortization (500,000 / 10 x 2) Carrying value, 1/1/2014 Competitive Patent Total Divide by: Remaining life Amortization (D) Question No. 3 Carrying value, 1/1/2014 Less: Amortization 2014 Carrying value, 12/31/2014 (D) Question No. 4 Carrying value, 12/31/2014 Add: Related patent Total Carrying value, 1/1/2015 Divide by: Extended life Amortization Question No. 5 Total Carrying value, 1/1/2015 Less: Amortization, 2015 Carrying value, 1/1/2016 = Loss SUMMARY OF ANSWERS: 1. C 2. D 3. D 4. PROBLEM 22-18 Comprehensive

A

Question No. 1 Acquisition cost

5.

500,000 10 50,000 500,000 100,000 400,000 240,000 640,000 8 80,000 640,000 80,000 560,000

(A)

560,000 200,000 760,000 20 38,000

(A)

760,000 38,000 722,000

A

600,000

202


Costs of employee benefits arising directly from bringing the asset to its intended condition Professional fees arising directly from bringing the asset to its intended condition Total cost of the trademark (C)

60,000 13,000 673,000

Question No. 2 None, the trademark has an indefinite life and is not subject to amortization. (A) Question No. 3 Amortization - Trademark Amortization - Customer list Total amortization

(B)

60,000 60,000

(A)

60,000 165,416 225,416

Downpayment Add: Present Value of notes payable (600,000 x .7118) Cost of franchise

400,000 427,080 827,080

Question No. 4 Amortization - Trademark Amortization - Customer list Amortization - Franchise Total amortization

Question No. 5 Cost of trademark Cost of customer list Less: Accumulated Amortization Cost of franchise Less: Accumulated Amortization Total carrying value SUMMARY OF ANSWERS: 1. C 2. A 3. B

673,000 300,000 120,000 827,080 165,416 (A) 4.

A

5.

A

PROBLEM 22-19 Question No. 1 Zero, organization cost is treated as outright expense.(A)

203

180,000 661,664 1,514,664


Question No. 2 Design costs Add: Legal fees Registration fee with Patent office Total cost of trademark Question No. 3 Cash Add Present value of the note (200,000 x 2.91) Cost of Franchise Question No. 4 Cost (see no. 3) Less: Amortization (982,000/20) Carrying value, 12/31/2016 Question No. 5 Amortization of the franchise

P49,100

(B)

3,000,000 300,000 100,000 3,400,000

(B)

400,000 582,000 982,000

(A)

982,000 49,100 932,900

(D)

The trademark has no amortization because it has an indefinite life. It is only tested for possible impairment. SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

A

5.

D

PROBLEM 22-20 Question No. 1 Cost-Patent Less: Amortization for the year (136,000/20) Carrying value of the Patent Question No. 2 Licensing agreement No. 1 Unadjusted balance Less: Amortization for 2 years (100,000/20 x 2) Total Less: Reduction in value (90,000 x 60%) Carrying value Question No. 3 Unadjusted balance Add: Amount credited for advance collection Total cost Less: Amortization (120,000/10)

204

(C)

136,000 6,800 129,200

(B)

100,000 10,000 90,000 54,000 36,000

118,000 2,000 120,000 12,000


Carrying value - Licensing agreement No. 2 Question No. 4 Carrying values: Patent (see no. 1) Licensing Agreement No. 1 (No. 2) Licensing Agreement No. 2 (No. 3) Total carrying value

(C)

108,000

(C)

129,200 36,000 108,000 273,200

The P16,000 cost incurred for advertising and the P32,000 legal expenses for incorporation should be charged to expense when it were incurred. Question No. 5 Nonamortization of Licensing Agreement No 1 (100,000/20 x 1) Expenses capitalized: Goodwill (16,000+32,000) Organization cost Overstatement of Retained earnings (A)

5,000 48,000 58,000 111,000

All the expenses above were understated thereby overstating the net income and retained earnings. SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

C

5.

A

PROBLEM 22-21 Question No. 1 Unadjusted balance Less: Unamortized portion of improvements debited Cost P75,000 Less: Amortization (P75,000 / 10 x 3) 22,500 Adjusted balance – 01/01/2016 Less: Amortization 2016 (P52,500 + P56,071) – see below Carrying value – 12/31/2016 (A) Computation of amortization: Adjusted balance – 01/01/2016 Less: CV of Patent with remaining UL of 2 years – 01/01/2016 Cost 210,000 Less: Accumulated amortization 01/01/2016 (P210,000 / 14 x 7) 105,000 CV of Patent with remaining UL of 7 years – 01/01/2016 Amortization of: Patent with remaining UL of 2 years (105,000 / 2) Patent with remaining UL of 7 years (392,500 / 7) Total Amortization

205

550,000 52,500 497,500 108,571 388,929 497,500

105,000 392,500 52,500 56,071 108,571


Question No. 2 Franchise cost Less: Amortization (50,000 / 5) Carrying value 12/31/2016

50,000 10,000 40,000

(A)

Question No. 3 The amount to be reported as goodwill is the excess of cost over the fair value of net asset acquired. Goodwill is not amortized but only subject to impairment testing. Therefore, the amount to be reported is P200,000. (A) Question No. 4 Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing master for training materials Total Software Cost (A)

240,000 200,000 150,000 590,000

Question No. 5 Completion of detailed program design Costs incurred for coding and testing to establish technological feasibility Total Cost charged to Expense (A) Question No. 6 Amortization: Patent (see No. 1) Franchise (see No. 2) Software cost – none yet Total Cost charged to Expense SUMMARY OF ANSWERS: 1. A 2. A 3. A

130,000 100,000 230,000

108,571 10,000 118,571

(C) 4.

A

5.

A

6.

C

PROBLEM 22-22 Inventories, PPE and Intangible Assets Question No. 1 Unadjusted balance Add: Goods purchased FOB Shipping Point Adjusted balance Question No. 2 Total acquisition cost Add: Mortgage assumed

(B)

4,300,000 40,000 4,340,000

4,000,000 800,000

206


Total cost of land and building Multiply by: Percentage allocated to building Total Purchase Price allocated to Building Add: Remodeling Cost (300,000 – 20,000) Total Cost of Building

(A)

4,800,000 80% 3,840,000 280,000 4,120,000

Question No. 3 Cost of improvement Less: Accumulated depreciation (500,000/8 x 9/12) Carrying value (B)

500,000 46,875 453,125

Question No. 4 Carrying value – 01/01/2016 Less: Amortization 2016 (432,000 / 3 years remaining UL) Carrying value (C)

432,000 144,000 288,000

Question No. 5 Building (4,120,000-120,000)/50 Leasehold Improvements (500,000/8 x 9/12) Furniture and Fixtures Franchise (500,000 / 10) Licensing agreement Total depreciation and amortization expense SUMMARY OF ANSWERS: 1. B 2. A 3. B

4.

C

207

(A)

5.

A

80,000 46,875 150,000 50,000 144,000 P470,875

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

CHAPTER 23: REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE PROBLEM 23-1 Revaluation, No Change in Estimate Question No. 1

Historical Cost 8,000,000 2,000,000 6,000,000

Machinery Accumulated depreciation (25%) CA/DRC/RS

Replacement Cost 15,000,000 3,750,000 12,250,000

Increase 7,000,000 1,750,000 5,250,000 (C)

Carrying amount/Depreciated Replacement Cost/Revaluation Surplus Question No. 2 Depreciated Replacement cost Divide by: Remaining useful life (20 – 5) Depreciation Expense – 2017

(C)

11,250,000 15 750,000

Question No. 3 Revaluation surplus, beginning Less: Piecemeal realization – 2017 (5,250,000 / 15) Remaining revaluation surplus end of 2017 (B)

5,250,000 350,000 4,900,000

Question No. 4 Net Selling Price Less: Carrying amount – 01/02/2018 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P750,000 x 2 years) Gain on sale

10,000,000 11,250,000 1,500,000 (A)

Question No. 5 Revaluation surplus, beginning Less: Piecemeal realization for two years (5,250,000/ 15 x 2) Remaining revaluation surplus to R/E (B) SUMMARY OF ANSWERS: 1. C 2. C 3. B

4.

A

208

5.

B

9,750,000 250,000

5,250,000 700,000 4,550,000


PROBLEM 23-2 Revaluation, With Change in Useful Life Question No. 1

Replacement Cost 14,000,000 2,800,000 11,200,000

Cost 12,000,000 2,400,000 9,600,000

Machinery Accumulated depreciation (25%) CA/DRC/RS

Increase 2,000,000 400,000 1,600,000 (B)

Carrying amount/Depreciated Replacement Cost/Revaluation Surplus Question No. 2 Depreciated Replacement cost Divide by: Remaining useful life Depreciation Expense – 2016

(B)

11,200,000 25 448,000

Question No. 3 Revaluation surplus, 01/01/2016 Less: Piecemeal realization – 2016 (1,600,000/ 25) Remaining revaluation surplus end of 2016 (C)

1,600,000 64,000 1,536,000

Question No. 4 Net Selling Price Less: Carrying amount – 01/02/2017 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P11.2M / 25 x 2) Gain on sale

10,000,000 11,200,000 896,000 (A)

Question No. 5 Revaluation surplus, beginning Less: Piecemeal realization for two years (1,600,000 / 25 x 2) Remaining revaluation surplus to R/E (B) SUMMARY OF ANSWERS: 1. B 2. B 3. C

4.

A

5.

10,304,000 (304,000)

1,600,000 128,000 1,472,000

B

PROBLEM 23-3 Revaluation, With Change in Useful Life and Residual Value

Machinery Less: Accumulated depreciation CA/DRC/RS

Cost 4,550,000 *1,125,000 3,425,000

209

Replacement Cost 9,100,000 **2,250,000 6,850,000

Increase 4,550,000 1,125,000 3,425,000 (C)


Carrying amount/Depreciated Replacement Cost/Revaluation Surplus *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 residual value. Question No. 2 Depreciated Replacement cost Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation Expense – 2016

(B)

6,850,000 100,000 6,7500,000 25 270,000

Question No. 3 Revaluation surplus, 01/01/2016 Less: Piecemeal realization – 2016 (3,425,000 / 25) Remaining revaluation surplus end of 2016 (B)

3,425,000 137,000 3,288,000

Question No. 4 Net Selling Price Less: Carrying amount – 01/02/2018 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P540,000 x 2) Gain on sale

7,000,000 6,850,000 540,000 (C)

Question No. 5 Revaluation surplus, beginning Less: Piecemeal realization for two years (P274,000 x 2) Remaining revaluation surplus to R/E (B) SUMMARY OF ANSWERS: 1. C 2. B 3. B

4.

C

5.

6,310,000 690,000

3,425,000 274,000 3,151,000

B

PROBLEM 23-4 Impairment and Revaluation of PPE CASE NO. 1 COST MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2016 (B)

210

2,200,000 200,000 2,000,000 10 200,000


Question No. 2 Zero. The company is using the cost model.(A) Question No. 3 Cost Less: Accumulated depreciation Carrying amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation - 2017

2,200,000 200,000 2,000,000 290,000 1,710,000 9 190,000

(E)

Question No. 4 Cost Less: Accumulated Depreciation (200,000 + 190,000 + 190,000) Carrying amount – 12/31/2019 Less: Recoverable amount, date of impairment Impairment loss (C) Question No. 5 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation SUMMARY OF ANSWERS: 1. B 2. A 3. E

939,500 40,000 899,500 7 128,500

(B)

4.

C

5.

B

CASE NO. 2 REVALUATION MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2016 (B) Question No. 2 Recoverable amount/fair value Less: Carrying amount Machinery at cost Less: Accumulated depreciation Revaluation surplus

2,200,000 1,620,000 1,620,000 939,500 680,500

2,200,000 200,000 2,000,000 10 200,000

2,990,000 2,200,000 200,000 (D)

211

2,000,000 990,000


Question No. 3 Recoverable amount/fair value Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation

2,990,000 290,000 2,700,000 9 300,000

(C)

Question No. 4 Recoverable amount, date of revaluation Less: Subsequent depreciation for 2 years Carrying amount Less: Recoverable amount, date of impairment Decrease in value Less: Remaining revaluation Revaluation surplus, date of revaluation Less: Piecemeal realization for two years Impairment loss (C) Question No. 5 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation-2019

2,990,000 600,000 2,390,000 939,500 1,450,500 990,000 220,000

770,000 680,500

939,500 40,000 899,500 7 128,500

(B)

PROBLEM 23-5 Impairment and Revaluation of PPE CASE NO. 1 COST MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2016 (C)

2,300,000 200,000 2,100,000 10 210,000

Question No. 2 Cost Less: Accumulated Depreciation Carrying amount – 12/31/2017 Less: Recoverable amount, date of impairment Impairment loss

2,300,000 210,000 2,090,000 1,850,000 240,000

212

(C)


Question No. 3 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation

1,850,000 50,000 1,800,000 9 200,000

(B)

Question No. 4 Recoverable amount – 01/01/2017 Less: Accumulated Depreciation – 12/31/2018 Carrying amount – 12/31/2018 Lower of: Would have been carrying amount no impairment Less: Recoverable amount – 01/01/2019 Gain on impairment recovery – P&L The increase in fair value is recognized in P&L.

1,850,000 400,000 1,450,000 2,300,000 630,000

(A)

Would have been carrying amount had been there no impairment: Cost Less: Depreciation 2016 2017 2018 Would have been carrying value – 12/31/2018 Question No. 5 Lower between Recoverable amount and would have been book value – 01/01/2019 Less: New residual value Depreciable amount Divide by: Remaining useful life (10 – 3) Depreciation (D) SUMMARY OF ANSWERS: 1. C 2. C 3. B

4.

A

5.

2,300,000 210,000 210,000 210,000 1,670,000

1,499,400 0 1,499,400 7 214,200

D

CASE NO. 2 REVALUATION MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2016 (C)

213

1,670,000 49,400

2,300,000 200,000 2,100,000 10 210,000


Question No. 2 Cost Less: Accumulated Depreciation Carrying amount – 12/31/2017 Less: Recoverable amount, date of impairment Impairment loss Question No. 3 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation

(C)

2,300,000 210,000 2,090,000 1,850,000 240,000

(B)

1,850,000 50,000 1,800,000 9 200,000

Question No. 4 Recoverable amount – 01/01/2017 Less: Accumulated Depreciation – 12/31/2018 Carrying amount – 12/31/2018 Lower of: Would have been carrying amount no impairment Less: Recoverable amount – 01/01/2019 Gain on impairment recovery – P&L The increase in fair value is recognized in P&L.

1,850,000 400,000 1,450,000 2,300,000 630,000

1,670,000 49,400

(A)

Would have been carrying amount had been there no impairment: Cost Less: Depreciation 2016 2017 2018 Would have been carrying value – 12/31/2018

2,300,000 210,000 210,000 210,000 1,670,000

Zero, since recoverable amount is lower than the would have been book value if there is no impairment loss. Question No. 5 Recoverable amount – 01/01/2019 Less: Revised residual value Depreciable amount Divide by: Remaining useful life (10 – 3) Depreciation SUMMARY OF ANSWERS: 1. C 2. C 3. B

4.

(D)

A

214

5.

D

1,499,400 1,499,400 7 214,200


PROBLEM 23-6 Impairment of Intangible Assets Question No. 1 Patent (200,000 / 10) Computer software (100,000 x 60/120) Total amortization

20,000 50,000 70,000

(A)

The copyright and tradename is not amortized because they have indefinite useful life. Question No. 2 Copyright: Carrying value Less: Recoverable amount (80,000 / .05) Tradename: Carrying value Less: Recoverable amount (15,000 / .05) Goodwill: Carrying value of reporting unit Less: Recoverable amount (200,000 x 14.0939) Total impairment loss

400,000 160,000

240,000

350,000 300,000

50,000

3,000,000 2,818,780 (C)

181,220 471,220

Question No. 3 Carrying value of goodwill – 12/31/2015 Less: Allocated impairment loss of reporting unit Carrying value of goodwill – 12/31/2016 (B)

900,000 181,220 718,780

Question No. 4 Patent (P200,000 – P20,000) Copyright (recoverable amount) Tradename (recoverable amount) Computer software (100,000 – 50,000) Carrying value of intangible assets – 12/31/2016 (A)

180,000 160,000 300,000 50,000 690,000

Note that goodwill is not reported as an intangible asset. SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

A

215


PROBLEM 23-7Amortization and Impairment of Intangible Assets Questions 1 and 2 Trademark - Unadjusted balance Less: Unamortized cost of improvement that should have been expensed Cost Less: Accum. amortization (150,000/10 x 2) Total Add: Competitive patent debited to expense Cost Less: Accum. amortization (135,000/9 x 1) Adjusted balance, January 1. 2016 Less: Amortization during the year Patent with remaining life of 4 years *(160,000/4) Remaining patent (1,430,000-160,000)/15-7) Carrying value of the Patent, 12/31/2016

1,430,000 150,000 30,000 135,000 15,000 40,000 158,750 (2) A

Computation of the P160,000: Original cost Less: Accumulated amortization (300,000/15) x 7 years)) Remaining carrying value, 1/1/2016

120,000 1,310,000 120,000 1,430,000 (1) A 198,750 1,231,250

300,000 140,000 160,000

The 7 years age is from January 1, 2009 to January 1, 2016. Questions 3 Carrying value of the trademark (no amortization) Less: Recoverable amount (P75,000/10%) Impairment loss (B)

800,000 750,000 50,000

Questions 4 Adjusted carrying value of the trademark is equal to its recoverable amount of P750,000. (See no. 3) (B) Questions 5 Downpayment Add: Present value of the note Total cost of the franchise Divide by: Useful life Amortization expense SUMMARY OF ANSWERS: 1. A 2. A 3. B

(D)

4.

B

216

5.

D

500,000 874,000 1,374,000 10 137,400


PROBLEM 23-8 Impairment of Cash Generating Unit Question No. 1 Total carrying amount before impairment Less: Fair value less costs to sell Impairment loss Less: Impairment loss allocated to Goodwill Impairment loss allocated to other assets

(D)

72,000,000 60,000,000 12,000,000 2,000,000 10,000,000

Questions No. 2 and 3 (A) Other assets in this case would include only PPE and Patent. Impairment of inventories (i.e. write-down to NRV) is covered by PAS 2 while impairment of FA at FVTOCI will be covered by PAS 39 / PFRS 9. Questions No. 4 and 5 PPE (at cost model) Patent Total

Carrying amount before impairment 30,000,000 10,000,000 40,000,000

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

4.

D

5.

Ratio 0.75 0.25

Allocated Impairment loss 7,500,000 (D) 2,500,000 (D) 10,000,000 (D)

D

PROBLEM 23-9 Impairment and Reversal of Impairment of Cash Generating Unit Cash Inventory Accounts receivable Plant and equipment Less: Accumulated depreciation Trademark Patent Goodwill Total Carrying amount of CGU Less: Value in use Impairment loss Less: Impairment allocated to goodwill Impairment loss allocated to other asset

217

100,000 800,000 1,200,000 24,000,000 10,400,000 2,550,000 850,000 400,000 19,500,000 16,300,000 3,200,000 400,000 2,800,000


Plant and equipment Trademark Patent Total

Balance before Impairment 13,600,000 2,550,000 850,000 17,000,000


Balance after Impairment 11,360,000 2,130,000 710,000 14,200,000

Fraction 13.6/17 2.55/17 .85/17

Reallocation (40,000) (7,500) 47,500 -

Plant and Equipment: Would have been BV, no impairment Cost Less: Accumulated depreciation (2.6M +300,000) Actual Book value Impaired value Less: Subsequent depreciation Maximum gain on reversal of impairment Trademark: Would have been BV, no impairment Cost Less: Subsequent amortization

Balance after Reallocation 11,320,000 2,122,500 757,500 3,520,000

24,000,000 11,600,000 11,320,000 1,000,000

2,550,000 120,000

Actual Book value Impaired value Less: Subsequent depreciation Maximum gain on reversal of impairment Patent: Would have been BV, no impairment Cost Less: Subsequent amortization

2,122,500 112,000

850,000 80,000

Actual Book value Impaired value Less: Subsequent depreciation Maximum gain on reversal of impairment

218

Balance after Impairment 11,360,000 2,130,000 710,000 14,200,000

Impairment Loss (2,240,000) (420,000) (140,000) 2,800,000

757,500 60,000

1. (B) 2. (B) 3. (B)

12,400,000

10,320,000 2,080,000

2,430,000

2,010,500 419,500

770,000

697,500 72,500




Balance before Reversal 10,320,000 2,010,500 697,500 13,028,000

Balance bef. Reall 12,221,136 2,380,872 825,992 15,428,000

Max gain 1,901,136 370,372 72,500 2,344,008


4.

Allocated Gain 1,901,136 370,372 128,492 2,400,000

Fraction 10320/13028 2010.5/13028 697.5/13028

C

5.

Reallocation 46,863 9,130 (55,992) -

C

6.

Max gain 1,901,136 370,372 72,500 2,344,008 Balance after reallocation 12,267,999 2,390,001 770,000 15,428,000

A

PROBLEM 23-10 Noncurrent Assets Held for Sale -Single Asset Question No. 1 Cost Less: Accumulated depreciation Carrying amount Less: Initial amount recognized– lower of: Carrying amount Fair value less cost to sell Impairment loss

1,200,000 480,000 720,000 720,000 600,000 (C)

Question No. 2 Zero. Non-current asset held for sale should not be depreciated. Question No. 3 Lower of: Carrying amount FVLCTS Less: Carrying amount at initial recognition Gain on reversal – P&L Question No. 4 Net Selling Price (1,800,000 – 50,000) Less: Carrying amount Gain on sale

720,000 790,000 (C)

(B)

219

600,000 120,000

(A)

720,000 600,000 120,000

750,000 720,000 30,000


Question No. 5 Cost Accumulated depreciation Carrying amount Less: Initial amount recognized– lower of: Carrying amount Fair value less cost to sell Impairment loss SUMMARY OF ANSWERS: 1. C 2. A 3. C

4.

B

1,200,000 480,000 720,000 720,000 800,000 (A)

5.

720,000 -

A

PROBLEM 23-11 Noncurrent Assets held for Sale- Disposal Group Question No. 1 C P8,800,000. Question No. 2 (E) P6,000,000. Question No. 3 Total carrying amount before impairment Less: Fair value less costs to sell Impairment loss Less: Impairment loss allocated to Goodwill Impairment loss allocated to other assets

59,600,000 52,000,000 7,600,000 6,000,000 1,600,000

(B)

Questions No. 4 & 5

PPE (at cost model) PPE (at revaluation model) Total

Carrying amount as remeasured 22,800,000 16,000,000 38,800,000 Revaluation surplus

PPE (at cost model) PPE (at revaluation model) Total

400,000 400,000

Remaining revaluation surplus is (P3,000,000 minus (P32M-P30M)

0.59 0.41

Impairment loss 940,206 259,794 1,200,000

P1,000,000

220

Allocated Decrease 940,206 659,794 1,600,000

Revaluation surplus 400,000 1,000,000

Carrying amount after impairment 21,859,794 15,340,206 37,200,000


Decrease in value of the PPE (at revaluation model) is allocated to 1. First, remaining revaluation surplus 2. 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. 1 Share in net income (900,000 x 30%) Less: Amortization of undervalued asset Net investment income Question No. 2 Beginning balance – 01/01/2016 Add: Net investment income (see No. 1) Less: Dividends received (150,000 x 30%) Carrying amount – 12/31/2016 Question No. 3 Carrying amount – 12/31/2016 Less: Initial amount recognized– lower of: Carrying amount Fair value less cost to sell Impairment loss

(B)

270,000 10,000 260,000

(A)

5,000,000 260,000 45,000 5,215,000

5,215,000 5,215,000 4,900,000 (B)

4,900,000 315,000

Question No. 4 Zero. No Share in the profit or loss and amortization shall be recognized when the investment in associate is classified as noncurrent held for sale. The cash dividend shall be recognized as income. (A) Question No. 5 Net Selling Price (P4,900,000 – P100,000) Less: Carrying amount Loss on sale SUMMARY OF ANSWERS: 1. B 2. A 3. B

4.

