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AUDITING
2016 EDITION
SOLUTION GUIDE
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CHRISTOPHER T. ESPENILLA, CPA MBA
FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY
REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY,
MANILA
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AUDITING (2016 EDITION) SOLUTIONS GUIDE
CTESPENILLA 1 of 155
CHAPTER 1: THE AUDIT PROCESS
DISCUSSION PROBLEMS
CHAPTER 2-PROBLEM 1
1 B
2 D
3 A
4 B
5 D
6 D
7 D
8 D
9 D
10 D
11 D
12 B
13 C
14 B
15 B
16 C
17 B
18 D
19 D
20 B
21 C
22 D
23 C
24 D
25 B
2. Ans. P2,250,000
Savings account at Rural Bank 2,750,000
Compensating balance - legally restricted (500,000)
Adjusted savings account at Rural Bank 2,250,000
3. Ans. Zero
The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset, that is the company
has no bank account with BDO.
4. Ans. P738,000.
Undeposited collections, unadjusted balance 1,278,000
Customer stale check - adjusted to AR (180,000)
Customer post-dated check - adjusted to AR (125,000)
Customer DAUD check - Adjusted to AR (155,000)
Officer's NSF check - Adjusted to AR-nontrade (80,000)
Adjusted undeposited collections 738,000
5. Ans. P18,500
Bills and coins 7,000
Replenishment check 11,500
Adjusted petty cash fund as of 12/31/14 18,500
6. Ans. P613,500
Travel fund 50,000
Interest and dividend fund 120,000
Payroll fund 400,000
Change fund 25,000
Petty cash fund 18,500
Adjusted cash fund - Cash and cash equivalent 613,500
7. Ans. P900,000
Debt security investment due 3/31/15 purchased 12/31/14 600,000
Preference shares redeemable on 2/28/15 purchased 12/1/14 300,000
Debt and equity securities - Cash and cash equivalent 900,000
8. Ans. P7,946,500
Adjusted current account at Metrobank 3,445,000
Adjusted savings account at Rural Bank 2,250,000
Adjusted undeposited collections 738,000
Adjusted cash fund - Cash and cash equivalent 613,500
Debt and equity securities - Cash and cash equivalent 900,000
Cash and cash equivalents, adjusted balance 7,946,500
9. Ans. P1,874,500
Customer stale check - adjusted to AR 180,000
Customer post-dated check - adjusted to AR 125,000
Customer DAUD check - Adjusted to AR 155,000
Officer's NSF check - Adjusted to AR-nontrade 80,000
Petty cash fund shortage - Adjusted to AR-custodian 1,500 *alternatively, this can be charged to other expense
Postage stamps - Office supplies 3,000
IOU from a key officer - AR-nontrade 30,000
Investment in debt security due 1/31/15 purchased 1/1/14 900,000 *classified as short-term investment
Ordinary shares - Trading securities/FA at FMV through P&L 400,000
Current assets (other than cash and cash equivalents) 1,874,500
4. Adjusting entries:
1 Transportation expense 500
Repairs and maintenance expense 300
Entertainment, amusement and representation expense 900
Due to employees 1,000
Petty cash fund 2,700
To record unreplenished paid vouchers.
3 Adjusting Entries:
(a) Cash in bank 8,000
Accounts receivables 8,000
3. Ans. No shortage.
AJEs:
(a) Office supplies expense (150-80) 70
Unused office supplies 80
Receivable from employee 300
Petty cash fund 450
To record unreplensihed expense vouchers as of December 31.
Reconciliation:
Petty cash fund, imprest balance 15,000
AJE (a) (450)
AJE (b) (14,503) (14,953) 2. ans. B.
Petty cash fund, adjusted balance 47 3. Ans. B.
Notes:
1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be
reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be
regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution).
2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement
was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31.
3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check
the same was also part of the valid supporting items. As an additional audit procedure, return of expense advance shall
be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be
returned back to the general cash of the company.
2. Ans. D.
Undeposited collections (as being reported) 3,000
Shortage 700
Accountability for cash on hand 3,700
3. Ans. B.
Correct cash balance per audit 14,450
Cash on hand/Undeposited collection (3,000)
Cash in Bank (excluding Cash on Hand) 11,450
2. Ans. B.
November Bank Service Charge 1,500
Decemeber Bank Service Charge 3,250
Bank Service Charge recorded per books in Dec. (2,500)
Unrecorded Bank Service Charge, Dec. 2,250
3. Ans. A.
Actual company collections in December 152,500
Book error, underfooting cash receipts (2,500)
Book receipts, December 150,000
4. Ans. C.
Outstanding checks, December 31 12,500
Add: Checks paid by bank in December 130,000
Total 142,500
Less: Outstanding checks, November 30 (16,250)
Checks issued in December 126,250
5. Ans. D.
Checks issued in December (4) 126,250
Add: Bank service charges recorded in
2,500
December
Book disbursements in December 128,750
6. Ans. A.
Book balance, December 31 37,500
Add: Book disbursements in December (5) 128,750
Total 166,250
Less: Book receipts in December (from number
(150,000)
3)
Book balance, November 30 16,250
2. Ans. D.
Balance per books, November 30 15,698
Total book receipts, December 371,766
Total book disbursements, December (377,668)
Balance per books, December 31, 9,796
3. Ans. C.
Check number 3408 440
Check number 3418 2,814
Check number 3419 5,788
Outstanding checks, December 31, 9,042
**Note that the entry to record the reversal of the dibursement check in which the company released a stop-payment order to the bank
will result both as a credit and debit in the company's books and will never be reflected as debit and credit on the bank records.
Thus, to reconcile, the same has been deducted both in the receipt and disbursement columns per books.
DISCUSSION PROBLEMS
CHAPTER 3-PROBLEM 1
1 A
2 B.
3 A.
4 A.
5 D.
6 B.
7 D.
8 D.
9 D.
10 D.
11 A.
12 C.
13 B.
14 A.
15 A.
16 D.
17 C.
18 B.
19 B.
20 A.
21 A.
22 D.
2. Ans. P107,537
Gross Accounts Receivable 124,500
Allowance for Sales Discount (P124,500*50%*25%)*5% (778)
Alowance for Bad Debts:
60 Days past due (P124,500*30%)*10% (3,735)
>120 Days past due (P124,500*20%)*50% (12,450) (16,185)
Amortized cost, 12/31/14 107,537
4. Ans. P330,720
Gross Accounts Receivable 366,000
Allowance for Doubtful Accounts (17,640)
Allowance for Sales Discounts (P252,000*20%)*10% (5,040)
Allowance for Sales Returns (P252,000*5%) (12,600)
Amortized Cost, 12/31/14 330,720
5. Ans. P25,320
Allowance for Doubtful Accounts, End 17,640
Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance 1,680
Write-of off Accounts 6,000
Bad debt expense for the year 25,320
3. Ans. P1,960,700
Gross Accounts Receivable 2,240,000
Allowance for DA (275,100)
Allowance for Sales Discount (P700,000*30%)*2% (4,200)
Amortized Cost, 12/31/14 1,960,700
Reconciliation of GL and SL
Per GL Per SL Current 1-60 d past 61-120 d past >120 d past Credit bal
Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)
Advances from Reomeo Co. 500,000 500,000 500,000
Posting error - - 600,000 (600,000)
Adjsuted balances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 -
Unreconciled difference (1. Ans.) (30,000)
Adjusted balance (2. Ans.) 14,120,000
Required allowance for Bad Debt as % 2% 5% 20% 50%
Required allowance for Bad Debt 1,328,500 122,000 222,500 534,000 450,000
3. Ans. P378,500
Allowance for BD, ending 1,328,500
Less: Allowance for BD, beg (950,000)
Bad Debt Expense 378,500
4. Ans. P12,791,500
Gross Accounts Receivable 14,120,000
Allowance for BD (1,328,500)
Amortized Cost, 12/31/14 12,791,500
Inventory 8,000
Income summary/Cost of sales 8,000
Per GL Per SL 1-60 days 61-120 days > 120 days Credit bal.
Unadusted balances 221,250 221,250 110,625 66,375 51,750 (7,500)
(a) Credit balance 7,500 7,500 7,500
(c) Customer Bee (13,800) (13,800) (13,800)
(d) Customer See and Dee - 16,600 (16,600)
(e) Customer Eee (11,600) (11,600) (11,600)
(f) Customer Eff (14,000) (14,000) (14,000)
(g) Customer Jeeh (6,000) (6,000) (6,000)
(h) Customer Eych (1,200) (1,200) (1,200)
Adjusted balances (2. Ans.) 182,150 182,150 81,825 48,575 51,750 -
Required allowance for BD in % 2% 10% 20%
Required allowance for BD (3. Ans.) 16,844 1,636.50 4,857.50 10,350.00
4. Ans. P1,844
Allowance for BD, ending 16,844
Less: Allowance for BD, beg. (7,500)
AJE a) Recovery of write-off (7,500)
Bad Debt Expense 1,844
2. Ans. P1,018,182
Amortization table: Loans Receivable/Notes Receivable
Correct Int. Nominal Int. Amortization Balance
January 1, 2014: 1,034,711
December 31, 2014: 103,471 120,000 (16,529) 1,018,182
December 31, 2015: 101,818 120,000 (18,182) 1,000,000
3. Ans. P373,944
Carrying value/Amortized cost 12/31/15 1,000,000 1
Accured interest, 12/31/15 120,000 2.48685
Total 1,120,000
Present value of new future cash flows at 10% for
3 periods with annuity P300,000*2.48685 746,056
Impairment loss 12/31/15 373,944
July 1, 2014:
Loans receivable 36,800
Interest income 36,800
Cash 750,000
Interest income 250,000
Loans receivable 500,000
SUMMARY
Interest Interest Current Non-current
Income Recevable Loans Rec. Loans Rec.
(a) DEF Corp, 10% - trade 581,586 - 4,908,330
(b) GHI, 12% - nontrade 240,000 - 2,000,000
(c) KLM - trade 300,526 - 3,305,785
(d) NOP - trade 545,809 225,000 4,350,816
Total 1,667,920 225,000 12,564,932 2,000,000
6. Ans. 7. Ans. 8. Ans. 9. Ans.
Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus
trade receivables are always current.
(b) Discounting of NR
Cash (Proceeds) 2,082,667
Notes receivable 2,000,000
Interest income (P2M*10%*4/12) 66,667
Gain on discounting 16,000
Maturity Value:
Principal Amount 2,000,000
Interest (P2M*10%) 200,000 2,200,000
4. Ans. 0
Since discounting was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the notes receivable has been derecognized/transferred.
5. Ans. P16,000.
Proceeds from discounting/Sales proceeds 2,082,667
Less: Carrying value of Notes Receivable 2,000,000
Interest from Jan. 1 to May 1 (4 mo.)
(P2,000,000*10%*4/12) 66,667 2,066,667
Gain on discounting 16,000
(b) Factoring of AR
Cash, net (350,000-10,000) 340,000
Receivable from factor 50,000
Allowance for BD 20,000
Loss on Factoring 90,000
Accounts receivable 500,000
Since factoring was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the accounts receivable factored has been derecognized/transferred.
4. Ans. (P90,000)
Net proceeds from factoring (350,000-10,000) 340,000
Add: Factor's holdback 50,000
Total/Net Sales proceeds from AR 390,000
Carrying value of AR
Gross Accounts receivable factored 500,000
Allowance for BD (20,000) 480,000
Loss of Factoring (90,000)
Note:
(a) The credit balances from customer accounts at P60,000 and P40,000 shall be presented as advances from customers (current liab.)
unless there is right of offset.
(b) The cash advances to subsidiary amounting to P800,000 shall be presented as an addition to the investment in subsidiary account in
the parent-company financial statements, thus is presented as LT Investment.
(c) The deposit on contract bids amounting to P500,000 shall be presented as Other Assets in the noncurrent asset portion of SFP.
(d) The advances to stockholders amounting to P2,000,000 is a non-trade, noncurrent receivable, thus is presented as Other Asset.
2. Ans. B.
Gross Accounts Receivable 2,375,000
Less: Allowance for DA, Dec. 31, 2014 (per aging) (700,000)
Amortized cost/Carrying value, Dec. 31, 2014 1,675,000
2. Ans. C.
Age of accounts Amount Allow in % Required Allow. In Amount
Current 1,686,400 2% 33,728
1 to 30 days past due 922,000 5% 46,100
31 to 60 days past due 384,800 10% 38,480
61 to 90 days past due 153,300 20% 30,660
Over 90 days past due 78,800 50% 39,400
Total 3,225,300 188,368
3. Ans. A.
Gross Accounts Receivable 3,225,300
Allowance for uncollectible accounts (188,368)
Amortized cost/Net realizable value 3,036,932
1. Ans. C.
*Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail. The adjusting entry shall be:
Sales 7,000
Accounts receivable 7,000
2. Ans. B.
Required allowance for BD, Dec. 31 88,700
Less: Allowance for BD, unadjusted balance (106,000)
Add: Additional write-off per audit 40,000
Additional bad debt expense per audit 22,700
Bad debt expense per books (P12.8M*2%) 256,000
Total bad debt expense per audit 278,700
3. Ans. C.
Gross Accounts Receivable 1,183,000
Less: Allowance for BD (88,700)
Amortized cost/Net realizable value 1,094,300
CHAPTER 3-EXERCISE 5: ROVERS INC. Dec. Nov. Oct. Sept. Aug. and prior
Customer Invoice date Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 days
Gudang 9/12/14 139,200 139,200
Tisoy 12/12/14 153,600 153,600
12/2/14 99,200 99,200
Gusoy 11/17/14 185,120 185,120
10/8/14 176,000 176,000
Naning 12/8/14 160,000 160,000
10/25/14 44,800 44,800
8/20/14 40,000 40,000
Nanong 9/27/14 96,000 96,000
Balong 8/20/14 71,360 71,360
Peejong 12/6/14 112,000 112,000
11/29/14 169,440 169,440
Total 1,446,720 524,800 354,560 220,800 235,200 111,360
1. Ans. D.
Allowance for BD, ending 120,320
Less: Allowance for BD, unadjusted (46,720)
Add: Write off of AR-Balong 71,360
Bad Debt Expense 144,960
2. Ans. C.
3. Ans. C.
Write-off of AR-Balong (71,360)
Unlocated difference (debited to Sales) (20,000)
Total adjustments to AR-GL (91,360)
4. Ans. A.
Gross Accounts Receivable 1,375,360
Allowance for Bad Debts (120,320)
Amortized cost/Carrying value 1,255,040
5. Ans. B.
AJE to record unreconciled difference:
Sales 20,000
Accounts receivable 20,000
Adjusting entries:
(a) Bad debt expense 1,296
Allowance for bad debt 1,296
To adjust the entry made upon recovery of previously written-off account, credited by the client to Bad Debt Expense account.
5. Ans. D.
Gross Accounts Receivable 798,960
Allowance for BD (19,057)
Amortized cost/Carrying value 779,903
1. Ans. A.
Sales 10,000
Accounts receivable 10,000
To record the unlocated difference (SL should prevail over GL)
4. Ans. D.
Allowance for BD, ending 46,020
Less: Allowance for BD, beg. (30,000)
Add: Write off of AR 24,000
Additional write-off per audit 72,000
Bad debt expense per audit 112,020
Bad debt expense per books 72,000
Additional bad debt expense per audit 40,020
AJE:
Bad debt expense 40,020
Allowance for bad debt 40,020
5. Ans. C.
Accounts receivable, Gross 1,227,000
Allowance for bad debts (46,020)
Amortized cost/Carrying vallue 1,180,980
CHAPTER 3-EXERCISE 9: MILK CORP. Dec. Nov. Oct. Sept. Aug. and prior
Customer Invoice date Invoice Amount 1-30 days 31-60 days 61-90 days 91-120 days more than 120 days
Zulu Inc. 12/6/14 42,000 42,000
11/29/14 63,540 63,540
Yankee Co. 9/27/14 36,000 36,000
8/20/14 26,760 26,760
Xylon Inc. 12/30/14 20,000 20,000
12/8/14 40,000 40,000
10/25/14 31,800 31,800
Whiskey Co. 11/17/14 69,420 69,420
10/9/14 66,000 66,000
Victory Corp. 12/12/14 57,600 57,600
8/20/14 37,200 37,200
Uniform Inc. 9/12/14 52,200 52,200
542,520 159,600 132,960 97,800 88,200 63,960
2. Ans. D.
Gross Accounts Receivable 470,320
Allowance for BD (31,413)
Amortized cost/Carrying value 438,907
3. Ans. A.
Allowance for BD, end 31,413
Add: Write off 52,200
Debit unadjusted balance 16,500
Bad debt expense 100,113
4. Ans. B.
Sales 7,480
Accounts receiavable 7,480
To adjust the unreconciled difference. (SL should prevail over GL)
i. Sales 4,500,000
Accounts receivable 4,500,000
(no adjustment to subsidiary- aging)
l. Inventory 6,920,400
Cost of sales 6,920,400
(3,925,500+4,500,000+225,000)*80%
1. Ans. D.
Cash, Unadjusted balance (90,000)
(a) (67,500)
(b) (189,000)
(c) 107,550
(d) 115,650
(e) 258,000
(f) (57,900)
(g) 3,207,900
Cash, adjusted balance 3,284,700
2. Ans. C.
Cash in bank, BADO (3,150,000)
(f) (57,900)
Cash in bank, BADO (total overdraft)(3,207,900)
4. Ans. C.
Bad debt expense per books 435,900
Additional bad debt expense per audit' 880,763
Bad debt expense per audit 1,316,663
5. Ans. C.
Gross Accounts Receivable 58,740,900
Allowance for bad debt (2,568,293)
Amortized cost/Carrying value 56,172,607
6. Ans. D.
Inventory, unadjusted balance 55,558,140
(l) 6,920,400
Inventory, adjusted balance 62,478,540
2. Ans. C.
Carrying value/Amortized cost (12/31/15) 981,481
Accrued interest (as of 12/31/15) 60,000
Total receivables as of 12/31/15 1,041,481
Present value of new cash flows at original eff. % (8%)
Due 12/2016: P300,000*0.925926 277,778 0.925926
Due 12/2018: P300,000*0.793832 238,150 515,927 0.793832
Impairment loss 525,554
3. Ans. C.
1. Ans. B.
Amortization table: Loans receivable
Correct Int. Nominal Int. Amortization Balance
December 31, 2013: 3,874,000
December 31, 2014: 358,345 320,000 38,345 3,912,345
December 31, 2015: 361,892 320,000 41,892 3,954,237
December 31, 2016: 365,763 320,000 45,763 4,000,000
2. Ans. D.
Amortized cost/Carrying value (12/31/15) 3,954,237
Accrued interest (12/31/15): 320,000
Total receivables as of 12/31/15 4,274,237
Less: Present value of new future cash flows at 9.25%
Due 12/31/2017: (1.4M*0.837832) 1,172,965 0.915332
Due 12/31/2018: (P1M*0.766895) 766,895 0.837832
Due 12/31/2019 (P600K*0.701963) 421,178 0.766895
Due 12/31/2020: (P400K*0.642529) 257,012 2,618,049 0.701963
Impairment loss 1,656,188 0.642529
2. Ans. D.
Assignment is only a loan transaction, thus there is no transfer of receivable.
3. Ans. A.
Accounts receivable-assigned 800,000
May collection with sales discount (P200,000+P5,000) (205,000)
June collection with sales discount (P150,000+P4,000) (154,000)
Sales returns (30,000)
Accounts written-off as worthless (20,000)
Accounts receivable-assigned - June 30 391,000
4. Ans. B.
Payment Interest Principal Balance
(Bal*24%*1/12) (Payment-Int)
Loans payable balance, May 1 500,000
May 31 remittance 200,000 10,000 190,000 310,000
June 31 remittance 150,000 6,200 143,800 166,200
5. Ans. B.
Proceeds from discounting ** 625,400
Less: Carrying value of Notes (600,000)
Interest receivable up to Oct. 31 (P600K*12%*4/12) (24,000)
Gain on Discounting 1,400
** Proceeds from discounting
Maturity value
Principal amount 600,000
Interest (P600,000*12%*6/12) 36,000 636,000
Discount (P636,000*10%*2/12) (10,600)
Proceeds from discounting 625,400
DISCUSSION PROBLEMS
CHAPTER 4-PROBLEM 1
1 B.
2 D.
3 D.
4 C.
5 B.
6
7
1 A
2 D
3 C
4 B
5 A
6 B
7 D
8 D
9 B
10 B
11 D
12 A
13 C
Inventory 58,040
Income summary 58,040
3. Ans. P2,439,140
Inventory, Nov. 1, 2013 235,000
Net Purchases, as adjusted 2,616,680
Cost of goods avaialble for sale 2,851,680
Inventory, Oct. 31, 2014, as adjusted (412,540)
Cost of Sales 2,439,140
2. Ans. P48,000.
Merchandise Inventory, Jan. 1 120,000
Purchaes (Jan. 1 to Oct. 31) 830,000
Transportation-in 20,000
Purchase returns and allowances (10,000) 840,000
Actual cost of goods available for sale 960,000
Less: Estimated cost of sale* (864,000)
Estimated inventory, October 31 96,000
Inventory not damaged by fire 48,000
Inventory loss due to fire 48,000
2. Ans. P1,850,000.
Gross Sales 2,225,000
Less: Sales returns (25,000)
Sales for inventory estimation 2,200,000
3. Ans. P400,000.
Inventory, December 31, 2013 320,000
Purchases 1,410,000
Unrcorded purchases 10,000
Advances to suppliers recorded as purch. (20,000) 1,400,000
Cost of goods available for sale 1,720,000
Less: Estimated cost of sales (P2.2M*60%) (1,320,000)
Estimated Inventory, December 31, 2014 400,000
4. Ans. P80,000.
Estimated Inventory per audit 400,000
Inventory per books 320,000
Inventory shortage 80,000
1. Ans. 20%.
Sales, 11 months 840,000 100%
Cost of sales, 11 months 672,000 80%
Gross profit, 11 months 168,000 20%
2. Ans. P98,000.
Sales, 12 months 960,000
Sales, 11 months (840,000)
Sales for the month of June 120,000
e) Sales in June at 0% GP (10,000)
Sales for June at 20% GP 110,000
Multiply by Cost% 80%
Cost of sales (Sales at 20%GP) 88,000
Add: Cost of sales (Sales at 0%GP) 10,000
Total Cost of Sales for June 98,000
3. Ans. P114,000.
Inventory, July 1, 2013 87,500
Purchases, 12 months 796,500
Cost of goods available for sale, 12 months 884,000
Less: Cost of sales, 12 months (P672,000+P98,000) (770,000)
Estimated Inventory, June 30, 2014 114,000
2. Ans. P105,000.
Sales, Jan 1 - March 31 90,400
Collections from customers, Apr. 1 - 15 10,200
Add: AR, April 15 26,400
Write-off of receivables 5,000
Less: AR, March 31 (27,000) 14,600
Sales, Jan. 1 - Apr. 15 105,000
3. Ans. 45%
Total Sales 2012 and 2013 700,000 100%
Cost of sales 2012 and 2013 385,000 55%
Gross profit 2012 and 2013 315,000 45%
4. Ans. P43,000.
Inventory, Dec. 31, 2013 50,000
Purchases, Jan. 1 - Apr. 15 50,750
Cost of goods available for sale 100,750
Estimated cost of sales (105K*55%) 57,750
Estimated Inventory, Apr. 15 43,000
5. Ans. P39,650.
Estimated Inventory, Apr. 15 43,000
NRV of remaining inventory (3,350)
Inventory Loss 39,650
1. Ans. P236,220.
Inventory, End at retail price 381,000
Conservative Cost % 62%
Inventory, End at cost 236,220
2. Ans. P247,645.
Inventory, End at retail price 381,000
Average Cost % 65%
Inventory, End at cost 247,645
2. Ans. P251,460.
Inventory, End at retail price 381,000
FIFO Retail Cost % 66%
Inventory, End at cost 251,460
3. Ans. P1,105,000.
Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.
