Solution Manual - Financial Accounting

SOLUTION MANUAL

Financial Accounting Valix and Peralta Volume One - 2008 Edition 1 CHAPTER 1 Problem 1-1

Problem 1-2

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

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

D C D D C C B C D A

A A D B D B D C C D

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

C D D A D

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

A C A A D A D B D D

Problem 1-5

Problem 1-6

Problem 1-7

Problem 1-8

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

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

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

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

A A A D D D B D C D

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

D D C B C

A A C A A A B C A B

D D C A A C D D B D

B B C C A B D D A B

Problem 1-10

Problem 1-11

Problem 1-12

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

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

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

A B D B A D C A D A

C B D A F E J G H I

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. Materiality 2. Going concern 3. Income recognition principle 4. Accounting entity 5. Standard of adequate disclosure 6. Comparability 7. Matching principle 8. Cost principle 9. Reliability 10. 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. Accrual assumption 6. Income recognition principle 2. Going concern assumption 7. Expense recognition principle 3. Asset recognition principle 8. Cause and effect association principle 4. Cost principle 9. Systematic and rational allocation principle 5. Liability recognition principle 10. Immediate recognition principle

Problem 1-17 1. Monetary unit assumption 2. Cost principle 3. Materiality 4. Time period 5. 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: Property, plant and equipment Long-term investments Intangible asset Total noncurrent assets Total assets

Note 800,000 (1)

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

(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 Accrued expenses Total

350,000 100,000 450,000

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:

Note 420,000 250,000 620,000

(2)

(1) 1,250,000 (3) 20,000

2,560,000

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

(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 Noncurrent liabilities: Serial bonds payable - remaining portion Shareholders’ equity: Share capital Share premium Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

Note (7)

620,000 500,000 1,120,000 2,000,000 5,000,000 500,000 880,000 6,380,000 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 Cost 1,500,000 4,000,000 2,000,000 40,000 7,540,000

Land Building Machinery Tools Total

Accum. depr. 1,600,000 1,300,000 2,900,000

Book value 1,500,000 2,400,000 700,000 40,000 4,640,000

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 Goodwill Total

200,000 100,000 300,000

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

Problem 2-3

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

Exemplar Company Statement of Financial Position December 31, 2008 ASSETS

Current assets: Cash and cash equivalents Trading securities

Note 500,000 280,000

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

(1)

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 Noncurrent liabilities: Bonds payable Premium on bonds payable Total noncurrent liabilities

(6)

1,000,000

5,000,000 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

Land

Cost 1,500,000

Accum. depr. -

Book value 1,500,000

Building Equipment Total

5,000,000 1,000,000 7,500,000

2,000,000 200,000 2,200,000

3,000,000 800,000 5,300,000

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

500,000 400,000 350,000 60,000 1,310,000

Note 4 - Intangible assets Computer software Lease rights Total

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

10

Note 5 - Other noncurrent assets 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

Problem 2-4

500,000 200,000 700,000

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 400,000 750,000 1,000,000 100,000

(1)

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)

1,750,000

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

1,600,000 500,000 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 Note 2 - Property, plant and equipment

800,000 ( 50,000) 750,000

Cost 500,000 5,000,000 3,000,000 400,000 8,900,000

Land Building Machinery Equipment Total

Accum. depr. 2,000,000 1,200,000 100,000 3,300,000

Book value 500,000 3,000,000 1,800,000 300,000 5,600,000

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

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

Total noncurrent assets Total assets

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

650,000

Equity: Share capital Reserves Retained earnings Total equity Total liabilities and equity

(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

Land Building Furniture and equipment Total Note 4 - Intangible asset

Cost 1,000,000 5,500,000 2,400,000 8,900,000

Accum. depr. 2,500,000 900,000 3,400,000

Book value 1,000,000 3,000,000 1,500,000 5,500,000

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 Unissued share capital Issued share capital Subscribed share capital, 10,000 shares Subscription receivable Paid in capital

5,000,000 (2,000,000) 3,000,000 1,000,000 500,000 ( 500,000) 3,500,000

Note 7 - Reserves Share premium Retained earnings appropriated for contingencies Total

300,000 200,000 500,000

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

Note Net sales revenue Cost of sales Gross income Other income Total income Expenses: Selling expenses Administrative expenses Other expenses Income before tax Income tax Net income

(1) (2)

7,700,000 (5,000,000) 2,700,000 400,000 3,100,000

(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

175,000 650,000 125,000 950,000

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 Other expenses Income before tax Income tax Net income

Note (1) (2) (3) (4) (5) (6)

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

6,850,000 1,250,000 ( 250,000) 1,000,000

16 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 – Other income Rental income Dividend revenue Total other income

Note 3 – Increase in inventory

250,000 150,000 400,000

Inventory, December 31 Inventory, January 1 Increase in inventory

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

Note 4 – Net purchases Purchases Freight in Purchase returns and allowances Purchase discounts Net purchases

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

Note 5 – Depreciation Depreciation – store equipment Depreciation – office equipment Total

125,000 300,000 425,000

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 Raw materials used Direct labor Factory overhead: Indirect labor Superintendence Light, heat and power Rent – factory building

200,000 3,000,000 3,200,000 280,000 2,920,000 950,000 250,000 210,000 320,000 120,000

Repair and maintenance – machinery Factory supplies used Depreciation – machinery Total manufacturing cost Goods in process – January 1 Total Cost of goods in process Less: Goods in process – December 31 Cost of goods manufactured

50,000 110,000 60,000

1,120,000 4,990,000 240,000 5,230,000 170,000 5,060,000

Cost of sales method Masay Company Income Statement Year ended December 31, 2008 Net sales revenue Cost of goods sold Gross income Other income Total income Expenses: Selling expenses Administrative expenses Other expense Income before tax Income tax expense Net income

Note (1) (2)

7,450,000 (5,120,000) 2,330,000 210,000 2,540,000

(3) (4) (5) (6)

830,000 590,000 300,000

1,720,000 820,000 ( 320,000) 500,000

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

(

7,500,000 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 Net sales revenue Other income Total income Expenses: Decrease in finished goods

Note (1) (2)

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

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

(4)

(3) 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

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 Raw materials – December 31 Raw materials used

200,000 3,000,000 3,200,000 280,000 2,920,000

Note 5 – Factory overhead Indirect labor

250,000

Superintendence Light, heat and power Rent – factory building Repair and maintenance – machinery Factory supplies used Depreciation – machinery Total

210,000 320,000 120,000 50,000 110,000 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

Problem 2-8

300,000

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 Net sales revenue

Note 2 – Cost of goods sold

9,070,000 ( 200,000) 8,870,000

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 Total Increase in raw materials Raw materials used Direct labor Factory overhead: Indirect labor Depreciation – machinery Factory taxes Factory supplies expense Factory superintendence Factory maintenance Factory heat, light and power Total manufacturing cost Decrease in goods in process Cost of goods manufactured

80,000 1,680,000 ( 100,000) 1,580,000 1,480,000 600,000 50,000 130,000 120,000 480,000 150,000 220,000

1,750,000 4,810,000 90,000 4,900,000

Christian Company Income Statement Year Ended December 31, 2008 Note Sales revenue Cost of goods sold Gross income Expenses: Selling expenses Administrative expenses Income before tax Income tax expense Net income

8,000,000 (5,100,000) 2,900,000

(1) (2) (3)

800,000 930,000

1,730,000 1,170,000 ( 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 Purchases Freight on purchases Purchase discounts Materials available for use Less: Materials – December 31 Materials used Direct labor Factory overhead: Heat, light and power Repairs and maintenance Indirect labor Other factory overhead Factory supplies used (300,000 + 660,000 – 540,000) Depreciation – factory building Total manufacturing cost Goods in process – January 1 Total cost of goods in process Less: Goods in process – December 31 Cost of goods manufactured

1,120,000 1,600,000 220,000 ( 20,000)

1,800,000 2,920,000 1,560,000 1,360,000 2,000,000

600,000 100,000 360,000 340,000 420,000 280,000

2,100,000 5,460,000 360,000 5,820,000 320,000 5,500,000

24

Ronald Company Income Statement Year Ended December 31, 2008 Note Net sales revenue Cost of goods sold Gross income Other income Total income Expenses: Selling expenses Administrative expenses Income before tax Income tax expense Net income

(1) (2)

6,980,000 (5,400,000) 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 Adjusted net income

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

Problem 3-2 D B C C A

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) 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

60,000 500,000 150,000 100,000 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

100,000 50,000

c. Accounts receivable Cash

200,000

d. Accounts receivable (20,000 + 60,000 + 30,000)

110,000

200,000

Money market placement Cash in closed bank Advances to employee Pension fund Cash

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

1,450,000 500,000 10,000 1,960,000 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 4. Cash on hand Petty cash fund Security Bank current account PNB current account No. 1 PNB current account No. 2 BSP Treasury bill – 60 days Total cash and cash equivalents

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

(

400,000 15,000 1,200,000 400,000 50,000) 3,000,000 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

100,000 100,000

Expenses Receivable from employee Petty cash fund Security Bank current account Accounts payable

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

28

Problem 3-6 1. Cash on hand NSF customer check Postdated customer check Adjusted on hand

500,000 ( 40,000) ( 60,000) 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 Undelivered company check Postdated company check delivered Adjusted cash in bank 4. Accounts receivable (40,000 + 60,000) Cash on hand Advances to employees Cash short or over Petty cash fund Cash in bank (100,000 + 150,000) Accounts payable

2,000,000 100,000 150,000 2,250,000 100,000 100,000 3,000 2,000 5,000 250,000 250,000

Problem 3-7 1. Cash on hand NSF customer check Postdated customer check Adjusted cash on hand 2. Petty cash fund: Currency and coins 3. Philippine Bank current account Undelivered company check Postdated company check delivered Adjusted balance

200,000 ( 35,000) ( 15,000) 150,000 5,000 5,000,000 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 1,000

Philippine Bank current Accounts payable

70,000

15,000 70,000

City Bank current Bank overdraft

100,000 100,000

Problem 3-8 Fluctuating Fund System 1. Petty cash fund Cash in bank

10,000

2. Postage Supplies Transportation Miscellaneous expense Petty cash fund

1,500 5,500 1,200 800

3. Petty cash fund Cash in bank

10,000

1. Petty cash fund Cash in bank

10,000 10,000

2. No entry

9,000 14,000 14,000

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

Imprest Fund System

3. Petty cash fund Postage Supplies Transportation Miscellaneous expense Cash in bank

5,000 1,500 5,500 1,200 800 14,000

Imprest Fund System

10,000 10,000

1. Petty cash fund Cash in bank

10,000 10,000

2. Postage Supplies Petty cash fund

1,500 2,000

2. No entry 3,500 3. No entry

3. Transportation Miscellaneous expense Cash in bank

1,000 500 1,500

4. No entry

Fluctuating Fund System 4. Supplies Accounts payable Petty cash fund

1,000 3,000

5. Petty cash fund Cash in bank

9,000

4,000 9,000

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

Problem 3-10

Imprest Fund System

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

Fluctuating Fund System

29 Postage Supplies Transportation Miscellaneous expense Petty cash fund

9,000

6. No entry 9,000

May 2 Petty cash fund Cash in bank

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

30

10,000 10,000 1,000 3,000 2,500 1,500 8,000

7. Petty cash fund Postage Supplies Transportation Cash in bank

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

Imprest Fund System May 2 Petty cash fund Cash in bank 29 Postage Supplies Transportation Miscellaneous expense Petty cash fund Petty cash fund Cash in bank

10,000 10,000 1,000 3,000 2,500 1,500 8,000 8,000

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

2,000 1,000 1,000

July

4,000

1 Petty cash fund

4,000

June 30 Supplies Accounts payable Transportation Petty cash fund

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

Supplies Postage Transportation

2,000 1,000 1,000

To reverse the adjustment made on June 30. 15 Petty cash fund Supplies Postage Transportation Miscellaneous expense Cash in bank

5,000 3,500 1,500 1,500 500

July 15 Supplies 1,500 Postage 500 Transportation 500 Miscellaneous expense 500 Petty cash fund Petty cash fund Cash in bank

12,000 12,000

31

Problem 3-11 2008 Nov. 2 30

Dec. 31

2009 Jan. 1

2 31

3,000

12,000

Petty cash fund Cash in bank

10,000

Postage Supplies Petty cash fund Cash in bank

2,000 5,000 10,000

Postage Supplies Special deposit Petty cash fund

3,000 4,000 2,000

Petty cash fund Postage Supplies Special deposit

9,000

10,000

17,000

9,000

3,000 4,000 2,000

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

Problem 3-12 2008 Dec. 1 Petty cash fund Cash in bank

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

Requirement 1 10,000 10,000

20 Selling expenses Miscellaneous expenses Equipment Cash in bank

5,000 2,000 2,000

31 Receivable from employee Selling expenses Transportation Petty cash fund

2,000 1,500 500

9,000

4,000

2009 Jan. 1 Petty cash fund Receivable from employee Selling expenses Transportation

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 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 Petty cash before replenishment

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

10,000

6,700 3,300

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

1,750,000 ( 100,000)

Time deposit account 90-day Treasury bill Total cash and cash equivalent

250,000 500,000 2,400,000

Problem 3-18 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 Postdated customer check NSF check Undelivered company check Adjusted balance

8,000,000 (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

Problem 3-22 Answer B

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

Problem 3-23 Answer A

Problem 3-24 Answer A

Problem 3-25 Answer A Cash on hand and in bank Time deposit Saving deposit Total

Problem 3-26 Answer B

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

Currencies Coins Accommodation check Total

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

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

2,000 4,000 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. 2. 3. 4. 5.

D A B C C

6. 7. 8. 9. 10.

C D C A B

11. 12. 13. 14. 15.

C 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 Add: Deposit in transit Total Less: Outstanding checks: No. 102 105 107 Adjusted bank balance

65,000 30,000 95,000 2,000 93,000 108,000 80,000 188,000 15,000 30,000 50,000

Adjusting entries: 1. Cash in bank

30,000

95,000 93,000

Note receivable

30,000

2. Bank service charge Cash in bank

2,000 2,000

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

110,000 45,000 155,000 5,000 10,000 42,000 113,000

27,000

35 Balance per bank Add: Deposit in transit Erroneous bank debit Total Less: Outstanding checks: No. 770 775 777 Adjusted bank balance

135,000 60,000 68,000 203,000

8,000 20,000 30,000 40,000

90,000 113,000

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

45,000 5,000 50,000

2. Bank service charge Accounts receivable Accounts payable Cash in bank

5,000 10,000 27,000 42,000

Problem 4-4 Balance per book Add: CM for note collected Total Less: DM for service charge Adjusted book balance

2,840,000 270,000 3,110,000 5,000 3,105,000

Balance per bank Add: Deposit in transit Total Less: Outstanding checks: No. 116 122 124 125 Adjusted bank balance

3,265,000 450,000 3,715,000 60,000 180,000 120,000 250,000

610,000 3,105,000

Adjusting entries: 1. Cash in bank Bank service charge Note receivable Interest income 2. Bank service charge Cash in bank

270,000 10,000 250,000 30,000 5,000 5,000

36 Problem 4-5 Balance per book Add: Note collected by bank Total Less: Bank service charge NSF check Adjusted book balance

5,000,000 2,150,000 7,150,000 50,000 550,000 500,000 6,600,000

Balance per bank Deposit in transit Total Less: Outstanding checks Adjusted bank balance

4,450,000 3,000,000 7,450,000 850,000 6,600,000

Adjusting entries: 1. Cash in bank Bank service charge Note receivable Interest income

2,150,000 50,000

2. Bank service charge Accounts receivable Cash in bank

50,000 500,000

2,000,000 200,000

550,000

Problem 4-6 Book balance Add: Collection of note Interest on note Book error on check no. 175 Total Less: Bank service charge Payment for light and water NSF check Adjusted book balance Bank balance Add: Deposit in transit Total Less: Bank error Outstanding checks Adjusted bank balance

1,405,000 2,500,000 150,000 45,000

2,695,000 4,100,000

5,000 245,000 220,000

470,000 3,630,000

5,630,000 750,000 6,380,000 1,100,000 1,650,000

2,750,000 3,630,000

37 Adjusting entries: 1. Cash in bank Note receivable Interest income Accounts payable

2,695,000 2,500,000 150,000 45,000

2. Bank service charge Light and water Accounts receivable Cash in bank

5,000 245,000 220,000 470,000

Problem 4-7 a. Balance per book – April 30 Credit memo for note collected Outstanding checks: No. 1331 1332 1334 1335 Total Less: Bank service charge

1,100,000 60,000 40,000 30,000 60,000 10,000

140,000 1,300,000 5,000

NSF check Undeposited collections Balance per bank – April 30

25,000 270,000

300,000 1,000,000

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

60,000

2. Bank service charge Accounts receivable Cash in bank

5,000 25,000

60,000

30,000

c. Balance per book – April 30 CM for note collected Bank service charge NSF check Adjusted cash in bank

1,100,000 60,000 ( 5,000) ( 25,000) 1,130,000

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

3,500,000 550,000 50,000 5,000 125,000 650,000 270,000 180,000

730,000 4,230,000 1,100,000 3,130,000

b. Adjusting entries: 1. Cash in bank Accounts payable Accounts receivable

450,000

2. Accounts receivable Bank service charge Accounts payable Cash in bank

50,000 5,000 125,000

270,000 180,000

180,000

c. Balance per book Overstatement of creditor’s check Understatement of customer’s check Total Less: NSF check DM for safety box Unrecorded check Adjusted book balance

3,130,000 270,000 180,000 3,580,000 50,000 5,000 180,000 125,000 3,400,000

Problem 4-9 Balance per book Add: Proceeds of bank loan Note collected by bank Total Less: Service charge Customer’s check charged back Adjusted book balance

2,700,000 940,000 1,375,000 435,000 4,075,000 10,000 60,000 50,000 4,015,000

39 Balance per bank Add: Deposit in transit Incorrect deposit Erroneous bank charge Erroneous debit memo Total Less: Outstanding checks Erroneous bank credit Adjusted bank balance

4,000,000 475,000 90,000 150,000 200,000 600,000 300,000

915,000 4,915,000 900,000 4,015,000

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

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

Accounts receivable Cash in bank

50,000 60,000

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

2,120,000 500,000 435,000 5,000 50,000

935,000 3,055,000 55,000 3,000,000 3,070,000

450,000 180,000

630,000 3,700,000 700,000 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 Adjusted book balance Balance per bank Add: Undeposited collections Erroneous bank charge Deposit omitted from bank statement Total Less: Erroneous bank credit Outstanding checks Adjusted bank balance Adjusting entries:

5,000,000 516,000 5,516,000 180,000 10,000

190,000 5,326,000 5,500,000

300,000 50,000 500,000 6,000,000 130,000 674,000 544,000 5,326,000

150,000

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 Total Less: Service charge NSF check Adjusted book balance Balance per bank Add: Undeposited collections Total Less: Outstanding checks: Number 761 762 763 764 765 Adjusted bank balance

1,300,000 20,000 10,000 5,000 85,000

30,000 1,330,000 90,000 1,240,000

1,200,000 275,000 1,475,000 55,000 40,000 25,000 65,000 50,000

235,000 1,240,000

41

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

30,000

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 a. Bank reconciliation – June 30

20,000 10,000

90,000

10,000

Book balance Add: Credit memo for note collected Total Less: NSF check Service charge Adjusted book balance Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance

1,000,000 300,000 1,300,000 100,000 104,000 4,000 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 Add: Deposits during July: Book debits Less: June credit memo for note collected Total Less: Deposits credited by bank during July: Bank credits Less: July credit memo for bank loan Deposit in transit – July 31

400,000 4,000,000 3,700,000 300,000 4,100,000 3,500,000 500,000

3,000,000 1,100,000

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

854,000 3,600,000 100,000 4,000

104,000 2,500,000 1,000

3,496,000 4,350,000 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 Add: Deposit in transit Check of Susan Company charged in error Total Less: Outstanding checks Deposit of Susan Company erroneously credited Adjusted bank balance

930,000 190,000 390,000 200,000 1,320,000 400,000 500,000 100,000 820,000

b. Adjusting entries – November 30 1. Cash in bank Accounts receivable

90,000 90,000

2. Accounts payable Cash in bank

270,000 270,000

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

100,000 1,800,000 270,000

2,070,000 2,170,000

1,970,000 1,770,000 ( 200,000) 400,000

Computation of deposit in transit – November 30 Deposit in transit – October 31 Add: Cash receipts deposited during November: Book receipts 2,200,000 Understatement of collection from customer 90,000 Total Less: Deposits credited by bank during November: Bank receipts 2,500,000 Deposit of Susan Company erroneously credited ( 100,000) Deposit in transit – November 30

300,000 2,290,000 2,590,000 2,400,000 190,000

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

1,270,000

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

1,720,000 500,000 2,220,000 950,000 1,270,000

Reconciliation on July 31 Book balance Add: Note collected by bank

470,000 1,500,000

Total Less: Bank service charge Adjusted book balance

1,970,000

Bank balance Add: Deposit in transit Total Less: Outstanding checks: Check # 107 108 Adjusted bank balance

2,700,000 400,000 3,100,000

20,000 1,950,000

650,000 500,000

1,150,000 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) Cash receipts per book Total Less: Deposits credited by bank Deposit in transit – July 31

500,000 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

160,000 340,000

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 November NSF check Outstanding checks – November 30

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)

1,195,000 1,320,000

1,000,000 ( 10,000) ( 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 Book balance Note collected by bank March April Service charge

March 31 200,000 60,000

Receipts 800,000 ( 60,000) 100,000

Disbursements 720,000

April 30 280,000 100,000

March April NSF check March April Deposit in transit March 31 April 30 Outstanding checks March 31 April 30 Bank balance

(

8,000)

(

( 20,000) ( 80,000)

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

178,000 700,000

330,000

8,000) 2,000

(

2,000)

( 30,000) (220,000)

178,000 (372,000) 530,000

372,000 500,000

Problem 4-18 July 31 Receipts Disbursements August 31 Bank balance 800,000 5,000,000 3,940,000 1,860,000 Book error on collection ( 180,000) ( 180,000) Book error on payment ( 540,000) 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) 650,000 ( 650,000) August 4,400,000 3,600,000 2,000,000 Book balance 1,200,000

47 Problem 4-19 Nov. 30 Book balance Bank service charge

2,032,000

Receipts 2,568,000

Disbursements

Dec. 31

1,440,000

3,160,000

November 30 December 31 Collection of note November 30 December 31 Adjusted book balance

(

2,000)

( 200,000) 1,830,000

Bank balance 1,890,000 Outstanding checks November 30 ( 180,000) December 31 Deposit in transit November 30 80,000 December 31 498,000 Check erroneously charged by bank November 30 40,000 December 31 Adjusted bank balance 1,830,000

(

2,000) 4,000

(

4,000)

200,000 ( 300,000) 2,468,000

1,442,000

( 300,000) 2,856,000

2,090,000

1,080,000

2,900,000

( 180,000) 592,000

( 592,000)

(

80,000) 498,000

(

40,000) (

2,468,000

50,000) 1,442,000

50,000 2,856,000

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 NSF check: September 30 ( 60,000) October 31 Collection of accounts receivable September 30 30,000 October 31 Overstatement of check September 30 90,000 October 31 Adjusted balance 1,960,000 Bank balance Deposit in transit September 30 October 31 Outstanding checks September 30 October 31 Adjusted balance

1,400,000

2,400,000 (

(

30,000) 50,000

(

40,000) 50,000

90,000) ________ 1,330,000

( 120,000) 2,260,000

120,000 1,030,000

2,100,000

1,200,000

2,500,000

800,000

130,000

( 130,000) 260,000

( 270,000) 1,960,000

(

60,000) 40,000

900,000

260,000

(

270,000) 30,000 ( 30,000) 1,330,000 2,260,000 1,030,000

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

40,000 40,000

2. Cash in bank Accounts receivable Salaries

170,000 50,000 120,000

49 Problem 4-21

May 31

Receipts

Disbursements

June 30

Balance per book Bank service charge: May 31 June 30 NSF check: June 30 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

2,500,000 (

5,300,000

20,000)

5,400,000 (

2,400,000

20,000) 25,000

(

200,000

( 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

25,000)

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 Adjusted book balance

4,000,000 ( 10,000) 1,500,000 60,000 ( 250,000) (1,000,000) 4,300,000

50

Problem 4-23 Answer B Balance per bank Add: Deposit in transit Total Less: Outstanding checks Erroneous bank credit Adjusted bank balance

2,000,000 200,000 2,200,000 400,000 300,000

700,000 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) Adjusted book balance

850,000 750,000 1,600,000 100,000 1,500,000

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

8,500,000 950,000 ( 180,000) ( 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 Collection of note Book error Unrecorded check for traveling expenses Adjusted book balance

3,750,000 50,000) 1,500,000 ( 100,000) ( 500,000) 4,600,000

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

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 Checks issued by depositor in June: Total credits to cash in June Service charge in May recorded in June Total Checks paid by bank in June: Checks and charges by bank in June Service charge in June NSF check in June Outstanding checks – June 30

3,000,000 (

9,000,000 100,000)

8,900,000 11,900,000

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

6,950,000 4,950,000

Problem 4-32 Answer A Balance per book – June 30 Service charges Collection by bank NSF check Adjusted book balance Balance per bank – June 30 Deposits outstanding – June 30 Checks outstanding – June 30 Adjusted bank balance Outstanding checks – May 31 Checks recorded by book in June Total Less: Checks recorded by bank in June Outstanding checks – June 30 Deposits outstanding – May 31 Deposits recorded by book in June Total Less: Deposits recorded by bank in June Deposits outstanding – June 30

2,100,000 50,000) 550,000 ( 100,000) 2,500,000 (

2,400,000 500,000 ( 400,000) 2,500,000 100,000 2,500,000 2,600,000 2,200,000 400,000 300,000 1,800,000 2,100,000 1,600,000 500,000

Problem 4-33 Answer A Note collected Book error (1,930,000 – 1,390,000) NSF check Service charge Net debt to cash

1,936,000 ( 540,000) ( 840,000) ( 47,000) 509,000

52 Problem 4-34 Answer A

Problem 4-35 Answer A Problem 4-36 Answer D Balance per bank – November 30 December deposits Total December disbursements Balance per bank – December 31 Deposit in transit – December Outstanding checks – December Adjusted bank balance – December 31 Balance per book – December 31 (squeeze) Note collected by bank NSF check Service charge Adjusted book balance

3,600,000 5,500,000 9,100,000 (4,400,000) 4,700,000 700,000 ( 500,000) 4,900,000 4,300,000 1,000,000 ( 350,000) ( 50,000) 4,900,000

Problem 4-37 Answer A Bank disbursements for July Outstanding checks – June 30 Outstanding checks – July 31 Book disbursements for July

9,000,000 (1,400,000) 1,000,000 8,600,000

Problem 4-38 Answer B Bank receipts for April Deposits in transit – March 31 Deposits in transit – April 30 Book receipts for April

6,000,000 (1,000,000) 1,500,000 6,500,000

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

D D D B A

6. 7. 8. 9. 10.

Problem 5-2 A B C A C

1. 2. 3. 4. 5.

A C A A A

6. 7. 8. 9. 10.

Problem 5-3 A D C C D

1. 2. 3. 4. 5.

D 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 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

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

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

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

Writeoff Merchandise returns Allowances to customers Accounts receivable – December 31

35,000 40,000 25,000

5,400,000 1,200,000

54 b. Subscription receivable Deposit on contract Claim receivable Advances to employees Advances to affiliated Advances to supplier Accounts receivable 490,000

150,000 120,000 60,000 10,000 100,000 50,000

c. Accounts receivable Claim receivable 60,000 Advances to employees 10,000 Advances to supplier Total trade and other receivables

1,200,000

50,000 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 longterm investment.

Problem 5-6 Requirement 1 1. Accounts receivable Sales

3,600,000 3,600,000

2. Notes receivable Accounts receivable 3. Doubtful accounts Allowance for doubtful accounts

400,000 400,000 90,000 90,000

4. Allowance for doubtful accounts Accounts receivable

20,000

5. Sales return Accounts receivable

15,000

20,000 15,000

6. Cash Accounts receivable

2,450,000

7. Sales discount Accounts receivable

45,000

8. Cash Notes receivable

2,450,000 45,000 150,000 150,000

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. Sales return Accounts receivable

100,000

5. Sales return Allowance for sales return

40,000

4,000,000

1,500,000 1,000,000 100,000 40,000

Problem 5-9 Gross method

Net method

July 1 Accounts receivable Sales 49,000

50,000

2 Accounts receivable Sales 196,000

200,000

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

July 1 Accounts receivable Sales

49,000

50,000

2 Accounts receivable Sales

196,000

200,000

12 Cash 196,000 Accounts receivable 200,000

30 Cash 50,000 Accounts receivable 49,000 1,000

50,000

30 Cash 50,000 Accounts receivable Sales discount forfeited

Problem 5-10 a. Credit sales (75% x 5,000,000)

3,750,000

Doubtful accounts (2% x 3,750,000) Doubtful accounts Allowance for doubtful accounts

75,000 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 Doubtful accounts Allowance for doubtful accounts c. Doubtful accounts (2% x 1,900,000) Allowance for doubtful accounts

50,000 10,000 60,000 60,000 60,000 38,000 38,000

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

240,000

b. Doubtful accounts Allowance for doubtful accounts

170,000

240,000 170,000

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%)

2,450,000 50,000

3. Cash Accounts receivable

3,900,000

7,000,000

2,500,000 3,900,000

4. Allowance for doubtful accounts Accounts receivable

30,000

5. Accounts receivable Allowance for doubtful accounts

10,000

Cash Accounts receivable 6. Sales return

30,000 10,000 10,000 10,000 70,000

Accounts receivable

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) Less: Allowance before adjustment Doubtful accounts expense

60,000 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

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

4. Sales discount Allowance for sales discount

10,000

5. Sales return Accounts receivable

80,000

6. Allowance for doubtful accounts Accounts receivable

60,000

Accounts receivable Allowance for doubtful accounts Cash Accounts receivable

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

7. Doubtful accounts Allowance for doubtful accounts

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 Net realizable value

2,400,000 120,000 10,000

130,000 2,270,000

60

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

2,600,000

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

1,000,000

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

1,455,000 45,000 1,500,000

4. Allowance for doubtful accounts Accounts receivable

2,600,000 1,000,000

20,000 20,000

5. Cash Sales

470,000

6. Sales return and allowances Accounts receivable

55,000

7. Sales return and allowances Cash

10,000

8. Accounts receivable Allowance for doubtful accounts

470,000 55,000 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 Net credit sales

2,600,000 45,000 55,000

100,000 2,500,000

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

50,000

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

625,000 60,000 565,000

61 Problem 5-16 1. Accounts receivable – Jan. 1 1,500,000 Sales 7,935,000 Recovery 15,000 Collections (8,000,000) Sales discount ( 115,000) Writeoff ( 55,000) Sales return ( 30,000) Accounts receivable – Dec. 31 1,250,000

Amount 1,700,000 1,200,000 100,000 150,000 1,200,000 3,270,000

2. Allowance – January 1 Receivables Doubtful accounts expense (squeeze) Total Less: Writeoff (235,000 + 30,000) Required allowance – December 31

4,500,000

2,475,000/99%

2,500,000

Sales discount: 2% x 4,500,000 90,000 1% x 2,500,000 25,000 115,000

Problem 5-17 1. Not yet due 1 – 30 days past due 31 – 60 days past due 61 – 90 days past due Over 90 days past due

4,410,000/98%

Percent of Uncollectible 5% 25% 50% 100%

Required allowance 60,000 25,000 75,000 120,000 280,000 170,000 30,000 345,000 545,000 265,000 280,000

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

3,270,000 280,000 2,990,000

Problem 5-18 1. 1,000,000 x 1% 400,000 x 5% 300,000 x 10% 200,000 x 25% 60,000 x 100% 1,960,000

10,000 20,000 30,000 50,000 60,000 170,000

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

3. Doubtful accounts Allowance for doubtful accounts

90,000 20,000 200,000 310,000 140,000 170,000

20,000 20,000

Correct amount Recorded (2% x 9,000,000) Understatement

200,000 180,000 20,000

4. Accounts receivable – December 31 Less: Allowance for doubtful accounts Net realizable value

1,960,000 170,000 1,790,000

62 Problem 5-19 2005 2006 2007 Total 26,000 29,000 30,000 85,000 3,000 4,000 9,000 2,000 26,000 26,000 76,000 24,000 76,000 Percentage to be used in computing the allowance = ------------------- = 2% 3,800,000

1. Writeoff Less: Recoveries Net writeoff

2. Credit sales for 2008 Multiply by bad debt percentage Provision for doubtful accounts 3. Accounts receivable – January 1, 2008 Add: Credit sales for 2008 Recoveries Total Less: Collections in 2008 Writeoff Accounts receivable – December 31, 2008 4. Allowance for doubtful accounts – January 1 Add: Doubtful accounts for 2008 Recoveries

3,000,000 2% 60,000 250,000 3,000,000 5,000 2,615,000 40,000

3,005,000 3,255,000 2,655,000 600,000 20,000

60,000 5,000

65,000

Total Less: Writeoff Allowance for doubtful accounts – December 31

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

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

5,010,000 5,610,000 4,610,000 1,000,000 30,000 10,000 40,000 50,000 (10,000)

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

35,000 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 10,000,000 1. Retained earnings (.016 x 1,250,000) Allowance for doubtful accounts 2. Allowance – January 1 Recoveries – 2008 Doubtful accounts – 2008 (squeeze) Total Less: Writeoff – 2008

258,000 – 20,000 Rate in 2008 = -------------------------- = .017 14,000,000 20,000 20,000 20,000 10,000 92,000 122,000 88,000

Allowance – December 31 (.017 x 2,000,000)

34,000

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

2,000,000 34,000 1,966,000

Problem 5-22 1. Allowance – January 1, 2008 Doubtful accounts recorded (2% x 20,000,000) Recovery Total Less: Writeoff (300,000 + 100,000) Allowance balance before adjustment

500,000 400,000 50,000 950,000 400,000 550,000

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

250,000 200,000 250,000 300,000 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) Recovery Total Writeoff Allowance before adjustment

28,000 30,000 7,000 65,000 (27,000) 38,000

3. 300,000 x 1% 80,000 x 5% 60,000 x 20% 25,000 x 80% Required allowance – 12/31/2008 4. Doubtful accounts Allowance for doubtful accounts (39,000 – 38,000)

3,000 4,000 12,000 20,000 39,000 1,000 1,000

Problem 5-24 2008 Jan. 1

Loan receivable Cash

4,000,000 4,000,000

Dec. 31

Cash Unearned interest income

342,100

Unearned interest income Cash

150,000

Cash Interest income

400,000

342,100 150,000 400,000

Unearned interest income Interest income Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010

(10%) Interest received 400,000 400,000 400,000

56,948 56,948 (12%) Interest income 456,948 463,782 471,370*

Amortization 56,948 63,782 71,370

Carrying value 3,807,900 3,864,848 3,928,630 4,000,000

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

2009 Dec. 31 2010 Dec. 31

Cash Interest income

400,000 400,000

65 Unearned interest income Interest income

63,782 63,782

Cash Interest income Unearned interest income Interest income Cash Loan receivable

400,000 400,000 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 Cash

260,300

Cash Direct origination cost

100,000 100,000

260,300

Dec. 31

Cash Interest income

240,000 240,000

Interest income Direct origination cost Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010 2009 Dec. 31

50,382

(8%) Interest received

(6%) Interest income

Amortization

240,000 240,000 240,000

189,618 186,595 183,487

50,382 53,405 56,513

Cash Interest income Interest income Direct origination cost

2010 Dec. 31

50,382

Cash Interest income

Carrying value 3,160,300 3,109,918 3,056,513 3,000,000

240,000 240,000 53,405 53,405

240,000 240,000

66 2010 Dec. 31

Interest income Direct origination cost Cash Loan receivable

56,513 56,513 3,000,000 3,000,000

Problem 5-26 Requirement 1 December 31, 2009 (1,000,000 x .93) December 31, 2010 (2,000,000 x .86) December 31, 2011 (3,000,000 x .79) Total present value of loan

900,000 1,720,000 2,370,000 5,020,000

Requirement 2 Loan receivable – 12/31/2008 Accrued interest (6,000,000 x 8%) Total carrying value Present value of loan

6,000,000 480,000 6,480,000 5,020,000

Impairment loss

1,460,000

Requirement 3 2008

2009

Impairment loss Accrued interest receivable Allowance for loan impairment

1,460,000

Cash Loan receivable

1,000,000

Allowance for loan impairment Interest income (8% x 5,020,000) 2010

Cash Loan receivable Allowance for loan impairment Interest income Loan receivable – 12/31/2009 Allowance for loan impairment (980,000 – 401,600) Carrying value – 12/31/2009

480,000 980,000 1,000,000 401,600 401,600 2,000,000 2,000,000 353,728 353,728 5,000,000 ( 578,400) 4,421,600

Interest income for 2010 (8% x 4,421,600)

353,728

67 2011

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

3,000,000 3,000,000 224,672 224,672 3,000,000 ( 224,672) 2,775,328 222,026 224,672 2,646

Problem 5-27 Requirement 1 December 31, 2009 ( 500,000 x .89) December 31, 2010 (1,000,000 x .80) December 31, 2011 (2,000,000 x .71)

445,000 800,000 1,420,000

December 31, 2012 (4,000,000 x .64) Total present value of loan

2,560,000 5,225,000

Requirement 2 Loan receivable Accrued interest receivable (12% x 7,500,000) Total carrying value Present value of loan Impairment loss

7,500,000 900,000 8,400,000 5,225,000 3,175,000

Requirement 3 2008

2009

2010

Impairment loss Accrued interest receivable Allowance for loan impairment

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

Cash Loan receivable

500,000

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

627,000 627,000

500,000

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 Allowance for loan impairment (2,275,000 – 627,000) Carrying value – 12/31/2009

7,000,000 (1,648,000) 5,352,000

Interest income for 2010 (12% x 5,352,000)

642,240

Problem 5-28 December 31, 2011 ( 360,000 x .772) 277,920 December 31, 2012 ( 360,000 x .708) 254,880 December 31, 2013 ( 360,000 x .650) 234,000 December 31, 2014 (4,360,000 x .596) 2,598,560 Total present value of loan 3,365,360 2008

Face value of loan Present value of loan Impairment loss

Cash Interest income

360,000

Impairment loss

634,640

4,000,000 3,365,360 634,640

360,000

Allowance for loan impairment 2009 2010 2011 2012 2013

2014

634,640

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

302,882

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

331,758

Cash Interest income

360,000

Cash Interest income

360,000

Cash Interest income

360,000

Cash Interest income Loan receivable

302,882 331,758 360,000 360,000 360,000 4,360,000 360,000 4,000,000

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) Present value of interest (80,000 x 5 = 400,000 x .735) Total present value of loan

367,500 294,000 661,500

Loan receivable Present value of loan Loan impairment loss 12/31/2009

Allowance for loan impairment Interest income (8% x 661,500)

1,000,000 661,500 338,500 52,920 52,920

Problem 5-30 Answer B Accounts receivable-January 1 Credit sales Collections from customers Sales return

1,300,000 5,500,000 (5,000,000) ( 150,000)

Accounts written off Accounts receivable-December 31 Allowance for doubtful accounts Allowance for sales return Net realizable value

( 100,000) 1,550,000 ( 250,000) ( 50,000) 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

Problem 5-34 Answer D Allowance – January 1 Uncollectible accounts expense (squeeze) Recovery of accounts written off Total Accounts written off Allowance – December 31 (2,700,000 – 2,500,000)

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

70 280,000 100,000 50,000 430,000 (230,000) 200,000

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

180,000 50,000 230,000 30,000 200,000

Problem 5-36 Answer B 0 –60 days (1,200,000 x 1%) 61 – 120 days (900,000 x 2%) Over 120 days (1,000,000 x 6%) Allowance – December 31, 2008

12,000 18,000 60,000 90,000

Allowance – December 31, 2007 Uncollectible accounts expense (squeeze) Recovery Total Accounts written off Allowance – December 31, 2008

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

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

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

72

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

C C C A C

6. 7. 8. 9. 10.

