Applied Auditing 2017 Answer Key

APPLIED AUDITING With Comprehensive Review of Philippine Financial Reporting Standards (PFRSs) A guide in applying auditing procedures to specific accounts of the financial statements.

TEACHERS MANUAL 2017 Edition By

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

Dear fellow teacher,

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

Thanks and God bless.

Sincerely, Darrell Joe O. Asuncion, MBA, CPA Mark Alyson B. Ngina, CMA, CPA Raymund Francis A. Escala, MBA, CPA

Table of Contents CHAPTER 5: CASH TO ACCRUAL.................................... ............................................ 4 CHAPTER 6: CORRECTION OF ERRORS ..................................... ...........................19 CHAPTER 8: CASH AND CASH EQUIVALENTS ..................................... ..............28 CHAPTER 10: LOANS AND RECEIVABLES ...................................... .....................46 CHAPTER 12: INVENTORIES ....................................... ..............................................75 CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES ..................................... ....................................................... 100 CHAPTER 15: INVESTMENT IN DEBT SECURITIES ..................................... . 117 CHAPTER 16 INVESTMENT IN ASSOCIATE...................................................... 133 CHAPTER 18 PROPERTY, PLANT AND EQUIPMENT....................................148 CHAPTER 19 WASTING ASSETS............... ..................................................... ........ 172 CHAPTER 20 INVESTMENT PROPERTY ..................................... ....................... 178 CHAPTER 22 INTANGIBLE ASSETS ...................................... ............................... 184 CHAPTER 23 REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE ...................................... ................................................................ ..... 195 CHAPTER 25 INTRODUCTION TO LIABILITIES....... . .. .. . . ..... .................. 212 CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING.. 226 CHAPTER 27 LEASE ..................................... ..............................................................245 CHAPTER 29 SHAREHOLDERS’ EQUITY................. .......................................... .271 CHAPTER 30 BOOK VALUE AND EARNINGS PER SHARE ......................... .293 CHAPTER 32 STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME .................................................................................... .305 CHAPTER 33 STATEMENT OF CASH FLOWS..................................... ............. .324

Chapter 5: Cash to Accrual

CHAPTER 5: CASH TO ACCRUAL PROBLEM 5-1 (Computation of Sales under cash basis) Accounts receivable/Notes receivable trade/Advances from customers Beg. balance – AR 200,000 180,000 Balance end - AR Beg. balance – NR 240,000 170,000 Balance end - NR Balance end - Advances 40,000 55,000 Beg. balance - Advances Sales on account 600,000 4,000 Sales ret. and allowance Recoveries 2,000 Salesdiscounts

Total

666,000 3,000 1,080,000 1,080,000

Collections recoveries Write-off

including

Suggested answer: A PROBLEM 5-2 Computatio n of Bad Debts Allowance for bad debts Ending balance Write-off

40,000 8,000

25,000 21,000 2,000

Total

48,000

48,000

Beginning balance Bad debts expense Recoveries

Suggested answer: C

PROBLEM 5-3 (Computation of Purchases) Accounts Payable / Notes Payable / Advances to Suppliers Payments 800,000 200,000 Beg. balance - AP Purchase ret. and allow. 6,000 400,000 Beg. balance - NP Purchase discount 3,000 68,000 Balance end - Advances Beg. balance - Advances 50,000 651,000 Purchases (gross) Balance end – AP 250,000 Balance end – NP 210,000 Total 1,319,000 1,319,000 Suggested answer: A

4


PROBLEM 5-4 Computatio n of Cost of Sales Accounts Payable (AP) / Notes Payable (NP) Payments 800,000 200,000 Beg. balance - AP Purchase ret. and allow. 6,000 - Beg. balance - NP Purchase discount 3,000 859,000 Purchases (gross) Balance end - AP 250,000 Balance end-NP Total 1,059,000 1,059,000

Beginning balance Net purchases Total

Merchandise Inventory 400,000 210,000 Ending balance 860,000 1,050,000 Cost of sales 1,260,000 1,260,000

Computation of the net purchases: Grossp urchases onaccount Addcash purchases Total Less: Purchase returns and allowances Purchase discount Netpurchases

859,000 10,000 869,000 6,000 3,000 860,000

Suggested answer: B PROBLEM 5-5 (Computation of Income Other Than Sales) Rent Receivable/Unearned rent income Beg. Balance - Rent Receivable Balance end - Unearned rent income Rent Income (squeeze) Total

200,000

250,000

Balance end - Rent Receivable 90,000 Beg. Balance – Unearned rent income 660,000 Collections

30,000

770,000 1,000,000

1,000,000

Suggested answer: B PROBLEM 5-6 (Computation of Expenses in General) Prepaid Rent/Rent payable Beg. Balance - Prepaid Salaries Balance end - Accrued Salaries Payments Total

200,000

250,000

Balance end - Prepaid Rent 80,000 Beg. Ba lance – Re nt payable 785,000 Rent Expense

65,000

850,000 1,115,000

1,115,000 5


Suggested answer: C PROBLEM 5-7 (Computation of Cost of Machine Acquired and Sold) Question No. 1 Carrying amount of equipment sold Add: Accumulated depreciation Cost

25,000 15,000 40,000

Question No. 2 Equipment Beg. Balance Cost of PPE (squeeze)

acquired

Total

100,000 60,000

120,000 40,000

160,000

160,000

Balance end Cost of PPE disposed

Accumulated depreciation Balancee nd Accumulated depreciation ofP PE disposed

18,000 15,000

Total

33,000

15,000 Beg. Balance 18,000 Depreciation expense 33,000

SUMMARY OF ANSWERS: 1. 2. D A

PROBLEM 5-8 Question No. 1 Prepaid Insurance Beg.Balance Payments

7,500 41,500

Total

49,000

6,000 Balancee nd 43,000 Expenses (squeeze) 49,000

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

14,500 112, 700

3,700 Balancee nd 123,500 Collections

Total

127,200

127,200

6


Question No. 3 Salaries payable Balancee nd Payments

61,500 481,000

Total

542,500

53,000 Beg. Balance 489,500 Expenses 542,500

Question No. 4 Accounts receivable trade Beg. Balance Sales

415,000 1,980,000

550,000 Balance end 1,845,000 Collections (squeeze)

Total

2,395,000

2,395,000

Question No. 5 Accounts receivable trade Beg. Balance Sales

415,000 1,980,000

550,000 Balance end 1,820,000 Collections (squeeze) 25,000 Write-off

Total

2,395,000

2,395,000

Question No. 6 Accounts receivable trade Beg. Balance Sales Recoveries

415,000 1,980,000 20,000

550,000 Balance end 1,840,000 Collections (squeeze) 25,000 Write-off

Total

2,415,000

2,415,000

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

C

4.

A

5.

6.

A

B

PROBLEM 5-9 Question No. 1 Accounts/Notes receivable trade Decrease in A/R Sales on account (squeeze)

100,000 100,000 I ncrease in N/R 10,000 Write-off 4,260,000 4,200,000 Collections 30,000 20,000

Total

4,360,000

4,360,000

7

Sales discounts Sales ret. and allow.


Question No. 2 Accounts payable Cash paid to creditors

2,800,000

Purchase discounts

200,000

Decrease in Accounts payable purchases 2,650,000Gross (squeeze)

40,000

Purchase returns

10,000

Total

2,850,000

2,850,000

Question No. 3

Merchandise inventory

Decrease in Inventory Gross purchases

25,000 2,650,000

40,000 P urchase discounts 10,000 Purchase returns 2,625,000 Cost of sales (squeeze)

Total

2,675,000

2,675,000

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

revenue

Total

14,000 I ncrease in Rental receivable 40,000 Decrease in Unearned rental 400,000 Collections from tenants

454,000

454,000

454,000

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

Prepaid

5,500

Interest

8,500

114,000Interest (squeeze)

100,000 114,000

SUMMARY OF ANSWERS: 1. D 2. D 3. A 4. A

114,000

5.

8

D

expense


PROBLEM 5-10 Question No. 1 Accounts Receivable/Notes receivable trade Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze)

200,000 300,000 1,000,000

Total

1,500,000

250,000 Bal. end – A/R 100,000 Bal. end – N/R 20,000 Sales ret. and allow. 10,000 Sales discount 1,120,000 Collections 1,500,000

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

and

Total

25,000 75,000 40,000

50,000 Beg. Balance – A/P 100,000 Beg. Balance – N/P 650,000 Gross purchases (squeeze)

10,000 650,000 800,000

800,000

Gross purchases Less: Purchase ret and allow Purchased iscounts

650,000 40,000 10,000

Net Purchases

50,000

600,000

Question No. 3 Sales Less:Salesret and allow Salesdiscounts Net Sales Less: Cost of Sales Merchandiseinventorybeg. Add: Net Purchases Purchases Add:Freight-in GrossPurchases Less: Purch.R et and allow Purchase discounts

1,000,000 20,000 10,000

30,000 970,000

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

Totalg oodsavailablefors ale Less: Merchandisei nventory,e nd Gross Income / Gross Profit

6 00,000 800,000 100,000

9

700,000 270,000


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

100,000

350,000

Total

500,000

125,000

Balance end - Pr epaid Salaries 75,000 Beg. Balance - Accrued Salaries expense 300,000Salaries (squeeze)

50,000

500,000

Question No. 5 Accrued rent/Unearned rent Beg. Balance - Accrued rent Balance end - Unearned rent Rent income (squeeze)

70,000

40,000

490,000

Balance end - Accrued rent 80,000 Beg. Balance - Unearned rent 300,000 Collection of rent

Total

600,000

600,000

40,000

SUMMARY OF ANSWERS: 1. A 2. B 3. C 4. B

5.

B

PROBLEM 5-11 Question No. 1 Beg. Balance Recoveries Sales (squeeze)

Total Sales Less: Sales discount Net Sales

Accounts receivable trade 200,000 300,000 Balance end 8,000 20,000 Sales discounts 1,570,000 1,408,000 Collections including recoveries (1,498,00080,000+20,00-30,000) 50,000 Accounts written-off 1,778,000

1,778,000

1,570,000 20,000 1,550,000

Question No. 2 Payment (1,210,00020,000+30,000) Purchase ret. and allow. Balance end

Accounts payable trade 150,000 Beg. Balance 1,210,000 1 ,170,000 Purchases (squeeze) 10,000 100,000 10


Total

1,320,000

Purchases Less: Purchases discount Net Purchases

1,320,000

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

Question No. 3 Merchandise inventory Beg. Balance

380,000

Net Purchases (1,170,000-10,000) Total

330,000 Balancee nd

1,160,000

1,210,000 Cost of Sales (squeeze)

1,540,000

1,540,000

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

70,000 130, 000

80,000 Balancee nd 120,000 Collections

Total

200,000

200,000

Question No. 5 Allowance for Doubtful accounts Accounts written off

50,000

20,000

Beg. Balance

Balancee nd

30,000

account 52,000Doubtful expense (squeeze) 8,000 Recoveries

Total

80,000

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

B

80,000

4.

A

5.

A

PROBLEM 5-12 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Professional

fees

500,000 5,250,000

750,000 5,000,000

5,750,000

5,750,000

(squeeze) Total

11

Balance end Collections


Question No. 2 ProfessionalFees(SeeN o.1) Less: Rent expense (1.2M +100,000) Supplies expense (800,000+300,000-250,000) Othero peratingexpense Interest expense (1M x 12% x 9/12) Depreciation expense (2,500,000/10) Net income Question No. 3 Cash AccountsReceivable Supplies Total Current Assets

850,000 750,000 90,000 250,000

3,240,000 2,010,000

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

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

2,500,000 375,000 2,125,000

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

2,500,000 2,125,000

Total Assets

4,625,000

Question No. 6 NotesPayable Accruedrent Accrued interest on notes payable (1,000,000 x1 2% x9/12) Total Current Liabilities

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

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

5,250,000 1,300,000

4.

A

12

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

5.

A

6.

C

7.

B


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

124,000 1,535,000

Total

146,000 Balancee nd 13,000 Salesdiscount 1,500,000 Collections

1,659,000

1,659,000

Salesonaccount

1,535,000

Add: sales TotalCash sales

160,000 1,695,000

Question No. 2 Grosss ales(seeNo.1) Less:Sales discount Net sales

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

Question No. 3 Accounts Payable Payments Balancee nd

1,206,000 410,000

382,000 1,234,000

Total

1,616,000

1,616,000

Beg. Balance Purchases (squeeze)

Purchasesona ccount

1,234,000

Add:C ashp urchases Total Purchases

120,000 1,354,000

Question No. 4 Merchandise Inventory Beg. Balance Net purchases

186,000 1,354,000

190,000 Balance end 1,350,000 Cost of sales (squeeze)

Total

1,540,000

1,540,000

Question No. 5 Prepaid G&A/Accrued G&A Beg. Balance - Prepaid Interest Balance end – Accrued Interest Payments

9,600

204,000

Total

222,600

8,400

Balance end - Prepaid Interest 7,000 Beg. Balance – Accrued Interest 207,200 Expenses

9,000

222,600 13


Question No. 6 General and administrative expense (see No. 5) Depreciationexpense Warrantyexpense Total operating expense

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

Question No. 7 Sellingprice of land Less:Bookvalue of land Gain on sale of land

20,000 16,000 4,000

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

12,000 25,000 16,000

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

9,000 3,000 42,000

48,000 20,000

28,000 14,000

Question No. 10 NetSales

1,682,000

Less:Cost ofSales Gross Profit Less:Operatingexpenses Gain on sale (14,000+3,000+4,000) Net income

1,350,000 332,000 297,600 21,000 55,400

SUMMARY OF ANSWERS: 1. 2. 3. B C 6. 7. 8. A A

D C

4. 9.

A B

5. 10.

B A

PROBLEM 5-14 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance

150,000

Sales (squeeze)

800, 000

Total

950,000

200,000

Balancee nd

10,000 Sales returns 740,000 Collections 950,000

14


Question No. 2 Salesonaccount Add:Cash sales Total sales Less: Salesr eturns anda llowances Net sales Less:Costo fsales( squeeze) Grossprofit(200,000/40%)

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

Merchandise inventory Beg. Balance Net Purchase s (squeeze)

190,000 420,000

220,000 390,000

Total

610,000

610,000

Balancee nd Cost of Sales

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

230,000

Beg. Ba lance - Accounts payable 428,000 Gross purchases (420,000+8,000)

470, 000 8,000 180,000 658,000

658,000

Question No. 4 Total payment of Accounts payable and admin expenses Less: Payment ofA ccounts payable Payment of admin expe nses Question No. 5 Paymentof adminexpenses Divided by: Percentage of cash expenses to total admin expense Totaladminexpenses Add:Sellingexpenses Total selling and administrative expense Question No. 6 Totaladministrativeexpenses Less: Payment of administrative expense Non-cash administrative expenses Less: Depreciation for building (440,000 x60%x 5% x9/12) 15

518,000 470,000 48,000

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

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


Depreciation for furniture andf ixtures Divided by: Number of months used over 12 months Annual depreciation Dividedby: Depreciationrate Cost of Furniture and Fix tures (no res idual value )

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

4. A

5. C

PROBLEM 5-15 Question No. 1 Cash Receipts: Fromcustomers From issue of ordinary shares Frombankloan Cash disbursements: Purchaseo fi nventory Rent Salaries Utilities Insurance Purchase of equipment and furniture Cash

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

6.

360,000 100,000 100,000 300,000 15,000 30,000 5,000 3,000 40,000

Question N os. 2 and 3 Current assets Cash Inventories Prepaidrent(1,000x3) Total current assets (No. 2) Noncurrent assets Property, plant and equipment Less accumulated depreciation Total assets (No. 3)

A

560,000

393,000 167,000

167,000 100,000 3,000 270, 000 40,000 4,000

Question No. 4 Accountspayable Utilitiespayable Loanspayable

36,000 306, 000

20,000 1,000 100,000

Interest on loans payable (100,000 x 12% x 9/12) Total current liabilities

16

9,000 130,000


Question No. 5 Ordinary shares Retained earnings (net income) Shareholders’ equity SUMMARY OF ANSWERS: 1. 2. 3. B B

100,000 176,000 176,000

A

4.

D

5.

A

PROBLEM 5-16 Question No. 1 Notesreceivable–December3 1 Accountsreceivable– December31 Collectiono fnotesandaccounts Notereceivablediscounted Total Less: Notes receivable – January 1 Accounts receivable– January1 Sales on account

210,000 950,000 2,950,000 200,000 4,310,000 200,000 740,000

Question No. 2 Notespayable –December31 Less:Notepayable–bank Notespayable –trade Accountspayable–December31 Paymentofn otesanda ccounts Total Less: Notes payable – January 1 Accounts payable – January 1 Purchases on account

940,000 3,370,000

580,000 300,000 280,000 750,000 2,100,000 3,130,000 750,000 600,000

Question No. 3 Equipment –January1 Add:Acquisition Total Less:Equipment–December3 1 Depreciation

1,350,000 1,780,000

1,000,000 280,000 1,280,000 1,200,000 80,000

Question No. 4 Interest accrued on note issued to bank (300,000 x 12% x 10/12) Interest expense Question No. 5 Volks Company Income Statement Year ende d Decembe r 31, 2016 17

30,000 30,000


Sales Cost of sales: Inventory – January1 Purchases Goods available for sale Less: Inventory – December 31 Gross income Expenses: *Expenses

3,370,000 1,600,000 1,780,000 3,380,000 1,500,000

820,000

Depreciation **Losso ns ale ofi nvestment ***Loss on note receivable discounted Interestexpense Net income

80,000 50,000 10,000 30,000

*Expensespaid Add:Prepaidexpenses–January1 Accruedexpenses–December31 Total Less: Prepaid expenses – December 31 Accrued expenses – January 1 Expenses

990,000 500,000 790,000 120,000 50,000 960,000

100,000 40,000 140,000 820,000

**Salesprice Less:Cost ofinvestmentsold Loss on saleof investment

250,000 300,000 ( 50,000)

***Loss on note receivable discounted (200,000 – 190,000) OR Retained earnings – December 31 Add:Dividends Total Less: Retained earnings – January1 Net income

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

1,880,000 1,490,000

C

10,000

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

4.

18

C

5.

D

Chapter 6: Correction of Errors

CHAPTER 6: CORRECTION OF ERRORS PROBLEM 6-1 Income Statement and SFP Errors Que stions Nos. 1-6 2016

Unadjusted balances 1 2 Adjusted balances

2017 RE, end of the year

Net income 160,000

260,000

360,000

160,000

260,000

360,000

Net income

Workin g capital

200,000

180,000

200,000

-

-

-

-

200,000

-

180,000

Workin g capital

-

200,000

Questions No. 7 Assuming errors were discover ed in 2016 ADJUSTING ENTRIES Debit 1) Miscellaneousi ncome 25,000 Rent income

25,000

2) Notespayable Accountspayable

28,000

Credit

28,000

Assuming errors were discover ed in 2017 1)

ADJUSTING ENTRIES Noentry

2)

Noentry

Assuming errors were discover ed in 2018 ADJUSTING ENTRIES 1) Noentry 2)

Debit

Credit

Debit

Credit

Noentry

SUMMARY OF ANSWER S: 1. A 2. B 3.

A

4.

RE, end of the year

C

19

5.

C

6.

C


PROBLEM 6-2 Counterb alancing Erro rs Que stions Nos. 1-6 2016 Workin g capital

Net income

Net income

R/E

2017 Workin g capital

R/E

Unadjusted balances 1 2 3 4

200,000 (15,000) 20,000 6,000 (7,500)

180,000 200,000 160,000 (15,000) (15,000) 15,000 2 0,000 2 0,000 (20,000) 6,000 6,000 (6,000) (7,500) (7,500) 7,500

260,000 -

360,000

Adjusted balances

203,500

183,500

260,000

360,000

203,500

Question No. 7 A. Errors were dis covered in 2016 ADJUSTING ENTRIES 1) Interestexpense Interestpayable 2)

156,500

Debit 15,000

Credit 15,000

Interestreceivable Interestincome

20,000 20,000

3) Prepaidi nsurance Insuranceexpense

6,000 6,000

4) Rentrevenue Unearnedrentrevenue

7,500 7,500

B. Errors were dis covered in 2017 Assuming errors are discovered when the cash flows related to the transactions were processed and books are still open ADJUSTING ENTRIES Debit Credit 1) Retainedearnings 15,000 Interestexpense 15,000 2) Interestincome Retainedearnings

20,000

3) Insuranceexpense Retainedearnings

6,000

4) Retainedearnings Rentrevenue

7,500

20,000 6,000 7,500

When books are already closed, no necessary adjusting entries to be made. C. Errors were dis covered in 2018 No necessary adjusting entries to be made.

SUMMARY OF ANSWER S: 1. C 2. B 3.

C

4.

C 20

5.

B

6.

C


PROBLEM 6-3 Counterb alancing Erro rs Que stions Nos. 1-6 Net income Unadjusted balances 1 2 3

200,000 (60,000) 80,000 (20,000)

Adjusted balances

200,000


R/E, end

180,000 200,000 160,000 (60,000) (60,000) 6 0,000 80,000 80,000 (80,000) (20,000) (20,000) 2 0,000

180,000

200,000

Question No. 7 A. Errors were dis covered in 2016 ADJUSTING ENTRIES 1) Purchases Accountspayable 2)

Net income

160,000


R/E, end

260,000 -

360,000 -

260,000

360,000

Debit 60,000

Credit 60,000

Accountsreceivable Sales

80,000 80,000

3) Cost of sales Inventory

20,000 20,000

B. Errors were dis covered in 2017

Assuming errors are discovered when the cash flows related to the transactions were processed and books are still open ADJUSTING ENTRIES Debit Credit 1) Retainedearnings 60,000 Purchases 60,000 2) Sales Retainedearnings 3)

80,000 80,000

Retainedearnings Inventory,beginning

20,000 20,000

If books are already closed, no necessary adjusting entries to be made. C. Errors were dis covered in 2018 No ne cessa ry adjusting entries to be made .

SUMMARY OF ANSWER S: 1. 2. 3. C B

C

4.

B

21

5.

C

6.

B


PROBLEM 6-4 Noncount erba lancing Errors Que stions Nos. 1-6 2016

2017

Net income

Workin g capital

RE, end of the year

Net income

Unadjusted balances 1. 2. 3.

200,000 (30,000) 20,000 12,000

180,000 200,000 ( 30,000) ( 30,000) 20,000 20,000 12,000

160,000 (6,000) 10,000 -

4. 5. 6.

150,000 (12,000) (15,000)

Adjusted balances

325,000

- 150,000 - (12,000) - (15,000)

170,000

325,000

Question No. 7 A. Errors were discovered in 2016 ADJUSTING ENTRIES 1) Insuranceexpense Prepaidinsurance 2)

Accumulated depreciation

4)

Depreciationexpense Building improvements Repairsexpense

260,000 360,000 ( 36,000) ( 36,000) 30,000 30,000 12,000 -

-

100,000 (12,000) - (10,000)

254,000

444,000

Credit 30,000

20,000 20,000 12,000 12,000 200,000 200,000

Depreciation expense Accumulatedd epreciation

50,000 50,000

5) Other income Accumulated depreciation Gain on sale Building

20,000 48,000

6) Repairsexpense Building

20,000

8,000 60,000 20,000

Accumulated depreciation Depreciationexpense B.

119,000

Debit 30,000

Unearned rent income Rent income

3)

(50,000) 5,000

RE, end of the year

Workin g capital

5,000 5,000

Errors were discovered in 2017 ADJUSTING ENTRIES 1) Retainedearnings Insuranceexpense Prepaidinsurance

Debit 30,000 6,000

Credit

36,000 22


2)

3) 4)

Unearned rent income Retainedearnings Rent income

30,000 20,000 10,000

Accumulated depreciation Retainedearnings

12,000 12,000

Building improvements Retainedearnings

200,000 200,000

Depreciation expense

50,000

Retained earnings Accumulatedd epreciation 5)

6)

50,000

Retainedearnings Accumulated depreciation Building

12,000 48,000

Retainedearnings Building

20,000

60,000 20,000

Accumulated depreciation Retainedearnings Depreciationexpense C.

10,000 5,000 5,000

Errors were discovered in 2018 ADJUSTING ENTRIES 1) Retainedearnings Prepaidinsurance

Debit 36,000

2)

30,000

3) 4)

5)

6)

100,000

Credit 36,000

Unearned rent income Retainedearni gs

30,000


12,000 12,000

Building improvements Retainedearnings

200,000

Depreciation expense Retained earnings Accumulatedd epreciation

50,000 100,000

200,000

150,000

Retainedearnings Accumulated depreciation Building

12,000 48,000

Retained earnings Building

20,000

60,000


20,000

10,000 10,000 23


SUMMARY OF ANSWER S: 1. 2. 3. D A

D

4.

A

5.

6.

A

D

PROBLEM 6-5 Comprehen sive Que stions Nos. 1-3 Effects of error in Net income Working 2015 2016 Capital 10,000 (10,000) (8,000) ( 8,000)

1)M Iover,N Iover MIunder, NIunder 2) Purchases over, NI under

(20,000)

3)S aleso ver,NIover

20,000

4) Expenses over, NI under Depreciation exp under, NI over 5)O therincomeover *Lossu nder,N Iover Adjustment

20,000 (40,000) (20,000) 70,000

(40,000) 70,000

(80,000) 20,000 20,000 5,000 (45,000)

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

32,000

22,000

20,000 40,000 15,000

Question No. 4 Effect of errors to Retained Earnings in 2016 Understatement to2 015 net income Overstatementto2 016net income Net understatement to 2016 retained earnings Questions No. 5 ADJUSTING ENTRIES 1) Retainedearnings,beg Merchandiseinventory,beg Merchandisei nventory, end CostofSales

25,000 (5,000)

45,000 32,000 13,000

Debit 10,000

Credit 10,000

8,000 8,000

2) Purchases Retainedearnings

20,000 20,000

Advances supplier Purchases

40,000

3) Retainedearnings,beg Sales

40,000

20,000 20,000 24


Sales Advances customers

70,000

4) Depreciationexpense Improvements Accumulatedd epreciation Retainedearnings

20,000 100,000

5)

70,000

40,000 80,000

Accumulatedd epreciation Retained earnings, beg Equipment

SUMMARY OF ANSWER S: 1. 2. 3. A A

A

15,000 25,000 40,000 4.

5.

A

C

PROBLEM 6-6 Comprehen sive Que stions Nos. 1-5 2015 Net Workin Income g capital Ending Inventory 2015 understated, NI understated Ending Inventory 2016 overstated, NI overstated Depreciation exp. 2015 overstated, NI understated Depreciation exp. 2016 over tated, NI understated Accrued expense understated, NI overstated 2015 Accrued expense understated, NI overstated 2016 Prepaid expense understated, NI understated 2015 Prepaid expense understated, NI understated 2016 Accrued revenues understated, NI understated 2016 Deferred revenues understated, NI overstated 2015 Total

(6,000)

(6,000)

Net Income

-

Workin g capital

6,000

10,000 (11,000)

12/31/2 016

2016

10,000

-

4,500

(4,500)

7,500

(5,000)

1,200 (16,300)

(5,000)

5,000

10,000

-

(7,000)

4,500

R/E

(11,000)

-

( 7,000)

-

-

7,500

7,500

-

-

(12,000)

(12,000)

(12,000)

(3,000)

(3,000)

(3,000)

1,200

(1,200)

-

-

5,300

800

2,500

(15,500)

25


SUMMARY OF ANSWER S: 1. D 2. D 3.

A

A

4.

5.

C

PROBLEM 6-7 Note to pro fessor: Item letter b - On December 31, “f” should be December 31, 2016. Item letter e - Additional industrial robots were acquired at the beginning of 20X0 (should be 2015). Adjusting entries: a) PrepaidI nsurance( InsuranceExpense( RetainedEarnings( b) c) d)

14,000 7,000 21,000

Retained earnings, beginning MerchandiseI nventory, beginning

25,000 25,000

Retained earnings,beg Commissionexpense

15,500 15,500

This is not an error, rather it is a change in accounting estimate.

e) Equipment Accumulated depreciation ( Retainedearnings

100,000 20,000 80,000

Depreciation expense ( Accumulatedd epreciation

10)

10,000

Question No. 5 Item a Item b Item c dItem Item e Net adjustment to retained e arnings SUMMARY OF ANSWER S: 1. 2. 3. B B

A

10,000

4.

21,000 (25,000) (15,500) 80,000 60,500

(E)

B

26

5.

(E)


PROBLEM 6-8 Net Income Unadjusted balances 1. Advtg exp over, NI under 2. Advances rec. as sales 2016 2017 3. Advances rec. as purchases 2016 2017 4. Gain understated Cost under Accumulated depreciation Depr. Over, NI under 5. Rent revenue under 6. Bad debts exp under (5% x 480K)16,000) 7. Purchases under EI under 8. Ins. Exp. Under, NIover Adjusted balances

CA

200,000

NCA

1 ,570,400

CL

1 ,365,600

636,000

RE 300,000

50,000

60,000 (100,000)

100,000 (100,000)

(50,000) 80,000

80,000

80,000

64,000

64,000 (336,000) 400,000

13,600

13,600

13,600

20,000

(60,000)

(8,000)

(8,000)

60,000

(8,000) 20,000

20,000 15,000

15,000

344,600

SUMMARY OF ANSWER S: 1. C 2. C 3.

1 ,662,400

D

4.

A

27

1 ,443,200

5.

D

696,000

424,600

Chapter 8: Cash and Cash Equivalents

CHAPTER 8: CASH AND CASH EQUIVALENTS PROBLEM 8-1 Cash and Cash Equivalents CurrentaccountatM etrobank Payrollaccount Pettycashfund( Postalmoneyorder Traveler’scheck Treasury bills, due 3/31/2018 (purchased 12/31/2017) Treasurywarrants Undeliveredcheck Company’spostdatedcheck Stale checkissued Total cash and cash equivalents (E)

1,000,000 250,000 2,000 15,000 25,000 100,000 150,000 100,000 50,000 25,000 1,717,000

PROBLEM 8-2 Cash and Cash Equivalents Reportedc ashandc ash equivalents Certificate of deposits with maturity of 120 days Postdated check Adjusted cash and cash equiva lents

6,325,000 (500,000) (125,000) P5,700,000

Suggested answer: A

Cash and Cash Equivalents PRO BLEcoins M 8-3 Billsand onhand Checking Account Balance in Bank of Philippine Island Money order Pettycash ( - 1,650) Traveler’scheck Total

105,560 44,000 1,600 2,350 44,800 198,310

Suggested answer: (E) PROBLEM 8-4 Cash and Cash Equival ents Cash on hand CheckingaccountNo.1 43-BPI CheckingaccountNo.1 55-BPI *Securities classified as cash equivalents Checking account No. 155 - BPI

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

*Breakdown of securities classified as cash equivalents Date Maturity Securities: Acquired Date 120-day Certificate of Deposit 12/10/2016 01/31/2017 BSP-Treasury Bills (No.2) 10/31/2016 01/20/2017 28

Amount P 600,000 1,000,000


Money Market Funds

11/21/2016

02/10/2017

2,000,000

Suggested answer: A

PROBLEM 8-5 Cash and Cash Equival ents Bank cheque account Bank savings account (collectible immediately) Cash Treasury bonds – maturing in 2 months Cash and cash equi valents

P

P

58,400 23,440 10,000 8,500 100,340

Suggested answer: B

PROBLEM 8-6 Cash and Cash Equival ents Petty cash fund (70,000-15,000-5,000) Current account – Metro Bank (4,000,000+100,000) Cash and cash equi valents

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

Suggested answer: C

PROBLEM 8-7 Effective Interest Rate Question No. 1 Let X = Principal amount of the loan Principal Less: Compensating balance Add:Currentbalance Amountneeded X-.05X+50,000 .95X .95X/.95 X

= = = =

X 5%X 50,000 P3,375,000

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

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

420,000 5,000 415,000 3,375,000

12.30%

Suggested answers: 1.C 2C.

29


PROBLEM 8-8 Petty Cash Fund

Requirement No. 1: Wor king Paper for the Petty Cash Fund

Petty Cash Count Sheet January 3, 2017; 9:00 AM Bills

Denomination Quantity 200 10 100 20 20 40

Coins

10 10 59 1 804 .25 1,410 .10 1,520 .05 810

100 45 804 352.50 152 40.5 6,258

TotalBillsandCoins Checks for Deposits: Maker Date W. Ally, Cashier 12/28/17

Total 2,000 2,000 800

Payee Amount ABC Company 500

I.O.U's D at e Amount A. Braham, janitor 12/19/17 250 R. Tica, clerk 12/20/17 150 P. Du, Bookkeeper 12/22/17 200 Total Vouchers: Payee J. Cruz, messenger CidBookstore DalinLiner Bureau of Posts (stamps) A. Bala, carpenter Total

600 Date 12/14/17 12/15/17 12/19/17 12/20/17 12/21/17

Accountcharged Advances to employees Supplies Freight-out Supplies Repairs

Billsandcoins Checksfordeposit I.O.U’s Voucherspaid Unusedstamps

6,258 500 600 1,217 50

TotalPettyCashAccounted Less: Petty cash Accountabilities PettyCashShortage

8, 625 12,600 (3,975)

30

Amount 125.00 150.00 192.00 300.00 450.00 1,217.00


Petty cash accountabilities Pettycashimprestbalance Unclaimedpayroll Pettycashaccountabilities

12,000 600 12,600

Acknowledgment I hereby acknowledge that the above petty cash fund items were counted in my presence and the same were returned to me intact. I further acknowledge a petty cash short of three thousand nine hundred seventy-five ( 3,975). I have no other fund accountabilities. W. Ally Petty Cash Custodian Requirement No. 2 ADJUSTING ENTRIES 1) Employeea dvances Petty cashfund 2) Expenses Officesupplies Petty cashfund

Debit 600

Credit 600

1,217 50 1,267

3) Cashs hortorover Petty cashfund

3,975

4) Cashs hortorover

3,975

3,975

Petty cashfund

3,975

Requirement No 3 Billsand coins Checksfordeposit TotalPetty CashFund

6,258 500 6,758

PROBLEM 8-11 Bank Reconciliation Oct.3 1 Receipts Unadjusted bank bal 18,005 17,709 Erroneousbank credit (500) DIT:October 1,790 (1,790) November 3,600 OC: October (6,681) Nov.(760+1,868)

13,114

Unadjusted book bal Creditmemo Oct. Nov.

11,534 1,600

19,019 18,269 750 31

Disb 25,620

Nov.3 0 10,094 (500) 3,600

(6,681) 2,628 21,567 21,575

(2,628) 10,566 8,228 1,600 750


NSF-Nov BSC: Oct Nov Check No. overstated disbursement Check No. understated disbursement

665

(665) (20) 22 (22) 35 (35)

(20)

148 (1,000)

1,000

150 270 13,114

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

B

4.

19,019

D

PROBLEM 8-12 Deposit in Transit Depositin transit,beg Add: Book debits for the month Less: CM recorded this month Error – check received (Jan) Error – check issued (Jan) Add: Error – check received (Feb) Total Less: Bank debits for this month Less:CMforthismonth

5.

21,567

(270) 10,566

A

P 50,000 P 400,000 5,000 36,000 27,000 16,000

348,000 398,000

P 360,000 6,000

Erroneous bank credit - Feb Erroneous bank charge - Jan Deposit in tran it, end

2,500 1,000 350,500 P 47,500

Suggested answer: A PROBLEM 8-13 Outstanding Checks Outstanding checks, beg (squeeze) Add: Book credits for the month Less: Errorin recording Servicec hargerecorded Total Less: Bank debits for this month Less: NSF check returned DMforthismonth Outstanding checks, end

P 12,880 P8 5,800 1,800 30 83,970 96,850 P 97,650 2,300 3,000 92,350 P 4,500

Suggested answer: A

32


PROBLEM 8-14 Proof of Cash Question No. 1 Outstanding checks, beg. Add:Checksissued Total Less: Checks paid by the bank Outstanding checks, end

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

Question No. 2 Deposits intransit, beg Add:Depositsmade Total Less: Deposits acknowledged by the bank Deposits intransit, end

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

31-May Receipts Unadjusted bal-bank 2,600,000 *2,190,000 Deposit in transit-May 31 300,000 (300,000) -June30 500,000 Outstanding checksMay31 (100,000) -June30 Erroneous bank credit (60,000) Erroneous bank charge 40,000 (40,000)

Disb. 30-Jun **2,410,000 2,380,000

500,000 (100,000) 400,000 (400,000) (60,000)

Adjusted balances 2,780,000 2,350,000 *(1,600,000+40,000+550,000) **(2,200,000+60,000+50,000+100,000) Unadjusted bal-book Bank service chargeMay31 -June30 CM for collection-May 31 -June30 NSFchecksforJune30 Adjusted balances

31-May 2,190,000

2,650,000

Receipts ***2,400,000

50,000 (600,000) 550,000

2,780,000

A

4.

(10,000) (50,000)

550,000 100,000 (100,000) 2,350,000 2, 650,000 2,480,000

***(1,800,000+600,000)

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

Disb. 30-Jun 2,500,000 2,090,000

(10,000)

600,000

2,480,000

A

33

5.

A


PROBLEM 8-15 Proof of Cash Question No. 2 Outstandingchecks, beg. Add Checks issued Bookdisb. LessDMlastmo Error last mo. C T M Under ofCD OverofCR Total Less checks issued Bank disb. lessDMthismo Error last mo. C T M Under ofCD Erroneous B Cr-LM Erroneous BC H-TM Outstandingchecks, end

150,000 1,500,000 110,000 -

1,390,000 1,540,000

1,300,000 75,000 45,000 30,000

Deposits intransit, beg Add deposits made Book receipts 1,300,000 Less: CM last month 125,000 Error last mo. C T M Under of CR (21K-12K) 9,000 OverofCD Total Less: Deposits acknowledged by the bank Bankr eceipts 1400000 Less: CM this month 150,000 Error last mo. C T M Under of CR Erroneous B CH-LM 20,000 Erroneous B Cr-TM 17,000 Deposits intransit, end

1,150,000 390,000

200,000

1,166,000 1,366,000

1,213,000 153,000

31-May Receipts Disb. 30-Jun BANK Unadjusted bal-bank 1,250,000 1,400,000 1,300,000 1,350,000 Deposit in transit-May 31 200,000 (200,000) -June30 153,000 153,000 Outstanding checks-May 31 (150,000) (150,000) -June30 390,000 (390,000) Erroneous bank credit-May 31 (45,000) (45,000) -June30 (17,000) (17,000) 34


Erroneous bank chargeMay31 -June30 Adjusted balances

20,000

(20,000) (30,000) 30,000 1,465,000 1, 126,000

1,275,000 1, 316,000

31-May Receipts Disb. 30-Jun BOOK Unadjusted bal-book 1,251,000 1, 300,000 1,500,000 1,051,000 NSF-May31 (110,000) (110,000) -June30 75,000 (75,000) CM for collection-May 31 125,000 (125,000) -June30 150,000 150,000 Undero fC R-May Adjusted balances

9,000 (9,000) 1,275,000 1, 316,000

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

C

4.

D

5.

PROBLEM 8-16 Proof of Cash Question No. 1 Beg.Bal.,7/1 Add:CashreceiptsforJuly Cash receiptsfor Aug. Total Less: Cashd isbursementf or July Cashd isbursementforAug. Bankreconciliationitem Unadjusted balance

Unadjusted balances Outstanding checks July31 August31 Deposit in transit July31

31-Jul 180,250

D

P 67,122 P1,702,830 1,166 4,950

P

Receipts 1,830,752

( 50,944)

32,844

6.

A

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

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

Questions No 3 to 5 BANK

1,465,000 1, 126,000

1,696,714 P1,763,836

1,712,892 50,944

Disb. *1,702,918 ( 50,944) 67,122

( 32,844) 35

Aug.3 1 308,084

(67,122)


August31 Erroneousbank charge Adjusted Balances (*1,702,830 + 88) BOOK Unadjusted balances Error in recording check no. 216 taken up as P1,930 but should be P1,390 (1,930-1,390) DM forint.onnote Bank service charge July 31 ( August 31 NSF forJuly 31 ( Adjusted balances **(1,712,892+750)

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

162,150

31-Jul P162,360

41,836 - ( 1,166) 1,839,744 1,717,930

Receipts P1,839,744

Disb. Aug. 31 **P1,713,642 P288,462

540

540 4,950 ( 4,950)

52)

(

698) P162,150

A

4.

41,836 1,166 283,964

52)

88 ( 88) ( 698) P1,839,744 P1,717,930 P283,964

B

5.

A

PROBLEM 8-17 Proof of Cash Question No 1 Outstanding check Check Nos. 144 P 1,500 149 8,000 150 12,000 Total P 21,500 Alternatively, it may also be computed as f ollows: Outstandingcheck,beg P 7,000 Add:Checksissued 75,000 Total P82,000 Less: Checks paid by the bank Bank Debits P 113,000 Less: DM for this month NSF checks (10,000+40,000) 50,000 Banks ervicecharge 2,000 ErrorCorrection 500 60,500 Outstanding checks, end P 21,500

Question No 2 Unadjustedrec.perbank Deposit in transit: November30 December 31

P171,500 (11,000) 20,000 36


Error correction NSF check, no entry on the books when ret urned andredeposited Adjusted balance 140,000

Question No 3 Unadjusted disbursement, per bank Outstanding checks November30 December 31 Error correction NSF check, no entry on the books on the returned and redeposit Adjusted balance

(500) ( 40,000) P P1 13,000 (7,000) 21,500 (500)

( 40,000) P 87,000

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

P 127,500

20,000

( 21,500) P126,000

Question No 5 Zero, adjusted bank and book balance on December 31 is the same. PROOF OF CASH Unadjusted bank balance Deposit in transit November30 December 31 Outstanding checks November30 December 31 Error correction NSF check, no entry on the books on the return and redeposit Adjusted bal.

Nov.3 0 69,000

Receipts 171,500

11,000

(11,000) *20,000

(7,000)

Disb. 113,000

Dec. 31 *127,500

20,000

(500)

(7,000) 21,500 (500)

73,000

(40,000) 140,000

(40,000) 87,000

Nov.3 0 66,000

Receipts 113,800

Disb. 85,000

(21,500)

126,000

* (69,000+171,500-113,000) ** (18,000+2,000) Unadjusted book balance Credit memo for note collected

37

Dec. 31 94,800


November30 December 31 Bank service charge November30 December 31 Adjusted bal.

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

8,800

(8,800) 35,000

35,000

(1,800) 73,000

B

4.

2,000 87,000

140,000

B

PROBLEM 8-18 Proof of Cash Question No. 1 Outstandingchecks,beg Add: Check s issued this mont h Book disbursements (squeeze) Less: DM recorded this month Total Less: Checks paid by the bank Erroneousbank charge Outstandingchecks,end

5.

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

A

P 16,250

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

Question No. 2 Depositin transit,beg Add: Deposits made by the company Total

126,250 142,500 130,000 P 12,500

P 12,500 152,500 165,000

Less: Deposits acknowledged by the bank Deposit in transit, end

Question No. 3 Unadjusted cash in bank balance per ledger Add: Under-footing ofc ash receipts Total Less: Unrecorded bank service charges (3,250 +1,500-2,500) Adjusted cash in bank balance, 12/31 Question No. 4 Bank service charges per bankstatementi nD ecember Less: Bank service charge in December

145,000 P 20,000

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

P 3,250

recorded in December Total BSC recorded in the books Dec Less: BSC in Nov. recordedi nD ec. Unrecorded BSC charge in December

P 2, 500 1,500 1,000 P 2,250

38


Question No. 5 Unadjusted cash in bank, November (squeeze) Add: BookR eceipts (152,500 - 2,500) Total Less:Bookdisbursements Unadjusted cash in bank, December

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

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

P 16,250 1,500 P 14,750

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

4.

C

D

PROBLEM 8-19 Proof of Cash Question No. 1 Outstanding checks, beg (squeeze) Add: Check s issued this mont h Book disbursements Less: DM recorded this month Total Less:B ankd isbursements Add: Paid out in currency Less:NSF redeposited DMforthismonth Outstandingchecks, end Question Nos 2 to 5 BANK Unadj. balance - bank Undeposited collections: September3 0 October 31 Outstanding checks: September 30 October 31 Paidoutincurrency Adjusted balances BOOK Unadj. balance - book Customer’s notes collected: September3 0 October 31 Bank service charge:

5.

B

P 8,000 P 148,000 2,500

145,500 153,500

P1 50,000 2,000 3,000 1,500

Sept.3 0 100,000

R eceipts 200,000

5,000

(5,000) 7,000

(8,000) 2,000 201,000

97, 000 Sept.3 0 91,500

R eceipts 196,000

8,000

39

(8,000) 13,000

147,500 P 6,000

Disb. 150,000

Oct.3 1 150,000

7,000 (8,000) 6,000 (6,000) 2,000 147, 000 151, 000

Disb. 148,000

Oct.3 1 139,500

13,000


September 30 October 31 Adjusted balances

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

(2,500) 97,000 4.

A

(2,500) 1,500 147,000

201,000

A

5.

1,500 151,000

A

PROBLEM 8-20 Proof of Cash Question No. 1 Account No. 143: Bank Book Unadjusted balances P1,000,000 P1,099,400 Depositin transit *80,000 Misplaced check ( 20,000) Outstandingcheck (**60,000) Undeliveredcheck 15,000 Note chargedbythebank ( 74 400) Adjusted balance P1,020,000 P1,020,000 *(100,000 - 20 ,000, Misplaced check) **(75,000 - 15,000, Undelivered check) Question No. 2 Total Outstanding checks: AccountNo.143 *Account No.144 Total outstanding check

P

60,000 1,860,000 1,92 P 0,000

*Outstanding check for Account No. 144 is computed as follows: Outstandingchecks, beg P 250,000 Add: Check s issued this mont h Book Credits P3,500,000 Less: BSC November 10,000 3,490,000 Total P 3,740,000 Less: Checks paid by the bank BankD ebits P2,000,000 Less: BSC December 20,000 NSF check 100,000 1,880,000 Outstanding checks, end P1,860,000

Question Nos. 3 to 4 December Unadjusted bank balance Deposit in transit: November 30 December 31

Nov.3 0 2,200,000 90,000

R eceipts 1,000,000 ( 90,000) **240,00 40

Disb. 2,000,000

Dec.3 1 1,200,000

240,000


0 Outstanding check: November30 December 31 Erroneous bank charge November Adjusted balances Unadjusted balance

(250,000)

(250,000) 1,860,000

(1,860,000)

20,000 2,060,000

(20,000) 1,130,000

3,610,000

(420,000)

1,980,000

1,420,000

3,500,000

(100,000)

(10,000) 20,000

(20,000)

book

Bank service charge: November30 (10,000) December 31 Unrecorded collections November3 0 90,000 Uncollected customer's note already recorded ascashreceipt (200,000) NSF-December31 Adjusted balances 2,060,000

(90,000)

(200,000) 100,000 (100,000) 1,130,000 3,610,000 (420,000)

**Depositi ntransit,beg P Add: Deposit made by the co. this month BookDebits P1,420,000 Less: Unrecorded collection 90,000

90,000

Customer’s cash receiptsnote recorded as 200,000 1,130,000 Total P1,22000 Less: Deposits acknowledged by the bank BankC redits P1,000,000 Less: Erroneous bank charge 20,000 980,000 Outstandingchecks,end P 240,000

Question No. 5 Adjusted balances: AccountNo.1 43 AccountNo.1 44 Total adjusted balances SUMMARY OF ANSWERS: 1. 2. 3. A A

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

B

4.

B

PROBLEM 8-21 Proof of Cash Question No. 1 RCBC Account Unadjustedbalance

5.

C

Book P 165,000 41

Bank P 125,000


Creditmemof ornotec ollected Bank service charge Depositin transit Outstanding checks (25,000+20,000) Unrecordeddisbursement Adjusted balance

6,000 (1,000) 60,000 (45,000) ( 30,000) P 140,000 P 140,000

Question Nos. 2-3 Book Bank Equitable PCI Bank Unadjusted bal. (squeeze) P 93,000 P 62,000 Creditmemof ornotec oll. 10,000 Bank service charge ( 2,000) Deposit int ransit (15,000+20,000+50,000*) 85,000 Outstandingchecks (28,000) Unrecorded transfer (30,000+50,000*) 80,000 Adjusted balance P 150,000 P150, 00 0 *fund transfer No. 4 (Included both as unrecorded transfer and deposit in transit) Question No. 4 Outstanding checks: RCBC Account (25,000+20,000) EquitablePCI Bank Total outstanding checks

P 45,000 28,000 P 73,000

Question No. 5 Fund transfer No. 1 is recorded in the disbursing book during December while it only cleared in the disbursin g bank in January. SUMMARY OF ANSWERS: 1. 2. 3. 4. 5. A A B B

PROBLEM 8-22 Proof of Cash BOOK Unadjusted balances-books CreditMemo-January CreditMemo-February BSCcheck-January BSCcheck-February Check of the company issued in January was muti lated and returned by the payee. A replacement check was issued. Both checks were entered in the Check register but no entry was made to cancel the mutilated check, P700.

B

Jan. 31 R eceipts 200,000 150,000 9,000 (9,000) 13,000 (100) 700 -

42

Disb Feb. 28 80,000 270,000 13,000 (100) 150 ( 150) 700


The company issued a sto p payment order to the bank in February for check issued in February which was not received by the payee. A new check was written and recorded in the Check register in February. The old check was written off by a journal entry also in February, P1,200. Adjusted balances

-

209,600

(1,200)

(1,200)

-

1 52,800

78,850

2 83,550

BANK Jan.3 1 Receipts Disb Feb.2 8 Unadjusted balances-bank 206,600 159,000 276,950 88,650 Deposit int ransit-January 10,000 (10,000) Depositint ransit-February 11,000 11,000 Outstanding checks-January (4,200) ( 4,200) Outstanding checks-February 1,800 ( 1,800) Erroneous bankc redit-January (6,000) (6,000) Erroneous bankc redit-February (4,000) (4,000) Erroneous bankc harge-January 3,200 (3,200) Erroneous bank charge(1,400) 1,400 February Adjusted balances 209,600 152,800 78,850 283,550 SUMMARY OF ANSWERS: 1. 2. 3. D C

C

4.

A

5.

C

PROBLEM 8-23 Computation of Cash Shortage Question No. 1 Unadjustedbank bal. Less: Outstanding checks (8,434+4,300+ 6,524+ 9,551.50+4,577+5,961) Add:Undepositedreceipts Adjustedbankbalance

(39,347.50) 35,000 P221,052.50

Question No. 2 Unadjustedbookbal. Creditmemof ornotescollection

P242,310.50 30,000

Creditmemo for int. Balance( cash accountability)

P

225,400

900 P273,210.50

43


Question No. 3 Adjusted bank bal. (Cash accounted) Less: Cash in bank bal. (cash accountability) Shortage SUMMARY OF ANSWERS: 1. 2. 3. B D

P221,052.50 273,210.50 (P52,158.00)

B

PROBLEM 8-24 Computation of Cash Shortage Question No. 1 Unadjustedbank bal. P 42,400 Outstandingchecks ( 11,500) Undeposited collections 5,000 Adjusted bank balance P 35,900 Question No. 2 Unadjustedbookbal. Creditmemop roceedscleandraft Debit memo for bank servicec harge Balance (cash accountability)

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

Question No. 3 Adjusted bank bal.( Cash accounted) Cash inb ank bal.( cash accountability) Shortage asofJune30

(

Question No. 4 Additional cas shortage from July 1-15 JulycollectionperduplicateO.R. Less: collections in July that were deposited in July Collection per duplicates lips Less :Undeposited collection, June 30 Casht hatshouldb eo nh andonJuly1 5 Less:Actualc ashonh andonJuly1 5 Cash shortage from July 1-15

P3 5,900 47,300 P11,400)

P 18,800

P1 1,000 5,000

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

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

P

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


1.

C

2.

D

3.

B

4.

D

5.

D

PROBLEM 8-25 Computation of Cash Shortage Question No. 1 Deposit int ransit,u nadjustedb al. Less:C ustomer's Post-dated check Adjusted Deposit in transit 125,250

P 175,250 50,000 P

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

194,790

Question No. 3 Unadjustedbal.perbank Add:Deposit intransit( No. 1) Less: Outstanding checks (No.2 ) Erroneousbankcredit Adjusted cash in bank bal.

250,460

Question No. 4 Unadjustedbal.perbooks Add:Creditmemofornotecoll. Unreleasedcheck Company'spost-datedcheck Total Less: Customer s post-dated check Cashi nb ankperbooksbal. Less: Adjusted cash in bank balance Cash shortage

B

P350,000 125,250 (194,790) ( 30,000) P

P 293,500 15,000 14,750 37,210 360 P 460 (50,000) P310,360 250,460 (P60,000)

Question No. 5 Unadjustedbal.perbooks Less: Adjusted cash in bank balance Net adjustments SUMMARY OF ANSWERS: 1. 2. 3. B D

P 246,760 ( 14,750) ( 37,210) P

P293,500 250,460 P 43,040 4.

C

45

5.

A

Chapter 10: Loans and Receivables

CHAPTER 10: LOANS AND RECEIVABLES Note to pro fessor: Page 257. ILLUSTRATION : Sales Disco unt (PAS 18 vs. PFRS 15) SOLUT ION: (PAS 18 ) Accountsreceivable 100,000 Sales (inst ead of allowance for sales discount )

100,000

PROBLEM 10-1 Trade and oth er receiva bles Trade Trade and other Noncurrent Receivables receivables Asset 1 277,000 277,000 2 150,000 150,000 3 10,000 4 30,000 5 110,000 6 15,000 7 70,000 70,000 8 80,000 220,000 9 100,000 100,000 Adjusted bal. 597,000 1. C 732,000 2. C 330,000 PROBLEM 10-2 Different Fre ight terms Question No. 1 FOB Destination, freight prepaid Invoicepriceofmerchandisesold 300,000 Less:Invoicep riceof merchandisereturned Netinvoiceprice 300,000 Less:Salesdiscount( 300,000x 2%) 6,000 Collectionbeforefreight 294,000 Less: Freight payment - FOB Destination, freight collect Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash Collection ( B) 294,000

Question No. 2 FOB Destination, freight collect Invoicepriceofmerchandisesold Less:Invoicep riceof merchandisereturned Netinvoiceprice Less:Salesdiscount( 300,000x 2%)

300,000 300,000 6,000

NetPayment freight 294,000 Less: Freightbefore payment - FOB Destination, freight collect 5,000 Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash Collection(A) 289,000 46


Question No. 3 FOB Shipping point, freight prepaid Invoicepriceofmerchandisesold 300,000 Less:Invoicep riceofm erchandisereturned Netinvoiceprice 300,000 Less:Salesdiscount( 300,000x 2%) 6,000 NetReceiptbefore freight 294,000 Less: Freight payment - FOB Destination, freight collect Add: Freight payment - FOB shipping point, freight prepaid 5,000 Total Net Cash Collection(C) 299,000 Question No. 4 FOB Shipping point, freight prepaid Invoicepriceofmerchandisesold 300,000 Less:Invoicep riceofm erchandisereturned Netinvoiceprice 300,000 Less:Salesdiscount( 300,000x 2%) 6,000 Collectionbeforefreight 294,000 Less: Freight payment - FOB Destination, freight collect Add: Freight payment - FOB shipping point, freight prepaid Total Net Cash Collection(B) 294,000 SUMMARY OF ANSWER S: 1. B 2. A 3.

C

4.