A B C
Cost 250,000 500,000 400,000 1,150,000
Current purchase price 250,000 480,000 375,000
Required allowance for write-down - 20,000 25,000 (45,000)
1,105,000
4. Ans. P855,000.
Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.
X Y Z
Cost 400,000 300,000 200,000 900,000
Current purchase price 450,000 275,000 180,000
Required allowance for write-down - 25,000 20,000 (45,000)
855,000
5. Ans. P825,000.
Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down.
D E
Cost 375,000 450,000 825,000
6. Ans. P103,000.
Allowance for WD-FG, ending 23,000
Less: Allowance for WD-FG, beg. (10,000)
Loss on write-down - FG 13,000
6. Ans. B.
Current Assets
Cash 668,600
Accounts receivables 2,564,000
Merchandise inventory 6,035,000 9,267,600
Current Liabilities
Accounts payable 4,615,900
Accrued expense 60,400 4,676,300
Working Capital Ratio 1.98
CHAPTER 4-EXERCISE 7:
Accts Receivable
Inventories Sales Cost of Sales Gross profit
276,500 425,000 1,320,000 842,000 478,000
December recorded sales:
In-tansit FOB, Dest. (8,680) 7,240 (8,680) (7,240) (1,440)
Sipment to consignee (14,200) 12,500 (14,200) (12,500) (1,700)
In-tansit FOB, Dest. (10,000) (10,000) (10,000)
In-transit FOB, SP (6,100) 6,100 (6,100)
Sipment to consignee (14,000) (14,000) (14,000)
January recorded sales:
In-transit FOB, SP 21,000 (18,200) 21,000 18,200 2,800
Adjusted balance 250,620 420,440 1,294,120 846,560 447,560
1. Ans B. 2. Ans. B. 3. Ans. A. 4. Ans. C. 5. Ans. D.
2. Ans. D.
** Sales 150,000
Multiply by Cost rate (100%-32.5%) 68%
Estimated cost of sales 101,250
2. Ans. A.
Collections from customers Jan. 1 to Sept. 1 6,030,400
Add: AR, Sept. 1 1,031,120
Less: AR, Jan. 1 (1,044,720)
Gross sales (accrual basis) 6,016,800
3. Ans.
Payments to suppliers Jan. 1 to Sept. 1 3,900,000
Add: AP, Sept. 1 982,800
Less: AP, Jan. 1 (705,120)
Gross purchases (accrual basis) 4,177,680
4. Ans.
Inventory, Jan. 1 1,150,800
Purchases 4,177,680
Cost of goods available for sale 5,328,480
Less: Estimated cost of sales
Sales 6,016,800
Multiply by: Cost % (100%-30%) 70% (4,211,760)
Estimated Inventory, Sept. 1 1,116,720
5. Ans. A.
Estimated Inventory, Sept. 1 1,116,720
Goods out on consignment 390,000
Goods in transit as of Sept. 1 139,000 529,000
Inventory loss 587,720
2. Ans. A.
Sales (12 months), as adjusted (for GP Method)(d) 6,575,000
Sales (10 months), as adjusted (for GP Method) (4,590,000)
Gross Sales for 2 months (for GP Method) 1,985,000
Less: Sales in Dec. at 10% mark-up on cost (110,000)
Sales in Dec. at normal 50% mark-up 1,875,000
Multiply by normal Cost %, under normal GP% 50%
Cost of sales at normal GP rate 937,500
Add: Cost of sales 10% markup on cost 100,000
Total cost of sales for 2 months 1,037,500
3. Ans. D.
Cost of Sales (10 months, see number 1
2,295,000
solution)
Cost of Sales (2 months, see number 2
1,037,500
solution)
Total Cost of Sales 3,332,500
4. Ans. B.
Inventory, beginning 450,000
Add: Net Purchases (12 months)
Gross Purchases 3,410,000
Freight in 90,000
Purchase discount (70,000)
Purchase returns and allowance (100,000) 3,330,000
Cost of Goods Available for Sale (12 months) 3,780,000
Cost of Sales 12 months (see number 3 solution) (3,332,500)
Estimated ending inventory 447,500
1. Ans. B.
2. Ans. C.
Estimated Inventory at Retail 1,685,000
Multiply by Cost % - Conservative 56%
Estimated Inventory at Cost 943,600
Less: Inventory per count (649,600)
Inventory shortage 294,000
3. Ans. C.
Estimated Inventory at Retail 1,685,000
Multiply by Cost % - Conservative 61%
Estimated Inventory at Cost 1,027,850
Less: Inventory per count (649,600)
Inventory shortage 378,250
1. Ans. B.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 58%
Estimated Inventory at Cost 652,500
Less: Inventory per count (400,000)
Inventory shortage 252,500
2. Ans. A.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 62%
Estimated Inventory at Cost 697,500
Less: Inventory per count (400,000)
Inventory shortage 297,500
3. Ans. C.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 63%
Estimated Inventory at Cost 708,750
Less: Inventory per count (400,000)
Invntory shortage 308,750
3. Ans. B.
Class Z: Quantity Unit Cost NRV Total Cost Total NRV LCorNRV
Z-01 10,000 20 25 200,000 250,000
Z-02 15,000 25 22 375,000 330,000
Z-03 20,000 30 26 600,000 520,000
Z-04 25,000 32 35 800,000 875,000
Z-05 30,000 35 30 1,050,000 900,000
3,025,000 2,875,000 2,875,000
Class Y:
Y-01 20,000 22 23 440,000 460,000
Y-02 22,000 28 25 616,000 550,000
Y-03 28,000 25 30 700,000 840,000
Y-04 25,000 30 25 750,000 625,000
Y-05 30,000 15 25 450,000 750,000
2,956,000 3,225,000 2,956,000
5,831,000
2. Ans.
Total Cost 5,981,000
Lower of Cost or NRV 5,831,000
Loss on inventory write-down 150,000
1. Ans. B.
Total Cost 72,880
Lower of cost or NRV 69,000
Loss on write-down 3,880
2. Ans. B.
Total Cost 72,880
Lower of cost or NRV 69,000
Allowance for write-down, end 3,880
Allowance for write-down, beg. 2,000
Loss on write-down 1,880
3. Ans. B.
Total Cost 72,880
Lower of cost or NRV 69,000
Allowance for write-down, end 3,880
Allowance for write-down, beg. 5,000
Gain on recovery (1,120)
4. Ans. C.
2. Ans. B.
Work-in-process Item A Item B Item C
Direct Materials 30,000 45,000 75,000
Direct Labor 50,000 65,000 35,000
Overhead 25,000 40,000 80,000
Total Cost 105,000 150,000 190,000
Selling price upon completion 200,000 250,000 240,000
Cost to complete (50,000) (60,000) (40,000)
Cost to sell (% of Sellin price) (40,000) (75,000) (24,000)
NRV 110,000 115,000 176,000
Lower of cost or NRV 105,000 115,000 176,000 396,000
3. Ans. B.
RM - Item A (FG not written-down, thus RM - Item A shall not be tested anymore.
RM A-01 RM A-02
Cost 120,000 95,000 215,000
RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore.
RM C-01 RM C-02
Cost 175,000 40,000 215,000
Total Lower of Cost or NRV 708,000
4. Ans. D.
FG WIP RM
Cost 2,500,000 445,000 725,000
Lower of Cost or NRV 2,350,000 396,000 708,000
Loss on write-down 150,000 49,000 17,000 216,000
5. Ans. B.
Cost 2,500,000 445,000 725,000
Lower of Cost or NRV 2,350,000 396,000 708,000
Allowance for WD, ending 150,000 49,000 17,000
Allowance for WD, beginning 60,000 70,000 -
Loss on WD(Recovery gain) 90,000 (21,000) 17,000 86,000
DISCUSSION PROBLEMS
CHAPTER 5-PROBLEM 1
1 D
2 A
3 C
4 C
5 C
6 D
7 A
8 A
4. Ans. P1,025,312.
FA at FMV 250,000
Unrealized holding gain 250,000
Fair Value (12/14): P1M*120% 1,200,000
Carrying value 950,000
Unrealized holding gain - P/L 250,000
2. Ans. P261,104.
Transaction cost (Expense) (88,896)
Interest income 100,000
Unrealized holding gain 250,000
Net investment income 261,104
3. Ans. (P50,000)
Interest income 100,000
Unrealized holding loss (150,000)
Net investment loss (50,000)
4. Ans. P1,050,000.
5. Ans.0
Sales proceeds (1/1/16) 1,050,000
Less: Carrying Value/FMV, 12/31/15 1,050,000
Realized gain on sale -
2. Ans. P93,501
Interest income - P/L (2014) 93,501
3. Ans. (P142,916)
Unrealized holding loss - OCL of SCI (2015) (142,916)
4. Ans. P24,688.
Unrealized holding gain - SHE, end 24,688
5. Ans. P1,050,000.
4. Ans. P10,497,370.
FA at FMV 213,759
Unrealized holding gain 213,759
Fair Value (12/14)** 10,971,916
Carrying value 10,758,157
Unrealized holding gain - P/L 213,759
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425) 7,084,252 0.708425
Interest: (P1,200,000*3.239720) 3,887,664 3.239720
FMV (12/14) 10,971,916
2. Ans. P1,413,759.
Interest income 1,200,000
Unrealized holding gain 213,759
Net investment income 1,413,759
FA at FMV 58,923
Unrealized holding gain - P/L 58,923
Fair Value (12/15)** 11,030,839
Carrying value 10,971,916
Unrealized holding gain - P/L 58,923
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832) 7,938,322 0.793832
Interest: (P1,200,000*2.577097) 3,092,516 2.577097
FMV (12/15) 11,030,839
3. Ans. P1,258,923.
Interest income 1,200,000
Unrealized holding gain 58,923
Net investment income 1,258,923
4. Ans. P11,030,839.
2. Ans. P1,075,816.
Interest income - P/L (2014) 1,075,816
3. Ans. P195,526.
Unrealized holding gain - OCI of SCI (2015) 195,526
4. Ans. P533,468
Unrealized holding gain - SHE, end 533,468
5. Ans. P11,030,839.
2. Ans. P6,229,862.
3. Ans. 0.
The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015. Instead what shall be recognized is the
unrealized holding gain or loss from the FA's remeasurement since it will still be treated as FA at FMV at the end of 2015.
2. Ans. (P138,865)
Proceeds from sale (P5,897,249*4/6) 3,931,499
Carrying value (P6,105,546*4/6) 4,070,364
Realized loss on partial sale (138,865)
3. Ans. 0.
The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015.
4. Ans. P7,345.
Unrealized gain/loss on transfer on Janaury 1, 2016:
FMV of remaining investment (P5,897,249*2/6) 1,965,750
Carrying value of remaining inv. (P6,105,546*2/6) 2,035,182 (69,432)
Unrealized gain/loss on remeasurement on December 31, 2016:
FMV (12/31/16) 1,973,094
CV (FMV at 12/31/15) 1,965,750 7,345
Net unrealized holding gain or loss in the 2016 profit or loss (62,088)
5. Ans. P1,973,094.
1. Ans. P4,667,769.
Amortized cost, December 31, 2015: 9,502,630
Accrued interest, December 31, 2015: 800,000 10,302,630
Present value of new future cash flows at 10%
Principal: (P10M*75%)*0.751315 5,634,861 0.7513148
Impairment loss 4,667,769
2. Ans. P6,198,347.
Amortization table: FA at amortized cost after impairment:
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
December 31, 2015: After Impairment 5,634,861
December 31, 2016: 563,486 - 563,486 6,198,347
3. Ans. P1,239,669.
Amortized cost, December 31, 2016 6,198,347
Present value of revised cash flows at 10%
Principal (P10M*90%)*0.826446 7,438,017 0.826446
Impairment recovery gain 1,239,669
4. Ans. P8,181,818.
Amortization table: FA at amortized cost after impairment recovery:
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
December 31, 2016: After Impairment recovery 7,438,017
December 31, 2017: 743,802 - 743,802 8,181,818
2. Ans.
Unrealized holding loss - OCL of SCI 30,000
FA at FMV through OCI/L 30,000
Charlie, FMV (12/14) 850,000
Carrying value, including transaction cost 880,000
Unrealized holding loss - OCL of SCI (30,000)
3. Ans.
No entry to remeasure investment in associate to FMV since Investment in Assoc. is accounted for under equity method.
4. Ans.
FA at FMV 100,000
Unrealized holding gain - P&L 100,000
FMV (12/15) CV (FMV 12/14)
Alpha 350,000 300,000 *reclassification is not allowed, thus Alpha is still
Beta 525,000 475,000 regarded as FA at FMV through OCI/L.
Total 875,000 775,000
Unrealized holding gain - P&L 100,000
5. Ans.
Unrealized holding loss - OCL of SCI 100,000
FA at FMV through OCI/L 100,000
Charlie, FMV (12/15) 750,000
Carrying valuu (FMV 12/14) 850,000
Unrealized holding loss - OCL of SCI (100,000)
6. Ans. P875,000.
7. Ans. P750,000.
8. Ans. P3,260,000.
Delta Securities - Investment in Associate
Acquisition cost, including transaction cost 1,650,000
Share from net income (P2.5M*25%) 625,000
Share from forex loss (P500K*25%) (125,000)
Share from dividends (P200K*25%) (50,000)
Carrying value, 12/31/14 2,100,000
Additional Investment 500,000
Share from net income (P1.9M*30%) 570,000
Share from forex gain (P600K*30%) 180,000
Share from dividends (P300K*30%) (90,000)
Carrying value, 12/31/15 3,260,000
2. Ans. (P30,000)
Proceeds from sale (15,000*P8) 120,000
Original cost (P300,000/30,000)*15,000 150,000
Realized loss on sale (30,000)
3. Ans. (P72,000)
FMV (12/14) Cost
Bee Inc. 90,000 150,000
Si Corp. 24,000 36,000
114,000 186,000
Impairment loss - P&L (72,000)
4. Ans. P15,000.
FMV (12/14) Cost/Impaired value
Aye Co. 60,000 45,000
Bee Inc. 90,000 90,000
Si Corp. 24,000 24,000
174,000 159,000
Unrealized holding gain - SHE 15,000
5. Ans. P174,000.
Case 2: PFRS 9
1. Ans. P51,000.
FMV (12/13) CV
Aye Co. 50,000 45,000
Bee Inc. 250,000 300,000
Si Corp. 30,000 36,000
330,000 381,000
Unrealized holding loss - SHE (51,000)
2. Ans. None.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.
3. Ans. None
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.
4. Ans. P15,000.
FMV (12/14) Cost
Aye Co. 60,000 45,000
Bee Inc. 90,000 150,000
Si Corp. 24,000 36,000
174,000 231,000
Unrealized holding loss - SHE (57,000)
5. Ans. P174,000.
Case 2: PFRS 9
1. Ans.
No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding loss
in the OCI/L.
2. Ans. P2,670,000
Share from net income (P10.8M*25%) 2,700,000
Less: Understated Depr (P300,000/10y) (30,000)
Share from net income 2,670,000
3. Ans. P16,345,000.
Initial cost 14,000,000
Share from net income 2,670,000
Share from UHGain-OCI (P800K*25%) 200,000
Share from dividends (P2.1M*25%) (525,000)
Carrying value, 12/31/14 16,345,000
4. Ans. P805,000.
Realized Unrealized Total
Proceeds from portion sold (25,000*40%)*(P680-P5) 6,750,000 6,750,000
Fair value of remaining portion to be reclassified:
(25,000*60%)*P680 10,200,000 10,200,000
Carrying value of Investment in Associate:
Sold (P16,345,000*40%) (6,538,000) (6,538,000)
Reclassified (P16,345,000*60%) (9,807,000) (9,807,000)
Gain on cessation before recycling of OCI/L 212,000 393,000 605,000
Recycling of OCI to P&L
Sold (P200,000*40%) 80,000 80,000
Reclassified (P200,000*60%) 120,000 120,000
Total cessation gain - P&L 292,000 513,000 805,000
5. Ans. 6. Ans.
7. Ans. P171,000.
#shares #shares outs. % interest
Proportionate interest before dilution 25,000 100,000 25%
Proportionate interest after dilution 25,000 125,000 20%
Decrease in interest 5%
2. Ans. P3,176,000.
January 1, 2014 Cost (10%) 700,000
Share from Net Income, 2014 (P400,000*10%) 40,000
Share from Dividends, Oct. 1, 2014 (10,000*P0.90) (9,000)
Carrying value, 12/31/14 had equity method been used 731,000
Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000
Share from Dividends, Apr. 1, 2015 (10,000*P1.10) (11,000)
Additional investment, July 1, 2015 (30%) 2,400,000
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Carrying value, 12/31/2015 3,176,000
2. Ans. P3,126,000.
January 1, 2014 Original Cost (10%) 700,000
Additional investment, July 1, 2015 (30%) 2,400,000
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Carrying value, 12/31/2015 3,126,000
2. Ans. P3,226,000.
Original Investment at prevailing FMV on July 1, 2015 (10%)
10,000sh*(P2.4M/30K) 800,000 - the prevailing FMV is based on the current
Additional investment, July 1, 2015 (30%) 2,400,000 selling price of the additional shares.
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
Carrying value, 12/31/2015 3,226,000
2. Ans. P2,000,000.
Fair Market Value 12/31/2014 12,500,000
Carrying value (Acquisition cost 1/1/2014) 10,500,000
Unrealized holding loss - P&L 2,000,000
3. Ans. P11,000,000.
Fair Market Value 12/31/2015 11,000,000
4. Ans. (P1,500,000)
Fair Market Value 12/31/2015 11,000,000
Carrying value (FMV, 12/31/2014) 12,500,000
Unrealized holding loss - P&L (1,500,000)
5. Ans. P10,000,000.
June 30, 2016 FMV P10,000,000
6. Ans. (P1,000,000)
June 30, 2016 FMV upon reclassification 10,000,000
Carrying value (FMV 12/31/15) 11,000,000
Unrealized holding loss - P&L (1,000,000)
7. Ans. (P1,000,000)
Proceeds from sale 10,000,000
Carrying value (FMV 12/31/15) (11,000,000)
Realized loss from sale (1,000,000)
2. Ans. P8,400,000.
Cost 10,500,000
Accum Depr: (P10.5M/10)*2yrs (2,100,000)
Carrying value 8,400,000 *lower than FMV, P10.5M, thus not impaired.
4. Ans. P2,125,000.
Proceeds from sale 10,000,000
Carrying value, July 1, 2016 (7,875,000)
Realized gain from sale 2,125,000
January 1, 2011:
Life insurance expense 180,000
Cash 180,000
January 1, 2012:
Life insurance expense 180,000
Cash 180,000
January 1, 2013:
Life insurance expense 180,000
Cash 180,000
July, 2013:
Cash 5,000
Life insurance expense 5,000
January 1, 2014:
Life insurance expense 180,000
Cash 180,000
August, 2014:
Cash 7,000
Life insurance expense 7,000
December 1, 2014:
Cash 5,000,000
Cash surrender value (9/30/14) 277,500
Life insurance expense (180,000*3/12) 45,000 *unexpired portion as of date of death
Gain on life insurance policy settlement 4,677,500
3. Ans. P90,500.
Annual insurance premium 180,000
Unexpired insurance premium as of date of death (45,000)
Dividend from CSV (7,000)
Increasein CSV up to date of death (37,500)
Life insurance expense, 2014 90,500
2. Ans. A.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
other comprehensive income/losses 150,000
3. Ans. B.
Debt security of another company quoted in an active market. Business
model of the company has an objective of collecting contractual cash-
flows from the bonds which are primarily in the form of interests and 500,000
principal.
4. Ans. B.
20% Equity securities of another company quoted in an active market 500,000
5. Ans. D.
51% Equity securities of another company quoted in an active market 1,400,000
6. Ans. B.
Real property held for speculation purposes 700,000
Real property of a manufacturing business being leased out to another party
under operating lease 900,000
Land held for undetermined future use 800,000
Real property being developed as an investment property 300,000
Total Investment Property 2,700,000
2. Ans. C.
Proceeds (15,000*59) 885,000
Original Cost (15,000*60) 900,000
Realized loss (15,000)
3. Ans. D.
Proceeds 1,100,000
Accrued interest (50,000)
Carrying Value (P2,035,182/2) (1,017,591) *half of the carrying value which is the fair value on 12.31.13
Realized gain 32,409
4. Ans. A.
Proceeds 1,100,000
Accrued interest (50,000)
Carrying Value (P1,973,866/2) (986,933) **half of the carrying value which is the amortized cost on 6/30/14
Realized gain 63,067
5. Ans A.
Alpha shares (FMV through P/L) - (50,000sh*62) 3,100,000
6. Ans. B.
Alpha sahres (FMV through P/L) 3,100,000
Delta bonds (FMV through P/L) 982,143 ***
Total Current Investment 4,082,143
4. Ans. B.
Transactions costs - Expense
Aye Corp. Shares (10,000)
Bee Inc. Shares (20,000)
Dividend income - Bee Inc. 120,000
Interest income - See Co. 50,000
Unrealized holding gain - FA 121,948
Share from net income - Dee Corp. 280,000
Total/Net Investment income 541,948
5. Ans. D.
See Co Bonds at amortized cost 1,930,690
Dee Corp. Shares - Assoc. 2,430,000
Total noncurrent investmetns 4,360,690
Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct Int. Nominal Int. Amortization Balance
October 1, 2014: 1,923,000 *excluding accrued interest
December 31, 2014: 57,690 50,000 7,690 1,930,690
6. Ans. D.
Transactions costs - Expense
Aye Corp. Shares (10,000)
Bee Inc. Shares (20,000)
Dividend income - Bee Inc. 120,000
Interest income - See Co. 57,690 *(1,923,000*12%*3/12)
Unrealized holding gain - FA 80,000 UHG from Aye and Bee only
Share from net income - Dee Corp. 280,000
Total/Net Investment income 507,690
2. Ans. B.
FMV Cost
PATATAS (1M*P64) 64,000,000 62,000,000 *reclassification to FA through P&L not allowed.
