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ROGON, JOHN CARLO A.

BSA 2-1

CASH AND CASH EQUIVALENTS (PROBLEMS) PROBLEM 12-1 The cash account of the Mang June Corporation as of December 31, 2006 consists of the following: On deposit in current account with Real Bank

P 900,000

Cash collection not yet deposited to the bank

350,000

A customer’s check returned by the bank for insufficient Fund

150,000

A check drawn by the Vice-President of the Corporation dated January 15, 2007

70,000

A check drawn by a supplier dated December 28, 2006 for goods returned by the Corporation

60,000

A check dated May 31,2006 drawn by the Corporation against the Piggy Bank in payment of customs duties. Since the importation did not materialize, the check was returned by the customs broker. This check was an outstanding check in the reconciliation of the Piggy Bank account

410,000

Petty Cash fund of which P5,000 is in currency; P3,600 in form of employees’ I.O.U. s; and P1,400 is supported by approved petty cash vouchers for expenses all dated prior to closing of the books on December 31, 2006 Total

10,000 P1,950,000

Less: Overdraft with Piggy Bank secured by a Chattel Balance per ledger

( 300,000) P1,650,000

At what amount will the account “Cash” appear on the December 31, 2006 balance sheet? a. P1,425,000 b. P1,495,000 c. P1,315,000 d. P1,725,000 Solution: Answer (a) Current account with Real Bank Undeposited collection Supplier's check for goods returned by the Corporation Unexpended petty cash Current account with Piggy Bank (P410,000 - P300,000) Total

P 900,000 350,000 60,000 5,000 110,000 P1,425,000

PROBLEM 1-2 Dawn Company reported checkbook balance on December 31, 2015 at P4,000,000. Data about certain cash items follow: * A customer check amounting to P200,000 dated January 2, 2016 was included in the December 31, 2015 check book balance. * A P400,000 check payable to supplier date and recorded on December 30, 2015 was mailed on January 16, 2016. * Another customer check for P500,000 deposited on December 22, 2015 was included in the checkbook balance but returned by the bank for insufficiency of fund. This check was redeposited on December 26, 2015 and cleared two days after.

* A petty cash fund of P50,000 with the following summary on December 31, 2015: Coins and currencies

P5,000

Petty cash vouchers

P43,000

Return value of 20 cases of soft drinks

2,000

45,000

Total

P50,000

* A check of P43,000 was drawn on December 31, 2014 payable to Petty Cash What total amount should be reported as “cash” on December 31, 2015? a. P4,205,000 b. 3P3,748,000 c. P4,200,000 d. P4,248,000 Solution: Answer (d) Check book balance

P4,000,000

Postdated customer check

(200,000)

Undelivered check payable to supplier

400,000

Adjusted cash in bank

P4,200,000

Petty cash: Coins and currencies

P5,000

Replenishment check

43,000

Total

48,000 P4,248,000

PROBLEM 12-3 In the course of your audit of the Las Conde Corporation, its controller is attempting to determine the amount of cash to be reported on its December 31, 2006 balance sheet. The following information is provided: 1. Commercial savings account of P1,200,000 and a commercial checking account balance of P1,800,000 are held at PS Bank. 2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee to reimburse through salary deduction). 3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term debt. 4. Petty cash fund of P10,000. 5. An I.O.U. from a company officer in the amount of P40,000. 6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its time, the cash receipts. At the present company has no deposits at this bank. 7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of deposit have maturity of 120 days. 8. Las Conde has received a check dated January 2, 2007 in the amount of P150,000. 9. Las Conde has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure future credit availability. 10. Currency and coin on hand amounted to P15,000.

Based on the above and the result of your audit, how much will be reported as cash and cash equivalent at December 31, 2006? a. P2,075,000 b. P3,025,000

c. P2,825,000 d. P5,025,000 Solution: Answer (b) Savings account at PS Bank Checking account at PS Bank

P1,200,000 1,800,000

Petty cash fund

10,000

Currency and coin

15,000

Total

P3,025,000

PROBLEM 12-5 Provided the following on December 31,2018: Balance per bank statement

P250,000

Balance per ledger

350,000

Cash in sinking fund

300,000

Check drawn on Carlo’s account payable to vendor, dated and Recorded 12/31/18; not mailed until 1/15/19 What amount should be charged to “cash” under current assets? a. 425,000 b. 975,000 c. 900,000 d. 725,000

75,000

Solution: Answer (a) Balance per ledger Check drawn, not actually paid Total Cash balance

P350,000 P75,000 P425,000

PROBLEM 12-6 You noted the following composition of Malabanan Company’s “cash account” as of December 31, 2006in connection with your audit: Demand deposit account

P2,000,000

Time deposit – 30 days

1,000,000

NSF check of customer

40,000

Money market placement (due June 30, 2007) Savings deposit in a closed bank IOU from employee Pension fund

1,500,000 100,000 20,000 3,000,000

Petty cash fund 10,000 Customer’s check dated January 1, 2007

50,000

Customer’s check outstanding for 18 months

40,000

Total

P7,760,000

Additional information follows: a) Check of P200,000 in payment of accounts payable was recorded on December 31, 2006 but mailed to suppliers on January 5, 2007. b) Check of P100,000 dated January 15, 2007 in payment of accounts payable was recorded and mailed on December 31, 2006.

c) The company uses the calendar year. The cash receipts journal was held open until January 15, 2007, during which time P400,000 was collected and recorded on December 31, 2006. The cash and cash equivalents to be shown on the December 31, 2006 balance sheet is a. P3,310,000 b. 1,910,000 c. P2,910,000 d. P4,410,000 Solution: Answer (c) Demand deposit account as adjusted: Demand deposit account per books

P2,000,000

Undelivered check

200,000

Postdated check issued

100,000

Window dressing of collection Total Time deposit - 30 days Petty cash fund Cash and cash equivalents

(400,000) P1,900,000 1,000,000 10,000 P2,910,000

PROBLEM 12-7 Joel Company reported cash account balance consisting of the following: Currency and Coins Bond sinking fund Petty Cash Fund (53,000 is in the form of paid vouchers)

P2,375,000 1,600,000 127,000

Receivables from officers and employees Checking Account in BPI (240,000 check still outstanding) Deposit in a bank closed by BSP

326,000 3,450,000 500,000

*The bond sinking fund will be held matured after 9 months *The petty cash fund is not replenished at the end of the month. What is the balance on “cash”? a. 5,952,000 b. 5,899,000 c. 7,085,000 d. 7,259,000 Solution: Answer (b) Currency and coins Petty cash fund (127,000-53,000) Checking account in BPI Total Cash on account

P2,375,000 74,000 3,450,000 P5,899,000

PROBLEM 12-8 Ezrael Company provided the following information with respect to the cash and cash equivalents on December 31, 2015: Checking account at First Bank (overdraft)

(P200,000)

Checking account at Second Bank

3,500,000

Treasury bonds

1,000,000

Payroll account

500,000

Value added tax account

400,000

Foreign bank account – unrestricted (in equivalent pesos)

2,000,000

Postage stamps

50,000

Employee’s postdated check

300,000

IOU from president

750,000

Credit memo from a vendor for a purchase return

80,000

Traveler’s check

300,000

Not-sufficient-fund check

150,000

Petty cash fund (P20,000 in currency and expense receipts for P30,000)

50,000

Money order

180,000

What amount should be reported as unrestricted cash on December 31, 2015? a. 4,600,000 b. 6,900,000 c. 5,900,000 d. 4,900,000 Solution: Answer (b) Checking account at Second Bank

P3,500,000

Payroll account

500,000

Value added tax account

400,000

Foreign bank account – unrestricted

2,000,000

Traveler’s check

300,000

Petty cash fund

20,000

Money order Total unrestricted cash

180,000 P6,900,000

PROBLEM 12-9 Claine Company reported petty cash fund which comprised the following:

Coins and Currency

P5,200

Paid Vouchers: Office Supplies

P1,600

Postage Stamps

420

Gasoline

530

Transportation

700

3,250

Total

P8,450

Manager’s check returned; marked NSF

P2,500

Checks drawn for replenishment of petty cash

3,100

What amount should be reported as cash? a. 14,050 b. 8,450 c. 8,300 d. 7,700 Solution: Answer (c) Coins and Currency Replenishment of petty cash Total Cash

P5,200 3,100 P8,30

BANK RECONCILIATION (PROBLEMS) 1. Estella Company provided the bank statement for the month of December which included the following information: Ending balance, December 31 2,800,000 Bank service charge for December 12,000 Interest paid by bank to Estella Company for December 10,000 In comparing the bank statement to its own cash records, the entity found the following: Deposits made but not yet recorded by the bank 350,000 Checks written and mailed but not yet recorded by the bank 650,000 In addition, the entity discovered that it had drawn and erroneously recorded a check for P46,000 that should have been recorded for P64,000. What is the cash balance per ledger on December 31? a. 2,500,000 b. 2,800,000 c. 2,520,000 d. 2,540,000 Solution: Answer (a) Balance per bank

P2,800,000

Deposits in transit

350,000

Outstanding checks

( 650,000)

Adjusted bank balance

P2,500,000

Balance per ledger (SQUEEZE)

2,520,000

Unrecorded customer check

10,000

Bank service charge

( 12,000)

NSF check

( 18,000)

Adjusted book balance

P2,500,000

2. Jacquard Loom Company collected the following information to prepare its May bank reconciliation: * Cash balance per books, May 31

P5,300

* Deposits in transit

P510

* Notes receivable with interest collected by bank

P580

* Bank service charges

P30

* Outstanding checks

P1,800

* NSF checks

P150

*The deposit in transit was erroneously recorded by the bank as P150. *The bank unappropriately charged a bank service fee to Jaguar Company chargeable to the entity. *The NSF checks returned was redeposited 2 days after the coming month. The adjusted cash balance per books on May 31 is: a. P5,700 b.P5,810 c.P6,210 d.P5,660 Solution: Answer (a) Cash balance per books,May 31

P5,300

Notes receivable with interest collected by bank

580

Bank service charges

(30)

NSF checks

(150)

Adjusted cash balance

P5,700

3.In reconciling the book and bank balances of Papaya Corporation, you discover the following for the month of December 2015: Balance per bank statement Balance per books Receipts of December 31, 2015 not deposited until January 3, 2016 Bank service charges for December

45,000 34,000 10,000 300

DAIF check returned with the December bank statement, P3,200. A paid check for P4,000 was recorded in the cash register as P400. Customer’s check for P25,200 was recorded in the cash receipts journal as P22,500. Charges per bank statement included a check of Pear Company erroneously charged in the amount of P8,000. Assuming no error except as noted, the amount of outstanding checks is a. b. c. d.

63,000 29,600 33,400 16,200

Solution: Answer (c) Balance per bank statement Undeposited receipts Erroneous debit memo

Balance per books Service charge NSF check Book error in recording check Book error Outstanding checks

P45,000 10,000 8,000 P63,000 (34,000) ( 300) (3,200) (3,600) 2,700 P 33,400

4.Ester Company provided the month-end bank statement which showed a balance of P3,600,000. Outstanding checks amounted to P1,200,000, a deposit of P400,000 was in transit at month-end, and a check for P50,000 was erroneously charged by the bank against the account what amount should be reported as cash in bank at month-end? a. b. c. d.

2,050,000 2,750,000 2,850,000 4,350,000

Solution: Answer (c) Adjusted bank balance (3,600,000 – 1,200,000 + 400,000 + 50,000)

2,850,000

5. The bank statement of Amethyst Corporation for April, 2015 showed an ending balance of P169,263. Deposit in transit on April 30 was P18,200. Outstanding checks as of April 30 were P59,435. During the month of April, the bank charged back NSF checks in the amount of P3,435 of which P1,835 had been redeposited by April 30. The company made no entry for the return and for the redeposit of the checks. On April 23, the bank charged Amethyst Corporation’s account for a P2,200 item which should have been charged against the account of Ametite Corporation; the error was not detected by the bank. During April, the proceeds from notes collected by the bank for Amethyst Corporation were P7,548 and bank charges for this service were P180. What is the unadjusted book balance for “Cash” of Amethyst Corporation at April 30, 2015? a. b. c. d.

132,008 126,295 124,460 124,310

Solution: Answer (c)

Balance per bank statement Deposit in transit, April 30 Outstanding checks, April 30 Erroneous charge by bank NSF checks not yet redeposited (3,435 – 1,835) Proceeds of note collected by bank Bank service charge Unadjusted book balance for cash, April 30, 2015

P169,263 18,200 ( 59,435) 2,200 1,600 ( 7,548) 180 P 124,460

6. The cash account shows a balance of P450,000 before reconciliation. The bank statement does not include a deposit of P23,000 made on the last day of the month. The bank statement shows a collection by the bank of P9,400 and a customer’s check for P3,200 was returned because it was NSF. A customer’s check for P4,500 was recorded on the books at P5,400, and a check written for P790 was recorded as P970.

The correct balance in the cash account was a. b. c. d.

P455,120 455,480 457,280 478,480

Solution: Answer (b) Unadjusted cash balance Collection NSF Check Error made in recording customer’s check Error made in recording check written

P450,000 9,400 ( 3,200) ( 900) 180

Adjusted cash balance

P455,480

7. Core Company provided the following data for the purpose of reconciling the cash balance per book with the balance per bank statement on December 31, 2015:

Balance per bank statement Outstanding checks (including certified check of P100,000) Deposit in transit December NSF checks (of which P50,000 had been redeposited and cleared by December 27 Erroneous credit to Core’s account, representing proceeds of loan granted to another company Proceeds of note collected by bank for Core, net of service charge of P20,000

2,000,000 500,000 200,000 150,000 300,000 750,000

What amount should be reported as cash in bank on December 31, 2015? a. b. c. d.

1,500,000 1,400,000 1,800,000 1,450,000

Solution: Answer (a) Balance per bank Deposit in transit

P2,000,000 200,000

Total

P2,200,000

Outstanding checks (500,000 – 100,000) Erroneous bank credit

( 400,000) ( 300,000)

Adjusted bank balance

1,500,000

8. On June 30, 2015, the bank statement of Bougainvilla Company had an ending balance of P3,735,000. The following data were assembled on the course of reconciling the bank balance:     

The bank erroneously credited Bougainvilla Company for P21,000 on June 22 During the month, the bank charged back NSF checks amounting to P23,000 of which P8,000 had been redeposited by June 25 Collection for June 30 totaling P103,000 was deposited the following month Checks outstanding on June 30 amounted to P302,000 Note collected by the bank for Bougainvilla Company was P80,000 and the corresponding bank charge was P5,000.

 What is the unadjusted cash in bank per ledger on June 30, 2015?

a. b. c. d.

3,515,000 3,557,000 3,455,000 3,497,000

Solution: Answer (c)

Balance per bank Erroneous bank credit Deposit in transit Outstanding checks

P3,735,000 ( 21,000) 103,000 ( 302,000)

Adjusted bank balance

P3, 515,000

Balance per book (SQUEEZE) NSF checks (23,000 – 8,000) Note collected by bank Service charge

P3,455,000 ( 15,000) 80,000 ( 5,000)

Adjusted book balance

P3,515,000

9. In preparing the bank reconciliation on December 31, 2015, Case Company provided the following data: Balance per bank statement Deposit in transit Amount erroneously credited by bank to Case’s account Bank service charge for December Outstanding checks

3,800,000 520,000 40,000 5,000 675,000

What is the adjusted cash in bank on December 31, 2015?

a. b. c. d.

3,685,000 3,600,000 3,645,000 3,605,000

Solution: Answer (d)

Per bank statement Deposit in transit Outstanding checks Bank error

P 3,800,000 520,000 ( 675,000) ( 40,000)

Adjusted bank balance

P3,605,000

10) Ken Company has an existing balance of P5000 on his cash book on January. At the end of the year, he reconciled the amount with the bank balance. The ff. information was given: Deposit In transit

500

Outstanding checks

100

NSF check

500

Interest earned by note collected by bank

500

What is ken’s correct cash balance on the end of the year? a.5000 b.5500 c.5400 d.4900 Solution: Answer (a) Balance

P5000

NSF check

(500)

Interest earned by note collected by bank

500

Adjusted

P5000

ACCOUNTS RECEIVABLE (PROBLEMS)

PROBLEM 1-1 Claine Company prepared an aging of Accounts Receivable on year end December 31,2014 and determined that the net realizable value of the Accounts Receivable was P1,750,000. Allowance for Doubtful Accounts, January 1(credit)

125,000

Accounts written off as uncollectible

100,000

Accounts Receivable., December 31 Collection of accounts written off

1,850,000 15,000

*No other transactions occurred during the year. What amount of doubtful accounts expense should be recorded on December 31,2014? a. 30,000 b. 40,000 c. 50,000 d. 60,000 Solution: Answer (d) Allowance, January 1

125,000

Recovery of accounts written off

15,000

Doubtful Accounts Expense (SQUEEZE)

60,000

Total Accounts written off Allowance, December,31

200,000 (100,000) 100,000

PROBLEM 1-2 The Kramers Corporation starts operations in Year One and makes gross sales of P740,000 per year, incurring P240,000 cost of expense; while collecting cash of only P200,000 per year. During each year, P15,000 in accounts are judged to be uncollectible. The company estimates that 8 percent of its credit sales will eventually prove to be worthless. In addition to that, the entity wrote off P24,000 during the year. There were no collection of accounts written off. The Accounts Receivable has an ending balance of 100,000. What is reported as the allowance for doubtful accounts on the company’s balance sheet at the end of Year Two a. b. c. d.

P15,000 P40,000 P24,000 P30,000

Solution: Answer (b) Net Sales (740,000-240,000)

P500,000 x 8%

Doubtful Accounts Expense

P40,000

PROBLEM 1-3 The Yasuo Corporation starts operations in Year One and makes credit sales of P400,000 per year while collecting cash of only P300,000 per year. During each year, P12,000 in accounts are judged to be uncollectible. The company estimates that 10 percent of its ending accounts receivable each year will eventually prove to be worthless. During the year, the entity wrote off 9,000 on the uncollectible accounts. Also, the corporation made collection of P5,000 of accounts previously written off. The entities accounts receivable totaled P170,000 on year end.

What is reported as bad debt expense on the company’s income statement for Year Two? a. b. c. d.

