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July 9, 2017 | Author: Cyrus Dann Miolata | Category: Debits And Credits, Expense, Accrual, Book Value, Cost Of Goods Sold
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APPLIED AUDITING...

Description

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

TEACHERS MANUAL 2015 Edition By

DARRELL JOE O. ASUNCION, MBA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA MARK ALYSON B. NGINA, CMA, CPA

Dear fellow teacher, This “Teacher’s Manual” should be used solely by the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization). If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Raymund Francis A. Escala – 0917-715-1226 Mark Alyson B. Ngina – 0915-510-7281 Email ad: [email protected] Thanks and God bless. Sincerely, Darrell Joe O. Asuncion, MBA, CPA Raymund Francis A. Escala, MBA, CPA Mark Alyson B. Ngina, CMA, CPA

Table of Contents CHAPTER 5: CASH TO ACCRUAL................................................................................ 1 CHAPTER 6: CORRECTION OF ERRORS................................................................15 CHAPTER 8: CASH AND CASH EQUIVALENTS ...................................................25 CHAPTER 10: LOANS AND RECEIVABLES ...........................................................46 CHAPTER 12: INVENTORIES .....................................................................................83 CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES ............................................................................................ 116 CHAPTER 15: INVESTMENT IN DEBT SECURITIES ...................................... 132 CHAPTER 16 INVESTMENT IN ASSOCIATE...................................................... 140 CHAPTER 18 PROPERTY, PLANT AND EQUIPMENT.................................... 154 CHAPTER 19 WASTING ASSETS............................................................................ 180 CHAPTER 20 INVESTMENT PROPERTY ............................................................ 186 CHAPTER 22 INTANGIBLE ASSETS ..................................................................... 188 CHAPTER 23 REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE ........................................................................................................... 200

Chapter 5: Cash to Accrual

CHAPTER 5: CASH TO ACCRUAL PROBLEM 5-1 (Computation of Sales) Accounts receivable/Notes receivable trade Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze)

450,000 350,000 300,000

400,000 340,000 350,000 10,000

Total Sales on Account Add: Cash Sales Total Gross Sales

1,100,000

Balance end – A/R Balance end – N/R Collections Write-off

1,100,000

300,000 300,000 600,000

Suggested answer: B PROBLEM 5-2 (Computation of Purchases) Accounts Payable/Notes payable trade Payments Balance end – A/P Balance end – N/P

200,000 200,000 140,000

250,000 150,000 165,000

Total

565,000

565,000

Purchase on Account Add: Cash Purchases Total Gross Purchases

Beg. Balance – A/P Beg. Balance – N/P Purchases (squeeze)

165,000 500,000 665,000

Suggested answer: A PROBLEM 5-3 (Computation of Income Other Than Sales) Rent Receivable/Rent in advance Beg. Balance - Rent Receivable Balance end - Rent in advance Rent Income (squeeze) Total

15,900

14,500

3,600

2,700

130,000

132,300

149,500

149,500

Suggested answer: A

1

Balance end - Rent Receivable Beg. Balance - Rent in advance Collections

Chapter 5: Cash to Accrual

PROBLEM 5-4 (Computation of Expenses in General) Prepaid Salaries/Accrued Salaries Beg. Balance - Prepaid Salaries Balance end - Accrued Salaries Payments Total

2,200

2,600

1,600

1,800

249,350

248,750

253,150

253,150

Balance end - Prepaid Salaries Beg. Balance - Accrued Salaries Expenses

Suggested answer: C PROBLEM 5-5 (Computation of Cost of Machine Acquired and Sold) Question No. 1 Carrying amount of equipment sold 25,000 Add: Accumulated depreciation 15,000 Cost 40,000 Question No. 2 Equipment Beg. Balance Cost of PPE acquired (squeeze)

100,000 60,000

120,000 40,000

Total

160,000

160,000

Balance end Cost of PPE disposed

Accumulated depreciation Balance end Accumulated depreciation of PPE disposed

18,000

Total

33,000

15,000 18,000

15,000

Beg. Balance Depreciation expense

33,000

SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 5-6 Question No. 1 Prepaid Insurance Beg. Balance Payments

7,500 41,500

6,000 43,000

Total

49,000

49,000

2

Balance end Expenses (squeeze)

Chapter 5: Cash to Accrual

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

14,500 112,700

3,700 123,500

Total

127,200

127,200

Balance end Collections

Question No. 3 Salaries payable Balance end Payments

61,500 481,000

53,000 489,500

Total

542,500

542,500

Question No. 4

Beg. Balance Expenses

Accounts receivable trade

Beg. Balance Sales

415,000 1,980,000

550,000 1,845,000

Total

2,395,000

2,395,000

Balance end Collections (squeeze)

Question No. 5 Accounts receivable trade Beg. Balance Sales

415,000 1,980,000

550,000 1,820,000 25,000

Total

2,395,000

2,395,000

Question No. 6

Balance end Collections (squeeze) Write-off

Accounts receivable trade

Beg. Balance Sales Recoveries

415,000 1,980,000 20,000

550,000 1,840,000 25,000

Total

2,415,000

2,415,000

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

4.

A

5.

Balance end Collections (squeeze) Write-off

A

6.

B

PROBLEM 5-7 Question No. 1 Accounts/Notes receivable trade Decrease in A/R Sales on account

100,000 4,260,000

100,000 10,000

3

Increase in N/R Write-off

Chapter 5: Cash to Accrual

(squeeze)

4,200,000 30,000 20,000

Total

4,360,000

Question No. 2

Collections Sales discounts Sales ret. and allow.

4,360,000

Accounts payable

Cash paid to creditors

2,800,000

200,000

Purchase discounts

40,000

2,650,000

Purchase returns

10,000

Total

2,850,000

Question No. 3

Decrease in Accounts payable Gross purchases (squeeze)

2,850,000

Merchandise inventory

Decrease in Inventory Gross purchases

25,000 2,650,000

40,000 10,000 2,625,000

Total

2,675,000

2,675,000

Purchase discounts Purchase returns Cost of sales (squeeze)

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

revenue

454,000

14,000 40,000 400,000

Total

454,000

Increase in Rental receivable Decrease in Unearned rental Collections from tenants

454,000

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

Prepaid

5,500

Interest

8,500

114,000

Interest (squeeze)

100,000 114,000

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

4.

114,000 A

4

5.

D

expense

Chapter 5: Cash to Accrual

PROBLEM 5-8 Question No. 1

Accounts Receivable/Notes receivable trade

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

200,000 300,000 1,000,000

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

1,500,000

1,500,000

Total

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

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

and

Total

25,000 75,000 40,000

50,000 100,000 650,000

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

10,000 650,000 800,000

800,000

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

650,000 40,000 10,000

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

50,000 600,000

20,000 10,000

1,000,000 30,000 970,000

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

5

600,000 800,000 100,000

700,000 270,000

Chapter 5: Cash to Accrual

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

100,000

125,000

50,000

75,000

350,000

300,000

Total

500,000

500,000

Question No. 5

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

Accrued rent/Unearned rent

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

70,000

40,000

40,000

80,000

490,000

300,000

600,000

600,000

4.

B

5.

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

B

PROBLEM 5-9 Question No. 1 Accounts receivable trade Beg. Balance Recoveries Sales (squeeze)

200,000 8,000 1,570,000

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

Total Sales Less: Sales discount Net Sales Question No. 2 Payment (1,210,00020,000+30,000) Purchase ret. and allow. Balance end

1,778,000

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

1,778,000

1,570,000 20,000 1,550,000 Accounts payable trade 1,210,000 10,000 100,000

6

150,000 1,170,000

Beg. Balance Purchases (squeeze)

Chapter 5: Cash to Accrual

Total

1,320,000

Purchases Less: Purchases discount Net Purchases

1,320,000

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

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

380,000 1,160,000

330,000 1,210,000

Total

1,540,000

1,540,000

Balance end Cost of Sales (squeeze)

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

70,000 130,000

80,000 120,000

Total

200,000

200,000

Balance end Collections

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

50,000 30,000

20,000 52,000 8,000

Total

80,000

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

4.

Beg. Balance Doubtful account expense(squeeze) Recoveries

80,000

A

5.

A

PROBLEM 5-10 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Professional (squeeze) Total

fees

500,000 5,250,000

750,000 5,000,000

5,750,000

5,750,000

7

Balance end Collections

Chapter 5: Cash to Accrual

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

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

3,240,000 2,010,000

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

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

375,000 2,125,000

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

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

2,500,000

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

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

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

5,250,000

4.

A

8

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

5.

A

6.

C

7.

B

Chapter 5: Cash to Accrual

PROBLEM 5-11 Question No. 1

Accounts receivable trade

Beg. Balance Sales on account (squeeze)

124,000 1,535,000

146,000 13,000 1,500,000

Total

1,659,000

1,659,000

Balance end Sales discount Collections

Sales on account Add: Cash sales Total sales

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

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

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

Question No. 3 Accounts Payable Payments Balance end

1,206,000 410,000

382,000 1,234,000

Total

1,616,000

1,616,000

Purchases on account Add: Cash purchases Total Purchases

Beg. Balance Purchases (squeeze)

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

Question No. 4 Merchandise Inventory Beg. Balance Net purchases

186,000 1,354,000

190,000 1,350,000

Total

1,540,000

1,540,000

Question No. 5

Balance end Cost of sales (squeeze)

Prepaid G&A/Accrued G&A

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

9,600

8,400

9,000

7,000

204,000

207,200

222,600

222,600

9

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

Chapter 5: Cash to Accrual

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

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

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

20,000 16,000 4,000

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

12,000 25,000 16,000

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

42,000 48,000 20,000

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

9,000 3,000

4. 9.

A B

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

5. 10.

B A

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

150,000 800,000

200,000 10,000 740,000

Total

950,000

950,000

10

Balance end Sales returns Collections

Chapter 5: Cash to Accrual

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

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

Merchandise inventory Beg. Balance Net Purchases (squeeze)

190,000 420,000

220,000 390,000

Total

610,000

610,000

Balance end Cost of Sales

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

470,000

230,000

8,000

428,000

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

180,000 658,000

658,000

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

11

518,000 470,000 48,000

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

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

Chapter 5: Cash to Accrual

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

B

4.

A

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

5.

C

6.

A

PROBLEM 5-13 Question No. 1 Accounts receivable trade Beg. Balance Sales on (squeeze)

account

800,000 930,000

700,000 30,000 1,000,000

Total

1,730,000

Balance end Sales returns allowances Collections

and

1,730,000

Sales Less: Sales returns and allowances Net sales

900,000 30,000 900,000

Question No. 2 Merchandise inventory Beg. Balance Net Purchases (484,000 – 50,000)

150,000 434,000

144,000 440,000

Total

584,000

584,000

Balance end Cost of Sales

Accounts Payable trade Payments Purchase ret. and allow Balance end

394,000 50,000 200,000

160,000 484,000

Total

644,000

644,000

Payment to suppliers was computed as follows: Reported cost of sales Add: Merchandise inventory, beginning Less: Merchandise inventory, end Payments to suppliers

12

Beg. Balance Purchases

400,000 144,000 150,000 394,000

Chapter 5: Cash to Accrual

Question No. 3 Prepaid Interest/Accrued Interest Beg. Balance - Prepaid Interest Balance end - Accrued Interest Interest payments

10,000

14,000

17,000

15,000

40,000

38,000

Total

67,000

67,000

Balance end - Prepaid Interest Beg. Balance - Accrued Interest Interest expense

Unadjusted operating expense Less: Adjustment of overstated interest expense Adjusted total operating expense Question No. 4

200,000 2,000 198,000

Accrued Rent/Unearned Rent

Beg. Balance - Accrued Rent Balance end - Unearned Rent Rent income Total

22,000

19,000

18,000

20,000

49,000

50,000

89,000

89,000

Balance end - Accrued Rent Beg. Balance - Unearned Rent Collections

Question No. 5 Net sales (see No. 1) Less: Cost of sales (see No. 2) Gross income Less: Operating expense (including interest expense of P38,000) Add: Rent Income Net Income SUMMARY OF ANSWERS: 1. A 2. D 3.

D

4.

B

5.

900,000 440,000 460,000 198,000 49,000 311,000

B

PROBLEM 5-14 Question No. 1 Accounts receivable/Notes Receivable Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze)

1,600,000 400,000 5,660,000

2,000,000 1,200,000 3,000,000 1,000,000 100,000 300,000 60,000

Total

7,660,000

7,660,000

13

Balance end – A/R Balance end – N/R Collections of A/R Collections of N/R Sales discounts Sales returns Accounts written-off

Chapter 5: Cash to Accrual

Sales on account Add: Cash sales Total Sales

5,660,000 800,000 6,460,000

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

500,000 1,000,000 1,500,000 1,300,000 80,000

700,000 1,200,000

Total

4,380,000

4,380,000

2,480,000

Purchases on account Add: Cash purchases Total purchases Question No. 3

Beg. Balance – N/P Beg. Balance – A/P Purchase on account (squeeze)

2,480,000 600,000 3,080,000

Accrued interest payable

Balance end Interest paid

40,000 100,000

80,000 60,000

Total

140,000

140,000

Beg. Balance Interest (squeeze)

expense

Question No. 4 Unearned rent income Balance end Rent income (squeeze)

40,000 240,000

120,000 160,000

Total

280,000

280,000

Question No. 5

Beg. Balance Collections from tenants

Merchandise inventory

Beg. Balance Purchases (see No. 2)

1,600,000 3,080,000

1,000,000 80,000 3,600,000

Total

4,680,000

4,680,000

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

D

4.

14

D

Balance end Purchase discount Cost of sales (squeeze)

5.

A

Chapter 6: Correction of Errors

CHAPTER 6: CORRECTION OF ERRORS Note to professor: Page 109

Existing data: Omission of deferred expense The entire amount was debited to asset account and no adjustment was made at the end of 2015.

The entire amount was debited to expense account and no adjustment was made at the end of 2015.

109

Omission of Deferred Income Collection of rent was credited to unearned rent revenue account. At the end of 2015, no entry was made to take up the earned portion of the amount collected.

Collection of rent was credited to rent revenue account. At the end of 2015, no entry was made to take up the unearned portion of the amount collected.

110

Omission of Accrual of Expenses Accrued salaries expense of P4,000 was not recorded at the end of 2016.

Accrued salaries expense of P4,000 was not recorded at the end of 2015.

Omission of Accrual of Revenues Accrued rent receivable of P8,000 was not recorded at the end of 2016.

Accrued rent receivable of P8,000 was not recorded at the end of 2015.

Error affecting ending inventory (e.g. overstatement) Effect of the error in 2016 Net Income X

Effect of the error in 2016 Net Income -U

Additional information # 4 Accrued interest receivable of P8,000 was …

Accrued interest receivable of P15,000 was …

110

111

112

113

Requirement No. 1 Total 2015 Adjusted Income – 399,000

114

Requirement No. 1 Total 2015 Adjusted Income – 345,000

117

Improper capitalizing of expense Effect of error in 2016 Net income O Improper expensing of capital expenditure Effect of error in 2016 Net income U

15

Change to:

Total 2015 Adjusted Income – 181,000 Total 2015 Adjusted Income – 235,000 Effect of error in 2016 Net income U Effect of error in 2016 Net income O

Chapter 6: Correction of Errors

PROBLEM 6-1 Income Statement and SFP Errors Questions Nos. 1-6 2015

Unadjusted balances 1 2 Adjusted balances

2016

Net income

Workin g capital

RE, end of the year

Net income

Workin g capital

RE, end of the year

100,000 -

300,000 -

100,000 -

150,000 -

400,000 -

250,000 -

100,000

300,000

100,000

150,000

400,000

250,000

Question No. 7 Assuming errors were discovered in 2015 ADJUSTING ENTRIES Debit 1) Interest expense 20,000 Rent expense 2)

Accounts receivable Notes receivable

30,000

Accounts receivable Notes receivable

Credit

30,000 30,000

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

20,000

30,000

Assuming errors were discovered in 2016 ADJUSTING ENTRIES Debit 1) No entry 2)

Credit

Accounts receivable Notes receivable

30,000

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

4.

A

5.

D

Credit

30,000 6.

A

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

Unadjusted balances 1 2 3 4 Adjusted balances

Net income

2015 Workin g capital

R/E

Net income

2016 Workin g capital

100,000 (10,000) 15,000 6,000 (16,000)

300,000 (10,000) 15,000 6,000 (16,000)

100,000 (10,000) 15,000 6,000 (16,000)

150,000 10,000 (15,000) (6,000) 16,000

400,000 -

250,000

95,000

295,000

95,000

155,000

400,000

250,000

16

R/E

Chapter 6: Correction of Errors

Question No. 7 A. Errors were discovered in 2015 ADJUSTING ENTRIES 1) Rent expense Rent payable 2)

Debit 10,000

Credit 10,000

Interest receivable Interest income

15,000

3)

Prepaid insurance Insurance expense

6,000

4)

Rent revenue Unearned rent revenue

15,000 6,000

16,000 16,000

B. Errors were discovered in 2016 Assuming errors are discovered when the cash flows related to the transactions were processed and books are still open ADJUSTING ENTRIES Debit Credit 1) Retained earnings 10,000 Rent expense 10,000 2) 3) 4)

Interest income Retained earnings

15,000

Insurance expense Retained earnings

6,000

Retained earnings Rent revenue

16,000

15,000 6,000 16,000

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

Errors were discovered in 2017 No necessary adjusting entries to be made.

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

4.

A

5.

B

6.

A

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

Unadjusted balances 1 2 3 Adjusted balances

Net income

2015 Workin g capital

R/E, end

Net income

2016 Workin g capital

R/E, end

100,000 (50,000) 70,000 20,000

300,000 (50,000) 70,000 20,000

100,000 (50,000) 70,000 20,000

150,000 50,000 (70,000) (20,000)

400,000 -

250,000 -

140,000

340,000

140,000

110,000

400,000

250,000

17

Chapter 6: Correction of Errors

Question No. 7 A. Errors were discovered in 2015 ADJUSTING ENTRIES 1) Purchases Accounts payable 2) 3)

Debit 50,000

Credit 50,000

Accounts receivable Sales

70,000

Inventory Cost of sales

20,000

70,000 20,000

B. Errors were discovered in 2016 Assuming errors are discovered when the cash flows related to the transactions were processed and books are still open ADJUSTING ENTRIES Debit Credit 1) Retained earnings 50,000 Purchases 50,000 2) 3)

Sales Retained earnings

70,000 7,000

Inventory, beginning Retained earnings

6,000

6,000

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

Errors were discovered in 2017 No necessary adjusting entries to be made.

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

4.

A

5.

B

6.

A

PROBLEM 6-4 Noncounterbalancing Errors Questions Nos. 1-6 2015

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

Net income

Workin g capital

100,000 (18,000) 32,000 (12,000) 160,000 (25,000) 4,000 (20,000)

300,000 (18,000) 32,000 -

221,000

314,000

2016 RE, end of the year

RE, end of the year

Net income

Workin g capital

100,000 (18,000) 32,000 (12,000) 160,000 (25,000) 4,000 (20,000)

150,000 (6,000) 16,000 (40,000) 4,000

400,000 (24,000) 48,000 -

250,000 (24,000) 48,000 (12,000) 120,000 (25,000) 8,000 (20,000)

221,000

124,000

424,000

345,000

18

Chapter 6: Correction of Errors

Question No. 7 A. Errors were discovered in 2015 ADJUSTING ENTRIES 1) Insurance expense Prepaid insurance 2)

Debit 18,000

18,000

Unearned rent income Rent income

32,000

3)

Depreciation expense Accumulated depreciation

12,000

4)

Building improvements Repairs expense

5)

6)

32,000 12,000

200,000 200,000

Depreciation expense Accumulated depreciation

40,000

Other income Accumulated depreciation Loss on sale Building

20,000 15,000 5,000

Repairs expense Building

20,000

40,000

40,000 20,000

Accumulated depreciation Depreciation expense

4,000 4,000

B. Errors were discovered in 2016 ADJUSTING ENTRIES 1) Retained earnings Insurance expense Prepaid insurance

Debit 18,000 6,000

2)

Unearned rent income Retained earnings Rent income

48,000

3)

Retained earnings Accumulated depreciation

12,000

4)

Building improvements Retained earnings

5)

Credit

Credit 24,000 32,000 16,000 12,000

200,000 200,000

Depreciation expense Retained earnings Accumulated depreciation

40,000 40,000

Retained earnings Accumulated depreciation Building

25,000 15,000

80,000

40,000

19

Chapter 6: Correction of Errors

6)

Retained earnings Building

20,000 20,000

Accumulated depreciation Retained earnings Depreciation expense C.

8,000 4,000 4,000

Errors were discovered in 2017 ADJUSTING ENTRIES 1) Retained earnings Prepaid insurance

Debit 24,000

2)

Unearned rent income Retained earnings

48,000

Retained earnings Accumulated depreciation

12,000

3) 4)

5)

6)

24,000 48,000 12,000

Building improvements Retained earnings

200,000 200,000

Depreciation expense Retained earnings Accumulated depreciation

40,000 80,000

Retained earnings Accumulated depreciation Building

25,000 15,000

Retained earnings Building

20,000

120,000

40,000 20,000

Accumulated depreciation Retained earnings SUMMARY OF ANSWERS: 1. A 2. A 3. A

Credit

4.

8,000

A

5.

B

8,000 6.

C

PROBLEM 6-5 (COMPREHENSIVE) Questions Nos. 1-3 Effects of error in Net income Working 2014 2015 Capital 10,000 (10,000) (8,000) (8,000) (20,000) 20,000 (40,000) (40,000) 20,000 (20,000) 70,000 70,000 (80,000) 20,000

1) MI over, NI over MI under, NI under 2) Purchases over, NI under 3) Sales over, NI over 4) Expenses over, NI under Depreciation exp under, NI over

20

Chapter 6: Correction of Errors

5) Other income over *Loss under, NI over Adjusted balance

20,000 5,000 (45,000)

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

32,000

20,000 40,000 15,000

Questions No. 4 Effect of errors to Retained Earnings in 2015 Understatement to 2014 net income Overstatement to 2015 net income Net understatement to 2015 retained earnings Questions No. 5 ADJUSTING ENTRIES 1) Retained earnings, beg Merchandise inventory, beg Merchandise inventory, end Cost of Sales 2)

3)

4)

5)

25,000 (5,000)

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

Credit 10,000

8,000

Purchases Retained earnings Advances supplier Purchases

20,000

Retained earnings, beg Sales

20,000

Sales Advances customers

70,000

40,000

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

Depreciation expense Improvements Accumulated depreciation Retained earnings

20,000 100,000

Accumulated depreciation Retained earnings, beg Equipment

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

22,000

70,000

40,000 80,000

15,000 25,000 40,000 4.

A

21

5.

C

Chapter 6: Correction of Errors

PROBLEM 6-6 Comprehensive Questions Nos. 1-5 2014 Net Workin Income g capital Ending Inventory 2014 understated, NI understated Ending Inventory 2015 overstated, NI overstated Depreciation exp. 2014 overstated, NI understated Depreciation exp. 2015 overstated, NI understated Accrued expense understated, NI overstated 2014 Accrued expense understated, NI overstated 2015 Prepaid expense understated, NI understated 2014 Prepaid expense understated, NI understated 2015 Accrued revenues understated, NI understated 2015 Deferred revenues understated, NI overstated 2014 Total

(6,000)

2015 Net Workin Income g capital

(6,000)

(11,000)

4,500

(5,000)

(5,000)

R/E

6,000

-

-

10,000

10,000

10,000

-

-

(11,000)

(7,000)

-

(7,000)

(4,500)

-

-

7,500

7,500

7,500

5,000

-

-

(12,000)

(12,000)

(12,000)

(3,000)

(3,000)

(3,000)

-

4,500

12/31/2 015

1,200

1,200

(1,200)

-

-

(16,300)

5,300

800

2,500

(15,500)

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

4.

A

22

5.

C

Chapter 6: Correction of Errors

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

8

Unadjusted balances Overstatement of ending inventory - 2013 Understatement of ending inventory 2015 Understatement of accrued expense - 2013 Overstatement of accrued exp. Understatement of Depreciation Expense Overstatement of Depreciation Expense Overstatement of Purchases 2013 2014 Overstatement of other income Correct gain 20,000 Less: Per record 5,000 Adjusted balances

2013 3,000,000 (120,000)

2014 (1,000,000) 120,000

(40,000)

40,000

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

(30,000)

2,870,000

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

40,000

(40,000)

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

3,790,000

20,000 40,000 25,000

Questions Nos. 3 and 5 Adjusted net income (loss): 2013 2014 Total RE, 12/31/2014 Adjusted net income 2015 Total RE, 12/31/2015 SUMMARY OF ANSWERS: 1. B 2. B 3. B

2015 3,500,000

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

4.

C

PROBLEM 6-8 Question No. 1 Entry made: Cash Equipment

5.

15,000 5,000

No. 3 No. 5

D

Debit 30,000

Credit 30,000

Depreciation expense Accumulated depreciation (70,000 x 10%)

23

7,000 7,000

Chapter 6: Correction of Errors

“Should be” entry: Cash Accumulated depreciation Loss on sale Equipment

Debit 30,000 60,000 10,000

Adjusting entry in 2015: Accumulated depreciation Retained earnings Equipment

Debit 67,000 3,000

Credit

70,000 Credit 70,000

Question Nos. 2-7

Unadjusted balances Exp over, NI under, WC under 2013 2014 2015 Income over, WC over: 2013 2015 EI under, NI under, WC under: 2013 2014 EI over, NI over, WC over Loss under, NI over Depreciation exp. Over, NI under Adjusted bal.

2013 Workin Net g income capital Over/ 600,000 (under)

1,000

(2,000)

10,000

2014 Net income

(1,000)

2,000

700,000

Working capital Over/ (under)

(1,000) 1,500

(1,500)

2015 Workin Net g income capital Over/ 800,000 (under)

(1,500) 600

(600)

(3,000)

3,000

2,000

(10,000)

(10,000) 20,000

(20,000)

(20,000) (25,000)

25,000

751,100 (6)

27,400 (7)

(10,000)

609,000 (2)

7,000 709,500 (4)

(9,000) (3)

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

4.

B

24

(21,500) (5)

5.

D

6.

D

7.

A

Chapter 8: Cash and Cash Equivalents

CHAPTER 8: CASH AND CASH EQUIVALENTS Note to professor: Page 179

Existing data: 1. Customer’s NSF check returned by bank in January and redeposited in February (no entry in January and February), P 3,400

181

Requirement No. 2 Erroneous bank charge – October 7,000 Erroneous bank charge – November 18,000

182

Requirement No. 6: Adjusting entries #3 3) Salaries payable 120,000

Beg (3,400)

Change to: Rec. Disb. 3,400

End

Erroneous bank charge – October 18,000 Erroneous bank charge – November 7,000 3) Rent payable 120,000

PROBLEM 7-1 Cash and Cash Equivalents Postal money order Correct cash balance in a general checking account with BPI Treasury warrants Currency and coins in a petty cash fund Cash and cash equivalents

50,000 320,000 20,000 1,000 P 391,000

Suggested answer: B PROBLEM 7-2 Cash and Cash Equivalents Reported cash and cash equivalents Certificate of deposits with maturity of 120 days Postdated check Compensating balance – legally restricted Adjusted cash and cash equivalents

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

Suggested answer: C PROBLEM 7-3 Cash and Cash Equivalents Bills and coins on hand Traveler’s check Petty cash excluding paid cash vouchers of P1,650 Money order Checking Account Balance in Bank of Philippine Island Total Suggested answer: D

25

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

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-4 Cash and Cash Equivalents Cash on hand Checking account No. 143 - BPI Checking account No. 155 - BPI *Securities classified as cash equivalents Checking account No. 155 - BPI

P

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

*Breakdown of securities classified as cash equivalents Date Maturity Securities: Acquired Date 120-day Certificate of Deposit 12/10/2014 01/31/2015 BSP-Treasury Bills (No.2) 10/31/2014 01/20/2015 Money Market Funds 11/21/2014 02/10/2015

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

Suggested answer: A PROBLEM 7-5 Cash and Cash Equivalents Cash in bank – checking account Cash in bank – payroll account Cash on hand Treasury bills, purchased December 15, 2013 and due March 15, 2014 Unreleased checks Postdated checks Cash and cash equivalents

5,000,000 1,000,000 500,000 2,000,000 100,000 ( 200,000) P8,400,000

Suggested answer: B PROBLEM 7-6 Cash and Cash Equivalents Petty cash fund (70,000-15,000-5,000) Current account – Metro Bank (4,000,000+100,000) Cash and cash equivalents Suggested answer: C PROBLEM 7-7 Effective Interest Rate SOLUTION: Question No. 1 Let X = Principal amount of the loan Principal X Less: Compensating balance 5%X Add: Current balance 50,000 Amount needed P3,375,000

26

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

Chapter 8: Cash and Cash Equivalents

X-.05X+50,000 .95X .95X/.95 X

= = = =

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

Question No. 2 Annual interest payment (3,500,000 x 12%) Interest income on the loan proceeds in the compensating balance [3.5M-3,375,000) x 4%] Effective interest Divide by loan proceeds (3,500,000-175,000) Effective interest rate Suggested answers: 1. C

420,000 5,000 415,000 3,375,000 12.30%

2. C

PROBLEM 7-8 Petty Cash Fund Requirement No. 1 Currencies Coins A check drawn by the company payable to the order of the petty cash custodian, representing her salary Adjusted Petty Cash Fund Requirement No. 2 Petty cash Accounted: Currencies Coins Petty cash vouchers: Transportation Office supplies Repair of computer Loans to employees Miscellaneous expenses Postage A check drawn by the company payable to the order of the petty cash custodian, representing her salary An employee’s check returned by the bank because of insufficient funds A piece of paper with names of several employees together with a contribution for a wedding gift for an employee. Attached to the sheet of paper is a currency of

27

3,000 450 3,800 7,250

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

500

11,200

Chapter 8: Cash and Cash Equivalents

Less: Petty Cash Accountabilities PCF imprest balance A piece of paper with names of several employees together with a contribution for a wedding gift for an employee. Attached to the sheet of paper is a currency of Petty cash overage Requirement No. 3: Adjusting Entries 1) Transportation expense Office supplies expense Repairs expense Advances to employees Miscellaneous expense Postage Petty Cash fund

10,000

500 Debit 650 160 400 600 240 200

2)

Unused stamps Postage

50

3)

Petty cash fund Miscellaneous Income

700

4)

Advances to employees Petty cash fund

1,200

PROBLEM 7-9 Petty Cash Fund Coins and currencies Check drawn by the company payable to the order of the petty cash custodian, representing salary for the month Petty cash

10,500 700 Credit

2,250 50 700 1,200 17,000 18,000 P 35,000

Suggested answer: C PROBLEM 7-10 Bank Reconciliation Unadjusted balances Outstanding check, net of certified checks Deposit in transit (Undeposited collections) Book error – disbursement for utilities Note charged by the bank, including interest Bank service charge Erroneous bank credit NSF check Adjusted balance

28

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

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

Chapter 8: Cash and Cash Equivalents

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

3) 4)

Notes payable Interest expense Cash

6,000 500 6,500

Bank service charge Cash

240

Accounts receivable Cash

750

240 750

PROBLEM 7-11 Bank Reconciliation Unadjusted bank bal Erroneous bank credit DIT: October November OC: October Nov. (760+1,868) Unadjusted book bal Credit memo Oct. Nov. NSF-Nov BSC: Oct Nov Check No. overstated disbursement Check No. understated disbursement

Oct. 31 18,005 1,790

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

Disb 25,620

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

(6,681) 13,114

19,019

(6,681) 2,628 21,567

11,534 1,600

18,269

21,575

22 35

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

(1,000)

1,000

270 21,567

(270) 10,566

750 665 (20)

(2,628) 10,566

148 150 13,114

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

4.

19,019

D

29

5.