Problem 6-2 B C B A C

1. 2. 3. 4. 5.

C D C C B

6. 7. 8. 9. 10.

A B B B D

Problem 6-3 March 1 Cash

2,000,000 Note payable – bank

April

2,000,000

1 Cash Sales discount Accounts receivable

June 1 Cash

980,000 20,000 2,000,000

Accounts receivable

Sept. 1 Note payable – bank Interest expense (12% x 2,000,000 x 6/12) Cash

1,000,000 2,000,000

2,000,000 120,000 2,120,000

Problem 6-4 Requirement 1 2008 Oct. 1 Cash Discount on note payable (10% x 4,000,000) Note payable – bank 1 Interest expense (400,000 x 3/12) Discount on note payable 2009 Oct. 1 Note payable – bank Cash

100,000

4,000,000 100,000

4,000,000 4,000,000

Dec. 31 Interest expense Discount on note payable Current liabilities: Note payable – bank (Note 3) Discount on note payable Carrying value

3,600,000 400,000

300,000

300,000

Requirement 2 4,000,000 ( 300,000) 3,700,000

73 Note 3 – Note payable – bank Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000. Problem 6-5 May 1 Accounts receivable – assigned Accounts receivable

800,000

1 Cash (640,000 – 20,000) Service charge Note payable – bank

620,000 20,000

5 Sales return Accounts receivable – assigned

30,000

10 Cash Sales discount (2% x 500,000) Accounts receivable – assigned

490,000 10,000

June 1 Note payable – bank Interest expense (2% x 640,000) Cash

July

490,000 12,800 10,000

20 Cash Accounts receivable – assigned

200,000

1 Accounts receivable Accounts receivable – assigned Accounts receivable – assigned Less: Collections Sales discount Sales return Worthless accounts Balance

640,000 30,000

7 Allowance for doubtful accounts Accounts receivable – assigned

1 Note payable – bank (640,000 – 490,000) Interest expense (2% x 150,000) Cash

800,000

500,000

502,800 10,000 200,000

150,000 3,000 153,000 60,000 60,000 800,000 690,000 10,000 30,000 10,000

740,000 60,000

Problem 6-6 July 1 Accounts receivable – assigned Accounts receivable

1,500,000

1,500,000

74 July 1 Cash (1,125,000 – 60,000) Service charge (4% x 1,500,000) Note payable – bank

1,065,000 60,000

Aug. 1 Note payable – bank Accounts receivable – assigned

800,000

1 Interest expense (2% x 1,125,000) Cash

22,500

Sept. 1 Cash Interest expense Note payable – bank Accounts receivable – assigned

168,500 6,500 325,000

Accounts receivable Accounts receivable – assigned

200,000

Collections by bank Less: Payment of loan (1,125,000 – 800,000) Excess collection Less: Interest (2% x 325,000) Cash remittance from bank

1,125,000 800,000 22,500

500,000 200,000 500,000 325,000 175,000 6,500 168,500

Problem 6-7 July 1 Accounts receivable – assigned Accounts receivable 1 Cash (400,000 – 10,000) Service charge (2% x 500,000) Note payable – bank Aug. 1 Cash Accounts receivable – assigned 1 Interest expense (1% x 400,000) Note payable – bank Cash Sept. 1 Cash Accounts receivable – assigned 1 Interest expense (1% x 74,000) Note payable – bank Cash

500,000 390,000 10,000 330,000

500,000

400,000 330,000

4,000 326,000 330,000 170,000 740 74,000

170,000

74,740

75

Problem 6-8 Requirement a Dec. 1 Accounts receivable – assigned Accounts receivable

1,500,000

1 Cash Service charge Note payable – bank

1,250,000 50,000

31 Cash Sales discount Accounts receivable – assigned

970,000 30,000

31 Interest expense (1% x 1,300,000) Note payable – bank Cash

13,000 957,000

1,500,000

1,300,000

1,000,000

970,000

Requirement b The accounts receivable – assigned with a balance of P500,000 should be classified as current asset and included in trade and other receivables. The note payable – bank of P343,000 should be classified and presented as a current liability. The company should disclose the equity in assigned accounts as follows: Accounts receivable – assigned Note payable – bank Equity in assigned accounts

500,000 (343,000) 157,000

Problem 6-9 July

1 Accounts receivable – assigned Accounts receivable

800,000

1 Cash (640,000 – 24,000) Service charge (3% x 800,000) Note payable – bank

616,000 24,000

Aug. 1 Interest expense (1% x 640,000) Note payable – bank Accounts receivable – assigned

6,400 413,600

Sept. 1 Cash Interest expense Note payable – bank Accounts receivable – assigned

91,336 2,264 226,400

800,000

640,000

420,000

320,000 76

Accounts receivable Accounts receivable – assigned

60,000 60,000

Bank loan August 1 payment Balance Collections by bank Less: Payment of loan Interest (1% x 226,400) Remittance from bank

640,000 413,600 226,400 226,400 2,264

320,000 228,664 91,336

Problem 6-10 Cash Allowance for doubtful accounts Loss on factoring Accounts receivable

400,000 30,000 70,000

500,000

Problem 6-11 Cash Receivable from factor Allowance for bad debts Loss on factoring Accounts receivable

5,000,000 300,000 250,000 450,000

6,000,000

Problem 6-12 Feb. 1 Cash Service charge (5% x 800,000) Receivable from factor (10% x 800,000) Accounts receivable

680,000 40,000 80,000 800,000

15 Sales return and allowances Receivable from factor

20,000

28 Cash (80,000 – 20,000) Receivable from factor

60,000

20,000 60,000

Problem 6-13 June 1 Accounts receivable Sales

500,000 500,000

77

June 3 Cash Sales discount (2% x 500,000) Commission (5% x 500,000) Receivable from factor (25% x 500,000) Accounts receivable 9 Sales return and allowances Sales discount (2% x 50,000) Receivable from factor

340,000 10,000 25,000 125,000 50,000

500,000 1,000 49,000

11 No entry 15 Cash (125,000 – 49,000) Receivable from factor

76,000

76,000

Problem 6-14 July 26 Cash Commission (5% x 1,000,000) Receivable from factor (20% x 1,000,000) Accounts receivable

750,000 50,000 200,000

July 28 Sales return and allowances Receivable from factor

50,000

Aug. 31 Cash Receivable from factor

150,000

1,000,000 50,000 150,000

Problem 6-15 1. Cash Service charge (5% x 200,000) Receivable from factor (20% x 200,000) Accounts receivable

150,000 10,000 40,000

2. Accounts receivable – assigned Accounts receivable

300,000

Cash Service charge (5% x 300,000) Note payable – bank

225,000 15,000

3. Doubtful accounts Allowance for doubtful accounts Required allowance (5% x 1,300,000) Less: Allowance – January 1 Doubtful accounts

200,000 300,000

240,000 35,000

35,000 65,000 30,000 35,000 78

4. The net realizable value of the accounts receivable is included in trade and other receivables and presented as current asset. Accounts receivable – unassigned Accounts receivable – assigned Total Less: Allowance for doubtful accounts Net realizable value

1,000,000 300,000 1,300,000 65,000 1,235,000

The receivable from factor of P40,000 is also included in trade and other receivables. The note payable – bank of P240,000 is classified and presented as current liability. However, the company should disclose the equity in assigned accounts as follows: Accounts receivable – assigned Note payable – bank Equity in assigned accounts

300,000 (240,000) 60,000

Problem 6-16 Books of Motorway Company 1. Cash Receivable from factor Allowance for doubtful accounts Loss on factoring Accounts receivable

2,250,000 300,000 100,000 350,000

3,000,000

Gross amount Holdback (10% x 3,000,000) Commission (15% x 3,000,000) Cash received

( (

Sales price (3,000,000 x 85%) Book value of accounts receivable (3,000,000 – 100,000) Loss on factoring

2,250,000 2,900,000 ( 350,000)

2. Cash Receivable from factor Accounts receivable factored Collections by factor Balance – December 31 Receivable from factor per book Required holdback (10% x 500,000) Remittance from factor

Books of Freeway Company (factor)

250,000

3,000,000 300,000) 450,000) 2,250,000

250,000 3,000,000 2,500,000 500,000 300,000 50,000 250,000

79

1. Accounts receivable Cash Clients retainer Commission income

3,000,000

2. Cash Accounts receivable

2,500,000

3. Clients retainer Cash 4. Doubtful accounts Allowance for doubtful accounts (4% x 500,000)

2,250,000 300,000 450,000

250,000 20,000

2,500,000 250,000 20,000

Problem 6-17 Jan. 15 Notes receivable Sales

500,000

Feb. 15 Cash Interest expense Notes receivable discounted

496,875 3,125

500,000

Principal Interest (500,000 x 12% x 6/12) Maturity value Discount (530,000 x 15% x 5/12) Net proceeds July 15 Notes receivable discounted Notes receivable

500,000 500,000 30,000 530,000 33,125 496,875

500,000

500,000

Problem 6-18 March 14 Accounts receivable Sales

2,050,000

April

7 Notes receivable Freight out Accounts receivable

2,000,000 50,000

April 20 Cash Notes receivable discounted Interest income

2,001,750

2,050,000

2,050,000 2,000,000 1,750

80

Principal Add: Interest (2,000,000 x 12% x 60/360) Maturity value Less: Discount (2,040,000 x 15% x 45/360) Net proceeds June 4

July

4

2,000,000 40,000 2,040,000 38,250 2,001,750

Accounts receivable (2,040,000 + 10,000) Cash

2,050,000

Notes receivable discounted Notes receivable

2,000,000

Cash Accounts receivable Interest income (2,000,000 x 12% x 30/360

2,070,000

2,050,000 2,000,000 2,050,000 20,000

Problem 6-19 Requirement a April 5 Notes receivable Accounts receivable 19 Cash Notes receivable discounted Interest income

500,000 501,075

Principal Add: Interest (500,000 x 12% x 60/360) Maturity value Less: Discount (510,000 x 14% x 45/360) Net proceeds May 3 Notes receivable Accounts receivable 16 Cash Interest expense Notes receivable discounted

500,000 1,075 500,000 10,000 510,000 8,925 501,075

1,000,000 1,000,000 995,000 5,000

Principal Less: Discount (1,000,000 x 12% x 15/360) Net proceeds May 25 Notes receivable Interest income Accounts receivable

500,000

1,000,000 1,000,000 5,000 995,000

1,500,000 4,500

1,504,500 81

Principal

1,500,000

Add: Interest (1,500,000 x 12% x 60/360) Maturity value Less: Discount (1,530,000 x 12% x 50/360) Net credit June 7 Accounts receivable (510,000 + 20,000) Cash Notes receivable discounted Notes receivable 15 Notes receivable Sales June 18 Cash Accounts receivable Interest income (530,000 x 12% x 15/360)

30,000 1,530,000 25,500 1,504,500 530,000 500,000 800,000 532,650

530,000 500,000 800,000 530,000 2,650

Requirement b – Adjustments on June 30 1. Accrued interest receivable Interest income (800,000 x 12% x 15/360)

4,000

4,000

Accrued interest on D’s note. 2. Notes receivable discounted Notes receivable

1,000,000

1,000,000

To cancel the contingent liability on B’s note. This note matured on May 31. Since there is no notice of dishonor it is assumed that the said note is paid on the date of maturity. Problem 6-20 May

1 Notes receivable Accounts receivable

200,000

1 Notes receivable Accounts receivable

300,000

July 30 Accounts receivable Notes receivable Interest income (200,000 x 12% x 90/360)

206,000

Aug. 1 Cash Note receivable discounted Interest income

306,075

200,000 300,000 200,000 6,000 300,000 6,075 82

Principal

300,000

Interest (300,000 x 12% x 6/12) Maturity value Less: Discount (318,000 x 15% x 3/12) Net proceeds Sept. 1 Notes receivable Accounts receivable Interest income 28 Cash Accounts receivable Interest income (206,000 x 12% x 60/360)

18,000 318,000 11,925 306,075 132,000

210,120

Oct. 1 Notes receivable Sales

500,000

Nov. 1 Accounts receivable (318,000 + 12,000) Cash

330,000

Notes receivable discounted Notes receivable Dec. 30 Cash

31 Cash

Notes receivable Interest income (500,000 x 12% x 90/360 Accounts receivable Interest income (330,000 x 12% x 2/12)

120,000 12,000 206,000 4,120 500,000

300,000 515,000

336,600

330,000 300,000 500,000 15,000 330,000 6,600

Problem 6-21 2008 Jan. 1 Cash Notes receivable Land Gain on sale of land Dec. 31 Accrued interest receivable Interest income (12% x 6,000,000) 2009 Dec. 31 Accrued interest receivable Interest income (12% x 6,720,000) 2010 Jan. 1 Cash

Notes receivable Accrued interest receivable

1,000,000 6,000,000

720,000

806,400

7,526,400

5,000,000 2,000,000 720,000

806,400

6,000,000 1,526,400 83

Problem 6-22 Jan. 1 Notes receivable Sales Unearned interest income

600,000

Dec. 31 Cash Notes receivable

200,000 200,000

31 Unearned interest income Interest income Year 2008 2009 2010

540,000 60,000

30,000 30,000

Notes receivable 600,000 400,000 200,000 1,200,000

Fraction 6/12 4/12 2/12

Interest income 30,000 20,000 10,000 60,000

Problem 6-23 Face value Present value (300,000 x 2.4018) Unearned interest income

900,000 720,540 179,460

Present value Cash received Sales price Cost of generator Gross income

Jan. 1 Cash Notes receivable Sales Unearned interest income

100,000 900,000

Dec. 31 Cash

300,000 Notes receivable

820,540 179,460 300,000

31 Unearned interest income Interest income Date Jan. 1, 2008 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2010

720,540 100,000 820,540 700,000 120,540

86,465 86,465

Collection

Interest

Principal

300,000 300,000 300,000

86,465 60,841 32,154

213,535 239,159 267,846

Present value 720,540 507,005 267,846 -

84 Problem 6-24

Requirement 1 12/31/2008

Note receivable Sales (500,000 x 3.99) Unearned interest income

2,500,000

12/31/2009

Cash Note receivable

500,000

Unearned interest income Interest income (8% x 1,995,000)

159,600

1,995,000 505,000 500,000 159,600

Requirement 2 Note receivable (2,500,000 – 500,000) Unearned interest income (505,000 – 159,600) Book value – 12/31/2009

(

2,000,000 345,400) 1,654,600

Requirement 3 Interest income for 2010 (8% x 1,654,600)

132,368

Problem 6-25 Face value of note Present value (400,000 x .7118) Unearned interest income

400,000 284,720 115,280

2008 Jan. 1 Cash Notes receivable Accumulated depreciation Equipment Gain on sale of equipment Unearned interest income Dec. 31 Unearned interest income Interest income Date Jan. 01, 2008 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2010

Interest income 34,166 38,266 42,848

2009 Dec. 31 Unearned interest income Interest income

Present value Cash received Sales price Book value Gain on sale

284,720 125,000 409,720 350,000 59,720

125,000 400,000 150,000 500,000 59,720 115,280 34,166 Unearned interest 115,280 81,114 42,848 38,266

34,166 Present value 284,720 318,886 357,152 400,000

38,266 85

2010 Dec. 31 Unearned interest income Interest income

42,848 42,848

2011 Jan. 1 Cash Notes receivable

400,000

400,000

Problem 6-26 1/1/2008

Note receivable Loss on sale of land Land Unearned interest income

9,000,000 250,000

PV of note (9,000,000 x .75) Carrying amount of land Loss on sale

7,000,000 2,250,000 6,750,000 7,000,000 ( 250,000)

12/31/2008

Unearned interest income Interest income (10% x 6,750,000)

675,000

12/31/2009

Unearned interest income Interest income (10% x 7,425,000)

742,500

12/31/2010

Unearned interest income Interest income (2,250,000 – 1,417,500)

832,500

1/1/2011

Cash Note receivable

9,000,000

675,000 742,500 832,500 9,000,000

Problem 6-27 Answer C Note payable Discount on note payable (1,000,000 x 10.8%) Net proceeds Discount on note payable Amortization from August 1 to December 31 (108,000 x 5/12) Balance – December 31, 2008 Note payable Discount on note payable Carrying value

1,000,000 ( 108,000) 892,000 108,000 ( 45,000) 63,000 1,000,000 ( 63,000) 937,000

Problem 6-28 Question 1 – Answer A Problem 6-29 Answer A

Question 2 - Answer B

86

Problem 6-30 Answer C Principal Add: Interest (500,000 x 8%) Maturity value Less: Discount (540,000 x 10% x 6/12) Net proceeds

Problem 6-31 Answer C 500,000 40,000 540,000 27,000 513,000

Principal Less: Discount (200,000 x 10% x 6/12) Net proceeds

200,000 10,000 190,000

Problem 6-32 Answer A Principal Interest (4,000,000 x 12% x 90/360) Maturity value Less: Discount (4,120,000 x 15% x 60/360) Net proceeds Principal Interest revenue Problem 6-33 Answer C Principal Add: Interest (600,000 x 10% x 6/12) Maturity value Less: Discount (630,000 x 12% x 4/12) Net proceeds

4,000,000 120,000 4,120,000 103,000 4,017,000 4,000,000 17,000

Problem 6-34 Answer B 600,000 30,000 630,000 25,200 604,800

Note receivable – June 30, 2007 Less: Payment on July 1, 2008 Balance – July 1, 2008 Accrued interest from July 1, 2008 to June 30, 2009 (1,000,000 x 8)

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

Problem 6-35 Answer C Problem 6-36 Answer A First payment on January 1, 2008 Present value of remaining six payments (600,000 x 4.36) Correct sales revenue

600,000 2,616,000 3,216,000

Problem 6-37 Answer D

Problem 6-38 Answer C

Note receivable 1,000,000 Unearned interest income ( 435,000) Carrying value equal to present value (100,000 x 5.65) 565,000

The note receivable is shown at its value on December 31, 2008. Face value – remaining nine payments (500,000 x 9) Present value (500,000 x 6.25) Unearned interest income

4,500,000 3,125,000 1,375,000 87

Problem 6-39 1. Answer C

Note receivable Present value of note receivable (6,000,000 x .75) Unearned interest income

6,000,000 4,500,000 1,500,000

Interest income: 2008 (10% x 4,500,000) 2009 (10% x 4,950,000) 2010 (1,500,000 – 450,000 – 495,000) Total

450,000 495,000 555,000 1,500,000

2. Answer D Present value of note receivable Carrying amount of equipment Loss on sale of equipment

4,500,000 4,800,000 ( 300,000)

Problem 6-40 Answer B Present value of note receivable (1,000,000 x .712) Book value of equipment Loss on sale

712,000 800,000 ( 88,000)

Interest income for first year (12% x 712,000)

85,440

Problem 6-41 Answer D NR from Hart

1,000,000

NR from Maxx (1,150,000 x .68)

782,000

88

CHAPTER 7 Problem 7-1 1. 2. 3. 4.

D B D D

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

D D A C

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

B A A C

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

D C C A

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

C B A C

5. 6. 7. 8. 9. 10.

D D C A A A

5. 6. 7. 8. 9. 10.

D A D A A B

5. 6. 7. 8. 9. 10.

C D C A A D

5. 6. 7. 8. 9. 10.

A C A C A C

5. 6. 7. 8. 9. 10.

D D A B B A

Problem 7-6 Items counted in the bodega Items included in count specifically segregated per sales contract Items returned by customer Items ordered and in receiving department Items shipped today, FOB destination Items for display Items on counter for sale Damaged and unsalable items included in count Items in shipping department

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

Problem 7-7 Materials Goods in process Finished goods in factory Finished goods in company-owned retail store (750,000/150%) Finished goods in the hands of consignees (400,000 x 60%) Finished goods in transit Finished goods out on approval Materials in transit (330,000 + 30,000) Correct inventory

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

Problem 7-8 Finished goods Finished goods held by salesmen Goods in process (720,000/80%) Materials Materials returned to suppliers for replacement Factory supplies (110,000 + 60,000) Correct inventory

2,000,000 100,000 900,000 1,000,000 100,000 170,000 4,270,000 89

Problem 7-9 1. Inventory Income summary

50,000

2. Accounts payable Purchases

75,000

3. Purchases

30,000

50,000 75,000

Accounts payable

30,000

Inventory Income summary

30,000

4. Income summary Inventory

90,000

5. Purchases Accounts payable

140,000

30,000 90,000 140,000

Problem 7-10 1. EXCLUDE – The term of the shipment is FOB destination. 2. EXCLUDE – The goods are held only for consignment. 3. INCLUDE – There is no perfected sale yet as of December 31, 2008. 4. INCLUDE – The term FOB supplier’s warehouse is synonymous with FOB shipping point. 5. EXCLUDE – There is already a constructive delivery since the article was specifically made according to the customer’s specifications and the article is already completed on December 31, 2008. Problem 7-11 Inventory before adjustment Goods out on consignment Goods purchased FOB shipping point Goods sold FOB shipping point Goods sold FOB destination Goods sold FOB destination Correct December 31 inventory

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

90

Problem 7-12 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 7-13 Requirement a

Periodic System 1. Purchases Accounts payable 800,000

Perpetual System 800,000

2. Accounts payable Purchase returns 50,000

50,000

3. Accounts payable Cash

600,000

50,000

4. Accounts receivable 1,580,000 Sales 1,580,000

600,000

1,580,000

2. Accounts payable 50,000 Merchandise inventory 3. Accounts payable Cash

6. Cash Accounts receivable 40,000

40,000

1,360,000 1,360,000 60,000

600,000 600,000

4. Accounts receivable

1,580,000

5. Sales return 40,000 Accounts receivable 790,000

7. Inventory-Dec. 31 Income summary 20,000 (60 x 1,000)

1. Merchandise inventory 800,000 800,000 Accounts payable

Sales Cost of sales 790,000 Merchandise inventory 5. Sales return Accounts receivable

40,000

Merchandise inventory 20,000 60,000 Cost of sales 6. Cash 1,360,000 Accounts receivable 1,360,000 7. Inventory shortage 10,000 Merchandise inventory

10,000

Merchandise inventory per book Physical count Shortage

70,000 60,000 10,000

Requirement b Periodic System

Perpetual System

Inventory – January 90,000 Cost of sales recorded Purchases 800,000 (790,000 – 20,000) 770,000 Inventory shortage Purchase returns ( 50,000) 750,000 10,000 Goods available for sale 840,000 Adjusted cost of sales 780,000 Less: Inventory – December 31 60,000 Cost of sales 780,000

91 Problem 7-14 Company A List price Less: First trade discount (20% x 500,000)

Third trade discount (10% x 360,000) Invoice price Less: Cash discount (2% x 324,000) Payment within the discount period

500,000 100,000 400,000 40,000 360,000 36,000 324,000 6,480 317,520

Company B List price Less: Trade discount (35% x 500,000) Invoice price Less: Cash discount (2% x 325,000) Payment within the discount period

500,000 175,000 325,000 6,500 318,500

Second trade discount (10% x 400,000)

Problem 7-15 Requirement a Gross method 1. Purchases 4,750,000 Accounts payable 4,655,000 2. Freight in Cash 250,000

Net method 1. Purchases 4,750,000

250,000

4,655,000 Accounts payable

2. Freight in 250,000

250,000 Cash

3. Accounts payable 1,650,000 3. Accounts payable Cash 1,617,000 Cash 1,617,000 Purchase discount 33,000 Accounts payable Cash

2,100,000 2,100,000

4. No entry

5. Inventory Income summary 981,000

Accounts payable 2,058,000 Purchase discount lost 42,000 Cash 2,100,000 4. Purchase discount lost Accounts payable (1,000,000 x 2%)

1,000,000

5. Inventory 1,000,000

1,617,000

20,000

981,000 Income summary

20,000

92 Requirement b Gross method

Net method

Purchases Freight in Total Less: Purchase discounts Goods available for sale Less: Inventory – December 31 Cost of sales

4,750,000 250,000 5,000,000 33,000 4,967,000 1,000,000 3,967,000

4,655,000 250,000 4,905,000 -___ 4,905,000 981,000 3,924,000

Ending inventory: Gross (5,000,000/5) Net (4,905,000/5)

1,000,000

981,000

Problem 7-16 Gross method Sept. 1 Purchases Accounts payable

650,000

1 Freight in Accounts payable

20,000

7 Accounts payable Purchase returns and allowances

10,000

Oct. 1 Accounts payable Cash

660,000

650,000 20,000 10,000 660,000

Net method Sept. 1 Purchases Accounts payable

637,000

1 Freight in Accounts payable

20,000

7 Accounts payable (10,000 x 98%) Purchase returns and allowances Oct. 1 Accounts payable (657,000 – 9,800) Purchase discount lost (2% x 640,000) Cash

9,800

637,000 20,000 9,800

647,200 12,800 660,000

93

Problem 7-17 Gross method

Net method

1. Merchandise inventory Accounts payable 980,000

1,000,000

2. Accounts payable Cash 50,000

50,000

3. Accounts payable Cash 784,000 Cost of sales

800,000

4. Accounts payable Cash

150,000

5. Cash Sales 1,200,000

1,000,000

50,000

784,000

1. Merchandise inventory 980,000 Accounts payable

2. Accounts payable Cash

50,000

3. Accounts payable 784,000 Cash (800,000 x 98%)

16,000 150,000

1,200,000 1,200,000

Cost of sales 700,000 Merchandise inventory 686,000 (1,000,000 x 70%)

700,000

Problem 7-18 1. FIFO - periodic Lot No. 4 5 2. Beginning inventory Purchases: Lot No. 1 2 3 4 5 Goods available for sale Weighted average (4,855,000/50,000)

4. Accounts payable Purchase discount lost Cash 5. Cash Sales

146,000 4,000 150,000 1,200,000

Cost of sales 686,000 Merchandise inventory (980,000 x 70%) Units

Unit cost

Total cost

500 14,500 15,000

100 90

50,000 1,305,000 1,355,000

10,000 2,000 8,000 6,000 9,500 14,500 50,000

80 100 110 120 100 90

800,000 200,000 880,000 720,000 950,000 1,305,000 4,855,000

15,000

97.10

1,456,500

3. Specific identification Lot 3 4

FIFO Weighted average Specific identification

6,000 9,000 15,000 Goods available 4,855,000 4,855,000 4,855,000

120 100

Inventory-Dec. 31 1,355,000 1,456,500 1,620,000

720,000 900,000 1,620,000 Cost of sales 3,500,000 3,398,500 3,235,000 94

Problem 7-19 FIFO December 17 22 Average method December 1 7 17 22 Available for sale Inventory (5,580,000/120,000)

Units

Unit cost

Total cost

10,000 20,000 30,000

45 43

450,000 860,000 1,310,000

10,000 30,000 60,000 20,000 120,000

52 50 45 43

520,000 1,500,000 2,700,000 860,000 5,580,000

46.50

1,395,000

30,000

FIFO 5,580,000 1,310,000 4,270,000

Goods available for sale Less: Inventory – December 31 Cost of goods sold

Average 5,580,000 1,395,000 4,185,000

Problem 7-20 The stock cards are not prepared anymore. The end results are simply given. Units FIFO Ending inventory

Unit cost 210

4,000

Cost of sales Average method Ending inventory

Total cost 840,000 2,700,000

252.50

4,000

Cost of sales

1,010,000 2,530,000

Problem 7-21 2006 2007 2008

Purchases 5,000 9,000 15,000

Sales 4,000 7,000 12,000

Inventory increment 1,000 2,000 3,000

Total inventory – December 31, 2008 (units)

6,000

Sales Cost of sales: Inventory – December 31, 2007 (3,000 x 60) Purchases Goods available for sale Less: Inventory – December 31, 2008 (6,000 x 75) Gross income Problem 7-22

1,200,000 180,000 1,125,000 1,305,000 450,000

855,000 345,000 95

FIFO October 1

Units

Unit cost

15,000

60

900,000

Weighted average – periodic January 1 April 1 October 1 Goods available for sale Less: Sales Ending inventory

10,000 15,000 25,000 50,000 35,000 15,000

40 50 60

400,000 750,000 1,500,000 2,650,000

Weighted average (2,650,000/50,000)

15,000

53

795,000

Moving average – perpetual January 1 31 Balance April 1 Total July 31 Balance October 1 Total December 31 Balance

Units 10,000 ( 5,000) 5,000 15,000 20,000 (18,000) 2,000 25,000 27,000 (12,000) 15,000 FIFO

Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of sales Cost of sales – Weighted average perpetual January 31 Sale July 31 Sale December 31 Sale

400,000 2,250,000 2,650,000 900,000 1,750,000

Unit cost 40 40 40 50 47.50 47.50 47.50 60__ 59.07 59.07 59.07

Total cost

Total cost 400,000 ( 200,000) 200,000 750,000 950,000 ( 855,000) 95,000 1,500,000 1,595,000 ( 708,840) 886,160

Weighted average 400,000 2,250,000 2,650,000 795,000 1,855,000 200,000 855,000 708,840

Total cost of sales Problem 7-23 FIFO October 1 purchase

Weighted average January 1 April 5 October 1 Goods available for sale Inventory – December 31 (9,200,000/1,000)

1,763,840 Units

Unit cost

Total cost

300

10,000

3,000,000

Units

Unit cost

96 Total cost

200 300 500 1,000

7,500 9,000 10,000

1,500,000 2,700,000 5,000,000 9,200,000

300

9,200

2,760,000

FIFO Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of goods sold

Weighted average

1,500,000 7,700,000 9,200,000 3,000,000 6,200,000

1,500,000 7,700,000 9,200,000 2,760,000 6,440,000

Problem 7-24 Sales Gross profit Cost of goods sold Inventory – July 31 (see below) Cost of goods available for sale Purchases for July Inventory – July 1 July 12 25 FIFO inventory – July 31

6,000,000 (2,400,000) 3,600,000 928,000 4,528,000 (3,174,000) 1,354,000 Quantity 1,000 14,000 15,000

Unit cost 60 62

Total cost 60,000 868,000 928,000

Problem 7-25 1. Cost of units available for sale for July Purchases for July Cost of inventory – July 1 Number of units – July 1 (410,000 / P4) 2. July 1 inventory Purchases for July