A

221

(D)

5.

D

4,800,000 4,900,000 (100,000)


PROBLEM 23-13 Question No. 1 Irrigation Equipment Freight in Installation cost Total Machinery and Equipment, end

P (A)

Question No. 2 Trade in allowance Book Value: Cost Less: Accum. Depreciation (P660,000+ P165,000) Loss on trade in

P

740,000 10,000 192,000 942,000 400,000

1,300,000 825,000 (B)

475,000 75,000

Question No. 3 Before addition [(P3,100,000 – P100,000)/20 x 3/12) After addition: [(P3,100,000 – (P562,500 + P37,500) + 980,000 P200,000)/20) x 9/12) Depreciation expense (B)

37,500 123,000 160,500

Remaining life (20 – 4 + 4) = 20 years Question No. 4 Turf cutter [{(P1,300,000 – P200,000)/5} x 9/12] + {(P800,000 – P50,000)/6 x 3/12)}] Water desalinator [(P3,780,000 – P270,000)/10] Irrigation equipment [(942,000/4) x 6/12] Office building Total Depreciation expense (B)

P

P

196,250 351,000 117,750 160,500 825,500

Question No. 5 Fair value on initial revaluation P 3,780,000 Book value on initial revaluation: Cost P 4,000,000 Accumulated depreciation [(P4,000,000 – P200,000)/10 x 2) ( 760,000) 3,240,000 12/31/2016 Revaluation Surplus P 540,000 Less: Piecemeal realization in 2017 (P540,000/10) 54,000 12/31/2017 Revaluation surplus P 486,000 12/31/2017 Fair value P 3,400,000 12/31/2017 Book value: Adjusted cost P 3,780,000 Accumulated Depreciation [(P3,780,000 – P270,000)/10] ( 351,000) 3,429,000 Revaluation decrease – charged to Revaluation Surplus (A) P 29,000

222



4.

B

5.

A

PROBLEM 23-14 Question Nos. 1 and 2 Cost-beginning balance Less Accumulated depreciation, beginning Held for sale-carrying amount Total Depreciation charge for the year Held for sale (8,200 x 20% x 6/12) Remaining balance (232,425 x 20%) Classified as held for sale: Depreciation for the year Carrying amount

126,000 144.375 8,200 232,425 820 46,845

1. (A) 47,305 820 185,940 (A)

Question No. 3 Carrying amount at 1 Oct 2015 Less valuation at 1 October 2015 Revaluation surplus

372,000 449,500 77,500

Valuation at 1 October 2015 Less Depreciation expense (449,500/(40-9) Revaluation surplus (B)

449,500 14,500 435,000

Question No. 4 Carrying amount at 1 Oct 2015 Less valuation at 1 October 2015 Decrease in value

1,080,000 600,000 480,000

Valuation at 1 October 2015 Less Depreciation expense (600,000/(50-20) Revaluation surplus (B) Question No. 5 C Carrying amount at 1 Oct 2015 Less valuation at 1 October 2015 Decrease in value Less remaining revaluation surplus Impairment loss-Property B Impairment loss-held for sale (8,200-820)-6,500

600,000 20,000 580,000

1,080,000 600,000 480,000 456,000 24,000 880

223


Total impairment loss

(C)

24,880

Question No. 6 Depreciation expense based on revalued amount Less depreciation expense based on historical cost (400,000/40) Piecemeal realization (D)

14,500 10,000 4,500

Or Revaluation surplus, beginning (Prop. A) Add revaluation surplus, Oct. 1, 2015 Total revaluation surplus Divide by remaining life Piecemeal realization (D) SUMMARY OF ANSWERS: 1. A 2. A 3. B

4.

B

224

62,000 77,500 139,500 31 4,500

5.

C

6.

D

Chapter 25: Introduction to Liabilities

CHAPTER 25: INTRODUCTION TO LIABILITIES PROBLEM 25-1 Total Liabilities Total liabilities Current Accounts payable Loan payable – current portion Unearned rent income Income tax payable Dividends payable Total current liabilities

P 1,000,000 1,000,000 300,000 250,000 100,000 P 2,650,000

Non-current Bonds payable Discount on bonds payable Loan payable – non-current portion Deferred tax liability Total non-current liabilities Total liabilities

(

(B)

Below items shall be presented as part of entity’s assets: Current asset Advances to employees

P 5,000,000 500,000) 1,500,000 15,000 P 6,015,000 P 8,665,000

P

Non-current asset Cash surrender value of officers’ life insurance Patent Below item shall be presented in the shareholder’s equity: Share dividends payable

45,000 75,000 50,000

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 bank balance with positive balance as provided under PAS 7. PROBLEM 25-2 Current Liabilities Current liabilities Accounts payable – unadjusted Add/(Deduct): Adjustments Debit balances in suppliers’ accounts Postdated checks of Accounts payable – adjusted Credit balances in customers’ accounts

225

P 4,000,000 100,000 50,000 P 4,150,000 500,000


Premiums payable Accrued expenses Total current liabilities

(A)

600,000 150,000 P 5,400,000

Below items shall be presented as part of entity’s non-current liabilities: Bonds payable 1,000,000 Premium on bonds payable 100,000 Mortgage payable 850,000 Deferred tax liability 200,000 Deferred revenue 175,000 Below item shall be presented as part of shareholders’ equity: Stock dividends payable PROBLEM 25-3 Refinancing Current liabilities 10% note payable, maturing 03/3 1/2015 Annual sinking fund requirement Total current liabilities

(C)

750,000

P10,000,000 500,000 10,500,000

Below items shall be presented as part of entity’s non-current liabilities: 12% note payable, maturing 06/30/2015 6,000,000 7% 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 since the 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 since the grace period was granted after the reporting date. PROBLEM 25-6 Accounts payable Accounts payable Accounts payable – unadjusted Cost of goods lost in transit Cost of returned goods Accounts payable – adjusted

(B)

226

P 8,000,000 500,000 ( 200,000) P 8,300,000


PROBLEM 25-7 Accounts payable Amount of cash to eliminate accounts payable Accounts payable from: *Purchases through March 15 (gross)(P4,900,000 / 98%) Merchandise inventory at cost(P1,500,000 / 150%) Accounts payable (B)

P 5,000,000 1,000,000 P 6,000,000

*The amount was grossed-up since the entity is no longer entitled to cash discount. The liability as of March 15, 2015 has been outstanding for more than 10 days. PROBLEM 25-8 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Basis of bonus Multiply by: Bonus rate Total current liabilities PROBLEM 25-9 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Amount of income subject to bonus (125%) Less: Bonus (25%) (squeeze) Basis of bonus (100%) (P600,000/125%)

(C)

(D)

PROBLEM 25-10 Unearned Revenue Unearned revenue – gift certificates Unearned revenue 1,500,000 Gift certificate redeemed 4,000,000 5,000,000 Expired gift certificate 300,000 4,300,000 6,500,000 Balance, End (B) 2,200,000 6,500,000 6,500,000

227

P 2,200,000 880,000 P 1,320,000 10% P 132,000

P 1,600,000 1,000,000 P 600,000 120,000 P 480,000

Balance, Beg. Cash receipts from gift certificate sold


PROBLEM 25-11 Advances from Customers Unearned revenue – Advances from customers Unearned revenue 1,100,000 Advances applied to shipments 1,600,000 1,800,000 Orders cancelled 100,000 1,700,000 2,900,000 Balance, End (C) 1,200,000 2,900,000 2,900,000

PROBLEM 25-12 Escrow Liability Deposits received – Escrow account Escrow liability 600,000 Cash payments nine months 4,200,000 4,500,000 4,200,000 5,100,000 Balance, End (C) 900,000 5,100,000 5,100,000

PROBLEM 25-13 Container’s Deposits Deposits received – Escrow account Liability for Deposits 100,000 Cash refunds for container returned in 2014 92,000 100,000 Balance, End (C)

92,000 108,000 200,000

Balance, Beg. Advances received

Balance, Beg. Cash receipts for nine months

Balance, Beg. Cash deposits from deliveries

200,000 200,000

PROBLEM 25-14 VAT payable Provision - VAT payable VAT Payable Payment made

120,000

Balance, End (A)

120,000 180,000 300,000

120,000 84,000 96,000 300,000 300,000

228

Balance, Beg. For October For November For December


PROBLEM 25-15 Provision: Continuous range of outcome (D) A range between ₱10,000 and ₱4,000,000 means that the contingency cannot 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 70% chance that outcome will occur × 80% × ₱100,000 Expected value Multiply by: Risk adjustment Risk adjusted expected value Multiply by: Present value factor Provision (D)

₱ 28,000 56,000 84,000 1.07 89,880 89,000 ₱ 81,709

PROBLEM 25-17 Restructuring Provisions Wages of retrenched employees Salary (₱50,000 x 60%) Retrenchment package Restructuring provision (D)

₱1,000,000 30,000 150,000 ₱1,180,000

Note that 60% (administering the closure and transfer of employees of Factory A) is only included in computing the restructuring provision since it is directly related to the restructuring. PROBLEM 25-18 Contingencies (C) Since the outcome of the lawsuit remains uncertain, disclosure of the contingency 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 as supported by Rose’s filing of a petition for bankruptcy, Derick should accrue and disclose the provision for guarantee on a loan of ₱3,000,000. PROBLEM 25-20 Premiums Payable Provision – Premiums liability Premiums liability **Coupons redeemed Balance, End (D)

50,000 50,000 30,000 80,000

229

80,000 80,000 80,000

Balance, Beg. *Premiums expense


*(20,000 x 80%)/5 x (P30 + P5 - P10) **(10,000/5) x (P30 + P5 - P10) PROBLEM 25-21 Premiums Premiums liability (2015) **Balance, End 200,000 *Coupons redeemed

**Balance, End

800,000 1,000,000

1,000,000 1,000,000

Premiums liability (2016) 120,000 200,000

*Coupons redeemed

2,000,000 1,920,000 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

Balance, Beg. Premiums expense (squeeze)

Balance, Beg. Premiums expense (squeeze) (D)

The beginning balance of the 5,000 towels is included as part of the 50,000 towels distributed in 2016. If the actual towels distributed from 2016 is different from that was recorded as of the end of 2015, this is considered as a change in accounting estimate which should be taken into account during 2016 and for the succeeding accounting period. PROBLEM 25-22 Warranty Liability Warranties liability (2015) Actual expenditures 150,000 500,000 150,000 500,000 Balance, End 350,000 500,000 500,000 Warranties liability (2016) 350,000 Actual expenditures 550,000 600,000 550,000 950,000 Balance, End (A) 400,000 950,000 950,000 *Sales x Total estimated warranty cost of 10%

230

Balance, Beg. *Warranties expense

Balance, Beg. *Warranties expense


PROBLEM 25-23 Warranty Liability Warranties liability Actual expenditures Balance, End (C)

480,000 480,000

140,000 140,000 340,000 480,000

Balance, Beg. Warranties expense

480,000

PROBLEM 25-24 Warranty - Sales are Made Evenly Pattern of Realized Revenues: 2015 SALES From sales in: 2015 1st (40% x ½) 0.20 2nd (36% x ½) 3rd (24% x ½) Total 0.20 2016 SALES From sales in: 2016 1st (40% x ½) 0.20 2nd (36% x ½ 3rd (24% x ½) Total 0.20

2016 0.20 0.18 0.38 2017 0.20 0.18 0.38

2017

2018

0.18 0.12 0.30 2018

Total 0.40 0.36 0.24 1

0.12 0.12 2019

0.18 0.12 0.30

Total 0.40 0.36 0.24 1

0.12 0.12

Requirement No. 1 (A) Warranty Sales in 2015 earned in 2016 (38% x 1,000 x P1,500) Warranty Sales in 2016 earned in 2016 (20% x 1,200 x P1,500) Total warranty sales revenue earned in 2016

570,000 360,000 930,000

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) Expenses relating to computer warranties Profit from sales warranty Requirement No. 3 (A) Unearned sales warranty from 2015 [(30% + 12% x 1,000 x P1,500)] Unearned sales warranty from 2016 [(100%-20%) x 1,200 x P1,500)] Total unearned sales warranty

231

930,000 60,000 870,000

630,000 1,440,000 2,070,000


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 Refinancing 1. 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 or roll over the loan for at least twelve months from December 31, 2014 the entire amount is treated as Noncurrent liability. 3. Nil (Letter A). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis before the reporting date, the entire amount of liability is treated as noncurrent. 4. P2,000,000 (Letter B). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis after the reporting date, the entire amount of liability is treated as current. PROBLEM 25-26 Obligations Payable on Demand, Breach of Loan Agreement 1. 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 at least 12 months from the end of the reporting period that the note may be classified as noncurrent. 2. Nil (Letter A). The entire amount of loan is noncurrent liability since there was an agreement on the reporting date not to demand payment in order for 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 since the agreement not to demand payment happened after the reporting period. PROBLEM 25-27 Contingencies 1. A 2. D 3. B 4. B

232


5. 6.

A (Amount of accrual is P2,040,000 using expected value method which is calculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%) A (Amount of accrual is P2,250,000 using midpoint of the range which is calculated as (P1.5M+3M)/2)

PROBLEM 25-28 Contingencies 1. A 2. 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. D 6. 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 3,090,000 618,000

x x

BR 20%

2.

Net income after bonus but before tax NY B = BR x 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

B

= = =

30%

X (3,090,000 – B) 927,000-.3B

OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)]

233


= = = =

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 tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. D 2. B 3. C PROBLEM 25-30 Question Nos. 1 and 2

Estimated liability from Warranties

Disbursement warranties Balance end

for

164,000 212,000

Total

44,800

Beginning balance

240,000

Warranty expense.

376,000

Warranty expense Divide by % age of warranty Sales from musical instruments and sound reproduction equipment (Question No. 1) Question No. 3 Premium expense = P2,000,000 =

X

1 coupon P2

200 coupons P63,000

234

240,000 4% 6,000,000

x

90%

P34-P20


Question No. 4 Inventory of Premium Beg. Balance Net Purchases (6,500 x P34)

39,950 221,000

56,950 204,000

Total Question No. 5

Balance end Cost of issued premium (1.2M coupons.200 coupons x P34

260,950

Estimated liability for Premiums

Disbursement for premiums (1.2M coupons/200 coupons x P(34-P20) Balance end Total

84,000 23,800

44,800

Beginning balance

63,000

Premium expense.

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 NonInterest Bearing Note to the Professor: This problem should be discussed after the discussion in Chapter 26. Question No. 1 (A) Periodic payment-NP Delivery equipment (P2M/4) Multiply by PV of ordinary annuity Present value of NP-delivery equipment Amortization table: Payment Date 01/01/2015 12/31/2015 500,000 12/31/2016 500,000 Question Nos. 2 and 3 12% Note payable 10% note payable Note payable-del.

500,000 3.0373 1,518,650

Interest Expense


182,238 144,107

317,762 355,893

Noncurrent 1,400,000 2,000,000 844,995

235

Current 700,000 355,893

Present value 1,518,650 1,200,888 844,995


Equipment Total

4,244,995

1,055,893

Question No. 4 Accrued interest payable-12% Note payable =P2,100,000 x 12% x 8/12 =P168,000 Question No. 5 Interest expense: 12% Note payable 1/1-5/1 (2.8M x 12% x 4/12) 5/1-12/31 (2.1M x 12% x 8/12) 10% Note payable (2M x 10%) Note payable - Delivery. Equipment (see amortization table) Total SUMMARY OF ANSWERS: 1. A 2. B 3. B 4.

B

112,000 168,000 200,000 182,238 662,238 5.

C

PROBLEM 25-32 Warranty, Premiums and Bonus Question No. 1 Warranty expense (P150 x 1,200) Less: Warranty paid Estimated Premiums payable (A)

180,000 85,000 95,000

Question No. 2 Premium expense (P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) Less: Net cost of redeemed coupons (500,000/400)x( P45-P20) Estimated Premiums payable (C) Question No. 3 Unadjusted net income Warranty expense under, Net income over (P180,000-P85,000) Premium expense over, Net income under (P270,000-P45,000) Adjusted Net income (C) Question No. 4 Net income after bonus but before tax NY B = BR x 100% + BR = 20% x 2,065,000 100% + 20%

236

45,000 31,250 13,750 1,935,000 (95,000) 225,000 2,065,000


=

344,167

(B)

Question No. 5 Net income after bonus and tax B = BR x (NY – B – T) T

=

B

=

TR

x (NY – B) OR BR x [NY x (1-TR)] 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

B

= = = = = = =

30%

X (2,065,000 – B) 619,500-.3B

OR BR x [NY x (1-TR)] 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 tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. A 2. C 3. C 4.

B

5.

C

237


PROBLEM 25-33 Comprehensive Question No. 1 SSS Payable Philhealth payable Estimated liabilities under guarantee agreement Estimated warranties on goods sold Utilities payable Trade payables (170,000+30,000+20,000+12,000-8,000) Notes payable arising from purchase of goods Convertible bonds payable due July 1, 2014 Serial bonds payable (40,000 x 2) Accrued interest expense Advances from customers Unearned rent income Unearned interest on receivables Income taxes payables Cash dividends payable Property dividends payable Credit balance of notes payable Overdraft with PNB Container's deposit Loans payable-12% Financial liability designated as FVTPL Current liabilities (B)

10,000 9,000 110,000 120,000 6,000 224,000 200,000 1,000,000 80,000 4,000 25,000 36,000 3,500 45,000 100,000 120,000 40,000 80,000 45,000 270,000 200,000 2,727,500

Question No. 2 Deferred tax liability Notes payable Arising from 4-year bank loan Arising from advances by officers, dune in 3 years Serial bonds payable (800,000 minus (40,000 x 2) Security deposit received from lessee Loans payable-10% Total noncurrent liabilities (A)

400,000 300,000 720,000 89,000 150,000 1,699,000

Question No. 3 Total liabilities Current liabilities Total noncurrent liabilities Total liabilities

2,727,500 1,699,000 4,426,500

(B)


238

40,000

Chapter 26: Financial Liabilities and Debt Restructuring

CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING BONDS PAYABLE PROBLEM 26-1 Financial Liabilities at FVTPL (Interest Expense and Unrealized gains or losses) Question No. 1 Face value Multiply by: nominal rate Multiply by: months outstanding/12 Interest expense Question No. 2 Fair value of the bonds Less: Carrying value Unrealized loss (or gain)-P&L Question No. 3 Retirement Price (3M x 104) Less: Carrying value (3M x 103) Realized loss on derecognition-P&L

(A)

3,000,000 8% 12/12 P240,000

(B)

3,090,000 2,850,756 239,244

(D)

3,120,000 3,090,000 30,000

SUMMARY OF ANSWERS: 1. A 2. B 3. D PROBLEM 26-2 Unrealized Gain or Loss of FVTPL with Change Due To Credit Risk Question No. 1 Market price of the liability, end of the period Less: Fair value of liability using the sum observed interest rate and instrument specific IRR Unrealized loss (or gain)-OCI (B) Internal rate of return at the start of the period - yield or effective rate Less: Observed (benchmark) interest rate, date of inception Instrument specific IRR Observed (benchmark) interest rate, end of period Add: Instrument specific-IRR Discount rate

239

2,159,740 2,077,740 82,000 10% 7% 3% 6.00% 3% 9.00%


Question No. 2 Market price of the liability, end of the period Less: Carrying amount of FVTPL Increase (or decrease) in FVTPL Less: Unrealized loss (or gain) in the OCI Unrealized loss (or gain) in the P&L (C)

2,159,740 2,000,000 159,740 82,000 77,740

Present value market rate of 8% Present value of Principal (2,000,000 X 0.6806 ) Add: Present value of interest payments (2,000,000 x 10% x 3.9927) Market price of the liability, end of the period

1,361,200 798,540 2,159,740

Present value using 9% Present value of Principal (2,000,000 X 0.6499 ) 1,299,800 Add: Present value of interest payments (2,000,000 x 10% x 3.8897 ) 777,940 Fair value of liability using the sum observed interest rate and instrument specific IRR 2,077,740 Journal entry end of the period is: Unrealized loss-OCI 82,000 Unrealized loss-P&L 77,740 Financial liability at FVTPL 159,740 (Increase in FV of the liability) SUMMARY OF ANSWERS: 1. B 2. C PROBLEM 26-3 Financial Liabilities at Amortized Cost-Term Bonds Question No. 1 Present value of Principal (1,200,000 X 0.7513 ) Add: PV of interest payments (96,000 X 2.4869 ) Present value of the investment bonds Question No. 2 Amortization Table Interest Date payment 01/01/2016 12/31/2016 96,000 12/31/2017 96,000 12/31/2018 96,000

Interest expense 114,030 115,833 117,867

SUMMARY OF ANSWERS: 1. C 2. B

240

901,560 238,742 1,140,302

(C)

Premium Amortization (B)

18,030 19,833 21,835

Present value 1,140,302 1,158,333 1,178,166 1,200,000


PROBLEM 26-4 Financial Liabilities at Amortized Cost-Serial Bonds Question No. 1

Interest Principal payment 400,000 96,000 400,000 64,000 400,000 32,000 Total PV of the bonds

Total payment 496,000 464,000 432,000

Preset value factor 0.9091 0.8264 0.7513 (A)

Total PV 450,914 383,450 324,562 P1,158,925

Question No. 2 Date 01/01/2016 12/31/2016 12/31/2017 12/31/2018

Interest Payment

Interest Expense


Principal

96,000 64,000 32,000

115,892 77,882 39,301

19,892 13,882 7,301

400,000 400,000 400,000

Present value 1,158,925 778,817 392,699 -

SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 26-5 Financial Liabilities at Amortized Cost-Term Bonds Issue Price (110% x 5,000 x P1,000) Less: Bond issue cost Net cash received from issuance

5,500,000 300,000 P5,200,000

(D)

PROBLEM 26-6 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs Issue Price (5,000,000 x 98%) Less: Bond issue cost Present value on January 1, 2015 Add: Discount amortization Nominal interest (5M x 10%) Effective interest (4,760,000 x 12%) Carrying value – 12/31/2015

4,900,000 140,000 4,760,000 500,000 571,200 (D)

241

71,200 4,831,200


PROBLEM 26-7 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs Issue Price (5,000,000 x 110%) Less: Bond issue cost Present value on January 1, 2015 Less: Premium amortization Nominal interest (5M x 8%) Effective interest (5,420,000 x 6%) Carrying value – 12/31/2016