BAWA (250,000*P74) 18,500,000 20,000,000
82,500,000 82,000,000
Unrealized holding gain - SHE 500,000
3. Ans. C.
Interest from SIBUY bonds (Apr. 15 to Oct. 15): P100M*10%*6/12 5,000,000
Interest from remaining SIBUY bonds (Oct. 15 - Dec. 31): P50M*10%*2.5/12 1,041,667
Cash dividends from PATATAS 1,500,000
Total interest and dividends income, 2013 7,541,667
4. Ans. A.
Proceeds from sale of half of PATATAS (500,000sh*P65) 32,500,000
Original cost (P62,000,000/2) 31,000,000
Realized gain on sale, under PAS 39 1,500,000
5. Ans. D.
Proceeds from sale of all BAWA shares (250,000sh*P78) 19,500,000
Original cost 20,000,000
Realized loss on sale, under PAS 39 (500,000)
2. Ans. C.
FMV (12/14) Cost
DEF Corp. Shares 1,140,000 1,080,000
GHI Corp.Shares 348,000 360,000
JKL Shares 323,400 325,400
1,811,400 1,765,400
Unrealized holding gain - SHE 46,000
3. Ans. A.
IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES
FMV (12/14) CV (FMV 12/13)
DEF Corp. Shares 1,140,000 1,050,000
GHI Corp.Shares 348,000 369,600
JKL Shares 323,400 315,000
1,811,400 1,734,600
Unrealized holding gain - SHE 76,800
4. Ans. B.
IF JKL SHARES IS INVESTMENT IN ASSOCIATE:
Initial cost (including transaction cost) 325,400
Share from dividends (0.75*4200) (3,150)
Sahre from net income (450,000*20%*8/12) 60,000
Carrying Value, 12.31.14 382,250
2. Ans. B.
Fair market value, Dec. 31, 2014 7,346,331
Carrying value 5,953,927
Unrealized holding gain - P&L 1,392,404
3. Ans. B.
Proceeds from sale:
Dos shares (10,000*P100) 1,000,000
Tres shares (18,000*140) 2,520,000 3,520,000
Carrying value of shares sold:
Dos shares (10,000*80) 800,000
Tres shares (18,000*100) 1,800,000 2,600,000
Realized gain on sale - P&L 920,000
4. Ans. A.
Aggregate Fair Value (12/31/14) Equity Securities only 5,275,000
Original Cost of Equity Securities:
# of shares Cost including
Dec. 31, 2014 Trans. Cost Total cost
Uno shares 10,000 150 1,500,000
Dos shares 11,000 74.55 820,000
Tres shares 18,000 108 1,950,000
Total Cost 4,270,000
Unrealized holding gain - OCI 1,005,000
5. Ans. B.
Amortized cost of Quatro bonds (12/31/12)
Correct Interest Nominal InterestAmortization Balance
1/1/12: Orig Cost (12% yield rate) 1,903,927
12/31/12: 228,471 200,000 28,471 1,932,398
2. Ans. C.
Proceeds from sale: ABC (15,000*P15) 225,000
XYZ (5,000*P13) 65,000 290,000
Carrying value:
ABC: 15,000*(P21.50-P1.50) 300,000
XYZ: 5,000*(20,000*(P13-P1.50))/23,000 50,000 350,000
Realized loss on sale (60,000)
3. Ans. D.
FMV 12/31/14 CV
ABC (25,000sh*P18) 450,000 416,667 (a)
XYZ (18,000sh*P15) 270,000 180,000 (c)
DEF at 11% yield rate
Principal (P500,000*0.9009009) 450,450 0.9009009
Interest (P60,000*0.9009009) 54,054 504,505 487,129
1,224,505 1,083,796
Unrealized holding gain - P&L 140,709
4. Ans. B.
Interest income (6/30 to 12/1): P1,000,000*12%*5/12) 50,000
Interest income (12/1 - 12/31): P500,000*12%*1/12 5,000
Interest income from bond investment 55,000
5. Ans. A.
Stock dividend does not result to dividend income and accounted only through memo entry.
Cash in lieu of share dividends is accounted through the "as if" approach, that is, as if shares were received and were as if
sold for the cash dividend received.
6. Ans. D.
FMV 12/31/14
ABC (25,000sh*P18) 450,000
XYZ (18,000sh*P15) 270,000
DEF at 11% yield rate
Principal (P500,000*0.9009009) 450,450
Interest (P60,000*0.9009009) 54,054 504,505
Total 1,224,505
2. Ans. A.
Proceeds from sale on 12/31 (P300,000*95%) 285,000
Amortized cost (P551,033*3/5) 330,620 *
Realized loss on sale of bonds (45,620)
3. Ans. B.
FMV 12/31/14 Cost/Amortized cost
SMC (600sh*P275) 165,000 156,000 (600sh*P260)
ABI (1,200sh*P340) 408,000 396,000 (1,200sh*P330)
TDI (P200,000*95%) 190,000 220,413 (P551,033*2/5)
763,000 772,413
Unrealized holding loss-OCI (9,413)
4. Ans. C.
2. Ans. D.
Proceeds from sale of JKL (4,000sh*P124) 496,000
Cost: 4,000sh*(P1,180,000/10,000) 472,000
Realized gain on sale 24,000
3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.
4. Ans. D.
FA at FMV through P&L FMV (12/31/14) CV
ABC (13,000*P153.20) 1,991,600 1,984,000 (P1,525,000+P459,000)
DEF (4,000*P137) 548,000 528,250 (4,000sh*(P1,056,500/8,000sh))
GHI (P500,000*82.22%) 411,100 373,500
PQR (P400,000*98%) 392,000 372,000 (P400,000*93%)
3,342,700 3,257,750
Unrealized holding gain - P&L 84,950
5. Ans. D.
FA at FMV through OCI/L FMV (12/31/14) Cost
JKL (6,000sh*P110.50) 663,000 708,000 6,000sh*(P1,180,000/10,000sh)
MNO (20,000sh*P44) 880,000 980,000
1,543,000 1,688,000
Unrealized holding loss - SHE (145,000)
2. Ans. C.
Proceeds from sale of Tri shares (25,000sh*P30) 750,000
Cost: (25,000sh*P35) 875,000
Realized loss on sale, under PAS 39 (125,000)
3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.
4. Ans. C.
FMV of Poor shares 800,000
Cost 1,400,000
Impairment loss - P&L (600,000)
5. Ans. D.
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.
6. Ans. C.
Proceeds from sale of Seeks shares (10,000*P45) 450,000
Cost (P1,000,000/20,000sh)*10,000sh 500,000
Realized loss on sale, under PAS 39 (50,000)
7. Ans. A.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.
8. Ans. C.
FA at FMV through P&L FMV 12/31/14 CV (FMV 12/31/13)
Wan ordinary shares 825,000 858,750 (P1,145,000/20,000sh)*5,000sh
Too preference shares 650,000 700,000
1,475,000 1,558,750
Unrealized holding loss - P&L (83,750)
9. Ans. C.
FA at FMV through OCI/L, under PAS 39 FMV 12/31/14 COST
Poor preference shares 800,000 800,000 *Impaired value under PAS 39
Five ordinary shares 1,500,000 1,250,000
Seeks ordinary shares 900,000 1,000,000
3,200,000 3,050,000
Unrealized holding gain - SHE 150,000
10. Ans. A.
FA at FMV through OCI/L, under PFRS 9 FMV 12/31/14 COST
Poor preference shares 800,000 1,400,000 *No impairment loss under PFRS 9
Five ordinary shares 1,500,000 1,250,000
Seeks ordinary shares 900,000 1,000,000
3,200,000 3,650,000
Unrealized holding loss - SHE (450,000)
11. Ans. C.
12. Ans. C.
2. Ans. B.
Fair Market Value, 12/31/2014 P161,100
Fair Market Value, last remeasurement date 12/31/2013 160,300
Unrealized Holding Loss (800)
4. Ans. C.
Fair Market Value of the Inv. portfolio, 12/31/2014 P161,100
4. Ans. D.
BLACK INC.: FMV (12/31/2014) 2,000*150 300,000
WHITE INC.: FMV (12/31/2014) 30,000*190 5,700,000 6,000,000
2. Ans. B.
Acquisition cost (1,500sh*P150) 225,000
Add: Transaction cost 30,000
Initial cost - DEF Shares 255,000
3. Ans. D.
No dividend income shall be recognized from the share dividends received from DEF.
4. Ans. B.
# of GHI shares after share split 5,000
Multiply by: cash div. per share 5
Dividend income from cash dividends 25,000
5. Ans. B.
Shares in lieu of cash dividends (4,000sh/4) 1,000
Fair value of shares 55
Dividend income (shares in lieu of cash) 55,000
6. Ans. C.
Financial asset at FMV through P&L FMV, 12/31 CV
ABC (2,000sh*P105) 210,000 180,000
GHI (5,000sh*P75) 375,000 410,000 (P285,000+(5,000sh*P25))
585,000 590,000
Unrealized holding loss - P&L (5,000)
7. Ans. C.
Financial asset at FMV through OCI/L FMV, 12/31 Cost
DEF (1,500sh+300sh)*P160 288,000 255,000
JKL (4,000sh+1,000sh)*P60 300,000 255,000 (P200,000+(1,000sh*P55)
588,000 510,000
Unrealized holding gain - SHE 78,000
8. Ans. B.
Investment in Associate - MNO shares
Initial cost, January 1, 2014 850,000
Share from net income (P600,000*20%) 120,000
Share from forex loss (P100,000*20%) (20,000)
Share from dividends (10,000sh*P12) (120,000)
Carrying value, 12/31/14 830,000
2. Ans. C.
Share from net income of King Inc. 2013 (650,000*25%) 162,500
Understatement in Depr expense (500,000/5)*25% (25,000)
Share from net income of King Inc. 2013 137,500
*note: King shares is only 25% (250,000/1,000,000), thus shall be accounted for as Associate Investment under equity method.
3. Ans. C.
Fair Value of Queen Corp shares 12/31/2014 (100,000*6.50) P650,000
4. Ans. C.
Acquisition cost (January 1, 2013) (250,000*10) 2,500,000
Share from net income: 2013 137,500
CV of Investment (12/31/13) 2,637,500 vs Rec. Value (FV:250,000*12) P3,000,000 – no imp.
Share from net income: 2014 37,500
Share from dividends: 2014 (100,000*25%) (25,000)
CV of Investment (12/31/14) 2,650,000 vs Rec. Value (FV:250,000*15) P3,750,000 – no imp.
5. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14 (100,000*6.50) P650,000
Fair value of Queen Sahres (AFS), 12/31/13 (100,000*7.00) 700,000
Unrealized Holding Loss – SCI P50,000
6. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14 650,000
Original cost of Queen Shares, 1/1/13 (100,000*5) 500,000
Unrealized Holding Gain (Cumulative)- SHE/BS 150,000
2. Ans. C.
Share from the net income of associate (P1,280K*30%) 384,000
Understatement in depr: (P192,000/8yrs) (24,000)
Investment Income 360,000
3. Ans. A.
Acquistion cost 2,592,000
Share from dividends (P6*40,000sh) (240,000)
Share from net income 360,000
Carrying value, 12/31/14 2,712,000
Recoverable amount/Fair value less cost to sell:
(40,000shares*P64) 2,560,000
Impairment loss 152,000
4. Ans. B.
Share from net income 360,000
Impairment loss (152,000)
Net amount to be reported in the income statement 208,000
5. Ans. B.
Dividend income (P6*40,000sh) 240,000
Unrealized holding loss - P&L (32,000)
Net amount to be reported in the income statement 208,000
FMV, 12/31/14 (40,000*P64) 2,560,000
Carrying value (Cost) 2,592,000
Unrealized holding loss-P&L (32,000)
6. Ans. C.
2. Ans. D.
Acquisition cost, January, 2014 (50,000sh*P325) 16,250,000
Share from net income in 2014 300,000
Carrying value, Decmeber 31, 2014 16,550,000
3. Ans. C.
Net income 2,500,000
Multiply by: Proportionate interest (50,000sh/200,000sh) 25%
Share from net income before adjustments 625,000
Understatement in Depr: (P4M*25%)/5yrs (200,000)
Adjusted share from Net Income 425,000
4. Ans. C.
Acquisition cost, January, 2014 (50,000sh*P325) 16,250,000
Share from net income in 2014 425,000
Carrying value, Decmeber 31, 2014 16,675,000
2. Ans. D.
Share from other comp. loss (800,000*30%) (240,000)
3. Ans. C.
Acquisition price 5,000,000
Share from net income (4.8M*30%) 1,440,000
Understatement depr. (1.6M/5)*30% (96,000) 1,344,000
Share from other comp. loss (800,000*30%) (240,000)
Share from dividends (1,500,000*30%) (450,000)
Carrying Value, 12/31/14 5,654,000
4. Ans. B.
CESSATION:
Proceeds from sale (18,000*210) 3,780,000
FMV of remaining share relassified to FA at FMV (12,000*210) 2,520,000
Total 6,300,000
Less: Carrying Value of Investment in Assoc. before cessation 5,654,000
Gain before recycling of OCLoss 646,000
Recycling of OCloss (240,000)
Total cessation loss - IS 406,000
5. Ans. D.
6. Ans. D.
DILUTION:
Before Dilution After Dilution
# shares held 30,000 30,000
# shares outstanding 100,000 125,000
% of interest 30% 24%
2. Ans. A.
Share from net income (P2.5M*30%) 750,000
Understatement in Depr: (360,000/5yrs) (72,000)
Investment income - P&L 678,000
3. Ans. D.
Investment income - P&L 678,000
Share from Unrealized holding loss - OCL (P500K*30%) (150,000)
Net amount to be reported in the SCI 528,000
4. Ans. B.
Acquisition cost 6,000,000
Share from dividends (P800,000*30%) (240,000)
Share from net income 678,000
Share from OCL (P500,000*30%) (150,000)
Carrying value, 12/31/14 6,288,000
5. Ans. B.
Before Dil. After Dil. Decrease
Number of shares owned 300,000 300,000
Total outstanding shares 1,000,000 1,200,000
30% 25% 5%
6. Ans. B.
Share from the increase in White's capital as a result of share issue:
(200,000sh*P30)*25% 1,500,000
CV of investment, excluding goodwill deemed sold:
(P6,228,000-P600,000)*(5%/30%) (948,000)
Dilution gain before recycling of OCL 552,000
Recycling of OCL (P150,000*(5%/30%)) (25,000)
Adjusted dilution gain 527,000
7. Ans. C.
Before Cess. After Cess.
Number of shares owned 300,000 180,000
Total outstanding shares 1,000,000 1,000,000
30% 18%
8. Ans. A.
2. Ans. A.
Share from net income (Jan. 1 - June 30, 2015): P700,000*15% 105,000
Share from net incoem (Jul. 1 - Dec. 31, 2015): P800,000*25% 200,000
Total investment income in 2015 305,000
3. Ans. A.
Acquistion cost, January 1, 2014 1,400,000
Share from dividends, Aug. 1, 2014 (P3.50*7,500sh) (26,250)
Share from net income in 2014 (P1,250,000*15%) 187,500
Carrying value, Dec. 31, 2014 (Equity Method) 1,561,250
Share from dividends, Apr. 5, 2015 (P4.50*7,500sh) (33,750)
Share from net income (Jan. 1 - Jun. 30, 2015) 105,000
Acquisition cost, July 1, 2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Carrying value, Dec. 31, 2015 2,763,750
5. Ans. D.
Dividend income, Apr. 5, 2015 (P4.50*7,500) 33,750
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Total investment income in 2015 (Cost-based w/o catch-up adj.) 233,750
6. Ans. D.
Acquistion cost, January 1, 2014 (deemed cost) 1,400,000
Acquisition cost, July 1, 2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Carrying value, Dec. 31, 2015 2,531,250
8. Ans. D.
Dividend income, Apr. 5, 2015 (P4.50*7,500) 33,750
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Total investment income in 2015 FMV-based w/o catch-up adj.) 233,750
9. Ans. C.
FMV of original investment, July 1, 2015 (7,500sh*P200) 1,500,000 *
Acquisition cost, July 1, 2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
Carrying value, Dec. 31, 2015 2,631,250
2. Ans. A.
Face Value of bonds 4,000,000
Consideration given up (FMV) 4,253,589
Debit to/Reduction in interest income per books (253,589)
Nominal interest collected/Credited to interest income 480,000
Interest income in 2013 per books: 226,411
Correct interst income (see amortization table) 425,359
Understatement in interest income in 2013 198,948
3. Ans. A.
FMV of bonds, Dec. 31, 2014 at 9% effective rate: (a) 4,211,093
FMV of bonds, Dec. 31, 2013 at 11% effective rate: (b) 4,097,749
Unrealized holding gain - P&L 113,345
(a) FMV of bonds, Dec. 31, 2014 = PV of remaining cashflows at 9% effective rate for 2 periods.
Principal: P4,000,000*0.841680 3,366,720 0.841680
Interest: P480,000*1.759111 844,373 1.759111
4,211,093
(b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11% effective rate for 23periods.
Principal: P4,000,000*0.731191 2,924,766 0.731191
Interest: P480,000*2.443715 1,172,983 2.443715
4,097,749
4. Ans. C.
Investment in Associate (20%)
Acquisition cost 5,800,000
BV of net assets acquired (P25M*20%) 5,000,000
Excess of Acquisition cost (Attrib. to Depr. Asset) 800,000 *
5. Ans. A.
Dividend income (2*40,000) 80,000
Unrealized holding gain (155-145)*40,000 400,000
Investment income per books in 2013 480,000
Investment income per audit in 2013 (see analysis) 170,000
Retroactive adjustement to RE, beg 310,000
6. Ans. B.
CESSATION: Before Cess. After Cess.
Number of shares owned 40,000 30,000
Number of outstanding shares 200,000 200,000
20% 15%
Realized Unrealized Total
Proceeds from sale (169*10,000) 1,690,000 1,690,000
Fair value of remaining Investment (169*30,000) 5,070,000 5,070,000
CV of investment
Portion sold: (6,670,000*10/40) (1,667,500) (1,667,500)
Portion reclassified: (6,670,000*30/40) (5,002,500) (5,002,500)
Cessation gain, before recycling of OCI/L 22,500 67,500 90,000
Recycling of OCI 15,000 45,000 60,000
Recycling of OCL (20,000) (60,000) (80,000)
Total cessation gain/loss 17,500 52,500 70,000
7. Ans. B.
Fair Value on Reclass date (6/30/14) 3,600,000
Carrying Value/Depreciation Cost (6/30/14) 3,250,000
Revaluation Surplus (OCI) on Reclass 350,000
8. Ans. D.
FMV, Investment property, 12/31/14 3,200,000
CV, (FMV upon reclass on 6/30/2014) 3,600,000
Unrealized holding loss - P&L (400,000)
6. Ans. A.
PPE to IP
If a property is transferred from PPE to IP, and the FMV method is used to value IP, any decrease on the reclassification date shall be
recognized as impairment loss in the profit or loss. Any increase in the value, however, on the reclassification date shall be recognized
in the OCI as Revaluation Surplus, following PAS 16, PPE.'
FMV, 12/31/14 upon reclass to IP 4,300,000
Carrying value (Depr. Cost: P4.5M*22/25) 3,960,000
Revaluation surplus - OCI 340,000
7. Ans. D.
IP to PPE
If a property is transferred from IP to PPE, and the FMV mehtod is used to value IP, any decrease or increase in the value of the
property on the transfer date shall be recognized in the profit or loss.
FMV, 12/31/14 upon reclass to PPE 4,300,000
Carrying value (FMV 12/31/13) 4,100,000
Gain on the transfer - P&L 200,000
2. Ans. D.
Annual premium, 2015: (P8,000*12mo) 96,000
Less: Increase in CSV for 2015 (P30,000-P25,200) (4,800)
Dividend from CSV (8,000)
Life insurance expense, 2015 83,200
3. Ans. C.
Annual premium, 2016: (P8,000*12mo) 96,000
Less: Increase in CSV for 2016 (P39,600-P30,000) (9,600)
Dividend from CSV (9,600)
Life insurance expense, 2016 76,800
4. Ans. D.
Insurance premium up to date of death (P8,000*10mo) 80,000
Less: Increase in CSV up to date of death (P50,400-P39,600)*10/12 (9,000)
Dividend from CSV in 2017 (11,200)
Life insurance expense, 2017 59,800
5. Ans. A.
Life insurance policy 4,000,000
CV of CSV as of October 31, 2017:
CSV, Dec. 31, 2016 39,600
Increase up to Oct. 31, 2017: 9,000 48,600
Gain on life insurance policy settlement 3,951,400
Observe that since the insurance premium are payable monthly, it is assumed that after death on October 31, 2017, no additional
insurance premium had been paid.
DISCUSSION PROBLEMS
CHAPTER 6-PROBLEM 1
1 C.
2 C.
3 D.
4 A.
5 D.
6 C.
7 D.
8 B.
9 A.
10 C.
11 B.
12 A.
13 C.
14 D.
15 C.
16 D.
17 C.
18 C.
b. Building
Initial cost, Jan., 2014
FMV of shares issued (100,000sh*P70) 7,000,000
Accum. Depr, Dec. 31, 2014: (P7M*10%) (700,000) 1.a. Ans.
Carrying value, Dec. 31, 2014 6,300,000 2.b. Ans.
c.1. Equipment A
Initial cost, Jan., 2014
Cash price equivalent (P2M*90%) 1,800,000
Accum. Depr., Dec. 31, 2014: (P1.8M-P180K)*5/15 (540,000) 1.b. Ans.
Carrying value, Dec. 31, 2014 1,260,000 2.c. Ans.
c.2. Equipment B
Initial cost, July 1, 2014
Purchase price 4,000,000
Import duties and nonrefundable taxes 250,000
Installation cost 50,000
PV of future retirement cost at 10% effective % for 5 yrs
(P161,051*0.6209213) 100,000 0.6209213
Intial cost, July 1, 2014 4,400,000
Accum. Depr., Dec. 31, 2014: (P4.4M-440K)*5/15*6/12 (660,000) 1.c. Ans.
Carrying value, Dec. 31, 2014 3,740,000 2.d. Ans.
c.3. Equipment C
Initial cost, September 1
Fair value of asset accepted as donation 1,200,000
Accum. Depr., Dec. 31, 2014 (P1.2M-120K)*5/15*4/12 (120,000) 1.d. Ans.
Carrying value, Dec. 31, 2014 1,080,000 2.e. Ans.
*note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is
credited, any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost.
CHAPTER 6-PROBLEM 5:
Case 1: ABC CORP.
1. Ans. P39,792.
Actual borrowing cost (Jul. 1 - Nov. 31): P1M*12%*5/12 50,000
Income from temporary investments (Jul. 1 - Nov. 31)
July: (P1,000,000-P100,000)*5%*1/12 3,750
August: (P1,000,000-P250,000)*5%*1/12 3,125
September (P1,000,000-P550,000)*5%*1/12 1,875
October (P1,000,000-P750,000)*5%*1/12 1,042
November (P1,000,000-P900,000)*5%*1/12 417 (10,208)
Net capitalizable borrowing cost 39,792
2. Ans. P70,000.
Interest expense (Jan. 2 - Jun. 30): P1M*12%*6/12 60,000
Interest expene (Dec. 1 - Dec. 31): P1M*12%*1/12 10,000
Interest expense for 2014 70,000
2. Ans. P5,171,077.
Actual General Borrowing Cost 5,760,000
Less: Capitalizable Gen. Borr. Cost (588,923)
Gen. Borr. Cost. - Interest Expense 5,171,077
*note that the entire actual borrowing cost from specific borrowing had been entirely capitalized.