1,452,100 (1,042,100) 410,000 102,500 102,500 200,000

Total units available for sale for July July 31 inventory Units sold during the month of July

302,500 ( 60,000) 242,500

3. Average unit cost (1,452,100 / 302,500) Inventory – July 31 (60,000 x 4.80)

4.80 288,000

Another computation (1,452,100 – 1,164,100)

288,000 97

Problem 7-26

Units

Average unit cost

1. Inventory – December 31, 2007 2007 layer

11,000

2. Inventory – December 31, 2006 Purchases – 2007 Materials available Less: Inventory – December 31, 2007 Raw materials used – 2007

14,000 12,000 26,000 11,000 15,000

3. Inventory – December 31, 2008 2008 layer

15,000

4. Inventory – December 31, 2007 Purchases – 2008 Materials available Less: Inventory – December 31, 2008 Raw materials used – 2008

11,000 20,000 31,000 15,000 16,000

138 138

153 153

Total cost 1,518,000 1,480,000 1,656,000 3,136,000 1,518,000 1,168,000 2,295,000 1,518,000 3,060,000 4,578,000 2,295,000 2,283,000

Problem 7-27 Available for sale Units sold (2,800,000/100) Ending inventory FIFO September 5 25 Weighted average (1,753,500/42,000) Available for sale Less: Ending inventory

42,000 28,000 14,000 Units

Unit cost

Total cost

2,000 12,000 14,000

43.00 42.50

86,000 510,000 596,000

14,000

41.75

584,500

Average 1,753,500 584,500

FIFO 1,753,500 596,000

Cost of sales

1,169,000

1,157,500

(Sch. 1)

(Sch. 2)

98 Problem 7-28 Cost of sales – Average Understatement of ending inventory: 2006 2007 2008 Cost of sales – FIFO Sales Cost of sales – FIFO Gross income Operating expenses Operating income Proof Net income – Average Understatement of ending inventory: 2006 2007 2008 Net income – FIFO

2006 1,500,000

2007 2,000,000

2008 2,400,000

( 150,000) _______ 1,350,000

150,000 ( 200,000) ________ 1,950,000

200,000 ( 270,000) 2,330,000

2006 3,000,000 1,350,000 1,650,000 800,000 850,000

2007 4,000,000 1,950,000 2,050,000 900,000 1,150,000

2008 4,800,000 2,330,000 2,470,000 1,000,000 1,470,000

700,000

1,100,000

1,400,000

150,000) 200,000 _____ 1,150,000

( 200,000) 270,000 1,470,000

150,000

(

_______ 850,000

Problem 7-29 Materials: R S T

Units

Lower of cost or NRV

1,000 2,000 3,000

100 250 300

100,000 500,000 900,000

Goods in process: X Y

4,000 5,000

480 620

1,920,000 3,100,000

Finished goods: A B

2,000 2,000

790 730

1,580,000 1,460,000

Inventory value

Valuation at lower of cost or NRV

9,560,000

99

Problem 7-30 Units 1,000 1,500 1,200 1,800 1,700

A B C D E

Unit cost 120 110 150 140 130

NRV 150 120 140 160 160

(Lower of cost or NRV) Inventory value 120,000 165,000 168,000 252,000 221,000 926,000

Problem 7-31 Product 1 2 3 4

Unit cost 700 475 255 450

NRV 650 745 250 740

Lower of cost or NRV 650 475 250 450

Units

Unit cost

NRV

Lower of cost or NRV

500 300

2,500 3,700

2,700 3,600

1,250,000 1,080,000

Car accessories C 600 D 800 Valuation at lower of cost or NRV

1,400 2,100

2,000 2,000

840,000 1,600,000 4,770,000

Problem 7-32 Appliances: A B

Problem 7-33 1. September 30 (40,000 x 75) December 31 (10,000 x 90) Total FIFO cost NRV (50,000 x 72) Loss on inventory writedown Inventory – January 1 Purchases Purchase discount Goods available for sale Less: Inventory – December 31 Cost of goods sold before inventory writedown Loss on inventory writedown

3,000,000 900,000 3,900,000 3,600,000 300,000 1,200,000 9,400,000 ( 400,000) 10,200,000 3,900,000 6,300,000 300,000

Cost of goods sold after inventory writedown 2. Inventory – December 31 Income summary

6,600,000 3,900,000

3,900,000 100

Loss on inventory writedown Allowance for inventory writedown

300,000

300,000

Problem 7-34 a. No adjustment is necessary because the market price is higher than the agreed price. Any gain on purchase commitment is not recognized. b. No adjustment is necessary because the market price has not declined as of December 31, 2008. The market decline is only a possible loss. c. Loss on purchase commitment (10,000 x 30) Estimated liability for purchase commitment

300,000

d. Purchases (100,000 x 150) Loss on purchase commitment Estimated liability for purchase commitment Accounts payable (10,000 x 200)

1,500,000 200,000 300,000

e. Purchases Estimated liability for purchase commitment Accounts payable Gain on purchase commitment

2,000,000 300,000

300,000

2,000,000

2,000,000 300,000

Problem 7-35 12/31/2008

Loss on purchase commitment Estimated liability for PC

500,000

03/31/2009

Purchase (100,000 x 54) Estimated liability for PC Accounts payable Gain on purchase commitment

5,400,000 500,000

500,000

5,500,000 400,000

Problem 7-36 Purchase price Improving and subdividing cost Total cost

Group 1 (20 x 3,000,000)

26,850,000 43,500,000 70,350,000 Sales price

Fraction

60,000,000

60/105

Cost 40,200,000

2 3

(10 x 2,500,000) (10 x 2,000,000)

25,000,000 20,000,000 105,000,000

25/105 20/105

16,750,000 13,400,000 70,350,000 101

Cost per lot

Group 1 (40,200,000/20) 2 (16,750,000/10) 3 (13,400,000/10)

2,010,000 1,675,000 1,340,000

Unsold

Cost

5 4 3

10,050,000 6,700,000 4,020,000 20,770,000

Problem 7-37 Inventory 1,750,000 50,000 20,000 26,000 25,000 30,000 10,000 1,911,000

Accounts payable 1,200,000 50,000 60,000 20,000 1,330,000

Net sales 8,500,000 ( 35,000) ( 40,000) -_ __ 8,425,000

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

Net sales 9,000,000 ( 40,000) - ___ 9,040,000

Unadjusted 1 2 3 4 5 6 7 8 Adjusted Problem 7-38 Unadjusted 1 2 3 4 5 Problem 7-39 1. Biological asset Cash

600,000

2. Biological asset Gain from change in fair value

700,000

3. Biological asset Gain from change in fair value

100,000

4. Loss from change in fair value Biological asset

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

102

Problem 7-40 Requirement 1 1. To record the purchase of one animal aged 2.5 years on July 1. Biological assets Cash

108 108

2. To record the birth of one animal on July 1 with fair value of P70. Biological assets Cash

70 70

3. To record the change in the fair value: Biological assets Cash

222

222

Fair value of 10 animals on January 1 (10 x P100) Newborn animal on July 1 at fair value Acquisition cost of one animal on July 1 Total book value of biological assets – December 31

1,000 70 108 1,178

Fair value of 3-year old animals on December 31 (11 x P120) Fair value of 0.5-year old animal on December 31, the newborn (1 x P80) Total fair value – December 31, 2008 Book value of biological assets – December 31 Increase in fair value

1,320 80 1,400 1,178 222

Requirement 2 Statement of financial position : Biological assets Income statement: Gain from change in fair value (70 + 222)

1,400 292

Problem 7-41 Answer C Physical count

1,500,000

Problem 7-42 Answer D Physical count Merchandise shipped FOB shipping point on December 30, 2008 from a vendor Goods shipped FOB shipping point to a customer on January 4, 2009

2,500,000 100,000 400,000

Correct inventory

3,000,000 103

Problem 7-43 Answer D Problem 7-44 Answer D Markup (40% x 500,000) Goods received on consignment Total reduction

200,000 400,000 600,000

Problem 7-45 Answer B Inventory shipped on consignment Freight paid Consigned inventory

600,000 50,000 650,000

Problem 7-46 Answer A Reported inventory Goods sold in transit, FOB destination Goods purchased in transit, FOB shipping point Correct amount of inventory

2,000,000 200,000 300,000 2,500,000

Problem 7-47 Answer A Problem 7-48 Answer A Consignment sales revenue (40 x P10,000)

400,000

Problem 7-49 Answer B Sales (900 x 1,000) Commission (10% x 900,000) Payable to consignor

900,000 ( 90,000) 810,000

Problem 7-50 Answer C List price Trade discounts 20% x 900,000 10% x 720,000 Invoice price Freight Cost of purchase

900,000 (180,000) 720,000 ( 72,000) 648,000 50,000 698,000

104 Problem 7-51 Answer B List price Trade discounts 20% x 1,000,000 10% x 800,000 Invoice price Cash discount (5% x 720,000) Net amount Freight charge Total remittance

1,000,000 ( 200,000) 800,000 ( 80,000) 720,000 ( 36,000) 684,000 50,000 734,000

Problem 7-52 Answer A Problem 7-53 Answer B Purchases of IBM compatibles Purchases of commercial software packages Total Less: Purchase return Net purchases

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

Discounts available on purchases (2% x 2,850,000) Less: Purchase discount taken Purchase discount lost

57,000 17,000 40,000

Problem 7-54 Answer D Accounts payable per book Goods lost in transit, FOB shipping point Purchase return Adjusted balance

2,000,000 100,000 ( 50,000) 2,050,000

Problem 7-55 Answer D Accounts payable per book Undelivered checks Unrecorded purchases on December 28 (150,000 x 98%) Purchase on December 20 (200,000 x 95%)

900,000 400,000 147,000 190,000 1,637,000

Problem 7-56 Answer A Net sales per book Sales return Goods shipped on December 31, 2008 Goods shipped on January 3, 2009 recorded on December 30, 2008 Adjusted balance

5,000,000 50,000) 300,000 ( 200,000) 5,050,000 (

105

Problem 7-57 Answer A Gross sales Estimated sales return (10% x 4,000,000) Net sales

(

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

Problem 7-58 Answer A January 18 28 Total FIFO cost

Units 15,000 10,000 25,000

Unit cost 23 24

Total cost 345,000 240,000 585,000

Problem 7-59 Answer A (4,500 x 73.50)

330,750

Problem 7-60 Answer A January 10 February 8

Units 2,000 3,000 5,000

Unit cost 100 110

Weighted average unit cost (530,000/5,000)

Total cost 200,000 330,000 530,000 106

Cost of inventory (3,000 x 106)

318,000

Problem 7-61 Answer B January 1 January 17 Balance January 28 Balance

Units 40,000 (35,000) 5,000 20,000 25,000

Unit cost 5 5 5 8 7.40

Total cost 200,000 (175,000) 25,000 160,000 185,000

Units 200 300 500 1,000 800 200

Total cost 300,000 525,000 1,000,000 1,825,000

Problem 7-62 Answer D January 1 April 3 October 1 Total Less: Sales (400 + 400) Ending inventory Average unit cost (1,825,000/1,000)

1,825

Cost of inventory (200 x 1,825)

365,000 106

Problem 7-63 Answer C

Units

Unit cost

Total cost

January 1 8

8,000 ( 4,000) 4,000 12,000 16,000

20 (3,680,000/16,000 = 230)

200 200 200 240 230

1,600,000 ( 800,000) 800,000 2,880,000 3,680,000

Problem 7-64 Answer C Problem 7-65 Answer B Estimated selling price Cost of disposal Net realizable value (lower than cost)

4,050,000 ( 200,000) 3,850,000

Problem 7-66 Answer B Estimated sales price Cost to complete Net realizable value

4,000,000 (1,200,000) 2,800,000

FIFO cost (lower than NRV)

2,600,000

Problem 7-67 Answer B Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of goods sold before inventory writedown Loss on inventory writedown Cost of goods sold after inventory writedown

700,000 3,300,000 4,000,000 600,000 3,400,000 100,000 3,500,000

Problem 7-68 Answer C Sales price 24,000,000 16,000,000 20,000,000 60,000,000

A (100 x 240,000) B (100 x 160,000) C (200 x 100,000)

Fraction 24/60 16/60 20/60

Allocated cost 6,000,000 4,000,000 5,000,000 15,000,000

Problem 7-69 Answer B Problem 7-70 Answer B

107 CHAPTER 8 Problem 8-1 1. D

Problem 8-2 1. D

2. A 3. B 4. B 5. D 6. C 7. C 8. B 9. D 10. D

2. B 3. A 4. C 5. B 6. C 7. A 8. A 9. B 10. A

Problem 8-3 Answer A Inventory – January 1 Purchases Freight in Total Less: Purchase returns Goods available for sale Less: Cost of sales (4,500,000 x 60%) Inventory – March 31 Problem 8-4 Answer B Inventory – January 1 Purchases Goods available for sale Less: Cost of sales (3,200,000 x 75%) Inventory – December 31 Less: Physical inventory Missing inventory

3,200,000 50,000 3,250,000 75,000

3,175,000 3,825,000 2,700,000 1,125,000

Problem 8-5 Answer D 500,000 2,500,000 3,000,000 2,400,000 600,000 500,000 100,000

Problem 8-6 Answer D Cost of sales (7,000,000 – 1,400,000) Multiply by Sales Less: Collections Accounts receivable

650,000

5,600,000 140% 7,840,000 4,000,000 3,840,000

Cost of sales (3,640,000/130%) 2,800,000 Problem 8-7 Answer A Inventory – Jan. 1 Purchases Goods available for sale Less: Inventory – Dec. 31 Cost of goods sold Gross profit Total sales Less: Cash sales Sales on account Accounts receivable–Jan. 1 Total Less: Collections Accounts receivable-Dec. 31

1,200,000 2,000,000 3,200,000 1,100,000 2,100,000 900,000 3,000,000 500,000 2,500,000 800,000 3,300,000 2,600,000 700,000

108 Problem 8-8 Answer D

Problem 8-9 Answer B

Net sales = 1,200,000 x 5

6,000,000

Inventory – January 1 Purchases

1,800,000 4,500,000

Sales (950,000 x 8) Cost of sales (1,150,000 x 4) Gross margin

7,600,000 4,600,000 3,000,000

Goods available for sale Less: Cost of sales (6,000,000 x 60%) Inventory – December 31

6,300,000 3,600,000 2,700,000

Problem 8-10 Answer B Sales Less: Sales returns Net sales Cost of sales: Inventory – January 1 Purchases Freight in Total Less: Purchase returns, allowances and discounts Goods available for sale Less: Inventory – December 31 Gross income

6,200,000 200,000 6,000,000 1,000,000 5,500,000 250,000 5,750,000 150,000

5,600,000 6,600,000 2,100,000

Gross profit rate on cost (1,500,000/4,500,000)

4,500,000 1,500,000 33 1/3%

Problem 8-11 Answer A Inventory, January 1 Purchases Freight in Purchase returns and allowances Purchase discounts Goods available for sale Less: Cost of sales: Sales Sales returns Net sales Cost of sales (2,100,000/125%) Inventory, December 31

2,000,000 100,000 ( 120,000) ( 80,000)

(

2,200,000 100,000) 2,100,000

500,000

1,900,000 2,400,000

1,680,000 720,000

Problem 8-12 Answer B Sales – 2007 Cost of sales: Net purchases – 2007 Less: Inventory – December 31, 2007 Gross income Rate in 2007 (1,500,000/6,000,000) Inventory – January 1, 2008 Net purchases – 2008 Goods available for sale Less: Cost of sales (9,000,000 x 70%) Inventory – December 31, 2008

6,000,000 5,500,000 1,000,000

25%

Rate in 2008 (25% + 5%)

4,500,000 1,500,000 109 30% 1,000,000 7,500,000 8,500,000 6,300,000 2,200,000

Less: Undamaged merchandise (500,000 x 70%) Realizable value of damaged merchandise Fire loss

350,000 10,000

360,000 1,840,000

Problem 8-13 Answer C Problem 8-14 Answer A Sales – 2006 and 2007 Cost of sales: Inventory – January 1, 2006 Purchases – 2006 and 2007 Goods available for sale Less: Inventory – December 31, 2007 Gross income

7,400,000 850,000 5,370,000 6,220,000 1,040,000

Average rate (2,220,000/7,400,000)

5,180,000 2,220,000 30%

Inventory – January 1, 2008 Purchases – 2008 Goods available for sale Less: Cost of sales (5,000,000 x 70%) Inventory – December 31, 2008 Less: Goods consigned (300,000 x 70%) Goods in transit Fire loss

210,000 190,000

1,040,000 4,360,000 5,400,000 3,500,000 1,900,000 400,000 1,500,000

Problem 8-15 Answer C Average gross profit rate (2,250,000/9,000,000) Inventory – January 1 Net purchases Goods available for sale Less: Cost of sales (5,600,000 x 75%) Inventory – September 30 Less: Undamaged goods (60,000 x 75%) Realizable value of damaged goods Fire loss

25% 660,000 4,240,000 4,900,000 4,200,000 700,000 45,000 25,000

70,000 630,000

110 Problem 8-16 Answer D Average rate

=

3,200,000 ------------------8,000,000

=

40%

Inventory – January 1 Purchases (1,600,000 + 500,000 – 400,000) Goods available for sale Less: Cost of sales: Collections Accounts receivable – December 31 Accounts receivable – January 1 Sales

500,000 1,700,000 2,200,000 2,640,000 440,000 ( 480,000) 2,600,000

Cost of sales (2,600,000 x 60%) Inventory – December 1 Less: Goods on consignment (200,000 x 60%) Salvage value Fire loss

1,560,000 640,000 120,000 20,000

140,000 500,000

Problem 8-17 Question 1 Answer A Gross profit rate: 2005 (750,000/3,000,000) 2006 (1,050,000/3,500,000) 2007 (1,295,000/3,700,000) 2008

25% 30% 35% 40%

There seems to be a trend in the gross profit rate, which is a yearly increase of 5%. Thus, it can be safely assumed that the trend continues in 2008. Inventory – January 1 Net purchases, January 1 – October 15 Goods available for sale Less: Cost of sales: Sales Sales return and allowances Net sales Cost of sales (3,800,000 x 60%) Inventory – October 15 Less: Inventory not destroyed Fire loss

500,000 3,500,000 4,000,000 (

3,840,000 40,000) 3,800,000 2,280,000 1,720,000 320,000 1,400,000 111

Question 2 Answer D Goods available for sale Cost of sales (70% x 3,800,000) Inventory, October 15 Inventory not destroyed Fire loss

4,000,000 2,660,000 1,340,000 320,000 1,020,000

Problem 8-18 Answer D Problem 8-19 Answer A Problem 8-20 Answer B Net sales in 2007 Less: Cost of sales Beginning inventory Net purchases in 2007 Goods available for sale Less: Ending inventory Gross profit

8,000,000 2,000,000 4,800,000 6,800,000 1,200,000

Gross profit rate (2,400,000/8,000,000) Inventory, January 1, 2008 Net purchases – 2008 Goods available for sale Less: Cost of sales Sales Less: Sales return and allowances Net sales

5,600,000 2,400,000 30% 1,200,000 4,960,000 6,160,000

7,880,000 80,000 7,800,000

Cost of sales (7,800,000 x 70%) Estimated value of ending inventory Less: Cost of inventory not stolen Estimated cost of stolen inventory

5,460,000 700,000 100,000 600,000

112 Problem 8-21 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)

1,000,000 100,000

300,000 1,100,000 1,400,000 600,000 800,000 800,000 400,000

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)

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

The amount of goods in process on December 31is computed as simply working back. Problem 8-22

Balances 1 2 3 4 Adjusted

Requirement a Physical inventory May 31, 2008 950,000 ( 55,000) 895,000

Purchases up to May 31, 2008 6,750,000 75,000 ( 10,000) ( 20,000) ( 55,000) 6,740,000

Purchases up to June 30, 2008 8,000,000 ( 15,000) ( 20,000) -_ __ 7,965,000

Inventory – July 1, 2007 Purchases up to May 31, 2008 Goods available for sale Less: Inventory – May 31, 2008 Cost of sales

875,000 6,740,000 7,615,000 895,000 6,720,000

Sales up to May 31, 2008 Cost of sales Gross profit

8,400,000 6,720,000 1,680,000

Rate (1,680,000/8,400,000)

20% Requirement b

Sales for year ended June 30, 2008 Less: Sales for 11 months ended May 31, 2008 Sales for June

Cost of goods sold with profit (1,100,000 x 80%) Cost of goods sold without profit Cost of goods sold during June 2008

9,600,000 8,400,000 1,200,000 113 880,000 100,000 980,000

Requirement c Inventory, July 1, 2007

875,000

Purchases for year ended June 30, 2008 (as adjusted) Goods available for sale Less: Cost of goods sold Sales with profit (9,500,000 x 80%) Sales without profit Inventory, June 30, 2008

7,965,000 8,840,000 7,600,000 100,000

7,700,000 1,140,000

Problem 8-23 1. Accounts receivable – April 30 Writeoff Collections (440,000 – 20,000) Total Less: Accounts receivable – March 31 Sales for April Sales up to March 31 Total sales

1,040,000 60,000 420,000 1,520,000 920,000 600,000 3,600,000 4,200,000

2. Accounts payable – April 30 for April shipments Payment for April merchandise shipments Purchases of April Purchases up to March 31 Total purchases

340,000 80,000 420,000 1,680,000 2,100,000

3. Inventory – January 1 Purchases Less: Purchases return Goods available for sale Less: Cost of sales (4,200,000 x 60%) Inventory – April 30 Less: Goods in transit Salvage value Fire loss

1,880,000 2,100,000 20,000

100,000 140,000

240,000 1,200,000

114

Problem 8-24 Answer B Cost 280,000 2,480,000 75,000

Inventory – January 1 Purchases Freight in Markup Markup cancellation GAS Cost ratio (2,835/6,300)

2,080,000 3,960,000 2,520,000 1,440,000

__ __ __ _ 2,835,000 45%

Retail 700,000 5,160,000 500,000 ( 60,000) 6,300,000

Markdown Markdown cancellation GAS – Average

_ __ _ 2,835,000

Sales Shrinkage (2% x 5,000,000) Inventory – December 31

( 250,000) 50,000 6,100,000 (5,000,000) ( 100,000) 1,000,000

Conservative cost (1,000,000 x 45%)

450,000

The “approximate lower of average cost or market” retail is the same as the conservative or conventional retail. Problem 8-25 Answer C Cost 720,000 4,080,000

Inventory – January 1 Purchases Markup Markdown GAS

__ _____ 4,800,000

Cost ratio (4,800/7,500)

64%

Sales Shoplifting losses Inventory

(5,900,000) ( 100,000) 1,500,000

Average cost (1,500,000 x 64%)

960,000

Problem 8-26 Answer D Beginning inventory and purchases Net markup GAS

Problem 8-27 Answer A

Cost

Retail

6,000,000 ________ 6,000,000

9,200,000 400,000 9,600,000

Cost ratio (6,000/9,600) = 62.5% Sales Net markdown Ending inventory

Retail 1,000,000 6,300,000 700,000 ( 500,000) 7,500,000

Beginning inventory Purchases Net markups Net markdown Net purchases

115

Cost 600,000 3,000,000

Retail 1,500,000 5,500,000 500,000 __ _____ (1,000,000) 3,000,000 5,000,000

Cost ratio (3,000/5,000) = 60% (7,800,000) ( 600,000) 1,200,000

GAS Sales

3,600,000

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

Conservative cost (1,200,000 x 62.5%)

Ending inventory 750,000

Goods available for sale Less: Ending inventory Cost of sales

6,000,000 750,000 5,250,000

FIFO cost (2,000,000 x 60%)

Problem 8-28 Answer A Inventory – January 1 Purchases Freight in Net markup Net markdown Net purchases (6,000/8,000) Goods available for sale Sales Inventory – December 31

2,000,000 1,200,000

Cost 1,200,000 5,600,000 400,000 75%

FIFO cost (2,200,000 x 75%)

Retail 1,800,000 7,200,000 1,400,000 600,000) 8,000,000 9,800,000 (7,600,000) 2,200,000

________ 6,000,000 7,200,000

(

1,650,000

Goods available for sale Less: Inventory – December 31 Cost of goods sold

7,200,000 1,650,000 5,550,000

Problem 8-29 Answer C Cost 4,900,000

Available for sale Markdown Sales Inventory, December 31 Average cost (1,400,000 x 71%) Cost ratio (4,900,000 / 6,900,000)

Retail 7,000,000 ( 100,000) (5,500,000) 1,400,000

994,000 71% 116

Problem 8-30 Inventory, January 1 Purchases Transportation in Purchases return Purchase discount Markup Cancelation of markup Goods available for sale – conservative Cost ratio – conservative (357/510) Markdown Cancelation of markdown Goods available for sale – average cost

Cost 500,000 3,070,000 70,000 ( 25,000) ( 45,000)

70%

________ 3,570,000 ________ 3,570,000

Retail 770,000 4,300,000 (

40,000)

(

100,000 30,000) 5,100,000

( 350,000) 10,000 4,760,000

Cost ratio – average cost (357/476) Less: Sales Sales return Inventory, December 31 at selling price

75% (

Conservative cost (840,000 x 70%) Average cost (840,000 x 75%)

4,000,000 80,000)

3,920,000 840,000

588,000 630,000

Problem 8-31 Beginning inventory Purchases Freight in Purchase returns Purchase allowances Departmental transfer in Markup Goods available for sale – conventional Cost ratio (4,800/8,000) Markdown Goods available for sale – average Cost ratio (4,800/7,500) Less: Sales Employee discount Spoilage and breakage Ending inventory

60%

Cost 340,000 4,500,000 100,000 ( 150,000) ( 90,000) 100,000 ________ 4,800,000 ________ 4,800,000

Retail 640,000 7,300,000 ( 250,000) 160,000 150,000 8,000,000 ( 500,000) 7,500,000

64% 6,600,000 100,000 200,000

Conservative cost (600,000 x 60%) Average cost (600,000 x 64%)

6,900,000 600,000

360,000 384,000

117

Problem 8-32 Beginning inventory Purchases Freight in Markup Markup cancellation Goods available for sale – conservative Cost ratio (3,016/3,770) Markdown Markdown cancellation Goods available for sale – average Less: Sales Shrinkage (4% x 3,000,000) Ending inventory

Cost 168,000 2,806,000 42,000

80%

_______ 3,016,000

Retail 400,000 3,100,000 ( (

_________ 3,016,000 3,000,000 120,000

300,000 30,000) 3,770,000 150,000) 40,000 3,660,000

3,120,000 540,000

Conservative cost (540,000 x 80%) Physical inventory (500,000 x 80%) Shortage

432,000 400,000 32,000

Inventory, December 31 Inventory shortage Income summary

400,000 32,000

432,000

Problem 8-33 1. Opening inventory Purchases Freight in Purchase allowances Departmental transfer – credit Additional markup Markup cancellation Goods available for sale – conventional Cost ratio (5,250/7,000) Markdown (500,000 – 400,000) Goods available for sale – average

Cost 1,650,000 3,700,000 200,000 ( 100,000) ( 200,000)

75%

Retail 2,200,000 4,950,000

________ 5,250,000

( 300,000) 180,000 ( 30,000) 7,000,000

________ 5,250,000

( 100,000) 6,900,000

Less: Sales Inventory shortage Ending inventory at sales price

4,000,000 100,000

Ending inventory at cost (2,800,000 x 75%)

2,100,000

2. Goods available for sale Less: Ending inventory Cost of sales

4,100,000 2,800,000

5,250,000 2,100,000 3,150,000 118

Problem 8-34 Inventory, January 1 Purchases Markup (5,000 x 100) Markup cancelation (1,000 x 100) Goods available for sale – conservative Markdown Goods available for sale – average

Cost 560,000 4,000,000 (60%) (64%)

_________ 4,560,000 _________ 4,560,000

Net sales Inventory, December 31 Conservative cost (1,925,000 x 60%) Average cost (1,925,000 x 64%)

Retail 1,000,000 6,200,000 500,000 ( 100,000) 7,600,000 ( 475,000) 7,125,000 (5,200,000) 1,925,000

1,155,000 1,232,000

Problem 8-35 Cost 144,000 1,200,000 1,344,000 504,000 840,000

Finished goods – January 1 Cost of goods manufactured (squeeze Goods available for sale Less: Finished goods – December 31 Cost of goods sold

Retail 240,000 2,000,000 2,240,000 840,000 1,400,000

The amount of goods manufactured at retail is determined by simply working back. Cost ratio

= = =

Goods manufactured at cost ------------------------------------------------Goods manufactured at retail 1,200,000/2,000,000 60%

Finished goods: January 1 - 240,000 x 60% Problem 8-36 Inventory – January 1, 2008 Purchases Net markup Net markdown Net purchases (65%) Goods available for sale

144,000

December 31 - 840,000 x 60% Cost 556,800 4,576,000 ________ 4,576,000 5,132,800

Sales Inventory – December 31, 2008 FIFO inventory (65% x 1,128,000)

504,000

Retail 928,000 7,028,000 42,000 ( 30,000) 7,040,000 7,968,000 (6,840,000) 1,128,000

733,200

1,128,000 119

Inventory – January 1, 2009 Purchases Net markup Net markdown Net purchases (70%) Goods available for sale

Cost 733,200 4,760,000 ________ 4,760,000 5,493,200

Sales Inventory – December 31, 2009 FIFO inventory (70% x 1,000,000)

Retail 1,128,000 6,812,000 56,000 ( 68,000) 6,800,000 7,928,000 (6,928,000) 1,000,000

700,000

1,000,000

Problem 8-37 Inventory, January 1, 2008 Purchases adjusted for markup and markdown Goods available for sale

72%

Cost 420,000 5,011,200 5,431,200

Retail 600,000 6,960,000 7,560,000

Sales – 2008 Inventory, December 31, 2008

(6,839,000) 721,000

FIFO cost (721,000 x 72%)

519,120

Inventory, January 1, 2009 Purchases adjusted Goods available for sale

70%

519,120 4,970,000 5,489,120

721,000 7,100,000 7,821,000

Sales – 2009 Inventory, December 31, 2009

(7,033,000) 788,000

FIFO cost (788,800 x 70%)

551,600

120

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

A C C A A

6. 7. 8. 9. 10.

Problem 9-4 Red White Blue Green

Problem 9-2 D D B B B

1. 2. 3. 4. 5.

A D C B C

6. 7. 8. 9. 10.

Problem 9-3 B A C B D

1. 2. 3. 4. 5. Cost 300,000 500,000 1,000,000 2,000,000

D A C A C Market 250,000 700,000 1,100,000 1,700,000

Total

3,800,000

1. Trading securities Cash

3,800,000

2. Unrealized loss – trading securities Trading securities (3,800,000 – 3,750,000)

50,000

3,750,000 3,800,000 50,000

Problem 9-5 1. Unrealized loss – TS Trading securities 2. Cash Loss on sale of trading securities Trading securities 3. Trading securities (680,000 – 610,000) Unrealized gain – TS A Common (4,000 x 80) C Preferred (2,000 x 180) Problem 9-6

60,000 60,000 140,000 20,000 70,000 Carrying amount 300,000 310,000 610,000

160,000 70,000 Market 320,000 360,000 680,000

December 31, 2008: Trading securities Unrealized gain - TS (2,500,000 – 2,000,000)

500,000

Unrealized loss – AFS Available for sale securities

100,000

500,000 100,000 121

December 31, 2009: Unrealized loss – TS Trading securities (2,500,000 – 2,200,000)

300,000

Available for sale securities - AFS Unrealized loss – AFS Unrealized gain – AFS

200,000

300,000 100,000 100,000

Problem 9-7 December 31, 2008: Unrealized loss – AFS Available for sale securities

150,000 150,000

December 31, 2009: Available for sale securities – AFS Unrealized loss – AFS

50,000

50,000

Problem 9-8 1. Unrealized loss – AFS Available for sale securities

100,000

2. Cash Loss on sale of AFS securities Available for sale securities Unrealized loss – AFS

2,100,000 400,000

3. No entry XYZ RST

100,000

2,000,000 500,000 Carrying amount 1,200,000 200,000 1,400,000

Unrealized loss in 2008 Unrealized loss – 12/31/2008 (600,000 – 500,000) Cumulative unrealized loss – 12/31/2009

Market 1,200,000 200,000 1,400,000 0 ( 100,000) ( 100,000)

Total cost (1,000,000 + 500,000) Market value Cumulative unrealized loss

1,500,000 1,400,000 100,000 122

Problem 9-9 2008 1. Trading securities Available for sale securities Cash

2,900,000 3,600,000

2. Unrealized loss – TS Trading securities (2,900,000 – 2,400,000)

500,000

3. Available for sale securities Unrealized gain – AFS (3,600,000 – 4,000,000)

400,000

2009 1. Cash Trading securities (1/2 x 1,400,000) Gain on sale of TS 2. Cash Unrealized gain – AFS (1/2 x 500,000)

6,500,000 500,000 400,000

1,000,000 700,000 300,000 1,300,000 250,000

Available for sale securities (1/2 x 2,500,000) Gain on sale of AFS securities 3. Trading securities Unrealized gain – TS (2,000,000 – 1,700,000) Security One Security Two 4. Available for sale securities Unrealized gain – AFS Security Three Security Four

1,250,000 300,000 300,000 Carrying value 700,000 1,000,000 1,700,000 50,000 1,500,000 1,250,000 2,750,000

Security Three Security Four (1/2 x 2,000,000) Total cost Market value Cumulative unrealized gain – 12/31/2009

2009 Dec. 31 Investment equity security Unrealized loss – transfer of AFS Available for sale securities Unrealized loss – AFS 31 Available for sale securities Unrealized loss – AFS Unrealized gain – AFS Market of W and X – 12/31/2009 Market of W and X – 12/31/2008 Increase in value

50,000 1,600,000 1,200,000 2,800,000

150,000 50,000 200,000 123

Problem 9-10

Dec. 31 Unrealized loss – AFS Available for sale securities

Market 900,000 1,100,000 2,000,000

1,600,000 1,000,000 2,600,000 2,800,000 200,000

Unrealized gain – AFS 12/31/2008 (400,000 – 250,000) Unrealized gain in 2009 Cumulative unrealized gain – 12/31/2009

2008 Jan. 1 Available for sale securities Cash

300,000

1,320,000 1,320,000 80,000 80,000 650,000 70,000 650,000 70,000 110,000

10,000 100,000 700,000 590,000 110,000

Problem 9-11 December 31, 2008 Unrealized loss – TS Trading securities Available for sale securities – AFS Unrealized gain – AFS December 31, 2009 Trading securities Unrealized gain – TS (5,500,000 – 4,600,000) Available for sale securities Unrealized gain – AFS (3,300,000 – 3,100,000)

400,000 100,000

900,000 200,000

400,000 100,000

900,000 200,000

Problem 9-12 01/01/2008

12/31/2008

Trading securities AFS securities Cash Trading securities Unrealized gain – TS

2,000,000 4,000,000 6,000,000 500,000 500,000

124 12/31/2008

Unrealized loss – AFS AFS securities

700,000

12/31/2009

Trading securities Unrealized gain - TS

200,000

Impairment loss – AFS Unrealized loss – AFS

700,000

Unrealized loss – TS Trading securities

600,000

AFS securities Unrealized gain – AFS (4,200,000 – 3,300,000)

900,000

12/31/2010

700,000 200,000 700,000 600,000 900,000

Problem 9-13 2008

Available for sale securities Cash Unrealized loss – AFS Available for sale securities (6,000,000 – 5,700,000)

6,000,000 300,000

6,000,000 300,000

2009

Unrealized loss – AFS Available for sale securities (5,700,000 – 5,200,000) Held to maturity securities Available for sale securities

500,000 500,000 5,200,000 5,200,000

The total unrealized loss of P800,000 (300,000 + 500,000) will still be reported in equity but it will be subsequently amortized through interest income over the remaining term of the debt securities. Problem 9-14 2008 Jan. 1 Held to maturity securities Cash Dec. 31 Cash (8% x 4,000,000) Interest income 31 Held to maturity securities Interest income

3,649,600 320,000 44,960

Interest income (10% x 3,649,600) Interest received Amortization

3,649,600 320,000 44,960 364,960 320,000 44,960 125

2009 Dec. 31 Cash Interest income 31 Held to maturity securities Interest income

320,000 49,456

Interest income (10% x 3,694,560) Interest received Amortization 31 Available for sale securities Held to maturity securities 31 Available for sale securities Unrealized gain – AFS Market value (4,000,000 x 105) Book value Unrealized gain Problem 9-15

320,000 49,456 369,456 320,000 49,456

3,744,016 3,744,016 455,984

455,984 4,200,000 3,744,016 455,984

01/01/2008

Available for sale securities Cash

6,500,000

12/31/2008

Unrealized loss – AFS Available for sale securities (6,500,000 – 5,750,000)

750,000

06/30/2009

Unrealized loss – AFS Available for sale securities (5,750,000 – 5,300,000)

450,000

06/30/2009

Held to maturity securities Available for sale securities

5,300,000

12/31/2009

No entry is required to recognize the decrease in value of P400,000 (P5,300,000 – P4,900,000).