B

PROBLEM 10-3 Gross method and Net method List price P100 000 Less: Trade discounts 15%: (100,000 x1 5%) 15,000 20%: (100,000 – 15,000) x 20% 17,000 32,000 Invoice price, gross of discount (C) 68,000 Less: Sales discount (68,000 x3 %) 2,040 Invoice price, net of discount P 65,960 (D) SUMMARY OF ANSWER S: 1. C 2. D PROBLEM 10-4 Compu tatio n of Percentage of Bad Debts Expens e Credit Sales 2013 2014 2015

2,000,000 3,500,000 7,000,000

CASE 1 Accounts written off 40,000 270,000 330,000 47

Recoveries 20,000 15,000 50,000


2016 2017

2,000,000 9,000,000 3,000,000 12,000,000

65,000 395,000 85,000 480,000

30,000 80,000 40,000 120,000

Question No. 1 Percentage

Accounts written off minus Recoveries Total credit sales

=

Total years fr om 2013 to 2017: Percentage

480,000 - 120,000 12,000,000

=

Percentage = 3.00 %

Question No. 2 Bad debts expense

= 3% x 3,000,000 = 90,000

Question No. 3 Allowance for Bad debts 85,000 400,000 Beg.Balance 90,000 Bad debts exp 445,000 40,000 Recovery 520,000 520,000

Writeoff Balance end (squeeze)

CASE 2

Question No.4 Percentage


=

Total years from 2013 to 2015 (years should exclude the last two years ): 330,000 - 50,000 Percentage = 7,000,000 Percentage = 4 %

Question No. 5 Bad debts expense

= 4% x P3,000,000 = 0,000

Question No. 6 Credit Sales

BD exp

2016 2017

80,000 1 20,000

2,000,000 3,000,000

Recoveries

Write-off

65,000 30,000 85,000 40,000 Allowance for BD (D) 48

Net AB 1 15,000 165,000 280,000


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

=


Total years fr om 2013 to 2016: Percentage of bad = debts to AR

395,000 - 80,000 9,000,000

Percentage = 3.5% Percentage debts to of ARbad

=

Accounts written minus Total off credit sales Recoveries

Total years fr om 2013 to 2017: Percentage of bad = debts to AR

480,000 12,000,000

Percentage = 3 %

Question Nos. 8 and 9 Allowance for Bad deb ts Balance end (3,400,000 x 3%) 102,000 105,000 Writeoff 85,000 (D)42,000 40,000 187,000 187,000 SUMMARY OF ANSWER S: Case 1 1. B 2. B 3. B

Beg. Balance (3,000,000 x 3.5%) Bad debts exp (squeeze) Recovery

Case 2 4. D 5. D 6. D

PROBLEM 10-5 Aging Based on Out standin g Receivab les Question No. 1 Categories Balance (No. of Days) 0-30d ays 500,000 31-60d ays 600,000 61-90d ays 750,000 over 91 days 300,000 Totals 2,150,000 Balancee nd

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

Allowance for Bad debts 95,500 40,000 Beg. balance 49

Case 3 7. C 8. D 9. C


(see above table) Writeoff (23,000+100,000)

123,000 218,500

12,000 Recoveries 166,500 Bad debts exp (squeeze) 218,500

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

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

SUMMARY OF ANSWER S: 1.

A

2.

A

PROBLEM 10-6 Aging Base d On Days Past Due Question No. 1 Overdue accounts % uncollectible Balance Forl ess than 31 days 5.00% 300,000 From31-60days 6.00% 220,000 From61-90days 8.00% 150,000 From91-120d ays 15.00% 60,000 For over121days 20.00% Required allowance for doubtful accounts

Al lowance 15,000 13,200 12,000 9,000 49,200

Question No. 2 Balance end

Allowance for Bad debts 49,200 20,000 Beg. balance 29,200 Bad debts exp (squeeze) 158 000 158,000

SUMMARY OF ANSWER S: 1. A 2. A

PROBLEM 10-7 Interest -bearing Not e with Realistic Intere st Rate Requirement No. 1 *Selling price P100,000 Less: Carrying amount of machinery Cost 500,000 Less: Accumulated depreciation 350,000 150,000 Loss on sale 50,000) (P The selling price is equal to the face amount, which is likewise equal to *Note: the present value of the note since the note bears an annual interest rate that is similar with the market rate.

50


Requirement No. 2 Interest income = (100,000 x 10%) = P10,000 Requirement No. 3 Zero. The principal amount is collectible beyond one year from the reporting date and thus, reported as non-cu rrent. Requirement No. 4 P100,000. The entire principal amount of notes receivable is treated as noncurrent asset since it i s collect ible beyond one year from the reporting date. Journ al entries are as follows: 01/01/2016 Notes receivable Accumulated depreciation Losson sale Machinery

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

\

12/31/2016 Cash Interestincome

10,000 10,000

PROBLEM 10-8 Interest-bearing Note with Unrealistic Interest Rate, Interes t Is Payable Ann ually, One-Ti me Col lection of Principa l Question No. 1 Present value of principal (2,000,000 x 0.7118) Add: Present value of interest payments (2,000,000x 10%x2.4018) Total present value/ Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Question Nos. 2 to 5 Amortization table Date Interest Collections 01/01/2016 12/31/2016 200,000 12/31/2017 200,000 12/31/2018 200,000

P 1,423,600 480,366 1,903,966 1,000,000 150,000

Interest Income

Discount Amortization

228,475 231,892 235,704

28,475 31,892 35,672

850,000 P1,053,966

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

The total 1,932,435 is reported it is noncurrent receivable due to be amount coll ectedofbeyond twelve m onthsas from the end of the reportingsince period.

SUMMARY OF ANSWER S: 1. B 2. B 3.

A

4.

A 51

5.

C


PROBLEM 10-9 Interest-bearing Note with Unrealistic Interest Rate, Interes t Is Payable Semi-A nnu ally, One-Time Collecti on of Principa l Question No. 1 Present value of principal (2,000,000 x 0.7050) Add: Present value of interest payments (2,000,000x 5%x4.9173) Total present value/ Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale Amortization table Date Interest Collections 01/01/2016 07/31/2016 100,000 12/31/2016 100,000 07/31/2017 100,000 12/31/2017 100,000 07/31/2018 100,000 12/31/2018 100,000

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

Question No. 2 Interest income up to 07/31/2016 Interest income up to 12/31/2016 Total interest income

P 1,410,000 491,730 1,901,730 1,000,000 150,000

Discount Amortization 4,104 1 14,950 15,815 16,796 17,804 18,802

850,000 P1,051,730

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

114,104 114,950 229,054

Question No. 3 1,930,784. See amortization table above. Que stion No .s 4 and 5 The total amount of 1,932,435 is reported as noncurrent receivable since it is due to be collecte d beyond twe lve month s from the end of the reporting period. SUMMARY OF ANSWER S: 1. B 2. B 3.

B

4.

A

5.

D

PROBLEM 10-10 Interest -bearing Note with Unrea listic Interest Rate, Uniform Coll ection of Principal Question No. 1 52


Computation of present value of all payments: Present Interest Principal value fact or collections 0.8929 600,000 180,000 0.7972 600,000 120,000 0.7118 600,000 60,000 Totalpresentvalue Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale

Amortization table Interest Date Collections 01/01/16 12/31/16 180,000 12/31/17 120,000 12/31/18 60,000

Total collections 780,000 720,000 660,000

To tal PV 696,462 573,984 469,788 1,740,234

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

Interest Income

850,000 P890,234

Amortizatio n

208,828 140,287 70,651

Principal collections

28,828 20,287 10,651

600,000 600,000 600,000

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

Question No. 2 208,828. See amortization table above. Question No. 3 1,169,062. See amortization table above. Question N . 4 Principal collections – 2017 Less: Amortization – 2017 Current portion – 12/31/2016

600,000 20,287 579,713

Question No. 4 Carrying value – 12/31/2016 Less: Current portion – 12/31/2016 Non-current portion – 12/31/2016 SUMMARY OF ANSWER S: 1. 2. 3. B B

A

4.

1,169,062 579,713 589,350

B

5.

A

PROBLEM 10-11 Non-interest-bearing Note with Unrealistic Interest Rate, Non-Uniform Collection of Principal Question No. 1 Computation of present value of all payments: 53


Total PV facto r collections 0.8929 1,000,000 0.7972 600,000 0.7118 200,000 Total present value of the notes

TotalP V 892,900 478,320 142,360 1,513,580

Total present value / Selling price Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale

Question Nos. 2 to 5 Amortization table Interest Date income 01/01/16 12/31/16 181,630 12/31/17 83,425 12/31/18 21,382

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

850,000 P663,580

Amortizatio n

Principal Collections

181,630 83,425 21,365

1,000,000 600,000 200,000

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

Question No. 2 181,630. See amortization table above. Question No. 3 695,210. See amortization table above. Question No. 4 Principal collections – 2017 Less: Amortization – 2017 Current portion – 12/31/2016

600,000 83,425 516,575

Question No. 5 Carrying value – 12/31/2016 Less: Current portion – 12/31/2016 Non-current portion – 12/31/2016

695,210 516,575 178,635

SUMMARY OF ANSWER S: 1. 2. 3. B B

A

4.

B

5.

D

PROBLEM 10-12 Noninterest-bearing Note, One-T ime Collection of Principal Question No. 1 Total present value (1,800,000 x 0.7118) 54

1,281,240


Less: Carrying amount of machinery Cost Less: Accumulated depreciation Gain on sale

Amortization table Date Inter est Income 01/01/16 12/31/16 153,749 12/31/17 172,199

1,000,000 150,000

Amortization 153,749 172,199

850,000 P431,240

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

12/31/18 192,812 192,812 Question No. 2 153,749. See amortization table above.

1,800,000

Question No. 3 1,434,989. See amortization table above. Que stion No . 4 and 5 The total amount of 1,434,989 is reported as noncurrent receivabl e since it is due to be coll ected beyond twelve m onths from the end of the reporting period. SUMMARY OF ANSWER S: 1. B 2. B 3.

A

4.

B

5.

A

PROBLEM 10-13 Com putation of Annual Payment or Collection Requirement No. 1

CASE 1: Based on the original data

Annual collection

=

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

Annual collection

=

1,500,000 2.4018

Annual collection

= P624,532

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

= P180,000

CASE 2 Requirement No. 1 Annual collection

=

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

Annual collection

=

1,500,000 2. 6901

Annual collection

= P557,600 55


Requirement No. 2 Interest income (1,500,000 – 557,600) x 12%

= P113,088

PROBLEM 10-14 Accountsreceivable Sales

250,000 250,000

Sales discount 250,000 x 3% x4 0%)

3,000

Allowanceforsalesdiscount Cash( 250,000x 50%x97%) Allowancef ors alesdiscount Sales discount [ 250,000 x (50% - 40%) x 3%] Accounts receivable ( 250,000x 50%)

121,250 3,000 750

3,000

125,000

On December 31, 2016, the receivable then is included in the statement of financial position as follows: Accountsreceivable,end 250,000 Less: Allowancef ors ales discount 3,000 Netrealizablevalue 247,000

SOL UTION: (PFRS 15) Accountsreceivable Refund liability Sales [ 100,000 – ( 100,000x2 %x 50%) Cash( 100,000x 60%x9 8%) Sales discount [ 100,000 x (60% - 50%) x 2%] Refundliability Accountsreceivable( 100,000x 60%)

100,000 1,000 99,000 58,800 200 1,000 60,000

On December 31, 2016, the receivable then is included in the statement of financial position as follows: Accounts receivable = Net realizable value 100,000

PROBLEM 10-15 SOLUTION: Requirement No. 1 PAS 18 2017: Dec.3 1 Accountsreceivable Sales

550,000 550,000

Cost of sales Merchandiseinventory

300,000

Sales returns ( 550,000 x 30%)

165,000

300,000

56


Allowancefors alesreturn

2018: Jan. 5

165,000

Cash [ 550,000 - (45% x 550,000)] Sales returns [(45%-30%) x 550,000] Allowance for sales returns Accountsreceivable

302,500 82,500 165,000 550,000

Requirement No. 2 PAS 18 2017: Dec. 31 No journal entry. No revenue is recognized because the company cannot estimate reliably any future returns. 2018: Feb.1


550,000 550,000

Cost of sales 300,000 Merchandiseinventory 300,000 Note: Revenue is recognized since the time period for rejecting/accepting has elapsed.

Requirem ent No. 1 PFRS 15 2017: Dec.3 1 Accountsreceivable Sales[ 550,000x (100%-30%)] Cost of sales ( 300,000 x 70%) Asset for right to recover product to be returned Merchandise inventory

2018: Jan. 5

Cash [ 550,000 - (45% x 550,000)] Sales returns [(45%-30%) x 550,000] Accountsreceivable Merchandisei nventory Costof sales Asset for right to recover product to be returned

Requirem ent No. 2 PFRS 15 2017: Dec. 31 Asset for right to recover product to be returned

5,000 5,000 210,000 90,000 300,000 302,500 82,500 5,000 135,000 45,000 90,000

300,000

Merchandiseinventory

2018: Feb.1

300,000


550,000 550,000 57


Cost of sales Asset for right to recover product to be returned

300,000 300,000

PROBLEM 10-16 Impairment of Receivable, One-time Collection of Principal CAS E NO. 1 Question No. 1 Principal 16,000,000 Add: Accrued interest receivable 1,600,000 17,600,000 Less: *Present value of expected cash flows 7,705,280 Loan impairment ( A) 9,894,720 *Computation of prese nt value of all payments: PV factor Total collections Total PV 0.9091 1,600,000 1,454,560 0.8264 3,200,000 2,644,480 0.7513 4,800,000 3,606,240 Total present value of the notes 7,705,280

Question Nos. 2 to 3 Amortization table Date 12/31/2015 12/31/2016 12/31/2017 12/31/2018

Collections

Interest Income

Amortization

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

770,528 687,581 436,339

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

CAS E NO. 2 Question No. 4 Carrying value – 12/31/2015 (see table below) Less: *Present value of expected cash flows Loan impairment (B) Amortization table Interest Received Date Or Accrued 01/01/2013 12/31/2013 1 ,600,000 12/31/2014 1 ,600,000 12/31/2015 1,600,000* *Interest accrued .

Interest Income 1,781,530 1,803,313 1,827,711 58

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

15,458,634 7,705,280 9,894,720

Amortization 181,530 203,313 227,710

Carrying amount 14,846,080 15,027,610 15,230,923 15,458,634


12/31/2015

Accrued interest receivable Interestincome

1,600,000 1,600,000

Unearned interest income Interestincome

227,710 227,710

CAS E NO. 3 Question No. 5 Carrying value – 12/31/2015 (see table below) Less: *Present value of expected cash flows Loan impairment ( C) Amortization table Interest Received Date Or Accrued 01/01/2013 12/31/2013 1 ,600,000 12/31/2014 1 ,600,000 12/31/2015 12/31/2015

17,058,634 7,705,280

9,353,354

Interest Income

Amortization

1,781,530 1,803,313 1,827,711

181,530 203,313 1 ,827,711


Carrying amount 14,846,080 15,027,610 15,230,923 17,058,634

1,827,711 1,827,711

CAS E NO. 4 Question No. 6 Carrying value – 12/31/2015 (see table below) Less: *Present value of expected cash flows Loan impairment C)

Amortization table Interest Received Date Or Accrued 01/01/2013 12/31/2013 1 ,600,000 12/31/2014 1 ,600,000 12/31/2015 1 ,600,000

Interest Income 1,781,530 1,803,313 1,827,711

12/31/2015 Cash Interestincome

15,458,634 7,705,280 9,894,720

Amortization 181,530 203,313 227,710

Carrying amount 14,846,080 15,027,610 15,230,923 15,458,634

1,600,000 1,600,000


SUMMARY OF ANSWER S: 59

227,710

227,710


1.

A

2.

B

3.

B

4.

B

5.

C

6.

PROBLEM 10-17 Rev ersal of Impairment Loss Question No. 1 Present value of expected cash flows vs. Would have been present value if there was no impairment Lower Less:Actualamortizedcost Gain on reversal of impairment loss (A) Question No. 2 Present value of expected cash flows Less:Actuala mortizedc ost Gain on reversal of impairment loss (D)

P6 54,552 600,000 600,000 396,681

P 2 03 ,319 P6 54,552 396,681 P 2 57 ,871

Question No. 3 Interest inc ome (600, 000 x 10%)

( B)

P 60,000

Question No. 4 Interest inc ome (654, 552 x 10%)

(A)

P 65,4 55

SUMMARY OF ANSWER S: 1. A 2. D 3.

B

4.

C

A

PROBLEM 10-18 Pledge of Receiv able Principalamountborrowed P900,000 Less: One year interest deducted in advance (900,000 x 10%) ( 90,000) Cash received on December 1 ( B) P810,000

PROBLEM 10-19 Assignment of Accounts Receivable Question No. 1 Principalamountborrowed P150,000 Less: Finance fee (150,000 x 5%) ( 7 ,500) Cash received on December (1D) P 142,50 0 Question No. 2 Notespayable Less: Princip al payment Remittance Less: Interest (150,000 x 12% x 3/12) Notes payable – Decemb er 31 (C) Question No. 3 60

P150,000 95,000 ( 1,500) 93,500 P56,500


Accounts receivable – assigned (200,000 – 100,000) P 100,000 Less:Notespayable ( 56,500) Equity in assigned account (C) P 43,500

SUMMARY OF ANSWER S: 1. D 2. C 3.

C

PROBLEM 10-20 Factorin g of Rec eivables Entries to reco rd transactions Option Accounts Debit Credit One Cash( 400,000x90%) 360,000 Receivable from factor (25,000 – [5% x 400,000]) 5,000 Loss on sale of receivables (squeeze) 35,000 Notespayable 400,000 Two Cash( 400,000x90%) 360,000 Receivable from factor (25,000 – [4% x 400,000]) 9,000 Loss on sale of receivables (squeeze) 34,000 Notespayable 400,000 Estimatedr ecoursel iability 3,000

SUMMARY OF ANSWER S: 1. B 2. C

PROBLEM 10-21 Notes Receivab le Discounting and Notes Receiv able Dishonored CASE NO. 1 Question No. 1 Principal P 600,000.00 Add: Interest over full credit period (600,000 x 9% x 90/360) 13,500.00 Maturity value 613,500.00 Less: Discount (613,500 x 12% x6 5/360) 13,292.50 Net proceeds from discounting ( C) P 600,207.50 Question No. 2 Netproceeds fromdiscounting Less: Carrying amount on date of discounting Principal Add: Interest (600,000 x 9% x 25/360) Loss on notes receivable discounting ( A)

CASE NO. 2 Question No. 3 61

P 600,207.50 600,000.00 3,750.00(P 3,5603,750.00 4 2.50)


Loss of P3,524.50. The amount of loss to be recognized is computed in a similar way as to th at of discounted note without recourse. (A) Question No. 4 Maturityv alue oft he note Add: Protest fee and other bank charges Cash received on December 1 (C)

P 613,500 5,000 P618,500

CASE NO. 3 Question No. 5 Interest expense of P3,524.50 . The amoun t of interest ex pense is compute d in a similar sale. (A)way as to that of discounted note without recourse or conditional

Question No. 6 Maturityv alue oft he note Add: Protest fee and other bank charges Cash received on December 1 (C) SUMMARY OF ANSWER S: 1. C 2. A 3.

A

4.

P 613,500 5,000 P618,500

C

5.

A

PROBLEM 10-22 Discount ing “Own” Note Question No. 1 Notepayable Less: Discount on note payable (250,000 x 12%) Carrying amount – Date ofi ssuance Effective interest rate

6.

P250,000 ( 30,000) P2 20,000

= Discount/Net proceeds = 3 ,000/220,000 = 1 3.60% (D)

Question No. 2 Entry to record trans action Cash 220,000 Discount on notes payable 30,000 Notespayable 250,000 SUMMARY OF ANSWER S: 1. 2. D B COMPREHENSIVE PROBLEMS PROBLEM 10-23 Question No. 1 2013 2014 2015

Credit Sa les 2,220,000 2,450,000 2,930,000

Accounts written off 52,000 59,000 60,000 62

C

Recoveries 4,300 7,500 7,200


7,600,000

171,000

19,000

Accounts written off minus Recoveries Total credit sales Total years fr om 2013 to 2015: 171,000 - 19,000 Percentage = 7,600,000 Percentage

=

Percentage = 0.02 or 2%

Question No. 2 Doubtful accounts expense (3,000,000 x 2%) = P60,000

Question No. 3 Reported doubtful account expense (bad debts written off) P 62,000 Less: Correct doubtful account expense (see No. 2 ) ( 60,000) Overstatement in doubtful account expenses P 2,000 Question No. 4 Accounts receivable trade Beg. Balance Sales on account

418,000 3,000,000

Total

3,418,000

645,600 Balance end 62,000 Write-off 2,710,400 Collections excluding advance from customers 3,418,000

Question No. 5 All wa nce for Doubtful accounts Accounts written off Balance end

62,000 15,200 Beg. Balance 21,600 60,000 Doubtful accounts expense 8,400 Recoveries

Total

83,600 83,600

SUMMARY OF ANSWER S: 1. A 2. A 3.

B

4.

B

5.

A

PROBLEM 10-24 Question No. 1 Unadjusted accounts receivable, Dec. 1 (squeeze) Add:Adjustednet sales Total Less: Collections, net of discounts 63

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


Estimated uncollectible accounts charged to AR in Dec. 30,000 Unadjusted accounts receivable, Dec. 31 P 90,000 Subsidiary ledgerb alance, Dec. 1 Less: AR controlling account, Dec. 1 (see above) Add: Estimated uncollectible account chargedtoARin Dec. Customers’ credit balance (D)

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

P 59,000 21,800 6,000 27,800 P31,200

P1 56,800 98% P160,000

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

P 31,200 10,000 P 21,200

Question No. 4 Unadjusted Sales, balance P2 60,000 b) Sales, FOB shipping pt., not yet recorded 10,000 c)S ales,F OB destination ( 15,000) Adjusted Sales balance ( A) P 255,000 Question No. 5 Subsidiary ledger, balance, 12/1 Add: Adjusted Sales in December Freight prepaid by the company Total Less: total credit to AR for coll. Adjusted accounts receivable in Dec. (B)

SUMMARY OF ANSWER S: 1. D 2. A 3.

A

4.

P 59,000 255,000 1,000 P315,000 160,000 P1 55,000

A

64

5.

B


PROBLEM 10-25 Question No. 1 Balance De c. 31 1 12,000 2 22,000 4 20,000 5 55,000 6 7,500 116,500

Accounts Not due 3,000 22,000

1 - 6 0 da y s 8,000

61-120 d ays 1,000

Over 120

10,000 2,220

52,780 7,500 68,280

27,220

Multiply by:

0.50% 136.10

11,000

2% 1,365.60

10,000

10,000

5% 550

Question Nos. 2 and 3 Required balance (P136.10+P1,365.60+P550+P5,000) Less: Allowance for doubtful accounts, beginning Doubtful accounts expense 2,051.70

50% 5,000.00

P 7,051.70 5,000.00 P

Question Nos. 4 and 5 Interest income (120,000X6 %X2 /12) (100,000X 6%X 1/12) Interest income SUMM 1. DARY OF 2. ANSWER C 3.S:

Interest income P 1,200 500 P 1,700

B

4.

Accrued interest income P 500 P 500

D

PROBLEM 10-26 Question No. 1 Principal Originationf ees received Direct origination cost incurred Initial Carrying amount of the loan

5.

A

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

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

65


Question N os. 3 and 4 Date 01/01/2016 31/12/2016 31/12/2017 31/12/2018

Collections

Interest Income

Amortization

400,000 400,000 400,000

456,950 463,784 471,439

56,950 63,784 71,346

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

Question No. 5 Zero, As of December 31, 2016, the entire loan proceeds will be collectible on December 31, 2018, that is two years from the repor ting date. SUMMARY OF ANSWER S: 1. 2. 3. A C

4.

B

PROBLEM 10-27 Question No. 1 Annual Cash Date flows Dec. 31, 2015 P1,750,000 Dec. 31, 2016 2,000,000 Dec. 31, 2017 1,750,000 Total

5.

A

A

PV factor Amount 0.9091 P 1,590,925 0.8264 1,652,800 0.7513 1,314,775 4,55P8,500

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

P

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

Question Nos. 3 to 5 Date 12/31/2014 12/31/2015 12/31/2016 12/31/2017

P a y me n t

Interest Income

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

P455,850 326,435 159,079

SUMMARY OF ANSWER S: 1. C 2. A 3.

B

4.

66

Reduc tion to Principal P1 ,294,150 1,673,565 1,590,785

A

5.

C

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


PROBLEM 10-28 Question Nos. 1 to 4

Unadjusted balances 2)Salereturn Cost of return Merchandise (30,000 x80%) 3)Sales FOB shipping point not Salerecorded as Cost of mdse sold (40,000 x80%) 4) Goods shipped FOB Destination recorded assale Cost of goods (50,000 x 80%) 6)D oubtful accts exp Adjusted bal.

Accounts Receivable 300,000 (30,000)

Allow for DA 3,000

Mdse. Net Inventory Sales 400,000 1, 000,000 (30,000)

24,000

40,000

(24,000)

40,000 (32,000)

(50,000)

32,000

(50,000) 40,000

260,000

Cost of Sales 800,000

(12,000) 15,000

432,000

(40,000)

960,000

768,000

Question No. 5 Accounts receivable P 260,000 Less: Allowance for doubtful accounts ( 15,000) Net realizable value P245,000 SUMMARY OF ANSWER S: 1 B 2 B 3.

B

4.

B

5.

C

PROBLEM 10-29 Question No. 1 Classification 1-60 days 61-120days 121-180days 181-360days More than oney ear Totals

Balance P1 ,000,000 400,000 300,000 200,000 60,000 P1 ,960,000

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

Question No. 2 Accounts receivable, adjusted (see no. 1) Less: Allowance for doubtful accounts, end (see no. 1) Net realizable value 67

P 1,960,000 158,000 P1,802,000


Question No. 3 Doubtful accounts per books (9,000,000 x 2%) Less: *Adjusted doubtful accounts expense Understatement of doubtful accounts

P 180,000 188,000 (P 8,000)

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

140,000 158,000

90,000 20,00 188,000

Total

Beg. Balance Recoveries Doubtful account expense

298,000 298,000

Question No. 4 Totalcarryingv alue Less: **Present value of the loan Impairment loss 210,000

P3,000,000 2,790,000 P

*Computation of present value Annual Cash flow PV factor Total P1,000,000 1.00 P 1,000,000 1,000,000 0.93 930,000 1,000,000 0.86 860,000 Total Present value of the loan P 2,790,000

Question No. 5 Date 01/01/2016 12/31/2016 12/31/2017

Collections

Interest Income

1,000,000 1,000,000

143,200

SUMMARY OF ANSWER S: 1. A 2. B 3.

D

B

4.

Amortizatio n 1,000,000 856,800 5.

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

B

PROBLEM 10-30 Question No. 1 Accounts receivable, unadjusted balance Per subsidiary ledger Note receivablei ncluded in theA R Factored Accounts receivable SalesFOBshipping point Adjusted AR balance

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

68


Question No. 2 Allowancef ord oubtfula ccts,b eg. Add: Doubtful accounts (P15,000,000 + P100,000) x 1% Total Less:Accountswrittenoff Allowance for doubtful accts, end 223,000 Question No. 3 UnadjustedNetSales Add:Sales,FOBshippingpoint TotalSales Multiply by: rate Doubtful accounts

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

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

P

Question No. 4 No effect . The audit adjustmen ts did not result to any changes to inventory account. Question No. 5 Sales, FOB shipping point SUMMARY OF ANSWER S: 1. D 2. A 3.

100,000 D

4.

D

PROBLEM 10-31 Question No. 1 Accountsreceivablef actored Less: Service charge (400,000x 5%) Receivable from factor (400,000 x 20%) Customers’ credit balance

5.

P

A

P 400,000 20,000 80,000

Question No. 2 Principal Add: Interest over full credit period (300,000 x 12% x 6/12) Maturity value Less:D iscount(318,000x1 2%x3 /12) Net proceeds from discounting 306,075 Question No. 3 Maturity value of the notes (see item in No. 2) Add:Protest fee Total cash paid/Amount to be debited to AR Question No. 4 Notep ayable( 80% xP600,000) Less: Service fee (5% x P600,00) Cash received

450,000 69

100,000 P300,000 P 300,000 18,000 318,000 11,925 P

318,000 12,000 330,000 P 480,000 30,000 P


Question No. 5 TotalCash paid(see No.3) Add: Interest income (P330,000x 12% x2 /12) Cash received 336,600

330,000 6,600 P

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

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

SUMMARY OF ANSWER S: 1. B 2. C 3.

A

4.

B

D

5.

6.

D

PROBLEM 10-32 Question Nos. 1 to 3 Total Unadjusted Balance, 12/31/2016 Adjustments: WriteOff Unrecordedsale

60 days and below

61 to 90 days

1,000,000

5 00,000

1,900,000 (40,000) 50,000

NSF Check shipment – 20,000 In transit FOB Destination (45,000) Consignment (45,000) Erroneous unit price (7,500) Adjusted balance, 12/31/2016 1,832,500 PercentageofU ncollectibility Required allowance, 12/31/2016 108,825

Over 90 days 4 00,000 (40,000) 50,000

20,000 (45,000) (45,000) (7,500) 49 2,500 5%

930,000 4% 37,200

24,625

410,000 10% 41,000

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

40,000 100,000 Beg. Balance 102,825 - Recoveries

42,825 Total

142,825 142,825 70

Doubtful account expense (squeeze)


Item 1

Accounts Allowancef orb ad debts Accountsreceivable

Debit 40,000


50,000

3

Accountsreceivable Cash inbank

20,000

4

Sales Accountsreceivable

45,000


45,000


7,500

2

5 6

SUMMARY OF ANSWER S: 1. C 2. D 3.

Credit 40,000 50,000 20,000 45,000 45,000 7,500

D

D

4.

C

5.

PROBLEM 10-33 Question Nos. 1 and 3 Adjusting entries for Accounts receivable Item Accounts 1 Accountsreceivable Allowance for doubtful accounts

Debit 20,000

20,000

2

Salesdiscount Accountsreceivable

16 00

3

Accountsreceivable Allowance for doubtful accounts

120,000

Accountsreceivable Allowance for doubtful accounts

30,000

4

Credit

16,000

Miscellaneous income Accountsreceivable

120,000 30,000 30,000 30,000

Accounts receivable Beg. Balance (20,000+200,000) Sales Recoveries

220,000

4,000,000 30,000

71

2,720,000

Balance end

30,00 Recoveries *1,500,000 Collections, gross of discount


Total

4,250,000

4,250,000

*Collections from customers excludin g recoveries Collections withoutdiscount Add:Collections withd iscount Cash discount availed (784,000/98% x 2%) Total collections excluding recoveries

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

Allowance for Doubtful accoun ts 20,000 Beg. Balance 30,000 Recoveries 120,000 Doubtful account expense

Balancee nd

170,000

Total

170,000 170,000

Accounts receivable 2,720,000 Less: Allowance for bad debts 170,000 Net realizable value 2,55P0,000

Question N os. 2, 4 and 5 Adjusting entries for Loans receivable Item Accounts Debit 1 LoanR eceivable 400,000 Interestincome 2


45,382 4,000,000 11,520 (300,000) 3,711,520

Amortization table at 12% Effective Rate Interest Date Collections Income 01/01/2015 12/31/2015 400,000 445,382 12/31/2016 400,000 450,828 12/31/2017 400,000 456,928 400,000 400,000

SUMMARY OF ANSWER S: 1. B 2. C 3.

D

400,000

45,382

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

12/31/2018 12/31/2019

Credit

463,759 471,410 4.

D 72

45,382 50,828 56,928

Carrying amount 3,711,520 3,756,902 3,807,731 3,864,658

63,759 71,583

3,928,417 4,000,000

Amortization

5.

A


PROBLEM 10-34 Question No. 1 Unrecorded gain on sale of machinery – 2015 (see below) 90,183 Unrecorded interest income – receivable from sale of machinery (240,183 x12%) 28,822 Unrecorded accrued interest – receivable from sale of plant (1,500,000x 12%x9/12) 135,000 Net adjustment to R/E – 01/01/16 (B) 254,005 Cash consideration Add: Present value of future cash flows (2.4018 x 100,000) Totalsellingprice Less: Carrying value of machine (800,000 – 450,000) Gain on sale of machine

200,000 240,183 440,183 350,000 90,183

Amortization table (receivable from s ale of machinery): Interest Carrying Date Collections Income Amortization amount 01/01/2015 240,183 12/31/2015 100,000 28,822 71,178 169,005 12/31/2016 100,000 20,281 79,719 89,286 12/31/2017 100,000 10,714 89,286 Question No. 2 Interest income from note receivable: Saleofmachinery( 169,005x1 2%) Sale of plant [(1,500,000 x 12% 3/12) + (1M x 12% x 9/12) Sale of equipment (170,750 x 10% x 9/12) Total interest income (C) 168,087 Question No. 3 Current portion of note receivable fr om: Sale of machinery (see amortization table above) Sale of plant Total current portion (B)

20,281 135,000 12,806

89,286 500,000 589,286

Question No. 4 Non-current portion of note receivable from: Sale of plant Sale of equipment( 170,750 + 12,806) Total non-current portion ( D)

500,000 183,556 683,556 73


Question No. 5 Interestincomefroms aleofmachine Interest income from sale of plant (180,000 – 135,000) Interest income froms ale of equipment Net overs tatement of income ( D) SUMMARY OF ANSWER S: 1. B 2. C 3.

B

4.

D

74

5.

D

20,281 (45,000) 12,806

(11,912)

Chapter 12: Inventories

CHAPTER 12: INVENTORIES PROBLEM 12-1 Cost of Purchase

Purchasep rice basedo n vendors’ invoices 1,250,000 Brokerage commission paid to agents for arranging imports 50,000 Import duties 100,000 Freightandinsuranceonpurchases 250,000 Otherh andling costs relatingt oimports 25,000 Total cost of purchase (B) P1,675,000 Note that the trade discount was already deducted in arriving at the vendor’s invoice.

PROBLEM 12-2 Inventoriable Cost Materials Irrecoverablepurchasetaxes Labor Variableproduction overhead Fixedproduction costs Cartage in Total

350,000 30,000 120,000 50,000 40,000 8,000 (C )

PROBLEM 12-3 Rebates Question No. 1 Invoice price ( o VAT is charged on these goods) Less: Rebate offered to the entity by the supplier Inventoriable cost (B) Question No. 2 Inventoriable cost

10,000

(C)

PROBLEM 12-4 FREIGHT TERMS & FOREIGN EXCHANGE Question No . 1 Free o n Board Cost of inventory ($100,000 x ForEx loss ( -

(A)

187,500

Qu esof tion No. 2 Co st, Insuraxnce and Freight Cost inventory ($100,000 ForEx loss ( (D)

125,000

75


PROBLEM 12-5 MANUFACTURING COST Question No. 1 Variable cost: Direct labor ( Directmaterials( Fixed Cost ( Total cost

/ 100,000 normal capacity) x 100,000 actual (C)

200,000 100,000

Question No. 2 Variable cost:

Directlabor( 120,000units) Direct materials ( 2 excluding VAT x 120,000 units) Fixed Cost ( Total cost (C) Question No. 3 Variable cost: Direct labor ( Directmaterials( Fixed Cost ( Total cost

(D)

PROBLEM 12-6 Items to b e Included in th e Inventory 1 Items in the warehouse during the count 2 Items out on consignment at another company's store

4 5

7 10 14 15 17 18 19 20

1,080,000 200,000 100,000 420,000

160,000 80,000 960,000

P1,090,000 70,000

Items purchased FOB shipping point that are in transit at December 31 500,000 Freight charges on goods purchased above 13,000 Items sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the invent ory. Total cost of merchandiseis 200,000 Items sold FOB destination that are in transit at December 31, at cost 75,000 Items currently being used for window display 100,000 Itemsoncounterfor sale 400,000 Items included in the count, damaged and unsalable (150,000) Items in receiving dept., returned by customer, in good condition( not includedi nt hec ount) 50,000 Merchandise inventories out on approval, at cost 100,000 Finished special article goods, made to order (included in the count) (78,000) Total (A) P2,370,000

76


The following items would not be reported as inventory: 3 Cost of goods sold in the income statement 6 Not reported int he financial statements 8 Cost of goods sold in the income statement 9 Cost of goods sold in the income statement 11 A dvertising exp. In the income statement 12 Not reported in the financial statements 13 Temporary investments in the current assets section oft he balance sheet 16 N ot reported in the financial statements 21

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

Office supplies in thesheet current asset section ofthebalance

40,000

PROBLEM 12-7 Accounts Payable

Unadjustedbalance Goods acquired in transit, FOB shipping point Goodslost intransit Adjusted Accounts Payable (A)

1,800,000 100,000 50,000 P 1, 95 0, 000

The journal entry on item 2 would include the following: Purchases/Inventory 50,000 AccountsPayable

50,000

To record the purchase on December 20.

Query: For F/S presentation on December 31, is the goods lost in transit be

presented as part of inventor y? Answer: No, since the inventories were lost in transit and it is improper to report inventories that is not existing (i.e. it violates the existence assertion). Thus the journal entry at December 31 if no claim was filed and the common carrier has yet to acknowledge the claim may include a: Loss on goods lost in transit (preferably presented as

50,000

other expense and not as cost of goods sold)

Inventory /Purchases

50,000

And on the next year (January 5), when the claim was filed and acknowledged by the common carrier, the journal entry will be: Claimsfromc ommonc arrier 50,000 Gaino n reimbursement of lost inventory 50,000 To record the claim against common carrier on January 5.

77


PROBLEM 12-8 Consigned Goods

Inventory shipped on consignment to Lomasoc FreightbyDesireetoLomasoc Total Inventoriable cost (D)

360,000 18,000 P 378,000

PROBLEM 12-9 Gross method vs. Net method CASE NO 1: Gross method Accounts

Date

Debit

01/02

Purchases (100,000 x [1-20%]) Accountspayable

01/12

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

80,000

Accountspayable Cash

80,000

01/14

Date 01/02

80,000

Credit

80,000 78,400 1,600 80,000

CASE NO 2: Net method Accounts Debit Credit Purchases (100,000 x [1-20%] x[1-2%]) 78,400 Accountspayable 78,400

01/12Accountspayable

78,400

Cash (80,000x[1-98%]) 01/14Accountspayable Purchased iscountlost Cash

78,400 78,400 1,600 80,000

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

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

PROBLEM 12-10 Cost Formulas - Diffe rent Methods Question No s. 1 and 2 Weighted average Weighted average = unit cost

Weightedaverage

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

=

1,105,000 78


unit cost

85,000

Weighted average unit cost = P13/unit Inventoryend(40,000x13) = P520,000 Cost of goods sold (20,000+5,000+21,000–1,000) x 13 = P585,000

(C) (C)

Question N os. 3 and 4 Moving average Units

April1 balance Apr. 2 Balance Apr. 4 Balance Apr. 10 Balance Apr. 15 Balance Apr. 17 Apr. 28 Apr.2 8

Purchase Sale Purchase Sales Salesreturn Balance Purchase Balance

Unit cost

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

10 12 11 11 11 14 12 12 12 12

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

16.75 15

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

Total cost

580,000

=

P580,000 = P525,000

(A) (A)

Question N os. 5 and 6 FIFO April 1balance Apr.2 Apr. 4 (25,000 units sold) Balance from Apr. 2 Apr.10 Apr. 15 (21,000 units sold) Balance from April 2 Balance from April 10 Apr.17 Balance Balance from April 2 Balance from April 10 Apr.28 Total

Units

Purchase From Apr. 1 FromApr.2 Purchase From Apr. 2

Salesreturn

Purchase Balance

Unit cost

Total cost

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

10 1 2 10 12 12 14 12 12 14 12

200,000 360,000 (200,000) (60,000) 300,000 210,000 (252,000) 48,000 210,000 12,000

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

12 14 17

60,000 210,000 335,000 605,000

Inventory end = P605,000 Cost of goods sold (200,000 + 60,000 + 252,000 – 12,000) = P500,000

(B) (B)

Question N os. 7 and 8 Note that inventory and cost of goods sold under FIFO periodic and perpetual is the same. 79


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

4.

5.

A

6.

B

B

7. B

8. B

PROBLEM 12-11 Lower of Cost or Net Realizable Value Question No. 1 Raw Mater ials Supply of steel (used for motorbikes) Cost Moreprofitable( asis)

Write-down 40,000 25,000

Supply of aluminum (used for bicycles) Cost More profitable (completed product) Total write-down

60,000 50,000 (C)

Question No. 2 Work-in- process Incompletemotorbikes Cost More profitable (completed product)

15,000

10,000 5,000

Write-down 30,000 25,000

Incomplete bicycles Cost Moreprofitable (asis) Total write-down

50,000 60,000 (D)

5,000

5,000

Question No. 3 Finished goods

Motorbikes Cost More profi able (completed product)

0,000 60 000

Bicycles Cost More profitable (completed product) Total write-down

80,000 110,000 (C)

Question No. 4 Adju sted COGS Cost of goods sold before write-down Add: Write-down Raw materials Work-in-process Finished goods Adjusted cost of goods sold

Write-down 20,000

,000

25,000 5,000 20,000 (C)

PROBLEM 12-12 Purchase Commitment CASE NO. 1 Date

Accounts 80

Debit

Credit


11/15

No entry

12/31

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

03/15

Purchases(25,000x2 5) Estimated liability for purchase commitment Accountspayable/Cash Gainonp urchasecommitment

100,000 100,000 500,000 100,000 500,000 100,000

CASE NO. 2 Date

Accounts

11/15 12/31

No entry No entry

03/15

Purchases(25,000x2 5) Accountspayable/Cash

Debit

Credit

500,000 500,000

PROBLEM 12-15 Purchase Commitment Date

Accounts

Debit

3/31

No entry

12/31

Loss on purchase commitment (1,200,000-1,000,000) Estimated liability for purchase commitment

04/30 Purchases Estimated liability for purchase commitment Accountspayable/Cash

Credit

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

Gainonpurchasec ommitment

200,000

SUMMARY OF ANSWERS: 1. B 2. A

PROBLEM 12-13 Inventory Estimation - Gross Profit Rate Method

Sales Less: Salesreturns Net Sales excluding Sales discount Multiplyb y:C ost ratio (1-30%) Cost of Goodssold

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

Inventory,January 1 Add: Net Purchases

650,000

Purchases Add:Freight-in Less: Purchaser eturns TotalGoodsavailableforsale Less: Cost ofgoodssold

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

81

2,280,000 2,930,000 (2,359,000)


Merchandise inventory that should be on hand Less: Actual merchandise inventory on hand Cost of Missing inventory (A)

571,000 (420,000) 151,000

PROBLEM 12-14 Inve ntory Estimation: Average Method - Retail Method

Computation of cost ratio: Cost Retail 250,000 375,000 1,325,000 1,750,000 200,000 (75,000) 1,575,000 2,250,000

Inventorya t January 1 Purchases Netmarkups Netmarkdowns Totals Cost ratio (1,575,000 / 2,250,000) = 70%

Computation of Inventory end at retail Balance up to markdowns (see above computation) 2,250,000 Less:Sales 1,500,000 Estimated normal shrinkage (1,500,000 x 5%) 75,000 Estimated normal shoplifting losses 50,000 Inventoryendat retail P 625,000 Computation of Cost of goods sold Total goods available for sale at cost Less: Inventory end at cost (625,000 x 70%) Cost of Sales

(B)

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

PROBLEM 12-15 Inventory Estimation: FIFO Method - Retail Method

Computation of cost ratio: Cost 292,500 292,500

Purchases Net markups Netmarkdowns Totals

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

Cost ratio (292,500 / 450,000) = 65% Computation of Inventory end at retail Balance up to markdowns (see above computation) 450,000 Add:Inventorybeginning 100,000 Less:Sales 375,000 Inventoryendat retail P 175,000 Multiply: Costratio 65% Inventory end at cost (A) P113,750 82


PROBLEM 12-16

PROBLEM 12-17 Question No. 1 A EI over (P129-P119)x 4,000 B EI under C EI over Overstatement of ending inventory

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

Question No. 2 D. Ending inventory understated

(140,000)

(C) (B)

Question N os. 3 and 4

A. B. C. D.

2015 2016 1,000,000 1,200,000 (40,000) 40,000 70,000 (70,000) (100,000) 100,000 140,000 930,000 1,410,000 (A) (C)

Unadjustedbalance EI over, NI over (P129-P119) x 4,000 EI under,NIunder EI over, NI over EI under,NIunder Adjusted balances

Question No. 5 Unadjusted net income (1,000,000+1,200,000)

2,200,000

Less: Adjusted net income (930,000+1,410,000) Net adjustment to income-understated SUMMARY OF ANSWERS: 1. C 2. B 3.

A

4.

C

5.

2,340,000 (D) (140,000) D

PROBLEM 12-18 Question No s. 1 and 2

Balances priort o adjustment Add: Goods in transit sold, FOB destination Less:unrecorded sale Less:unrecordedp urchasereturns

Ledger Balance P3 14,800 3,200 ( 8,400) ( 6,000)

Physical Count P 293,600 3,200 -

Less: goodsheldonc onsignment Add:unrecorded purchase 3,640-- ( 8,800)Add: Goods in transit purchased, FOB shipping point 1,600 Add:Goodsoutonconsignment 14,800 Adjusted balances P 307,240 P 304,400 83


(A) Question No. 3 Adjusted balances, perl edger Adjusted balances, physical count Inventory shortage SUMMARY OF ANSWERS: 1. A 2. C 3.

P

(C)

P 307,240 304,400 2 , 84 0 (B)

B

PROBLEM 12-19 Note to the professor: Use the following guide questions in answering this question: 1. Accounts Payable and related accounts Was there a valid purchase? Was the purchase recorded? Were the inventories INCLUDED in the count? 2. Accounts Receivable and related accounts Was there a valid sale? Was the sale recorded? Were the inventories EXCLUDED in the count? SOLUTION: Ending Inventory

679 680 681 682

683 684 685 686 310 311

312

313

314 315 316

Unadjusted balances

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

550,000

Sales

1 ,000,000

Purchases

600,000

AP

Net Income

450,000

120,000

(46,740) (46,740) (46,740)

(46,740) 46,740

(4,500) 1,060

(560) 392

1,060

(4,500) (1,060)

(560)

(31,940)

392 (31,940)

(6,350)

22,358 (6,350)

(1,930)

4,445 (1,930)

22,358

4,445

84

Chapter 12: Inventories 317 318

No,No , No Net adjustment Adjusted balances

(24,045) (40,780) 525,955 959,220 (A) (A)

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

A

4.

(45,680) (45,680) 554,320 404,320 (A) (A)

5.

A

(19,145) 100,855 (D)

D

PROBLEM 12-20 Ending inventory

Unadjusted balance P220,000 A B (10,000) C 50,000 D 14,000 E ( 24,000) Adjusted P 250,000

Accounts receivable

Accounts payable

P104,000

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

Sales

Neti ncome

P 1,010,000

P180,400 20,000

(64,000) (16,000) P24,000 (C)

(A)

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

D

4.

(64,000) (16,000) P108,000 (D)

D

5.

(14,000) (2,000) ( 24,000)

P930,000 (D)

P160,400 (A)

A

PROBLEM 12-21 Inventory

Unad usted balances A B C D E F G H I J Adjusted b alan ce s

250,000 35,000 4,000 (25,000) 10,000 34,000 60,000 3 68 , 00 0

Accounts payable

400,000 4,000 60,000

Accounts Re ce iv ab le

1,000,000 4,000,000 40,000 40,000 (30,000) (30,000) ( 68,000) (68,000) (10,000) (10,000) (90,000) -

4 64 , 00 0

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

A

932 ,000

4.

A

PROBLEM 12-22 Questions No. 1 to 5 85

Net Pu r chase s

Ne t Sa le s

2,500,000 4,000

D

600,000

35,000

15,000 10,000 (30,000) (34,000) (10,000) (90,000) 60,000 -

3 , 8 42 ,0 0 0

5.

N etin c o me

2 , 5 64 ,0 0 0

6.

D

4 96 , 00 0


R /E

2016 Purchases under, CGS under, NI over, RE over 2017 Purchases over, CGS over 2016 EI under, NI under, RE under 2017 BI under, CGS under Salesunder Purchasesu nder,C GSu nder EIunder, CGSover Purchases under,C GS under EIunder, CGSover

Sales

EI

A /P

CGS

36,000 36,000 (32,000) (32,000) (20,000) (24,000) (8,000) (4,000) (4,000)

Total

4,000

(20,000)

(12,000)

(28,000)

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

Legend: BI - Beginning inventory EI - Ending inventory NI - Net Income CGS - Cost of goods sold RE - Retained earnings – 12/31/2016 or 01/01/2017 4,000 – overstated (4,000) – understated Note: The effect of errors on December 2016 and January 2017 has no effect on the ending balance of the accounts payable on December 31, 2017 since the payable is expected to be settled before the end of the year. SUMMARY OF ANSWERS: 1. C 2. B 3.

B

4.

D

5.

C

PROBLEM 12-23 Question No. 1 Sales (475,000/80%) Less:Cost ofsales Grossprofit

P593,750 475,000 118,750

100% 80% 20%

Inventory (in units)

Beg. Balance (60,000/P3) Purchases Total

20,000

100,000

25,000

Balance end (squeeze) or (125,000/5) 95,000 Cost of sales (475,000/5)

120,000 120,000 Inventory (in peso amount)

Beg. Balance (squeeze) Purchases

60,000 540,000 86

125,000 Balance end (squeeze) 475,000 Costo fs ales


Total

600,000

600,000

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

B

4.

A

5.

B

PROBLEM 12-24 Question No. 1 The cumulative effect on change in accounting policy on January 1, 2016 or December 31, 2015 Retained Earnings is understatement of 100,000, which is the understatement of Ending Inventory on December 31, 2015. (B) Question No. 2 Netincome– weightedaverage Beginning inventory under, CGS under, Net income over Ending inventory under, CGS over, Net income under Adjusted net income – FIFO Question No. 3 Computation of units sold: Beginninginventory–units Add:Total purchases–units Totalgoodsavailablef ors ale–units Less: Units sold (P6,400,000 / P80/unit) Ending inventory inunits

(B)

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

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

The 30,000 ending inventory comes from the last two purchases as follows: Units Unit cost Total cost From 4th quarterpurchases 10,000 68 680,000 From 3rd quarter purchases 20,000 66 1,320,000 Total 30,000 (B) 2,000,000 Question No. 4 Cost (refer tono.3) Net realizable value [(P70 – P5) x 30,000] Loss on inventory write-down Question No. 5 Beginninginventory–FIFO Add: Net Purchases (P6,480,000 – 980,000) Totalgoodsavailablef ors ale Less: Ending inventory at cost (see no. 3) 87

(B)

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

500,000 5,500,000 6,100,000 2,000,000


Cost of goodssoldat cost Add: Loss on inventory write-down (see no. 4) Cost of goods sold afte r inventory write-down SUMMARY OF ANSWERS: 1. B 2. B 3.

B

4.

B

(A)

5.

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

A

PROBLEM 12-25 Question No. 1 (10,500 - 1,000 + 3,000) = 12,000 units No. of units 3,000 2,000 4,000 3,000 12,000

Unit cost Total 14 P 42,000 13 26,000 15 60,000 16 48,000 P 176,000 (A)

Question No. 2 (4,500+700+600)=5,800 units No. of units 1,800 1,800 1,200

Unit cost 19 20 21

1,000 5,800

22

Total P 34,200 36,000 25,200

22,000 P 117,400 (A)

Question No. 3 T-shirts: Net realizable value (12,000 x (P16-(10% x P16)) Jackets: (5,800 x (P22-(10%xP22) Lower of cost or NRV

NRV Cost Lower P172,800 P176,000 P 172,800

114,840 117,400 P287,640 P 293,400

Question No. 4 Totalcost (seeno. 3) Less: Lower ofc ost or NRV( see no. 3) Loss on inventory write-down (B)

114,840 P287,640

P 293,400 287,640 P 5, 760

Question No. 5

Beginning inventories: T-shirts(9,000xP11) Jackets(5,000xP15) Add:*Total purchases (299,500 + 183,900) Totalgoodsavailablef ors ale 88

P 99,000 75,000

P 174,000 483,400 P 657,400


Less: Merchandise inventory atc ost Cost of sales before inventory write-down Add: Lossoninventory write-down Cost of sales after inventory write-down (B) *T-shirts 4,000 3,000 2,500 3,500 2,000

4,000 3,000 22,000 Jackets 900 1,100 1,500 2,000 1,800 1,200 1,000 9,500

P12 12 13 14 13 15 16

P 48,000 36,000 32,500 49,000 26,000 60,000 48,000 P 299,500

P16 18 19 19 20 21 22

P 14,400 19,800 28,500 38,000 36,000 25,200 22,000 P1 83,900

293,400 P 364,000 5,760 P369,760

SUMMARY OF ANSWERS:

1.

A

2.

A

3.

A

4.

5.

B

B

PROBLEM 12-26

This T-Account of Raw Materials will be the same under the three different cases: Raw Materials Beginning balance Net Purchases

600,000 2,200,000

1,200,000 B alance end 1,600,000 Direct materials used

Total

2,800,000

2,800,000

CASE NO. 1 Question No. 1 GP Rate: Gross Profit Divide by: Sales GrossProfit Rate

2013 2,000,000 1,700,000 0. 15

89

2014 3,500,000 2,800,000 0.20

2015 2016 4,000,000 3,000,000 0.25 0.30


The trend of gross profit for the past three years increases by 5% each year; thus, if the trend continues, the gross profit for 2016 will be 30%. The cost ratio then would be 70% (100% - 30%). Therefore, the cost of goods sold is computed as follows: Sales Multiplyb y:C ostRatio Cost of goods sold

6,000,000 0.70 4,200,000 (B)

Question No. 2 Finished Goods

Beginning balance Cost of goods manufactured

2,800,000

2,000,000 Balance end 4,200,000 Cost of goods sold

Total

6,200,000

Beginning balance Direct materials used Direct labor Factory overhead

2,000,000 1,600,000 1,600,000 800,000

Balance end Cost of goods 3,400,000 manufactured

Total

6,000,000

6,000,000

3,400,000 6,200,000

Work in Process 2,600,000

Computation of factory overhead: Directlaborcost Multiply by: Predetermined rate Factory overhead

(A)

1,600,000 50% 800,000 CASE NO. 2:

Question No. 3 GP Rate: GrossProfit Divide by: Sales GrossProfit Rate

2013 340,000 2,000,000 0.17

2014 630,000 3,500,000 0 . 18

2015 2016 1,000,000 4,000,000 0.25 0.20

The GP rate in 2016 is computed as follows: 16% + 18% + 25% Gross Profit Rate = 3 = 20% The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goods sold is computed as follows: Sales 6,000,000 Multiplyb y:C ostRatio 0.80 Cost of goods sold 4,800,000 (B) 90




2,800,000

Total

6,800,000


4,000,000 6,800,000

Work in Process


2,000,000 1,600,000 1,600,000 800,000

Balance end Cost of goods 4,000,000 manufactured

Total

6,000,000

6,000,000

2,000,000

(A)

CASE NO. 3: Question No. 5 The gross profit for 2016 is computed based on the overall gross profit for 2014 and 2015: 800,000 + 1,000,000 Gross Profit Rate = 3,500,000 + 4,000,000 1,800,000 = 7,500,000 Gross Profit Rate = 24%

The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goods sold is computed as follows: Sales Multiplyb y:C ostRatio Cost of goods sold

6,000,000 0.76 4,560,000 (A)



2,800,000

Total

6,560,000


3,760,000 6,560,000

Work in Process


2,000,000 1,600,000 1,600,000 800,000

2,240,000 Cost Balanofcegoods end 3,760,000 manufactured

Total

6,000,000

6,000,000 91

(A)


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

4.

B

A

5.

A

6.

