advanced auditing 2016 solution guide - 1 File Download

!!

AUDITING 2016 EDITION

SOLUTION GUIDE !! !!!!!!!!!!

CHRISTOPHER T. ESPENILLA, CPA MBA FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY

REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY, MANILA

!

AUDITING (2016 EDITION)CTESPENILLA

SOLUTIONS GUIDE1 of 155

CHAPTER 1: THE AUDIT PROCESS


PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE1 D 11 B2 D 12 C3 D4 A5 D6 B7 B8 A9 D10 D

PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY1 D 11 C2 D 12 B3 C 13 B4 D 14 D5 D 15 D6 D 16 B7 A8 D9 C10 E

PROBLEM 3: INTERNAL CONTROL1 C 11 E 21 B2 D 12 B 22 A3 C 13 D 23 C4 C 14 C 24 B5 A 15 C 25 C6 D 16 C 26 A7 C 17 C8 D 18 D9 D 19 D10 A 20 A

PROBLEM 4: RISK BASED AUDIT PLANNING1 D 11 C2 C 12 B3 D4 B5 B6 B7 C8 A9 D10 C




PROBLEM 5: SUBSTANTIVE TESTING1 B 21 B2 A 22 D3 C 23 B4 C 24 D5 C 25 C6 D 26 C7 C 27 B8 D 28 B9 C 29 B10 C 30 B11 A 31 D12 B 32 A13 B 33 A14 A15 A16 B17 A18 A19 D20 A

PROBLEM 6: AUDIT REPORTING1 C2 B3 B4 B5 B6 C7 A8 B9 C10 C11 A12 C



CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

CHAPTER 2: AUDIT OF CASH

DISCUSSION PROBLEMSCHAPTER 2-PROBLEM 1

1 B2 D3 A4 B5 D6 D7 D8 D9 D

10 D11 D12 B13 C14 B15 B16 C17 B18 D19 D20 B21 C22 D23 C24 D25 B

AP02-PROBLEM 2: MAPERA CORPORATION1. Ans. P3,445,000

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

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

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

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

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

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

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

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




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

10. Ans. P1,700,000Rural bank - compensating balance - Adjusted to Other assets 500,000 Pension fund - Adjusted to Long-term Investment 250,000 Bond sinking fund - Adjusted to Long-term Investment 500,000 Cash in closed bank at recoverable value - Adjusted to Other assets 150,000 Ordinary shares - Available-for-sale security/FA at FMV through OCI/L 300,000 Non-current assets 1,700,000

11. Ans. P495,000Current account at BDO - Bank overdraft 240,000 Post-dated disbursement check - adjusted to AP 75,000 Undelivered disbursement check - adjusted to AP 120,000 Credit memo for a purchase return - adjusted to AP 60,000 Current liabilities 495,000

CHAPTER 2-PROBLEM 3: MANNY CO.Accountability:

Petty Cash Fund, Imprest balance 40,000 Return of an expense advance (a) 900 Total Accountability 40,900 1. Ans.

Valid supporting items:Bills and coins 13,400 Unreplenished paid vouchers 3,700 Accomodated checks Dated 12/30 2,000 Dated 11/30 - marked NSF 1,000 Replenishment check 10,000 30,100

Petty cash fund shortage 10,800 2. Ans. (a) Should be subsequently deposited to the bank.

Cash items as of December 31, 2014Bills and coins 13,400 Return of excess travel expense advance (a) (900) Unreplenished paid voucher dated 1/2 1,000 Accomodated check 12/30 2,000 Replenishment check 10,000 Adjusted petty cash fund 25,500 3. Ans. (a) Should be subsequently deposited to the bank.

4. Adjusting entries:1 Transportation expense 500

Repairs and maintenance expense 300 Entertainment, amusement and representation expense 900 Due to employees 1,000 Petty cash fund 2,700 To record unreplenished paid vouchers.

2 Receivable from employee 1,000 Petty cash fund 1,000 To record NSF accomodated check.

3 Receivable from employee 10,800 Petty cash fund 10,800 To record petty cash fund shortage.

Petty cash fund, imprest balance 40,000 AJE 1. (2,700) AJE 2. (1,000) AJE 3. (10,800) Adjusted petty cash fund 25,500




CHAPTER 2-PROBLEM 4: MAKWARTA COMPANYAns. P1,630Accountability:

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

Valid supporting items:Currency and coins 12,310 Customer collection checks9/30/14 - Baguio Corp. 2,350 10/3/14 - L. Reyes 1,960 10/4/14 - La. Union Corp. 1,590 5,900 Unused postage (adjusted to supplies) 110 Vouchers paid out of receipt (adjusted to expense) 1,500 19,820

Overage 1,630

CHAPTER 2-PROBLEM 5: BETTY CO.Accountability

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

Total Accountability 14,170 1. Ans.

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

Petty Cash Shortage 2,608 2. Ans.

AJEs to the Petty Cash Fund:(a) Expenses 730

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

(b) Receivable from employee 700 Petty Cash fund 700 To record employee .

(c) Receivable from employee 2,608 Petty Cash fund 2,608 To record the petty cash fund shortage.

Imprest balance 10,000 AJE (a) (730) AJE (b) (700) AJE (c) (2,608) (4,038) 3. Ans. Adjusted Petty Cash Fund as of Dec. 31 5,962 4. Ans.

CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO.Bank Reconciliation Statement 10/31/2014

BANK BOOKUnadjusted Balance, per Bank Statement 144,975 125,245 Unadjusted Balance per BooksUndeposited collections, excluding missapprop. 10,770 8,000 Unrecorded Bank CreditsOustanding checks (50,550) (2,300) Unrecorded Bank Debits: NSF CheckBank error (unrecorded bank charge) (1,250) (1,250) Unrecorded Bank Debits: Bank Service ChargeCorrect cash in bank balance (2. Ans. ) 103,945 129,695 Adjusted balance per books

(25,750) Cash shortage (1. Ans. )103,945 Correct cash balance




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

Accounts receivables 8,000

(b) Accounts receivables 2,300 Cash in bank 2,300

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

CHAPTER 2-PROBLEM 7: JADE CORPORATIONBank Reconciliation 12/31/2014

BANK BOOKUnadjusted balance 792,285 726,600 Unadjusted balanceDeposit in transit 10,500 20,000 Unrecorded creditOutstanding check (75,975) (5,000) Unrecorded debitBank error 2,250 31,500 Book errors (audit note a.)Correct cash balance (1. Ans. ) 729,060 773,100

(44,040) Shortage (3. Ans. )729,060 Adjusted balance

Unadjusted balance per books 726,600 Correct cash balance 729,060 Net adjustement to cash (12/31) (2,460) 2. Ans.

Accountability as of January 15 180,500 Unrecorded credit as of 12/31 (20,000) Book errors in Janaury (audit note b and c) 19,500 Adjusted accountability 180,000

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

CHAPTER 2-PROBLEM 8: PIRA CO.Proof of Cash, 6/30/2014

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

2. Ans. 6. Ans.

May 31, Receipt Disbursement June 30,Unadjusted balances per book (1. Ans. ) 538,200 4,818,600 2,443,200 2,913,600 Unrecorded bank credit: May 600,000 (600,000) Unrecorded bank debits: BSC, May (7,200) (7,200) Unrecorded bank debits: BSC, June 9,600 (9,600) Unrecorded bank debits: NSF Check June 144,000 (144,000) Bank error, May Overstated disbursement 405,000 (405,000) Book error, June Overstated collection (720,000) (720,000) Book error, June Overstated disbursement (213,840) 213,840 Adjusted balances 1,536,000 3,093,600 2,375,760 2,253,840

3. Ans. No shortage.

CHAPTER 2-PROBLEM 9: KRAME INC.Proof of Cash

Augsut 31: Receipt Disbursement September 30:Unadjusted balances, per bank 485,000 1,955,000 1,655,000 785,000 Undeposited collections - Aug 450,000 (450,000) Undeposited collections - Sept 240,000 240,000 2. Ans.Outstanding checks - Aug (180,000) (180,000) Outstanding checks - Sept 220,000 (220,000) 3. Ans.Bank error - Aug (80,000) (80,000)

675,000 1,745,000 1,615,000 805,000 1. Ans. 4. Ans.June 30: Receipt Disbursement July 31:

Unadjusted balances, per book 640,000 1,795,000 1,800,000 635,000 Unrecorded credit - Aug 200,000 (200,000) Unrecorded credit - Sept 250,000 250,000 Unrecorded debit - Aug (120,000) (120,000) Unrecorded debit - Sept 80,000 (80,000) Book Error - Aug (45,000) (45,000) Book Error - Sept /Correction - Sept (100,000) (100,000)

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




CHAPTER 2-PROBLEM 10: MANGO COMPANYProof of Cash, 4/30/2014

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

March 31, Receipt Disbursement April 30,Unadjusted balances per book 16,545 222,190 216,055 22,680 Book receipts used to pay creditors in cash (1,210) (1,210) Unrecorded bank credit: March 12,150 (12,150) Unrecorded bank credit: April 11,640 11,640 Unrecorded bank debits: NSF check, returned in April recorded in April 1,040 1,040 NSF check, returned in April not yet recorded 860 (860) Unrecorded bank debits: BSC, March (750) (750) Unrecorded bank debits: BSC, April 420 (420) Bank error, April Understated disbursement 360 (360) Adjusted balances 27,945 221,510 216,775 32,680

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

MULTIPLE CHOICE EXERCISESCHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY

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

CHAPTER 2-EXERCISE 2: BIG BROTHER CORP. Cash & Cash Equivalent

Noncurrent Asset

6,000,000 6,000,000 (300,000) *no right of off-set, classified as current liability 1,500,000 1,500,000 60,000 3,000,000 *Other Asset at current exchang price 3,000 *prepaid expense 12,000 *other receivables 30,000 *other receivables 60,000 *debited to accounts payable 150,000 150,000 45,000 *accounts receivable 90,000 90,000 12,000 12,000 600,000 600,000 900,000 *current investment 10,000 10,000 1,000,000 1,000,000 *LT fund investment

8,362,000 4,000,000 1. Ans .C. 2. Ans. B.

CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANYAccountability:

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

Total Accountability 170,504

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

Petty cash shortage 14,503 1. Ans. B.

Treasury bills, due 3/31/15 (purchased 12/31/14)Treasury bills, due 1/31/15 (purchased 1/1/14)Change fundBond sinking fund

Current account at Bank of the Philippine IslandsCurrent account at Equitable PCI BankPayroll accountForeign bank account – restricted (in USD) **Postage stampsEmployee’s post dated checkIOU from a key officerCredit memo from a vendor for a purchase returnTraveler’s checkCustomer’s not-sufficient-funds check Money ordersPetty cash fund, currencies only




Cash on hand as of January 5, 2015Bills and coins 105,174 Customer collection checks 43,482 Accomodated check 310 Return of expense advance check 260 149,226

Cash that does not belong to the petty cash fundUndeposited collections: Collection checks 43,482 Cash collections (100,500+560+1,202) 102,262 (145,744) Return of expense advance (260) Excess collection from Christmas Party (9,500-6,290) (3,210)

Cash on hand as of January 5, belonging to the Petty Cash 12 Vouchers paid after December 31: 1/2/15, PNR 35 Petty cash fund as of December 31, 2015 47 3. Ans. B.

AJEs:(a) Office supplies expense (150-80) 70

Unused office supplies 80 Receivable from employee 300 Petty cash fund 450 To record unreplensihed expense vouchers as of December 31.

(b) Receivable from employee 14,503 Petty cash fund 14,503 To record petty cash shortage

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

Notes:1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution).2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31.3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check the same was also part of the valid supporting items. As an additional audit procedure, return of expense advance shall be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be returned back to the general cash of the company.

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

BANK BOOKUnadjusted balance per Bank Statement 12,300 15,000 Unadjusted balance per booksUndeposited collections (as being reported) 3,000 150 Unrecorded bank creditOutstanding checks (as per complete list) (850) Correct cash balance per audit (4. Ans. B.) 14,450 15,150 Unadjusted balance per books

(700) Shortage 1. Ans. D.14,450 Adjusted balance per books

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

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

CHAPTER 2-EXERCISE 5: HOME CORP.Bank Reconciliation 12/31/2014

BANK BOOKUnadjusted balance 1,548,570 1,239,200 Unadjusted balanceDeposit in transit 21,000 200,000 Unrecorded creditOutstanding check (151,950) (10,000) Unrecorded debitBank error 4,500 63,000 Book errors (audit note)Correct cash balance (16. Ans. D) 1,422,120 1,492,200

(70,080) Shortage (17. Ans. C )1,422,120 Adjusted balance

Accountability as of January 10 521,000 Unrecorded credit as of 12/31 (200,000) Book errors in Janaury (audit note a and b) 39,000 Adjusted accountability 360,000 (18. Ans. B.)

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




CHAPTER 2-EXERCISE 6: CARRERA INC.Proof of Cash, July 31, 2014

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

March 31, Receipt Disbursement April 30, Unadjusted balances per book 140,330 763,680 654,330 249,680 Unrecorded bank debits, July Payment of AP 31,800 (31,800) Unrecorded bank debits, July BSC 2,610 (2,610) Unrecorded bank debits, July Payment of NP 183,000 (183,000) Unrecorded bank debits, July NSF 9,330 (9,330) Adjusted balances 140,330 763,680 881,070 22,940

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

CHAPTER 2-EXERCISE 7: EDILBERTO INC.Proof of Cash, December 31, 2014

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

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

November 30, Receipt Disbursement December 31,Unadjusted balances per book 82,350 1,182,260 1,063,185 201,425 1. Ans. B. 2. Ans. B.Unrecorded bank credit: Note Col., Nov. 359,075 (359,075) Unrecorded bank credit: Note Col., Dec. 404,500 404,500 Unrecorded bank debits: BSC, Nov. (3,600) (3,600) Unrecorded bank debits: BSC, Dec. 3,000 (3,000) NSF Check, return and redeposit, same month* 41,250 41,250 Adjusted balances 437,825 1,268,935 1,103,835 602,925

3. Ans. B.

CHAPTER 2-EXERCISE 8: HALALAN CORP.Proof of Cash, June 30, 2014

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

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

May 31, Receipt Disbursement June 30,Unadjusted balances per book 570,800 219,000 57,400 732,400 6. Ans. C.Unrecorded bank credit: May 72,000 (72,000) Unrecorded bank debits: BSC, May (800) (800) Unrecorded bank debits: BSC, June 200 (200) Unrecorded bank debits: NSF, June 13 (b) 1,000 1,000 Unrecorded bank debits: NSF, June 30 3,000 (3,000) Adjusted balances 642,000 148,000 60,800 729,200

4. Ans. D. 5. Ans. B.Notes:(a) the error committed by the bank in June was also corrected in June, thus both receipts and disbursements per bank shall be in excess by P1,000 if compared to receipts and disbursements per books. To reconcile, the same had been deducted from both receipt and disbursements.(b) the NSF check on June 13 had been redeposited immediately. No entry had been made by the company to reflect the receipt and redeposit while on the bank side, the NSF check had been recorded both as disbursement (upon learning that it is NSF) and as receipt (upon redeposit). Thus, to reconcile, the same has been added to both receipts and disbursements per books.

CHAPTER 2-EXERCISE 9: SALUYOT CORP.Proof of Cash, September 30, 2014

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




August 31, Receipt Disbursement September 30,Unadjusted balances per book 120,000 127,200 25,380 221,820 4. Ans. A.Unrecorded bank credit: August 27,000 (27,000) Unrecorded bank debits: BSC, August (300) (300) Unrecorded bank debits: BSC, September 1,320 (1,320) Unrecorded bank debits: NSF, Sept. 12 420 420 Unrecorded bank debits: NSF, Sept. 30 900 (900) Adjusted balances 146,700 100,620 27,720 219,600

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

CHAPTER 2-EXERCISE 10: WISE COMPANY1. Ans. B.

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

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

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

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

5. Ans. D. Checks issued in December (4) 126,250 Add: Bank service charges recorded in December 2,500 Book disbursements in December 128,750

6. Ans. A.Book balance, December 31 37,500Add: Book disbursements in December (5) 128,750 Total 166,250 Less: Book receipts in December (from number 3) (150,000) Book balance, November 30 16,250

Proof of Cash, December 31, 2014November 30. Receipt Disbursement December 31,

Unadjusted balances per bank statement 18,500 145,000 137,000 26,500 (SQUEEZE)Deposit in transit, November 12,500 (12,500) Deposit in transit, December 20,000 20,000 Outstanding checks, November (16,250) (16,250) Outstanding checks, September 12,500 (12,500) Bank error, Dec. Overstated Disbursement (3,750) 3,750 Adjusted balances 14,750 152,500 129,500 37,750

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

November 30. Receipt Disbursement December 31,Unadjusted balances per book 16,250 150,000 128,750 37,500 Unrecorded bank debits: BSC, November (1,500) (1,500) Unrecorded bank debits: BSC, December 2,250 (2,250) Book error, Dec. Understated Receipt 2,500 2,500 Adjusted balances 14,750 152,500 129,500 37,750

CHAPTER 2-EXERCISE 11: I-BOT INC.1. Ans. A

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

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




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

Proof of Cash, December 31, 2014November 30. Receipt Disbursement December 31,

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

4. Ans. B.

November 30. Receipt Disbursement December 31,Unadjusted balances per book 15,698 371,766 377,668 9,796 Unrecorded bank credits: Note Coll, Dec. 4,000 4,000 Unrecorded bank debits: BSC, November (36) (36) Unrecorded bank debits: BSC, December 42 (42) Book error, Nov. Over. check 3413 (not yet corr.) 270 270 Book error, Nov. Over. Check 3417 (not yet corr.) 800 800 Adjusted balances 16,732 375,766 377,674 14,824

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

CHAPTER 2-EXERCISE 12: HALAL CORP.Proof of Cash, December 31, 2014

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

4. Ans. C. 6. Ans. B.

November 30. Receipt Disbursement December 31,Unadjusted balances per book 637,860 306,220 367,660 576,420 1. Ans. A. (SQUEEZE)Unrecorded bank credits: Note Coll, Dec. 2,060 2,060 Unrecorded bank debits: BSC, November (60) (60) Book error, December, Overstated Disbursement (980) 980 Reversal of check (stop-payment)** (780) (780) Adjusted balances 637,800 307,500 365,840 579,460

5. Ans. A. 7. Ans. D.3. Ans. D.

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

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



CHAPTER 3: AUDIT OF RECEIVABLES AND SALES



1 A2 B.3 A.4 A.5 D.6 B.7 D.8 D.9 D.

10 D.11 A.12 C.13 B.14 A.15 A.16 D.17 C.18 B.19 B.20 A.21 A.22 D.

CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION1. Ans. P124,500

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

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

3. Adjusting Journal Entries:(a) Accounts receivable-trade 9,000

Advances from customers 9,000

(b) Sales 25,000 Accounts receivable-trade 25,000

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

(d) Advances from customers 5,000 Accounts receivable-trade 5,000

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

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

(g) Advances to affiliates (Investment) 50,000 Accounts receivable-trade 50,000

(h) Advances to suppliers 10,000 Accounts receivable-trade 10,000

(i) Accounts receivable-trade 10,000 Advances from customers 10,000

(j) Accounts receivable-trade 2,000 Claims receivable (AR-nontrade) 2,000




(k) Accounts receivable-trade 45,000 Subscriptions receivable (AR-nontrade) 45,000

CHAPTER 3-PROBLEM 3: DELL COMPANY1. Ans. P366,000

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

2. Ans. P22,320; 3. Ans. P17,640Allowance for Doubtful Accounts, End 17,640 Less: Allowance for Doubtful Accounts, Beginning (1,320) Add: Write-of off Accounts 6,000 Bad debt expense for the year 22,320

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

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

CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATIONPer GL Per SL Nov-Dec Jul-Oct Jan-Jun Prior to Jan

Balances 2,270,000 2,270,000 1,140,000 600,000 400,000 130,000 Accounts definitely uncollectible (30,000) (30,000) (30,000) Adjusted balances 2,240,000 2,240,000 1,140,000 600,000 400,000 100,000 % Uncollectible 1.5% 8% 35% 70%Allowance for Doubtful Accounts 275,100 17,100 48,000 140,000 70,000

2. Ans.Per books:Allowance for DA, Jan. 1 65,000 Add: Interim provisions (P4.5M*2%) 90,000 Recoveries of previous write-off 7,500 Less: Write-off of receivables (45,000) Additional write-off (30,000) Allowance for DA, Dec. 31 per books 87,500 Allowance for DA, per audit 275,100 Additional DA Expense for the year 187,600

1. Ans. Entry:Doubtful Accounts Expense 187,600 Allowance for DA 187,600

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




CHAPTER 3-PROBLEM 5: MAHOGANNY CORP.Customer Invoice Date Amount Current 1-60 d past 61-120 d past >120 d past Credit bal

Nov-Dec Sept-Oct Jul-Aug June and priorZulu Inc. 41,993 550,000 550,000

41,974 1,200,000 1,200,000 41,923 950,000 950,000 41,855 420,000 420,000

Whiskey Co. 41,963 2,000,000 2,000,000 41,886 900,000 900,000 41,853 500,000 500,000

Uniform Inc. 41,983 1,750,000 1,750,000 41,916 600,000 600,000 41,825 500,000 500,000

Tango Corp. 41,891 2,600,000 2,600,000 41,830 1,250,000 1,250,000 41,703 900,000 900,000

Romeo Co. 41,974 (500,000) (500,000) 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)

Reconciliation of GL and SLPer GL Per SL Current 1-60 d past 61-120 d past >120 d past Credit bal

Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000) Advances from Reomeo Co. 500,000 500,000 500,000 Posting error - - 600,000 (600,000) Adjsuted balances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 - Unreconciled difference (1. Ans.) (30,000) Adjusted balance (2. Ans.) 14,120,000 Required allowance for Bad Debt as % 2% 5% 20% 50%Required allowance for Bad Debt 1,328,500 122,000 222,500 534,000 450,000

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

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

CHAPTER 3-PROBLEM 6: BONIFACIO INC.ADJUSTING ENTRIES:(a) Credit balance:

Accounts receivable 7,500 Allowance for bad debts 7,500

(b) Customer Aye:No AJE necessary since the remmittance is still in transit as of December 31, 2014.

(c) Customer Bee:Sales Returns 13,800 Accounts payable 13,800 Accounts receivable (1-60 days) 13,800 Purchases 13,800

(d) Customer See and Dee: (1. Ans.)Payment of customer See for a 61-120 days receivable has been deducted from customer Dee's 1-60 days receivable.Posting error only. No AJE necessary.

(e) Customer Eee:Sales 11,600 Accounts receivable (1-60 days) 11,600

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

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




(g) Customer Jeeh:Sales 6,000 Accounts receivable (1-60 days) 6,000

(h) Customer Eych:Sales returns and allowance 1,200 Accounts receivable (61-120 days) 1,200

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

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

CHAPTER 3-PROBLEM 7: ABC COMPANY1. Ans. P1,034,711

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

2. Ans. P1,018,182Amortization table: Loans Receivable/Notes Receivable

Correct Int. Nominal Int. Amortization BalanceJanuary 1, 2014: 1,034,711 December 31, 2014: 103,471 120,000 (16,529) 1,018,182 December 31, 2015: 101,818 120,000 (18,182) 1,000,000

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

4. Entries 12/31/16 to 12/31/18Amortization table after impairment loss:

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

12/31/16: Cash 300,000 Interest income 74,606 Notes receivable/Loans receivable 225,394






CHAPTER 3-PROBLEM 8: ABC CORP.1. Ans. P4,754,134 and P4,908,330(a) DEF Corp, 10% - Trade receivable, Term, Interest-bearing

CORRECT ENTRIES:Jan. 1, 2013:

Cash 4,754,134 Loans receivable 4,754,134 Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods) Principal: (5,000,000*0.704961) 3,524,803 0.704961 Interest: (250,000*4.917324) 1,229,331 4.917324 Total 4,754,134 Amortization table: Loans receivable, DEF Corp.

Correct Int. Nominal Int. Amortization BalanceJanuary 1, 2013: 4,754,134 June 30, 2013: 285,248 250,000 35,248 4,789,382 December 31, 2013: 287,363 250,000 37,363 4,826,745 June 30, 2014: 289,605 250,000 39,605 4,866,349 December 31, 2014: 291,981 250,000 41,981 4,908,330 June 30, 2015: 294,500 250,000 44,500 4,952,830 December 31, 2015: 297,170 250,000 47,170 5,000,000

June 30, 2013: June 30, 2014:Cash 250,000 Cash 250,000 Interest income 250,000 Intrest Income 250,000

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

December 31, 2013: December 31, 2014:Cash 250,000 Cash 250,000 Interest income 250,000 Intrest Income 250,000

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

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

3. Ans. P2,000,000 and P2,000,000(b) GHI, 12% - Non-trade receivable (Advances to associate), Term and Interest-bearing

CORRECT ENTRIESJanuary 1, 2014:

Cash 2,000,000 Loans receivable-Nontrade 2,000,000 *note that the nominal interest and effective interest are the same thus, the face value is also the proceeds (fmv)

December 31, 2014:Cash 240,000 Interest income (2M*12%) 240,000 *note that since nominal interest and effective interests are the same and since there are no principal collections yet, the carrying value/amortized cost at 12/31/14 remains the face value.

4. Ans. P2,483,684 and P3,305,785(c) KLM - Trade receivable, Term and Non-interest-bearing

CORRECT ENTRIESJanaury 1, 2012:

Cash 2,483,685 Loans receivable 2,483,685 Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods) Principal: P4,000,000*0.6209213) 2,483,685 0.6209213 Amortization table: Loans receivable, KLM

Correct Int. Nominal Int. Amortization BalanceJanuary 1, 2012: 2,483,685 December 31, 2012: 248,369 - 248,369 2,732,054 December 31, 2013: 273,205 - 273,205 3,005,259 December 31, 2014: 300,526 - 300,526 3,305,785 December 31, 2015: 330,579 - 330,579 3,636,364 December 31, 2016: 363,636 - 363,636 4,000,000




December 31, 2012:Loans receivable 248,369 Interest income 248,369



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

6. Ans. P4,780,007 and P4,350,818(d) NOP, 10% - Trade, Serial and Interest-bearing

CORRECT ENTRIESJanuary 1, 2014:

Cash 4,780,007 Loans receivable 4,780,007 Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 10 semi-annual periods) Cash to be collected on:

Principal Interest Total PV factor Present Value July 1, 2014: 500,000 250,000 750,000 0.943396 707,547 January 1, 2014: 500,000 225,000 725,000 0.889996 645,247 July 1, 2015: 500,000 200,000 700,000 0.839619 587,733 January 1, 2015: 500,000 175,000 675,000 0.792094 534,663 July 1, 2016: 500,000 150,000 650,000 0.747258 485,718 January 1, 2016: 500,000 125,000 625,000 0.704961 440,600 July 1, 2017: 500,000 100,000 600,000 0.665057 399,034 January 1, 2017: 500,000 75,000 575,000 0.627412 360,762 July 1, 2018: 500,000 50,000 550,000 0.591898 325,544 January 1, 2018: 500,000 25,000 525,000 0.558395 293,157 TOTAL 4,780,007

Amortization table: Loans receivable, NOPCorrect Int. Nominal Int. Amortization Princ. Coll. Balance

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

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

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


Interest receivable 225,000 Interest income 225,000




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

SUMMARYInterest Interest Current Non-currentIncome Recevable Loans Rec. Loans Rec.

(a) DEF Corp, 10% - trade 581,586 - 4,908,330 (b) GHI, 12% - nontrade 240,000 - 2,000,000 (c) KLM - trade 300,526 - 3,305,785 (d) NOP - trade 545,809 225,000 4,350,816 Total 1,667,920 225,000 12,564,932 2,000,000

6. Ans. 7. Ans. 8. Ans. 9. Ans.Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus trade receivables are always current.

CHAPTER 3-PROBLEM 9: DWARF CORP.Noncurrent Current Int. ReceivableInt. Income

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

(b) Note receivable from officer - nontrade 1,200,000 - - Int. Income (P1,200,000*10%) 120,000

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

(d) Note receivable from sale of land - nontrade Jul. 1, 2014 @ FMV=Face (Nominal%=Effective%) Dec. 31, 2014 balance = Face 2,100,000 Current portion: Periodic payment (on Jul. 1, 2015) 676,875 Interest expense (upto Jul. 1, 2015) 231,000 445,875 445,875 Long-term portion: 1,654,125 1,654,125 Interest receivable (P2.1M*11%*6/12) 115,500 Interst income (P2.1M*11%*6/12) 115,500

Total 4,875,363 1,945,875 385,500 683,538 1. Ans. 2. Ans. 3. Ans. 4. Ans.

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

CHAPTER 3-PROBLEM 10: WHISKEY INC.1. JORNAL ENTRIES(a) Pledging of ARJune 30, 2014: SUMMARY:

Cash (P4M*80%)-(P4M*5%) 3,000,000 2. Ans. P1,450,000Interest expense (P4M*5%) 200,000 Loans payable (P4M*80%) 3,200,000 Jun. 30, bal 4,000,000

1,320,000 Jul. CollJuly 31, 2014: 80,000 Jul Returns

Cash 1,200,000 950,000 Aug. CollSales discount 120,000 200,000 Aug. Write-off Accounts receivable 1,320,000 Aug. 31, bal 1,450,000

Interest expense (P3.2M*12%*1/12) 32,000 Loans payable (balance) 1,168,000 3. Ans. P1,152,320 Cash 1,200,000

3,200,000 Jun. LoanSales returns 80,000 Jul. Payment 1,168,000 Accounts receivable 80,000 2,032,000 Jul 31. bal

Aug. Payment 879,680 1,152,320 Aug. 31, bal

ACCOUNTS RECEIVABLE

LOANS PAYABLE




August 31, 2014:Cash 900,000 Sales discount 50,000 Accounts receivable 950,000

Interest expense (P2,032K*12%*1/12) 20,320 2,032,000 Loans payable (balance) 879,680 Cash 900,000

Allowance for BD 200,000 Accounts receivable 200,000

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

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

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

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

CHAPTER 3-PROBLEM 11:VICTORY INC.1. JORNAL ENTRIES(a) Assignement of ARNovember 1, 2014: SUMMARY:

Cash (P1.5M*95%) 1,425,000 2. Ans. P470,000.Interest expense (P1.5M*5%) 75,000 Loans payable 1,500,000 Jun. 30, bal 2,000,000

650,000 Jul. CollAccounts receivable-Assigned 2,000,000 60,000 Jul Returns Accounts receivable 2,000,000 740,000 Aug. Coll

80,000 Aug. Write-offNovember 30, 2014: Aug. 31, bal 470,000

Cash 600,000 Sales discount 50,000 Accounts receivable-Assigned 650,000 3. Ans. P224,150

Interest expense (P1.5M*12%*1/12) 15,000 1,500,000 Jun. LoanLoans payable (balance) 585,000 Jul. Payment 585,000 Cash 600,000 915,000 Jul 31. bal

Aug. Payment 690,850 Sales returns 60,000 224,150 Aug. 31, bal Accounts receivable-Assigned 60,000

August 31, 2014:Cash 700,000 Sales discount 40,000 Accounts receivable-Assigned 740,000

Interest expense (P915K*12%*1/12) 9,150 915,000 Loans payable (balance) 690,850 Cash 700,000

Allowance for BD 80,000 Accounts receivable-Assigned 80,000

ACCOUNTS RECEIVABLE-ASSIGNED

LOANS PAYABLE




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

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

MULTIPLE CHOICE EXERCISESCHAPTER 3-EXERCISE 1: DKNY COMPANY

Trade Other - current Total trade & otherTrade accounts receivable 1,550,000 Trade accounts receivable, assigned(proceeds from assignment 750,000 12% Trade notes receivable 200,000

600,000 Advance payments for purchase ofmerchandise 300,000 Claim from insurance company 30,000 Subscription receivable due in 60 days, 600,000 Accrued interest receivable 20,000

3,100,000 950,000 4,050,000 1. Ans. B. 2. Ans. D.

3. Ans. C.Proceeds from AR factored 250,000 Carrying value of AR factored (300,000) Loss from factoring (50,000)

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

Total loss from receivable financing (86,000)

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

CHAPTER 3-EXERCISE 2: MORGAN INC.1. Ans. A.

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

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

Installments receivable, normally due 1 year to two years




CHAPTER 3-EXERCISE 3: INUYASHA INC.1. Ans. C.

Year Current 1 – 30 days PD 31 – 60 days PD

1 – 90 days PD

More than 90 days PD2013 1% 6% 9% 23% 55%

2012 2% 8% 10% 18% 60%2011 1% 4% 11% 16% 45%2010 3% 5% 12% 22% 45%2009 3% 2% 8% 21% 45%

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

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

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

CHAPTER 3-EXERCISE 4: MEXICAN CORP.Reconciliation of GL and SL with Aging of AR

Per GL Per SL 0-60 days 61-90 days 91-120 days > 120 days1,230,000 1,223,000 825,000 220,000 50,000 128,000

Write off of AR (40,000) (40,000) (40,000) Balance 1,190,000 1,183,000 825,000 220,000 50,000 88,000 Unlocated difference* (7,000) Adjusted Gross AR 1,183,000 Required Allowance for BD in % 2% 10% 30% 40%Required Allowance for BD in Amounts 88,700 16,500 22,000 15,000 35,200

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

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

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

CHAPTER 3-EXERCISE 5: ROVERS INC. Dec. Nov. Oct. Sept. Aug. and priorCustomer Invoice date Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 daysGudang 9/12/14 139,200 139,200 Tisoy 12/12/14 153,600 153,600

12/2/14 99,200 99,200Gusoy 11/17/14 185,120 185,120

10/8/14 176,000 176,000 Naning 12/8/14 160,000 160,000

10/25/14 44,800 44,800 8/20/14 40,000 40,000

Nanong 9/27/14 96,000 96,000 Balong 8/20/14 71,360 71,360 Peejong 12/6/14 112,000 112,000

11/29/14 169,440 169,440 Total 1,446,720 524,800 354,560 220,800 235,200 111,360




Reconciliation between GL and SL with Aging of AR analysisPer GL Per SL 0-30 days 31-60 days 61-90 days 91-120 days >120 days

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

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

2. Ans. C.

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

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

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

CHAPTER 3-EXERCISE 6: NATASHA INC.Reconciliation between GL and SL with Aging of AR analysis

Per GL Per SL 0-1 Month 1-3 Months 3-6 Months > 6 MonthsUnadjusted balances 788,000 792,960 372,960 307,280 88,720 24,000 (b) Additional write-off (GL only) (800) (c) Additional write-off per aging sched. (4,000) (4,000) (4,000) (d) AR with credit balances 10,000 10,000 8,000 2,000

793,200 798,960 380,960 309,280 88,720 20,000 Unreconciled difference 5,760 8,000 12,000 Adjusted balances (3. Ans. C.) 798,960 Allowance for BD in % 1% 2% 3% 50% 20%Allowance for BD in Amount (4. Ans. A.) 19,057 3,810 6,186 2,662 4,000.00 2,400.00

Adjusting entries:(a) Bad debt expense 1,296

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

(b) Allowance for bad debt 800 Accounts receivable 800 To record additional accounts written-off per SL.

(c) Allowance for bad debt 4,000 Accounts receivable 4,000 To record additional accounts written-off per the aging schedule.

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

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




(f) Accounts receivable 5,760 2. Ans. B. Sales 5,760 To adjust the unlocated difference (SL should prevail over GL).

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

CHAPTER 3-EXERCISE 7: SAYOTE INC.Reconciliation between GL and SL with Aging of AR analysis

Per GL Per SL Under 1 mo. 1-6 mo. Over 6 mo. Credit bal.Unadjusted balances 1,270,000 1,260,000 540,000 552,000 228,000 (60,000) Credit balance - Kamote (Advances) 12,000 12,000 12,000 Credit balance - Kutchay (Posting error) - - (21,000) 21,000 Credit balance - Kalachuchi (Advances) 27,000 27,000 27,000 Write-off of accounts (72,000) (72,000) (72,000)

1,237,000 1,227,000 540,000 531,000 156,000 - Unlocated difference (10,000) 36,000 120,000 Adjusted balance (2. Ans. B) 1,227,000 Allowance for BD % 1% 2% 50% 10%Allowance for BD in Amount (3. Ans A) 46,020 5,400 10,620 18,000 12,000

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

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

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

CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY

(320*P100) – P48,000 = P16,000.

CHAPTER 3-EXERCISE 9: MILK CORP. Dec. Nov. Oct. Sept. Aug. and priorCustomer Invoice date Invoice Amount 1-30 days 31-60 days 61-90 days 91-120 days more than 120 daysZulu Inc. 12/6/14 42,000 42,000

11/29/14 63,540 63,540 Yankee Co. 9/27/14 36,000 36,000

8/20/14 26,760 26,760 Xylon Inc. 12/30/14 20,000 20,000

12/8/14 40,000 40,000 10/25/14 31,800 31,800

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

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

Uniform Inc. 9/12/14 52,200 52,200 542,520 159,600 132,960 97,800 88,200 63,960

16. Ans. D.

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

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

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

4. Ans. D.

Receivable from Mr. Sia is correctly stated because the goods are considered sold in 20145. Ans. A.




