Chapter 16-30 Valix Practical accounting 2011

16

INVENTORY Problem 16-1 (IAA) Aman Company provided the following data with respect to its inventory: Items counted in the bodega Items included in the count specifically segregated per sale contract items in receiving department, returned by customer, in good condition Items ordered and in the receiving deparment, invoice not received Items ordered, invoice received but goods not received. Freight is on account of seller. Items shipped today, invoice mailed, FOB shipping point Items shipped today, invoice mailed, FOB destination Items currently being used for window display Items on counter for sale Items in receiving department, refused by Aman Company because of damage Items included in count, damaged and unsalable Items in the shipping department

What is the correct amount of inventory? a. 5,700,000 b. 6,000,000 c. 5,800,000 d. 5,150,000 Solution 16-1 Answer a Items counted in the bodega Items included in the count specifically segregated per sale contract Items returned by customer Items ordered and in receiving deparment Items shipped today, FOB destination Items for display Items on counter for sale Damaged and unsalable items included in count Items in the shipping department

Problem 16-2 (IAA)

Lunar Company included the following items under inventory: Materials Advance for materials ordered Goods in process Unexpired insurance on inventory Advertising catalogs and shipping cartons Finished goods in factory Finished goods in entity-owned retails store, including 50% profit on cost Finished goods in hands of consignees including 40% profit on sales Finished goods in transit to customer, shipped FOB destination at cost Finished goods out on approval, at cost Unsalable finished goods, at cost Office supplies Materials in transit, shipped FOB shipping point, excluding rate of P30,000 Goods held on consignment, at sales price, cost P150,000

What is the correct amount of inventory? a. 5,375,000 b. 5,500,000 c. 5,540,000 d. 5,250,000

Solution 16-2 Answer b

Materials Goods in process Finished goods in factory Finished goods in entity-owned retails store (750,000/150%) Finished goods in hands of consignees (400,000*60%) Finished goods in transit Finished goods out on approval Materials in transit (330,000 + 30,000) Correct inventory

Problem16-3 (IAA) The information below is taken from the records of Ram Company at the end of current year.

Finished goods in storeroom, at cost, including overhead ofP400,000 or 20%. Finished goods in transit, including freight charge of P20,000, FOB shipping point Finished goods held by salesmen, at selling price, cost, P100,000 Goods in process, at cost of materials and direct labor Materials Materials in transit, FOB destination Defective materials returned to suppliers Shipping supplies Gasoline and oil for testing finished goods Machine lubricants

What is the correct amount of inventory? a. 4,000,000 b. 4,170,000 c. 4,270,000 d. 4,090,000

Solution 16-3 Answer b Finished goods Finished goods held by salesmen Goods in process (720,000/80%) Materials Factory supplies (110,000 + 60,000) Correct inventory

Problem 16-4 (IFRS)

Brilliant Company incurred the following costs during the current year: Cost of purchases based on vendors' invoices Trade discounts on purchases already deducted from vendors' invoices Import duties Freight and insurance on purchases Other handling costs relating to imports Salaries of accounting department Brokerage commission paid to agents for arranging imports Sales commission paid to sales agents After-sales warranty costs

What is the total cost of the purchases? a. 5,700,000 b. 6,100,000 c. 6,700,000 d. 6,500,000

Solution 16-4 Answer c Cost of purchases Import duties Freight and insurance Other handling costs Brokerage commission Total cost of purchases

5,000,000 400,000 1,000,000 100,000 200,000 6,700,000

Problem 16-5 (IFRS) Corolla Company incurrd the following costs: Materials Storage costs of finished goods Delivery to customers Irrecoverable purchase taxes

700,000 180,000 40,000 60,000

At what amount should the inventory be measured? a. 880,000 b. 760,000 c. 980,000 d. 940,000

Solution 16-5 Answer b Materials Irrecoverable purchase taxes Total cost of inventory

Problem 16-6 (IFRS) Eagle Company incurred the following costs in relation to a certain product:

700,000 60,000 760,000

Diirect materials and labor Variable production overhead Factory administrative costs Fixed production costs

180,000 25,000 15,000 20,000

What is the correct measurement of the product? a. 205,000 b. 225,000 c. 195,000 d. 240,000

Solution 16-6 Answer d All costs are inventoriable.

Problem 16-7 (AICPA Adapted) The following information applied to Fenn Company for the current year: Merchandise purchase for resale Freight in Freight out Purchase returns Interest on inventory loan

4,000,000 100,000 50,000 20,000 200,000

What is the inventoriable cost of the purchase? a. 4,280,000 b. 4,030,000 c. 4,080,000 d. 4,130,000

Solution 16-7 Answer c Merchandise purchased Freight In Total Purchase returns Inventoriable cost

4,000,000 100,000 4,100,000 (20,000) 4,080,000

Problem 16-8 (AICPA Adapted) On December 28, 2011, Kerr Company purchase goods costing P500,000. The terms where F.O.B. destination. Some of the costs incurred in connection with the sale and delivery of the goods where as follows:

Packaging for shipment Shipping Special handling charges

10,000 15,000 25,000

These goods were received on December 31, 2011. On December 31, 2011, what total cost for these goods should be inclu a. 545,000 b. 535,000 c. 520,000 d. 500,000 Solution 16-8 Answer d

When the shipping terms are FOB destination, the seller is responsible for costs incurred in transporting the goods to the bu such as packaging costs, shipping costs and special handling charges. The amount to be included in the buyer's inventory cost is the purchase price.

Problem 16-9 (AICPA Adapted) On December 26, 2011, Branigan Company purchased goods costing P1,000,000. The terms were FOB Shipping point. The goods were received on December 28, 2011. Costs incurred by Branigan Company in connection with the purchase and the delivery of the goods were as follows: Normal freight charge Handling cost Insurance on shipment Abnormal freight charge for express shipping

What is the total cost that Branigan Company should charge to inventory? a. 1,050,000 b. 1,030,000 c. 1, 055,000 d. 1, 067,000 Solution 16-9 Answer c

Purchase price Normal freight charge Handling cost Insurance on shipment Total cost of inventory

1,000,000 30,000 20,000 5,000 1,055,000

The abnormal freight charge should be charged to expense.

Problem 16-10 (AICPA Adapted) Stone Company had the following consignment transaction during December 2011: Inventory shipped on consignment to Beta Company Freight paid by Stone Inventory received on consignment from Alpha Company Freight paid by Alpha

No sales of consigned goods where made in December 2011. What amount should be included as consigned inventory on December 31, 2011? a. 1,200,000 b. 1,250,000 c. 1, 800,000 d. 1,890,000 Solution 16-10 Answer d Inventory shipped on consignment to Beta Freight paid by Stone Total cost of consigned inventory

Problem 16-11 (AICPA Adapted) Clem Company provided the following for the current year:

Beginning inventory Purchases Freight in Transportation to consignees Freight out Ending inventory

Central warehouse 1,100,000 4,800,000 100,000 300,000 1,450,000

What is the cost of sales for the current year? a. 4,550,000 b. 4,850,000 c. 5,070,000 d. 5,120,000 Solution 16-11 Answer d Beginning inventory Purchases Freight in (100,000 + 50,000) Goods available for sale Ending inventory Cost of sales

1,220,000 5,400,000 150,000 6,770,000 (1,650,000) 5,120,000

Problem 16-12 (CGAC) Brooke Company uses a perpetual inventory system. At the end of 2010, the balance in the inventory account was P360,000 and P30,000 of those goods included in ending inventory were purchased FOB Shipping point and did not arrived until 2011. Purchases in 2011 were P3,000,000. The perpetual inventory records showed an ending inventory of P420,000 for 2011. A physical count of the goods on hand at the end of 2011 showed an inventory of P380,000. Inventory shortages are included in cost of goods sold. What amount should be reported in the 2011 income statement for cost of good sold? a. 2, 940,000 b. 2,980,000 c. 3,000,000 d. 3,010,000 Solution 16-12 Answer b Inventory- December 31, 2010 Purchases-2011 Good available for sale Inventory- December 31, 2011 Cost of good sold

360,000 3,000,000 3,360,000 (380,000) 2,980,000

Problem 16-13 (AICPA Adapted) On December 1,2011, Alt department store received 505 sweaters on consignment from Todd. Todd's cost for the sweaters was P800 each, and they were priced to sell at P1,000. Alt's commision on consigned goods is 10%. On December 31, 2011, 5 sweaters remained. In its December 31, 2011 statement of financial position, what amount should

Alt report as payable for consigned goods? a. 490,000 b. 454,000 c. 450,000 d. 404,000 Solution 16-13 Answer c Sweaters sold (500 x P1,000) Less: Commision (10% x 500,000) Payable for consigned goods Cash

500,000 50,000 450,000 500,000

Commision Income Accounts Payable

50,000 450,000

Problem 16-14 (AICPA Adapted) On October 1, 2011, Grimm Company consigned 40 freezer to Holden Company costing P14,000 each for sale at P20,000 each and paid P16,000 in transportation costs. On December 30, 2011, Holden reported the sale of 10 freezer and remitted P170,000. The remittance was net of the agreed 15% commision. What amount should Grim recognize as consignment sales revenue for 2011? a. 154,000 b. 170,000 c. 196,000 d. 200,000 Solution 16-14 Answer d Freezer sold (10 x P20,000)

200,000

Problem 16-15 (PHILCPA Adapted)

An analysis of the ending inventory of Lilac Company on December 31, 2011 disclosed the inclusion of the following item Merchandise in transit purchased on terms: FOB Shipping point FOB Destination Merchandise out on consignment at sales price (including markup of 30% on cost) Merchandise sent to customer for approval (cost of goods, P30,000)

Merchandise held on consignment

What is the reduction of the inventory on December 31, 2011? a. 355,000 b. 190,000 c. 203,500 d. 222,000 Solution 16-15 Answer b Merchandise in transit purchased FOB destination Markup on goods out on consignment (195,000-150,000) Markup on merchandise for approval Merchandise held on consignment Total reduction

Problem 16-16 (AICPA Adapted)

Dean Sportswear regularly buys sweaters form Mill Company and is allowed trade discounts of 20% and 10% from the list price. Dean made a purchase on March 20, 2011, and received an invoice with a list price of P600,000, a freight charge of P15,000 and payment terms of 2/10, n/30. What is the cost of the purchase? a. 432,000 b. 447,000 c. 438,360 d. 435,000 Solution 16-16 Answer b List price Trade discount (20% x 600,000) Balance Trade discount (10% x 480,000) Invoice price Freight charge Total cost of purchase

600,000 (120,000) 480,000 (48,000) 432,000 15,000 447,000

Purchases are normally recorded at gross. Thus, the cash discount is ignored.

Problem 16-17 (PHILCPA Adapted) Hungary Company uses the net method of accounting for cash discounts. In one of its transactions on December 15, 2011,

Hungary sold merchandise with a list price of P2,000,000 to a customer who was given a trade discounts of 20% and 15%. Credit terms were 2/10,n/30. The goods were shipped FOB destination, freight collect. Total freight charge paid by the customer returned damged goods originally billed at P60,000. What is the net realizable value of this account receivabl on December 31, 2011? a. 1,280,000 b. 1,300,000 c. 1,170,000 d. 1,320,000 Solution 16-17 Answer a List price Trade discount (20% x 2,000,000) Balance Trade discount (15% x 1,600,000) Invoice price Sales return Freight paid by customer Net realizable value of AR

2,000,000 (400,000) 1,600,000 (240,000) 1,360,000 (60,000) (20,000) 1,280,000

There is no cash discount because the discount period of 10 days has already expired.

Problem 16-18 (AICPA Adapted)

On June 1, 2011, Pitt Company sold merchandise with a list price of P5,000,000 to Burr on account. Pitt allowed trade discount of 30% and 20%. Credit terms were 2/10,n/30 and the sale was made FOB shipping point. Pitt prepaid P200,000 o delivery costs for Burr as an accommodation. On June 11, 2011, what amount was received by Pitt form Burr as remittance in full? a. 2,744,000 b. 2,940,000 c. 2,944,000 d. 3,140,000 Solution 16-18 Answer c List price Trade discounts: 30% x 5,000,000 20% x 3,500,000 Invoice price Cash discount (2% x 2,800,000) Net amount

5,000,000 (1,500,000) 3,500,000 (700,000) 2,800,000 (56,000) 2,744,000

Add: Reimbursement of delivery cost Total remittance from Burr

200,000 2,944,000

Problem 16-19 (IAA)

On August 1 of the current year, Stella Company recorded purchases of inventory of P800,000 and P1,000,000 under credit terms of 2/l15,net 30. The payment due on the P800,000 purchase was remitted on August 16. The payment due on the P1,000,000 purchase was remitted on August 31. Under the net method and the gross method, these purchases should be included at what respective amount in the determination of cost of goods available for s Net method a. 1,784,000 b. 1,764,000 c. 1,764,000 d. 1,800,000

Gross method 1,764,000 1,800,000 1,784,000 1,764,000

Solution 16-19 Answer c Net method Purchases (800,000 + 1,000,000) Purchase discount taken (2% x 800,000) Purchase discount not taken (2% x 1,000,000) Net amount

1,800,000 (16,000) (20,000) 1,764,000

Under the net method, the purchase discount is deducted from purchases regardless of whether taken or not taken. Gross method Purchases Purchase discount taken Net purchases

1,800,000 (16,000) 1,784,000

Under the gross method, the purchases are recorded at gross and only the purchase discount taken is deducted from purchases in determining cost of goods available for sale.

Problem 16-20 (AICPA Adapted) Rabb Company records its purchases at gross amount but wishes to change to recording purchases net of purchase discounts. Discount available on purchases for the current year totaled P100,000. Of this amount, P10,000 is still available in the accounts payable balance. The balances in the accounts as of and for the year ended December 31,, before conversion are: Purchases Purchase discount taken Accounts payable

5,000,000 40,000 1,500,000

What is the balance of accounts payable on December 31 after the conversion? a. 1,490,000 b. 1,460,000 c. 1,440,000 d. 1,410,000 Solution 16-20 Answer a Accounts payable at gross Discounts available in the accounts payable balance Accounts payable at net

Problem 16-21 (PHILCPA Adapted) Duke Company specializes in the sale of IBM compatibles and software packages. It had the following transactions with one of its suppliers: Purchases of IBM compatibles Purchases of commercial software packages Returns and allowances Purchase discounts taken

1,700,000 1,200,000 50,000 17,000

Purchases were made throughout the year on terms 2/10,n/30. All returns and allowances took place within 5 days of purchase and prior to any payment on account.

How much is the discount lost? a. 57,000 b. 40,000 c. 17,000 d. 41,000 Solution 16-21 Answer b Purchases of IBM compatibles Purchases of commercial software packages Total Less: Returns and allowances Net purchases Discounts available on purchases (2% x 2,850,000) Less: Purchase discounts taken

1,700,000 1,200,000 2,900,000 (50,000) 2,850,000 57,000 17,000

Discount lost

74,000

Problem 16-22 (AICPA Adapated) Hero Company's inventory on December 31, 2011 was P6,000,000 based on a physical count of goods priced at cost and before any necessary year-end adjustments relating to the following: ● Included in the physical count were goods billed to a customer FOB shipping point on December 30,2011. These goods had a cost of P125,000 and were picked up by the carrier on January 7, 2012. ● Goods shipped FOB shipping point on December 28, 2011, form a vendor to Hero were received on January 4, 2012. The invoice cost was P300,000. What amount should be reported as inventory on December 31, 2011? a. 5,875,000 b. 6,000,000 c. 6, 175,000 d. 6,300,000 Solution 16-22 Answer d Physical count Goods shipped FOB shipping point on December 30, 2011 to Hero and received January 4, 2012 Inventory, December 31, 2011 The goods costing P125,000 are properly included in the December 31, 2011 physical count because they are shipped FOB shipping point only on January 7, 2012 (picked up by common carrier).

Problem 16-23 (AICPA Adapted) The physical count conducted in the warehouse of Reverend Company on December 31, 2011 revealed merchandise with a total cost of P5,000,000. However, further investigation revealed that the following items were excluded from the count. ● Goods sold to a customer, which are being held for the customer to call at the customer's convenience with a cost of P200,000. ● A packing case containing a product costing P500,000 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked "hold for shipping instructions". The investigation revealed that the customer's order was dated December 28, 2011, but that the case was shipped and the

customer billed on January 4, 2012. ● A special machine costing P250,000, fabricated to order for a customer, was finished and specifically segregated at the back part of the shipping room on December 31,2011. The customer was billed on that date and the machine was excluded from inventory although it was shipped on January 2, 2012.

What is the correct amount of inventory that should be reported on December 31, 2011? a. 5,950,000 b. 5,750,000 c. 5,500,000 d. 5,700,000 Solution 16-23 Answer c Physical count Inventory marked "hold for shipping instructions" Correct amount of inventory

Problem 16-24 (PHILCPA Adapted) The inventory on hand on December 31, 2011 for Fair Company is valued at a cost of P950,000. The following items were not included in this inventory amount: Item 1:

Purchased goods in transit, shipped FOB destination, invoice price P30,000 which includes freight charge of P1,500.

Item 2:

Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission of 20% of the sales price.

Item 3:

Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500 which includes P1,000 freight charge to deliver the goods. Goods are in transit. The entity's selling price is 140% of cost.

Item 4:

Purchased goods in transit, terms FOB shipping point, invoice price P50,000, freight cost, P2,500.

Item 5:

Goods out on consignment to Manila Company, sales price P35,000, shipping cost of P2,000.

What is the adjusted cost of the inventory on December 31,2011? a. 1,042,000 b. 1,043,000 c. 1,040,000

d. 1,073,500 Solution 16-24 Answer a Inventory per book Item 3 (18,500 - 1,000/140%) Item 4 (50,000 + 2,500) Item 5 (35,000/140% = 25,000 + 2,000) Adjusted inventory

950,000 12,500 52,500 27,000 1,042,000

Problem 16-25 (IAA) Baritone Company counted its ending inventory on December 31, 2011. None of the following items were included when the total amount of the ending inventory was computed: ● P150,000 in goods located in the entity's warehouse that are on consignment from another entity. ● P200,000 in goods that were sold by the entity and shipped on December 30 and were in transit on December 31, 2011. The goods were received by the customer on January 2, 2012. Terms were FOB destination. ● P300,000 in goods that were purchased by the entity and shipped on December 30 and were in transit on December 31, 2011. The goods were received by the entity on January 2, 2012. Terms were FOB shipping point. ● P400,000 in goods that were sold by the entity and shipped on December 30 and were in transit on December 31, 2011. The goods were received by the customer on January 2, 2012. Terms were FOB shipping point.

The entity's reported inventory before any corrections was P2,000,000. What is the correct amount of inventory on December 31, 2011? a. 2,500,000 b. 2,350,000 c. 2,900,000 d. 2,750,000 Solution 16-25 Answer a Reported inventory Goods sold in transit, FOB destination Goods purchased in transit, FOB shipping point

2,000,000 200,000 300,000

Correct amount of inventory

2,500,000

Problem 16-26 (IAA) Sterling Comapany reported its 2011 year-end inventory at P7,600,000 before the following adjustments:

● Goods valued at P1,000,000 are on consignment with a customer. These goods are not included in the year-end inventory ● Goods costing P250,000 were received from a vendor on January 12,2012. The goods were shipped on December 31, 20 ● Goods costing P850,000 were shipped on December 31, 2011, and were delivered to the customer on January 2, 2012. Th FOB shipping point. The goods were included in ending inventory for 2011 even though the sale was recorded in 2011. ● A P350,0000 shipment of goods to a customer on December 31, 2011, terms FOB destination, was not included in the ye and were delivered to customer on January 8, 2012. The sale was properly recorded in 2012. ● An invoice for goods costing P350,000 was received and recorded as a purchase on December 31, 2011. The related goo on January 2, 2012, and thus were not included in the physical inventory. ● Goods valued at P650,000 are on consignment from a vendor.These goods are not included in the year-end inventory. ● A P1,050,000 shipment of goods to a customer on December 30, 2011, terms FOB destination, was recorded as a sale in to the customer on January 6, 2012, were not included in 2011 inventory.

What is the correct inventory on December 31, 2011? a. 9,100,000 b. 8,100,000 c. 9,950,000 d. 9,450,000 Solution 16-26 Answer a Inventory before adjustment Goods out on consignment Goods purchased, FOB shippin point Goods sold , FOB shipping point Goods sold, FOB destination Goods sold, FOB destination

7,600,000 1,000,000 250,000 (850,000) 260,000 840,000 9,100,000

Problem 16-27 (IAA)

A physical count on December 31, 2011 revealed that Joy Company had inventory with a cost of P4,440,000. The Audit id that the following items were excluded from this amount:

● Merchandise of P610,000 is held by Joy on consignment. ● Merchadise costing P380,000 was shipped by Joy FOB destination to a customer on December 31, 2011. The customer w to received the goods on January 5, 2012.

● Merchandise costing P460,000 was shipped by Joy FOB shipping point to a customer on December 29, 2011. The custom to receive the goods on January 5, 2012. Merchandise costing P830,000 shipped by a vendor FOB destination on Decem received by Joy on January 5, 2012. ● Merchandise costing P510,000 purchased FOB shipping point was shipped by the supplier on December 31, 2011 and re January 5, 2012.

What is the correct inventory on December 31, 2011? a. 5,300,000 b. 4,690,000 c. 3,800,000 d. 4,920,000 Solution 16-27 Answer a Physical count Goods sold in transit, FOB destination Goods purchased in transit, FOB shipping point Adjusted inventory

Problem 16-28 (AICPA Adapted) Mia Company submitted an inventory list on December 31, 2011 which showed a total of P5,000,000.

● Excluded from the inventory was merchandise costing P80,000 because it was transferred to the delivery department for packaging on December 28, 2011and for shipping on January 2, 2012. ● The bill of lading and other import documents on a merchandise were delivered by the bank and the trust receipt accepte entity on December 26, 2011. Taxes and duties have been paid on this shipment but the broker did not deliver the mercha until January 7, 2012. Delivered cost of the shipment totaled P800,000. This shipment was not included in the inventory December 31, 2011. ● A review of the entity's purchased orders showed a commitment to buy P100,000 worth of merchandise from Myrose Com This was not included in the inventory because of the goods were received on Januar 3, 1012. ● Supplier's invoice for P300,000 worth of merchandise dated December 28, 2011 was received through the mail on Decem although the goods arrived only on January 4, 2012. Shipment terms are FOB shipping point. This items was included in December 31, 2011 inventory by the entity. ● Goods valued at P20,000 were received from Darlyn Company on December 28, 2011 for approval by Mia. The inventor included this merhandise in the list but did not place any value on it. On January 4, 2012, thne entity informed the suppl distance telephone of the acceptance of the goods and the supplier's invoice was received on January 7, 2012. ● On December 27, 2011, an order for P25,000 worth of merchandise was placed. This was include in the year-end invento it was received only on January 5, 2012. The seller shipped the goods FOB destination.

What is the correct inventory on December 31, 2011?

a. 5,855,000 b. 5,055,000 c. 5,555,000 d. 5,830,000

Solution 16-29 Answer a Inventory per book Inventory transferred in delivery department Shipment consumed by bill of lading Goods in transit, purchased FOB destination Correct inventory

Problem 16-29 (AICPA Adapted)

The physical count conducted in the warehouse of Leila Company on December 31, 2011 revealed total cost of P3,600,000 However, the following items was excluded from the count:

● Goods sold to a customer which are being held for the customer to call for the customer's convenience with a cost of P200,000. ● A packing case containing a product costing P80,000 was standing in the shipping room when the physical inventory was It was not included in the inventory because it was marked "hold for shipping instruction". ● Goods in process costing P300,000 held by an outside processor for further processing. ● Goods costing P50,000 shipped by a vendor FOB seller on December 28, 2011 and received by Leila Company on Janua

What is the correct inventory on December 31, 2011? a. 4,180,000 b. 4,230,000 c. 3,980,000 d. 4,030,000 Solution 16-29 Answer d Inventory per physical count Inventory marked "hold for shipping instructions" Goods in process inventory Goods shipped FOB seller or FOB shipping point Correct Inventory

Problem 16-30 (AICPA Adapted)

Black Company's accounts payable on December 31, 2011, totaled P4,500,000 before any necessary year-end adjustments r the following transactions:

● On December 27, 2011, Black wrote and recorded checks to creditors totaling P2,000,000 causing an overdraft of P500,0 Black's bank account on December 31, 2011. The checks were mailed on January 10, 2012. ● On December 28, 2011, Black purchased and received goods for P750,000, terms 2/10, n/30. Black records purchases an payable at net amount. The invoice was recordedand paid January 3, 2012. ● Goods shipped F.O.B destination on December 20, 2011 from a vendor to Black were received January 2, 2012. The invo was P325,000.

On December 31, 2011, what amount should Black report as account payable? a. 7,575,000 b. 7,250,000 c. 7,235,000 d. 7,553,000 Solution 16-30 Answer c Accounts payable per book Undelivered entity checks Goods purchased and received on December 28, 2011. Purchase discount ( 2% × 750,000) Total Accounts Payable The undelivered checks should be adjusted as follows: Cash 2,000,000 Accounts Payable

2,000,000

Problem16-31 (AICPA Adapted) Kew Company 's accounts payable balance on December 31, 2011, was P2,200,000 before considering the following data:

● Goods shipped to Kew F.O.B. shipping point on December 22, 2011, were lost in transit. The invoice cost of P40,000 wa On January 7, 2012, Kew filed a P40,000 claim against the common carrier.

● On December 27, 2011, a vendor authorized Kew to return, for full credit, goods shipped and billed at P70,000 on Decem The returned goods were shipped by Kew on December 28, 2011. A P70,000 credit memo was received and recorded by

● On December 31, 2011, Kew has a P500,000 debit balance in its accounts payable to Ross, a supplier, resulting from a P for goods to be manufactured to Kew specifications. What amount should be reported as accounts payable in the December 31, 2011 statement of financial position?

a. 2,170,000 b. 2,680,000 c. 2,730,000 d. 2,670,000

Solution 16-31 Answer d Accounts payable per book Goods shipped FOB shipping point on December 22, 2011 and lost in transit Purchase returns Advance payment erroneously debited to accounts payable Adjusted accounts payable

Kew Company shall suffer the loss of the goods in transit because the goods are shipped FOB shipping point. Appropriatel Company must file a claim against hte common carrier.

Problem 16-32 (CGAC)

Bakun Company began operations late in 2010. For the first quarter ended March 31, 2011, Bakun made available the follo Total merchandise purchased through March 15, 2011, recorded at net Merchandise inventory on December 31, 2010, at selling price

All merchandise was acquired on credit and no payments have been made on accounts payable since the inception of the en All merchandise is marked to sell at 50% above invoice cost before time discounts of 2/10, n/30. No sales were made n 201 What amount of cash is required to eliminate the current balance in accounts payable? a. 6,000,000 b. 5,900,000 c. 6,400,000 d. 5,750,000 Solution 16-32 Answer a Gross purchases through March 15, 2011 (4,900,000/ 98%) Inventory - December 31, 2010, at cost (1,500,000/ 150%) Total gross amount to be paid

Problem 16-33 (IFRS)

Aiza Company sells merchandise for P800,000 to a customer on December 31, 2011. The terms of the sale agreement state is due in one year's time. Aiza has an imputed rate of interest of 9%. What amount of sales revenue should Aiza recognize f

a. 872,000 b. 733,600 c. 800,000 d. 0 Solution 16-33 Answer b Sales price Multiply by PV of 1 at 9% for one period Present Value - actual sales revenue

Problem 16-34 (AICPA Adapted)

Lewis Company's usual sales terms are net 60 days, F.O.B. shipping point. Sales, net of returns and allowances, totaled P9, ended December 31, 2011, before year-end adjustments.

● On December 27, 2011, Lewis authorized a cutromer to return, for full credit, goods shipped and billed at P200,000 on D The returned goods were received by Lewis on January 4, 2012, and a P200,000 credit memo was issued and recorded o

● Goods with an invoice amount of P300,000 were billed and recorded on January 3, 2012. The goods were shipped on De

● Goods with an invoice amount of P400,000 were billed and recorded on December 30, 2011. The goods were shipped on What is the correct amount of net sales for 2011? a. 9,300,000 b. 9,100,000 c. 9,000,000 d. 8,900,000 Solution 16-34 Answer d Net sales per book Sales return Goods shipped on December 30, 2011 but recorded January 3, 2012 Goods shipped on January 3, 2012 erroneously recorded on December 30, 2011 Adjusted net sales

Problem 16-35 (AICPA Adapted)

Fenn Company had sales of P5,000,000 during December 2011. Experience had shown that merchandise equaling 7% of sa be returned within 30 days and an additional 3% will be returned within 90 days. Returned merchandise is readily resalable merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn

its income statement for the month of December 2011? a. 4,500,000 b. 4,250,000 c. 3,900,000 d. 3,750,000 Solution 16-35 Answer a Gross Sales Estimated sales returns (10% x 5,000,000) Net Sales

5,000,000 (500,000) 4,500,000

As a conservative approach, sales revenue should be reduced by the 10% estimated probable sales returns. However, the estimated exchanges of 15% will not result to reduction of sales.

Problem 16-36 (AICPA Adapted)

On October 1,2011, Acme Company sold 100,000 gallons of heating oil to Kam Company at P30 per gallon. Fifty thousand on December 15, 2011, and the remaining P50,000 gallons were delivered on January 15, 2012. Payment terms were: 50% on the first delivery, and the remaining 25% due on the second delivery. What amount of revenue should Acme recognize th during 2011? a. 3,000,000 b. 1,500,000 c. 2,250,000 d. 750,000 Solution 16-36 Answer b (50,000×30)

1,500,000

Problem 16-37 (IFRS) On July 1,2011, Loveluck Company, a manufacturer of office furniture, supplied goods to Kaye Company for P1,200,000 on condition that this amount is paid in full on July 1, 2012. Kaye had earlier rejected an alternative offer from Loveluck whereby it could have bought the same goods by paying cash of P1,080,000 on July 1,2011. What amoun should be respectively be recognized as sales revenue and interest income for the year ended June 30, 2012? a. 1,080,000 and 120,000 b. 1,200,000 and 120,000 c. 1,080,000 and 0 d. 1,200,000 and 0

Solution 16-37 Answer a Sales price Cash price - actual sales revenue Implied interest income

1,200,000 1,080,000 120,000

Problem 16-38 (IFRS) On July 1,2011, Kathleen Company handed over to a client a new computer system. The contract price for the supply of the system and after-sales support for 12 months was P800,000. Kathleen estimates the cost of the after-sales support at P120,000 and it normally marks up such cost by 50% when tendering for support contracts. What is the total revenue that should be recognized for 2011? a. 620,000 b. 800,000 c. 710,000 d. 0 Solution 16-38 Answer c Contract price Contract price of after-sales support (120,000 x 150%) Revenue from sale of computer system Revenue from after-sales support (180,000 x 6/12) Total revenue

Problem 16-39 (PHILCPA Adapted) Ilocos Company produced 80,000 kilos of tobacco during the 2011 season. Ilocos sells all of its tobacco to a certain customer which has agreed to purchase the entire production at the prevailing market price. Recent legislation assures that the market price will not fall below P100 per kilo during the next two years. The costs of selling and distributing the tobacco are immaterial and can be reasonably estimated. Ilocos reports its inventory to expected exit value. During 2011, Ilocos sold and delivered to the customer 60,000 kilos at the market price of P100. Ilocos sold the remaining 20,000 kilos during 2012 at the market price of P150. What amount of revenue should Ilocos recognize in 2011? a. 6,000,000 b. 3,000,000 c. 8,000,000 d. 9,000,000 Solution 16-39 Answer c Sales revenue in 2011 (80,000 x P100)

8,000,000

Revenue is recognized at the point of production for agricultural, mineral and forest product when a sale is assured under a forward contract. The remainder of the sales in 2012 of P1,000,000 (20,000 x P50) is recognized as revenue in 2012 and not a correction of 2011 revenue.