3. Ans. P97,856,223.
*January 1 8,000,000
April 1 19,000,000
July 31 24,400,000
October 1 27,600,000
December 31 14,000,000
Capitalizable borrowing cost 4,856,223
Carrying value, 12/31/14 97,856,223
2. Ans. P36,000.
Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12 36,000
3. Ans. P276,000.
Depreciation of Old Machinery (2,325,000/10) 232,500
Depreciation of New Machinery (870,000/10)*6/12 43,500
Depreciation expense – MACHINERY AND EQUIPMENT 276,000
4. Ans. P66,300.
Leasehold improvement carrying value (12/31/2013) 331,500
Divide by: Remaining useful life: 8yrs-3yrs=5yrs
(shorter than the remaining extended lease term: 3yrs+5yrs=8yrs) 5
Depreciation expense – LEASEHOLD IMPROVEMENT 66,300
5. Ans. P43,369.
Delivery Equipment: Book value, Jan. 1, 2014 137,400
Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014 (31,356) *P24,300+P7,056
Balance subject to depreciation 106,044
Multiply by 150% declining rate (1/5)*150% 30%
Depreciation on the Remaining Delivery Equipment 31,813
Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12 4,500
Depn on truck sold on Sept. 30, 7,056
Total Depreciation expense – DELIVERY EQUIPMENT 43,369
3. Ans. P11,500.
CV on the date of fire (P23,000*5/10) 11,500
Recoverable value -
Impairment loss due to fire 11,500
Note: The reimbursement received from insurance company is recognized as a separate transaction, thus income from insurance
settlement shall be recognized separately.
4. Ans. (P700)
Fair value of asset received 12,000
Cash paid to equalize exchange (10,000)
Assumed fair value of asset given-up 2,000
CV of asset given up 2,700
Loss on trade-in (700)
1.c. Ans.
Acquistion of furniture 50,000
2. Ans. P1195,000.
Repainting of building 60,000
Routinary repairs to building 50,000
Replacements of minor gears 20,000
Service contract of office equipment 40,000
Sealing of roof leaks in the factory 25,000
Total repairs and maintenance expense 195,000
2. Ans. P1,645,700.
Present value of future net cash flows at 10% effective rate for 15 years remaining life:
From continued use: P200,000*7.60608) 7.606080 1,521,216
From eventual disposal: P520,000*0.239392) 124,484
Value in Use 0.239392 1,645,700
3. Ans. P1,645,700.
Value in Use 1,645,700
FMV less Cost to sell 1,560,000
Recoverable value shall be the Value in Use, since it is higher.
4. Ans. P1,994,300.
Carrying value, Dec. 31, 2014 3,640,000
Recoverable amount 1,645,700
Impairment loss 1,994,300
5. Ans. P75,047.
Carrying value, Dec. 31, 2014 after impairment 1,645,700
Less: Salvage value 520,000
Depreciable cost 1,125,700
Divide by: remaining useful life 15
Depreciation expense 75,047
2. Ans. P5,518,855.
Value in Use 5,518,855
FMV less Cost to sell 5,070,000
Recoverable value shall be the Value in Use, since it is higher.
3. Ans. P1,861,145.
Carrying value, Dec. 31, 2014 7,380,000
Recoverable amount 5,518,855
Impairment loss 1,861,145
2. Ans. P180,000.
Fair value, 12/31/14 1,050,000
Carrying value, 12/31/14 (P1.2M*7/10) 840,000
Revaluation surplus, 12/31/14 210,000
Transferred to RE in 2015 (210K/7yrs) (30,000)
Revaluation surplus, 12/31/15 180,000
3. Ans. P900,000.
Fair value, 12/31/14 1,050,000
Depr in 2014 (150,000)
Carrying value, 12/31/15 900,000
5. Ans. P565,714.
Fair market value, 12/31/14 1,500,000
Carrying value, 12/31/14 840,000
Revaluation surplus, 12/31/14 660,000
Divide by: remaining life 7
Annual transfer to RE 94,286
Revaluation surplus, 12/31/15 565,714
2. Ans. P1,750,000.
Carrying value, 1/1/13 after impairment 14,000,000
Divide by: remaining useful life 8
Annual depreciation after impairment 1,750,000
3. Ans. P1,500,000.
Recoverable amount/FMV 15,000,000
Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000
Increase over CV had there been no impariment is ignored under cost method. 3,000,000
Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method.
4. Ans. P2,000,000.
Carrying value had there been no impairment (cost method) 12,000,000
Divide by: remaining useful life 6
Annual depreciation after recovery, cost method 2,000,000
5. Ans. None.
The property had been transferred from PPE to Investment property, where the property is measured under FMV model.
Under the FMV model of valuing investment properties, no depreciation is provided, instead the propety is remeasured at each
balance sheet date at their prevailing FMV. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss.
2. Ans. P562,500.
Carrying value after revaluation, 1/1/14 4,500,000
Divide by: remaining useful life 8
Annual depr. after revaluation 562,500
3. Ans. P700,000.
Carrying value based on revalued amount, 1/1/17 (P4.5M*5yrs/8yrs) 2,812,500
Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000
Reversal of revaluation surplus in the OCI 312,500
Incidentally, this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus
to retained earnings. (P500,000*5yrs/8yrs)
4. Ans. P360,000.
Carrying value after impairment loss, 1/1/17 1,800,000
Divide by remaining useful life: 5
Revised annual depr. after impairment loss 360,000
2. Ans. D.
Correct cost of Building, July 1, 2014 1,543,500
Divide by: useful life 25
Annual depreciation 61,740
Multiply by: 6months/12 months in 2014 6/12
Depreciation for 2014 30,870
2 .Ans. A.
Since actual borrowing cost was fully capitalizable, no borrowing cost shall be recognized as outright expense for 2014.
3. Ans. B.
January 1 18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Capitalizable borrowing cost 2,500,000
Carrying value, 12/31/14 36,728,500
Machine B:
Carrying value, 1/1/4/14 (P50,000-P25,000) 25,000
Salvage value (5,000)
Depreciable carrying value 20,000
Divide by: remaining useful life (4yrs+2yrs) 6
Depreciation expense 3,333 Ans. B.
Machine C:
Depreciation expense, 2014 (P20,000*60%*40%) 4,800 Ans. B.
2. Ans. C.
Machinery DE020
Cost 1/1/12 6,790,000
Less: Salvage value (500,000)
Depreciable cost 6,290,000
Divide by: Useful life 20
Annual Depreciation 314,500
3. Ans. C.
Machinery GH033
Cost 7/1/14
Down payment: 1,000,000
Balance: (3M*2.577097) 7,731,291
Initial Cost (Cash Price/Present Value) 8,731,291
Multply by: Double Decl. Bal rate 25%
Multiply by (6months/12months) 1/2
Depreciation in 2014 (6 mo.) 1,091,411
4. Ans. A.
Wasting Asset
Cost 18,000,000
Restoration cost 2,000,000
Salvage value (1,000,000)
Depletable cost 19,000,000
Divide by: Useful life (output) 7,600,000
Depletion rate: 2.50
Mulitply by: Actual production 1,200,000
Total Depletion 3,000,000
5. Ans. B.
Depletion rate: 2.50
Mulitply by: Actual sales 900,000
Depletion expense 2,250,000
2. Ans. A.
Depreciable cost 9,500,000
Divide by: Depreciation expense 900,000
Composite life 10.56
3. Ans. B.
Total cost 9,680,000
Multiply by: Composite depr. rate 9.30%
Depreciation expense 900,000
4. Ans. C.
Building 6,100,000
Equipment 1,030,000
Total 7,130,000
Multiply by: Composite depr. rate 9.30%
Depreciation expense 662,913
2. Ans. D.
Tools disposed, 2014 300
Cost of later purchase (2006 purchase) 60
Total 18,000
Less: Proceeds from sale (300*10) (3,000)
Depreciation 15,000
3. Ans. C.
2014 2015
Beginning inventory 32,000 40,000
Purchases 24,000 72,000
Cost of tools available for use 56,000 112,000
Ending inventory (40,000) (35,000)
Balance 16,000 77,000
Less: Proceeds from sale (3,000) (9,800)
Depreciation expense 13,000 67,200
2. Ans. A.
Machinery Bee (Cost) 1,020,000
Accum Depr (1/1/14)
(960,000/15,000hrs)*11,000hrs (704,000)
Carrying Value, 1/1/14 316,000
3. Ans. B.
Mach. See (Cost) 1,600,000
Accum Depr (1/1/14)
**(1.5M/15)*3yrs (300,000)
Carrying Value (1/1/14) 1,300,000
**as per policy, no depreciation on year of acquisition; full on year of disposal
4. Ans. C.
Carrying Value of remaining machineries:
Cost:
Machinery Bee 1,020,000
Machinery See 1,600,000
Machinery Dee 1,600,000
Machinery Eff 440,000 4,660,000
Accum. Depr:
Bee: (704,000+84,000) (788,000)
See: (300,000+120,000) (420,000)
Dee: (1.6M*20%)+(1,280K*20%) (576,000)
Eff: (440K*20%) (88,000) (1,872,000)
Carrying value as of December 31, 2014 2,788,000
2. Ans. A.
Depreciation - Machinery
Disposed Mach: P2.4M/10yrs*6/12 120,000
New Mach: P1.45M/10yrs*6/12 72,500
Remaining Mach: P12.6M/10yrs 1,260,000
Depreciation expense - Machinery 1,452,500
3. Ans. B.
Depreciation - Furniture and Fixture
Disposed F&F: P1.8M*6/55*2/12 32,727
New F&F: P2.2M*10/55*6/12 200,000
Remaining F&F: P4.2M*6/55 458,182
Depreciation expense - F&F 690,909
4. Ans. D.
Fair market value of asset given-up 1,250,000
Carrying value of asset given-up, 6/30/14
(P2.4M*5.5yrs/10yrs) (1,320,000)
Loss on trade-in (70,000)
5. Ans. D.
Proceeds from sale 400,000
Carrying value of F&F sold, 3/1/14 (654,545)
Loss on sale of F&F (254,545)
Cost 1,800,000
Accum Depr, 12/31/13 (P1.8M*34/55) (1,112,727)
Depr. up to 3/1/14 (P1.8M*6/55*2/12) (32,727)
Carrying value, 3/1/14 654,545
3. Ans. B.
Proceeds from sale of C, net 71,250
CV of C, 1/1/2013: P132,000*2yrs/5yrs 52,800
Gain on sale of C 18,450
4. Ans. D.
Proceeds from sale of B 24,000
CV of B, 10/1/14: P120,000*0.25yrs/5yrs (6,000)
Gain on sale of B 18,000
5. Ans. C.
FMV of A, (Asset given-up): 129,000
CV of A, 6/30/12: P157,200*2.5yrs/5yrs (78,600)
Gain on trade-in 50,400
2. Ans. A.
Downpayment P1,000,000
PV of Balance, at 10% for four periods:
P250,000*3.169865 792,466
Incidental costs (freight and installation) 120,000
PV of future retirement cost, at 10% for 10 period: 87,534
P227,041*0.385543
Initial cost of new Factory equipment P2,000,000
3. Ans. C
Fair value of asset given up (1,200,000-500,000) 700,000 Cost 1,000,000
*Book value of asset given up 355,000 Accum Depr (3 yrs + 7 mo.) 645,000
Gain on trade-in 345,000 Carrying Value 355,000
4. Ans. D.
Building (10,000,000*90%)*12/120 900,000 - building being deprecated on its 4th year.
Building Improvement (780,000*12/78) 120,000 - over the remaining life of building which is 12 years.
Total Depr. – Building & Improv. 1,020,000
5. Ans. C.
Disposed: (1,500,000*80%*80%*80%*20%)*5/12) 64,000
New: (2,000,000*20%*7/12) 233,333
Balance: (6,500,000**80%*80%*80%*20%) 665,600
Total Depreciation – Factory Equipment 962,933
6. Ans. C.
Disposed: (1,000,000*90%)/5*7/12 105,000
New: (1,200,000*90%)/5*5/12 90,000
Balance (4,000,000*90%)/5 720,000
Total Depreciation – Automotive 915,000
7. Ans. D.
Cost Accum Depr. CV
Land 5,000,000 5,000,000
Building and Improvements 10,780,000 4,170,000 6,610,000
Factory Equipment 8,500,000 4,070,933 4,429,067
Automotive Equipment 5,200,000 2,970,000 2,230,000
Total 18,269,067
2. Ans. D.
Building per audit: at FMV 650,000
Buidling per books, June 1, 2014 500,000
Adjustment to Building account 150,000
3. Ans A.
Inventory Fixtures Total
Per audit: Prorata based on relative FMV 75,893 49,107 125,000
Per books, Apr. 1, 2015 85,000 55,000 140,000
Adjustement to Inventory and Fixtures (9,107) (5,893) (15,000)
4. Ans. A.
Per audit, Land at FMV 48,500
Per books, September, 2015 -
Adjustment to Land 48,500
5. Ans. B.
Per audit, Machinery at FMV 40,000
Per books, October 12, 2015 45,000
Adjustment to Machinery (5,000)
6. Ans. A.
Equipment, Correct cost (see #1) 92,593
Divide by: Useful life 10
Depreciation expense, 2015 9,259
7. Ans. A.
Building, Correct cost (see #2) 650,000
Divide by: Useful life 25
Depreciation expense, 2015 26,000
8. Ans.A.
Fixtures, Correct cost (see #3) 49,107
Divide by: Useful life 10
Depreciation expense, 2015 4,911
9. Ans. A.
Machinery, Correct cost (see #5) 40,000
Divide by: Useful life 10
Depreciation expense, 2015 4,000
3. Ans. B.
Cost of Building A P11,070,000
Less: Salvage value (600,000)
Depreciable cost 10,470,000
Divide by: Annual depreciation 261,750
Estimated life 40 years
4. Ans. A.
Depreciation expense on Building A for the year
Ended September 30, 2016 261,750
Same as prior year because straight-line method is used in depreciating Building A.
5. Ans. D.
Fair value of Land on acquisition date = FMV of shares P1,125,000
*Demolition cost shall be charged to the cost of the new constructed Building.
6. Ans. D.
Since Builidng B is not yet available for use as of September 30, 2016, no depreciation shall be provided yet.
7. Ans. A.
Donated equipment, at fair value P450,000
8. Ans. D.
Depreciation expense—Donated equipment, for the year ended September 30, 2015:
Cost P450,000
150% declining balance rate (1/10 x 150%) X 15%
Depreciation expense P67,500
9. Ans. C.
Depreciation expense—Donated equipment, for the year ended September 30, 2016:
Book value, Oct. 1, 2015 (P450,000-P67,500) P382,500
150% declining balance rate (1/10 x 150%) X 15%
Depreciation expense P57,375
10. Ans. B.
Total cost as recorded P2,473,500
Less: Normal repairs and maintenance 223,500
Correct cost of Machinery A P2,250,000
11. Ans. C.
Depreciation expense—Machinery A for the year ended September 30, 2015:
(P2,250,000-P90,000=P2,160,000 x 8/36) P480,000
12. Ans. A.
Depreciation expense—Machinery A, for the year ended September 30, 2016:
(P2,160,000 x 7/36 x 4/12) P140,000
13. Ans. C.
Down payment P86,000
First installment payment on October 1, 2015 90,000
Present value of succeeding 10 nstallment payments
(P90,000 x 6.710) 603,900
Total cost of Machinery B P780,000
14. Ans. B.
Depreciation expense-Machinery B, for the year ended Septmeber 30, 2016:
(P780,000/20years) 39,000
2. Ans. A.
Book value of purchased technology (Patent)
(P60 million x 3/6) P30 million
3. Ans. D.
Plant and equipment:
Book value P75 million
Recoverable value (FMV) 50 million *cash flow is undiscounted, thus not useful
Impairment loss P25 million
4. Ans. C.
Purchased technology:
Book value P30 million
Recoverable value (FMV) 10 million *cash flow is undiscounted thus not useful
Impairment loss P20 million
2. Ans. B.
Present value of future net cash flows from the CGU's:
Continued use: P1,050,000*4.9676 5,215,980
3. Ans. A.
Carrying value of CGU:
Factory: (P1,800,000*24/30) 1,440,000
Building: (P10,000,000*14/20) 7,000,000
Total 8,440,000
Recoverable value/Value in use 5,215,980 *FMV not determinable
Impairment loss 3,224,020
4. Ans. B.
Factory Machinery
Carrying value before impairment loss: 1,440,000 7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020 (550,070)
Building (7,000,000/8,440,000)*P3,224,020 (2,673,950)
Carrying value after impairment loss 889,930 4,326,050
5. Ans. B.
Factory Machinery
Carrying value before impairment loss: 1,440,000 7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020 (550,070)
Building (7,000,000/8,440,000)*P3,224,020 (2,673,950)
Carrying value after impairment loss 889,930 4,326,050 *lower than FMV P4.5M
Additional impairment to Factory (173,950) 173,950
Carrying value after reallocation of impairment loss 715,980 4,500,000
Observe that the carrying value of the individual assets comprising the CGU should not result to an amount that is
lower than the higher between the individual assets' Recoverable Value or Zero.
2. Ans. B.
Present value of future net cash flows from:
Use: 2015: P141,000*0.909091 128,182 0.909091
2016: P114,000*0.826446 94,215 0.826446
2017: P30,000*0.751315 22,539 0.751315
2018: P15,000*0.683013 10,245 0.683013
2019: P10,000*0.620921 6,209 261,391 0.620921
Disposal: 2019: P49,000*0.620921 30,425
Value in use 291,816
3. Ans. C.
Value in use 291,816
FMV less cost to sell 300,000 higher
4. Ans. D.
Carrying value 399,000
Recoverable amount (300,000)
Impairment loss 99,000
5. Ans. B.
Value in use 291,816 higher
FMV less cost to sell 275,000
6. Ans. D.
Carrying value 399,000
Recoverable amount (291,816)
Impairment loss 107,184
2. Ans. C.
Land A Land B
Fair Market Value 12,000,000 11,000,000
Cost (10,000,000) (12,000,000)
(Impairment loss)/Revaluation Surplus 2,000,000 (1,000,000)
OCI P&L
Fair Market Value 12,000,000 11,000,000
CV (8,000,000) (16,000,000)
Total increase/decrease in value 4,000,000 (5,000,000)
2,000,000 (4,000,000)
Recovery gain Reversal of RS
3. Ans. B.
Land A Land B
Fair Market Value 11,000,000 15,000,000
Cost (10,000,000) (12,000,000)
(Impairment loss)/Revaluation Surplus - 3,000,000
OCI OCI
Fair Market Value 11,000,000 15,000,000
CV (12,000,000) (11,000,000)
Total increase/decrease in value (1,000,000) 4,000,000
(1,000,000) 1,000,000
Reversal of RS Recovery gain
2. Ans. B.
CV after impairment loss 338,000
2014 Depr: (338,000-50,000)/8yrs (36,000)
CV, 12/31/14 302,000
3. Ans. C.
Replacement depreciable cost (P555,000-50,000) 505,000
Multiply by: Condition percent (6yrs/10yrs) 6/10
Depreciable FMV, Depreciable Sound Value 303,000
Salvage value 50,000
Fair value/Sound value 353,000
4. Ans. A.
Fair value/Sound Value 353,000
CV had there been no impairment (P500,000-P180,000) 320,000
Revaluation surplus 33,000
5. Ans. C.
RS, 12/31/16: (P33,000*7years/8years) 28,875
*note that the remaining life of the asset after revaluation is (12years-4years) 8 years.
DISCUSSION PROBLEMS
CHAPTER 7-PROBLEM 1
1 A.
2 B.
3 C.
CHAPTER 7-PROBLEM 2:
Ans. P3,700,000.
Purchase of a franchise 1,200,000
Goodwill acquired in the purchase of a business 640,000
Legal costs incurred in securing a patent 70,000
Cost of purchasing a patent from an inventor 500,000
Cost of purchasing a copyright 900,000
Cost of purchasing a trademark 290,000
Stand-alone application computer
100,000
software
Total Intangible Assets 3,700,000
2. Ans. P680,938.
Condition % CV
Cost Acq. Date 12/31/14: 12/31/14:
Patent ABC 100,000 4/1/2010: 15.75y/20y 78,750
Patent DEF 375,000 12/31/2011: 9.5y/12.5y 285,000
Patent GHI 350,000 7/1/2013: 14.5y/16y 317,188
Total 680,938
4. Ans. P128,855.
CV, 1/1/15 after impairment 386,565
Divide by: Remaining life 3
Amortization, 2015 128,855
2. Ans. P476,000.
Patent, Jan., 2014 544,000
Amortization, 2014 (544,000/8yrs) (68,000)
Carrying value, 12/31/14 476,000
3. Ans. P389,474.
Trademark, Jan., 2012 1,000,000
Amortization, 2012 (P1M/10yrs) (100,000)
Carrying value, 12/3/12 900,000
Value in use/PV of net cash flows at 9% for 9yrs:
P200,000*5.995247 5.995247 1,199,049
Impairment loss -
4. Ans. P2,858,150.
Fanchise:
Amortization 234,823
Impairment loss 673,649
Interest expense (P1,748,227*14%) 244,752
Continuing franchise fee (P18M*5%) 900,000 2,053,223
Patent:
Amortization 68,000
Trademark:
Amortization 100,000
Impairment loss 310,526
Legal fees - successful defense 326,400 736,926
Total expenses 2,858,150
Case 2:
1. Ans. P2,348,227.
Franchise, Jan. 1, 2014
Downpayment 600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712 1,748,227 2,348,227
Carrying value, 12/31/2014 2,348,227
Value in use/PV of net cash flows at 10% for an indefinite period:
P250,000/10% 5.759024 2,500,000
Impairment loss -
2. Ans. P476,000.
Patent, Jan., 2014 544,000
Amortization, 2014 (544,000/8yrs) (68,000)
Carrying value, 12/31/14 476,000
3. Ans. P800,000.
Trademark, Jan., 2012 1,000,000
Carrying value, 12/3/12 1,000,000
Value in use/PV of net cash flows at 9% for an indefinite period:
P200,000/9% 5.995247 2,222,222
Impairment loss -
4. Ans. P1,739,152.
Fanchise:
Interest expense (P1,748,227*14%) 244,752
Continuing franchise fee (P18M*5%) 900,000 1,144,752
Patent:
Amortization 68,000
Trademark:
Impairment loss 200,000
Legal fees - successful defense 326,400 526,400
Total expenses 1,739,152
FMV BV Difference
Current Asset 700,000 550,000 150,000
Noncurrent Asset (excluding GW)
Land 950,000 950,000 -
Depr. Asset 1,850,000 1,500,000 350,000
Liabilities (900,000) (900,000) -
Net Assets 2,600,000 2,100,000
2. Ans.
a) Purchase of excess earnings
FMV of Net Assets 2,600,000
Goodwill 200,000
Acquisition cost/price 2,800,000
b) Capitalization of excess earnings
FMV of Net Assets 2,600,000
Goodwill (P40,000/25%) 160,000
Acquisition cost/price 2,760,000
c) Capitalzation of average earnings
Projected annual average oper. Profits 300,000
Divide by: Capitalization rate 10%
Acquisition cost/price 3,000,000
d) Present value method
FMV of Net Assets 2,600,000
Goodwill: (P40,000*0.3.79079) 151,631
Acquisition cost/price 2,751,631
3. Ans. Option d)
For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill.