A

PROBLEM 12-27 Question No. 1 Accounts payable

Balancee nd

250,000

555,000 Beg. Balance

Purchase ret. and allow. Purchase discounts Payments to supplier (squeeze)

70,000 80,000 3,000,000 100,000 3,255,000

Total

3,655,000 3,655,000

Purchases Freight-in

Question No. 2 Direct materials inventor y

Beg. Balance Net purchases

200,000 2,950,000

320,000 Balancee nd 2,830,000 Direct materials used

Total

3,150,000

3,150,000

Purchases Add:Freight-in

3,000,000 100,000

GrossPurchase Purchasesreturns and allow Less: Purchasediscounts NetPurchases

3,100,000 70,000 80,000 2,950,000

Question No. 3 Work in process

Beg. Balance Direct materials used Directlabor Factoryo verhead

250,000 2,950,000 900,000 675,000

280,000 Balancee nd 4,375,000 Cost of goods manufactured

Total

4,655,000

4,655,000

Question No. 4 Sales

P5,100,000 120%

Less: Cost of sales (5,000,000/120%) Grossprofit

4,250,000 100% 850,000 20%

Note: Do not deduct sales discount from the gross sales since sales discount does not constitute actual return of merchandise. 92


Question No. 5 Finished goods

Beg. Balance Cost of goods manufactured

400,000 4,375,000

525,000 Balancee nd 4,250,000 Cost of goods sold

Total

4,775,000 4,775,000

Estimated finished goods Less: Cost of goods out on consignment

525,000 20,000

Salvage Inventory firevalue loss

10,000 495,000

Question No. 6 Cost of goods sold (80% x P5,100,000)

= P4,080,000

Question No. 7 Sales (5,100,000-100,000) Less: Cost of sales (80% x P5,100,000) Grossprofit

P5,000,000 100% 4,080,000 80% 1,000,000 20%

Finished goods

Beg. Balance Cost of goods manufactured

400,000 4,375,000

695,000 Balancee nd 4,080,000 Cost of goods sold

Total

4,775,000 4,775,000

Estimated finished goods Less: Cost of goods out on consignment Salvagevalue Inventory fire loss SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

B

695,000 20,000 10,000 665,000

5.

B

6.

A

7.

A

PROBLEM 12-28 Question No. 1 Accountspayable,March3 1

2,370,000

Less: TotalPaymentinApril Accounts payable for April Purchases Totalpurchases Less:PaymentinA pril

300,000 2,070,000 600,000 200,000 93

400,000


Total

2,470,000

(B)

Question No. 2 Purchases,a s of March3 1 Add:PurchasesinApril Grosspurchases Less:Purchasereturns Net purchases

4,200,000 600,000 4,800,000 12,000 4,788,000

(B)

Question No. 3

Beg. Balance Sales on account Recoveries

Accounts receivable 2,700,000 3,000,000 Bal. end Collections including 1,488,000 938,000 recoveries 0 250,000 Writeoff 0 Sales returns 4,188,000 4,188,000

Net Sales SalesasofMarch3 1 AprilSales Less: Sales return Net Sales

9,040,000 1,488,000 100,000 (C)

1,388,000 10,428,000

Question No. 4

NetSales Multiply by:Costratio Cost of Sales

10,428,000 60% 6,256,800

(C)

Costo f Sales Divide by: Gross Profit

9,000,000 10,500,000 9,000,000 4,500,000 50.000% 30.000%

Average gross profit = (50%+30%)/2 = 40% Cost ratio = 100% - 40% = 60% Question No. 5 Estimatedinventory Less:Shipment int ransit Undamaged goods at cost Salvagevalue

Inventory fire loss SUMMARY OF ANSWERS: 1 . B 2 . B 3. C 4.

3,031,200 40,000 120,000 25,000 2,846,200

(C)

C

5.

C 94


PROBLEM 12-29 Questions No. 1 and 2 Purchases ending 11m os 12m os 2,700,000 3,200,000 30,000 (4,000) (6,000) (8,000) (8,000) (22,000) -

Unadjustedbalance Shipment in Nov. included in December purchases Unsalables hipmentsreceived Deposits in October shipped February Depositsmadev endorinNovember Adjustedbalance

2,696,000 1.( D)

2,186,000 2.( D)

Question No. 3 Beginning inventory – January 1, 2015 350,000 Add: Purchases for 11 months (see No. 1) 2,696,000 Less: Ending inventory – Nov. 30, 2015 (360,000358,000 22,000 + 20,000) Cost of sales 2,688,000 (A)

Cost ratio (5,736,000 / 6,720,000) = 80% Question No. 4 Sales endingD ecember 31, 2015 Less: Sales ending Nov. 30, 2015 (3.4M-40,000)

SalesSales –December Less: at cost 2015 Sales in December 2015 made at a profit Multiply: Cost ratio (2,688,000 / 3,360,000) Cost ofs alesmadeat profit Add:Costo fs alesmadea tc ost Total Cost of Sales -December

3,840,000 3,360,000 480,000 40,000 440,000 80% 352,000 40,000 392,000 (A)

Question No. 5 Beginning inventory – Nov. 30, 2015 358,000 Add: Purchases for December (3,186,000 – 2,696,000) 490,000 Less:Costo fSales–December 392,000 Ending inventory – December 31, 2015 456,000 (A) SUMMARY OF ANSWERS: 1. D 2. D 3. A 4. A

5.

A

PROBLEM 12-30 Cost 300,000

Inventory,Jan1 95

Retail 1,200,000


Purchases Purchasereturns Purchase discounts Purchase allowance Freight-in Departmental Transfer-In Departmental Transfer-Out Totals

6,000,000 (400,000) (150,000) (50,000) 20,000 600,000 (560,000) 5,760,000

8,500,000 (800,000) 1,100,000 (1,334,000) 8,666,000

5,760,000

8,666,000 600,000 (50,000) 9,216,000 (316,000) 100,000 9,000,000

Basis of computation of cost ratios

Totals Markups Markupcancellations Basis of computation (conservative) Markdown Markdowncancellations Basis of computation (average)

5,760,000

5,760,000

Cost ratios: Conservative

Cost ratio Cost ratio

5,760,000 9,216,000 = 62,50% =

Average


=

5,760,000 9,000,000 = 64%

FIFO


5,760,000 – 300,000 9,000,000 – 1,200,000 = 70% =

Estimated ending inventory @ ret ail – for all methods TGAS @ retail under average method 9,000,000 Sales (7,000,000) Salereturns 700,000 NormalShrinkage (500,000) Estimated ending inventory @ retail 2,200,000 Question Nos. 1 to 6 Cost method Conservative (62.5%)

Ending inventory at cost (EI @ retail x cost ratio) P1 ,375,000 96

Cost of goods sold (TGAS @cost – EI @cost) 4,385,000


FIFO (70%) Average (64%)

1,540,000 1,408,000

SUMMARY OF ANSWERS: 1 . A 2 . B 3. B 4.

C

5.

4,220,000 4,352,000

C

6.

D

PROBLEM 12-31 Question No. 1 Subsidiary General Ledger Ledger Unadjustedbal. P 760,000 P 1,020,000 Undeliveredsales ( 100,000) Valid Sales 60,000 SalesFOBdestination ( 100,000) NSFcheck 50,000 50,000 Collectionbyt hebank ( 60,000) ( 60,000) Sales in 2015 recorded in 2016 DR No. 38740 3,360 3,360 Receivable ins. Co DR No. 38741 ( 10,080) ( 10,080) Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200) ( 19,200) Adjusted balance (D) P 784,080 P 784,080 Question No. 2 Current: UnadjustedbeginningBalance Add: ValidS ales in 2015 (60,000+ 3,360) Total Less:Receivablei ns Co(DR#3 8741) Sales in 2016 recorded in 2015 (DR # 38743) Current Accounts Receivable balance

97,500 63,360 160,860 10,080 19,200 131,580

Past Due: Adjusted Accounts Receivable balance (see no. 1) Less: Current Accounts Receivable balance Past due Accounts Receivable *or (662,500+50,000-60,000)

784,080 131,580 *652,500

Age classification

Total

Amount

Percentage

Current 131,580 Past due 652,500 Allowance for doubtful accounts

6 10 (A)

Question No. 3 Allowance for doubtful accounts, beginning Less:Accountswrittenoff Less: Allowance for doubtful accounts, ending 97

7,894.80 65,250.00 73, 144. 80 7,000.00 73,144.80


Doubtful accounts expense

(A)

66,144.80

Question No. 4 Unadjusted Merchandise Inventory, ending 316,000 Add: Cost of merchandise sold of DR # 38743(19,200/120%) 16,000 Doubtful accounts expense (B) 332, 000 Question No. 5 UnadjustedNetSalesbalance Undeliveredsales SalesFOBdestination

P3,000,000 ( 100,000) ( 100,000)

Sales in 2015 recorded in 2016D R No. 38740 Sales in 2016 recorded in 2015 DR No. 38743 Adjusted balance (B) SUMMARY OF ANSWERS: 1 . D 2 . A 3. A 4.

B

5.

3,360 ( 19,200) P2 ,784,160

B

PROBLEM 12-33

Unadj.

Adj.

Inventory 625,000 (77,500) (11,000) -

Accounts payable 500,000 (77,500) -

105,000 12,500 1,000 (2,650) 652,350

12,5001,000 (2,650) 433,350

SUMMARY OF ANSWERS: 1 . D 2 . B 3. B 4.

Accts. Net Net Receivable Net Sales Purchases income 500,000 4,500,000 1,607,500 1,086,000 - (77,500) - (11,000) 20,000 20,000 20,000 -520,000

B

5.

A

5.

D

5.

C

PROBLEM 12-34 SUMMARY OF ANSWERS: 1 . C 2 . A 3. A 4. PROBLEM 12-35 SUMMARY OF ANSWERS: 1 . C 2 . D 3. D 4.

B

PROBLEM 12-36 98

--

- 105,000 1 2,500 1,000 (2,650) 4,520,000 1,540,850 1,200,000


SUMMARY OF ANSWERS: 1 . A 2 . A 3. C 4.

C

5.

B

99

Chapter 14: Introduction to Financial Asset and Investment in Equity Securities

CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES PROBLEM 14-1 Financial Assets and Financial Liabilities FA NFA FL Accountspayable 450,000 Accounts receivable 300,000 Accruedinterestexpense 54,000 Accumulated depreciation (150,000) Advances customers Allowancefrom for bad debts Biologicalassets Bonds payable Cash and cash equivalents Cash dividendspayable Cash surrender value Claimsf ort axrefund Deferredtaxassets Deferredtaxliabilities Discountonbondspayable Finance leaseliability Income taxes payable Intangibleassets Interest receivable Investment in associate Investment in bonds Investment in equity instruments Investment in subsidiary Issued redeemable preference shares (with mandatoryredemption) Merchandisei nventories Notes receivable PHILHEALTH contributions payable Prepaid interest (not a valuation account to financial liability) Prepaidrent

(30,000)

Security deposit Sinkingfund SSScontributionspayable Stock appreciation rights payable (SARs Payable)

90,000 120,000

NFL

48,000 360,000 360,000

210,000 81,000 180,000 135,000 180,000 57,000 (45,000) 135,000 27,000 90,000 63,000 135,000 510,000 375,000 210,000

300,000 399,000 450,000 18,000

60,000 60,000

15,000 360,000 101


Unearned interest on receivables Unearnedrentincome Utilitiespayable Warrantyobligations

15,000 24,000 750,000 2,673 (E)

1,074 (C)

2,445 (E)

39,000 243 (D)

Legend: FA – Financial Asset NFA – Non-Financial Asset FL – Financial Liabilities NFL – Non-Financial Liabilities SHE: Shareholders equity SUMMARY OF ANSWERS: 1. E 2. C 3.

E

4.

D

PROBLEM 14-2 Acquisition of Investment Journal entries are: 1) FVTPL 1/5/2017 Financial Asset at FVTPL Brokeragefee CommissionExpense Cash 1/10/2017 2/14/2017 2) FVTOCI 1/5/2017 1/10/2017 2/14/2017

Dividend receivable

1,000,000 20,000 5,000 1,025,000 20,000

Dividendincome Cash Dividendreceivable

20,000 20,000 20,000

Financial Asset at FVTOCI Cash Dividend receivable Dividendincome

1,025,000 1,025,000 20,000 20,000

Cash Dividendreceivable

20,000 20,000

The difference between FVTPL and FVTOCI is the treatment of transaction cost.

102


PROBLEM 14-3 Basic Journal Entries- Acquisitions in Between Dates of Declaration and Record 1) Trading securities 1/5/2017 Financial Asset at FVTPL (Squeeze) Dividends receivable Brokerageexpense CommissionExpense Cash 2/14/2017

Cash

980,000 20,000 20,000 5,000 1,025,000 20,000

Dividendreceivable 12/31/2017 12/31/2018

20,000

Unrealized Loss – P&L FinancialAssetat FVTPL

30,000

Financial Asset at FVTPL Unrealizedgain–P&L

250,000

30,000 250,000

2) Fair Val ue through Other Comprehensive Income securities 1/5/2017 FVTOCIs ecurities 1,005,000 Dividendreceivable 20,000 Cash 1,025,000 2/14/2017 12/31/2017

Cash Dividendreceivable

20,000

Unrealized loss - OCI FVTOCI securities

30,000

20,000 30,000

12/31/2018 FVTOC secur ties Unrealizedloss–OCI Unrealizedgain–OCI

250,000 30,000 220,000

PROBLEM 14-4 Derecognition of Financial Assets - Sale of Investment CASE NO. 1: FVTPL Question No. 1 Nil, since the above securities are FVTPL unrealized gain or loss is recognized in the profit or loss. (A) Question No. 2 Consideration received (

x 15,000 x 1/2)

Less: Brokerage andc ommission NetSellingPrice Less: Carrying value( 1,600,000x ½) Realized loss on sale – P&L (B) 103

750,000 20,000 730,000 800,000 (70,000)


CASE NO. 2: FVTOCI Question No. 3 Fairvalue,12/31/2016 Less:Cost Unrealized gain - P&L

1,600,000 1,500,000 100,000

(B)

Question No. 4 Considerationreceived Less: Brokerage andc ommission NetSellingPrice

750,000 20,000 730,000

Less: Carrying value (1,600,000 x ½) Realized loss on sale – P&L (B) Question No. 5 Journal entries for the sale are : 1) FVTPL 12/31/2016 FVTPL Unrealizedgain-P&L 1/2/2017

100,000 100,000

Cash Loss on sale FVPTL To record the sale

730,000 70,000 800,000

2) FVTOCI 12/31/2016 FVTOCI 1/2/2017

800,000 (70,000)

100,000

Unrealizedgain-OCI Cash Loss on sale FVTOCI To record the sale

730,000 70,000

100,000

800,000

Unrealized Gain (100,000 x ½) 50,000 Retainedearnings 50,000 To record transfer of unrealized gain to Retained earnin gs SUMMARY OF ANSWERS: 1. A 2. B 3. B 4. B

PROBLEM 14-5 Share Dividends 1.

Memo entry: Received from Pulsate Company.1,500 ordinary shares

2.

Investment in Preference shares - FVTOCI Investment in Ordinary shares - FVTOCI 104

250,000 250,000


Allocation:

Total Fair value 300,000 1,500,000 1,800,000

Pref. shares (1,500 x P200) Ordinary shares (15,000 x P100) Total

Fraction 3/18 15/18

Allocated cost 250,000 1,250,000 1,500,000

Share dividends is not regarded as an income., however different type of shares received from the shares held is allocated using the relative fair value. Comments on share dividends: Accounting treatment for share dividends is actually a gray area, no clear cut rules is provided under PFRS or other accounting standard setting body. However, the authors believe that share dividends will onl y be accounted as an increase in number of shares held and a decrease on the price per unit.

PROBLEM 14-6 Cash Dividends Question No. 1 The dividend income to be recognized in 2016 is P30,000 (15,000 x P2). Question No. 2 December 1 Dividend Receivable (15,000 x P2) Dividendincome December 15

(B)

30,000 30,000

No formal accounting entry

December31 Cash DividendReceivable

30,000 30,000

PROBLEM 14-7 Property Dividends Question No. 1 Property dividends are as income at fair value at date of declaration (250,000 x 15%) = P37,500. (B) Question No. 2 November 1 Dividend Receivable (250,000 x 15%) Dividendincome December 31

No journal entry

February 15

NoncashAsset DividendReceivable

105

37,500 37,500

37,500

37,500


PROBLEM 14-8 Cash Received in Lieu of Share dividends Question No. 1 Nil. The share divide nd is not considered an income. Question No. 2 NetSelling Price( 15,000x 15%xP36) Less: Carrying amount of the investment sold [(345,000/(15,000+(15% x 15,000)] x 2,250 Gain (or loss) on sale

(A) 81,000 45,000 36,000

(D)

Question No. 3 October 1 Memo entry October31

Cash Gain on sale FAatFVTOCI

81,000 36,000 45,000

PROBLEM 14-9 Shares Received in Lieu of Cash Div idends Question No. 1 Shares received in lieu of cash dividends are in effect recorded at the fair value of shares received on date of payment. Since the date of declaration and date of payment is within the same period, the dividend income is computed as follows: (15,000/5 x P44) = P132,000 (C) Question No. 2 Journal entries are: October 1 Dividend Receivable (15,000 x P8) Dividendincome October 31

FA at FVTOCI (15,000/5 x P44) Dividendreceivable Dividendincome

120,000 120,000 132,000 120,000 12,000

PROBLEM 14-10 Dividends Out Of Capital Questions No. 1 and 2 Cash (P100 x 15% x 20,000) Investment Questions No. 3 and 4 Cash Losso nl iquidation Investment

300,000 300,000

300,000 110,000

SUMMARY OF ANSWERS: 1. A 2. D 3. B 4. C 106

440,000


PROBLEM 14-11 Stock Split and Special Assessment Question No. 1 Date

No. of shares 10,000 15,000 25,000

1/1 3/1stock split Total(10,000 x5/2) 11/1 Special assessment (P3.2 x 25,000) Total

25,000 (D)

Question No. 2 Fair value( P30 x 25,000) Less:Carryingv alue Unrealized gain-OCI

P750,000 500,000 P250,000

Questions No. 3 an d 4 Journal entries are: 1/1 Financial Asset atF VTOCI Cash 3/1

Received `5,000 shares as a result of 5 for 2 share split.

11/1

FinancialAssetatF VTOCI

12/31

Finan ialAssetatF VTOCI Unrealized gain – OCI [(P30 x 25,000) – P500,000]

Cost per Total share Cost P42 P420,000 P16.80

P420,000 80,000 500,000

P20

(D)

P420,000

(B) P420,000

80,000

Cash (P3.20 x25,000)

80,000 2500 00 (C)

250,000

SUMMARY OF ANSWERS: 1. D 2. D 3. B 4. C

PROBLEM 14-12 Stock Rig ht Question No. 1 Nil. The company will only make a memo entry to record the receipt of stock right on a financial asset at FVTPL. (A) Question No. 2 The stock right should be initially recorded at fair values as follows: (P20 x 10,000) = P200,000. (B)

107


Question No. 3 The cost of the investment will only include the subscription price of P400,000 (5,000 x P80). (B) Question No. 4 The cost of the investme nt will include the subscription price of P400,000 and cost of stock rights exercised of P200,000 = P600,000. (C) The journal entries under the two classifications are as follows: Fair Value through profit and loss securities June 15 Memo entry (Received 10,000 stock July15

rights) FVTPL(P80 x1 0,000/2) Cash

400,000 400,000

Fair Value Through Other Comp rehensive Income June 15 Stock rights( P20 x 10,000) Unrealizedgain-P/L July 15

FVTOCI (P80 x 10,000/2)+ 200,000 Cash Stockrights

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

SUMMARY OF ANSWERS: 1. A 2. B 3. B 4. C

PROBLEM 14-13 Theoretical Value of Rights Question No. 1 When the stock is selling right on

Value of one right

= =

P320 – P200 5+1 P20

Question No. 2 When the stock is selling ex-right

Value of one right

= =

P320 – P100 5 P24

SUMMARY OF ANSWERS: 1. B 2. C

PROBLEM 14-13 Dividend Income Cash dividend Shares in lieu of cash dividends (5,000 x P150) 108

1,500,000 750,000


Total dividend income

(C)

2,250,000

PROBLEM 14-15 Dividend Income The dividend income to be recorded is equal to P2,400,000 (300,000 / 1,000,000 x P8,000,000). The base is on actual dividends declar ed. A share dividend is not regarded as an income. (A)

PROBLEM 14-16 Reclassifications of Investments in Equity Securities Question No. 1 Not allowed. The only allowed reclassification is from Financial Asset at Amortized Cost (FAAC) to held for trading Financial Asset at Fair Value Through Profit or Loss debt securities (FVTPL), or vice versa. Therefore the securities remain as FVTPL. Since reclassification is not allowed, there is no reclassification gain or loss. (A) Question No. 2 Not allowed (see discussion on no. 1). Therefore the securities remain as FVTOCI. Since reclassification is not allowed, there is no reclassification gain or loss. (A)

PROBLEM 14-17 Purchase: Trade Date vs. Settlement Date Accounting SUMMARY OF ANSWERS: 1. B 2. D

PROBLEM 14-18 Sale: Trade Date vs. Settlement Date Accounting SUMMARY OF ANSWERS: 1. D 2. A

PROBLEM 14-19 Exchange of One Financial Asset into Another Financial Asset Question No. 1 Fair value- Ordinary Shares (6,000 x P40) Less: Carrying value- Pref. Shares (P425,000/8,000 x 4,000) Gain on exchange (C) Question No. 2 Journal entry would be: Investment in Trading- Ordinary Shares (6,000 x P30) 109

240,000 212,500 27,500

240,000


Gain onexchange Investment in Trading- Pref. Shares (P425,000/8,000 x 4,000)

27,500 212,500

SUMMARY OF ANSWERS: 1. C 2. B

PROBLEM 14-20 Exch ange of a PPE for Financial Asse t Question No. 1 Fair valueo f the financiala sset Less: Carryingv alue oft hel and Gain onexchange

820,000 600,000 220,000

Question No. 2 Journal entries are: March3 1 Financial asset at FVTOCI Land Gain on exchange (820,000-600,000)

(B)

820,000 600,000 220,000

SUMMARY OF ANSWERS: 1. B 2. D

PROBLEM 14-21 Exch ange of a Financial Asset for PPE Question No. 1 Fair valueo f the financiala sset Less: Carrying value of the financial asset Gain onexchange Question No. 2 Journal entries are: March 31 Land (at fair value of the asset given up) FVTOCI Gain on exchange (650,000-600,000) Retainedearnings Unrealized loss (625,000-600,000) SUMMARY OF ANSWERS: 1. B 2. B

110

650,000 600 000 50,000

(B)

650,000 600,000 50,000 25,000 25,000


PROBLEM 14-22 Trading Securities Question No. 1 (A) The cost of investment is P880,000. The brokerage fee and commission of P10,000 and P10,000 respectively is charged to expense since the investment acquired is a trading security. The investments are also acquired prior to the declaration of dividends on January 10, 2016 so they are not purchased dividend on. Question No. 2 Dividend income (P2 x 6,000 + P16,000) =P28,000 Question No. 3 Sellingprice Less:Commission andtaxes Netsellingprice Less: Carrying value [2,500x(P90,000/6,000)] Gain on sale (C)

(A) P50,000 5,000 45,000 37,500 P7,5 00

Question No. 4 EDA Corp. shares [P50 – (P30,000/1,000)] DJOA,Inc. [P15– (P90,000/6,000)] RVFE, Co. [P45– (P80,000/2,000)] ARP, Co. [P100 – (P880,000/8,000)] Loss chargeable to income statement

x 1 ,000 x 3,500 x 2,000 x 8,000 (B)

Question No. 5 EDAC orporationshares

1,000

P50

x

DJOA,Inc. P15 x 3,500 RVFE,Co. P45 x 2,000 ARP, Co. P100 x 8,000 Total balance of financial asset at profit or loss (A)

= = = =

= = = =

P20,000 10,000 ( 80,000) (P50,000) P50,000 52,500 90,000 800,000 P992,500

(Note: Reclassification of equity securities are not allowed.) SUMMARY OF ANSWERS: 1. A 2. A 3. C 4. B

5.

A

PROBLEM 14-23 Fair Value through Other Comprehensive Income Question No. 1 1/1/2016BookValue Brokeragefee Commission Dividendsreceivable Cost ofFVTOCI

P

880,000 10,000 10,000 ( 16,000) P 884,000

111

(C)


Question No. 2 Dividend income (P2 x 6,000) = P12,000 (D) Question No. 3 Proceeds(P35x 500) P 17,500 Carrying value (P500 x (P88,000/(2,000 x 110%)) ( 20,000) Loss on sale P (2,500) Net Proceeds (P40,000 – P5,000) Carrying value (2,500 x (P90,000/6,000))

P (

35,000 37,500)

Dividends on stocks sold (P2 x 2,500) Loss on sale

(P

5,000)* (7,500)

Total loss on sale (P2,500 + P7,500)

P

(10,000) (D)

*This was sold dividend-on. Question No. 4 March3 1 June15 Gain/(Loss) on Exchange

(65,000-50,000) (50,000-20,000) (A)

15,000 30,000 45,000

Question No. 5 EDA Corporation preference shares (500 x P50) P 25,000 DJOA,Inc.(3,500xP15) 52,500 RVFE Co. ((2,000 x 110% - 500) x P45) 76,500 ARPCo.(8,000xP100) 800,000 LCC(1,000x 60) 60,000 Adjustedbalance P 1 014,000 SUMMARY OF ANSWERS: 1. C 2. D 3. D 4. A

5.

(D)

D

PROBLEM 14-24 Question No. 1 Stockrights( 11,000xP6)

P

Question No. 2 Cashp aid (P90 x( 10,000/5)) Cost of stock rights used (P4 x 10,000) Totalinvestmentc ost

P P

Question No. 3 Proceeds(P5.5x1 ,000) Costo fs tockrights( P4x 1,000) Gaino nsaleofstockrights

P P 112

66,000

(D)

180,000 40,000 220,000

(B)

5,500 4,000 1,500

(C)


Question No. 4 Proceeds Cost of shares sold (P76 ** x 4,000) Gain onsaleofstocks

P 440,000 304,000 P 136,000

Question No. 5 Original investment cost Costa llocated to stock rights* Additionali nvestment**

(

Sale ofinvestment Adjusted cost of investment

P 880,000 44,000) 220,000

( P 304,000) 752,000

SUMMARY OF ANSWERS: 1. D 2. B 3. C 4. D

5.

D

PROBLEM 14-25 Question No. 1 Cashp aid(400K+20K) Less:dividends Correctcost

420,000 10,000 410,000

Question No. 2 Feb. 10 Nov. 2 (10,000+(11,000/5) x 1 Totaldividendi ncome

(D)

30,000 13,200 43,200

(C)

Question No. 3 Fair value of new FA (10,000 x 40) Less: Carrying value (975,000/15K x 5K) Gain onconversion

325,000 75,000

(C)

Question No. 4 Consideration received (2,000 x 70) Less: Dividends (2,000 xP 1) NetSellingPrice Less:Carryingv alue Gain onsale

140,000 2,000 138,000 99,000 39,000

(C)

10-Feb

Shares 10000 1,000

Carrying value 451,000 113

(D)

400,000

(D)


Total 1-May (11,000/5) Total 15-Nov Total

11,000

451,000

2,200 13,200 (2,000) 11,200

202,400 653,400 (99,000) 554,400

Cost of stocks on May 1 Subs. Price( 11,000/5x P62) Add cost of stock rights (6 x 11,000)

136,400 66,000

Costo fs tocksonM ay1

10-Feb Total 1-May (11,000/5) Total 15-Nov Total

202,400

Shares 10000 1,000 11,000

Cost 550,000 550,000

2,200 13,200 (2,000) 11,200

202,400 752,400 (114,000) 638,400

Question No. 5 Gerrit-PS (70 x 10,000) -OS (45 x 10,000) Loesch (72 x 11,200) Barr( 20 x2 0,000)

Fairv alues 700,000 450,000 806,400 400,000 2,356,400

Cost Difference 600,000 (900,000/15K x 10K) 400,000 638,400 410,000 2,048,400 308,000 (A)

Note: Use bid price on asse t held, asked price for asset to be purchased. SUMMARY OF ANSWERS: 1. D 2. C 3. A 4. B

5.

PROBLEM 14-26 Question No. 1 FVTOCI Portfolio – 12/31/2015 ColomaCompany Soliman

A

3,070,000 2,737,500

VillanuevaCompany Less: FVTOCI Portfolio – 01/01/2015 ColomaCompany Soliman VillanuevaCompany 114

1,871,000

7,678,500

3,050,000 2,725,000 1,875,000

7,650,000


Unrealized gain – SFP

28,500

(C)

Question No. 2 Fairvalue ofshares Less: Carrying amount of Soliman portfolio Gain onexchange

2,797,500 2,737,500 60,000

(B)

Note that the carrying amount is equal to the fair value previous remeasurement date (12/31/2015). Question No. 3 Proceeds from sale of Aquino shares Less: Carrying amount of Aquino portfolio Loss on sale Question No. 4 FVTOCI Portfolio – 12/31/2016 ColomaCompany VillanuevaCompany Less: FVTOCI Portfolio – 01/01/2015 ColomaCompany VillanuevaCompany Unrealized gain – SFP (cumulative)

2,590,000 2,600,000 (10,000)

(B)

3,080,000 1,867,500

4,947,500

3,050,000 1,875,000 (C)

4,925,000 22,500

SUMMARY OF ANSWERS: 1. C 2. B 3. B 4. C

PROBLEM 14-27 Question No. 1 Adjusted balance (5,000 – 4,000) x P50 = P200,000 Question No. 2 Type of stocks # shares Ordinary 10,000 Preference 2,000 Totalcost

Fair value P30 10

Total fair value P300,000 20,000 P320,000

(A)

Allocated cost P234,375 15, 625 P250,000

(B )

Question No. 3 Allocate part of the investment cost to the prefe rence shares. Question No. 4 Proceeds(1,000xP17) P 17,000 Carrying amount [(P15,625/(10,000/5)) x 1,000)( 7,812.50) Gain onsale P 9,187.50 115

(C)


Question No. 5 Proceeds, exclusive of interest Carrying amount (250 x 1,000 x 110%) Gain onsale SUMMARY OF ANSWERS: 1. A 2. B 3. B 4. C

P ( P

5.

2 80,000 275,000) 5,000

(A)

A

PROBLEM 14-28 Question No. 1 NetSellingprice Less: Carrying value (740,000/40,000 x 5,000) Gain on sale

(D)

Question No. 2 Considerationreceived Less: Dividend income of the investment sold (6,000 x *P20 x 20%) NetSellingprice Less: Carrying value (740,000/40,000 x 6,000) Gain on sale (D)

250,000 92,500 157,500

270,000 24,000 248,000 111,000 137,000

*The par value after 2 for 1 share split is equal to P40 x ½= P20 Question No. 3 6/1/2016(35,000x4) 12/1/2016(35,000x 20%xP20) Total dividend income

(A)

Question N os. 4 and 5 Fairvalue( 29,000xP43) Less: Cost (700,000/40,000 x 29,000) Unrealizedgain SUMMARY OF ANSWERS: 1. D 2. D 3. A 4. D

1,247,000 507,500 739,500

5.

116

D

140,000 140,000 280,000

4.(D) 5.(D)

Chapter 15: Investment in Debt Securities

CHAPTER 15: INVESTMENT IN DEBT SECURITIES PROBLEM 15-1 Acquisition of FAAC Term Bonds on Interest Date Question No. 1 Present value of Principal (1,200,000 x 0.6355 ) 762,600 Add: Present Value of interest payments (120,000 x 3.0373 ) 364,476 Present value of the investment bonds (C) 1,127,076 Question No. 2 Amortization table: Interest Date Collection 01/01/2015 12/31/2015 120,000

Interest Income )(B135,249

Premium Amortization 5,249 1

Present value 1,127,076 1,142,325

PROBLEM 15-2 Acquisition of FAAC Term Bonds in Between Interest Dates Question No. 1 Present value oft hei nvestment bonds Add: Discount amortization Effectiveinterest Nominalinterest Present value of the investment bonds, April 1 AddAccruedinterest Total Present value of the bonds Question No. 2 Amortization table: Interest Date Collection 01/01/2015 12/31/2015 200,000

Interest Income 225,415

1,878,460 56,354 50,000

(D)

Discount Amortization 25,415

Total interest income (P225,425 x 9/12) = P169,061

6,354 1,884,814 50,000 1,934,814

Present value 1,878,460 1,903,875

(B)

PROBLEM 15-3 Interpolation of Effective Interest Rate of FAAC - Term Bonds and Computation of Interest Income Purchase price Add:Transactioncost Initialcarryingamount

P1,100,000 44,752 P1,144,752

117


Since there is transaction cost incurred, effective rate must be computed. The effective rate therefore is computed at 11.5% (refer to page 530 and 531 of the textbook for example of interpolation). Interest income (11.5% x P1,144,752) =1 31,646

(B)

PROBLEM 15-4 Acquisition of FAAC - Serial Bonds Question No. 1 Interest

Total

Principal Collection Collection 450,000 180,000 630,000 450,000 135,000 585,000 450,000 90,000 540,000 450,000 45,000 495,000 Total Pre sent Value of the serial bond s Question No. 2 Interest income (1,727,834 x 12%) = 207,340

Present

Total Present

Val ue Factor 0.8929 0.7972 0.7118 0.6355 (C)

Value 562,527 466,362 384,372 314,573 1,727,834

(B)

PROBLEM 15-5 Reclassification Note to Teacher: The requi rement shoul d be “ Under each item described above, prepare the necessary entries on January 1, 2016 and December 31, 2018.” SCENARIO 1: Securities are properly classified as FVTPL under PFRS 9 208,985 Dec. 31, Investment in bonds - FVTPL nrealized U gain ( 208,985 2016 1,855,809) Unrealizedloss Dec. 31, Investment in bonds -FVTPL 2017 ( -

113,668 113,668

Cash Interestincome To record the receipt of interest.

0,000 0,000

SCENARIO 1: CASE NO. 1: Financial asse t at FVT OCI Investment in Bonds - FVTOCI 1,951,126 Jan. 1, 2018

Investment in Bonds – FVTPL 1,951,126 To record the transfer of financial asset at FVTPL to FVTOCI.

Cash De c. 31, Interestincome 2018 To record the receipt of interest. 118

0,000 0,000


Interestincome 14,624 InvestmentinBonds –FVTOCI 14,624 To record premium amortizati on using 11% revised effectiv e rate.

Amortization table-based on the 11% effective rate on the date of reclassification is: Interest Interest Present Date Collection Income Amortization Value December31,2017 1,951,126 December 31, 2018 200,000 214,624 14,624 1,965,750 December 31, 2019 December 31, 2020

200,000 200,000

216,233 218,018

16,233 18,018

1,981,983 2,000,000

SCENARIO 1: CASE NO. 2: Financial Ass et at amor tized cost (FAAC) Investment in Bonds - FAAC 1,951,126 Jan. 1, Investment in Bonds – FVTPL 1,951,126 2018 To record the transfer of financial asset at FVTPL to amortized cost. Cash De c. 31, Interestincome 2018 To record the receipt of interest.

0,000 0,000

Interestincome 14,624 InvestmentinBonds–FAAC 14,624 To record premium amortizati on using 11% revised effectiv e rate.

SCENARIO 2: Securities are properly classified as FVTOCI Dec. 31, 2016

nvestment I in bonds - FVTOCI nrealized U gain ( )

186,288 -

Dec. 31, Unrealizedgain-OCI Investment in bonds - FVTOCI 2017 ( )–186,288

186,288 139,089 139,089

Cash Interestincome To record the receipt of interest.

0,000 0,000

SCENARIO 2: CASE NO. 1: Financial asset at FVTPL Investment in Bonds - FVTPL 1,951,126 Jan. 1, Investment in Bonds – FVTOCI 1,951,126 2018 To record the transfer of financial asset at FVTOCI to FVTPL. Unrealizedgain-OCI Reclassificationgain

47,199

Cash De c. 31, Interestincome 2018 To record the receipt of interest. 119

0,000 0,000

47,199


SCENARIO 2: CASE NO. 2: Financial Ass et at amortized cost (FA AC) Investment in Bonds - FAAC 1,903,927 Jan. 1, 47,199 2018 Unrealizedgain–OCI Investment in Bonds – FVTOCI 1,951,126 To record the transfer of financial asset at FVTOCI to FAAC. Cash De c. 31, Interestincome 2018 To record the receipt of interest.

0,000 0,000

Interestincome 28,471 InvestmentinBonds–FAAC 28,471 To record premium amortizati on using 11% revised effectiv e rate.

Amortization table-based on the 12% ORIGINAL effective rate on the date of reclassification is: Interest Interest Present Date Collection Income Amortization value January 1, 2016 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020

200,000 200,000 200,000 200,000 200,000

222,697 225,421 228,471 231,888 235,714

1,855,809 1,878,506 1,903,927 1,932,398 1,964,286 2,000,000

22,697 25,421 28,471 31,888 35,714

SCENARIO 3: Securities are properly classified as FAAC Cash 0,000 De c. 31, Interestincome 0,000 2016 To record the receipt of interest. Investment in Bonds – FAAC Interestincome Cash De c. 31, Interestincome 2017 To record the receipt of interest.

22,697 22,697 0,000 0,000

Investment in Bonds – FAAC Interestincome

25,421 25,421

SCENARIO 3: CASE NO. 1: Financial asset at FVTPL Investment in Bonds - FVTPL Jan. 1, Reclassificationgain–P&L 47,199 2018 Investmentin Bonds –FAAC 1,903,927 To record the transfer of financial asset at FAAC to FVTPL. Cash De c. 31, Interestincome 2018

0,000 0,000 120


To record the receipt of interest.

SCENARIO 3: CASE NO. 2: Financial ass et at FVT OCI Investment in Bonds – FVTOCI Jan. 1, Reclassificationgain–OCI 47,199 2018 Investmentin Bonds –FAAC 1,903,927 To record the transfer of financial asset at FAAC to FVTOCI. Cash De c. 31, Interestincome 2018 To record the receipt of interest.

0,000 0,000

PROBLEM 15-6 (Initial and Subsequent measurement, Derecognition and Reclassification of Trading Debt Secu rities) Question No. 1 Face value Multiplyb y:N ominalr ate Multiply by: Months outstanding Interest Income (C)

5,000,000 12% 12/12 600,000

Question No. 2 Fair value of the bonds (5M X 104) Less:Carryingv alue Unrealized gain (or loss)-P&L (B)

5,200,000 5,379,079 (179,079)

Question No. 3 Ne Selling Price (5M x ½ x 05) Less: Carrying value (5M x ½ x 104) Gain (or loss) on sale (B)

2,625,000 2,600,000 25,000

Question No. 4 Facev alue( 5M x½) Multiplyb y:N ominalr ate Multiply by: Months outstanding Interest Income (B)

2,500,000 12% 12/12 300,000

Note that interest income is computed for the whole year even though the business model was changed on July 1, 2016 since reclassification date will be on the first day of the next repor ting period (January 1, 2017). The investment therefore would be continued to be reported as held for trading on December 31, 2016.

121


Question No. 5 Fair value of the bond s on the reclassification date, 1/1/ 17 (2.5M X 104) Less: Carrying value (2.5M X 1.02) Unrealized gain (or loss)-P&L (C)

2,600,000 2,550,000 50,000

Question No. 6 Fair value of the bond s on the reclassification date, 1/1/17 (2.5M X 104) Less: Carrying value (2.5M X 1.02) Unrealized gain (or loss)-OCI

2,600,000 2,550,000 50,000

(A)

SUMMARY OF ANSWERS: 1. C 2. B 3. B 4. B

5.

C

6.

A

PROBLEM 15-7 (Initial and Subsequent measurement, Derecognition and Reclassification of FAAC Securities) CASE NO. 1 Question No. 1 Face value 5,379,079 Multiplyb y:N ominalr ate 10% Multiply by: Months outstanding 12/12 Interest Income 537,908 (B) The present value of the bonds is computed as follows: Present value of Pr ncipal (5,000,000 x 0.6209 ) Add: Present Value of interest payments (600,000 X 3.7908) Present value oft hei nvestment bonds

3,104,607 2,274,472 5,379,079

(Please carry all the decimal places in the comp utation) Amortization table (srcinal): Interest Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000 12/31/2017 600,000 12/31/2018 600,000 12/31/2019

600,000

Interest Income

Premium Amortization

53 7,908 (C) 531,699 524,869 517,355

2,092 6 68,301 75,131 82,645

Present value 5,379,079 5,316,987 5,248,685 5,173,554 5,090,909

509,091

90,909

5,000,000

Question No. 2 Nil. No unrealized gain or loss is recognized if the financial asset is classified as financial asset at amortized cost. (A) 122


Question No. 3 Net Selling Price (5M x ½ x 105) Less: Car rying value (see amort ization table) (5,316,987 x ½) Gain (or loss) on sale (C)

2,625,000 2,658,494 (33,494)

Question No. 4 Carrying value, 12/31/16 (5,316,987 x ½) Multiplyb y:N ominalr ate

2,658,494 10%

Multiply by: Months outstanding Interest Income (A)

12/12 265,849

Note that interest income is computed for the whole year even though the business model was changed on July 1, 2016 since reclassification date will be on the first day of the next reporting period (January 1, 2017). The investment therefore would be continued to be reported as Financial Assets at Amortized Cost on Dec ember 31, 201 6.

Question No. 5 Fair value of the bond s on the reclassification date, 1/1/ 17 (2.5M X 104) Less: Carrying value (2,658,494 X 1. 10) 300,000) Reclassificati on loss- P&L (B) SUMMARY OF ANSWERS: 1. B 2. A 3. C 4. A

5.

2,600,000 2,624,343 (24,343)

B

CASE NO. 2 Note to teacher: You may ignore this since there is incomplete information to answer some of the questions under this case.

PROBLEM 15-8 Requirement No. 1 Annual expected loss Multiply by: Present value of ordinary annuity for 5 years using 12% Lifetime expected credit losses Requirement No. 2 Annual expected loss Multiply by: Present value of 1 for 5 years using 12% 12-month expected credit losses 123

3.6048

.5674


Requirement No. 3 On initial recognition, Bank Company records the foll owing journal entries: January1 , LoanR eceivable 1,500,000 2017 Cash 1,500,000 To recognize loan asset at gross amount. Impairment loss – P&L Loss allowance in SFP To recognize 12-month expected credit losses.

11,348 11,348

Requirement No. 4 If, at the end of 2017, there is no significant deterioration of the credit quality, there would be no change to the recognition of the 12-month expected credit losses. Requirement No. 5 If, at the end of 2017, there is a significant deterioration of the credit quality, the company should record lifetime expected credit loss. The amount to be recognized is computed as follows: Annual expected loss Multiply by: Present value of ordinary annuity for 4 years using 12% 3.0373 Lifetime expected credit losses Less: 12-m onth expect ed credit loss recognized January 1 11,348 Impairment loss – P&L The journal entry therefore to record the increase in allowance is as follows: Dec.3 1, Impairmentloss–P&L 49,398 2017 Loss allowance inSFP 49,398 To recognize lifetime expected credit losses

PROBLEM 15-9 Requirement No. 1 Since the expected probability of default is only 2%, this is not considered significant. Therefore the Company will only recognize 12-month expected loss. Requirement No. 2 12-month expected credi t loss is computed as follows : = 2% x ,000

PROBLEM 15-10 Requirement No. 1 70%probability(4.8M–4.8M) 20%probability(4.8M–3.6M)

0 1,200,000 124


10%probability(4.8M–3M) Totalexpectedcashshortf all

1,800,000 2,000,000

Requirement No. 2 70%probability(4.8M–4.8M)x 70% 20%probability(4.8M –3.6M)x2 0% 10%probability(4.8M–3M)x 10% Probability weightedcashshortfall

0 340,000 180,000 420,000

Requirement No. 3 Annual cashshortfall Multiply by: Present value of annuity using 6.4% for 5 years Present value – lifetime expected credit loss

420,000 4.1669 1,750,098

Requirement No. 4 Annual cashshortfall Multiply by: Present value of 1 using 6.4% for 1 year Present value – 12 month expected credit loss

Requirement No. 5 Jan.1, Loan receivable 2017 Cash To recognize the loan at gross amount

420,000 .9398 394,716

20M 20M

Impairmentloss- P&L 394,716 Loss allowance–SFP To recognize 12-month expected credit loss.

394,716

PROBLEM 15-11 Requirement No. 1 Customer: Group A Not pastdue 1-30d ayspastdue 31-60d ayspastdue 61-90d ays past due >90daysp astdue Total

Customer: Group B Notpastdue

Gross carrying amount ,700,000 3,000,000 1,000,000 2,200,000 800,000 12,700,000 Gross carrying amount 3,700,000 125

Expected credit loss 0.3% 1.2% 3.3% 8.0% 11.5%

Expected credit loss 0.3%

Lifetime Expected Credit Loss 17,100 36,000 33,000 176,000 92,000 354,100 Lifetime Expected Credit Loss 11,100


1-30d ayspastdue 31-60d ayspastdue 61-90d ayspastdue >90daysp astdue Total

1,200,000 1,500,000 800,000 900,000

1.5% 3.9% 7.2% 8.3%

18,000 58,500 57,600 74,700 219,900

The total lifetime expected credit loss is 574,000 ( 354,100+ 219,900).

Requirement No. 2 Gross carrying amount( Less:Lifetimeexpectedcreditl oss

+

)

20,800,000 574,000

Amortizedcost

20,226,000

PROBLEM 15-12 Amortization Table @ 6.1932% Interest Date Collection January 1, 2017 December 31, 2017 100,000 December 31, 2018 100,000 December 31, 2019 100,000 December 31, 2020 100,000 December 31, 2021 100,000

Interest Income

Amortization

117,670 118,766 119,928 121,162 122,472

17,670 18,766 19,928 21,162 22,472

Present value 0,000 1,917,670 1,936,436 1,956,364 1,977,524 2,000,000

Requirement No. 1 Investment in Bonds – FVTOCI Cash

1,900,000

Impairmentloss–P&L Loss allowance -OCI

1,900,000

10,000 10,000

Requirement No. 2 Cash ( 2,000,000x 5%) InvestmentinBonds–FVTOCI Interest income( 1,900,000 x6 .1932%) To record interest collection and amortization.

100,000 17,670 117,670

Requirement No. 3 If interest has not changed Discountrate Present value: Principal Interest TotalPV

If only prime rate changed by 25%

If both prime rate and credit risk changed

6.1932%

6.4432%

6.9432%

1,572,690 344,980 *1 ,917,670

1,557,968 343,022 1,900,990

1,529,034 339,156 1,868,190

126


*Based on the amortization table. The change in fa ir value may be analyzed as follows: Accretion due to time factor as interest income (Discount amortization) Decrease due to prime rate ( 1,917,674 - 1,900,990) Decrease due to credit risk ( 1,900,990 - 1,868,190) Total change in fair value ( 1,900,000 - 1 ,868,190)

17,670 (16,684) (32,800) 31,810

Requirement No. 4 Unrealized loss – OCI ( 16,684 + ,000) 26,684 Impairment loss – P&L ( 32,800 - 10,000) 22,800 Loss allowance ( ,000) 22,800 InvestmentinBonds–FVTOCI 26,684 To record impairment loss in profit or loss and decrease in fair value of asset. Fairvalue –12/31/2017 Less: Amortized cost (see amortization table) Decreaseinfairvalue Less: Decrease in fair value due to credit risk = impairment Decreaseinfairvalue–OCI

1,868,190 1,917,670 (49,480) 22,800 26,680)

Requirement No. 5 Investment in Bonds – FVTOCI – 01/01/2017 Add:DiscountAmortization Less:Decreaseinfair value

1,900,000 17,670 26,684

Less:Impairmentloss Carrying amount = Fair value 12/31/2017

22,800 1,868,186

PROBLEM 15-13 Requirement No. 1 Cash Lossa llowance– SFP Investmentin Bonds –FAAC

433,000 ,000,000

Requirement No. 2 Cash Investment in Bonds – FAAC Lossa llowance– SFP

5,000,000 5,000,000 433,000

Gaino n reversalo f impairment

Requirement No. 3 Cash Lossa llowance– SFP

433,000 ,500,000 433,000 127


Impairmentloss – P&L Investment in Bonds – FAAC

67,000 5,000,000

PROBLEM 15-13 Impairment of Financial Asset at Amortized Cost SOLUTION: Question No. 1 Carrying amount of the investment – 12/31/2015 Less: Present value of expected cash flows (get the present value computed using srcinal effective rate ) Impairment loss (B) Question No. 2 Interest income (3,188,800 x 12%) = 382,656

3,864,680 3,188,800 675,880

(D)

PROBLEM 15-14 Reversal of Impairment on Financial Asset at Amortized Cost Present Value of Principal (5,000,000 x 0.8929) Add: Present Value of interest payments (500,000 x 2 x 0.8929) Present value oft hei nvestment bonds

4,464,500 892,900 5,357,400

CASE NO. 1 PAS 39 Present value expected cash flows, date of reversal Would have been present value had there been no impairment

5,357,400 4,910,521

Lowerofthe two above Less: Actual amortized cost (P3,986,000 x 1.12) Gain onreversalof impairment

CASE NO. 2 PFRS 9 Present value expected cash flows, date of reversal Less: Actual amortized cost (P3,986,000 x 1.12) Gain onreversalof impairment

4,910,521 4,464,320 446,201

5,357,400 4,464,320 893,080

COMPREHENSIVE PROBLEMS PROBLEM 15-15 Question No. 1 Cost of investment – Jan. 21(P2,000,000 x 102%) =P2,040,000 Question No. 2 Proceeds Less: Accrued interest (P1,000,000 x 9% x 3/12) NetProceeds Less: Carrying amount (P2,000,000 x 102%) 128

(A)

P 1,060,000 22,500 1,037,500 1,020,000


Gain on sale

(A)

P

17,500

Question No. 3 Proceeds Less: Accrued interest (P400,000 x 9% x 5/12) Net proceeds Carrying amount(P400,000 x102%) Loss on sale

P 419,000 15,000 404,000 408,000 4,000) (A) (

Question No. 4 Sold bonds: x9%x 38/360 P1,000,000 P400,000x 9%x280/360 Outstanding bonds: P600,000x 9%x340/360 Total interest income

P

(A)

9,500 28,000 51,000 P 88,500

Question No. 5 Carrying value – 12/31/20 16 (P600, 000 x 102%) = P612,000 The market value is equal to its cos t. SUMMARY OF ANSWERS: 1. A 2. A 3. A 4. A

5.

(A)

A

PROBLEM 15-16 Impairment and Reversal of Impairment Loss CASE NO. 1 PAS 39 Question No. 1 Present value of Principal (5,000,000 x 0.6209 ) Add: Present Value of interest payments (600,000 X 3.7908) Present value oft hei nvestment bonds

3,104,607 2,274,472 5,379,079

(Please carry all the decimal places in the comp utation) Question No. 2 Amortization table (srcinal): Interest Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000

537,908 531,699

12/31/2017 12/31/2018 12/31/2019

524,869 517,355 509,091

600,000 600,000 600,000

Interest Income

129

Premium Amortization 62,092 68,301 75,131 82,645 90,909

Present value 5,379,079 5,316,987 5,248,685 5,173,554 5,090,909 5,000,000


Question No. 3 Carrying amount of the investment 12/31/2016 (see table above) Less: Present value of expected cash flows Impairmentloss

5,248,685 3.756,574 1,492,111

Present value of Principal (5,000,000 x 0.7513 ) Add: PV of interest payments (No interest will be recovered) Present value of the investment bonds

3,756,574 3,756,574

Question No. 4 Interest income (P3,756,574 x 10%) = 375,657 The interest income was computed using the srcinal effective rate and the impaired value as of 12/31/2016.

Question No. 5 Present value expected cash flows, date of reversal Would have been present value had there been no impairment (see srcinal amortization table) Lowerofthe two above Less: Actual amortized cost (P3,756,574 x 1.10) Gaino nreversalofi mpairment

5,619,835 5,173,554 5,173,554 4,132,231 1,041,322

Present value of Principal (5,000,000 x 0.8264 ) Add: Present value of interest payments (600,000 x 3 x 0.8264) Present value oft hei nvestment bonds

4,132,231 1,487,603 5,619,835

CASE NO. 2 PFRS 9 Question No 1 Present value of Principal (5,000,000 x 0.6209 ) Add: Present Value of interest payments (600,000 X 3.7908) Present value oft hei nvestment bonds

3,104,607 2,274,472 5,379,079

(Please carry all the decimal places in the comp utation) Question No. 2 Amortization table (srcinal): Interest Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000 12/31/2017 600,000 12/31/2018 600,000 12/31/2019 600,000

Interest Income 537,908 531,699 524,869 517,355 509,091

130

Premium Amortization 62,092 68,301 75,131 82,645 90,909

Present value 5,379,079 5,316,987 5,248,685 5,173,554 5,090,909 5,000,000


Question No. 3 Carrying amount of the investment 12/31/2016 (see table above) Less: Present value of expected cash flows Impairmentloss

5,248,685 3.756,574 1,492,111

Present value of Principal (5,000,000 x 0.7513 ) Add: PV of interest payments (No interest will be recovered) Present value oft hei nvestment bonds

3,756,574 3,756,574

Question No. 4 Interest income (P3,756,574 x 10%) = 375,657 The interest income was computed using the srcinal effective rate and the impaired value as of 12/31/2016.

Question No. 5 Present value expected cash flows, date of reversal Less: Actual amortized cost (P3,756,574 x 1.10) Gaino nreversalofi mpairment

5,619,835 4,132,231 1,487,604

Present value of Principal (5,000,000 x 0.8264 ) Add: Present value of interest payments (600,000 x 3 x 0.8264) Present value oft hei nvestment bonds

4,132,231 1,487,603 5,619,835

PROBLEM 15-17 Question No. 1 Proceeds Less: Carrying amount [(P432,000/24,000) x 12,000) Loss on sale (B) Question No. 2 Cost,1/1/2015 Less:Amortizedcost,1 2/31/2015 Premiumamortization Less: Nominal interest( 5,000,000x 12%) InterestIncome

P204,000 216,000 (12,000)

P 5,311,400 5,242,540 68,860 600,000 531,140

Effective interest (P531,400/5,311,140) = 10% Interest income (P5,242,540 x 10%) = P524,254 (B)

Questi on No. 3amortization (P1,903,150 – P1,881,000) 2015 discount Nominalinterest(P2,000,000x 13%) Effective interest Divide by: 1/1/2015 amortizedc ost 131

P

22,500 260,000 P 282,500 P 1,881,000


Effective interest rate

15%

2016 Interest Inc ome = 12/31/2015 amortized cost x Effective inte rest rate = P1,903,150 x 15% = P285,472.50 (C)

Question No. 4 Fair value, 1/1/2017 (2,000,000x 101) P 2,020,000 Less: Amortized cost – 01/01/2017 Book value, 12/31/2015 P 1,903,150 Add: Discount amortization Nominalinterest 260,000 Less: Effective interest 282,473 22,473 1,928,623 Gain on reclassification (C) P 91,377 Question No. 5 Trading securities: Panaghoy, Inc. (14,400 x P22) P 316,800 Lamentation, Inc. [(24,000 – 12,000) x P15] 180,000 Total P 496,800 FVTOCI: Zephaniah, Inc. ( x 360,000) Genesis bonds (1.04 x 5,000,000) Total SUMMARY OF ANSWERS: 1. B 2. B 3. C 4. C

P10,080,000 5,200,000 P15,280,000

5.

132

A

Chapter 16: Investment in Associate

CHAPTER 16: INVESTMENT IN ASSOCIATE PROBLEM 16-1 Investment securities and equity method investments compared Question No. 1 Cost of Investment Less: Book value of net asset acquired (P120M x 20%) Excesso fc ostoverbookvalue Less: Overvalued depreciable asset (P6M x 20%) Goodwill

Question No. 2 Dividendsdeclared andpaid Multiplyb y:Percentageofownership Dividends Revenue

30,000,000 24,000,000 6,000,000 1,200,000

(A)

4,800,000

(C)

5,000,000 20% 1,000,000

Question No. 3 Shareinnetincome(P8Mx20%) Less: Amortization of Undervalued valued asset (see below) Adjusted net investment income (A)

1,600,000 200,000 1,400,000

Amortization of Undervalued asset Depreciable Asset Divideby:Averageremainingusefullife Amortization ofU ndervalued valued asset

1,200,000 6 200,000

Question No. 4 Cost of Investment Add: Net investment income (see no. 3) Less: Dividends received (P1 x 1M shares) Carrying value – 12/31/2015

30,000,000 1,400,000 1,000,000 30,400,000

(B)

Question No. 5 Investment using Fair Value ( 32 x 1,000,000) = 32,000,000 SUMMARY OF ANSWERS: 1. A 2. C 3. A 4. B

5.