P20,800 P17,600 P28,800 P32,000

Solution: Answer (a) Net Accounts Receivable

P170,000 x 10%

Required Allowance

P17,000

Required Allowance

P17,000

Less: Allowance for Uncollectible Accounts (credit)

(8,000)

Doubtful Accounts Expense

P19,000

PROBLEM 1-4 A company has the following unadjusted account balances at December 31 of the current year. Accounts Receivable of P185,700 and Allowance for Doubtful Accounts of P1,600 (credit balance). This company uses the aging of accounts receivable to estimate its bad debts. The following aging schedule reflects its accounts receivable at the current year-end: Account Age

Current (not yet due) 1-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due Total

Age Group Balance P96,000 64,000 16,000 6,400 3,200 P185,600

Estimated Uncollectible Percentage 1.5% 4.0 10.0 40.0 65.0

What is the Doubtful Accounts Expense that should appear on December 31 of the current year?

a. 7,240 b. 8,600 c. 8,640 d. 8,200 Solution: Answer (c) P96,000 x 0.015

=

P1,440

64,000 x .04

=

2,560

16,000 x .10

=

1,600

6,400 x .40

=

2,560

3,200 x .65

=

2,080

Total Required Allowance

P10,240 P10,240

Allowance for Doubtful Accounts (credit)

(1,600)

Doubtful Accounts Expense

8,640

PROBLEM 1-5 The total credit sales of Fizz Company for the year 2015 are P175,000. At the end of the year, the management estimates that 1% of the total credit sales will not be collected. The balance in allowance for doubtful accounts is P650 before making adjusting entry. What is the estimated uncollectible accounts using income statement approach? a. 1,750 b. 17,500 c. 2,400 d. 1,744 Solution: Answer (a) Sales

P175,000 x .01

Uncollectible Accounts

P1,750

PROBLEM 1-6 Asrel Company provided the following information for the current year: Allowance for Doubtful Accounts, January 1 Sales

P200,000 10,600,000

Sales Returns and Allowances

880,000

Sales Discounts

310,000

Write off

125,000

The firm provided for doubtful accounts expense at the rate of 8% of net sales. What is the allowance for doubtful accounts at year-end? a. b. c. d. 827,800

Solution: Answer (d) Allowance for doubtful accounts, January 1

200,000

Doubtful Accounts Expense (10,600,000-880,000-310,000x8%)

752,800

Total

952,800

Accounts written off Allowance for Doubtful Accounts, December 31

(125,000) 827,800

PROBLEM 1-7 Von Company used the statement of financial approach in estimating uncollectible accounts expense. The entity prepared an adjusting entry to recognize this expense at the end of the year. During the year, the entity wrote off a 250,000 and made no recovery of previous write off. After the adjusting entry for the year, the credit balance in the allowance for doubtful accounts was 425,000 larger than it was on January 1. What amount of uncollectible account expense was recorded for the year?

a. 250,000 b. 675,000 c. 425,000 d. 350,000 Solution: Answer (b) Excess of ending allowance over beginning allowance

P425,000

Write off

250,000

Uncollectible Accounts Expense

P675,000

PROBLEM 1-8 An entity provided the following: Allowance balances of December 31, 2013- 530,000; December 31, 2014- 600,000; Doubtful Accounts Expense 90,000. What is amount was debited to the appropriate account to write off uncollectible accounts in 2014? a. 20,000 b. 30,000 c. 50,000 d. 0 Solution: Answer (a) Allowance for Doubtful Accounts, ending 2013

P530,000

Doubtful Accounts Expense

90,000

Total

P620,000

Write off (SQUEEZE)

(20,0000)

Allowance for Doubtful Accounts, ending 2014

P600,000

PROBLEM 1-9 Jean Company reported the following information after adjustments at year-end: 2015

2016

Accounts Receivable

7,100,000

6,900,000

Net Realizable Value

6,250,000

5,800,000

During 2016, the entity wrote off accounts totaling P330,000 and collected P207,000 on accounts written off. What amount should be recognized as doubtful accounts expense for the year ended December 31,2016? a. 373,000 b. 473,000 c. 1,430,000 d. 850,000 Solution: Answer (a) Allowance- 2015 (7,100,00-6,250,000)

P850,000

Recovery of accounts written off

207,000

Doubtful accounts expense for 2016 (SQUEEZE)

373,000

Total

P1,430,000

Accounts written off in 2016

(330,000)

Allowance- 2016(6,900,000-5,800,000)

P1,100,000

PROBLEM 1-10 Biann Company provided the following accounts abstracted from the unadjusted trial balance on December 31, 2014: Debit Accounts Receivable Allowance for Doubtful Accounts Net credit Sales

Credit

10,000,000 20,000 35,000,000

The company estimated that 11% of the gross accounts receivable will become uncollectible. What amount should the company recognize as doubtful accounts expense? a. 1,210,000 b. 1,100,000

c. 1,120,000 d. 1,000,000 Solution: Answer (c) Required Allowance for Doubtful Accounts Expense on December 31, 2014 ( 10,000,000 x 11%)

Allowance for Doubtful Accounts Add: Debit balance in allowance for doubtful accounts Doubtful Accounts Expense

P1,100,000

P1,100,00 20,000 P1,120,000

RECEIVABLE FINANCING ( PLEDGE, FACTORING, ASSIGNMENT) Lee Sin Company factored P7,980,000 accounts receivable to a finance entity on August 1, 2015.The factor was assessed a fee of 5% and reserve a holdback of 6% of the accounts receivable. Lee Sin Company also did surrender the control. In line with this, the factor charged 10% interest on a weighted average time to maturity of the accounts receivable of 69 days. 1. What is the amount of cash initially received from the factoring? a. 6, 305, 000 b.6, 704, 000 c.6, 952, 145 d.7, 980, 000 2. What is the cost of factoring of the accounts receivable if all accounts are collected? a. 399, 000 b. 549, 855 c. 798, 000 d.1, 027, 855 Solution: Answer (c) Accounts Receivable

P7, 980, 000

Factor’s Holdback (7, 980, 000 x 6%)

(478, 800)

Factoring Fee (7, 980, 000 x 5%)

(399, 000)

Interest (7, 980, 000 x 10% x69/365)

(150,855)

Cash initially received from factoring

P 6, 952, 145

Solution: Answer (b) Factoring Fee

P399, 000

Interest

150,855

Total cost of factoring

P549, 855

2. Skarner Company factored accounts receivable of P450, 000 with credit terms of 3/10, n/15 instantly after the delivery of the goods to the costumer. The factor is charged with 4% commission which is based on the gross amount of the factored accounts receivables. In addition the factor withheld 16% of the receivables factored in order to cover the sales return and allowances. What is the cash received from factoring? a.351, 000 b.369, 000 c.387, 000 d.450, 000 Solution: Answer (a) Gross amount

P450, 000

Less: Sales Discount (450,000 x 2%)

P9,000

Commission (450, 000 x 4%)

18,000

Factor’s Holdback (450,000 x 16%)

72,000

Cash Received from factoring

(99,000) P351, 000

3. Riven Company sold P 5, 750, 000 in accounts receivable for cash payment of P 4, 950,000.An allowance for bad debts of P500, 000 had previously been established by the entity in relation to these accounts. To allow adjustments and possible costumer returns the factor withheld 10% of the cash proceeds. What is the loss on factoring that should be recognized? a.300, 000 b.498, 875 c. 500, 000 d.800, 000 Solution: Answer (a) Sale price

P4, 950, 000

Carrying amount of accounts receivable (5, 750, 000 – 500, 000) Loss on Factoring

5, 250, 000 (P 300, 000)

4. Malphite Company during its third year of operations found itself at financial difficulties. With this, the entity decided to use its accounts receivable as a means of obtaining cash to continue operations. On July 1, 2014, the entity sold P 2, 150, 000 of accounts receivable for cash proceeds of P2, 000, 000. No bad debt allowance was associated with these accounts. On December 15, 2014 the entity assigned the remainder of its accounts receivable, P4,000,000 as of the date, as collateral on a P 2,550, 000, with 10% annual interest rate loan from Teemo Company. The entity received P 2,500, 000 less a 3% finance charge. None of the assigned accounts had been collected by the end of the year. Allowance for bad debts before adjustment, 12/31/14 Estimated uncollectible, 12/ 31. 14

75, 000 3% of accounts receivable

Accounts receivable excluding factored and assigned accounts, 12/31/14

1,550,000

What amount should be recognized as Bad debt expense for 2014? a. 159, 000 b. 166, 500 c. 241, 500 d.550, 000 Solution: Answer (c) Accounts receivable- unassigned

P 1,550,000

Accounts receivable-assigned

4,000,000

Total Accounts Receivable

P 5, 550, 000

Required Allowance- 12/31/14 (3% x 5, 550, 000)

P166, 500

Add: Allowance for Bad debts before adjustment

75, 000

Bad debt expense for 2014

P241, 500

5. Annie Company factored without recourse P 3,500, 000 of accounts receivable with a bank. The finance charge is 3%, and 5% was restrained to cover sales discounts, sales returns and sales allowances. What amount of cash was received on the sales of accounts receivables? a.2, 000, 000 b.2, 300, 000 c.2, 620, 000 d.3, 220, 000 Solution: Answer D Accounts Receivable

P3,500,000

Finance Charge (3% x 3, 500, 000)

(105, 000)

Factor’s Holdback (5% x 3, 500, 000)

(175, 000)

Cash Received from factoring

P3, 220, 000

6. Lucian Company factored P 4,900, 000 of accounts receivable without guarantee for a finance charge of 3%. The finance entity retained an amount equal to 8% of the accounts receivable for possible adjustments. What should be recorded as gain or loss on the transfer of accounts receivable? a.490, 000 b.147, 000 c.392, 000 d.539, 000 Solution: Answer (c ) Loss in Factoring- Equal to finance fee( 3% x 4, 900 ,00)

P 147, 000

7. Storm Company assigned P 4, 000, 000 of accounts receivables as collateral for a P1, 500, 000 5% loan with a bank. The entity was also assessed by the bank for a finance charge of 6% on the transaction and is paid up front. What amount should be recorded as a gain or loss on the transfer of accounts receivables? a.150, 000 gain b.100, 000 gain c.240, 000 loss d. 0 Solution: Answer (d) No gain or loss is recognized because assignment of accounts receivable is a secures borrowing and not a sale 8. On December 1, 2014, Mordekeiser Company assigned specific accounts receivable totaling P3, 100, 000 as collateral on a P2, 500, 000, 12% note from a certain bank. The entity will continue to collect the assigned accounts receivable. In addition to the interest on the note, the bank also charged a 5% finance charge deducted in advance on the P2, 500, 000 value of the note. The December collections of assigned accounts receivable amounted to P1, 000, 000 less cash discounts of P50, 000. On December 31, 2014, the entity remitted the collections to the bank in payment for the interest accrued on December 31, 2014 and the note payable.

1. What amount of cash was received from the assignment of accounts receivable on December 1, 2014? a.2, 000, 000 b.2, 150, 0000 c.2, 375, 0000 d.3, 100, 000 2. What is the carrying amount of note on December 31, 2014? a.1, 550, 000 b.1, 575, 000 c. 1, 600, 000 d.1, 757, 000 3. What amount should be disclosed as the equity of Merriweather Company in assigned accounts on December 31, 2014? a.425, 000 b.475, 000 c.495, 000 d.525, 000 Solution: Question 1: Answer (c) Note Payable

P2, 500, 000

Finance Fee (5% x 2, 500, 000)

(125, 000)

Cash received on December 1

P2, 375, 000

Question 2: Answer (b) Note Payable

P2, 500, 000

Principal Payment: Remittances

P950,000

Interest (2,500, 000 x 12% x 1/12) 950,000

25, 000

Note Payable- 12/31/14

925, 000 P1, 575, 000

Question 3: Answer (a) Accounts Receivable- assigned(3, 000, 000- 1, 000, 000)

P2, 000, 000

Note Payable

1, 575, 000

Equity of Moedekeiser Company in assigned accounts

P 425,000

NOTES RECEIVABLE (PROBLEMS) PROBLEM 20-1 On January 1, 2015, Lux Companyany sold a building and received as consideration P1,000,000 cash and a P4,000,000 noninterest bearing note due on January 1, 2018. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2015 was 10%. The present value of 1 at 10% for three periods is 0.75. What amount of interest revenue should be included in the 2016 income statement? a. 370,000

b. 300,000

c. 330,000

d. 400,000

Solution: Answer (c) Note receivable

P4,000,000

Less: Present value (4,000,000x .75)

3,000,000

Unearned interest income

P1,000,000

Present value, January 1, 2015

P3,000,000

Interest income for 2015 (10% x 3,000,000)

300,000

Present value, December 31, 2015

P3,300,000

Interest income for 2016 (10%x 3,300,000)

330,000

Present value, December 31, 2016

P3,630,000

Interest income for 2017 ( 1,000,000 – 630,000)

370,000

Present value, December 31, 2017

P4,000,000

Interest income for 2015

P300,000

Interest income for 2016

330,000

Interest income for 2017 (simply the remainder)

370,000

Total interest income

P1,000,000

PROBLEM 20-2 Warwick Company discounted its own P5,000,000 one-year note at a discount rate of 12%, when the prime rate was 10%. In reporting the note prior to maturity, what rate should be used for the recording of interest expense? a.13.6% b.12.7% c.9.0% d.12.0% Solution: Answer (a) Note payable

P5,000,000

Discount (5,000,000 x 12%)

( 600,000)

Net proceeds

P4,400,000

Effective interest rate = Discount / Net proceeds = 600,000 / 4,400,000 = 13.6%

PROBLEM 20-3 Lissandra Company received from a customer a one-year, P500,000 note bearing annual interest of 8%. After holding the note for six months, the entity discounted then note without recourse at 10%. What amount of cash was received from the bank? a. 496,210 b. 523,000 c. 513,000 d. 523,810

Solution: Answer c Principal

P500,000

Interest (500,000 x 8%)

40,000

Maturity value

P540,000

Less: discount (540,000 x 10% x 6/12)

(27,000)

Net proceeds

P513,000

PROBLEM 20-4 On January 1, 2015, Miss Fortune Company sold land with carrying amount of P1,500,000 in exchange for a 9-month, 10% note with face value of P2,000,000. The 10% rate properly reflects the time value of money for this type of note.On April 1, 2015, the entity discounted the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted for as a secured borrowing.On October 1, 2015, the maker dishonoured the note receivable. The entity paid the bank the maturity value of the note plus protest fee of P10,000.On December 31, 2015, the entity collected the dishonoured note in full plus 12% annual interest on the total amount due. What is the amount received from the discounting of note receivable? a. 1,951,500 b. 2,021,000 c. 2,050,500 d. 2,150,000 Solution: Answer (b) Principal

P2,000,000

Interest (2,000,000 x 10%x 9/12)

150,000

Maturity value

P2,150,000

Discount (2,150,000 x 12% x 6/12)

( 129,000)

Net proceeds

P2,021,000

PROBLEM 20-5&6 On January 1, 2015, Nunu Company reported the following balances: Note receivable from sale of building

7,500,000

Note receivable from an officer

2,000,000

The P2,000,000 note receivable is dated December 31, 2012, bears interest at 8% and is due on December 31, 2017. Interest is payable annually on December 31, and all interest payments were made through December 31, 2015. The P7,500,000 note receivable is dated May 1, 2014, bears interest at 9%. Principal payments of P2,500,000 plus interest are due annually beginning May 1, 2015. On July 1, 2015, Ryze Company sold a parcel of land to Barr Company for P4,000,000 under an instalment sale contract. Blitz Company made a P1,200,000 cash down payment on July 1, 2015, and signed a 4-year 10% note for the P2,800,000 balance. The equal annual payments of principal and interest on the note totalled P880,000, payable on July 1 of each year from 2016 through 2019. 5.What is the total amount of notes receivable including accrued interest that should be classified as current assets on December 31, 2015? a. 3,540,000 b. 3,080,000 c. 2,940,000 d. 3,820,000 6. What is the total amount of notes receivable that should be classified as noncurrent assets on December 31, 2015? a. 6,700,000 b. 7,300,000 c. 4,500,000 d. 6,420,000

Solution #5: Answer (a) Note receivable from sale of building due 5/1/2016

P2,500,000

Accrued interest on note receivable from sale of building from 5/1/2015 to 12/31/2015 (5,000,000 x 9% x 8/12)

300,000

Principal payment of note receivable from sale of land due on 7/1/2016: Annual Interest

P880,000

Interest from 7/1/2015 to 7/1/2016

(280,000)

600,000

Accrued interest on NR from sale of land from 7/1/2015 to 12/31/2015 (1/2 x 280,000)

140,000

Total current receivable – December 31, 2015

P3,540,000

Solution #6: Answer (a) NR from sale of building due May 1, 2017

P2,500,000

NR from officer due December 31, 2017

2,000,000

NR from sale of land – noncurrent portion: Principal

P2,800,000

Due July 1, 2016 – current portion

( 600,000)

Total noncurrent notes receivable – December 31, 2015

2,200,000 P6,700,000

PROBLEM 20-7 On December 31, 2015, Hemeindeger Company sold for P3,000,000 an old equipment having an original cost of P5,400,000 and carrying amount of P2,400,000. The terms of the sale were P600,000 down payment and P1,200,000 payable each year on December 31 of the next two years. The sale agreement made no mention of interest. However, 9% would be a fair rate for this type of transaction. The present value of an ordinary annuity of 1 at 9% for two years is 1.76. What is the carrying amount of the note receivable on December 31, 2016? a. 1,009,920 b. 2,302,080 c. 1,200,000 d. 1,102,080 Solution: Answer (d) Note receivable – December 31, 2015

P2,400,000

Present value (1,200,000 x 1.76)

(2,112,000)

Unearned interest income

P288,000

Interest income for 2016 (9% x 2,112,000)

P190,080

Note Receivable – December 31, 2016

P1,200,000

Unearned interest income – 12/31/2016 (288,000 – 190,080)

( 97,920)

Carrying amount – December 31, 2016

P1,102,080

PROBLEM 20-8&9 On August 31, 2015, Syvir Company discounted with recourse a note at the bank at discount rate of 15%. The note was received from the customer on August 1, 2015, is for 90 days, has a face value of P5,000,000 and carries an interest rate of 12%. The customer paid the note to the bank on October 30, 2014, the date of maturity. 8.If the discounting is accounted for as a secured borrowing, what is the interest expense to be recognized on August 31, 2015?

a. 28,750 b. 23,000 c. 50,000 d. 0 9.What is the amount to be recorded as net proceeds? a. 5,000,000 b. 5,021,000 c. 5,021,250 d. 5,050,000 Solution: Answer (a) Principal

P5,000,000

Interest (5,000,000 x 12% x 90/360)

150,000

Maturity value

P5,150,000

Discount (5,150,000 x 15% x 60/360)

128,750

Net proceeds

P5,021,250

Principal

P5,000,000

Accrued interest receivable (5,000,000,000 x 12% x 30/360)

50,000

Carrying amount of note receivable

P5,050,000

Net proceeds

P5,021,250

Carrying amount of note receivable

(5,050,000)

Interest expense

(P 28,750)

LOANS RECEIVABLE (PROBLEMS) 1. MALICIOUS BANK loaned P5,500,000 to MIHO Company on January 1, 2015. The initial loan repayment terms include a 10% interest rate plus annual principal payments of P1,100,000 on January 1 each year. Bargain made the required interest payment in 2014 but did not make the P1,100,000 principal payment nor the P550,000 interest payment for 2015. Malicious is preparing its annual financial statements on December 31, 2015. Miho is having financial difficulty, and Malicioius has concluded that the loan is impaired. Analysis of Miho’s financial condition on December 31, 2015, indicates the principal payments will be concluded, but the collection of interest is unlikely. Malicious did not accrue the interest on December 31, 2015. The projected cash flows are: December 31, 2017

P1,750,000

December 31, 2018

2,000,000

December 31, 2019

1,750,000

What is the loan impairment loss on December 31, 2016? What is the interest income to be reported by Malicious Bank in 2017? What is the carrying value of the loan receivable on December 31, 2018? What is the interest income in 2018? What is the interest income in 2019? a. 941,500 ; 455,850 ; 1,590,758 ; 326,435 ; 159,079 b. 1,095,500 ; 325,700 ; 1,850,563 ; 632,486 ; 156,084 c. 821,640 ; 485,240 ; 1,591,581 ; 125,435 ; 214,123 d. 0 ; 500,850 ; 1,095,597 ; 569,758 ; 109,559

Solution: Answer (a) Book value of loan receivable

P5,500,000

Present Value of projected cash flows: December 31, 2017 (P1,750,000 x 0.9091)

P1,590,925

December 31, 2018 (P2,000,000 x 0.8264)

1,652,000

December 31, 2019 (P1,750,000 x 0.7513)

1,314,775

Loan impairment loss Date

Dec. 31,2017 Dec.31, 2018 Dec.31, 2019

Receivable before payment P5,500,000 3,750,000 1,750,000

4,558,000 P 941,500

Allowance for loan impairment P941,500 485,650 150,215

Net loan receivable

Interest Income

Payment received

P4,558,500 3,264,350 1,590,785

P455,850 326,435 159,079

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

Loan Receivable (P5,500,000 – P1,750,000 – P2,000,000)

P1,750,000

Allowance for loan impairment

(159,215)

Carrying Value

P1,590,785

PROBLEM 2 FPJ Bank loaned P6,000,000 to Jax Company on January 1,2013. The terms of the loan require principal payments of P1,500,000 each year for 4 years plus interest at 9%. The first principal and interest payment is due on January 1,2014. Jax Company made the required payments during 2014 and 2015. However, during 2015 Jax Company began to experience financial difficulties, requiring TVJ Bank to reassess the collectibility of the loan. On December 31,2015, TVJ Bank has determined that the remaining principal payment will be collected but the collection of the interest is unlikely. TVJ Bank did not accrue the interest on December 31,2015.