Reconciliation of GL and SL with Aging of AR analysisPer GL Per SL 1-30 days 31-60 days 61-90 days 91-120 days more than 120 days

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

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

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

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

CHAPTER 3-EXERCISE 10: BROCOLI CORP.Adjusting entries

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

b. Accounts receivable (current) 189,000 Cash - METREBANK 189,000

c. Cash - METREBANK 107,550 Accounts payable 107,550

d. Cash - METREBANK 115,650 Accounts payable 115,650

e. Cash - METREBANK 258,000 Expense 42,000 Loans payable 300,000

f. Accounts receivable (current) 57,900 Cash – BADO 57,900

g. Cash – BADO 3,207,900 Overdraft (Liability) 3,207,900

h. Advances to supplier 60,000 Purchases 60,000

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

j. Sales return 225,000 Accounts receivable 225,000(no adjustment to subsidiary – aging)

k. Bad debt expense 880,763 Allowance for bad debts 880,763

Gen Ledger Subs. Ledger Current Past due63,219,000 65,045,790 35,550,000 29,495,790

Customer post-dated check (AJE b) 189,000 189,000 189,000 Customer post-dated check (AJE f) 57,900 57,900 57,900 Collections Received on Dec. 31, 2014 (adj to SL only) (2,626,290) (1,000,000) (1,626,290) Consigned goods to NITZ (adj to SL only) (3,925,500) (3,925,500) Undelivered sales (adj to GL only/ AJE i) (4,500,000) Unrecorded sales returns (adj to GL only/AJE j) (225,000) Adjusted Balances 58,740,900 58,740,900 30,871,400 27,869,500

3. Ans. D.




Current 30,871,400 2% 617,428 Past Due 27,869,500 7% 1,950,865 Required Allowance, end 2,568,293 Add: Write-offs 521,565 Less: Allowance, beg (1,773,195) Interim provision/Bad debt per books (435,900) Additional bad debt expense 880,763

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

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

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

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

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

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

CHAPTER 3-EXERCISE 11: MYBAGS INC.NR - total Recievable-Curr Interest IncomeInterest Rec.

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

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

CHAPTER 3-EXERCISE 12: YZA INC.1. Ans. A.

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

948,458

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

Amortization table: Loans receivableCorrect Int. Nominal Int. Amortization Balance

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




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

3. Ans. C.

CHAPTER 3-EXERCISE 13: ISIAH COMPANYPrincipal amount 4,000,000 Add: Origination cost 248,000 Less: Origination fees (374,000) Initial amount/Fair value/Proceeds 3,874,000

1. Ans. B.Amortization table: Loans receivable

Correct Int. Nominal Int. Amortization BalanceDecember 31, 2013: 3,874,000 December 31, 2014: 358,345 320,000 38,345 3,912,345 December 31, 2015: 361,892 320,000 41,892 3,954,237 December 31, 2016: 365,763 320,000 45,763 4,000,000

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

3. Ans. B.; 4. Ans. C.Amortization table: Loans receivable after impairment loss

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

CHAPTER 3-EXERCISE 14: VISAGE CORP.1. Ans. A.

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

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

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

4. Ans. B.Payment Interest Principal Balance

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




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



CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES



1 B.2 D.3 D.4 C.5 B.671 A2 D3 C4 B5 A6 B7 D8 D9 B

10 B11 D12 A13 C

CHAPTER 4-PROBLEM 2: NOKIA CORP.Inventory Acc. Payable Net Sales Net Purch. Net Income

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

1,169,000 770,000 5,950,000 3,280,000 499,000 1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.

CHAPTER 4-PROBLEM 3: INGGO CORP.Inventory Acc. Payable Sales Net Income

Unadusted balances 3,750,000 3,075,000 27,000,000 (a) Goods held on consignment, recorded as purchases (465,000) (465,000) - (b) Credit balance - Fox Inc. (Advances to supplier) 25,000

Sale on approval - not yet valid sale 66,000 (84,000) (18,000) (c) Sales in transit - FOB Seller (FOB, SP) - no adjustment(d) Goods out on consignment, recorded as sales 630,000 (750,000) (120,000) (e) Purchase in transit, FOB Seller (FOB, SP) 75,000 75,000 - (f) Unrecorded freight cost 3,000 6,000 (3,000) (g) Purchase discount - Beta Corp. (P795,000*2%) (15,900) (15,900) - (h) Inventory financing - Loan to Hote Inc. (not purch) (100,000) (100,000) -

3,943,100 2,600,100 26,166,000 (141,000) 1. Ans. 2. Ans. 3. Ans. 4. Ans.

CHAPTER 4-PROBLEM 4: TOUR COMPANYPurchases Inventories

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

2. Ans.




1. Adjusting journal entries:Purchases 72,780 Accounts payable 72,780

Inventory 58,040 Income summary 58,040

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

CHAPTER 4-PROBLEM 5: ABC CORP.1. Ans. P156,000.

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

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

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

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

CHAPTER 4-PROBLEM 6: KAGOME COMPANY1. Ans. P2,225,000.

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

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




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

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

CHAPTER 4-PROBLEM 7: JIM CORPORATION11 Mo. Purch 12 Mo. Purch

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

Inventory, July 1, 2013 87,500 Purchases, 11 months as adjusted 674,000 Cost of goods available for sale, 11 months 761,500 Inventory, May 31, 2014 95,000 d) May purch in transit, FOB Dest. (5,500) 89,500 Cost of sales, 11 months 672,000

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

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

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

CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION1. Ans. P50,750.

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




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

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

4. Ans. P43,000.Inventory, Dec. 31, 2013 50,000 Purchases, Jan. 1 - Apr. 15 50,750 Cost of goods available for sale 100,750 Estimated cost of sales (105K*55%) 57,750 Estimated Inventory, Apr. 15 43,000

5. Ans. P39,650.Estimated Inventory, Apr. 15 43,000 NRV of remaining inventory (3,350) Inventory Loss 39,650

CHAPTER 4-PROBLEM 9: DIOSAH INC.Cost Retail

Inventory, October 1, 2013 372,000 620,000 Purchases 2,910,000 4,452,000 Transportation in 55,000 Purchase return (27,000) (45,000)Purchase allowance (18,500) Purchase discounts (15,960)Departmental transfer out (135,500) (175,000)Departmental transfer in 125,500 165,000 Net Mark up (P290,000-40,000) 250,000

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

Cost of goods available for sale at retail 5,024,000 Less: COGAS at retail/Sales Gross sales 4,872,000 Sales returns (355,000) Normal breakages 50,500 Discounts to employees 75,500 (4,643,000) Inventory, End at retail price 381,000

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

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

2. Ans. P251,460.Inventory, End at retail price 381,000 FIFO Retail Cost % 66%Inventory, End at cost 251,460




CHAPTER 4-PROBLEM 10: GLORIA CORPORATION1. Ans. P540,000; P527,000; P430,000.

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

2. Ans. P240,000; P148,000; P320,000.Work-in-process Item M Item P Item QCost 240,000 188,000 320,000 748,000 NRV: Est. Selling Price - Cost to Sell - Cost to Compl. 240,000 148,000 550,750 Required allowance for write-down - 40,000 - (40,000) Lower of Cost or NRV 708,000

3. Ans. P1,105,000.Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.

A B C Cost 250,000 500,000 400,000 1,150,000 Current purchase price 250,000 480,000 375,000 Required allowance for write-down - 20,000 25,000 (45,000)

1,105,000

4. Ans. P855,000.Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.

X Y Z Cost 400,000 300,000 200,000 900,000 Current purchase price 450,000 275,000 180,000 Required allowance for write-down - 25,000 20,000 (45,000)

855,000

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

D E Cost 375,000 450,000 825,000

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

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

Allowance for WD-RM, ending 90,000 Less: Allowance for WD-RM, beg. (40,000) Loss on write-down - RM 50,000 Total loss on inventory write-down 103,000

MULTIPLE CHOICE EXERCISES:CHAPTER 4-EXERCISE 1: 1. Ans. A.

2,400,000360,000900,000

Freight charges on goods purchased 240,000150,000

1,050,000840,000

Factory supplies 60,000780,000120,000

Total inventories 6,900,000

CHAPTER 4-EXERCISE 2: SILANG CORP. Cash Acc. Rec. Merch. Invty Acc. Payable Accrued Exp. Cost of Sales

Unadjusted balances 963,200 2,254,000 6,050,000 4,201,000 60,400 (a) (654,600) 310,000

Cost of goods in transit sold FOB destination

Cost of goods out on consignment at another company’s storeGoods in transit purchased FOB shipping pointCost of goods sold with repurchase agreement/Inventory financing

Factory labor costs incurred on goods still unsoldMaterials on hand not yet placed into productionRaw materials on which the company has started production

Costs identified with units completed but not yet sold




(b) 360,000 372,400 (c-1) 275,000 (275,000) (c-2) 217,500 217,500 - (c-3) (637,500) 637,500 (c-4) 130,000 (130,000) (c-5) (175,000) (175,000) Adusted balances 668,600 2,564,000 6,035,000 4,615,900 60,400 57,500

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

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

CHAPTER 4-EXERCISE 3: IVY INC.Inventory AR Sales AP Purchases Net Income

a. Goods out on consignment 100,000 (140,000) (140,000) (40,000) b. Purch in transit (FOB SP) 33,000 33,000 33,000 - c. Sales in transit (FOB SP) (40,000) (40,000) d. Sales in transit (FOB Dest) 16,000 16,000 e. Purch in transit (FOB Dest) (22,000) (22,000) 22,000 f. Goods held on consignemnt (50,000) (50,000) g. Sales in transit (FOB Dest) (112,000) (112,000) (112,000) Net adjustments: 59,000 (252,000) (252,000) 11,000 11,000 (204,000)

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

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

2,815,000 1,500,000 300,000 250,000 200,000 SI 1024 (23,000) (23,000) SI 1025 (34,000) (34,000) SI 1026 (8,000) (8,000) RR 1115 9,000 9,000 RR 1118 32,000 SI 1023 (50,000) 40,000 (50,000) SI 1021 (75,000) 60,000 (75,000) RR 1119 400,000 400,000 401,000 Adjsuted balance 2,625,000 1,909,000 832,000 60,000 610,000

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

CHAPTER 4-EXERCISE 5: SOFIA INC.Invty, end Purchases Cost of Sales Net Income

Unadjusted balance 200,000 3,200,000 3,160,000 Beginning of the year:a. Dec. purchases recorded in Jan. (50,000) (50,000) 50,000 b. Dec. purchases not included in Invty 26,400 (26,400) End of the year:a. Unrecorded Dec. sale 86,000 b. Dec. purchases recorded in Jan. 30,000 30,000 (30,000) c. Dec. purchases not included in Invty 36,000 (36,000) 36,000 d. Dec. purchases 24,000 24,000 - - Adjusted balances 260,000 3,204,000 3,130,400 115,600

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




CHAPTER 4-EXERCISE 6: BIRD COMPANYInventory Accts Payable Net Sales

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

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

CHAPTER 4-EXERCISE 7:Accts ReceivableInventories Sales Cost of Sales Gross profit

276,500 425,000 1,320,000 842,000 478,000 December recorded sales:

In-tansit FOB, Dest. (8,680) 7,240 (8,680) (7,240) (1,440) Sipment to consignee (14,200) 12,500 (14,200) (12,500) (1,700) In-tansit FOB, Dest. (10,000) (10,000) (10,000) In-transit FOB, SP (6,100) 6,100 (6,100) Sipment to consignee (14,000) (14,000) (14,000)

January recorded sales:In-transit FOB, SP 21,000 (18,200) 21,000 18,200 2,800 Adjusted balance 250,620 420,440 1,294,120 846,560 447,560

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

CHAPTER 4-EXERCISE 8: KAMPT COMPANYSales Inventories

December 2014 recorded sales1) (2,000) 3) (2,000) 4) (6,900) 5) (600) 7) (4,000) 8) (10,000)

January 2015 recorded sales9) 6,000 (4,000) 12) 8,000 (5,500) Net Adjustment (8,900) (12,100)

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

CHAPTER 4-EXERCISE 9: MALAGUKU CO.Purchases Inventories

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

1. Ans. A. 2. Ans. C




CHAPTER 4-EXERCISE 10: KULA INC.Inventories Purchases

27,000 650,000 December 2014 entries

Invoice No. 9176 310 Invoice No. 0010 180 Invoice No. 6609 690 Invoice No. 6610 420 Invoice No. 0481 (750) Invoice No. 3671 290 Invoice No. 6098 (350)

January 2015, entriesInvoice No. 7711 460 460 Invoice No. 9001 770 Invoice No. 4678 315 315 Invoice No. 9981 595 595 Invoice No. 7263 610 610

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

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

CHAPTER 4-EXERCISE 11: FLORES COMPANY1. Ans. D.

Per Count Per GL Per "Tab Run"Unadjusted balances 342,400 384,900 403,300

1 (500)2 (23,900)3 (600)4 (800) (800)5 4,400 6 (7,500) (7,500)7 (900)8 2,100 9 (1,200) (1,200)10 700 11 30,000

Adjsuted balances 374,300 374,300 374,300

2. Ans. D.

CHAPTER 4-EXERCISE 12: ALDER PAINTSRM Inventory, beg 15,000 Purchases 50,000 Freight-in 5,000 55,000 RM available for use 70,000 Less: RM Inventory, end (30,000) RM used 40,000 2. Ans C.Direct labor 40,000 Factory overhead (45% of Direct labor) 18,000 Total manufacturing cost 98,000 Add: WIP, beg 50,000 Total goods placed into process 148,000 3. Ans. D.less: WIP, end (Squeeze) 56,750 4. Ans. A.Cost of goods manufactured (Squeeze) 91,250 1. Ans. D.Add: Finished goods, beg. 70,000 Cost of goods available for sale 161,250 less: Finished goods, end (60,000) Cost of sales (estimated)** 101,250

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




CHAPTER 4-EXERCISE 13: NATURAL CORPORATIONInventory, Jan. 1 80,000 Purchases 400,000 Less: Purchase discounts (40,000) Purchase returns and allowance (30,000) 330,000 Cost of goods available for sale 410,000 Estimated cost of sale Sales 380,000 Less: Sales returns (20,000) Sales for GP method purposes 360,000 Divide by: Selling price % 120% 300,000 Estimated ending inventory 110,000 1. Ans. C.Less: Inventory not damaged by fire (in-transit) (40,000) Inventory loss 70,000 2. Ans. C.

CHAPTER 4-EXERCISE 14: BAGUIO CORP.1. Ans. C.

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

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

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

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

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

CHAPTER 4-EXERCISE 15: AB CORP.1. Ans. B.

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

(a) Sales 10 months, unadjusted 4,765,000 Less: Delivery in transit (FOB Dest.) (75,000) Adjusted Sales 10 months 4,690,000 Less: Sales returns and allowance (300,000) Add: Employee discounts 150,000 Normal breakages 50,000 Sales 10 months, adjusted (for GP comp only) 4,590,000




(b) Beg Inventory 450,000 Net purchases (as adjusted:)(c) 2,485,000 Cost of Goods Available for sale (10 months) 2,935,000 Less: Inventory, end (550,00+90,000) (640,000) Cost of Sales (10 months) 2,295,000

(c) Purchases, unadjusted 2,450,000 Add: Purchase in transit FOB shipping point 90,000 Freight in 60,000 Less: Purchase discount (45,000) Purchase returns and allowance (70,000) Net purchases (as adjusted) 2,485,000

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

(d) Sales 12 months, unadjusted 6,750,000 Less: Sales returns and allowance (12 months) (375,000) Add: Employee discounts (12 months) 150,000 Add: Normal breakages (12 months) 50,000 Sales 12 months, adjusted 6,575,000

3. Ans. D.Cost of Sales (10 months, see number 1 solution) 2,295,000 Cost of Sales (2 months, see number 2 solution) 1,037,500 Total Cost of Sales 3,332,500

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

CHAPTER 4-EXERCISE 16: SURETY CORP. Cost Retail Cost %

Beginning inventory 598,400 1,500,000 Purchases 3,048,400 5,500,000 Freight in 80,000 Purchase returns (140,000) (180,000) Mark-ups 600,000 Mark-up cancellations (100,000)Cost of goods available for sale - Conserv. 3,586,800 7,320,000 49%

Mark-downs (1,300,000) Mark-down cancellations 385,000 Cost of goods available for sale - Average 3,586,800 6,405,000 56%

Less: Beginning inventory (598,400) (1,500,000) Purchases - FIFO Retail 2,988,400 4,905,000 61%

Cost of goods available for sale at Retail 6,405,000 Less: Cost of sales at Retail/Sales Sales 4,470,000 Sales returns (150,000) Employee discount 400,000 (4,720,000) Estimated Inventory at Retail 1,685,000

1. Ans. B.




Estimated Inventory at Retail 1,685,000 Multiply by Cost % - Conservative 49%Estimated Inventory at Cost 825,650 Less: Inventory per count (649,600) Inventory shortage 176,050

2. Ans. C.Estimated Inventory at Retail 1,685,000

Multiply by Cost % - Conservative 56%Estimated Inventory at Cost 943,600 Less: Inventory per count (649,600) Inventory shortage 294,000


Multiply by Cost % - Conservative 61%Estimated Inventory at Cost 1,027,850 Less: Inventory per count (649,600) Inventory shortage 378,250

CHAPTER 4-EXERCISE 17: TITANIUM CORP. Cost Retail Cost %

Beginning inventory 1,020,000 1,920,000 Purchases 13,072,500 22,155,000 Freight in 300,000 Purchase returns (450,000) (750,000) Purchase allowance (270,000) Departmental transfer debit 300,000 425,000 Departmental transfer credit (600,000) (1,200,000) Abnormal spoilages and breakages (120,000) (200,000) Net markup 450,000 Cost of goods available for sale - Conserv. 13,252,500 22,800,000 58%

Net markdown (1,425,000)Cost of goods available for sale - Average 13,252,500 21,375,000 62%

Less: Beginning inventory (1,020,000) (1,920,000) Purchases - FIFO Retail 12,232,500 19,455,000 63%

Cost of goods available for sale at Retail 21,375,000 Less: Cost of sales at Retail/Sales Sales 19,800,000 Sales returns (450,000) Employee discount 300,000 Normal Spoilage 600,000 (20,250,000) Estimated Inventory at Retail 1,125,000

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

Inventory shortage 252,500

2. Ans. A.Estimated Inventory at Retail 1,125,000

Multiply by Cost % - Conservative 62%Estimated Inventory at Cost 697,500 Less: Inventory per count (400,000) Inventory shortage 297,500


Multiply by Cost % - Conservative 63%Estimated Inventory at Cost 708,750 Less: Inventory per count (400,000) Invntory shortage 308,750




CHAPTER 4-EXERCISE 18: NANCY INC.1. Ans.A.

Item Quantity Unit Cost NRV Lower of Cost or NRVZ-01 10,000 20 25 20 200,000 Z-02 15,000 25 22 22 330,000 Z-03 20,000 30 26 26 520,000 Z-04 25,000 32 35 32 800,000 Z-05 30,000 35 30 30 900,000 Y-01 20,000 22 23 22 440,000 Y-02 22,000 28 25 25 550,000 Y-03 28,000 25 30 25 700,000 Y-04 25,000 30 25 25 625,000 Y-05 30,000 15 25 15 450,000

5,515,000 2. Ans.

Total Cost 5,981,000 Lower of Cost or NRV 5,515,000 Loss on inventory write-down 466,000

3. Ans. B.Class Z: Quantity Unit Cost NRV Total Cost Total NRV LCorNRV

Z-01 10,000 20 25 200,000 250,000 Z-02 15,000 25 22 375,000 330,000 Z-03 20,000 30 26 600,000 520,000 Z-04 25,000 32 35 800,000 875,000 Z-05 30,000 35 30 1,050,000 900,000

3,025,000 2,875,000 2,875,000 Class Y:

Y-01 20,000 22 23 440,000 460,000 Y-02 22,000 28 25 616,000 550,000 Y-03 28,000 25 30 700,000 840,000 Y-04 25,000 30 25 750,000 625,000 Y-05 30,000 15 25 450,000 750,000

2,956,000 3,225,000 2,956,000 5,831,000

2. Ans.Total Cost 5,981,000 Lower of Cost or NRV 5,831,000 Loss on inventory write-down 150,000

CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION Markers Pens Pencils

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

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

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

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

4. Ans. C.




CHAPTER 4-EXERCISE 20:OCTOBER INC.1. Ans. B.

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

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

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

RM A-01 RM A-02Cost 120,000 95,000 215,000

RM - Item B RM B-01 RM B-02 RM B-03Cost 80,000 105,000 110,000 NRV (Replacement cost) 100,000 98,000 100,000

80,000 98,000 100,000 278,000

RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore.RM C-01 RM C-02

Cost 175,000 40,000 215,000 Total Lower of Cost or NRV 708,000

4. Ans. D.FG WIP RM

Cost 2,500,000 445,000 725,000 Lower of Cost or NRV 2,350,000 396,000 708,000 Loss on write-down 150,000 49,000 17,000 216,000

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

CHAPTER 4-EXERCISE 21:SOLSONS COMPANYQuantity Cost NRV Amount at Lower of Cost or NRV

A 360 units 3.60/dozen 3.64/dozen 108.00 - 360/12per dozen*P3.60B 24 units 4.70 each 4.80 each 112.80 C 28 units 16.50 each 16.50 each 462.00 D 43 units 5.15 each 5.20 each 221.45 E 400 units 9.10 each 8.10 each 3,240.00 F 70 dozens 2.00 each 2.00 each 1,680.00 - 70*12 per dozen*P2G 95 grosses 144.00/gross 132.00/gros

s 12,540.00 18,364.25 Ans. A.



CHAPTER 5: AUDIT OF INVESTMENTS



1 D2 A3 C4 C5 C6 D7 A8 A

CHAPTER 5-PROBLEM 2: KILALA CORP.CASE 1: FA at Amortized Cost1. Ans.P1,038,896.January 1, 2014:

Financial asset at amortized cost 1,038,896 Cash 1,038,896 Quoted price (P1M*95%) 950,000 Transaction cost 88,896 Initial cost 1,038,896

Amortization table: FA at Amortized CostCorrect Int. Nominal Int. Amortization Balance(Bal*eff%) (Princ*nom%)

January 1, 2014: 1,038,896 December 31, 2014: 93,501 100,000 (6,499) 1,032,397 December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:Cash 100,000 Interest income 100,000

Interest income 6,499 FA at amortized cost 6,499

2. Ans. P93,501.



3. Ans. P92,916.

4. Ans. P1,025,312.

5. Ans. P24,688 gainSales proceeds (1/1/16) 1,050,000 Less: Carrying Value/Amortized cost 1,025,312 Realized gain on sale 24,688

CASE 2: FA at FMV through Profit or Loss1. Ans. P950,000.January 1, 2014:

FA at FMV (P1M*95%) 950,000 Expense 88,896 Cash 1,038,896

December 31, 2014:Cash 100,000 Interest Income (P1M*10%) 100,000

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

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




December 31, 2015:Cash 100,000 Interest Income (P1M*10%) 100,000

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

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

4. Ans. P1,050,000.

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

CASE 3: AVAILABLE FOR SALE SECURITY1. Ans.P1,038,896.January 1, 2014:

Available for sale security 1,038,896 Cash 1,038,896 Quoted price (P1M*95%) 950,000 Transaction cost 88,896 Initial cost 1,038,896

Amortization table: Available for sale securityCorrect Int. Nominal Int. Amortization Balance(Bal*eff%) (Princ*nom%)



Interest income 6,499 Available for sale security 6,499

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

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



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

3. Ans. (P142,916)Unrealized holding loss - OCL of SCI (2015) (142,916)

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

5. Ans. P1,050,000.




6. Ans. P24,688 gainSales proceeds (1/1/16) 1,050,000 Less: Carrying Value/Amortized cost - Realized gain on sale 1,050,000

CHAPTER 5-PROBLEM 3: SOTA CORPORATIONCASE 1: FA at Amortized Cost1. Ans. P10,758,157.January 1, 2014:

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

Amortization table: FA at Amortized CostCorrect Int. Nominal Int. Amortization Balance(Bal*eff%) (Princ*nom%)

January 1, 2014: 10,758,157 December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973 December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370 June 30, 2016: 524,869 600,000 (75,131) 10,422,239

December 31, 2014:Cash 1,200,000 Interest income 1,200,000


2. Ans. P1,075,816.



3. Ans. P1,063,397.

4. Ans. P10,497,370.

5. Ans. P622,239 lossSales proceeds (6/30/16) 10,400,000 Less: Carrying Value/Amortized cost (10,422,239) Accrued interest (600,000) Realized loss on sale (622,239)

CASE 2: FA at FMV through Profit or Loss1. Ans. P10,758,157.January 1, 2014:

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

December 31, 2014:Cash 1,200,000 Interest Income (P10M*12%) 1,200,000

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

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




December 31, 2015:Cash 1,200,000 Interest Income (P10M*12%) 1,200,000

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

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

4. Ans. P11,030,839.

5. Ans. P1,230,839 lossSales proceeds (6/30/16) 10,400,000 Less: Carrying Value/Amortized cost (11,030,839) Accrued interest (600,000) Realized loss on sale (1,230,839)

CASE 3: AVAILABLE FOR SALE SECURITY1. Ans. P10,758,157.January 1, 2014:

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

Amortization table: Available for sale securityCorrect Int. Nominal Int. Amortization Balance(Bal*eff%) (Princ*nom%)

January 1, 2014: 10,758,157 December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973 December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370



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

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



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




3. Ans. P195,526.Unrealized holding gain - OCI of SCI (2015) 195,526

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

5. Ans. P11,030,839.

6. Ans. P622,239 lossSales proceeds (6/30/16) 10,400,000 Less: Carrying Value/Amortized cost - Accrued interest (136,603) Realized loss on sale 10,263,397

CHAPTER 5-PROBLEM 4: ABC COMPANY1. Ans. P35,479.

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

2. Ans. P6,229,862.

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

December 31, 2015: Entry upon remeasurement as FA at FMVUnrelized holding loss - P/L 15,870 FA at FMV 15,870

January 1, 2016: Entry upon transfer to FA at Amortized CostFA at amortized cost (FMV 12/15) 6,213,992 FA at FMV (CV) 6,213,992

4. Ans. P6,213,992. (As FA at FMV)5. Ans. P6,111,111.

Amortization table: FA at Amortized cost at 8% effective rate:Correct Int. Nominal Int. Amortization Balance(Bal*eff%) (Princ.*nom%) 1 5,144,032.92

December 31, 2015: 6,213,992 2 1,069,958.85 December 31, 2016: 497,119 600,000 (102,881) 6,111,111 6,213,992 December 31, 2017: 488,889 600,000 (111,111) 6,000,000

CHAPTER 5-PROBLEM 5: ABC COMPANY1. Ans. P6,151,877.

Amortization table: FA at amortized cost at 9%Correct Int. Nominal Int. Amortization Balance(Bal*eff%) (Princ.*nom%)


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

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

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

5. Ans. P1,973,094.

CHAPTER 5-PROBLEM 6: BET CO.Amortization table: FA at amortized cost at 10%.

Correct Int. Nominal Int. Amortization Balance(Bal.*Eff%) (Princ*Nom%)

January 1, 2014: 9,241,843 December 31, 2014: 924,184 800,000 124,184 9,366,027 December 31, 2015: 936,603 800,000 136,603 9,502,630




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

2. Ans. P6,198,347.Amortization table: FA at amortized cost after impairment:


December 31, 2015: After Impairment 5,634,861 December 31, 2016: 563,486 - 563,486 6,198,347

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

4. Ans. P8,181,818.Amortization table: FA at amortized cost after impairment recovery:


December 31, 2016: After Impairment recovery 7,438,017 December 31, 2017: 743,802 - 743,802 8,181,818

CHAPTER 5-PROBLEM 7: ABC CORPORATION1. Ans.

FA at FMV 25,000 Unrealized holding gain 25,000

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

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

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

4. Ans.FA at FMV 100,000 Unrealized holding gain - P&L 100,000

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

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

6. Ans. P875,000.

7. Ans. P750,000.

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




CHAPTER 5-PROBLEM 8: ETC INC.Case 1: PAS 391. Ans. P51,000.

FMV (12/13) CostAye Co. 50,000 45,000 Bee Inc. 250,000 300,000 Si Corp. 30,000 36,000

330,000 381,000 Unrealized holding loss - SHE (51,000)

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

3. Ans. (P72,000)FMV (12/14) Cost

Bee Inc. 90,000 150,000 Si Corp. 24,000 36,000

114,000 186,000 Impairment loss - P&L (72,000)

4. Ans. P15,000.FMV (12/14) Cost/Impaired value

Aye Co. 60,000 45,000 Bee Inc. 90,000 90,000 Si Corp. 24,000 24,000

174,000 159,000 Unrealized holding gain - SHE 15,000

5. Ans. P174,000.

Case 2: PFRS 91. Ans. P51,000.

FMV (12/13) CVAye Co. 50,000 45,000 Bee Inc. 250,000 300,000 Si Corp. 30,000 36,000


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

3. Ans. NoneNo impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whetherpermanent or temporary shall be recognized in the OCI/L.

4. Ans. P15,000.FMV (12/14) Cost



5. Ans. P174,000.

CHAPTER 5-PROBLEM 9: ETC INC.Case 1: PAS 391. Ans. None.

Once equity security investment categorized as financial asset through OCI/L has been impaired due to permanent decline,any recovery from the previous impairment shall not be recognized in the profit or loss, but shall be recognized as unrealizedholding gain in the OCI/L.

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



Case 2: PFRS 91. Ans.

No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding lossin the OCI/L.

acer

Highlight

57,000 !!!




2. Ans. P300,000 and P69,000.FMV (12/15) Cost



CHAPTER 5-PROBLEM 10: SHIPO CO.1. Ans. P2,000,000.

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

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

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

4. Ans. P805,000.Realized Unrealized Total

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

5. Ans. 6. Ans.

7. Ans. P171,000.#shares #shares outs. % interest

Proportionate interest before dilution 25,000 100,000 25%Proportionate interest after dilution 25,000 125,000 20%Decrease in interest 5%

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

CHAPTER 5-PROBLEM 11: ANALEN INC.Case 1: “Cost-Based Approach, with Catch-up Adjustment”:1. Ans. P110,000.

Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000 Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Share from Net Income in 2015 110,000

acer

Highlight

800k




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

Case 2: “Cost-Based Approach, without Catch-up Adjustment”:1. Ans. P91,000.

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

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

Case 3: ““Fair Market Value Approach, without Catch-up Adjustment”1. Ans. P91,000.

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

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

CHAPTER 5-PROBLEM 12: KIKIO CORPORATIONCase 1: Fair Value Method1. Ans. P12,500,000.

Fair Market Value 12/31/2014 12,500,000

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

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

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

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

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

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

Case 2: Cost Method1. Ans. P9,450,000.

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




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

3. Ans. P7,875,000 and None.Cost 10,500,000 Accum Depr: (P10.5M/10)*2.5yrs (2,625,000) Carrying value, July 1, 2016 7,875,000 *lower than FMV, P10M, thus not impaired.

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

CHAPTER 5-PROBLEM 13: PULITZER INC.January 1, 2010:

Life insurance expense 180,000 Cash 180,000

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


December 31, 2012:Cash surrender value 180,000 Retained earnings (180,000*2/3) 120,000 Life insurance expense 60,000


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

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


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

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

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

1. Ans. P180,000; P120,000; P115,000.2011 2012 2013

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




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

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

4a) Ans. P4,677,5004b) Ans. None.

MULTIPLE CHOICE EXERCISES:CHAPTER 5-EXERCISE 1: 1. Ans. C.

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

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

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

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

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

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

CHAPTER 5-EXERCISE 2: PINAY CORP.1. Ans. A.

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

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

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

FMV=Present value of future cash flows at 9% yield rate Principal (P2,000,000*0.84168) 1,683,360 2,000,000 0.8416800 Interest (P200,000*1.759111) 351,822 200,000 1.7591112 CV/FMV 12/31/2013 2,035,182

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

Amortization table: Correct interst Nominal InterstAmortization Balance1/1/13: 1,951,126 12/31/13: 214,624 200,000 14,624 1,965,750 6/30/14: 108,116 100,000 8,116 1,973,866

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




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

FMV=Present value of remaining future cash flows at yield rate 12% Principal (P1,000,000*0.892857) 892,857 1,000,000 0.892857 Interest (P100,000*0.892857) 89,286 100,000 0.8928571

982,143

CHAPTER 5-EXERCISE 3: BENSHOPPE INC.1. Ans. C.2. Ans. C.

FMV 12/14 CV/CostAye Corp. Shares 700,000 540,000 (29.50-2-0.50)*20,000shBee Inc. Shares 1,000,000 1,080,000 (27.50-.50)*40,000shSee Co. 10%, 2M Bonds* 1,964,948 1,923,000 (1,973,000-50,000)

3,664,948 3,543,000 Unrealized holding gain - IS 121,948 Financial assets at FMV through P&L 3,664,948 See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual prevailing effective rate)Principal (2M*0.8072) 1,614,433 1 Interest (100,000*3.5052) 350,515

* 1,964,948 3. Ans. C.

Investment in Dee Shares (Associate)Intial cost (6/30/14) 2,400,000 Share from dividends (250,000) Share from net income 280,000 (2,240,000*6/12)*25%Investment in Assoc Balance 2,430,000

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

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

Amortization table: Financial asset at amortized cost, See Co at effective rate 10%Correct Int. Nominal Int. Amortization Balance

October 1, 2014: 1,923,000 *excluding accrued interestDecember 31, 2014: 57,690 50,000 7,690 1,930,690

Alternative Solution: Financial asset at amortized cost: See Co 10%, 2M Bonds Amortized cost shall be PV of cash flows using original effetive rate (6% semi-annually)Principal (2,000,000*0.7921) 1,584,187 0.7921 Interest (100,000*3.4651) 346,511 3.4651 Amortized cost, 12/31/14 1,930,698

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




CHAPTER 5-EXERCISE 4: SITAW CORP.1. Ans. A.

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

2. Ans. B.FMV Cost

PATATAS (1M*P64) 64,000,000 62,000,000 *reclassification to FA through P&L not allowed.BAWA (250,000*P74) 18,500,000 20,000,000

82,500,000 82,000,000 Unrealized holding gain - SHE 500,000

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

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

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

CHAPTER 5-EXERCISE 5: MARIAH CORP.1. Ans. A.

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

2. Ans. C.FMV (12/14) Cost

DEF Corp. Shares 1,140,000 1,080,000 GHI Corp.Shares 348,000 360,000 JKL Shares 323,400 325,400


3. Ans. A.IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES

FMV (12/14) CV (FMV 12/13)DEF Corp. Shares 1,140,000 1,050,000 GHI Corp.Shares 348,000 369,600 JKL Shares 323,400 315,000


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

CHAPTER 5-EXERCISE 6: ANGEL CORP.1. Ans. D. Fair Value

Dec. 31, 2014 Dec. 31, 2014 Total FMVUno shares 10,000 160 1,600,000 Dos shares 11,000 105 1,155,000 Tres shares 18,000 140 2,520,000 Quatro bonds 2,000,000 8% yield 2,071,331 *

7,346,331 **FMV=Present value of cash flows at 8% 2,000,000 0.85734 Principal (P2,000,000*0.85734) 1,714,678 200,000 1.783265 Interest (P200,000*1.783265) 356,653 Total Fair Value 2,071,331

Carrying values before year-end remeasurement# of shares CV Dec. 31,

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




**Acquisition cost=Present value of cash flows at 12% 2,000,000 0.85734 Principal (P2,000,000*0.711780) 1,423,560 2,000,000 0.711780 200,000 1.783265 Interest (P200,000*2.401831) 480,366 200,000 2.401831 Total Fair Value 1,903,927 Unrealized holding gain - P&L

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

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

4. Ans. A.Aggregate Fair Value (12/31/14) Equity Securities only 5,275,000 Original Cost of Equity Securities:

# of shares Cost includingDec. 31, 2014 Trans. Cost Total cost

Uno shares 10,000 150 1,500,000 Dos shares 11,000 74.55 820,000 Tres shares 18,000 108 1,950,000 Total Cost 4,270,000 Unrealized holding gain - OCI 1,005,000

5. Ans. B.Amortized cost of Quatro bonds (12/31/12)

Correct Interest Nominal InterestAmortization Balance1/1/12: Orig Cost (12% yield rate) 1,903,927 12/31/12: 228,471 200,000 28,471 1,932,398

CHAPTER 5-EXERCISE 7: DUMBO INC.1. Ans. B.

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

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

3. Ans. D.FMV 12/31/14 CV

ABC (25,000sh*P18) 450,000 416,667 (a)XYZ (18,000sh*P15) 270,000 180,000 (c) DEF at 11% yield rate Principal (P500,000*0.9009009) 450,450 0.9009009 Interest (P60,000*0.9009009) 54,054 504,505 487,129

1,224,505 1,083,796 Unrealized holding gain - P&L 140,709

(a) Initial cost ABC (40,000*P20) 800,000 CV of 15,000 shares sold (300,000) Effect of cash div. in lieu of stock div. (83,333) (b) CV ABC, 12/31/14 416,667

(b) CV of ABC before cash div. in lieu of stock div. 500,000 Divide by: # of shares (25,000+5,000) 30,000 CV of ABC after cash div. in lieu of stock div. 16.67 Multiply by: Remaining shares 25,000 Carrying value, 12/31/14 416,667

(c) Initial cost DEF (20,000*P11.50) 230,000 CV of shares sold on 8/5 (50,000) CV DEF 12/31/14 180,000




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

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

6. Ans. D.FMV 12/31/14

ABC (25,000sh*P18) 450,000 XYZ (18,000sh*P15) 270,000 DEF at 11% yield rate Principal (P500,000*0.9009009) 450,450 Interest (P60,000*0.9009009) 54,054 504,505 Total 1,224,505

CHAPTER 5-EXERCISE 8: NYU CORP.1. Ans. D.

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

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

*Amortized cost: 12/31/14 Correct Int. Nominal Int. Amortization Balance(Bal*9%) (Princ*12%)

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

3. Ans. B.FMV 12/31/14 Cost/Amortized cost

SMC (600sh*P275) 165,000 156,000 (600sh*P260)ABI (1,200sh*P340) 408,000 396,000 (1,200sh*P330)TDI (P200,000*95%) 190,000 220,413 (P551,033*2/5)

763,000 772,413 Unrealized holding loss-OCI (9,413)

4. Ans. C.

CHAPTER 5-EXERCISE 9: VEGAS CORP.1. Ans. C.

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

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

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

4. Ans. D.FA at FMV through P&L FMV (12/31/14)CVABC (13,000*P153.20) 1,991,600 1,984,000 (P1,525,000+P459,000)DEF (4,000*P137) 548,000 528,250 (4,000sh*(P1,056,500/8,000sh))GHI (P500,000*82.22%) 411,100 373,500 PQR (P400,000*98%) 392,000 372,000 (P400,000*93%)

3,342,700 3,257,750 Unrealized holding gain - P&L 84,950




5. Ans. D.FA at FMV through OCI/L FMV (12/31/14)CostJKL (6,000sh*P110.50) 663,000 708,000 6,000sh*(P1,180,000/10,000sh)MNO (20,000sh*P44) 880,000 980,000

1,543,000 1,688,000 Unrealized holding loss - SHE (145,000)

CHAPTER 5-EXERCISE 10: JACK CORP.1. Ans. C.