(D)

D

PROBLEM 16-2 Question No. 1 Cost of Investment Less: Book value of net asset acquired (P10M x 30%) Excesso fc ostoverbookvalue 133

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


Over or (under )valued asset: Inventory[ (P900,000 – P800,000) x 30%] Machinery [(P2,200,000 – P2,500,000) x 30%] Goodwill

(30,000) 90,000 2,060,000

(C)

Question No. 2 Shareinnetincome(P2Mx30%) Less: Amortization of undervalued valued asset (see below) Add: amortization ofovervalued asset Adjusted net investment income (A) Amortization of asset: Inventory

2016

600,000 30,000 18,000 588,000

2017 (30,000)

Machinery Divideby:Remaininglife Amortization of overvalued machinery

90,000 5 18,000

90,000 5 18,000

2016 2017 2,000,000 4,500,000 30% 30% 600,000 1,350,000

Net incomeo ft hea ssociate Multiplyb y: Percentage of ownership Shareinthenetincome Dividends declareda nd paid Multiplyb y: Percentage of ownership Dividendsreceived

800,000 30% 240,000

Question No. 3 Cost of Investment Add: Net investmenti ncome (see no. 2) Less: Dividends received (P800,000x 30%) Carrying value – 12/31/2016

(A)

1,600,000 30% 480,000

5,000,000 588,000 240,000 5,348,000

Question No. 4 Sharein netincome(P4.5M x3 0%) Add: Amortization of Overvalued valued asset (see no. 2) Adjusted net investment income (C)

1,350,000 18,000 1,368,000

Question No. 5 Carryingvalue– 01/01/2017 Add: Net investment income (see no. 4) Less: Dividends received( P1.6M x3 0%)

5,348,000 1,368,000 480,000

Carrying value – 12/31/2017

SUMMARY OF ANSWERS: 1. C 2. A 3. A 4. C

(A) 5.

134

A

6,236,000


PROBLEM 16-3 Investment in Associate with Inventories, Machinery and Land - Land Was Subsequently Sold Question No. 1 Cost of Investment Less: Book value of net asset acquired (P12M x 20%) Excesso fc ostoverbookvalue Over or (under) valued asset Inventory((P50,000)x20%) Machinery((P500,000)x2 0%) Land(P300,000 x20%) Goodwill (A)

5,000,000 2,400,000 2,600,000 (10,000) (100,000) 60,000 2,550,000

Amortization of Over (Under) valued asse t Inventory

2016 (10,000)

2017

Machinery Divideby:Remaininglife Amortization of Under (over) valued asset

(100,000) 10 (10,000)

(100,000) 10 (10,000)

Land

-

60,000

2016 2017 8,000,000 10,000,000 20% 20% 1,600,000 2 ,000,000

Net incomeo ft hea ssociate Multiplyb y: Percentage of ownership Sharein thenetincome Dividends declareda nd paid

2,000,000

3,000,000

20% 400,000

20% 600,000

Multiplyb y: Percentage of ownership Dividendsreceived

Question No. 2 Shareinnetincome(P8Mx20%) 1,600,000 Less: Amortization of Undervalued valued asset (see table 20,000 above) Adjusted net investment income 1,580,000 (A) Question No. 3 Cost of Investment Add: Net investment income (see no. 2) Less:Dividends received( P2M x20%) Carrying value – 12/31/2016

(A)

6,000,000 1,580,000 400,000 6,180,000

Question No. 4 Sharein netincome(P10Mx20%) 2,000,000 Less: Amortization of Undervalued valued asset (see table 10,000 above) Add: amortization ofovervalued asset 60,000 135


Adjusted net investment income

Question No. 5 Carryingvalue– 01/01/2017 Add: Net investment income (see no. 4) Less:Dividends received (P3Mx2 0%) Carrying value – 12/31/2017 SUMMARY OF ANSWERS: 1. A 2. A 3. A 4. C

5.

(C)

2,050,000

(A)

6,180,000 2,050,000 600,000 7,630,000

A

PROBLEM 16-4 Associate with Outstanding Cumulative Preference Shares When an investee has outstanding cumulative preference share capital, an investor should compute its share of earnings after deducting the investee’s preference dividends, whether or not such dividends are declared. Net income Less: Preference dividend (10% x 1,000,000) Net income toordinaryshares

600,000 ( 100,000) 500,000

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

(A)

400,000

PROBLEM 16-5 Associate with Outstanding Preference Shares CASE NO. 1 Question No. 1 Netincome P2,500,000 Less: Total preference dividends ( 3,000,000 x 10%) 300,000 Netincomet oordinaryshares P2,200,000 Multiplyb y:Percentageofownership 30% Sharein thenetincomeofa ssociate 660,000 Less: Amortization of undervalued asset ( 1,000,000/8) 125,000 Net investment income 535,000 (B) Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less:Dividendsreceived Carrying value – 12/31/2016

(B)

CASE NO. 2 Question No. 1 Netincome Less: Total actual preference dividends declared Netincomet oordinaryshares 136

6,000,000 535,000 6,535,000

P2,500,000 450,000 P2,050,000


Multiplyb y:Percentageofownership Sharein thenetincomeofa ssociate Less: Amortization of undervalued asset (1,000,000/8) Net investment income (A)

30% 615,000 125,000 490,000

Question No. 2 Cost of Investment Add: Net investment income (see no. 1) Less:Dividendsreceived Carrying value – 12/31/2016

6,000,000 490,000 6,490,000

(A)

CASE NO. 3 Question No. 1 Netincome Multiplyb y:Percentageofownership Sharein thenetincomeofa ssociate Less: Amortization of undervalued asset ( 1,000,000/8) Net investment income (C) Although the answe r shoul d be 500,000.

P2,500,000 30% 750,000 125,000 625,000

400,000, the next best poss ible answer is

Question No. 2 Cost of Investment Add: Net investment income (see no. 1)

6,000,000 625,000

Less:Dividendsreceived Carrying value – 12/31/2016

(C)

SUMMARY OF ANSWERS: CASEN O.1 CASEN O.2 1. B 2. B 1. A 2. A 1.

C

2.

6,625,000

CASEN O.3 C

PROBLEM 16-6 Change From Fair Value through Profit or Loss to Equity Method - Step Acquisition Question No. 1 Fairvalue –12/31/2017 Less: Carrying value (Fair value – 12/31/2016) Unrealized loss – P&L

(B)

Question No. 2 Investment income ( 550,000 x 15%)

(C)

137

3,600,000 (3,900,000) (300,000)

82,500


Question No. 3 Nil. No catch-up adjustment on retained earn ings. (A) Fair valueo f previously held interest Acquisitioncost Totalcost ofinvestment Less: Book value of net asset acquired (12.5m x 30%) Excesso fa ttributablet o machinery Divideby:Remaininglife AmortizationofU ndervaluedasset

3,600,000 3,600,000 7,200,000 3,750,000 3,450,000 10 345,000

Netincomeo ft hea ssociate-2018 Multiply by: Percentage of ownership (15% + 15%) Shareinthenetincome

1,600,000 30% 480,000

Dividendsdeclared andpaid Multiplyb y:Percentageofownership Dividendsreceived

700,000 30% 210,000

Question No. 4 Shareinnetincome Less: Amortization of Undervalued asset (see table above) Adjusted net investment income (A) Question No. 5 Cost of Investment Add: Net investment income (see no. 4)

7,200,000 135,000

Less:Dividendsreceived Carrying value – 12/31/2018

SUMMARY OF ANSWERS: 1. B 2. C 3. A 4. A

480,000 345,000 135,000

5.

(A)

210,000 7,125,000

(A)

P5,200,000 400,000 4,800,000 5,000,000 (P200,000)

B

PROBLEM 16-7 Cost To Equity Method Question No. 1 Consideration received (40,000 x 130) Less:Dividendincome(10x 40,000) Netsellingprice Less:Carryingv alue( 5,000,000) Loss on sale (Assuming FIFO Method) Question No. 2 Considerationreceived Less:Dividendincome(5x 40,000) Netsellingprice

P5,200,000 200,000 5,000,000 138


Less: Carrying value [12M-(P5 x 100,000)/100,000] x 40,000) Gain on sale (B)

Question No. 3 Fair value (P140 x 60,00 0)

4,600,000 P400,000 P8,400,000

(A)

Question No. 4 Costo fI nvestment–01/01/2015 Add: Net investment income - 2015 (5,000,000 x 30%) Less: Dividends received -2015 (30% x 2,000,000)

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

Carrying 12/31/2015 Add: Netvalue– investment income - 2016 (6,000,000 x 30%) Less: Dividends received -2016 (30% x 3,200,000) Carryingvalue– 12/31/2016

3,300,000 1,800,000 960,000 4,140,000

Netsellingprice LessC arrying amount (P4,140,000 x ½) Gain on sale

(B)

Question No. 5 Investment in Kababain – FVTOCI: Fairvalue( P150x1 5,000) Less:Carryinga mount Investment in Passing Rate – FVTOCI: Fairvalue( P140x60,000) Less Cost (12M-(10 x 100,000))/100,000 x 60,000) Total Unrealized Gain –OCI to SFP

SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. B

2,400,000 2,070,000 P330,000

2,250,000 2,070,000

180,000

8,400,000 6,600,000

1,800,000

(C) 5.

1,980,000

C

PROBLEM 16-8 Change From Equity to Cost Method Question No. 1 Cost of Investment Add: Net investment income [(1.8M-840,000) x 20%] Less: Dividends received (P100,000 + P100,000) Carrying value – 12/31/2015 (B)

4,000,000 192,000 200,000 3,992,000

Note: The dividend received on August 1, 2015 need not be prorated even though the investment was acquired on July 1, 2015 since dividends is considered when the investor has the righ t to recei ve paymen t (i.e. date of declara tion). The P1.8M net income wa s for a peri od of 12 months en ding Dece mber 31.

139


Question No. 2 Salesprice (P25x50,000) Carrying value of shares (P3,992,000 x 50,000/200,000) Gain on sale of inve stment (B)

1,250,000 998,000 252,000

Question No. 3 Fair value of retained investment (P25 x 150, 000) Less: Carrying amount of retained investment (P3,992,000 x 150,000/200,000) Gain on reclassification to P&L (C)

3,750,000 2,994,000 756,000

Question No. 4 Fair value, Dec.3 1, 2016 (P30 x 150,000) Fair value, Jan. 1, 2016 (P25 x1 50,000) Unrealized gain, Dec. 31, 2016

(B)

4,500,000 3,750,000 750,000

Question No. 5 Fair value, Dec. 31, 2016 (P30 x 150,000)

(A)

4,500,000

SUMMARY OF ANSWERS: 1. B 2. B 3. C 4. B

5.

A

PROBLEM 16-9: Discontinuance of Equity Method Question No. 1 Cost (300,000x100) Add:Income(4,000,000x. 3) Less:Dividends (2,500,000x 3) Carrying Amount - 2015

(C)

30,000,000 1,200,000 (750,000) 30,450,000

Question No. 2 Netproceeds(160,000x120) Less: Carrying amount (30,450,000x(160,000/300,000)) Gain on Sale (C)

19,200,000 (16,240,000) 2,960,000

Question No. 3 FVTOCI (140000x120) Less: Carrying amount (30,450,000x(140,000/300,000) Gain on Reclassification (B)

17,080,000 14,210,000 2,870,000

Question No. 4 Dividend Income (2,000,000x .14)

(A)

140

280,000


Question No. 5 Investment in FVTOCI (140,000x125) SUMMARY OF ANSWERS: 1. C 2. C 3. B 4. A

17,500,000

(B)

5.

B

PROBLEM 16-10 Associate Having Heavy Losses Originalcost Cash advances Totalinterest Net loss from 2015 to 2017 (40% x 4,000,000) Carrying amount of investment – 12/31/2017 Share in net loss of 2018 (40% x 800,000) Loss to be reported in 2018 should be equal to the investment balance only (C)

1,400,000 400,000 1,800,000 (1,600,000) 200,000 320,000 200,000

PAS 28, paragraph 29, provides that if under equity method an investor’s share of losses of an associate equals or exceeds the carrying amount of an investment, the investor discontinues recognizing its share of further losses. The investment is reported at NIL or zero value.

PROBLEM 16-11 Downstream Sale of Inventory 2015 Netincomey: Percentage of ownership Multiplyb Share in the net income before adjustment Less: Unrealized profit on downstream sale of inventory Share in the net income after adjustment

2016

1,000,000 25% 250,000

1,500,000 25% 375,000

(30,000) 220,000 (B)

30,000 405,000 (D)

2015 1,000,000 25% 250,000

2016 1,500,000 25% 375,000

(9,000) 241,000 (B)

9,000 384,000 (D)

PROBLEM 16-12 Upstream Sale of Inventory Netincome Multiplyb y: Percentage of ownership Share in the net income before adjustment Less: Unrealized profit on upstream sale of inventory Share in the net income after adjustment

141


PROBLEM 16-13 Downstream Sale of Depreciable Asset 2015 2016 Netincome 1,000,000 1,500,000 Multiplyb y: Percentage of ownership 25% 25% Share in the net income before adjustment 250,000 375,000 Less: Unrealized gain on downstream sale of PPE (160,000) 40,000 Share in the net income after adjustment 90,000 415,000 (B) (D)

PROBLEM 16-14 Upstream Sale of Depreciable Asset Netincome Multiplyb y: Percentage of ownership Share in the net income before adjustment Less: Unrealized gain on upstream sale of PPE Share in the net income after adjustment

2015 2016 1,000,000 1,500,000 25% 25% 250,000 375,000 (40,000) 10,000 210,000 385,000 (B) (D)

COMPREHENSIVE PROBLEMS PROBLEM 16-15 Question Nos. 1 and 2 2015 2,500,000

Net incomeo ft hea ssociate Multiplyb ShareinNI y: Percentage of ownership Less: Gaino sale of equipment Add:Depreciationo fExcess Gain on sale of inventory (upstream) (50,000x .3) Less: Gain on sale of inventory (Downstream) NetshareinNI

Question No. 3 Cost Add:Investment Income2015 Less:Dividends(900,000x.3) Carrying amount 2015 Question No. 4 Carryingamount01/01/2016 Add:Income Less:Dividends(2,000,000x.3) Carrying Amount - 2015 142

2016 4,000,000

30% 1,200,000 30% 750,000 (100,000) 20,000 20,000 (15,000) 15,000 (150,000) 655,000 1,085,000 1.( B) 2.( B)

(A)

5,000,000 655,000 270,000 5,385,000

(B)

5,385,000 1,085,000 600,000 5,870,000


Question No. 5 Carryingamount01/01/2016 Add:Income Less:Dividends(2,000,000x.3) Less: Amortization of goodwill (400,000 x 2/10) Carrying Amount - 2015 (A)

5,385,000 1,085,000 600,000 80,000 5,790,000

Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized over their useful life. If an entity canno t determine reliably the useful life, it is assumed to be 10 yea rs.

SUMMARY OF ANSWERS: 1. B 2. B 3. A 4. B

5.

A

PROBLEM 16-16 Question No. 1 Cost Less:Equityinnetassets Implied goodwill

(D)

Question No. 2 Proceeds(2,500xP13) Less: Carrying amount [(P60,000/6,000) x 2,500] Gain on sale

P1,700,000 1,400,000 300,000

P 32,500 25,000 7,500

(C)

Question No. 3 Proceeds(500 xP21) Less: Carrying amount [(P66,000/(2,000 x 110%)) x 500] Loss on sale (D) Question No. 4 FV off inancial asset received (1,500 xP 21) Less: Carrying amount [(P45,000/1,000) x 500] Gain on conversion

(A)

Question No. 5 Investment in Roque Corporation: 3/9 1,000 x P1.2

P 10,500 15,000 4,500

P 31,500 22,500 9,000

1,200

9/9 1,000 x P1.2 Investment in Ocampo Corporation: 6/30 (6,000 –2,500)xP1 Total dividen d income

1,200

(D) 143

3,500 5,900


Question No. 6 1/2/2016 AcquisitionCost Add: Share in net income of associate (P1,200,000 x 30%) Less:Dividends(P.50x4x100,000) 12/31/2016 carrying amount (D)

1,700,000 360,000 200,000 P1,860,000

Question No. 7 Roquepref.(1,000–500)xP56 Roqueordinary(1,500xP20) Ocampo(6,000-2,500)xP11

28,000 30,000 38,500

Dagumboy Co.( 2,000 x 110% -500) x P22 12/31/2016 FVTOCI Balance

SUMMARY OF ANSWERS: 1. D 2. C 3. D 4. A

5.

37,400 133,900

(C)

D

6.

D

7.

C

PROBLEM 16-17 Question No. 1 Solano (264,500-250,000) Castaneda (280,000-320,000) (70,000-195,000) Unrealized G/(L)

(C)

Question No. 2 Zero, gain or loss on reclassifi cation is NOT allowed Question No. 3 Fair value previously held interest (50,000 x 30) Less:Carrying value Gain on reclassificati on-P&L

Question No. 5 Fair value previously held interest (50,000 x 30) Add:Acquisitioncost Initial carrying amount – investment in associate Add: investment income (see No.4 ) Less:Net Dividends declared (P2x 150,000) Investment balance end

4. D

5.

C

1,500,000 1,350,000 150,000

(D)

270,000

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

(C)

144

(A)

(C)

Question No. 4 Net investment income = July 1- Dec. 31 (30% x 900,000)

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

14,500 (40,000) (125,000) (150,500)

270,000 300,000 4,470,000


PROBLEM 16-18 Question No. 1 Consideration received (P230 x4 ,000) Less: Dividend of the investment sold (P8 x 4,000) NetSellingPrice Less: Carrying value of the investment sold (*1,970,000/10,000 x 4,000) Gain on sale (B)

920,000 32,000 888,000 788,000 100,000

*(10,000 x P200) -(P8 x 10,00 0) + P50,000 The dividend that was paid and sold is not classified as dividend income since the company did not ow n the shar es when the dividend was declared.

Question No. 2 Net Selling Price( P450 x 50,000x 1/2) 11,250,000 Less: Carrying value of the investment sold (P20,800,000 x 1/2) 10,400,000 Gain on sale 850,000 (C) Beg. Balance of Investment in Associate Add: Share in the net income of associate (25% x P20M) Total Less: Amortization (P2,000,000/10) Dividends received( P40x 50,000) Ending balance of investment in associate – 12/31/2016

18,000,000 5,000,000 23,000,000 200,000 2,000,000 20,800,000

Question N . 3 Nil. (A) The dividend that was paid and sold in Boy-ot shares is not classified as dividend income since the company did not own the shares when the dividend was declared. The dividend received in Cleo Shares is not regarded as income, but as a deduction of the initial carryin g amount of the investment in associate. Question Nos. 4 and 5 Rodolfo (P46 x 20,000) Boy-ot (P192 x 6,000) Gene (P28 x 40,000) Cleo( P450 x2 5,000) Total

Fair value Cost (UL)/ UG 920,000 1 ,000,000 (80,000) 1,152,000 *1,182,000 (30,000) 1,120,000 1,280,000 (160,000) 11,250,000 11,250,000 14,442,000 14,712,000 (C)

* (1,970,000/10,000 x 6,000)

145

(270,000) (C)


SUMMARY OF ANSWERS: 1. B 2. C 3. A 4. C

5.

C

PROBLEM 16-19 Impairment losses recognized by an associate or joint venture Question No. 1 In accounting for its associate, Mark Co. should recognize impairment loss. However, it is generally not acceptable to simply multiply the amount of impairment recognized in the investee’s own books by the investor’s percentage of ownership, because the investor should initially measure its interest in an associate’s identifiable net ownership at fair value at the date of acquisition of an associate. Accordingly, appropriate adjustments based on those fair values are made for impair ment losses recognized by the associa te. Carrying amount reflecting fair values made by Mark Co. CGU A CGUB CGUC Netassets

100,000 320,000 560,000

Recoverable amount (40%) 180,000 160,000 460,000

Impairment loss n/a 160,000 180,000 (A)

Question No. 2 The carrying amount refl ecting fair values made by Mark Co. after imp airment: CGU A CGUB 100,000 CGUC 160,000 Netassets 380,000 Goodwill 40,000 Investment in associate (A)

PROBLEM 16-20: PFRS for SME: Jointly Controlled Entity CASE NO. 1 Question No. 1 Cost model Total dividend paid by Entity Z’s Multiply by:Percentage Dividend income – P&L to SCI

(B)

Question No. 2 Cost model Carrying amount

(D)

30%

146


CASE NO. 2 Question No. 3 Fair value mode l Fair value – Decemb er 31 Less:Acquisition cost Gain on change in fair value – P&L to SCI Add:Dividendincome( Total to P&L (A) Question No. 4 Fair value mode l Carrying amount = Fair value Dec. 31

300,000 45,000

(A)

CASE NO. 3 Question No. 5 Equity method Entity Z’s reported profit Multiply by:Percentage Share in net income

30%

(C)

Question No. 6 Equity method Acquisition cost Add:Shareinnetincome Less:Dividendsreceived (( Carrying value – December 31

120,000 45,000

(B)

147

Chapter 18: Property, Plant and Equipment

CHAPTER 18: PROPERTY, PLANT AND EQUIPMENT PROBLEM 18-1 Capitalizable Cost of Machinery Machinery Others Purchase price including VAT (1,568,000/1.12) 1,400,000 Costo f waterd evice to keep machine cool. 8,000 Cost of safety rail and platform surrounding machine 12,000 Installation cost, including site preparation and assembling. 20,000 Fees paid to consultan ts for advice on acquisition of themachinery. 13,000 PV of estimated dismantling cost of the new machine 10,000 Repair cost of the ma chine damaged while i n the processof installation 5,000 Losso np remature retirement-old machine 18,000 Other nonrefundable salestax 13,000 Cost of training for personnel who will use the machine 25,000 Adjusted balances 1,476,000 48,000 (A)

PROBLEM 18-2 Improvements

Capitalizable

Cost

of

Question No. 1 Purchase Price Title Insurance Legal feestopurchaseland Property taxes, January 1, 2016 -June 30, 2016 Costo fg rading and filling building site Total Cost of t he land Question No. 2 Costo fbuildingconstruction Interestonconstruction loan Costo frazingoldbuildingonlot Proceeds from sale of salvageable materials Total cost of the building Question No. 3 Cost of constructingdriveway Cost ofparkinglot and fencing Total cost of the land improvements

148

Land,

Building

and

Land

(A)

925,000 7,500 5,000 15,000 45,000 997,500

(A)

3,100,000 60,000 42,500 (6,000) 3,196,500

(B)

400,000 60,000 460,000


PROBLEM 18-3 Deferred Settlement Terms (With or Without Cash Price Equivalent) Question No. 1 Cash price equivale nt Question No. 2 Principal Multiply by:Presentvalueof1 Cost of the equipment

(A)

800,000

(B)

1,000,000 0.7972 797,200

PROBLEM 18-4 Exchange (With or Without Commercial Substance) Question No. 1 Fairvalue oftheassetgiven Add:Cash payment Cost of equipment Question No. 2 Fairvalue oftheassetgiven Less:Carrying amount Gain on exchange

(D)

1,200,000 200,000 1,400,000

(B)

1,200,000 800,000 400,000

Question No. 3 Carryingamountoft heassetgiven Add:Cash payment

800,000 200,000

Cost of equipment

(B)

1,000,000

Question No 4 Zero, the transaction lacks c ommercial substance. (A)

PROBLEM 18-5 Trade–in Question No. 1 Cash price witho ut trade in Question No. 2 Cash pricewithout tradein Less:Cash pricewithtradein Trade in value Less:Carrying amount Loss on trade in

149

(A)

340,000

(B)

340,000 270,000 70,000 230,000 (160,000)


PROBLEM 18-6 Acquisition through Issuance of Equity Instrument Question No. 1 Fair value of the equipment received

4,000,000

(D)

Question No. 2 Zero, the difference between the fair value and its par value is recognized as share premium in the equit y. (A)

PROBLEM 18-7 Acquisition through Issuance of Bonds Payable Question No. 1 Fair value of the bonds (10,200 x 500)

(C)

5,100,000

Question No. 2 Zero, the difference between the fair value and its par value is recognized as premium on bonds payable. (A)

PROBLEM 18-8 Acquisition by Donation Question No. 1 Fair value Add:Directcost Total cost

(B)

4,000,000 40,000 4,040,000

Question No. 2 Fair value

(C)

4,000,000

The registration and transfer of title is charged to Donated Capital / Share Premium.

PROBLEM 18-9 Subsequent Expenditure on PPE Question No. 1 Beginningbalance –Jan 1 Add:Overhaul–June30 Total cost of motor veh icle

(C)

Question No. 2 Beginningbalance –Jan 1

790,000 60,000 850,000

1,900,000

Add: Rearrangement and installation – March 2 Improvement that extend the life – December Total cost of machine (B)

150

45,000 60,000 2,005,000


Question No. 3 Beginningbalance –Jan 1 Add:Unloadingand set upcost Total cost of precision machine

(C)

Question No. 4 Beginningbalance –Jan 1 Add: Installation of sprinkler system – part of blue print Add:Cost of attic Total cost of building (B) Question No. 3 Routine repairs and maintenance SUMMARY OF ANSWERS: 1. C 2. B 3. C 4. B

(D)

5.

600,000 48,000 648,000

4,100,000 130,000 500,000 4,730,000

26,000

D

PROBLEM 18-10 Question No. 1 Interest paid(2,000,000 x1 4% x1 2/12) Less: Investment income 1,400,000x 10%x 6/12 200,000 x10%x 2/12 Capitalizable borrowingcost

280,000 70,000 3,333 206,667

Note that capitalization of borrowing costs does not cease during a temporary de ay in construct on

Question No. 2 Interest paid (2,000,000 x 14% x 12/12) Less:Capitalizedborrowingcost Interestexpense

280,000 206,667 73,333

Note that the interest paid and investment income is used to compute for the capitalizable borrowing cost. However, the amount recognized as an interest expense is the difference between the total interest paid and capitalizable borrowing cost. Also, the amount recognized as interest income is 73,333.

Question No. 3 Totalprogresspayments

20,000,000

Add:Capitalizedborrowingcost Totalcost ofthe stadium

206,667 20,206,667

151


PROBLEM 18-11 Question No. 1 Interest expense under effective interest method (5,000,000 x .176319 x 11/12) Less: Investment income (250,000 x 11/12) Capitalizable borrowingcost Question No. 2 Interest expense under effective interest method (5,000,000 x .176319 x 12/12) Less:Capitalizedborrowingcost Interestexpense

808,129 229,167 578,962

881,595 578,962 302,633

Question No. 3 Totalexpenditures Add:Capitalizedborrowingcost Totalcost ofthebuilding

2,700,000 578,962 3,278,962

Question No. 3 Totalcost ofthe building Less:Residualvalue Depreciable amount Divideby:Useful life Multiply by: Months Depreciation -2016

3,278,962 1,000,000 2,278,962 10 1/12 18,991

Note depreciation will start when the asset is available for use.

PROBLEM 18-12 Question No. 1 Rate 15% 20% Total

Principal Interest 4,000,000 600,000 2,000,000 400,000 6,000,000 1,000,000

Capitalization Rate (P1,000,000 / P6,000,000) = 16.67% January 1 (600,000 + 2,100,000) July1 December Averagea 1 ccumulatedexpenditure Multiply by: Rate Capitalizable borrowingcost

2,700,000 1,200,000 240,000

152

x 12/12 2,700,000 x6/12 600,000 x 1/12

20,000 3,320,000 16.67% 553,334


Note that investment income is not considered since the two loans are considered general borrowings.

Question No. 2 Totalinterestexpense Less:Capitalizedborrowingcost Interestexpense

1,000,000 553,334 446,667

Question No. 3 Expenditures capitalized – previous period

600,000

Add: Expenditures during the current year Add:Capitalizedborrowingcost Totalcosto fthef actorybuilding

3,540,000 553,334 4,693,334

PROBLEM 18-13 Specific and General Borrowings Questions No. 1 & 2 January 1,2 015 September1,2 015 December31,2015 Average accumulated expenditure Multiply by: Rate Capitalizable borrowing cost

200,000 300,000 300,000 (A)

(D)

x 12/12 x4 /12 x0/12 1.

2.

200,000 100,000 0 300,000 12% P36,000

Since the average accumulated expenditure did not exceed the principal of the specific borrowing, the specific rate was used in determining the capitalizable borrowing cost.

Question No. 3 & 4 Accumulated expenditures – 836,000 12/31/2015 (P800,000 + 36,000) March 31, 2016 300,000 September30,2016 200,000 Average accumulated expenditure (D) Less:Specificborrowing Excessa ttributablet og eneralb orrowing Multiply by: Rate Multiply by: Monthsoutstanding Capitalizable borrowing cost – general borrowings Add: Specific borrowings (750,000 x 12% x 9/12) Total capitalizable borrowing cost

(B)

153

x 9/9 x 6/9 x 0/12 3.

4.

836,000 200,000 0 1,036,000 750,000 286,000 9% 9/12 19,305 67,500 86,805


PROBLEM 18-14 Specific Borrowing Used For General Purposes Totalexpenditures Divide by Total Less: Investment income (50,000x 3/12) Weightedaverageexpenditures Multiply by: Rate Capitalizable borrowing cost

(A)

6,000,000 2 3,000,000 12,500 2,987,500 10% 298,750

PROBLEM 18-15 Different Depreciation Methods Cost Less:Residualvalue Depreciable amount

P3,300,000 300,000 P3,000,000

Requirement No. 1 Straight Line 2016(P3,000,000/ 5x 12/12)

600,000

2017(P3,000,000/ 5x 12/12)

600,000

Requirement No. 2 Service Hours Depreciation rate per hour (P3,000,000 / 60,000 hours) = P50/hour 2016(P50/hourx 3,000hours)

150,000

2017(P50/hourx 3,500hours)

175,000

Requirement No. 3 Units of Output Method Depreciation rate per unit (P3,000, 000 / 50,000 units) = P60/unit 2016(P60/unitx 5,000units)

300,000

2017(P60/unitx 4,500units)

270,000

Requirement No. 4 Sum-of the Years’ Digits Sum-of-years-digits [5 x ((5+1)/2)] = 15 2016(P3,000,000x 5/15)

1,000,000

2017(P3,000,000x 4/15)

800,000

Requirement No. 5 Sum-of the Years’ Digits Sum-of-years-digits [5 x ((5+1)/2)] = 15 2016(P3,000,000x5 /15x 3/12)

250,000 154


2017 (P3,000,000 x 5/15 x 9/12) + (P3,000,000 x 4/15 x 9/12)

950,000

Requirement No. 6 Double-declining balance Double declining rate (2/5) = 40% 2016(P3,300,000x 40%)

1,820,000

2017 [(P3,300,000 – 1,820,000) x4 0%]

792,000

Requirement No. 7 Double-declining balance Double declining rate (2/5) = 40% 2016(P3,300,000x4 0%x3/12)

990,000

2017 [(P3,300,000 – 990,000) x 40% x 12/12)]

924,000

Requirement No. 8 150% declining balance 150% declining rate (1.5/5) = 30% 2016(P3,300,000x 30%)

990,000

2017 [(P3,300,000 – 990,000) x 30% x 12/12)]

693,000

PROBLEM 18-16 Composite Method Salvage MachineA MachineB Machine C Total

Cost 275,000 100,000 20,000 395,000

Depreciable

Value 25,000 10,000 35,000

Amount 250,000 90,000 20,000 360,000

Estd. Life 20 15 5

Annual Depreciation 12,500 6,000 4,000 22,500

Composite Life = (Depreciable amount / Total annual depreciation) = P360,000 / P22,500 = 16 years (B)

PROBLEM 18-17 Retirement Method Original cost Less:Salvage proceeds Depreciation

(B)

155

5,000 600 4,400


PROBLEM 18-18 Change in Estimate Cost Less: Accumulated depreciation – 12/31/2016 [(P3,300,000 – P300,000) / 8 x4 ] Carryingvalue– 12/31/2016

3,300,000 1,500,000 1,800,000

CASE NO. 1 Requirement No. 1 Carryingvalue– 12/31/2015 Less:Residualvalue

1,800,000 300,000

Depreciable amount Dividedby:R evisedremainingusefull ife Depreciation –2016

1,500,000 2 750,000

Requirement No. 2 Carryingvalue– 12/31/2015 Less: Depreciation –2016 Carryingvalue– 12/31/2016

1,800,000 750,000 1,050,000

CASE NO. 2 Requirement No. 1 Carryingvalue– 12/31/2015 Less:Residualvalue Depreciable amount Dividedby:R emainingusefullife(8 –4)

1,800,000 150,000 1,650,000 4

Depreciation –2016

412,500

Requirement No 2 Carryingvalue– 12/31/2015 Less: Depreciation –2016 Carryingvalue– 12/31/2016

1,800,000 412,500 1,387,500

CASE NO. 3 Requirement No. 1 Carryingvalue– 12/31/2015 Less:Residualvalue Depreciable amount Multiply by: Fraction (SYD=10) Depreciation –2016

1,800,000 300,000 1,500,000 4/10 600,000

Requirement No. 2 Carryingvalue– 12/31/2015 Less: Depreciation–2016 Carryingvalue– 12/31/2016

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

156


PROBLEM 18-19 Replacement Method Replacementcost Less:Salvage proceeds Depreciation

(C)

6,000 600 5,400

PROBLEM 18-20 Fixed Asset Turnover Let X = Net Fixed Asset at the end of 2016 Sales Fixed asset tur nover = Average Fixed Asset P1,480,000 4= .5 (P320,000 + X) P1,480,000 4= P160,000 + .5x P1,480,000 = P640,000 + 2x X= P420,000 (C)

COMPREHENSIVE PROBLEMS PROBLEM 18-21 Question No. 1 Beg.Balanceofthe Land Cash paid Mortgage assumed

P 700,000 2,500,000 4,000,000

Realtor's commission Legal fees, realty taxes and documentation expenses Amount paid to rel cate persons squatting on the property Total Cost of t he Land (B)

Question No. 2 Beginning balanceo f theL and Improvement Cost offencingproperty Total cost of Land Improve ment Question No. 3 Beg.Balanceofthe Building Amount recovered from salvage of building Costo ft earingdownanoldbuilding Amountpaidto contractor Buildingpermit Excavationexpenses Architects'fees Total cost of building

157

(A)

(A)

300,000 50,000 100,000 P7,650,000 P 10,000 110,000 P 120,000 P 900,000 (150,000) 120,000 2,000,000 20,000 50,000 50,000 P2,990,000


Question No. 4 Beg.BalanceoftheM achinery Invoicecostofmachinery Freight,unloading Customs duties Allowancesduringinstallations Total cost of machin ery

(B)

P 980,000 2,000,000 60,000 140,000 400,000 P3,580,000

Question No. 5 Totalcosto fLandImprovement

P 120,000

Totalcost ofbuilding Totalcost ofmachinery Total depreciable property

2,990,000 3,580,000 P6,690,000

(A)

Royalty payment on machines purchased in the amount of P120,000 should be included as part of manufacturing overhead in the company’s income statement, if the same is based on units produced. However, if royalty payment is based on units produced and sold, it sho uld be treated as a selling ex pense.

SUMMARY OF ANSWERS: 1. B 2. A 3. A 4. B

5.

A

PROBLEM 18-22 Specific and General Borrowings Question No . 1 an d 2 WEIGHTED AVERAGE INMonths 2014 Date Expenditures 01/01/2015 3,000,000 07/01/2015 7,000,000 11/01/2015 6,000,000 Total 16,000,000 Divide by Weighted averagec arryinga mount Specific borrowings (2,000,000 x 10%) General borrowings: Rate 14% 12%

Principal 2,000,000 18,000,000

outstanding Average 12 36,000,000 6 42,000,000 2 12,000,000 90,000,000 12 7,500,000 200,000

Interest 280,000 2,160,000

Total 20,000,000 2,440,000 Capitalization Rate (P2,440,000 / P20,000,000) = 12.20% Weighted average borrowing cost: Specific borrowings 158


Actualborrowing cost Less:Investmentincome General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiplyb y: Capitalization rate Multiply by: Months/12 Weightedaverageb orrowingcost: vs.Actual borrowingcost

200,000 13,000 7,500,000 2,000,000 5,500,000 12.20% 1

187,000

671,000 858,000 2,640,000

Capitalizable borrowing cost 858,000 (lower) (A) WEIGHTED AVERAGE IN 2015 Months Date Expenditures outstanding Average 01/01/2016 *16,858,000 8 134,864,000 07/01/2016 1,000,000 2 2,000,000 08/01/2016 2,000,000 1 2,000,000 Total 19,858,000 138,864,000 Divide by 8 Weighted averagec arryinga mount 17,358,000 *Total expenditures in 2015 plus capitalized borrowing cost in 2015. Weighted average borrowing cost: Specific borrowings Actual borrowing cost (P2,000,000 x 10% x 8/12) Less:Investmentincome General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiplyb y: Capitalization rate Multiply by:M onths/12 Weightedaverageb orrowingcost: vs. Actual borrowing cost (2,640,000 x 8/12) Capitalizable borrowing cost (lower)

Question No. 3 Actualborrowingcost-2015 Less: Capitalizable borrowingc ost - 2015 Interest expense Question No. 4 Actualborrowingcost-2016 Less: Capitalizable borrowing cost - 2016 Interest expense 159

133,333 17,358,000 2,000,000 15,358,000 12.20% 8/12

(B)

133,333

1,249,117 1,382,451 1,760,000 1,382,451

(C)

2,640,000 858,000 1,782,000

(C)

2,640,000 1,382,451 1,257,550


Question No. 5 Totalcost,2015 Expendituresin2016 Add: Capitalizable borrowing cost - 2016 Total cost of the building SUMMARY OF ANSWERS: 1. A 2. B 3. C 4. C

5.

(B)

16,858,000 3,000,000 1,382,451 21,240,451

B

PROBLEM 18-23 Question No. 1 The computation of the income from government grant is as follows: Totalcashreceived 20,000,000 Divideby:Usefullifeof thebuilding 20 Incomef romgovernmentgrant 1,000,000 Question No. 2 Cost ofbuilding Divideby:Usefullifeof thebuilding Depreciation

24,000,000 20 1,200,000

Question No. 3 Cost ofbuilding

24,000,000

Less:Governmentgrant Total Divideby Usefu lifeof thebuilding Depreciation

20,000,000 4,000,000 20 200,000

Question No. 4 Cost ofbuilding Less:Depreciation–2016 Carryingamount–12/31/2016

24,000,000 1,200,000 22,800,000

Question No. 5 Netcostofbuilding Less:Depreciation–2016 Carryingamount–12/31/2016

4,000,000 200,000 3,800,000

PROBLEM 18-24 Grants Related to Nondepreciable Assets Question No. 1 The computation of the income from government grant is as follows: Totalfair valueoftheland 10,000,000 160


Dividebyusefullifeof thebuilding Incomef romgovernmentgrant

10 1,000,000

Question No. 2 Cost offactorybuilding Divideby:Usefullifeof thebuilding Depreciation

15,000,000 10 1,500,000

Question No. 3 Cost offactorybuilding

15,000,000

Less:Governmentgrant Total Divideby:Usefullifeof thebuilding Depreciation

10,000,000 5,000,000 10 500,000

Question No. 4 Cost offactorybuilding Less:Depreciation–2016 Carryingamount–12/31/2016

15,000,000 1,500,000 13,500,000

Question No. 5 Netcostoff actorybuilding Less:Depreciation–2016 Carryingamount–12/31/2016

5,000,000 500,000 4,500,000

PROBLEM 18-25 Question No. 1 Cost( 800,000+45,000-5,000) Less ResidualValue Depreciable cost Divide by Depreciation

(B)

840,000 40,000 800,000 5 160,000

Question No. 2 Cost( 800,000+45,000-5,000) Less Accumulated Depreciation (160,000 x 3) Carryingamount Less newresidualvalue Depreciable cost Dividebyremainingusefull ife (5-2) Depreciation (A)

840,000 320,000 520,000 70,000 450,000 3 150,000

161


Question No. 3 Cost Less Accumulated depreciation (270,000/4 x 8/12) Total Carrying amount of old tires (12,000-(12,000/4 x 8/12) Cost ofnewtires Total

270,000 45,000 225,000 (10,000) 24,000 239,000

Depreciation Motor vehicle: Sept.1 -May 30, 2019( 270,000/4 x8 /12) June 1-Sept. 30 (215,000/4 x 12 mos-8 mos x 4 mos) Tyres from June 1- Sept 30 (24,000/24 mos x 4 mos) Depreciation expense (D)

45,000 21,500 4,000 70,500

Question No. 4 Depreciable cost Cost

Residual Value

800,000

0

100,000

0

Airframe

800,000

Interior Engines

100,000 and

rotary blades Inspection Total

Divide by Useful life 10 years 10 years

370,000 400,000 240,000

30,000 0

240,000

Question No. 5 Cost Less ResidualValue Depreciable cost Divide by Multiply by Depreciation SUMMARY OF ANSWERS: 1. B 2. A 3. D 4. D

(B)

5.

Depreciation exp

80.000 10,000 74,000

5 years 3y ears 80,000 244 000

280,000 40,000 240,000 3 8/12 53,333

B

PROBLEM 18-26 Question No. 1 SellingPrice Less Book value

P52,000 162


Cost Less: Accumulated Depreciation Upto 1/1 From Jan. 1-May 1 [(140,000 -12,400) x 5/55]* Gain on sale of mac hinery D

P140,000 P92,800 11,600 (A)

(104,400)

35,600 P 16,400

Note: No depreciation is recorded in the year an asset is purchased, and full year depreciation is provided in the year an asset is disposed of

Question No. 2 Accumulatedd epreciation,RJan1 P1 40,800 Add: Depreciation expense [(204,000-12,000)/15,000 x 2,100] 26,880 Accumulated depreciation, R Dec. 31 167,680 P (B) Question No. 3 Accumulatedd epreciation,IJan1 Add: Depreciation expense [(320,000-60,000-20,000)/10] Accumulated depreciation, I Dec. 31 (C) Question No. 4 Accumulatedd epreciation,AJan1 Add: Depreciation expense (320,000-64,000) x 20% Accumulated depreciation, A Dec. 31 (A)

P60,000 24,000 84,000 P

P 64,000 51,200 115,200 P

Question No. 5 Depreciation expense on D (seecomputation inno. 1)Machinery: R(seecomputationinno.2) I(seecomputationinno.3) A(seecomputationinno.4) N(88,000/20%) Total depreciation expense

SUMMARY OF ANSWERS: 1. A 2. B 3. C 4. A

(D)

5.

P 11,600 26,880 24,000 51,200 17,600 P 131,280

D

PROBLEM 18-27 Component Depreciation Question No. 1 Purchase of bottling plant Delivery and installation (750,000x 1/3) Testing (33,000/3) Total cost of engine

163

(C)

P1,500,000 250,000 11,000 P1,761,000


Question No. 2 Purchase of bottling plant Delivery and installation (750,000x 1/3) Testing (33,000/3) Total cost of conveyor belt and fittings

P2,000,000 250,000 11,000 P2,261,000

(C)

Question No. 3 Purchase of bottling plant Delivery and installation (750,000x 1/3) Testing (33,000/3) Total cost of outer struc ture

P 800,000 250,000 11,000 P1,061,000

(C)

Question No. 4 Depreciation of component of plant: Engine = (1,500,000 + 250,000 + 11,000 – 500,000) / 5 years x 11/12 231,183 Conveyor belt etc = (2,000,000 + 250,000 + 11,000 – 0) / 8 years 11/12 x 259,073 Outer structure = (800,000 + 250,000 + 11,000 – 50,000) / 3 years 11/12 x 308,917 Total depreciation of plant P 799,173 (A) Depreciation starts from the date that the asset was available for use: February 1, 2016.

Question No. 5 Depreciation of component of plant: Engine = (1,500,000 + 250,000 + 11,000 – 500,000) / 5 years 252,200 Conveyor bel t etc = (2,0 00 000 + 250,000 + 11 000 – 0) / 8 years 282,625 Outer structure = (800,000 + 250,000 + 11,000 – 50,000) / 3 years 337,000 Total depreciation of plant P 871,825 (A)

SUMMARY OF ANSWERS: 1. C 2. C 3. C 4. A

5.

B

PROBLEM 18-28 Question No. 1 Fair value

1,400,000

Legal fees cost Remodeling Total cost of building

(C)

164

50,000 100,000 1,550,000


Question No. 2 Fairvalueo ftheassetreceived Less:Cash paid Fairvalue oftheassetgiven Less: Book value of the asset giv en Cost Less: Accumulated depreciation (1M/10 x 3.5) Gain on exchange

1,200,000 400,000 800,000 1,000,000 350,000 (A)

650000 150,000

Question No. 3 OfficebuildingNo.1 (940,000/7) Office building No.2 (1,000,000/10 x 6/12) Office building No.3 (1,200,000/4 x 6/12) Factoryb uilding(1,550,000/10) Total Depreciation expense Costo foffice building No. 1 Less: Accumulated Depreciation Bookvalue Add:Majorimprovements Total

135,000 50,000 150,000 155,000 490,000

(C) 1,000,000 300,000 700,000 245,000 945,000

Question No. 4 Income from government grant (1,400,000/10)

Questi on No. 5 cost Total depreciable Less:Subsequentd epreciation Book value SUMMARY OF ANSWERS: 1. C 2. A 3. C 4. A

5.

(A)

140,000

(A)

945,000 135,000 810,000

A

PROBLEM 18-29 Question No. 1 Date January1 ,2 015 July1, 2015

Exp enditures 2,000,000 4,000,000

November1 ,2015 Total Divide by Weightedaveragec arryinga mount

3,000,000 9,000,000

165

Months outstanding Average 12 24,000,000 6 24,000,000 2

6,000,000 54,000,000 8 4,500,000


Weighted average borrowing cost: Specific borrowings Actual borrowing cost (2M x 10% x 12/12) Less:Investmentincome General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiplyb y:Capitalizationrate Multiply by: Months/12 Weightedaverageb orrowingcost: vs.Actual borrowingcost Capitalizable borrowing cost (lower)

200,000 -

200,000

4,500,000 2,000,000 2,500,000 12% 12/12

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

(D)

Question No. 2 Totalexpenditures–2015 Totalexpenditures-2016 Capitalizedborrowingcost-2015 Capitalized borrowing cost – 2016 (see computation below) Total cost of building (C)

9,000,000 1,000,000 500,000 1,160,000 11,660,000

Exp enditures *9,500,000 1,000,000

Months outstanding Average 12 114,000,000 6 6,000,000

Total 10,500,000 Divide by Weig tedaveragec arryinga mount

120,000,000 12 10,000,000

Date January1 ,2 016 July1, 2016

Total of expenditure in 2015 of P9M and capitalized borrowing cost of P500,000. Weighted average borrowing cost: Specific borrowings Actual borrowing cost (2M x 10% x 12/12) Less:Investmentincome General borrowings: Weighted average carrying amount Less: Principal amount of Specific borrowings Weighted average related to General borrowings Multiplyb y:Capitalizationrate Multiply by: Months/12 Weightedaverageborrowingc ost: vs.Actual borrowingcost Capitalizable borrowing cost (lower) 166

200,000 10,000,000 2,000,000 8,000,000 12% 12/12

200,000

960,000 1,160,000 2,000,000 1,160,000


Question No. 3 Totalexpenditures–2015 Totalexpenditures-2016 Total cost of building

(A)

9,000,000 1,000,000 10,000,000

Borrowing cos t under PFRS for SME is expens ed outrig ht.

Question No. 4 Costo fM achineryandEquipment Multiply by: Fraction Depreciation

(A)

3,000,000 3/15 600,000

Question No. 5 Depreciation – remaining delivery truck (see below) Depreciation – overhauled delivery truck (see below) Depreciation – new delivery truck (see below) Total depreciation on delivery truck (B)

114,000 30,000 24,000 168,000

SYD is 15 yea rs and useful life is 5 year s.

Delivery truck: Cost Less:Accumulateddepreciation Carryingvalue –12/31/2015 Less: Carryingv alue ofo verhauled truck Balance Divide by:Remaining usefullife (8-3) ruck Depreciation on remaining deliveryt

Overhauled delivery truck: Cost Less: Accumulated depreciation (P240,000 / 8 x 3) Carryingvalue –12/31/2015 Add:Overhaulingcost Adjusted carrying value – 01/01/2016 Divide by: Revised remaining usefull ife( 5 +2 ) Depreciation on overhauled delivery truck

1,152,000 432,000 720,000 150,000 570,000 5 114,000

P240,000 90,000 150,000 60,000 210,000 7 30,000

New Delivery truck: Invoice cost Freight

400,000 20,800

Installation andtesting Totalcosto fnew deliverytruck Divideby:Useful life Annual depreciation Multiply by: Number of months used (July 26 to December 31)

40,000 460,800 8 57,600 5/12

167


Depreciation on remaining deliveryt ruck

24,000

Question No. 6 Beginningbalance Add:Overhaulingcost Add:Cost ofnewdelivery truck Adjustedcostofdeliverytruck Less: Accumulated depreciation (432,000 + 168,000) Carrying value – 12/31/2016 (C) SUMMARY OF ANSWERS: 1. D 2. C 3. A 4. A

5.

B

5.

B

6.

C

PROBLEM 18-29 SUMMARY OF ANSWERS: 1. C 2. B 3. B 4. C

PROBLEM 18-31 Question No. 1 SYD

=(5 (5+1)/2 = 15

Date 4/1/06-4/1/07 4/1/07-4/1/08

Fraction tob e used (5/15) (4/15)

Depreciation exp: Jan 1-4/1/08 (4/15*1,500,000*3/12) Add: depreciation from 4/1-12/31 Of the 1.2M (3/15*1,200,000*9/12) Of the 300,000 (see computation below) Total depreciation expense

180,000 30,000 P3 10,000

Depreciation exp. from (4/1/-12/31): Cost 300,000 Less: Accumulated Depreciation 5/15*300,000 100,000 4/15*300,000) 80,000 Book Value, 4/1/08 120,000 Divide by remaining Life (5-2) 3 Total 40,000 Multiply by: 9/12 Depreciation 30,000

Question No. 2 Accumulated depreciation, beg. Add depreciation expense

800,000 320,000 168

1,152,000 60,000 460,800 1,672,800 600,000 1,072,800


Accumulated depreciation, End

P 1,120,000

Question No. 3 Beg.Balofland Add: Acquisition on Nov 4 Total cost of the land Question No. 4 Directcost Fixedc ost Variable cost Total Cost of bldg.

550,000 700,000 1,250,000

2,220,000 375,000

(15,000 X 25) (15,000 X 27)

405,000 3,000,000

Question No. 5 Depreciation on the beginning balance (6M-4,427,136-1,300,000) Add: Depre ciation on new bldg. (3,000,000X 20%) Totaldepreciation Question No. 6 Cost of the machinery-beg bal. Addmajoroverhaul Add: Cost of the new machinery Invoicec ost Concrete embedding Walldemolition Rebuilding ofw all Total costo fm achinery

272,864 600,000 872,864

3,000,000 600,000 356,000 18,000 7,000 19,000

4000 00 P4 ,000,000

Question No. 7 Depreciation of machinery Depreciation of the beg bal of machinery OriginalCost Add:Major overhaul Total Accum. depreciation (3,000,000/20*10) Adjustedbookvalue Dividedby:r evisedremaininglife Depreciation of the beg bal of machinery Depreciation on the (400,000/20*6/12) Depreciationofm achinery

new

SUMMARY OF ANSWERS: 1. A 2. C 3. B 4. A

5.

P 3,000,000 600,000 3,600,000 P1,500,000 P 2,100,000 15 P 140,000

machinery

D 169

6.

10,000 P 150,000

C

7.

B


PROBLEM 18-32 Question No. 1 Property-cost Less: Accumulated depreciation Depreciation (3,400,000 x 4%) Carrying value of property (C)

3,400,000 (1,360,000) (136,000) 1,904,000

Question No. 2 Cost at 30June2016 Less:Disposal1July2 016

360,000 32,000

Accumulatedd epreciation Disposal 1 July 2016 (32,000 x 20% x 2yrs) Carrying value1 July 2016a fter disposal Less:Depreciation(214,800 x1 5%) Additions1 April2017 Less: Depreciation (78,000 x 15% x 3/12) Carrying value – 30 June 2017 (C)

(126,000) 12,800 (113,200) 214,800 (32,220) 78,000 (2,925) 75,075 257,655

Question No. 3 Constructioncosts Professionalfees Sitepreparation costs Total cost of retai l outlet

3 28,000

1,200,000 7,800 90,000 1,297,800

(B)

Question No. 4 Intangible–brand( cost) Less: Accumulated amortization – 30 June 2016 Less: Amortization – 2017 (290,000 / 10) Capitalized development cost (96,000 / 6 x 4) Less: Amortization (64,000 /4 x3 /12) Carrying value – 30 June 2017 (C) Land Property-cost Less: Accumulated depreciation Depreciation (3,400,000 x 4%)

290,000 101,500 29,000 64,000 4,000

159,500 60,000 219,500

1,500,000 3,400,000 (1,360,000) (136,000)

Constructions costs Fixtures&fittings Carryingvalue of PPE

1,904,000 1,297,800 257,655 4,959,455

170


Question No. 5 Depreciation: Property Fixtures and fittings (32,220 + 2,925) Amortization(29,000+4,000) Total depreciation and amortization SUMMARY OF ANSWERS: 1. C 2. C 3. B 4. C

5.