The present value of 1 at 9% is as follow: For one period

0.917

For two periods

0.842

1. What is the loan impairment loss on December 31,2015? a. 237,000 b. 112,500 c. 124,500 d. 0 2. What is the interest income for 2016? a. 124,875 b. 123,795 c. 113,670 d. 0 3. What is the carrying amount of the loan receivable on December 31,2016? a. 1,499,295 b. 1,489,170 c. 1,375,500 d. 1,500,000 Question 1 Answer c January 1,2016 ( 1,500,000 × 1.000 )

P1,500,000

January 1,2017 ( 1,500,000 × 0.917 )

1,375,500

Total present value of loan

P2,875,500

Loan receivable

P3,000,000

Present value of loan

(2,875,500)

Impairment loss

P124,500

Journal entry to record the impairment loss Impairment loss Allowance for loan impairment

124,500 124,500

Solution: Answer (b) Loan receivable

P3,000,000

Collection on January 1,2016

(1,500,000)

Loan receivable- January 1,2016

P1,500,000

Allowance for loan impairment

(124,500)

Carrying amount - January 1,2016

P1,375,500

Interest income for 2016 (1,375,000 × 9%)

P123,795

Solution: Answer (a) Loan receivable - December 31,2016

1,500,000

Allowance for loan impairment - December 31,2016 ( 124,500 - 123,795 ) Carrying amount - December 31,2016

( 705 ) P1,499,295

PROBLEM 4

March 16, 2015, TARIC INC. loaned P3,000,000 to AMUMU CO.. Under the loan agreement, Alloy Co.is to make an annual principal payment of P600,000 for 5 years plus interest at 8%. The first principal and interest payments is due on January 1, 2015. The required payments were made by Alloy Co. for 2016 and 2017. However, during 2017, Alloy Co. began to face financial difficulties, requiring TARIC In. to reevaluate the collectability of the loan. December 31, 2017, TARIC determines that it will be able to collect the remaining principal, but it is unlikely that the interest will be collected. The following present value actors are taken from the table of present values: Present value of 1 at 8% for: 1 period 0.92593 2 period 0.85734 3 period 0.79383 What is the present value of the expected future cash flows as of December 31, 2017? What is the amount of loan impairment on December 31, 2017? Assuming that Taric Inc. assessment of the collectibility of the loan has not change, what amount of interest income should be recognize 2018? a. 969,953 ; 150,528 ; 72,567 b. 1,650,874 ; 120,058 ; 83,563 c. 1,855,542 ; 135,210 ; 76,462 d. 1,669,962 ; 130,038 ; 85,597

Solution: Answer (d) Present value of expected future cash flows: January 1, 2017

P 600,000

January 1, 2018 (P600,000 x 0.92593)

555,558

January 1, 2019 (P600,000 x 0.85734)

514,404

Present value at December 21, 2015

P1,669,962

Carrying value of loan, December 31, 2017 (P600,000 x 3)

P1,800,000

Present Value of future cash flows

(1,669,962)

Loan Impairment

P130,038

Present value of expected future cash flows

P1,669,962

Less: Collection of loan payment on Jan. 1, 2017

(600,000)

Carrying value, Jan. 1, 2018

P1,069,962

Multiply Interest Interest income for 2018

x8% P 85,597

INVENTORIES (PROBLEMS) Problem 23-1 AC Company incurred the following costs: Materials

P430,000

Storage costs of finished goods

120,000

Delivery to customers

80,000

Irrecoverable purchase taxes

20,000

What is the cost of inventory? a. 500,000 b. 450,000 c. 630,000 d. 520,000 Solution: Answer (b) Materials

P430,000

Irrecoverable purchase taxes

20,000

Total cost of inventory

P450,000

Problem 23-2 Mori Company provided the following information for the current year: Merchandise purchased for sale

5,000,000

Freight in

300,000

Freight out

250,000

Purchase returns

82,000

Purchase discount

18,000

Interest on inventory loan

350,000

What is the amount to record on the purchase? a. 5,218,000 b. 6,300,000 c. 5,200,000 d. 5,120,000 Solution: Answer (a) Merchandise purchased for sale

P5,000,000

Freight in

300,000

Less: Purchase returns

(82,000)

Cost of Purchase

P5,218,000

PROBLEM 23-3&4 Joshua company shows the following account balances:

Merchandise Inventory

2014 150,000

2015 90,000

Cash

180,000

?

Accounts Receivable

240,000

180,000

Accounts payable

405,000

200,00

Assuming all sales and purchases are on account. The amount of cost of goods sold is P360,000 during the current year. The gross profit margin on sales is 20%.

3. What is the amount of purchases? a. 300,000 b. 210,000 c. 240,000 d. 310,000 4. What is the 2015 cash balance? a. 105,000 b. 35,000 c. 55,000 d. 185,000 Solution #3:Answer (a) Merchandise Inventory – 12/31/14

P150,000

Purchases (SQUEEZE)

300,000

Total goods available for sale

P450,000

Cost of goods sold

(360,000)

Merchandise Inventory – 12/31/15

P90,000

Solution #4: Answer (b) Sales (100%)

P450,000

Cost of goods sold (80%)

(360,000)

Gross profit (20%)

P90,000

Cash – 12/31/14

P180,000

Add: Collections

510,000

Balance

P690,000

Less: Disbursement

P150,000

Payment to suppliers

505,000

(655,000)

Cash – 12/31/15

P35,000

Accounts Receivable – 12/31/14

240,000

Sales

450,000

Collections

(510,000)

Accounts Receivable – 12/31/15

P180,000

Accounts Payable – 12/31/14

P405,000

Purchases

300,000

Payment to suppliers

(505,000)

Accounts Payable – 12/31/15

P200,000

PROBLEM 23-5 On December 25, 2015, Joy Company purchased goods costing P500,000. The terms were FOB shipping point. The goods were received on December 28, 2015. Costs incurred by the entity in connection with the purchase and delivery of the goods were normal freight charge P15,000, handling cost P10,000, insurance on shipment P2,000 and abnormal freight charge for express shipping P18,000. What is the total cost of the inventory? a. 527,000 b. 545,000

c. 515,000 d. 513,000 Solution: Answer (a) Purchased goods

P500,000

Normal freight charge

15,000

Handling cost

10,000

Insurance

2,000

Inventory

P527,000

PROBLEM 23-6 Gen Company recorded purchases at net amount. On December 10, 2015 the entity purchased merchandise on account, P2,500,000, terms 4/10, n/30. The entity returned P150,000 of the December 10 purchase and received credit on account. The account had not been paid on December 31. At what amount should the account payable be adjusted on December 31? a. 150,000 b. 47,000 c. 103,000 d. 50,000 Solution: Answer (b) Gross invoice

P2,500,000

Purchase return

(150,000)

Balance

P2,350,000

Purchase discount loss (2% x 2,350,000)

P47,000

PROBLEM 23-7 Romar Company has the following data during the year: Merchandise inventory – January 1, 2015

P685,000

Cost of goods sold

500,000

Merchandise inventory – December 31, 2015

435,000

What is the amount of purchases during the year? a. 185,000 b. 65,000 c. 250,000 d. 620,000 Solution: Answer c Merchandise inventory – beginning

P685,000

Purchases (SQUEEZE)

250,000

Total goods available for sale

P935,000

Cost of goods sold

(500,000)

Merchandise inventory – ending

P435,000

PROBLEM 23-8 Xtyle Sportswear regularly buys sweaters from Asahi Company and is allowed trade discounts of 18% and 8% from the list price. Xtyle made a purchase during the year, and received an invoice with a list price of P780,000 , a freight charge of P22,000 and payment terms of 2/10, n/30. What is the cost of purchase? a. 617,600 b. 588,432

c. 583,248 d. 566,432 Solution: Answer (d) List price

P780,000

Trade discount (18% x 780,000)

140,400

Balance

P639,600

Trade discount

(51,168)

Invoice price

P588,432

Freight charge

(22,000)

Total cost of purchase

P566,432

PROBLEM 23-9 Diego Company used perpetual inventory system. At the end of 2013, the inventory account was P420,000 and P40,000 of those goods included in ending inventory were purchased FOB shipping point and did not arrive until 2014. Purchases in 2014 were P4,000,000. The perpetual inventory records showed an ending inventory of P500,000 for 2014. A physical count at the end of 2014 showed an inventory of P480,000. Inventory shortages are included in cost of goods sold. What amount should be reported as cost of goods sold for 2014? a. 4,480,000 b. 4,420,000 c. 3,940,000 d. 4,000,000 Solution: Answer (c) Inventory – December 31, 2013

P420,000

Purchases – 2014

4,000,000

Goods available for sale

P4,420,000

Inventory – December 31, 2014

(480,000)

Cost of goods sold

P3,940,000

PROBLEM 23-10 On December 1, 2015, Mickey store 101 jeans on consignment from Donald. Donald’s cost for the jeans was P950 each, and they were priced to sell at P1,200. Mickey’s commission on consigned goods is 10%. On December 31, 2015, 1 jeans remained. In the December 31, 2015 statement of financial position, what amount should be reported as payable for consigned goods? a. 120,000 b. 108,000 c. 121,200 d. 109,080 Solution: Answer b Consigned goods sold

P120,000

Commission

(12,000)

Payable for consigned goods

P108,000

FINANCIAL ASSET AT FAIR VALUE (PROBLEMS) PROBLEM 32-1 On October 7, 2014, Reno Company acquired a financial asset for P3,000,00. The entity also paid commission and taxes amounting to P300,000. The financial asset had a market value of P2,900,000 on December 31, 2014. At what amount should the financial asset initially be recognized if it is classified as fair value through profit or loss? a.P3,000,000 b.P2,900,000 c.P3,300,000 d.P2,700,000 Answer (c) Financial Asset at Fair Value

P3,300,000

PROBLEM 32-2&3 During 2014, Ever Company purchased marketable equity securities held as trading investment. The entity also paid commission and taxes amounting P400,000. For the year ended December 31,2014, the entity recognized unrealized loss of P200,000. There were no security transactions during 2015. The securities had the following fair value at year-end: Security

December 31,2014

December 31, 2015

A 1,500 shares

300,000

350,000

B 2,000 shares

500,000

450,000

1. At what amount should the financial asset initially be recognized? a. 800,000 b. 900,000 c 1,000,000 d. 1,100,000 2 What amount of unrealized gain or loss should be recognized in inome statement for the year ended December 31,2015? a. 50,000 gain b. 100,000 gain c. 150,000 gain d. 50,000 loss Solution #2: Answer (c) Fair Value- 12/31/14

P800,000

Unrealized loss

200,000

Acquisition Cost

P1,000,000

Solution #3: Answer (b) Fair Value- 12/31/15

P900,000

Fair Value- 12/31/14

800,000

Unrealized gain in 2015

P100,000

PROBLEM 32-4,5,6&7 On September 21,2013, JaLo Company purchased 35,000 shares for P50 per share The investment was classified as trading investment On December 31,2013, the market price per share is P42. During 2014, the entity sold 15,000 shares for P65 per share. On December 31,2014, the market price per share had declined to P38.

4. What amount of unrealized gain or loss should be reported in the income statement for 2013? a. 280,000 loss b. 525,000 gain c. 420,000 loss d. 280,000 gain 5. What is the carrying amount of the investment for the year ended December 31,2013? a. 1,750,000 b. 1,570,000 c. 1,470,000 d. 1,330,000 6. What net amount of gain or loss should be recognized for 2014? a. 345,000 gain b. 265,000 gain c. 80,000 loss d. 105,000 gain 7. What is the carrying amount of the invesment for the year ended December 31,2014? a. 760,000 b. 840,000 c. 670,000 d. 1,000,000 Solution #4 Answer (a) Market Value- 12/31/13

P1,470,000

Acquisition Cost

1,750,000

Unrealized gain in 2013

(P280,000)

Solution #5: Answer (c) Carrying Amount- 12/31/13 ( 35,000 × 42 )

P1,470,000

Solution #6: Answer (b) Sale price ( 15,000 × 65 )

P975,000

Cost of shares sold ( 15,000 × 42)

630,000

Gain on sale

P345,000

Market value of remaining shares (20,000 × 38)

P760,000

Carrying amount (20,000 × 42)

(840,000)

Loss from change in fair value

(P80,000)

Net gain ( 345,000 - 80,000 )

P265,000

Solution #7: Answer (b) Carrying amount- 12/31/14 (20,000 × 42)

P840,000

PROBLEM 31- 8&9 Dora Company acquired financial instrument for P4,000,000, on July 17,2014. The entity also paid commission, taxes and other costs amounting P300,000. The financial instrument is classified as financial asset at fair value through other comprehensive income. On December 31,2014 the fair value of the instrument was P4,500,000 and the transaction costs that would be incurred on the sale of investment are estimated at P700,000. On December 31 2015, the issuer of the instrument was in severe financial difficulty and the fair value of the instrument had fallen to P2,800,000.

1. What amount of unrealized gain or loss should be reported in the 2014 income statement? a. 500,000 gain

b. 200,000 gain c. 200,000 loss d. 0

2. What amount of loss should be reported as component of other comprehensive income in the statement of changes in equity on December 31,2015? a. 1,000,000 b. 1,200,000 c. 1,500,000 d. 1,700,000 Question #8: Answer (d) When financial instrument classified as at fair value through other comprehensive income, any unrealized gain or loss is reported as component of other comprehensive income. Solution #9: Answer (c) Fair Value- 12/31/15

P2,800,000

Historical Cost

(4,300,000)

Cumulative unrealized loss

(P1,500,000)

PROBLEM 32-10 On October 24,2014, Tiu Tan Company purchased P2,000,000 face value 10% bonds for P1,875,000 plus accrued interest to yield 12%. The bonds mature on October 24,2010, pay interest semi-annually on Jan. 1 and July 1. On December 31,2014,the bonds had a market value of P1,925,000. On March 12,2015,the entity sold the bonds for P1,900,000. On December 31,2014, what amount should be reported for short-term investments in trading debt securities? a. 1,925,000 b. 1,875,000

c. 1,900,000 d. 2,000,000 Answer (a) Financial Asset at fair value

P1,925,000

INVESTMENT IN EQUITY SECURITIES (PROBLEMS) 1. On January 1, 2015, Mylene Company purchased 50,000 shares of another entity for P3,600,000. On October 1. 2015, the entity received 50,000 stock rights from the investee. Each right entitled the shareholder to acquire one share of P85. The market price of the investee’s share was P100 immediately before the rights were issued and P90 immediately after the rights were issued. On December 31, 2015, the entity sold 25,000 shares at P90 per share. The stock rights are not accounted for separately. The FIFO approach is used. What is the gain on sale of investment that should be recognized in 2015? a. 700,000 b. 450,000 c. 287,500 d. 125,000 Solution: Answer (b)

Original Invetment New investment acquired through stock rights (50,000x85) Total

Shares 50,000 50,000

Cost P3,600,000 4,250,000

100,000

P7,850,000

FIFO approach Sale price (25,000 x 90)

P2,250,000

Cost of shares sold (25,000/50,000 x 3,600,000)

1,800,000

Gain on sale

P450,000

PROBLEM 33-2 On January 1, 2015, ABC Company purchased 40,000 shares of RST at P100 per share. The investment is measured at fair value through other comprehensive income. Brokerage fees amounted to P120,000. A P5 dividend per share of RST had been declared on December 15, 2013, to be paid on March 31, 2015 to shareholders of record on January 31, 2015. No other transactions occurred in 2015 affecting the investment in RST shares. What is the initial measurement of the investment?

a. 4,120,000 b. 3,920,000 c. 4,000,000 d. 3,800,000 Solution: Answer (b) Purchase price (40,000 x 100)

P4,000,000

Brokerage

120,000

Total

P4,120,000

Less: Purchased dividend (40,000 x 5)

(200,000)

Cost of investment

P3,920,000

PROBLEM 33-3 On January 1, 2015, Hostile Company purchased 4,000 shares of another entity at P100 per share. Transaction costs amounted to P12,000. The investment is measured at fair value through other comprehensive income. A P5 dividend per share had been declared on December 15, 2013, to be paid on March 31, 2015 to shareholders of record on January 31, 2015. No other transaction occurred in 2015 affecting the investment. What is the initial measurement of the investment on January 1, 2015? a. 392,000 b. 400,000 c. 412,000 d. 380,000

Solution: Answer (a) Fair Value (4,000 x 100)

P400,000

Transaction Cost

12,000

Carrying Amount

P412,000

Less: Dividends (4,000 x 5)

( 20,000)

Investment in Stocks

P392,000

PROBLEM 33-4 Wray Company provided the following data for 2015: * On September 1, Wray received a P500,000 cash dividend from Seco Company in which Wray owns a 30% interest. * On October 1, Wray received a P60,000 liquidating dividend from King Company. Wray owns a 5% interest in King. * Wray owns a 2% interest in Bow Company, which declared a P2,000,000 cash dividend on November 15, 2015 payable on January 15, 2016. What amount should be reported as dividend income for 2015? a. 600,000 b. 560,000 c. 100,000 d. 40,000 Solution: Answer (d) Cash dividend from Bow Company (2% x 2,000,000)

P40,000

PROBLEM 33-5 Valedictory Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the shareholders to subscribe for 1 share at P100. Vast Company owned 50,000 shares of Valedictory Company with total cost of P5,000,000. The share is quoted right-on at 125. The stock rights are accounted for separately. What is the cost of the new investment if all of the stock rights are exercised by Vast Company? a. 1,250,000 b. 1,562,000 c. 1,500,000 d. 1,450,000 Solution: Answer (c) Theoretical value of right (125-100 / 4+1)

P5

Initial cost of rights (50,000 x 5)

P250,000

Cash paid for new shares (50,000/4 = 12,500 x 100)

1,250,000

Cost of new investment

P1,500,000

PROBLEM 33-6 Rice company owned 30,000 ordinary shares of Wood Company acquired on July 31, 2015, at a total coast of P1,100,000. ON December 1, 2015, Rice received 30,000 stock rights from Wood. Each right entitles the holder to acquire one share at P45. The market price of each right was P10. Rice sold its rights on December 31, 2015 for P450,000 less a P10,000 commission. What amount should be reported as gain from the sale of the rights? a. 150,000 b. 140,000

c. 250,000 d. 240,000

Solution: Answer (b) Net sale price (450,000-10,000)

P440,000

Initial cost of rights sold (30,000 x 10)

( 300,000)

Gain on sale of rights

P140,000

PROBLEM 33-7 During 2015, Neil Company held 30,000 shares of Brock company’s 100,000 outstanding shares and 6,000 shares of Amal Company’s 300,000 outstanding shares. During the year, Neil received P300,000 cash dividend from Brock, P15,000 cash dividend and 3% stock dividend from Amal. The closing price of Amal share is P150. What amount should be reported as dividend revenue for 2015? a. 342,000 b. 315,000 c. 442,000 d. 15,000 Solution: Answer (d) Cash dividend from Amal (6,000/300,000 = 2% interest)

P15,000

PROBLEM 33-8 Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on February 15, 2015. Cobb Company received a stock dividend of 2,000 shares on March 31, 2015, when the carrying amount per share was P350 and the market value per share was P400. Roe Company paid a cash dividend of P15 per share on September 15, 2015.

