Financial_Accounting_1_Valix.doc

SOLUTION MANUAL

Financial Accounting Valix and Peralta Volume One - 2008 Edition 1

CHAPTER 1 Problem 1-1 Problem 1-4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

D C D D C C B C D A

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Problem 1-2 A A D B D B D C C D

Problem 1-3 1. 2. 3. 4. 5.

C D D A D

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A C A A D A D B D D

Problem 1-5 8 1. 2. 3. 4. 5. 6.

A A A D D D

Problem 1-6 1. 2. 3. 4. 5. 6.

A A C A A A

Problem 1-7 1. 2. 3. 4. 5. 6.

D D C A A C

Problem 11. 2. 3. 4. 5. 6.

B B C C A B

7. B 8. D

7. B 8. C

7. D 8. D

7. D 8. D

9. C

9. A

9. B

9. A

10. D

10. B

10. D

10. B

Problem 1-9 Problem 1-12 1. 2. 3. 4. 5.

D D C B C

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Problem 1-10 A B D B A D C A D A

Problem 1-11

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

C B D A F E J G H I

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

E D B C G H I F J A

2 Problem 1-13 1. Systematic and rational allocation as a matching process 2. Comparability or consistency 3. Monetary unit 4. Income recognition principle 5. Time period 6. Going concern and cost principle 7. Accounting entity 8. Materiality 9. Completeness or standard of adequate disclosure 10. Conservatism or prudence

Problem 1-14 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Materiality Going concern Income recognition principle Accounting entity Standard of adequate disclosure Comparability Matching principle Cost principle Reliability Time period

Problem 1-15 1. The cost of leasehold improvement should not be recorded as outright expense, but should be amortized as expense over the life of the improvement or life of the lease, whichever is shorter. This is in conformity with the systematic and rational allocation principle of expense recognition. 2. The fact that the customer has not been seen for a year is not a controlling factor to write off the account. If the account is doubtful of collection, an allowance should be set up. It is only when there is proof of uncollectibility that the account should be written off. 3. Advertising cost should be treated as outright expense, by reason of the uncertainty of the benefit that may be derived therefrom in the future, in conformity with “immediate recognition principle”. 4. The balance of the cash surrender value should not be charged to loss. In reality, this is conceived as a prospective receivable if and when the policy is canceled because of excessive premium in the early stage of policy. The CSV should be classified as noncurrent investment. 5. The cost of obsolete merchandise should not be included as part of inventory but charged to expense, as a conservative approach. 6. The excess payment represents goodwill which should not be amortized but subject to impairment. Conservatism dictates that goodwill should be recognized when paid for. 7. The depreciation is not dependent on the amount of profit generated during the year. Depreciation is an allocation of cost and therefore should be provided regardless of the level of earnings.

3 8. An entry should be made to recognize the inventory fire loss, and such loss should be treated as component of income. 9. Revenues and expenses of the canteen should be separated from the revenues and cost of regular business operations in order to present fairly the financial position and performance of the regular operations. 10. The increase in value of land and building should not be taken up in the accounts. The use of revalued amount is permitted only when the revaluation is made by independent and expert appraiser. The expected sales price of P5,000,000 is not necessarily the revalued amount of the land and building. Moreover, increase in value is not an income until the asset is sold.

Problem 1-16

1. 2. 3. 4. 5.

Accrual assumption Going concern assumption Asset recognition principle Cost principle Liability recognition principle

6. Income recognition principle 7. Expense recognition principle 8. Cause and effect association principle 9. Systematic and rational allocation principle 10. Immediate recognition principle

Problem 1-17 1. 2. 3. 4. 5.

Monetary unit assumption Cost principle Materiality Time period Matching principle

6. Substance over form 7. Income recognition principle 8. Comparability or consistency 9. Conservatism or prudence 10. Adequate disclosure or completeness

Problem 1-18 1. The cost of the asset should be the amount of cash paid. No income should be recognized when an asset is purchased at an amount less than its market value. Revenue arises from the act of selling and not from the act of buying. 2. The entry should be reversed because the pending lawsuit is a mere contingency. The contingent loss is simply disclosed. To be recognized in accordance with conservatism, the contingent loss must be both probable and measurable. 3. The new car should be charged against the president and debited to receivable from officer, because the car is for personal use.

4 4. The entry is incorrect because no revenue shall be recognized until a sale has taken place. 5. Purchased goodwill should be recorded as an asset. Under the new standard, goodwill is not amortized anymore but on each balance sheet date it should be assessed for impairment.

Problem 1-19 1. 2. 3. 4. 6.

Accrual Going concern Accounting entity Monetary unit Time period

5 CHAPTER 2 Problem 2-1 Easy Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash and cash equivalents Accounts receivable Inventories Prepaid expenses Total current assets Noncurrent assets:

Note

(1)

800,000 450,000 900,000 200,000 2,350,000

Property, plant and equipment Long-term investments Intangible asset Total noncurrent assets Total assets

(2) (3)

4,400,000 950,000 800,000 6,150,000 8,500,000

LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade and other payables Note payable, short-term debt Total current liabilities Noncurrent liabilities: Mortgage payable, due in 5 years Note payable, long-term debt Total noncurrent liabilities Shareholders’ equity: Share capital, P100 par Share premium Retained earnings Total shareholders’ equity Total liabilities and stockholders’ equity

(4)

450,000 200,000 650,000 1,500,000 500,000 2,000,000 4,000,000 500,000 1,350,000 5,850,000 8,500,000

Note 1 - Prepaid expenses Office supplies Prepaid rent Total prepaid expenses

50,000 150,000 200,000

6 Note 2 - Property, plant and equipment Property, plant and equipment Accumulated depreciation Net book value

5,600,000 (1,200,000) 4,400,000

Note 3 - Intangible asset Patent

800,000

Note 4 - Trade and other payables Accounts payable

350,000

Accrued expenses Total

100,000 450,000

Problem 2-2 Simple Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash Trading securities Trade and other receivables Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Long-term investments Intangible assets Total noncurrent assets Total assets

Note (1) (2) (3)

420,000 250,000 620,000 1,250,000 20,000 2,560,000

(4) (5) (6)

4,640,000 2,000,000 300,000 6,940,000 9,500,000

7 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade and other payables Serial bonds payable - current portion Total current liabilities

Note (7)

620,000 500,000 1,120,000

Noncurrent liabilities: Serial bonds payable - remaining portion 2,000,000 Shareholders’ equity: Share capital Share premium Retained earnings Total shareholders’ equity

5,000,000 500,000 880,000 6,380,000

Total liabilities and shareholders’ equity

9,500,000

Note 1 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Claim receivable Total

500,000 ( 50,000) 150,000 20,000 620,000

Note 2 - Inventories Finished goods Goods in process Raw materials Factory supplies Total

400,000 600,000 200,000 50,000 1,250,000

Note 3 - Prepaid expenses Prepaid insurance

20,000

Note 4 - Property, plant and equipment

Land 1,500,000 Building 2,400,000 Machinery 700,000 Tools 40,000 Total 4,640,000

Cost 1,500,000

Accum. depr.

Book value -

4,000,000

1,600,000

2,000,000

1,300,000

40,000 7,540,000

2,900,000

8 Note 5 - Long-term investments Investment in bonds Plant expansion fund Total

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

Note 6 - Intangible assets Franchise

200,000

Goodwill 100,000 Total

300,000

Note 7 - Trade and other payables Accounts payable Notes payable Income tax payable Advances from customers Accrued expenses Accrued interest on note payable Employees income tax payable Total

300,000 100,000 60,000 100,000 30,000 10,000 20,000 620,000

Problem 2-3 Exemplar Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash and cash equivalents Trading securities Trade and other receivables Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Long-term investments Intangible assets Other noncurrent assets Total noncurrent assets Total assets

Note (1)

500,000 280,000 640,000 1,300,000 70,000 2,790,000

(2) (3) (4) (5)

5,300,000 1,310,000 3,350,000 150,000 10,110,000 12,900,000

9 LIABILITIES AND SHAREHOLDERS’ EQUITY Note Current liabilities: Trade and other payables 1,000,000 Noncurrent liabilities: Bonds payable

(6) 5,000,000

Premium on bonds payable Total noncurrent liabilities

1,000,000 6,000,000

Shareholders’ equity: Share capital Reserves Retained earnings (deficit) Total shareholders’ equity Total liabilities and shareholders’ equity

(7) (8)

7,000,000 700,000 (1,800,000) 5,900,000 12,900,000

Note 1 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Accrued interest on notes receivable Total

400,000 ( 20,000) 250,000 10,000 640,000

Note 2 - Property, plant and equipment Cost value Land 1,500,000 Building 3,000,000 Equipment 800,000 Total 5,300,000

Accum. depr.