5.500,000 80,000 5,420,000 400,000 325,200 (B)

74,800 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) Add: Present value of interest (8M x 6% x 7.72) Net cash received from issuance – initial carrying amount (B)

4,880,000 3,705,600 P8,585,600

PROBLEM 26-10 Issuance of Convertible Bonds Total Proceeds (5M X 110%) Less: Present value of the bonds without conversion option Present value of Principal (5M x. 77) 3,850,000 Add: Present value of int. payments (5M x 6% x 2.53) 759,000 Residual amount allocated to Equity component (B)

5,500,000

4,609,000 891,000

PROBLEM 26-11 Issuance of Convertible Bonds Carrying amount of the bonds Less: Par value of issued shares (50,000 x P50) Share issue cost Total Add: Share Premium - conversion option Total Share Premium (C)

242

6,000,000 2,500,000 100,000 3,400,000 1,500,000 4,900,000


PROBLEM 26-12 Issuance of Convertible Bonds Question No. 1 Total Proceeds (P1,000 x 1,000) Less: Fair value of the bonds without conversion privilege Total Share Premium (A) Using 7.48% Present value of Principal (1,000,000 x 0.7 ) Add: Present value of interest payments (50,000 x 4 ) Total present value

1,000,000 900,000 100,000

700,000 200,000 900,000

Question No. 2 See amortization table below. Amortization Table Interest Date Payment 01/01/2065 12/31/2016 50,000

Interest Expense


67,320

17,320

Present value 900,000 917,320

SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-13 Retirement of Bonds Payable Retirement price (₱5,000,000 x .98) Less: Carrying value (₱5,000,000 - ₱500,000 - ₱300,000) Loss on retirement (A)

4,900,000 4,200,000 700,000

PROBLEM 26-14 Conversion of Convertible Bonds Question No. 1 – Case No. 1 Nil. (A) No gain or loss on conversion of convertible bonds unless the conversion is induced by the company. The journal entry to record the transaction would then be: Bonds payable 1,500,000 Share premium-conversion option 60,000 Premium on bonds payable 52,049 Ordinary shares (20000 X 50 ) 1,000,000 Share Premium 612,049 Question No. 2 - Case No. 2 Fair value of liability Less: Carrying amount of the bonds payable Loss on settlement (conversion) of liability (B)

243

1,600,000 1,552,049 47,951


Fair value of liability Less: Total par value of the shares issued Share Premium

1,600,000 1,000,000 600,000

The journal entry to record the transaction would then be: Bonds payable 1,500,000 Loss on settlement of liability 47,951 Premium on bonds payable 52,049 Ordinary shares (20,000 X 50 ) Share Premium

1,000,000 600,000

SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-15 Induced Conversion Face amount of debt securities converted Divide by: New conversion price Number of shares issued upon conversion Multiply by: Fair value of shares on the conversion date Fair value of shares converted

1,500,000 20 75,000 30 2,250,000

Face amount of debt securities converted Divide by: Old conversion price Number of shares issued under original conversion Multiply by: Fair value of shares on the conversion date Fair value of shares under original conversion

1,500,000 25 60,000 30 1,800,000

Fair value of shares converted Less: Fair value of shares under original conversion Debt conversion expense or loss on induced conversion (B)

2,250,000 1,800,000 450,000

Journal entry is: Bonds payable Debt conversion expense or loss on induced conversion Premium on bonds payable Ordinary shares (75,000 x 10 ) Share premium

1,500,000 450,000 52,049

750,000 1,252,049

PROBLEM 26-16 Interest-Bearing Note Accrued interest 2015 (₱5,000,000 x 12% x 9/12) Accrued interest 2016 (₱5,450,000 x 12% x 12/12) Total accrued interest (C)

244

450,000 654,000 1,104,000


PROBLEM 26-17 Non-Interest Bearing Note Principal Less: Discount on notes payable (2M x 10.8% x 12/12) Amortization (216,000/12 x 5) Carrying amount of the note payable

216,000 (90,000) (B)

2,000,000 126,000 1,874,000

PROBLEM 26-18 Interest-Bearing Note Accrued interest [(₱1,350,000 - ₱450,000) x 12% x 4/12] (B)

₱ 36,000

PROBLEM 26-19 Interest-Bearing Note Accrued interest 2015 (₱10,000 x 12% x 10/12) Accrued interest 2016 (₱11,000 x 12% x 12/12) Total accrued interest (A)

1,000 1,320 2,320

PROBLEM 26-20 Loans Payable Principal Less: Direct origination fees paid (1.5M x 4%) Initial carrying amount of the loans payable

(D)

1,500,000 60,000 1,440,000

PROBLEM 26-21 Debt Restructuring Carrying value of liability (₱6,000,000 + ₱600,000) Less: Cost or carrying value of land Gain on extinguishment (D)

6,600,000 3,500,000 3,100,000

PROBLEM 26-22 Debt Restructuring Fair value of equity securities (₱70 x 50,000) Less: Par value (₱50 x 50,000) Share premium (D)

3,500,000 2,500,000 1,000,000

PROBLEM 26-23 Debt Restructuring Question No. 1 Present value of Principal (₱4,000,000 x 0.75) Add: Present value of interest payments (320,000 x 2.49) Present value of the notes payable Less: Carrying value of the notes (₱5,000,000 + ₱500,000)

245

3,000,000 796,800 3,796,800 5,500,000


Gain on extinguishment

(B)

1,203,200

The gain is recognized since the restructuring results in a substantial modification (i.e., 21.88% = 1,203,200 / 5,500,000) Question No. 2 Interest expense (3,796,800 x 10%)

(B)

379,680

SUMMARY OF ANSWERS: 1. B 2. B PROBLEM 26-24 Debt Restructuring Principal Add: Accrued interest – January 1, 2015 Accrued interest – 2015 Carrying amount of old liability Less: Present value of new liability Present value of principal (P5M x .6209) Present value of interest (P5M x .08 x 3.7908) Gain on extinguishment of liability (A)

P6,000,000 600,000 600,000 7,200,000 3,104,500 1,516,320

4,620,820 2,579,180

COMPREHENSIVE PROBLEMS PROBLEM 26-25 Interest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Add: Present value of interest payments (36,000 x 2.4018 ) Present value of the notes payable (A) Amortization Table: Interest Date Payment 01/01/2016 12/31/2016 36,000 12/31/2017 36,000 12/31/2018 36,000

Interest Expense


112,875 122,100 132,432

76,875 86,100 96,400

Question No. 2 Interest Expense (940,625 x .12) = P112,875

(B)

Question No. 3 P1,017,500. See amortization table above.

(A)

Question No. 4 Nil. (A) The entire note payable is noncurrent liability.

246

854,160 86,465 940,625 Present value 940,625 1,017,500 1,103,600 1,200,000


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 Interest Principal payment 1,200,000 60,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Date Date 01/01/2016 12/31/2016 60,000 12/31/2017 24,000 12/31/2018 12,000

Total payment 1,260,000 424,000 412,000

Preset value factor 0.8929 0.7972 0.7118 (D)

Interest Expense

Discount on N/P

Principal Payment

210,759 84,851 44,079

150,759 60,851 32,062

1,200,000 400,000 400,000

Present Value 1,125,054 338,013 293,262 1,756,328

Present Value 1,756,328 707,088 367,938 -

Question No. 2 Interest expense (1,756,328 x .12)

P210,759

(D)

Question No. 3 Carrying amount – December 31, 2016

P707,088

(C)

Question No. 4 Principal payable Dec. 31, 2017 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal payable Dec. 31, 2018 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. D 2. D 3. C 4.

C

5.

(C)

P400,000 60,851 P339,149

(C)

P400,000 32,062 P367,938

C

247


PROBLEM 26-27 Interest-Bearing Note –Uniform Installments Question No. 1

Interest Principal payment 400,000 36,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Interest Date Payment 01/01/2016 12/31/2016 36,000 12/31/2017 24,000 12/31/2018 12,000

Total payment 436,000 424,000 412,000

Preset value factor 0.8929 0.7972 0.7118 (A)

Present Value 389,304 338,013 293,262 1,020,579

Interest Expense

Discount

Principal Payment

122,469 84,846 44,106

86,469 60,846 32,106

400,000 400,000 400,000

Present Value 1,020,579 707,048 367,894 -

Question No. 2 Interest expense (1,020,579 x .12)

P122,469

(B)


707,048

(A)

Question No. 4 Principal (payable Dec. 31, 2017 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2018 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.

B

5.

(B)

P400,000 60,846 P339,154

(A)

P400,000 32,106 P367,894

A

PROBLEM 26-28 Noninterest-Bearing Note – With Cash Price Equivalent Question No. 1 The carrying amount of the note on initial recognition is equal to its cash price equivalent of P994,760. (C) Coincidentally, the effective rate using the cash price equivalent is 12% and the amortization table is as follows:

248


Amortization Table at 12% Principal Date payment 01/01/2016 12/31/2016 400,000 12/31/2017 400,000 12/31/2018 400,000

Interest expense

Amortization

99,476 69,424 36,340

300,524 330,576 363,660

Present value 994,760 694,236 363,660 -

Question No. 2 Interest expense (994,760x .12)

P99,476

(A)


P694,236

(A)

Question No. 4 Principal (payable Dec. 31, 2017 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2018 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. C 2. A 3. A 4.

B

5.

(B)

P400,000 69,424 P330,576

(C)

P400,000 36,340 P363,660

C

PROBLEM 26-29 Noninterest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Amortization Table Date Interest expense 01/01/2016 12/31/2016 102,499 12/31/2017 114,799 12/31/2018 128,542

(B)

854,160

Present value 854,160 956,659 1,071,458 1,200,000

Question No. 2 Interest expense (854,160 x .12)

P102,499

(B)


P956,659

(A)

249


Question No. 4 Nil. The entire note payable is noncurrent liability since it is due beyond 12 months from the reporting date. (B) Question No. 5 The total entire carrying amount of note payable is presented as noncurrent liability. See Question No. 4. (A) SUMMARY OF ANSWERS: 1. B 2. B 3. A 4.

B

5.

A

PROBLEM 26-30 Noninterest-Bearing Note – Installments Question No. 1 Present value of Principal (400,000 X 2.4018 ) Amortization Table Date Interest Payment 01/01/2016 12/31/2016 400,000 12/31/2017 400,000 12/31/2018 400,000

(D)

Interest expense

Amortization

115,286 81,121 42,873

284,714 318,879 357,127

960,720

Present value 960,720 676,006 357,127 -

Question No. 2 P115,286. See amortization table above. (A) Question No. 3 P676,006. See amortization table above. (A) Question No. 4 Principal (payable Dec. 31, 2017 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2018 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. D 2. A 3. A 4.

B

5.

(B)

P400,000 81,121 P318,879

(C)

P400,000 42,873 P357,127

C

250


PROBLEM 26-31 Issuance, Retirement and Conversion of Non-Convertible Bonds Question No. 1 Present value of Principal (3,000,000 X 0.6499 ) Add: Present value of interest payments (3,000,000 x 12% x 3.8897 ) Present value of the bonds payable (B) Amortization Table Date Interest payment 01/01/2014 12/31/2014 360,000 12/31/2015 360,000

Interest expense

1,949,794 1,400,274 3,350,068


301,506 296,242

58,494 63,758

Question No. 2 Retirement Price Less: Carrying amount (3,227,816 x 1/2) Loss on retirement (B) Question No. 3 Amortization table: Interest Date payment 12/31/2015 12/31/2016 180,000

Present value 3,350,068 3,291,574 3,227,816 1,900,000 1,613,908 286,092

(B) Interest expense

Amortization

145,252

34,748

Question No. 4 Fair value of the ordinary shares issued (460 x 5,000) Less: Carrying amount of the liability Loss on conversion (D)

Present value 1,613,908 1,579,160 P2,300,000 1,579,160 P720,840*

Or P720,839* Question No. 5 Fair value of the ordinary shares issued (460 x 5,000) Less: Total par value of the shares issued (40 x 5,000) Share Premium (D) SUMMARY OF ANSWERS: 1. B 2. B 3. B 4.

D

5.

D

251

P2,300,000 200,000 P2,100,000


PROBLEM 26-32 Issuance, Retirement and Conversion of Convertible Bonds Note to the professor: On January 1, 2014, Tagbilaran Co. issued its 10%, 5year, ₱3,000,000 convertible bonds for the face amount of ₱3,000,000 not ₱5,000,000. Question No. 1 Total Proceeds Less: Present value of the bonds without the conversion option Present value of Principal (3,000,000 x 0.5674 ) Present value of interest payments (300,000 x 3.6048 ) Residual amount to equity (B) Amortization Table Date Interest payment 01/01/2015 12/31/2015 300,000 12/31/2016 300,000

Interest expense 334,046 338,131

Question No. 2 Fair value of liability using current rate Less: Carrying amount (2,817,759 x ½) Loss on settlement of liability

P3,000,000 1,702,281 1,081,433

Discount Amortization (34,046) (38,131)

(B)

Present value using 9% for 3 periods Present value of Principal (1,500,000 X 0.7722) Add: Present value of interest payments (150,000 X 2.5313) Present value of the bonds payable Question No. 3 Retirement Price Less: Fair value of liability using current rate Decrease in equity (E)

2,783,713 216,287

Present value 2,783,713 2,817,759 2,855,890 1,537,969 1,427,945 110,024 1,158,275 379,694 1,537,969

1,600,000 1,537,969 62,031

Question No. 4 Interest expense is P338,131 based on the amortization table above. Question No. 5 Shares to be issued based on amended terms (1.5M/400) Less: Shares to be issued based on original terms (1.5M/500) Incremental shares Multiply by: Fair value Debt settlement expense (C)

252

(D) 3,750 3,000 750 420 315,000


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 shares Present value of Principal (15,000 x 1.05 x 0.72161 ) Add: Present value of interest payments (1,500 x 2.42308 ) Present value of the preference shares Amortization table: Date Interest Payment 01/01/2016 12/31/2016 1,500 12/31/2017 1,500 12/31/2018 1,500

Interest Expense

Amortization

1,723 1,749 1,778

223 249 246

Question No. 1 P1,723. See amortization table above.

(B)


(C)


(D)

Present value of the debentures Present value of Principal (20,000 x 1.02 x 0.53884 ) Add: Present value of interest payments (2400 x 3.5032 ) Present value of bonds payable Amortization Table Date Interest Payment 12/31/2018 12/31/2019 2,400

Interest Expense

Amortization

2,554

(154)


(B)


(B)

253

11,365 3,635 15,000

Present value 15,000 15,223 15,472 15,718

10,992 8,408 19,400

Present value 19,400 19,554


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

B

5.

B

PROBLEM 26-34 Question No. 1 Accounts payable, unadjusted Good in transit FOB shipping point Undelivered check Accounts payable, adjusted

(D)

P1,350,000 75,000 60,000 P1,485,000

Question No. 2 14% Note payable (1,250,000 x 14%) 16% Note payable (3,000,000 x 16%) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (D)

P175,000 480,000 100,000 P755,000

Question No. 3 14% Note payable (1,250,000 x 14% x 3/12) 16% Note payable (3,000,000 x 16% x 9/12) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (C)

P43,750 360,000 100,000 P503,750

Question Nos. 4 and 5 Current 1,485,000 1,250,000

Accounts payable 14% Note payable 16% Note payable 10% Note payable Accrued interest payable Total

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

Noncurrent 3,000,000 2,000,000

503,750 P3,238,750 (C) C

5.

P5,000,000 (C)

C

PROBLEM 26-35 (Comprehensive) Question No. 1 Present value of Principal (10,000,000 X 0.3118 ) Add: Present value of interest payments (500,000 X 11.46992 ) Present value of the bonds payable (A)

254

3,118,000 5,734,960 8,852,960


Question No. 2 April 1, 2016 July 1, 2016 October 1, 2016 January 1, 2017 Notes payable-current liability

P 400,000 600,000 300,000 300,000 P1,600,000

(B)

Question Nos. 3 and 4 Estimated liability from Warranties Disbursement for warranties Balance end (A)

358,000 342,000

Total

180,000

Beginning balance

520,000

Warranty expense (C)

700,000

Question No. 5 (a)

A B C Total

Fixed salary 10,000 14,000 18,000

(b)

( c)

Net Sales 200,000 400,000 600,000

d=b x c

Comm. Rate 4% 6% 6%

Comm. Expense 8,000 24,000 36,000 (C)

E=d-a Accrued Salaries Payable 0 10,000 18,000 P28,000

Question Nos. 6 and 7 Int. payable - Bonds (10M x 10% x 3/12) Int. payable - Note payable Notes payable Estimated warranties payable Trade payable Sales commissions payable Cash dividends payable (6M x P.2) Bonds payable Total

Current 250,000 600,000 1,600,000 342,000 740,000 28,000 1,200,000 P4,760,000 (B)

Noncurrent 5,400,000*

8,970,751 P14,370,751** (C)

*(P7M-1.6M) ** or P14,370,783 which is the same as P8,952,185 x 100% +(Effective rate x months outstanding/12) minus payment Or [(P8,952,185 x 103%) - P250,000]

255


Amortization Table Interest Date Payment 07/01/2014 01/01/2015 500,000 07/01/2015 500,000 01/01/2016 500,000 03/31/2016 250,000 (8,952,185 x 12% x 3/12) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.

C

Interest Expense

Amortization

531,178 533,048 535,031 268,566

31,178 33,048 34,999 18,566

5.

C

6

B

7

Present value 8,852,960 8,884,138 8,917,186 8,952,185 8,970,751

C

PROBLEM 26-36 Financial liabilities, Investment in associate and research and development cost Question No. 1 Total proceeds (P100 x 2M) Less: Present value of the convertible debt (see No. 2) Share premium – conversion privilege Less: Share issuance cost Net amount allocated to equity (C)

200,000,000 181,635,200 18,364,800 4,000,000 14,364,800

Question No. 2 Present value of convertible debt without conversion option at 11.81% Present value of Principal (200M x .7154) 143,080,000 Add: Present value of interest payments (200M x .08 x 2.4097) 38,555,200 Present value of the convertible debt (B) 181,635,200 Question No. 3 Interest expense (181,635,200 x .1181)

(D)

21,451,117

(C)

380,000,000 370,000,000 10,000,000 20% 2,000,000

Question No. 4 Net asset of GL Less: Recoverable amount Impairment loss of GL Multiply by: Percentage share Impairment loss

Question No. 5 1. 6. 7.

Research on size of potential market Staff training costs Advertisement costs Total amount expensed (B)

256

₱ 800,000 600,000 3,400,000 ₱4,800,000


Question No. 6 2. 3. 4.

Products designing Labor costs in refinement of products Development work undertaken to finalize the product design Total Development cost capitalized (C)

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

C

5.

B

6

1,500,000 950,000 11,000,000 13,450,000

C

PROBLEM 26-37 Financial Liability at FVTPL vs. FLAC

CASE NO. 1 Question No. 1 Initial carrying amount is fair value or issuance price of ₱1,898,205. Transaction cost is expensed outright. (D) Question No. 2 Interest expense (₱2,000,000 x 8%)= ₱ 160,000 (A) Question No. 3 Fair value 12/31/2015 (1.02 x ₱2,000,000) Less: Initial carrying amount Unrealized loss (C)

₱2,040,000 1,898,205 ₱ 141,795

Question No. 4 Carrying value (₱2,000,000 x .98)= ₱ 1,960,000 (C) Question No. 5 Fair value 12/31/2017 (.99 x ₱2,000,000) Less: Carrying value (.98 x ₱2,000,000) Unrealized loss (D)

₱1,980,000 1,960,000 ₱ 20,000

Question No. 6 Retirement price (1.05 x ₱2,000,000) Add: Transaction cost Total retirement price Less: Carrying value (.98 x ₱2,000,000) Loss on derecognition SUMMARY OF ANSWERS: 1. D 2. A 3. C 4.

C

5.

₱2,100,000 20,000 2,120,000 1,980,000 ₱ 140,000

(A)

D

257

6.

A


CASE NO. 2 Question No. 7 Issue price Less: Transaction cost Initial carrying amount

₱1,898,205 25,000 ₱ 1,873,205

(C)

Question No. 8 Effective interest rate = 10% (B) Please refer to discussion on interpolation. Question No. 9 Interest expense (₱1,873,205 x 10%)= ₱ 187,321 (B) Question No. 10 No gain or loss due to change in fair value is not recognized. (D) Question No. 11 Carrying value 12/31/2016

(A)

₱1,930,579

Retirement price (1.05 x ₱2,000,000) Add: Transaction cost Total retirement price Less: Carrying value – 01/01/2018 Loss on derecognition

(B)

₱2,100,000 20,000 2,120,000 1,963,636 ₱ 156,364

SUMMARY OF ANSWERS: 7. C 8. B 9. B 10.

A

Question No. 12

D

11.

258

12.

B

Chapter 27 – Lease

CHAPTER 27: LEASE PROBLEM 27-1 Unequal rental payments 2014 2015 2016 2017 Total rent Divide by: Number of years Rent expense per year

20,000 18,000 16,000 14,000 68,000 4 17,000

(C)

PROBLEM 27-2 Operating Lease - Unequal rental payments 07/01/2014 to 06/30/2015 07/01/2015 to 06/30/2016 07/01/2016 to 06/30/2017 Total Divide by: Lease term Rent income per year

60,000 90,000 210,000 360,000 3 120,000

Rent income to date (120,000 x 2) Less: Collection to date (60,000 + 90,000) Rent receivable (A)

240,000 150,000 90,000

PROBLEM 27-3 Operating Lease - Comprehensive CASE NO. 1 Question No. 1 Periodic rent-one year (₱25,000 x 12) (B)

300,000

CASE NO. 2 Question No. 2 Periodic rent-one year Amortization of lease bonus (180,000 / 3 ) Rent expense (C)

300,000 60,000 360,000

CASE NO. 3 Question No. 3 Total lease payments [(3 x 12) – 6) x 25,000] Divide by: Lease term Rent expense per year (D)

750,000 3 250,000

259


Question No. 4 Total payments to date, 2016 (6 x 25,000 ) Less: Total expense to date, 2016 Accrued rent payable (E)

150,000 250,000 100,000

CASE NO. 4

Question No. 5 Total lease payments (25,000 x 2 x 12 ) (30,000 x 1 x 12 ) Divide by: Lease term Rent expense per year

600,000 360,000 (A)

960,000 3 320,000

Question No. 6 Total payments to date, 2016 Less: Total expense to date, 2016 Accrued rent payable (D)

300,000 320,000 (20,000)

CASE NO. 5 Question No. 7 Rent Revenue Less: Amortization of Direct Cost (120,000 / 3) Insurance and property tax expense on leased asset Depreciation of the leased asset Net income (A) CASE NO. 6 Question No. 8 Period rent for one year Add: Contingent rent 1st [(2,500,000 – 1,500,000) x 10%] 100,000 2nd [(6,000,000 – 2,500,000) x 8%] 280,000 Total rent expense (A) SUMMARY OF ANSWERS: 1. B 2. C 3. D 6. D 7. A 8. A

4.

(E)

5.

300,000 40,000 40,000 30,000 190,000

300,000 380,000 680,000

A

PROBLEM 27-4 Finance Lease - Lease Liability (A) The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity 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 to expense.