6,500,000 750,000

450,000

5,300,000

The total unrealized loss of P1,200,000 on the reclassification of AFS securities will continue to be reported as part of equity as a deduction. However, it is amortized through interest income over the remaining life of the debt security starting June 30, 2009.

Problem 9-16 Answer A A common B common C preferred D preferred Total Problem 9-17 Answer A Man Kemo Penn Total Unrealized loss (3,000,000 – 2,800,000)

126 Cost 1,000,000 1,500,000 2,000,000 2,500,000 7,000,000

Market 800,000 1,800,000 1,700,000 2,600,000 6,900,000

Cost 1,000,000 900,000 1,100,000 3,000,000

Market 900,000 1,100,000 800,000 2,800,000 200,000

Problem 9-18 Answer A Total market value – December 31, 2008 Total market value – December 31, 2007 Unrealized gain

2,000,000 1,650,000 350,000

Problem 9-19 Answer A Total market value – December 31, 2008

4,500,000

Total market value – December 31, 2007 Unrealized loss in 2008 Unrealized loss – December 31, 2007 Total unrealized loss – December 31, 2008

4,800,000 ( 300,000) ( 200,000) ( 500,000)

Problem 9-20 Answer C Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain in 2008 Unrealized loss – December 31, 2007 Net unrealized gain – December 31, 2008

1,600,000 1,300,000 300,000 ( 200,000) 100,000

Problem 9-21 Question 1 – Answer B Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain – trading

1,550,000 1,000,000 550,000 127

Question 2 – Answer A Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain in 2008 Unrealized loss – December 31, 2007 (1,500,000 – 1,200,000) Net unrealized loss – December 31, 2008

1,300,000 1,200,000 100,000 ( 300,000) ( 200,000)

Problem 9-22 Answer A The unrealized loss of P40,000 on trading securities is shown in the income statement. However, the unrealized loss of P100,000 on available for sale securities is recognized in equity. Problem 9-23 Answer B Unrealized losses Unrealized gains Net unrealized loss – December 31, 2008

260,000 40,000 220,000

Problem 9-24 Answer B Net sales price Unrealized loss related to B Net amount Carrying amount of B

1,450,000 ( 150,000) 1,300,000 (1,550,000)

Loss on sale

( 250,000)

Net sales price (1,500,000 – 50,000) Less: Cost of B Loss on sale

1,450,000 1,700,000 ( 250,000)

Problem 9-25 Answer C Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain in 2008 Unrealized loss – December 31, 2007 Net unrealized loss – December 31, 2008

850,000 800,000 50,000 (200,000) (150,000)

Problem 9-26 Answer C Available for sale equity securities, at cost Unrealized loss Market value

2,200,000 ( 200,000) 2,000,000 128

Problem 9-27 Answer C 12/31/2007

Unrealized loss - AFS Available for sale securities (2,000,000 – 1,800,000)

200,000

12/31/2008

Available for sale securities Unrealized loss – AFS (1,850,000 – 1,800,000)

50,000

200,000

50,000

129

CHAPTER 10 Problem 10-1 1. 2. 3. 4. 5.

C C A A C

6. 7. 8. 9. 10.

D B D A C

Problem 10-2 A (8,000 x 100) B (16,000 x 150) C (1,000,000 x 90%) Investment in A shares Investment in B shares Investment in C Bonds Cash

Market value 800,000 2,400,000 900,000 4,100,000

Fraction 8/41 24/41 9/41 600,000 1,800,000 675,000

Allocated cost 600,000 1,800,000 675,000 3,075,000

3,075,000

Problem 10-3 Requirement 1 a. Investment in equity securities Cash

309,000

b. Investment in equity securities Cash

1,030,000

Requirement 2

309,000 1,030,000

a. Cash Loss on sale of investment Investment in equity securities

405,000 32,750 437,750

Lot No. 1 – 1,000 shares Lot No. 2 - 500 shares (500/4,000 x 1,030,000)

309,000 128,750 437,750

b. Cash Investment in equity securities (1,500/5,000 x 1,339,000) Gain on sale of investment

405,000

401,700 3,300

Problem 10-4 July 15

Cash Dividend income (5,000 shares x 5)

Dec. 15

Memo – Received 1,000 shares representing 20% stock dividend on 5,000 original shares held.

28

25,000

Cash (3,000 shares x 60) Investment in equity securities Gain on sale of investment

25,000 130

180,000 133,000 47,000

Lot No. 1 (2,400 shares) Lot No. 2 (600/3,600 x 198,000) Cost of investment sold

100,000 33,000 133,000

Problem 10-5 1. Investment in XYZ ordinary shares (40,000 x 50) Cash

2,000,000

2,000,000

2. Memo – Received 200,000 XYZ ordinary shares as a result of 5 for 1 split of 40,000 original shares. 3. Investment in XYZ preference shares Investment in XYZ ordinary shares Ordinary shares (200,000 x 15) Preference shares (20,000 x 10) 4. Investment in ABC ordinary shares Dividend income (200,000/4 = 50,000 x 6)

125,000 Market value 3,000,000 200,000 3,200,000

Fraction 30/32 2/32 300,000

5. Cash (80,000 x 15) 1,200,000 Investment in XYZ ordinary shares (80,000/200,000 x 1,875,000) Gain on sale of investment

125,000 Cost 1,875,000 125,000 2,000,000 300,000 750,000 450,000

Problem 10-6 1. Investment in ANA ordinary shares Cash

300,000

2. Investment in Benguet ordinary shares Dividend income (2,000 x 60)

120,000

3. Investment in ANA ordinary shares Cash

420,000

4. Cash Dividend income (12% x P200 = 24 x 5,000 x 1/2)

60,000

300,000 120,000 420,000 60,000 131

5. Memo – Received 20,000 new ANA ordinary shares as a result of a 2 for 1 split of 10,000 original shares. 6. Cash (680,000 – 34,000) Investment in ANA ordinary shares (8,000/20,000 x 720,000) Gain on sale of investment SMC preference share Benguet ordinary share Benguet ordinary share ANA ordinary share Problem 10-7 1. Investment in ABC ordinary shares Cash

646,000

Shares 5,000 10,000 2,000 12,000 29,000 720,000

288,000 358,000 Cost 1,200,000 1,000,000 120,000 432,000 2,752,000

720,000

2. Memo – Received 2,000 shares as 20% stock dividend on 10,000 original shares. Shares now held, 12,000. 3. Cash (2,000 x 70) 140,000 Investment in ABC ordinary shares (2,000/12,000 x 720,000) Gain on sale of investment

120,000 20,000

4. Investment in ABC preference shares (5,000 x 70) Investment in ABC ordinary shares (5,000/10,000 x 600,000) Gain on exchange

350,000

300,000 50,000

5. Investment in ABC ordinary shares Cash (5,000 x 20)

100,000

Problem 10-8 a. 2004

Cash

400,000

100,000

Investment in equity securities

400,000

2005

Cash Dividend income Investment in equity securities

400,000

2006

Cash Dividend income Investment in equity securities

400,000

2007

Cash 400,000 Dividend income Investment in equity securities (1,000,000 – 950,000) Gain on investment

100,000 300,000 150,000 250,000 200,000 50,000 150,000 132

2008

b.

Cash Dividend income Gain on investment

400,000

250,000 150,000

The investment account has been totally eliminated as of December 31, 2007 because the liquidating dividends received exceed the cost of investment. Hence, there is no more investment account to be reported in the December 31, 2008 statement of financial position, but such fact should be disclosed in the notes to financial statements to the effect that the company is still the owner of 10,000 shares with a zero cost.

Problem 10-9 1. Investment in equity securities Cash

1,800,000

1,800,000

2. 10,000 rights 3. Cost of rights (10/200 x 1,800,000)

90,000

4. Stock rights Investment in equity securities

90,000

5. Investment in equity securities Cash (10,000/5 = 2,000 x 150) Stock rights

390,000

6. Cash (10,000 x 10) Stock rights Gain on sale of rights

100,000

7. Loss on stock rights Stock rights

90,000 300,000 90,000 90,000 10,000

90,000 90,000

Problem 10-10

Requirement 1

125 - 100 Theoretical value = --------------------- = 5.00 per right 4+1 a. Stock rights (5/125 x 2,100,000) Investment in equity securities

84,000

b. Investment in equity securities Stock rights Cash (25,000/4 = 6,250 x 100)

709,000

84,000 84,000 625,000 133 Requirement 2

125 - 100 Theoretical value = --------------------- = 6.25 per right 4 a. Stock rights (6.25/131.25 x 2,100,000) Investment in equity securities

100,000

b. Investment in equity securities Stock rights Cash

725,000

100,000 100,000 625,000

Problem 10-11 1. Stock rights (10/100 x 3,000,000) Investment in equity securities 2. Investment in equity securities Stock rights (30,000/40,000 x 300,000) Cash (15,000 shares x 80)

300,000 1,425,000 225,000

1,200,000

3. Cash (6,000 x 10) Stock rights (6,000/40,000 x 300,000) Gain on sale of rights

60,000

4. Loss on stock rights (4,000/40,000 x 300,000) Stock rights

30,000

First acquisition (3,000,000 – 300,000) New acquisition

300,000

45,000 15,000

Shares 40,000 15,000 55,000

30,000 Cost 2,700,000 1,425,000 4,125,000

Problem 10-12 1. Investment in equity securities Cash

3,200,000

3,200,000

2. Memo – Received 20,000 shares as stock dividend on 80,000 original shares. Shares now held, 100,000. 3. Cash (100,000 x 5) Dividend income

500,000

4. Stock rights (5/40 x 3,200,000) Investment in equity securities

400,000

500,000 400,000

134 5. Cash (40,000 x 5) Stock rights (40,000/100,000 x 400,000) Gain on sale of rights

200,000

6. Investment in equity securities Stock rights (60,000/100,000 x 400,000) Cash (60,000/5 = 12,000 x 30)

600,000

7. Cash (80,000 x 35) Investment in equity securities (80,000/100,000 x 2,800,000) Gain on sale of investment Original acquisition New acquisition

160,000 40,000

2,800,000

240,000 360,000 2,240,000 560,000

Shares 20,000 12,000 32,000

Cost 560,000 600,000 1,160,000

Problem 10-13 2008 Aug. 1 Oct. 1 2009 July 1 Aug. 1

Investment in equity securities Cash

60,000

Investment in equity securities Cash

560,000

Investment in equity securities Cash

480,000

Cash Investment in equity securities Gain on sale of investment

500,000

60,000 560,000 480,000 340,000 160,000

Lot 1 (1,000 shares) Lot 2 (4,000/8,000 x 560,000) Cost of investment sold 2010 Feb. 1 Nov. 1

60,000 280,000 340,000

Received 5,000 shares representing 50% stock dividend on 10,000 remaining shares held. Shares now held, 15,000. Stock rights Investment in equity securities

95,000

Lot 2 – 6,000 rights (10/80 x 280,000) Lot 3 – 9,000 rights (10/80 x 480,000) Cost of rights received

2010 Dec. 1

95,000 35,000 60,000 95,000 135

Cash (15,000 x 10) Stock rights Gain on sale of stock rights

Summary of investments Lot 2 (280,000 – 35,000) Lot 3 (480,000 – 60,000) Total

150,000 95,000 55,000 Shares 6,000 9,000 15,000

Cost 245,000 420,000 665,000

Problem 10-14 Jan. 2

Investment in King Corporation Cash

700,000

Mar. 1

Investment in Plastic Company Cash

660,000

Apr. 1

Cash (10,000 x 5) Dividend income

July 1

Received 2,000 shares as 20% stock dividend on 10,000 Plastic Company shares originally held. Shares now held, 12,000.

Aug. 1 Investment in Makati Corporation Cash

50,000

700,000 660,000 50,000

500,000 500,000

Oct. 1 Received 60,000 new shares of Plastic Company as a result of a 5 for 1 split of 12,000 original shares. 1 Cash (10,000 x 5) Dividend income 31 Stock rights (3/33 x 660,000)

50,000 50,000 60,000

Investment in Plastic Company

60,000

Nov. 15 Investment in Plastic Company Cash (6,000 shares x 20) Stock rights

180,000

Dec. 1 Cash (66,000 shares x 5) Dividend income

330,000

15 Cash (10,000 shares x 30) Investment in Plastic Company (10,000/60,000 x 600,000) Gain on sale of investment

300,000

120,000 60,000 330,000 100,000 200,000

136 Summary of investments King Corporation common Plastic Company common Block 1 Block 2 Makati Corporation common

Shares 10,000

Cost 700,000

50,000 6,000 10,000 76,000

500,000 180,000 500,000 1,880,000

Of course, the investments will simply be described as “investments in equity securities” in the balance sheet. Problem 10-15 Answer A Purchase price (4,000 x P100) Brokerage Total Less: Dividend purchased (4,000 x 5) Acquisition cost

400,000 12,000 412,000 20,000 392,000

Problem 10-16 Answer D Fair value of asset given (land)

3,000,000

Problem 10-17 Answer D Original shares acquired January 15 Stock dividend on March 31 (20% x 50,000) Total shares Dividend income – cash dividend on December 15 (60,000 x 5)

50,000 10,000 60,000 300,000

Problem 10-18 Answer C Dividend income – cash dividend on July 1

100,000

Original shares on March 1 Stock dividend on December 1 (10% x 20,000) Total shares

20,000 2,000 22,000

Problem 10-19 Answer B Original shares on October 1, 2007 Stock dividend on November 30, 2008 (10%) Total shares Shares sold on December 31, 2008 Balance

40,000 4,000 44,000 ( 4,000) 40,000

137 Sales price Cost of shares sold (4,000/44,000 x 6,600,000) Gain on sale

1,000,000 ( 600,000) 400,000

Problem 10-20 Answer B Shares received as property dividend (5,000/5)

1,000

Dividend income (1,000 x 100)

100,000

Problem 10-21 Answer D Cash dividend (10% x 500,000)

50,000

Problem 10-22 Answer A Dividend income (2,000 x 60)

120,000

Problem 10-23 Answer C Sales price (80,000 x 30) Less: Cost of shares sold (80,000 x 40) Loss on disposal Problem 10-24 Answer A Original shares Stock dividend – 20% Total shares

2,400,000 3,200,000 ( 800,000) June 1 20,000 4,000 24,000

Sales price (30,000 x 125) Cost of shares sold: From June 1 – 24,000 shares 2,000,000 From December 1 – 6,000 shares (6,000 / 36,000 x 3,600,000) 600,000

December 1 30,000 6,000 36,000 3,750,000 2,600,000

Gain on sale

1,150,000

Problem 10-25 Answer B Cost of rights (5/100 x 8,000,000)

400,000

Problem 10-26 Answer B Sales price (50,000 x 10) Cost of rights sold (10/100 x 3,600,000) Gain on sale of rights

500,000 360,000 140,000

138 Problem 10-27 Answer B Cost of rights (18/150 x 500,000) Cost paid for new shares (2,500 shares x 90) Total cost of new investment Cost per share (285,000 / 2,500 shares)

60,000 225,000 285,000 114

Problem 10-28 Answer B Cost of 2006 rights (4/100 x 180,000) Cost of 2007 rights (4/100 x 330,000) Total cost of rights 900 shares x 5 rights Cash paid (900 x 80) Cost of rights exercised 2006 – 2,250 rights 2007 – 2,250 rights (2,250/3,750 x 13,200) Total cost of 900 shares

7,200 13,200 20,400 4,500 rights 72,000 7,200 7,920 87,120

139 CHAPTER 11 Problem 11-1 1. 2. 3. 4. 5.

A C C A D

6. 7. 8. 9. 10.

A C A D B

Problem 11-2

Problem 11-3

Problem 11-4

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

B D B A C

Problem 11-5

D D C A C

B C D A A

Equity method

1. Investment in associate Cash

2,400,000

Acquisition cost Net assets acquired (20% x 8,000,000) Goodwill

2,400,000 2,400,000 1,600,000 800,000

2. Investment in associate Investment income (20% x 1,500,000)

300,000

300,000

3. Memo – Received 2,000 shares as 10% stock dividend on 20,000 original shares. Shares now held, 22,000. 4. Investment loss Investment in associate (20% x 300,000) 5. Cash (20% x 500,000) Investment in associate

60,000 100,000

6. Cash (5,500 x 200) Investment in associate Gain on sale of investment

1,100,000

Sales price Less: Cost of investment sold (5,500/22,000 x 2,540,000) Gain on sale

60,000 100,000 635,000 465,000 1,100,000 635,000 465,000

Cost method 1. Investment in equity securities Cash 2. No entry

2,400,000 2,400,000

140 3. Memo – Received 2,000 shares as 10% stock dividend. Shares now held, 22,000. 4. No entry 5. Cash Dividend income 6. Cash Investment in equity securities (5,500/22,000 x 2,400,000) Gain on sale of investment

100,000 1,100,000

100,000 600,000 500,000

Problem 11-6 1. Investment in equity securities Cash 2. Cash (15% x 4,000,000) Dividend income (15% x 3,000,000) Investment in equity securities (15% x 1,000,000)

6,000,000 600,000

6,000,000 450,000 150,000

Problem 11-7 2008

Investment in associate Cash

5,000,000

Investment in associate Investment income (30% x 4,000,000 x 3/12)

300,000

Cash (30% x 3,000,000) Investment in associate

900,000

Investment income Investment in associate (200,000 x 3/12) 2009

5,000,000

Investment in associate Investment income (30% x 6,000,000)

300,000 900,000 50,000 50,000 1,800,000 1,800,000

Cash (30% x 5,000,000) Investment in associate

1,500,000

Investment income Investment in associate

200,000

1,500,000 200,000

141 Problem 11-8 2006 Jan. 1 Investment in equity securities Cash Dec. 31 Cash (15% x 300,000) Dividend income 2007 Dec. 31 Cash (15% x 400,000) Dividend income 2008 Jan. 1 Investment in associate Cash 1 Investment in associate Retained earnings

1,000,000 45,000

60,000

Dec. 31 Investment in associate Investment income (40% x 900,000) 31 Cash (40% x 600,000) Investment in associate

45,000

60,000

3,000,000 3,000,000 75,000

Investment income – Equity method (2006 and 2007) (15% x 500,000 + 700,000) Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) Cumulative effect of change to equity 1 Investment in associate Investment in equity securities (Reclassification)

1,000,000

1,000,000

360,000 240,000

75,000 180,000 105,000 75,000

1,000,000

360,000 240,000

Problem 11-9 2008 Jan. 1

Investment in associate Cash

Dec. 31 Investment in associate Investment income (30% x 5,000,000) 31 Cash (30% x 2,000,000) Investment in associate

8,000,000 1,500,000 600,000

8,000,000 1,500,000 600,000

142

2009 June 30 Investment in associate Investment income (30% x 6,000,000)

1,800,000

July

6,000,000

Oct.

1 Cash Investment in associate (10,700,000 x 1/2) Gain on sale of investment 1 Cash (2,500,000 x 15%) Dividend income 1

Dec. 31

Available for sale securities Investment in associate (Reclassification)

1,800,000 5,350,000 650,000 375,000 5,350,000

375,000 5,350,000

No entry is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest.

Problem 11-10 Requirement a 1. Investment in associate Cash

3,500,000

2. Investment in associate Investment income (40% x 4,000,000)

1,600,000

3. Cash (40% x 1,000,000) Investment in associate

400,000

4. Investment income Investment in associate (600,000 / 4)

150,000

3,500,000 1,600,000 400,000 150,000

Cost Book value of interest acquired (40% x 7,000,000) Excess of cost over book value Excess attributable to equipment (40% x 1,500,000) Excess attributable to inventory (40% x 500,000) Excess net fair value over cost

3,500,000 2,800,000 700,000 ( 600,000) ( 200,000) ( 100,000)

5. Investment income Investment in associate

200,000

6. Investment in associate Investment income

100,000

200,000 100,000

143

Requirement b Share in net income Amortization of excess attributable to equipment Amortization of excess attributable to inventory Excess net fair value over cost Net investment income

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

Problem 11-11 1. Investment in associate Cash 2. Investment in associate Investment income (40% x 650,000) 3. Cash (40% x 150,000) Investment in associate 4. Investment in associate Revaluation surplus – investee (40% x 1,300,000)

1,700,000 260,000 60,000 520,000

1,700,000 260,000 60,000 520,000

Note: 1. Cost Interest acquired (40% x 4,000,000) Goodwill – not amortized

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

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

Problem 11-12 1. Journal entries a. Investment in associate Cash

6,000,000

b. Investment in associate Investment income

750,000

c. Cash Investment in associate

450,000

d. Investment income Investment in associate

200,000

6,000,000 750,000 450,000 200,000

144 2. Share in net income Amortization of patent (2,000,000 / 10) Investment income

750,000 (200,000) 550,000

3. Acquisition cost Share in net income (5,000,000 x 15%) Share in cash dividend (3,000,000 x 15%) Amortization of patent (2,000,000 / 10) Carrying value

6,000,000 750,000 ( 450,000) ( 200,000) 6,100,000

Interest acquired (30,000 / 200,000)

15%

Acquisition cost Book value of net assets acquired Excess of cost applicable to patent

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

Problem 11-13 1. Journal entries a. Investment in associate Cash

5,000,000

b. Investment in associate Investment income

1,200,000

c. Cash Investment in associate

300,000

d. Investment income Investment in associate

150,000

5,000,000 1,200,000 300,000 150,000

2. Share in net income Amortization of depreciable asset (750,000 / 5) Investment income

1,200,000 ( 150,000) 1,050,000

3. Acquisition cost Share in net income (30% x 4,000,000) Share in cash dividend (30% x 1,000,000) Amortization of depreciable asset (750,000 / 5) Carrying value of investment

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

Acquisition cost Net assets acquired (30% x 12,000,000) Excess of cost Excess attributable to depreciable asset (30% x 2,500,000) Excess attributable to goodwill

5,000,000 3,600,000 1,400,000 750,000 650,000

145 Problem 11-14 1. Journal entries a. Investment in associate Cash

1,000,000

b. Investment in associate Investment income

175,000

c. Cash Investment in associate

75,000

d. Investment income Investment in associate

50,000

2. Share in net income Amortization of excess (25,000 + 25,000) Investment income 3. Acquisition cost Net assets acquired (25% x 3,000,000) Excess of cost 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) Investment balance

1,000,000 175,000 75,000 50,000 175,000 ( 50,000) 125,000 1,000,000 750,000 250,000 25,000 125,000 100,000 250,000 1,000,000 175,000 ( 25,000) ( 25,000) ( 75,000) 1,050,000

Problem 11-15 1. Share in 2008 net income Amortization of excess (400,000 / 20) Investment income for 2008 Acquisition cost (20,000 x 120) Net assets acquired (25% x 8,000,000) Excess of cost

900,000 ( 20,000) 880,000 2,400,000 2,000,000 400,000

146 2. Share in 2008 net income Amortization of excess Investment income for 2009

975,000 ( 20,000) 955,000

3. Acquisition cost Share in net income: 2008 (25% x 3,600,000) 2009 (25% x 3,900,000) Share in cash dividend: 2008 (20,000 x 16) 2009 (20,000 x 20) Amortization of excess: 2008 (400,000 / 20) 2009 Investment balance – 12/31/2009

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

Problem 11-16 Requirement a 1. Memo – Received 500 shares as 10% stock dividend on 5,000 original Dale ordinary shares. Shares now held, 5,500. 2. Cash (5,500 x 20) Dividend income

110,000

3. Stock rights (15/150 x 1,600,000) Investment in equity securities – Ever

160,000

Cash Stock rights Gain on sale of stock rights 4. Investment in associate Cash Acquisition cost Net assets acquired: 10% x 16,000,000 20% x 20,000,000 Goodwill Income from Fox investment in 2007 (10% x 4,000,000) Less: Dividend income recorded in 2007 – cost method Understatement of income

110,000 160,000 200,000

5,000,000

160,000 40,000 5,000,000

1/1/2007 2,000,000

1/1/2008 5,000,000

1,600,000 ________ 400,000

4,000,000 1,000,000 400,000 -___ 400,000

147 5. Investment in associate Investment in equity securities (Reclassification) 6. Investment in associate Retained earnings

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

7. Investment in associate Investment income (30% x 6,000,000)

1,800,000

8. Cash (75,000 x 20) Investment in associate

1,500,000

400,000 1,800,000 1,500,000

Requirement b Noncurrent assets: Investment in equity securities (Note) Investment in associate – Fox Corporation

2,690,000 7,700,000

Note – Investment in equity securities Dale Corporation, 5,500 shares Ever Corporation, 10,000 shares Total cost

1,250,000 1,440,000 2,690,000

Problem 11-17 Answer D Problem 11-18 Answer D Problem 11-19 Answer B Investment in Lax Corporation

3,000,000

Problem 11-20 Answer C Total cash dividend Cumulative net income Liquidating dividend Cash (10% x 3,000,000) Dividend income (10% x 2,500,000) Investment in equity securities

3,000,000 2,500,000 500,000 300,000 250,000 50,000

Problem 11-21 Answer B Investment income (20% x 1,600,000)

320,000

148 Problem 11-22 Answer A Investment income (20% x 6,000,000)

1,200,000

Problem 11-23 Answer C Interest (30,000/100,000) Investment income (5,000,000 x 6/12 x 30%)

30% 750,000

Problem 11-24 Answer C Cost Less: Net assets acquired (40% x 8,000,000) Excess of cost or goodwill Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%)

4,000,000 3,200,000 800,000 300,000

Problem 11-25 Answer B Acquisition cost Share in net income (20% x 1,800,000) Share in cash dividend (20% x 600,000) Amortization of excess (1,000,000/10) Carrying value

7,000,000 360,000 ( 120,000) ( 100,000) 7,140,000

Problem 11-26 Answer A Acquisition cost Share in net income (10% x 5,000,000) Share in cash dividend (10% x 1,500,000) Carrying value

4,000,000 500,000 ( 150,000) 4,350,000

Problem 11-27 Answer D Acquisition cost (squeeze) Share in net income (25% x 1,200,000) Share in cash dividend (25% x 480,000) Carrying value – December 31

1,720,000 300,000 ( 120,000) 1,900,000

Problem 11-28 Answer D Acquisition cost Less: Book value of net assets acquired (30% x 5,000,000) Excess of cost over book value Less: Amount attributable to undervaluation of land (30% x 2,000,000) Goodwill

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

149 Acquisition cost Add: Share in net income (30% x 1,000,000) Balance, December 31

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

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

Problem 11-29 Answer B Acquisition cost – January 1 Acquisition cost – December 31 Total cost Share in net income (10% x 8,000,000) Carrying value

1,000,000 3,000,000 4,000,000 800,000 4,800,000

Problem 11-30 Answer C Investment income in 2008 (30% x 6,500,000)

1,950,000

Investment income in 2007 (10% x 6,000,000) Less: Dividend income recorded in 2006 (10% x 2,000,000) Understatement of income Investment in associate Retained earnings

600,000 200,000 400,000 400,000

400,000

Problem 11-31 Answer A Acquisition cost Net assets acquired (30% x 11,800,000) Excess of cost Attributable to depreciable assets (30% x 2,600,000) Attributable to goodwill

5,160,000 3,540,000 1,620,000 780,000 840,000

Acquisition cost Share in net income (30% x 3,600,000) Share in dividends (30% x 400,000) Amortization (780,000/4) Investment balance – December 31

5,160,000 1,080,000 ( 120,000) ( 195,000) 5,925,000

Problem 11-32 Answer B Acquisition cost Net assets acquired (40% x 5,000,000) Excess of cost

2,560,000 2,000,000 560,000

150 Attributable to equipment (40% x 800,000) Attributable to building (40% x 600,000) 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 value of investment – 12/31/2008

320,000 240,000 560,000 2,560,000 640,000 ( 400,000) ( (

80,000) 20,000) 2,700,000

Problem 11-33 Answer A Net income Less: Preference dividend (10% x 2,000,000) Net income to ordinary shares

5,000,000 200,000 4,800,000

Investment income (50% x 4,800,000)

2,400,000

Problem 11-34 Question 1 – Answer B Share in 2008 net income (30% x 800,000)

240,000

Question 2 – Answer B Acquisition cost Share in net income – 2008 Cash dividends – 2008 (30% x 500,000) Book value – December 31, 2008

2,000,000 240,000 ( 150,000) 2,090,000

Question 3 – Answer B Book value – December 31, 2008 Share in net income up to June 30, 2009 (30% x 1,000,000) Book value – June 30, 2009

2,090,000 300,000 2,390,000

Sales price Book value sold (2,390,000 x ½) Gain on sale

1,500,000 1,195,000 305,000

151 Problem 11-35 Answer C Acquisition cost (30,000 x 120) Deficit on January 1, 2008 (30% x 500,000) Carrying value of investment – 1/1/2008 Net income for 2008 (30% x 700,000) Net income for 2009 (30% x 800,000) Cash dividend on 12/31/2009 (30% x 400,000) Carrying value of investment – 12/31/2009

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

Another approach Acquisition cost Share in retained earnings – 12/31/2009 (30% x 600,000) Carrying value of investment – 12/31/2009

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

152

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

B B A A D

6. 7. 8. 9. 10.

C C B B C

Problem 12-2

Bonds held as trading

2008 April 1 Trading securities Cash

2,200,000

Oct. 1 Cash (2,000,000 x 12% x 6/12) Interest income Dec. 31 Accrued interest receivable Interest income (2,000,000 x 12% x 3/12) 31 Trading securities Unrealized gain – TS

120,000 60,000 100,000

2009 Jan. 1 Interest income Accrued interest receivable

60,000 100,000

60,000 120,000

Oct. 1 Cash Interest income

120,000

120,000

Dec. 31 Accrued interest receivable Interest income 31 Unrealized loss – TS Trading securities (2,300,000 – 1,960,000)

Oct. 1 Cash Interest income

120,000

60,000

April 1 Cash Interest income

2008 April 1 Held to maturity securities Cash

2,200,000

60,000 340,000

120,000 60,000 340,000

Bonds held to maturity 2,200,000 2,200,000 120,000 120,000

153 2008 Dec. 31 Accrued interest receivable Interest income 31 Interest income (50,000 x 9/12) Held to maturity securities 2009 Jan. 1 Interest income Accrued interest receivable

60,000 37,500

60,000

April 1 Cash Interest income

120,000

Oct. 1 Cash Interest income

120,000

Dec. 31 Accrued interest receivable Interest income 31 Interest income (200,000/4) Held to maturity securities

60,000 50,000

60,000 37,500

60,000 120,000 120,000 60,000 50,000

Problem 12-3 Bonds held as trading Jan. 1 Trading securities Cash July

3,761,000

1 Cash Interest income (4,000,000 x 12%)

Dec. 31 Accrued interest receivable Interest income 31 Trading securities Unrealized gain – TS (4,200,000 – 3,761,000)

240,000 240,000 439,000

3,761,000 240,000 240,000 439,000

Bonds held as available for sale Jan. 1 Available for sale securities Cash July

1 Cash Interest income

3,761,000 240,000

3,761,000 240,000

154 July

1 Available for sale securities Interest income

23,270 23,270

Interest income (3,761,000 x 7%) Interest received Amortization of discount Dec. 31 Accrued interest receivable Interest income 31 Available for sale securities Interest income

263,270 240,000 23,270 240,000 24,899

Interest income (3,784,270 x 7%) Interest accrued Amortization of discount 31 Available for sale securities Unrealized gain – AFS

240,000 24,899 264,899 240,000 24,899

390,831 390,831

Market value (4,000,000 x 105) Book value Unrealized gain

4,200,000 3,809,169 390,831

Problem 12-4 Aug. 1 Trading securities (5,000,000 x 104) Interest income (5,000,000 x 12% x 3/12) Cash

5,200,000 150,000

31 Trading securities (2,000,000 x 98) Interest income (2,000,000 x 12% x 2/12) Cash

1,960,000 40,000

Nov. 1 Cash (5,000,000 x 12% x 6/12) Interest income Dec. 1 Cash (1,880,000 + 20,000) Loss on sale of trading securities Trading securities Interest income (2,000,000 x 12% x 1/12) Selling price (2,040,000 – 160,000) Less: Cost of bonds sold (2,000/5,000 x 5,200,000) Loss on sale

300,000

5,350,000

2,000,000 300,000

1,900,000 200,000 2,080,000 20,000 1,880,000 2,080,000 ( 200,000)

155 Dec. 31 Cash (2,000,000 x 12% x 6/12) Interest income

120,000 120,000

31 Accrued interest receivable (3,000,000 x 12% x 2/12) Interest income 31 Unrealized loss – TS Trading securities

60,000 60,000 160,000

Carrying amount Acme bonds (3,000,000 x 98%) Avco bonds (2,000,000 x 99%)

3,120,000 1,960,000 5,080,000

Current assets: Trading securities, at market value

160,000 Market 2,940,000 1,980,000 4,920,000

4,920,000

Problem 12-5 Requirement a March 1 Trading securities (2,000,000 x 93%) Interest income (2,000,000 x 12% x 1/12) Cash

1,860,000 20,000

April

3,800,000 40,000

Aug.