CGU-ABC
Impairment loss 130,000
Chargeable to Goodwill-ABC (130,000)
CGU-DEF
Impairment loss -
2. Ans. P395,000.
After impairment, 12/31/14 ABC DEF GHI JKL TOTAL
Cash 50,000 100,000 - - 150,000
Factory equipment 100,000 240,000 75,806 172,727 588,534
Office Equipment 250,000 490,000 90,968 172,727 1,003,695
Building 500,000 900,000 303,226 604,545 2,307,771
Goodwill** 70,000 375,000 - - 445,000
Carrying value of CGU 970,000 2,105,000 470,000 950,000 4,495,000
3. Ans. P605,000.
Goodwill, before impairment 1,000,000
Goodwill, after impairment 445,000
Impairment loss charged to goodwill 555,000
4. Ans. P258,064.
5. Ans. P604,546.
1. Ans. P510,000.
2014 Rental expense 480,000
2014 Amortization of leaserights
(P300,000/10yrs) 30,000 510,000
2. Ans. P63,158.
Cost of leasehold improvement 1,200,000
Divide by: Remaining lease term: 9.5yrs 9.50 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs.
Annual depreciation 126,316
Multiply by: 6/12
Depreciation expense, 2014 63,158
3. Ans. P60,150.
Carrying value, 1/1/2019
(P1,200,000*5yrs/9.5yrs) 631,579
Divide by: Remaining useful life 10.50 *remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended
Depreciation expense, 2019 60,150 remaining lease term (10-5yrs+10yrs), 15yrs.
2. Ans. P2,480.
Patent, initial cost 24,800
Divide by: useful life 10
Amortization expense 2,480
3. Ans. P22,320.
Patent (24,800-2480) 22,320
2. Ans. P330,000.
Expenses after technical feasibility is established 330,000
3. Ans. P100,500.
Amortization of computer software (330,000/3yrs) 110,000
Cost to produce and prepare software for sale 225,000
Cost of goods produced 335,000
Portion of goods remaining on hand 30%
Cost of ending inventory 100,500
4. Ans. P117,000.
Amortization of computer software:
P330,000*(P2,000,000/P4,000,000) 165,000
Cost to produce and prepare software for sale 225,000
Cost of goods produced 390,000
Portion of goods remaining on hand 30%
Cost of ending inventory 117,000
2. Ans. C.
CV, Franchise, 12/31/14: P252,000*6.5yrs/8yrs 204,750
3. Ans. B.
Prepaid rent, 12/31/14: P168,000*0.75yrs/2yrs 63,000
4. Ans. D.
Amortization of franchise, 2013 (P252,000/8yrs)*6/12 15,750
Rent expense, 2013 (P168,000/2yrs)*3/12 21,000
Net loss including organization expense in 2013 96,000
Retroactive adjustment to RE,beg. 2013 132,750
5. Ans. B.
Amortization of franchise, 2014 (P252,000/8yrs) 31,500
Rent expense, 2014 (P168,000/2yrs) 84,000
Amortization of patent, 2014 (P444,000/10yrs) 44,400
Cost to develop a secret formula 450,000
Legal fees - successful defense 75,900
Research and development expense, 2014 960,000
Total expense in 2014 1,645,800
2. Ans. B.
Patent:
Cost (1/1/14) 2,220,000
Amortization: (2,220K/10yrs) (222,000)
Carrying Value (12/14) 1,998,000
Recoverable value/Value in use
(337,822*5.32825) 1,800,000 0 5.328250
Impairment loss 198,000
3. Ans. A.
2013 expenses:
Rent expense (840,000/2)*3/12 105,000
Net loss for the year 480,000
Retroactive adjustment to RE, Beg 585,000
4. Ans. A.
2014 expenses:
Impairment loss on Franchise 10,000
Rent expense for 2014 420,000
Amortization on Patent 222,000
Impairment loss on Patent 198,000
Cost of developing recepe 2,250,000
Legal fees on patent defense 379,500
Total expense 3,479,500
2. Ans. D.
License, Correct Cost, 1/2012 2,160,000 -Training cost is recognized as outright expense.
Amortization (2012-2014): P2,160,000*3yrs/10yrs (648,000)
Carrying value, 12/31/14 1,512,000
3. Ans. B.
Training cost, expense in 2012 per audit 240,000
Amortization expense (2012-2013) per audit: P2,160,000*2yrs/10yrs 432,000
Prior period expense, per audit 672,000
Amortization expnse (2012-2013) per books: P2,400,000*2yrs/10yrs 480,000
Retroactive adjustment, debit, to RE, beg. 2014 192,000
4. Ans. C.;
Trademark, Correct CV, 12/31/14 1,280,000 - Trademark is with indefinite life, thus no amortization.
Recoverable value/Value in use: - Successful defense cost is recognized as outright expense.
PV of Future net cash flows at 9% for an indefinite period:
P90,000/9% 1,000,000
Impairment loss 280,000
5. Ans. C.
Depreciation on the Leasehold Improvement
P900,000/5yrs * 10/12 150,000 - Depr. is over useful life since it is shorter than remaining lease term.
Amortization of Leaserights; P400,000/10yrs 40,000
Total expense 190,000
2. Ans. B.
CV, Dec. 31, 2007: P660,000*14/15 616,000
3. Ans. C.
Amortization expense 2012:
Original Patent: P660,000/15yrs 44,000
Competing Patent: P220,000/11yrs 20,000
Total amortization, 2012 64,000
4. Ans. A.
Original Patent, CV, Dec. 31, 2011:
P660,000*10/15 440,000
Competing Patent, CV, Dec. 31, 2011:
P220,000*10/11 200,000 640,000
5. Ans. D.
Original Patent, CV, 1/1/2012 440,000
Competing Patent, CV, 1/1/2012 200,000
Related Patent, 1/1/2012 335,000
Total Patent, 1/1/2012 975,000
Divide by: Extended remaining life (10yrs+3yrs) 13
Revised amortization expense, 2012 75,000
6. Ans. B.
CV, 12/31/13 (P975,000*11/13) 825,000
7. Ans. B.
CV, 12/31/14 (P975,000*10/13) 750,000
Recoverable value -
Impairment loss 750,000
2. Ans. A.
Patent, 12/31/14 (before amortization), per audit 500,000
Correct amortization for 2014 (113,333)
Patent, 12/31/14 after amortization 386,667
3. Ans. B.
The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.
3. Ans. B.
PATENT: 8 YEARS:
Cost 1/1/2014 545,000 517,750
Amortization (545,000/8) 68,125
Carrying Value 12/31/2014 476,875
Recoverable value
(120,000*4,563757) 547,651 0
Impairment loss -
4. Ans. C.
LEASE AGREEMENT:
Rent expense for 2014 200,000
Amortizatin of lease rights (150,000/5yrs) 30,000
Depr of improvement (450,000/4.5yrs)*6/12 50,000
Total expense 280,000
2. Ans D.
Salaries and other employee benefits 7,800,000
Other expenses 3,080,000
Depreciation on Building (11.2M/20yrs) 560,000
Total R&D Expense 11,440,000
3. Ans. B.
Patent cost 3,200,000
Useful life 10
Amortization for 2014 320,000
4. Ans. A
Building cost 11,200,000
Accum Depr (11.2M/20) (560,000)
CV 12/31/14 10,640,000
5. Ans. B.
Patent cost 3,200,000
Amortization in 2013: (3.2M/10yrs)*9/12 (240,000)
Amortization in 2014 (320,000)
CV 12/31/14 2,640,000
2. Ans. 0.
Organization cost is recognized as outright expense.
3. Ans. C.
Excess of cost over net assets of entrprise acquired in 2012 200,000
*No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost.
1. Ans. D.
Projected average excess earnings 3,182,400
Divide by: Capitalization rate 18%
Goodwill: 17,680,000
Add: Fair value of net assets 36,000,000
Acquisition price 53,680,000
2. Ans. A.
Projected average excess earnings 3,182,400
Multiply by: # of years 4
Goodwill 12,729,600
Add: Fair value of net assets 36,000,000
Acquisition price 48,729,600
3. Ans. A.
Projected average earnings 9,662,400
Divide by: Capitalization rate 20%
Acquisition price 48,312,000
4. Ans. C.
Projected average excess earnings 3,182,400
Multiply by: PV factor at 15%, 4 periods 3
Goodwill 9,085,683
Add: Fair value of net assets 36,000,000
Acquisition price 45,085,683
2. Ans. A.
Value in use=Present value of future net cash flows from CGU Country C:
Estim. Future net cash flows before impairment event 1,500,000
Effect of new legislation (cutting by 40% imports to Country C) 60%
Estim. Future net cash flows after impairment event 900,000
Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.771584
Value in use 4,294,426
*observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal.
3. Ans. A.
Carrying Value of Country C's, Assets
Factory equipment 2,500,000
Store Equipment 1,500,000
Building 2,700,000
Goodwill 1,125,000 **observe that payables is deducted since, estimate of cashflows
Payables (700,000) 7,125,000 also included cash flows related to payable.
Value in use/Recoverable value 4,294,426
Impairment loss 2,830,574
6. Ans. D.
Impairment loss 2,830,574
Allocation of loss:
Goodwill of Country C (1,125,000)
Balance to other asset, prorata: 1,705,574
Factory equipment 1,800,000 (458,214) 1,341,786
Store Equipment 1,500,000 (381,845) 1,118,155 Should not be lower than its Rec. Value, P1.4M
Building 2,700,000 (687,321) 2,012,679
Payables (700,000) (700,000) *liabilities are not impaired.
Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable
amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property
and equipment, prorata.
6. Ans. C.
Cash -
Allocation of loss:
Goodwill of Country C (100,000)
Balance to other asset, prorata: (100,000)
Factory equipment 1,800,000 (458,214) 1,341,786
Store Equipment 1,500,000 (381,845) 1,118,155 Not be lower than its Rec. Value, P1M
Building 2,700,000 (687,321) 2,012,679
Payables (700,000) (700,000) *liabilities are not impaired.
2. Ans. A.
Carrying value of CGU
Factory equipment 1,750,000 included in the determination of the fair value less cost to sell.
Office equipment 1,475,000
Building 2,725,000
Goodwill 500,000 6,450,000
Recoverable value/FMV less cost to sell 5,250,000
Impairment loss 1,200,000
3. Ans. C.
Impairment loss 1,200,000
Allocated to:
Goodwill (500,000)
Balance to other assets, prorata 700,000
Factory equipment 1,750,000 (205,882) 1,544,118
Office equipment 1,475,000 (173,529) 1,301,471
Building 2,725,000 (320,588) 2,404,412
4. Ans. C.
Impairment loss 1,200,000
Allocated to:
Goodwill (500,000)
Balance to other assets, prorata 700,000
Factory equipment 1,750,000 (205,882) 1,544,118 *Should not be lower than 1.6M
Office equipment 1,475,000 (173,529) 1,301,471 *Office Equipment CV should not be lower than P1.4M
Building 2,725,000 (320,588) 2,404,412
2. Ans. C.
Capitalizable cost, after Nov. 1, 2014 60,000
Recoverable amount, Dec. 31, 2014 500,000
Impairment loss -
2. Ans. A.
Amortization of Software (300,000/240)*100 P125,000
Amortization of Franchise (480,000/10) 48,000
Continuing franchise fee (2,500,000*.05) 125,000
Total expenses related to computer software and franchise P298,000
3. Ans. A.
Total research and development costs (all costs in item f) P433,000
4. Ans. C.
Patent (600,000*9/10) P540,000
Copyright (1,200,000-360,000) 840,000
Tradename 1,050,000
Computer software (300,000-125,000) 175,000
Franchise (480,000*9/10) 432,000
Goodwill 2,700,000
Total carrying value of intangible, 12/31/15 P5,737,000
The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not qualified
yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense.
The second Patent is useful for many projects, thus only the amortization is recognized as R&D Expense. The balance shall be
reflected as Intangible asset.
Patent, CV, June 30, 2014: (P16,200*9/10) 14,580
Goodwill
Acquisition cost 1,582,000
FMV, Net Assets acquired 1,560,000
Goodwill, initial recognition 22,000
Note that since there are no indication of GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired.
2. Ans. D.
Salaries of staff doing research 18,500
Patent solely for Project AM123 12,000
Depr. on Equipment for various projects (10,000/5yrs) 2,000
Amo. on Patent for various projects (16,200/10yrs) 1,620
Cost of pilot models 8,950
Total R&D Expense 43,070
3. Ans. A.
Amortization Expense: ABC (30,000/25yrs) 1,200
Amortization Expense: XYC (33,000/15yrs) 2,200
Total amortization expense on copyrights 3,400
4. Ans. A.
DISCUSSION PROBLEMS
CHAPTER 8-PROBLEM 1
1 B.
2 C.
3 B.
4 C.
5 D.
6 C/B.
7 B.
8 D.
9 A.
10 A.
11 B.
12 C.
13 D.
14 D.
15 B.
16 B.
17 B.
18 B.
19 C.
1. Ans.:
Warranties expense 1,950,000
Estimated warranties payable 1,950,000
2. Ans. P3,200,000.
3. Ans. P1,950,000.
1. Ans.
Audit adjusting entry in 2015:
Retained earnings (add'l exp. in 2014) 425,000
Warranties expense 250,000
Estimated warranties payable 675,000
2. Ans. P750,000.
3. Ans. P900,000.
4. Ans. P425,000.
5. Ans. P675,000.
1. Ans. P3,303,000.
2. Ans. P209,250.
2. Ans. P453,750.
2013 leaves:
55employees*4weeks*5days 1,100 days
25employees*2weeks*5days 250 days
Total 2013 unused leaves: 1,350 days
Less: Exercised in 2014 925 days
Unexercised in 2014, thus forfeited by year-end 2014 425 days
2014 leaves:
30employees*6weeks*5days 900 days
25employees*5weeks*5days 625 days
30employees*3weeks*5days 450 days
10employees*2weeks*5days 100 days
Total cummulative unused leaves by 12/31/2014 2,075 days
Less: Expired unused leaves from 2013: (425)
Unused leaves still exerciseable 1,650
Mulitply by: Current salary rate, 2014 275
Liability for compensated absences/Salaries payable 453,750
2. Ans.
2. Ans. C.
The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract
(10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous
as of the balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous.
Entry:
Loss on purchase commitment (P100-P60)*10,000 400,000
Estimated liability on purchase commitment 400,000
3. Ans. D.
The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37) while
virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16)
4. Ans. C.
The contingent asset that is probable is disclosed.
Correct entries:
March 1, 2014:
Cash 1,081,109
Bonds payable 1,000,000
Premium on bonds payable 81,109
September 1, 2014:
Interest expense 50,000
Cash 50,000
Premium on bonds payable 6,756
Interest expense 6,756
December 31, 2014:
Interest expense 33,333
Interest payable 33,333
(P1,000,000*10%*4/12)
Premium on bonds payable 4,684
Interest expense 4,684
Correct interest (P1,074,353*8%*4/12) 28,649
Nominal interest accrued (P1,000,000*10%*4/12) 33,333
Amortization (4,684)
2. Ans. P71,894.
Interest expense (Mar. 1 - Sept. 1)
P1,081,109*8%*6/12 43,244
Interst expense (Sept. 1 - Dec. 31)
P1,074,353*8%*4/12 28,649
Interest expense, 2014 71,894
3. Ans. P1,069,669.
Amortized cost, Sept. 1, 2014 (see table) 1,074,353
Amortization up to Dec. 31, 2014 (see entries) (4,684)
Amortized cost, Dec. 31, 2014 1,069,669
4. Ans. P10,021.
Retirement price 1,050,000
Amortized cost, Sept. 30, 2015: (1,058,754)
Accrued interst (P1M*10%*1/12) (1,267)
Gain on retirement of bonds (10,021)
Entry:
Bonds payable 1,000,000
Premium on bonds payable 58,754
Interest expense 1,267
Cash 1,050,000
Gain on retirement of bonds 10,021
2. Ans. P720,000.
Required warranty expense, 2013: (2,500u*40%*P900) 900,000
Actual cost (560,000)
Warranties liability, Dec. 31, 2013 340,000
Required warranty expense, 2014: (3,000u*40%*P900) 1,080,000
Actual cost (700,000)
Warranties liability, Dec. 31, 2014 720,000
3. Ans. P2,099,474.
Proceeds from bond issue/FMV 1/1/13 = PV of future cash flows at 10% for 5 years.
Principal: P2,000,000*0.620921 1,241,843 0.620921
Interest: P240,000*3.790787 909,789 2,151,631 3.790787
4. Ans. P78,505.
Net income before any adjustments: 1,557,679
Understated accounts payable/purchases (5,000)
Understated warranties payable/warranties expense (380,000)
Overstatement in interest expense in 2014 27,321
Adjusted net income 2014, before bonus 1,200,000
5. Ans. P785,046.
Adjusted net income 2014, before bonus 1,200,000
Less: Bonus (78,505)
Net income before 30% tax 1,121,495
Income tax expense (336,448)
Net Income after tax 785,046
2. Ans. P248,700.
Warranty expense in 2013 (1,250*70%)*P350 306,250
Less: Actual warranty cost incurred in 2011 (153,000) AJE 2: Warranties Expense 95,450
Warranties payable, 2013 153,250 Warranties payable 95,450
Warranty expense in 2014 (1,410*70%)*P350 345,450
Less: Actual warranty cost incurred in 2014 (250,000)
Warranties payable, 2012 248,700
3. Ans. P222,750.
2013 unused leaves forwarded to 2015 (625-(700-200))* 125
2014 unused leaves forwarded to 2015 550 AJE 3: Salaries payable 45,750
Total unused leaves that may be forwarded to 2053 675 Salaries expense 45,750
Multiply by current salary rate in 2014: (268,500/895days)*1.1 330 (268,500-222,750)
Salaries payable (Liab for compensated absences) 222,750
*any unused prior to 2013 leaves are forfieted by the end of 2014
4. Ans. P1,600,000.
*There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probable
proceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.
5. Ans. P130,841.
Unajdusted net income 2,032,700
AJE 1: Overstated purchases 17,000
AJE 2: Understated warranty expense (95,450)
AJE 3: Overstated salaries expense 45,750
Adjusted net income 2,000,000
B = 10% (NI - B - TX)
TX = 30% (NI - B)
2. Ans. P8,277,686.
Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance
(Bal.*10%) (Face*12%)
January 1, 2014: 8,397,896
December 31, 2014: 839,790 960,000 (120,210) 8,277,686
December 31, 2015: 827,769 960,000 (132,231) 8,145,455
December 31, 2016: 814,545 960,000 (145,455) 8,000,000
3. Ans.
Entry upon conversion:
Alt1 Bonds payable 8,000,000
Premium on bonds payable 277,686
Ordinary shares (8,000*50*P10) 4,000,000
Share premium 4,277,686
4. Ans. P65,455.
Total Bonds Payable APIC-BCP
(at FMV, 102) (Residual)
Retirement price 8,320,000 8,080,000 240,000
CV, Bonds payable, 1/1/16 8,145,455
CV, APIC - Bond coversion privilege 402,104
Gain on retirement of convertible bonds 65,455 162,104
to profit/loss to APIC
Entry:
Bonds payable 8,000,000
Premium on bonds payable 145,455
APIC - Bond conversion privilege 402,104
Cash 8,320,000
Gain on retirement of bonds (profit/loss) 65,455
APIC/Share premium 162,104
2. Ans. P1,898,486.
Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance
(Bal.*10%) (Face*12%)
January 1, 2014: 1,870,736
July 1, 2014: 93,537 80,000 13,537 1,884,273
January 1, 2015: 94,214 80,000 14,214 1,898,486
3. Ans. P257,559.
Entry upon exericise of warrants:
Cash (2,000*5w)*60%*P55 330,000
Ordinary share warrants outstanding(60%) 227,559
Ordinary shares (6,000shares*P50) 300,000
Share premium 257,559
4. Ans.
Entry upon expiration of remaining warrants:
Ordinary share warrants outstanding(40%) 151,706
Share premium/APIC - Expired warrants 151,706
CASE 2:
Annual rental 300,000
Amortization of lease bonus (100,000/8yrs) 12,500
Contingent rental (P2.5M-P2M)*5% 25,000
Rent Expense 337,500
CASE 3:
Total lease payments: P30,000*(60mo - 9mo) 1,530,000
CASE 4:
Total lease payments: P40,000*(120mo-3mo) 4,680,000
Divide by: 10 years 10
Annual rental expense 468,000
Multiply by: 4mo/12mo 4/12
Rent expense for 2014 156,000
CASE 5:
Total lease collection:
First two years: (P2,000*100*2yrs) 400,000
Last two years: (P3,000*100*2yrs) 600,000 1,000,000
Divide by: 4 years 4
Annual rental income 250,000
Multiply by: 9mo/12mo 9/12
Rent income for the period ended 9/30/14 187,500
Amount collected in 2014 200,000
Unearned rental income (12,500)
CASE 6:
Gross rental income 500,000
Amortization of direct lease expense (150,000/5years) (30,000)
Depreciation expense (120,000)
Property taxes (90,000)
Net rental income 260,000
CASE 2:
Minimum lease payment in advance 96,000
Multiply by: PV factor of 1 at 10% for 8 period in advance 5.8680
Initial cost of the asset 563,328
Divide by: 12 yrs (life since title passes to the lessee) 12
Depreciation expense 46,944
CASE 3:
Minimum lease payment
Periodic payments in advance 400,000
Multiply by: PV factor of 1 at 14% for 10 period in advance 5.9500 2,380,000
Bargain purchase option 200,000
Multiply by: PV factor of 1 at 14% for 10 period without annuity 0.2700 54,000
Initial cost of the asset 2,434,000
Less: Depreciation (2,434,000/12 years) (202,833) *
Carrying value as of 12/31/14 2,231,167
*note that the depreciation is based on the useful life since ownership will be transferred to the lessee
CASE 4:
Amortization table:
Periodic PaymentsInterest Principal Balance
Dec. 31, 2014: (P3,165,000 - P500,000) 3,165,000
Dec. 31, 2015: 500,000 316,500 183,500 2,981,500
Dec. 31, 2016: 500,000 298,150 201,850 2,779,650
AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000)
The lease agreement does not qualify as finance, thus should have been accounted for only under operating lease.
January 1, 2014:
Rent expense 500,000
Prepaid rent 500,000
1. Ans. P125,902.
Expenses per books
Interest on finance lease liability 287,951
Depreciation expense 337,951 625,902
Expense per audit 500,000
Overstatement in expense/Understatement in NI 125,902
2. Ans. None.
April 1, 2014:
Rent expense 150,000
Cash 150,000
July 1, 2014:
Rent expense 150,000
Cash 150,000
October 1, 2014:
Rent expense 150,000
Cash 150,000
AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388)
The lease agreement does qualify as finance, thus should have been accounted for only under finance lease.
