CHRISTOPHER T.

ESPENILLA, CPA MBA

FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY
REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY,
MANILA
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CHAPTER 1: THE AUDIT PROCESS

PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE

1
D 11
B
2
D 12
C
3 D
4 A
5 D
6 B
7 B
8 A
9 D
10 D

PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY

1
D 11
C
2
D 12
B
3
C 13
B
4
D 14
D
5
D 15
D
6
D 16
B
7 A
8 D
9 C
10 E

PROBLEM 3: INTERNAL CONTROL

C
1 11
E 21
B

D
2 12
B 22
A
C
3 13
D 23
C
C
4 14
C 24
B
A
5 15
C 25
C
D
6 16
C 26
A
7
C 17
C
8
D 18
D
9
D 19
D
10A 20A

PROBLEM 4: RISK BASED AUDIT PLANNING

1
D 11
C
2
C 12
B
3 D
4 B
5 B
6 B
7 C
8 A
9 D
10 C

CHAPTER 1: THE AUDIT PROCESS

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PROBLEM 5: SUBSTANTIVE TESTING

1
B 21
B
2
A 22
D
3
C 23
B
4
C 24
D
5
C 25
C
6
D 26
C
7
C 27
B
8
D 28
B
9
C 29
B
10C 30B

11A 31D
12B 32A
13B 33A
14 A
15 A
16 B
17 A
18 A
19 D
20 A

PROBLEM 6: AUDIT REPORTING

1 C
2 B
3 B
4 B
5 B
6 C
7 A
8 B
9 C
10 C
11 A
12 C

CHAPTER 1: THE AUDIT PROCESS

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CHAPTER 2: AUDIT OF CASH

DISCUSSION PROBLEMS
CHAPTER 2-PROBLEM 1
1 B
2 D
3 A
4 B
5 D
6 D
7 D
8 D
9 D
10 D
11 D
12 B
13 C
14 B
15 B

16 C
17 B
18 D
19 D
20 B
21 C
22 D
23 C
24 D
25 B

AP02-PROBLEM 2: MAPERA CORPORATION

1. Ans. P3,445,000
CurrentaccountatMetrobank 3,250,000
Post-dated disbursement check - adjusted to AP 75,000
Undelivered disbursement check - adjusted to AP 120,000
Adjust ed curr en t ac count at Me troban k 3, 44 5, 000

2. Ans. P2,250,000
Savings accountatRural Bank 2,750,000
Compensating balance - legally restricted (500,000)
Adjust ed sa vings acc ount at Rura l B ank 2, 25 0, 000

3. Ans. Zero
The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset, that is the company
has no bank account with BDO.

4. Ans. P738,000.
Undeposited collections, unadjusted balance 1,278,000
Customer stale check - adjusted to AR (180,000)
Customer post-dated check - adjusted to AR (125,000)
Customer DAUD check - Adjusted to AR (155,000)
Officer's NSF check - Ad justed to AR-nontrade (80,000)
A d j u s t e d u n d e p o s i t e d c o l l e c t io n s 73 8 ,0 0 0

5. Ans. P18,500
Bills
andcoins 7,000
Replenishmentcheck 11,500
Adjus t ed pet t y c as h f und as of 1 2/31 /14 18 , 50 0

6. Ans. P613,500
Travel
fund 50,000
Interestanddividendfund 120,000
Payroll
fund 400,000
Changefund 25,000
Petty
cashfund 18,500
Adjust ed ca sh fun d - Cas h and c ash eq uivale 613,500

7. Ans. P900,000
Debt security investment due 3/31/15 purchased 12/31/14 600,000
Preference shares redeemable on 2/28/15 purchased 12/1/14 300,000
De bt and e quit y s ec ur it ie s - C as h an d c as h e quiv alent 900, 000

8. Ans. P7,946,500
AdjustedcurrentaccountatMetrobank 3,445,000
Adjusted savings accountatRural Bank 2,250,000
Adjustedundepositedcollections 738,000
Adjusted cash fund - Cash and cash equivalent 613,500
Debt and equity securities - Cash and cash equivalent 900,000
C a s h a n d c a s h e qu i v a l e n t s , a dju s t e d ba l a n c e 7, 94 6 ,5 0 0

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9. Ans. P1,874,500
Customerstalecheck-adjustedtoAR 180,000
Customer post-dated check - adjusted to AR 125,000
CustomerDAUDcheck-AdjustedtoAR 155,000
Officer's NSF check - Adjusted to AR-nontrade 80,000
Petty cash fund shortage - Adjusted to AR-custodian 1,500 *alternatively, this can be charged to other expense
Postagestamps-Officesupplies 3,000
IOUfromakeyofficer-AR-nontrade 30,000
Investment in debt security due 1/31/15 purchased 1/1/14 900,000 *classified as short-term investment
Ordinary shares - Trading securities/FA at FMV through P&L 400,000
Curren t ass ets ( other th an ca sh an d cas h eq uiv ale nts) 1,874, 500

10. Ans. P1,700,000

Rural bank - compensating balance - Adjusted to Other assets 500,000
Pensionfund-AdjustedtoLong-termInvestment 250,000
Bond sinking fund - Adjusted to Long-term Investment 500,000
Cash in closed bank at recoverable value - Adjusted to Other assets 150,000
Ordinary shares - A vailable-for-sale security/FA at FMV through OCI/L 300,000
Non-current assets 1,700,000

11. Ans. P495,000

CurrentaccountatBDO-Bankoverdraft 240,000
Post-dated disbursement check - adjusted to AP 75,000
Undelivered disbursement check - adjusted to AP 120,000
Credit memo for a purchase return - adjusted to AP 60,000
C u r r e nltia b ilit ie s 4 95 , 00 0

CHAPTER 2-PROBLEM 3: MANNY CO.

Accountability:
PettyCashFund,Imprestbalance 40,000
Returnofanexpenseadvance(a) 900
T ot aA l c c o u n t a b il i t y 40 , 91.
0 0Ans.
Valid supporting items:
Bills
and coins 13,400
Unreplenishedpaidvouchers 3,700
Accomodated checks
Dated 12/30 2,000
Dated11/30-markedNSF 1,000
Replenishmentcheck 10,000 30,100
P e t t yc a s hf u n dsh o r t a ge 10 , 80 0
2. Ans.
(a) Should be subsequently deposited to the bank.

Cash items as of December 31, 2014

Bills
andcoins 13,400
Return of excess travel expense advance (a) (900)
Unreplenished paid voucher dated 1/2 1,000
Accomodatedcheck12/30 2,000
Replenishmentcheck 10,000
A dju s t e dpe t t yc a s hf un d 2 5 , 53.
0 0Ans.
(a) Should be subsequently deposited to the bank.

4. Adjusting entries:
1 Transportationexpense 500
Repairsandmaintenanceexpense 300
Entertainment, amusement and representation ex 900
Dueto
employees 1,000
Petty
cash
fund 2,700
To record unreplenished paid vouchers.

2 Receivablefromemployee 1,000
Petty
cash
fund 1,000
To record NSF accomodated check.

3 Receivablefromemployee 10,800
Petty
cash
fund 10,800
To record petty cash fund shortage.

Pettycashfund,imprestbalance 40,000
1.
AJE (2,700)
2.
AJE (1,000)
AJE
3. (10,800)
A dju s t e dpe t t yc a s hf un d 2 5 ,5 0 0

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CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY

Ans. P1,630
Accountability:
Totalcollections,10/1-10/11(perOR) 28,840
Total bank credits, 10/1-10/11 (per bank statement) 16,550
Septemberdepositintransit (4,500)
September bank charge error (corrected in October) (1,400) 10,650
UndepositedcollectionsasofOctober11 18,190

Valid supporting items:

Currencyand
coins 12,310
Customer collection checks
9/30/14-BaguioCorp. 2,350
10/3/14L.
-Reyes 1,960
10/4/14-La.UnionCorp. 1,590 5,900
Unusedpostage(adjustedtosupplies) 110
Vouchers paid out of receipt (adjusted to expense) 1,500 19,820
O v e r a ge 1, 6 30

CHAPTER 2-PROBLEM 5: BETTY CO.

Accountability
Pettycashfund,imprestbalance 10,000
Undeposited collections
Cash collections (per cash sales invoices) 1,670
Customer collection checks (depositable only) 2,500 4,170
T o t aAl c c ou n t a bilit y 14 , 11.
7 0Ans.

Valid supporting items

Currenciesandcoins 5,980
Customer collection checks (depositable only)
12/30ErrolCorp.,Customer 1,300
1/2R.Rarr,Customer 1,200
Accomodated checks (whether depositable or not)
12/30D.Dong,VicePresident 1,220
1/2
Junior, Employee 312
UnreplenishedVouchers 850
EmployeeIOU's 700 11,562
P e t tC
ya sShh o r t a ge 2 , 60 82. Ans.

AJEs to the Petty Cash Fund:

(a) Expenses 730
Petty
Cash
Fund 730
To record unreplenished expense vouchers as of Dec. 31 only.

(b) Receivablefromemployee 700

Petty
Cash
fund 700
To record employee .

(c) Receivablefromemployee 2,608

Petty
Cash
fund 2,608
To record the petty cash fund shortage.

Imprest
balance 10,000
(a)
AJE (730)
(b)
AJE (700)
AJE
(c) (2,608) (4,038)
3. Ans.
A dju s t e d P e t t y C a s h F u n d a s o f D e c . 3 1 5 , 964.
2 Ans.

CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO.

Bank Reconciliation Statement 10/31/2014
BANK BOOK
Unadjusted Balance, per Bank Statement 144,975 125,245Unadjusted Balance per Books
Undeposited collections, excluding missapprop. 10,770 8,000
Unrecorded Bank Credits
Oustandingchecks (50,550) (2,300)
Unrecorded Bank Debits: NSF Check
Bank error (unrecorded bank charge) (1,250) (1,250)Unrecorded Bank Debits: Bank Service Charge
C or re ct cash in ban k balance (2. A ns . ) 103 , 94 5 129,695Adjusted balance per books
(25,750) Cash shortage (1. Ans. )
103,945Correct cash balance

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3 Adjusting Entries:
(a) Cash
bank
in 8,000
Accounts
receivables 8,000

(b) Accountsreceivables 2,300

Cash
bank
in 2,300

(c) Bank service charge/Other expenses 1,250

Cash
bank
in 1,250

CHAPTER 2-PROBLEM 7: JADE CORPORATION

Bank Reconciliation 12/31/2014
BANK BOOK
Unadjustedbalance 792,285 726,600
Unadjusted balance
Deposit in
transit 10,500 20,000
Unrecorded credit
Outstandingcheck (75,975) (5,000)
Unrecorded debit
Bank
error 2,250 31,500 Book errors (audit note a.)
C o r r e c t c a s h ba l a n c e ( 1 . A n s . ) 72 9 ,0 6 0 773,100
(44,040)Shortage (3. Ans. )

729,060
Adjusted balance
Unadjustedbalanceperbooks 726,600
Correctcashbalance 729,060
N e t a dj u s t e m e n t t o c a s h ( 1 2 / 3 1 ) ( 2,2.
46Ans.
0)

AccountabilityasofJanuary15 180,500
Unrecordedcreditasof12/31 (20,000)
Book errors in Janaury(auditnote bandc) 19,500
Adjustedaccountability 180,000

January deposits from January collections

Januraybankcredits 143,895
Correction of Dec. bank charge error (2,250)
Dec.depositintransit (10,500) 131,145
Cash
hand
on 10,125
Expense vouchers 1,125
CashshortagefromJan.2-Jan.15 37,605
Add:CashshortageasofDec.31 44,040
T o t a l c a s h s h o r t a ge a s o f J a n . 1 5 , 2 0 1 5 81 , 64
4.5 Ans.

CHAPTER 2-PROBLEM 8: PIRA CO.

Proof of Cash, 6/30/2014
May3 1, Receipt Disbursement June3 0,
Unadjusted balances per bank statement 1,836,000 2,496,000 1,224,000 3,108,000
Depositintransit,May 480,000 (480,000)
Deposit in transit, June (SQUEEZE) 4. Ans. 1,317,600 1,317,600
Outstandingchecks,May (1,020,000) (1,020,000)
Outstanding checks, June (SQUEEZE) 5. Ans. 2,171,760 (2,171,760)
Bank error, May Overstated disbursement 240,000 (240,000)
Adjusted balances 1,536,000 3,093,600 2,375,760 2,253,840
2. Ans. 6. Ans.

May3 1, Receipt Disbursement June3 0,

Un adjust ed bala nces pe r book (1. Ans . ) 538, 20 0 4,818,600 2,443,200 2,913,600
Unrecordedbankcredit:May 600,000 (600,000)
Unrecorded bank debits: BSC, May (7,200) (7,200)
Unrecordedbankdebits:BSC,June 9,600 (9,600)
Unrecordedbankdebits:NSFCheckJune 144,000 (144,000)
Bank error, May Overstated disbursement 405,000 (405,000)
Bookerror,June O verstatedcollection (720,000) (720,000)
Bookerror,June Overstateddisbursement (213,840) 213,840
Adjustedbalances 1,536,000 3,093,600 2,375,760 2,253,840

3. Ans. No shortage.

CHAPTER 2-PROBLEM 9: KRAME INC.

Proof of Cash
Augsut 31: Receipt Disbursemen September 30:
Unadjustedbalances,perbank 485,000 1,955,000 1,655,000 785,000
Undepositedcollections-Aug 450,000 (450,000)
U n de po sit e dc o lle c t io ns-S e pt 2 40 , 00 0 240,000
2. Ans.
Outstandingchecks-Aug (180,000) (180,000)
O u t s t a n di n g
c h e c ks
S
- e pt 2 2 0, 0 00 (220,000)
3. Ans.
Bank error Aug
- (80,000) (80,000)
675,000 1,745,000 1,615,000 805,000
A
1n. s. A
4n. s.
June 30: Receipt Disbursemen July 31:
Unadjustedbalances,perbook 640,000 1,795,000 1,800,000 635,000
Unrecordedcredit-Aug 200,000 (200,000)
Unrecordedcredit-Sept 250,000 250,000
Unrecordeddebit-Aug (120,000) (120,000)
Unrecorded
debit
Sept
- 80,000 (80,000)
Book
Error
Aug
- (45,000) (45,000)
BookError-Sept/Correction-Sept (100,000) (100,000)
675,000 1,745,000 1,615,000 805,000
Shortage/Overage -

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CHAPTER 2-PROBLEM 10: MANGO COMPANY

Proof of Cash, 4/30/2014
March 31, Receipt Disbursement April 30,
Unadjusted balances per bank statement 21,560 220,450 218,970 23,040
Undepositedreceipts,March 9,060 (9,060)
Undepositedreceipts,April 10,120 10,120
Outstandingchecks,March (2,675) (2,675)
Outstandingchecks,April (excludingcertifiedcheck) 1,430 (1,430)
Bankerror,AprilOverstateddisbursement (950) 950
Adjusted balances 27,945 221,510 216,775 32,680

March 31, Receipt Disbursement April 30,

Unadjustedbalancesperbook 16,545 222,190 216,055 22,680
Book receipts usedto paycreditors in cash (1,210) (1,210)
Unrecordedbankcredit:March 12,150 (12,150)
Unrecordedbankcredit:April 11,640 11,640
Unrecorded bank debits:
NSF check, returned in April recorded in April 1,040 1,040

NSFcheck,returnedinAprilnotyetrecorded 860 (860)

Unrecorded bank debits: BSC, March (750) (750)
Unrecordedbankdebits:BSC,April 420 (420)
Bankerror,AprilUnderstateddisbursement 360 (360)
Adjusted balances 27,945 221,510 216,775 32,680
1. Ans. 2. A ns . 3. A ns . 4. Ans.

MULTIPLE CHOICE EXERCISES

CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY
Unadjustedcashbalance 105,600
1. January 5 collection recorded in December (15,000)
2. Undelivered check disbursements 9,300
3. Post-dated customer collection check (7,800)
4.NSFcustomercollectioncheck (1,500)
5. Cash fund for non-current purpose (40,000) *classifed as LT Fund Investment
A dju s t e d c a s h b a l a n c e - c u r r e n t a s s e t 5 0Ans.
, 6 0 0 B.

CHAPTER 2-EXERCISE 2: BIG BROTHER CORP.

Equivalent Asset
Current account at Bank of the Philippine Islands 6,000,000 6,000,000
Current account at Equitable PCI Bank (300,000) *no right of off-set, classified as current liabi
Payroll account 1,500,000 1,500,000
Foreign bank account – restricted (in USD) ** 60,000 3,000,000*Other Asset at current exchang price
Postage stamps 3,000 *prepaid expense
Employee’s post dated check 12,000 *other receivables
IOU from a key officer 30,000 *other receivables
Credit memo from a vendor for a purchase return 60,000 *debited to accounts payable
Traveler’s check 150,000 150,000
Customer’s not-sufficient-funds check 45,000 *accounts receivable
Money orders 90,000 90,000
Petty cash fund, currencies only 12,000 12,000
Treasury bills, due 3/31/15 (purchased 12/31/14) 600,000 600,000
Treasury bills, due 1/31/15 (purchased 1/1/14) 900,000 *current investment
Change fund 10,000 10,000
Bond sinking fund 1,000,000 1,000,000*LT fund investment
8, 362, 00 0 4, 000, 000
1. A ns .C . 2. A ns . B.

CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY

Accountability:
Pettycashfund,imprestbalance 15,000
Undeposited collections
Cash sales invoices (17903-18112) 100,500
Official receipts 39,537
Customer collection check, n ot yet included 5,707 145,744
Othercollections:Returnofexpenseadvance 260
Other collections: Contribution for Christmas Party 9,500
T o t aAl c c o u n t a bi l i t y 1 70 , 50 4

Valid supporting items:

Bills
andcoins 105,174
Customer collection checks
12/30
Otis
T. 11,920
12/26R.
Eyes 12,505
1/2
O.
Liever 5,707
12/21 F.
Rancisco 13,350
Accomodated check 310
12/29 O. Camp (return of expense advance) 260
ExpensevouchersandIOUs 6,775 156,001
P e t tcya ss
hh or t a ge 14 , 50 3 1. Ans. B.

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Cash on hand as of January 5, 2015

Bills
andcoins 105,174
Customercollectionchecks 43,482
Accomodated check 310
Returnofexpenseadvancecheck 260 149,226
Cash that does not belong to the petty cash fund
Undeposited collections:
Collectionchecks 43,482
Cash collections (100,500+560+1,202) 102,262 (145,744)
Returnof expense advance (260)
Excess collection from Christmas Party (9,500-6,290) (3,210)
Cash on hand as of January 5, belonging to the Petty Cash 12
VoucherspaidafterDecember31:1/2/15,PNR 35
P e t t yc a s hf u n daso fDe c e mbe r3 1,20 1 5 4 7 3. Ans. B.

AJEs:
(a) Officesuppliesexpense(150-80) 70
Unused office
supplies 80
Receivablefromemployee 300
Petty
cash
fund 450

To record unreplensihed expense vouchers as of December

31.
(b) Receivablefromemployee 14,503
Petty
cash
fund 14,503
To record petty cash shortage

Reconciliation:
Pettycashfund,imprestbalance 15,000
(a)
AJE (450)
AJE
(b) (14,503) (14,953)
2. ans. B.
P e t t yc a s hf u n d,a d ju st e dba lan c e 4 7 3. Ans. B.

Notes:
1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be
reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be
regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution).
2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement
was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31.
3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check
the same was also part of the valid supporting items. As an additional audit procedure,return of expense advance shall
be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be
returned backto the general cash of the company.

CHAPTER 2-EXERCISE 4: SILVER COMPANY

Bank Reonciliation Statement 12/31/2014
BANK BOOK
Unadjusted balance per Bank Statement 12,300 15,000Unadjusted balance per books
Undeposited collections (as being reported) 3,000 150
Unrecorded bank credit
Outstanding checks (as per complete list) (850)
Corr ec t c ash b alan ce pe r au dit ( 4. Ans. B .) 14 ,450 15,150Unadjusted balance per books
(700)Shortage 1. Ans. D.
14,450Adjusted balance per books

2. Ans. D.
Undeposited collections (as being reported) 3,000
Shortage 700
A c c o u n t a b il i t y f o r c a s h o n h a n d 3 ,7 00

3. Ans. B.
Correctcashbalanceperaudit 14,450
Cash on hand/Undeposited collection (3,000)
C a s h i n B a n k ( e x c lu d i n g C a s h o n H a n d ) 1 1 ,4 5 0

CHAPTER 2-EXERCISE 5: HOME CORP.

Bank Reconciliation 12/31/2014
BANK BOOK
Unadjustedbalance 1,548,570 1,239,200
Unadjusted balance
Deposit in
transit 21,000 200,000
Unrecorded credit
Outstandingcheck (151,950) (10,000)
Unrecorded debit
Bank
error 4,500 63,000Book errors (audit note)
C o r r e c t c as h b a l a n c e ( 1 6 . A ns . D ) 1 ,4 2 2, 1 20 1,492,200
(70,080) Shortage (17. Ans. C )
1,422, 120 Adjusted balanc e

AccountabilityasofJanuary10 521,000
Unrecordedcreditasof12/31 (200,000)
Book errors in Janaury(auditnote aandb) 39,000
A dju s t e da cc o u nt a bilit y 3 60 , 00(18.
0 Ans. B.)

January deposits from January collections

Januraybankcredits 322,790
Correction of Dec. bank charge error (4,500)
Dec.depositintransit (21,000) 297,290
CashandChecksonhand(Depositable) 23,475
Expense vouchers 22,250
C a s hs ho r t ag ef r o mJ a n.2-J a n.10 16 , 98 5 (19. Ans. B)

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CHAPTER 2-EXERCISE 6: CARRERA INC.

Proof of Cash, July 31, 2014
June 30, Receipt Disbursement July 31,
Unadjusted b alances p er bank s tatement 172,590 751,680 903,390 20,880
Depositintransit,June 18,000 (18,000)
D e p os itint r a n s it ,J u ly( S Q U EE Z E) 30 , 00 0 30,000
2. Ans. B.
Outstandingchecks,June (52,260) (52,260)
O u t s t a n dingc h e c ks ,J u ly( S Q U E EZ E ) 4 1, 8 20 (41,820)
1. Ans. C.
Bankerror,JulyOverstateddisbursement (11,880) 11,880
Adjusted balances 138,330 763,680 881,070 20,940
3. Ans. A.

March 31, Receipt Disbursement April 30,

Unadjustedbalancesperbook 140,330 763,680 654,330 249,680
Unrecorded bank debits, July Payment of AP 31,800 (31,800)
Unrecorded bank debits, July BSC 2,610 (2,610)
Unrecorded bank debits, July Payment of NP 183,000 (183,000)
Unrecordedbankdebits,JulyNSF 9,330 (9,330)
Adjusted balances 140,330 763,680 881,070 22,940

C a s h i n ba n k , s h o r t a ge J u n e 3 0 2 , 0 004. Ans. C.

CHAPTER 2-EXERCISE 7: EDILBERTO INC.

Proof of Cash, December 31, 2014
November 30, Receipt Disbursement December 31,
Unadjusted b alances p er bank s tatement 535,410 1,245,540 1,091,865 689,085
Undepositedcollections,Nov. 41,005 (41,005)
Undepositedcollections,Dec. 64,400 64,400
Outstandingchecks,Nov. (138,590) (138,590)
Outstanding
checks,Dec. 150,560 (150,560)
Adjusted balances 1437,825
, 26 8 ,9 3 5 1 ,1 03 , 83 5 6 0 2, 9 25
4. A n s . A . 5 . An s . B . 6. A n s . B .

November 30, Receipt Disbursement December 31,

Unadjustedbalancesperbook 82,350 1, 182, 26 0 1, 063, 185 201,425 1. An s. B . 2. A ns . B .
Unrecorded bank credit: Note Col., Nov. 359,075 (359,075)
Unrecordedbankcredit:NoteCol.,Dec. 404,500 404,500
Unrecorded bank debits: BSC, Nov. (3,600) (3,600)
Unrecordedbankdebits:BSC,Dec. 3,000 (3,000)
NSF Check, return and redeposit, same month* 41,250 41,250
Adjusted balances 1437,825
, 26 8 ,9 3 5 1 ,1 03 , 83 5 6 0 2, 9 25
3. Ans. B.

CHAPTER 2-EXERCISE 8: HALALAN CORP.

Proof of Cash, June 30, 2014
May3 1, Receipt Disbursement June3 0,
Unadjusted b alances p er bank s tatement 652,000 88,000 63,200 676,8003. Ans. A.
Depositintransit,May 10,000 (10,000)
Deposit
in transit,
June 70,000 70,000
Outstandingchecks,May (20,000) (20,000)
Outstandingchecks,
June 17,600 (17,600)
Bank error,June correctedalso in June(a) (1,000) (1,000)
Adjustedbalances 642,000 148,000 60,800 729,200
1. A ns . B. 2. A ns . D.

May3 1, Receipt Disbursement June3 0,

Unadjustedbalancesperbook 570,800 219,000 57,400 732,4006. Ans. C.
Unrecordedbankcredit:May 72,000 (72,000)
Unrecordedbankdebits:BSC,May (800) (800)
Unrecorded bankdebits:
BSC,June 200 (200)
Unrecordedbankdebits:NSF,June13(b) 1,000 1,000
Unrecordedbankdebits:NSF,June30 3,000 (3,000)
Adjustedbalances 642,000 148,000 60,800 729,200
4. A ns . D. 5. A ns . B .
Notes:
(a) the error committed by the bank in June was also corrected in June, thus both receipts and disbursements per bank shall be in excess
by P1,000 if compared to receipts and disbursements per books. Toreconcile, the same had been deductedfrom both receipt and disbursements.
(b) the NSF check on June 13 had been redeposited immediately. No entry had been made by the company to reflect the receipt and redeposit
while on the bank side, theNSF check had beenrecorded both as disbursement (upon learning that it is NSF) and receipt
as (upon redeposit).
Thus, to reconcile, the same has been
added to both receipts anddisbursements per books.

CHAPTER 2-EXERCISE 9: SALUYOT CORP.

Proof of Cash, September 30, 2014
August 31, Receipt Disbursement September 30,
Unadjusted b alances p er bank s tatement 156,000 76,020 29,220 202,800
1. Ans. D.
Depositintransit,August 2,700 (2,700)
Depositintransit,September 28,200 28,200
Outstandingchecks,August (12,000) (12,000)
Outstandingchecks,September 10,800 (10,800)
Bankerror,Sept.correctedalsoinSept. (300) (300)
Bankerror,Sept.,Overstatedreceipt (600) (600)
Adjustedbalances 146,700 100,620 27,720 219,600
5. Ans. B.

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August 31, Receipt Disbursement September 30,

Unadjustedbalancesperbook 120,000 127,200 25,380 221,820
4. Ans. A.
Unrecordedbankcredit:August 27,000 (27,000)
Unrecorded bank debits: BSC, August (300) (300)
Unrecordedbankdebits:BSC,September 1,320 (1,320)
Unrecordedbankdebits:NSF,Sept.12 420 420
Unrecordedbankdebits:NSF,Sept.30 900 (900)
Adjustedbalances 146,700 100,620 27,720 219,600
2. A ns . C . 3. A ns . B.

CHAPTER 2-EXERCISE 10: WISE COMPANY

1. Ans. B.
December actual collections from customers 152,500
Deposit credited by bank in Decemeber 145,000
Less:DIT,November (12,500)
December collections credited in December (132,500)
DIDT ,e ce mbe r 20 , 00 0

2. Ans. B.

NovemberBankServiceCharge 1,500
DecemeberBankServiceCharge 3,250
Bank Service Charge recorded per books in Dec. (2,500)
U n r e c o r de d B a n k S e r v i c e C h a r ge , D e c . 2 ,2 50

3. Ans. A.
Actual company collections in December 152,500
Book error, underfooting cash receipts (2,500)
B o okr e c e ipt s ,D e c e mb e r 15 0 ,0 0 0

4. Ans. C.
Outstanding checks, December 31 12,500
Add: Checks paid by bank in December 130,000
Total 142,500
Less: Outstanding checks, November 30 (16,250)
C h e c ks is s u e d in De c e mb e r 1 2 6, 25 0

5. Ans. D.
C hecksissuedinDecember(4) 126,250
2,500
B oo k dis bu r s e me n t s in D e c e mb e r 1 2 8, 7 50

6. Ans. A.
Bookbalance,December31 37,500
Add: Book disbursements in December (5) 128,750
T otal 166,250
(150,000)
B oo kba la nc e ,N o v e mbe r30 1 6, 2 50

Proof of Cash, December 31, 2014

November 30. Receipt Disbursement December 31,
Un adjust ed bala nces pe r ba nk st at emen t 18 ,500 145,000 137,000 26,500 (SQUEEZE)
Depositintransit,November 12,500 (12,500)
Depositintransit,December 20,000 20,000
Outstandingchecks,November (16,250) (16,250)
Outstandingchecks,September 12,500 (12,500)
Bankerror,Dec.OverstatedDisbursement (3,750) 3,750
Adjustedbalances 14,750 152,500 129,500 37,750
7. A n s . B . 8. A n s . C . 9 . An s D. 1 0 . An s . B .

November 30. Receipt Disbursement December 31,

Unadjustedbalancesperbook 16,250 150,000 128,750 37,500
Unrecorded bank debits: BSC, November (1,500) (1,500)
Unrecordedbankdebits:BSC,December 2,250 (2,250)
Bookerror,Dec.UnderstatedReceipt 2,500 2,500
Adjusted
balances 14,750 152,500 129,500 37,750

CHAPTER 2-EXERCISE 11: I-BOT INC.

1. Ans. A
Total checks issued and recorded in December 377,632
NovemberBSC recordedin Decemeber 36
T ot a l bo o k dis burs e me nt s , D e c e mb e r 37 7 ,6 6 8

2. Ans. D.
Balanceperbooks,November30 15,698
Totalbookreceipts,December 371,766
Total book disbursements, December (377,668)
B a l a n c e pe r b o o k s , D e c e m be r 3 1 , 9 ,7 96

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3. Ans. C.
Check number 3408 440
Check number 3418 2,814
Check number 3419 5,788
O u t s t a n di n g c h e c k s , D e c e m be r 3 1 , 9 ,0 42

Proof of Cash, December 31, 2014

November 30. Receipt Disbursement December 31,
Unadjusted balances per bank statement 24,298 373,502 380,284 17,516
Depositintransit,November 3,648 (3,648)
Depositintransit,December 5,912 5,912
Outstandingchecks,November (11,214) (11,214)
Outstanding checks,September 9,042 (9,042)
Bankerror,Dec.OverstatedDisbursement (480) 480
Bankerror,Dec.UnderstatedDisbursement 42 (42)
Adjusted balances 16,732 375,766 377,674 14,824
4. Ans. B.

November 30. Receipt Disbursement December 31,

Unadjustedbalancesperbook 15,698 371,766 377,668 9,796
Unrecordedbankcredits:NoteColl,Dec. 4,000 4,000
Unrecorded bank debits: BSC, November (36) (36)
Unrecordedbankdebits:BSC,December 42 (42)
Book error, Nov. Over. check 3413 (not yet corr.) 270 270
Book error, Nov. Over. Check 3417 (not yet corr.) 800 800
Adjusted
balances 16,732 375,766 377,674 14,824
5. A n s . D. 6 . An s . C. 7 . A ns . A .

CHAPTER 2-EXERCISE 12: HALAL CORP.

Proof of Cash, December 31, 2014
November 30. Receipt Disbursement December 31,
Unadjusted b alances p er bank s tatement 685,180 308,120 356,080 637,220 2. Ans. B (SQUEEZE)
Depositintransit,November 15,260 (15,260)
Depositintransit,December 16,140 16,140
Outstandingchecks,November (64,140) (64,140)
Outstandingchecks,September 74,080 (74,080)
Bank error, Nov. Overstated Disbursement 1,500 (1,500)
Bankerror,Dec.OverstatedDisbursement (180) 180
Adjusted balances 637,800 307,500 365,840 579,460
4.A n s .C . 6 .A n s .B .

November 30. Receipt Disbursement December 31,

Unadjustedbalancesperbook 637,860 306,220 367,660 576,420 1. Ans. A. (SQUEEZE)
Unrecordedbankcredits:NoteColl,Dec. 2,060 2,060
Unrecorded bank debits: BSC, November (60) (60)
Bookerror,December,OverstatedDisbursement (980) 980
Reversalofcheck(stop-payment)** (780) (780)
Adjustedbalances 637,800 307,500 365,840 579,460
5.A n s .A . 7 .A ns .D.
3. Ans. D.
Checks issued prior to Dec.(P64,140- P26,140) 38,000
Checks issued in Dec. not yet clearing the bank 36,080
To t al o ut s t a n ding c h e cks , D e c e mbe r 3 1 7 4, 0 80

**Note that the entry to record the reversal of the dibursement check in which the company released a stop-payment order to the bank
will result both as a credit and debit in the company's books and will never be reflected as debit and credit on the bank records.
Thus, to reconcile, the same has been deducted both in the receipt and disbursement columns per books.

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CHAPTER 3: AUDIT OF RECEIVABLES AND SALES

DISCUSSION PROBLEMS
CHAPTER 3-PROBLEM 1
1 A
2 B.
3 A.
4 A.
5 D.
6 B.
7 D.
8 D.
9 D.
1 0 D.
11 A.
1 2 C.
1 3 B.
14 A.
15 A.
1 6 D.
1 7 C.
1 8 B.
1 9 B.
20 A.
21 A.
2 2 D.

CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION

1. Ans. P124,500
January 1, balance (credit balance to be adjusted to Advances) 115,000
Charge
sales 1,250,000
Recoveryofpreviouswrite-offs 5,000
Collections from customers (overpayment credited to Advances) (1,230,000)
Write-offof
receivables (7,000)
Salesreturndsandallowances(P5,500+P3,000) (8,500)
Gr o s sA cc o u n t sRe ce i v a b l eba l a n c e 124,500

2. Ans. P107,537
GrossAccounts
Receivable 124,500
Allowance for Sales Discount (P124,500*50%*25%)*5% (778)
Alowance for Bad Debts:
60 Days past due (P124,500*30%)*10% (3,735)

A m>120
o r t i zDays
past
, 2due
/ 31(P124,500*20%)*50%
(12,450)
e dc o s t1 /14 1 0(16,185)
7,537

3. Adjusting Journal Entries:

(a) Accountsreceivable-trade 9,000
Advancesfromcustomers 9,000

(b) Sales 25,000

Accountsreceivable-trade 25,000

(c) Subscriptions receivable (AR-nontrade) 60,000

Accountsreceivable-trade 60,000

(d) Advancesfromcustomers 5,000

Accountsreceivable-trade 5,000

(e) Claimsr eceivable( AR-nontrade) 5,000

Accountsreceivable-trade 5,000

(f) Advances to employees (AR-nontrade) 1,000

Accountsreceivable-trade 1,000

(g) Advances to affiliates (Investment) 50,000

Accountsreceivable-trade 50,000

(h) Advancestosuppliers 10,000

Accountsreceivable-trade 10,000

(i) Accountsreceivable-trade 10,000

Advancesfromcustomers 10,000

(j) Accountsreceivable-trade 2,000

Claimsreceivable(AR-nontrade) 2,000

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(k) Accountsreceivable-trade 45,000

Subscriptions receivable (AR-nontrade) 45,000

CHAPTER 3-PROBLEM 3: DELL COMPANY

1. Ans. P366,000
PerGL PerSL Under30d 30-60d 61-120d 121-180d Over180d
Balances 360,000 360,000 240,000 48,000 36,000 24,000 12,000
Accounts definitely uncollectible (6,000) (6,000) (6,000)
Advancesfromcustomers 12,000 12,000 12,000
Adjusted balances 366,000 366,000 252,000 48,000 36,000 24,000 6,000
Uncollectible
% %- 15% 3 30% 60%
AllowanceforDoubtfulAccounts 17,640 - 1,440 5,400 7,200 3,600

2. Ans. P22,320; 3. Ans. P17,640

A l l o w a n c e f o r Do u b t f u l A c c o u n t s , E n d 17,640
Less: Allowance for Doubtful Accounts, Beginning (1,320)
Add: Write-of off Accounts 6,000
B a dd eb te x pe n s ef o rt h ey e a r 22,320

4. Ans. P330,720
GrossAccounts Receivable 366,000
AllowanceforDoubtfulAccounts (17,640)
Allowance for Sales Discounts (P252,000*20%)*10% (5,040)
AllowanceforSalesReturns(P252,000*5%) (12,600)
A m o r t i z e dC o s t1
, 2/31/14 330,720

5. Ans. P25,320
A l lo w a n c ef o rDo u b t f u lA c c o u n t s ,E n d 17,640
Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance 1,680
Write-of off Accounts 6,000
B a dd eb te x pe n s ef o rt h ey e a r 25,320

CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATION

PerGL PerSL Nov-Dec Jul-Oct Jan-Jun PriortoJan
Balances 2,270,000 2,270,000 1,140,000 600,000 400,000 130,000
Accounts definitely uncollectible (30,000) (30,000) (30,000)
Adjustedbalances 2,240,000 2,240,000 1,140,000 600,000 400,000 100,000
Uncollectible
% 1.5% 8% 35% 70%
A l l o w a n c e f o r Do u b t f u l A c c o u n t s 275,100 17,100 48,000 140,000 70,000
2. Ans.
Per books:
AllowanceforDA,Jan.1 65,000

Add:Interimprovisions(P4.5M*2%) 90,000
Recoveriesofpreviouswrite-off 7,500
Less: Write-off of receivables (45,000)
Additionalwrite-off (30,000)
AllowanceforDA,Dec.31perbooks 87,500
AllowanceforDA,peraudit 275,100
AdditionalDAExpensefortheyear 187,600
1. Ans. Entry:
D o u b t f u l A c c o u n t s E x p e n se 1 87 , 6 0 0
Allowance for DA 187,600

3. Ans. P1,960,700
GrossAccountsReceivable 2,240,000
Allowance for
DA (275,100)
Allowance for Sales Discount (P700,000*30%)*2% (4,200)
A m o r t i z e dC o s t ,1 2 / 3 1 / 1 4 1,960,700

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CHAPTER 3-PROBLEM 5: MAHOGANNY CORP.

Customer InvoiceDate Amount Current 1-60 d past 61-120 d pas >120 d past Credit bal
Nov-Dec Sept-Oct Jul-Aug Juneandprior
ZuluInc. 41,993 550,000 550,000
41,974 1,200,000 1,200,000
41,923 950,000 950,000
41,855 420,000 420,000
WhiskeyCo. 41,963 2,000,000 2,000,000
41,886 900,000 900,000
41,853 500,000 500,000
UniformInc. 41,983 1,750,000 1,750,000
41,916 600,000 600,000
41,825 500,000 500,000
TangoCorp. 41,891 2,600,000 2,600,000
41,830 1,250,000 1,250,000
41,703 900,000 900,000
Romeo
Co. 41,974 ( 500,000) (500,000)
13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)

Reconciliation of GL and SL
PerGL PerSL Current 1-60dpast 61-120dpas >120dpast Creditbal
Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000)
AdvancesfromReomeoCo. 500,000 500,000 500,000
Posting error - - 600,000 (600,000)
Adjsutedbalances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 -
Unre co ncil ed di ffer en ce (1 . Ans. ) (30,000)
A dj u s t e d b a l a n ce ( 2 . A n s . ) 1 4 ,1 2 0 , 0 0 0
Required allowance for
Bad
Debt as% 2% 5% 20% 50%
RequiredallowanceforBadDebt 1,328,500 122,000 222,500 534,000 450,000

3. Ans. P378,500
AllowanceforBD,ending 1,328,500
Less: Allowance for BD, beg (950,000)
Ba dDe btE x pe n s e 3 78 , 5 0 0

4. Ans. P12,791,500
Gross Accounts Receivable 14,120,000
AllowanceforBD (1,328,500)
A m o r t i ze d C o s t , 1 2 / 3 1 / 1 4 1 2 ,7 9 1 , 5 0 0

CHAPTER 3-PROBLEM 6: BONIFACIO INC.

ADJUSTING ENTRIES:

(a) Credit balance:

Accounts receivable 7,500
Allowancefor
bad
debts 7,500

(b) Customer Aye:

No AJE necessary since the remmittan ce is still in transit as of December 31, 2014.

(c) Customer Bee:

Sales
Returns 13,800
Accountspayable 13,800
Accounts receivable (1-60 days) 13,800
Purchases 13,800

(d) Customer See and Dee: (1. Ans.)

Payment of customer See for a 61-120 days receivable has been deducted from customer Dee's 1-60 days receivable.
Posting error only. No AJE necessary.

(e) Customer Eee:

Sales 11,600
Accountsreceivable(1-60days) 11,600

Inventory 8,000
Incomesummary/Costofsales 8,000

(f) Customer Eff:

Sales 18,000
Accountsreceivable(1-60days) 14,000
Advancesfromcustomers 4,000

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(g) Customer Jeeh:

Sales 6,000
Accountsreceivable(1-60days) 6,000

(h) Customer Eych:

Salesreturnsandallowance 1,200
Accountsreceivable(61-120days) 1,200

PerGL PerSL 1-60days 61-120days >120days Creditbal.

Unadustedbalances 221,250 221,250 110,625 66,375 51,750 (7,500)
(a)Creditbalance 7,500 7,500 7,500
(c)CustomerBee (13,800) (13,800) (13,800)
(d)
Customer Seeand Dee - 16,600 (16,600)
(e)CustomerEee (11,600) (11,600) (11,600)
(f)CustomerEff (14,000) (14,000) (14,000)
(g)CustomerJeeh (6,000) (6,000) (6,000)
(h)CustomerEych (1,200) (1,200) (1,200)
A d j u s t e d b a l a n c e s (2 . A n s . ) 1 82 , 1 5 0 182,150 81,825 48,575 51,750 -
Required allowance for
BD
in
% 2% 10% 20%
Re q u i r e d a l l o w a n c e f o r B D ( 3 . A n s . ) 16,844 1,636.50 4,857.50 10,350.00

4. Ans. P1,844
AllowanceforBD,ending 16,844
Less: Allowance for BD, beg. (7,500)
AJE a) Recovery of write-off (7,500)
Ba dDe btE x pe n s e 1,844

CHAPTER 3-PROBLEM 7: ABC COMPANY

1. Ans. P1,034,711
PrincipalAmount 1,000,000
Originationcost 57,851
Originationfee (23,140)
FMV of Loa n/Initi al measurement 1,034,711

2. Ans. P1,018,182
Amortization table: Loans Receivable/Notes Receivable
Correct Int. Nominal Int. Amortization Balance
January
2014:
1, 1,034,711
December 31, 2014: 103,471 120,000 (16,529) 1,018,182
December31,2015: 101,818 120,000 (18,182) 1,000,000

3. Ans. P373,944
Carrying value/Amortized cost 12/31/15 1,000,000 1

Accured
Total interest,12/31/15
120,000 2.48685
1,120,000
Present value of new future cashflows at 10% for
3 periods with annuity P300,000*2.48685 746,056
Im pa i r m e n tl o s s1 2 / 3 1 / 1 5 373,944

4. Entries 12/31/16 to 12/31/18

Amortization table after impairment loss:
Correct Int. Nominal Int. Amortization Principal Coll. Balance
December
2015:
31, 746,056
December31,2016: 74,606 - 74,606 (300,000) 520,661
December31,2017: 52,066 - 52,066 (300,000) 272,727
December31,2018: 27,273 - 27,273 (300,000) 0

12/31/16:Cash 300,000
Interestincome 74,606
Notes r eceivable/Loans r eceivable 225,394

12/31/17:Cash 300,000
Interestincome 52,066
Notes r eceivable/Loans r eceivable 247,934

12/31/18:Cash 300,000
Interestincome 27,273
Notes r eceivable/Loans r eceivable 272,727

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CHAPTER 3-PROBLEM 8: ABC CORP.

1. Ans. P4,754,134 and P4,908,330
(a) DEF Corp, 10% - Trade receivable,Term, Interest-bearing
CORRECT ENTRIES:
Jan. 1, 2013:
Cash 4,754,134
Loans receivable 4,754,134
Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods)
Principal: (5,000,000*0.704961) 3,524,803 0.704961
Interest:( 250,000*4.917324) 1,229,331 4.917324
To tal 4,754,134
Amortization table: Loans receivable, DEF Corp.
Correct Int. Nominal Int. Amortization Balance
January
2013:
1, 4,754,134
June30,2013: 285,248 250,000 35,248 4,789,382
December31,2013: 287,363 250,000 37,363 4,826,745
June30,2014: 289,605 250,000 39,605 4,866,349
December 31, 2014: 291,981 250,000 41,981 4,908,330
June30,2015: 294,500 250,000 44,500 4,952,830
December31,2015: 297,170 250,000 47,170 5,000,000

June
30,
2013: June
30,
2014:
Cash 250,000
ash C 250,000
Interest
income 250,000IntrestIncome 250,000

Loansreceivable 35,248 Loansreceivable 39,605

Interest
income 35,248Interestincome 39,605

December
31,
2013: December 31,
2014:
Cash 250,000
ash C 250,000
Interest
income 250,000IntrestIncome 250,000

Loansreceivable 37,363 Loansreceivable 41,981

Interest
income 37,363Interestincome 41,981

2. Ans. Retroactive adjustement:

Retainedearnings,beg 173,255
Loansreceiavable 173,255
Face
value 5,000,000
Less: Proceeds (4,754,134)
Add:Nominalinterest 500,000
Interest income in2013, per books 745,866
Interest income in 2013, per audit (see amo.) 572,611
Overstatement in interest income in 2013 173,255

3. Ans. P2,000,000 and P2,000,000

(b) GHI, 12% - Non-trade receivable (Advances to associate), Term and Interest-bearing
CORRECT ENTRIES
January 1, 2014:
Cash 2,000,000
Loansreceivable-Nontrade 2,000,000
*note that the nominal interest and effective interest are the same thus, the face value is also the proceeds (fmv)

December 31, 2014:

Cash 240,000
Interestincome(2M*12%) 240,000
*note that since nominal interest and effective interests are the same and since there are no principal collections yet,
the carrying value/amortized cost at 12/31/14 remains the face value.

4. Ans. P2,483,684 and P3,305,785

(c) KLM - Trade receivable, Term and Non-interest-bearing
CORRECT ENTRIES
Janaury 1, 2012:
Cash 2,483,685
Loansreceivable 2,483,685
Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods)
Principal: P4,000,000*0.6209213) 2,483,685 0.6209213
Amortization table: Loans receivable, KLM
Correct Int. Nominal Int. Amortization Balance
January
2012:
1, 2,483,685
December31,2012: 248,369 - 248,369 2,732,054
December31,2013: 273,205 - 273,205 3,005,259
December31,2014: 300,526 - 300,526 3,305,785
December31,2015: 330,579 - 330,579 3,636,364
December31,2016: 363,636 - 363,636 4,000,000

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December 31, 2012:

Loansreceivable 248,369
Interest
income 248,369

December 31, 2013:

Loansreceivable 273,205
Interest
income 273,205

December 31, 2014:

Loansreceivable 300,526
Interest
income 300,526

5. Ans. Retroactive adjustement:

Retainedearnings,beg 994,741
Loansreceivable 994,741
Principalamount 4,000,000
Less:Proceeds (2,483,685)
Interest income rececognized in 2012 1,516,315
Correct interest income in 2012 (see amo.) (248,369)
Correct interest income in 2013 (see amo.) (273,205)
Overstatement in interest income in '12 and '13 994,741

6. Ans. P4,780,007 and P4,350,818

(d) NOP, 10% - Trade, Serial and Interest-bearing
CORRECT ENTRIES
January 1, 2014:
Cash 4,780,007
Loansreceivable 4,780,007
Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 10 semi-annual periods)
Cash to be collected on:
Principal Interest Total PVfactor PresentValue
July
1,2014: 500,000 250,000 750,000 0.943396 707,547
January1,2014: 500,000 225,000 725,000 0.889996 645,247
July1,
2015: 500,000 200,000 700,000 0.839619 587,733
January1,2015: 500,000 175,000 675,000 0.792094 534,663
July1,
2016: 500,000 150,000 650,000 0.747258 485,718
January1,2016: 500,000 125,000 625,000 0.704961 440,600
July1,
2017: 500,000 100,000 600,000 0.665057 399,034
January1,2017: 500,000 75,000 575,000 0.627412 360,762
July1,
2018: 500,000 50,000 550,000 0.591898 325,544
January1,2018: 500,000 25,000 525,000 0.558395 293,157
TOTAL 4,780,007

Amortization table: Loans receivable, NOP

Correct Int. Nominal Int. Amortization Princ. Coll.4,780,007

Balance
January
2014:
1,
July
1,
2014: 286,800 250,000 36,800 (500,000) 4,316,808
January1,2015: 259,008 225,000 34,008 (500,000) 3,850,816
July
1,
2015: 231,049 200,000 31,049 (500,000) 3,381,865
January1,2016: 202,912 175,000 27,912 (500,000) 2,909,777
July
1,
2016: 174,587 150,000 24,587 (500,000) 2,434,364
January1,2017: 146,062 125,000 21,062 (500,000) 1,955,425
July
1,
2017: 117,326 100,000 17,326 (500,000) 1,472,751
January1,2018: 88,365 75,000 13,365 (500,000) 986,116
July
1,
2018: 59,167 50,000 9,167 (500,000) 495,283
January1,2019: 29,717 25,000 4,717 (500,000) (0)

July 1, 2014:
Loansreceivable 36,800
Interest
income 36,800

Cash 750,000
Interest
income 250,000
Loans
receivable 500,000

December 31, 2014:

Loansreceivable 34,008
Interest
income 34,008

Interestreceivable 225,000
Interest
income 225,000

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Proceeds from issue 1/1/14 4,780,007

July1,2014amortization 36,800
July 1, 2014 principal collection (500,000)
Dec31,2014amortization 34,008
De ce m b e r 3 1 , a m o r t i ze d c o s t 4 ,3 5 0 , 8 1 6 *note that the next P500,000 principal collection shall be made on Jan. 1, 2015

SUMMARY
Interest Interest Current Non-current
Income Recevable LoansRec. LoansRec.
(a)DEFCorp,10%-trade 581,586 - 4,908,330
(b)GHI,12%-nontrade 240,000 - 2,000,000
(c)
KLM trade
- 300,526 - 3,305,785
(d)
NOP trade
- 545,809 225,000 4,350,816
Total 1,667,920 225,000 12,564,932 2,000,000
6. Ans. 7. Ans. 8. Ans. 9. Ans.
Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus
trade receivables are always current.

CHAPTER 3-PROBLEM 9: DWARF CORP.

Noncurrent Current Int. Receivabl Int. Income
(a) Note receivable from sale of plant - nontrade
Dec.31,2013balance 4,500,000
Apr. 1, 2 014, pr incipal collection (1,500,000)
Dec.31,2104balance 3,000,000 1,500,000 1,500,000
Int.
Receivable:P3,000,000*12%*9/12 270,000
Int.Income:(P4.5M*12%*3/12)+(P3M*12%*9/12) 405,000

(b)Notereceivablefromofficer-nontrade 1,200,000 - -
Int.
Income
(P1,200,000*10%) 120,000

(c) Note receivable from sale of equipment - nontrade

Apr. 1, 2014 @FMV=PV of future cash flows at 12% for 2 periods
(P600,000*0.797) 478,200
Dec. 31, 2014: Amo. (478,200*12%*9/12) 43,038 43,038
Dec.31,2014amortizedcost 521,238 521,238 - -

(d) Note receivable from sale of land - nontrade

Jul. 1, 2014 @ FMV=Face (Nominal%=Effective%)
Dec.31,2014balance=Face 2,100,000
Current portion:
Periodic payment (on Jul. 1, 2015) 676,875
Interest expense (upto Jul. 1, 2015) 231,000 445,875 445,875

Long-term portion: 1,654,125 1,654,125

Interestreceivable
(P2.1M*11%*6/12) 115,500
Interst
income(P2.1M*11%*6/12) 115,500
To t a l 4
, 9, 8
4755
,8, 3
7653 1 3 8 5, 5 0 0 683,538
1. Ans . 2. Ans . 3. A ns . 4. Ans .
Note that per PAS 1, a nontrade receivable is current if it is realizable within 12 months after the reporting period or balance sheet date.

CHAPTER 3-PROBLEM 10: WHISKEY INC.

1. JORNAL ENTRIES
(a) Pledging of AR
June 30, 2014: SUMMARY:
Cash (P4M*80%)-(P4M*5%) 3,000,000 2. Ans. P1,450,000
Interest expense (P4M*5%) 200,000 ACCOUNTS RECEIVABLE
Loanspayable(P4M*80%) 3,200,000 Jun. 30, bal 4,000,000
1,320,000
Jul. Coll
2014:
31,July 80,000 Jul Returns
Cash 1,200,000 950,000
Aug. Coll
Salesdiscount 120,000 200,000
Aug. Write-o
Accountsreceivable 1,320,000 Aug. 31 , bal 1,450,000

Interest expense (P3.2M*12%*1/12) 32,000

Loanspayable(balance) 1,168,000 3. Ans. P1,152,320
C ash 1,200,000 LOANS PAYABLE
3,200,000
Jun. Loan
Sales
returns 80,000 Jul. Payment 1,168,000
Accountsreceivable 80,000 2,032,000
Jul 31. bal
Aug.P aymen 879,680
1,152,320 Au g. 31, b

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August 31, 2014:

Cash 900,000
Salesdiscount 50,000
Accountsreceivable 950,000

Interest expense (P2,032K*12%*1/12) 20,320 2,032,000

Loanspayable(balance) 879,680
Cash 900,000

AllowanceforBD 200,000
Accountsreceivable 200,000

(b) Discounting of NR
Cash(Proceeds) 2,082,667
Notesreceivable 2,000,000
Interestincome(P2M*10%*4/12) 66,667
Gain
ondiscounting 16,000
Maturity Value:
PrincipalAmount 2,000,000
Interest(P2M*10%) 200,000 2,200,000

Proceeds: (Maturity value - Discount)

Maturity
Value 2,200,000
Less: Discount: (Maturity value*Discount rate*Remaining term)
(P2,200,000*8%*8/12) (117,333)
Proceedsfromdiscounting 2,082,667

4. Ans. 0
Since discounting was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the notes receivable has been derecognized/transferred.

5. Ans. P16,000.
Proceedsf romd iscounting/Salesp roceeds 2,082,667
Less: Carrying value of Notes Receivabl 2,000,000
Interest from Jan. 1 to May 1 (4 mo.)
(P2,000,000*10%*4/12) 66,667 2,066,667
Ga i n
ondi s co u n t i n g 16,000

CHAPTER 3-PROBLEM 11:VICTORY INC.

1. JORNAL ENTRIES
(a) Assignement of AR
November
2014:
1, SUMMARY:

Cash (P1.5M*95%) 1,425,000 2. Ans. P470,000.

Interest expense (P1.5M*5%) 75,000 ACCOUNTS RECEIVABLE-ASSIGNED
Loans payable 1,500,000 Jun. 30, bal 2,000,000
650,000
Jul. Coll
Accounts receivable-Assigned 2,000,000 60,000
Jul Returns
Accountsreceivable 2,000,000 740,000
Aug. Coll
80,000
Aug. Write-o
November 30, 2014: A ug. 3 1, b al 4 7 0,0 0 0
Cash 600,000
Sales
discount 50,000
Accountsreceivable-Assigned 650,000 3. Ans. P224,150
LOANS PAYABLE
Interest expense (P1.5M*12%*1/12) 15,000 1,500,000
Jun. Loan
Loanspayable(balance) 585,000 Jul. Payment 585,000
Cash 600,000 915,000
Jul 31. bal
Aug.P aymen 690,850
Sales
returns 60,000 224,150Aug. 31, b
Accountsreceivable-Assigned 60,000

August 31, 2014:

Cash 700,000
Salesdiscount 40,000
Accountsreceivable-Assigned 740,000

Interest expense ( P915K*12%*1/12) 9,150 915,000

Loanspayable(balance) 690,850
Cash 700,000

AllowanceforBD 80,000
Accountsreceivable-Assigned 80,000

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(b) Factoring of AR
Cash, net (350,000-10,000) 340,000
Receivablefromfactor 50,000
AllowanceforBD 20,000
LossonFactoring 90,000
Accountsreceivable 500,000
Since factoring was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the accounts receivable factored has been derecognized/transferred.

4. Ans. (P90,000)
Net proceeds from factoring (350,000-10,000) 340,000
Add: Factor's holdback 50,000
Total/NetSalesproceedsfromAR 390,000
Carrying value of AR
Gross Accounts receivable factored 500,000
AllowanceforBD (20,000) 480,000
Lo s s
oFf ac to ri ng (9 0 , 0 00 )

MULTIPLE CHOICE EXERCISES

CHAPTER 3-EXERCISE 1: DKNY COMPANY
Trade Other - current Total trade & other
Trade accounts receivable 1,550,000
,
750,000
12%Tradenotesreceivable 200,000
Installments receivable, normally due 1 year to two yea 600,000
300,000
Claimfrominsurancecompany 30,000
Subscription receivable due in 60 days, 600,000
Accruedinterestreceivable 20,000
3,100,000 950,000 4,050,000
1A
. n s .B. 2 .A n s D
. .
3. Ans. C.
ProceedsfromARfactored 250,000
Carrying value of AR factored (300,000)
Lo s sf r o mf a ct o r i n g (5 0 , 0 00 )

Proceeds from NR discounted:

Maturity value: (Principal + Interest)
Principal 300,000
Interest (P300,000*20%*6/12) 30,000 330,000
Less: Discount (MV*disc%*remaining term)
(P330,000*40%*6/12) (66,000)
ProceedsfromNRdiscounted: 264,000
CarryingvalueofNR(nointerest) 300,000
Lo s sf r o md i s co u n t i n g (3 6 , 0 00 )

To t a l l o s s f r o m r e c e i v a bl e fi n a n c i n g (8 6 , 0 00 )

Note:
(a) The credit balances from customer accounts at P60,000 and P40,000 shall be presented as advances from customers (current liab.)
unless there is right of offset.
(b) The cash advances to subsidiary amounting to P800,000 shall be presented as an addition to the investment in subsidiary account in
the parent-company financial statements, thus is presented as LT Investment.
(c) The deposit on contract bids amounting to P500,000 shall be presented as Other Assets in the noncurrent asset portion of SFP.
(d) The advances to stockholders amounting to P2,000,000 is a non-trade, noncurrent receivable, thus is presented as Other Asset.

CHAPTER 3-EXERCISE 2: MORGAN INC.