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

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

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

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

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

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

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

8. Ans. C.FA at FMV through P&L FMV 12/31/14 CV (FMV 12/31/13) Wan ordinary shares 825,000 858,750 (P1,145,000/20,000sh)*5,000shToo preference shares 650,000 700,000

1,475,000 1,558,750 Unrealized holding loss - P&L (83,750)

9. Ans. C.FA at FMV through OCI/L, under PAS 39 FMV 12/31/14 COSTPoor preference shares 800,000 800,000 *Impaired value under PAS 39Five ordinary shares 1,500,000 1,250,000 Seeks ordinary shares 900,000 1,000,000


10. Ans. A.FA at FMV through OCI/L, under PFRS 9 FMV 12/31/14 COSTPoor preference shares 800,000 1,400,000 *No impairment loss under PFRS 9Five ordinary shares 1,500,000 1,250,000 Seeks ordinary shares 900,000 1,000,000

3,200,000 3,650,000 Unrealized holding loss - SHE (450,000)

11. Ans. C.

12. Ans. C.

CHAPTER 5-EXERCISE 11: EBC CO.1. Ans. C.

Fair Market Value, 12/31/2013 P160,300Fair Market Value last remeasurement date, 12/31/2012 (see 1. below) P57,20010% BS Treasury bond at cost (purchased in the current year) 103,250 160,450Unrealized Holding Loss P150 *Cost (P25,250 + 32,450) P57,700 FMV adjustment credit balance (500) 57,200




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

3. Ans. A. 2009 2010Face Value, 10% BS Treasury Bonds P100,000 P100,000Multiply by: Interest rate 10% 10%Annual interest 10,000 10,000Mulitiply by: Months outstanding 2/12 12/12Interest income P1,667 P10,000

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

CHAPTER 5-EXERCISE 12: HART CORP.1. Ans. C.

July 5 saleProceeds from sale (450*1,000) P450,000CV of shares sold (570,000/2,000)*1,000 (285,000) 165,000Oct. 11 saleProceeds from sale (150*1,000) P150,000CV of shares sold (285,000/3,000)*1,000 (95,000) 55,000TOTAL GAIN FROM SALE OF BLACK SHARES 220,000

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

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

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

CHAPTER 5-EXERCISE 13: CSI INC.1. Ans. B.

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

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

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

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

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

6. Ans. C.Financial asset at FMV through P&L FMV, 12/31 CVABC (2,000sh*P105) 210,000 180,000 GHI (5,000sh*P75) 375,000 410,000 (P285,000+(5,000sh*P25))

585,000 590,000 Unrealized holding loss - P&L (5,000)




7. Ans. C.Financial asset at FMV through OCI/L FMV, 12/31 CostDEF (1,500sh+300sh)*P160 288,000 255,000 JKL (4,000sh+1,000sh)*P60 300,000 255,000 (P200,000+(1,000sh*P55)


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

CHAPTER 5-EXERCISE 14: PRINCE INC.1. Ans. A.

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

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

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

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

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

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

CHAPTER 5-EXERCISE 15: ISUZU CORP.1. Ans. A.

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

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

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

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

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




6. Ans. C.

CHAPTER 5-EXERCISE 16: PACQUIAO CORP.1. Ans. D.

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

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

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

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

CHAPTER 5-EXERCISE 17: IFFY CORP.1. Ans.

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

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

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

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

5. Ans. D.

6. Ans. D.DILUTION:

Before Dilution After Dilution# shares held 30,000 30,000 # shares outstanding 100,000 125,000 % of interest 30% 24%

Share from increase in Assoc.'s net assets (25,000*210)*24% 1,260,000 Carrying value of Investment as if given up (5,654,000*6/30) (1,130,800) Gain on dilution before recycling of OCLoss 129,200 Recycling of Ocloss (240,000*6/30) (48,000) Total cessation loss - IS 81,200

CHAPTER 5-EXERCISE 18: BLACK CORP.1. Ans. A.

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




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

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

4. Ans. B.Acquisition cost 6,000,000 Share from dividends (P800,000*30%) (240,000) Share from net income 678,000 Share from OCL (P500,000*30%) (150,000) Carrying value, 12/31/14 6,288,000

5. Ans. B.Before Dil. After Dil. Decrease

Number of shares owned 300,000 300,000 Total outstanding shares 1,000,000 1,200,000

30% 25% 5%

Share from the increase in White's capital as a result of share issue: (200,000sh*P30)*25% 1,500,000 CV of investment deemed sold: (P6,228,000*(5%/30%)) (1,048,000) Dilution gain before recycling of OCL 452,000 Recycling of OCL (P150,000*(5%/30%)) (25,000) Adjusted dilution gain (True Sale) 427,000

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

7. Ans. C.Before Cess. After Cess.

Number of shares owned 300,000 180,000 Total outstanding shares 1,000,000 1,000,000

30% 18%

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

8. Ans. A.

CHAPTER 5-EXERCISE 19: GREENDAY INC.Case 1: “Cost-Based Approach, with Catch-up Adjustment”:1. Ans. C.

Share from net income under Equity Method in 2014 (P1,250,000*15%) 187,500 Dividend income recognized under FMV Method in 2014 (P3.50*7,500sh) 26,250 Rertroactive adjustment to RE, beg 2015 161,250

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

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




Case 2: “Cost-Based Approach, without Catch-up Adjustment”:4. Ans. A.

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

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

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

Case 3: “Fair Market Value Approach, without Catch-up Adjustment”:7. Ans. A.

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

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

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

*FMV/Acq. Price of new investment (10%) 1,000,000 Divide by: # of shares 5,000 Assumed FMV, July 1, 2015 200

CHAPTER 5-EXERCISE 20: ORION CORP.1. Ans. C.

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

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

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

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

4,211,093 (b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11% effective rate for 23periods. Principal: P4,000,000*0.731191 2,924,766 0.731191 Interest: P480,000*2.443715 1,172,983 2.443715

4,097,749




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

September 30, 2013 Acquisition Cost 5,800,000 Share from Dividends, 2013 (80,000) Share from NI, 2013 (3.8M*20%)*3/12 190,000 *Understatement in Depr (800K/10)*3/12 (20,000) 170,000 December 31, 2013 Carrying Value 5,890,000 Share from Dividends, 2014 (160,000) Share from NI, 2014 (5.2M*20%) 1,040,000 *Understatemetn in Depr (800K/10) (80,000) 960,000 Share from OCL (400,000*20%) (80,000) Share from OCI (300,000*20%) 60,000 December 31, 2013 Carrying Value 6,670,000

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

6. Ans. B.CESSATION: Before Cess. After Cess.Number of shares owned 40,000 30,000 Number of outstanding shares 200,000 200,000

20% 15%Realized Unrealized Total

Proceeds from sale (169*10,000) 1,690,000 1,690,000 Fair value of remaining Investment (169*30,000) 5,070,000 5,070,000 CV of investment Portion sold: (6,670,000*10/40) (1,667,500) (1,667,500) Portion reclassified: (6,670,000*30/40) (5,002,500) (5,002,500) Cessation gain, before recycling of OCI/L 22,500 67,500 90,000 Recycling of OCI 15,000 45,000 60,000 Recycling of OCL (20,000) (60,000) (80,000) Total cessation gain/loss 17,500 52,500 70,000

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

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

CHAPTER 5-EXERCISE 21: JUDE CORPORATION1. Ans. C.

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

2. Ans. D.; 3. Ans. B.Cost (Jan. 1, 2012) 4,500,000 Accum depr, Dec. 31, 2013 (4.5M/25yrs)*2yrs. 360,000 Depreciated cost 4,140,000 Recoverable amount/Fair market value 4,100,000 Impairment loss 40,000

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

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




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

CHAPTER 5-EXERCISE 22: DADO COMPANY1. Ans. B.

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

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

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

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

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



CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT



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

10 C.11 B.12 A.13 C.14 D.15 C.16 D.17 C.18 C.

CHAPTER 6-PROBLEM 2: BACOLOD INC.Land Land Impr. Buidling Mach. & Eq.

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

15,912,000 1,600,000 80,094,000 4,550,000 1. Ans. 2. Ans. 3. Ans. 4. Ans.

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

CHAPTER 6-PROBLEM 3: MIRAM COMPANYLand Building Adj. to NI

Organization fees - outright expense (120,000) Land and Building (Prorata)* 1,512,000 378,000 Option payments (P250K-50K)* 160,000 40,000 (50,000) Broker's fees* 88,320 22,080 Remodelling cost of the building 60,000 Salaries of executives (360,000) Stock bonus - Organization expense (300,000) Property taxes - in arrears (P240K*6/12)* 96,000 24,000 Property taxes - 2014 expense (P240K*6/12) (120,000)

1,856,320 524,080 (950,000) 1. Ans. 2. Ans. 3. Ans.

*FMV of Land 1,800,000 1 FMV of Building 450,000 0 Total 2,250,000 1

CHAPTER 6-PROBLEM 4: ABC CORPORATIONa. Land

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

8,065,259 2.a. Ans.




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

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

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

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

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

CHAPTER 6-PROBLEM 5: Case 1: ABC CORP.1. Ans. P39,792.

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

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

Case 2: PAN CORP.1. Ans. P4,856,223.

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

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

Cost incurred #mo. to 12/31 Peso*Mos.*January 1 8,000,000 12 96,000,000 April 1 19,000,000 9 171,000,000 July 31 24,400,000 5 122,000,000 October 1 27,600,000 3 82,800,000 December 31 14,000,000 - - Total 471,800,000




Divide by: 12 months 12 Weighted average actual expenditure 39,316,667

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

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

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

CHAPTER 6-PROBLEM 6: KELSON CORP. 1. Ans. P254,628

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

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

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

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

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

CHAPTER 6-PROBLEM 7: GANADO CORPORATION1.a. P56,214.

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




1.b. Ans. P103,775.Depr. on Disposed Mach.: P23,000/10yrs*3/12 575 Depr. on New Mach.: P310,000/10yrs*6/12 15,500 Depr. on Remaining Mach.: P877,000/10yrs 87,700 Depreciation expense - Mach&Eqpt 103,775

1.c. Ans. P21,000.Depr. on New Auto: P12,000*4/10 4,800 Depr. on Remaining Auto:** Depr on Auto had there been no change 18,000 Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10) (1,800) 16,200 Depr Expense - Automotive Equipment 21,000

2.a. Ans. P319,314.Accum. Depr - Building, Jan. 1, 2014 263,100 Depr for the year 56,214 Accum. Depr - Building, Dec. 31, 2014 319,314

2.b. Ans. P342,275.Accum. Depr - Mach&Eqpt, Jan. 1, 2014 250,000 Accum. Depr of M&E disposed on Apr 1, (11,500) Depr for the year 103,775 Accum. Depr - M&E Dec. 31, 2014 342,275

2.c. Ans. P99,300.Accum. Depr - Auto. Eqpt. Jan. 1, 2014 84,600 Accum. Depr of Auto. Eqpt. Disp. on Jan. 1, (6,300) Depr for the year 21,000 Accum. Depr - M&E Dec. 31, 2014 99,300

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

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

CHAPTER 6-PROBLEM 8: MALIK CORP.1.a. Ans. P732,000.

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

1.b. Ans. P690,000.Replacement of retired factory equipment 500,000 Rearrangement cost to ensue a more efficient production 120,000 Overhead crane in the assembly department 70,000 Total amount capitalizable to Equipment 690,000

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

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




CHAPTER 6-PROBLEM 9: BONBON COMPANY1. Ans. P3,640,000.

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

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

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

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

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

CHAPTER 6-PROBLEM 10: LEGASPI CORP.1. Ans. P5,518,855.

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

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

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

CHAPTER 6-PROBLEM 11: NAIA COMPANY1. Ans. P150,000.

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

Fair value, 12/31/14 1,050,000 Divide by: remaining life 7 Depreciation expense, 2015 150,000

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

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




4. Ans. P50,000 and P150,000.Proceeds from sale 800,000 Carrying value, 12/31/16 (P1,050,000*5/7) (750,000) Gain on sale - P&L 50,000

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

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

CHAPTER 6-PROBLEM 12: PEPSI CORP.1. Ans. P2,000,000.

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

Value is use 14,000,000 higherFMV less cost to sell 13,500,000

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

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

Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000 Carrying value based on the impaired value: (P14M*6yrs/8yrs) 10,500,000 Gain on impairment recovery - P&L 1,500,000 - whether under cost or FMV method, the gain on impairment recovery is recognized in the P&L.

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

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

CHAPTER 6-PROBLEM 13: RAM CORP.1. Ans. P500,000.

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

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

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

Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000 Recoverable value/FMV, 1/1/17 1,800,000 Impairment loss - P&L 700,000

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




MULTIPLE CHOICE EXERCISES:CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY1. Ans. C.; 2. Ans. C.

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

1,337,000 1,543,500

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

CHAPTER 6-EXERCISE 2: MILDEN COMPANY1. Ans. C.; 2. Ans. C.

Land BuildingAcquisition price 2,500,000 Cost of razing old building 300,000 Proceeds from sale of salvaged materials (30,000)Title insurance and legal fees to purchase land 150,000 Architect’s fees 600,000 New building construction cost 15,000,000

2,650,000 15,870,000

CHAPTER 6-EXERCISE 3: BOND COMPANY1. Ans. B.

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

Cost incurred #mo. to 12/31 Peso*Mos.*January 1 18,228,500 12 218,742,000 March 1 7,000,000 10 70,000,000 September 1 4,000,000 4 16,000,000 December 31 5,000,000 - - Total 304,742,000 Divide by: 12 months 12 Weighted average actual expenditure 25,395,167

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

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




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

CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATIONMachine A:Carrying Value, 1/1/14 (P30,000*80%*80%) 19,200 Salvage value (5,000) Depreciable carrying value 14,200 Divide by: 8 years 8 Depreciation expense 1,775 Ans. B.

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

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

CHAPTER 6-EXERCISE 5: DELITE CORP.1. Ans. A.

Machinery AB001Carrying Value 1/1/14 (6M*10/20) 3,000,000 Less: Salvage value (600,000) Depreciable carrying value 2,400,000 Divide by: Extended remaining life 15 Depreciation expense in 2014 160,000

2. Ans. C.Machinery DE020Cost 1/1/12 6,790,000 Less: Salvage value (500,000) Depreciable cost 6,290,000 Divide by: Useful life 20 Annual Depreciation 314,500

Capitalizable cost on 1/1/14 486,000 Divide by: Remaining life 18 Additional Depreciation 27,000 Total Depreciation in 2014 341,500

3. Ans. C.Machinery GH033Cost 7/1/14Down payment: 1,000,000 Balance: (3M*2.577097) 7,731,291 Initial Cost (Cash Price/Present Value) 8,731,291 Multply by: Double Decl. Bal rate 25%Multiply by (6months/12months) 1/2Depreciation in 2014 (6 mo.) 1,091,411

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

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




CHAPTER 6-EXERCISE 6: JERSEY CORP.1. Ans. D.

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

Depreciation expense 900,000 Divide by: Total cost 9,680,000 Composite depreciation rate 9.30%

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

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

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

CHAPTER 6-EXERCISE 7: GRANNY INC.1. Ans. B.

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

Tools disposed, 2015: 700Cost of earlier purchases (500*40) 20,000 Cost of next earlier purchase (200*60) 12,000 Less: Proceeds from sale (700*14) (9,800) Depreciation 22,200

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

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

3. Ans. C.2014 2015

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

CHAPTER 6-EXERCISE 8: COCO COMPANY1. Ans. A.

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




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

Mach. Bee (Depr Carrying Value): (316,000-36,000) 280,000 Div. by: Revised remaining useful life (18,000-11,000) 7,000 Depreciation rate per hour 40.00 Multiply by: Actual hours used in 2014 2,100 Depreciation Expense in 2014 84,000

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

Mach See (Depr Carrying Value): 1.3M-100,000 1,200,000 Divide by: Revised remaining useful life 10 Depreciation Expense in 2014 120,000

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

CHAPTER 6-EXERCISE 9: PQR CORP.1. Ans. A.

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

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

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

Present value of installment price at 8% effective rate: P2.4M/3yrs*2.577097 2,061,678 2.577097 Freight and handling cost 138,322 Total initial cost of new F&F 2,200,000

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

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

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




CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP.1. Ans. C.

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

2. Ans. A.; 6. Ans. C.Correct cost Date of Acq Date of Disp Cond. % as of CV as of Depr. Exp.

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

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

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

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

CHAPTER 6-EXERCISE 11: ROLLING CORP.1. Ans. B.

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

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

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

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




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

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

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

CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY1. Ans. C.

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

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

3. Ans A.Inventory Fixtures Total

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

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

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

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

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

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

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

CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY1. Ans. D.; 2. Ans. C.

P1,230,00011,070,000P12,300,000

Allocation of lump sum price in proportion to fair values: Land A (135/1,350 x P12,300,000) Building A (1,215/1,350 x P12,300,000) Total




3. Ans. B.P11,070,000

(600,000)10,470,000

261,75040 years

4. Ans. A.

261,750Same as prior year because straight-line method is used in depreciating Building A.

5. Ans. D. Fair value of Land on acquisition date = FMV of shares P1,125,000 *Demolition cost shall be charged to the cost of the new constructed Building.

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

7. Ans. A.P450,000

8. Ans. D.

P450,000X 15%

P67,500

9. Ans. C.

P382,500X 15%

P57,375

10. Ans. B.P2,473,500

223,500P2,250,000

11. Ans. C.

P480,000

12. Ans. A.Depreciation expense—Machinery A, for the year ended September 30, 2016:

P140,000

13. Ans. C.P86,00090,000

603,900P780,000

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

CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC.1. Ans. D.

Book value of plant and equipment,End of 2016 (P120 million x 5/8) P75 million

2. Ans. A.Book value of purchased technology (Patent) (P60 million x 3/6) P30 million

3. Ans. D.Plant and equipment:Book value P75 millionRecoverable value (FMV) 50 million *cash flow is undiscounted, thus not usefulImpairment loss P25 million

4. Ans. C.Purchased technology:Book value P30 millionRecoverable value (FMV) 10 million *cash flow is undiscounted thus not usefulImpairment loss P20 million

Present value of succeeding 10 nstallment payments (P90,000 x 6.710)Total cost of Machinery B

(P2,160,000 x 7/36 x 4/12)

Down paymentFirst installment payment on October 1, 2015

Total cost as recordedLess: Normal repairs and maintenanceCorrect cost of Machinery A

(P2,250,000-P90,000=P2,160,000 x 8/36)Depreciation expense—Machinery A for the year ended September 30, 2015:

Book value, Oct. 1, 2015 (P450,000-P67,500)150% declining balance rate (1/10 x 150%)Depreciation expense

Depreciation expense—Donated equipment, for the year ended September 30, 2016:

Donated equipment, at fair value

Cost150% declining balance rate (1/10 x 150%)Depreciation expense

Depreciation expense—Donated equipment, for the year ended September 30, 2015:

Estimated life

Depreciation expense on Building A for the year Ended September 30, 2016

Cost of Building ALess: Salvage valueDepreciable costDivide by: Annual depreciation




CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION1. Ans. A.

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

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

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

4. Ans. B.Factory Machinery

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

5. Ans. B.Factory Machinery

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

CHAPTER 6-EXERCISE 16: MARGOT CORPORATION1. Ans. A.

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

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

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

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

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

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




CHAPTER 6-EXERCISE 17: REVO CORP.1. Ans. C.

Land A Land BFair Market Value 8,000,000 16,000,000 Cost (10,000,000) (12,000,000) (Impairment loss)/Revaluation Surplus (2,000,000) 4,000,000

P&L OCI

2. Ans. C.Land A Land B

Fair Market Value 12,000,000 11,000,000 Cost (10,000,000) (12,000,000) (Impairment loss)/Revaluation Surplus 2,000,000 (1,000,000)

OCI P&LFair Market Value 12,000,000 11,000,000 CV (8,000,000) (16,000,000) Total increase/decrease in value 4,000,000 (5,000,000)

2,000,000 (4,000,000) Recovery gain Reversal of RS

Impairment loss from Land B (1,000,000) Recovery gain from Land A 2,000,000 Net gain from Lands 1,000,000

3. Ans. B.Land A Land B

Fair Market Value 11,000,000 15,000,000 Cost (10,000,000) (12,000,000) (Impairment loss)/Revaluation Surplus - 3,000,000

OCI OCIFair Market Value 11,000,000 15,000,000 CV (12,000,000) (11,000,000) Total increase/decrease in value (1,000,000) 4,000,000

(1,000,000) 1,000,000 Reversal of RS Recovery gain

Revaluation surplus from Land B 3,000,000 Reversal of revaluaiton surplus for Land A (1,000,000) Net OCI for the year 2,000,000

CHAPTER 6-EXERCISE 18: LABANOS CORP.1. Ans. C.

Carrying value (P500,000-P90,000) 410,000 Recoverable value (338,000) Impairment loss 72,000

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

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

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

CV had there been no impairment (P500,000-P180,000) 320,000 CV based on impaired value (P338,000-P72,000) 266,000 Recovery gain - P&L 54,000

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



CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS



1 A.2 B.3 C.

CHAPTER 7-PROBLEM 2: Ans. P3,700,000.

Purchase of a franchise 1,200,000 Goodwill acquired in the purchase of a business 640,000 Legal costs incurred in securing a patent 70,000 Cost of purchasing a patent from an inventor 500,000 Cost of purchasing a copyright 900,000 Cost of purchasing a trademark 290,000 Stand-alone application computer software 100,000 Total Intangible Assets 3,700,000

CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP. 1. Ans.

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

2. Ans. P680,938.Condition % CV

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

CHAPTER 7-PROBLEM 4: GARY INC. 1. Ans.

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

2. Ans. P386,565.; 3. Ans. (P140,102).Value in use/Present value of future net cash flows at 8% for 3 years. P150,000*2.577097 386,565 2.577097 Carrying value, 12/31/14 Original and Related patent cost 760,000 Amortization, 12/31/14 (233,333) 526,667 Impairment loss (140,102)




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

CHAPTER 7-PROBLEM 5: COLGATE COMPANY Case 1:1. Ans. P1,439,756.

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

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

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

Trademark, Jan., 2013 900,000 Amortization, 2013 (P1M/10yrs) (100,000) Carrying value, 12/3/13 800,000 Value in use/PV of net cash flows at 9.5% for 8yrs: P200,000*5.433436 5.433436 1,086,687 Impairment loss -

Trademark, Jan., 2014 800,000 Amortization, 2014 (P1M/10yrs) (100,000) Carrying value, 12/3/14 700,000 Value in use/PV of net cash flows at 10% for 7yrs: P80,000*4.868419 4.868419 389,474 Impairment loss 310,526

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

Case 2:1. Ans. P2,348,227.

Franchise, Jan. 1, 2014 Downpayment 600,000 PV of Balance a 14% for 4 periods. P2.4M/4yrs*2.913712 1,748,227 2,348,227 Carrying value, 12/31/2014 2,348,227

P250,000/10% 5.759024 2,500,000 Impairment loss -

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

Value in use/PV of net cash flows at 10% for an indefinite period:




3. Ans. P800,000.Trademark, Jan., 2012 1,000,000 Carrying value, 12/3/12 1,000,000

P200,000/9% 5.995247 2,222,222 Impairment loss -

Trademark, Jan., 2013 1,000,000 Carrying value, 12/3/13 1,000,000

P200,000/9.5% 5.433436 2,105,263 Impairment loss -

Trademark, Jan., 2014 1,000,000 Carrying value, 12/3/14 1,000,000

P80,000/10% 4.868419 800,000 Impairment loss 200,000

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

CHAPTER 7-PROBLEM 6: PJ CORP. 1. Ans. P1,500,000.

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

2. Ans. P1,950,000; Ans. P8,450,000.FMV of Net Assets 6,500,000 Excess earnings in % (12%-9%) 3%Excess earings 195,000

Goodwill (P195,000*10yrs) 1,950,000 FMV of Net Assets 6,500,000 Acquisition cost 8,450,000

3. Ans. P1,625,000; Ans. P8,125,000.Goodwill (P195,000/12%) 1,625,000 FMV of Net Assets 6,500,000 Acquisition cost 8,125,000

4. Ans. P1,200,000; Ans. P7,800,000.Average/Normal Earnings of DA Inc. (P6.5M*12%) 780,000 Divide by: Capitalization rate 10%Acquisition cost 7,800,000 FMV of Net Assets 6,500,000 Goodwill 1,300,000

5. Ans. P1,198,191; Ans. P7,698,191.Present value of excess earnings at 10% for 10 years: Goodwill: P195,000*6.144567 1,198,191 6.144567 FMV of Net Assets 6,500,000 Acquisition cost 7,698,191

CHAPTER 7-PROBLEM 7: KAREN CORPORATIONAccumulated profits 2010-2014 1,800,000 Less: Gain on sale of equipment in 2012 (200,000) Accum. Operating Profits 2010-2014 1,600,000 Divide by: 5 Annual average operating profits 320,000 Add: Annual presidents bonus 50,000 Less: Inrease in depr. exp. (P350,000/5yrs) (70,000) Projected average operating profits 300,000 Less: Average/Normal earnings of industry (P2.6M*10%) (260,000) Projected excess earnings 40,000


Value in use/PV of net cash flows at 9.5% for an indefinte period:





FMV BV DifferenceCurrent Asset 700,000 550,000 150,000 Noncurrent Asset (excluding GW) Land 950,000 950,000 - Depr. Asset 1,850,000 1,500,000 350,000 Liabilities (900,000) (900,000) - Net Assets 2,600,000 2,100,000

1. Ans. P200,000; P160,000; P400,000; P151,631.a) Purchase of excess earnings Goodwill (P40,000*5yrs) 200,000 b) Capitalization of excess earnings Goodwill (P40,000/25%) 160,000 c) Capitalzation of average earnings Projected annual average oper. Profits 300,000 Divide by: Capitalization rate 10% Acquisition cost/price 3,000,000 Less: FMV of Net Asset (2,600,000) Goodwill 400,000 d) Present value method Goodwill: (P40,000*0.3.79079) 151,631 3.79079

2. Ans.a) Purchase of excess earnings FMV of Net Assets 2,600,000 Goodwill 200,000 Acquisition cost/price 2,800,000 b) Capitalization of excess earnings FMV of Net Assets 2,600,000 Goodwill (P40,000/25%) 160,000 Acquisition cost/price 2,760,000 c) Capitalzation of average earnings Projected annual average oper. Profits 300,000 Divide by: Capitalization rate 10% Acquisition cost/price 3,000,000 d) Present value method FMV of Net Assets 2,600,000 Goodwill: (P40,000*0.3.79079) 151,631 Acquisition cost/price 2,751,631

3. Ans. Option d)For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill.

CHAPTER 7-PROBLEM 8: ABC CORPORATION1. Ans. P1,000,000.

ABC DEF GHI JKLAcquisition price 5,000,000 FMV of net assets (4 CGUs) 800,000 1,500,000 700,000 1,000,000 4,000,000 Goodwill (prorated)** 200,000 375,000 175,000 250,000 1,000,000

Before impairment, 12/31/14Cash* shall be excluded in determining the CV of the CGU (not included in the "other assets" within the scope of PAS 36)Factory equipment 100,000 240,000 100,000 200,000 Office Equipment 250,000 490,000 120,000 200,000 Building 500,000 900,000 400,000 700,000 Goodwill** 200,000 375,000 175,000 250,000 Carrying value of CGU 1,050,000 2,005,000 795,000 1,350,000 Value in use:ABC: P149,726*6.144567 920,000 6.144567 DEF: P289,242*7.606080 2,200,000 7.606080 GHI: P76,490*6.144567 470,000 6.813692 JKL: P161,440*6.813692 950,000 Impairment loss 130,000 - 325,000 400,000

CGU-ABCImpairment loss 130,000 Chargeable to Goodwill-ABC (130,000)

CGU-DEFImpairment loss -




CGU-GHI CV, after impairmentImpairment loss 325,000 Chargeable to Goodwill-GHI (175,000) - Balance to allocated to other assets 150,000 Factory equipment (100,000/620,000) 100,000 (24,194) 75,806 Office equipment (120,000/620,000) 120,000 (29,032) 90,968 Building (400,000/620,000) 400,000 (96,774) 303,226

CGU-JKL CV, after impairmentImpairment loss 400,000 Chargeable to Goodwill-GHI (250,000) - Balance to allocated to other assets 150,000 Factory Equipment (200,000/1,100,000) 200,000 (27,273) 172,727 Office equipment (200,000/1,100,000) 200,000 (27,273) 172,727 Building (700,000/1,100,000) 700,000 (95,455) 604,545

2. Ans. P395,000.After impairment, 12/31/14 ABC DEF GHI JKL TOTALCash 50,000 100,000 - - 150,000 Factory equipment 100,000 240,000 75,806 172,727 588,534 Office Equipment 250,000 490,000 90,968 172,727 1,003,695 Building 500,000 900,000 303,226 604,545 2,307,771 Goodwill** 70,000 375,000 - - 445,000 Carrying value of CGU 970,000 2,105,000 470,000 950,000 4,495,000

3. Ans. P605,000.Goodwill, before impairment 1,000,000 Goodwill, after impairment 445,000 Impairment loss charged to goodwill 555,000

4. Ans. P258,064.

5. Ans. P604,546.

CHAPTER 7-PROBLEM 9: EDD CORP.

1. Ans. P510,000.2014 Rental expense 480,000 2014 Amortization of leaserights (P300,000/10yrs) 30,000 510,000

2. Ans. P63,158.Cost of leasehold improvement 1,200,000 Divide by: Remaining lease term: 9.5yrs 9.50 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs.Annual depreciation 126,316 Multiply by: 6/12Depreciation expense, 2014 63,158

3. Ans. P60,150.Carrying value, 1/1/2019 (P1,200,000*5yrs/9.5yrs) 631,579 Divide by: Remaining useful life 10.50 *remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended Depreciation expense, 2019 60,150 remaining lease term (10-5yrs+10yrs), 15yrs.

CHAPTER 7-PROBLEM 10: MUSAR CORP.1. Ans. P139,375.

Salaries of staff working on research project 78,000 Computer program services 17,500 Allocated general expenses (P175,500*25%) 43,875 Total research and development expense 139,375

2. Ans. P2,480.Patent, initial cost 24,800 Divide by: useful life 10 Amortization expense 2,480

3. Ans. P22,320.Patent (24,800-2480) 22,320

CHAPTER 7-PROBLEM 11: BITS AND BYTES INC.1. Ans. P1,253,600.

Salaries and wages of programmers doing research 940,000 Expenses prior to establishment of tech. feasibility 313,600 Total research and development expense 1,253,600




2. Ans. P330,000.Expenses after technical feasibility is established 330,000

3. Ans. P100,500.Amortization of computer software (330,000/3yrs) 110,000 Cost to produce and prepare software for sale 225,000 Cost of goods produced 335,000 Portion of goods remaining on hand 30%Cost of ending inventory 100,500

4. Ans. P117,000.Amortization of computer software: P330,000*(P2,000,000/P4,000,000) 165,000 Cost to produce and prepare software for sale 225,000 Cost of goods produced 390,000 Portion of goods remaining on hand 30%Cost of ending inventory 117,000

CHAPTER 7-PROBLEM 12: HARRY CORP.Prepayment Exp.-2014 Miscellaneous

Rent Security Deposit 50,000 - Receivable 1-year rent 220,000 20,000 Lease bonus 55,000 5,000 Inurance Fire insurance 12,500 37,500 Property insurance 56,250 18,750 Advertising 25,000 50,000 Office supplier 25,000 90,000 Advances to officers 135,000 - Receivable/Other assetIdle office equipment 25,000 - Other assetBond redemption fund 545,000 - LT Investment

393,750 221,250 2. Ans. 1. Ans.

MULTIPLE CHOICE EXERCISES:CHAPTER 7-EXERCISE 1:

Purchased recipes and secret formulas 150,000 Licensing, royalty, and stand still agreement 300,000 Operating and broadcast rights 112,000 Goodwill purchased in a business combination 500,000 A license to manufacture a steroid by means of a government grant 150,000 Initial franchise fees paid 175,000 Cost of purchasing a patent from an inventor 137,000 Legal cost in securing a patent 70,000 Cost of purchasing a trademark 250,000 Amount paid to a lessor for the exclusive right to rent a facility under an operating lease agreement for a period of 10 years 100,000 Total intangibles including goodwill 1,944,000

CHAPTER 7-EXERCISE 2: DOHA CORPORATION1. Ans. A.

CV, Patent, 12/31/14: P444,000*9yrs/10yrs 399,600

2. Ans. C.CV, Franchise, 12/31/14: P252,000*6.5yrs/8yrs 204,750

3. Ans. B.Prepaid rent, 12/31/14: P168,000*0.75yrs/2yrs 63,000

4. Ans. D.Amortization of franchise, 2013 (P252,000/8yrs)*6/12 15,750 Rent expense, 2013 (P168,000/2yrs)*3/12 21,000 Net loss including organization expense in 2013 96,000 Retroactive adjustment to RE,beg. 2013 132,750

5. Ans. B.Amortization of franchise, 2014 (P252,000/8yrs) 31,500 Rent expense, 2014 (P168,000/2yrs) 84,000 Amortization of patent, 2014 (P444,000/10yrs) 44,400 Cost to develop a secret formula 450,000 Legal fees - successful defense 75,900 Research and development expense, 2014 960,000 Total expense in 2014 1,645,800




CHAPTER 7-EXERCISE 3: ALYSSA CORP.1. Ans. B.

Franchise:Carrying Value/Cost (no definite life) 1,260,000 Recoverable value/Value in use: (180,000/12%) 1,500,000 Impairment loss in 2014 - no impairment in 2013

Carrying Value/Cost (no definite life) 1,260,000 Recoverable value/Value in use: (150,000/12%) 1,250,000 Impairment loss in 2014 10,000

2. Ans. B.Patent:Cost (1/1/14) 2,220,000 Amortization: (2,220K/10yrs) (222,000) Carrying Value (12/14) 1,998,000 Recoverable value/Value in use (337,822*5.32825) 1,800,000 0 5.328250 Impairment loss 198,000

3. Ans. A.2013 expenses:Rent expense (840,000/2)*3/12 105,000 Net loss for the year 480,000 Retroactive adjustment to RE, Beg 585,000

4. Ans. A.2014 expenses:Impairment loss on Franchise 10,000 Rent expense for 2014 420,000 Amortization on Patent 222,000 Impairment loss on Patent 198,000 Cost of developing recepe 2,250,000 Legal fees on patent defense 379,500 Total expense 3,479,500

CHAPTER 7-EXERCISE 4: STU CORPORATION1. Ans. B.

Patent, Correct Cost, 1/2013 3,740,000 Amortization (2013-2014): P3,740,000*2yrs/20yrs (374,000) Carrying value, 12/31/14 3,366,000

2. Ans. D.License, Correct Cost, 1/2012 2,160,000 -Training cost is recognized as outright expense.Amortization (2012-2014): P2,160,000*3yrs/10yrs (648,000) Carrying value, 12/31/14 1,512,000

3. Ans. B.Training cost, expense in 2012 per audit 240,000 Amortization expense (2012-2013) per audit: P2,160,000*2yrs/10yrs 432,000 Prior period expense, per audit 672,000 Amortization expnse (2012-2013) per books: P2,400,000*2yrs/10yrs 480,000 Retroactive adjustment, debit, to RE, beg. 2014 192,000

4. Ans. C.; Trademark, Correct CV, 12/31/14 1,280,000 - Trademark is with indefinite life, thus no amortization.Recoverable value/Value in use: - Successful defense cost is recognized as outright expense. PV of Future net cash flows at 9% for an indefinite period: P90,000/9% 1,000,000 Impairment loss 280,000

5. Ans. C.Depreciation on the Leasehold Improvement P900,000/5yrs * 10/12 150,000 - Depr. is over useful life since it is shorter than remaining lease term.Amortization of Leaserights; P400,000/10yrs 40,000 Total expense 190,000

CHAPTER 7-EXERCISE 5: NICOLE CORP.1. Ans. D.

Legal and other professional fees to process the patent application (useful life is 15 years), Jan., 2007 660,000




2. Ans. B.CV, Dec. 31, 2007: P660,000*14/15 616,000

3. Ans. C.Amortization expense 2012:Original Patent: P660,000/15yrs 44,000 Competing Patent: P220,000/11yrs 20,000 Total amortization, 2012 64,000

4. Ans. A.Original Patent, CV, Dec. 31, 2011: P660,000*10/15 440,000 Competing Patent, CV, Dec. 31, 2011: P220,000*10/11 200,000 640,000

5. Ans. D.Original Patent, CV, 1/1/2012 440,000 Competing Patent, CV, 1/1/2012 200,000 Related Patent, 1/1/2012 335,000 Total Patent, 1/1/2012 975,000 Divide by: Extended remaining life (10yrs+3yrs) 13 Revised amortization expense, 2012 75,000

6. Ans. B.CV, 12/31/13 (P975,000*11/13) 825,000

7. Ans. B.CV, 12/31/14 (P975,000*10/13) 750,000 Recoverable value - Impairment loss 750,000

CHAPTER 7-EXERCISE 6: DEF CORP.1. Ans. D.

Patent, 12/31/14 (before amortization), per books 550,000 CV of Repairs cost capitalized in 1/1/2011 P75,000*6yrs/9yrs (50,000) Patent, 12/31/14 (before amortization), per audit 500,000 CV of Patent with revised useful life: P210,000*6yrs/14yrs 90,000 CV of remaining Patent with the same useful life 410,000

Amortization of patent with revised life: (P90,000/2yrs) 45,000 Amortization of patent w/o change in life: (P410,000/6yrs) 68,333 Total amortization expense, 2014 113,333

2. Ans. A.Patent, 12/31/14 (before amortization), per audit 500,000 Correct amortization for 2014 (113,333) Patent, 12/31/14 after amortization 386,667

3. Ans. B.The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.

CHAPTER 7-EXERCISE 7: AMFURST CORP.1. Ans. C. 2. Ans. C.