136,000 35,145

(D)

D

171

171,145 33,000 204,145

Chapter 19: Wasting Assets

CHAPTER 19: WASTING ASSETS PROBLEM 19-1 Depletion with Change in Estimate Question No. 1 Acquisitioncost Less:Estimatedresidualvalue Depletable costo f then aturalr esource Divide by: Tons estimatedt o be extracted Depletion perton Multiplyb y:Tonsextracted-2015 Depletion – 2015 Question No. 2 Acquisitioncost Less: Accumulated depletion – 12/31/2015 Carryingvalue –01/01/2016 Divide by: Tons estimatedt o be extracted Depletion perunit Multiplyb y:Tonsextracted–2016 Depletion – 2016

(B)

P164,000 P164,000 20,000 P8.20 4,000 P32,800

(C)

P164,000 32,800 131,200 20,000 P6.56 8,000 P52,480

PROBLEM 19-2 Depletion with Change in Estimate Acquisitioncost

20,000,000

Exploration cost. Intangibledevelopmentcost To al cos oft henaturalresources lesse stimatedresidualvalue Total depletable cost of the natural resources divideby unitsest.t o be extracted Depletion perunit x unitsextracted Depletion from2015to 2017

15,000,000 4,000,000 390 00,000 1,000,000 38,000,000 2,000,000 19.00 500,000 9,500,000

Question No. 1 Cost ofnatural resource Accumulated depletion Carryingamount,12/31/2017 Residualvalue

39,000,000 9,500,000 29,500,000 600,000

Depletablecost Divideby revisedr emainingunits Depletion rateper unit Multiply by: Unitsextracted Depletion

28,900,000 400,000 72.25 200,000 14,450,000

(D) 172


Question No. 2 Cost ofnaturalresource Accumulated depletion Carrying amount, 12/31/2018

(D)

39,000,000 23,950,000 15,050,000

PROBLEM 19-3 Depreciation of Movable and Immovable Equipment – Useful Life of the Immovabl e Equipment is Shorter Question No. 1 Acquisitioncost Exploration cost. Intangibledevelopmentcost Total costo ft he natural resources less estimatedresidualvalue Total depletable cost of the natural resources divide by units est.t o be extracted Depletion perunit Multiply by: Unitsextracted Depletion (D)

8,000,000 12,000,000 5,000,000 25,000,000 25,000,000 2,000,000 12.50 500,000 6,250,000

Question No. 2 Costoft hemovableequipment Divideby:Usefullife Depreciation

(A)

4,000,000 10 400,000

(B)

2,000,000 4 500,000

Question No. 3 Costo ft hemovableequipment Divideby:Usefullife(shorter) Depreciation

PROBLEM 19-4 Depreciation of Movable and Immovable Equipment - Life of the Wasting Asset is Shorter Question No. 1 Acquisitioncost Exploration cost. Intangibledevelopmentcost Total costo ft he natural resources less estimatedresidualvalue

8,000,000 12,000,000 5,000,000 25,000,000 -

Total depletable cost of the natural resources divide by units est.t o be extracted Depletion perunit x unitsextracted Depletion (D)

25,000,000 2,000,000 12.50 500,000 6,250,000

173


Question No. 2 costo ft hemovableequipment dividebyunitsest. tobeextracted Depreciation

(A)

Question No. 3 Costo ft hemovableequipment Divide by: Units estimated to be extracted (shorter)* Depreciationrateperunit Multiplyb y:A ctualunitse xtracted Depreciation - 2016

(B)

4,000,000 20 200,000

P2,000,000 2,000,000 P1 500,000 500,000

*Estimated useful li fe using output method (2,000, 000 / 500,000) = 4 years

PROBLEM 19-5 Depreciation –No Production Costo fi mmovableequipment Divide by: Units est. to be extracted Depreciationper unit x unitsextracted Accum. Depreciation

4,000,000 2,000,000 2.00 500,000 1,000,000

Question No. 1 Costo fi mmovableequipment

4,000,000

Less:Accumulatedd epreciation Bookvalue,Dec. 31,2017 Divideby Unitsest.t beextracted Depreciation in 2018

(B)

1,000,000 3,000,000 12 250,000

Question No. 2 Costo fi mmovableequipment Less:Accumulateddepreciation Bookvalue,Dec. 31,2018 Divide by: Remaining units to be extracted Depreciationper unit Multiply by: Unitsextracted Depletion (A)

4,000,000 1,250,000 2,750,000 1,500,000 1.83 100,000 183,333

PROBLEM 19-6 Liquidating Dividends Accumulated profits -unappropriated 9,000,000 Accumulated depletion 4,000,000 Total 13,000,000 less: Capital liquidated 850,000 174


Depletion in the ending inventory (150,000 units X4 ) 600,000 1,450,000 Maximum Dividend (C ) 11,550,000

PROBLEM 19-7 Question No. 1 Acquisitioncost Divide by: Tons estimated to be extracted Depletion perton Multiplyb y:A ctual tons extracted – 2016 Depletion - 2016 Question No. 2 Cost of Installation Divide by: Tons estimated to be extracted Depreciationper ton Multiplyb y:A ctual tons extracted – 2016 Depreciation - 2016 Question No. 3 Cost ofminingequipment Divideby:Useful life Depreciation – 2016 Question No. 4 Acquisitioncost Less:Accumulated Depletion Carryingvalue– 12/31/2016 Add: Additionald evelopment cost - 2017 Remainingdepletable cost Divide by: Estimatedt ons to be extracted Depletion per ton Multiplyb y:Tonsextracted–2017 Depletion - 2017 Question No. 5 Installation ((P1,925,000/1.1M) x 150,000 tons) Miningequipment(P4,400,000/8) Total depreciation expense SUMMARY OF ANSWERS: 1. D 2. B 3. A 4. C

5.

175

C

(D)

P9,075,000 1,100,000 P8.25 100,000 825,000

(B)

1,925,000 1,100,000 1.75 100,000 175,000

(A)

4,400,000 8 550,000

(C)

P9,075,000 825,000 P8,250,000 750,000 P9,000,000 1,000,000 P 9 150,000 P1,350,000

(C)

P 262,500 550,000 P 812,500


PROBLEM 19-8 Cost of Wasting Asset with Estimated Restoration Cost, Depletion, Depreciation of Movable and Immovable Equ ipment Question No. 1 Acquisition costo ft he wastinga ssets Explorationa nd intangible devt.C ost Estimated decommissioning and restoration costs-at PV Initial cost (A)

150,000,000 8,000,000 8,196,161 166,196,162

Estimatedrestorationcost

P12,000,000

Multiply by: Present value of 1 for four periods Present value oft he restorationc ost

0.6830 P 8,196,161

Question No. 2 Totalcosto fthew astingassets Divide by: Total units estimated to be extracted Depletion perunit Multiply by:U nitsextracted Depletion expense (B) Question No. 3 Costoft hemovableequipment Divideby:Usefullife Depreciation

(A)

166,196,162 12,000,000 13.85 1,600,000 22,159,488

6,000,000 20 300,000

Question No. 4 Costo ft hemovableequipment 9,000,000 Divide by: Total units estimated to be extracted 12,000,000 Depreciationperunit .75 Multiply by:U nitsextracted 1,600,000 Depletion expense 1,200,000 (B) Note: Units of output method was used since the useful life in years using the estimated units to be extracted each year (8 years) is shorter than the useful life of the immovab le equipmen t. *Estimated useful life using output method (11,000, 000 / 1,500,000) = 8years Question No. 5 Date Interest expense 01/01/2015 12/31/2015 819,612 (A) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. B

Present value 8,196,161 9,015,777

5.

176

A


PROBLEM 19-9 Cost of Wasting Asse t with Est imated Restor ation Cost, Deple tion, Depre ciation of Movable and Immov able Equip ment Question No. 1 Acquisition costo ft he wastinga ssets Explorationa nd intangible devt.C ost Estimated decommissioning and restoration costs-at PV Initial cost (A)

120,000,000 6,000,000 6,355,181 132,355,181

Estimatedrestorationcost

P10,000,000

Multiply by: Present value of 1 for four periods Present value oft he restorationc ost

0..6355 P 6,355,181

Question No. 2 Totalcosto fthew astingassets Divide by: Total units estimated to be extracted Depletion perunit Multiply by:U nitsextracted Depletion expense (B)

132,355,181 12,000,000 11.03 1,600,000 17,647,357

Question No. 3 Costoft hemovableequipment Divideby:Usefullife Depreciation Question No. 4 Costoft hemovableequipment Divideby:Usefullife(shorter) Depreciation

(A)

6,000,000 6 1,000,000

(A)

9,000,000 5 1,800,000

*Estimated useful life using output method (11,000, 000 / 1,500,000) = 8years

Question No. 5 Date Interest expense 01/01/2016 12/31/2016 2,6 7622 (A) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. A

Present value 6,355,181 7,117,803

5.

177

A

Chapter 20: Investment Property

CHAPTER 20: INVESTMENT PROPERTY PROBLEM 20-1: Classificat ion Issu e Question No. 1 Farming land was purchased for its investment potential. Planning permission has not been obtained for building constructions of any kind. A building that is held under mixed use; half is to earn rentals A building leased to an associate under an operating lease Total investment property (D) Question No. 2 A new office building used by one of its subsidiaries as its head office which was purchased specifically in the center of Makati City in orde r to exploi t its capital gains potential. Owner-occupiedproperties Buildings occupied by employees, including Ms. Munda – the accountant. The employees pays rent on the building they occupied A building occupied by employees, the employees do not pay market rent on the building they occupied. A building that is held under mixed use; half of it is owneroccupied A property wherein significant ancillary services are provided to occupants Land and building leased to a subsidiary A new machine leased to another associate under an operating lease A building that is being constructed for future use as administration building. Total PPE (B)

Question No. 3 A property that is in the process of construction for sale A property intended for sale in the ordinary course of business Total inventories (C) Question No.4

(C)

Question No.5

SUMMARY OF ANSWERS: 1. D

2. B

3. C

4. C

5.

178

C

(C)

800,000

860,000 1,620,000 3,280,000 1,200,000

1,600,000 760,000

240,000 860,000 960,000 2,100,000 530,000 870,000 9,120,000

950,000 450,000 1,400,000


PROBLEM 20-2: Classificati on Issue Question No. 1 Separate if portions can be sold or leased out separately. (C) Question No. 2

(A )

Question No. 3

(B )

Question No. 4

(C )

PROBLEM 20-3: Ancillary services Question No.1

(C )

Question No.2

(D)

PROBLEM 20-4: Intracompany rentals Question No.1

(B)

Question No.2

(D)

PROBLEM 20-5: Initial measurement - Investment property leased under finance lease Lower of fair val ue or present value of minim um lease pay ments.

Suggested answer: (B)

PROBLEM 20-6: Subsequent measurement: Cost model vs Fair value model SUMMARY OF ANSWERS: 1. D 2. B 3. D 4. B

5.

D

6.

A

PROBLEM 20-7: Transfer from PPE to Investment Property – Fair value vs Cost model Question No. 1 (D) No gain or loss is recognized if the transfer is made at cost model. Question No. 2 (D) No gain or loss is re cognized if the transfer is m ade at cost mo del. Question No . 3 an d 4 Fair value date of trans fer Less: Carryingv alue– 12/31/2016( Revaluationsurplus–OCI Less: Transfer of revaluation surplus to R/E as a result of reclassification 179

80,000,000 6,000,000 6,000,000


Gain (loss) on transfe r

(D)

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

4. D

PROBLEM 20-8: Transfer from inventory to investment property – Fair value vs Cos t model Question No. 1 Cost Netrealizablevalue(

(B) -

2,700,000

Lower of cos t and net re alizable value

Question No. 2 (B) The initial carrying amount under the new classification is the previous carryin g amount of Question No. 3 (D) No gain or loss is recognized if the transfer is made at cost model. Question No. 4 (A) 2,880,000. Fair value at the date of transfe r. Don’t deduc t cost to sell. Question No. 5 (A) Fair value at the date of transfer Less:Carrying value Gain on transfer

2,600,000

PROBLEM 20-9: Derecognition of investment property – Fair value vs Cost Model Question No. 1 Gross selling price Less:Disposalcost Netsellingprice Less:Carryingv alue– 12/31/2015( Gain on sale (D)

120,000 2,870,000 2,700,000

Question No. 2 Gross selling price Less:Disposalcost Netsellingprice Less: Carrying value – 12/31/2015 (fair value) Gain on sale (C) 180

120,000 2,870,000 2,450,000 420,000


PROBLEM 20-10 Question No. 1 Cost Less:Residualvalue Depreciable cost Dividedby: Usefullife Annual depreciation Multiply by: Monthsoutstanding Depreciation – 2010 (D) Question No. 2 Depreciation [( – Impairmentloss Total amount to SCI

1,000,000 13,000,000 10 years 1,300,000 8/12

480,000

(A)

Question No. 3 Cost Accumulated depreciation Carrying value, beforei mpairment Impairmentloss Carrying value, after impairment - 12/31/2012 Less:Residualvalue Depreciable amount Divide by: Remaining useful life (120 – 32) Multiply by: Numberof months Depreciation – 2013 (to SCI) (B)

3,466,667 10,533,333 480,000 10,053,333 1,000,000 9,053,333 88 months 12 1,234,545

Question No. 4 Cost Accumulated depreciation Carrying value, beforei mpairment Impairmentloss Carrying value, after impairment - 12/31/2012 Depreciation -2013[( Depreciation –2014 [( Carrying value, 10/31/2014 Depreciation –2014 [( Gaino ntransfer( 10,050,000Unrealized gain - change in fair value( Total amount to SCI

(A) 181

3,466,667 10,533,333 480,000 10,053,333 1,234,545 1,028,788

-

1,028,788 2,260,000 950,000


Question No. 5 Fair value - 12/31/2015 Fairvalue -12/31/2014 Gain on change in fair valu e Question No. 6 Reclassification loss: Fairvalue- 05/01/2016 Carrying value, 05/01/2016 Depreciation -2016 [( Total

11,000,000 450,000

(B)

9,500,000 11,450,000 -

2,322,222

(A)

PROBLEM 20-11 Various investments No. of shares 10,000 15,000 25,000

Date 1/1 3/1stock split Total(10,000x5/2) 11/1 Special assessment 25,000) Total

( 1.60

Cost per Total share Cost 21 210,000 8.4 210,000

x

25,000

Question No. 1 Fair value ( Less:Carrying value Unrealized gain-OCI

(D)

Question No. 2 Broker’s expense over, net income under Operating expense over, NI under ( 1. 60 x 25,000 shares) Net income understated (B)

10

40,000 250,000

375,000 250,000 125,000

( 10,000) (40,000) ( 50,000)

Question No. 3 Netincome ofassociate 3,000,000 Multiplyb y:Percentageofownership 30% Share in the net income before adjustment 900,000 Less: Unrealized gain on downstream sale of PPE 320,000 [( Less: Unrealized profit on upstream sale of inventory ( 30,000 Share in the ne t income after adjustment (C) 550,000

182


Question No. 4 Costo fI nvestment–01/01/2016 Add: Net investment income - 2016 (see No. 3) Less: Dividends received -2016 (30% x 800,000) Add: Share in the translation gain (30% x 1,000,000) Carrying value – 12/31/2016 (B)

4,000,000 550,000 240,000 300,000 4,610,000

Question No. 5 Costo fI nvestment–01/01/2016 Add: Net investment income - 2016 (see No. 3)

4,000,000 550,000

Less: Dividends received -2016 (30% x 800,000) Add: Share in the translation gain (30% x 1,000,000) Less: Amortization of goodwill ( 200,000/10) Carrying value – 12/31/2016 (C)

240,000 300,000 20,000 4,590,000

Note: Under PFRS for SMEs, Intangible Assets and Goodwill is amortized over their useful life. If an entity canno t determine reliably the useful life, it is assumed to be 10 yea rs. Question No. 6 Fairvalue ofbuildingA Less:Carrying value Unrealized gain - P&L SUMMARY OF ANSWERS: 1. D 2. B 3. C 4. B

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

(B)

5.

183

C

6.

B

Chapter 22: Intangible Assets

CHAPTER 22: INTANGIBLE ASSETS PROBLEM 22-1 Research and Development Cost R&D Cost of activities aimed at obtaining new knowledge Marketingr esearch to study consumert astes Cost of developing and producing a prototype model Cost of testing the prototype model for safety and environmentalfriendliness Cost revising designs for flaws in the prototype model Salaries of employees, consultants, and technicians involvedinR&D Amount paid for conference for the introduction of the newly developed product including fee of a model hiredasendorser Advertising to establish recognition of the newly developed product Cost incurred on search for alternatives for materials, devices, products, processes, systems or services Cost of final selection of possible alternatives for a new process Periodic or routine design changes to existing products Modification of design for a specific customer Cost of design, constru ction and operation of a pilot plant that is not of a scale economically feasible for commercialproduction Cost of routine, seasonal, and periodic design of tools,jigs,moldsanddies Cost of quality control during commercial production Cost of purchased building to be used in various R&D projects Depreciation on the building described above Personnel costs of persons involved in research and development projects Design, construction, and testing of preproduction prototypesandmodels Adjusted balances

184

Others

700,000 23,000

16,000 -

80,000 15,000

-

120,000

-

-

102,000 -

43,000

30,000 96,000

-

-

2,500 10,000

5,000 -

18,000

100,000

41,200 96,000 1,306,200 (A)

32,000 1,000,000 -

1,223,500


PROBLEM 22-2 Research and Development Question No. 1 Subsequent expenditure on research Development expenditures not qualifying for recognition ( 5/12) Research and development expense (A) Question No. 2 Acquisition cost of research and develop ment Development expen ditures qualifyi ng for recognition ( Intangible Asset under Development (A)

200,000

280,000

In-process research and development acquired is recorded as intangible asset at cost. Subsequent expenditure on an in-process research and development project recognized as usually done: research is expensed and development costs capitalized only if all criteria for capit alization of development costs are met.

PROBLEM 22-3 Purchased computer software Purchase price excluding refundable purchase tax Add:Customizationc ost( 120,000+ Testing cost ( Amortization (D)

550,000 135,000 37,000 722,000

PROBLEM 22-4 Website Cost Question No. 1 Zero. All cost s are charged to expense.

(A)

Question No. 2 Obtainingadomainname Installing developed applications on the web server Stress testing Designing the appearance (e.g. layout and color) of web pages Creating, purchasing, preparing (e.g. creating links and identifying tags), and uploading information Updating graphics and revisingc ontent Adding new functions, features and content Reviewing securityaccess Total intangible asset (B)

185

32,000 80,000 12,000 160,000 60,000 32,000 12,000 36,000 424,000


PROBLEM 22-5 Renewable Rights Question No. 1 As the costs associated with the renewal are insignificant, the asset must be amortized over the 10 year useful life. The entity intends to renew the license and the government intends to re-issue the license to Bangus Co., and therefore it must be treated as an asset with a 10 year useful life. Amortization (

(D)

Question No. 2 As the cost costsofassociated with renewal areamortized significant, andthe almost equaling the initial the license, thethe asset must be over 5 year useful life. Although the entity intends to renew the license, the renewed license, when it is acquired, must be treated a separate asset and amortiz ed over a useful life of 5 years. Amortization (

(C)

COMPREHENSIVE PROBLEMS PROBLEM 22-6 Goodwill Computation Current Assets ( 6,000,000 + 800,000) Investments PPE( 13,000,000+ 1,850,000) Currentliabilities Noncurrent liabilities Fairvalueo fnetassetacquired

6,800,000 2,000,000 14,850,000 (3,500,000) (2,500,000) 17,650,000

Fairvalueo fnetassetacquired Multiply by: Normal rateofreturn Normalearnings

176 50,000 10% 1,765,000

Totalearnings Losso n sale(or Gain)onsale Bonus ( 150,000 x4years) Operating income Divideby:No. ofyears Averageearnings

9,000,000 (100,000) 600,000 9,500,000 4 2,375,000

Question No. 1 Averageearnings Less:Normal earning Averageexcessearnings Multiply by: Capitalization period Goodwill Add: Fair value ofn eta sseta cquired Purchase price

(A) (A) 186

2,375,000 1,765,000 610,000 4 2,440,000 17,650,000 20,090,000


Question No. 2 Averageearnings Less:Normal earning Averageexcessearnings Divideby:Capitalizationrate Goodwill Add: Fair value of net asseta cquired Purchase price

(B) (B)

Question No. 3 Averageearnings Divideby:Capitalizationrate Purchase price Less:Fairvalueo f netasset Goodwill

(B) (B)

Question No. 4 Averageearnings Less:Normal earning Averageexcessearnings Multiply by: Present value of ordinary annuity Goodwill Add: Fair value of net asset acquired Purchase price

2,375,000 1,765,000 610,000 10% 6,100,000 17,650,000 23,750,000

2,375,000 8% 29,687,500 17,650,000 12,037,500

(C)

2,375,000 1,765,000 610,000 3.0373 1,852,753 17,650,000 19,502,753

Question No. 1 NetPatent,January1 Divideby: Remaininglife(8years-2y ears) Amortization

(A)

336,000 6 56,000

Question No. 2 None, the tradem ark has an indefinite life.

(B)

(C)

SUMMARY OF ANSWERS: 1 A 2. B 3. B 4. C

PROBLEM 22-7

Question No. 3 Cost of noncompetition agreement (1,600,000 x 1/4) Divideby:Useful life Amortization expense (A)

187

400,000 5 80,000


Question No. 4 Purchase price Less: Fair valueo fn et assets acquired Goodwill (carrying amount)

2,400,000 1,600,000 800,000

(A)

The goodwill shall not be amortized because its useful life is indefinite. However, goodwill shall be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate a possible impairment.

Question No. 5 Cost-Patent Less: Accumulated Amortization (48,000 + 56,000) Cost - Trademark (no amortization) (1.6M x 3/4) Cost- Noncompetition agreement Less: Accumulated Amortization (see no. 3) Total carrying amount of the Intangible assets

384,000 104,000 400,000 80,000 (B)

280,000 1,200,000 320,000 1,800,000

Note: Goodwill should not be reported as part of intangible asset since it is not identifiable. SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. A

5.

B

PROBLEM 22-8 Question No. 1 Legal cost Payment of licenses to author excluding refund able purchase taxes (100,000-10,000) Total cost of intangible assets (D) Question No ’s 2, 3 and 5 Cost Less: Amortization in 2016 (97,000/5 x 6/12) Carryingvalue,12/31/2 016 Less: Amortization in 2017 (97,000/5 ) Carryingvalue,12/31/2 017 Question No. 4 Generalstart-upcost Amortization Cost of printing Advertisingexpense(20,000x6 /12) Total Expense SUMMARY OF ANSWERS: 1. D 2. C 3. C 4. B

97,000 9,700 87,300 19,400 67,900

(B) 5. 188

D

7,000 90,000 97,000

No. 2 (C) No. 3 (C) No. 5 (D)

1,500 9,700 100 10,000 21,300


PROBLEM 22-9 Patent, Competitive, Related Pate nt Question No. 1 Cost Divideby:Remaining usefullife Amortization

(C)

500,000 10 50,000

Question No. 2 Cost of theoldPatent Less: Accumulated Amortization (500,000 / 10 x 2) Carryingvalue,1/1/2014 Competitive Patent Total Divideby:Remaininglife Amortization (D)

500,000 100,000 400,000 240,000 640,000 8 80,000

Question No. 3 Carryingvalue,1/1/2014 Less:Amortization2014 Carrying value, 12/31/2014 Question No. 4 Carryingvalue,12/31/2014 Add:Related patent TotalCarryingvalue,1/1/2015 Divideby:Extendedlife Amortization

(D)

640,000 80,000 560,000

(A)

560,000 200,000 760,000 20 38,000

(A)

760,000 38,000 722,000

Question No. 5 TotalCarryingvalue,1/1/2015 Less:Amortization,2015 Carrying value, 1/1/2016 = Loss

SUMMARY OF ANSWERS: 1. C 2. D 3. D 4. A

5.

A

PROBLEM 22-10 Comprehensive Question No. 1 Acquisitioncost Costs of employee benefit s arising directl y from bringing the assettoi tsi ntendedcondition Professional fees arising directly from bringing the asset to its intended condition Total cost of the trademark

(C)

600,000 60,000 13,000 673,000

Question No. 2 None, the trademark has an indefinite life and is not subject to amortization. (A) 189


Question No. 3 Amortization-Trademark Amortization-Customerlist Total a mortization

(B)

Question No. 4 Amortization-Trademark Amortization-Customerlist Amortization-Franchise

60,000 165,416

Total a mortization

(A)

Downpayment Add: Present Value of notes payable (600,000 x .7118) Cost offranchise

Question No. 5 Cost of trademark Cost of customer list Less: AccumulatedA mortization Cost offranchise Less: Accumulated Amortization Total carryin g value SUMMARY OF ANSWERS: 1. C 2. A 3. B 4. A

60,000 60,000

225,416 400,000 427,080 827,080

673,000 300,000 120,000 827,080 165,416 (A)

5.

180,000 661,664 1,514,664

A

PROBLEM 22-11 Question No. 1 Zero, organiz ation cost is treated as outrig ht expense .(A) Question No. 2 Designcosts Add:Legalfees Registration fee with Patent office Total cost of tradem ark

(B)

Question No. 3 Cash

3,000,000 300,000 100,000 3,400,000

400,000

Add Present value of the note (200,000 x 2.91) Cost of Franchise

Question No. 4 Cost (seeno. 3) Less:Amortization(982,000/20)

(B)

582,000 982,000 982,000 49,100

190


Carrying value, 12/31/2016

(A)

Question No. 5 Amortization of the franchise P49,100

932,900

(D)

The trademark has no amortization because it has an indefinite life. It is only tested for possible impairment .

SUMMARY OF ANSWERS: 1. A 2. B 3. B 4. A

5.

D

PROBLEM 22-12 Question No. 1 Cost-Patent Less: Amortization for the year (136,000/20) Carrying value of the Patent Question No. 2 Licensing agreement No. 1 Unadjustedbalance Less: Amortization for 2 years (100,000/20 x 2) Total Less: Reduction inv alue (90,000x 60%) Carrying value Question No 3 Unadjustedbalance Add: Amount creditedf ora dvancec ollection Total cost Less:Amortization(120,000/10) Carrying value - Licensing agreement No. 2 Question No. 4 Carrying values: Patent(seeno.1) LicensingAgreementNo.1(No.2) LicensingAgreementNo.2(No.3) Total carryin g value

(C)

136,000 6,800 129,200

(B)

100,000 10,000 90,000 54,000 36,000

(C)

118,000 2,000 120,000 12,000 108,000

(C)

129,200 36,000 108,000 273,200

The P16,000 cost incurred for advertising and the P32,000 legal expenses for incorporation should be charged to expense when it were incurred.

Question No. 5 Nonamortization of Licensing Agreement No 1 (100,000/20 x 1) Expenses capitalized: 191

5,000


Goodwill(16,000+32,000) Organization cost Overstatement of Retained earnings

(A)

48,000 58,000 111,000

All the expenses above were understated thereby overstating the net income and retained ea rnings.

SUMMARY OF ANSWERS: 1. C 2. B 3. C 4. C

5.

A

PROBLEM 22-13 Question No. 1 Unadjustedbalance Less: Unamortized portion of improvements debited Cost P75,000 Less: Amortization (P75,000 / 10 x 3) 22,500 Adjustedbalance–01/01/2016 Less: Amortization 2016 (P52,500 + P56,071) – see below Carrying value – 12/31/2016 (A) Computation of amortization: Adjustedbalance–01/01/2016 Less: CV of Patent with remaining UL of 2 years – 01/ 01/2016 Cost 210,000 Less: Accumulated amortization 01/01/2016 (P210,000/14x7 ) 105,000 CV of Patent with remaining UL of 7 years – 01/01/2016 Amortization of: Patent with remaining UL of 2 years (105,000 / 2) Patent with remaining UL of 7 years (392,500 / 7) TotalAmortization

Question No. 2 Franchise cost Less:Amortization(50,000/ 5) Carrying value 12/31/2016

550,000

52,500 497,500 108,571 388,929 497,500

105,000 392,500 52,500 56,071 108,571

(A)

50,000 10,000 40,000

Question No. 3 The amount to be rep orted as goodwill is the excess of cost over the fair va lue of net asset acquired. Goodwill is not amortized but only subject to impairment testing. Therefore, the amount to be repor ted is P200,000. (A) Question No. 4 Other coding costs after establishment of feasibility 192

technological 240,000


Other testing costs after establishment of technological feasibility Costs of producing master for training materials Total Software Cost (A)

Question No. 5 Completion of detailedp rogram design Costs incurred for coding and testing to establish technological feasibility Total Cost charged to Expense (A) Question No. 6 Amortization: Patent(seeNo. 1) Franchise(see No.2) Software cost–noneyet Total Cost charged to Expense SUMMARY OF ANSWERS: 1. A 2. A 3. A 4. A

(C) 5.

A

6.

200,000 150,000 590,000

130,000 100,000 230,000

108,571 10,000 118,571

C

PROBLEM 22-14 Inventories, PPE and Intangible Asse ts Question No. 1 Unadjustedbalance

4,300,000

Add: Goods purchased FOB Shipping Point Adjusted balance

Question No. 2 Totalacquisitioncost Add:Mortgageassumed Totalcosto flandandb uilding Multiplyb y: Percentage allocated to building Total Purchase Price allocated to Building Add: Remodeling Cost( 300,000 – 20,000) Total Cost of Building

(B)

40,000 4,340,000

(A)

4,000,000 800,000 4,800,000 80% 3,840,000 280,000 4,120,000

Question No. 3 Cost of improvement Less: Accumulated depreciation (500,000/8 x 9/12) Carrying value

(B)

Question No. 4 Carryingvalue –01/01/2016 Less: Amortization 2016 (432,000 / 3 years remaining UL) 193

500,000 46,875 453,125

432,000 144,000


Carrying value

Question No. 5 Building( 4,120,000-120,000)/50 Leasehold Improvements (500,000/8 x 9/12) Furnitureand Fixtures Franchise (500,000/10) Licensingagreement Total depreciation and amortization expense SUMMARY OF ANSWERS: 1. B 2. A 3. B 4. C

5.

194

A

(C)

288,000

(A)

80,000 46,875 150,000 50,000 144,000 P470,875

Chapter 23: Revaluation, Impairment and Noncurrent Asset Held for Sale

CHAPTER 23: REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE PROBLEM 23-1 Revaluation, No Change in Estimate Question No. 1

Machinery Accumulated depreciation (25%) CA/DRC/RS

Historical Cost 8,000,000 2,000,000 6,000,000

Replacement Cost 15,000,000 3,750,000 12,250,000

Increase 7,000,000 1,750,000 5,250,000 (C)

Carrying amount/Depreciated R eplacement Cost/Revaluation Surplus

Question No. 2 DepreciatedReplacementcost Divideby:Remainingusefullife(20–5) Depreciation Expense – 2017

(C)

11,250,000 15 750,000

Question No. 3 Revaluationsurplus,b eginning Less: Piecemeal realization – 2017 (5,250,000 / 15) Remaining revaluation surplus end of 2017 (B)

5,250,000 350,000 4,900,000

Que stionPrice No. 4 Net Selling Less: Carrying amount – 01/02/2018 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P750,000 x 2 years) Gain on sale

10,000,000 11,250,000 1,500,000

(A)

Question No. 5 Revaluationsurplus,b eginning Less: Piecemeal realization for two years (5,250,000/ 15 x 2) Remaining revaluation surplus to R/E (B) SUMMARY OF ANSWERS: 1. C 2. C 3. B 4. A

5.

195

B

9,750,000 250,000

5,250,000 700,000 4,550,000


PROBLEM 23-2 Revaluation, With Change in Useful Life Question No. 1

Machinery Accumulated depreciation (25%) CA/DRC/RS

Replacement Cost 14,000,000 2,800,000 11,200,000

Cost 12,000,000 2,400,000 9,600,000

Increase 2,000,000 400,000 1,600,000 (B)

Carrying amount/Depreciated R eplacement Cost/Revaluation Surplus

Question No. 2 DepreciatedR eplacementcost Divideby:Remainingusefullife Depreciation Expense – 2016

(B)

11,200,000 25 448,000

Question No. 3 Revaluationsurplus,01/01/2016 Less: Piecemeal realization – 2016 (1,600,000/ 25) Remaining revaluation surplus end of 2016 (C)

1,600,000 64,000 1,536,000

Question No. 4 NetSellingPrice Less: Carrying amount – 01/02/2017 Depreciated Replacement Cost, date of revaluation

11,200,000

Less: Subsequent depreciation (P11.2M / 25 x 2) Gain on sale

896,000 (A)

10,000,000

Question No. 5 Revaluationsurplus,b eginning Less: Piecemeal realization for two years (1,600,000 / 25 x 2) Remaining revaluation surplus to R/E (B) SUMMARY OF ANSWERS: 1. B 2. B 3. C 4. A

5.

10,304,000 (304,000)

1,600,000 128,000 1,472,000

B

PROBLEM 23-3 Revaluation, With Change in Useful Life and Residual Value Replacement Machinery Less: Accumulated depreciation CA/DRC/RS

Cost 4,550,000 *1,125,000 3,425,000

196

Cost 9,100,000 **2,250,000 6,850,000

Increase 4,550,000 1,125,000 3,425,000 (C)


Carrying amount/Depreciated R eplacement Cost/Revaluation Surplus *This amount should be the actual amount of accumulated depreciation (i.e. using the original residual value) ** (9,100,000 – 100,000) / 20 x 5. This is computed using the revised residual value.

Question No. 2 DepreciatedR eplacementcost

6,850,000

Less: Revisedamount residualvalue Depreciable Divideby:Remainingusefullife Depreciation Expense – 2016

(B)

100,000 6,7500,000 25 270,000

Question No. 3 Revaluationsurplus,0 1/01/2016 Less: Piecemeal realization – 2016 (3,425,000 / 25) Remaining revaluation surplus end of 2016 (B)

3,425,000 137,000 3,288,000

Question No. 4 NetSellingPrice Less: Carrying amount – 01/02/2018 Depreciated Replacement Cost, date of revaluation Less: Subsequent depreciation (P540,000 x 2) Gain on sale

7,000,000 6,850,000 540,000

(C)

Question No. Revaluationsurplus,b eginning Less: Piecemeal realization for two years (P274,000 x 2) Remaining revaluation surplus to R/E (B) SUMMARY OF ANSWERS: 1. C 2. B 3. B 4. C

5.

6,310,000 690,000 3,425,000 274,000 3,151,000

B

PROBLEM 23-4 Impairment and Revaluation of PPE CASE NO. 1 COST MODEL Question No. 1 Cost Less:Residualvalue Depreciable amount Divideby:Estimated usefullife Depreciation - 2016 (B) 197

2,200,000 200,000 2,000,000 10 200,000


Question No. 2 Zero. The company is usin g the cost model . (A) Question No. 3 Cost Less:Accumulatedd epreciation Carryingamount Less:Revised residualvalue Depreciable amount

2,200,000 200,000 2,000,000 290,000 1,710,000

Divideby:Remainingusefullife Depreciation - 2017

9 190,000

(D)

Question No. 4 Cost Less: Accumulated Depreciation (200,000 + 190,000 + 190,000) Carryingamount–12/31/2019 Less: Recoverable amount, date of impairment Impairment loss (C) Question No. 5 Recoverable amount Less:Revised residualvalue Depreciable amount Divideby:Remainingusefullife

939,500 40,000 899,500 7

Depreciation

SUMMARY OF ANSWERS: 1. B 2. A 3. D 4. C

2,200,000 1,620,000 1,620,000 939,500 680,500

128,500

(B) 5.

B

CASE NO. 2 REVALUATION MODE L Question No. 1 Cost Less:Residualvalue Depreciable amount Divideby:Estimated usefullife Depreciation - 2016 (B) Question No. 2 Recoverablea mount/fairv alue

2,200,000 200,000 2,000,000 10 200,000

2,990,000

Less: Carr ying amount Machinery at cost Less: Accumulated depreciation Revaluation surplus

2,200,000 200,000

(D)

198

2,000,000 990,000


Question No. 3 Recoverablea mount/fairv alue Less:Revised residualvalue Depreciable amount Divideby:Remainingusefullife Depreciation

2,990,000 290,000 2,700,000 9 300,000

(C)

Question No. 4 Recoverablea mount, date of revaluation Less: Subsequentd epreciationf or 2y ears

2,990,000 600,000

Carryingamount Less: Recoverable amount, date of impairment Decreaseinvalue Less: Remaining r evaluation Revaluation surplus, date of revaluation Less: Piecemeal realization for two years Impairment loss (C)

Question No. 5 Recoverable amount Less:Revised residualvalue Depreciable amount Divideby:Remainingusefullife Depreciation-2019

2,390,000 939,500 1,450,500 990,000 220,000

770,000 680,500

939,500 40,000 899,500 7 128,500

(B)

PROBLEM 23-5 Impairment and Revaluation of PPE CASE NO. 1 COST MODEL Question No. 1 Cost Less:Residualvalue Depreciable amount Divideby:Estimated usefullife Depreciation - 2016 (C)

2,300,000 200,000 2,100,000 10 210,000

Question No. 2 Cost Less:AccumulatedD epreciation Carryingamount–12/31/2017

2,300,000 210,000 2,090,000

Less: Recoverable amount, date of impairment Impairment loss

199

(C)

1,850,000 240,000


Question No. 3 Recoverable amount Less:Revised residualvalue Depreciable amount Divideby:Remainingusefullife Depreciation

1,850,000 50,000 1,800,000 9 200,000

(B)

Question No. 4 Recoverablea mount –01/01/2017 Less: Accumulated Depreciation – 12/31/2018

1,850,000 400,000

Carryingamount–12/31/2018 Lower of: Would have been carrying amount no impairment Less: Recoverable amount – 01/01/2019 Gaino nimpairmentrecovery–P&L The increase in fai r value is recogniz ed in P&L.

1,450,000 2,300,000 630,000

1,670,000 49,400

(A)

Would have been carrying amoun t had been there no impairmen t: Cost 2,300,000 Less: Depreciation 2016 210,000 2017 210,000 2018 210,000 Would have been carrying value – 12/31/2018 1,670,000

Question No. 5 Lower between Recoverable amount and would have been book value – 01/01/2019 Less:Newresidual value Depreciable amount Divideby:Remainingusefullife( 10–3) Depreciation (D) SUMMARY OF ANSWERS: 1. C 2. C 3. B 4. A

5.

1,499,400 0 1,499,400 7 214,200

D

CASE NO. 2 REVALUATION MODE L Question No. 1 Cost Less:Residualvalue

2,300,000 200,000

Depreciable amount Divideby:Estimated usefullife Depreciation - 2016

(C)

200

2,100,000 10 210,000


Question No. 2 Cost Less:AccumulatedD epreciation Carryingamount–12/31/2017 Less: Recoverable amount, date of impairment Impairment loss

2,300,000 210,000 2,090,000 1,850,000 240,000

(C)

Question No. 3 Recoverable amount Less:Revised residualvalue

1,850,000 50,000

Depreciable amount Divideby:Remainingusefullife Depreciation

1,800,000 9 200,000

(B)

Question No. 4 Recoverablea mount –01/01/2017 Less: Accumulated Depreciation – 12/31/2018 Carryingamount–12/31/2018 Lower of: Would have been carrying amount no impairment Less: Recoverable amount – 01/01/2019 Gaino nimpairmentrecovery–P&L The increase in fai r value is recogni zed in P&L.

1,850,000 400,000 1,450,000 2,300,000 630,000

1,670,000 49,400

(A)

Would have been carrying amoun t had been there no impairmen t: Cost Less: Depreciation 2016 2017 2018 Would have been carrying value – 12/31/2018

2,300,000 210,000 210,000 210,000 1,670,000

Zero, since recoverable amount is lower than the would have been book value if there is no impairment loss. Question No. 5 Recoverablea mount –01/01/2019 Less:Revised residualvalue Depreciable amount Divideby:Remainingusefullife( 10–3) Depreciation SUMMARY OF ANSWERS: 1. C 2. C 3. B 4. A

(D)

5.

201

D

1,499,400 1,499,400 7 214,200


PROBLEM 23-6 Impairment of Intangible Assets Question No. 1 Patent(200,000/10) Computer software(100,000x6 0/120) Total a mortization

20,000 50,000 70,000

(A)

The copyright and tradename is not amortized because they have indefinite useful life.

Question No. 2 Copyright: Carryingvalue Less: Recoverable amount (80,000 / .05) Tradename: Carryingvalue Less: Recoverable amount (15,000 / .05) Goodwill: Carrying value of reporting unit Less: Recoverable amount (200,000 x 14.0939) Total impairment loss Question No. 3 Carrying valueo fg oodwill – 12/31/2015 Less: Allocated impairment loss of reporting unit Carrying value of goodwill – 12/31 /2016

400,000 160,000

240,000

350,000 300,000

50,000

3,000,000 2,818,780 (C)

181,220 471,220

(B)

900,000 181,220 718,780

Question No 4 Patent(P200,000–P20,000) Copyright(recoverableamount) Tradename(recoverableamount) Computer software (100,000 – 50,000) Carrying value of intangible assets – 12/31/2016 (A)

180,000 160,000 300,000 50,000 690,000

Note that goodwill is not rep orted as an intan gible asset.

SUMMARY OF ANSWERS: 1. A 2. C 3. B 4. A

202


PROBLEM 23-7 Amortization and Impair ment of Intangible Assets Questions 1 and 2 Trademark-Unadjustedbalance Less: Unamortized cost of improvement that should have been expensed Cost Less: Accum. amortization (150,000/10 x 2) Total Add: Competitive patent debited to expense

1,430,000

150,000 30,000

120,000 1,310,000

Cost 135,000 Less: Accum. amortization (135,000/9 x 1) 15,000 120,000 Adjustedbalance,January1.2016 1,430,000 Less: Amortization during the year Patent with remaining life of 4 years *(160,000/4) 40,000 1() A Remaining patent (1,430,000-160,000)/15-7) 158,750 198,750 Carrying value of the Patent, 12/31/2016 1,231,250 2) A ( Computation of the P160,000: Original cost Less: Accumulated amortization (300,000/15) x 7 years)) Remainingc arryingv alue,1/1/2016

300,000 140,000 160,000

The 7 years age is from January 1, 2009 to January 1, 2016.

Questions 3 Carrying value of the trademark (no amortization) Less: Recoverable amount (P75,000/10%) Impairment loss (B)

800,000 750,000 50,000

Questions 4 Adjusted carrying value of the trademark is equal to its recoverable amount of P750,000. (See no. 3) (B) Questions 5 Downpayment Add:Presentvalue ofthenote Totalcost ofthe franchise Divideby:Useful life Amortization expense SUMMARY OF ANSWERS: 1. A 2. A 3. B 4. B

(D)

5.

203

D

500,000 874,000 1,374,000 10 137,400


PROBLEM 23-8 Impairment of Cash Generating Unit Question No. 1 Total carrying amount before impairment Less:Fairv aluel esscosts to sell Impairmentloss Less: Impairment loss allocated to Goodwill Impairment loss allocated to other assets

(D)

72,000,000 60,000,000 12,000,000 2,000,000 10,000,000

Questions No. 2 and 3 (A) Other assets in this case would include only PPE and Patent. Impairment of inventories (i.e. write-down to NRV) is covered by PAS 2 while impairment of FA at FVTOCI will be covered by PAS 39 / PFRS 9. Questions No. 4 and 5

PPE (atc ost model) Patent Total

Carryinga mount before impairment 30,000,000 10,000,000 40,000,000

SUMMARY OF ANSWERS: 1. D 2. A 3. A 4. D

5.

Ratio 0.75 0.25

Allocated Impairment loss 7,500,000 (D) 2,500,000 (D) 10,000,000(D)

D

PROBLEM 23-9 Impairment and Reversal of Impairment of Cash Generating Unit Cash Inventory Accountsreceivable Plant andequipment Less:Accumulateddepreciation Trademark Patent Goodwill TotalCarryingamountof CGU Less:Value inuse Impairmentloss Less: Impairment allocated to goodwill Impairment loss allocatedt o othera sset

204

100,000 800,000 1,200,000 24,000,000 10,400,000 2,550,000 850,000 400,000 19,500,000 16,300,000 3,200,000 400,000 2,800,000


Plant and equipment Trademark Patent Total


Balance before Impairment 13,600,000 2,550,000 850,000 17,000,000

Fraction 13.6/17 2.55/17 .85/17

Balance after Impairment

Reallocation

11,360,000 2,130,000 710,000 14,200,000

(40,000) (7,500) 47,500 -

Plant and Equipment: Would have been BV, no impairment Cost Less: Accumulated depreciation (2.6M +300,000) Actual Book value Impairedvalue Less: Subsequent depreciation Maximumg aino n reversal ofi mpairment

Trademark: Would have been BV, no impairment Cost Less: Subsequent amortization

Balance after Reallocation 11,320,000 2,122,500 757,500 3,520,000

24,000,000 11,600,000

11,320,000 1,000,000

2,550,000 120,000

Actual Book value Impairedvalue Less: Subsequent depreciation Maximumg aino n reversal ofi mpairment

Patent: Would have been BV, no impairment Cost Less: Subsequenta mortization

2,122,500 112,000

850,000 80,000

Actual Book value Impaired value Less: Subsequent depreciation Maximumg aino n reversal ofi mpairment

205

Balance after Impairment 11,360,000 2,130,000 710,000 14,200,000

Impairment Loss (2,240,000) (420,000) (140,000) 2,800,000

757,500 60,000

1. (B) 2. (B) 3. (B)

12,400,000

10,320,000 2,080,000

2,430,000

2,010,500 419,500

770,000

697,500 72,500



Balance before Reversal 10,320,000 2,010,500 697,500 13,028,000

Allocated Gain Max gain 1,901,136 1,901,136 370,372 370,372 1 28,492 72,500 2,400,000 2,344,008

Fraction 10320/13028 2010.5/13028 697.5/13028

Balance after

Balance Plant and equipment Trademark Patent Total

Max gain 1,901,136 370,372 72,500 2,344,008

SUMMARY OF ANSWERS: 1. B 2. B 3. B 4. C

bef. Reall 12,221,136 2 ,380,872 825,992 15,428,000

5.

C

6.

Reallocatio n reallocation 46,863 12,267,999 9,130 2,390,001 (55,992) 770,000 15,428,000

A

PROBLEM 23-10 Noncurrent Assets Held for Sale -Sing le Asset Question No. 1 Cost Less:Accumulatedd epreciation Carryingamount

1,200,000 480,000 720,000

Less: Initial amount recognized– lower of: Carryingamount Fairvalue lesscosttosell Impairment loss

720,000 600,000 (C)

600,000 120,000

Question No. 2 Zero. Non-current asset hel d for sale should not be depreciated.

(A)

Question No. 3 Lower of: Carryingamount FVLCTS Less: Carrying amount at initial recognition Gain on reversal – P &L

720,000 600,000 120,000

Question No. 4 Net Selling Price( 1,800,000 – 50,000) Less:Carrying amount Gain on sale

720,000 790,000

(C)

(B) 206

750,000 720,000 30,000


Question No. 5 Cost Accumulated depreciation Carryingamount Less: Initial amount recognized– lower of: Carryingamount Fairvalue lesscosttosell Impairment loss

1,200,000 480,000 720,000 720,000 800,000 (A)

720,000 -

SUMMARY OF ANSWERS: 1. C

2. A

3. C

4. B

5.

A

PROBLEM 23-11 Noncurrent Assets held for Sale- Disposal Group Question No. 1 C P8,800,000. Question No. 2 (C) P6,000,000. Question No. 3 Total carrying amount before impairment Less:Fairv aluel esscoststosell Impairmentloss Less: Impairment loss allocated to Goodwill

59,600,000 52,000,000 7,600,000 6,000,000

(B)

Impairment loss allocated to othera ssets

1,600,000

Questions No. 4 & 5

PPE(atc ostmodel) PPE (at revaluation model) Total

Carrying amount as remeasured 22,800,000 0.59 16,000,000 0.41 38,800,000 Revaluation surplus

PPE(atc ostmodel) PPE Total(at revaluation model)

400,000 400,000

Remaining revaluation surplus is (P3,000,000 minus (P32M-P30M)

Allocated Decrease 940,206 659,794 1,600,000

Carrying amount Impairment after loss impairment 940,206 21,859,794 259,794 1,200,000

P1,000,000 207

Revaluation surplus 400,000 1,000,000

15,340,206 37,200,000


Decrease in value of the PPE (at revalu ation model) is allocat ed to 1. First, remaining revaluation surplus 2. Balance to impairment loss.

SUMMARY OF ANSWERS: 1. C 2. E 3. D 4. B

5.

A

PROBLEM 23-12 Noncurrent Assets held for Sale – Investment in Associate Question No. 1 Sharein netincome(900,000x 30%) Less: Amortization of undervalued asset Net investment income Question No. 2 Beginningbalance– 01/01/2016 Add: Net investmentincome (see No.1 ) Less: Dividends received( 150,000 x 30%) Carrying amount – 12/31/2016 Question No. 3 Carryingamount–12/31/2016 Less: Initial amount recognized– lower of: Carryingamount

(B)

270,000 10,000 260,000

(A)

5,000,000 260,000 45,000 5,215,000

5,215,000 5,215,000

Fair value less cost to sell Impairment loss

4,900,000 (B)

4,900,000 315,000

Question No. 4 Zero. No Share in the profit or loss and amortization shall be recognized when the investment in associate is classified as noncurrent held for sale. The cash dividend shall be recognized as income. (A) Question No. 5 Net Selling Price (P4,900,000 – P100,000) Less:Carrying amount Loss on sale SUMMARY OF ANSWERS: 1. B 2. A 3. B 4. A

5.

208

(D)

D

4,800,000 4,900,000 (100,000)


PROBLEM 23-13 Question No. 1 Irrigation Equipment Freight in Installation cost Total Machinery and Equipment, end

(A)

Question No. 2 Tradeinallowance Book Value: Cost Less: Accum. Depreciation (P660,000+ P165,000) Loss on trade in

P 740,000 10,000 192,000 P 942,000

400,000 1,300,000 825,000 (B)

Question No. 3 Before addition [(P3,100,000 – P100,000)/20 x 3/12) After addition: [(P3,100,000 – (P562,500 + P37,500) + 980,000 P200,000)/20)x9/12) Depreciation expense (B)

475,000 75,000

37,500 123,000 160,500

Remaining life (20 – 4 + 4) = 20 ye ars

Question No. 4 Turf cutter [{(P1,300,000 – P200,00 0)/5} x 9/12] + {(P800,000 – P50,000)/6 x3 /12)}] Water desalinator [(P3,780,000 – P270,000)/10] Irrigation equipment [(942,000/4) x 6/12] Officebuilding Total Depreciation expense

P

(B)

P

196,250 351,000 117,750 160,500 825,500

Question No. 5 Fairvalueo ninitialr evaluation P 3,780,000 Book value on initial revaluation: Cost P4,000,000 Accumulated d epreciation [(P4,000,000 – P200,000)/10 x 2) ( 760,000) 3,240,000 12/31/2016RevaluationS urplus P 540,000 Less: Piecemeal realization in 2017 (P540,000/10) 54,000 12/31/2017Revaluations urplus P 486,000 12/31/2017Fairvalue

P 3,400,000

12/31/2017 Book value: Adjustedcost P 3,780,000 Accumulated Depreciation [(P3,780,000 – P270,000)/10] ( 351,000) Revaluation decrease – charged to Revaluation Surplus (A) P 209

3,429,000 29,000


SUMMARY OF ANSWERS: 1. A 2. B 3. B 4. B

5.

A

PROBLEM 23-14 Question N os. 1 and 2 Cost-beginningbalance Less Accumulated depreciation, beginning Heldfor sale-carryingamount Total Depreciation charge for the year Held fors ale(8,200x20%x6/12) Remaining balance (232,425 x 20%) Classified as held for sale: Depreciationfor theyear Carrying amount

Question No. 3 Carryingamountat1Oct2015 Lessvaluationa t1 October2015 Revaluationsurplus

126,000 144.375 8,200 232,425 820 46,845

(A 1.) 47,305 820 185,940 (A)

372,000 449,500 77,500

Valuation at1October2015

449,500

Less Depreciation expense (449,500/(40-9) Revaluation surplus (B)

Question No. 4 Carryingamountat1Oct2015 Lessvaluationa t1 October2015 Decreaseinvalue

14,500 435,000

1,080,000 600,000 480,000

Valuation at1October2015 Less Depreciation expense (600,000/(50-20) Revaluation surplus (B)

Question No. 5 C Carryingamountat1Oct2015 Lessvaluationa t1 October2015

600,000 20,000 580,000

1,080,000 600,000

Decrease invaluerevaluations urplus Lessremaining Impairmentloss-PropertyB Impairment loss-held for sale (8,200-820)-6,500

480,000 456,000 24,000 880 210


Total impairment loss

24,880

(C)

Question No. 6 Depreciation expense based on revalued amount Less depreciation expense based on historical cost (400,000/40) Piecemeal realization (D)

14,500 10,000 4,500

Or Revaluation surplus,b eginning( Prop. A) Addrevaluations urplus,Oct.1 ,2 015

62,000 77,500

Totalrevaluation surplus Dividebyremaininglife Piecemeal realization

SUMMARY OF ANSWERS: 1. A 2. A 3. B 4. B

139,500 31 4,500

(D)

5.

211

C

6.

D

Chapter 25: Introduction to Liabilities

CHAPTER 25: INTRODUCTION TO LIABILITIES PROBLEM 25-1 Total Liabilities Total liabilities Current Accountspayable Loanp ayable– currentportion Unearnedrent income Income taxpayable

P 1,000,000 1,000,000 300,000 250,000

Dividends payable Totalcurrent liabilities

100,000 P 2,650,000

Non-current Bonds payable Discountonbondspayable Loanp ayable– non-current portion Deferredtax liability Totalnon-currentliabilities Total liabilities

(

(B)

P 5,000,000 500,000) 1,500,000 15,000 P 6,015,000

P8 ,665,000

Below items shall be presented as part of entity’s assets: Current asset

Advances toemployees

P

45,000

Non-current asset

Cash surrender value of officers’ life insurance Patent

75,000 50,000

Below ite m shall be pre sented in the shareholder’s equity: Sharedividendspayable P

150,000

Below item shall be disclosed in the not es to financial stateme nts: Contingent liability – guarantee to James P 500,000 The bank overdraft, which is part of cash management, is offset to an y bank balance with posi tive bala nce as provided under PAS 7.

PROBLEM 25-2 Current Liabilities Current liabilities Accounts payable –unadjusted

P 4,000,000

Add/(Deduct): Adjustments Debit balances in suppliers’ accounts Postdated checksof Accountspayable–adjusted Credit balances in customers’a ccounts 212

100,000 50,000 P 4,150,000 500,000


Premiumspayable Accruedexpenses Total current liabilities

(A)

600,000 150,000 P5 ,400,000

Below items shall be presented as part of entity’s non-cur rent liabilities: Bonds payable 1,000,000 Premiumonbondspayable 100,000 Mortgage payable 850,000 Deferredtaxliability 200,000 Deferredrevenue 175,000 Below item shall be presented as part of shareholders’ equity: Stockdividendspayable 750,000

PROBLEM 25-3 Refinancing Current liabilities 10% note payable, maturing 03/3 1/2015 Annuals inkingfund requirement Total current liabilities (C)

P10,000,000 500,000 10,500,000

Below items shall be presented as part of entity’s non-cur rent liabilities: 12% note payable, maturing 06/30/2015 6,000,000 7% guaranteed debentures, due2 018 2,000,000

PROBLEM 25-4 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the refinancing agreement was completed af ter the reporting date.

PROBLEM 25-5 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the grace period was gran ted after the reporting date.

PROBLEM 25-6 Accounts payable Accounts payable Accounts payable –unadjusted Cost of goodslostintransit Cost ofreturnedgoods

P 8,000,000 500,000 ( 200,000)

Accounts payable – adjusted

(B)

213

P8 ,300,000


PROBLEM 25-7 Accounts payable Amount of cash to eliminate accou nts payable Accounts payable from: *Purchases through March 15 (gross)(P4,900,000 / 98%) P 5,000,000 Merchandise inventory at cost(P1,500,000 / 150%) 1,000,000 Accounts payable (B) P6 ,000,000 *The amount was gros sed-up since the entity is no longer enti tled to cash discount. The liability as of March 15, 2015 has been outstanding for more than 10 days.

PROBLEM 25-8 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Basis of bonus Multiply by: Bonusrate Total current liabilities

(C )

PROBLEM 25-9 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Amount of income subject to bonus (125%) Less: Bonus (25%) (squeeze) (D) Basis of bonus (100%) (P600,000/125%)

PROBLEM 25-10 Unearned Revenue Unearned revenue – gift certificates Unearned revenue 1,500,000 Gift certificate redeemed 4,000,000 5,000,000 Expired gift certificate 300,000 4,300,000 6,500,000 Balance, End (B) 2,200,000 6,500,000 6,500,000

214

P 2,200,000 880,000 P 1,320,000 10% P 132,000

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

120,000 P 480,000

Balance, Beg. Cash receipts from gift certificate sold


PROBLEM 25-11 Advances from Customers Unearned rev enue – Advance s from customers Unearned revenue 1,100,000 Advances applied to shipments 1,600,000 1,800,000 Ordersc ancelled 100,000 1,700,000 2,900,000 Balance, End (C) 1,200,000 2,900,000 2,900,000

PROBLEM 25-12 Escrow Liability Deposits received – Escrow account Escrow liability 600,000 Cash payments nine months 4,200,000 4,500,000 4,200,000 5,100,000 Balance, End (C) 900,000 5,100,000 5,100,000

PROBLEM 25-13 Container’s Deposits Deposits received – Escrow account Liability for Deposits 100,000 Cash refunds for container returned in 2014 92,000 100,000

Balance, End (C)

92,000 108, 000 200,000

Balance, Beg. Advances received

Balance, Beg. Cash receipts for nine months

Balance, Beg. Cash deposits from d eliveries

200,000 200,000

PROBLEM 25-14 VAT payable Provision - VAT payable VAT Payable Payment made

Balance, End (A)

120,000

120,000 84,000 96,000 300,000

120,000 180, 000 300,000

300,000 215

Balance, Beg. For October For November For December


PROBLEM 25-15 Provision: Continuous range of outcome means that the contingency (D) A range between 10,000 and cannot be reliab ly estimated, hence no pro vision is recognized.