1. Ans. A.
Allowance for DA, Dec. 31, 2014 (per aging) 700,000 3,225,300
Less: AllowanceforDA,Jan.1,2014 (600,000) (169,000)
Recovery of previously written-off accounts (100,000) 3,056,300
Add: Write-off of accounts during the year 375,000
Co r r e ctBa dDe b tEx p e n s e 375,000

2. Ans. B.
GrossAccountsReceivable 2,375,000
Less: Allowance for DA, Dec. 31, 2014 (per aging) (700,000)
Amor ti ze d c os t/Ca rryi ng valu e, De c. 31, 2 014 1,675,000

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CHAPTER 3-EXERCISE 3: INUYASHA INC.

1. Ans. C.
Year Current 1 – 30 days PD
2013 1% 6% 9% 23% 55%
2012 2% 8% 10% 18% 60%
2011 1% 4% 11% 16% 45%
2010 3% 5% 12% 22% 45%
2009 3% 2% 8% 21% 45%
A v e r a geu n co l l e c t i bl ea cco u n t si n 2% 5% 10% 20% 50%

2. Ans. C.
Ageofaccounts Amount A llow in % Required Allow. In Amount
Current 1,686,400 2% 33,728
1to30dayspastdue 922,000 5% 46,100
31to60dayspastdue 384,800 10% 38,480
61to90dayspastdue 153,300 20% 30,660
Over90dayspastdue 78,800 50% 39,400
Total 3,225,300 188,368

3. Ans. A.
GrossAccountsReceivable 3,225,300
Allowanceforuncollectibleaccounts (188,368)
A m o r t i z e d c o s t / Ne t r e a l i z a b l e v a l u e 3,036,932

CHAPTER 3-EXERCISE 4: MEXICAN CORP.

Reconciliation of GL and SL with Aging of AR
PerGL PerSL 0-60days 61-90days 91-120days >120days
1,230,000 1,223,000 825,000 220,000 50,000 128,000
WriteoffofAR (40,000) (40,000) (40,000)
Balance 1,190,000 1,183,000 825,000 220,000 50,000 88,000
U n l o ca t e ddi ff e r e n ce * (7 , 0 0 0 )
AdjustedGrossAR 1,183,000
Required Allowance for
BDin
% 2% 10% 30% 40%
RequiredAllowanceforBDinAmounts 88,700 16,500 22,000 15,000 35,200

1. Ans. C.
*Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail. The adjusting entry shall be:
S ales 7,000
Accountsreceivable 7,000

2. Ans. B.
RequiredallowanceforBD,Dec.31 88,700

Less: Allowance for BD, per

unadjusted balance (106,000)
Add:Additional write-off audit 40,000
Additionalbaddebtexpenseperaudit 22,700
Bad debt expense per books (P12.8M*2%) 256,000
To t a l ba d de bt e x pe n s e p e r a u di t 278,700

3. Ans. C.
GrossAccountsReceivable 1,183,000
Less:AllowanceforBD (88,700)
A m o r t i z e d c o s t / Ne t r e a l i z a b l e v a l u e 1,094,300

CHAPTER 3-EXERCISE 5: ROVERS INC. Dec. Nov. Oct. Sept. Aug.andpri

Customer Invoicedate Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 days
Gudang 9/12/14 1 39,200 139,200
Tisoy 12/12/14 153,600 153,600
12/2/14 99,200 99,200
Gusoy 11/17/14 185,120 185,120
10/8/14 176,000 176,000
Naning 12/8/14 160,000 160,000
10/25/14 44,800 44,800
8/20/14 40,000 40,000
Nanong 9/27/14 96,000 96,000
Balong 8/20/14 71,360 71,360
Peejong 12/6/14 112,000 112,000
11/29/14 169,440 169,440
Total 1,446,720 524,800 354,560 220,800 235,200 111,360

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Reconciliation between GL and SL with Aging of AR analysis

PerGL PerSL 0-30days 31-60days 61-90days 91-120days >120days
Unadjustedbalances 1,466,720 1,446,720 524,800 354,560 220,800 235,200 111,360
(a)Write-off of AR-Balong (71,360) (71,360) (71,360)
(b)
Postingerror - - (99,200) 99,200
Adjustedbalances 1,395,360 1,375,360 425,600 453,760 220,800 235,200 40,000
Unreconcileddifference (20,000)
Adjustedbalance 1,375,360
Required allowance
for
BD
%
in 2% 5% 10% 20% 50%
Required allowanc for BD in amount 120,320 8,512 22,688 22,080 47,040 20,000

1. Ans. D.
AllowanceforBD,ending 120,320
Less: Allowance for BD, unadjusted (46,720)
Add:WriteoffofAR-Balong 71,360
Ba dDe btE x pe n s e 1 44 , 9 6 0

2. Ans. C.

3. Ans. C.
Write-offofAR-Balong (71,360)
Unlocated difference (debited to S ales) (20,000)
T o t a l a d j u s t m e n t s t o A R- G L (9 1 , 3 6 0 )

4. Ans. A.
Gross Accounts Receivable 1,375,360
AllowanceforBadDebts (120,320)
A m or t ized c o st / Ca r r y in g v a lu e 1 ,2 5 5 ,0 4 0

5. Ans. B.
AJE to record unreconciled difference:
Sales 20,000
Accounts
receivable 20,000

CHAPTER 3-EXERCISE 6: NATASHA INC.

Reconciliation between GL and SL with Aging of AR analysis
PerGL PerSL 0-1Month 1-3Months 3-6Months >6Months
Unadjustedbalances 788,000 792,960 372,960 307,280 88,720 24,000
(b) Additional write-off (GL only) (800)
(c) Additional write-off per aging sched. (4,000) (4,000) (4,000)
(d)ARwithcreditbalances 10,000 10,000 8,000 2,000
793,200 798,960 380,960 309,280 88,720 20,000
Unreconcileddifference 5,760 8,000 12,000

A dj u% sin
t e d b a l a n c e s (3 . A n s . C . ) 7 98 , 9 6 0
AllowanceBD
for 1% 2% 3% 50% 20%
A l l o w a n c e f o r BD i n A m o u n t ( 4 . A n s . A . ) 19,057 3,810 6,186 2,662 4,000.00 2,400.00

Adjusting entries:
(a) Baddebtexpense 1,296
Allowance for
bad
debt 1,296
To adjust the entry made upon recovery of previously written-off account, credited by the client to Bad Debt Expense account.

(b) Allowanceforbaddebt 800

Accounts
receivable 800
To record additional accounts written-off per SL.

(c) Allowanceforbaddebt 4,000

Accounts
receivable 4,000
To record additional accounts written-off per the aging schedule.

(d) Accountsreceivable 8,000

Advancesfromcustomers 8,000
To reclassify the credit balances in customer accounts at (0-1 mo.) P8,000 and (1-3 mo.) P2,000.

(e) Allowanceforbaddebts 10,297

Bad
debt
expense 10,297
AllowanceforBD,ending 19,057
Less: Allowance for BD, beginning (15,250)
Recovery of previous write-off (1,296)
Add: Write off of accounts receivable 6,832
Additional write-off per audit 4,000
Ba d D e b t E x p e n s e p e r a u d i t 13,341.
3 Ans. C.
BadDebtExpenseperbooks 23,640
Overstatement in Bad Debt Expense (10,297)

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(f) Accounts receivable 5,760 2. Ans. B.

S a les 5,760
To adjust the unlocated difference (SL should prevail over GL).

5. Ans. D.
GrossAccounts Receivable 798,960
AllowanceforBD (19,057)
A m o r t i ze d c o s t / C a r r y i n g v a l u e 7 79 , 9 0 3

CHAPTER 3-EXERCISE 7: SAYOTE INC.

Reconciliation between GL and SL with Aging of AR analysis
PerGL PerSL Under1mo. 1-6mo. Over6mo. Creditbal.
Unadjustedbalances 1,270,000 1,260,000 540,000 552,000 228,000 (60,000)
Credit balance - Kamote (Advances) 12,000 12,000 12,000
Credit balance - Kutchay (Posting error - - (21,000) 21,000
Credit balance - Kalachuchi (Advances) 27,000 27,000 27,000
Write-offofaccounts (72,000) (72,000) (72,000)
1,237,000 1,227,000 540,000 531,000 156,000 -
Unlocateddifference (10,000) 36,000 120,000
A d j u s t e d b a l a n c e ( 2 . A n s . B) 1 ,2 2 7 , 0 0 0
Allowance%
BD
for 1% 2% 50% 10%
A l l o w a n c e f o r BD i n A m o u n t ( 3 . A n s A ) 46,020 5,400 10,620 18,000 12,000

1. Ans. A.
Sales 10,000
Accounts
receivable 10,000
To record the unlocated difference (SL should prevail over GL)

4. Ans. D.
AllowanceforBD,ending 46,020
Less: Allowance for BD, beg. (30,000)
Add:WriteoffofAR 24,000
Additional write-off per audit 72,000
Ba d d e b t e x p e n s e p e r a u d i t 1 12 , 0 2 0
Baddebtexpenseperbooks 72,000
Additional bad debt expense per audit 40,020
AJE:
Baddebtexpense 40,020
Allowanceforbaddebt 40,020

5. Ans. C.
Accounts receivable, Gross 1,227,000
Allowanceforbaddebts (46,020)

Amortized cost/Carrying vallue 1,180,980

CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY

1. Ans. C.
P30,000*20% = P6,000 - Income is overstated by the gross profit on the sales.
2. Ans. A.
The credit memo should be recorded as of December 31, 2014.
3. Ans. B.
Actual number of units sold to Mr Lazo was 320 (P48,000/P150)
4. Ans. D.
(320*P100) – P48,000 = P16,000.
5. Ans. A.
Receivable from Mr. Sia is correctly stated because the goods are considered sold in 2014
16. Ans. D.

CHAPTER 3-EXERCISE 9: MILK CORP. Dec. Nov. Oct. Sept. Aug.andpri

Customer Invoicedate InvoiceAmount 1-30 days 31-60 days 61-90 days 91-120 days more than 1
Zulu
Inc. 12/6/14 42,000 42,000
11/29/14 63,540 63,540
Yankee Co. 9/27/14 36,000 36,000
8/20/14 26,760 26,760
XylonInc. 12/30/14 20,000 20,000
12/8/14 40,000 40,000
10/25/14 31,800 31,800
WhiskeyCo. 11/17/14 69,420 69,420
10/9/14 66,000 66,000
VictoryCorp. 12/12/14 57,600 57,600
8/20/14 37,200 37,200
UniformInc. 9/12/14 52,200 52,200
542,520 159,600 132,960 97,800 88,200 63,960

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Reconciliation of GL and SL with Aging of AR analysis

PerGL PerSL 1-30days 31-60days 61-90days 91-120days morethan1
Unadjustedbalances 550,000 542,520 159,600 132,960 97,800 88,200 63,960
Yankee&Victory:Postingerror 26,760 (26,760)
Xylon:FOBDestination (20,000) (20,000) (20,000)
Uniform:Write-off (52,200) (52,200) (52,200)
Adjustedbalances 477,800 470,320 166,360 132,960 97,800 36,000 37,200
Unreconcileddifference (7,480)
Adjustedbalance 470,320
Allowance
%in
BD
for 1% 2% 5% 10% 50%
A l l o w a n c e f o r BD i n A m o u n t s ( 1 . A n s . A . ) 31,413 1,664 2,659 4,890 3,600 18,600

2. Ans. D.
GrossAccountsReceivable 470,320
AllowanceforBD (31,413)
A m o r t i z e d co s t / Ca r r y i n g v a l u e 4 38 , 9 0 7

3. Ans. A.
AllowanceforBD,end 31,413
Add:Write
off 52,200
Debit unadjusted balance 16,500
Bad debt expense 100,113

4. Ans. B.
Sales 7,480
Accounts
receiavable 7,480
To adjust the unreconciled difference. (SL should prevail over GL)

CHAPTER 3-EXERCISE 10: BROCOLI CORP.

Adjusting entries
a. Accounts payable 67,500
Cash
METREBANK
- 67,500

b. A ccounts receivable (current) 189,000

CashMETREBANK
- 189,000

c. Cash-METREBANK 107,550
Accounts
payable 107,550

d. Cash-METREBANK 115,650
Accounts
payable 115,650

Ee. Cash-METREBANK
xpense 258,000
42,000
Loans
payable 300,000

f. A ccounts receivable (current) 57,900

Cash
BADO
– 57,900

g.Cash–BADO 3,207,900
Overdraft(Liability) 3,207,900

h. Advancestosupplier 60,000
P urchases 60,000

i. Sales 4,500,000
Accountsreceivable 4,500,000
(no adjustment to subsidiary- aging)

j. Sales return 225,000

Accountsreceivable 225,000
(no adjustment to subsidiary – aging)

k. Baddebtexpense 880,763
Allowanceforbaddebts 880,763
Gen Ledger Subs. Ledger Current Past due
63,219,000 65,045,790 35,550,000 29,495,790
Customerpost-datedcheck(AJEb) 189,000 189,000 189,000
Customerpost-datedcheck(AJEf) 57,900 57,900 57,900
Collections Received on Dec. 31, 2014 (adj to SL only) (2,626,290) (1,000,000) (1,626,290)
ConsignedgoodstoNITZ(adjtoSLonly) (3,925,500) (3,925,500)
Undelivered sales (adj to GL only/ AJE i) (4,500,000)
Unrecorded sales returns (adj to GL only/AJE j) (225,000)
A d j u s t e dBa l a n c e s 58,740,900 58,740,900 30,871,400 27,869,500
3. Ans. D.

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Current 30,871,400
% 617,428 2
Past
Due 27,869,500
% 1,950,865 7
Re qu i r e dA l l o wa n cee , nd 2 , 5 6 8 , 2 93
Add:
Write-offs 521,565
Less:Allowance, beg (1,773,195)
Interimprovision/Baddebtperbooks (435,900)
A d di t i o n a lba dd e bte x pe n s e 880,763

l.Inventory 6,920,400
Cost
of
sales 6,920,400
(3,925,500+4,500,000+225,000)*80%

1. Ans. D.
Cash,Unadjustedbalance (90,000)
(a) (67,500)
(b) (189,000)
(c) 107,550
(d) 115,650
(e) 258,000
(f) (57,900)
(g) 3,207,900
Ca s h , a d j u s t e d b a l a n c e 3 ,2 8 4 , 7 0 0

2. Ans. C.
Cash in bank, BADO (3,150,000)
(f) (57,900)
Cash in ba nk, BADO (tota l overdr af (3,207,900)

4. Ans. C.
Bad debtexpenseper books 435,900
Additional bad debt expense per audit' 880,763
Ba d d e b t e x p e n s e p e r a u d i t 1 ,3 1 6 , 6 6 3

5. Ans. C.
Gross Accounts Receivable 58,740,900
Allowanceforbaddebt (2,568,293)
Amor ti ze d co st /Carryin g va lu e 56,172,6 07

6. Ans. D.
Inventory, unadjusted balance 55,558,140
(l) 6,920,400
In ve n t o r y, a dj u s t e d b a l a n ce 6 2 ,4 7 8 , 5 4 0

CHAPTER 3-EXERCISE 11: MYBAGS INC.

NR - total Recievable-Curr Interest Inco Interest Rec.
(a)
NR discounted as
a
sale - - - -
(b)
NR
30
days
- 900,000 900,000
(c)NR-90days(SubscriptionReceivable) 500,000
Int.Inc.(P500,000*16%*2/12) 13,333.33 13,333
(d) NR-dishonored (collection w/in 12 months is doubtf - - 16,000 -
(e)NR-90days(AdvancestoOfficer) 160,000
(f)
NR
120
- days 120,000 120,000
Int.
Inc.(P120,000*16%*108/360) 5,760 5,760
To t a l 1,020,000 1,680,000 35,093 19,093
1 . A n s . C. 2. A n s . C . 3 . A n s . D. 4. Ans . A.

CHAPTER 3-EXERCISE 12: YZA INC.

1. Ans. A.
Proceeds from the loan (FMV = Present Value of future cash flows at 8% effective rate for 3 periods)
Principal (1,000,000*0.793832) 793,832 0.793832
Interest (60,000*2.577097) 154,626 2.577097
948,458

Principalamount 1,000,000
A dd : O r i g i n a t i o n c o s t ( S q u e e z e ) 28,458
Less:Originationfee (80,000)
Netproceeds/Fairvalue 948,458

Amortization table: Loans receivable

Correct Int. Nominal Int. Amortization Balance
Janaury
2014:
1, 948,458
December31,2014: 75,877 60,000 15,877 964,335
December31,2015: 77,147 60,000 17,147 981,481
December31,2015: 78,519 60,000 18,519 1,000,000

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2. Ans. C.
Carrying value/Amortized cost (12/31/15) 981,481
Accruedinterest(asof12/31/15) 60,000
Totalreceivablesasof12/31/15 1,041,481
Present value of new cash flows at srcinal eff. % (8%)
Due 12/2016: P300,000*0.925926 277,778 0.925926
Due 12 /2018: P3 00,000*0.793832 238,150 515,927 0.793832
Im pa i r m e nlto s s 525,554

3. Ans. C.

CHAPTER 3-EXERCISE 13: ISIAH COMPANY

Principalamount 4,000,000
Add:Originationcost 248,000
Less:Originationfees (374,000)
Initial amount/Fair value/Proceeds 3,874,000

1. Ans. B.
Amortization table: Loans receivable
Correct Int. Nominal Int. Amortization Balance
December
31,
2013: 3,874,000
December31,2014: 358,345 320,000 38,345 3,912,345
December31,2015: 361,892 320,000 41,892 3,954,237
December31,2016: 365,763 320,000 45,763 4,000,000

2. Ans. D.
Amortizedcost/Carryingv alue( 12/31/15) 3,954,237
Accruedinterest(12/31/15): 320,000
Totalreceivablesasof12/31/15 4,274,237
Less: Present value of new future cash flows at 9.25%
Due 12/31/2017: (1.4M*0.837832) 1,172,965 0.915332
Due 12/31/2018: (P1M*0.766895) 766,895 0.837832
Due 12/31/2019 (P600K*0.701963) 421,178 0.766895
Due 12/31/2020: (P400K*0.642529) 257,012 2,618,049 0.701963
Im pa i r m e nlto s s 1,656,188 0.642529

3. Ans. B.; 4. Ans. C.

Amortization table: Loans receivable after impairment loss
Correct Int. Nominal Int. Amortization Principal Coll. Balance
December31,
2015: 2,618,049
December31,2016: 242,170 - 242,170 - 2,860,219
December 31, 2017: 264,570 - 264,570 1,400,000 1,724,789
December31,2018: 159,543 - 159,543 1,000,000 884,332

December
December31,
31,2019:
81,801 -- 81,801 600,000 366,133
2020: 33,867 33,867 400,000 (0)

CHAPTER 3-EXERCISE 14: VISAGE CORP.

1. Ans. A.
Net cash proceeds from factoring (P350,000-P10,000) 340,000
Factors holdback 50,000
Total/NetsalespriceofARfactored 390,000
Less: Carrying value of AR (P500,000-P20,000) (480,000)
Lo s sf r o mf a ct o r i n g (9 0 , 0 00 )

2. Ans. D.
Assignment is only a loan transaction, thus there is no transfer of receivable.

3. Ans. A.
Accountsreceivable-assigned 800,000
May collection with sales discount (P200,000+P5,000) (205,000)
June collection with sales discount (P150,000+P4,000) (154,000)
Sales
returns (30,000)
Accountswritten-offasworthless (20,000)
A cco u n t s r e ce i v a bl e - a s s i gn e d - J u n e 3 0 391,000

4. Ans. B.
Payment Interest Principal Balance
(Bal*24%*1/12 (Payment-Int)
Loans
payable
balance,
May1 500,000
May31remittance 200,000 10,000 190,000 310,000
June31remittance 150,000 6,200 143,800 166,200

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5. Ans. B.
Proceedsfromdiscounting** 625,400
Less:CarryingvalueofNotes (600,000)
Interest receivable up to Oct. 31 (P600K*12%*4/1 (24,000)
Ga i n
onDi s co u n t i n g 1,400
** Proceeds from discounting
Maturity value
Principalamount 600,000
Interest (P600,000*12%*6/12) 36,000 636,000
Discount(P636,000*10%*2/12) (10,600)
Proceedsfromdiscounting 625,400

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CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES

DISCUSSION PROBLEMS
CHAPTER 4-PROBLEM 1
1 B.
2 D.
3 D.
4 C.
5 B.
6
7
1 A
2 D
3 C
4 B

5 A
6 B
7 D
8 D
9 B
10 B
11 D
12 A
13 C

CHAPTER 4-PROBLEM 2: NOKIA CORP.

Inventory Acc. Payable Net Sales Net Purch. Net Income
Unadjustedbalances 1,200,000 790,000 6,050,000 3,300,000 610,000
(c) Purchintransit-FOB,Dest. (120,000) (120,000) 120,000
(d) Unrecordedp urch.r eturns/allowance (70,000) (70,000) (70,000) -
(e) "BillandHold"Sales (224,000) (224,000)
(f) Goodsoutonconsignment 70,000 (100,000) (30,000)
(g) Salesintransit-FOB,SP (105,000) (105,000)
(h) Goods segregated but not yet sold 98,000 98,000
(i) Purchintransit-FOB,SP 170,000 170,000 (170,000)
(j) Purchintransit-FOB,SP 200,000 200,000
1 ,16 9,0 00 5 ,7
9750 ,0 0 0 3 ,28 0,0 00 499,000
1 .A n s . 2 . A ns . 3 . A ns . 4 . A n s. 5 . A ns .

CHAPTER 4-PROBLEM 3: INGGO CORP.

Inventory Acc.Payable Sales Net Income
Unadustedbalances 3,750,000 3,075,000 27,000,000
(a) Goods held on consignment, recorded as purchases (465,000) (465,000) -
(b) Credit balance - FoxInc.(Advancesto supplier) 25,000
Saleonapproval-notyetvalidsale 66,000 (84,000) (18,000)
(c) Sales in transit - FOB Seller (FOB, SP) - no adjustment
(d) Goods out on consignment, recorded as sales 630,000 (750,000) (120,000)
(e) Purchase in transit, FOB Seller (FOB, SP) 75,000 75,000 -
(f) Unrecordedfreightcost 3,000 6,000 (3,000)
(g) Purchase discount - Beta Corp. (P795,000*2%) (15,900) (15,900) -
(h) Inventory financing - Loan to Hote Inc. (not purch) (100,000) (100,000) -
3,943,100
,6 0 0,10 0 2 2 6,1 66 ,00 0 (141,000)
1 . A ns . 2 . A n s. 3 . A n s. 4 . A ns .

CHAPTER 4-PROBLEM 4: TOUR COMPANY

Purchases Inventories
Unadjustedbalances 2,543,900 354,500
RR
#11204 (7,800)
RR
#11210 4,000 4,000
RR
#11211 9,700
RR
#11212 12,840
RR
#11214 25,640 25,640
RR
#11215 28,400 28,400
Total/Net Adjustment 72,780 58,040
Adjustedbalances 2,616,680 412,540
2. Ans.

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1. Adjusting journal entries:

Purchases 72,780
Accounts
payable 72,780

Inventory 58,040
Income
summary 58,040

3. Ans. P2,439,140
Inventory,Nov.1,2013 235,000
Net Purchases, as adjusted 2,616,680
Cost of goods avaialble for sale 2,851,680
Inventory, Oct. 31, 2014, as adjusted (412,540)
C o sto fS a l e s 2 ,43 9,1 40

CHAPTER 4-PROBLEM 5: ABC CORP.

1. Ans. P156,000.
MerchandiseInventory,Jan.1 120,000
Purchaes(Jan.1 to Oct.31) 830,000
Transportation-in 20,000
Purchase returns and allowances (10,000) 840,000
Actual cost ofgoodsavailable forsale 960,000
Less:Estimatedcostofsale* (756,000)
Estimatedinventory,October31 204,000
Inventorynotdamagedbyfire 48,000
I nv e n t o ryl o ssdu et of ire 156 ,00 0

*Estimated cost of sale

Gross
Sales 1,096,000
Sales
returns (40,000)
Employeediscount 24,000 1,080,000
Multiplybycost%(100%-30%) 70%
Estimatedcostofsale 756,000

2. Ans. P48,000.
MerchandiseInventory,Jan.1 120,000
Purchaes(Jan.1 to Oct.31) 830,000
Transportation-in 20,000
Purchase returns and allowances (10,000) 840,000
Actual cost ofgoodsavailable forsale 960,000

Less:Estimatedcostofsale* (864,000)
Estimatedinventory,October31 96,000
Inventorynotdamagedbyfire 48,000
I nv e n t o ryl o ssdu et of ire 48 ,00 0

*Estimated cost of sale

GrossSales 1,096,000
Sales
returns (40,000)
Employeediscount 24,000 1,080,000
DividebySellingPrice%(100%+25%) 125%
Estimatedcostofsale 864,000

CHAPTER 4-PROBLEM 6: KAGOME COMPANY

1. Ans. P2,225,000.
CollectiononAR 1,825,000
Add:AR,December31, 270,000
Salesreturns 25,000
Salesdiscounts 30,000
Accountswritten-off 20,000
Less:AR,January1 (295,000)
GrossSalesonaccount 1,875,000
GrossCashSales 350,000
G r o ssS a l e s 2 ,22 5,0 00

2. Ans. P1,850,000.
Gross Sales 2,225,000
Less:Salesreturns (25,000)
S a l e s f o r i n v e nt o r y e s t i m a t io n 2 ,20 0,0 00

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3. Ans. P400,000.
Inventory,December31,2013 320,000
Purchases 1,410,000
Unrcordedpurchases 10,000
Advances to suppliers recorded as purch. (20,000) 1,400,000
Costofgoodsavailableforsale 1,720,000
Less: Estimated cost of sales (P2.2M*60%) (1,320,000)
E st i m a t e d I nv e nt o r y , D e c e m b e r 3 1 , 2 0 1 4 400 ,00 0

4. Ans. P80,000.
Estimated Inventory per audit 400,000
Inventoryperbooks 320,000
I nv e n t o rysh o rt a ge 80, 000

CHAPTER 4-PROBLEM 7: JIM CORPORATION

11 Mo. Purch 12 Mo. Purch
Unadjustedbalances 675,000 800,000
a) May purchases recorded only in June 7,500
b) Unrecorded purch. returns/allow. (1,000) (1,500)
c)Advancestosuppliers (2,000) (2,000)
d) May purch in transit, FOB Dest. (5,500)
Adjustedbalances 674,000 796,500

Inventory,July1,2013 87,500
Purchases,11monthsasadjusted 674,000
Cost of goods available for sale, 11 months 761,500
Inventory,May31,2014 95,000
d) May purch in transit, FOB Dest. (5,500) 89,500
Costofsales,11months 672,000

1. Ans. 20%.
Sales,11months 840,000 100%
Costofsales,11months 672,000 80%
Grossprofit,11months 168,000 20%

2. Ans. P98,000.
Sales,12months 960,000
Sales,11months (840,000)
SalesforthemonthofJune 120,000

e)SalesinJuneat0%GP (10,000)
SalesforJuneat20%GP 110,000
Multiply byCost% 80%
Cost of sales (Sales at 20%GP) 88,000
Add: Cost of sales (Sales at 0%GP) 10,000
T o t a l C o s t o f S a le s f o r J une 98, 000

3. Ans. P114,000.
Inventory,July1,2013 87,500
Purchases, 12months 796,500
Cost of goods available for sale, 12 months 884,000
Less: Cost o f sales, 12 months (P672,000+P98,000) (770,000)
E st i m a t e d I nv e nt o r y , J u ne 3 0 , 2 0 1 4 114 ,00 0

CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION

1. Ans. P50,750.
Purchases,Jan.1-March31 42,000
Payments to suppliers, Apr. 1 - 15
Cash purchases 2,000
Purchases on account (P8,500-P1,300) 7,200
Purchase returns (450) 8,750
P u rc ha se s,J a n .1t oA prl1 5 50 ,75 0

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2. Ans. P105,000.
Sales, Jan1
March
- 31 90,400
Collections from customers, Apr. 1 - 15 10,200
Add:AR, April15 26,400
Write-off of receivables 5,000
Less:AR,March31 (27,000) 14,600
S a l e s,J a n .1-A pr.1 5 105 ,00 0

3. Ans. 45%
TotalSales2012and2013 700,000 100%
Cost ofsales2012and 2013 385,000 55%
Gross profit 2012 and 2013 315,000 45%

4. Ans. P43,000.
Inventory,Dec.31,2013 50,000
Purchases,Jan.1-Apr.15 50,750
Cost of goods available for sale 100,750
Estimated cost of sales (105K*55%) 57,750
E s t i m a t e d I n v e n t o r y , A pr . 1 5 43, 000

5. Ans. P39,650.
Estimated Inventory,Apr.15 43,000
NRVofremaininginventory (3,350)
I nv e n t o ryL o ss 39, 650

CHAPTER 4-PROBLEM 9: DIOSAH INC.

Cost Retail
Inventory, October 1, 2013 372,000 620,000
Purchases 2,910,000 4 ,452,000
Transportationin 55,000
Purchasereturn (27,000) (45,000)
Purchase
allowance (18,500)
Purchasediscounts (15,960)
Departmental transfer out (135,500) (175,000)
Departmental transfer in 125,500 165,000
NetMarkup(P290,000-40,000) 250,000
3,265,540 5,267,000 62 % Co nservat iv e
Net Mark down (P283,000-P40,000) (243,000)
Cost of goods available for sale 3,265,540 5,024,000 6 5% Av er age

Less: Inventory, October 1, 2013 (372,000) (620,000)

COGAS-Inventory,Beg 2,893,540 4,404,000 66 % FI FO Reta il

Cost of goods available for sale at retail 5,024,000

Less: COGAS at retail/Sales
Gross
sales 4,872,000
Salesreturns (355,000)
Normalbreakages 50,500
Discountstoemployees 75,500 (4,643,000)
Inventory,Endatretailprice 381,000

1. Ans. P236,220.
Inventory, End at retail price 381,000
Conservative Cost % 62%
I nv e n t o ry ,E n da tc o st 2 36, 220

2. Ans. P247,645.
Inventory, End at retail price 381,000
Average Cost % 65%
I nv e n t o ry ,E n da tc o st 2 47, 645

2. Ans. P251,460.
Inventory, End at retail price 381,000
FIFO Retail Cost % 66%
I nv e n t o ry ,E n da tc o st 2 51, 460

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CHAPTER 4-PROBLEM 10: GLORIA CORPORATION

1. Ans. P540,000; P527,000; P430,000.
Finishedgoods Item
M ItemP Item
Q
Cost 550,000 540,000 430,000 1,520,000
NRV: Est. Selling Price - Cost to Sell 540,000 527,000 697,000
Required allowance for write-down 10,000 13,000 - (23,000)
Lower
Cost
ofNRV
or 1,497,000

2. Ans. P240,000; P148,000; P320,000.

Work-in-process Item
M Item
P Item
Q
Cost 240,000 188,000 320,000 748,000
NRV: Est. Selling Price - Cost to Sell - Cost to Compl. 240,000 148,000 550,750
Requiredallowanceforwrite-down - 40,000 - (40,000)
Lower
NRV
Cost
or
of 708,000

3. Ans. P1,105,000.
Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.
A B C
Cost 250,000 500,000 400,000 1,150,000
Current purchase price 250,000 480,000 375,000
Required allowance for write-down - 20,000 25,000 (45,000)
1,105,000

4. Ans. P855,000.
Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.
X Y Z
Cost 400,000 300,000 200,000 900,000
Current purchase price 450,000 275,000 180,000
Required allowance for write-down - 25,000 20,000 (45,000)
855,000

5. Ans. P825,000.
Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down.
D E
Cost 375,000 450,000 825,000

6. Ans. P103,000.
Allowance forWD-FG,ending 23,000
Less: Allowance for WD-FG, beg. (10,000)
Lossonwrite-down
FG
- 13,000

Allowance for WD-WIP,ending 40,000

Less: Allowance forWD-WIP,beg. -
Lossonwrite-down-WIP 40,000

Allowance forWD-RM,ending 90,000

Less: Allowance for WD-RM, beg. (40,000)
Lossonwrite-down-RM 50,000
T o t a l lo s s o n i nv e n t o r y w r it e - d o w n 103 ,00 0

MULTIPLE CHOICE EXERCISES:

CHAPTER 4-EXERCISE 1:
1. Ans. A.
Cost of goods out on consignment at another company’s store 2,400,000
Goods in transit purchased FOB shipping point 360,000
Cost of goods sold with repurchase agreement/Inventory financing 900,000
Freightchargesongoodspurchased 240,000
Factory labor costs incurred on goods still unsold 150,000
Materials on hand not yet placed into production 1,050,000
Raw materials on which the company has started production 840,000
Factory
supplies 60,000
Costs identified with units completed but not yet sold 780,000
Cost of goods in transit sold FOB destination 120,000
T o tain
l v e nt o rie s 6, 900 ,0 00

CHAPTER 4-EXERCISE 2: SILANG CORP.

Cash Acc. Rec. Merch. Invty Acc. Payable Accrued Exp. Cost of Sales
Unadjustedbalances 963,200 2,254,000 6,050,000 4,201,000 60,400
(a) (654,600) 310,000

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(b) 360,000 372,400

(c-1) 275,000 (275,000)
(c-2) 217,500 217,500 -
(c-3) (637,500) 637,500
(c-4) 130,000 (130,000)
(c-5) (175,000) (175,000)
Adu st e dba la nc e s 6 68, 600 2,564,000
6, 035 ,0 00 4 ,61 5,9 00 60,400 57,500
1 .A n s.D . 2 .An s.C . 3 .A ns.C . 5 .A ns .C . 4 .An s.A .

6. Ans. B.
Current Assets
C ash 668,600
Accountsreceivables 2,564,000
Merchandiseinventory 6,035,000 9,267,600
Current Liabilities
Accountspayable 4,615,900
Accruedexpense 60,400 4,676,300
W o r ki ng
C a pit aR
l atio 1.9 8

CHAPTER 4-EXERCISE 3: IVY INC.

I nv e nt o r y AR Sale s AP P ur c ha s e s N e tI nc o m e
a.Goods out on consignment 100,000 (140,000) (140,000) (40,000)
b.Purchintransit(FOBSP) 33,000 33,000 33,000 -
c.Salesintransit (FOBSP) (40,000) (40,000)
d.Salesintransit (FOBDest) 16,000 16,000
e.
Purch
in
transit
(FOBDest) (22,000) (22,000) 22,000
f.Goods held on consignemnt (50,000) (50,000)
g.Salesintransit(FOBDest) (112,000) (112,000) (112,000)
Net adjustments: 59,000 (252,000) (252,000) 11,000 11,000 (204,000)
1 .A ns.A . 2 .A ns .B. 3 .A ns .C . 4 .A ns .D .

CHAPTER 4-EXERCISE 4: LONE STAR CORP.

Sales Purchases Inventory Accts Rec. Acc.Payable
2,815,000 1,500,000 300,000 250,000 200,000
1024
SI (23,000) (23,000)
1025
SI (34,000) (34,000)
1026
SI (8,000) (8,000)
1115
RR 9,000 9,000
1118
RR 32,000
1023
SI (50,000) 40,000 (50,000)

1021
SI (75,000) 60,000 (75,000)
1119
RR 400,000 400,000 401,000
Adj sut e dba la n c e 2 ,62 5,0 00 1,9 09, 000 832,000 60,000 610,000
1 . A ns. A . 2 . A ns . B . 3 . A n s. A . 4 . A n s. D . 5 . A ns . A .

CHAPTER 4-EXERCISE 5: SOFIA INC.

Invty, e nd Purchases Cost o f S ales Net Income
Unadjustedbalance 200,000 3,200,000 3,160,000
Beginning of the year:
a.D ec.purchasesrecordedinJan. (50,000) (50,000) 50,000
b.Dec.purchasesnotincludedinInvty 26,400 (26,400)
End of the year:
Unrecorded
a. Dec.
sale 86,000
b.Dec.purchasesrecordedinJan. 30,000 30,000 (30,000)
c. Dec. purchases not included in Invty 36,000 (36,000) 36,000
d.Dec.purchases 24,000 24,000 - -
Adj ust e dba la n c e s 2 60, 000 3,204,000
, 130 ,4 00 3 1 15, 600
1 . A ns . C . 2 . A ns. D . 3 . A n s. B . 4 . A n s. D .

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CHAPTER 4-EXERCISE 6: BIRD COMPANY

Inventory Accts Payable Net Sales
Unadjusted balances 1,870,000 1,415,000 9,693,400
Adjustments:A (78,500)
B 93,000 93,000
C 27,000
D 49,000 (67,800)
E 17,000
F 31,200
G 36,000
H 8,000 16,000
Adj ust e dba la n c e s 2 ,09 5,2 00 1,5 60, 000 9,547,100
1 . A ns. A . 2 . A ns . B . 3 . A ns . D .

CHAPTER 4-EXERCISE 7:
Accts Receiv Inventories Sales Cost of Sales Gross profit
276,500 425,000 1,320,000 842,000 478,000
December recorded sales:
In-tansitFOB,Dest. (8,680) 7,240 (8,680) (7,240) (1,440)
Sipmenttoconsignee (14,200) 12,500 (14,200) (12,500) (1,700)
In-tansitFOB,Dest. (10,000) (10,000) (10,000)
In-transit
FOB,
SP (6,100) 6,100 (6,100)
Sipmenttoconsignee (14,000) (14,000) (14,000)
January recorded sales:
In-transitFOB,SP 21,000 (18,200) 21,000 18,200 2,800
Adj ust e dba la n c e 2 50, 620 ,420,440
294 ,1 20 1 8 46, 560 447,560
1 . A ns B . 2 . A ns . B . 3 . A n s. A . 4 . A ns . C . 5 . A ns. D .

CHAPTER 4-EXERCISE 8: KAMPT COMPANY

Sales Inventories
December 2014 recorded sales
1) (2,000)
3) (2,000)
4) (6,900)
5) (600)
7) (4,000)
8) (10,000)
January 2015 recorded sales

9) 6,000 (4,000)
12) 8,000 (5,500)
N e tAdj ust m e nt (8 ,9 0 0 ) (12,100)
1 . A ns. A . 2 . A ns . A .

CHAPTER 4-EXERCISE 9: MALAGUKU CO.

Purchases Inventories
Unadjustedbalances 1,750,000 175,000
631
No.
RR 2,000
RR
No.
632 (4,000)
633
No.
RR 9,000
634
No.
RR 8,000
RR No. 635
RR
No.
636 (6,000)
RR
No.
638 7,200
RR
No.
641 4,100
Adj ust e dba la n c e s 1 ,75 1,3 00 194 ,00 0
1 . A ns. A . 2 . A ns . C

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CHAPTER 4-EXERCISE 10: KULA INC.

Inventories Purchases
27,000 650,000
December 2014 entries
Invoice
No.
9176 310
Invoice
No.
0010 180
Invoice
No.
6609 690
Invoice
No.
6610 420
Invoice
No.
0481 (750)
Invoice
No.
3671 290
Invoice
No.
6098 (350)
January 2015, entries
Invoice
No.
7711 460 460
Invoice
No.
9001 770
Invoice
No.
4678 315 315
Invoice
No.
9981 595 595
Invoice No.
7263 610 610
Goodsheldonconsignment (750)
Deliveries made to customers after count date (1,900)
A dj su t e dba la n c e s 28, 220 651,650
1 . A ns . B . 2 . A n s. D .

CHAPTER 4-EXERCISE 11: FLORES COMPANY

1. Ans. D.
Per Count Per GL Per "Tab Run"
Unadjusted balances 342,400 384,900 403,300
1 (500)
2 (23,900)
3 (600)
4 (800) (800)
5 4,400
6 (7,500) (7,500)
7 (900)
8 2,100
9 (1,200) (1,200)
10 700
11 30,000
Adj sut e dba la n c e s 3 74, 300 374,300 374,300

2. Ans. D.

CHAPTER 4-EXERCISE 12: ALDER PAINTS

RMInventory, beg 15,000
Purchases 50,000
Freight-in 5,000 55,000
RMavailable for
use 70,000
Less:RMInventory,end (30,000)
uRsMed 4 0 , 0 0 0 2. Ans C.
Direct
labor 40,000
Factoryoverhead (45% ofDirect labor) 18,000
Totalmanufacturingcost 98,000
Add:
WIP,
beg 50,000
T o t a lgo o dspla c e din t opro c e ss 1 4 8 , 0 0 03. Ans. D.
le ss :WI P ,e nd( S que e z e ) 5 6 , 7 5 0 4. Ans. A.
C o s t o f g o o ds m a n u f a c t u r e d ( S q u e e z e ) 9 1 , 2 51.
0 Ans. D.
Add:Finishedgoods,beg. 70,000
Cost of goods available for sale 161,250
le ss :F i nis he dgo o ds,e nd ( 60, 000 )
Costofsales(estimated)** 101,250

** Sales 150,000
Multiply by Cost rate (100%-32.5%) 68%
Estimatedcostofsales 101,250

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CHAPTER 4-EXERCISE 13: NATURAL CORPORATION

Inventory, Jan.1 80,000
Purchases 400,000
Less:Purchasediscounts (40,000)
Purchase returns and allowance (30,000) 330,000
Costofgoodsavailableforsale 410,000
Estimated cost of sale
S ales 380,000
Less:Salesreturns (20,000)
Sales for GP method purposes 360,000
Divide by: Selling price % 120% 300,000
E st i m a t e de n di ngi nv e n t o ry 1 1 0 , 0 0 1.
0 Ans. C.
Less: Inventory not damaged by fire (in-transit) (40,000)
I nv e n t o rly
o ss 7 0 , 0 0 02. Ans. C.

CHAPTER 4-EXERCISE 14: BAGUIO CORP.

1. Ans. C.
2011 2012 2013 Total
Sales 5,008,000 5,640,000 5,440,000
GrossProfit 1,502,400 1,466,400 1,849,600
Grossprofit%basedonsales 30% 26% 34% 90%
years
3
Divide
by: 3
Av e ra ggero spsro fria
t te 30 %

2. Ans. A.
Collections from customers Jan. 1 to Sept. 1 6,030,400
Add:AR,Sept.1 1,031,120
Less:AR,Jan.
1 (1,044,720)
G r o sssa l e s( a c c r ua lba si s) 6,0 16, 800

3. Ans.
Payments to suppliers Jan. 1 to Sept. 1 3,900,000
Add:AP,
Sept.1 982,800
Less:AP,
Jan.1 (705,120)
G r o s s pu r c h a s e s ( a c c r u a l ba s i s ) 4,1 77, 680

4. Ans.
Inventory,
Jan.
1 1,150,800
Purchases 4,177,680

Costofgoodsavailableforsale 5,328,480
Less: Estimated cost of sales
S ales 6,016,800
Multiply by: Cost % (100%-30%) 70% (4,211,760)
E st i m a t e dI nv e nt o r y ,S e pt .1 1,1 16, 720

5. Ans. A.
EstimatedInventory,Sept.1 1,116,720
Goodsoutonconsignment 390,000
Goods in transit as of Sept.1 139,000 529,000
I nv e n t o rlyo ss 587 ,72 0

CHAPTER 4-EXERCISE 15: AB CORP.

1. Ans. B.
Sales for 10 months (Jan to Oct) (a) 4,590,000 100%
Cost of Sales 10 months (Jan to Oct) (b) (2,295,000) 50%
G r o sspr o fi t 2,2 95, 000 50%

(a)Sales10months,unadjusted 4,765,000
Less: Delivery in transit (FOB Dest.) (75,000)
AdjustedSales10months 4,690,000
Less: Sales returns and allowance (300,000)
Add: Employeediscounts 150,000
Normalbreakages 50,000
Sales 10 months, adjusted (for GP comp only) 4,590,000

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(b)
BegInventory 450,000
Net purchases(as adjusted:)(c) 2,485,000
Cost of Goods Available for sale (10 months) 2,935,000
Less: Inventory, end (550,00+90,000) (640,000)
CostofSales(10months) 2,295,000

(c)Purchases,unadjusted 2,450,000
Add: Purchase in transit FOB shipping point 90,000
Freight
in 60,000
Less:Purchasediscount (45,000)
Purchase returns and allowance (70,000)
Netpurchases(asadjusted) 2,485,000

2. Ans. A.
Sales (12 months), as adjusted (for GP Method)(d) 6,575,000
Sales (10 months), as adjusted (for GP Method) (4,590,000)
Gross Sales for 2 months (for GP Method) 1,985,000
Less: Sales in Dec. at 10% mark-up on cost (110,000)
Sales in Dec. at normal 50% mark-up 1,875,000
Multiply by normal Cost %, u nder normal GP% 50%
CostofsalesatnormalGPrate 937,500
Add: Cost of sales 10% markup on cost 100,000
T o t a l c o s t o f s a le s f o r 2 m o n t hs 1, 037 ,5 00

(d)Sales12months,unadjusted 6,750,000
Less: Sales returns and allowance (12 months) (375,000)
Add: Employee discounts (12 months) 150,000
Add: Normal breakages (12 months) 50,000
Sales 12 months, adjusted 6,575,000

3. Ans. D.
,
2,295,000
,
1,037,500
T o t a lC o sto fS a le s 3,3 32, 500

4. Ans. B.
Inventory,beginning 450,000
Add: Net Purchases (12 months)
Gross Purchases 3,410,000
Freight
in 90,000

Purchasediscount (70,000)
Purchase returns and allowance (100,000) 3,330,000
Cost of Goods Available for Sale (12 months) 3,780,000
Cost of Sales 12 months (see number 3 solution) (3,332,500)
E st i m a t e de n di ngi nv e n t o ry 44 7, 500

CHAPTER 4-EXERCISE 16: SURETY CORP.

Cost Retail Cost %
Beginning inventory 598,400 1,500,000
Purchases 3,048,400 5,500,000
Freight in 80,000
Purchase returns (140,000) (180,000)
Mark-ups 600,000
Mark-up cancellations (100,000)
Cost of goods available for sale - Conserv. 3,586,800 7,320,000 49%
Mark-downs (1,300,000)
Mark-down cancellations 385,000
Cost of goods available for sale - Average 3,586,800 6,405,000 56%
Less: Beginning inventory (598,400) (1,500,000)
Purchases - FIFO Retail 2,988,400 4,905,000 61%

Cost of goods available for sale at Retail 6,405,000

Less: Cost of sales at Retail/Sales
Sales 4,470,000
Sales returns (150,000)
Employee discount 400,000 (4,720,000)
EstimatedInventoryatRetail 1,685,000

1. Ans. B.

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Estimated Inventory at Retail 1,685,000

Multiply by Cost % - Conservative 49%
Estimated Inventoryat Cost 825,650
Less:Inventorypercount (649,600)
I nv e n t o rysh o rt a ge 1 76, 050

2. Ans. C.
Estimated Inventory at Retail 1,685,000
Multiply by Cost % - Conservative 56%
Estimated Inventoryat Cost 943,600
Less:Inventorypercount (649,600)
I nv e n t o rysh o rt a ge 2 94, 000

3. Ans. C.
Estimated Inventory at Retail 1,685,000
Multiply by Cost % - Conservative 61%
Estimated Inventory at Cost 1,027,850
Less:Inventorypercount (649,600)
I nv e n t o rysh o rt a ge 3 78, 250

CHAPTER 4-EXERCISE 17: TITANIUM CORP.

Cost Retail Cost %
Beginning inventory 1,020,000 1,920,000
Purchases 13,072,500 22,155,000
Freight in 300,000
Purchase returns (450,000) (750,000)
Purchase allowance (270,000)
Departmental transfer debit 300,000 425,000
Departmental transfer credit (600,000) (1,200,000)
Abnormal spoilages and breakages (120,000) (200,000)
Net markup 450,000
Cost of goods available for sale - Conserv. 13,252,500 22,800,000 58%
Net markdown (1,425,000)
Cost of goods available for sale - Average 13,252,500 21,375,000 62%
Less: Beginning inventory (1,020,000) (1,920,000)
Purchases - FIFO Retail 12,232,500 19,455,000 63%

Cost of goods available for sale at Retail 21,375,000

Less: Cost of sales at Retail/Sales

Sales 19,800,000
Sales returns (450,000)
Employee discount 300,000
Normal Spoilage 600,000 (20,250,000)
EstimatedInventoryatRetail 1,125,000

1. Ans. B.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 58%
Estimated Inventory at Cost 652,500
Less: Inventorypercount (400,000)
I nv e n t o rysh o rt a ge 2 52, 500

2. Ans. A.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 62%
Estimated Inventoryat Cost 697,500
Less:Inventorypercount (400,000)
I nv e n t o rysh o rt a ge 2 97, 500

3. Ans. C.
Estimated Inventory at Retail 1,125,000
Multiply by Cost % - Conservative 63%
Estimated Inventoryat Cost 708,750
Less:Inventorypercount (400,000)
I nv n t o rysh o rt a ge 3 08, 750

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CHAPTER 4-EXERCISE 18: NANCY INC.

1. Ans.A.
Item Quantity Unit Cost NRV Lower of Cost or NRV
Z-01 10,000 20 25 20 200,000
Z-02 15,000 25 22 22 330,000
Z-03 20,000 30 26 26 520,000
Z-04 25,000 32 35 32 800,000
Z-05 30,000 35 30 30 900,000
Y-01 20,000 22 23 22 440,000
Y-02 22,000 28 25 25 550,000
Y-03 28,000 25 30 25 700,000
Y-04 25,000 30 25 25 625,000
Y-05 30,000 15 25 15 450,000
5,515,000
2. Ans.
Total
Cost 5,981,000
LowerofCostorNRV 5,515,000
L o s s o n i nv e n t o ry w r it e - d o w n 4 66, 000

3. Ans. B.
Class Z: Quantity Unit Cost NRV TotalCost TotalNRV LCorNRV
Z-01 10,000 20 25 200,000 250,000
Z-02 15,000 25 22 375,000 330,000
Z-03 20,000 30 26 600,000 520,000
Z-04 25,000 32 35 800,000 875,000
Z-05 30,000 35 30 1,050,000 900,000
3,025,000 2,875,000 2,875,000
Class Y:
Y-01 20,000 22 23 440,000 460,000
Y-02 22,000 28 25 616,000 550,000
Y-03 28,000 25 30 700,000 840,000
Y-04 25,000 30 25 750,000 625,000
Y-05 30,000 15 25 450,000 750,000
2,956,000 3,225,000 2,956,000
5,831,000
2. Ans.
TotalCost 5,981,000
LowerofCostorNRV 5,831,000
L o s s o n i nv e n t o ry w r it e - d o w n 1 50, 000

CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION

Markers Pens Pencils
Historical cost 24,000 18,880 30,000
Selling price 36,000 21,800 38,000
Estimated cost to complete (3,000) (2,620) (6,200)
Estimated cost to sell (1,800) (2,180) (3,800)
Netrealizablevalue 31,200 17,000 28,000
LowerofcostorNRV 24,000 17,000 28,000 69,000

1. Ans. B.
Total
Cost 72,880
LowerofcostorNRV 69,000
Lo s so nw rit e- d o w n 3, 880

2. Ans. B.
Total
Cost 72,880
LowerofcostorNRV 69,000
Allowance forwrite-down,end 3,880
Allowance for write-down, beg. 2,000
Lo s so nw rit e- d o w n 1, 880

3. Ans. B.
Total
Cost 72,880
LowerofcostorNRV 69,000
Allowance forwrite-down,end 3,880
Allowance for write-down, beg. 5,000
Gaino nre c o v e ry (1 , 1 2 0 )

4. Ans. C.

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CHAPTER 4-EXERCISE 20:OCTOBER INC.

1. Ans. B.
Finishedgoods ItemA ItemB Item
C
Cost 500,000 1,200,000 800,000
NRV (Selling price - Cost to sell) 800,000 1,050,000 1,080,000
LowerofCostorNRV 500,000 1,050,000 800,000 2,350,000

2. Ans. B.
Work-in-process ItemA ItemB ItemC
DirectMaterials 30,000 45,000 75,000
Direct
Labor 50,000 65,000 35,000
Overhead 25,000 40,000 80,000
Total
Cost 105,000 150,000 190,000
Selling price upon completion 200,000 250,000 240,000
Costtocomplete (50,000) (60,000) (40,000)
Cost to sell (% of Sellin price) (40,000) (75,000) (24,000)
NRV 110,000 115,000 176,000
LowerofcostorNRV 105,000 115,000 176,000 396,000

3. Ans. B.
RM - Item A (FG not written-down, thus RM - Item A shall not be tested anymore.
RM A-01 RM A-02
Cost 120,000 95,000 215,000

RM
Item
- B RM
B-01 RM
B-02 RM
B-03
Cost 80,000 105,000 110,000
NRV(Replacementcost) 100,000 98,000 100,000
80,000 98,000 100,000 278,000

RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore.
RM C-01 RM C-02
Cost 175,000 40,000 215,000
T o taLlo w eorCfo sotN
r RV 7 08, 000

4. Ans. D.
FG WIP RM
Cost 2,500,000 445,000 725,000
LowerofCostorNRV 2,350,000 396,000 708,000

Lo s so nw rit e- d o w n 1 50, 000 49,000 17,000 216,000

5. Ans. B.
Cost 2,500,000 445,000 725,000
LowerofCostorNRV 2,350,000 396,000 708,000
AllowanceforWD,ending 150,000 49,000 17,000
AllowanceforWD,beginning 60,000 70,000 -
LossonWD(Recoverygain) 90,000 (21,000) 17,000 86,000

CHAPTER 4-EXERCISE 21:SOLSONS COMPANY

Quantity Cost NRV Amount at Lower of Cost or NRV
A 360 units 3.60/dozen 3.64/dozen 108.00 - 360/12per dozen*P3.60
B2 4 units 4.70 each 4.80 each 112.80
C 28 units 16.50 each 16.50 each 462.00
D4 3 units 5.15 each 5.20 each 221.45
E 400 units 9.10 each 8.10 each 3,240.00
F 70 dozens 2.00 each 2.00 each 1,680.00 - 70*12 per dozen*P2
.
G 95 grosses 144.00/gross 12,540.00
18,364.25
Ans. A.

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CHAPTER 5: AUDIT OF INVESTMENTS

DISCUSSION PROBLEMS
CHAPTER 5-PROBLEM 1
1 D
2 A
3 C
4 C
5 C
6 D
7 A
8 A

CHAPTER 5-PROBLEM 2: KILALA CORP.

CASE 1: FA at Amortized Cost
1. Ans.P1,038,896.
January 1, 2014:
Financial asset at amortized cost 1,038,896
Cash 1,038,896
Quotedprice(P1M*95%) 950,000
Transactioncost 88,896
I n i t i a lc o s t 1,038, 896

Amortization table: FA at Amortized Cost

Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January
2014:
1, 1,038,896
December 31, 2014: 93,501 100,000 (6,499) 1,032,397
December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:

Cash 100,000
Interest
income 100,000

Interest
income 6,499
FA
at
amortized
cost 6,499
2. Ans. P93,501.

December 31, 2015:

Cash 100,000
Interest
income 100,000

Interest
income 7,084
FA
at
amortized
cost 7,084
3. Ans. P92,916.

4. Ans. P1,025,312.

5. Ans. P24,688 gain

Salesproceeds(1/1/16) 1,050,000
Less: Carrying Value/Amortized cost 1,025,312
R e a l i z e dg a i no nsa l e 24 ,688

CASE 2: FA at FMV through Profit or Loss

1. Ans. P950,000.
January 1, 2014:
F Aa tF M V ( P 1 M *9 5 % ) 95 0,000
Expense 88,896
Cash 1,038,896

December 31, 2014:

Cash 100,000
InterestIncome(P1M*10%) 100,000

FMV
FA
at 250,000
Unrealizedholdinggain 250,000
Fair Value (12/14): P1M*120% 1,200,000
Carryingvalue 950,000
Unrealized holding gain -P/L 250,000

2. Ans. P261,104.
Transactioncost(Expense) (88,896)
Interestincome 100,000
Unrealizedholdinggain 250,000
N e ti n v e s t m e n ti n c o m e 26 1,104

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December 31, 2015:

Cash 100,000
InterestIncome(P1M*10%) 100,000

Unrealizedholdingloss 150,000
FMV
at
FA 150,000
F a i r V a l u e ( 1 2 / 1 5 ): P 1 M * 1 0 5 % 1,050, 000
Carryingvalue 1,200,000
Unrealized holding loss - P/L (150,000)

3. Ans. (P50,000)
Interestincome 100,000
Unrealizedholdingloss (150,000)
N e ti n ve s t m e n tl o ss (50,0 00)

4. Ans. P1,050,000.

5. Ans.0

Salesproceeds(1/1/16) 1,050,000
Less: Carrying Value/FMV, 12/31/15 1,050,000
R e a l i z e dg a i no nsa l e -

CASE 3: AVAILABLE FOR SALE SECURITY

1. Ans.P1,038,896.
January 1, 2014:
Availableforsalesecurity 1,038,896
Cash 1,038,896
Quotedprice(P1M*95%) 950,000
Transactioncost 88,896
I n i t i a lc o s t 1,038, 896

Amortization table: Available for sale security

Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January
2014:
1, 1,038,896
December 31, 2014: 93,501 100,000 (6,499) 1,032,397
December 31, 2015: 92,916 100,000 (7,084) 1,025,312

December 31, 2014:

Cash 100,000
Interest
income 100,000

Interest
income 6,499
Availableforsalesecurity 6,499

Availableforsalesecurity 167,603
Unrealizedholdinggain-OCI 167,603
Fair Value (12/14): P1M*120% 1,200,000
Amortizedcost(12/14) 1,032,397
Unrealized holding gain - OCI of SCI 167,603

2. Ans. P93,501
Interestincome-P/L(2014) 93,501

December 31, 2015:

Cash 100,000
Interest
income 100,000

Interest
income 7,084
Availableforsalesecurity 7,084

Unrealized holding loss - OCL of SCI 142,916

Availableforsalesecurity 142,916
Fair Value (12/15): P1M*105% 1,050,000
Amortizedcost(12/15) 1,025,312
Unrealized holding gain - SHE, end 24,688
Unrealized hoding gain - SHE, beg 167,603
Unrealized holding loss - OCL of SCI (142,916)

3. Ans. (P142,916)
Unrealized holding loss - OCL of SCI (201 (142,916)

4. Ans. P24,688.
Unrealized holding gain - SHE, end 24,688

5. Ans. P1,050,000.

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6. Ans. P24,688 gain

Salesproceeds(1/1/16) 1,050,000
Less: Carrying Value/Amortized cost -
R e a l i z e d g a i no n s a l e 1,050, 000

CHAPTER 5-PROBLEM 3: SOTA CORPORATION

CASE 1: FA at Amortized Cost
1. Ans. P10,758,157.
January 1, 2014:
Financial asset at amortized cost 10,758,157
Cash 10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921) 6,209,213 0.620921
Interest (P1,200,000*3.790787) 4,548,944 3.790787
Initialcost 10,758,157

Amortization table: FA at Amortized Cost

Correct Int. Nominal Int. Amortization Balance

(Bal*eff%) (Princ*nom%)
January
2014:
1, 10,758,157
December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973
December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370
June 30, 2016: 524,869 600,000 (75,131) 10,422,239

December 31, 2014:

Cash 1,200,000
Interest
income 1,200,000

Interestincome 124,184
FA
at
amortizedcost 124,184
2. Ans. P1,075,816.