Book

1,500,000

-

5,000,000

2,000,000

1,000,000

200,000

7,500,000

2,200,000

Note 3 - Long-term investments Land held for speculation Sinking fund Preference share redemption fund Cash surrender value 60,000 Total

500,000 400,000 350,000 1,310,000

Note 4 - Intangible assets Computer software Lease rights Total

10 Note 5 - Other noncurrent assets

3,250,000 100,000 3,350,000

Advances to officers, not collectible currently Long-term refundable deposit Total

100,000 50,000 150,000

Note 6 - Trade and other payables Accounts payable Notes payable Unearned rent income SSS payable Accrued salaries Dividends payable Withholding tax payable Total

400,000 300,000 40,000 10,000 100,000 120,000 30,000 1,000,000

Note 7 – Share capital Preference share capital Ordinary share capital Total

2,000,000 5,000,000 7,000,000

Note 8 - Reserves Share premium – preference Share premium – ordinary Total

500,000 200,000 700,000

Problem 2-4 Relax Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash Trade accounts receivable Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Investment in associate Intangible assets Total noncurrent assets Total assets

Note (1)

400,000 750,000 1,000,000 100,000 2,250,000

(2) (3)

5,600,000 1,300,000 350,000 7,250,000 9,500,000

11 LIABILITIES AND SHAREHOLDERS’ EQUITY

Note Current liabilities: Trade and other payables Mortgage note payable-current portion Total current liabilities

(4)

Noncurrent liabilities: Mortgage note payable, remaining position Bank loan payable, due June 30, 2010 Total noncurrent liabilities Shareholders’ equity: Share capital Reserves Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

1,350,000 400,000 1,750,000 1,600,000 500,000 2,100,000

(5)

3,000,000 1,400,000 1,250,000 5,650,000 9,500,000

Note 1 - Trade accounts receivable Accounts receivable Allowance for doubtful accounts Net realizable value

800,000 ( 50,000) 750,000

Note 2 - Property, plant and equipment

Land Building 3,000,000 Machinery 1,800,000 Equipment Total 5,600,000

Cost 500,000 5,000,000

Accum. Book depr. value 500,000 2,000,000

3,000,000

1,200,000

400,000 8,900,000

100,000 3,300,000

300,000

Note 3 - Intangible assets Trademark Secret processes and formulas Total

150,000 200,000 350,000

Note 4 - Trade and other payables Notes payable Accounts payable Income tax payable Accrued expenses Estimated liability for damages Total

750,000 350,000 50,000 60,000 140,000 1,350,000

12 Note 5 - Reserves Additional paid in capital Retained earnings appropriated for plant expansion Retained earnings appropriated for contingencies Total

300,000 1,000,000 100,000 1,400,000

Problem 2-5 Summa Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash Bond sinking fund Trade and other receivables Inventory Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Investment property Intangible asset Total noncurrent assets Total assets

Note (1) (2)

700,000 2,000,000 830,000 1,200,000 100,000 4,830,000

(3) (4)

5,500,000 700,000 370,000 6,570,000 11,400,000

LIABILITIES AND EQUITY Note Current liabilities: Trade and other payables Bonds payable due June 30, 2009 Total current liabilities

(5)

2,050,000 2,000,000 4,050,000

Noncurrent liability: Deferred tax liability Equity: Share capital Reserves Retained earnings Total equity Total liabilities and equity

650,000 (6) (7)

3,500,000 500,000 2,700,000 6,700,000 11,400,000

13 Note 1 - Cash Cash on hand Cash in bank

50,000 650,000 700,000

Note 2 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Accrued interest receivable Total

650,000 ( 50,000) 200,000 30,000 830,000

Note 3 - Property, plant and equipment

1,000,000 5,500,000 2,400,000

Accum. depr. 2,500,000 900,000

8,900,000

3,400,000

Cost Land Building Furniture and equipment 1,500,000 Total 5,500,000

Book value 1,000,000 3,000,000

Note 4 - Intangible asset Patent

370,000

Note 5 - Trade and other payables Accounts payable Notes payable Accrued taxes Other accrued liabilities Total

1,000,000 850,000 50,000 150,000 2,050,000

Note 6 – Share capital Authorized share capital, 50,000 shares, P100 par 5,000,000 Unissued share capital Issued share capital Subscribed share capital, 10,000 shares Subscription receivable Paid in capital

(2,000,000) 3,000,000 1,000,000 ( 500,000) 500,000 3,500,000

Note 7 - Reserves Share premium

300,000

Retained earnings appropriated for contingencies Total

200,000 500,000

14 Problem 2-6 (Functional method) Karla Company Income Statement Year ended December 31, 2008

Note Net sales revenue 7,700,000 Cost of sales (5,000,000) Gross income 2,700,000 Other income 400,000 Total income 3,100,000 Expenses: Selling expenses Administrative expenses Other expenses Income before tax Income tax Net income

(1) (2)

(3)

(4) (5) (6)

950,000 800,000 100,000

1,850,000 1,250,000 ( 250,000) 1,000,000

Note 1 – Net sales revenue Gross sales Sales returns and allowances Sales discounts Net sales revenue

7,850,000 ( 140,000) ( 10,000) 7,700,000

Note 2 – Cost of sales Inventory, January 1 Purchases Freight in Purchase returns and allowances Purchase discounts Net purchases Goods available for sale Inventory, December 31 Cost of sales

1,000,000 5,250,000 500,000 ( 150,000) ( 100,000) 5,500,000 6,500,000 (1,500,000) 5,000,000

Note 3 – Other income Rental income Dividend revenue Total other income

250,000 150,000 400,000

15 Note 4 – Selling expenses Freight out Salesmen’s commission Depreciation – store equipment Total selling expenses 950,000

175,000 650,000 125,000

Note 5 – Administrative expenses Officers’ salaries Depreciation – office equipment Total administrative expenses

500,000 300,000 800,000

Note 6 – Other expenses Loss on sale of equipment Loss on sale of investment Total other expenses

50,000 50,000 100,000

Natural method Karla Company Income Statement Year ended December 31, 2008 Net sales revenue Other income Total Expenses: Increase in inventory Net purchases Freight out Salesmen’s commission Depreciation Officers’ salaries

Note (1) (2) (3) (4) (5)

7,700,000 400,000 8,100,000 ( 500,000) 5,500,000 175,000 650,000 425,000 500,000

Other expenses 6,850,000 Income before tax Income tax Net income

16 Note 1 – Net sales revenue Gross sales 7,850,000 Sales returns and allowances ( 140,000) Sales discounts ( 10,000) Net sales revenue 7,700,000

Note 2 – Other income Rental income 250,000 Dividend revenue 150,000 Total other income 400,000

Note 3 – Increase in inventory Inventory, December 31 1,500,000 Inventory, January 1 1,000,000 Increase in inventory 500,000

Note 4 – Net purchases Purchases 5,250,000 Freight in 500,000

(6)

100,000 1,250,000 ( 250,000) 1,000,000

Purchase returns and allowances ( 150,000) Purchase discounts ( 100,000) Net purchases 5,500,000

Note 5 – Depreciation Depreciation – store equipment 125,000 Depreciation – office equipment 300,000 Total 425,000

Note 6 – Other expenses Loss on sale of equipment Loss on sale of investment Total

50,000 50,000 100,000

17 Problem 2-7 Masay Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008 Raw materials – January 1 Purchases Raw materials available for use Less: Raw materials – December 31 280,000 Raw materials used Direct labor Factory overhead: Indirect labor Superintendence Light, heat and power Rent – factory building Repair and maintenance – machinery Factory supplies used

200,000 3,000,000 3,200,000 2,920,000 950,000 250,000 210,000 320,000 120,000 50,000 110,000

Depreciation – machinery 1,120,000 Total manufacturing cost 4,990,000 Goods in process – January 1 240,000 Total Cost of goods in process 5,230,000 Less: Goods in process – December 31 170,000 Cost of goods manufactured

60,000

5,060,000

Cost of sales method Masay Company Income Statement Year ended December 31, 2008 Note Net sales revenue 7,450,000 Cost of goods sold (5,120,000) Gross income 2,330,000 Other income 210,000 Total income 2,540,000 Expenses: Selling expenses Administrative expenses Other expense 1,720,000 Income before tax 820,000 Income tax expense ( 320,000) Net income 500,000

(1) (2)

(3)

(4) (5) (6)

830,000 590,000 300,000

18 Note 1 – Net sales revenue Sales

7,500,000

Sales returns and allowances Net sales revenue

( 50,000) 7,450,000

Note 2 – Cost of goods sold Finished goods – January 1 Cost of goods manufactured Goods available for sale Finished goods – December 31 Cost of goods sold

360,000 5,060,000 5,420,000 ( 300,000) 5,120,000

Note 3 – Other income Gain from expropriation Interest income Gain on sale of equipment

100,000 10,000 100,000 210,000

Note 4 – Selling expenses Sales salaries Advertising Depreciation – store equipment Delivery expenses Total

400,000 160,000 70,000 200,000 830,000

Note 5 – Administrative expenses Office salaries Depreciation – office equipment Accounting and legal fees Office expenses Total

150,000 40,000 150,000 250,000 590,000

Note 6 – Other expense Earthquake loss

300,000

19 Nature of expense method Masay Company

Income Statement Year Ended December 31, 2008 Note (1) (2)

Net sales revenue Other income Total income Expenses: Decrease in finished goods and goods in process Raw materials used Direct labor Factory overhead Salaries Advertising Depreciation Delivery expenses Accounting and legal fees Office expenses Other expense Income before tax Income tax expense Net income

130,000 2,920,000 950,000 (5) 1,120,000 (6) 550,000 160,000 (7) 110,000 200,000 150,000 250,000 (8) 300,000

7,450,000 210,000 7,660,000

(3) (4)

6,840,000 820,000 ( _320,000) 500,000

Note 1 – Net sales revenue Sales Sales returns and allowances Net sales revenue

(

7,500,000 50,000) 7,450,000

Note 2 – Other income Gain from expropriation Interest income Gain on sale of equipment

100,000 10,000 100,000 210,000

Note 3 – Decrease in finished goods and goods in process Finished goods Goods in process Total

January 1 360,000 240,000 600,000

December 31 300,000 170,000 470,000

Decrease 60,000 70,000 130,000

20 Note 4 – Raw materials used Raw materials – January 1 Purchases Raw materials available for use

200,000 3,000,000 3,200,000

Raw materials – December 31 Raw materials used

280,000 2,920,000

Note 5 – Factory overhead Indirect labor Superintendence Light, heat and power Rent – factory building Repair and maintenance – machinery Factory supplies used 110,000 Depreciation – machinery Total

250,000 210,000 320,000 120,000 50,000 60,000 1,120,000

Note 6 – Salaries Sales salaries Office salaries Total

400,000 150,000 550,000

Note 7 – Depreciation Depreciation – store equipment Depreciation – office equipment Total

70,000 40,000 110,000

Note 8 – Other expense Earthquake loss

300,000

Problem 2-8 Youth Company Income Statement Year ended December 31, 2008 Net sales revenue Cost of goods sold Gross income Expenses: Selling expenses Administrative expenses Other expense Income before tax Income tax expense Net income

Note (1) (2) (3) (4) (5)