April 1, 2014:
Interest expense 80,708
Lease liability 69,292
Cash 150,000
July 1, 2014:
Interest expense 79,322
Lease liability 70,678
Cash 150,000
October 1, 2014:
Interest expense 77,908
Lease liability 72,092
Cash 150,000
1. Ans. P132,943.
Expense per books
Rent expense (P150,000*4qtrs) 600,000
Expense per audit:
Interest expense 314,405
Depreciation expense 418,539 732,943
Understatement in Expense/Overstatement Net Income (132,943)
2. Ans. P3,823,326.
Lease liability, 12.31.14 3,823,326
Interest payable, 12.31.14 76,467
3. Ans. P303,076.
Principal due from January 1, 2015 to December 31, 2015 (see amortization table)
Janaury 1, 2015: 73,533
April 1, 2015: 75,004
July 1, 2015: 76,504
October 1, 2015: 78,034
Current portion of lease liability 303,076
2. Ans. 40,000.
Sales price 420,000
Fair market value (380,000)
Deferred gain on sale 40,000
3. Ans. 100,000.
Sales price 420,000
Fair market value (320,000)
Deferred gain on sale 100,000
4. Ans. 60,000.
Sales price 420,000
Fair market value (450,000)
Ignored (30,000)
CASE 2:
1. Ans. P80,000.
Sales price 400,000
Fair market value (480,000)
Deferred loss on sale (80,000) * since the future rentals is below rent, there is an expected future benefit
from the asset being sold at a loss.
Fair market vaue 480,000
Carrying value (540,000)
Realized loss on sale (60,000)
2. Ans. P40,000.
Sales price 400,000
Fair market value (480,000)
Realized loss on sale (80,000) * since the future rentals is at market rate of rent, there is no expected
future benefit from the asset sold at a loss.
Fair market vaue 480,000
Carrying value (540,000)
Realized loss on sale (60,000)
CASE 3:
1. Ans. 626,667.
Interest expense on finance lease liab (600,000*10%) 60,000
Depreciation on the leased-back asset (600,000/3yrs) 600,000
Amortization of deferred gain on sale (100,000/3yrs) (33,333) - gain on a sale and leaseback (finance) is fully deferred and
Net amount recognized in the profit or loss 626,667 amortized over lease term.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.
2. Ans. 141,269
Rent expense 241,269
Realized gain on sale (P600,000 - P500,000) (100,000) *Selling price is at FMV
Net amount recognized in the profit/loss 141,269
*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.
CASE 4:
1. Ans. 115,000.
Interest expense on finance lease liab (150,000*10%) 15,000
Depreciation on the leased-back asset (150,000/3yrs) 50,000
Realized loss on sale 50,000 *loss on sale is fully realized since it is an indication of
Net amount recognized in the profit or loss 115,000 asset impairement.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.
2. Ans. P158,205.
Rent expense 58,205
Realized loss on sale (P200,000 - P150,000) 100,000 *Selling price is at FMV (no expected future benefit)
Net amount recognized in the profit/loss 158,205
*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.
Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 12%) 720,955
December 31, 2015: 200,000 86,515 113,485 607,470
December 31, 2016: 200,000 72,896 127,104 480,366
December 31, 2017: 200,000 57,644 142,356 338,010
December 31, 2018: 200,000 40,561 159,439 178,571
December 31, 2019: 200,000 21,429 178,571 (0)
1. Ans. 0.
Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset
since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer.
*Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amount receivable.
2. Ans. 72,896.
3. Ans. 480,366.
See amortization table above.
CASE 2:
Minimum lease collections 200,000
Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance 4.169865 1
Present value of minimum lease collection = Sales Price 833,973
Cost of the asset 600,000
Gross profit on sale 233,973
Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 10%) 633,973
January 1, 2016: 200,000 63,397 136,603 497,370
January 1, 2017: 200,000 49,737 150,263 347,107
January 1, 2018: 200,000 34,711 165,289 181,818
January 1, 2019: 200,000 18,182 181,818 0
1. Ans. 233,973.
Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the difference
between the Sales Price of the asset and its Cost on the company's books.
*Direct lease costs incurred under sales type lease is recognized as outright expense
2. Ans. 49,737.
Entry upon accrual of interest and periodic collections:
Dec. 31, 2015:
Interest receivable 63,397
Interest income 63,397
Jan. 1, 2016:
Cash 200,000
Interest receivable 63,397
Finance lease receivable 136,603
Jan. 1, 2017:
Cash 200,000
Interest receivable 49,737
Finance lease receivable 150,263
3. Ans. 497,370.
See amortization table
CASE 3:
Minimum lease collections 400,000
Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787
Present value of minimum lease collection 1,516,315
Guaranteed residual value 100,000
Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921
Present value of the guaranteed residual value 62,092
Total Sales Price of the asset = Total Lease Receivable 1,578,407
Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 10%) 1,578,407
December 31, 2015: 400,000 157,841 242,159 1,336,248
December 31, 2016: 400,000 133,625 266,375 1,069,872
1. Ans. P1,578,407.
Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the guaranteed
residual value is added to the total sales price of the asset.
*Direct lease expense under sales type lease is recognized as outright operating expense.
2. Ans. P1,000,000.
Entry to recognize cost of sales, if perpetual inventory is used:
Cost of sales 1,000,000
Inventory 1,000,000
3. Ans. 578,407.
Total Sales Price of the Asset 1,578,407
Less: Cost of the asset/FMV of asset (1,000,000)
Gross Profit on Sale 578,407
4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash 400,000
Interest income 157,841
Finance lease receivable 242,159
CASE 4:
Minimum lease collections 400,000
Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.790787
Present value of minimum lease collection = Sales Price of the asset 1,516,315
*Since the residual value is unguaranteed, that portion of the asset is not deemed sold. Thus was not included in the sales price.
Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January 1, 2015: (CV * 10%) 1,578,407
December 31, 2015: 400,000 157,841 242,159 1,336,248
December 31, 2016: 400,000 133,625 266,375 1,069,872
December 31, 2017: 400,000 106,987 293,013 776,860
December 31, 2018: 400,000 77,686 322,314 454,545
December 31, 2019: 400,000 45,455 354,545 100,000
December 31, 2019: Guaranteed RV 100,000 100,000 0
1. Ans. P1,516,315.
Entry upon inception/Sale of asset:
Finance lease receivable 1,516,315
Sales 1,516,315
2. Ans. P937,908.
Entry to recognize cost of sales, if perpetual inventory is used:
Finance lease recievable 62,092
Cost of sales 937,908
Inventory 1,000,000
3. Ans. 578,407.
Total Sales Price of the Asset 1,516,315
Less: Cost of the asset/FMV of asset (937,908)
Gross Profit on Sale 578,407
4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash 400,000
Interest income 157,841
Finance lease receivable 242,159
1. Ans. P4,340,000.
Taxable income 10,850,000
Mulitply by: Current tax rate 40%
Current tax expense 4,340,000
2. Ans. P3,840,000.
Net income after permanent differences 9,600,000
Multiply by: Constant tax rate 40%
Total tax expense 3,840,000
3. Ans. P660,000.
Future deductible amounts 1,650,000
Mulitply by: Constant tax rate 40%
Deferred tax asset 660,000
4. Ans. P160,000.
Future taxable amounts 400,000
Mulitply by: Constant tax rate 40%
Deferred tax liability 160,000
To reconcile:
Current tax expense 4,340,000
Add: Deferred tax expense (FTA) 160,000
Less: Deferred tax benefit (FDA) (660,000)
Total tax expense 3,840,000
5. Ans. P3,902,500.
If tax rate in the future is expected to change (at 35%):
Current tax expense (P10.85M*40%) 4,340,000
Add: Deferred tax expense (FTA:P400,000*35%) 140,000
Less: Deferred tax benefit (FDA:P1,650,000*35%) (577,500)
Total tax expense 3,902,500
6. Ans. P140,000.
Future taxable amounts 400,000
Mulitply by: Futre tax rate 35%
Deferred tax liability 140,000
7. Ans. P577,500.
Future deductible amounts 1,650,000
Mulitply by: Constant tax rate 35%
Deferred tax asset 577,500
1. Ans. P2,320,000
Taxable income 5,800,000
Mulitply by: Current tax rate 40%
Current tax expense 2,320,000
2. Ans. P2,040,000.
Net income after permanent differences 5,100,000
Multiply by: Constant tax rate 40%
Total tax expense 2,040,000
3. Ans. P660,000.
Cummulative Future Deductible Amt, end 1,600,000
Mulitply by: Constant tax rate 40%
Deferred tax asset 640,000
4. Ans. P200,000.
Cummulative Future Taxable Amt, end 500,000
Mulitply by: Constant tax rate 40%
Deferred tax liability 200,000
To reconcile:
Current tax expense 2,320,000
Less: Deferred tax benefit ( dec in FTA) (120,000) (decrease in deferred tax liability)
Less: Deferred tax benefit (inc in FDA) (160,000)
Total tax expense 2,040,000
4. Ans. P700,000.
To reconcile:
Accrued pension, beg 630,000
Pension expense (total) 1,270,000
Total 1,900,000
Contribution to the plan for the year (1,200,000)
Accrued pension, end 700,000
4. Ans. P350,000.
To reconcile:
Prepaid pension, beg (ceiling was higher) (220,000)
Pension expense (total) 620,000
Total 400,000
Contribution to the plan for the year (750,000)
Prepaid pension, end (ceiling is lower) (350,000)
3. Ans. B.
Estimated warranty liability, beginning 2,176,000
Total sales – kitchen applicances 86,400,000
Multiply by: 5%
Estimated warranties expense 4,320,000
Actual warranty costs during the year` (2,624,000)
Estimated warranty liability, end 3,872,000
2. Ans. D.
Unadjusted net income 1,277,500
Understatement in accrued comp. abs./salaries expense (18,000)
Adjusted net income 1,259,500 1,147,608 745,945 111,892
1. Ans. C.
b. Required premiums expense: (40,000*75%)/5*(P95-P25) 420,000
Actual cost/Actual redemption (5,000-1,250)*(P95-P25) (262,500)
Estimated premiums liability, per audit 157,500
Estimated premiums liabilty, per books 118,750
Net adjustment 38,750
AJE 2:
Premiums expense 38,750
Estimated premiums liability 38,750
2. Ans. A.
c. Cummulative unused leaves 12/31/14 750
Less: 2012 leaves (forfeited (50)
Leaves that can be carried forward to 2015 700
Exercise rate (per past experience) 80%
Cummulative leaves that will probably be exercised 560
Multiply by: 2014 current salary rate 400
Accrued salaries - compensated absences, per audit 224,000
Accrued salaries - compensated absences, per books 300,000
Net adjustment (76,000)
AJE 3:
Accrued salaries 76,000
Salaries expense 76,000
3. Ans. A.
Unadjusted net income before bonus and tax 1,015,131
AJE 2: Understated premiums expense (38,750)
AJE3: Overstated salaries expense 76,000
Adjusted net income before bonus and tax 1,052,381
B = 15% (NI - Tx - B)
Tx = 30% (NI - B)
B = 15%(NI - 30%(NI - B) - B)
B = 15%(1,052,381 - 30%(1,052,381 - B) - B)
B = 110,500/1.105
B = 100,000
AJE 4:
Accrued salaries 5,540
Salaries expense 5,540
(100,000-96,460)
4. Ans. A.
Net Income before tax (1,052,381 - 100,000) 952,381
Less: Income tax (952,381*30%) (285,714)
Net Income after tax 666,667
AJE 5:
Income tax expense (current) 285,714
Income tax payable 285,714
d. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.
ENTRY:
Income tax expense (deferred) 250,000
Deferred tax liability 250,000
5. Ans. B.
e. The refinancing agreement was completed as of December 31, 2014, thus there is a right to refinance the liablity on a long-term
basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of the
fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis.
The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus will
still be presented as current as of December 31, 2014.
2. Ans. D.
Warranties liability, unadjusted 10,000
Warranty expense, 2014 (10,550,000*6%) 633,000
Total 643,000
Less: Actual warranties paid (310,000)
Warranties liability, adjusted (12/2014) 333,000
3. Ans. A.
Legal services 4,600
Medical services 5,500
Payroll (12/21/ - 12/31) : 14,400 *8/12 9,600
Royalties 3,900
Accrued interest on Bond Liability
24,000
(800,000*12%*3/12)
Total accruals 47,600
4. Ans. A.
Amortization Table: Lease Liability
Interest
13.59032634 Payment Principal Balance
(Bal.*2%)
Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326) 3,397,582
June 30, 2014: 250,000 135,903 114,097 3,283,485
December 31, 2014: 250,000 131,339 118,661 3,164,824
June 30, 2015: 250,000 126,593 123,407 3,041,417
December 31, 2015: 250,000 121,657 128,343 2,913,074
Current portion Long-term Portion
5. Ans. A.
Amortization Table: Bonds Payable
Nominal Effective Amortization Balance
Balance 851,706
September 30, 2014: 42,585 48,000 (5,415) 846,291
March 31, 2015: 42,315 48,000 (5,685) 840,606
2. Ans. C.
Required estimated expense 2013: (50,000/5)*40%*(P160-P50) 440,000
Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50) (198,000)
Estimated premiums payable, 12/31/2013 242,000
Required estimated expense 2014: (60,000/5)*40%*(P160-P50) 528,000
Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50) (561,000)
Estimated premiums payable, 12/31/2014 209,000
3. Ans. D.
Proceeds from issuance of bonds on 1/1/2013 P2,050,000
Fair value of bonds at 12% effective rate* 1,903,927
APIC – Bond Conversion Privilege P146,073
*PV of future cash flows at 12% for 3 periods:
Principal: 2,000,000 * 0.711780 P1,423,560
Interest: 200,000 * 2.40183 480,366
Total present value = Fair value P1,903,927
4. Ans. A.
Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14:
DR: Bonds payable 1,000,000
DR: APIC – Bond conv. priv. 73,036
CR: Discount on bonds payable 17,857
CR: Ordinary shares (10,000*50) 500,000
CR: Share premium 555,179
5. Ans. B.
Present value of the minimum lease payment at
implicit lease rate, 8% for 5 periods: (600,000*3.9927) P2,395,626
Fair market value of the leased asset at inception of lease 2,400,000 *100%, thus Finance lease
6. Ans. C.
Present value of MLP on 1/1/14 P2,395,626
Divide by: Term (no transfer of ownership) 5 years
Depreciation expense in 2014 P479,125
2. Ans. D.
Lease liability balance per books,
P2,240,000
12/31/2014
Debits to the account for the periodic
4,800,000
payments
Amounts starting
initially12/31/2011
capitalized on
P7,040,000
12/31/2011 = Fair market value of the
Amortization table: Finance Lease Liability
Effective
Date Payment Principal Balance
Interest
December 31, 2011: P7,040,000
December 31, 2011: 1,200,000 5,840,000
December 31, 2012: 1,200,000 584,000 616,000 5,224,000
December 31, 2013: 1,200,000 522,400 677,600 4,546,400
December 31, 2014: 1,200,000 545,640 745,360 3,801,040 Liab. balance
December 31, 2015: 1,200,000 380,104 819,896 2,981,144
Current Noncurrent
3. Ans. C.
Notes payable P7,569,669
Liability under capital lease – Long term** 2,981,144
Deferred tax liability 250,000
Total long term liabilities P10,800,813
4. Ans. B.
Accounts payable, unadjusted balance P1,840,500
RR# 65218, purchase in transit, FOB Destination (19,000)
RR# 65219, purchase in transit, FOB Buyer (Destination) (30,500)
RR# 65220, goods received only after the December 31 (41,000)
Accounts payable, adjusted balance P1,750,000
5. Ans. D.
2014 Sales P31,650,000
Multiply by estimated warranty cost as % of
8%
sales
Warranties expense in 2014 P2,532,000
6. Ans. B.
Accounts payable 1,750,000
Warranties payable (2,532,000 – 1,950,000) 582,000
Interest payable on notes (8,000,000*12%*9/12) 720,000
Current portion of Long term liability under capital lease 819,896
Total current liabilities P3,871,896
2. Ans. C.
The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset:
Estimated premiums payable, 2014 (5,000 * P20) P100,000
Multiply by tax rate: 30%
Deferred tax asset (Noncurrent Asset) P30,000
The temporary difference from excess tax depreciation over financial depreciation is future taxable amount
creating Deferred Tax Liability:
Deferred tax liability (Noncurrent Liability): P150,000*30% P45,000
3. Ans. D.
Accounts payable, as adjusted (P540,000 + P50,000) P590,000
Estimated premiums payable, 2014 (5,000 * P20) 100,000
Current liabilities P690,000
4. Ans. A.
Proceeds from bond issuance (the amount credited per entry made) P5,500,000
Fair value of bonds without the conversion option (at 8% effective rate)* 5,399,271
Equity component/ APIC from Bond Conversion Privilege P100,729
Present value of Principal: P8,000,000*0.680583 P3,402,916
Present value of Interest: 500,000*3,99271 1,996,355
Fair value of the bonds without the conv. Option P5,399,271
5. Ans. D.
Carrying value of bonds up to 12/31/2015 5,257,710
APIC- Bond Conversion Priv. 100,729
Total Par Value of Shares (5,000*10*50) (2,500,000)
Share Premium from conversion 2,858,439
6. Ans. B.
Upon assumed retirement: 1/2016:
Carrying value of bonds up to 12/31/2015 5,257,710
Fair value of bonds without the conversion option at 12% effective rate:
Present value of principal: P5,000,000*0.711780 3,558,901
Present value of interest: 500,000*2.401831 1,200,916 4,759,817
Gain on retirement of bonds (profit or loss) 497,893
Case 2:
a. The obligating event is the guarantee agreement completed in 2014, thus is present obligation.
b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance
sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event.
c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.
Thus, accrue obligation at best estimate P2,000,000.
Case 3:
a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there are
no claims yet.
b. The outflow of economic benefit is probable.
c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However,
since there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be
a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over the
portion to be reimbursed by the insurance company.
Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company will be
reimbursing the company for anything in excess of the deductible clause.
Case 4:
a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no present
obligation yet.
Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event.
2. Ans. D.
Class B Laundry appliance sales (280,000,000*40%) P112,000,000
Multiply by: Estimated warranty cost as % of sales 3%
Estimated warranty expense for 2014 P3,360,000
2. Ans. D.
a. The obligating event is the environmental damages occuring in 2014, thus is present obligation.
b. The outflow of future economic benefits is probable.
c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per
the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event)
3. Ans. B.
PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776) 3,683,821 4.604776
Fair market value of leased asset at inception: 4,000,000
92% More than 90%, thus Finance
Amortization table: Periodic paymt Interest Exp. Principal Balance
Present value of MLP 3,683,821
January 1, 2012: 800,000 800,000 2,883,821
January 1, 2013: 800,000 346,059 453,941 2,429,879
January 1, 2014: 800,000 291,586 508,414 1,921,465 Liab balance
Janaury 1, 2015: 800,000 230,576 569,424 1,352,041
Accrued interest
4. Ans. B.
PV of MLP, Jan. 1, 2012 (Asset capitalized) 3,683,821
Multiply by condition percent (over term), Dec. 31, 2014: 3/6
Carrying value of leased asset, Dec. 31, 2014 1,841,910
5. Ans. A.
Allocation of issue price on January 1, 2014:
Total issue price 4,250,000
FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods:
Principal: P4,000,000*0.7049605 2,819,842 0.7049605
Interest: P200,000*4.9173243 983,465 3,803,307 4.9173243
Residual amount allocated to APIC-Bond conversion privilege 446,693
2. Ans. C.
Total Bonds @ FV* APIC@Residual
Retirement Price 2,500,000 2,365,267 134,733
Carrying Value** (5,289,319*50%); (113,914*50%) 2,644,659 56,957
P&L Loss/ Cap. Gain (279,392) 77,776
profit/loss APIC/Share premium
*FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods.
PV of Principal 2,500,000*0.62275 1,556,874
PV of Interest: 150,000*5.389289 808,393
Fair value of bonds w/out conv. priv 2,365,267
3. Ans .C.
Interest from Bonds Payable
from 1/1 - 6/30 (see amortiz.) 267,770
from 7/1 - 12/31 (see amortiz.) 266,158 533,928
Interest from Notes Payable
from 1/1 - 8/31 (2.5M*10%*8/12) 166,667
from 9/1 - 12/31 (2M*10%*4/12) 66,667 233,333
Total interest expense 767,261
4. Ans. B.
Fin. Inc. after permanent diff 1,000,000
FDAAB for the period 100,000
FTALE for the period (500,000)
Taxable income 600,000
Mulitply by tax rate 40%
Current Tax Expense 240,000
5. Ans. D.
Cum. Temp Diff (FTALE) 1,550,000
Multiply tax rate 40%
Deferred Tax Liability 620,000
6. Ans. D.
Bonds Payable (half - see amor.) 2,644,659
Notes payable - long term 1,500,000
Deferred tax liabilty 620,000
Total noncurrent liability 4,764,659
2. Ans. D.
Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance
January 1, 2014: (Princ.*6%) (CV*9%) 3,696,245
December 31, 2014: 332,662 240,000 92,662 3,788,907
December 31, 2015: 341,002 240,000 101,002 3,889,908
December 31, 2016: 350,092 240,000 110,092 4,000,000 53. Ans. D.
3. Ans. B.
Bonds Payable, CV at 1/1/2016 (see amortization table) 3,889,908
APIC-Bonds Conversion Privilege 303,755
Total 4,193,663
Multiply by exercise rate: (3,000/4,000) 3/4
Prorated CV of BP and APIC-Bond Conv. Priv. 3,145,247
Less:Par value of issuable shares (3,000*40) *P10 (1,200,000)
Share premium from assumed conversion 1,945,247
4. Ans. A.
Proceeds from issuance (at face value, net of transaction cost) P3,848,531
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.741162 2,964,648
PV of Interest: P240,000*2.465123 591,630 3,556,278
Equity component/APIC-Bond Conversion P292,253
5. Ans. B.
Total Bonds @ FV* APIC (Res. Val.)
Retirement Price P4,000,000 3,889,908 110,092
Carrying Value 3,837,104 292,253
P&L Loss/ Cap. Gain 52,804 (182,161)
retirement loss capital gain
*FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period.