260


PROBLEM 27-5 Finance Lease with Bargain Purchase Option Question No. 1 (A) Present value of periodic payment (120,000 x 3.4018) Add: Present value of bargain purchase option (20,000 x 0.6355) Present value of minimum lease payments Amortization Table Annual Date payment 12/31/2016 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 120,000 12/31/2020 20,000

Interest expense 36,111 26,044 14,770 2,142

Amortization 120,000 83,889 93,956 105,230 17,858

408,220 12,710 420,926

Present value 420,926 300,926 217,037 123,082 17,851 (6)

Question No. 2 (B) P36,111. See amortization table above. Question No. 3 (C) P83,889. See amortization table above. Question No. 4 (B) P217,037. 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. 1 Question No. 1 Present value of periodic payment (130,000 x 3.4869) Add: Present value of guaranteed residual value (50,000 x 0.683) Present value of minimum lease payments Add: Initial direct cost Cost of the Machinery (C) Amortization Table Annual Date payment 12/31/2016 12/31/2016 130,000 12/31/2017 130,000 12/31/2018 130,000 12/31/2019 130,000 12/31/2020 50,000

Interest expense 35,745 26,319 15,951 4,538

261

Amortization 130,000 94,255 103,681 114,049 45,462

453,297 34,150 487,447 40,000 527,447

Present value 487,447 357,447 263,192 159,511 45,462 0


Question No. 2 (B) P35,745. See amortization table above. Question No. 3 (C) P94,255. See amortization table above. Question No. 4 (B) P263,192. See amortization table above. CASE NO. 2 Question No. 5 Present value of periodic payment (130,000 x 3.4226) Add: Present value of guaranteed residual value (50,000 x 0.647) Present value of minimum lease payments = Fair value Add: Initial direct cost Cost of the Machinery (D) Amortization Table: Effective rate = 11.50% Annual Interest Date payment expense Amortization 12/31/2016 12/31/2016 130,000 130,000 12/31/2017 130,000 39,938 90,062 12/31/2018 130,000 29,581 100,419 12/31/2019 130,000 18,033 111,967 12/31/2020 50,000 5,160 44,840

444,938 32,350 477,288 40,000 517,288

Present value 477,288 347,288 257,226 156,807 44,840 (0)

Question No. 6 (D) P39,938. See amortization table above. Question No. 7 (A) P90,062. See amortization table above. Question No. 8 (D) P257,226. See amortization table above. SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

B

5.

262

D

6.

D

7.

A

8.

D


PROBLEM 27-7 Finance Lease - Depreciation Question No. 1 Cost of the lease asset Less: Estimated residual value end of the useful life of the asset Depreciable cost Divide by: Useful life Depreciation (A)

487,447 60,000 427,447 8 53,431

Question No. 2 Cost of the lease asset Less: Gross amount of guaranteed residual value Depreciable amount Divide by: Lease term Depreciation (B)

487,447 50,000 437,447 4 109,362

PROBLEM 27-8 Computation of Periodic Lease Payments Fair value Less: Present Value of Guaranteed Residual Value Total Divide by: Present value of Annuity Due Periodic lease payments (B)

800,000 59,630 740,370 4.8897 151,414

PROBLEM 27-9 Direct Financing Lease - Lessor Question No. 1 Gross Investment: Total Periodic Lease Payment (261,692 x 4) Add: Unguaranteed Residual value (URV) Less: Cost of the equipment Unearned interest income (C)

*1,046,775 150,000

1,196,775 1,000,000 196,775

*1,046,770 OR 1,046,775 Amortization Table Annual Date Collection 12/31/2016 12/31/2016 261,692 12/31/2017 261,692 12/31/2018 261,692 12/31/2019 261,692 12/31/2020 150,000

Interest Income 81,214 61,361 39,325 14,864

263

Amortization 261,692 180,479 200,331 222,368 135,136

Present value 1,000,000 738,308 557,829 357,498 135,130 (6)


Question No. 2 (C) P81,214. See amortization table above. Question No. 3 (A) P180,479. See amortization table above. SUMMARY OF ANSWERS: 1. C 2. C 3. A PROBLEM 27-10 Direct Financing Lease - With Initial Direct Cost Question No. 1 Gross Investment: Total Periodic Lease Payment (251,600 X 4) Add Unguaranteed Residual value (URV) Less: Cost of the equipment Unearned interest income (A)

*1,006,402 -

1,006,402 924,128 82,273

*4,796,278 OR *4,796,280 Cost of the equipment Add: Initial direct cost Net cost of investment Amortization Table Annual Date Collection 12/31/2016 12/31/2016 251,600 12/31/2017 251,600 12/31/2018 251,600 12/31/2019 251,600

900,000 24,128 924,128 Interest Income 51,872 35,894 18,637

Question No. 2 (A) P51,872. See amortization table above. Question No. 3 (B) P199,728. See amortization table above. SUMMARY OF ANSWERS: 1. A 2. A 3. B

264

Amortization 251,600 199,728 215,707 232,963

Present value 900,000 648,400 448,671 232,964 1


PROBLEM 27-11 Direct Financing Lease - Sale Of Leased Asset CASE NO. 1 Question No. 1 Gross Investment: Total periodic lease payments (300,000 x 4) Add: Residual Value Present value of the leased asset Present value of minimum lease payments (300,000 x 3.3121) Add: Present value of residual value (50,000 x .735) Unearned interest income (A) Amortization Table Annual Date Collection 01/01/2016 12/31/2016 300,000 12/31/2017 300,000 12/31/2018 300,000 12/31/2019 350,000

Interest Income

(B)

Question No. 4 Nil.

(A)

The journal entry is: Inventory Cash Lease receivable SUMMARY OF ANSWERS: 1. A 2. B 3. B

1,030,380 900,000 10,000 120,380

44,000 6,000 50,000 4.

A

265

36,750

217,570 234,975 253,773 324,094


1,250,000

993,630

Amortization

82,430 65,025 46,227 25,906

Question No. 3: Guaranteed Sales Less: Cost of goods sold Initial direct cost Dealer's profit

1,200,000 50,000

1,030,380 219,620

Present value 1,030,380 812,810 577,835 324,062 (32)


CASE NO. 2 Question No. 1 Gross Investment: Total periodic lease payments (300,000 x 4) Add: Residual Value Present value of the leased asset Present value of minimum lease payments (300,000 x 3.3121) Add: Present value of residual value (50,000 x .735) Unearned interest income (A) Question No. 2 Amortization Table Annual Date Collection 01/01/2016 12/31/2016 300,000 12/31/2017 300,000 12/31/2018 300,000 12/31/2019 350,000

1,250,000

993,630 36,750

1,030,380 219,620

(B) Interest Income

Amortization

82,430 65,025 46,227 25,906

Question No. 3: Unguaranteed Sales Less: Net cost Cost of goods sold Less: Present value of URV Initial direct cost Dealer's profit (B) Question No. 4 P6,000.

217,570 234,975 253,773 324,094

Present value 1,030,380 812,810 577,835 324,062 (32)

993,630 900,000 36,750

863,250 10,000 120,380

(B)

The journal entry is: Inventory Loss on sales type Lease receivable SUMMARY OF ANSWERS: 1. A 2. B 3. B

1,200,000 50,000

44,000 6,000 50,000 4.

B

PROBLEM 27-12 Sales-Type Lease Net Selling Price Less: Present value of lease receivable Gain on sale (D)

400,000 150,000 250,000

266


PROBLEM 27-13 Sale and Leaseback as Finance Lease Question No. 1 Sales Price Less: Carrying amount Loss on sale and leaseback

(B)

993,630 1,100,000 (106,370)

Question No. 2 Sales Price Less: Carrying amount Deferred gain on sale and leaseback Divide by: Lease term Gain on sale and leaseback (D)

993,630 900,000 93,630 4 23,408

PROBLEM 27-14 Sale and Leaseback as Operating Lease - Treatment of Gain Question No. 1 (B) Sales Price = Fair value Less: Carrying amount Gain on sale - recognize immediately

800,000 500,000 300,000

Question No. 2 (B) Sales price Less: Carrying amount Loss on sale - recognize immediately

800,000 1,000,000 (200,000)

Question No. 3 Sales price Less: Fair value Deferred Gain

800,000 600,000 200,000

Fair value Less: Carrying amount Outright gain

(D)

600,000 450,000 150,000

Question No. 4 (B) Sales Price = Fair value Less: Carrying amount Gain on sale - recognize immediately

800,000 400,000 400,000

Question No. 5 Sales Price = Fair value Less: Carrying amount Loss on sale and leaseback

800,000 880,000 (80,000)

(B)

267


Question No. 6 Note to the Professor: The question should be what amount of loss on sale and leaseback should Beegees Co. recognized immediately and not GAIN on sale and leaseback. 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

COMPREHENSIVE PROBLEMS PROBLEM 27-16 CASE NO. 1 Question No. 1 (A) “Substantially all” test Present value of Periodic Payment (200,000 x 6.75902) % age

1,351,805 2,000,000

1,351,805

=68%

Not substantially all. Major part test % age

10 20

=50%

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 Rent expense

(B) P200,000

Question No. 3 Nil.

(A)

Question No. 4 Nil.

(A)

Question No. 5 (D) Depreciation expense overstated, net income understated Interest expense overstated, net income understated Rent expense understated, net income overstated Net income understated SUMMARY OF ANSWERS – CASE NO. 1: 1. A 2. B 3. A 4. A 5.

268

D

(115,181) (135,181) 200,000 (50,362)


Question No. 1 “Substantially all” test % age 1,351,805 =90% 1,500,000

CASE NO. 2 (B)

The lease is a finance lease. The cost of the leased asset is lower between the fair value and the present value of minimum lease payment which is P1,351,805. Amortization Table Annual Date Payment 01/01/2015 12/31/2015 200,000 12/31/2016 200,000 12/31/2017 200,000 12/31/2018 200,000

Interest Expense

Amortization

115,181 106,699 97,368

200,000 84,819 93,301 102,632

Question No. 2 (D) Depreciation expense (1,351,805/10) Interest expense Total lease- related expenses

Present value 1,351,805 1,151,805 1,066,986 973,684 871,052

135,181 115,181 250,362

Question No. 3 (C) P93,301. See amortization table above. 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 the lease term. Selling Price Less: Carrying amount Deferred gain on sale and leaseback Less: Amortization in 2014 (29,695/10) Deferred gain on sale and leaseback, end

269

379,695 350,000 29,695 2,970 26,725


Question No. 2 (D) Interest expense Depreciation expense (379,695/10) Rent expense (5,000 x 12) Total lease related expenses Amortization Table Annual Date Payment 01/02/2016 01/02/2016 60,000 01/02/2017 60,000

38,363 37,970 60,000 136,333

Interest Expense

Amortization

38,363

60,000 21,637

Question No. 3 (C) Sale and leaseback as finance lease Lease liability, 01/02/2016 Add: Accrued interest Total lease-related liability

Present value 379,695 319,695 298,058

319,695 38,363 358,058

Question No. 4 (B) Amortization of deferred gain on sale and leaseback (see No. 1) Add: Gain on sale and leaseback as operating lease (P400,000P350,000) Total gain on sale and leaseback

2,970 50,000 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 Fair Value of the leased asset

201,865 P213,213

PAR. 20 OF PAS 17 States that: At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset.

270


Question Nos. 2-4 Amortization Table Annual Date Payment 12/31/2015 12/31/2015 50,000 12/31/2016 50,000 12/31/2017 50,000 12/31/2018 50,000 12/31/2019 50,000

Interest Expense

Amortization

18,224 14,411 10,140 5,361

50,000 31,776 35,589 39,860 44,639

Present value 201,865 151,865 120,089 84,499 44,639 0

Question No. 2 (D) P120,089. See amortization table above. Question No. 3 (C) P35,589. See amortization table above. Question No. 4 (C) P18,224. See amortization table above. Question No. 5 (A) Depreciation expense (201,865/5) SUMMARY OF ANSWERS: 1. C 2. D 3. C

4.

C

P40,373 5.

A

PROBLEM 27-19 Question No. 1 Annual lease payments

(A) = =

Annual lease payments

=

Fair market value – Present value of Unguaranteed Residual Value Annuity due 286,420 - (.5066 X 20,000) 4.6048 60,000

Question No. 2 (C) Total minimum lease payments(60,000 x 6) Add: Unguaranteed residual value Total lease receivable Less: Fair market value of the leased asset Total Financial revenue

271

360,000 20,000 380,000 286,420 93,580


Question No. 3 Amortization Table Annual Date Collection 01/01/2016 01/01/2016 60,000 12/31/2016 60,000

(A) Interest Income

Amortization

27,170

60,000 32,830

Present value 286,420 226,420 193,590

Question No. 4 (C) Present value of periodic lease payments (60,000 x 4.6048) Amortization Table Annual Date Collection 01/01/2015 01/01/2015 60,000 12/31/2015 60,000

Interest Income

Amortization

25,955

60,000 34,045

Depreciation expense (276,288/6) Add: Interest expense Total expenses

P 276,288 Present value 276,288 216,288 182,243

46,048 25,955 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) Amortization of lease bonus (300,000/6) Rent expense Question No. 2 (C) Periodic rent Contingent rent: 1st (4M x 4%) 160,000 2nd (6M-4M) x 5%) 100,000 Amortization of lease bonus (500,000/5) Total rent expense

272

144,000 50,000 194,000

480,000 260,000 100,000 840,000


Question No. 3 Rent expense

=

Rent expense

=

(B) [(3 x 12)-6] x 10,000 3 100,000

Question No. 4 (B) Lease No. 1 (Rent expense overstated, asset understated) (P444,000-P194,000) Lease No. 2 (Rent expense overstated, asset understated) Asset understated Rent expense per year-Lease 3 Less: Payment (10,000 x 6 months) Accrued rent payable under, Liability understated

100,000 60,000 (40,000)

Question No. 5 (C) Lease no. 1 (Rent expense overstated, net income understated) Lease No. 2 (Rent expense overstated, net income understated) Lease No. 3 (Rent expense understated, net income overstated) (100,000-60,000) Net income understated SUMMARY OF ANSWERS: 1. B 2. C 3. B

4.

B

5.

(250,000) (400,000) (650,000)

(250,000) (400,000) 40,000 (610,000)

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 Executory costs Minimum lease payment Multiply by: Present value of annuity due Present value of minimum lease payments

P1,440,000 (49,410) P1,390,590 6.33 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 = 12/31/15 balance [(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

273


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 P8,800,000/10 = P880,000

(A)

Question No. 5 (A) Depreciation expense Interest expense (P8,800,000 – P1,390,590) x 12 Executory costs Total lease-related expenses SUMMARY OF ANSWERS: 1. B 2. D 3. B

4.

B

5.

P 880,000 889,129 49,410 P1,818,539

A

PROBLEM 27-22 Question No. 1 07/01/2015 to 06/30/2016 07/01/2016 to 06/30/2017 07/01/2017 to 06/30/2018 Total Divide by: Number of years Rent expense per year

(B) 60,000 90,000 210,000 360,000 3 120,000

Rent expense to date (120,000 x 1) Less: Payment to date Accrued rent payable

120,000 60,000 60,000

Question No. 2 (B) Present value of Periodic Payment (400,000 x 5.9500) Fair value of leased asset

2,380,000 P2,380,000

Cost is equal to P2,380,000 (Fair value which is the same as the Present value of minimum lease payments.) Amortization Table Annual Date Payment 06/30/2016 06/30/2016 400,000 06/30/2017 400,000

Interest Expense

Amortization

277,200

400,000 122,800

274

Present value 2,380,000 1,980,000 1,857,200


Question No. 3 (A) First lease (See No. 1) Second lease (see amortization table) Current liabilities

60,000 122,800 182,800

Question No. 4 (A) Rent expense (First lease) Interest expense Depreciation expense (2,380,000/10) Total lease-related expenses

120,000 277,200 238,000 635,200


4.

A

PROBLEM 27-23 Exercise of Guaranteed Residual Value Question No. 1 (C) Present value of periodic payment (120,000 x 3.4437) Add: Present value of bargain purchase option (30,000 x 0.6587) Present value of minimum lease payments Add: Initial direct cost Cost of the Machinery Question No. 2 Interest expense Executory cost Depreciation Total lease-related expenses Question Nos. 3 to 4 Amortization Table Annual Date Payment 12/31/2016 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 120,000 12/31/2020 30,000

(B)

413,244 19,761 433,005 20,000 453,005

34,431 20,000 105,751 160,182

Interest Expense

Amortization

34,431 25,018 14,570 2,977

120,000 85,569 94,982 105,430 27,023

Question No. 3 (C) P85,569. See amortization table above. Question No. 4 (B) P227,436. See amortization table above.

275

Present value 433,005 313,005 227,436 132,453 27,023 (0)


Question No. 5 (B) Gross amount of guaranteed residual value Less: Fair value Loss on finance lease Question No. 6 Zero

30,000 25,000 5,000

(A)

Question No. 7 (C) Cost of leased asset Less: Accumulated depreciation Carrying amount Add: Cash payment Total consideration Less: Lease liability Cost of equipment purchased SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

B

453,005 211,503 241,503 200,000 441,503 227,436 214,067 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 present value of the minimum lease payments. Lease receivable (P959,500 x 8 + P400,000) Present 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 Total interest over the lease term

276

P 8,076,000

5,499,966 P2,576,034*


Since the lease is a direct financing lease (meaning, present value of the minimum lease payments approximates the value of the property upon the commencement 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) Present value of minimum lease payments: Rental (3.60 x P3,000,000) P10,800,000 Unguaranteed residual value (0.57 x P1,000,000) 570,000 Total unearned interest income Question No. 2 (B) Present value of minimum lease payments Cost of goods sold (P8,000,000 + P300,000)

(B) P 7,040,000 ( 5,600,000) 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.

277

(11,370,000) P 4,630,000 11,370,000 (8,300,000) P3,070,000

Question No. 3 (A) P11,370,000 x 12% = P1,364,400 Question No. 4 Selling price Book value Gain on sale

P16,000,000

B


PROBLEM 27-26 Financial Liability, Sale and Leaseback, Impairment loss on PPE and Investment in Associate Note to the professor: Question should be - How much is the overstatement or understatement (please disregard the sign ( ) for understatement. Question No. 1 (B) Interest cost paid (50M x 12%) Less: Interest expense for the year (47,078,000 x 14%) Understated finance cost

6,000,000 6,590,920 (590,920)

Rounded off to P591,000 Question No. 2 (C) Profit accounted for on disposal of plant Profit to be booked (10M/5 X .5) Overstated profit on sale and leaseback

10,000,000 1,000,000 9,000,000

Question No. 3 (C) Depreciation per book (30M/15) Depreciation to be booked Apr. 1, 2015 to Sept. 30, 2015 (30M/15 X .5) 1,000,000 Depreciation to be booked Oct. 1, 2015 to March 31, 2016 (16M/5 X .5) 1,600,000 Understated depreciation Question No. 4 (C) Carrying value as of October 1, 2015 (30M/15 X 10.5) Recoverable amount Impairment loss Question No. 5 (C) Acquisition cost Dividend income (P20 x 50,000) Share in the net income (P10M x 25%) Share in the comprehensive income (P2M x 25%) Investment in associate SUMMARY OF ANSWERS: 1. B 2. C 3. C

4.

C

5.

278

C

2,000,000

2,600,000 (600,000)

21,000,000 16,000,000 5,000,000

6,000,000 (1,000,000) 2,500,000 500,000 8,000,000


PROBLEM 27-27 Investment Property Question No. 1 (A) Nil, since the property should be investment property and not property, plant and equipment. Present value of periodic payment (500,000 x 4.97) Add: Present value of bargain purchase option (400,000 x 0.40) Present value of Minimum lease payments Present value of minimum lease payments Less: Fair value of the land at the inception of the lease Cost of the building as investment property Amortization Table Annual Date Payment 01/01/2016 12/31/2016 500,000 12/31/2017 500,000

2,485,000 160,000 2,645,000 2,645,000 200,000 2,445,000

Interest Expense

Amortization

317,400 295,488

182,600 204,512

Present value 2,645,000 2,462,400 2,257,888

Question No. 2 (C) P317,400. See amortization table above. Question No. 3 (C) P204,512. See amortization table above. Question No. 4 (C) P2,257,888. See amortization table above. Question No. 5 and 6 Total rent income (40,000 x 24) + (50,000 x 24) x 20 Divide by: Number of years Rent income per year

43,200,000 4 10,800,000

Periodic rent Add: Amortization of lease bonus (30,000 x 20)/4 Gross Rental income (No. 5) (A) Less: Expenses Amortization of initial direct cost (5,000 x 20)/4 Annual maintenance cost Interest expense Depreciation *(2,645,000-200,000/10) Net rental income (B) SUMMARY OF ANSWERS: 1. A 2. C 3. C

4.

C

5.

279

A

10,800,000 150,000 10,950,000 25,000 40,000 317,400 244,500 10,323,100

6.

B


PROBLEM 27-28 Question No. 1 (900,000+50,000+25,000)

(D)

Question No. 2 (D) Total warranty expense (1.4M x 12%) Less: Total actual expenditures Warranty liability end of 2015 Question No. 3 Legal services Add: Medical services Payroll (14,400/12 x 8) Royalties Total accrual

975,000

P

168,000 63,000 105,000

P

(C) P

P

Question No. 4 (D) Fair value (equal to present value MLP) Less: First payment Total Add: Interest accrued (420,000 x 9%) Total lease liability Question No. 5 (3,875,902 x 111%)-400,000 SUMMARY OF ANSWERS: 1. D 2. D 3. C

P

P

P

4,600 5,500 9,600 3,900 23,600 490,000 70,000 420,000 37,800 457,800

(A) P 3,902,251 4.

D

5.

A

PROBLEM 27-29 Question No. 1 (C) Unadjusted balance – Accounts Payable 2 3 Adjusted balance Question No. 2 Units sold: October November December Total Multiply by Total failures expected

450,000 60,000 45,000 555,000

(A) 32,000 28,000 40,000 100,000 2% 2,000

280


Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cost

640 360 180

Warranty expense Estimated warranty liability

1,180 820 150 123,000

123,000 123,000

Question No. 3 (C) Notes payable is (200,000 x 3.6048) = 720,960 Amortization Table Annual Date Payment 01/01/2016 12/31/2016 200,000 12/31/2017 200,000

Interest Expense

Amortization

86,515 72,897

113,485 127,103

Question No. 4 (A) Present value of principal (4M x .6830) Present value of interest payments (480,000 x 3.1699) Total Present value Amortization Table Interest Date Payment 01/01/2016 12/31/2016 480,000 Question No. 5

Interest Expense


425,355

54,645

2,732,000 1,521,552 4,253,552 Present value 4,253,552 4,198,907

(D)

Present value of minimum lease payments (200,000 x 6.759) Amortization Table Annual Date Payment 01/01/2016 01/01/2016 200,000 12/31/2016 SUMMARY OF ANSWERS: 1. C 2. A 3. C

Present value 720,960 607,475 480,372

Interest Expense

Amortization

115,180 4.

A

5.