8,870,000 (5,900,000) 2,970,000 690,000 580,000 340,000

1,610,000 1,360,000 ( 360,000) 1,000,000

21

Note 1 – Net sales revenue Sales Sales returns and allowances

9,070,000 ( 200,000)

Net sales revenue

8,870,000

Note 2 – Cost of goods sold Beginning inventory Purchases Transportation in Purchase discounts Goods available for sale Ending inventory Cost of goods sold

1,500,000 5,750,000 150,000 ( 100,000)

5,800,000 7,300,000 (1,400,000) 5,900,000

Note 3 – Selling expenses Depreciation – store equipment Store supplies Sales salaries Total

110,000 80,000 500,000 690,000

Note 4 – Administrative expenses Officers’ salaries Depreciation – building Office supplies Total

400,000 120,000 60,000 580,000

Note 5 – Other expense Uninsured flood loss

340,000

22 Problem 2-9 Christian Company

Statement of Cost of Goods Manufactured Year Ended December 31, 2008 Purchases 1,600,000 Freight in 80,000 Total 1,680,000 Increase in raw materials ( 100,000) Raw materials used 1,580,000 Direct labor 1,480,000 Factory overhead: Indirect labor Depreciation – machinery Factory taxes Factory supplies expense Factory superintendence Factory maintenance Factory heat, light and power 1,750,000 Total manufacturing cost Decrease in goods in process Cost of goods manufactured

600,000 50,000 130,000 120,000 480,000 150,000 220,000 4,810,000 90,000 4,900,000

Christian Company Income Statement Year Ended December 31, 2008 Note Sales revenue Cost of goods sold (5,100,000) Gross income Expenses: Selling expenses Administrative expenses 1,730,000 Income before tax Income tax expense ( 170,000) Net income

8,000,000 (1) 2,900,000 (2) (3)

800,000 930,000 1,170,000 1,000,000

Note 1 – Cost of goods sold Cost of goods manufactured Decrease in finished goods Cost of goods sold

4,900,000 200,000 5,100,000

23

Note 2 – Selling expenses Sales salaries 520,000 Advertising 120,000 Delivery expense 160,000 Total 800,000

Note 3 – Administrative expenses Office supplies expense 30,000 Office salaries 800,000 Doubtful accounts 100,000 Total 930,000

Problem 2-10 Ronald Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008 Materials – January 1 1,120,000 Purchases Freight on purchases Purchase discounts 1,800,000 Materials available for use 2,920,000 Less: Materials – December 31 1,560,000 Materials used 1,360,000 Direct labor 2,000,000 Factory overhead: Heat, light and power Repairs and maintenance Indirect labor

1,600,000 220,000 ( 20,000)

600,000 100,000 360,000

Other factory overhead Factory supplies used (300,000 + 660,000 – 540,000) Depreciation – factory building 2,100,000 Total manufacturing cost 5,460,000 Goods in process – January 1 360,000 Total cost of goods in process 5,820,000 Less: Goods in process – December 31 320,000 Cost of goods manufactured

340,000 420,000 280,000

5,500,000

24

Ronald Company Income Statement Year Ended December 31, 2008 Note Net sales revenue

(1)

Cost of goods sold (5,400,000) Gross income Other income

(2)

Total income Expenses: Selling expenses Administrative expenses Income before tax Income tax expense Net income

6,980,000

1,580,000 160,000

(3)

1,740,000 200,000 340,000

540,000 1,200,000 ( 200,000) 1,000,000

Note 1 – Net sales revenue Sales Sales returns and allowances Net sales revenue

7,120,000 ( 140,000) 6,980,000

Note 2 – Cost of goods sold Finished goods – January 1 Cost of goods manufactured Goods available for sale Finished goods – December 31 Cost of goods sold

420,000 5,500,000 5,920,000 ( 520,000) 5,400,000

Note 3 – Other income Interest revenue

160,000

25 Problem 2-11 Reliable Company Statement of Retained Earnings Year Ended December 31, 2008 Retained earnings – January 1 Prior period error – overdepreciation in 2007 Change in accounting policy from FIFO to weighted average method – credit adjustment Corrected beginning balance Net income Decrease in appropriation for treasury share Total Cash dividends paid to shareholders Current appropriation for contingencies Retained earnings – December 31

200,000 100,000 150,000 450,000 1,300,000 200,000 1,950,000 ( 500,000) ( 100,000) 1,350,000

Problem 2-12 Net income Loss from fire Goodwill impairment Loss on sale of equipment Gain on retirement of bonds payable Gain on life insurance settlement

3,000,000 ( 50,000) ( 250,000) ( 200,000) 100,000 450,000

Adjusted net income

3,050,000

Gondola Company Statement of Retained Earnings Year ended December 31, 2008 Balance – January 1 Compensation of prior period not accrued Correction of prior period error – credit Adjusted beginning balance Net income – adjusted Stock dividend Loss on retirement of preference share Appropriated for treasury share Balance – December 31

2,600,000 ( 500,000) 400,000 2,500,000 3,050,000 ( 700,000) ( 350,000) (1,000,000) 3,500,000

26

CHAPTER 3 Problem 3-1 1. 2. 3. 4. 5.

D A A C B

6. 7. 8. 9. 10.

D B C C A

Problem 3-2 1. 2. 3. 4. 5.

D D C A C

6. 7. 8. 9. 10.

D D B D B

Problem 3-3 a. Undeposited collections Cash in bank – PCIB Cash in bank – PCIB (for payroll) 150,000 Cash in bank - PCIB (savings deposit) Money market instrument – 90 days Total cash and cash equivalents b. Accounts receivable (15,000 + 25,000) Cash in foreign bank Advances to officers Sinking fund cash Trading securities Bank overdraft Cash

60,000 500,000 100,000 2,000,000 2,810,000 40,000 100,000 30,000 450,000 120,000 50,000 690,000

Problem 3-4 Adjusting entries on December 31, 2008 a. Cash Accounts payable

100,000

b. Cash Accounts payable

50,000

c. Accounts receivable Cash d. Accounts receivable (20,000 + 60,000 + 30,000) Money market placement Cash in closed bank Advances to employee Pension fund Cash

100,000 50,000 200,000 200,000 110,000 1,000,000 50,000 30,000 400,000 1,590,000

27 Cash and cash equivalents: Demand deposit (see below) Time deposit – 30 days Petty cash fund Total

1,450,000 500,000 10,000 1,960,000

Demand deposit per book Undelivered check Postdated check delivered Window dressing of collection Adjusted balance

1,500,000 100,000 50,000 ( 200,000) 1,450,000

Problem 3-5 1. Cash on hand Postdated check Adjusted cash on hand

500,000 (100,000) 400,000

2. Petty cash fund Unreplenished petty cash expenses Postdated employee check Adjusted petty cash

20,000 ( 2,000) ( 3,000) 15,000

3. Security Bank current account Postdated company check delivered Adjusted balance

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

4. Cash on hand Petty cash fund

400,000 15,000

Security Bank current account PNB current account No. 1 PNB current account No. 2 BSP Treasury bill – 60 days 3,000,000 Total cash and cash equivalents

1,200,000 400,000 ( 50,000) 4,965,000

*The BPI Time deposit of P2,000,000 is shown as noncurrent investment because it is restricted for land acquisition. 5. Accounts receivable Cash on hand Expenses Receivable from employee Petty cash fund Security Bank current account Accounts payable

100,000 100,000 2,000 3,000 5,000 200,000 200,000

28 Problem 3-6 1. Cash on hand 500,000 NSF customer check ( 40,000) Postdated customer check ( 60,000) Adjusted on hand 400,000 2. Currency and coins Check drawn payable to petty cashier Adjusted petty cash

1,000 14,000 15,000

3. Cash in bank 2,000,000 Undelivered company check 100,000 Postdated company check delivered 150,000 Adjusted cash in bank 2,250,000 4. Accounts receivable (40,000 + 60,000) Cash on hand 100,000

100,000

Advances to employees Cash short or over Petty cash fund Cash in bank (100,000 + 150,000) Accounts payable 250,000

3,000 2,000 5,000 250,000

Problem 3-7 1. Cash on hand 200,000 NSF customer check ( 35,000) Postdated customer check ( 15,000) Adjusted cash on hand 150,000 2. Petty cash fund: Currency and coins

5,000

3. Philippine Bank current account 5,000,000 Undelivered company check Postdated company check delivered Adjusted balance

25,000 45,000 5,070,000

4. Cash on hand Petty cash fund Philippine Bank current Manila Bank current Asia Bank time deposit Total cash and cash equivalent

150,000 5,000 5,070,000 4,000,000 2,000,000 11,225,000

29 5. Accounts receivable Cash on hand 50,000

50,000

Receivable from officer Expenses Cash short or over Petty cash

2,000 12,000

Philippine Bank current Accounts payable

70,000

1,000 15,000 70,000

City Bank current 100,000 Bank overdraft 100,000

Problem 3-8 Fluctuating Fund System 1. Petty cash fund Cash in bank 2. Postage Supplies Transportation Miscellaneous expense Petty cash fund 3. Petty cash fund Cash in bank

10,000 10,000 1,500 5,500 1,200 800

Imprest Fund System 1. Petty cash fund Cash in bank

10,000 10,000

2. No entry

9,000 14,000 14,000

3. Petty cash fund 5,000 Postage 1,500 Supplies 5,500 Transportation 1,200 Miscellaneous expense 800 Cash in bank 14,000

Problem 3-9 Fluctuating Fund System 1. Petty cash fund Cash in bank 2. Postage Supplies Petty cash fund