FRANCHISE: TERM 10 YEARS FRANCHISE: INDEFINITEInitial franchise fee (PV) Initial franchise fee (PV)Down payment 600,000 Down payment 600,000 Balance (800,000*2.321632) 1,857,306 1 Balance (800,000*2.321632) 1,857,306

2,457,306 2.321632 2,457,306 Less: Amortization: 245,731 Recoverable amount/Value in useCV 12/31/14 2,211,575 (400,000/12%) 3,333,333 Recoverable Value/Value in Use Impairment loss - (400,000*5.32825) 2,131,300 0 Impairment loss 80,275 5.3282498 Amortization -

Impairment loss - Amortization (2,457,306/10) 245,731 Interest expense (1,857,306*14%) 260,023 Impairment loss 80,275 Continuing franchise fee (12M*5%) 600,000 Interest expense (1,857,306*14%) 260,023 Total expense 860,023 Continuing franchise fee (12M*5%) 600,000 Total expense 1,186,028

3. Ans. B.PATENT: 8 YEARS:Cost 1/1/2014 545,000 517,750 Amortization (545,000/8) 68,125 Carrying Value 12/31/2014 476,875 Recoverable value (120,000*4,563757) 547,651 0 Impairment loss -




4. Ans. C.LEASE AGREEMENT:Rent expense for 2014 200,000 Amortizatin of lease rights (150,000/5yrs) 30,000 Depr of improvement (450,000/4.5yrs)*6/12 50,000 Total expense 280,000

CHAPTER 7-EXERCISE 8: SAHARA CORP.1. Ans. D.

*No capitalizable internally developed intangible yet since one of criteria for capitalization (i.e. how future economic benefits shall be derived) has not been met. Under PAS 38, Intangibles, the following criteria should be strictly complied with if to capitalize development cost of an internally generated intangible:

2. Intention to complete the project and to either sell/use the result of the project.3. Ability to complete the project and to either sell/use the result of the project.

5. How probable future economic benefits can be derived from the intangible.6. Ability to reliably estimate future cost to be incurred to complete the intangible.

2. Ans D. Salaries and other employee benefits 7,800,000 Other expenses 3,080,000 Depreciation on Building (11.2M/20yrs) 560,000 Total R&D Expense 11,440,000

3. Ans. B. Patent cost 3,200,000 Useful life 10 Amortization for 2014 320,000

4. Ans. A Building cost 11,200,000 Accum Depr (11.2M/20) (560,000) CV 12/31/14 10,640,000

5. Ans. B. Patent cost 3,200,000 Amortization in 2013: (3.2M/10yrs)*9/12 (240,000) Amortization in 2014 (320,000) CV 12/31/14 2,640,000

CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES1. Ans. B.

Franchise, CV, 12/31/14 550,000 *No definite life, thus no amortization*Continuing franchise fee is recgonized as outright expense.

Recoverable value/ Value in use (P67,500/15%) 450,000 *PV of future net cash flows from continued use at 15% for an indefinite period.Impairment loss 100,000

2. Ans. 0.Organization cost is recognized as outright expense.

3. Ans. C.Excess of cost over net assets of entrprise acquired in 2012 200,000 *No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost.

CHAPTER 7-EXERCISE 10: CAN CORP.Projected profits for the next four years: 2014: (6M*1.2) 7,200,000 2015: (7.2M*1.2) 8,640,000 2016: (8.64M*1.2) 10,368,000 2017: (10.368M*1.2) 12,441,600 Total 38,649,600

Divide by: 4 Projected average earnings 9,662,400 9,662,400 Average/Normal earnings at industry rate: Fair market Value of Net Assets Current Asset (9M+4.8M) 13,800,000 Investments at FMV 9,000,000 PPE, net 24,000,000 Current liabilities (4,800,000) Noncurrent liabilities (6,000,000) FMV of net assets 36,000,000 Multiply by: industry rate of return 18%Average/Normal earnings at industry rate: 6,480,000 6,480,000 Projected average excess earnings 3,182,400

1. Establishment of technical feasibility

4. Availability of resources to complete the project.




1. Ans. D.Projected average excess earnings 3,182,400 Divide by: Capitalization rate 18%Goodwill: 17,680,000 Add: Fair value of net assets 36,000,000 Acquisition price 53,680,000

2. Ans. A.Projected average excess earnings 3,182,400 Multiply by: # of years 4 Goodwill 12,729,600 Add: Fair value of net assets 36,000,000 Acquisition price 48,729,600

3. Ans. A.Projected average earnings 9,662,400 Divide by: Capitalization rate 20%Acquisition price 48,312,000

4. Ans. C.Projected average excess earnings 3,182,400 Multiply by: PV factor at 15%, 4 periods 3 Goodwill 9,085,683 Add: Fair value of net assets 36,000,000 Acquisition price 45,085,683

CHAPTER 7-EXERCISE 11: T CORPORATION1. Ans. B.

Total Country A Country B Country C Acquisition Price, January 1, 2013 10,000,000 FMV of Identifiable Net Asset 8,000,000 2,000,000 1,500,000 4,500,000 Goodwill (Allocated, Prorata: FMV of NA) 2,000,000 500,000 375,000 1,125,000

2. Ans. A.Value in use=Present value of future net cash flows from CGU Country C: Estim. Future net cash flows before impairment event 1,500,000 Effect of new legislation (cutting by 40% imports to Country C) 60% Estim. Future net cash flows after impairment event 900,000 Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.771584 Value in use 4,294,426 *observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal.

3. Ans. A.Carrying Value of Country C's, Assets Factory equipment 2,500,000 Store Equipment 1,500,000 Building 2,700,000 Goodwill 1,125,000 **observe that payables is deducted since, estimate of cashflows Payables (700,000) 7,125,000 also included cash flows related to payable.Value in use/Recoverable value 4,294,426 Impairment loss 2,830,574

4. Ans. C.; 5. Ans. C.Impairment loss 2,830,574

Allocation of loss: Goodwill of Country C (1,125,000) Balance to other asset, prorata: 1,705,574 Factory equipment 2,500,000 (636,408) 1,863,592 CV after impairment Store equipment 1,500,000 (381,845) 1,118,155 CV after impairment Building 2,700,000 (687,321) 2,012,679 CV after impairment Payables (700,000) (700,000) *liabilities are not impaired.

6. Ans. D.Impairment loss 2,830,574

Allocation of loss: Goodwill of Country C (1,125,000) Balance to other asset, prorata: 1,705,574 Factory equipment 1,800,000 (458,214) 1,341,786 Store Equipment 1,500,000 (381,845) 1,118,155 Should not be lower than its Rec. Value, P1.4M Building 2,700,000 (687,321) 2,012,679 Payables (700,000) (700,000) *liabilities are not impaired.




Reallocation of impairment loss:Impairment loss 2,830,574

Allocation of loss: Goodwill of Country C (1,125,000) Balance to other asset, prorata: 1,705,574 Cash 700,000 - 700,000 *no impairment allocated to cash Factory equipment 1,800,000 (642,230) 1,157,770 CV after impairment Store Equipment 1,500,000 (100,000) 1,400,000 Should not be lower than its Rec. Value, P1.4M Building 2,700,000 (963,345) 1,736,655 CV after impairment Payables (700,000) (700,000) *liabilities are not impaired.

Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property and equipment, prorata.

6. Ans. C. Cash -

Allocation of loss: Goodwill of Country C (100,000) Balance to other asset, prorata: (100,000) Factory equipment 1,800,000 (458,214) 1,341,786 Store Equipment 1,500,000 (381,845) 1,118,155 Not be lower than its Rec. Value, P1M Building 2,700,000 (687,321) 2,012,679 Payables (700,000) (700,000) *liabilities are not impaired.

CHAPTER 7-EXERCISE 12: ABC CORPORATION1. Ans. B.

Fair value less cost to sell 5,250,000 higherValue in use/PV of future net cash flows at 8% for 5 periods: Use: P1,252,282*3.992710 3.992710 5,000,000

2. Ans. A.Carrying value of CGU

Factory equipment 1,750,000 included in the determination of the fair value less cost to sell. Office equipment 1,475,000 Building 2,725,000 Goodwill 500,000 6,450,000

Recoverable value/FMV less cost to sell 5,250,000 Impairment loss 1,200,000

3. Ans. C.Impairment loss 1,200,000 Allocated to: Goodwill (500,000) Balance to other assets, prorata 700,000

Factory equipment 1,750,000 (205,882) 1,544,118 Office equipment 1,475,000 (173,529) 1,301,471 Building 2,725,000 (320,588) 2,404,412

4. Ans. C.Impairment loss 1,200,000 Allocated to: Goodwill (500,000) Balance to other assets, prorata 700,000

Factory equipment 1,750,000 (205,882) 1,544,118 *Should not be lower than 1.6M Office equipment 1,475,000 (173,529) 1,301,471 *Office Equipment CV should not be lower than P1.4M Building 2,725,000 (320,588) 2,404,412

Reallocation of Impairment lossImpairment loss 1,200,000 Allocated to: Goodwill (500,000) Balance to other assets, prorata 700,000

Factory equipment 1,750,000 (150,000) 1,600,000 Office equipment 1,475,000 (75,000) 1,400,000 Building 2,725,000 (475,000) 2,250,000

CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY1. Ans. B.

Cost incurred prior to establishment of capitalization criteria on Nov. 1, 2014 540,000

2. Ans. C.Capitalizable cost, after Nov. 1, 2014 60,000 Recoverable amount, Dec. 31, 2014 500,000 Impairment loss -




3. Ans. D.; 4. Ans. C.Capitalizable cost, after Nov. 1, 2014 60,000 Additional capitalizable cost, 2015 1,200,000 Total cost as of Dec. 31, 2015 1,260,000 Recoverable amount, Dec. 31, 2015 1,140,000 Impairment loss 120,000

CHAPTER 7-EXERCISE 14: LAS VEGAS INC.1. Ans. C.

Amortization of Patent (600,000/10) P60,000Amortization of Copyright (1,200,000*1.5M/5M) 360,000Total amortization (Patent and Copyright) P420,000

2. Ans. A.Amortization of Software (300,000/240)*100 P125,000Amortization of Franchise (480,000/10) 48,000Continuing franchise fee (2,500,000*.05) 125,000Total expenses related to computer software and franchise P298,000

3. Ans. A.Total research and development costs (all costs in item f) P433,000

4. Ans. C.Patent (600,000*9/10) P540,000Copyright (1,200,000-360,000) 840,000Tradename 1,050,000Computer software (300,000-125,000) 175,000Franchise (480,000*9/10) 432,000Goodwill 2,700,000Total carrying value of intangible, 12/31/15 P5,737,000

CHAPTER 7-EXERCISE 15: BOHOL CORPORATION1. a) Ans. A.; b) Ans. D.; c) Ans. B.; d) Ans. B.

Project 123 is entirely research and development, thus no capitalizable intangible, unless qualified under PAS 38 capitalization criteria.

The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not qualified yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense.

The second Patent is useful for many projects, thus only the amortization is recognized as R&D Expense. The balance shall be reflected as Intangible asset. Patent, CV, June 30, 2014: (P16,200*9/10) 14,580

Copyright: Cost Acq. Date Condition % CV6/30/2014: 6/30/2014:

Copyright ABC 30,000 1/2/2010: 20.5yrs/25yrs 24,600 Copyright XYC 33,000 7/15/2011: 12yrs/15yrs 26,400

51,000

GoodwillAcquisition cost 1,582,000 FMV, Net Assets acquired 1,560,000 Goodwill, initial recognition 22,000 Note that since there are no indication of GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired.

2. Ans. D.Salaries of staff doing research 18,500 Patent solely for Project AM123 12,000 Depr. on Equipment for various projects (10,000/5yrs) 2,000 Amo. on Patent for various projects (16,200/10yrs) 1,620 Cost of pilot models 8,950 Total R&D Expense 43,070

3. Ans. A.Amortization Expense: ABC (30,000/25yrs) 1,200 Amortization Expense: XYC (33,000/15yrs) 2,200 Total amortization expense on copyrights 3,400

4. Ans. A.




CHAPTER 7-EXERCISE 16: TAILOR CORP.Searching for applications of new research findings 57,000 Radical modification of the formulation of a glassware production 78,000 Laboratory research aimed at discovery of new knowledge 204,000 Testing for evaluation of new products 72,000 Materials consumed in research and development projects 177,000 Consulting fees paid to outsiders for research and projects 300,000 Personnel costs of persons involved in research and devt projects 384,000 Indirect costs reasonably allocable to research and devt projects 150,000 Design, construction, and testing of preproduction prototypes and models 870,000 Total research and developmnet

expense 2,292,000



CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES



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

10 A. 11 B.12 C.13 D.14 D.15 B.16 B.17 B.18 B.19 C.

CHAPTER 8-PROBLEM 2: MERMAID COMPANYCurrent Noncurrent

Accounts payable, adjusted for the debit balance (Advances to suppliers) 660,000 Note payable - trade only 500,000 Salaries payable 800,000 SSS payable 30,000 Pag-ibig payable 5,000 Medicare payable 15,000 Wittholding taxes payable 60,000 VAT payable 120,000 Advance from customers (AR with credit balances) 50,000 Serial bonds payable, payable P1M, semi-annyally 2,000,000 8,000,000 Accrued interest on bonds payable 300,000 Estimated warranties payable 420,000 Estimated liability for environmenta damages 50,000 Unearned rental income, for 3 years starting Jan. 1, 2015 50,000 100,000 Cash advances from shareholders 200,000 Total 5,060,000 8,300,000

1. Ans. 2. Ans.

CHAPTER 8-PROBLEM 3: JOJO INC.Current Noncurrent

a) P1M short-term notes payable, due Feb. 7, 2015 1,000,000 b) P500,000 short term debt, due June 1, 2015 500,000 c) P500,000 notes payable, due June 15, 2015 20,000 480,000 d) P1M bonds payable, due Dec. 31, 2018 1,000,000 Interest on the bonds payable P1M*10% 100,000

2,620,000 480,000 1. Ans. 2. Ans.

Notes: For item a, there was no indication that the right to refinance already existed as of the balance sheet date. Thus, while there was a LT-refinancing agreement completed after the balance sheet date, the liability is still current as of Dec. 31, 2014. For item b, the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date. For item c, the right existed already as of the balance sheet date, however, since the amount of the loan to be used to refinance the currently maturing obligation is expected only at 80% of P600,000, that is P480,000 only P480,000 of the currently maturing obligation is expected to be refinanced on a long-term basis. For item d, while the grace period was agreed upon as of the balance sheet date (Dec. 31), the grace period is short-term only.

CHAPTER 8-PROBLEM 4: TARBUCK INC.Ans. P4,120,000.

Per GL Per SLUnadjusted balances 4,450,000 4,020,000 Goods received on Dec. 30 (valid purch.) 400,000 Goods in-transit, FOB Dest (not valid purch.) (300,000) Payments to suppliers, checks released Dec. 30 (valid payment) (520,000) Payments to suppliers, checks not yet released as of Dec. 31 (not valid) 200,000 Purchase returns (valid Dec. transaction) (50,000) Credit balance (Advances to suppliers) 40,000 Adjusted balances 4,120,000 4,120,000




CHAPTER 8-PROBLEM 5: RONNIE COMPANYRequired Estimated Expense (500u*80%*P8,000) 3,200,000 Less: Actual cost incurred (1,250,000) Estimated warranties payable 1,950,000

1. Ans.:Warranties expense 1,950,000 Estimated warranties payable 1,950,000

2. Ans. P3,200,000.

3. Ans. P1,950,000.

CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND Analysis

2014 2015Estimated warranties payable, beg. 425,000 Required estimated expense: 2014: 5,000units*30%*P500 750,000 2015: 6,000units*30%*P500 900,000 Actual cost incurred for the year (325,000) (650,000) Estimated warranties payable, end 425,000 675,000

1. Ans.Audit adjusting entry in 2015:Retained earnings (add'l exp. in 2014) 425,000 Warranties expense 250,000 Estimated warranties payable 675,000

2. Ans. P750,000.

3. Ans. P900,000.

4. Ans. P425,000.

5. Ans. P675,000.

CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP.Analysis:Required estimated expense: VC SF Total Vacuum Cleaners: (P45M*30%)/P15,000*(P2,250-P500) 1,575,000 Stand Fan: (P45M*40%)/P12,500*(P1,500-P300) 1,728,000 3,303,000 Actual cost incurred/Actual redemption: Vacuum Cleaners: (1,000u-175u)*(P2,250-P500) (1,443,750) Stand Fan: (1,500u-125u)*(P1,500-P300) (1,650,000) (3,093,750) Estimated premiums payable, end 131,250 78,000 209,250

1. Ans. P3,303,000.

2. Ans. P209,250.

CHAPTER 8-PROBLEM 8: NOKIA CORP.2014 2015 2016 2017

Collection for unearned service contract 400,000 25% earned in the first contract year: 100,000 6 months in 2014 50,000 6 months in 2015 50,000 30% earned in the second contract year: 120,000 6 months in 2015 60,000 6 months in 2016 60,000 45% earned in the third contract year: 180,000 6 months in 2016 90,000 6 months in 2017 90,000 Service contract earned for each year 50,000 110,000 150,000 90,000 Balance unearned at the end of each year: 350,000 240,000 90,000 -

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




CHAPTER 8-PROBLEM 9: SAN MIG CORP.1. Ans. P337,500.

2013 leaves: 55employees*4weeks*5days 1,100 days 25employees*2weeks*5days 250 daysTotal 2013 unused leaves: 1,350 daysMultiply by: Salary rate in 2013 250 Liability for compensated absences/Salaries payable 337,500 unaccrued, thus expense in 2013 was understated.

2. Ans. P453,750.2013 leaves: 55employees*4weeks*5days 1,100 days 25employees*2weeks*5days 250 daysTotal 2013 unused leaves: 1,350 daysLess: Exercised in 2014 925 daysUnexercised in 2014, thus forfeited by year-end 2014 425 days

2014 leaves: 30employees*6weeks*5days 900 days 25employees*5weeks*5days 625 days 30employees*3weeks*5days 450 days 10employees*2weeks*5days 100 daysTotal cummulative unused leaves by 12/31/2014 2,075 daysLess: Expired unused leaves from 2013: (425) Unused leaves still exerciseable 1,650 Mulitply by: Current salary rate, 2014 275 Liability for compensated absences/Salaries payable 453,750

2. Ans.

CHAPTER 8-PROBLEM 10: BARO CORP.1. Ans. B.

Damages occurred in 2014, thus is a present obligation. The outflow of benefits is probable and the most reliable estimate is P400,000. Since the lawyers estimate that the reasonably possible outflow may be upto P700,000, additional contingent liabiltiy should be disclosed at P300,000.

2. Ans. C.The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract (10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous as of the balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous.Entry: Loss on purchase commitment (P100-P60)*10,000 400,000 Estimated liability on purchase commitment 400,000

3. Ans. D.The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37) while virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16)

4. Ans. C.The contingent asset that is probable is disclosed.

CHAPTER 8-PROBLEM 11: MOATS COMPANYProceeds from issue of bonds=PV of future cash flows at 4% semi-annual effective rate for 10 periods: Principal: P1,000,000*0.675564 675,564 0.675564 Interest: P50,000*8.110896 405,545 8.110896

1,081,109 Amortization tabe: Bonds payable:

Correct Int. Nominal Int. Amortization Balance(CV*4%) (P1M*5%)

March 1, 2014: 1,081,109 September 1, 2014: 43,244 50,000 (6,756) 1,074,353 March 1, 2015: 42,974 50,000 (7,026) 1,067,327 September 1, 2015: 42,693 50,000 (7,307) 1,060,021 March 1, 2016: 42,401 50,000 (7,599) 1,052,421

Correct entries:March 1, 2014:

Cash 1,081,109 Bonds payable 1,000,000 Premium on bonds payable 81,109




September 1, 2014:Interest expense 50,000 Cash 50,000 Premium on bonds payable 6,756 Interest expense 6,756

December 31, 2014:Interest expense 33,333 Interest payable 33,333 (P1,000,000*10%*4/12)Premium on bonds payable 4,684 Interest expense 4,684 Correct interest (P1,074,353*8%*4/12) 28,649 Nominal interest accrued (P1,000,000*10%*4/12) 33,333 Amortization (4,684)

1. Ans: Adjusting Entries:Bonds payable 81,109 Premium on bonds payable 69,669 Interest expense 11,440 Interest expense 33,333 Interest payable 33,333

2. Ans. P71,894.Interest expense (Mar. 1 - Sept. 1) P1,081,109*8%*6/12 43,244 Interst expense (Sept. 1 - Dec. 31) P1,074,353*8%*4/12 28,649 Interest expense, 2014 71,894

3. Ans. P1,069,669.Amortized cost, Sept. 1, 2014 (see table) 1,074,353 Amortization up to Dec. 31, 2014 (see entries) (4,684) Amortized cost, Dec. 31, 2014 1,069,669

4. Ans. P10,021.Retirement price 1,050,000 Amortized cost, Sept. 30, 2015: (1,058,754) Accrued interst (P1M*10%*1/12) (1,267) Gain on retirement of bonds (10,021)

Amortized cost, Sept. 1, 2015 (see table) 1,060,021 Amortization up to Sept. 30: Correct interest (P1,060,021*8%*1/12) 7,067 Nominal interest (P1,000,000*10%*1/12) (8,333) (1,267) Amortized cost, Sept. 1, 2015 1,058,754

Entry:Bonds payable 1,000,000 Premium on bonds payable 58,754 Interest expense 1,267 Cash 1,050,000 Gain on retirement of bonds 10,021

CHAPTER 8-PROBLEM 12: MNO INC.1. Ans. P1,245,000.

Accounts payable, unadjusted balance 1,240,000 RR 2903 - on consignment (30,000) RR 2904 - in transit, FOB SP 35,000 Accounts payable, adjusted 1,245,000

2. Ans. P720,000.Required warranty expense, 2013: (2,500u*40%*P900) 900,000 Actual cost (560,000) Warranties liability, Dec. 31, 2013 340,000 Required warranty expense, 2014: (3,000u*40%*P900) 1,080,000 Actual cost (700,000) Warranties liability, Dec. 31, 2014 720,000

3. Ans. P2,099,474.Proceeds from bond issue/FMV 1/1/13 = PV of future cash flows at 10% for 5 years. Principal: P2,000,000*0.620921 1,241,843 0.620921 Interest: P240,000*3.790787 909,789 2,151,631 3.790787




Amortization table: Bonds payableCorrect Int. Nominal Int. Amortization Balance(Bal*10%) (Face*12%)


4. Ans. P78,505.Net income before any adjustments: 1,557,679 Understated accounts payable/purchases (5,000) Understated warranties payable/warranties expense (380,000) Overstatement in interest expense in 2014 27,321 Adjusted net income 2014, before bonus 1,200,000

B = 10% (NI - Tx - B); Tx = 30%(NI - B)B = 10% (1.2M - (30%(1.2M - B) - B)B = P78,505.

5. Ans. P785,046.Adjusted net income 2014, before bonus 1,200,000 Less: Bonus (78,505) Net income before 30% tax 1,121,495 Income tax expense (336,448) Net Income after tax 785,046

CHAPTER 8-PROBLEM 13: MAMALOLA CORP.1. Ans. P443,000.

Accounts payable, unadjusted balance 460,000 Shipments from consignor (recorded) (42,000) AJE 1: Accounts Payable 17,000 Shipments-in-transit, FOB Destination (recorded) (30,000) Purchases 17,000 Shipment-in-transit, FOB SP (not yet recorded) 55,000 Accounts payable, adjusted 443,000

2. Ans. P248,700.Warranty expense in 2013 (1,250*70%)*P350 306,250 Less: Actual warranty cost incurred in 2011 (153,000) AJE 2: Warranties Expense 95,450 Warranties payable, 2013 153,250 Warranties payable 95,450 Warranty expense in 2014 (1,410*70%)*P350 345,450 Less: Actual warranty cost incurred in 2014 (250,000) Warranties payable, 2012 248,700

3. Ans. P222,750.2013 unused leaves forwarded to 2015 (625-(700-200))* 125 2014 unused leaves forwarded to 2015 550 AJE 3: Salaries payable 45,750 Total unused leaves that may be forwarded to 2053 675 Salaries expense 45,750 Multiply by current salary rate in 2014: (268,500/895days)*1.1 330 (268,500-222,750)Salaries payable (Liab for compensated absences) 222,750 *any unused prior to 2013 leaves are forfieted by the end of 2014

4. Ans. P1,600,000.*There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probableproceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.

5. Ans. P130,841.Unajdusted net income 2,032,700 AJE 1: Overstated purchases 17,000 AJE 2: Understated warranty expense (95,450) AJE 3: Overstated salaries expense 45,750 Adjusted net income 2,000,000 B = 10% (NI - B - TX)TX = 30% (NI - B)

B = 10% (2,000,000 - B - 30%(2,000,000 - B))B = 140,000 - .07B1.07B = 140,000Bonus = P130,841

CHAPTER 8-PROBLEM 14: SANTOS CORP.1. Ans. P402,104.

Proceeds from convertible bond issue (P8M*110%) 8,800,000 Less: FMV of bonds without conversion option = PV of future cash flows from the bonds at 10% for 3 years: Principal: P8,000,000*0.751315 6,010,518 0.751315 Interest: P960,000*2.486852 2,387,378 8,397,896 2.4868520 Residual amount/APIC from bond coversion privilege 402,104




2. Ans. P8,277,686.Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance

(Bal.*10%) (Face*12%)January 1, 2014: 8,397,896 December 31, 2014: 839,790 960,000 (120,210) 8,277,686 December 31, 2015: 827,769 960,000 (132,231) 8,145,455 December 31, 2016: 814,545 960,000 (145,455) 8,000,000

3. Ans.Entry upon conversion:

Alt1 Bonds payable 8,000,000 Premium on bonds payable 277,686 Ordinary shares (8,000*50*P10) 4,000,000 Share premium 4,277,686

Alt2 Bonds payable 8,000,000 Premium on bonds payable 277,686 APIC-Bond conversion privilege 402,104 Ordinary shares (8,000*50*P10) 4,000,000 Share premium 4,679,790

Note: Both alternatives are acceptable under PAS 39.

4. Ans. P65,455.Total Bonds Payable APIC-BCP

(at FMV, 102) (Residual)Retirement price 8,320,000 8,080,000 240,000 CV, Bonds payable, 1/1/16 8,145,455 CV, APIC - Bond coversion privilege 402,104 Gain on retirement of convertible bonds 65,455 162,104

to profit/loss to APICEntry:Bonds payable 8,000,000 Premium on bonds payable 145,455 APIC - Bond conversion privilege 402,104 Cash 8,320,000 Gain on retirement of bonds (profit/loss) 65,455 APIC/Share premium 162,104

CHAPTER 8-PROBLEM 15: DIRT CORP.1. Ans. P379,264.

Proceeds from bond with warrants issue 2,250,000 Less: FMV of bonds without conversion option = PV of future cash flows from the bonds at 5% for 8 semi-annual periods: Principal: P2,000,000*0.676839 1,353,679 0.676839 Interest: P80,000*6.4632128 517,057 1,870,736 6.4632128 Residual amount/Ordinary Share Warrants Outstanding 379,264

2. Ans. P1,898,486.Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance

(Bal.*10%) (Face*12%)January 1, 2014: 1,870,736 July 1, 2014: 93,537 80,000 13,537 1,884,273 January 1, 2015: 94,214 80,000 14,214 1,898,486

3. Ans. P257,559.Entry upon exericise of warrants:Cash (2,000*5w)*60%*P55 330,000 Ordinary share warrants outstanding(60%) 227,559 Ordinary shares (6,000shares*P50) 300,000 Share premium 257,559

4. Ans.Entry upon expiration of remaining warrants:Ordinary share warrants outstanding(40%) 151,706 Share premium/APIC - Expired warrants 151,706

CHAPTER 8-PROBLEM 16: CASE 1:

Periodic rentals (March to December); (40,000*10mo) 400,000 Amortization of lease bonus (120,000/5yrs)*10/12 20,000 Rent Expense 420,000

CASE 2:Annual rental 300,000 Amortization of lease bonus (100,000/8yrs) 12,500 Contingent rental (P2.5M-P2M)*5% 25,000 Rent Expense 337,500

CASE 3:Total lease payments: P30,000*(60mo - 9mo) 1,530,000




Divide by: 5 years 5 Annual rental expense 306,000 Mulitply by: 11mo/12mo 11/12Rent expense for 2014 280,500 Less: Amount paid for the year (Nov. and Dec.) (60,000) Accrued rent expense, 12/31 220,500

CASE 4:Total lease payments: P40,000*(120mo-3mo) 4,680,000 Divide by: 10 years 10 Annual rental expense 468,000 Multiply by: 4mo/12mo 4/12Rent expense for 2014 156,000

Leasehold improvement cost 300,000 Divide by: 5 years 5 Annual depreciation expense 60,000 Mulitply by: 3mo/12mo 3/12 15,000 Total expense for 2014 171,000

CASE 5:Total lease collection:First two years: (P2,000*100*2yrs) 400,000 Last two years: (P3,000*100*2yrs) 600,000 1,000,000 Divide by: 4 years 4 Annual rental income 250,000 Multiply by: 9mo/12mo 9/12Rent income for the period ended 9/30/14 187,500 Amount collected in 2014 200,000 Unearned rental income (12,500)

CASE 6:Gross rental income 500,000 Amortization of direct lease expense (150,000/5years) (30,000) Depreciation expense (120,000) Property taxes (90,000) Net rental income 260,000


Minimum lease payments in arrears 200,000 Multiply by: PV factor of 1 at 10% for 10 periods in arrears 6.1450 Initial cost of the asset 1,229,000

CASE 2:Minimum lease payment in advance 96,000 Multiply by: PV factor of 1 at 10% for 8 period in advance 5.8680 Initial cost of the asset 563,328 Divide by: 12 yrs (life since title passes to the lessee) 12 Depreciation expense 46,944

CASE 3:Minimum lease payment Periodic payments in advance 400,000 Multiply by: PV factor of 1 at 14% for 10 period in advance 5.9500 2,380,000 Bargain purchase option 200,000 Multiply by: PV factor of 1 at 14% for 10 period without annuity 0.2700 54,000 Initial cost of the asset 2,434,000 Less: Depreciation (2,434,000/12 years) (202,833) *Carrying value as of 12/31/14 2,231,167 *note that the depreciation is based on the useful life since ownership will be transferred to the lessee

CASE 4:Amortization table:

Periodic PaymentsInterest Principal BalanceDec. 31, 2014: (P3,165,000 - P500,000) 3,165,000 Dec. 31, 2015: 500,000 316,500 183,500 2,981,500 Dec. 31, 2016: 500,000 298,150 201,850 2,779,650

CHAPTER 8-PROBLEM 18: ANGLO INC.Entries made, under finance lease:December 31, 2013:

Building* 3,379,512 Cash 500,000 Lease liability 2,879,512 *PV of MLP 10% for 10 years in advance: (lower than FMV of asset) (P500,000*6.7590238) 0 5.759024 6.7590238




Amortization table (per books): Finance LeasePeriodic PaymentCorrect Int. Principal Balance

December 31, 2013: 2,879,512 December 31, 2014: 500,000 287,951 212,049 2,667,463

December 31, 2014:Interest expense 287,951 Lease liability 212,049 Cash 500,000

Depreciation expense 337,951 Accumulated Depreciation 337,951 (P3,379,512/10years)

AUDIT ANALYSIS:1. There is no transfer of ownership.2. There is no bargain purchase option.3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000)The lease agreement does not qualify as finance, thus should have been accounted for only under operating lease.

Correct entries, under operating lease.December 31, 2013:

Prepaid rent 500,000 Cash 500,000

January 1, 2014:Rent expense 500,000 Prepaid rent 500,000

December 31, 2014:Prepaid rent 500,000 Cash 500,000

1. Ans. P125,902.Expenses per books Interest on finance lease liability 287,951 Depreciation expense 337,951 625,902 Expense per audit 500,000 Overstatement in expense/Understatement in NI 125,902

2. Ans. None.

CHAPTER 8-PROBLEM 19: LACTUM INC.Entries made per books, operating lease:January 1, 2014:

Rent expense 150,000 Cash 150,000

April 1, 2014:Rent expense 150,000 Cash 150,000

July 1, 2014:Rent expense 150,000 Cash 150,000

October 1, 2014:Rent expense 150,000 Cash 150,000

AUDIT ANALYSIS:1. There is no transfer of ownership.2. There is no bargain purchase option.3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388)The lease agreement does qualify as finance, thus should have been accounted for only under finance lease.

Correct entries per audit, finance leaseJanuary 1, 2014:

Building* 4,185,388 Cash 150,000 Lease liability 4,035,388 *PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888) 26.9025888 27.9025888

0.4619482 Amortization table: Finance lease liabilty:

Periodic PaymentCorrect Int. Principal BalanceJanuary 1, 2014: 4,035,388 April 1, 2014: 150,000 80,708 69,292 3,966,096 July 1, 2014: 150,000 79,322 70,678 3,895,418 October 1, 2014: 150,000 77,908 72,092 3,823,326




Janaury 1, 2015: 150,000 76,467 73,533 3,749,793 April 1, 2015: 150,000 74,996 75,004 3,674,789 July 1, 2015: 150,000 73,496 76,504 3,598,285 October 1, 2015: 150,000 71,966 78,034 3,520,250

April 1, 2014:Interest expense 80,708 Lease liability 69,292 Cash 150,000

July 1, 2014:Interest expense 79,322 Lease liability 70,678 Cash 150,000

October 1, 2014:Interest expense 77,908 Lease liability 72,092 Cash 150,000

December 31, 2014:Interest expense 76,467 Interest payable 76,467

Depreciation expense 418,539 Accumulated depreciation 418,539 (P4,185,388/10years) * no transfer of ownership, thus depr shall be over term.

1. Ans. P132,943.Expense per books Rent expense (P150,000*4qtrs) 600,000 Expense per audit: Interest expense 314,405 Depreciation expense 418,539 732,943 Understatement in Expense/Overstatement Net Income (132,943)

2. Ans. P3,823,326.Lease liability, 12.31.14 3,823,326 Interest payable, 12.31.14 76,467

3. Ans. P303,076.Principal due from January 1, 2015 to December 31, 2015 (see amortization table)Janaury 1, 2015: 73,533 April 1, 2015: 75,004 July 1, 2015: 76,504 October 1, 2015: 78,034 Current portion of lease liability 303,076

CHAPTER 8-PROBLEM 20: CASE 1:1. Ans. P60,000.

Sales price 420,000 Fair market value (420,000) Deferred gain on sale -

Fair market vaue 420,000 Carrying value (360,000) Realized gain on sale 60,000

2. Ans. 40,000.Sales price 420,000 Fair market value (380,000) Deferred gain on sale 40,000

Fair market vaue 380,000 Carrying value (360,000) Realized gain on sale 20,000

3. Ans. 100,000.Sales price 420,000 Fair market value (320,000) Deferred gain on sale 100,000

Fair market vaue 320,000 Carrying value (360,000) Realized loss on sale (40,000)

4. Ans. 60,000.Sales price 420,000 Fair market value (450,000) Ignored (30,000)

Sales price 420,000




Carrying value (360,000) Realized loss on sale 60,000

CASE 2:1. Ans. P80,000.

Sales price 400,000 Fair market value (480,000) Deferred loss on sale (80,000) * since the future rentals is below rent, there is an expected future benefit

from the asset being sold at a loss.Fair market vaue 480,000 Carrying value (540,000) Realized loss on sale (60,000)

2. Ans. P40,000.Sales price 400,000 Fair market value (480,000) Realized loss on sale (80,000) * since the future rentals is at market rate of rent, there is no expected

future benefit from the asset sold at a loss.Fair market vaue 480,000 Carrying value (540,000) Realized loss on sale (60,000)

Total realized loss (140,000)

CASE 3:1. Ans. 626,667.

Interest expense on finance lease liab (600,000*10%) 60,000 Depreciation on the leased-back asset (600,000/3yrs) 600,000 Amortization of deferred gain on sale (100,000/3yrs) (33,333) - gain on a sale and leaseback (finance) is fully deferred andNet amount recognized in the profit or loss 626,667 amortized over lease term. *note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. 141,269Rent expense 241,269 Realized gain on sale (P600,000 - P500,000) (100,000) *Selling price is at FMVNet amount recognized in the profit/loss 141,269 *note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.

CASE 4:1. Ans. 115,000.

Interest expense on finance lease liab (150,000*10%) 15,000 Depreciation on the leased-back asset (150,000/3yrs) 50,000 Realized loss on sale 50,000 *loss on sale is fully realized since it is an indication of Net amount recognized in the profit or loss 115,000 asset impairement. *note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. P158,205.Rent expense 58,205 Realized loss on sale (P200,000 - P150,000) 100,000 *Selling price is at FMV (no expected future benefit)Net amount recognized in the profit/loss 158,205 *note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.


Minimum lease collections 200,000 Multiply by: PV factor of 1 at 12% for 5 years with annuity 3.604776 1 Present value of minimum lease collection 720,955

Cost of the asset/FMV of asset (Under Direct Finance) 700,000 Add: Direct finance lease cost 20,955 Initial investment on the lease agreeement 720,955

Amortization table:Periodic Coll. Interest Inc. Principal Balance

January 1, 2015: (CV * 12%) 720,955 December 31, 2015: 200,000 86,515 113,485 607,470 December 31, 2016: 200,000 72,896 127,104 480,366 December 31, 2017: 200,000 57,644 142,356 338,010 December 31, 2018: 200,000 40,561 159,439 178,571 December 31, 2019: 200,000 21,429 178,571 (0)

1. Ans. 0.Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer.*Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amount receivable.