December 31, 2015:

Cash 1,200,000
Interest
income 1,200,000

Interestincome 136,603
FA
at
amortizedcost 136,603
3. Ans. P1,063,397.

4. Ans. P10,497,370.

5. Ans. P622,239 loss

Salesproceeds(6/30/16) 10,400,000
Less: Ca rrying Value/Amortized cost (10,422,239)
Accruedinterest (600,000)
R e a l i z e dl o sso nsa l e (622, 239)

CASE 2: FA at FMV through Profit or Loss

1. Ans. P10,758,157.
January 1, 2014:
FA
at
FMV 10,758,157
Cash 10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921) 6,209,213 0.620921
Interest (P1,200,000*3.790787) 4,548,944 3.790787
Initialcost 10,758,157

December 31, 2014:

Cash 1,200,000
InterestIncome(P10M*12%) 1,200,000

FMV
FA
at 213,759
Unrealizedholdinggain 213,759
FairValue(12/14)** 10,971,916
Carryingvalue 10,758,157
Unrealized holding gain -P/L 213,759
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425) 7,084,252 0.708425
Interest: ( P1,200,000*3.239720) 3,887,664 3.239720
FMV(12/14) 10,971,916

2. Ans. P1,413,759.
Interestincome 1,200,000
Unrealizedholdinggain 213,759
N e t i nve s t m e nt inc o m e 1,413, 759

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December 31, 2015:

Cash 1,200,000
InterestIncome(P10M*12%) 1,200,000

FMV
at
FA 58,923
Unrealizedholdinggain-P/L 58,923
FairValue(12/15)** 11,030,839
Carryingvalue 10,971,916
Unrealizedholdinggain-P/L 58,923
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832) 7,938,322 0.793832
Interest: ( P1,200,000*2.577097) 3,092,516 2.577097
FMV(12/15) 11,030,839

3. Ans. P1,258,923.
Interestincome 1,200,000
Unrealizedholdinggain 58,923
N e t i n ve s t m e n t i n c o m e 1,258, 923

4. Ans. P11,030,839.
5. Ans. P1,230,839 loss
Salesproceeds(6/30/16) 10,400,000
Less: Ca rrying Value/Amortized cost (11,030,839)
Accruedinterest (600,000)
R e a l i z e d l o ss o n sa l e (1, 230,839 )

CASE 3: AVAILABLE FOR SALE SECURITY

1. Ans. P10,758,157.
January 1, 2014:
Availableforsalesecurity 10,758,157
Cash 10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921) 6,209,213 0.620921
Interest (P1,200,000*3.790787) 4,548,944 3.790787
Initialcost 10,758,157

Amortization table: Available for sale security

Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ*nom%)
January
2014:
1, 10,758,157
December 31, 2014: 1,075,816 1,200,000 (124,184) 10,633,973
December 31, 2015: 1,063,397 1,200,000 (136,603) 10,497,370

December 31, 2014:

Cash 1,200,000
Interest
income 1,200,000

Interestincome 124,184
Availableforsalesecurity 124,184

Availableforsalesecurity 337,943
Unrealizedholdinggain-OCI 337,943
FairValue(12/14)** 10,971,916
Amortizedcost(12/14) 10,633,973
Unrealized holding gain - OCI of SCI 337,943
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425) 7,084,252 0.708425
Interest: ( P1,200,000*3.239720) 3,887,664 3.239720
FMV(12/14) 10,971,916

2. Ans. P1,075,816.
Interest income - P/L (2014) 1,075,816

December 31, 2015:

Cash 1,200,000
Interest
income 1,200,000

Interestincome 136,603
Availableforsalesecurity 136,603

Availableforsalesecurity 195,526
Unrealizedholdinggain-OCIofSCI 195,526
Fair Value (12/15): P1M*105% 11,030,839
Amortizedcost(12/15) 10,497,370
Unrealized holding gain - SHE, end 533,468
Unrealized hoding gain - SHE, beg 337,943
Unrealized holding gain - OCI of SCI 195,526
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832) 7,938,322 0.793832
Interest: ( P1,200,000*2.577097) 3,092,516 2.577097
FMV(12/15) 11,030,839

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3. Ans. P195,526.
Unrealized holding gain - OCI of SCI (201 195,526

4. Ans. P533,468
Unrealized holding gain - SHE, end 533,468

5. Ans. P11,030,839.

6. Ans. P622,239 loss

Salesproceeds(6/30/16) 10,400,000
Less: Carrying Value/Amortized cost -
Accruedinterest (136,603)
R e a l i z e d l o ss o n sa l e 10,263, 397

CHAPTER 5-PROBLEM 4: ABC COMPANY

1. Ans. P35,479.
FMV(12/31/14) 6,229,862

Carryingvalue 6,194,383
U nr eal iz ed hol d i ng g a in - P/L 35 ,479

2. Ans. P6,229,862.

3. Ans. 0.
The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015. Instead what shall be recognized is the
unrealized holding gain or loss from the FA's remeasurement since it will still be treated as FA at FMV at the end of 2015.

December 31, 2015: Entry upon remeasurement as FA at FMV

Unrelizedholdingloss-P/L 15,870
FMV
atFA 15,870

January 1, 2016: Entry upon transfer to FA at Amortized Cost

FA at amortized cost (FMV 12/15) 6,213,992
FA
at
FMV(CV) 6,213,992

4. Ans. P6,213,992. (As FA at FMV)

5. Ans. P6,111,111.
Amortization table: FA at Amortized cost at 8% effective rate:
Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ.*nom%) 1 5,144,032.92
December
31,
2015: 6,213,992 2 1,069,958.85
December31,2016: 497,119 600,000 (102,881) 6,111,111 6,213,992
December31,2017: 488,889 600,000 (111,111) 6,000,000

CHAPTER 5-PROBLEM 5: ABC COMPANY

1. Ans. P6,151,877.
Amortization table: FA at amortized cost at 9%
Correct Int. Nominal Int. Amortization Balance
(Bal*eff%) (Princ.*nom%)
January
2014:
1, 6,194,383
December31,2014: 557,494 600,000 (42,506) 6,151,877
December31,2015: 553,669 600,000 (46,331) 6,105,546

2. Ans. (P138,865)
Proceeds f rom sa le ( P5,897,249*4/6) 3,931,499
Carryingv alue( P6,105,546*4/6) 4,070,364
R e a l i z e d l o ss o n p a r t i a l sa l e (138, 865)

3. Ans. 0.
The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015.

4. Ans. P7,345.
Unrealized gain/loss on transfer on Janaury 1, 2016:
FMV of remaining investment (P5,897,249*2/6) 1,965,750
Carrying value of remaining i nv. ( P6,105,546*2/6) 2,035,182 (69,432)
Unrealized gain/loss on remeasurement on December 31, 2016:
FMV(12/31/16) 1,973,094
CV(FMVat12/31/15) 1,965,750 7,345
Net unre al iz ed ho ld ing ga in or loss in th e 20 16 pr ofit or loss (62, 088)

5. Ans. P1,973,094.

CHAPTER 5-PROBLEM 6: BET CO.

Amortization table: FA at amortized cost at 10%.
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
January
2014:
1, 9,241,843
December31,2014: 924,184 800,000 124,184 9,366,027
December31,2015: 936,603 800,000 136,603 9,502,630

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1. Ans. P4,667,769.
Amortized cost, December 31, 2015: 9,502,630
Accrued interest, December 31, 2015: 800,000 10,302,630
Present value of new future cash flows at 10%
Principal:(P10M*75%)*0.751315 5,634,861 0.7513148
I mp a i r m e nlto ss 4,667, 769

2. Ans. P6,198,347.
Amortization table: FA at amortized cost after impairment:
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
December31,2015:AfterImpairment 5,634,861
December31,2016: 563,486 - 563,486 6,198,347

3. Ans. P1,239,669.
Amortizedcost,December31,2016 6,198,347
Present value of revised cash flows at 10%
Principal(P10M*90%)*0.826446 7,438,017 0.826446
I mp a i r m e n tr e c o ve r yg a i n 1,239, 669

4. Ans. P8,181,818.
Amortization table: FA at amortized cost after impairment recovery:
Correct Int. Nominal Int. Amortization Balance
(Bal.*Eff%) (Princ*Nom%)
December31,2016:AfterImpairmentrecovery 7,438,017
December31,2017: 743,802 - 743,802 8,181,818

CHAPTER 5-PROBLEM 7: ABC CORPORATION

1. Ans.
FMV
at
FA 25,000
Unrealizedholdinggain 25,000
FMV (12/14) CV (excluding transaction cost)
Alpha 300,000 250,000
Beta 475,000 500,000
Total 775,000 750,000
Unrealizedholdinggain -P&L 25,000

2. Ans.
Unrealized holding loss - OCL of SCI 30,000
FAatFMVthroughOCI/L 30,000
Charlie,FMV(12/14) 850,000
Carrying value, including transaction cost 880,000
Unrealized holding loss - OCL of SCI (30,000)

3. Ans.
No entry to remeasure investment in associate to FMV since Investment in Assoc. is accounted for under equity method.

4. Ans.
FMV
FA
at 100,000
Unrealizedholdinggain-P&L 100,000
FMV (12/15) CV (FMV 12/14)
Alpha 350,000 300,000 *reclassification is not allowed, thus Alpha is still
Beta 525,000 475,000 regarded as FA at FMV through OCI/L.
Total 875,000 775,000
Unrealized holding gain -P&L 100,000

5. Ans.
Unrealized holding loss - OCL of SCI 100,000
FAatFMVthroughOCI/L 100,000
Charlie,FMV(12/15) 750,000
Carryingvaluu(FMV12/14) 850,000
Unrealized holding loss - OCL of SCI (100,000)

6. Ans. P875,000.

7. Ans. P750,000.

8. Ans. P3,260,000.
Delta Securities - Investment in Associate
Acquisition cost, i ncluding transaction cost 1,650,000
Sharefromnetincome(P2.5M*25%) 625,000
Sharefromforexloss(P500K*25%) (125,000)
Sharefromdividends(P200K*25%) (50,000)
Carryingvalue,12/31/14 2,100,000
AdditionalInvestment 500,000
Sharefromnetincome(P1.9M*30%) 570,000
Sharefromforexgain(P600K*30%) 180,000
Sharefromdividends(P300K*30%) (90,000)
C a r r y i n gva l u e ,1 2 / 3 1 / 1 5 3,260, 000

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CHAPTER 5-PROBLEM 8: ETC INC.

Case 1: PAS 39
1. Ans. P51,000.
FMV ( 12/13) Cost
Aye
Co. 50,000 45,000
Bee
Inc. 250,000 300,000
Corp.
Si 30,000 36,000
330,000 381,000
U nr e al iz e d ho l d i ng l o s s - S HE (51,0 00)

2. Ans. (P30,000)
Proceeds from sale (15,000*P8) 120,000
Original cost (P300,000/30,000)*15,000 150,000
R e a l i z e dl o sso nsa l e (30,0 00)

3. Ans. (P72,000)
FMV ( 12/14) Cost
Bee
Inc. 90,000 150,000
Corp.
Si 24,000 36,000

114,000 186,000
I mp a i r m e n tl o ss-P & L (72,0 00)

4. Ans. P15,000.
FMV (12/14) Cost/Impaired value
Aye
Co. 60,000 45,000
Bee
Inc. 90,000 90,000
Corp.
Si 24,000 24,000
174,000 159,000
U nr e al iz e d ho l d i ng g a in - S HE 15 ,000

5. Ans. P174,000.

Case 2: PFRS 9
1. Ans. P51,000.
FMV (12/13) CV
Aye
Co. 50,000 45,000
Bee
Inc. 250,000 300,000
Corp.
Si 30,000 36,000
330,000 381,000
U nr e al iz e d ho l d i ng l o s s - S HE (51,0 00)

2. Ans. None.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

3. Ans. None
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.

4. Ans. P15,000.
FMV ( 12/14) Cost
Aye
Co. 60,000 45,000
Bee
Inc. 90,000 150,000
Corp.
Si 24,000 36,000
174,000 231,000
U nr e al iz e d ho l d i ng l o s s - S HE (57,0 00)

5. Ans. P174,000.

CHAPTER 5-PROBLEM 9: ETC INC.

Case 1: PAS 39
1. Ans. None.
Once equity security investment categorized as financial asset through OCI/L has been impaired due to permanent decline,
any recovery from the previous impairment shall not be recognized in the profit or loss, but shall be recognized as unrealized
holding gain in the OCI/L.

2. Ans. P300,000 and P141,000.

FMV (12/15) Cost/Impaired value
Aye
Co. 75,000 45,000
Bee
Inc. 175,000 90,000
Corp.
Si 50,000 24,000
300,000 159,000
U nr e al iz e d ho l d i ng g a in - S HE 14 1,000

Case 2: PFRS 9
1. Ans.
No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding loss
in the OCI/L.

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2. Ans. P300,000 and P69,000.

FMV ( 12/15) Cost
Aye
Co. 75,000 45,000
Bee
Inc. 175,000 150,000
Corp.
Si 50,000 36,000
300,000 231,000
U nr e al iz e d ho l d i ng g a in - S HE 69 ,000

CHAPTER 5-PROBLEM 10: SHIPO CO.

1. Ans. P2,000,000.
Acquisition
price 14,000,000
Book value of net assets acquired (P48M*25%) (12,000,000)
Total
excess 2,000,000
Identifiable asset:
Depreciable asset: (P1.2M*25%) 300,000
Land(P6M*25%) 1,200,000 1,500,000
Unidentifiableasset/Goodwill 500,000
Divide
by: 25%

To ta l G oodwil l b ased on 25% i nt er est o f S hi po 2,000, 000

2. Ans. P2,670,000
Share from net income (P10.8M*25%) 2,700,000
Less: Understated Depr (P300,000/10y) (30,000)
S h a r e f r o m n e t i n co me 2,670, 000

3. Ans. P16,345,000.
Initial
cost 14,000,000
Sharefromnetincome 2,670,000
Share f rom U HGain-OCI ( P800K*25%) 200,000
Share from dividends (P2.1M*25%) (525,000)
C ar r y in g va l ue , 1 2 / 3 1 / 1 4 16,345, 000

4. Ans. P805,000.
Realized Unrealized Total
Proceeds from portion sold (25,000*40%)*(P680-P5) 6,750,000 6,750,000
Fair value of remaining portion to be reclassified:
(25,000*60%)*P680 10,200,000 10,200,000
Carrying value of Investment in Associate:
Sold(P16,345,000*40%) (6,538,000) (6,538,000)
Reclassified(P16,345,000*60%) (9,807,000) (9,807,000)
Gain on cessation before recycling of OCI/L 212,000 393,000 605,000
Recycling of OCI to P&L
Sold (P200,000*40%) 80,000 80,000
Reclassified(P200,000*60%) 120,000 120,000
T o t a lc e ssa t i o ng a i n-P & L 29 2,000 513,000 805,000
5 . A n s. 6 . A n s.

7. Ans. P171,000.
#shares #shares outs. % interest
Proportionate interest before dilution 25,000 100,000 25%
Proportionate interest after dilution 25,000 125,000 20%
Decrease
interest
in 5%

Share from increase in capital due to share issuance:

(25,000sh*P680)*20% 3,400,000
Prorated CV of portion deemed sold:
P16,345,000*(5%/25%) (3,269,000)
Gain on dilution before recycling of OCI/OCL 131,000
Recycling of OCI to P&L: P200,000*(5%/25%) 40,000
Gai n
ond i l u tion 17 1,000

CHAPTER 5-PROBLEM 11: ANALEN INC.

Case 1: “Cost-Based Approach, with Catch-up Adjustment”:
1. Ans. P110,000.
Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
S h a r efr o mN e tI n c o m ei n2 0 1 5 110,000

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2. Ans. P3,176,000.
January 1,2014Cost (10%) 700,000
SharefromNetIncome,2014(P400,000*10%) 40,000
Sharefrom Dividends, Oct.1, 2014 (10,000*P0.90) (9,000)
Carrying value, 12/31/14 had equity method been used 731,000
Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000
Share from Dividends, Apr. 1, 2015 (10,000*P1.10) (11,000)
Additionalinvestment,July1,2015(30%) 2,400,000
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
C a r r y i n gva l u e ,1 2 / 3 1 / 2 0 1 5 3,1 76,000

Case 2: “Cost-Based Approach, without Catch-up Adjustment”:

1. Ans. P91,000.
DividendsIncome,April1,2015(10,000*P1.10) 11,000
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
S h a r efr o mN e tI n c o m ei n2 0 1 5 91,000

2. Ans. P3,126,000.
January1,2014OriginalCost(10%) 700,000
Additionalinvestment,July1,2015(30%) 2,400,000
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
C a r r y i n gva l u e ,1 2 / 3 1 / 2 0 1 5 3,1 26,000

Case 3: ““Fair Market Value Approach, without Catch-up Adjustment”

1. Ans. P91,000.
DividendsIncome,April1,2015(10,000*P1.10) 11,000
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
S h a r efr o mN e tI n c o m ei n2 0 1 5 91,000

2. Ans. P3,226,000.
Original Investment at prevailing FMV on July 1, 2015 (10%)
10,000sh*(P2.4M/30K) 800,000 - the prevailing FMV is based on the current
Additionalinvestment,July1,2015(30%) 2,400,000 selling price of the additional shares.
Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000
C a r r y i n gva l u e ,1 2 / 3 1 / 2 0 1 5 3,2 26,000

CHAPTER 5-PROBLEM 12: KIKIO CORPORATION

Case 1: Fair Value Method
1. Ans. P12,500,000.
Fair Market Value 12/31/2014 12,500,000

2. Ans. P2,000,000.
Fair Market Value 12/31/2014 12,500,000
Carrying value (Acquisition cost 1/1/2014) 10,500,000
U nr eal iz ed h ol d i ng l oss - P & L 2,000, 000

3. Ans. P11,000,000.
Fair Market Value 12/31/2015 11,000,000

4. Ans. (P1,500,000)
Fair Market Value 12/31/2015 11,000,000
Carrying value (FMV, 12/31/2014) 12,500,000
U nr eal iz ed hol d i ng l oss - P& L (1, 500,000 )

5. Ans. P10,000,000.
June30,2016FMV P10,000,000

6. Ans. (P1,000,000)
June 30, 2016 FMV upon reclassification 10,000,000
Carrying value (FMV 12/31/15) 11,000,000
U nr eal iz ed hol d i ng l oss - P& L (1, 000,000 )

7. Ans. (P1,000,000)
Proceedsfromsale 10,000,000
Carrying value (FMV 12/31/15) (11,000,000)
R e a l i z e d l o ss f r o m sa l e (1, 000,000 )

Case 2: Cost Method

1. Ans. P9,450,000.
Cost 10,500,000
Accum Depr: (P10.5M/10)*1yr (1,050,000)
C a r r y i n gva l u e 9 , 4 5 0 , 0 0 0 *lower than FMV, P12.5M, thus not impaired.

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2. Ans. P8,400,000.
Cost 10,500,000
Accum Depr: (P10.5M/10)*2yrs (2,100,000)
C a r r y i n gva l u e 8 , 4 0 0 , 0 0 0 *lower than FMV, P10.5M, thus not impaired.

3. Ans. P7,875,000 and None.

Cost 10,500,000
Accum Depr: (P10.5M/10)*2.5yrs (2,625,000)
C ar r y in g va l ue , J ul y 1 , 2 0 1 6 7 , 8 7 5 , 0 0 0 *lower than FMV, P10M, thus not impaired.

4. Ans. P2,125,000.
Proceedsfromsale 10,000,000
Carrying value, July 1, 2016 (7,875,000)
R e a l i z e d g a i n f r o m sa l e 2,125, 000

CHAPTER 5-PROBLEM 13: PULITZER INC.

January 1, 2010:

Lifeinsuranceexpense 180,000
Cash 180,000

January 1, 2011:
Lifeinsuranceexpense 180,000
Cash 180,000

January 1, 2012:
Lifeinsuranceexpense 180,000
Cash 180,000

December 31, 2012:

Cashsurrendervalue 180,000
Retainedearnings(180,000*2/3) 120,000
Life
insurance
expense 60,000

January 1, 2013:
Lifeinsuranceexpense 180,000
Cash 180,000

July, 2013:
Cash 5,000
Life
insurance
expense 5,000

December 31, 2013:

Cashsurrendervalue 60,000
Lifeinsurance
expense 60,000
CSV,Dec.31,2013 240,000
CSV,Dec.31,2012 180,000
IncreaseinCSVfor2013 60,000

January 1, 2014:
Lifeinsuranceexpense 180,000
Cash 180,000

August, 2014:
Cash 7,000
Life
insurance
expense 7,000

September 30, 2014:

Cashsurrendervalue 37,500
Lifeinsuranceexpense 37,500
CSV,12/31/2014 290,000
CSV,12/31/2013 240,000
Increasefortheyear 50,000
Multiply by: 9months/12months 75%
Increaseupto9/30/14 37,500

December 1, 2014:
Cash 5,000,000
Cashsurrendervalue(9/30/14) 277,500
Lifeinsuranceexpense(180,000*3/12) 45,000 *unexpired portion as of date of death
Gain on life insurance policy settlement 4,677,500

1. Ans. P180,000; P120,000; P115,000.

2011 2012 2013
Annualinsurancepremium 180,000 180,000 180,000
Increaseincashsurrendervalue - (60,000) (60,000)
Dividends
from
CSV (5,000)
Li f ei n su r a n c ee x p e n se 18 0,000 120,000 115,000

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2. Ans. P0; P180,000; P240,000

3. Ans. P90,500.
Annualinsurancepremium 180,000
Unexpired insurance premium as of date of death (45,000)
Dividend fromCSV (7,000)
IncreaseinCSVuptodateofdeath (37,500)
Li f ei n su r a n c ee x p e n se ,2 0 1 4 90 ,500

4a) Ans. P4,677,500

4b) Ans. None.

MULTIPLE CHOICE EXERCISES:

CHAPTER 5-EXERCISE 1:
1. Ans. C.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
profits/losses 100,000
Debt security of another company quoted in an active market. Business
model of the company has an objective to hold debt securities for short-
term
profits. 100,000
T o t a lf i n a n c i a la s s e ta tF M Vt h r o u g hP& L 20 0 , 0 00

2. Ans. A.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
other comprehensive income/losses 150,000

3. Ans. B.
Debt security of another company quoted in an active market. Business
model of the company has an objective of collecting contractual cash-
flows from the bonds which are primarily in the form of interests and 500,000
principal.

4. Ans. B.
20% Equity securities of another company quoted in an active market 500,000

5. Ans. D.
51% Equity securities of another company quoted in an active market 1,400,000

6. Ans. B.
Realpropertyheldforspeculationpurposes 700,000
Real property of a manufacturing business being leased out to another party
under operating lease 900,000
Landheldforundeterminedfutureuse 800,000
Real property being developed asan investment property 300,000

T o t aIl n v e st m e nP
t r op er ty 2 ,700,0 00
CHAPTER 5-EXERCISE 2: PINAY CORP.
1. Ans. A.
Proceeds(50,000*58) 2,900,000
Carrying Value (50,000*55) 2,750,000
R e a l i z e dg a i n 15 0,000

2. Ans. C.
Proceeds(15,000*59) 885,000
OriginalCost(15,000*60) 900,000
R e a l i z e dl o ss (15,0 00)

3. Ans. D.
Proceeds 1,100,000
Accruedinterest (50,000)
Carrying Value (P2,035,182/2) (1,017,591) *half of the carrying value which is the fair value on 12.31.13
R eal i zed
g ai n 32 ,409

FMV=Present value of future cash flows at 9% yield rate

Principal (P2,000,000*0.84168) 1,683,360 2,000,000 0.8416800
Interest (P200,000*1.759111) 351,822 200,000 1.7591112
CV/FMV12/31/2013 2,035,182

4. Ans. A.
Proceeds 1,100,000
Accruedinterest (50,000)
Carrying Value (P1,973,866/2) (986,933) **half of the carrying value which is the amortized cost on 6/30/14
R eal i zed
g ai n 63 ,067

Amortization table: Correct interst Nominal Inters Amortization Balance

1/1/13: 1,951,126
12/31/13: 214,624 200,000 14,624 1,965,750
6/30/14: 108,116 100,000 8,116 1,973,866

5. Ans A.
Alpha shares (FMV through P/L) - (50,000sh*62) 3,100,000

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6. Ans. B.
Alphasahres(FMVthroughP/L) 3,100,000
Deltabonds(FMVthroughP/L) 982,143 ***
T o t a lC u r r e n tI n v e st m e n t 4,082, 143

FMV=Present value of remaining future cash flows at yield rate 12%

Principal (P1,000,000*0.892857) 892,857 1,000,000 0.892857
Interest (P100,000*0.892857) 89,286 100,000 0.8928571
982,143

CHAPTER 5-EXERCISE 3: BENSHOPPE INC.

1. Ans. C.
2. Ans. C.
FMV 12/14 CV/Cost
AyeCorp.Shares 700,000 540,000 (29.50-2-0.50)*20,000sh
BeeInc.Shares 1,000,000 1,080,000 (27.50-.50)*40,000sh

SeeCo.10%,2MBonds* 1,964,948 1,923,000 (1,973,000-50,000)

3,664,948 3,543,000
U n r e a l i z e dh o l d i n gg a i n-I S 12 1,948
F i n a n c i a l a sse t s a t F M V t h r o u g h P & L 3,664, 948
See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual prevailing effective rate)
Principal(2M*0.8072) 1,614,433 1
Interest(100,000*3.5052) 350,515
* 1,964,948
3. Ans. C.
Investment in Dee Shares (Associate)
Intialcost(6/30/14) 2,400,000
Sharefromdividends (250,000)
Sharefromnetincome 280,000 (2,240,000*6/12)*25%
I n v e st m e n t i n A sso c B a l a n c e 2,430, 000

4. Ans. B.
Transactions costs - Expense
AyeCorp.Shares (10,000)
BeeInc.Shares (20,000)
Dividendincome-BeeInc. 120,000
Interestincome-SeeCo. 50,000
Unrealizedholdinggain-FA 121,948
Share from net income - Dee Corp. 280,000
T o t a l / Ne t I n v e st me n t i n c o m e 54 1,948

5. Ans. D.
See Co Bonds at amortized cost 1,930,690
DeeCorp.Shares-Assoc. 2,430,000
T o t a l n o n c u r r e n t i n v e st m e t n s 4,360, 690

Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct Int. Nominal Int. Amortization Balance
October
2014:
1, 1,923,000 *excluding accrued interest
December31,2014: 57,690 50,000 7,690 1,930,690

Alternative Solution: Financial asset atamortized cost: SeeCo 10%, 2M Bonds

Amortized cost shall be PV of cash flows using srcinal effetive rate (6% semi-annually)
Principal( 2,000,000*0.7921) 1,584,187 0.7921
Interest(100,000*3.4651) 346,511 3.4651
Amortized cost, 12/31/14 1,930,698

6. Ans. D.
Transactions costs - Expense
AyeCorp.Shares (10,000)
BeeInc.Shares (20,000)
Dividendincome-BeeInc. 120,000
Interestincome-SeeCo. 57,690 *(1,923,000*12%*3/12)
Unrealizedholdinggain-FA 80,000 UHG from Aye and Bee only
Share from net income - Dee Corp. 280,000
T o t a l / Ne t I n v e st me n t i n c o m e 50 7,690

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CHAPTER 5-EXERCISE 4: SITAW CORP.

1. Ans. A.
Proceeds from sale of half of SIBUY bonds 51,250,000
Amortized cost October 16, (face value) 50,000,000
R e a l i z e d g a i no n s a l e 1,250, 000

2. Ans. B.
FMV Cost
PATATAS(1M*P64) 64,000,000 62,000,000 *reclassification to FA through P&L not allowed.
BAWA(250,000*P74) 18,500,000 20,000,000
82,500,000 82,000,000
U nr e al iz e d ho l d i ng g a in - S HE 50 0,000

3. Ans. C.
Interest from SIBUY bonds (Apr. 15 to Oct. 15): P100M*10%*6/12 5,000,000
Interest from remaining SIBUY bonds (Oct. 15 - Dec. 31): P50M*10%*2.5/12 1,041,667
Cash dividends from PATATAS 1,500,000
T o t a li n t e r e sta n dd i vi d e n d si n c o m e ,2 0 1 3 7 ,541,6 67

4. Ans. A.
Proceeds from sale of half o f PATATAS (500,000sh*P65) 32,500,000
Originalcost(P62,000,000/2) 31,000,000
R e a l i z e d g a i n o n sa l e , u n d e r P A S 3 9 1,500, 000

5. Ans. D.
Proceeds from sale of all BA WA shares (250,000sh*P78) 19,500,000
Original cost 20,000,000
R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 (500, 000)

CHAPTER 5-EXERCISE 5: MARIAH CORP.

1. Ans. A.
Proceeds from sale (9,000*65) 585,000
Original cost 441,000
R e a l i z e d g a i n o n sa l e ( P AS 3 9 ) 14 4,000

2. Ans. C.
FMV ( 12/14) Cost
DEFCorp.Shares 1,140,000 1,080,000
GHICorp.Shares 348,000 360,000
JKL
Shares 323,400 325,400
1,811,400 1,765,400
U nr e al iz e d ho l d i ng g a in - S HE 46 ,000

3. Ans. A.
IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES
FMV (12/14) CV (FMV 12/13)
DEFCorp.Shares 1,140,000 1,050,000
GHICorp.Shares 348,000 369,600
JKL
Shares 323,400 315,000
1,811,400 1,734,600
U nr e al iz e d ho l d i ng g a in - S HE 76 ,800

4. Ans. B.
IF JKL SHARES IS INVESTMENT IN ASSOCIATE:
Initialcost(including transaction cost) 325,400
Sharefromdividends(0.75*4200) (3,150)
Sahre from net income (450,000*20%*8/12) 60,000
C a r r y i n gVa l u e ,1 2 . 3 1 . 1 4 38 2,250

CHAPTER 5-EXERCISE 6: ANGEL CORP.

1. Ans. D. Fair Value
Dec. 31, 2014 Dec. 31, 2014 Total FMV
Uno
shares 10,000 160 1,600,000
Dos
shares 11,000 105 1,155,000
Tres
shares 18,000 140 2,520,000
Quatrobonds 2,000,0008% yield 2,071,331 *
7,346,331
**FMV=Presentvalueofcashflowsat8% 2,000,000 0.85734
Principal(P 2,000,000*0.85734) 1,714,678 200,000 1.783265
Interest( P200,000*1.783265) 356,653
TotalFairValue 2,071,331

Carrying values before year-end remeasurement

# of shares CV Dec. 31,
Uno
shares 10,000 145 1,450,000
Dos
shares 11,000 72.73 800,000
Tres
shares 18,000 100 1,800,000
Quatrobonds 2,000,000
12% yield 1,903,927 **
Total
Carrying
Value 5,953,927

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**Acquisitioncost=Presentvalueofcashflowsat12% 2,000,000 0.85734

Principal(P 2,000,000*0.711780) 1,423,560 2,000,000 0.711780 200,000 1.783265
Interest( P200,000*2.401831) 480,366 200,000 2.401831
TotalFairValue 1,903,927
Unrealized holding gain - P&L

2. Ans. B.
Fair market value, Dec. 31, 2014 7,346,331
Carryingvalue 5,953,927
U nr eal iz ed h ol d i ng g a in - P& L 1,392, 404

3. Ans. B.
Proceeds from sale:
Dosshares(10,000*P100) 1,000,000
Tresshares(18,000*140) 2,520,000 3,520,000
Carrying value of shares sold:
Dosshares(10,000*80) 800,000
Tresshares(18,000*100) 1,800,000 2,600,000

Realized gain on sale - P&L 920,000

4. Ans. A.
AggregateFairValue(12/31/14)EquitySecuritiesonly 5,275,000
Original Cost of Equity Securities:
# of shares Cost including
Dec. 31, 2014 Trans. Cost Total cost
Uno shares 10,000 150 1,500,000
Dos
shares 11,000 74.55 820,000
Tres
shares 18,000 108 1,950,000
Total
Cost 4,270,000
Unrealized holding gain - OCI 1,005,000

5. Ans. B.
Amortized cost of Quatro bonds (12/31/12)
Correct Interes Nominal Inter Amortization Balance
1/1/12:OrigCost(12%yieldrate) 1,903,927
12/31/12: 228,471 200,000 28,471 1,932,398

CHAPTER 5-EXERCISE 7: DUMBO INC.

1. Ans. B.
Proceeds from sale plus accrued interest
(P500,000*98%)+(P500,000*12%*11/12) 545,000
Carrying value (Initial cost, excluding accrued interest and transaction cost)
Total cash consideration paid 1,044,258
Accrued interest (P1M*12%*6/12) (60,000)
Transaction cost (rec. as expense) (10,000) 974,258
Prorata: portion sold 50% (487,129)
Accruedinterest:(P500,000*12%*11/12) (55,000)
R e a l i z eg
da ionsna l e 2,871

2. Ans. C.
Proceeds from sale: ABC (15,000*P15) 225,000
XYZ(5,000*P13) 65,000 290,000
Carrying value:
ABC:15,000*(P21.50-P1.50) 300,000
XYZ: 5,000*(20,000*(P13-P1.50))/23,00 50,000 350,000
R e a l i z e dl o sso nsa l e (60,0 00)

3. Ans. D.
FMV 12/31/14 CV
ABC(25,000sh*P18) 450,000 416,667 (a)
XYZ(18,000sh*P15) 270,000 180,000 (c)
DEF at 11% yield rate
Principal (P500,000*0.9009009) 450,450 0.9009009
Interest (P60,000*0.9009009) 54,054 504,505 487,129
1,224,505 1,083,796
U n r e a l i z e dh o l d i n gg a i n-P & L 14 0,709

(a) Initial cost ABC (40,000*P20) 800,000

CVof15,000sharessold (300,000)
Effect of cash div. in lieu of stock div. (83,333) (b)
CVABC,12/31/14 416,667

(b) CV of ABC before cash div. in lieu of stock div. 500,000

Divide by: # of shares (25,000+5,000) 30,000
CV of ABC after cash div. in lieu of stock div. 16.67
Multiplyby:Remainingshares 25,000
Carryingvalue,12/31/14 416,667

(c) Initial cost DEF (20,000*P11.50) 230,000

CVofsharessoldon8/5 (50,000)
CVDEF12/31/14 180,000

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4. Ans. B.
Interest income (6/30 to 12/1): P1,000,000*12%*5/12) 50,000
Interest i ncome ( 12/1 - 1 2/31): P500,000*12%*1/12 5,000
I n t e r e st i n c o m e f r o m b o n d i n v e st m e n t 55 ,000

5. Ans. A.
Stock dividend does not result to dividend income and accounted only through memo entry.
Cash in lieu of share dividends is accounted through the "as if" approach, that is, as if shares were received and were as if
sold for the cash dividend received.

6. Ans. D.
FMV 12/31/14
ABC(25,000sh*P18) 450,000
XYZ(18,000sh*P15) 270,000
DEF at 11% yield rate
Principal (P500,000*0.9009009) 450,450
Interest (P60,000*0.9009009) 54,054 504,505
T ot al 1,224, 505

CHAPTER 5-EXERCISE 8: NYU CORP.

1. Ans. D.
Proceeds from sale on 11/5
SMC:(400sh*P230) 92,000
ABI:(800sh*P325) 260,000 352,000
Original cost:
SMC:(400sh*P260) 104,000
ABI:(800sh*P330) 264,000 368,000
R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 (16,0 00)

2. Ans. A.
Proceeds from sale on 12/31 (P300,000*95%) 285,000
Amortizedcost(P551,033*3/5) 330,620 *
R e a l i z e dl o sso nsa l eo fb o n d s (45,6 20)

*Amortized cost: 12/31/14 Correct Int. Nominal Int. Amortization Balance

(Bal*9%) (Princ*12%)
March
2014:
31, 558,345
December31, 2014:(9months) 37,688 45,000 (7,312) 551,033

3. Ans. B.
FMV 12/31/14 Cost/Amortized cost
SMC(600sh*P275) 165,000 156,000 (600sh*P260)
ABI(1,200sh*P340) 408,000 396,000 (1,200sh*P330)
TDI(P200,000*95%) 190,000 220,413 (P551,033*2/5)
763,000 772,413
U n r e a l i z e d h o l d i n g l o s s -OC I (9,4 13)

4. Ans. C.

CHAPTER 5-EXERCISE 9: VEGAS CORP.

1. Ans. C.
Proceeds from sale of DEF (4,000sh*P138) 552,000
CV (FMV 12/31/13): 4,000sh*(P1,056,500/8,000sh) 528,250 132
R e a l i z e dg a i no nsa l e 23 ,750

2. Ans. D.
Proceeds from sale of JKL (4,000sh*P124) 496,000
Cost:4 ,000sh*(P1,180,000/10,000) 472,000
R e a l i z e dg a i no nsa l e 24 ,000

3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

4. Ans. D.
FAatFMVthroughP&L FMV(12/31/14 CV
ABC(13,000*P153.20) 1,991,600 1,984,000 (P1,525,000+P459,000)
DEF(4,000*P137) 548,000 528,250 (4,000sh*(P1,056,500/8,000sh))
GHI(P500,000*82.22%) 411,100 373,500
PQR(P400,000*98%) 392,000 372,000 (P400,000*93%)
3,342,700 3,257,750
U nr eal iz ed hol d i ng g a in - P& L 84 ,950

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5. Ans. D.
FA at FMV through OCI/L FMV (12/31/14 Cost
JKL(6,000sh*P110.50) 663,000 708,000 6,000sh*(P1,180,000/10,000sh)
MNO(20,000sh*P44) 880,000 980,000
1,543,000 1,688,000
U nr e al iz e d ho l d i ng l o s s - S HE (145, 000)

CHAPTER 5-EXERCISE 10: JACK CORP.

1. Ans. C.
Proceeds from sale of Wan shares (5,000sh*P60) 300,000
CV:(P1,145,000/20,000sh)*5,000sh 286,250
R e a l i z e dg a i no nsa l e-P & L 13 ,750

2. Ans. C.
Proceeds from sale of Tri shares (25,000sh*P30) 750,000
Cost:(25,000sh*P35) 875,000
R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 (125, 000)

3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

4. Ans. C.
FMV of Poor shares 800,000
Cost 1,400,000
I m p a i r m e n t l o s s -P & L (600, 000)

5. Ans. D.
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.

6. Ans. C.
Proceeds from sale of Seeks shares (10,000*P45) 450,000
Cost(P1,000,000/20,000sh)*10,000sh 500,000
R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 (50,0 00)

7. Ans. A.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal
to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold
investment shall be transferred directly to RE.

8. Ans. C.
FA at FMV through P&L FMV 12/31/14 CV (FMV 12/31/13)
Wanordinaryshares 825,000 858,750 (P1,145,000/20,000sh)*5,000sh
Toopreferenceshares 650,000 700,000
1,475,000 1,558,750
U nr eal iz ed hol d i ng l oss - P& L (83,7 50)

9. Ans. C.
FA at FMV through OCI/L, under PAS 39 FMV 12/31/14 COST
Poorpreferenceshares 800,000 800,000 *Impaired value under PAS 39
Fiveordinaryshares 1,500,000 1,250,000
Seeksordinaryshares 900,000 1,000,000
3,200,000 3,050,000
U nr e al iz e d ho l d i ng g a in - S HE 15 0,000

10. Ans. A.
FA at FMV through OCI/L, under PFRS 9 FMV 12/31/14 COST
Poorpreferenceshares 800,000 1,400,000 *No impairment loss under PFRS 9
Fiveordinaryshares 1,500,000 1,250,000
Seeksordinaryshares 900,000 1,000,000
3,200,000 3,650,000
U nr e al iz e d ho l d i ng l o s s - S HE (450, 000)

11. Ans. C.

12. Ans. C.

CHAPTER 5-EXERCISE 11: EBC CO.

1. Ans. C.

Fair
MarketValue,
12/31/2013 P160,300
Fair Market Value last remeasurement date, 12/31/2012 (see 1. below) P57,200
10% BS Treasury bond at cost (purchased in the current year) 103,250 160,450
U n r e a l i z eHdo l d i nLgo ss P150
*Cost (P25,250 + 32,450) P57,700
FMV adjustment credit balance (500) 57,200

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2. Ans. B.
FairMarketValue,12/31/2014 P161,100
Fair Market Value, last remeasurement date 12/31/2013 160,300
U n r e a l i z e dH o l d i n gLo ss (800)

3. Ans. A. 2009 2010

Face Value, 10% BS Treasury Bonds P100,000 P100,000
Multiplyby:Interestrate 10% 10%
Annual interest 10,000 10,000
Mulitiplyby: Monthsoutstanding 2/12 12/12
I n t e r e sti n c o m e P1, 667 P10, 000

4. Ans. C.
F air Market Value of the Inv. portfolio, 12/31/2014 P161,100

CHAPTER 5-EXERCISE 12: HART CORP.

1. Ans. C.

July 5 sale
Proceeds from sale (450*1,000) P450,000
CV of shares sold (570,000/2,000)*1,000 (285,000) 165,000
Oct. 11 sale
Proceeds from sale (150*1,000) P150,000
CV of shares sold (285,000/3,000)*1,000 (95,000) 55,000
220,000

2. Ans. C.
June 1 sale
Proceedsfromsale(195*20,000) P3,900,000
Cost of sharessold (P3,000,000-P90,000) 2,910,000 990,000
Nov. 20
Proceeds from sale (3,700,000 – 300,000) P3,400,000
Cost of shares sold (7,500,000/50,000)*20,000 3,000,000 400,000
1,390,000

3. Ans. D.
BLACK INC.
FMV(12/31/2014)2,000*150 300,000
Carryingvalue(285,000/3,000)*2,000 190,000 110,000
WHITE INC.
FMV(12/31/2014)30,000*190 5,700,000
Carrying value (7,500,000/50,000)*30,000 4,500,000 1,200,000
U N R E A LI Z E DHOLD I N GGA I N–P & L 1,31 0,000

4. Ans. D.
BLACK INC.: FMV (12/31/2014) 2,000*150 300,000
WHITE INC.: FMV (12/31/2014) 30,000*190 5,700,000 6,000,000

CHAPTER 5-EXERCISE 13: CSI INC.

1. Ans. B.
Acquisitioncost,excluding transaction cost 200,000
Less: Dividends recievable (shares acquired "Div.-on") (20,000)
I n i t i a lc o st-A B CS h a r e s 18 0,000

2. Ans. B.
Acquisitioncost(1,500sh*P150) 225,000
Add: Transaction cost 30,000
I n i t i a lc o st-D E FS h a r e s 25 5,000

3. Ans. D.
No dividend income shall be recognized from the share dividends received from DEF.

4. Ans. B.
#ofGHIsharesaftersharesplit 5,000
Multiplyby:cashdiv.pershare 5
D i v i d e n d i n c o me f r o m c a s h d i v i d e n d s 25 ,000

5. Ans. B.
Shares in lieu of cash dividends (4,000sh/4) 1,000
Fair
value shares
of 55
D i v i d e n d i n c o me ( sh a r e s i n l i e u o f ca sh ) 55 ,000

6. Ans. C.
Financial asset at FMV through P&L FMV, 12/31 CV
ABC(2,000sh*P105) 210,000 180,000
GHI(5,000sh*P75) 375,000 410,000 (P285,000+(5,000sh*P25))
585,000 590,000
U nr eal iz ed hol d i ng l oss - P& L (5,0 00)

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7. Ans. C.
Financial asset at FMV through OCI/L FMV, 12/31 Cost
DEF(1,500sh+300sh)*P160 288,000 255,000
JKL(4,000sh+1,000sh)*P60 300,000 255,000 (P200,000+(1,000sh*P55)
588,000 510,000
U nr e al i z e d ho l d i ng g a i n - S HE 78 ,000

8. Ans. B.
Investment in Associate - MNO shares
Initialcost,January1,2014 850,000
Sharefrom netincome(P600,000*20%) 120,000
Sharefromforexloss(P100,000*20%) (20,000)
Sharefrom dividends(10,000sh*P12) (120,000)
Carrying value, 12/31/14 830,000

CHAPTER 5-EXERCISE 14: PRINCE INC.

1. Ans. A.
Di vi de n d i nc o me fr o m Qu ee n Co rp . in 2 0 1 4 (3 0 0 , 00 0 *1 0 % ) P 3 0, 0 0 0

*note: Queen shares is only 10% (100,000/1,000,000), thus shall be accounted for as AFS.
Investment income for investment in AFS shall be through dividends declared by Queen.

2. Ans. C.
Share from net income of King Inc. 2013 (650,000*25%) 162,500
Understatement in Depr expense ( 500,000/5)*25% (25,000)
S h a r efr o mn e ti n co meo fK i n gI n c .2 0 1 3 137,500
*note: King shares is only 25% (250,000/1,000,000), thus shall be accounted for as Associate Investment under equity method.

3. Ans. C.
Fa ir Va lue of Queen Corp sh ar es 12/31/20 14 (10 0,00 0*6.50) P650 ,000

4. Ans. C.
Acquisition cost (January 1, 2013) (250,000*10) 2,500,000
Sharefromnetincome:2013 137,500
CVofInvestment(12/31/13) 2,637,500 vs Rec. Value (FV:250,000*12) P3,000,000 – no imp.
Sharefromnetincome:2014 37,500
Share from dividends: 2014 (100,000*25%) (25,000)
C Vo fI n ve st me n t( 1 2 / 3 1 / 1 4 ) 2,650, 000 vs Rec. Value (FV:250,000*15) P3,750,000 – no imp.

5. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14 (100,000*6.50) P650,000
Fair value of Queen Sahres (AFS), 12/31/13 (100,000*7.00) 700,000
U n r e a l i z e dHo l d i n gLo ss–S CI P50,000

6. Ans. C.
FairvalueofQueenShares(AFS),12/31/14 650,000
Originalcost of Queen Shares, 1/1/13 (100,000*5) 500,000
U n r e a l i z e d H o l d i n g Ga i n ( C u m u l a t i v e ) - S H E / B S 1 50,000

CHAPTER 5-EXERCISE 15: ISUZU CORP.

1. Ans. A.
Acquisition cost 2,592,000
BV of Net Assets acquired (P6.4M*30%) 1,920,000
Total excess of acqusition cost over book value 672,000
Excess attributable to D epreciable a sset (P640K*30%) 192,000
E x c e ssa t t r i b u t a b l et oGo o d wi l l 48 0,000

2. Ans. C.
Share from the net income of associate (P1,280K*30%) 384,000
Understatement in depr: (P192,000/8yrs) (24,000)
I n ve st m e nI
t ncome 36 0,000

3. Ans. A.
Acquistion
cost 2,592,000
Sharefromdividends(P6*40,000sh) (240,000)
Share
from net
income 360,000
Carryingvalue,12/31/14 2,712,000
Recoverable amount/Fair value less cost to sell:
(40,000shares*P64) 2,560,000
Impairmentloss 152,000

4. Ans. B.
Share
fromnetincome 360,000
Impairmentloss (152,000)
Net amount t o be rep ort ed i n the in come statement 208,000

5. Ans. B.
Dividendincome(P6*40,000sh) 240,000
Unrealizedholdingloss-P&L (32,000)
Net amount t o be rep ort ed i n the in come statement 208,000
FMV, 12/31/14 (40,000*P64) 2,560,000
Carryingvalue(Cost) 2,592,000
Unrealized holding loss-P&L (32,000)

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6. Ans. C.

CHAPTER 5-EXERCISE 16: PACQUIAO CORP.

1. Ans. D.
Net income 2,500,000
Less: PS share in net income (10%*P50*100,000) 500,000
OSshareinnetincome 2,000,000
Multiply by: Proportionate interest (50,000sh/200,000sh) 25%
Share from net income before adjustments 500,000
Understatement in Depr: (P4M*25%)/5yrs (200,000)
A d j u st e d sh a r e f r o mN e t I n c o m e 30 0,000

2. Ans. D.
Acquisition cost, January, 20 14 ( 50,000sh*P325) 16,250,000
Sharefromnetincomein2014 300,000
C ar r y i n g va l ue , De c m e b e r 3 1 , 2 0 1 4 16,550, 000

3. Ans. C.
Net income 2,500,000
Multiply by: Proportionate interest (50,000sh/200,000sh) 25%
Share from net income before adjustments 625,000
Understatement in Depr: (P4M*25%)/5yrs (200,000)
A d j u st e d sh a r e f r o mN e t I n c o m e 42 5,000

4. Ans. C.
Acquisition cost, January, 20 14 ( 50,000sh*P325) 16,250,000
Sharefromnetincomein2014 425,000
C ar r y i n g va l ue , De c m e b e r 3 1 , 2 0 1 4 16,675, 000

CHAPTER 5-EXERCISE 17: IFFY CORP.

1. Ans.
Share from net income (P4.8M*30%) 1,440,000
Understatement depr. (P1.6M/5)*30% (96,000)
I n v e st m e n t I n c o m e - P & L 1,344, 000

2. Ans. D.
Sh a re fro m o t h er co m p . lo ss (8 0 0 , 0 0 0 *30 %) (2 4 0 ,0 0 0 )

3. Ans. C.
Acquisition price 5,000,000
Share from net income (4.8M*30%) 1,440,000
Understatement depr. (1.6M/5)*30% (96,000) 1,344,000
Share from other comp. loss (800,000*30%) (240,000)
Share from dividends (1,500,000*30%) (450,000)
C a r r y i n gV a l u e ,1 2 / 3 1 / 1 4 5,654, 000

4. Ans. B.
CESSATION:
Proceedsfromsale(18,000*210) 3,780,000
FMV of remaining share rel assified to FA at FMV (12,000*210) 2,520,000
Total 6,300,000
Less: Carrying Value of Investment in Assoc. before cessation 5,654,000
GainbeforerecyclingofOCLoss 646,000
Recycling of
OCloss (240,000)
T o t acl e ssa t i o n
l o sIs
-S 406,000

5. Ans. D.

6. Ans. D.
DILUTION:
Before Dilution After Dilution
#
shares
held 30,000 30,000
#sharesoutstanding 100,000 125,000
interest
of
% 30% 24%

Share from increase in Assoc.'s net assets (25,000*210)*24% 1,260,000

Carrying value of Investment as if given up (5,654,000*6/30) (1,130,800)
GainondilutionbeforerecyclingofOCLoss 129,200
RecyclingofOcloss(240,000*6/30) (48,000)
T o t acl e ssa t i o n
l o sI-sS 81,200

CHAPTER 5-EXERCISE 18: BLACK CORP.

1. Ans. A.
Acquistionc ost( 300,000sh*P20) 6,000,000
BV of Net Asset (P16M*30%) 4,800,000
Excess of acq. cost over book value 1,200,000
Excess attrib. to identifiable assets
Land(P800,000*30%) 240,000
Building (P1,200,000*30%) 360,000
E x c e s s a t t r i b t o Go o d w i l l 60 0,000

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2. Ans. A.
Share from net income (P2.5M*30%) 750,000
Understatement in Depr: (360,000/5yrs) (72,000)
I n v e st m e n t i n c o m e - P & L 67 8,000

3. Ans. D.
Investmentincome-P&L 678,000
Share from Unrealized holding loss - OCL (P500K*30%) (150,000)
Net amoun t t o b e r e p or t ed in the SC I 52 8,000

4. Ans. B.
Acquisitioncost 6,000,000
Share from dividends (P800,000*30%) (240,000)
Sharefromnetincome 678,000
Sharefrom OCL(P500,000*30%) (150,000)
C ar r y in g va l ue , 1 2 / 3 1 / 1 4 6,288, 000

5. Ans. B.
Before Dil. After Dil. Decrease

Numberofsharesowned 300,000 300,000

Totaloutstandingshares 1,000,000 1,200,000
30% 25% 5%

Share from the increase in White's capital as a result of share issue:

(200,000sh*P30)*25% 1,500,000
CV of investment deemed sold:
(P6,228,000*(5%/30%)) (1,048,000)
DilutiongainbeforerecyclingofOCL 452,000
Recycling of OCL(P150,000*(5%/30%)) (25,000)
A d j u st e d d i l u t i o n g a i n ( T r u e S a l e ) 42 7,000

6. Ans. B.
Share from the increase in White's capital as a result of share issue:
(200,000sh*P30)*25% 1,500,000
CV of investment, excluding goodwill deemed sold:
(P6,228,000-P600,000)*(5%/30%) (948,000)
DilutiongainbeforerecyclingofOCL 552,000
Recycling of OCL(P150,000*(5%/30%)) (25,000)
Adjusted dilution gain 527,000

7. Ans. C.
Before Cess. After Cess.
Numberofsharesowned 300,000 180,000
Totaloutstandingshares 1,000,000 1,000,000
30% 18%

Realized Unrealized Total

Proceeds f rom p oriton s old ( 120,000shares*P30) 3,600,000 3,600,000
FMV of remaining portion to be reclassified to FA at FMV 5,400,000 5,400,000
Less: CV of portion sold (P6,228,000*120/300) (2,515,200) (2,515,200)
CVo fp ortionr eclassified( P6,228,000*180/300) (3,772,800) (3,772,800)
Cessation g ain/loss b efore recycling of OCI/L 1,084,800 1,627,200 2,712,000
Recycling of OCL:
Portionsold(P150,000*120/300) (60,000) (60,000)
Portionreclassified(P150,000*180/300) (90,000) (90,000)
A d j su t e dc e ssa t i o ng a i n 1,024, 800 1,537,200 2,562,000

8. Ans. A.

CHAPTER 5-EXERCISE 19: GREENDAY INC.

Case 1: “Cost-Based Approach, with Catch-up Adjustment”:
1. Ans. C.
Share from net income under Equity Method in 2014 (P1,250,000*15%) 187,500
Dividend income recognized under FMV Method in 2014 (P3.50*7,500sh) 26,250
Rertroactive adjustment to RE, beg 2015 161,250

2. Ans. A.
Share from net income (Jan. 1 - June 30, 2015): P700,000*15% 105,000
Share from net incoem (Jul. 1 - Dec. 31, 2015): P800,000*25% 200,000
T o t a li n ve st me n ti n c o m ei n2 0 1 5 305,000

3. Ans. A.
Acquistioncost,January1,2014 1,400,000
Share from dividends, Aug. 1, 2014 (P3.50*7,500sh) (26,250)
Share from net income in 2014 (P1,250,000*15%) 187,500
Carrying value, Dec. 31, 2014 (Equity Method) 1,561,250
Share from dividends, Apr. 5, 2015 (P4.50*7,500sh) (33,750)
Share from net income (Jan. 1 - Jun. 30, 2015) 105,000
Acquisitioncost,July1,2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
C a r r y i n g v a l u e ,D e c .3 1 ,2 0 1 5 2,763, 750

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Case 2: “Cost-Based Approach, without Catch-up Adjustment”:

4. Ans. A.
No retroactive adjustment to RE,beg under the Cost-based approach without catch-up adjustement.Instead, whatever is
the srcinal cost of the srcinal investment before gaining significant influence shall be its deemed cost.

5. Ans. D.
Dividendincome,Apr.5,2015(P4.50*7,500) 33,750
Sharefromnetincoem(Jul.1-Dec.31,2015) 200,000
Tot al investment income in 2015 (Cost-based w/o catch-up adj .) 233,750

6. Ans. D.
Acquistion cost, January 1, 2014 (deemed cost) 1,400,000
Acquisitioncost,July1,2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
C a r r y i n g v a l u e ,D e c .3 1 ,2 0 1 5 2,531, 250

Case 3: “Fair Market Value Approach, without Catch-up Adjustment”:

7. Ans. A.
No retroactive adjustment to RE, beg under the FMV-based approach without catch-up adjustement. Instead, the srcinal
investment shall be remeasured at prevailing fair value at the date significant influence is gained.

8. Ans. D.
Dividendincome,Apr.5,2015(P4.50*7,500) 33,750
Sharefromnetincoem(Jul.1-Dec.31,2015) 200,000
To ta l in vest ment i ncome in 2015 FM V-ba sed w/ o ca tc h-up a dj .) 233,750

9. Ans. C.
FMV of original investment, July 1, 2015 (7,500sh*P200) 1,500,000 *
Acquisitioncost,July1,2015 1,000,000
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) (68,750)
Share from net incoem (Jul. 1 - Dec. 31, 2015) 200,000
C a r r y i n g v a l u e ,D e c .3 1 ,2 0 1 5 2,631, 250

*FMV/Acq. Price of new i nvestment (10%) 1,000,000

Divide by: # of shares 5,000
AssumedFMV,July1,2015 200

CHAPTER 5-EXERCISE 20: ORION CORP.