PV of Principal 4,000,000*0.917431 P3,669,725
PV of Interest: 240,000*0.917431 220,183
Fair value of bonds w/out conv. priv P3,889,908
Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance
January 1, 2014: 3,556,278
December 31, 2014: 373,409 240,000 133,409 3,689,687
December 31, 2015: 387,417 240,000 147,417 3,837,104
December 31, 2016: 402,896 240,000 162,896 4,000,000
1. Ans. A.
Net income after permanent differences 9,800,000
Multiply by: Constant tax rate 33%
Total tax expense 3,234,000
2. Ans. C.
Taxable income 9,500,000
Mulitply by: Current tax rate 33%
3. Ans. A.
Future deductible amounts 900,000
Mulitply by: Constant tax rate 33%
Deferred tax asset 297,000
4. Ans. B.
Future taxable amounts 1,200,000
Mulitply by: Constant tax rate 33%
Deferred tax liability 396,000
To reconcile:
Current tax expense 3,135,000
Add: Deferred tax expense (FTA) 396,000
Less: Deferred tax benefit (FDA) (297,000)
Total tax expense 3,234,000
5. Ans. B.
Current tax expense; P9,500,000*33% 3,135,000
Add: Deferred tax expense (FTA): P1,200,000*35% 420,000
Less: Deferred tax benefit (FDA): P900,000*35% (315,000)
Total tax expense 3,240,000
1. Ans. B.
Taxable income 10,900,000
Mulitply by: Current tax rate 32%
Current tax expense 3,488,000
2. Ans. A.
Future deductible amounts 600,000
Mulitply by: Constant tax rate 33%
Deferred tax asset 198,000
3. Ans. D.
Future taxable amounts 900,000
Mulitply by: Constant tax rate 33%
Deferred tax liability 297,000
4. Ans. D.
To reconcile:
Current tax expense 3,488,000
Add: Deferred tax expense (FTA) 297,000
Less: Deferred tax benefit (FDA) (198,000)
Total tax expense 3,587,000
4. Ans. B.
To reconcile:
Accrued pension, beg 200,000
Pension expense (total) 508,000
Total 708,000
Contribution to the plan for the year (210,000)
Accrued pension, end 498,000
4. Ans. B.
Plan asset, beginning balance 7,000,000
Add: Contribution for the year 1,200,000
Interset on PA (P7,000,000*10%) 700,000
Less: Settlements at scheduled retirement (1,500,000)
Settlement price of addl ben. Settled (400,000)
Balance 7,000,000
Less: Actuarial gain on PA 140,000
Plan asset, FMV, end 7,140,000
5. Ans. A.
ABO, beginning balance 7,500,000
Add: Current service cost 1,400,000
Interest on ABO (P7,500,000*10%) 750,000
Less: Benefits settled, at scheduled ret. (1,500,000)
PV of additional benefits settled (500,000)
Balance 7,650,000
Add: Actuarial gain on ABO (200,000)
ABO, present value, end 7,450,000
4. Ans. B.
Plan asset at fair value, end 7,140,000
ABO at present value, end 7,450,000
Accrued pension expense, end (310,000)
To reconcile:
Prepaid pension, beg 500,000
Pension expense (total) 1,010,000
Total 1,510,000
Contribution to the plan for the year (1,200,000)
Accrued pension, end 310,000
DISCUSSION PROBLEMS
CHAPTER 9-PROBLEM 1
1 A
2 D
3 D
4 B
5 C
6 B
Summary
Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS Sh. Prem-TST RE-unapp RE-app TS
(a) Ordinary share issuance in 2013 5,000,000 2,500,000
(b) Preference share issuance in 2013 1,000,000 200,000
(c) Net income in 2013 5,540,000
(a) Treasury shares reacquired in 2014 (3,200,000)
(b) Ordinary and Preference shares issue 1,000,000 500,000 960,000 340,000
(c) Preference shares issuance in 2014 250,000 150,000
(d) Ordinary shares issued with Bonds 1,500,000 1,300,000
(e) Treasury shares reissuance in 2014 200,000 1,280,000
(f) Treasury shares retirement in 2014 (700,000) (350,000) (70,000) 1,120,000
(g) Net income in 2014 4,530,000
(h) Appropriation for treasury (800,000) 800,000
Adjusted 12/31/14 balances 6,800,000 1,750,000 4,410,000 690,000 130,000 9,270,000 800,000 (800,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 7. Ans.
Share capital:
Ordinary Shares 6,800,000
Preference Shares 1,750,000 8,550,000
Additional paid-in capital:
Share premium-OS 4,410,000
Share premium-PS 690,000
Share premium-TST 130,000 5,230,000 5. Ans.
Total Contributed Capital 13,780,000 6. Ans.
Retained earnings - appropriated 800,000
Retained earnings - unappropriated 9,270,000
Treasury shares at cost (800,000)
Total Stockholders' Equity 23,050,000 8. Ans.
Summary
Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS RE-unapp RE-app TS
(a) Ordinary share issuance in 2013 1,000,000 400,000
(b) Preference share issuance in 2013 1,000,000 1,500,000
(c) Net income in 2013 540,000
(a) Conversion of PS to OS in 2014 800,000 (400,000) 200,000 (600,000)
(b) Ordinary and Preference shares issue 250,000 400,000 375,000 175,000
(c) Preference shares issuance in 2014 100,000 148,000
(d) Reacquisition of Treasury (220,000)
(e) Treasury shares reissuance in 2014 (4,000) 44,000
(f) Treasury shares retirement in 2014 (50,000) (20,000) (40,000) 110,000
(g) Net income in 2014 830,000
(h) Appropriation for treasury (66,000) 66,000
Adjusted 12/31/14 balances 2,000,000 1,100,000 955,000 1,223,000 1,260,000 66,000 (66,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 7. Ans.
Share capital:
Ordinary Shares 2,000,000
Preference Shares 1,100,000 3,100,000
Additional paid-in capital:
Share premium-OS 955,000
Share premium-PS 1,223,000 2,178,000 5. Ans.
Total Contributed Capital 5,278,000 6. Ans.
Retained earnings - appropriated 66,000
Retained earnings - unappropriated 1,260,000
Treasury shares at cost (66,000)
Total Stockholders' Equity 6,538,000 8. Ans.
2. Ans. P276,000.
(d) Cash (5,000*60%)/5w*P60 36,000
Ordinary share warrants (P450K*60%) 270,000
Ordinary shares (600sh*P50) 30,000
Share premium-OS 276,000
3. Ans. P45,000.
(e) Cash (40,000/10)*P55 220,000
Ordinary shares (4,000*P50) 200,000
Share premium-OS 20,000
Summary:
Prefence Sh Ordinary Sh APIC/Sh Prem. Accum. Prof. Treasury Total
Balances, January 1, 1,000,000 2,500,000 500,000 2450000 (375,000) 6,075,000
(a) Warrants issuance 450,000 450,000
(b) Treasury reissue (20,000) 300,000 280,000
Tresaury retirement (50,000) (5,000) (20,000) 75,000 -
(c) Share rights issue (memo entry) -
(d) Warrants exercise 30,000 6,000 36,000
(e) Rights exercise 200,000 20,000 220,000
(f) net Income 1,250,000 1,250,000
Balances, December 31, 1,000,000 2,680,000 971,000 3,660,000 - 8,311,000
4. Ans. 5. Ans. 6. Ans.
Correct entry:
Cash 130,000
Share premium-TST 65,000
Treasury shares (P363,000/605)*325 195,000
Correct entry:
Cash 650,000 Allocation: Prorata
Preference shares 300,000 Pref. Sh. (6Ksh*P80) 480,000 80%
Share premium-PS (P650K*80%)-PAR 220,000 Warrants (12Kw*P10) 120,000 20%
Ordinary share warrants outstanding (P650K*20%) 130,000 600,000
Correct entry:
Cash (700sh*P440)*40% 123,200
Subscription receivable 184,800
Ordinary shares subscribed (700sh*P20) 14,000
Share premium-OS 294,000
Correct entry:
Cash 158,400
Subscriptions receivable 158,400
Correct entry:
Cash 3,200,000
Ordinary share warrants (P130K*4/12) 43,333
Ordinary shares (4,000*2sh*P20) 160,000
Share premium-OS 3,083,333
6. Ans.
(f) Correct entry/Adjusting entry
Cash (P184,800-P158,400)+P5,000 31,400
Miscellaneous expense 5,000
Subscription receivable 26,400
2. Ans. P58,333.
Revised FMV of options (85emp*100opt)*P25 212,500
Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 141,667 Entry:
Less: Prior year's salaries expense (83,333) Salaries expense 58,333
Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333
3. Ans. P33,333.
Final FMV of options (70emp*100opt)*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (141,667) Salaries expense 33,333
Salaries expense, 2016 33,333 Ordinary share options outstanding 33,333
4. Ans. P210,000.
Entry upon exercise of all options:
Cash (7,000sh*P25) 175,000
Ordinary share options oustanding 175,000
Ordinary shares (7,000sh*P20) 140,000
Share premium 210,000
2. Ans. P58,333.
Revised FMV of options (100-25emp)*100opt*P25 187,500
Multiply by: 2years/3 years 2/3
Cummulative salaries expense as of Dec. 31, 2015 125,000 Entry:
Less: Prior year's salaries expense (66,667) Salaries expense 58,333
Salaries expense, 2015 58,333 Ordinary share options outstanding 58,333
3. Ans. P50,000.
Final FMV of options (70emp*100opt)*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (125,000) Salaries expense 50,000
Salaries expense, 2016 50,000 Ordinary share options outstanding 50,000
4. Ans. P50,000.
Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market based-
condition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the
services were received, thus, salaries expense shall be recognized.
Entry:
Salaries expense 50,000
Ordinary share options outstanding 50,000
Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity.
Entry:
Ordinary share options outstanding 175,000
Retained earnings/APIC-Unexercised options 175,000
5. Ans. P120,833.
Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are
accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 years.
Final FMV of options, Dec. 2015 (75emp*100opt)*P25 187,500
Less: Prior years' cummulative salaries expense (66,667)
Salaries expense, 2015 120,833
2. Ans. P137,500.
Dec. 31, 2015: Is the non-market based condition achievable?
Actual sales, 2015 110,000,000
Multiply by: 120% estimated increase 120%
Projected sales, 2016 132,000,000
Minimum required sales 100,000,000 Thus, achievable.
Note that the estimated sales in 2016 is P132M, thus the estimated number of options per employee shall be 150.
3. Ans. P220,000.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual sales, 2016 150,000,000
Minimum required sales 100,000,000 Thus, achieved, therefore options are exercisable.
Note that the actual sales in 2016 is P150M, thus the final number of options per employee shall be 200.
4. Ans. P504,000.
Entry upon exercise of all options:
Cash (16,800sh*P25) 420,000
Ordinary share options outstanding 420,000
Ordinary shares (16,800sh*P20) 336,000
Share premium 504,000
2. Ans. P33,333.
Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015?
Actual increase in sales, 2014 (P81M-75M)/75M 8%
Actual inrease in sales, 2015 (P92.23M-81M)/81M 14%
Actual average increase in sales (2014 and 2015) 11%
Minimum required average increase in sales (2014 - 2015) 12% Thus, not achieved.
3. Ans. P41,667.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M 20%
Actual average increase in sales (2014-2016) (8%+14%+20%)/3 14%
Minimum required average increase in sales (2014 - 2016) 14% Thus, the condition has bee achieved.
Options are exercisable.
Final FMV of options (10-3emp)*1,000opt*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (133,333) Salaries expense 41,667
Salaries expense, 2016 41,667 Ordinary share options outstanding 41,667
4. Ans. P210,000.
Entry upon exercise of all options:
Cash (7,000sh*P25) 175,000
Ordinary share options outstanding 175,000
Ordinary shares (7,000sh*P20) 140,000
Share premium 210,000
2. Ans. P1,050,000.
End of 2016: Has the non-market based condition been achieved?
Actual 2016 sales 760,000,000
Minimum required 2016 sales 250,000,000 Achieved, number of SARs is 20,000.
3. Ans.
Entry upon exercise in 2017 at prevailing FMV P98.
SAR payable 1,900,000
Salaries expense 60,000
Cash (20,000sars*P98) 1,960,000
4. Ans. P1,800,000.
SAR payable at prevaiing FMV (20,000sars*P90) 1,800,000
Entry to remeasure the SAR at the end of 2017:
SAR payable 100,000
Salaries expense/Income from SAR reversal 100,000
(P95 - P90)*20,000SARS
2. Ans.
Retained earnings (25%*99,000sh)*P10 247,500
Share dividends payable (24,750sh*P10) 247,500
3. Ans. P1,337,500.
Ordinary shares, beginning balance 1,000,000
10% share dividends (90,000sh*10%)*P10 90,000
25% share dividends (99,000sh*25%)*P10 247,500
Ordinary shares, ending balance 1,337,500
2. Ans.
Stock dividends payable 500,000
Ordinary shares (46,000sh*P10) 460,000
Fractional warrants outstanding (4,000*P10) 40,000
3. Ans.
Fractional warrants outstanding 36,000
Ordinary shares (3,600sh*P10) 36,000
4. Ans.
Fractional warrants outstanding 4,000
Share premium - Expired fractional warrants 4,000
5. Ans. P1,099,200.
Oustanding shares, beginning 500,000
Ordinary share dividends distributed 46,000
Shares issued from fractional warrants 3,600
Total outstanding shares 549,600
Multiply by: Cash dividends 2
Dividends from earnings 1,099,200
Entry:
Retained earnings 1,099,200
Capital liquidated (549,600*P1) 549,600
Dividends payable 1,648,800
Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE.
2. Ans. P700,000.
Balance sheet date: December 31, 2014
Property dividends payable 200,000
Retained earnings 200,000
FMV at 12/31/14 700,000
Dividends payable, CV 900,000
Adjustment to RE (200,000)
Loss 20,000
Noncurrent asset held for disposal 20,000
FMV less cost to sell, NCAHFD 700,000
CV, upon reclass 720,000
Loss on remeasurement - P&L (20,000)
3. Ans. None.
Note that the increase or decrease in the property dividends payable is charged to RE.
4. Ans. P100,000.
Distribution:
Retained earnings 100,000
Property dividends payable 100,000
Final FMV, 1/31/2015 800,000
Dividends payable, CV (FMV 12/2014) 700,000
Adjustment to RE 100,000
Summary: Preference Sh Ordinary Sh Sh. Prem-PS Sh. Prem-OS Sh. Prem-TS Accum. P.-App Accum. Prof Treasury
January 1, 2014 balances 400,000 100,000 192,000 1,200,000
(a) Retroactive adjustment, 2013 dividends (50,000)
(b) Treasury shares reacquisition (80,000)
(c) Share split - No Effect
(d) Treasury shares reissue 22,000 28,000
(e) Preference shares issue 100,000 50,000
(f) 10% stock dividends 8,700 12,180 (20,880)
(g) 2014 cash dividends (59,570)
(h) 2014 net income 940,000
-- Appropriation for treasury 52,000 (52,000)
December 31, 2014 balances 500,000 108,700 50,000 204,180 22,000 52,000 1,957,550 (52,000)
4. Ans.
5. Ans.
Accumulated profits 17,400
Share dividends payable 17,400
Computed as: (34,800*20%*P2.50)
CASE 2:
Entries:
a) PPE - Appraisal Increase 1,000,000 Repl. Cost 2,500,000 1,500,000 Cost
Accum Depr - Appraisal Increase 400,000 Repl AD (1,000,000) (600,000) AD
Revaluation surplus 600,000 Sound Value 1,500,000 900,000 Carrying Value
Assets Liabilities SHE Ordinary Sh. Share Prem. Rev. Surplus Ret. Earnings
Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)
a) Write-down of PPE 600,000 600,000 600,000
b) Write-down of Inventory (75,000) (75,000) (75,000)
c) Accrual of additional Liability 175,000 (175,000) (175,000)
d) Write-off of deficit - (500,000) 500,000
Balances, after quasi-reorganization 1,675,000 475,000 1,200,000 1,000,000 100,000 100,000 -
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.
2. Ans. P9,100,000.
Unadjusted Net Income, per books 9,000,000
Inventory fire loss (150,000)
Impairment loss on PPE (750,000)
Loss on sale of Equipment (200,000)
Gain on retirement of bonds 300,000
Unrealized holding gain on FA 700,000
Increase in beg. Inventory under FIFO (100,000)
Increase in end. Inventory under FIFO 300,000
Adjusted Net Income, per audit 9,100,000
3. Ans. P6,400,000.
Retained earnings, beginning 7,800,000
Correction of prior period error (1,500,000)
Change in policy (Ave to FIFO) 100,000
Retained earnings, beg. as restated 6,400,000
4. Ans. P10,650,000.
Retained earnings, beg. as restated 6,400,000
15% stock dividend declaration (1,650,000)
Loss on retirement of Treasury (P1,050,000-P850,000) (200,000)
Reserve for plant expansion (3,000,000)
Adjusted Net Income 9,100,000
Retained earnings, ending balance 10,650,000
5. Ans. P1,100,000.
Excess over par on share dividends (P1,650,000-P1,500,000) 150,000
Loss on retirement of treasury (850,000)
Excess over par on share issuance 1,000,000
Proceeds from sale of donated shares 800,000
Net/Total adjustment to Additional Paid-in Capital 1,100,000
2. Ans. A.
Revaluation surplus 240,000
Unrealized holding gain - AFS 6,000
Translation reserves (credit) 100,000
Unrealized capital/Other comprehensive income 346,000
3. Ans. B.
Contributed capital 2,998,000
Accum. other comprehensive income 346,000
Accumulated profits 820,000
Stockholders' equity 4,164,000
2. Ans. D.
Authorized preference shares at P50 par value 400,000
Unissued preference shares 100,000
Preference shares issued P300,000
3. Ans. C.
Additional paid-in capital on ordinary shares 460,000
Additional paid-in capital on preference shares 112,000
Additional paid in capital on sale of treasury shares 4,000
Ordinary share warrants outstanding 20,000
Donated capital 25,000
Total Additional Paid-in Capital P621,000
4. Ans. D.
Ordinary shares issued P400,000
Preference shares issued 300,000
Ordinary shares subscribed, net of subs. receivable,
30,000
20,000
Preference shares subscribed, net of subs. receivable,
30,000
15,000
Total Additional Paid-in Capital 621,000
Total Contributed Capital P1,381,000
5. Ans. C.
Ordinary shares issued P400,000
Preference shares issued 300,000
Ordinary shares subscribed 50,000
Preference shares subscribed 45,000
Total Legal Capital (Par value of issued and subs.) P795,000
6. Ans. C.
Total Contributed Capital 1,381,000
Accumulated other comprehensive
income:
Unrealized holding gain-AFS 3,000
Revaluation increment in properties 100,000
Accumulated profits:
Accumulated profits – unappropriated 410,000
Reserve for bond sinking fund 220,000
Total Stockholder’s equity P2,114,000
2. Ans. B.
Ordinary shares, January 1, 2014 P14,000,000
Stock dividends issuance (100,000*20) 2,000,000
Ordinary shares, December 31, 2014 P16,000,000
*share split is accounted through memo entry only, aggregate par value remains the same.
3. Ans. C.
Share premium, January 1, 2014 P8,000,000
Share premium from share dividends
(6,800,000 – 2,000,000) 4,800,000
Share Premium, December 31, 2014 P12,800,000
4. Ans. B.
Preference shares P10,000,000
Ordinary shares 16,000,000
Share premium 12,800,000
Retained earnings 16,400,000
Retained earnings, Dec. 31, 2014 P55,200,000
2. Ans. D.
Proceeds from exercise of rights (60,000–5,000)/5*130 P1,430,000
Par value of Ordinary shares issued (11,000*100) 1,100,000
Share premium P330,000
3. Ans. B.
Share premium from ordinary shares P1,000,000
Share premium from exercise of warrants 575,000
Share premium from exercise of rights 330,000 P1,905,000
Ordinary share options outstanding (20,000*30) 600,000
Ordinary share warrants outstanding (750,000*50%) 375,000
Total APIC P2,880,000
4. Ans. D.
Accumulated profits, beginning P3,000,000
Retroactive adjustment to retained earnings (400,000)
Appropriation for dividends (71,000 * 5) (355,000)
Net income, 2014 (2,500,000 – 200,000) 2,300,000
Accumulated profits, end P4,545,000
2. Ans. D.
2015:
VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved.
VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable.
Number of options: (65-5)*500 30,000
Fair value of options on grant date P18
Estimated value of services over 3 years P540,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of
P360,000
2015
Less: Prior years’ salaries expense (270,000)
Salaries expense, 2015 P90,000
3. Ans. C.
2016:
VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved.
Final number of options: 63*500 31,500
Fair value of options on grant date P18
Final value of services over 3 years P567,000
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P567,000
Less: Prior years’ salaries expense (360,000)
Salaries expense, 2016 P207,000
4. Ans. A.
Final number of options: 63*500 31,500
Options exercised in 2017: 45*500 (22,500)
Options forfeited in 2017 3*500 (1,500)
Remaining options as of 12/31/17 7,500
Multiply by fair value on grant date P18
Carrying value of options outstanding 12/31/17 P135,000
5. Ans. C.
Entry upon exercise of 45*500 = 22,500 options:
Cash (22,500*P35) 787,500
Ordinary share options outstanding
(22,500*18) 405,000
Ordinary shares (22,500*P20) 450,000
Share premium 742,500
4. Ans. A.
2016:
Final number of options: (600-5-20-30)*100 54,500
Fair value of options on grant date P5
Final value of services over 3 years P272,500
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P272,500
Less: Prior years’ salaries expense (180,000)
Salaries expense, 2016 P92,500
2. Ans. C.
2015:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable.
Number of options: (100*85%)*300 25,500
Fair value of options on grant date P40
Estimated value of services over 3 years 1,020,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of 2015 P680,000
Less: Prior years’ salaries expense (213,333)
Salaries expense, 2015 P466,667
3. Ans. D.
2016:
Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived.
Final number of options: (100-14)*300 25,800
Fair value of options on grant date P40
Final value of services over 3 years P1,032,000
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P1,032,000
Less: Prior years’ salaries expense (680,000.0)
Salaries expense, 2016 P352,000
4. Ans. A.
Entry upon exercise of 60% of the options (25,800*60% = 15,480 options):
Cash (15,480*P120) 1,857,600
Ordinary share options outstanding
(15,480*40) 619,200
Ordinary shares (15,480*P100) 1,548,000
Share premium 928,800
5. Ans. B.
Entry upon expiration of 40% of the options (25,800*40% = 10,320 options):
Ordinary share options outstanding
(10,320*40) 412,800
Share premium – Expired options 412,800
2. Ans. D.
2015:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable
Estimated number of SAR: (20-4)*10,000 160,000
Estimated FMV of SAR at year-end P6.75
Estimated value of services over 3 years P1,080,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of 2015 P720,000
Less: Prior years’ salaries expense (320,000)
Salaries expense, 2015 400,000
3. Ans. B; 4 Ans. D.
2016:
Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved.
Final number of SAR 15*20,000 300,000
Fair value of options on grant date P7
Est. value of services over 3 years P2,100,000
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2016 P2,100,000
Less: Prior years’ salaries expense (720,000)
Salaries expense, 2016 P1,380,000
Cash 252,000
Subscription receivable 252,000
MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par
8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price
5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit
Cash 40,000
RE 22,500
Treasury shares (10,000*6.25) 62,500
2. Ans. C.
Compensation expense 84,000
SAR Payable 84,000
(7*4,000*P15)/5years
3. Ans. C.
RE 270,000
Cash Dividends Payable 270,000
Shares Outstanding 238,000
Shares Subscribed 32,000
Total 270,000
Multiply by cash div rate 1
Total Cash dividends 270,000
2013 transactions:
A. Cash dividend declaration (June 15, 2013) 440,000
B. Share issue for cash 80,000 288,000 8,000
C. Reacquisition of Treasury Shares 312,000 (8,000)
D. Stock Dividend Declaration 220,000 924,000 22,000
462,000
2014 transaction:
A. Reissue of TS 6,000 (78,000) 2,000
Balances: June 30, 2014 4,700,000 11,152,000 6,000 234,000 464,000
2. Ans. C.
Share premium - OS 11,152,000
Share premium - Treasury-OS 6,000
Total Share premium 11,158,000
3. Ans C.
Retained earnings, June 30, 2013 2,760,000
Net Income for 2014 fiscal year 160,000
Stock Dividends to OS (Dec. 2013)
(440,00sh*5%*P52) (1,144,000)
Cash Dividends to PS (Dec. 2013)
(200,000*P1) (200,000)
Voluntary approp. for sinking fund (200,000)
Legal approp. for treasury shares (equal to cost) (234,000)
Retained earnings, unappropriated June 30, 2014 1,142,000
4. Ans. A.
Ordinary Shares 4,700,000
Preference Shares 5,000,000
Share Premium - OS 11,152,000
Share Premium - PS 3,800,000
Share Premium - Treasury (OS) 6,000
RE, appropriated 434,000
RE, unappropriated 1,142,000
Treasury Shares at cost (234,000)
Total SHE, June 30, 2014 26,000,000
1. Ans. C.
b) RE (10,000*70) 700,000
Property dividends payable 700,000
RE (10,000*5) 50,000
Property dividends payable 50,000
2. Ans. A.
Property dividends payable 750,000
Trading securities @CV 680,000
Gain/Income 70,000
d) RE (100,000*2) 200,000
OSWO 200,000
e) RE (1.8M*10%) 180,000
Dividends payable 180,000
Land 900,000
Building (600,000 – 50,000) 550,000
Machinery and equipment (330,000 – 110,000) 220,000 1,670,000
TOTAL 2,850,000 5. Ans. A.