Entry upon inception/Sale of asset:Finance lease receivable 720,955 Asset 700,000 Cash 20,955

2. Ans. 72,896.




Entry upon periodic collections:Dec. 31, 2015:Cash 200,000 Interest income 86,515 Finance lease receivable 113,485

Dec. 31, 2016:Cash 200,000 Interest income 72,896 Finance lease receivable 127,104

3. Ans. 480,366.See amortization table above.

CASE 2:Minimum lease collections 200,000 Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance 4.169865 1 Present value of minimum lease collection = Sales Price 833,973 Cost of the asset 600,000 Gross profit on sale 233,973


January 1, 2015: (CV * 10%) 633,973 January 1, 2016: 200,000 63,397 136,603 497,370 January 1, 2017: 200,000 49,737 150,263 347,107 January 1, 2018: 200,000 34,711 165,289 181,818 January 1, 2019: 200,000 18,182 181,818 0

1. Ans. 233,973.Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the difference between the Sales Price of the asset and its Cost on the company's books.*Direct lease costs incurred under sales type lease is recognized as outright expense

Entry upon inception/Sale of asset:Finance lease receivable 833,973 Sales 833,973

Entry to recognize cost of sales, if perpetual inventory is used:Cost of sales 600,000 Inventory 600,000

Entry to recognize the direct lease expense:Expense 20,000 Cash 20,000

2. Ans. 49,737.Entry upon accrual of interest and periodic collections:Dec. 31, 2015:Interest receivable 63,397 Interest income 63,397

Jan. 1, 2016:Cash 200,000 Interest receivable 63,397 Finance lease receivable 136,603

Dec. 31, 2016:Interest receivable 49,737 Interest income 49,737

Jan. 1, 2017:Cash 200,000 Interest receivable 49,737 Finance lease receivable 150,263

3. Ans. 497,370.See amortization table

CASE 3:Minimum lease collections 400,000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787 Present value of minimum lease collection 1,516,315 Guaranteed residual value 100,000 Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921 Present value of the guaranteed residual value 62,092 Total Sales Price of the asset = Total Lease Receivable 1,578,407


January 1, 2015: (CV * 10%) 1,578,407 December 31, 2015: 400,000 157,841 242,159 1,336,248 December 31, 2016: 400,000 133,625 266,375 1,069,872




December 31, 2017: 400,000 106,987 293,013 776,860 December 31, 2018: 400,000 77,686 322,314 454,545 December 31, 2019: 400,000 45,455 354,545 100,000 December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,578,407.Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the guaranteed residual value is added to the total sales price of the asset.*Direct lease expense under sales type lease is recognized as outright operating expense.

Entry upon inception/Sale of asset:Finance lease receivable 1,578,407 Sales 1,578,407

2. Ans. P1,000,000.Entry to recognize cost of sales, if perpetual inventory is used:Cost of sales 1,000,000 Inventory 1,000,000


3. Ans. 578,407.Total Sales Price of the Asset 1,578,407 Less: Cost of the asset/FMV of asset (1,000,000) Gross Profit on Sale 578,407

4. Ans. P133,625.Entry upon periodic collections:Dec. 31, 2015:Cash 400,000 Interest income 157,841 Finance lease receivable 242,159


CASE 4:Minimum lease collections 400,000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787 Present value of minimum lease collection = Sales Price of the asset 1,516,315 *Since the residual value is unguaranteed, that portion of the asset is not deemed sold. Thus was not included in the sales price.

Minimum lease collections 400,000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787 Present value of minimum lease collection 1,516,315 Guaranteed residual value 100,000 Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921 Present value of the guaranteed residual value 62,092 Total Lease receivable. 1,578,407 *Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership), the unguaranteed residual value which will be received at the expiration of the lease term is still added to the receivable.

Total cost of the asset 1,000,000 Less: Present value of the unguaranteed residual value (62,092) Net cost of the asset sold 937,908 *Since the residual value is unguaranteed, that portion of the aset is not deemed sold. The PV of the unguaranteed residual value is therefore deducted from the cost of the inventory sold.


January 1, 2015: (CV * 10%) 1,578,407 December 31, 2015: 400,000 157,841 242,159 1,336,248 December 31, 2016: 400,000 133,625 266,375 1,069,872 December 31, 2017: 400,000 106,987 293,013 776,860 December 31, 2018: 400,000 77,686 322,314 454,545 December 31, 2019: 400,000 45,455 354,545 100,000 December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,516,315.Entry upon inception/Sale of asset:Finance lease receivable 1,516,315 Sales 1,516,315

2. Ans. P937,908.Entry to recognize cost of sales, if perpetual inventory is used:Finance lease recievable 62,092 Cost of sales 937,908 Inventory 1,000,000





3. Ans. 578,407.Total Sales Price of the Asset 1,516,315 Less: Cost of the asset/FMV of asset (937,908) Gross Profit on Sale 578,407

4. Ans. P133,625.Entry upon periodic collections:Dec. 31, 2015:Cash 400,000 Interest income 157,841 Finance lease receivable 242,159


CHAPTER 8-PROBLEM 22: ABC CO.Reconciliation:

Net income before any differences 10,000,000 Permanent Differences: Nondeductible expenses 100,000 Nontaxable income (500,000) Net income after permanent differences 9,600,000 Temporary Differences:Future Deductible amounts Accrued warranties 250,000 Advances from customers 500,000 Provision for probable losses 900,000 1,650,000 Future Taxable Amounts Prepaid rent 400,000 (400,000) Taxable income 10,850,000

1. Ans. P4,340,000.Taxable income 10,850,000 Mulitply by: Current tax rate 40%Current tax expense 4,340,000




2. Ans. P3,840,000.Net income after permanent differences 9,600,000 Multiply by: Constant tax rate 40%Total tax expense 3,840,000

3. Ans. P660,000.Future deductible amounts 1,650,000 Mulitply by: Constant tax rate 40%Deferred tax asset 660,000

4. Ans. P160,000.Future taxable amounts 400,000 Mulitply by: Constant tax rate 40%Deferred tax liability 160,000

To reconcile:Current tax expense 4,340,000 Add: Deferred tax expense (FTA) 160,000 Less: Deferred tax benefit (FDA) (660,000) Total tax expense 3,840,000

5. Ans. P3,902,500.If tax rate in the future is expected to change (at 35%):

Current tax expense (P10.85M*40%) 4,340,000 Add: Deferred tax expense (FTA:P400,000*35%) 140,000 Less: Deferred tax benefit (FDA:P1,650,000*35%) (577,500) Total tax expense 3,902,500

6. Ans. P140,000.Future taxable amounts 400,000 Mulitply by: Futre tax rate 35%Deferred tax liability 140,000

7. Ans. P577,500.Future deductible amounts 1,650,000 Mulitply by: Constant tax rate 35%Deferred tax asset 577,500

CHAPTER 8-PROBLEM 23:XYZ CO.Reconciliation:

Net income before any differences 5,000,000 Permanent Differences: Nondeductible expenses 150,000 Nontaxable income (50,000) Net income after permanent differences 5,100,000 Temporary Differences:Increase in Future Deductible for the year: Cummulative FDA, ending 1,600,000 Cummulative FDA, beginning 1,200,000 400,000 Decrease in Future Taxable Amount for the year: Cummulative FTA, ending 500,000 Cummulative FTA, beginning 800,000 300,000 Taxable income 5,800,000

1. Ans. P2,320,000Taxable income 5,800,000 Mulitply by: Current tax rate 40%Current tax expense 2,320,000

2. Ans. P2,040,000.Net income after permanent differences 5,100,000 Multiply by: Constant tax rate 40%Total tax expense 2,040,000

3. Ans. P660,000.Cummulative Future Deductible Amt, end 1,600,000 Mulitply by: Constant tax rate 40%Deferred tax asset 640,000

4. Ans. P200,000.Cummulative Future Taxable Amt, end 500,000 Mulitply by: Constant tax rate 40%Deferred tax liability 200,000

To reconcile:Current tax expense 2,320,000 Less: Deferred tax benefit ( dec in FTA) (120,000) (decrease in deferred tax liability)Less: Deferred tax benefit (inc in FDA) (160,000) Total tax expense 2,040,000




CHAPTER 8-PROBLEM 24: JAPS CORP.1. Ans. P1,270,000.

Service costs Current service cost 855,000 Past service cost recognized for the year 120,000 Loss on settlment: Payments to early retirees 800,000 CV of accrued benefits of early ret. 650,000 150,000 1,125,000 Net interest (income)expense Interest on ABO (P10,080,000*12%) 1,209,600 Interset on PA (P9,450,000*12%) (1,134,000) 75,600 Pension expense (Profit or loss) 1,200,600 2. Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)Actuarial gain on PA (a) (216,000) Actuarial loss on ABO (b) 285,400 69,400 3. Ans.

Total pension expense 1,270,000

(a) Actuarial gain/loss on Plan assetPlan asset, beginning balance 9,450,000 Add: Contribution for the year 1,200,000 Interest on PA (P9,450,000*12%) 1,134,000 Less: Settlements at scheduled retirement (1,400,000) Settlements to early retirees (800,000) Balance 9,584,000 Plan asset, at FMV at the year-end 9,800,000 Actuarial gain on plan asset 216,000

(b) Actuarial gain/loss on Accumulated Benefit ObligationABO, beginning balance 10,080,000 Add: Current service cost 855,000 Past service cost for the year 120,000 Interest on ABO (P10,080,000*12%) 1,209,600 Less: Benefits settled, at scheduled ret. (1,400,000) Benefits settled, early retirees (650,000) Balance 10,214,600 ABO, present value, ending balance 10,500,000 Actuarial loss on AB0 285,400

4. Ans. P700,000.To reconcile:Accrued pension, beg 630,000 Pension expense (total) 1,270,000 Total 1,900,000 Contribution to the plan for the year (1,200,000) Accrued pension, end 700,000

ABO, end 10,500,000 Plan asset, end (9,800,000) Accrued pension end 700,000

CHAPTER 8-PROBLEM 25: IRELAND CORP.1. Ans. P620,000.

Service costs Current service cost 480,000 Net interest (income)expense Interest on ABO (P2,980,000*8%) 238,400 Interset on PA (P3,200,000*8%) (256,000) (17,600) Pension expense (Profit or loss) 462,400 2. Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)Actuarial loss on PA 80,000 Actuarial loss on ABO 30,000 Effect of ceiling** 47,600 157,600 3. Ans.

Total pension expense 620,000




Plan asset, beginning balance 3,200,000 Add: Contribution for the year 750,000 Interest on PA (P3,200,000*8%) 256,000 Less: Settlements at scheduled retirement (560,000) Balance 3,646,000 Less: Actuarial loss on PA (80,000) Plan asset, FMV, end 3,566,000

ABO, beginning balance 2,980,000 Add: Current service cost 480,000 Interest on ABO (P2,980,000*8%) 238,400 Less: Benefits settled, at scheduled ret. (560,000) Balance 3,138,400 Add: Actuarial loss on ABO 30,000 ABO, present value, end 3,168,400

Plan asset at fair value, end 3,566,000 ABO at present value, end 3,168,400 Prepaid pension, end 397,600 Asset Ceiling (lower) 350,000 Remeasurement loss/Effect of ceiling 47,600 **

4. Ans. P350,000.To reconcile:Prepaid pension, beg (ceiling was higher) (220,000) Pension expense (total) 620,000 Total 400,000 Contribution to the plan for the year (750,000) Prepaid pension, end (ceiling is lower) (350,000)

MULTIPLE CHOICE EXERCISES:CHAPTER 8-EXERCISE 1: PROBE INC.

ITEM Current Liabilities

Noncurrent Liabilitiesa. Accounts payable – trade, P170,000 + 30,000 P200,000

b. Notes payable – trade, P70,000 70,000 Interest on Notes: 50,000*15%*4/12 2,500 20,000*15%*2/12 500c. Advance receipts from customers, 100,000d. Containers deposit 50,000e. Notes payable – BPI , P200,000/5 40,000 160,000i. Convertible bonds 1,000,000j. Notes payable – officers 40,000k. Salaries and wages (68,000*15/30) 34,000m. Output VAT, net of Input (246,000 – 164,000) 82,000n. Accounts receivable, credit balance 12,3000. Cash in banks (overdraft) 115,000 – (125,000+55,000) 65,000r. Estimated warranty costs on goods sold 46,000s. Installment notes payable, P75,000 *1/3 25,000 50,000t. Provision for losses (25,000 + 75,000) / 2 50,000u. Deferred tax liability 150,000TOTAL P817,300 P1,360,000 P2,177,300

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

CHAPTER 8-EXERCISE 2: CUT INC.

Bonds payable: Noncurrent Current 7/1/2008: (P4,000,000*98%) 3,920,000 Cummulative discount amortization: P80,000/10yrs*5.75yrs 46,000 3,966,000 Accrued interest on bonds (P4M*7%*3/12) 70,000 Accrued interest on notes payable 90,000 Current portion of notes payable 600,000 Noncurrent portion of notes payabe 2,400,000 Warranties liability (P55,000+P145,000-P130,000) 70,000 Trade payables 325,000 Payroll related items 193,000 Taxes payable 535,000 Other accruals 50,000 Cash dividends payable (P0.40*2,500,000shares) 1,000,000

6,366,000 2,933,000 1. Ans. B. 2. Ans. A.

Note: Stock dividends payable is classifed as capital and not as liability.

CHAPTER 8-EXERCISE 3: RADO INC.Ans. A.

Estimated Warranties Payable, beginning balance P225,000 Required Estimated Expense (7,250,000-150,000)*5% 355,000 Less: Actual cost incurred for the year (415,500)Estimated Warranties Payable, ending balance P164,500




CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT1. Ans. C.; 2. Ans. B.

Total sales – home furniture 28,800,000 Divide by: 2,000 Total premium distributable 14,400 Multiply by: estimated redemption 60%Estimated redemption 8,640 Multiply by, net cost of premiums (340-50) 290 Estimated premium expense 2,505,600 Premiums liability, beg 716,000 Total 3,221,600 Actual redemption (9,600,000/2,000)*290 (1,392,000)Estimated premiums liability, end 1,829,600

3. Ans. B.Estimated warranty liability, beginning 2,176,000 Total sales – kitchen applicances 86,400,000 Multiply by: 5%Estimated warranties expense 4,320,000 Actual warranty costs during the year` (2,624,000)Estimated warranty liability, end 3,872,000

CHAPTER 8-EXERCISE 5: ABRA COMPANY1. Ans. C.

2013 unused leaves by the end of 2014 (850days-550days) 300 2014 unused leaves by the end of 2014 500 Total unused leaves by the end of 2014 800 Multiply by probable exercise rate 80%Leaves that will probably materialize 640 Multiply by: 2014 current salary rate 400 Accrued compensated absences per audit 256,000

2. Ans. D.Unadjusted net income 1,277,500 Understatement in accrued comp. abs./salaries expense (18,000) Adjusted net income 1,259,500 1,147,608 745,945 111,892

B = 15% (NI - B - Tx); Tx = 35% (NI - B)B = 15% (NI - B - 35%(NI - B) 818,675 122,801 B = P111,892. 65% 0.09750 1.0975 111,892

CHAPTER 8-EXERCISE 6: ASCOT INC.Audit notes:a. Since there is no right of offset, the advances to sppliers should be reclassifed as an asset:AJE 1:

Advances to suppliers 55,000 Accounts payable 55,000

1. Ans. C.b. Required premiums expense: (40,000*75%)/5*(P95-P25) 420,000

Actual cost/Actual redemption (5,000-1,250)*(P95-P25) (262,500) Estimated premiums liability, per audit 157,500 Estimated premiums liabilty, per books 118,750 Net adjustment 38,750

AJE 2:Premiums expense 38,750 Estimated premiums liability 38,750

2. Ans. A.c. Cummulative unused leaves 12/31/14 750

Less: 2012 leaves (forfeited (50) Leaves that can be carried forward to 2015 700 Exercise rate (per past experience) 80%Cummulative leaves that will probably be exercised 560 Multiply by: 2014 current salary rate 400 Accrued salaries - compensated absences, per audit 224,000 Accrued salaries - compensated absences, per books 300,000 Net adjustment (76,000)

AJE 3:Accrued salaries 76,000 Salaries expense 76,000




3. Ans. A.Unadjusted net income before bonus and tax 1,015,131 AJE 2: Understated premiums expense (38,750) AJE3: Overstated salaries expense 76,000 Adjusted net income before bonus and tax 1,052,381 B = 15% (NI - Tx - B)Tx = 30% (NI - B)B = 15%(NI - 30%(NI - B) - B)B = 15%(1,052,381 - 30%(1,052,381 - B) - B)B = 110,500/1.105B = 100,000

AJE 4:Accrued salaries 5,540 Salaries expense 5,540 (100,000-96,460)

4. Ans. A.Net Income before tax (1,052,381 - 100,000) 952,381 Less: Income tax (952,381*30%) (285,714) Net Income after tax 666,667

AJE 5:Income tax expense (current) 285,714 Income tax payable 285,714

d. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.ENTRY:

Income tax expense (deferred) 250,000 Deferred tax liability 250,000

5. Ans. B.e. The refinancing agreement was completed as of December 31, 2014, thus there is a right to refinance the liablity on a long-term

basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of the fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis.The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus willstill be presented as current as of December 31, 2014.

CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC.1. Ans. A.

Accounts Payable, unadjusted 250,000 Receiving report number 2634 (Unrecorded purchase) 12,500 Receiving report number 2636 (Purchase in transit) 10,000 Accounts Payable, adjusted 272,500

2. Ans. D.Warranties liability, unadjusted 10,000 Warranty expense, 2014 (10,550,000*6%) 633,000 Total 643,000 Less: Actual warranties paid (310,000)Warranties liability, adjusted (12/2014) 333,000

3. Ans. A.Legal services 4,600 Medical services 5,500 Payroll (12/21/ - 12/31) : 14,400 *8/12 9,600 Royalties 3,900 Accrued interest on Bond Liability (800,000*12%*3/12) 24,000 Total accruals 47,600

4. Ans. A.Amortization Table: Lease Liability

13.59032634 Payment Interest (Bal.*2%) Principal Balance

Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326) 3,397,582 June 30, 2014: 250,000 135,903 114,097 3,283,485December 31, 2014: 250,000 131,339 118,661 3,164,824June 30, 2015: 250,000 126,593 123,407 3,041,417December 31, 2015: 250,000 121,657 128,343 2,913,074

Current portion5. Ans. A.

Amortization Table: Bonds PayableNominal Effective Amortization Balance

Balance 851,706 September 30, 2014: 42,585 48,000 (5,415) 846,291 March 31, 2015: 42,315 48,000 (5,685) 840,606 Carrying value as of Dec. 31, 2014:Balance, September 30, 2014 846,291 Amortization up to 12/31/14: P5,685*3/12: (2,843) Amortized cost as of December 31, 2014: 843,449

Long-term Portion




CHAPTER 8-EXERCISE 8: DETOX INC.1. Ans. D.

Accounts Payable, unadjusted 534,000 RR# 1015 (purchase in transit – FOB Destination) (35,000) RR# 1013 (goods received on December 30, 2014) 65,000 RR# 1016 (purchase in transit – FOB Shipping point) 40,000 Accounts payable, adjusted 604,000

2. Ans. C.Required estimated expense 2013: (50,000/5)*40%*(P160-P50) 440,000 Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50) (198,000) Estimated premiums payable, 12/31/2013 242,000 Required estimated expense 2014: (60,000/5)*40%*(P160-P50) 528,000 Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50) (561,000) Estimated premiums payable, 12/31/2014 209,000

3. Ans. D.Proceeds from issuance of bonds on 1/1/2013 P2,050,000Fair value of bonds at 12% effective rate* 1,903,927APIC – Bond Conversion Privilege P146,073*PV of future cash flows at 12% for 3 periods: Principal: 2,000,000 * 0.711780 P1,423,560 Interest: 200,000 * 2.40183 480,366 Total present value = Fair value P1,903,927

Amortization table: Bonds payableCorrect Int. Nominal Int. Amortization Balance

1,903,927 Dec. 31, 2103: 228,471 200,000 28,471 1,932,398 Dec. 31, 2014: 231,888 200,000 31,888 1,964,286

4. Ans. A.Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14:DR: Bonds payable 1,000,000 DR: APIC – Bond conv. priv. 73,036 CR: Discount on bonds payable 17,857 CR: Ordinary shares (10,000*50) 500,000 CR: Share premium 555,179

5. Ans. B.Present value of the minimum lease payment at implicit lease rate, 8% for 5 periods: (600,000*3.9927) P2,395,626Fair market value of the leased asset at inception of lease 2,400,000

Amortization table: Lease liabilityDate Periodic Paymts Interest Principal Balance Jan. 1, 2014: 2,395,626 Dec. 31, 2014: 600,000 191,650 408,350 1,987,276 Dec. 31, 2015: 600,000 158,982 441,018 1,546,258

6. Ans. C.Present value of MLP on 1/1/14 P2,395,626Divide by: Term (no transfer of ownership) 5 yearsDepreciation expense in 2014 P479,125

CHAPTER 8-EXERCISE 8: PIPINO CORP.1. Ans. C.

Amortization table: Notes PayableDate Correct Interest Nominal

Interest Amortization BalanceApril 1, 2012: P7,195,000March 31, 2013: 1,079,250 960,000 119,250 7,314,250March 31, 2014: 1,097,138 960,000 137,138 7,451,388December 31, 2014: 838,281* 720,000* 118,281* P7,569,669

*9 months only up to December 31, 2014

2. Ans. D.Lease liability balance per books, 12/31/2014 P2,240,000Debits to the account for the periodic payments starting 12/31/2011 4,800,000Amounts initially capitalized on 12/31/2011 = Fair market value of the P7,040,000

Amortization table: Finance Lease LiabilityDate Payment Effective

Interest Principal BalanceDecember 31, 2011: P7,040,000December 31, 2011: 1,200,000 5,840,000December 31, 2012: 1,200,000 584,000 616,000 5,224,000December 31, 2013: 1,200,000 522,400 677,600 4,546,400December 31, 2014: 1,200,000 545,640 745,360 3,801,040 Liab. balanceDecember 31, 2015: 1,200,000 380,104 819,896 2,981,144

Current Noncurrent

Jan. 1, 2013:

*100%, thus Finance lease




3. Ans. C.Notes payable P7,569,669Liability under capital lease – Long term** 2,981,144Deferred tax liability 250,000Total long term liabilities P10,800,813

4. Ans. B.Accounts payable, unadjusted balance P1,840,500RR# 65218, purchase in transit, FOB Destination (19,000)RR# 65219, purchase in transit, FOB Buyer (Destination) (30,500)RR# 65220, goods received only after the December 31 (41,000)Accounts payable, adjusted balance P1,750,000

5. Ans. D.2014 Sales P31,650,000Multiply by estimated warranty cost as % of sales 8%Warranties expense in 2014 P2,532,000

6. Ans. B.Accounts payable 1,750,000Warranties payable (2,532,000 – 1,950,000) 582,000Interest payable on notes (8,000,000*12%*9/12) 720,000Current portion of Long term liability under capital lease 819,896Total current liabilities P3,871,896

CHAPTER 8-EXERCISE 9: ADELAIDA INC.1. Ans. D.

Tote bags actually distributed in 2014 19,000 Estimated premiums liability at the end of 2013, in tote bags (7,000) Estimated premiums liability at the end of 2014, in tote bags 5,000 Estimated premiums expense in 2014, in tote bags 17,000 Multiply by: Net expense per tote bag (P25 – P5) P20Estimated premiums expense in 2014 P340,000

2. Ans. C.The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset:Estimated premiums payable, 2014 (5,000 * P20) P100,000Multiply by tax rate: 30%Deferred tax asset (Noncurrent Asset) P30,000

The temporary difference from excess tax depreciation over financial depreciation is future taxable amount

Deferred tax liability (Noncurrent Liability): P150,000*30% P45,000

3. Ans. D.Accounts payable, as adjusted (P540,000 + P50,000) P590,000Estimated premiums payable, 2014 (5,000 * P20) 100,000Current liabilities P690,000

4. Ans. A.P5,500,0005,399,271P100,729

Present value of Principal: P8,000,000*0.680583 P3,402,916 Present value of Interest: 500,000*3,99271 1,996,355 Fair value of the bonds without the conv. Option P5,399,271

Amortization Table: Bonds PayableCorrect Int. Nominal Int. Amortization Balance


5. Ans. D. Carrying value of bonds up to 12/31/2015 5,257,710 APIC- Bond Conversion Priv. 100,729 Total Par Value of Shares (5,000*10*50) (2,500,000) Share Premium from conversion 2,858,439

6. Ans. B.Upon assumed retirement: 1/2016: Carrying value of bonds up to 12/31/2015 5,257,710 Fair value of bonds without the conversion option at 12% effective rate: Present value of principal: P5,000,000*0.711780 3,558,901 Present value of interest: 500,000*2.401831 1,200,916 4,759,817 Gain on retirement of bonds (profit or loss) 497,893

creating Deferred Tax Liability:

Upon assumed conversion: 1/2016:

Proceeds from bond issuance (the amount credited per entry made)Fair value of bonds without the conversion option (at 8% effective rate)*Equity component/ APIC from Bond Conversion Privilege




CHAPTER 8-EXERCISE 11: Ans. C.

Case 1:a. The obligating event is the damages occurring in 2014, thus is present obligation.b. The outflow of economic benefits is probable.c. The amount of liability is reliably measurable given a range of amounts without best estimate.Thus, accrue obligation at the mid-range (P500,000+P1,500,000)/2 = P1,000,000.

Case 2:a. The obligating event is the guarantee agreement completed in 2014, thus is present obligation.b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event.c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.Thus, accrue obligation at best estimate P2,000,000.

Case 3:a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there are no claims yet.b. The outflow of economic benefit is probable.c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However, since there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over the portion to be reimbursed by the insurance company.Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company will be reimbursing the company for anything in excess of the deductible clause.

Case 4:a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no present obligation yet. Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event.

CHAPTER 8-EXERCISE 12: LABANDERA INC.1. Ans. B.

Class A Laundry appliance sales (280,000,000*60%) P168,000,000Divide by P50Number of coupons distributed 3,360,000Multiply by: probable redemption 60%Coupons that will probably be redeemed 2,016,000Divide by: number of coupons to acquire 1 premium 400Estimated number of premiums to be redeemed 5,040Number of premiums actually redeemed (1,680,000/400) (4,200) Liability for premiums in units 840Liability for premium in peso (840*4,100) 3,444,000

2. Ans. D.Class B Laundry appliance sales (280,000,000*40%) P112,000,000Multiply by: Estimated warranty cost as % of sales 3%Estimated warranty expense for 2014 P3,360,000

3. Ans. C.; 4. Ans. A.; 5. Ans. A.Unadjusted net income 80,164,000Adjustment for additional premium expense (3,444,000) Adjustment for additional warranties expense (1,720,000) Adjusted net income 75,000,000Less: Bonus (2,480,916) Income tax (35%) (25,381,679) Net income 47,137,405

Bonus = 5% (75,000,000 – 35%(75,000,000 – B)) Tax = 35% (75,000,000 -2,480,916)B = 5% (48,750,000 + .35B) T = 25,381,679B = 2,437,500 + .0175B0.9825B = 2,437,500B = 2,480,916

CHAPTER 8-EXERCISE 13: LUZON COMPANY1. Ans. B.

Estimated warranty expense (30,000u*60%*P1,500) 27,000,000 Actual cost incurred (19,500,000) Estimated warranties payable 7,500,000

2. Ans. D.a. The obligating event is the environmental damages occuring in 2014, thus is present obligation.b. The outflow of future economic benefits is probable.c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event)




3. Ans. B.PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776) 3,683,821 4.604776 Fair market value of leased asset at inception: 4,000,000

92% More than 90%, thus FinanceAmortization table: Periodic paymt Interest Exp. Principal BalancePresent value of MLP 3,683,821 January 1, 2012: 800,000 800,000 2,883,821 January 1, 2013: 800,000 346,059 453,941 2,429,879 January 1, 2014: 800,000 291,586 508,414 1,921,465 Liab balanceJanaury 1, 2015: 800,000 230,576 569,424 1,352,041

Accrued interest4. Ans. B.

PV of MLP, Jan. 1, 2012 (Asset capitalized) 3,683,821 Multiply by condition percent (over term), Dec. 31, 2014: 3/6Carrying value of leased asset, Dec. 31, 2014 1,841,910

5. Ans. A.Allocation of issue price on January 1, 2014:Total issue price 4,250,000 FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods: Principal: P4,000,000*0.7049605 2,819,842 0.7049605 Interest: P200,000*4.9173243 983,465 3,803,307 4.9173243 Residual amount allocated to APIC-Bond conversion privilege 446,693

Amortization table: Bonds payableCorrect Int. Nominal Int. Amortization Balance

January 1, 2014: 3,803,307 June 30, 2014: 228,198 200,000 28,198 3,831,505 December 31, 2014: 229,890 200,000 29,890 3,861,396

Carrying value of converted bonds, Dec. 31, 2014 (P3,861,396*3/4) 2,896,047 Carrying value of APIC-Bond conversion privilege (P446,693*3/4) 335,020 Less: Par value of issuable shares: (50,000sh*3/4)*P50 (1,875,000) Share premium/APIC 1,356,067

CHAPTER 8-EXERCISE 14: MNO INC.1. Ans. B.

Proceeds from issuance of convertible bonds 5,500,000FMV of bonds w/out conv. option at 5% for 10 semi-annual periods: PV of Principal: P5,000,000*0.613913 3,069,566 PV of Interest: 300,000*7.721734 2,316,520 5,386,086Equity portion (APIC -Bond Conv. Priv.) 113,914

2. Ans. C. Total Bonds @ FV* APIC@Residual

Retirement Price 2,500,000 2,365,267 134,733 Carrying Value** (5,289,319*50%); (113,914*50%) 2,644,659 56,957 P&L Loss/ Cap. Gain (279,392) 77,776

profit/loss APIC/Share premium

*FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods. PV of Principal 2,500,000*0.62275 1,556,874 PV of Interest: 150,000*5.389289 808,393 Fair value of bonds w/out conv. priv 2,365,267

Amortization Table: Bonds Payable Correct Nominal Amortization BalanceJune 30, 2013: 5,386,087December 31, 2013: 269,304 300,000 (30,696) 5,355,391June 30, 2014: 267,770 300,000 (32,230) 5,323,161December 31, 2014: 266,158 300,000 (33,842) 5,289,319 **

3. Ans .C.Interest from Bonds Payable from 1/1 - 6/30 (see amortiz.) 267,770 from 7/1 - 12/31 (see amortiz.) 266,158 533,928Interest from Notes Payable from 1/1 - 8/31 (2.5M*10%*8/12) 166,667 from 9/1 - 12/31 (2M*10%*4/12) 66,667 233,333Total interest expense 767,261

4. Ans. B.Fin. Inc. after permanent diff 1,000,000FDAAB for the period 100,000FTALE for the period (500,000) Taxable income 600,000Mulitply by tax rate 40%Current Tax Expense 240,000




5. Ans. D.Cum. Temp Diff (FTALE) 1,550,000Multiply tax rate 40%Deferred Tax Liability 620,000

6. Ans. D.Bonds Payable (half - see amor.) 2,644,659Notes payable - long term 1,500,000Deferred tax liabilty 620,000Total noncurrent liability 4,764,659

CHAPTER 8-EXERCISE 15: KURT CORP.1. Ans. C.

Proceeds from issuance (at face value) 4,000,000 Fair value of bonds at effective rate 9% for 3 periods PV of Principal: P4,000,000*0.772183 3,088,734 PV of Interest: 240,000*2.531295 607,511 3,696,245 Equity component/APIC-Bond Conversion 303,755

2. Ans. D.Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance

January 1, 2014: (Princ.*6%) (CV*9%) 3,696,245 December 31, 2014: 332,662 240,000 92,662 3,788,907 December 31, 2015: 341,002 240,000 101,002 3,889,908 December 31, 2016: 350,092 240,000 110,092 4,000,000 53. Ans. D.

3. Ans. B.Bonds Payable, CV at 1/1/2016 (see amortization table) 3,889,908APIC-Bonds Conversion Privilege 303,755 Total 4,193,663Multiply by exercise rate: (3,000/4,000) 3/4Prorated CV of BP and APIC-Bond Conv. Priv. 3,145,247 Less:Par value of issuable shares (3,000*40) *P10 (1,200,000) Share premium from assumed conversion 1,945,247

4. Ans. A.Proceeds from issuance (at face value, net of transaction cost) P3,848,531 Fair value of bonds at effective rate 9% for 3 periods PV of Principal: P4,000,000*0.741162 2,964,648 PV of Interest: P240,000*2.465123 591,630 3,556,278 Equity component/APIC-Bond Conversion P292,253

5. Ans. B. Total Bonds @ FV* APIC (Res. Val.)

Retirement Price P4,000,000 3,889,908 110,092Carrying Value 3,837,104 292,253P&L Loss/ Cap. Gain 52,804 (182,161)

retirement loss capital gain *FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period. PV of Principal 4,000,000*0.917431 P3,669,725 PV of Interest: 240,000*0.917431 220,183 Fair value of bonds w/out conv. priv P3,889,908

Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance January 1, 2014: 3,556,278

December 31, 2014: 373,409 240,000 133,409 3,689,687 December 31, 2015: 387,417 240,000 147,417 3,837,104 December 31, 2016: 402,896 240,000 162,896 4,000,000

CHAPTER 8-EXERCISE 16: TRY CORP.Reconciliation:

Net income before any differences 10,000,000 Permanent Differences: Nondeductible expenses: Life insurance expense 300,000 Nontaxable income: Dividend income (500,000) Net income after permanent differences 9,800,000 Temporary Differences:Future Deductible amounts Estimated litigation loss 600,000 Unearned retnal income 300,000 900,000 Future Taxable Amounts Installment receivable 1,200,000 (1,200,000) Taxable income 9,500,000

1. Ans. A.Net income after permanent differences 9,800,000 Multiply by: Constant tax rate 33%Total tax expense 3,234,000

2. Ans. C.Taxable income 9,500,000 Mulitply by: Current tax rate 33%




Current tax expense 3,135,000

3. Ans. A.Future deductible amounts 900,000 Mulitply by: Constant tax rate 33%Deferred tax asset 297,000

4. Ans. B.Future taxable amounts 1,200,000 Mulitply by: Constant tax rate 33%Deferred tax liability 396,000

To reconcile:Current tax expense 3,135,000 Add: Deferred tax expense (FTA) 396,000 Less: Deferred tax benefit (FDA) (297,000) Total tax expense 3,234,000

5. Ans. B.Current tax expense; P9,500,000*33% 3,135,000 Add: Deferred tax expense (FTA): P1,200,000*35% 420,000 Less: Deferred tax benefit (FDA): P900,000*35% (315,000) Total tax expense 3,240,000

CHAPTER 8-EXERCISE 17: COSINE CORP.Reconciliation:

Net income before any differences 12,000,000 Permanent Differences: Nondeductible expenses: Life insurance expense 400,000 Nontaxable income: Dividend income (1,200,000) Net income after permanent differences 11,200,000 Temporary Differences:Future Deductible amounts Warranty provision 600,000 600,000 Future Taxable Amounts Prepaid advertising 500,000 Excess tax depr. over finanicial depr. 400,000 (900,000) Taxable income 10,900,000

1. Ans. B.Taxable income 10,900,000 Mulitply by: Current tax rate 32%Current tax expense 3,488,000

2. Ans. A.Future deductible amounts 600,000 Mulitply by: Constant tax rate 33%Deferred tax asset 198,000

3. Ans. D.Future taxable amounts 900,000 Mulitply by: Constant tax rate 33%Deferred tax liability 297,000

4. Ans. D.To reconcile:

Current tax expense 3,488,000 Add: Deferred tax expense (FTA) 297,000 Less: Deferred tax benefit (FDA) (198,000) Total tax expense 3,587,000

CHAPTER 8-EXERCISE 18: BONCHON CORP.Service costs Current service cost 160,000 Net interest (income)expense Interest on ABO (P3,000,000*6%) 180,000 Interset on PA (P2,800,000*6%) (168,000) 12,000 Pension expense (Profit or loss) 172,000 2. Ans. B.

Net remeasurement gain/loss (Other comprehensive Income/loss)Actuarial gain on PA (a) (106,000) Actuarial loss on ABO (b) 442,000 336,000 3. Ans. C.

Total pension expense 508,000 1. Ans. D.




(a) Actuarial gain/loss on Plan assetPlan asset, beginning balance 2,800,000 Add: Contribution for the year 210,000 Interest on PA (P2,800,000*6%) 168,000 Less: Settlements at scheduled retirement (300,000) Balance 2,878,000 Plan asset, at FMV at the year-end 2,984,000 Actuarial gain on plan asset 106,000

(b) Actuarial gain/loss on Accumulated Benefit ObligationABO, beginning balance 3,000,000 Add: Current service cost 160,000 Interest on ABO (P3,000,000*6%) 180,000 Less: Benefits settled, at scheduled ret. (300,000) Balance 3,040,000 ABO, present value, ending balance 3,482,000 Actuarial loss on AB0 442,000

4. Ans. B.To reconcile:Accrued pension, beg 200,000 Pension expense (total) 508,000 Total 708,000 Contribution to the plan for the year (210,000) Accrued pension, end 498,000

ABO, end 3,482,000 Plan asset, end (2,984,000) Accrued pension end 498,000

CHAPTER 8-EXERCISE 19: DEE CORP.Service costs Current service cost 1,400,000 Settlement gain: Settlement price other ben. settled 400,000 PV of other benefits settled (500,000) (100,000) 1,300,000 Net interest (income)expense Interest on ABO (P7,500,000*10%) 750,000 Interset on PA (P7,000,000*10%) (700,000) 50,000 Pension expense (Profit or loss) 1,350,000 2. Ans. A.

Net remeasurement gain/loss (Other comprehensive Income/loss)Actuarial gain on PA Actual return on plan asset 840,000 Estimated return (Interest on PA) (700,000) (140,000) Actuarial gain on ABO (200,000) (340,000) 3. Ans. D.

Total pension expense 1,010,000 1. Ans. D.