A

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-12 Deposit in Transit Deposit in transit, beg Add: Book debits for the month Less: CM recorded this month Error – check received (Jan) Error – check issued (Jan) Add: Error – check received (Feb) Total Less: Bank debits for this month Less: CM for this month Erroneous bank credit - Feb Erroneous bank charge - Jan Deposit in transit, end

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

P 50,000

348,000 398,000

350,500 P 47,500

Suggested answer: A PROBLEM 7-13 Outstanding Checks Outstanding checks, beg (squeeze) Add: Book credits for the month Less: Error in recording Service charge recorded Total Less: Bank debits for this month Less: NSF check returned DM for this month Outstanding checks, end

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

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

Suggested answer: A PROBLEM 7-14 Proof of Cash Question No. 2 Deposit in transit, beg Add: Book debits for the month Less: CM recorded this month Total Less: Bank debits for this month Less: CM for this month Erroneous bank credit - Oct Erroneous bank debit - Sep Deposit in transit, end

30

P 151,230 1,500 P 149,951 4,277 3,000 600

P 5,200 149,730 154,930

142,074 P 12,856

Chapter 8: Cash and Cash Equivalents

Question No. 3 Outstanding checks, beg (squeeze) Add: Book credits for the month Less: DM recorded (526+50) Total Less: Bank debits for this month Less: Erroneous bank debits-Oct Erroneous bank credits-Sep DM for this month (700+65) Outstanding checks, end

P 8,007

P 111,423 576 P 110,098 900 1,000 765

110,847 118,854

107,433 P 11,421

Question Nos. 1, 4 and 5 BANK 30-Sep Unadjusted bal - bank 130,560 Deposit in transit: September 30 5,200 October 31 Outstanding checks: September 30 (8,007) October 31 Erroneous bank credit (1,000) Erroneous bank credit Erroneous bank debitOct Erroneous bank debitSep 600 Adjusted balances 127,353 *(130,560+149,651-110,098) BOOK Unadjusted bal - book Bank service charge: September 30 October 31 NSF checks: September 30 October 31 CM for collection: September 30 October 31 Adjusted balances

Receipts 149,951

Disb. 110,098

(5,200) 12,856

12,856 (8,007) 11,421 (1,000)

(11,421)

(900)

900

111,612

169,748

(3,000)

(600) 154,007

30-Sep **126,429

Receipts 151,230

(3,000)

Disb. 111,423

31-Oct 166,236

(50)

(50) 65

(65)

(526)

(526) 700

(600)

111,612

4,277 169,748

1,500

(1,500) 4,277 154,007

127,353

*(166,236+111,423-151,230) SUMMARY OF ANSWERS: 1. B 2. A 3. B

31-Oct *170,413

4.

A

31

5.

D

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-15 Proof of Cash Question No. 1 Outstanding checks, beg. Add: Checks issued Total Less: Checks paid by the bank Outstanding checks, end

100,000 2,500,000 2,600,000 2,200,000 400,000

Question No. 2 Deposits in transit, beg Add: Deposits made Total Less: Deposits acknowledged by the bank Deposits in transit, end

300,000 1,800,000 2,100,000 1,600,000 500,000

Question No. 3 to 5 BANK 31-May Receipts Unadjusted bal - bank 2,600,000 *2,190,000 Deposit in transit: May 31 300,000 (300,000) June 30 500,000 Outstanding checks: May 31 (100,000) June 30 Erroneous bank credit (60,000) Erroneous bank charge 40,000 (40,000) Adjusted balances 2,780,000 2,350,000 *(1,600,000+40,000+550,000) **(2,200,000+60,000+50,000+100,000) BOOK Unadjusted bal - book Bank service charge: May 31 June 30 CM for collection: May 31 June 30 NSF checks - June 30 Adjusted balances

31-May 2,190,000

Disb. **2,410,000

500,000

Receipts ***2,400,000

(100,000) 400,000 (60,000)

(400,000)

2,650,000

2,480,000

Disb. 2,500,000

30-Jun 2,090,000

50,000

(10,000) (50,000)

100,000 2,650,000

550,000 (100,000) 2,480,000

(10,000) 600,000

(600,000) 550,000

2,780,000

2,350,000

***(1,800,000+600,000) SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

A

32

5.

30-Jun 2,380,000

A

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-16 Proof of Cash Question No. 1 Outstanding checks, beg Add: Checks issued this month Book disbursements (squeeze) Less: DM recorded this month Total Less: Checks paid by the bank Erroneous bank charge Outstanding checks, end

P 16,250 P128,750 2,500 P 133,750 3,750

Question No. 2 Deposit in transit, beg Add: Deposits made by the company Total Less: Deposits acknowledged by the bank Deposit in transit, end

130,000 P 12,500 P 12,500 152,500 165,000 145,000 P 20,000

Question No. 3 Unadjusted cash in bank balance per ledger Add: Under-footing of cash receipts Total Less: Unrecorded bank service charges (3,250 +1,500-2,500) Adjusted cash in bank balance, 12/31 Question No. 4 Bank service charges per bank statement in December Less: Bank service charge in December recorded in December Total BSC recorded in the books Dec Less: BSC in Nov. recorded in Dec. Unrecorded BSC charge in December

126,250 142,500

P 37,500 2,500 40,000 2,250 P 37,750

P 3,250 P 2,500 1,500

1,000 P 2,250

Question No. 5 Unadjusted cash in bank, November (squeeze) Add: Book Receipts (152,500 - 2,500) Total Less: Book disbursements Unadjusted cash in bank, December

P 16,250 150,000 166,250 128,750 P 37,500

Unadjusted cash in bank, November (squeeze) Less: BSC in November Adjusted cash in bank, December

P 16,250 1,500 P 14,750

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

4.

D

33

5.

B

Chapter 8: Cash and Cash Equivalents

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

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

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

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

67,122

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

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

**(1,712,892+750)

31-Jul 180,250

Receipts 1,830,752

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

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

Disb. *1,702,918

Aug. 31 308,084

( 50,944) 67,122

( 67,122)

( 1,166) 1,717,930

41,836 1,166 283,964

Disb. **P1,713,642

Aug. 31 P288,462

540 4,950 (

52)

( 698) P162,150

540 4,950)

(

P1,839,744

34

52) 88 ( 698) P1,717,930

( (

88) P283,964

Chapter 8: Cash and Cash Equivalents

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

4.

B

5.

A

PROBLEM 7-18 Proof of Cash Question No. 1 Beg. Balance, Nov. 30 Add: Total Collections from customers on Dec. November bank coll. for customer note Total Less: Checks drawn for December Bank service charges – November Unadjusted cash balance, Dec. 31 Question Nos. 2-5 BANK Unadjusted bank balance NSF check, no entry on the books for return and redeposit Erroneous bank charge in December Undeposited collection November 30 December 31 Bank service charge charged to another client Outstanding check Nov. 30 Dec. 31 Adjusted balances BOOK Unadjusted balance NSF check recorded as reduction of cash receipts returned in December but also recorded in December Error in recording check No. 7159 entered as P30,000 but should be 3,000 Cancellation of check No. 7767 Bank service charge Nov. 30 Dec. 31 Bank collection for customer's note: Nov. 30 Dec. 31 Adjusted balances

Nov. 30 90,800

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

December Receipts Disb. 171,272 99,072 (

472)

Dec. 31 163,000

( 472) ( 1,500)

5,000

1,500

( 5,000) 8,000

( 5,000)

8,000 150

( 150) ( 7,700) 164,650 125,800

90,800

173,800

( 5,000) 7,700 99,950

50,900

173,000

98,100

1,800

1,800

27,000 5,000

27,000 5,000

( 100)

8,000 90,800

35

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

99,950

(

150)

7,000 164,650

Chapter 8: Cash and Cash Equivalents

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

4.

B

PROBLEM 7-19 Proof of Cash Question No. 1 Outstanding checks, beg (squeeze) Add: Checks issued this month Book disbursements Less: DM recorded this month Total Less: Bank disbursements Add: Paid out in currency Less: NSF redeposited DM for this month Outstanding checks, end

5.

B

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

145,500 153,500

147,500 P 6,000

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

Sept. 30 100,000

Receipts 200,000

5,000

(5,000) 7,000

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

(8,000)

Disb. 150,000

Oct. 31 150,000 7,000

97,000

2,000 201,000

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

151,000

Sept. 30 91,500

Receipts 196,000

Disb. 148,000

Oct. 31 139,500

8,000

(8,000) 13,000

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

(2,500) 97,000

4.

201,000

A

36

5.

A

(6,000)

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

1,500 151,000

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-20 Proof of Cash Question No. 1 Account No. 143: Unadjusted balances Deposit in transit Misplaced check Outstanding check Undelivered check Note charged by the bank Adjusted balance *(100,000 - 20,000, Misplaced check) **(75,000 - 15,000, Undelivered check)

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

Bank P1,000,000 *80,000

Book P1,099,400 ( 20,000)

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

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

P

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

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

Nov. 30 2,200,000 90,000

December Receipts Disb. 1,000,000 2,000,000 (90,000) **240,00 0

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

37

(20,000) 1,130,000

Dec. 31 1,200,000

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

(1,860,000)

3,610,000

(420,000)

Chapter 8: Cash and Cash Equivalents

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

1,980,000

1,420,000

3,500,000

(100,000)

(10,000) 20,000

(20,000)

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

(100,000) (420,000)

(10,000) 90,000

(90,000)

(200,000) 2,060,000

1,130,000

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

P

90,000

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

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

B

PROBLEM 7-21 Proof of Cash Question No. 1 RCBC Account Unadjusted balance Credit memo for note collected Bank service charge Deposit in transit Outstanding checks (25,000+20,000) Unrecorded disbursement Adjusted balance

38

5.

C

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

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

Chapter 8: Cash and Cash Equivalents

Question Nos. 2-3 Equitable PCI Bank Book Bank Unadjusted bal. (squeeze) P 62,000 P 93,000 Credit memo for note coll. 10,000 Bank service charge ( 2,000) Deposit in transit (15,000+20,000+50,000*) 85,000 Outstanding checks ( 28,000) Unrecorded transfer (30,000+50,000*) 80,000 Adjusted balance P 150,000 P150,000 *fund transfer No. 4 (Included both as unrecorded transfer and deposit in transit) Question No. 4 Outstanding checks: RCBC Account (25,000+20,000) Equitable PCI Bank Total outstanding checks

P 45,000 28,000 P 73,000

Question No. 5 Fund transfer No. 2 is recorded in the disbursing bank during December while it was only recorded in the disbursing book in January. This is an unrecorded disbursement for fund transfer. SUMMARY OF ANSWERS: 1. A 2. A 3. B

4.

B

5.

PROBLEM 7-22 Proof of Cash Question No. 1 Unadjusted bank statement balance - Dec. 31 Add: Deposit in transit Less: Outstanding checks Adjusted cash in bank balance, December 31 Less: Credit memo December Add: Bank service charge December NSF check, December Unadjusted book balance - December 31 *(3,000,000+9,000,000-7,000,000) Question No. 2 Unadjusted bank receipts Deposit in transit-Nov. 30 November 30 December 31 Credit Memo - December 31 Unadjusted book receipts

B

*P5,000,000 1,000,000 600,000 P 5,400,000 200,000 10,000 140,000 P 5,350,000

P 9,000,000 (400,000) 1,000,000 ( 200,000) P9,400,000

39

Chapter 8: Cash and Cash Equivalents

Question No. 3 Unadjusted bank disbursements Outstanding checks: November 30 December 31 Bank service charge-Dec. 31 NSF check-Dec. 31 Unadjusted book disbursements

P7,000,000 (900,000) 600,000 (10,000) ( 140,000) P6,550,000

Question No. 4 Currencies Coins Check drawn payable to petty cash custodian Total Petty cash fund Question No. 5 Cash in bank (See No. 1) Petty cash fund (See No. 4) Cash on hand (1,725,000-1,600,000) Total Cash and cash equivalents SUMMARY OF ANSWERS: 1. B 2. A 3. A

4.

P 40,000 4,000 30,000 P 74,000 P 5,400,000 74,000 125,000 P5,599,000

C

5.

C

PROBLEM 7-23 Proof of Cash Question No 1 Outstanding check Check Nos. 144 P 1,500 149 8,000 150 12,000 Total P 21,500 Alternatively, it may also be computed as follows: Outstanding check, beg Add: Checks issued Total Less: Checks paid by the bank Bank Debits P 113,000 Less: DM for this month NSF checks (10,000+40,000) 50,000 Bank service charge 2,000 Error Correction 500 Outstanding checks, end

40

P

7,000 75,000 P 82,000

60,500 P 21,500

Chapter 8: Cash and Cash Equivalents

Question No 2 Unadjusted rec. per bank Deposit in transit: November 30 December 31 Error correction NSF check, no entry on the books when returned and redeposited Adjusted balance Question No 3 Unadjusted disbursement, per bank Outstanding checks November 30 December 31 Error correction NSF check, no entry on the books on the returned and redeposit Adjusted balance

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

Question No 4 Unadjusted bank bal. Deposit in transit November 30 December 31 Outstanding checks November 30 December 31 Adjusted bal.

P 127,500 20,000 ( 21,500) P126,000

Question No 5 Zero, adjusted bank and book balance on December 31 is the same. PROOF OF CASH Unadjusted bank balance Deposit in transit November 30 December 31 Outstanding checks November 30 December 31 Error correction NSF check, no entry on the books on the return and redeposit

Nov. 30 69,000

Receipts 171,500

11,000

(11,000) *20,000

(7,000)

41

Disb. 113,000

Dec. 31 *127,500 20,000

(500)

(7,000) 21,500 (500)

(40,000)

(40,000)

(21,500)

Chapter 8: Cash and Cash Equivalents

Adjusted bal. * (69,000+171,500-113,000) ** (18,000+2,000) Unadjusted book balance Credit memo for note collected November 30 December 31 Bank service charge November 30 December 31 Adjusted bal.

73,000

140,000

87,000

126,000

Nov. 30 66,000

Receipts 113,800

Disb. 85,000

Dec. 31 94,800

8,800

(8,800) 35,000

35,000

(1,800) 73,000

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

4.

2,000 87,000

140,000

B

5.

PROBLEM 7-24 Computation of Cash Shortage SOLUTION: Question No. 1 Unadjusted bank bal. Less: Outstanding checks (8,434+4,300+ 6,524+ 9,551.50+4,577+5,961) Add: Undeposited receipts Adjusted bank balance

A

P

225,400

(39,347.50) 35,000 P221,052.50

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

P242,310.50 30,000 900 P273,210.50

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

P221,052.50 273,210.50 (P52,158.00)

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

42

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

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-25 Computation of Cash Shortage Question No. 1 Unadjusted bank bal. Outstanding checks Undeposited collections Adjusted bank balance

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

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

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

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

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

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

P 18,800 P 11,000 5,000

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

4.

D

43

5.

D

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

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

Chapter 8: Cash and Cash Equivalents

PROBLEM 7-26 Computation of Cash Shortage Question No. 1 Deposit in transit, unadjusted bal. Less: customer's Post-dated check Adjusted Deposit in transit

P 350,500 100,000 P 250,500

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

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

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

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

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

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

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

P587,000 500,920 P 86,080

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

4.

C

5.

A

PROBLEM 7-27 Computation of Cash Shortage Question No. 1 Purchases (squeeze) P 81,160 Less: Merchandise inventory, end 23,480 Cost of Sales (80,752/140%) P 57,680

44

Chapter 8: Cash and Cash Equivalents

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

P 81,160 11,571 P 69,589

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

P 80,752 21,345 P 59,407

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

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

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

140,528 P 26,879 P ( P

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

P 167,407

P

6,582 463) 1,285 7,404

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

B

45

5.

A

Chapter 10: Loans and Receivables

CHAPTER 10: LOANS AND RECEIVABLES Note to professor: Page 256

259

269

Existing data: Requirement No. 1 Net Selling price = Present value of notes receivable (25,000 x 3.5493)

Disregard (25,000 x 3.5493)

Illustration The note is a non-interest bearing note and the prevailing rate of interest for a note of this type is 16% and the principal amount…

The note is a non-interest bearing note and the prevailing rate of interest for a note of this type is 14% and the principal amount…

Requirement No. 1 Add: Accrued interest 600,000 Carrying amount of receivable: 5,600,000 Loan impairment – 12/31/2014 2,594,800

Add: Accrued interest 500,000 Carrying amount of receivable: 5,500,000 Loan impairment – 12/31/2014 2,494,800

270

Journal entries 12/31/14 Loan impairment 2,594,800 Accrued interest 600,000 Allowance for loan impairment 1,994,800

286

Solution Maturity Value = Principal + Interest = P60,000+ (P600,000 x 10% x 90/360)

288

Replace to:

Illustration On July 1, 2015, Boy Co. discounted its “own” P50,000, 1-year note at a bank, at a discount rate of 12%, when the prime rate is 10%.

Loan impairment 2,494,800 Accrued interest 500,000 Allowance for loan impairment 1,994,800

Maturity Value = Principal + Interest = P600,000+ (P600,000 x 10% x 90/360) On July 1, 2015, Boy Co. discounted its “own” P500,000, 1-year note at a bank, at a discount rate of 12…

PROBLEM 10-1 Trade and other receivables Trade Trade and other Receivables receivables 1 277,000 277,000 2 150,000 150,000 3 10,000 4 30,000 5 6 15,000 7 70,000 70,000 8 80,000

46

Noncurrent Asset 110,000 220,000

Chapter 10: Loans and Receivables

9 Adjusted bal.

100,000 597,000 1. C

100,000 732,000 2. C

PROBLEM 10-2 Different Freight terms Question No. 1 FOB Destination, freight prepaid Invoice price of merchandise purchased Less: Invoice price of merchandise returned Net invoice price Less: Purchase discount (300,000 x 2%) Net Payment before freight Less: Freight payment - FOB Destination, freight collect Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash payment

330,000

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

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

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

Question No. 3 FOB Shipping point, freight prepaid Invoice price of merchandise purchased Less: Invoice price of merchandise returned Net invoice price Less: Purchase discount (300,000 x 2%) Net Payment before freight Less: Freight payment - FOB Destination, freight collect Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash payment

300,000 300,000 6,000 294,000 5,000 299,000

Question No. 4 FOB Shipping point, freight prepaid Invoice price of merchandise purchased Less: Invoice price of merchandise returned Net invoice price Less: Purchase discount (300,000 x 2%) Net Payment before freight Less: Freight payment - FOB Destination, freight collect

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

47

Chapter 10: Loans and Receivables

Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash payment SUMMARY OF ANSWERS: 1. B 2. A 3. C

4.

294,000

B

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

P 100,000 32,000 68,000 2,040 P 65,960

SUMMARY OF ANSWERS: 1. C 2. D PROBLEM 10-4 Computation of Percentage of Bad Debts Expense Note to Professor: Existing data: Change to: Accounts written off for 2015 – Accounts written off for 2015 – 80,000 113,000 The accounts Receivable as of December 31, 2015 is as follows: From 2014 1,000,000 From 2015 1,200,000 2,200,000

2011 2012 2013 2014 2015

Credit Sales 2,100,000 1,850,000 2,050,000 6,000,000 2,000,000 8,000,000 2,000,000 10,000,000

The year-end balances of accounts Receivable are as follows: December 31, 2014 1,000,000 December 31, 2015 1,200,000

CASE 1 Accounts written off 20,000 40,000 130,000 190,000 22,000 212,000 113,000 325,000

Recoveries 15,000 20,000 5,000 40,000 20,000 60,000 40,000 100,000

Question No. 1 Percentage

=

Accounts written off minus Recoveries Total credit sales

48

Chapter 10: Loans and Receivables

Total years from 2011 to 2015: Percentage

325,000 - 100,000 10,000,000

=

Percentage = 0.0225 or 2.25% Question No. 2 Bad debts expense

= 2.25% x P2,000,000 = P45,000

Question No. 3 Write off Balance end (squeeze)

Allowance for Bad debts 113,000 400,000 372,000 45,000 40,000 485,000 485,000

Beg. Balance Bad debts exp Recovery

CASE 2 Question No.4 Percentage

Accounts written off minus Recoveries Total credit sales

=

Total years from 2011 to 2013 (years should exclude the last two years): 190,000 - 40,000 Percentage = 6,000,000 Percentage = 0.025 or 2.50% Question No. 5 Bad debts expense

= 2.50% x P2,000,000 = P50,000

Question No. 6 Credit Sales 2014 2,000,000 2015 2,000,000

BD exp 50,000 50,000

Recoveries Write-off 20,000 22,000 40,000 113,000 Allowance for BD

Net AB 48,000 (23,000) 25,000

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

=

Accounts written off minus Recoveries Total credit sales

49

Chapter 10: Loans and Receivables

Total years from 2011 to 2014: Percentage of bad = debts to AR

212,000 - 60,000 8,000,000

Percentage = 0.019 or 1.90% Percentage of bad debts to AR

Accounts written off minus Recoveries Total credit sales

=

Total years from 2011 to 2015: Percentage of bad = debts to AR

325,000 - 100,000 10,000,000

Percentage = 0.0225 or 2.25% Question Nos. 8 and 9 Allowance for Bad debts Balance end (1,200,000 x 2.25%) Write off

27,000 113,000 140,000

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

19,000 81,000 40,000 140,000

Case 2 4. A 5. A 6. A

Beg. Balance (1,000,000 x 1.90%) Bad debts exp (squeeze) Recovery

Case 3 7. D 8. C 9. C

PROBLEM 10-5 Aging Based on Outstanding Receivables Note to professor: Existing data: Change to: (P100,000 definitely collectible, (P100,000 definitely uncollectible, balance is 90%) balance is 90%) Question No. 1 Categories Balance (No. of Days) 0-30 days 500,000 31-60 days 600,000 61-90 days 750,000 over 91 days 300,000 Totals 2,150,000

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

Allowance for Bad debts

50

Chapter 10: Loans and Receivables

Balance end (see above table) Write off (23,000+100,000)

95,500 123,000 218,500

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

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

Beg. balance Recoveries Bad debts exp (squeeze)

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

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

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

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

Beg. balance Bad debts exp (squeeze)

SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 10-7 Interest-bearing Note with Realistic Interest Rate SOLUTION: Requirement No. 1 *Selling price P 100,000 Less: Carrying amount of machinery Cost 500,000 Less: Accumulated depreciation 350,000 150,000 Loss on sale (P 50,000) *Note: The selling price is equal to the face amount, which is likewise equal to the present value of the note since the note bears an annual interest rate that is similar with the market rate. Requirement No. 2

51

Chapter 10: Loans and Receivables

Interest income = (100,000 x 10%) = P10,000 Requirement No. 3 Zero. The principal amount is collectible beyond one year from the reporting date and thus, reported as non-current. Requirement No. 4 P100,000. The entire principal amount of notes receivable is treated as noncurrent asset since it is collectible beyond one year from the reporting date. Journal entries are as follows: 1/1/2015 Notes receivable Accumulated depreciation Loss on sale Machinery \

12/31/2015

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

Cash Interest income

10,000 10,000

PROBLEM 10-8 Interest-bearing Note with Unrealistic Interest Rate, Interest Is Payable Annually, One-Time Collection of Principal SOLUTION: Question No. 1 Present value of principal (2,000,000 x 0.7118) P 1,423,600 Add: Present value of interest payments (2,000,000 x 10% x 2.4018) 480,366 Total present value / Selling price 1,903,966 Less: Carrying amount of machinery Cost 1,000,000 Less: Accumulated depreciation 150,000 850,000 Gain on sale P1,053,966 Question Nos. 2 to 5 Amortization table Date Interest Collections 01/01/2015 12/31/2015 200,000 12/31/2016 200,000 12/31/2017 200,000

Interest Income

Discount Amortization

228,475 231,892 235,704

28,475 31,892 35,672

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

The total amount of 1,932,435 is reported as noncurrent receivable since it is due to be collected beyond twelve months from the end of the reporting period. SUMMARY OF ANSWERS: 1. B 2. B 3. A

4.

A

52

5.

C

Chapter 10: Loans and Receivables

PROBLEM 10-9 Interest-bearing Note with Unrealistic Interest Rate, Interest Is Payable Semi-Annually, One-Time Collection of Principal Note to professor: Existing data: Choices for question No. 2 a. 100,000 c. 115,847 b. 114,104 d. 141,104

Change to: a. 200,000 b. 229,054

Question No. 1 Present value of principal (2,000,000 x 0.7050) Add: Present value of interest payments (2,000,000 x 5% x 4.9173) Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Amortization table Date Interest Collections 01/01/2015 07/31/2015 100,000 12/31/2015 100,000 07/31/2016 100,000 12/31/2016 100,000 07/31/2017 100,000 12/31/2017 100,000

c. 215,847 d. 232,643 P 1,410,000 491,730 1,901,730

1,000,000 150,000

Interest Income

Discount Amortization

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

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

Question No. 2 Interest income up to 07/31/2015 Interest income up to 12/31/2015 Total interest income

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

114,104 114,950 229,054

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

4.

A

53

5.

D

Chapter 10: Loans and Receivables

PROBLEM 10-10 Interest-bearing Note with Unrealistic Interest Rate, Uniform Collection of Principal Note to professor: Existing data: Problem 10-10 Principal is due in equal annual payments, starting December 31, 2017.

Change to: Principal is due in equal annual payments, starting December 31, 2015.

Question No. 1 Computation of present value of all payments: Present Interest Principal value factor collections 0.8929 600,000 180,000 0.7972 600,000 120,000 0.7118 600,000 60,000 Total present value Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Amortization table Interest Date Collections 01/01/15 12/31/15 180,000 12/31/16 120,000 12/31/17 60,000

Total collections 780,000 720,000 660,000

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

1,740,234 1,000,000 150,000

850,000 P890,234

Interest Income

Amortizatio n

Principal collections

208,828 140,287 70,651

28,828 20,287 10,651

600,000 600,000 600,000

Question No. 2 208,828. See amortization table above. Question No. 3 1,169,062. See amortization table above. Question No. 4 Principal collections – 2016 Less: Amortization – 2016 Current portion – 12/31/2015

600,000 20,287 579,713

54

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

Chapter 10: Loans and Receivables

Question No. 4 Carrying value – 12/31/2015 Less: Current portion – 12/31/2015 Non-current portion – 12/31/2015 SUMMARY OF ANSWERS: 1. B 2. B 3. A

1,169,062 579,713 589,350

4.

B

5.

A

PROBLEM 10-11 Non-interest-bearing Note with Unrealistic Interest Rate, Non-Uniform Collection of Principal Question No. 1 Computation of present value of all payments: Total PV factor collections Total PV 0.8929 1,000,000 892,900 0.7972 600,000 478,320 0.7118 200,000 142,360 Total present value of the notes 1,513,580 Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Question Nos. 2 to 5 Amortization table Interest Date income 1/1/15 12/31/15 181,630 12/31/16 83,425 12/31/17 21,382

1,513,580 1,000,000 150,000

Amortizatio n 181,630 83,425 21,365

850,000 P663,580

Principal Collections 1,000,000 600,000 200,000

Question No. 2 181,630. See amortization table above. Question No. 3 695,210. See amortization table above. Question No. 4 Principal collections – 2016 Less: Amortization – 2016 Current portion – 12/31/2015

600,000 83,425 516,575

55

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

Chapter 10: Loans and Receivables

Question No. 4 Carrying value – 12/31/2015 Less: Current portion – 12/31/2015 Non-current portion – 12/31/2015 SUMMARY OF ANSWERS: 1. B 2. B 3. A

695,210 516,575 178,635

4.

B

5.

D

PROBLEM 10-12 Noninterest-bearing Note, One-Time Collection of Principal SOLUTION: Question No. 1 Total present value (1,800,000 x 0.7118) 1,281,240 Less: Carrying amount of machinery Cost 1,000,000 Less: Accumulated depreciation 150,000 850,000 Gain on sale P431,240 Amortization table Date Interest Income 01/01/15 12/31/15 153,749 12/31/16 172,199 12/31/17 192,812

Amortization

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

153,749 172,199 192,812

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

4.

B

5.

A

PROBLEM 10-13 Computation of Annual Payment or Collection CASE 1: Based on the original data Requirement No. 1 Annual collection

=

Present value of the notes Present value of ordinary annuity for 3 periods

Annual collection

=

1,500,000 2.4018

56

Chapter 10: Loans and Receivables

Annual collection

= P624,532

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

= P180,000

CASE 2 Requirement No. 1 Annual collection

=

Present value of the notes Present value of annuity due for 3 periods

Annual collection

=

1,500,000 2. 6901

Annual collection

= P557,600

Requirement No. 2 Interest income (1,500,000 – 557,600) x 12% PROBLEM 10-14 Loan Receivable SOLUTION: Loan receivable (principal amount) Less: Unearned interest income Origination fee received 342,100 Less: Direct origination cost ( 150,000) Carrying amount – January 1, 2015

= P113,088

P4,000,000 192,100 P3,807,900

Interest income for 2015 (12% x 3,807,900) Interest received for 2015 (10% x 4,000,000) Amortization of unearned interest income

P456,948 400,000 P 56,948

Loan receivable Unearned interest income – December 31, 2015 (192,100 – 56,948) Carrying amount – December 31, 2015

P 4,000,000 ( 135,152) P3,864,848

Suggested answer: C PROBLEM 10-15 Impairment of Receivable, One-time Collection of Principal Question No. 1 Principal 16,000,000 Add: Accrued interest receivable 1,600,000 17,600,000 Less: *Present value of expected cash flows 7,705,280 Loan impairment 9,894,720

57

Chapter 10: Loans and Receivables

*Computation of present value of all payments: PV factor Total collections Total PV 0.9091 1,600,000 1,454,560 0.8264 3,200,000 2,644,480 0.7513 4,800,000 3,606,240 Total present value of the notes 7,705,280 Question Nos. 2 to 3 Amortization table Date 12/31/2014 12/31/2015 12/31/2016 12/31/2017

Collections

Interest Income

Amortization

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

770,528 687,581 436,339

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

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

SUMMARY OF ANSWERS: 1. A 2. B 3. B PROBLEM 10-16 Impairment of Receivable, Principal is Collectible Every Year Question No. 1 Principal 960,000 Add: Accrued interest receivable 160,000 1,120,000 Less: Present value of expected cash flows 770,528 Loan impairment 349,472 *Computation of present value of all payments: PV factor Principal Total collections 0.9091 160,000 160,000 0.8264 320,000 320,000 0.7513 480,000 480,000 Total present value of the notes

Total PV 145,456 264,448 360,624 770,528

Question Nos. 2 to 3 Amortization table Date 12/31/2014 12/31/2015 12/31/2016 12/31/2017

Collections

Int. Income

Amortization

160,000 320,000 480,000

77,053 68,758 43,661

82,947 251,242 436,339

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

58

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

Chapter 10: Loans and Receivables

PROBLEM 10-17 Reversal of Impairment Loss Question No. 1 Present value of expected cash flows vs. Would have been present value if there was no impairment Lower Less: Actual amortized cost Gain on reversal of impairment loss Question No. 2 Interest income (600,000 x 10%)

P

P 654,552 600,000 600,000 396,681 P 203,319

60,000

SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 10-18 Pledge of Receivable SOLUTION: Principal amount borrowed Less: One year interest deducted in advance (900,000 x 10%) Cash received on December 1

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

Suggested answer: B PROBLEM 10-19 Assignment of Receivable Entries to record transactions Date Accounts 10/1/2015 Cash Finance charge expense Notes payable 12/31/2015

Debit 395,000 5,000

400,000

Cash Accounts receivable

300,000

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

12,000 300,000

SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 10-20 Assignment of Accounts Receivable Question No. 1 Principal amount borrowed P 150,000 Less: Finance fee (150,000 x 5%) ( 7,500) Cash received on December 1 P142,500

59

Credit

300,000

312,000

Chapter 10: Loans and Receivables

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

P150,000 95,000 ( 1,500)

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

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

SUMMARY OF ANSWERS: 1. D 2. C 3. C PROBLEM 10-21 Factoring of Receivables Entries to record transactions Option Accounts One Cash (400,000 x 90%) Receivable from factor (25,000 – [5% x 400,000]) Loss on sale of receivables (squeeze) Notes payable Two

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

Debit 360,000

Credit

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

SUMMARY OF ANSWERS: 1. B 2. C PROBLEM 10-22 Factoring SOLUTION: Sales price Less: Carrying amount of accounts receivable (300,000 – 12,500) Loss on factoring Suggested answer: B

60

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

Chapter 10: Loans and Receivables

PROBLEM 10-23 Notes Receivable Discounting and Notes Receivable Dishonored CASE NO. 1 Question No. 1 Principal P 600,000.00 Add: Interest over full credit period (600,000 x 9% x 90/360) 13,500.00 Maturity value 613,500.00 Less: Discount (613,500 x 12% x 65/360) 13,292.50 Net proceeds from discounting P 600,207.50 Question No. 2 Net proceeds from discounting Less: Carrying amount on date of discounting Principal Add: Interest (600,000 x 9% x 25/360) Loss on notes receivable discounting

P 600,207.50 600,000.00 3,750.00

603,750.00 (P 3,542.50)

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

P 613,500 5,000 P618,500

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

4.