1 Trading securities (4,000,000 x 95%) Interest income (4,000,000 x 12% x 1/12) Cash

1,880,000

1 Cash (2,000,000 x 12% x 6/12) Interest income

120,000

Sept. 1 Cash (4,000,000 x 12% x 6/12) Interest income

240,000

Oct. 1 Cash (1,010,000 + 10,000) Interest income (1,000,000 x 12% x 1/12) Trading securities Gain on sale of trading securities Sales price (1,000,000 x 105%) Less: Brokerage Net proceeds Less: Cost of bonds sold (1,000/4,000 x 3,800,000) Gain on sale

3,840,000 120,000

240,000

1,020,000 10,000 950,000 60,000 1,050,000 40,000 1,010,000 950,000 60,000

156 Dec. 1 Cash (1,940,000 + 80,000) Trading securities Interest income (2,000,000 x 12% x 4/12) Gain on sale of trading securities

2,020,000 1,860,000 80,000 80,000

Sales price (2,000,000 x 100%) Less: Brokerage Net proceeds Less: Cost of bonds sold Gain on sale

2,000,000 60,000 1,940,000 1,860,000 80,000

31 Accrued interest receivable (3,000,000 x 12% x 4/12) Interest income

120,000

31 Unrealized loss – TS (2,850,000 – 2,700,000) Trading securities

150,000

120,000 150,000

Requirement b Current assets: Trading securities, at market value (3,000,000 x 90)

2,700,000

Problem 12-6 2008 July 1 Trading securities Commission expense Interest income (2,000,000 x 4%) Cash Dec. 31 Unrealized loss – TS Trading securities

2,200,000 50,000 80,000 2,330,000 300,000 300,000

Market value (2,000,000 x 95) Carrying amount Unrealized loss 31 Cash (2,000,000) x 8%) Interest income 2009 March 31 Cash Trading securities Gain on sale of TS Interest income (2,000,000 x 8%) x 3/12)

1,900,000 2,200,000 300,000 160,000

160,000

2,140,000 1,900,000 200,000 40,000

157 Problem 12-7 Requirement 1 Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010

Interest received

Interest income

160,000 160,000 160,000

190,050 193,055 196,395

Discount amortization 30,050 33,055 36,395

Book value 1,900,500 1,930,550 1,963,605 2,000,000

Requirement 2 2008 Jan. 1 Available for sale securities Cash Dec. 31 Cash Interest income

1,900,500 160,000

31 Available for sale securities Interest income

30,050

31 Available for sale securities Unrealized gain – AFS

269,450

Market value (2,000,000 x 110) Carrying amount Unrealized gain 2009 Dec. 31 Cash Interest income

160,000 30,050 269,450 2,200,000 1,930,550 269,450

160,000

31 Available for sale securities Interest income

33,055

31 Available for sale securities Unrealized gain

166,945

Market value 12/31/2009 (2,000,000 x 120) Book value per table – 12/31/2009 Cumulative unrealized gain – 12/31/2009 Unrealized gain – 12/31/2008 Increase in 2009

1,900,500

160,000 33,050 166,945 2,400,000 1,963,605 436,395 269,450 166,945

158

Problem 12-8 Requirement 1 Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010

Interest received

Interest income

300,000 300,000 300,000

379,360 385,709 392,931

Discount amortization 79,360 85,709 92,931

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

Requirement 2 2008 Jan. 1 Available for sale securities Cash Dec. 31 Cash Interest income

4,742,000 300,000

31 Available for sale securities Interest income

79,360

31 Available for sale securities Unrealized gain – AFS

428,640

Market value - 12/31/2008 (5,000,000 x 105) Book value – 12/31/2008 Unrealized gain – 12/31/2008 2009 Dec. 31 Cash Interest income 31 Available for sale securities Interest income 31 Cash Unrealized gain - AFS Available for sale securities Gain on sale of AFS Sales price (5,000,000 x 110) Unrealized gain Total Investment balance – 12/31/2009 Unrealized gain – 12/31/2009

4,742,000 300,000 79,360 428,640 5,250,000 4,821,360 428,640

300,000 85,709

300,000 85,709

5,500,000 428,640 5,335,709 592,931 5,250,000 428,640 5,928,640 5,335,709 592,931

159 Another computation Sales price Book value per table – 12/31/2009 Gain on sale

5,250,000 4,907,069 592,931

Problem 12-9 Requirement a 2008 May 1 Held to maturity securities (6,000,000 x 94%) Interest income (6,000,000 x 12% x 3/12) Cash

5,640,000 180,000

Aug. 1 Cash Interest income (6,000,000 x 12% x 6/12)

360,000

Dec. 31 Accrued interest receivable Interest income (6,000,000 x 12% x 5/12)

300,000

31 Held to maturity securities (8,000 x 8) Interest income

64,000

5,820,000 360,000 300,000 64,000

May 1, 2008 – February 1, 2012 = 45 months 360,000 / 45 = 8,000 monthly amortization

Requirement b 2010 May 1 Held to maturity securities (8,000 x 4) Interest income 1 Cash (6,300,000 + 180,000) Held to maturity securities Interest income (6,000,000 x 12% x 3/12) Gain on sale of bonds

32,000 32,000 6,480,000 5,832,000 180,000 468,000

Original cost – May 1, 2008 Add: Discount amortization from May 1, 2008 to May 1, 2010 (8,000 x 24 months) Book value, May 1, 2010

5,640,000 192,000 5,832,000

Selling price (6,000,000 x 105%) Less: Book value Gain on sale

6,300,000 5,832,000 468,000

160 Problem 12-10 1. Held to maturity securities Cash

8,598,400 8,598,400

2. Cash (12% x 8,000,000) Interest income

960,000

3. Interest income Held to maturity securities

100,160

960,000 100,160

Interest received Interest income (10% x 8,598,400) Premium amortization

960,000 859,840 100,160

Problem 12-11 Year

Bond outstanding

Fraction

2008 2009 2010 2011 2012

1,000,000 800,000 600,000 400,000 200,000 3,000,000

10/30 8/30 6/30 4/30 2/30

2008 Jan. 1 Held to maturity securities Cash

Premium amortization 50,000 40,000 30,000 20,000 10,000 150,000

1,000,000 1,000,000

June 30 Cash (100,000 x 12% x 6/12) Interest income

60,000

Dec. 31

Cash Interest income

60,000

Interest income Held to maturity securities

50,000

31 31

Cash

60,000 60,000 50,000 200,000

Held to maturity securities

200,000

161 2009 June 30 Cash (800,000 x 12% x 6/12) Interest income

48,000

Dec. 31 Cash Interest income

48,000

48,000 48,000

31 Interest income Held to maturity securities

40,000

31 Cash Held to maturity securities

200,000

40,000 200,000

Problem 12-12 Year 2008 2009 2010 2011

Bond outstanding 4,000,000 3,000,000 2,000,000 1,000,000 10,000,000

2010 Dec. 31 Cash Interest income 31 Held to maturity securities Interest income 31 Cash Held to maturity securities 2011 Dec. 31 Cash Interest income 31 Held to maturity securities Interest income 31 Cash Held to maturity securities

Fraction 4/10 3/10 2/10 1/10

Discount amortization 120,000 90,000 60,000 30,000 300,000 240,000 60,000 1,000,000

240,000 60,000 1,000,000

120,000 120,000 30,000 30,000 1,000,000 1,000,000

162 Problem 12-13 Bond Months Peso Bond year outstanding outstanding months 10/01/2008 – 02/01/2009 3,000,000 4 12,000,000 02/01/2009 - 02/01/2010 2,000,000 12 24,000,000 02/01/2010 – 02/01/2011 1,000,000 12 12,000,000 48,000,000

Fraction 12/48 24/48 12/48

2008 Oct. 1 Held to maturity securities Interest income (3,000,000 x 12% x 2/12) Cash Dec. 31 Accrued interest receivable Interest income (3,000,000 x 12% x 5/12) 31 Held to maturity securities Interest income (75,000 x 3/4)

2009 Jan. 1 Interest income Accrued interest receivable Feb. 1 Cash (3,000,000 x 12% x 6/12) Interest income 1 Cash

2,700,000 60,000

Discount amortization 75,000 150,000 75,000 300,000

2,760,000

150,000 150,000 56,250 56,250

150,000 150,000 180,000 180,000 1,000,000

Held to maturity securities

1,000,000

Aug. 1 Cash (2,000,000 x 12% x 6/12) Interest income

120,000

Dec. 31 Accrued interest receivable Interest income (2,000,000 x 12% x 5/12)

100,000

31 Held to maturity securities Interest income From January1 to February 1, 2009 (75,000 x 1/4) From February 1 to December 31, 2009 (150,000 x 11/12) Total amortization for year 2009

156,250

120,000 100,000 156,250 18,750 137,500 156,250

163 Problem 12-14 Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 2008 Jan. 1

Interest received

Interest income

Discount amortization

400,000 400,000 400,000 400,000

450,842 456,943 463,776 471,424

50,842 56,943 63,776 71,424

Held to maturity securities Cash

Dec. 31 Cash

3,757,015 400,000

Interest income

31 Held to maturity securities Interest income

50,842

Book value 3,757,015 3,807,857 3,864,800 3,928,576 4,000,000

3,757,015 400,000 50,842

Problem 12-15 Date Jan. 01, 2008 June 30, 2008 Dec. 31, 2008 June 30, 2009 Dec. 31, 2009

Interest received

Interest income

120,000 120,000 120,000 120,000

93,345 92,546 91,722 90,877

2008 Jan. 1 Held to maturity securities Cash June 30 Cash Interest income 30 Interest income Held to maturity securities Dec. 31 Cash Interest income 31 Interest income Held to maturity securities

Premium amortization Carrying value 3,111,510 26,655 3,084,855 27,454 3,057,401 28,278 3,029,123 29,123 3,000,000 3,111,510 3,111,510 120,000 120,000 26,655 26,655 120,000 27,454

120,000 27,454

164 Problem 12-16 1. Journal entries a. Held to maturity securities Cash

7,679,000 7,679,000

b. Cash (10% x 8,000,000) Interest income

800,000

c. Held to maturity securities Interest income

121,480

800,000 121,480

Interest income (7,679,000 x 12%) Interest received (8,000,000 x 10%) Discount amortization d. Cash Held to maturity securities 2. Cost Discount amortization Annual installment Book value – 12/31/2008

921,480 800,000 121,480 2,000,000

2,000,000 7,769,000 121,480 (2,000,000) 5,800,480

Problem 12-17 Semiannual nominal interest (5,000,000 x 4%) Semiannual effective interest (5,000,000 x 5%) Difference Multiply by present value of annuity of 1 for 20 periods at 5% Discount Face value Discount Purchase price

200,000 250,000 50,000 12.462 623,100 5,000,000 ( 623,100) 4,376,900

Problem 12-18 1. Annual nominal interest (4,000,000 x 16%) Annual effective interest (4,000,000 x 12%) Difference Multiply by present value factor Premium Face value Purchase price

640,000 480,000 160,000 3.605 576,800 4,000,000 4,576,800

165 2. Date Interest received Jan. 01, 2008 Dec. 31, 2008 640,000 Dec. 31, 2009 640,000 Dec. 31, 2010 640,000 Dec. 31, 2011 640,000 Dec. 31. 2012 640,000

Interest income 549,216 538,322 526,121 512,455 497,086

3. Held to maturity securities Cash Cash Interest income Interest income Held to maturity securities

Premium amortization 90,784 101,678 113,879 127,545 142,914

Book value 4,576,800 4,486,016 4,384,338 4,270,459 4,142,914 4,000,000

4,576,800 4,576,800 640,000 640,000 90,784 90,784

Problem 12-19 Semiannual nominal interest (8,000,000 x 5%) Semiannual effective interest (8,000,000 x 4%) Difference Multiply by PV of annuity of 1 for 10 periods at 4% Premium Face value Purchase price

400,000 320,000 80,000 8.11 648,800 8,000,000 8,648,800

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

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

Journal entries 2008 Jan. 1 Held to maturity securities Cash July

1 Cash Interest income 1 Interest income Held to maturity securities

8,648,800 8,648,800 400,000 400,000 54,048 54,048

166 Interest received Interest income (8,648,800 x 8% x 6/12) Premium amortization Dec. 31 Accrued interest receivable Interest income 31 Interest income Held to maturity securities

400,000 345,952 54,048 400,000 56,210

Interest accrued Interest income (8,594,752 x 8% x 6/12) Premium amortization

400,000 56,210 400,000 343,790 56,210

Problem 12-20 1. Principal payment Interest payment (3,000,000 x 12%) Total payment on December 31, 2008

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

Principal payment Interest payment (2,000,000 x 12%) Total payment on December 31, 2009

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

Principal payment Interest payment (1,000,000 x 12%) Total payment on December 31, 2010

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

December 31, 2008 payment (1,360,000 x .91) December 31, 2009 payment (1,240,000 x .83) December 31, 2010 payment (1,120,000 x .75) Total present value on January 1, 2008

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

2. Journal entries 2008 Jan. 1 Held to maturity securities Cash Dec. 31 Cash Interest income 31 Interest income Held to maturity securities

3,106,800 3,106,800 360,000 360,000 49,320 49,320

167 Interest received Interest income (3,106,800 x 10%) Premium amortization Dec. 31 Cash

Held to maturity securities

360,000 310,680 49,320 1,000,000

3. Acquisition cost – 1/1/2008 Premium amortization for 2008 Annual installment Carrying value of investment – 12/31/2008

1,000,000 3,106,800 ( 49,320) (1,000,000) 2,057,480

Problem 12-21 1. The present value of the bonds using the interest rate of 11% is as follows: PV of principal (5,000,000 x .6587) PV of interest (500,000 x 3.1024) Total present value of cash flows

3,293,500 1,551,200 4,844,700

2. 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 interest (500,000 x 3.0373) Total present value of cash flows 3.

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

X – 11%____ 12% - 11% 4,700,000 – 4,844,700_ 4,696,150 – 4,844,700 _144,700_ 148,550

= .97

Effective rate = 11% + .97 = 11.97% 4. Interest income for 2008 (4,700,000 x 11.97%)

562,590

5. Journal entries Held to maturity securities Cash Cash (10% x 5,000,000) Interest income

4,700,000 500,000

4,700,000 500,000

168 Held to maturity securities Interest income

62,590

62,590

Interest income Interest received Discounted amortization

562,590 500,000 62,590

Problem 12-22 Question 1 – Answer A Acquisition cost (4,400,000 – 100,000) Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15) Book value – December 31, 2008 Monthly amortization (300,000/75 months)

(

4,300,000 60,000) 4,240,000 4,000

Question 2 – Answer B Interest for 2008 (4,000,000 x 10%) Amortization of premium (4,000 x 12 months) Interest income

400,000 ( 48,000) 352,000

Problem 12-23 Answer B Interest for 2008 (2,000,000 x 12%) Amortization of discount (100,000/5) Interest income

240,000 20,000 260,000

Problem 12-24 Answer B Premium on sale of bonds Unamortized discount (100,000 – 20,000) Gain on sale of bonds

140,000 80,000 220,000

Problem 12-25 Answer A Acquisition cost – 1/1/2008 Discount amortization for 2008: Interest income (14% x 3,767,000) Interest received (12% x 4,000,000) Book value – 12/31/2008

3,767,000 527,380 480,000

47,380 3,814,380

169 Problem 12-26 Answer A Bond year

Bond outstanding

04/01/2007 – 03/31/2008 04/01/2008 – 03/31/2009 04/01/2009 – 03/31/2010 04/01/2010 – 03/31/2011

4,000,000 3,000,000 2,000,000 1,000,000 10,000,000

Interest for the year 2008: From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12) From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12) Amortization of discount for year 2008: From January 1 to March 31, 2008 (80,000 x 3/12) From April 1 to December 31, 2008 (60,000 x 9/12) Interest income for year 2008

Fraction 4/10 3/10 2/10 1/10

120,000 270,000 20,000 45,000

Amortization 80,000 60,000 40,000 20,000 200,000

390,000 65,000 455,000

Problem 12-27 Answer D Interest income for 2008 (3,756,000 x 10%)

375,600

Problem 12-28 Answer D Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12)

200,000

Problem 12-29 Answer C Interest received (1,000,000 x 10% x 6/12) Interest income (1,198,000 x 8% x 6/12) Premium amortization Acquisition cost – July 1, 2008 Premium amortization Book value – December 31, 2008

50,000 47,920 2,080 1,198,000 ( 2,080) 1,195,920

170 Problem 12-30 Answer A Interest accrued (1,000,000 x 8% x 6/12) Interest income (906,000 x 10% x 6/12) Discount amortization

40,000 45,300 5,300

Acquisition cost – July 1, 2008 (946,000 - 40,000) Discount amortization Book value – December 31, 2008

906,000 5,300 911,300

Problem 12-31 Answer B Acquisition cost – July 1, 2008 Discount amortization from July 1 to December 31, 2008: Interest accrued (5,000,000 x 8% x 6/12) Interest income (4,614,000 x 10% x 6/12) Book value – December 31, 2008

4,614,000 200,000 230,700

30,700 4,644,700

Problem 12-32 Answer D Acquisition cost Discount amortization: Interest income (4,766,000 x 12%) Interest received (5,000,000 x 10%) Total Annual installment on December 31, 2008 Book value –December 31, 2008

4,766,000 571,920 500,000

71,920 4,837,920 (1,000,000) 3,837,920

Problem 12-33 Answer A Annual effective (5,000,000 x 14%) Annual nominal (5,000,000 x 12%) Difference Multiply by present value factor using effective rate of 14% Discount Face value Purchase price

700,000 600,000 100,000 5.216 521,600 5,000,000 4,478,400

Problem 12-34 Answer A 12/31/2008 (1,250,000 + 600,000 x .9091) 12/31/2009 (1,250,000 + 450,000 x .8264) 12/31/2010 (1,250,000 + 300,000 x .7513) 12/31/2011 (1,250,000 + 150,000 x .6830)

1,681,835 1,404,880 1,164,515 956,200 5,207,430

171

CHAPTER 13 Problem 13-1

Problem 13-2

Problem 13-3

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

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

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

C B D D D A D B A B

A C D D A A D A D A

A A B A B A D A A D

Problem 13-4 2008 Jan. 1 Sinking fund cash Cash April 1 Sinking fund securities Sinking fund cash Oct. 1 Sinking fund cash Sinking fund income (400,000 x 12% x 6/12) Dec. 31 Sinking fund cash Cash 31 Accrued interest receivable Sinking fund income (400,000 x 12% x 3/12) Sinking fund securities Sinking fund income

400,000

400,000

384,000 384,000 24,000 24,000 400,000 400,000 12,000 12,000 3,000 3,000

Amortization of discount on sinking fund securities for 9 months. (16,000/4 years = 4,000 x 9/12 = 3,000) 31 Retained earnings Retained earnings appropriated for sinking fund Sinking fund cash Sinking fund securities Accrued interest receivable Total Less: Appropriated retained earnings balance Additional appropriation

439,000 439,000 440,000 387,000 12,000 839,000 400,000 439,000

2009 Jan. 1 Sinking fund income Accrued interest receivable April 1 Sinking fund cash Sinking fund income 1 Sinking fund expenses Sinking fund cash Oct. 1 Sinking fund cash Sinking fund income 1 Sinking fund securities (4,000 x 9/12) Sinking fund income 1 Sinking fund cash (400,000 x 106%) Sinking fund securities Gain on sale of securities Dec. 31 Sinking fund cash Cash 31 Retained earnings Retained earnings appropriated for sinking fund

172 12,000 12,000 24,000 24,000 12,000 24,000 3,000 424,000

400,000 461,000

Sinking fund cash Less: Appropriated retained earnings balance Additional appropriation 2010 July 1 Bonds payable Interest expense Sinking fund cash 1 Cash Sinking fund cash 1 Retained earnings appropriated for sinking fund Retained earnings

12,000 24,000 3,000 390,000 34,000 400,000 461,000 1,300,000 839,000 461,000

1,000,000 100,000

1,100,000

200,000 200,000 1,300,000 1,300,000

Problem 13-5 2008 Jan. 1 18

Sinking fund cash Cash

2,700,000

Sinking fund securities Sinking fund cash

2,500,000

2,700,000 2,500,000

173 2008 July 5 Sept. 9

Sinking fund expenses Sinking fund cash

100,000

Sinking fund cash Loss on sale of securities Sinking fund securities

530,000 70,000

Dec. 20 Sinking fund cash Sinking fund income

100,000

600,000 150,000 150,000

2009 Feb. 12 No entry Dec. 31 Sinking fund cash Sinking fund income

270,000 270,000

31 Sinking fund cash Sinking fund securities Gain on sale of securities

2,250,000

31 Bonds payable Sinking fund cash

3,000,000

31 Cash Sinking fund cash

300,000

1,900,000 350,000 3,000,000 300,000

Problem 13-6 1. Sinking fund cash Cash

2,000,000

2. Sinking fund securities Sinking fund cash

450,000

3. Sinking fund securities Sinking fund cash

400,000

4. Sinking fund cash Sinking fund income (500,000 x 12%) Sinking fund securities Sinking fund income

60,000 10,000

Amortization of bond discount (50,000/5 years = 10,000 per year)

2,000,000 450,000 400,000 60,000 10,000

174 5. Sinking fund expenses Sinking fund cash

20,000

6. Sinking fund securities Sinking fund income Sinking fund cash

400,000 10,000

20,000

7. Sinking fund cash Sinking fund income (500,000 x 10%)

50,000

8. Sinking fund cash Sinking fund income

20,000

9. Sinking fund cash Sinking fund securities Gain on sale of securities 10. Retained earnings Retained earnings appropriated for sinking fund

450,000

410,000 50,000 20,000 400,000 50,000

2,160,000 2,160,000

Composition of fund: Sinking fund cash Sinking fund securities

1,300,000 860,000 2,160,000

Problem 13-7 1. Sinking fund – trustee Cash

1,000,000 1,000,000

2. No entry 3. No entry 4. No entry 5. No entry 6. Sinking fund – trustee Sinking fund expense Sinking fund income (60,000 + 10,000) Gain on sale of securities 7. Bonds payable Interest expense Sinking fund – trustee

140,000 30,000 70,000 100,000 1,000,000 100,000

1,100,000

175 8. Cash Sinking fund – trustee

40,000 40,000

Problem 13-8 Annual contribution (5,000,000/6.051) Date 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012

Interest income 81,899 171,987 271,085 380,094

818,987 Annual contribution 818,987 818,987 818,987 818,987 818,987

Fund balance 818,987 1,719,873 2,710,847 3,800,919 5,000,000

Problem 13-9 Annual contribution (2,000,000/5.1051) Date 07/01/2008 07/01/2009 07/01/2010 07/01/2011 07/01/2012

Interest income 39,176 82,271 129,674 181,819

391,765 Annual contribution 391,765 391,765 391,765 391,765 -

Fund balance 391,765 822,706 1,296,742 1,818,181 2,000,000

Problem 13-10 2008 Jan. 1 Life insurance Cash

60,000

2009 Jan. 1 Life insurance Cash

60,000

2010 Jan. 1 Life insurance Cash

60,000

Dec. 31 Cash surrender value Life insurance Retained earnings 2011 Jan. 1 Life insurance Cash

60,000

60,000

60,000

60,000

60,000 20,000 40,000

60,000

176 Dec. 31 Cash surrender value Life insurance

24,000 24,000

Balance – December 31, 2011 Balance – December 31, 2010 Increase in cash surrender value 2012 Jan. 1 Life insurance Cash June 30 Cash surrender value Life insurance

84,000 60,000 24,000 60,000 60,000 16,000 16,000

Balance – December 31, 2012 Balance – December 31, 2011 Increase in cash surrender value for 2012

116,000 84,000 32,000

Increase from January 1 to June 30, 2012 (1/2 x 32,000) July 31 Cash Cash surrender value Life insurance (60,000 x 6/12) Gain on sale of life insurance settlement

16,000 2,000,000

100,000 30,000 1,870,000

Problem 13-11 2007 April 1 Life insurance Cash Dec. 31 Prepaid life insurance (60,000 x 3/12) Life insurance 2008 Jan. 1 Life insurance Prepaid life insurance

60,000 15,000

15,000

April 1 Life insurance Cash

60,000

Dec. 31 Prepaid life insurance Life insurance

15,000

2009 Jan. 1 Life insurance Prepaid life insurance

60,000 15,000

15,000 60,000 15,000

15,000

15,000

April 1 Life insurance Cash

60,000

Dec. 31 Prepaid life insurance Life insurance

15,000

2010 Jan. 1 Life insurance Prepaid life insurance April 1 Cash surrender value Life insurance Retained earnings

15,000 60,000

April 1, 2007 – December 31, 2009 (33/36 x 60,000) prior years January 1, 2010 – April 1, 2010 (3/36 x 60,000) current period Total 1 Life insurance Cash

60,000

Dec. 31 Prepaid life insurance Life insurance

15,000

31 Cash surrender value Life insurance

18,000

177 60,000

15,000

15,000 5,000 55,000 55,000 5,000 60,000 60,000 15,000 18,000

Balance – April 1, 2011 Balance – April 1, 2010 Increase from April 1, 2010 to April 1, 2011

84,000 60,000 24,000

Increase from April 1, 2010 to December 31, 2010 (24,000 x 9/12)

18,000

2011 Jan. 1 Life insurance Prepaid life insurance April 1 Cash surrender value (18,000 x 3/12) Life insurance 1 Life insurance Cash July 1 Cash surrender value Life insurance Balance – April 1, 2012 Balance – April 1, 2011 Increase from April 1, 2011 to April 1, 2012

15,000 15,000 6,000 6,000 60,000 60,000 8,000 8,000 116,000 84,000 32,000

178 Increase from April 1, 2010 to July 1, 2010 (32,000 x 3/12) July 31 Cash Cash surrender value Life insurance (60,000 x 9/12) Gain on life insurance settlement

8,000 2,000,000

92,000 45,000 1,863,000

Problem 13-12 2008 Jan. 1 Life insurance Cash

80,000

2009 Jan. 1 Life insurance Cash

80,000

Dec. 31 Cash Life insurance 31 Cash surrender value Life insurance (42,000 x 1/3) Retained earnings

80,000 5,000 5,000 42,000

2010 Jan. 1 Life insurance Cash

80,000

Dec. 31 Cash

6,000

14,000 28,000

80,000

Life insurance 31 Cash surrender value Life insurance

80,000

6,000 5,000 5,000

Balance – December 31, 2010 Balance – December 31, 2009 Increase in cash surrender value

47,000 42,000 5,000

Problem 13-13 a. Life insurance (10,000 x 6/12) Cash surrender value

5,000

b. Prepaid life insurance (28,000 x 1/2) Life insurance

14,000

c. Interest expense Accrued interest payable (50,000 x 12% x 9/12)

4,500

5,000 14,000 4,500

d. Dividend income Dividend receivable

2,000

179 2,000

Current assets: Prepaid life insurance

14,000

Investment: Cash surrender value

85,000

Current liabilities: Loan payable Accrued interest payable

50,000 4,500

Problem 13-14 1. Land held by Eragon for undetermined use Vacant building Building owned by a subsidiary Eragon occupied by lessees Total investment property

5,000,000 3,000,000 1,500,000 9,500,000

2. a. The property held by a subsidiary Eragon in the ordinary course of business in included in inventory. b. The property held by Eragon for use in production is owner-occupied property and therefore part of property, plant and equipment. c. The land leased by Eragon to a subsidiary under an operating lease is owneroccupied property for purposes of consolidated financial statements. However, from the perspective of separate financial statements of Eragon, the land is an investment property. d. The property under construction for use as investment property is owner-occupied property until the land is completed. Upon completion, the building becomes investment property. e. The land held for future factory site is owner-occupied property and therefore part of property, plant and equipment. f. The machinery leased out to an unrelated party is part of property, plant and equipment because investment property includes only land and building, and not movable property like machinery.

Problem 13-15 Cost model 2008

Depreciation Accumulated depreciation

1,800,000 1,800,000

2009

Depreciation Accumulated depreciation

1,800,000

2010

Depreciation Accumulated depreciation

1,800,000

180 1,800,000 1,800,000

Fair value model 2008

Investment property Accumulated depreciation

5,000,000

2009

Loss from change in fair value Accumulated depreciation

2,000,000

2010

Investment property Gain from change in fair value

7,000,000

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

Problem 13-16 Answer D Annual deposit (8,000,000 / 4.78)

1,673,640

Problem 13-17 Answer B Annual deposit (9,000,000 / 6.34)

1,419,560

Problem 13-18 Answer A Principal amount Multiply by future value of 1 for 6 periods at 10% Future amount at maturity

5,000,000 1.77 8,850,000

Problem 13-19 Answer A Future amount of 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 13-20 Answer A Sinking fund balance – January 1 Add: 2007 investment Dividends on investment Interest revenue Total Less: Administration costs Sinking fund balance – December 31

900,000 150,000 300,000

4,500,000 1,350,000 5,850,000 100,000 5,750,000

181 Problem 13-21 Answer C Premium paid – January 1 Less: Dividend received Increase in cash surrender value (270,000 – 245,000) Life insurance expense for 2008

15,000 25,000

100,000 40,000 60,000

Problem 13-22 Answer D Premium paid Less: Increase in cash surrender value (540,000 – 435,000) Life insurance expense

200,000 105,000 95,000

The dividend of P30,000 is not deducted anymore because it is already part of the increase in cash surrender value.

Problem 13-23 Answer A Sinking fund cash Sinking fund securities Accrued interest receivable Plant expansion fund Cash surrender value Land held for capital appreciation Advances to subsidiary Investment in joint venture

500,000 1,000,000 50,000 600,000 150,000 3,000,000 200,000 2,000,000 7,500,000

182

CHAPTER 14 Problem 14-1

Problem 14-2

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

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

A A B A D B C D D A

Problem 14-3

B D D B C D D A B C

1. 2. 3. 4. 5.

B C D C C

Problem 14-4 Requirement 1 2008 Jan. 1 Cash

4,000,000 Loan payable

Dec. 31 Interest expense Cash (12% x 4,000,000) 31 Interest rate swap receivable Unrealized gain – interest rate swap (80,000 x .877) 2009 Dec. 31 Interest expense Cash (14% x 4,000,000) 31 Cash

Interest rate swap receivable Unrealized gain – interest rate swap

31 Loan payable Cash 31 Unrealized gain – interest rate swap Interest expense

4,000,000 480,000 480,000 70,160 70,160 560,000 80,000

4,000,000 80,000

560,000 70,160 9,840 4,000,000 80,000

Requirement 2 2008 Jan. 1 Cash

4,000,000 Loan payable

4,000,000

183 2008 Dec. 31 Interest expense Cash 31 Unrealized loss – interest rate swap Interest rate swap payable (40,000 x .901) 2009 Dec. 31 Interest expense Cash (11% x 4,000,000) 31 Interest rate swap payable Unrealized loss - Interest rate swap Cash 31 Loan payable Cash 31 Interest expense Unrealized loss - interest rate swap

480,000 36,040

480,000 36,040

440,000 440,000 36,040 3,960 4,000,000 40,000

40,000 4,000,000 40,000

Problem 14-5 2008 Jan. 1 Cash

6,000,000 Loan payable

Dec. 31 Interest expense Cash (10% x 6,000,000)

6,000,000 600,000 600,000

31 Interest rate swap receivable 159,300 Unrealized gain – interest rate swap (180,000 x .885) 2009 Dec. 31 Interest expense Cash (13% x 6,000,000) 31 Cash

Interest rate swap receivable Unrealized gain – interest rate swap

31 Loan payable Cash 31 Unrealized gain – interest rate swap Interest expense

780,000 180,000

6,000,000 180,000

159,300

780,000 159,300 20,700 6,000,000 180,000

184

Problem 14-6 2008 Jan. 1 Cash

Loan payable

Dec. 31 Interest expense Cash (8% x 3,000,000) 31 Interest rate swap receivable Unrealized gain – interest rate swap (30,000 x 3.24)

3,000,000 240,000 97,200

3,000,000 240,000 97,200

Batangas Company will receive P30,000 at the end of 2009 and can expect to receive P30,000 at the end of 2010, 2011 and 2012. Thus, the present value of the four annual payments of P30,000 is recognized on December 31, 2008 as interest rate swap receivable. 2009 Dec. 31 Interest expense Cash (9% x 3,000,000) 31 Cash

Interest rate swap receivable

270,000 30,000

31 Unrealized gain – interest rate swap Interest expense

30,000

31 Unrealized gain – interest rate swap Interest rate swap receivable (97,200 – 30,000)

67,200

31 Unrealized loss – interest rate swap Interest rate swap payable (60,000 x 2.67)

160,200

270,000 30,000 30,000 67,200

160,200

Batangas Company will make a payment of P60,000 at The end of 2010 by reason of the reduced interest rate and can expect to make payment of P60,000 at the end of 2011 and 2012. Thus, the present value of the three annual payments of P60,000 is recognized on December 31, 2009 as the interest rate swap payable.

Problem 14-7 Jan.

2008 1 Cash Loan payable

5,000,000

5,000,000

185 Dec. 31 Interest expense (10% x 5,000,000) Cash 31 Interest swap receivable Unrealized gain – interest swap (5,000,000 x 4% x 2.32) 2009 Dec. 31 Interest expense (14% x 5,000,000) Cash

500,000 500,000 464,000 464,000 700,000 700,000

31 Cash Interest rate swap receivable

200,000

31 Unrealized gain – interest rate swap Interest expense

200,000

31 Unrealized gain – interest swap Interest rate swap receivable

200,000 200,000 95,000 95,000

Unrealized gain – 12/31/2009 (5,000,000 x 2% x 1.69) Unrealized gain per book (464,000 – 200,000) Decrease in unrealized gain 2010 Dec. 31 Interest expense (12% x 5,000,000) Cash

169,000 264,000 ( 95,000) 600,000

31 Cash Interest rate swap receivable

100,000

31 Unrealized gain – interest rate swap Interest expense

100,000

31 Unrealized gain – interest swap Interest rate swap receivable

31 Cash Interest rate swap receivable Unrealized gain – interest rate swap

100,000 100,000

24,000 24,000

Unrealized gain – 12/31/2010 (5,000,000 x 1% x .90) Unrealized gain per book (169,000 – 100,000) Decrease in unrealized gain 2011 Dec. 31 Interest expense (11% x 5,000,000) Cash

600,000

45,000 69,000 (24,000) 550,000 50,000

550,000 45,000 5,000

Dec. 31 Unrealized gain – interest rate swap Interest expense 31 Loan payable Cash

50,000 5,000,000

186 50,000 5,000,000

Problem 14-8 2008 Jan. 1 Cash Loan payable Dec. 31 Interest expense (5,000,000 x 8%) Cash 31 Interest swap receivable Unrealized gain – interest rate swap (5,000,000 x 2% x 2.49) 2009 Dec. 31 Interest expense (5,000,000 x 10%) Cash

5,000,000 400,000

249,000

500,000 100,000

31 Unrealized gain – interest rate swap Interest expense

100,000

31 Interest rate swap receivable Unrealized gain – interest rate swap (5,000,000 x 2% x 2.49)

107,500

Unrealized gain – 12/31/2009 (5,000,000 x 3% x 1.71) Unrealized gain per book (249,000 – 100,000) Increase in unrealized gain

500,000 100,000 100,000 107,500 256,500 149,000 107,500

550,000

31 Cash Interest swap receivable

150,000

31 Unrealized gain – interest rate swap Interest expense

150,000

31 Interest rate swap receivable Unrealized gain – interest rate swap

400,000

249,000

31 Cash Interest rate swap receivable

2010 Dec. 31 Interest expense (5,000,000 x 11%) Cash

5,000,000

550,000 150,000 150,000

71,500 71,500

187 Unrealized gain – 12/31/2010 (5,000,000 x 4% x .89) Unrealized gain per book (256,500 – 150,000) Increase in unrealized gain 2011 Dec. 31 Interest expense (5,000,000 x 12%) Cash

178,000 106,500 71,500 600,000

31 Cash Interest rate swap receivable Unrealized gain – interest swap

200,000

31 Unrealized gain – interest swap Interest expense

200,000

31 Loan payable Cash

600,000 178,000 22,000 200,000

5,000,000

5,000,000

Problem 14-9 2008 Jan. 31 Cash Note payable

1,000,000 1,000,000

Dec. 31 Interest expense (1,000,000 x 8%) Cash

80,000

31 Note payable Gain on note payable

34,760

80,000 34,760

On every year-end the note payable is measured at fair value. The fair value is equal to the present value of the principal plus the present value of future interest payments. PV of principal (1,000,000 x .8264) PV of interest (80,000 x 1.7355) Fair value of note payable – 12/31/2008 Carrying value of note payable Decrease in carrying value – gain 31 Loss on interest rate swap Interest rate swap payable

826,400 138,840 965,240 1,000,000 34,760 34,760

34,760

The derivative which is the interest rate swap is also measured at fair value. The fair value is equal to the present value of the net cash settlement with the speculator.