Imprest Fund System

10,000 10,000 1,500 2,000

1. Petty cash fund Cash in bank

10,000 10,000

2. No entry 3,500 3. No entry

3. Transportation 1,000 Miscellaneous expense 500 Cash in bank 1,500

4. No entry

30 Fluctuating Fund System 4. Supplies Accounts payable Petty cash fund

1,000 3,000

5. Petty cash fund Cash in bank

9,000

6. Postage

Imprest Fund System

4,000 9,000 2,000

5. Postage 1,500 Supplies 3,000 Transportation 1,000 Miscellaneous expense 500 Accounts payable 3,000 Cash in bank

9,000

Supplies Transportation Petty cash fund 7. Petty cash fund Cash in bank

3,000 4,000

6. No entry 9,000

19,000 19,000

7. Petty cash fund Postage Supplies Transportation Cash in bank

10,000 2,000 3,000 4,000 19,000

Problem 3-10 Fluctuating Fund System May 2 Petty cash fund Cash in bank 29 Postage Supplies 3,000 Transportation Miscellaneous expense 1,500 Petty cash fund

10,000 10,000

Imprest Fund System May 2 Petty cash fund Cash in bank

1,000 3,000

10,000 10,000

29 Postage Supplies

2,500 1,500

Transportation 8,000

1,000

2,500 Miscellaneous expense

Petty cash fund Petty cash fund Cash in bank

8,000 8,000

8,000 June 30 Supplies Accounts payable Transportation Petty cash fund July

1 Petty cash fund Supplies Postage Transportation

2,000 1,000 1,000

June 30 Supplies Accounts payable Transportation 4,000 Petty cash fund

2,000 1,000 1,000 4,000

4,000 2,000 1,000 1,000

To reverse the adjustment made on June 30. 15 Petty cash fund 5,000 July 15 Supplies 1,500 Supplies 3,500 Postage 500 Postage 1,500 Transportation 500 Transportation 1,500 Miscellaneous expense 500 Miscellaneous expense 500 Petty cash fund 3,000 Cash in bank 12,000 Petty cash fund 12,000 Cash in bank 12,000

31 Problem 3-11 2008 Nov. 2 30

Petty cash fund Cash in bank Postage Supplies Petty cash fund

10,000 10,000 2,000 5,000 10,000

Cash in bank Dec. 31

2009 Jan. 1

2 31

17,000

Postage Supplies Special deposit Petty cash fund

3,000 4,000 2,000

Petty cash fund Postage Supplies Special deposit

9,000

9,000

3,000 4,000 2,000

No entry Postage Supplies Accounts payable Cash short or over Cash in bank

5,000 6,000 7,000 1,000 19,000

Problem 3-12 Requirement 1 2008 Dec. 1 Petty cash fund Cash in bank 20 Selling expenses Miscellaneous expenses Equipment Cash in bank 31 Receivable from employee Selling expenses Transportation Petty cash fund 2009 Jan. 1 Petty cash fund Receivable from employee Selling expenses Transportation

10,000 10,000 5,000 2,000 2,000 9,000 2,000 1,500 500 4,000 4,000 2,000 1,500 500

32 2009 Jan. 15 No entry 31 Selling expenses Administrative expenses Transportation Purchases Cash in bank

2,000 2,000 1,500 1,200 6,700

Requirement 2 Petty cash 10,000 Less: Petty cash expenses from December 21, 2008 to January 31, 2009: Selling expenses (1,500 + 500) 2,000 Administrative expenses 2,000 Transportation (500 + 1,000) 1,500 Purchases 1,200 6,700 Petty cash before replenishment 3,300

Problem 3-13 Answer B

Problem 3-14 Answer C

Problem 3-15 Answer A

Problem 3-16 Answer A

Petty cash fund Undeposited collections Cash in bank Total

50,000 1,100,000 2,500,000 3,650,000

Payroll account Value added tax account Traveler’s check Money order Petty cash fund Total

2,500,000 1,000,000 300,000 700,000 40,000 4,540,000

Problem 3-17 Answer C Checking account #101 Checking account #201 Time deposit account 90-day Treasury bill Total cash and cash equivalent

Problem 3-18

1,750,000 ( 100,000) 250,000 500,000 2,400,000

Answer B

Cash in First Bank Change fund Petty cash fund Total

5,000,000 50,000 15,000 5,065,000

Problem 3-19 Answer B Cash balance per book Credit adjustment Adjusted cash balance

6,000,000 (1,600,000) 4,400,000

33 Note receivable Accounts receivable (400,000 + 200,000) Cash

1,000,000 600,000 1,600,000

Problem 3-20 Answer A Checkbook balance

8,000,000

Postdated customer check NSF check Undelivered company check Adjusted balance

(2,000,000) ( 500,000) 1,500,000 7,000,000

Problem 3-21 Answer A Cash on hand Cash in bank Petty cash Saving deposit Total deposit

2,400,000 3,500,000 40,000 2,000,000 7,940,000

Problem 3-22 Answer B 24 Answer A Problem 3-25 Answer A

Problem 3-23 Answer A

Cash on hand and in bank Time deposit Saving deposit Total

Problem 3-

5,000,000 6,000,000 1,000,000 12,000,000

Problem 3-26 Answer B Currencies Coins Accommodation check Total

4,000 1,000 6,000 11,000

Problem 3-27 Answer C Coins and currency Replenishment check 4,000 Total

2,000 6,000

Problem 3-28 Answer C Total petty cash Currency and coins Amount of replenishment

10,000 ( 3,000) 7,000

34 CHAPTER 4 Problem 4-1 1. D

6. C

11. C

2. 3. 4. 5.

A B C C

7. 8. 9. 10.

D C A B

12. 13. 14. 15.

B A C C

Problem 4-2 Balance per book Add: CM for note collected Total Less: DM for service charge Adjusted book balance Balance per bank 108,000 Add: Deposit in transit 80,000 Total 188,000 Less: Outstanding checks: No. 102 105 107 95,000 Adjusted bank balance 93,000

65,000 30,000 95,000 2,000 93,000

15,000 30,000 50,000

Adjusting entries: 1. Cash in bank Note receivable 30,000

30,000

2. Bank service charge Cash in bank 2,000

2,000

Problem 4-3 Balance per book 110,000 Add: CM for note collected 45,000 Total 155,000 Less: DM for service charge NSF check Book error (52,000 – 25,000) 42,000 Adjusted book balance 113,000

5,000 10,000 27,000

35 Balance per bank 135,000 Add: Deposit in transit Erroneous bank debit 68,000 Total 203,000 Less: Outstanding checks: No. 770 775 777

60,000 8,000

20,000 30,000 40,000

90,000 Adjusted bank balance 113,000 Adjusting entries: 1. Cash in bank Bank service charge Note receivable 50,000

45,000 5,000

2. Bank service charge Accounts receivable Accounts payable Cash in bank 42,000

5,000 10,000 27,000

Problem 4-4 Balance per book 2,840,000 Add: CM for note collected 270,000 Total 3,110,000 Less: DM for service charge 5,000 Adjusted book balance 3,105,000 Balance per bank 3,265,000 Add: Deposit in transit 450,000 Total 3,715,000

Less: Outstanding checks: No. 116 122 124 125

60,000 180,000 120,000 250,000

610,000 Adjusted bank balance 3,105,000 Adjusting entries: 1. Cash in bank Bank service charge Note receivable Interest income

270,000 10,000

2. Bank service charge Cash in bank

5,000

250,000 30,000 5,000

36 Problem 4-5 Balance per book 5,000,000 Add: Note collected by bank Total 7,150,000 Less: Bank service charge NSF check 550,000 Adjusted book balance 6,600,000 Balance per bank 4,450,000 Deposit in transit 3,000,000 Total 7,450,000 Less: Outstanding checks 850,000 Adjusted bank balance 6,600,000

2,150,000 50,000 500,000

Adjusting entries: 1. Cash in bank Bank service charge Note receivable 2,000,000

2,150,000 50,000

Interest income 200,000 2. Bank service charge Accounts receivable Cash in bank 550,000

50,000 500,000

Problem 4-6 Book balance 1,405,000 Add: Collection of note Interest on note Book error on check no. 175 2,695,000 Total 4,100,000 Less: Bank service charge Payment for light and water NSF check 470,000 Adjusted book balance 3,630,000 Bank balance 5,630,000 Add: Deposit in transit 750,000 Total 6,380,000 Less: Bank error Outstanding checks 2,750,000 Adjusted bank balance 3,630,000

2,500,000 150,000 45,000

5,000 245,000 220,000

1,100,000 1,650,000

37 Adjusting entries: 1. Cash in bank Note receivable 2,500,000 Interest income 150,000

2,695,000

Accounts payable 45,000 2. Bank service charge Light and water Accounts receivable Cash in bank 470,000

5,000 245,000 220,000

Problem 4-7 a. Balance per book – April 30 1,100,000 Credit memo for note collected 60,000 Outstanding checks: No. 1331 1332 1334 1335 140,000 Total 1,300,000 Less: Bank service charge NSF check Undeposited collections 300,000 Balance per bank – April 30 1,000,000

40,000 30,000 60,000 10,000

5,000 25,000 270,000

b. Adjusting entries: 1. Cash in bank Note receivable

60,000

2. Bank service charge Accounts receivable Cash in bank

5,000 25,000

c. Balance per book – April 30 1,100,000 CM for note collected Bank service charge ( 5,000) NSF check ( 25,000) Adjusted cash in bank 1,130,000

60,000

30,000

60,000

38 Problem 4-8 a. Balance per bank 3,500,000 Add: Undeposited collections NSF check DM for safety deposit Unrecorded check 730,000 Total Less: Checks outstanding Overstatement of creditor’s check Understatement of customer’s check 1,100,000 Balance per book 3,130,000

550,000 50,000 5,000 125,000 4,230,000 650,000 270,000 180,000

b. Adjusting entries: 1. Cash in bank Accounts payable 270,000 Accounts receivable 180,000

450,000

2. Accounts receivable Bank service charge Accounts payable Cash in bank 180,000

50,000 5,000 125,000

c. Balance per book 3,130,000 Overstatement of creditor’s check 270,000 Understatement of customer’s check 180,000 Total 3,580,000 Less: NSF check DM for safety box Unrecorded check 180,000 Adjusted book balance 3,400,000