In the income statement for the year ended October 31, 2015, what amount should be reported as dividend income? a. 150,000 b. 980,000 c. 180,000 d. 880,000 Solution: Answer (c) Original shares

10,000

Stock Dividend

2,000

Total shares

12,000

Dividend income (12,000 x P15)

P180,000

PROBLEM 33-9&10 On January 1, 2012, Christopher Company purchased 20,000 shares of Bay Company, P100 par, at P110 per share. On March 1, 2012, Bay Company issued rights to Christopher Company, each permitting the purchase of ¼ share at par. No entry was made. The bid price of the share was 140 and there was no quoted price for the rights. On April 1, 2012, Christopher Company paid for the new shares charging the payment to the investment account. Since Christopher Company felt that it had been assessed by Bay Company, the dividends received from Bay Company in 2012 and 2013 (10% on December 31 of each year) are credited to the investment account until the debit was fully offset. Bay Company declared annual dividend of P2,500,000 for the year ended December 31, 2012 and 2013. On January 1, 2014, Christopher Company received 50% stock dividend from Bay Company. On same date, the shares received as stock dividend were sold at P160 per share and the proceeds were credited to income. On December 31, 2014, the shares of Bay Company were split 2 for 1. Christopher Company found that each new share was worth P5 more than the P110 paid for the original shares. Accordingly, Christopher Company debited the investment account with the additional shares received at P110 per share and credited income. On June 30, 2015, Christopher Company sold one-half of the investment at P92 per share and credited the proceeds to the investment account.

9. What is the balance of the investment on December 31, 2015 as it was kept by Christopher Company? a. 3,150,000 b. 2,650,000 c. 2,200,000 d. 4,950,000 10. Using the average method, what is the correct balance of the investment on December 31, 2015? a. 2,200,000 b. 1,800,000 c. 900,000 d. 0 Solution #9: Answer (b) Share

Cost

1/1/2012 (20,000 x 110)

20,000

P2,200,000

4/1/2012 (5,000 x 100)

5,000

500,000

12/31/2012 (10% x 2,500,000)

-----

(250,000)

12/31/2013 (10% x 2,500,000)

-----

(250,000)

12/31/2014 (25,000 x 110)

25,000

2,750,000

6/30/2015 (25,000 x 92)

(25,000)

(2,300,000)

Investment account per book

25,000

P2,650,000

Solution #10: Answer (c)

Shares

Cost

1/1/2012 (20,000 x 110)

20,000

P2,200,000

4/1/2012 (5,000 x 100)

5,000

500,000

1/1/2014 (50% x 25,000)

12,500

Balance

37,500

P2,700,000

1/1/2014 (12,500/37,500 X 2,700,000)

(12,500)

( 900,000)

Balance

25,000

P1,800,000

12/31/2014 (2 for 1 split)

25,000

Balance

50,000

P1,800,000

6/30/2015 (1/2 x 1,800,000)

(25,000)

( 900,000)

Balance December 31, 2015

25,000

P900,000

-----

-----

FINANCIAL ASSET AT AMORTIZED COST 1. On October 1, 2015, Park Company purchased 6,000 of the P1,000 face amount, 10% bonds of Ott Company for P6,600,000 including accrued interest of P150,000. The bonds, which mature on January 1, 2022, pay interest semiannually on January 1 and July 1. Park used the straight line method of amortization and appropriately recorded the bonds as financial asset at amortized cost. On December 31, 2015, the bond investment should be reported at what amount? a. 6,450,000 b. 6,432,000 c. 6,426,000 d. 6,360,000 Solution: Answer b October 1, 2015 to January 1, 2022 =

75 months

Cost (6,600,000-150,000)

P6,450,000

Face Value

(6,000,000)

Premium

P450,000

Monthly amortization (450,000 / 75)

P6,000

Cost

P6,450,000

Amortization of premium from October 1 to December 31, 2015 (4,000 x 3) Carrying Amount – December 41, 2015

( 18,000) P6,432,000

2. On January 1, 2015, Portugal Company purchased bonds with face value of P8,000,000 for P7,679,000 as a long-term investment. The stated rate on the bonds is 10% but the bonds are acquired to yield 12%. The bonds mature at the rate of P2,000,000 annually every December 31 and the interest is payable annually also every December 31. The entity used the effective interest method of amortizing discount. What is the carrying amount of the investment in bonds on December 31, 2015?

a. 5,729,250 b. 7,759,250 c. 7,800,480 d. 5,800,480 Solution: Answer (d) Interest income (7,679,000 x 12%)

P921,480

Interest received (8,000,000 x 10%)

(800,000)

Discount amortization

P121,480

Cost

P7,679,000

Discount amortization

121,480

Annual installment

(2,000,000)

Carrying amount – December 31, 2015

P5,800,480

3. On January 1, 2015, Queen Company purchased bonds with face value of P5,000,000 for P5,400,000. The stated interest rate is 8% payable annually every December 31. The bonds are acquired to yield an effective rate of 6%. The entity has elected the fair value option for the bond investment. On December 31, 2015, the bonds had a fair value of P5,600,000. What total income should be reported for 2015? a. 200,000 b. 400,000 c. 500,000 d. 600,000

Solution: Answer (d) Gain from change in fair value (5,600,000-5,400,000)

P200,000

Interest income ( 5,000,000 x 8%)

400,000

Total income

P600,000

4.-5. On January 1, 2015, Russia Company purchased 5-year bonds with face value of P8,000,000 and stated interest of 10% per year payable semi-annually January 1 and July 1. The bonds were acquired to yield 8%. Present value factors are: Present value of an annuity of 1 for 10 periods at 5%

7.72

Present value of an annuity of 1 for 10 periods at 4%

8.11

Present value of 1 for 10 periods at 4%

0.6756

4. What is the purchase price of the bonds? a. 7,732,400 b. 7,351,200 c. 8,648,800 d. 8,617,600 5. What is the carrying amount of the bond investment on December 31, 2015? a. 8,538,542 b. 8,302,848 c. 8,594,752 d. 8,540,704

Solution: Question #4 (c) Semi-annual nominal interest (8,000,000 x 5%)

P400,000

Semi-annual effective interest (8,000,000 x 4%)

320,000

Difference

P80,000

Multiply by PV of annuity of 1 for 10 periods at 4%

x8.11

Premium

P648,800

Face value

8,000,000

Purchase price

P8,648,800

Another approach: PV of principal (8,000,000 x .6756)

P5,404,800

PV of semiannual interest payments (400,000 x 8.11)

3,244,000

Purchase price or present value of bonds

P8,648,800

Solution: Question #5 (a) Acquisition cost – January 1, 2015

P8,648,800

Amortization of premium – 1/1/2015 to 6/30/2015: Interest received (5% x 8,000,000)

P400,000

Interest income (4% x 8,648,800)

345,952

Carrying amount – June 30, 2015

54,048 P8,594,752

Amortization of premium – 7/1/2015 to 12/31/2015: Interest received Interest income (4% x 8,594,752) Carrying amount – December 31, 2015

P400,000 P343,790

56,210 P8,538,542

6. On January 1, 2015, Venus company purchased 10% bonds with face value of P5,000,000 plus transaction cost of P101,500 with a yield of rate of 8%. The bonds mature on December 31, 2019 and pay interest annually on December 31. The carrying amount of the investment on December 31, 2015 using the effective interest method is P5,333,620. What is the initial acquisition cost of the bond investment? a. 5,401,500 b. 5,300,000 c. 5,198,500 d. 5,398,500 Solution: Answer a Carrying amount – December 31. 2015

P5,333,620

Nominal interest (5,000,000 x 10%)

500,000

Total

P5,333,620

Divide by (100% + 8%) Total acquisition cost

108% P5,401,500

7. On July 1, 2015, York Company purchased as a long-term investment P1,000,000 of Park Company’s 8% bonds for P946,000, including accrued interest of P40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2021, and pay interest annually on January 1. York Company used the effective interest method of amortization. On December 31, 2015, what carrying amount of the investment in bonds? a. 916,600 b. 911,300 c. 953,300 d. 960,600

Solution: Answer (b) Purchase price

P946,000

Less: Accrued interest

( 40,000)

Cost of investment

P906,000

Amortization of discount from July 1 to December 31, 2015: Interest income (906,000 x 10% x 6/12)

P45,300

Interest received (1,000,000 x 8% x 6/12)

40,000

Carrying amount – December 31, 2015

5,300 P911,300

8. Tiger Company purchased P5.000,000 of bonds at par. The entity has elected the fair value model for this investment. At year-end, the entity received annual interest of P200,000 and the fair value of the bonds was P4,705,000. What amount should be reported for the bond investment as total income or loss in the income statement? a. 200,000 income b. 295,000 loss c. 495,000 income d. 95,000 loss Solution: Answer (d) Interest income

P200,000

Loss from change in fair value (5,000,000 – 4,705,000)

(295,000)

Total Loss

(P95,000)

9. On January 1, 2015, Purl Company purchased as a long-term investment P5,000,000 face value of Shaw Company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2020 and pay interest annually on December 31. The interest method of amortization is used. What is the carrying amount of the investment on December 31, 2016? a. 4,662,000 b. 4,680,020 c. 4,562,000 d. 4,618,200 Solution: Answer (b) Carrying amount – January 1, 2015

P4,562,000

Amortization of discount for 2015: Interest income (4,562,000 x 10%)

456,200

Interest received (5,000,000 x 8%)

400,000

Carrying amount – December 31, 2016

56,200 P4,618,200

Amortization of discount for 2016: Interest income (4,618,200 x 10%)

P461,820

Interest received (5,000,000 x 8%)

400,000

Carrying amount – December 31, 2016

61,820 P4,680,020

10. On October 1, 2015, Danica Company purchased P2,000,000 face value 12% bonds for 98 plus accrued interest and brokerage fee. Interest is paid semi-annually on January 1 and July 1. Brokerage fee for this transaction was P50,000. At what amount should this acquisition of bonds be recorded? a. 1,960,000 b. 2,010,000

c. 2,020,000 d. 2,070,000 Solution: Answer (b) Purchase price (2,000,000 x .98)

P1,960,000

Brokerage fee

50,000

Total acquisition cost

P2,010,00

EFFECTIVE INTEREST METHOD

1. OnJanuary 1,2014 Tungsten Company purchased 15% bonds wuth face value of 4,000,000 plus transaction cost of 54,000 with a yield ate of13%. The bonds mature on December 31,2018. And pay interest annually on December 31. The arrying amount of the investment on December 31,2014 using the effective interest method is 4 ,146,000. What is the initial cost of the bond investment? A. 4,244,000 B. 3,138,000 C. 4,200,000 D. 4,126,000 Solution: Answer (c) Carrying amount - December 31,2014

P4,146,000

Add: Nominal interest (4,000,000x15%)

600,000

Total

P4,746,000

Divide by (100 + 13%) Total acquisition cost

113% P4,200,000

2. On July 1, 2014 Xenon company purchased a long term investment 4,500,000 face amount, 5% bonds of Xion Company for 3,150,000 to yield 10% per year .The bonds pay interest semiannually on January 1 and July 1. On December 31,2014, what amount should be reported as interest receivable? A. 112,500 B. 225,000 C. 450,000 D. 115,375

Solution: Answer (a) Accrued interest receivable from July 1 to December 31,2014 (4,500,000 x 5% x 6/12)

P112,500

3. Company DS intended to issue a bond with face value of 100,000 having a maturity of 5 years and annual coupon of 8%. At the time of issue however, the market interest rate rose to 10% and the bond could fetch a price of 92,420 only. What is the amortization on the first year? A. 9,242 B. 8,000 C. 1,242 D. 2,606 Solution: Answer (c) Interest Income (92,420 x 10%)

P9,242

Interest Receivable (100,000x8%)

(8,000)

Amortization

P1,242

4. On January 1, 2011, Company A issues long-terms bonds which are due on January 1, 2016. Interest is paid semiannually on January 1 and July 1 each year. Face amount of bonds is 500,000 with stated interest rate (coupon rate) of 10%. At the time of issuance, market interest rate is 12%. What will be the price of bonds issued by Company A? A. 463,202 B. 279,200 C. 500,000 D.184,002 Solution: Answer (a)

Present value of principal = 500,000 x Present value factor for a single payment (6%, 10 periods) = 500,000 x 0.5584 = 279,200 Present value of interest payments = 500,000 x Present value factor for an ordinary annuity (6%, 10 periods) = (500,000 x 5%) x 7.3601 = 184,002 Price of bonds = Present value of principal + Present value of interest payments = 279,200 + 184,002 = 463,202 5. Wrightway Corporation issues 100,000 of 10%, 5-year bonds on January 1, 2007, with interest payable each January 1. The bonds sell for $92,790 which results in bond discount of $7,210 ($100,000 - $92,790) and an effective-interest rate of 12%. What is the carrying amount of bonds on December 31,2007? A. 93,925 B.92,790 C. 98,865 D. 91,655 Solution: Answer (a) Bond interest expense ($92,790 x 12%)

P11,135

Bond interest paid ($100,000 x 10%) .........

(10,000)

Bond discount amortization.......................

P1,135

Carrying amount (92,790 + 1,135)

P93,935

6. Helium Corporation issues 100,000, 10%, 5-year bonds on January 1, with interest payable on January 1. In this case, the bonds sell for 107,985, which results in bond premium of 7,985 and an effective-interest rate of 8%. What is the amortization premium for the year? A. 7,985 B. 2,159.5 C. 1,361 D. 2, 798.5 Answer C. 1,361 Bond interest paid (100,000 x 10%)

P10,000

Bond interest expense (107,985 x 8%)

8,639

Bond premium amortization

P1,361

7.Bismuth Company purchased 3,500,000 of bonds at par. The entity has elected the fair value model for this investment. At year end, the entity received annual interest of 140,000 and the fair valur of bonds was 3,205,000. What amount should be reported for the bond investment as total income or loss in the income statement? A. 295,000loss B. 155,000loss C. 140,000 income D. 435,000 loss Solution: Answer (b) Interest income

P140,000

Loss from change in fair value (3,500,000 -3,205,000)

(295,000)

Total loss

(P155,000)

8. OnJanuary 1,2014 Arci company purchased bonds with face valur of 2,500,000. The bonds are dated January 1,2014 and mature on January 1,2018. The interest on bonds is 10% payable semiannually every June 30 and December 31. The prevailing market rate of interest on the bonds is 12%. What is the present value of the bonds on January 1,2014? A. 806,750 B. 798,750 C. 1,575,000 D. 776,250 Solution: Answer (b) PV of principal (2,500,000 x .63)

P1,575,000

PV of semiannual interest payments

(776,250)

(125,000x6.21) Present value

P798,750

9. On January 2014 Linux Company purchased bonds with face value of 4,000,000 for 4,700,000. The stated interest rate is 12% payable annually every December 31. The bonds are acquired to yield an effective rate of 8%. The entity has elected the fair value option for the bond investment. On December 31,2014 the bonds had a fair value of 5,300,000. What total income should be reported for 2014? A. 1,080,000 B.920,000 C. 1,620,000 D. 280,000 Solution: Answer (b) Gain from change in fair value (5,300,000-4,700,000)

P600,000

Interest Income (4,000,000 x 12%)

320,000

Total Income

P920,000

10. Hydrogen company purchased bonds at a discount of 200,000. Subsequently, the entity sold these bonds at a premium of 230,000. During the period that the entity held this investment, amortization of the discount amounted to 30,000. What amount should be reported as gain on sale of bonds? A. 460,000 B. 360,000 C. 480,000 D. 500,000 Solution: Answer (a) Carrying amount (1,000,000-200,000)

P800,000

Amortization to date

(30,000)

Carrying amount

P770,000

Selling price (1,000,000 + 230,000)

P1,230,000

Less: Carrying amount

(770,000)

Gain on sale

P460,000

INVESTMENT PROPERTY

1. Azalea Company and its subsidiaries own the following properties that are accounted for in accordance with PAS 40: Land held for future factory site

4, 000, 000

Machinery leased out by Azalea to an unrelated party under an operating lease

1, 500, 000

Land held by Azalea for undetermined use

5, 000, 000

A vacant building owned by Azalea and to be leased out under an operating lease

3, 250, 000

Land leased by Azalea to a subsidiary under an operating lease

2, 000, 000

Property held by a subsidiary of Azalea, a real estate firm, in the ordinary course of business