4. Ans. B.Plan asset, beginning balance 7,000,000 Add: Contribution for the year 1,200,000 Interset on PA (P7,000,000*10%) 700,000 Less: Settlements at scheduled retirement (1,500,000) Settlement price of addl ben. Settled (400,000) Balance 7,000,000 Less: Actuarial gain on PA 140,000 Plan asset, FMV, end 7,140,000

5. Ans. A.ABO, beginning balance 7,500,000 Add: Current service cost 1,400,000 Interest on ABO (P7,500,000*10%) 750,000 Less: Benefits settled, at scheduled ret. (1,500,000) PV of additional benefits settled (500,000) Balance 7,650,000 Add: Actuarial gain on ABO (200,000) ABO, present value, end 7,450,000

4. Ans. B.Plan asset at fair value, end 7,140,000 ABO at present value, end 7,450,000 Accrued pension expense, end (310,000)

To reconcile:Prepaid pension, beg 500,000 Pension expense (total) 1,010,000 Total 1,510,000 Contribution to the plan for the year (1,200,000) Accrued pension, end 310,000



CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY



1 A2 D3 D4 B5 C6 B

CHAPTER 9-PROBLEM 2: SB CORP.Correct entries to record transactions in 2013:(a) Cash (50,000*P150) 7,500,000

Ordinary shares (50,000*P100) 5,000,000 Share premium-OS 2,500,000

(b) Building 1,200,000 Preference shares (20,000*P50) 1,000,000 Share premium-PS 200,000

(c) Income summary 5,540,000 Retained earnings 5,540,000

Correct entries to record transactions in 2014:(a) Treasury shares (20,000*P160) 3,200,000

Cash 3,200,000

(b) Cash 2,800,000 Ordinary shares (10,000*P100) 1,000,000 *Allocation: FMV (total) Rato Amount Allocated Share premium-OS (P1,960,000-P1,000,000) 960,000 Ordinary 1,750,000 70% 1,960,000 Preference shares (10,000*P50) 500,000 Preference 750,000 30% 840,000 Share premium-PS (P840,000-P500,000) 340,000 Total 2,500,000 2,800,000

(c) Cash, net (5,000*P85)-P25,000 400,000 Preference shares (5,000*P50) 250,000 Share premium-PS 150,000

(d) Cash 5,000,000 Bonds payable 2,000,000 *Allocation: Amount Allocated Premium on bonds payable (P2,200,000-P2,000,000) 200,000 Bonds pay. @ Fair value 2,200,000 Ordinary shares (15,000*P100) 1,500,000 Ordinary @ Residual 2,800,000 Share premium-OS (P2,800,000-P1,500,000) 1,300,000 5,000,000

(e) Cash (8,000*P185) 1,480,000 Treasury shares (8,000*P160) 1,280,000 Share premium-TST 200,000

(f) Ordinary shares (7,000*P100) 700,000 Share premium-OS (7,000*P50) 350,000 *share premium from original issuance (P150-P100)Share premium-TST 70,000 Treasury shares (7,000*160) 1,120,000

(g) Income summary 4,530,000 Retained earnings 4,530,000

(h) Retained earnings 800,000 Retained earnings appropriated for Treasury 800,000

SummaryOrdinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS Sh. Prem-TST RE-unapp RE-app TS

(a) Ordinary share issuance in 2013 5,000,000 2,500,000 (b) Preference share issuance in 2013 1,000,000 200,000 (c) Net income in 2013 5,540,000 (a) Treasury shares reacquired in 2014 (3,200,000) (b) Ordinary and Preference shares issue 1,000,000 500,000 960,000 340,000 (c) Preference shares issuance in 2014 250,000 150,000 (d) Ordinary shares issued with Bonds 1,500,000 1,300,000 (e) Treasury shares reissuance in 2014 200,000 1,280,000 (f) Treasury shares retirement in 2014 (700,000) (350,000) (70,000) 1,120,000 (g) Net income in 2014 4,530,000 (h) Appropriation for treasury (800,000) 800,000 Adjusted 12/31/14 balances 6,800,000 1,750,000 4,410,000 690,000 130,000 9,270,000 800,000 (800,000)

1. Ans. 2. Ans. 3. Ans. 4. Ans. 7. Ans.

Share capital: Ordinary Shares 6,800,000 Preference Shares 1,750,000 8,550,000 Additional paid-in capital: Share premium-OS 4,410,000 Share premium-PS 690,000 Share premium-TST 130,000 5,230,000 5. Ans.Total Contributed Capital 13,780,000 6. Ans. Retained earnings - appropriated 800,000 Retained earnings - unappropriated 9,270,000 Treasury shares at cost (800,000) Total Stockholders' Equity 23,050,000 8. Ans.




CHAPTER 9-PROBLEM 3: GLORIETTA INC.Correct entries to record transactions in 2013:(a) Land 1,400,000

Ordinary shares (100,000*P10) 1,000,000 Share premium-OS 400,000

(b) Cash (50,000*P50) 2,500,000 Preference shares (50,000*P20) 1,000,000 Share premium-PS 1,500,000

(c) Income summary 540,000 Retained earnings 540,000

Correct entries to record transaction in 2014:(a) Preference shares (20,000*P20) 400,000

Share premium-PS (20,000*P30) 600,000 *Share premium from the original issuance of preference shares in 2013 Ordinary shares (80,000*P10) 800,000 Share premium-OS 200,000

(b) Building (@fair value) 1,200,000 *Allocation: Ordinary shares (25,000*P10) 250,000 Ordinary @Fair value (25,000*P25) 625,000 Share premium-OS (P625,000-P250,000) 375,000 Preference @Residual amount 575,000 Preference shares (20,000*P20) 400,000 Fair value of Building 1,200,000 Share premium-PS (P575,000-P400,000) 175,000 Note that the Building's fair value was more clearly determinable that the

fair value of the securities issued, since while the fair value of ordinary shares(c) Cash, net (5,000*52)-P12,000 248,000 were determinable at P25, the fair value of preference shares is not clearly

Preference shares (5,000*P20) 100,000 determinable since it is highly speculative or volatile. Share premium-PS 148,000

(d) Treasury shares (10,000*P22) 220,000 Cash 220,000

(e) Cash (2,000*P20) 40,000 Retained earnings 4,000 Treasury shares (2,000*P22) 44,000

(f) Ordinary shares (5,000*P10) 50,000 Share premium-OS 20,000 *Share premium from original issuance computed as:Retained earnings 40,000 (P400,000/100,000)*5,000 Treasury shares (5,000*P22) 110,000

(g) Income summary 830,000 Retained earnings 830,000

(h) Retained earinings 66,000 Retained earinings appropriated for Treasury 66,000

SummaryOrdinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS RE-unapp RE-app TS

(a) Ordinary share issuance in 2013 1,000,000 400,000 (b) Preference share issuance in 2013 1,000,000 1,500,000 (c) Net income in 2013 540,000 (a) Conversion of PS to OS in 2014 800,000 (400,000) 200,000 (600,000) (b) Ordinary and Preference shares issue 250,000 400,000 375,000 175,000 (c) Preference shares issuance in 2014 100,000 148,000 (d) Reacquisition of Treasury (220,000) (e) Treasury shares reissuance in 2014 (4,000) 44,000 (f) Treasury shares retirement in 2014 (50,000) (20,000) (40,000) 110,000 (g) Net income in 2014 830,000 (h) Appropriation for treasury (66,000) 66,000 Adjusted 12/31/14 balances 2,000,000 1,100,000 955,000 1,223,000 1,260,000 66,000 (66,000)


Share capital: Ordinary Shares 2,000,000 Preference Shares 1,100,000 3,100,000 Additional paid-in capital: Share premium-OS 955,000 Share premium-PS 1,223,000 2,178,000 5. Ans.Total Contributed Capital 5,278,000 6. Ans. Retained earnings - appropriated 66,000 Retained earnings - unappropriated 1,260,000 Treasury shares at cost (66,000) Total Stockholders' Equity 6,538,000 8. Ans.

CHAPTER 9-PROBLEM 4: BULACAN CO.Correct entries:1. Ans. P450,000.(a) Cash 5,700,000

Bonds payable 5,000,000 Premium on bonds payabe 250,000 Ordinary share warrants outstanding 450,000

(b) Cash (4,000sh*P70) 280,000 Accumulated profits 20,000 Treasury shares (4,000sh*P75) 300,000




Ordinary shares (1,000*P50) 50,000 Share premium-OS (P250K/50Ksh)*1K 5,000 Accumulated profits 20,000 Treasury shares (1,000sh*P75) 75,000

(c) Memo: 49,000share rights were issued to 49,000 shares outstanding.

2. Ans. P276,000.(d) Cash (5,000*60%)/5w*P60 36,000

Ordinary share warrants (P450K*60%) 270,000 Ordinary shares (600sh*P50) 30,000 Share premium-OS 276,000

3. Ans. P45,000.(e) Cash (40,000/10)*P55 220,000

Ordinary shares (4,000*P50) 200,000 Share premium-OS 20,000

(f) Income summary 1,250,000 Accumulated profits 1,250,000

Summary:Prefence Sh Ordinary Sh APIC/Sh Prem. Accum. Prof. Treasury Total

Balances, January 1, 1,000,000 2,500,000 500,000 2450000 (375,000) 6,075,000 (a) Warrants issuance 450,000 450,000 (b) Treasury reissue (20,000) 300,000 280,000 Tresaury retirement (50,000) (5,000) (20,000) 75,000 - (c) Share rights issue (memo entry) - (d) Warrants exercise 30,000 6,000 36,000 (e) Rights exercise 200,000 20,000 220,000 (f) net Income 1,250,000 1,250,000 Balances, December 31, 1,000,000 2,680,000 971,000 3,660,000 - 8,311,000

4. Ans. 5. Ans. 6. Ans.

CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES.(a) Entry made:

Cash 130,000 Treasury shares 130,000

Correct entry:Cash 130,000 Share premium-TST 65,000 Treasury shares (P363,000/605)*325 195,000

1. Ans. Adjusting entry:Share premium-TST 65,000 Treasury shares 65,000

(b) Entry made:Cash 650,000 Preference shares (6,000sh*50) 300,000 Share premium-PS 350,000

Correct entry: Cash 650,000 Allocation: Prorata Preference shares 300,000 Pref. Sh. (6Ksh*P80) 480,000 80% Share premium-PS (P650K*80%)-PAR 220,000 Warrants (12Kw*P10) 120,000 20% Ordinary share warrants outstanding (P650K*20%) 130,000 600,000

2. Ans. Adjusting entry:Share premium-PS 130,000 Ordinary share warrants outstanding 130,000

(c) Entry made:Cash (700sh*P440)*40% 123,200 Subscription receivable 184,800 Orinary shares subscribed 308,000

Correct entry:Cash (700sh*P440)*40% 123,200 Subscription receivable 184,800 Ordinary shares subscribed (700sh*P20) 14,000 Share premium-OS 294,000

3. Ans. Adjsuting entry:Ordinary shares subscribed 294,000 Share premium-OS 294,000

(d) Entry made:Cash 158,400 Subscriptions receivable 158,400

Correct entry:Cash 158,400 Subscriptions receivable 158,400

Ordinary shares subscribed (600sh*P20) 12,000 Ordinary shares 12,000

4. Ans. Adjusting entry:Ordinary shares subscribed 12,000 Ordinary shares 12,000

(e) Entry made:




Cash (4,000*2sh*P400) 3,200,000 Ordinary shares 3,200,000

Correct entry:Cash 3,200,000 Ordinary share warrants (P130K*4/12) 43,333 Ordinary shares (4,000*2sh*P20) 160,000 Share premium-OS 3,083,333

5. Ans. Adjusting entry:Ordinary shares 3,040,000 Ordinary share warrants outstanding 43,333 Share premium-OS 3,083,333

6. Ans.(f) Correct entry/Adjusting entry

Cash (P184,800-P158,400)+P5,000 31,400 Miscellaneous expense 5,000 Subscription receivable 26,400

Ordinary shares subscribed 2,000 Ordinary shares (100*P20) 2,000

CHAPTER 9-PROBLEM 6: PUNK INC.1. Ans. P83,333.

FMV of options (100emp*100opt)*P25 250,000 Entry:Divide by: Vesting period 3 Salaries expense 83,333 Salaries expense, 2014 83,333 Ordinary share options outstanding 83,333

2. Ans. P58,333.Revised FMV of options (85emp*100opt)*P25 212,500 Multiply by: 2years/3 years 2/3Cummulative salaries expense as of Dec. 31, 2015 141,667 Entry:Less: Prior year's salaries expense (83,333) Salaries expense 58,333 Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333

3. Ans. P33,333.Final FMV of options (70emp*100opt)*P25 175,000 Entry:Less: Prior years' cummulative salaries expense (141,667) Salaries expense 33,333 Salaries expense, 2016 33,333 Ordinary share options outstanding 33,333

4. Ans. P210,000.Entry upon exercise of all options:Cash (7,000sh*P25) 175,000 Ordinary share options oustanding 175,000 Ordinary shares (7,000sh*P20) 140,000 Share premium 210,000

CHAPTER 9-PROBLEM 7: PUNK INC.1. Ans. P66,667.

Estimated FMV of options (100-20emp)*100opt*P25 200,000 Entry:Divide by: Vesting period 3 Salaries expense 66,667 Salaries expense, 2014 66,667 Ordinary share options outstanding 66,667

2. Ans. P58,333.Revised FMV of options (100-25emp)*100opt*P25 187,500 Multiply by: 2years/3 years 2/3Cummulative salaries expense as of Dec. 31, 2015 125,000 Entry:Less: Prior year's salaries expense (66,667) Salaries expense 58,333 Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333

3. Ans. P50,000.Final FMV of options (70emp*100opt)*P25 175,000 Entry:Less: Prior years' cummulative salaries expense (125,000) Salaries expense 50,000 Salaries expense, 2016 50,000 Ordinary share options outstanding 50,000

4. Ans. P50,000.Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market based- condition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the services were received, thus, salaries expense shall be recognized. Entry: Salaries expense 50,000 Ordinary share options outstanding 50,000

Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity.Entry: Ordinary share options outstanding 175,000 Retained earnings/APIC-Unexercised options 175,000

5. Ans. P120,833.Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 years.Final FMV of options, Dec. 2015 (75emp*100opt)*P25 187,500 Less: Prior years' cummulative salaries expense (66,667) Salaries expense, 2015 120,833

CHAPTER 9-PROBLEM 8 : PUNK INC.1. Ans. P62,500.

Dec. 31, 2014: Is the non-market based condition achievable?Actual sales, 2014 75,000,000 Multiply by: 120% estimated increase 120%Projected sales, 2015 90,000,000 Multiply by: 120% estimated increase 120%Projected sales, 2016 108,000,000




Minimum required sales 100,000,000 Thus, achievable. Note that the estimated sales in 2016 is P108M, thus the estimated number of options per employee shall be 100.

Est. FMV of options vested (100-25emp)*100opt.*P25 187,500 Entry:Divide by: Vesting period 3 Salaries expense 62,500 Salaries expense, 2014 62,500 Ordinary share options outstanding 62,500

2. Ans. P137,500.Dec. 31, 2015: Is the non-market based condition achievable?Actual sales, 2015 110,000,000 Multiply by: 120% estimated increase 120%Projected sales, 2016 132,000,000 Minimum required sales 100,000,000 Thus, achievable. Note that the estimated sales in 2016 is P132M, thus the estimated number of options per employee shall be 150.

Revised FMV of options (100-20emp)*150opt*P25 300,000 Multiply by: 2years/3 years 2/3Cummulative salaries expense as of Dec. 31, 2015 200,000 Entry:Less: Prior year's salaries expense (62,500) Salaries expense 137,500 Salaries expense, 2015 137,500 Ordinary share options outstanding 137,500

3. Ans. P220,000.Dec. 31, 2016: Has the non-market based condition been achieved?Actual sales, 2016 150,000,000 Minimum required sales 100,000,000 Thus, achieved, therefore options are exercisable. Note that the actual sales in 2016 is P150M, thus the final number of options per employee shall be 200.

Final FMV of options (100-16emp)*200opt*P25 420,000 Entry:Less: Prior years' cummulative salaries expense (200,000) Salaries expense 220,000 Salaries expense, 2016 220,000 Ordinary share options outstanding 220,000

4. Ans. P504,000.Entry upon exercise of all options:Cash (16,800sh*P25) 420,000 Ordinary share options outstanding 420,000 Ordinary shares (16,800sh*P20) 336,000 Share premium 504,000

CHAPTER 9-PROBLEM 9 : PUNK INC.1. Ans. P100,000.

Dec. 31, 2014: Has the non-market based condition been achieved at the end of 2014? Actual increase in sales, 2014 (P81M-75M)/75M 8%Minimum required increase in sales, 2014 10% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?Estimated average increase in sales in 2014 and 2015: (8%+16%)/2 12%Minimum required average increase in sales (2014 -2015) 12% Thus, achievable, VP is 2 years.

Est. FMV of options vested (10-2emp)*1,000opt.*P25 200,000 Entry:Divide by: Vesting period 2 Salaries expense 100,000 Salaries expense, 2014 100,000 Ordinary share options outstanding 100,000

2. Ans. P33,333.Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015? Actual increase in sales, 2014 (P81M-75M)/75M 8%Actual inrease in sales, 2015 (P92.23M-81M)/81M 14%Actual average increase in sales (2014 and 2015) 11%Minimum required average increase in sales (2014 - 2015) 12% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?Estimated average increase in sales in 2014 and 2015: (8%+14%+20%)/3 14%Minimum required average increase in sales (2014 - 2016) 14% Thus, achievable, VP is 3 years.

Revised FMV of options (10-2emp)*1,000opt*P25 200,000 Multiply by: 2years/3 years 2/3Cummulative salaries expense as of Dec. 31, 2015 133,333 Entry:Less: Prior year's salaries expense (100,000) Salaries expense 33,333 Salaries expense, 2015 33,333 Ordinary share options outstanding 33,333

3. Ans. P41,667.Dec. 31, 2016: Has the non-market based condition been achieved?Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M 20%Actual average increase in sales (2014-2016) (8%+14%+20%)/3 14%Minimum required average increase in sales (2014 - 2016) 14% Thus, the condition has bee achieved.

Options are exercisable.Final FMV of options (10-3emp)*1,000opt*P25 175,000 Entry:Less: Prior years' cummulative salaries expense (133,333) Salaries expense 41,667 Salaries expense, 2016 41,667 Ordinary share options outstanding 41,667




4. Ans. P210,000.Entry upon exercise of all options:Cash (7,000sh*P25) 175,000 Ordinary share options outstanding 175,000 Ordinary shares (7,000sh*P20) 140,000 Share premium 210,000

CHAPTER 9-PROBLEM 10 : MYX CO.1. Ans. P603,333.

End of 2014: Is the non-market based condition achievable?Projected 2016 sales: (P210M*120%*120%) 328,125,000 Minimum required 2016 sales 250,000,000 Achievable, number of SARs is 10,000.

Estimated FMV of SARS, 2014 (10,000sars*P74) 740,000 Entry:Divide by: Vesting period 3 Salaries expense 246,667 Salaries expense, 2014 246,667 SAR payable 246,667

End of 2015: Is the non-market based condition achievable?Projected 2016 sales: (P410M*120%) 640,625,000 Minimum required 2016 sales 250,000,000 Achievable, number of SARs is 15,000.

Estimated FMV of SARS, 2015 (15,000sars*P85) 1,275,000 Multiply by: 2years/3 years 2/3Cummulative salaries expense as of Dec. 31, 2015 850,000 Entry:Less: Prior year's salaries expense (246,667) Salaries expense 603,333 Salaries expense, 2015 603,333 SAR payable 603,333

2. Ans. P1,050,000.End of 2016: Has the non-market based condition been achieved?Actual 2016 sales 760,000,000 Minimum required 2016 sales 250,000,000 Achieved, number of SARs is 20,000.

Final FMV of SARS (20,000sars*P95) 1,900,000 Entry:Less: Prior years' cummulative salaries expense (850,000) Salaries expense 1,050,000 Salaries expense, 2016 1,050,000 SAR payable 1,050,000

3. Ans.Entry upon exercise in 2017 at prevailing FMV P98.SAR payable 1,900,000 Salaries expense 60,000 Cash (20,000sars*P98) 1,960,000

4. Ans. P1,800,000.SAR payable at prevaiing FMV (20,000sars*P90) 1,800,000 Entry to remeasure the SAR at the end of 2017:SAR payable 100,000 Salaries expense/Income from SAR reversal 100,000 (P95 - P90)*20,000SARS

CHAPTER 9-PROBLEM 11 : DARK COMPANY1. Ans.

Retained earnings (10%*90,000sh)*P14 126,000 Share dividends payable (9,000sh*P10) 90,000 Share premium 36,000

Share dividends payable 90,000 Ordinary shares 90,000

2. Ans.Retained earnings (25%*99,000sh)*P10 247,500 Share dividends payable (24,750sh*P10) 247,500


3. Ans. P1,337,500.Ordinary shares, beginning balance 1,000,000 10% share dividends (90,000sh*10%)*P10 90,000 25% share dividends (99,000sh*25%)*P10 247,500 Ordinary shares, ending balance 1,337,500

CHAPTER 9-PROBLEM 12 : CHRIS COMPANY1. Ans.

Retained earnings (10%*500,000)*P25 2,500,000 Stock dividends payable (50,000sh*P10) 500,000 Share premium 2,000,000

2. Ans.Stock dividends payable 500,000 Ordinary shares (46,000sh*P10) 460,000 Fractional warrants outstanding (4,000*P10) 40,000

3. Ans.Fractional warrants outstanding 36,000 Ordinary shares (3,600sh*P10) 36,000




4. Ans.Fractional warrants outstanding 4,000 Share premium - Expired fractional warrants 4,000

5. Ans. P1,099,200.Oustanding shares, beginning 500,000 Ordinary share dividends distributed 46,000 Shares issued from fractional warrants 3,600 Total outstanding shares 549,600 Multiply by: Cash dividends 2 Dividends from earnings 1,099,200

Entry:Retained earnings 1,099,200 Capital liquidated (549,600*P1) 549,600 Dividends payable 1,648,800 Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE.

CHAPTER 9-PROBLEM 13 : ABC INC.1. Ans. P900,000.

Declaration:Retained earnings 900,000 Property dividends payable 900,000

Noncurrent asset held for disposal 720,000 Accum. depr (P800,000*1/10) 80,000 Building (PPE) 800,000

2. Ans. P700,000.Balance sheet date: December 31, 2014Property dividends payable 200,000 Retained earnings 200,000 FMV at 12/31/14 700,000 Dividends payable, CV 900,000 Adjustment to RE (200,000)

Loss 20,000 Noncurrent asset held for disposal 20,000 FMV less cost to sell, NCAHFD 700,000 CV, upon reclass 720,000 Loss on remeasurement - P&L (20,000)

3. Ans. None.Note that the increase or decrease in the property dividends payable is charged to RE.

4. Ans. P100,000.Distribution:Retained earnings 100,000 Property dividends payable 100,000 Final FMV, 1/31/2015 800,000 Dividends payable, CV (FMV 12/2014) 700,000 Adjustment to RE 100,000

Property dividends payable 800,000 Noncurrent asset held for disposal 700,000 Gain on settlement of property dividends - P&L 100,000

CHAPTER 9-PROBLEM 14: JKL CORP.Correct entries:(a) Accumulated profits, beg 50,000

Cash 50,000 Preference shares (40,000*P1) 40,000 Ordinary shares (20,000*P0.50) 10,000 Total cash dividends 50,000

(b) Treasury shares (80,000/4,000= P20) 80,000 Cash 80,000

(c) Memo: Share split up 1 is to 2: 1. Ans. NO EFFECT.From 20,000 shares issued to 40,000 shares issued; From P5 par to P2.50 parFrom 4,000 treasury shares to 8,000 treasury shares; From P20 cost per treasury to P10 per treasury

(d) Equipment 50,000 Treasury shares (2,800*P10) 28,000 Share premium-TST 22,000

(e) Cash (10,000*P15) 150,000 Preference shares (10,000*P10) 100,000 Share premium-PS 50,000

(f) Accumulated profits (34,800*10%)*P6 20,880 2. Ans. Share dividends payable (3,480*P2.50) 8,700 Share premium-OS 12,180





(g) Accumulated profits 59,570 3. Ans. Cash dividends payable 59,570 Preference shares (50,000*P1) 50,000 Ordinary shares (38,280*P0.25) 9,570 Total cash dividends 59,570

(h) Income summary 940,000 Accumulated profits 940,000

-- Accumulated profits 52,000 Accumulated profits appropriated for treasury 52,000

Summary: Preference Sh Ordinary Sh Sh. Prem-PS Sh. Prem-OS Sh. Prem-TS Accum. P.-App Accum. Prof TreasuryJanuary 1, 2014 balances 400,000 100,000 192,000 1,200,000

(a) Retroactive adjustment, 2013 dividends (50,000) (b) Treasury shares reacquisition (80,000) (c) Share split - No Effect(d) Treasury shares reissue 22,000 28,000 (e) Preference shares issue 100,000 50,000 (f) 10% stock dividends 8,700 12,180 (20,880) (g) 2014 cash dividends (59,570) (h) 2014 net income 940,000 -- Appropriation for treasury 52,000 (52,000)

December 31, 2014 balances 500,000 108,700 50,000 204,180 22,000 52,000 1,957,550 (52,000) 4. Ans.

5. Ans.Accumulated profits 17,400 Share dividends payable 17,400 Computed as: (34,800*20%*P2.50)

CHAPTER 9-PROBLEM 15: TRUST CORPORATIONCASE 1:

Entries:a) Retained earnings 100,000

Accum Depr 100,000

b) Retained earnings 50,000 Inventories 50,000

c) Retained earnings 150,000 Accounts payable/Liabilities 150,000

d) Ordinary shares (P5*100,000sh) 500,000 Share premium 500,000

e) Share premium 550,000 Retained earnings 550,000

Assets Liabilities SHE Ordinary Sh. Share Prem. Ret. EarningsBalances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000) a) Write-down of PPE (100,000) (100,000) (100,000) b) Write-down of Inventory (50,000) (50,000) (50,000) c) Accrual of additional Liability 150,000 (150,000) (150,000) d) Recapitalization - (500,000) 500,000 e) Write-off of deficit - (550,000) 550,000 Balances, after quasi-reorganization 1,000,000 450,000 550,000 500,000 50,000 -

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

CASE 2:Entries:

a) PPE - Appraisal Increase 1,000,000 Repl. Cost 2,500,000 1,500,000 Cost Accum Depr - Appraisal Increase 400,000 Repl AD (1,000,000) (600,000) AD Revaluation surplus 600,000 Sound Value 1,500,000 900,000 Carrying Value

b) Retained earnings 75,000 Inventories 75,000

c) Retained earnings 175,000 Accounts payable/Liabilities 175,000

d) Revaluation surplus 500,000 Retained earnings 500,000

Assets Liabilities SHE Ordinary Sh. Share Prem. Rev. Surplus Ret. EarningsBalances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000) a) Write-down of PPE 600,000 600,000 600,000 b) Write-down of Inventory (75,000) (75,000) (75,000) c) Accrual of additional Liability 175,000 (175,000) (175,000) d) Write-off of deficit - (500,000) 500,000 Balances, after quasi-reorganization 1,675,000 475,000 1,200,000 1,000,000 100,000 100,000 -


CHAPTER 9-PROBLEM 16: SPURS INC.1. Ans. Dr. P150,000.

Debit to RE, per books 1,500,000 Debit to RE, per audit (15%*100,000sh)*P110 1,650,000 Adjustment to RE (additional debit) (150,000)




2. Ans. P9,100,000.Unadjusted Net Income, per books 9,000,000 Inventory fire loss (150,000) Impairment loss on PPE (750,000) Loss on sale of Equipment (200,000) Gain on retirement of bonds 300,000 Unrealized holding gain on FA 700,000 Increase in beg. Inventory under FIFO (100,000) Increase in end. Inventory under FIFO 300,000 Adjusted Net Income, per audit 9,100,000

3. Ans. P6,400,000.Retained earnings, beginning 7,800,000 Correction of prior period error (1,500,000) Change in policy (Ave to FIFO) 100,000 Retained earnings, beg. as restated 6,400,000

4. Ans. P10,650,000.Retained earnings, beg. as restated 6,400,000 15% stock dividend declaration (1,650,000) Loss on retirement of Treasury (P1,050,000-P850,000) (200,000) Reserve for plant expansion (3,000,000) Adjusted Net Income 9,100,000 Retained earnings, ending balance 10,650,000

5. Ans. P1,100,000.Excess over par on share dividends (P1,650,000-P1,500,000) 150,000 Loss on retirement of treasury (850,000) Excess over par on share issuance 1,000,000 Proceeds from sale of donated shares 800,000 Net/Total adjustment to Additional Paid-in Capital 1,100,000

MULTIPLE CHOICE EXERCISES:CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC.1. Ans. A.

Ordinary shares issued (40,000sh*P20) 800,000 Ordinary shares subscribed (5,000sh*P20) 100,000 Preference shares issued (6,000sh*P100) 600,000 Preference shares subscribed (900sh*P100) 90,000 Share premium from ordinar shares Issued 920,000 Subscribed (P56-P20)*5,000sh 180,000 1,100,000 Share premium from preference shares Issued 224,000 Subscribed (P140-P100)*900 36,000 260,000 Share premium from treasury shares 8,000 Ordinary share warrants outstanding 40,000 Total contributed capital 2,998,000

2. Ans. A.Revaluation surplus 240,000 Unrealized holding gain - AFS 6,000 Translation reserves (credit) 100,000 Unrealized capital/Other comprehensive income 346,000

3. Ans. B.Contributed capital 2,998,000 Accum. other comprehensive income 346,000 Accumulated profits 820,000 Stockholders' equity 4,164,000

CHAPTER 9-EXERCISE 2: ALPHA CORPORATION1. Ans. D.

900,000 Unissued ordinary shares (500,000) Ordinary shares issued P400,000

2. Ans. D.400,000

Unissued preference shares 100,000 Preference shares issued P300,000

3. Ans. C.460,000 112,000

4,000 Ordinary share warrants outstanding 20,000 Donated capital 25,000 Total Additional Paid-in Capital P621,000

4. Ans. D.Ordinary shares issued P400,000Preference shares issued 300,000

30,000 30,000

Total Additional Paid-in Capital 621,000 Total Contributed Capital P1,381,000

Preference shares subscribed, net of subs. receivable, 15,000

Ordinary shares subscribed, net of subs. receivable, 20,000

Authorized ordinary shares at P10 par value

Authorized preference shares at P50 par value

Additional paid-in capital on ordinary sharesAdditional paid-in capital on preference sharesAdditional paid in capital on sale of treasury shares




5. Ans. C.Ordinary shares issued P400,000Preference shares issued 300,000 Ordinary shares subscribed 50,000 Preference shares subscribed 45,000

P795,000

6. Ans. C.Total Contributed Capital 1,381,000 Accumulated other comprehensiveincome: Unrealized holding gain-AFS 3,000 Revaluation increment in properties 100,000 Accumulated profits: Accumulated profits – unappropriated 410,000 Reserve for bond sinking fund 220,000 Total Stockholder’s equity P2,114,000

CHAPTER 9-EXERCISE 3: TABUK CORPORATIONEntry Made

Cash 900,000 O.S. 300,000 P.S. 450,000 Retained earnings 150,000

Cash 225,000Other expense 37,500 Treasury Stock 262,500

O.S. 600,000 Treasury Stock 350,000 Retained Earnings 250,000

CHAPTER 9-EXERCISE 4: NEVADA SQUARE1. Ans. D.

Retained earnings, Jan. 1, 2014 P30,000,000Cash dividends (2,800,000) Stock dividends (100,000*P68) (a) (6,800,000) Property dividends (800,000/2)*P25 (b) (10,000,000) Net income for the year 60,000,000 Retained earnings, Dec. 31, 2014 P16,400,000

(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.

2. Ans. B.Ordinary shares, January 1, 2014 P14,000,000Stock dividends issuance (100,000*20) 2,000,000Ordinary shares, December 31, 2014 P16,000,000*share split is accounted through memo entry only, aggregate par value remains the same.

3. Ans. C.Share premium, January 1, 2014 P8,000,000Share premium from share dividends (6,800,000 – 2,000,000) 4,800,000Share Premium, December 31, 2014 P12,800,000

4. Ans. B.Preference shares P10,000,000Ordinary shares 16,000,000Share premium 12,800,000Retained earnings 16,400,000Retained earnings, Dec. 31, 2014 P55,200,000

CHAPTER 9-EXERCISE 5: MISAMIS INC.1. Ans. B.

Number of options estimated to vest (200opt*100emp) 20,000Multiply by Market value of Options 30Total Options Outstanding 600,000Multiply by (2012 & 2013) 2/3Total Accum. Comp. Exp. as of 12.31.2013 400,000

2. Ans. D.Proceeds from exercise of rights (60,000–5,000)/5*130 P1,430,000Par value of Ordinary shares issued (11,000*100) 1,100,000Share premium P330,000

2. Ans. D.

Share Prem. – OS 90,000Retained Earnings 250,000 Share Premium – TS 340,0003. Ans. C.

Cash 425,000 Subs Rec. 350,000 Retained earnings 75,000*books are already closed.4. Ans. A.

Adjusting Journal EntryRetained Earnings 150,000 Share Prem – PS 117,000 Share Prem – OS 33,0001. Ans. C.

Share Prem – OS 90,000 Treasury Stock 350,000 Share Prem – TS 340,000

Cash 225,000Share Prem – TS 37,500 Treasury Stock 262,500

O.S. 600,000

Share Prem. – TS 37,500 Retained Earnings 37,500*books are already closed.

Total Legal Capital (Par value of issued and subs.)

No entry

Correct EntryCash 900,000 O.S. 300,000 P.S. 450,000 Share Prem – PS 117,000 Share Prem – OS 33,000

Opex 50,000 Interest income 25,000

Cash 425,000 Subs Rec. 350,000




3. Ans. B.Share premium from ordinary shares P1,000,000 Share premium from exercise of warrants 575,000 Share premium from exercise of rights 330,000 P1,905,000Ordinary share options outstanding (20,000*30) 600,000Ordinary share warrants outstanding (750,000*50%) 375,000Total APIC P2,880,000

4. Ans. D.Accumulated profits, beginning P3,000,000Retroactive adjustment to retained earnings (400,000) Appropriation for dividends (71,000 * 5) (355,000) Net income, 2014 (2,500,000 – 200,000) 2,300,000Accumulated profits, end P4,545,000

CHAPTER 9-EXERCISE 6: SANTIAGO INC.1. Ans. B.The share options are under a variable option plan with a non-market based condition, thus:

2014:VP 1 year achieved if 2014 Rev>=15M; Actual 2014 Rev, P14.5M – not achieved.VP 2 years achievable if 2015 Rev>=18M; Estimated 2014 Rev, (P14.5M*125%) = 18.125M – achievable.Number of options: (68-8)*500 30,000Fair value of options on grant date P18Estimated value of services over 2 years P540,000Divide by: Vesting period 2 yearsSalaries expense, 2014 P270,000

2. Ans. D.2015:VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved.VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable.Number of options: (65-5)*500 30,000Fair value of options on grant date P18Estimated value of services over 3 years P540,000Multiply by: 2/3 2/3Accumulated salaries expense as of 2015 P360,000Less: Prior years’ salaries expense (270,000)Salaries expense, 2015 P90,000

3. Ans. C.2016:VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved.Final number of options: 63*500 31,500Fair value of options on grant date P18Final value of services over 3 years P567,000Multiply by: 3/3 3/3Accumulated salaries expense as of 2016 P567,000Less: Prior years’ salaries expense (360,000)Salaries expense, 2016 P207,000

4. Ans. A.Final number of options: 63*500 31,500Options exercised in 2017: 45*500 (22,500)Options forfeited in 2017 3*500 (1,500)Remaining options as of 12/31/17 7,500 Multiply by fair value on grant date P18Carrying value of options outstanding 12/31/17 P135,000

5. Ans. C.Entry upon exercise of 45*500 = 22,500 options:

Cash (22,500*P35) 787,500

405,000 Ordinary shares (22,500*P20) 450,000 Share premium 742,500

CHAPTER 9-EXERCISE 7: PANDORA CORP.1. Ans. B.The share options are under a variable option plan with a market based condition, thus the achievability of the condition is not a matter to consider in determining annual salaries expense:

2014:Number of options: (600-5-45)*100 55,000Fair value of options on grant date P5Estimated value of services over 3 years P275,000Divide by: Vesting period 3 yearsSalaries expense, 2014 91,667

2. Ans. A.; 3. ans. C.2015:Number of options: (600-5-20-35)*100 54,000Fair value of options on grant date P5Estimated value of services over 3 years P270,000Multiply by: 2/3 2/3Accumulated salaries expense as of 2015 P180,000Less: Prior years’ salaries expense (91,667)Salaries expense, 2015 P88,333

Ordinary share options outstanding (22,500*18)




4. Ans. A.2016:Final number of options: (600-5-20-30)*100 54,500Fair value of options on grant date P5Final value of services over 3 years P272,500Multiply by: 3/3 3/3Accumulated salaries expense as of 2016 P272,500Less: Prior years’ salaries expense (180,000)Salaries expense, 2016 P92,500

CHAPTER 9-EXERCISE 8: JUBEE CORP.1. Ans. B.The share options are under a variable option plan with a non-market based condition, thus:

2014:Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. 12% – achievable.Number of options: (100*80%)*200 16,000Fair value of options on grant date P40Estimated value of services over 3 years 640,000Divide by: Vesting period 3 yearsSalaries expense, 2014 P213,333

2. Ans. C.2015:Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable.Number of options: (100*85%)*300 25,500Fair value of options on grant date P40Estimated value of services over 3 years 1,020,000Multiply by: 2/3 2/3Accumulated salaries expense as of 2015 P680,000Less: Prior years’ salaries expense (213,333)Salaries expense, 2015 P466,667

3. Ans. D.2016:Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived.Final number of options: (100-14)*300 25,800Fair value of options on grant date P40Final value of services over 3 years P1,032,000Multiply by: 3/3 3/3Accumulated salaries expense as of 2016 P1,032,000Less: Prior years’ salaries expense (680,000.0)Salaries expense, 2016 P352,000

4. Ans. A.Entry upon exercise of 60% of the options (25,800*60% = 15,480 options):

Cash (15,480*P120) 1,857,600Ordinary share options outstanding (15,480*40) 619,200 Ordinary shares (15,480*P100) 1,548,000 Share premium 928,800

5. Ans. B.Entry upon expiration of 40% of the options (25,800*40% = 10,320 options):

Ordinary share options outstanding (10,320*40) 412,800 Share premium – Expired options 412,800

CHAPTER 9-EXERCISE 9: KALINGA CO.1. Ans. A.The share appreciation rights are under a variable plan with a non-market based condition, thus:

2014:Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable.Estimated number of SAR: (20-4)*10,000 160,000Estimated FMV of SAR at year-end P6Estimated value of services over 3 years P960,000Divide by: Vesting period 3 yearsSalaries expense, 2014 P320,000

2. Ans. D.2015:Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievableEstimated number of SAR: (20-4)*10,000 160,000Estimated FMV of SAR at year-end P6.75Estimated value of services over 3 years P1,080,000Multiply by: 2/3 2/3Accumulated salaries expense as of 2015 P720,000Less: Prior years’ salaries expense (320,000)Salaries expense, 2015 400,000

3. Ans. B; 4 Ans. D.2016:Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved.Final number of SAR 15*20,000 300,000Fair value of options on grant date P7Est. value of services over 3 years P2,100,000Multiply by: 3/3 3/3Accumulated salaries expense as of 2016 P2,100,000Less: Prior years’ salaries expense (720,000)Salaries expense, 2016 P1,380,000




CHAPTER 9-EXERCISE 10: SANS CORP.CORRECT ENTRIES:Land (1.8M*30%) 540,000Building (1.8M*70%) 1,260,000 Ordinary Shares 500,000 Share premium 1,300,000

Subsription receivable 420,000 Ordinary shares subscribed 200,000 Share premium 220,000

Treasury shares (5,000 sh) 125,000 Cash 125,000

Cash 252,000 Subscription receivable 252,000

Ordinary share subscribed 120,000 Ordinary shares 120,000

MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par 8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price 5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit Cash 40,000RE 22,500 Treasury shares (10,000*6.25) 62,500

2. Ans. C.Compensation expense 84,000 SAR Payable 84,000 (7*4,000*P15)/5years

3. Ans. C.RE 270,000 Cash Dividends Payable 270,000Shares Outstanding 238,000Shares Subscribed 32,000Total 270,000Multiply by cash div rate 1Total Cash dividends 270,000

Income Summary 1,500,000 RE 1,500,000

Summary OS OS-Subs Share Prem. RE TS TOTAL January 15, 500,000 1,300,000 March 1, 200,000 220,000 June 1, (125,000)July 15, 120,000 (120,000)September 2, (22,500) 62,500 December 30, (270,000)December 31, 1,500,000 Appropriation for TS (62,500)Adj. Balances 620,000 80,000 1,520,000 1,145,000 (62,500) 3,365,000

1. Ans. B. 4. Ans. C. 5. Ans. C 6. Ans. D.

CHAPTER 9-EXERCISE 11: ROXXY CORP.1. Ans. D.