1. Ans. C.
Investments in Bonds:
Proceeds (PV of future cash flows, effective rate: 10%)
Principal: (4,000,000*0.6830) 2,732,054 0.6830
Interest: (480,000*3.1699) 1,521,535 3.1699
Intialfairvalue(1/1/13) 4,253,589

Correct Interes Nominal Inter Amortization

January
2013:
1, 4,253,589
December31,2013: 425,359 480,000 (54,641) 4,198,948
D e c e m b e r3 1 ,2 0 1 4 : 41 9,895 480,000 (60,105) 4,138,843 7. C.
December31,2015: 413,884 480,000 (66,116) 4,072,727
December31,2016: 407,273 480,000 (72,727) 4,000,000

2. Ans. A.
Face
Value of
bonds 4,000,000
Considerationgivenup(FMV) 4,253,589
Debit to/Reduction in interest income per books (253,589)
Nominal interest collected/Credited to interest income 480,000
Interestincomein2013perbooks: 226,411
Correct interst income (see amortization table) 425,359
U n d e r st a t e m e n t i n i n t e r e st i n co me i n 2 0 1 3 19 8,948

3. Ans. A.
FMV of bonds, Dec. 31, 2014 at 9% effective rate: (a) 4,211,093
FMV of bonds, Dec. 31, 2013 at 11% effective rate: (b) 4,097,749
U n r e a l i z e dh o l d i n gg a i n-P & L 11 3,345
(a) FMV of bonds, Dec. 31, 2014 = PV of remaining cash flows at 9% effective rate for 2 periods.
Principal: P4,000,000*0.841680 3,366,720 0.841680
Interest:P480,000*1.759111 844,373 1.759111
4,211,093
(b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11% effective rate for 23periods.
Principal: P4,000,000*0.731191 2,924,766 0.731191
Interest:P480,000*2.443715 1,172,983 2.443715
4,097,749

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4. Ans. C.
Investment in Associate (20%)
Acquisitioncost 5,800,000
BV of net assets acquired (P25M*20%) 5,000,000
Excess of Acquisition cost (Attrib. to Depr. Asset) 800,000 *

September30,2013AcquisitionCost 5,800,000
Share fromDividends, 2013 (80,000)
Sharefrom NI, 2013 (3.8M*20%)*3/12 190,000
*Understatement in Depr (800K/10)*3/12 (20,000) 170,000
December31,2013CarryingValue 5,890,000
Share fromDividends,2014 (160,000)
SharefromNI,2014(5.2M*20%) 1,040,000
*Understatemetn in Depr(800K/10) (80,000) 960,000
SharefromOCL(400,000*20%) (80,000)
Share fromOCI (300,000*20%) 60,000
D e c e m b e r3 1 ,2 0 1 3Ca r r yi n gVa l u e 6,6 70,000

5. Ans. A.

Dividendincome(2*40,000) 80,000
Unrealized holding gain (155-145)*40,000 400,000
Investmentincomeperbooksin2013 480,000
Investment income per audit in 2013 (see analysis) 170,000
R e t r o a c t i v e a d j u st e m e n t t o R E , b e g 31 0,000

6. Ans. B.
CESSATION: BeforeCess. AfterCess.
Numberofsharesowned 40,000 30,000
Number of outstanding shares 200,000 200,000
20% 15%
Realized Unrealized Total
Proceedsfromsale(169*10,000) 1,690,000 1,690,000
Fair value of remaining Investment (169*30,000) 5,070,000 5,070,000
CV of investment
Portion sold: (6,670,000*10/40) (1,667,500) (1,667,500)
Portion reclassified:(6,670,000*30/40) (5,002,500) (5,002,500)
Cessation gain, before recycling of OCI/L 22,500 67,500 90,000
Recyclingof
OCI 15,000 45,000 60,000
Recyclingof
OCL (20,000) (60,000) (80,000)
Total cessation gain/loss 17,500 52,500 70,000

7. Ans. B.
Fair Valueon Reclassdate(6/30/14) 3,600,000
Carrying Value/Depreciation Cost (6/30/14) 3,250,000
R e v a l u a t i o n S u r p l u s ( OC I ) o n R e c l a ss 35 0,000

8. Ans. D.
FMV,Investmentproperty,12/31/14 3,200,000
CV,(FMVupon reclasson 6/30/2014) 3,600,000
U n r e a l i z e dh o l d i n gl o s s-P & L (400, 000)

CHAPTER 5-EXERCISE 21: JUDE CORPORATION

1. Ans. C.
Present value of the installment payments at 12% effective rate:
D ownpayament 1 1,000,000
Balance (P4,000,000/4yrs)*3.037349) 3.0373493 3,037,349
Option money related to property acquired 314,779
Property taxes in arrears as of January 1, 2012 147,872
I n i t i a lc o sto ft h ep r o p e r t y 4,500, 000

2. Ans. D.; 3. Ans. B.

Cost(Jan.1,2012) 4,500,000
Accum depr, Dec. 31, 2013 (4.5M/25yrs)*2yrs. 360,000
Depreciated cost 4,140,000
R e c o v e r a b l e a mo u n t / F a i r m a r k e t v a l u e 4,100, 000
I mp a i r m e nlto ss 40 ,000

4. Ans. A.; 5. Ans. C.

Recoverableamount12/31/13 4,100,000
Depr2014:P4.1M/23years (178,261)
Carrying value, before impairment recovery 3,921,739
Carrying value had there been no impairment:
P4( . 5 M *2 2 / 2 5 ) 3,960, 000
I mp a i r m e n tr e c o ve r y-P & L 38 ,261

6. Ans. A.
PPE to IP
If a property is transferred from PPE to IP, and the FMV method is used to value IP, any decrease on the reclassification date shall be
recognized as impairment loss in the profit or loss. Any increase in the value, however, on the reclassification date shall be recognized
in the OCI as Revaluation Surplus, following PAS 16, PPE.'
FMV,12/31/14uponreclasstoIP 4,300,000
Carryingv alue( Depr.C ost:P4.5M*22/25) 3,960,000
R e va l u a t i o nsu r p l u s-OCI 34 0,000

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7. Ans. D.
IP to PPE
If a property is transferred from IP to PPE, and the FMV mehtod is used to value IP, any decrease or increase in the value of the
property on the transfer date shall be recognized in the profit or loss.
FMV,12/31/14uponreclasstoPPE 4,300,000
Carryingvalue(FMV12/31/13) 4,100,000
G a i no nt h et r a n s f e r-P & L 20 0,000

CHAPTER 5-EXERCISE 22: DADO COMPANY

1. Ans. B.
Annualpremium,2014:(P8,000*12mo) 96,000
Less: Increase in CSV for 2014: (P25,200*1/3) (8,400)
L i f ei n s u r a n c ee x p e n s e ,2 0 1 4 87 ,600

2. Ans. D.
Annualpremium,2015:(P8,000*12mo) 96,000
Less: Increase in CSV for 2015 (P30,000-P25,200) (4,800)
DividendfromCSV (8,000)

L i f ei n s u r a n c ee x p e n s e ,2 0 1 5 83 ,200
3. Ans. C.
Annualpremium,2016:(P8,000*12mo) 96,000
Less: Increase in CSV for 2016 (P39,600-P30,000) (9,600)
Dividend from CSV (9,600)
L i f ei n s u r a n c ee x p e n s e ,2 0 1 6 76 ,800

4. Ans. D.
Insurance premium up to date of death (P8,000*10mo) 80,000
Less: Increase in CSV up to date of d eath (P50,400-P39,600)*10/12 (9,000)
Dividend from CSV in
2017 (11,200)
L i f ei n s u r a n c ee x p e n s e ,2 0 1 7 59,800

5. Ans. A.
Lifeinsurancepolicy 4,000,000
CV of CSV as of October 31, 2017:
CSV,Dec.31,2016 39,600
Increase up to Oct.31, 2017: 9,000 48,600
G a i n o n l i fe i n su r a n ce po l i cy se t t l e me n t 3,951, 400
Observe that since the insurance premium are payable monthly, it is assumed that after death on October 31, 2017, no additional
insurance premium had been paid.

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CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT

DISCUSSION PROBLEMS
CHAPTER 6-PROBLEM 1
1 C.
2 C.
3 D.
4 A.
5 D.
6 C.
7 D.
8 B.
9 A.
10 C .
11 B .
12 A.
13 C .
14 D .
15 C .
16 D .
17 C .
18 C .

CHAPTER 6-PROBLEM 2: BACOLOD INC.

Land LandImpr. Buidling Mach.&Eq.
Purchase of
land 15,600,000
Land
survey 208,000
Feesforsearchoftitleforland 24,000
Building construction permit
fee 140,000
Temporaryquartersforconstructionworkers 430,000
Paymentstotenantsoftheoldbuilding 184,000
Costof
to
razethe
old
building 940,000
Excavation the
of
land 400,000
Special assessment of the gov. for road projects 80,000
Cost
construction
of 78,000,000
Cost of paving parking lot, driveway and sidewalks 1,600,000
ListpriceofMachineryandequipmentpurchased 4,567,000
Trade discount taken on the machinery (127,000)
Cost
freight
of and handling 50,000
Cost
testing
of the
equipment 125,000
Income fromthe
testing
of
machinery (65,000)

1 5, 912 ,0 00 1 ,6 00 ,0 00 80,094,000 4,550,000

1 .A ns . 2 .A n s . 3 .A ns . 4 .A n s .
Note: (a) The demolition of the old building is preferably capitalized as cost of the new building as per PIC Q&A 2012-012.
(b) The income from the car park during construction is from an unrelated activity unnecessary for the construction of the building.
The income shall be recognzied as outright income in the P&L and shall not affect the cost of the constructed building.

CHAPTER 6-PROBLEM 3: MIRAM COMPANY

Land Building Adj.toNI
Organizationfees-outrightexpense (120,000)
LandandBuilding(Prorata)* 1,512,000 378,000
Option payments (P250K-50K)* 160,000 40,000 (50,000)
Broker's
fees* 88,320 22,080
Remodellingcostofthebuilding 60,000
Salaries
of
executives (360,000)
Stockbonus-Organizationexpense (300,000)
Property taxes - in arrears (P240K*6/12)* 96,000 24,000
Propertytaxes-2014expense(P240K*6/12) (120,000)
1,856,320 524,080 (950,000)
1 .A ns . 2 .A ns . 3 .A n s .
*FMVof
Land 1,800,000 1
FMVof
Building 450,000 0
Total 2,250,000 1

CHAPTER 6-PROBLEM 4: ABC CORPORATION

a. Land
Initial cost, Jan., 2014
Present value of installment payments at 10% effective rate:
D ownpayment 2,000,000
Balance:( P8M/5yrs)*3.790787 3.790787 6,065,259
8,065,259
2.a. Ans.

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b. Building
Initial cost, Jan., 2014
FMVof sharesissued(100,000sh*P70) 7,000,000
Accum. Depr, Dec. 31, 2014: (P7M*10%) (700,000)1.a. Ans.
C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 6 , 3 0 0 , 02.b.
0 0 Ans.

c.1. Equipment A
Initial cost, Jan., 2014
Cashpriceequivalent(P2M*90%) 1,800,000
Accum. Depr., Dec. 31, 2014: (P1.8M-P180K)*5/15 (540,000)1.b. Ans.
C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 1 , 2 6 0 , 02.c.
0 0 Ans.

c.2. Equipment B
Initial cost, July 1, 2014
Purchase price 4,000,000
Importdutiesandnonrefundabletaxes 250,000
Installationcost 50,000
PV of future retirement cost at 10% effective % for 5 yrs
(P161,051*0.6209213) 100,000 0.6209213
Intialcost,July1,2014 4,400,000
Accum. Depr., Dec. 31, 2014: (P4.4M-440K)*5/15*6/12 (660,000)1.c. Ans.
C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 3 , 7 4 0 , 02.d.
0 0 Ans.

c.3. Equipment C
Initial cost, September 1
Fair valueof asset accepted as donation 1,200,000
Accum. Depr., Dec. 31, 2014 (P1.2M-120K)*5/15*4/12 (120,000)1.d. Ans.
C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 1 , 0 8 0 , 02.e.
0 0 Ans.
*note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is
credited, any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost.

d. Furniture and fixture

Initial cost, Jan., 2014
Cashpriceuponacquistion 3,200,000
Accum Depr., Dec. 31, 2014 (P3.2M-P320K)/10yrs (288,000)1.e. Ans.
C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 2 , 9 1 2 , 02.f.
0 0 Ans.

CHAPTER 6-PROBLEM 5:
Case 1: ABC CORP.
1. Ans. P39,792.
Actual borrowing cost (Jul. 1 - Nov. 31): P1M*12%*5/12 50,000
Income from temporary investments (Jul. 1 - Nov. 31)
July:(P1,000,000-P100,000)*5%*1/12 3,750
August:( P1,000,000-P250,000)*5%*1/12 3,125
September (P1,000,000-P550,000)*5%*1/12 1,875
October( P1,000,000-P750,000)*5%*1/12 1,042
November( P1,000,000-P900,000)*5%*1/12 417 (10,208)
N e tc a p it a li z a b leb o rr o w i ngc o s t 39 ,7 92

2. Ans. P70,000.
Interest expense (Jan. 2 - Jun. 30): P1M*12%*6/12 60,000
Interest expene (Dec. 1 - Dec. 31): P1M*12%*1/12 10,000
I nt e re s te xp e n s ef o r2 0 1 4 7 0, 00 0

Case 2: PAN CORP.

1. Ans. P4,856,223.
Actual borrowing cost from Specific Borrowing:
1st Quarter:P34M*12%*3/12 1,020,000
2ndQ uarter:( P35.020M*12%*3/12) 1,050,600
3rd Qu arter: (P 36,070,600*12%*3/12) 1,082,118
4th Qu arter: ( P37,152,718*12%*3/12) 1,114,582 4,267,300

Borrowing cost from General Borrowing

Weighted average actual expenditure* 39,316,667
Less: Proceeds from specific borrowing (34,000,000)
WAAE f inanced by general borrowing 5,316,667
Multiply by: Weighted Ave. Gen Borr. %** 11.08% 588,923
C a pi t a l i z a bl eb o r r o w i ngc o s t 4 ,8 56 ,2 23

Cost incurred #mo. to 12/31 Peso*Mos.

*January 1 8,000,000 12 96,000,000
April
1 19,000,000 9 171,000,000
July
31 24,400,000 5 122,000,000
October
1 27,600,000 3 82,800,000
December31 14,000,000 - -
Total 471,800,000

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Divide
months
by:
12 12
Weightedaverageactualexpenditure 39,316,667

**Actual General Borrowing Cost

24,000,000*10%
P 2,400,000
P28,000,000*12% 3,360,000 5,760,000
Divide by: Proceeds from Gen. Borr. (P24M+P28M) 52,000,000
Weightedaveragegenearlborrowing% 0

2. Ans. P5,171,077.
Actual General Borrowing Cost 5,760,000
Less: Capitalizable Gen. Borr. Cost (588,923)
Ge n . B o r r . C o s t . - I n t e r e s t E x p e n s e 5, 17 1, 077
*note that the entire actual borrowing cost from specific borrowing had been entirely capitalized.

3. Ans. P97,856,223.
*January 1 8,000,000
April
1 19,000,000
July
31 24,400,000
October 1 27,600,000
December 31 14,000,000
Capitalizableborrowingcost 4,856,223
C a rr y in g v a lu e, 1 2/ 31 /1 4 9 7, 85 6, 22 3

CHAPTER 6-PROBLEM 6: KELSON CORP.

1. Ans. P254,628
Depreciation of Old Buildings (3,600,000-796,200)*6% 168,228
Depreciation of New Building (1,800,000-360,000)*6% 86,400
D e p r e c i a t i o ne xp e ns e–B U I L D I N GS 25 4,6 28

2. Ans. P36,000.
Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12 36,000

3. Ans. P276,000.
DepreciationofOldMachinery(2,325,000/10) 232,500
DepreciationofNewMachinery(870,000/10)*6/12 43,500
D e p r e c i a t i o n e x p e n s e – M A C HI N E R Y A N D E Q U I P ME N T 27 6,0 00

4. Ans. P66,300.
Leasehold improvement carryingvalue (12/31/2013) 331,500
Divide by: Remaining useful life: 8yrs-3yrs=5yrs
(shorter than the remaining extended lease term: 3yrs+5yrs=8yrs) 5
D e p r e c i a t i o n e x p e n s e – L E A S E HO L D I MP R O V E ME N T 66 ,3 00

5. Ans. P43,369.
DeliveryEquipment:B ookvalue,Jan.1,2014 137,400
Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014 (31,356) *P24,300+P7,056
Balancesubjecttodepreciation 106,044
Multiplyby150%decliningrate(1/5)*150% 30%
DepreciationontheRemainingDeliveryEquipment 31,813
Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12 4,500
Depn on truck sold on Sept. 30, 7,056
T o t a l D e p r e c i a t i o n e x p e n s e – D E L I V ER Y EQ U I P M EN T 43 ,3 69

CHAPTER 6-PROBLEM 7: GANADO CORPORATION

1.a. P56,214.
Buidling,CVJan.1,2014 936,900
Multiply by: 150%Dbrate over 25 years 6%
D ep r ec i at i on e xp e ns e - B ui ld i ng 5 6, 21 4

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1.b. Ans. P103,775.

Depr. on Disposed Mach.: P23,000/10yrs*3/12 575
Depr. on New Mach.:P310,000/10yrs*6/12 15,500
Depr. on Remaining Mach.: P877,000/10yrs 87,700
D e p r e c i a t i o n e x p e n s e - Ma c h & E q p t 10 3, 77 5

1.c. Ans. P21,000.

Depr.onNew
Auto:P12,000*4/10 4,800
Depr. on Remaining Auto:**
DepronAutohadtherebeennochange 18,000
Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10) (1,800) 16,200
D e p rExp e ns e-A u t o m o t iv eEq u ip m e nt 21 ,0 00

2.a. Ans. P319,314.

Accum. Depr - Building, Jan. 1, 2014 263,100
Deprfor
the
year 56,214
A cc um . D epr - Bu ild ing, De c. 3 1, 2 01 4 3 19 ,3 14

2.b. Ans. P342,275.

Accum. Depr - Mach&Eqpt, Jan. 1, 2014 250,000
Accum. Depr of M&E disposed on Apr 1, (11,500)
Depr for
the
year 103,775
A c c u m . D e pr - M & E D e c . 3 1 , 2 0 1 4 34 2, 27 5

2.c. Ans. P99,300.

Accum. Depr - Auto. Eqpt. Jan. 1, 2014 84,600
Accum. Depr of Auto. Eqpt. Disp. on Jan. 1, (6,300)
Depr for
the
year 21,000
A c c u m . D e pr - M & E D e c . 3 1 , 2 0 1 4 9 9, 30 0

3. Ans. P11,500.
CV on the date of fire (P23,000*5/10) 11,500
Recoverablevalue -
I mp a ir me nt lo s s d ue t o fi r e 1 1, 50 0
Note: The reimbursement received from insurance company is recognized as a separate transaction, thus income from insurance
settlement shall be recognized separately.

4. Ans. (P700)
Fairvalueofassetreceived 12,000
Cash paidtoequalizeexchange (10,000)
Assumed fair value of asset given-up 2,000
CVofassetgivenup 2,700
Los sont ra d e- i n ( 70 0)

CHAPTER 6-PROBLEM 8: MALIK CORP.

1.a. Ans. P732,000.
Replacementofwoodenrooftobrickroof 300,000
Majorimprovementonelectricalwiringsystem 70,000
Stormwindowsandscreensinstallation 162,000
Automaticdoor-openingsysteminstallation 200,000
Tota l am ount ca pi ta liza bl e to Buildi ng or Buildi ng Im pr ovem ents 73 2, 00 0

1.b. Ans. P690,000.

Replacementofretiredfactoryequipment 500,000
Rearrangement cost to ensue a more efficient production 120,000
Overheadcraneintheassemblydepartment 70,000
T o t a la m o u ntc a p i t a l iz a b l et oEq ui p m e nt 6 90 ,0 00

1.c. Ans.
A c q u is ti o no ff u rn i tu r e 5 0, 00 0

2. Ans. P1195,000.
Repaintingofbuilding 60,000
Routinaryrepairstobuilding 50,000
Replacementsofminorgears 20,000
Service contract of office equipment 40,000
Sealing of roof leaks in the factory 25,000
Tota l re pa irs an d ma inte na nce e xp ense 19 5, 00 0

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CHAPTER 6-PROBLEM 9: BONBON COMPANY

1. Ans. P3,640,000.
Cost,
Jan.
2005 5,200,000
Accum. Depr, Dec. 31, 2014: (P5.2M-P520K)*10/30 (1,560,000)
C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 3 ,6 40 ,0 00

2. Ans. P1,645,700.
Present value of future net cash flows at 10% effective rate for 15 years remaining life:
From continued use: P200,000*7.60608) 7.606080 1,521,216
From eventual disposal: P520,000*0.239392) 124,484
Value in Use 0.239392 1,645,700

3. Ans. P1,645,700.
V al u e
inUs e 1, 64 5, 700
FMVlessCosttosell 1,560,000
Recoverable value shall be the Value in Use, since it is higher.

4. Ans. P1,994,300.
Carryingvalue,Dec.31, 2014 3,640,000
Recoverableamount 1,645,700
I m p a ir m e ntlo s s 1, 99 4, 300

5. Ans. P75,047.
Carrying value, Dec. 31, 2014 after impairment 1,645,700
Less:
Salvage value 520,000
Depreciable cost 1,125,700
Divideby:remainingusefullife 15
D ep r ec i at i on
e xp e ns e 7 5, 04 7

CHAPTER 6-PROBLEM 10: LEGASPI CORP.

1. Ans. P5,518,855.
Present value of future net cash flows at 5% effective rate for 4 years remaining life:
From continued use: 7.606080
2015: (P4,500,000-P1,680,000)*0.952381 2,685,714 0.952381
2016: (P4,800,000-P2,520,000)*0.907029 2,068,027 0.907029
2017: (P3,900,000-P3,300,000)*0.863838 518,303 0.863838
2018:( P1,200,000-P900,000)*0.822702 246,811 0.822702
From
eventualdisposal:
0 -
Value in Use 0.239392 5,518,855

2. Ans. P5,518,855.
V al u e
inUs e 5, 51 8, 855
FMVlessCosttosell 5,070,000
Recoverable value shall be the Value in Use, since it is higher.

3. Ans. P1,861,145.
Carryingvalue,Dec.31, 2014 7,380,000
Recoverableamount 5,518,855
I m p a ir m e ntlo s s 1, 86 1, 145

CHAPTER 6-PROBLEM 11: NAIA COMPANY

1. Ans. P150,000.
Replacementcost 1,500,000
Mulitply by condition % (7yrs/10yrs) 70%
Fair value/Sound value/Depr. Repl. Cost 1,050,000

Fairvalue,12/31/14 1,050,000
Divideby:remaininglife 7
D ep r ec i at i on e xp e ns e , 20 15 15 0, 00 0

2. Ans. P180,000.
Fairvalue,12/31/14 1,050,000
Carrying value, 12/31/14 (P1.2M*7/10) 840,000
Revaluationsurplus,12/31/14 210,000
Transferred to RE in 2015 (210K/7yrs) (30,000)
R ev al ua t io n s u rp l us , 12 /3 1/ 15 18 0, 00 0

3. Ans. P900,000.
Fairvalue,12/31/14 1,050,000
Deprin
2014 (150,000)
C a rr y i n gv a l u e , 1 2 / 3 1 / 1 5 90 0, 00 0

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4. Ans. P50,000 and P150,000.

Proceedsfromsale 800,000
Carrying value, 12/31/16 (P1,050,000*5/7) (750,000)
Ga ino ns a le-P & L 5 0, 00 0

Revaluation sur plus bala nce , 12/ 31/ 16 (2 10,000 *5/7) 150,00 0

5. Ans. P565,714.
Fair marketvalue,12/31/14 1,500,000
Carryingvalue,12/31/14 840,000
Revaluationsurplus,12/31/14 660,000
Divideby:remaininglife 7
AnnualtransfertoRE 94,286
R ev al ua t io n s u rp l us , 12 /3 1/ 15 56 5, 71 4

CHAPTER 6-PROBLEM 12: PEPSI CORP.

1. Ans. P2,000,000.
Carrying value, 12/31.2012 (P24M-P8M) 16,000,000 -provide additional depr. for 2012 (P18M/9yrs)
Recoverable amount (higher)* 14,000,000
I m p a ir m e ntlo s s 2, 00 0, 000

Value
is
use 14,000,000 higher
FMVlesscosttosell 13,500,000

2. Ans. P1,750,000.
Carrying value, 1/1/13 after impairment 14,000,000
Divideby:remainingusefullife 8
Annual de pr ecia ti on af te r im pa irme nt 1, 75 0, 000

3. Ans. P1,500,000.
Recoverable
amount/FMV 15,000,000
Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000
Incr ea se o ve r CV h ad t he re b ee n no i mp arim ent is i gn ored u nd er c os t me th od. 3, 00 0, 00 0
Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method.

Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000

Carrying value based on the impaired value: (P14M*6yrs/8yrs) 10,500,000
Ga ino ni m p a i r m e n tr e c o ve ry-P & L 1 ,5 00 ,0 00
- whether under cost or FMV method, the gain on impairment recovery is recognized in the P&L.

4. Ans. P2,000,000.
Carrying value had there been no impairment (cost method) 12,000,000
Divideby:remainingusefullife 6
Annual de pr ecia ti on af te r re co ve ry, co st me thod 2, 00 0, 00 0

5. Ans. None.
The property had been transferred from PPE to Investment property, where the property is measured under FMV model.
Under the FMV model of valuing investment properties, no depreciation is provided, instead the propety is remeasured at each
balance sheet date at their prevailing FMV. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss.

CHAPTER 6-PROBLEM 13: RAM CORP.

1. Ans. P500,000.
Fair Value/Soud Value, 1/1/2014 4,500,000
Carrying Value, 1/1/2014 (P5 M*8yrs/10yrs) 4,000,000
R ev al ua t io n S u r p lu s , 1 /1 /2 01 4 50 0, 00 0

2. Ans. P562,500.
Carrying value after revaluation, 1/1/14 4,500,000
Divideby:remainingusefullife 8
An n ua l d ep r . a ft er r ev a lu at i on 56 2, 50 0

3. Ans. P700,000.
Carrying value based on revalued amount, 1/1/17 (P4.5M*5yrs/8yrs) 2,812,500
Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000
ReversalofrevaluationsurplusintheOCI 312,500
Incidentally, this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus
to retained earnings. (P500,000*5yrs/8yrs)

Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000

Recoverablevalue/FMV,1/1/17 1,800,000
I m p a ir m e nlto sP-s& L 7 00 ,0 00

4. Ans. P360,000.
Carrying value after impairment loss, 1/1/17 1,800,000
Dividebyremainingusefullife: 5
R ev is e d a nn u al d e p r. a f t er im p ai r men t l os s 36 0, 00 0

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MULTIPLE CHOICE EXERCISES:

CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY
1. Ans. C.; 2. Ans. C.
Land Building
Landandbuildingacquisitionprice 1,308,000
Property taxes in arrears, Jan. 1, 2014: (P20,000*1yr/2yrs) 10,000
Optionpaymentonproperty acquiredonly 15,000
Costof
removal
of
old
buidling 22,000
Partialpaymentonconstructedbuilding 700,000
Legal
fees 4,000 1,500
Insuranceduringconstructiononly:(P24,000*4/12) 8,000
Secondpaymentonconstructedbuilding 600,000
Generalexpense-relatedtoconstruction 12,000
Finalpaymentonconstructedbuilding 200,000
1,337,000 1,543,500

2. Ans. D.
Correct cost of Building, July 1, 2014 1,543,500
Divide by:useful life 25
Annualdepreciation 61,740
Multiply by: 6months/12 months in 2014 6/12
D e p r e c i a t i o nf o r2 0 1 4 3 0, 87 0

CHAPTER 6-EXERCISE 2: MILDEN COMPANY

1. Ans. C.; 2. Ans. C.
Land Building
Acquisitionprice 2,500,000
Costof
razingold
building 300,000
Proceeds from sale of salvaged materials (30,000)
Title insurance and legal fees to purchase land 150,000
Architect’s
fees 600,000
Newbuildingconstructioncost 15,000,000
2,650,000 15,870,000

CHAPTER 6-EXERCISE 3: BOND COMPANY

1. Ans. B.
Actual borrowing cost from Specific Borrowing: P10M*12% 1,200,000
Borrowing cost from General Borrowing
Weighted average actual expenditure* 25,395,167
Less: Proceeds from specific borrowing (10,000,000)
WAAE f inanced by general borrowing 15,395,167
Multiply by: Weighted Ave. Gen Borr. %** 8.67% 1,334,248
Capitalizableborrowingcost 2,534,248
A c t u a l b o r ro wi n g c o st ( P 1 .2 M+ P 5 0 0 K+ P 8 0 0 K) 2 , 5 0 0 , 0 0 0lower

Cost incurred #mo. to 12/31 Peso*Mos.

*January 1 18,228,500 12 218,742,000
March
1 7,000,000 10 70,000,000
September1 4,000,000 4 16,000,000
December31 5,000,000 - -
Total 304,742,000
Divide
months
by:
12 12
Weightedaverageactualexpenditure 25,395,167

**Actual General Borrowing Cost

P5,000,000*10% 500,000
P10,000,000*8% 800,000 1,300,000
Divide by: Proceeds f rom Gen. Borr. (P10M+P5M) 15,000,000
Weightedaveragegenearlborrowing% 0

2 .Ans. A.
Since actual borrowing cost was fully capitalizable, no borrowing cost shall be recognized as outright expense for 2014.

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3. Ans. B.
January 1 18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Capitalizableborrowingcost 2,500,000
C a rr y in g v a lu e, 1 2/ 31 /1 4 3 6, 72 8, 50 0

CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATION

Machine A:
Carrying Value, 1/1/14 (P30,000*80%*80% 19,200
Salvage value (5,000)
Depreciablecarryingvalue 14,200
Divide
by:
years
8 8
D e p r e c i a t i o ne xp e ns e 1Ans.
, 7 7 5 B.

Machine B:
Carrying value, 1/1/4/14 (P50,000-P25,000) 25,000
Salvage value (5,000)
Depreciablecarryingvalue 20,000
Divide by: remaining useful life (4yrs+2yrs) 6
D e p r e c i a t i o ne xp e ns e 3Ans.
, 3 3 3 B.

Machine C:
Depreciation expense, 2014 (P20,000*60%*40%) 4,800
Ans. B.

CHAPTER 6-EXERCISE 5: DELITE CORP.

1. Ans. A.
Machinery AB001
Carrying Value 1/1/14 (6M*10/20) 3,000,000
Less:Salvagevalue (600,000)
Depreciablecarryingvalue 2,400,000
Divideby:Extendedremaininglife 15
D ep r ec i at i on e xp e ns e i n 20 14 16 0, 00 0

2. Ans. C.
Machinery DE020
Cost 1/1/12 6,790,000
Less:Salvagevalue (500,000)
Depreciablecost 6,290,000
Divide
by:
Useful
life 20
AnnualDepreciation 314,500

Capitalizablecoston1/1/14 486,000
Divideby:Remaininglife 18
AdditionalDepreciation 27,000
Tot a l D ep r ec i at i on i n 2 01 4 34 1, 50 0

3. Ans. C.
Machinery GH033
Cost 7/1/14
Down payment: 1,000,000
Balance:(3M*2.577097) 7,731,291
Initial Cost (Cash Price/Present Value) 8,731,291
Multplyby:DoubleDecl.Balrate 25%
Multiplyby(6months/12months) 1/2
D ep r ec i at i on i n 2 01 4 ( 6 mo.) 1, 09 1, 411

4. Ans. A.
Wasting Asset
Cost 18,000,000
Restorationcost 2,000,000
Salvagevalue (1,000,000)
Depletablecost 19,000,000
Divide by: Useful life (output) 7,600,000
Depletion rate: 2.50
Mulitply by: Actual production 1,200,000
T o t a lD e p l e t i o n 3, 00 0, 000

5. Ans. B.
Depletion rate: 2.50
Mulitplyby:Actualsales 900,000
D e p l e t i o ne x p e n s e 2, 25 0, 000

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CHAPTER 6-EXERCISE 6: JERSEY CORP.

1. Ans. D.
Cost Salvage Depr. Cost Life in years Depr. Exp.
Building 6,100,000 1 00,000 6,000,000 20 300,000
Machinery 2,550,000 50,000 2,500,000 5 500,000
Equipment 1,030,000 3 0,000 1,000,000 10 100,000
Total 9,680,000 9,500,000 900,000

Depreciationexpense 900,000
Divideby:Totalcost 9,680,000
C om p os i t e d ep r ec ia t io n r at e 9 .3 0 %

2. Ans. A.
Depreciablecost 9,500,000
Divide by: Depreciation expense 900,000
C o m p o s i tlei f e 1 0 .5 6

3. Ans. B.
Total
cost 9,680,000
Multiply by: Compositedepr. rate 9.30%
D e p r e c i a t i o ne xp e ns e 90 0, 00 0

4. Ans. C.
Building 6,100,000
Equipment 1,030,000
Total 7,130,000
Multiply by: Compositedepr. rate 9.30%
D e p r e c i a t i o ne xp e ns e 66 2, 91 3

CHAPTER 6-EXERCISE 7: GRANNY INC.

1. Ans. B.
Tools
disposed, 2014 300
Cost of earlier purchase (From beg. Invty) 40
Total 12,000
Less: P roceeds from sale (300*10) (3,000)
D ep r ec i at i on 9, 00 0

Tools disposed, 2015: 700

Cost of earlier purchases (500*40) 20,000
Cost of next earlier purchase (200*60) 12,000
Less: P roceeds from sale (700*14) (9,800)
D ep r ec i at i on 2 2, 20 0

2. Ans. D.
Tools
disposed, 2014 300
Cost of later purchase (2006 purchase) 60
Total 18,000
Less: P roceeds from sale (300*10) (3,000)
De p r e c i a t i o n 1 5, 00 0

Toolsdisposed,2015:700 700
Cost of latest purchases (2015 purchase) 80
Total 56,000
Less: Proceeds from sale (700*14) (9,800)
Depreciation 46,200

3. Ans. C.
2014 2015
Beginning inventory 32,000 40,000
Purchases 24,000 72,000
Cost of tools available for use 56,000 112,000
Ending inventory (40,000) (35,000)
Balance 16,000 77,000
Less:Proceedsfromsale (3,000) (9,800)
D e p r e c i a t i o ne xp e ns e 1 3, 00 0 67,200

CHAPTER 6-EXERCISE 8: COCO COMPANY

1. Ans. A.
ProceedsfromsaleofMach.Aye 260,000
Carrying Value as of date of disposal
OriginalCost 700,000
**Accum. Depr.: 638,000*(45/55) (522,000) 178,000
Gao
sin
a le 8 2, 00 0

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2. Ans. A.
MachineryBee(Cost) 1,020,000
Accum Depr (1/1/14)
9
( 60,000/15,000hrs)*11,000hrs (704,000)
CarryingValue,1/1/14 316,000

Mach. Bee (Depr Carrying Value): (316,000-36,000) 280,000

Div. by: Revised remaining useful life (18,000-11,000) 7,000
Depreciationrateperhour 40.00
Multiplyby:Actualhoursusedin2014 2,100
D e p r e c i a t i o nE xp e n s ei n2 0 1 4 8 4, 00 0

3. Ans. B.
Mach.See(Cost) 1,600,000
Accum Depr (1/1/14)
**(1.5M/15)*3yrs (300,000)
CarryingValue(1/1/14) 1,300,000
**as per policy, no depreciation on year of acquisition; full on year of disposal

Mach See (Depr Carrying Value): 1.3M-100,000 1,200,000

Divideby:Revisedremainingusefullife 10
D e p r e c i a t i o nE xp e n s ei n2 0 1 4 12 0, 00 0

4. Ans. C.
Carrying Value of remaining machineries:
Cost:
Machinery Bee 1,020,000
Machinery See 1,600,000
Machinery Dee 1,600,000
Machinery Eff 440,000 4,660,000
Accum. Depr:
Bee:(704,000+84,000) (788,000)
See:(300,000+120,000) (420,000)
Dee:( 1.6M*20%)+(1,280K*20%) (576,000)
Eff:(440K*20%) (88,000) (1,872,000)
C a rr y in g v a lu e as of D e c emb e r 31 , 2 01 4 2 ,7 88 ,0 00

CHAPTER 6-EXERCISE 9: PQR CORP.

1. Ans. A.
Building,CV1/1/14 5,904,900
Multiply by: Double decl. bal. rate (20yrs) 10%
D ep r ec i at i on e xp e ns e - B ui ld i ng 59 0, 49 0

2. Ans. A.
Depreciation - Machinery
Disposed Mach: P2.4M/10yrs*6/12 120,000
NewMach:P1.45M/10yrs*6/12 72,500
Remaining Mach: P12.6M/10yrs 1,260,000
D e p r e c i a t i o n e x p e n s e - Ma c h i n e r y 1, 45 2, 500

3. Ans. B.
Depreciation - Furniture and Fixture
DisposedF&F: P1.8M*6/55*2/12 32,727
NewF&F:P2.2M*10/55*6/12 200,000
RemainingF&F:P4.2M*6/55 458,182
D e p r e c i at i o n e xp e ns e - F& F 69 0, 90 9

Present value of installment price at 8% effective rate:

P 2.4M/3yrs*2.577097 2,061,678 2.577097
Freightandhandlingcost 138,322
TotalinitialcostofnewF&F 2,200,000

4. Ans. D.
Fair market value of asset given-up 1,250,000
Carrying value of asset given-up, 6/30/14
P2.4M*5.5yrs/10yrs)
( (1,320,000)
L o s so nt ra d e - i n ( 70 ,0 00 )

5. Ans. D.
Proceedsfromsale 400,000
Carrying value of F&F sold, 3/1/14 (654,545)
L o s so ns a l eo fF & F (2 54 , 5 45 )

Cost 1,800,000
Accum Depr, 1 2/31/13 ( P1.8M*34/55) (1,112,727)
Depr. up to 3/1/14 (P1.8M*6/55*2/12) (32,727)
Carryingvalue,3/1/14 654,545

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CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP.

1. Ans. C.
Debit Credit Balance
January1,2010(A,B,C) 409,200 409,200
September 30, (D) (18,000+6,000) 24,000 433,200
October 31,
(D) 18,000 451,200
November 30,
(D) 18,000 469,200
December 31,
(D) 18,000 487,200
December31,Depreciation(20%ofbal) (97,440) 389,760
January31,2011(D) 18,000 407,760
February 28,(D) 18,000 425,760
March31,
(D) 18,000 443,760
April
30,
(D) 18,000 461,760
May
31,
(D) 18,000 479,760
June
30,
(D) 18,000 497,760
June
30,
(E) 240,000 737,760
July
31
(D) 18,000 755,760
August30,(D) 18,000 773,760
December 31, Depreciation (20%of bal) (154,752) 619,008
June 30, 2012 (F) (P279,000-P129,000) 150,000 769,008
December 31, Depreciation (20%of bal) (153,802) 615,206
January1,2013:(P75,000-P3,750) (71,250) 543,956
December 31, Depreciation (20%of bal) (108,791) 435,165
October1,
2014: (24,000) 411,165
December31,Depreciation(20%ofbal) (82,233) 328,932

2. Ans. A.; 6. Ans. C.

Correct cost Date of Acq Date of Disp Cond. % as of CV as of Depr. Exp.
12/31/14: 12/31/14: 2014
Equipment A 1/1/10:
157,200 6/30/12: - - -
Equipment B 1/1/10:
120,000 10/1/14: - - 18,000
Equipment C 132,000
/1/10: 1 1/1/13: - - -
Equipment D: C ash price equiv.+Trans. Cost /30/14:
186,000 9 - 0.75yrs/5yrs 27,900 37,200
Equipment E: Cash price equiv. (net of disc.) 6/30/11:
235,200 - 1.5yrs/5yrs 70,560 47,040
EquipmentF:atFMV 279,000
/30/12: 6 - 2.5yrs/5yrs 139,500 55,800
C o r r eCc1V
t2, / 3 1 / 1 4 2 37 ,9 60 158,040

3. Ans. B.
ProceedsfromsaleofC,net 71,250
CV of C, 1/1/2013: P132,000*2yrs/5yrs 52,800
Ga i n
ons a le
oCf 1 8, 45 0

4. Ans. D.
ProceedsfromsaleofB 24,000
CV of B, 10/1/14: P120,000*0.25yrs/5yrs (6,000)
Ga i n
ons a le
oBf 1 8, 00 0

5. Ans. C.
FMV of A, (Asset given-up): 129,000
CV of A, 6/30/12: P157,200*2.5yrs/5yrs (78,600)
Ga ino nt ra d e - i n 5 0, 40 0

CHAPTER 6-EXERCISE 11: ROLLING CORP.

1. Ans. B.
Proceeds 250,000
CarryingV alue( 1.5M*80%*80%*80%)-64,000** 704,000 **depreciation for 5 months in 2014
L os s on d i s p os al o f ol d F ac t o ry eq u ip me nt (4 54 , 0 00 )

2. Ans. A.
Downpayment P1,000,000
PV of Balance, at 10% for f our periods:
P250,000*3.169865 792,466
Incidentalcosts(freight and installation) 120,000
PV of future retirement cost, at 10% for 10 period: 87,534
P227,041*0.385543
I ni t i al c o s t o f n e w Fa c t o r y e q u i p me n t P2 ,00 0, 00 0

3. Ans. C
Fair value of asset given up (1,200,000-500,000) 700,000 Cost 1,000,000
*Book value of asset given up 355,000 Accum Depr (3 yrs + 7 mo. 645,000
Gain on trade-in 345,000 Carrying Value 355,000

4. Ans. D.
Building (10,000,000*90%)*12/120 900,000 - building being deprecated on its 4 th year.
Building Improvement (780,000*12/78) 120,000 - over the remaining life of building which is 12 years.
T o t a l D e p r . – B u i l d i n g & I m pr o v. 1 ,0 20 ,0 00

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5. Ans. C.
Disposed: (1,500,000*80%*80%*80%*20%)*5/12) 64,000
New: (2,000,000*20%*7/12) 233,333
Balance: (6,500,000**80%*80%*80%*20%) 665,600
T o t a l D e p r e c i a t i o n – F a c t o r y Eq u i p m e n t 9 62 ,9 33

6. Ans. C.
Disposed: (1,000,000*90%)/5*7/12 105,000
New: (1,200,000*90%)/5*5/12 90,000
Balance (4,000,000*90%)/5 720,000
Total Depreciation – Automotive 915,000

7. Ans. D.
Cost Accum Depr. CV
Land 5,000,000 5,000,000
Building and Improvements 10,780,000 4,170,000 6,610,000
FactoryEquipment 8,500,000 4,070,933 4,429,067
AutomotiveEquipment 5,200,000 2,970,000 2,230,000
Total 18,269,067

CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY

1. Ans. C.
Equipment per audit: (P100,000*0.92593) 92,593 0.92593
Equipment per books, Feb. 1, 2014 100,000
A d j u s t m e n t t o Eq u i p m e n t a c c o u n t ( 7 ,4 07 )

2. Ans. D.
Buildingperaudit:atFMV 650,000
Buidling per books, June 1, 2014 500,000
A d j us t m e n t t o B ui ld i n g a c co un t 15 0, 00 0

3. Ans A.
Inventory Fixtures Total
Per audit: Prorata based on relative FMV 75,893 49,107 125,000
Perbooks,Apr.1,2015 85,000 55,000 140,000
Adjustement to Inventory and Fixtures (9,107) (5,893) (15,000)

4. Ans. A.
Peraudit,LandatFMV 48,500
Perbooks,September,2015 -
A d j us t m e n tt oL a n d 4 8, 50 0

5. Ans. B.
Peraudit,MachineryatFMV 40,000
Perbooks,October12,2015 45,000
A d j us t m e n tt oMa c hi ne ry ( 5 ,0 00 )

6. Ans. A.
Equipment, Correct cost (see #1) 92,593
Divideby:Useful life 10
D ep r ec i at i one xp e ns e ,20 15 9, 25 9

7. Ans. A.
Building,Correct cost (see #2) 650,000
Divideby:Useful life 25
D ep r ec i at i on e xp e ns e , 20 15 2 6, 00 0

8. Ans.A.
Fixtures,Correctcost(see#3) 49,107
Divide
by:Useful life 10
D ep r ec i at i one xp e ns e ,20 15 4, 91 1

9. Ans. A.
Machinery,Correct cost (see #5) 40,000
Divideby:Useful life 10
D ep r ec i at i one xp e ns e ,20 15 4, 00 0

CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY

1. Ans. D.; 2. Ans. C.
Allocation of lump sum price in proportion to fair values:
Land A (135/1,350 x P12,300,000) P1,230,000
Building A (1,215/1,350 x P12,300,000) 11,070,000
Total P12,300,000

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3. Ans. B.
Cost of Building A P11,070,000
Less: Salvage value (600,000)
Depreciable cost 10,470,000
Divide by: Annual depreciation 261,750
Estimated life 40 years

4. Ans. A.
Depreciation expense on Building A for the year
Ended September 30, 2016 261,750
Same as prior year because straight-line method is used in depreciating Building A.

5. Ans. D.
F a ir va l ue o f L an d o n ac q u is i t i o n d a te = FM V o f s ha re s P1 ,1 25 ,0 00
*Demolition cost shall be charged to the cost of the new constructed Building.

6. Ans. D.
Since Builidng B is not yet available for use as of September 30, 2016, no depreciation shall be provided yet.

7. Ans. A.
Donated equipment, at fair value P450,000

8. Ans. D.
Depreciation expense—Donated equipment, for the year ended September 30, 2015:
Cost P450,000
150% declining balance rate (1/10 x 150%) X 15%
Depreciation expense P67,500

9. Ans. C.
Depreciation expense—Donated equipment, for the year ended September 30, 2016:
Book value, Oct. 1, 2015 (P450,000-P67,500) P382,500
150% declining balance rate (1/10 x 150%) X 15%
Depreciation expense P57,375

10. Ans. B.
Total cost as recorded P2,473,500
Less: Normal repairs and maintenance 223,500
Correct cost of Machinery A P2,250,000

11. Ans. C.
Depreciation expense—Machinery A for the year ended September 30, 2015:
(P2,250,000-P90,000=P2,160,000 x 8/36) P480,000

12. Ans. A.
Depreciation expense—Machinery A, for the year ended September 30, 2016:
(P2,160,000 x 7/36 x 4/12) P140,000

13. Ans. C.
Down payment P86,000
First installment payment on October 1, 2015 90,000
Present value of succeeding 10 nstallment payments
(P90,000 x 6.710) 603,900
Total cost of Machinery B P780,000

14. Ans. B.
Depreciation expense-Machinery B, for the year ended Septmeber 30, 2016:
(P780,000/20years) 39,000

CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC.

1. Ans. D.
Book value of plant and equipment,
En d o f 2 0 1 6 ( P 1 2 0 m i l l i o n x 5 / 8 ) P7 5 mi l li on

2. Ans. A.
Book value of purchased technology (Patent)
( P 6 0m i l li o nx3 / 6 ) P 3 0m i l li o n

3. Ans. D.
Plant and equipment:
Bookvalue P75
million
Recoverablevalue(FMV) 50million *cash flow is undiscounted, thus not useful
I m p a ir m e ntlo s s P 2 5m i l li o n

4. Ans. C.
Purchased technology:
Bookvalue P30
million
Recoverable value (FMV) 10 million*c ash flow is undiscounted thus not useful
I m p a ir m e ntlo s s P 2 0m i l li o n

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CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION

1. Ans. A.
Factory: (P1,800,000*24/30) 1,440,000
Building: (P10,000,000*14/20) 7,000,000

2. Ans. B.
Present value of future net cash flows from the CGU's:
Continued use: P1,050,000*4.9676 5,215,980

3. Ans. A.
Carrying value of CGU:
Factory:(P1,800,000*24/30) 1,440,000
Building:( P10,000,000*14/20) 7,000,000
Total 8,440,000
Recoverable value/Value in use 5,215,980 *FMV not determinable
I m p a ir m e ntlo s s 3, 22 4, 020

4. Ans. B.
Factory Machinery
Carryingvaluebeforeimpairment loss: 1,440,000 7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020 (550,070)
Building( 7,000,000/8,440,000)*P3,224,020 (2,673,950)
C a rr y in g v a lu e af t er i mp a ir me nt lo s s 88 9, 93 0 4,326,050

5. Ans. B.
Factory Machinery
Carryingvaluebeforeimpairment loss: 1,440,000 7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020 (550,070)
Building( 7,000,000/8,440,000)*P3,224,020 (2,673,950)
Carryingvalueafterimpairmentloss 889,930 4,326,050 *lower than FMV P4.5M
AdditionalimpairmenttoFactory (173,950) 173,950
Ca rrying v alue a ft er re allo ca tion o f im pa irme nt l os s 71 5, 98 0 4,500,000
Observe that the carrying value of the individual assets comprising the CGU should not result to an amount that is
lower than the higher between the individual assets' Recoverable Value or Zero.

CHAPTER 6-EXERCISE 16: MARGOT CORPORATION

1. Ans. A.
Costofmachineries 609,000
Accum. Depr. (609,000-49,000)*3yrs/8yrs (210,000)
C a rr y in g v a lu es , 1 2/ 31 /1 4 39 9, 00 0

2. Ans. B.
Present value of future net cash flows from:
Use:2015:P141,000*0.909091 128,182 0.909091
2016:P114,000*0.826446 94,215 0.826446
2017:P30,000*0.751315 22,539 0.751315
2018:P15,000*0.683013 10,245 0.683013
2019:P10,000*0.620921 6,209 261,391 0.620921
Disposal:2019:P49,000*0.620921 30,425
V al u
ine
se 29 1, 81 6

3. Ans. C.
Value
in
use 291,816
F MVl e s sc o s tt os e l l 30 0, 00 0 higher

4. Ans. D.
Carrying value 399,000
Recoverableamount (300,000)
I m p a ir m e ntlo s s 9 9, 00 0

5. Ans. B.
V a l uieu
ns e 29 1, 81 6 higher
FMVlesscosttosell 275,000

6. Ans. D.
Carrying
value 399,000
Recoverableamount (291,816)
I m p a ir m e ntlo s s 10 7, 18 4

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CHAPTER 6-EXERCISE 17: REVO CORP.

1. Ans. C.
LandA LandB
FairMarketValue 8,000,000 16,000,000
Cost (10,000,000) (12,000,000)
(Impairment loss)/Revaluation Surplus (2,000,000) 4,000,000
P&L OCI

2. Ans. C.
LandA LandB
FairMarketValue 12,000,000 11,000,000
Cost (10,000,000) (12,000,000)
(Impairment lo ss)/Revaluation S urplus 2,000,000 (1,000,000)
OCI P&L
FairMarketValue 12,000,000 11,000,000
CV (8,000,000) (16,000,000)
Total increase/decrease in value 4,000,000 (5,000,000)
2,000,000 (4,000,000)
Recovery gainReversal of RS

Impairment loss fromLand B (1,000,000)

RecoverygainfromLandA 2,000,000
N e tg a i nf r o mL a nd s 1, 00 0, 000

3. Ans. B.
LandA LandB
FairMarketValue 11,000,000 15,000,000
Cost (10,000,000) (12,000,000)
(Impairmentl oss)/RevaluationS urplus - 3,000,000
OCI OCI
FairMarketValue 11,000,000 15,000,000
CV (12,000,000) (11,000,000)
Totali ncrease/decrease invalue (1,000,000) 4,000,000
(1,000,000) 1,000,000
Reversal of RS Recovery gain

Revaluation surplus from Land B 3,000,000

Reversal of revaluaiton surplus for Land A (1,000,000)
N e tO C If o rt hey e a r 2, 00 0, 000

CHAPTER 6-EXERCISE 18: LABANOS CORP.

1. Ans. C.
Carrying value (P500,000-P90,000) 410,000
Recoverablevalue (338,000)
I m p a ir m e ntlo s s 7 2, 00 0

2. Ans. B.
CVafterimpairmentloss 338,000
2014 Depr: (338,000-50,000)/8yrs (36,000)
C V1, 2 / 3 1 / 1 4 30 2, 00 0

3. Ans. C.
Replacement depreciable cost (P555,000-50,000) 505,000
Multiplyby:Conditionpercent(6yrs/10yrs) 6/10
Depreciable FMV, Depreciable Sound Value 303,000
Salvage value 50,000
F a i rv a l u e / S o u ndv a l ue 35 3, 00 0

4. Ans. A.
Fair
value/SoundValue 353,000
CV had there been no impairment (P500,000-P180,000) 320,000
Revaluation
surplus 33,000

CV had there been no impairment (P500,000-P180,000) 320,000

CV based on impaired value (P338,000-P72,000) 266,000
R ec ov erg
y a iP
n
- &L 5 4, 00 0

5. Ans. C.
R S, 1 2/ 31 /1 6: ( P 33 ,0 00 *7 ye ar s /8 y e a rs ) 2 8, 87 5
*note that the remaining life of the asset after revaluation is (12years-4years) 8 years.

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CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS

DISCUSSION PROBLEMS
CHAPTER 7-PROBLEM 1
1 A.
2 B.
3 C.

CHAPTER 7-PROBLEM 2:
Ans. P3,700,000.
Purchaseofafranchise 1,200,000
Goodwill acquired in the purchase of a business 640,000
Legal costs incurred in securing a patent 70,000
Cost of purchasing a patent from an inventor 500,000
Costofpurchasingacopyright 900,000
Costofpurchasingatrademark 290,000
100,000
T o t alI nt ang i b l eA s s e t s 3 ,7 0 0 ,0 0 0

CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP.

1. Ans.
2008:
Research and development expense 418,000
2009:
Research and development expense 520,000
2010:
Patent ABC amo. (P100,000/20yrs)*9/12 3,750
Research and development expense 125,000 128,750
2011:
Patent ABC amo. (P100,000/20yrs) 5,000
Research and development expense 450,000 455,000
2012:
Patent ABC amo. (P100,000/20yrs) 5,000
Patent DEF amo. (P375,000/12.5yrs) 30,000
Research and development expense 500,000
Legal fees-successfuldefense 42,600 577,600
2013:
Patent ABC amo. (P100,000/20yrs) 5,000
Patent DEF amo. (P375,000/12.5yrs) 30,000
Patent GHI amo. (P350,000/16yrs)*6/12 10,938 45,938
2014:
Patent ABC amo. (P100,000/20yrs) 5,000
Patent DEF amo. (P375,000/12.5yrs) 30,000
Patent GHI amo. (P350,000/16yrs) 21,875

Research and development expense 360,000 416,875

2. Ans. P680,938.
Condition% CV
Cost Acq.Date 12/31/14: 12/31/14:
PatentABC 4/1/2010:
100,000 15.75y/20y 78,750
PatentDEF 12/31/2011:
375,000 9.5y/12.5y 285,000
PatentGHI 7/1/2013:
350,000 14.5y/16y 317,188
T o t al 680,938

CHAPTER 7-PROBLEM 4: GARY INC.

1. Ans.
2 0 1 1 : A m o r t i z at i o n ( P 6 4 0 , 0 0 0 / 1 0 y r s ) 64,000
2 0 1 2 : A m o r t i z at i o n ( P 6 4 0 , 0 0 0 / 1 0 y r s ) 64,000
2013: Amortization:
Original Patent (P640,000-P128,000)/12 years 42,667
RelatedPatent(P120,000/12years) 10,000
T o t aAl m o r t i z at i o n 52,667
2014: Amortization:
Original Patent (P640,000-P128,000)/12 years 42,667
RelatedPatent(P120,000/12years) 10,000
T o t aAl m o r t i z at i o n 52,667

2. Ans. P386,565.; 3. Ans. (P140,102).

Value in use/Present value of future net cash flows at 8% for 3 years.
P 150,000*2.577097 3 8 6 , 5 6 5 2.577097
Carrying value, 12/31/14
Original and Related patent cost 760,000
Amortization,12/31/14 (233,333) 526,667
I m p ai r m e nlto s s (1 4 0 , 1 0 2 )

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4. Ans. P128,855.
CV,1/1/15afterimpairment 386,565
Divideby:Remaininglife 3
A m o r t i z at i o n,2 0 1 5 128,855

CHAPTER 7-PROBLEM 5: COLGATE COMPANY

Case 1:
1. Ans. P1,439,756.
Franchise, Jan. 1, 2014
D ownpayment 600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712 1,748,227 2,348,227 2.913712
Less:Amo,2014(2,348,227/10yrs) (234,823)
Carryingvalue,12/31/2014 2,113,405
Value in use/PV of net cash flows at 10% for 9yrs:
P250,000*5.759024 5.759024 1,439,756
Impairment loss 673,649

2. Ans. P476,000.
Patent,Jan.,2014 544,000
Amortization, 2014 (544,000/8yrs) (68,000)
C ar r y i ng v al u e , 1 2 / 3 1 / 1 4 476,000

3. Ans. P389,474.
Trademark,Jan.,2012 1,000,000
Amortization,2012(P1M/10yrs) (100,000)
Carryingvalue,12/3/12 900,000
Value in use/PV of net cash flows at 9% for 9yrs:
P200,000*5.995247 5.995247 1,199,049
Impairment
loss -

Trademark, Jan.,
2013 900,000
Amortization,2013(P1M/10yrs) (100,000)
Carryingvalue,12/3/13 800,000
Value in use/PV of net cash flows at 9.5% for 8yrs:
P200,000*5.433436 5.433436 1,086,687
Impairment
loss -

Trademark, Jan.,
2014 800,000
Amortization,2014(P1M/10yrs) (100,000)
Carryingvalue,12/3/14 700,000
Value in use/PV of net cash flows at 10% for 7yrs:
P80,000*4.868419 4.868419 389,474
Impairmentloss 310,526

4. Ans. P2,858,150.
Fanchise:
Amortization 234,823
Impairmentloss 673,649
Interest expense (P1,748,227*14%) 244,752
Continuing franchise fee (P18M*5%) 900,000 2,053,223
Patent:
A mortization 68,000
Trademark:
Amortization 100,000
Impairmentloss 310,526
Legal fees - successful defense 326,400 736,926
T o t ael x p e ns e s 2 ,8 5 8 ,1 5 0

Case 2:
1. Ans. P2,348,227.
Franchise, Jan. 1, 2014
D ownpayment 600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712 1,748,227 2,348,227
C ar r y i ngv al u e ,1 2 / 3 1 / 2 0 1 4 2 ,3 4 8 ,2 2 7
Value in use/PV of net cash flows at 10% for an indefinite period:
P250,000/10% 5.759024 2,500,000
Impairment loss -

2. Ans. P476,000.
Patent,Jan.,2014 544,000
Amortization, 2014 (544,000/8yrs) (68,000)
C ar r y i ng v al u e , 1 2 / 3 1 / 1 4 476,000

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3. Ans. P800,000.
Trademark,Jan.,2012 1,000,000
Carryingvalue,12/3/12 1,000,000
Value in use/PV of net cash flows at 9% for an indefinite period:
P200,000/9% 5.995247 2,222,222
Impairment
loss -

Trademark,Jan.,2013 1,000,000
Carryingvalue,12/3/13 1,000,000
Value in use/PV of net cash flows at 9.5% for an indefinte period:
P200,000/9.5% 5.433436 2,105,263
Impairment
loss -

Trademark,Jan.,2014 1,000,000
Carryingvalue,12/3/14 1,000,000
Value in use/PV of net cash flows at 10% for an indefinite period:
P80,000/10% 4.868419 800,000
Impairmentloss 200,000

4. Ans. P1,739,152.
Fanchise:
Interest expense (P1,748,227*14%) 244,752
Continuing franchise fee (P18M*5%) 900,000 1,144,752
Patent:
A mortization 68,000
Trademark:
Impairmentloss 200,000
Legal fees - successful defense 326,400 526,400
T o t ael x p e ns e s 1 ,7 3 9 ,1 5 2

CHAPTER 7-PROBLEM 6: PJ CORP.