2, 610, 000

Property held by Azalea for use in production

3, 950, 000

Building owned by a subsidiary of Azalea and for which the subsidiary provides security and maintenance services to the lessees

1, 750, 000

Property under construction for use in investment property

5, 550, 000

What is the total investment property that should be reported in the consolidated statement of financial position of the parent and its subsidiaries? a.15, 550, 000 b.15, 550, 000

c.17, 170, 000 d.21, 660, 000 Solution: Answer (d) Land held by Azalea for undetermined use

P 5, 000, 000

A vacant building owned by Azalea and to be leased out under an operating lease

3, 250, 000

Building owned by a subsidiary of Azalea and for which the

1, 750, 000

subsidiary provides security and maintenance services to the lessees Property under construction for use in investment property

5, 550, 000

Total investment property

P15, 550,000

2. George Company acquired a building on January 1, 2013 for P10, 000, 000. At the date, the building had a useful life of 35 years. On December 31, 2013, the fair value of the building was P10, 500, 000 and on December 31, 2014, the fair value was P10, 900, 000. The building was classified as an investment property and accounted for under the cost model. 1. What is the depreciation of the investment property for 2014? a.300, 000 b.241, 500 c.285, 714 d.298, 417 2. What is the carrying amount of the investment property on December 31, 2014? a. 9, 428, 571 b. 10, 000, 000 c. 9, 714, 286

d.10, 285, 714 Solution: Answer (c) Depreciation for 2013 (10, 000, 000/ 35)

P285, 714

Question 2: Answer (a) Cost- January 1, 2013

P10, 000,000

Accumulated Depreciation (10, 000, 000/ 35x2)

( 571, 429)

Carrying Amount- December 31, 2014

P 9, 428,571

3. Howard Company owned an investment property which had an original cost of P6, 500,000 on January 1, 2012. On December 31, 2013, the fair value was P 7, 000, 000 and on December 31, 2014 the fair value was 6, 900, 000 .On acquisition, the property had a useful life of 45 years. 1. Under the fair value model, what is the expense to be recognized for the year ended December 31, 2014? a.50,000 b.100,000 c.250,000 d.500,000 2. Under the cost model, what is the expense to be recognized for the year ended December 31, 2014? a.156, 000 b.153, 333 c. 195,667 d.144, 444

Solution: Question 1: Answer (b) FAIR VALUE MODEL Fair value- December 31, 2013

P 6,900,000

Fair Value- December 31, 2014

7,000,000

Loss from change in Fair Value

(P 100, 000)

Question 2: Answer (d) COST MODEL Depreciation Expense (2014) (6, 500, 000/ 45)

P144, 444

4. Amaya Company purchased an investment property in January 1, 2012 for P3, 450, 000. The property had a useful life of 35 years and on December 31, 2014 had a fair value of P4, 000, 000. On December 31, 2014, the property was sold for net proceeds of P3, 900, 000. The entity used the cost model to account the investment property. What is the gain or loss to be recognized for the year ended December 31, 2014 regarding the disposal of the property? a.645, 315 b.735, 451 c.745, 715 d.815, 669 Solution: Answer (c ) Cost- January 1, 2012

P 3, 450,000

Accumulated Depreciation (3, 450, 000/35x3)

(295, 714)

Carrying Amount December 31, 2014

P 3,154,286

Selling Price

P 3, 900,000

Carrying Amount-December 31, 2014

(3,154,286)

Gain on Disposal of Property

P745, 715

5. Clayton Company owned three properties which are classified as investment properties. Details of the properties are as follows: Each property was acquired in 2011 with a useful life of 30 years. The accounting policy is to use the fair value model for investment properties. What is the gain or loss to be recognized for the year ended December 31, 2015? a. 250, 000 b. 300, 000 c.450, 000 d. 500, 000 Solution: Answer (d) Fair Value 2014

Fair Value 2015

Gain (loss)

Property 1

P3,150,000

P3, 200,000

P50,000

Property 2

3,050, 000

2, 950, 000

(100,000)

Property 3

3,750, 000

3,500, 000

(250, 000)

Net loss from change in fair value

(P300, 000)

6. Aslan Company has a building with a carrying amount of P25, 000, 000 on December 31, 2014. The building is used as offices of the entity’s administrative staff. * On December 31, 2014, the entity intended to rent out the building to independent third parties. The staff will be moved to a new building purchased early in 2014 * On December 31, 2014, the original building had a fair value of P35, 000, 000 * On December 31, 2014, the entity also had land that was held in the ordinary course of the business

* The land had a carrying amount of P15, 000, 000 and fair value of P20, 000, 000 on December 31, 2014. On such date, the entity decided to hold the land for capital appreciation. The accounting policy is to carry all investment property at fair value. 1. On December 31, 2014, what amount should be recognized as revaluation surplus as a result of transfer of the building to investment property? a. 10, 000, 000 b. 15, 000, 000 c. 20, 000, 000 d 25, 000, 000 2. On the same date, what amount should be recognized on profit or loss as a result of the transfer of the land to investment property? a. 5, 000, 000 b. 10, 000, 000 c. 20, 000, 000 d 15, 000, 000 Solution: Question 1: Answer (a) Fair value of Building- December 31, 2014

P 35,000,000

Carrying amount of building- December 31, 2014

25,000,000

Revaluation Surplus

P10, 000,000

Question 2: Answer (d) Fair value of land-December 31, 2014

P 20,000,000

Carrying amount of land- December 31, 2014

(15, 000,000)

Gain on Reclassification

P 5,000,000

7. Lenidya Company’s accounting policy with respect to investment properties is to measure them at fair value at the end of each reporting period. One of the investment properties was measured at 7,950,000 and on December 31, 2014. The property had been acquired on January 1, 2014 for a total of P 7, 600, 000, made up of P 6,900, 000 paid to the vendor, P300, 000 paid to the local authority as a property transfer tax and P400, 000 paid to professional advisers. The useful life of the property is 50 years. What is the amount of gain to be recognized in profit or loss for the year ended December 31, 2014 in respect of the investment property? a. 350, 000 b. 400, 000 c. 450, 000 d. 500, 000 Solution: Answer (a) Fair Value

P7,950,000

Acquisition Cost

7, 600,000

Gain from change in Fair Value

P 350,000

INVESTMENT IN ASSOCIATE (PROBLEMS) PROBLEM 34-1 On March 31,2014, Qua Lee Company acquired 40% of the outstanding ordinary shares of an investee for P8,000,000. The carrying amount of the net assets of the investee equalled P15,000,000. Any excess of cost over carrying amount is attributable to goodwill. During the year, the investee reported net loss of P4,500,000 and paid dividends of P3,300,000. What is the carrying amount of the investment on December 31,2014? a. 5,330,000 b. 5,660,000 c. 8,000,000 d. 6,650,000 Solution: Answer (a) Acquisition cost

P8,000,000

Share in net loss (4,500,000 × 9/12 × 40%)

(1,350,000)

Share in cash dividend (40% × 3,300,000)

(1,320,000)

Carrying amount- December 31,2014

P5,330,000

PROBLEM 34-2 On June 30,2014, Clark Company purchased 20% of Leah Company's outstanding ordinary shares and no goodwill resulted from the purchase Leah appropriately carried its investment at equity and the balance in Leah's investment account was P2,700,000 at December 31,2014. Leah Company reported net income of P1,600,000 for the year ended December 31,2014,and paid dividend totalling 220,000. How much did Clark pay for the interest in Leah? a. 2,744,000 b. 2,854,000 c. 2,584,000 d. 2,700,000

Solution: Answer (c) Acquisiton cost,June 31 (SQUEEZE)

P2,584,000

Add: Share in net income (1,600,000 × 6/12 × 20%)

160,000

Total

P2,744,000

Less: Share in cash dividend (20% × 220,000)

(44,000)

Investment balance, December 31

P2,700,000

PROBLEM 34-3,4,5&6 Nica Company acquired 30% of Chizza Company's voting share capital for P2,000,000 on January 1,2013. Nica's 30% interest in Chizza gave Nica the ability to exercise significant influence over Chizza's operating and financial policies. During 2013, Chizza earned P1,200,000 and paid dividend of P800,000. Chizza reported earnings of P900,000 for the 6 months ended June 30,2014, and P1,700,000 for the year ended December 31,2014. On July 1,2014 Nica sold half of the investment in Chizza for P1,900,000 cash. Chizza paid dividend of P400,000 September 31,2014. The fair value of the retained investment is P1,400,000 on July 1,2014 and P1,650,000 on December 31,2014. The retained investment is to be held as financial asset at fair value through other comprehensive income. 1. Before income tax, what amount should be included in the 2014 income statement as a result of the investment? a. 360,000 b. 180,000 c. 252,000 d. 1,200,000 2. In the December 31,2013 statement of financial position, what is the carrying amount of the investment in associate? a. 2,000,000 b. 2,360,000

c. 2,120,000 d. 2,600,000 3. In the 2014 income statement, what amount should be reported as gain from the sale of investment? a. 900,000 b. 600,000 c. 705,000 d. 720,000 4. In the 2014 income statement, what amount should be reported as gain from remeasurement of the retained investment? a. 220,000 b. 205,000 c. 400,000 d. 100,000 Solution #3: Answer (a) Share in 2013 net income (30% × 1,200,000)

P360,000

Solution #4: Answer (c) Acquisition cost, January 1,2013

P2,000,000

Add: Share in 2013 net income

360,000

Total

P2,360,000

Less: Share in 2013 dividend (30% × 800,000)

(240,000)

Carrying amount of investment, December 31,2013

P2,120,000

Solution #5: Answer (c) Carrying amount of investment, December 31,2013

P2,120,000

Add: Share in net income from January 1 to June 30,2014 (30% × 900,000)

270,000

Carrying amount of investment, June 30,2014

P2,390,000

Sale price

P1,900,000

Cost of investment sold (2,390,000/2)

(1,195,000)

Gain from sale of investment

P705,000

Solution #6: Answer (b) Fair value - July 1,2014

P1,400,000

Carrying amount of retained investment

1,195,000

Gain from re-measurement

P205,000

Fair value - December 31,2014

P1,650,000

Fair value - July 1,2014

(1,400,000)

Unrealized gain of financial asset

P250,000

PROBLEM 34-7 On January 1,2013, Geneth Company purchased 20% of Janeth Company's ordinary shares outstanding for P7,000,000. The acquisition cost is equal to the carrying amount of the net assets acquired. During 2013, the investee reported net income of P8,900,000 and paid cash dividend of P3,200,000. What amount should be reported as investment in associate on December 31,2013? a. 8,780,000 b. 8,140,000

c. 9,420,000 d. 7,640,000 Solution: Answer (b) Acquisition cost- January

P17,000,000

Add: Share in net income (20% × 8,900,000)

1,780,000

Total

P8,780,000

Less: Cash divided received (20% × 3,200,000)

(640,000)

Carrying amount of investment

P8,140,00

PROBLEM 34-8&9 On January 1,2014, Coco Company purchased 25% of Nata Company for P 2,500,000. The carrying amount of Nata's net assets was P9,000,000.Fair values and carrying amounts were the same for all items except for land whose fair value exceeded it's carrying amount by P900,000. For the year ended December 31,2014, Nata Company reported net income of P1,800,000 and declared and paid cash dividends of P1,200,000. 1.What amount of revenue from the investment should be reported for 2014? a. 300,000 b. 750,000 c. 450,000 d. 475,000 2. On December 31,2014, what is the amount of the investment in Nata Company? a. 2,950,000 b. 2,800,000 c. 3,200,000 d. 2,925,000 Solution #8: Answer (c)

Share in net income (25% × 1,800,000) 450,000 Solution #9: Answer (a) Acquisition cost

P2,500,000

Net assets acquired (25% × 9,000,000)

2,250,000

Excess of cost over carrying amount

P250,000

Less: Amount attributable to undervaluation of land (25% × 900,000)

(225,000)

Goodwill- not amortized

P25,000

Acquisition cost, January 1

P2,500,000

Add: Share in net income (25% × 1,800,000)

450,000

Carrying amount of investment

P2,950,000

PROBLEM 34-10 Aldub Company owned 20% of Liz Quen Company's preference share capital and 80% of the ordinary share capital on December 31,2014. 10% cumulative preference share capital 3,600,000 Ordinary share capital 6,000,000 The investee reported net income P3,000,000 for the year ended December 31, 2014. What is the equity in earnings of the investee for 2014? a. 2,400,000 b. 1,824,000 c. 1,842,000 d. 2,112,000

Solution #10: Answer (d)

Net income

P3,000,000

Preference dividend (10% × 3,600,000)

(360,000)

Net income to ordinary shares

P2,640,000

Share in net income - ordinary shares (80% × 2,640,000)

P2,112,000

PROPERTY PLANT AND EQUIPMENT (PROBLEMS) P29-1 ALDUB, INC. has constructed a production equipment needed for the company's expansion program. Aldub received a P2,000,000 bid from a reputable manufacturer for the construction of the equipment. The costs of direct material and direct labor incurred to construct the equipment were P1,060,000 and P700,000, respectively. It is estimated that incremental overhead costs for construction amount to 140% of direct labor costs. Fixed costs (excluding interest) of P3,200,000 were incurred during the construction period. This amount was allocated to construction on the basis of total prime costs-the sum of direct labor and direct material. The prime costs incurred to construct the new equipment amounted to 35% of the total prime costs incurred for the period. The company's policy is to capitalize all possible costs on self-construction projects. To assist in financing the construction of the production equipment, Aldub borrowed P2 million at the beginning of the 6-month construction period. The loan was for 2 years with interest at 10%. What is the total cost of the self-constructed equipment? A. P3,960,000 B. P3,096,000 C. P2,960,000 D. P3,285,000 Solution: Answer (a) Direct material

P1,060,000

Direct labor

700,000

Variable overhead (P700,000 x 140%)

980,000

Fixed overhead (P3,200,000 x 35%)

1,120,000

Interest on specific borrowing (P2,000,000 x 10% x 6/12)

100,000

Total cost of self-constructed equipment

P3,960,000

PROBLEM 29-2 HELLO COMPANY is a major supplier of computer parts and accessories. To improve delivery services to customers, the company acquired four new trucks on July 1, 2015. Described below are the terms of acquisition for each truck. No. 1 P700,000 Acquired for a cash payment of P656,000. No. 2 P900,000 Acquired for a down payment of P90,000 cash and a 1-year, noninterest bearing note with a face amount of P820,000. There was no established cash price for the equipment. The prevailing interest rate for this type of note is 10%. No. 3 P740,000 Acquired in exchange for a computer package that the company carries in inventory. The computer package cost P580,000 and is normally sold by Hello Co. for P708,000. No. 4 P660,000 Acquired by issuing 50,000 of Hello Co.'s ordinary shares. The shares have a par value per share of P10 and a market value per share of P13. What is the total cost of the trucks purchased on July 1, 2015? A. P2,524,000 B. P2,454,000 C. P2,889,454 D. P2,849,454 Solution 29-2 Answer d. Truck No. 1 P656,000 Truck No. 2 Down payment P 90,000 Present value of note issued

(P820,000 x 0.90909) 745,454 835,454 Truck No. 3 708,000 Truck No. 4 (P13 x 50,000 shares) 650,000 Total cost P2,849,454 P29-3 EXO COMPANY acquires a new manufacturing equipment on January 1, 2015, on installment basis. The deferred payment contract provides for a down payment of P400,000 and an 8-year note for P3,204,160. The note is to be paid in 8 equal annual installment payments of P400,520, including 10% interest. The payments are to be made on December 31 of each year, beginning December 31, 2015. The equipment has a cash price equivalent of P2,470,000. Exo's financial year-end is December 31. 1. What is the acquisition cost of the equipment? A. P3,504,160 B. P2,904,160 C. P2,470,000 D. P3,204,160 2. The amount to be recognized on January 1, 2015, as discount on note payable is A. P410,416 B. P 0 C. P1,134,160 D. P927,160 3. The amount of interest expense to be recognized in 2015 is A. P410,416 B. P207,000 C. P 0 D. P187,648

4. The amount of interest expense to be recognized in 2016 is A. P410,416 B. P207,000 C. P 0 D. P187,648 5. The carrying value of the note payable at December 31, 2016, is A. P1,663,608 B. P1,988,980 C. P1,412,062 D. P1,800,082 Solution 29-3: Answer (c)(c) (b) (d) (a) 1. Acquisition cost of equipment (cash price equivalent)

P2,470,000

2. Cost of equipment (cash price equivalent)

P2,470,000

Less: Down payment

(400,000)

Amount assigned to note payable

P2,070,000

Face value of note

3,204,160

Discount on note payable, January 1, 2015

P1,134,160

The entry to record the acquisition is: Equipment

2,470,000

Discount on note payable

1,134,160

Note payable

3,204,160

Cash

400,000

3. Interest expense for 2015: Carrying value of note payable, Jan. 1, 2015 (P3,204,160 - 1,134,160)

P2,070,000

Interest rate

x 10%

Discount amortization for 2015

P 207,000

The entry to record the discount amortization is: Interest expense Discount on note payable

207,000 207,000

4. Interest expense for 2016: Note payable, Jan. 1, 2015

P3,204,160

Less: Payment made on Dec. 31, 2015

(400,520)

Note payable, Dec. 31, 2015

P2,803,640

Discount on note payable, Dec. 31, 2015 ( P1,134,160 - P207,000) Carrying value of note, Dec. 31, 2015 Interest rate

(927,160) P1,876,480 x 10%

Discount amortization (interest expense) for 2016

P 187,648

5. Carrying value of note, Dec 31, 2015 (see no.4)

P1,876,480

Discount amortization for 2015 (see no.4)

P187,648

Payment made on Dec. 31, 2016

(400,520)

Carrying value of note, Dec. 31, 2016

P1,663,608

PROBLEM 29-4 Various equipment used by RICHARD CO. in its operations are either purchased from dealers or self-constructed. The following items for two different types of equipment were recorded during the calendar year 2015. Manufacturing equipment (self-constructed): Materials and purchased parts at gross invoice price (Richard failed to take the 2% cash discount)

P550,000

Imputed interest on funds used during construction (Stock financing)

46,000

Labor costs

285,000

Overhead costs (fixed - P50,000; variable - P70,000)

120,000

Gain on self-construction

84,000

Installation cost

9,600

Store equipment (purchased): Cash paid for equipment

P275,000

Freight and insurance cost while in transit

4,500

Cost of moving equipment into place at store

2,200

Wage cost for technicians to test equipment

8,000

Insurance premium paid during first year of operation on this equipment Special plumbing fixtures required for this equipment

6,200 9,200

Repair cost incurred in first year of operations related to this equipment

2,450

1. What is the total cost of the self-constructed equipment? A. P953,600 B. P874,600 C. P970,600 D. P935,600 2. What is the total cost of the store equipment purchased? A. P293,400 B. P295,700 C. P300,100 D. P298,900 Solution: Answer (a) (d) 1. Manufacturing equipment (self-constructed): Materials and parts (P550,000 x 98%) P539,000 Labor costs