Ordinary Sh. Sh Prem - OS Sh Prem- TS Treasury Shares# of Shares OutstandingPrior to 2013:A. Share issue for cash 3,800,000 7,980,000 380,000 B. Share issue for land 200,000 680,000 20,000 C. Share subsription/issue 400,000 1,280,000 40,000 D. Cash dividend declaration (Dec. 15, 2012) 440,000

2013 transactions:A. Cash dividend declaration (June 15, 2013) 440,000 B. Share issue for cash 80,000 288,000 8,000 C. Reacquisition of Treasury Shares 312,000 (8,000) D. Stock Dividend Declaration 220,000 924,000 22,000

462,000 2014 transaction:A. Reissue of TS 6,000 (78,000) 2,000 Balances: June 30, 2014 4,700,000 11,152,000 6,000 234,000 464,000

2. Ans. C.Share premium - OS 11,152,000 Share premium - Treasury-OS 6,000 Total Share premium 11,158,000

3. Ans C.Retained earnings, June 30, 2013 2,760,000 Net Income for 2014 fiscal year 160,000 Stock Dividends to OS (Dec. 2013) (440,00sh*5%*P52) (1,144,000) Cash Dividends to PS (Dec. 2013) (200,000*P1) (200,000) Voluntary approp. for sinking fund (200,000) Legal approp. for treasury shares (equal to cost) (234,000) Retained earnings, unappropriated June 30, 2014 1,142,000




4. Ans. A.Ordinary Shares 4,700,000 Preference Shares 5,000,000 Share Premium - OS 11,152,000 Share Premium - PS 3,800,000 Share Premium - Treasury (OS) 6,000 RE, appropriated 434,000 RE, unappropriated 1,142,000 Treasury Shares at cost (234,000) Total SHE, June 30, 2014 26,000,000

CHAPTER 9-EXERCISE 12: GLORIA CORPORATIONENTRIES:a) OS (30,000*5) 150,000 Share premium - OS 150,000 Treasury shares 270,000 Share premium - TST 30,000

1. Ans. C.b) RE (10,000*70) 700,000

700,000

RE (10,000*5) 50,000 Property dividends payable 50,000

2. Ans. A. Property dividends payable 750,000 Trading securities @CV 680,000 Gain/Income 70,000

Cash (840K/4)*11 2,310,000 OS (210K*5) 1,050,000 Share premium - OS 1,260,000

d) RE (100,000*2) 200,000 OSWO 200,000

Cash (80,000*8) 640,000 OSWO (200,000*80%) 160,000 OS (80,000*5) 400,000 Share premium - OS 400,000

e) RE (1.8M*10%) 180,000 Dividends payable 180,000

f) Available for sale securities 110,000 UHGain - OCI (SCI/SHE) 110,000

UHLoss - AFS 12/31/13 245,000UHLoss - AFS 12/31/14 (135,000)

Decrease in UHL or UHGain for the year 110,000

g) RE, beg 275,000 Income tax expense 225,000 Rent income 500,000

h) Income summary 2,600,000 RE 2,600,000

SUMMARYJanuary 1 balances 1,800,000 5,150,000 3,590,000 (245,000) 4,000,000 (270,000) a) Treasury shares retirement (150,000) (120,000) 270,000 b) Property dividends (750,000) c) Stock rights exerise 1,050,000 1,260,000 d) Options (prior period error) 200,000 (200,000) Options exercise 400,000 240,000 e) Cash dividends (180,000) f) UHGain - AFS for the year 110,000 g)Prior period error (275,000) h) Net Income for the year 2,600,000 December 31, balances 1,800,000 6,450,000 5,170,000 (135,000) 5,195,000 -

3. Ans. B. 4. Ans. B. 6. Ans. D.5. Ans. A; 7. Ans. C.

Preference share 1,800,000 Ordinary shares 6,450,000 APIC 5,170,000 Contributed Capital 13,420,000 Unrealized holding loss – SHE (135,000) Accumulated profits - Total 5,195,000 Total Stockholders’ Equity P18,480,000

UHLoss RE TS

Property dividends payable

c) Memo: 1M share rights were received; 1 OS: 4 SR plus P11

PS OS APIC




CHAPTER 9-EXERCISE 13: RAJA CORPORATIONOS Sh. Prem. RE-app RE-unapp TS TOTAL

Beginning balance 4,000,000 1,700,000 6,000,000 11,700,000 Jan. 5 100,000 60,000 160,000 Jan. 16 (164,000) (164,000) Feb. 20 (1,000,000) (1,000,000) Feb. 25 200,000 280,000 480,000 Mar. 1 1,140,000 (1,140,000) - Apr. 1 Split (no entry) - May. 30 200,000 500,000 700,000 Jul. 1 778,500 2,335,500 (3,114,000) - Aug. 1 (238,740) (238,740) Dec. 31 2,150,000 2,150,000 Appropriation for TS (500,000) 500,000 - Ending balance 6,218,500 4,575,500 2,993,260 500,000 (500,000) 13,787,260

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

CHAPTER 9-EXERCISE 14: APAYAO CORPORATIONASSETS

Cash and cash equivalents (325,000 + 75,000) 400,000 Accounts receivable (275,000 + 100,000) 375,000 Marketable securities, at FMV as of 12/31/06 (955,000 – 600,000) 355,000 Prepayments 50,000 1,180,000 1. Ans. B.

Land 900,000 Building (600,000 – 50,000) 550,000 Machinery and equipment (330,000 – 110,000) 220,000 1,670,000 TOTAL 2,850,000 5. Ans. A.

LIABILITIES AND CAPITALCurrent liab. (325,000+75,000+100,000+3,000–50,000–100,000) 353,000 2. Ans. BNon-current liabilities (250,000 + 50,000) 300,000 653,000

Ordinary shares, (50,000 – 5,000 + 4,000) * 25 1,225,000 Share premium (750,000 – 75,000 + 140,000) 815,000 Contributed capital 2,040,000 3. Ans. A.Reserve for self insurance 75,000 Reserve for treasury shares (50*5,000) 250,000 Accum.profits (625,000–3,000–100,000–140,000–50,000–250,000) 82,000 4. Ans. D.Treasury shares (50,000*5,000) (250,000) 2,197,000 TOTAL 2,850,000

CHAPTER 9-EXERCISE 15: WHISPER INC.#of Shares Ordinary Sh. RetainedOutstanding Issued APIC Earnings

May, 2012 balances 300,000 P3,000,000 P300,000Net income, 2012 P125,000July 23, 2013 share issue 500,000 5,000,000 1,250,000 October 2 stock dividends (800,000*5%) 40,000 400,000 40,000 (440,000) Net income, 2013 350,000 February, 2014 treasury stock (30,000) June, reissuance of treasury 15,000 45,000 October, issuance of stocks thru rights exercise (250,000*2) 500,000 5.000,000 1,500,000 November, issuance of stacks thru rights exercise (400,000*2) 800,000 8,000,000 2,400,000 December 15, cash dividends: (2,125,000*.30) (637,500) 1. Ans. C.December 31, retirement of TS (100,000) 10,000 Net income, 2014 800,000 Balances 2,125,000 P21,300,000 P5,545,000 P197,500

2. Ans. A. 3. Ans. C.4. Ans. A.

Ordinary shares issued P21,300,000Additional paid-in capital 5,545,000Retained earnings 197,500Treasury shares (5,000*9) (45,000) Total stockholders’ equity P26,997,500

CHAPTER 9-EXERCISE 16: GREY CO.1. Ans. A.

Contributed capital in excess of par value P18,000Donated capital (from stockholder) 15,000Recapitalization (reduction in par value) 1,500,000Additional paid in capital P1,533,000

2. Ans. D.; 3. Ans. A.2010 – 2013 Net income P2,400,000 2010 – 2013 Cash dividends (1,560,000)Correction of error (note 2) 6,000 Refund of prior year’s income tax 27,000 Net income, 2014 510,000 50% share dividend, 2014 (750,000)Retained earnings, total P633,000 Retained earnings, appropriated (60,000*4) 240,000 Retained earnings, unappropriated P393,000




CHAPTER 9-EXERCISE 17: SCURBS CORPORATIONADJUSTING JOURNAL ENTRIESa. Ordinary shares 180,000 h. PPE 36,000 Share premium 180,000 Retained earnings 36,000

b. Retained earnings 150,000 i. Retained earnings 3,300 Share dividends payable 150,000 Accumulated Depr. 3,300

c. Allowance for bad debt 30,000 j. Depreciation expense 3,300 Bad debt expense 30,000 Accumulated Depr 3,300

d. Marketable securities 9,000 k. Accumulated depr 52,500 Retained earnings 9,000 PPE 45,000

Gain on sale of PPE 7,500e. Unrealized loss (IS) 57,000 Marketable securities 57,000 l. Prepayment 2,700

Insurance expense 2,700f. Retained earnings 12,000 Retained earnings 5,400 Income summary 12,000

g. Income summary 18,300 Inventory, end 18,300

SUMMARY:1. Ans. A.

Total assets, 2014 unadjusted 2,545,200 (c) Decrease in allowance for bad debt 30,000 (d) Increase in value of marketable sec. in 2013 9,000 (e) Decrease in value of marketable sec. in 2014 (57,000) (g) Decreasein inventory, end 2014 (18,300) (h) Understatement in PPE in 2013 36,000 (i) Depreciation of PPE in item h, in 2013 (3,300) (j) Depreciation of PPE in tem h, in 2014 (3,300) (k) Correction error: PPE disposal in 2014 7,500 (l) Correcrion of error: prepayment 2,700 Total assets, 2014 adjusted 2,548,500

2. Ans. B.; 3. Ans. D.2013 2014

Unadjusted net income, 585,000 660,000 (c) Decrease in bad debts in 2014 30,000 (d) Increase in value of marketable sec. in 2013 9,000 (e) Decrease in value of marketable sec. in 2014 (57,000) (f) Overstatement in inventory, end 2013 (12,000) 12,000 (g) Understatement in inventory, end 2014 (18,300) (h) Overstatement of repairs expense in 2013 36,000 (i) Understatement in depreciation in 2013 (3,300) (j) Understatement in depreciation in 2014 (3,300) (k) Understatement in gain on sale of equipment, 2014 7,500 (l) Overstatement of insurance expense, 2013 5,400 Understatement of insruance expense, 2014 (2,700) Adjusted Net Income 620,100 628,200

4. Ans. D.Unadjusted Retained Earnings, end 2014 1,401,000 Prior period errors: (P585,000-P620,100) 35,100 Overstatemetn in 2014 Net Income (P660,000-P628,200) (31,800) Unrecorded dividend declaration (b) (150,000) Adjusted Retained Earnings, end 2014 1,254,300

CHAPTER 9-EXERCISE 18: GBC INC.1. Ans. D.

Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends.

2. Ans. B.Shares issued 100,000Less: treasury (1,000,000/50) (20,000) Outstanding shares 80,000Multiply by 10%Dividends distributable, small 8,000Multiply by fair value 42Appropriation for share dividends 336,000

3. Ans. B.a. Total net income since incorporation P3,200,000b. Total cash dividends paid (150,000) c. Impairment on property declared as dividend (600,000 – 450,000) (150,000) Appropriation for property dividend at impaired value (450,000) e. Correct valuation of share dividends (336,000) h. Appropriated for plant expansion (700,000) i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000) (140,000) l. Appropriated for remaining treasury shares at cost P50/share (1,000,000) Correct Unappropriated Accumulated Profits balance P274,000

4. Ans. A.

5. Ans. D.d. Proceeds from sale of donated stocks 150,500 e. Share premium from share dividends (336,000 – 200,000)136,000 f. Gain on treasury share transaction 375,000 i. Loss on treasury share reissue (debited to f)(375,000) j. Share premium in excess of par from issued shares215,000 k. Share issuance expense (45,000) APIC 456,500




CHAPTER 9-EXERCISE 19: MAMA CORP.ENTRIES: PROPERTY DIVIDENDS

Declaration: Retained earnings 900,000 Dividends payable 900,000 1. Ans. A.

Noncurrent Asset Held for Disposal900,000 Loss 300,000 Equipment 1,200,000

Payment: Retained earnings 100,000 Dividends payable 100,000

Dividends payable 1,000,000 Noncurrent Asset Held for Disposal 900,000 Gain 100,000 2. Ans. D.

ENTRIES STOCK DIVIDENDSDeclaration: Retained earnings (200,000*10%)*42 840,000 3. Ans. A. Dividends payable (20,000*25) 500,000 Share premium 340,000

Payment: Dividends payable 500,000 Ordinary shares 500,000

4. Ans. D.a. Total net income since 2013 6,400,000 b. Cash dividends since 2013 (300,000) c. Property Dividends (see entries above) (1,000,000) Adjustments to Net income in relation to the property dividends Loss on reclassification of Equipment to held for disposal (300,000) Gain on settlement of the property dividends 100,000 d. Capital loss from treasury shares reissue (300,000-400,000) (100,000) e. Stock dividends (see entries above) (840,000) g. Appropriation for plant expansion (700,000) *Appropriation for treasury stock (30,000*P40) (1,200,000) Accumulated profits - unappropriated balance 2,060,000

CHAPTER 9-EXERCISE 20: TAR CO.1. Ans. A.

Net income, unadjusted 300,000 Profit sharing of employees (30,000) Proceeds from life insurance 150,000 Gain on sale of property 23,000 NET INCOME 443,000

2. Ans. A.Accumulated profits, beginning 200,000 Correction of prior period error (15,000) Dividends to ordinary (50,000) Dividends to preference (40,000) Appropriation for bond redemption (20,000) Correct net income 443,000 ACCUM PROFITS, UNAPP. 518,000

3. Ans. A.APIC, unadjusted 100,000 Gain on sale of treasury, net 3,000 Donation from stockholder 52,000 Gain on sale of own shares 12,000 APIC 167,000



CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION


DISCUSSION PROBLEMSCHAPTER 10-PROBLEM 1: ABC CORPORATION

Current Noncurrent Current Noncurrent SHEAsset Asset Liabilities Liabilities

Cash 800,000 800,000 Accounts receivable 750,000 750,000 Allowance for doubtful accounts 50,000 (50,000) Dividend receivable (a) 40,000 Prepaid expenses 160,000 160,000 Inventory 1,000,000 1,000,000 Financial assets at fair value (a) 690,000 400,000 Land (b) 525,000 Building in process (b) 5,500,000 4,950,000 Patent 200,000 200,000 Machinery and equipment 1,500,000 1,500,000 Accumulated depreciation 300,000 (300,000) Discount on bonds payable 200,000 (200,000) Accounts payable 900,000 900,000 Accrued expenses 150,000 150,000 Note payable, 10% (c) 250,000 250,000 Accrued interest on notes payable (c) 52,500 Bonds payable 2,000,000 2,000,000 Accrued interest on bonds payable (d) 60,000 Share capital 3,000,000 3,000,000 Accumulated profits (b), (c), (d) 4,150,000 4,012,500 Treasury shares (a) (250,000) Adjusted balances 3,100,000 6,875,000 1,412,500 1,800,000 6,762,500

1. Ans. 2. Ans. 3. Ans. 5. Ans.Audit notes:

(a) Financial asset at fair value, unadjusted 690,000 Treasury shares (250,000) Dividend receivable (40,000) Financial asset at fair value, adjusted 400,000

(b) Building in progress, unadjusted 5,500,000 Land including property taxes in arrears (525,000) Property tax expense (25,000) *charged to REBuilding in progress, adjusted 4,950,000

(c) Notes payable, principal 250,000

Interest in 2013 (P250,000*10%) 25,000 Interest in 2014 (P275,000*10%) 27,500 *charged to RETotal interest payable on notes 52,500 *charged to RE

(d) Accrued interest on bonds payable (P2,000,000*12%*3/12) 60,000

4. Ans. P3,762,500.Accumulated profits, unadjusted 4,150,000 (b) Property taxes for the current year (25,000) (c) Interest on notes in 2013 (25,000) Interest on notes in 2014 (27,500) (d) Unaccrued interest on bonds in 2014 (60,000) Appropriation for Treasury shares (250,000) Accum. Profits, unappropriated, adjusted 3,762,500




CHAPTER 10-PROBLEM 2: RCW CORP. Current Noncurrent Current Noncurrent SHEAsset Asset Liabilities Liabilities

Cash 400,000 400,000 Accounts receivable 800,000 800,000 Allowance for doubtful accounts 50,000 (50,000) Inventories at cost (NRV is P900,000) 1,000,000 900,000 (100,000) Land, plant site 500,000 500,000 Land, for speculation at FMV (Note a) 1,200,000 1,200,000 Building 3,800,000 3,800,000 Accumulated depreciation – building 2,000,000 (2,000,000) Equipment 3,400,000 3,400,000 Accumulated depreciation – equipment 1,300,000 (1,300,000) Investment in associate 1,300,000 1,300,000 Prepaid expenses 100,000 100,000 Notes payable 750,000 750,000 Accounts payable 350,000 350,000 Income tax payable 50,000 50,000 Accrued expenses 60,000 60,000 Mortgage payable, P100,000 quarterly 2,000,000 400,000 1,600,000 Estimated liability for damages 140,000 140,000 Retained earnings app. for plant expansion 1,000,000 1,000,000 Retained earnings app. for contingencies 100,000 100,000 Share capital 3,000,000 3,000,000 Share premium 300,000 300,000 Retained earnings, unappropriated 1,350,000 1,350,000 Trademark 150,000 150,000 Secret processes and formulas 200,000 200,000 Bank loan payable – June 30, 2015 (Note b) 500,000 500,000 Def. tax asset, net def. tax liability, P50,000 100,000 150,000 50,000 Adjusted balances 2,150,000 7,400,000 1,750,000 2,150,000 5,650,000


CHAPTER 10-PROBLEM 3: SCR COMPANYCurrent Noncurrent Current Noncurrent SHEAsset Asset Liabilities Liabilities

Unadjusted balances 6,200,000 11,800,000 2,000,000 2,000,000 14,000,000 Restricted foreign deposit (600,000) 600,000 Investment property at cost (1,000,000) 1,000,000 Loss on inventory write-down (200,000) (200,000) Treasury shares (600,000) (600,000) Store supplies 100,000 (100,000) Financial asset at fair value through profit/loss 800,000 (800,000) Share premium (500,000) 500,000 Unearned leasehold income -current portion 140,000 (140,000) Stock dividends payable (300,000) 300,000 Serial bonds payable - current portion 100,000 (100,000) Adjusted balances 4,700,000 12,500,000 1,740,000 1,460,000 14,000,000


CHAPTER 10-PROBLEM 4: ABC COMPANYStatement of Comprehensive Income (Expenses according to function)

Note #Net Sales Note 1 12,230,000 Less: Cost of Sales Note 2 (6,560,000) Gross profit 5,670,000 Share from net income of associate Note 3 170,000 Other income Note 4 210,000 Total income 6,050,000 Less: Operating expenses Selling expenses Note 5 1,820,000 General and administrative expenses Note 6 850,000 Interest expense 400,000 Unrealized holding loss from financial asset 400,000 (3,470,000) Net income before tax 2,580,000 Income tax expense (30%) (774,000) Net income after tax 1,806,000 4. Ans.

Other comprehensive income/loss:Unrealized holding gain on financial asset, net of tax 140,000 Revaluation surplus, net of tax 350,000 Foreign translation gain, net of tax 70,000 560,000

Total comprehensive income 2,366,000 5. Ans.

Statement of Comprehensive Income (Expenses according to nature)Note #

Net Sales Note 1 12,230,000 Share from net income of associate Note 3 170,000 Other income Note 4 210,000




Total income before expenses 12,610,000 3. AnsLess: Operating expenses (Increase)Decrease in inventories Note 7 390,000 Net purchases Note 2 5,140,000 Depreciation 1,200,000 Salaries 900,000 Supplies 600,000 Utilities 400,000 Rent 200,000 Advertising 150,000 Freight-out 250,000 Interest expense 400,000 Unrealized holding loss on financial asset 400,000 (10,030,000) Net income before tax 2,580,000 Income tax expense (30%) (774,000) Net income after tax 1,806,000 4. Ans.

Other comprehensive income/loss:Unrealized holding gain on financial asset, net of tax 140,000 Revaluation surplus, net of tax 350,000 Foreign translation gain, net of tax 70,000 560,000

Total comprehensive income 2,366,000 5. Ans.

SUPPLEMENTARY NOTES:Note 1: Net SalesGross sales 13,000,000 Less: Sales returns and allowances (520,000) Sales discounts (250,000) Net Sales 12,230,000

Note 2: Cost of SalesRaw materials inventory, January 1, 1,150,000 Add: Net purchases Gross purchases 5,400,000 Add: Freight-in 200,000 Less: Purchase returns and allowances (310,000) Purchase discounts (150,000) 5,140,000 Raw materials available for use 6,290,000 Less: Raw materials, December 31, (800,000) Raw materials used 5,490,000 Direct labor (P900,000*30%) 270,000 Factory overhead: Depreciation (P1,200,000*40%) 480,000 Supplies (P600,000*20%) 120,000 Utilities (P400,000*40%) 160,000 760,000 Total manufacturing cost 6,520,000 Add: Work-in process inventory, January 1,. 920,000 Cost of goods placed into process 7,440,000 Less: Work-in process inventory, December 31 (1,100,000) Cost of goods manufactured 6,340,000 Add: Finished goods inventory, January 1, 1,200,000 Cost of goods available for sale 7,540,000 Less: Finished goods inventory, December 31, (980,000) Cost of goods sold 6,560,000 1. Ans.

Note 3: Share from Net Income of AssociateXYZ Inc. Net Income for 2014 850,000 Proportionate share 20%Share from net income of associate 170,000

Note 4: Other incomeRent income 120,000 Royalty income 90,000 Total other income 210,000




Note 5: Selling ExpensesDepreciation (P1,200,000*35%) 420,000 Salaries (P900,000*40%) 360,000 Supplies (P600,000*50%) 300,000 Utilities (P400,000*35%) 140,000 Rent expense 200,000 Advertising expense 150,000 Freight out 250,000 Total selling expenses 1,820,000 2. Ans.

Note 6: General and Administrative ExpensesDepreciation (P1,200,000*25%) 300,000 Salaries (P900,000*30%) 270,000 Supplies (P600,000*30%) 180,000 Utilities (P400,000*25%) 100,000 Total general and administrative expenses 850,000

Note 7: Increase/Decrease in InventoriesInventories, January 1: Raw materials 1,150,000 Work-in process 920,000 Finished goods 1,200,000 3,270,000 Inventories, December 31: Raw materials 800,000 Work-in process 1,100,000 Finished goods 980,000 2,880,000 Decrase in inventories 390,000

CHAPTER 10-PROBLEM 5: UTV CORP.Noncurrent Current Noncurrent

Current Asset Assets Liabilities Liabilities Cash and cash equivalents 400,000 400,000 Bank overdraft 100,000 100,000 Accounts receivable 900,000 900,000 Allowance for doubtful accounts 40,000 (40,000) Raw materials 560,000 560,000 Goods in process 600,000 600,000 Finished goods 1,400,000 1,400,000 Financial assets at fair value through OCI 2,500,000 2,500,000 Land, at fair market value 12/31/14 1,000,000 1,000,000 Building 6,000,000 6,000,000 Accumulated depreciation – building 1,600,000 (1,600,000) Plant and equipment 2,400,000 2,400,000 Accumulated depreciation – Plant and Eqpt. 400,000 (400,000) Patent 800,000 800,000 Goodwill, recognized in Jan. 2013 1,400,000 1,400,000 Note payable, bank – due June 30, 2015 1,300,000 1,300,000 Note payable, bank – due June 30, 2016 2,100,000 2,100,000 Accounts payable 1,000,000 1,000,000 Employee benefit provisions 180,000 180,000 Warranty liabilities 80,000 80,000 Income tax payable 120,000 120,000 Deferred tax liability 280,000 280,000 Accumulated profits, January 1, 2014 3,600,000 Revaluation surplus on Land, January 1, 2014 360,000 Unrealized gain on financial assets, 1/1/14 280,000 Share capital 5,000,000 Share premium, 1,000,000 Sales 10,000,000 Revaluation surplus on Land during the year 140,000 Unrealized gain on financial asset for the year 100,000 Cost of sales 6,000,000 Selling expenses 1,960,000 Administrative expenses 500,000 Finance cost 100,000 Income tax expense 160,000 Dividend declared and paidBalances 3,820,000 12,100,000 2,780,000 2,380,000 Net Income 1. Ans. 2. Ans. 3. Ans. 4. Ans.




Continued… Total Compre.Net Income Income Accum. Profits SHE

Cash and cash equivalentsBank overdraftAccounts receivableAllowance for doubtful accountsRaw materialsGoods in processFinished goodsFinancial assets at fair value through OCILand, at fair market value 12/31/14BuildingAccumulated depreciation – buildingPlant and equipment Accumulated depreciation – Plant and Eqpt.PatentGoodwill, recognized in Jan. 2013 Note payable, bank – due June 30, 2015Note payable, bank – due June 30, 2016Accounts payableEmployee benefit provisionsWarranty liabilitiesIncome tax payableDeferred tax liabilityAccumulated profits, January 1, 2014 3,600,000Revaluation surplus on Land, January 1, 2014 360,000Unrealized gain on financial assets, 1/1/14 280,000Share capital 5,000,000Share premium, 1,000,000Sales 10,000,000 Revaluation surplus on Land during the year 140,000 140,000Unrealized gain on financial asset for the year 100,000 100,000Cost of sales (6,000,000) Selling expenses (1,960,000) Administrative expenses (500,000) Finance cost (100,000) Income tax expense (160,000) Dividend declared and paid (1,000,000) BalancesNet Income 1,280,000 1,280,000 1,280,000 Total Comprehensive Income 1,520,000Accumulated Profits 3,880,000 3,880,000 Stockholders' Equity 10,760,000

5. Ans. 6. Ans. 7. Ans.

CHAPTER 10-PROBLEM 6: THEODORE COMPANY1. Ans. P7,485,000.

Sales revenue P7,935,000 Increase in accounts receivable (P1,800,000-P1,350,000) (450,000)Collections from customers P7,485,000

2. Ans. P2,025,000.Cost of goods sold P1,800,000 Increase in inventory (P2,700,00-P1,575,000) 1,125,000 Purchases 2,925,000 Increase in accounts payable (P2,250,000-P1,350,000) (900,000)Cash disbursed for purchases P2,025,000

Operating expenses P1,500,000Increase in accrued expenses payable (900,000-675,000) (225,000)Cash paid for operating expenses P1,275,000

3. Ans. P4,185,000.Collections from customers P7,485,000 Cash disbursed for purchases (2,025,000)Cash paid for operating expenses (1,275,000)Cash provided by operating activities P4,185,000

4. Ans. P2,160,000.Purchase of equipment (P2,700,000)1

Sale of land 495,000Sale of equipment 45,000Cash used in investing activities (P2,160,000)

Increase in equipment (P8,550,000-P6,750,000) P1,800,000Add: Cost of equipment sold 900,000Purchase of equipment P2,700,000




Increase in lease-liability—Land P450,000Less: Increase in land (P2,025,000-1,800,000) 225,000Carrying value of land sold 225,000Add: Gain on sale of land 270,000Proceeds from sale of land P495,000

Carrying value of equipment sold (P900,000x10%) P90,000Less: Loss on sale of equipment 45,000Proceeds from sale of equipment 45,000

5. Ans. P1,350,000.Cash used in financing activities-cash dividends paid (P1,350,000)

CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY1. Ans. P920,000.

Net income 790,000 Adj: Non-operating (gain)/loss Gain on sale of LT investment (P135,000-P100,000) (35,000) Adj: Non-cash (income)/expenses Depreciation expense 250,000 Adj: Decrease/(Increase) in Working Capital Inventory, increase (80,000) Accounts payable and accrued liabilities, decrease (5,000) Cash provided by operating activities 920,000

2. Ans. P1,005,000.Proceeds from sale of Building 350,000 Proceeds from sale of LT Investment 135,000 Purchase of Plant assets (P700,000+600,000-110,000) (1,190,000) Purchase of Available for sale securities (300,000) Cash used in investing activities (1,005,000)

3. Ans. P205,000.Proceeds from share issuance 220,000 Proceeds from short-term bank debt 325,000 Payment of dividends (P500,000-160,000) (340,000) Cash provided by financing activities 205,000

Summary:Cash provided by operating activities 920,000 Cash used in investing activities (1,005,000) Cash provided by financing activities 205,000 Increase in cash for the year 120,000

CHAPTER 10-PROBLEM 8: ABC CORP.STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE

Profits-Unapp SharesJanuary 1, balances 3,000,000 2,540,000 4,000,000 9,540,000 Share issuance 1,000,000 1,000,000 Treasury shares reaquisition (300,000) (300,000) Treasury shares retirement (100,000) (20,000) 120,000 - Dividends declaration: Share dividends (20%*65,000sh)*P50 650,000 (650,000) - Cash dividends (P12*5,000)+(P3*78,000) (294,000) (294,000) Appropriations: Plant expansion 400,000 (400,000) - Treasury shares 180,000 (180,000) - Comprehensive income Net income 1,200,000 1,200,000 Other comprehensive income (200,000) (200,000) December 31, balances 4,550,000 2,900,000 3,676,000 (180,000) 10,946,000

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




CHAPTER 10-PROBLEM 9: GLORIA CORPORATIONSTATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE

Profits-Unapp SharesJanuary 1, balances 6,950,000 3,615,000 3,730,000 (270,000) 14,025,000 Prior period adjustment: Unrecorded 2011-2013 options 200,000 (200,000) - Overstatement in rent income in 2013 (275,000) (275,000) Share issuance from exercise of rights 1,050,000 1,260,000 2,310,000 Share issuance from exercise of options 400,000 240,000 640,000 Treasury shares retirement (150,000) (120,000) 270,000 - Dividends declaration: Property dividends (10,000sh*P75) (750,000) (750,000) Cash dividends (P10%*P100*18,000sh) (180,000) (180,000) Reversal of appropriation Treasury shares (270,000) 270,000 - Comprehensive income Net income 2,600,000 2,600,000 Other comprehensive income 110,000 110,000 December 31, balances 8,250,000 5,035,000 5,195,000 - 18,480,000

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

MULTIPLE CHOICE EXERCISES:CHAPTER 10-EXERCISE 1: KALAMANSI INC.1. Ans. A.

Cash (184,920 – 101,920) P83,000Accounts receivable (84,480 – 4,125) 80,355Inventory at NRV (90,000*80%) 72,000Prepaid Insurance 12,000Total current assets P247,355

2. Ans. A.Land P167,000Building, net (375,000 – 45,000) 330,000Furniture and fixtures, net (114,600 – 34,600) 80,000Total PPE P577,000

3. Ans. C.Accounts payable P23,595Interest payable 8,405Advances 12,000Short term portion of serial bonds 50,000Total Current liabilities P94,0009. c.

4. Ans. C.Unappropriated retained earnings P295,000Adjustment (inventory LCNRV) (75,125–72,000) (3,125)Appropriated for bond treatment 50,000Total retained earnings P341,875

5. Ans. B.Share capital (4,000*10) P40,000Paid-in capital in excess of par 430,00Total retained earnings 341,875Total SHE P811,875

CHAPTER 10-EXERCISE 2:ETT INC. Current Asset

Noncurrent Assets

Current Liabilities

Noncurrent Liabilities SHE Accum. Profits

Unadjusted balances 8,000,000 3,600,000 3,000,000 200,000 8,400,000 2,000,000 Bank overdraft 200,000 200,000 Allowance for bad debts/bad debt expense (260,000) (260,000) (260,000) Increase in FMV of financial asset at fair value 150,000 150,000 150,000 Inventory write-down (to NRV which is lower) (100,000) (100,000) (100,000) Goodwill (200,000) 200,000 Salaries payable/Salaries expense 500,000 (500,000) (500,000) Mortgage payable 4,000,000 4,000,000 Interest payable 400,000 400,000 Accumulated depreciation on the building (600,000) (600,000) (600,000) Current tax payable 200,000 (200,000) Adjusted balances 7,790,000 7,600,000 4,300,000 4,000,000 7,090,000 690,000

1. Ans. D. 2. Ans. B. 3. Ans. D. 4. Ans. B. 5. Ans. C. 6. Ans. C.




CHAPTER 10-EXERCISE 3: JACOB CORPORATIONASSETS

Cash and cash equivalents (325,000+75,000) 400,000 Accounts receivable (275,000+100,000) 375,000 Marketable securities (955,000-600,000) 355,000 Prepayments 50,000 TOTAL CURRENT ASSETS P1,180,000 1. Ans. B.Land 900,000 Building 600,000 Reserve for depreciation – Building (50,000)Machinery and equipment 330,000 Reserve for depreciation – Machinery and equipment (110,000)TOTAL NONCURRENT ASSETS 1,670,000 TOTAL ASSETS 2,850,000 2. Ans. A.

LIABILITIES AND CAPITALCurrent liabilities (325,000+75,000+100,000+3,000-50,000-100,000) 353,000 3. Ans. B.Non-current liabilities (250,000+50,000) 300,000 4. Ans. C.TOTAL LIABILITIES P653,000 Ordinary shares, P25 par, 45,000 shares issued (1,250,000-125,000) 1,125,000 Share dividends payable (4,000sh*25) 100,000 Share premium (750,000+(4,000sh*(60-25))-((750,000/50,000)*5,000sh) 815,000 TOTAL CONTRIBUTED CAPITAL 2,040,000 Reserve for self insurance 75,000 Reserve for treasury shares 250,000 Accumulated profits (625,000-3,000-100,000-140,000-50,000-250,000) 82,000 Treasury shares (500,000-250,000) (250,000)TOTAL SHE 2,197,000 5. Ans. A.TOTAL 2,850,000

CHAPTER 10-EXERCISE 4: REESE CORP.1. Ans. B.

Cash 775,000 Accounts receivable (net) 2,695,000 Inventory 2,085,000 Total current assets 5,555,000

2. Ans. A.Accounts payable and accrued liabilities 1,701,000 Income taxes payable (654,000-525,000) 129,000 Total current liabilities 1,830,000

3. Ans. C.Retained earnings, 1/1/14 3,450,000 Net sales and other revenues 13,360,000 Costs and expenses 11,180,000 Net income before tax 2,180,000 Income tax expense (30%) (654,000)Net Income for the year 1,526,000 Retained earnings, 12/31/14 4,976,000

CHAPTER 10-EXERCISE 5: TORRES COMPANY

Cash 1,765,000 Compensating balance (300,000) 300,000 Other Assets Bond retirement (600,000) 600,000 LT Investment Contingency fund (500,000) 365,000 1. Ans. D. 500,000 LT Investment

Account receivable 930,007 Credit balance 45,000 Advances to officers (past due) (600,000) Current portion of past due: 2015: (P100,000 x .917431)) 91,743 Non-current portion: 2016:(P200,000 × .84168) 168,336 Other Assets 2017: (P300,000 × .77218) 231,654 Other AssetsMdse. sent on consignment: (P100,000 × 125%) (125,000) Due from consignee: (P75,000 ×125% × 92% - P3,000) 83,250 425,000 2. Ans. A.

Inventory 750,000 On consignment (P100,000 × 25%) 25,000 775,000

Investment 763,000 Financial Asset at Fair value through P&L 170,000 3. Ans B. (150,000) Prepaid expense 30,000 (30,000) Increase in value of AFS 50,000 633,000 LT InvestmentTotal 1,765,000 2,432,990

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

Note that the installment receivable from customer is classified as current since it is a trade payable.