PROBLEM 25-16 Provision: Expected value with adjustment factor 70% chance that outcome will occur × 20% × 200,000 70% chance that outcome will occur × 80% × 100,000 Expectedvalue Multiply by: Riskadjustment Risk adjustedexpected value Multiplyb y:Presentvaluefactor Provision (D)

28,000 56,000 84,000 1.07 89,880 89,000 81,709

PROBLEM 25-17 Restructuring Provisions Wagesofretrenchedemployees Salary ( 50,000x 60%) Retrenchmentpackage Restructuring provision

1,000,000 30,000 150,000 1,180,000

(D)

Note that 60% (administering the closure and transfer of employees of Factory A) is only included in computing the restructuring provision since it is directly related to the restructuring.

PROBLEM 25 18 Continge ncies (C) Since the outcome of the lawsuit remains uncertain, disclosure of the contingency in the notes to financial statements would be the necessary.

PROBLEM 25-19 Continge ncies (B) Since it is probable that De rick will be liab le to pay the 3,000,000 as supported by Rose’s filing of a petition for bankruptcy, Derick should accrue and disclose the provision for guarantee on a loan of 3,000,000.

PROBLEM 25-20 Premiums Payable Provision – Premiums liability Premiums liability **Coupons redeemed Balance, End (D)

50,000 50,000 30,000 216

Balance, Beg.

80,000 *Premiums expense 80,000


80,000

80,000

*(20,000 x 80%)/5 x (P30 + P5 - P1 0) **(10,000/5) x (P30 + P5 - P10)

PROBLEM 25-21 Premiums Premiums liability (2015) **Balance,E nd 200,000 *Coupons redeemed

**Balance, End *Coupons redeemed

800,000 1,000,000

1,000,000 1,000,000

Premiums liability (2016) 120,000 200,000

2,000,000 2,120,000

1,920,000 2,120,000

Balance,Beg. Premiums expense (squeeze)

Balance, Beg. Premiums expense (squeeze) (D)

*Number of towels distributed x net cost of P40 **Number of towels yet to be distributed x net cost of P40 The beginning balance of the 5,000 towels is included as part of the 50,000 towels distributed in 2016. If the actual towels distributed from 2016 is different from that was recorded as of the end of 2015, this is considered as a change in accounting estimate which should be taken into account during 2016 and fo r the succeeding accounting period.

PROBLEM 25-22 Warranty Liability Warranties liability (2015) Balance, Beg. Actual expenditures 150,000 500,000 * Warranties expense 150,000 500,000 Balance,End 350,000 500,000 500,000 Warranties liabil ity (2016) 350,000 Balance, Beg. Actual expenditures 550,000 600,000 *Warranties expense 550,000 950,000 Balance, End (A) 400,000 950,000 950,000 *Sales x Total estimated warranty cost of 10%

PROBLEM 25-23 Warranty Liability 217


Warranties liability Actual expenditures Balance, End (C)

Balance, Beg. 480,000 Warranties expense 480,000

140,000 140,000 340,000 480,000

480,000

PROBLEM 25-24 Warranty - Sales are Made Evenly Pattern of Realized Revenues: 2015 SALES Fromsalesi n: 2015 1st (40%x½) 0.20 2nd (36%x½) 3rd (24%x½) Total 0.20 2016 SALES Fromsalesi n: 1st (40%x½) 2nd (36% x½ 3rd (24%x½) Total

2016 0.20

0.20

2016 0.20 0.18

2017

2017 0.20 0.18

2018

0.18 0.12 .30 0 0.38

0.38

0.18 0.12 0.30

2018

Total 0.40 0.36 0.12 0.24 0.12 1 2019

0.12 0.12

Requirement No. 1 (A) Warranty Sales in 2015 earned in 2016 (38% x 1,000 x P1,500) Warranty Sales in 2016 earned in 2016 (20% x 1,200 x P1,500) Total warranty sales revenue earned in 2016

Total 0.40 0.36 0.24 1

570,000 360,000 930,000

Notes: The 38% repre sents the reali zed reven ue in 2016 from 2015 Sales. The 20% repre sents the reali zed reven ue in 2016 from 2016 Sales. Requirement No. 2 (B) Total warranty sales revenue earned in 2016 (see No. 1) Expenses relating to computer warranties Profitfromsales warranty Requirement No. 3 (A) Unearned sales warranty from 2015 [(30% + 12% x 1,000 x P1,500)] Unearned sales warranty from 2016 [(100%-20%) x 1,200 x P1,500)] Totalunearnedsalesw arranty Notes: 218

930,000 60,000 870,000

630,000 1,440,000 2,070,000


The 30% and 12% repr esent the unrealized revenues in 2016 fro m 2015 Sales. The 20% rep resents the realized revenue in 2016 from 2016 Sales. So 100% minus 20% realized is equal to 80% unrealized revenue in 2016 from 2016 Sales.

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

PROBLEM 25-25 Refinancing 1. P2,000,000 (Letter B). The entire amount is payable within one year from the report ing date thus presen ted as current liabi lity. 2. Nil (Letter A). Since both parties are financially capable of honoring the agreement’s provisions and the debtor has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2014 the entire amount is treated as Noncurrent liabili ty. 3. Nil (Letter A). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis before the reporting date, the entire amount of liabilit y is treated as noncurren t. 4. P2,000,000 (Lett er B). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis after the reporting date, the entire amount of liability is treated as current.

PROBLEM 25-26 Obligations Payable on Demand, Breach of Loan Agreement 1. P2,000,000 (Letter C). Only if an enforceable promise is received by the end of the reporting period from the creditor not to demand payment for at least 12 months from the end of the reporting period that the note may be classified as noncurrent. 2. Nil (Letter A). The entire amount of loan is noncurrent liability since there was an agreement on the reporting date not to demand payment in order for the debtor to rectify the breach with 12 months from the reporting date. 3. P2,000,000 (Letter B). The entire amount of loan is current liability since the agreement not to demand payment happened after the reporting period.

PROBLEM 25-27 Continge ncies 1. 2. 3. 4.

A D B B

219


5. 6.

A (Amount of accrual is P2,040,000 using expected value method which is calculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%) A (Amount of accrual is P2,250,000 using midpoint of the range which is calculated as (P1.5M+3M)/2)

PROBLEM 25-28 Continge ncies 1. A 2. B (Disclose an amount of P1,500,000) 3. B (Disclose an amount of P1,500,000) 4. 5. 6.

B (Disclose an amount of P1,000,000) D A (It is virtually certain that the company will be receiving the P1,5000,000.)

PROBLEM 25-29 Bonus Computation 1.

Net income before bonus but before tax

B

= = =

NY 3,090,000 618,000

x x

BR 20%

2.

Net income after bonus but before tax NY B = BR x 100% + BR = 20% x 3,090,000 100% + 20% = 515,000

3.

Net income after bonus and tax B BR (NY – B – T) = X B = 20% x (3,090,000-B-(927,000-3.B) B = 20% x (3,090,000-B-927,000+.3B) B = 618,000-.2B-185,400+.06B 1B+.2B-.06B = 618,000-185,400 1.14B 432,600 = 1.14 1.14 B = 379,474

T

B

= = =

30%

X (3,090,000 – B) 927,000-.3B

OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)] 220


=

20% x (3,090,000 x (1-30%) 1+[20% x (1-30%)] 20% x (3,090,000 x 70%) 1+(20% x 70%) 20% x (2,163,000) 1.14 379,474

= = =

Where: NY B BR T TR

= Net income before bonus and tax = Bonus = Bonus Rate =T ax = Tax Rate

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

PROBLEM 25-30 Question N os. 1 and 2 Estimated liability from Warranties

Disbursement warranties

for

Balance end Total

44,800

Beginning balance

164,000 212,000 240,000 Warranty expense. 376,000

Warrantyexpense Divideby% ageofwarranty Sales from musical instruments and sound reproduction equipment ( Question No. 1)

Question No. 3 Premium expense = P2,000,000

X

1c oupon P2

200 coupons

=

P63,000

221

240,000 4%

6,000,000

x

9 0%

P34-P20


Question No. 4 Inventory of Premium Beg.Balance Net Purchases (6,500 x P34)

39,950 221,000

56,950

204,000 Total

Balance end Cost of issued premium (1.2M coupons.200 coupons x P34

260,950

Question No. 5 Estimated liability for Premiums Disbursement for premiums (1.2M coupons/200 coupons x P(34-P20) Balance end Total

44,800 84,000 23,800 63,000

Beginning balance

Premium expense.

107,800

SUMMARY OF ANSWERS: 1 . A 2. A 3 . C 4 . D

5.

D

PROBLEM 25-31 Refinancing of Loan, Notes Payable Interest and NonInterest Bearing Note to the Professor: This problem should be discussed after the discussion in Chapter 26. Question No. 1 (A) Periodic payment-NP Deli very equipment (P2M/4) Multiplyb y PV of ordinarya nnuity Present value of NP-delivery equipment Amortization table: Payment Date 01/01/2015 12/31/2015 500,000 12/31/2016 500,000

500,000 3.0373 1,518,650

Interest Expense 182,238 144,107

Discount Amortization 317,762 355,893

Question N os. 2 and 3 12% Note payable 10% note payable Note payable-del.

Noncurrent 1,400,000 2,000,000 844,995 222

Current 700,000 355,893

Present value 1,518,650 1,200,888 844,995


Equipment Total

4,244,995

1,055,893

Question No. 4 Accrued interest payable-12% Note payable =P2,100,000 x 12% x 8/12 =P168,000 Question No. 5 Interest expense: 12% Note payable 1/1-5/1 (2.8M x 12% x 4/12) 5/1-12/31 (2.1M x 12% x 8/12) 10% Note payable (2M x 10%) Note payable - Delivery. Equipment (seea mortization table) Total SUMMARY OF ANSWERS: 1 . A 2. B 3 . B 4 . B

5.

112,000 168,000 200,000 182,238 662,238

C

PROBLEM 25-32 Warranty, Premiums and Bonus Question No. 1 Warrantyexpense(P150x1,200) Less:Warrantypaid

180,000 85,000

Estimated Premiums payable (A) Question No 2 Premium expense (P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) Less: Net cost of redeemed coup ons (500,000/400)x(P45-P20) Estimated Premiums payable (C)

95,000

45,000 31,250 13,750

Question No. 3 Unadjustednetincome 1,935,000 Warranty expense under, Net income over (P180,000-P85,000) (95,000) Premium expense over, Net income under (P270,000-P45,000) 225,000 Adjusted Net income 2,065,000 (C) Question No. 4 Net income after bonus but be fore tax NY B = BR x 100% + BR = 20% x 2,065,000 100% + 20% 223


=

344,167

(B)

Question No. 5 Net income after bonus and tax B = BR (NY – B – T) x T

=

B

=

TR

(NY – B) x OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)]

Net income after bonus and tax B BR (NY – B – T) = X B = 20% x (2,065,000-B-(9619,500-3.B) B = 20% x (2,065,000-B-619,500+.3B) B = 413,000-.2B-123,900+.06B 1B+.2B-.06B = 413,000-123,900 1.14B 289,100 = 1.14 1.14 B = 253,596 (C) T

= =

30%

X (2,065,000 – B) 619,500-.3B

OR BR x [NY x (1-TR)] B

= = = = =

1 + [BR x (1-TR)] 20% x (2,065,000 x (1-30%) 1+[20% x (1-30%)] 20% x (2,065,000 x 70%) 1+(20% x 70%) 20% x (1,445,500) 1.14 253,596

Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T =T ax TR = Tax Rate SUMMARY OF ANSWERS: 1 . A 2. C 3 . C 4 . B

5.

C

224


PROBLEM 25-33 Comprehensive Question No. 1 SSS Payable Philhealth payable Estimated liabilities under guarantee agreement Estimatedwarrantieso ng oodss old Utilities payable Trade payables (170,000+30,000+20,000+12,000-8,000) Notesp ayablea risingf rom purchaseo fg oods Convertibleb ondsp ayable due July1 ,2 014 Serial bonds payable(40,000 x 2) Accrued interestexpense Advances from customers Unearned rent income Unearned interestonreceivables Incometaxes payables Cashdividends payable Property dividends payable Creditbalanceof notes payable Overdraft with PNB Container's deposit Loans payable-12% Financiall iabilityd esignateda s FVTPL Current liabilities (B)

10,000 9,000 110,000 120,000 6,000 224,000 200,000 1,000,000 80,000 4,000 25,000 36,000 3,500 45,000 100,000 120,000 40,000 80,000 45,000 270,000 200,000 2,727,500

Question No. 2 Deferred taxliability Notes payable Arsingfrom 4-year bankloan Arising from advances by officers, dune in 3 years Serial bonds payable (800,000 minus (40,000 x 2) Security deposit received froml essee Loanspayable-10% Total noncurrent liabilities (A)

Question No. 3 Total liabilities Currentliabilities Totalnoncurrentl iabilities Total liabilities

40,000 400,000 300,000 720,000 89,000 150,000 1,699,000

2,727,500 1,699,000 4,426,500

(B)

SUMMAR AN : 1. B 2. Y OF A 3 . SWERS B

225

Chapter 26: Financial Liabilities and Debt Restructuring

CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING BONDS PAYABLE PROBLEM 26-1 Financial Liabil ities at FVTPL (Interest Expense and Unrealized gains or losses) Question No. 1 Face value Multiply by:nominal rate Multiplyb y: months outstanding/12 Interest expense Question No. 2 Fairvalue ofthebonds Less:Carryingvalue Unrealized loss (or gain)-P&L Question No. 3 RetirementP rice(3M x 104) Less: Carryingv alue( 3M x1 03) Realized loss on derecognition- P&L

(A)

3,000,000 8% 12/12 P240,000

(B)

3,090,000 2,850,756 239,244

(D)

3,120,000 3,090,000 30,000

SUMMARY OF ANSWERS: 1. A

2. B 3 . D

PROBLEM 26-2 Unrealized Gain or Loss of FVTPL with Change Due To Credit Risk Question No. 1 Market price of the liability, end of the period 4,000,000 Less: Fair value of liability using the sum observed interest rate andinstruments pecificIRR 4,155,480 Unrealized gain - OCI ( C) 155,480 Internal rate of return at the start of the period - yield or effective rate Less: Observed (benchmark) interest rate, date of inception InstrumentspecificIRR Observed (benchmark) interest rate, end of period Add:Instrumentspecific-IRR Discount rate

226

10% 9% 1% 8% 1% 9%


PROBLEM 26-3 Financial Liabilities at Amortized Cost-Term Bonds Question No. 1 Present value of Principal (1,200,000 X 0.7513 ) Add: PV of interest payments (96,000 X 2.4869 ) Present value of the investment bonds (C) Que stion No. 2Table Amortization Interest Date payment 01/01/2016

Interest expense

227

901,560 238,742 1,140,302


Present value 1,140,302


12/31/2016 12/31/2017 12/31/2018

96,000 96,000 96,000

114,030 115,833 117,867

18 ,030 19,833 21,835

(B)

1,158,333 1,178,166 1,200,000

SUMMARY OF ANSWERS: 1. C 2. B PROBLEM 26-4 Financial Liabilities at Amortized Cost- Serial Bonds Question No. 1 Interest Principal payment 400,000 96,000 400,000 64,000 400,000 32,000 Total PV of the bonds

Total payment 496,000 464,000 432,000 (A)

Preset value factor TotalP V 0.9091 450,914 0.8264 383,450 0.7513 324,562 P1,1 58,925

Question No. 2 Date 01/01/2016 12/31/2016 12/31/2017 12/31/2018

Interest Payment

Interest Expense

96,000 64,000 3 2,000

115,892 77,882 39,301

Discount Amortization 19,892 13,882 7,301

Principal 400,000 400,000 400,000

Present value 1,158,925 778,817 392,699 -


2. A

PROBLEM 26-5 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs IssueP rice (5,000,000x98%) Less:Bondissue cost PresentvalueonJanuary1,2015 Add: Discount amortization Nominalinterest(5Mx1 0%) Effective interest (4,760,000 x 12%) Carrying value – 12/31/2015

4,900,000 140,000 4,760,000 500,000 571,200

(D)

71,200 4,831,200

PROBLEM 26-6 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs IssueP rice( 5,000,000x110%) Less:Bondissue cost PresentvalueonJanuary1,2015

5.500,000 80,000 5,420,000 228


Less: Premium amortization Nominalinterest(5Mx8 %) Effective interest (5,420,000 x 6%) Carrying value – 12/31/2016

400,000 325,200

(B)

74,800 5,345,200

PROBLEM 26-7 Bonds payable wi th warr ants Market value of the bonds without the warr ants

(B)

4,800,000

PROBLEM 26-8 Issuance of Convertible Bonds Question No. 1 TotalProceeds( P1,000x1,000) Less: Fair value of the bonds without conversion privilege Total Share Premium (A)

1,000,000 900,000 100,000

Using 7.48% Present value of Principal (1,000,000 x 0.7 ) Add: Present value of interest payments (50,000 x 4 ) Totalpresentvalue

700,000 200,000 900,000

Question No. 2 See amortization table below. Amortization Table Interest Date 01/01/2016 12/31/2016

Payment 500 00

Interest

Discount

Expense

Amortization

67,320

173 20

Present value 900,000 917,320

SUMMARY OF ANSWERS: 1 . A 2. B

PROBLEM 26-9 Retirement of Bonds Pay able Retirementp rice( 5,000,000 x. 98) Less: Carrying value ( 5,000,000 - 50 0,000 - 30 0,000) Loss on retirement (A)

4,900,000 4,200,000 700,000

PROBLEM 26-10 Conversion of Convertible Bonds Question No. 1 – Case No. 1 Nil. (A) No gain or loss on conversion of convertible bonds unless the conversion is induced by the company. The journal entry to record the transaction would then be: Bonds payable 1,500,000 229


Share premium-conversion option Premiumonbondspayable Ordinarys hares(20000X50) SharePremium

60,000 52,049 1,000,000 612,049

Question No. 2 - Case No. 2 Fairvalue ofliability Less: Carrying amount of the bonds payable Loss on settlement (convers ion) of liabi lity (B)

1,600,000 1,552,049 47,951

Fairvalue ofliability

1,600,000

Less: Totalp arv alueo ft he shares issued SharePremium

1,000,000 600,000

The journal entry to record the transaction would then be : Bonds payable 1,500,000 Losso ns ettlementofliability 47,951 Premiumonbondspayable 52,049 Ordinarys hares(20,000X50) SharePremium

1,000,000 600,000

SUMMARY OF ANSWERS: 1 . A 2. B

PROBLEM 26-11 Induced Conversion Facea mount of debts ecurities converted

1,500,000

Divideby:New conversionprice Number ofs haresi ssued upon conversion Multiply by: Fair value of shares on the conversion date Fairvalueo fsharesconverted

20 75,000 30 2,250,000

Facea mount of debts ecurities converted Divideby:Old conversion price Number of shares issued under original conversion Multiply by: Fair value of shares on the conversion date Fair value of shares under original conversion

1,500,000 25 60,000 30 1,800,000

Fairvalueo fsharesconverted Less: Fair value of shares under original conversion Debt conv ersion expense or loss on induced conversion

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

(B)

Journal entry is: Bonds payable Debt conv ersion expense or loss on inducedconversion Premiumonbondspayable Ordinaryshares(75,000x10 )

1,500,000 450,000 52,049 750,000 230


Sharepremium

1,252,049

PROBLEM 26-12 Interest-Bearing Note Accrued interest 2015 ( 0,000 x 12% x 9/12) Accrued interest 2016 ( 5,450,000 x 12% x 12/12) Total accrued interest (C)

450,000 654,000 1,104,000

PROBLEM 26-13 Non-Interest Bearing Note Principal Less: Discount on notes payable (2M x 10.8% x 12/12) Amortization (216,000/12x 5) Carrying amount of the note payable

2,000,000 216,000 (90,000)

(B)

126,000 1,874,000

PROBLEM 26-14 Interest-Bearing Note Accrued interest [( 1,350,000 - 450,000) x 12% x 4/12] (B)

36,000

PROBLEM 26-15 Loans Payable Principal Less: Directo riginationf ees paid (1.5M x4 %) Initial carryin g amount of the loans payable

(D)

1,500,000 60,000 1,440,000

PROBLEM 26-16 Debt Restructuring Carrying value of liability ( 6,000,000 + Less: Cost orcarryingvalueofl and Gain on extingui shment

00,000)

(D)

6,600,000 3,500,000 3,100,000

Fair value of equity securities ( 70 x 50,000) Less:Par value( Share premium (D)

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

PROBLEM 26-17 Debt Restructuring

PROBLEM 26-18 Debt Restructuring Question No. 1 Present value of Principal ( 4,000,000 x 0.75) 231

3,000,000


Add: Present value of interest payments (320,000 x 2.49) Presentvalueoft he notespayable Less: Carrying value of the notes ( 5,000,000 + 00,000) Gain on extingui shment (B)

796,800 3,796,800 5,500,000 1,203,200

The gain is recognized since the restructuring results in a substantial modification (i.e., 21.88% = 1,203,200 / 5,500,000)

Question No. 2 Interest expense (3,796,800 x 10%)

(B)

379,680

Principal Add: Accrued interest – January 1,2 015 Accruedinterest–2015 Carryingamountofo ldl iability Less: Present value of new liability Present value of principal (P5M x .6209) Present value of interest (P5M x .08 x 3.7908) Gain on extinguishment of liability (A)

P6,000,000 600,000 600,000 7,200,000

SUMMARY OF ANSWERS: 1 . B 2. B

PROBLEM 26-19 Debt Restructuring

3,104,500 1,516,320

4,620,820 2,579,180

COMPREHENSIVE PROBLEMS PROBLEM 26-20 Interest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (4,000,000 x 0.6830 ) Add: Present value of interest payments (600,000 x 3.1699) Present value of the notes payable (D) Amortization Table: Interest Date Payment 01/01/2017 12/31/2017 600,000 12/31/2018 600,000 12/31/2019 600,000

Interest Expense 463,397 449,737 434,711

Question No. 2 Interest Expense (4,633,973x .10) =463,397 Question No. 3 P4,497,370. See amortiz ation table above. 232

Discount Amortization 136,603 150,263 165,289

(C)

(C)

2,732,054 1,901,919 4,633,973

Present value 4,633,973 4,497,370 4,347,107 4,181,818


Question No. 4 Nil. (A) The entire note payab le is noncurr ent liability. Question No. 5 P4,497,370. (D) The entir e note payable is current liabil ity. SUMMARY OF ANSWERS: 1 . D 2. C 3 . C 4 . A

5.

D

PROBLEM 26-21 interest-be aring note – non-uniform installments Question No. 1 Interest Principal payment 1,200,000 60,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Date Date 01/01/2016 12/31/2016 60,000 12/31/2017 24,000 12/31/2018 12,000

Total payment 1,260,000 424,000 412,000 (D)

Preset value Present factor Value 0.8929 1,125,054 0.7972 338,013 0.7118 293,262 1,756,328

Interest Expense

Discount on N/P

210,759 84,851 44,079

150,759 1,200,000 60,851 400,000 32,062 400,000

Question No. 2 Interest expense (1,756,328 x .12)

Principal Payment

Present Value 1,756,328 707,088 367,938 -

P210,759

Question No. 3 Carrying amount – December 31, 2016

P707,088

Question No. 4 Principal payable Dec. 31,2 017 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal payable Dec.3 1,2 018 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 233

(C)

P400,000 60,851 P339,149

(C)

P400,000 32,062 P367,938

(D)

(C)


1. D

2. D 3. C 4. C

5.

C

PROBLEM 26-22 Interest-Bearing Note –Uniform Installments Question No. 1 Interest Principal payment 1,000,000 600,000 1,000,000 450,000 1,000,000 300,000 1,000,000 150,000 Total PV of notes payable Amortization Table Interest Date Payment 01/01/2017 12/31/2017 600,000 12/31/2018 450,000 12/31/2019 30 0,000 12/31/2020 150,000

Total payment 1,600,000 1,450,000 1,300,000 1,150,000 (C)

Interest Expense


441,507 325,657 213,223 104,545

P441,507


3,256,573

Question No. 4 Principal (payable Dec. 31, 2018) Add: Premium on notes payable Carrying amount-current liability Question No. 5 Carrying amount – December 31, 2017 Add: Premium on notes payable Carrying amount-noncurrent liability

5.

Principal Payment

158,493 1,000,000 124,343 1,000,000 86,777 1,000,000 45,455 1,000,000

Question No. 2 Interest expense (4,415,066 x .10)

SUMMARY OF ANSWERS: 1. C 2. B 3 . B 4 . C

Preset value Present factor Value 0.9091 1,454,545 0.8264 1,198,347 0.7513 976,709 0.6830 785,465 4,415,066

(C)

P1,000,000 124,343 P1,124,343

(D)

P3,256,573 1,124,343 P2,132,230

Present Value 4,415,066 3,256,573 2,132,230 1,045,453 0

(B)

(B)

D

PROBLEM 26-23 Noninterest-Bearing Note – With Cash Price Equivalent Question No. 1 234


The carrying amount of the note on initial recognition is equal to its cash price equivalent of P994,760 . (C) Coincidentally, the effective rate using the cash price equivalent is 12% and the amortization table is as follows:

Amortization Table at 12% Principal Date payment 01/01/2016 12/31/2016 400,000 12/31/2017 400,000 12/31/2018 400,000

Interest expense

Amortization

99,476 69,424 36,340

300,524 330,576 363,660

Question No. 2 Interest expense (994,760x .12)

Present value 994,760 694,236 363,660 -

P99,476


(A)

P694,236

Question No. 4 Principal (payableD ec.3 1,2 017 Less: Discount on notes payable Carrying amount-current liability

(A)

(B)

P400,000 69,424 P330,576

(C)

P400,000 36,340 P363,660

Question No. 5 Principal (payableD ec.3 1,2 018 Less: Discount on notes payable Carrying amount noncurrent liabi lity

SUMMARY OF ANSWERS: 1. C 2. A 3 . A 4 . B

5.

C

PROBLEM 26-24 Noninterest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Amortization Table Date Intereste xpense 01/01/2016 12/31/2016 102, 499 12/31/2017 114,799 12/31/2018 128,542

(B)

Presentv alue 854,160 956, 659 1,071,458 1,200,000

235

854,160


Question No. 2 Interest expense (854,160 x .12)

P102,499


(B)

P956,659

(A)

Question No. 4 Nil. The entire note payable is noncurrent liability since it is due beyond 12 months from the reporting date. (B) Que onentire No. 5 carrying amount of note payable is presented as noncurrent The sti total liability. See Question No. 4. (A) SUMMARY OF ANSWERS: 1 . B 2. B 3 . A 4 . B

5.

A

PROBLEM 26-25 Noninterest-Bearing Note – Installments Question No. 1 Present valu e of Princi pal (400,000 X 2.4018 ) Amortization Table Date Inte rest Payment

Interest expense

01/01/2016 12/31/2016 12/31/2017 12/31/2018

115,286 81,121 42,873

400,000 400,000 400,000

(D)

Amortization 284,714 318,879 357,127

960,720

Present value 960,720 676,006 357,127 -

Question No. 2 P115,286. See amortization table above. (A) Question No. 3 P676,006. See amortization table above. (A) Question No. 4 Principal (payableD ec.3 1,2 017 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payableD ec.3 1,2 018 Less: Discount on notes payable Carrying amount-noncurrent liability 236

(B)

P400,000 81,121 P318,879

(C)

P400,000 42,873 P357,127


SUMMARY OF ANSWERS: 1 . D 2. A 3 . A 4 . B

5.

C

PROBLEM 2 6-26 Issuance, Retirement and Conversion of Non-Convertible Bonds Question No. 1 Present value of Principal (3,000,000 X 0.6499 ) Add: Present value of interest payments (3,000,000 x12%x3.8897) Present value of the bonds payable (B) Amortization Table Date Inte rest payment 01/01/2014 12/31/2014 360,000 12/31/2015 360,000

Interest expense

1,949,794 1,400,274 3,350,068

Discount Amortization

301,506 296,242

Question No. 2 RetirementPrice Less: Carrying amount (3,227,816 x 1/2) Loss on retirement QuestionNo. 3 Amortization table: Interest Date payment 12/31/2015 12/31/2016 180,000

58,494 63,758

Present value 3,350,068 3,291,574 3,227,816

1,900,000 1,613,908 286,092

(B) (B )

Interest expense 145,252

Amortization 4,748 3

Question No. 4 Fair value of the ordinary shares issued (460 x 5,000) Less: Carryinga mount oft he liability Loss on conversion (D)

Present value 1,613,908 1,579,160

P2,300,000 1,579,160 P720,840*

Or P720,839*

Question No. 5 Fair thevalue ordinary shares issued (460 5,000) Less:value Totalof par of the shares issued (40 x x 5,000) Share Premium (D)

SUMMARY OF ANSWERS: 1 . B 2. B 3 . B 4 . D

5.

D 237

P2,300,000 200,000 P2,100,000


PROBLEM 26-27 Issuance, Retirement and Conversion of Convertible Bonds Question No. 1 TotalProceeds Less: Present value of the bonds without the conversion option Present value of Principal (3,000,000 x 0.5674 ) Present value of interest payments (300,000 x 3.6048 ) Residual amount to equity (B) Amortization Table Date Inte rest payment 01/01/2015 12/31/2015 300,000 12/31/2016 300,000

Interest expense 334,046 338,131

Question No. 2 Fair value of liability using current rate Less: Carryinga mount (2,817,759 x ½) Loss on settlement of liability

P3,000,000

1,702,281 1,081,433

Discount Amortization (34,046) (38,131)

(B)

2,783,713 216,287

Present value 2,783,713 2,817,759 2,855,890

1,537,969 1,427,945 110,024

Present value using 9% for 3 per iods Present value of Principal (1,500,000 X 0.7722) Add: Present value of interest payments (150,000 X 2.5313)

1,158,275 379,694

Presentvalueoft he bondsp ayable

1,537,969

Question No. 3 Retirement Price Less: Fair value of liability using current rate Decrease in equity (C)

1,600,000 1,537,969 62,031

Question No. 4 Interest expense is P338,131 based on the amor tization table above. Question No. 5 Shares to be issued based on amended terms (1.5M/400) Less: Shares to be issued based on original terms (1.5M/500) Incrementalshares Multiply by: Fairvalue Debt settlement expense

SUMMARY OF ANSWERS: 1 . B 2. B 3 . C 4 . D

(C)

5.

C 238

(D)

3,750 3,000 750 420 315,000


PROBLEM 26-28 Redeemable Preference Shares and De bentures Present value of the redeemable preference shares Present value of Principal (15,000 x 1.05 x 0.72161 ) Add: Present value of interest payments (1,500 x 2.42308 ) Present valueoft he preferences hares Amortization table: Date Inte rest Payment 01/01/2016 12/31/2016 1,500 12/31/2017 1,500 12/31/2018 1,500


Amortization 223 249 246

Question No. 1 P1,723. See amortization table above.

(B)


(C)


(D)

Present value of the debentures Present value of Principal (20,000 x 1.02 x 0.53884 ) Add: Present value of interest payments (2400 x 3.5032 ) Presentvalueofbonds payable

Amortization Table Date Inte rest Payment 12/31/2018 12/31/2019 2,400

Interest Expense 2,554

(154)


(B)


(B)

SUMMARY OF ANSWERS: 1 . B 2. C 3 . D 4. B

5.

B

239

Amortization

11,365 3,635 15,000

Present value 15,000 15,223 15,472 15,718

10,992 8,408 19,400

Present value 19,400 19,554


PROBLEM 26-29 Question No. 1 Accounts payable, unadjusted Good in transitF OB shippingp oint Undeliveredcheck Accounts payable, adjusted

(D)

P1,350,000 75,000 60,000 P1,485,000

Question No. 2 14% Note payable (1,250,000 x 14%) 16% Note payable (3,000,000 x 16%) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (D)

P175,000 480,000 100,000 P755,000

Question No. 3 14% Note payable (1,250,000 x 14% x 3/12) 16% Note payable (3,000,000 x 16% x 9/12) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (C)

P43,750 360,000 100,000 P503,750

Question N os. 4 and 5 Current 1,485,000 1,250,000

Accountspayable 14%Notepayable 16%Notepayable 10%Notepayable Accruedinterestpayable Total

SUMMARY OF ANSWERS: 1 . D 2. D 3. C 4. C

Noncurrent

3,000,000 2,000,000 503,750 P3 238,750 (C)

5.

P5,000,000 (C)

C

PROBLEM 26-30 (Comprehensive) Question No. 1 Present value of Principal (10,000,000 X 0.3118 ) Add: Present value of interest payments (500,000 X 11.46992 ) Present value of the bonds payable (A)

3,118,000 5,734,960 8,852,960

Question No. 2 April 2016 July 1,1,2016 October1,2016 January 1, 2017 Notes payable-current liability

P400,000 600,000

(B) 240

300,000 300,000 P1,600,000


Question N os. 3 and 4 Estimated liability from Warranties Disbursement fo r warranties Balance end (A)

180,000 358,000 342,000 520,000

Total

Beginning balance Warranty expense (C)

700,000

Question No. 5 (a)

A B C Total

Fixed salary 10,000 14,000 18,000

(b)

( c)

d =b x c

Comm. Rate 4% 6% 6% (C)

Net Sales 200,000 4 00,000 600,000

E =d - a

Comm. Expense 8,000 24,000 36,000 P28,000

Accrued Salaries Payable 0 10,000 18,000

Question No s. 6 and 7 Int. payable - Bonds (10M x 10% x 3/12) Int.payable-Notepayable Notespayable Estimated warranties payable Tradepayable Salescommissionspayable Cash dividends payable (6M x P.2) Bonds payable Total

Current 250,000 600,000 1,600,000 342,000 740,000

Noncurrent

5,400,000*

28,000 1,200,000 8,970,751 P4,760,000 P14,370,751** (B) (C)

*(P7M-1.6M) ** or P14,370,783 which is the same as P8,952,185 x 100% +(Effective rate x months outstanding/12) minus payment Or [(P8,952,185 x 103%) - P250,000] Amortization Table Interest Date Payment

Interest Expense

07/01/2014 01/01/2015 07/01/2015 01/01/2016 03/31/2016

531,178 533,048 535,031 268,566

500,000 500,000 500,000 250,000

241

Amortization 31,178 33,048 34,999 18,566

Present value 8,852,960 8,884,138 8,917,186 8,952,185 8,970,751


(8,952,185 x 12% x 3/12) SUMMARY OF ANSWERS: 1 . A 2. B 3 . A 4 . C 5.

C

6

B

7

C

PROBLEM 26-31 Financial liabilities , Investment in associate and research and development cost Question No. 1 Totalproceeds(P100x2M) Less: Present value of the convertible debt (see No. 2) Share premium – conversionp rivilege Less:Shareissuancecost Net amount allocated to equity (C)

200,000,000 181,635,200 18,364,800 4,000,000 14,364,800

Question No. 2 Present value of convertibl e debt without conversion option at 11.81% Present value of Principal (200M x .7154) 143,080,000 Add: Present value of interest payments (200M x .08 x 2.4097) 38,555,200 Present value of the convertible debt 181,635,200 (B) Question No. 3 Interest expense (181,635,200 x .1181)

(D)

21,451,117

(C)

380,000,000 370,000,000 10,000,000 20% 2,000,000

Question No. 4 Netassetof GL Less:Recoverableamount ImpairmentlossofGL Multiply by:Percentageshare Impairment loss

Question No. 5 1. Researcho n sizeo fp otential market 6. Stafftraining costs 7. Advertisementcosts Total amount expensed (B)

800,000 600,000 3,400,000 4,800,000

Question No. 6 2. Productsdesigning 3. 4.

1,500,000

Laborc osts in refinement of productsto finalize the Development work undertaken productdesign Total Development cost capitalized (C)

242

950,000 11,000,000 13,450,000


SUMMARY OF ANSWERS: 1 . C 2. B 3 . D 4. C

5.

B

6

C

PROBLEM 26-32 Financial Liability at FVTPL vs. FLAC

CASE NO. 1 Question No. 1 Initial carrying amount is fair value or issuance price of

1,898,205.

Transaction cost is expensed outright. (D) Question No. 2 Interest expense ( 2,000,000 x 8%)=

160,000 (A)

Question No. 3 Fair value 12/31/2015 (1.02 x 2,000,000) Less:Initialcarryingamount Unrealized loss (C)

Question No. 4 Carrying value ( 2,000,000 x .98)=

2,040,000 1,898,205 141,795

1,960,000 (C)

Question No. 5 Fair value1 2/31/2017 (.99 x 2,000,000) Less:Carrying value (.98x Unrealized loss (D)

1,980,000 1,960,000 20,000

Question No. 6 Retirementp rice (1.05 x 2,000,000) Add:Transactioncost Totalretirementprice Less:Carrying value (.98x Loss on derecognition

SUMMARY OF ANSWERS: 1 . D 2. A 3 . C 4 . C

5.

D

(A)

6.

2,100,000 20,000 2,120,000 1,980,000 140,000

A

CASE NO. 2 Question No. 7 Issue price Less:Transactioncost Initial carrying amount

(C) 243

1,898,205 25,000 1,873,205


Question No. 8 Effective interest rate = 10% (B) Please refer to discussion on interp olation. Question No. 9 Interest expense (

x 10%)=

187,321 (B)

Question No. 10 No gain or loss due to change in fair value is not recognized . (D) Question No. 11 Carrying value 12/31/2016

(A)

1,930,579

Retirementp rice (1.05 x 2,000,000) Add:Transactioncost Totalretirementprice Less:Carryingv alue– 01/01/2018 Loss on derecognition

(B)

2,100,000 20,000 2,120,000 1,963,636 156,364

SUMMARY OF ANSWERS: 7. C 8. B 9. B 10. D

12. B

Question No. 12

11. A

244

Chapter 27 – Lease

CHAPTER 27: LEASE PROBLEM 27-1 Uneq ual rental paym ents 2014 2015 2016 2017 Totalrent Divideby:Numberofyears Rent expense per year

20,000 18,000 16,000 14,000 68,000 4 17,000

(C)

PROBLEM 27-2 Ope rating Lea se - Une qual rental payme nts 07/01/2014 to 06/30/2015 07/01/2015 to 06/30/2016 07/01/2016 to 06/30/2017 Total Divideby:Leaseterm Rentincomepery ear

60,000 90,000 210,000 360,000 3 120,000

Rent income to date (120,000 x 2) Less: Collection to date (60,000 + 90,000) Rent receivable (A)

240,000 150,000 90,000

PROBLEM 27-3 Ope rating Lease - Comprehensive CAS E NO. 1 Question No. 1 Periodic rent-one year (

(B)

300,000

CAS E NO. 2 Question No. 2 Periodicrent-oneyear Amortization of lease bonus (180,000 / 3 ) Rent expense (C)

300,000 60,000 360,000

CAS E NO. 3 Question No. 3 Total lease payments [(3 x 12) – 6) x 25,000]

750,000

Divide by:Leaseterm Rent expense per year

3 250,000

(D)

245


Question No. 4 Total payments to date, 2016 (6 x 25,000 ) Less: Total expenset o date, 2016 Accrued rent payable (D)

150,000 250,000 100,000

CAS E NO. 4 Question No. 5 Total lease payments (25,000x 2x 12) (30,000x1x12) Divideby:Leaseterm Rent expense per year Question No. 6 Totalpayments todate, 2016 Less: Total expenset o date, 2016 Accrued rent payable

600,000 360,000

(A)

960,000 3 320,000

(D)

300,000 320,000 (20,000)

CAS E NO. 5 Question No. 7 Rent Revenue Less: Amortization of Direct Cost (120,000 / 3) Insurance and property tax expense on leased asset Depreciationo ft he leased asset Net income (A) CAS E NO. 6 Question No. 8 Periodrentforoneyear Add: Contingent rent 1st [(2,500,000 – 1,500,000) x 10%] 100,000 2nd [(6,000,000 – 2,500,000) x 8%] 280,000 Total rent expense (A) SUMMARY OF ANSWER S: 1. B 2. C 3. D 4. (D) 5 . 6 . D 7. A 8. A

300,000 40,000 40,000 30,000 190,000

300,000

380,000 680,000

A

PROBLEM 27-4 Finance Lea se - Lea se Liabil ity (A) The capitalized lease liability should be the annual lease payments less the executory taxes) the present valuebe: factor for an- ordinary annuity of cost 1 for(real nineestate years at 9%. times The calculation would (P26,000 1,000) × 6.0 = P150,000. The real estate taxes are a period cost and should be charged to expense.

246


PROBLEM 27-5 Finance Lea se with Bargain Purchas e Option QuestionNo. 1 ( A) Present value of periodic payment (120,000 x 3.4018) Add: Present value of bargain purchase option (20,000 x 0.6355) Present value ofm inimuml ease payments Amortization Table Annual Date payment 12/31/2016 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020

120,000 120,000 120,000 120,000 20,000

Interest expen se 36,111 26,044 14,770 2,142

Amortization

408,220 12,710 420,926

Present value 420,926

120,000 300,926 83,889 2 17,037 93,956 123,082 105,230 17,851 17,858 (6)

QuestionNo. 2 ( B) P36,111. See amortization table above. QuestionNo. 3 (C) P83,889. See amortization table above. QuestionNo. 4 ( B) P217,037. See amortization table above. SUMMARY OF ANSWER S: 1. A

2. B

3. C

4. B

PROBLEM 27-6 With Gua ranteed Residual Value And Initial Direct Cost CAS E NO. 1 Question No. 1 Present value of periodic payment (130,000 x 3.4869) Add: Present value of guaranteed residual value (50,000 x 0.683) Present value ofm inimuml ease payments Add:Initialdirect cost Cost of the Machinery (C) Amortization Table Annual Date payment 12/31/2016 12/31/2016 130,000 12/31/2017 130,000 12/31/2018 130,000 12/31/2019 130,000 12/31/2020 50,000

Interest expen se 35,745 26,319 15,951 4,538 247

Present value 487,447 357,447 2 63,192 159,511 45,462 0

Amortization 130,000 94,255 103,681 114,049 45,462

453,297 34,150 487,447 40,000 527,447


QuestionNo. 2 ( B) P35,745. See amortization table above. QuestionNo. 3 ( C) P94,255. See amortization table above. QuestionNo. 4 ( B) P263,192. See amortization table above. CAS E NO. 2 Question No. 5 Present value of periodic payment (130,000 x 3.4226) Add: Present value of guaranteed residual value (50,000 x 0.647) Present value of minimum lease payments = Fair value Add:Initialdirect cost Cost of the Machinery (D)

444,938 32,350 477,288 40,000 517,288

Amortization Table: Effective rate = 11.50% Annual Interest Present Date payment expen se Amortization value 12/31/2016 477,288 12/31/2016 130,000 130,000 347,288 12/31/2017 130,000 39,938 90,062 2 57,226 12/31/2018 130,000 29,581 100,419 156,807 12/31/2019 130,000 18,033 111,967 44,840 12/31/2020

50,000

5,160

44,840

(0)

QuestionNo 6 (D) P39,938. See amortization table above. QuestionNo. 7 ( A) P90,062. See amortization table above. QuestionNo. 8 (D) P257,226. See amortization table above. SUMMARY OF ANSWER S: 1. C 2. B 3. C 4. B

5.

D

6.

248

D

7.

A

8. D


PROBLEM 27-7 Finance Lea se - Deprecia tion Question No. 1 Cost of the lease asset Less: Estimated residual value end of the useful life of the asset Depreciable cost Divideby:Useful life Depreciation (A)

487,447 60,000 427,447 8 53,431

Question No. 2 Cost of the lease asset Less: Gross amount of guaranteed residual value Depreciable amount Divideby:Leaseterm Depreciation (B)

487,447 50,000 437,447 4 109,362

PROBLEM 27-8 Compu tatio n of Periodic Lease Payments Fair value Less: Present Value of Guaranteed Residual Value Total Divide by: Present valueo f Annuity Due Periodic lease payments (B)

PROBLEM 27-9 Direct Financing Lease - Lessor Question No. 1 Gross Investment: Total Periodic Lease Payment (261,692 x 4) Add: Unguaranteed Residual value (URV) Less:Cost oftheequipment Unearned interest income (C)

800,000 59,630 740,370 4.8897 151,414

*1,046,775 150,000

1,196,775 1,000,000 196,775

*1,046,770 OR 1,046,775 Amortization Table Annual Date Collection 12/31/2016 12/31/2016 261,692 12/31/2017 261,692 12/31/2018 12/31/2019 12/31/2020

261,692 261,692 150,000

Interest Income

Amortization -

261,692 180,479

61,361 39,325 14,864

200,331 222,368 135,136

81,214

249

Present value 1,000,000 738,308 557,829 357,498 135,130 (6)


QuestionNo. 2 (C) P81,214. See amortization table above. QuestionNo. 3 ( A) P180,479. See amortization table above. SUMMARY OF ANSWER S: 1. C 2. C 3. A

PROBLEM 27-10 Direct Financing Lea se - With Initial Direct Cost Question No. 1 Gross Investment: Total Periodic Lease Payment (251,600 X 4) *1,006,402 Add Unguaranteed Residual value (URV) - 1,006,402 Less:Cost oftheequipment 924,128 Unearned interest income 82,273 (A) *4,796,278 OR *4,796,28 0 Costo ft heequipment Add: Initialdirectc ost Net cost ofi nvestment

Amortization Table Annual Date Collection 12/31/2016 12/31/2016 251,600 12/31/2017 251,600 12/31/2018 251,600 12/31/2019 251,600

900,000 24,128 924,128

Interest Income

Amortization

51,872 35,894 18,637

251,600 199,728 215,707 232,963

QuestionNo. 2 ( A) P51,872. See amortization table above. QuestionNo. 3 ( B) P199,728. See amortization table above. SUMMARY OF ANSWER S: 1 . A 2 . A 3. B

250

Present value 900,000 648,400 448,671 232,964 1


PROBLEM 27-11 Direct Financing Lea se - Sale Of Lea sed Asset CAS E NO. 1 Question No. 1 Gross Investment: Total periodic lease payments (300,000 x 4) Add:ResidualValue Present value of the leased asset Present value of minimum lease payments (300,000 x3.3121) Add: Present value of residual value (50,000 x .735) Unearned interest income ( A)

Amortization Table Annual Date Collection 01/01/2016 12/31/2016 300,000 12/31/2017 300,000 12/31/2018 300,000 12/31/2019 350,000

993,630 36,750 1,030,380 219,620

Interest Income

Amortization

82,430 65,025 46,227 25,906

217,570 234,975 253,773 324,094

Question No. 2 P82,430. See amortization table above. Question No. 3: Guarant eed Sales Less: Costo f goods sold Initialdirectcost Dealer's profit

(B)

Question No. 4 Nil.

(A)

The journal ent ry is: Inventory Cash Leasereceivable

1,200,000 50,000 1,250,000

1,030,380 900,000 10,000 120,380

44,000 6,000 50,000

SUMMARY OF ANSWER S: 1. A 2 . B 3. B 4. A

251

Present value 1,030,380 812,810 577,835 324,062 (32)


CAS E NO. 2 Question No. 1 Gross Investment: Total periodic lease payments (300,000 x 4) Add:ResidualValue Present value of the leased asset Present value of minimum lease payments (300,000 x3.3121) Add: Present value of residual value (50,000 x .735) Unearned interest income ( A)

QuestionNo. 2 Amortization Table Annual Date Collection 01/01/2016 12/31/2016 300,000 12/31/2017 300,000 12/31/2018 300,000 12/31/2019 350,000

The journal ent ry is: Inventory Lossons alestype Leasereceivable

993,630 36,750 1,030,380

219,620 (B) Interest Income

Amortization

82,430 65,025 46,227 25,906

Question No. 3: Ungua ranteed Sales Less: Net cost Costo fgoodssold Less: Present value of URV Initialdirectcost Dealer's profit (B) QuestionNo. 4 P6,000.

1,200,000 50,000 1,250,000

217,570 234,975 253,773 324,094

Present value 1,030,380 812,810 577,835 324,062 (32)

993,630 900,000 36,750

863,250 10,000 120,380

( B)

44,000 6,000 50,000

SUMMARY OF ANSWER S: 1. A 2 . B 3. B 4. B

PROBLEM 27-12 Sales-Typ e Lease NetSellingPrice Less: Present value of lease receivable Gain on sale (D)

400,000 150,000 250,000 252


PROBLEM 27-13 Sale and Leaseback as Finance Lease Question No. 1 SalesPrice Less:Carryinga mount Loss on sale and le aseback

(B)

993,630 1,100,000 (106,370)

Question No. 2 SalesPrice Less:Carrying amount Deferred gain on sale and leaseback Divideby:Leaseterm Gain on sale an d leaseb ack (D)

993,630 900,000 93,630 4 23,408

PROBLEM 27-14 Sale and Leaseback as Operating Lease - Treatment of Gain QuestionNo. 1 ( B) SalesPrice =Fair value Less:Carrying amount Gain on sale - recognize immediately QuestionNo. 2 Salesprice Less:Carryinga mount

800,000 500,000 300,000

( B) 800,000 1,000,000

Loss on sale - recognize immediately

(200,000)

Question No. Salesprice Less:Fair value DeferredGain

800,000 600,000 200,000

Fairvalue Less:Carrying amount Outright gain

600,000 450,000 150,000

(D)

QuestionNo. 4 ( B) SalesPrice =Fair value Less:Carrying amount Gain on sale - recognize immediately

800,000 400,000 400,000

QuestionNo. 5 SalesPrice =Fair value Less:Carrying amount Lossons aleandleaseback

800,000 880,000 (80,000)

( B)

253


Question No. 6 Nil. The loss is compensate d by future lease rental below the market r ate. SUMMARY OF ANSWER S: 1. B 2. D 3. D 4. B

5.

B

6.

A

COMPREHENSIVE PROBLEMS PROBLEM 27-16 QuestionNo. 1 (ACAS ) E NO. 1 “Substantially all” test Present value of Periodic Payment (200,000 x 6.75902) % age

1,351,805

1,351,805 =68% 2,000,000

Not substantially all.

Major part test %age

10 20

=50%

The lease term does not amount to major part of the economic life of the asset. Answer: Nil. The lease do not classify as finance lease.

QuestionNo. 2 Rente xpense

( B) P200,000

QuestionNo. 3 Nil.

( A)

QuestionNo. 4 Nil.

( A)

QuestionNo. 5 (D) Depreciation expense overstated, net income understated Interest expense overstated, net income understated Rent expense understated, net income overstated Netincome understated SUMMARY OF AN SWERS – CAS E NO. 1: 1. A 2. B 3. A 4. A 5. D

QuestionNo. 1 “Substantially all” test

CAS E NO. 2 ( B) 254

(115,181) (135,181) 200,000 (50,362)


% age

1,351,805 =90% 1,500,000

The lease is a finance lease. The cost of the leased asset is lower between the fair value and the present value of minimum lease payment which is P1,351,805.

Amortization Table Annual Date Payment 01/01/2015 12/31/2015 200,000 12/31/2016 200,000 12/31/2017 200,000 12/31/2018 200,000


QuestionNo. 2 (D) Depreciation expense (1,351,805/10) Interestexpense Total lease- related expenses

Amortization 200,000 84,819 93,301 102,632

Present value 1,351,805 1,151,805 1,066,986 973,684 871,052

135,181 115,181 250,362

QuestionNo. 3 (C) P93,301. See amortization table above. QuestionNo. 4 ( B) P1,066,986. See amortization table above. QuestionNo. 5

( A)

Nil. The company did not commit any error.

SUMMARY OF AN SWERS – CAS E NO. 2: 1. B 2. D 3. C 4. B 5. A

PROBLEM 27-17 QuestionNo. 1 ( B) Lease is a finance lease thus any gain should be deferred and amortize over the lease term. SellingPrice Less:Carrying amount Deferred gain on sale and leaseback Less: Amortization in 2014 (29,695/10) Deferred gain on sale and leaseback, end

QuestionNo. 2 (D) Interestexpense Depreciation expense (379,695/10) Rentexpense(5,000x1 2)

379,695 350,000 29,695 2,970 26,725

38,363 37,970 60,000 255


Totalleaserelated expenses

Amortization Table Annual Date Payment 01/02/2016 01/02/2016 60,000 01/02/2017 60,000 QuestionNo. 3

136,333



Present value 379,695 319,695 298,058

( C)

Sale and leaseback as finance lea se Leaseliability, 01/02/2016 Add:Accruedinterest Totallease-relatedl iability

319,695 38,363 358,058

QuestionNo. 4 ( B) Amortization of deferred gain on sale and leaseback (see No. 1) Add: Gain on sale and leaseback as operating lease (P400,000P350,000) Totalgainonsale andleaseback

2,970 50,000 52,970

QuestionNo. 5 ( B) The deferred gain on sale and leaseback should be recognized immediately. SUMMARY OF ANSWER S: 1. B

2. D

3. C

4. B

5.

B

PROBLEM 27-18 QuestionNo. 1 ( C) Present value of Periodic Payment (50,000 x 4.0373) - LOWER FairValue ofthe leasedasset

201,865 P213,213

PAR. 20 OF PAS 17 States that: At the commen cement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset. Question Nos. 2-4 Amortization Table Annual Interest Present Date Payment Expense Amortization value 256


12/31/2015 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019

5 0,000 50,000 50,000 50,000 50,000

50,000 31,776 35,589 39,860 44,639

18,224 14,411 10,140 5,361

201,865 1 51,865 120,089 84,499 44,639 0

QuestionNo. 2 (D) P120,089. See amortization table above. QuestionNo. 3 ( C) P35,589. See amortization table above. QuestionNo. 4 ( C) P18,224. See amortization table above. QuestionNo. 5 ( A) Depreciation expense (201,865/5) SUMMARY OF ANSWER S: 1. C 2. D 3. C 4. C

5.

P40,373

A

PROBLEM 27-19 QuestionNo. 1

( A)

Annual lease payments

=

Annual lease payments

=

=

Fair market value – Present value of Unguaranteed R esidual Value Annuity due 286,420 - (.5066 X 20,000) 4.6048 60,000

QuestionNo. 2 ( C) Total minimum lease payments(60,000 x 6) Add: Unguaranteedr esidual value Totalleasereceivable Less: Fair market value of thele ased asset TotalFinancialrevenue

257

360,000 20,000 380,000 286,420 93,580


QuestionNo. 3 Amortization Table Annual Date Collection 01/01/2016 01/01/2016 6 0,000 12/31/2016 60,000

( A) Interest Income

Amortization

Present value 286,420 2 26,420 193,590

27,170

60,000 32,830

QuestionNo. 4 (C) Present value of periodic lease payments (60,000 x 4.6048) Amortization Table Annual Date Collection 01/01/2015 01/01/2015 6 0,000 12/31/2015 60,000

Interest Income

25,955


Depreciation expense (276,288/6) Add:Interestexpense Totalexpenses

P 276,288

Present value 276,288 2 16,288 182,243

46,048 25,955 72,003

QuestionNo. 5 ( C) P182,243. See amortization table in No. 4. SUMMARY OF ANSWER S: 1. A 2. C 3. A 4. C

5.

C

PROBLEM 27-20 QuestionNo. 1 ( B) Periodic rent(12,000x12) Amortization of lease bonus (300,000/6) Rentexpense QuestionNo. 2 ( C) Periodicrent Contingent rent: 1st(4Mx4%) 160,000 2nd( 6M-4M)x5%) 100,000 Amortization of lease bonus (500,000/5) Totalrentexpense

144,000 50,000 194,000

480,000

260,000 100,000 840,000

258


QuestionNo. 3 Rent expense

=

Rent expense

=

( B) [(3 x 12)-6] x 10,000 3 100,000

QuestionNo. 4 ( B) Lease No. 1 (Rent expense overstated, asset understated) (P444,000-P194,000) Lease No. 2 (Rent expense overstated, asset understated) Assetunderstated Rentexpenseperyear-Lease3 Less:Payment(10,000x6 months) Accrued rent payable under, Liability understated

100,000 60,000 (40,000)

QuestionNo. 5 ( C) Lease no. 1 (Rent expense overstated, net income understated) Lease No. 2 (Rent expense overstated, net income understated) Lease No. 3 (Rent expense understated, net income overstated) (100,000-60,000) Netincome understated SUMMARY OF ANSWER S: 1. B 2. C 3. B 4. B

5.