P285,000

Overhead costs

120,000

Installation cost

9,600

Total cost

P953,600

2. Store equipment (purchased): Cash paid for equipment

P275,000

Freight and insurance cost while in transit

4,500

Cost of moving equipment into place at store

2,200

Wage cost for technicians to test equipment

8,000

Special plumbing fixtures required for this equipment

9,200

Total cost

P298,900

PROBLEM 29-5 CEILO CORP. has been experiencing a significant increase in customers' demand for its product. To expand its production capacity, Ceilo decided to purchase equipment from Bigay Pera Company on January 2, 2015. Ceilo issues a P2,400,000 5-year, noninterest bearing note to Bigay Pera for the new equipment when prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five P480,000 installments due at the end of each year over the life of the note. Ceilo's financial year-end is December 31. The appropriate present value factor of an ordinary equity of 1 at 12% for 5 periods 3.60478. 1. What is the cost of the equipment? A. P2,400,000 B. P1,730,294 C. P1,457,931 D. P2,112,000 2. What amount of interest expense should be reported in Ceilo's income statement for the year ended December 31, 2016? A. P230,400 B. P207,635 C. P174,951 D. P288,000 3. What is the carrying value of the note at December 31, 2017? A. P811,226 B. P1,440,000 C. P1,152,880 D. P1,480,932

Solution: Answer (b) (c) (a) 1. Cost of the equipment (P480,000 x 3.60478)

P1,730,294

The entry to record the purchase is: Equipment

1,730,294

Discount on note payable (P2,400,000 - 1,730,294)

669,706

Note payable

2,400,000

2. Interest expense for 2016 (See amortization schedule)

P174,951

The entries to record the payment and interest for 2016 are: Interest expense

174,951

Discount on notes payable

174,951

Note payable

480,000

Cash

480,000

PROBLEM 29-6 YAMAHA, INC. constructs equipment for its own use. The account below is for a manufacturing equipment it has assembled in 2015. EQUIPMENT Debit Cost of dismantling old equipment

P 53,440

Cash proceeds from sale of old equipment

P46,000

Raw materials used in construction of new equipment

Credit

328,000

Labor in construction of new machine

247,000

Cost of installation

43,600

Cost of testing the equipment

35,000

Materials spoiled in machine trial runs

8,200

Profit on construction

82,000

An analysis of the details in the account disclosed the following: a.) The old equipment, which was removed before the installation of the new one, had been fully depreciated. b.) Cash discounts received on the payments for the materials used in construction totalling P10,000 were reported in the purchase discounts account. c.) The factory overhead account shows a balance of P976,000 for the year ended December 31, 2015; this balance exceeds normal overhead on regular plant activities by approximately P60,700 and is attributable to equipment construction. d.) A profit was recognized on construction for the difference between costs incurred and the price at which the equipment could have been purchased. e.) While testing the equipment, sample items were produced. These were sold for P6,000 which was credited to miscellaneous revenue. 1. What is the total cost of new equipment? A. P711,500 B. P715,500 C. P686,500 D. P706,500 2. Prepare individual journal entries to correct the accounts as of December 31, 2015. Assume that the nominal accounts are still open. Solution: Answer (d) 1. Cost of equipment: Raw material used (P328,000 - P10,000 discount)

P318,000

Labor

247,000

Installation

43,600

Factory overhead

60,700

Material spoiled in trial runs

8,200

Cost of testing

35,000

Net proceeds from sale of sample items

(6,000)

Total

P706,500

2. CORRECTING ENTRIES a.) Loss on sale of equipment

P7,440

Equipment

7,440

Proceeds from sale

P46,000

Less: Cost of dismantling od equipment

(53,440)

Loss on sale of equipment

P (7,440)

b.) Purchase discounts

10,000

Equipment c.) Equipment

10,000 60,700

Factory overhead d.) Profit on construction of equipment

60,700 82,000

Equipment e.) Miscellaneous revenue Equipment

82,000 35,000 35,000

PROBLEM 29-7 On June 1, 2015, MAIDEN CORP. purchased equipment from Dingdong Company under a deferred payment plan. Maiden issued a P2,000,000 four-year noninterest-

bearing note to Dingdong for the new equipment. The loan agreement provides that Maiden is to pay off the note in four equal installments due at the end of each of the next four years. On the date of the acquisition, the prevailing market rate of interest for obligations of this nature was 10%. The following costs were incurred to complete this transaction: Freight

P21,250

Installation

25,000

The following are the appropriate factors for the time value of money at a 10% rate of interest: Future value of 1 for 4 periods

1.46

Future value of an ordinary annuity for 4 periods

4.64

Present value of 1 for 4 periods

0.68

Present value of an ordinary annuity for 4 periods

3.17

What is the cost of the equipment? A. P1,206,250 B. P1,046,250 C. P838,750 D. P792,500 Solution: Answer (c) Present value of noninterest-bearing note issued (P250,000 x 3.17)

P792,500

Freight

21,250

Installation

25,000

Total

P838,750

PROBLEM 29-8

On July 1, 2015, WALLNUT, INC. exchanged machines with Busog Company. The following facts pertain to these assets.

Original cost

Wallnut’s Asset

Busog’s Assett

P288,000

P330,000

135,000

156,000

180,000

225,000

Accumulated depreciation (to date of exchange) Fair market value at date of exchange Cash paid by Wallnut Cash paid by Busog

45,000 45,000

Although the fair values of the assets involved in the exchange had been reliably determined, certain cash flow calculations made by both companies proved that this exchange transaction lacks commercial substance.What entry should be made on the books of each company to record the exchange? Solution: Answer WALLNUT, INC. Machinery - new

198,000

Accumulated depreciation

135,000

Cash

45,000

Machinery - old

288,000

Cost of machines given up

P288,000

Less: Accumulated depreciation

(135,000)

Add: Cash paid

45,000

Cost of machines acquired

P198,000

BUSOG COMPANY

Cash

45,000

Machinery - new

129,000

Accumulated depreciation

156,000

Machinery - old

330,000

Cost of machines given up

P330,000

Less: Accumulateddepreciation

(156,000)

Book value

P174,000

Less: Cash received

(45,000)

Cost of machines acquired

P129,000

PROBLEM 29-9 Sharalyn Company purchased equipment by making a down payment of P400,000 and issuing a note payable for P1,800,000. A payment of P600,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity of 1 for three years at 8% is 2.58, and the present value for the future amount of a single sum for three years 8% is .735. Shipping charges for the equipment of P200,000 and installation charges of P350,000 were incurred. What is the capitalized cost of the equipment? A. P1,948,000 B. P2,148,000 C. P2,498,000 D. P2,750,000 Solution: Answer (c) Down Payment

P400,000

Present value of note receivable (600,000 x 2.58)

1,548,000

Shipping

200,000

Installation

350,000

Cost of equipment

P2,498,000

PROBLEM 29-10 On March 16, 2015, Clinton Company issued 400,000 treasury shares with P35 par value for a parcel of land to be held as investment property. The treasury shares were acquired at a cost of P25 per share. The share had a fair market value of P50 on March 16, 2015. The entity received P64,000 from the sale of scrap when an existing unusable structure on the site was immediately razed. What is the initial cost of the land? a. 19,036,000 b. 18,996,000 c. 19,136,000 d. 19,936,000 Solution 29-10 Answer d. Fair value of treasury shares (400,000 x 50)

P20,000,000

Scrap value of existing structure

64,000

Cost of land

P19,936,000

ACQUISITION BY EXCHANGE (PROBLEMS)

PROBLEM 1-1 During July of Year 1, Mary Joy Company exchanged an old equipment costing P5,500,000 and was 30% depreciated for another used equipment. The entity also paid a cash difference of P650,000. The fair value of old equipment is 4,250,000. 1. What is the cost of the equipment in the exchange? a. 5,500,000 b.4,900,000 c. 4,250,000 d. 2,300,000 2. What is the gain or loss in the exchange? a. 400,000 gain b. 1,250, 000 loss c. 40,000 loss d. 1,250,000 gain Solution: Answer (b) Fair Value of old Equipment Cash Payment Cost of new Equipment

P4,250,000 650,000 P4,900,000

Solution: Answer (a) Fair Value of old Equipment

P4,250,000

Carrying amount (5,500,000 x 70%)

3,850,000

Gain on exchange

P400,000

PROBLEM 1-2 On August 8, 2014, Evangeline Company paid a cash difference of P130,000 for the exchange of an old van with a carryon amount of P1,900,000 and a fair value of P2,070,000. The old van was exchange to another van with a market price of P2,200,000. 1. What should be the cost of the van in the exchange? a. 2,070,000 b. 1,900,000 c. 2,000,000 d. 2,200,000 2. What is the gain on exchange? a. 0 b. 130,000 c. 170,000 d. 40,000 Solution: Answer (d) Fair Value of old Van Cash Payment Cost of new Van

P2,070,000 130,000 P2,200,000

Solution: Answer (c) Fair Value of new Van Less: Cash paid by Evangeline

P2,200,000 (130,000)

Fair Value of old Van

P2,070,000

Less: Carrying amount of Van

(1,900,000)

Gain on exchange

P170,000

PROBLEM 1-3 Michael and Jonalyn are with the same line of business. Michael and Jonalyn exchanged ownership; Michael paying P410,000 to compensate for a difference in the exchange. It is determined that the exchange lacks commercial substance. The following are the cost and market value of item exchanged: Cost Market Value

Michael Company P750,000 805,000

Jonalyn Company P1,000,000 1,075,000

1. What amount should Michael record as cost of item received in exchange? a.1, 160,000 b. 1,215,000 c. 805,000 d. 750,000 2. What amount should Jonalyn record as cost of exchange? a. 1,000,000 b. 590,000 c. 1,075,000 d. 1,410,000 3. What amount should Michael record as gain or loss on exchange? a. 55,000 gain b. 0 c. 270,000 gain d. 140,000 loss 4. What amount should Jonalyn record as gain or loss on exchange? a. 75,000 gain b. 270,000 loss c. 625,000 gain d. 0

Solution: Answer (a) Cost of item

P750,000

Add: Cash Payment Cost of new item

410,000 P1,160,000

Solution: Answer (b) Cost item of item

P1,000,000

Less: Cash paid by Michael

(410,000)

Cost of new item

P590,000

Solution: Answer (b) No gain or loss is recognized when the exchange lacks commercial substance. Solution: Answer (d) No gain or loss is recognized when the exchange lacks commercial substance.

PROBLEM 1-4 Joshua Company acquired a delivery van. The entity paid a total of P3,300,000 consisting of: Price of Van Charge for extra Equipment

P3,025,000 80,000

Value Added Tax- recoverable

405,000

Insurance

130,000

Motor Vehicle Registration Total Trade in Value of van Cash Payment

50,000 P3,690,000 (390,000) P3,300,000

The cost of old van was P2,100,000 with carrying amount of P700,000 and fair value of P80,000. What is the cost of new van acquired in the exchange? a. 3,300,000 b. 700,000

c. 2,100,000 d. 2,795,000 Solution: Answer (d) Cash Paid

P3,300,000

Value Added Tax

(405,000)

Insurance

(130,000)

Motor Vehicle Registration Capitalizable Cash Payment Fair Value of old van Cost of new Van

(50,000) P2,715,000 80,000 P2,795,000

PROBLEM 1-5 Nino Company exchanged a truck with a carrying amount of 1,500,000 and a fair value off P3,000,000 for a truck and P370,000 cash. The cash flows from the new truck are jot expected to be significantly different from the cash flows of the old truck. The fair value of the truck received was P1,950,000. At what amount should the truck received in the exchange be recorded? a. 1, 950,000 b. 3,000,000 c. 1,130,000 d. 1,500,000 Solution: Answer (c) Carrying amount of truck given Cash Received Cost of new truck

P1,500,000 (370,000) P1,130,000

GOVERNMENT GRANT 1.) On January 1,2015 Lourde Company received a grant of P25,000,000 from the American Government in order to defray safety and environmental cost within the area where the entity is located. The safety and environment cost are expected to be incurred over four years, respectively,P2,000,000 ,P4,000,000 ,P6,000,000 and P8,000,000.What amount of grant income should be recognized in 2015? a. 25,000,000 b. 2,000,000 c. 2,500,000 d. 6,250,000 Solution: Answer (c) Year

Cost

Fraction

Income

2014

P2,000,000

2/20

P2,500,000

2015

4,000,000

4/20

5,000,000

2016

6,000,000

6/20

7,500,000

2017

8,000,000

8/20

10,000,000

P20,000,000

P25,000,000

2.) On January 2 ,2014, Marlborough Company received a grant of P60,000,000 to compensate for costs to be incurred in planting trees over a period of 5 years. The entity will incur such cost at P2,000,000 for 2014, P4,000,000 for 2015, P6,000,000 for 2016, P8,000,000 for 2017, and P10,000,000 for 2018. What amount of grant income should be recognized for 2015? a. 6,000,000 b. 4,000,000 c. 12,000,000 d. 8,000,000

Solution: Answer (d) Grant income (4/30 x 60,000,000)

P8,000,000

3.) On January 1, 2015 Madlangtuta Co. received a grant of P25,000,000 from the British government for the construction of a laboratory and research facility with an estimated cost of P15,000,000 and useful life of 5 years. The laboratory and research facility was completed and ready for the intended use on January 1, 2015. What amount of grant income should be included in the income statement for 2016? a. 3,000,000 b. 5,000,000 c. 0 d.1,500,000 Solution: Answer (b) Grant income (25,000,000/5)

P5,000,000

4.) Brainless Company received a government grant of P15,000,000 to install and run a windmill in an economically backward area. The entity had estimated that such a windmill would cost P25,000,000 to construct. The secondary condition attached to the grant is that the entity shall hire labor in the area where the windmill is to locate. The construction was completed on January 1,2014 .The windmill is to be depreciated using the straight line method over a period of 10 years. What amount of grant income should be recognized for 2014? a. 1,500,000 b. 3,000,000 c. 2,500,000 d. 5,000,000 Solution: Answer (a) Grant income (15,000,000/10)

P1,500,000

5-6.) Clause Co. purchased a varnishing machine for P4,000,000 on January 1,2015. The entity received a government grant of P840,000 in respect of this asset. The accounting policy is to depreciate the asset over 4 years on a straight line method basis and to treat the grant as deferred income. 5.) What is the carrying amount of the machine on December 31, 2016? a. 2,000,000 b. 3,000,000 c. 2,420,009 d. 3,160,000 6.) What amount should be reported as deferred grant income on December 31, 2016? a. 420,000 b. 720,000 c. 840,000 d. 120,000 Solution No. 5: Answer (a) Cost

P4,000,000

Accumulated Depreciation (4,000,000/4x2)

(2,000,000)

Carrying Amount-Dec. 31 ,2016

P2,000,000

Solution No. 6 Answer a Deferred Grant income

P840,000

Income Earned (840,000/4x2)

(420,000)

Deferred Grant Income - Dec. 31,2015

P420,000

7-8.) Arancar Company purchased a machine for P8,000,000 on January 1,2015 and received a government grant of P2,000,000 toward the capital cost. The machine is to be depreciated on a straight line basis over 5 years and estimated to have a residual value of P500,000 at the end of this period. The accounting policy is to treat the grant as a deferred income. 7.) What is the carrying amount of the asset on December 31,2016? a. 6,500,000 b. 1,500,000 c. 5,000,000 d. 3,000,000 8.) What is the deferred grant income on December 31,2016? a. 1,600,000 b. 400,000 c. 1,200,000 d. 800,000 Solution No. 7: Answer (c) Cost of Machine

P8,000,000

Accumulated Depreciation (8,000,000-500,000=7,500,000/5x2)

(3,000,000)

Carrying Amount - Dec. 31 ,2016

P5,000,000

Solution No. 8: Answer (c) Deferred Income Jan. 1,2015

P2,000,000

Earned grant income(2,000,000/5x2)

(800,000)

Deferred Grant Income - Dec. 31, 2016

P1,200,000

9.) TMZ Company purchased a jewel polishing machine for P4,000,000 on January 1, 2015 and received a government grant of P500,000 toward the capital cost. The accounting policy is to treat the grant as reduction in the cost of the asset. The machine is to be depreciated on a straight line basis over 8 years and estimated to have a residual value of P200,000 at the end of this period. What is the depreciation of the machine for 2015? a. 412,500 b. 475,000 c. 437,500 d.500,000 Solution: Answer (a) Cost

P4,000,000

Government Grant

(500,000)

Net Cost

P3,500,000

Residual value

(200,000)

Depreciable amount

P3,300,000

Annual Depreciation (3,300,000/8)

P412,500

10.) Mikmak Company purchased a varnishing machine for P3,000,000 on January 1,2014. The entity received a government grant of P500,000 in respect of this aaset. The accounting policy is to depreciate the asset over 4 years on a straight line basis and to treat the grant as deferred income. What amount of grant income should be recognized for 2014? a. 500,000 b. 125,000 c. 250,000 d. 0 Solution Answer b Grant income (500,000/4)

P125,000

BORROWING COST (PROBLEMS) Problem 1 On January 1, 2015, Green Company borrowed P10,000,000 at an annual interest rate of 9% to finance specifically the cost of building a plant. Construction commenced on January 1, 2015 with a cost P10,000,000. The entity invested its idle funds and earned interest income of P100,000. The project was completed on October 31, 2015. What is the carrying amount of the plant? a. 10,650,000 b.10,800,000 c. 10,000,000 d. 10,100,000 Solution 1 Answer (a) Construction cost

P10,000,000

Interest (10,000,000 x 9% x 10/12)

750,000

Interest income

(100,000)

Total cost of plant

P10,650,000

Problem 2 Sheeran Company borrowed P6,000,000 on a 15% note payable to finance a new factory which the entity is constructing for own use. The only other debt of the entity is a P8,000,000, 10% mortgage payable on an office building. At the end of the current year, average accumulated expenditure on the new factory totaled P7,850,000. What amount should be capitalized as interest for the current year? a. 1,850,000 b. 1,700,000 c. 1,085,000 d. 1,075,000

Solution 2 Answer (c) Accumulated Average Expenditure

P7,850,000

Applicable to specific loan

6,000,000

Applicable to general loan

1,850,000

Specific borrowing (6,000,000 x 15%)

900,000

General borrowing (1,850,000 x 10%)

185,000

Capitalizable interest

P1,085,000

Problem 3 Kyra Company had loans outstanding during 2015 and 2016. Specific construction loan 2,500,000 8% General loan 12,000,000 10% The entity began the self-construction of a new building on January 1, 2015 and the building was completed on December 31, 2016. Expenditures during 2015 and 2016 were: January 1, 2015

3,000,000

July 1, 2015

1,500,000

November 1, 2015

3,000,000

July 1, 2016

2,000,000

What is the cost of the new building on December 31, 2016? a. 8,125,000 b. 7,500,000 c. 7,875,000 d. 7,675,000