Problem 4-9

50,000 5,000 125,000

Balance per book 2,700,000 Add: Proceeds of bank loan Note collected by bank 1,375,000 Total 4,075,000 Less: Service charge Customer’s check charged back 60,000 Adjusted book balance 4,015,000

940,000 435,000

10,000 50,000

39 Balance per bank 4,000,000 Add: Deposit in transit Incorrect deposit Erroneous bank charge Erroneous debit memo 915,000 Total 4,915,000 Less: Outstanding checks Erroneous bank credit 900,000 Adjusted bank balance 4,015,000

475,000 90,000 150,000 200,000

600,000 300,000

Adjusting entries: 1. Cash in bank Bank service charge Interest expense (60,000 x 1/6) Prepaid interest expense Loan payable (940,000/94%) 1,000,000 Note receivable Interest income 2. Bank service charge Accounts receivable Cash in bank

1,375,000 5,000 10,000 50,000 400,000 40,000 10,000 50,000 60,000

Problem 4-10 Balance per book (squeeze) Add: Proceeds of bank loan Proceeds of note collected 935,000 Total Less: Bank service charge NSF check 55,000 Adjusted book balance Balance per bank (squeeze) Add: Deposit in transit Bank error (200,000 – 20,000) 630,000 Total Less: Outstanding checks (750,000 – 50,000) 700,000 Adjusted bank balance

2,120,000 500,000 435,000 3,055,000 5,000 50,000 3,000,000 3,070,000 450,000 180,000 3,700,000 3,000,000

Adjusting entries: Cash in bank Bank service charge (5,000 + 15,000) Accounts receivable Loan payable Notes receivable Interest income

880,000 20,000 50,000 500,000 400,000 50,000

40 Problem 4-11 Balance per book Add: Proceeds of bank loan Total Less: Understatement of check in payment of account (200,000 – 20,000) Petty cash fund 190,000 Adjusted book balance Balance per bank Add: Undeposited collections Erroneous bank charge Deposit omitted from bank statement 500,000 Total Less: Erroneous bank credit Outstanding checks 674,000 Adjusted bank balance

5,000,000 516,000 5,516,000 180,000 10,000 5,326,000 5,500,000 300,000 50,000 150,000 6,000,000 130,000 544,000 5,326,000

Adjusting entries: Cash in bank Interest expense (84,000 x 2/12) Prepaid interest expense Accounts payable Petty cash fund Supplies Transportation Postage Loan payable (516,000/86%)

326,000 14,000 70,000 180,000 4,000 2,000 3,000 1,000 600,000

Problem 4-12 Balance per book Add: Overstatement of check number 765 Check number 555 stopped for payment 30,000 Total Less: Service charge NSF check 90,000 Adjusted book balance Balance per bank Add: Undeposited collections Total Less: Outstanding checks: Number 761 762 763 764 765 235,000 Adjusted bank balance

1,300,000 20,000 10,000 1,330,000 5,000 85,000 1,240,000 1,200,000 275,000 1,475,000 55,000 40,000 25,000 65,000 50,000 1,240,000

41 Adjusting entries: 1. Cash in bank Accounts payable Miscellaneous income

30,000 20,000 10,000

2. Bank service charge Accounts receivable Cash in bank

5,000 85,000

3. Receivable from cashier Accounts receivable Sales discounts

40,000 30,000

Problem 4-13

90,000

10,000

a. Bank reconciliation – June 30 Book balance Add: Credit memo for note collected Total Less: NSF check Service charge Adjusted book balance

1,000,000 300,000 1,300,000 100,000 4,000

Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance

104,000 1,196,000 1,650,000 400,000 2,050,000 854,000 1,196,000

Bank reconciliation – July 31 Book balance Add: Credit memo for bank loan Total Less: Service charge Adjusted book balance

1,400,000 500,000 1,900,000 1,000 1,899,000

Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance

2,650,000 1,100,000 3,750,000 1,851,000 1,899,000

b. Adjusting entries, July 31 1. Cash in bank Bank loan payable 500,000

500,000

42 2. Bank service charge Cash in bank

1,000 1,000

Computation of deposit in transit – July 31 Deposit in transit – June 30 400,000 Add: Deposits during July: Book debits Less: June credit memo for note collected 3,700,000 Total 4,100,000

4,000,000 300,000

Less: Deposits credited by bank during July: Bank credits Less: July credit memo for bank loan 3,000,000 Deposit in transit – July 31 1,100,000

3,500,000 500,000

Computation of outstanding checks – July 31 Outstanding checks, June 30 854,000 Add: Checks drawn by company during July: Book credits Less: June debit memos for NSF check Service charge 3,496,000 Total Less: Checks paid by bank during July: Bank debits Less: July service charge Outstanding checks, July 31

3,600,000 100,000 4,000

104,000 4,350,000 2,500,000 1,000 2,499,000 1,851,000

Problem 4-14 a. Reconciliation – October 31 Adjusted book balance

600,000

Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance

400,000 300,000 700,000 100,000 600,000

Reconciliation – November 30 Book balance Add: Understatement of collection from customer Total Less: Understatement of check disbursement Adjusted book balance

1,000,000 90,000 1,090,000 270,000 820,000

43 Bank balance 930,000 Add: Deposit in transit Check of Susan Company charged in error 390,000

190,000 200,000

Total 1,320,000 Less: Outstanding checks Deposit of Susan Company erroneously credited 500,000 Adjusted bank balance 820,000

400,000 100,000

b. Adjusting entries – November 30 1. Cash in bank Accounts receivable 90,000 2. Accounts payable Cash in bank 270,000

90,000

270,000

Computation of outstanding checks – October 31 Outstanding checks – October 31 (squeeze) Add: Checks issued by depositor: Book disbursements Understatement of check paid 2,070,000 Total Less: Checks paid by bank: Bank disbursements Check of Susan Company charged in error 1,770,000 Outstanding checks – November 30

100,000 1,800,000 270,000 2,170,000 1,970,000 ( 200,000) 400,000

Computation of deposit in transit – November 30 Deposit in transit – October 31 Add: Cash receipts deposited during November: Book receipts Understatement of collection from customer 2,290,000 Total Less: Deposits credited by bank during November: Bank receipts Deposit of Susan Company erroneously credited 2,400,000 Deposit in transit – November 30

300,000 2,200,000 90,000 2,590,000 2,500,000 (

100,000) 190,000

Problem 4-15 a. Reconciliation on July 1 Adjusted book balance

1,270,000

44 Bank balance 1,720,000 Add: Deposit in transit 500,000 Total 2,220,000 Less: Outstanding checks 950,000 Adjusted bank balance 1,270,000 Reconciliation on July 31 Book balance 470,000 Add: Note collected by bank 1,500,000 Total 1,970,000 Less: Bank service charge 20,000 Adjusted book balance 1,950,000 Bank balance 2,700,000 Add: Deposit in transit 400,000 Total 3,100,000 Less: Outstanding checks: Check # 107 108 1,150,000 Adjusted bank balance

650,000 500,000 1,950,000

b. Adjusting entries on July 31 1. Cash in bank Note receivable 2. Bank service charge Cash in bank

1,500,000 1,500,000 20,000 20,000

Computation of deposit in transit – July 1 Deposit in transit – July 1 (squeeze)

500,000

Cash receipts per book Total Less: Deposits credited by bank Deposit in transit – July 31

3,400,000 3,900,000 3,500,000 400,000

Computation of outstanding checks – July 1 Outstanding checks – July 1 (squeeze) Checks drawn by depositor Total Less: Checks paid by bank Outstanding checks – July 31

950,000 4,200,000 5,150,000 4,000,000 1,150,000

45 Problem 4-16 Balance per book – November 30 Less: Service charge NSF check Customer’s note erroneously recorded as cash receipt Adjusted book balance

500,000 10,000 50,000 100,000

Balance per bank – November 30 Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance

600,000 120,000 720,000 380,000 340,000

Deposit in transit – October 31 Cash receipts deposited: Book debits October collections recorded in November Customer’s note recorded as cash receipt Total Less: Deposits credited by bank: Bank credits Correction of bank error Deposit in transit – November 30 Outstanding checks – October 31 Checks issued by depositor: Book credits October bank service charge Total Checks paid by bank: Bank debits November bank service charge

160,000 340,000

45,000 710,000 ( 45,000) (100,000)

565,000 610,000

500,000 ( 10,000) 490,000 120,000 125,000 1,200,000 ( 5,000)

(

1,000,000 10,000)

1,195,000 1,320,000

November NSF check Outstanding checks – November 30

(

50,000)

940,000 380,000

Adjusting entry: Bank service charge Accounts receivable Note receivable Cash in bank

10,000 50,000 100,000 160,000

46 Problem 4-17 March 31 April 30 Book balance 280,000 Note collected by bank March April Service charge March April ( 2,000) NSF check March April ( 30,000) Deposit in transit March 31 April 30 (220,000) Outstanding checks March 31 April 30 Bank balance

200,000 60,000 (

Receipts 800,000

100,000 (

( 20,000)

8,000) 2,000

( 20,000) 30,000 80,000 (220,000)

178,000 330,000

720,000

( 60,000) 100,000

8,000)

( 80,000)

Disbursements

700,000

178,000 (372,000) 530,000

372,000 500,000

Problem 4-18 July 31 August 31 Bank balance Book error on collection Book error on payment

800,000

Receipts 5,000,000 ( 180,000)

Disbursements 3,940,000 ( 540,000)

1,860,000 ( 180,000) 540,000

Bank error on deposit ( 200,000) ( 200,000) Bank error on payment ( 400,000) 400,000 NSF check: July 100,000 100,000 August ( 50,000) 50,000 Note collected by bank: July ( 200,000) 200,000 August ( 300,000) ( 300,000) Deposit in transit: July 600,000 ( 600,000) August 480,000 480,000 Outstanding checks: July ( 100,000) ( 100,000) August 650,000 ( 650,000) Book balance 1,200,000 4,400,000 3,600,000 2,000,000