P 613,500 5,000 P618,500 C

5.

PROBLEM 10-24 Discounting “Own” Note Question No. 1 Note payable Less: Discount on note payable (250,000 x 12%) Carrying amount – Date of issuance Effective interest rate

= Discount/Net proceeds = 30,000/220,000

61

A

6.

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

C

Chapter 10: Loans and Receivables

= 13.60% Question No. 2 Entry to record transaction Cash 220,000 Discount on notes payable 30,000 Notes payable

250,000

SUMMARY OF ANSWERS: 1. D 2. B COMPREHENSIVE PROBLEMS PROBLEM 10-25 Question No. 1 Allowance for Doubtful accounts Accounts written off Balance end (squeeze)

164,000 200,000

212,000 152,000

Total

364,000

364,000

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

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

Percent Uncollectible 2% 10% 30% 40%

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

Question No. 3 Allowance for Doubtful accounts Accounts written off Balance end

164,000 209,400

212,000 161,400

Total

373,400

373,400

Beg. Balance DA expense (squeeze)

Question No. 4 Accounts receivable, December 31, 2013 Less Allowance for doubtful accounts, December 31, 2013 Net realizable value

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

Question No. 5 Accounts receivable trade Beg. Balance Sales

2,500,000 7,600,000

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

62

Balance end Write-off Collections (squeeze)

Chapter 10: Loans and Receivables

Total

10,100,000

SUMMARY OF ANSWERS: 1. A 2. C 3. D PROBLEM 10-26 Question No. 1 Credit Sales 2012 2,220,000 2013 2,450,000 2014 2,930,000 7,600,000 Percentage

10,100,000

4.

B

5.

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

D

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

Accounts written off minus Recoveries Total credit sales

=

Total years from 2012 to 2014: Percentage

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

=

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

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

Accounts receivable trade

Beg. Balance Sales on account

418,000 3,000,000

645,600 62,000 2,710,400

Total

3,418,000

3,418,000

Balance end Write-off Collections excluding advance from customers

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

62,000 21,600

15,200 60,000 8,400

Total

83,600

83,600

SUMMARY OF ANSWERS:

63

Beg. Balance Doubtful accounts expense Recoveries

Chapter 10: Loans and Receivables

1.

A

2.

A

3.

PROBLEM 10-27 Question No. 1 Year Credit sales 2011 3,000,000 2012 4,500,000 2013 5,900,000 2014 6,600,000 Total 20,000,000 2015 8,100,000 Total 28,100,000 Percentage

B

4.

B

Write-off 30,000 76,000 104,000 130,000 340,000 125,550 465,550

=

5.

A

Recoveries 5,400 5,000 9,600 20,000 10,000 30,000

Accounts written off minus Recoveries Total credit sales

Total years from 2011 to 2014: Percentage = 2014

340,000 - 20,000 20,000,000

Percentage = 0.016 or 1.6% Entry to set up the beginning allowance for doubtful accounts Retained earnings (2,500,000 x 1.6%) 40,000 Allowance for doubtful accounts 40,000 Question No. 2 Total years from 2011 to 2015: Percentage = 2015

465,550 - 30,000 28,100,000

Percentage = 0.0155 or 1.55% Question Nos. 3 and 4 Allowance for Doubtful accounts Accounts written off (166,000-40,450) Balance end (4,000,000 + 100,000+40,450)x1.55%

125,550

40,000

64,177

139,727

Total

189,727

10,000

64

189,727

Beg. Balance Doubtful account expense (squeeze) Recoveries

Chapter 10: Loans and Receivables

Question No. 5 Accounts receivable (4,000,000+100,000+40,450) Less: Allowance for doubtful accounts Net realizable value

P 4,140,450 ( 64,177) P4,076,273

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

A

PROBLEM 10-28 Question Nos. 1 to 4 Unadjusted balances 2) Sale return Cost of return Merchandise (30,000 x 80%) 3)Sales FOB shipping point not recorded as Sale Cost of mdse sold (40,000 x 80%) 4) Goods shipped FOB Destination recorded as sale Cost of goods (50,000 x 80%) 6) Doubtful accts exp Adjusted bal.

Accounts Receivable 300,000 (30,000)

4.

B

Allow for DA 3,000

5.

Mdse. Inventory 400,000

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

24,000

Cost of Sales 800,000

(24,000)

40,000

40,000 (32,000)

(50,000)

32,000

(50,000) 40,000

260,000

(12,000) 15,000

432,000

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

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

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

B

4.

5.

(40,000) 960,000

C

PROBLEM 10-29 Question No. 1 Unadjusted accounts receivable, Dec. 1 (squeeze) Add: Adjusted net sales Total Less: Collections, net of discounts Estimated uncollectible accounts charged to AR in Dec. Unadjusted accounts receivable, Dec. 31

65

792,000

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

Chapter 10: Loans and Receivables

Subsidiary ledger balance, Dec. 1 Less: AR controlling account, Dec. 1 (see above) Add: Estimated uncollectible account charged to AR in Dec. Customers’ credit balance

P 59,000 21,800 6,000

Question No. 2 Collection, net of discount Divide by: (100%-2%) Total credit to AR for collection

P 156,800 98% P160,000

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

P 31,200 10,000 P 21,200

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

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

Question No. 5 Subsidiary ledger, balance, 12/1 Add: Adjusted Sales in December Freight prepaid by the company Total Less: total credit to AR for coll. Adjusted accounts receivable in Dec.

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

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

4.

A

5.

27,800 P31,200

B

PROBLEM 10-30 Note to professor:  Replace JOSHIA to Joanna in Item I.  Remove “P” sign in Question No. 5 Question Nos. 1 to 4 Accounts receivable Unadjusted bal. 200,000 1 (14,800) 3 (47,400) 4 (30,000) 5 (8,000)

Merchandise Inventory 300,000 32,600

66

Net Sales 1,000,000 (47,400) (90,000) (8,000)

Cost of Sales 600,000 (32,600)

Chapter 10: Loans and Receivables

6 7

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

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

24,000 356,600

Debit 14,800 32,400

Sales Accounts receivable

47,400

Merchandise inventory Cost of sales

32,600

Sales Accounts receivable Customers’ deposit on orders

90,000

H

Sales Accounts receivable

*8,000

I

Sales Accounts receivable

36,000

Merchandise inventory Cost of sales

24,000

F

Credit

32,400 47,400 32,600 30,000 60,000 8,000 36,000 24,000

J

Sales returns and allowances 1,200 Accounts receivable *Computation of overstatement of sales for item H Original bill (P200 x 100) P 20,000 Per audit: (P120 x 100) 12,000 Overstatement P 8,000 SUMMARY OF ANSWERS: 1. A 2. A 3. D

543,400

14,800

Accounts receivable – D Accounts receivable – C

E

(24,000)

P 20,000 200 100

Question No. 6 Item Accounts B Accounts payable Accounts receivable C

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

4.

B

67

5.

B

1,200

Chapter 10: Loans and Receivables

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

Over 120 22,300

22,300 0.60 13,380

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

15,000 26,532

22,450 19,082

Total

41,532

41,532

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

4.

C

5.

Beg. Balance Doubtful accounts expense

C

PROBLEM 10-32 Question No. 1 Balance Accounts Dec. 31 Not due 1-60 days 61-120 days Over 120 1 12,000 3,000 8,000 1,000 2 22,000 22,000 4 20,000 10,000 10,000 5 55,000 2,220 52,780 6 7,500 7,500 116,500 27,220 68,280 11,000 10,000 Multiply by: 0.50% 2% 5% 50% 136.10 1,365.60 550 5,000.00 Question Nos. 2 and 3 Required balance (P136.10+P1,365.60+P550+P5,000) Less: Allowance for doubtful accounts, beginning Doubtful accounts expense

68

P 7,051.70 5,000.00 P 2,051.70

Chapter 10: Loans and Receivables

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

Interest income P 1,200 500 P 1,700

SUMMARY OF ANSWERS: 1. D 2. C 3. B PROBLEM 10-33 Question No. 1 Days 0 - 60 days 61 - 120 days Over 120 days Total

Amount outstanding P 960,000 720,000 1,000,000 P 2,680,000

4.

Accrued interest income P 500 P 500

D

5.

Percent Uncollectible 2% 4% 6%

A

Allowance 19,200 28,800 60,000 108,000

Question No. 2 Allowance for Doubtful accounts Accounts written off Balance end

184,000 108,000

120,000 48,000 124,000

Total

292,000

292,000

Beg. Balance Recovery Doubtful accounts expense (squeeze)

Question No. 3 Allowance for Doubtful accounts Accounts written off Unadjusted balance

184,000 144,000

120,000 48,000 160,000

Total

328,000

328,000

Question No. 4 Reported Bad debts expense (see No. 3) Divided by: Bad debts rate Net credit sales Add: Sales return Unadjusted accounts receivable, Dec. 31

69

Beg. Balance Recovery Doubtful accounts expense (squeeze)

P 160,000 2% 8,000,000 100,000 P 8,100,000

Chapter 10: Loans and Receivables

Question No. 5 Accounts receivable Beg. Balance Sales Recoveries

2,000,000 8,100,000 48,000

2,680,000 184,000 100,000 7,184,000

Total

3,418,000

3,418,000

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

4.

B

PROBLEM 10-34 SOLUTION: Question No. 1 Principal Origination fees received Direct origination cost incurred Initial Carrying amount of the loan

5.

Balance end Write-off Sales return Collections including recoveries

C

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

Question No. 2 By trial and error, 12% interest rate will have a present value equal to the initial carrying amount of the loan. Present value of Prin. (4,000,000 x .7118) 2,847,200 Present value of Int. (4M x 10% x 2.4018) 960,720 Present value of Loan Receivable 3,807,920 Question Nos. 3 and 4 Date 01/01/2015 31/12/2015 31/12/2016 31/12/2017

Collections

Interest Income

Amortization

400,000 400,000 400,000

456,950 463,784 471,439

56,950 63,784 71,346

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

Question No. 5 Zero, As of December 31, 2015, the entire loan proceeds will be collectible on December 31, 2017, that is two years from the reporting date. SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

A

PROBLEM 10-35

70

5.

A

Chapter 10: Loans and Receivables

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

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

Question Nos. 2 and 3 By trial and error, 12% interest rate will have a present value equal to the initial carrying amount of the loan. Present value of Prin. (4,000,000 x .6355) 2,542,000 Present value of Int. (4M x 10% x 3.0373) 1,214,920 Present value of Loan Receivable 3,756,920 Amortization table Date 01/01/2014 31/12/2014 31/12/2015 31/12/2016

Collections

Interest Income

Amortization

400,000 400,000 400,000

450,830 456,930 463,762

50,830 56,930 63,762

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

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

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

*Computation of present value of expected cash flows Date Cash flow PV factor at 12% Present value 12/31/2016 1,800,000 0.8929 1,607,220 12/31/2017 2,000,000 0.7972 1,594,400 3,201,620 Question No. 5 Date 12/31/2015 12/31/2016 12/31/2017

Collections

Interest Income

Amortization

1,800,000 2,000,000

384,194 214,298

1,415,806 1,785,814

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

4.

B

71

5.

B

Carrying value 3.201,620 1,785,814 -

Chapter 10: Loans and Receivables

PROBLEM 10-36 Question Nos. 1 and 3 Carrying amount of the loan, December 31, 2015 Less Carrying amount of the loan, December 31, 2016 Amortization in 2016 Less Interest collection in 2016 Interest income in 2015 (3) Divide by Carrying amount of the loan, 12/31/2015 Effective interest rate (1)

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

Question No. 2 Carrying amount of the loan, January 1, 2015 Multiply by: Effective interest rate Interest income in 2015

8,397,824 10% 839,782

Question No. 3 Carrying amount of the loan, 12/31/2015 Multiply by: Effective interest rate Interest income in 2015

8,277,606 10% 827,761

Question No. 4 Carrying amount of the loan, December 31, 2015 Add: Interest collection (8M x 12%) Total Divide by: 100% plus effective rate Carrying amount of the loan, January 1, 2015

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

Question No. 5 Carrying amount of the loan, January 1, 2015 Direct origination fees received Principal Direct origination cost incurred Date 01/01/2015 12/31/2015 12/31/2016 12/31/2017

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

Collections

Interest Income

Amortization

960,000 960,000 960,000

839,782 827,761 814,537

120,218 132,239 145,367

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

4.

D

72

5.

D

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

Chapter 10: Loans and Receivables

PROBLEM 10-37 Question No. 1 Annual Cash Date flows Dec. 31, 2014 P1,750,000 Dec. 31, 2015 2,000,000 Dec. 31, 2016 1,750,000 Total

PV factor 0.9091 0.8264 0.7513

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

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

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

Question Nos. 3 to 5 Date 12/31/2013 12/31/2014 12/31/2015 12/31/2016

Payment

Interest Income

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

P455,850 326,435 159,079

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

B

PROBLEM 10-38 SOLUTION: Question No. 1 Age of Accts 1-10 days 11-30 days Past due 31-60 Past due 61-120 Past due 121-180 Past due over 180 days

4.

Balance 960,000 270,000 120,000 75,000 45,000 30,000

Reduction to Principal

A

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

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

C

%uncollectible 1% 2.5% 5% 20% 35% 80% Allowance for BD

Allowance 9,600 6,750 6,000 15,000 15,750 24,000 77,100

Question No. 2 Allowance for Doubtful accounts Accounts written off Unadjusted balance

292,500 54,800

27,300 320,00

Total

347,300

347,300

73

Beg. Balance DA expense (8M x 4%)

Chapter 10: Loans and Receivables

Allowance for doubtful accounts, adjusted Allowance for doubtful accounts, unadjusted Credit to Allowance for BD Question Nos. 3 to 5 Principal Direct origination cost incurred Origination fees received Carrying amount, Jan. 1, 2015

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

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

77,100 54,800 22,300

4.

D

PROBLEM 10-39 Question No. 1 Principal Direct origination cost incurred Direct origination fees received Initial carrying amount

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

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

A

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

Question Nos. 2 and 3 Amortization table at 12% Effective Rate Interest Date Collections Income 01/01/2013 12/31/2013 400,000 445,382 12/31/2014 400,000 450,828 12/31/2015 400,000 456,928 12/31/2016 400,000 463,759 12/31/2017 400,000 471,410

74

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

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

Chapter 10: Loans and Receivables

Question No. 4 Carrying amount of loan Less: Present value of expected cash flows 12/31/2015 (1,750,000 x .8929) 12/31/2017 (1,750,000 x .7118) Impairment loss

3,807,731 1,562,575 1,245,650

2,808,225 999,506

Question No. 5 Date 12/31/2014 12/31/2015

Collections

Interest Income

Amortization

1,750,000

336,987

1413,013

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

4.

PROBLEM 10-40 Question No. 1 Classification

Balance

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

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

C

5.

Carrying amount 2,808,225 1,395,212

B

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

Question No. 2 Accounts receivable, adjusted (see no. 1) Less: Allowance for doubtful accounts, end (see no. 1) Net realizable value Question No. 3 Doubtful accounts per books (9,000,000 x 2%) Less: *Adjusted doubtful accounts expense Understatement of doubtful accounts

P 1,960,000 158,000 P1,802,000 P 180,000 188,000 (P 8,000)

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

140,000 158,000

90,000 20,00 188,000

Total

298,000

298,000

75

Beg. Balance Recoveries Doubtful account expense

Chapter 10: Loans and Receivables

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

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

Question No. 5 Date 01/01/2015 12/31/2015 12/31/2016

Collections

Interest Income

Amortizatio n

1,000,000 1,000,000

143,200

1,000,000 856,800

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

4.

B

PROBLEM 10-41 Question No. 1 Accounts receivable factored Less: Service charge (400,000 x 5%) Receivable from factor (400,000 x 20%) Customers’ credit balance

5.

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

B

P 400,000 20,000 80,000

100,000 P300,000

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

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

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

318,000 12,000 P 330,000

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

480,000 30,000 P 450,000

76

Chapter 10: Loans and Receivables

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

330,000 6,600 P 336,600

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

P 700,000 600,000 1,300,000 65,000 P1,235,000

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

4.

PROBLEM 10-42 Note to professor: Existing data: T-Account of Allowance for bad debts: Beg. Bal - 01/01/2014

B

5.

D

6.

D

Change to: Beg. Bal - 01/01/2015

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

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

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

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

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

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

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

77

Chapter 10: Loans and Receivables

Question No. 5 Sales, FOB shipping point

P 100,000

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

4.

D

5.

A

PROBLEM 10-43 Question Nos. 1 to 3 Total

60 days and below

61 to 90 days

800,000

400,000

Unadjusted Balance, 12/31/2015 1,450,000 Adjustments: Write Off (50,000) Failure to record Sales Return (40,000) Failure to record Employee Discount (4,000) Consignment (45,000) Freight collect (3,800) Adjusted balance, 12/31/2015 1,307,200 Percentage of Uncollectibility Required allowance, 12/31/2015 37,258

Over 90 days 250,000 (63,000)

(36,000) (3,600) (54,000) (4,500) 701,900 2%

400,000 3%

187,000 6%

14,038

12,000

11,220

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

Total Item 1

63,000 37,258

50,000 45,000 4,134

100,258

100,258

Beg. Balance Recoveries Adjustment to Doubtful account expense (squeeze)

Accounts Allowance for doubtful accounts Accounts receivable

Debit 50,000

Sales return Accounts receivable

40,000

3

Claim from insurance Accounts receivable

55,000

4

Sales discount Accounts receivable

4,000

2

Credit 50,000 40,000 55,000 4,000

78

Chapter 10: Loans and Receivables

5 6

Sales Accounts receivable

45,000

Delivery expense Accounts receivable

3,800

45,000 3,800

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

4.

A

PROBLEM 10-44 Note to professor: Existing data: Kaya Co. incurred and paid P11,520 of direct origination cost was debited to direct origination income. Kaya Co. charged P300,000 nonrefundable origination fees which was credited to direct origination income.

5.

Change to: Kaya Co. incurred and paid P11,520 of direct origination cost was debited to unearned interest income. Kaya Co. charged P300,000 nonrefundable origination fees which was credited to unearned interest income.

Question Nos. 1 and 3 Adjusting entries for Accounts receivable Item Accounts 1 Accounts receivable Allowance for doubtful accounts 2 3 4

C

Sales discount Accounts receivable

Debit 20,000

Credit 20,000

16,000 16,000

Accounts receivable Allowance for doubtful accounts

120,000

Accounts receivable Allowance for doubtful accounts

30,000

120,000 30,000

Miscellaneous income 30,000 Accounts receivable 30,000 NOTE: The accounts receivable account was incorrectly footed. The unadjusted balance should have been P2,596,000 instead of P2,636,000. Accounts receivable Beg. Balance (20,000+200,000) Sales Recoveries

220,000

2,720,000

4,000,000 30,000

30,00 *1,500,000

Total

4,250,000

4,250,000

79

Balance end Recoveries Collections, gross of discount

Chapter 10: Loans and Receivables

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

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

Allowance for Doubtful accounts Balance end

170,000

20,000 30,000 120,000

Total

170,000

170,000

Accounts receivable Less: Allowance for bad debts Net realizable value

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

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

Unearned interest income Interest income

Credit 400,000

45,382 45,382

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

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

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

Beg. Balance Recoveries Doubtful account expense

4.

D

80

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

A

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

Chapter 10: Loans and Receivables

PROBLEM 10-45 Question No. 1 Nonrecording of gain on sale Nonrecording of interest income NR from sale of Machinery NR from sale of plant (3,000,000 x 12% x 9/12) Understatement of Ret. Earnings on 12/31/2015

180,360 57,643 270,000 508,003

NR sale of machinery: Downpayment Add: Present value of the note (200,000 x 2.4018*) Total Selling Price Less: Book value Cost Less: Accumulated depreciation Gain that should have been recognized *PV of ordinary annuity

400,000 480,360 880,360 1,600,000 900,000

700,000 180,360

Amortization table 1 Date 01/01/2014 12/31/2014 12/31/2015 12/31/2016

Collections

Interest Income

Reduction to principal

200,000 200,000 200,000

57,643 40,560 21,437

142,357 159,440 178,563

Question No. 2 Interest Income: NR from sale of machinery NR from sale of plant (3M x 12% x 3/12) (2M x 12% x 9/12) NR from sale of equipment Total Int. Income Amortization table 2 Interest Date Income 04/01/2015 12/31/2015 25,613

40,560 90,000 180,000 25,613 336,173 Unearned Interest Income 158,500 132,888

Question No. 3 NR from sale of machinery (see amortization table 1) NR from sale of plant Total current portion

81

Carrying amount 341,500 367,113 178,564 1,000,000 1,178,564

Carrying amount 480,360 338,003 178,564 -

Chapter 10: Loans and Receivables

Question No. 4 NR from sale of plant NR from sale of equipment (see amortization table 2) Total noncurrent portion Question No. 5 Nonrecording of loss Overstatement of Int. income Per books 360,000 Per audit 336,173 Total overstatement of net income in 2015

158,500 23,827 182,327

NR sale of equipment: Downpayment Add: Present value of the note (500,000 x 0.6830*) Total Selling Price Less: Book value Cost Less: Accumulated depreciation Loss that should have been recognized *PV of 1 SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

C

82

1,000,000 367,113 1,367,113

5.

700,000 341,500 1,041,500 2,000,000 800,000

B

1,200,000 (158,500)

Chapter 12: Inventories

CHAPTER 12: INVENTORIES Note to professor: 358 Requirement No. 4 T-Account Beginning balance – 90,000 359

Change 90,000 to 190,000

SOLUTION:  Items counted in the warehouse (bodega) (P4,000,000 P32,000) P3,968,000  Total P4,716,000

373

Notes: 1. The invoice price is computed by deducting the trade discount of 20 and 10. List Price P 150,000 Less: Trade discount 30,000 – 20% Net 120,000 Less: Trade discount 1,200 - 10% Invoice price P 108,000 Note that the total trade discount of P31,200 is not recorded in the books. 2. . 3. . 4. The cash to be paid under the net method is computed as follows: Purchases P 83,420 Less: Purchase 9,700 returns Net purchases 76,000 Less: Purchase 2,280 discount Cash paid P 73,720

378

2. Moving Average Method Cost of merchandise sold – Aug. 12 Unit Cost Qty 200

379



Items counted in the warehouse (bodega) (P4,000,000 - P32,000 – P80,000) P3,888,000 Total P4,636,000

Notes: 1. The invoice price is computed by deducting the trade discount of 20 and 10. List Price P 150,000 Less: Trade 30,000 discount – 20% Net 120,000 Less: Trade discount - 10% 12,000 Invoice price P 108,000 Note that the total trade discount of P42,000 is not recorded in the books. 2. . 3. . 4. The cash to be paid under the net method is computed as follows: Purchases P 83,420 Less: Purchase 9,700 returns Cash paid P 73,720

Unit Cost 21.60

Total Cost

Qty 200

Qty 1,900

Unit Cost 26.92

Total Cost

4,320

4,000

Total inventory Qty 1,900

390

20.00

Total Cost



Unit Cost 26.58

Total Cost 50,498

Additional information No. 3 To record the purchase of the aviation fuel on March 23, 2016, being the lower of the commitment

83

51,139

To record the purchase of the aviation fuel on March 23, 2016, being the lower of the

Chapter 12: Inventories

price of P3,200.

commitment price of P3,000.

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

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

Note that the trade discount was already deducted in arriving at the vendor’s invoice. PROBLEM 12-2 Inventoriable Cost Materials Irrecoverable purchases taxes Total cost of inventory PROBLEM 12-3 Inventoriable Cost Direct materials and labor Variable production overhead Factory administrative costs Fixed production costs Total Inventoriable cost

(B)

350,000 30,000 P 380,000

(D)

180,000 25,000 15,000 20,000 P 240,000

PROBLEM 12-4 Items to be Included in the Inventory 1 2 4 5

7 10 14 15 17 18 19 20

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

84

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

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

Chapter 12: Inventories

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

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

PROBLEM 12-5 Items to be Included in the Inventory Unadjusted balance Goods acquired in transit, FOB shipping point Goods sold in transit, FOB Destination Goods out on consignment Total Inventoriable cost (C)

325,000 30,000 38,000 12,000 P 405,000

PROBLEM 12-6 Accounts Payable Unadjusted balance Goods acquired in transit, FOB shipping point Goods lost in transit Adjusted Accounts Payable (A) The journal entry on item 2 would include the following: Purchases / Inventory Accounts Payable To record the purchase on December 20.

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

Query: For F/S presentation on December 31, is the goods lost in transit be presented as part of inventory? Answer: No, since the inventories were lost in transit and it is improper to report inventories that is not existing (i.e. it violates the existence assertion). Thus the journal entry at December 31 if no claim was filed and the common carrier has yet to acknowledge the claim may include a: Loss on goods lost in transit (preferably presented as other expense and not as cost of goods sold) Inventory / Purchases

85

50,000 50,000

Chapter 12: Inventories

And on the next year (January 5), when the claim was filed and acknowledged by the common carrier, the journal entry will be: Claims from common carrier 50,000 Gain on reimbursement of lost inventory 50,000 To record the claim against common carrier on January 5. PROBLEM 12-7 Consigned Goods Inventory shipped on consignment to Lomasoc Freight by Desiree to Lomasoc Total Inventoriable cost (D)

360,000 18,000 P 378,000

PROBLEM 12-8 Items to be Included in the Inventory Merchandise out on consignment at cost [150,000 x (100%-35%)] Goods purchased in transit, FOB shipping pt. Goods out on approval at cost Total Cost of inventory (D)

97,500 60,000 40,000 P197,500

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

Guide Questions

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

SUMMARY OF ANSWERS: 1. A 2. A

86

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

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

Chapter 12: Inventories

PROBLEM 12-10 Gross method vs. Net method CASE NO 1: Gross method Date Accounts 01/02 Purchases (100,000 x [1-20%]) Accounts payable 01/12

01/14

Debit 80,000

80,000

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

80,000

Accounts payable Cash

80,000

78,400 1,600 80,000

CASE NO 2: Net method Date Accounts 01/02 Purchases (100,000 x [1-20%] x [1-2%]) Accounts payable 01/12 01/14

Credit

Debit

Credit

78,400 78,400

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

78,400

Accounts payable Purchase discount lost Cash

78,400 1,600

78,400

80,000

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

CASE NO. 2 5. C 6. C 7. A 8. D

PROBLEM 12-11 Cost Formulas - FIFO Method Under FIFO method, inventories at the end of the period shall be measured using the most recent purchase price. From third purchase (15 x 60) From second purchase (5 x 54) Total inventoriable cost

900 270 P 1,170

(A)

87

Chapter 12: Inventories

PROBLEM 12-11 Cost Formulas - FIFO Method

Date

Qty

Purchases Unit Total Cost Cost

Feb 3 Feb 11

13

17.00

Cost of Merchandise Sold Qty Unit Total Cost Cost

221.00

Feb 14 Feb 21

12 6 9

20

15.00 17.00

180 102

180.00

Feb 25

7 3

17.00 20.00

119 60

Cost of merchandise sold = P461 (180+102+119+60) Ending Inventory = P120 (6 units @ P20)

12 12 13 7

Inventory Unit Total Cost Cost 15.00 180 15.00 180 17.00 221 17.00 119

7 9 6

17.00 20.00 20.00

Qty

(C)

PROBLEM 12-13 Cost Formulas - Weighted Average Method Weighted average unit cost

=

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

Weighted average unit cost

=

(10 x 61) + (25 x 63) + (30 x 64) + (15 x 73) 10 + 25 + 30 + 15

Weighted average unit cost

=

5,200 80

Weighted average unit cost = P65/unit Inventory end = Weighted average unit cost x Number of units Inventory end = 65 x 20 Inventory end = P1,300

(A)

PROBLEM 12-14 Cost Formulas - Moving Average Method Date Dec. 1 Dec. 15 Balance Dec. 26 Balance

Units 20,000 (17,500) 2,500 10,000 12,500

Unit cost 25 25 40

Total cost 500,000 (437,500) 62,500 400,000 462,500

88

(B)

119 180 120

Chapter 12: Inventories

PROBLEM 12-15 Cost Formulas - Different Methods Question Nos. 1 and 2 Moving average April 1 balance Apr. 2 Balance Apr. 4 Balance Apr. 10 Balance Apr. 15 Balance Apr. 17 Apr. 28 Apr. 28

Units 20,000 30,000 50,000 (25,000) 25,000 15,000 40,000 (21,000) 19,000 1,000 20,000 20,000 40,000

Purchase Sale Purchase Sales Sales return Balance Purchase Balance

Unit cost 10 12 11 11 11 14 12 12 12 12

Total cost 200,000 360,000 560,000 (280,000) 280,000 210,000 490,000 (257,250) 232,750 12,250 245,000 335,000 580,000

17 15

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

= P580,000 = P525,000

(A) (A)

Question Nos. 3 and 4 FIFO April 1 balance Apr. 2 Apr. 4 (25,000 units sold) Balance from Apr. 2 Apr. 10 Apr. 15 (21,000 units sold) Balance from April 2 Balance from April 10 Apr. 17 Balance Balance from April 2 Balance from April 10 Apr. 28 Total

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

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

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

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

Purchase Balance

12 14 17

Total cost 200,000 360,000 (200,000) (60,000) 300,000 210,000 (252,000) 48,000 210,000 12,000 60,000 210,000 335,000 605,000

Inventory end = P605,000 Cost of goods sold (200,000 + 60,000 + 252,000 – 12,000) = P500,000 Question Nos. 5 and 6 Weighted average Weighted average = unit cost Weighted average unit cost

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

=

89

(B) (B)

Chapter 12: Inventories

Weighted average unit cost = P13/unit Inventory end (40,000 x 13) Cost of goods sold (20,000+5,000+21,000–1,000) x 13 SUMMARY OF ANSWERS: 1. A 2. A 3. B

4.

B

5.

= P520,000 = P585,000

C

6.

(C) (C)

C

PROBLEM 12-16 Lower of Cost or Net Realizable Value Question Nos. 1 to 3 Markers 120,000

Pens 94,400

Highlighters 150,000

Selling price Less: Estimated cost to complete Net realizable value

180,000 24,000 156,000

180,000 24,000 156,000

180,000 34,000 146,000

Lower of cost-or-NRV

120,000

94,400

146,000

Historical cost

SUMMARY OF ANSWERS: 1. C 2. D 3. B PROBLEM 12-17 Purchase Commitment CASE NO. 1 Date 11/15 No entry

Accounts

Debit

12/31

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

100,000

03/15

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

500,000 100,000

CASE NO. 2 Date 11/15 No entry

Accounts

12/31

No entry

03/15

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

Credit

100,000

500,000 100,000 Debit

Credit

500,000 500,000

90

Chapter 12: Inventories

PROBLEM 12-18 Purchase Commitment Date 3/31 12/31 04/30

No entry

Accounts

Debit

Loss on purchase commitment (1,200,000-1,000,000) Estimated liability for purchase commitment Purchases Estimated liability for purchase commitment Accounts payable/Cash Gain on purchase commitment

Credit

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

SUMMARY OF ANSWERS: 1. B 2. A PROBLEM 12-19 Purchase Commitment Gain on purchase commitment [50,000 x (55 - 40)] To record the actual purchase on March 31, 2016: Purchases (50,000 x 55) Estimated liability for purchase commitment Accounts payable/Cash Gain on purchase commitment

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

(A)

2,750,000 750,000

The gain to be recognized is limited to the loss on purchase commitment previously recorded. PROBLEM 12-20 Purchase Commitment Question No. 1 Remaining contract – minimum of 500 units each year 2016 (500 x 100) 2017 (500 x 100) Total Less: Estimated realizable value (1,000 x 20) Probable loss from purchase commitment (C)

P 50,000 50,000 P 100,000 20,000 P 80,000

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

91

Chapter 12: Inventories

PROBLEM 12-21 Inventory Estimation - Gross Profit Rate Method Sales Less: Sales returns Net Sales excluding Sales discount Multiply by: Cost ratio (1-30%) Cost of Goods sold

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

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

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

(A)

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

PROBLEM 12-22 Inventory Estimation - Gross Profit Rate Method CASE NO. 1 Sales Divide by: Sales ratio Cost of Sales

1,552,000 125.00% 1,241,600

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

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

CASE NO. 2 Sales Multiply by: Cost ratio Cost of Sales

1,552,000 75% 1,164,000

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

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

SUMMARY OF ANSWERS: 1. A 2. D

92

(A)

(D)

Chapter 12: Inventories

PROBLEM 12-23 Inventory Estimation: LCM - Retail Method Computation of cost ratio:

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

Inventory at January 1 Purchases Freight-in Net markups Totals

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

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

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

PROBLEM 12-24 Inventory Estimation: Average Method - Retail Method Computation of cost ratio: Cost 250,000 1,325,000 1,575,000

Inventory at January 1 Purchases Net markups Net markdowns Totals

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

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

2,250,000 1,500,000 75,000 50,000 P 625,000

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

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

93

Chapter 12: Inventories

PROBLEM 12-25 Inventory Estimation: FIFO Method - Retail Method Computation of cost ratio:

Cost 292,500 292,500

Purchases Net markups Net markdowns Totals

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

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

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

PROBLEM 12-26 Question No. 1 A EI over (P129-P119) x 4,000 B EI under C EI over Overstatement of ending inventory Question No. 2 D. Ending inventory understated

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

(C)

(140,000)

(B)

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

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

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

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

4.