281

200,000

D

P1,351,800 Present value 1,351,800 1,151,800 1,266,980


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 Annual Interest Date Payment Expense 12/31/2015 12/31/2015 60,000 12/31/2016 60,000 38,363 12/31/2017 60,000 35,767

Amortization 60,000 21,637 24,233

Present value 379,692 319,692 298,055 273,822

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 lease Date Expense 1/1-12/31/16 1/1-12/31/17 1/1-12/31/18

240,000 240,000 240,000

Expense To date 240,000 480,000 720,000

Payment to date 120,000 300,000 720,000

Accrued rent (Prepaid) 120,000 180,000 -

Question No. 5 (C) CONTINGENCIES Answer: P400,000 (P200,000+P200,000) 1.

Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably.

2. Retained earnings Estimated liability for income tax

200,000

3. Accounts receivable – Innova Loss on guaranty Note payable – bank SUMMARY OF ANSWERS: 1. D 2. D 3. B

4.

120,000 80,000

(E)

5.

282

C

200,000

200,000


PROBLEM 27-31 Question No. 1 Date 04/01/2011 03/31/2012 03/31/2013 03/31/2014 03/31/2015 03/31/2016 Revised Date 04/01/2016 09/30/2016

Finance cost

Present Value 19,000,000 20,900,000 22,990,000 25,289,000 27,817,900 30,599,690

1,900,000 2,090,000 2,299,000 2,528,900 2,781,790

Finance cost

Present Value 25,000,000

1,250,000

10/1/2016 to 3/31/2016 (2,781,790 x 6/12) 04/01/2016 to 9/30/2016 (25,000,000 x 10% x 6/12 Finance cost (C) Question No. 3 Cost of the plant Add: Present value of decommissioning cost Total Less: Accumulated depreciation (149M/20 x 5) Carrying value, 3/31/2016 Less: Decrease due to revision of decom liability Present value of decommissioning liability Less: Revised estimate Total Less: Depreciation April to Sept 2016 (106,160,310/15 x 6/12) Carrying value, 9/30/2016 (B)

1,390,895 1,250,000 2,640,895

130,000,000 19,000,000 149,000,000 37,250,000 111,750,000 30,599,690 25,000,000

Question No. 2 Depreciation October 1 to March 31 Depreciation April to Sept 2016 (106,160,310/15 x 6/12) Total depreciation (B) Question No. 4 2016 2017 2018 Total Divide by: Total semi-annual payments Semi-annual income (B)

283

5,599,690 106,150,310 3,538,344 102,611,966

3,725,000 3,538,344 7,263,344

6,000,000 6,300,000 6,615,000 18,915,000 6 3,152,500


Question No. 5 Total income to date Less: Total collection to date Rent receivable SUMMARY OF ANSWERS: 1. C 2. B 3. B

3,152,500 3,000,000 152,500

(B)

4.

B

5.

284

B

Chapter 29 – Shareholders’ Equity

CHAPTER 29: SHAREHOLDERS’ EQUITY PROBLEM 29-1 Question No. 1 (A) Authorized ordinary shares at P10 stated value Less: Unissued ordinary shares Ordinary Shares issued

1,200,000 650,000 550,000

Question No. 2 (B) Authorized preference shares at P50 par value Less: Unissued preference shares Preference Shares issued

800,000 150,000 650,000

Question No. 3 (D) Share Premium on ordinary shares Share Premium conversion option-bonds payable Share premium on preference shares Gain on sale of treasury shares Ordinary share warrants outstanding Donated capital Ordinary shares options outstanding Total Share Premium

300,000 40,000 150,000 60,000 35,000 40,000 25,000 650,000

Question No. 4 (D) Ordinary Shares issued Preference Shares issued Subscribed Ordinary shares Subscription receivable – ordinary shares Subscribed Preference shares Subscription receivable – preference Total Share Premium Contributed Capital

550,000 650,000 200,000 (20,000) 50,000 (15,000) 650,000 2,075,000

Question No. 5 (C) Preference Shares issued Subscribed Preference shares Ordinary Shares issued Subscribed Ordinary shares Share Premium on ordinary shares Total Legal Capital

650,000 60,000 550,000 200,000 300,000 1,760,000

285


Question No. 6 (D) Contributed Capital Accumulated profits – unappropriated Unrealized increase in value of FVTOCI securities Reserve for bond sinking fund Revaluation surplus Total Shareholders' Equity SUMMARY OF ANSWERS: 1. A 2. B 3. D

4.

D

5.

C

2,075,000 500,000 10,000 320,000 130,000 3,035,000 6.

D

PROBLEM 29-2 1.

Cash (3,000 x ₱100) Share capital To record share issuance at a premium

300,000

2.

Cash (5,000 x ₱110) Share capital (5,000 x ₱100) Share premium To record share issuance at a premium

550,000

Share premium Retained earnings Cash To record payment of share issue cost

50,000 10,000

Cash (4,000 x ₱90) Discount on share capital Share capital (4,000 x ₱100) To record share issuance at a discount

360,000 40,000

3.

300,000

500,000 50,000

60,000

400,000

PROBLEM 29-3 1.

2.

3.

Machinery Share capital (2,500 x ₱100) Share premium To record share issuance for machinery

280,000

Patent (1,000 x ₱105) Share capital (1,000 x ₱100) Share premium To record share issuance for patent

105,000

Organization expense Share capital (500 x ₱100) Share premium To record share issuance for organization services.

286

250,000 30,000

100,000 5,000 60,000

50,000 10,000


PROBLEM 29-4 Loans payable – bank Loss on extinguishment of liability* Share capital (2,000 x ₱100) Share premium** To record issuance of shares for liability

250,000 30,000 200,000 80,000

*Computation of loss on extinguishment of liability Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x ₱140) Less: Carrying amount of liability Loss (or Gain) on extinguishment of liability **Computation of increase in share premium Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x ₱140) Less: Total par or stated value of equity issued (2,000 x ₱100) Share premium (or Discount)

280,000 250,000 30,000 280,000 200,000 80,000

PROBLEM 29-5 1.

2.

Cash (5,000 x ₱220) Preference shares (5,000 x ₱200) Share premium-pref. share To record issuance of preference shares

1,100,000 1,000,000 100,000

Cash (1,000 x ₱120) Ordinary shares (1,000 x ₱100) Share premium - ordinary shares To record issuance of ordinary shares

120,000

100,000 20,000

PROBLEM 29-6 Allocation of the lump-sum price: Preference shares (1,000 x ₱240) Ordinary shares (2,000 x ₱180) Total

Total Fair value 240,000 360,000 600,000

Fraction 24/60 36/60

The transaction will then be recorded as follows: Cash Preference shares (1,000 x ₱200) Share premium-preference share (400,000-200,000) Ordinary shares (2,000 x ₱100) Share premium - ordinary share (600,000-200,000)

287

Allocated cost 400,000 600,000 1,000,000

1,000,000 200,000 200,000 200,000 400,000


PROBLEM 29-7 Allocation of the lump-sum price: Total proceeds Less: Total fair value of pref. shares (1,000 x ₱240) Amount allocated to the other securities The transaction will then be recorded as follows: Cash Preference shares (1,000 x ₱200) Share premium-preference share (240,000-200,000) Ordinary shares (2,000 x ₱100) Share premium-ordinary share (760,000-200,000) To record issuance of preference and ordinary shares

1,000,000 240,000 760,000 1,000,000 200,000 40,000 200,000 560,000

PROBLEM 29-8 1.

Subscriptions receivable (5,000 x ₱110) Subscribed ordinary shares (5,000 x ₱100) Share premium-ordinary share To record subscriptions of 5,000 shares at ₱110

550,000

2.

Cash (550,000 x 40%) Subscriptions receivable To record receipt of cash for subscriptions

220,000

3.

Cash (550,000 x 60%) Subscriptions receivable To record receipt of the remaining balance

330,000

Subscribed ordinary shares Ordinary shares To record issuance of certificate of stocks

500,000

500,000 50,000

220,000

330,000

500,000

PROBLEM 29-9 1.

Subscriptions receivable (10,000 x ₱110) Subscribed ordinary shares (10,000 x ₱100) Share premium-ordinary share To record subscriptions of 10,000 shares at ₱110

2.

Cash (1,100,000 x 40%) Subscriptions receivable To record receipt of cash for subscriptions

3.

Subscribed ordinary shares (10,000 x ₱100) Share premium-ordinary share Subscriptions receivable (1,100,000 x 60%) Share premium forfeited down-payment

288

1,100,000 1,000,000 100,000 440,000

440,000

1,000,000 100,000 660,000 440,000


PROBLEM 29-10 1.

Subscriptions receivable (6,000 x ₱110) Subscribed ordinary shares (6,000 x ₱100) Share premium-ordinary share To record subscriptions of 6,000 shares at ₱110.

660,000

2.

Cash (660,000 x 40%) Subscriptions receivable To record receipt of cash for subscriptions.

264,000

3.

4.

5.

Receivable from highest bidder Cash To record cost of ₱20,000.

600,000 60,000

264,000 20,000 20,000

Cash Receivable from highest bidder Subscriptions receivable To record the collection from highest bidder.

416,000

Subscribed ordinary shares (6,000 x ₱100) Share capital To record the issuance of share capital.

600,000

20,000 396,000

600,000

PROBLEM 29-11 1.

2.

Subscriptions receivable (6,000 x ₱110) Subscribed ordinary shares (6,000 x ₱100) Share premium-ordinary share To record subscriptions of 6,000 shares at ₱110.

660,000

Cash (660,000 x 40%) Subscriptions receivable To record receipt of cash for subscriptions.

264,000

3.

Receivable from highest bidder Cash To record cost of ₱20,000.

4.

Treasury shares Receivable from highest bidder Subscriptions receivable To record the collection from highest bidder.

600,000 60,000

264,000 20,000

289

416,000

20,000

20,000 396,000


PROBLEM 29-12 a.

Treasury shares (5,000 x ₱160) Cash

800,000

b.

Cash (2,000 x ₱180) Treasury shares (2,000 x ₱160) Share premium-Treasury shares

360,000

Cash (1,000 x ₱150) Share premium-Treasury shares Treasury shares (1,000 x ₱160)

150,000 10,000

Ordinary shares (2,000 x ₱100) Share premium (200,000/50,000) x 2,000 Share premium-Treasury shares (40,000-10,000) Retained earnings Treasury shares (2,000 x ₱160)

200,000 8,000 30,000 82,000

c.

d.

e.

Memo entry: Received 5,000 shares from a stockholder as a donation. Cash (2,000 x ₱180) Donated capital

800,000 320,000 40,000

160,000

320,000

360,000

360,000

PROBLEM 29-13 a.

b.

Preference shares (4,000 x ₱100) Share Premium on Preference shares [(400,000/40,000) x 4,000] Accumulated profits (balancing figure) Cash (130 x 4,000)

400,000 40,000 80,000

Preference shares (4,000 x ₱100) 400,000 Share Premium on Preference shares (400,000/40,000) x 4,000 40,000 Cash (90 x 4,000) Share premium retirement of shares (balancing figure)

520,000

360,000 80,000

PROBLEM 29-14 1)

2)

Preference shares (4,000 x ₱100) Share Premium on Preference shares [(400,000/40,000) x 4,000] Ordinary shares (4,000 x 1/1 x ₱50) Share premium-ordinary shares

400,000

Preference shares (4,000 x ₱100) Share Premium on Preference shares [(400,000/40,000) x 4,000]

400,000

290

40,000 200,000 240,000

40,000


Accumulated profits Ordinary shares (4,000 x 4/1 x ₱50)

360,000 800,000

PROBLEM 29-15 1a.

1b.

2.

Ordinary shares (100,000 x ₱50) Share Premium on Ordinary shares Ordinary shares (100,000 x ₱50) Share premium-recapitalization

5,000,000 1,000,000

Ordinary shares (100,000 x ₱50) Share Premium on Ordinary shares Accumulated profits Ordinary shares (100,000 x ₱150)

5,000,000 1,000,000 9,000,000

Ordinary shares (₱50-₱40) x 100,000 Share premium-recapitalization

1,000,000

5,000,000 1,000,000

15,000,000 1,000,000

3. Share split Ordinary Share capital issued Subscribed share capital Total Less: Treasury shares Outstanding shares

Before 100,000 100,000 100,000

Multiply by 5/1 5/1 5/1 5/1 5/1

After 500,000 500,000 500,000

Par value per share

Before ₱50

multiply by 1/5

After ₱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. 1 Total Fair value Preference shares (4,000 x ₱90) 360,000 Warrants (4,000 x ₱10) 40,000 Total 400,000 *(150 x 4,000) Cash Preference Share capital (4,000 x ₱50) Share Premium (540,000-200,000) Ordinary share warrants outstanding

291

Fraction

Allocated cost

36/40 4/40

540,000 60,000 600,000*

600,000 200,000 340,000 60,000


When the warrants are exercised: Cash (2,000 x 70% x P45) Ordinary share warrants outstanding (60,000 x 70%) Ordinary Share capital (2,000 x 70% x ₱20) Share Premium –ordinary share

63,000 42,000 28,000 77,000

CASE NO. 2 Total proceeds Less: Total fair value of the preference shares (4,000 x ₱90) Value of the warrants Cash Preference Share capital (4,000 x ₱50) Share Premium (360,000-200,000) Ordinary share warrants outstanding CASE NO. 3 Market value of ordinary shares Less: Option price/exercise price Intrinsic value of warrant Multiply: # of ordinary shares claimable under warrants Market value of share warrants

600,000 360,000 240,000

600,000 200,000 160,000 240,000 ₱

₱

Total proceeds Less: Value of Share warrants Value assigned to Preference Share

50 45 5 2,000 10,000 600,000 10,000 590,000

Cash Preference Share capital (4,000 x ₱50) Share Premium (590,000-200,000) Ordinary share warrants outstanding

600,000

200,000 390,000 10,000

PROBLEM 29-17 Computation of outstanding shares: Ordinary shares issued Less: Treasury shares Outstanding shares a.

Retained earnings (9,000 x ₱2) Dividends payable

b.

No formal accounting entry

c.

Dividends payable Cash

10,000 1,000 9,000 18,000 18,000 18,000 18,000

292


PROBLEM 29-18 Cash dividends for Preference Shares-Semi-annual Payment July 1:

Retained Earnings Dividends Payable (19,000 x P50 x 8% x 6/12) Dec. 31: Retained Earnings Dividends Payable (20,000 x P50 x 8% x 6/12) Computation of outstanding shares: July 1 Preference shares issued 20,000 Less: Treasury shares 1,000 Outstanding shares 19,000

38,000

38,000

40,000 40,000

December 31 Preference shares issued Less: Treasury shares Outstanding shares

20,000 20,000

PROBLEM 29-19 Nov. 1, 2016

Retained earnings Dividends payable

600,000

Dec. 31, 2016


200,000

600,000 200,000

Fair value Less: Previous Fair value Increase in dividends payable Feb. 15, 2017

Dividends payable Retained earnings

₱800,000 600,000 ₱200,000 20,000 20,000

Fair value Less: Previous Fair value Decrease in dividends payable Dividends payable Inventory Gain on distribution - prop. dividends Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends

293

₱780,000 800,000 ₱(20,000) 780,000 700,000 80,000 ₱780,000 700,000 ₱ 80,000


PROBLEM 29-20 Nov. 1, 2016


600,000

Equipment-noncurrent asset for distribution* Impairment loss (₱700,000 - ₱600,000) Equipment Dec. 31, 2016


700,000

200,000 200,000

Fair value Less: Previous Fair value Increase in dividends payable Equipment-noncurrent asset for distribution** Gain on recovery of impairment loss Feb. 15, 2017

600,000 100,000

600,000

Dividends payable Retained earnings

₱800,000

600,000

₱200,000

100,000 100,000 20,000

Fair value Less: Previous Fair value Decrease in dividends payable

20,000

₱780,000

800,000 ₱(20,000)

Dividends payable 780,000 Equipment-noncurrent asset for distribution Gain on distribution of prop. Dividends

700,000 80,000

Carrying amount of dividend payable = Fair value ₱780,000 Less: Carrying amount of noncash assets 700,000 Gain 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 of impairment loss of ₱100,000. Computation of the impairment loss is as follows: Original carrying amount Less: Lower between these two amounts FVLCTD 600,000 Original carrying amount 700,000 Impairment loss

294

₱700,000

600,000 ₱100,000


Computation of the gain on reversal of the impairment loss is as follows: Lower between subsequent FVLTCD and original carrying amount Original carrying amount ₱700,000 FVLCTD 800,000 ₱700,000 Carrying amount at initial recognition 800,000 Gain on reversal 100,000 Note: FVLCTD – Fair Value less Cost to Distribute. PROBLEM 29-21 Retained earnings Dividends payable

P 197,000

P

Supporting computation: Cash alternative (20 x 70% x P10,000) Non-cash alternative (20 x 30% x P9,500) Total dividends

197,000 P P

140,000 57,000 197,000

Date of payment: If the shareholders opted to receive cash, the journal entry is: a. Dividends payable 197,000 Loss on distribution (balancing figure) 3,000 Cash (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) Retained earnings (balancing figure)

190,000 7,000

PROBLEM 29-22 1)

2)

Accumulated Profits 1,300,000 [(105,000-5,000) x 10% x ₱130] Share dividends payable [(105,000-5,000) x 10% x ₱50] Share premium on Ordinary shares

500,000 800,000

Accumulated Profits 1,000,000 [(105,000-5,000) x 20% x ₱50] Share dividends payable [(105,000-5,000) x 20% x ₱50]

1,000,000

3)

Capital Liquidated (₱2 x 100,000 shares) Cash

200,000

4)

Accumulated Profits Share dividends payable - Treasury shares

300,000

295

200,000 300,000


PROBLEM 29-23 Fractional Share rights 1.

Date of declaration of share dividends Retained earnings (100,000 x 30% x ₱50) Share dividends payable

1,500,000 1,500,000

2.

Issuance of full share dividends and the fractional share warrants or rights Share dividends payable 1,500,000 Share capital (27,000 x ₱50) 1,350,000 Fractional warrants outstanding 150,000

3.

Issuance of full shares as a result of the exercise of the fractional share warrants Fractional warrants outstanding 150,000 Share capital (2,800 x ₱50) 140,000 Share premium-unexercised warrants 10,000

PROBLEM 29-24 Comprehensive Problem Questions 1 to 3 Date A. B. C. BAL D. BAL E. BAL

Jan. 2, 2012 Jan. 3, 2013 May 1, 2014 Dec. 31, 2014 Jan. 1, 2015 Dec. 31, 2015 Jan. 1, 2016 July 1, 2016 Dec. 31, 2016

(10,000/50 x 2) 1. (D) [(30,400/2 x 3) - 30,400] 2. (B) [(45,600/1 x 2) - 45,600] (10,000 x 2 x 20%) 3. (A)

Question No. 4 June 30 (₱1.50 x 45,600) Dec. 31 (₱2.50 x 45,600) Total Dividends Question No. 5 June 30 (₱1.25 x 91,200) Dec. 31 (₱1.00 x 95,200) Total Dividends SUMMARY OF ANSWERS: 1. D 2. B 3. A

4.

(A)

68,400 114,000 182,400

(D)

114,000 95,200 209,200

A

5.

296

D

Ordinary shares 20,000 400 10,000 30,400 15,200 45,600 45,600 4,000 95,200

Preference shares 10,000 10,000 10,000 (10,000) -


PROBLEM 29-25 Questions 1 to 3 *in ‘000s Beginning Jan. 5 Jan. 28 Feb. 2 Feb. 14 Jul. 15 Oct. 15 Nov. 15 Nov. 27 Dec. 31 Total

Pref. shares 1,400

Ord. shares 3,500 600

Total Share Premium 1,925 60 (60)

Retained earnings 4,500 (20)

Treasury shares

Subs. Ord. share

Subs. Receivable

1,000 Memo

800

100

50 880 200 2,250

(500)

1,500

1,000 2,200 1. (B)

5,200 2. (C)

1,000 5,480

5,305 3. (C)

500

(1,000)

3,750 (1,500) (1,500)

500

750

Question No. 4 (C) Retained earnings, total Outstanding balance of treasury stocks Retained earnings – unappropriated

P 5,480,000 ( 500,000) P 4,980,000

Question No. 5 (B) Preference shares Ordinary shares Subscribed ordinary shares Subscriptions receivable Share premium Retained Earnings Treasury stocks Total

P 2,200,000 5,200,000 500,000 (750,000) 5,305,000 5,480,000 ( 500,000) P17,435,000

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

4.

C

5.

297

B


PROBLEM 29-26

Beg. Balances 2.) 3.) 4.) 5.) 6.) 8.) 9.) Total

Pref. shares 400,000

400,000

800,000 1. (C)

Ord. shares 200,000

Share Prem 250,000

244,200 2. (D)

380,000

(38,200) 2,400,000 (80,000) (91,680) 3,090,120

120,000 4. (D)

Number of Shares Ordinary Preference 40,000 4,000 (5,000) 2,000 4,000 1,200 7,640 45,840 8,000 x2 x 10 91,680 80,000

Question No. 3 (D) Retained earnings (see table above) Less: Treasury shares Retained earnings - unappropriated

P 3,090,120 120,000 P 2,970,120

Question No. 5 (A) Preference shares Ordinary shares Share premium Retained earnings-total Treasury shares Total shareholder’s equity SUMMARY OF ANSWERS: 1. C 2. D 3. D

Treasury shares 200,000 (80,000)

20,000 80,000 30,000

6,000 38,200

Beginning balance 2. Treasury shares 3. Reissuance of treasury shares 4. Issuance of P/S 5. Exercise of warrants 6. Share dividends Balance Dividend per share Dividends

Retained earnings 900,000

P

800,000 244,200 380,000 3,090,120 (120,000) P 4,394,320 4.

D

5.

298

A


PROBLEM 29-27

Beg. 1.) 2.) 3.) 4.) 5.) 6.) 7.) Total

Pref. Shares

Ord. Shares

4,000

840 80 40 1,350

(200)

3,800 1. (D)

2,310 2. (C)

Subscri bed share Capital

Subscri ption Receiva ble

Total Share Premiu m

Retaine d Earnin gs

Treasu ry Shares

100 (100)

52 (52)

968 9.6 160 675 27

15,000

44

0

0

1,839.6 3. (C)

Beginning balance - issued Beginning balance - treasury 1.) February 1, 2016 Issuance of shares 2.) March 1, 2016 Conversion of preference shares 3.) April 1, 2016 Exercise of stock rights (67,500 x 2) Balance – April 30 4. ) September 30, 2016 Reissuance of treasury shares Balance – October 31

Beginning balance – issued and outstanding 2.) March 1, 2016 Conversion into ordinary shares Balance – April 30 & October 31 Computation of dividends: Ordinary shares: April 30 (227,000 x P1) October 31 (230,000 x P1) Preference shares: April 30 (38,000 x P100 x 10%) October 31 (38,000 x P100 x 10%) Total dividends

(33) 280 2,500 (1,217) 16,563

11 Ordinary Shares 84,000 (4,000) 8,000 4,000 135,000 227,000 3,000 230,000

Preference Shares 40,000 (2,000) 38,000

227,000 230,000 380,000 380,000 1,217,000

Question No. 4 (E) Retained earnings (see table above) Less: Treasury shares Retained earnings - unappropriated

P16,563,000 11,000 P16,552,000

299


Question No. 5 (E) Preference shares Ordinary Shares Share Premium Retained Earnings - Unappropriated Retained Earnings - Appropriated Less: Treasury Shares Shareholder’s Equity

3,800,000 2,310,000 1,839,600 16,552,000 11,000 11,000 24,501,600

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

5.