188 Variable interest (1,000,000 x 10%) Fixed interest (1,000,000 x 8%) Net cash payment to speculator Multiply by PV of an ordinary annuity of 1 at 10% for two periods Fair value of interest swap payable – 12/31/2008

100,000 80,000 20,000 1.7355 34,760*

*20,000 times 1.7355 equals P34,760. There is a difference of P50 due to rounding. The gain on note payable and the loss on interest rate swap are recognized immediately in profit or loss because the interest rate swap is designated as fair value hedge. 2009 Dec. 31 Interest expense Cash Note payable

96,524 80,000 16,624

Actually, on December 31, 2008, there is a discount on note payable because the fair value is P965,240 and the face value is P1,000,000. This discount is amortized using the effective interest method. Interest expense (965,240 x 10%) Interest paid (1,000,000 x 8%) Amortization of discount – increase in note payable 31 Note payable Gain on note payable

96,524 80,000 16,524 8,792

PV of principal (1,000,000 x .9009) PV of interest payment (80,000 x .9009) Fair value of note payable – 12/31/2009 Carrying value of note payable (965,240 – 16,524) Decrease in carrying value – gain 31 Interest rate swap payable Cash

8,792 900,900 72,072 972,972 981,764 8,792

20,000 20,000

This is the cash payment to the speculator as a result of the increase in market rate of interest on January 1, 2009. 31 Loss on interest rate swap Interest rate swap payable

12,267 12,267

189 Variable interest (1,000,000 x 11%) Fixed interest (1,000,000 x 8%) Net cash payment to speculator Multiply by PV of 1 at 11% for one period Fair value of interest rate swap payable – 12/31/2009 Carrying value of interest rate swap payable (34,760 – 20,000) Increase in interest rate swap payable 2010 Dec. 31 Interest expense Cash Note payable

107,028

Interest expense (972,972 x 11%) Interest paid Amortization of discount

110,000 80,000 30,000 .9009 27,027 14,760 12,267

80,000 27,028 107,028* 80,000 27,028

*972,972 x 11% equals P107,027 or a difference of P1 due to rounding to bring the carrying value of the note payable to P1,000,000 on maturity date. 31 Loss on interest rate swap Interest rate swap payable

2,973 2,973

Final cash payment to speculator Carrying value of interest rate swap payable Loss on interest rate swap 31 Interest rate swap payable Cash

30,000 27,027 2,973 30,000

30,000

Final settlement with the speculator. 31 Note payable Cash

1,000,000 1,000,000

Repayment of the loan to the bank.

Problem 14-10

Requirement 1

2008 Dec. 31 Forward contract receivable Unrealized gain – forward contract (5,000 x 300)

1,500,000

2009 Jan. 1 Tree inventory (5,000 x 1,800) Cash

9,000,000

1,500,000

9,000,000

190 1 Cash Forward contract receivable

1,500,000

1 Unrealized gain – forward contract Gain on forward contract

1,500,000

1,500,000 1,500,000

Requirement 2 2008 Dec. 31 Unrealized loss – forward contract Forward contract payable (5,000 x 100) 2009 Jan. 1 Tree inventory (5,000 x 1,400) Cash

500,000 500,000 7,000,000

1 Forward contract payable Cash

500,000

1 Loss on forward contract Unrealized loss – forward contract

500,000

7,000,000 500,000 500,000

Problem 14-11 2008 Dec. 31 Forward contract receivable 893,000 Unrealized gain – forward contract (1,000,000 x .893)

893,000

2009 Dec. 31 Unrealized gain – forward contract Forward contract receivable

893,000

893,000

Cancelation of the forward contract receivable because of the reduction of market price on December 31, 2009 and January 1, 2010. 31 Unrealized loss – forward contract Forward contract payable (100,000 x 5) 2010 Jan. 1 Fish inventory (100,000 x 75) Cash

500,000 500,000 7,500,000

1 Forward contract payable Cash

500,000

1 Loss on forward contract Unrealized loss – forward contract

500,000

7,500,000 500,000 500,000

191

Problem 14-12 2008 Dec. 31 Forward contract receivable Unrealized gain – forward contract (50,000 x P10)

500,000

2009 March 1 Unrealized gain – forward contract Forward contract receivable

100,000 100,000

Forward contract receivable – 3/1/2009 (500,000 x P8) Forward contract receivable – 12/31/2008 Decrease in derivative asset 1 Cash Forward contract receivable 1 Purchases (500,000 x 58) Cash

Problem 14-13

400,000 500,000 (100,000) 400,000 2,900,000

1 Unrealized gain – forward contract Gain on forward contract

500,000

400,000

400,000 2,900,000 400,000

Requirement 1

2008 Dec. 31 Futures contract receivable Unrealized gain – futures contract (50,000 x 10) 2009 Jan. 1 Purchases Cash (50,000 x 160)

500,000

8,000,000

1 Cash Futures contract receivable

500,000

1 Unrealized gain – futures contract Gain on futures contract

500,000

500,000

8,000,000 500,000 500,000

Requirement 2 2008 Dec. 31 Unrealized loss – futures contract Futures contract payable (50,000 x 5) 2009 Jan. 1 Purchases Cash (50,000 x 145)

250,000 250,000 7,250,000

7,250,000

192 1 Futures contract payable Cash

250,000

1 Loss on futures contract Unrealized loss - futures contract

250,000

250,000 250,000

Problem 14-14 2008 Dec. 31 Futures contract receivable Unrealized gain – futures contract (100,000 x 15)

1,500,000

2009 Jan. 1 Purchases Cash (100,000 x 65)

6,500,000

1,500,000

6,500,000

1 Cash Futures contract receivable

1,500,000

1 Unrealized gain – futures contract Gain on futures contract

1,500,000

1,500,000 1,500,000

Problem 14-15 2008 Dec. 31 Unrealized loss – futures contract Futures contract payable (25,000 x 5) 2009 June 1 Unrealized loss – futures contract Futures contract payable

125,000 125,000 75,000

Futures contract payable – 6/1/2009 (25,000 x P8) Futures contract payable – 12/31/2008 Increase in derivative liability 1 1 1

Futures contract payable Cash Purchases (25,000 x 42) Cash Loss on futures contract Unrealized loss – futures contract

75,000 200,000 125,000 75,000

200,000 200,000 1,050,000 1,050,000 200,000 200,000

193 Problem 14-16 Requirement 1 2008 Dec. 31 Call option Cash 2009 July 1 Call option Gain on call option

50,000

700,000 700,000

Fair value of call option (150,000 x 5) Payment for call option Increase 2009 July 1 1

Cash Call option Purchases Cash (150,000 x 35)

50,000

750,000 50,000 700,000 750,000 5,250,000

750,000 5,250,000

Requirement 2 2008 Dec. 31 Call option Cash 2009 July 1 Purchases Cash (150,000 x 28) 1 Loss on call option Call option

50,000 50,000 4,200,000 50,000

4,200,000 50,000

Problem 14-17 2008 Dec. 1 Call option Cash Dec. 31 Call option Unrealized gain - call option Fair value (200,000 x 2) Payment for call option Increase

20,000 380,000

20,000 380,000 400,000 20,000 380,000

2009 June 1 Call option Unrealized gain – call option

194 200,000 200,000

Call option – 6/1/2009 (200,000 x P3) Call option – 12/31/2008 Increase in derivative asset 1

Cash Call option

1

Purchases (200,000 x P28) Cash

1

Unrealized gain – call option Gain on call option

600,000 400,000 200,000 600,000 5,600,000 600,000

600,000 5,600,000 600,000

Problem 14-18 2008 Dec. 1 Put option Cash 2009 Feb. 1 Cash (50,000 x 180) Sales 1

Loss on put option Put option

100,000

100,000

9,000,000 9,000,000 100,000 100,000

With the price above the put option price, on the part of the seller, there is no reason to exercise the option. It is better to sell the product on the open market. Thus, the output option is not exercised on February 1, 2009 and has no value.

Problem 14-19 2008 Sept. 1 Equipment Accounts payable Dec. 31 Loss on foreign exchange Accounts payable Peso equivalent – 12/31/2008 Peso equivalent – 09/01/2008 Loss on foreign exchange

2,250,000 50,000

2,250,000 50,000 2,050,000 2,000,000 50,000

195 31 Forward contract receivable Gain on forward contract 2009 March 1 Loss on foreign exchange Accounts payable

50,000 50,000 100,000

Peso equivalent – 3/1/2009 Peso equivalent – 12/31/2008 Loss on foreign exchange

2,150,000 2,050,000 100,000

1 Forward contract receivable Gain on forward contract

100,000

1

150,000

1

Cash Forward contract receivable Accounts payable (50,000 x 43) Cash

100,000

100,000 150,000 2,150,000 2,150,000

Problem 14-20 2008 Dec. 31 Forward contract receivable Unrealized gain – forward contract ($50,000 x P1)

50,000

2009 March 31 Forward contract receivable Unrealized gain – forward contract ($50,000 x P2)

100,000

31 Cash Forward contract receivable 31 Purchases ($50,000 x P43) Cash 31 Unrealized gain – forward contract Purchases

50,000

150,000 2,150,000 150,000

100,000 150,000 2,150,000 150,000

Problem 14-21 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 – 12/31/2008 Underlying fixed price Derivative asset

196 1,500 1,200 300

Forward contract receivable (8,000 x 300)

2,400,000

Present value of derivative asset (2,400,000 x .91)

2,184,000

The present value of P2,184,000 is recognized as forward contract receivable on December 31, 2008 because the amount is collectible on January 1, 2010, one year from December 31, 2008. Question 3 Answer B Market price – 12/31/2009 Underlying fixed price Derivative liability Forward contract payable – 12/31/2009 (8,000 x 200)

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

Problem 14-22 Answer C Fair value of call option (120 – 100 = 20 x 10,000)

200,000

Problem 14-23 Answer B Exchange rate on July 31 (80,000,000 / 92) Strike price (80,000,000 / 100) Derivative asset Call option payment Saving

869,565 800,000 69,565 10,000 59,565

Problem 14-24 Question 1 Answer A Camry’s payment to Corolla (5,000,000 x 2%)

100,000

Question 2 Answer C Fair value of interest rate swap (100,000 x .926)

92,600

Problem 14-25 Answer C Notional amount Exchange rate on December 31, 2008 (47,850,000 / 115) Fair value of forward contract receivable

435,000 416,087 18,913

197

CHAPTER 15 Problem 15-1

Problem 15-2

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

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

D C A D D C A B A C

Problem 15-3

D C D C C C B C D C

1. 2. 3. 4. 5.

A C A A D

Problem 15-4 1. Machinery Cash 2. Land (2/5 x 5,500,000) Building (3/5 x 5,500,000) Cash 3. Investment in equity security Cash Delivery equipment (5,000 x 120) Investment in equity security Gain on exchange Taxes and licenses Cash 4. Equipment Donated capital Donated capital Cash 5. Land Building Share capital (60,000 x 100) Share premium

500,000 2,200,000 3,300,000

500,000

5,500,000

500,000 600,000

500,000 500,000 100,000

3,000 3,000 1,000,000 1,000,000 25,000 25,000 2,000,000 5,500,000

6,000,000 1,500,000

198

Problem 15-5 Net method

Gross method

a. Within the discount period:

a. Within the discount period:

1. Machinery Accounts payable (500,000 x 98%)

490,000

2. Accounts payable Cash

490,000

490,000

490,000

b. Beyond the discount period: 1. Machinery Accounts payable

490,000

2. Accounts payable Purchase discount lost Cash

490,000 10,000

1. Machinery Accounts payable

500,000

2. Accounts payable Cash Machinery

500,000

490,000

500,000

1. Machinery 500,000 Accounts payable

500,000

2. Accounts payable 500,000 Purchase discount lost 10,000 Cash Machinery

500,000 10,000

2008 Jan. 1 Equipment Discount on note payable Cash Note payable

580,000 120,000 200,000 500,000

Dec. 31 Note payable Cash

100,000

31 Interest expense Discount on note payable

2009 Dec. 31 31

490,000 10,000

b. Beyond the discount period:

Problem 15-6

2008 2009 2010 2011 2012

500,000

Note payable 500,000 400,000 300,000 200,000 100,000 1,500,000

Note payable Cash Interest expense Discount on note payable

40,000 Fraction 5/15 4/15 3/15 2/15 1/15

100,000 40,000

Amortization 40,000 32,000 24,000 16,000 8,000 120,000 100,000 32,000

100,000 32,000

199 Problem 15-7 Down payment Present value of note (200,000 x 3.17) Total cost 2008 Jan. 1

100,000 634,000 734,000

Machinery Discount on note payable Cash Note payable

734,000 166,000 100,000 800,000

Dec. 31 Note payable Cash

200,000

31 Interest expense Discount on note payable Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011

Payment 200,000 200,000 200,000 200,000

2009 Dec. 31 Note payable Cash 31 Interest expense Discount on note payable

63,400 10% interest 63,400 49,740 34,714 18,146

Principal 136,600 150,260 165,286 181,854

200,000 63,400

Present value 634,000 497,400 347,140 181,854 200,000 49,740

200,000 49,740

Problem 15-8 1. Building Cash Share capital Share premium

7,000,000

2. Land Income from donation

1,500,000

3. Machinery (800,000 x 95%) Cash

760,000

4. Equipment Note payable

200,000

1,000,000 5,000,000 1,000,000 1,500,000 760,000 200,000

200

Problem 15-9 1. Land (1/4 x 6,000,000) Building (3/4 x 6,000,000) Machinery (8/12 x 1,800,000) Office equipment (4/12 x 1,800,000) Delivery equipment Cash

1,500,000 4,500,000 1,200,000 600,000 500,000

2. Land Building Machinery Share capital Share premium

1,000,000 5,000,000 2,000,000 6,000,000 2,000,000

3. Land Donated capital

500,000

4. Machinery (900,000 x 98%) Cash

882,000

Machinery Cash 5. Furniture and fixtures (400,000 x .797) Discount on note payable Note payable

8,300,000

35,000

500,000 882,000 35,000

318,800 81,200 400,000

Problem 15-10 1. Land Accumulated depreciation Equipment – old Gain on exchange

1,500,000 700,000

Fair value of equipment given Less: Book value Gain on exchange

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

2. Equipment - new Accumulated depreciation Equipment – old

1,300,000 700,000

3. Equipment - new Accumulated depreciation Equipment – old Cash Gain on exchange

2,000,000 700,000

2,000,000

2,000,000 500,000 200,000

201 Fair value Cash payment Cost of new asset

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

Fair value Less: Book value Gain on exchange

1,500,000 1,300,000 200,000

Problem 15-11 1. Computer Inventory (car) Cash Gain on exchange

430,000

2. Machinery – new (110,000 + 30,000) Accumulated depreciation Loss on exchange Machinery – old Cash

140,000 120,000 10,000

300,000 50,000 80,000

Fair value of asset given Book value Loss on exchange

240,000 30,000 110,000 120,000 ( 10,000)

Problem 15-12 ABC Equipment - new 500,000 Accumulated depreciation 2,000,000 Equipment – old 2,400,000 Gain on exchange 100,000

XYZ Equipment – new 500,000 Accumulated depreciation 1,750,000 Equipment – old 2,200,000 Gain on exchange 50,000

Problem 15-13 Equipment – new Loss on exchange Accumulated depreciation Equipment – old

1,000,000 200,000 1,800,000 3,000,000

Problem 15-14 Company A Machinery – new (600,000 + 200,000) Accumulated depreciation Machinery – old Cash Gain on exchange (600,000 – 500,000)

800,000 1,500,000 2,000,000 200,000 100,000

202 Company B Machinery – new (800,000 - 200,000) Accumulated depreciation Cash Machinery – old Gain on exchange (800,000 – 700,000)

600,000 1,800,000 200,000 2,500,000 100,000

Problem 15-15 Equipment - new Accumulated depreciation Loss on exchange Equipment – old Cash

1,400,000 1,050,000 50,000

1,200,000 1,300,000

Fair value Cash payment (1,600,000 – 300,000) Cost of new asset

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

Fair value Less: Book value Loss on exchange

100,000 ( 150,000) ( 50,000)

Problem 15-16 Cash price without trade in Cash payment Trade in value Less: Book value Gain on exchange Equipment - new Accumulated depreciation Equipment – old Cash Gain on exchange

1,400,000 980,000 420,000 400,000 20,000 1,400,000 600,000 1,000,000 980,000 20,000

Problem 15-17 Delivery equipment - new Accumulated depreciation Loss on exchange Input tax Insurance Taxes and licenses Delivery equipment – old Cash

2,300,000 1,300,000 150,000 300,000 120,000 10,000

1,500,000 2,680,000

203 Fair value of asset given Cash paid Total Less: VAT Insurance Registration fee Cost of new asset

300,000 120,000 10,000

Fair value Book value Loss on exchange

Problem 15-18 1. Direct labor Materials Overhead 2. Direct labor Materials Overhead 135 / 180 x 2,000,000 45 / 180 x 2,000,000 3. Direct labor Materials Overhead 42 / 60 x 2,000,000 18 / 60 x 2,000,000

50,000 2,680,000 2,730,000 430,000 2,300,000 50,000 200,000 (150,000)

Total 6,000,000 7,000,000 2,000,000 15,000,000 6,000,000 7,000,000 2,000,000 _________ 15,000,000 6,000,000 7,000,000 2,000,000 _________ 15,000,000

Finished goods 4,200,000 3,000,000 2,000,000 9,200,000

Building 1,800,000 4,000,000 -___ 5,800,000

4,200,000 3,000,000

1,800,000 4,000,000

1,500,000 _________ 8,700,000

500,000 6,300,000

4,200,000 3,000,000

1,800,000 4,000,000

1,400,000 _________ 8,600,000

600,000 6,400,000

Problem 15-19 a. Materials Direct labor Overhead Cost of machinery Overhead Charged to finished goods (75% x 4,000,000) Charged to machinery b. Materials Direct labor Overhead (1/5 x 3,600,000) Cost of machinery

500,000 1,000,000 600,000 2,100,000 3,600,000 3,000,000 600,000 500,000 1,000,000 720,000 2,220,000

204 Direct labor: Finished goods Machinery

4,000,000 1,000,000 5,000,000

4/5 1/5

Problem 15-20 Date January 1 June 30 December 31

Expenditure

Months

Amount

2,000,000 2,000,000 1,000,000 5,000,000

12 6 0

24,000,000 12,000,000 -____ 36,000,000

Average expenditures (36,000,000 x 12)

3,000,000

Average capitalization rate (1,060,000 / 8,000,000)

13.25%

Expenditures on building Interest (3,000,000 x 13.25%) Total cost of building

5,000,000 397,500 5,397,500

Problem 15-21 Average capitalization rate (900,000 / 8,000,000) Date January 1 March 31 September 30

11.25%

Expenditure

Months

Amount

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

12 9 3

24,000,000 9,000,000 9,000,000 42,000,000

Average expenditures (42,000,000 / 12)

3,500,000

Expenditures on construction Specific interest cost: Actual interest Interest income General interest cost: Average expenditures Less: Specific borrowing General borrowing Capitalization rate Total cost of building

6,000,000 240,000 ( 10,000) 3,500,000 2,000,000 1,500,000 11.25%

230,000

168,750 6,398,750

205 Problem 15-22 Date January 1 March 31 June 30 September 30 December 31

Expenditure 1,500,000 1,000,000 1,000,000 1,000,000 1,000,000 5,500,000

Months 12 9 6 3 0

Amount 18,000,000 9,000,000 6,000,000 3,000,000 -___ 36,000,000

Average expenditures (36,000,000 x 12)

3,000,000

Expenditures on construction Interest cost (3,000,000 x 11.5%) Total cost

5,500,000 345,000 5,845,000

Problem 15-23 Date January 1 July 1 November 1

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

Months 12 6 2

Amount 12,000,000 12,000,000 6,000,000 30,000,000

Average expenditures (30,000,000 / 12)

2,500,000

Average expenditures Applicable to specific loan Applicable t general loan

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

Actual expenditures Capitalizable interest: Specific (1,000,000 x 10%) General (1,500,000 x 12%) Total cost of building

6,000,000 100,000 180,000 6,280,000

Problem 15-24 Date January 1, 2008 April 1, 2008 December 1, 2008

Expenditure 4,000,000 5,000,000 3,000,000 12,000,000

Average expenditures in 2008 (96,000,000 / 12) Applicable to specific loan Applicable t general loan

Months 12 9 1

Amount 48,000,000 45,000,000 3,000,000 96,000,000 8,000,000 (3,000,000) 5,000,000

206 Actual expenditures in 2008 Capitalizable interest in 2008 Specific (3,000,000 x 10%) General (5,000,000 x 12%) Total cost of building Date January 1, 2009 March 1, 2009

Expenditure 12,900,000 6,000,000 18,900,000

12,000,000 300,000 600,000 12,900,000 Months

Amount

6 4

77,400,000 _24,000,000 101,400,000

Average expenditures in 2009 (101,400,000 / 6) Applicable to specific loan Applicable to general loan

16,900,000 ( 3,000,000) 13,900,000

Note that the construction period in 2009 is only 6 months because the building was completed on June 30, 2009. Thus, the average expenditures should be for 6 months only. Actual expenditures in 2009 Capitalizable interest in 2009 Specific (3,000,000 x 10% x 6/12) General (13,900,000 x 12% x 6/12) Total cost of new building – 6/30/2009

18,900,000 150,000 834,000 19,884,000

Problem 15-25 1. Cash Deferred income-government grant

30,000,000 30,000,000

Environmental expenses Cash

2,000,000

Deferred income-government grant Income from government grant (2/20 x 30,000,000)

3,000,000

2. Cash Deferred income-government grant Building Cash

2,000,000 3,000,000 40,000,000 40,000,000 50,000,000 50,000,000

Depreciation Accumulated depreciation (50,000,000 / 20)

2,500,000

Deferred income-government grant Income from government grant (40,000,000 / 20)

2,000,000

2,500,000 2,000,000

207 3. Land Deferred income-government grant Building Cash

50,000,000 50,000,000 80,000,000 80,000,000

Depreciation Accumulated depreciation (80,000,000 / 25)

3,200,000

Deferred income-government grant Income from government grant (50,000,000 / 25)

2,000,000

4. Cash Income from government grant

10,000,000

3,200,000 2,000,000 10,000,000

Problem 15-26 Answer D Cost of land (5,400,000 x 2/5)

2,160,000

Problem 15-27 Answer B Cash price Installation cost Total cost

950,000 30,000 980,000

Problem 15-28 Answer C Cash price Installation cost Total cost

2,000,000 50,000 2,050,000

Problem 15-29 Answer B Present value of first note payable (500,000 x 5.65) Present value of second note payable (3,000,000 x .80) Total cost of machinery

2,825,000 2,400,000 5,225,000

Problem 15-30 Answer D First payment on December 30, 2008 Present value of next 7 payments (200,000 x 4.712) Total cost of machine

200,000 942,400 1,142,400

Another computation: PV of annuity of 1 in advance for 8 periods (200,000 x 5.712)

1,142,400

208 Problem 15-31 Answer A Invoice price Discount (2% x 700,000) Freight and insurance Cost of assembling and installation Total cost

700,000 ( 14,000) 3,000 5,000 694,000

Problem 15-32 Answer A Equipment: Invoice price Discount (5% x 600,000) Land (at its fair value) Machinery: Acquisition cost Installation cost Trial run and testing cost Construction of base Total

600,000 ( 30,000) 275,000 7,000 18,000 10,000

570,000 1,100,000

310,000 1,980,000

Problem 15-33 Answer B Fair value of asset given Cash payment Total cost

700,000 160,000 860,000

Problem 15-34 Answer B Fair value of asset given Cash payment Cost of new inventory

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

Problem 15-35 Answer A Fair value of asset given Less: Cost of asset given Gain on exchange

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

Problem 15-36 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.

209 Problem 15-37 Answer A

Average expenditures (20,000,000 / 2) Multiply y capitalization rate Interest on average expenditures

10,000,000 12% 1,200,000

The capitalizable borrowing cost is limited to the actual borrowing cost incurred. In this case, the computed amount of P1,200,000 is more than the actual borrowing cost of P1,020,000. Accordingly, the capitalizable interest is P1,020,000. Note that in computing the average expenditures, the amount of P20,000,000 is simply divided by 2 because the said amount is incurred evenly during the year ended 2008.

Problem 15-38 Answer C Since the actual interest incurred is not given, the interest on the average expenditures is determined. Average expenditures (9,600,000 / 2) Interest on average expenditures (4,800,000 x 10%) Interest income on unexpended portion Capitalizable interest

4,800,000 480,000 (320,000) 160,000

Problem 15-39 Answer B Accumulated expenditures at the end of two years Average expenditures in the third year (8,000,000 / 2) Total Capitalizable interest (7,000,000 x 9%)

3,000,000 4,000,000 7,000,000 630,000

Problem 15-40 Answer B Average accumulated expenditures Specific borrowing Applicable to general borrowing Specific (6% x 1,500,000) General (9% x 1,000,000) Capitalizable interest

2,500,000 (1,500,000) 1,000,000 90,000 90,000 180,000

210 CHAPTER 16 Problem 16-1 1. 2. 3. 4. 5.

C D D D B

Problem 16-2

Land Building Cash paid for land and old building 1,000,000 Removal of old building 50,000 Payment to tenants of old building to vacate premises 15,000 Architect fee 200,000 Building permit 30,000 Fee for title search 10,000 Survey before construction 20,000 Excavation 100,000 Cost of new building constructed 6,000,000 Assessment fee 5,000 Cost of grading, leveling and landfill 45,000 Driveways and walks 40,000 Temporary quarters for construction crew 80,000 Temporary building to house tools and materials 60,000 Cost of construction changes _________ 50,000 6,560,000 1,145,000

Note: The cost of replacing windows is treated as expense. Problem 16-3 Cost of land Legal fees Payment of mortgage Payment of taxes Cost of razing building Proceeds from sale of materials Grading and drainage Architect fee Payment to contractor Interest cost Driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing lights in parking lot Premium for insurance

Land 2,000,000 10,000 50,000 20,000 30,000 ( 5,000) 15,000

Building

Land improvement

200,000 8,000,000 300,000

_______ 2,120,000

25,000 8,525,000

40,000 55,000 5,000 _______ 100,000

The payment for medical bills and the cost of open house party are outright expenses because they are not a necessary cost of acquiring the land and building.

211

Problem 16-4

Purchase price Materials Excavation Labor Remodeling Cash discounts Supervision Compensation insurance Clerical and other expenses Paving of streets Plans and specifications Legal cost - land

Land 1,300,000

10,000 1,310,000

Office Factory Land building building improvements 700,000 3,200,000 100,000 2,500,000 200,000 ( 60,000) 30,000 50,000 30,000 40,000 150,000 ________ ________ ______ 900,000 6,000,000

40,000

1. The imputed interest on corporation’s own money is not capitalizable. 2. The payment of claim for injuries not covered by insurance and the legal cost of injury claim are treated as expense. 3. Saving on construction is not recognized.

Problem 16-5 Taxes in arrears Payment for land Demolition of old building Total cost of land

50,000 1,000,000 100,000 1,150,000

Architect fee Payment to city hall Contract price Safety fence around construction site Safety inspection on building Removal of safety fence Total cost of factory building

230,000 120,000 5,000,000 35,000 30,000 20,000 5,435,000

Problem 16-6 Purchase price Title clearance fee Cost of razing old building Scrap value of old building Total cost of land Construction cost of new building

3,000,000 50,000 100,000 ( 10,000) 3,140,000 8,000,000

212 Problem 16-7 Purchase price Remodeling Salvage materials Grading, leveling and other permanent improvement Repairs

Land 1,000,000

Building 4,000,000 150,000 ( 5,000)

50,000 ________ 1,050,000

10,000 4,155,000

The repairs are capitalized because they are necessary prior to the occupancy and intended use of the building.

Problem 16-8 Fair value Repairs Remodeling Invoice price Discount Base

Land 1,500,000

Building 5,000,000 200,000 300,000

Machinery

1,000,000 20,000) _________ _________ 50,000 5,500,000 1,030,000 1,500,000 (

The driveway and parking lot are charged to land improvements.

Problem 16-9 Fair value Repairs Special tax assessment Platform Remodeling Purchase price Discount Freight Installation

Land Building Machinery 4,000,000 1,500,000 200,000 30,000 70,000 400,000 800,000 ( 40,000) 20,000 _________ _________ 30,000 4,600,000 2,380,000 1,530,000

1,500,000

Problem 16-10 Purchase price Commission Legal fees Title guarantee

2,000,000 100,000 50,000 10,000

Contract price 6,000,000 Plans, specification and blueprint 100,000 Architectural fee 250,000

Cost of razing old building Salvage value of materials Cost of land

75,000 ( 5,000) 2,230,000

Cost of new building

6,350,000

213 Problem 16-11 Land Balances, Jan. 1 Acquisition of land - #621: Purchase price Commission Clearing cost Sale of timber and gravel Acquisition of land - #622: Purchase price Cost of demolition New building: Construction cost Excavation fee Architectural design Building permit Improvements: Electrical work Construction extension (800,000 x 1/2) Improvements on office space Purchase of new machine: Invoice price Freight Unloading charge Balances, December 31

1,500,000

Building

Leasehold improvements

Machinery

4,000,000

500,000

1,000,000

3,000,000 60,000 15,000 ( 5,000) 4,000,000 300,000 5,000,000 50,000 150,000 40,000 350,000 400,000 650,000 1,750,000 _________ 8,870,000

_________ 9,240,000

_________ 1,900,000

20,000 __ 30,000 2,800,000

The third tract of land should be presented as current asset because it was “classified as held for sale”.

Problem 16-12

Land Land improvements

Balances, Jan. 1 3,500,000 Land acquired 1,250,000 Issuance of share capital: 12/36 x 4,500,000 1,500,000 24/36 x 4,500,000 New machinery New parking lot, street and sidewalk

900,000

Building

Machinery

7,000,000

1,500,000

3,000,000 3,400,000 750,000

Machinery sold Balances, Dec. 31

________ ________ _________ 1,650,000 10,000,000 6,250,000

(

500,000) 4,400,000

The “assessed values” do not represent the fair values of the land and building but are used in allocating the market value of the share capital.

214 Problem 16-13 Invoice price Cash discount Freight Installation cost Testing cost

Problem 16-14 3,000,000 Invoice cost 4,000,000 ( 150,000) Discount (5% x 4,000,000) ( 200,000) 50,000 Transportation 40,000 30,000 Installation 100,000 Trial run-salary of engineer 50,000 20,000 Cash allowance ( 60,000) 2,950,000 3,930,000

Problem 16-15 Cost paid (896,000 – 96,000) Cost of transporting machine Installation cost Testing cost Safety rails and platform Water device Cost of adjustment Estimated dismantling cost Total cost of machine

800,000 30,000 50,000 40,000 60,000 80,000 75,000 65,000 1,200,000

Note that the estimated dismantling cost is capitalized because the company has a present obligation as required by contract. In the absence of a present obligation, the estimated dismantling cost is not capitalized.