Solution 3 Answer (c) Date

Expenditure

Fractional Months

Average Expenditure

January 1,2015 July 1,2015 November 1,2015 Total

P3,000,000 1,500,000 3,000,000 P7,500,000

12/12 6/12 2/12

P3,000,000 750,000 500,000 P4,250,000

Average expenditure in 2015

P4,250,000

Applicable to specific loan

(2,500,000)

Applicable to general loan

P1,750,000

Actual expenditure in 2015

7,500,000

Capitalizable interest in 2015: Specific (2,500,000 x 8%)

200,000

General (1,750,000 x 10%)

175,000

Total cost of new building – 12/31/2015

P7,875,000

Date

Expenditure

Fractional Months

Average Expenditure

January 1,2016

P7,7875,000

12/12

P7,875,000

July 1,2016

2,000,000

6/12

1,000,000

Total

P9,875,000

P8,875,000

Average expenditure 2016

P8,875,000

Applicable to specific loan

2,500,000

Applicable to general loan

P6,375,000

Actual expenditure

P9,875,000

Capitalizable interest in 2016: Specific (2,500,000 x 8%)

200,000

General (6,375,000 x10%)

637,500

Total cost of new building – 12/31/16

P10,712,500

Problem 4 On January 1, 2015, Alaska Company borrowed 6,450,000 at an annual interest rate of 7.5% to finance specifically the cost of building a plant. Construction commenced on January 1, 2015 with a cost 8,000,000. The entity earned P300,000 interest income from its fund. The plant was completed on December 31, 2015. What amount of interest should be capitalized? a. 483,750 b. 300,000 c. 220,000 d. 183,750 Solution 4: Answer (d) Actual interest (6,450,000 x 7.5%)

P483,750

Interest income

(300,000)

Capitalizable interest

P183,750

Problem 5 On January 1, 2015, Shawty Company borrowed 8,750,000 at an annual interest rate of 12% to finance specifically the cost of building a plant. Construction commenced on January 1, 2015 with a cost P9,500,000. The entity earned P370,000 interest income from its fund. The plant was completed on December 31, 2015. What amount of interest should be capitalized? a. 750,000 b. 680,000 c. 380,000 d. 770,000

Solution 5: Answer (b) Actual interest (8,750,000 x 12%)

P1,050,000

Interest income

(370,000)

Capitalizable interest

P680,000

Problem 6 Benny Company commenced construction of a new plant on February 1, 2015. The cost of P20,500,000 was paid in full to the contractor on February 1, 2015 and was funded from existing general borrowings. The construction was completed on October 31, 2015. The entity’s borrowing during 2015 comprised the following: Bank A – 7%

9,000,000

Bank B – 7.7%

11,000,000

Bank C – 8%

25,000,000

What is the amount of borrowing cost that should be capitalized in relation of the plant? a. 2,608,875 b. 2,898,750 c. 3,477,000 d. 3,478,500 Solution 6: Answer (a) Principal

Interest

Bank A – 7%

P9,000,000

P630,000

Bank B – 7.7%

11,000,000

847,000

Bank C – 8%

25,000,000

2,000,000

Total

P45,000,000

P3,477,000

Average interest rate (3,477,000/45,000,000) Capitalizable borrowing cost (45,000,000 x 7.73% x 9/12)

7.73% P2,608,875

Problem 7 Agsunta Company started construction of a new building on January 1, 2015, and moved into the finished building on June 31, 2015. Of the P20,000,000 total cost, P30,000,000 was incurred in 2015 evenly throughout the year. The incremental borrowing rate was 15% throughout 2015 and the total amount of interest incurred was P2,000,000. What amount should be reported as capitalized interest on December 31, 2015? a. 4,500,000 b. 3,000,000 c. 2,250,000 d. 2,000,000 Solution 7: Answer (d) Average Expenditure ( 30,000,000/2)

P15,000,000

Average Interest (15,000,000 x 15%)

P2,250,000

Capitalizable Interest

P2,000,000

The capitalizable borrowing cost is limited to the actual borrowing cost incurred of P2,000,000 because this is the lower than the computed amount of P1,200,000.

Problem 8 Disney Company borrowed P30,000,000 at 15% partly for general purposes and partly to finance the construction of an office building on January 1, 2015. The loan shall be repaid commencing the month following completion of the building. Expenditures incurred evenly during the year for the completed building totaled P10,000,000 on December 31, 2015. The entity earned interest of P300,000 for the year on the unexpected portion of the loan. What amount of interest capitalized on December 31, 2015?

a. 750,000 b. 450,000 c. 1,500,000 d. 1,200,000 Solution 8 Answer (a) Average expenditure (10,000,000/2)

P5,000,000

5,000,000 Capitalizable Interest(5,000,000 x 15%)

P750,000

Problem 9 UNI Company borrowed 5,500,000 on a 8% note payable to finance a new plant which the entity is constructing for own use. The only other debt of the entity is a P10,000,000, 12% mortgage payable on an office building. At the end of the current year, average accumulated expenditure on the new factory totaled P9,000,000. What amount should be capitalized as interest for the current year? a. 1,140,000 b. 1,620,000 c. 860,000 d. 640,000 Solution 9: Answer (c) Accumulated Average Expenditure

P9,000,000

Applicable to specific loan

(5,500,000)

Applicable to general loan

P3,500,000

Specific borrowing (5,500,000 x 8%)

P440,000

General borrowing (3,500,000 x 12%)

420,000

Capitalizable interest

P860,000

Problem 10 During 2015, Jerusalem Company constructed a building costing P3,200,000. The weighted average expenditure during 2015 amounted to P2,700,000. The entity borrowed P1,500,000 at 9.5% on January 1, 2015. Funds not needed for construction were temporarily invested and earned P45,000 in interest revenue. In addition to the construction loan, the entity had two other notes outstanding during the year, a P1,000,000. 10-year, 9% note payable date October 1, 2013, and a P800,000, 7%, 5year note payable dated November 5, 2014. What amount of interest should be capitalized during 2015? a. 288,500 b. 275,500 c. 320,700 d. 243,500 Solution 10: Answer (b) Principal

Interest

10-year note (9%)

P1,000,000

P90,000

5-year note (7%)

800,000

56,000

P1,800,000

P146,000

Average rate (146,000/1,800,000)

8.1%

Average expenditure

P2,700,000

Applicable to specific loan

1,500,000

Applicable to general loan

P3,200,000

Specific borrowing (1,500,000 x 9.5%)

P142,500

Interest related to specific borrowing

(45,000)

General borrowing (2,200,000 x 8.1%)

178,200

Capitalizable interest

P275,500

LAND AND BUILDING 1. Hasht5 Company purchased a P5,000,000 tract of land for a factory site. The entity razed an old building on the property to make room for the construction of new building and sold the materials salvaged from the demolition. The entity incurred additional costs and realized salvage proceeds as follows: Demolition of Old Building 400,000 Legal fees for purchase contract and recording ownership 250,000 Title guarantee insurance 70,000 Proceeds from sale of salvaged materials 30,000. What is carrying amount of Land? a. 5,290,000 b. 4,920,000 c. 5,320,000 d. 5,720,000 2. Pabebe Company incurred the following expenditures related to the construction of a new home office: Cost of Land, which included usable old apartment building with fair value of P200,000 3,000,000 Legal fees, including fee for title search 20,000 Payment of land mortgage and related interest due at time of sale 60,000 Payment of delinquent property taxes 15,000 Cost of razing the apartment building 45,000 Grading and drainage on land site 20,000 Architect fee on new building 250,000 Payment to building contractor 7,000,000 Interest cost on specific borrowing during construction 200,000 Payment of medical bills of employees accidentally injured while inspecting building construction 30,000 Cost of paving driveway and parking lot 70,000 Cost of trees, shrubs, and other landscaping 65,000 Cost of installing light in parking lot 8,000 Premium for insurance on building during construction 22,000 Cost of open house party to celebrate opening of building 80,000 1. What is the cost of land? a. 2,720,000 b. 3,205,000 c. 2,915,000 d. 2,950,000 2. What is the cost of building? a. 7,517,000

b. 7,537,000 c. 7,495,000 d. 7,525,000 3. What is the cost of land improvement? a. 200,000 b. 203,000 c. 143,000 d. 0 3. At year-end, Hecker Company provided the following information about property, plant, & equipment: Plant assets acquired form Krom Company 8,000,000 Repairs made on building prior to occupancy 250,000 Special tax assessment 40,000 Construction of platform for machinery 70,000 Remodeling of office space in building including new partitions and walls 500,000 Purchase of new machinery 900,000 Total property, plant and equipment 9,760,000 In exchange for the plant assets of Krom company, Hecker company issued 50,000 shares with P100 par value. On the date of purchase, the share had a quoted price of P150 and the plant assets had the following fair value: Land 600,000 Building 4,500,000 Machinery 2,000,000 1. What is the Cost of Land? a. 600,000 b. 670,000 c. 640,000 d. 690,000 2. What is the Cost of Building? a. 5,250,000 b. 5,000,000 c. 5,500,000 d. 4,500,000

3. What is the cost of machinery? a. 2,900,000 b. 2,970,000 c. 2,000,000 d, 2,830,000 Kingsman Company incurred the following costs during the current year in relation to property, plant and equipment: Cash paid for purchase of land 3,500,000 Mortgage assumed on the land purchased, including interest accrued 1,400,000 Realtor commission 500,000 Legal fees, realty taxes and documentation expenses 40,000 Amount paid to relocate persons squatting on the property 150,000 Cost of tearing down an old building on the land to make room for construction of new building 350,000 Salvage value of the old building demolished 50,000 Cost of fencing the property 110,000 Amount paid to contractor for the building constructed 4,500,000 Building permit fee 40,000 Excavation 45,000 Architect Fee 200,000 Interest that would have been earned had the money used during the period of construction been invested 150,000 Invoice cost of machine acquired 2,500,000 Freight, unloading and delivery charges 60,000 Custom duties and other charges 140,000 Allowances and hotel accommodation, paid to foreign technicians during installation and test run of machine 500,000 1. What amount should be capitalized as cost of land? a. 5,450,000 b. 5,590,000 c. 5,440,000 d. 5,550,000 2. What amount should be capitalized as cost of building? a. 5,000,000 b. 5,085,000 c. 5,135,000 d. 4,885,000 3. What amount should be capitalized as cost of machine? a. 3,060,000

b. 3,200,000 c. 3,140,000 d.3,000,000 Answer Key (Land & Building) 1. Answer: C Purchase Price

P5,000,000

Legal fees

250,000

Title guarantee insurance

70,000

Carrying Amount of Land

P5,320,000

2. 2.1 Answer C Allocated cost of land (3,000,000 – 200,000)

P2,800,000

Legal fees

20,000

Payment of land mortgage

60,000

Payment of delinquent property taxes

15,000

Graining and drainage

20,000

Total Cost of Land

P2,915,000

2.2 Answer A Cost of razing old apartment building

P45,000

Architect fee

250,000

Payment to building contractor

7,000,000

Interest cost

200,000

Premium for insurance during construction

22,000

Total Cost of New Building

P7,517,000

2.3 Answer C Cost of paving driveway and parking lot

P70,000

Cost of trees, shrubs, and other landscaping

65,000

Cost of installing light in parking lot

8,000

Total Cost of Land Improvement

P143,000

3. 3.1 Answer C Fair Value

P600,000

Special tax assessment

40,000

Total Cost of Land

640,000

3.2 Answer A Fair Value

P4,500,000

Repairs

250,000

Remodeling of Office Space

500,000

Total Cost of Building

P5,250,000

3.3 Answer B Fair Value

P2,000,000

Construction of platform

70,000

New Machinery

900,000

Total Cost of Machinery

P2,970,000

4. 4.1 Answer B Cash paid for Land

P3,500,000

Mortgage assumed including interest accured

1,400,000

Commission

500,000

Legal fees, realty taxes and documentation

40,000

Cost of relocating squatters

150,000

Cost of land

P5,590,000

4.2 Answer B Cost of tearing down old building

P350,000

Salvage value of old building

( 50,000)

Amount paid to contractor

4,500,000

Building permit fee

40,000

Excavation

45,000

Architect fee

200,000

Cost of Building

P5,085,000

4.3 Answer Invoice cost

P2,500,000

Freight

60,000

Custom duties and other charges

140,000

Allowances and hotel accommodation

500,000

Cost of Machine

P3,200,000

DEPRECIATION 1. On April 1, 2012, Everbleen Co. purchased a new equipment for P300,000. The equipment has an estimated useful life of 5 years, and the depreciation expense is computed using sum-of-the-year- digits method. The accumulated depreciation of the machinery at March 31, 2014 should be a. 192,000 b. 180,000 c. 100,000 d. 150,000 Solution: Answer: B SYD = (𝑛+12) ; where n= useful life (in years) Depreciation Formula: Cost x Remaining Useful Life (SYD) Depreciation for the year ended March 31, 2013 (300,000 x 5/15)

P 100,000

Depreciation for the year ended March 31, 2014 (300,000 x 4/15) Accumulated Depreciation 3/31/14

80,000 P 180,000

2. Anneth runs a business making embroidered linens for receptions. She purchases a new machine for P15,000. The machine is expected to produce approximately 5,000 linens, at which point it will be valueless. During the first year after buying the machine, Anneth uses it to produce 1,500 linens. She plans to use the units of production method of depreciation. At year end, which of the following entries is correct? a. A debit to Depreciation Expense 5,500. b. A credit to Depreciation Expense 4,500. c. A credit to Accumulated Depreciation 5,500. d. A debit to Depreciation Expense 4,500.

Solution: Answer: D

P15,000 depreciable value ÷ 5,000 units = P3 of depreciation per unit 1,500 units produce x P3 per unit = P 4,500 depreciation expense. To record depreciation for the first year: Depreciation Expense

4,500

Accumulated Depreciation

4,500

3. JJ spends P20,000 cash on a piece of equipment for use in her restaurant. She plans to use the straight-line method to depreciate the equipment over 5 years. She expects it to have no value at the end of the 5 years. After 4 years, JJ sells the equipment for P2,000. What is the gain/loss on sale of the equipment? a. P4,000 loss b. P4,000 gain c. P2,000 loss d. P2,000 gain Solution: Answer: C Accumulated Depreciation after 4 years : (20000/5)= 4000 x 4 = 16,000 Computation for gain or loss: Selling Price

P 2,000

Less : Carrying Amount (20,000-16,000)

4,000 (P2,000) loss

4. On July 1, 2006, Oh Corp. purchased computer equipment at a cost of P360,000. This equipment was estimated to have a six-year life with no residual value and was depreciated by the straight-line method. On January 1, 2009, Oh determined that this equipment could no longer process data efficiently, that its value had been permanently impaired, and that P70,000 could be recovered with a residual value of 5,000 over the remaining useful life of the equipment.

What is the amount of accumulated depreciation that should be reported at December 31, 2009 statement of financial position? a. 308,571.43 b. 380,571.34 c. 308,517.43 d. 308,517.43 Solution: Answer: A Accumulated Depreciation (360000/6)= 60000 x 30/12 = 150,000 New Carrying Amount as of 1/1/09 = 70,000 , Impairment Loss = 70,000- 210,000 = 140,000 New Depreciation Expense = 70000−5000/3.5 = 18,571.43 Accumulated Depreciation 12/31/09 = 150,000 + 140,000 = 18,571.43 = P308,571.43 5. Jun-jun Company’s statement of financial position at December 31, 2014 and 2013 reported accumulated depreciation balances of P950,000 and P600,000 respectively. Property with a cost of P50,000 and a carrying amount of P35,000 was the only property sold in 2014. Depreciation charged to operations in 2014 was a. 350,000 b. 365,000 c. 370,000 d. 375,000 Solution: Answer: B Accumulated Depreciation for 2013

P600,000

Less: Accumulated Depreciation of the property sold (50,000-35,000)

15,000

Accumulated Depreciation balance before 2014 depreciation expense

P585,000

Accumulated Depreciation for 2014

P950,000

Accumulated Depreciation, per above

(585,000)

Depreciation charged to operations in 2014

P365,000

6. On January 1, 2013, Tropang Forever Co. sold a building for P900,000 to Tutan Corp. , its wholly-owned subsidiary. Tropang Forever Co. paid P1,000,000 for this building, which had accumulated depreciation of P250,000. Tropang Forever Co. estimated a P100,000 salvage value and depreciated the building on the straight-line method over 20 years. In Tropang Forever Co.’s December 31, 2013 consolidated statement of financial position, this building should be included in cost and accumulated depreciation as Cost

Accumulated Depreciation

a. 850,000

42,500

b. 900,000

40,000

c. 1,100,000

290,000

d. 1,100,000

300,000

Solution: Answer: D Cost of the building

P1,100,000

Accumulated Depreciation At January 1, 2013

P 250,000

For 2013

50,000

Total

P 300,000

7. Klatuu purchased a photocopy machine at P500,000 on January 2008. The machine had an estimated salvage value of P100,000, an estimated 8-year useful life, and was being depreciated by the straight line method. Two years later, it became apparent to Klaatu that this machine suffered a permanent impairment value. In January 2010, management determined the carrying amount should be only P175,000, with a 2-year remaining useful life, and the salvage value should be reduced by P25,000.