1. Ans. P1,500,000.
AcquisitionCost 8,000,000
FMVofNetAssets 6,500,000
Go o dw i l l 1 ,5 0 0 ,0 0 0

2. Ans. P1,950,000; Ans. P8,450,000.

FMVofNetAssets 6,500,000
Excessearningsin%(12%-9%) 3%
Excessearings 195,000

Go o dw i l l (P 1 9 5 ,0 0 0 * 1 0 yr s ) 1 ,9 5 0 ,0 0 0
FMVofNetAssets 6,500,000
A c q u is i t i o nc o s t 8 ,4 5 0 ,0 0 0

3. Ans. P1,625,000; Ans. P8,125,000.

Go o dw i l l (P 1 9 5 ,0 0 0 / 1 2 %) 1 ,6 2 5 ,0 0 0
FMVofNetAssets 6,500,000
A c q u is i t i o nc o s t 8 ,1 2 5 ,0 0 0

4. Ans. P1,200,000; Ans. P7,800,000.

Average/Normal Earnings of DA Inc. (P6.5M*12%) 780,000
Divideby:Capitalizationrate 10%
A c q u is i t i o n
co s t 7 ,8 0 0 ,0 0 0
FMV of
NetAssets 6,500,000
Go o dw i l l 1 ,3 0 0 ,0 0 0

5. Ans. P1,198,191; Ans. P7,698,191.

Present value of excess earnings at 10% for 10 years:
Go o d w i l l : P 195, 000*6. 144567 1 ,1 9 8 ,1 9 1 6.144567
FMVofNetAssets 6,500,000
A c q u is i t i o nc o s t 7 ,6 9 8 ,1 9 1

CHAPTER 7-PROBLEM 7: KAREN CORPORATION

Accumulatedprofits2010-2014 1,800,000
Less:Gain on sale of equipment in 2012 (200,000)
Accum.OperatingProfits2010-2014 1,600,000
by:
Divide 5
Annualaverageoperatingprofits 320,000
Add:Annualpresidentsbonus 50,000
Less: Inrease in depr. exp. (P350,000/5yrs) (70,000)
Projectedaverageoperatingprofits 300,000
Less: Average/Normal earnings of industry (P2.6M*10%) (260,000)
Projectedexcessearnings 40,000

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FMV BV Difference
Current Asset 700,000 550,000 150,000
Noncurrent Asset (excluding GW)
L and 950,000 950,000 -
Depr.Asset 1,850,000 1,500,000 350,000
Liabilities (900,000) (900,000) -
Net
Assets 2,600,000 2,100,000

1. Ans. P200,000; P160,000; P400,000; P151,631.

a) Purchase of excess earnings
G oo d w i l l ( P4 0 , 0 0 0 * 5 y r s ) 200,000
b) Capitalization of excess earnings
Goo d w i l l (P4 0 , 0 0 0 / 2 5 %) 160,000
c) Capitalzation of average earnings
Projected annual average oper. Profits 300,000
Divideby:Capitalizationrate 10%
Acquisitioncost/price 3,000,000
Less:FMVofNetAsset (2,600,000)
G oo d w i l l 400,000
d) Present value method
G oo d w i l l : ( P4 0 , 0 0 0 * 0 . 3 . 7 9 0 7 9 ) 151,631 3.79079

2. Ans.
a) Purchase of excess earnings
FMVofNetAssets 2,600,000
Goodwill 200,000
A c q u i s i t i o n c o s t / pr i c e 2 ,8 0 0 ,0 0 0
b) Capitalization of excess earnings
FMVofNetAssets 2,600,000
Goodwill(P40,000/25%) 160,000
A c q u i s i t i o n c o s t / pr i c e 2 ,7 6 0 ,0 0 0
c) Capitalzation of average earnings
Projected annual average oper. Profits 300,000
Divideby:Capitalizationrate 10%
A c q u i s i t i o n c o s t / pr i c e 3 ,0 0 0 ,0 0 0
d) Present value method
FMVofNetAssets 2,600,000
Goodwill:( P40,000*0.3.79079) 151,631
A c q u i s i t i o n c o s t / pr i c e 2 ,7 5 1 ,6 3 1

3. Ans. Option d)
For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill.

CHAPTER 7-PROBLEM 8: ABC CORPORATION

1. Ans. P1,000,000.
ABC DEF GHI JKL
Acquisition
price 5,000,000
FMVofnetassets(4CGUs) 800,000 1,500,000 700,000 1,000,000 4,000,000
Goodwill (prorated)** 200,000 375,000 175,000 250,000 1,000,000

Before impairment, 12/31/14

Cash* shall be excluded in determining the CV of the CGU (not included in the " other assets" within the scope of PAS 36)
Factoryequipment 100,000 240,000 100,000 200,000
OfficeEquipment 250,000 490,000 120,000 200,000
Building 500,000 900,000 400,000 700,000
Goodwill** 200,000 375,000 175,000 250,000
CarryingvalueofCGU 1,050,000 2,005,000 795,000 1,350,000
Value in use:
ABC:P149,726*6.144567 920,000 6.144567
DEF:P289,242*7.606080 2,200,000 7.606080
GHI:
P76,490*6.144567 470,000 6.813692
JKL:
P161,440*6.813692 950,000
Impairment loss 130,000 - 325,000 400,000

CGU-ABC
Impairmentloss 130,000
ChargeabletoGoodwill-ABC (130,000)

CGU-DEF
Impairment
loss -

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CGU-GHI CV,
after
impairment
Impairmentloss 325,000
ChargeabletoGoodwill-GHI (175,000) -
Balancetoallocatedtootherassets 150,000
Factory equipment (100,000/620,000) 100,000 (24,194) 75,806
Office equipment (120,000/620,000) 120,000 (29,032) 90,968
Building (400,000/620,000) 400,000 (96,774) 303,226

CGU-JKL CV,
after
impairment
Impairmentloss 400,000
ChargeabletoGoodwill-GHI (250,000) -
Balancetoallocatedtootherassets 150,000
Factory Equipment (200,000/1,100,000) 200,000 (27,273) 172,727
Office equipment (200,000/1,100,000) 200,000 (27,273) 172,727
Building (700,000/1,100,000) 700,000 (95,455) 604,545

2. Ans. P395,000.
After impairment, 12/31/14 ABC DEF GHI JKL TOTAL
Cash 50,000 100,000 - - 150,000
Factory equipment 100,000 240,000 75,806 172,727 588,534
Office Equipment 250,000 490,000 90,968 172,727 1,003,695
Building 500,000 900,000 303,226 604,545 2,307,771
Goodwill** 70,000 375,000 - - 445,000
CarryingvalueofCGU 970,000 2,105,000 470,000 950,000 4,495,000

3. Ans. P605,000.
Goodwill, before impairment 1,000,000
Goodwill,afterimpairment 445,000
Im pair m ent l os s c harge d t o g oo d wi ll 55 5, 00 0

4. Ans. P258,064.

5. Ans. P604,546.

CHAPTER 7-PROBLEM 9: EDD CORP.

1. Ans. P510,000.
2014Rentalexpense 480,000
2014 Amortization of leaserights
( P300,000/10yrs) 30,000 510,000

2. Ans. P63,158.
Cost of leasehold improvement 1,200,000
Divide by: Remaining lease term: 9.5yrs 9.50 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs.
Annualdepreciation 126,316
Multiply
by: 6/12
D e p r e c i a t i o n e x p e ns e , 2 0 1 4 63,158

3. Ans. P60,150.
Carrying value, 1/1/2019
(P1,200,000*5yrs/9.5yrs) 631,579
Divide by:Remainingusefullife 10.50 *remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended
D e p r e c i a t i o n e x p e ns e , 2 0 1 9 60,150 remaining lease term (10-5yrs+10yrs), 15yrs.

CHAPTER 7-PROBLEM 10: MUSAR CORP.

1. Ans. P139,375.
Salaries of staff working on research project 78,000
Computerprogramservices 17,500
Allocated general expenses (P175,500*25%) 43,875
T o t al r e s e ar c h an d d e v e l o p m e nt e x p e n s e 139,375

2. Ans. P2,480.
Patent,initialcost 24,800
Divideby: useful life 10
A m o r t i z at i o ne x p e ns e 2,480

3. Ans. P22,320.
P at e n t( 2 4 , 8 0 0 - 2 4 8 0 ) 22,320

CHAPTER 7-PROBLEM 11: BITS AND BYTES INC.

1. Ans. P1,253,600.
Salaries and wages of programmers doing research 940,000
Expenses prior to establishment of tech. feasibility 313,600
T o t al r e s e ar c h an d d e v e l o p m e nt e x p e n s e 1 ,2 5 3 ,6 0 0

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2. Ans. P330,000.
Ex pe ns es afte r tec hnical fe as ib il it y is es tabl is he d 33 0, 00 0

3. Ans. P100,500.
Amortization o f computer s oftware ( 330,000/3yrs) 110,000
Cost to produce and prepare software for sale 225,000
Costofgoodsproduced 335,000
Portionofgoodsremainingonhand 30%
C o s to fe nd i ngi nv e nt o r y 100,500

4. Ans. P117,000.
Amortization of computer software:
P 330,000*(P2,000,000/P4,000,000) 165,000
Cost to produce and prepare software for sale 225,000
Costofgoodsproduced 390,000
Portionofgoodsremainingonhand 30%
C o s to fe nd i ngi nv e nt o r y 117,000

CHAPTER 7-PROBLEM 12: HARRY CORP.

Prepayment Exp.-2014 Miscellaneous
Rent
SecurityDeposit 50,000 - Receivable
1-yearrent 220,000 20,000
Leasebonus 55,000 5,000
Inurance
Fire
insurance 12,500 37,500
Propertyinsurance 56,250 18,750
Advertising 25,000 50,000
Officesupplier 25,000 90,000
Advances to
officers 135,000 - Receivable/Other asset
Idle
office
equipment 25,000 - Other asset
Bondredemption fund 545,000 - LT Investment
393,750 221,250
2 .A n s . 1 . A ns .

MULTIPLE CHOICE EXERCISES:

CHAPTER 7-EXERCISE 1:
Purchasedrecipesandsecretformulas 150,000
Licensing,royalty,andstandstillagreement 300,000
Operating and
broadcastrights 112,000
Goodwillpurchasedinabusinesscombination 500,000
A license to manufacture a steroid by means of a government grant 150,000
Initial franchise fees paid 175,000
Costofpurchasingapatentfromaninventor 137,000
Legal cost in
securing apatent 70,000
Cost ofpurchasing a
trademark 250,000
Amount paid to a lessor for the exclusive right to rent a facility under an
operating lease agreement for a period of 10 years 100,000
T o t ali nt ang i b l e si nc l u d i ngg o o d w i l l 1,944,000

CHAPTER 7-EXERCISE 2: DOHA CORPORATION

1. Ans. A.
C V , P at e nt , 1 2 / 3 1 / 1 4 : P 4 4 4 , 0 0 0 * 9 y r s / 1 0 y r s 399,600

2. Ans. C.
CV , F ranchis e, 12 /3 1/ 14 : P 25 2, 00 0* 6. 5y rs /8 yrs 20 4, 75 0

3. Ans. B.
P r e p ai d re nt , 12 / 3 1 / 1 4 : P1 6 8 , 0 0 0 * 0 . 7 5 y r s / 2 y rs 63,000

4. Ans. D.
Amortization of franchise, 2013 (P252,000/8yrs)*6/12 15,750
Rent expense, 2013 (P168,000/2yrs)*3/12 21,000
Net loss including organization expense in 2013 96,000
Re t r o ac t i v e ad j u s t m e nt t o R E , b e g . 2 0 1 3 132,750

5. Ans. B.
Amortization of franchise, 2014 (P252,000/8yrs) 31,500
Rentexpense,2014(P168,000/2yrs) 84,000
Amortization of patent, 2014 (P444,000/10yrs) 44,400
Costtodevelopasecretformula 450,000
Legalfees-successfuldefense 75,900
Research and development expense, 2014 960,000
T o t ale x p e ns ei n2 0 1 4 1 ,6 4 5 ,8 0 0

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CHAPTER 7-EXERCISE 3: ALYSSA CORP.

1. Ans. B.
Franchise:
Carrying Value/Cost (no definite life) 1,260,000
Recoverable value/Value in use:
( 180,000/12%) 1,500,000
Impairmentlossin2014 - no impairment in 2013

Carrying Value/Cost (no definite life) 1,260,000

Recoverable value/Value in use:
(1 5 0 , 0 0 0 / 1 2 % ) 1 ,2 5 0 ,0 0 0
Impairmentlossin2014 10,000

2. Ans. B.
Patent:
Cost
(1/1/14) 2,220,000
Amortization: (2,220K/10yrs) (222,000)
CarryingValue(12/14) 1,998,000
Recoverable value/Value in use
(337,822*5.32825) 1 ,8 0 0 ,0 0 0 0 5.328250
Impairmentloss 198,000

3. Ans. A.
2013 expenses:
Rent expense (840,000/2)*3/12 105,000
Netlossfortheyear 480,000
Re t r o ac t i v e a d j u s t m e nt t o R E , B e g 585,000

4. Ans. A.
2014 expenses:
ImpairmentlossonFranchise 10,000
Rentexpensefor2014 420,000
AmortizationonPatent 222,000
ImpairmentlossonPatent 198,000
Costofdevelopingrecepe 2,250,000
Legalfeesonpatentdefense 379,500
T o t ale x p e ns e 3 ,4 7 9 ,5 0 0

CHAPTER 7-EXERCISE 4: STU CORPORATION

1. Ans. B.
Patent,CorrectCost,1/2013 3,740,000
Amortization(2 013-2014):P3 ,740,000*2yrs/20yrs (374,000)
C ar r y i ngv al u e ,1 2 / 3 1 / 1 4 3 ,3 6 6 ,0 0 0

2. Ans. D.
License,CorrectCost,1/2012 2,160,000 -Training cost is recognized as outright expense.
Amortization(2 012-2014):P2 ,160,000*3yrs/10yrs (648,000)
C ar r y i ngv al u e ,1 2 / 3 1 / 1 4 1 ,5 1 2 ,0 0 0

3. Ans. B.
Trainingcost,expensein2012peraudit 240,000
Amortization e xpense (2 012-2013) pe r au dit: P2 ,160,000*2yrs/10yrs 432,000
Priorperiodexpense,peraudit 672,000
Amortization expnse (2 012-2013) per books: P2,400,000*2yrs/10yrs 480,000
Re t r o ac t i v e ad j u s t m e nt , d e b i t , t o RE , b e g . 2 0 1 4 192,000

4. Ans. C.;
Trademark,CorrectCV,12/31/14 1,280,000 - Trademark is with indefinite life, thus no amortization.
Recoverable value/Value in use: - Successful defense cost is recognized as outright expense.
PV of Future net cash flows at 9% for an indefinite period:
P90,000/9% 1 ,0 0 0 ,0 0 0
Impairment
loss 280,000

5. Ans. C.
Depreciation on the Leasehold Improvement
P900,000/5yrs*10/12 150,000 - Depr. is over useful life since it is shorter than remaining lease term.
Amortization of Leaserights; P400,000/10yrs 40,000
To ta
elx p e ns e 190,000

CHAPTER 7-EXERCISE 5: NICOLE CORP.

1. Ans. D.
Legal and other professional fees to process the patent
application (useful life is 15 years), Jan., 2007 660,000

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2. Ans. B.
CV, Dec. 31, 2007: P660,000*14/15 616,000

3. Ans. C.
Amortization expense 2012:
Original Patent: P660,000/15yrs 44,000
Competing Patent: P220,000/11yrs 20,000
T o t a l a m o r t i z a t i o n ,2 0 1 2 64,000

4. Ans. A.
Original Patent, CV, Dec. 31, 2011:
P660,000*10/15 440,000
Competing Patent, CV, Dec. 31, 2011:
P220,000*10/11 200,000 640,000

5. Ans. D.
OriginalPatent,CV,1/1/2012 440,000
CompetingPatent,CV,1/1/2012 200,000
RelatedPatent,1/1/2012 335,000
Total
Patent, 1/1/2012 975,000
Divide by: Extended remaining life (10yrs+3yrs) 13
Re v i s e d am o r t i z at i o n e x p e ns e , 2 0 1 2 75,000

6. Ans. B.
CV, 12/31/13 (P975,000*11/13) 825,000

7. Ans. B.
CV, 12/31/14 (P975,000*10/13) 750,000
Recoverable value -
I m p ai r m e ntl o s s 750,000

CHAPTER 7-EXERCISE 6: DEF CORP.

1. Ans. D.
Patent, 12/31/14 (before amortization), per books 550,000
CV of Repairs cost capitalized in 1/1/2011
P75,000*6yrs/9yrs (50,000)
Patent, 12/31/14 (before amortization), per audit 500,000
CV of Patent with revised useful life:
P 210,000*6yrs/14yrs 90,000
CV of remaining Patent with the same useful life 410,000

Amortization of patent with revised life: (P90,000/2yrs) 45,000

Amortization of patent w/o change in life: (P410,000/6yrs) 68,333
T o t alam o r t i z at i o ne x p e ns e ,2 0 1 4 113,333

2. Ans. A.
Patent, 12/31/14 (before amortization), per audit 500,000
Correctamortizationfor2014 (113,333)
P at e n t , 1 2 / 3 1 / 1 4 af t e r am o r t i z at i o n 386,667

3. Ans. B.
The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.

CHAPTER 7-EXERCISE 7: AMFURST CORP.

AC
1.s
n .. AC
2.s
n ..
FRANCHISE:TERM10YEARS FRANCHISE:INDEFINITE
Initialfranchisefee(PV) Initialfranchisefee(PV)
Down payment 600,000 Down
payment 600,000
Balance( 800,000*2.321632) 1,857,306 Balance
1 (800,000*2.321632) 1,857,306
2,457,306 2.321632 2,457,306
Less:Amortization: 245,731 Recoverable amount/Value in use
CV
12/31/14 (400,000/12%)
2,211,575 3,333,333
Recoverable
Value/Value
in
Use Impairment loss -
(400,000*5.32825) 2,131,300 0
Impairmentloss 80,275 5.3282498
mortization
A -
Impairment loss -
Amortization(2,457,306/10) 245,731 Interest expense (1,857,306*14%) 260,023
Impairment loss 80,275 Continuing franchise fee (12M*5%) 600,000
Interest expense (1,857,306*14%) 260,023 To t ael x p e ns e 860,023
Continuing franchise fee (12M*5%) 600,000
T o t ale x p e ns e 1 ,1 8 6 ,0 2 8

3. Ans. B.
PATENT: 8 YEARS:
Cost1/1/2014 545,000 517,750
Amortization(545,000/8) 68,125
C ar r y i ng V al u e 1 2 / 3 1 / 2 0 1 4 476,875
Recoverable value
(120,000*4,563757) 547,651 0
Impairment loss -

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4. Ans. C.
LEASE AGREEMENT:
Rentexpensefor2014 200,000
Amortizatin of lease rights (150,000/5yrs) 30,000
Depr of improvement (450,000/4.5yrs)*6/ 50,000
T o t ae
l xp en se 280,000

CHAPTER 7-EXERCISE 8: SAHARA CORP.

1. Ans. D.
*No capitalizable internally developed intangible yet since one of criteria for capitalization (i.e. how future economic benefits shall be derived)
has not been met. Under PAS 38, Intangibles, the following criteria should be strictly complied with if to capitalize development cost of
an internally generated intangible:
1. Establishment of technical feasibility
2. Intention to complete the project and to either sell/use the result of the project.
3. Ability to complete the project and to either sell/use the result of the project.
4. Availability of resources to complete the project.
5. How probable future economic benefits can be derived from the intangible.
6. Ability to reliably estimate future cost to be incurred to complete the intangible.

2. Ans D.
Salaries and other employee benefits 7,800,000
Other expenses 3,080,000
Depreciation on Building (11.2M/20yrs) 560,000
T o t a lR& DE x p e n s e 1 1 , 4 4 0 ,0 0 0

3. Ans. B.
Patent
cost 3,200,000
Useful
life 10
A m o r t i z a t i o nf o r2 0 1 4 320,000

4. Ans. A
Building cost 11,200,000
AccumDepr(11.2M/20) (560,000)
C V1 2 / 3 1 / 1 4 1 0 , 6 4 0 ,0 0 0

5. Ans. B.
Patentcost 3,200,000
Amortization in 2013: (3.2M/10yrs)*9/12 (240,000)
Amortizationin2014 (320,000)
C V1 2 / 3 1 / 1 4 2 ,6 4 0 ,0 0 0

CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES

1. Ans. B.
Franchise,CV,12/31/14 550,000 *No definite life, thus no amortization
*Continuing franchise fee is recgonized as outright expense.
Recoverable value/ Value in use
( P6 7 , 5 0 0 / 1 5 % ) 450,000 *PV of future net cash flows from continued use at 15% for an indefinite period.
Impairment loss 100,000

2. Ans. 0.
Organization cost is recognized as outright expense.

3. Ans. C.
Ex ce ss o f c o st o v e r n e t a ss e ts o f e n tr pri se a cq u ir e d i n 2 0 1 2 2 0 0 ,0 0 0
*No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost.

CHAPTER 7-EXERCISE 10: CAN CORP.

Projected profits for the next four years:
2014:(6M*1.2) 7,200,000
2015:(7.2M*1.2) 8,640,000
2016:(8.64M*1.2) 10,368,000
2017:(10.368M*1.2) 12,441,600
Total 38,649,600
Divide
by: 4
Projectedaverageearnings 9,662,400 9,662,400
Average/Normal earnings at industry rate:
Fair market Value of Net Assets
Current Asset (9M+4.8M) 13,800,000
InvestmentsatFMV 9,000,000
PPE,
net 24,000,000
Currentliabilities (4,800,000)
Noncurrentliabilities (6,000,000)
FMVofnetassets 36,000,000
Multiply by: industry rate of return 18%
Average/Normal earnings at i ndustry rate 6,480,000 6,480,000
Projectedaverageexcessearnings 3,182,400

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1. Ans. D.
Projected average excess earnings 3,182,400
Divideby:Capitalizationrate 18%
Goodwill: 17,680,000
Add: Fair value of net assets 36,000,000
A c q u i s i t i o npr i c e 5 3 , 6 8 0 ,0 0 0

2. Ans. A.
Projected average excess earnings 3,182,400
Multiply by: #ofyears 4
Goodwill 12,729,600
Add: Fair value of net assets 36,000,000
A c q u i s i t i o npr i c e 4 8 , 7 2 9 ,6 0 0

3. Ans. A.
Projectedaverageearnings 9,662,400
Divideby:Capitalizationrate 20%
A c q u i s i t i o npr i c e 4 8 , 3 1 2 ,0 0 0

4. Ans. C.
Projected average excess earnings 3,182,400
Multiply by: PV factor at 15%, 4 periods 3
Goodwill 9,085,683
Add: Fair value of net assets 36,000,000
A c q u i s i t i o npr i c e 4 5 , 0 8 5 ,6 8 3

CHAPTER 7-EXERCISE 11: T CORPORATION

1. Ans. B.
Total Country A Country B Country C
Acquisition Price, January 1, 2013 10,000,000
FMV of Identifiable Net Asset 8,000,000 2,000,000 1,500,000 4,500,000
Goodwill (Allocated, Prorata: FMV of NA) 2,000,000 500,000 375,000 1,125,000

2. Ans. A.
Value in use=Present value of future net cash flows from CGU Country C:
Estim. Future net cash flows before impairment event 1,500,000
Effect of new legislation (cutting by 40% imports to Country C) 60%
Estim. Future net cash flows after impairment event 900,000
Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.771584
Va l u
ins
ee 4,294,426
*observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal.

3. Ans. A.
Carrying Value of Country C's, Assets
Factoryequipment 2,500,000
StoreEquipment 1,500,000
Building 2,700,000
Goodwill 1,125,000 **observe that payables is deducted since, estimate of cashflows
P ayables (700,000) 7,125,000 also included cash flows related to payable.
Valueinuse/Recoverablevalue 4,294,426
I m p a i rm e nlto s s 2 ,8 3 0 ,5 7 4

4. Ans. C.; 5. Ans. C.

Impairment loss 2,830,574
Allocation of loss:
Goo d w i l lo fC o u n t ryC (1,125,000)
Balancetootherasset,prorata: 1,705,574
Factoryequipment 2,500,000 (636,408) 1,863,592
CV after impairment
Storeequipment 1,500,000 (381,845) 1,118,155
CV after impairment
B uilding 2,700,000 (687,321) 2,012,679 CV after impairment
P ayables (700,000) (700,000) *liabilities are not impaired.

6. Ans. D.
Impairment loss 2,830,574
Allocation of loss:
GoodwillofCountryC (1,125,000)
Balancetootherasset,prorata: 1,705,574
Factoryequipment 1,800,000 (458,214) 1,341,786
StoreEquipment 1,500,000 (381,845) 1,118,155 Should not be lower than its Rec. Value, P1.4M
Building 2,700,000 (687,321) 2,012,679
Payables (700,000) (700,000) *liabilities are not impaired.

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Reallocation of impairment loss:

Impairment loss 2,830,574
Allocation of loss:
G o o d w i l lo fC o u nt ryC (1,125,000)
Balancetootherasset,prorata: 1,705,574
Cash 700,000 - 700,000 *no impairment allocated to cash
Factoryequipment 1,800,000 (642,230) 1,157,770
CV after impairment
StoreEquipment 1,500,000 (100,000) 1,400,000 Should not be lower than its Rec. Value, P1.4M
Building 2,700,000 (963,345) 1,736,655 CV after impairment
P ayables (700,000) (700,000) *liabilities are not impaired.

Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable
amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property
and equipment, prorata.

6. Ans. C.
C ash -
Allocation of loss:
GoodwillofCountryC (100,000)
Balancetootherasset,prorata: (100,000)
Factoryequipment 1,800,000 (458,214) 1,341,786
StoreEquipment 1,500,000 (381,845) 1,118,155 Not be lower than its Rec. Value, P1M
Building 2,700,000 (687,321) 2,012,679
P ayables (700,000) (700,000) *liabilities are not impaired.

CHAPTER 7-EXERCISE 12: ABC CORPORATION

1. Ans. B.
F ai rv al u el e s sco s tt os e l l 5 ,2 5 0 ,0 0 0 higher
Value in use/PV of future net cash flows at 8% for 5 periods:
Use:P1,252,282*3.992710 3.992710 5,000,000

2. Ans. A.
Carrying value of CGU
Factory equipment 1,750,000 included in the determination of the fair value less cost to sell.
Office equipment 1,475,000
Building 2,725,000
Goodwill 500,000 6,450,000
Recoverable value/FMV less cost to sell 5,250,000
I m p ai r m e nlto s s 1 ,2 0 0 ,0 0 0

3. Ans. C.
Impairment loss 1,200,000
Allocated to:
G oodwill (500,000)
Balancetootherassets,prorata 700,000
Factory equipment 1,750,000 (205,882) 1,544,118
Office equipment 1,475,000 (173,529) 1,301,471
Building 2,725,000 (320,588) 2,404,412

4. Ans. C.
Impairment loss 1,200,000
Allocated to:
G oodwill (500,000)
Balancetootherassets,prorata 700,000
Factory equipment 1,750,000 (205,882) 1,544,118 *Should not be lower than 1.6M
Office equipment 1,475,000 (173,529) 1,301,471 Office Equipment CV should not be lower than P1.4M
Building 2,725,000 (320,588) 2,404,412

Reallocation of Impairment loss

Impairment loss 1,200,000
Allocated to:
G oodwill (500,000)
Balancetootherassets,prorata 700,000
Factory equipment 1,750,000 (150,000) 1,600,000
Office equipment 1,475,000 (75,000) 1,400,000
Building 2,725,000 (475,000) 2,250,000

CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY

1. Ans. B.
Cos t incurred pri or to est abl ishment of capital iza tio n crit eria on Nov. 1, 2014 540 ,00 0

2. Ans. C.
Capi tal iz ab le co st , af te r No v . 1, 20 14 60 ,0 00
Recoverable amount, Dec. 31, 2014 500,000
Impairment loss -

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3. Ans. D.; 4. Ans. C.

Capitalizable cost, after Nov. 1, 2014 60,000
Additional capitalizable cost, 2015 1,200,000
Total cost as of Dec.31, 2015 1,260,000
Re co ve rabl e amou nt, De c. 31 , 20 15 1,14 0,00 0
I m p ai r m e ntl o s s 120,000

CHAPTER 7-EXERCISE 14: LAS VEGAS INC.

1. Ans. C.
AmortizationofPatent(600,000/10) P60,000
Amortizationo fC opyright( 1,200,000*1.5M/5M) 360,000
Total amortization (Patent and Copyright) P420,000

2. Ans. A.
Amortization of Software( 300,000/240)*100 P125,000
AmortizationofFranchise(480,000/10) 48,000
Continuing franchise fee (2,500,000*.05) 125,000
Total expenses related to c omputer software and franchise P298,000

3. Ans. A.
Total research and development costs (all costs in item f) P433,000

4. Ans. C.
Patent(600,000*9/10) P540,000
Copyright(1,200,000-360,000) 840,000
Tradename 1,050,000
Computersoftware(300,000-125,000) 175,000
Franchise(480,000*9/10) 432,000
Goodwill 2,700,000
Total carrying value of intangible, 12/31/15 P5,737,000

CHAPTER 7-EXERCISE 15: BOHOL CORPORATION

1. a) Ans. A.; b) Ans. D.; c) Ans. B.; d) Ans. B.
Project 123 is entirely research and development, thus no capitalizable intangible, unless qualified under PAS 38 capitalization criteria.

The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not qualified
yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense.

The second Patent is useful for many projects, thus only t he amortization is recognized as R&D Expense. The balance shall be
reflected as Intangible asset.
P at e nt , C V , J u ne 3 0 , 2 0 1 4 : ( P 1 6 , 2 0 0 * 9 / 1 0 ) 14,580

Copyright: Cost Acq.

Date Condition
% CV
6/30/2014: 6/30/2014:
Copyright
ABC 1/2/2010:
30,000 20.5yrs/25yr 24,600
Copyright
XYC /15/2011:
33,000 712yrs/15yrs 26,400
51,000

Goodwill
Acquisitioncost 1,582,000
FMV,NetAssetsacquired 1,560,000
G o o d w i l l , i n i t i a l r e c o g ni t i o n 22,000
Note that since there are no indication of GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired.

2. Ans. D.
Salariesofstaffdoingresearch 18,500
PatentsolelyforProjectAM123 12,000
Depr. on Equipment for various projects (10,000/5yrs) 2,000
Amo. on Patent for various projects (16,200/10yrs) 1,620
Costof
pilotmodels 8,950
T o t aRl & D
E x p e ns e 43,070

3. Ans. A.
Amortization Expense:ABC (30,000/25yrs) 1,200
AmortizationExpense:XYC(33,000/15yrs) 2,200
T o t al am o r t i z at i o n e x p e ns e o n c o p y r i g ht s 3,400

4. Ans. A.

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CHAPTER 7-EXERCISE 16: TAILOR CORP.

Searching for applications of new research findings 57,000
Radical modification of the formulation of a glassware production 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testingforevaluationofnewproducts 72,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and projects 300,000
Personnel costs of persons involved in research and devt projects 384,000
Indirect costs reasonably allocable to research and devt projects 150,000
Design, construction, and testing of preproduction prototypes and
models 870,000
2,292,000

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CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

DISCUSSION PROBLEMS
CHAPTER 8-PROBLEM 1
1 B.
2 C.
3 B.
4 C.
5 D.
6 C/ B .
7 B.
8 D.
9 A.
1 0 A.
11 B.
12 C.
13 D.
14 D.

15 B.
16 B.
17 B.
18 B.
19 C.

CHAPTER 8-PROBLEM 2: MERMAID COMPANY

Current Noncurrent
Accounts payable, adjusted for the debit balance (Advances to suppliers) 660,000
Notepayable
trade
- only 500,000
Salaries
payable 800,000
payable
SSS 30,000
Pag-ibig
payable 5,000
Medicarepayable 15,000
Wittholding taxespayable 60,000
payable
VAT 120,000
Advancefromcustomers(ARwithcreditbalances) 50,000
Serialbondspayable,payableP1M,semi-annyally 2,000,000 8,000,000
Accruedinterestonbondspayable 300,000
Estimated warrantiespayable 420,000
Estimatedliabilityforenvironmentadamages 50,000
Unearned rental income, for 3 years starting Jan.1, 2015 50,000 100,000
Cash advances fromshareholders 200,000
T o ta l 5 ,0 60 ,0 0 0 8,300,000
1 .A n s . 2 .A n s.

CHAPTER 8-PROBLEM 3: JOJO INC.

Current Noncurrent
a) P1M short-term notes payable, due Feb. 7, 2015 1,000,000
b) P500,000 short term debt, due June 1, 2015 500,000
c) P500,000 notes payable, due June 15, 2015 20,000 480,000
d) P1M bonds payable, due Dec. 31, 2018 1,000,000
Interest on the bondspayableP1M*10% 100,000
2,620,000 480,000
1 .A n s. 2 .A n s .
Notes: For item a, there was no indication that the right to refinance already existed as of the balance sheet date. Thus, while there
was a LT-refinancing agreement completed after the balance sheet date, the liability is still current as of Dec. 31, 2014.
For item b, the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date.
For item c, the right existed already as of the balance sheet date, however, since the amount of the loan to be used to refinance
the currently maturing obligation is expected only at 80% of P600,000, that is P480,000 only P480,000 of the currently
maturing obligation is expected to be refinanced on a long-term basis.
For item d, while the grace period was agreed upon as of the balance sheet date (Dec. 31), the grace period is short-term only.

CHAPTER 8-PROBLEM 4: TARBUCK INC.

Ans. P4,120,000.
PerGL PerSL
Unadjusted balances 4,450,000 4,020,000
GoodsreceivedonDec.30(validpurch.) 400,000
Goodsin-transit,FOBDest(notvalidpurch.) (300,000)
Payments to suppliers, checks released Dec. 30 (valid payment) (520,000)
Payments to suppliers, checks not yet released as of Dec. 31 (not valid) 200,000
Purchasereturns(validDec.transaction) (50,000)
Creditbalance(Advancestosuppliers) 40,000
A d j u s t eb
da l a n c e s 4 ,1 20 ,0 0 0 4,120,000

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CHAPTER 8-PROBLEM 5: RONNIE COMPANY

Required Estimated Expense (500u*80%*P8,000) 3,200,000
Less:Actualcostincurred (1,250,000)
Estimatedwarrantiespayable 1,950,000

1. Ans.:
W a r r a n t i e se x p e n s e 1, 9 50 ,0 00
E s t im a t e dw a r r a n t i e sp a y a b l e 1, 95 0 ,0 00

2. Ans. P3,200,000.

3. Ans. P1,950,000.

CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND

Analysis
2014 2015
Estimatedwarrantiespayable,beg. 425,000
Required estimated expense:
2014:5,000units*30%*P500 750,000
2015:6,000units*30%*P500 900,000
Actual cost incurred for the year (325,000) (650,000)
E sti mat e d w a r ra nt i es p a y a b l e, e n d 4 25 , 00 0 675,000

1. Ans.
Audit adjusting entry in 2015:
Re ta in e d e a rn in gs (a dd 'l exp. in 2 01 4 ) 42 5, 0 00
W a r r a n t i e se x p e n s e 2 50 , 00 0
E s t im a t e dw a r r a n t i e sp a y a b l e 6 75 ,0 00

2. Ans. P750,000.

3. Ans. P900,000.

4. Ans. P425,000.

5. Ans. P675,000.

CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP.

Analysis:
Required estimated expense: VC SF Total
Vacuum Cleaners: (P45M*30%)/P15,000*(P2,250-P500) 1,575,000
StandFan:(P45M*40%)/P12,500*(P1,500-P300) 1,728,000 3,303,000
Actual cost incurred/Actual redemption:
Vacuum Cleaners:(1,000u-175u)*(P2,250-P500) (1,443,750)
StandFan:(1,500u-125u)*(P1,500-P300) (1,650,000) (3,093,750)
E s t i m at e dp r e m i u m sp a y ab l e ,e n d 1 3 1, 25 0 78,000 209,250

1. Ans. P3,303,000.

2. Ans. P209,250.

CHAPTER 8-PROBLEM 8: NOKIA CORP.

2014 2015 2016 2017
Collection for unearned service contract 400,000
25% earned in the first contract year: 100,000
months
6 2014
in 50,000
months
6 2015
in 50,000
30% earned in the second contract year: 120,000
months
6 2015
in 60,000
months
2016
6in 60,000
45% earned in the third contract year: 180,000
months
2016
6in 90,000
2017
months
in6 90,000
Servicecontractearnedforeachyear 50,000 110,000 150,000 90,000
B al a n c e u ne a rn ed a t t he en d of e ac h y ea r : 3 50 ,0 00 240,000 90,000 -
1 .A n s. 2 .A n s . 3 .A n s.

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CHAPTER 8-PROBLEM 9: SAN MIG CORP.

1. Ans. P337,500.
2013 leaves:
5 5employees*4weeks*5days 1,100 days
2 5employees*2weeks*5days 250 days
Total
2013 unused leaves: 1,350 days
Multiplyby:Salaryratein2013 250
Liability for compensated absences/Salaries payable 337,500 unaccrued, thus expense in 2013 was understated.

2. Ans. P453,750.
2013 leaves:
5 5employees*4weeks*5days 1,100 days
2 5employees*2weeks*5days 250 days
Total
2013unused leaves: 1,350 days
Less:
Exercised
in
2014 925 days
Unexercised in 2014, thus forfeited by year-end 2014 425 days

2014 leaves:
3 0employees*6weeks*5days 900 days
2 5employees*5weeks*5days 625 days
3 0employees*3weeks*5days 450 days
1 0employees*2weeks*5days 100 days
Total cummulative unused leaves by 12/31/2014 2,075 days
Less:Expiredunusedleavesfrom2013: (425)
Unusedleavesstillexerciseable 1,650
Mulitplyby:Currentsalaryrate,2014 275
Liab il it y fo r co mp en sate d absen ce s/ Sa laries pa ya bl e 45 3, 75 0

2. Ans.

CHAPTER 8-PROBLEM 10: BARO CORP.

1. Ans. B.
Damages occurred in 2014, thus is a present obligation. The outflow of benefits is probable and the most reliable estimate is
P400,000. Since the lawyers estimate that the reasonably possible outflow may be upto P700,000, additional contingent
liabiltiy should be disclosed at P300,000.

2. Ans. C.
The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract
(10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous
as of the balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous.
Entry:
Loss on purchase commitment (P100-P60)*10,000 400,000
Estimatedliabilityonpurchasecommitment 400,000

3. Ans. D.
The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37) while
virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16)

4. Ans. C.
The contingent asset that is probable is disclosed.

CHAPTER 8-PROBLEM 11: MOATS COMPANY

Proceeds from issue of bonds=PV of future cash flows at 4% semi-annual effective rate for 10 periods:
Principal: P1,000,000*0.675564 675,564 0.675564
Interest:P50,000*8.110896 405,545 8.110896
1,081,109
Amortization tabe: Bonds payable:
Correct Int. Nominal Int. Amortization Balance
(CV*4%) (P1M*5%)
March
2014:
1, 1,081,109
September1,2014: 43,244 50,000 (6,756) 1,074,353
March 1,
2015: 42,974 50,000 (7,026) 1,067,327
September1,2015: 42,693 50,000 (7,307) 1,060,021
March 1,
2016: 42,401 50,000 (7,599) 1,052,421

Correct entries:
March 1, 2014:
Cash 1,081,109
Bondspayable 1,000,000
Premiumonbondspayable 81,109

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September 1, 2014:
Interest
expense 50,000
Cash 50,000
Premiumonbondspayable 6,756
Interest
expense 6,756
December 31, 2014:
Interest
expense 33,333
Interest
payable 33,333
(P1,000,000*10%*4/12)
Premiumonbondspayable 4,684
Interest
expense 4,684
Correctinterest(P1,074,353*8%*4/12) 28,649
Nominal i nterest a ccrued (P1,000,000*10%*4/12) 33,333
Amortization (4,684)

1. Ans: Adjusting Entries:

Bonds
payable 81,109
Premiumonbondspayable 69,669
Interest
expense 11,440
Interest
expense 33,333
Interest
payable 33,333

2. Ans. P71,894.
Interest expense (Mar. 1 - Sept. 1)
P1,081,109*8%*6/12 43,244
Interst expense (Sept. 1 - Dec. 31)
P 1,074,353*8%*4/12 28,649
I n t e r e s te x p e n se ,2 0 1 4 71 ,8 9 4

3. Ans. P1,069,669.
Amortized cost, Sept. 1, 2014 (see table) 1,074,353
Amortization up to Dec. 31, 2014 (see entries) (4,684)
A m o r t i z e dc o st ,D e c .3 1 ,2 0 1 4 1, 06 9 ,6 69

4. Ans. P10,021.
Retirementprice 1,050,000
Amortized cost, Sept. 30, 2015: (1,058,754)
Accruedinterst(P1M*10%*1/12) (1,267)
Ga in o n r et i r e m e nt o f b o nd s (1 0 ,0 21 )

Amortized cost, Sept. 1, 2015 (see table) 1,060,021

Amortization up to Sept. 30:
Correct interest (P1,060,021*8%*1/12) 7,067
Nominal interest (P1,000,000*10%*1/12) (8,333) (1,267)
Amortizedcost,Sept.1,2015 1,058,754

Entry:
Bondspayable 1,000,000
Premiumonbondspayable 58,754
Interest
expense 1,267
Cash 1,050,000
Gainonretirementofbonds 10,021

CHAPTER 8-PROBLEM 12: MNO INC.

1. Ans. P1,245,000.
Accounts payable, unadjusted balance 1,240,000
RR2903-onconsignment (30,000)
RR2904-intransit,FOBSP 35,000
Ac cou n ts p ay a b l e, ad j ust ed 1, 2 45 ,0 00

2. Ans. P720,000.
Required warranty expense, 2013: (2,500u*40%*P900) 900,000
Actual
cost (560,000)
Warrantiesliability,Dec.31,2013 340,000
Required warranty expense, 2014: (3,000u*40%*P900) 1,080,000
Actual
cost (700,000)
W a r r a n t i e sl i a b i l i t y , D e c . 3 1 , 2 0 1 4 7 20 ,0 00

3. Ans. P2,099,474.
Proceeds from bond issue/FMV 1/1/13 = PV of fu ture cash flows at 10% for 5 years.
Principal: P2,000,000*0.620921 1,241,843 0.620921
Interest:P 240,000*3.790787 909,789 2,151,631 3.790787

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Amortization table: Bonds payable

Correct Int. Nominal Int. Amortization Balance
(Bal*10%) (Face*12%)
January
2013:
1, 2,151,631
December31,2013: 215,163 240,000 (24,837) 2,126,795
December31,2014: 212,679 240,000 (27,321) 2,099,474

4. Ans. P78,505.
Netincomebeforeanyadjustments: 1,557,679
Understatedaccountspayable/purchases (5,000)
Understated warranties payable/warranties expense (380,000)
Overstatement in interestexpensein 2014 27,321
Adjusted netincome2014,beforebonus 1,200,000

B = 10% (NI - Tx - B); Tx = 30%(NI - B)

B = 10% (1.2M - (30%(1.2M - B) - B)
B = P78,505.

5. Ans. P785,046.
Adjusted netincome2014,beforebonus 1,200,000
Less:
Bonus (78,505)
Netincomebefore30%tax 1,121,495
Income taxexpense (336,448)
N eIt n c o m e
a fte r
t ax 7 85 ,0 46

CHAPTER 8-PROBLEM 13: MAMALOLA CORP.

1. Ans. P443,000.
Accountspayable,unadjustedbalance 460,000
Shipmentsfromconsignor(recorded) (42,000) AJE 1: Accounts Payable 17,000
Shipments-in-transit, F OB D estination ( recorded) (30,000) Purchases 17,000
Shipment-in-transit, FOB SP (not yet recorded) 55,000
A c c o u n t sp a y a b l e ,a d j u st e d 4 43 ,0 00

2. Ans. P248,700.
Warranty expense in 2013 (1,250*70%)*P350 306,250
Less: Actual warranty cost incurred in 2011 (153,000) AJE 2: Warranties Expense 95,450
Warrantiespayable,2013 153,250 Warrantiespayable 95,450
Warranty expense in 2014 (1,410*70%)*P350 345,450
Less: Actual warranty cost incurred in 2014 (250,000)
W a r r a n t i e sp a y a b l e ,2 0 1 2 2 48 ,7 00

3. Ans. P222,750.
2013 unused leaves forwarded to 2015 (625-(700-200))* 125
2014unusedleavesforwardedto2015 550 AJE3:Salariespayable 45,750
Total unused leaves that may be forwarded to 2053 675 Salariesexpense 45,750
Multiply by current salary rate in 2014: (268,500/895days)*1 330 (268,500-222,750)
Sa la ri es pa ya bl e (Lia b fo r co mp en sa te d ab se nc es) 22 2, 75 0
*any unused prior to 2013 leaves are forfieted by the end of 2014

4. Ans. P1,600,000.
*There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probable
proceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.

5. Ans. P130,841.
Unajdustednetincome 2,032,700
AJE1:Overstatedpurchases 17,000
AJE 2: Understated warranty expense (95,450)
AJE 3: Overstated salaries expense 45,750
Adjustednetincome 2,000,000
B = 10% (NI - B - TX)
TX = 30% (NI - B)

B = 10% (2,000,000 - B - 30%(2,000,000 - B))

B = 140,000 - .07B
1.07B = 140,000
Bonus = P130,841

CHAPTER 8-PROBLEM 14: SANTOS CORP.

1. Ans. P402,104.
Proceedsfromconvertiblebondissue(P8M*110%) 8,800,000
Less: FMV of bonds without conversion option = PV of future cash flows
from the bonds at 10% for 3 years:
Principal:P8,000,000*0.751315 6,010,518 0.751315
Interest:P960,000*2.486852 2,387,378 8,397,896 2.4868520
R e s i d u a l a m o u n t / A P I C f r o m b o n d c o v e r si o n p r i v i l e g e 4 0 2, 10 4

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2. Ans. P8,277,686.
Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance
(Bal.*10%) (Face*12%)
January
2014:
1, 8,397,896
December31,2014: 839,790 960,000 (120,210) 8,277,686
December31,2015: 827,769 960,000 (132,231) 8,145,455
December31,2016: 814,545 960,000 (145,455) 8,000,000

3. Ans.
Entry upon conversion:
Alt1 Bondspayable 8,000,000
Premiumonbondspayable 277,686
Ordinaryshares(8,000*50*P10) 4,000,000
S h a rp
e r e mi u m 4, 27 7 ,6 86

Alt2 Bondspayable 8,000,000

Premiumonbondspayable 277,686
APIC-Bond conversion privilege 402,104
Ordinaryshares(8,000*50*P10) 4,000,000
S h a rp
e r e mi u m 4, 67 9 ,7 90

Note: Both alternatives are acceptable under PAS 39.

4. Ans. P65,455.
Total BondsPayabl APIC-BCP
(at FMV, 102) (Residual)
Retirementprice 8,320,000 8,080,000 240,000
CV,Bondspayable,1/1/16 8,145,455
CV,APIC-Bondcoversionprivilege 402,104
Gain on retirement of convertible bonds 65,455 162,104
to pr ofit/los to A PIC
Entry:
Bondspayable 8,000,000
Premiumonbondspayable 145,455
APIC -Bond conversion privilege 402,104
Cash 8,320,000
Gain on retirementofbonds(profit/loss) 65,455
APIC/Share premium 162,104

CHAPTER 8-PROBLEM 15: DIRT CORP.

1. Ans. P379,264.
Proceeds from bond with warrants issue 2,250,000
Less: FMV of bonds without conversion option = PV of future cash flows
from the bonds at 5% for 8 semi-annual periods:
Principal:P2,000,000*0.676839 1,353,679 0.676839
Interest:P80,000*6.4632128 517,057 1,870,736 6.4632128
R e s i d u a l a m o u n t / Or d i n a r y S h a r e W a r r a n t s O u t s t a n d i n g 3 7 9, 26 4

2. Ans. P1,898,486.
Amortization table: Bonds payable Correct Int. Nominal Int. Amortization Balance
(Bal.*10%) (Face*12%)
January
2014:
1, 1,870,736
July
1,
2014: 93,537 80,000 13,537 1,884,273
January1,
2015: 94,214 80,000 14,214 1,898,486

3. Ans. P257,559.
Entry upon exericise of warrants:
Cash(2,000*5w)*60%*P55 330,000
Ordinary share warrants outstanding(60%) 227,559
Ordinaryshares(6,000shares*P50) 300,000
Share
premium 257,559

4. Ans.
Entry upon expiration of remaining warrants:
Ordinary share warrants outstanding(40%) 151,706
Share premium/APIC -Expiredwarrants 151,706

CHAPTER 8-PROBLEM 16:

CASE 1:
Periodic rentals (March to December); (40,000*10mo) 400,000
Amortization of lease bonus (120,000/5yrs)*10/12 20,000
R enEtx p e n se 4 20 ,0 00

CASE 2:
Annual
rental 300,000
Amortization of lease bonus (100,000/8yrs) 12,500
Contingentrental(P2.5M-P2M)*5% 25,000
R enEtx p e n se 3 37 ,5 00

CASE 3:
Total lease payments: P30,000*(60mo - 9mo) 1,530,000

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Divide
years
by:
5 5
Annual rental expense 306,000
Mulitply by:11mo/12mo 11/12
Rentexpense for
2014 280,500
Less: Amount paid for the year (Nov. and Dec.) (60,000)
A c c r u e dr e n te x p e n se ,1 2 / 3 1 2 20 ,5 00

CASE 4:
Total lease payments: P40,000*(120mo-3mo) 4,680,000
Divide
by:
10
years 10
Annualrentalexpense 468,000
Multiplyby:4mo/12mo 4/12
Rentexpense for
2014 156,000

Leaseholdimprovementcost 300,000
Divide
by:
years
5 5
Annualdepreciationexpense 60,000
Mulitplyby:3mo/12mo 3/12 15,000
T o tae
l x p e n s ef o r2 0 1 4 1 71 ,0 00

CASE 5:
Total lease collection:
First two years: (P2,000*100*2yrs) 400,000
Last two years: (P3,000*100*2yrs) 600,000 1,000,000
Divide
years
by:
4 4
Annual rental income 250,000
Multiplyby:
9mo/12mo 9/12
Rentincomefor theperiod ended 9/30/14 187,500
Amountcollectedin2014 200,000
U n e a r n e dr e n t a li n c o m e (1 2, 50 0 )

CASE 6:
Grossrental income 500,000
Amortization o f d irect l ease e xpense ( 150,000/5years) (30,000)
Depreciation expense (120,000)
Propertytaxes (90,000)
N erte n t ailn c o m e 2 60 ,0 00

CHAPTER 8-PROBLEM 17:

CASE 1:
Minimumleasepaymentsinarrears 200,000
Multiply by: PV factor of 1 at 10% for 10 periods in arrears 6.1450
I n i t i a lc o s to ft h ea s s e t 1, 22 9 ,0 00

CASE 2:
Minimumleasepaymentinadvance 96,000
Multiply by: PV factor of 1 at 10% for 8 period in advance 5.8680
Initial
cost
of
theasset 563,328
Divide by: 12 yrs (life since title passes to the lessee) 12
D ep r ec ia t io n
e x p e n se 46 ,9 44

CASE 3:
Minimum lease payment
Periodicpaymentsinadvance 400,000
Multiply by: PV factor of 1 at 14% for 10 period in advance 5.9500 2,380,000
Bargainpurchaseoption 200,000
Multiply by: PV factor of 1 at 14% for 10 period without ann 0.2700 54,000
Initial
costof
theasset 2,434,000
Less:Depreciation(2,434,000/12years) (202,833) *
C a r r y i n gv a l u ea so f1 2 / 3 1 / 1 4 2 ,2 31 ,1 6 7
*note that the depreciation is based on the useful life since ownership will be transferred to the lessee

CASE 4:
Amortization table:
Periodic Payme Interest Principal Balance
Dec.31,2014:(P3,165,000-P500,000) 3,165,000
Dec.
31,2015: 500,000 316,500 183,500 2,981,500
Dec.
31,2016: 500,000 298,150 201,850 2,779,650

CHAPTER 8-PROBLEM 18: ANGLO INC.

Entries made, under finance lease:
December 31, 2013:
Building* 3,379,512
Cash 500,000
Lease
liability 2,879,512
*PV of MLP 10% for 10 years in advance: (lower than FMV of asset)
(P500,000*6.7590238) 0 5.759024 6.7590238

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Amortization table (per books): Finance Lease

Periodic Payme Correct Int. Principal Balance
December
31,
2013: 2,879,512
December31,2014: 500,000 287,951 212,049 2,667,463

December 31, 2014:

Interest
expense 287,951
Lease
liability 212,049
Cash 500,000

Depreciationexpense 337,951
AccumulatedDepreciation 337,951
(P3,379,512/10years)

AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000)
The lease agreement does not qualify as finance, thus should have been accounted for o nly under operating lease.

Correct entries, under operating lease.

December 31, 2013:
Prepaid
rent 500,000
Cash 500,000

January 1, 2014:
Rentexpense 500,000
Prepaid
rent 500,000

December 31, 2014:

Prepaid
rent 500,000
Cash 500,000

1. Ans. P125,902.
Expenses per books
Interest on finance lease liability 287,951
Depreciationexpense 337,951 625,902
Expenseper
audit 500,000
Over st ate me nt in ex pe ns e /U n de r st ate me n t in N I 12 5, 90 2

2. Ans. None.

CHAPTER 8-PROBLEM 19: LACTUM INC.

Entries made per books, operating lease:
January 1, 2014:
Rent
expense 150,000
Cash 150,000

April 1, 2014:
Rent
expense 150,000
Cash 150,000

July 1, 2014:
Rentexpense 150,000
Cash 150,000

October 1, 2014:
Rent
expense 150,000
Cash 150,000

AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388)
The lease agreement does qualify as finance, thus should have been accounted for only under finance lease.

Correct entries per audit, finance lease

January 1, 2014:
Building* 4,185,388
Cash 150,000
Lease
liability 4,035,388
*PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888) 26.9025888 27.9025888
0.4619482
Amortization table: Finance lease liabilty:
Periodic Payme Correct Int. Principal Balance
January
2014:
1, 4,035,388
April
1,
2014: 150,000 80,708 69,292 3,966,096
July
1,
2014: 150,000 79,322 70,678 3,895,418
October 1,
2014: 150,000 77,908 72,092 3,823,326

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Janaury1,
2015: 150,000 76,467 73,533 3,749,793
April
1,
2015: 150,000 74,996 75,004 3,674,789
July
1,
2015: 150,000 73,496 76,504 3,598,285
October
1,2015: 150,000 71,966 78,034 3,520,250

April 1, 2014:
Interest
expense 80,708
Lease
liability 69,292
Cash 150,000

July 1, 2014:
Interestexpense 79,322
Leaseliability 70,678
Cash 150,000

October 1, 2014:
Interest
expense 77,908
Lease
liability 72,092
Cash 150,000

December 31, 2014:

Interest
expense 76,467
Interest
payable 76,467

Depreciationexpense 418,539
Accumulateddepreciation 418,539
(P4,185,388/10years) * no transfer of ownership, thus depr shall be over term.

1. Ans. P132,943.
Expense per books
Rentexpense(P150,000*4qtrs) 600,000
Expense per audit:
Interestexpense 314,405
Depreciationexpense 418,539 732,943
Understatement in Expense/Overst atement Net Income (132,943)

2. Ans. P3,823,326.
Le a sel i a b i l i t y ,1 2 . 3 1 . 1 4 3, 82 3 ,3 26
Interestpayable,12.31.14 76,467

3. Ans. P303,076.
Principal due from January 1, 2015 to December 31, 2015 (see amortization table)
Janaury 1,
2015: 73,533
April
1,
2015: 75,004
July
1,
2015: 76,504
October 1,
2015: 78,034
C u r r e n t p o r t i o n o f l e a se l i a b i l i t y 3 03 , 07 6

CHAPTER 8-PROBLEM 20:

CASE 1:
1. Ans. P60,000.
Sales
price 420,000
Fairmarketvalue (420,000)
D e f e r r e dg a i n
o nsa l e -

Fair
market vaue 420,000
Carrying value (360,000)
R e a l i z e dg a i no ns a l e 60 ,0 0 0

2. Ans. 40,000.
Sales
price 420,000
Fairmarketvalue (380,000)
D e f e r r e dg a i no nsa l e 40 ,0 0 0

Fair
market vaue 380,000
Carrying value (360,000)
R e a l i z e dg a i no ns a l e 20 ,0 0 0

3. Ans. 100,000.
Sales
price 420,000
Fairmarketvalue (320,000)
D e f e r r e dg a i no nsa l e 1 00 , 00 0

Fair
market vaue 320,000
Carrying value (360,000)
R e a l i z e dl o sso ns a l e (4 0 ,0 00 )

4. Ans. 60,000.
Sales
price 420,000
Fairmarketvalue (450,000)
Ig n o r e d (3 0 ,0 00 )

Sales
price 420,000

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Carrying value (360,000)

R e a l i z e dl o sso ns a l e 60 ,0 0 0

CASE 2:
1. Ans. P80,000.
Sales
price 400,000
Fairmarketvalue (480,000)
D e f e r r e dl o s so nsa l e (8 0 ,0 00 ) * since the future rentals is below rent, there is an expected future benefit
from the asset being sold at a loss.
Fair
market vaue 480,000
Carrying value (540,000)
R e a l i z e dl o sso ns a l e (6 0 ,0 00 )

2. Ans. P40,000.
Sales
price 400,000
Fairmarketvalue (480,000)
Realizedlossonsale (80,000) * since the future rentals is at mark et rate of rent, there is no expected
future benefit from the asset sold at a loss.
Fair
market
vaue 480,000
Carryingvalue (540,000)
Realizedlossonsale (60,000)

T o t a lr e a l i z e dl o ss (14 0 ,0 00 )

CASE 3:
1. Ans. 626,667.
Interest expense on finance lease liab (600,000*10%) 60,000
Depreciation on the leased-back asset (600,000/3yrs) 600,000
Amortization of deferred gain on sale (100,000/3yrs) (33,333) - gain on a sale and leaseback (finance) is fully deferred and
Ne t a mo u nt r e c og n i ze d in th e p r of i t o r l oss 6 26 ,6 67 amortized over lease term.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. 141,269
Rent
expense 241,269
Realized gain on s ale (P600,000 - P 500,000) (100,000) *Selling price is at FMV
Ne t a mo un t r ec og ni ze d i n t he pro fi t/ lo ss 14 1, 26 9
*note that the lease back agreement is acconted for as o perating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.

CASE 4:
1. Ans. 115,000.
Interest expense on finance lease liab (150,000*10%) 15,000
Depreciation o n t he l eased-back a sset ( 150,000/3yrs) 50,000
Realized loss on sale 50,000 *loss on sale is fully realized since it is an indication of
Ne t a mo u nt r e c og n i ze d in th e p r of i t o r l oss 1 15 ,0 00 asset impairement.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.