LIABILITIES AND CAPITAL
Current liab. (325,000+75,000+100,000+3,000–50,000–100,000) 353,000 2. Ans. B
Non-current liabilities (250,000 + 50,000) 300,000 653,000
SUMMARY:
1. Ans. A.
Total assets, 2014 unadjusted 2,545,200
(c) Decrease in allowance for bad debt 30,000
(d) Increase in value of marketable sec. in 2013 9,000
(e) Decrease in value of marketable sec. in 2014 (57,000)
(g) Decreasein inventory, end 2014 (18,300)
(h) Understatement in PPE in 2013 36,000
(i) Depreciation of PPE in item h, in 2013 (3,300)
(j) Depreciation of PPE in tem h, in 2014 (3,300)
(k) Correction error: PPE disposal in 2014 7,500
(l) Correcrion of error: prepayment 2,700
Total assets, 2014 adjusted 2,548,500
4. Ans. D.
Unadjusted Retained Earnings, end 2014 1,401,000
Prior period errors: (P585,000-P620,100) 35,100
Overstatemetn in 2014 Net Income (P660,000-P628,200) (31,800)
Unrecorded dividend declaration (b) (150,000)
Adjusted Retained Earnings, end 2014 1,254,300
2. Ans. B.
Shares issued 100,000
Less: treasury (1,000,000/50) (20,000)
Outstanding shares 80,000
Multiply by 10%
Dividends distributable, small 8,000
Multiply by fair value 42
Appropriation for share dividends 336,000
3. Ans. B.
a. Total net income since incorporation P3,200,000
b. Total cash dividends paid (150,000)
c. Impairment on property declared as dividend (600,000 – 450,000) (150,000)
Appropriation for property dividend at impaired value (450,000)
e. Correct valuation of share dividends (336,000)
h. Appropriated for plant expansion (700,000)
i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000) (140,000)
l. Appropriated for remaining treasury shares at cost P50/share (1,000,000)
Correct Unappropriated Accumulated Profits balance P274,000
4. Ans. A.
5. Ans. D.
d. Proceeds from sale of donated stocks 150,500
e. Share premium from share dividends (336,000 136,000
– 200,000)
f. Gain on treasury share transaction 375,000
i. Loss on treasury share reissue (debited to (375,000)
f)
j. Share premium in excess of par from issued215,000
shares
k. Share issuance expense (45,000)
APIC 456,500
4. Ans. D.
a. Total net income since 2013 6,400,000
b. Cash dividends since 2013 (300,000)
c. Property Dividends (see entries above) (1,000,000)
Adjustments to Net income in relation to the property dividends
Loss on reclassification of Equipment to held for disposal (300,000)
Gain on settlement of the property dividends 100,000
d. Capital loss from treasury shares reissue (300,000-400,000) (100,000)
e. Stock dividends (see entries above) (840,000)
g. Appropriation for plant expansion (700,000)
*Appropriation for treasury stock (30,000*P40) (1,200,000)
Accumulated profits - unappropriated balance 2,060,000
2. Ans. A.
Accumulated profits, beginning 200,000
Correction of prior period error (15,000)
Dividends to ordinary (50,000)
Dividends to preference (40,000)
Appropriation for bond redemption (20,000)
Correct net income 443,000
ACCUM PROFITS, UNAPP. 518,000
3. Ans. A.
APIC, unadjusted 100,000
Gain on sale of treasury, net 3,000
Donation from stockholder 52,000
Gain on sale of own shares 12,000
APIC 167,000
DISCUSSION PROBLEMS
CHAPTER 10-PROBLEM 1: ABC CORPORATION
Current Noncurrent Current Noncurrent SHE
Asset Asset Liabilities Liabilities
Cash 800,000 800,000
Accounts receivable 750,000 750,000
Allowance for doubtful accounts 50,000 (50,000)
Dividend receivable (a) 40,000
Prepaid expenses 160,000 160,000
Inventory 1,000,000 1,000,000
Financial assets at fair value (a) 690,000 400,000
Land (b) 525,000
Building in process (b) 5,500,000 4,950,000
Patent 200,000 200,000
Machinery and equipment 1,500,000 1,500,000
Accumulated depreciation 300,000 (300,000)
Discount on bonds payable 200,000 (200,000)
Accounts payable 900,000 900,000
Accrued expenses 150,000 150,000
Note payable, 10% (c) 250,000 250,000
Accrued interest on notes payable (c) 52,500
Bonds payable 2,000,000 2,000,000
Accrued interest on bonds payable (d) 60,000
Share capital 3,000,000 3,000,000
Accumulated profits (b), (c), (d) 4,150,000 4,012,500
Treasury shares (a) (250,000)
Adjusted balances 3,100,000 6,875,000 1,412,500 1,800,000 6,762,500
1. Ans. 2. Ans. 3. Ans. 5. Ans.
Audit notes:
(a) Financial asset at fair value, unadjusted 690,000
Treasury shares (250,000)
Dividend receivable (40,000)
Financial asset at fair value, adjusted 400,000
4. Ans. P3,762,500.
Accumulated profits, unadjusted 4,150,000
(b) Property taxes for the current year (25,000)
(c) Interest on notes in 2013 (25,000)
Interest on notes in 2014 (27,500)
(d) Unaccrued interest on bonds in 2014 (60,000)
Appropriation for Treasury shares (250,000)
Accum. Profits, unappropriated, adjusted 3,762,500
SUPPLEMENTARY NOTES:
Note 1: Net Sales
Gross sales 13,000,000
Less: Sales returns and allowances (520,000)
Sales discounts (250,000)
Net Sales 12,230,000
2. Ans. P2,025,000.
Cost of goods sold P1,800,000
Increase in inventory (P2,700,00-P1,575,000) 1,125,000
Purchases 2,925,000
Increase in accounts payable (P2,250,000-P1,350,000) (900,000)
Cash disbursed for purchases P2,025,000
3. Ans. P4,185,000.
Collections from customers P7,485,000
Cash disbursed for purchases (2,025,000)
Cash paid for operating expenses (1,275,000)
Cash provided by operating activities P4,185,000
4. Ans. P2,160,000.
Purchase of equipment (P2,700,000)1
Sale of land 495,000
Sale of equipment 45,000
Cash used in investing activities (P2,160,000)
Increase in equipment (P8,550,000-
P1,800,000
P6,750,000)
Add: Cost of equipment sold 900,000
Purchase of equipment P2,700,000
5. Ans. P1,350,000.
Cash used in financing activities-cash
(P1,350,000)
dividends paid
2. Ans. P1,005,000.
Proceeds from sale of Building 350,000
Proceeds from sale of LT Investment 135,000
Purchase of Plant assets (P700,000+600,000-110,000) (1,190,000)
Purchase of Available for sale securities (300,000)
Cash used in investing activities (1,005,000)
3. Ans. P205,000.
Proceeds from share issuance 220,000
Proceeds from short-term bank debt 325,000
Payment of dividends (P500,000-160,000) (340,000)
Cash provided by financing activities 205,000
Summary:
Cash provided by operating activities 920,000
Cash used in investing activities (1,005,000)
Cash provided by financing activities 205,000
Increase in cash for the year 120,000
2. Ans. A.
Land P167,000
Building, net (375,000 – 45,000) 330,000
Furniture and fixtures, net (114,600 – 34,600) 80,000
Total PPE P577,000
3. Ans. C.
Accounts payable P23,595
Interest payable 8,405
Advances 12,000
Short term portion of serial bonds 50,000
Total Current liabilities P94,000
9. c.
4. Ans. C.
Unappropriated retained earnings P295,000
Adjustment (inventory LCNRV)
(3,125)
(75,125–72,000)
Appropriated for bond treatment 50,000
Total retained earnings P341,875
5. Ans. B.
Share capital (4,000*10) P40,000
Paid-in capital in excess of par 430,00
Total retained earnings 341,875
Total SHE P811,875
2. Ans. A.
Accounts payable and accrued liabilities 1,701,000
Income taxes payable (654,000-525,000) 129,000
Total current liabilities 1,830,000
3. Ans. C.
Retained earnings, 1/1/14 3,450,000
Net sales and other revenues 13,360,000
Costs and expenses 11,180,000
Net income before tax 2,180,000
Income tax expense (30%) (654,000)
Net Income for the year 1,526,000
Retained earnings, 12/31/14 4,976,000
Inventory 750,000
On consignment (P100,000 × 25%) 25,000 775,000
Investment 763,000
Financial Asset at Fair value through P&L 170,000 3. Ans B. (150,000)
Prepaid expense 30,000 (30,000)
Increase in value of AFS 50,000 633,000 LT Investment
Total 1,765,000 2,432,990
4. Ans. B. 5. Ans. D.
2. Ans. D.
Proceeds from sale of equipment P100,000
Loan to Ari Co. (750,000)
Principal collection of loan receivable 93,750
Net cash used in investing activities P556,250
3. Ans. A.
Net cash used in financing activities (Dividends paid) (P250,000)
2. Ans. A.
Accumulated profits, unapp., Jan 1, 2014 1,344,000
Less: Increase in appropriations for expansion (180,000)
Stock dividends declaration (237,600*30%)*P10 (712,800)
Accumulated profits, unapp. Dec. 31 (943,200)
Less: Net income for the year 528,000
Reversal of approp for Treasury 60,000
Cash dividend declaration 96,000
3. Ans. C.
Share capital, Dec. 31, 2014 4,312,800
Share premium, Dec. 31, 2014 1,392,000
Total 5,704,800
Less:
Share capital, Dec. 31, 2013 2,400,000
Share premium, Dec. 31, 2013 60,000
2,460,000
Increase in Share capital and share premium 3,244,800
Share dividends (237,600*30%)*10 (712,800)
Share premium from treasury shares reissue (12,000)
Proceeds from issuance of shares 2,520,000
4. Ans. B.
Decrease in Trading securities 360,000
Add:Gain on sale of Trading securities 144,000
Unrealized loss on trading securities (48,000)
Proceeds from sale of Trading securities 456,000
5. Ans. C.
Proceeds from sale of equipment 84,000
Add: Loss on sale of equipment 12,000
Carrying Value of eqiupment sold 96,000
6. Ans. D.
Equipment, end 3,732,000
Equipment, beg 2,040,000
Increase in equipment 1,692,000
Add: Cost of disposed equipment 180,000
Total equipment acquired during the year 1,872,000
Equipment acquired through note issuance (600,000)
Overhaul on equipment (72,000)
Total cash payment made for equipment acquisition] 1,200,000
7. Ans. A.
Decrase in treasury shares (120,000 - 60,000) 60,000
Share premium on treasury shares reissue 12,000
Proceeds from treasury shares reissue 72,000
8. Ans. C.
Net Income 528,000
Non cash expenses/income
Depreciation expense - Bldg 45,000
Depreciaiton expense - Equipment 303,000
Bad debt expense 36,000
Amortization of bond discount 6,000
Income tax benefit (Decrease in Def. tax liab) (75,600)
Non operating income/expense
Loss on sale of equipment 12,000
Changes in working capital
Trading security 360,000
Accounts receivable (576,000)
Inventories 108,000
Prepaid Insurance (6,000)
Accounts payable (60,000)
Accrued expenses 111,600
Income tax payable 300,000
Unearned Income (96,000)
Net cash provided by operating activities 996,000
9. Ans. B.
Purchase of equipment (1,200,000)
Overhaul of equipment (72,000)
Sale of equipment 84,000
(1,188,000)
10. Ans. A.
Payment of serial notes payable (240,000)
Share issuance 2,520,000
Treasury shares reissuance 72,000
Payment of dividends (96,000)
2,256,000
DISCUSSION PROBLEMS
CHAPTER 11-PROBLEM 1: SAFARI COMPANY
2012 NI 2013 NI 2014 NI 2014 RE, BEG 2014 RE, END 2014 WC
A. Accrued expense, under 2012 (15,000) 15,000
Accrued expense, under 2013 (7,000) 7,000 (7,000)
Accrued expense, under 2014 (22,000) (22,000) (22,000)
B. Accrued income, under 2012 8,000 (8,000)
Accrued income, under 2013 9,000 (9,000) 9,000
Accrued income, under 2014 5,000 5,000 5,000
C. Prepaid expense, under 2012 16,000 (16,000)
Prepaid expense, under 2013 12,000 (12,000) 12,000
Prepaid expense, under 2014 6,000 6,000 6,000
D. Unearned income, under 2012 (11,000) 11,000
Unearned income, under 2013 (13,000) 13,000 (13,000)
Unearned income, under 2014 (10,000) (10,000) (10,000)
EFFECT OF ERRORS (2,000) 3,000 (22,000) 1,000 (21,000) (21,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.
2. Ans. P2,260,000.
Cash basis sales 1,980,000
Add: AR, ending balance 550,000
Sales discounts 80,000
Sales returns, no refund 60,000
Write-off of AR 25,000
Total 2,695,000
Less: AR, beginning balances (415,000)
Recovery of previous write-off (20,000)
Accrual basis gross sales 2,260,000
2. Ans. P2,600,000.
Gross purchases 2,800,000
Less: Purchase discount (45,000)
Purchase returns (80,000)
Net purchases 2,675,000
Add: Inventory, beginning 250,000
Cost of goods available for sale 2,925,000
Less: Inventory, end (325,000)
Cost of sales 2,600,000
2. Ans. P5,670,000.
Cash purchases 5,100,000
Credit purchases 1,200,000
Total gross purchases 6,300,000
Less: Purchase discounts (210,000)
Purchase returns (120,000)
Net purchases 5,970,000
Add: Inventory, beginning 1,500,000
COGAS 7,470,000
Less: Inventory, ending (1,800,000)
Cost of Sales 5,670,000
3. Ans. P345,600.
CV, 1/1/14: (P3M*90%*80%*80%) 1,728,000
Multiply by: Ddbal rate 20%
Depreciation expense, 2014 345,600
4. Ans. P2,304,400.
Net Sales 10,550,000
Cost of sales (5,670,000)
Gross profit 4,880,000
Interest income (a) 90,000
Total income 4,970,000
Operating expenses (b) (2,220,000)
Depreciation expense (345,600)
Bad debt expense (100,000)
Net income 2,304,400
2. Ans. P254,620
Sales P340,000
Less: Accounts receivable – trade, November 15 85,380
Collections from sales P254,620
3. Ans. P121,612.
CASH ACCOUNTABILITY:
RECEIPTS
Issuance of ordinary shares (P300,000 + P20,000) P320,000
Mortgage payable 80,000
Note payable – bank 32,000
Collections from sale (from number 2) 254,620
Total 686,620
DISBURSEMENTS
Real property P200,000
Furniture and Fixtures (P29,000 – P6,000) 23,000
Expenses 60,756
Purchases (from number 1) 251,636
Total P535,392
CASH BALANCE P151,228
CASH AS ACCOUNTED:
Bank balance, November 15 P26,328
Add: Undeposited collections 5,140
Total P31,468
Less: Outstanding checks 1,852 29,616
CASH SHORTAGE as of November 15, 2014 P121,612
2. Ans. P14,535,000.
Cash collections from customers 11,430,000
Add: AR, ending 3,240,000
Less: Advances from customers, ending (135,000)
Accrual basis gross sales 14,535,000
3. Ans. P9,738,000.
Total deposits per bank statement 12,600,000
Cash in bank, end per bank statement (900,000)
Total disbursements per bank statement 11,700,000
Add: Outstanding checks 180,000
Less: Payments of bank loan and interest (540,000)
Payments of installment due on equipment (1,602,000)
Total cash payments made to suppliers 9,738,000
4. Ans. P10,998,999.
Cash payments to suppliers 9,738,000
Add: Accounts payable, ending 1,260,000
Accrual basis gross purchases 10,998,000
5. Ans. P8,280,000
Gross purchases/Net purchases 10,998,000
Inventory, end (2,718,000)
Cost of sales 8,280,000
6. Ans. P3,070,000.
Gross sales/Net sales 14,535,000
Cost of sales (8,280,000)
Gross profit 6,255,000
Operating expenses
Utilities (P360,000+40,000) 400,000
Salaries (P360,000+25,000) 385,000
Supplies (P720,000-150,000) 570,000
Depreciation - Bldg (P16.2M/15yrs) 1,080,000
Depreciation - Eqpt (P1.44M/5yrs) 288,000
Bad debt expense 180,000
Interest expense - loan (P90,000+30,000) 120,000
Interst expense, instal. (P1.602M-P1.44M) 162,000 (3,185,000)
Net Income 3,070,000
2. Ans. A.
Carrying value, 1/1/2014: 393,750*10/12 328,125
Multiply by: 150% declining balance rate: (1/6)*150% 25%
DEPRECIATION EXPENSE (Mach UVW) 82,031
3. Ans. D.
Carrying value, 1/1/2014: 4,500,000*17/20 3,825,000
Less: Salvage value 50,000
Depreciable cost 3,775,000
Multiply by: SYD rate 12/78
DEPRECIATION EXPENSE 580,769
4. Ans. D.
Correct cost of Building (P1.2M+100K+200K) 1,500,000
Accum depr: (P1.5M*2/10) (300,000)
Correct carrying value of Building 12/31/14 1,200,000
4. Ans. A.
Net income, 2012 per books 381,000
Net income, 2013 per books 450,000
Total accumulated profits, 1/1/2014, per books 831,000
Net income, 2012 per audit 363,000
Net income, 2013 per audit 528,000
Total accumulated profits, 1/1/2014 per audit 891,000
Understatement of accumulated profits, 1/1/2014 60,000
Correct appropriation of accum profits for share div in item e (39,000)
Net adjustment (increase/credit) 21,000
5. Ans. C.
Entry made for item e:
Correct entry:
Accumulated profits 39,000
Ordinary shares 30,000
Share premium 9,000
Adjusting entry:
Accumulated profits 9,000
Share premium 9,000
2014 net
2013 net income RE,beg 2014 RE, end 2014
income
Unadjusted bal. 300,000 1,700,000 1,150,000 2,350,000
a. Policy change: Inventory 2013 100,000 -100,000 100,000
Inventory 2014 90,000 90,000
b. Overstatement in depn in 2014 (a) 10,000 10,000
c. Error correction – Borrowing Cost 25,000 75,000 25,000 100,000
Adjusted balances P425,000 P1,775,000 P1,275,000 P2,550,000
1. Ans. A. 2. Ans. C. 3. Ans. D. 4 . Ans. C.
5. Ans. C.
2. Ans. C.
Cost of sales 7,050,000
Less: Decrease in inventory 450,000
Purchases, accrual basis 6,600,00
Add: Decrease in accounts payable 412,500
Cash paid to suppliers 7,012,500
3. Ans. D.
Total operating expense, accrual basis 1,725,000
Add: Increase in prepaid expense 255,000
Decrease in accrued expense 150,000
Total 2,130,000
Less: Depreciation expense (non-cash expense) 90,000
Cash payments for operating expenses 2,040,000
4. Ans. B.
Cash received from customers 10,890,000
Cash paid to suppliers (7,012,500)
Cash paid for operating expenses (2,040,000)
Cash provided by Operating activities 1,837,500
2. Ans. D.
c) Unearned rent income 21,000
d) Salaries payable 8,400
f) Accrued accounting fees 1,500
TOTAL LIABILITIES 30,900
ACCOUNTS PAYABLE
116,000 AP, beginning
Payments 344,000 348,000 Purchases
120,000 AP, ending
3. Ans. A.
Present value of principal (200,000*0.456387) P91,277
Present value of interest, semiannual (10,000*13.59032) 135,903 P227,180
Amortization, June 30, 2014 (227,180*4%) – 10,000 (913)
Amortization, December 31, 2014 (226,267*4%) – 10,000 (949)
Carrying value, December 31, 2014 P225,318
4. Ans. D.
Effective interest as of 6/30/14
9,087
(227,180*4%)
Effective interest 12/31/14 (226,267*4%) 9,051
Total interest expense P18,138
5. Ans. B.
Unadjusted net income 25,000
Overstatement in other expenses ** 2,000
Overstatement in interest expense (20,000 – 18,138) 1,862
Correct net income P28,862
**Other Expenses
Accrual basis 164,000
Increase in prepayments 4,000 2,000 Increase in accrued utilities
Cash basis 166,000
2. Ans. A.
Total payments to suppliers 13,618,000
Deduct: payments to suppliers for 2013 invoices 4,632,000
Balance: payments to suppliers for 2014 invoices 8,986,000
Add: Accounts payable, ending balance 2,621,000
Purchases, accrual basis 11,607,000
3. Ans. B.
Wages paid 3,050,000
Add: Wages payable, ending balance 125,000
Deduct: Wages payable, beginning bal. 85,000
Wages expense, accrual basis 3,090,000
4. Ans. B.
Advertising expenses paid 300,000
Add: Advertising supplies, beg bal. 35,000
Accrued advertising, ending bal. 40,000
Deduct: Advertising supplies, end. bal. 75,000
Accrued advertising, beg. Bal. 14,250
Advertising expense, accrual basis 285,750
5. Ans. B.
Insurance premium paid 125,000
Add: Prepaid insurance, beg bal. 25,000
Less: Unexpired insurance, ending bal. 41,000
Insurance expense, accrual basis 109,000
2. Ans. B.
Cost of sales, accrual basis 2014 2,250,000
Add: Inventory, end 279,000
Less: Inventory, beg (423,000)
Purchases, accrual basis 2014 2,106,000
Add: Accounts payable, beg. 139,500
Less: Accounts payable, end (225,000)
Cash payments to suppliers 2,020,500
3. Ans. A.
Interest expense, accrual basis 2014 38,700
Less: Amortization of bond discount (4,500)
Cash payments for ineterest 34,200
4. Ans. D.
Selling expense, accrual basis 2014 1,273,500
Less: 1/3 of depreciation expense
(13,500*1/3) (4,500)
Bad debt expense (45,000)
Cash payments for selling expense 1,224,000
4. Ans. A.
Net sales, per audit 4,475,000
Less: Cost of Sales, per audit (3,770,000)
Gross Profit 705,000
Less: Expense 560,000
Add: Accrued expense, end 20,000
Deduct, supplies, end (5,000)
Prepaid insurance, end (15,000)
Equipment (100,000) (460,000)
Depreciation (100,000/10)*6/12 (5,000)
Interest expense (100,000*12%*4/12) (4,000)
Net income P236,000