(250,000) (400,000) (650,000)

(250,000) (400,000) 40,000 (610,000)

C

PROBLEM 27-21 QuestionNo. 1 ( B) The present value of annuity due of 12% for 10 periods can be computed as: [1 – (1+12%) -9] + 1 = 6.33 12% Annual rentals Executory costs Minimumleasepayment Multiply by: Present value of annuity due Present value of minimum lease payments

P1,440,000 (49,410) P1,390,590 6.33 P8,802,438

Fairvalueo ftheproperty P8,800,000 (The difference is immaterial, implicit rate is 12% at P8.8M)

QuestionNo. 2

(D)

[12/31/2015 balance x (1+Effective rate)] – annual payments = 12/31/15 balance [(P8,800,000 – P1,390,590) x 1.12%] - P1,390,590 = P 6,907,949 The current portion as of 12/31/2016 can be compu ted as: (P6,907,949 - P1,390,590) x 12% = P561,636 259


QuestionNo. 3 ( B) 12/31/2016 balance – current portion(no.2) = Non-current portion = P6,907,9 49 - P561,636 = P6,346,313 QuestionNo. 4 P8,800,000/10 = P880,000

( A)

QuestionNo. 5 Depreciationexpense

( A) P 880,000

Interest expense Executory costs (P8,800,000 – P1,390,590) x 12 Total lease-related expenses

SUMMARY OF ANSWER S: 1. B 2. D 3. B 4. B

5.

889,129 49,410 P1,818,539

A

PROBLEM 27-22 QuestionNo. 1 07/01/2015 to 06/30/2016 07/01/2016 to 06/30/2017 07/01/2017 to 06/30/2018 Total Divideby:Numberofyears Rent expense per year

( B) 60,000 90,000 210,000 360,000 3 120,000

Rent expense to date (120,000 x 1) Less:Payment odate Accrued rent payable

120,000 60,000 60,000

QuestionNo. 2 ( B) Present value of Periodic Payment (400,000 x 5.9500) Fairvalue ofleasedasset

2,380,000 P2,380,000

Cost is equal to P2,380,000 (Fair value which is the same as the Present value of minimum lease payments .)

Amortization Table Annual Date Payment 06/30/2016 06/30/2016 400,000 06/30/2017 400,000


260


Present value 2,380,000 1,980,000 1,857,200


QuestionNo. 3 ( A) Firstl ease( SeeN o.1) Second lease (see amortization table) Current liabilities

60,000 122,800 182,800

QuestionNo. 4 ( A) Rent expense (First lease) Interestexpense Depreciation expense (2,380,000/10) Total lease-related expenses

120,000 277,200 238,000 635,200

SUMMARY OF ANSWER S: 1. B 2 . B 3. A 4. A

PROBLEM 27-23 Exercise of Gua ranteed Residual Value QuestionNo. 1 ( C) Present value of periodic payment (120,000 x 3.4437) Add: Present value of bargain purchase option (30,000 x 0.6587) Present value ofm inimuml ease payments Add:Initialdirect cost Cost of the Machinery QuestionNo. 2 Interestexpense

( B) 34,431

Executory cost Depreciation Total lease related expenses

Question Nos. 3 to 4 Amortization Table Annual Date Payment 12/31/2016 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 120,000 12/31/2020 30,000

413,244 19,761 433,005 20,000 453,005

20,000 105,751 160,182

Interest Expense

Amortization

34,431 25,018 14,570 2,977

120,000 85,569 94,982 105,430 27,023

QuestionNo. 3 (C) P85,569. See amortization table above. QuestionNo. 4 ( B) P227,436. See amortization table above. 261

Present value 433,005 313,005 227,436 132,453 27,023 (0)


QuestionNo. 5 ( B) Gross amount of guaranteed residual value Less:Fairvalue Losson finance lease QuestionNo. 6 Zero

( A)

QuestionNo. 7 Cost of leased asset

( C)

30,000 25,000 5,000

453,005

Less: Accumulatedd epreciation Carryingamount Add:Cashpayment Totalconsideration Less:Leaseliability Costo fequipmentpurchased

SUMMARY OF ANSWER S: 1. C 2. B 3. C 4. B

211,503 241,503 200,000 441,503 227,436 214,067

5.

B

6.

A

7.

C

PROBLEM 27-24 Direct Financing Lea se QuestionNo. 1 ( C) Annual payment = P3,224,000 = P750,000 4.312 Total interest to be earned = [(P750,000 x 5) – P3,234,000] = P516,000

QuestionNo 2 ( B) (P3,234,000 – P750,000) x 8% = P198,720 QuestionNo. 3 ( A) The PV annuity due of 12% ov er 8 years can be com puted as: [1 – (1+12%) -7 ] + 1= 5.5638 12% The present value of 12% f or 8 years can also be computed as: (1+12%) -8 = 0.4039 The total interest revenue is the difference the lease receivable and the present value of the minimum lease payments. Lease receivable (P959,500 x 8 + P400,000) Present value of the lease Unguaranteed residual value (P400,000 x 0.4039) Present value of lease payments (P959,500 x5 .5638) Total interest over the lease term

P 8,076,000

P 161,560 5,338,466 262

5,499,966 P2,576,034*


Since the lease is a direct financing lease (meaning, present value of the minimum lease payments approximates the value of the property upon the commencement of the lease), this can b e solved alternatively as: [(P959,500 x 8 + P400,000) – P5,500,000)] = P2,576,000

QuestionNo. 4 ( B) (P5,500,000 – P959,500) x 12% = P544,860 SUMMARY OF ANSWER S: 1. C 2. B 3. A 4. B

PROBLEM 27-25 Sales-Typ e Lease QuestionNo. 1 ( A) Lease receivable (P3,000,000 x 5 + P1,000,000) Present value of minimum lease payments: Rental (3.60 x P3,000,000) P10,800,000 Unguaranteed residual value (0.57 x P1,000,000) 570,000 Total unearned interest income QuestionNo. 2 ( B) Present value of minimum lease payments Cost of goods sold (P8,000,000 + P300,000) QuestionNo. x312% = P1,364,400(A) P11,370,000 QuestionNo. 4 Selling price Book value Gaino n sale

( B) P 7,040,000 ( 5,600,000) P1 ,440,000

QuestionNo. 5 ( B) P7,040,000 x 10% x 6/12 = P352,000 SUMMARY OF ANSWER S: 1. A 2. B 3. A 4. B

5.

B

263

P16,000,000

(11,370,000) P 4,630,000

11,370,000 (8,300,000) P3,070,000


PROBLEM 27-26 Financial Liability, Sale and Leaseback, Impairment loss on PPE and Inv estment in Associate QuestionNo. 1 ( B) Interestcostpaid(50Mx1 2%) Less: Interest expense for the year (47,078,000 x 14%) Understatedfinancecost

6,000,000 6,590,920 (590,920)

Rounded off to P59 1,000

QuestionNo. 2 ( C) Profit accounted for on disposal of plant Profittobebooked(10M/5X. 5) Overstated profit on sale and leaseback

10,000,000 1,000,000 9,000,000

QuestionNo. 3 (C ) Depreciationperbook(30M/15) Depreciation to be booked Apr. 1, 2015 to Sept. 30, 2015 (30M/15X.5) 1,000,000 Depreciation to be boo ked Oct . 1, 2015 to Mar ch 31, 201 6 (16M/5 X.5) 1,600,000 Understateddepreciation

2,000,000

2,600,000 (600,000)

QuestionNo. 4 ( C) Carrying value as of October 1, 2015 (30M/15 X 10.5)

21,000,000

Recoverable amount Impairmentloss

16,000,000 5,000,000

QuestionNo. 5 ( C) Acquisitioncost Dividend income( P20x 50,000) Share in the net income( P10M x2 5%) Share in the comprehensive income (P2M x 25%) Investmentinassociate SUMMARY OF ANSWER S: 1. B 2. C 3. C 4. C

5.

C

264

6,000,000 (1,000,000) 2,500,000 500,000 8,000,000


PROBLEM 27-27 Inves tment Property QuestionNo. 1 ( A) Nil, since the property should be investment property and not property, plant and equipment. Present value of periodic payment (500,000 x 4.97) Add: Present value of bargain purchase option (400,000 x 0.40) Present value of Minimum lease payments

2,485,000 160,000 2,645,000

Present value of minimum lease payments Less: Fair value of the land at the inception of the lease

2,645,000 200,000

Cost of the building as investment property

2,445,000

Amortization Table Annual Date Payment 01/01/2016 12/31/2016 500,000 12/31/2017 500,000

Interest Expense

Amortization

Present value 2,645,000 2,462,400 2,257,888

317,400 295,488

182,600 204,512

QuestionNo. 2 ( C) P317,400. See amortization table above. QuestionNo. 3 ( C) P204,512. See amortization table above. QuestionNo. 4 ( C) P2,257,888. See amortization table above. Que stion No . 5 and 6 Total rent income (40,000 x 24) + (50,000 x 24) x 20 Divideby:Numberofyears Rentincomeper year Periodicrent Add: Amortization of lease bonus (30,000 x 20)/4 Gross Ren tal income (No. 5) (A) Less: Expenses Amortization of initial direct cost (5,000 x 20)/4 Annualmaintenancecost Interestexpense Depreciation *(2,645,000-200,000/10) Net rental income (B)

SUMMARY OF ANSWER S: 1. A 2. C 3. C 4. C

5.

A

6.

265

B

43,200,000 4 10,800,000 10,800,000 150,000 10,950,000 25,000 40,000 317,400 244,500 10,323,100


PROBLEM 27-28 QuestionNo. 1 (900,000+50,000+25,000)

(D) P

QuestionNo. 2 (D) Total warranty expense (1.4M x 12%) Less: Total actuale xpenditures Warranty liability end of 2015 QuestionNo. 3

P P

P

P

QuestionNo. 4 (D) Fair value (equal to present value MLP) Less:First payment Total Add: Interest accrued( 420,000x 9%) Totallease liability

SUMMARY OF ANSWER S: 1. D 2. D 3. C 4. D

168,000 63,000 1 05,000

( C)

Legal services Add:Medicalservices Payroll(14,400/12 x8) Royalties Totalaccrual

QuestionNo. 5 (3,875,902 x1 11%)-400,000

975,000

P

P

4,600 5,500 9,600 3,900 23,600

490,000 70,000 420,000 37,800 457,800

( A) P 3,902,251

5.

A

PROBLEM 27-29 QuestionNo. 1 ( C) Unadjusted balance – Accounts Payable 2 3 Adjustedbalance QuestionNo. 2 Units sold: October

450,000 60,000 45,000 555,000

( A) 32,000

November December Total Multiply by Totalfailuresexpected

28,000 40,000 100,000 2% 2,000 266


Less: Failures already recorded: October sales Novembersales December sales Expectedfuturefailures Multiply by Estimatedcost

640 360 180

Warrantyexpense Estimated warranty liability

1,180 820 150 123,000

123,000 123,000

QuestionNo. 3 (C) Notes payable is (200,000 x 3.6048 ) = 720,960 Amortization Table Annual Date Payment 01/01/2016 12/31/2016 200,000 12/31/2017 200,000



QuestionNo. 4 ( A) Present value ofp rincipal (4M x .6830) Present value of interest payments (480,000 x 3.1699) TotalPresentvalue

Present value 720,960 607,475 480,372

2,732,000 1,521,552 4,253,552

Amortization Table Date 01/01/2016 12/31/2016

Interest Payment

Interest Expense

480,000

425,355

QuestionNo. 5

Premium Amortization 54,645

(D)

Present value of minimum lease payments (200,000 x 6.759)

Amortization Table Annual Date Payment 01/01/2016 01/01/2016 200,000 12/31/2016


SUMMARY OF ANSWER S: 1. C

2. A

Present value 4,253,552 4,198,907

3. C

4. A

5.

D

267

Amortization 200,000

P1,351,800

Present value 1,351,800 1,151,800 1,266,980


PROBLEM 27-30 QuestionNo. 1 (D) Zero, the two notes payable should be presented as noncurrent liabi lities. QuestionNo. 2 (D) FINANCE LEASE: Amortization Table Annual Interest Date Payment Expense 12/31/2015 12/31/2015 60,000 12/31/2016 60,000 38,363 12/31/2017 60,000 35,767

Present value 379,692 319,692 298,055 273,822

Amortization 60,000 21,637 24,233

Answer: P273,822. Refer to amortization table above.

QuestionNo. 3 (B) Answer: P38,363. Refer to amortization table above. QuestionNo. 4

( D)

Annual rent expe nse = P720,000/3=P240,000

Operating lease Date Expense 1/1-12/31/16 1/1-12/31/17

240,000 240,000

Expense To date 240,000 480,000

1/1-12/31/18

2 40,000

720,000

Payment to date 120,000 300,000

Accrued rent (Prepaid) 120,000 180,000

720,000

-

QuestionNo 5 ( C) CONTINGENCIES Answer: P400,000 (P200,000+P200,000) 1.

Only a disclo sure is necessary because it is not p robable that the com pany will be liable, alth ough the a mount can be measured reliably.

2. Retainedearnings Estimated liability for income tax

200,000

3. Accounts receivable – Innova Lossonguaranty Notepayable –bank

120,000 80,000

SUMMARY OF ANSWER S: 1. D 2. D 3. B 4. (D) 5 .

200,000

200,000

C

268


PROBLEM 27-31 Question No. 1 Date 04/01/2011 03/31/2012 03/31/2013 03/31/2014 03/31/2015 03/31/2016 Revised Date 04/01/2016 09/30/2016

Finance cost 1,900,000 2,090,000 2,299,000 2,528,900 2,781,790

Finance cost

Present Value 19,000,000 20,900,000 22,990,000 25,289,000 27,817,900 30,599,690

Present Value 25,000,000

1,250,000

10/1/2016 to 3/31/2016 (2,781,790 x 6/12) 04/01/2016 to 9/30/2016 (25,000,000 x 10% x 6/12 Finance cost (C)

1,390,895 1,250,000 2,640,895

Question No. 3 Cost of theplant Add: Present value of decommissioning cost Total Less: Accumulated depreciation (149M/20 x 5) Carryingvalue,3/31/2016

130,000,000 19,000,000 149,000,000 37,250,000 111,750,000

Less: Decrease due to revision of decom liability Present value of decommissioning liability Less Revisedestima e Total Less: Depreciation April to Sept 2016 (106,160,310/15 x 6/12) Carrying value, 9/30/2016 (B)

30,599,690 25,000,000

Question No. 2 DepreciationOctober1 to March31 Depreciation April to Sept 2016 (106,160,310/15 x 6/12) Total depreciation (B) Question No. 4 2016

5,599,690 106,150,310 3,538,344 102,611,966

3,725,000 3,538,344 7,263,344

6,000,000

2017 2018 Total Divideby:Totalsemi-annualpayments Semi-annual income (B)

6,300,000 6,615,000 18,915,000 6 3,152,500 269


Question No. 5 Totalincometodate Less:Totalcollectiontodate Rent receivable SUMMARY OF ANSWER S: 1. C 2. B 3. B 4. B

3,152,500 3,000,000 152,500

(B)

5.

B

270

Chapter 29 – Shareholders’ Equity

CHAPTER 29: SHAREHOLDERS’ EQUITY PROBLEM 29-1 Question No.1 ( A) Authorized ordinary shares at P10 stated value Less: Unissued ordinarys hares OrdinarySharesissued Question No.2

1,200,000 650,000 550,000

( B)

Authorized preference shares at P50 par value Less: Unissued preference shares PreferenceSharesi ssued

800,000 150,000 650,000

Question No.3 (D) Share Premium on ordinary shares Share Premium conversion option-bonds payable Share premium on preference shares Gaino nsale oftreasuryshares Ordinary share warrants outstanding Donatedcapital Ordinary shares options outstanding TotalShare Premium

300,000 40,000 150,000 60,000 35,000 40,000 25,000 650,000

Question No.4 (D) OrdinarySharesissued PreferenceSharesi ssued SubscribedO rdinarys hares Subscription receivable – ordinary shares SubscribedP reference shares Subscription receivable – preference TotalShare Premium ContributedCapital

550,000 650,000 200,000 (20,000) 50,000 (15,000) 650,000 2,075,000

Question No.5 ( C) PreferenceSharesi ssued SubscribedP reference shares OrdinarySharesissued SubscribedO rdinaryshares Share Premium on ordinary shares TotalLegal Capital

650,000 60,000 550,000 200,000 300,000 1,760,000

271


Question No.6 (D) ContributedCapital Accumulated profits – unappropriated Unrealized increase in value of FVTOCI securities Reserve for bond sinking fund Revaluationsurplus Total Shareholders' Equity SUMMARY OF ANSWER S: 1. A 2. B 3. D 4. D

5.

C

6.

2,075,000 500,000 10,000 320,000 130,000 3,035,000

D

PROBLEM 29-2 1.

2.

3.

Cash (2,000x P50) Share capital To record share issuance at a premium

100,000

Cash (5,000x P60) Share capital (5,000 x P50) Share premium To record share issuance at a premium

300,000

100,000

250,000 50,000

Share premium Retained earnings Cash To record payment of share issue cost

50,000 20,000

Cash (4,000x P40) Discount onshare capital Share capital (4,000 x P50) To record share issuance at a discount

160,000 40,000

70,000

200,000

PROBLEM 29-3 1. Machinery Share capital (2,500 x P50) Share premium To record share issuance for machinery

180,000

2. Patent(1,000x P65) Share capital (1,000 x 50) Share premium To record share issuance for patent

65,000

3.

125,000 55,000

50,000 15,000

Organization expense Share capital (400 xP50)

40,000 20,000

premium ToShare record share issuance for organization services.

272

20,000


PROBLEM 29-4 Loanspayable-bank Share capital Share premium** Gain on settlement on liability To record issuance of shares for liability

150,000 100,000 40,000 10,000

*Computation of loss on extinguishment of liability Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x P70) Less:Carryinga mountofliability Gainonsettlementof liability **Computation of increase in share premium Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x P70) Less: Total par or stated value of equity issued (2,000 x P50) Share premium(or Discount)

140,000 150,000 10,000 140,000 100,000 40,000

PROBLEM 29-5 1.

2.

Cash (2,500x P216) Preferenceshares( 2,500x P200) Share premium-pref.share To record issuance of preference shares Cash (500x P120) Ordinary shares (500x P100) Share premium -ordinary shares To record issuance of ordinary shares

540,000 500,000 40,000 60,000 50,000 10,000

PROBLEM 29-6 Allocation of the lump-sum price: Preferences hares( 2,500x P216) Ordinarys hares( 500x1 20) Total

Total Fair value 540,000 60,000 600,000

The transaction will then be recorded as follows: Cash Preferenceshares (2,500 x P200) Share premium-preference share (810,000-500,000) Ordinary shares (500x 100) Sharepr emium - ordinary share (90,000-50,000)

Fraction 54/60 6/60

Allocated proceeds 810,000 90,000 900,000

900,000 500,000 310,000 50,000 40,000

PROBLEM 29-7 Allocation of the lump-sum price: Total proceeds Less: Total fair value of preference shares (2,500 x P216) 273

900,000 540,000


Amounta llocatedtotheordinaryshares

360,000

The transaction will then be recorded as follows: Cash Preferenceshares (2,500 xP200) Share premium-preference share (540,000-500,000) Ordinary shares (500x P100) Share premium-ordinary share (360,000-50,000) To record issuance of preference and ordinary shares

900,000 500,000 40,000 50,000 310,000

PROBLEM 29-8 1.

Subscription receivable (4,000 xP 60) Subscribedsharec apital( 4,000xP 50) Share premium To record subscriptions of share capital

240,000 200,000 40,000

2. Cash (240,000x 40%) Subscriptionreceivable To record cash collection 3.

96,000 96,000

Cash (240,000x 60%) Subscriptionreceivable To record cash collection

144,000 144,000

Subscribedsharecapital ShareCapital(4,000x 50) To record issuance of share certificate

200,000 200,000

PROBLEM 29-9 1.

2.

3.

Subscriptions receivable (5,000 xP 60) Subscr bedo rdinarys hares( 5,000xP 50) Sharepremium-ordinary share To record subscriptions of 10,000 shares at P110

300,000 250,000 50,000

Cash (300,000x 40%) Subscriptionsreceivable To record receipt of cash for subscriptions

120,000

Subscribedordinaryshares Sharep remium-ordinarys hare Subscriptions receivable (300,000x 60%) Sharep remiumf orfeited down-payment

250,000 50,000

120,000

180,000 120,000

PROBLEM 29-10 Journal entries to record the transactions would be: To record the expenses incurred related to the auction Receivable from highest bidder P 10,000 Cash To record the collection from highest bidder Cash Subscriptionreceivable 274

P 10,000

300,000 290,000


Receivablefromh ighestbidder To record the issuance of share capital Subscribed share capital (7,500 x P50) Share capital

10,000 375,000 375,000

PROBLEM 29-11 To record the expenses incurred related to the auction Receivable from highest bidder P 10,000 Cash P

10,000

To record the acquisition of entity’s own shares Treasuryshares 300,000 Subscriptionreceivable Receivablefromh ighestbidder

290,000 10,000

To record the issuance of share capital Subscribed share capital (7,500 x P50) 375,000 Share capital

375,000

PROBLEM 29-12 1)

Treasuryshares( 15,000x 24) Cash

360,000 360,000

2) Cash (5,000x P26) Treasuryshares (5,000x P24) Share premium-Treasuryshares

130,000 120,000 10,000

3) Cash (4,000x 20) Sharep remium-Treasuryshares Retained earnings Treasuryshares (4,000x 24)

80,000 10,000 6,000

4) Ordinarys hares( 6,000x2 0) Share premium (600,000/100,000) x 6,000 Share premium-Treasuryshares Treasuryshares (6,000x P24)

120,000 36,000

5)

96,000

Memo entry: Received 5,000 shares from a stockholder as a donation. Cash (2,000x 28) Donated capital

12,000 144,000

56,000 56,000

PROBLEM 29-13 a.

Preferences hares( 100) Share Premium on 3,000xP Preference shares [(300,000/30,000) x 3,000] Accumulated profits (balancing figure) Cash (3,000x P140)

b. Preference shares

300,000 30,000 90,000 420,000 300,000

275


Share Premiumo n Preferences hares Cash (95 x 3,000) Share premium retirement of shares (balancing figure)

30,000 285,000 45,000

PROBLEM 29-14 1)

Preferences hares( 4,000xP 100) Share Premium on Preference shares [(300,000/30,000) x 4,000] Ordinary shares (4,000x P50) Sharep remium-ordinaryshares

2)

Preference shares( 4,000xP 100) Share Premium on Preference shares [(300,000/30,000) x 4,000] Accumulatedprofits Ordinarys hares( 4,000x5 /1xP 50)

400,000 40,000 200,000 240,000 400,000 40,000 560,000 1,000,000

PROBLEM 29-15 1a.

Ordinarys hares( 50,000xP 50) Share Premium on Ordinary shares Ordinarys hares( 50,000x P40) Sharep remium-recapitalization

2,500,000 100,000

1b.

Ordinary shares Share Premium on Ordinary shares Accumulatedprofits Ordinarys hares( 50,000x P140)

2,500,000 100,000 4,400,000

2.

Ordinary shares ((P50-P40) x5 0,000) Sharep remium-recapitalization

2,000,000 600,000

7,000,000 500,000 500,000

3. Share split OrdinaryS harec apital issued Subscribedsharecapital Total Less:Treasuryshares Outstandingshares

Before 100,000 100,000 100,000

Multiplyb y 5/1 5/1 5/1 5/1 5/1

After 500,000 500,000 500,000

Before P50

multiply by 1/5

After P10

Par valueper share Memo entry: Changes:

increase number of shares Same SHE Decrease number in Par value

276


PROBLEM 29-16

Preferences hares( 2,000x P80) Warrants (2,000 x P20) Total *(150 x 4,000)

CASE NO. 1 Total Fair value 160,000 40,000 200,000

Cash PreferenceSharecapital( 2,000xP 50)

Fraction 80% 20%

Allocated cost 320,000 80,000 400,000*

400,000 100,000

ShareP remium(320,000-100,000) Ordinarys harewarrantsoutstanding

220,000 80,000

When the warrants are exercised: Cash(1,000x 80% x P40) Ordinary share warrants outstanding (80,000 x 80%) OrdinaryS hare capital( 1,000x 80% xP 20) Share Premium–ordinaryshare

32,000 64,000 16,000 80,000

CASE NO. 2 Total proceeds Less: Total fair value of the preference shares (2,000 x P80) Valueofthewarrants Cash PreferenceSharecapital( 2,000xP 50) Share Premium(160,000-100,000) Ordinarys harewarrantsoutstanding

400,000 160,000 240,000 400,000 100,000 60,000 240,000

CASE NO. 3 Marketvalueofordinary shares Less:Option price/exercise price Intrinsic valueof warrant Multiply: # of ordinary shares claimable under warrants Marketvalueofshare warrants

P

50

P

40 10 1,000 1 0,000

Total proceeds Less:ValueofSharewarrants Valueassignedt oPreferenceS hare

400,000 10,000 390,000

Cash PreferenceSharecapital( 2,000xP 50) Share Premium(390,000-100,000) Ordinarys harewarrantsoutstanding

400,000 100,000 290,000 10,000

PROBLEM 29-17 Ordinarys haresi ssued Less:Treasury shares Outstandingshares a.

40,000 2,000 38,000

Retainede arnings( 38,000x P5)

190,000 277


Dividends payable b. c.

190,000

No formal accounting entry Dividends payable Cash

190,000 190,000

PROBLEM 29-18 Cash dividends for Preference Shares-Semi-annual Payment July1: RetainedEarnings Dividends Payable (9,000 x P100 x 10% x6 /12) Dec. 31: Retained Earnings Dividends Payable (9,600 x P100 x 10% x 6/12)

45,000 45,000 48,000 48,000

Computation of outstanding shares: July1 December 31 Preference shares issued 10,000 Preference shares issued Less: Treasury shares 1,000 Less: Treasury shares (1,000-600) Outstanding shares 9,000 Outstanding shares

10,000 400 9,600

PROBLEM 29-19 Feb.15, 2017

Retained earnings Dividends payable

Dec. 31, 2016


450,000 450,000 150,000 150,000

Fair value,Dec.31 Less:PreviousF airv alue Increase ind ividendsp ayable Feb.15, 2017

Dividends payable Retained earnings

600,000 450,000 150,000 60,000 60,000

Fair value,Feb. 15 Less:PreviousF airv alue Decrease ind ividendsp ayable

540,000 600,000 (60,000)

Dividends payable Inventory Gain on distribution - prop.d ividends

540,000

Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends

540,000 500,000 40,000

500,000 40,000

PROBLEM 29-20 Nov. 1, 2017


450,000 450,000

Equipment-noncurrent asset for distribution* 278

450,000


Impairment loss (P500,000 – P450,000) Equipment Dec. 31, 2017

50,000 500,000


150,000 150,000

Fair value,Dec.31 Less:PreviousF airv alue Increase ind ividendsp ayable

600,000 450,000 150,000

Equipment-noncurrent asset for distribution** Gain onrecoveryo fi mpairmentl oss Feb.15, 2018

50,000 50,000

Dividends payable Retainedearnings

60,000 60,000

Fair value,Feb. `5 Less:PreviousF airv alue Decrease ind ividendsp ayable

540,000 600,000 (60,000)

Dividends payable Equipment-noncurrent asset for distribution Gain on distribution of prop.D ividends

540,000 500,000 40,000

Carrying amount of dividend payable = Fair value 540,000 Less: Carrying amount of noncash assets 500,000 Gain on distribution of prop. Dividends 40,000 *(Lower between P500,000 and P450,000) **(P800,000 minus P600,000) but the gain shall not exceed the amount of impairment loss of P100,000. Alternative Computation: *Computation of the impairment loss is as follows: Original carryingamount Less: Lower between these two amounts FV LessC ost To Distribute (FVLCTD) Originalc arryinga mount Impairment loss

500,000 450,000 500,000

450,000 50,000

**Computation of the gain on reversal of the impairment loss is as follows: Lower between subsequent FVLTCD and srcinal carrying amount Original carrying amount 500,000 FVLCTD, Dec. 31 600,000 500,000 Carryingamounta ti nitialrecognition 450,000 Gain on reversal 50,000

PROBLEM 29-21 Cash and Noncash Altern ative Retainede arnings

P

Dividends payable Supporting computation: Casha lternative(10x6 0%x P8,000) Non-casha lternative( 10x 40%x P9,000) Totaldividends

84,000 P

84,000 P

P 279

48,000 36,000 84,000


Date of payment: If the shareholders opted to receive cash, the journal entry is: a. Dividends payable Cash (10 X 8,000) Retainede arnings(balancingf igure)

84,000 80,000 4,000

If the shareholders opted to receive noncash, the journal entry is: b. Dividends payable 84,000 Loss on distribution of dividends (balancing figure) 6,000 Noncash(10x 9,000)

90,000

PROBLEM 29-22 Share Divid ends: Small, Large and Tre asury Shares Computation of outstanding shares: Ordinarys haresi ssued 53,000 Less:Treasuryshares 3,000 Outstandingshares 50,000 1)

Accumulated Profits [(50,000) x 10% x P80] Share dividends payable [(50,000) x 10% x P50] Sharep remiumo nOrdinaryshares

400,000

2)

Accumulated Profits [(50,000) x 20% x P50] Share dividends payable [(50,000) x 20% x P50]

500,000

3)

Capital Liquidated (P2 x 50,000 shares) Cash

4)

AccumulatedProfits Treasuryshares

250,000 150,000

500,000 100,000 100,000 120,000 120,000

PROBLEM 29-23 Fra ctional Share right s 1.

Date of declaration of share dividends Retained earnings (100,000 x 30% x 50) Sharedividendspayable

1,500,000 1,500,000

2.

Issuance of full share dividends and the fractional share warrants or rights Share dividends payable 1,500,000 Sharec apital (27,000x 50) 1,350,000 Fractional warrants outstanding 150,000

3.

Issuance of full shar es as a result of the exe rcise of the frac tional share warrants Fractional warrants outstanding 150,000 Sharec apital(2,800x 50) Share premium-unexercised warrants

280

140,000 10,000


PROBLEM 29-24 Comprehens ive Problem Questions 1 to 3 Date A. Jan.2,2012 B. Jan.3,2013 (10,000/50x2) C. May1, 2014 BAL Dec. 31, 2014 (D ) 1. D. Jan. 1, 2015 [(30,400/2 x 3) - 30,400] BAL E. BAL

Dec. 31, 2015 Jan. 1, 2016 July 1,2 016 Dec. 31, 2016

(B) 2. [(45,600/1 x 2) - 45,600] (10,000x 2 x 20%) (A) 3.

Question No. 4 June 30 ( 1.50 x 45,600) Dec.3 1 ( 2.50 x 45,600) Total Dividends Question No. 5 June 30 ( 1.25 x9 1,200) Dec.3 1 ( 1.00 x 95,200) Total Dividends SUMMARY OF ANSWER S: 1. D 2. B 3. A 4. A

Ordinary shares 20,000 400 10,000 30,400 15,200 45,600 45,600 4,000 95,200

(A)

68,400 114,000 182,400

(D)

114,000 95,200 209,200

5.

Preference shares 10,000

10,000 10,000 (10,000) -

D

PROBLEM 29-25 Questions 1 to 3

*in ‘000s Beginning Jan.5 Jan. 28 Feb. 2 Feb. 14

Pref. shares 1,400

Ord. shares 3,500 600

Total Share Retained Premium earnings 1,925 4,500 60 (20) (60)

Treasury shares

Subs. Ord. share

Subs. Receivable

1,000 Memo 50

(500) 880

Jul. 15 Oct.15 Nov. 15 Nov. 27 Dec. 31 Total

800

100

200 2,250

1,500

1,000 2,200

5,200

(1,000) 5,305

1,000 5,480 281

500

500

3,750 (1,500) (1,500) 750


1.( B)

2.( C)

3.( C)

Question No.4 ( C) Retainedearnings,total Outstanding balance of treasury stocks Retained earnings – unappropriated

P 5,480,000 ( 50 0,000) P 4,980,000

Question No.5 Preferenceshares Ordinary shares

P 2,200,000 5,200,000

(B )

Subscribedo rdinarys hares Subscriptionsr eceivable Sharepremium Retained Earnings Treasurystocks Total SUMMARY OF ANSWER S: 1. B 2. C 3. C 4. C

500,000 (750,000) 5,305,000 5,480,000 ( 500,000) P17,435,000

5.

B

PROBLEM 29-26

Beg. Balances 2.) 3) 4.) 5.) 6.) 8.) 9.) Total

Pref. shares 400,000

Ord. shares 200,000

400,000 6,000 38,200

800,000 244,200 1 . ( C) 2. ( D)

Beginningbalance 2.T reasuryshares 3. Reissuance of treasury shares 4. Issuance of P/S 5.E xercise of warrants 6.S hared ividends

Share Prem 250,000

20,000 80,000 30,000

Retained earnings 900,000

Treasury shares

200,000 (80,000)

(38,200) 2,400,000 (80,000) (91,680) 380,000 3,090,120 120,000 4. (D) Number of Shares Ordinary Preference 40,000 4,000 (5,000) 2,000 4,000 1,200 7,640 282


Balance Dividendpershare Dividends

45,840 x2 91,680

8,000 x 10 80,000

Question No.3 (D) Retained earnings (see table above) Less:Treasury shares Retained earnings - unappropriated Question No.5

P 3,090,120 120,000 P 2,970,120

(A )

Preferenceshares Ordinary shares Sharepremium Retainedearnings-total Treasuryshares Totalshareholder’sequity

P 800,000 244,200 380,000 3,090,120 (120,000) P 4,394,320

SUMMARY OF ANSWER S: 1. C 2. D 3. D 4. D

5.

A

PROBLEM 29-27

Pref. Shares

Beg. 1.) 2.) 3.) 4.) 5.) 6.) 7.) Total

4,000 (200)

3,800 1 . ( D)

Ord. Shares

840 80 40 1,350

2,310 2 . ( C)

Subscri bed share Capital

Subscri ption Receiva ble

100 (100)

52 (52)

0

Total Share Premiu m

968 9.6 160 675 27

0 1,839.6 3 . ( C)

Beginningbalance -issued Beginningbalance -treasury 1.) February 1,2 016 Issuance ofshares 2.) March 1, 2016 Conversion of preference shares 3.) April 1, 2016 Exercise of stock rights (67,500 x 2) Balance –April30 4. ) September 30, 2016 Reissuance of treasury shares 283

Retaine d Earnin gs

15,000

Treasu ry Shares

44

(33) 280 2,500 (1,217) 16,563

11 Ordinary Shares 84,000 (4,000) 8,000 4,000 135,000 227,000 3,000


Balance –October 31

230,000 Preference Shares 40,000 (2,000) 38,000

Beginning balance– issued ando utstanding 2.) March 1, 2016 Conversion into ordinary shares Balance –April30&October 31 Compu tation of dividends: Ordinary shares: April30 (227,000x P1) October31(230,000 xP1) Preference shares: April30 (38,000xP100x10%) October31(38,000xP100x10%) Totaldividends

227,000 230,000 380,000 380,000 1,217,000

QuestionNo. 4 (B) Retained earnings (see table above) Less:Treasury shares Retained earnings - unappropriated

P16,563,000 11,000 P16,552,000

QuestionNo. 5 (B) Preferenceshares OrdinaryShares SharePremium Retained Earnings - Unappropriated Retained Earnings - Appropriated Less: Treasury Shares Shareholder’s Equity

3,800,000 2,310,000 1,839,600 16,552,000 11,000 11,000 24,501,600

SUMMARY OF ANSWER S: 1 . D 2 . C 3 . C 4 . ( B) 5 .

( B)

PROBLEM 29-28 Preference Shares Beginning A.) B.) C.) D.) E.)

Ordinary Shares 840,000

Total Share Premium 4 20,000 13,500

SPLIT2 for1

Retained Earnings 15,000,000

(650,000)

200,000

340,000 60,000 16,000

8,000 284

Treasury Shares 44,000 (16,500)


F.) G.) H.) Total

(10,000)

(5,000)

838,000 2 . ( D)

844,500 3.( C)

200,000 1.( C)

(25,000) (650,400) 2,400,000 16,074,600

Computationo fc ashdivid ends:

Ordinary Shares 84,000 (4,000) 1,500 81,500 81,500 1,600 (2,000) 162,600 P4 650,400

Beginningbalance -issued Beginningbalance -treasury a.J an1 5R eissuanceo ft reasuryshares Balance b. March 12for1sharesplit e. October 1 Exercise of warrants (80% x 2,000) f.N ovember2Retirementofshares Balance –December 31 Multiply: Dividendpershare Totaldividends QuestionNo. 4 ( A) Retained earnings (see table above) Less:Treasury shares Retained earnings - unappropriated QuestionNo. 5 Preferenceshares

27,500

P16,074,600 27,500 P16,047,100

(A) 200,000

OrdinaryShares SharePremium Retained earnings unappropriated Retained earnings - appropriated Less:Treasury Shares Shareholders’E quity SUMMARY OF ANSWER S: 1. C 2. D 3. C 4. A

5.

838,000 844,500 16,047,100 27,500 27,500 17,929,600 A

PROBLEM 29-29

Beg. Jan.4 Mar. 2 May 7 Jun. 15 Jul.2

Preferenc e Shares 1,200,000 400,000

Ordinary Shares 1,800,000 300,000

Total Share Retained Premium Earnings 4,116,000 2,300,000 750,000 500,000 18,000

274,400 285

Treasury Shares 420,000

(126,000)

2-for-1 split 98,000

OCI 61,740

(274,400)


Oct.1 Oct. 1 Oct. 15 Nov. 1 Dec. 31

Total

61,740 (61,740) (329,280) 400,000

5,000

800,000

2,000,000 2,203,000 6,458,400 1.( D) 2.( C) 3.( B)

(82,320) (825,200) (224,000) 2,250,000 2,876,540

0

294,000

Ordinary Shares 180,000 (20,000) 30,000 190,000 6,000 196,000 196,000 392,000 19,600 1,000 412,600

Beginningbalance -issued Beginningbalance -treasury Jan.4Issuanceof shares Balance –January30 May7R eissuanceoftreasuryshares Balance beforesharesplit Add:Sharesplit–2 for1 Balance July2 5%sharedividends Oct. 15Issuance of shares Balance –December 31

Preference Shares Beginning balance– issued ando utstanding Mar.2 Issuanceof shares October15 Iss ance ofshares Balance –December 31

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

Compu tation of cash dividen ds: Ordinary shares: Dec31(P2x412,600) Preference shares: Dec31 (8%xP2,800,000) Totaldividends

825,200 224,000 1,049,200

Question No. 4 (E) Retainedearnings-total Less: Appropriated for Treasury shares

2,876,540 294,000

Retained earnings-unappropriated

2,582,540

Question No. 5 Preferenceshare Ordinary share

(E) 2,000,000 2,203,000 286


Totalsharepremium Retained earnings - unappropriated Retained earnings – appropriated Less:TreasuryShares Total Shareholders’ equity SUMMARY OF ANSWER S: 1 . D 2. C 3. B 4.

(E)

6,458,400 2,582,540 294,000 294,000 13,243,940

5.

(E)

PROBLEM 29-30 Jan.1 Land Organizationexpense Ordinarys hares( 1,000x P100 SharePremium-O/S Feb. 23

Mar. 10

Apr. 10

July14

Aug.3

2,850,000

Cash (6,000 x 390)-50,000 Ordinarys hares( 6,000x P10) Sharepremium-OS

2,290,000

Subscriptions receivable (8,000 x P450) Subs.O rdinary shares( 8,000x P10) Sharepremium-OS Building Preferences hares( 2,800 x P100) Share Premium-PS (460,000-280,000) Ordinarys hares( 1,400x P10) Share premium-OS (560,000-14,000)

Cash Ordinarys hares( 1,200x P10) SharePremium-OS Cash

2,000,000 850,000 60,000 2,230,000 3,600,000 80,000 3,520,000 1,080,000 280,000 180,000 14,000 546,000 1,020,000 560,000 460,000 480,000 12,000 468,000 2,800,000

Subscriptionsreceivable Subs. Ordinary shares (8,000 x ½ x P10) Ordinary shares Dec.1

10,000 470,000

Cash (20,000 x 150)-150,000 Preference shares (20,000 x P100) Sharepremium-PS

Fair valueo f the building Less: Fair value of the ordinary shares (480,000/1,200 x 1,400) Valueo f the pref. shares July14

340,000 140,000

Retainedearnings

2,800,000 40,000 40,000 580,000

287


Dividendspayable

580,000

Pref.d ividends (2,280,000 x 10%)

228,000

OSI ssued (136,000/10) Add:SubscribedOS Outstandingshares Multiplyb y:D ividend pers hare Totaldividends Dec.3 1

1/1 2/23 3/10 4/10 7/14 7/14 8/3 12/1

13,600 4,000 17,600 20

Dividendspayable Cash

228,000 228,000

Ordinar P/S SP– P/S y Shares P - P P10 P 470 2,000 850 60 280

180

14 12 40

Subs. Subscrib Receiv SP – O/S ed O/S able P P 2,230 3,520 80 3,600 546 468 (40) (2,800)

50 Total

P2,280 1 . ( B)

P1,030 2. (C)

352,000 580,000

P136 3. (C)

P7,234

P 40

P800

4. (C)

QuestionN o.6 (C) Preference shares Ordinary shares Subscribed ordinary shares Less: Subscriptions receivable Paidi nc apital-Pref.s hares Paidi nc apital-Ordinarys hares Retained earnings Totalshareholders’equity

R/E

(228) (352) 1,280 P700 5. (B)

2,280,000 136,000 40,000 800,000

(760,000) 1,030,000 7,234,000 700,000 10,620,000

Note: Sec. 43 of the Corporation Code of the Philippines states that “ The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stoc k to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid”

288


Thus, the dividend on the subscribed share capital is paid to that shareholder because he was not yet declared delinquent by corporation.

SUMMARY OF ANSWER S: 1. B 2. C 3. C 4. C

5.

B

6.

C

PROBLEM 29-31 Question No.1 Preferenceshares,beg.

( C) P

800,000

Additionali ssue (20,000x P10) Total

200,000 P1,000,000

Question No.2 ( A) Ordinary shares,beg. Stockdividend(3,480sharesx P5)* Total

P 200,000 17,400 P 217,400

Outstandingshares,beginning Treasurysharesacquisition Treasurysharesre-issue Totaloutstandingshares Multiplied by: Dividendshares Question No.3

40,000 (8,000) 2,800 34,800 10% 3,480

( A)

Sharepremium,beg. P 384,000 Premium on treasury share re-issue (100,000 – (2,800 x P20) 44,000 Premium on preference share ssue (P15 – P10) x 20,000 shares 100,000 Premium on stock dividends (P12 – P5) x 3,480 shares 24,360 Totalsharepremium,end P 552,360 Question No.4 (D) Retainedearnings,beg. P 2,400,000 Add: Net Income UnadjustedN etIncome P 1,780,000 Overstatement in operating expenses 100,000 1,880,000 Less: Dividends Stock dividends (3,480 x P12) P 41,760 Cash dividends* 119,140 (160,900) Retainedearnings,adjusted P 4,119,100 Retained earnings, appropriated for treasury shares (104,000) Retained earnings, appropriated for plant expansion (1,200,000) Retained earnings, unappropriated P 2,815,100 * Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 289

P

100,000


Ordinarys hares (34,800+ 3,480) x P.50 Totalcashdividends

19,140 P 119,140

Question No.5 ( B) Treasury shares acquired (8,000x P20) Treasury shares reissued (2,800x P20) Treasuryshares,end

P 160,000 ( 56,000) P 104,000

* Computation of the Cash dividends Preferred stock dividends (80,000 + 20,000) x P1

P

Ordinarys hares (34,800+ 3,480) x P.50 Totalcashdividends

19,140 P 119,140

Computation of the net income: Net Income Unadjusted NetIncome Overstatement in operatinge xpenses Adjustednet income SUMMARY OF ANSWER S: 1. C 2. A 3. A 4. D

5.

100,000

P 1,780,000 100,000 P 1,880,000

B

ADJUSTING JOURNAL ENTRIES: a .

EntriesM ade Other 100 operating expense Cash

b .

c .

Ordinary shares Cash

160

Equipment

100

Ordinary shares (2,800 x P5) Share Premium

d .

Cash Preference shares

Shouldb ee ntries Dividends 100 payable 100

Cash

160

Treasury shares Cash

100

Equipment 14

86

300

Treasury shares (2,800 x 20) Share Premium-TS

Cash 300

Adjustinge ntries Dividends 100 payable

Other operation exp 160 Treasury shares 160 Ordinary shares 1 00 Ordinary shares 56 Share Premium 44

300

Preference shares (20,000 x P10) Share Premium-PS 290

200

100

Treasury shares (2,800 x 20) Share Premium-TS Preference shares Share Premium-PS

100 160 160 14 86

56

44 100 100

Chapter 29 – Shareholders’ Equity e .

f.

g .

h .

i.

Memoe ntry

Share Premium Ordinary shares No journal entry

Retained earningsunappropria ted Retained earnings appropriate d for plant expansion No journal entry

No journal entry

17.4 17.4

1,20 0

Retained earnings (40K-5,200) x 10% x P12) Share div. payable (34,800 x 10% x P5) Share premium Share div. payable Ordinary shares Retained* earnings Dividends payable Same

41,7 60

Retained earningsunappropria ted Retained earnings appropriate d for Treasury shares Income summary Retained earningsunappropria ted

104

17.4

24.3 6 17.4 17.4 119. 14 119. 14 AJE

Retained earnings (40K-5,200) x 10% x P12) Share div. payable (34,800 x 10% x P5) Share premium Share div. payable Share Premium Retained earnings Dividends payable NO

41,7 60

Retained earningsunappropria ted Retained earnings appropriate d for Treasury shares Income summary Retained earningsunappropria ted

104

17.4

24.3 6 17.4 17.4 119. 14 119. 14

1,20 0

* Computation of the Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800+ 3,480) xP .50 Total cash dividends Computation of the net income: Net Income UnadjustedN et Income Overstatement in

104

1,88 0 1,88 0

P

100,000

P

19,140 119,140

P

1,780,000

291

104

1,88 0 1,88 0


operatingexpenses Adjustedneti ncome

P

292

100,000 1,880,000

Chapter 30 – Book Value and Earnings Per Share

CHAPTER 30: BOOK VALUE AND EARNINGS PER SHARE PROBLEM 30-1 One Class of Shares Totalshareholders'equity Add:Subscriptionreceivable Total SHE excluding subscription receivable Divided by:O rdinarys hares outstanding* Book value per share

16,220,000 1,200,000 17,420,000 200,000 87.10

(A)

Sharesissued Add: Subscribed shares (P1,000,000 / P50 par) Less:Treasury shares Ordinary sharesoutstanding

200,000 20,000 20,000 200,000

PROBLEM 30-2 Two Classes of Shares - Pre ference and Ordinary Shares Total Preference shares: Shares par value Preference share capital issued 12,500 P5,000,000 Add:Subscribedpreferenceshares Total 12,500 P5,000,000 Less:Treasurysharesatpar Shares outstanding and total par value 12,500 P5,000,000 Total Shares par value 75,000 P3,000,000 75,000 P3,000,000 75,000 P3,000,000

Ordinaryshares: Ordinarys harec apitali ssued Add:Subscribedordinaryshares Total Less:Treasury sharesatpar Shares outstanding and total par value Totalshareholders'equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excessoverpar

15,000,000 5,000,000 3,000,000 7,000,000

CASE NO. 1 Question No. 1 & 2

Balances Preference dividend (5,000,000 x 8% x 4) Balancet o ordinarys hares

Excess

Preference

over par P7,000,000

shares P5,000,000

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

1,600,000

293

Ordinary shares P3,000,000

5,400,000


Total shareholders’ equity Divide by: Outstanding shares Book value per share

6,600,000 8,400,000 12,500 75,000 P528. 00 P112.00 CASE NO. 2

Question No. 3 & 4 Excess over par P7,000,000

Balances Preference dividend (5,000,000 x 8% x 4) Liquidation premium [(P420P400)x 12,500] Balancet o ordinarys hares Total shareholders’ equity Divide by: Outstanding shares Book value per share

Preference Ordinary shares shares P5,000,000 P3,000,000

(1,600,000)

1,600,000

(250,000) 5,150,000

250,000

5,150,000 6,850,000 8,150,000 12,500 75,000 P548. 00 P108.67

CASE NO. 3 Question No. 4 & 5 Excess over par P7,000,000

Balances Preference dividend (5,000,000 x 8% x 1) Balancet o ordinarys hares


(400,000) 6,600,000

Total shareholders’ equity Divide by: Outstanding shares Book value per share

4 00,000 6,600,000 5,400,000 9,600,000 12,500 75,000 P128.00

P432. 00 CASE NO. 4


Balances Preference dividend (5,000,000 x 8% x 4) Ordinary dividend (3,000,000 x8%x 1) Balance for participation Preference (5/8 x 5,160,000) Balancet o ordinarys hares

(1,600,000)

1,600,000

(240,000) 5,160,000 (3,225,000) 1,935,000

Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. A 2. A 3. B 4. D


240,000 3,225,000 1,935,000

9,825,000 5,175,000 12,500 75,000 P786. 00 P69.00 5.

C

6.

294

B

7.

D

8. C


PROBLEM 30-3 Book Valu e per Share Preference shares: Preference share capital issued Add:Subscribedpreferenceshares Total Less:Treasury sharesatpar Shares outstanding and total par value

Total Shares par value 40,000 P4,000,000 40,000 P4,000,000 40,000 P4,000,000

Ordinaryshares: Ordinarys harec apitali ssued Add:Subscribedordinaryshares Total Less:Treasurys haresatpar Shares outstanding and total par value

Shares par value 26,000 P1,040,000 26,000 P1,040,000 1,000 40,000 25,000 P1,000,000

Total

Totalshareholders'equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excessoverpar

11,970,000 4,000,000 1,000,000 6,970,000


Balances dividend Preference (40 00,000x 8% x4 ) Balancet o ordinarys hares Total shareholders’ equity Divide by: Outstanding shares Book value per share

Excess over par

Preference shares

P6,970,000

P4,000,000

(1,280,000) 5,690,000

12 80,000

Ordinary shares P1,000,000

5,690,000 5,280,000 6,690,000 40,000 25,000 P132. 00 P2 67. 6 0


Balances Preference dividend (4,000,000 x 8% x 4) Liquidation premium [(P105-P100) x 40,000] Balancet o ordinarys hares Total shareholders’ equity Divide by: Outstanding shares Book value per share

Excess over par P6,970,000


(1,280,000)

1,280,000

(200,000) 5,490,000

200,000

5,490,000 5,480,000 6,490,000 40,000 25,000 P137. 00 P259.60

295


CASE NO. 3 Question No. 5 & 6 Excess over par P6,970,000

Balances Preference dividend (4,000,000x 8% x 1) Balancet o ordinarys hares Total shareholders’ equity Divide by: Outstanding shares


(320,000) 6,650,000

320,000 4,320,000 40,000

Book value per share

P108. 00 CASE NO. 4

6,650,000 7,650,000 25,000

P306.00


Balances Preference dividend (4,000,000x 8% x 1) Balancet o ordinarys hares Total shareholders’ equity Divide by: Outstanding shares Book value per share

(320,000) 6,650,000

320,000

6,650,000 4,320,000 7,650,000 40,000 25,000 P108. 00 P306.00

Excess over par P6,970,000

Balances Preference dividend (4,000,000x 8% x 1) Ordinary dividend (1,000,000 x8%x 1) Balance for participation Preference (4/5 x 6,570,000) Balancet o ordinarys hares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. B 2. C 3. B 4. B



(320,000)

320,000

(80,000) 6,570,000 (5,256,000) 1,314,000

80,000 5,256,000

1,314,000 9,576,000 2,394,000 40,000 25,000 P239. 40 P95. 76

5.

C

6.

296

A

7.

D

8. D


PROBLEM 30-4 Weighted Average with Bonus Issue Outstanding Date Shares 01/01/2015 200,000 x 120% 240,000 03/01/2015 15,000x 120% 18,000 07/01/2015 (10,000) (10,000) 10/01/2015 4,000 4,000 Weighted average outstanding shares (A)

Fraction Average 12/12 240,000 10/12 15,000 6/12 (5,000) 3/12 1,000 251, 000

PROBLEM 30-5 Weighted Average with Share Split Outstanding Date Shares 01/01/2015 220,000 x 4/1 880,000 03/01/2015 12,000 x 4/1 48,000 04/01/2015 9,000 9,000 10/01/2015 6,000 6,000 Weighted average outstanding shares (A)

Fraction Average 12/12 880,000 10/12 40,000 9/12 6,750 3/12 1,500 928, 250

PROBLEM 30-6 Basic Earnings per Share QuestionNo. 1 (B) Basic EPS = [P3,000,000 / 40,000] = P75 per share QuestionNo. 2 (C) Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share QuestionN . 3 (C) Basic EPS = [P3,000,000 - (1 0,000 x 10% x P50)]/40,000= P73.75 per share

PROBLEM 30-7 Basic Loss per Share QuestionNo. 1 (B) Basic LPS = [P2,000,000 / 30,000] = P66.67 per share QuestionNo. 2 (C) Basic LPS = [P2,000,000 + (5,000 x 10% x P100)]/30,000= 68.33 per share QuestionNo. 3 (D) Basic LPS = [P2,000,000 + (60,000)]/30,000= P68.67 per share

PROBLEM 30-8 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P3,000,000 / 120,000 = P25 p er share

297


Question No. 2 P3,000,000 + [(P1,800,000 x 10%) x (1 – 30%)] Diluted = EPS 129,000 shares * Diluted EPS = P2 4.23 per share Weighted average of actual ordinary shares Add: Weighted average of potentia l ordinary shares from assumed conversion (1,800 x 5 x 12/12) Total weighted averageo f ordinary shares

120,000 9,000 129,000

Question No. 3 Diluted = P3,000,000 + [(P1,800,000 x 10% 8/12) x (1 – 30%)] EPS 126,000 shares * Diluted EPS = P2 4.48 per share Weighted average of actual ordinary shares Add: Weighted average of potentia l ordinary shares from assumed conversion (1,800 x 5 x 8/12) Total weighted averageo f ordinary shares

120,000 6,000 126,000

Question No. 4 Basic EPS

P3,000,000 123,750* P24.24

= =

Weighted averageo f actual ordinary shares Add: Issuance of shares related to conversion (1,800 x5x5/12) Total weighted average of actual ordinary shares issued Add: Assumed converted ordinary shares x months outstanding(1,800x5x7/12) Total weighted average outstanding ordinary shares

120,000 3,750 123,750 5,250 129,000

Question No. 5 P3,000,000 + [(P1,800,000 x 10% x 7/12) x (1 – 30%)] 129,000 shares * Diluted EPS = P2 3.83 per share Diluted EPS

=

SUMMARY OF ANSWERS: 1. A 2. D 3. B 4. D

5.

B

PROBLEM 30-9 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P4,000,000 / 200,000 = P20 p er share

298


Question No. 2 P4,000,000 + [(P1,123,910 x 10% x 8/12) x (1 – 30%)] 210,000 shares* Diluted EPS = P1 9.30 per share Diluted EPS

=

Weighted averageo f actual ordinary shares Add: Weighted average of potential ordinary shares from assumedc onversion(15,000 x8 /12) Total weighted averageo f ordinary shares

200,000 10,000 210,000

PROBLEM 30-10 Basic and Diluted EPS with Convertible Preference Shares Question No. 1 Basic EPS Basic EPS

P4,000,000 - [5,000 x P100 x 10%] 200,000 shares = P19.75 per share =

Question No. 2 Diluted EPS Diluted EPS

P4,000,000 225,000 shares* = P17.78 per share

=

*[200,000 + (5 x 5,000 x 12/12)] Question No. 3 P4,000,000

Diluted EPS

=

Diluted EPS

= P18.2218,750 9 per shshares are

*[200,000 + (5 x 5 000 x 9/12)] Question No. 4 Basic EPS Basic EPS

P4,000,000 – (5,000 x P100 x 10% x 9/12)] 206,250 shares = P19.21 per share =

*[200,000 + (5 x 5,000 x 3/12)] Question No. 5 Diluted EPS Diluted EPS

P4,000,000 225,000 shares = P17.78 per share

=

*[200,000 + (5 x 5,000 x 3/12) + (5 x 5,000 x 9/12)] SUMMARY OF ANSWERS: 1. A 2. D 3. C 4. C

5.