2. Ans. P158,205.
Rent
expense 58,205
Realized loss on sale (P200,000 - P150,000) 100,000 *Selling price is at FMV (no expected future benefit)
Ne t a mo un t r ec og ni ze d i n t he pro fi t/ lo ss 15 8, 20 5
*note that the lease back agreement is acconted for as o perating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.

CHAPTER 8-PROBLEM 21:

CASE 1:
Minimumleasecollections 200,000
Multiply by: PV factor of 1 a t 12% for 5 y ears with annuity 3.604776 1
Presentvalueofminimum leasecollection 720,955

Cost of the asset/FMV of asset (Under Direct Finance) 700,000

Add:Directfinanceleasecost 20,955
Initial investment on thelease agreeement 720,955

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January
2015:
1, (CV
12%)
* 720,955
December31,2015: 200,000 86,515 113,485 607,470
December31,2016: 200,000 72,896 127,104 480,366
December31,2017: 200,000 57,644 142,356 338,010
December31,2018: 200,000 40,561 159,439 178,571
December31,2019: 200,000 21,429 178,571 (0)

1. Ans. 0.
Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset
since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer.
*Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amoun t receivable.

Entry upon inception/Sale of asset:

Financeleasereceivable 720,955
Asset 700,000
Cash 20,955

2. Ans. 72,896.

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Entry upon periodic collections:

Dec. 31, 2015:
Cash 200,000
Interest
income 86,515
Financeleasereceivable 113,485

Dec. 31, 2016:

Cash 200,000
Interest
income 72,896
Financeleasereceivable 127,104

3. Ans. 480,366.
See amortization table above.

CASE 2:
Minimumleasecollections 200,000
Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance 4.169865 1
Present value of minimum lease collection = Sales Price 833,973
Cost of the asset 600,000
G r o ss
p r o f io
tnsa l e 2 33 ,9 73

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January
2015:
1, (CV
10%)
* 633,973
January
1,
2016: 200,000 63,397 136,603 497,370
January
1,
2017: 200,000 49,737 150,263 347,107
January
1,
2018: 200,000 34,711 165,289 181,818
January
1,
2019: 200,000 18,182 181,818 0

1. Ans. 233,973.
Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the difference
between the Sales Price of the asset and its Cost on the company's books.
*Direct lease costs incurred under sales type lease is recognized as outright expense

Entry upon inception/Sale of asset:

Financeleasereceivable 833,973
Sales 833,973

Entry to recognize cost of sales, if perpetual inventory is used:

Cost
of
sales 600,000
Inventory 600,000

Entry to recognize the direct lease expense:

Expense 20,000
Cash 20,000

2. Ans. 49,737.
Entry upon accrual of interest and periodic collections:
Dec. 31, 2015:
Interestreceivable 63,397
Interest
income 63,397

Jan. 1, 2016:
Cash 200,000
Interest
receivable 63,397
Financeleasereceivable 136,603

Dec. 31, 2016:

Interestreceivable 49,737
Interest
income 49,737

Jan. 1, 2017:
Cash 200,000
Interest
receivable 49,737
Financeleasereceivable 150,263

3. Ans. 497,370.
See amortization table

CASE 3:
Minimumleasecollections 400,000
Multiply by: PV factor of 1 a t 10% for 5 y ears with annuity 3.790787
Presentvalueofminimumleasecollection 1,516,315
Guaranteedresidualvalue 100,000
Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921
Presentvalueoftheguaranteedresidualvalue 62,092
Total Sales Price of the asset = Total Lease Receivable 1,578,407

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January
1,
2015: (CV
10%)
* 1,578,407
December31,2015: 400,000 157,841 242,159 1,336,248
December31,2016: 400,000 133,625 266,375 1,069,872

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December31,2017: 400,000 106,987 293,013 776,860

December31,2018: 400,000 77,686 322,314 454,545
December31,2019: 400,000 45,455 354,545 100,000
December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,578,407.
Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the guaranteed
residual value is added to the total sales price of the asset.
*Direct lease expense under sales type lease is recognized as outright operating expense.

Entry upon inception/Sale of asset:

Financeleasereceivable 1,578,407
Sales 1,578,407

2. Ans. P1,000,000.
Entry to recognize cost of sales, if perpetual inventory is used:
Cost
of
sales 1,000,000
Inventory 1,000,000

Entry to recognize the direct lease expense:

Expense 50,000
Cash 50,000

3. Ans. 578,407.
TotalSalesPriceoftheAsset 1,578,407
Less: Cost of the asset/FMV of asset (1,000,000)
Gross
Profit
on
Sale 578,407

4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash 400,000
Interest
income 157,841
Financeleasereceivable 242,159

Dec. 31, 2016:

Cash 400,000
Interest
income 133,625
Financeleasereceivable 266,375

CASE 4:
Minimumleasecollections 400,000
Multiply by: PV factor of 1 a t 10% for 5 y ears with annuity 3.790787
Present value of minimum lease collection = S ales Price of the asset 1,516,315
*Since the residual value is unguaranteed, that portion of the asset is not deemed sold. Thus was not included in the sales price.

Minimumleasecollections 400,000
Multiply by: PV factor of 1 a t 10% for 5 y ears with annuity 3.790787
Presentvalueofminimumleasecollection 1,516,315
Guaranteedresidualvalue 100,000
Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921
Presentvalueoftheguaranteedresidualvalue 62,092
Total
Leasereceivable. 1,578,407
*Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership), the unguaranteed residual value
which will be received at the expiration of the lease term is still added to the receivable.

Totalcostof
theasset 1,000,000
Less: Present value of the u nguaranteed residual value (62,092)
Netcostoftheassetsold 937,908
*Since the residual value is unguaranteed, that portion of the aset is not deemed sold. The PV of the unguaranteed residual value
is therefore deducted from the cost of the inventory sold.

Amortization table:
Periodic Coll. Interest Inc. Principal Balance
January
1,
2015: (CV
10%)
* 1,578,407
December31,2015: 400,000 157,841 242,159 1,336,248
December31,2016: 400,000 133,625 266,375 1,069,872
December31,2017: 400,000 106,987 293,013 776,860
December31,2018: 400,000 77,686 322,314 454,545
December31,2019: 400,000 45,455 354,545 100,000
December 31, 2019: Guaranteed RV 100,000 100,000 0

1. Ans. P1,516,315.
Entry upon inception/Sale of asset:
Financeleasereceivable 1,516,315
Sales 1,516,315

2. Ans. P937,908.
Entry to recognize cost of sales, if perpetual inventory is used:
Financeleaserecievable 62,092
Cost
of
sales 937,908
Inventory 1,000,000

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Entry to recognize the direct lease expense:

Expense 50,000
Cash 50,000

3. Ans. 578,407.
TotalSalesPriceoftheAsset 1,516,315
Less: Cost of the asset/FMV of asset (937,908)
Gross
Profit
on
Sale 578,407

4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash 400,000
Interest
income 157,841
Financeleasereceivable 242,159

Dec. 31, 2016:

Cash 400,000
Interest
income 133,625
Financeleasereceivable 266,375

CHAPTER 8-PROBLEM 22: ABC CO.

Reconciliation:
Netincomebeforeanydifferences 10,000,000
Permanent Differences:
Nondeductibleexpenses 100,000
Nontaxable income (500,000)
Netincomeafterpermanentdifferences 9,600,000
Temporary Differences:
Future Deductible amounts
Accruedwarranties 250,000
Advancesfromcustomers 500,000
Provisionforprobablelosses 900,000 1,650,000
Future Taxable Amounts
Prepaid rent 400,000 (400,000)
Taxable income 10,850,000

1. Ans. P4,340,000.
Taxableincome 10,850,000
Mulitplyby:Currenttaxrate 40%
C u r r e n tt axe x p e n s e 4, 3 40 ,0 00

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2. Ans. P3,840,000.
Net income after permanent differences 9,600,000
Multiplyby:Constanttaxrate 40%
T o t a lt a xe x p e n se 3, 8 40 ,0 00

3. Ans. P660,000.
Futuredeductibleamounts 1,650,000
Mulitplyby:Constanttaxrate 40%
D e f e r r e dt axa ss e t 6 60 , 00 0

4. Ans. P160,000.
Futuretaxableamounts 400,000
Mulitplyby:Constanttaxrate 40%
D e f e r r e dt axl ia b i l i t y 1 60 , 00 0

To reconcile:
Currenttaxexpense 4,340,000
Add: Deferred tax expense (FTA) 160,000
Less: Deferred tax benefit (FDA) (660,000)
Totaltaxexpense 3,840,000

5. Ans. P3,902,500.
If tax rate in the future is expected to change (at 35%):
Currenttaxexpense(P10.85M*40%) 4,340,000
Add: Deferred tax expense (FTA:P400,000*35%) 140,000
Less: Deferred tax benefit (FDA:P1,650,000*35%) (577,500)
T o t atla x
e x p e n se 3, 90 2 ,5 00

6. Ans. P140,000.
Futuretaxableamounts 400,000
Mulitplyby:Futretaxrate 35%
D e f e r r e dt axl ia b i l i t y 1 40 , 00 0

7. Ans. P577,500.
Futuredeductibleamounts 1,650,000
Mulitplyby:Constanttaxrate 35%
D e f e r r e dt axa ss e t 5 77 , 50 0

CHAPTER 8-PROBLEM 23:XYZ CO.

Reconciliation:
Netincomebeforeanydifferences 5,000,000
Permanent Differences:
Nondeductibleexpenses 150,000
Nontaxableincome (50,000)
Netincomeafterpermanentdifferences 5,100,000
Temporary Differences:
Increase in Future Deductible for the year:
CummulativeFDA,ending 1,600,000
CummulativeFDA, beginning 1,200,000 400,000
Decrease in Future Taxable Amount for the year:
CummulativeFTA,ending 500,000
CummulativeFTA,beginning 800,000 300,000
Taxable income 5,800,000

1. Ans. P2,320,000
Taxable income 5,800,000
Mulitplyby:Currenttaxrate 40%
C u r r e n tt axe x p e n s e 2, 3 20 ,0 00

2. Ans. P2,040,000.
Net income after permanent differences 5,100,000
Multiplyby:Constanttaxrate 40%
T o t a lt a xe x p e n se 2, 0 40 ,0 00

3. Ans. P660,000.
Cummulative Future Deductible Amt, end 1,600,000
Mulitplyby:Constanttaxrate 40%
D e f e r r e dt axa ss e t 6 40 , 00 0

4. Ans. P200,000.
Cummulative Future Taxable Amt, end 500,000
Mulitplyby:Constanttaxrate 40%
D e f e r r e dt axl ia b i l i t y 2 00 , 00 0

To reconcile:
Currenttaxexpense 2,320,000
Less: Deferred tax benefit ( dec in F TA) (120,000) (decrease in deferred tax liability)
Less: Deferred tax benefit (inc in FDA) (160,000)
Totaltaxexpense 2,040,000

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CHAPTER 8-PROBLEM 24: JAPS CORP.

1. Ans. P1,270,000.
Service costs
Current servicecost 855,000
Pastservicecostrecognized fortheyear 120,000
Loss on settlment:
Paymentstoearlyretirees 800,000
CV of ac crued benefits of early ret. 650,000 150,000 1,125,000
Net interest (income)expense
InterestonABO(P10,080,000*12%) 1,209,600
IntersetonPA(P9,450,000*12%) (1,134,000) 75,600
P e n si o ne x p e n s e( P r o f i to rl o s s) 1 , 2 0 0 , 62.
0 0Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)

ActuarialgainonPA(a) (216,000)
ActuariallossonABO(b) 285,400 69,400
3. Ans.

T o t apl e n si o n
e x p e n se 1 ,2 70 ,0 0 0

(a) Actuarial gain/loss on Plan asset

Plan asset, beginning balance 9,450,000
Add:Contribution fortheyear 1,200,000
Interest on PA (P9,450,000*12%) 1,134,000
Less: Settlements at scheduled retirement (1,400,000)
Settlements to early retirees (800,000)
Balance 9,584,000
Plan asset, at FMV at the year-end 9,800,000
Actuarialgainonplanasset 216,000

(b) Actuarial gain/loss on Accumulated Benefit Obligation

ABO,beginningbalance 10,080,000
Add:Currentservicecost 855,000
Pastservicecostfor theyear 120,000
Interest on A BO (P10,080,000*12%) 1,209,600
Less: Benefits settled, at scheduled ret. (1,400,000)
Benefits settled, early retirees (650,000)
Balance 10,214,600
ABO, present value, ending balance 10,500,000
ActuariallossonAB0 285,400

4. Ans. P700,000.
To reconcile:
Accruedpension,beg 630,000
Pensionexpense(total) 1,270,000
Total 1,900,000
Contribution t o the p lan f or the year (1,200,000)
Accruedpension,end 700,000

ABO,
end 10,500,000
Planasset,end (9,800,000)
Accruedpensionend 700,000

CHAPTER 8-PROBLEM 25: IRELAND CORP.

1. Ans. P620,000.
Service costs
Current service
cost 480,000
Net interest (income)expense
InterestonABO(P2,980,000*8%) 238,400
IntersetonPA(P3,200,000*8%) (256,000) (17,600)
P e n si o ne x p e n s e( P r o f i to rl o s s) 4 6 2 , 42.
0 0 Ans.

Net remeasurement gain/loss (Other comprehensive Income/loss)

Actuarial loss on PA 80,000
Actuarial
loss
on
ABO 30,000
Effect
of
ceiling** 47,600 157,600
3. Ans.

T o t aple n si oe
nx p e n se 6 2 0, 00 0

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Plan asset, beginning balance 3,200,000

Add:Contributionfortheyear 750,000
Interest on PA (P3,200,000*8%) 256,000
Less: Settlements a t scheduled re tirement (560,000)
Balance 3,646,000
Less: Actuarial loss on PA (80,000)
Planasset,FMV,end 3,566,000

ABO,beginningbalance 2,980,000
Add:Currentservicecost 480,000
Interest on ABO (P2,980,000*8%) 238,400
Less: Benefits settled, at scheduled ret. (560,000)
Balance 3,138,400
Add:ActuariallossonABO 30,000
ABO,presentvalue,end 3,168,400

Planassetatfairvalue,end 3,566,000
ABOatpresentvalue,end 3,168,400
Prepaidpension,end 397,600
AssetCeiling(lower) 350,000
Remeasurement loss/Effect of ceiling 47,600 **

4. Ans. P350,000.
To reconcile:
Prepaid pension, beg (ceiling was higher) (220,000)
Pensionexpense(total) 620,000
Total 400,000
Contribution to the plan for the year (750,000)
Pr ep ai d p en si on , e nd (cei li ng is lo we r) (350 ,0 00 )

MULTIPLE CHOICE EXERCISES:

CHAPTER 8-EXERCISE 1: PROBE INC.
ITEM
a. A ccounts payable – trade, P170,000 + 30,000 P200,000
b. Notespayable–trade,P70,000 70,000
InterestonNotes: 50,000*15%*4/12 2,500
0,000*15%*2/122 500
c. Advancereceiptsfromcustomers, 100,000
d. Containers deposit 50,000
e. Notespayable–BPI,P200,000/5 40,000 160,000
i.
Convertible bonds 1,000,000
j. Notes payable – officers 40,000
k. S alariesandwages(68,000*15/30) 34,000
m. O utput VAT, net of Input (246,000 – 164,000) 82,000
n. Accountsreceivable,creditbalance 12,300
0. Ca sh in banks (overdraft) 115,000 – (125,000+55,000) 65,000
r. E stimatedwarrantycostson goodssold 46,000
s. Installmentnotespayable,P75,000*1/3 25,000 50,000
t. P rovision for losses (25,000 +75,000) / 2 50,000
u.Deferredtax
liability 150,000
TOTAL P8 17 ,3 0 0 P1 , 36 0, 00 0 P2 ,1 7 7, 30 0
1 . A n s. C . 2 . A ns. B . 3 . An s. A.

CHAPTER 8-EXERCISE 2: CUT INC.

Bondspayable: Noncurrent Current

7/1/2008:(P4,000,000*98%) 3,920,000
Cummulative discount amortization:
P80,000/10yrs*5.75yrs 46,000 3,966,000
Accruedinterestonbonds(P4M*7%*3/12) 70,000
Accruedinterestonnotespayable 90,000
Currentportionofnotes
payable 600,000
Noncurrentportionofnotespayabe 2,400,000
Warrantiesliability(P55,000+P145,000-P130,000) 70,000
Trade
payables 325,000
Payroll
related
items 193,000
Taxes
payable 535,000
Other
accruals 50,000
Cash dividendspayable(P0.40*2,500,000shares) 1,000,000
6,366,000 2,933,000
1 . A n s. B . 2. A ns. A .
Note: Stock dividends payable is classifed as capital and n ot as liability.

CHAPTER
Ans. A. 8-EXERCISE 3: RADO INC.
Estimated Warranties Payable, beginning balance P225,000
Required Estimated Expense (7,250,000-150,000)*5% 355,000
Less: Actual cost incurred for theyear (415,500)
Esti m at e d W a r r a n ti e s Pa y a b l e, e n d in g b a l a n c e P1 64 ,5 0 0

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CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT

1. Ans. C.; 2. Ans. B.
Totalsales–homefurniture 28,800,000
Divide
by: 2,000
Totalpremiumdistributable 14,400
Multiplyby:estimatedredemption 60%
Estimated redemption 8,640
Multiply by, net cost of premiums (340-50) 290
E s t i m at e dp r e m i u me x p e n s e 2, 5 05 ,6 00
Premiumsliability,beg 716,000
Total 3,221,600
Actual redemption (9,600,000/2,000)*290 (1,392,000)
E sti mat e d p r emi ums l ia b i l it y , e nd 1, 8 29 ,6 00

3. Ans. B.
Estimatedwarrantyliability,beginning 2,176,000
Totalsales–kitchenapplicances 86,400,000
Multiply
by: 5%
Estimatedwarrantiesexpense 4,320,000
Actualwarrantycostsduringtheyear` (2,624,000)
E s t i m at e dw a r r a n t yl i a b i l i t y ,e n d 3, 87 2, 0 00

CHAPTER 8-EXERCISE 5: ABRA COMPANY

1. Ans. C.
2013 unused leaves by the end of 2014 (850days-550days) 300
2014unusedleavesbytheendof2014 500
Totalunusedleavesbytheendof2014 800
Multiplybyprobableexerciserate 80%
Leavesthatwillprobablymaterialize 640
Multiplyby:2014currentsalaryrate 400
A c c r u e d c o m p e n sa t e d a b se n c e s p e r a u d i t 2 56 ,0 00

2. Ans. D.
Unadjustednetincome 1,277,500
Understatement in accrued comp. abs./salaries expense (18,000)
Adjusted
net
income 1,259,500 1,147,608 745,945 111,892

B = 15% (NI - B - Tx); Tx = 35% (NI - B)

B=15%(NI-B-35%(NI-B) 818,675 122,801
B = P111,892. 65% 0.09750 1.0975 111,892

CHAPTER 8-EXERCISE 6: ASCOT INC.

Audit notes:
a. Since there is no right of offset, the advances to sppliers should be reclassifed as an asset:
AJE 1:
Advancestosuppliers 55,000
Accounts
payable 55,000

1. Ans. C.
b. Required premiums expense: (40,000*75%)/5*(P95-P25) 420,000
Actual cost/Actual redemption (5,000-1,250)*(P95-P25) (262,500)
E s t i m at e dp r e m i u m sl ia b i l it y ,p e ra u d i t 1 5 7, 50 0
Estimatedpremiumsliabilty,perbooks 118,750
Net
adjustment 38,750
AJE 2:
Premiums expense 38,750
Estimatedpremiumsliability 38,750

2. Ans. A.
c. Cummulativeunusedleaves12/31/14 750
Less:
2012 leaves(forfeited (50)
Leavesthatcanbecarriedforwardto2015 700
Exerciserate(perpastexperience) 80%
Cummulativeleavesthatwillprobablybeexercised 560
Multiplyby:2014currentsalaryrate 400
A c c r u e d s a l a r i e s - c o m p e n sa t e d a b se n c e s , p e r a u d i t 2 2 4, 00 0
Accruedsalaries-compensatedabsences,perbooks 300,000
Net
adjustment (76,000)
AJE 3:
Accruedsalaries 76,000
Salaries
expense 76,000

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3. Ans. A.
Unadjusted net income before bonus and tax 1,015,131
AJE2:Understatedpremiumsexpense (38,750)
AJE3:Overstatedsalariesexpense 76,000
Ad j uste d ne t i n co me b e f o r e b o n us a n d ta x 1, 05 2 ,3 81
B = 15% (NI - Tx - B)
Tx = 30% (NI - B)
B = 15%(NI - 30%(NI - B) - B)
B = 15%(1,052,381 - 30%(1,052,381 - B) - B)
B = 110,500/1.105
B = 100,000
AJE 4:
Accruedsalaries 5,540
Salaries
expense 5,540
(100,000-96,460)

4. Ans. A.
Net Income before tax (1,052,381 - 100,000) 952,381
L e ss : I n c o m e t a x ( 9 5 2 , 3 8 1 *3 0 % ) ( 28 5, 71 4 )
N eIt n c o m ea fte r
t ax 6 66 ,6 67
AJE 5:
Incometaxexpense(current) 285,714
Income taxpayable 285,714
d. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.
ENTRY:
Incometaxexpense(deferred) 250,000
Deferred tax
liability 250,000

5. Ans. B.
e. The refinancing agreement was completed as of December 31, 2014, thu s there is a right to refinance the liablity on a long-term
basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of the
fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis.
The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus will
still be presented as current as of December 31, 2014 .

CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC.

1. Ans. A.
AccountsPayable,unadjusted 250,000
Receiving report number 2634 (Unrecorded purchase) 12,500
Receiving report number 2636 (Purchase in transit) 10,000
Accounts Payable, adjusted 272,500

2. Ans. D.
Warrantiesliability,unadjusted 10,000
Warranty expense, 2014 (10,550,000*6%) 633,000
Total 643,000
Less:Actualwarrantiespaid (310,000)
Warranties liability, adjusted (12/2014) 333,000

3. Ans. A.
Legal
services 4,600
Medicalservices 5,500
Payroll (12/21/ - 12/31) : 14,400 *8/12 9,600
Royalties 3,900
24,000
* *
Total accruals 47,600

4. Ans. A.
Amortization Table: Lease Liability
13.59032634 Payment Principal Balance
*
Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326) 3,397,582
June30,2014: 250,000 135,903 114,097 3,283,485
December31,2014: 250,000 131,339 118,661 3,164,824
June30,2015: 250,000 126,593 123,407 3,041,417
December31,2015: 250,000 121,657 128,343 2,913,074
Current portionLong-term Portion
5. Ans. A.
Amortization Table: Bonds Payable
Nominal Effective Amortization Balance
Balance 851,706
September30, 2014: 42,585 48,000 (5,415) 846,291
March31,2015: 42,315 48,000 (5,685) 840,606

Carrying value as of Dec. 31, 2014:

Balance,September30,2014 846,291
Amortization up to 12/31/14:P5,685*3/12: (2,843)
A m o r t i z e d c o st a s o f D e c e m b e r 3 1 , 2 0 1 4 : 8 43 ,4 49

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CHAPTER 8-EXERCISE 8: DETOX INC.

1. Ans. D.
AccountsPayable,unadjusted 534,000
RR# 1015 (purchase in transit – FOB Destination) (35,000)
RR# 1013 (goods received on December 30, 2014) 65,000
RR# 1016 (purchase in transit – FOB Shipping point) 40,000
A c c o u n t sp a y a b l e ,a d j u s t e d 6 04 ,0 00

2. Ans. C.
Required estimated expense2013:(50,000/5)*40%*(P160-P50) 440,000
Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50) (198,000)
Estimatedpremiumspayable,12/31/2013 242,000
Required estimated expense2014:(60,000/5)*40%*(P160-P50) 528,000
Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50) (561,000)
E s t i m a t e dp r e m i u m sp a y a b l e ,1 2 / 3 1 / 2 0 1 4 2 0 9, 00 0

3. Ans. D.
Proceeds from issuance of bonds on 1/1/2013 P2,050,000
Fair value of bonds at 12% effectiverate* 1,903,927
APIC–BondConversionPrivilege P146,073
*PV of future cash flows at 12% for 3 periods:
Principal: 2,000,000 * 0.711780 P1,423,560
Interest:200,000*2.40183 480,366
Totalpresentvalue=Fairvalue P1,903,927

Amortization table: Bonds payable

Correct Int. Nominal Int. Amortization Balance
Jan. 1, 2013: 1,903,927
Dec.31, 2103: 228,471 200,000 28,471 1,932,398
Dec. 31, 2014: 231,888 200,000 31,888 1,964,286

4. Ans. A.
Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14:
DR: Bonds payable 1,000,000
DR:APIC–Bondconv.priv. 73,036
CR: Discountonbondspayable 17,857
CR: Ordinaryshares(10,000*50) 500,000
C R : S ha r e
p r e mi u m 5 55 ,1 79

5. Ans. B.
Present value of the minimum lease payment at
implicit lease rate, 8% for 5 per iods: (600,000*3.9927) P2,395,626
Fair ma rket value of the leased asset at in ception of l ease 2,400,000 *100%, thus Finance lease

Amortization table: Lease liability

Date Periodic Paymts Interest Principal Balance
Jan. 1, 2014: 2,395,626
Dec. 31, 2014: 600,000 191,650 408,350 1,987,276
Dec. 31, 2015: 600,000 158,982 441,018 1,546,258

6. Ans. C.
Present value of MLP on 1/1/14 P2,395,626
Divide by: Term (no transfer of ownership) 5 years
D e p r e c i a t i o n e x p e n se i n 2 0 1 4 P4 79 ,1 2 5

CHAPTER 8-EXERCISE 8: PIPINO CORP.

1. Ans. C.
Amortization table: Notes Payable
Date Correct
Interest Amortization Balance
2012:
April
1, P7,195,000
March31,2013: 1,079,250 960,000 119,250 7,314,250
March31,2014: 1,097,138 960,000 137,138 7,451,388
December31,2014: 838,281 720,000 118,281 P7,569,669
*9 months only up to December 31, 2014

2. Ans. D.
,
P2,240,000
4,800,000
P7,040,000

Amortization table: Finance Lease Liability

Date Payment Principal Balance
December
31,
2011: P7,040,000
December31,
2011: 1,200,000 5,840,000
December31,2012: 1,200,000 584,000 616,000 5,224,000
December31,2013: 1,200,000 522,400 677,600 4,546,400
December31,2014: 1,200,000 545,640 745,360 3,801,040Liab. balance
December31,2015: 1,200,000 380,104 81 9 ,8 96 2 ,9 8 1, 14 4
Current Noncurrent

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3. Ans. C.
Notespayable P7,569,669
Liability under capital lease – Long term** 2,981,144
Deferred taxliability 250,000
T o t a ll o n gt e r ml i a b i l i t i e s P1 0 ,8 00 ,8 13

4. Ans. B.
Accountspayable,unadjustedbalance P1,840,500
RR# 65218, purchase in transit, FOB Destination (19,000)
RR# 65219, purchase in transit, FOB Buyer (Destination) (30,500)
RR# 65220, goods received only after the December 31 (41,000)
Ac cou n ts p ay a b l e, ad j ust ed b a l a n ce P 1 ,7 50 ,0 00

5. Ans. D.
2014
Sales P31,650,000
8%
W a r r a n t i e se x p e n s ei n2 0 1 4 P 2 ,5 32 ,0 00

6. Ans. B.
Accountspayable 1,750,000
Warranties payable (2,532,000 – 1,950,000) 582,000
Interest payable on notes (8,000,000*12%*9/12) 720,000
Current portion of Long term liability under capital lease 819,896
Total current liabilities P3,871,896

CHAPTER 8-EXERCISE 9: ADELAIDA INC.

1. Ans. D.
Totebagsactuallydistributedin2014 19,000
Estimated premiums liability at the end of 2013, in tote bags (7,000)
Estimated premiums liability at the end of 2014, in tote bags 5,000
Estimated premiums expense in 2014, in tote bags 17,000
Multiply by: Net expense per totebag (P25 – P5) P20
E s t i m a t e d p r e m i u m s e x p e n se i n 2 0 1 4 P 3 40 ,0 00

2. Ans. C.
The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset:
Estimated premiums payable, 2014 (5,000 * P20) P100,000
Multiply
by
tax
rate: 30%
Deferredtaxasset(NoncurrentAsset) P30,000

The temporary difference from excess tax depreciation over financial depreciation is future taxable amount
creating Deferred Tax Liability:
D e f e r r e d t a x l i a b i l i t y ( N o n c u r r e n t Li a b i l i t y ) : P 1 5 0 , 0 0 0 * 3 0 % P4 5, 00 0

3. Ans. D.
Accounts payable, as adjusted (P540,000 + P50,000) P590,000
Estimated premiums payable, 2014 (5,000 * P20) 100,000
C u r r e nlti a b i l i t i e s P 6 90 ,0 00

4. Ans. A.
Proceeds from bond issuance (the amount credited per entry made) P5,500,000
Fair value of bonds without the conversion option (at 8% effective rate)* 5,399,271
Equity component/ APIC from Bond Conversion Privilege P100,729
Present value of Principal: P8,000,000*0.680583 P3,402,916
Present value of Interest: 500,000*3,99271 1,996,355
Fair value of the bonds without the conv. Option P5,399,271

Amortization Table: Bonds Payable

Correct Int. Nominal Int. Amortization Balance
January
2014:
1, 5,399,271
December31,2014: 431,942 500,000 (68,058) 5,331,213
December31,2015: 426,497 500,000 (73,503) 5,257,710
Upon assumed conversion: 1/2016:

5. Ans. D.
Carrying value of bonds up to 12/31/2015 5,257,710
APIC- Bond Conversion Priv. 100,729
Total Par Value of Shares (5,000*10*50) (2,500,000)
Share Premium from conversion 2,858,439

6. Ans. B.
Upon assumed retirement: 1/2016:
Carrying value of bonds up to 12/31/2015 5,257,710
Fair value of bonds without the conversion option at 12% effective rate:
Present value of principal: P5,000,000*0.711780 3,558,901
Present value of interest: 500,000 2.401831 1,200,916 4,759,817
Ga i no nr e t i r e m e n to fb o n d s( p r o f i to rl o s s) 4 9 7, 89 3

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CHAPTER 8-EXERCISE 11:

Ans. C.
Case 1:
a. The obligating event is the damages occurring in 2014, thus is present obligation.
b. The outflow of economic benefits is probable.
c. The amount of liability is reliably measurable given a range of amounts without best estimate.
Thus, accrue obligation at the mid-range (P500,000+P1,500,000)/2 = P1,000,000.

Case 2:
a. The obligating event is the guarantee agreement completed in 2014, thus is pr esent obligation.
b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance
sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event.
c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.
Thus, accrue obligation at best estimate P2,000,000.

Case 3:
a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there are
no claims yet.
b. The outflow of economic benefit is probable.
c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However,
since there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be
a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over the
portion to be reimbursed by the insurance company.
Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company will be
reimbursing the company for anything in excess of the deductible clause.

Case 4:
a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no present
obligation yet.
Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event.

CHAPTER 8-EXERCISE 12: LABANDERA INC.

1. Ans. B.
Class A Laundry appliance sales (280,000,000*60%) P168,000,000
Divide
by P50
Numberofcouponsdistributed 3,360,000
Multiplyby:probableredemption 60%
Couponsthatwillprobably beredeemed 2,016,000
Divide by: number of coupons to acquire 1 premium 400
Estimated number of premiumsto be redeemed 5,040
Number of premiums actually redeemed (1,680,000/400) (4,200)
Liabilityforpremiumsinunits 840
L i a b i l i t y f o r p r e m i u m i n p e so ( 8 4 0 *4 , 1 0 0 ) 3, 44 4 ,0 00

2. Ans. D.
Class B Laundry appliance sales (280,000,000*40%) P112,000,000
Multiply by: Estimated warranty cost as % of sales 3%
E sti mat e d w a r ra nt y ex p e nse f o r 20 1 4 P 3, 36 0 ,0 00

3. Ans. C.; 4. Ans. A.; 5. Ans. A.

Unadjustednetincome 80,164,000
Adjustment for additional premium expense (3,444,000)
Adjustment for additional warranties expense (1,720,000)
Adjustednetincome 75,000,000
L e ss :Bo n u s ( 2, 48 0, 91 6 )
I n c o me t a x ( 3 5 % ) (2 5, 38 1, 67 9 )
N eitn c o m e 4 7 ,1 37 ,4 05

Bonus = 5% (75,000,000 – 35%(75,000,000 – B)) Tax = 35% (75,000,000 -2,480,916)

B = 5% (48,750,000 + .35B) T = 25,381,679
B = 2,437,500 + .0175B
0.9825B = 2,437,500
B = 2,480,916

CHAPTER 8-EXERCISE 13: LUZON COMPANY

1. Ans. B.
Estimated warranty expense (30,000u*60%*P1,500) 27,000,000
Actualcostincurred (19,500,000)
E s t i m at e dw a r r a n t i e sp a y a b l e 7, 50 0 ,0 00

2. Ans. D.
a. The obligating event is the environmental damages occuring in 2014, thus is present obligation.
b. The outflow of future economic benefits is probable.
c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per
the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event)

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3. Ans. B.
PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776) 3,683,821 4.604776
Fairmarketvalueofleasedassetatinception: 4,000,000
92% More than 90%, thus Finance
Amortizationtable: Periodicpaymt InterestExp. Principal Balance
Present
value
MLP
of 3,683,821
January1,
2012: 800,000 800,000 2,883,821
January1,
2013: 800,000 346,059 453,941 2,429,879
January1,
2014: 800,000 291,586 508,414 1,921,465
Liab balance
Janaury1,
2015: 800,000 230,576 569,424 1,352,041
Accrued interest
4. Ans. B.
PV of MLP, Jan. 1, 2012 (Asset capitalized) 3,683,821
Multiply by condition percent (over term), Dec. 31, 2014: 3/6
C a r r y i n g v a l u e o f l e a s e d a ss e t , D e c . 3 1 , 2 0 1 4 1, 84 1 ,9 10

5. Ans. A.
Allocation of issue price on January 1, 2014:
Total
issue
price 4,250,000
FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods:
Principal:P4,000,000*0.7049605 2,819,842 0.7049605
Interest:P200,000*4.9173243 983,465 3,803,307 4.9173243
Residual amount allocated to APIC-Bond conversion privilege 446,693

Amortization table: Bonds payable

Correct Int. Nominal Int. Amortization Balance
January
2014:
1, 3,803,307
June
30,
2014: 228,198 200,000 28,198 3,831,505
December31,2014: 229,890 200,000 29,890 3,861,396

Carrying value of converted bonds, Dec. 31, 2014 (P3,861,396*3/4) 2,896,047

Carrying value of APIC-Bond conversion privilege (P446,693*3/4) 335,020
Less: Par value of issuable shares: (50,000sh*3/4)*P50 (1,875,000)
S h a rp
er e m i u m / A P I C 1 ,3 56 ,0 6 7

CHAPTER 8-EXERCISE 14: MNO INC.

1. Ans. B.
Proceedsfromissuanceofconvertiblebonds 5,500,000
FMV of bonds w/out conv. option at 5% for 10 semi-annual periods:
PVof Principal:P5,000,000*0.613913 3,069,566
PVofInterest: 300,000*7.721734 2,316,520 5,386,086
E q u i t yp o r t i o n( A P I C-B o n dC o n v .P r i v . ) 11 3, 91 4

2. Ans. C.
Total Bonds @ FV* APIC@Residual
RetirementPrice 2,500,000 2,365,267 134,733
Carrying Value** (5,289,319*50%);(113,914*50%) 2,644,659 56,957
P &LLo ssC
/a pG.a i n (2 79 ,3 92 ) 77,776
profit/loss APIC/Share premium

*FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods.
PVofPrincipal 2,500,000*0.62275 1,556,874
PVofInterest: 150,000*5.389289 808,393
Fairvalue of bonds w/outconv. priv 2,365,267

Amortization Table: Bonds Payable Correct Nominal Amortization Balance

June
2013:
30, 5,386,087
December31,2013: 269,304 300,000 (30,696) 5,355,391
June
30,
2014: 267,770 300,000 (32,230) 5,323,161
December31,2014: 266,158 300,000 89,319
(33,842)
** 5,2

3. Ans .C.
Interest from Bonds Payable
from 1/1 -6/30 (seeamortiz.) 267,770
from 7/1 -12/31(seeamortiz.) 266,158 533,928
Interest from Notes Payable
from 1/1 - 8/31 (2.5M*10%*8/12) 166,667
from 9/1 -12/31(2M*10%*4/12) 66,667 233,333
T o t a iln t e r e ste x p e n s e 7 67 ,2 6 1

4. Ans. B.
Fin.Inc.afterpermanentdiff 1,000,000
FDAAB for
theperiod 100,000
FTALE forthe
period (500,000)
Taxable income 600,000
Mulitply by
tax
rate 40%
C u r r e nTt axE x p e n se 2 40 ,0 0 0

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5. Ans. D.
Cum.TempDiff(FTALE) 1,550,000
Multiply
tax
rate 40%
D e f e r r e dT a xL i ab i l i t y 6 20 ,0 0 0

6. Ans. D.
BondsPayable(half-seeamor.) 2,644,659
Notespayable-longterm 1,500,000
Deferred tax liabilty 620,000
Total noncurrent liability 4,764,659

CHAPTER 8-EXERCISE 15: KURT CORP.

1. Ans. C.
Proceeds from issuance (at face value) 4,000,000
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.772183 3,088,734
of
PVInterest: 240,000*2.531295 607,511 3,696,245
Equity component/APIC-Bond Conversion 303,755

2. Ans. D.
Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance
January1,2014: (Princ.*6%) (CV*9%) 3,696,245
December 31, 2014: 332,662 240,000 92,662 3,788,907
December 31, 2015: 341,002 240,000 101,002 3,889,908
December 31, 2016: 350,092 240,000 110,092 4,000,000 53. Ans. D.

3. Ans. B.
Bonds Payable, CV at 1/1/2016 (see amortization table) 3,889,908
APIC-Bonds Conversion Privilege 303,755
Total 4,193,663
Multiply by exercise rate: (3,000/4,000) 3/4
Prorated CV of BP and APIC-Bond Conv. Priv. 3,145,247
Less:Par value of issuable shares (3,000*40) *P10 (1,200,000)
Share premium from assumed conversion 1,945,247

4. Ans. A.
Proceeds from issuance (at face value, net of transaction cost) P3,848,531
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.741162 2,964,648
PV
of Interest: P240,000*2.465123 591,630 3,556,278
Equity component/APIC-Bond Conversion P292,253

5. Ans. B.
Total Bonds @ FV* APIC (Res. Val.)
RetirementPrice P4,000,000 3,889,908 110,092
Carrying
Value 3,837,104 292,253
P&L Loss/ Cap. Gain 52,804 (182,161)
retirement loss capital gain
*FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period.
PV of Principal 4,000,000*0.917431 P3,669,725
PVofInterest: 240,000*0.917431 220,183
Fair value of bonds w/out conv. priv P3,889,908

Amortization table: Bonds Payable Correct Int. Nominal Int. Amo. Balance
January 1, 2014: 3,556,278
December 31, 2014: 373,409 240,000 133,409 3,689,687
December 31, 2015: 387,417 240,000 147,417 3,837,104
December 31, 2016: 402,896 240,000 162,896 4,000,000

CHAPTER 8-EXERCISE 16: TRY CORP.

Reconciliation:
Netincomebeforeanydifferences 10,000,000
Permanent Differences:
Nondeductible expenses: Life insurance expense 300,000
Nontaxableincome:Dividendincome (500,000)
Netincomeafterpermanentdifferences 9,800,000
Temporary Differences:
Future Deductible amounts
Estimatedlitigationloss 600,000
Unearnedretnalincome 300,000 900,000
Future Taxable Amounts
Installmentreceivable 1,200,000 (1,200,000)
Taxable income 9,500,000

1. Ans. A.
Net income after permanent differences 9,800,000
Multiplyby:Constanttaxrate 33%
T o t a lt a xe x p e n se 3, 2 34 ,0 00

2. Ans. C.
Taxableincome 9,500,000
Mulitplyby:Currenttaxrate 33%

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C u r r e n tt axe x p e n s e 3, 1 35 ,0 00

3. Ans. A.
Futuredeductibleamounts 900,000
Mulitplyby:Constanttaxrate 33%
D e f e r r e dt axa ss e t 2 97 , 00 0

4. Ans. B.
Futuretaxableamounts 1,200,000
Mulitplyby:Constanttaxrate 33%
D e f e r r e dt axl ia b i l i t y 3 96 , 00 0

To reconcile:
Currenttaxexpense 3,135,000
Add: Deferred tax expense (FTA) 396,000
Less: Deferred tax benefit (FDA) (297,000)
Totaltaxexpense 3,234,000

5. Ans. B.
Currenttaxexpense;P9,500,000*33% 3,135,000
Add: Deferred tax expense (FTA): P1,200,000*35% 420,000
Less: Deferred tax benefit (FDA): P900,000*35% (315,000)
T o t atla x
e x p e n se 3, 24 0 ,0 00

CHAPTER 8-EXERCISE 17: COSINE CORP.

Reconciliation:
Netincomebeforeanydifferences 12,000,000
Permanent Differences:
Nondeductible expenses: Life insurance expense 400,000
Nontaxableincome:Dividend income (1,200,000)
Net income after permanent differences 11,200,000
Temporary Differences:
Future Deductible amounts
Warrantyprovision 600,000 600,000
Future Taxable Amounts
Prepaidadvertising 500,000
Excess tax depr. over finanicial depr. 400,000 (900,000)
Taxable income 10,900,000

1. Ans. B.
Taxableincome 10,900,000
Mulitplyby:Currenttaxrate 32%
C u r r e n tt axe x p e n s e 3, 4 88 ,0 00

2. Ans. A.
Futuredeductibleamounts 600,000
Mulitplyby:Constanttaxrate 33%
D e f e r r e dt axa ss e t 1 98 , 00 0

3. Ans. D.
Futuretaxableamounts 900,000
Mulitplyby:Constanttaxrate 33%
D e f e r r e dt axl ia b i l i t y 2 97 , 00 0

4. Ans. D.
To reconcile:
Currenttaxexpense 3,488,000
Add: Deferred tax expense (FTA) 297,000
Less: Deferred tax benefit (FDA) (198,000)
T o t a lt a xe x p e n se 3, 5 87 ,0 00

CHAPTER 8-EXERCISE 18: BONCHON CORP.

Service costs
Current service
cost 160,000
Net interest (income)expense
InterestonABO(P3,000,000*6%) 180,000
IntersetonPA(P2,800,000*6%) (168,000) 12,000
P e n si o ne x p e n s e( P r o f i to rl o s s) 1 7 2 , 0 0 02. Ans. B.

Net remeasurement gain/loss (Other comprehensive Income/loss)

ActuarialgainonPA(a) (106,000)
ActuariallossonABO(b) 442,000 336,000
3. Ans. C.

T o t aple n si oe
nx p e n se 5 0 8 , 0 0 01. Ans. D.

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(a) Actuarial gain/loss on Plan asset

Plan asset, beginning balance 2,800,000
Add:Contributionfortheyear 210,000
Interest on PA (P2,800,000*6%) 168,000
Less: Settlements a t scheduled re tirement (300,000)
Balance 2,878,000
Plan asset, at FMV at the year-end 2,984,000
Actuarialgainonplanasset 106,000

(b) Actuarial gain/loss on Accumulated Benefit Obligation

ABO,beginningbalance 3,000,000
Add:Currentservicecost 160,000
Interest on ABO (P3,000,000*6%) 180,000
Less: Benefits settled, at scheduled ret. (300,000)
Balance 3,040,000
ABO, present value, ending balance 3,482,000
ActuariallossonAB0 442,000

4. Ans. B.
To reconcile:
Accruedpension,beg 200,000
Pensionexpense(total) 508,000
Total 708,000
Contribution to the plan for the year (210,000)
Accruedpension,end 498,000

ABO,
end 3,482,000
Planasset,end (2,984,000)
Accruedpensionend 498,000

CHAPTER 8-EXERCISE 19: DEE CORP.

Service costs
Current service cost 1,400,000
Settlement gain:
Settlement price other ben. settled 400,000
PVof otherbenefitssettled (500,000) (100,000) 1,300,000
Net interest (income)expense
InterestonABO(P7,500,000*10%) 750,000
IntersetonPA(P7,000,000*10%) (700,000) 50,000
P e n si o ne x p e n s e( P r o f i to rl o s s) 1 , 3 5 0 , 0 0 02. Ans. A.

Net remeasurement gain/loss (Other comprehensive Income/loss)

Actuarial gain on PA
Actualreturnonplanasset 840,000
Estimated return (Interest on PA) (700,000) (140,000)
Actuarial
gain
onABO (200,000) (340,000)
3. Ans. D.

T o t apl e n si o n
e x p e n se 1 ,0 10 ,0 0 0
1. Ans. D.

4. Ans. B.
Plan asset, beginning balance 7,000,000
Add:Contribution fortheyear 1,200,000
Interseto nPA (P7,000,000*10%) 700,000
Less: Settlements at scheduled retirement (1,500,000)
Settlement price of addl ben. Settled (400,000)
Balance 7,000,000
Less: Actuarial gain on PA 140,000
P l a na ss e t ,F M V ,e n d 7, 1 40 ,0 00

5. Ans. A.
ABO,beginningbalance 7,500,000
Add:Currentservicecost 1,400,000
Interest on ABO (P7,500,000*10%) 750,000
Less: Benefits settled, at scheduled ret. (1,500,000)
PV ofa dditional benefits settled (500,000)
Balance 7,650,000
Add:ActuarialgainonABO (200,000)
A B O ,p r e s e n tv a l u e ,e n d 7, 4 50 ,0 00

4. Ans. B.
Planassetatfairvalue,end 7,140,000
ABOatpresentvalue,end 7,450,000
A c c r u e d p e n si o n e x p e n s e , e n d (31 0 ,0 00 )

To reconcile:
Prepaid pension, beg 500,000
Pensionexpense(total) 1,010,000
Total 1,510,000
Contribution t o the p lan f or the year (1,200,000)
A c c r u e dp e n si o n ,e n d 3 10 , 00 0

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CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY

DISCUSSION PROBLEMS
CHAPTER 9-PROBLEM 1
1 A
2 D
3 D
4 B
5 C
6 B

CHAPTER 9-PROBLEM 2: SB CORP.

Correct entries to record transactions in 2013:
(a)C ash(50,000*P150) 7,500,000
Ordinaryshares(50,000*P100) 5,000,000
Sharepremium-OS 2,500,000

(b) Building 1,200,000

Preferenceshares(20,000*P50) 1,000,000
Sharepremium-PS 200,000

(c) Incomesummary 5,540,000

Retained
earnings 5,540,000

Correct entries to record transactions in 2014:

(a) Treasury shares (20,000*P160) 3,200,000
Cash 3,200,000

(b) Cash 2,800,000

Ordinaryshares(10,000*P100) 1,000,000*Allocation: FMV (total) Rato Amount Allocated
Share premium-OS (P1,960,000-P1,000,000) rdinary
960,000 1,750,000
O 0% 1,960,000 7
Preferenceshares(10,000*P50) reference
500,000 P 750,000 0% 840,000 3
Share premium-PS (P840,000-P500,000) otal
340,000 2,500,000
T 2,800,000

(c) C ash, net (5,000*P85)-P25,000 400,000

Preferenceshares(5,000*P50) 250,000
Sharepremium-PS 150,000

(d) Cash 5,000,000

Bonds payable 2,000,000
*Allocation: AmountAllocated
Premium on bonds payable (P2,200,000-P2,000,000) 200,000 Bonds pay. @ Fair value 2,200,000
Ordinaryshares(15,000*P100) 1,500,000 Ordinary @ Residual 2,800,000
Share premium-OS (P2,800,000-P1,500,000) 1,300,000 5,000,000

(e)C ash(8,000*P185) 1,480,000

Treasuryshares(8,000*P160) 1,280,000
Share
premium-TST 200,000

(f) Ordinary shares( 7,000*P100) 700,000

Share premium-OS (7,000*P50) 350,000 *share premium from srcinal issuance (P150-P100)
Sharepremium-TST 70,000
Treasuryshares(7,000*160) 1,120,000

(g)I ncomesummary 4,530,000

Retained
earnings 4,530,000

(h)R etainedearnings 800,000

Retained earnings appropriated for Treasury 800,000

Summary
Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS Sh. Prem-TST RE-unapp RE-app TS
(a) Ordinary share issuance in 2013 5,000,000 2,500,000
(b) Preferenceshareissuancein2013 1,000,000 200,000
(c)
Net
income
2013
in 5,540,000
(a) Treasuryshares
reacquired2014
in (3,200,000)
(b) Ordinary and Preference shares issue 1,000,000 500,000 960,000 340,000
(c) Preferencesharesissuancein2014 250,000 150,000
(d) Or dinary shares issued with Bonds 1,500,000 1,300,000
(e) Treasury shares
reissuance in
2014 200,000 1,280,000
(f) Treasury s hares r etirement i n 2 014 (700,000) (350,000) (70,000) 1,120,000
(g) Net
income
2014
in 4,530,000
(h) Appropriation
for
treasury (800,000) 800,000
Adjusted 12/31/14 balances 6,800,000 1,750,000 4,410,000 690,000 130,000 9,270,000 800,000 (800,000)
1 .A n s . 2 .A n s . 3 .A ns . 4 .A n s . 7 .A n s .

Share capital:
OrdinaryShares 6,800,000
PreferenceShares 1,750,000 8,550,000
Additional paid-in capital:
Sharepremium-OS 4,410,000
Sharepremium-PS 690,000
Sharepremium-TST 130,000 5,230,0005. Ans.
T o t a lC o n t r i b u t e dC a p i t a l 1 3 ,7 8 0
6., 0Ans.
00
Retainedearnings-appropriated 800,000
Retainedearnings - unappropriated 9,270,000
Treasurysharesatcost (800,000)
T o t a lS t o c k h o l d e r s 'Eq ui t y 2 3 ,0 5 0
8., 0Ans.
00

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CHAPTER 9-PROBLEM 3: GLORIETTA INC.

Correct entries to record transactions in 2013:
(a) Land 1,400,000
Ordinaryshares(100,000*P10) 1,000,000
Share
premium-OS 400,000

(b)C ash(50,000*P50) 2,500,000

Preferenceshares(50,000*P20) 1,000,000
Sharepremium-PS 1,500,000

(c)Incomesummary 540,000
Retained
earnings 540,000

Correct entries to record transaction in 2014:

(a) Preference shares (20,000*P20) 400,000
Sharep remium-PS( 20,000*P30) 600,000 *Share premium from the srcinal issuance of preference shares in 2013
Ordinaryshares(80,000*P10) 800,000
Share
premium-OS 200,000

(b) Building(@fairvalue) 1,200,000 *Allocation:

Ordinaryshares(25,000*P10) 250,000 Ordinary @Fair value (25,000*P25) 625,000
Share premium-OS (P625,000-P250,000) 375,000Preference @Residual amount 575,000
Preferenceshares(20,000*P20) 400,000 FairvalueofBuilding 1,200,000
Share premium-PS (P575,000-P400,000) 175,000 Note that the Building's fair value was more clearly determinable that the
fair value of the securities issued, since while the fair value of ordinary shares
(c) C ash, net (5,000*52)-P12,000 248,000 were determinable at P25, the fair value of preference shares is not clearly
Preferenceshares(5,000*P20) 100,000 determinable since it is highly speculative or volatile.
Sharepremium-PS 148,000

(d) Treasury shares (10,000*P22) 220,000

Cash 220,000

(e)C ash(2,000*P20) 40,000

Retainedearnings 4,000
Treasuryshares(2,000*P22) 44,000

(f) Ordinaryshares (5,000*P10) 50,000

Share premium-OS 20,000 *Share premium from srcinal issuance computed as:
Retainedearnings 40,000 (P400,000/100,000)*5,000
Treasuryshares(5,000*P22) 110,000

(g)I ncomesummary 830,000

Retained
earnings 830,000

(h)R etainedearinings 66,000

Retained earinings appropriated for Treasury 66,000

Summary
Ordinary Sh, Preference Sh. Sh. Prem-OS Sh. Prem-PS RE-unapp RE-app TS
(a) Ordinary share issuance in 2013 1,000,000 400,000
(b) Preferenceshareissuancein2013 1,000,000 1,500,000
(c)
Net
income
2013
in 540,000
(a) Conversion of PS to OS in 2014 800,000 (400,000) 200,000 (600,000)
(b) Ordinary and Preference shares issue 250,000 400,000 375,000 175,000
(c) Preferencesharesissuancein2014 100,000 148,000
(d)
Reacquisition
Treasury
of (220,000)
(e) Treasury shares
reissuance
in
2014 (4,000) 44,000
(f) Treasury shares retirement in 2014 (50,000) (20,000) (40,000) 110,000
(g) Net
income
2014
in 830,000
(h) Appropriation for
treasury (66,000) 66,000
Adjusted 12/31/14 balances 2,000,000 1,100,000 955,000 1,223,000 1,260,000 66,000 (66,000)
1 . An s. 2. Ans . 3 . A ns . 4. A n s . 7 . An s.

Share capital:
OrdinaryShares 2,000,000
PreferenceShares 1,100,000 3,100,000
Additional paid-in capital:
Sharepremium-OS 955,000
Sharepremium-PS 1,223,000 2,178,000 5. Ans.
T o t a lC o n t r i b u t e dC a p i t a l 5 , 2 7 86.
, 0Ans.
00
Retainedearnings-appropriated 66,000
Retainedearnings - unappropriated 1,260,000
Treasurysharesatcost (66,000)
T o t a lS t o c k h o l d e r s 'Eq ui t y 6 , 5 3 88.
, 0Ans.
00

CHAPTER 9-PROBLEM 4: BULACAN CO.

Correct entries:
1. Ans. P450,000.
(a)
Cash 5,700,000
Bondspayable 5,000,000
Premiumonbondspayabe 250,000
Ordinaryshare warrantsoutstanding 450,000

(b)C ash(4,000sh*P70) 280,000

Accumulatedprofits 20,000
Treasuryshares(4,000sh*P75) 300,000

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Ordinaryshares (1,000*P50) 50,000

Share premium-OS (P250K/50Ksh)*1K 5,000
Accumulatedprofits 20,000
Treasuryshares(1,000sh*P75) 75,000

(c) Memo: 49,000share rights were issued to 49,000 shares outstanding.

2. Ans. P276,000.
(d) Cash(5,000*60%)/5w*P60 36,000
Ordinary share warrants (P 450K*60%) 270,000
Ordinaryshares(600sh*P50) 30,000
Share
premium-OS 276,000

3. Ans. P45,000.
(e)C ash(40,000/10)*P55 220,000
Ordinaryshares(4,000*P50) 200,000
Share
premium-OS 20,000

(f) Incomesummary 1,250,000

Accumulatedprofits 1,250,000

Summary:
Prefence Sh Ordinary Sh APIC/Sh Prem. Accum. Prof. Treasury Total
Balances, January 1, 1,000,000 2,500,000 2450000
500,000 (375,000) 6,075,000
(a)
Warrantsissuance 450,000 450,000
(b)
Treasury
reissue (20,000) 300,000 280,000
Tresauryretirement (50,000) (5,000) (20,000) 75,000 -
(c)
Share
rights
issue
(memoentry) -
(d)
Warrants exercise 30,000 6,000 36,000
(e)
Rights
exercise 200,000 20,000 220,000
net
Income
(f) 1,250,000 1,250,000
Balances,December31, 1,000,000 2,680,000 971,000 3,660,000 - 8,311,000
4
A.ns . 5
A.n s . 6
A.ns .

CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES.

(a) Entry made:
Cash 130,000
Treasury
shares 130,000

Correct entry:
Cash 130,000
Sharepremium-TST 65,000
Treasuryshares(P363,000/605)*325 195,000

1. Ans. Adjusting entry:

Sh a r ep r e m i um - T S T 65 , 00 0
T r e a s u rs
yh a r e s 65 , 00 0

(b) Entry mad e:

Cash 650,000
Preferenceshares(6,000sh*50) 300,000
Share
premium-PS 350,000

Correct entry:
Cash 650,000 Allocation: Prorata
Preference
shares 300,000 Pref. Sh. (6Ksh*P80) 480,000 80%
Sharepremium-PS(P650K*80%)-PAR 220,000
Warrants (12Kw*P10) 120,000 20%
Ordinary share warrants outstanding (P650K*20%) 130,000 600,000

2. Ans. Adjusting entry:

Sh a r ep r e m i um - P S 1 30 , 0 00
O r d i n a r y s ha r e w a r ra nt s o ut s t a n d i n g 1 30 , 0 00

(c) Entry made:

Cash(700sh*P440)*40% 123,200
Subscriptionreceivable 184,800
Orinarysharessubscribed 308,000

Correct entry:
Cash(700sh*P440)*40% 123,200
Subscriptionreceivable 184,800
Ordinary shares subscribed (700sh*P20) 14,000
Share
premium-OS 294,000

3. Ans. Adjsuting entry:

O rd i na ry s h a r e s s u b s c ri b e d 2 94 , 0 00
S h a r ep r e mi u m - O S 2 94 , 0 00

(d) Entry mad e:

Cash 158,400
Subscriptionsreceivable 158,400

Correct entry:
Cash 158,400
Subscriptionsreceivable 158,400

Ordinary shares subscribed (600sh*P20) 12,000

Ordinary
shares 12,000

4. Ans. Adjusting entry:

O r d i na r ys h a r e ss u b s c r i b e d 12 , 00 0
O r d i n a rs
yha r e s 12 , 00 0

(e) Entry made:

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Cash(4,000*2sh*P400) 3,200,000
Ordinary
shares 3,200,000

Correct entry:
Cash 3,200,000
Ordinary share warrants (P130K*4/12) 43,333
Ordinaryshares(4,000*2sh*P20) 160,000
Share
premium-OS 3,083,333

5. Ans. Adjusting entry:

O r d i na r ys h a r e s 3, 0 40 , 0 00
Or di na ry s ha re w ar ra nt s ou ts ta nd in 43 ,3 33
S h a r ep r e mi u m - O S 3 ,0 8 3 ,3 3 3

6. Ans.
(f) Correct entry/Ad justing entry
Ca sh(P1 84 ,8 00 -P 15 8, 40 0) +P 5, 00 0 31 ,4 00
M i s c e l l a n e o u se x p e n s e 5 ,0 0 0
S u b s c r i p t i o nr e c e i v a b l e 2 6 ,4 0 0

O rd i na ry s h a r e s s u b s c ri b e d 2, 0 00
O r d i n a r ys ha r e s( 1 0 0 * P 2 0 ) 2 ,0 0 0

CHAPTER 9-PROBLEM 6: PUNK INC.