How much will be the difference of the original depreciation expense and the new depreciation expense of the machine? a. 12,500 b. 25,000 c. 0 d. no answer Solution: Answer: C Original Depreciation Expense= (500,000−100,0008) = P50,000 2010 New Carrying amount = P175,000 New Depreciation Expense = (175,000−75,0002) = P50,000 Difference of the original depreciation expense and the new depreciation expense of the machine = P0 8. Sapphire Sky Company provided the following information with respect to a building: * The building was acquired January 1, 2011 at cost of P3,000,000. It has an estimated useful life of 12 years and salvage value of P150,000. The method of depreciation used was double declining method. * The building was renovated on January 1, 2014 at a cost of P800,000. The residual value became P200,000. * On January 1, 2015, the management decided to change the method being used to straight line method. What is the depreciation of the building for December 2014? a. 439,351.85 b. 304,513.89 c. 493,351.58 d. 340,513.98

Solution: Answer: C Accumulated Depreciation Y1 (3,000,000 𝑥 2/12)

P 500,000

Y2 (2,500,000 𝑥 212)

416,666.67

Y3 (2,083,333.33 𝑥 2/12)

247,222.22 P1,163,888.9

CA = 3,000,000− 1,163,888.89 = 1,836,111.11 + 800,000 capitalized cost = 2, 636,111.11 Depreciation for 2014: (2,636,111.11𝑥 2/12) =

P 439,351.85

9. Angela Company used straight line depreciation for property, plant and equipment which consisted the following: 2014

2013

Land

P500,000

P500,000

Machinery and Equipment

1,800,000

1,350,000

Total

P2,300,000

P1,850,000

Less: Accumulated Depreciation

(1,000,000)

(700,000)

P1,300,000

P1,150,000

What amount was debited to accumulation depreciation during 2014 of property, plant and equipment retirements if the depreciation for 2013 and 2014 was P300,000 and P200,000 respectively. a. 50,000 b. 75,000 c. 100,000

d. 125,000 Solution: Answer: C Accumulated Depreciation – December 2013

P 700,000

Add: Depreciation for 2014

200,000 P900,000

Less: Accumulated Depreciation on Property Retirement (squeeze)

Accumulated Depreciation – December 2014

100,000

P 1,000,000

10. On January 1, 2011, Lene Corporation purchased a building with an estimated useful life of 10 years. At the end of its life, it is expected to sold at 5,000. The sum-ofthe-years-digit method was used in computing its depreciation. For the year ended December 31, 2014, the depreciation applicable to the equipment was P42,000. What is the acquisition cost of the equipment? a. 309,000 b. 390,000 c. 930,000 d. 903,000 Solution: Answer: B x = acquisition cost 42,000 = (𝑥−5000) x 𝟔/31/𝟐 42,000 6/31/2 = x – 5000 385,000 + 50000 = x 390,000 = x

DEPLETION (PROBLEMS) Tropang FOREVER Company, purchased a tract of land for mining worth 5,000,000 with removable ore estimated at 20,000,000 tons. Before the start of its operation the company incurred 3,000,000 exploration cost. Of these cost 2,000,000 was associated with successful wells and the remaining with so called “dry holes”. The entity uses the full cost method in accounting the exploration cost. The entity also incurred development cost of 3,600,000 during the current year. The entity is required by the law to restore the land to its original condition at estimated cost of 4,000,000. The present value of Estimated restoration cost is 3,300,000 The land is estimated to be sold at 1,500,000 afterwards. The entity removed 400,000 tons during the year and sold 300,000 of it. 1. What total amount of depletion should be recorded for the current year? A. 262,000 B. 268,000 C. 312,000 D.201,000 Solution: Answer (b) Cost of land

P5,000,000

Exploration cost

3,000,000

Development cost

3,600,000

Restoration cost

3,300,000

Total cost of wasting asset

P14,900,000

Residual value of land

1,500,000

Depletable amount

P13,400,000

Rate per ton (13,400,000/20,000,000)

x

Depletion (400,000 x .67)

P268,000

.67

2. Using the same information, what amount of depletion will be included on cost of goods sold? A. 196,500 B. 150,750 C. 234,000 D. 201,000 ANSWER : D Cost of goods sold (.67 x 300,000)

P201,000

3. On July 1, 2012, Nasasaktan Corp. purchased a mining land for 12,000,000. The entity expects to extract 3,000,000 tons for the entire operation. They also estimated to extract 500,000 tons per year. The entity purchased new mining equipment for 10,000,000 with estimated useful life of 10 years. The equipment is said to have a residual value of 400,000. The entity was able to extract 250,000 tons for the year. What amount should be reported as depreciation of the mining equipment for 2012? A. 960,000 B. 1,000,000 C. 2,000,000 D. 500,000 ANSWER: B Depreciation per rate (12,000,000/3,000,000)= 4 Depreciation (4 x 250,000)= 1,000,000 Since the life of the mine(3,000,000/500,000= 6 years) is shorter than the life of the equipment (8 years) the output method is used.

Ganda company acquired a tract of land containing an extractable natural resource. The entity is required to restore the land after it has extracted the natural resources. Geological study indicated that the recoverable reserves will be 2,500,000 tons which will be completed in 10 years. Relevant costs are as follows: Land

12,000,000

Exploration and development costs

3,000,000

Expected cash flow for restoration cost

2,000,000

Credit –adjusted risk free interest rate

10%

PV of 1 at 10% for 10 periods

.39

4. What is the depletion rate per ton? A. 6.31 B. 6.8 C. 5.56 D. 6.5 ANSWER: A Cost of land

P12,000,000

Exploration and development costs

3,000,000

Restoration cost (2,000,000 x .39)

780,000 P15,780,000

Depletion rate (15,780,000/ 2,500,000)

6.31%

5. Assuming that the entity has extracted 250,000 at the end of the year and new geological study reveals that 5,000,000 tons are available for mining . What is the new depletion per ton? A. 3.16 B. 4.31

C. 2.84 D. 6.31 ANSWER:C Total cost

P15,780,000

Less: depletion for the year (6.31 x 250,000)

(1,577,500)

Carrying amount at the end of the year

P14,202,500

New depletion per rate (14,202,500/5,000,000)

2.84%

6. The entity purchased a mining land for 7,000,000. The entity incurred exploration costs of 5,000,000. Of these cost 3,500,000 is associated with successful holes and the remaining is with “dry holes”. The entity uses successful method in accounting the exploration costs. The entity also incurred 2,000,000 development costs. What is the total amount of the wasting asset? A. 12,000,000 B. 14,000,000 C. 11,500,000 D. 12,500,000 ANSWER: D Land cost

P7,000,000

Exploration costs

3,500,000

Development costs

2,000,000

Total cost

P12,500,000

On January 1, 2012, Spiderman Company paid 10,000,000 for property containing natural resources of 3,000,000 tons. The present value of the estimated cost of restoring the land is 800,000 and the land will have a value of 600,000 after it is restored for suitable use. Building and bunk houses were build costing 8,000,000 , it is use as a storage of mining equipment and houses for the miners. Its expected useful life is 10 years with no residual value.

Operations began on January 1, 2013 and resources removed totaled 500,000 tons. During 2014, it is discovered that available resource will total 1,500,000 tons. At the beginning of 2014, 800,000 development cost were incurred, and only 200,000 tons are extracted. 7. What amount should be reported as depletion for 2013? A. 1,800,000 B. 1,600,000 C. 1,700,000 D. 1,500,000 ANSWER: C Acquisition cost

P10,000,000

Restoration cost

800,000

Residual value

(600,000)

Total cost

P10,200,000

Rate per ton ( 10,200,000/3,000,000) Depletion (500,000 x 3.4)

3.4% P1,700,000

8. What is the depreciation for the year ended December 31, 2013 assuming that it uses a straight line method of depreciation. A. 800,000 B. 1,700,000 C. 888,888 D. 900,000 ANSWER: A Depreciation (8,000,000/ 10 years)

P800,000

9. What is the depletion for the year ended December 31, 2014? A. 1,240,000 B. 1,300,000 C. 1,200,000 D. 1,340,000 ANSWER: A Total cost

P10,200,000

Depletion-2013

(1,700,000)

Carrying amount

8,500,000

Development cost

800,000

Total cost

P9,300,000

Depletion rate (9,300,000/1,500,000) Depletion- 2015 (200,000 x 6.2)

6.2% P1,240,000

10. The following data are available at year-end: Wasting asset, at cost

5,000,000

Retained earnings

9,000,000

Accumulated depletion

500,000

Capital liquidated

2,000,000

Unrealized depletion in ending inventory

850,000

What amount will be the maximum dividend? A. 10,500,000 B. 9,650,000

C. 12,500,000 D. 9,000,000 ANSWER: B Retained earnings

P9,000,000

Accumulated depletion

3,500,000

Total

P12,500,000

Capital liquidated

(2,000,000)

Unrealized depletion in ending inventory

(850,000)

Maximum dividend

P9,650,000

IMPAIRMENT OF ASSET (PROBLEMS)

1. James Pogi Company acquired a machine for 5,000,000 on July 1, 2014. The machine has a 12-year useful life, a 500,000 residual value, and was depreciated using the straight-line method. On June 30, 2016 a test for recoverability revealed that the machine has been impaired. The fair value less cost of disposal on this date is 1,750,000 and the value in use amount to 1,500,000. What amount should be recognized as impairment loss? A. 2,750,000 B. 2,500,000 C. 2,875,000 D. 3,125,000 ANSWER: B Acquisition cost

P5,000,000

Residual value

(500,000)

Depreciable amount

P4,500,000

Accumulated Depreciation (4,500,000/12 x 2)

P750,000

Cost

P5,000,000

Accumulated depreciation

( 750,0000)

Carrying amount

P4,250,000

Fair value less cost of disposal

(1,750,000)

Impairment loss

P2,500,000

2. On January 1, 2013, Umasa Corporation acquired equipment for 19,000,000 with an estimated useful life of 15 years. It is also estimated that the equipment will be sold for 1,500,000 at the end of its useful life. The entity uses the sum of year’s digit for depreciation. At the year ended December 31, 2014 one of the adjusting entry includes

an impairment loss of 500,000. What will be the carrying amount of the equipment on December 31, 2014? A. 16,812,500 B. 17,312,500 C. 14,270,833 D. 19,000,000 ANSWER: C SYD [15(15+1/2)]= 120years Cost

P19,000,000

Residual value

(1,500,000)

Depreciable amount

P17,500,000

Cost

P19,000,000

Depreciation-2013(17,500,000 x 15/120)

(2,187,500)

Carrying amount-January,2014

P16,812,500

Depreciation-2014(17,500,000 x 14/120)

(2,041,667)

Carrying amount

P14,770,883

Impairment loss

(500,000)

Recoverable amount/ carrying amount- December 2014 14

P270,833

3. Using the same information in No.2, Umasa Corporation change its depreciation method into straight line method at the beginning of 2015. It is estimated to have a residual value of 1,000,000 it is estimated to have a total of 10-year useful life. What amount should be recognized as depreciation in 2015? A. 1,914,062.5 B. 2,039,062.5 C. 1,701,388.89

D. 1,531,250 ANSWER: A Carrying amount

P16,312,500

Residual value

(1,000,000)

Depreciable amount

P15,312,500

Depreciation (15,312,500/8years)

P1,914,062.5

On January 1, 2008, Maganda company purchased a sewing machine for 3,000,000, with a residual value of 500,000. On January 1, 2011 the Accumulated Depreciation account has a balance of 750,000. A test for impairment also revealed that the undiscounted cash flow from the sewing machine are 200,000 a year for the remaining 7 periods. The prevailing market rate at this date is 5%. The fair value less cost of disposal amounted to 1,600,000. PV of ordinary annuity if 1 at 5% for 7 period is 5.79. 4. What amount should be reported as loss on impairment? A. 650,000 B. 1,092,000 C. 150,000 D. 592,000 ANSWER: A Value in use (200,000 x 5.79)

P1,158,000

Fair value less cost of disposal

1,600,000

Cost

P 3,000,000

Accumulated Depreciation

(750,000)

Carrying amount

2,250,000

Less: fair value less cost of disposal

(1,600,000)

Impairment loss

P650,000

On January 1, 2013, Diosa Company purchased equipment with cost of 15,000,000, useful life of 10 years and no residual value. The entity used straight line depreciation. On December 31, 2013, and December 31, 2014, the entity determined the impairment indicators are present. There is no change in useful life or residual value. December 31, 2013

December 31, 2014

Fair value less cost of disposal

9,100,000

9,300,000

Value in use

9,600,000

9,200,000

5. What is the impairment loss for 2013? A. 4,400,000 B. 5,000,000 C. 5,400,000 D. 3,900,000 ANSWER: D Cost

P15,000,000

Depreciation (15,000,000/10)

(1,500,000)

Carrying amount

P13,500,000

Value in use- (higher)

(9,600,000)

Impairment loss

P3,900,000

6. What would be the balance of Accumulated Depreciation on December 31, 2013? A. 1,500,000 B. 3,000,000 C. 3,900,000 D. 5,400,000

ANSWER: D Accumulated Depreciation

P1,500,000

Impairment loss

3,900,000

Accumulated Depreciation- 2013

P5,400,000

7. What is the gain on reversal of impairment for 2014? A. 766,667 B. 800,000 C. 866,667 D. 700,000 ANSWER: A Carrying amount- 01/01/2014

P9,600,000

Depreciation- 2014(9,600,000/9)

(1,066,667)

Carrying amount- with impairment

P8,533,333

Cost- 01/01/2013

P15,000,000

Accumulated Depreciation (15,000,000/10 x 2)

(3,000,000)

Carrying amount- with no impairment

P12,000,000

Fair value less cost of disposal (higher)

9,300,000

Carrying amount –with impairment

( 8,533,333)

Gain on reversal of impairment

P766,667

Gold Company operates a product line which is treated as a cash generating unit for impairment purposes. On December 31, 2014, the carrying amounts of the noncurrent assets are as follows: Goodwill

1,000,000

Machine

4,000,000

Equipment

3,000,000

On December 31, 2014 the fair value less cost to sell is P7,500,000 8. What amount will be the balance of goodwill? A. 500,000 B. 62,500 C. 1,000,000 D. 66,667 ANSWER: A Carrying amount of CGU

P8,000,000

Fair value less cost to sell

7,500,000

Impairment loss

P500,000

Impairment is charged to goodwill up to the extent of it balance. Goodwill (1,000,000-500,000)

P500,000

9. Assuming that the fair value less cost to sell is 6,000,000. What is the amount of impairment allocated to machine? A. 4,000,000 B. 571,428.57 C. 857,142.86 D. 3,000,000

ANSWER: B Impairment loss (8,000,000-6,000,000)

P2,000,000

Charged to goodwill

1,000,000

Allocable to other assets

P1,000,000

Allocated to machine (1,000,000 x 4/7)

P571, 428.57

10. What is the new carrying amount of goodwill, machine and equipment respectively? A. 500,000; 3,500,000; 2,500,000 B. 0; 3,428,571.43; 3,000,000 C. 0; 3,428,571.43; 2,571,428.57 D. 750,000; 3,000,000; 2,250,000 ANSWER: C Goodwill = P0 Machine [4,000,000-(1,000,000 x 4/7)]

3,428,571.43

Equipment [3,000,000-(1,000,000 x 3/7)]

2,571,428.57

INTANGIBLE ASSETS-GOODWILL (PROBLEMS) 1. Lucid Corp showed the following balances on December 31, 2015: Copyright 900,000 Deposit with advertising agency used to promote goodwill 600,000 Bond sinking fund 2,000,000 Excess of Cost over fair value of Identifiable asset 500,000 Trademark 4,000,000 What amount should be reported as intangible assets? a. 1,400,000 b. 4,500,000 c. 5,400,000 d. 5,800,000 Solution: Answer (c) Total Intangible Assets (900,000+ 500,000+ 4,000,000) 5,400,000

2. Dick Co. Incurred P2,500,000 of research and development cost to develop a product for which a patent was granted at the beginning year. Legal fees and other cost associated with registration of the patent totaled P500,000. At year end, the entity paid P750,000 for legal fees in a successful defense of the patent. What is the total amount that should be capitalized for the patent at year end? a. 2,250,000 b. 500,000 c 3,000,000 d 750,000 Solution: Answer (b) Legal fees and other cost associated with registration 300,000 3. Levi Co. builds and sells equipment used in manufacturing pharmaceuticals. On December 31, 2015 , the entity has financial assets at fair value through profit or loss at P1,000,000,goodwill valued at P1,500,000, prepaid insurance at P50,000 ,patent valued at P2,500,000, and a customer list valued at P500,000. What amount should be reported as total intangible assets Dec. 31,2015? a. 4,000,000 b. 4,500,000 c. 5,500,000 d. 3,000,000

Solution: Answer (b) Goodwill

P1,500,000

Patent

2,500,000

Customer list

500,000

Total Intangible Assets

P 4,500,000

4.) Tententenen Company acquired a patent for a drug with remaining legal and useful life of 6 years on January 1,2012 for P3,600,000. On January 1,2014, a new patent is received for a timed release version of the same drug. The new patent has a legal and useful life of 20 years. What is the amortization expense for 2014? a. 180,000 b. 150,000 c. 120,000 d. 300,000 Solution: Answer (c) Cost

P3,600,000

Amortization (3,600,000/6x2)

(1,200,000)

Carrying Amount- Jan. 1, 2014

P2,400,000

Amortization for 2014 ( 2,400,000/20)

P120,000

5.) Gru Co. Purchased a patent on January 1,2009 for P6,000,000. The original useful life was estimated to be 15 years. However, in Dec. 2014, the management received information proving conclusively that the product protected by the Gru patent would be obsolete within 4 years. Accordingly, the entity decided to write off the unamortized cost of patent over 5 years beginning in 2014. What is the patent amortization for 2014? a. 1,200,000 b. 1,000,000 c. 800,000 d. 400,000

Solution: Answer (c) Cost

P6,000,000

Accumulated Depreciation (6,000,000/15x5)

(2,000,000)

Carrying Amount -Jan. 2014

P4,000,000

Amortization for 2014 ( 4,000,000/5)

P800,000

6.) Beiv Company has acquired a trademark relating to the introduction of a new manufacturing process. The cost incurred were as follows: Cost of Trademark 3,500,000 Expenditure on promoting the new product 50,000 Employee benefits relating to the process 400,000 What total cost should be capitalized as intangible non current asset in respect to the new process? a. 3,550,000 b. 3,900,000 c. 3,500,000 d. 3,950,000

Solution: Answer b Total Cost ( 3,500,000+400,000)

P3,900,000

7&8 Leviathan Company developed a new machine for manufacturing baseballs. Because the machine is considered very valuable, the entity had it patented. The following expenditures were incurred in developing and patenting the machine: Purchase of new equipment to be used solely for development of new machine 2,000,000 Research salaries and fringe benefits for engineer and scientists 200,000 Cost of testing prototype 350,000 Legal fees for filing of patent 250,000 Fees paid to government patent office 50,000 Drawings required by patent office to be filed with patent application 40,000

What amount should be capitalized as cost of patent? a. 340,000 b. 290,000 c. 250,000

d. 300,000 What amount of research and development cost should be expensed in the current year? a. 2,550,000 b. 2,200,000 c. 2,350,000 d. 2,750,000 Solution No. 7 Answer a Legal cost for filing patent

P250,000

Fees paid to patent office

50,000

Drawings required by the patent office

(40,000)

Total cost of patent

P340,000

Solution No. 8 Answer (a) Purchase of special equipment

P2,000,000

Research and fringe benefits

200,000

Cost testing prototype

350,000

Research and development expense

P2,550,000

9.) On January 1,2012 , Water company purchased a patent for a new consumer product for P900,000. At the time of purchase, the patent was valid for 15 years. However, the patent's useful life was estimated to be only 10 years due to competitive nature of the product. On Dec. 31,2015, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should be changed against income of 2015 if amortization is recorded at the end of each year? a. 90,000 b. 630,000 c. 540,000 d. 720,000

Solution: Answer (b) Acquisition cost

P900,000

Amortization ( 900,000/10x3)

(270,000)

Carrying Amount - Jan. 1,2015

P630,000

10. On Jan. 1,2015, Dante Company bought a trademark from Lucia Co. For P5,000,000. The entity retained an independent consultant who estimated the trademark's useful life to be indefinite. The carrying amount of the trademark was P1,500,000 on the books of Lucia Co. On Dec. 31,2015, what is the carrying amount of the Trademark? a. 5,000,000 b. 1,500,000 c. 1,800,000 d. 0 Solution: Answer (a) The trademark has an indefinite life, therefore it will not be amortized but tested for impairment at least annually.