Problem 16-16 Second hand market value Overhaul and repairs Installation Testing Hauling Safety device

2,400,000 150,000 80,000 110,000 10,000 250,000 3,000,000

Problem 16-17 1. Materials Labor Installation Trial run Discount Overhead

600,000 400,000 60,000 30,000 ( 40,000) 150,000 1,200,000

2. Adjusting entries: 1. Loss on retirement of old machinery Machinery (20,000 – 14,000)

6,000 6,000

215 2. Purchase discount Machinery

40,000 40,000

3. Machinery Factory overhead

150,000

4. Profit on construction Machinery

100,000

150,000 100,000

5. Tools Machinery

90,000

6. Depreciation – tools Tools (90,000 / 3 x 4/12)

10,000

7. Machinery Accumulated depreciation Depreciation – machinery

90,000 10,000 128,600 40,000 88,600

Depreciation recorded Correct depreciation (1,200,000 / 10 x 4/12) Overdepreciation

128,600 40,000 88,600

Problem 16-18 Initial design fee Executive chairs and desks Storm windows and installation Installation of automatic door opening system Overhead crane Total capital expenditures

150,000 200,000 500,000 200,000 350,000 1,400,000

Problem 16-19 1. Accumulated depreciation Loss on retirement of building Building Building Cash Depreciation (8,100,000 / 20) Accumulated depreciation

400,000 1,600,000 2,000,000 2,500,000 2,500,000 405,000 405,000

Building (9,000,000 + 2,500,000 – 2,000,000) Accumulated depreciation (1,800,000 – 400,000) Book value 2. Accumulated depreciation (1,960,000 x 20%) Loss on retirement of building Building (2,500,000 x .784)

9,500,000 1,400,000 8,100,000 392,000 1,568,000 1,960,000

216 Building Cash Depreciation (8,132,000 / 20) Accumulated depreciation

2,500,000 2,500,000 406,600 406,600

Building (9,000,000 – 1,960,000 + 2,500,000) Accumulated depreciation (1,800,000 – 392,000) Book value

9,540,000 1,408,000 8,132,000

Problem 16-20 a. Annual depreciation (8,400,000 / 30)

280,000

Age of building (7,000,000 / 280,000)

25 years

b. Building Cash

2,500,000 2,500,000

c. Building (8,400,000 + 2,500,000) Less: Accumulated depreciation Book value d. Depreciation (3,900,000 / 15) Accumulated depreciation

10,900,000 7,000,000 3,900,000 260,000 260,000

Original life Less: Expired life Remaining useful life, beginning of current year Add: Extension in life Revised useful life

30 25 5 10 15

Problem 16-21 1. Building Cash 2. Depreciation Accumulated depreciation 3. Building

10,500,000 10,500,000 200,000 200,000 3,000,000

Cash Accumulated depreciation (2,500,000 / 50 x 2) Loss on retirement of building Cash 4. Depreciation (10,700,000 – 500,000 / 48) Accumulated depreciation

3,000,000 100,000 2,400,000 2,500,000 212,500 212,500

217 Building (10,500,000 + 3,000,000 – 2,500,000) Accumulated depreciation (400,000 – 100,000) Book value – 1/1/2008

11,000,000 300,000 10,700,000

Problem 16-22 1. Machinery Cash

5,000,000 5,000,000

2. Depreciation Accumulated depreciation

450,000

3. Depreciation (3,600,000 / 6) Accumulated depreciation

600,000

Cost Accumulated depreciation: 2005 2006 Book value Residual value Remaining depreciable cost – 1/1/2007

450,000 600,000 5,000,000 450,000 450,000

4. Machinery Cash

300,000

5. Depreciation (3,300,000 / 5) Accumulated depreciation

660,000

900,000 4,100,000 500,000 3,600,000 300,000 660,000

Cost Accumulated depreciation (900,000 + 600,000) Book value – 1/1/2008 Residual value Remaining depreciable cost – 1/1/2008

5,300,000 1,500,000 3,800,000 500,000 3,300,000

Problem 16-23 1. Depreciation (60,000 x 3/12) Accumulated depreciation

15,000 15,000

Accumulated depreciation (480,000 + 15,000) Loss on retirement of store equipment Store equipment 2. Depreciation (150,000 x 4/12) Accumulated depreciation

495,000 105,000 600,000 50,000 50,000

218 Cash Accumulated depreciation (1,050,000 + 50,000) Loss on sale of office equipment Office equipment 3. Depreciation (600,000 x 5/12) Accumulated depreciation Delivery equipment – new Accumulated depreciation Cash (5,000,000 – 750,000) Delivery equipment – old Gain on exchange (750,000 – 350,000)

100,000 1,100,000 300,000 1,500,000 250,000 250,000 5,000,000 2,650,000 4,250,000 3,000,000 400,000

Original cost Less: Accumulated depreciation to date (2,400,000 + 250,000) Book value 4. Accumulated depreciation Office equipment 5. Depreciation (900,000 x 9/12) Accumulated depreciation Accumulated depreciation (2,700,000 + 675,000) Fire loss Machinery

3,000,000 2,650,000 350,000

1,200,000 1,200,000 675,000 675,000 3,375,000 1,125,000 4,500,000

Problem 16-24 1. Discount on bonds payable Machinery

500,000 500,000

Interest expense (500,000 / 10 x 9/12) Discount on bonds payable

37,500

Accumulated depreciation Depreciation

75,000

37,500 75,000

Depreciation for 9 months Depreciation for 12 months (600,000 / 9/12) Depreciable cost (800,000 x 5 years) Cost Less: Residual value Depreciable cost

600,000 800,000 4,000,000 Per book 5,000,000 1,000,000 4,000,000

Adjusted 4,500,000 1,000,000 3,500,000

219 Correct depreciation for 9 months (3,500,000 / 5 x 9/12) Less: Depreciation recorded Overstatement

525,000 600,000 75,000

2. Interest expense Machinery (3,500,000 – 3,200,000)

300,000 300,000

Machinery Freight in

150,000 150,000

Accumulated depreciation Depreciation

30,000 30,000

Depreciation per book Correct depreciation (3,350,000 / 5) Overstatement

700,000 670,000 30,000

3. Loss on exchange Machinery Cost per book Correct cost Trade in value Add: Cash paid Overstatement

390,000 390,000 3,000,000 150,000 2,460,000

Trade in value Less: Book value Loss on exchange 4. Allowance for doubtful accounts Loss on exchange – accounts receivable Treasury share Per book Machinery

2,610,000 390,000 150,000 540,000 (390,000)

840,000 60,000 900,000 4,200,000

Accounts receivable Treasury shares Machinery Should be Machinery Allowance for doubtful accounts (20% x 4,200,000) Loss on accounts receivable Accounts receivable

4,200,000 4,200,000 4,200,000 3,300,000 840,000 60,000 4,200,000

220 Treasury shares Machinery

3,300,000 3,300,000

The cost of treasury shares acquired for noncash consideration is usually measured by the recorded amount of the noncash asset surrendered (SFAS No. 18).

Problem 16-25 Answer A Allocated cost of land (2,400,000 / 6,000,000 x 5,500,000) Property taxes (2,400 / 6,000 x 250,000) Cost of survey Total cost of land

2,200,000 100,000 5,000 2,305,000

Incidentally, the cost of the building is: Allocated cost (3,600 / 6,000 x 5,500,000) Property taxes (3,600 / 6,000 x 250,000) Renovation Total cost of building

3,300,000 150,000 500,000 3,950,000

Problem 16-26 Answer A Purchase price Payments to tenants Demolition of old building Legal fees Title insurance Proceeds from sale of materials Total cost of land

4,000,000 200,000 100,000 50,000 30,000 ( 10,000) 4,370,000

Problem 16-27 Answer D Purchase price of land

Land 600,000

Building

Legal fees for contract Architect fee Demolition of old building Construction cost Total cost

20,000 80,000 50,000 _______ 670,000

3,500,000 3,580,000

Problem 16-28 Answer D Acquisition price Option of building acquired Repairs Total cost

7,000,000 200,000 500,000 7,700,000

221 Problem 16-29 Answer D Purchase price Shipping Installation Testing Total cost

250,000 5,000 10,000 35,000 300,000

Problem 16-30 Answer A Problem 16-31 Answer A All expenditures are capitalized.

Problem 16-32 Answer A All costs are capitalized.

Problem 16-33 Answer C Continuing and frequent repairs Repainting of the plant building Partial replacement of roof tiles Repair and maintenance expense

400,000 100,000 150,000 650,000

Problem 16-34 Answer B Problem 16-35 Answer B

222 CHAPTER 17 Problem 17-1

Problem 17-2

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

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

A D B D D D D C C B

Problem 17-3

C A D D D B C B A A

Depreciation Table – Straight Line Year

Particular Acquisition cost

Depreciation

2008 2009 2010 2011 2012

120,000 120,000 120,000 120,000 120,000 600,000

Accumulated depreciation 120,000 240,000 360,000 480,000 600,000

Book value 635,000 515,000 395,000 275,000 155,000 35,000

Depreciation Table – Service Hours Method Year 2008 2009 2010 2011 2012

Particular Acquisition cost 14,000 x 10 13,000 x 10 10,000 x 10 11,000 x 10 12,000 x 10

Depreciation 140,000 130,000 100,000 110,000 120,000 600,000

Accumulated depreciation

Book value 635,000 495,000 365,000 265,000 155,000 35,000

140,000 270,000 370,000 480,000 600,000

Depreciation rate per hour = 600,000 / 60,000 = 10

223 Depreciation Table – Production Method Year 2008 2009 2010 2011 2012

Particular Acquisition cost 34,000 x 4 32,000 x 4 25,000 x 4 29,000 x 4 30,000 x 4

Depreciation 136,000 128,000 100,000 116,000 120,000 600,000

Accumulated Depreciation 136,000 264,000 364,000 480,000 600,000

Book value 635,000 499,000 371,000 271,000 155,000 35,000

Depreciation rate per unit of output = 600,000 / 150,000 = 4 Depreciation Table – Sum of Years’ Digits Accumulated

Year 2008 2009 2010 2011 2012

Particular Acquisition cost 5/15 x 600,000 4/15 x 600,000 3/15 x 600,000 2/15 x 600,000 1/15 x 600,000

Depreciation 200,000 160,000 120,000 80,000 40,000 600,000

depreciation 200,000 360,000 480,000 560,000 600,000

Book value 635,000 435,000 275,000 155,000 75,000 35,000

SYD = 1 + 2 + 3 + 4 + 5 = 15 Depreciation Table – Double Declining Balance

Year 2008 2009 2010 2011 2012

Particular Acquisition cost 40% x 635,000 40% x 381,000 40% x 228,600 40% x 137,160 82,296 – 35,000

Depreciation 254,000 152,400 91,440 54,864 47,296 600,000

Accumulated depreciation 254,000 406,400 497,840 552,704 600,000

Book value 635,000 381,000 228,600 137,160 82,296 35,000

Fixed rate = 100% / 5 = 20% x 2 = 40% Problem 17-4 a. Straight line method: 2008 2009

27,500 55,000

224 b. Working hours method: 550,000 Rate per hour = ------------------- = 11 50,000 hours 2008 (3,000 hours x 11) 2009 (5,000 hours x 11) c. Output method: 550,000 Rate per unit = -------------------- = 2.75 200,000 units

33,000 55,000

2008 (18,000 units x 2.75) 2009 (22,000 units x 2.75)

49,500 60,500

d. Sum of years’ digits: 10 + 1 SYD = 10 (------------) = 55 2 2008 (10/55 x 550,000 x 6/12)

50,000

2009 Jan. 1-June 30 July 1-Dec. 31 (9/55 x 550,000 x 6/12)

50,000 45,000 95,000

e. Double declining balance: 2008 (570,000 x 20% x 6/12) 2009 (570,000 – 57,000 x 20%)

57,000 102,600

Problem 17-5 Fixed rate = 1.00 - .5623 or .4377 2008 2009 2010 2011

(500,000 x .4377) (500,000 – 218,850 x .4377) (500,000 - 341,909 x .4377) (500,000 – 411,105 – 50,000)

218,850 123,059 69,196 38,895 450,000

Problem 17-6 a. Sum of years’ digit April 1, 2008 – March 31, 2009 (1,080,000 x 8/36) April 1, 2009 – March 31, 2010 (1,080,000 x 7/36)

240,000 210,000

225 Depreciation from April 1 to December 31, 2008 (240,000 x 9/12)

180,000

Depreciation for 2009: January 1 – March 31 (240,000 x 3/12) April 1 – December 31 (210,000 x 9/12) b. Double declining balance Fixed rate = 100 / 8 = 12.5 x 2 = 25%

60,000 157,500 217,500

2008 (1,200,000 x 25% x 9/12) 2009 (1,200,000 – 225,000 x 25%)

225,000 243,750

Problem 17-7 a. Service hours method: 960,000 – 60,000 Depreciation rate per hour = ---------------------------- = 112.50 8,000 hours 2008 (1,000 hours x 112.50) 2009 (2,000 hours x 112.50)

112,500 225,000

b. Sum of years’ digits: Sum of half years

=

45

2008 (9/45 x 900,000 x 3/6) 2009 January 1 – March 31 (9/45 x 900,000 x 3/6) April 1 – September 30 (8/45 x 900,000) October 1 – December 31 (7/45 x 900,000 x 3/6)

90,000 90,000 160,000 70,000 320,000

Problem 17-8 a. Rate per unit (900,000 / 180,000) 2008 (5,000 x 5) 2009 (20,000 x 5)

5.00 25,000 100,000

b. Double declining balance: Fixed rate (100% / 8 x 2) 2008 (920,000 x 25% x 6/12) 2009 (920,000 – 115,000 x 25%)

25% 115,000 201,250

226 c. Sum of years’ digits: July 1 – December 31, 2008 (900,000 x 8/36 x 6/12) January 1 – June 30, 2009 (900,000 x 8/36 x 6/12) July 1 – December 31, 2009 (900,000 x 7/36 x 6/12) Depreciation for 2009

Problem 17-9

100,000 100,000 87,500 187,500

Assets Machinery Office equipment Building Delivery equipment

Cost 310,000 110,000 1,600,000 430,000 2,450,000

Salvage 10,000 10,000 100,000 30,000

Depreciable cost 300,000 100,000 1,500,000 15 400,000 2,300,000

Life in years 5 10 4

Annual depreciation 60,000 10,000 100,000 100,000 270,000

a. Composite rate = 270,000 / 2,450,000 = 11.02% b. Composite life

= 2,300,000 / 270,000 =

8.52 years

c. Depreciation Accumulated depreciation

270,000 270,000

Problem 17-10 Assets Building Machinery Equipment

Cost 6,100,000 2,550,000 1,030,000 9,680,000

Salvage 100,000 50,000 30,000

Depreciable cost 6,000,000 2,500,000 1,000,000 9,500,000

Life in Annual years depreciation 20 300,000 5 500,000 10 100,000 900,000

a. Composite depreciation rate = 900,000 / 9,680,000 = 9.3% b. Average life = 9,500,000 / 900,000 = 10.56 years c. Depreciation Accumulated depreciation d. Cash Accumulated depreciation Machinery e. Depreciation Accumulated depreciation (9,680,000 – 2,550,000 x 9.3%)

900,000 900,000 40,000 2,510,000 2,550,000 663,090 663,090

227 Problem 17-11 2003 Jan. 1 Machinery Cash Dec. 31 Depreciation (20% x 900,000) Accumulated depreciation

900,000 900,000 180,000 180,000

2004 Dec. 31 Depreciation Accumulated depreciation

180,000

2005 Dec. 31 Depreciation Accumulated depreciation

180,000

2006 Dec. 31 Depreciation Accumulated depreciation

180,000

180,000

180,000

180,000

Cash Accumulated depreciation Machinery (4 x 45,000)

10,000 170,000 180,000

2007 Dec. 31 Depreciation (720,000 x 20%) Accumulated depreciation Cash Accumulated depreciation Machinery (14 x 45,000)

144,000 144,000 15,000 615,000 630,000

2008 Dec. 31 Depreciation Accumulated depreciation

9,000 9,000

Remaining cost Less: Balance of accumulated depreciation Book value Less: Salvage proceeds Maximum depreciation Cash Accumulated depreciation Machinery (4 x 45,000)

90,000 79,000 11,000 2,000 9,000 2,000 88,000 90,000

228

Problem 17-12 1. Old machinery overhauled (240,000 + 60,000) Accumulated depreciation 2005 (240,000 / 8) 2006 2007

300,000 30,000 30,000 30,000

Total Book value – January 1, 2008

90,000 210,000

Old machinery overhauled (210,000 / 7 years) Remaining cost of old machinery (1,152,000 – 240,000 / 8) New machinery (460,800 / 8 x 5/12) Total depreciation 2. Old machinery New machinery Cost of overhaul Total cost Accumulated depreciation: Balance – January 1 Depreciation for 2008 Book value – December 31, 2008

30,000 114,000 24,000 168,000 1,152,000 460,800 60,000 1,672,800 432,000 168,000

600,000 1,072,800

Problem 17-13 Main machine (7,500,000 / 10) First component – from January 1 to April 1, 2008 (1,200,000 / 6 x 3/12) Second component – from April 1 to December 31, 2009 (2,000,000 – 400,000 / 4 x 9/12) Total depreciation for 2008

750,000 50,000 300,000 1,100,000

The second component is depreciated over the remaining life of the main machine. The original life is 10 years and 6 years already expired. Thus, the remaining life is 4 years.

Problem 17-14 1. Tools

40,000 Cash

40,000

2. Tools

20,000 Cash

20,000

3. Cash Tools

4,000 4,000

4. Depreciation Tools

46,000 46,000

Balance of tools account Less: Estimated cost on December 31 Depreciation

196,000 150,000 46,000

229 Problem 17-15 Retirement method

March

1 Electric meters Cash

250,000 250,000

1 Cash Depreciation Electric meters July

20,000 160,000 180,000

1 Electric meters Cash

400,000

December 1 Electric meters Cash

200,000

400,000 200,000

1 Cash Depreciation Electric meters

15,000 135,000 150,000

Replacement method March July

1 Depreciation (250,000 – 20,000) Cash 1 Electric meters Cash

2008 Tools Cash Cash (300 x 50) Depreciation Tools (300 x 200) 2009 Tools Cash Cash (700 x 70) Depreciation Tools

230,000 400,000 400,000

December 1 Depreciation (200,000 – 15,000) Cash

Problem 17-16

230,000

185,000 185,000

Retirement method 120,000 120,000 15,000 45,000 60,000 360,000 360,000 49,000 111,000 160,000

230 500 x 200 200 x 300

100,000 60,000

Cost of tools retired

160,000 Replacement method

2008 Tools (100 x 300) Depreciation (300 x 30) Cash

30,000 90,000 120,000

Cash Depreciation

15,000 15,000

2009 Tools (200 x 400) Depreciation (700 x 400) Cash

80,000 280,000 360,000

Cash Depreciation

49,000 49,000 Inventory method

2008 Tools Cash

120,000

Cash Tools

15,000

Depreciation (265,000 – 200,000) Tools

65,000

120,000 15,000 65,000

2009 Tools Cash

360,000

Cash Tools

49,000

Depreciation (511,000 - 350,000) Tools

360,000 49,000 161,000 161,000

Problem 17-17 1. Land (350,000 + 450,000) Land acquired (380,000 + 25,000 + 45,000)

800,000 450,000

2. Depreciation of land improvements (180,000 / 15)

12,000

3. Depreciation of building (4,500,000 – 1,050,000 x 7.5%)

258,750

231 4. Depreciation of machinery and equipment

(1,160,000 – 60,000 / 10) (300,000 / 10) (60,000 / 10 x 6/12)

110,000 30,000 3,000 143,000

5. Fixed rate (100% / 3 x 1.5)

50%

(1,800,000 – 1,344,000 x 50%)

228,000

Problem 17-18 1. Beginning balance Acquisition (150,000 / 750,000 x 1,250,000) Total cost of land

875,000 250,000 1,125,000

Technically, the land for undetermined use is an investment property. 2. Old (7,500,000 – 1,644,500 x 8%) New (600,000/750,000 x 1,250,000 = 1,000,000 x 8%) Depreciation – building

468,440 80,000 548,440

3. 2,250,000 / 10 400,000 / 10 x 6/12 Depreciation – machinery

225,000 20,000 245,000

4. Depreciation – leasehold improvements (216,000 – 108,000 / 5 years)

21,600

5. Depreciation – land improvements 192,000 / 12 x 9/12)

12,000

Problem 17-19 1. Old building (4,672,200 x 10%) New building Direct cost Fixed (15,000 x 25) Variable (15,000 x 27) Total cost 3,000,000 x 10% Total depreciation Fixed rate (100 / 20 x 2)

467,220 2,220,000 375,000 405,000 3,000,000 300,000 767,220 10%

232

2. Old machinery (1,380,000 / 10) New machinery Invoice cost Concrete embedding Wall demolition Rebuilding of wall Total cost 400,000 / 10 x 6/12 Total depreciation

138,000 356,000 18,000 7,000 19,000 400,000 20,000 158,000

Problem 17-20 Answer A Cost of machinery (cash price) Less: Residual value Depreciable cost

1,100,000 50,000 1,050,000

Straight line depreciation (1,050,000 / 10)

105,000

Problem 17-21 Answer B Sales price Book value: Cost Accumulated depreciation (3,600,000 / 5 x 3) Gain

2,300,000 4,200,000 2,160,000

2,040,000 260,000

Problem 17-22 Answer B Accumulated depreciation – 12/31/2007 Add: Depreciation for 2008 Total Less: Accumulated depreciation on property, plant and equipment retirements (squeeze) Accumulated depreciation – 12/31/2008

Problem 17-23 Answer B A B C

Cost 550,000 200,000 40,000 790,000

Salvage 50,000 20,000

Composite life = 720,000 / 45,000

Depreciable cost Life 500,000 180,000 40,000 720,000

3,700,000 550,000 4,250,000 250,000 4,000,000

Annual depreciation 20 25,000 15 12,000 5 8,000 45,000 16 years

233 Problem 17-24 Answer D Invoice price Cash discount (2% x 4,500,000) Delivery cost Installation and testing Total cost Salvage value Depreciable cost

4,500,000 90,000) 80,000 310,000 4,800,000 800,000 4,000,000 (

Rate per unit (4,000,000 / 200,000)

20

Depreciation for 2008 (30,000 x 20)

600,000

Problem 17-25 Answer B Cost Accumulated depreciation 2007 (8/36 x 3,600,000) 2008 (7/36 x 3,600,000) Book value, 12/31/2008

4,000,000 800,000 700,000

1,500,000 2,500,000

Problem 17-26 Answer B The first three fractions are: 2006 2007 2008

10/55 9/55 8/55

Thus, the 2008 depreciation of P240,000 is equal to 8/55. Depreciable cost (240,000 / 8/55) Salvage Total cost

1,650,000 50,000 1,700,000

Problem 17-27 Answer B April 1, 2006 to March 31, 2007 (5/15 x 3,000,000) April 1, 2007 to March 31, 2008 (4/15 x 3,000,000) Accumulated depreciation, March 31, 2008

1,000,000 800,000 1,800,000

Problem 17-28 Answer A The accumulated depreciation on December 31, 2007 is recomputed following a certain method. The same is arrived at following the SYD as follows: SYD = 1 + 2 + 3 + 4 + 5 = 15

234 2005 (5/15 x 900,000) 2006 (4/15 x 900,000) 2007 (3/15 x 900,000) Accumulated depreciation – 12/31/2007

300,000 240,000 180,000 720,000

Accordingly, the SYD is followed for 2008. 2008 depreciation (2/15 x 900,000)

120,000

Problem 17-29 Answer B Straight line rate (100% / 8 years) Fixed rate (12.5 x 2) 2007 depreciation (1,280,000 x 25%) 2008 depreciation (1,280,000 – 320,000 x 25%)

12.5% 25% 320,000 240,000

Problem 17-30 1. 4,000,000 – 2,560,000 x 40%

(Answer D)

576,000

2. 1,800,000 x 2/15 (SYD)

(Answer A)

240,000

(Answer A)

1,700,000 1,456,000 244,000

3. Sales price Book value (2,800,000 – 1,344,000) Gain

Problem 17-31 Answer B Straight line rate (100% / 5 years) Fixed rate (20% x 2) 2006 depreciation (5,000,000 x 40%) 2007 depreciation (3,000,000 x 40%) Accumulated depreciation, December 31, 2007 Depreciation for 2008 – straight line (5,000,000 – 3,200,000 / 3) Accumulated depreciation, December 31, 2008

20% 40% 2,000,000 1,200,000 3,200,000 600,000 3,800,000

Problem 17-32 Answer A Cost – 1/1/2005 Accumulated depreciation – 12/31/2007 (7,200,000 / 10 x 3) Book value – 12/31/2007

7,200,000 2,160,000 5,040,000

SYD for the remaining life of 7 years (1 + 2 + 3 + 4 + 5 + 6 + 7)

28

Depreciation for 2008 (5,040,000 x 7/28)

1,260,000

Problem 17-33 Answer B Annual depreciation (1,536,000 / 8)

192,000

235 Problem 17-34 Answer B Fixed rate (100% / 4 x 2) Cost Depreciation for 2007 (50% x 6,000,000) Book value – 1/1/2008 Residual value Maximum depreciation in 2008 Fixed rate in 2008 (100% / 2 x 2)

50% 6,000,000 3,000,000 3,000,000 ( 600,000) 2,400,000 100%

This means that the computers should be fully depreciated in 2008. Since there is a residual value of P600,000, the maximum depreciation for 2008 is equal to the book value of P3,000,000 minus the residual value of P600,000 or P2,400,000.

236 CHAPTER 18 Problem 18-1

Problem 18-2

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

D A A C A

B C C C D

Problem 18-3 1. Ore property Cash

5,000,000

2. Ore property Cash

3,000,000

3. Machinery Cash

4,000,000

4. Depletion Accumulated depreciation

1,140,000

5,000,000 3,000,000 4,000,000 1,140,000

8,000,000 – 400,000 = 7,600,000 7,600,000 / 2,000,000 = 3.80 300,000 x 3.80 = 1,140,000 5. Depreciation Accumulated depreciation

600,000 600,000

4,000,000 / 2,000,000 = 2.00 300,000 x 2.00 = 600,000

Problem 18-4 2008

Rock and gravel property Cash

960,000

Depletion (1,000,000 x .40) Accumulated depletion

400,000

960,000 400,000

2009

Rock and gravel property Cash

490,000

Depletion (600,000 x .75) Accumulated depletion

450,000

490,000 450,000

237 Total cost (960,000 + 490,000) Less: Accumulated depletion Depletable cost Divide by estimated remaining output (2,400,000 – 1,000,000) Revised depletion rate per ton 2010

1,450,000 400,000 1,050,000 1,400,000 .75

Rock and gravel property Cash

500,000

Depletion (700,000 x .44) Accumulated depletion

308,000

500,000 308,000

Total cost Add: Additional development cost Total Less: Accumulated depletion (400,000 + 450,000) Remaining depletable cost Divide by new estimated remaining output New depletion rate

1,450,000 500,000 1,950,000 850,000 1,100,000 2,500,000 .44

Problem 18-5 2008

Resource property Cash

3,960,000

Building Equipment Cash

960,000 1,240,000

Depletion (12,000 x 32) Accumulated depletion

3,960,000

2,200,000 384,000 384,000

Cost of resource property Less: Residual value Depletable cost Divide by estimated output Depletion rate per unit Depreciation (12,000 x 8)

3,960,000 120,000 3,840,000 120,000 32 96,000

Accumulated depreciation – building

96,000

960,000 Depreciation rate per unit = ---------------- = 8 120,000 The output method is used in computing the depreciation of the building because the life of the resource property (5 years or 120,000 / 24,000) is shorter than the life of the building (8 years).

238 Depreciation Accumulated depreciation (1,240,000 / 4 years = 310,000)

310,000 310,000

The straight line method is used for the heavy equipment because the life of 4 years is shorter than the life of the resource property of 5 years. 2009

Depletion Accumulated depletion (25,000 x 32)

800,000 800,000

Depreciation (25,000 x 8) Accumulated depreciation – building

200,000

Depreciation Accumulated depreciation – equipment

310,000

200,000 310,000

Problem 18-6 2008

Ore property Cash Ore property Estimated liability for restoration cost

2009

2010

5,400,000 5,400,000 450,000 450,000

Mine improvements Cash

8,000,000

Depletion (600,000 x 2.60) Accumulated depletion

1,560,000

Depreciation (600,000 x 4) Accumulated depreciation

2,400,000

Depletion (400,000 x 1.60) Accumulated depletion Depletable cost

8,000,000 1,560,000 2,400,000 640,000 640,000 5,200,000

Less: 2009 depletion Balance (3,640,000 / 2,275,000 = 1.60)

1,560,000 3,640,000

Mine improvements Cash

770,000 770,000

Depreciation (400,000 x 2.80) Accumulated depreciation

1,120,000 1,120,000

Cost (8,000,000 + 770,000) Less: Accumulated depreciation Book value (6,370,000 / 2,275,000 = 2.80)

8,770,000 2,400,000 6,370,000

239

Problem 18-7 Depletion rate (5,000,000 / 1,000,000) Depreciation rate (8,000,000 / 1,000,000)

5.00 8.00

First year Depletion (200,000 x 5) Depreciation (200,000 x 8)

1,000,000 1,600,000

Second year Depletion (250,000 x 5) Depreciation (250,000 x 8)

1,250,000 2,000,000

Third year Depletion Depreciation (Schedule A)

none 550,000

Schedule A – Computation of depreciation for third year Cost of equipment Less: Accumulated depreciation Book value – beginning of third year by remaining useful life in years (10 – 2) for third year

8,000,000 3,600,000 4,400,000 Divide Depreciation 8 550,000

Fourth year Depletion (100,000 x 5) Depreciation (Schedule B)

500,000 700,000

Schedule B – Computation of depreciation for fourth year Cost of equipment Less: Accumulated depreciation Book value – beginning of fourth year

8,000,000 4,150,000 3,850,000

Original estimate of resource deposits Less: Extracted in first and second years Remaining output

1,000,000 tons 450,000 550,000 tons

Depreciation rate per unit (3,850,000 / 550,000) Depreciation for third year (100,000 x 7)

7.00 700,000

Problem 18-8 1. Retained earnings Accumulated depletion Total Less: Capital liquidated Depletion in ending inventory (5,000 x 20) Maximum dividend

1,500,000 2,500,000 4,000,000 1,800,000 1,900,000 100,000 2,100,000

240 2. Retained earnings Capital liquidated Dividends payable

1,800,000 200,000 2,000,000

Problem 18-9 1. Cash (50,000 x 110) Share capital (50,000 x 100) Share premium

5,500,000

2. Resource property Cash

3,000,000

3. Mining equipment Cash

800,000

4. Cash (85,000 x 50) Sales

4,250,000

5. Mining and other direct cost Administrative expenses Cash

2,268,000 500,000

6. Depletion Accumulated depletion (3,000,000 / 1,000,000 x 90,000) 7. Depreciation (90,000 x .80) Accumulated depreciation - mining equipment

5,000,000 500,000 3,000,000 800,000 4,250,000

2,768,000 270,000 270,000 72,000 72,000

Depreciation rate (800,000 / 1,000,000) = .80 8. Inventory, December 31 (5,000 x 29)

145,000

Profit and loss

145,000

Mining labor and other direct costs Depletion Depreciation Total production costs incurred Divide by number of units extracted Unit cost

2,268,000 270,000 72,000 2,610,000 90,000 29

241 Multinational Company Income Statement Year ended December 31, 2008 Sales Cost of sales Mining labor and other direct costs Depletion Depreciation Total production cost Less: Inventory, December 31 Gross income Administrative expenses Net income

4,250,000 2,268,000 270,000 72,000 2,610,000 2,465,000 145,000 1,785,000 500,000 1,285,000

Multinational Company Statement of Financial Position December 31, 2008 Assets Current assets: Cash Inventory Noncurrent assets: Resource property Less: Accumulated depletion Mining equipment Less: Accumulated depreciation Total assets

3,182,000 145,000 3,000,000 2,730,000 270,000 800,000 728,000 72,000

3,327,000

3,458,000 6,785,000

Equity Share capital Share premium Retained earnings Total equity

5,000,000 500,000 1,285,000 6,785,000

Retained earnings Add: Accumulated depletion Total Less: Unrealized depletion in ending inventory (5,000 x 3) Maximum dividend

1,285,000 270,000 1,555,000 15,000 1,540,000

Retained earnings Capital liquidated Dividends payable

1,285,000 255,000 1,540,000

242 Problem 18-10 1. Purchase price Road construction Improvements and development costs Total cost Residual value Depletable cost

50,000 5,000,000 750,000 5,800,000 ( 600,000) 5,200,000

Depletion rate per unit (5,200,000 / 4,000,000) Depletion for 2008 (500,000 x 1.30)

1.30 650,000

Depletable cost Depletion in 2008 Remaining depletable cost Development costs in 2009 Total depletable cost – 1/1/2009

5,200,000 ( 650,000) 4,550,000 1,300,000 5,850,000

Original estimated tons Additional estimate Total estimated tons Extracted in 2008 Remaining tons – 1/1/2009

4,000,000 3,000,000 7,000,000 ( 500,000) 6,500,000

New depletion rate per unit (5,850,000 / 6,500,000)

.90

Depletion for 2009 (1,000,000 x .90) 2. Cost of buildings Residual value Depreciable cost Depreciation rate per unit (1,800,000 / 4,000,000) Depreciation for 2008 (500,000 x .45)

900,000 2,000,000 ( 200,000) 1,800,000 .45 225,000

In the absence of any statement to the contrary, the output method is used in computing depreciation of mining equipment. Depreciable cost Depreciation for 2008 Remaining depreciable cost Additional building in 2009 Total depreciable cost – 1/1/2009 New depreciation rate per unit (1,950,000 / 6,500,000) Depreciation for 2009 (1,000,000 x .30)

Problem 18-11 2008

No depletion because there is no production.

2009

Purchase price Estimated restoration cost Development cost – 2008 Development cost – 2009 Total cost Residual value Depletable cost Rate in 2009 (27,000,000 / 10,000,000) Depletion in 2009 (3,000,000 x 2.70)

2010

Tons extracted in 2010 Tons remaining in 12/31/2010 Total estimated output – 1/1/2010 New rate in 2010 (27,000,000 – 8,100,000/6,000,000) Depletion in 2010 (3,500,000 x 3.15)

Problem 18-12 Answer B

1,800,000 ( 225,000) 1,575,000 375,000 1,950,000 .30 300,000

243

28,000,000 2,000,000 1,000,000 1,000,000 32,000,000 ( 5,000,000) 27,000,000 2.70 8,100,000 3,500,000 2,500,000 6,000,000 3.15 11,025,000

Acquisition cost Development cost Estimated restoration cost Total cost Less: Residual value Depletable cost Rate per unit (28,800,000 / 1,200,000) Depletion for 2008 (60,000 x 24)

26,400,000 3,600,000 1,800,000 31,800,000 3,000,000 28,800,000 24 1,440,000

Problem 18-13 Answer C Depletion rate per unit (9,200,000 / 4,000,000)

2.30

Problem 18-14 Answer C Rate per unit (46,800,000 – 3,600,000 / 2,160,000) Depletion in cost of goods sold (240,000 x 20)

20 4,800,000

244 Problem 18-15 Answer D Acquisition cost Less: Residual value Depletable cost Less: Accumulated depletion – 12/31/2007 (7,000,000 / 10,000,000 = .70 x 4,000,000) Remaining depletable cost – 1/1/2008 New depletion rate (4,200,000 / 7,500,000) Depletion for 2008 (1,500,000 x .56)

10,000,000 3,000,000 7,000,000 2,800,000 4,200,000 .56 840,000

Problem 18-16 Answer B Depletable cost Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000) Balance – 1/1/2008

33,000,000 ( 1,650,000) 31,350,000

Production in 2008 New estimate – 12/31/2008 New estimate – 1/1/2008

225,000 5,000,000 5,225,000

Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000)

1,350,000

Problem 18-17 Question 1 – Answer A Purchase price Less: Residual value Depletable cost Depletion rate (12,000,000 / 1,500,000) Depletion for 2008 (150,000 x 8) Production (25,000 x 6)

14,000,000 2,000,000 12,000,000 8.00 1,200,000 150,000

Question 2 – Answer C Production from July 1 to December 31, 2008 (25,000 x 6) Annual production (25,000 x 12) Estimated life of mine (1,500,000 / 300,000)

150,000 tons 300,000 tons 5 years

Since the life of the mine is shorter than the life of the equipment, the output method is used in computing depreciation.

245 Equipment Less: Residual value Depreciable cost Rate per unit (7,500,000 / 1,500,000) Depreciation for 2008 (150,000 x 5)

8,000,000 500,000 7,500,000 5.00 750,000

Problem 18-18 Answer C Purchase price Development costs in 2007 Total cost Residual value Depletable cost Rate in 2007 (8,100,000 / 2,000,000) Depletion for 2007 (200,000 x 4.05) Depletable cost Depletion in 2007 Balance Development costs in 2008

9,000,000 300,000 9,300,000 1,200,000 8,100,000 4.05 810,000 8,100,000 ( 810,000) 7,290,000 135,000

Depletable cost in 2008

7,425,000

Rate in 2008 (7,425,000 / 1,650,000)

4.50

Depletion for 2008 (300,000 x 4.50)

1,350,000

246 CHAPTER 19 Problem 19-1 1. 2. 3. 4. 5.

C B D C C

6. 7. 8. 9. 10.