D 299


PROBLEM 30-11 Basic and Diluted EPS with Warrants and Options Question No. 1 Basic EPS = P4,000,000 / 100,000 = P40 p er share Question No. 2 Diluted EPS Diluted EPS

P4,000,000 101,200 shares * = P39.53 per share =

Weighted averageo f actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 12/12) Total weighted averageo f ordinary shares

100,000 1,200 101,200

Note: Months outstanding for assumed exercise of options is 12 months, which is from date of issu ance up to the reporting date. Option shares Multiplyb y: Totale xercise price( 120+10) Proceeds from assumed exercise of options Divided by: Average market price during the year Assumed treasuryshares Option shares Less:Assumedtreasuryshares Incrementalshares

9,000 130 1,170,000 150 7,800 9,000 7,800 1,200


P4,000,000 100 900 shares * = P39.64 per share =

Weighted averageo f actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 9/12) Total weighted averageo f ordinary shares

100,000 900 100,900


P4,000,000 104,667 shares * = P38.22 per share =

Weighted average of actual beginning ordinary shares Add: Weighted average number of shares from issuance of

100,000

options (9,000of x4/12) Totalshare weighted average actual ordinary shares issued Add: Weighted average of incremental shares from assumed exercise of options (2,500 x 8/12) Total weighted average outstanding ordinary shares

3,000 103,000

300

1,667 104,667


Option shares Multiplyb y: Totale xercise price( 120+10) Proceeds from assumed exercise of options Divided by:M arketp riceatexercise date Assumedtreasuryshares Option shares Less:Assumedtreasury shares Incrementalshares

9,000 130 1,170,000 180 6,500 9,000 6,500 2,500


2. C

3. B

4. D

PROBLEM 30-12 Multiple Potential Dilutive Securities QuestionNo. 1

Basic EPS Basic EPS

(A)

P2,360,000 – (60,000 x P100 x 6%) = 200,000 = P10 per share

Question No. 2 1) Check for initial test of dilution a. Options Dilutive. The exercise price (P50) is less than the average market price (P100). b.

Convertible preference . Theshares incremental EPS (P1.2) is less than the basic Probably dilutive EPS (P10). (P6,000,000 x 6%) Incremental EPS = (60,000 x 5) Incremental EPS = P1.2 per share

c.

Convertible bonds Probably dilutive. The incremental EPS (P.84 ) is less than the basi c EPS (P10). (P2,000,000 x 12%) x (1-30%) Incremental EPS = (P2,000,000/P1,000) x 100 Incremental EPS = P.84 per share

`

2) Rank the dilutive potential diluters from the most dilutive to the leas t dilutive. 1st Options 2nd Convertible bonds (incremental EPS of P.84 per share) 3rd Convertible preference share (incremental EPS of P1.2 per share) 3) Include potentially dilutive convertible securities one by one. Every time an item is included, calculate new earnings per share or new loss per share amount as follows: 301


Basic EPS from continuing operations Options Total Convertible Bonds payable Total Convertible Preference share Total

Profit *2,000,000

Ordinary shares 200,000

0 2,000,000 168,000 2,168,000 360,000 2,528,000

10,000 210,000 9.52 200,000 410,000 5.29 300,000 710,000 3.56

EPS 10

*Net Income less preference dividends [(P2,360,000 –(60,000 x P100 x 12%)] Answer: The final diluted EPS would be P3.56 per share. QuestionNo. 3

BasicE PS BasicE PS Q u e st i o n N o . 4

Diluted EPS Diluted EPS

(D)

(B)

P500,000 = 200,000 = P2.5 per share ( C) P500,000 = 710,000 = P. 70 per share

SUMMARY OF ANSWERS: 1 . A 2 . D 3. B 4. C

PROBLEM 30-13 Rights Is sue Fairvalue pershare–righton Less:Theoreticalvalueofoneright* Theoretical ex-rights fair valuep er share *Value of one right

=

150 –40 4* + 1

P P =

150 22 128

22

Adjustmentfactor (150/128)

1.17

Question No. 1 2014: Weighted average outstanding shares (40,000 x 1.17 x 12/12) Basic EPS (P562,500 /46,800)

(D)

302

46,800

P12.02 / sh are


Question No. 2 2015: Weighted average outstanding shares (40,000x1.17x3 /12) [(40,000+ 10,000)x9/12]

11,700 37,500

Basic EPS (P800,000/49,200)

(B)

Question No. 3 2016: Weighted average outstanding shares[(40,000 + 10,000) x 12/12] Basic EPS (P1,000,000 /50,000)

(A)

PROBLEM 30-14 Written Put Options Incremental shares

=

(P350 – P280) x 10,000 P280

(C) =

2,500 shares

Retained NetI ncome Earnings 2015 2016 12/31/16 Unadjusted **1,300,000 *500,000 1,800,000 1) (50,000) 50,000 (30,000) (30,000) 2) 3) 45,000 (45 000) 4) ***28,000 (28,000) 5) 5,000 (5,000) 6) (20,000) (20,000) 7) 8) 9) 1,328,000 422,000 1,750,000 Adjusted Item

* (P5 EPS x P1 ,000,000 / P10 par) ** (1,800,000 – 500,000 2015 net income) *** (P48,000 / 12 x 7 months) Question No. 1 (D) Refer to table above. Adjusted Net Income in 2016 is P422,000. (C)

303

50,000

P20p ers hare

PROBLEM 30-15 Comprehensive Problem

Question No. 2 Refer to table above.

49,200

P16.26 / sh are


Question No. 3 (C) EPS 2016 (P42 2,000 / 100,000 shares) = P4.22 Question No. 4 (B) Ordinarys harec apital,P10par Sharepremium Retained earnings, 12/31/2016 (as adjusted) Totalshareholders'equity Question No. 5

(B)

BVPS (P3,250,000 / 100,000) = P32.50 SUMMARY OF ANSWERS: 1. D 2. C 3. C 4. B

5.

B

304

1,000,000 500,000 1,750,000 3,250,000

Chapter 32 – Statement of Financial Position and Comprehensive Income

CHAPTER 32: STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME PROBLEM 32-1 Current and Noncurrent Assets Question No. 1 Cash Tradereceivables Inventory, including inventory expected in the ordinary course of operations to be sold beyond 12 months amounting to P800,000 Prepaid insurance Financial assets at fair value through profit or loss NoncurrentA ssets held fors ale building Total Current Assets (D)

400,000 1,500,000 1,200,000 240,000 300,000 650,000 4,290,000

Question No. 2 Financial assets at fair value through other comprehensive income 600,000 Financialassetsatamortizedc ost 1,000,000 Deferredtaxasset 150,000 Machinery 800,000 Accumulated depreciation (200,000) Landusedasaplant site 920,000 Total Noncurrent Assets 3,270,000 (C)

PROBLEM 32-2 Current and Noncurrent Assets Question No 1 Cash (1M+300,000+100,000-50,000-280,000) Accounts receivable (3M-200,000+50,000) Investments securities held for trading (1.8M-500,000) Inventories (800,000-200,000+(450,000/125%) Prepaid Expenses (only the prepaid insurance) Total Current Assets (A) Question No. 2 Cash in sinking fund Long-term investments Deposit to supplier for inventories to be delivered in 16 months Cash surrender value Property,plantandequipment Total noncurrent Assets

(A)

305

1,070,000 2,850,000 1,300,000 960,000 48,000 6,228,000

280,000 500,000 23,000 20,000 5,000,000 5,823,000


PROBLEM 32-3 Current and Noncurrent Liabilities Question No. 1 Bank overdraft Accounts payable (1M+25,000+100,000) Property dividendspayable Income taxpayable Notepayable,d ueJanuary31,2 016 Cash dividendspayable Financial liabilities at fair value through profit or loss Estimated expenses of meeting warranties Estimated damages as a result of unsatisfactory performance on a contract Loanspayable-current Total current liabilities (A) Question No. 2 Bondspayable Premiumonbondspayable Deferredtaxliability Mortgage payable Loanspayable-noncurrent Total noncurrent liabilities

(C)

300,000 1,125,000 400,000 300,000 500,000 80,000 130,000 335,000 268,000 100,000 3,538,000 3,400,000 200,000 400,000 1,000,000 400,000 5,400,000

PROBLEM 32-4 Shareholders’ Equity Ordinary share capital Sharepremium Subscribed ordinary share Subscriptionsreceivable Retained earnings unappropriated (6M-2M cost of treasury) Reserves: Retained earnings appropriated for treasury shares Reserveforcontingencies Unrealizedgain onFVTOCI Revaluationsurplus Cumulative translation adjustment – debit Total Less:Treasuryshares Total Shareholders' Equity (C)

306

10,000,000 1,000,000 100,000 (120,000) 4,000,000 2,000,000 3,000,000 1,000,000 4,000,000 (1,500,000) 23,480,000 2,000,000 21,480,000


PROBLEM 32-5 Adjusting and Nonadjusting events Lossonexpropriation Impairment loss on Accounts Receivable Litigationloss Total adjusting events

(A)

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

All other data are nonadjusting events.

PROBLEM 32-6: Related Party Relationship Requirement No. 1 The following companies are considered to be related parties of Frozen Throne Company in accordance with PAS 24 Related Party Disclosures: Name Description 1) Sand King Co. Post-employment benefit plan established by Frozen Throne 2) Shadow Fiend Co. Associate 4) Harbringer Co. Subsidiary 5) Night Crawler Co. Subsidiary of Harbringer 6) Disruptor Co. Associate of Harbringer 7) Geomancer Co. Parent 8) Jakiro Co. Parent ofG eomancer 9) Rylai Co. Sister company of Frozen Throne Company 10) Medusa Co. Key Management personnel of Frozen Throne Company. 11) BarathrumC o. Bank 16) Pudge Co. Joint venturer of Frozen Throne Company 17) Invoker Co. Joint venture of Frozen Throne Company Requirement No. 2 Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. Therefore, Frozen Throne Company should disclose Jakiro Co., its ultima te parent or controlling party.

PROBLEM 32-7 (Distribution costs and gener al and administrative expenses) Question No. 1 Advertising

500,000

Deliveryexpense Rentforo ffices pace(500,000X1 /2) Salescommissions Depreciationondeliverytruck Total distribution costs

(B) 307

300,000 250,000 1,075,000 14,000 2,139,000


Question No. 2 AuditingandAccounting fees Officers’salaries Rentforo ffices pace(500,000X1 /2) Insurance Depreciationonofficeequipment Total general and administrative expenses (D)

300,000 625,000 250,000 200,000 15,000 1,390,000

PROBLEM 32-8 Comprehensive Income Net Sales Cost of goodssold Grossincome Other income Shareofprofitof associate Totalincome Expenses: Distribution costs Administrativeexpenses Financecost Otherexpense Income beforeincome tax Income taxexpense Incomef romc ontinuingo perations Incomef rom discontinued operations

4,000,000 2,500,000 1,500,000 30,000 125,000 1,655,000 60,000 120,000 35,000 50,000

Net Income Other comprehensive income: Revaluationsurpus Translationgain Unrealized gain on FVTOCI securities Comprehensive income (C) Other income: Interestincome Other expense: Lossonsaleofequipment

1,082,000 300,000 50,000 200,000

30,000 50,000

308

265,000 1,390,000 408,000 982,000 100,000

550,000 1,632,000


COMPREHENSIVE PROBLEMS PROBLEM 32-9

Unadjusted balance 1. Notes receivable – maturity date July 1, 2018 Land 2. FVTOCI 3. Inventory 4. Treasuryshares 5. Prepaid insurance 10. Accumulated depreciation – Building Accumulated depreciation – Equipment Allowance for baddebts Adjustedbalance

Unadjusted balance 4. Treasuryshares 6 Bondspayable 7. Accruedwages 8. Mortgage – current portion 9. P remiumonbondspayable 10. Allowance for baddebts Accumulated depreciation – Building Accumulated depreciation – Equipment Adjustedbalance

SUMMARY OF ANSWERS: 1. B 2. A 3. A 4. B

5.

Current Asset 44,300 (10,000) (12,000) 4,600 30,500 2,900

(700) 59,600 1. (B)

Current Liabilities 66,600 (40,000) 4,100 4,000

34,700 3. (A)

A

309

Noncurrent asset 158,400 10,000

Total Asset 202,700 -

12,000 (4,600) (30,500) (1,800) (2,900) (21,000)

(1,800) (21,000)

(13,000)

(13,000)

106,600

Noncurrent liabilities 24,100 40 000 (4,100) (4,000) 4,300

-

(700) 166,200 2. (A)

Equity 112,000 (1,800)

(21,000)

(4,300) (700) (21,000)

(13,000)

(13,000)

60,300 4. (B)

71,200 5. (A)


PROBLEM 32-10

Unadjusted balances 1 2 3 4 5 6 7 8 9 10 11 Adjusted balances

Cash in bank 100 -

4(15) --

(14) 20 (5) -

-

-

-

-

-

-

- 101 1. (B)

-

-

1,849

-

-

500

112.5

112.5

-

-

-

Depreciation -

-

-

-

-

-

5 -

Accum. Depr 400

PPE 1,000

-

-60

-

-

-

Accts. Receivable 2,500

Inventory 1,800

(20) (4) 2,505 1,480

(4) 508.5

108.5

Continuation…

Unadjusted balances 1 2 3 4 5 6 7 8 9 10 11 Adjusted balances

Advances from customers -

4 -

5 -

Accounts payable 320 -

-

Interest Bonds payable payable 1,924,144 -

Discount -

Amortization -

-

14 20 (5) - - 60 180 75,856 63.442 12.414 5 413 180 1, 936,558 63.442 12,414 2. (B)

*000 Current Assets: Cash inbank Inventory Accounts Receivable Noncurrent assets: PPE Less: Accumulated Depreciation Totalassets

101,000 1,849,000 2,505,000 1,480,000 508,500

310

4,455,000

3.(A)

971,500 5,426,500

4.(B)


Current liabilities: Advances from customers Accountspayable Interestpayable

5,000 413,000 180,000

Noncurrent liabilities: Bondspayable Discount on bonds payable Totalliabilities

SUMMARY OF ANSWERS: 1. B 2. B 3. A 4. B

2,000,000 63,442

5.

B

6.

598,000

5.(B)

1,936,558 2,534,558

6.(C)

C

PROBLEM 32-11

1. EI over, COS under 2015 2016 2. Salaries expense under 2015 2016 3. Sales ov erstated 2015 2016 4 Expe nse ov rstated 2015 2016 5. Purch. Over, COS over 2015 2016 6. Sales und er 2015 2016 7. Bad debt under 2015(32.4+2.5) x2% 2016 (66.1+4) x 2%-698 8. Dep. Expense under 2015 2016 Adjusted bal.

Sales 385,000

2015 COS EI 157,600 98,500 6,200 (6,200)

OPEX 69,300

14,600

(1,700) (180)

(3,200)

2,500

698

14,500 385,800

311

160,600

92,300

98,918


1. EI over, COS under 2015 2016 2. Salaries expense under 2015 2016 3. Sales ov erstated 2015 2016 4. Expense overstated 2015 2016 5. Purch. Over, CO S over 2015 2016 6. Sales und er 2015 2016 7. Bad debt under 2015 (32.4+2.5) x 2% 2016(66.1+4) x2%-698 8. Dep. Expense under 2015 2016 Adjusted bal.

Sales 420,000

2016 COS EI 203,800 164,900 (6,200) 8,500 (8,500)

OPEX 76,700

(14,600) 17,300 1,700 (800) 180 (200) 3,200 (4,600) (2,500) 4,000

704

422,400

2 04,700

1 56,400

Question No. 6 (A) Sales LessCost ofsales GrossProfit LessOperatingexpenses AddOther income Netprofit Add: Retained earnings, beginning Retained earnings, December 31, 2015 )

385,800 160,600 225,200 98,918 2,100 128,382 23,400 151,782

Question No. 7 (C) Cost Less Accumulated depreciation (14,500 x 2) Book value of machinery, December 31, 2016

145,000 29,000 116,000

312

14,500 94,584


Question No. 9 (B) Accounts receivable, 2015 (32,400+2,500) Less: Allowance for bad debts (32,400+2,500) * 2% Netrealizablevalue

34,900 698 34,202

Question No. 10 (B) Sales2016 Less:Cost ofsales GrossProfit Less:Operatingexpenses Add:Otherincome Netincome

422,400 204,700 217,700 94,584 1100 124,216

SUMMARY OF ANSWERS: 1. C 2. C 3. D 4. A 5. C 6 . A 7. C 8. B 9. B 1 0. B

PROBLEM 32-12 Question No. 1 Unadjustedsales Less:Advances Adjusted Sales

4,323,600 132,000 4,191,600

(A)

Question No. 2 Carryingvalue( 100,000x70%^4*) Less:Recoverableamount(higher) Impairment loss (B) *future value after 4 periods = carry ing value after 4 periods. Question No. 3 Sales Add: Increase in raw materials (75,800 – 56,800) Increase in finished goods (130,700 – 105,800) Less: Purchaseo fr awm aterials Othere xpenses(seebelow) Wages and salaries (890,400 + 33,000) Amortization of development cost (648,000 / 3 x 4/12) Impairmentloss Depreciation [(567,000 – 402,000) x 30%] Tax expense (52,000 + 35,000 – 30,000) Net income (A)

313

24,010 23,000 1,010

4,191,600 19,000 24,900 (2,056,500) (522,100) (923,400) (72,000) (1,010) (49,500) (57,000) 553,990


UnadjustedOther Expense Add: Rent expense [10,000+ (4,000/4)**] Increase in accrued expense (26,700 - 17,000) Less: Taxsettlement Increase in prepaid expense (45,000 – 11,500) AdjustedOtherExpense

569,900 11,000 9,700 (35,000) (33,500) 522,100

**Since the deposit is non-refundable, this is recognized as additional expense over the lease term.

Questions No. 4 to No. 7 Current assets: Cashi nbank(41,850–33,000) Trade receivables and other receivables Raw materials Finished goods Prepaidexpense

8,850 245,800 75,800 130,700 45,000

Non-current assets: Intangible asset (648,000 – 72,000) Plant (567,000 – 402,000 – 49,500 – 1,010) Leasedeposit(4,000 –1,000) Total assets . (C

576,000 114,490 3,000 ) 5

Current liabilities: Tradeandotherpayables

693,490 1,199,640

156,700

Incometaxfromc payable Advances ustomers A cruedpurchases

52,000 132,000 26,700

Non-current liabilities: None Totalliabilities

-

367,400 6. (C)

367,400

Equity: Ordinary shares Retained earnings (553,990 – 1,750 deficit – 20,000) Total liabilities and shareholders’ equity SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. B

506,150 4. (B)

5.

C

6.

314

300,000 532,240

C

7.

A

7. (A) 832,240 1,199,640


PROBLEM 32-13 Question N os. 1 and 2 Unadjustednetincome 1) BD expense under, NI over (392,000 x 10% )37,000 2) Unreal. Gain (Loss) (81,000-78,000) and (62,000-81,000) 3) EI overstated, NI over EI overstated, NIover 4) *Expenseo ver,NIunder Depreciation expense under, NI over 5) **Gainon saleunder, NIunder 6) Exp.Over Adjustednet income

2015 195,000

2016 220,000 (2,200)

3,000 (4,000) 10,900

1,800 206,700 1.( B)

(19,000) 4,000 (6,100) (1,100) 2,500 (900) 197,200 2.( B)

*(Expenses recorded P12,000 should be (12,000-1,000)/10= 12,000-1,000) **NetSellingPrice 2,500 Less carrying amount Cost 17,500 Less Accumulated depreciation 17,500 0 Gain on sale 2,500

Question No. 3 Cash Accounts receivable (296,000-18,000) Tradings ecurities at Fairv alue Merchandise inventory (202,000-4,000) Prepaidi nsurance( 2,700-900) Total current assets (D) Question No. 4 Cash Accounts receivable (392,000 x 90%) Tradings ecurities at Fairv alue Merchandise inventory (207,000-6,100) Prepaid insurance Totalcurrentassets Property, plant and equipment (169,500+12,000-17,500) Less: Accumulated. Depreciation (121,600+1,100+1,100-17,500) NetBook value Total Assets

163,000 352,800 62,000 200,900 900 779,600 164,000

(B) 315

82,000 278,000 81,000 198,000 1,800 640,800

106,300 57,700 837,300


Question No. 5 Sharec apital(20,000xP10) Sharepremium Retained earnings (206,700+197,200+*52,000) Adjusted Shareholders' equity (A)

200,000 60,000 455,900 715,900

*(247,000-195,000)

SUMMARY OF ANSWERS: 1. B 2. B 3. C 4. B

5.

A

PROBLEM 32-14 Question No. 1 Unadjustedsales Less: Sale with a repurchase agreement (selling price) Adjusted Sales (B)

550,000 (10,000) 540,000

Note: The transaction should be reported as a financing arrangement, rather than sale. Hence, the company will instead report a liability and interest. Also, the cost sho uld be included as part of inventory. Question No. 2 Unadjustedcost ofsales Less: Sale with a repurchase agreement (cost) Add: Depreciation on Plant (see below) Depreciation onB uilding (35,000/ 14) Adjusted cost of sales (D) Depreciation of plant asset is com puted as follows: Plant asset classified as held for sale [(9,000 – 5,000) x 20% x 6/12] Remaining plant asset [(70,000 – 4,000) x 20%] Totalplant assetdepreciation Non-current asset held for sale: Fairvalue lesscosttosell Carrying value date of classification (4,000 – 400) Initial carryin g amount - LOWER Question No. 3 Sales Less:Cost ofsales Gross profit Less: Distribution cost Administrativeexpenses Interest [(700 + (10,000 x 10% x6 /12*)] 316

411,500 (7,000) 13,600 2,500 420,600

400 13,200 13,600

4,200 3,600 3,600

540,000 420,600 119,400 (21,500) (30,900) (1,200)


Provision for bonus (540,000 x1 %) Tax expense (increase in DTL an d CTL) – (27, 200 + 9,400 –1,200–6,200) Net income (A)

Question No. 4 Net income Add: Revaluation surplus (see computation below) Total comprehensive income (B) Land: Appraisedvalue Carryingamount

Questions No. 4 to No. 9 Current assets: Tradereceivables Inventory(43,700+7,000) Non-currentasset held for sale

35,000 30,000

42,200 50,700 3,600

Non-cur Land rent assets: Building( 35,000–2,500) Plant (66,000–13,200) Total assets

12,000 32,500 52,800

Current liabilities: Tradepayables Bank overdraft Currenttaxliability Provision –bonus

35,100 6,800 27,200 5,400

Non-current liabilities: Deferredtax liability Bank loan Interestpayable

9,400 10,000 500

Totalliabilities Equity: Equityshares Sharepremium Revaluationsurplus

(29,200) 31,200

31,200 7,000 38,200

12,000 10,000

Building: Appraisedvalue Less: Carrying amount (50,000 – 20,000) Totalrevaluation surplus

(5,400)

2,000

5,000 7,000

96,500 5. (D)

) (6. C 97,300 193,800

74,500 7. (C) (D 8.) 19,900 94,400

50,000 20,000 7,000 317


Retained earnings (11,200 + 31,200 – 20,000) Total liabilities and shareholders’ equity

22,400

9. (B) 99,400 1,199,640

Question No. 10 Net income Divided by: Weighted average shares (see below) Earnings per share (A)

31,200 96,739 3225

April 1 to July 1 (80,000* x 2 / 1.84** x3/12) July1t oMarch31(100,000x9/12) Weightedaveragen umberofs hares

21,739 75,000 96,739

*The number of shares before the exercise of the rights may be computed by dividing the ( ¼rights). **Adjustment factor. Value of one right

=

Value of one right

=

Fair value per share – right on minus exercise price Number of rights to purchase one share plus 1 -

4+ 1

= Fair value per share – rig ht on Less:T heoreticalvalueof oneright Theoretical ex-rights fair value per share

.16

SUMMARY OF ANSWERS: 1. B 2. D 3. A 4. B 5. D 6 . C 7. C 8. D 9. B 1 0. A

PROBLEM 32-15 Question No. 1 Inventoriesat30September2015 Add:Purchases Less: Inventories at 30 September 2016 Add: Depreciation – plant and machinery (see below) Add: Depreciation – ma chine classi fied as held for sale (8,2 00 x 20% 6/12) x Add: Impairment loss – noncurrent asset held for sale [(8,200 – 820) 6,500] – Adjusted Cost of Sales

31,800 344,000 27,300 46,485 820 880 396,685

(B)

Plant and Machinery Cost –balanceforward Less: Accumulated depreciation – balance forward 318

385,000 144,375


Less: Held fors ale asset – carrying amount Balance Less: Depreciation during the year (232,425 x 20%) Carryingamount–year end

8,200 232,425 46,485 185,940

Question No. 2 Trial balance Add: Depreciation – Property (14,500 + 30,000) - see below Add: Downward Valuation (480,000 – 456,000) Adjusted Admin Expense (C)

216,200 34,500 24,000 274,700

Property Valuations Property A Property B 372,000 1,080,000 (449,500) (600,000) (77,500) 480,000

Carrying amount – October 1, 2015 Valuation– October 1,2 015 Revaluation(gain)/loss Valuation– October1,2 015 Less: Depreciation (Property A: 31 years; PropertyB :3 0y ears) Carrying amount – October 1, 2016

449,500

600,000

(14,500) 435,000

(20,000) 580,000

Question No. 3 Trial balance Add:Provisioncharge( seebelow) Add:LeaseOther expense (seebelow) Adjusted Operating Costs

86,900 33,600 27,600 148,100

(C)

Provision – Onerous Lease Current liabilities [(3,000 – 2,300)x 12] Non-current liabilities (8,4000 x3 years) Total

8,400 25,200 33,600

Operating Lease Total Payments [(18,000 x 7 years) + (36,000 x 8 years)] Divided by: Operatingl easeexpensep eryear

414,000 15 years 27,600

Question No. 4 Revenue Less:Cost ofsales

1,057,000 396,685

Gross profit Less: Administrative expenses ( see No. 2) Other operating costs (see No. 3) Profitbefore tax Less: Tax

660,315 274,700 148,100 237,515 56,000

319


Profit after tax

181,815

(A)

Questions No. 4 to No. 8 Current assets: Inventories Tradeandotherreceivables Cash in bank

27,300 61,500 5,100 93,900 6,500

Non-currentassetheldf ors ale

Non-current assets: PPE (185,940 + 400,000 + 435,000 + 580,000) Total assets (D)

1,600,940 6.

Current liabilities: Tradeandotherpayables Incometax payable Provisions

199,800 56,000 8,400

Non-current liabilities: Leaseliability( 27,600–18,000) Provision Totalliabilities

9,600 25,200

Equity: Ordinary share capital

1,600,940 1,701,340

264,200 7. (A) 34,800 299,000

672,600

Revaluationsurplus Retainedearnings Total liabilities and shareho ders’ equity

135,000 594,740

Retained Earnings 576,875 181,515

Beginningbalance Total comprehensive income for the year (77,500 – 456,000) Dividend on ordinary shares Piecemeal realization of revaluation surplus Ending balance

SUMMARY OF ANSWERS: 1. A 2. C 3. D 4. A

100,400 5. (D)

5.

D

6.

320

(168,150) 4,500 594,740

D

7.

A

8. B

(B 8.) 1,402,340 1,701,340 Revaluation Surplus 518,000 (378,500)

(4,500) 135,000


PROBLEM 32-16 SUPPORTING COMPUTATIONS: Cost of Sales: Unadjustedbalance Add: Amortization of leased property [36,000 / (12 – 4)] Add: Amortization of leased plant (25,000 / 5) Add: Depreciation of other plant and equipment [(47,500 – 33,500) 20%] x AdjustedCostof Sales

2,800 311,000

Leased Property: Carrying amount – April 1, 2015 (48,000 – 16,000) Add: Revaluation surplus (36,000 – 32,000) Revaluedamount–April1,2015 Less: Amortization (36,000 / remaining life 8 years) Carryingamount–March3 1,2016

32,000 4,000 36,000 (4,500) 311,000

Leased Liability: Amortization Table: Principal Date Payment April 1, 2015 April1,2015 2,000 March3 1,2 016 6,000 March3 1,2 017 6,000


Amortization 2,000 3,700 4,070

Leased Plant: Fairvalue –April1, 2015 Less:Amort zation(25,000 /5years) Carryingamount–March3 1,2016

298,700 4,500 5,000

Present value 25,000 23,000 19,300 15,230 25,000 5,000 20,000

Deferred Tax: Deferred tax liability – March 31, 2016 (12,000 x 25%) Deferredtaxliability–April1,2 015 Decreaseindeferredtaxliability Question No. 1 Revenue Less:Cost ofsales Gross profit Less: Distribution costs Administrative expense (26,900 + 3,000 fraud) Finance cost (300 + 2,300 interest in the lease) Lossbeforetax Incomet ax benefit [(9,600 x 25%) + 200 – 800] Loss after tax (D) 321

3,000 3,200 200

350,000 311,000 39,000 16,100 29,900 2,600 (9,600) 1,800 (7,800)


Questions No. 2 to 5 Current assets: Inventory Trade receivables (28,500 – 4,000) Current tax refund (9,600x 25%)

25,200 24,500 2,400

Non-current assets: Leasedproperty Leased plant (25,000 –5,000) Owned plant (47,500 – 33,500 – 2,800) Total assets

31,500 20,000 11,200

Current liabilities: Tradepayables Bank overdraft Financel ease liability – current

62,700 114,800

27,300 1,400 4,070

Non-current liabilities: Finance lease liability – noncurrent Deferredtax liability Totalliabilities

32,770

15,230 3,000

Equity: Share capital Reserves: Sharepremium Revaluationsurplus

18,230 51,000 54,000

9,500 3,500

earnings TotalRetained shareholders’ equity

Statement of Changes in Equity: Share Capital Begbal 45,000 Prior period adjustment fraud – Restatedbalance Rights issue (see below) 9,000 Net loss Revaluationsurplus Piecemeal realization of R/S . Ending bal. 54,000

52,100

(3,200)

Share Premium 5,000

9,800 63,800

Revaluation Retained Surplus Earnings 5,100 (1,000) 4,100

4,500 (7,800) 4,000 . 9,500

(500)

500 3,500

(3,200)

The rights issue was 18 million shares (45,000/50 cents each x 1/5) at 75 cents = 13·5 million. Thi s equates to the balance on the susp ense account. Thi s should be recorded as 9 million equity shares (18,000 x 50 cen ts) and 4.5 million share pr emium (18,000 x (75 cents – 50 cents)). 322


The discovery of the fraud represents an error part of which is a prior period adjustment ( 1 million) in accor dance with PAS 8 Accounti ng policies, chan ges in accounting estimates and errors.

Question No. 6 Loss after tax Divided by: Weighted average shares (see below) Loss per share (B)

7,800 99,000

April 1 to December 31 (90,000 x 1.20 / 1.125* x 9/12) January1 toMarch31( 108,000x3/12) Weightedaveragen umberofs hares

72,000 27,000 99,000

*Adjustment factor. Value of one right

=

Value of one right

=

Fair value per share – right on minus exercise price Number of rights to purchase one share plus 1 -.

5+ 1

= Fair value per share–right on Less:T heoretical valueof one right Theoretical ex-rights fair value per share SUMMARY OF ANSWERS: 1. D 2. D 3. B 4. A

5.

B

6.

323

1.20 .075

B

Chapter 33 – Statement of Cash Flows

CHAPTER 33: STATEMENT OF CASH FLOWS PROBLEM 33-1 Cash flows and non-cash activities 1) Sale of common stock 2) Sale of land 3) Purchase of treasury stock 4) Merchandise sales 5) Issuance of long-term note payable 6) Purchase of merchandise 7) 8) 9) 10) 11) 12) 13)

Repayment of note payable Receipts from sale of half of investment in associate Employee salaries Sale of equipment at a gain Issuance of bonds Acquisition of bond of another corporation Acquisition of a 60-day treasury bills

14) 15) 16) 17) 18) 19) 20)

Purc hase of building Acquisition of a land und er a finance lease Collection of nontrade note receivable (principal amount) Loan to another firm Declaration of cash dividend Retirement of common stock Income taxes paid

F I F O F O FI O I F I Not reported** I NC I I NC F O

21) 22) 23) 24) 25) 26)

Issuance of short-term note p ayable to a supplier NC Sale of a copyright I Purchase of a treasury share of another corporat on I Payment of cash dividends F Receipt of dividends O Payment for the acquisition of additio nal 10% interest in a F** subsidiary 27) Payment of semiannual interest on bon ds payable F 28) Receipt of interest O 29) Increase in shareholders’ equity from a dividend NC reinvestment plan 30) Declaration of share dividend NC 31) Interest paid capitalized under PAS 23 I *Acquisition of 60-day treasury bills is transaction reclassifying cash to cash equivalent. **PFRS 10.23 Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (ie transactions with owners in their capacity as owners). PAS 7 par 42A Cash flows arising from changes in ownership interests in a subsidiary that do not

324


result in a loss of control shall be classified as cash flows from financing activities.

PROBLEM 33-2 Indirect Method - Operating Activities Net income Decreaseinaccountsreceivable Increaseinaccountspayable Depreciationexpense Net cash provided by operating activities

(A)

668,000 96,000 44,000 20,000 828,000

PROBLEM 33-3 Indirect Method - Operating Activities Net income Increaseinaccountsreceivable Decreaseinprepaidexpenses Increase in accumulated depreciation-depreciation expense Decreaseinaccountspayable Net cash provided by operating activities (A)

292,000 (40,000) 12,000 64,000 (16,000) 312,000

PROBLEM 33-4 Investing Activities Cash acquisition of fair value through other comprehensive securities Proceeds from sale of the company’s used equipment Purchase of equipment Net cash provided by investing activities

(B)

(100,000) 1,000,000 (560,000) 340,000

PROBLEM 33-5 Financing Activities Issuance of shares of the company’s own ordinary shares Dividends paid to the company’s own shareholders Repayment of principal on the company’s own bonds Net cash provided by financing activities (A)

680,000 (28,000) (160,000) 492,000

PROBLEM 33-6 Question No. 1 Cash receipts from receivable (216 + 800 – 324) Cash payment for purchases [(321 + 300 – 425) + 117 – 210] Cashd isbursement – (66 +4 0––102) 88) Cash disbursement –insurance salaries (93 + 120 Cashd isbursement–interest( 50–10) Cashd isbursement–tax(78+5 2– 60) Net cash provided by operating activities 325

(D)

692 (103) (18) (111) (40) (70) 350


Question No. 2 Net Income Depreciation Gain onsaleofbuilding Losson saleof machinery Increase in A/R DecreaseinInventory Decreaseinprepaidinsurance IncreaseinAccountsPayable

88 123 (11) 12 (108) 104 22 93

Increase insalariespayable Increase in DTL Bonddiscountamortization Net cash provided by operating activities

(D)

8 9 10 350

Note that cash flows for operating activities using direct or indirect method is the same.

COMPREHENSIVE PROBLEMS PROBLEM 33-7 Question No. 1

(B) Accounts receivable

Beg. balance – AR Sales on account

125,0000 1,000,000

Recoveries

-

Total

Question No. 2

1,125,000

0 150,000

Total

675,000

Beg. Balance Net Purchases (squeeze)

525,000 0

and

- Sales discounts Collections (squeeze) 990,000 - W ite-off 1,125,000

(C) Accounts Payable Trade

Payments (squeezed) Purchase returns and allow. Purchased iscounts Balance end – AP

Total

135,000 Balance end - AR - Sales returns allowance*

190,000 485,000

Beg. balance – AP Purchases

Merchandise Inventory 175,000 160,000 Balance end 485,000 500,000 Cost of Sales 660,000 326


Question No. 3

(D) Deferred income taxes

Payments (squeezed)

190,000

Balance end

85,000

Total

Question No. 4

175,000 Beg. balance 100,000 Income tax expense

275,000

(D)

Collectiono fa ccountsreceivable Paymentof accountspayable Paymentof income taxes* Paymentofo peratingexpenses Net cash prov ided by (or used in) Operating activit ies

990,000 (525,000) (190,000) (180,000) 95,000

*Computation of Payment of income taxes

Prepaid insurance Beg. Balance Payment (squeezed)

Total

25,000 40,000 Balance end 180,000 165,000 Operating expenses excluding depreciation (260,000-95,000) 205,000

Depreciation expense=245,000-150,000 =95,000

Question No. 5 Receipt of cash from note payable-bank (200,000-160,000) Issuance for cash of ordinary shares(225,000-200,000) Dividendspaid Net cash provided used in Financing activities (A)

40,000 25,000 (75,000) (10,000)

Question No. 6 *ProceedsfromSaleofi nvestment Cash acquisition of PPE (540,000-460,000) Net cash provided used in investing activ ities (B)

20,000 (80,000) (60,000)

Costo fi nvestment sold (190,000-180,000) Add:Gainon sale Proceedsfroms aleofi nvestment SUMMARY OF ANSWERS: 1. B 2. C 3. D 4. D 5.

10,000 10,000 20,000

A

6.

327

B


PROBLEM 33-8 Question No. 1 Beg. Balance Sales on account

Question No. 2

(A) Accounts receivable 600,000 1,250,000 Bal. end 5,000,000 4,330,000 Collections 20,000 Write-off 5,600,000 5,600,000 (B)

Bal. end Payment

Accounts payable 4,800,000 4,500,000 Beg. Balance 1,900,000 2,200,000 Net purchases 6,700,000 6,700,000


Merchandise inventory 2,000,000 2,200,000 Bal. end 2,200,000 2,000,000 Cost of goods sold 4,200,000 4,200,000

Question No. 3 (A) Net income Amortization of premium of Investment in Bonds Depreciation Gain onsaleofequipment

700,000 60,109 900,000 (220,000)

Amortizationof franchise Decrease (or increase) in Trading securities De rease(ori ncrease)inNetAR Decrease (ori ncrease) in Inventories Increase(ordecrease)inAP Increase(ordecrease) in DTL Net cash prov ided by (or used in) Operating activit ies

100,000 (450,000) (530,000) (200,000) 300,000 200,000 860,109

Computation of accumulated depreciation: Beg.Balance Add:Depreciationexpense Less: Accumulated depreciation of asset sold Balance end Gain or (loss) on sale NetSellingPrice Less: Carry ing amount Cost Less: Accumulated Depreciation Gain on sale

3,200,000 900,000 200,000 3,900,000 500,000 480,000 200,000

328

280,000 220,000


Amortization table: Interest Date Collection 01/01/2015 12/31/2015 480,000 12/31/2016 480,000 Question No. 4 AcquisitionofPPE Sale of PPE

Interest Income


425,355 419,891

54,645 60,109

Present value 4,253,552 4,198,907 4,138,798

(B) (1,000,000) 500,000

Net cash provided by (or used in) investing activities

Question No. 5 (D) Dividendspaid Cash receipts-issuance of OS (10,000 x 120) Cashp aidforT reasuryshares Net cash provided by (or used in) Financing activities SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. B

5.

(500,000) (300,000) 1,200,000 (500,000) 400,000

D

PROBLEM 33-9 Question No. 1 Bal. end Payment


(D) Accounts payable 3,400,000 3,500,000 Beg. Balance 1,900,000 1,800,000 Net purchases 5,300,000 5,300,000


Question No. 2 (B) Income tax payable/Deferred tax liability Bal. end-ITP 150,000 200,000 Beg. Balance-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 150,000 300,000 Income tax expense 1,000,000 1,000,000 Question No. 3 (A) Net income Share in the net income ofa ssociate Cash dividendsfromassociate

700,000 (1,024,000) 280,000 329


Depreciation Losson saleofequipment Amortizationof franchise Decrease (or increase) in Tradin g securities Decrease(ori ncrease)inNetAR Decrease(ori ncrease)in Inventories Increase(ordecrease)inAP Increase(ordecrease)inITP Increase(ordecrease)inDTL Net cash provided by (or used in) Operating activities

Year of Acquisition Percentageof ownership Cost of Investment Less: Book value of net asset acquired Excess ofc ost over book value Over or (under) valued asset Inventory Machinery Land Goodwill

200,000 100,000 100,000 (90,000) 200,000 (100,000) (50,000) 200,000 516,000

20% 4,000,000 2,400,000 1,600,000 (40,000) 240,000 1,800,000

Amortization of Over (Under) valued asset Inventory

2015 40,000

Machinery Divideby:Remaining life

(240,000) 10

Amortization of Under (over) valued asset No of monthsdivideby12(1st year) Amortization of Under (over) valued asset

(24,000) 1 (24,000)

2016

(24,000) 1 (24,000)

Net incomeo ft hea ssociate Multiplyb y: Percentage of ownership Shareinthenetincome

2015 2016 4,000,000 5,000,000 1,000,000 1,400,000 2015 2016 4,000,000 5,000,000 20% 20% 800,000 1,000,000

Dividends declareda nd paid Multiplyb y: Percentage of ownership Dividendsreceived

1,000,000 20% 200,000

Net incomeo ft hea ssociate Dividends declareda nd paid

2016 Investment Income ShareintheNetIncome Add: Amortization ofo vervalued machinery Netinvestmentincome-2016 Investment in Associate 330

1,400,000 20% 280,000 1,000,000 24,000 1,024,000


Beg.Balance Add:Netinvestmentincome Less:Dividendsreceived Balance end

4,584,000 1,024,000 280,000 5,328,000

Question No. 4 (B) Cashr eceiptfromloanreceivable AcquisitionofPPE Sale of PPE Net cash provided by (or used in) investing activities

120,000 (2,000,000) 500,000 (1,380,000)

Question No. 5 (D) Dividendspaid Cash receipts-issuance ofO rdinary shares Cash receipts-reissuance of Treasury shares Net cash provided by (or used in) Financing activities

(350,000) 1,120,000 105,000 875,000

SUMMARY OF ANSWERS: 1. D 2. B 3. A 4. B

5.

D

PROBLEM 33-10 Question No. 1 Bal. end

(D) Accounts payable 4,000,000 3,500,000

Payment

15,700,000 ,700,000 2,200,000 5,700,000 Net purchases



Beg. Balance

Question No. 2 (B) Income tax payable/Deferred tax liability Bal. end-ITP 150,000 200,000 Beg. Balance-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 270,000 420,000 Income tax expense 1,120,000 1,120,000 Question No. 3 (A) Net income Share in thenet income ofa ssociate Cashd ividendsfromassociate Depreciation

980,000 (630,000) 225,000 200,000 331


Losson saleofequipment Amortizationof franchise Amortization of disc on investment in bonds Decrease (or increase) in Net Accounts Receivable Decrease (ori ncrease) in Inventories Increase (or decrease) in Accounts Payable Increase (or decrease) in Income Tax Payable Increase (or decrease) in Deferred Tax Liability Net cash provided by (or used in) Operating activities

Amortization table: Interest Date Collection 01/01/2016 12/31/2016 100,000 12/31/2017 100,000

Interest Income 112,708 114,233

Year of Acquisition Percentageof ownership Cost ofInvestment Less: Book value of net asset acquired Excess ofc ost over book value Over or (under) valued asset Inventory Machinery Land Goodwill

150,000 100,000 (12,708) (90,000) (200,000) 500,000 (50,000) 200,000 1,372,292

Premium Amortization 12,708 14,233

Present value 939,230 951,938 966,170

25% 3,500,000 2,500,000 1,000,000 (50,000) 300,000 1,250,000

Amortization of Over (Under) valued asset Inventory

2015 50,000

Machinery Divideby:Remaining life Amortization of Under (over) valued asset No of monthsdivideby12(1st year) Amortization of Under (over) valued asset

(300,000) 10 (30,000) 1 (30,000)

2016

(30,000) 1 (30,000)

2015 2016 2,000,000 2,400,000 800,000 900,000 2015 2016 2,000,000 2,400,000 25% 25% 500,000 600,000

Net incomeo ft hea ssociate Dividends declareda nd paid Net incomeo ft hea ssociate Multiplyb y: Percentage of ownership Shareinthenetincome Dividends declareda nd paid Multiplyb y: Percentage of ownership Dividendsreceived

800,000 25% 200,000

2015 Investment Income 332

900,000 25% 225,000


ShareintheNetIncome Add: Amortization ofo vervalued machinery Less:Undervaluationofinventory Netinvestmentincome-2015

500,000 30,000 50,000 480,000

Investment in Associate Cost of investment Add:Netinvestmentincome Less:Dividendsreceived Balance end, 12/31/2015

3,500,000 480,000 200,000 3,780,000

2016 Investment Income ShareintheNetIncome Add: Amortization ofo vervalued machinery Netinvestmentincome-2016

600,000 30,000 630,000

Investment in Associate Beginningbalance,01/01/2016 Add:Netinvestmentincome Less:Dividendsreceived Balance end, 12/31/2016

Beg. Balance Acquisition cost Present value of MLP

3,780,000 630,000 225,000 4,185,000

Property, Plant and Equipment 9,000,000 900,000 C ost of equipment sold 600,000 9 ,069,180 bal. end 369,180 9,969,180 9,969,180

Accumulated depreciation Bal.e nd 3,000,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 400,000 200,000 Depreciation expense 3,400,000 3,400,000 NetSellingPrice Less: Carry ing amount Cost Less: Accumulated Depreciation Loss on sale

350,000 900,000 400,000

Question No. 4 (B) Casha cquisition ofI nvestment inB onds AcquisitionofPPE Sale of PPE Net cash provided by (or used in) investing activities Present Value of Periodic Payment (100,000 x 3.4869) Add: Present Value of Bargain Purchase option(30,000 x 0.683) 333

500,000 (150,000)

(939,230) (600,000) 350,000 (1,189,230) 348,690 20,490


Present Value ofM inimuml ease payments

Amortization table: Interest Date Payment 12/31/2016 12/31/2016 100,000 12/31/2017 100,000 Question No. 5


369,180


Present value 369,180 269,180 196,098

(D)

Payment of principal finance lease liability Dividendspaid Cash receipts-issuance ofO rdinary Shares Net cash provided by (or used in) Financing activities

(100,000) (350,000) 720,000 270,000

Share Capital Beginningbalance Issuancefor cash IssuancethruSDP Balance end

10,000,000 600,000 1,910,000 12,510,000

Share Premium Beginningbalance Issuancefor cash Balance end

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

Retained Earnings Beginningbalance Add:Netincome Less:Dividendsdeclared-cash Less:Sharedividend Balance end SUMMARY OF ANSWERS: 1. D 2. B 3. A 4. B

3,740,000 980,000 350,000 1,910,000 2,460,000

5.

D

PROBLEM 33-11 Question No. 1 Collection from customers (202M + 410M – 200M – 6M) Proceeds from investment income (4M + 5M – 6M) Proceedsfroms aleofc ash equivalent Payment of purchases [(205M + 180M -200M) + 65M – 50M] Paymentofi nsurance(4M+7M-8M) Paymentofs alaries(11M+65M–6M) Paymentofi nterest( 4M+25M–8M) Payment oft ax( 14M + 8M + 36M – 12M – 11M) 334

406M 3M 2M (200M) (3M) (70M) (21M) (35M)


(C)

82M

Question No. 2 Purchase of land(196M–150M) Proceeds from sale of major components of machine Purchase of long-term investment Proceeds froms ale ofl ong-term investment Net cash used from investing activities (C)

(46M) 17M (25M) 23M (31M)

Net cash provided from operating activities

Long-term Investment Beg.Balance Investment income (associate) Acquisition (Tory) Total

125M 6M 48M 179M

156M Bal.e nd 23M Disposal 179M

Question No. 3 Retirement ofbonds Proceeds fromi ssuanceofp referreds tock Acquisitionoftreasuryshares Dividends paid Net cash used from financing activities

Balancee nd

(60M) 75M (9M) (22M) (16M)

(A)

Retained Earnings 242M 227M Beg.Balance

Dividends Total

52M 294M

67M Netincome 294M

Total dividends Less: Stock dividends – small (4M shares x 7.50 fair value) Cash dividendspaid

52M 30M 22M

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

PROBLEM 33-11 Question No. 1 Overdraft end – Add:Bank,beginning Netc asho utflow

110 120 (230)

(A)

Question No. 2 Profitfor the year

135 335


Depreciation Amortization Increaseininventory( 200–110) Increase in trade receivable (195 – 75) Increaseintradepayable(210–160) Decrease in current tax payable( 80 – 110) Net cash from operating activities (D)

Question No. 3 Acquisition of PPE (see computation below) Acquisition of intangible assets (see computation below) Acquisitionofinvestment Net cash used in investing activities (A)

115 25 (90) (120) 50 (30) 85

(305) (125) (230) (660)

Balanceb eginning Acquisition Revaluation Total

PPE, net 410 680 Endingb alance - Disposal 305 80 115 Depreciation 795 795

Balanceb eginning Acquisition Revaluation Total

Intangible asse t, net 200 300 Endingb alance - Disposal 125 25 Amortization 325 325

Question No. 4 10%securedloannotes Issuanceofshares Dividends paid (seec omputation below) Net cash from financing activities Balancee nd Dividends Total

(C)

Retained Earnings 375 295 Beg.Balance 55 135 Net income 430 430

SUMMARY OF ANSWERS: 1 . A 2 . D 3. A 4. C

336

300 100 (55) 345


PROBLEM 33-13 Question No. 1 Cash Accountsreceivable Allowancef ord oubtfula ccounts Inventories Total current assets (A)

5,639,900 1,000,000 (180,000) 2,200,000 8,659,900

Question No. 2 Investment in bonds - FA at amortized cost Propertyp lant and equipment Accumulatedd epreciation Franchise -net Total noncurrent assets (A)

3,861,105 9,520,000 (3,900,000) 500,000 9,981,105

Totalassets

18,641,005

Question No. 3 Liabilities and equity Accountspayable Dividendspayable Total current liabilities

(A)

4,800,000 400,000 5,200,000

Question No. 4 Deferredtaxliability Total noncurrent liabilities

(C)

700,000 700,000

Totalliabilities

5,900,000

Question No. 5 Ordinary shares, P100 parv alue SharePremium Treasurysharesatc ost Retainedearnings Total shareholders' equity

11,000,000 1,200,000 (500,000) 1,041,005 12,741,005

(C)

Total liabilities and equity Beg. Balance Sales on account

Bal.e nd Write-off

18,641,005

Accounts receivable 600,000 1,000,000 Bal. end 5,000,000 4,600,000 Collections - Write-off 5,600,000 5,600,000 Allowance for doubtful accounts 180,000 40,000 Beg. Balance 140,000 Baddebts 180,000 180,000 337




Bal. end Payment

Accounts payable 4,800,000 4,500,000 Beg. Balance 1,900,000 2,200,000 Net purchases 6,700,000 6,700,000

Amortization table: Interest Date Collection 01/01/2015 12/31/2015 320,000 12/31/2016 320,000 12/31/2017 320,000 12/31/2018 320,000

Beg. Balance Acquisition cost PresentvalueofM LP

Interest Income 374,637 380,100 386,111 392,816

Discount Amortization 54,637 60,100 66,079 72,816

Present value 3,746,368 3,801,005 3,861,105 3,927,184 4,000,000

Property, Plant and Equipment 9,000,000 480,000 Cost of equipment sold 1,000,000 9,520,000 bal. end 10,000,000 10,000,000

Accumulated depreciation Bal.e nd 3,900,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 200,000 900,000 Depreciation expense 4,100,000 4,100,000 NetSellingPrice Less: Carry ing amount Cost Less: Accumulated Depreciation Gain on sale

500,000 480,000 200,000

280,000 220,000

Ordinary shares Beginningbalance Issuancefor cash Balance end

10,000,000 1,000,000 11,000,000

Share Premium Beginningbalance Issuancefor cash

1,000,000 200,000 338


Balance end

1,20,000

Retained Earnings Beginningbalance Add:Netincome Less:Dividendsdeclared-cash Balance end SUMMARY OF ANSWERS: 1. A 2. A 3. A 4. C

461,005 980,000 400,000 1,041,005

5.

C

PROBLEM 33-14 QuestionNo. 1 Ending balance Payment Total

QuestionNo. 2 Balance beginning Acquired–cash Acquired – lease Acquired – business combination Total

(C) Income tax payable 143,700 65,000 76,000 154,700 219,700 219,700

Beg. Balance Income tax expense

(C ) PPE, net 791,500 805,300 Ending balance 50,000 - Disposal 12,130 153,330 Depreciation 105,000 958,630

958,630

QuestionNo. 3 (A) Profitfor the year 471,440 Depreciation 153,330 Amortization 8,200 Shareinprofitofassociate (24,700) Increase in inventory (57,300 – 46,900) (10,400) Increase in trade and other receivables (excluding receivable (17,520) from business combination) – (75,900 – 51,930 – 6,450) Decrease in trade and other payab les (excluding re ceivable from (43,758) business combination) – (82,600 + 9,950 – 48,792) Increaseinincome taxpayable 87,800 Net cash provided by operatinga ctivities 615,292 QuestionNo. 4 (C) Proceeds from sale of license (see computation below) AcquisitionofPPE AcquisitionofHey Jude 339

21,600 (50,000) (10,000)


AcquisitionofYesterday Cash and cash equivalents acquired in business combination Net cash used by investing activities

Balance beginning Acquisition Goodwill* Total

(58,800) 8,700 (88,500)

Intangible asse t, net 33,450 28,800 Ending balance 8,200 Amortization 25,150 21,600 Disposal 58,600 58,600

Consideration transferred [(58,500 + (35,000 x 1.4)] Less:FVNAA(110,200x 75) Goodwill

QuestionNo. 5

107,800 82,650 25,150

()

PROBLEM 33-15 QuestionNo. 1 Beg. Balance Interestincome Total

QuestionNo. 2 Ending balance Payment Total

(A) Interest receivable – investing 10,500 1 2,500 Endingb alance 52,000 50,000 Collection 62,500 62,500 (A) Income tax payable 170,000 130,000 140,000 180,000 310,000 310,000

Beg. Balance Income tax expense

QuestionNo. 3 (B) Increase in cash and cash equivalents (12,500 – 400) Add:Decrease inbankoverdraft Netcashinflows Net income Depreciation Gaino nsale(450,000–324,500) Interest income – investing activities

12,100 3,500 15,600 834,900 560,000 (125,500) (52,000)

Decreaseininventory Decrease in trade and other r eceivables (exclud ing interest related to investing) – (495,100 – 415,600) Decrease in trade and other payables Decreaseinwarranty 340

56,400 79,500 (122,600) (30,000)


Increaseinincome taxpayable Net cash provided by operating activities

QuestionNo. 4 (A) Interest collected – investing activity Proceedsfroms aleofm achinery Proceeds froms ale off actory building Loans to unrelated parties (1,000,000 – 850,000) Acquisition of PPE (see computation below) Net cash used by investing activities

Balance beginning Acquisition Revaluation Total

Ending balance Transfer to R/E Total

40,000 1,240,700

50,000 450,000 340,000 (150,000) (2,022,500) (1,332,5000

PPE, net 1,594,400 2,567,400 Ending balance 324,500 Disposal - Machinery 2,022,500 220,000 340,000 Disused factory 560,000 Depreciation 3,791,900 3,791,900 Revaluation surplus 350,000 250,000 Balance beginning 120,000 220,000 R/S – current period 470,000 470,000

QuestionNo. 5 (C) Dividends paid (seec omputation below)

(42,600)

Proceeds from issuance of shares (100,000 x 1.50) Net cash provided from financing activities

150,000 107,400

Balance end Bonus issue* Transfer to R/E Dividends Total

Retained Earnings 1,478,300 876,000 Beg. Balance 310,000 834,900 Net income 120,000 42,600 1,830,900 1,830,900

*Total increase in share capital and share premium Less:Issuanceofshareforc ash Bonus issue

341

460,000 150,000 310,000

Applied Auditing 2017 Answer Key

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