1. Ans. P83,333.
FMV of options (100emp*100opt)*P25 250,000 Entry:
Divideby:Vestingperiod 3 Salariesexpense 83,333
Sa l a r i e s e x p e n s e , 2 0 1 4 8 3, 3 33 Ordinary share options outstanding 83,333

2. Ans. P58,333.
RevisedF MVo fo ptions( 85emp*100opt)*P25 212,500
Multiplyby:2years/3years 2/3
Cummulative salaries expense as of Dec. 31, 2015 141,667 Entry:
Less:Prioryear'ssalariesexpense (83,333) Salariesexpense 58,333
Sa la r i e se x p e n s e ,2 0 1 5 5 8 ,3 3 3 Ordinary share options outstanding 58,333

3. Ans. P33,333.
Final FMV of options (70emp*100opt)*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (141,667)
Salariesexpense 33,333
Sa la r i e se x p e n s e ,2 0 1 6 3 3 ,3 3 3 Ordinary share options outstanding 33,333

4. Ans. P210,000.
Entry upon exercise of all options:
Cash(7,000sh*P25) 175,000
Ordinary share options oustanding 175,000
Ordinaryshares(7,000sh*P20) 140,000
Share
premium 210,000

CHAPTER 9-PROBLEM 7: PUNK INC.

1. Ans. P66,667.
Estimated FMV of options (100-20emp)*100opt*P25 200,000 Entry:
Divide
by: Vesting period 3 Salariesexpense 66,667
Sa la r i e se x p e n s e ,2 0 1 4 6 6 ,6 6 7 Ordinary share options outstanding 66,667

2. Ans. P58,333.
Revised FMV of options (100-25emp)*100opt*P25 187,500
Multiplyby:2years/3years 2/3
Cummulative salaries expense as of Dec. 31, 2015 125,000 Entry:
Less:Prioryear'ssalariesexpense (66,667) Salariesexpense 58,333
Sa la r i e se x p e n s e ,2 0 1 5 5 8 ,3 3 3 Ordinary share options outstanding 58,333

3. Ans. P50,000.
Final FMV of options (70emp*100opt)*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (125,000)
Salariesexpense 50,000
Sa la r i e se x p e n s e ,2 0 1 6 5 0 ,0 0 0 Ordinary share options outstanding 50,000

4. Ans. P50,000.
Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market based-
condition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the
services were received, thus, salaries expense shall be recognized.
Entry:
Salariesexpense 50,000
Ordinaryshareoptionsoutstanding 50,000
Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity.
Entry:
Ordinary share options outstanding 175,000
Retained e arnings/APIC-Unexercised o ptions 175,000

5. Ans. P120,833.
Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are
accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 y ears.
Final FMV of options, Dec. 2015 (75emp*100opt)*P25 187,500
Less: Prior years' cummulative salaries expense (66,667)
Sa la r i e se x p e n s e ,2 0 1 5 12 0 , 83 3

CHAPTER 9-PROBLEM 8 : PUNK INC.

1. Ans. P62,500.
Dec. 31, 2014: Is the non-market based condition achievable?
Actualsales,2014 75,000,000
Multiply by: 120% estimated increase 120%
Projectedsales,2015 90,000,000
Multiply by: 120% estimated increase 120%
Projectedsales,2016 108,000,000

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Minimum required sales 100,000,000 Thus, achievable.

Note that the estimated sales in 2016 is P108M, thus the estimated number of options per employee shall be 100.

Est. FMV of options vested (100-25emp)*100opt.*P25 187,500 Entry:

Divide
by: Vesting period 3 Salariesexpense 62,500
Sa la r i e se x p e n s e ,2 0 1 4 6 2 ,5 0 0 Ordinary share options outstanding 62,500

2. Ans. P137,500.
Dec. 31, 2015: Is the non-market based condition achievable?
Actualsales,2015 110,000,000
Multiply by: 120% estimated increase 120%
Projectedsales,2016 132,000,000
Minimum required sales 100,000,000 Thus, achievable.
Note that the estimated sales in 2016 is P132M, thus the estimated number of options per employee shall be 150.

Revised FMV of options (100-20emp)*150opt*P25 300,000

Multiplyby:2years/3years 2/3
Cummulative salaries expense as of Dec. 31, 2015 200,000 Entry:
Less:Prioryear'ssalariesexpense (62,500) Salariesexpense 137,500
Sa la r i e se x p e n s e ,2 0 1 5 13 7 , 50 0 Ordinary s hare o ptions o utstanding 137,500

3. Ans. P220,000.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actualsales,2016 150,000,000
Minimum required sales 100,000,000 Thus, achieved, therefore options are exercisable.
Note that the actual sales in 2016 is P150M, thus the final number of options per employee shall be 200.

FinalF MV o fo ptions ( 100-16emp)*200opt*P25 420,000 Entry:

Less: Prior years' cummulative salaries expense (200,000)
Salariesexpense 220,000
Sa la r i e se x p e n s e ,2 0 1 6 22 0 , 00 0 Ordinary s hare o ptions o utstanding 220,000

4. Ans. P504,000.
Entry upon exercise of all options:
Cash(16,800sh*P25) 420,000
Ordinary share options outstanding 420,000
Ordinaryshares(16,800sh*P20) 336,000
Share
premium 504,000

CHAPTER 9-PROBLEM 9 : PUNK INC.

1. Ans. P100,000.
Dec. 31, 2014: Has the non-market based condition been achieved at the end of 2014?
Actual i ncrease in sales, 2014 (P81M-75M)/75M 8%
Minimum required increase in sales, 2014 10% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?

Estimated average increase in sales in 2014 and 2015: (8%+16%)/2 12%
Minimum required average increase in sales (2014 -2015) 12% Thus, achievable, VP is 2 years.

Est. FMV of options vested (10-2emp)*1,000opt.*P25 200,000 Entry:

Divide
by: Vesting period 2 Salariesexpense 100,000
Sa la r i e se x p e n s e ,2 0 1 4 10 0 , 00 0 Ordinary s hare o ptions o utstanding 100,000

2. Ans. P33,333.
Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015?
Actual i ncrease in sales, 2014 (P81M-75M)/75M 8%
Actualinrease ins ales, 2015( P92.23M-81M)/81M 14%
Actual average increase in sales (2014 and 2015) 11%
Minimum required average increase in sales (2014 - 2 01 12% Thus, not achieved.

Is the non-market based condition achievable by the end of 2015?

Estimated average increase in sales in 2014 and 2015: (8%+14%+20%)/3 14%
Minimum required average increase in sales (2014 - 2016) 14% Thus, achievable, VP is 3 years.

Revised FMV of options (10-2emp)*1,000opt*P25 200,000

Multiplyby:2years/3years 2/3
Cummulative salaries expense as of Dec. 31, 2015 133,333 Entry:
Less:Prioryear'ssalariesexpense (100,000) Salariesexpense 33,333
Sa la r i e se x p e n s e ,2 0 1 5 3 3 ,3 3 3 Ordinary share options outstanding 33,333

3. Ans. P41,667.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M 20%
Actual average increase in sales (2014-2016) (8%+14%+20%)/3 14%
Minimum required average increase in sales (2014 - 2016) 14% Thus, the condition has bee achieved.
Options are exercisable.
Final F MV of options (10-3emp)*1,000opt*P25 175,000 Entry:
Less: Prior years' cummulative salaries expense (133,333)
Salariesexpense 41,667
Sa la r i e se x p e n s e ,2 0 1 6 4 1 ,6 6 7 Ordinary share options outstanding 41,667

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4. Ans. P210,000.
Entry upon exercise of all options:
Cash(7,000sh*P25) 175,000
Ordinary share options outstanding 175,000
Ordinaryshares(7,000sh*P20) 140,000
Share
premium 210,000

CHAPTER 9-PROBLEM 10 : MYX CO.

1. Ans. P603,333.
End of 2014: Is the non-market based condition achievable?
Projected 2016 sales: (P210M*120%*120%) 328,125,000
Minimumrequired2016sales 250,000,000 Achievable, number of SARs is 10,000.

Estimated FMV of SARS, 2014 (10,000sars*P74) 740,000 Entry:

Divide
by:
Vesting
period 3 Salariesexpense 246,667
Salariesexpense,2014 246,667 SAR
payable 246,667

End of 2015: Is the non-market based condition achievable?

Projected 2016 sales: (P410M*120%) 640,625,000
Minimumrequired2016sales 250,000,000 Achievable, number of SARs is 15,000.

Estimated FMV of SARS, 2015 (15,000sars*P85) 1,275,000

Multiplyby:2years/3years 2/3
Cummulative salaries expense as of Dec. 31, 2015 850,000 Entry:
Less:Prioryear'ssalariesexpense (246,667) Salariesexpense 603,333
Sa la r i e se x p e n s e ,2 0 1 5 60 3 , 33 3 SARpayable 603,333

2. Ans. P1,050,000.
End of 2016: Has the non-market based condition been achieved?
Actual2016sales 760,000,000
Minimumrequired2016sales 250,000,000 Achieved, number of SARs is 20,000.

Final FMV of SARS(20,000sars*P95) 1,900,000 Entry:

Less: Prior years' cummulative salaries expense (850,000)Salaries expense 1,050,000
Sa la r i e se x p e n s e ,2 0 1 6 1 ,0 5 0 ,0 0 0 SARpayable 1,050,000

3. Ans.
Entry upon exercise in 2017 at prevailing FMV P98.
SA Rp a y a b l e 1, 9 00 , 0 00
Sa la r i e se x p e n s e 6 0, 0 00
C a s h( 2 0 , 0 0 0 s a r s * P 9 8 ) 1 ,9 6 0 ,0 0 0

4. Ans. P1,800,000.
SAR pay able at p rev aii ng FMV ( 20, 000 sar s*P 90) 1,8 00, 000
Entry to remeasure the SAR at the end of 2017:
SAR
payable 100,000
Salaries expense/Income from SAR reversal 100,000
(P95 - P90)*20,000SARS

CHAPTER 9-PROBLEM 11 : DARK COMPANY

1. Ans.
Retained earnings (10%*90,000sh)*P14 126,000
Share dividends payable (9,000sh*P10) 90,000
Share
premium 36,000

Sharedividendspayable 90,000
Ordinary
shares 90,000

2. Ans.
Retained earnings (25%*99,000sh)*P10 247,500
Share dividends payable (24,750sh*P10) 247,500

Sharedividendspayable 247,500
Ordinary
shares 247,500

3. Ans. P1,337,500.
Ordinaryshares,beginning balance 1,000,000
10% share dividends (90,000sh*10%)*P10 90,000
25% share dividends (99,000sh*25%)*P10 247,500
O rd i na ry s h a r e s , e n d in g b a l a n c e 1 ,3 3 7 ,5 0 0

CHAPTER 9-PROBLEM 12 : CHRIS COMPANY

1. Ans.
Retained earnings (10%*500,000)*P25 2,500,000
Stock dividends payable (50,000sh*P10) 500,000
Share
premium 2,000,000

2. Ans.
Stockdividendspayable 500,000
Ordinaryshares(46,000sh*P10) 460,000
Fractional warrants outstanding (4,000*P10) 40,000

3. Ans.
Fractional warrants outstanding 36,000
Ordinaryshares(3,600sh*P10) 36,000

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4. Ans.
Fractional warrants outstanding 4,000
Share premium - Expired fractional warrants 4,000

5. Ans. P1,099,200.
Oustanding shares, beginning 500,000
Ordinary share dividends distributed 46,000
Shares issued from fractional warrants 3,600
Totaloutstandingshares 549,600
Multiplyby:Cashdividends 2
Di v i d e n d s f r o m e a r n i n g s 1, 0 99 , 2 00

Entry:
Retainedearnings 1,099,200
Capital liquidated (549,600*P1) 549,600
Dividends payable 1,648,800
Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE.

CHAPTER 9-PROBLEM 13 : ABC INC.

1. Ans. P900,000.
Declaration:
Retainedearnings 900,000
Propertydividendspayable 900,000

Noncurrent asset h eld for d isposal 720,000

Accum. depr (P800,000*1/10) 80,000
Building
(PPE) 800,000

2. Ans. P700,000.
Balance sheet date: December 31, 2014
Property dividends payable 200,000
Retainedearnings 200,000
FMVat12/31/14 700,000
Dividendspayable,CV 900,000
AdjustmenttoRE (200,000)

Loss 20,000
Noncurrentassetheldfordisposal 20,000
FMV less cost to sell, NCAHFD 700,000
CV,uponreclass 720,000
Loss on remeasurement - P&L (20,000)

3. Ans. None.
Note that the increase or decrease in the property dividends payable is charged to RE.

4. Ans. P100,000.
Distribution:
Retainedearnings 100,000
Propertydividendspayable 100,000
FinalFMV,1/31/2015 800,000
Dividends payable, CV (FMV 12/201 700,000
AdjustmenttoRE 100,000

Property dividends payable 800,000

Noncurrentassetheldfordisposal 700,000
Gain on settlement of property dividends - P&L 100,000

CHAPTER 9-PROBLEM 14: JKL CORP.

Correct entries:
(a) Accumulatedprofits,beg 50,000
Cash 50,000
Preference shares (40,000*P1) 40,000
Ordinary shares (20,000*P0.50) 10,000
Totalcashdividends 50,000

(b) Treasury shares (80,000/4,000= P20) 80,000

Cash 80,000

(c) Memo: Share split up 1 is to 2: 1. Ans. NO EFFECT.

From 20,000 shares issued to 40,000 shares issued; From P5 par to P2.50 par
From 4,000 treasury shares to 8,000 treasury shares; From P20 cost per treasury to P10 per treasury

(d) Equipment 50,000

Treasuryshares(2,800*P10) 28,000
Share
premium-TST 22,000

(e)C ash(10,000*P15) 150,000

Preferenceshares(10,000*P10) 100,000
Share
premium-PS 50,000

(f) Accumulated profits (34,800*10%)*P6 20,880 2. Ans.

Share dividends payable(3,480*P2.50) 8,700
Share
premium-OS 12,180

Sharedividendspayable 8,700
Ordinary
shares 8,700

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(g)A ccumulatedprofits 59,570 3. Ans.

Cashdividendspayable 59,570
Preference shares (50,000*P1) 50,000
Ordinary shares (38,280*P0.25) 9,570
Totalcashdividends 59,570

(h)I ncomesummary 940,000

Accumulated
profits 940,000

-- Accumulatedprofits 52,000
Accumulated profits a ppropriated f or t reasury 52,000

Summary: Preference Sh Ordinary Sh Sh. Prem-PS Sh. Prem-OS Sh. Prem-TS Accum. P.-App Accum. Prof Treasury
January1,2014balances 400,000 100,000 192,000 1,200,000
(a) Retroactiveadjustment,2013
dividends (50,000)
(b) Treasury
shares
reacquisition (80,000)
(c) Share split - No Effect
(d) Treasuryshares
reissue 22,000 28,000
(e) Preferencesharesissue 100,000 50,000
(f) 10% stock
dividends 8,700 12,180 (20,880)
(g) 2014
cash
dividends (59,570)
(h)income
2014
net 940,000
-- Appropriation for
treasury 52,000 (52,000)
December 31, 2014 balances 500,000 108,700 50,000 204,180 22,000 52,000 1,957,550 (52,000)
4. Ans.

5. Ans.
Accumulated profits 17,400
Share dividends payable 17,400
Computed as: (34,800*20%*P2.50)

CHAPTER 9-PROBLEM 15: TRUST CORPORATION

CASE 1:
Entries:
a) Retainedearnings 100,000
Accum
Depr 100,000

b) Retainedearnings 50,000
Inventories 50,000

c) Retainedearnings 150,000
Accountspayable/Liabilities 150,000

d) Ordinary shares (P5*100,000sh) 500,000

Share
premium 500,000

e) Sharepremium 550,000
Retained
earnings 550,000

Assets Liabilities SHE OrdinaryS h. ShareP rem. Ret.E arnings

Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)
a)Write-downofPPE (100,000) (100,000) (100,000)
b) Write-downofInventory (50,000) (50,000) (50,000)
c)AccrualofadditionalLiability 150,000 (150,000) (150,000)
Recapitalization
d) - (500,000) 500,000
Write-off
e) deficit
of - (550,000) 550,000
Balances, after quasi-reorg anizat ion 1,000,000 450,000 550,000 500,000 50,000 -
1 .A n s . 2 .A n s . 3 .A n s . 4 .A n s .

CASE 2:
Entries:
a) PPE-AppraisalIncrease 1,000,000 Repl. Cost 2,500,000 1,500,000 Cost
AccumDepr-AppraisalIncrease 400,000Repl AD (1,000,000) (600,000) AD
Revaluation
surplus 600,000
Sound Value 1,500,000 900,000
Carrying Value

b) Retainedearnings 75,000
Inventories 75,000

c) Retainedearnings 175,000
Accountspayable/Liabilities 175,000

d) Revaluationsurplus 500,000
Retained
earnings 500,000

Assets Liabilities SHE OrdinaryS h.

ShareP rem. Rev.S urplus Ret.E arnings
Balances, before quasi-reorganization 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)
a)Write-downofPPE 600,000 600,000 600,000
b) Write-downofInventory (75,000) (75,000) (75,000)
c)AccrualofadditionalLiability 175,000 (175,000) (175,000)
Write-off
d) deficit
of - (500,000) 500,000
Balances, after quasi-reorg anizat ion 1,675,000 475,000 1,200,000 1,000,000 100,000 100,000 -
1 .A n s . 2 .A n s . 3 .A n s . 4 .A n s . 5 .A n s .

CHAPTER 9-PROBLEM 16: SPURS INC.

1. Ans. Dr. P150,000.
DebittoRE,perbooks 1,500,000
Debit to RE, per audit (15%*100,000sh)*P110 1,650,000
A d j u s t m e nt t o R E ( a d d i t i o n a l d e b i t ) (1 5 0 ,0 0 0)

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2. Ans. P9,100,000.
Unadjusted Net Income, per books 9,000,000
Inventoryfireloss (150,000)
ImpairmentlossonPPE (750,000)
LossonsaleofEquipment (200,000)
Gainonretirement ofbonds 300,000
Unrealized holding gain on FA 700,000
Increase in beg. Inventory under FIFO (100,000)
Increase in end. Inventory under FIFO 300,000
A d ju st ed Ne t I nc om e, pe r a ud it 9 ,1 0 0, 00 0

3. Ans. P6,400,000.
Retainede arnings,b eginning 7,800,000
Correction of prior period error (1,500,000)
Change in policy (Ave to FIFO) 100,000
Ret ain ed ea rni ngs, beg . as res tate d 6,4 00, 000

4. Ans. P10,650,000.
Retainedearnings, beg. as restated 6,400,000
15%stockdividenddeclaration (1,650,000)
Loss on retirement of Treasury (P1,050,000-P850,000) (200,000)
Reserveforplantexpansion (3,000,000)
AdjustedNetIncome 9,100,000
R e t a i n e d e a r n i n g s ,e n d i n g b a l a n c e 1 0 ,6 5 0 ,0 0 0

5. Ans. P1,100,000.
Excess over par on share dividends (P1,650,000-P1,500,000) 150,000
Lossonretirementoftreasury (850,000)
Excessoverparonshareissuance 1,000,000
Proceedsfromsaleofdonatedshares 800,000
N e t / To t a l a d j u s t m e n t t o A d d i t i o n a l P a id - i n C a p i t a l 1 ,1 0 0 ,0 0 0

MULTIPLE CHOICE EXERCISES:

CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC.
1. Ans. A.
Ordinary shares issued (40,000sh*P20) 800,000
Ordinary shares subscribed (5,000sh*P20) 100,000
Preferences haresi ssued( 6,000sh*P100) 600,000
Preference shares subscribed (900sh*P100) 90,000
Share premium from ordinar shares
I ssued 920,000
Subscribed( P56-P20)*5,000sh 180,000 1,100,000
Share premium from preference shares
I ssued 224,000
Subscribed (P140-P100)*900 36,000 260,000
Sharepremiumfromtreasuryshares 8,000
Ordinarysharewarrantsoutstanding 40,000
T o t a lc o n t r i b u t e dc a p i t a l 2 ,9 9 8 ,0 0 0

2. Ans. A.
Revaluationsurplus 240,000
Unrealizedholdinggain-AFS 6,000
Translationreserves(credit) 100,000

Unre al iz ed cap it al /O th er co mp re he ns iv e i nc om e 34 6, 00 0
3. Ans. B.
Contributedcapital 2,998,000
Accum. other comprehensive income 346,000
Accumulatedprofits 820,000
St o c k h o l d e r s ' e q u i t y 4, 1 64 , 0 00

CHAPTER 9-EXERCISE 2: ALPHA CORPORATION

1. Ans. D.
Authorized ordinary shares at P10 par value 900,000
Unissuedordinaryshares (500,000)
O r d i na r ys h a r e si s s u e d P 40 0 ,0 0 0

2. Ans. D.
Authorized preference shares at P50 par value 400,000
Unissuedpreferenceshares 100,000
P r e f e r e nc es h a r e sis s u e d P 30 0 ,0 0 0

3. Ans. C.
Additional paid-in capital on ordinary shares 460,000
Additional paid-in capital on preference shares 112,000
Additional paid in capital on sale of treasury shares 4,000
Ordinarysharewarrantsoutstanding 20,000
Donated capital 25,000
To t a l A d di t i o n a l P a i d- i n C a p i t a l P 62 1 ,0 0 0

4. Ans. D.
Ordinarysharesissued P400,000
Preferencesharesissued 300,000
, . ,
30,000
, . ,
30,000

Total
T o t aAdditional
lC o n t r i bPaid-in Capital
u t e dC a pit a l P621,000
1 ,3 8 1 ,0 0 0

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5. Ans. C.
Ordinarysharesissued P400,000
Preferencesharesissued 300,000
Ordinarysharessubscribed 50,000
Preferencesharessubscribed 45,000
Total Legal Capital (Par value of issued and subs.)
P795,000

6. Ans. C.
TotalContributedCapital 1,381,000

Unrealizedholdinggain-AFS 3,000
Revaluationincrementinproperties 100,000
Accumulated profits:
Accumulated profits – unappropriated 410,000
Reserveforbondsinkingfund 220,000
T o t a lS t o c k h o l d e r ’ se q u i t y P 2 ,1 1 4 ,0 0 0

CHAPTER 9-EXERCISE 3: TABUK CORPORATION

Entry Made Correct Entry Adjusting Journal Entry
Cash 900,000 Cash 900,000 Retained Earnings 150,000
O.S. 300,000 O.S. 300,000 Share Prem – PS 117,000
P.S. 450,000 P.S. 450,000 Share Prem – OS 33,000
Retained earnings 150,000 SharePrem – PS 117,000 1. Ans. C.
Share Prem – OS 33,000

Cash 225,000 Cash 225,000 Share Prem. – TS 37,500

Other expense 37,500 Share Prem – TS 37,500 Retained Earnings 37,500
Treasury Stock 262,500 Treasury Stock 262,500 *books are already closed.
2. Ans. D.

O.S. 600,000 O.S. 600,000 Share Prem. – OS 90,000

Treasury Stock 350,000 Share Prem – OS 90,000 Retained Earnings 250,000
Retained Earnings 250,000 Treasury Stock 350,000 Share Premium – TS 340,000
SharePrem – TS 340,000 3. Ans. C.

Cash 425,000 Cash 425,000

Subs Rec. 350,000 Subs Rec. 350,000
Opex 50,000 Retained earnings 75,000
No entry
Interest income 25,000 *books are already closed.
4. Ans. A.

CHAPTER 9-EXERCISE 4: NEVADA SQUARE

1. Ans. D.
Retainedearnings,Jan.1,2014 P30,000,000
Cashdividends (2,800,000)
Stockdividends (100,000*P68) (a) (6,800,000)
Propertyd ividends( 800,000/2)*P25( b) (10,000,000)
Netincomefortheyear 60,000,000
Re t a i n e d e a r n i n g s , De c . 3 1 , 2 0 1 4 P1 6 ,4 0 0 ,0 0 0
(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market v alue.
(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.

2. Ans. B.
Ordinaryshares,January1,2014 P14,000,000
Stock dividends issuance (100,000*20) 2,000,000
O rd i na ry s h a r e s , D e c e m b e r 3 1 , 2 0 1 4 P1 6 ,0 0 0 ,0 0 0
*share split is accounted through memo entry only, aggregate par value remains the same.

3. Ans. C.
Share premium, January 1, 2014 P8,000,000
Share premium from share dividends
(6,800,000 – 2,000,000) 4,800,000
Share Prem ium, Decem ber 31, 2014 P12,8 00,000

4. Ans. B.
Preferenceshares P10,000,000
Ordinary shares 16,000,000
Share premium 12,800,000
Retained earnings 16,400,000
Ret ain ed ear nin gs, Dec. 31, 201 4 P55 ,20 0,0 00

CHAPTER 9-EXERCISE 5: MISAMIS INC.

1. Ans. B.
Number o f options estimated to v est (2 00opt*100emp) 20,000
MultiplybyMarketvalueofOptions 30
TotalOptionsOutstanding 600,000
Multiply by
(2012 &
2013) 2/3
T o t a l A c c u m . C o m p . Ex p . a s o f 1 2 . 3 1 . 2 0 1 3 4 00 , 00 0

2. Ans. D.
Proceeds from ex ercise of righ ts (60, 000–5,000)/5*130 P1,430,000
Par value of Ordinary shares issued (11,000*100) 1,100,000
Share premium P330,000

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3. Ans. B.
Share premiumfromordinary shares P1,000,000
Share premium from exercise of warrants 575,000
Share premium from exercise of rights 330,000 P1,905,000
Ordinaryshareoptions outstanding (20,000*30) 600,000
Ordinary share warrants outstanding (750,000*50%) 375,000
T o tA
aPl IC P 2 ,8 8 0 ,0 0 0

4. Ans. D.
Accumulatedprofits,beginning P3,000,000
Retroactive adjustment to retained earnings (400,000)
Appropriation for dividends (71,000 *5 ) (355,000)
Net income, 2014 (2,500,000 – 200,000) 2,300,000
A c c u m u l a t e dp r o f i t s ,e nd P4 ,5 4 5 ,0 0 0

CHAPTER 9-EXERCISE 6: SANTIAGO INC.

1. Ans. B.
The share options are under a variable option plan with a non-market based condition, thus:
2014:
VP 1 year achieved if 2014 Rev>=15M; Actual 2014 Rev, P14.5M – not achieved.
VP 2 years achievable if 2015 Rev>=18M; Estimated 2014 Rev, (P14.5M*125%) = 18.125M – achievable.
Number of options:(68-8)*500 30,000
Fair value of options on grant date P18
Estimated value of services over 2 years P540,000
Divideby:Vestingperiod 2years
Sa l a r i e s e x p e n s e , 2 0 1 4 P 2 70 , 0 00

2. Ans. D.
2015:
VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved.
VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable.
Numberofoptions:(65-5)*500 30,000
Fairvalueofoptionsongrantdate P18
Estimated value of services over 3 years P540,000
Multiply
by:
2/3 2/3
P360,000
Less:Prior years’ salaries expense (270,000)
Sa la r i e se x p e n s e ,2 0 1 5 P9 0 ,0 0 0

3. Ans. C.
2016:
VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved.
Finalnumberofoptions:63*500 31,500
Fairvalueofoptionsongrantdate P18
Fi n a l v a l u e o f s e r v i c e s o v e r 3 y e a r s P5 6 7 ,0 0 0
Multiply
by:
3/3 3/3
Accumulated salaries expense as of 2016 P567,000
Less:Prior years’ salaries expense (360,000)
Salariesexpense,2016 P207,000

4. Ans. A.
Finalnumberofoptions:63*500 31,500
Options exercised in2017:45*500 (22,500)
Optionsforfeitedin20173*500 (1,500)
Remainingoptionsasof12/31/17 7,500
Multiplybyfairvalueongrantdate P18
Ca rr ying va lu e of op ti ons o ut st an ding 12 /3 1/ 17 P1 35 ,0 00

5. Ans. C.
Entry upon exercise of 45*500 = 22,500 options:
Cash(22,500*P35) 787,500
Ordinary share options outstanding
(22,500*18) 405,000
Ordinaryshares(22,500*P20) 450,000
Share premium 742,500

CHAPTER 9-EXERCISE 7: PANDORA CORP.

1. Ans. B.
The share options are under a variable option plan with a market based condition, thus the achievability of the condition
is not a matter to consider in determining annual salaries expense:
2014:
Numberofoptions:(600-5-45)*100 55,000
Fairvalueofoptionsongrantdate P5
Estimated value of services over 3 years P275,000
Divideby:Vestingperiod 3years
Sa la r i e se x p e n s e ,2 0 1 4 9 1 ,6 6 7

2. Ans. A.; 3. ans. C.

2015:
Numberofoptions:(600-5-20-35)*100 54,000
Fairvalueofoptionsongrantdate P5
Estimated value of services over 3 years P270,000
Multiply
by:
2/3 2/3
A c c u m u l a t e d s a l a r i e s e x p e n s e a s o f 20 1 5 P1 8 0 ,0 0 0
Less:Prior years’ salaries expense (91,667)
Sa la r i e se x p e n s e ,2 0 1 5 P8 8 ,3 3 3

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4. Ans. A.
2016:
Final number of options: (600-5-20-30)*100 54,500
Fairvalueofoptionsongrantdate P5
Finalvalueofservicesover3years P272,500
Multiply
by:
3/3 3/3
Accumulated salaries expense as of 2016 P272,500
Less:Prior years’ salaries expense (180,000)
Sa la r i e se x p e n s e ,2 0 1 6 P9 2 ,5 0 0

CHAPTER 9-EXERCISE 8: JUBEE CORP.

1. Ans. B.
The share options are under a variable option plan with a non-market based condition, thus:
2014:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. 12% – achievable.
Numberofoptions:(100*80%)*200 16,000
Fairvalueofoptionsongrantdate P40
Estimated value of services over 3 years 640,000
Divideby:Vestingperiod 3years
Sa la r i e se x p e n s e ,2 0 1 4 P2 1 3 ,3 3 3

2. Ans. C.
2015:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable.
Numberofoptions:(100*85%)*300 25,500
Fairvalueofoptionsongrantdate P40
Estimated value of services over 3 years 1,020,000
Multiply
by:
2/3 2/3
Accumulated salaries expense as of 2015 P680,000
Less:Prior years’ salaries expense (213,333)
Sa la r i e se x p e n s e ,2 0 1 5 P4 6 6 ,6 6 7

3. Ans. D.
2016:
Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived.
Finalnumberofoptions:(100-14)*300 25,800
Fairvalueofoptionsongrantdate P40
Final value ofservices over3years P1,032,000
Multiply
by:
3/3 3/3
Accumulateds alariesexpense aso f2 016 P1,032,000
Less: Prior years’ salaries expense (680,000.0)
Sa la r i e se x p e n s e ,2 0 1 6 P3 5 2 ,0 0 0

4. Ans. A.
Entry upon exercise of 60% of the options (25,800*60% = 15,480 options):
Cash(15,480*P120) 1,857,600
Ordinary share options outstanding
(15,480*40) 619,200
Ordinaryshares(15,480*P100) 1,548,000
Share premium 928,800

5. Ans. B.
Entry upon expiration of 40% of the options (25,800*40% = 10,320 options):
Ordinary share options outstanding
(10,320*40) 412,800
Sh a re p re m i u m – Ex p i r e d o p t i o n s 41 2 ,8 0 0

CHAPTER 9-EXERCISE 9: KALINGA CO.

1. Ans. A.
The share appreciation rights are under a variable plan with a non-market based condition, thus:
2014:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable.
Estimated number of SAR: (20-4)*10,000 160,000
EstimatedFMVofSARatyear-end P6
Estimated value of services over 3 years P960,000
Divideby:Vestingperiod 3years
Sa la r i e se x p e n s e ,2 0 1 4 P3 2 0 ,0 0 0

2. Ans. D.
2015:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable
Estimated number of SAR: (20-4)*10,000 160,000
EstimatedFMVofSARatyear-end P6.75
Estimated value of services over 3 years P1,080,000
Multiply
by:
2/3 2/3
Accumulated salaries expense as of 2015 P720,000
Less:Prior years’ salaries expense (320,000)
Sa la r i e se x p e n s e ,2 0 1 5 40 0 ,0 0 0

3. Ans. B; 4 Ans. D.
2016:
Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved.
FinalnumberofSAR15*20,000 300,000
Fairvalueofoptionsongrantdate P7
Es t . v a l u e o f s e r v i c e s o v e r 3 y e a r s P 2 ,1 0 0, 0 0 0
Multiply
by:
3/3 3/3
Accumulateds alariesexpense aso f2 016 P2,100,000
Less:Prior years’ salaries expense (720,000)
Sa la r i e se x p e n s e ,2 0 1 6 P 1 ,3 8 0, 0 0 0

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CHAPTER 9-EXERCISE 10: SANS CORP.

CORRECT ENTRIES:
Land(1.8M*30%) 540,000
Building(1.8M*70%) 1,260,000
OrdinaryShares 500,000
Sharepremium 1,300,000

Subsriptionreceivable 420,000
Ordinarysharessubscribed 200,000
Share
premium 220,000

Treasuryshares(5,000sh) 125,000
C ash 125,000

Cash 252,000
Subscriptionreceivable 252,000

Ordinarysharesubscribed 120,000
Ordinary
shares 120,000

MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par
8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price
5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit

Cash 40,000
RE 22,500
Treasuryshares(10,000*6.25) 62,500

2. Ans. C.
Compensationexpense 84,000
S APRa y a b l e 8 4 ,0 0 0
(7*4,000*P15)/5years

3. Ans. C.
RE 270,000
CashDividendsPayable 270,000
SharesOutstanding 238,000
SharesSubscribed 32,000
Total 270,000
Multiplybycashdivrate 1
T o t a lC a s hd i v i d e n d s 2 7 0, 0 00

IncomeSummary 1,500,000
R E 1,500,000

Summary OS OS-Subs SharePrem. RE TS TOTAL

January15, 500,000 1,300,000
March 1, 200,000 220,000
1,June (125,000)
July15, 120,000 (120,000)
September 2, (22,500) 6 2,500
December 30, (270,000)
December 31, 1,500,000
Appropriation for
TS (62,500)
A d jB
. a la nc e s 6 2 0, 0 00 80,000 1, 52 0, 00 0 1, 14 5, 00 0 (62,500) 3,365,000
1 .A n s .B . 4 .A n s .C . 5 .A ns .C 6 .A n s .D.

CHAPTER 9-EXERCISE 11: ROXXY CORP.

1. Ans. D.
Ordinary Sh. Sh Prem - OS Sh Prem- TS reasury Share Shares Outstanding
Prior to 2013:
A.Shareissueforcash 3,800,000 7,980,000 380,000
B.Shareissueforland 200,000 680,000 20,000
C.Sharesubsription/issue 400,000 1,280,000 40,000
D.Cashdividenddeclaration(Dec.15,2012) 440,000

2013 transactions:
A.Cashdividenddeclaration(June15,2013) 440,000
B.Shareissueforcash 80,000 288,000 8,000
C.ReacquisitionofTreasuryShares 312,000 (8,000)
D. Stock Dividend Declaration 220,000 924,000 22,000
462,000
2014 transaction:
Reissue
A. TS
of 6,000 (78,000) 2,000
Ba l a n c e s : J u n e 3 0 , 2 0 1 4 4, 7 00 , 0 00 11,152,000 6,000 234,000 464,000

2. Ans. C.
Sharepremium-OS 11,152,000
Sharepremium- Treasury-OS 6,000
To t a l Sh a r e p r e mi u m 1 1, 1 58 , 0 00

3. Ans C.
Retainedearnings,June30,2013 2,760,000
NetIncomefor2014fiscalyear 160,000
Stock Dividends to OS (Dec. 2013)
(440,00sh*5%*P52) (1,144,000)
Cash Dividends to PS (Dec. 2013)
( 200,000*P1) (200,000)
Voluntaryapprop.forsinkingfund (200,000)
Legal approp. for treasury shares (equal to cost) (234,000)
Ret ain ed ear nin gs, unap pro priate d June 30 , 2014 1,1 42, 000

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4. Ans. A.
OrdinaryShares 4,700,000
PreferenceShares 5,000,000
SharePremium-OS 11,152,000
SharePremium-PS 3,800,000
Share Premium - Treasury (OS) 6,000
RE,appropriated 434,000
RE,unappropriated 1,142,000
TreasurySharesatcost (234,000)
To t a l SHE, J un e 3 0 , 2 0 14 2 6, 0 00 , 0 00

CHAPTER 9-EXERCISE 12: GLORIA CORPORATION

ENTRIES:
a)OS(30,000*5) 150,000
Sharepremium-OS 150,000
Treasury
shares 270,000
Share
premium TST
- 30,000

1. Ans. C.
b )R E( 1 0, 0 00 * 7 0 ) 7 0 0 ,0 0 0
Property dividends payable 700,000

RE
(10,000*5) 50,000
Propertydividendspayable 50,000

2. Ans. A.
Property dividends payable 750,000
Tradingsecurities@CV 680,000
Ga i n / I n co m e 70 , 00 0

c) Memo: 1M share rights were received; 1 OS: 4 SR plus P11

Cash(840K/4)*11 2,310,000
OS(210K*5) 1,050,000
Sharepremium-OS 1,260,000

d)RE(100,000*2) 200,000
O SWO 200,000

Cash(80,000*8) 640,000
OSWO(200,000*80%) 160,000
OS
(80,000*5) 400,000
SharepremiumOS
- 400,000

e)RE(1.8M*10%) 180,000
Dividends
payable 180,000

f) Available for sale securities 110,000

UHGain-OCI(SCI/SHE) 110,000
UHLoss-AFS12/31/13 245,000
UHLoss-AFS12/31/14 (135,000)
Decrease in UHL or UHGain for the year 110,000

g)
RE,
beg 275,000
Incometaxexpense 225,000
Rent
income 500,000

h)Incomesummary 2,600,000
R E 2,600,000
PS OS APIC UHLoss RE TS
SUMMARY
January1balances 1,800,000 5,150,000 3,590,000 (245,000) 4,000,000 (270,000)
a)Treasurysharesretirement (150,000) (120,000) 270,000
Property
b) dividends (750,000)
c)Stockrightsexerise 1,050,000 1,260,000
d)Options(priorperioderror) 200,000 (200,000)
Options exercise 400,000 240,000
Cash
e)
dividends (180,000)
f)
UHGainAFS
- for
the
year 110,000
g)Prior
period
error (275,000)
h)
Net
Incomefor
the
year 2,600,000
December31,balances 1,800,000 6, 4 50 , 00 0 5, 1 70 , 00 0 ( 13 55
,0, 1
0095
) ,0 0 0 -
3 .A n s .B. 4 .A n s .B. 6 .A n s .D.
5. Ans. A; 7. Ans. C.
Preferenceshare 1,800,000
Ordinaryshares 6,450,000
APIC 5,170,000
C o n t ri b ut e d C a p i t a l 1 3, 4 20 , 0 00
Unrealized holding loss – SHE (135,000)
Accumulated profits - Total 5,195,000
T o t al S t o c k h o l d e r s ’ Eq ui t y P 18 , 4 80 , 00 0

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CHAPTER 9-EXERCISE 13: RAJA CORPORATION

OS Sh.Prem. RE-app RE-unapp TS TOTAL
Beginningbalance 4,000,000 1,700,000 6,000,000 11,700,000
Jan.
5 100,000 60,000 160,000
16
Jan. (164,000) (164,000)
20Feb. (1,000,000) (1,000,000)
Feb.
25 200,000 280,000 480,000
Mar.
1 1,140,000 (1,140,000) -
entry)
(no
Split1Apr. -
May.
30 200,000 500,000 700,000
Jul.
1 778,500 2,335,500 (3,114,000) -
1
Aug. (238,740) (238,740)
Dec.
31 2,150,000 2,150,000
Appropriation
for
TS (500,000) 500,000 -
Ending balance 6,218,500 4,575,500 2,993,260 500,000 (500,000) 13,787,260
1 .A ns .A . 2 .A n s .A . 3 .A n s .C . 4 .A n s .C .

CHAPTER 9-EXERCISE 14: APAYAO CORPORATION

ASSETS
Cash and cash equivalents (325,000 + 75,000) 400,000
Accounts receivable(275,000 +100,000) 375,000
Marketable securities, at FMV as of 12/31/06 (955,000 – 600,000) 355,000
Prepayments 50,000 1,180,000 1. Ans. B.

Land 900,000
Building(600,000–50,000) 550,000
Machinery and equipment (330,000 – 110,000) 220,000 1,670,000
TOTAL 2,850,000 5. Ans. A.
LIABILITIES AND CAPITAL
Current liab. (325,000+75,000+100,000+3,000–50,000–100,000) 353,000 2. Ans. B
Non-current liabilities (250,000 + 50,000) 300,000 653,000

Ordinary shares, (50,000 – 5,000 + 4,000) * 25 1,225,000

Share premium (750,000 – 75,000 + 140,000) 815,000
Contributed capital 2,040,000 3. Ans. A.
Reserveforselfinsurance 75,000
Reservefortreasuryshares(50*5,000) 250,000
Accum.profits (625,000–3,000–100,000–140,000–50,000–250,000) 82,000 4. Ans. D.
Treasuryshares(50,000*5,000) (250,000) 2,197,000
TOTAL 2,850,000

CHAPTER 9-EXERCISE 15: WHISPER INC.

#ofShares OrdinarySh. Retained
Outstanding Issued APIC Earnings
May,
2012balances 300,000
3,000,000 P P300,000
income,
Net2012 P125,000
July
23,
2013share issue 500,000 5,000,000 1,250,000
October2stockdividends(800,000*5%) 40,000 400,000 40,000 (440,000)
income,
Net
2013 350,000
February,2014treasurystock (30,000)
June,reissuanceoftreasury 15,000 45,000
October, i ssuance of s tocks t hru r ights exercise ( 250,000*2) 5.000,000
500,000 1,500,000
November, issuance of stacks thru rights exercise (400,000*2) 800,000 8,000,000 2,400,000
De c e m b e r1 5 ,c a s hd i v i d e n d s :( 2 , 1 2 5 , 0 0 0 * . 3 0 ) ( 6 3 7 , 5 01.
0 )Ans. C.
December 31,retirement of
TS (100,000) 10,000
income,
Net
2014 800,000
Balances 2,125,000 P21,300,000 P5,545,000 P197,500
2. A n s . A . 3. A n s . C .
4. Ans. A.
Ordinarysharesissued P21,300,000
Additional paid-incapital 5,545,000
Retainedearnings 197,500
Treasuryshares(5,000*9) (45,000)
To t a l s t o c k h o ld e rs ’ e q u i t y P 2 6, 9 97 , 5 00

CHAPTER 9-EXERCISE 16: GREY CO.

1. Ans. A.
Contributed capital in excess of par value P18,000
Donatedcapital(fromstockholder) 15,000
Recapitalization (reduction in par value) 1,500,000
A d d it io n a lp a i di nc a p it a l P 1 ,5 3 3, 0 0 0

2. Ans. D.; 3. Ans. A.

2010–2013Netincome P2,400,000
2010–2013Cashdividends (1,560,000)
Correctionoferror(note2) 6,000
Refundofprioryear’sincometax 27,000
Net
income, 2014 510,000
50%sharedividend,2014 (750,000)
Retainedearnings,total P633,000
Re ta in ed ea rn in gs, ap pr op ri at ed (6 0, 00 0* 4) 24 0, 00 0
Re t a i n e d e a r n i n g s , u n a p p r o p r i a t e d P3 9 3 ,0 0 0

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CHAPTER 9-EXERCISE 17: SCURBS CORPORATION

ADJUSTING JOURNAL ENTRIES
a.Ordinary
shares 180,000 h.PPE 36,000
Sharepremium 180,000 Retained
earnings 36,000

b. Retainedearnings 150,000 i. Retainedearnings 3,300

Sharedividendspayable 150,000 AccumulatedDepr. 3,300

c. Allowanceforbaddebt 30,000 j. Depreciationexpense 3,300

Baddebt
expense 30,000 AccumulatedDepr 3,300

d. Marketablesecurities 9,000 k. Accumulateddepr 52,500

Retained
earnings 9,000 P PE 45,000
GainonsaleofPPE 7,500
e. Unrealizedloss(IS) 57,000
Marketablesecurities 57,000 l.Prepayment 2,700
Insuranceexpense 2,700
f.Retained
earnings 12,000 Retained
earnings 5,400
Incomesummary 12,000

g.Incomesummary 18,300
Inventory,
end 18,300

SUMMARY:
1. Ans. A.
Totalassets,2014unadjusted 2,545,200
(c)D ecreaseinallowanceforbaddebt 30,000
(d) Increase in value of marketable sec. in 2013 9,000
(e) Decrease in value of marketable sec. in 2014 (57,000)
(g)Decreaseininventory,end2014 (18,300)
(h)UnderstatementinPPEin2013 36,000
(i) Depreciation of PPE in item h, in 2013 (3,300)
(j) Depreciationof PPE intemh, in2014 (3,300)
(k) Correction error: PPE d isposal in 2014 7,500
(l)Correcrionoferror:prepayment 2,700
T o t a la s s e t s ,2 0 1 4a d j u s t e d 2 ,5 4 8 ,5 0 0

2. Ans. B.; 3. Ans. D.

2013 2014
Unadjusted net income, 585,000 660,000
(c)Decreaseinbaddebtsin2014 30,000
(d) Increase in value of marketable sec. in 2013 9,000
(e) Decreaseinvalue of marketablesec. in2014 (57,000)
(f) Overstatement in inventory, end 2013 (12,000) 12,000
(g)Understatementininventory,end2014 (18,300)
(h) Overstatement of repairs expense in 2013 36,000
(i)Understatement in depreciation in 2013 (3,300)
(j)Understatementindepreciationin2014 (3,300)
(k) Understatement in gain on sale of equipment, 2014 7,500
(l) Overstatement of insurance expense, 2013 5,400
Understatementofinsruanceexpense,2014 (2,700)
A d j u s t e dN e tIn c o m e 62 0 , 10 0 628,200

4. Ans. D.
UnadjustedRetainedEarnings,end2014 1,401,000
Priorperioderrors:(P585,000-P620,100) 35,100
Overstatemetn in 2014 Net Income (P660,000-P628,200) (31,800)
Unrecordeddividenddeclaration(b) (150,000)
A d j u s t e d Re t a i n e d E a r n i n g s , e n d 2 0 1 4 1 ,2 5 4 ,3 0 0

CHAPTER 9-EXERCISE 18: GBC INC.

1. Ans. D.
Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends.

2. Ans. B.
Sharesissued 100,000
Less:treasury(1,000,000/50) (20,000)
Outstanding shares 80,000
Multiply
by 10%
Dividendsdistributable,small 8,000
Multiplyby
fair
value 42
A p p ro p r i a t i o n f o r s h a r e d i v i d e nd s 3 36 , 00 0

3. Ans. B.
a. Totalnetincomesinceincorporation P3,200,000
b.Total
cashdividends
paid (150,000)
c. Im pairment on property declared as dividend (600,000 – 450,000) (150,000)
Appropriationfor property dividend at impaired value (450,000)
e. Correct valuation of share dividends (336,000)
h.Appropriatedforplantexpansion (700,000)
i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000) (140,000)
l. Appropriated for remaining treasury shares at cost P50/share (1,000,000)
Correct Unappropriated Accumulated Profits balance P274,000

4. Ans. A.

5. Ans. D.
d. Proceeds from sale of donated stocks 150,500
e. Share premium from share dividends 136,000
f. Gain on treasury share transaction 375,000
i. Loss on treasury share reissue (debit (375,000)
j. Share premium in excess of par from 215,000
k. S hareissuanceexpense (45,000)
A P IC 4 5 6, 5 0 0

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CHAPTER 9-EXERCISE 19: MAMA CORP.

ENTRIES: PROPERTY DIVIDENDS
Dec lar at ion : R et ai ned ea r ni ng s 90 0 ,0 00
Di v i d e n d s p a y a b l e 9 0 0 , 01.
0 0Ans. A.

Noncurrent Asset Held 900,000

Loss 300,000
Equipment 1,200,000

Payment: Retained earnings 100,000

Dividendspayable 100,000

Dividends payable 1,000,000

Noncurrent Asset Held for Disposal 900,000
Ga in 1 0 0 , 0 2.
0 0 Ans. D.

ENTRIES STOCK DIVIDENDS

Declaration: Retained earnings
( 20 0 ,0 0 0 * 1 0 % )* 4 2 8 4 0, 0 0 0 3. Ans. A.
Dividends payable (20,000*25) 500,000
Sharepremium 340,000

Payment: Dividends payable 500,000

Ordinaryshares 500,000

4. Ans. D.
a.Totalnetincomesince2013 6,400,000
b.Cashdividendssince2013 (300,000)
c. P ropertyDividends(seeentriesabove) (1,000,000)
Adjustments to Net income in relation to the property dividends
Loss on reclassification of Equipment to held for disposal (300,000)
Gain on settlement of the property dividends 100,000
d. Capital loss from treasury shares reissue (300,000-400,000) (100,000)
e.Stockdividends(seeentriesabove) (840,000)
g.Appropriationforplantexpansion (700,000)
*Appropriation for treasury stock (30,000*P40) (1,200,000)
A c c um u l a t e d p ro f i t s - u n a p p ro p ri a t e d b a l a n c e 2 ,0 6 0 ,0 0 0

CHAPTER 9-EXERCISE 20: TAR CO.

1. Ans. A.
Netincome,unadjusted 300,000
Profit sharing ofemployees (30,000)
Proceeds from life insurance 150,000
Gainonsaleofproperty 23,000
N ET
IN C O M E 4 4 3, 0 0 0

2. Ans. A.
Accumulatedprofits,b eginning 200,000
Correction of prior period error (15,000)
Dividendstoordinary (50,000)
Dividendstopreference (40,000)
Appropriation for bond redemption (20,000)
Correctnetincome 443,000
A C C U M P R O FI T S , U N A P P . 5 1 8, 0 0 0

3. Ans. A.
APIC,unadjusted 100,000
Gainonsaleoftreasury,net 3,000
Donationfromstockholder 52,000
Gainonsaleofownshares 12,000
A P IC 1 6 7, 0 0 0

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CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION

DISCUSSION PROBLEMS
CHAPTER 10-PROBLEM 1: ABC CORPORATION
Current Noncurrent Current Noncurrent SHE
Asset Asset Liabilities Liabilities
Cash 800,000 800,000
Accountsreceivable 750,000 750,000
Allowance for doubtful accounts 50,000 (50,000)
Dividendreceivable(a) 40,000
Prepaidexpenses 160,000 160,000
Inventory 1,000,000 1,000,000
Financial assets at fair value (a) 690,000 400,000
Land (b) 525,000
Buildinginprocess(b) 5,500,000 4,950,000
Patent 200,000 200,000
Machinery and equipment 1,500,000 1,500,000
Accumulated depreciation 300,000 (300,000)

Discountonbondspayable 200,000 (200,000)

Accountspayable 900,000 900,000
Accruedexpenses 150,000 150,000
Note payable, 10% (c) 250,000 250,000
Accrued interest on notes payable (c) 52,500
Bondspayable 2,000,000 2,000,000
Accruedinterest
onbonds
payable(d) 60,000
Sharecapital 3,000,000 3,000,000
Accumulated profits (b), (c), (d) 4,150,000 4,012,500
Treasury
shares
(a) (250,000)
Adjusted balances 3,100,000 6,875,000 1,412,500 1,800,000 6,762,500
1A. n s. 2A. n s. 3A
. n s. 5A. n s.
Audit notes:
(a) Financial asset at fair value, unadjusted 690,000
Treasury
shares (250,000)
Dividendreceivable (40,000)
Financial asset a t fair value, a djusted 400,000

(b) Building in progress, unadjusted 5,500,000

Land including property taxes in arrears (525,000)
Propertytaxexpense (25,000) *charged to RE
Building in progress, adjusted 4,950,000

(c) Notespayable,principal 250,000

Interestin 2013 (P250,000*10%) 25,000

Interestin 2014 (P275,000*10%) 27,500 *charged to RE
Totalinterestpayableonnotes 52,500 *charged to RE

(d) Accrued interest on bonds payable (P2,000,000*12%*3/12) 60,000

4. Ans. P3,762,500.
Accumulatedprofits,unadjusted 4,150,000
(b)Propertytaxesforthecurrentyear (25,000)
(c)Interestonnotesin2013 (25,000)
Interestonnotesin2014 (27,500)
(d)Unaccruedinterestonbondsin2014 (60,000)
AppropriationforTreasuryshares (250,000)
A c c u m . P r o f i t s, u n a p p r o p r i a t e d , a d j u st e d 3, 76 2, 5 00

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CHAPTER 10-PROBLEM 2: RCW CORP. Current Noncurrent Current Noncurrent SHE

Asset Asset Liabilities Liabilities

Cash 400,000 400,000

Accountsreceivable 800,000 800,000
Allowance for doubtful accounts 50,000 (50,000)
Inventories at cost (NRV is P900,000) 1,000,000 900,000 (100,000)
Land,plantsite 500,000 500,000
Land, for speculation at FMV (Note a) 1,200,000 1,200,000
Building 3,800,000 3,800,000
Accumulated depreciation – building 2,000,000 (2,000,000)
Equipment 3,400,000 3,400,000
Accumulated depreciation – equipment 1,300,000 (1,300,000)
Investment in associate 1,300,000 1,300,000
Prepaidexpenses 100,000 100,000
Notespayable 750,000 750,000
Accountspayable 350,000 350,000
Incometaxpayable 50,000 50,000
Accruedexpenses 60,000 60,000
Mortgage payable, P100,000 quarterly 2,000,000 400,000 1,600,000
Estimated liability for damages 140,000 140,000
Retained earnings app. for plant expansion 1,000,000 1,000,000
Retained earnings app. for contingencies 100,000 100,000
Sharecapital 3,000,000 3,000,000
Sharepremium 300,000 300,000
Retained earnings, unappropriated 1,350,000 1,350,000
Trademark 150,000 150,000
Secret processes and formulas 200,000 200,000
Bank loan payable – June 30, 2015 (Note b) 500,000 500,000
Def. tax asset, net def. tax liability, P50,000 100,000 150,000 50,000
Ad j u ste d
b al a nc es 2, 15 0, 0 00 7,400,000 1,750,000 2,150,000 5,650,000
1 .A n s. 2 .A n s. 3 .A n s. 4 .A n s . 5 .A n s.

CHAPTER 10-PROBLEM 3: SCR COMPANY

Current Noncurrent Current Noncurrent SHE
Asset Asset Liabilities Liabilities
Unadjustedbalances 6,200,000 11,800,000 2,000,000 2,000,000 14,000,000
Restrictedforeigndeposit (600,000) 600,000
Investment property atcost (1,000,000) 1,000,000
Lossoninventorywrite-down (200,000) (200,000)
Treasury shares (600,000) (600,000)
Storesupplies 100,000 (100,000)
Financial asset at fair value through profit/loss 800,000 (800,000)
Share
premium (500,000) 500,000
Unearnedleaseholdincome-currentportion 140,000 (140,000)
Stock
dividends payable (300,000) 300,000
Serialbondspayable-currentportion 100,000 (100,000)
A d j u s t e db a l a n c e s 4, 70 0, 0 00 12,500,000 1,740,000 1,460,000 14,000,000
1 .A n s. 2 .A n s. 3 .A n s. 4 .A n s. 5 .A n s .

CHAPTER 10-PROBLEM 4: ABC COMPANY

Statement of Comprehensive Income (Expenses according to function)
Note #
Net
Sales Note
1 12,230,000
Less:Cost
ofSales Note
2 (6,560,000)
Gross
profit 5,670,000
Sharefromnetincomeofassociate Note3 170,000
Other
income Note
4 210,000
Total
income 6,050,000
Less: Operating expenses
Sellingexpenses Note5 1,820,000
General and administrative expenses Note 6 850,000
Interest
expense 400,000
Unrealized holding loss from financial asset 400,000 (3,470,000)
Net
incomebeforetax 2,580,000
Income taxexpense(30%) (774,000)
Net income after tax 1,806,000
4. Ans.

Other comprehensive income/loss:

Unrealized holding gain on financial asset, net of tax 140,000
Revaluationsurplus,netoftax 350,000
Foreigntranslationgain,netoftax 70,000 560,000

Total comprehensive income 2,366,000

5. Ans.

Statement of Comprehensive Income (Expenses according to nature)

Note #
Net
Sales Note
1 12,230,000
Sharefromnetincomeofassociate Note3 170,000
Other
income Note
4 210,000

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Total income before expenses 12,610,000

3. Ans
Less: Operating expenses
(Increase)Decreasein inventories Note7 390,000
Net
purchases Note
2 5,140,000
Depreciation 1,200,000
Salaries 900,000
Supplies 600,000
Utilities 400,000
Rent 200,000
Advertising 150,000
Freight-out 250,000
Interestexpense 400,000
Unrealized holding loss on financial asset 400,000 (10,030,000)
Net
income before
tax 2,580,000
Income taxexpense
(30%) (774,000)
Net income after tax 1,806,000
4. Ans.

Other comprehensive income/loss:

Unrealized holding gain on financial asset, net of tax 140,000
Revaluationsurplus,netoftax 350,000
Foreigntranslationgain,netoftax 70,000 560,000

Total comprehensive income 2,366,000

5. Ans.

SUPPLEMENTARY NOTES:
Note 1: Net Sales
Gross
sales 13,000,000
Less: Sales returns and allowances (520,000)
Salesdiscounts (250,000)
Net
Sales 12,230,000

Note 2: Cost of Sales

Rawmaterialsinventory,January1, 1,150,000
Add: Net purchases
Grosspurchases 5,400,000
Add: Freight-in 200,000
Less: Purchase returns and allowances (310,000)
Purchasediscounts (150,000) 5,140,000
Rawmaterialsavailableforuse 6,290,000
Less:Rawmaterials,December31, (800,000)
Rawmaterials used 5,490,000
Directlabor(P900,000*30%) 270,000
Factory overhead:
Depreciation (P1,200,000*40%) 480,000
Supplies(P600,000*20%) 120,000
Utilities(P400,000*40%) 160,000 760,000
Totalmanufacturingcost 6,520,000
Add:Work-in process inventory, January 1,. 920,000
Costofgoodsplacedintoprocess 7,440,000
Less: Work-in process inventory, December 31 (1,100,000)
Costofgoodsmanufactured 6,340,000
Add:Finished goods inventory, January 1, 1,200,000
Costofgoodsavailableforsale 7,540,000
Less: Finished goods inventory, December 31, (980,000)
C o so
tgf oo d sol d 6 , 5 6 0 , 0 0 01. Ans.