47 Problem 4-19 Nov. 30

Receipts

Disbursements

Dec. 31 Book balance 3,160,000 Bank service charge November 30 December 31 4,000) Collection of note November 30 December 31 ( 300,000) Adjusted book balance 2,856,000 Bank balance 2,900,000 Outstanding checks November 30 December 31 ( 592,000) Deposit in transit November 30 December 31

2,032,000 (

2,568,000

2,000)

(

( 200,000)

1,440,000

2,000) 4,000

(

(

300,000)

200,000

1,830,000

1,890,000

2,468,000

2,090,000

( 180,000)

1,442,000

1,080,000

( 180,000) 592,000

80,000 498,000

(

80,000) 498,000

Check erroneously charged by bank November 30 December 31 50,000 Adjusted bank balance 2,856,000

40,000

(

40,000) (

1,830,000

2,468,000

50,000) 1,442,000

Adjusting entry: Bank service charge Note receivable Cash in bank

4,000 300,000 304,000

48 Problem 4-20 Sept. 30

Receipts

Disbursements

Oct. 31 Book balance 1,900,000 1,400,000 2,400,000 900,000 NSF check: September 30 ( 60,000) ( 60,000) October 31 40,000 ( 40,000) Collection of accounts receivable September 30 30,000 ( 30,000) October 31 50,000 50,000 Overstatement of check September 30 90,000 ( 90,000)

October 31 120,000 Adjusted balance 1,030,000

________

Bank balance 800,000 Deposit in transit September 30 October 31 260,000 Outstanding checks September 30 October 31 ( 30,000) Adjusted balance 1,030,000

(

1,960,000

1,330,000

2,100,000

1,200,000

130,000

( 130,000) 260,000

( 270,000)

(

120,000)

2,260,000

2,500,000

270,000) 30,000

1,960,000

1,330,000

2,260,000

Adjusting entries on October 31 1. Accounts receivable Cash in bank

40,000 40,000

2. Cash in bank Accounts receivable Salaries 120,000

170,000 50,000

49 Problem 4-21 May 31

Receipts

Disbursements

June 30 Balance per book 2,400,000 Bank service charge: May 31

2,500,000 (

20,000)

5,300,000

5,400,000 (

20,000)

June 30 ( 25,000) NSF check: June 30 ( 200,000) Interest collected: June 30 Book error: June 30 Adjusted balance Balance per bank Deposit in transit May 31 June 30 Outstanding checks May 31 June 30 Adjusted balance

25,000 200,000 75,000 2,480,000

_________ 5,375,000

2,700,000

5,500,000

625,000

( 625,000) 500,000

( 845,000) 2,480,000

75,000 (

300,000) 5,305,000

300,000 2,550,000

5,600,000

2,600,000 500,000

( 5,375,000

845,000) 550,000 5,305,000

(

550,000) 2,550,000

Adjusting entries on June 30: 1. Cash in bank Interest income Equipment

375,000

2. Bank service charge Accounts receivable Cash in bank

25,000 200,000

75,000 300,000

225,000

Problem 4-22 Answer A Balance per book Bank charges Customer note collected by bank Interest on customer note NSF customer check Depositor’s note charged to account (1,000,000) Adjusted book balance

(

4,000,000 10,000) 1,500,000

60,000 ( 250,000) 4,300,000

50 Problem 4-23 Answer B Balance per bank

2,000,000

Add: Deposit in transit Total Less: Outstanding checks Erroneous bank credit 700,000 Adjusted bank balance

200,000 2,200,000 400,000 300,000 1,500,000

The adjusted cash in bank can also be computed by starting with the balance per book. Balance per book Add: Proceeds of note collected Total Less: NSF checks (150,000 – 50,000) 100,000 Adjusted book balance

850,000 750,000 1,600,000 1,500,000

Problem 4-24 Answer C Balance per book Note collected by bank Book error (200,000 – 20,000) ( 180,000) NSF check Bank service charge Adjusted book balance

8,500,000 950,000 ( 250,000) ( 20,000) 9,000,000

Problem 4-25 Answer A Problem 4-26 Answer B Problem 4-27 Answer B Problem 4-28 Answer D Balance per ledger Service charges

3,750,000 (

Collection of note

50,000) 1,500,000

Book error

(

Unrecorded check for traveling expenses Adjusted book balance

( 500,000) 4,600,000

Balance per bank Deposit in transit Total Outstanding checks (squeeze) Adjusted bank balance

100,000)

6,200,000 1,400,000 7,600,000 3,000,000 4,600,000

51 Problem 4-29 Answer B Problem 4-30 Answer A Problem 4-31 Answer C Outstanding checks – May 31 3,000,000 Checks issued by depositor in June: Total credits to cash in June Service charge in May recorded in June 8,900,000 Total 11,900,000 Checks paid by bank in June: Checks and charges by bank in June Service charge in June NSF check in June 6,950,000 Outstanding checks – June 30 4,950,000 Problem 4-32 Answer A Balance per book – June 30 2,100,000 Service charges ( 50,000) Collection by bank 550,000 NSF check ( 100,000) Adjusted book balance 2,500,000 Balance per bank – June 30 2,400,000 Deposits outstanding – June 30 500,000 Checks outstanding – June 30 ( 400,000) Adjusted bank balance 2,500,000 Outstanding checks – May 31 100,000 Checks recorded by book in June 2,500,000 Total 2,600,000 Less: Checks recorded by bank in June 2,200,000 Outstanding checks – June 30 400,000

9,000,000 (

(

100,000)

8,000,000 50,000) (1,000,000)

Deposits outstanding – May 31 300,000 Deposits recorded by book in June 1,800,000 Total 2,100,000 Less: Deposits recorded by bank in June 1,600,000 Deposits outstanding – June 30 500,000 Problem 4-33 Answer A Note collected 1,936,000 Book error (1,930,000 – 1,390,000) ( 540,000) NSF check ( 840,000) Service charge ( 47,000) Net debt to cash

509,000

52 Problem 4-34 Answer A

Problem 4-35 Answer A Problem 4-36

Answer D

Balance per bank – November 30 3,600,000 December deposits 5,500,000 Total 9,100,000 December disbursements (4,400,000) Balance per bank – December 31 4,700,000 Deposit in transit – December 700,000 Outstanding checks – December ( 500,000) Adjusted bank balance – December 31 4,900,000 Balance per book – December 31 (squeeze) 4,300,000

Note collected by bank 1,000,000 NSF check ( 350,000) Service charge ( 50,000) Adjusted book balance 4,900,000 Problem 4-37

Answer A

Bank disbursements for July 9,000,000 Outstanding checks – June 30 (1,400,000) Outstanding checks – July 31 1,000,000 Book disbursements for July 8,600,000 Problem 4-38

Answer B

Bank receipts for April 6,000,000 Deposits in transit – March 31 (1,000,000) Deposits in transit – April 30 1,500,000 Book receipts for April 6,500,000

53

CHAPTER 5

Problem 5-1 Problem 5-3 1. D

6. A

Problem 5-2 1. A

6. A

1. D

2. 3. 4. 5.

D D B A

7. 8. 9. 10.

B C A C

2. 3. 4. 5.

C A A A

7. 8. 9. 10.

D C C D

2. 3. 4. 5.

B C D A

Problem 5-4 a. Accounts receivable Notes receivable Installments receivable Advances to suppliers Advances to subsidiary Claim receivable Subscriptions receivable Accrued interest receivable Customer’s credit balances Advances from customers Receivables

775,000 100,000 300,000 150,000 400,000 15,000 300,000 10,000 30,000 20,000 2,000,000

b. Accounts receivable Allowance for doubtful accounts Notes receivable Installments receivable Advances to suppliers Claim receivable Subscription receivable Accrued interest receivable Total trade and other receivables

(

775,000 50,000) 100,000 300,000 150,000 15,000 300,000 10,000 1,600,000

c. The advances to subsidiary should be classified as noncurrent and presented as long-term investment. The customers’ credit balances and advances from customers should be classified as current liabilities and included as part of “trade and other payables”.

Problem 5-5 a. Accounts receivable – January 1 Charge sales Total Less: Collections from customers Writeoff Merchandise returns Allowances to customers Accounts receivable – December 31

600,000 6,000,000 6,600,000 5,300,000 35,000 40,000 25,000 5,400,000 1,200,000

54 b. Subscription receivable Deposit on contract

150,000 120,000

Claim receivable Advances to employees Advances to affiliated Advances to supplier Accounts receivable 490,000

60,000 10,000 100,000 50,000

c. Accounts receivable 1,200,000 Claim receivable 60,000 Advances to employees 10,000 Advances to supplier 50,000 Total trade and other receivables 1,320,000 d. The subscriptions receivable should be deducted from subscribed share capital. The deposit on contract should be classified as noncurrent and presented as other noncurrent asset. The advances to affiliates should be classified as noncurrent and presented as long-term investment.

Problem 5-6 Requirement 1 1. Accounts receivable Sales 3,600,000 2. Notes receivable Accounts receivable 400,000

3,600,000

400,000

3. Doubtful accounts Allowance for doubtful accounts 90,000

90,000

4. Allowance for doubtful accounts Accounts receivable 20,000

20,000

5. Sales return Accounts receivable 15,000 6. Cash Accounts receivable 2,450,000

15,000

2,450,000

7. Sales discount Accounts receivable 45,000 8. Cash Notes receivable 150,000

45,000

150,000

55 Requirement 2 Notes receivable

250,000

Requirement 3 Accounts receivable Less: Allowance for doubtful accounts Net realizable value

670,000 70,000 600,000

Problem 5-7 FOB destination and freight collect 1. Accounts receivable Freight out Sales Allowance for freight charge

500,000 10,000

2. Cash Sales discount Allowance for freight charge Accounts receivable

475,000 15,000 10,000

500,000 10,000

500,000

FOB destination and freight prepaid 1. Accounts receivable Freight out Sales Cash

500,000 10,000

2. Cash Sales discount Accounts receivable

485,000 15,000

500,000 10,000

500,000

FOB shipping point and freight collect 1. Accounts receivable Sales

500,000 500,000

2. Cash Sales discount Accounts receivable

485,000 15,000 500,000

FOB shipping point and freight prepaid 1. Accounts receivable Sales Cash

510,000 500,000 10,000

56 2. Cash Sales discount Accounts receivable

495,000 15,000 510,000

Problem 5-8 1. Accounts receivable Sales

4,000,000

2. Cash Sales discount Accounts receivable

1,470,000 30,000

3. Cash Accounts receivable

1,000,000

4,000,000

1,500,000 1,000,000

4. Sales return Accounts receivable

100,000 100,000

5. Sales return Allowance for sales return

40,000 40,000

Problem 5-9 Gross method July 1 Accounts receivable Sales 49,000

50,000

2 Accounts receivable Sales 196,000

200,000

50,000

200,000

12 Cash 196,000 Sales discount 4,000 196,000 Accounts receivable 30 Cash

Net method

50,000

July 1 Accounts receivable Sales 2 Accounts receivable Sales

49,000

196,000

12 Cash 196,000 Accounts receivable 200,000 30 Cash

50,000

Accounts receivable 49,000 forfeited 1,000

50,000

Accounts receivable Sales discount

Problem 5-10 a. Credit sales (75% x 5,000,000) 3,750,000 Doubtful accounts (2% x 3,750,000) 75,000 Doubtful accounts Allowance for doubtful accounts 75,000

75,000

b. Doubtful accounts (1% x 5,000,000) Allowance for doubtful accounts 50,000

50,000

57 c. Required allowance Less: Credit balance of allowance Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts

80,000 20,000 60,000 60,000 60,000

d. Required allowance (10% x 500,000) Less: Credit balance of allowance Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts

50,000 20,000 30,000 30,000 30,000

Problem 5-11 a. Required allowance (5% x 600,000) Add: Debit balance in allowance account Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts

30,000 10,000 40,000 40,000 40,000

b. Required allowance Add: Debit balance in allowance account Doubtful accounts expense

50,000 10,000 60,000

Doubtful accounts Allowance for doubtful accounts

60,000

c. Doubtful accounts (2% x 1,900,000) Allowance for doubtful accounts

38,000

60,000 38,000

Problem 5-12 a. Doubtful accounts (3% x 8,000,000) Allowance for doubtful accounts

240,000 240,000

b. Doubtful accounts Allowance for doubtful accounts

170,000 170,000

Allowance – January 1 Doubtful accounts (squeeze) Recovery Total Accounts written off Allowance – December 31 (8% x 2,000,000) c. Doubtful accounts Allowance for doubtful accounts

100,000 170,000 20,000 290,000 130,000 160,000 210,000 210,000

58 Allowance – January 1 Doubtful accounts (squeeze) Recovery Total Accounts written off Allowance – December 31

100,000 210,000 20,000 330,000 130,000 200,000

Problem 5-13 Requirement a 1. Accounts receivable Sales

7,000,000

2. Cash Sales discount Accounts receivable(2,450,000/98%) 2,500,000

2,450,000 50,000

3. Cash Accounts receivable

3,900,000

7,000,000

3,900,000

4. Allowance for doubtful accounts Accounts receivable

30,000

5. Accounts receivable Allowance for doubtful accounts

10,000

Cash Accounts receivable

30,000 10,000 10,000 10,000

6. Sales return Accounts receivable

70,000 70,000

Requirement b Doubtful accounts Allowance for doubtful accounts

40,000 40,000

Rate = 40,000/1,000,000 = 4% Allowance for doubtful accounts – December 31 (4% x 1,500,000) 60,000 Less: Allowance before adjustment Doubtful accounts expense

20,000 40,000

Requirement c Accounts receivable – December 31 Allowance for doubtful accounts Net realizable value

1,500,000 ( 60,000) 1,440,000

59 Problem 5-14 Requirement a 1. Cash Accounts receivable Sales (800,000/10%) 2. Cash Sales discount (5% x 720,000) Accounts receivable(10% x 7,200,000) 3. Cash Accounts receivable 4. Sales discount Allowance for sales discount 10,000

800,000 7,200,000 8,000,000 684,000 36,000 720,000 5,940,000 5,940,000 10,000

5. Sales return Accounts receivable 6. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash

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

Accounts receivable 7. Doubtful accounts Allowance for doubtful accounts

10,000 70,000 70,000

Required allowance – December 31 (5% x 2,400,000) Less: Allowance before adjustment Doubtful accounts

120,000 50,000 70,000

Rate = 100,000/2,000,000 = 5% Requirement b Accounts receivable Less: Allowance for doubtful accounts Allowance for sales discount 130,000 Net realizable value

2,400,000 120,000 10,000 2,270,000

60 Problem 5-15 Requirement a 1. Accounts receivable Sales (3,070,000 – 470,000)

2,600,000 2,600,000

2. Cash (2,455,000 – 1,455,000) Accounts receivable 1,000,000

1,000,000

3. Cash Sales discount Accounts receivable (1,455,000/97%)

1,455,000 45,000

4. Allowance for doubtful accounts Accounts receivable 5. Cash Sales 6. Sales return and allowances Accounts receivable 7. Sales return and allowances Cash 8. Accounts receivable Allowance for doubtful accounts

1,500,000 20,000 20,000 470,000 470,000 55,000 55,000 10,000 10,000 5,000 5,000

Cash Accounts receivable

5,000 5,000

7. Doubtful accounts Allowance for doubtful accounts

50,000 50,000

Credit sales Less: Sales discount Sales return and allowances 100,000 Net credit sales

2,600,000 45,000 55,000 2,500,000

Doubtful accounts (2,500,000 x 2%)

50,000

Requirement b Accounts receivable Less: Allowance for doubtful accounts Net realizable value

61

625,000 60,000 565,000

Problem 5-16

1. Accounts receivable – Jan. 1 4,500,000 Sales Recovery 2,500,000 Collections Sales discount Writeoff 90,000 Sales return 25,000 Accounts receivable – Dec. 31 115,000

1,500,000

4,410,000/98%

7,935,000 15,000

2,475,000/99%

(8,000,000) ( 115,000) ( 55,000)

Sales discount: 2% x

(

30,000)

1%

4,500,000

x

2,500,000

1,250,000

Problem 5-17 Percent of Required allowance 1. Not yet due 1 – 30 days past due 60,000 31 – 60 days past due 25,000 61 – 90 days past due 75,000

Amount

Uncollectible

1,700,000 1,200,000

-

5%

100,000

25%

150,000

50%

Over 90 days past due 120,000

1,200,000

100%

3,270,000 280,000 2. Allowance – January 1 170,000 Receivables 30,000 Doubtful accounts expense (squeeze) 345,000 Total 545,000 Less: Writeoff (235,000 + 30,000) 265,000 Required allowance – December 31 280,000 3. Accounts receivable 3,270,000 Less: Allowance for doubtful accounts 280,000 Net realizable value 2,990,000

Problem 5-18 1. 1,000,000 x 1% 10,000 2. 90,000 400,000 x 5% 20,000 20,000 300,000 x 10% 30,000 200,000 200,000 x 25% 50,000 310,000 60,000 x 100% 60,000 140,000 1,960,000 170,000 170,000 3. Doubtful accounts Allowance for doubtful accounts 20,000 Correct amount 200,000 Recorded (2% x 9,000,000) 180,000 Understatement 20,000 4. Accounts receivable – December 31 1,960,000 Less: Allowance for doubtful accounts 170,000

Allowance – January 1 Recoveries Doubtful accounts (squeeze) Total Less: Writeoff (100,000 + 40,000) Allowance – December 31 20,000

Net realizable value 1,790,000

62 Problem 5-19 2005

2006

2007

Total 1. Writeoff 85,000 Less: Recoveries 9,000 Net writeoff 76,000

26,000 2,000 24,000

29,000

30,000

3,000

4,000

26,000

26,000

76,000 Percentage to be used in computing the allowance = ------------------- = 2% 3,800,000 2. Credit sales for 2008 3,000,000 Multiply by bad debt percentage Provision for doubtful accounts 60,000 3. Accounts receivable – January 1, 2008 250,000 Add: Credit sales for 2008 Recoveries 3,005,000 Total 3,255,000 Less: Collections in 2008 Writeoff Accounts receivable – December 31, 2008 4. Allowance for doubtful accounts – January 1 Add: Doubtful accounts for 2008 Recoveries Total Less: Writeoff Allowance for doubtful accounts – December 31

2%

3,000,000 5,000

2,615,000 40,000

2,655,000 600,000 20,000 60,000

5,000

65,000 85,000 40,000 45,000

Problem 5-20 1. Accounts receivable – December 31, 2007 Add: Sales for 2008 Recovery of accounts written off Total Less: Collection from customers Accounts written off Accounts settled by issuance of note Accounts receivable – December 31, 2008

600,000 5,000,000 10,000 4,360,000 50,000 200,000

5,010,000 5,610,000 4,610,000 1,000,000

2. Allowance for doubtful accounts – December 31, 2007 30,000 Add: Recovery of accounts written off Total Less: Accounts written off 50,000 Allowance before adjustment – December 31, 2008 (debit balance)

10,000 40,000 (10,000)

63 3. Required allowance – December 31, 2008 On current accounts (700,000 x 5%) 35,000 On past due accounts (300,000 x 20%) Total

60,000 95,000

4. Required allowance – December 31, 2008 Add: Debit balance before adjustment Increase in allowance

95,000 10,000 105,000

5. Doubtful accounts Allowance for doubtful accounts

105,000 105,000

Problem 5-21 170,000 – 10,000 Rate in 2007 = ------------------------ = .016 017 10,000,000

258,000 – 20,000 Rate in 2008 = -------------------------- = .