4.

(E)

(E)

PROBLEM 29-28 Preference Shares Beginning A.) B.) C.) D.) E.) F.) G.) H.) Total

Ordinary Shares 840,000

Total Share Premium 420,000 13,500

Retained Earnings 15,000,000

Treasury Shares 44,000 (16,500)

SPLIT 2 for 1 (650,000) 200,000

200,000 1. (C)

8,000 (10,000)

340,000 60,000 16,000 (5,000)

838,000 2. (D)

844,500 3. (C)

Computation of cash dividends: Beginning balance - issued Beginning balance - treasury a. Jan 15 Reissuance of treasury shares Balance b. March 1 2 for 1 share split e. October 1 Exercise of warrants (80% x 2,000) f. November 2 Retirement of shares Balance – December 31 Multiply: Dividend per share Total dividends Question No. 4 (A) Retained earnings (see table above) Less: Treasury shares Retained earnings - unappropriated

(25,000) (650,400) 2,400,000 16,074,600

27,500 Ordinary Shares 84,000 (4,000) 1,500 81,500 81,500 1,600 (2,000) 162,600 P4 650,400

P16,074,600 27,500 P16,047,100

300


Question No. 5 (A) Preference shares Ordinary Shares Share Premium Retained earnings -unappropriated Retained earnings - appropriated Less: Treasury Shares Shareholders’ Equity

200,000 838,000 844,500 16,047,100 27,500 27,500 17,929,600

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

5.

4.

PROBLEM 29-29

Beg. Jan. 4 Mar. 2 May 7 Jun. 15 Jul. 2 Oct. 1 Oct. 1 Oct. 15 Nov. 1 Dec. 31 Total

Preferenc e Shares 1,200,000

Ordinary Shares 1,800,000 300,000

400,000

A

Total Share Premium 4,116,000 750,000 500,000 18,000

A

Retained Earnings 2,300,000

OCI 61,740

Treasury Shares 420,000 (126,000)

2-for-1 split 98,000 400,000

2,000,000 1. (D)

5,000

2,203,000 2. (C)

274,400

(274,400) 61,740 (329,280)

(61,740)

800,000

6,458,400 3. (B)

(82,320) (825,200) (224,000) 2,250,000 2,876,540

0

294,000

Ordinary Shares 180,000 (20,000) 30,000 190,000 6,000 196,000 196,000 392,000 19,600 1,000 412,600

Beginning balance - issued Beginning balance - treasury Jan. 4 Issuance of shares Balance – January 30 May 7 Reissuance of treasury shares Balance before share split Add: Share split – 2 for 1 Balance July 2 5% share dividends Oct. 15 Issuance of shares Balance – December 31

301


Preference Shares 12,000 4,000 4,000 20,000

Beginning balance – issued and outstanding Mar. 2 Issuance of shares October 15 Issuance of shares Balance – December 31 Computation of cash dividends: Ordinary shares: Dec 31 (P2 x 412,600) Preference shares: Dec 31 (8% x P2,800,000) Total dividends

825,200 224,000 1049,200

Question No. 4 (E) Retained earnings-total Less: Appropriated for Treasury shares Retained earnings-unappropriated

2,876,540 294,000 ₱2,582,540

Question No. 5 (E) Preference share Ordinary share Total share premium Retained earnings - unappropriated Retained earnings – appropriated Less: Treasury Shares Total Shareholders’ equity

2,000,000 2,203,000 6,458,400 2,582,540 294,000 294,000 13,243,940


4.

(E)

5.

(E)

PROBLEM 29-30 Jan. 1

Feb. 23

Mar. 10

Land Organization expense Ordinary shares (1,000 x P100 Share Premium-O/S

340,000 140,000 10,000 470,000

Cash (20,000 x 150)-150,000 Preference shares (20,000 x P100) Share premium-PS

2,850,000

Cash (6,000 x 390)-50,000 Ordinary shares (6,000 x P10) Share premium-OS

2,290,000

302

2,000,000 850,000 60,000 2,230,000


Apr. 10

July 14

Subscriptions receivable (8,000 x P450) Subs. Ordinary shares (8,000 x P10) Share premium-OS

3,600,000

Building Preference shares (2,800 x P100) Share Premium-PS (460,000-280,000) Ordinary shares (1,400 x P10) Share premium-OS (560,000-14,000)

1,080,000

Fair value of the building Less: Fair value of the ordinary shares (480,000/1,200 x 1,400) Value of the pref. shares

1,020,000 560,000

July 14

Cash Ordinary shares (1,200 x P10) Share Premium-OS

Aug. 3

Cash Subscriptions receivable


480,000

12,000 468,000 2,800,000

40,000 40,000 580,000 580,000

Pref. dividends (2,280,000 x 10%) OS Issued (136,000/10) Add: Subscribed OS Outstanding shares Multiply by: Dividend per share Total dividends Dec. 31

280,000 180,000 14,000 546,000

460,000

2,800,000

Subs. Ordinary shares (8,000 x ½ x P10) Ordinary shares Dec. 1

80,000 3,520,000

Dividends payable Cash

228,000 13,600 4,000 17,600 20

352,000 580,000

228,000 228,000

303


1/1 2/23 3/10 4/10 7/14 7/14 8/3 12/1

Total

P/S P 2,000

SP – P/S P 850

280

180

Ordinar y Shares P10 60 14 12 40

SP – O/S P 470 2,230 3,520 546 468

P2,280

P 1,030

P 136

50 P 7,234

1. (B)

2. (C)

3. (C)

4. (C)

Question No. 6 (C) Preference shares Ordinary shares Subscribed ordinary shares Less: Subscriptions receivable Paid in capital-Pref. shares Paid in capital-Ordinary shares Retained earnings Total shareholders’ equity

Subscrib ed O/S P -

Subs. Receiv able

80

3,600

(40)

(2,800)

P 40

R/E P

P800

-

(228) (352) 1,280 P700 5. (B)

2,280,000 136,000 40,000 800,000

(760,000) 1,030,000 7,234,000 700,000 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.

304

B

6.

C


PROBLEM 29-31 Question No. 1 (C) Preference shares, beg. Additional issue (20,000 x P10) Total

P

800,000 200,000 P 1,000,000

Question No. 2 (A) Ordinary shares, beg. Stock dividend (3,480 shares x P5)* Total

P P

Outstanding shares, beginning Treasury shares acquisition Treasury shares re-issue Total outstanding shares Multiplied by: Dividend shares

200,000 17,400 217,400 40,000 (8,000) 2,800 34,800 10% 3,480

Question No. 3 (A) Share premium, beg. P Premium on treasury share re-issue (100,000 – (2,800 x P20) Premium on preference share issue (P15 – P10) x 20,000 shares Premium on stock dividends (P12 – P5) x 3,480 shares Total share premium, end P

384,000 44,000 100,000 24,360 552,360

Question No. 4 (D) Retained earnings, beg. P 2,400,000 Add: Net Income Unadjusted Net Income P 1,780,000 Overstatement in operating expenses 100,000 1,880,000 Less: Dividends Stock dividends (3,480 x P12) P 41,760 Cash dividends* 119,140 (160,900) Retained earnings, adjusted P 4,119,100 Retained earnings, appropriated for treasury shares (104,000) Retained earnings, appropriated for plant expansion (1,200,000) Retained earnings, unappropriated P 2,815,100 * Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends Question No. 5 (B) Treasury shares acquired (8,000 x P20) Treasury shares reissued (2,800 x P20) Treasury shares, end

305

P P

100,000 19,140 119,140

P ( P

160,000 56,000) 104,000


* Computation of the Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends

P P

Computation of the net income: Net Income Unadjusted Net Income Overstatement in operating expenses Adjusted net income SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

D

100,000 19,140 119,140

P 1,780,000 100,000 P 1,880,000 5.

B

ADJUSTING JOURNAL ENTRIES: a .

b . c .

Entries Made Other 100 operating expense Cash Ordinary shares Cash

160

Equipment

100

Cash Preference shares

e .

Memo entry

100

160

Ordinary shares (2,800 x P5) Share Premium

d .

Should be entries Dividends 100 payable

14 86

300

Cash

100

Treasury shares Cash

160

Equipment

100

160

Treasury shares (2,800 x 20) Share Premium-TS

Cash 300

Adjusting entries Dividends 100 payable

56 44

300

Preference shares (20,000 x P10) Share Premium-PS Retained earnings (40K-5,200) x 10% x P12) Share div. payable (34,800 x 10% x P5)

200

Other operation exp Treasury shares Ordinary shares Ordinary shares Share Premium Treasury shares (2,800 x 20) Share Premium-TS Preference shares Share Premium-PS

100 160 160 14 86 56 44 100 100

100 41,7 60

306

17.4

Retained earnings (40K-5,200) x 10% x P12) Share div. payable (34,800 x 10% x P5)

41,7 60

17.4


f.

g . h .

i.

Share Premium Ordinary shares No journal entry Retained earningsunappropria ted Retained earnings appropriate d for plant expansion No journal entry

No journal entry

17.4 17.4

1,20 0

Share premium Share div. payable Ordinary shares Retained* earnings Dividends payable Same

24.3 6 17.4 17.4 119. 14 119. 14

Share premium Share div. payable Share Premium Retained earnings Dividends payable NO AJE

24.3 6 17.4 17.4 119. 14 119. 14

1,20 0

Retained earningsunappropria ted Retained earnings appropriate d for Treasury shares Income summary Retained earningsunappropria ted

104

104

1,88 0

* Computation of the Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends Computation of the net income: Net Income Unadjusted Net Income Overstatement in operating expenses Adjusted net income

307

1,88 0

Retained earningsunappropria ted Retained earnings appropriate d for Treasury shares Income summary Retained earningsunappropria ted

P

100,000

P

19,140 119,140

P

1,780,000

P

100,000 1,880,000

104

104

1,88 0 1,88 0

Chapter 30 – Book Value and Earnings Per Share

CHAPTER 30: BOOK VALUE AND EARNINGS PER SHARE PROBLEM 30-1 One Class of Shares Total shareholders' equity Add: Subscription receivable Total SHE excluding subscription receivable Divided by: Ordinary shares outstanding* Book value per share

16,220,000 1,200,000 17,420,000 200,000 87.10

(A)

Shares issued Add: Subscribed shares (P1,000,000 / P50 par) Less: Treasury shares Ordinary shares outstanding

200,000 20,000 20,000 200,000

PROBLEM 30-2 Two Classes of Shares - Preference and Ordinary Shares Total Preference shares: Shares par value Preference share capital issued 12,500 P5,000,000 Add: Subscribed preference shares Total 12,500 P5,000,000 Less: Treasury shares at par Shares outstanding and total par value 12,500 P5,000,000 Ordinary shares: Ordinary share capital issued Add: Subscribed ordinary shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 75,000 75,000 75,000

Total shareholders' equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excess over par

Total par value P3,000,000 P3,000,000 P3,000,000 15,000,000 5,000,000 3,000,000 7,000,000

CASE NO. 1 Question No. 1 & 2 Balances Preference dividend (5,000,000 x 8% x 4) Balance to ordinary shares

Excess over par P7,000,000

Preference shares P5,000,000

(1,600,000) 5,400,000

1,600,000

308

Ordinary shares P3,000,000 5,400,000


Total shareholders’ equity Divide by: Outstanding shares Book value per share

6,600,000 12,500 P528.00

8,400,000 75,000 P112.00



Ordinary shares P3,000,000

(1,600,000)

1,600,000

(250,000) 5,150,000

250,000

CASE NO. 2 Question No. 3 & 4 Balances Preference dividend (5,000,000 x 8% x 4) Liquidation premium [(P420P400) x 12,500] Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share

6,850,000 12,500 P548.00

5,150,000 8,150,000 75,000 P108.67




(400,000) 6,600,000

400,000

CASE NO. 3 Question No. 4 & 5 Balances Preference dividend (5,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share

5,400,000 12,500 P432.00

6,600,000 9,600,000 75,000 P128.00




(1,600,000)

1,600,000

CASE NO. 4 Question No. 7 & 8 Balances Preference dividend (5,000,000 x 8% x 4) Ordinary dividend (3,000,000 x 8% x 1) Balance for participation Preference (5/8 x 5,160,000) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. A 2. A 3. B

(240,000) 5,160,000 (3,225,000) 1,935,000

240,000 3,225,000 9,825,000 12,500 P786.00

4.

D

5.

309

C

6.

B

7.

1,935,000 5,175,000 75,000 P69.00 D

8.

C


PROBLEM 30-3 Book Value per Share Preference shares: Preference share capital issued Add: Subscribed preference shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 40,000 40,000 40,000

Total par value P4,000,000 P4,000,000 P4,000,000

Ordinary shares: Ordinary share capital issued Add: Subscribed ordinary shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 26,000 26,000 1,000 25,000

Total par value P1,040,000 P1,040,000 40,000 P1,000,000

Total shareholders' equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excess over par

11,970,000 4,000,000 1,000,000 6,970,000




(1,280,000) 5,690,000

1,280,000


5,280,000 40,000 P132.00

5,690,000 6,690,000 25,000 P267.60




(1,280,000)

1,280,000

(200,000) 5,490,000

200,000

CASE NO. 2 Question No. 3 & 4 Balances Preference dividend (4,000,000 x 8% x 4) Liquidation premium [(P105-P100) x 40,000] Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share

5,480,000 40,000 P137.00

310

5,490,000 6,490,000 25,000 P259.60




(320,000) 6,650,000

320,000


4,320,000 40,000 P108.00

6,650,000 7,650,000 25,000 P306.00




(320,000) 6,650,000

320,000

CASE NO. 4

Question No. 7 & 8 Balances Preference dividend (4,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share

Balances Preference dividend (4,000,000 x 8% x 1) Ordinary dividend (1,000,000 x 8% x 1) Balance for participation Preference (4/5 x 6,570,000) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. B 2. C 3. B


4,320,000 40,000 P108.00

6,650,000 7,650,000 25,000 P306.00




(320,000)

320,000

(80,000) 6,570,000 (5,256,000) 1,314,000

80,000 5,256,000 9,576,000 40,000 P239.40

4.

B

5.

311

C

6.

A

7.

1,314,000 2,394,000 25,000 P95.76

D

8.

D


PROBLEM 30-4 Weighted Average with Bonus Issue Outstanding Date Shares Fraction 01/01/2015 200,000 x 120% 240,000 12/12 03/01/2015 15,000 x 120% 18,000 10/12 07/01/2015 (10,000) (10,000) 6/12 10/01/2015 4,000 4,000 3/12 Weighted average outstanding shares (A)

Average 240,000 15,000 (5,000) 1,000 251,000

PROBLEM 30-5 Weighted Average with Share Split Outstanding Date Shares Fraction 01/01/2015 220,000 x 4/1 880,000 12/12 03/01/2015 12,000 x 4/1 48,000 10/12 04/01/2015 9,000 9,000 9/12 10/01/2015 6,000 6,000 3/12 Weighted average outstanding shares (A)

Average 880,000 40,000 6,750 1,500 928,250

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. 1 Basic EPS = P3,000,000 / 120,000 = P25 per share

312


Question No. 2 P3,000,000 + [(P1,800,000 x 10%) x (1 – 30%)] Diluted = EPS 129,000 shares * Diluted EPS = P24.23 per share Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion (1,800 x 5 x 12/12) Total weighted average of ordinary shares

120,000 9,000 129,000

Question No. 3 P3,000,000 + [(P1,800,000 x 10% 8/12) x (1 – 30%)] Diluted = EPS 126,000 shares * Diluted EPS = P24.48 per share Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion (1,800 x 5 x 8/12) Total weighted average of ordinary shares

120,000 6,000 126,000

Question No. 4 Basic EPS

P3,000,000 123,750* P24.24

= =

Weighted average of actual ordinary shares Add: Issuance of shares related to conversion (1,800 x 5 x 5/12) Total weighted average of actual ordinary shares issued Add: Assumed converted ordinary shares x months outstanding (1,800 x 5 x 7/12) Total weighted average outstanding ordinary shares

120,000 3,750 123,750 5,250 129,000

Question No. 5

P3,000,000 + [(P1,800,000 x 10% x 7/12) x (1 – 30%)] 129,000 shares * Diluted EPS = P23.83 per share Diluted EPS

=


4.

D

5.

B

PROBLEM 30-9 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P4,000,000 / 200,000 = P20 per share

313


Question No. 2 P4,000,000 + [(P1,123,910 x 10% x 8/12) x (1 – 30%)] 210,000 shares* Diluted EPS = P19.30 per share Diluted EPS

=

Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion(15,000 x 8/12) Total weighted average of ordinary shares

200,000 10,000 210,000

PROBLEM 30-10 Basic and Diluted EPS with Convertible Preference Shares Question No. 1 Basic EPS Basic EPS

P4,000,000 - [5,000 x P100 x 10%] 200,000 shares = P19.75 per share =

Question No. 2 Diluted EPS Diluted EPS

P4,000,000 225,000 shares* = P17.78 per share

=

*[200,000 + (5 x 5,000 x 12/12)] Question No. 3 Diluted EPS Diluted EPS

P4,000,000 218,750 shares = P18.29 per share

=

*[200,000 + (5 x 5,000 x 9/12)] Question No. 4 Basic EPS Basic EPS

P4,000,000 – (5,000 x P100 x 10% x 9/12)] 206,250 shares = P19.21 per share =

*[200,000 + (5 x 5,000 x 3/12)] Question No. 5 Diluted EPS Diluted EPS

P4,000,000 225,000 shares = 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.

314

D


PROBLEM 30-11 Basic and Diluted EPS with Warrants and Options Question No. 1 Basic EPS = P4,000,000 / 100,000 = P40 per share Question No. 2 Diluted EPS Diluted EPS

P4,000,000 101,200 shares * = P39.53 per share =

Weighted average of actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 12/12) Total weighted average of ordinary shares

100,000 1,200 101,200

Note: Months outstanding for assumed exercise of options is 12 months, which is from date of issuance up to the reporting date. Option shares Multiply by: Total exercise price (120+10) Proceeds from assumed exercise of options Divided by: Average market price during the year Assumed treasury shares Option shares Less: Assumed treasury shares Incremental shares

9,000 130 1,170,000 150 7,800 9,000 7,800 1,200



Weighted average of actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 9/12) Total weighted average of ordinary shares

100,000 900 100,900



Weighted average of actual beginning ordinary shares Add: Weighted average number of shares from issuance of share options (9,000 x 4/12) Total weighted average of actual ordinary shares issued Add: Weighted average of incremental shares from assumed exercise of options (2,500 x 8/12) Total weighted average outstanding ordinary shares

315

100,000 3,000 103,000 1,667 104,667


Option shares Multiply by: Total exercise price (120+10) Proceeds from assumed exercise of options Divided by: Market price at exercise date Assumed treasury shares Option shares Less: Assumed treasury shares Incremental shares SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

9,000 130 1,170,000 180 6,500 9,000 6,500 2,500

D

PROBLEM 30-12 Multiple Potential Dilutive Securities Question No. 1

Basic EPS Basic EPS

(A)

P2,360,000 – (60,000 x P100 x 6%) = 200,000 = P10 per share

Question No. 2 1) Check for initial test of dilution a. Options Dilutive. The exercise price (P50) is less than the average market price (P100). b.

Convertible preference shares Probably dilutive. The incremental EPS (P1.2) is less than the basic EPS (P10). (P6,000,000 x 6%) Incremental EPS = (60,000 x 5) Incremental EPS = P1.2 per share

c.

Convertible bonds Probably dilutive. The incremental EPS (P.84) is less than the basic EPS (P10). (P2,000,000 x 12%) x (1-30%) Incremental EPS = (P2,000,000/P1,000) x 100 Incremental EPS = P.84 per share

`

2) Rank the dilutive potential diluters from the most dilutive to the least dilutive. 1st Options 2nd 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 an item is included, calculate new earnings per share or new loss per share amount as follows:

316


Basic EPS from continuing operations Options Total Convertible Bonds payable Total Convertible Preference share Total

Profit *2,000,000

Ordinary shares 200,000

0 2,000,000 168,000 2,168,000 360,000 2,528,000

10,000 210,000 200,000 410,000 300,000 710,000

EPS 10 9.52 5.29 3.56

*Net Income less preference dividends [(P2,360,000 –(60,000 x P100 x 12%)] Answer: The final diluted EPS would be P3.56 per share. Question No. 3

Basic EPS Basic EPS Question No. 4 Diluted EPS Diluted EPS

(D)

(B)

P500,000 = 200,000 = P2.5 per share (C) P500,000 = 710,000 = P.70 per share


4.

C

PROBLEM 30-13 Rights Issue Fair value per share – right on Less: Theoretical value of one right* Theoretical ex-rights fair value per share *Value of one right

=

150 –40 4* + 1

=

P P

150 22 128

22

Adjustment factor (150/128)

1.17

Question No. 1 2014: Weighted average outstanding shares (40,000 x 1.17 x 12/12) Basic EPS (P562,500 /46,800)

(D)

317

46,800 P12.02 / share


Question No. 2 2015: Weighted average outstanding shares (40,000 x 1.17 x 3/12) [(40,000 + 10,000) x 9/12]

11,700 37,500

Basic EPS (P800,000/49,200)

(B)

49,200 P16.26 / share

Question No. 3 2016: Weighted average outstanding shares[(40,000 + 10,000) x 12/12] Basic EPS (P1,000,000 /50,000)

(A)

PROBLEM 30-14 Written Put Options

(C)

Incremental shares

=

(P350 – P280) x 10,000 P280

=

P20 per share

2,500 shares

PROBLEM 30-15 Comprehensive Problem Item Unadjusted 1) 2) 3) 4) 5) 6) 7) 8) 9) Adjusted

Net Income 2015 2016 **1,300,000 *500,000 (50,000) 50,000 (30,000) 45,000 (45,000) ***28,000 (28,000) 5,000 (5,000) (20,000) 1,328,000 422,000

Retained Earnings 12/31/16 1,800,000 (30,000) (20,000) 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 Refer to table above.

(C)

318

50,000


Question No. 3 (C) EPS 2015 (P422,000 / 100,000 shares) = P4.22 Question No. 4 (B) Ordinary share capital, P10 par Share premium Retained earnings, 12/31/2015 (as adjusted) Total shareholders' equity

1,000,000 500,000 1,750,000 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.