Current Non-current




CHAPTER 10-EXERCISE 6: KATZ CORP. Other Comp. Total Com. Accumulated Cost of Sales Net Income Income Income Profits

Sales 53,000,000 53,000,000 Purchases 32,000,000 32,000,000 Sales discount 2,000,000 (2,000,000) Purchase discount 1,200,000 (1,200,000) Sales returns and allowance 1,000,000 (1,000,000) Purchase returns and allowance 800,000 (800,000)

400,000 400,000 Merchandise Inventory, January 1 (adjusted) 3,400,000 3,400,000 Merchandise Inventory, December 31 3,500,000 (3,500,000) Distribution costs 5,000,000 (5,000,000) General and administrative expenses 4,000,000 (4,000,000) Interest expense 2,000,000 (2,000,000) Gain on early extinguishment of long-term debt 500,000 500,000 Foreign translation adjustment, net of income tax – credit 1,250,000 1,250,000 Revaluation surplus for the period, net of income tax 700,000 700,000

550,000 (550,000) Investment income – equity method 3,000,000 3,000,000 Gain on expropriation of asset 2,000,000 2,000,000 Income tax expense 5,000,000 (5,000,000) Proceeds from sale of land with a carrying value of P5,300,000 4,800,000 (500,000) Dividends declared 1,300,000 (1,300,000) Accumulated profits, January 1, 2014 4,200,000 4,200,000 Cost of Sales 29,900,000 (29,900,000) Net Income 1. Ans. B. 9,100,000 9,100,000 9,100,000 Other Comprehensive Income 2. Ans. B. 1,400,000 1,400,000 Total Comprehensive Income 3. Ans. B. 10,500,000 Accumulated Profits, Dec. 31, 2014 4. Ans. C. 12,400,000

CHAPTER 10-EXERCISE 7: NAM COMPANY1. Ans. B.

Net income P925,000Depreciation (see note below) 375,000 Gain on sale of equipment (P100,000-P87,500) (12,500) Share from net income of associate (P300,000*25%) (75,000) Decrease in accounts receivable 100,000 Increase in inventories (337,500) Increase in accounts payable 150,000 Decrease in income taxes payable (50,000) Net cash provided by operating activities P1,075,000

Increase in accumulated depreciation (2,912,500-2,600,000) 312,500 Accumulated depreciation of equipment sold (150,000-87,500) 62,500 Depreciation for 2014 P375,000

2. Ans. D.Proceeds from sale of equipment P100,000Loan to Ari Co. (750,000) Principal collection of loan receivable 93,750 Net cash used in investing activities P556,250

3. Ans. A.Net cash used in financing activities (Dividends paid) (P250,000)

CHAPTER 10-EXERCISE 8:RAVEN CORPORATION1. Ans. D.

Sales 10,776,000 Cost of goods sold (6,468,000) Gross profit 4,308,000 Gain on sale of trading securities 144,000 Total 4,452,000 Selling and administrative expenses (3,444,000) Unrealized holding loss on trading securities (48,000) Loss on sale of equipment (12,000) Net income before tax 948,000 Income taxes (420,000) Net income after tax 528,000

2. Ans. A.Accumulated profits, unapp., Jan 1, 2014 1,344,000 Less: Increase in appropriations for expansion (180,000) Stock dividends declaration (237,600*30%)*P10 (712,800) Accumulated profits, unapp. Dec. 31 (943,200) Less: Net income for the year 528,000 Reversal of approp for Treasury 60,000 Cash dividend declaration 96,000

Correction of merchandise inventory, beginning error, net of income tax – credit

Unrealized loss on financial assets at fair value through other comprehensive income or losses, net of income tax




3. Ans. C.Share capital, Dec. 31, 2014 4,312,800 Share premium, Dec. 31, 2014 1,392,000 Total 5,704,800 Less:Share capital, Dec. 31, 2013 2,400,000 Share premium, Dec. 31, 2013 60,000

2,460,000 Increase in Share capital and share premium 3,244,800 Share dividends (237,600*30%)*10 (712,800) Share premium from treasury shares reissue (12,000) Proceeds from issuance of shares 2,520,000

4. Ans. B.Decrease in Trading securities 360,000 Add:Gain on sale of Trading securities 144,000 Unrealized loss on trading securities (48,000) Proceeds from sale of Trading securities 456,000

5. Ans. C.Proceeds from sale of equipment 84,000 Add: Loss on sale of equipment 12,000 Carrying Value of eqiupment sold 96,000

6. Ans. D.Equipment, end 3,732,000 Equipment, beg 2,040,000 Increase in equipment 1,692,000 Add: Cost of disposed equipment 180,000 Total equipment acquired during the year 1,872,000 Equipment acquired through note issuance (600,000) Overhaul on equipment (72,000) Total cash payment made for equipment acquisition] 1,200,000

7. Ans. A.Decrase in treasury shares (120,000 - 60,000) 60,000 Share premium on treasury shares reissue 12,000 Proceeds from treasury shares reissue 72,000

8. Ans. C.Net Income 528,000 Non cash expenses/income Depreciation expense - Bldg 45,000 Depreciaiton expense - Equipment 303,000 Bad debt expense 36,000 Amortization of bond discount 6,000 Income tax benefit (Decrease in Def. tax liab) (75,600) Non operating income/expense Loss on sale of equipment 12,000 Changes in working capital Trading security 360,000 Accounts receivable (576,000) Inventories 108,000 Prepaid Insurance (6,000) Accounts payable (60,000) Accrued expenses 111,600 Income tax payable 300,000 Unearned Income (96,000) Net cash provided by operating activities 996,000

9. Ans. B.Purchase of equipment (1,200,000) Overhaul of equipment (72,000) Sale of equipment 84,000

(1,188,000)

10. Ans. A.Payment of serial notes payable (240,000) Share issuance 2,520,000 Treasury shares reissuance 72,000 Payment of dividends (96,000)

2,256,000



CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY

CHAPTER 11: ERROR CORRECTION AND CASH;ACCRUAL

DISCUSSION PROBLEMSCHAPTER 11-PROBLEM 1: SAFARI COMPANY

2012 NI 2013 NI 2014 NI 2014 RE, BEG 2014 RE, END 2014 WCA. Accrued expense, under 2012 (15,000) 15,000

Accrued expense, under 2013 (7,000) 7,000 (7,000) Accrued expense, under 2014 (22,000) (22,000) (22,000)

B. Accrued income, under 2012 8,000 (8,000) Accrued income, under 2013 9,000 (9,000) 9,000 Accrued income, under 2014 5,000 5,000 5,000

C. Prepaid expense, under 2012 16,000 (16,000) Prepaid expense, under 2013 12,000 (12,000) 12,000 Prepaid expense, under 2014 6,000 6,000 6,000

D. Unearned income, under 2012 (11,000) 11,000 Unearned income, under 2013 (13,000) 13,000 (13,000) Unearned income, under 2014 (10,000) (10,000) (10,000)

EFFECT OF ERRORS (2,000) 3,000 (22,000) 1,000 (21,000) (21,000) 1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 2: MASIGLA COMPANY2012 NI 2013 NI 2014 NI 2014 RE, BEG 2014 RE, END 2014 WC

A. Ending Inventory, over 2012 (50,000) 50,000 Ending Inventory, over 2013 (30,000) 30,000 (30,000) Ending Inventory, over 2014 (40,000) (40,000) (40,000)

B. Ending Invenotry, under 2012 12,000 (12,000) Ending Invenotry, under 2013 14,000 (14,000) 14,000 Ending Invenotry, under 2014 8,000 8,000 8,000

C. AR/Sales, under 2012 25,000 (25,000) AR/Sales, under 2013 22,000 (22,000) 22,000 AR/Sales, under 2014 16,000 16,000 16,000

D. AP/Purchases, under 2012 (15,000) 15,000 AP/Purchases, under 2013 (12,000) 12,000 (12,000) AP/Purchases, under 2014 (10,000) (10,000) (10,000)

E. Equipment, under/Expense, over per year 200,000 240,000 220,000 440,000 660,000 Depr Expense, under (2012 Equipment) (20,000) (20,000) (20,000) (40,000) (60,000) Depr Expense, under (2013 Equipment) (24,000) (24,000) (24,000) (48,000) Depr Expense, under (2014 Equipment) (22,000) (22,000)

EFFECT OF ERRORS 152,000 218,000 134,000 370,000 504,000 (26,000) 1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 3: AMICI COMPANY2013 NI 2014 NI 2014 RE, BEG 2014 WC

Unadjusted balances 245,000 310,000 A. Salaries payable, under 2013 (12,000) 12,000 (12,000)

Salaries payable, under 2014 (5,000) (5,000) Accrued interest income, under 2013 4,000 (4,000) 4,000 Accrued interest income, under 2014 3,000 3,000 Unearned rental income, under 2013 (14,000) 14,000 (14,000) Unearned rental income, under 2014 (15,000) (15,000) Prepaid insurance, under 2013 3,000 (3,000) 3,000 Prepaid insurance, under 2014 5,000 5,000

B. Advances from customers, under 2013 (31,000) 31,000 (31,000) Advances from customers, under 2014 (25,000) (25,000)

C. Advances to suppliers, under 2013 10,000 (10,000) 10,000 Advances to suppliers, under 2014 7,000 7,000

D. Equipment, over/Expense under (each year) (60,000) (80,000) (60,000) Depr Expense, over (on 2013 Equipment) 12,000 12,000 12,000 Depr Expense, over (on 2014 Equipment) 16,000

ADJUSTED BALANCES/EFFECT OF ERRORS 157,000 268,000 (88,000) (30,000) 1. Ans. 2. Ans. 3. Ans. 5. Ans.




Retained earnings, beg 2013 - Adjusted NI, 2013 157,000 Dividends declared and paid in 2013 (75,000) Retained earnings, end 2013 82,000 Adjusted NI, 2014 268,000 Dividends declared and paid in 2014 (75,000) Retained earnings, end 2014 275,000 6. Ans.

CHAPTER 11-PROBLEM 4: SOLID COMPANY1. Ans. P2,255,000.

Cash basis sales 1,980,000 Add: AR, ending balance 550,000 Sales discounts 80,000 Sales returns, no refund 60,000 Total 2,670,000 Less: AR, beginning balances (415,000) Accrual basis gross sales 2,255,000

2. Ans. P2,260,000.Cash basis sales 1,980,000 Add: AR, ending balance 550,000 Sales discounts 80,000 Sales returns, no refund 60,000 Write-off of AR 25,000 Total 2,695,000 Less: AR, beginning balances (415,000) Recovery of previous write-off (20,000) Accrual basis gross sales 2,260,000

CHAPTER 11-PROBLEM 5: DEISEL CORP.1. Ans. P2,800,000.

Cash basis purchases 2,500,000 Add: AP, ending balance 800,000 Purchase discounts 45,000 Purchase returns, no refund 55,000 Total 3,400,000 Less: AP, beginning balance (600,000) Accrual basis gross purchases 2,800,000

2. Ans. P2,600,000.Gross purchases 2,800,000 Less: Purchase discount (45,000) Purchase returns (80,000) Net purchases 2,675,000 Add: Inventory, beginning 250,000 Cost of goods available for sale 2,925,000 Less: Inventory, end (325,000) Cost of sales 2,600,000

CHAPTER 11-PROBLEM 6: BECKER COMPANYAns. P215,000

Cash basis royalty income 200,000 Add: Royalty receivables, ending 85,000 Unearned royalties, beginning 60,000 Total 345,000 Less: Royalty receivables, beginning (90,000) Unearned royalties, ending (40,000) Accrual basis royalty income 215,000

CHAPTER 11-PROBLEM 7: XYZ COMPANYAns. P305,000

Cash basis royalty expense 300,000 Add: Royalty payables, ending 75,000 Prepaid royalties, beginning 55,000 Total 430,000 Less: Royalty payables, beginning (80,000) Prepaid royalties, ending (45,000) Accrual basis royalty income 305,000




CHAPTER 11-PROBLEM 8: BACOLOD CORP.1. P10,550,000.

Total collections from charge customers 2,550,000 Allowance for BD, beg 125,000 Add: AR, ending balance 1,200,000 Add: Bad debt expense 100,000 AR written-off 75,000 Recovery of write-off 25,000 Total 3,825,000 Total 250,000 Less: AR, beginning balance (750,000) Less: AR write-off (SQZ) (75,000) Recovery of previous write-off (25,000) Accrual basis gross sales 3,050,000 Allowance for BD, end 175,000 Add: gross cash sales 7,500,000 Total gross sales/Net sales 10,550,000 *Note that since there are no sales discounts or sales returns and allowances, gross sales is also net sales.

2. Ans. P5,670,000.Cash purchases 5,100,000 Credit purchases 1,200,000 Total gross purchases 6,300,000 Less: Purchase discounts (210,000) Purchase returns (120,000) Net purchases 5,970,000 Add: Inventory, beginning 1,500,000 COGAS 7,470,000 Less: Inventory, ending (1,800,000) Cost of Sales 5,670,000

3. Ans. P345,600.CV, 1/1/14: (P3M*90%*80%*80%) 1,728,000 Multiply by: Ddbal rate 20%Depreciation expense, 2014 345,600

4. Ans. P2,304,400.Net Sales 10,550,000 Cost of sales (5,670,000) Gross profit 4,880,000 Interest income (a) 90,000 Total income 4,970,000 Operating expenses (b) (2,220,000) Depreciation expense (345,600) Bad debt expense (100,000) Net income 2,304,400

(a) Interest collected 120,000 Less: Accrued interest income, Beg (30,000) Interest income, accrual basis 90,000

(b) Operating expenses, cash basis 2,250,000 Add: Accrued expense, ending 60,000 Less: Prepaid expense, ending (90,000) Operating expense, accrual basis 2,220,000

CHAPTER 11-PROBLEM 9: CUTTING EDGE.Cash collections from customer on account 6,000,000 Add: AR, increase 1,480,000

Sales discount 80,000 Sales returns, without refund 120,000 AR written-off 240,000

Less: NR-trade, decrease (800,000) Recovery of previous write-off (72,000)

Gross Sales on Account 7,048,000 1. Ans. Gross cash sales 1,200,000 Gross Sales 8,248,000 2. Ans. Less: Sales discounts (80,000)

Sales returns (Total) (320,000) Net Sales 7,848,000 3. Ans.




Cash paid to suppliers on account 4,800,000 Add: Notes payable-trade increase 800,000

Purchase discount 140,000 Purchase returns, without refund 200,000

Less: Accounts payable, decrease (600,000) Gross Purchases on Account 5,340,000 4. Ans. Gross cash purchases 1,000,000 Gross Purchases 6,340,000 5. Ans.Less; Purchase discount (140,000)

Purchase returns (total) (320,000) Net Purchases 5,880,000 6. Ans.

CHAPTER 11-PROBLEM 10: GLASS CO.1. Ans. P251,636.

Cost of sales (P340,000 total sales * 60%) P204,000 Add: Merchandise Inventory, November 15 93,920 Purchases P297,920 Less: Accounts payable – trade, November 15 46,284 Payments for purchases P251,636

2. Ans. P254,620 Sales P340,000 Less: Accounts receivable – trade, November 15 85,380 Collections from sales P254,620

3. Ans. P121,612. CASH ACCOUNTABILITY: RECEIPTS Issuance of ordinary shares (P300,000 + P20,000) P320,000 Mortgage payable 80,000 Note payable – bank 32,000 Collections from sale (from number 2) 254,620 Total 686,620 DISBURSEMENTS Real property P200,000 Furniture and Fixtures (P29,000 – P6,000) 23,000 Expenses 60,756 Purchases (from number 1) 251,636 Total P535,392 CASH BALANCE P151,228 CASH AS ACCOUNTED: Bank balance, November 15 P26,328 Add: Undeposited collections 5,140 Total P31,468 Less: Outstanding checks 1,852 29,616 CASH SHORTAGE as of November 15, 2014 P121,612

CHAPTER 11-PROBLEM 11: EDU COMPANY1. Ans. P11,430,000.

Total deposits per bank statement 12,600,000 Cash receipts from share issuance (1,800,000) Proceeds of bank loan, directly credited to account (1,800,000) Deposits from cash collections from customers 9,000,000 Collections from customers which were used to pay directly disbursements Utilities 360,000 Salaries 360,000 Supplies 720,000 Dividends 540,000 1,980,000 Undeposited collections on hand 450,000 Total collections from customers 11,430,000

2. Ans. P14,535,000.Cash collections from customers 11,430,000 Add: AR, ending 3,240,000 Less: Advances from customers, ending (135,000) Accrual basis gross sales 14,535,000




3. Ans. P9,738,000.Total deposits per bank statement 12,600,000 Cash in bank, end per bank statement (900,000) Total disbursements per bank statement 11,700,000 Add: Outstanding checks 180,000 Less: Payments of bank loan and interest (540,000) Payments of installment due on equipment (1,602,000) Total cash payments made to suppliers 9,738,000

4. Ans. P10,998,999.Cash payments to suppliers 9,738,000 Add: Accounts payable, ending 1,260,000 Accrual basis gross purchases 10,998,000

5. Ans. P8,280,000Gross purchases/Net purchases 10,998,000 Inventory, end (2,718,000) Cost of sales 8,280,000

6. Ans. P3,070,000.Gross sales/Net sales 14,535,000 Cost of sales (8,280,000) Gross profit 6,255,000 Operating expensesUtilities (P360,000+40,000) 400,000 Salaries (P360,000+25,000) 385,000 Supplies (P720,000-150,000) 570,000 Depreciation - Bldg (P16.2M/15yrs) 1,080,000 Depreciation - Eqpt (P1.44M/5yrs) 288,000 Bad debt expense 180,000 Interest expense - loan (P90,000+30,000) 120,000 Interst expense, instal. (P1.602M-P1.44M) 162,000 (3,185,000) Net Income 3,070,000

MULTIPLE CHOICE EXERCISES:CHAPTER 11-EXERCISE 1: BEE CO.1. Ans. C.

Depreciation per books: P250,000/8yrs (a) 31,250Additional depreciation on capitalizable major repairs (220,000/11yrs) (b) 20,000Depreciation expense per audit P51,250

(a) The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years, thus on 12/31/14 the expired life is (5+3), 8 years. Depreciation per books is computed as: Accum Depr/Expired Life

(b) The major repairs cost should have been capitalized on 1/1/12 and depreciated over the remaining useful life of the related asset. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books), P500,000/31,250 = 16 years. Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years.

NI 2012 NI 2013 NI 2014 RE, beg 2014 WC, 2014

Unadjusted balances P100,000 P145,000 P185,000 a. Unearned rent income, under 2014 (6,500) (6,500)b. Salaries payable, under 2011 2,500 - Salaries payable, under 2012 (5,500) 5,500 - Salaries payable, under 2013 (7,500) 7,500 (7,500) Salaries payable, under 2014 (4,700) (4,700)c. Unused supplies, under 2011 (3,500) Unused supplies, under 2012 6,500 (6,500) Unused supplies, under 2013 3,700 (3,700) 3,700 Unused supplies, under 2014 7,100 7,100 d. Repairs expense, over 2012 220,000 220,000 Depreciation expense, under 2012-2014 (20,000) (20,000) (20,000) (40,000)Adjusted balances P300,000 P120,200 P164,700 P176,200 (P4,100)

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




CHAPTER 11-EXERCISE 2: LOG CORP.2013 2014

Unadjusted pretax income P4,545,000 P3,483,000 a. 2013 sales overstatement (1,719,000) 1,719,000 b. 2013 inventory understatement 388,800 (388,800) 2014 inventory overstatement (255,000) c. Understatement in interest expense due to amortization of bond discount: (a) 2013: 10,640,250*7% = 744,818 Less: 11,250,000*6% = 675,000 (69,818) 2014: 10,710,068*7% = 749,705 Less: 11,250,000*6% = 675,000 (74,705) d. Ordinary repairs (382,500) (423,000) Overstatement in depreciation: Amount capitalized in 2013: 382,500*20% 76,500 Balance of amt. cap. in 2013: 306,000*20% 61,200 Amount capitalized in 2015: 423,000*20% 84,600 ADJUSTED PRETAX INCOME P2,838,982 P4,206,295

1. Ans. C. 2. Ans. A.(a) The loan was originated on 1/1/12 at P10,575,000 (11,250,000-675,000). Discount amo. by 12/31/12 therefore shall be:

Correct interest (10,575,000*7%) 740,250 Less: Nominal interest (11,250,000*6%) 675,000 2012 Amortization: 65,250 Carrying value of Bonds, 12/31/12 (10,575,000+65,250), P10,640,250

CHAPTER 11-EXERCISE 3: LOT INC.1. Ans. B.

Accumulated depreciation per books (Machine XYZ): 400,000*3/10 120,000 Less: Accumulated depreciation per audit : 450,000*3/10 (135,000) Adjustment related to the under depn for 3 years (2011 to 2014) 15,000 creditAdd: Debit to accum depn attributed to old equipment traded in (2011) 150,000 debitNET ADJUSTMENT TO ACCUM DEPN ACCOUNT 135,000 debit

Depreciation expense for the period: Cost 450,000 Accum depn, adjusted 135,000 Carrying value 315,000 Divide by: Revised remaining useful life 5 yearsDEPRECIATION FOR THE YEAR (Mach XYZ) 63,000

2. Ans. A.Carrying value, 1/1/2014: 393,750*10/12 328,125 Multiply by: 150% declining balance rate: (1/6)*150% 25%DEPRECIATION EXPENSE (Mach UVW) 82,031

3. Ans. D.Carrying value, 1/1/2014: 4,500,000*17/20 3,825,000Less: Salvage value 50,000Depreciable cost 3,775,000Multiply by: SYD rate 12/78DEPRECIATION EXPENSE 580,769

Carrying value, 1/1/2014 3,825,000Depreciation for 2014 580,769BUILDING CARRYING VALUE 12/2014 3,244,231

CHAPTER 11-EXERCISE 4: INSULAR CORP.Retained earningsNet income (2014)

a. IGNORED (COUNTERBALANCED)b. AR/Sales, under 2013 (over in 2014) 120,000 (120,000) c. Insurance expense, under 2013 & 2014 (57,600) (86,400) d. Accrued interest expense, under 2013 7,200 (7,200) e. Depreciation, under 2013 & 2014 (117,600) (117,600)

Net adjustments (48,000) (331,200) Unadjusted Net Income 1,750,000 Adjusted 2014 net income 1,418,800

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




CHAPTER 11-EXERCISE 5: KUTING CORP.2013 2014 2014

(NET INCOME) (NET INCOME) WORKING CAPITAL

Omitted prepayments, 2013 256,000 (256,000)Omitted prepayments, 2014 205,200 205,200 205,200 Salaries and wages, 2013 (582,400) 582,400 Salaries and wages, 2014 (520,000) (520,000) (520,000)Accrued interest income, 2013 172,800 (172,800)Accrued interest income, 2014 142,000 142,000 142,000 Advances from customers, 2013 (313,600) 313,600 Advances from customers, 2014 (374,000) (374,000) (374,00) Capital expenditure, 2013 376,000 376,000 Depn on cap. ex. in 2013 (18,800) (37,600) (56,400)Capital expenditure, 2014 348,000 348,000 Depn on cap ex in. 2014 (17,400) (17,400)Total under (overstatement) (110,000) 213,400 (546,800) 103,400

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

CHAPTER 11-EXERCISE 6: GHI INC.2013 NI 2014 NI 2015 RE, Beg

Unadjusted balances 1,750,000 2,000,000 a. Salaries payable, under 2013 (100,000) 100,000 Salaires payable, under 2014 (140,000) (140,000) b. Inventory, over 2013 (190,000) 190,000 c. Prepaid insurance, under 2014 120,000 120,000 d. Interest receivable, under 2014 20,000 20,000 e. Overstatement in gain on eqpt sale, 2014 (160,000) (160,000) f. Overstatement in expense in 2013 100,000 100,000 Depr, under 2013 (1.3M/10yrs) (130,000) (130,000) Depr, under 2014 (1.3M/10yrs) (130,000) (130,000) Inc. from grant, under 2013 (1.2M/10) 120,000 120,000 Inc. from grant, under 2013 (1.2M/10) 120,000 120,000 Adjusted balances 1,550,000 2,120,000 (80,000)

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

4. Ans. D.Correct cost of Building (P1.2M+100K+200K) 1,500,000 Accum depr: (P1.5M*2/10) (300,000) Correct carrying value of Building 12/31/14 1,200,000

CHAPTER 11-EXERCISE 7: BABY INC.2012 2013 2014 2014 2014 2014

Net Income Net Income Net Income RE, Beg RE, End WCBalance 600,000 750,000 300,000 2,000,000 a. 2012 Accured expense understated (90,000) 90,000 2013 Accrued expense understated (110,000) 110,000 (110,000) 2014 Accrued expense understated (98,000) (98,000) (98,000) 2012 Accrued rental income understated 40,000 (40,000) 2013 Accrued rental income understated 45,000 (45,000) 45,000 2014 Accrued rental income understated 50,000 50,000 50,000 2012 Prepaid expense understated 20,000 (20,000) 2013 Prepaid expense understated 30,000 (30,000) 30,000 2014 Prepaid expense understated 35,000 35,000 35,000 b. 2012 Equipment charged to expense 400,000 400,000 400,000 2012/2013/2014 Depreciation understated (80,000) (80,000) (80,000) (160,000) (240,000) 2014 Equipment charged to expense 550,000 550,000 2014 Depreciation understated (110,000) (110,000) c. Cash dividends charged to other expense 100,000 150,000 200,000 *Land accepted as a donation from a stockholder (APIC) (400,000) (400,000) * Loss on inventory due to flood (50,000)

990,000 815,000 832,000 (195,000) 2,187,000 (13,000) 1. Ans. C. 2. Ans. B. 3. Ans. D. 4. Ans. A. 5. Ans. A.

2014 RETAINED EARNINGS




CHAPTER 11-EXERCISE 8: ROXAS INC.1. Ans. C.

Depreciable cost, Old bulding P3,000,000Divide by: Total Useful Life 20 *Depreciation Expense, Old building P150,000Depreciable cost, Extension (Addition) P750,000Divide by: Remaining life (20 – 5) 15 50,000Total Depreciation expense P200,000

Accumulated Depreciation, 12/31/200 P1,125,000Divide by, Expired life as of 12/31/2010 (5 +2.5) 7.5Annual Depreciation P150,000

Depreciable cost, Building P3,000,000Divide by: Annual Depreciation 150,000Total useful life 20 years *

2012 2013 2014Unadjusted net income P1,500,000 1,750,000 2,000,000a. Salary Accruals: 2011 95,000 Salary accruals, 2012 (110,000) 110,000 Salary accruals, 2013 (100,000) 100,000 Salary accruals, 2014 (140,000)b. Inventory, 12/13 overstatement (190,000) 190,000 c. Inventory, 12/14 understatement (150,000) Purchases, 12/14 understatement 150,000 d. Prepaid insurance: 2011 (75,000) Prepaid insurance, 2012 100,000 (100,000) Prepaid insurance, 2013 115,000 (115,000) Prepaid insurance, 2014 120,000 e. Interest receivable: 2012 20,000 (20,000) Interest receivable, 2013 25,000 (25,000) Interest receivable, 2014 30,000 f. Gain on sale of equipment in 2014, overstatement (160,000)g. Capitalizable cost in 2012 750,000 Understatement in depreciation 2012-2014 (25,000) (50,000) (50,000)Adjusted Net Income P2,255,000 P1,540,000 P1,950,000

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

CHAPTER 11-EXERCISE 9: GKNB CORP2012 NET INCOME

2013 NET INCOME

2014 NET INCOME

Unadjusted balances 381,000 450,000 385,500a. Understatement of ending inventory, 12/31/2013 42,000 -42,000 Overstatement of ending inventory, 12/31/2014 -69,000b. Overstatement in 2014 purchases 45,000c. Understatement of sales, 2012 12,000 -12,000 Understatement of sales, 2013 15,000 -15,000 Understatement of sales, 2014 10,500d. Understatement of salaries expense, 2012 -30,000 30,000 Understatement of salaries expense, 2013 -42,000 42,000e. 2013 stock dividend charge to expense 30,000f. Overstatement in rent expense, 2013 15,000 Understatement in rent expense, 2014 -6,000g. Understatement in gain on retirement of bonds (a) 37,800Adjusted balances P363,000 528,000 388,800

1. Ans. B. 2. Ans. C. 3. Ans. B.(a) Gain on the retirement of bonds should be an outright income or loss. Total gain on retirement is (P360,000-P318,000), P42,000. The client recognized only 1/10 of the amount as an amortization over 10 years deducted from interest. Thus effectively, only 9/10 of the amount needs to be added to current net income.

4. Ans. A.Net income, 2012 per books 381,000Net income, 2013 per books 450,000Total accumulated profits, 1/1/2014, per books 831,000Net income, 2012 per audit 363,000Net income, 2013 per audit 528,000Total accumulated profits, 1/1/2014 per audit 891,000Understatement of accumulated profits, 1/1/2014 60,000Correct appropriation of accum profits for share div in item e (39,000)Net adjustment (increase/credit) 21,000

5. Ans. C.Entry made for item e:




Other expense 30,000 Ordinary shares 30,000

Correct entry:Accumulated profits 39,000 Ordinary shares 30,000 Share premium 9,000

Adjusting entry:Accumulated profits 9,000 Share premium 9,000

CHAPTER 11-EXERCISE 10: WWEE COMPANY

2013 net income 2014 net income RE,beg 2014 RE, end 2014

Unadjusted bal. 300,000 1,700,000 1,150,000 2,350,000a. Policy change: Inventory 2013 100,000 -100,000 100,000 Inventory 2014 90,000 90,000b. Overstatement in depn in 2014 (a) 10,000 10,000c. Error correction – Borrowing Cost 25,000 75,000 25,000 100,000Adjusted balances P425,000 P1,775,000 P1,275,000 P2,550,000

2. Ans. C. 3. Ans. D. 4 . Ans. C.

(a)Depreciation per books (2014), Double Decl. P350,000Depreciation per audit, Straight lineCV, 1/1/14: (P350,000/20%) P1,750,000Less: Salvage (50,000) Depreciable cost P1,700,000Divide By: remaining life 5 yrs 340,000 Overstatement in Depreciation P10,000

5. Ans. C.

CHAPTER 11-EXERCISE 11: KRIS COMPANY1. Ans. A.

Sales, accrual basis 10,350,000Add: Decrease in accounts receivable 540,000Cash received from customers 10,890,000

2. Ans. C.Cost of sales 7,050,000Less: Decrease in inventory 450,000Purchases, accrual basis 6,600,00Add: Decrease in accounts payable 412,500Cash paid to suppliers 7,012,500

3. Ans. D.Total operating expense, accrual basis 1,725,000Add: Increase in prepaid expense 255,000 Decrease in accrued expense 150,000Total 2,130,000Less: Depreciation expense (non-cash expense) 90,000Cash payments for operating expenses 2,040,000

4. Ans. B.Cash received from customers 10,890,000Cash paid to suppliers (7,012,500)Cash paid for operating expenses (2,040,000)Cash provided by Operating activities 1,837,500

1. Ans. A.




CHAPTER 11-EXERCISE 12: PROTER COMPANY1. Ans. B.

Excess of cash receipts over cash disbursements 136,500Adjustments: a) Depreciation -31,500 b) Prepaid insurance (5,400*2/3) 3,600 c) Unearned rent income -21,000 d) Salaries payable -8,400 e) Interest receivable 9,510 f) Accrued accounting fees -1,500ACCRUAL NET INCOME 87,210,

2. Ans. D.c) Unearned rent income 21,000d) Salaries payable 8,400f) Accrued accounting fees 1,500TOTAL LIABILITIES 30,900

CHAPTER 11-EXERCISE 13: UKG INC.1. Ans. A.

Beginning invty 186,000Purchases (sqz) 348,000 174,000 Ending invty

Cost of sales 360,000

116,000 AP, beginningPayments 344,000 348,000 Purchases

120,000 AP, ending

2. Ans. C.AR, beginning 96,000

Sales on account 600,000 586,000 CollectionsAR, ending balance 110,000

3. Ans. A.Present value of principal (200,000*0.456387) P91,277Present value of interest, semiannual (10,000*13.59032) 135,903 P227,180Amortization, June 30, 2014 (227,180*4%) – 10,000 (913)Amortization, December 31, 2014 (226,267*4%) – 10,000 (949)Carrying value, December 31, 2014 P225,318

4. Ans. D.Effective interest as of 6/30/14 (227,180*4%) 9,087

Effective interest 12/31/14 (226,267*4%) 9,051Total interest expense P18,138

5. Ans. B.Unadjusted net income 25,000Overstatement in other expenses ** 2,000Overstatement in interest expense (20,000 – 18,138) 1,862Correct net income P28,862

Accrual basis 164,000Increase in prepayments 4,000 2,000

Cash basis 166,000

CHAPTER 11-EXERCISE 14: WOWIE CORP.1. Ans. C.

Cash collected from customers 10,000,000Add: AR, ending 4,000,000Deduct: AR, beginning 6,400,000Sales Accrual basis 7,600,000

COST OF SALES

Increase in accrued utilities

ACCOUNTS PAYABLE

ACCOUNTS RECEIVABLE

**Other Expenses




2. Ans. A.Total payments to suppliers 13,618,000Deduct: payments to suppliers for 2013 invoices 4,632,000Balance: payments to suppliers for 2014 invoices 8,986,000Add: Accounts payable, ending balance 2,621,000Purchases, accrual basis 11,607,000

3. Ans. B.Wages paid 3,050,000Add: Wages payable, ending balance 125,000Deduct: Wages payable, beginning bal. 85,000Wages expense, accrual basis 3,090,000

4. Ans. B.Advertising expenses paid 300,000Add: Advertising supplies, beg bal. 35,000 Accrued advertising, ending bal. 40,000Deduct: Advertising supplies, end. bal. 75,000 Accrued advertising, beg. Bal. 14,250Advertising expense, accrual basis 285,750

5. Ans. B.Insurance premium paid 125,000Add: Prepaid insurance, beg bal. 25,000Less: Unexpired insurance, ending bal. 41,000Insurance expense, accrual basis 109,000

CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION1. Ans. A.

Cash sales 3,000,000 Collections from accounts receivable 30,000,000 Collections from trade notes receivable 2,400,000 35,400,000 Add: Sales returns and allowances (no refund) 800,000 Increase in Accounts receivable 1,400,000 Total 37,600,000 Less: Decrease in Notes receivable (600,000)Gross Sales P37,000,000 Less: Sales returns (total) (1,200,000)Net sales, per audit 35,800,000

2. Ans. C.; 3. Ans. B.Cash purchases 1,000,000 Payments of accounts payable 16,500,000 17,500,000 Add: Purchase returns and allowances (no refund) 300,000 Increase in Accounts payable 400,000 Gross Purchases 18,200,000 Less: Purchase returns and allowances (total) (800,000)Net purchases, per audit 17,400,000 Add: Decrease in inventory 1,000,000 Cost of Sales, per audit 18,400,000

4. Ans. C.; 5. Ans. A.Net sales, per audit P35,800,000 Less: Cost of Sales, per audit (18,400,000)Gross Profit P17,400,000 Interest income 200,000 Total P17,600,000 Less: Expense Insurance (700,000-200,000) 500,000 Salaries(10,000,000-300,000) 9,700,000 Depreciation (100,000+800,000) 900,000 Other expenses 1,500,000 (12,600,000)Net income P5,000,000

CHAPTER 11-EXERCISE 16: ALASKA INC.1. Ans. D.

Sales, accrual basis 2014 4,849,200 Add: Accounts receivable, beg. 270,000 Less: Accounts receivable, end (297,000) AR written-off during the year (43,200) Cash collections from customers 4,779,000




2. Ans. B.Cost of sales, accrual basis 2014 2,250,000 Add: Inventory, end 279,000 Less: Inventory, beg (423,000) Purchases, accrual basis 2014 2,106,000 Add: Accounts payable, beg. 139,500 Less: Accounts payable, end (225,000) Cash payments to suppliers 2,020,500

3. Ans. A.Interest expense, accrual basis 2014 38,700 Less: Amortization of bond discount (4,500) Cash payments for ineterest 34,200

4. Ans. D.Selling expense, accrual basis 2014 1,273,500 Less: 1/3 of depreciation expense (13,500*1/3) (4,500) Bad debt expense (45,000) Cash payments for selling expense 1,224,000

CHAPTER 11-EXERCISE 17: ALAMAT COMPANY1. Ans. B.

Cash sales 4,400,000 Add: Accounts receivable, end 100,000 Total 4,500,000 Less: Advances from customers, end (25,000)Gross/Net Sales 4,475,000

2. Ans. B.; 3. Ans. B.Cash purchases 4,200,000 Add: Accounts payable, end 80,000 Total 4,280,000 Less: Purchase for president (adj to advances) (10,000)Gross/Net Purchases 4,270,000 Less: Inventory, end (500,000)Cost of Sales, per audit 3,770,000

4. Ans. A.Net sales, per audit 4,475,000 Less: Cost of Sales, per audit (3,770,000)Gross Profit 705,000 Less: Expense 560,000 Add: Accrued expense, end 20,000 Deduct, supplies, end (5,000) Prepaid insurance, end (15,000) Equipment (100,000) (460,000) Depreciation (100,000/10)*6/12 (5,000) Interest expense (100,000*12%*4/12) (4,000)Net income P236,000

CHAPTER 11-EXERCISE 18: TITANIUM COMPANYCash, Jan. 1 balanceCollections from customers:'Sales on Account 17,628,510 Less: AR, April 16 (1,327,650) Sales allowances (54,990) Add: AR, Jan. 1 678,690 16,924,560 2. Ans. A.Payments of merchandise to suppliers:Merchandise purchases 10,845,780 Less: AP, April 16 (621,900) Add: AP, Jan. 1 344,160

(10,568,040) 1. Ans. C.Purchase of furniture (9,000) Expenses paid (5,597,490) Cash dividends paid (120,000) Total disbursements (16,294,530) 3. Ans. C.Total accountability 728,040 4. Ans. A.Less: Cash in bank, net of outstanding check (296,490)Cash shortage 431,550 Less: Chargeable against the bank (for encashing the obviously forged check: (300,000)Cash shortage chargeable against the cashier 131,550 5. Ans. B.

Date post:	08-Dec-2021
Category:	Documents
Upload:	others
View:	36 times
Download:	0 times

advanced auditing 2016 solution guide - 1 File Download

Documents