C

94

5.

D

930,000 (A)

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

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

(D)

Chapter 12: Inventories

PROBLEM 12-27 Question No. 1

Direct materials inventory

Beg. Balance DM purchased (squeeze)

9,000 70,000 (B)

7,000 72,000

Total

79,000

79,000

Balance end Direct materials used

Question No. 2 Total cost added to work in process (72,000+80,000+24,000) = P176,000 (C) Question No. 3 Applied overhead to job 3 (24,000/10,000 x 120 hours) = P288 Question No. 4

(D)

Work in process inventory

Beg. Balance DM used Direct labor Factory overhead Total SUMMARY OF ANSWERS: 1. B 2. C 3. D

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

31,000 162,000 (B)

193,000

193,000

4.

Balance end Cost of goods manufacture (squeeze)

B

PROBLEM 12-28 Question Nos. 1 and 2 Balances prior to adjustment Add: Goods in transit sold, FOB destination Less: unrecorded sale Less: unrecorded purchase returns Less: goods held on consignment Add: unrecorded purchase Add: Goods in transit purchased, FOB shipping point Add: Goods out on consignment Adjusted balances

95

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

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

Chapter 12: Inventories

Question No. 3 Adjusted balances, per ledger Adjusted balances, physical count Inventory shortage

P 307,240 304,400 P 2,840

(B)

SUMMARY OF ANSWERS: 1. A 2. C 3. B PROBLEM 12-29

1 2 3 4 5 6 7 8

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

Accounts Payable P335,000 ( 18,000)

Sales P5,000,000

22,000 100,000

-

-

16,000

16,000

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

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

P333,000 (A)

50,000 P5,050,000 (B)

SUMMARY OF ANSWERS: 1. A 2. A 3. B PROBLEM 12-30 Note to the professor: Use the following guide questions in answering this question: 1. Accounts Payable and related accounts Was there a valid purchase? Was the purchase recorded? Were the inventories INCLUDED in the count? 2. Accounts Receivable and related accounts Was there a valid sale? Was the sale recorded? Were the inventories EXCLUDED in the count?

96

Chapter 12: Inventories

SOLUTION:

679 680 681 682

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

Unadjusted balances

Ending Inventory 550,000

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

Sales 1,000,000

Purchases 600,000

AP 450,000

Net Income 120,000

(46,740)

(46,740)

(46,740)

(46,740)

46,740

(4,500) 1,060

392 22,358

1,060

(560)

(560)

(31,940)

392 (31,940)

(6,350)

22,358 (6,350)

(1,930)

4,445 (1,930)

4,445

Net adjustment Adjusted balances

(24,045) 525,955 (A)

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

(40,780) 959,220 (A)

4.

A

(4,500) (1,060)

5.

(45,680) 554,320 (A)

(45,680) 404,320 (A)

(19,145) 100,855 (E)

E

PROBLEM 12-31 Ending inventory Unadjusted balance A B C D E Adjusted

P220,000

Accounts receivable

Accounts payable

P104,000

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

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

(64,000) (16,000) P24,000 (E)

4.

D

97

Sales

Net income

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

P1,010,000

P180,400 20,000

(64,000) (16,000)

P108,000 (D)

P930,000 (D)

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

5.

A

Chapter 12: Inventories

PROBLEM 12-32 Unadjusted balances A B C D E F G H I J Adjusted balances

Inventory

Accounts payable

Accounts Receivable

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

400,000 4,000 60,000

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

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

2,500,000 4,000 60,000

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

368,000

464,000

932,000

3,842,000

2,564,000

496,000

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

4.

A

PROBLEM 12-33

Ending inventory

Unadjusted balance 100 101 102 103 104 105 106 107 108 109 110 A B Adjusted

P280,000 (10,000)

Net Sales

5.

D

Net Purchases

6.

Net income

D

Accounts receivable

Purchases

Accounts payable

P5,000,000

P3,900,000

P2,800,000

P2,870,000

(12,500)

(12,500)

(11,200)

(11,200)

15,000

15,000

13,500

13,500 (11,750) 8,350 P2,796,600

(11,750) 8,350 P2,866,600

Sales

(15,000) (12,500)

P 242,500

P5,004,800

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

4.

P3,904,800

D

98

5.

A

Chapter 12: Inventories

PROBLEM 12-34 Ending inventory Unadjusted balance a. Sales under b EI under c Purchase over d Sales under EI over Adj.

Net Sales

P500,000

P1,000,000 64,000

Cost of Sales

Net Income

Retained Earnings

P550,000

P200,000 64,000 19,000 23,500 28,500 (25,800) P309,200

P1,500,000 64,000 19,000 23,500 28,500 ( 25,800) P1,609,200

19,000

(19,000) (23,500) 28,500

( 25,800) P 493,200

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

P1,092,500

4.

D

25,800 P533,300

5.

B

PROBLEM 12-35 Questions No. 1 to 5 2015 Purchases under, CGS under, NI over, RE over 2016 Purchases over, CGS over 2015 EI under, NI under, RE under 2016 BI under, CGS under Sales under Purchases under, CGS under EI under, CGS over Purchases under, CGS under EI under, CGS over Total

R/E 36,000

Sales

EI

A/P

CGS 36,000

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

(24,000) (4,000)

4,000

(20,000)

(4,000) (12,000)

(28,000)

(24,000) 8,000 (4,000) 4,000 (12,000)

Legend: BI - Beginning inventory EI - Ending inventory NI - Net Income CGS - Cost of goods sold RE - Retained earnings – 12/31/2015 or 01/01/2016 4,000 – overstated (4,000) – understated Note: The effect of errors on December 2015 and January 2016 has no effect on the ending balance of the accounts payable on December 31, 2016 since the payable is expected to be settled before the end of the year. SUMMARY OF ANSWERS: 1. C 2. B 3. B

4.

D

99

5.

C

Chapter 12: Inventories

PROBLEM 12-36 Question No. 1 Sales (475,000/80%) Less: Cost of sales Gross profit

P593,750 475,000 118,750

100% 80% 20%

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

20,000

25,000

Purchases

100,000

95,000

Total

120,000

120,000

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

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

60,000 540,000

125,000 475,000

Total

600,000

600,000

Balance end (squeeze) Cost of sales

Weighted average unit cost = TGAS (peso) / TGAS (units) Weighted average unit cost (P600,000/120,000) = P5/unit SUMMARY OF ANSWERS: 1. A 2. A 3. B

4.

A

5.

B

PROBLEM 12-37 Question No. 1 The cumulative effect on change in accounting policy on January 1, 2015 or December 31, 2014 Retained Earnings is understatement of 100,000, which is the understatement of Ending Inventory on December 31, 2014. (B) Question No. 2 Net income – weighted average Beginning inventory under, CGS under, Net income over Ending inventory under, CGS over, Net income under Adjusted net income – FIFO Question No. 3 Computation of units sold: Beginning inventory – units Add: Total purchases – units Total goods available for sale – units Less: Units sold (P6,400,000 / P80/unit) Ending inventory in units

100

(B)

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

10,000 100,000 110,000 80,000 30,000

Chapter 12: Inventories

The 30,000 ending inventory comes from the last two purchases as follows: Units Unit cost Total cost From 4th quarter purchases 10,000 68 680,000 From 3rd quarter purchases 20,000 66 1,320,000 Total 30,000 (B) 2,000,000 Question No. 4 Cost (refer to no. 3) Net realizable value [(P70 – P5) x 30,000] Loss on inventory write-down

(B)

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

(A)

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

(A)

100,000 970,000 100,000 1,170,000 819,000 351,000

Question No. 2 Beginning balance Add: Raw materials used (see no. 1) Wages (3,000,000 x 60%) Variable overhead (1,000,000 x 60%) Wooden boxes (purchased and used) Fixed manufacturing overhead (see computation below) Total manufacturing cost put into process Less: Work-in-process completed [4,969,000 x (100% - 20%)] Ending balance (4,969,000,000 x 20%) (A)

250,000 819,000 1,800,000 600,000 300,000 1,200,000 4,969,000 3,975,200 993,800

Question No. 5 Beginning inventory – FIFO Add: Net Purchases (P6,480,000 – 980,000) Total goods available for sale Less: Ending inventory at cost (see no. 3) Cost of goods sold at cost Add: Loss on inventory write-down (see no. 4) Cost of goods sold after inventory write-down SUMMARY OF ANSWERS: 1. B 2. B 3. B

4.

B

5.

A

PROBLEM 12-38 Question No. 1 Beginning balance Add: Purchases of raw materials Transport inwards of raw materials Total raw materials available for use Less: Raw materials used [1,170,000 x (100% - 30%)] Ending balance (1,170,000 x 30%)

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Chapter 12: Inventories

Fixed manufacturing overheads are allocated to the products at year end using the normal production (unless actual production is higher than normal): Fixed manufacturing overheads Fixed manufacturing = overhead per box Budgeted production =

800 000 depreciation + 700 000 rent 250,000

=

1,500,000 250,000

=

P6 per box

Fixed overheads allocated to work-in-progress: = 6 x 200,000 = 1 200,000 Fixed overheads expensed (unallocated): = 800,000 + 700,000 – 1,200 000 = 300,000 Question No. 3 Beginning balance Add: Work-in-process completed (see no. 2) Total goods available for sale Less: Cost of goods sold [4,125,200 x (100% - 10%)] Ending balance (4,125,200 x 10%) Question No. 4 Finished goods and work-in-process (see no. 5) Raw materials process (see no. 5) Total lower of cost and net realizable value

(A)

150,000 3,975,200 4,125,200 819,000 412,520

(C)

1,406,320 250,000 1,656,320

Question No. 5 F/G Net realizable value: Expected selling price Less: Cost to complete Cost to sell Net realizable value Cost: Ending balance

WIP

FG & WIP

1,300,000 80,000 1,220,000

700,000 100,000 20,000 580,000

2,000,000 100,000 100,000 1,800,000

300,000 50,000 250,000

412,520

993,800

1,406,320

351,000

1,406,320 -

250,000 101,000

Lower of cost or NRV Write-down

(C)

102

RM

Chapter 12: Inventories

Normally it is considered to be inappropriate to calculate the net realizable value per classification of inventory, but since the raw materials is to be sold as is, it becomes its own product line and must be evaluated separately. SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

C

5.

C

PROBLEM 12-39 Question No. 1 (10,500 - 1,000 + 3,000) = 12,000 units No. of units 3,000 2,000 4,000 3,000 12,000

Unit cost 14 13 15 16

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

(A)

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

Unit cost 19 20 21 22

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

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

(A)

NRV P172,800

Cost P176,000

Lower P 172,800

114,840 P287,640

117,400 P 293,400

114,840 P 287,640

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

P 293,400 287,640 P 5,760

(B)

Question No. 5 Beginning inventories: T-shirts (9,000 x P11) Jackets (5,000 x P15) Add:*Total purchases (299,500 + 183,900) Total goods available for sale

103

P 99,000 75,000

P 174,000 483,400 P 657,400

Chapter 12: Inventories

Less: Merchandise inventory at cost Cost of sales before inventory write-down Add: Loss on inventory write-down Cost of sales after inventory write-down (B) *T-shirts 4,000 3,000 2,500 3,500 2,000 4,000 3,000 22,000

P12 12 13 14 13 15 16

P 48,000 36,000 32,500 49,000 26,000 60,000 48,000 P 299,500

Jackets 900 1,100 1,500 2,000 1,800 1,200 1,000 9,500

P16 18 19 19 20 21 22

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

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

4.

B

293,400 P 364,000 5,760 P369,760

5.

B

PROBLEM 12-40 Note to professor: Change “Data for 2012 were:” to 2015. This T-Account of Raw Materials will be the same under the three different cases: Raw Materials Beginning balance Net Purchases

600,000 2,200,000

1,200,000 1,600,000

Total

2,800,000

2,800,000

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

Balance end Direct materials used

CASE NO. 1 2012 2,000,000 1,700,000 0.15

104

2013 3,500,000 2,800,000 0.20

2014 4,000,000 3,000,000 0.25

2015 0.30

Chapter 12: Inventories

The trend of gross profit for the past three years increases by 5% each year; thus, if the trend continues, the gross profit for 2015 will be 30%. The cost ratio then would be 70% (100% - 30%). Therefore, the cost of goods sold is computed as follows: Sales Multiply by: Cost Ratio Cost of goods sold Question No. 2

6,000,000 0.70 4,200,000

(B)

Finished Goods

Beginning balance Cost of goods manufactured

2,800,000

Total

6,200,000

2,000,000 4,200,000

Balance end Cost of goods sold

3,400,000 6,200,000

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

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

2,600,000

Total

6,000,000

6,000,000

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

3,400,000

Balance end Cost of goods manufactured

(A)

2014 1,000,000 4,000,000 0.25

2015

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

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

2012 340,000 2,000,000 0.17

2013 630,000 3,500,000 0.18

0.20

The GP rate in 2015 is computed as follows: 16% + 18% + 25% Gross Profit Rate = 3 = 20% The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goods sold is computed as follows: Sales Multiply by: Cost Ratio Cost of goods sold

6,000,000 0.80 4,800,000

105

(B)

Chapter 12: Inventories

Question No. 4 Finished Goods Beginning balance Cost of goods manufactured

2,800,000

Total

6,800,000

4,000,000

2,000,000 4,800,000

Balance end Cost of goods sold

6,800,000

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

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

2,000,000

Total

6,000,000

6,000,000

4,000,000

Balance end Cost of goods manufactured

(A)

CASE NO. 3: Question No. 5 The gross profit for 2015 is computed based on the overall gross profit for 2013 and 2014: 800,000 + 1,000,000 Gross Profit Rate = 3,500,000 + 4,000,000 1,800,000 = 7,500,000 Gross Profit Rate = 24% The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goods sold is computed as follows: Sales Multiply by: Cost Ratio Cost of goods sold

6,000,000 0.76 4,560,000

(A)

Question No. 6 Finished Goods Beginning balance Cost of goods manufactured

2,800,000

Total

6,560,000

3,760,000

2,000,000 4,560,000

Balance end Cost of goods sold

6,560,000

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

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

2,240,000

Total

6,000,000

6,000,000

106

3,760,000

Balance end Cost of goods manufactured

(A)

Chapter 12: Inventories

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

4.

A

5.

A

6.

A

PROBLEM 12-41 Direct materials inventory Beg. Balance DM purchased

32,000 340,000

130,000 242,000

Total

372,000

372,000

Balance end (squeeze) Direct materials used (602,00 - 360,000)

Work in process inventory Beg. Balance DM used Direct labor Factory overhead (360,000/60% x 40%)

68,000 242,000 360,000 240,000

50,000 860,000

Total

910,000

910,000

Balance end(squeeze) Cost of goods manufacture

Conversion cost = Direct labor + Factory overhead Prime cost = DM used + Direct Labor Finished goods Beg. Balance Cost of goods manufactured (squeeze)

60,000 860,000

120,000 800,000

Total

920,000

920,000

Balance end (squeeze) Cost of sales (1,000,000 x 80%)

Note: The beginning balance on January 1, 2015 is the ending balance as of December 31, 2014. SUMMARY OF ANSWERS: 1. A 2. A 3. D

4.

B

5.

A

PROBLEM 12-42 Note to the professor: The following corrections should be made to this problem:  The ending accounts payable (Dec. 31) should be P250,000, instead of P200,000.  Add Direct Labor of P900,000 and Factory Overhead of P675,000.

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Chapter 12: Inventories

Question No. 1 Accounts payable Balance end Purchase ret. and allow. Purchase discounts Payments to supplier (squeeze) Total

250,000 70,000 80,000 3,255,000

555,000 3,000,000 100,000

3,655,000

3,655,000

Beg. Balance Purchases Freight-in

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

200,000 2,950,000

320,000 2,830,000

Total

3,150,000

3,150,000

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

Balance end Direct materials used

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

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

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

280,000 4,375,000

Total

4,655,000

4,655,000

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

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

Balance end Cost of goods manufactured

120% 100% 20%

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

Finished goods 400,000 4,375,000

108

525,000 4,250,000

Balance end Cost of goods sold

Chapter 12: Inventories

Total

4,775,000

4,775,000

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

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

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

= P4,080,000

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

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

100% 80% 20%

Finished goods Beg. Balance Cost of goods manufactured

400,000 4,375,000

695,000 4,080,000

Total

4,775,000

4,775,000

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

4.

B

Balance end Cost of goods sold

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

5.

B

6.

A

7.

A

PROBLEM 12-43 Question No. 1 Accounts payable – March 31, 2015 Add: Unrecorded obligation – April 25 April Shipments Less: Payment from April 1 to 25 (285,000 + 100,000) Adjusted balance – April 25

1,185,000 425,000 100,000 385,000 1,325,000

(C)

Note: The P22,500 of purchase return should not be deducted from the accounts payable since it was refunded.

109

Chapter 12: Inventories

Question No. 2 Purchases – March 31, 2015 Add: Unrecorded obligation – April 25 April Shipments Less: Purchase return Adjusted Net Purchases – April 25

2,100,000 425,000 100,000 22,500 2,602,500

(B)

Question No. 3 Sales – March 31, 2015 Add: Sales April 1 to 25 (see computation below) Adjusted Sales – April 25

4,520,000 730,000 5,250,000

(D)

Computation of sales: Accounts Receivable Beg. Bal. – 03/31/2015 Sales (squeeze)

1,250,000 730,000

Bal. end (acknowledged)

1,320,000

Write-off (never be acknowledged) Collections (P532,500 – 22,500)

250,000 510,000 Total

2,080,000

2,080,000

Questions No. 4 and 5 Beginning inventory – March 31, 2014 Add: Purchases Total goods available for sale Less: Cost of sales (55% x 5,250,000) Estimated ending inventory Less: Salvaged value of inventory worth P325,000 Inventory in transit Inventory loss

2,500,000 2,602,500 5,102,500 2,887,500 2,215,000 150,000 65,000 2,000,000

Computation of cost ratio: Beginning inventory Add: Net purchases Less: Ending inventory Cost of sales Net sales

Year Ended 2014 2013 2,250,000 1,750,000 11,300,000 8,700,000 2,500,000 2,250,000 8,200,000 11,050,000 P20,000,000

P15,000,000

Cost Ratio (19,250,000 / 35,000,000) = 55% SUMMARY OF ANSWERS: 1. C 2. B 3. D

4.

D

110

5.

B

Total

19,250,000 35,000,000

4. (D)

5. (B)

Chapter 12: Inventories

PROBLEM 12-44 Note to professor: The purchases for the element months should be eleven. Questions No. 1 and 2 Purchases ending 11 mos 12 mos 2,700,000 3,200,000 30,000 (4,000) (6,000) (8,000) (8,000) 2,718,000 3,186,000 1. (C) 2. (D)

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

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

350,000 2,718,000 380,000 2,688,000

(A)

3,840,00 3,360,000 480,000 40,000 440,000 80% 352,000 40,000 392,000

(A)

380,000 468,000 392,000 456,000

(A)

Cost ratio (2,688,000 / 3,360,000) = 80% Question No. 4 Sales ending December 31, 2015 Less: Sales ending Nov. 30, 2015 Sales – December 2015 Less: Sales at cost Sales in December 2015 made at a profit Multiply: Cost ratio (2,688,000 / 3,360,000) Cost of sales made at profit Add: Cost of sales made at cost Total Cost of Sales -December Question No. 5 Beginning inventory – Nov. 30, 2015 Add: Purchases for December (3,186,000 - 2,718,000) Less: Cost of Sales – December Ending inventory – December 31, 2015 SUMMARY OF ANSWERS: 1. C 2. D 3. A

4.

A

111

5.

A

Chapter 12: Inventories

PROBLEM 12-45 Inventory, Jan 1 Purchases Purchase returns Purchase discounts Purchase allowance Freight-in Departmental Transfer-In Departmental Transfer-Out Totals Basis of computation of cost ratios Totals Markups Markup cancellations Basis of computation (conservative) Markdown Markdown cancellations Basis of computation (average)

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

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

5,760,000

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

5,760,000 5,760,000

Cost ratios: Conservative Cost ratio Cost ratio

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

Average Cost ratio Cost ratio

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

FIFO Cost ratio Cost ratio

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

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

112

Chapter 12: Inventories

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

Ending inventory at cost (EI @ retail x cost ratio) P 1,375,000 1,540,000 1,408,000

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

4.

C

5.

C

Cost of goods sold (TGAS @cost – EI @cost) 4,385,000 4,220,000 4,352,000

6.

D

PROBLEM 12-46 Question No. 1 Unadjusted bal. Undelivered sales Valid Sales Sales FOB destination NSF check Collection by the bank Sales in 2015 recorded in 2016 DR No. 38740 Receivable ins. Co DR No. 38741 Sales in 2016 recorded in 2015 DR No. 38743 Adjusted balance (D)

Subsidiary Ledger P 760,000 60,000 ( ( ( P

50,000 60,000) 3,360 10,080) 19,200) 784,080

Question No. 2 Current: Unadjusted beginning Balance Add: Valid Sales in 2015 (60,000 + 3,360) Total Less: Receivable ins. Co (DR # 38741) Sales in 2016 recorded in 2015 (DR # 38743) Current Accounts Receivable balance

Amount

(

100,000) 50,000 ( 60,000) 3,360 ( 10,080) ( 19,200) P 784,080

97,500 63,360 160,860 10,080 19,200 131,580

Past Due: Adjusted Accounts Receivable balance (see no. 1) Less: Current Accounts Receivable balance Past due Accounts Receivable *or (662,500+50,000-60,000) Age classification

General Ledger P 1,020,000 ( 100,000)

784,080 131,580 *652,500

Percentage

Total

6 10

7,894.80 65,250.00 73,144.80

Current 131,580 Past due 652,500 Allowance for doubtful accounts

(A)

113

Chapter 12: Inventories

Question No. 3 Allowance for doubtful accounts, beginning Less: Accounts written off Less: Allowance for doubtful accounts, ending Doubtful accounts expense

7,000.00 73,144.80 66,144.80

(A)

Question No. 4 Unadjusted Merchandise Inventory, ending Add: Cost of merchandise sold of DR # 38743(19,200/120%) Doubtful accounts expense (B) Question No. 5 Unadjusted Net Sales balance Undelivered sales Sales FOB destination Sales in 2015 recorded in 2016 DR No. 38740 Sales in 2016 recorded in 2015 DR No. 38743 Adjusted balance SUMMARY OF ANSWERS: 1. D 2. A 3. A

4.

B

5.

P 3,000,000 100,000) 100,000) 3,360 ( 19,200) P 2,784,160

( ( (B)

B

PROBLEM NO. 6-47 Question No. 1 Cash, unadjusted balance Unrecorded disbursement NSF check Adjusted balance-cash

100,000 (10,000) (2,000) 88,000

(A)

Question No. 2 Accounts receivable, unadjusted NSF check Invalid sales already recorded Adjusted Accounts receivable x percent uncollectible (100%-5% +2%) Net realizable value

93% 219,480

(A)

Question No. 3 Unadjusted balance, MI Goods shipped FOB shipping pt. Cost of goods in transit to customer Adjusted merchandise inventory

300,000 30,000 10,000 340,000

(C)

250,000 2,000 (16,000) 236,000

114

316,000 16,000 332,000

Chapter 12: Inventories

Question No. 4 Unadjusted balance, AP Unrecorded disbursement Unrecorded purchase Adjusted accounts payable

120,000 (10,000) 30,000 140,000

(C)

Question No. 5 Cash Net realizable value Merchandise inventory Prepayments Current Assets Accounts payable Notes payable Current liabilities Working capital

88,000 219,480 340,000 12,000 659,480 140,000 180,000 320,000 339,480

(B)

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

4.

C

5.

115

B

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES Note to professor: Page 461: Total FL (Financial Liab) should be 1,690 instead of 1,450. 473

Requirement No. 2 FVTPL Net Selling Price (10,000 x ½ x P48) 238,000 Requirement No. 2 FVTOCI Net Selling Price (10,000 x ½ x P48) 238,000 Financial asset through other comprehensive income (FVTOCI) – Journal entry on 01/02/15 Cash 238,000 Loss on sale 12,000 FVTOCI 250,000

Kindly disregard the (10,000 x ½ x P48) Kindly disregard the (10,000 x ½ x P48) Cash Loss on sale FVTOCI

PROBLEM 14-1 Financial Assets and Financial Liabilities FA NFA FL Cash and cash equivalents 70 Accounts receivable 100 Allowance for bad debts (10) Notes receivable 150 Interest receivable 21 Prepaid interest (not a valuation account to financial liability) 20 Investment in equity instruments 125 Investment in associate 45 Investment in subsidiary 70 Investment in bonds 170 Cash surrender value 60 Sinking fund 40 Merchandise inventories 133 Biological assets 120 Building 500 Accumulated depreciation (50) Intangible assets 30 Prepaid rent 20 Treasury shares Claims for tax refund 45 Deferred tax assets 60 Accounts payable 150 Utilities payable 250 Accrued interest expense 18

116

238,000 37,000 275,000

NFL

SHE -

-

-

(23) -

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Cash dividends payable Finance lease liability Bonds payable Discount on bonds payable Security deposit Advances from customers Unearned rent Warranty obligations Unearned interest on receivables Income taxes payable SSS contributions payable PHILHEALTH contributions payable Share Premium Accumulated Profits-appropriated for plant expansion Accumulated Profitsunappropriated Issued redeemable preference shares (with mandatory redemption) Issued Preference shares capital Adjusted balances

-

-

27 45 120 (15) 30 -

16 8 13 5 9 5 6 -

35

-

-

-

-

500

-

-

-

-

3,200

861 (E)

858 (A)

100 725 (B)

-

-

62 (A)

3,712

Legend: FA – Financial Asset NFA – Non-Financial Asset FL – Financial Liabilities NFL – Non-Financial Liabilities SHE: Shareholders equity SUMMARY OF ANSWERS: 1. E 2. A 3. B

4.

A

PROBLEM 14-2 Acquisition of Investment Journal entries are: 1) FVTPL 1/5/2015 Financial Asset at FVTPL Brokerage fee Commission Expense Cash 1/10/2015 2/14/2015

1,600,000 10,000 5,000 1,615,000

Dividend receivable Dividend income

32,000

Cash Dividend receivable

32,000

32,000 32,000

117

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

2) FVTOCI 1/5/2015 1/10/2015 2/14/2015

Financial Asset at FVTOCI Cash

1,615,000 1,615,000

Dividend receivable Dividend income

32,000

Cash Dividend receivable

32,000

32,000 32,000

The difference between FVTPL and FVTOCI is the treatment of transaction cost. PROBLEM 14-3 Basic Journal Entries- Acquisitions in Between Dates of Declaration and Record Note to professor: Received dividends from Defray Co. declared January 2, 2007 to. 2007 should be replaced with 2015. 1) Trading securities 1/5/2015 Financial Asset at FVTPL (Squeeze) Dividends receivable Brokerage expense Commission Expense Cash 2/14/2015 12/31/2015 12/31/2016

1,584,000 16,000 10,000 5,000 1,615,000

Cash Dividend receivable

16,000

Unrealized Loss – PL Financial Asset at FVTPL

64,000

Financial Asset at FVTPL Unrealized gain – PL

400,000

16,000 64,000 400,000

2) Fair Value through Other Comprehensive Income securities 1/5/2015 FVTOCI securities 1,599,000 Dividend receivable 16,000 Cash 2/14/2015 12/31/2015 12/31/2016

Cash Dividend receivable

16,000

Unrealized loss - equity FVTOCI securities

79,000

1,615,000 16,000

FVTOCI securities Unrealized loss – equity Unrealized gain – equity

118

79,000 400,000 79,000 321,000

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

PROBLEM 14-4 Derecognition of Financial Assets - Sale of Investment CASE NO. 1: FVTPL Question No. 1 Nil, since the above securities are FVTPL unrealized gain or loss is recognized in the profit or loss. (A) Question No. 2 Consideration received Less: Brokerage and commission Net Selling Price Less: Carrying value (800,000 x ½) Realized loss on sale – P&L Question No. 3 Fair value, 12/31/2014 Less: Cost Unrealized gain - P&L

(B)

CASE NO. 2: FVTOCI

Question No. 4 Consideration received Less: Brokerage and commission Net Selling Price Less: Carrying value (800,000 x ½) Realized loss on sale – P&L Question No. 5 Journal entries for the sale are: 1) FVTPL 12/31/2014 FVTPL Unrealized gain-P&L 1/2/2015

2) FVTOCI 12/31/2014 1/2/2015

375,000 10,000 365,000 400,000 (35,000)

(B)

800,000 750,000 50,000

(B)

375,000 10,000 365,000 400,000 (35,000)

50,000

Cash Loss on sale FVPTL To record the sale

50,000

365,000 35,000 400,000

FVTOCI Unrealized gain-OCI

50,000 50,000

Cash Loss on sale (if any) FVTOCI To record the sale

365,000 35,000 400,000

Unrealized Gain (50,000 X ½) 25,000 Retained earnings 25,000 To record transfer of unrealized gain to Retained earnings

119

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

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

4.

B

PROBLEM 14-5 Purchase: Trade Date vs. Settlement Date Accounting SUMMARY OF ANSWERS: 1. B 2. D PROBLEM 14-6 Sale: Trade Date vs. Settlement Date Accounting SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 14-7 Share Dividends 1.

Memo entry: Received 1,500 ordinary shares from Pulsate Company.

2.

Investment in Preference shares - FVTOCI Investment in Ordinary shares - FVTOCI Allocation:

Total Fair value 100,000 750,000 850,000

Pref. shares (1,000 x P100) Ordinary shares (15,000 x P50) Total

88,235 88,235 Fraction 10/85 75/85

Allocated cost 88,235 661,765 750,000

Share dividends is not regarded as an income., however different type of shares received from the shares held is allocated using the relative fair value. Comments on share dividends: Accounting treatment for share dividends is actually a gray area, no clear cut rules is provided under PFRS or other accounting standard setting body. However, the authors believe that share dividends will only be accounted as an increase in number of shares held and a decrease on the price per unit. PROBLEM 14-8 Cash Dividends Question No. 1 The dividend income to be recognized in 2015 is P60,000 (15,000 x P4). Question No. 2 December 1 Dividend Receivable (15,000 x P4)

120

60,000

(B)

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Dividend income

60,000

December 15

No formal accounting entry

December 31

Cash Dividend Receivable

60,000 60,000

PROBLEM 14-9 Property Dividends Question No. 1 Property dividends are as income at fair value at date of declaration (500,000 x 15%) = P75,000. (B) Question No. 2 November 1 Dividend Receivable (500,000 x 15%) Dividend income December 31

No journal entry

February 15

Noncash Asset Dividend Receivable

75,000 75,000 75,000

75,000

PROBLEM 14-10 Cash Received in Lieu of Share dividends Question No. 1 Nil. The share dividend is not considered an income. Question No. 2 Net Selling Price (2,250 x P18) Less: Carrying amount of the investment sold (P172,500/(15,000+(15% x 15,000) x 2,250 Gain (or loss) on sale

(A) 40,500 22,500 18,000

(E)

Question No. 3 October 1 Memo entry October 31

Cash Gain on sale FA at FVTOCI

45,000

18,000 22,500

PROBLEM 14-11 Shares Received in Lieu of Cash Dividends Question No. 1 Shares received in lieu of cash dividends are in effect recorded at the fair value of shares received on date of payment. Since the date of declaration and date of payment is within the same period, the dividend income is computed as follows: (15,000/5 X P22) = P66,000 (C)

121

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Question No. 2 Journal entries are: October 1 Dividend Receivable (15,000 x P4) Dividend income

60,000 60,000

October 31

FA at FVTOCI (15,000/5 x P22) Dividend receivable Dividend income PROBLEM 14-12 Dividends Out Of Capital Questions No. 1 and 2 Cash (P100 x 15% x 10,000) Investment

150,000

Questions No. 3 and 4 Cash Loss on liquidation Investment

150,000 70,000

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

66,000

60,000 6,000

150,000

220,000 4.

C

PROBLEM 14-13 Stock Split and Special Assessment Question No. 1 Date 1/1 3/1 stock split Total (10,000 x 5/2) 11/1 Special assessment (P1.60 x 25,000) Total

Question No. 2 Fair value (P15 x 25,000) Less: Carrying value Unrealized gain-OCI

No. of shares 10,000 15,000 25,000

Cost per share P21

Total Cost P210,000

P8.40

P210,000

25,000 (D)

P10

40,000 250,000

P375,000 250,000 P125,000

Questions No. 3 and 4 Journal entries are: 1/1 Financial Asset at FVTOCI Cash 3/1

Received `5,000 shares as a result of 5 for 2 share split.

122

(D)

210,000

210,000

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

10/1 12/31

Financial Asset at FVTOCI Cash (P1.60 x 25,000) Financial Asset at FVTOCI Unrealized gain – OCI [(P25 x 25,000) – P250,000]

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

4.

60,000 60,000 125,000 (C)

125,000

C

PROBLEM 14-14 Stock Right Question No. 1 Nil. The company will only make a memo entry to record the receipt of stock right on a financial asset at FVTPL. (A) Question No. 2 The stock right should be initially recorded at fair values as follows: (P20 x 10,000) = P200,000. (B) Question No. 3 The cost of the investment will only include the subscription price of P400,000 (5,000 x P80). (B) Question No. 4 The cost of the investment will include the subscription price of P400,000 and cost of stock rights exercised of P200,000 = P600,000. (B) The journal entries under the two classifications are as follows: Fair Value through profit and loss securities June 15 Memo entry (Received 10,000 stock rights) July 15

FVTPL (P80 x 10,000/2) Cash

400,000

Fair Value Through Other Comprehensive Income June 15 Stock rights (P20 x 10,000) Unrealized gain - P/L

200,000

July 15

600,000

FVTOCI (P80 x 10,000/2)+ 200,000 Cash Stock rights

PROBLEM 14-15 Theoretical Value of Rights Question No. 1 When the stock is selling right-on

Value of one right

=

P160 – P100 5+1 123

400,000

200,000 400,000 200,000

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

=

P10

Question No. 2 When the stock is selling ex-right

Value of one right

= =

P160 – P100 5 P12

SUMMARY OF ANSWERS: 1. B 2. C

PROBLEM 14-16 Dividend Income Cash dividend Shares in lieu of cash dividends (5,000 x P150) Total dividend income

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

(C)

PROBLEM 14-17 Dividend Income Note to professor: The question should be dividend income in its 2015 income statement, not 2008. The dividend income to be recorded is equal to P2,400,000 (300,000 / 1,000,000 x P8,000,000). The base is on actual dividends declared. A share dividend is not regarded as an income. (A) PROBLEM 14-18 Trading Securities Question No. 1 (A) The cost of investment is P880,000. The brokerage fee and commission of P10,000 and P10,000 respectively is charged to expense since the investment acquired is a trading security. The investments are also acquired prior to the declaration of dividends on January 10, 2015 so they are not purchased dividend on. Question No. 2 Dividend income (P2 x 6,000 + P16,000) = P28,000 Question No. 3 Selling price Less: Commission and taxes Net selling price Less: Carrying value [2,500x(P90,000/6,000)] Gain on sale

124

(C)

(A) P50,000 5,000 45,000 37,500 P7,500

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Question No. 4 EDA Corp. shares [P50 – (P30,000/1,000)] DJOA, Inc. [P15 – (P90,000/6,000)] RVFE, Co. [P45 – (P80,000/2,000)] ARP, Co. [P100 – (P880,000/8,000)] Loss chargeable to income statement

x 1,000 x 3,500 x 2,000 x 8,000 (B)

Question No. 5 EDA Corporation shares P50 x DJOA, Inc. P15 x RVFE, Co. P45 x ARP, Co. P100 x Total balance of financial asset at profit or loss

1,000 3,500 2,000 8,000 (A)

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

4.

B

5.

= = = =

= = = =

P20,000 10,000 ( 80,000) (P50,000) P50,000 52,500 90,000 800,000 P992,500

A

PROBLEM 14-19 Fair Value through Other Comprehensive Income Question No. 1 1/1/2015 Book Value Brokerage fee Commission Dividends receivable Cost of FVTOCI

P ( P

880,000 10,000 10,000 16,000) 884,000

(A)

17,500 20,000) (2,500)

(B)

Question No. 2 Dividend income (P2 x 6,000) = P12,000 (D) Question No. 3 Proceeds (P35 x 500) Cost (P500 x (P88,000/(2,000 x 110%)) Loss on sale Question No. 4 Net Proceeds (P40,000 – P5,000) Carrying value (2,500 x (P90,000/6,000)) Dividends on stocks sold (P2 x 2,500) Loss on sale

P ( P

( (

P P

35,000 37,500) 5,000)* (7,500) (E)

*This was sold dividend-on. Question No. 5 EDA Corporation preference shares (1,000 x P50) P DJOA, Inc. (3,500 x P15) RVFE Co. ((2,000 x 110% - 500) x P45)

125

50,000 52,500 76,500

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

ARP Co. (8,000 x P100) Adjusted balance SUMMARY OF ANSWERS: 1. A 2. D 3. C

800,000 979,000

P 4.

E

5.

(A)

A

PROBLEM 14-20 Exchange of One Financial Asset into Another Financial Asset Question No. 1 Fair value- Ordinary Shares (6,000 x P80) Less: Carrying value- Pref. Shares (P850,000/8,000 x 4,000) Gain on exchange (C)

480,000 425,000 55,000

Question No. 2 Journal entry would be: Investment in Trading- Ordinary Shares (6,000 x P80) 480,000 Gain on exchange Investment in Trading- Pref. Shares (P800,000/8,000 x 4,000)

55,000 425,000

SUMMARY OF ANSWERS: 1. C 2. B or C PROBLEM 14-21 Exchange of a PPE for Financial Asset Question No. 1 Fair value of the financial asset Less: Carrying value of the land Gain on exchange

820,000 600,000 220,000

Question No. 2 Journal entries are: March 31 Financial asset at FVTOCI Land Gain on exchange (820,000-600,000)

820,000

(B)

600,000 220,000

SUMMARY OF ANSWERS: 1. B 2. B PROBLEM 14-22 Exchange of a Financial Asset for PPE Question No. 1 Fair value of the financial asset Less: Carrying value of the financial asset Gain on exchange

126

650,000 600,000 50,000

(B)

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Question No. 2 Journal entries are: March 31 Land (at fair value of the asset given up) FVTOCI Gain on exchange (650,000-600,000) Retained earnings Unrealized loss (625,000-600,000)

650,000 600,000 50,000 25,000 25,000

SUMMARY OF ANSWERS: 1. B 2. B PROBLEM 14-23 Reclassifications of Investments in Equity Securities Question No. 1 Not allowed. The only allowed reclassification is from Financial Asset at Amortized Cost (FAAC) to held for trading Financial Asset at Fair Value Through Profit or Loss debt securities (FVTPL), or vice versa. Therefore the securities remain as FVTPL. Since reclassification is not allowed, there is no reclassification gain or loss. (A) Question No. 2 Not allowed (see discussion on no. 1). Therefore the securities remain as FVTOCI. Since reclassification is not allowed, there is no reclassification gain or loss. (A) PROBLEM 14-24 Question No. 1 Stock rights (11,000 x P6) Question No. 2 Cash paid (P90 x (10,000/5)) Cost of stock rights used (P4 x 10,000) Total investment cost Question No. 3 Proceeds (P5.5 x 1,000) Cost of stock rights (P4 x 1,000) Gain on sale of stock rights

P

66,000

(D)

P

180,000 40,000 220,000

(B)

5,500 4,000 1,500

(C)

440,000 304,000 136,000

(D)

P P P

Question No. 4 Proceeds Cost of shares sold (P76 ** x 4,000) Gain on sale of stocks

P P

127

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Question No. 5 Original investment cost Cost allocated to stock rights* Additional investment ** Sale of investment Adjusted cost of investment

P 880,000 44,000) 220,000 ( 304,000) P 752,000 (

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

4.

D

5.

(D)

D

PROBLEM 14-25 Note to professor: Question No. 5 should be 2015 instead of 2014. Question No. 1 Cash paid (400K+20K) Less: dividends Correct cost

420,000 10,000 410,000

Question No. 2 Feb. 10 Nov. 2 (10,000+(11,000/5) x 1 Total dividend income

(D)

30,000 13,200 43,200

(C)

Question No. 3 Fair value of new FA (10,000 x 40) Less: Cost (900,000/15K x 5K) Gain on conversion

400,000 300,000 100,000

(A)

Question No. 4 Consideration received (2,000 x 70) Less: Dividends (2,000 x P1) Net Selling Price Less: Cost Gain on sale

140,000 2,000 138,000 114,000 24,000

(B)

10-Feb Total 1-May (11,000/5) Total 15-Nov Total

Shares 10000 1,000 11,000

Cost 550,000 550,000

2,200 13,200 (2,000) 11,200

202,400 752,400 (114,000) 638,400

Cost of stocks on May 1

128

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Subs. Price (11,000/5 x P62) Add cost of stock rights (6 x 11,000) Cost of stocks on May 1

136,400 66,000 202,400

Question No. 5 Gerrit-PS (70 x 10,000) -OS (45 x 10,000) Loesch (72 x 11,200) Barr (20 x 20,000)

Fair values 700,000 450,000 806,400 400,000 2,356,400

Cost 600,000 400,000 638,400 410,000 2,048,400

Difference (900,000/15K x 10K)

308,000 (A)

Note: Use bid price on asset held, asked price for asset to be purchased. SUMMARY OF ANSWERS: 1. D 2. C 3. A

4.

B

PROBLEM 14-26 Question No. 1 FVTOCI Portfolio – 12/31/2014 Coloma Company Soliman Villanueva Company Less: FVTOCI Portfolio – 01/01/2014 Coloma Company Soliman Villanueva Company Unrealized gain – SFP Question No. 2 Fair value of shares Less: Carrying amount of Soliman portfolio Gain on exchange

5.

A

3,070,000 2,737,500 1,871,000

7,678,500

3,050,000 2,725,000 1,875,000 (C)

7,650,000 28,500

2,797,500 2,737,500 60,000

(B)

Note that the carrying amount is equal to the fair value previous remeasurement date (12/31/2014). Question No. 3 Proceeds from sale of Aquino shares Less: Carrying amount of Aquino portfolio Loss on sale Question No. 4 FVTOCI Portfolio – 12/31/2015 Coloma Company Villanueva Company Less: FVTOCI Portfolio – 01/01/2014

129

2,590,000 2,600,000 (10,000)

(B)

3,080,000 1,867,500

4,947,500

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Coloma Company Villanueva Company Unrealized gain – SFP (cumulative) SUMMARY OF ANSWERS: 1. C 2. B 3. B

3,050,000 1,875,000 (C)

4.

4,925,000 22,500

C

PROBLEM 14-27 Question No. 1 Adjusted balance (5,000 – 4,000) x P50 = P200,000 Question No. 2 Type of stocks # shares Ordinary 10,000 Preference 2,000 Total cost

Fair value P30 10

Total fair value P300,000 20,000 P320,000

(A) Allocated cost P234,375 15,625 P250,000

(B)

Question No. 3 Allocate part of the investment cost to the preference shares. Question No. 4 Proceeds (1,000 x P17) P Carrying amount [(P15,625/(10,000/5)) x 1,000)( Gain on sale P

17,000 7,812.50) 9,187.50

(C)

Question No. 5 Proceeds, exclusive of interest Carrying amount (250 x 1,000 x 110%) Gain on sale

280,000 275,000) 5,000

(A)

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

4.

P ( P C

5.

A

PROBLEM 14-28 Question No. 1 Net Selling price Less: Carrying value (740,000/40,000 x 5,000) Gain on sale Question No. 2 Consideration received Less:

(D)

250,000 92,500 157,500

270,000

130

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

Dividend income of the investment sold (6,000 x *P20 x 20%) Net Selling price Less: Carrying value (740,000/40,000 x 6,000) Gain on sale (D)

24,000 248,000 111,000 137,000

*The par value after 2 for 1 share split is equal to P40 x ½= P20 Question No. 3 6/1/2015 (35,000 x 4) 12/1/2015 (35,000 x 20% x P20) Total dividend income

(A)

Question Nos. 4 and 5 Fair value (29,000 x P43) Less: Cost (700,000/40,000 x 29,000) Unrealized gain SUMMARY OF ANSWERS: 1. D 2. D 3. A

4.

1,247,000 507,500 739,500

D

131

5.

D

140,000 140,000 280,000

4. (D) 5. (D)

Chapter 15: Investment in Debt Securities

CHAPTER 15: INVESTMENT IN DEBT SECURITIES Note to professor: SOLUTION # 1 537

The carrying value as of December 31, 2013 is computed using the market interest of 9% for 8 periods as follows: Fair value-12/31/2014 (8M x 1.04) P8,320,000 Less: Fair value-12/31/2013 8M x 1.05) 8,400,000 Loss on changes in fair value-FVTPL-P&L P120,000

Change P120,000 to P80,000

PROBLEM 15-1 Held for Trading Interest Income and Unrealized Gains or Losses Question No. 1 Face value Multiply by: Nominal rate Multiply by: Months outstanding Interest Income (A)

3,000,000 10% 12/12 300,000

Question No. 2 Fair value of the bonds (3M x 104) Less: Carrying value Unrealized gain - P&L (E)

3,120,000 2,855,940 264,060

PROBLEM 15-2 Derecognition of Held for Trading Debt Securities Fair value of the bonds Less: Carrying value Gain on sale

3,120,000 3,090,000 30,000

(D)

PROBLEM 15-3 Acquisition of FAAC Term Bonds on Interest Date Question No. 1 Present value of Principal (1200000 x 0.6355 ) Add: Present Value of interest payments (120000 x 3.0373 ) Present value of the investment bonds (C) Question No. 2 Amortization table: Interest Date Collection 01/01/2015 12/31/2015 120,000

Interest Income

Premium Amortization

(B) 135,249

15,249

132

762,600 364,476 1,127,076

Present value 1,127,076 1,142,325

Chapter 15: Investment in Debt Securities

PROBLEM 15-4 Acquisition of FAAC Term Bonds in Between Interest Dates Question No. 1 Present value of the investment bonds Add: Discount amortization Effective interest Nominal interest Present value of the investment bonds, April 1 Add: Accrued interest Total Present value of the bonds Question No. 2 Amortization table: Interest Date Collection 01/01/2015 12/31/2015 200,000

1,878,460 56,354 50,000 (E)

Interest Income

Discount Amortization

225,415

25,415

Total interest income (P225,425 x 9/12) = P169,061

6,354 1,884,814 50,000 1,934,814

Present value 1,878,460 1,903,875

(B)

PROBLEM 15-5 Interpolation of Effective Interest Rate of FAAC - Term Bonds and Computation of Interest Income Purchase price Add: Transaction cost Initial carrying amount

P1,100,000 44,752 P1,144,752

Since there is transaction cost incurred, effective rate must be computed. The effective rate therefore is computed at 11.5% (refer to page 530 and 531 of the textbook for example of interpolation). Interest income (11.5% x P1,144,752) = 131,646

(B)

PROBLEM 15-6 Acquisition of FAAC - Serial Bonds Question No. 1

Interest Total Principal Collection Collection 450,000 180,000 630,000 450,000 135,000 585,000 450,000 90,000 540,000 450,000 45,000 495,000 Total Present Value of the serial bonds Question No. 2 Interest income (1,727,834 x 12%) = 207,340

133

Present Value Factor 0.8929 0.7972 0.7118 0.6355 (C)

(B)

Total Present Value 562,527 466,362 384,372 314,573 1,727,834

Chapter 15: Investment in Debt Securities

PROBLEM 15-7 Reclassification from Financial Assets at Amortized Cost to Held for Trading Question No. 1 Interest income (P2,855,940 x 12%) = 342,713

(B)

Note that interest income is computed for the whole year even though the business model was changed on July 1, 2014 since reclassification date will be on the first day of the next reporting period (January 1, 2015). The investment therefore would be continued to be reported as Financial Assets at Amortized Cost on December 31, 2014. Question No. 2 Fair value of the bonds, reclassification date (104% x P3,000,000) Less: Carrying value, reclassification date [(P2,855,940 x 1.12) – (10% x P3,000,000) Gain on reclassification (B)

3,120,000 2,898,653 221,347

PROBLEM 15-8 Reclassification: Held for Trading to Financial Asset at Amortized Cost Question No. 1 Interest income (P3,000,000 x 10%) = 300,000

(A)

Note that interest income is computed for the whole year and is based on the nominal rate since this is a held for trading investment. The investment will be continued to be measured at fair value and reported as Financial Assets at Fair Value Through Profit or loss on December 31, 2014. Question No. 2 Fair value of the bonds, reclassification date (104% x P3,000,000) Less: Carrying value, reclassification date (103% x P3,000,000) Gain on reclassification (D)

3,120,000 3,090,000 30,000

PROBLEM 15-9 Impairment of Financial Asset at Amortized Cost SOLUTION: Question No. 1 Carrying amount of the investment – 12/31/2015 Less: Present value of expected cash flows (get the present value computed using original effective rate) Impairment loss (B) Question No. 2 Interest income (3,188,800 x 12%) = 382,560

134

(D)

3,864,680 3,188,800 675,880

Chapter 15: Investment in Debt Securities

PROBLEM 15-10 Reversal of Impairment on Financial Asset at Amortized Cost Present Value of Principal (5,000,000 x 0.8929) Add: Present Value of interest payments (500,000 x 2 x 0.8929) Present value of the investment bonds

4,464,500 892,900 5,357,400

Present value expected cash flows, date of reversal Would have been present value had there been no impairment

5,357,400 4,910,521

Lower of the two above Less: Actual amortized cost (P3,986,000 x 1.12) Gain on reversal of impairment

4,910,521 4,464,320 446,201

(D)

COMPREHENSIVE PROBLEMS PROBLEM 15-11 Question No. 1 Cost of investment – Jan. 21(P2,000,000 x 102%) = P2,040,000 Question No. 2 Proceeds Less: Accrued interest (P1,000,000 x 9% x 3/12) Net Proceeds Less: Carrying amount (P2,000,000 x 102%) Gain on sale Question No. 3 Proceeds Less: Accrued interest (P400,000 x 9% x 5/12) Net proceeds Carrying amount (P400,000 x 102%) Loss on sale

(A)

(A)

P1,060,000 22,500 1,037,500 1,020,000 P 17,500

(A)

P 419,000 15,000 404,000 408,000 ( 4,000)

The question should be gain or loss on November 1, 2014. Question No. 4 Sold bonds: P1,000,000 x 9% x 38/360 P400,000 x 9% x 280/360 Outstanding bonds: P600,000 x 9% x 340/360 Total interest income

P

(A)

Question No. 5 Carrying value – 12/31/2014 (P600,000 x 102%) = P612,000 The market value is equal to its cost.

135

P (A)

9,500 28,000 51,000 88,500

Chapter 15: Investment in Debt Securities

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

4.

A

5.

A

PROBLEM 15-12 Impairment and Reversal of Impairment Loss Question No. 1 Present value of Principal (4,000,000 x 0.683 ) Add: Present Value of interest payments (480,000 X 3.1699) Present value of the investment bonds (C) Question No. 2 Amortization table (original): Interest Interest Date Collection Income 01/01/2014 12/31/2014 480,000 425,355 (B) 12/31/2015 480,000 419,891 12/31/2016 480,000 413,880 12/31/2017 480,000 407,355

Premium Amortization 54,645 60,109 66,152 72,645

2,732,000 1,521,552 4,253,552

Present value 4,253,552 4,198,907 4,138,798 4,072,646 4,000,000

Question No. 3 Carrying amount of the investment 12/31/2015 (see table above) Less: Present value of expected cash flows Impairment loss (B)

4,138,798 3,305,600 833,198

Present value of Principal (4,000,000 x 0.8264 ) Add: PV of interest payments (No interest will be recovered) Present value of the investment bonds

3,305,600 3,305,600

Question No. 4 Interest income (P3,305,600 x 10%) = 330,560

(D)

The interest income was computed using the original effective rate and the impaired value as of 12/31/2015. Question No. 5 Present value expected cash flows, date of reversal Would have been present value had there been no impairment

4,509,136 4,072,646

Lower of the two above Less: Actual amortized cost (P3,305,600 x 1.10) Gain on reversal of impairment

(D)

4,072,646 3,636,160 436,486

Present value of Principal (4,000,000 x 0.9091 ) Add: Present value of interest payments (480,000 x 2 x 0.9091) Present value of the investment bonds

3,636,400 872,736 4,509,136

136

Chapter 15: Investment in Debt Securities

PROBLEM 15-13 Question No. 1 Proceeds Less: Carrying amount [(P432,000/24,000) x 12,000) Loss on sale (B) Question No. 2 Cost, 1/1/2014 Less: Amortized cost, 12/31/2014 Premium amortization Less: Nominal interest (5,000,000 x 12%) Interest Income

P 204,000 216,000 (12,000)

P5,311,400 5,242,540 68,860 600,000 531,140

Effective interest (P531,400/5,311,140) = 10% Interest income (P5,242,540 x 10%) = P524,254 (B) Question No. 3 2014 discount amortization (P1,903,150 – P1,881,000) Nominal interest (P2,000,000 x 13%) Effective interest Divide by: 1/1/2014 amortized cost Effective interest rate

P

22,500 260,000 P 282,500 P1,881,000 15%

2015 Interest Income = 12/31/2014 amortized cost x Effective interest rate = P1,903,150 x 15% = P285,472.50 (C) Question No. 4 Fair value, 1/1/2016 (2,000,000 x 101) Less: Amortized cost – 01/01/2016 Book value, 12/31/2014 P 1,903,150 Add: Discount amortization Nominal interest 260,000 Less: Effective interest 282,473 22,473 Gain on reclassification (C) Question No. 5 Trading securities: Panaghoy, Inc. (14,400 x P22) Lamentation, Inc. [(24,000 – 12,000) x P15] Total

P 316,800 180,000 P 496,800

FVTOCI: Genesis bonds Exodus bonds Total

P 5,166,794 1,928,263 P 7,095,417

137

P2,020,000

P

1,928,623 91,377

Chapter 15: Investment in Debt Securities

Genesis Bonds Date 01/01/2014 12/31/2014 12/31/2015

Interest Collection

Interest Income

Premium Amortization

600,000 600,000

531,140 524,254

68,860 75,746

Interest Collection

Interest Income

Discount Amortization

260,000 260,000

282,150 285,473

22,150 25,473

Present value 5,311,400 5,242,540 5,166,794

Exodus Bonds Date 01/01/2014 12/31/2014 12/31/2015

Present value 1,881,000 1,903,150 1,928,623

PROBLEM 15-14 Reclassification from FAAC to FVTPL Note to professor: 3rd bullet - The dividend was distributed on January 31, 2016 instead of 2015.. Question No. 1 Present value of Principal (P5,000,000 x .621) Add: PV of interest payments (P5,000,000 x 12% x 3.791) Present value of the investment bonds – 01/01/2014 Amortization up to 7/1/2014 P5,379,600 x 10% 6/12 P 268,980 P5,000,000 x 12% 6/12 ( 300,000) Accrued interest up to 7/1/2014 (P5,000,000 x 12% 6/12 ) Purchase price – 7/1/2014 (C) Question No. 2 Interest income – 2014 (P5,379,600 x 10% x 6/12) = P268,980 Question No. 3 Fair value date of reclassification Less: Carrying amount 12/31/2015 or 01/01/2016 Loss on reclassification (B) Question No. 4 Dividend income (cash dividend) = P40,000

(A)

Question No. 5 Investment in Sta. Ana (20,000 x 110% x P40) = P880,000 (C) SUMMARY OF ANSWERS: 1. C 2. B 3. B

4.

A

138

5.

C

3,105,000 2,274,600 5,379,600 (31,020) 300,000 5,648,580

(B) 5,121,400 5,249,316 (127,916)

Chapter 15: Investment in Debt Securities

PROBLEM 15-15 Investment in Associate - Change from Equity Method to Fair Value Method and Impairment of Financial Assets at Amortized Cost Question No. 1 Acquisition cost Share in the Net income in 2014 (1.7M x 25%) Share in the dividend (25% x 320,000) Understatement of depreciation (160,000/4 years) Balance end, 12/31/2014 (A) Understatement of Plant and equipment x Percent of interest Understatement of Net asset acquired

640,000 25% 160,000

Question No. 2 Fair value of investment, date of date of transfer (25,000 x P120) Less: Carrying value of investment - 12/31/2014 Unrealized gain – P&L (C) Question No. 3 and 4 (See Amortization table below): Interest Interest Date Collection Income 01/01/2014 12/31/2014 400,000 462,101 (B) 12/31/2015 400,000 468,311 (C) 12/31/2016 400,000 475,142

Discount Amortization 62,101 68,311 75,142

Question No. 5 Present value of the principal (5M x .751) Add: Present value of interest payments (only principal will be recovered) Total Present value of future cash inflows Less: Amortized cost - 12/31/2015(see amortization table) Impairment loss (C) SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

2,140,000 425,000 (80,000) (40,000) 2,445,000

C

139

5.

C

3,000,000 2,445,000 555,000

Present value 4,621,006 4,683,107 4,751,418 4,826,560 3,755,000 3,755,000 4,751,418 (996,418)

Chapter 16: Investment in Associate

CHAPTER 16: INVESTMENT IN ASSOCIATE PROBLEM 16-1 Investment securities and equity method investments compared Question No. 1 Cost of Investment Less: Book value of net asset acquired (P120M x 20%) Excess of cost over book value Less: Overvalued depreciable asset (P6M x 20%) Goodwill (A) Question No. 2 Dividends declared and paid Multiply by: Percentage of ownership Dividends Revenue

30,000,000 24,000,000 6,000,000 1,200,000 4,800,000

5,000,000 20% 1,000,000

(C)

Question No. 3 Share in net income (P8M x 20%) Less: Amortization of Undervalued valued asset (see below) Adjusted net investment income (A)

1,600,000 200,000 1,400,000

Amortization of Undervalued asset Depreciable Asset Divide by: Average remaining useful life Amortization of Undervalued valued asset

1,200,000 6 200,000

Question No. 4 Cost of Investment Add: Net investment income (see no. 3) Less: Dividends received (P1 x 1M shares) Carrying value – 12/31/2015

30,000,000 1,400,000 1,000,000 30,400,000

(A)

Question No. 5 Investment using Fair Value (P32 x 1,000,000) = P32,000,000 SUMMARY OF ANSWERS: 1. A 2. C 3. A

4.

B

5.

(D)

D

PROBLEM 16-2 Question No. 1 Cost of Investment (P3.9M + 100,000) Less: Book value of net asset acquired (P12M x 25%) Excess of cost over book value

140

4,000,000 3,000,000 1,000,000

Chapter 16: Investment in Associate

Over or (under)valued asset: Inventory [(P600,000 – P400,000) x 25%] Machinery [(P3,000,000 – P1,500,000) x 25%] Goodwill

(50,000) (375,000) 1,425,000

(A)

Question No. 2 Share in net income (P4M x 25%) Add: Amortization of Overvalued valued asset (see below) Adjusted net investment income (A) Amortization of Overvalued asset: Inventory

1,000,000 87,500 1,087,500

2015 (50,000)

2016

Machinery Divide by: Remaining life Amortization of overvalued machinery

(375,000) 10 (37,500)

(375,000) 10 (37,500)

Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received

2015 4,000,000 25% 1,000,000 1,000,000 25% 250,000

2016 5,000,000 25% 1,250,000 1,400,000 25% 350,000

Question No. 3 Cost of Investment Add: Net investment income (see no. 2) Less: Dividends received (P1M x 25%) Carrying value – 12/31/2015

4,000,000 1,087,500 250,000 4,837,500

(C)

Question No. 4 Share in net income (P5M x 25%) Add: Amortization of Overvalued valued asset (see no. 2) Adjusted net investment income (B)

1,250,000 37,500 1,287,500

Question No. 5 Carrying value – 01/01/2016 Add: Net investment income (see no. 4) Less: Dividends received (P1.4M x 25%) Carrying value – 12/31/2016

4,837,500 1,287,500 350,000 5,775,000

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

4.

(B)

B

141

5.

B

Chapter 16: Investment in Associate

PROBLEM 16-3 Investment in Associate with Inventories, Machinery and Land - Land Was Subsequently Sold Question No. 1 Cost of Investment Less: Book value of net asset acquired (P12M x 25%) Excess of cost over book value Over or (under)valued asset Inventory (P200,000 x 25%) Machinery (P1,500,000 x 25%) Land (P600,000 x 25%) Goodwill (A)

4,000,000 3,000,000 1,000,000 (50,000) (375,000) 150,000 1,275,000

Amortization of Over (Under) valued asset Inventory

2015 (50,000)

2016

Machinery Divide by: Remaining life Amortization of Under (over) valued asset

(375,000) 10 (37,500)

(375,000) 10 (37,500)

-

150,000

2015 4,000,000 25% 1,000,000 1,000,000 25% 250,000

2016 5,000,000 25% 1,250,000 1,400,000 25% 350,000

Land Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received

Question No. 2 Share in net income (P4M x 25%) Add: Amortization of Overvalued valued asset (see table above) Adjusted net investment income (C)

1,000,000 87,500 1,087,500

Question No. 3 Cost of Investment Add: Net investment income (see no. 2) Less: Dividends received (P1M x 25%) Carrying value – 12/31/2015

4,000,000 1,087,500 250,000 4,837,500

(C)

Question No. 4 Share in net income (P5M x 25%) Less: Net Amortization of Undervalued valued asset (see no. 1) Adjusted net investment income (B) Question No. 5

142

1,250,000 112,500 1,137,500

Chapter 16: Investment in Associate

Carrying value – 01/01/2016 Add: Net investment income (see no. 4) Less: Dividends received (P1.4M x 25%) Carrying value – 12/31/2016 SUMMARY OF ANSWERS: 1. A 2. C 3. C

4.

4,837,500 1,137,500 350,000 5,625,000

(E)

B

5.

E

PROBLEM 16-4 Associate with Outstanding Cumulative Preference Shares When an investee has outstanding cumulative preference share capital, an investor should compute its share of earnings after deducting the investee’s preference dividends, whether or not such dividends are declared. Net income Less: Preference dividend (10% x 1,000,000) Net income to ordinary shares

600,000 ( 100,000) 500,000

Share in net income – ordinary shares (80% x 500,000)

(A)

400,000

PROBLEM 16-5 Associate with Outstanding Preference Shares CASE NO. 1 Question No. 1 Net income P2,000,000 Less: Total preference dividends (4,000,000 x 10%) 400,000 Net income to ordinary shares P1,600,000 Multiply by: Percentage of ownership 25% Share in the net income of associate 400,000 Less: Amortization of undervalued asset (800,000/8) 100,000 Net investment income (B) 300,000 Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less: Dividends received Carrying value – 12/31/2015

(A)

CASE NO. 2 Question No. 1 Net income Less: Total actual preference dividends declared Net income to ordinary shares Multiply by: Percentage of ownership Share in the net income of associate Less: Amortization of undervalued asset (800,000/8)

143

5,000,000 300,000 5,300,000

P2,000,000 450,000 P1,550,000 25% 387,500 100,000

Chapter 16: Investment in Associate

Net investment income

(D)

287,500

(B)

5,000,000 287,500 5,287,500

CASE NO. 3 Question No. 1 Net income Multiply by: Percentage of ownership Share in the net income of associate Less: Amortization of undervalued asset (800,000/8) Net investment income (E)

P2,000,000 25% 500,000 100,000 400,000

Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less: Dividends received Carrying value – 12/31/2015

Although the answer should be P400,000, the next best possible answer is P500,000. Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less: Dividends received Carrying value – 12/31/2015 SUMMARY OF ANSWERS: CASE NO. 1 CASE NO. 2 1. A 2. A 1. D 2. B

(C)

1.

5,000,000 400,000 5,400,000

CASE NO. 3 E 2. C

PROBLEM 16-6 Change From Fair Value through Profit or Loss to Equity Method - Step Acquisition Question No. 1 Fair value – 12/31/2016 Less: Carrying value (Fair value – 12/31/2015) Unrealized loss – P&L

(B)

2,200,000 2,500,000 (300,000)

Question No. 2 Investment income (P500,000 x 10%)

(E)

50,000

Question No. 3 Nil. No catch-up adjustment on retained earnings. (A)

144

Chapter 16: Investment in Associate

Fair value of previously held interest Acquisition cost Total cost of investment Less: Book value of net asset acquired Excess of attributable to machinery Divide by: Remaining life Amortization of Undervalued asset

2,200,000 3,075,000 5,275,000 3,500,000 1,775,000 8 221,875

Net income of the associate - 2017 Multiply by: Percentage of ownership (10% + 15%) Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received

1,500,000 25% 375,000 550,000 25% 137,500

Question No. 4 Share in net income Less: Amortization of Undervalued asset (see table above) Adjusted net investment income (B) Question No. 5 Cost of Investment Add: Net investment income (see no. 4) Less: Dividends received Carrying value – 12/31/2015 SUMMARY OF ANSWERS: 1. B 2. E 3. A

4.

(B)

B

5.

375,000 221,875 153,125

5,275,000 153,125 137,500 5,290,625

B

PROBLEM 16-7 Cost To Equity Method Note to professor: Total credit should be P5,500,000 instead of P9,500,000. Question No. 1 Consideration received (40,000 x 65) Less: Dividend income (5 x 40,000) Net selling price Less: Carrying value (2,500,000/40,000 x 40,000) Loss on sale (A)

P2,600,000 200,000 2,400,000 2,500,000 (P100,000)

Question No. 2 Consideration received Less: Dividend income (5 x 40,000) Net selling price Less: Carrying value [6M-(P5 x 100,000)/100,000] x 40,000) Gain on sale (B)

P2,600,000 200,000 2,400,000 2,200,000 P200,000

145

Chapter 16: Investment in Associate

Question No. 3 Fair value (P70 x 60,000)

(A)

P4,200,000

Question No. 4 Cost of Investment – 01/01/2015 Add: Net investment income - 2015 (2,500,000 x 30%) Less: Dividends received -2015 (30% x 1,000,000) Carrying value – 12/31/2015 Add: Net investment income - 2016 (3,000,000 x 30%) Less: Dividends received -2016 (30% x 1,600,000) Carrying value – 12/31/2016

1,200,000 750,000 300,000 1,650,000 900,000 480,000 2,070,000

Net selling price Less Carrying amount (P2,070,000 x ½) Gain on sale

1,200,000 1,035,000 P165,000

(B)

Question No. 5 Investment in Kababain – FVTOCI: Fair value (P75 x 15,000) Less: Carrying amount Investment in Passing Rate – FVTOCI: Fair value (P70 x 60,000) Less Cost (6M-(5 x 100,000))/100,000 x 60,000) Total Unrealized Gain –OCI to SFP (C) SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

B

5.

1,125,000 1,035,000 4,200,000 3,300,000

90,000 900,000 P990,000

C

PROBLEM 16-8 Change From Equity to Cost Method Question No. 1 Cost of Investment Add: Net investment income [(1.8M-840,000) x 20%] Less: Dividends received (P100,000 + P100,000) Carrying value – 12/31/2015 (B)

4,000,000 192,000 200,000 3,992,000

Note:  The dividend received on August 1, 2015 need not be prorated even though the investment was acquired on July 1, 2015 since dividends is considered when the investor has the right to receive payment (i.e. date of declaration).  The P1.8M net income was for a period of 12 months ending December 31. Question No. 2 Sales price (P25 x 50,000) Carrying value of shares (P3,992,000 x 50,000/200,000) Gain on sale of investment (B)

146

1,250,000 998,000 252,000

Chapter 16: Investment in Associate

Question No. 3 Fair value of retained investment (P25 x 150, 000) Less: Carrying amount of retained investment (P3,992,000 x 150,000/200,000) Gain on reclassification to P&L (C)

3,750,000 2,994,000 756,000

Question No. 4 Fair value, Dec. 31, 2016 (P30 x 150,000) Fair value, Jan. 1, 2016 (P25 x 150,000) Unrealized gain, Dec. 31, 2016

(B)

4,500,000 3,750,000 750,000

Question No. 5 Fair value, Dec. 31, 2016 (P30 x 150,000)

(A)

4,500,000

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

4.

B

5.

A

PROBLEM 16-9: Discontinuance of Equity Method Note to professor: Change available-for-sale securities to FVTOCI. Question No. 1 Acquisition Cost( P66 x 250, 00) Add: Share of net income [(P7,200,000 - P3,360,000) x 25%] Less: Dividends received (P420, 000 x 2) Investment balance, December 31, 2015 (A) Question No. 2 Sales price (68 x 100,000) Less: Carrying value of shares (P16,620,000 x 100,000/250,000) Gain on sale of investment Fair value of retained investment (P69 x 150, 000) Less: Carrying amount of retained investment (P16,620,000 x 150,000/250,000) Gain on reclassification to P&L Total Gain (152,000+378,000) Question No. 3 Fair value, Dec. 31, 2016 (P70 x 150,000) Fair value, Jan. 1, 2016 (P69 x 150,000) Unrealized gain, Dec. 31, 2016 – OCI

147

16,500,000 960,000 (840,000) 16,620,000

6,800,000 6,648,000 152,000 10,350,000 9,972,000 378,000

(C)

530,000

(B)

10,500,000 10,350,000 150,000

Chapter 16: Investment in Associate

Question No. 4 Fair value, Dec. 31, 2015 (P70 x 150,000) SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

(D)

10,500,000

D

PROBLEM 16-10 Associate Having Heavy Losses Original cost Cash advances Total interest Net loss from 2015 to 2017 (40% x 4,000,000) Carrying amount of investment – 12/31/2017 Share in net loss of 2018 (40% x 800,000) Loss to be reported in 2018 should be equal to the investment balance only (C)

1,400,000 400,000 1,800,000 (1,600,000) 200,000 320,000 200,000

PAS 28, paragraph 29, provides that if under equity method an investor’s share of losses of an associate equals or exceeds the carrying amount of an investment, the investor discontinues recognizing its share of further losses. The investment is reported at NIL or zero value. PROBLEM 16-11 Downstream Sale of Inventory Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized profit on downstream sale of inventory Share in the net income after adjustment

2015 1,000,000 25% 250,000

2016 1,500,000 25% 375,000

(30,000) 220,000 (B)

30,000 405,000 (D)

2015 1,000,000 25% 250,000

2016 1,500,000 25% 375,000

(9,000) 241,000 (B)

9,000 384,000 (D)

PROBLEM 16-12 Upstream Sale of Inventory Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized profit on upstream sale of inventory Share in the net income after adjustment

148

Chapter 16: Investment in Associate

PROBLEM 16-13 Downstream Sale of Depreciable Asset Note to professor: Change Josiah to Eldon. Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized gain on downstream sale of PPE Share in the net income after adjustment

2015 1,000,000 25% 250,000 (160,000) 90,000 (B)

2016 1,500,000 25% 375,000 40,000 415,000 (D)

PROBLEM 16-14 Upstream Sale of Depreciable Asset Note to professor: Change Josiah to Stalion. Net income Multiply by: Percentage of ownership Share in the net income before adjustment Less: Unrealized gain on upstream sale of PPE Share in the net income after adjustment

2015 1,000,000 25% 250,000 (40,000) 210,000 (B)

2016 1,500,000 25% 375,000 10,000 385,000 (D)

COMPREHENSIVE PROBLEMS PROBLEM 16-15 Note to professor:  However, it was sold by Myrah Company in 2012 should be 2016.  Josiah Company is the associate. Questions No. 1 & 2 Net income Multiply by: Percentage of ownership Share in the net income before adjustment Unrealized gain on downstream sale of PPE Unrealized profit on upstream sale of inventory Unrealized profit on upstream sale of inventory Share in the net income after adjustment

Questions No. 3 & 4 Cost of Investment – 01/01/2015 Add: Net investment income - 2015 (see No. 1) Less: Dividends received -2015 (30% x P800,000)

149

2015 2,000,000 30% 600,000 (160,000) (30,000) 410,000 (C)

2016 3,000,000 30% 900,000 40,000 30,000 (45,000) 925,000 (D) 4,000,000 410,000 240,000

Chapter 16: Investment in Associate

Carrying value – 12/31/2015 Add: Net investment income - 2016 (see No. 2) Less: Dividends received -2016 (30% x P1,200,000) Carrying value – 12/31/2016

(E)

Question No. 5 Cost of Investment – 01/01/2015 Add: Net investment income - 2015 (see No. 1) Less: Amortization of Goodwill (P200,000 / 10) Less: Dividends received -2015 (30% x P800,000) Carrying value – 12/31/2015 Add: Net investment income - 2016 (see No. 2) Less: Amortization of Goodwill (P200,000 / 10) Less: Dividends received -2016 (30% x P1,200,000) Carrying value – 12/31/2016

(E)

4,170,000 925,000 360,000 4,735,000

(C)

4,000,000 410,000 20,000 240,000 4,150,000 925,000 20,000 360,000 4,695,000

Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized over their useful life. If an entity cannot determine reliably the useful life, it is assumed to be 10 years. SUMMARY OF ANSWERS: 1. C 2. D 3. E

4.

E

5.

C

PROBLEM 16-16 Question No. 1 Cost Less: Equity in net assets Implied goodwill

(A)

P1,700,000 1,400,000 300,000

(A)

P 32,500 25,000 7,500

Question No. 3 Proceeds (500 x P21) Less: Carrying amount [(P55,000/(2,000 x 110%)) x 500] Loss on sale (A)

P 10,500 12,500 2,000

Question No. 4 Proceeds (1,500 x P21) Less: Carrying amount [(P40,000/1,000) x 500] Gain on conversion

P 31,500 20,000 11,500

Question No. 2 Proceeds (2,500 x P13) Less: Carrying amount [(P60,000/6,000) x 2,500] Gain on sale

150

(C)

Chapter 16: Investment in Associate

Question No. 5 Investment in Roque Corporation: 3/9 1,000 x P1.2 9/9 1,000 x P1.2 Investment in Ocampo Corporation: 6/30 (6,000 – 2,500) x P1 Total dividend income

1,200 1,200 (A)

3,500 5,900

Question No. 6 1/2/2016 Acquisition Cost Add: Share in net income of associate (P1,200,000 x 30%) Less: Dividends (P.50 x 4 x 100,000) 12/31/2016 carrying amount (A)

1,700,000 360,000 200,000 P1,860,000

Question No. 6 Roque pref. (1,000 – 500) x P56 Roque ordinary (1,500 x P20) Ocampo (6,000 -2,500) x P11 Dagumboy Co. (2,000 x 110% -500) x P22 12/31/2016 FVTOCI Balance SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

C

28,000 30,000 38,500 37,400 133,900

(A)

5.

A

6.

A

7.

A

PROBLEM 16-17 Question No. 1 Solano: Fair values (11,000 x 23) Less: Cost

253,000 250,000

3,000

A. Castaneda Fair values (20,000 x 14) Less: Cost Net unrealized loss

280,000 320,000 (B or D)

(40,000) (37,000)

Question No. 2 Net Proceeds Less: Carrying value (P3 x 20,000) Gain on sale

(A)

Question No. 3 Zero, gain or loss on reclassification is recognized in the profit or loss.

151

75,000 60,000 15,000

(D)

Chapter 16: Investment in Associate

Fair value previously held interest (50,000 x 30) Less: Carrying value Gain on reclassification-P&L

1,500,000 1,350,000 150,000

Question No. 4 Net investment income = July 1- Dec. 31 (30% x 900,000) (D) Question No. 5 Fair value previously held interest (P3M / 20% x 10%) Add: Acquisition cost Initial carrying amount – investment in associate Add: Net investment income (see No. 4) Less: Dividends declared (P2 x 150,000) Investment balance end SUMMARY OF ANSWERS: 1. B or D 2. A 3.

D

4.

D

5.

(B)

270,000

1,500,000 3,000,000 4,500,000 270,000 300,000 4,470,000

B

PROBLEM 16-18 Note to professor: The investment in associate was acquired on January 1, 2016 should be on January 1, 2015. Question No. 1 Consideration received (P115 x 4,000) Less: Dividend of the investment sold (P4 x 4,000) Net Selling Price Less: Carrying value of the investment sold (*985,000/10,000 x 4,000) Gain on sale (B)

460,000 16,000 444,000 394,000 50,000

*(10,000 x P100)-(P4 x 10,000) + 25,000 The dividend that was paid and sold is not classified as dividend income since the company did not own the shares when the dividend was declared. Question No. 2 Net Selling Price (P225 x 50,000 x 1/2) Less: Carrying value of the investment sold (P10,400,000 x 1/2) Gain on sale (D) Beg. Balance of Investment in Associate Add: Share in the net income of associate (25% x P10M) Total Less: Amortization (P1,000,000/10) Dividends received (P20 x 50,000) Ending balance of investment in associate – 12/31/2016

152

5,625,000 5,200,000 425,000 9,000,000 2,500,000 11,500,000 100,000 1,000,000 10,400,000

Chapter 16: Investment in Associate

Question No. 3 Nil. (A)  The dividend that was paid and sold in Boy-ot shares is not classified as dividend income since the company did not own the shares when the dividend was declared.  The dividend received in Cleo Shares is not regarded as income, but as a deduction of the initial carrying amount of the investment in associate. Question Nos. 4 and 5 Rodolfo (P23 x 20,000) Boy-ot (P96 x 6,000) Gene (P14 x 40,000) Cleo (P225 x 25,000) Total

Fair value 460,000 576,000 560,000 5,625,000 7,221,000 (A)

Cost 500,000 *591,000 640,000 5,625,000 7,356,000

* (985,000/10,000 x 6,000) SUMMARY OF ANSWERS: 1. B 2. D 3. A

4.

A

153

5.

B

(UG) / UL 40,000 15,000 80,000 135,000 (B)

Chapter 18: Property, Plant and Equipment

CHAPTER 18: PROPERTY, PLANT AND EQUIPMENT Note to professor: Page Existing Data: 683 Requirement No. 3 Credit to Machine M

Change to: Credit to Machine A

685

Requirement No. 4: Sum of the Years’ Digits Also the accumulated depreciation Change 2016 to 2015. as of December 31, 2015 may…

686

Requirement No. 5: SYD acquired on April 1, 2015 12/31/2016: 12/31/2016: Depreciation = 300,000 Depreciation = 325,000 Accumulated depreciation = Accumulated depreciation = 700,000 625,000 Book value = 400,000 Book value = 475,000

PROBLEM 18-1 Capitalizable Cost of Machinery Purchase price including VAT (1,568,000/1.12) Cost of water device to keep machine cool. Cost of safety rail and platform surrounding machine Installation cost, including site preparation and assembling. Fees paid to consultants for advice on acquisition of the machinery. Dismantling cost of the machine Repair cost of the machine damaged while in the process of installation Loss on premature retirement-old machine Other nonrefundable sales tax Cost of training for personnel who will use the machine Adjusted balances (A)

PROBLEM 18-2 Improvements

Capitalizable

Cost

of

Question No. 1 Purchase Price Title Insurance Legal fees to purchase land Property taxes, January 1, 2015 -June 30, 2015

154

Machinery 1,400,000 8,000

Land,

Others

-

12,000

-

20,000

-

13,000 10,000

-

13,000

5,000 18,000 -

1,476,000

25,000 48,000

Building

and

Land

925,000 7,500 5,000 15,000

Chapter 18: Property, Plant and Equipment

Cost of grading and filling building site Total Cost of the land Question No. 2 Cost of building construction Interest on construction loan Cost of razing old building on lot Proceeds from sale of salvageable materials Total cost of the building Question No. 3 Cost of constructing driveway Cost of parking lot and fencing Total cost of the land improvements

(A)

45,000 997,500

(A)

3,100,000 60,000 42,500 (6,000) 3,196,500

(B)

400,000 60,000 460,000

PROBLEM 18-3 Old Building Is Not To Be Demolished Question No. 1 Allocated purchase price (4/10 x P11M) Draining cost and filling the land. Cost of grading and leveling the land Broker’s fee on the land Cost of option of the acquired land Registration fees and transfer of title. Mortgages, encumbrances on the land assumed by buyer. Total cost of land (C) Question No. 2 Allocated purchase price (6/10 x P11M) Interest, liens and other encumbrances on the building assumed by the buyer. Payments to tenants of the building to induce them to vacate the premises. Repairs and renovation costs before the building is occupied Unpaid taxes on the building up to the date of acquisition Legal Fees and other expenses incurred in connection with the purchase of the building Total cost of building (D) Question No. 3 Cost of shrubs, trees, and other landscaping

(C)

4,400,000 33,000 6,000 6,500 8,000 13,000 13,500 4,480,000

6,600,000 21,000 50,000 66,400 2,000 8,000 6,747,400

53,000

Real Property taxes on the land accrued after acquisition of P5,000 shall be treated as expense.

155

Chapter 18: Property, Plant and Equipment

PROBLEM 18-4 Acquisition on Cash Basis Question No. 1 Cash paid Commissions paid to brokers Non-refundable sales taxes Total cost Multiply by: Ratio (200,000 / 500,000) Allocated cost of the land Question No. 2 Total cost Multiply by: Ratio (300,000 / 500,000) Allocated purchase price Demolition cost Proceeds from sale of demolition scrap Total cost of the building

(B)

800,000 80,000 40,000 920,000 0.40 368,000

(C)

920,000 0.60 552,000 60,000 (15,000) 597,000

PROBLEM 18-5 Acquisition on Account Invoice Price Multiply by: (1 - discount rate) Net invoice price Additional cost: Freight and insurance Cost of testing and trial runs Cost of the equipment

500,000 97% 485,000

(B)

15,000 12,000 512,000

PROBLEM 18-6 Acquisition on Account Invoice Price Multiply by: (1 - discount rate) Net invoice price Additional cost: Installation cost Present value of estd. decommissioning and restoration cost Total cost of the equipment (B)

500,000 0.97 485,000

Estimated decommissioning and restoration cost Multiply by: Present value of 1 Present value of estd. decommissioning and restoration cost

100,000 0.6209 62,090

156

50,000 62,090 597,090

Chapter 18: Property, Plant and Equipment

PROBLEM 18-7 Deferred Settlement Terms (With or Without Cash Price Equivalent) Question No. 1 Cash price equivalent Question No. 2 Principal Multiply by: Present value of 1 Cost of the equipment

(A)

800,000

(B)

1,000,000 0.7972 797,200

PROBLEM 18-8 Exchange (With or Without Commercial Substance) Note to professor: Change Brayden to Jane Co. Question No. 1 Fair value of the asset given Add: Cash payment Cost of equipment Question No. 2 Fair value of the asset given Less: Carrying amount Gain on exchange Question No. 3 Carrying amount of the asset given Add: Cash payment Cost of equipment

(D)

1,200,000 200,000 1,400,000

(B)

1,200,000 800,000 400,000

(B)

800,000 200,000 1,000,000

Question No. 4 Zero, the transaction lacks commercial substance. (A) PROBLEM 18-9 Trade–in Question No. 1 Cash price without trade in Question No. 2 Cash price without trade in Less: Cash price with trade in Trade in value Less: Carrying amount Loss on trade in

157

(A)

340,000

(B)

340,000 270,000 70,000 230,000 (160,000)

Chapter 18: Property, Plant and Equipment

PROBLEM 18-10 Acquisition through Issuance of Equity Instrument Question No. 1 Fair value of the equipment received

(D)

4,000,000

Question No. 2 Zero, the difference between the fair value and its par value is recognized as share premium in the equity. (A) PROBLEM 18-11 Acquisition through Issuance of Bonds Payable Question No. 1 Fair value of the bonds (10,200 x 500)

(C)

5,100,000

Question No. 2 Zero, the difference between the fair value and its par value is recognized as premium on bonds payable. (A) PROBLEM 18-12 Acquisition by Donation Question No. 1 Fair value Add: Direct cost Total cost

(B)

4,000,000 40,000 4,040,000

Question No. 2 Fair value

(C)

4,000,000

The registration and transfer of title is charged to Donated Capital / Share Premium. PROBLEM 18-13 Capitalizable Cost of Land Question No. 1 Purchase price Demolition of existing building on site Legal and other fees to close escrow Less: Proceeds from sale of demolition scrap Total cost Question No. 2 Purchase price Legal and other fees to close escrow Total cost

158

(C)

400,000 75,000 12,000 10,000 477,000

(A)

400,000 12,000 412,000

Chapter 18: Property, Plant and Equipment

PROBLEM 18-14 Specific Borrowings Question No. 1 Loan received Multiply by: Interest rate Actual borrowing cost Less: Investment income Capitalizable borrowing cost Question No. 2 Loan received Multiply by: Interest rate Actual borrowing cost Less: Investment income (60,000 x 4/12) Capitalizable borrowing cost Question No. 3 Loan received Multiply by: Future value of 1 for 4 periods Future value of the loan – 12/31/2015 Less: Principal amount of the loan Actual borrowing cost Less: Investment income Capitalizable borrowing cost

(B)

1,000,000 20% 200,000 60,000 140,000

(D)

1,000,000 20% 200,000 20,000 180,000

(C)

1,000,000 1.2155 1,215,500 1,000,000 215,500 60,000 155,500

Question No. 4 Loan received Add: Expenditures incurred on Jan. 1 Balance at Jan 1

1,000,000 400,000 600,000

Interest on surplus funds on June 1 (600,000 x 15% x 5/12) Balance at June 1 Less: Expenditure incurred on June 1 Balance at December 31

37,500 600,000 250,000 350,000

Interest on surplus funds on December 31 (350,000 x 15% x 7/12) Total interest on surplus funds Actual borrowing cost Less: Investment income (see above) Capitalizable borrowing cost

(C)

159

30,625 68,125 200,000 68,125 131,875

Chapter 18: Property, Plant and Equipment

PROBLEM 18-15 Specific Borrowings - Expenditures Incurred Evenly Question No. 1 Loan at January 1, 2015 Loan at December 31, 2015(1,000,000 – 800,000) Average used during the year (1,000,000 + 200,000 ) /2

1,000,000 200,000 600,000

Total actual borrowing cost Less: Interest on surplus funds (600,000 x 0.15 ) Capitalizable borrowing cost (A)

200,000 90,000 110,000

Question No. 2 Average expenditures (800,000 /2 ) Capitalizable borrowing cost (400,000 x 0.2 )

400,000 80,000

(C)

With a loan, the total proceeds are received on day 1 and any surplus funds are invested until needed (as shown in the example above). With a facility (e.g. overdraft facility), cash is withdrawn as needed. As a result there are no surplus funds to invest and interest is paid only on those amounts withdrawn. PROBLEM 18-16 Specific and General Borrowings Note to professor: Page Existing Data: 701 Kendall borrowed P750,000 on a construction loan at 12% interest on January 1, 2013. This loan was outstanding throughout the construction period. The company had P4,500,000 in 9% bonds payable outstanding in 2013 and 2014. Questions No. 1 & 2 January 1, 2015 September 1, 2015 December 31, 2015 Average accumulated expenditure Multiply by: Rate Capitalizable borrowing cost

200,000 300,000 300,000

Change To: Change 2013 to 2015 Change 2014 to 2016

x 12/12 x 4/12 x 0/12 1. (A) 2. (D)

200,000 100,000 0 300,000 12% P36,000

Since the average accumulated expenditure did not exceed the principal of the specific borrowing, the specific rate was used in determining the capitalizable borrowing cost.

160

Chapter 18: Property, Plant and Equipment

Question No. 3 & 4 Accumulated expenditures – 836,000 12/31/2015 (P800,000 + 36,000) March 31, 2016 300,000 September 30, 2016 200,000 Average accumulated expenditure Less: Specific borrowing Excess attributable to general borrowing Multiply by: Rate Multiply by: Months outstanding Capitalizable borrowing cost – general borrowings Add: Specific borrowings (750,000 x 12% x 9/12) Total capitalizable borrowing cost

x 9/9

836,000

x 6/9 x 0/12 3. (D)

200,000 0 1,036,000 750,000 286,000 9% 9/12 19,305 67,500 86,805

4. (B)

PROBLEM 18-17 Specific Borrowing Used For General Purposes Total expenditures Divide by Total Less: Investment income (50,000 x 3/12) Weighted average expenditures Multiply by: Rate Capitalizable borrowing cost

(A)

6,000,000 2 3,000,000 12,500 2,987,500 10% 298,750

PROBLEM 18-18 Different Depreciation Methods Cost Less: Residual value Depreciable amount

P3,300,000 300,000 P3,000,000

Requirement No. 1 Straight Line 2015 (P3,000,000 / 5 x 3/12)

150,000

2016 (P3,000,000 / 5 x 12/12)

600,000

Requirement No. 2 Service Hours Depreciation rate per hour (P3,000,000 / 60,000 hours) = P50/hour 2015 (P50/hour x 6,100 hours)

305,000

2016 (P50/hour x 8,200 hours)

410,000

Requirement No. 4 Units of Output Method Depreciation rate per unit (P3,000,000 / 50,000 units) = P60/unit

161

Chapter 18: Property, Plant and Equipment

2015 (P60/unit x 5,000 units)

300,000

2016 (P60/unit x 6,000 units)

360,000

Requirement No. 4 Sum-of the Years’ Digits Sum-of-years-digits [5 x ((5+1)/2)] = 15 2015 (P3,000,000 x 5/15 x 3/12)

250,000

2016 (P3,000,000 x 5/15 x 9/12) + (P3,000,000 x 4/15 x 9/12)

950,000

Requirement No. 5 Double-declining balance Double declining rate (2/5) = 40% 2015 (P3,300,000 x 40% x 3/12)

330,000

2016 [(P3,300,000 – 330,000) x 40% x 12/12)]

1,188,000

Requirement No. 6 150% declining balance 150% declining rate (1.5/5) = 30% 2015 (P3,300,000 x 30% x 3/12)

247,500

2016 [(P3,300,000 – 247,500) x 30% x 12/12)]

915,750

PROBLEM 18-19 Straight-Line Cost – 01/01/2013 Less: Accumulated depreciation – 12/31/2014 [(P102,750 – P6,750) / 6 x 2) Carrying value – 01/01/2015 Less: Revised residual value Depreciable amount Divide by: Remaining useful life (7-2) Depreciation expense

102,750

(B)

32,000 70,750 4,500 66,250 5 13,250

(A)

P308,000 10,000 298,000 10 29,800

PROBLEM 18-20 Straight-Line Cost (P300,000 + P8,000) Less: Residual value Depreciable amount Divide by: Useful life Depreciation expense

162

Chapter 18: Property, Plant and Equipment

PROBLEM 18-21 Composite Method

Machine A Machine B Machine C Total

Cost 275,000 100,000 20,000 395,000

Salvage Value 25,000 10,000 35,000

Depreciable Amount 250,000 90,000 20,000 360,000

Estd. Life 20 15 5

Annual Depreciation 12,500 6,000 4,000 22,500

Composite Life = (Depreciable amount / Total annual depreciation) = P360,000 / P22,500 = 16 years (B) PROBLEM 18-22 The balancing figure is accumulated depreciation under the group method of depreciation. (D) PROBLEM 18-23 Units of Output Method Depreciation rate per unit [(P600,000 – P60,000) / 200,000 units) = P2.7/unit 2015 (P2.7/unit x 30,000 units)

(C)

81,000

PROBLEM 18-24 Working Hours Method Depreciation rate per hour [(P600,000 – P60,000) / 100,000 hours) = P5.4/hour 2015 (P5.4/hour x 15,000 hours)

(C)

81,000

PROBLEM 18-25 Double Declining Balance Depreciation rate (2/4) = 50% Cost Less: Accumulated depreciation 2014 (P18,000 x 50%) 2015 (P18,000 – 9,000 – P4,700) * Book value – 12/31/2015

18,000

(B)

9,000 4,300 4,700

*Maximum depreciation. The carrying amount should not be reduced below its residual value.

163

Chapter 18: Property, Plant and Equipment

PROBLEM 18-26 Double Declining Balance Double declining rate (2/10) = 20% 2015 [(P480,000 x 20% x 12/12]

96,000

2016 [(P480,000 – P90,000) x 20% x 12/12]

(B)

76,800

(D)

300,000 210,000 510,000

(C)

36,000

PROBLEM 18-27 150% Declining Balance 150% declining rate (1.5/5) = 30% 2014 (P1,000,000 x 30%) 2015 [(P1,000,000 – 300,000) x 30%] Accumulated depreciation – 12/31/2015 PROBLEM 18-28 Sum of the Years’ Digits Sum-of-years-digits [5 x ((5+1)/2)] = 15 2015 [(P50,000 + 100,000) x 4/15 x 12/12)

PROBLEM 18-29 Component Depreciation Component A B C D E Total

Cost 550,000 420,000 360,000 190,000 235,000 1,755,000

Residual value 50,000 20,000 10,000 30,000 40,000 150,000

Depreciable cost 500,000 400,000 350,000 160,000 195,000 1,605,000

Useful Life 10 9 8 7 6 (E)

Dep’n expense 50,000 44,444 43,750 22,857 32,500 193,551

PROBLEM 18-30 Change in Estimate Cost Less: Depreciation – first year (8,000 / 4) Carrying value – end of first year Divided by: Revised remaining useful life (5 – 1) Depreciation – 2nd year

(C)

8,000 2,000 6,000 4 1,500

(B)

5,000 600 4,400

PROBLEM 18-31 Retirement Method Original cost Less: Salvage proceeds Depreciation

164

Chapter 18: Property, Plant and Equipment

PROBLEM 18-32 Change in Estimate Cost Less: Accumulated depreciation – 12/31/2014 [(P3,300,000 – P300,000) / 8 x 4] Carrying value – 12/31/2014

3,300,000 1,500,000 1,800,000

CASE NO. 1 Requirement No. 1 Carrying value – 12/31/2014 Less: Residual value Depreciable amount Divided by: Revised remaining useful life Depreciation – 2015

1,800,000 300,000 1,500,000 2 750,000

Requirement No. 2 Carrying value – 12/31/2014 Less: Depreciation – 2015 Carrying value – 12/31/2015

1,800,000 750,000 1,050,000

CASE NO. 2 Requirement No. 1 Carrying value – 12/31/2014 Less: Residual value Depreciable amount Divided by: Remaining useful life ( 8 – 4) Depreciation – 2015

1,800,000 150,000 1,650,000 4 412,500

Requirement No. 2 Carrying value – 12/31/2014 Less: Depreciation – 2015 Carrying value – 12/31/2015

1,800,000 412,500 1,387,500 CASE NO. 3

Requirement No. 1 Carrying value – 12/31/2014 Less: Residual value Depreciable amount Multiply by: Fraction (SYD = 10) Depreciation – 2015

1,800,000 300,000 1,500,000 4/10 600,000

Requirement No. 2 Carrying value – 12/31/2014 Less: Depreciation – 2015 Carrying value – 12/31/2015

1,800,000 600,000 1,200,000

165

Chapter 18: Property, Plant and Equipment

PROBLEM 18-33 Replacement Method Replacement cost Less: Salvage proceeds Depreciation

(C)

6,000 600 5,400

PROBLEM 18-34 Fixed Asset Turnover Let X = Net Fixed Asset at the end of 2014

Sales Average Fixed Asset

Fixed asset turnover = 4= 4= P1,480,000 = X=

P1,480,000 .5 (P320,000 + X) P1,480,000 P160,000 + .5x P640,000 + 2x P420,000 (C)

PROBLEM 18-35 Derecognition of PPE Note to professor: Change Pine to Jeremy. Insurance Proceeds Less: Carrying value [P160,000 – (P20,000 x 6/12)] Gain on disposal (D)

200,000 150,000 50,000

COMPREHENSIVE PROBLEMS PROBLEM 18-36 Question No. 1 Beg. Balance of the Land Cash paid Mortgage assumed Realtor's commission Legal fees, realty taxes and documentation expenses Amount paid to relocate persons squatting on the property Total Cost of the Land (B)

P 700,000 2,500,000 4,000,000 300,000 50,000 100,000 P7,650,000

Question No. 2 Beginning balance of the Land Improvement Cost of fencing property Total cost of Land Improvement

P 10,000 110,000 P 120,000

166

(A)

Chapter 18: Property, Plant and Equipment

Question No. 3 Beg. Balance of the Building Amount recovered from salvage of building Cost of tearing down an old building Amount paid to contractor Building permit Excavation expenses Architects' fees Total cost of building Question No. 4 Beg. Balance of the Machinery Invoice cost of machinery Freight, unloading Customs duties Allowances during installations Total cost of machinery Question No. 5 Total cost of Land Improvement Total cost of building Total cost of machinery Total depreciable property

(A)

P 900,000 (150,000) 120,000 2,000,000 20,000 50,000 50,000 P2,990,000

(B)

P 980,000 2,000,000 60,000 140,000 400,000 P3,580,000

(A)

P 120,000 2,990,000 3,580,000 P6,690,000

Royalty payment on machines purchased in the amount of P120,000 should be included as part of manufacturing overhead in the company’s income statement, if the same is based on units produced. However, if royalty payment is based on units produced and sold, it should be treated as a selling expense. SUMMARY OF ANSWERS: 1. B 2. A 3. A

4.

B

5.

A

PROBLEM 18-37 Specific and General Borrowings Question No. 1 and 2 WEIGHTED AVERAGE IN 2014 Months Expenditures outstanding 3,000,000 12 7,000,000 6 6,000,000 2 16,000,000

Date 01/01/2014 07/01/2014 11/01/2014 Total Divide by Weighted average carrying amount

Specific borrowings (2,000,000 x 10%)

167

200,000

Average 36,000,000 42,000,000 12,000,000 90,000,000 12 7,500,000

Chapter 18: Property, Plant and Equipment

General borrowings: Rate 14% 12% Total

Principal 2,000,000 18,000,000 20,000,000

Interest 280,000 2,160,000 2,440,000

Capitalization Rate (P2,440,000 / P20,000,000) = 12.20% Weighted average borrowing cost: Specific borrowings Actual borrowing cost Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost Capitalizable borrowing cost (lower)

200,000 13,000 7,500,000 2,000,000 5,500,000 12.20% 1 (A)

WEIGHTED AVERAGE IN 2015 Months Expenditures outstanding *16,858,000 8 1,000,000 2 2,000,000 1 19,858,000

Date 01/01/2015 07/01/2014 08/01/2014 Total Divide by Weighted average carrying amount

187,000

671,000 858,000 2,640,000 858,000

Average 134,864,000 2,000,000 2,000,000 138,864,000 8 17,358,000

*Total expenditures in 2014 plus capitalized borrowing cost in 2014. Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P2,000,000 x 10% x 8/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost (2,640,000 x 8/12) Capitalizable borrowing cost (lower)

168

133,333 17,358,000 2,000,000 15,358,000 12.20% 8/12 (A)

133,333

1,249,117 1,382,451 1,760,000 1,382,451

Chapter 18: Property, Plant and Equipment

Question No. 3 Actual borrowing cost - 2014 Less: Capitalizable borrowing cost - 2014 Interest expense Question No. 4 Actual borrowing cost - 2015 Less: Capitalizable borrowing cost - 2015 Interest expense Question No. 5 Total cost, 2014 Expenditures in 2015 Add: Capitalizable borrowing cost - 2015 Total cost of the building SUMMARY OF ANSWERS: 1. A 2. A 3. C

4.

C

5.

(C)

2,640,000 858,000 1,782,000

(C)

2,640,000 1,382,451 1,257,550

(B)

16,858,000 3,000,000 1,382,451 21,240,451

B

PROBLEM 18-38 Grants Related To Depreciable Assets Question No. 1 The computation of the income from government grant is as follows: Total cash received 25,000,000 Divide by: Useful life of the building 20 Income from government grant (D) 1,250,000 Question No. 2 Cost of building Divide by: Useful life of the building Depreciation Question No. 3 Cost of building Less: Government grant Total Divide by: Useful life of the building Depreciation Question No. 4 Cost of building Less: Depreciation – 2015 Carrying amount – 12/31/2015

169

(C)

30,000,000 20 1,500,000

(B)

30,000,000 25,000,000 5,000,000 20 250,000

(D)

30,000,000 1,500,000 28,500,000

Chapter 18: Property, Plant and Equipment

Question No. 5 Net cost of building Less: Depreciation – 2015 Carrying amount – 12/31/2015 SUMMARY OF ANSWERS: 1. D 2. C 3. B

(C)

4.

D

5.

5,000,000 250,000 4,750,000

C

PROBLEM 18-39 Grants Related to Nondepreciable Assets Question No. 1 The computation of the income from government grant is as follows: Total fair value of the land 5,000,000 Divide by useful life of the building 10 Income from government grant (B) 500,000 Question No. 2 Cost of factory building Divide by: Useful life of the building Depreciation Question No. 3 Cost of factory building Less: Government grant Total Divide by: Useful life of the building Depreciation Question No. 4 Cost of factory building Less: Depreciation – 2015 Carrying amount – 12/31/2015 Question No. 5 Net cost of factory building Less: Depreciation – 2015 Carrying amount – 12/31/2015 SUMMARY OF ANSWERS: 1. B 2. C 3. D

4.

A

170

5.

(C)

20,000,000 10 2,000,000

(D)

20,000,000 5,000,000 15,000,000 10 1,500,000

(A)

20,000,000 2,000,000 18,000,000

(B)

15,000,000 1,500,000 13,500,000

B

Chapter 18: Property, Plant and Equipment

PROBLEM 18-40 Question No. 1 Cost of land and old building Real estate broker's commission Legal fees Title insurance Cost of land

P1,200,000 72,000 12,000 36,000 P1,320,000

(C)

Question No. 2 Date Expenditures January 1, 2014 1,000,000 April 1, 2014 500,000 October 1, 2014 800,000 December 31, 2014 900,000 Total 3,200,000 Divide by Weighted average carrying amount

Months outstanding 12 9 3 0

Average 12,000,000 4,500,000 2,400,000 18,900,000 12 1,575,000

Capitalization Rate (P840,000 / P8,000,000) = 10.50% Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P1M x 12% x 12/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost (P120,000 + P840,000) Capitalizable borrowing cost (lower)

120,000 1,575,000 1,000,000 575,000 10.50%% 12/12 (A)

120,000

60,375 180,375 960,000 180,375

Question No. 3 Date Expenditures January 1, 2015 *4,380,375 May 1, 2015 600,000 September 1, 2015 1,200,000 Total 3,200,000 Divide by Weighted average carrying amount *(3,200,000+180,375+1,000,000)

171

Months outstanding 8 4 -

Average 35,043,000 2,400,000 37,443,000 8 4,680,375

Chapter 18: Property, Plant and Equipment

Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P1,000,000 x 12% x 8/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost (P960,000 x 8 / 12) Capitalizable borrowing cost (lower) Question No. 4 Fixed construction contract price Plans, specifications, and blueprints Architects' fees Removal of old building Interest capitalized during 2014 Interest capitalized during 2015 Cost of building

80,000 4,680,375 1,000,000 3,680,375 10.50%% 8/12

257,626 337,626 640,000 337,626

(A)

(C)

Question No. 5 Interest cost in 2015: Specific borrowing General borrowing Total interest Less: Capitalizable borrowing cost in 2015 Interest expense in 2015

80,000

P6,000,000 42,000 164,000 108,000 180,375 337,626 P6,832,001

P

(C)

120,000 840,000 P 960,000 337,626.25 P622,373.75

Question No. 6 Depreciation rate (150%/40 years) = 3.75% Total depreciation expense (6,832,001.25 x 3.75% x 4/12) = (B) SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

C

172

5.

C

P

84,500

Chapter 18: Property, Plant and Equipment

PROBLEM 18-41 Question No. 1 SYD [5 x (5+1)/2] = 15 Date 4/1/2013 - 4/1/2014 4/1/2014 - 4/1/2015

Fraction to be used (5/15) (4/15)

Depreciation expense: Jan. 1 - 4/1/2015 (4/15 x 1,500,000 x 3/12) Add: depreciation from 4/1 - 12/31 Of the 1.2M (3/15 x 1,200,000 x 9/12) Of the 300,000 (see computation below) Total depreciation expense

P 100,000

(A)

Depreciation exp. from (4/1/-12/31): Cost Less: Accumulated Depreciation 2013 to 2014 - 5/15 x 300,000 2014 to 2015 - 4/15 x 300,000) Book Value, 4/1/2015 Divide by: Remaining Life (5-2) Total Multiply by: Number of months Depreciation

180,000 30,000 P 310,000 P 300,000 100,000 80,000 P 120,000 3 P 40,000 9/12 P 30,000

Question No. 2 Accumulated depreciation, beg. Add: Depreciation expense - 2015 Accumulated depreciation, 12/31/2015

(A)

P 800,000 310,000 P1,110,000

(B)

P 550,000 700,000 P1,250,000

(A)

P2,220,000 375,000 405,000 P3,000,000

Question No. 5 Depreciation on the beginning balance (6M - 4,427,136 - 1,300,000) Add: Depreciation on new building (3,000,000 x 20%) Total depreciation (D)

P 272,864 600,000 P 872,864

Question No. 3 Beginning balance of land Add: Acquisition on Nov 4 Total cost of the land Question No. 4 Direct cost Fixed cost (15,000 x 25) Variable cost (15,000 x 27) Total Cost of building

173

Chapter 18: Property, Plant and Equipment

Question No. 6 Cost of the machinery-beg bal. Add: Cost of the new machinery Invoice cost Concrete embedding Wall demolition Rebuilding of wall Total cost of machinery

P3,000,000 P 356,000 18,000 7,000 19,000 (A)

Question No. 7 Depreciation of machinery Depreciation of the beginning balance of machinery Original Cost Accumulated depreciation (3,000,000/20*10) P1,500,000 Less: Major overhaul 600,000 Adjusted book value Divided by: Revised remaining life (20 – 10 + 5) Depreciation of the beginning balance of machinery Depreciation on the new machinery (400,000/20 x 6/12) Depreciation of machinery (E) SUMMARY OF ANSWERS: 1. A 2. A 3. B

4.

A

5.

D

6.

A

400,000 P3,400,000

P3,000,000 900,000 P2,100,000 15 P 140,000 10,000 P 150,000

7.

E

PROBLEM 18-42 Question No. 1 Selling Price Less Book value Cost Less: Accumulated Depreciation Up to 1/1 From Jan. 1-May 1 [(140,000 -12,400) x 5/55]* Gain on sale of machinery D

P 52,000 P140,000 P 92,800 11,600 (A)

(104,400)

35,600 P 16,400

Note: No depreciation is recorded in the year an asset is purchased, and full year depreciation is provided in the year an asset is disposed of Question No. 2 Accumulated depreciation, R Jan 1 Add: Depreciation expense [(204,000-12,000)/15,000 x 2,100] Accumulated depreciation, R Dec. 31 (B)

174

P 140,800 26,880 P 167,680

Chapter 18: Property, Plant and Equipment

Question No. 3 Accumulated depreciation, I Jan 1 Add: Depreciation expense [(320,000-60,000-20,000)/10] Accumulated depreciation, I Dec. 31 (C)

P 60,000 24,000 P 84,000

Question No. 4 Accumulated depreciation, A Jan 1 Add: Depreciation expense (320,000-64,000) x 20% Accumulated depreciation, A Dec. 31 (A)

P 64,000 51,200 P 115,200

Question No. 5 Depreciation expense on Machinery: D (see computation in no. 1) R (see computation in no. 2) I (see computation in no. 3) A (see computation in no. 4) N (88,000/20%) Total depreciation expense

P 11,600 26,880 24,000 51,200 17,600 P 131,280

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

4.

(D) A

5.

D

PROBLEM 18-43 Question No. 1 SYD

55

Cost of the office equipment Multiply by: Used fractions (10/55+9/55+8/55+7/55) Accumulated depreciation, December 31, 2015 (C) Question No. 2 Machine 101 (70,000-7,000)/10 x 3/12 Machine 102 (80,000-8,000)/9 x 3/12 Machine 103 (30,000-3,000)/8 Total depreciation Machine 101 Cost Less: Accumulated Depreciation, Jan 1, 2016 Book value, January 1, 2016 Divide by: Remaining useful life (7-3) Depreciation in 2016 Question No. 3 Office equipment Less: Accumulated depreciation, Dec 31, 2015

175

(C)

330,000 34/55 204,000

12,775 2,000 3,375 18,150 70,000 18,900 51,100 4 12,775

330,000 204,000

Chapter 18: Property, Plant and Equipment

Book value, December 31, 2015 Divide by: Remaining useful life (10-4) Depreciation - office equipment Depreciation of the building (200,000/5) Total depreciation expense

(C)

Question No. 4 Net Selling price Less: Book value of the Machine Cost Less: Accumulated depreciation (80,000-8,000)/9 x 1 9/12 Loss on sale

52,500 80,000 14,000 (A)

Question No. 5 Cost of the office equipment Less: Accumulated depreciation Accumulated depreciation, Dec 31, 2015 Depreciation expense in 2016 Book value, December 31, 2016 SUMMARY OF ANSWERS: 1. C 2. C 3. C

4.

126,000 6 21,000 40,000 61,000

A

5.

66,000 (13,500)

330,000 204,000 21,000 (B)

225,000 105,000

B

PROBLEM 18-44 Question No. 1 Fair value Legal fees Remodeling cost Total cost of building

1,400,000 50,000 100,000 1,550,000

(C)

Question No. 2 Fair value of the asset received Less: Cash paid Fair value of the asset given Less: Book value of the asset given Cost Less: Accumulated depreciation (1M/10 x 3.5) Gain on exchange Question No. 3 Office building No. 1 (940,000/7) Office building No. 2 (1,000,000/10 x 6/12) Office building No. 3 (1,200,000/4 x 6/12)

176

1,200,000 400,000 800,000 1,000,000 350,000 (A)

650000 150,000

135,000 50,000 150,000

Chapter 18: Property, Plant and Equipment

Factory building (1,550,000/10) Total Depreciation expense

155,000 490,000

(C)

Cost of office building No. 1 Less: Accumulated Depreciation Book value Add: Major improvements Total

1,000,000 300,000 700,000 245,000 945,000

Question No. 4 Income from government grant (1,400,000/10) Question No. 5 Total depreciable cost Less: Subsequent depreciation Book value SUMMARY OF ANSWERS: 1. C 2. A 3. C

4.

A

5.

(A)

140,000

(A)

945,000 135,000 810,000

A

PROBLEM 18-45 Question No. 1 Date Expenditures January 1, 2015 2,000,000 July 1, 2015 4,000,000 November 1, 2015 3,000,000 Total 9,000,000 Divide by Weighted average carrying amount Weighted average borrowing cost: Specific borrowings Actual borrowing cost (2M x 10% x 12/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost Capitalizable borrowing cost (lower)

177

Months outstanding 12 6 2

200,000 4,500,000 2,000,000 2,500,000 12% 12/12 (D)

Average 24,000,000 24,000,000 6,000,000 54,000,000 8 4,500,000

200,000

300,000 500,000 2,000,000 500,000

Chapter 18: Property, Plant and Equipment

Question No. 2 Total expenditures – 2015 Total expenditures - 2016 Capitalized borrowing cost - 2015 Capitalized borrowing cost – 2016 (see computation below) Total cost of building (C)

Date Expenditures January 1, 2016 *9,500,000 July 1, 2016 1,000,000 Total 10,500,000 Divide by Weighted average carrying amount

Months outstanding 12 6

9,000,000 1,000,000 500,000 1,160,000 11,660,000

Average 114,000,000 6,000,000 120,000,000 12 10,000,000

Total of expenditure in 2015 of P9M and capitalized borrowing cost of P500,000. Weighted average borrowing cost: Specific borrowings Actual borrowing cost (2M x 10% x 12/12) Less: Investment income General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiply by: Capitalization rate Multiply by: Months/12 Weighted average borrowing cost: vs. Actual borrowing cost Capitalizable borrowing cost (lower) Question No. 3 Total expenditures – 2015 Total expenditures - 2016 Total cost of building

200,000 10,000,000 2,000,000 8,000,000 12% 12/12

(A)

200,000

960,000 1,160,000 2,000,000 1,160,000

9,000,000 1,000,000 10,000,000

Borrowing cost under PFRS for SME is expensed outright. Question No. 4 Cost of Machinery and Equipment Multiply by: Fraction Depreciation

(A)

SYD is 15 years and useful life is 5 years.

178

3,000,000 3/15 600,000

Chapter 18: Property, Plant and Equipment

Question No. 5 Depreciation – remaining delivery truck (see below) Depreciation – overhauled delivery truck (see below) Depreciation – new delivery truck (see below) Total depreciation on delivery truck (B)

114,000 30,000 24,000 168,000

Delivery truck: Cost Less: Accumulated depreciation Carrying value – 12/31/2015 Less: Carrying value of overhauled truck Balance Divide by: Remaining useful life (8-3) Depreciation on remaining delivery truck

1,152,000 432,000 720,000 150,000 570,000 5 114,000

Overhauled delivery truck: Cost Less: Accumulated depreciation (P240,000 / 8 x 3) Carrying value – 12/31/2015 Add: Overhauling cost Adjusted carrying value – 01/01/2016 Divide by: Revised remaining useful life (5 + 2) Depreciation on overhauled delivery truck

P240,000 90,000 150,000 60,000 210,000 7 30,000

New Delivery truck: Invoice cost Freight Installation and testing Total cost of new delivery truck Divide by: Useful life Annual depreciation Multiply by: Number of months used (July 26 to December 31) Depreciation on remaining delivery truck

400,000 20,800 40,000 460,800 8 57,600 5/12 24,000

Question No. 6 Beginning balance Add: Overhauling cost Add: Cost of new delivery truck Adjusted cost of delivery truck Less: Accumulated depreciation (432,000 + 168,000) Carrying value – 12/31/2015 (C) SUMMARY OF ANSWERS: 1. D 2. C 3. A

4.

A

179

5.

B

1,152,000 60,000 460,800 1,672,800 600,000 1,072,800

6.

C

Chapter 19: Wasting Assets

CHAPTER 19: WASTING ASSETS PROBLEM 19-1 Depletion with Change in Estimate Question No. 1 Acquisition cost Less: Estimated residual value Depletable cost of the natural resource Divide by: Tons estimated to be extracted Depletion per ton Multiply by: Tons extracted - 2015 Depletion – 2015 Question No. 2 Acquisition cost Less: Accumulated depletion – 12/31/2015 Carrying value – 01/01/2016 Divide by: Tons estimated to be extracted Depletion per unit Multiply by: Tons extracted – 2016 Depletion – 2016

(B)

P164,000 P164,000 20,000 P8.20 4,000 P32,800

(C)

P164,000 32,800 131,200 20,000 P6.56 8,000 P52,480

PROBLEM 19-2 Depletion with Change in Estimate Acquisition cost Exploration cost Intangible development cost Total cost of the natural resource Less: Estimated residual value Total depletable cost of the natural resource Divide by: Units estimated to be extracted Depletion per unit Multiply by: Units extracted from 2015 to 2017 Depletion from 2015 to 2017

8,000,000 12,000,000 10,000,000 30,000,000 900,000 29,100,000 4,000,000 7.275 400,000 2,910,000

Question No. 1 Cost of natural resource Less: Accumulated depletion – 12/31/2017 Carrying amount – 12/31/2017 Less: Residual value Depletable cost Divide by: Revised remaining units Depletion rate per unit Multiply by: Units extracted - 2018 Depletion – 2018

30,000,000 2,910,000 27,090,000 600,000 26,490,000 500,000 52.98 200,000 10,596,000

180

(A)

Chapter 19: Wasting Assets

Question No. 2 Cost of natural resource Less: Accumulated depletion (P2,910,000 + P10,596,000) Carrying amount – 12/31/2018 (A)

30,000,000 13,506,000 16,494,000

PROBLEM 19-3 Depreciation of Movable and Immovable Equipment – Useful Life of the Immovable Equipment is Shorter Question No. 1 Acquisition cost Exploration cost Intangible development cost Total cost of the natural resource Less: Estimated residual value Total depletable cost of the natural resource Divide by: Units estimated to be extracted Depletion per unit Multiply by: Units extracted - 2015 Depletion – 2015 Question No. 2 Cost of the movable equipment Divide by: Useful life in years Depreciation - 2015 Question No. 3 Cost of the movable equipment Divide by: Useful life in years (shorter) Depreciation - 2015

(A)

4,000,000 6,000,000 5,000,000 15,000,000 15,000,000 4,000,000 3.75 500,000 1,875,000

(A)

2,000,000 10 200,000

(A)

1,000,000 5 200,000

PROBLEM 19-4 Depreciation of Movable and Immovable Equipment - Life of the Wasting Asset is Shorter Question No. 1 Acquisition cost Exploration cost Intangible development cost Total cost of the natural resource Less: Estimated residual value Total depletable cost of the natural resource Divide by: Units estimated to be extracted Depletion per unit Multiply by: Units extracted - 2015 Depletion – 2015

181

(A)

4,000,000 6,000,000 5,000,000 15,000,000 15,000,000 4,000,000 3.75 500,000 1,875,000

Chapter 19: Wasting Assets

Question No. 2 Cost of the movable equipment Divide by: Useful life in years Depreciation - 2015

(A)

2,000,000 20 100,000

Question No. 3 Cost of the movable equipment Divide by: Units estimated to be extracted (shorter)* Depreciation rate per unit Multiply by: Actual units extracted Depreciation - 2015 (C)

P1,000,000 4,000,000 P.25 500,000 125,000

*Estimated useful life using output method (4,000,000 / 500,000) = 8 years PROBLEM 19-5 Depreciation –No Production Cost of immovable equipment Divide by: Units estimated to be extracted Depreciation per unit Multiply by: Actual units extracted from 2015 to 2017 Accumulated Depreciation – 12/31/2017

5,000,000 2,000,000 3 620,000 1,550,000

Question No. 1 Cost of immovable equipment Less: Accumulated depreciation – 12/31/2017 Book value – 12/31/2017 Divide by: Remaining useful life (15 – 3) Depreciation - 2018

(A)

5,000,000 1,550,000 3,450,000 12 287,500

(A)

5,000,000 1,837,500 3,162,500 1,380,000 2.29 150,000 343,750

Question No. 2 Cost of immovable equipment Less: Accumulated depreciation – 12/31/2018 Book value – 12/31/2018 Divide by: Remaining units to be extracted Depreciation per unit Multiply by: Actual units extracted - 2019 Depreciation – 2019 PROBLEM 19-5 Liquidating Dividends

Accumulated profits -unappropriated Add: Accumulated depletion Total Less: Capital Liquidated Depletion in the ending inventory (P6 x 120,000) Maximum Dividend (D)

182

9,000,000 7,000,000 16,000,000 800,000 720,000 14,480,000

Chapter 19: Wasting Assets

PROBLEM 19-6 Question No. 1 Acquisition cost Divide by: Tons estimated to be extracted Depletion per ton Multiply by: Actual tons extracted – 2016 Depletion - 2016 Question No. 2 Cost of Installation Divide by: Tons estimated to be extracted Depreciation per ton Multiply by: Actual tons extracted – 2016 Depreciation - 2018 Question No. 3 Cost of mining equipment Divide by: Useful life Depreciation – 2016 Question No. 4 Acquisition cost Less: Accumulated Depletion Carrying value – 12/31/2016 Add: Additional development cost - 2017 Remaining depletable cost Divide by: Estimated tons to be extracted Depletion per ton Multiply by: Tons extracted – 2017 Depletion - 2017

(D)

P9,075,000 1,100,000 P8.25 100,000 825,000

(B)

1,925,000 1,100,000 1.75 100,000 175,000

(A or D)

4,400,000 8 550,000

(C)

P9,075,000 825,000 P8,250,000 750,000 P9,000,000 1,000,000 P 9 150,000 P1,350,000

Question No. 5 Installation ((P1,925,000/1.1M) x 150,000 tons) Mining equipment (P4,400,000/8) Total depreciation expense (C)

P 262,500 550,000 P 812,500

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

4.

183

C

5.

C

Chapter 19: Wasting Assets

PROBLEM 19-7 Cost Of Wasting Asset with Estimated Restoration Cost, Depletion, Depreciation of Movable and Immovable Equipment Question No. 1 Acquisition cost of the wasting assets Add: Exploration and intangible development cost Add: Estimated decommissioning and restoration costs Initial cost (A)

150,000,000 8,000,000 8,196,161 166,196,161

Estimated restoration cost Multiply by: Present value of 1 for four periods Present value of the restoration cost

P 12,000,000 0.683013455 P 8,196,161

Question No. 2 Total cost of the wasting assets Divide by: Estimated units to be extracted Depletion per unit Multiply by: Units extracted Depletion expense – 2015

(B)

166,196,161 12,000,000 13.85 1,600,000 22,159,488

(A)

6,000,000 20 300,000

Question No. 4 Cost of the movable equipment Divide by: Units estimated to be extracted (shorter) Depreciation rate per unit Multiply by: Units extracted Depletion expense – 2015 (B)

9,000,000 12,000,000 0.75 1,600,000 1,200,000

Question No. 3 Cost of the movable equipment Divide by: Useful life Depreciation – 2015

*Estimated useful life using output method (12,000,000 / 1,500,000) = 8 years Question No. 5 Date Interest expense 01/01/2015 12/31/2015 819,616 12/31/2016 901,578 (E) 12/31/2017 991,736 12/31/2018 1,090,909

Present value 8,196,161 9,015,778 9,917,355 10,909,091 12,000,000

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

B

4.

184

5.

E

Chapter 19: Wasting Assets

PROBLEM 19-8 Cost Of Wasting Asset with Estimated Restoration Cost, Depletion, Depreciation of Movable and Immovable Equipment Question No. 1 Acquisition cost of the wasting assets Add: Exploration and intangible development cost Add: Estimated decommissioning and restoration costs Initial cost (A)

120,000,000 6,000,000 6,355,181 132,355,181

Estimated restoration cost Multiply by: Present value of 1 for four periods Present value of the restoration cost

P 10,000,000 0.635518078 P 6,355,181

Question No. 2 Total cost of the wasting assets Divide by: Estimated units to be extracted Depletion per unit Multiply by: Units extracted Depletion expense – 2015

(B)

132,355,181 12,000,000 11.03 1,600,000 17,647,357

(A)

6,000,000 6 1,000,000

(A)

9,000,000 5 1,800,000

Question No. 3 Cost of the movable equipment Divide by: Useful life Depreciation – 2015 Question No. 4 Cost of the movable equipment Divide by: Useful life Depreciation – 2015 Question No. 5 Date Interest expense 01/01/2015 12/31/2015 762,622 12/31/2016 854,136 (E) 12/31/2017 956,633 12/31/2018 1,071,429

Present value 6,355,181 7,117,802 7,971,939 8,928,571 10,000,000

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

A

4.

185

5.

E

Chapter 20: Investment Property

CHAPTER 20: INVESTMENT PROPERTY Note to professor: Page Existing Data: 747 Solution to Requirement No. 1 Investment Property 12/31/14 – P2,700,000 12/31/15 – P2,550,000

Change to: Cost 12/31/14 – P3,000,000 12/31/15 – P3,000,000

PROBLEM 20-1: Classification Issue Item

Owneroccupied property

Investment Property

Inventory

Others 1,260,000 1,110,000

2) 6)

9) 10)

2,100,000 530,000

11)

420,000 2,160,000

1. (A)

7,740,000

Remarks Covered by PAS 11 Derecognized since it is leased out under a finance lease IP in the separate FS Cannot qualify as IP since it is not land or building Not reported since it is leased under operating lease

450,000

2. (C)

3. (C)

PROBLEM 20-4: Intracompany rentals Question No. 2

(D)

PROBLEM 20-6: Subsequent measurement: Cost model vs Fair value model SUMMARY OF ANSWERS: 1. D 2. 3. D

4.

5.

6.

A

PROBLEM 20-7: Transfer under Cost model – PPE to IP Question No. 1

(D)

PROBLEM 20-8: Transfer from PPE to Investment Property – Fair value vs Cost model SUMMARY OF ANSWERS: 1. D 2. 3.

4.

C

186

Chapter 20: Investment Property

PROBLEM 20-8: Transfer from inventory to investment property – Fair value vs Cost model Question No. 3 P2,880,000. Fair value at the date of transfer. Don’t deduct cost to sell. PROBLEM 20-9: Derecognition of investment property – Fair value vs Cost Model Question No. 2

(C)

187

Chapter 22: Intangible Assets

CHAPTER 22: INTANGIBLE ASSETS PROBLEM 22-1 Research and Development Cost R&D Cost of activities aimed at obtaining new knowledge Marketing research to study consumer tastes Cost of developing and producing a prototype model Cost of testing the prototype model for safety and environmental friendliness Cost revising designs for flaws in the prototype model Salaries of employees, consultants, and technicians involved in R&D Amount paid for conference for the introduction of the newly developed product including fee of a model hired as endorser Advertising to establish recognition of the newly developed product Cost incurred on search for alternatives for materials, devices, products, processes, systems or services Cost of final selection of possible alternatives for a new process Periodic or routine design changes to existing products Modification of design for a specific customer Cost of design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production Cost of routine, seasonal, and periodic design of tools, jigs, molds and dies Cost of quality control during commercial production Cost of purchased building to be used in various R&D projects Depreciation on the building described above Personnel costs of persons involved in research and development projects Design, construction, and testing of preproduction prototypes and models Adjusted balances

188

Others

700,000 -

16,000

23,000

-

80,000

-

15,000

-

120,000

-

-

102,000

-

43,000

30,000

-

96,000

-

-

2,500 10,000

5,000

-

-

18,000

-

32,000

100,000

1,000,000 -

41,200

-

96,000 1,306,200 (A)

1,223,500

Chapter 22: Intangible Assets

PROBLEM 22-2 Issuance of Treasury Shares Issuance of treasury shares in exchange for non-cash asset is simply recorded just like an issuance from unissued shares. Hence, the transaction should be accounted in the following order of priority: 1. Fair value of asset received 2. Fair value of shares (i.e., treasury shares) issued 3. Cost of treasury shares Cost (P110 x 2,000) = P220,000

(D)

PROBLEM 22-3 Change in Estimate Cost of the Patent Less: Amortization, 12/31/2014 (300,000/15 x 2) Carrying value, 1/1/2015 Divided by: Remaining useful life (10 – 2) Amortization – 2015 (A)

300,000 40,000 260,000 8 32,500

PROBLEM 22-4 Trademark Since the trademark is considered to have an indefinite useful life, it is only subject to impairment and not amortized. Hence the amount to be reported in its December 31, 2015 SFP is P500,000. (A) PROBLEM 22-5 Franchise Downpayment Present value of installment receivable (*2.91x 1,000,000) Total cost of franchise (D)

2,000,000 2,910,000 4,910,000

*The present value factor is the present value of ordinary annuity using 14% for 4 periods. PROBLEM 22-6 Leasehold Improvement Cost of the improvement Less: Accumulated depreciation (2,250,000 / 10*) Carrying value – 12/31/2015 (B)

2,250,000 225,000 2,025,000

*Shorter of useful life of 10 years and extended lease term (12 – 3 + 6) = 15.

189

Chapter 22: Intangible Assets

PROBLEM 22-7 Goodwill 2013 2014 2015 Total Divide by: Number of periods Average

Net income 1,000,000 1,250,000 1,950,000 4,200,000 3 1,400,000

Average earnings (see table above) Less: Normal earnings (4,250,000 x 20%) Average excess earnings Divide by: Capitalization rate Goodwill Add: Fair value of net asset acquired Purchase price

Net assets 3,900,000 4,350,000 4,500,000 12,750,000 3 4,250,000

(A)

1,400,000 850,000 550,000 25% 2,200,000 4,500,000 6,700,000

PROBLEM 22-8 Internally Developed Computer Software Cost Question No. 1 Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing product masters Total Software Cost (A)

1,000,000 750,000 1,250,000 3,000,000

Question No. 2 Duplication of computer software and training materials from product master Packaging product Total Inventoriable Cost (A)

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

Question No. 3 Total Software Cost Multiply by: (10M / 40M) Amortization

3,000,000 25% 750,000

(A)

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

190

Chapter 22: Intangible Assets

PROBLEM 22-9 Website Cost Question No. 1 Zero. All costs are charged to expense.

(A)

Question No. 2 Obtaining a domain name Installing developed applications on the web server Stress testing Designing the appearance (e.g. layout and color) of web pages Creating, purchasing, preparing (e.g. creating links and identifying tags), and uploading information Updating graphics and revising content Adding new functions, features and content Reviewing security access Total intangible asset (B)

32,000 80,000 12,000 160,000 60,000 32,000 12,000 36,000 424,000

COMPREHENSIVE PROBLEMS PROBLEM 22-10 Goodwill Computation Current Assets (6,000,000 + 800,000) Investments PPE (13,000,000 + 1,850,000) Current liabilities Noncurrent liabilities Fair value of net asset acquired

6,800,000 2,000,000 14,850,000 (3,500,000) (2,500,000) 17,650,000

Fair value of net asset acquired Multiply by: Normal rate of return Normal earnings

17,650,000 10% 1,765,000

Total earnings Loss on sale (or Gain) on sale Bonus (150,000 x 4years) Operating income Divide by: No. of years Average earnings

9,000,000 (100,000) 600,000 9,500,000 4 2,375,000

Question No. 1 Average earnings Less: Normal earning Average excess earnings Multiply by: Capitalization period Goodwill Add: Fair value of net asset acquired Purchase price

(A) (A)

191

2,375,000 1,765,000 610,000 4 2,440,000 17,650,000 20,090,000

Chapter 22: Intangible Assets

Question No. 2 Average earnings Less: Normal earning Average excess earnings Divide by: Capitalization rate Goodwill Add: Fair value of net asset acquired Purchase price

(B) (B)

Question No. 3 Average earnings Divide by: Capitalization rate Purchase price Less: Fair value of net asset Goodwill

(B) (B)

Question No. 4 Average earnings Less: Normal earning Average excess earnings Multiply by: Present value of ordinary annuity Goodwill Add: Fair value of net asset acquired Purchase price

2,375,000 1,765,000 610,000 10% 6,100,000 17,650,000 23,750,000

2,375,000 8% 29,687,500 17,650,000 12,037,500

(C)

2,375,000 1,765,000 610,000 3.0373 1,852,753 17,650,000 19,502,753

Question No. 1 Net Patent, January 1 Divide by: Remaining life (8years -2 years) Amortization

(A)

336,000 6 56,000

Question No. 2 None, the trademark has an indefinite life.

(B)

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

4.

(C)

C

PROBLEM 22-11

Question No. 3 Cost of noncompetition agreement (1,600,000 x 1/4) Divide by: Useful life Amortization expense (A)

192

400,000 5 80,000

Chapter 22: Intangible Assets

Question No. 4 Purchase price Less: Fair value of net assets acquired Goodwill (carrying amount)

2,400,000 1,600,000 800,000

(A)

The goodwill shall not be amortized because its useful life is indefinite. However, goodwill shall be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate a possible impairment. Question No. 5 Cost-Patent Less: Accumulated Amortization (48,000 + 56,000) Cost - Trademark (no amortization) (1.6M x 3/4) Cost - Noncompetition agreement Less: Accumulated Amortization (see no. 3) Total carrying amount of the Intangible assets

384,000 104,000 400,000 80,000 (B)

280,000 1,200,000 320,000 1,800,000

Note: Goodwill should not be reported as part of intangible asset since it is not identifiable. SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

A

5.

B

PROBLEM 22-12 Question No. 1 Legal cost Payment of licenses to author excluding refundable purchase taxes (100,000-10,000) Total cost of intangible assets (D) Question No’s 2, 3 and 5 Cost Less: Amortization in 2015 (97,000/5 x 6/12) Carrying value, 12/31/ 2015 Less: Amortization in 2016 (97,000/5 ) Carrying value, 12/31/ 2016

97,000 9,700 87,300 19,400 67,900

Question No. 4 General start-up cost Amortization Cost of printing Advertising expense (20,000 x 6/12) Total Expense SUMMARY OF ANSWERS: 1. D 2. C 3. C

4.

(B) B

193

5.

D

7,000 90,000 97,000

No. 2 (C) No. 3 (C) No. 5 (D) 1,500 9,700 100 10,000 21,300

Chapter 22: Intangible Assets

PROBLEM 22-13 Patent, Competitive, Related Patent Question No. 1 Cost Divide by: Remaining useful life Amortization

(C)

500,000 10 50,000

Question No. 2 Cost of the old Patent Less: Accumulated Amortization (500,000 / 10 x 2) Carrying value, 1/1/2013 Competitive Patent Total Divide by: Remaining life Amortization (D)

500,000 100,000 400,000 240,000 640,000 8 80,000

Question No. 3 Carrying value, 1/1/2013 Less: Amortization 2013 Carrying value, 12/31/2013

(D)

640,000 80,000 560,000

(A)

560,000 200,000 760,000 20 38,000

(A)

760,000 38,000 722,000

Question No. 4 Carrying value, 12/31/2013 Add: Related patent Total Carrying value, 1/1/2014 Divide by: Extended life Amortization Question No. 5 Total Carrying value, 1/1/2014 Less: Amortization, 2014 Carrying value, 1/1/2015 = Loss SUMMARY OF ANSWERS: 1. C 2. D 3. D

4.

A

5.

A

PROBLEM 22-14 Comprehensive Question No. 1 Acquisition cost Costs of employee benefits arising directly from bringing the asset to its intended condition Professional fees arising directly from bringing the asset to its intended condition Total cost of the trademark (C)

600,000 60,000 13,000 673,000

Question No. 2 None, the trademark has an indefinite life and is not subject to amortization. (A)

194

Chapter 22: Intangible Assets

Question No. 3 Amortization - Trademark Amortization - Customer list Total amortization

(B)

60,000 60,000

(A)

60,000 165,416 225,416

Downpayment Add: Present Value of notes payable (600,000 x .7118) Cost of franchise

400,000 427,080 827,080

Question No. 4 Amortization - Trademark Amortization - Customer list Amortization - Franchise Total amortization

Question No. 5 Cost of trademark Cost of customer list Less: Accumulated Amortization Cost of franchise Less: Accumulated Amortization Total carrying value SUMMARY OF ANSWERS: 1. C 2. A 3. B

300,000 120,000 827,080 165,416 (A) 4.

A

5.

673,000 180,000 661,664 1,514,664

A

PROBLEM 22-15 Question No. 1 Zero, organization cost is treated as outright expense.(A) Question No. 2 Design costs Add: Legal fees Registration fee with Patent office Total cost of trademark Question No. 3 Cash Add Present value of the note (200,000 x 2.91) Cost of Franchise Question No. 4 Cost (see no. 3) Less: Amortization (982,000/20)

(B)

3,000,000 300,000 100,000 3,400,000

(B)

400,000 582,000 982,000 982,000 49,100

195

Chapter 22: Intangible Assets

Carrying value, 12/31/2015 Question No. 5 Amortization of the franchise

(A)

P49,100

932,900

(D)

The trademark has no amortization because it has an indefinite life. It is only tested for possible impairment. SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

A

5.

D

PROBLEM 22-16 Question No. 1 Cost-Patent Less: Amortization for the year (136,000/20) Carrying value of the Patent Question No. 2 Licensing agreement No. 1 Unadjusted balance Less: Amortization for 2 years (100,000/20 x 2) Total Less: Reduction in value (90,000 x 60%) Carrying value Question No. 3 Unadjusted balance Add: Amount credited for advance collection Total cost Less: Amortization (120,000/10) Carrying value - Licensing agreement No. 2 Question No. 4 Carrying values: Patent (see no. 1) Licensing Agreement No. 1 (No. 2) Licensing Agreement No. 2 (No. 3) Total carrying value

(C)

136,000 6,800 129,200

(B)

100,000 10,000 90,000 54,000 36,000

(C)

118,000 2,000 120,000 12,000 108,000

(C)

129,200 36,000 108,000 273,200

The P16,000 cost incurred for advertising and the P32,000 legal expenses for incorporation should be charged to expense when it were incurred. Question No. 5 Nonamortization of Licensing Agreement No 1 (100,000/20 x 1) Expenses capitalized:

196

5,000

Chapter 22: Intangible Assets

Goodwill (16,000+32,000) Organization cost Overstatement of Retained earnings

(A)

48,000 58,000 111,000

All the expenses above were understated thereby overstating the net income and retained earnings. SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

C

5.

A

PROBLEM 13-17 Question No. 1 Unadjusted balance Less: Unamortized portion of improvements debited Cost P75,000 Less: Amortization (P75,000 / 10 x 3) 22,500 Adjusted balance – 01/01/2015 Less: Amortization 2015 (P52,500 + P56,071) – see below Carrying value – 12/31/2015 (A) Computation of amortization: Adjusted balance – 01/01/2015 Less: CV of Patent with remaining UL of 2 years – 01/01/2015 Cost 210,000 Less: Accumulated amortization 01/01/2015 (P210,000 / 14 x 7) 105,000 CV of Patent with remaining UL of 7 years – 01/01/2015 Amortization of: Patent with remaining UL of 2 years (105,000 / 2) Patent with remaining UL of 7 years (392,500 / 7) Total Amortization Question No. 2 Franchise cost Less: Amortization (50,000 / 5) Carrying value 12/31/2015

(A)

197

550,000 52,500 497,500 108,571 388,929

497,500

105,000 392,500

52,500 56,071 108,571

50,000 10,000 40,000

Chapter 22: Intangible Assets

Question No. 3 The amount to be reported as goodwill is the excess of cost over the fair value of net asset acquired. Goodwill is not amortized but only subject to impairment testing. Therefore, the amount to be reported is P200,000. (A) Question No. 4 Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing master for training materials Total Software Cost (A)

240,000 200,000 150,000 590,000

Question No. 5 Completion of detailed program design Costs incurred for coding and testing to establish technological feasibility Total Cost charged to Expense (A) Question No. 6 Amortization: Patent (see No. 1) Franchise (see No. 2) Software cost – none yet Total Cost charged to Expense SUMMARY OF ANSWERS: 1. A 2. A 3. A

130,000 100,000 230,000

108,571 10,000 118,571

(C)

4.

A

5.

A

6.

C

PROBLEM 22-18 Inventories, PPE and Intangible Assets Question No. 1 Unadjusted balance Add: Goods purchased FOB Shipping Point Adjusted balance Question No. 2 Total acquisition cost Add: Mortgage assumed Total cost of land and building Multiply by: Percentage allocated to building Total Purchase Price allocated to Building Add: Remodeling Cost (300,000 – 20,000) Total Cost of Building

198

(B)

4,300,000 40,000 4,340,000

(A)

4,000,000 800,000 4,800,000 80% 3,840,000 280,000 4,120,000

Chapter 22: Intangible Assets

Question No. 3 Cost of improvement Less: Accumulated depreciation (500,000/8 x 9/12) Carrying value (B)

500,000 46,875 453,125

Question No. 4 Carrying value – 01/01/2015 Less: Amortization 2015 (432,000 / 3 years remaining UL) Carrying value (C)

432,000 144,000 288,000

Question No. 5 Building (4,120,000-120,000)/50 Leasehold Improvements (500,000/8 x 9/12) Furniture and Fixtures Franchise (500,000 / 10) Licensing agreement Total depreciation and amortization expense SUMMARY OF ANSWERS: 1. B 2. A 3. B

4.

C

199

(A)

5.

A

80,000 46,875 150,000 50,000 144,000 P470,875

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

CHAPTER 23: REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE Note to professor: Page: Existing data: 828

830 858

862

Change to: Additional credit to Revaluation Surplus in No. 1 under Proportional. Elimination No. 1 Additional Journal Entry Debit: Accumulated depreciation Credit: Equipment

Case No. 2 Appreciation = P900,000

Appreciation = P825,000

Illustration: Noncurrent Assets Held for Sale -Single Asset On January 1, 2015, Raycie-Fe Co. decided to sell a machinery with a cost of

Change 2015 to 2016.

On July 1, 2017, Marga Co. sold the machinery…

On July 1, 2017, Marga Co. sold the investment in associate…

PROBLEM 23-1 Revaluation, No Change in Estimate Note to professor: Change 2017 to 2018 in Question No. 5 Question No. 1 Machinery Accumulated depreciation (25%) CA/DRC/RS

Historical Cost 6,000,000 1,500,000 4,500,000

Replacement Cost 20,000,000 5,000,000 15,000,000

Increase 14,000,000 3,500,000 10,500,000 (A)

Carrying amount/Depreciated Replacement Cost/Revaluation Surplus Question No. 2 Depreciated Replacement cost Divide by: Remaining useful life (20 – 5) Depreciation Expense – 2016

(B)

Question No. 3 Revaluation surplus, beginning Less: Piecemeal realization – 2016 (10,500,000 / 15)

200

15,000,000 15 1,000,000

10,500,000 700,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Remaining revaluation surplus end of 2016

(B)

Question No. 4 Net Selling Price Less: Carrying amount – 01/02/2018 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P1M x 2 years) Gain on sale

15,000,000 15,000,000 2,000,000 (A)

Question No. 5 Revaluation surplus, beginning Less: Piecemeal realization for two years (10,500,000 / 15 x 2) Remaining revaluation surplus to R/E (A) SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

A

5.

9,800,000

13,000,000 2,000,000

10,500,000 1,400,000 9,100,000

A

PROBLEM 23-2 Revaluation, With Change in Useful Life Question No. 1 Machinery Accumulated depreciation (25%) CA/DRC/RS

Replacement Cost 20,000,000 5,000,000 15,000,000

Cost 9,000,000 2,250,000 6,750,000

Increase 11,000,000 2,750,000 8,250,000 (A)

Carrying amount/Depreciated Replacement Cost/Revaluation Surplus Question No. 2 Depreciated Replacement cost Divide by: Remaining useful life Depreciation Expense – 2015

(B)

15,000,000 25 600,000

Question No. 3 Revaluation surplus, 01/01/2015 Less: Piecemeal realization – 2015 (8,250,000 / 25) Remaining revaluation surplus end of 2015 (B)

8,250,000 330,000 7,920,000

Question No. 4 Net Selling Price Less: Carrying amount – 01/02/2017 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P15M / 25 x 2) Gain on sale

201

15,000,000 15,000,000 1,200,000 (A)

13,800,000 1,200,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Question No. 5 Revaluation surplus, beginning Less: Piecemeal realization for two years (8,250,000 / 25 x 2) Remaining revaluation surplus to R/E (A) SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

A

5.

8,250,000 660,000 7,590,000

A

PROBLEM 23-3 Revaluation, With Change in Useful Life and Residual Value

Machinery Less: Accumulated depreciation CA/DRC/RS

Replacement Cost 18,200,000 **4,500,000 13,700,000

Cost 9,100,000 *2,250,000 6,850,000

Increase 9,100,000 2,250,000 6,850,000 (A)

Carrying amount/Depreciated Replacement Cost/Revaluation Surplus *This amount should be the actual amount of accumulated depreciation (i.e. using the original residual value) ** (18,200,000 – 200,000) / 20 x 5. This is computed using the revised residual value. Question No. 2 Depreciated Replacement cost Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation Expense – 2015

(B)

15,000,000 200,000 13,500,000 25 540,000

Question No. 3 Revaluation surplus, 01/01/2015 Less: Piecemeal realization – 2015 (6,850,000 / 25) Remaining revaluation surplus end of 2015 (B)

6,850,000 274,000 6,576,000

Question No. 4 Net Selling Price Less: Carrying amount – 01/02/2017 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P540,000 x 2) Gain on sale

14,000,000 13,700,000 1,080,000 (A)

Question No. 5 Revaluation surplus, beginning Less: Piecemeal realization for two years (P274,000 x 2) Remaining revaluation surplus to R/E (A)

202

12,620,000 1,380,000

6,850,000 548,000 6,302,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

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

4.

A

5.

A

PROBLEM 23-4 Impairment and Revaluation of PPE CASE NO. 1 COST MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2015

(A)

Question No. 2 Zero. The company is using the cost model.

(A)

Question No. 3 Cost Less: Accumulated depreciation Carrying amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation - 2016

1,200,000 100,000 1,000,000 155,000 845,000 9 93,888

(E)

Question No. 4 Cost Less: Accumulated Depreciation (100,000 + 93,888 + 93,888) Carrying amount – 12/31/2017 Less: Recoverable amount, date of impairment Impairment loss (E) Question No. 5 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation SUMMARY OF ANSWERS: 1. A 2. A 3. E

E

203

5.

1,200,000 287,776 912,224 600,000 312,224

600,000 40,000 560,000 7 80,000

(C)

4.

1,200,000 200,000 1,000,000 10 100,000

C

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

CASE NO. 2 REVALUATION MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2015 (A) Question No. 2 Recoverable amount/fair value – 01/01/2016 Less: Carrying amount – 01/01/2016 Machinery at cost Less: Accumulated depreciation – 01/01/2016 Revaluation surplus – 01/01/2016 Question No. 3 Recoverable amount/fair value – 01/01/2016 Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation – 2016

1,280,000 1,200,000 100,000 (D)

Question No. 4 Recoverable amount, date of revaluation – 01/01/2018 Less: Subsequent depreciation for 2 years Carrying amount – 01/01/2018 Less: Recoverable amount, date of impairment Decrease in value Less: Remaining revaluation Revaluation surplus, date of revaluation 180,000 Less: Piecemeal realization for two years 40,000 Impairment loss (D)

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

D

204

5.

1,280,000 250,000 1,030,000 600,000 430,000 140,000 290,000

600,000 40,000 560,000 7 80,000

(C)

4.

1,100,000 180,000

1,280,000 155,000 1,125,000 9 125,000

(C)

Question No. 5 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation

1,200,000 200,000 1,000,000 10 100,000

C

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

PROBLEM 23-5 Impairment and Revaluation of PPE CASE NO. 1 COST MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2015 (A)

1,200,000 200,000 1,000,000 10 100,000

Question No. 2 Cost Less: Accumulated Depreciation Carrying amount – 12/31/2015 Less: Recoverable amount, date of impairment Impairment loss

(D)

1,200,000 100,000 1,100,000 900,000 200,000

(D)

900,000 90,000 810,000 9 90,000

Question No. 3 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation

Question No. 4 Recoverable amount – 01/01/2016 Less: Accumulated Depreciation – 12/31/2017 Carrying amount – 12/31/2017 Lower of: Would have been carrying amount no impairment Less: Recoverable amount – 01/01/2018 Gain on impairment recovery – P&L The increase in fair value is recognized in P&L.

900,000 180,000 720,000 875,555 770,000

(A)

Would have been carrying amount had been there no impairment: Cost Less: Depreciation 2015 2016 [(1,200,000 – 90,000 – 100,000) / 9) 2017 Would have been carrying value – 12/31/2017 Question No. 5 Carrying value – 01/01/2018 Less: Revised residual value

770,000 50,000

1,200,000 100,000 112,222 112,222 875,555

770,000 -

205

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Depreciable amount Divide by: Remaining useful life (10 – 3) Depreciation SUMMARY OF ANSWERS: 1. A 2. D 3. D

4.

770,000 7 110,000

(C)

A

5.

C

CASE NO. 2 REVALUATION MODEL Question No. 1 Cost Less: Residual value Depreciable amount Divide by: Estimated useful life Depreciation - 2015 (A)

1,200,000 200,000 1,000,000 10 100,000

Question No. 2 Cost Less: Accumulated Depreciation Carrying amount – 12/31/2015 Less: Recoverable amount, date of impairment Impairment loss

(D)

1,200,000 100,000 1,100,000 900,000 200,000

(D)

900,000 90,000 810,000 9 90,000

Question No. 3 Recoverable amount Less: Revised residual value Depreciable amount Divide by: Remaining useful life Depreciation

Question No. 4 Recoverable amount – 01/01/2016 Less: Accumulated Depreciation – 12/31/2017 Carrying amount – 12/31/2017 Lower of: Would have been carrying amount no impairment Less: Recoverable amount – 01/01/2018 Gain on impairment recovery – P&L The increase in fair value is recognized in P&L.

900,000 180,000 720,000 875,555 770,000

(A)

Would have been carrying amount had been there no impairment: Cost Less: Depreciation 2015 2016 [(1,200,000 – 90,000 – 100,000) / 9) 2017 Would have been carrying value – 12/31/2017

206

770,000 50,000

1,200,000 100,000 112,222 112,222 875,555

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Question No. 5 Carrying value – 01/01/2018 Less: Revised residual value Depreciable amount Divide by: Remaining useful life (10 – 3) Depreciation SUMMARY OF ANSWERS: 1. A 2. D 3. D

4.

770,000 770,000 7 110,000

(C)

A

5.

C

PROBLEM 23-6 Impairment of Intangible Assets Question No. 1 Patent (200,000 / 10) Computer software (100,000 x 60/120) Total amortization

20,000 50,000 70,000

(A)

The copyright and tradename is not amortized because they have indefinite useful life. Question No. 2 Copyright: Carrying value Less: Recoverable amount (80,000 / .05) Tradename: Carrying value Less: Recoverable amount (15,000 / .05) Goodwill: Carrying value of reporting unit Less: Recoverable amount (200,000 x 14.0939) Total impairment loss

400,000 160,000

240,000

350,000 300,000

50,000

3,000,000 2,818,780 (C)

181,220 471,220

Question No. 3 Carrying value of goodwill – 12/31/2015 Less: Allocated impairment loss of reporting unit Carrying value of goodwill – 12/31/2016 (B)

900,000 181,220 718,780

Question No. 4 Patent (P200,000 – P20,000) Copyright (recoverable amount) Tradename (recoverable amount) Computer software (100,000 – 50,000) Carrying value of intangible assets – 12/31/2016 (A)

180,000 160,000 300,000 50,000 690,000

Note that goodwill is not reported as an intangible asset.

207

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

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

4.

A

PROBLEM 23-7 Amortization and Impairment of Intangible Assets Questions 1 and 2 Trademark - Unadjusted balance Less: Unamortized cost of improvement that should have been expensed Cost Less: Accum. amortization (150,000/10 x 2) Total Add: Competitive patent debited to expense Cost Less: Accum. amortization (135,000/9 x 1) Adjusted balance, January 1. 2016 Less: Amortization during the year Patent with remaining life of 4 years *(160,000/4) Remaining patent (1,430,000-160,000)/15-7) Carrying value of the Patent, 12/31/2016

1,430,000 150,000 30,000 135,000 15,000 40,000 158,750 (1) A

Computation of the P160,000: Original cost Less: Accumulated amortization (300,000/15) x 7 years)) Remaining carrying value, 1/1/2016

120,000 1,310,000 120,000 1,430,000 (2) A 198,750 1,231,250

300,000 140,000 160,000

The 7 years age is from January 1, 2009 to January 1, 2016. Questions 3 Carrying value of the trademark (no amortization) Less: Recoverable amount (P75,000/10%) Impairment loss (B)

800,000 750,000 50,000

Questions 4 Adjusted carrying value of the trademark is equal to its recoverable amount of P750,000. (See no. 3) (B) Questions 5 Downpayment Add: Present value of the note Total cost of the franchise Divide by: Useful life Amortization expense

(D)

208

500,000 874,000 1,374,000 10 137,400

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

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

4.

B

5.

D

PROBLEM 23-8 Impairment of Cash Generating Unit Question No. 1 Total carrying amount before impairment Less: Fair value less costs to sell Impairment loss Less: Impairment loss allocated to Goodwill Impairment loss allocated to other assets

(B)

105,000,000 85,000,000 20,000,000 5,000,000 15,000,000

Questions No. 2 and 3 (A) Other assets in this case would include only PPE and Patent. Impairment of inventories (i.e. write-down to NRV) is covered by PAS 2 while impairment of FA at FVTOCI will be covered by PAS 39 / PFRS 9. Questions No. 4 and 5 PPE (at cost model) Patent Total

Carrying amount before impairment 32,000,000 28,000,000 60,000,000

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

4.

D

5.

Ratio 0.53 0.47

Allocated Impairment loss 8,000,000 (D) 7,000,000 (D) 15,000,000 (D)

D

PROBLEM 23-9 Impairment and Reversal of Impairment of Cash Generating Unit Cash Inventory Accounts receivable Plant and equipment Less: Accumulated depreciation Trademark Patent Goodwill Total Carrying amount of CGU Less: Value in use Impairment loss Less: Impairment allocated to goodwill Impairment loss allocated to other asset

209

100,000 800,000 1,200,000 24,000,000 10,400,000 2,550,000 850,000 400,000 19,500,000 16,300,000 3,200,000 400,000 2,800,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Plant and equipment Trademark Patent Total

Balance before Impairment 13,600,000 2,550,000 850,000 17,000,000

Plant and equipment Trademark Patent Total

Balance after Impairment 11,360,000 2,130,000 710,000 14,200,000

Fraction 13.6/17 2.55/17 .85/17

Reallocation (40,000) (7,500) 47,500 -

Plant and Equipment: Would have been BV, no impairment Cost Less: Accumulated depreciation (2.6M +300,000) Actual Book value Impaired value Less: Subsequent depreciation Maximum gain on reversal of impairment Trademark: Would have been BV, no impairment Cost Less: Subsequent amortization

Balance after Reallocation 11,320,000 2,122,500 757,500 3,520,000

24,000,000 11,600,000 11,320,000 1,000,000

2,550,000 120,000

Actual Book value Impaired value Less: Subsequent depreciation Maximum gain on reversal of impairment Patent: Would have been BV, no impairment Cost Less: Subsequent amortization

2,122,500 112,000

850,000 80,000

Actual Book value Impaired value Less: Subsequent depreciation Maximum gain on reversal of impairment

210

Balance after Impairment 11,360,000 2,130,000 710,000 14,200,000

Impairment Loss (2,240,000) (420,000) (140,000) 2,800,000

757,500 60,000

1. (B) 2. (B) 3. (B)

12,400,000

10,320,000 2,080,000

2,430,000

2,010,500 419,500

770,000

697,500 72,500

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Plant and equipment Trademark Patent Total

Plant and equipment Trademark Patent Total

Balance before Reversal 10,320,000 2,010,500 697,500 13,028,000

Balance bef. Reall 12,221,136 2,380,872 825,992 15,428,000

Max gain 1,901,136 370,372 72,500 2,344,008

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

4.

Allocated Gain 1,901,136 370,372 128,492 2,400,000

Fraction 10320/13028 2010.5/13028 697.5/13028

C

5.

Reallocation 46,863 9,130 (55,992) -

C

6.

Max gain 1,901,136 370,372 72,500 2,344,008 Balance after reallocation 12,267,999 2,390,001 770,000 15,428,000

A

PROBLEM 23-10 Noncurrent Assets Held for Sale -Single Asset Question No. 1 Cost Less: Accumulated depreciation Carrying amount Less: Initial amount recognized– lower of: Carrying amount Fair value less cost to sell Impairment loss

2,000,000 800,000 1,200,000 1,200,000 1,100,000 (B)

Question No. 2 Zero. Non-current asset held for sale should not be depreciated. Question No. 3 Lower of: Carrying amount FVLCTS Less: Carrying amount at initial recognition Gain on reversal – P&L Question No. 4 Net Selling Price (1,800,000 – 50,000) Less: Carrying amount Gain on sale

1,200,000 1,500,000 (B)

(D)

211

1,100,000 100,000

(A)

1,200,000 1,100,000 100,000

1,750,000 1,200,000 550,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Question No. 5 Cost Accumulated depreciation Carrying amount Less: Initial amount recognized– lower of: Carrying amount Fair value less cost to sell Impairment loss SUMMARY OF ANSWERS: 1. B 2. A 3. B

4.

D

2,000,000 800,000 1,200,000 1,200,000 1,300,000 (A)

5.

1,200,000 -

A

PROBLEM 23-11 Noncurrent Assets held for Sale- Disposal Group Question No. 3 Total carrying amount before impairment Less: Fair value less costs to sell Impairment loss Less: Impairment loss allocated to Goodwill Impairment loss allocated to other assets

64,600,000 55,000,000 9,600,000 5,000,000 4,600,000

(B)

Questions No. 4 & 5

PPE (at cost model) PPE (at revaluation model) Total

Carrying amount as remeasured 20,000,000 30,000,000 50,000,000 Revaluation surplus

PPE (at cost model) PPE (at revaluation model) Total

1,000,000 1,000,000

Remaining revaluation surplus is (P3,000,000 minus (P32M-P30M)

0.40 0.60

Allocated Decrease 1,840,000 2,760,000 4,600,000

Impairment loss 1,840,000 1,760,000 3,600,000

Carrying amount after impairment 18,160,000 27,240,000 45,400,000

P1,000,000

Decrease in value of the PPE (at revaluation model) is allocated to 1. First, remaining revaluation surplus 2. Balance to impairment loss. SUMMARY OF ANSWERS: 1. B 2. B 3. B

4.

A

212

5.

D

Revaluation surplus 1,000,000 1,000,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

PROBLEM 23-12 Noncurrent Assets held for Sale – Investment in Associate Note to professor: Change “On July 1, 2017, Honorato Co. sold the machinery for to …” to investment in associate. Question No. 1 Share in net income (800,000 x 25%) Less: Amortization of undervalued asset Net investment income Question No. 2 Beginning balance – 01/01/2016 Add: Net investment income (see No. 1) Less: Dividends received (150,000 x 25%) Carrying amount – 12/31/2016 Question No. 3 Carrying amount – 12/31/2016 Less: Initial amount recognized– lower of: Carrying amount Fair value less cost to sell Impairment loss

(C)

200,000 10,000 190,000

(A)

3,800,000 190,000 37,500 3,952,500

3,952,500 3,952,500 4,000,000 (A)

3,952,500 -

Question No. 4 Zero. No Share in the profit or loss and amortization shall be recognized when the investment in associate is classified as noncurrent held for sale. The cash dividend shall be recognized as income. (A) Question No. 5 Net Selling Price (P4,260,000 – P60,000) Less: Carrying amount Gain on sale SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

A

4,200,000 3,952,500 247,500

(D)

5.

D

PROBLEM 23-13 Question No. 1 Irrigation Equipment Freight in Installation cost Total Machinery and Equipment, end

P (A)

213

P

740,000 10,000 192,000 942,000

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

Question No. 2 Trade in allowance Book Value: Cost Less: Accum. Depreciation (P660,000+ P165,000) Loss on trade in

400,000 1,300,000 825,000 (B)

475,000 75,000

Question No. 3 Before addition [(P3,100,000 – P100,000)/20 x 3/12) After addition: [(P3,100,000 – (P562,500 + P37,500) + 980,000 P200,000)/20) x 9/12) Depreciation expense (B)

37,500 123,000 160,500

Remaining life (20 – 4 + 4) = 20 years Question No. 4 Turf cutter [{(P1,300,000 – P200,000)/5} x 9/12] + {(P800,000 – P50,000)/6 x 3/12)}] Water desalinator [(P3,780,000 – P270,000)/10] Irrigation equipment [(942,000/4) x 6/12] Office building Total Depreciation expense (B)

P

P

196,250 351,000 117,750 160,500 825,500

Question No. 5 Fair value on initial revaluation P 3,780,000 Book value on initial revaluation: Cost P 4,000,000 Accumulated depreciation [(P4,000,000 – P200,000)/10 x 2) ( 760,000) 3,240,000 12/31/2016 Revaluation Surplus P 540,000 Less: Piecemeal realization in 2017 (P540,000/10) 54,000 12/31/2017 Revaluation surplus P 486,000 12/31/2017 Fair value P 3,400,000 12/31/2017 Book value: Adjusted cost P 3,780,000 Accumulated Depreciation [(P3,780,000 – P270,000)/10] ( 351,000) 3,429,000 Revaluation decrease – charged to Revaluation Surplus (A) P 29,000 SUMMARY OF ANSWERS: 1. A 2. B 3. B

4.

B

214

5.

A

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

PROBLEM 23-14 Question No. 1 Revalued amount – 01/01/2016 Divided by: Remaining useful life (20 – 6) Depreciation

31,500,000 14 2,250,000

(C)

Annual depreciation = P30,000,000/20 = P1,500,000 Age of the building = P9,000,000/P1,500,000 = 6 years Question No. 2 Cost Land P 5,000,000 Building 30,000,000 Accum. Depreciation ( 9,000,000) Book value P21,000,000 Total Revaluation surplus, Jan. 1 Less: Excess of depreciation on revalued amt. over the cost Depreciation on revalued amount(no. 1) Depreciation on cost Total Revaluation surplus, Dec. 31

Fair value P 7,000,000 31,500,000

Revaluation Surplus P 2,000,000 10,500,000 P12,500,000

P 2,250,000 1,500,000 (B)

750,000 P11,750,000

Question No. 3 Annual depreciation rate (200%/2) = 100% Cost Less: Accumulated Depreciation Book value Less: Salvage value Maximum depreciation Question No. 4 Cost Divided by: Useful life Annual depreciation

(B)

P 600,000 300,000 300,000 60,000 P 240,000

(D)

900,000 9 P 100,000

Question No. 5 D Cost Less: Accumulated Depreciation (300,000 +100,000 (no. 4) Book value, Dec. 31 Less: Recoverable amount – value in use (125,000 x 3.60) Impairment loss (B) SUMMARY OF ANSWERS: 1. C 2. B 3. B

4.

D

215

5.

B

P 900,000 400,000 500,000 450,000 P 50,000

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