319

B

Chapter 32 – Statement of Financial Position and Comprehensive Income

CHAPTER 32: STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME PROBLEM 32-1 Current and Noncurrent Assets Question No. 1 Cash Trade receivables Inventory, including inventory expected in the ordinary course of operations to be sold beyond 12 months amounting to P800,000 Prepaid insurance Financial assets at fair value through profit or loss Noncurrent Assets held for sale building Total Current Assets (D) Question No. 2 Financial assets at fair value through other comprehensive income Financial assets at amortized cost Deferred tax asset Machinery Accumulated depreciation Land used as a plant site Total Noncurrent Assets (C)

400,000 1,500,000 1,200,000 240,000 300,000 650,000 4,290,000

600,000 1,000,000 150,000 800,000 (200,000) 920,000 3,270,000

PROBLEM 32-2 Current and Noncurrent Assets Question No. 1 Cash (1M+300,000+100,000-50,000-280,000) Accounts receivable (3M-200,000+50,000) Investments securities held for trading (1.8M-500,000) Inventories (800,000-200,000+(450,000/125%) Prepaid Expenses (only the prepaid insurance) Total Current Assets (A)

1,070,000 2,850,000 1,300,000 960,000 48,000 6,228,000

Question No. 2 Cash in sinking fund Long-term investments Deposit to supplier for inventories to be delivered in 16 months Cash surrender value Property, plant and equipment Total noncurrent Assets (A)

280,000 500,000 23,000 20,000 5,000,000 5,823,000

320


PROBLEM 32-3 Current and Noncurrent Liabilities Question No. 1 Bank overdraft Accounts payable (1M+25,000+100,000) Property dividends payable Income tax payable Note payable, due January 31, 2016 Cash dividends payable Financial liabilities at fair value through profit or loss Estimated expenses of meeting warranties Estimated damages as a result of unsatisfactory performance on a contract Loans payable-current Total current liabilities (A) Question No. 2 Bonds payable Premium on bonds payable Deferred tax liability Mortgage payable Loans payable-noncurrent Total noncurrent liabilities

(C)

300,000 1,125,000 400,000 300,000 500,000 80,000 130,000 335,000 268,000 100,000 3,538,000 3,400,000 200,000 400,000 1,000,000 400,000 5,400,000

PROBLEM 32-4 Shareholders’ Equity Ordinary share capital Share premium Subscribed ordinary share Subscriptions receivable Retained earnings unappropriated (6M-2M cost of treasury) Reserves: Retained earnings appropriated for treasury shares Reserve for contingencies Unrealized gain on FVTOCI Revaluation surplus Cumulative translation adjustment – debit Total Less: Treasury shares Total Shareholders' Equity (C)

321

10,000,000 1,000,000 100,000 (120,000) 4,000,000 2,000,000 3,000,000 1,000,000 4,000,000 (1,500,000) 23,480,000 2,000,000 21,480,000


PROBLEM 32-5 Adjusting and Nonadjusting events Loss on expropriation Impairment loss on Accounts Receivable Litigation loss Total adjusting events (A)

100,000 600,000 1,000,000 1,700,000

All other data are nonadjusting events. PROBLEM 32-6: Related Party Relationship Requirement No. 1 The following companies are considered to be related parties of Frozen Throne Company in accordance with PAS 24 Related Party Disclosures: Name Description 1) Sand King Co. Post-employment benefit plan established by Frozen Throne 2) Shadow Fiend Co. Associate 4) Harbringer Co. Subsidiary 5) Night Crawler Co. Subsidiary of Harbringer 6) Disruptor Co. Associate of Harbringer 7) Geomancer Co. Parent 8) Jakiro Co. Parent of Geomancer 9) Rylai Co. Sister company of Frozen Throne Company 10) Medusa Co. Key Management personnel of Frozen Throne Company. 11) Barathrum Co. Bank 16) Pudge Co. Joint venturer of Frozen Throne Company 17) Invoker Co. Joint venture of Frozen Throne Company Requirement No. 2 Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. Therefore, Frozen Throne Company should disclose Jakiro Co., its ultimate parent or controlling party. PROBLEM 32-7 (Distribution costs and general and administrative expenses) Question No. 1 Advertising Delivery expense Rent for office space (500,000 X 1/2) Sales commissions Depreciation on delivery truck Total distribution costs

(B)

322

500,000 300,000 250,000 1,075,000 14,000 2,139,000


Question No. 2 Auditing and Accounting fees Officers’ salaries Rent for office space (500,000 X 1/2) Insurance Depreciation on office equipment Total general and administrative expenses(D)

300,000 625,000 250,000 200,000 15,000 1,390,000

PROBLEM 32-8 Comprehensive Income Net Sales Cost of goods sold Gross income Other income Share of profit of associate Total income Expenses: Distribution costs Administrative expenses Finance cost Other expense Income before income tax Income tax expense Income from continuing operations Income from discontinued operations Net Income Other comprehensive income: Revaluation surplus Translation gain Unrealized gain on FVTOCI securities Comprehensive income (C) Other income: Interest income Other expense: Loss on sale of equipment

4,000,000 2,500,000 1,500,000 30,000 125,000 1,655,000 60,000 120,000 35,000 50,000

300,000 50,000 200,000

30,000 50,000

323

265,000 1,390,000 408,000 982,000 100,000 1,082,000

550,000 1,632,000


COMPREHENSIVE PROBLEMS PROBLEM 32-9

1. 2. 3. 4. 5. 10.

4. 6. 7. 8. 9. 10.

Current Asset 44,300 (10,000)

Unadjusted balance Notes receivable – maturity date July 1, 2018 Land FVTOCI Inventory Treasury shares Prepaid insurance Accumulated depreciation – Building Accumulated depreciation – Equipment Allowance for bad debts Adjusted balance

Unadjusted balance Treasury shares Bonds payable Accrued wages Mortgage – current portion Premium on bonds payable Allowance for bad debts Accumulated depreciation – Building Accumulated depreciation – Equipment Adjusted balance

SUMMARY OF ANSWERS: 1. (E) 2. (E) 3. A

4.

(12,000) 4,600 30,500 2,900

(700) 59,600 1. (E) Current Liabilities 66,600 (40,000) 4,100 4,000

34,700 3. (A) B

5.

324

A

Noncurrent asset 158,400 10,000

Total Asset 202,700 -

12,000 (4,600) (30,500) (1,800) (2,900) (21,000)

(1,800) (21,000)

(13,000)

(13,000)

106,600

(700) 166,200 2. (E)

Noncurrent liabilities 24,100 40,000 (4,100) (4,000) 4,300

Equity 112,000 (1,800)

(21,000)

(4,300) (700) (21,000)

(13,000)

(13,000)

60,300 4. (B)

71,200 5. (A)


PROBLEM 32-10

Unadjusted balances 1 2 3 4 5 6 7 8 9 10 11 Adjusted balances

Cash in bank 100 (14) 20 (5) 101 1. (B)

Inventory 1,800

Accts. Receivable 2,500

PPE 1,000

Accum. Depr 400

Depreciation

4 (15) 60 1,849

5 2,505

500 (20) 1,480

112.5 (4) 508.5

112.5 (4) 108.5

-

Continuation…

Unadjusted balances 1 2 3 4 5 6 7 8 9 10 11 Adjusted balances

Advances from customers 5 5

Accounts payable 320

Interest payable

Bonds payable 1,924,144

Discount -

Amortization -

4 14 20 (5) 60 413 2. (B)

180 180

75,856 1,936,558

63.442 63.442

12.414 12,414

*000 Current Assets: Cash in bank Inventory Accounts Receivable Noncurrent assets: PPE Less: Accumulated Depreciation Total assets

101,000 1,849,000 2,505,000 1,480,000 508,500

325

4,455,000

3. (A)

971,500 5,426,500

4. (B)


Current liabilities: Advances from customers Accounts payable Interest payable

5,000 413,000 180,000

Noncurrent liabilities: Bonds payable Discount on bonds payable Total liabilities SUMMARY OF ANSWERS: 1. B 2. B 3. A

2,000,000 63,442

4.

B

5.

B

6.

598,000

5. (B)

1,936,558 2,534,558

6. (C)

C

PROBLEM 32-11

1. EI over, COS under 2015 2016 2. Salaries expense under 2015 2016 3. Sales overstated 2015 2016 4. Expense overstated 2015 2016 5. Purch. Over, COS over 2015 2016 6. Sales under 2015 2016 7. Bad debt under 2015 (32.4+2.5) x 2% 2016 (66.1+4) x 2%-698 8. Dep. Expense under 2015 2016 Adjusted bal.

Sales 385,000

2015 COS EI 157,600 98,500 6,200 (6,200)

OPEX 69,300

14,600

(1,700)

(180)

(3,200)

2,500

698

14,500 385,800

326

160,600

92,300

98,918


2016 1. EI over, COS under 2015 2016 2. Salaries expense under 2015 2016 3. Sales overstated 2015 2016 4. Expense overstated 2015 2016 5. Purch. Over, COS over 2015 2016 6. Sales under 2015 2016 7. Bad debt under 2015 (32.4+2.5) x 2% 2016 (66.1+4) x 2%-698 8. Dep. Expense under 2015 2016 Adjusted bal.

Sales 420,000

COS 203,800 (6,200) 8,500

EI 164,900

OPEX 76,700

(8,500) (14,600) 17,300

1,700 (800) 180 (200) 3,200 (4,600) (2,500) 4,000

704

422,400

204,700

156,400

Question No. 6 (A) Sales Less Cost of sales Gross Profit Less Operating expenses Add Other income Net profit Add: Retained earnings, beginning Retained earnings, December 31, 2015)

385,800 160,600 225,200 98,918 2,100 128,382 23,400 151,782

Question No. 7 (C) Cost Less Accumulated depreciation (14,500 x 2) Book value of machinery, December 31, 2016

145,000 29,000 116,000

327

14,500 94,584


Question No. 9 (B) Accounts receivable, 2015 (32,400+2,500) Less: Allowance for bad debts (32,400+2,500) * 2% Net realizable value Question No. 10 (B) Sales 2016 Less: Cost of sales Gross Profit Less: Operating expenses Add: Other income Net income SUMMARY OF ANSWERS: 1. C 2. C 3. D 6. A 7. C 8. B

34,900 698 34,202

422,400 204,700 217,700 94,584 1100 124,216 4. 9.

A B

5. 10.

C B

PROBLEM 32-12 Question No. 1 Unadjusted sales Less: Advances Adjusted Sales

4,323,600 132,000 4,191,600

(A)

Question No. 2 Carrying value (100,000 x 70%^4*) Less: Recoverable amount (higher) Impairment loss (B) *future value after 4 periods = carrying value after 4 periods. Question No. 3 Sales Add: Increase in raw materials (75,800 – 56,800) Increase in finished goods (130,700 – 105,800) Less: Purchase of raw materials Other expenses (see below) Wages and salaries (890,400 + 33,000) Amortization of development cost (648,000 / 3 x 4/12) Impairment loss Depreciation [(567,000 – 402,000) x 30%] Tax expense (52,000 + 35,000 – 30,000) Net income (A)

328

24,010 23,000 1,010

4,191,600 19,000 24,900 (2,056,500) (522,100) (923,400) (72,000) (1,010) (49,500) (57,000) 553,990


Unadjusted Other Expense 569,900 Add: Rent expense [10,000 + (4,000/4)**] 11,000 Increase in accrued expense (26,700 - 17,000) 9,700 Less: 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 expense over the lease term. Questions No. 4 to No. 7 Current assets: Cash in bank (41,850 – 33,000) Trade receivables and other receivables Raw materials Finished goods Prepaid expense

8,850 245,800 75,800 130,700 45,000

Non-current assets: Intangible asset (648,000 – 72,000) Plant (567,000 – 402,000 – 49,500 – 1,010) Lease deposit (4,000 – 1,000) Total assets

576,000 114,490 3,000 5. (C)

Current liabilities: Trade and other payables Income tax payable Advances from customers Accrued purchases

156,700 52,000 132,000 26,700

Non-current liabilities: None Total liabilities

693,490 1,199,640

367,400 6. (C)

-

Equity: Ordinary shares Retained earnings (553,990 – 1,750 deficit – 20,000) Total liabilities and shareholders’ equity SUMMARY OF ANSWERS: 1. A 2. B 3. A

506,150 4. (B)

4.

B

5.

329

300,000

C

6.

367,400

532,240

7. (A) 832,240 1,199,640

C

A

7.


PROBLEM 32-13 Question Nos. 1 and 2 Unadjusted net income 1) BD expense under, NI over (392,000 x 10% )27,000 2) Unreal. Gain (Loss) (81,000-78,000) and (62,000-81,000) 3) EI overstated, NI over EI overstated, NI over 4) *Expense over, NI under Depreciation expense under, NI over **Gain on sale under, NI under 5) Exp. Over Adjusted net income

2015 195,000

2016 220,000 (2,200)

3,000 (4,000)

(19,000) 4,000 (6,100)

10,900 1,800 206,700 1. (B)

(1,100) 2,500 (900) 197,200 2. (B)

*(Expenses recorded P12,000 should be (12,000-1,000)/10=12,000-1,000) **Net Selling Price 2,500 Less carrying amount Cost 17,500 Less Accumulated depreciation 17,500 0 Gain on sale 2,500 Question No. 3 Cash Accounts receivable (296,000-18,000) Trading securities at Fair value Merchandise inventory (202,000-4,000) Prepaid insurance (2,700-1,800) Total current assets (C) Question No. 4 Cash Accounts receivable (392,000 x 90%) Trading securities at Fair value Merchandise inventory (207,000-6,100) Prepaid insurance Total current assets Property, plant and equipment (169,500+12,000-17,500) Less: Accumulated. Depreciation (121,600+1,100+1,100-17,500) Net Book value Total Assets (B)

330

82,000 278,000 81,000 198,000 900 639,900

163,000 352,800 62,000 200,900 900 779,600 164,000 106,300 57,700 837,300


Question No. 5 Share capital (20,000 x P10) Share premium Retained earnings (206,700+197,200+*52,000) Adjusted Shareholders' equity (A) *(247,000-195,000) SUMMARY OF ANSWERS: 1. B 2. B 3. C

4.

B

5.

200,000 60,000 455,900 715,900

A

PROBLEM 32-14 Question No. 1 Unadjusted sales Less: Sale with a repurchase agreement (selling price) Adjusted Sales (B)

550,000 (10,000) 540,000

Note: The transaction should be reported as a financing arrangement, rather than sale. Hence, the company will instead report a liability and interest. Also, the cost should be included as part of inventory. Question No. 2 Unadjusted cost of sales Less: Sale with a repurchase agreement (cost) Add: Depreciation on Plant (see below) Depreciation on Building (35,000 / 14) Adjusted cost of sales (D) Depreciation of plant asset is computed as follows: Plant asset classified as held for sale [(9,000 – 5,000) x 20% x 6/12] Remaining plant asset [(70,000 – 4,000) x 20%] Total plant asset depreciation Non-current asset held for sale: Fair value less cost to sell Carrying value date of classification (4,000 – 400) Initial carrying amount - LOWER Question No. 3 Sales Less: Cost of sales Gross profit Less: Distribution cost Administrative expenses Interest [(700 + (10,000 x 10% x 6/12*)]

331

411,500 (7,0000 13,600 2,500 420,600

400 13,200 13,600

4,200 3,600 3,600

540,000 420,600 119,400 (21,500) (30,900) (1,200)


Provision for bonus (540,000 x 1%) Tax expense (increase in DTL and CTL) – (27,200 + 9,400 – 1,200 – 6,200) Net income (A) Question No. 4 Net income Add: Revaluation surplus (see computation below) Total comprehensive income (B) Land: Appraised value Carrying amount

Questions No. 4 to No. 9 Current assets: Trade receivables Inventory (43,700 + 7,000) Non-current asset held for sale

35,000 30,000

42,200 50,700 3,600

Non-current assets: Land Building (35,000 – 2,500) Plant (66,000 – 13,200) Total assets

12,000 32,500 52,800

Current liabilities: Trade payables Bank overdraft Current tax liability Provision – bonus

35,100 6,800 27,200 5,400

Non-current liabilities: Deferred tax liability Bank loan Interest payable Total liabilities

9,400 10,000 500

Equity: Equity shares Share premium Revaluation surplus

50,000 20,000 7,000

332

(29,200) 31,200

31,200 7,000 38,200

12,000 10,000

Building: Appraised value Less: Carrying amount (50,000 – 20,000) Total revaluation surplus

(5,400)

2,000

5,000 7,000

96,500 5. (D) 6. (C) 97,300 193,800

74,500 7. (C) 8. (D) 19,900 94,400


Retained earnings (11,200 + 31,200 – 20,000) Total liabilities and shareholders’ equity

22,400

9. (B) 99,400 1,199,640

Question No. 10 Net income Divided by: Weighted average shares (see below) Earnings per share (A)

31,200 96,739 ₱.3225

April 1 to July 1 (80,000* x 2 / 1.84** x 3/12) July 1 to March 31 (100,000 x 9/12) Weighted average number of shares

21,739 75,000 96,739

*The number of shares before the exercise of the rights may be computed by dividing the (₱50,000 / 50 centavos) by 125% (100% + ¼ rights). **Adjustment factor. Value of one right

=

Value of one right

=

Fair value per share – right on minus exercise price Number of rights to purchase one share plus 1 ₱2 - ₱1.20

=

4+1 ₱.16

Fair value per share – right on Less: Theoretical value of one right Theoretical ex-rights fair value per share SUMMARY OF ANSWERS: 1. B 2. D 3. A 6. C 7. C 8. D

4. 9.

B B

5. 10.

₱2.00 .16 ₱1.84 D 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 a carrying amount of ₱8,200 on September 30, 2015. Question No. 1 Inventories at 30 September 2015 Add: Purchases Less: Inventories at 30 September 2016 Add: Depreciation – plant and machinery (see below) Add: Depreciation – machine classified as held for sale (8,200 x 20% x 6/12) Add: Impairment loss – noncurrent asset held for sale [(8,200 – 820) – 6,500] Adjusted Cost of Sales (E)

333

31,800 344,000 27,300 46,485 820 880 396,685


Plant and Machinery Cost – balance forward Less: Accumulated depreciation – balance forward Less: Held for sale asset – carrying amount Balance Less: Depreciation during the year (232,425 x 20%) Carrying amount – year end

385,000 144,375 8,200 232,425 46,485 185,940

Question No. 2 Trial balance Add: Depreciation – Property (14,500 + 30,000) - see below Add: Downward Valuation (480,000 – 456,000) Adjusted Admin Expense (C)

216,200 34,500 24,000 274,700

Property Valuations Carrying amount – October 1, 2015 Valuation – October 1, 2015 Revaluation (gain)/loss Valuation – October 1, 2015 Less: Depreciation (Property A: 31 years; Property B: 30 years) Carrying amount – October 1, 2016

Property A 372,000 (449,500) (77,500)

Property B 1,080,000 (600,000) 480,000

449,500

600,000

(14,500) 435,000

(20,000) 580,000

Question No. 3 Trial balance Add: Provision charge (see below) Add: Lease expense (see below) Adjusted Other Operating Costs (C)

86,900 33,600 27,600 148,100

Provision – Onerous Lease Current liabilities [(3,000 – 2,300) x 12] Non-current liabilities (8,4000 x 3 years) Total Operating Lease Total Payments [(18,000 x 7 years) + (36,000 x 8 years)] Divided by: Operating lease expense per year Question No. 4 Revenue Less: Cost of sales Gross profit Less: Administrative expenses ( see No. 2)

334

8,400 25,200 33,600 414,000 15 years 27,600

1,057,000 396,685 660,315 274,700


Other operating costs (see No. 3) Profit before tax Less: Tax Profit after tax (A)

148,100 237,515 56,000 181,815

Questions No. 4 to No. 8 Current assets: Inventories Trade and other receivables Cash in bank

27,300 61,500 5,100 93,900 6,500

Non-current asset held for sale Non-current assets: PPE (185,940 + 400,000 + 435,000 + 580,000) Total assets

1,600,940 6. (D)

Current liabilities: Trade and other payables Income tax payable Provisions

1,600,940 1,701,340

199,800 56,000 8,400

Non-current liabilities: Lease liability (27,600 – 18,000) Provision Total liabilities

672,600 135,000 594,740

Beginning balance Total comprehensive income for the year (77,500 – 456,000) Dividend on ordinary shares Piecemeal realization of revaluation surplus Ending balance

4.

264,200 7. (A)

9,600 25,200

Equity: Ordinary share capital Revaluation surplus Retained earnings Total liabilities and shareholders’ equity

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

100,400 5. (D)

A

5.

335

D

34,800 299,000

8. (B) 1,402,340 1,701,340

Retained Earnings 576,875 181,515

Revaluation Surplus 518,000 (378,500)

(168,150) 4,500 594,740

(4,500) 135,000

6.

D

7.

A

8.

B


PROBLEM 32-16 SUPPORTING COMPUTATIONS: Cost of Sales: Unadjusted balance Add: Amortization of leased property [36,000 / (12 – 4)] Add: Amortization of leased plant (25,000 / 5) Add: Depreciation of other plant and equipment [(47,500 – 33,500) x 20%] Adjusted Cost of Sales Leased Property: Carrying amount – April 1, 2015 (48,000 – 16,000) Add: Revaluation surplus (36,000 – 32,000) Revalued amount – April 1, 2015 Less: Amortization (36,000 / remaining life 8 years) Carrying amount – March 31, 2016 Leased Liability: Amortization Table: Principal Date Payment April 1, 2015 April 1, 2015 2,000 March 31, 2016 6,000 March 31, 2017 6,000

Interest Expense

Leased Plant: Fair value – April 1, 2015 Less: Amortization (25,000 / 5 years) Carrying amount – March 31, 2016

2,800 311,000 32,000 4,000 36,000 (4,500) 311,000

Amortization

2,300 1,930

298,700 4,500 5,000

2,000 3,700 4,070

Present value 25,000 23,000 19,300 15,230 25,000 5,000 20,000

Deferred Tax: Deferred tax liability – March 31, 2016 (12,000 x 25%) Deferred tax liability – April 1, 2015 Decrease in deferred tax liability Question No. 1 Revenue Less: Cost of sales Gross profit Less: Distribution costs Administrative expense (26,900 + 3,000 fraud) Finance cost (300 + 2,300 interest in the lease) Loss before tax Income tax benefit [(9,600 x 25%) + 200 – 800] Loss after tax (D)

336

3,000 3,200 200

350,000 311,000 39,000 16,100 29,900 2,600 (9,600) 1,800 (7,800)


Questions No. 2 to 5 Current assets: Inventory Trade receivables (28,500 – 4,000) Current tax refund (9,600 x 25%)

25,200 24,500 2,400

Non-current assets: Leased property Leased plant (25,000 – 5,000) Owned plant (47,500 – 33,500 – 2,800) Total assets

31,500 20,000 11,200

Current liabilities: Trade payables Bank overdraft Finance lease liability – current

27,300 1,400 4,070

Non-current liabilities: Finance lease liability – noncurrent Deferred tax liability Total liabilities

15,230 3,000

Equity: Share capital Reserves: Share premium Revaluation surplus Retained earnings Total shareholders’ equity Statement of Changes in Equity: Share Capital Beg bal 45,000 Prior period adjustment – fraud Restated balance Rights issue (see below) 9,000 Net loss Revaluation surplus Piecemeal realization of R/S . Ending bal. 54,000

52,100

62,700 114,800

32,770

18,230 51,000 54,000

9,500 3,500 (3,200)

Share Premium 5,000

Revaluation Surplus -

9,800 63,800

Retained Earnings 5,100 (1,000) 4,100

4,500

(7,800) 4,000

. 9,500

(500) 3,500

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. This should be recorded as ₱9 million equity shares (18,000 x 50 cents) and ₱4.5 million share premium (18,000 x (75 cents – 50 cents)).