B C A B A

Problem 19-2 1. Appreciation (7,200,000 – 4,500,000)

2,700,000

2. Book value (4,500,000 – 900,000)

3,600,000

3. Depreciated replacement cost (7,200,000 x 80%)

5,760,000

4. Revaluation surplus (5,760,000 – 3,600,000)

2,160,000

Problem 19-3 1. Annual depreciation on cost (750,000 / 5)

150,000

Original life (3,000,000 / 150,000) 2. Equipment Accumulated depreciation Revaluation surplus 3. Depreciation (4,800,000 / 20) Accumulated depreciation 4. Revaluation surplus Retained earnings (1,350,000 / 15)

20 years 1,800,000 450,000 1,350,000 240,000 240,000 90,000 90,000

Problem 19-4 1. Annual depreciation on cost (9,000,000 / 25)

360,000

Age of asset (3,600,000 / 360,000) 2. Machinery Accumulated depreciation (40% x 6,000,000) Revaluation surplus 3. Depreciation (9,000,000 / 15) Accumulated depreciation

10 years 6,000,000 2,400,000 3,600,000 600,000 600,000

247 4. Revaluation surplus Retained earnings (3,600,000 / 15)

240,000 240,000

Problem 19-5 Proportional approach 1. Building Accumulated depreciation Revaluation surplus 2. Depreciation (8,000,000 / 40) or (6,000,000 / 30) Accumulated depreciation

3,000,000 750,000 2,250,000 200,000 200,000

Gross replacement cost (6,000,000 / 75%) 8,000,000 3. Revaluation surplus Retained earnings (2,250,000 / 30)

75,000 75,000

Elimination approach 1. Accumulated depreciation Building

1,250,000 1,250,000

Building (6,000,000 – 3,750,000) Revaluation surplus

2,250,000 2,250,000

2. Depreciation (6,000,000 / 30) Accumulated depreciation

200,000 200,000

3. Revaluation surplus Retained earnings

75,000 75,000

Problem 19-6 1. Equipment Accumulated depreciation Revaluation surplus

2,700,000

2. Depreciation (7,500,000 / 10) Accumulated depreciation

750,000

3. Revaluation surplus (2,200,000 / 10) Retained earnings

500,000 2,200,000 750,000 220,000 220,000

4. Cash Accumulated depreciation Equipment Gain on sale of equipment

8,000,000 2,250,000 9,200,000 1,050,000

248 Revaluation surplus (2,200,000 - 220,000) Retained earnings

1,980,000 1,980,000

Problem 19-7 1. Building Accumulated depreciation Revaluation surplus

10,000,000

2. Depreciation (13,000,000 / 5) Accumulated depreciation

2,600,000

3. Revaluation surplus Retained earnings (6,000,000 / 5)

4,000,000 6,000,000 2,600,000 1,200,000 1,200,000

Problem 19-8 Building Accumulated depreciation

Cost 3,000,000 600,000 2,400,000

Replacement cost 5,000,000 1,000,000 4,000,000

Appreciation 2,000,000 400,000 1,600,000

Accumulated depreciation on cost (3,000,000 x 20%)

600,000

Life of asset (100% / divided by 4%)

25 years

Percent of accumulated depreciation (5 years / 25)

20%

Gross replacement cost (4,000,000 / 80%)

5,000,000

Accumulated depreciation on replacement cost (5,000,000 x 20%)

1,000,000

a. “Should be entry: Building Accumulated depreciation Revaluation surplus

2,000,000 400,000 1,600,000

b. Correcting entry: Building Retained earnings Accumulated depreciation Revaluation surplus

1,000,000 1,000,000

c. Depreciation (4,000,000 / 20) Accumulated depreciation

200,000

400,000 1,600,000 200,000

249 d. Revaluation surplus Retained earnings (1,600,000 / 20)

80,000 80,000

Problem 19-9 1. Accumulated depreciation Machinery

800,000

2. Retained earnings Revaluation surplus

400,000

800,000 400,000

Problem 19-10 Land Building Accumulated depreciation (25,000,000 x 3/25)

Cost 5,000,000

Replacement cost 10,000,000

Appreciation 5,000,000

25,000,000

45,000,000

20,000,000

3,000,000

(45,000,000 x 3/25) Machinery Accumulated depreciation (10,000,000 x 3/5) (15,000,000 x 3/5)

Equipment Accumulated depreciation (3,000,000 x 3/10) (4,200,000 x 3/10)

_________ 22,000,000

5,400,000 39,600,000

10,000,000

15,000,000

6,000,000 __________ 4,000,000

2,400,000 17,600,000 5,000,000

3,000,000 9,000,000 6,000,000 2,000,000

Cost 3,000,000

Replacement cost 4,200,000

900,000 _________ 2,100,000

1,260,000 2,940,000

a. Land Building Machinery Equipment Accumulated depreciation – building Accumulated depreciation – machinery Accumulated depreciation – equipment Revaluation surplus

5,000,000 20,000,000 5,000,000 1,200,000

b. Depreciation Accumulated depreciation – building Accumulated depreciation – machinery Accumulated depreciation – equipment

5,220,000

Appreciation 1,200,000 _ 360,000 840,000

2,400,000 3,000,000 360,000 25,440,000 1,800,000 3,000,000 420,000

250 Building: Cost (22,000,000 / 22) Appreciation (17,600,000 / 22)

1,000,000 800,000

1,800,000

Machinery: Cost (4,000,000 / 2) Appreciation (2,000,000 / 2)

2,000,000 1,000,000

3,000,000

Equipment: Cost (2,100,000 / 7) Appreciation (840,000 / 7) Total depreciation c. Revaluation surplus Retained earnings (800,000 + 1,000,000 + 120,000) d. Property, plant and equipment (at revalued amounts):

300,000 120,000

420,000 5,220,000

1,920,000 1,920,000

Land Building Machinery Equipment Total Less: Accumulated depreciation Net carrying value

10,000,000 45,000,000 15,000,000 4,200,000 74,200,000 20,880,000 53,320,000

The following disclosure should be made in the notes to financial statements: Cost Land Building Machinery Equipment Total Accumulated depreciation Net carrying value

5,000,000 25,000,000 10,000,000 3,000,000 43,000,000 13,200,000 29,800,000

Replacement cost 10,000,000 45,000,000 15,000,000 4,200,000 74,200,000 20,880,000 53,320,000

Schedule of Accumulated Depreciation Cost 4,000,000 8,000,000 1,200,000 13,200,000

Building Machinery Equipment

251

Problem 19-11 Answer B Building Accumulated depreciation

Replacement cost 7,200,000 12,000,000 1,680,000 20,880,000

Cost 5,000,000 1,250,000 3,750,000

Replacement cost 8,000,000 2,000,000 6,000,000

Sound value 5,000,000 18,750,000 2,500,000

Book value 2,000,000 11,250,000 1,500,000

Appreciation 3,000,000 750,000 2,250,000

Problem 19-12 Answer B Land Building (75% x 25,000,000) Machinery (50% x 5,000,000)

Revaluation surplus 3,000,000 7,500,000 1,000,000 11,500,000

Problem 19-13 Answer D Fair value – December 31, 2008 Net book value – December 31, 2008 Revaluation surplus

450,000 302,500 142,500

Problem 19-14 Question 1 Question 2 Question 3

Answer A Answer B Answer B

Problem 19-15 1. 2. 3. 4. 5.

A C B A A

6. 7. 8. 9. 10.

A A D D D

11. 12. 13. 14. 15.

A A A D A

Problem 19-16 1. Impairment loss Accumulated depreciation Cost Accumulated depreciation Book value – January 1 Recoverable value Impairment loss 2. Depreciation (1,500,000 / 3) Accumulated depreciation

900,000 900,000 4,500,000 2,100,000 2,400,000 1,500,000 900,000 500,000 500,000

252 3. Cost Accumulated depreciation (2,100,000 + 900,000 + 500,000) Book value – December 31

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

Problem 19-17 1. Impairment loss Accumulated depreciation Cost – January 1 Accumulated depreciation (2,500,000 – 500,000 / 8 x 2) Book value – January 1

1,125,000 1,125,000 2,500,000 500,000 2,000,000

Recoverable value Impairment loss

875,000 1,125,000

2. Depreciation Accumulated depreciation (875,000 – 125,000 / 2)

375,000 375,000

3. Cost Accumulated depreciation (500,000 + 1,125,000 + 375,000) Book value – December 31

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

Problem 19-18 1. Offer price 25,000,000 5,000,000 30,000,000

Cost of dismantling and removal assumed by the bidder Fair value less cost to sell Present value of future cash flows Less: Estimated liability Value in use

33,000,000 5,000,000 28,000,000

Carrying amount 39,000,000 Less: Estimated liability 5,000,000 Adjusted carrying amount 34,000,000 Recoverable amount – fair value less cost to sell, being the higher amount 30,000,000 Impairment loss 4,000,000 PAS 36, paragraph 78, provides that the fair value less cost to sell is equal to the estimated selling price plus the estimated liability assumed by the buyer. The standard further provides that to perform a meaningful comparison between the carrying amount and recoverable amount, the estimated liability assumed by the buyer is deducted in determining both the value in use and carrying amount of the asset. 2. Impairment loss Accumulated depreciation

4,000,000 4,000,000

253 Problem 19-19 1. 2008 2009 2010 2011 Total value in use

Net cash inflows 18,000,000 15,000,000 15,000,000 12,000,000 60,000,000

PV factor .930 .857 .794 .735

Present value 16,740,000 12,855,000 11,910,000 8,820,000 50,325,000

2. The recoverable amount is the value in use of P50,325,000 because this is higher than the

fair value less cost to sell of P48,000,000. 3. Impairment loss Accumulated depreciation (65,000,000 – 50,325,000)

14,675,000

4. Depreciation Accumulated depreciation (50,325,000 / 4)

12,581,250

14,675,000 12,581,250

Problem 19-20 1. Depreciation Accumulated depreciation (10,000,000 / 10)

1,000,000 1,000,000

2. Depreciation Accumulated depreciation

1,000,000

3. Impairment loss Accumulated depreciation

2,000,000

4. Depreciation Accumulated depreciation (6,000,000 / 8) 5. Accumulated depreciation Gain on impairment recovery

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

Cost – 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 2) Book value – 12/31/2007 Impairment loss – 2007 Adjusted book value – 12/31/2007 Depreciation – 2008 (6,000,000 / 8) Book value – 12/31/2008 Cost – 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 3) Book value – 12/31/2008 (assuming no impairment) Recorded book value Gain on reversal of impairment

10,000,000 2,000,000 8,000,000 2,000,000 6,000,000 750,000 5,250,000 10,000,000 3,000,000 7,000,000 5,250,000 1,750,000

254 The fair value or recoverable value of P7,500,000 cannot exceed the “book value” that would have been determined assuming no impairment is recognized.

Problem 19-21 1. Impairment loss Accumulated depreciation (35,000,000 – 30,000,000)

5,000,000

2. Depreciation

6,000,000

5,000,000

Accumulated depreciation (30,000,000 / 5)

6,000,000

Observe that the undiscounted net cash flows from the asset amount to P37,500,000 for 5 years. This amount is more than the book value of the machinery. Under American Standard, no impairment loss should be recognized in this case. However, under the PAS 36, if the recoverable amount is less than carrying amount, an impairment loss is recognized, regardless of the amount of undiscounted cash flows whether less than or more than the carrying amount. PAS 36 has totally rejected the concept of undiscounted cash flows for impairment purposes.

Problem 19-22 1. Value in use (1,500,000 x 5.65) 2. Impairment loss Accmulated depreciation

8,475,000 8,250,000 8,250,000

Buildings Accumulated depreciation (22,500,000 / 20 x 6) Book value – 1/1/2008 Fair value – higher than value in use Impairment loss 3. Depreciation Accumulated depreciation (10,000,000 / 10)

25,000,000 6,750,000 18,250,000 10,000,000 8,250,000 1,000,000 1,000,000

Problem 19-23 1. Value in use (800,000 x 3.99) 2. Impairment loss Accumulated depreciation

3,192,000 308,000 308,000

Machinery Accumulated depreciation Book value – 1/1/2008 Present value of cash flows – higher than fair value Impairment loss 3. Depreciation Accumulated depreciation (3,192,000 / 5)

5,000,000 1,500,000 3,500,000 3,192,000 308,000 638,400 638,400

255 Problem 19-24 1. Total carrying amount Value in use Impairment loss 2. Impairment loss allocated to goodwill

5,000,000 3,600,000 1,400,000 500,000

Impairment loss allocated to the other assets

900,000 1,400,000

When an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order: a. First, to the goodwill, if any. b. Then, to all other assets of the unit prorata based on their carrying amount. Building Inventory Trademark

Carrying amount 2,000,000 1,500,000 1,000,000 4,500,000

3. Impairment loss Goodwill Accumulated depreciation – building Inventory Trademark

Fraction 20/45 15/45 10/45

Loss 400,000 300,000 200,000 900,000

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

Problem 19-25 1. Carrying amount Value in use Impairment loss

16,000,000 11,000,000 5,000,000

2. Allocation of impairment loss Building (8/16 x 5,000,000) Equipment (4/16 x 5,000,000) Inventory (4/16 x 5,000,000)

2,500,000 1,250,000 1,250,000 5,000,000

Observe that after allocating the P2,500,000 loss to the building, the carrying amount of the building would be P5,500,000 which is lower than its fair value of P6,500,000. Accordingly, only P1,500,000 loss is allocated to the building and the balance of P1,000,000 is reallocated to the equipment and inventory prorata.

256 Allocated loss Reallocated loss (4/8 x 1,000,000) (4/8 x 1,000,000)

Building 2,500,000 (1,000,000) _________

Equipment 1,250,000 500,000 _________

Inventory 1,250,000 500,000

Impairment loss 3. Impairment loss Accumulated depreciation – building Accumulated depreciation – equipment Inventory

1,500,000

1,750,000

1,750,000

5,000,000 1,500,000 1,750,000 1,750,000

Problem 19-26 All Unimart’s stores are in different locations and probably have different customer profile. So although Smart is managed at the corporate level, Smart generates cash inflows that are largely independent from those of the other Unimart’s stores. Therefore, it is likely that Smart in itself is a cash generating unit.

Problem 19-27 It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced to a certain extent by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, decisions to abandon titles are made on an individual basis. Accordingly, the individual magazine titles generate cash inflows that are largely independent from one another and therefore, each magazine title is a separate cash generating unit.

Problem 19-28 Case 1 1. A is separate cash generating unit because there is an active market for A’s products. 2. Although there is an active market for the products of B and C, cash inflows from B and C depend on the allocation of production across two countries. It is unlikely that cash inflows from B and C can be determined individually. Therefore, B and C, together should be treated as a cash generating unit.

257 Case 2 a. A cannot be treated as a separate cash generating unit because its cash inflows depend on the sales of the final product by B and C, since there is no active market for A’s product.

b. As a consequence, A, B and C, together, and therefore, Maximus Company, as a whole, should be treated as the largest single cash generating unit.

Problem 19-29 The primary purpose of the building is to serve as a corporate asset supporting Litmus Company’s manufacturing operations. Therefore, the building in itself cannot be considered to generate cash inflows that are largely independent of the cash inflows from the entity as a whole. In this case, the cash generating unit is Litmus Company as a whole. The building is not held for investment. Thus, it is not appropriate to determine the value in use of the building based on the cash inflows of related rent.

Problem 19-30 Answer C Cost, January 1, 2005 Accumulated depreciation, December 31, 2007 (100,000 x 3) Book value, December 31, 2007 Recoverable value Impairment loss

800,000 300,000 500,000 200,000 300,000

The loss is recorded as follows: Impairment loss Accumulated depreciation Cost Accumulated depreciation (300,000 + 300,000) Recoverable value, January 1, 2008 Depreciation for 2008 (200,000 / 5) Book value, December 31, 2008

300,000 300,000 800,000 600,000 200,000 40,000 160,000

Problem 19-31 Answer B From August 31, 2005 to May 31, 2008 is a period of 33 months. Thus, the remaining life of the machine is 27 months, 60 months original life minus 33. Depreciation for the month of June 2008 (1,350,000 / 27 months)

50,000

258 Cost Accumulated depreciation – 5/31/2008 (3,200,000 – 500,000 x 33/60) Book value – 5/31/2008 Fair value

3,200,000 1,485,000 1,715,000 1,350,000

Impairment loss

365,000

Problem 19-32 Answer B Cost – January 1, 2004 Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4) Book value, December 31, 2007 Depreciation for 2008 (640,000 – 40,000 / 4) Book value, December 31, 2008

1,000,000 360,000 640,000 150,000 490,000

Problem 19-33 Answer C Book value, 1/1/2008 Depreciation for 2008 (1,600,000 / 4) Book value, 12/31/2008 Sales price-recoverable value Impairment loss

2,400,000 400,000 2,000,000 650,000 1,350,000

Problem 19-34 Answer C Depreciation for 2008 (10% x 2,000,000) Cost – 1/2/2004 Accumulated depreciation - 12/31/08 (200,000 x 5) Book value-12/31/2008 Estimated cost of disposal Impairment loss

200,000 2,000,000 1,000,000 1,000,000 50,000 1,050,000

Problem 19-35 Answer C Cost Accumulated depreciation – 1/1/2008 (2,000,000 – 100,000 / 10 x 2.5) Book value – 1/1/2008 Fair value Impairment loss

2,000,000 475,000 1,525,000 600,000 925,000

Problem 19-36 Answer C Cost – 12/31/2004 Accumulated depreciation – 8/31/2008 (2,400,000 / 96 months x 44) Book value – 8/31/2008 Fair value Impairment loss

2,800,000 1,100,000 1,700,000 1,500,000 200,000

259 Problem 19-37 Answer C Carrying value Decommissioning cost Adjusted carrying value Fair value less cost to sell – higher (20,000,000 less 1,000,000)

28,000,000 ( 8,000,000) 20,000,000 19,000,000

Impairment loss

1,000,000

Value in use Decommissioning cost Adjusted value in use

26,000,000 ( 8,000,000) 18,000,000

Problem 19-38 Answer C Carrying value – 12/31/2007 Depreciation for 2008 (20%) Carrying value – 12/31/2008 Carrying value – 12/31/2008 (assuming no impairment) Reversal of impairment loss

7,000,000 (1,400,000) 5,600,000 7,200,000 1,600,000

260 CHAPTER 20 Problem 20-1

Problem 20-2

1. D

1. A

6. D

6. B

2. 3. 4. 5.

C D A D

7. 8. 9. 10.

A D D B

2. 3. 4. 5.

A C D D

7. 8. 9. 10.

B D D D

Problem 20-3 2008 Jan. 1 Patent Cash

255,000 255,000

Dec. 31 Amortization of patent Patent (255,000 / 20)

12,750 12,750

2009 Dec. 31 Amortization of patent Patent

12,750

2010 Jan. 5 Legal expense Cash

90,000

12,750

90,000

Dec. 31 Amortization of patent Patent

12,750 12,750

2011 Jan. 1 Patent Cash

510,000 510,000

Dec. 31 Amortization of patent Patent

42,750 42,750

On original cost On competing patent (510,000 / 17)

12,750 30,000 42,750

Problem 20-4 2008 2011

Research and development expense Cash

510,000

Patent

720,000

510,000

Cash

720,000

261 Amortization of patent (720,000 / 16) Patent

45,000 45,000

2012

Patent

540,000 Cash

540,000

Amortization of patent Patent

81,000 81,000

On related patent On competing patent (540,000 / 15)

45,000 36,000 81,000

Problem 20-5 2008 2009

Research and development expense Cash

250,000 250,000

Patent

60,000 Cash

60,000

Amortization of patent Patent (60,000 / 10) 2010

6,000 6,000

Patent

600,000 Cash

600,000

Original cost New patent Total cost Less: Amortization for 2008 Balance – January 1, 2009 Amortization of patent (654,000 / 15) Patent 2011

Amortization of patent Patent Patent written off Patent Balance – 1/1/2010 Less: Amortization 2010 2011 Unamortized cost

60,000 600,000 660,000 6,000 654,000 43,600 43,600 43,600 43,600 566,800 566,800 654,000 43,600 43,600

87,200 566,800

262

Problem 20-6 1. Patent Cash

7,140,000 7,140,000

2. Amortization of patent Patent (7,140,000 / 15)

476,000 476,000

3. Amortization of patent Patent (5,712,000 / 7)

816,000 816,000

4. Acquisition cost Amortization for 2005, 2006 and 2007 (476,000 x 3) Carrying amount – 1/1/2008 Amortization for 2008 Carrying amount – 12/31/2008

7,140,000 (1,428,000) 5,712,000 ( 816,000) 4,896,000

Problem 20-7 1. Patent Cash 2. Amortization of patent Patent (900,000 / 10) 3. Patent written off Patent

900,000 900,000 90,000 90,000 540,000 540,000

Cost Amortization for 2005, 2006, 2007 and 2008 (90,000 x 4) Carrying amount – 12/31/2008

900,000 (360,000) 540,000

Problem 20-8 1. Patent Cash 2. Legal expenses Cash 3. Amortization of patent Patent X (1,200,000 / 8) Y (2,000,000 / 5) Z (3,000,000 / 6)

6,200,000 6,200,000 450,000 450,000 1,050,000 1,050,000 150,000 400,000 500,000 1,050,000

263

Problem 20-9 1. Retained earnings Patent

500,000

2. Patent Retained earnings

510,000

500,000 510,000

3. No adjustment. 4. Loss on damages Legal expense Accrued liabilities

100,000 30,000

5. Patent Retained earnings

24,500

130,000 24,500

Amortization per book (500,000 – 450,000) Correct amortization for 2007 (510,000 / 20) Overamortization 6. Amortization of patent Patent

50,000 25,500 24,500 25,500 25,500

Problem 20-10 2008

Copyright Cash

285,000

Amortization of copyright Copyright

150,000

285,000 150,000

285,000 / 95,000 = 3 per copy 50,000 x 3 = 150,000 2009

Amortization of copyright Copyright (30,000 x 3)

90,000 90,000

Problem 20-11 1. Copyright Retained earnings

240,000 240,000

Cost of copyright Less: Amortization (300,000 / 5) Book value 2. Amortization of copyright Copyright

300,000 60,000 240,000 60,000 60,000

264

Problem 20-12 1. Copyright Patent Retained earnings

620,000 400,000 1,020,000

Copyright 1 Less: Amortization from 1/1/2004 to 12/31/2007 (400,000 / 20 x 4) Book value

400,000 80,000 320,000

Copyright 2 Less: Amortization from 7/1/2005 to 12/31/2007 (360,000 / 15 x 2.5) Book value

360,000 60,000 300,000

Patent Less: Amortization for 2006 and 2007 (500,000 / 10 x 2) Book value

500,000 100,000 400,000

2. Amortization of copyright (20,000 + 24,000) Amortization of patent Copyright Patent

44,000 50,000 44,000 50,000

Problem 20-13 Books of Franchisee 1. Franchise Cash

6,000,000 6,000,000

2. Amortization of franchise Franchise (6,000,000 / 20)

300,000 300,000

3. Cash Sales

25,000,000 25,000,000

4. Franchise fee expense Cash (25,000,000 x 5%)

1,250,000 1,250,000

Problem 20-14 Books of Franchisee 1. Franchise Cash Note payable 2. Note payable (15,000,000 / 4) Interest expense (15,000,000 x 10%)

20,000,000 5,000,000 15,000,000 3,750,000 1,500,000

Cash

5,250,000

265 3. There is no amortization because the franchise is for an indefinite period.

Problem 20-15 Books of Franchisee 1. Franchise (3,000,000 + 3,790,000) Discount on note payable Cash Note payable

6,790,000 1,210,000 3,000,000 5,000,000

Note payable Present value of note (1,000,000 x 3.79) Implied interest

5,000,000 3,790,000 1,210,000

2. Amortization of franchise Franchise (6,790,000 / 10) 3. Note payable Cash 4. Interest expense (10% x 3,790,000) Discount on note payable

679,000 679,000 1,000,000 1,000,000 379,000 379,000

Problem 20-16 Requirement a 1. Leasehold improvement – building Cash

5,000,000 5,000,000

2. Rent expense (50,000 x 12) Cash

600,000

3. Depreciation (5,000,000 / 10) Accumulated depreciation

500,000

600,000 500,000

Requirement b Accumulated depreciation Loss on leasehold cancelation Leasehold improvement – building

2,500,000 2,500,000 5,000,000

Problem 20-17 1. Rent expense

1,200,000

Prepaid rent Cash

1,200,000 2,400,000

266 2. Leasehold Cash

2,000,000 2,000,000

3. Leasehold improvement Cash

500,000

4. Amortization of leasehold Leasehold (2,000,000 / 5)

400,000

5. Depreciation (500,000 / 5) Accumulated depreciation

100,000

500,000 400,000 100,000

Problem 20-18 1. Leasehold Cash

1,000,000

2. Rent expense (150,000 x 12) Cash

1,800,000

1,000,000 1,800,000

3. Leasehold improvement Cash

400,000

4. Leasehold improvement Cash

100,000

5. Amortization of leasehold Leasehold (1,000,000 / 10)

100,000

6. Depreciation Accumulated depreciation

400,000 100,000 100,000 60,000 60,000

400,000 / 10 100,000 / 5

40,000 20,000 60,000

Problem 20-19 1. Rent expense Cash

600,000

2. Leasehold Cash

100,000

600,000 100,000

3. Leasehold improvement Cash

200,000

4. Leasehold improvement Cash

50,000

200,000 50,000

267 5. Amortization of leasehold Leasehold (100,000 / 5)

20,000

6. Depreciation Accumulated depreciation

52,500

20,000 52,500

200,000 / 5 50,000 / 4

40,000 12,500 52,500

Problem 20-20 1. Amortization of patent Accumulated amortization (1,920,000 – 240,000 / 6)

280,000

2. Trademark (800,000 x 3/4) Noncompetition agreement Cash

600,000 200,000

280,000

800,000

3. Amortization of noncompetition agreement Accumulated amortization (200,000 / 5)

40,000

4. Royalty expense Cash

50,000

40,000 50,000

Problem 20-21 1. Acquisition cost Net assets acquired Goodwill 2. Cash Accounts receivable Inventory Property, plant and equipment Goodwill Accounts payable Note payable – bank Cash

Problem 20-22

7,500,000 (4,600,000) 2,900,000 50,000 800,000 1,350,000 4,300,000 2,900,000 900,000 1,000,000 7,500,000

1. Acquisition cost Net assets acquired at fair value Goodwill

6,000,000 (3,300,000) 2,700,000

Total assets at fair value Total liabilities Net assets acquired at fair value

5,300,000 2,000,000 3,300,000

268 2. Cash Accounts receivable Inventory Patent Property, plant and equipment Goodwill Accounts payable Cash

50,000 500,000 1,500,000 250,000 3,000,000 2,700,000 2,000,000 6,000,000

Problem 20-23 1. Cash Inventory In-process R and D Total assets Total liabilities Net assets Acquisition cost Net assets acquired at fair value Goodwill

1,000,000 500,000 5,000,000 6,500,000 3,000,000 3,500,000 8,000,000 (3,500,000) 4,500,000

The goodwill includes the fair value of the assembled workforce of P1,200,000. The assembled workforce is not accounted for separately as an asset. 2. Cash Inventory In process R and D Goodwill Accounts payable Notes payable Cash

1,000,000 500,000 5,000,000 4,500,000 2,600,000 400,000 8,000,000

Problem 20-24 1. Average earnings Divide by Net assets including goodwill Less: Net assets before goodwill Goodwill

250,000 10% 2,500,000 1,700,000 800,000

2. Average earnings Less: Normal earnings (8% x 1,700,000) Excess earnings Divide by Goodwill

250,000 136,000 114,000 15% 760,000

269 3. Average earnings Less: Normal earnings (10% x 1,700,000) Excess earnings Multiply by Goodwill

250,000 170,000 80,000 5 400,000

4. Excess earnings Multiply by Goodwill

80,000 5.65 452,000

Problem 20-25 Average earnings or prior years (1,500,000 / 3) Increase in average earnings (10% x 500,000) Total Less: Patent amortization (500,000 / 5 years) Earnings for goodwill computation a. Average future earnings Divide by Net assets including goodwill Less: Net assets excluding goodwill Goodwill

500,000 50,000 550,000 100,000 450,000 450,000 8% 5,625,000 5,000,000 625,000

b. Average earnings Less: Normal earnings (8% x 5,000,000) Average excess earnings Divide by Goodwill

450,000 400,000 50,000 10% 500,000

c. Goodwill (50,000 x 3.17)

158,500

Problem 20-26 a. Average earnings Expected increase (1,000,000 – 900,000) Total Less: Normal earnings (4,800,000 x 10%) Excess earnings

750,000 100,000 850,000 480,000 370,000

Goodwill (370,000 x 4) Shareholders’ equity per book Less: Recorded goodwill Net assets before goodwill

1,480,000 5,000,000 200,000 4,800,000

b. Goodwill (370,000 / 20%)

1,850,000

270 Problem 20-27 1. Share capital Retained earnings Total shareholders’ equity Less: Recorded goodwill Net assets before goodwill

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

Average earnings (1,200,000 + 150,000 / 3) Less: Normal earnings (10% x 2,500,000) Excess earnings Divide by Goodwill 2. Net assets before goodwill Goodwill Purchase price

450,000 250,000 200,000 16% 1,250,000 2,500,000 1,250,000 3,750,000

Problem 20-28 1. Value in use Net assets including goodwill at carrying amount Impairment loss 2. Impairment loss Goodwill

38,000,000 42,000,000 ( 4,000,000) 4,000,000 4,000,000

Problem 20-29 1. Value in use Net assets including goodwill at carrying amount Impairment loss 2. Impairment loss Goodwill Accounts receivable Inventory Accumulated depreciation

60,000,000 75,000,000 (15,000,000) 15,000,000 5,000,000 2,000,000 3,000,000 5,000,000

The remaining impairment loss of P10,000,000, after deducting the loss applicable to goodwill, is allocated to the other noncash assets on a prorata basis.

Problem 20-30 1. Present value of indefinite cash flows (200,000 / 10%) Trademark Impairment loss

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

271 Present value of cash flows from cash generating unit (9,000,000 x 8.51) 76,590,000 Net assets including goodwill at carrying amount 80,000,000 Impairment loss ( 3,410,000) 2. Impairment loss Trademark Goodwill

7,410,000 4,000,000 3,410,000

Problem 20-31 1. Total carrying amount Value in use Impairment loss 2. Impairment loss Goodwill Accumulated depreciation – building (25/45 x 270,000) Inventory (15/45 x 270,000) Trademark (5/45 x 270,000)

5,000,000 4,230,000 770,000 770,000 500,000 150,000 90,000 30,000

Problem 20-32 12/31/2008 1/1/2009 7/1/2009 11/1/2009

R and D expense Cash

2,500,000

R and D expense Cash

1,200,000

R and D expense Cash

500,000

Patent

350,000

2,500,000 1,200,000 500,000

Cash 11/15/2009

Patent

350,000 800,000

Cash

800,000

12/31/2009

Patent

100,000 Cash

100,000

Problem 20-33 1. Product costs which are associated wit inventory items are: Duplication of computer software and training materials Packaging product Total inventory

2,500,000 900,000 3,400,000

2. The costs incurred from the time of technological feasibility to the time when product costs are incurred should be capitalized as computer software cost.

Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing product masters for training materials Total costs to be capitalized

272 2,400,000 2,000,000 1,500,000 5,900,000

3. Completion of detail program design Cost incurred for coding and testing to establish technological feasibility Total costs charged as expense

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

Problem 20-34 1. Designing and planning Code development Testing Total R and D expense in 2008

1,000,000 1,500,000 __500,000 3,000,000

The cost of producing the product master of P2,500,000 is capitalized as software cost to be subsequently amortized. 2. Cost of producing the software program in 2009 Amortization of software cost (2,500,000 / 4) Total expense in 2009

1,000,000 625,000 1,625,000

Problem 20-35 Answer C Cost Accumulated amortization from 2005 to 2007 (357,000 / 15 x 3) Book value – 12/31/2007 Amortization for 2008 (285,600 / 7) Book value – 12/31/2008

Problem 20-36 Answer C

357,000 71,400 285,600 40,800 244,800

Cost 1/1/2003 Accumulated depreciation – 12/31/2007 (6,000,000 / 15 x 5) Book value – 1/1/2008 Amortization for 2008 (4,000,000 / 5)

6,000,000 2,000,000 4,000,000 800,000

Problem 20-37 Answer C Cumulative earnings Less: Gain on sale Adjusted cumulative earnings

550,000 50,000 500,000

273 Average earnings (500,000 / 5) Divide by capitalization rate Net assets including goodwill Less: Net assets before goodwill Goodwill

100,000 10% 1,000,000 750,000 250,000

Problem 20-38 Answer C Net assets Multiply by excess rate (16% minus 10%) Excess earnings Multiply by present value factor Goodwill

1,800,000 6% 108,000 3.27 353,160

Problem 20-39 Answer D Purchase price Less: Goodwill Net assets before goodwill Estimated annual earnings (squeeze) Less: Normal earnings (4,500,000 x 10%) Excess or superior earnings Divide by capitalization rate Goodwill

5,000,000 500,000 4,500,000 550,000 450,000 100,000 20% 500,000

Problem 20-40 Answer C Accounts receivable Inventory Equipment Short-term payable

2,000,000 500,000 500,000 (2,000,000)

Net assets at fair value

1,000,000

Acquisition cost Net assets at fair value Goodwill

5,000,000 (1,000,000) 4,000,000

Problem 20-41 Answer A Problem 20-42 Answer C Downpayment Present value of annual payment for 4 years (1,000,000 x 2.91) Cost of franchise

2,000,000 2,910,000 4,910,000

274 Problem 20-43 Answer A Design costs Legal fees of registering trademark Registration fee with Patent Office Total cost of trademark

1,500,000 150,000 50,000 1,700,000

Problem 20-44 Answer B Original lease Extension Total life Less: Years expired (2006 and 2007) Remaining life Life of improvement (shorter) Leasehold improvement Less: Depreciation for 2008 (540,000 / 15) Book value

12 years 8 20 2 18 years 15 years 540,000 36,000 504,000

Problem 20-45 Answer D Depreciation (3,600,000 / 6)

600,000

Problem 20-46 Answer C Depreciation of equipment Materials used

135,000 200,000

Compensation costs of personnel Outside consulting fees Indirect costs allocated

500,000 150,000 250,000 1,235,000

Problem 20-47 Answer A Modification to the formulation of a chemical product Design of tools, jigs, molds and dies Laboratory research Total research and development expense

135,000 170,000 215,000 520,000

Problem 20-48 Answer D All costs are charged to R and D expense.

275 Problem 20-49 Answer A Trademark Value in use (120,000 / 6%) Impairment loss

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

Patent Amortization for 2008 (2,000,000 / 5) Book value – 12/31/2008 Value in use (500,000 x 3.47) Impairment loss

2,000,000 400,000 1,600,000 1,735,000 -_ _

Problem 20-50 Answer B Carrying amount of net assets Value in use (8,000,000 x 1.5) Impairment loss – applicable to goodwill

16,000,000 12,000,000 4,000,000