Problem 16-40 (IFRS) Beverly Company provides service contracts to customers for maintenance of their electrical system. On October 1, 2011, it agrees to a four-year contract with a major customer for P1,540,000. Costs over the period of the contract are reliably estimated at P513,330. What amount of revenue should be recognized for the year ended December 31, 2011? a. 385,000 b. 128,330 c. 96,250 d. 32,080 Solution 16-40 Answer c Revenue from October 1 to December 31, 2011 (1,540,000/4 years = 385,000 x 3/12)

96,250

Problem 16-41 (AICPA Adapted) Emco Company has the following transactions in 2011: ● Emco sells goods to a customer for P50,000 FOB shipping point on December 30, 2011. ● Emco sells three pieces of equipment on a contract over a three-year period. The sale price of each piece of equipment is P100,000. Delivery of each piece of equipment is on February 10 of each year. In 2011, the customer paid a P200,000 down payment, and will pay P50,000 per year in 2012 and 2013. Collectibility is reasonably assured. ● On June 1, 2011, Emco signs a contract for P200,000 for goods to be sold on account. Payment is to be made in two installments of P100,000 each on December 1, 2011 and December 1, 2012. The goods are delivered on October 1, 2011. Collection is reasonably assured and the goods may no be returned. ● Emco sells goods to a customer on July 1, 2011 for P500,000. If the customer does not sell the goods to retail customers by December 31, 2012, the goods can be returned to Emco. The customer sells the goods to retail customers on October 1, 2012.

What amount of sales revenue should be reported in the 2011 income statement? a. 350,000

b. 850,000 c. 450,000 d. 550,000 Solution16-41 Answer a Goods sold FOB shipping point Delivery of one equipment on February 10, 2011 Goods sold on account on October 1, 2011 Total sales revenue

Problem 16-42 (AICPA Adapted) Marie Company, a distributor of machinery, bought a machine from the manufacturer in November 2011 for P10,000. On December 30, 2011, Marie sold this machine to Zoe Company for P15,000 under the following terms: 2% discount if paid wihtin thirty days, 1% discount if paid after thirty days but within sixty days, or payable in full within ninety days if not paid within the discount periods. However, Zoe had the right to return this machine to Marie if it was unable to resell the machine before expiration of the ninety-day payment period, in which case Zoe's obligation to Marie would be canceled. In Marie's net sales for the year ended December 31, 2011, what amount should be included for the sale of this machine? a. 15,000 b. 14,700 c. 14,850 d. 0 Solution 16-42 Answer d

Problem 16-43 (AICPA Adapted) On January 1, 2011, Bell Company contracted with the City of Manila to provide custom built desks for the city schools. The contract made Bell the city's sole supplier and required Bell to supply no less than 4,000 desks and no more than 5,500 desks per year for two years. In turn, the City of Manila agreed to pay a fixed price of P550 per desk. During 2011, Bell produced 5,000 desks for the City of Manila. On December 31, 2011, 500 of these desks were segregated from the regular inventory and were accepted and awaiting pickup by the City of Manila. The City of Manila paid Bell P2,250,000 during 2011. What amount should Bell recognize as contract revenue in 2011? a. 2,250,000 b. 2,475,000 c. 2,750,000 d. 3,025,000 Solution 16-43 Answer c

Contract revenue (5,000 x 550)

2,750,000

Problem 16-44 (AICPA Adapted) Delicate Company is a wholesale distributor of automotive replacement parts. Inintial amounts taken from accouting records on December 31, 2011 are as follows: Inventory on December 31 based on physical count Accounts payable Sales A. Parts held on consignment from another entity to Delicate, the consignee, amounting to P165,000, were included in the physical count on December 31, 2011, and in accounts payable on December 31, 2011. B. P20,000 of parts which were purchased and paid for in December 2011, were sold in the last week of 2011 and appropriately recorded as sales of P28,000. The parts were included in the physical count on December 31, 2011 because the parts were on the loading dock waiting to be picked up by the customer. C. Parts in transit on December 31, 2011 to customers, shipped FOB shipping point on December 28, 2011, amounted to P34,000. The customers received the parts on January 6, 2012. Sales of P40,000 to the customers for the parts were recorded by Delicate on January 2, 2012. D. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on consignment from Delicate, at their stores on December 31, 2011. E. Goods were in transit from a vendor to Delicate on December 31, 2011. The cost of goods was P25,000. The goods were shipped FOB shipping point on December 29, 2011. 1. What is the correct amount of inventory? a. 1,300,000 b. 1,320,000 c. 1,334,000 d. 1,090,000 2. What is the correct amount of accounts payable? a. 835,000 b. 960,000 c. 975,000 d. 860,000 3. What is the correct amount of sales? a. 9,250,000 b. 9,290,000 c. 9,040,000 d. 9,000,000 Solution 16-44 Question 1 Answer a

Question 2 Answer d Question 3 Answer c

Unadjusted A B C D E Adjusted

Inventory 1,250,000 (165,000) (20,000) 210,000 25,000 1,300,000

Accounts payable 1,000,000 (165,000) 25,000 860,000

4,000,000 100,000 50,000 400,000 300,000 250,000 150,000 200,000 800,000 180,000 50,000 2,500,000

4,000,000 (100,000) 50,000 400,000 150,000 200,000 800,000 (50,000) 250,000 5,700,000

1,400,000 200,000 650,000 60,000 150,000 2,000,000 750,000 400,000 250,000 100,000 50,000 40,000 330,000 200,000

1,400,000 650,000 2,000,000 500,000 240,000 250,000 100,000 360,000 5,500,000

2,000,000 250,000 140,000 720,000 1,000,000 50,000 100,000 20,000 110,000 60,000

2,000,000 100,000 900,000 1,000,000 170,000 4,170,000

5,000,000 500,000 400,000 1,000,000 100,000 600,000 200,000 300,000 250,000

O.B. destination.

these goods should be included in the inventory?

nsporting the goods to the buyer, ed in the buyer's inventory

ere FOB Shipping point.

oods were as follows: 30,000 20,000 5,000 12,000

1,800,000 90,000 1,200,000 50,000

1,800,000 90,000 1,890,000

Held by consignees 120,000 600,000 50,000 80,000 200,000

entory account was ping point and did not d an ending inventory

ventory shortages are for cost of good sold?

Todd's cost for the goods is 10%. On tion, what amount should

00 each for sale at P20,000 e of 10 freezer and remitted cognize as consignment

clusion of the following items:

165,000 100,000 195,000 40,000

35,000

100,000 45,000 10,000 35,000 190,000

f 20% and 10% from the list 600,000, a freight charge of

ons on December 15, 2011,

discounts of 20% and otal freight charge paid by ue of this account receivable

ount. Pitt allowed trade oint. Pitt prepaid P200,000 of Pitt form Burr as

and P1,000,000

d and the gross cost of goods available for sale?

taken or not taken.

ken is deducted

ses net of purchase nt, P10,000 is still nded December 31,,

1,500,000 (10,000) 1,490,000

ollowing transactions with

place within 5 days of

f goods priced at

mber 30,2011.

cause they are

ollowing items

en the physical

e investigation

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

0. The following

hich includes

ding sales commission

,500 which includes

reight cost, P2,500.

cost of P2,000.

5,000,000 500,000 5,500,000

sit on December 31, 2011.

n transit on

ed in the year-end inventory. hipped on December 31, 2011, terms FOB shipping point. omer on January 2, 2012. The terms of the invoice were e sale was recorded in 2011. n, was not included in the year-end inventory. The goods cost P260,000

er 31, 2011. The related goods, shipped FOB destination, were received

n the year-end inventory. n, was recorded as a sale in 2011. The goods, costing P840,000 and delivered

of P4,440,000. The Audit identified

er 31, 2011. The customer was expected

cember 29, 2011. The customer was expected FOB destination on December 31, 2011 was

n December 31, 2011 and received by Joy on

4,410,000 380,000 510,000 5,300,000

the delivery department for

and the trust receipt accepted by the er did not deliver the merchandise ot included in the inventory on

erchandise from Myrose Company.

d through the mail on December 30, 2011 t. This items was included in the

proval by Mia. The inventory team ne entity informed the supplier by long n January 7, 2012. lude in the year-end inventory although

5,000,000 80,000 800,000 (25,000) 5,855,000

aled total cost of P3,600,000.

nvenience with a cost of

n the physical inventory was taken.

by Leila Company on January 10, 2012.

3,600,000 80,000 300,000 50,000 4,030,000

ssary year-end adjustments relating to

using an overdraft of P500,000 in Black records purchases and accounts

ed January 2, 2012. The invoice cost

4,500,000 2,000,000 750,000 (15,000)

735,000 7,235,000

sidering the following data:

e invoice cost of P40,000 was not recorded by Kew.

d billed at P70,000 on December 3, 2011. as received and recorded by Kew on January 5, 2012 supplier, resulting from a P500,000 advance payment

nancial position?

2,200,000 40,000 (70,000) 500,000 2,670,000

shipping point. Appropriately Kew

kun made available the following information:

since the inception of the entity. 0. No sales were made n 2011.

5,000,000 1,000,000 6,000,000

s of the sale agreement state that payment nue should Aiza recognize from the transaction?

800,000 0.917 733,600

and allowances, totaled P9,200,000 for the year

and billed at P200,000 on December 15, 2011. o was issued and recorded on the same date.

e goods were shipped on December 30, 2011.

. The goods were shipped on January 3, 2012.

rchandise equaling 7% of sales will chandise is readily resalable. In addition, e. What amount should Fenn report for net sales in

9,200,000 (200,000) 300,000 (400,000) 8,900,000

30 per gallon. Fifty thousand gallons were delivered . Payment terms were: 50% due on October 1,2011, 25% ue should Acme recognize them from the sale

e Company for P1,200,000 ative offer from Loveluck

year ended June 30, 2012?

ct price for the supply of the after-sales support What is the total

s tobacco to a certain cent legislation osts of selling and ntory to expected rice of P100. of revenue should

800,000 (180,000) 620,000 90,000 710,000

hen a sale is

012 and not a

over the period ed for the year

f each piece of In 2011, the Collectibility is

ent is to be made ds are delivered

he goods to retail e goods to retail

50,000 100,000 200,000 350,000

f this machine?

desks for the city schools. esks and no more than 50 per desk. During

anila. The City of nue in 2011?

ber 28, 2011,

1,250,000 1,000,000 9,000,000

Net sales 9,000,000 40,000 9,040,000

17 BIOLOGICAL ASSETS Problem 17-1 (IFRS) Forester Company on adoption of PAS 41 has reclassified certain assets as biological assets. The total value of the forest assets is P6,000,000 which comprises: Freestanding trees Land under trees Roads in forests

5,100,000 600,000 300,000 6,000,000

In Forester Company's statement of financial portion, what total amount of the forest assets shall be classified as biological assets? a. 5,100,000 b. 5,700,000 c. 5,400,000 d. 6,000,000 Solution 17-1 Answer a Only the freestanding trees shall be classified as biological assets. The land under trees and roads in forests shall be included in property, plant and equipment.

Problem 17-2 (IFRS) Colombia Company is a producer of coffee. The entity is cosidering the valuation of its harvested coffee beans. Industry practice is to value the coffee beans at market value and uses as reference a local publication "Accounting for Successful Farms". On December 31, 2011, the entity has harvested coffee beans costing P3,000,000 and with fair value less cost to sell of P3,500,000 at the point harvest. Because of long aging ang maturation process after harvest, the harvested coffee beans were still on hand on December 31, 2012. On such date, the fair value less cost to sell is P3,900,000 and the net realizable value is P3,200,000.

What is the meaasurement of the coffee beans inventory on December 31, 2012? a. 3,000,000 b. 3,500,000 c. 3,200,000 d. 3,900,000 Solution 17-2 Answer c Fair value measurement stops at the point of harvest and PAS 2 on inventory applies after such date. Accordingly, the coffee beans inventory shall be measured at the lower of cost and net realizable value on December 31, 2012. The fair value less cost to sell P3,500,000 at the point of harvest is the initial cost of coffee beans inventory for purposes of applying PAS 2. The net realizable value of P3,200,000 is the measurement on December 31, 2012 because this is lower than the deemed cost of P3,500,00.

Problem 17-3 (IFRS) Joan Company provided the following data: Value of biological asset at acquisition cost on December 31, 2011 Fair valuation surplus on initial recognition at fair value on December 31, 2011 Change in fair value to December 31, 2012 due to growth and price fluctuation Decrease in fair value due to harvest

1. What is the carrying amont of the biological asset on December 31, 2012? a. 1,400,000 b. 1,310,000 c. 1,300,000 d. 1,490,000 2. What is the gain from change in fair value of biological asset that should be reported in the 2012 income statement:

a. 100,000 b. 800,000 c. 710,000 d. 10,000 Solution 17-3 Question 1 Answer b Acquisiton cost - December 31, 2011 Increase in fair value on initial recognition Change in fair value in 2012 Decrease in fair value due to harvest Carrying amount - December 31, 2012

600,000 700,000 100,000 (90,000) 1,310,000

Question 2 Answer d Change in fair value in 2012 Decrease in fair value due to harvest Net gain

Problem 17-4 (IFRS) Salve Company is engaged in raising dairy livestock. Information regarding its activities relating to the dairy livestock is as follows: Carrying amount on January 1, 2011 Increase due to purchases Gain arising from change in fair value less cost to sell attributable to price change Gain arising from change in fair value less cost to sell attributable to physical change Decrease due to sales Decrease due to harvest What is the carrying amount of the biological asset on December 31, 2011? a. 6,950,000 b. 6,000,000 c. 8,000,000 d. 7,150,000

100,000 (90,000) 10,000

Solution 17-4 Answer a Carrying amount - January 1, 2011 Increase due to purchases Gain from change in fair value due to price change Gain from change in fair value due to physical change Decrease due to sales Decrease due to harvest Carrying amount - December 31, 2011

Problem 17-5 (IFRS) Honey Company has a herd of 10 2-year old animals on January 1, 2011. Oe animal aged 2.5 years was purchased on July 1,2011 for P108, and one animal was born on July 1,2011. No animals were sold or disposed of during the year. the fair value less cost to sell per unit is as follows: 2 - year old animal on January 1 2.5 - year old animal on Jaly 1 New born animal on July 1 2 - year old animal on December 31 2.5 - year old animal on December 31 New born animal on December 31 3 - year old animal on December 31 0.5 - year old animal on December 31

1. What fair value of the biological assets on December 31, 2011? a.1,400 b. 1,320 c. 1,440 d. 1,360 2. What is the gain from change in fair value of biological assets that should be recognized in 2011? a. 222 b. 292 c. 300 d. 332 3. What is the gain from change in fair value due to price change?

100 108 70 105 111 72 120 80

a. 292 b. 222 c. 327 d. 55

Solution 17-5 Question 1 Answer a Fair value of 3 - old animals on December 31 ( 11×P120) Fair value of 0.5-year old animals on December 31, the newborn (1 × P8 0) Total fair value - December 31,2011 Question 2 Answer b Fair value of 10 animals on January 1 ( 10 × P100 ) Acquisition cost of one animal on July 1 Total carrying amount of biological assets - December 31 Fair value on December 31, 2011 Carrying amount Gain from change in fair value Question 3 Answer d Gain from change in fair value due to price change: 10 2-year old animals ( 105 － 100 = 5 × 10 ) 1 2.5-year old animal ( 111－108 = 3 × 1 ) 1 newborn on July 1 ( 72 － 70 = 2 × 1 ) TOTAL

50 3 2 55

Gain from change in fair value due to physical change: 10 3-year old animal acquired 1/1/2011 ( 120 - 105 = 15 × 10 ) 1 3-year old animal acquired 7/1/2011 ( 120 - 111 = 9 × 1 ) 1 0.5-year old born on 7/1/2011 ( 80 - 72 = 8 × 1 ) 1 newborn (70 × 1 )

150 9 8 70

TOTAL

237

Price change Physical Change Total gain from change in fair value

55 237 292

Problem 17-6 (IFRS) Farmland Company produces milk on its farms. Thne entity produces 20% of the community's milk that consumed. Farmland Company own 5 farms and had a stock of 2,100 cows and 1,050 heifers. The farms produce 800,000 kilograms of milk a year and the average inventory held is 15,000 kilograms of milk. However, on December 31,2011 the entity is currently holding 50,000 kilograms of milk in powder. On December 31,2011, The biological assets are: Purchased before January 1, 2011 Puchased on January 1, 2011 Purchased on July 1, 2011

( 3 years old ) ( 2 years old ) ( 1.5 years old )

No animals were born or sold durin the current year. The unit fair value less cost to sell is as follows. January 1, 2011: 1-year old 2- year old

3,000 4,000

July 1, 2011: 1-year old

3,000

December 31, 2011: 1-year old 2-year old 1.5-year old 3-year old

3,200 4,500 3,600 5,000

The entity has had problems during the year. Contaminated milk was sold to customers. As a result, milk consumption has gone down. The entiy's business is spread over different parts of the country. The only region affected by the contamination was Batangas. However, the cattle in this area were unaffected by the contamination and were healthy. The entity feels that it cannot measure the fair value of the cows in the region because of the problems created by the contamination. There are 600 cows and 200 heifers in the Batangas farm and all these animals had been purchased on January 1, 2011.

1. What fair value of the biological assets on January 1, 2011? a. 9,300,000 9,600,000 8,400,000 7,200,000 2. What is the fair value of biological assets purchased on July 1, 2011? a. 2,250,000 b. 3,000,000 c. 3, 750,000 d. 3,375,000 3. What is the fair value of biological assets on December 31, 2011? a. 14, 550,000 b. 15, 750,000 c. 15,225,000 d. 11,850,000 5. What is the increase in fair value of biological assets due to physical change? a. 1,260,000 b. 1,740,000 c. 3,000,000 d. 1,440,000 Solution 17-6 Question 1 Answer a Cows which are 2 years old on 1/1/2011 ( 2,100×4,000 ) Heifers purchased which are 1 year old on 1/1/2011 ( 300 × 3,000 ) Total fair value - January 1,2011 Question 2 Answer a Heifers purchased which are 1 year old on July 1, 2011 ( 750 × 3,000 ) Question 3 Answer a

2,250,000

Cows which are 3 years old on 12/31/2011 ( 2,100 × 5,000 ) Heifers which are 2 years old on 12/31/2011 ( 300 × 4,500 ) Heifers which are 1.5 years old on 12/31/2011 ( 750 × 3,600 ) Total fair value- December 31, 2011

10,500,000 1,350,000 2,700,000 14,550,000

Question 4 Answer a Fair value - December 31, 2011 Fair value - January 1, 2011 Fair value - July 1, 2011 Increase in fair value

14,550,000 (9,300,000) (2,250,000) 3,000,000

Question 5 Answer b Increase due to price change: 2,100 × ( 5,000 - 4,000 ) 300 × ( 3,200 - 3,000 ) 750 × ( 3,200 - 3,000 ) Increase due to physical change: 2,100 × ( 5,000 - 4,500 ) 300 × ( 4,500 - 3,200 ) 750 × ( 3,600 - 3,200 )

1,050,000 60,000 150,000

1,260,000

1,050,000 390,000 300,000

1,740,000 3,000,000

Total increase in fair value

Problem 17-7 (IFRS) DairyComapny provided the following balances for the year ended December 31,2011: Cash trade and other receivables Inventories Dairy livestok - immature Dairy livestock - mature Property, plant and equipment, net Trade and othe payables Note payable - long term

500,000 1,500,000 100,000 50,000 400,000 1,400,000 520,000 1,500,000

Share capital Retained earnings - January 1 Fair value of milk produced Gain from change in fair value Inventories used Staff costs Depreciation expense Other operating expenses Income tax Expense

1,000,000 800,000 600,000 50,000 140,000 120,000 15,000 190,000 55,000

1. What is the net income for 2011? a. 650,000 b. 600,000 c. 130,000 d. 185,000 2. What is the fair value of biological assets on December 31, 2011? a. 550,000 b. 450,000 c. 500,000 d. 400,000 Solution 17-7 Question 1 Answer c Fair value of the milk produced Gain from change in fair value Total income Inventories used Staff costs Depreciation expense Other operating expenses Income before income tax Income tax Expense Net income

600,000 50,000 650,000 (140,000) (120,000) (15,000) (190,000) 185,000 (55,000) 130,000

Question 2 Answer b Dairy livestock - immature

50,000

Dairy livestock - mature Fairy value of biological assets

400,000 450,000

600,000 700,000 100,000 90,000

5,000,000 2,000,000 400,000 600,000 850,000 200,000

5,000,000 2,000,000 400,000 600,000 (850,000) (200,000) 6,950,000

was purchased on of during the year.

1,320 80 1,400

1,000 108 1,108 1,400 1,108 292

grams of milk. . On December 31,2011,

ontamination thy. The entity d by the contamination. on January 1, 2011.

2,100 cows 300 heifers 750 heifers

8,400,000 900,000 9,300,000

19 GROSS PROFIT METHOD

Problem 19-1 (AICPA Adapted) Lin Company sells its merchandise at a gross profit of 30%. On June 30, 2011, all of Lin's inventory was destroyed by fire. The following figures pertain to Lin's operations for the six months ended June 30, 2011: Net sales Beginning inventory Net purchases

8,000,000 2,000,000 5,200,000

What is the estimated cost of the destroyed inventory? a. 4,800,000 b. 2,800,000 c. 1,600,000 d. 800,000 Solution 19-1 Answer c Beginning inventory Net purchases Goods available for sale Less: Cost of sales (8,000,000 x 70%) Ending inventory destroyed by fire

2,000,000 5,200,000 7,200,000 (5,600,000) 1,600,000

In the absence of any contrary statement, the gross profit rate is based on sales. Thus, if the gross profit rate is 30% on sales, the cost ratio is 70%.

Problem 19-2 (AICPA Adapted) The following information appears in Olivia Company's records for the year ended December 31,2011:

Inventory, January 1 Purchases Purchase returns Freight In Sales Sales discounts Sales Revenue

650,000 2,300,000 80,000 60,000 3,400,000 20,000 30,000

On December 31,2011, a physical inventory revealed that the ending inventory was only P420,000. The gross profit on sales has remained constant at 30% in recent years. Olivia suspects that some inventory may have been pilfered by one of the entity's employees. On December 31,2011, what is the estimated cost of missing inventory? a 151,000 b. 165,000 c. 420,000 d. 585,000 Solution 19-2 Answer a Sales Sales Returns Net sales

3,400,000 (30,000) 3,370,000

The sales discounts are ignored for purposes of estimating inventory under the gross profit method. Inventory - January 1 Purchases Purchase returns Freight In GOODS AVAILABLE FOR SALE Cost of sales ( 70% × 3,370,000 ) Inventory - December 31 Physical inventory - December 31 COST OF MISSING INVENTORY

650,000 2,300,000 (80,000) 60,000 2,930,000 (2,359,000) 571,000 (420,000) 151,000

Problem 19-3 (AICPA Adapted) On October 31,2011, a flood at Pamel Company's only warehouse caused severe damage to its entire inventory. Based on the recent history, Pamela has a gross profit of 25 percent of sales. The following information is availabe from Pamela's records for ten months ended October 31, 2011:

Inventory - January 1 Purchases Purchase returns Sales Sales Returns Sales allowances

520,000 4,120,000 60,000 5,600,000 400,000 100,000

A physical inventory disclosed usable damaged goods which Pamela estimates can be sold for P70,000. Using the gross profit method, what is the estimated cost of goods sold for the ten months ended October 31,2011? a. 3,360,000 b. 3,830,000 c. 3,900,000 d. 3,825,000 Solution 19-3 Answer c Sales Sales Returns Net sales Cost of goods sold (75% x 5,200,000)

5,600,000 (400,000) 5,200,000 3,900,000

Like sales discounts, sales allowances are ignored in determining net sales under the gross profit method.

Problem 19-4 (AICPA Adapted) On December 31,2011, a fire at Brock Company's warehouse caused serve damage to its entire inventory. Brock Company has a gross profit of 30% on cost. The following data are available for nine months ended September 30, 2011: Inventory at January 1 Net purchases Net sales

1,100,000 6,000,000 7,280,000

A physical inventory disclosed usable damaged goods which can be sold for P 100,000. What is the estimated cost of goods sold for the nine months ended September 30, 2011? a. 5,500,000 b. 4,970,000

c. 5,096,000 d. 5,600,000 Solution 19-4 Answer d Cost of Goods sold ( 7,280,000 / 130% )

5,600,000

Problem 19-5 (AICPA Adapted) The following information is available for Tonette Company for the current year: Net sales Freight In Purchase discounts Ending Inventory

3,600,000 90,000 50,000 240,000

The gross margin is 40% of sales. What is the cost of goods available for sale? a. 1,680,000 b. 1,920,000 c. 2,400,000 d. 2,440,000 Solution 19-5 Answer c Cost of goods sold ( 60% × 3,600,000 ) Ending inventory Cost of goods available for sale

2,160,000 240,000 2,400,000

Problem 19-6 (IAA) On the night of September 30, 2011, a fire destroyed most of the merchandise inventorry of Sonia Company. All goods were completely destroyed except for partial damaged goods that normally sell for P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that normally sell for P60,000. The following data are available: Inventory, January 1 Net purchases, January 1 through September 30 Net sales, January 1 through September 30 Total

'2010

Net sales Cost of sales Gross Income

9,000,000 6,750,000 2,250,000

5,000,000 3,840,000 1,160,000

What is the estimated amount of fire loss on September 30, 2011? a. 700,000 b. 615,000 c. 630,000 d. 580,000 Solution 19-6 Answer c Average gross profit rate ( 2,250,000/9,000,000 )

25%

Inventory - January 1 Net purchases Goods available for sale Cost of sales ( 5,600,000 × 75% )

660,000 4,240,000 4,900,000 (4,200,000)

Inventory - September 30 Less: Undamaged goods ( 60,000 × 75% ) Realizable value of damaged goods Fire loss

700,000 45,000 25,000

70,000 630,000

Problem 19-7 (IAA) Cool Air Company lost 50% of its inventory by fire on December 31, 2011. No inventory had been taken on December 31, 2011. The following profit and loss data are available:

Inventory - January 1 Purchases Purchase returns Sales Sales Returns

2011 1,040,000 3,600,000 240,000 4,060,000 60,000

What is the value of the inventory destroyed by fire? a. 1,600,000 b. 1,760,000

2010 840,000 2,876,000 140,000 3,900,000 100,000

c. 800,000 d. 880,000 Solution 19-7 Answer c Sales, net 2009 and 2010 Cost of sales: Inventory - January1, 2009 Net purchases 2009 and 2010 Goods available for sale Inventory - December 31, 2010 Gross Profit Average gross profit rate ( 2,220,000/7,400,000 ) Inventory - January 1, 2011 Net purchases - 2011 Goods available for sale Cost of sales ( 70% × 4,000,000 ) Inventory - December 31, 2011 Fire loss ( 50% × 1,600,000 )

7,400,000 848,000 5,372,000 6,220,000 1,040,000

5,180,000 2,220,000 30% 1,040,000 3,360,000 4,400,000 (2,800,000) 1,600,000 800,000

Problem 19-8 (IAA) Beyonce Company sells merchandise on a consignment basis to dealers . The selling price of the merchandise averages 25% above cost. The dealer is paid a 10% commission of the sales price for all sales made. All dealer sales made on cash basis. The following consignment activities occured during 2011: Manufacturing cost of goods shipped on consignment Sales price of merchandise sold by dealers Payments remitted by dealers after deducting commission

What is the gross profit on sales? a. 2,400,000 b. 1,920,000 c. 1,700,000 d. 1,220,000 Solution 19-8 Answer b

Sales Cost of sales ( 9,600,000/ 125% ) Gross profit

9,600,000 7,680,000 1,920,000

Problem 19-9 (AICPA Adapted) Steven Company began operations in 2011. For the year ended December 31, 2011, Steven made availbale the following information: Total merchandise purchases for the year Merchandise inventory on December 31 Collection from customers

7,000,000 1,400,000 4,000,000

All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all receivables are collectible. What is the balance of accounts receivable on December 31, 2011? a. 1,000,000 b. 3,840,000 c. 5,000,000 d. 5,800,000 Solution 19-9 Answer b Purchases Inventory - December 31 Cost of goods sold Markup on cost (40% x 5,600,000) Sales (140% x 5,600,000) Collections from customers Accounts receivable - December 31

7,000,000 (1,400,000) 5,600,000 2,240,000 7,840,000 (4,000,000) 3,840,000

Problem 19-10 (AICPA Adapted) On December 31, 2011, Empress Company had a fire which completely destroyed the goods in process inventory. After the fire a physical inventory was taken. The raw materials were valued at P600,000, the finished goods at P1,000,000 and supplies at P100,000 on December 31, 2011. The inventories on January 1, 2011 consisted of the following: Finished goods

1,400,000

Goods in process Raw materials Supplies

1,000,000 300,000 400,000

Data for 2011 were: Sales Purchases Freight In Direct labor Manufacturing overhead - 50% of direct labor Average gross profit rate

3,000,000 1,000,000 100,000 800,000 ? 30%

What is the estimated cost of the goods in process on December 31, 2011 that wre completely destroyed by fire? a. 1,300,000 b. 2,100,000 c. 2,000,000 d. 1,700,000 Solution 19-10 Answer a Raw materials - January 1 Purchases Freight In Raw materials available for use Less: Raw materials - December 31 Raw materials used Direct labor Manufacturing overhead (50% x 800,000) Total manufacturing cost Add: Goods in process - January 1 Total goods in process Less: Goods in process - December 31 (SQUEEZE) Cost of goods manufactured Add: Finished goods - January 1 Goods available for sale Less: Finished goods - December 31 Cost of sales (70% x 3,000,000)

1,000,000 100,000

The amount of goods in process on December 31, 2011 is "squeezed" by simply working back from the cost of sales.

Problem 19-11 (AICPA Adapted) In conducting an audit of Romy Company for the year ended June 30, 2011, the entity's CPA observed the physical inventory at an transaction date, May 31, 2011. The following information was obtained: Inventory, July 1, 2010 Physical inventory, May 31, 2011 Sales for 11 months ended May 31, 2011 Sales for year ended June 30, 2011 Purchases for 11 months ended May 31, 2011 Purchases for year ended June 30, 2011 a. Shipments received in May and included in the physical inventory but recorded at June purchases b. Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not been received nor had chargebacks to vendors been recorded Total at May 31, 2011 Total at June 30, 2011 (including the May unrecorded Chargebacks) c. Deposit made with vendor and charged to purchases in April, 2011. Product was shipped in July, 2011. d. Deposit made with vendor and charged to purchases in May, 2011. Product was shipped FOB destination, on May 29, 2011 and was included in May 31, 2011 physical inventory as goods in transit. e. Through the carelessness of the receiving department a June shipment was damaged by rain. This shipment was later sold in June at its cost of 1. What is the cost of goods for the month of June 2011? a. 980,000 b. 960,000 c. 880,000 d. 780,000 2. What is the June 30, 2011 inventory? a. 1,240,000 b. 1,140,000 c. 1,160,000

875,000 950,000 8,400,000 9,600,000 6,750,000 8,000,000

d. 1,340,000 Solution 19-11 Question 1 - Answer a

Balances a b c d Adjusted

Physical inventory May 31, 2011 950,000 (55,000) 895,000

Inventory - July 1, 2010 Purchases up to May 31, 2011 Goods available for sale Inventory - May 31, 2011 Cost of goods sold Sales up to May 31, 2011 Cost of goods sold Gross profit Rate (l1,680,000/8,400,000) Sales for June (9,600,000 - 8,400,000) Cost of goods sold with profit (1,100,000x80%) Cost of goods sold without profit Cost of goods sold during June 2011

Purchases up to May 31, 2011 6,750,000 75,000 (10,000) (20,000) (55,000) 6,740,000

Purchases up to June 30, 2011 8,000,000 (15,000) (20,000) 7,965,000 875,000 6,740,000 7,615,000 (895,000) 6,720,000 8,400,000 (6,720,000) 1,680,000 20% 1,200,000 880,000 100,000 980,000

Question 2- Answer b Inventory, July 1, 2010 Purchases for year ended June 30, 2011 (as adjusted) Goods available for sale Less: Cost of goods sold Sales with profit (9,500,000x80%) Sales without profit Inventory, June 30, 2011

7,600,000 100,000

Problem 19-12 (AICPA Adapted) On April 30, 2011, a fire damaged the office of Amaze Company. The following balances were gathered

from the general ledger on March 31, 2011: Accounts receivable Inventory - January 1, 2011 Accounts payable Sales Purchases

920,000 1,880,000 950,000 3,600,000 1,680,000

● An examination of the April bank statement and canceled checks revealed checks written during the period April-30 as follows: Accounts payable as of March 31 April merchandise shipments Expenses

240,000 80,000 160,000

Deposits during the same period amounted to P440,000 which consisted of collections from customers with the exception of P20,000 refund from a vendor for merchandise returned in April. ● Customers acknowledged indebtedness of P1,040,000 at April 30. Customers owed another P60,000 that will never be recovered. Of the acknowledged indebtedness, P40,000 may prove uncollectible. ● Correspondence with suppliers revealed unrecorded obligations at April 30, of P340,000 for April merchandise shipment, including P100,000 for shipments in transit on that date. ● The average gross profit rate is 40%. ● Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of the inventory was a total loss. What is the fire loss on April 30? a. 1,440,000 b. 1,300,000 c. 1,200,000 d. 1,340,000 Solution 19-12 Answer c Accounts receivable - April 30 Writeoff Collections from customers (440,000-20,000) Total Less: Accounts receivable - March 31 Sales for April Sales up to March 31

1,040,000 60,000 420,000 1,520,000 (920,000) 600,000 3,600,000

Total Sales Accounts payable - April 30 for April shipments Payment for April merchadise shipments Purchases of April Purchases up to March 31 Total purchases Inventory - January 1 Purchases Purchase returns Goods available for sale Cost of sales (4,200,000 x 60%) Inventory - April 30 Less: Goods in transit Salvage value Fire loss

4,200,000 340,000 80,000 420,000 1,680,000 2,100,000 1,880,000 2,100,000 (20,000) 3,960,000 (2,520,000) 1,440,000 100,000 140,000

(240,000) 1,200,000

mber 31,2011:

hat some inventory the estimated

e to its entire inventory.

ber 31, 2011:

hs ended October 31,2011?

ross profit method.

entire inventory. nine months ended

y of Sonia Company. l for P100,000 and ly sell for P60,000.

660,000 4,240,000 5,600,000 '2009

'2008

3,000,000 2,200,000 800,000

1,000,000 710,000 290,000

2009 848,000 2,836,000 200,000 3,620,000 20,000

ce of the merchandise sales made. All dealer

8,800,000 9,600,000 6,300,000

en made availbale

d all receivables are

oods in process

es at P100,000

300,000 1,100,000 1,400,000 (600,000) 800,000 800,000 400,000 2,000,000 1,000,000 3,000,000 (1,300,000) 1,700,000 1,400,000 3,100,000 (1,000,000) 2,100,000

g back from the

CPA observed was obtained:

75,000

10,000 15,000 20,000

55,000

100,000

Purchases up to June 30, 2011 8,000,000 (15,000) (20,000) 7,965,000

s were gathered

875,000 7,965,000 8,840,000

(7,700,000) 1,140,000

20

RETAIL METHOD Problem 20-1 (AICPA Adapted) On December 31, 2011, the following information was available from Huff Company's accounting records:

Inventory, January 1 Purchases Additional markups Available for sale

Cost 735,000 4,165,000 4,900,000

Retail 1,015,000 5,775,000 210,000 7,000,000

Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the approximate lower of average cost of market retail method, what is the inventory on December 31, 2011? a. 1,540,000 b. 1,400,000 c. 1,078,000 d. 980,000 Solution 20-1 Answer d

Available for sale Markdowns Sales Inventory - December 31 Conservatives cost ratio (4,900/7,000) Inventory - December 31 at cost

Cost 4,900,000

The approximate lower of average cost or market retail method is the same as the consevative or conventional retail approach.

Problem 20-2 (AICPA Adapted)

Dean Company uses the retail inventory method to estimate its inventory. Data relating to the inventory computation on December 31, 2011 are as follows: Cost 720,000 4,080,000

Inventory, January 1 Purchases Net markups Sales Estimated normal shoplifting losses Net markdowns

Under the average cost retail method, what is the estimated inventory on December 31, 2011? a. 408,000 b. 600,000 c. 360,000 d. 384,000 Solution 20-2 Answer d Cost 720,000 4,080,000

Inventory - January 1 Purchases Net markups Available for sale - average Cost ratio ((4,800,000/8,000,000) 60% Net markdowns Available for sale - average Cost ratio (4,800,000/7,500,000) 64% Sales Estimated shoplifting losses Inventory - December 31 Consevative cost (600,000 x 60%) Average cost (600,000 x 64%)

4,800,000

4,800,000

360,000 384,000

The requirement is the average cost approach.

Problem 20-3 ( IAA )

Caramel Company uses the average retail inventory method. On December 31, 2011, the following information relating to the i Cost

Retail

Inventory - January 1 Purchases Purchase discounts Freight in Markups Markdowns Sales Sales return Sales discount Sales allowance

190,000 2,990,000 40,000 150,000

450,000 4,350,000

300,000 400,000 4,400,000 100,000 50,000 30,000

What is the estimated cost of the inventory on December 31, 2011? a. 400,000 b. 280,000 c. 245,000 d. 315,000 Solution 20-2 Answer b

Inventory - January 1 Purchases Purchase discounts Freight in Markups Markdowns GAS - Average ( cost ratio - 70% ) Net sales ( 4,400,000 - 100,000 ) Ending Inventory at retail Average cost ( 400,000× 70% )

Cost 190,000 2,990,000 (40,000) 150,000

3,290,000

Retail 450,000 4,350,000

300,000 (400,000) 4,700,000 (4,300,000) 400,000

280,000

Note that the sales discount and sales allowance are ignored in determining the net sales under the retail method.

Problem 20-4 (PHILCPA Adapted) Diane Company's inventory records showed the following information on December 31, 2011: Cost

Inventory - January 1 Sales Purchases Freight in Markup Markup cancelation Markdown Markdown cancelation Estimated normal shrinkage in 2.5% of sales

560,000 4,960,000 150,000

Diane uses the average cost retail inventory method in estimating the value of its inventory. What is the estimated cost of inventory on December 31, 2011? a. 460000 b. 877,500 c. 990000 d. 897,000 Solution 20-3 Answer d

Inventory - January 1 Purchases Freight in Markup Markup cancelation Available for sale - conservative Cost ratio (5,670 / 12,600 ) Markdown Markdown cancelation Available for sale - average Cost ratio (5,670 / 12,600 )

Cost 560,000 4,960,000 150,000

5,670,000 45%

5,670,000 46%

Sales Shrinkage (10,000,000× 2.5 % ) Inventory - December 31 Consevative cost ( 1,950,000 × 45% )

877,500

Average cost ( 1,950,000 × 46% )

897,000

Problem 20-5 (AICPA Adapted)

Hutch Company uses thne average cost retail inventory method to account for inventory. The following information relates to o for the current year: Cost 6,000,000

Beginning inventory and purchases Net markups Net marktowns Sales

What is the amount should be reported as cost of sales for the current year? a. 4,800,000 b. 4,875,000 c.5,200,000 d. 5,250,000 Solution 20-5 Answer c

Beginnning inventory and purchases Net markups Net marktowns Goods available for sale Cost ratio (6,000/9,000 ) Sales Ending Inventory

Cost 6,000,000

6,000,000 66 2/3%

Average cost ( 1,200,000×66 2/3% ) Goods available for sale Ending inventory Cost of sales

Problem 20-6 (PHILCPA Adapted) On January 1, 2011 the stock inventory of Ron Company was P1,000,000 at the retail and P560,000 at cost. During the current year, the entity registered the following purchases: Cost Retail price

4,000,000 6,200,000

Original Markup

2,200,000

The total net sales was P5,400,000. The following reductions were made in the retail price: To meet price competition To dispose of overstock Miscellaneous reductions

50,000 30,000 120,000

During the current year, the selling price of a certain inventory increased from P200 to P300. This additonal markup applied to 5,000 items but was later canceled on the remaining 1,000 items. What is the inventory on December 31,2011 using the average cost retail method? a.2,000,000 b. 2,400,000 c. 1,240,000 d. 1,200,000

Solution 20-6 Answer c

Inventory - January 1 Purchases Markup Markdown cancelation (1,000 × P100 ) Goods available Markdowns (reduction in retail price) Goods available - average Net sales Inventory - December 31 Consevative cost ( 60% × 2,000,000) Average cost (62% × 2,000,000)

Cost 560,000 4,000,000

60%

4,560,000

62%

4,560,000

1,200,000 1,240,000

Problem 20-7 ( IAA ) Airborne Company uses the cost retail inventory method. The following information is available for the year ended December 31, 2011.

Inventory - January 1

Net purchases Departmental transfer - credit Net markup Inventory shortage - sales price Employee discounts Sales ( including sales of P400,000 of items which were marked down from P500,000)

What is the estimated cost of the inventory on December 31, 2011? a. 1,950,000 b. 2,600,000 c.1,924,000 d.2,250,000 Solution 20-7 Answer a

Inventory - January 1 Net purchases Departmental transfer - credit Net markup Markdown (500,000 - 400,000) Goods available for sale (75%)

Cost 1,650,000 3,725,000 (200,000)

5,175,000

Sales Inventory shortage - sales price Employee discounts Inventory - December 31 Average cost (2,600,000× 75% )

Retail 2,200,000 4,950,000 (300,000) 150,000 (100,000) 6,900,000 (4,000,000) (100,000) (200,000) 2,600,000

1,950,000

Problem 20-8 (AICPA Adapted) Union Company uses the FIFO retail method of inventory valuation. The following information is available:

Beginning inventory Purchases Net additional markups Net markdowns

Cost 600,000 3,000,000

Retail 1,500,000 5,500,000 500,000 1,000,000

Sales revenue

4,500,000

What is the estimated cost of ending inventory? a. 1,200,000 b. 1,040,000 c. 1,000,000 d. 960,000 Solution 20-8 Answer a Cost 600,000 3,000,000

Beginning inventory Purchases Net markups Net markdowns Net purchases Cost ratio (3,000,000/5,000,000) 60% Goods available for sale Sales Ending inventory FIFO cost (2,000,000 x 60%)

3,000,000

Retail 1,500,000 5,500,000 500,000 (1,000,000) 5,000,000

3,600,000

6,500,000 (4,500,000) 2,000,000

1,200,000

Problem 20-9 (IAA) Groom Company uses the FIFO retail method of inventory valuation. The following information is available for the current year:

Inventory - January 1 Net purchases Net markups Net markdowns Net sales

Cost 1,200,000 4,200,000

What is the estimated cost of ending inventory? a. 1,400,000 b. 1,550,000 c. 1,440,000

Retail 1,500,000 5,900,000 200,000 100,000 5,500,000

d. 1,460,000 Solution 20-9 Answer b

Inventory - January1 80% Purchases Net markups Net markdowns Net purchases (4,200/6,000) 70% Goods available for sale Sales FIFO inventory - 12/31 (2,000,000x70%) Inventory - January 1 Increase (70%x500,000) LIFO inventory - 12/31

Cost 1,200,000 4,200,000

4,200,000 5,400,000 1,400,000 1,200,000 350,000 1,550,000

Retail 1,500,000 5,900,000 200,000 (100,000) 6,000,000 7,500,000 (5,500,000) 2,000,000 1,500,000 500,000 2,000,000

Retail 7,000,000 (70,000) (5,530,000) 1,400,000 70% 980,000

Retail 1,000,000 6,300,000 700,000 6,820,000 80,000 500,000

Retail 1,000,000 6,300,000 700,000 8,000,000 (500,000) 7,500,000 (6,820,000) (80,000) 600,000

formation relating to the inventory was gathered:

Retail

1,400,000 10,000,000 10,320,000 1,000,000 120,000 500,000 100,000

Retail 1,400,000 10,320,000 1,000,000 (120,000) 12,600,000 (500,000) 100,000 12,200,000

(10,000,000) (250,000) 1,950,000

ng information relates to operations

Retail 9,200,000 400,000 600,000 7,800,000

Retail 9,200,000 400,000 (600,000) 9,000,000 (7,800,000) 1,200,000 800,000 6,000,000 (800,000) 5,200,000

Retail 1,000,000 6,200,000 500,000 (100,000) 7,600,000 (200,000) 7,400,000 (5,400,000) 2,000,000

Cost 1,650,000

Retail 2,200,000

3,725,000 200,000

4,950,000 300,000 150,000 100,000 200,000 4,000,000

21 FINANCIAL ASSETS AT FAIR VALUE

Problem 21-1 (IFRS) Raiza Company acquired a financial asset at its market value of P3,200,000. Broker fees of P200,000 were incurred in relation to the purchase. At what amount should the financial asset initially be recognized respectively if it is classified as at fair market value through profit or loss, or as available for sale? a. 3,400,000 and 3,200,000 b. 3,200,000 and 3,200,000 c. 3,200,000 and 3,400,000 d. 3,400,000 and 3,400,000 Solution 21-1 Answer c Financial asset at fair value through profit or loss Financial asset classified as available for sale (3,200,000 + 200,000)

3,200,000

3,400,000

Under PAS 39, paragraph 43, any transaction cost is not included as part of the initial measurement of a financial asset at fair value through profit or loss. Actually, a financial asset at fair value through profit or loss is classified as held for "trading". However, any transaction cost is included as part of the initial measurement of a financial asset classified as "available for sale". Under PFRS 9, the term "available for sale is now eliminated. The equivalent term is "financial asset at fair value through other comprehensive other income".

Problem 21-2 (IFRS) On January 1, 2011, Alexis Company purchased marketable equity securities to be hels as "trading" for P5,000,000. The entity also paid commission, taxes, and other transaction costs amounting to P200,000. The securities had a market value of P5,500,000 on December 31, 2011 and the transaction costs that would be incurred on sale are estimated at P110,000. No securities were sold during 2011. What amount of unrealized gain or loss on these securities should be reported in the 2011 income statement? a. 500,000 unrealized gain b. 500,000 unrealized loss c. 300,000 unrealized gain

d. 400,000 unrealized gain Solution 21-2 Answer a Fair Value Acquisition cost -- Trading Unrealized gain -- included in profit or loss

5,500,000 5,000,000 500,000

The transaction costs that would be incurred on sale are ignored because the financial asset held for trading is measured at fair value and not at fair value less cost to sell.

Problem 21-3 (IFRS) Carmela Company acquired a financial instrument for P4,000,000 on March 31,2011. The financial instrument is classified as financial asset at fair value through other comprehensive income. The direct acquisition costs incurred amounted to P700,000. On December 31, 2011, the fair value of the instrument was P5,500,000 and the transaction costs that would be incurred on the sale of the investment are estimated at P600,000. What gain should be realized in other comprehensive income for the year ended December 31, 2011? a. 200,000 b. 900,000 c. 800,000 d. 0 Solution 21-3 Answer c Fair value -- December 31, 2011 Acquisition cost (4,000,000 + 700,000) Unrealized gain -- other comprehensive income

5,550,000 4,700,000 800,000

The transaction costs of P600,000 that would be incurred on the sale of the investment are ignored because the financial asset is measured at fair value and not at fair value less cost to sell. Problem 21-4 (AICPA Adapted) On December 31, 2011, Fay Company appropriately reported a P100,000 unrealized loss. There was no change in 2012 in the composition in the portfolio of marketable equity securities held as financial asset at fair value through other comprehensive income. Pertinent data are as of follows: Market value Security Cost December 31, 2012

A B C

1,200,000 900,000 1,600,000

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

3,700,000

3,300,000

What amount of loss on these securities should be included in the statement of comprehensive income for the year ended December 31, 2012 as component of other comprehensive income? a. 400,000 b. 300,000 c. 100,000 d. 0 Solution 21-4 Answer b Market value -- (12/31/2012) Market value -- 12/31/2011 (3,700,000 - 100,000) Unrealized loss in 2012 Unrealized loss -- 12/31/2011

3,300,000 3,600,000 ( 300,000 ) ( 100,000 )

Cumulative unrealized loss -- 12/31/2012

( 400,000 )

Only the unrealized loss of P300,000 is shown in the 2012 statement of comprehensive income as component of other comprehensive income. However, the cumulative unrealized loss P400,000 would appear in the statement of changes in equity.

Actually, if the investment is held as financial asset at fair value through other comprehensive income, the total or cumulative unrealized gain or loss is always the difference between the market value and the original acquisition cost. Market value -- December 31, 2012 Acquisition cost

3,300,000 3,700,000

Cumulative unrealized loss -- December 31, 2012

( 400,000)

Problem 21-5 (AICPA Adapted) During 2011, Garr Company purchased marketable equity securities as trading investment. For the year ended December 31, 2011, the entity recognized an unrealized loss of P230,000. There were no security transactions during 2012. Pertinent information on December 31, 2012 is as follows: Security

Cost

Market value

A B

2,450,000 1,800,000 4,250,000

2,300,000 1,820,000 4,120,000

In the 2012 income statement , what amount should be reported as unrealized gain or loss? a. b. c. d.

Unrealized gain of P100,000 Unrealized loss of P100,000 Unrealized loss of P130,000 Unrealized gain of P130,000

Solution 21-5 Answer a Market value -- 12/31/12 Market value -- 12/31/11 (4,250,000 - 230,000)

4, 120,000 4, 020,000

Unrealized gain in 2012

100,000

Problem 21-6 (IAA) Lagoon Company purchased the following securities during 2011: Classification

Security A Security B

Trading Trading

Cost

900,000 1,000,000

Market value December 31, 2011 1,000,000 1,600,000

On the July 31, 2012 the entiry sold all of the shares of Security B for a total of P1,100,000. On December 31, 2012, the shares of Security A had a market value of P600,000. No other acitivity occurred during 2012 in relation to the trading security portfolio. What is the gain or loss on the sale of Security B on July 31, 2012? a. b. c. d.

500,000 gain 500,000 gain 100,000 loss 100,000 loss

Solution 21- 6 Answer b Sale price of Security B Carrying amount of Security B -- December 31, 2011 Loss on sale of trading securities

1,100,000 1,600,000 ( 500,000)

Problem 21-7 (AICPA Adapted) During 2011, Latvia Company purchased trading securities with the following cost and market value on Decemebr 31, 2011: Security A - 1,000 shares B - 10,000 shares C - 20,000 shares

Cost 200,000 1,700,000 3,100,000

Market value 300,000 1,600,000 2,900,000 5,000,000

4,800,000

Latvia sold 10,000 shares of Security B on January 15, 2012, for P130 per share, incurring P50,000 in brokage commission and taxes. What amount should be reported as loss on sale of trading investment in 2012? a. b. c. d.

450,000 400,000 300,000 350,000

Solution 21-7 Answer d Sale price (10,000 x P130) Less: Commission and taxes

1,300,000 50,000

Net sale price Less: Carrying amount of B shares on 12/31/2011

1,600,000

Loss on sale of trading investment

( 350,000)

Problem 21-8 (IAA) On January 1, 2011, Lebanon Company purchased equity securities to be held as "at fair value through other comprehensive income". On December 31, 2011, the cost and market values were:

Security X Security Y Security Z

Cost 2,000,000 3,000,000 5,000,000

Market 2,400,000 3,500,000 4,900,000

On July 1, 2012, Lebanon sold Security X for P2,500,000. What amount of gain on sale of financial asset should be reported in the 2012 income statement?

a. 500,000 b. 100,000 c. 400,000 d. 0 Solution 21-8 Answer b Sale price Carrying amount of Security X Gain on sale of financial asset

2,500,000 2,400,000 100,000

The Application Guidance of PFRS 9, paragraph B5.12, provides that amounts recognized in other comprehensive income are not subsequently transferred to profit or loss. The cumulative gain or loss may however be transferred within equity, meaning retained earnings. Problem 21-9 (IAA) On January 1, 2011, Caraga Company purchased equity securities to be held as financial assets measured "at fair value through other comprehensive income". The cost and market values were: Cost Security R Security S Security T

3,000,000 4,000,000 5,000,000

Market -- 12/31/2011 3,200,000 3,500,000 4,600,000

On January 31, 2012, Caraga Company sold Security R for P3,500,000. What unrealized gain or loss on the remaining financial assets ahould be reported in the 2012 statement of comprehensive income as component of other comprehensive income? a. b. c. d.

600,000 gain 600,000 loss 300,000 gain 300,000 loss

Solution 21-9 Answer c Fair value of S and T -- December 31, 2012 Fair value of S and T -- December 31, 2011

8,400,000 8,100,000

Unrealized gain in 2012 Unrealized loss on S and T -- December 31, 2011 (9,000,000 - 8,100,000) Cumulative unrealized loss -- December 31, 2012

( 900,000 ) ( 600,000 )

The unrealized gain of P300,000 is shown in the 2012 statement of comprehensive income as component of other comprehensive income. However, cumulative unrealized loss of P600,000 would appear in the statement of changes in equity. Problem 21- 10 (IAA) During 2011, Little Company purchased trading securities as a short-term investment. The cost of securities and their market value on December 31, 2011 follow: Security A B C

Cost 650,000 1,000,000 2,200,000

Market value 750,000 540,000 2,260,000

Before any adjustment related to these trading securities, Little had net income of P3,000,000 for 2011. What is the net income after making any necessary trading security adjustment? a. b. c. d.

3,000,000 2,700,000 3,300,000 2,540,000

Solution 21-10 Answer b Total market value Total cost Unrealized loss on trading securities Net income before adjustment Unrealized loss on trading securities Adjusted net income

3,550,000 3,850,000 ( 300,000) 3,000,000 ( 300,000) 2,700,000

Problem 21-11 (IAA) On January 1, 2011, Remington Company acquired 200,000 ordinary shares of Universal Company for P9,000,000. At the time of purchase, Universal Company had outstanding 800,000 shares with a carrying amount of P36,000,000. On December 31, 2011, the following events took place: * Universal Company reported net income of P1,800,000 for the calendar year 2011. * Remington Company received from Universal Company dividend of P0.75 per ordinary share. * The market value of Universal Company share had temporarily declined to P40. Remington Company has elected to measure the investment at fair value through other comprehensive income. What is the carrying of the investment on December 31, 2011?

a. b. c. d.

9,000,000 8,000,000 9,300,000 9,450,000

Solution 21-11 Answer b Market value 12/21/2011 (200,000 x 40) Acquisition cost Unrealized loss on financial asset

8,000,000 9,000,000 (1,000,000)

Although the interest is 25%, 200,000 shares divided by 800,000 shares, the equity method is not applied because the investment is classified as financial asset at fair value through other comprehensive income. The unrealized loss on the financial asset of P1,000,000 is shown in the statement of comprehensive income as component of other comprehensive income. Problem 21-12 (AICPA Adapted) Neal Company held the following financial assets as trading investments on December 31, 2011:

Cost 100,000 shares of Company A nonredeemable preference share capital, par value P75 7,000 shares of Company B preference share capital, par value P100, subject to mandatory redemption by the issuer at par on December 31, 2012

775,000

690,000

625,000 1,465,000

1,450,000

In the December 31, 2011 statement of financial position, what should be reported as carrying amount of the investments? a. b. c. d.

1,400,000 1,450,000 1,465,000 1,475,000

Solution 21-12 Answer b

The nonredeemable preference share is an equity security. The redeemable preference share is a debt security. Whether equity or debt security, financial assets held for trading are carried at fair value. Problem 21-13 (AICPA Adapted) Information regarding Trinidad Company's portfolio of financial assets at fair value through other comprehensive income is as follows: Aggregated cost -- December 31, 2011 Unrealized gains -- December 31, 2011 Unrealized losses -- December 31, 2011 Unrealized gains during 2011

1,700,000 40,000 260,000 300,000

On January 1, 2011, Trinidad reported an unrealized losses of P15,000 as a component of other comprehensive income. In its 2011 statement of changes in equity, Trinidad Company should report what amount of unrealized loss on these securities? a. 260,000 b. 220,000 c. 205,000 d. 0 Solution 21-13 Answer b Unrealized losses Unrealized gains Net unrealized losses -- December 31, 2011 Unrealized loss -- January 1, 2011 Increase in unrealized loss

260,000 40,000 220,000 15,000 205,000

The increase in unrealized loss of P205,000 is reported in the statement of comprehensive income as component of other comprehensive income. However, the 2011 statement of changes in equity should report the cumulative unrealized loss of P220,000. Incidentally, the net realized gains represent the gains from the financial assets that are actually sold and should shown in the statement of comprehensive income as component of profit or loss. Problem 21-14 (AICPA Adapted)

The following information was extracted from the December 31, 2011 statement of financial position of Gil Company: Noncurrent assets: Financial asset at fair value

3,700,000

Shareholder's equity: Unrealized loss on financial asset

( 300,000)

Gil Company paid transaction cost of P100,000 related to the acquisition of the investment. This amount is capitalized as part of the cost of the investment. The entity elected to measure the financial asset at fair value through other comprehensive income. What was the historical cost of the financial asset? a. b. c. d.

3,700,000 3,400,000 3,900,000 4,000,000

Solution 21-13 Answer d Historical cost (3,700,000 + 300,000)

4,000,000

Problem 21- 15 (AICPA Adapted) On July 1, 2011, Bellirose Company purchased P1,000,000 face value 8% bonds for P910,000 plus accrued interest to yield 10%. The bonds mature on January 1, 2018, pay interest annually on January 1, and are classified as trading securities. On December 31, 2011, the bonds had a market value of P945,000. On February 13, 2012, Bellirose Company sold the bonds for P920,000. On December 31, 2011 what amount should be reported for short-term investments in trading debt securities? a. b. c. d.

910,000 920,000 945,000 950,000

Solution 21-15 Answer c Financial asset fair value

945,000

Problem 21-16 (PAS 39) On January 1, 2011 Agustin Company purchased bonds with face value of P5,000,000 to be held as "available for sale". The entity paid P4,600,000 plus transaction costs of P142,000. The bonds mature

on December 31, 2013 and pay 6% interest annually on December 31 each year with 8% effective yield. The bonds are quoted at 105 on December 31, 2011 and 110 on December 31, 2012. What amount of cumulative unrealized gain on these bonds should be reported in the 2012 statement of changes in equity? a. 500,000 b. 250,000 c. 592, 931 d. 164, 291 Solution 21-16 Answer c Date 1/1/2011 12/31/2011 12/31/2012 12/31/2013

Interest received

300,000 300,000 300,000

Interest income

Discount Amortization

379,360 385,709 392,931

79,360 85,709 92,931

The interest received is equal to 6% multiplied by the face value. The interest income is equal to 8% multiplied by the carrying amount. Market value - 12/31/2011 (5,000,000 x 105) Carrying amount - 12/31/2011

4,821,360

Unrealized gain - December 31, 2011

428,640

Market value-- 12/31/2012 (5,000,000 x 110) Carrying amount-- 12/31/2012 Cumulative unrealized gain -- December 31, 2012

(4,907,069) 592,931

Under PFRS 9, bonds cannot be classified anymore as "available for sale". Bonds can be classified only as "financial assets amortized cost" or may be designated as financial assets "at fair value through profit or loss".

able for sale?

surement of a ough profit or

asset classified

ncial asset at

trading" for to P200,000.

What amount

inancial instrudirect acquistrument was re estimated

000 )

0,000

alue through

1,250,000

Market -- 12/31/2012 -3,700,000 4,700,000

300,000

3,550,000

3,000,000

is not applied nsive income.

Market value

825,000

1,450,000

Carrying amount

mortization

4,742,000 4,821,360 4,907,069 5,000,000

5,250,000

5,550,000

22 INVESTMENT IN EQUITY SECURITIES Problem 22-1 (AICPA Adapted) On January 1, 2011, ABC Company purhased 40,000 shares of RST at P100 per share. The investment in measurement at fair value through other comprehensive income. Brokerage fees measured to P120,000. A P5 dividend per share of RST had been declared on December 15, 2010 to be paid on March 31, 2011 to shareholders of record on January 31, 2011. No other transactions occurred in 2011 affecting the investment in RST shares. What is the initial measurement of the investment? a. b. c. d.

4,120,000 4,000,000 3,920,000 3,800,000

Solution 22-1 Answer c Purchase price (40,000 x 100) Brokerage Total Less: Purchased dividend (40,000 x 5) Cost of investment

4,000,000 120,000 4,120,000 200,000 3,920,000

The stock was purchased dividend-on, because the date of purchase is January 1, 2011 and dividends were declared on December 15, 2010 to shareholders of record on January 31, 2011. The purchased dividend is excluded from the cost if investment. Problem 22-2 (AICPA Adapted) On January 1, 2011, Adam Company purchased a long-term investment 100,000 ordinary shares of Mill Company for P40 a share. On December 31, 2011, the market price of Mill's share was P35, reflecting a temporary decline in market price. On December 28, 2012, Adam sold 80,000 shares of Mill Company for P30 a share. For the year ended, December 31, 2012, what amount should be reported as loss on disposal of long-term investment? a. 1,000,000 b. 900,000 c. 800,000

d. 400,000

Solution 22-1 Answer c Sales price (80,000 x 30) Cost of investment sold (80,000 x 40)

2,400,000 (3,200,000)

Loss on disposal of investment

( 800,000)

Problem 22-3 (AICPA Adapted) Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on February 15, 2011. Cobb received a stock dividend of P2,000 shares on March 31, 2011, when the carrying amount per share on Roe's books was P350 and the market value per share was P400. Roe paid a cash dividend of P15 per share on September 15, 2011. In the income statement for the year ended Ocotober 31, 2011, what amount should Cobb reported as dividend income? a. b. c. d.

980,000 880,000 180,000 150,000

Solution 23-3 Answer c Original shares Stock dividend

10,000 2,000

Total shares

12,000

Dividend income (12,000 x P15)

180,000

Problem 22-4 (PHILCPA Adapted) During 2011, Lawan Company bought the shares of Burwood Company as follows: June 1 December 1

20,000 shares @ 100 30,000 shares @ 120

The transactions for 2012 are:

January January December

10 20 10

Received cash dividend at P10 per share. Received 20% stock dividend. Sold 30,000 shares at P125 per share.

3,600,000

If the FIFO approach is used, what is the gain on the sale of the shares? a. 1,150,000 b. 950,000 c. 150,000 d. 550,000 Solution 22-4 Answer a FIFO approach

June 1

Original shares Stock dividend -- 20% Total shares

20,000 4,000 24,000

Sale price (30,000 x 125) Cost of shares sold: From June 1 (24,000 shares) From December 1 (6,000 shares) (6,000/36,000 x 3,600,000) Gain on sale

December 1 30,000 6,000 36,000 3,750,000

2,000,000 600,000

2,600,000 1,150,000

Average approach Sale price Cost of shares sold (30,000/ 60,000 x 5,600,000) Gain on sale

3,750,000 2,800,000 950,000

Problem 22-5 (AICPA Adapted) Wood Company owns 20,000 shares of Arlo Company's 200,000 shares of P100 par, 6% cumulative, nonparticipating preference share capital and 10,000 shares representing 2% ownership of Arlo's ordinary share capital. During 2011, Arlo declared and paid preference dividends of P2,400,000. No dividends has been declared or paid during 2010. In addition, Wood received a 5% stock dividend on ordinary share from Arlo when the quoted market price of Arlo's ordinary share was P10. What amount should Wood report as dividend income in its 2011 income statement? a. b. c. d.

120,000 125,000 240,000 245,000

Solution 22- 5 Answer c

Dividend income on preference share (20,000/200,000 = 10% x 2,400,000)

240,000

Problem 22-6 (AICPA Adapted) Day Company received dividends from its share investments during the year ended December 31, 2011 as follows: •

A stock dividend of P4,000 shares from Parr Company on July 31, 2011 when the market price of Parr's share was P20. Day owns less than 1% of Parr's share capital. of P150,000 from Lark Company in which Day owns a 25% interest. A ma• A cash dividend jority of Lark's director are also directors of Day. What amount of dividend revenue should Day report in its 2011 income statement? a. 230,000 b. 150,000 c. 80,000 d. 0 Solution 22-6 Answer d The stock dividend from Parr Company is not an income. The cash dividend from Lark Company is not also an income because the interest is 25% and therefore the equity method is used. Problem 22-7 (AICPA Adapted) Wray Company provided the following data for 2011:

• •

•

On September 1, Wray received a P500,000 cash dividend from Seco Company in which Wray owns a 30% interest. On October 1, Wray received a P60,000 liquidating dividend from King Company, Wray owns a 5% interest in King. Wray owns a 2% interest in Bow Company, which declared a P2,000,000 cash dividend on November 15, 2011 payable on January 15, 2012.

What amount should Wray report as dividend income for 2011? a. b. c. d.

600,000 560,000 100,000 40,000

Solution 22-7 Answer d

Cash dividend from Bow Company (2% x 2,000,000)

40,000

The cash dividend from Seco and the liquidating dividend from King are not income but reduction of the investment account. Problem 22-8 (AICPA Adapted) During 2011, Neil Company held 30,000 shares of Brock Company's 100,000 outstanding shares and 6,000 shares of Amal Company's 300,000 outstanding shares. During the year, Neil received P300,000 cash dividend from Brock, P15,000 cash dividend and 3% stock dividend from Amal. The closing price of Amal share is P150. What amount should be reported as dividend revenue for 2011? a. 342,000 b. 315,000 c. 442,000 d. 15,000 Solution 22-8 Answer a Cash dividend from Amal (6,000/300,000 = 2% interest)

15,000

The cash dividend of P300,000 from Brock Company is not an income because the interest is 30% and therefore the equity method is used. Problem 22-9 (AICPA Adapted) On March 1, 2011 Evan Company purchased 10,000 ordinary shares of LV at P80 per share. On September 30, 2011, Evan received 10,000 stock rights to purchase an additional 10,000 shares at P90 per share. The stock rights had an expiration date on February 1, 2012. On September 30, 2011, LVC's share had a market value P95 and the stock right has a market value of P5. What amount should Evan report in its September 30, 2011 statement of financial position for investment in stock rights? a. 150,000 b. 100,000 c. 50,000 d. 60,000 Solution 22-9 Answer c Initial measurement of stock rights (10,000 rights x 5 ) Under PFRS 9, stock rights are now initially measured at fair value. Problem 22-10 (AICPA)

50,000

Rice Company owns 30,000 ordinary shares of Wood Company acquired on July 31, 2011 at total cost of P1,100,000. On December 1, 2011, Rice received 30,000 stock rights from Wood. Each right entitles the holder to acquire one share at P45. The market price of Wood's share on this date was P50. and the market price of each right was P10. Rice sold its rights on December 31, 2011 for P450,000 less a P10,000 commission. What amount should be reported as gain from sale the of the rights? a. b. c. d.

150,000 140,000 250,000 240,000

Solution 22-10 Answer b Net sale price (450,000 - 10,000) Initial cost of rights sold (30,000 x 10) Gain on sale of rights

440,000 (300,000) 140,000

Problem 22- 11 (AICPA Adapted) Adam Company owns 50,000 ordinary shares of Bland Company. These 50,000 shares were purchased by Adam in 2009 for P120 per share. On August 30, 2011, Bland distributed 50,000 stock rights to Adam. Adam was entitled to buy one new share of Bland Company for P90 cash and two of these rights. On August 30, 2011, each share had a market value of P130 and each right had a market value of P20. What total cost should be recorded for the new shares that Adam acquired by exercising the rights? a. b. c. d.

2,250,000 3,250,000 3,050,000 5,550,000

Solution 22-11 Answer b Initial cost of rights Cash paid for new shares Total cost of new shares

(50,000 x 20) (25,000 x 90)

1,000,000 2,250,000 3,250,000

Problem 22-12 (ACP) Excelsia Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the shareholders to subscribe for 1 share at P100. Jealina Company owns 50,000 shares of Excelsia Company with total cost P5,000,000. The share is quoted right-on at 125. The stock rights are accounted for separately. What is the cost of the new investment if all of the stock rights are exercised by Jealina Company?

a. b. c. d.

1,500,000 1,250,000 1,562,500 1,450,000

Solution 22-12 Answer a Theoretical value of right (125 - 100 / 4 + 1 ) Initial cost of rights (50,000 x 5) Cash paid for new shares (50,000 / 4 = 12,500 x 100) Cost of new investment

5.00 250,000 1,250,000 1,500,000

Problem 22-13 (ACP) On January 1, 2011, Mylene Company purchased 50,000 shares of another entity for P3,600,000. On October 1, 2011, Mylene received 50,000 stock rights from the investee. Each right entitles the shareholder to acquire one share for P85. The market price of the investee's share was P100 immediately before the rights were issued and P90 immediately after the rights were issued. On December 1, 2011, Mylene exercised all stock rights. On December 31, 2011, Mylene sold P25,000 shares at P90 per share. The stock rights are not accounted for separately. If the FIFO approach is used, what is the gain on sale of investment that should be recognized in 2011? a. b. c. d.

450,000 700,000 287,500 125,000

Solution 22-13 Answer a

Original investment New investment acquired through stock rights (50,000 x 85) Total

Shares 50,000

Cost 3,600,000

50,000 100,000

4,250,000 7,850,000

FIFO approach Sale price (25,000 x 90) Cost of shares sold (25,000 / 50,000 x 3,600,000)

2,250,000 1,800,000

Gain on sale

450,000

Average Approach Sale price Cost of shares sold (25,000 / 100,000 x 7,850,000) Gain on sale

2,250,000 1,962,500 287,500

Problem 22-14 (PHILCPA Adapted) Christopher Company completed the following transactions in relation to its long-term investment in Bay Company: On January 1, 2009, Christopher Company purchased 20,000 shares of Bay Company, P100 par, at P110 per share. On March 1, 2009, Bay Company issued rights to Christopher Company, each permitting the purchase of 1/4 share at par. No entry was made. The bid price of the share was 140 and there was no quoted price for the rights. Christopher Company was advised that it would "lose out on the investment if it did not pay in the money for the rights". Thus, on April 1, 2009, Christopher Company paid for the new shares charging the payment to the investment account. Since Christopher Company felt that it had been assessed by Bay Company, the dividends received from Bay Company in 2009 and 2010 (10% on December 31 each year) are credited to the investment account until the debt was fully offset. On January 1, 2011, Christopher Company received 50% stock dividend from Bay Company. On same date, the shares received as dividend were sold at P160 per share and the proceeds were credited to income. December 31, 2011, the shares of Bay Company were split 2 for 1. Christopher Company found that each new share was worth P5 more than P110 paid for the original shares. Accordingly, Christopher Company debited the investment account with the additional shares received at P110 per share and credited income. On June 30, 2012, Christopher Company sold one-half of the investment at P92 per share and credited the proceeds to the investment account. 1. What is the balance of the investment on December 31, 2012 as it was kept by Christopher Company? a. b. c. d.

3,150,000 2,650,000 2,200,000 4,950,000

2. Using the "average method", what is the correct balance of the investment on December 31, 2012?

a. 2,200,000 b. 1,800,000 c. 900,000 d. 0 Solution 22-14 Question 1 Answer b 1/1/2009 (20,000 x 110) 4/1/2009 (5,000 x 100) 12/31/2009 (10% x 2,500,000) 12/31/2010 (10% x 2,500,000) 12/31/2011 (23,000 x 110) 6/30/2012 (25,000 x 92) Investment account per book

Shares 20,000 5,000 --25,000 (25,000) 25,000

Cost 2,200,000 500,000 (250,000) (250,000) 2,750,000 (2,300,000) 2,650,000

Shares 20,000 5,000 12,500

Cost 2,200,000 500,000 --

Question 2 Answer c

1/1/2009 4/1/2009 1/1/2011 Balance 1/1/2011

(20,000 x 110) (5,000 x 100) (50% x 25,000)

(12,500 / 37,500 x 2,700,000)

37,500 (12,500)

2,700,000 ( 900,000)

(2 for 1 split)

25,000 25,000

1,800,000 --

Balance 6/30/2012

(1/2 x 1,800,000)

50,000 ( 25,000)

1,800,000 ( 900,000)

Balance

December 31, 2012

25,000

900, 000

Balance 12/31/2011

2,000,000 5,600,000

dividend on

interest. A ma-

ed P300,000

ate was P50.

re purchased

market value

es the share-

mber 1, 2011,

e investment

ares received

and credited

her Company?

r 31, 2012?

Chapter 23 INVESTMENT IN ASSOCIATE Problem 23-1 (AICPA Adapted) On January 1, 2011. Saxe Company purchased 20% of Lex Company's ordinary shares outstanding for P6,000.000. The acquisition cost is equal to the carrying amount of the net assets acquired. During 2011, Lex reported net income of P7,000,000 and paid cash dividend of P4,000,0000. What is the balance in the investment in Lex Company on December 31, 2011? a. 5,200,000 b. 6,000,000 c. 6,600,000 d. 7,400,000 Solution 23-1 Answer c Acquisition cost Add: Share in net income (20% x 7,000,000) Total Less: Share in cash dividend ( 20% x 4,000,000) Investment balance

6,000,000 1,400,000 7,400,000 800,000 6,600,000

PAS 28, pargaraph 6, provides that if an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. The equity method of accounting is used if the investment is 20% or more of the of the voting power of the investee. Under the equity method, the investment account is increased by the investor's share of the inventee's earnings and decreased by the investor's share of the investee's losses. Dividend received from the investee reduces the carrying amount of the investment.

Problem 23-2 (AICPA Adapted) In January 2011, Farley Company acquired 20% of the outstanding ordinary shares of Davis Company for 8,000,000. This investment gave Farley the abillity to exercise significant influence

over Davis. The carrying amount of the acquired shares was P6,000,000. The excess of cost over carrying amount was attributed to a depreciable asset which was undervalued on Davis' statement of financial positionand which had a remaining useful life of ten years. For the year ended December 31, 2011, Davis reported net income of P1,800,000 and paid cash dividends of P400,000 and thereafter issued 5% stock dividend. What is the carrying amount of the investment in Davis Company on December 31, 2011? a. 7,720,000 b. 7,800,000 c. 8,000,000 d. 8,080,000 Solution 23-2 Answer d Original cost Share in net income (20% x 1,800,000) Share in cash dividends (20% x 400,000) Amortization of excess of cost (2,000,000 / 10) Carrying amount of investment - December 31, 2011 Acquisition cost Less: Carrying amount of interest acquired Excess of cost over carrying amount

8,000,000 360,000 (80,000) (200,000) 8080000 8000000 6000000 2000000

The excess of cost over the carrying amount of the underlying equity acquired which is attributable to undervaluation of a depreciable asset should be amortized over the remaining useful life of the depreciable asset. Such amortization is recorded by debiting investment income and crediting investment in associate.

Problem 23-3 (AICPA Adapted) On January 1, 2011, Dell Company paid P 18,000,000 for 50,000 ordinary shares of Case Company which represent a 25% interest in the in the net assets of Case. The acquisition cost is equal to the carrying amount of the net assets acquired. Dell has the ability to exercise significant influence over

Case. Dell received a dividend of P35 per share from Case in 2011. Case reported net income of P9,600,000 for the year ended December 31, 2011. In the December 31, 2011 statement of financial position, what amount should be reported as investment in Case Company? a. 22,150,000 b. 20,400,000 c. 18,650,000 d. 18,000,000 Solution 23-3 Answer c Acquisition cost - January 1 Add: Share in net income ( 25% x 9,600,000) Total Less: Cash dividend received( 50,000 x P35) Carrying amount of investment- December 31

18,000,000 2,400,000 20,400,000 1,750,000 18,650,000

Problem 23-4 (AICPA) On January 1, 2011, Well Company purchased 10% of Rea Company's outstanding ordinary shares for P4,000,000. Well is the largest single shareholder in Rea and Well's officers are a majority of Rea's board of directors. Rea reported net income of P5,000,000 for 2011 and paid dividends of P1,500,000. In its December 31, 2011 statement of financial position, what amount should Well report as investment in Rea? a. 4,500,000 b. 4,350,000 c. 4,000,000 d. 3,850,000

Solution 23-4 Answer b PAS 28, paragraph 6, provides that if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.

Wells position as Rea's largest single shareholder and the presence of Well's officers as a majority of Rea's board of directors demonstrate that Well does have significant influence despite the 10% ownership. Accordingly, the equity method is used. Acquisition, January 1 Add; Share in net income (10% x 5,000,000) Total Less: Share in cash dividends (10% x 1,500,000) Carrying value of the investment, December 31

4,000,000 500,000 4,500,000 150,000 4,350,000

Problem 23-5 (AICPA Adapted) On January 1, 2011, Dyer Company acquired as a long term investment a 20% ordinary share interest in Eason Company. Dyer paid P7,000,000 for this month when the fair value of Eason's net assets was P35,000,000. Dyer can exercise significant influence over Eason's operating and and financial policies. For the year ended December 31, 2011, Eason reported net income of P4,000,000 and declared and paid cash dividends of P1,600,000. What amount of revenue from the investment should Dyer report for 2011? a. 1,120,000 b. 480,000 c. 800,000 d. 320,000 Solution 23-5 Answer c Share net income (20% x 4,000,000)

800,000

Under the equity method, the investor recognizes as income its share of the investee's earnings. Cah dividends are not recorded as income but a reduction of the investment account.

Problem 23-6 ( AICPA Adapted) On July 1, 2011, Denver Company purchased 30,000 shares of Eagle Company's 100,000 outstanding ordinary shares for P200 per share. On December 15,2011, Eagle paid P400,000 in dividends to its share ordinary shareholders. Eagle's net icome for the year ended December 31, 2011 was P1,200,000, earned evenly throughout the year. In its 2011 income statement, what amount of income from the investment should Denver report?

a. 360,000 b. 180,000 c. 120,000 d. 60,000 Solution 23-6 Answer b Share in net income from July 1 to December 31, 2011 ( 1,200,000 x 6/12 x 30%)

180,000

Interest acquired ( 30,000/100,000)

30%

Problem 23-7 (AICPA Adapted) On April 1,2011, Ben Company purcahsed 40% of the outstanding ordinary shares of Clarke Company for P10,000,000. On the date, Clarke's net assets were P20,000,000 and Ben cannot attribute the excess of the cost of its investment in Clarke over its equity in Clarke's net assets to any particular factor. Clarke's 2011 net income is P5,000,000. Ben plans to retain its investment in Clarke indefinitely. Ben accounts for its investment in Clarke by the equity method. What is the maximum amount which could be included in Ben's 2011 income before tax to reflect the "equity in net income of Clarke"? a. 1,400,000 b. 1,500,000 c. 2,000,000 d. 1,850,000

Solution 23-7 Answer b Share in net income from April 1 to December 31, 2011 (5,000,000 x 9/12 x 40%) Acquisition cost Less: Carrying amount of the assets acquired (40% x 20,000,000)

1,500,000 10,000,000 8,000,000

Goodwill - not amortized

2,000,000

Problem 23-8 (IAA) On, January 1,2011, Ronald Company purchased 40% of the outstanding ordinary shares of New Company equaled P12,500,000. The difference was attributed to equipment which had a carrying amount of P3,000,000 and a fair market value of P5,000,000 and to building which had a carrying amount of P2,500,000 and a fair value of P4,000,000. The remaining useful life of the equipment and building was 4 years and 12 years, respectively. During 2011, New Company reported net income of P5,000,000 and paid dividends of P2,500,000. What amount should be reported as investment income for 2011? a. 2,000,000 b. 1,000,000 c. 1,800,000 d. 1,750,000 Solution 23-8 Answer d Acquisition cost Net assets acquired ( 40% x 12, 500,000) Excess of cost

6,400,000 5,000,000 1,400,000

Excess attributable to equipment (40% X 2,000,000) Excess attributable to building (40% X 1,500,000)

800,000 600,000 1,400,000

Share in net income (40% x 5,000,000) Amortiation of excess: Equipment (800,000/4) Building (600,000/12)

2,000,000 (200,000) (50,000) 1,750,000

Problem 23-9 ( AICPA Adapted) On January 1, 2011, Kean Company purchased 30% interest in Pod Company for P2,500,000. On this date Pod's shareholders' equity was P5,000,000. The carrying amount of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by P2,000,000. Pod reported net income of P1,000,000 for 2011 and paid no dividends. Kean accounts for this investment using the equity method. In its December 31,2011 statement of financial position, what amount should Kean report as

investment in associate? a. 2,100,000 b. 2,200,000 c. 2,800,000 d. 2,760,000 Solution 23-9 Answer c Acquisition cost Less: Carrying amount of net assets acquired (30% x 5,000,000) Excess of cost over carrying amount Less: Amount attributable to undervaluation of land (30% x 2,000,000) Goodwill - not amortized

2,500,000

Acquisition cost, January 1 Add: Share in net income (30% x 1,000,000) Carrying amount of investment

2,500,000 300,000 2,800,000

1,500,000 1,000,000 600,000 400,000

The excess of cost attributable to the land is not amortized because the land is nondepreciable.

Problem 23-10 ( AICPA Adapted) Sage Company bought 40% of Eve Company's outstanding ordinary shares on January 1,2011, for P4,000,000. The carrying amount of Eve's net assets at the purchase date totaled P9,000,000. Fair values and carrying amount were the same for for all the items except for plant and inventory, for which fair value exceeded their carrying amount by P900,000 and P100,000, respectively. The plant has an 18-year life. All inventory was sold during 2011. During 2011, Eve reported net income of P1,200,000 and paid a P200,000 cash dividend. What amount should Sage repport as investment income in its income statement for the year ended

December 31, 2011? a. 480,000 b. 420,000 c. 360,000 d. 320,000 Solution 23-10 Answer b Acquisition cost Net assets required ( 40% x 9,000,000) Excess of cost over carrying amount

4,000,000 (3,600,000) 400,000

The excess of cost is identified as follows: Understatement of plant Understatement of inventory Total excess of cost Share in net income ( 40% x 1,200,000) Less: Amortization of excess of cost: Depreciation of plant (360,000/18) Inventory(totally sold) Investment income

( 40% x 900,00) (40% x 100,000)

360,000 40,000 400,000

20,000 40,000

60,000 420,000

Problem 23-11 (CGAC) On January 1,2011, Anne Company purchased 20% of the outstanding ordinary shares of Dune Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000 is payable with 12% annual interest on December 31, 2012. Anne also paid P500,000 to a business broker who helped find a suitable business and negotiated the purchase. At the time of acqusition, the fair values of Dune's identifiable assets and liabilities were equal to their carrying amounts except for an office building which had a fair value in excess of carrying amount of P2,000,000 and an estimated life of 10 years. Dune's shareholders' equity on January 1, 2011 was P13,000,000. During 2011, Dune Company reported net income of P5,000,000

and paid dvidend of P2,000,000. What amount of income should Anne Company report for 2011 as a result of the investment? a. 810,000 b. 620,000 c. 960,000 d. 885,000 Solution 23-11 Answer c Acquisition cost (4,000,000 + 500,000) Carrying amount of net assets acquired (20% x 13,000,000) Excess of cost Excess attributable to building(20% x 2,000,000) Excess attributable to goodwill - not amortized

4,500,000

Share in net income(20% x 5,000,000) Amortization of excess of cost: Attributable to building ( 400,000 /10) Investment income

1,000,000

2,600,000 1,900,000 400,000 1,500,000

(40,000) 960,000

Problem 23-12 (IAA) On January 1, 2011, Occidental Company purchased 40% of the outstanding ordinary shares of Manapla Company for P3,500,000 when the net assets of Manapla amounted to P7,000,000. At acquisition date, the carrying amounts of the identifiable assets and liabilities of Manapla were equal to the fair value was P1,500.000 greater than its carrying amount and inventory whose fair value was P500,000 greater than its cost. The equipment has a remaining life of 4 years and the inventory was all sold during 2011 and paid no dividends during 2011.Manapla Company reported net income of P4,000,000 for 2011 and paid no dividends durinG 2011. What is the maximum amount of the "equity in earning of Manapia Company"?

a. 1,350,000 b. 1,250,000 c. 1,600,000 d. 1,700,000 Solution 23-12 Answer a Cost Carrying amount of interest acquired (40% x 7,000,000) Excess of cost over carrying amount Excess applicable to equipment Excess applicable to inventory Excess of fair value cost

3,500,000

(40% x 1,500,000) (40% x 500,000)

2,800,000 700,000 (600,000) (200,000) (100,000)

Any excess of the net fair value of the associate's identifiable net assets is included in investment income. Share in net income (40% x 4,000,000) Excess of fair value over cost Excess of cost over carrying amount: Equipment( 600,000 /4) Inventory - all sold Investment income

1,600,000 100,000 (150,000) (200,000) 1,350,000

Problem 23-13 (IAA) On January 1, 2011, Bing Companny purchased 30,000 shares of Latt Company's 200,000 outstanding ordinary shares for for 6,000,000. On that date, the carrying amount of the acquired shares on Latt's books was P4,000,000. Bing attributed the excess of cost over carrying amount to patent. The patent has remaining useful life of 10 years. During 2011, Bing's officers gained a majority on Latt's board of directors. Latt reported earnings of P 5,000,000 for the year ended December 31, 2011, and declared and paid dividend of P3,000,000 during 2011. On December 31, 2011, Latt ordinary share was trading over-the-counter at P15. What is the carrying amount of the investment in Latt Company on December 31, 2011?

a. 6,000,000 b. 6,100,000 c. 6,300,000 d. 6,750,000 Solution 23-13 Answer b Acquisition cost Carrying amount of net assets acquired Excess of cost applicable to patent Acquisition cost Share in net income Share in cash dividend Amortization of patent Carrying amount of investment

6,000,000 4,000,000 2,000,000

(5,000,000 x 15%) (3,000,000 x 15%) (2,000,000 /10)

Interest acquired(30,000/ 200,000)

6,000,000 750,000 (450,000) (300,000) 6,100,000 15%

The equity is used even if the investment is less than 20% because the officers of the investor entity are a majority of the bound of the investee entity.

Problem 23-14 (AICPA Adapted) On July 1, 2011, Miller Company purchased 25% of Wall Company's outstanding ordinary shares and no goodwill resulted from the purchase. Miller appropriately carries this investment as equity and the balance in Miller's investment account was P1,900,000 at December 31, 2011. Wall reported net income of P1,200,000 foe the year ended December 31, 2011, and paid divvidend totaling P480,000 on December 31, 2011. How much did Miller pay for its 25% interest in Wall? a. 1,720,000 b. 2,020,000 c. 1,870,000 d. 2,170,000

Solution 23-14 Answer c Acquisition cost, July 1 (SQUEEZE) Add: Share in net income from July 1 to December 31 (1,200,000 x 6/12 x 25%) Total Less: Share in cash dividend (25% 480,000) Investment balance, December 31

1,870,000 150,000 2,020,000 120,000 1,900,000

The acquisition cost is "squeezed" by working back from the invested balance on December 31,2011. Moreover, the investor shares only in the net income of the investee from the date of acquisition, July 1, 2011 to December 31, 2011. In the absence of any statement to the contrary, the net income is earned evenly during the year. However, the investor shares in full in the dividends paid on December 31, 2011.

Problem 23-15 (IAA) In January 1, 2011, Cyber company bought 30% of outstanding ordinary shares of Free company for P5,000,000 cash. Cyber company accounts for this investment by the equity method At the date of acquisition, Free Company's net assets had a carrying amount of P12,000,000. Depreciable assets with an average remaining life five years have a current market value that is P2,500,000 in excess of their carrying amount. The remaining difference between the purchase price and the carrying amount of the underlying equity cannot be attributed to any identifiable tangible or intangible asset. Accordingly, the remaining difference is allocated to goodwill. At the end of 2011, Free Company reported net income of P4,000,000. During 2011, Free Company declared and paid cash dividends of P1,000,000. What is the carrying amount of the investment in Free Company on December 31, 2011? a. 5,000,000 b. 5,900,000

c. 5,0750,00 d. 5,400,000 Solution 23-15 Answer c Acquisition cost Net assets acquired (30% x 12,000,000) Excess of cost over carrying amount Excess attributable to depreciable assets (30% x 2,500,000) Excess of attributable to goodwill

5,000,000 3,600,000 1,400,000

Aquisition cost Share in net income (30% x 4,000,000) Share in cash dividend (30% x 1,000,000) Amortization of depreciable assets (750,000/ 5) Carrying amount of investment

5,000,000 1,200,000 (300,000) (150,000) 5,750,000

750,000 650,000

Problem 23-16 (IAA) Jay Company purchased 35% of Jerry Company on January 1, 2011 for P11,200,000 when Jerry's carrying amount was P32,400,000. On that day, the market value of the net assets of Jerry company equaled their carrying amount with the following exceptions:

Equipment Building

Carrying amount 7,000,000 1,600,000

Market 5,600,000 2,600,000

The equipment has a remaining useful lfe of 5 years, and the building has a remaining useful life of 10 years. Jerry reported of P3,200,000 and cash dividends of P1,000,000 for 2011. What is the investment income that will be reported by Jay Company for 2011? a. 1,183,000

b. 1,120,000 c. 1,260,000 d. 987,000 Solution 23-16 Answer a Acquisition cost Net assets acquuired (35% x 32,400,000) Excess of carrying amount over cost

11,200,000 11,340,000 (140,000)

Equipment - carrying amount higher than market value (1,400,000 x 35%) Building - market value higher than carrying amount (1,000,000 x 35%)

(490,000) 350,000 (140,000)

Share in net income (35% x 3,200,000) Amortization Overdepreciation of equipment (490,000/ 5) Underdepreciation of building (350,000 /10) Investment income

1,120,000 98,000 (35,000) 1,183,000

The amortization of the equipment is added because the equipment it overvalued. The amortization of the building is deducted because the building is undervalued.

Problem 23-17 (IAA) On January 1, 2011, Bridge Company purchased 25,000 shares of the 1,000,000 outstanding shares of of River Company for a tortal of P1,000,000. At the time of the purchase, the carrying amount of River Company's equity was P3,000,000. River Company assets having a market value greater than carrying amount at the time of the acquisition were as follows:

Inventory Equipment Goodwill

Carrying amount 400,000 2,000,000 0

Market Value 500,000 2,500,000 400,000

Remaining life Less than 1 year 5 years Indefinite

River Company's income in 2011 was P700,000. Dividends per share paid by River Company amounted to P3 in 2011. What is the carrying amount of Bridge Company's investment in River Company on December 31, 2011?

a. 1,050,000 b. 1,000,000 c. 1,075,000 d. 1,100,000 Solution 23-17 Answer a Acquisition cost Net assets acquired (25% x 3,000,000) Excess of cost over carrying amount Excess attributable to inventory (25% x 100,000) Excess attributable to equipment (25% x 500,000) Excess attributable to goodwill (25% x 400,000)

Acquisition cost Share in net income (25% x 700,000) Amortization of excess: Inventory Equipment (125,000/5) Cash dividend (25,000 x 3) Carrying amount of investment

1,000,000 750,000 250,000 25,000 125,000 100,000 250,000 10,000,000 175,000 (25,000) (25,000) (75,000) 1,050,000

Problem 23-18 (IAA) Alpha Company acquired 20,000 shares of Beta Company on January 4, 2011 at P120 per share. Beta Company had 10,000 shares outstanding with a carryong amount of P8,000,000. The difference between the carrying amount and fair value all Beta Company on January 1, 2011 is attributable to a broadcast license which is an intagible asset. Beta Company recorded earnings of P3,600,000 and P3,900,000 for 2011 and 2012, respectively, and paid per-share dividend of P16 in 2011 and P20 in 2012. Alpha Company has a 20-year straight line amortization policy for the broadcast license. What is the carrying amount of Alpha Company's investment in Beta Company on December 31,2012? a. 3,515,000 b. 2,400,000 c. 3,555,000 d. 4,275,000 Solution 23-18 Answer a

Acquisition cost (20,000 x 120) Net assets acquired (25% x 8,000,000) Excess of cost over carrying amount

2,400,000 2,000,000 400,000

Acquisition cost Share in net income 2011 (25% x 3,600,000) 2012 (25% x 3,900,000) Share in cash dividend: 2011 ( 20,000 x 16) 2012 (20,000 x 20) Amortization of excess: 2011( 400,000/ 20) 2012 Carrying amount of investment - December 31, 2012

2,400,000 900,000 975,000 (320,000) (400,000) (20,000) (20,000) 3,515,000

Problem 23- 19 (IFR$) Seiko Comoany has 100,000 ordinary shares outstanding. Globe Company acquired 30,000 shares of of Seiko for P120 per share in 2009. The securities are being held as long term investment. Changes in retained earnings for Seiko for 2011 and 2012 re as follows: Retained earnings (deficit), January 1, 2011 Net income for 2011 Retained earnings, December 31, 2011 Net income for 2012 Cash dividend paid on December 30, 2012 Retained earnings, December 31, 2012

(500,000) 700,000 200,000 800,000 (400,000) 600,000

What is the carrying amount Globe Company's investment in Seiko Company on December 31, 2012? a. 3,600,000 b. 3,930,000 c. 3,780,000 d. 4,800,000

Solution 23-19 Answer c Acquisition cost (30,000 x 120) Deficit on January 1,l 2011 (30% x 500,000) Carrying amount of investment - January 1, 2011 Net income for 2011 (30% x 700,000) Net income for 2012 (30% 800,000) Cash dividend on 12/31/2012 (30% x 400,000) Carrying amount of investment - December 31, 2012

3,600,000 (150,000) 3,450,000 210,000 240,000 (120,000) 3,780,000

Another approach Acquuisition cost Share in retained earnings - December 31, 2012 (30% x 600,000) Carrying amount of investment - December 31, 2012

3,600,000 180,000 3,780,000

Problem 23-20 (IAA) On January 1, 2011, Marie Company purchased 40% of the outstanding shares of Lester Company paying P2,560,000 when the carrying amount of the net assets of Lester equaled P5,000,000. The difference was attributed to equipment which had a carrying amount of P1,200,000 and a fair value of P2,000,000, and to building with a carrying amount of P1,000,000 and a fair value of P1,600,000. The remaining useful life of the equipment and building was 4years and 12 years, respectively. During 2011, Lester reported net income of P1,600,000 and paid dividends of P1,000,000. What is the carrying amount of the investment in Lester Company on December 31,2011? a. 2,550,000 b. 2,700,000 c. 2,800,000 d. 3,050,000 Solution 23-20 Answer b Acquisition cost Net assets acquired (40% x 5,000,000)

2,560,000 2,000,000

Excess of cost over carrying amount

560,000

Attributable to equipment (40% x 800,000) Attributable to building (40% x 600,000)

320,000 240,000 560,000

Acquisition cost Net income (40% x 1,600,000) Cash dividend (40% x 1,000,000) Amortization of excess: Equipment (320,000 /4) Building (240,000 /12) Carrying amount of investment - December 31, 2011

2,560,000 640,000 (400,000) (80,000) (20,000) 2,700,000

Problem 23-21 (IFRS) Chur Company acquired a 40% interest in Film Company for P1,700,000 on January 1, 2011. The shareholder's equity of Film Company on January 1 and December 31, 2011 is presented below. January 1 Share Capital Revaluation Surplus Retained Earnings

December 31 3,000,000 1,000,000

3,000,000 1,300,000 1,500,000

On January 1, 2011, all the identifiable assets and liabilities of Film Company were recorded at fair value. Film Company reported profit of P700,000 after income tax expense of P300,000 and paid dividend of P150,000 to shareholder during the current year. The revaluation surplus is the result of the revaluation of land recognized by Film Company on December 31, 2011. Additionally depreciation is provided by Film Company on the diminishing balance method whereas Chur Company uses the straight line. Had Film Company used the straight, the accumulated depreciation would be increased by P200,000. the tax rate is 30%. What is the carrying amount of Chur Company's investment in Film Company on December 31, 2011?

a. 2,440,000 b. 1,700,000 c. 1,920,000 d. 2,230,000 Solution 23-21 Answer a Acquisition cost Net assets acquired (40% x 4,000,000) Goodwill - not amortized

1,700,000 1,600,000 100,000

Acquisition cost Net income Cash dividend Revaluation surplus Carrying amount of investment - December 31, 2011

1,700,000 280,000 (60,000) 520,000 2,440,000

There is no need to adjust for the difference in depreciation method. If both entities have chosen a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference.

Problem 23-22 (IFRS) Aye Company acquired 30% of the issued share capital of Bee Company for P1,000,000 on January 1, 2011. The accumulated profits of Bee Company on this date totaled P2,000,000. the entities prepare their financial statements on December 31of each year. The abbreviated statement of financial position of Bee Company on December 31, 2012 is as follows: Sundry net assets Share Capital, P10 par Share Premium Retained earnings

6,000,000 1,000,000 2,000,000 3,000,000

The fair value of the net assets of Bee Company at the date of acquisition was P5,000,000. the recoverable amount of the net assets of Bee Company is deemed to be P7,000,000 on December 31,2012. What is the carrying amount of the investment in Bee Company on December 31, 2012? a. 1,800,000 2,100,000 c. 1,500,000 d. 1,000,000

Solution 23-22 Answer a Investment associate (30% x 6,000,000)

1,800,000

Another approach Acquisition cost Post acquisition profits (3,000,000-2,000,000 x 30%) Excess net fair value- included in investment income Investment in associate

1,000,000 300,000 500,000 1,800,000

Acquisition cost Net assets acquired (30% x 5,000,000) Excess net fair value - included in investment income

1,000,000 1,500,000 500,000

The investment in associate is not impaired because the carrying amount of P1,800,00 is lower than the recoverable amount of P2,100,000 (30% x 7,000,000).

Probllem 23-23 (AICPA Adapted) Moss Company owns 20% of Dubro Company's preference share capital and 80% of its ordinary share capital and 80% of its ordinary share capital on December 31, 2011. 10% cumulative preference share capital Ordinary share capital

5,000,000 7,000,000

Dubro reported net income P3,000,000 for the year ended December 31, 2011. What is the equity in earnings of the investee for 2011? a. 2,000,000 b. 2,400,000 c. 2,100,000 d. 2,300,000 Solution 23-23 Answer a When an investee has outstanding cumulative preferences 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

3,000,000

Preference dividend ( 10% x 5,000,000) Net income to ordinary shares

(500,000) 2,500,000

Share in net income - ordinary shares (80% x 2,500,000)

2,000,000

Problem 23-24 (AICPA Adapted) Green Company owns 30% of the outstanding ordinary shares 100% of the outstanding noncumulative nonvoting preference shares of Axel Company. In 2011, Axel declared dividend of P1,000,000 on its ordinary share capital and P600,000 on its preference share capital. What amount of dividend revenue should Green report in its income statement for 2011? a. 900,000 b. 300,000 c. 600,000 d. 0 Solution 23-24 Answer c Only the dividend on preference share capital is recognized as dividend revenue. The equity method is not applicable to investment in preference shares regardless of the interest. Problem 23-25 (AICPA Adapted) On January 1, 2011, Wynn Company bought 15% of Parr Company's ordinary shares outstanding for P6,000,000. Wynn appropriately accounts for this investment by the cost method. Parr reported net income of P3,000,000 for 2011 and P9,000,000 for 2012. No dividend was paid in 2011 but Parr paid dividend of P15,000,000 in 2012. what dividend income should be reported by Wynn in 2012? a. 1,350,000 b. 2,250,000 c. 1,800,000 d. 450,000 Solution 23-25 Answer b Dividend income (15% x 15,000,000)

2,250,000

Under the cost method, dividends received are now totally recognized as income. There is no longer a distinction between preacquisition and postacquisition dividends. Problem 23-26 Pare Company purchased 10% of Tot Company's 100,000 outstanding ordinary shares on January 1, 2011 for 500,000. On December 31,2011, pare purchased an additional 20,000 shares of Tot for P1,500,000. there was no goodwill as a result of either acquisition, and Tot had no issued any additional shares during 2011. Tot reported earnings of P3,000,000 for 2011. What is the carrying amount of the investment on

December 31, 2011? a. 1,700,000 b. 2,000,000 c. 2,300,000 d. 2,900,000 Solution 23-26 Answer c Cost on January 1 (10%) Cost on December 31 (20,000/ 100,000 shares = 20%) Total acquisition cost Add: Share in net income (10% x 3,000,000) Carrying amount of investment - December 31

500,000 1,500,000 2,000,000 300,000 2,300,000

The share in the net income is only 10% because the additional 20% interest was acquired only on December 31, 2011.

Problem 23-27 (AICPA Adapted) On January 1, 2011, Mega Company aquired 10% of the outstanding ordinary shares of Penny Company. On January 1, 2012, Mega gained the ability to exeercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Penny's outstanding ordinary shares. The two purchases were made at prices proportionate to the value assigned to Penny's net assets, which equaled their carrying amounts. For the years ended December 31, 2011 and 2012, Penny reported the following: 2011 Dividend paid Net income

2012 2,000,000 6,000,000

3,000,000 6,500,000

What total amount of revenue should Mega Company include in profir or loss for the year ended December 31, 2012? a. 1,000,000 b. 1.950,000 c. 2,350,000 d. 1,550,000 Solution 23-27 Answer c 2012 investment income (30% x 6,500,000)

1,950,000

2011 investment income (10% x 6,000,000)

600,000

Less: Dividend income recorded in 2011 (10% x 2,000,000) Effect of change to equity method Investment in associate Gain on remeasurement to equity

200,000 400,000 400,000 400,000

When an investment qualifies for use of the equity method to investor should adopt the equity method retroactively. However, the effect of the change of equity method the investor should now be included in profit or loss as "gain on remeasurement to equity" and no longer a correction of retained earnings.

Problem 23-28 (AICPA Adapted) Grant Company acquired 30% of South Company's voting share capital for P2,000,000 on January 1, 2011. Grant's 30% interest in South gave Grant the abiity to exercise significant influence over South's operating and financial policies. During 2011, South earned P800,000 and paid dividend of P500,000. South reported earnings of P1,000,000 for the 6 months ended June 30, 2012, and P2,000,000 for the year ended December 31, 2012. The retained investment is to be held as financial asset at fair value through other comprehensive income. 1. Before income tax, what amount should Grant include in its 2011 income statement as a result of the investment? a. 150,000 b. 240,000 c. 500,000 d. 800,000 2. In Grant's December 31, 2011 statement of financial position, what should be the carrying amount of the investment? a. 2,000,000 b. 2,090,000 c. 2,240,000 d. 2,300,000 3. In its 2012 income statement, what amount should Grant report as gain from the sale of half of its

investment? a. 245,000 b. 305,000 c. 350,000 d. 455,000 4. In its 2012 income statement, what amount should Grant report as gain from remeasurement of its retained investment? a. 605,000 b. 405,000 c. 710,000 d. 910,000

Solution 23-28 Question 1 Answer b Share in 2011 net income (30% x 800,000)

240,000

Question 2 Answer b Acquisition cost, January 1, 2011 Add: Share in 2011 net income Total Less: Share in 2011 dividend (30% x 500,000) Carrying amount of investment, December 31, 2011

2,000,000 240,000 2,240,000 150,000 2,090,000

Question 3 Answer b Carrying amount of investment, December 31, 2011 Add: Share in net income from January 1 to June 30, 2012 (30% x 1,000,000) Carrying amount of investment, June 30, 2012 Sales price Cost of investment sold (2,390,000 /2) Gain from sale of investment Question 4 Answer b

2,090,000 300,000 2,390,000 1,500,000 (1,195,000) 305,000

Fair value - July 1,2012 Carrying amount of retained investment Gain from remeasurement

1,600,000 1,195,000 405,000

Fair Value - December 31,2012 Fair Value - July 1, 2012 Unrealized gain on financial asset

1,800,000 1,600,000 200,000

The unrealized gain of P200,000 is reported as other comprehensive income in the 2012 statement of comprehensive income because the retained investment is accounted for as financial asset at fair value through other comprehensive income.

Problem 23-29 (ACP) On January 1, 2008 , Bart Company acquired as a long term investment for P7,000,000, a 40% interest in Hall Company when the fair value of Hall's net assets was P17,500,000. Hall Company reported the following net losses: 2008 2009 2010 2011

5,000,000 7,000,000 8,000,000 4,000,000

On January 1, 2010, Bart Company made cash advances of P2,000,000 to Hall Company. On December 31, 2011, it is not expected that Bart Company will provide further financial support for Hall Company. What amount should Bart Company report in 2011 as loss from investment? a. 1,600,000 b. 4,000,000 c. 1,000,000 d. 600,000 Solution 23-29 Answer c Original cost Cash advances Total Net loss from 2008 to 2010 (40% x 20,000,000) Carrying amount of investment - 12/31/2010

7,000,000 2,000,000 9,000,000 (8,000,000) 1,000,000

Share in net loss of 2011 (40% x 4,000,000)

1,600,000

Loss to be reported in 2011 should be equal to the investment balance only

1,000,000

PAS 28, paragraph 2, 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 23-30(IFRS) On January 1, 2011, Haven Company acquired 20% of the ordinary shares of an associate for P6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded at fair value. An analysis of the acquisition showed that goodwill of P300,000 was acquired. The net income and dividend of the associate for 2011 and 2012 were follows: 2011 Net income Dividend paid

2012 3,000,000 1,000,000

4,000,000 1,500,000

In Deecember 2011, the associate sold inventory to Haven Company for P900,000. The cost of the inventory was P600,000. This inventory remained unsold by Haven Company on December 31,2011. However, it was sold by Haven Company in 2012. In December 2012, the associate hold inventory to Haven Company for P750,000. The cost of the inventory was P500,000. This inventory remained unsold by Haven Company on December 31, 2012. In December 2012, Haven Company sold inventory to the associate at a profit of P400,000 . One-half of this inventory was sold by the associate on December 3i, 2012. 1. What is the investor's share in the profit of the associate for 2011? a. 600,000 b. 540,000 c. 660,000 d. 648,000 2. What is the investor's sharein the profit of the associate for 2012? a. 710,000

b. 800,000 c. 770,000 d. 730,000 3. What is the carrying amount of the investment in associate on Decemkber 31, 2012? a. 6,870,000 b. 6,000,000 c. 6,900,000 d. 6,810,000

Solution 23-30 Question 1 Answer b Net income for 2011 Unrealized profit in 12/31/2011 inventory of Haven (900,000-600,000) Adjusted net income Investor's share (20% x 2,700,000)

3,000,000 (300,000) 2,700,000 540,000

Another approach Share in net income ( 20% x 3,000,000) Share in unrealized profit (20% x 300,000) Investor's share

600,000 (60,000) 540,000

Question 2 Answer c Net income for 2012 Realized profit in 12/31/2011 inventory of Haven Company Unrealized profit in 12/31/2012 inventory of Haven Company (750,000 - 500,000) Unrelized profit in 12/31/2012 inventory of associate (400,000 x 1/2) Adjusted net income Investor's share

4,000,000 300,000 (250,000) (200,000) 3,850,000 770,000

Question 3 Answer d Acquisition cost Share in profit of associate- 2011 Share in cash dividend- 2011 (20% x 1,000,000) Share in profit of associate - 2012 Share in cash dividend- 2012 (20% x 1,500,000) Carrying amount - December 31, 2012

6,000,000 540,000 (200,000) 770,000 (300,000) 6,810,000

Problem 23-31 (IFRS) Glorious Company acquired 40% interest in an associate, Alta Company, for P5,000,000 on January 1, 2011. At the acquisition date, there were no differences between fair value and carrying amount of identifiable assets and liabilities. Alta Company reported the following net income and divided for 2011 and 2012: 2011 Net income Dividend paid

2012 2,000,000 800,000

3,000,000 1,000,000

The following transactions occurred between Glorious Company and Alta Company: * On January 1, 2011, Alta Company sold an equipment costing P500,000 to Glorious Company for P800,000. Glorious Company applies a 10% straight line depreciation. * On July1, 2012, Alta Company sold an equipment for P900,000 to Gllorious Company. The carrying amount of the equipment is P500,000 at the time of sale. The remaining life of the equipment is 5 years and Glorious Company uses the straight line depreciation. * On December 1, 2012, Alta Company sold an inventory to Glorious Company for P2,800,000. The inventory had a cost of P2,000,000 and was still on hand on December 31,2012. * On January 1, 2012, Glorious Company sold an equipment to Alta Comapny for P3,000,000. The equipment had a cost of P2,500,000. Glorious Company regarded this equipment as inventory whereas Alta Company intended to use it as noncurrent asset.The remaining useful life of the equipment is 10 years.

1. What is the investor's share in the profit associate for 2011? a. 692,000 b. 800,000 c. 680,000 d. 920,000 2. What is the investor's share in profit of the associate for 2012? a. 1,200,000 b. 568,000 c. 520,000 d. 540,000 3. What is the carrying amount of the investment in associate on December 31, 2011? a. 5,692,000 b. 5,000,000 c. 5,372,000 d. 5,360,000 4. What is the carrying amount of the investment in associate on December 31, 2012? a. 5,508,000 b. 6,280,000 c. 5,540,000 d. 4,480,000 Solution 23-31 Question 1 Answer a

Net income for 2011 Unrealized profit on sale of equipment sold on 1/1 2011 (800,000 - 500,000) Realized profit on equipment sold on 1/1/2011 (10% x 300,000) Adjusted net income Investor's share (40% x 1,730,000)

2,000,000 (300,000) 30,000 1,730,000 692,000

Question-2 Answer b Net income for 2012 Realized profit on equipment on 1/1 2011 (10% x 300,000) Unrealized profit on sale equipment on 7/1/2012 (900,000 - 500,000) Realized profit on equipment sold on 7/1/2012 (400,000 /5 x 1/2) Unrealized profit on ending inventory on 12/ 31/2012 (2,800,000 - 2,000,000) Unrealized profit on sale of equipment on 1/1/2012 (3,000,000 - 2,500,000) Realized profit on equipment sold on 1/1/2012 (500,000/ 10) Adjusted net income Investor's share (40% x 1,420,000)

3,000,000 30,000 (400,000) 40,000 (800,000) (500,000) 50,000 1,420,000 568,000

Question 3 Answer c Acquisition cost Share in profit of associate -2011 Cash dividend - 2011 (40% x 800,000) Carrying amount - December 31, 2011

5,000,000 692,000 (320,000) 5,372,000

Question 4 Answer c Carrying amount -January 1, 2012 Share in profit of associate - 2012 Cash dividend - 2012 (50% x 1,000,000) Carrying amount - December 31, 2012

5,372,000 568,000 (400,000) 5,540,000

Problem 23-32 (IFRS) On January 1, 2011, Interlude Company acquired a 30% interest in an investee at a cost of P3,200,000. The equity of the investee on the date of acquisition was P6,000,000, consisting of P4,000,000 share capital and P2,000,000 retained earnings. All the identifiable assets and liabilities of the investee were recorded at fair value except for an equipment with a fair value of P3,000,000 greater than carrying amount. The remainig usseful life of the equipment is 5 years. On December 31, 2011, Interlude Company had inventory costing P2,000,000 on hand which had been purchased from the investee. A profit of P600,000 had been made on the sale. During the current year the investee reported net income of P4,000,000 and paid dividend of P1,500,000. The equity of the investee on December 31, 2011 showed the following: Share Capital Retained earnings Retained earning appropriated Revaluation surplus

4,000,000 3,500,000 1,000,000 2,000,000

The revaluation surplus arose from a revaluation of land made on December 31, 2011. The retained earnings appropriated arose from a transfer of unappropriated retained earnings to retained earnings appropriated for contingencies. 1. What is the goodwill arising from the acquisition of the investment in associate? a. 1,400,000 b. 700,000 c. 500,000 d. 0 2. What is the investment income to be reported by the investor for 2011?

a. 1,200,000 b. 1,020,000 c. 840,000 d. 750,000

3. What is the carrying amount of the investment in associate December 31, 2011? a. 3,200,000 b. 3,690,000 c. 4,190,000 d. 3,590,000 Solution 23-32 Question 1 Answer c Acquisition cost Net assets acquired (30% x 6,000,000) Excess of cost Excess attributable to equipment (30% x 3,000,000) Goodwill

3,200,000 (1,800,000) 1,400,000 (900,000) 500,000

Question 2 Answer c Net income for 2011 Unrealized profit on 12/31/2011 inventory Adjusted net income

4,000,000 (600,000) 3,400,000

Investor's share (30% x 3,400,000) Depreciation of Equipment (900,000/5) Investment income

1,020,000 (180,000) 840,000

Question 3 Answer c Acquisition cost Investment income Cash dividend Revaluation surplus Carrying amount - December 31, 2011

3,200,000 840,000 (450,000) 600,000 4,190,000

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CHAPTER 24 FINANCIAL ASSET AT AMORTIZED COST

PROBLEM 24-1 (AICPA Adpated) On October 1, 2011, Yost Company purchased P 4,000 of the P 1,000 face value, 10% bonds of Pell Company for P 4,400,000 which includes accrued interest of P 100,000. The bonds, which mature on January 1, 2018, pay interest semiannually on January 1 and July 1. Yost uses the straight line method of amortization and appropriately recorded the bonds as held to maturity. What is the carrying amount of the bonds in the December 31, 2011 statement of financial position? a. 4,284,000 b. 4,288,000 c. 4,300,000 d. 4,400,000 Solution 24-1 answer b October 1, 2011 to January 1, 2018 = Cost ( 4,400,000-100,000) Face Value Premium Monthly amortization (300,000/75) Cost Amortization of premium for October 1 to December 31, 2011 (4,000 x 3) Carrying amount- December 31, 2011

75 months 4,300,000 4,000,000 300,000 4,000 4,300,000 -12,000 4,288,000

Under PFRS 9, the term "held to maturity" is now eliminated. The equivalent term is "financial asset at amortized cost" PROBLEM 24- 2 (AICPA Adapted) Jent Company purchased bonds at a discount of P 100,000. Subsequently, Jent sold these bonds at a premium of P 140,000. During the period that Jent held this long-term investment, amortization of the discount amounted to P 20,000. What amount should Jent report as gain on the sale of bonds? a. 120,000 b. 220,000 c. 240,000 d. 260,000 Solution 24-2 answer b Premium on sale of bonds Unamortized discount ( 100,000- 20,000)

140,000 80,000

Gain on sale of bonds

220,000

PROBLEM 24-3 (IAA) On October 1, 2011, Danica Company purchased P 2,000,000 face value 12% bonds for 98 plus accrued interest and and brokerage fee. Interest is paid semiannually on January 1 and July 1. Brokerage fee for this transaction was P 50,000. At what amount should this acquisition of bonds be recorded. a. 1,960,000 b. 2,010,000 c. 2,020,000 d. 2,070,000 Solution 24-3 answer b Purchase price (2,000,000 x 98) Brokerage fee Total acquisition cost

1,960,000 50,000 2,010,000

The accrued interest of P60,000 (2,000,000 x 12% x 3/12) from July 1 to October 1, 2011 is not part of the cost of investment.Although, this amount is part of the payment for the bond investment.

PROBLEM 24-4 (IAA) On January 1, 2011, Venus Company purchased 10% bonds with face value of P5,000,000 plus transaction cost of P101,500 with a yield rate of 8%. The bonds mature on December 31, 2015 and pay interest annually on December 31. The carrying amount of the investment on December 21, 2011 using the effective interest method is P5,333,620. What is the initially acquisition cost of the bond investment? a. 5,401,500 b. 5,300,000 c. 5,198,500 d. 5,398,500 Solution 24-4 answer a Carrying amount - December 31, 2011 Add: Nominal Interest ( 5,000,000 x 10%) Total Divide by ( 100+ 8%) Total acquisition cost

5,333,620 500,000 5,833,620 108% 5,401,500

PROBLEM 24-5 (AICPA Adapted) On January 1, 2011, Carr Company purchased Fay Company 9% bonds with a face amount of P4,000,000 for P3,756,000

to yield 10%. The bonds are dated January 1, 2011, mature on December 21, 2020, and pay interest annually on December 31. Carr uses the interest method of amortizing bond discount. What total amount should Carr report as interest revenue from the bond investment for 2011? a. 400,000 b. 375,600 c. 360,000 d. 344,400 Solution 24-5 answer b Interest income for 2011 (3,756,000 x 10%)

375,600

Under the interest method, the interest income is computed by multiplying the carryong amount of the bond investment by the effective rate.

PROBLEM 24-6 (AICPA Adapted) On July 1, 2011, Cody Company paid P1,198,000 of 10%, 20-year bonds with a face amount of P1,000,000. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody uses the effective interest method to recogniz interest income from this long-term investment. What should be reported as the carrying amountof the bonds in the December 31, 2011 statement of financial position? a. 1,207,900 b. 1,198,000 c. 1,195,920 d. 1,193,050 Solution 24-6 answer c Interest Date received 7/1/2011 12/31/2011 50,000

Interest income 47,920

Premium amortization 2,080

Carrying amount 1,198,000 1,195,920

Interest received = = =

Face value x nominal rate 1,000,000 x 10% x 6/12 50,000

Interest income = = =

Carrying amount x effective rate 1,198,000 x 8% x 6/12 47,920

The premium amortization is the difference between the interest received and the interest income and is deducted from the carrying amount to arrive at the balance.

PAS 39, paragraph 46, requires the use of the effective interest method of amortizing discount or premium.

PROBLEM 24-7 (AICPA Adapted) On January 1, 2011. Purl Company purchased as a long-term investment P5,000,000 face value of Shaw Company's 8% bonds f P4,562,000.The bonds were purchased to yield 10% interest annually on December 31. Purl uses the interest method of amortiz What is the carrying amount of the investment (rounded to nearest P100) on December 31, 2012? a. 4,680,000 b. 4,662,000 c. 4,618,000 d. 4,562,000 Solution 24-7 answer a Carrying amount- January 1, 2011 Amortization of discount for 2011 Interest income(4,562,000x10%) Interest received(5,000,000x8%)

Carrying amount- December 31, 2011 Amortization of discount for 2012: Interest income(4,618,200x10%) Interest received(5,000,000x8%) Carrying amount- December 31, 2012

4,562,000 456,200 400,000

461,820 400,000

56,200 4,618,200

61,820 4,680,020

PROBLEM 24-8 (AICPA Adapted) On July 1,2011, York Company purchased as a long-term investment P1,000,000 of Park Company's 8% bonds for P946,000, including accrued interest of P 40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2017, and pay interest annually on January 1. York uses the effective interest method of amortization. On December 31,2011, what carrying amount should be reported as investment in bonds? a. 911,300 b. 916,600 c. 953,300 d. 960,600 Solution 24-8 answer a Purchase price Less: accrued interest Cost of investment

946,000 40,000 906,000

Amortization of discount from July 1 to December 31,2011: Interest income (906,000x10%x 6/12) Interest received (1,000,000x8%x6/12) Carrying amount- December 31, 2011

45,300 40,000

5,300 911,300

PROBLEM 24-9 (IAA) On January 1, 2011, Portugal Company purchased bonds with face value of P8,000,000 for P7,679,000 as a long term investme stated rate on the bonds is 10% but the bonds are acquired to yield 12%. The bonds mature at the rate of P2,000,000 annually ev December 31. The entity uses the effective interest method of amortizing discount. What carrying amount should Portugal Company report as investment in bonds on December 31, 2011? a. 5,759,250 b. 7,759,250 c. 7,800,480 d. 5,800,480 Solution 24-9 answer d Interest income (7,679,000 x 12%) Interest received (8,000,000 x 10%) Discount amortization

921,480 800,000 121,000

Cost Discount amortization Annual installment Carrying amount-December 31,2011

7,679,000 121,480 -2,000,000 5,800,480

PROBLEM 24-10 (AICPA Adapted) On July 1,2011, East Company purchased as a long term investment P5,000,000 face amount,8% bonds of Rand Company for P4,615,000 to yield 10% per year. The bonds pay interest semiannually on January 1 and July 1. On December 31,2011, what am should be reported as interest receivable? a. 184,000 b. 200,000 c. 230,750 d. 250,000 Solution 24-10 answer b Accrued interest receivable from July 1 to December 31, 2011 (5,000,000 x 8% x 6/12) The nominal rate of 8% is used in computing accrued interest.

200,000

PROBLEM 24-11 (AICPA Adapted) On July 1, 2011, Pell Company purchased Green Company ten year, 8% bonds with a face amount of P5,000,000 for P4,200,00 The bonds mature on June 30,2019 and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of 18,000 for the six months ended December 31, 2011. What amount should be reported a interest income for 2011? a. 168,000 b. 182,000 c. 200,000 d. 218,000 Solution 24-11 answer d Interest received from July 1 to December 31,2011 (5,000,000 x 8% x 6/12) Bonds discount amortization for six months Interest income for 2011

200,000 18,000 218,000

PROBLEM 24-12 (AICPA Adapted) On January 1,2011, Dean Company purchased ten-year bonds with a face value of P1,000,000 and a stated interest rate of 8% p payable semiannually July 1 and January 1. The bonds were acquired to yield 10%. Present value factors are as follows: Present value of 1 for 10 periods at 10% Present value of 1 for 20 periods at 5% Present value of an annuity of 1 for 10 periods at 10% Present value of an annuity of 1 for 20 periods at 5%

0.386 0.377 6.145 12.462

What is the purchase price of the bonds? a. 1,124,620 b. 1,100,000 c.1,000,000 d. 875,380 Solution 24-12 answer d Semiannually nominal interest (1,000,000 x 4%) Semiannually effective interest (1,000,000 x 5%) Difference Multiply by present value of annuity of 1 for 20 periods at 5% Discount

40,000 50,000 10,000 12,462 124,620

The amount of P124,620 is a discount because the effective rate is higher than nominal rate. Face value Discount Puchase price

1,000,000 124,620 875,380

Another approach PV of principal (1,000,000 x .377) PV of semiannually interest payments (40,000 x 12.462) Total present value

377,000 498,480 875,480

There is a difference of P100 because of rounding of present value factor.

PROBLEM 24-13 (IAA) On January 1, 2011, Russia Company purchased 5-year bonds with face value of P8,000,000 and stated interest of 10% per year payable semiannually January 1 and July 1. The bonds were acquired to yield 8%. Present value factors are: Present value of an annuity of 1 for 10 periods at 5% Present value of an annuity of 1 for 10 periods at 4% Present value of 1 for 10 periods at 4%

7.72 8.11 0.6756

1. What is the purchase price of the bonds? a. 7,382,400 b. 8,617,600 c. 8,648,800 d. 7,351,200 2. What is the carrying amount of the bond investment on December 31, 2011? a. 8,594,752 b. 8,540,704 c. 8,538,542 d. 8,302,848 Solution 24-13 Question 1 answer c Semiannual nominal interest (8,000,000 x 5%) Semiannual effective interest (8,000,000 x 4%) Difference Multiply by PV of annuity 1 for 10 periods at 4%

400,000 320,000 80,000 8.11

Premium Face value Purchase price

648,800 8,000,000 8,648,800

The amount of P648,800 is premium because the effective rate is lower than nominal rate. Another approach PV of principal (8,000,000 x .6756) PV of semiannually interest payments (400,000 x 8.11) Purchase price or present value of bonds

5,404,800 3,244,000 8,648,800

Question 2 answer c Acquisition cost- January 1, 2011 Amortization of premium- 1/1/2011 to 6/30/2011: Interest received Interest income (4% x 8,594,752 Carrying amount- December 31, 2011

8,648,800 400,000 343,790

56,210 8,538,542

PROBLEM 24-14 (ACP) On January 1, 2011, Tagbilaran Company purchased bonds with face value of P2,000,000. The bonds are dated January 1,2011 mature on January 1, 2015. The interest on the bonds is 10% payable semiannually every June 30 and December 31.. The preva market rate of interest on the bonds is 12%. The present value of 1 at 6% for 8 periods is .63, and an ordinary annuity of 1 at 6% 8 periods is 6.21. What is the present value of the bonds on January 1, 2011? a. 1,881,000 b. 1,888,000 c. 1,360,000 d. 1,480,000 Solution 24-14 answer a The term of the bonds is 4 years and the interest is payable semiannually. Therefore, there are 8 interest periods. PV of principal (2,000,000 x .63) PV of semianual interest payments (100,000 x 6.21) Present value or market price of bonds

1,260,000 621,000 1,881,000

PROBLEM 24-15(IAA) On January 1, 2011, Arabian Company purchased serial bonds with face value of P3,000,000 and stated 12% interest payable an every December 31. The bonds are to be held as financial asset at amortized cost with a 10% effective yield. The bonds mature annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for:

One period Two periods Three periods

0.91 0.83 0.75

What is the present value of the serial bonds on January 1, 2011? a. 3,106,800 b. 3,060,000 c. 3,045,000 d. 3,149,000 Solution 24-15 answer a Principal payment Interest payment (3,000,000 x 12%) Total payment on December 31,2012

1,000,000 360,000 1,360,000

Principal payment Interest payment (2,000,000 x 12%) Total payment on December 31, 2012

1,000,000 240,000 1,240,000

Principal payment Interest payment (1,000,000 x 12%) Total payment on December 31, 2013

1,000,000 120,000 1,120,000

December 31, 2011 payment (1,360,000 x .91) December 31, 2012 payment (1,240,000 x .83) December 31, 2013 payment (1,120,000 x .75) Total present value on January 1, 2011

1,237,600 1,029,200 840,000 3,106,800

PROBLEM 24-16 (ACP) On January 1, 2011, Cambodia Company purchased bonds with face value of P5,000,000 at a cost of P4,700,000 to be held as financial asset at amortized cost. The stated interest is 10% payable annually every December 31. The bonds mature in 4 years o January 1, 2015. What amount of interest income should be reported by Cambodia Company for the year ended December 31, 2011 under the effective interest method? a. 500,000 b. 470,000 c. 517,000 d. 562,590

Solution 24-16 answer d Interest income (4,700,000 x 11.97%)

562,590

The bonds are purchased at a discount and therefore, the effective rate must be higher than the 10% nominal rate. The effective determine through the interpolation process.

The PV of 1 at 11% for 4 periods is .6587, and the PV of an annuity of 1 at 11% for 4 periods is 3.1024. The present value of th bond using the interest rate of 11% is as follows: PV of principal (5,000,000 x .6587) PV of annual interest payments (500,000 x 3.1024) Total present value cash flows

3,293,500 1,551,000 4,844,000

The PV of 1 at 12% for 4 periods is .6355, and the PV of an annuity of 1 for 4 periods is 3.0373. The present value of the bonds using the interest rate of 12% is as follows: PV of principal (5,000,000 x .6355) PV of annual interest payments (500,000 x 3.0373) Total present value cash flows

3,177,500 1,518,650 4,696,150

Using a rate of 11% the present value of the bonds is P4,844,700. The cost of P4,700,000 is lower than P4,844,700. This mean the effective rate is higher than 11%.

Using a rate of 12% the present value of the bonds is P4,696,150. The cost of P4,700,000 is higher than P4,696,150. This mean the effective rate is lower than 12%. In conclusion, the effective rate is between 11% and 12%. Thus, the questions is how much more than 11% and how much less 12%? The effective rate is computed using the interpolation process as follows: Let X = the effective rate X= 4,700,000 11%= 4,844,700 12%= 4,696,150 Accordingly, the interest differential is determined as follows: X - 11% 12% - 11% The present values applicable to the rates are then substituted. 4,700,000 - 4,844,700

4,646,150 - 4,844,700 144700 = 148,550

0.97

Thus, the effective rate is 11% plus the difference of .97 or 11.97%.

ds of Pell Company for ry 1, 2018, pay interest appropriately recorded the 1 statement of financial

ds at a premium of count amounted to

us accrued interest and is transaction was

not part of the cost of

us transaction cost of annually on December 31. hod is P5,333,620. What

P4,000,000 for P3,756,000

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nt of the bond investment by the

of P1,000,000. Interest is ective interest method to recognize

ment of financial position?

ome and is deducted from the

nt or premium.

ue of Shaw Company's 8% bonds for uses the interest method of amortization.

mpany's 8% bonds for P946,000, bonds mature on January 1, 2017, n. On December 31,2011, what

7,679,000 as a long term investment. The the rate of P2,000,000 annually every

8% bonds of Rand Company for 1. On December 31,2011, what amount

mount of P5,000,000 for P4,200,000. 31. Using the interest method, Pell What amount should be reported as

0 and a stated interest rate of 8% per year alue factors are as follows:

and stated interest of 10% per year ue factors are:

e bonds are dated January 1,2011 and e 30 and December 31.. The prevailing and an ordinary annuity of 1 at 6% for

e 8 interest periods.

and stated 12% interest payable annually effective yield. The bonds mature at an

cost of P4,700,000 to be held as 31. The bonds mature in 4 years or

d December 31, 2011 under the

e 10% nominal rate. The effective rate is

is 3.1024. The present value of the

73. The present value of the bonds

lower than P4,844,700. This means that

higher than P4,696,150. This means that

more than 11% and how much less than

CHAPTER 25 INVESTMENT PROPERTY

PROBLEM 25-1 (IFRS) Galore Company ventured into construction of a condominium in Makati which is rated as the largest state-if-the-art structure. The entity's board of directors decided that instead of selling the condominium, the entity would hold this property for purposes of earning rentals by letting out space to business executives in the area. The construction of the condominium was completed and the property was placed in service on January 1, 2011. The cost of construction was P50,000,000. The useful life of the condominium is 25years and its residual value is P5,000,000. An independent valuation expert provided the following fair value at each subsequent year-end: December 31,2011 December 31,2012 December 31,2013

55,000,000 53,000,000 60,000,000

1. Under the cost model, what amount should Galore Company report as depreciation of investment property for 2011? a. 1,800,000 b. 2,000,000 c. 2,200,000 d. 0 2. Under the fair value method, what amount should Galore Company recognize as gain from change in fair value in 2011? a. 5,000,000 b. 3,000,000 c. 7,000,000 d. 0 Solution 25-1 Question 1 Answer a Cost of investment property Residual value Depreciable amount Annual depreciation (45,000,000/25)

50,000,000 -5,000,000 45,000,000 1,800,000

Question 2 Answer a Fair value-December 31, 2011 Cost- January 1, 2011 Gain from change in fair value in 2011

55,000,000 50,000,000 5,000,000

The entry to recognize the gain on December 31, 2011 is: Investment property Gain from change in fair value

5,000,000

Fair value- December 31, 2012 Carrying amount- December 31, 2011 Loss from change in fair value in 2012 The entry to recognize the loss on December 31, 2012 is: Loss from change in fair value Investment property

53,000,000 55,000,000 -2,000,000

2,000,000

Fair value- December 31, 2013 Carrying amount- December 31, 2012 Gain from change in fair value in 2013 The entry to recognize the gain on December 2013 is: Investment property Gain from change in fair value

60,000,000 53,000,000 7,000,000

7,000,000

Note that if the investment property is accounted for under the fair value model, no depreciation is recognized.

PROBLEM 25-2 (IFRS) Eragon Company and its subsidiaries own the following properties that are accounted for in accordance with PAS 40. Land held by Eragon for undetermine use A vacant building owned by Eragon and to be leased out under an operating lease Property held by a subsidiary of Eragon, a real estate firm, in the ordinary course of business Property held by Eragon for use in production Building owned by a subsidiary of Eragon and for which the subsidiary provideds security and maintenance services to the leases Land leased by Eragon to subsidiary under an operating lease Property under construction for use as investment property Land held for future factory site Machinery leased out by Eragon to an unrelated party under an operating lease What is the total investment property that should be reported in the consolidated statement of financial position of the parent and its subsidiaries?

Solution 25-2 Answer b Land for undetermined use Vacant building to be leased out under an operating lease Building owned and for which the subsidiary provides security and maintenance services to the lessees Property under construction for use as investment property Total investment property The property held by a subsidiary in the ordinary course of business is included in inventory. The property held for use in production is owner-occupied property and therefore part of property, plant and equipment.

The land leased by the parent to the subsidiary under an operating lease is owner-occupied property for the purposes of consolid financial statements. However, from the perspective of separate financial statements of the parent, the land is an investment p

Under the amended PAS 40, property under construction for use as investment property is now considered investment property. The land held for future factory site is owner-occupied property and therefore included in property, plant and equipment.

The machinery leased out to an unrelated party is owner-occupied property because investment property includes only land and building and not movable property, like machinery.

PROBLEM 25-3 (IFRS) Bona Company purchased an investment property on January 1, 2009 for P2,200,000. The property had a useful life of 40 years and on December 31, 2011 had a fair value of P3,000,000. On December 31, 2011, the property was sold for the proceeds of P2,900,000. Bona Company uses the cost model to account for the investment property. What is the gain or loss to be recognized for the year ended December 31, 2011 regarding the disposal of the property? a. 865,000 gain b. 810,000 gain c. 100,000 gain d, 700,000 gain Solution 25-3 Answer a Cost- January 1, 2009 Accumulated depreciation (2,200,000/40 x 3) Carrying amount-December 31, 2011

2,200,000 165,000 2,035,000

Sales price Carrying amount-December 31, 2011 Gain on disposal of property

2,900,000 2,035,000 865,000

PROBLEM 25-4 (IFRS) Dayanara Company owns three properties which are classified as investment properties. Details of the properties are as follows: Initial Fair Value Fair Value cost 12/31/2011 12/31/2012 Property 1 Property 2 Property 3

2,700,000 3,450,000 3,300,000

3,200,000 3,050,000 3,850,000

3,500,000 2,850,000 3,600,000

Each property was acquired in 2008 with a useful life of 25 years. The entity's accounting policy is to be use the fair value met investment properties. What is the gain or loss to be recognized for the year ended December 31, 2012? a. 189,000 loss b. 150,000 loss c. 300,000 gain d. 450,000 loss Solution 25-4 Answer b

Property 1 Property 2 Property 3 Net loss from change in fair value

Fair value 12/31.2011 3,200,000 3,050,000 3,850,000

Fair Value 12/31/2012 3,500,000 2,550,000 3,600,000

Gain(loss) 300,000 (200,00) (250,000) (150,000)

PROBLEM 25-5 (IFRS) Mikka company acquired a building on january 1, 2011 for P9,000,000. At that date the building had a useful life of 30 years. O 31, 2011, the fair value of the building was P9,600,000 and on December 31,2012, the fair value is P9,800,000. The building w as an investment property and accounted for under the cost model.

What amounts should be carried in the statement of financial positions on December 31, 2012 and recognized in profit or loss f Carrying Amount Profit or loss a. 8,400,000 300,000 expense b. 9,000,000 No gain/loss c. 9,800,000 200,000 gain d. 8,700,000 300,000 expense Solution 25-5 Answer a

Cost- January 1,2011 Accumulated depreciation (9,000,000/30 x 2) Carrying amount- December 31,2012 Depreciation expense for 2012 (9,000,000/30)

9,000,000 600,000 8,400,000 300,000

Problem 25-6 (IFRS) Crosswind Company has a single investment property which had an original cost of P5,800,000 on January 1, 2009. On Decemb its fair value was P6,000,000 and on December 31, 2012 it had a fair value of P5,900,000. On acquisition, the property has a us years. What should be the expense recognized in Crosswind's profit or loss or the year ended December 31, 2012 under the fair value and cost model? Fair Value model a. 147,500 b.100,000 c. 145000 d. 100,000

Cost model 145,000 145,000 100,000 147,500

Fair Value Model Fair value-December 31, 2012 Fair value-December 31, 2011 Loss from change in fair value Cost Model Depreciation expense for 2012(5,800,000/40)

5,900,000 6,000,000 -100,000

145,000

Problem 25-7 (IFRS) Paradise Company's accounting policy with respect to investment properties is to measure them at fair value at the end of each r period. One of the investment properties are measured at P5,000,000 on December 31, 2011. The property had been acquired on January 1, 2011 for a total of P7.600,000, made up of P6,900,000 paid to the vendor, P300, local authority as a property transfer tax and P 400,000 paid to professional advisers. The useful life of the property is 40 years. What is the amount of gain to be recognized in profir or loss for the year ended December31, 2011 in respect of the investment a. b. c. d.

400,000 700,000 800,000 590,000

Solution 25-7 Answer a Fair value

8,000,000

Acquisition cost Gain from change to fair value

7,600,000 400,000

PROBLEM 25-8 (IFRS) Rhino Company's a real estate, has a building with a carrying amount of P20,000,000 on December 31, 2011. The building is u of the entity's administrative staff. On December 31, 2011, the original building had a fair value of P35,000,000. On December Rhino also had land that was held in the ordinary course of its business. The land had a carrying amount of P10,000,000 and fa P15,000,000 on December 31, 2011. On such date, Rhino decided tto hold the land for capital appreciation. . Rhino's policy is investment property at fair value. On December 31, 2011, what amount should Rhino recognize in revaluation surplus and pr respectively?

a. b. c. d.

5,000,000 and 15,000,000 15,000,000 and 0 15,000,000 and 5,000,000 5,000,000 and 0

Solution 25-8 Answer c Fair value of building -Dcember 31,2011 Carrying amount -December 31,2011 Revaluation surplus

33,000,000 -20,000,000 15,000,000

PAS 40, paragraph 61, provides that if there is a transfer from owner occupied to investment property to be carried at a fair val the difference between fair value and carrying amount is accounted for as revaluation of property, plant and equipment. Fair value of land - December 31, 2011 Carrying amount of land- December 31, 2011 Gain on reclassification

15,000,000 -10,000,000 5,000,000

PAS 40 paragraph 63, provides that if there is a transfer from inventory to investment property to be carried at fair value, the dif between fare value and carrying amount is recognized in profit or loss.

t state-if-the-art would hold this

ary 1, 2011. The value is P5,000,000.

property for 2011?

e in fair value in 2011?

5,000,000

2,000,000

7,000,000

recognized.

nce with PAS 40. 5,000,000 3,000,000 2,000,000 4,000,000

1,500,000 2,500,000 6,000,000 3,500,000 1,000,000

cial position of the parent

5,000,000 3,000,000 1,500,000 6,000,000 15,500,000

plant and equipment.

or the purposes of consolidated the land is an investment property.

dered investment property.

lant and equipment.

erty includes only land and

had a useful life of 40 years sold for the proceeds of

al of the property?

e properties are as follows:

o be use the fair value method for

a useful life of 30 years. On December 9,800,000. The building was classified

cognized in profit or loss for 2012?

anuary 1, 2009. On December 31, 2011, ition, the property has a useful life of 40 2012 under the fair value model

ir value at the end of each reporting

0 paid to the vendor, P300,000 paid to of the property is 40 years.

n respect of the investment property?

31, 2011. The building is used as officers 35,000,000. On December 31, 2011. Rhino ount of P10,000,000 and fair value of ciation. . Rhino's policy is to carry all evaluation surplus and profir or loss,

y to be carried at a fair value, ant and equipment.

carried at fair value, the difference

Chapter 26 FUND AND OTHER INVESTMENTS Problem 26-1 (AICPA Adapted) The following information relates to a bond sinking fund that Fall Company placed in trust as required by the underwriter: Bond sinking fund, January 1, 2011 4,500,000 Additional Investment in 2011 900,000 Dividends on invetsments 150,000 Interest Revenue 300,000 Administration costs 50,000 Carrying amount of bonds payable 8,000,000 What is the carrying amount of the bond sinking fund on December 31. 2011? a. 5,850,000 b. 5,800,000 c. 5,750,000 d. 5,400,000 Solution 26-1 Answer b. Sinking fund - January 1,2011 Add: Additonal investment in 2011 Dividends on investment Interest revenue Total less: Administration costs Sinking fund - December 31,2011

4,500,000 900,000 150,000 300,000

1,350,000 5,850,000 50,000 5,800,000

The income earned on the sinking fund investments should form part of the sinking fund balance. Problem 26-2 (PHILCPA Adapted) In January 2011, Cameron Company established a sinking fund in connection with its issue of bonds due in 2013. A bank was appointed as independent trustee of the fund. On December 31,2011 the trustee held P364,000 cash in the sinking fund account representing P300,000 in annual deposits to the fund, and P64,000 of interest earned in Cameron's statement of financial position on December 31, 2011? a. No part of the sinking fund should appear in Cameron's statement of financial position. b. P64,000 should appear as a current asset c. P364,000 should appear as a current asset d. P364,000 should appear as a noncurrent asset

Solution 26-2 Answer d The annual deposits to the fund and the interest earned on those deposits should form part of the sinking fund to be classified as noncurrent asset.

Problem 26-3 (AICPA Adapted) On March 15.2011, Ashe Company adopted a plan to accumulate P5,000,000 by September 1, 2015. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Ashe made the first deposit on September 1,2011. Future value factors are as follows: Future Value of P1 at 10% for 4 periods 1.46 Future Value of an ordinary annuity of P1 at 10% for 4 periods 4.64 Future Value of an annuity of 1 in advance at 10% for 4 periods 5.11 What is the annual deposit to the fund ? a. 1,250,000 b. 1,077,500 c. 978,500 d. 730,000 Solution 26-3 Answer c Annual deposit (5,000,000/5.11)

978,500 (rounded)

The annual deposit is computed by dividing the amount of the fund to be accumulated by the future value factor. In the case, the future value factor of an annuity in advance is used because the annual deposit is made at the beginning of each year of the four year period. Problem 26-4 (AICPA Adopted) On January 1, 2011, Beal Company adopted a plan to accumulate funds for a new plant building to be erected beginning Juy 1,2016, at na estimated cost of P6,000,000. Beal intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is made on July 1,2011. Present value and future value factors are as follows: Present Value of 1 at 85 for 5 periods 0.68 Present Value of 1 at 8% for 6 periods 0.63 Future Value of an ordinary annuity of 1 at 8% for 5 periods 5.87 Future Value of an annuity of 1 in advance at 8% for 5 periods 6.34 What is the annual deposit to the fund? a. 1,022,150 b. 816,000 c. 946,400 d. 756,000 Solution 26-4 Answer c Annual Deposit (6,000,000/6.34) 946,400 (rounded) The annual deposit is made at the beginning of each year of the five-year period. Thus, the future value of an annuity of 1 in advance is used. Problem 26-5 (IAA)

On Jnauary 1, 2011, Mandaue Company adopted a plan to accumulate P5,000,000 by January 1, 2016. Mandaue plans to make 5 eaual annual annual deposits that will earn interest at 9% compounded annually. Mandaue made the first deposit on December 31, 2011. The future value of an ordinary annuity of 1 at 9% for 5 periods is 5.98, and the future value of an annuity due of 1 at 9% for 5 periods is 6.52. What amount must be deposited annually at the compound interest to accumulate the desired amount of P5,000,000? a. 766,871 b. 836,120 c. 664,894 d. 609,756 Solution 26-5 Answer b Annual deposit (5,000,000/5.98)

836,120

The future value of an ordinary annuity of 1 is used because the annual deposit is made at the end of each year of the 5-year period. Problem 26-6 (IAA) Cebu Company made an investment of P5,000,000 at 10% per annum compounded annually for 6 years.What is the amount of the investment on the date of maturity? Round off future value factor to two decimal places. a. 8,850,000 b.8,050,000 c. 9,750,000 d. 5,500,000 Solution 26-6 Answer a Principal amount Multiply by future value of 1 for 6 periods at 10% Future value at maturity

5,000,000 1.77 8,850,000

Problem 26-7 (IAA) Mactan Company made investment for 5 years at 12% per annum compounded semiannually to equal P7,160,000 on the date of maturity. What amount must be deposited now at the compound interest to provide the desired sum? Round off future value factor to two decimal places. a. 4,000,000 b. 4,068,180 c. 4,236,680 d. 3,768,420 Solution 26-7 Answer a Future Value at maturity Divide by future value of 1 for 10 periods at 6% Initial Investment

7,160,000 1.79 4,000,000

The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are 10 interest periods at 6%. Problem 26-8 (AICPA Adopted) Ball Company purchased a P1,000,000 ordinary life insurance policy on its present. Ball Company is the beneficiary under the life insurance policy. The policy year and Ball's accounting year coincide. Additional data available for the year ended December 31,2011 are as follows: Cash surrender value, January 1 43,500 Cash surrender value, December 31 54,000 Annual advance premium paid January 1 20,000 Dividend received July 1 3,000 What amount should be reported as life insurance expense for 2011? a. 6,500 b. 9,500 c. 17,000 d. 20,000 Solution 26-8 Answer a Annual premium paid Less: Increase in cash surrender value (54,000-43,500) Dividend received Life insurance expense

20,000 10,500 3000 13,500 6,500

The dividend received is not considered an income but a reduction of life insurance expense. Problem 26-9 (AICPA Adopted) Chain Company purchased a P1,000,000 life insurance policy on its president, of which Chain is the beneficiary Information regarding the policy for the year ended December 31,2011 followes: Cash surrender value, January 1 87,000 Cash surrender value, December 31 108,000 Annual advance premium paid January 1 40,000 During 2011, dividend of P6000 was applied to increase cash surrender value of the policy. What amount should Chain report as life insurance expense for 2011? a. 40,000 b. 25,000 c. 19,000 d. 13,000 Solution 26-9 Answer c Premium paid Less: Increase in cash surrender value

40,000

(108,000-87,000) Life insurance expense

21,000 19000

The dividend of P6,000 is not deducted anymore because it is already part of the increase in cash surrender value. Problem 26-10 (IAA) Slovenia Company insured the life insurance of its President for P2,000,000, the entity being the beneficiary of the ordinary life insurance policy. The annual premium is P80,000 and the policy is dated January 1, 2008. The cash surrender value are: December 31, 2010 15,000 December 31,2011 19,000 The entity follows the calendar year as its fiscal period. The Presidetnt died on October 1, 2011 and the policy is settled on December 31, 2011. 1. What amount should income statement? a. 1,962,000 b. 2,000,000 c. 1,961,000 d. 1,981,000

Slovenia Company report as gain on life insurance settlement in its 2011

2. What amount should Slovenia Company report as life insurance expense for 2011 a. 80,000 b.60,000 c. 77,000 d. 57,000 Solution 26-10 Question 1 Answer a Cash surrender value-December 31,2010 Increase in CSV from January 1 to October 1,2011 15,000 (4,000 x 9/12) 3000 cash surrender value- October 1,2011 18,000 Face of policy Cash surrender value Unexpired premium (80,000 x 3/12) Gain on life insurance settlement Question 2 An Answer d Annual premium piad on January 1, 2011 Unexpired premium on October 1,2011 Increase in CSV from January 1 to October 1, 2011 Life insurance expense for 2011

1,962,000

80,000 (20,000) (3000) 57,000

2,000,000 -18,000 -20,000 1,962,000

Problem 26-11 (ACP) The following accounts appear on the adjusted trial balance of Grand Company on December 31,2011: Petty cash fund 10,000 Payroll fund 100,000 Sinking fund cash 500,000 Sinking fund securities 1,000,000 Accrued interest receivable- sinking fun securities 50,000 Plant expansion fund 600,000 Cash surrender value 150,000 Investment property 3,000,000 Advances to subsidiary 200,000 Investment in joint venture 2,000,000 What total amount should be reported as noncurrent investements on December 31, 2011? a. 7,500,000 b. 4,500,000 c. 7,450,000 d. 2,300,000 Solution 26-11 Answer a All accounts are noncurrent investments except the petty cash fund and payroll fund.

n October 1,

t in its 2011

?

Chapter 27 DERIVATIVES Problem 27-1 (IAA) On January 1, 2011, Pasay Company entered into a two-year P3,000,000 variable interest rate loan at the prevailing rate of 12%. In 2012, the interest rate is equal to the prevailing interest rate at the beginning of the year. The principal loan is payable on December 31, 2012 and the interest rate is payable on December 31 of each year. On January 1, 2011, Pasay Company entered into a "receive variable, pay fixed" interest swap agreement with a speculator bank designated as a cash flow hedge. The prevailing interest rate on January 1, 2012 is 14% and the present value of 1 at for one period is .877. What amount should be reported as "interest rate swap receivable" on December 31, 2011? a. b. c. d.

60,000 52,620 30,000 0

Solution 27-1 Answer b Since the interest on January 1, 2012 is 14% which is 2% higher than the fixed rate of 12%, it means that Pasay Company shall receive P60,000 from the bank on December 31, 2012. This receivable is recognized as a derivative asset on December 31, 2011 at present value of P52,620 as follows: Interest rate swap receivable Unrealized gain -- interest rate swap (60,000 x .877)

52,620 52,620

Problem 27-2 (IAA) Imus Company received a two-year variable interest rate loan of P5,000,000 on January 1, 2011. The interest on the loan is payable on December 31 of each year and the principal is to be repaid on December 31, 2012. On January 1, 2011, Imus Company entered into "receivable variable, pay fixed" interest rate swap agreement with a speculator bank as a cash flow hedge. The interest rate for 2011 is the prevailing interest rate of 10% and the rate in 2012 is equal to the prevailing rate on January 1,2012. The market rate of interest on January 1, 2012 is 7% and the

present value of 1 at 7% for one period is .935. What amount should be reported by Imus Company on December 31, 2011 as "interest rate swap payable"? a. b. c. d.

150,000 140,250 100,000 0

Solution 27-2 Answer b Since the interest rate on January 1, 2012 is 7% which is 3% lower than the fixed rate of 10%, it means that Imus Company shall pay the bank P150,000 on December 31, 2012 or P5,000,000 times 3%. The interest rate swap payable is recognized as a derivative liability on December 31, 2011 as follows: Unrealized loss -- interest rate swap Interest rate swap payable (150,000 x .935)

140,250 140,250

Problem 27-3 (IAA) On January 1, 2011, Taal Company received a 5-year variable interest rate loan of P6,000,000 with interest payment at the end of each year and the principal to be repaid on December 31, 2015. The interest rate for 2011 is 8% and the rate in each succeeding year is equal to market interest rate on January 1 of each year. On January 1, 2011, Taal Company entered into an interest rate swap agreement with a financial institution to the effect that Taal will receive a swap payment if the interest on January 1 is more than 8% and will make a swap payment if the interest is less than 8%. The swap payments are made at the end of the year. This interest rate swap agreement is designated as a cash flow hedge. On January 1, 2012, the market rate of interest is 9%. The present value of an ordinary annuity of 1 at 9% for four periods is 3.24. On December 31, 2011, what amount should be reported by Taal Company as "interest rate swap receivable"? a. b. c. d.

300,000 240,000 194,400 120,000

Solution 27-3 Answer c The interest rate on January 1, 2012 is 9% which is 1% higher than a fixed rate of 8%. This means that Taal Company shall receive an annual interest swap payment from the financial institution of P6,000,000 times 1% or P60,000. Since the term of the loan is 5 years and one year already expired, Taal Company shall receive P60,000 at the end of 2012 and can expect to receive P60,000 at the end of 2013, 2014 and 2015. Thus, the present value of the four annual payments of P60,000 is recognized as interest rate swap receivable on December 31, 2011 or P60,000 times 3.24 equals P194,400. Problem 27-4 (IAA) On January 1, 2011, Trece Company borrowed P5,000,000 from a bank at a variable rate interest for 4 years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2014. Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and the amount of interest is to be paid on December 31. In conjunction with the loan, Trece Company entered into a "received variable, pay fixed" interest rate swap agreement with another bank speculator. The interest rate swap agreement was designated as a cash flow hedge. The market rates of interest are: January 1, 2011 January 1, 2012 January 1, 2013 January 1, 2014

10% 14% 12% 11%

The PV of an ordinary annuity of 1 is 2.32 at 14% for these periods, 1.69 at 12% for two periods and 0.90 at 11% for one period. 1. What is the "notional" of the interest rate swap agreement? a. b. c. d.

5,000,000 2,000,000 2,500,000 500,000

2. What is the derivative asset or liability on December 31, 2011? a. 464,000 asset b. 464,000 liability c. 600,000 asset d. 600,000 liability

3. What is the derivative asset or liability on December 31, 2012? a. 200,000 asset b. 200,000 liability c. 169,000 asset d. 169,000 liability 4. What is the derivative asset or liability on December 31, 2013? a. b. c. d.

45,000 asset 45,000 liability 50,000 asset 50,000 liability

Solution 27-4 Question 1

Answer a

The "notional" of the interest rate swap agreement is equal to the principal amount of the loan or P 5,000,000. Question 2

Answer a

The interest rate on January 1, 2012 is 14% which is higher than the underlying fixed rate of 10%. This means that Trece Company shall receive a swap payment from the bank of 4% times P5,000,000 or P200,000 annually for 2012, 2013 and 2014. The present value of the three annual payments is P200,000 times 2.32 or P464,000. This amount is recognized on December 31, 2011 as interest rate swap receivable which is a derivative asset. Question 3

Answer c

The interest rate on January 1, 2013 is 12% which is higher than the underlying fixed rate of 10%. This means that Trece Company shall receive a swap payment from the bank of 2% times P5,000,000 or P100,000 annually for 2013 and 2014. The present value of the two annual payments is P100,000 times 1.69 or P169,000. This amount must be the interest rate swap receivable on December 31, 2012. Question 4

Answer a

The interest rate on January 1, 2014 is 11% which is higher than the underlying fixed rate of 10%. This means that Trece Company shall receive a swap payment of 1% times P5,000,000 or P50,000 on December 31, 2014.

The present value of the P50,000 payment is P50,000 times .90 or P45,000. This amount must be the interest rate swap receivable on December 31, 2013. Problem 27-5 (IAA) On January 1, 2011, Camry Company received a two-year P500,000 loan. The loan calls for interest payments to be made at the end of each year based on the prevailing market value rate at January 1 of each year. The interest at January 1, 2011 was 10% Fortuner Company also has a two-year P500,000 loan but Fortuner's loan carries a fixed interest rate of 10%. Camry Company does not want to bear the risk that interest rates may increase in the second year of the loan. Fortuner Company believes that rates may decrease and it would prefer to have variable debt. So the two entities enter into an interest rate swap agreement whereby Fortuner agrees to make Camry's interest payment in 2012 and Camry likewise agree to make Fortuner's interest payment in 2012. The two entities agree to make settlement payments, for the difference only, on December 31, 2012 1. If the interest rate on January 1, 2012 is 8%, what will be Camry's settlement with Fortuner? a. b. c. d.

10,000 payment 10,000 receipt 5,000 payment 5,000 receipt

2. What amount will Camry report as fair value of the interest rate swap on December 31, 2011? a. b. c. d.

500,000 10,000 9,259 9,091

Solution 27-5 Question 1

Answer a

Since the interest rate of 8% on January 1, 2012 is lower than the underlying 10% rate, Camry is required to pay Fortuner the difference of 2% times P500,000 or P10,000. Question 2

Answer c

Since the P10,000 payment is to be made on December 31, 2012, it is discounted for one year. The present value of 1 at 8% for one period is .9259. Thus, the fair value of the interest rate swap payable on December 31, 2011 is P10,000 times .9259 or P9,259. Problem 27-6 (IAA)

Tagaytay Company is a golf course developer that constructs approximately 5 courses each year. On January 1, 2011, Tagaytay Company has agreed to buy 5,000 trees on January 31, 2012 to be planted in the courses it intends to build. In recent years, the price of trees has fluctuated wildly. On January 1, 2011, Tagaytay entered into a forward contract with a reputable bank. The price is set at P500 per tree. The derivative forward contract provides that if the market price on January 31, 2012 is more than P500, the difference is paid by the bank of Tagaytay. On the other hand, if the market price is less than P500, Tagaytay will pay the difference to the bank. This derivative forward contract was designated as cash flow hedge. The market price on December 31, 2011 and January 31, 2012 is P800. The appropriate discount rate is 8% and the present value of 1 at 8% for one period is .926. On December 31, 2011, what amount should be recognized by Tagaytay Company as derivative asset or liability? a. b. c. d.

1,500,000 asset 1,389,000 liability 1,500,000 liability 1,389,000 asset

Solution 27-6 Answer a The entry on December 31, 2011 is: Forward contract receivable Unrealized gain -- forward contract (5,000 x P300)

1,500,000 1,500,000

The forward contract receivable is the derivative asset. The amount is not discounted anymore because it is to be received on January 31, 2012. The entries on January 31, 2012 are: Tree inventory (5,000 x P800) Cash Cash Forward contract receivable Unrealized gain -- forward contract Gain on forward contract

4,000,000 4,000,000 1,500,000 1,500,000 1,500,000 1,500,000

Problem 27-7 (IAA) Carmona Grill operates a chain of seafood restaurants. On January 1, 2011, Carmona Grill determined that it will need to purchase 100,000 kilos of tuna fish on February 1, 2012. Because of the volatile

fluctuation in the price of tuna fish, on January 1, 2011, Carmona negotiated a forward contract with a reputable financial institution for Carmona Grill to purchase 100,000 kilos of tuna fish on February 1, 2012 at a price of P8,000,000 or P80 per kilo, This forward contract was designated as cash flow hedge. On December 31, 2011 and February 1, 2012, the market price of tuna fish per kilo is P75. The appropriate discount rate is 6% and the present value of 1 at 6% for one period is .943. What amount should be recognized by Carmona Grill as derivative asset or liability on December 31, 2011? a. b. c. d.

471,500 asset 500,000 asset 471,500 liability 500, 000 liability

Solution 27-7

Answer d

The entry on December 31, 2011 to recognize the reduction in the market price is: Unrealized loss -- forward contract Forward contract payable (100,000 x P5)

500,000 500,000

The forward contract payable is the derivative liability. Because of the reduction in the market price on Febraury 1, 2012, Carmona Company shall make a forward contract payment to the financial institution. The entries on February 1, 2012 are: Purchases Cash (100,000 x P75) Forward contract payable Cash Loss on forward contract Unrealized loss -- forward contract

7,500,000 7,500,000 500,000 500,000 500,000 500,000

Problem 27- 8 (IAA) Chavacano Company a seafood restaurant. On October 1, 2011, Chavacano determined that it will need to purchase 50,000 kilos of deluxe fish on March 1, 2012. Because of the volatile fluctuation in the price of deluxe fish, on October 1, 2011, Chavacano negotiated a forward contract with a reputable for Chavacano to purchase 50,000 kilos of deluxe fish on March 1, 2012 at a price of P50 per kilo or P2,500,000. This forward contract was designated as a cash flow hedge. The derivative

forward contract provides that if the market price of deluxe fish on March 1, 2012 is more than P50, the difference is paid by the bank to Chavacano. On the other hand, if the market price on March 1, 2012 is less than P50, Chavacano will pay the difference to the bank. On December 31, 2011, the market price per kilo is P60 and on March 1, 2012, the market price is P58. The appropriate discount rate is 8%. The present value of 1 is 8% for one period is .93. 1. What is the fair value of the derivative asset or liability on December 31, 2011? a. b. c. d.

500,000 asset 500,000 liability 465,000 asset 465,000 liability

2. What is the fair value of the derivative asset or liability on March 1, 2012? a. b. c. d.

400,000 asset 400,000 liability 372,000 asset 372,000 liability

Solution 27-8 Question 1

Answer a

Excess of market price over underlying price 12/31/2011 (60 - 50) Forward contract receivable -- 12/31/2011 (50,000 x 10) Question 2

10 500,000

Answer a

Excess of market price over underlying price 3/1/2012 (58 - 50) Forward contract receivable -- 3/1/2012 (50,000 x 8)

8 400,000

Problem 27- 9 (IAA) Seaside Company operates a five-star hotel. The entity makes very detailed long-term planning. On October 1, 2011, Seaside Company determined that it would need to purchase 8,000 kilos of Australian lobster on January 1, 2013. Because of the fluctuation in the price of the Australian lobster, on October 1, 2011, the entity negotiated a forward contract with a bank for Seaside to purchase 8,000 kilos of Australian lobster on January 1, 2013 at a price of P9,600,000. The price of Australian lobster is P1,200 per kilo on October 1, 2011. This forward contract was designated as cash flow hedge. The entity is predicting a drop in worldwide lobster prices between October 1, 2011 and January 1, 2013.

On December 31, 2011, the price of a kilo of Australian lobster is P1,500. On December 31, 2012, and January 1, 2013, the price of a kilo of Australian lobster P1,000. The appropriate discount rate throughout this period is 10%. The present value of 1 at 10% for one period is .91. 1. What is the notional value of the forward contract? a. b. c. d.

12,000,000 9,600,000 7,200,000 4,800,000

2. What is the derivative asset or liability on December 31, 2011? a. b. c. d.

2,400,000 asset 2,400,000 liability 2,184,000 asset 2,184,000 liability

3. What is the derivative asset or liability on December 31, 2012? a. 1,600,000 asset b. 1,600,000 liability c. 800,000 asset d. 800,000 liability Solution 27-9 Question 1

Answer b

The notional figure is 8,000 kilos and the notional value is 8,000 kilos times the underlying fixed price of P1,200 per kilo or P9,600,000. Question 2

Answer c

Market price -- December 31, 2011 Underlying fixed price Derivative asset Forward contract receivable (8,000 x 300) Present value of a derivative asset (2,400,000 x .91)

1,500 1,200 300 2,400,000 2,184,000

The present value of P2,184,000 is recognized as forward contract receivable on December 31, 2011 because the amount is collectible on January 1, 2013, one year from December 31, 2011.

The entry to recognized the derivative asset on December 31, 2011 is: Forward contract receivable Unrealized gain -- forward contract Question 3

2,184,000 2,184,000

Answer b

Market price -- December 31, 2012 Underlying fixed price

1,000 1,200

Derivative liability

200

Forward contract payable -- 12/31/2012 (8,000 x 200 )

1,600,000

The entry to recognized the derivative liability on December 31, 2012 are: Unrealized loss -- forward contract Forward contract payable

1,600,000 1,600,000

Problem 27-1- (IAA) Indang Company requires 40,000 kilos of soya beans each month in its operations. To eliminate the price risk associated with the purchase of soya beans, on December 1, 2011, Indang entered into a futures contract as a cash flow hedge to buy 40,000 kilos of soya beans at P150 per kilo on March 1, 2012. The market price on December 31, 2011 and March 1, 2012 is P160 per kilo. The appropriate discount rate is 9% and the present value of 1 at 9% for one period is .917. What amount should be recognized by Indang Company on December 31, 2011 as derivative asset or liability? a. 400,000 asset b. 400,000 liability c. 366,800 asset d. 366,800 liability Solution 27-10

Answer a

The entry on December 31, 2011 is: Future contract receivable (40,000 x P10) Unrealized gain -- futures contract

400,000 400,000

Market price -- December 31, 2011 Underlying fixed price

160 150

Derivative asset

10

The futures contract receivable is the derivative asset. The entries on March 1, 2012 are: Purchases Cash

6,400,000 (40,000 x P160)

Cash Futures contract receivable Unrealized gain -- futures contract Gain on futures contract

6,400,000 400,000 400,000 400,000 400,000

Problem 27-11 (IAA) Naga Company produces bottled grape juice. Grape juice concentrate is typically bought and sold by the pound. Naga uses 50,000 pounds of grape juice concentrate each month. On November 1, 2011, Naga entered into a grape juice concentrate futures contract as cash flow hedge to buy 50,000 pounds of concentrate on February 1, 2012 at a price of P50 per pound. The market price on December 31, 2011 and February 1, 2012 of the grape juice concentrate is P38 per pound. The appropriate discount rate is 11%. The periodic system is used. What amount should be recognized by Naga Company aon Decemer 31, 2011 as derivative asset or liability? a. b. c. d.

540,540 asset 540,540 liability 600,000 liability 600,000 asset

Solution 27-11

Answer c

The entry on December 31, 2011 is: Unrealized loss -- futures contract

600,000

Futures contract payable (50,000 x P12)

600,000

Market price -- December 31, 2011 Underlying fixed price

38 50

Derivative liability

12

The futures contract payable is the derivative liability. Entries on February 1, 2012 are: Purchases Cash

1,900,000 (50,000 x P38)

Futures contract payable Cash

1,900,000 600,000

Loss on futures contract 600,000 Unrealized loss -- futures contract

600,000

600,000

Problem 27-12 (IAA) Taal Company requires 25,000 pounds of copper each month in its operations. To eliminate the price risk associated with copper purchases, on December 1, 2011, Taal Company entered into a futures contract as a cash flow hedge to buy 25,000 pounds of copper on June 1, 2012. The futures price is P50 per pound. The futures contract is managed through an exchange, so Taal does not know the other party on the other side of the contract. As with most derivative contracts, this futures contract is settled by an exchange of cash on June 1, 2012 based on the price of copper on that date. The market price per pound is P45 on December 31, 2011 and P42 on June 1, 2012. What is the derivative asset or liability on December 31, 2011? a. 125,000 asset b. 125,000 liability c. 200,000 asset d. 200,000 liability Solution 27-12

Answer b

Market price -- December 31, 2011 Underlying fixed price

45 50

Derivative liability

5

Futures contract payable -- 12/31/2011 (25,000 x 5)

125,000

Market price -- June 1, 2012 Underlying fixed price

42 50

Derivative liability

8

Futures contract payable -- June 1, 2012 (25,000 x 8) Futures contract payable -- December 31, 2011 Increase in derivative liability on June 1, 2012

200,000 125,000 75,000

Problem 27-13 (IAA) Legaspi Company produces colorful 100% cotton T-shirts that are very popular among youth. The entity uses 150,000 kilos of cotton each month in its production process. In accordance with the entity's long-term planning, the entity normally procures one month supply of cotton to be used in its production process. On December 31, 2011, Legaspi Company purchased a call option as cash flow hedge to buy 150,000 kilos of cotton on July 1, 2012. The call option price is P30 per kilo. The entity paid P50,000 for the call option. The market price of cotton on July 1, 2012 is P35 per kilo. What amount should be recognized by Legaspi Company as gain on call option in 2012? a. b. c. d.

750,000 700,000 375,000 350,000

Solution 27-13

Answer b

Fair value of call option on 7/1/2012 Call option payment

(150,000 x P5)

Gain on call option

700,000

The entry on December 31, 2011 for the payment of the call option is: Call option Cash

50,000 50,000

The entries on July 1, 2012 are: Call option Unrealized gain -- call option

750,000 ( 50,000)

700,000 700,000

Cash Call option

750,000

Purchases Cash (150,000 x P35)

5,250,000

Unrealized gain -- call option Gain on call option

700,000

750,000

5,250,000

700,000

Problem 27-14 (IAA) Bicol Company uses approximately 200,000 units of raw material in its manufacturing operations. On December 31, 2011, Bicol Company purchased a call option to buy 200,000 units of the raw material on July 1, 2012 at a price of P25 per unit. The entity paid P20,000 for the call option. Bicol designated the call option as a cash flow hedge against price fluctuation for its July purchase. The market price of the raw material on July 1, 2012 is P22 per unit. What amount should be recognized by Bicol Company as loss on call option in 2012? a. b. c. d.

600,000 550,000 650,000 20,000

Solution 27-14

Answer d

The loss on call option is equal only to the payment of P20,000. Since the market price has decreased on July 1, 2012, the call option is not exercised but simply ignored. Remember that a call option is a right and not an obligation. The entry to record the payment of the option on December 31, 2011 is: Call option Cash

20,000 20,000

The entries on July 1, 2012 are: Raw materials purchases Cash (200,000 x P22) Loss on call option Call option

Problem 27-15 (IAA)

4,400,000 4,400,000 20,000 20,000

Sorsogon Company uses approximately 300,000 units of raw materials in its manufacturing operations. On December 1, 2011,Sorsogon Company purchased a call option to buy 300,000 units of raw materials on March 1,2012 at a price of P25 per unit. Sorsogon paid P50,000 for the call option and designated the call option as a cash flow hedge against price fluctuation for its March purchase. On December 31,2011, the market price of the raw material is P27 per unit and on March 1,2012, the market price is P28. What is the derivative asset or liability on December 31,2011? a. 600,000 asset b. 600,000 liability c.900,000 asset d. 900,000 liability Solution 27-15 Answer a Market price-December 31, 2011 Underlying fixed price Derivative Asset Call option -December 31,2011 (300,000x2) Market price-March 1,2012 Underlying fixed price Derivative Asset Call option-March 1, 2012 (300,000x3) Call option-December 31,2011 Increase fair value in 2012

27 25 2 600,000 28 25 3 900,000 600,000 300,000

Problem 27-16 (IFRS) Vivien Company purchases approximately 500,000 bushels of oats each month. On December 1,2011 Vivien purchase an option to purchase 500,000 bushels of oats on March 1, 2012 at a market price of P100 per bushel which is the market price of bushel on December 1, 2011. Vivien had to pay P100,000 to purchase the call option which it is designated as a cash flow hedge against price increase for its March 1,2012 purchase of oats. On December 31, 2011, the price of oats is P95 per bushel. Because there is still time for the price to potential rise above P100 per bushel before the option expire, the option has a value of P40,000 on December 31,2011. On March 1, 2012, the price of oats is P104 per bushel. What is the gain on call \option that should be reported in the 2012 statement of comprehensive income? a. 2,000,000 b. 1,900,000 c. 1,960,000 d. 1,940,000 Solution 27-16 Answer b

Call option-December 1,2011 Fair Value of call option- December 31,2011 Unrealized loss on call option on 2011

100,000 40,000 60,000

Fair value of call option- 3/1/2012 (500,000 x 4) Fair value call option- December 31, 2011 Gain in call option in 2012 Unrealized loss on call option in 2011 Net gain on call option in 2012

2,000,000 -40,000 1,960,000 60,000 1,900,000

Another approach Fair value of call option-3/1/2012 Call option payment Net gain on call option in 2012

2,000,000 -100,000 1,900,000

Problem 27-17 (IAA) Hazel Company enters into a call option contract with a bank on January 1, 2011. This contract gives the entity to purchase 10,000 shares at P100 pesos per share. The option expires on April 30, 2011. The shares are trading at P100 per share on January1, 2011, at which Hazel pays P10,000 for the call option.The market price per share is P120 on April 30, 2011, and the time value of option has not changed. In order to settle the option contract, what would Hazel most likely do? a. Pay the bank P200,000 b. Purchasethe shares at P100 per share and sell the shares at P120 per share to the bank c. Receive P200,000 from the bank d. Receive P190,000 from the bank Solution 27-17 Answer c Fair value of call option (120-100) 20 Call option receipt (10,000 x 20) 200,000 Problem 27-18 (IAA) Janina Company regularly hedge its purchase requirements and the sale of its finished products in futures market. On December 1, 2011, Janina Company entered into the following three contracts designated as a cash flow hedge: Future Price Market Price Type of contract Quantity 1/1/2011 12/31/2011 Purchase sugar 20,000 60 75 Purchase milk 50,000 100 91 Sell ice cream 30,000 220 195 All three contracts are to be settled on January 1, 2012. What is the derivative asset or liability on December 31,2011? a. 300,000 asset b. 600,000 liability

c. 900,000 asset d. 1,050,000 liability Solution 27-18 Answer b Sugar- "purchase" (20,000 x 15) Milk- "purchase" (50,000 x 9) Ice Cream- "sell" (30,000 x 25) Futures contract receivable - 12/31/2011

300,000 450,000 750,000 600,000

Problem 27-19 (IAA) On June 30 of the current year, Ester Company entered into a firm commitment to purchase specialized equipment from Nagasaki Company for Y80,000,000 on August 31. The exchange rate on June 30 is Y100=$1. To reduce the exchange rate risk that could increase the cost of the equipment in US Dollars, Ester pays $12,000 for the call option contract. This contract gives Ester Y80,000,000 at an exchange rate of Y100=$1 on August 31. On August 31, the exchange rate is Y93=$1. What amount in US dollars did Ester Company save by purchasing the call option? a. 12,000 b. 48,215 c. 60,215 d. Ester Company would have been better off not to have purchased the call option. Solution 27-19 Answer b Dollar equivalent-August 31 (80,000,000/93) Dollar equivalent-June 30 (80,000,000/100) Total saving Payment for call option Net saving-gain on call option

860,215 800,000

12,000

60,215 12,000 48,215

Problem 27-20 (IFRS) Oriental Company has the Philippine peso as its financial currency. The entity expects to purchase goods from USA for $50,000 on March 31, 2012. Accordingly, the entity is exposed If the dollar increase before the purchase takes place,the entity will have to pay more pesos to obtain the to a foreign currency risk. $50,000 that will have to pay for goods. On October 1, 2011 Oriental Company entered into a foreign currency forward contract with a bank speculator to purchase $50,000 is six months for a fixed amount of P2,050,000 or P41 to $1. This contract forward is designated as cash flow hedge of the entity's exposure to increase in dollar exchange rate. On December 31,2011, the exchange rate is P42 to $1 and on March 31,2012 the exchange rate id P44 to $1 What is the derivative asset or liability on Decmeber 31,2011? a. 150,000 asset b. 150,000 liability c. 50,000 asset

d. 50,000 liability Solution 27-20 Answer c Peso equivalent- Decmenber 31,2011 ($50,000 x 42) Pese equivalent- October 1,2011 Forward contract receivable - December 31,2011

2,100,000 2,050,000 50,000

Peso equivalent- March 31,2012 ($50,000 x 44) Peso equivalent- December 31,2011 Increase i n derivative asset

2,200,000 2,100,000 100,000

1. To recognize the derivative asset on December 31, 2011: Forward contract receivable Unrealized gain-forward contract

50,000 50,000

2. To recognize the increase in derivative asset on March 31, 2012: Forward contract receivable Unrealized gain-forward contract

100,000 100,000

Problem 27-21 (IAA) On November 1, 2011 Cassandra Company sold some limited edition art prints to Noritake Company for Y47,850,000 to be paid on January 1, 2012.The current exchange rate on November 1, 2011 was Y110=$1, so the total payment at the current exchange rate qould be equal to $435,000. Cassandra entered into a forward contract with a large bank to guarantee the number of dollars to be received. According to the terms of the contract, if Y47,850,000 is worth less than $435,000, the bank will pay Cassandra the difference in cash. Likewise, if Y47,850,000 is worth more than $435,000, Cassandra must pay the bank the difference in cash. The exchange rate on December 31, 2011 is Y120=$1. What amount in US dollars will Cassandra report as derivative asset or liability on December 31,2011? a. 398,750 asset b. 398,750 liability c. 36,250 asset d. 36,250 liability Solution 27-21 Answer c Dollar equivalent- November 1,2011 Dollar equivalent- 12/31/2011 (47,850,000/120) Forward contract receivable-December 31,2011

435,000 398,750 36,250

riable interest rate prevailing interest rate

payable on December e variable, pay fixed"

e of 1 at for one period on December 31, 2011?

xed rate of 12%, it ber 31, 2012. This ent value of P52,620

0 on January 1, 2011. incipal is to be repaid

ixed" interest rate swap

in 2012 is equal to the 2012 is 7% and the

as "interest rate swap

e fixed rate of 10%, it 012 or P5,000,000

ecember 31, 2011

oan of P6,000,000 with ecember 31, 2015. The market interest rate on

ment with a financial insJanuary 1 is more than payments are made at the

an ordinary annuity of 1

as "interest rate swap

rate of 8%. This means financial institution of

mpany shall receive P60,000 014 and 2015.

ized as interest rate swap

a variable rate interest for principal is due on Decemy 1 resets the variable rate conjunction with the loan, wap agreement with another h flow hedge. The market

12% for two periods and

amount of the loan or

ying fixed rate of 10%. k of 4% times P5,000,000

r P464,000. This amount is a derivative asset.

ying fixed rate of 10%. k of 2% times P5,000,000

P169,000. This amount

ying fixed rate of 10%. P5,000,000 or P50,000

This amount must be

The loan calls for interest t value rate at January 1 of has a two-year P500,000

ase in the second year of prefer to have variable debt. uner agrees to make ner's interest payment in e only, on December 31,

ment with Fortuner?

December 31, 2011?

g 10% rate, Camry is re-

unted for one year. The interest rate swap payable

y 5 courses each year. On ry 31, 2012 to be planted uated wildly. On January The price is set at P500

y 31, 2012 is more than he market price is less than contract was designated as 2012 is P800. The appro-

mpany as derivative asset

ary 31, 2012.

Carmona Grill determined . Because of the volatile

d a forward contract with s of tuna fish on February designated as cash flow

per kilo is P75. The appro-

liability on December 31,

Company shall make a

determined that it will the volatile fluctuation ward contract with a re2012 at a price of P50 w hedge. The derivative

1, 2012 is more than P50, market price on March 1, ecember 31, 2011, the The appropriate discount

long-term planning. On ase 8,000 kilos of Austra-

1, 2011, the entity negoof Australian lobster on P1,200 per kilo on October ity is predicting a drop in

On December 31, 2012, ppropriate discount rate

s the underlying fixed

ble on December 31, 2011 mber 31, 2011.

rations. To eliminate the , Indang entered into a P150 per kilo on March

o. The appropriate discount

2011 as derivative asset

ically bought and sold by

contract as cash flow of P50 per pound. juice concentrate is P38

11 as derivative asset or

ns. To eliminate the price y entered into a futures 2012. The futures price

w the other party on the ntract is settled by an ex-

ular among youth. The accordance with the entiotton to be used in its call option as cash flow is P30 per kilo. The 1, 2012 is P35 per kilo. tion in 2012?

nufacturing operations. 0,000 units of the raw for the call option. Bicol r its July purchase. The

market price has decreased mber that a call option is

28 PROPERTY, PLANT & EQUIPMENT Problem 28-1 (AICPA Adapted) At the beginning of the current year, Town Company purchased for P5,400,000, including appraiser’s fee of P50,000, a warehouse building and the land on which it is located. The following data were available concerning the property:

Land Warehouse building

Current Appraised Value 2,000,000 3,000,000 5,000,000

a. 2,140,000 b. 1,800,000 c. 2,000,000 d. 2,160,000 Solution 28 - 1 Answer D Cost of land (2/5 x 5,400,000) When a group of assets is acquired for a lump sum price, the total cost should be allocated to the individual assets based on their relative fair value or appraised value. Problem 28-2 (AICPA Adapted) On August 1, 2011, Bamco Company purchased a new machine on deferred payment basis. A down payment of P100,000 was made and 4 monthly installments of P250,000 each are to be made beginning on September 1, 2011. The cash equivalent price of the machine was P950,000. Bamco incurred and paid installation costs amounting to P30,000. What is the amount to be capitalized as cost of the machine? a. 950,000 b. 980,000 c. 1,100,000 d. 1,130,000 Solution 28-2 Answer B Cash Price Installation cost Total cost

Problem 28-3 (AICPA Adapted) Josey Company entered into a contract to acquire a new machine for its factory. The machine, which had a cash price of P2,000,000 was paid as follows: Down payment Note payable in 3 equal annual installments 20,000 ordinary shares with a par value of P25 and fair value of P40 per share

Prior to the machine’s use, installation cost of P50,000 was incurred. The machine has an estimated residual value of P100,000. What is the initial cost of the machine? a. 2,000,000 b. 2,400,000 c. 2,050,000 d 2,450,000 Solution 28-3 Answer C Cash price Installation cost Total cost Problem 28-4 (ACP) Anxious Company acquired two items of machinery as follows: * On December 31, 2011, Anxious Company purchased a machine in exchange for a noninterest bearing note requiring ten payments of P500,000. The first payment was made on December 31, 2012, and the others are due annually on December 31. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65 for ten periods. * On December 31, 2011, Anxious Company acquired used machinery by issuing the seller a two-year, noninterest-bearing note for P3,000,000. In recent borrowing, Anxious has paid a 12% interest for this type of note. The present value of 1 at 12% for 2 years is .80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69. What is the total cost of the machinery? a. 5,065,000 b. 5,225,000

c. 5,565,000 d. 8,235,000 Solution 28-4 Answer B Present value of first note payable (500,000 x 5.65) Present value of second note payable (3,000,000 x .80)

In the absence of cash price, the cost of asset acquired by installment is equal to the present value of the total installment payments. The “present value factor of an ordinary annuity of 1” is used in computing the present value of first note payable because the note is payable by installment. The “present value factor of 1” is used in computing the present value of the second note payable because the note is payable lump sum after 2 years. Problem 28-5 (AICPA Adapted) On December 31, 2011, Bart Company purchased a machine in exchange for a noninterest bearing note requiring eight payments of P200,000. The first payment was made on December 31, 2011, and the others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: PV of an ordinary annuity of 1 at 11% for 8 periods PV of an annuity of 1 in advance at 11% for 8 periods What amount should be recorded as initial cost of the machine? a. 1,600,000 b. 1,029,200 c. 1,400,000 d. 1,142,400 Solution 28-5 Answer D Present value of future payments (200,000 x 5.712) The “PV of an annuity of 1 in advance” is used because the machine was purchased on December 31, 2011 and the first payment was made on December 31, 2011. Problem 28-6 (IAA) Dawson Company has received a donation of land from a rich local philanthropist. The land originally

had a cost of P1,000,000. On the date of the donation, the land had a market value of P1,500,000 and an assessed value of 1,200 000. What amount of income should be recognized from the donation? a. 1,500,000 b. 1,200,000 c. 1,000,000 d. 0 Solution 28-6 Answer A Capital gifts or grants from nonshareholders shall be recorded as income at their fair value when they are received or receivable. Problem 28-7 (AICPA Adapted) Precious Company had the following property acquisition during the current year: * Acquired a tract of land with an existing building in exchange for 50,000 shares of Precious Company with P100 par value that had a market price of P120 per share on the date of acquisition. The last property tax bill indicated assessed value of P2,400,000 for the land and P600,000 for the building. Shortly after acquisition the building was razed at cost of P100,000 in anticipation of a new building construction in the current year. * Received land from a major shareholder as an inducement to locate a plant in the city. No payment was required but recious paid P50,000 for legal expenses for land tranfsfer. The land is fairly valued at P1,000,000. What is the total increase in land as a result of the cquisitions? a. 7,000,000 b. 6,100,000 c. 7,150,000 d. 7,100,000 Solution 28-7 Answer D First land: Fair value of shares issued (50,000x120) Cost of razing the old building Second land Total Cost

6,000,000 100,000

If shares are issued for noncash consideration, the proceeds should be measured by the fair value of the consideration received or the fair value of the shares issued in the absence of the fair value of the consideration given.

Contributions received from shareholders should be recorded at fair value with the credit going to donate capital. However, the legal expenses for the transfer of the donated proerty should not be capitalized but deducted from donated capital. Problem 28-8 (IAA) Lax Company recently acquired two items of equipment. The transactions ared described as follows: * Acquired a press at an invoice price of P 3,000.00 subject to a 5% cash discount which was taken Costs of freight and insurance during shipment were P 50,000 and installation cost amounted to P 200,000.00. * Acquired a welding machine at an invoice price of P 2,000,000.00 subject to a 10% cash discount which was not taken. Additional welding supplies were acquired at a cost of P 100,000.00 What is the total increase in the equipment account as a result of the transactions? a. 4,900,000 b. 5,000,000 c. 5,100,000 d. 5,200,000 Solution 28-8 Answer A First equipment: Invoice price Discount taken - 5% Freight ad Insurance Installation Cost Second equipment: Invoice price Discount not taken - 10% Total cost

3,000,000.00 (150,000.00) 50,000.00 200,000.00 2,000,000.00 (200,000.00)

Cash discounts, whether taken or not taken, trade discounts and rebates are deducted in arriving at the cost of property, plant and equipment. The welding supplies on the second equipment should not be capatilized but reported as prepaid expenses.

Problem 28-9 (IAA) Jazz Company purchased land with a current market value of P2,400,000. The carrying amount of the land was P1,305,0000. In exchange for the land, Jazz used 20,000 ordinary shares with par value if P100 and

market value of P140 per share. The shares are traded in an established stock exchange. What amount should Jazz record as cost of the land? a. 1,305,000 b. 2,000,000 c. 2,400,000 d. 2,800,000 Solution 28 – 9 Answer C Current market value of land Problem 28 – 10 (IFRS) Kirk Company purchased equipment by making a down payment of P400,000 and issuing a not payable for P1,800,000. A payment of P600,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity of 1 for three years at 8% is 2.58, and the present value for the future amount of a single sum for three years at 8% is .735. Shipping charges for the equipment of P200,000 and installation charges of P350,000 were incurred. What is the capitalized cost of equipment? a. 1,948,000 b. 2,148,000 c. 2,498,000 d. 2,750,000 Solution 28 – 10 Answer C Down payment Present value of note payable (600,000 x 2.58) Shipping Installation Cost of equipment Problem 28 – 11 (IAA) Figaro Company acquired land and paid in full issuing P600,000 of its 10 percent bonds payable and 40,000 ordinary shares with par value of P10. The shares was selling at P19 and the bonds were trading at 102. What amount should Figaro record as cost of the land? a.

988,000 b. 1,000,000 c. 1,372,000 d. 1,387,200

Solution 28 – 11 Answer C Fair value of bonds payable (600,000 x 102) Fair value of shares (40,000 x 19) Total cost of land Problem 28 – 12 (AICPA Adapted) On September 1, 2011 Ron Company issued 100,000 treasury shares with P25par value for a parcel of land to be held for a future plant site. The treasury shares were acquired by Ron at a cost of P30 per share. Ron’s share had a fait market value of P40 on September 1, 2011. Ron received P50,000 from the sale of scrap when an existing structure on the site was razed. At what amount should the land be initially measured? a. 4,000,000 b. 3,950,000 c. 3,000,000 d. 2,500,000 Solution 28 – 12 Answer B Fair value of treasury shares (100,000 x P40) Scrap value of existing structure Cost of land The market value of the treasury shares is used because the land has no known fair value. Problem 28 – 13 (PHILCPA Adapted) Fairmont Company, a public entity issued 5,000 ordinary shares with P1,000 per value for a building. The following information relates to the exchange. Carrying amount of building Face value of insurance policy for building Current quoted price of share What is the initial cost of the building? a. 5,000,000 b. 17,000,000 c. 22,000,000 d. 20,000,000 Solution 28 – 13 Answer C

Fair value of shares issued (5,000 x 4,400)

Problem 28 – 14 (AICPA Adapted) In October on the current year, Ewing Company exchanged an old packing machine, which cost P1, 200,000 and was 50% depreciated, for another used machine and paid a cash difference of P160, 000. The fair value of the old packaging machine was determined to be P700,000. What is the cost of the machine acquired in the exchange on the books of Ewing Company? a. 860,000 b. 700,000 c. 760,000 d. 540,000 Solution 28 – 14 Answer A Fair value of old machine Cash payment Cost of new machine PAS 16, paragraph 24, provides that an item of property, plant and equipment acquired in a nonmonetary exchange or combination of monetary and nonmonetary exchange is measured at fair value of the asset given up plus cash payment, unless the exchange transaction lacks commercial substance or the fair value of either the asset given up or asset is no reliably measurable. Problem 28 – 15 (AICPA Adapted) Caine Motor Sales exchange a car from its inventory for a computer to be used as a long term asset. The following information relates to this exchange: Carrying amount of the car List selling price of the car Fair value of the computer Fair value of the computer What amount of gain should Caine recognize on the exchange? a. 260,000 b. 160,000 c. 200,000 d. 0 Solution 28 – 15 Answer B

Fair value of computer Less: Cash paid by Caine Fair value of car – asset given Less: Carrying amount of car

Problem 28 – 16 (AICPA Adapted) At the beginning of the current year, Bell Company exchanged an old machine with a book value of P390,000 and a fair value of P350,000 and paid P100,000 cash for another used machine having a list price if P500,000. At what amount should the machine acquired in the exchange be recorded on the books of Bell? a. 450,000 b. 460,000 c. 490,000 d. 500,000 Solution 28 – 16 Answer A Fair value of old machine Cash payment Cost of new machine Problem 28-17 (AICPA Adapted) Eagle Company owns a tract of land that it purchased in 2008 for P2,000,000. The land is held as a future plant site and has a fair value of P2,800,000 on July 1, 2011. Hall Company also owans a tract of land held as a future plant site. Hall paid P3,600,000 for the land in 2009 and the land has a fair value of P3,800,000 on July 1, 2011. On this date, Eagle exchaged its land and paid P1,00,000 cash for the land owned by Hall. The configuration of cash flows from land acquired is expected to be significant differently from the configuration cash flows of the land exchanged. At what amount should Eagle record the land acquired in the exchange? a. 2,800,000 b. 3,000,000 c. 3,200,000 d. 3,800,000 Solution 28-17 Answer D Fair value of land given - Eagle Cash paid by Eagle Total Cost

Problem 28-18 (AICPA Adapted) During the current year, Beam Company paid P100,000 cash and traded inventory, which had a carrying amount of P2,000,000 and a fair value of P2,100,000, for other inventory in the same line of business with a fair value of P2,200,000. What amount should Beam record as cost of the inventory received in exchange? a. 2,000,000 b. 2,100,000 c. 2,200,000 d. 2,300,000 Solution 28-18 Answer C Fair value of invetory given Add: Cash payment Total cost of inventory received Problem 28-19 (AICPA Adapted) Yola Company and Zaro Company are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro P300,000 to compensate for a difference in the grade of oil. It is reliably determined that the exchange lacks commercial substance. On the date of the exchange, cost and market value of the oil were as follows: Yola Company 1,000,000 1,200,000

Cost Market value

1. What amount should Yola Company record as cost of the oil inventory received in exchanged? a. 1,000,000 b. 1,200,000 c. 1,300,000 d. 1,500,000 2. What amount should Zaro Company record as cost of the oil inventory received in exchanged? a. 1,400,000 b. 1,500,000 c. 1,100,000 d. 1,200,000 Solution 28 – 19 Questuion 1 Answer C

Cost of oil inventory given Add: Cash payment Total cost of oil inventory received Questuion 2 Answer C Cost of oil inventory given Less: Cash received Cost of oil inventory received The exchange transactions in measured at the carrying amount of the asset given up adjusted by the cash involved if the the exchange lacks commercial substance. Problem 28-20 (AICPA Adapted) Amiable Company exchanged a truck with a carrying amount of P1,200,000 and a fair value of P2,000,000 for a truck and P200,000 cash. The cash flows from the new truck are not expected to be significantly different from the cash flows of the old truck. The fair value of the truck received was P1,800,000. At what amount should Amiable record the truck received in the exchange? a. 2,000,000 b. 1,400,000 c. 1,000,000 d. 1,800,000 Solution 28- 20 Answer C Carrying amount of truck given Cash received Cost of new truck Problem 28-21 (AICPA Adapted) At the beginning of the current year, Winn Company traded in an old machine having a carrying amount of P1,680,000 and paid a cash difference of P600,000 for a new machine having a cash price of P2,050,000. What amount of loss should Winn recognize on the exchange? a. 600,000 b. 230,000 c. 370,000 d. 0 Solution 28-21 Answer B

Cash price of new machine Less: Cash payment Fair value of old machine Less: Carrying amount Loss on exchange Problem 28-22 (CGAC) Prince Company and Albert Company, two unrelated entities, agreed to exchange tractors trailers. Information relating to these assets is as follows:

Original acquisition cost Accumulated depreciation Fair value on the date of exchange

Prince 1,500,000 700,000 900,000

In accordance with the agreement, Albert will pay P750,000 in cash to Prince which is the difference in fair value. 1. What amount should Prince Company record as cost of the asset received in exchange? a. 150,000 b. 750,000 c. 950,000 d. 650,000 2. What amount should Albert Company record as cost of the asset received in exchange? a. 900,000 b. 830,000 c. 150,000 d. 230,000 Solution 28-22 Question 1 Answer A Fair value of Prince (recipient) Less: Cash received Cost of new asset received in exchange Question 2 Answer A Fair value of Albert (payor)

Add: Cash payment Cost of new asset received in exchange Problem 28-23 (AICPA Adapted) On January 1, 2011, Wilbur Company traded in an old machine for a newer model. Data relative to the old and new machines follow: Old Machine Orignal cost Accumulated depreciation on January 1, 2011 Average published retail value New Machine List price Cash price without trade in Cash paid with trade in What amount should be recognized as cost of the new machine acquired in the exchange? a. 900,000 b. 950,000 c. 980,000 d. 1,000,000 Solution 28-23 Answer A Since the old machine has no available fair value, the new machine received in exchange is recorded at its cash price without trade in of P900,000. The average published retail value of the old machine is not necessarily its fair value. Incidentally, the loss on exchaage is computed as follows: Cash price without trade in Less:Cash paid with trade in Trade in value of old machine Less: Carrying amount Loss on exchange Problem 28-24 (IAA) Jilmar Company acquired a elivery truck, making payment of P2,680,000 analyzed as follows: Price of truck Charge for extra equipment

Value added tax - recoverable Insurance for one year Motor vehicle registration Total Trade in alue of old truck Cash paid The cost of the old truck was P1,500,000 with carrying amount of P200,000 and fair value of P50,000. What is the cost of the new truck acquired in the exchange? a. 2,300,000 b. 2,680,000 c. 2,250,000 d. 2,550,000 Solution 28-24 Answer A Cash paid Value added tax Insurance Motor vehicle registration Capitalized cash payment Fair vaalue of old truck Cost of new truck Problem 28-25 (PHILCPA Adapted) Taiwan Company fabricated equipment for its office use at the entity's plant during the current year. The following data were taken from the entity's records:

Finished goods Office equipment

Material 1,000,000 600,000

Factory overhead amounted to P1,200,000. Normal poduction of finished goods is P50,000 units. Due to the fabrication of the office equpment, finished goods produced totaled 35,000 units only in the current year. The office equipment is to be charged with the overhead which would have been apportioned to the 15,000 units whhich were not produced. What is the total cost of office equipment after the apportionment of factory overhead? a. 1,100,000 b. 1,400,000 c. 1,460,000

d. 2,300,000 Solution 28-25 Answer C Materials Direct Labor Overhead (15,000/50,000x1,200,000) Total cost of office equipment In the absence of any statement, the overhead is allocated on the basis of direct labor as follows: Materials Direct Labor Overhead (500,000/2,000,000x1,200,000) Total cost of office equipmet

ding appraiser’s fee data were available

Seller's Original Cost 1,400,000 2,800,000 4,200,000

2,160,000

tal cost should be allocated to the

basis. A down e made beginning co incurred and paid of the machine?

950,000 30,000 980,000

machine, which had

400,000 1,200,000 800,000 2,400,000

s an estimated

noninterest bearing 31, 2012, and the of note at date of ine periods and 5.65

seller a two-year, % interest for this an ordinary annuity

2,000,000 50,000 2,050,000

2,825,000 2,400,000 5,225,000

resent value of the

nt value of first note

note payable

erest bearing note 2011, and the others or this type of note

n December 31,

he land originally

5.146 5.712

1,142,400

P1,500,000 and an donation?

r value when they

Precious Company on. The last property ding. Shortly after ng construction in

ty. er. The land is

e fair value he fair value of

6,100,000 1,000,000 7,100,000

redit going to ould not be

bed as follows:

which was taken mounted

% cash discount 00.00

3,100,000.00

1,800,000.00 4,900,000.00

in arriving at the

as prepaid expenses.

ng amount of the land was ue if P100 and

ge. What amount

2,400,000

uing a not payable e years. The ee years at 8% is % is .735. Shipping

nds payable and onds were trading at

400,000 1,548,000 200,000 350,000 2,498,000

612,000 760,000 1,372,000

ue for a parcel of ost of P30 per share. 000 from the sale of d be initially

4,000,000 (50,000) 3,950,000

e for a building. The

17,500,000 20,000,000 4,400

22,000,000

which cost P1, ce of P160, 000. The

700,000 160,000 860,000

d in a nonmonetary value of the asset nce or the fair value

ong term asset. The

600,000 900,000 860,000 100,000

860,000 100,000 760,000 600,000 160,000

book value of hine having a list ecorded on the books

350,000 100,000 450,000

nd is held as a future ns a tract of land held r value of P3,800,000 on nd owned by Hall. The y from the configuration ired in the exchange?

2,800,000 1,000,000 3,800,000

hich had a carrying line of business with received in exchange?

2,100,000 100,000 2,200,000

f oil to their customers, g the oil. Yola paid Zaro hat the exchange lacks were as follows: Zaro Company 1,400,000 1,500,000 inventory received in exchanged?

l inventory received in exchanged?

1,000,000 300,000 1,300,000

1,400,000 300,000 1,100,000 adjusted by the cash

r value of P2,000,000 for e significantly different 000. At what

a carrying amount of price of P2,050,000.

1,200,000 (200,000) 1,000,000

2,050,000 600,000 1,450,000 1,680,000 (230,000)

tors trailers.

Albert 800,000 720,000 150,000

s the difference in

hange?

hange?

900,000 750,000 150,000

150,000

750,000 900,000

ata relative to the old

800,000 600,000 170,000

1,000,000 900,000 780,000

nge?

nge is recorded he old machine is not

900,000 780,000 120,000 200,000 (80,000)

2,500,000 50,000

300,000 120,000 10,000 2,980,000 (300,000) 2,680,000

value of P50,000.

2,680,000 (300,000) (120,000) (10,000) 2,250,000 50,000 2,300,000

e current year. The

Direct Labor 1,500,000 500,000

0,000 units. Due to only in the current year. ortioned to the 15,000

600,000 500,000 360,000 1,460,000

r as follows: 600,000 500,000 300,000 1,400,000

29 GOVERNMENT GRANT Problem 29 – 1 (IFRS) On January 1, 2011, Sagada Company received a grant of P25,000,000 from the American government in order to defray safety and environmental costs within the area where the entity is located. The safety and environmental costs are expected to be incurred over four years, respectively, P2,000,000, P4,000,000, P6,000,000 and P8,000,000. How much income from the government grant should be recognized in 2011? a. 25,000,000 b. 2,000,000 c. 2,500,000 d. 6,250,000 Solution 29 – 1 Answers C Year 2011 2012 2013 2014

Costs 2,000,000 4,000,000 6,000,000 8,000,000 20,000,000

Fraction 2/20 4/20 6/20 8/20

Income 2,500,000 5,000,000 7,500,000 10,000,000 25,000,000

PAS 20, paragraph 12, provides that “government grants are recognized as income over the pe necessary to match them with the related costs which they are intended to compensate on a systematic basics.” Problem 29 – 2 (IFRS) On January 1, 2011, Valiant Company received a grant P60,000,000 to compensate for costs to be incurred in planting tree over a period of 5 years Valiant Company will incur such costs at P2,000,000 for 2011, P4,000,000 for 2012, P6,000,000 for 2013, P8,000,000 for 2014 and P10,000,000 for 2015. How much income from the government grant should be recognized for 2011? a. 12,000,000 b 8,000,000 c. 6,000,000 d. 4,000,000 Solution 29 – 2 Answer D

Income (2/30 x 60,000,000)

4,000,000

Problem 29 – 3 (PAS 20) On January 1, 2011, Beseo Company received a grant of P10, 000, 000 from the Australian government for the construction of a laboratory and research facility with an estimated cost of P15, 000, 000 and useful life of 5 years. The laboratory and research facility was completed and ready for its intended use on January 1, 2012. What amount should Beseo Company include in its 2012 income statement as income from the government grant? a. 10,000,000 b. 2,000,000 c. 1,000,000 d. 0 Solution 29 – 3 Answer B Income from government grant (10, 000,000/5) PAS 20, paragraph 17, provided that “grants related to depreciable assets are usually recognized as income over the periods and in proportion to the depreciation of the related assets”. Problem 29 – 4 (IFRS) Intelligent Company received a government grant of P15, 000, 000 to install and run a windwill in an economically backward area. The entity had estimated that such a windmill would costs P25, 000, 000 to construct. The secondary condition attached to the grant is that the entity shall hire labor in the area where the windmill is located. The construction was completed on January 1, 2011. The windmill is to be depreciated using the straight line method over a period of 10 years. How much income from the government grant is recognized for 2011? a. 1,500,000 b. 3,000,000 c. 2,500,000 d. 5,000,000 Solution 29 – 4 Answer A Income from government grant (15,000 ,000/10) Problem 29 – 5 (PAS 20) On January 1, 2011, Barling Company is granted a large tract of land in the Cordillera region by the Philippine government. The fair value of the land is P40, 000, 000. Barling Company is required by the grant to construct chemical research facility and employ only personnel residing in the Cordillera region.

The estimated costs of the facility was completed and ready for its intended use on January 1, 2012. What amount should Barling Company recognized in 2012 as income from government grant? a. 40,000,000 b. 4,500,000 c. 4,000,000 d. 0 Solution 29 – 5 Answer C Income from government grant (40, 000,000/10) PAS 20, paragraph 18, provides that “grants related to nondepreciable assets requiring fulfilment of certain conditions are recognized as income over the periods which bear the cost of meeting the conditions”. Problem 29 – 6 (IFRS) On January 1, 2011, Citimart Company was granted by local government authority 5,000 hectares of land located near the slums outside the city limits. The condition attached to this grant was that Citimart shall clean up this land and lay roads by employing laborers from the village where the land is located. The entire operation will take 3 years and is estimated to cost P10, 000, 000. This amount will be spent P2,000,000 for 2011, P 2, 000, 000 for 2012, and P6, 000, 000 for 2013. The fair value of this land is P12,000,000. What is the income from government grant that should be recognized for 2011? a. 4,000,000 b. 2,400,000 c. 4,800,000 d. 0 Solution 29 – 6 Answer B Income from government grant (2/10 x 12,000,000) Problem 29 – 7 (IFRS) On January 1, 2011, Exuberant Company received a consolidated grant of P12,000,000. Three fourths of the grant will be utilized to purchase a college building for students for underdeveloped countries. The balance of the grant is for subsidizing the tuition costs of those students for four years from date of grant. The building was purchased in January 2011 and is to be depreciated using the straight line method over 10 years. The tuition costs paid in 2011 amounted to P600,000. How much income from government grant should be recognized for 2011?

a. 1,200,000 b. 3,000,000 c. 1,650,000 d. 1,050,000 Solution 29 – 7 Answer C Grant released to asset (12,000,000 x ¾ = 9, 000, 000 /10) Grant released to income (12, 000, 000 x ¼ = 3, 000, 000/4) Income from government grant Problem 29 – 8 (PAS 20) On January 1, 2011, Sabangan Company received a grant of P6, 000, 000 from the British government to compensate from massive losses incurred because of a recent tsunami. The grant was made for purpose of giving immediate financial support to the entity. It will take Sabangan Company 2 years to reconstruct it assets destroyed by the tsunami. How much income from the government grant should be recognized by Sabangan in 2011? a. 10,000,000 b. 5,000,000 c. 2,500,000 d. 0 Solution 29 – 8 Answer A PAS 20, paragraph 20, provides that “a government grant that becomes received as compensation for expenses already incurred or for the purpose of giving financial support to the entity with no related future costs is recognized as income of the period in which it becomes receivable or when received’. Problem 29 – 9 (IFRS) Kate Company purchased a varnishing machine for P3, 000, 000 on January 1, 2011. The entity received a government grant of P500, 000 in respect of this asset. The accounting policy is to depreciate the asset over 4 years on a straight line basis and to treat the grant as deferred income. How much income from the government grant is recognized for 2011? a. 500,000 b. 125,000 c. 250,000 d. 0 Solution 29 – 9 Answer B Income from government grant (500,000/4)

Problem 29 – 10 (IFRS) Paula Company purchased a varnishing machine for P6, 000, 000 on January 1, 2011. The entity received a government grant of P540, 000 in respect of this asset. The accounting policy is to depreciate the asset over 4 years on a straight line basis and to treat the grant as deferred income. What should be reported as carrying amount of the machine and deferred income, respectively, on December 31, 2012? a. 3, 000, 000 b. 4, 500, 000 c. 3, 270, 000 d. 3, 000, 000

270, 000 405, 000 270, 000 540, 000

Solution 29 – 10 Answer A Cost Accumulated depreciation (6, 000, 000 / 4 x 2) Carrying amount – December 31, 2012 Deferred income Income earned (540, 000 / 4 x 2) Deferred income – December 31, 2012 Problem 29 – 11 (IFRS) Peach Company purchased a machine for P7, 000, 000 on January 1, 2011 and received a government grant of P1, 000, 000 toward the capital cost. The machine is to be depreciated on a straight line basis over 5 years and estimated to have residual value of P500, 000 at the end of this period. The accounting policy is to treat the grant as a deferred income. 1. What is the carrying amount of the asset in December 31, 2012? A. B. C. D.

4, 200, 000 5, 700, 000 4, 400, 000 3, 900, 000

2. What is the deferred income on December 31, 2012? A. B. C. D. Solution 29 – 11

400, 000 800, 000 600, 000 0

Question 1 Answer C Acquisition cost Accumulated depreciation (7,000,000 – 500, 000/5x2) Carrying amount – December 31, 2012 Question 2 Answer C Government grant Income recognized for 2011 (1,000,000 /5x2) Deferred income – December 31, 2012 Problem 29 – 12 (IFRS) Betty Company purchased a jewel polishing machine for P3, 600, 000 on January 1, 2011 and received a government grant of P500, 000 toward the capital cost. The accounting policy is to treat the grant as a reduction in the cost of the asset. The machine is to be depreciated on a straight line basis over 8 years estimated to have a residual value of P50, 000 at the end of this period. What is depreciation of the machine for 2011? A. B. C. D.

387,500 762, 500 443, 750 381, 250

Solution 29 – 12 Answer D Cost Government grant Net Cost Residual value Depreciable amount Annual depreciation (3,050,000/8) Problem 29 – 13 (IFRS) On January 1, 2011, Darwin Company purchased a plating machine for P5, 400, 000. Darwin received a government part of P400, 000 toward this capital cost. The machine is to be depreciated on a 20% reducing balance basis over 10 years. The estimated residual value is P200,000. The accounting policy is to treat the government grant as a reduction in the cost of the asset. What is the carrying amount of the machine on December 31, 2012? A. 4, 000, 000 B. 4, 040, 000 C. 3, 456, 000

D. 3, 200, 000 Solution 29 – 13 Answer D Acquisition cost net of grant (5,400,000–400,000) Accumulated depreciation: 2011 (20%x5,000,000) 2012 (20%x4,000,000)

1,000,000 800,000

Problem 29 – 14 (IFRS) On January 1, 2011, Easy Company received a grant of P1, 500, 000 from the government to subsidize tuition fees for a period of 5 years. On January 1, 2013, the entity violated certain conditions attached to the grant, and therefore had to repay such grant to the government. What amount should be recognized as loss resulting from the repayment of the grant in 2013? A. B. C. D.

1, 500, 000 900, 000 600, 000 0

Solution 29 – 14 Answer C Total grant received Income recognized in 2011 and 2012 (1,500,000/5x2) Deferred income – December 31, 2012 PAS 20, paragraph 32, provides that repayment of government grant shall be accounted for as a change in accounting estimate. The repayment of grant related to income shall be applied first to the unamortized deferred income and any balance shall be recognized in profit or loss. The entry on January 1, 2013 is as follows: Deferred income – government grant Loss on repayment of government grant Cash

900,000 600,000

Problem 29 – 15 (IFRS) Tiger Company received a government grant related to depreciable asset five years ago on January 1, 2006 in the amount of P1, 000, 000. This grant was deducted from the capital cost of asset purchased at a total amount of P6, 000, 000 on the same date with a useful life of 10 years and residual value. On January 1, 2011, the entire P 1, 000, 000 became repayable due to lack of compliance with the conditions attached to the grant. What is the depreciable expense to be recognized for 2011?

A. 1, 500, 000 B. 1, 600, 000 C. 1, 100, 000 D. 600, 000 Solution 29 – 15 Answer C Depreciable in 2011 in the absence of the grant (6,000,000/10) Cumulative additional depreciation that would have been recognized in prior years in the absence of the grant (1,000,000/10x5) Total depreciation in 2011 PAS 20, paragraph 32, provides that repayment of grant related to an asset shall be recognized by increasing the carrying amount of the asset or reducing the deferred income by the amount repayable. The cumulative additional depreciation that would have been recognized to date in the absence of the grant shall be recognized in profit or loss immediately. Problem 29 – 16 (IFRS) Tarhata Company received a government grant of P2, 000, 000 related to a factory building that it bought in January 2011. The entity’s policy is to treat the grant as deferred income. Tarhata Company acquired the building from an industrialist identified by the government. If Tarhata Company did not purchased the building, which was located in the slums of the city, it would have been repossessed by the government agency. Tarhata Company purchased the building for P12, 000, 000. The useful life of the building is 10 years with no residual value. On January 1, 2013, the entire amount of the government grant became repayable by reason of noncompliance with conditions attached to the grant. What is the loss to be recognized resulting from the repayment of the grant in 2013? A. 1, 200, 000 B. 2, 000, 000 C. 1, 400, 000 D. 400, 000 Solution 29 – 16 Answer D Total grant received Income recognized in 2011 and 2012 (2,000,00 /10x2) Deferred income – government grant Deferred income – government grant Loss on repayment of government grant Cash

1,600,000 400,000

n government

y, P2,000,000,

are recognized as income over the periods systematic basics.”

ts to be P2,000,000 for r 2015. How

n government 00, 000 and intended use on nt as income

2,000,000

nized as

dwill in an 25, 000, 000 to n the area where is to be om the

on by the quired by the dillera region.

1,500,000

y 1, 2012. What

4,000,000

ilment of g the

ectares of land Citimart shall ocated. The be spent P2,000,000 P12,000,000.

hree fourths of untries. The m date of grant.

e method over overnment

2,400,000

900,000 750,000 1,650,000

government to e for purpose of reconstruct it ecognized by

nsation for h no related received’.

ntity received ciate the asset ncome from the

125,000

entity received ciate the asset be reported as

government ht line basis he accounting

6,000,000 3,000,000 3,000,000 540,000 270,000 270,000

7,000,000 (2,600,000) 4,400,000

1,000,000 (400,000) 600,000

and received a he grant as a over 8 years on of the

win received a n a 20% nting policy is mount of the

3,600,000 (500,000) 3,100,000 (50,000) 3,050,000 381,250

5,000,000

1,800,000 3,200,000

to subsidize ns attached to e recognized as

1,500,000 (600,000) 900,000

as a change in unamortized

January 1, purchased at a lue. On the conditions

1,500,000

600,000 500,000 1,100,000

zed by repayable. The of the grant

g that it bought any acquired t purchased the government building is 10 nt became

2,000,000 400,000 1,600,000

2,000,000

Chapter 30 Land and Building Problem 30-1 (AICPA Adapted) On December, 1,2011, Boyd Company purchased a P4,000,000 tract of land for a factory site. Boyd razed an old building on the property and sold the materials is salvaged from the demolition. Boyd incurred additinal costs and realized salvage proceeds during December 2011as follows: Demolition of old building Legal fees for purchase contract and recording ownership Title guarantee insurance Proceeds from sale of salvaged materials

In the December 31,2011 statement of financial position, what should be reported as carryimg amount of the land? a. 4,380,000 b. 4,400,000 c. 4,180,000 d. 4,200,000 Solution 30-1 Answer a Purchase price Demolition of old building Legal fees for purchase contract Title guarantee insurance Proceeds from sale of salvaged materials

4,000,000 200,000 150,000 50,000 (20,000)

Carrying amount of land

4,380,000

Problem 30-2 (AICPA Adapted) On March 1, 2011, Kay Company purchased for P4,500,000 a tract of land as a factory site. An existing building on tne property was razed and construction was begun on a new factory building in April 2011. Additional data are available as follows: Cost of razing old building Title insurance and legal fees to purchase land

300,000 200,000

Architect fee New Building construction cost

950,000 8,000,000

What is the cost of factory building? a. 9,250,000 b. 9450,000 c.8,950,000 d. 9,150,000 Solution 30-2 Answer c Architect fee New Building construction cost Total cost of new building

950,000 8,000,000 8,950,000

Problem 30-3 (AICPA Adapted) During the current year, Burr Company had the following transactions pertaining to its new office building: Purchase price of land Legal fees for contract to purchase land Architect fee Demolition of old building on site Sales of scrap from old building Construction cost of new building (fully completed)

600,000 20,000 80,000 50,000 30,000 3,500,000

In Burr's year-end statement of finacial position, what amounts should be reported as cost of land and cost of building?

a. b. c. d.

Land 600,000 620,000 640,000 650,000

Building 3,600,000 3,600,000 3,580,000 3,620,000

Solution 30-3 Answer c Land

Building

Purchase price of land Legal fees for contract Architect fee Demolition of old building Sale of scrap Construction cost Total cost

600,000 20,000 80,000 50,000 (30,000) 3,500,000 3,580,000

640,000

Problem 30-4 (PHILCPA Adapted) Biliran Company incurred the following costs at the beginning of the current year: Cost of land Cost of building Remodeling and repair prior to occupancy Escrow fee Clearing, leveling and landfill Property tax for period prior to acquisition Real state commission

1,000,000 4,000,000 500,000 100,000 250,000 150,000 300,000

What is the cost of building? a. 4,500,000 b. 4,740,000 c. 4,800,000 d. 4,940,000 Solution 30-4 Answer d Escrow fee Property tax Real state commission Cost to be allocated Cost of building Remodeling and repairs Allocated cost (550,000 ×4/5) Total cost of building

Problem 30-5 (PHILCPA Adapted)

100,000 150,000 300,000 550,000 4,000,000 500,000 440,000 4,940,000

Siquijor Company was organized in June 2011. The land and building account revealed the following details: June

July August Sept. Dec.

1 30 30 1 31 1 31 31

Organization fees paid to the state Landsite and old building Corporate organization cost Title clearance fee Cost of razing old building Salaries of Siquijor Executives Real state tax Cost of New building completed and occupied on this date

●The building acquired on June 30,2011 was valued at P350,000. ●The entity paid P100,000 for the demolition of the old building and then sold the scrap for P10,000 and credited the proceeds to miscellaneous revenue. ● The entity executives did not participate in the construction of the new building. ● The real estate tax was for the 6-month period ended December 31, 2011 and was assessed on the land. What is the cost of land? a. 3,150,000 b.3,140,000 c. 2,850,000 d. 3,250,000 Solution 30-5 Answer b Purchase price Title clearance fee Cost of razing old building Scrap value of old building Total cost of land

3,000,000 50,000 100,000 (10,000) 3,140,000

Problem 30-6 (PHILCPA Adapted) Tanzania Company has decided to expand its operations and has purchased land in Smallville for construction of a new manufacturing plant. The following costs were incurred in purchasing the property and constructing the building. Land purchase price

2,500,000

Payment of delinquent property taxes Title search and insurance Special assessment for city improvement on water and sewer Building permit Cost to destroy existing building on land (10,000 worth of salvaged material used in new building) Contract cost of new building Architect fee Sidewalk and parking lot Fire insurance on building - 1 year

100,000 50,000 150,000 30,000 60,000 7,000,000 200,000 100,000 40,000

What amount should be reported as cost of the land and building, respectively? a. 2,850,000 and 7,240,000 b. 2,800,000 and 7,290,000 c. 2,700,000 and 7,240,000 d. 2,850,000 and 7,230,000 Solution 30-6 Answer a

Purchase price Property tax Title search Special assessment Building permit Cost to destroy old building Salvaged material used in new building Contract cost of new building Architect fee Total cost

Land 2,500,000 100,000 50,000 150,000 60,000 (10,000)

2,850,000

Problem 30-7 (AICPA Adapted) At the befinning of the current year, Leonora Company purchased a parcel of land as a factory site for P3,200,000. An old building on the property was demolished and construction started on a new building that was completed at the end of current year. Costs incurred on the construction project are as follows: Demolition of old building Architect fee

210,000 300,000

Legal fee-title investigation Construction cost Imputed interest based on stock financing Landfill for building site Clearing of trees from building site Temporary building used for construction activities Land survey Excavation for basement Salvaged material from demolition Timber sold

40,000 8,500,000 140,000 190,000 100,000 290,000 40,000 130,000 20,000 30,000

What is the cost of land and building, repectively? a. 3,730,000 and 9,220,000 b. 3,630,000 and 9,320,000 c. 3,860,000 and 9,090,000 d. 3,760,000 and 9,190,000 Solution 30-7 Answer a Purchase price of land Demolition of old building Legal fee-title investigation Landfill Clearing of trees Land survey Salvaged material from demolition Timber sold Total cost of land

3,200,000 210,000 40,000 190,000 100,000 40,000 (20,000) (30,000) 3,730,000

Architect fee Construction cost Temporary building Excavation for basement Total cost of new building

300,000 8,500,000 290,000 130,000 9,220,000

Problem 30-8 (PHILCPA Adapted) At the beginning of the current year, certain accoutns included in property, plant and equipment of Rock Company had the following balances:

Land Building

2,200,000 6,500,000

During the current year, the following transactions occured: ● A piece of land was acquired for P1,500,000. To be able to acquire the land, P90,000 was paid to a real estate agent, P15,000 was incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P25,000. ● A second piece of land with a building was acquired for P1,000,000. The appraiser valued the land at P200,000 and the building at P100,000. Shortly after acquisition, the building was demolished at a cost fo P20,000. A new building was constructed at a cost of P5,000,000 plus the following costs: Excavation fee Architectural fee Building permit fee

60,000 80,000 20,000

● A third piece of land was acquired for P1,400,000 and was held for undetermined use.

What total cost of land should be reported in the statement of financial position under property, plant and equipmetn? a. 6,200,000 b. 4,800,000 c.4,825,000 d. 4,780,000 Solution 30-8 Answer b Balance of land account on January 1 First piece of land acquired: Cost Payment to real estate agent Cost clearing land Timber and gravel recovered Second piece of land acquired: Cost Cost of demolition Total cost of land under property, plant and equipment The third piece of land acquired is classified as investment property.

1,500,000 90,000 15,000 (25,000) 1,000,000 20,000

Problem 30-9 (IAA) Alice Company made the following expenditures: Architect fee on new building Payment of building contractor Payment of medical bills of employees injured Cost of paving driveway and parking lot Cost of installing lights in parking lot Premium on insurance during construction Cost of open house party to celebrate

100,000 6,000,000 10,000 30,000 5,000 25,000 40,000

What is the cost of new building? a. 6,135,000 b. 6,125,000 c. 6,170,000 d. 6,210,000 Solution 30-9 Answer b Architect fee Payment to building contractor Premium on insurance during construction Total cost of new building

100,000 6,000,000 25,000 6,125,000

Problem 30-10 (IFRS) Isabela Company incureed the following costs during the current year: Option fee for land acquired Option fee for land not acquired Taxes in arrears on building on land Payment for land Demolition of old building, net of salvage of P10,000 Architect fee Payment to city hall for approval of building construction Contract price for factory building Safety fence around construction site Safety inspection on building

10,000 10,000 50,000 1,000,000 100,000 230,000 120,000 5,000,000 35,000 30,000

Removal of safety fence after completion of building New fence surrounding the factory Driveways, parking bays and safety lighting

20,000 80,000 550,000

What is the cost of land and building, repectively? a. 1,150,000 and 5,435,000 b. 1,160,000 and 5,435,000 c. 1,160,000 and 5,535,000 d. 1,060,000 and 5,535,000 Solution 30-10 Answer b

Option fee for land acquired Taxes in arrears Payment for land Demolition of old building Architect fee Payment to city hall Contract price Safety fence around construction site Safety inspection on building Removal of safety fence Total cost

Land 10,000 50,000 1,000,000 100,000

1,160,000

Building

230,000 120,000 5,000,000 35,000 30,000 20,000 5,435,000

Problem 30-11 (IAA) Rolex Company, new formed entity, incurred the following expenditures related to land and building. Cash paid for land and dilapidated building Removal of old building Payment of tenants for vacating old problem Architect fee for new building Building permit for new constuction Fee for title search Survey before construction of new building Excavation before new construction New building constructed Assessment by City for drainage project Cost of grading, leveling and landfill

1,000,000 50,000 15,000 200,000 30,000 10,000 20,000 100,000 6,000,000 5,000 45,000

Driveways and walks to new building from street ( part of building plan ) Temporary quarters for construction crew Temporary building to house tools and materials Cost of changes during construction to make new building more energy efficient Cost of windows broken by Vandals Cost of trees shrubs and other land skaping New fence surrounding the building

40,000 80,000 60,000 50,000 25,000 70,000 200,000

1. What is the cost of land? a. 1,145,000 b. 1,215,000 c. 1,130,000 d.1,080,000 2. what is the cost of the new building? a. 6,510,000 b. 6,560,000 c. 6,585,000 d. 6,420,000 3. What is the cost of land improvement? a. 270,000 b. 200,000 c. 310,000 d. 240,000 Solution 30-11 Quesion 1 Answer a Cash paid Removal of old building Payment of tenants Fee for title search Survey before construction Assessment for drainage project Cost of grading, leveling and landfill

1,000,000 50,000 15,000 10,000 20,000 5,000 45,000

Total cost of land

1,145,000

Quesion 2 Answer b Architect fee Building permit Excavation New building constructed Driveways and walks to building Temporary quarters for crew Temporary building to house tools and materials Cost of construction changes Total cost of new building

200,000 30,000 100,000 6,000,000 40,000 80,000 60,000 50,000 6,560,000

Quesion 3 Answer a Cost of trees shrubs and other land skaping New fence surrounding the building Total cost of land improvement

70,000 200,000 270,000

The cost of windows broken by vandals should be charge to expense.

Problem 30-12 (IAA) Altitude Company purchased a plot of land fo P2,00,000 as a plant site. There was a small office building on the plot, conservatively appraised at P700,000 which the entity will continue to use with some modification and renovation. The entity decided to construct a factory bilding and incurred the following cost: Materials and supplies Excavation Labor on construction Cost remodeling office building Legal cost of conveying land Imputed interest on entity's own money used during construction Cash discounts on materials purchased, not taken Supervision by management Compensation insrance premium from workers Clerical and other expenses related to construction

3,000,000 100,000 2,500,000 200,000 10,000 120,000 60,000 70,000 20,000 30,000

Paving of streets and sidewalks Plans and specification Payment for claims for injuries not covered by insurance Legal cause of injury claim Saving on construction

40,000 140,000 25,000 15,000 200,000

1. What is the initial cost of land? a. 1,310,000. b. 1,300,000 c. 1,350,000 d. 1,410,000 2. What is the initial cost of office building? a. 1,050,000 b. 900,000 c. 700,000 d. 850,000 3. What is the initial cost factory building? a. 5,720,000 b. 5,920,000 c. 5,800,000 d. 5,600,000

Solution 30-12 Quesion 1 Answer a Purchase price ( 2,000,000 - 700,000 ) Legal cost of conveying land Total cost of land

1,300,000 10,000 1,310,000

Quesion 2 Answer b Purchase price Cost of remodeling Total cost of office building

700,000 200,000 900,000

Quesion 3 Answer c Materials and supplies Excavation Labor on construction Cash discounts Supervision by management Compensation insurance Clerical and other expenses Plans and specification Total cost of Factory Building

3,000,000 100,000 2,500,000 (60,000) 70,000 20,000 30,000 140,000 5,800,000

The imputed interest is not is capitalizable. Only interest actually incurred on construction shall be capitalized. The payment of claim for injuries and the legal cost of inquiry claim are treated as outright expense. Saving on construction is not recognized.

Problem 30-13 (PHILCPA Adapted) On December 31,2011, the property, plant and equipment of Pearl Company included the following: Plant assets acquired from Zee Company Repairs made on building prior to occupancy Special tax assessment Construction of plotform for machineries Remodeling of office space in building including new partitions and walls Purchase of new machinery Total property, plant and equipment

7,500,000 200,000 30,000 70,000 400,000 800,000 9,000,000

In exchange for the plant assets of Zee Company, Pearl Company issued 50,000 shares with P100 per value. On the date of purchase, the share had a qouted price of P150 and the plant assets had the following fair value: Land Building Machinery

500,000 4,000,000 1,500,000

1. What is the cost of land? a. 530,000 b. 500,000 c. 625,000 d. 655,000 2. What is the cost of building? a. 4,400,000 b. 4,600,000 c. 5,600,000 d. 5,400,000 3. What is the cost of machinery? a. 2,300,000 b. 2,675,000 c. 2,370,000 d. 2,745,000 Solution 30-13 Question 1 Answer a Fair value Special tax assessment Total cost of land

500,000 30,000 530,000

Question 2 Answer b Fair value Repairs Remodeling of office space Total cost of building

4,000,000 200,000 400,000 4,600,000

Question 3 Answer c Fair value Contruction of platform New machinery Total cost of machinery

1,500,000 70,000 800,000 2,370,000

Assets acquired by issuing shares are measured at their fair value.

Problem 30-14 (IAA) Paragon Company incurred the following costs during the current year in relation to property, plant and equipment: Cash paid for purchase of land Mortgage assumed on the land purchased, including interest of 8% Real realtor's commission Legal fees realty taxes and documentation expenses Amount paid to relocate persons squatting on the property Cost of tearing down an old building on the land Amount recovered from the salvage of the old building demolished Cost of fencing the property Amount paid to the constructor for the building constructed Building permit fee Excavation Architect fee Interest that would have been earned had the money used during the period of construction been invested in the money market Invoice cost of machine acquired Freight, unloading and delivery charges Custom duties and other charges Allowances and hotel accommudation, paid to foriegn technicians during installation and testrun the machine

1. What amount should be capitalized as cost of land? a. 4,000,000 b. 4,110,000 c. 4,150,000 d. 3,000,000 2. What amount should be capitalized as cost of building? a. 5,300,000 b. 5,410,000 c. 5,450,000 d. 5,560,000

3. What amount should be capitalized as cost of machine? a. 2,600,000 b. 2,000,000 c. 2,200,000 d. 2,560,000 Solution 30-14 Quesion 1 Answer a Cash paid for land Mortgage assumed Commission Legal fees realty taxes and documentation Cost relocating squatters Demolition of old building Amount recovered from the salvage of the old building Cost of land

2,500,000 1,000,000 300,000 50,000 100,000 200,000 (150,000) 4,000,000

Question 2 Answer a Amount paid to the constructor Building permit fee Excavation Architect fee Cost of building

5,000,000 50,000 50,000 200,000 5,300,000

Question 3 Answer a Invoice cost Freight Custom duties and other charges Allowances and hotel accommudation Cost of machine

2,000,000 60,000 140,000 400,000 2,600,000

The cost of fencing the property is classified as land improvement while interest that would have been earned is an opportunity cost which is not recorded.

Problem 30-15 (IAA) Excelsior Company was incorporated on January 1, 2011 but began activities on July 1, 2011. The land and

building account on December 31, 2011 as follows: January Feb. May May June June June June July

31 28 1 1 1 1 1 30 1

Land and building Cost of removal of all building Partial payment on new construction Legal fees paid Second payment on new construction Insurance premium Special tax assessment General expenses Final payment on new construction

To acquire land and building, the entity paid P800,000 cash and issued 8,000 preference shares wiht par value of P100 and fair value of P150. Legal fees covered organization cost of P15,000, title examination of land purchased of P10,000, and legal work of P25,000 in connection with construction contract. Insurance premium covered the building for a 2-year term beginning May 1, 2011. Special tax assessment was for street improvements that are permanent in nature. General expenses included the president's salary of P220,000 and the plant superintendent's salary of P100,000. 1. What is the cost of land? a. 1,760,000 b. 2,160,000 c. 2,000,000 d. 2,100,000 2. What is the cost of building? a. 2,165,000 b. 2,065,000 c. 2,000,000 d. 2,305,000 Solution 30-15 Question 1 Answer b Cash paid Fair value of preference shares (8,000 x 150) Removal of old building Title examination Special assessment Cost of land

800,000 1,200,000 90,000 10,000 60,000 2,160,000

Note that the amount recorded for the land and building considered only the par value of the shares. Quesion 2 Answer b Total payment on construction (700,000 + 400,000 +900,000) Legal expense on construction contract Insurance during construction period (480,000/2x2/12) Cost of building

2,000,000 25,000 40,000 2,065,000

The capitalized insurance premium is only for 2 months from May 1 to July 1, 2011. The general expenses and organization cost are outright expenses.

200,000 150,000 50,000 20,000

wing details: 150,000 3,000,000 300,000 50,000 100,000 600,000 90,000 8,000,000

Building

30,000 10,000 7,000,000 200,000 7,240,000

2,200,000

1,580,000

1,020,000 4,800,000

2,500,000 1,000,000 300,000 50,000 100,000 200,000 150,000 110,000 5,000,000 50,000 50,000 200,000 150,000 2,000,000 60,000 140,000 400,000

1,600,000 90,000 700,000 50,000 400,000 480,000 60,000 320,000 900,000