337


The discovery of the fraud represents an error part of which is a prior period adjustment (₱1 million) in accordance with PAS 8 Accounting policies, changes in accounting estimates and errors. Question No. 6 Loss after tax Divided by: Weighted average shares (see below) Loss per share (B)

7,800 99,000 ₱.0788

April 1 to December 31 (90,000 x 1.20 / 1.125* x 9/12) January 1 to March 31 (108,000 x 3/12) Weighted average number of shares

72,000 27,000 99,000

*Adjustment factor. Value of one right

=

Value of one right

=

Fair value per share – right on minus exercise price Number of rights to purchase one share plus 1 ₱1.25 - . ₱75

=

5+1 ₱.075

Fair value per share – right on Less: Theoretical value of one right Theoretical ex-rights fair value per share SUMMARY OF ANSWERS: 1. D 2. D 3. B

4.

A

5.

338

₱1.20 .075 ₱1.125 B

6.

B

Chapter 33 – Statement of Cash Flows

CHAPTER 33: STATEMENT OF CASH FLOWS PROBLEM 33-1 Cash flows and non-cash activities 1) Sale of common stock 2) Sale of land 3) Purchase of treasury stock 4) Merchandise sales 5) Issuance of long-term note payable 6) Purchase of merchandise 7) Repayment of note payable 8) Receipts from sale of half of investment in associate 9) Employee salaries 10) Sale of equipment at a gain 11) Issuance of bonds 12) Acquisition of bond of another corporation 13) Acquisition of a 60-day treasury bills 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26)

F I F O F O F I O I F I Not reported** I NC I I NC F O NC I I F O F**

Purchase of building Acquisition of a land under a finance lease Collection of nontrade note receivable (principal amount) Loan to another firm Declaration of cash dividend Retirement of common stock Income taxes paid Issuance of short-term note payable to a supplier Sale of a copyright Purchase of a treasury share of another corporation Payment of cash dividends Receipt of dividends Payment for the acquisition of additional 10% interest in a subsidiary 27) Payment of semiannual interest on bonds payable F 28) Receipt of interest O 29) Increase in shareholders’ equity from a dividend NC reinvestment plan 30) Declaration of share dividend NC 31) Interest paid capitalized under PAS 23 I *Acquisition of 60-day treasury bills is transaction reclassifying cash to cash equivalent. **PFRS 10.23 Changes in a parent’s ownership interest in a subsidiary that do not 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 Cash flows arising from changes in ownership interests in a subsidiary that do not

339


result in a loss of control shall be classified as cash flows from financing activities. PROBLEM 33-2 Indirect Method - Operating Activities Net income Decrease in accounts receivable Increase in accounts payable Depreciation expense Net cash provided by operating activities

(A)

668,000 96,000 44,000 20,000 828,000

PROBLEM 33-3 Indirect Method - Operating Activities Net income Increase in accounts receivable Decrease in prepaid expenses Increase in accumulated depreciation-depreciation expense Decrease in accounts payable Net cash provided by operating activities (A)

292,000 (40,000) 12,000 64,000 (16,000) 312,000

PROBLEM 33-4 Investing Activities Cash acquisition of fair value through other comprehensive securities Proceeds from sale of the company’s used equipment Purchase of equipment Net cash provided by investing activities (B)

(100,000) 1,000,000 (560,000) 340,000

PROBLEM 33-5 Financing Activities Issuance of shares of the company’s own ordinary shares Dividends paid to the company’s own shareholders Repayment of principal on the company’s own bonds Net cash provided by financing activities (A)

680,000 (28,000) (160,000) 492,000

PROBLEM 33-6 Question No. 1 Cash receipts from receivable (216 + 800 – 324) Cash payment for purchases [(321 + 300 – 425) + 117 – 210] Cash disbursement – insurance (66 + 40 – 88) Cash disbursement – salaries (93 + 120 – 102) Cash disbursement – interest (50 – 10) Cash disbursement –tax (78 + 52 – 60) Net cash provided by operating activities (D)

340

692 (103) (18) (111) (40) (70) 350


Question No. 2 Net Income Depreciation Gain on sale of building Loss on sale of machinery Increase in A/R Decrease in Inventory Decrease in prepaid insurance Increase in Accounts Payable Increase in salaries payable Increase in DTL Bond discount amortization Net cash provided by operating activities

(D)

88 123 (11) 12 (108) 104 22 93 9 8 10 350

Note that cash flows for operating activities using direct or indirect method is the same. PROBLEM 33-7 Question No. 1

COMPREHENSIVE PROBLEMS (B) Accounts receivable

Beg. balance – AR Sales on account

125,0000 1,000,000

135,000 -

-

990,000 -

Recoveries

Total Question No. 2

1,125,000

Balance end - AR Sales returns and allowance* Sales discounts Collections (squeeze) Write-off

1,125,000

(C) Accounts Payable Trade

Payments (squeezed) Purchase returns and allow. Purchase discounts Balance end – AP Total

525,000 0

190,000 485,000

Beg. balance – AP Purchases

0 150,000 675,000 Merchandise Inventory

Beg. Balance Net Purchases (squeeze)

175,000 485,000

Total

660,000

160,000 500,000

341

Balance end Cost of Sales


Question No. 3

(D) Deferred income taxes

Payments (squeezed) Balance end Total

190,000

175,000 100,000

85,000

Beg. balance Income tax expense

275,000

Question No. 4 (D) Collection of accounts receivable Payment of accounts payable Payment of income taxes* Payment of operating expenses Net cash provided by (or used in) Operating activities

990,000 (525,000) (190,000) (180,000) 95,000

*Computation of Payment of income taxes Prepaid insurance Beg. Balance Payment (squeezed)

25,000 180,000

Total

40,000 165,000

Balance end Operating expenses excluding depreciation (260,000-95,000)

205,000

Depreciation expense=245,000-150,000 =95,000 Question No. 5 Receipt of cash from note payable-bank (200,000-160,000) Issuance for cash of ordinary shares(225,000-200,000) Dividends paid Net cash provided used in Financing activities (A)

40,000 25,000 (75,000) (10,000)

Question No. 6 *Proceeds from Sale of investment Cash acquisition of PPE (540,000-460,000) Net cash provided used in investing activities

20,000 (80,000) (60,000)

(B)

Cost of investment sold (190,000-180,000) Add: Gain on sale Proceeds from sale of investment SUMMARY OF ANSWERS: 1. B 2. C 3. D

4.

D

5.

342

10,000 10,000 20,000 A

6.

B


PROBLEM 33-8 Question No. 1 Beg. Balance Sales on account

Question No. 2 Bal. end Payment

Beg. Balance Net purchases

(A) Accounts receivable 600,000 1,250,000 5,000,000 4,330,000 20,000 5,600,000 5,600,000 (B) Accounts payable 4,800,000 4,500,000 1,900,000 2,200,000 6,700,000 6,700,000 Merchandise inventory 2,000,000 2,200,000 2,200,000 2,000,000 4,200,000 4,200,000

Bal. end Collections Write-off


Bal. end Cost of goods sold

Question No. 3 (A) Net income Amortization of premium of Investment in Bonds Depreciation Gain on sale of equipment Amortization of franchise Decrease (or increase) in Trading securities Decrease (or increase) in Net AR Decrease (or increase) in Inventories Increase (or decrease) in AP Increase (or decrease) in DTL Net cash provided by (or used in) Operating activities Computation of accumulated depreciation: Beg. Balance Add: Depreciation expense Less: Accumulated depreciation of asset sold Balance end Gain or (loss) on sale Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Gain on sale

700,000 60,109 900,000 (220,000) 100,000 (450,000) (530,000) (200,000) 300,000 200,000 860,109

3,200,000 900,000 200,000 3,900,000 500,000 480,000 200,000

343

280,000 220,000


Amortization table: Interest Date Collection 01/01/2015 12/31/2015 480,000 12/31/2016 480,000

Interest Income


425,355 419,891

54,645 60,109

Present value 4,253,552 4,198,907 4,138,798

Question No. 4 (B) Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities

(1,000,000) 500,000 (500,000)

Question No. 5 (D) Dividends paid Cash receipts-issuance of OS (10,000 x 120) Cash paid for Treasury shares Net cash provided by (or used in) Financing activities

(300,000) 1,200,000 (500,000) 400,000

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

4.

B

5.

D

PROBLEM 33-9 Question No. 1 Bal. end Payment


(D) Accounts payable 3,400,000 3,500,000 1,900,000 1,800,000 5,300,000 5,300,000 Merchandise inventory 2,000,000 1,800,000 1,800,000 2,000,000 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-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 150,000 300,000 Income tax expense 1,000,000 1,000,000 Question No. 3 (A) Net income Share in the net income of associate Cash dividends from associate

700,000 (1,024,000) 280,000

344


Depreciation Loss on sale of equipment Amortization of franchise Decrease (or increase) in Trading securities Decrease (or increase) in Net AR Decrease (or increase) in Inventories Increase (or decrease) in AP Increase (or decrease) in ITP Increase (or decrease) in DTL Net cash provided by (or used in) Operating activities Year of Acquisition Percentage of ownership Cost of Investment Less: Book value of net asset acquired Excess of cost over book value Over or (under)valued asset Inventory Machinery Land Goodwill Amortization of Over (Under) valued asset Inventory Machinery Divide by: Remaining life Amortization of Under (over) valued asset No of months divide by 12 (1st year) Amortization of Under (over) valued asset Net income of the associate Dividends declared and paid Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received 2016 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Net investment income - 2016 Investment in Associate

345

200,000 100,000 100,000 (90,000) 200,000 (100,000) (50,000) 200,000 516,000

20% 4,000,000 2,400,000 1,600,000 (40,000) 240,000 1,800,000 2015 40,000

2016

(240,000) 10 (24,000) 1 (24,000)

(24,000) 1 (24,000)

2015 4,000,000 1,000,000 2015 4,000,000 20% 800,000 1,000,000 20% 200,000

2016 5,000,000 1,400,000 2016 5,000,000 20% 1,000,000 1,400,000 20% 280,000 1,000,000 24,000 1,024,000


Beg. Balance Add: Net investment income Less: Dividends received Balance end

4,584,000 1,024,000 280,000 5,328,000

Question No. 4 (B) Cash receipt from loan receivable Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities

120,000 (2,000,000) 500,000 (1,380,000)

Question No. 5 (D) Dividends paid Cash receipts-issuance of Ordinary shares Cash receipts-reissuance of Treasury shares Net cash provided by (or used in) Financing activities

(350,000) 1,120,000 105,000 875,000


4.

B

5.

D

PROBLEM 33-10 Question No. 1 Bal. end Payment


(D) Accounts payable 4,000,000 3,500,000 1,700,000 2,200,000 5,700,000 5,700,000 Merchandise inventory 1,500,000 1,700,000 2,200,000 2,000,000 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-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 270,000 420,000 Income tax expense 1,120,000 1,120,000 Question No. 3 (A) Net income Share in the net income of associate Cash dividends from associate Depreciation

980,000 (630,000) 225,000 200,000

346


Loss on sale of equipment Amortization of franchise Amortization of disc on investment in bonds Decrease (or increase) in Net Accounts Receivable Decrease (or increase) in Inventories Increase (or decrease) in Accounts Payable Increase (or decrease) in Income Tax Payable Increase (or decrease) in Deferred Tax Liability Net cash provided by (or used in) Operating activities Amortization table: Interest Date Collection 01/01/2016 12/31/2016 100,000 12/31/2017 100,000

150,000 100,000 (12,708) (90,000) (200,000) 500,000 (50,000) 200,000 1,372,292

Interest Income


112,708 114,233

12,708 14,233

Year of Acquisition Percentage of ownership Cost of Investment Less: Book value of net asset acquired Excess of cost over book value Over or (under)valued asset Inventory Machinery Land Goodwill Amortization of Over (Under) valued asset Inventory Machinery Divide by: Remaining life Amortization of Under (over) valued asset No of months divide by 12 (1st year) Amortization of Under (over) valued asset Net income of the associate Dividends declared and paid Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received 2015 Investment Income

347

Present value 939,230 951,938 966,170

25% 3,500,000 2,500,000 1,000,000 (50,000) 300,000 1,250,000 2015 50,000

2016

(300,000) 10 (30,000) 1 (30,000)

(30,000) 1 (30,000)

2015 2,000,000 800,000 2015 2,000,000 25% 500,000 800,000 25% 200,000

2016 2,400,000 900,000 2016 2,400,000 25% 600,000 900,000 25% 225,000


Share in the Net Income Add: Amortization of overvalued machinery Less: Undervaluation of inventory Net investment income - 2015

500,000 30,000 50,000 480,000

Investment in Associate Cost of investment Add: Net investment income Less: Dividends received Balance end, 12/31/2015

3,500,000 480,000 200,000 3,780,000

2016 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Net investment income - 2016

600,000 30,000 630,000

Investment in Associate Beginning balance, 01/01/2016 Add: Net investment income Less: Dividends received Balance end, 12/31/2016

Beg. Balance Acquisition cost Present value of MLP

3,780,000 630,000 225,000 4,185,000

Property, Plant and Equipment 9,000,000 900,000 Cost of equipment sold 600,000 9,069,180 bal. end 369,180 9,969,180 9,969,180

Accumulated depreciation Bal. end 3,000,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 400,000 200,000 Depreciation expense 3,400,000 3,400,000 Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Loss on sale

350,000 900,000 400,000

Question No. 4 (B) Cash acquisition of Investment in Bonds Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities Present Value of Periodic Payment (100,000 x 3.4869) Add: Present Value of Bargain Purchase option(30,000 x 0.683)

348

500,000 (150,000)

(939,230) (600,000) 350,000 (1,189,230) 348,690 20,490


Present Value of Minimum lease payments Amortization table: Interest Date Payment 12/31/2016 12/31/2016 100,000 12/31/2017 100,000

369,180

Interest Expense

Amortization

26,918

100,000 73,082

Question No. 5 (D) Payment of principal finance lease liability Dividends paid Cash receipts-issuance of Ordinary Shares Net cash provided by (or used in) Financing activities

Present value 369,180 269,180 196,098 (100,000) (350,000) 720,000 270,000

Share Capital Beginning balance Issuance for cash Issuance thru SDP Balance end

10,000,000 600,000 1,910,000 12,510,000

Share Premium Beginning balance Issuance for cash Balance end

1,000,000 120,000 1,120,000

Retained Earnings Beginning balance Add: Net income Less: Dividends declared-cash Less: Share dividend Balance end

3,740,000 980,000 350,000 1,910,000 2,460,000


4.

B

5.

D

PROBLEM 33-11 Question No. 1 Collection from customers (202M + 410M – 200M – 6M) Proceeds from investment income (4M + 5M – 6M) Proceeds from sale of cash equivalent Payment of purchases [(205M + 180M -200M) + 65M – 50M] Payment of insurance (4M + 7M - 8M) Payment of salaries (11M + 65M – 6M) Payment of interest (4M + 25M – 8M) Payment of tax (14M + 8M + 36M – 12M – 11M)

349

406M 3M 2M (200M) (3M) (70M) (21M) (35M)


Net cash provided from operating activities

(C)

82M

Question No. 2 Purchase of land (196M – 150M) Proceeds from sale of major components of machine Purchase of long-term investment Proceeds from sale of long-term investment Net cash used from investing activities (C)

(46M) 17M (25M) 23M (31M)

Beg. Balance Investment income (associate) Acquisition (Tory) Total

Long-term Investment 125M 156M 6M 48M 179M

23M

Disposal

179M

Question No. 3 Retirement of bonds Proceeds from issuance of preferred stock Acquisition of treasury shares Dividends paid Net cash used from financing activities

Balance end Dividends Total

Bal. end

Retained Earnings 242M 227M 52M 67M 294M 294M

(60M) 75M (9M) (22M) (16M)

(A)

Beg. Balance Net income

Total dividends Less: Stock dividends – small (4M shares x ₱7.50 fair value) Cash dividends paid

52M 30M 22M

SUMMARY OF ANSWERS: 1. C 2. C 3. A PROBLEM 33-11 Question No. 1 Overdraft – end Add: Bank, beginning Net cash outflow

110 120 (230)

(A)

Question No. 2 Profit for the year

135

350


Depreciation Amortization Increase in inventory (200 – 110) Increase in trade receivable (195 – 75) Increase in trade payable (210 – 160) Decrease in current tax payable (80 – 110) Net cash from operating activities (D)

115 25 (90) (120) 50 (30) 85

Question No. 3 Acquisition of PPE (see computation below) Acquisition of intangible assets (see computation below) Acquisition of investment Net cash used in investing activities (A)

(305) (125) (230) (660)

PPE, net 410 305 80 795

Balance beginning Acquisition Revaluation Total Balance beginning Acquisition Revaluation Total

680 115 795

Intangible asset, net 200 300 125 25 325 325

Ending balance Disposal Depreciation

Ending balance Disposal Amortization

Question No. 4 10% secured loan notes Issuance of shares Dividends paid (see computation below) Net cash from financing activities (C) Balance end Dividends Total

Retained Earnings 375 295 55 135 430 430

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

4.

C

351

300 100 (55) 345 Beg. Balance Net income


PROBLEM 33-13 Question No. 1 Cash Accounts receivable Allowance for doubtful accounts Inventories Total current assets (A)

5,639,900 1,000,000 (180,000) 2,200,000 8,659,900

Question No. 2 Investment in bonds - FA at amortized cost Property plant and equipment Accumulated depreciation Franchise - net Total noncurrent assets (A)

3,861,105 9,520,000 (3,900,000) 500,000 9,981,105

Total assets

18,641,005

Question No. 3 Liabilities and equity Accounts payable Dividends payable Total current liabilities

(A)

4,800,000 400,000 5,200,000

Question No. 4 Deferred tax liability Total noncurrent liabilities

(C)

700,000 700,000

Total liabilities

5,900,000

Question No. 5 Ordinary shares, P100 par value Share Premium Treasury shares at cost Retained earnings Total shareholders' equity (C)

11,000,000 1,200,000 (500,000) 1,041,005 12,741,005

Total liabilities and equity

18,641,005

Beg. Balance Sales on account

Bal. end Write-off

Accounts receivable 600,000 1,000,000 5,000,000 4,600,000 5,600,000 5,600,000

Bal. end Collections Write-off

Allowance for doubtful accounts 180,000 40,000 Beg. Balance 140,000 Bad debts 180,000 180,000

352



Merchandise inventory 2,000,000 2,200,000 2,200,000 2,000,000 4,200,000 4,200,000

Bal. end Payment

Accounts payable 4,800,000 4,500,000 1,900,000 2,200,000 6,700,000 6,700,000

Amortization table: Interest Date Collection 01/01/2015 12/31/2015 320,000 12/31/2016 320,000 12/31/2017 320,000 12/31/2018 320,000 Beg. Balance Acquisition cost Present value of MLP



Interest Income


374,637 380,100 386,111 392,816

54,637 60,100 66,079 72,816

Present value 3,746,368 3,801,005 3,861,105 3,927,184 4,000,000

Property, Plant and Equipment 9,000,000 480,000 Cost of equipment sold 1,000,000 9,520,000 bal. end 10,000,000 10,000,000

Accumulated depreciation Bal. end 3,900,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 200,000 900,000 Depreciation expense 4,100,000 4,100,000 Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Gain on sale

500,000 480,000 200,000

280,000 220,000

Ordinary shares Beginning balance Issuance for cash Balance end

10,000,000 1,000,000 11,000,000

Share Premium Beginning balance Issuance for cash

1,000,000 200,000

353


Balance end

1,20,000

Retained Earnings Beginning balance Add: Net income Less: Dividends declared-cash Balance end SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

461,005 980,000 400,000 1,041,005 C

5.

C

PROBLEM 33-14 Question No. 1 Ending balance Payment Total Question No. 2 Balance beginning Acquired – cash Acquired – lease Acquired – business combination Total

(C) Income tax payable 143,700 65,000 76,000 154,700 219,700 219,700 (C) PPE, net 791,500 805,300 50,000 12,130 153,330 105,000 958,630

Beg. Balance Income tax expense

Ending balance Disposal Depreciation

958,630

Question No. 3 (A) Profit for the year Depreciation Amortization Share in profit of associate Increase in inventory (57,300 – 46,900) Increase in trade and other receivables (excluding receivable from business combination) – (75,900 – 51,930 – 6,450) Decrease in trade and other payables (excluding receivable from business combination) – (82,600 + 9,950 – 48,792) Increase in income tax payable Net cash provided by operating activities Question No. 4 (C) Proceeds from sale of license (see computation below) Acquisition of PPE Acquisition of Hey Jude

354

471,440 153,330 8,200 (24,700) (10,400) (17,520) (43,758) 87,800 615,292

21,600 (50,000) (10,000)


Acquisition of Yesterday Cash and cash equivalents acquired in business combination Net cash used by investing activities

Balance beginning Acquisition Goodwill* Total

Intangible asset, net 33,450 28,800 8,200 25,150 21,600 58,600 58,600

(58,800) 8,700 (88,500)

Ending balance Amortization Disposal

Consideration transferred [(58,500 + (35,000 x 1.4)] Less: FVNAA (110,200 x 75) Goodwill Question No. 5

107,800 82,650 25,150

()

PROBLEM 33-15 Question No. 1 Beg. Balance Interest income Total Question No. 2 Ending balance Payment Total

(A) Interest receivable – investing 10,500 12,500 Ending balance 52,000 50,000 Collection 62,500 62,500 (A) Income tax payable 170,000 130,000 140,000 180,000 310,000 310,000

Beg. Balance Income tax expense

Question No. 3 (B) Increase in cash and cash equivalents (12,500 – 400) Add: Decrease in bank overdraft Net cash inflows Net income Depreciation Gain on sale (450,000 – 324,500) Interest income – investing activities Decrease in inventory Decrease in trade and other receivables (excluding interest related to investing) – (495,100 – 415,600) Decrease in trade and other payables Decrease in warranty

355

12,100 3,500 15,600 834,900 560,000 (125,500) (52,000) 56,400 79,500 (122,600) (30,000)


Increase in income tax payable Net cash provided by operating activities

40,000 1,240,700

Question No. 4 (A) Interest collected – investing activity Proceeds from sale of machinery Proceeds from sale of factory building Loans to unrelated parties (1,000,000 – 850,000) Acquisition of PPE (see computation below) Net cash used by investing activities

Balance beginning Acquisition Revaluation Total

Ending balance Transfer to R/E Total

50,000 450,000 340,000 (150,000) (2,022,500) (1,332,5000

PPE, net 1,594,400 2,567,400 2,022,500 324,500 220,000 340,000 560,000 3,791,900 3,791,900

Ending balance Disposal - Machinery Disused factory Depreciation

Revaluation surplus 350,000 250,000 120,000 220,000 470,000 470,000

Balance beginning R/S – current period

Question No. 5 (C) Dividends paid (see computation below) Proceeds from issuance of shares (100,000 x 1.50) Net cash provided from financing activities Balance end Bonus issue* Transfer to R/E Dividends Total

Retained Earnings 1,478,300 876,000 310,000 834,900 120,000 42,600 1,830,900 1,830,900

*Total increase in share capital and share premium Less: Issuance of share for cash Bonus issue

356

(42,600) 150,000 107,400 Beg. Balance Net income

460,000 150,000 310,000

Applied Auditing Asuncion

Recommend Documents