1. Retained earnings (.016 x 1,250,000) Allowance for doubtful accounts 2. Allowance – January 1 Recoveries – 2008 10,000 Doubtful accounts – 2008 (squeeze) Total Less: Writeoff – 2008 Allowance – December 31 (.017 x 2,000,000) 3. Accounts receivable Less: Allowance for doubtful accounts Net realizable value

14,000,000 20,000 20,000 20,000 92,000 122,000 88,000 34,000 2,000,000 34,000 1,966,000

Problem 5-22 1. Allowance – January 1, 2008 Doubtful accounts recorded (2% x 20,000,000) 400,000 Recovery Total

500,000 50,000 950,000

Less: Writeoff (300,000 + 100,000) 400,000 Allowance balance before adjustment

550,000

2. 5,000,000 x 5% 2,000,000 x 10% 1,000,000 x 25% 500,000 – 100,000 x 75% 300,000 Required allowance – December 31, 2008

250,000 200,000 250,000 1,000,000

3. Doubtful accounts 450,000 Allowance for doubtful accounts (1,000,000 – 550,000)

450,000

64 Problem 5-23 1. Allowance – 1/1/2008 (1% x 2,800,000)

28,000

2. Allowance – 1/1/2008 Doubtful accounts recorded in 2008 (1% x 3,000,000) 30,000 Recovery Total Writeoff (27,000) Allowance before adjustment

28,000

3. 300,000 x 1% 80,000 x 5% 60,000 x 20% 25,000 x 80% Required allowance – 12/31/2008 39,000

3,000 4,000 12,000 20,000

4. Doubtful accounts Allowance for doubtful accounts (39,000 – 38,000) 1,000

7,000 65,000 38,000

1,000

Problem 5-24 2008 Jan. 1

Loan receivable Cash

4,000,000

4,000,000 Cash Unearned interest income

342,100

342,100 Unearned interest income

150,000

Cash 150,000 Dec. 31

Cash Interest income

400,000

400,000 Unearned interest income Interest income (10%) Date Interest received Carrying value 01/01/2008 3,807,900 12/31/2008 400,000 3,864,848 12/31/2009 400,000 3,928,630 12/31/2010 400,000 4,000,000

56,948 56,948

(12%) Interest income

Amortization

456,948

56,948

463,782

63,782

471,370*

71,370

*12% x 3,928,630 equals 471,435, or a difference of P65 due to rounding. 2009 Dec. 31

Cash Interest income

400,000

400,000

65 2009 Dec. 31 2010 Dec. 31

Unearned interest income Interest income Cash Interest income

63,782 63,782 400,000

400,000 Unearned interest income Interest income Cash Loan receivable

71,370 71,370 4,000,000

4,000,000

Problem 5-25 2008 Jan. 1

Loan receivable Cash

3,000,000

3,000,000 Direct origination cost

260,300

Cash 260,300 Cash Direct origination cost

100,000

Cash Interest income

240,000

100,000 Dec. 31 240,000 Interest income Direct origination cost (8%) Date Interest received Carrying value 01/01/2008 3,160,300 12/31/2008 240,000 3,109,918 12/31/2009 240,000 3,056,513 12/31/2010 240,000 3,000,000 2009 Dec. 31

50,382 50,382

(6%) Interest income

Cash Interest income

Amortization

189,618

50,382

186,595

53,405

183,487

56,513

240,000

240,000 Interest income Direct origination cost 2010 Dec. 31

Cash Interest income

53,405 53,405

240,000

240,000

66 2010 Dec. 31

Interest income Direct origination cost Cash Loan receivable

3,000,000

56,513 56,513 3,000,000

Problem 5-26 Requirement 1 December 31, 2009 (1,000,000 x .93) 900,000 December 31, 2010 (2,000,000 x .86) 1,720,000 December 31, 2011 (3,000,000 x .79) 2,370,000 Total present value of loan 5,020,000 Requirement 2 Loan receivable – 12/31/2008 6,000,000 Accrued interest (6,000,000 x 8%) 480,000 Total carrying value 6,480,000 Present value of loan 5,020,000 Impairment loss 1,460,000 Requirement 3 2008 Impairment loss Accrued interest receivable 480,000 Allowance for loan impairment 980,000

1,460,000

2009 Cash Loan receivable 1,000,000

1,000,000

Allowance for loan impairment Interest income (8% x 5,020,000) 401,600 2010 Cash Loan receivable 2,000,000 Allowance for loan impairment Interest income 353,728 Loan receivable – 12/31/2009 5,000,000 Allowance for loan impairment (980,000 – 401,600) ( 578,400)

401,600

2,000,000

353,728

Carrying value – 12/31/2009 4,421,600 Interest income for 2010 (8% x 4,421,600) 353,728

67 2011 Cash Loan receivable 3,000,000

3,000,000

Allowance for loan impairment Interest income 224,672 Loan receivable – 12/31/2010 3,000,000 Allowance for loan impairment (578,400 – 353,672) ( 224,672) Carrying value – 12/31/2010 2,775,328 Interest income for 2011 (8% x 2,775,328) 222,026 Allowance per book 224,672 Difference due to rounding 2,646

Problem 5-27 Requirement 1 December 31, 2009 ( 500,000 445,000 December 31, 2010 (1,000,000 800,000 December 31, 2011 (2,000,000 1,420,000 December 31, 2012 (4,000,000 2,560,000 Total present value of loan 5,225,000

x .89) x .80) x .71) x .64)

Requirement 2 Loan receivable 7,500,000 Accrued interest receivable (12% x 7,500,000) 900,000

224,672

Total carrying value 8,400,000 Present value of loan 5,225,000 Impairment loss 3,175,000 Requirement 3 2008 Impairment loss Accrued interest receivable Allowance for loan impairment

3,175,000 900,000 2,275,000

2009 Cash Loan receivable

500,000 500,000

Allowance for loan impairment Interest income (12& x 5,225,000)

627,000 627,000

2010 Cash Loan receivable

1,000,000 1,000,000

Allowance for loan impairment Interest income

642,240 642,240

68 Loan receivable – 12/31/2009 7,000,000 Allowance for loan impairment (2,275,000 – 627,000) (1,648,000) Carrying value – 12/31/2009 5,352,000 Interest income for 2010 (12% x 5,352,000) 642,240

Problem 5-28 December 31, 2011 ( 360,000 4,000,000 December 31, 2012 ( 360,000 3,365,360 December 31, 2013 ( 360,000 634,640 December 31, 2014 (4,360,000 Total present value of loan 2008 Cash Interest income 360,000

x .772)

277,920

Face value of loan

x .708)

254,880

Present value of loan

x .650)

234,000

Impairment loss

x .596) 2,598,560 3,365,360 360,000

Impairment loss Allowance for loan impairment 634,640

634,640

2009 Allowance for loan impairment Interest income (9% x 3,365,360) 302,882

302,882

2010 Allowance for loan impairment Interest income (634,640 – 302,882) 331,758

331,758

2011 Cash Interest income 360,000

360,000

2012 Cash Interest income 360,000

360,000

2013 Cash Interest income 360,000

360,000

2014 Cash Interest income 360,000 Loan receivable 4,000,000

4,360,000

Problem 5-29 12/31/2008 Impairment loss Allowance for loan impairment

338,500 338,500

The remaining term of the loan is 4 years. Accordingly, the present value factor for 4 periods is used.

69 Present value of principal (500,000 x .735) 367,500 Present value of interest (80,000 x 5 = 400,000 x .735) 294,000 Total present value of loan Loan receivable Present value of loan Loan impairment loss 338,500

661,500 1,000,000 661,500

12/31/2009 Allowance for loan impairment Interest income (8% x 661,500) 52,920

52,920

Problem 5-30 Answer B Accounts receivable-January 1 Credit sales Collections from customers Sales return Accounts written off Accounts receivable-December 31 Allowance for doubtful accounts Allowance for sales return

1,300,000 5,500,000 (5,000,000) ( 150,000) ( 100,000) 1,550,000 ( 250,000) ( 50,000)

Net realizable value

1,250,000

Problem 5-31 Answer A Trade accounts receivable Allowance for doubtful accounts Claim receivable Total trade and other receivables

2,000,000 ( 100,000) 300,000 2,200,000

Problem 5-32 Answer C Accounts receivable (squeeze) Allowance for doubtful accounts (900,000 – 200,000) Net realizable value

6,700,000 (

700,000) 6,000,000

Problem 5-33 Answer B Allowance – January 1 Doubtful accounts expense Recovery of accounts written off Total Accounts written off Allowance – December 31

300,000 650,000 100,000 1,050,000 450,000 600,000

70 Problem 5-34 Answer D Allowance – January 1 Uncollectible accounts expense (squeeze) Recovery of accounts written off Total

280,000 100,000 50,000 430,000

Accounts written off (230,000) Allowance – December 31 (2,700,000 – 2,500,000) 200,000

Problem 5-35 Answer A Allowance – December 2007 180,000 Doubtful accounts expense Total Accounts written off (squeeze) Allowance – December 2008 200,000

50,000 230,000 30,000

Problem 5-36 Answer B 0 –60 days (1,200,000 x 1%) 12,000 61 – 120 days (900,000 x 2%) 18,000 Over 120 days (1,000,000 x 6%) Allowance – December 31, 2008 Allowance – December 31, 2007 Uncollectible accounts expense (squeeze) Recovery Total Accounts written off Allowance – December 31, 2008

60,000 90,000 60,000 80,000 20,000 160,000 ( 70,000) 90,000

Problem 5-37 Answer D Allowance for sales discount (5,000,000 x 2% x 50%) 50,000

Problem 5-38 Answer A Problem 5-39 Answer B Doubtful accounts expense (3% x 3,000,000 + 10,000)

100,000

Problem 5-40 Answer A Doubtful accounts expense (2% x 7,000,000)

140,000

71

Problem 5-41 Answer A Allowance – January 1 Doubtful accounts expense (4% x 5,000,000) Collection of accounts written off Total Accounts written off Allowance – December 31

40,000 200,000 10,000 250,000 30,000 220,000

Problem 5-42 Answer D Allowance – January 1 Doubtful accounts expense (squeeze) Total Accounts written off Allowance – December 31

Problem 5-43 Answer A Problem 5-44 Answer A

250,000 175,000 425,000 205,000 220,000