Note 3: Share from Net Income of Associate

XYZI nc.NetIncomefor2014 850,000
Proportionate
share 20%
Share from net income of associate 170,000

Note 4: Other income

Rent
income 120,000
Royaltyincome 90,000
Totalotherincome 210,000

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Note 5: Selling Expenses

Depreciation (P1,200,000*35%) 420,000
Salaries(P900,000*40%) 360,000
Supplies(P600,000*50%) 300,000
Utilities(P400,000*35%) 140,000
Rent
expense 200,000
Advertisingexpense 150,000
Freightout 250,000
T o t a ls e l l i n g e x p e n s e s 1 , 8 2 02.
, 0 0Ans.
0

Note 6: General and Administrative Expenses

Depreciation (P1,200,000*25%) 300,000
Salaries(P900,000*30%) 270,000
Supplies(P600,000*30%) 180,000
Utilities(P400,000*25%) 100,000
Total general and administrative expenses 850,000

Note 7: Increase/Decrease in Inventories

Inventories, January 1:
Raw materials 1,150,000
Work-in process 920,000
Finishedgoods 1,200,000 3,270,000
Inventories, December 31:
Raw
materials 800,000
Work-inprocess 1,100,000
Finishedgoods 980,000 2,880,000
Decrasein
inventories 390,000

CHAPTER 10-PROBLEM 5: UTV CORP.

Noncurrent Current Noncurrent
Current Asset Assets Liabilities Liabilities
Cashandcashequivalents 400,000 400,000
Bankoverdraft 100,000 100,000
Accountsreceivable 900,000 900,000
Allowance for doubtful accounts 40,000 (40,000)
Rawmaterials 560,000 560,000
Goodsinprocess 600,000 600,000
Finishedgoods 1,400,000 1,400,000
Financial assets at fair value through OCI 2,500,000 2,500,000
Land, at fair market value 12/31/14 1,000,000 1,000,000
Building 6,000,000 6,000,000
Accumulated depreciation – building 1,600,000 (1,600,000)
Plant and equipment 2,400,000 2,400,000
Accumulated depreciation – Plant and Eqpt. 400,000 (400,000)
Patent 800,000 800,000
Goodwill, recognized in Jan. 2013 1,400,000 1,400,000
Note payable, bank – due June 30, 2015 1,300,000 1,300,000
Note payable, bank – due June 30, 2016 2,100,000 2,100,000
Accountspayable 1,000,000 1,000,000
Employee benefit provisions 180,000 180,000
Warrantyliabilities 80,000 80,000
Incometaxpayable 120,000 120,000
Deferredtaxliability 280,000 280,000
Accumulated profits, January 1, 2014 3,600,000
Revaluation surplus on Land, January 1, 2014 360,000
Unrealized gain on financial assets, 1/1/14 280,000
Share capital 5,000,000
Sharepremium, 1,000,000
Sales 10,000,000
Revaluation surplus on Land during the year 140,000
Unrealized gain on financial asset for the year 100,000
Costof
sales 6,000,000
Sellingexpenses 1,960,000
Administrativeexpenses 500,000
Finance cost 100,000
Incometaxexpense 160,000
Dividend declared and paid
Ba l a nc es 3, 82 0, 0 00 12,100,000 2,780,000 2,380,000
N eItn c o m e 1A.n s. 2A.n s. 3A.n s. 4A.n s .

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Continued… Total
Compre.
Net Income Income Accum. Profits SHE
Cash and cash equivalents
Bank overdraft
Accounts receivable
Allowance for doubtful accounts
Raw materials
Goods in process
Finished goods
Financial assets at fair value through OCI
Land, at fair market value 12/31/14
Building
Accumulated depreciation – building
Plant and equipment
Accumulated depreciation – Plant and Eqpt.
Patent
Goodwill, recognized in Jan. 2013
Note payable, bank – due June 30, 2015
Note payable, bank – due June 30, 2016
Accounts payable
Employee benefit provisions
Warranty liabilities
Income tax payable
Deferred tax liability
Accumulated profits, January 1, 2014 3,600,000
RevaluationsurplusonLand,January1,2014 360,000
Unrealizedgainonfinancialassets,1/1/14 280,000
Share capital 5,000,000
Share
premium, 1,000,000
Sales 10,000,000
RevaluationsurplusonLandduringtheyear 140,000 140,000
Unrealizedgainonfinancialassetfortheyear 100,000 100,000
Cost of sales (6,000,000)
Sellingexpenses (1,960,000)
Administrative expenses (500,000)
Finance cost (100,000)
Incometaxexpense (160,000)
Dividend declared and paid (1,000,000)
Balances
N eItn c o me 1, 28 0, 0 00 1,280,000 1,280,000
T o t a lC o mp r e h e n s iv eI n c o me 1, 52 0 ,0 00
Accumulated Profits 3,880,000 3,880,000
St oc k h o l d e rs
E'q u i t y 10 ,7 60 ,0 0 0
5A
. n s. 6A
. n s. 7A
. n s.

CHAPTER 10-PROBLEM 6: THEODORE COMPANY

1. Ans. P7,485,000.
Sales
revenue P7,935,000
Increase in accounts receivable (P1,800,000-P1,350,000) (450,000)
Collectionsfromcustomers P7,485,000

2. Ans. P2,025,000.
Cost
of
goods
sold P1,800,000
Increase in inventory (P2,700,00-P1,575,000) 1,125,000
Purchases 2,925,000
Increase in accounts payable (P2,250,000-P1,350,000) (900,000)
Cashdisbursedforpurchases P2,025,000

Operatingexpenses P1,500,000
(225,000)
-
Cash paid for operating expenses P1,275,000

3. Ans. P4,185,000.
Collectionsfromcustomers P7,485,000
Cash disbursed for purchases (2,025,000)
Cash paid for operating expenses (1,275,000)
Cash provided by operating activities P4,185,000

4. Ans. P2,160,000.
Purchase of equipment P2,700,000
1

Sale
land
of 495,000
Sale
of
equipment 45,000
Cash used in investing activities (P2,160,000)

, ,
P1,800,000
Add:Costofequipmentsold 900,000
Purchaseofequipment P2,700,000

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Increase in lease-liability—Land P450,000

, ,
225,000
Carryingvalueoflandsold 225,000
Add:Gainonsaleofland 270,000
Proceedsfromsaleofland P495,000

P90,000
Less:Lossonsaleofequipment 45,000
Proceedsfromsaleofequipment 45,000

5. Ans. P1,350,000.
(P1,350,000)

CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY

1. Ans. P920,000.
Net
income 790,000
Adj: Non-operating (gain)/loss
Gain on sale of LT investment (P135,000-P100,000) (35,000)
Adj: Non-cash (income)/expenses
Depreciation expense 250,000
Adj: Decrease/(Increase) in Working Capital
Inventory, increase (80,000)
Accounts payable and accrued liabilities, decrease (5,000)
C a sh p r o v i d e d b y o p e r a t i n g a c t i v i t i e s 9 20 ,0 00

2. Ans. P1,005,000.
ProceedsfromsaleofBuilding 350,000
ProceedsfromsaleofLTInvestment 135,000
Purchase of P lant a ssets ( P700,000+600,000-110,000) (1,190,000)
PurchaseofAvailablefor salesecurities (300,000)
C a sh u s e d i n i n v e st i n g a c t i v i t i e s (1 ,0 0 5, 00 0)

3. Ans. P205,000.
Proceedsfromshareissuance 220,000
Proceedsfromshort-termbankdebt 325,000
Payment of dividends (P500,000-160,000) (340,000)
C a sh p r o v i d e d b y f i n a n c i n g a c t i v i t i e s 2 05 ,0 00

Summary:
Cashprovidedbyoperatingactivities 920,000
Cashusedininvestingactivities (1,005,000)
Cashprovidedbyfinancingactivities 205,000
Increaseincashfortheyear 120,000

CHAPTER 10-PROBLEM 8: ABC CORP.

STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE
Profits-Unapp Shares
January1,balances 3,000,000 2,540,000 4,000,000 9,540,000
Shareissuance 1,000,000 1,000,000
Treasuryshares
reaquisition (300,000) (300,000)
Treasurysharesretirement (100,000) (20,000) 120,000 -
Dividends declaration:
Share dividends (20%*65,000sh)*P50 650,000 (650,000) -
Cashdividends(P12*5,000)+(P3*78,000) (294,000) (294,000)
Appropriations:
Plant
expansion 400,000 (400,000) -
Treasuryshares 180,000 (180,000) -
Comprehensive income
income
Net 1,200,000 1,200,000
Othercomprehensiveincome (200,000) (200,000)
December 31, balances 4,550,000 2,900,000 3,676,000 (180,000) 10,946,000
1A
. n s. 2A
. n s. 3A
. n s. 4A
. n s.

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CHAPTER 10-PROBLEM 9: GLORIA CORPORATION

STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE
Profits-Unapp Shares
January1,balances 6,950,000 3,615,000 3,730,000 (270,000) 14,025,000
Prior period adjustment:
Unrecorded2011-2013options 200,000 (200,000) -
Overstatementinrentincomein2013 (275,000) (275,000)
Share issuance from exercise of rights 1,050,000 1,260,000 2,310,000
Share issuance from exercise of options 400,000 240,000 640,000
Treasurysharesretirement (150,000) (120,000) 270,000 -
Dividends declaration:
Propertydividends(10,000sh*P75) (750,000) (750,000)
Cashdividends(P10%*P100*18,000sh) (180,000) (180,000)
Reversal of appropriation
Treasuryshares (270,000) 270,000 -
Comprehensive income
income
Net 2,600,000 2,600,000
Othercomprehensiveincome 110,000 110,000
December 31, balances 8,250,000 5,035,000 5,195,000 - 18,480,000
1 .A n s. 2 .A n s. 3 .A n s.

MULTIPLE CHOICE EXERCISES:

CHAPTER 10-EXERCISE 1: KALAMANSI INC.
1. Ans. A.
Cash(184,920–101,920) P83,000
Accounts receivable (84,480 – 4,125) 80,355
InventoryatNRV(90,000 80%) 72,000
Prepaid Insurance 12,000
T o t a lc u r r e n ta s se t s P2 47 ,3 5 5

2. Ans. A.
Land P167,000
Building,net(375,000 –45,000) 330,000
Furniture and fixtures, net (114,600 – 34,600) 80,000
T ot a
PlP E P5 77 ,0 0 0

3. Ans. C.
Accounts payable P23,595
Interest payable 8,405
Advances 12,000
Shortterm portion of serialbonds 50,000
T o t a lC u r r e n tl i a b i l i t i e s P 94 ,0 0 0
9. c.

4. Ans. C.
Unappropriated retained earnings P295,000
(3,125)
Appropriated– forbondtreatment 50,000
T o t a lr e t a i n e de a r n i n g s P3 41 ,8 7 5

5. Ans. B.
Sharecapital(4,0001 0) P40,000
Paid-incapitalinexcessofpar 430,00
Totalretainedearnings 341,875
T ot a
SlH E P8 11 ,8 7 5

CHAPTER 10-EXERCISE 2:ETT INC.

Current Asset Assets Liabilities Liabilities SHE Accum. Profits
Unadjustedbalances 8,000,000 3,600,000 3,000,000 200,000 8,400,000 2,000,000
Bank overdraft 200,000 200,000
Allowance for bad debts/bad debt expense (260,000) (260,000) (260,000)
Increase in FMV of financial asset at fair value 150,000 150,000 150,000
Inventory write-down (to NRV which is lower) (100,000) (100,000) (100,000)
Goodwill (200,000) 200,000
Salariespayable/Salariesexpense 500,000 (500,000) (500,000)
Mortgage payable 4,000,000 4,000,000
Interestpayable 400,000 400,000
Accumulateddepreciation on thebuilding (600,000) (600,000) (600,000)
Currenttax
payable 200,000 (200,000)
A d j u s t e db a l a n c e s 7, 79 0, 0 00 7,600,000 4,300,000 4,000,000 7,090,000 690,000
1 . A n s. D . 2 . An s. B . 3 . A n s. D . 4 . A ns. B . 5 . A n s. C . 6 . An s. C.

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CHAPTER 10-EXERCISE 3: JACOB CORPORATION

ASSETS
Cashandcashequivalents(325,000+75,000) 400,000
Accountsreceivable(275,000+100,000) 375,000
Marketablesecurities(955,000-600,000) 355,000
Prepayments 50,000
T O T A LC U R R E N TA S S E T S P 1 , 1 8 0 , 0 0 0 1 .A n s .B .
Land 900,000
Building 600,000
Reservefordepreciation–Building (50,000)
Machinery andequipment 330,000
Reserve for depreciation – Machinery and equipment (110,000)
TOTALNONCURRENT ASSETS 1,670,000
T O T AAL SS ET S 2 , 8 5 0 , 0 0 02A. n sA. .
LIABILITIES AND CAPITAL
Current liabilities (325,000+75,000+100,000+3,000-50,000-100,000) 353,000 3. Ans. B.
Non-current liabilities (250,000+50,000) 300,000 4. Ans. C.
TOTALLIABILITIES P653,000
Ordinary shares, P25 par, 45,000 shares issued (1,250,000-125,000) 1,125,000
Sharedividendspayable(4,000sh*25) 100,000
Share premium (750,000+(4,000sh*(60-25))-((750,000/50,000)*5,000sh) 815,000
TOTALCONTRIBUTEDCAPITAL 2,040,000
Reserve for
self
insurance 75,000
Reserve for
treasuryshares 250,000
Accumulated profits (625,000-3,000-100,000-140,000-50,000-250,000) 82,000
Treasuryshares(500,000-250,000) (250,000)
T O T ASLH E 2 , 1 9 7 , 0 0 05
A.n A
s ..
TOTAL 2,850,000

CHAPTER 10-EXERCISE 4: REESE CORP.

1. Ans. B.
Cash 775,000
Accountsreceivable(net) 2,695,000
Inventory 2,085,000
T o t a lc u r r e n ta s se t s 5 ,5 55 ,0 0 0
Note that the installment receivable from customer is classified as current since it is a trade payable.

2. Ans. A.
Accounts payable and accrued liabilities 1,701,000
Income taxes payable (654,000-525,000) 129,000
T ot a l c ur re nt l i a b il i ti e s 1 ,8 30 ,0 0 0

3. Ans. C.
Retainedearnings,1/1/14 3,450,000
Net sales and other revenues 13,360,000
Costsandexpenses 11,180,000
Netincomebeforetax 2,180,000
Incometaxexpense(30%) (654,000)
Net Income for the year 1,526,000
Retained earnings, 12/31/14 4,976,000

CHAPTER 10-EXERCISE 5: TORRES COMPANY

Current Non-current
Cash 1,765,000
Compensatingbalance (300,000) 300,000
Other Assets
Bondretirement (600,000) 600,000
LT Investment
C ontingencyfund (500,000) 365,0001. Ans. D. 500,000
LT Investment

Accountreceivable 930,007
Credit
balance 45,000
Advances to officers (past due) (600,000)
Current portion of past due:
2015:(P100,000x.917431)) 91,743
Non-current portion:
2016:(P200,000
. ! 84168) Other
168,336
Assets
2017: (P300,000 ! .77218) 231,654
Other Assets
Mdse. sent on consignment:
(P100,000 !1 25%) (125,000)
Due from consignee:
(P75,000 !125% !9 2%-P3,000) 83,250 425,0002. Ans. A.

Inventory 750,000
On consignment (P100,000
25%)! 25,000 775,000

Investment 763,000
Financial Asset at Fair value through P&L 170,0003. Ans B. (150,000)
Prepaid
expense 30,000 (30,000)
Increase in value of AFS 50,000 633,000
LT Investment
Tot a l 1, 76 5, 0 00 2,432,990
4A.n s
B.. 5A.n s
D..

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CHAPTER 10-EXERCISE 6: KATZ CORP. Other Comp. Total Com. Accumulated

Cost of Sales Net Income Income Income Profits
Sales 53,000,000 53,000,000
Purchases 32,000,000 32,000,000
Salesdiscount 2,000,000 (2,000,000)
Purchasediscount 1,200,000 (1,200,000)
Sales returns and allowance 1,000,000 (1,000,000)
Purchase returns and allowance 800,000 (800,000)
Correction of merchandise inventory,
beginning error, net of income tax – credit 400,000 400,000
Merchandise Inventory, January 1 (adjusted) 3,400,000 3,400,000
Merchandise Inventory, December 31 3,500,000 (3,500,000)
Distributioncosts 5,000,000 (5,000,000)
General and administrative expenses 4,000,000 (4,000,000)
Interestexpense 2,000,000 (2,000,000)
500,000 500,000
,
1,250,000 1,250,000
–
, 700,000 700,000
value through other comprehensive income or
550,000 (550,000)
Investment income – equity method 3,000,000 3,000,000
Gain on expropriation of asset 2,000,000 2,000,000
Incometaxexpense 5,000,000 (5,000,000)
4,800,000 (500,000)
Dividendsdeclared 1,300,000 (1,300,000)
Accumulated profits, January 1, 2014 4,200,000 4,200,000
C o soS
tfa l e s 2 9, 90 0 ,0 00 (29,900,000)
Net Income 1 . A ns. B . 9 ,1 0 0, 00 0 9,100,000 9,100,000
Ot h e rC o m p r e h e n s i v eI n c o m e 2 .A n s .B . 1 ,4 00 ,0 0 0 1,400,000
T o t aCl o m p r e h e n s i v eI n c o m e 3A. n sB
.. 1 0 ,5 00 ,0 0 0
Accumulated Profits, Dec. 31, 2014 4 . A n s. C . 1 2, 4 00 ,0 00

CHAPTER 10-EXERCISE 7: NAM COMPANY

1. Ans. B.
Net
income P925,000
Depreciation(seenotebelow) 375,000
Gain on sale of equipment (P100,000-P87,500) (12,500)
Share from net income of associate (P300,000*25%) (75,000)
Decreaseinaccountsreceivable 100,000
Increase ininventories (337,500)
Increaseinaccountspayable 150,000
Decreaseinincometaxespayable (50,000)
N e t c a sh p r o v i d e d b y o p e r a t i n g a c t i v i t i e s P 1, 07 5, 00 0

Increase in accumulated depreciation (2,912,500-2,600,000) 312,500

Accumulated depreciation of equipment sold (150,000-87,500) 62,500
Depreciation
for
2014 P375,000

2. Ans. D.
Proceedsfromsaleofequipment P100,000
Loan
Ari
to
Co. (750,000)
Principalcollectionofloanreceivable 93,750
N e t c a sh u s e d i n i n v e s t i n g a c t i v i t i e s P 5 56 ,2 50

3. Ans. A.
Net cash us ed i n fi nan cin g act ivi tie s (D ivi den ds p aid ) (P250, 000 )

CHAPTER 10-EXERCISE 8:RAVEN C ORPORATION

1. Ans. D.
Sales 10,776,000
Cost
ofgoods sold (6,468,000)
Gross
profit 4,308,000
Gainonsaleoftradingsecurities 144,000
Total 4,452,000
Sellingandadministrativeexpenses (3,444,000)
Unrealized holding loss on trading securities (48,000)
Lossonsaleofequipment (12,000)
Net
income before tax 948,000
Incometaxes (420,000)
N eitn c o m e
a f t etra x 5 28 ,0 00

2. Ans. A.
Accumulated profits, unapp., Jan 1, 2014 1,344,000
Less: Increase in appropriations for expansion (180,000)
Stock dividends declaration (237,600*30%)*P10 (712,800)
Accumulatedprofits,unapp.Dec.31 (943,200)
Less:Netincomefortheyear 528,000
ReversalofappropforTreasury 60,000
C a shd i v i d e n dd e c l a r a t i o n 96 ,0 00

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3. Ans. C.
Sharecapital,Dec.31,2014 4,312,800
Sharepremium,Dec.31,2014 1,392,000
Total 5,704,800
Less:
Sharecapital,Dec.31,2013 2,400,000
Sharepremium,Dec.31,2013 60,000
2,460,000
Increase in Share capital and share premium 3,244,800
Sharedividends(237,600*30%)*10 (712,800)
Sharepremium from treasury shares reissue (12,000)
P r o c e e d sf r o m i ss u a n c e o f sh a r e s 2, 52 0, 0 00

4. Ans. B.
DecreaseinTradingsecurities 360,000
Add:GainonsaleofTradingsecurities 144,000
Unrealizedlossontradingsecurities (48,000)
Pr oc e e d s f r o m sal e o f T r a d i n g sec ur it i es 4 56 ,0 00

5. Ans. C.
Proceedsfromsaleofequipment 84,000
Add:Lossonsaleofequipment 12,000
C a r r y i n gV a l u eo fe q i u p m e n ts o l d 96 ,0 00

6. Ans. D.
Equipment, end 3,732,000
Equipment, beg 2,040,000
Increaseinequipment 1,692,000
Add:Costofdisposedequipment 180,000
Totalequipment acquired during the year 1,872,000
Equipment acquired through noteissuance (600,000)
Overhaul on equipment (72,000)
To ta l ca sh pa ym en t m ad e fo r eq ui pm en t a cqu isit io n] 1, 20 0, 00 0

7. Ans. A.
Decrase in treasury shares (120,000 - 60,000) 60,000
Sharepremiumontreasurysharesreissue 12,000
P r o c e e d s f r o m t r e a s u r y sh a r e s r e i s su e 72 ,0 00

8. Ans. C.
Net
Income 528,000
Non cash expenses/income
Depreciationexpense-Bldg 45,000
Depreciaitonexpense-Equipment 303,000
Baddebt
expense 36,000
Amortizationofbonddiscount 6,000
Income tax benefit (Decrease in Def. tax liab) (75,600)
Non operating income/expense
Loss onsaleofequipment 12,000
Changes in working capital
Trading security 360,000
Accounts receivable (576,000)
Inventories 108,000
Prepaid Insurance (6,000)
Accounts payable (60,000)
Accrued expenses 111,600
Income tax
payable 300,000
Unearned Income (96,000)
N e t c a sh p r o v i d e d b y o p e r a t i n g a c t i v i t i e s 9 96 ,0 00

9. Ans. B.
Purchaseofequipment (1,200,000)
Overhaul
of
equipment (72,000)
Sale
equipment
of 84,000
(1,188,000)

10. Ans. A.
Paymentofserialnotespayable (240,000)
Share
issuance 2,520,000
Treasurysharesreissuance 72,000
Payment of
dividends (96,000)
2,256,000

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CHAPTER 11: ERROR CORRECTION AND CASH;ACCRUAL

DISCUSSION PROBLEMS
CHAPTER 11-PROBLEM 1: SAFARI COMPANY
2012 NI 2013 NI 2014 NI 2014 RE, BEG2 014 RE, END 2014 WC
A. Accruedexpense,under2012 (15,000) 15,000
Accruedexpense,under2013 (7,000) 7,000 (7,000)
Accruedexpense,under
2014 (22,000) (22,000) (22,000)
B. Accruedincome,under2012 8,000 (8,000)
Accruedincome,under2013 9,000 (9,000) 9,000
Accrued
income,
under2014 5,000 5,000 5,000
C. Prepaidexpense,under2012 16,000 (16,000)
Prepaidexpense,under2013 12,000 (12,000) 12,000
Prepaid
expense,
under2014 6,000 6,000 6,000
D. Unearnedincome,under2012 (11,000) 11,000
Unearnedincome,under2013 (13,000) 13,000 (13,000)

E FFUnearned
EC TOFERincome,
RORSunder
2014 ( 2,000) 3,000 (10,000)
(22,000) 1,000 (10,000)
(21,000) (10,000)
(21,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 2: MASIGLA COMPANY

2012 NI 2013 NI 2014 NI 2014 RE, BEG2 014 RE, END 2014 WC
A. E ndingInventory,over2012 (50,000) 50,000
EndingInventory,over2013 (30,000) 30,000 (30,000)
EndingInventory,
over
2014 (40,000) (40,000) (40,000)
B. EndingInvenotry,under2012 12,000 (12,000)
EndingInvenotry,under2013 14,000 (14,000) 14,000
EndingInvenotry,
under
2014 8,000 8,000 8,000
C. AR/Sales,under2012 25,000 (25,000)
AR/Sales,under
2013 22,000 (22,000) 22,000
AR/Sales,
under
2014 16,000 16,000 16,000
D. AP/Purchases,under2012 (15,000) 15,000
AP/Purchases,under2013 (12,000) 12,000 (12,000)
AP/Purchases,under
2014 (10,000) (10,000) (10,000)
E. Equipment, under/Expense, over per year 200,000 240,000 220,000 440,000 660,000
Depr Expense, under (2012 Equipment) (20,000) (20,000) (20,000) (40,000) (60,000)
DeprExpense,under(2013Equipment) (24,000) (24,000) (24,000) (48,000)
DeprExpense,under(2014Equipment) (22,000) (22,000)
E FFEC TOFERRORS 1 52 , 0 00 218,000 134,000 370,000 504,000 (26,000)
1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans. 6. Ans.

CHAPTER 11-PROBLEM 3: AMICI COMPANY

2013NI 2014NI 2014RE,BEG 2014WC
Unadjustedbalances 245,000 310,000
A. Salariespayable,under2013 (12,000) 12,000 (12,000)
Salariespayable,under2014 (5,000) (5,000)
Accrued interest income, under 2013 4,000 (4,000) 4,000
Accruedinterestincome,under2014 3,000 3,000
Unearned rental income, under 2013 (14,000) 14,000 (14,000)
Unearnedrentalincome,under2014 (15,000) (15,000)
Prepaidinsurance,under2013 3,000 (3,000) 3,000
Prepaidinsurance,under2014 5,000 5,000
B. Advances f rom customers, under 2013 (31,000) 31,000 (31,000)
Advancesfromcustomers,under2014 (25,000) (25,000)
C. Advances to suppliers, under 2013 10,000 (10,000) 10,000
Advancestosuppliers,under2014 7,000 7,000
D. Equipment, over/Expense under (each year (60,000) (80,000) (60,000)
Depr Expense, over (on 2013 Equipment) 12,000 12,000 12,000
DeprExpense,over(on2014Equipment) 16,000
ADJUSTED BALA NCES/EFFECT OF ERRORS 157, 000 268,000 (88,000) (30,000)
1. Ans. 2. Ans. 3. Ans. 5. Ans.

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Retainedearnings,beg2013 -
AdjustedNI,2013 157,000
Dividends declared and paid in 2013 (75,000)
Retainedearnings,end2013 82,000
AdjustedNI,2014 268,000
Dividends declared and paid in 2014 (75,000)
Re t a i n e d e a r n i n g s , e n d 2 0 1 4 2 756.
, 0Ans.
00

CHAPTER 11-PROBLEM 4: SOLID COMPANY

1. Ans. P2,255,000.
Cashbasissales 1,980,000
Add:AR,endingbalance 550,000
Salesdiscounts 80,000
Salesreturns,norefund 60,000
Total 2,670,000
Less:AR, beginning balances (415,000)
A c c r u a l b a s i s g r os s s a l e s 2,255,000

2. Ans. P2,260,000.
Cashbasissales 1,980,000
Add:AR,endingbalance 550,000
Sales discounts 80,000
Salesreturns,norefund 60,000
Write-off of
AR 25,000
Total 2,695,000
Less:AR, beginning balances (415,000)
Recovery of previous write-off (20,000)
A c c r u a l b a s i s g r os s s a l e s 2,260,000

CHAPTER 11-PROBLEM 5: DEISEL CORP.

1. Ans. P2,800,000.
Cashbasispurchases 2,500,000
Add:AP,endingbalance 800,000
Purchasediscounts 45,000
Purchasereturns,norefund 55,000
Total 3,400,000
Less:AP,beginningbalance (600,000)
A c c r u a l b a s i s g r os s p u rc h a s es 2,800,000

2. Ans. P2,600,000.
Grosspurchases 2,800,000
Less:Purchasediscount (45,000)
Purchasereturns (80,000)
Net
purchases 2,675,000
Add:Inventory,beginning 250,000
Cost of goods available for sale 2,925,000
Less:Inventory,end (325,000)
C o so
tsf a le s 2,600,000

CHAPTER 11-PROBLEM 6: BECKER COMPANY

Ans. P215,000
Cashbasisroyaltyincome 200,000
Add:Royalty receivables, ending 85,000
Unearned royalties, beginning 60,000
Total 345,000
Less: Royalty receivables, beginning (90,000)
Unearnedroyalties,ending (40,000)
A c c r u a l ba s i s ro y a l t y i n c o m e 2 15 , 0 00

CHAPTER 11-PROBLEM 7: XYZ COMPANY

Ans. P305,000
Cashbasisroyaltyexpense 300,000
Add:Royaltypayables,ending 75,000
Prepaidroyalties,beginning 55,000
Total 430,000
Less: Royalty payables, beginning (80,000)
Prepaidroyalties,ending (45,000)
A c c r u a l ba s i s ro y a l t y i n c o m e 3 05 , 0 00

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CHAPTER 11-PROBLEM 8: BACOLOD CORP.

1. P10,550,000.
Total collections from charge customers 2,550,000 Allowance for BD, beg 125,000
Add:AR,endingbalance 1,200,000 Add: Bad debt expense 100,000
AR written-off 75,000 Recovery of write-off 25,000
Total 3,825,000
otal T 250,000
Less:AR, beginningbalance (750,000) Less: AR write-off (SQZ) (75,000)
Recovery of previous write-off (25,000)
Accrualbasisgrosssales 3,050,000 Allowance for BD, end 175,000
Add:grosscashsales 7,500,000
To t a l g ro s s s a l e s / N et s a l e s 10,550,000
*Note that since there are no sales discounts or sales returns and allowances, gross sales is also net sales.

2. Ans. P5,670,000.
Cashpurchases 5,100,000
Creditpurchases 1,200,000
Totalgrosspurchases 6,300,000
Less:Purchasediscounts (210,000)
Purchasereturns (120,000)
Net
purchases 5,970,000
Add:Inventory,beginning 1,500,000
COGAS 7,470,000
Less:Inventory,ending (1,800,000)
Co s toS
f a l es 5,670,000

3. Ans. P345,600.
CV, 1/1/14: (P3M*90%*80%*80%) 1,728,000
Multiplyby:Ddbalrate 20%
De p r e c i a t i o n e x p e n s e , 2 0 1 4 3 45 , 6 00

4. Ans. P2,304,400.
Net
Sales 10,550,000
Costofsales (5,670,000)
Grossprofit 4,880,000
Interestincome(a) 90,000
Total
income 4,970,000
Operatingexpenses(b) (2,220,000)
Depreciationexpense (345,600)
Baddebtexpense (100,000)
Neitn c o m e 2,304,400

(a)Interestcollected 120,000
Less: Accrued interest income, Beg (30,000)
Interestincome,accrualbasis 90,000

(b) Operating expenses, cash basis 2,250,000

Add:Accruedexpense,ending 60,000
Less:Prepaidexpense, ending (90,000)
Operating expense, accrual basis 2,220,000

CHAPTER 11-PROBLEM 9: CUTTING EDGE.

Cash collections from customer on account 6,000,000
Add:AR,increase 1,480,000
Sales discount 80,000
Sales returns,withoutrefund 120,000
ARwritten-off 240,000
Less:NR-trade,decrease (800,000)
Recovery of previous write-off (72,000)
G r os sS a l e sonA c c o u n t 7 , 0 4 8 ,1.
0 0Ans.
0
Grosscash sales 1,200,000
G r osSs a le s 8 , 2 4 8 , 2.
000 Ans.
Less:Salesdiscounts (80,000)
Salesreturns(Total) (320,000)
N eSta l e s 7 , 8 4 8 , 03.
0 0Ans.

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Cash paid to suppliers on account 4,800,000

Add:Notes payable-trade increase 800,000
Purchasediscount 140,000
Purchase returns, without refund 200,000
Less: Accounts payable, decrease (600,000)
G r os s P u r c h a s e s on A c c o u n t 5 , 3 4 04., 0Ans.
00
Grosscashpurchases 1,000,000
G r os sP u r c h a s e s 6 , 3 4 05., 0 0Ans.
0
Less;Purchasediscount (140,000)
Purchasereturns(total) (320,000)
N ePt u r c h a se s 5 , 8 8 0 ,6.
0 0Ans.
0

CHAPTER 11-PROBLEM 10: GLASS CO.

1. Ans. P251,636.
Cost of sales (P340,000 total sales * 60%) P204,000
Add: Merchandise Inventory, November 15 93,920
Purchases P297,920
Less: A ccounts payable – trade, November 15 46,284
P a y m en t sf o rp u r c h a s e s P251,636

2. Ans. P254,620
Sales P340,000
Less: A ccounts receivable – trade, November 15 85,380
C o l l e c t i o n sf ro ms a l e s P254,620

3. Ans. P121,612.
CASH ACCOUNTABILITY:
RECEIPTS
Issuance of ordinary shares (P300,000 + P20,000) P320,000
Mortgage
payable 80,000
Note
payable
bank
– 32,000
Collectionsfromsale(fromnumber2) 254,620
T otal 686,620
DISBURSEMENTS
Real
property P200,000
FurnitureandFixtures(P29,000–P6,000) 23,000
E xpenses 60,756
Purchases (from
number 1) 251,636
T otal P535,392
CASH
BALANCE P151,228
CASH AS ACCOUNTED:
Bankbalance,November15 P26,328
Add: Undepositedcollections 5,140
T otal P31,468
Less:Outstandingchecks 1,852 29,616
C A S HS H OR TA G Ea so fNo v e m b e r1 5 ,20 1 4 P121,612

CHAPTER 11-PROBLEM 11: EDU COMPANY

1. Ans. P11,430,000.
Totaldepositsperbankstatement 12,600,000
Cashreceiptsfromshareissuance (1,800,000)
Proceeds of bank loan, directly credited to account (1,800,000)
Deposits f rom cash collections from c ustomers 9,000,000
Collections from customers which were used to
pay directly disbursements
U tilities 360,000
Salaries 360,000
Supplies 720,000
Dividends 540,000 1,980,000
Undepositedcollectionsonhand 450,000
To t a l c o l l ec t i o n s f r om c u s to m er s 11,430,000

2. Ans. P14,535,000.
Cash collections from customers 11,430,000
Add:AR,ending 3,240,000
Less: Advances from customers, ending (135,000)
A c c r u a l b a s i s g r os s s a l e s 14,535,000

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3. Ans. P9,738,000.
Totaldepositsperbankstatement 12,600,000
Cashinbank,endperbankstatement (900,000)
Total disbursements per bank statement 11,700,000
Add:Outstandingchecks 180,000
Less: Payments of bank loan and interest (540,000)
Payments of installment due on equipment (1,602,000)
To t a l c a s h pa y m en t s m a de t o s u p pl i er s 9,738,000

4. Ans. P10,998,999.
Cashpaymentstosuppliers 9,738,000
Add: Accounts payable, ending 1,260,000
A c c r u a l b a s i s g r os s p u rc h a s es 10,998,000

5. Ans. P8,280,000
Gross purchases/Net purchases 10,998,000
Inventory,end (2,718,000)
C o so
tsf a le s 8,280,000

6. Ans. P3,070,000.
Grosssales/Netsales 14,535,000
Cost
of
sales (8,280,000)
Gross
profit 6,255,000
Operating expenses
Utilities(P360,000+40,000) 400,000
Salaries(P360,000+25,000) 385,000
Supplies (P720,000-150,000) 570,000
Depreciation - Bldg (P16.2M/15yrs) 1,080,000
Depreciation - Eqpt (P1.44M/5yrs) 288,000
Baddebtexpense 180,000
Interest expense - lo an (P90,000+30,000) 120,000
Interst expense, instal. (P1.602M-P1.44M) 162,000 (3,185,000)
NeInt c ome 3,070,000

MULTIPLE CHOICE EXERCISES:

CHAPTER 11-EXERCISE 1: BEE CO.
1. Ans. C.
Depreciation per books: P250,000/8yrs (a) 31,250
Additional depreciation on capitalizable
major repairs (220,000/11yrs) (b) 20,000
De p r e c i a t i o n e x p e n s e p e r a u d i t P51,250
(a) The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years, thus on 12/31/14
the expired life is (5+3), 8 years. Depreciation per books is computed as: Accum Depr/Expired Life
(b) The major repairs cost should have been capitalized on 1/1/12 and depreciated over the remaining
useful life of the related asset. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books),
P500,000/31,250 = 16 years.
Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years.

NI 2012 NI 2013 NI 2014 RE, beg2014 WC, 2014

Unadjustedbalances P100,000 P145,000 P185,000

a.Unearnedrentincome,under2014 (6,500) (6,500)
b. Salaries payable, under 2011 2,500 -
Salaries payable, under 2012 (5,500) 5,500 -
Salariespayable,under2013 (7,500) 7,500 (7,500)
Salariespayable,under2014 (4,700) (4,700)
c. Unused supplies, under 2011 (3,500)
Unused supplies, under 2012 6,500 (6,500)
Unusedsupplies,under2013 3,700 (3,700) 3,700
Unusedsupplies,under2014 7,100 7,100
d. Repairs expense, over 2012 220,000 220,000
Depreciation expense, under 2012-2014 (20,000) (20,000) (20,000) (40,000)
A d j u s te db a l a n c e s P300,000 P 1 20 , 2 00 P164,700 P 1 7 6, 2 00 ( P 4, 1 0 0)
2 . A n s D. 3 . A n s B. 4 . A n s D. 5. A n s A. 6 . A n s B.

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CHAPTER 11-EXERCISE 2: LOG CORP.

2013 2014
Unadjustedpretaxincome P4,545,000 P3,483,000
a. 2013salesoverstatement (1,719,000) 1,719,000
b. 2013inventoryunderstatement 388,800 (388,800)
2014inventoryoverstatement (255,000)
c. Understatement in interest expense due to amortization of bond discount: (a)
2013: 10,640,250*7% = 744,818
Less: 11,250,000*6%= 675,000 (69,818)
2014: 10,710,068*7% = 749,705
Less:11,250,000*6% =675,000 (74,705)
d.Ordinaryrepairs (382,500) (423,000)
Overstatement in depreciation:
Amountcapitalizedin2013:382,500*20% 76,500
Balanceofamt.cap.in2013:306,000*20% 61,200
Amountcapitalizedin2015: 423,000*20% 84,600
A DJU S TE DP RET A XI NC OM E P 2 , 8 3 8 , 9 8 2 P 4 , 20 6 , 29 5
1. A n s . C . 2. A n s . A .
(a) The loan was srcinated on 1/1/12 at P10,575,000 (11,250,000-675,000). Discount amo. by 12/31/12 therefore shall be:
Correct interest (10,575,000*7%) 740,250
Less: Nominal interest (11,250,000*6%) 675,000
2012Amortization: 65,250
Carrying value of Bonds, 12/31/12 (10,575,000+65,250), P10,640,250

CHAPTER 11-EXERCISE 3: LOT INC.

1. Ans. B.
Accumulated depreciation per books (Machine XYZ): 400,000*3/10 120,000
Less: Accumulated depreciation per audit : 4 50,000*3/10 (135,000)
Adjustment related to the under depn for 3 years (2011 to 2014) 15,000 credit
Add: Debit to accum depn attributed to old equipment traded in (2011) 150,000 debit
NE TA DJUS T M E NTTOA C CU MDE P NA CC OU NT 135,000 debit

Depreciationexpensefortheperiod: Cost 450,000

Accumdepn,
adjusted 135,000
Carrying
value 315,000
Divideby: Revisedremainingusefullife 5years
DE P RE CI A T I ONF ORTH EYE A R( M a c hXYZ ) 63,000

2. Ans. A.
Carrying value, 1/1/2014: 393,750*10/12 328,125
Multiply by: 150% declining balance rate: (1/6)*150% 25%
DE P R E C I A T I O N E X P E N S E ( M a c h U V W ) 82,031

3. Ans. D.
Carrying value, 1/1/2014: 4,500,000*17/20 3,825,000
Less:Salvage
value 50,000
Depreciable
cost 3,775,000
Multiply by: SYD rate 12/78
DEPRECIATION EXPENSE 580,769

Carryingvalue,1/1/2014 3,825,000
Depreciationfor
2014 580,769
BU I LD I N G C A RR Y I N G V A LU E 1 2 / 2 0 1 4 3 , 2 4 4, 2 3 1

CHAPTER 11-EXERCISE 4: INSULAR CORP.

Retained earnin Net income (2014)
a. IGNORED (COUNTERBALANCED)
b. AR/Sales, under 2013 (over in 2014) 120,000 (120,000)
c. Insurance expense, under 2013 & 2014 (57,600) (86,400)
d. Accrued interest expense, under 2013 7,200 (7,200)
e. Depreciation, under 2013 & 2014 (117,600) (117,600)
N eat d j u st m e n t s ( 48,000) (331,200)
Unadjusted NetIncome 1,750,000
A d j u s t e d2 0 1 4n e ti n c o m e 1,418,800
1 . A n s . D. 2 . A n s . D.

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CHAPTER 11-EXERCISE 5: KUTING CORP.

2013 2014 2014 2014
WORKING RETAINED
(NET INCOME) (NET INCOME)
CAPITAL EARNINGS
Omitted prepayments, 2013 256,000 (256,000)
Omittedprepayments,2014 205,200 205,200 205,200
Salaries and wages, 2013 (582,400) 582,400
Salariesandwages,2014 (520,000) (520,000) (520,000)
Accrued interest income, 2013 172,800 (172,800)
Accruedinterestincome,2014 142,000 142,000 142,000
Advances from customers, 2013 (313,600) 313,600
Advancesfromcustomers,2014 (374,000) (374,000) (374,00)
Capital expenditure, 2013 376,000 376,000
Depnoncap.ex.in2013 (18,800) (37,600) (56,400)
Capitalexpenditure,2014 348,000 348,000
Depnoncapexin.2014 (17,400) (17,400)
Total under (overstatement) (110,0 00) 213,40 0 (546,800) 103,400
1. An s C . 2 . A n s D. 3. A n s A .

CHAPTER 11-EXERCISE 6: GHI INC.

2013NI 2014NI 2015RE,Beg
Unadjustedbalances 1,750,000 2,000,000
a. Salaries payable, under 2013 (100,000) 100,000
Salairespayable,under2014 (140,000) (140,000)
b.Inventory,over2013 (190,000) 190,000
c.Prepaidinsurance,under2014 120,000 120,000
d.Interestreceivable,under2014 20,000 20,000
e. Overstatement in gain on eqpt sale, 2014 (160,000) (160,000)
f. Overstatement in expense in 2013 100,000 100,000
Depr, under 2013 (1.3M/10yrs) (130,000) (130,000)
Depr,under2014(1.3M/10yrs) (130,000) (130,000)
Inc. from grant, under 2013 (1.2M/10) 120,000 120,000
Inc.fromgrant,under2013(1.2M/10) 120,000 120,000
A d j u s te db a l a n c e s 1,550,000 2,120,000 (80,000)
1. An s. A. 2. An s. A. 3. A n s. A.

4. Ans. D.
Correct cost of Building (P1.2M+100K+200K) 1,500,000
Accumdepr:(P1.5M*2/10) (300,000)
C o r r e c t c a r r y i n g v a l u e o f Bu i l d i n g 1 2 / 3 1 / 1 4 1,200,000

CHAPTER 11-EXERCISE 7: BABY INC.

2012 2013 2014 2014 2014 2014
NetIncome NetIncome NetIncome RE,Beg RE,End WC
Balance 600,000 750,000 300,000 2,000,000
a. 20 12 Accured expense understated (90,000) 90,000
2013Accruedexpenseunderstated (110,000) 110,000 (110,000)
2014Accruedexpenseunderstated (98,000) (98,000) (98,000)
2012 Accrued rental income understate 40,000 (40,000)
2013 Accruedrental incomeunderstated 45,000 (45,000) 45,000
2014Accruedrentalincomeunderstated 50,000 50,000 50,000
2012 Prepaid expense understated 20,000 (20,000)
2013Prepaidexpenseunderstated 30,000 (30,000) 30,000
2014Prepaidexpenseunderstated 35,000 35,000 35,000
b. 2012 Equipment charged to expense 400,000 400,000 400,000
2012/2013/2014 De preciation understa (80,000) (80,000) (80,000) (160,000) (240,000)
2014Equipmentchargedtoexpense 550,000 550,000
2014Depreciationunderstated (110,000) (110,000)
c. Ca sh dividends charged to other expens 100,000 150,000 200,000
*Landacceptedasadonationfromastockholder(APIC) (400,000) (400,000)
*Lossoninventoryduetoflood (50,000)
990,000 815,000 832,000 (195,000)
,187,000 2 ( 13,000)
1 .A n s .C . 2 .A n s .B . 3 .A n s .D. 4 .A n s .A . 5 .A n s .A .

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CHAPTER 11-EXERCISE 8: ROXAS INC.

1. Ans. C.
Depreciable cost, Old bulding P3,000,000
Divide by: Total Useful Life 20 *
DepreciationExpense,Oldbuilding P150,000
Depreciable cost, Extension (Addition) P750,000
Divideby:Remaininglife(20–5) 15 50,000
Total Depreciation expense P200,000

AccumulatedDepreciation,12/31/200 P1,125,000
Divide by, Expired life as of 12/31/2010 (5 +2.5) 7.5
Annual
Depreciation P150,000

Depreciablecost,Building P3,000,000
Divideby:AnnualDepreciation 150,000
Total
useful
life 20
years *

2012 2013 2014

Unadjustednetincome P1,500,000 1,750,000 2,000,000
a.SalaryAccruals:2011 95,000
Salaryaccruals,2012 (110,000) 110,000
Salaryaccruals,2013 (100,000) 100,000
Salary
accruals,
2014 (140,000)
b. Inventory,12/13overstatement (190,000) 190,000
c.Inventory,12/14understatement (150,000)
Purchases,12/14understatement 150,000
d. Prepaidinsurance: 2011 (75,000)
Prepaidinsurance,2012 100,000 (100,000)
Prepaidinsurance,2013 115,000 (115,000)
P repaid
insurance,2014 120,000
e. Interestreceivable: 2012 20,000 (20,000)
Interestreceivable,2013 25,000 (25,000)
Interest
receivable,
2014 30,000
f. Gainonsaleofequipmentin2014,overstatement (160,000)
g. Capitalizablecostin2012 750,000
Understatement in depreciation 2012-2014 (25,000) (50,000) (50,000)
Adjusted Net Income P2 ,2 55 ,0 00 P1 ,5 40 ,0 00 P1 ,9 50 ,0 00
2 . A n s. C. 3. An s. A. 4 . A n s . D.

CHAPTER 11-EXERCISE 9: GKNB CORP

2012 NET 2013 NET 2014 NET
INCOME INCOME INCOME
Unadjustedbalances 381,000 450,000 385,500
a. U nderstatementofendinginventory,12/31/2013 42,000 -42,000
Overstatementofendinginventory,12/31/2014 -69,000
b.Overstatement in
2014 purchases 45,000
c. Understatementofsales,2012 12,000 -12,000
Understatementofsales,2013 15,000 -15,000
Understatement of
sales,
2014 10,500
d.U nderstatementof salaries expense,2012 -30,000 30,000
Understatementofsalariesexpense,2013 -42,000 42,000
e. 2013stockdividendchargetoexpense 30,000
f.O verstatementinrentexpense,2013 15,000
Understatementinrentexpense,2014 -6,000
g. Understatementingainonretirementofbonds(a) 37,800
A d j u s te db a l a n c e s P 3 63 , 0 00 528,000 388,800
1 . An s . B. 2. An s . C . 3 . An s . B.
(a) Gain on the retirement of bonds should be an outright income or loss. Total gain on retirement is
(P360,000-P318,000), P42,000. The client recognized only 1/10 of the amount as an amortization
over 10 years deducted from interest. Thus effectively, only 9/10 of the amount needs to be added to current net income.

4. Ans. A.
Netincome,2012perbooks 381,000
Netincome,2013perbooks 450,000
Totalaccumulatedprofits,1/1/2014,perbooks 831,000
Netincome,2012peraudit 363,000
Netincome,2013peraudit 528,000
Totalaccumulatedprofits,1/1/2014peraudit 891,000
Understatementofaccumulatedprofits,1/1/2014 60,000
Correct appropriation of accum profits for share div in item e (39,000)
Net adjustment (increase/credit) 21,000

5. Ans. C.
Entry made for item e:

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Other
expense 30,000
Ordinary
shares 30,000

Correct entry:
Accumulatedprofits 39,000
Ordinary
shares 30,000
Share
premium 9,000

Adjusting entry:
A c c u m u l a te dp r o f i t s 9,000
S h a rper e m i u m 9,000

CHAPTER 11-EXERCISE 10: WWEE COMPANY

2014 net
2013 net income RE,beg 2014 RE, end 2014
income
Unadjustedbal. 300,000 1,700,000 1,150,000 2,350,000
a. Policychange:Inventory2013 100,000 -100,000 100,000
Inventory 2014 90,000 90,000
b.Overstatementindepnin2014(a) 10,000 10,000
c. Errorcorrection–BorrowingCost 25,000 75,000 25,000 100,000
A d j u s te db a l a n c e s P425,000 P 1 , 77 5 , 0 0 0 P 1 , 2 7 5 , 0 0 0 P 2 , 55 0 , 00 0
1. Ans. A. 2 . A n s. C. 3 . A n s . D. 4 . A n s. C.

( a)Depreciation per books (2014), Double Decl. P350,000

Depreciation per audit, Straight line
CV, 1/1/14: (P350,000/20%) P1,750,000
Less:
Salvage (50,000)
Depreciablecost P1,700,000
DivideBy:remaininglife 5yrs 340,000
OverstatementinDepreciation P10,000

5. Ans. C.

CHAPTER 11-EXERCISE 11: KRIS COMPANY

1. Ans. A.
Sales,accrualbasis 10,350,000
Add: Decrease in accounts receivable 540,000
Ca s h r e c e i v e d f r om c u s t o m e r s 1 0, 8 9 0, 0 0 0

2. Ans. C.
Cost
of
sales 7,050,000
Less:D ecreaseininventory 450,000
Purchases,accrualbasis 6,600,00
Add: D ecrease in accounts payable 412,500
Ca s hp a i dt os u p p l i e r s 7, 0 1 2, 5 0 0

3. Ans. D.
Totaloperatingexpense,accrualbasis 1,725,000
Add:Increaseinprepaidexpense 255,000
Decreaseinaccruedexpense 150,000
Total 2,130,000
Less: Depreciation expense (non-cash expense) 90,000
Ca s h p a y m en t s f o r op er a t i n g ex p en s es 2,040,000

4. Ans. B.
Cash received from customers 10,890,000
Cashpaidtosuppliers (7,012,500)
Cash paid for operating expenses (2,040,000)
Cas h p ro vi d ed b y O p er atin g a ct i vi ties 1,8 37,5 00

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CHAPTER 11-EXERCISE 12: PROTER COMPANY

1. Ans. B.
Excess of cash receipts over cash disbursements 136,500
Adjustments: a)Depreciation -31,500
b)Prepaidinsurance (5,400*2/3) 3,600
c)Unearnedrentincome -21,000
d)
Salariespayable -8,400
e)Interestreceivable 9,510
f)Accruedaccountingfees -1,500
A C C RU A L
NE T I N C OM E 87,210,

2. Ans. D.
c)Unearnedrentincome 21,000
d)
Salaries
payable 8,400
f)Accruedaccountingfees 1,500
TOTA LL I A BI LI TI E S 30,900

CHAPTER 11-EXERCISE 13: UKG INC.

1. Ans. A. COST OF SALES
Beginningi nvty 186,000
Purchases (sqz) 348,000 174,000 Ending invty
Cost of sales 360,000

ACCOUNTS PAYABLE
116,000 AP, beginning
Pa y m ent s 344,000 348,000 Purchases
120,000 AP, ending

2. Ans. C. ACCOUNTS RECEIVABLE

AR, beginning 96,000
Sales on account 600,000 586,000 Collections
AR, ending balance 110,000

3. Ans. A.
Present value of principal (200,000*0.456387) P91,277
Present value of interest, semiannual (10,000*13.59032) 135,903 P227,180
Amortization, June 30, 2014 (227,180*4%) – 10,000 (913)
Amortization, December 31, 2014 (226,267*4%) – 10,000 (949)
Carrying value, December 31, 2014 P225,318

4. Ans. D.
Effective interest as of 6/30/14
9,087
(227,180*4%)
Effective interest 12/31/14 (226,267*4%) 9,051
Total interest expense P18,138

5. Ans. B.
Unadjusted
net
income 25,000
Overstatementinotherexpenses** 2,000
Overstatement in interest expense (20,000 – 18,138) 1,862
Correct net income P28,862

**Other Expenses
Accrual basis 164,000
Increaseinprepayments 4,000 2,000 Increase in accrued utilities
Cash basis 166,000

CHAPTER 11-EXERCISE 14: WOWIE CORP.

1. Ans. C.
Cash collected from customers 10,000,000
Add: AR,ending 4,000,000
Deduct: AR, beginning 6,400,000
S a l e sA c c r u a lb a s i s 7, 6 0 0, 0 0 0

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2. Ans. A.
Total payments to suppliers 13,618,000
Deduct: payments to suppliers for 2013 invoices 4,632,000
Balance: payments to suppliers for 2014 invoices 8,986,000
Add:Accountspayable,endingbalance 2,621,000
P u rc h a s es ,a c c r u a lb a s i s 11,607,000

3. Ans. B.
Wagespaid 3,050,000
Add: Wages payable, ending balance 125,000
Deduct: W ages payable, beginning bal. 85,000
Wa g e s e x pe n se , a c c r u a l ba sis 3, 0 9 0, 0 0 0

4. Ans. B.
Advertisingexpensespaid 300,000
Add: Advertising supplies, beg bal. 35,000
Accrued advertising, ending bal. 40,000
Deduct: Ad vertising supplies, end. bal. 75,000
Accrued advertising, beg. Bal. 14,250
A dv e r ti s i n g e x pe n s e , a c c r u a l b a s i s 285,750

5. Ans. B.
Insurancepremiumpaid 125,000
Add:Prepaidinsurance,begbal. 25,000
Less: Unexpired insurance, ending bal. 41,000
I n s u r a n c e ex p en s e, a c c r u a l b a s i s 109,000

CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION

1. Ans. A.
Cash
sales 3,000,000
Collections from accounts receivable 30,000,000
Collections from trade notes receivable 2,400,000 35,400,000
Add: Salesreturnsandallowances(norefund) 800,000
IncreaseinAccountsreceivable 1,400,000
Total 37,600,000
Less:DecreaseinNotesreceivable (600,000)
Gross
Sales P37,000,000
Less:Salesreturns(total) (1,200,000)
Nesta l e sp, ea
r u di t 35,800,000

2. Ans. C.; 3. Ans. B.

Cash
purchases 1,000,000
Paymentsofaccountspayable 16,500,000 17,500,000
Add:Purchase returns and allowances (no refund) 300,000
IncreaseinAccountspayable 400,000
Gross
Purchases 18,200,000
Less:Purchasereturnsandallowances(total) (800,000)
Ne tp u r c h a s e sp
, e ra u d i t 17,400,000
Add:Decrease ininventory 1,000,000
Co sotSf a l esp, era u d it 18,400,000

4. Ans. C.; 5. Ans. A.

Netsales,peraudit P35,800,000
Less:CostofSales,peraudit (18,400,000)
GrossProfit P17,400,000
Interest income 200,000
Total P17,600,000
Less: Expense
nsurance
I (700,000-200,000) 500,000
Salaries(10,000,000-300,000) 9,700,000
Deprec ia ti on (1 00 ,0 00 +800 ,0 00 ) 90 0, 00 0
Otherexpenses 1,500,000 (12,600,000)
Nei n
t c om e P 5 , 00 0 , 00 0

CHAPTER 11-EXERCISE 16: ALASKA INC.

1. Ans. D.
Sales,accrualbasis2014 4,849,200
Add:Accounts receivable, beg. 270,000
Less:Accounts receivable, end (297,000)
AR written-off during the year (43,200)
Ca s h c o l l e c t i o n s f ro m c u s t o m e r s 4,779,000

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2. Ans. B.
Cost of sales, accrual basis 2014 2,250,000
Add:Inventory,end 279,000
Less:Inventory,beg (423,000)
Purchases, accrual basis 2014 2,106,000
Add:Accountspayable,beg. 139,500
Less:Accountspayable,end (225,000)
Ca s h pa y m en t s to s u ppl i e rs 2,020,500

3. Ans. A.
Interest expense, accrual basis 2014 38,700
Less: Amortization of bond discount (4,500)
Ca s h pa y m en t s f o r i n e te r es t 34 , 20 0

4. Ans. D.
Selling expense, accrual basis 2014 1,273,500
Less: 1/3 of depreciation expense
13,500*1/3)
( (4,500)
Baddebtexpense (45,000)
Ca s h pa y m en t s f o r s e l l i n g e x pe n s e 1,224,000

CHAPTER 11-EXERCISE 17: ALAMAT COMPANY

1. Ans. B.
Cashsales 4,400,000
Add: Accounts receivable, end 100,000
Total 4,500,000
Less: Advances from customers, end (25,000)
Gr o s s /N e tS a l es 4,475,000

2. Ans. B.; 3. Ans. B.

Cash
purchases 4,200,000
Add:Accountspayable,end 80,000
Total 4,280,000
Less: Purchase for president (adj to advances) (10,000)
Gr o s s /N e tP u rc h a s es 4,270,000
Less:Inventory,end (500,000)
Co s to fS a l es ,p era u d i t 3,770,000

4. Ans. A.
Netsales,per
audit 4,475,000
Less:CostofSales,peraudit (3,770,000)
Gross
Profit 705,000
Less:Expense 560,000
Add: Accrued expense, end 20,000
Deduct,supplies,end (5,000)
Prepaid insurance, end (15,000)
Equipment (100,000) (460,000)
Depreciation(100,000/10)*6/12 (5,000)
Interest expense (100,000*12%*4/12) (4,000)
Nientc o m e P 23 6 , 0 00

CHAPTER 11-EXERCISE 18: TITANIUM COMPANY

Cash, Jan. 1 balance
Collections from customers:'
SalesonAccount 17,628,510
Less:AR,April16 (1,327,650)
Salesallowances (54,990)
Add:AR,
Jan.
1 678,690 16,924,560 2. Ans. A.
Payments of merchandise to suppliers:
Merchandisepurchases 10,845,780
Less:AP,April16 (621,900)
Add:
AP,
Jan.1 344,160
(10,568,040) 1. Ans. C.
Purchaseoffurniture (9,000)
Expensespaid (5,597,490)
Cash dividends paid (120,000)
To t a ld i s b u rs em en t s ( 1 6 , 2 9 4 , 5 3 0 ) 3 .A n s .C .
To t a la c c o u n t a b i l i t y 7 28 , 0 4 0 4 .A n s .A .
Less: Cash in bank, net of outstanding check (296,490)
Cash shortage 431,550
Less: Chargeable against the bank (for encashing the obviou (300,000)
Cas h s ho rta g e ch a rg ea b le ag ai ns t the ca sh ier 131, 55 0 5. An s . B.

CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY