Chapter 1
Basic Concepts of Financial Statement Audit
1
Multiple Choice
1. B 2. D 3. D 4. B
5. A 6. C 7. C 8. D
9. B 10. C 11. A 12. D
13. C 14. D 15. B 16. C
Problem 1
Cielo Corporation
Audit Adjusting Entries:
Accounts receivable 15,000
Cash in bank 15,000
Doubtful accounts expense 15,650
Allowance for doubtful accounts 15,650
Purchases 50,000
Accounts payable 50,000
Cost of goods sold 2,120,500
Inventory, end (601,200 + 50,000 – 30,000) 621,200
Purchase returns and allowances 36,500
Purchases (2,159,300 + 50,000) 2,209,300
Inventory, beginning 568,900
Accumulated depreciation – equipment *11,000
Gain on sale of equipment 6,000
Furniture and equipment (40,000 – 35,000) 5,000
40,000 x 10% x 2.75 years) = 11,000
32,000/ 80% remaining life at 10/1/13 = 40,000
Depreciation expense – furniture and equipment 64,300
Accumulated depreciation – furniture and equipment 64,300
Furniture and equipment, per client P618,000
Adjustment above ( 5,000)
Furniture and equipment, per audit P613,000
Depreciation expense:
On remaining equipment 613,000 x 10% =P61,300
On equipment sold: 40,000 x 10% x 9/12 3,000
Depreciation for the year P64,300
Prepaid insurance (8,400 x 6/12) 4,200
Insurance expense 4,200
Prepaid rent 130,000 x 1/13 10,000
Rent expense 10,000
Discount on notes payable 11,000
Chapter 1
Basic Concepts of Financial Statement Audit
2
Interest expense 11,000
100,000 x 12% x 11/12
Retained earnings 300,000
Goodwill 300,000
CIELO CORPORATION
WORKING TRIAL BALANCE FOR THE YEAR ENDED SEPTEMBER 30, 2016
Trial Balance Adjustments Profit or Loss Financial Position
Debit Credit Debit Credit Debit Credit Debit Credit Cash 225,000 15,000 210,000
Accounts receivable 936,000 15,000 951,000
Allowance for doubtful accounts 31,900 15,650 47,550
Notes receivable 155,000 155,000
Merchandise inventory 568,900 568,900
Furniture and equipment 618,000 5,000 613,000
Accumulated depreciation 187,500 11,000 64,300 240,800
Goodwill 300,000 300,000
Accounts payable 536,000 50,000 586,000
Notes payable 100,000 100,000
Common stock 1,000,000 1,000,000
Retained earnings 552,500 300,000 252,500
Sales 3,728,200 3,728,200
Sales returns and allowances 47,600 47,600
Purchases 2,159,300 50,000 2,209,300
Purchase returns and allowances 36,500 36,500
Advertising expense 96,100 96,100
Sales salaries 288,500 288,500
Commission expense 152,000 152,000
Miscellaneous selling expense 29,900 29,900
Rent expense 130,000 10,000 120,000
Office salaries 197,200 197,200
Light and water 15,000 15,000
Insurance expense 10,800 4,200 6,600
Taxes and licenses 47,800 47,800
General expenses 163,400 163,400
Interest expense 41,200 11,000 30,200
Interest income 9,100 9,100
6,181,700 6,181,700
Doubtful accounts expense 15,650 15,650
Cost of goods sold 2,120,500 2,120,500
Merchandise inventory 621,200 621,200
Gain on sale of equipment 6,000 6,000
Depreciation expense 64,300 64,300
Prepaid insurance 4,200 4,200
Prepaid rent 10,000 10,000
Discount on notes payable 11,000 11,000
3,259,350 3,259,350
3,394,750 3,743,300
Income before income tax 348,550
3,743,300 3,743,300
Income before income tax 348,550
Income tax expense 104,565
Income tax payable 104,565
Profit 243,985 243,985
348,550 348,550 2,575,400 2,575,400
Chapter 1
Basic Concepts of Financial Statement Audit
3
Problem 2
Audit adjusting entries:
Inventory, December 31, 2016 (addition) 67,200
Income summary 67,200
Doubtful accounts expense 14,920
Allowance for doubtful accounts 14,920
3% x 522,000 = 15,660
15,660 – 740 = 14,920
Sales salaries and commission 816
Accrued expenses 816
3% x 27,200 = 816
Freight in 1,500
Accounts payable 1,500
Advertising expense 4,200
Prepaid advertising 4,200
Freight out 18,400
Sales 18,400
Depreciation expense – Office Equipment 1,300
Accumulated depreciation – office equipment 1,300
15,600/10 x 10/12
Other operating expenses – Loss from flood 145,200
Extraordinary loss 145,200
Income Tax Expense 50,374
Income Tax Payable 50,374
Chapter 1
Basic Concepts of Financial Statement Audit
4
(Function of expense method)
Flawless, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2016
Net Sales P984,640
Cost of goods sold 429,650
Gross profit P554,990
Other operating income 52,700
Total income P607,690
Operating expenses
Selling expenses P130,916
General and administrative expenses 154,620
Other operating expenses 145,200
Total operating expenses P430,736
Profit before interest and income tax P176,954
Interest expense 9,040
Profit before income tax P167,914
Income tax expense ( 30% x 167,914) 50,374
Profit P117,540
Schedules:
Net Sales
Sales 990,400 + 18,400 P1,008,800
Sales returns and allowances (22,400)
Sales discounts (1,760)
Net sales P984,640
Cost of Goods Sold
Inventory, January 1, 2014 P179,400
Net cost of purchases:
Purchases P346,000
Freight in 12,550 358,550
Total goods available for sale P537,950
Less: inventory, December 31, 2014 108,300
Cost of goods sold P 429,650
Other operating income
Interest revenue P 1,400
Dividend revenue 14,300
Gain on sale of equipment 37,000
Total other operating income P 52,700
Chapter 1
Basic Concepts of Financial Statement Audit
5
Selling Exp. Gen. and Adm. Other Operating Exp.
Sales salaries and commissions P 70,816
Advertising expense 36,380
Legal services P 4,450
Insurance and licenses 17,000
Salesmen’s traveling expenses 7,120
Depreciation expense – delivery
Equipment 12,200
Depreciation expense – office
Equipment 10,900
Utilities expense 12,800
Telephone and postage 2.950
Officers’ salaries 73,200
Doubtful accounts expense 14,920
Freight out 18,400
Miscellaneous selling 4,400
Loss from flood P145,200
Total P130,916 P154,620 P145,200
Flawless, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2016
Net Sales P984,640
Other operating income 52,700
Total income P1,037,340
Operating expenses
Net cost of purchases P 358,550
Decrease in inventory 71,100
Sales salaries and commissions 70,816
Advertising expense 36,380
Legal services 4,450
Insurance and licenses 17,000
Salesmen’s traveling expenses 7,120
Depreciation expense – delivery equipment 12,200
Depreciation expense – office equipment 10,900
Utilities expense 12,800
Telephone and postage 2.950
Officers’ salaries 73,200
Doubtful accounts expense 14,920
Freight out 18,400
Miscellaneous selling 4,400
Other expenses - Loss from flood P145,200
Total operating expenses P430,736
Profit before interest and income tax P176,954
Interest expense 9,040
Profit before income tax P167,914
Income tax expense ( 30% x 167,914) 50,374
Profit P117,540
Chapter 1
Basic Concepts of Financial Statement Audit
6
MULTIPLE CHOICE – Karkits Corporation
Audit adjusting Entries:
1. Advances to officers & employees 3,000
Marketing and administrative expense 4,500
Petty Cash 7,500
2. A. Accounts Receivable 35,000
Cash in Bank 35,000
B. Cash in Bank 40,000
Accounts Receivable 40,000
E. Cash in bank 48,300
Accounts Payable 48,300
3. Trading Securities 20,000
Unrealized gain on Trading Securities 20,000
4. A. Advances to Officers and Employees 120,000
Accounts Receivable 120,000
B. Sales 625,000
Inventories 500,000
Accounts Receivable 625,000
Cost of good sold 500,000
5. A Inventories 26,000
Cost of good sold 26,000
B. Accounts Payable 35,000
Cost of good sold 35,000
C. Inventories 27,000
Accounts Payable 27,000
D. Cost of good sold 22,350
Accounts Payable 22,350
E. Sales 36,000
Inventories 25,000
Accounts Receivable 36,000
Cost of good sold 25,000
* Marketing and Administrative Expense 17,900
Allowance for uncollectible accounts 17,900
6. Marketing and Administrative Expense 6,250
Prepaid Insurance 6,250
Chapter 1
Basic Concepts of Financial Statement Audit
7
A. Land 1,720,000
Building 7,750,000
Other income 30,000
Land and Building 8,600,000
Marketing and Administrative Expense 900,000
B. Marketing and Administrative Expense 166,800
Accumulated Depreciation-Building 150,000
Accumulated Depreciation-Leasehold Improvements 16,800
8. Marketing and Administrative Expense 50,000
Accumulated Amortization - Franchise 50,000
9. Marketing and Administrative Expense 72,000
Licensing Agreement 144,000
Accumulated Amortization - Licensing Agreement 216,000
10. A. Accounts Payable – De la Cruz 126,000
Accounts payable – De Leon 126,000
B. Marketing and Administrative Expense 50,800
Accrued expense 50,800
11. Other Income 130,000
Unearned Revenue 130,000
12. Interest Expense 200,000
Interest Payable 200,000
Mortgage Payable 500,000
Current portion of long term debt 500,000
13. Interest Expense 187,800
Interest Payable 180,000
Discount on Bonds Payable 7,800
14. Income Tax Payable 127,126
Income Tax Expense 127,126
1,458,579-1,585,705
Chapter 1
Basic Concepts of Financial Statement Audit
8
Karkits Corporation
Statement of Comprehensive Income
For the year ended December 31, 2016
Sales P 31,589,000
Cost of Good Sold (17,606,300)
Gross profit 13,982,700
Other Income 40,000
Total income 14,022,700
Marketing and Administrative Expense (8,368,650)
Income before Interest and taxes 5,654,050
Interest expense (792,120)
Profit before Tax 4,861,930
Income Tax (4,861,930 * 32%) (1,555,817)
Profit P 3,306,113
Karkits Corporation
Statement of Financial Position
As of December 31, 2016
Assets Notes
CURRENT ASSETS
Cash and Cash Equivalents 3 P 304,400
Trading Securities, market value 350,000
Accounts receivable, net 4 2,743,100
Inventories 4,976,900
Prepaid Insurance 23,150
CURRENT ASSETS P 8,397,550
NON CURRENT ASSETS
Property, Plant and Equipment 5 P 11,124,700
Intangibles, Net 6 594,000
NON CURRENT ASSETS 11,538,700
Total assets P 19,936,250
Liabilities and Shareholders’ Equity
CURRENT LIABILITIES
Trade And Other Payables 7 P 4,983,020
Unearned Revenues 130,000
Income Tax Payable 66,239
CURRENT LIABILITIES P 5,179,259
NON CURRENT LIABILITIES
Mortgage Payable P 1,500,000
Bonds Payable 8 1,885,800
NON CURRENT LIABILTIES 3,385,800
Total liabilities P 8,565,059
SHAREHOLDERS’ EQUITY
Ordinary Share Capital P 5,000,000
Additional Paid-in Capital 1,350,000
Chapter 1
Basic Concepts of Financial Statement Audit
9
Retained Earnings 5,021,191
SHAREHOLDERS’ EQUITY 11,371,191
Total Liabilities and Shareholders’ Equity 19,936,250
NOTES
3. Cash
Petty Cash P 7,500
Cash in bank 296,900
Cash and Cash Equivalents P 304,400
4. Trade and other receivables
Accounts receivable, net 2,758,000
Advance to Officers and Employees 123,000
Allowance for uncollectible account (137,900)
Trade and Other Receivables P 2,743,100
5. Property, plant and equipment
Land P 1,720,000
Building P 7,750,000
Accumulated Depreciation - Building (150,000 7,600,000
Furniture and Fixtures P2,177,000
Accumulated depreciation – Furniture and Fixtures (703,500 1,473,500
Leasehold Improvements P 168,00
Accumulated depreciation – Leasehold
Improvements (16,800) 151,200
Total Property, Plant and Equipment, Net P 11,124,700
6. Intangible Assets
Franchise P500,000
Accumulated Amortization – Franchise (50,000) P 450,000
Licensing Agreements P 360,000
Accumulated Amortization – Licensing Agreements (216,000 144,000
Total Intangible Assets P 594,000
7. Trade and Other Payables
Accounts Payable P 2,204,200
Accrued Expense 648,820
Interest Payable 380,000
Dividends Payable 1,250,000
Current portion of Long Term Debt 500,000
Trade and Other Payables P 4,983,020
8. Amortized cost of bonds payable
Bonds Payable P 2,000,000
Discount on Bonds payable (114,200)
Bonds Payable, Net of Discount P 1,885,80
Chapter 1
Basic Concepts of Financial Statement Audit
10
Answers:
1. Petty Cash 7,500 c
2. Cash in bank 296,900 a
3. Trading Securities 350,000 b
4. Accounts Receivable 2,758,900 d
5. Allowance for doubtful accounts 137,900 d
6. Advances to Officers & Employees 123,000 d
7. Inventories 4,976,900 d
8. Prepaid Insurance 23,150 c
9. Land 1,720,000 b
10. Building 7,750,000 b
11. Accumulated Depreciation – Building 150,000 b
12. Net book Value of Leasehold Improvement 151,200 c
13. Franchise 500,000 a
14. Licensing agreement, net 144,000 b
15. Accounts Payable 2,204,200 c
16. Accrued Expenses 648,820 c
17. Unearned Revenues 130,000 d
18. Interest Payable 380,000 c
19. Income Taxes Payable 163,477 a
20. Dividends Payable 1,250,000 d
21. Current portion of long term debt 500,000 b
22. Discount on Bonds Payable 114,200 c
23. Ordinary share capital 5,000,000 a
24. Retained Earnings 5,021,191 c
25. Sales 31,589,000 d
26. Cost of Good Sold 17,606,300 c
27. Marketing & administrative expense 8,368,650 c
28. Other income 40,000 a
29. Interest expense 792,120 b
30. Profit 3,306,113 a
Chapter 2
Misstatements in the Financial Statements
11
Problem 1
Nature of error
Under(Over) statement in Profit of Retained
Earnings
2017 Accounts Affected
2015
2016
2017
01/01/15 Account
Dr.
Cr.
Omission of prepaid expenses
12/31/15 29,000 (29,000)
12/31/16 30,000 (30,000) 30,000 Expenses 30,000
12/31/17 34,000 Prepaid expenses 34,000
Expenses 34,000
Omission of unearned revenue:
12/31/15 (20,000) 20,000
12/31/16 (28,000) 28,000 (28,000) Revenue 28,000
12/31/17 (15,000) Revenue 15,000
Unearned revenue 15,000
Omission of accrued expenses:
12/31/15 (27,500) 27,500
12/31/16 (25,000) 25,000 (25,000) Expenses 25,000
12/31/17 (27,000) Expenses 27,000
Accrued expenses 27,000
Omission of accrued revenues
12/31/15 42,500 (42,500)
12/31/16 45,000 (45,000) 45,000 Revenues 45,000
12/31/17 41,000 Accrued revenues 41,000
Revenues 41,000
Net under(over)statement
24,000
( 2,000)
11,000
22,000
Reported profit(loss) 240,000 (120,000) 200,000
Corrected profit(loss) 264,000 (122,000) 211,000
Problem 2
12/31/16 Assets 2016 Profit 12/31/17 Assets 2017 Profit
1. U U U O
2. O O O U
3. U U U O
4. U U U NE
5. U O U O
Problem 3
1. Retained Earnings 160,000 Wages Expense 160,000 2. Interest Income 48,000 Retained Earnings 48,000 3. Insurance Expense 20,000 Prepaid Insurance 20,000 Retained Earnings 40,000
Chapter 2
Correction of Errors
12
4. Supplies Expense 25,000 Retained Earnings 25,000 Unused Supplies 28,000 Supplies Expense 28,000 5. Retained Earnings 80,000 Accumulated Amortization – Development Cost 80,000 Capitalized Development Cost 120,000 Amortization Expense – Development Cost 40,000 6. Retained Earnings 80,000 Service Revenue 40,000 Unearned Service Revenue 40,000 7. Retained Earnings 36,000 Rent Revenue 36,000 8. Office Equipment 1,500,000
Depreciation Expense - Equipment 300,000 Accumulated Depreciation 900,000 Retained Earnings 900,000
Problem 4
(Function of Expense Method) 1. Cost of Goods Sold Retained Earnings 2. Cost of Goods Sold
Inventory
3. Retained Earnings Cost of Goods Sold 4. No entry ( no effect on cost of sales and profit of both 2016 and 2017; as both beginning inventory and purchases
in 2017 had been transferred to cost of sales) 5. Cost of Goods Sold
Retained Earnings
6. Sales Retained Earnings
Chapter 2
Correction of Errors
13
Problem 5 (Dragon Ball Company)
(1) Schedule to compute correct profit:
Under(over)statement in Profit RE, 1/1/15 2015 2016 2017
Omission of accrued wages
12/31/15 (80,000) 80,000
12/31/16 (60,000) 60,000 (60,000)
12/31/17 (78,000)
Omission of unused supplies
12/31/15 32,000 (32,000)
12/31/16 25,000 (25,000) 25,000
12/31/17 22,400
Omission of accrued interest income
12/31/15 18,000 (18,000)
Sale of equipment - Proceeds (25,000) (9,600)
Gain on sale 7,000
Recorded depreciation 4,200 4,200 4,200
Omission of unearned rent (40,000)
Net under(over)statement (43,800) (800) (56,400) (44,600)
Reported Profit 450,000 290,000 440,000
Corrected Profit 406,200 289,200 383,600
(2) Audit adjusting entries:
Retained Earnings 60,000 Wages Expense 60,000 Wages Expense 78,000 Wages Payable 78,000 Supplies Expense 25,000 Retained Earnings 25,000 Unused Supplies 22,400 Supplies Expense 22,400 Retained Earnings 9,600 Accumulated Depreciation 36,600 Equipment 42,000 Depreciation Expense 4,200
(3) Correcting entries in 2018
Retained Earnings 78,000 Wages Expense 78,000 Supplies Expense 22,400 Retained Earnings 22,400 Retained Earnings 5,400 Accumulated Depreciation 36,600 Equipment 42,000
Chapter 2
Correction of Errors
14
Problem 6 (Erasure Company) 1. Accumulated Depreciation 27,500 Depreciation Expense 9,167 Retained Earnings 18,333 2. Retained Earnings 65,000 Salaries Expense 65,000 3. Loss on Damages 585,000 Retained Earnings 585,000 4. Goodwill 24,000 Accumulated Amortization – GW 24,000 Retained Earnings 12,000 Amortization of Goodwill 12,000 Accumulated Amortization – Goodwill 24,000
(Note: SMEs amortize Goodwill over ten years)
5. Sales 340,000 Advances from Customers 340,000 6. Retained Earnings 54,000 Accumulated Depreciation 6,000 Equipment 60.000 Repairs and Maintenance 50,000 Equipment 50,000 Accumulated Depreciation (10% x (60,000+ 50,000) 11,000 Depreciation Expense 11,000 7. Cost of Sales 51,000 Retained Earnings 51,000 Cost of Sales 30,000 Inventory 30,000 8. No entry ( no effect on cost of sales of 2016 and 2017; Cost of sales had been set up; both purchases and beginning inventory for 2017 had been transferred to cost of sales)
Problem 7 (Gloria Company) Audit adjustments to correct 2016 financial statements Audit adjustments to correct 2017 financial statements Other operating income 8,000 Retained earnings 8,000 Unearned commission income 8,000 Other operating income 8,000 Other operating income 6,400 Unearned commission income 6,400 Prepaid rent 16,000 Selling and administrative expenses 16,000
Chapter 2
Correction of Errors
15
Selling and administrative expenses 16,000 Retained earnings 16,000 Prepaid rent 21,000 Selling and administrative expenses 21,000 Interest receivable 8,000 Other operating income 8,000 Other operating income 8,000 Retained earnings 8,000 Interest receivable 12,000 Interest income 12,000 Sales 90,000 Advances from customers 90,000 Cost of sales 15,000 Retained earnings 15,000 Accounts payable 15,000 Cost of sales 15,000 Equipment 20,000 Equipment 20,000 Selling and administrative expenses 20,000 Retained earnings 18,000 Accumulated depreciation 2,000 Selling and administrative expenses 2,000 Selling and administrative expenses 4,000 Accumulated depreciation 2,000 Accumulated depreciation 4,000 (a)
Gloria Company Comparative Statements of Comprehensive Income For the Years Ended December 31, 2017 and 2016
2017 2016
Sales P 910,000 P 720,000
Cost of Sales 585,000 465,000
Gross Profit P 325,000 P 255,000
Other Operating Income 73,600 30,000
Total Income P 398,600 P 285,000 Less: Selling and Administrative Expenses 279,000 156,000
Net Income from Operations P 119,600 P 129,000
Interest Expense 80,000 20,000
Net Income P 39,600 P 109,000
(b) Effect on total assets, December 31, 2016 (see audit adjusting entries for 2016) = 16,000 + 8,000 + 20,000 – 2,000 = P42,000 understated (c) Effect on total assets, December 31, 2017 (see audit adjusting entries for 2017) = 21,000 + 12,000 + 20,000 – 2,000 – 4,000 = P47,000 understated. (d) Effect on total liabilities, December 31, 2017 (see audit adjusting entries for 2017) = 6,400 + 90,000 = 96,400 understated
Chapter 2
Correction of Errors
16
Problem 8 Golden Crest
Particulars 2016 Profit Retained earnings, Dec. 31, 2016
Non- current Assets, 12/31/17
Retained earnings January 1, 2016
Omission of unused supplies 12/31/16 12/31/17
15,000
15,000
Repairs charged to equipment on 1/1/15 (8,500) (68,000) (59,500) (76,500)
AFS securities were measured at cost 50,000
Correct cost of equipment, P746,070 Recorded cost 900,000 Difference 153,930 Difference in depreciation 2016 153,930 x 10% x 3/12 = 3,848 2017 153,930 / 10 = 15,393 Interest expense 2016 P74,607 x 3/12 =
3,848
(18,652)
3,848
(18,652)
(153,930)
3,848 15,393
Net under (overstatement) (6,504) (67,804) (144,189) (76,500)
Present value of the note on October 1, 2016 = 300,000 x 2.4869 = 746,070 Amortization table for the note payable
Date Periodic Payment Applied to Interest Applied to Principal Bal. of Principal
October 1, 2016 746,070
September 30, 2017 300,000 74,607 225,393 520,677
September 30, 2018 300,000 52,068 247,932 272,745
Problem 9 (Golden Harvest Corporation) (a) Computation of correct profit (loss)
Particulars 2016 2017 2018
Omissions of
Accrued expenses, 12/31/16 (20,000) 20,000
12/31/17 (25,000) 25,000
12/31/18 (30,000)
Accrued income 12/31/16 32,000 (32,000)
12/31/17 30,000 (30,000)
12/31/18 26,000
Prepaid expenses 12/31/16 12,000 (12,000)
12/31/17 18,000 (18,000)
12/31/18 24,000
Unearned income 12/31/16 (15,000) 15,000
12/31/17 (10,000) 10,000
12/31/18 (8,000)
Omission in the ending inventory
2017 28,000 (28,000)
2018 64,000
Machine charged to expense on August 31, 2016 80,000
Depreciation on the machine (3,333) (10,000) (10,000)
Net understatement (overstatement) 85,667 22,000 25,000
Reported profit (loss) (250,000) 320,000 380,000
Correct profit (loss) 164,333 342,000 405,000
Chapter 2
Correction of Errors
17
Computation of retained earnings
2016 2017 2018
Balance, January 1 P 0 P(164,333) P117,667
Profit (loss) (164,333) 342,000 405,000
Dividends declared (60,000) (100,000)
Balance, December 31 P(164,333) P117,667 422,667
(b) 2018 Audit Adjusting Entries Retained Earnings 25,000 Operating Expenses 25,000 Operating Expenses 30,000 Accrued Expenses 30,000 Income 30,000 Retained Earnings 30,000 Accrued Income 26,000 Income 26,000 Expenses 18,000 Retained Earnings 18,000 Prepaid Expenses 24,000 Expenses 24,000 Retained Earnings 10,000 Income 10,000 Income 8,000 Unearned Income 8,000 Inventory, beginning/Cost of Sales 28,000 Retained Earnings 28,000 Inventory, end 64,000 Income Summary/ Cost of Sales 64,000 Machinery 80,000 Operating Expenses 10,000 Retained Earnings 66,667 Accumulated Depreciation 23,333 Problem 10 (Sukiyaki Corporation)
Audit Adjustments to restate 2016 FS Audit Adjustments to Restate 2017 FS
Allowance for Doubtful Accounts 5,000 Operating Expenses 5,000 32,000 – 37,000 = 5,000
Other Operating Expenses – Unrealized Held for Trading Equity Securities 7,000 Loss on Trading Sec. 3,000 Retained Earnings 3,000
Held for Trading Equity Securities 3,000 Other Operating Income – Unrealized Gain on Trading Sec. 10,000
Chapter 2
Correction of Errors
18
Cost of Sales 8,900 Retained Earnings 8,900 Merchandise Inventory 8,900 Cost of Sales 8,900 Cost of Sales 13,600 Merchandise Inventory 13,600
Equipment 36,000 Equipment 36,000 Operating Expenses 36,000 Retained Earnings 36,000
Operating Expenses 3,000 Retained Earnings 3,000 Accumulated Depreciation 3,000 Operating Expenses 3,000 (36,000 -6,000)/13 Accumulated Depreciation 6,000
Accumulated Depreciation 20,000 Equipment 17,000 Other Operating Income – Gain on Sale of Equipment 3,000 Prepaid Insurance 6,000 Prepaid Insurance 3,000 Operating Expenses 3,000 Operating Expenses 3,000
Retained Earnings 9,000 Retained Earnings 6,000
Sukiyaki Corporation Statement of Comprehensive Income
For the Years Ended December 31, 2017 and 2016 2017 2016
Sales P1,000,000 P900,000 Cost of Sales 434,700 403,900 Gross Profit P 565,300 P 496,100 Gain on Sale of Equipment 3,000 Unrealized Gain on Trading Securities 10,000 ________ Total Income 578,300 496,100 Operating Expenses (351,000) (280,000) Unrealized Loss on Trading Securities (3,000) Profit P227,300 P 213,100
Sukiyaki Corporation
Statement of Financial Position December 31, 2017 and 2016
2017 2016
Current Assets Cash P183,000 P 2,000 Held for Trading Equity Securities 85,000 75,000 Accounts Receivable, net 360,000 278,000 Merchandise Inventory 193,400 193,100 Prepaid Expenses 3,000 6,000 Total Current Assets P 824,400 P554,100 Non-Current Assets Property, Plant and Equipment, net of Acc. Deprn P 78,400 P 96,100 Total Assets P902,800 P650,200
Chapter 2
Correction of Errors
19
Current Liabilities Accounts Payable P121,400 P196,100 Shareholders’ Equity Ordinary Share P260,000 P180,000 Share Premium 20,000 0 Retained Earnings 501,400 274,100 Total Shareholders’ Equity P781,400 P 454,100 Total Liabilities and Shareholders’ Equity P902,800 P650,200
Cash Flow Statement For the Year Ended December 31, 2017
Cash Flow From Operating Activities Collection from customers P904,000 Payment to Suppliers (509,700) Payment for expenses (315,800) Net cash flow from operations P78,500 Cash Flow From Investing Activities Sale of equipment P 3,000 Purchase of equipment ( 500) Net cash flow from investing activities 2,500 Cash Flow From Financing Activities Issue of ordinary share (80,000 + 20,000) 100,000 Increase in cash P181,000 Cash Balance, January 1, 2017 2,000 Cash Balance, December 31, 2017 P183,000
Computations: 2017 2016 Accounts Receivable P392,000 P296,000 Allowance for Uncollectible Accounts 32,000 18,000 AR, Net P360,000 P278,000 Property, Plant and Equipment Cost P186,000 P205,500 Accumulated Depreciation 107,600 109,400 Carrying value P 78,400 P 96,100 Accounts Receivable, beg. P296,000 Sales 1,000,000 Accounts Receivable, end (392,000) Collections from customers P904,000 Inventory, end P193,400 Cost of sales 434,700 Inventory, beg. (193,400) Purchases P434,700 Accounts Payable, beginning 196,100 Accounts Payable, end (121,400) Payment to suppliers P509,700 Accumulated depreciation, end P107,600 Accumulated depreciation of equipment sold 20,000
Chapter 2
Correction of Errors
20
Accumulated depreciation, beg. (109,400) Depreciation expense P18,200 Operating expenses P351,000 Depreciation ( 18,200) Doubtful accounts expense 32,000 – 18,000 ( 14,000) Decrease in prepaid expenses ( 3,000) Operating expenses paid P315,800 Property, Plant and Equipment, cost, end P186,000 Cost of equipment sold 20,000 Property, plant and equipment, cost, beg. (205,500) Equipment purchased P 500 Problem 11 (Tahoma Corporation) Adjusting Entries – December 31, 2017 Sales 180,000 Retained Earnings 180,000 Accounts Receivable 240,000 Sales 240,000 Retained Earnings 175,000 Purchases 175,000 Purchases 140,000 Accounts Payable 140,000 Sales 20,000 Unearned Revenue 20,000 Retained Earnings 36,000 Sales 36,000 Retained Earnings 35,000 Expenses 35,000 Expenses 50,000 Accrued Expenses 50,000 Inventory, beginning 75,000 Retained Earnings 75,000 Inventory, end 110,000 Income Summary 110,000 Advances to Suppliers 50,000 Purchases 50,000
Chapter 2
Correction of Errors
21
Retained Earnings 3,333 Expenses 10,000 Accumulated Depreciation – Printing Equipment 13,333 Expenses 37,500 Retained Earnings 12,500 Accumulated Depreciation – Building 50,000 Expenses 24,000 Allowance for Uncollectible Accounts 24,000 Interest Expense (500,000 x 12% x 8/15) 40,000 Retained Earnings (500,000 x 12% x 4/15) 20,000 Operating Expenses 60,000 (Note: 2 semi-annual payments were made in 2017; both were charged to operating expenses, balance of Mortgage
payable before the annual payment in August 2017 is 450,000 + 50,000) Interest Expense 18,000 Interest Payable 18,000 450,000 x 12% x 4/15
Tahoma Company Statement of Comprehensive Income
For the Year Ended December 31, 2017
Sales P 2,076,000
Cost of Sales
Inventory, January 1 75,000
Purchases 915,000
Inventory, Dec. 31 (110,000)
Cost of Sales 880,000
Gross Profit 1,196,000
Selling and Administrative Expenses 776,500
Profit before interest expense 419,500
Interest expense 58,000
Profit 361,500
Tahoma Company
Statement of Financial Position December 31, 2017
Assets
Current Assets
Cash P 750,000
Accounts receivable, net of allowance for uncollectible accounts of P24,000 216,000
Advances to suppliers 50,000
Inventory 110,000
Total current assets P1,126,000
Non-current assets
Land P 400,000
Building, net of P50,000 accumulated depreciation 700,000
Printing equipment, net of P13,333 accumulated depreciation 86,667
Total property, plant and equipment P1,186,667
Chapter 2
Correction of Errors
22
Total assets P2,312,667
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable P 140,000
Accrued expenses 50,000
Current portion of mortgage payable 50,000
Interest payable 18,000
Unearned revenue 20,000
Total current liabilities P278,000
Non-current liabilities
Mortgage payable, net of current portion P 400,000
Total liabilities P 678,000
Shareholders’ Equity
Ordinary share capital P 1,000,000
Retained earnings *634,667
Total shareholders’ equity P 1,634,667
Total liabilities and shareholders’ equity P2,312,667
*Retained earnings, January 1, 2017 before adjustment P 300,000 Correction of prior period errors (26,833) Profit for 2017 361,500 Retained earnings, December 31, 2017 P 634,667
Multiple Choice
1. A 700,000 + 29,000 – 33,000 – 15,000 – 22,000+ 18,000
2. C -33,000 – 15,000 – 15,000 + 18,000 = ( 45,000 )
3. A - 29,000 – 15,000 + 22,000 = (22,000)
4. A 5,000,000 + 200,000 – 250,000 – 300,000 + 100,000 = 4,750,000
5. B (300,000) + (50,000) + 100,000 = (250,000)
6. A - 16,000 – 15,000 – 10,000 + 10,800 = (30,200)
7. A - 15,000 + 10,800 = (4,200)
8. B 5,000,000 – 200,000 – 150,000 = 4,650,000
9. B 2,500,000 – 1,000,000 + 1,500,000 – 500,000 – 200,000 + 600,000 = 2,900,000
10. D 1,500,000 + 600,000 = 2,100,000
11. B 1,000,000 + 500,000 + 200,000 = 1,700,000
12. B 200,000 / 5
13.. C 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000
14. B 3,000,000 – 400,000 = 2,600,000
15. A Profit is understated by 70,000 + 30,000; RE is understated by P30,000; P7,000 has been counterbalanced.
16. D 50,400 / 9 = 5,600
17. C 54,000 – 11,200 = 42,800
18. C
19 A 400,000 + 300,000 + 500,000 – 350,000 = 850,000 net overstatement
20. A -300,000 – 500,000 + 200,000 = 600,000 overstated
Chapter 3
Cash
MULTIPLE CHOICE
Problem 1
1. C 2. A, B, D 3. C. D 4. C, D 5. B, E 6. A, D 7. A, C 8. C 9. A, C, E 10. D, E
Problem 2. Meteor Company
a. Accounts receivable (the check has staled) b. Accounts receivable c. Financial assets at fair value through profit or loss d. Cash (P3,200 only) e. Cash ( if good check, otherwise, Receivable from Employees) f. still included in Cash and Accounts Payable until mailed. g. Notes receivable
Problem 3 Leila Corporation (a) Audit adjustments
Cash Equivalents 3,000,000 Cash 3,000,000 Other Non-current Financial Assets 3,200,000 Cash 3,200,000 Cash 35,000 Accrued Salaries Expense 35,000 Other Non-current Financial Assets 900,000 Cash 900,000 Miscellaneous Expenses 6,800 Advances to Employees 1,200 Cash (Petty Cash Fund) 8,000 Cash 5,300 Accrued Utilities Expense 5,300 Accounts Receivable 25,000 Cash 25,000
1. C 2. B 3. D 4. A 5. B
6. B 7. C 8. C 9. C 10. D
11. B 12. C 13. C 14. D 15. D
16. B
1. C 2. B 3. D 4. A 5. B
6. B 7. C 8. C 9. C 10. D
Chapter 3
Cash
26
(b) Cash and Cash Equivalents Savings account with Metrobank P1,500,000 Checking account with Metrobank 800,000 + 5,300 805,300 Certificates of deposit 3,000,000 Payroll fund 1,200,000 + 35,000 1,235,000 Tax fund 500,000 Petty cash fund 12,000 Undeposited collections 85,000 – 25,000 60,000 Correct cash and cash equivalents P7,112,300
Problem 4 (Sta. Monica, Inc.) Expenses 10,500 Petty Cash Fund 10,500 Correct balance of petty cash fund = P20,000 – P10,500 = P9,500 Problem 5 (Victor Company)
(a) Correct amount of petty cash fund Currencies and coins P6,400
(b) Per count Currencies and coins P 6,400 Paid petty cash vouchers 2,250 Employee’s NSF check 1,200 Wedding gift contribution (with bills) 1,500
Total per count P11,350 Cashier’s accountability: Petty cash fund, per ledger P10,000 Wedding gift contribution 1,500 11,500 Cash shortage P 150 (b) Audit Adjusting Entries Delivery Expense 250 Office Supplies Expense 160 Employees Medicine 240 Transportation Expense 400 Repairs and Maintenance 400 Receivables from Employees 2,000 Cash Shortage (or Misc. Expenses or Receivables fr Employees) 150 Petty Cash Fund 3,600
Chapter 3
Cash
27
Problem 6 (Rainbow Corporation) (a) Total per count P 35,000
Cashier’s Accountability Petty Cash Fund, per ledger P35,000 Unused postage stamps 1,800 Unused office supplies 1,200 Wedding gift contribution 1,000 39,000 Cash shortage P 4,000
(b). Telephone Expense 1,500 Water Expense 1,600 Office Supplies Expense (3,700 – 1,200) 2,500 Postage Expense (2,800 – 1,800) 1,000 Prepaid Expenses (1,200 + 1,800) 3,000 Receivables from Employees (3,900 + 4,000) 7,900 Petty Cash Fund 17,500
(c) Correct amount of petty cash fund = P35,000 – P17,500 = P17,500 Cash items in the petty cash fund: Bills and Coins P 2,500 Replenishment check 15,000 Total P17,500
Problem 7 San Rafael Company
Bills and Coins (show details of denomination and pieces per denomination) P6,717.50 Checks: Date Maker Amount 12-28-17 Urquiola, employee P 3,000.00 12-29-17 Sta. Maria, employee 1,500.00 12-31-17 L. Chua, customer 2,500.00 01-02-18 A. Bobadilla, customer 3,200.00 01-12-18 C. German, employee (check received 12-28-17) 1,500.00 11,700.00 Vouchers Date Voucher No. Particulars Amount 12-15-17 151 Freight out P 500.00 12-28-17 183 Supplies 300.00 12-29-17 184 Freight In 394.20 12-31-17 189 Freight on cabinet 741.10 01-02-18 001 Freight in 244.70 2,180.00 IOUs 12-21-17 S. Dechavez 300.00 Unused office supplies 40.00 Total per count P20,937.50 Cashier’s accountability: Petty cash fund, per ledger P15,000.00 Unremitted cash sales Inv. # 118 December 30 P1,000.40 Inv. # 129 December 31 2,500.00 Inv. # 133 January 2 3,200.00 6,700.40 Unused office supplies 40.00 21,740.40
Chapter 3
Cash
28
Cash shortage P 802.90 Audit Adjusting Entries:
Receivables from Employees (1,500.00 + 300.00) 1,800 Freight out 500 Supplies Expense (100 – 40) 260 Prepaid Expenses 40 Furniture and Equipment 741.10 Freight in 394.20 Cash Shortage (Receivable from Employees) 802.90 Petty Cash Fund 4,538.20 Cash in Bank (1,000.40 + 2,500.00) 3,500.40 Sales 3,500.40 Correct balance of petty cash fund (P15,000 – 4,538.20) P10,461.80 Composed of the following cash items at December 31, 2015 Bills and coins P6,717.50 Checks dated December 7,000.00 Petty cash vouchers dated January (undisbursed as of December 31) 244.70 Total cash items as of December 31 P13,962.20 Unremitted cash sales as of December 31 ( 1,000.40 + 2,500) (3,500.40) Petty cash fund, per audit, December 31 P10,461.80
Problem 8 (Da King Company) Bills and coins 500 x 1 P 500 100 x 8 800 50 x 3 150 10 x 4 40 5 x 2 10 1 x 3 3 P 1,503
Checks: 12/29/17 M. Roxas, employee P2,000 12/30/17 J. Madrigal Company 1.500 01/02/18 J. Estrada Junk Shop 2,450 01/15/18 F. Chavez, employee (received 12/27/15) 1,800 7,750
Paid petty cash vouchers: 12/16/17 Vo. No. 145 Freight on goods bought P500 12/26/17 164 Postage 200 12/29/17 165 Transportation of messenger 50 01/02/18 166 Repairs, completed Dec. 29, 2012 1,500 2,250 IOU Ed Gil, employee 1,200 Postage stamps 10 pcs x P12 120
Total per count P 12,823 Cashier’s accountability Petty cash fund P10,000 Unremitted collections 12/30/17 Refund for merchandise returned P 1,500 01/02/18 Sale of junk and scrap materials 2,450 3,950 Unused postage stamps 120 14,070
Chapter 3
Cash
29
Cash shortage P1,247
Adjusting entries Receivable from Employees (1,800 + 1,200 + shortage of 1,247) 4,247 Freight in/Cost of Goods Sold 500 Transportation Expense 50 Postage Expense (200 – 120) 80 Prepaid Expenses 120 Petty Cash Fund 4,997 Repairs and Maintenance 1,500 Accrued Expenses 1,500 Cash in Bank 1,500 Purchase Returns and Allowances /Cost of Goods Sold 1,500 Correct Petty Cash Fund = P10,000 – P4,997 = P5,003
Cash items as of December 31: Bills and coins P1,503 Checks dated December 3,500 Petty cash voucher dated January 2016 1,500 Cash refund for purchase returns (1,500)
Correct petty cash fund balance P5,003
Problem 9 General Company Per count Currency ........................................................................................................................... P 3,020.00 Checks: 12/29/17 Judith Cruz, Employee...................................................... 1,200.00 12/29/17 Viva Company, Customer ................................................. 2,500.00 12/30/17 Alvin Taipan, Employee .................................................... 1,100.00 1/15/18 Judith Cruz, Employee Cashed, December 30, 2017 .......................................................... 1,380.00 12/31/17 Manila Company, Customer .................................................... 3,500.00 Vouchers: ( All dated on or before 12/31/17) Office Supplies ………………. ...................................................... 390.00 Transportation expense .............................................................. 206.00 Freight on purchases …………………………………………… 220.00 Estimated unused office supplies) .............................................................. 150.00 Total per count .............................................................. P13,666.00 Cashier’s accountability Petty cash fund P 5,000.00 Undeposited collections (2,500 + 3,500) 6,000.00 Unrelieaed payroll 2,600.00 Unused office supplies 150.00 .... 13,750.00 Cash shortage .............................................................. P 84.00 Cash items Currency .............................................................. P3,020.00 Checks dated December .............................................................. 8,300.00 Collections from customers .............................................................. ( 6,000.00) Unreleased payroll .............................................................. ( 2,600.00) Correct petty cash fund, December 31 .............................................................. P 2,720.00
Chapter 3
Cash
30
Adjusting Entries: Receivable from Employees (1,380 + 84) .............................................. 1,464 Office Suplies Expense 390 – 150 ............................................ 240 Prepaid Expenses ........................................... 150 Transportation Expense ........................................... 206 Freight in ............................................ 220 Petty Cash Fund .............................................................. 2,280 Cash .............................................................. 6,000 Accounts Receivable .............................................................. 6,000 Cash .............................................................. 2,600 Salaries Payable .............................................................. 2,600 Problem 10 (Cisco Systems, Inc.) (1) Bank reconciliation:
Per bank Per books
Unadjusted balances P 1,463,212 P1,352,312*
Outstanding checks (140,000)
Undeposited receipts 59,500
Error in recording check issued for rental payment 1,800
Bank charge for payment of loan and interest (45,000)
Bank service charges (1,400)
Deposit of another company (87,500)
Customer’s DAIF check (12,500)
Adjusted balances P1,295,212 P1,295,212
(2) Adjusting entry:
Notes Payable – Bank 40,000 Interest Expense 5,000 Bank Service Charges 1,400 Accounts Receivable 12,500 Rent Expense 1,800 Cash in Bank 57,100
(3) Cash and cash equivalents:
Petty cash fund P 20,000 Cash in bank 1,295,212 Treasury bills maturing in 2 months 500,000 Total cash and cash equivalents P1,815,212
Problem 11 (Sunshine Corporation) 1. Per Bank Per Books Unadjusted Balances P 424,000 P465,000 Outstanding checks (113,000) Undeposited collections 48,000 Customer’s note collected by bank 19,000 Bank service charge (1,500)
Chapter 3
Cash
31
Adjusted balances P359,000 P482,500 Cash shortage (123,500)
Cash balance, December 31, per audit P359,000 P359,000
2. Understated book balance 456,000 – 465,000 P 9,000 Overstated bank balance 424,000 – 454,400 30,400 Omitted outstanding checks 183 4,500 198 12,500 Understated outstanding checks 52,000 – 25000 27,000 9,000 – 900 8,100 25,000 – 15,000 10,000 Overstated undeposited collections 3,000 Omission of bank credit memo 19,000
Total cash shortage P123,500
3. Undeposited collections, December 31 P 48,000 Collections, January 1 – 15 199,000
Total amount available for deposit P247,000 Amount deposited, per deposit slips (110,000)
Undeposited collections, January 15 P137,000 Cash on hand, January 15 (52,000)
Additional cash shortage in January P 85,000
.4. Adjusting Entries Bank Charges 1,500 Receivable from Employees (or Loss) 123,500 Cash 106,000 Notes Receivable 19,000 Problem 12 (Pamela Manufacturing Company)
Nov. 30 Receipts Disbursements. Dec. 31 Unadjusted bank balance 876,750 9,153,760 8,526,550 1,503,960 Outstanding checks November 30
(254,720)
(254,720)
December 31 335,610 (335,610) Deposits in transit November 30 164,220 (164,220) December 31 209,180 209,180 Check of Pamplona Company (5,830) 5,830
Adjusted Balances 786,250 9,198,720 8,601,610 1,383,360
Nov. 30 Receipts Disbursements Dec. 31 Balance per books 821,950 9,198,720 8,613,010 1,407,660 Error in recording check no. 359 2,700 2,700 Bank service charge November (3,500) (3,500) December 2,250 (2,250) NSF check returned in November (34,900) (34,900) Interest charged by the bank 24,750 (24,750)
Adjusted Balances 786,250 9,198,720 8,601,610 1,383,360
Chapter 3
Cash
32
Audit adjusting entries: Cash in Bank 2,700
Office Furniture 2,700 Bank Service Charge 2,250 Cash in Bank 2,250 Interest Expense 24,750 Cash in Bank 24,750
Problem 13 (Golden Bells Company)
Nov. 30 Receipts Disbursements Dec. 31 Unadjusted bank balance 2,500,000 2,300,000 1,700,000 3,100,000 Deposits in transit November 30 58,000 (58,000) December 31 47,000 47,000 Outstanding checks November 30 (97,000) (97,000) December 31 46,000 (46,000) Erroneous bank charges November 30 25,000 (25,000) December 31 (37,000) 37,000 Erroneous bank credit November 30 (45,000) (45,000) December 31 (50,000) (50,000)
Adjusted balances 2,441,000 2,214,000 1,567,000 3,088,000
Nov. 30 Receipts Disbursements Dec. 31 Unadjusted book balances (squeezed) 2,390,000 2,206,000 1,549,000 3,047,000 NSF checks returned by bank November 30 (15,000) (15,000) December 31 25,000 (25,000) Bank service charges November (10,000) (10,000) December 18,000 (18,000) Note collected by bank November 76,000 (76,000) December 84,000 84,000
Adjusted balances 2,441,000 2,214,000 1,567,000 3,088,000
Accounts Receivable 25,000 Cash in Bank 25,000 Bank Service Charges / Miscellaneous Expenses 18,000 Cash in Bank 18,000 Cash in Bank 84,000 Notes Receivable 84,000
Chapter 3
Cash
33
Problem 14 (Starr Company) May 1-31
Apr. 30 Receipts Disb. May 31 Unadjusted bank balance 570,360 883,200 1,320,600 132,960 Deposits in transit April 30 29,360 (29,360)
May 31 (squeezed) 40,560 40,560
Outstanding checks April 30 (144,800) (144,800) May 31 133,600 (133,600)
Adjusted balances 454,920 894,400 1,309,400 39,920
May 1-31
Apr. 30 Receipts Disb. May 31 Unadjusted book balances (squeezed) 463,040 654,400 621,240* 496,200 DAIF checks returned by bank April 30 (8,000) (8,000) May 31 Bank service charges April (120) (120) May 280 (280)
Check issued by the treasurer to himself 696,000 (696,000)
Proceeds of loan granted by bank May 240,000 240,000
Adjusted balances 454,920 894,400 1,309,400 39,920
*621,240 = 613,120 + 8,000 + 120 (a) 1. P463,040 2. P40,560 3. P696,000 4. P39,920 (b) Adjusting entries: Bank Service Charges 280 Cash in Bank 280 Loss from Theft/Receivable from Officers 696,000 Cash in Bank 696,000 Cash in Bank 240,000 Notes Payable – Bank 240,000
Chapter 3
Cash
34
Problem 15 Barry Company
(1) Deposits in transit Deposits in transit, beginning P 60,000 Deposits made 2,520,000 Deposits recorded by bank (2,500,000) Deposits in transit, June 30 P 80,000 (2) Outstanding checks Outstanding checks, beginning P 175,000 Checks recorded by Barry 2,380,000 Unrecorded check issued 100,000 Checks cleared (2,354,600 – 39,600) (2,315,000) Outstanding checks, June 30 P 340,000
Bank Books
Unadjusted balances, June 30 P 270,900 P 805,000
Deposits in transit 80,000
Outstanding checks (340,000)
Check of another company 39,600
NSF check (36,000)
Bank service charge (8,500)
Unrecorded check issued (100,000)
Direct payment of bank loan (610,000)
Adjusted balances P 50,500 P 50,500
Audit adjustments: Accounts receivable 36,000 Cash 36,000 Miscellaneous Expenses 8,500 Cash 8,500 Purchases 100,000 Cash 100,000 Notes Payable – Bank 595,000 Interest Expense 15,000 Cash 610,000 Problem 16 (Rocky Mountain High) Nov. 30 Receipts Disbursements Dec. 6 Unadjusted bank balance P888,800 P555,500 P666,600 777,700 Deposits in transit
November 30 148,900 (148,900)
December 6 (102,000 – 12,000) 90,000 90,000 Payment from collections 12,000 12,000 Outstanding checks
November 30 (116,200) (116,200)
December 6 = 62,000 + 105,000 + 30,000 + 40,000
237,000
(237,000)
Adjusted balances 921,500 508,600 799,400 630,700
Chapter 3
Cash
35
Nov. 30 Receipts Disbursements Dec. 6 Unadjusted book balances (squeezed) 921,500 508,600 559,400 870,700 Payment from receipts 12,000 (12,000) Bank charges in December (200,000 + 28,000) 228,000 (228,000)
Adjusted balances 921,500 508,600 799,400 630,700
Answers:
(a) P148,900 (b) P116,200 (c) P921,500 (d) P630,700
Problem 17
1. A,D 6. M, P 11. D, F 16. I, L
2. C, G. 7. I, L 12. A, D 17. Not a reconciling item
3. B, F 8. K, O 13. F, G 18. J, N
4. E, H 9. D, H 14. D, F 19. L, N
5. J, N 10. B, F 15. J, N 20. N, O
Problem 18 (Contronics Company)
Petty Cash
Fund Purchasing
Fund Cash in Bank Total
Balances, per ledger P 15,000 P 35,000 P134,500 P184,500 Disbursed in 2015 (6,000) (20,000) (26,000) Bank credit memo 58,000 58,000
Balances per audit P9,000 P15,000 192,500 P216,500
Adjusting entries Gasoline Expense 4,500 Miscellaneous Expenses 500 Transportation Expense 1,000 Petty Cash Fund 6,000 Purchases or Inventory 20,000 Purchasing Fund 20,000 Cash in Bank 58,000 Notes Receivable 58,000 Problem 19 (Fortune Company) (a) Audit Adjustments Sales 285,200 Cash 285,200 Cash 19,300 Utilities Payable 19,300 Accounts Receivable 57,800 Cash 57,800
Chapter 3
Cash
36
Accounts Receivable 32,500 Cash 32,500 No entry, dividend fund is part of cash. Accounts Receivable 3,500 Cash 3,500 Cash Shortage/ Receivable from Employees 550 Cash 550 No entry, payroll fund is part of cash. Cash Shortage / Receivable from Employees 300 Miscellaneous Expenses 5,500 Cash 5,800 Cash 13,500 Miscellaneous Income 13,500 (b) Correct amount of cash Cash balance, per ledger P1,640,000 Cash sales of 2018 (285,200) Unreleased check for utilities 19,300 Postdated checks received (57,800) Customers’ NSF checks (32,500) Stale check (3,500) Shortage in the change fund (550) 2017 vouchers in petty cash fund (5,500) Cash shortage in the petty cash fund (300) Unrecorded deposits (sale of scrap) 13,500
Cash balance, per audit 1,287,450
Summary of Answers:
1. 308.40 2. 4,606.60 3. no shortage 4. 35,000 5. 800 6. 5,700 7. 400 8. 5,300 9. 53,800 10. 838,600 11. 157,950 12. 780,650 or 761,650 (NSF checks may be treated as deduction from receipts) 13. 625,700 or 606,700 (NSF checks may be treated as deduction from receipts) 14. 3,000 15. 92,000 16. 145,600 17. 71,950 18. 1,828,212 19. imprest system – deposit of collections intact to the bank 20. segregation of duties of custodial function and bookkeeping function 21. 125,250
Chapter 3
Cash
37
22. 194,550 23. 255,700 24. 55,000
SUPPORTING COMPUTATIONS
A. 1. Total per count P 10,761.60 Cashier’s accountability Petty cash fund P 10,500 Postage stamps 220 Other collections 350 11,070
Cash shortage P308.40
2. Correct petty cash fund = 1,156.60 + 3,450 P4,606.60
B. 3. Total per count P 53,500 Cashier’s accountability Petty cash fund P 45,000 Check payable to Meralco 3,500 Birthday gift contribution 4,500 Unused postage 500 53,500 Cash shortage P 0 4. Correct petty cash fund = P17,000 + P18,000 P35,000 C. 5. Total per count P19,700 Cashier’s accountability Petty cash fund P 15,000.00 Undeposited collections 5,500.00 20,500
Cash shortage P 800
6. Bills and coins P6,400 Customers’ checks 4,800 Undeposited collections (5,500)
Petty cash fund, per audit P5,700
D. 7. Total per count (exclude the unsigned pay envelope with no contents) P 19,600 Cashier’s accountability Petty cash fund P15,000 Unreleased payroll 5,000 20,000
Cash shortage P 400
8. Bills and coins P7,300 Vouchers with January 2018 dates 200 Employee’s check dated December 2017 2,800 Total cash items as of December 31 P10,300 Unreleased payroll (5,000)
Correct petty cash balance on December 31 P5,300
Chapter 3
Cash
38
E. Bank Books
9. Unadjusted balances P850,000 P750,500 Bank credit memo 150,000 Bank debit memo (4,500) Outstanding checks (120,400) Check of Kin 21,000 Error in recording check (3,600) Cash on hand 88,000
Balances before cash shortage P838,600 P892,400 Cash shortage ( 53,800)
10. Cash balance, per audit P838,600 P838,600
F. January 31 Receipts Disbursements Feb. 28
Unadjusted balances per bank 13,500 790,450 647,700 156,250 Outstanding checks January 31 (65,000) (65,000) February 28 43,000 (43,000) Deposits in transit January 31 54,500 (54,500) February 28 44,700 44,700
Adjusted balances 3,000 780,650 625,700 157,950
January 31 Receipts Disbursements Feb. 28
Unadjusted balances, per books (92,250) 805,350 630,300 82,800 Bank credit memo January 123,500 (123,500) February 98,800 98,800 Bank service charges January (3,250) (3,250) February 4,650 (4,650) NSF checks returned by bank January (25,000) (25,000) February 19,000 (19,000)
Adjusted balances 3,000 780,650 625,700 157,950
G. December Disbursements
Per bank Per books 15. Unadjusted disbursements P195,000 P190,400 Outstanding checks, November 30 (90,000) Customers’ NSF checks November (6,000) December 12,000 Bank service charges November (2,400) December 3,000
Balances before outstanding checks, December 31 P105,000 P197,000 105,000
Outstanding checks, December 31 P92,000
Chapter 3
Cash
39
H. June Receipts
Per bank Per books 16. Unadjusted receipts in June P310,000 420,000 Collections made directly by bank in May (30,300) Deposits in transit, May 31 (15,000) Loans granted by bank in June 50,000 Error in recording deposit 900
Balances before deposits in transit, June 30 P295,000 P440,600
295,000
Deposits in transit, June 30 P145,600
I. Per bank Per books Unadjusted balances 1,555,000 1,890,162 Credit memo for collections by bank 10,000 Outstanding checks (106,229) Undeposited receipts 379,441
Balances before shortage P1,828,212 P1,900,162 17. Amount stolen (71,950)
18. Actual cash existing P1,828,212 P1,828,212
19. and 20. Features of internal control missing: Imprest system and segregation of duties J. Per bank Per books Unadjusted balances P350,000 P293,500 Erroneous bank credit (25,000)
22. Outstanding checks (246,750 – 15,000 – 37,200) (194,550)
Unreleased checks 15,000 Postdated checks issued and recorded as disbursements 37,200 Customer’s postdated check (50,000)
21. Deposits in transit (175,250 – 50,000) 125,250
Note collected by bank 15,000
Balances before cash shortage P255,700 P310,700
24. Cash shortage (55,000)
23. Actual cash existing P255,700 P255,700
Chapter 4
Receivables and Related Revenues
38
MULTIPLE CHOICE – THEORY
1. D 2. C 3. C 4. C 5. B
6. D 7. D 8. B 9. B 10. A
11. D 12. B
Problem 1
1. A 2. E 3. B, E 4. A,C,D 5. A,C,D 6. A,C 7. D 8. C,D 9. D 10. D 11. D 12. A,B,C 13. D 14. E 15. E
Problem 2 (Fontana Blue)
a. Cost of Sales 20,000 Inventory 20,000 b. Cost of Sales 18,000 Inventory 18,000 c. No adjustment d. Sales 40,000 Accounts Receivable 40,000 e. Sales 60,000 Accounts Receivable 60,000 Inventory 33,600 Cost of Sales 33,600 f. Sales 120,000 Accounts Receivable 120,000 g. Accounts Receivable 60,000 Sales 60,000 h. No adjustment i. Accounts Receivable 80,000 Sales 80,000 Cost of Sales 55,000 Inventory 55,000
Chapter 4 Receivables and Related Revenues
39
j. Accounts Receivable 90,000 Sales 90,000 Problem 3 (Magnolia Company)
1. Accounts Payable – B 74,000 Accounts Receivable - B 74,000 2. Accounts Receivable – L 16,200 Accounts Receivable – C 16,200 3. No disposition yet (Customer D) 4. Sales 24,000 Accounts Receivable – E 24,000 5. Inventory 16,500 Cost of Sales 16,500 6. Sales 60,000 Accounts Receivable - F 15,000 Advances from Customers 45,000 7. Sales 85,000 Accounts Receivable – G 85,000 Inventory 59,000 Cost of Sales 59,000 8. Sales 2,500 Accounts Receivable – H 2,500 10,000 / 200 x (200 – 150) = 2,500 9. Sales 180,000 Accounts Receivable – I 180,000 10. Inventory 120,000 Cost of Sales 120,000 11. Sales Returns and Allowances 5,000 Sales 5,000
Chapter 4 Receivables and Related Revenues
40
Problem 4 (Blooms Company)
Account Per client Adjustment Per audit Not due 1-60 days Past due
61-120 days past due
Over 120 days past
due
1 14,000 14,000 3,000 8,000 3,000
2 25,000 25,000 25,000
3 98,000 (98,000) 0
4 44,000 44,000 24,000 20,000
5 68,000 68,000 8,000 60,000
6 15,000 15,000 15,000
Total 264,000 (98,000) 166,000 36,000 83,000 27,000 20,000
Age Classification Balance per audit % Uncollectible Required Allowance
Not due 36,000 1% 360
1-60 days past due 83,000 2% 1,660
61-120 days past due 27,000 5% 1,350
Over 120 days past due 20,000 50% 10,000
Total P13,370
Notes Receivable 100,000 Interest Income 2,000 Accounts Receivable (customer 3) 98,000 Interest Receivable 750 Interest Income 750 Uncollectible Accounts Expense 5,370 Allowance for Doubtful Accounts 5,375 13,370 – 8,000 = 5,370 Problem 5 (Balimbing, Inc.)
Age Per Client Adjustment Per Audit % Uncollectible Required Allowance
Under 60 days 175,000 175,000 1% 1,750.00
61- 90 days 80,000 4,800 84,800 3% 2,544.00
91 – 120 days 42,000 (2,740) 39,260 6% 2,355.60
Over 120 days 24,000 (4,200) 19,800 25% 4,950.00
Total P321,000 (2,100) 318,860 11,599.00
Required Allowance P11,599 Balance of allowance before final adjustment 22,060 – 4,200 17,860 Adjustment P 6,261 (a) Adjusting entries: 1. Uncollectible Accounts Expense 2,740 Accounts Receivable – 91 – 120 days 2,740
Chapter 4 Receivables and Related Revenues
41
2. Allowance for Doubtful Accounts 4,200 Accounts Receivable – Over 120 days 4,200 3. Accounts Receivable – 61-90 days 4,800 Advances from Customers 4,800 4. Allowance for Uncollectible Accounts 6,261 Uncollectible Accounts Expense 6,261 (b) Correct balance of Accounts Receivable P318,860 (c) Correct balance of Uncollectible Accounts Expense Per Client ( P16,050 – 2,740) P13,310 Adjustment No. 1 2,740 No. 4 (6,261) Per audit P 9,789 Problem 6 (Esau Industries, Inc.) (a) Correct balance of Trade Accounts Receivable
General Ledger Subsidiary Ledger
Balances per client P 10,536,500 P 5,635,700
Undelivered sales (2,732,900)
Goods consigned to Automatic, Trinoma, etc. (3,260,700)
Collections received from Cebu and Davao branches (1,092,800)
Write off (168,000) (168,000)
Per audit P4,374,900 P4,374,900
(b) Correct balance of Allowance for Uncollectible Accounts
Age Before Adjustments
Adjustment Per Audit % Uncollectible Required Allowance
Current P 4,067,320 (1,092,800) 2,974,520 2% P 59,490
31-60 days 402,440 402,440 5% 20,122
61-90 days 267,320 267,320 10% 26,732
90 days 898,620 (168,000) 730,620 30% 219,186
P 325,530
Allowance for Uncollectible Accounts, Per Client P281,255 Additional write off ( 168,000) Additional provision 212,275* Balance per audit P325,530 (c) Correct balance of Uncollectible Accounts Expense: Per client P3,425,625 Additional provisions as a result of audit 212,275 Per Audit P3,637,900 Audit Adjustments: Sales 2,732,900 Accounts Receivable 2,732,900 Sales 3,260,700 Accounts Receivable 3,260,700
Chapter 4 Receivables and Related Revenues
42
Allowance for Uncollectible Accounts 168,000 Accounts Receivable 168,000 Uncollectible Accounts Expense 212,275 Allowance for Uncollectible Accounts 212,275 Problem 7 (a) Retained Earnings 20,000 Allowance for Uncollectible Accounts 20,000 Percentage of uncollectible accounts = Net wiriteoffs up to 2016 Net credit sales up to 2016 = 160,000 / 10,000,000 = 1.6% Required allowance, beginning of 2017 = 1.6% x 1,250,000 = 20,000 (b) Allowance for uncollectible accounts, beginning P 20,000 Write off (83,000) Recoveries 5,000 Balance before yearend adjustment P58,000 debit balance Required allowance: Rate = 238,000/ 14,000,000 = 1.7% 1.7% x 1,460,000 24,820 Uncollectible Accounts Expense, 2017 P82,820 Problem 8 (Smith, Inc.)
(a) Schedule of Trade Notes Receivable
Maker Due Date Per Client Adjustment Per Audit # of Days Accrued
Interest Rate Accrued Interest
Avon Co. 3/30/18 P100,000 (100,000) --
Sara Lee 1/30/18 250,000 (250,000) -- 60 8% P 3,333.
Triumph 7/2//17 60,000 (60,000) -- 60 6% 600
President 01/31/18 800,000 (800,000) --
Mondragon 1/12/18 60,000 -- 60,000 108 9% 1,620
Elizabeth 8/31/19 200,000 (200,000) -- --
Total P770,000 (710,000) P60,000 P5,553
(b) Adjusting Entries: Liability on Discounted Notes 100,577 Trade Notes Receivable 100,000 Gain on Sale of Notes Receivable 577
Principal P100,000 Interest for the entire term 3,333 Discount (103,333 x 8% x 4/12) ( 2,756) Proceeds from discounting P 100,577 Carrying value, date of discounting 100,000 Gain on sale of notes P 577 Subscription Receivable – Preference Share 250,000 Trade Notes Receivable 250,000
Chapter 4 Receivables and Related Revenues
43
Accounts Receivable 60,600 Trade Notes Receivable 60,000 Interest Income 600 Receivable from Officers 800,000 Compensation Expense 66,055 Trade Notes Receivable 800,000 Discount on Notes Receivable from Officers 66,055 Discount on Notes Receivable from Officers (66,055 x 11/12) 60,550 Interest Income 60,550 Depreciation Expense – Equipment 26,667 Accumulated Depreciation – Equipment 26,667 10% x P400,000 x 8/12
Accumulated Depreciation – Equipment 186,667 Notes Receivable – Non-current 200,000 Loss on Sale of Equipment 53,893 Discount on Notes Receivable 40,560 Equipment (400,000 – 250,000) 200,000 Trade Notes Receivable 200,000 Face P200,000 PV = 200,000 x .7972 159,440 Discount P 40,560
Discount on Notes Receivable 6,378 Interest Income (159,440 x 12% x 4/12) 6,378 Interest Receivable 4,953 Interest Income 4,953 (5,553 – 600 interest income recorded in audit adj. no. 3)
Problem 9 (Glowing Candles) (a) Non-current Portion of Long-Term Receivables
Notes Receivable from Sale of Division P1,000,000 Notes Receivable from Sale of Patents Face P2,000,000 Less: Discount on Notes Receivable (285,400 – 34.292) 251.108 1,748,892 Notes Receivable from Sale of Land 11,236,748 Total P16,557,854
(b) Current Portion of Long-term Receivables: Notes Receivable from Sale of Division, including interest Receivable of P135,000 P1,135,000 Notes Receivable from Sale of Land, including interest Receivable of P746,667 (2763,252 + 746,667) 3,509,919 Total P4,069,919
Chapter 4 Receivables and Related Revenues
44
(c) Interest Income from Long-term Receivables On NR from Sale of Division January 1, 2017 – March 31, 2017 P3,000,000 x 9% x 3/12 P67,500 April 1, 2017 – December 31, 2017 P2,000,000 x 9% x 9/12 135,000 Total P202,500
On NR from Officer P6,000,000 x 9% P540,000 On NR from Sale of Patents P1,714,600 x 8% x 3/12 P 34,292 On NR from Sale of Land P2,240,000 x 4/12 P746,667 Total interest income P1,523,459
(c) Gain on Sale of land (P20,000,000 – P15,000,000) P 5,000,000 Gain on Sale of Patents Selling Price P2,000,000 x .8573 P1,714,600 Carrying value of the patents on 10/01/14 Carrying value 1/01/14 P1,800,000 Amortization up to 10/01/14 450,000 x 9/12 (337,500) 1,462,500 Gain on sale of patents P 252,100
Note Receivable from Sale of Land
Date Periodic Payment Payment Applied to Interest Principal
Balance of Principal, end
09/01/17 P 14,000,000
09/01/18 P5,003,252 P 2,240,000 P 2,763,252 11,236,748
09/01/19 5,003,252 1,797,880 3,205,372 8,031,376
Problem 10 (Goliath Company) Notes Receivable from Company B Initial amortized cost = 3,000,000 x .7513 = P2,253,900 Face P3,000,000 Less: Discount on Notes Receivable Initial discount P3,000,000 – P2,253,900 = P746,100 Interest earned P2,253,900 x 10% x 8/12 = 150,260 595,840 Carrying value, 12/31/14 P2,404,160 Notes Receivable from Company C Face P1,000,000 Interest Receivable 1,000,000 x 10% x 3/12 25,000 Carrying value of the note P1,025,000 (a) Audit Adjustments: Interest Receivable 200,000 Interest Income 200,000 Impairment Loss ( Bad Debts) 456,555 Restructured Notes Receivable 1,743,445 Interest Receivable 200,000 Notes Receivable – Company A 2,000,000
Chapter 4 Receivables and Related Revenues
45
Gain on Sale of Land (400,000 -346,100) 400,000 Loss on Sale of Land 346,100 Discount on Notes Receivable 746,100
Discount on Notes Receivable 150,260
Interest Income 150,260 2,253,900 x 10% x 8/12 Interest Receivable 25,000 Interest Income 25,000 (b) Carrying value of notes: Current Assets: Note Receivable from Company A P550,000 – (P1,743,445 x 10%) P119,345 Note Receivable from Company C, including Accrued interest of P25,000 325,000 Total P444,345 Non-current Assets: Note Receivable from Company A (P1,743,445 – P119,345) P1,624,100 Note Receivable from Company B 2,404,160 Total Non-current Receivables P4,028,260
(d) Impairment Loss Notes Receivable from Company A
Face P2,000,000 Interest Receivable (still unrecorded) P2,000,000 x 10% 200,000 Carrying value of note P2,200,000 PV of future cash flows P550,000 x 3.1699 1,743,445 Impairment loss P 456,555 Interest Income: From Company A P200,000 From Company B 150,260 From Company C 25,000 Total P375,260
Problem 11 (MARINA CORPORATION ) Corrections: Info # 7: On December 1, the corporation received payment from Germany Company for one of the P15,000 notes (instead of P8,000).
(1) Audit Adjustments: a. Interest Expense 625 Trade Notes Receivable - Balanga 625 Balanga Company’s note b. Accounts Receivable 48,000 Impairment Loss – Notes Receivable (or Uncollectible Accounts Expense) 32,000
Chapter 4 Receivables and Related Revenues
46
Trade Notes Receivable – Caloocan 80,000 c. Notes Receivable – Officers 75,000 Trade Notes Receivable – Tomas Dee 75,000 Interest Receivable 300 Interest Revenue 300 75,000 x 8% x 138/360 = 2,300 2,300 – 2,000 = 300 d. Accounts Receivable 51,000 Interest Expense 340 Trade Notes Receivable – Eager Corp. 50,000 Interest Revenue 1,000 Interest Receivable 340 e. Trade Notes Receivable – Felicity 38,000 Notes Payable 38,000 Interest Receivable 507 Interest Revenue 507 48,000 x 8% x 60/360 = 640 640 – 133 = 507 Interest Expense 317 Interest Payable 38,000 x 10% x 30/360 317 f. Accounts Receivable 15,150 Trade Notes Receivable – Germany Company 15,000 Interest Revenue 150 Interest Revenue 300 Interest Receivable 300 45,000 x 12% x 60/360 = 900 1,200 – 900 =300 Trade Notes Receivable Interest Receivable Per Client P 275,625 P3,673 Adjustments: (a) (625) (b) ( 80,000) (c) (75,000) 300 (d) (50,000) (340) (e) 38,000 507 (f) (15,000) (300) Per Audit P 93,000 P3,840 Trade Notes Receivable: Felicity Ltd. P48,000 Germany Co. 45,000 Total P93,000 Interest Receivable: Tomas Dee = 75,000 x 8% x 133/360 = P 2,300 Felicity Ltd. = 48,000 x 8% x 60/360= 640
Chapter 4 Receivables and Related Revenues
47
Germany Company = 45,000 x 12% x 60/360 900 Total P 3,840
MULTIPLE CHOICE - PROBLEMS
1. C 5. C 9. D 13. D 17. C 21. A
2. B 6. A 10. B 14. B 18. A 22. A
3. B 7. C 11. A 15. B 19. A 23. B
4. A 8. A 12. A 16. B 20. D 24. D
Computations
1. P523,000 + P224,000 + P75,000 + P27,000 = P849,000
2 - 5 2. Accounts Receivable 3. Inventories 4. Sales 5. Cost of Sales
Per Client P276,500 P425,000 P1,320,000 P842,000
Adjustments : ( 8,680) 7,240 (8,680) (7,240)
(14,200) 12,500 (14,200) (12,500)
(10,000) (10,000)
(6,100) 6,100
(14,000) (14,000)
21,000 (18,200) 21,000 18,200
Per Audit P250,620 P420,440 P1,294,120 P846,560
6.
Classification Balance per audit % Uncollectible Required Allowance
Nov-Dec 2014 P1,080,000 2% P21,600
July – October 2014 650,000 10% 65,000
January – June 2014 420,000 25% 105,000
Prior to 1/01/14 90,000* 70% 63,000
Total P2,240,000 P254,600
Existing allowance = 154,000 – 95,000 + 15,000 + 180,000 – 60,000 194,000
Additional uncollectible accounts expense P 60,600
7. Total uncollectible accounts expense = P 180,000 + 60,600 = P240,600 8. Accounts receivable, net = P2,240,000 – 254,600 = P1,985,400
9. Carrying value of the receivable P4,480,000
Present value of future cash inflow = 1,120,000 x 3.0373 = 3,401,776 Impairment loss P1,078,224 10. No impairment loss shall be recognized, the loss évent is a non-adjusting évent, which présents condition different
from that as of the end of the reporting period. 11. No impairment loss shall be recognized on Company Y’s note. The interest to be collected during the extended term
equals the original interest rate of the loan ; the présent value of future cash inflow shall be equal to the loan’s carrying value.
12. Carrying value of the receivable P1,120,000 PV of future cash inflow = 120,000 + (1,100,000 X .8929) 1,102,190 Impairment loss P 17,810 13. The non-adjusting évent requires disclosure, because even when taken alone, the loss would have a material effect on
the financial condition of 5-6.
Chapter 4 Receivables and Related Revenues
48
14. Sales = (1,900,000 – 350,000) x 150% = P2,325,000
Collections from customers (1,830,000) Write off (15,000 – 8,000) ( 7,000) Gross accounts receivable P 488,000
15. Past due after write off 400,000 – 80,000 P 320,000 Allowance after write off 250,000 – 80,000 170,000 Additional uncollectible accounts expense P 150,000
16. Current assets = P506,370 – 30,000 selling price of unsold goods + 20,000 cost of unsold goods = P496,370 17. Additional allowance required : 120,000 – (65,000 +120,000 – 80,000) = 15,000
Total uncollectible accounts expense = 120,000 + 15,000 = P135,000
18. Accounts receivable = P1,300,000 + 50,000 + 15,000 = P1,365,000 19. Required allowance = 1,365,000 x .015 = P 20,475 20. Uncollectible accounts expense = 20,475 + 8,000 = P 28,475 21. Accounts receivable = 735,000 + 4,500,000 – 4,200,000 + 16,000 – 20,200 - 250,000 = P780,800 22. (780,800 – 100,800) x 2% = P13, 600 23. 16,200 + 16,000 – 20,200 = P12,000 24. (100,800 x 10%) + (680,000 x 2%) = P 23,680
MEEMEE, Inc. Adjusting Entries: 1. Miscellaneous Expenses 1,260 Receivables from Officers and Employees 500 Cash – Petty Cash Fund 1,760 2. Other Non-Current Financial Assets 400,625 Cash in Bank 400,000 Interest Income 625 Reclassified Security Bank SA 3. Cash in Bank – BPI SA 394 Interest Income 394 4. Accounts Receivable – 31 – 60 days overdue 12,800 Cash in Bank – BPI SA 12,800 5. Accounts Receivable – Dishonored Notes 5,500 Cash in Bank – BPI SA 5,500 Notes Receivable Discounted 5,000 Notes Receivable 5,000
Chapter 4 Receivables and Related Revenues
49
6. Cash in Bank – BPI CA Payroll 15,600 Accrued Payroll 15,600 5,200 + 10,400 7. Miscellaneous Expenses 150 Cash in Bank – BPI CA Payroll 150 8. Cash in Bank – BPI CA General 45,200 Accounts Payable 45,200 9. Accounts Payable 900 Miscellaneous Expenses 150 Cash in Bank _ BPI CA General 1,050 10. Accounts Receivable – Current 9,000 Accounts Receivable – 31- 60 days overdue 4,800 Customers’ Credit Balances 13,800 11. Receivables from Officers and Employees 2,000 Accounts Receivable – Current 2,000 12. Allowance for Bad Debts 5,000 Accounts Receivable – over 90 days 5,000 13. Accounts Receivable – Overdue Notes 15,250 Notes Receivable 15,000 Interest Income 250 14. Receivable from Officers and Employees 6,800 Notes Receivable 6,800 15. Interest Receivable 517 Interest Income 517 Creative: P10,000 x 24% x 64/360 = 427 President: P 6,800 x 25% x 19/360 = 90 Total 517 16. Allowance for Bad Debts 4,543 Bad Debts Expense 4,543
ANALYSIS OF ACCOUNTS RECEIVABLE
Age Class Per Client Adjustment Per Audit % Uncollectible Required Allowance
Current P362,412 9,000 (2,000)
369,412 ½ % 1,847
1-30 days past due
202,895 4,550 207.445 1% 2,074
31 – 60 days past due
130,480 12,800 4,800
148,080 3% 4,442
61 – 90 days past due
17,500 -- 17,500 10% 1,750
Over 90 days past due
11,387 (5,000) 6,387 50% 3,194
Dishonored notes
-- 5,500 15,250
20,750 20% 4,150
Chapter 4 Receivables and Related Revenues
50
Total required allowance P17,457
Balance of allowance 22,000
Adjustment (4,543)
Answers: (a) Petty Cash P8,240 (b) BPI SA depository 257,794 (c) BPI CA Payroll 76,250 (d) BPI CA Gen Disb. 214,150 (e) Security Bank SA 400,625 (f) Cash 556,434 (g) Accounts Receivable (Gross) 769,574 (h) Allowance for Bad Debts 17,457 (i) Bad Debts Expense 19,457 (j) Notes Receivable 18,000 (k) Liability on Discounted Notes 8,000 (l) Interest Receivable 517 (m) Interest Income 4,586 (n) Receivables from Officers and Employees 9,700 (o) Customer Credit Balances 13,800
Chapter 5
Inventories and Related Expenses
7MULTIPLE CHOICE – THEORY
1. C 2. D 3. A 4. C 5. A
6. D 7. A 8. A 9. D 10. D
11. B
Problem 1
1. A,C,D 2. A,C 3. E 4. B, E 5. D
6. A, B 7. D 8. C 9. B,C,E 10. C
11. C 12. D 13. C 14. C 15. D
16. D
Problem 2 (Goodwill Company) Inventories 88,800 Cost of Sales 88,800 16,000 + 13,200 + 26,100 + 19,200 + 14,300 = 88,800 Accounts Payable 15,920 Cost of Sales 15,920 Inventories 13,500 Cost of Sales 13,500 Cost of Sales 13,500 Accounts Payable 13,500 Cost of Sales 4,200 Accounts Payable 4,200 Inventories 22,200 Accounts Payable 22,200 16,000 + 6,200 = 22,200 or two separate entries for purchases and inclusion in ending inventory Cost of Sales 85,000 Inventories 85,000 Sales 80,000 Accounts Receivable 80,000 Inventories 60,000 Cost of Sales 60,000 Cost of Sales 60,000 Inventories 60,000 Problem 3 (Victory Enterprises)
Inventory, per client P 441,800
Goods shipped to customer on Dec 31, 2017 (presumed in transit), FOB destination
38,000
Goods in transit, shipped by a supplier FOB shipping point 51,000
Correct inventory amount, December 31 P 530,800
Chapter 5
Inventories and Related Expenses
50
Inventories 89,000 Cost of Sales 89,000 Problem 4 (Raindrops Company) (a) Correct inventory, November 30 55,000 Purchases in November 12,000 + 14,000 26,000 Units sold (50,000 – 4,000) (46,000) Correct inventory level, December 31 35,000 (b) Adjusting entries: Cost of Sales (unrecorded purchases) 1,260,000 Accounts Payable 1,260,000 14,000 x 90 = P1,120,000 Sales (4,000 x 125) 500,000 Accounts Receivable 500,000 Inventories (18,000 x 90) 1,620,000 Cost of Sales 1,620,000 Inventories, November 30 55,000 Received in December 12,000 Shipped out (50,000) Goods reported 17,000 Correct inventory level 35,000 Understatement in units 18,000 Problem 5 (Bulls Company)
(a) Net adjustment to Inventory = 21,096 net debit (See audit adjustments) Inventory, per count P98,000 Net adjustment to inventory 21,096 Inventory, per audit P119,096 (b) Adjusting entries Sales 15,773 Accounts Receivable 15,773 5,841 + 7,922 + 2,010 Cost of Sales / Purchases 2,183 Accounts Payable 2,183 Inventory 8,120 Cost of Sales / Income Summary 8,120 Inventory (12,700 /125%) 10,160 Cost of Sales / Income Summary 10,160
Chapter 5
Inventories and Related Expenses
51
Sales 19,270 Accounts Receivable 19,270 Inventory (19,270/125%) 15,416 Cost of Sales 15,416 Miscellaneous Receivables (from Carrier) 12,600 Inventory 11,250 + 1,350 12,600 Problem 6 George Michael Company
Inventory Accts Payable Net Sales
Initial amounts 2,400,000 800,000 10,150,000
Adjustments:
a. (60,000)
b. 65,000 65,000
c. 50,000
d. 32,000 (45,000)
e. 61,000
f. 27,000
g. 56,000
h. 4,000 8,000
Net adjustment 239,000 129,000 (105,000)
Corrected balances P2,639,000 P929,000 P10,045,000
a. Sales 60,000 Accounts Receivable 60,000 b. Inventory 65,000 Accounts Payable 65,000 c. Inventory 50,000 Cost of Sales 50,000 d. Sales Returns and Allowances 45,000 Accounts Receivable 45,000 Inventory 32,000 Cost of Sales 32,000 e. Inventory 61,000 Cost of Sales 61,000 f. Inventory 27,000 Cost of Sales 27,000 g. Cost of Sales 56,000 Accounts Payable 56,000 h. Cost of Sales 4,000 Inventory 4,000 Accounts Payable 8,000
Chapter 5
Inventories and Related Expenses
52
Problem 7 (Firenze Fashions)
General Ledger Physical Count
Unadjusted balances P 221,020 P 212,820
Goods held on consignment ( 66,000)
Goods purchased FOB shipping point, in transit 12,000
Goods shipped out FOB destination, in transit 24,000 24,000
Goods purchased and received, but not yet recorded 27,300
Goods sold, still unrecorded (63,000)
Unsalable goods (26,500)
Balance per audit P 182,820 P 182,820
Audit Adjustments Sales 39,000 Accounts Receivable 39,000 Inventory 24,000 Cost of Sales 24,000 Inventory 27,300 Accounts Payable 27,300 Accounts Receivable 96,000 Sales 96,000 Cost of Sales 63,000 Inventory 63,000 Loss from Inventory Obsolescence 26,500 Inventory 26,500 Problem 8
No entry on the P100,000 shipment Inventory (75% x 80,000) 60,000 Cost of Sales 60,000 Accounts Receivable 60,000 Sales 60,000 Sales 40,000 Accounts Receivable 40,000 Inventory 30,000 Cost of Sales 30,000
Chapter 5
Inventories and Related Expenses
53
Problem 9 (Maligaya Corporation) Overall Gross Profit Ratio Inventory, January 1, 2016 P 660,000 Net Purchases 2016 and 2017 (2,800,000 + 2,350,000) 5,150,000 Goods available for sale P5,810,000 Less: inventory, December 31, 2017 750,000 Cost of goods sold, 2016 and 2017 P5,060,000 Sales – 2016 and 2017 (5,300,000 + 3,900,000) P9,200,000 Less: Cost of goods sold 5,060,000 Gross Profit P4,140,000 Gross Profit Ratio = 4,140,000/ 9,200,000 45% Inventory Fire Loss Inventory, January 1, 2018 P 750,000 Add: Purchases January 1 to April 15, 2018 January 1 to March 31 P 520,000 April 1 to 15 Paid 34,000 Unpaid 106,000 Purchase returns ( 9,500) 650,500 Total goods available for sale P1,400,500 Less; Cost of goods sold, January 1 to April 15 Accounts Receivable, April 15 P 360,000 Write off 80,000 Collections (129,500 – 9,500) 120,000 Accounts Receivable, March 31 ( 400,000) Sales, April 1 to 15 P 160,000 Sales, January 1 to March 31 1,350,000 Sales, January 1 to April 15 P1,510,000 Cost ratio (100% - 45% ) 55% 830,500 Inventory, April 15, before the fire P 570,000 Less: undamaged goods (in transit) P 23,000 Proceeds from sale of damaged goods (lower than cost) 30,000 53,000 Inventory fire loss P 517,000 Problem 10 (Billy Corporation)
11 months ended May 31
Year ended June 30
Purchases per client P 6,750,000 P 8,000,000
Shipments received in May but recorded in June 75,000
Credit memoranda not recorded (10,000) (15,000)
Deposit for July purchases recorded as April purchases (20,000) (20,000)
Deposit in May, recorded as purchases (55,000) 55,000
Purchases, per audit P6,740,000 P8,020,000
(a) Inventory, July 1, 2016 P 875,000 Purchases, July 1, 2016 to May 31, 2017 6,740,000 Total goods available for sale P7,615,000 Less: Inventory, May 31, 2017 (950,000 – 55,000) 895,000 Cost of goods sold July 1, 2016 to May 31, 2017 P6,720,000
Chapter 5
Inventories and Related Expenses
54
Gross profit 8,400,000 – 6,720,000 = 1,680,000 Gross profit ratio = 1,680,000/ 8,400,000 20% (b) Sales in June at normal selling price (P9,600,000 – 8,400,000) – 100,000 P1,100,000 Cost ratio 80% Cost of goods sold in June at normal selling price P 880,000 Cost of merchandise sold at cost 100,000 Cost of goods sold in June P980,000 (c) Inventory, May 31. 2017 P895,000 Purchases in June (8,020,000 – 6,740,000) 1,280,000 Goods available for sale 2,175,000 Cost of goods sold in June 980,000 Inventory, June 30, 2017 1,195,000 Inventory, July 1, 2016 875,000 Purchases July 1, 2016– June 30, 2017 8,020,000 Total goods available for sale 8,895,000 Cost of goods sold (9,600,000 – 100,000) x 80% =7,600,000 100,000 7,700,000 Inventory, June 30, 2017 1,195,000 Problem 11 (Verde Manufacturing Company) (a) Inventory, November 30, 2017
Stock Cards Physical Count
Materials Work in Process
Inventory, November 30, 2015 P100,000 P497,000 P601,000
November purchases recorded in December 8,000
Obsolete materials (4,000)
Adjusted November 30, 2017 inventories P104,000 P497,000 P601,000
Correct December purchases (250,000 – 8,000) 242,000 242,000
Direct labor incurred 120,000 120,000
Materials issued to production (200,000) 200,000
Factory overhead applied to production 300,000 300,000
Cost of goods sold (786,000) (786,000)
Inventories, December 31, 2017 P 146,000 P331,000 477,000
Problem 12 (Magalang Corporation)
Inventory, beginning Purchases Inventory, end
Per client P300,000 P3,000,000 P420,000
July 1, 2016 adjustments
(a) 50,000
(b) (24,000)
June 30, 2017 adjustments
(a) 63,000 63,000
(b) 20,000
(c) 23,000
Per audit P350,000 P3,062,000 P503,000
Chapter 5
Inventories and Related Expenses
55
Inventory, July 1, 2016 P350,000
Purchases 3,062,000
Total goods available for sale 3,412,000
Inventory, June 30, 2017 503,000
Cost of goods sold P2,909,000
Audit Adjustments: Inventory, beg. 50,000 Retained Earnings 50,000 Retained Earnings 24,000 Purchases 24,000 Purchases 63,000 Accounts Payable 63,000 Inventory, end 63,000 Income Summary 63,000 Inventory, end 20,000 Income Summary 20,000 Purchases 23,000 Accounts Payable 23,000 Accounts Receivable 30,000 Sales 30,000 Problem 13 (Chi Fi Fai) Audit Adjusting Entries: Accounts Receivable 50,000 Sales 50,000 Cost of Sales (50,000 x 80/120) 33,333 Inventory 33,333 Other Operating Expenses – Loss from Inventory Contamination 800,000 Cost of Sales 800,000 Cost of Sales 36,000 Accounts Payable 36,000 (The company credited Cost of Sales on December 29 to adjust the stock cards inventory to inventory list, per physical count.) Decline in Net Realizable Value of Inventory 90,000 Allowance to Reduce Inventory to Net Realizable Value 90,000 Cost of Sales (400,000 – 80,000) 320,000 Accounts Payable 320,000
Chapter 5
Inventories and Related Expenses
56
(1.) Inventory is overstated by P33,333 as a result of goods out on consignment. (2.) The Accounts Receivable is understated by P50,000, as a result of goods out on consignment. (3.) The net income is understated by P16,667, as a result of goods out on consignment. (4.) The accounts payable shall be increased by P320,000. (5.) The gross profit is increased by P80,000, which in effect is the commission income. (6.) Inventory at cost, per audit = P890,000 – P33,333 = P856,667. (7.) The inventory shall be presented at P766,667, which is the cost of P856,667 reduced by the allowance for decline in
net realizable value of P90,000. Problem 14 (Global Company) Audit Adjustments Selling and Administrative Expenses 16,000 Receivables from Employees 1,500 Petty Cash Fund 17,500 Cash in Banks – BDO 32,000 Value Added Tax Payable 32,000 Notes Payable – Bank 50,000 Interest Expense 18,000 Cash in Banks – Asian Bank 68,000 Cash in Bank – Asian Bank 62,000 Accounts Payable 62,000 Selling and Administrative Expenses 250 Cash in Banks – BPI 250 Equipment Acquisition Fund 1,100,000 Cash in Banks – PNB 1,100,000 Allowance for Doubtful Accounts 168,000 Accounts Receivable (70% x 240,000) 168,000 Finished Goods Inventory 60,000 Cost of Sales 60,000 200,000 x 60% x 50% = 60,000 Sales 75,000 Accounts Receivable 60,000 / 80% 75,000 Inventory of Spoiled Goods and Scrap Materials 42,000 Cost of Sales 38,000 Work in Process Inventory 80,000 Inventory of Spoiled Goods and Scrap Materials 55,000 Cost of Sales 55,000 Selling and Administrative Expenses 152,250 Allowance for Doubtful Accounts 152,250 Accounts receivable, per client P3,400,000 Adjustments ( 168,000)
Chapter 5
Inventories and Related Expenses
57
( 75,000) Balance per audit P3,157,000 Account of Blue Ridge 240,000 – 168,000 ( 72,000) Remaining accounts P3,085,000 Provision rate on remaining 5% Required Allowance for D. A. P 154,250 Balance of allowance 170,000 – 168,000 ( 2,000) Additional doubtful accounts expense P 152,250
(1) Petty Cash Fund = P2,500 (2) Cash on deposits with Asian Bank = 400,000 – 68,000 + 62,000 P394,000 (3) Cash on deposits with Security Bank = 350,000 – 50,000 P300,000 (4) Cash on deposits with Banco de Oro = (12,000) + 32,000 P 20,000 (5) Cash on deposits with BPI = 200,000 – 250 P199,750 (6) Cash on deposits with PNB P1,100,000 (7) Total Cash in Bank – Current Assets = 394,000 + 300,000 + 20,000 + 199,750 = P913,750 (8) Accounts Receivable P3,157,000 (9) Allowance for Uncollectible Accounts P154,250 (10) Uncollectible Accounts Expense = 80,000 + 152,250 P232,250 (11) Finished Goods Inventory = 600,000 + 60,000 P660,000 (12) Work in Process Inventory = 1,000,000 – 80,000 P920,000 (13) Raw Materials Inventory = P400,000 (14) Inventory of Spoiled Goods and Scrap Materials = 80,000 + 42,000 + 55,000 P177,000 (15) Sales = 6.000,000 – 75,000 P5,925,000 (16) Cost of Sales = 4,200,000 – 60,000 + 38,000 – 55,000 P4,123,000 (17) Selling and Administrative Expenses = 500,000 + 16,000 + 250 + 152,250 P668,500 (18) Other Operating Income P120,000 (19) Interest Expense and Finance Costs = 200,000 + 18,000 P218,000
MULTIPLE CHOICE - PROBLEMS
1. A 7. B 13. C 19. C
2. C 8. B 14. B 20. C
3. C 9. C 15. A 21. D
4. C 10. C 16. C 22. A
5. A 11. D 17. B 23. B
6. C 12. A 18. A
Solutions: 1. Cash = 240,800 – 163,650 + 90,000 P167,150 2. Accounts Receivable = 563,500 + 77,500 P641,000 3. Inventory = 1,512,500 + 68,750 + 54,375 – 159,375 + 32,500 P1,508,750 4. Accounts Payable = 1,050,250 + 93,100 + 54,375 – 43,750 P1,153,975 5. Inventory, January 1 P 450,000
Chapter 5
Inventories and Related Expenses
58
Purchases 3,150,000 Goods available for sale P3,600,000 Cost of goods sold (4,000,000 x 70%) 2,800,000 Inventory, based on gross profit test P 800,000 Inventory, per count 750,000 Missing inventory P 50,000 6. Cost Retail Inventory, January 1 P142,000 P204,000 Purchases 313,000 520,000 Additional markup 20,000 Markdown (44,000) Goods available for sale P455,00 P700,000 Cost ratio = 455,000 / 700,000 = 65% Sales 620,000 Ending inventory at retail P 80,000 Cost ratio 65% Inventory, December 31 P52,000 7. Inventory, December 31, 2016 P 320,000 Purchases 1,410,000 + 10,000 – 20,000 1,400,000 Goods available for sale P1,720,000 Cost of goods sold Accounts receivable, December 31, 2017 P 300,000 Collections 1,800,000 Accounts receivable, January 1 ( 250,000) Sales on account P1,850,000 Cash sales 350,000 Total sales P2,200,000 Cost ratio 60% 1,320,000 Ending inventory before shortage P400,000 Inventory, per count 360,000 Inventory shortage P 40,000 Items 8 and 9 Per audit: Per client Adjustment Overhead = 25% x P900,000 = P225,000 P225,000 P 0 Direct labor cost = P225,000/75% 300,000 275,000 25,000 Direct materials 900,000 – 225,000 – 300,000 375,000 400,000 (25,000) Total manufacturing cost P900,000 Let x be the ending work in process inventory .6 x is the beginning inventory .6x + 900,000 – x = 800,000 100,000 = .4x x = 250,000 10. Sales per client P2,300,000 Returned goods ( 50,000) Goods shipped in December 80,000 Goods shipped in January ( 100,000) Correct sales P2,230,000
Chapter 5
Inventories and Related Expenses
59
Items 11 through 14
Inventory Accounts Payable Sales Effect on Cost of Sales
Per client 1,250,000 1,000,000 9,000,000
Parts held on consignment, recorded as purchases and included in inventory
(155,000) (155,000) ---
Parts sold still included in inventory (22,000) 22,000
Parts sold FOB shipping point 40,000
Goods out on consignment 210,000 (210,000)
Goods purchased in transit, FOB shipping point
25,000 25,000
Freight bill, unrecorded, relating to unsold goods
2,000 2,000
Cash discounts available (5,300) (5,300)
Per audit 1,304,700 866,700 9,040,000 (188,000)
Items 15 through 18
Inventory Purchases Sales Net income
March purchases recorded in Apr P 17,940 P(17,940)
Shipments in April (31,380) (31,380)
Goods shipped on March 31 (12,150) (12,150)
Goods not counted 18,200 18,200
Understate (overstatement) P6,050 P17,940 P(31,380) P(7,390)
19. Cash balance, December 31, 2017 P353,300 Payment on accounts payable 474,700 Payment for operating expenses 220,000 Total cash available P1,048,000 Cash balance, December 31, 2016 (100,000) Collection on notes receivable ( 25,000) Sales P923,000 Unit sales price P 50 Units sold 18,460 20. Average cost of purchases 32.60 + 32.60 x 0.10 (11 months) P 33.15 2 Accounts payable, Beginning P 75,000 Purchases 1,500 x 12 months x P33.15 596,700 Payments on accounts payable (474,700) Accounts payable, ending P197,000 21. Units in the beginning inventory 199,875 / 32.50 6,150 Units purchased 1,500 x 12 18,000 Units sold (18,460) 22. Units in the ending inventory 5,690 Ending inventory valued as follows 1,500 x 33.70 P50,550 1,500 x 33.60 50,400 1,500 x 33.50 50,250 1,190 x 33.40 39,746 Inventory, December 31, 2015 P190,946
Chapter 5
Inventories and Related Expenses
60
23. Selling price of damaged goods (80%) (210,000/70%) P240,000 Cost to sell 25% x P240,000 (60,000) Net realizable value P180,000 Cost 210,000 Decline in NRV P 30,000 Total cost of inventory 1,000,000 Inventory value, September 30 P 970,000
TIGER CORPORATION
Per count of petty cash fund
Coins and currencies P4,700
Checks 4,200
Petty cash vouchers
December 2017 P1,900
January 2018 500 2,400
Advances to Officers and Employees
December 2017 P 900
January 2018 300 1,200
Total per count P12,500
Cashier’s accountability
Petty cash fund P10,000
Collections
December collection P1,500
January 2018 collection 2,700 4,200 14,200
Cash shortage P1,700
Cash in Bank
Per Bank Per Books
Unadjusted Balances P252,742 P247,820
Deposits in transit 10,700
Unrecorded and undeposited collections (see above) 1,500 1,500
Unreleased checks 5,750
Stale checks 4,280
Outstanding checks (22,630 – 5,750 – 4,280) (12,600)
Uncollected note from Sergio Garcia
Principal P3,600
Interest 108 (3,708)
DAIF Check from customer (2,850)
Service charges ( 450)
Adjusted balances P252,342 P252,342
Adjusting entries
Selling and Administrative Expenses 1,900
Receivable from Officers and Employees (900 + 1,700) 2,600
Petty Cash Fund 4,500
Chapter 5
Inventories and Related Expenses
61
Cash in Bank 11,530
Accounts Receivable 1,500
Accounts Payable (5,750 + 4,280) 10,030
Accounts Receivable (3,708 + 2,850) 6,558
Selling and Administrative Expenses 450
Cash in Bank 7,008
Sales 8,000
Accounts Receivable 8,000
Inventories 7,500
Cost of Sales 7,500
Sales 10,000
Accounts Receivable 10,000
Accounts Receivable 12,000
Sales 12,000
Cost of Sales 10,200
Inventories 10,200
Allowance for Doubtful Accounts 47
Selling and Administrative Expenses 47
Accounts Receivable
Per client P328,300
Adjustments ( 1,500)
6,558
(8,000)
(10,000)
12,000
Per Audit P327,358
Provision rate for uncollectibles 5%
Required allowance P 16,368
Existing allowance 16,415
Deductions from uncollectible accounts expense P ( 47)
Notes Receivable 10,000
Notes Payable 10,000
Interest Expense 183
Interest Payable 183
10,000 x 22% x 30/360 = 183
Interest Receivable 1,415
Interest Income 1,415
20,000 x 18% x 77/360 = P770
15,000 x 20% x 59/360 = 492
8,000 x 15% x 46/360 = 153
Chapter 5
Inventories and Related Expenses
62
Total P1,415
Income Tax Payable 2,930
Income Tax Expense 2,930
35,065 – 32,135 = 3,127
Answers:
1. Petty Cash P5,500 2. Cash in bank 252.342 3. Accounts receivable 327,358 4. Allowance for doubtful accounts 16,368 5. Notes receivable 43,000 6. Interest receivable 1,415 7. Merchandise inventory 221,300 8. Receivables from officers and Employees 12,840 9. Accounts payable 397,030 10. Notes payable 73,070 11. Interest Payable 11,363 12. Income tax payable 10,162 13. Sales 1,869,000 14. Cost of sales 1,184,700 15. Selling and administrative expenses 530,300 16. Bad debts expense 12,553 17. Interest income 9,820 18. Interest expense and bank charges 56,703 19. Profit 72,838 20. Total assets 2,224,430
CHAPTER 6 – INVESTMENTS IN FINANCIAL INSTRUMENTS
Multiple Choice – Theories
1. B 2. A 3. B 4. D 5. C
6. A 7. B 8. C 9. B 10. D
Problem 1
1. A 2. C 3. B, E 4. C, D 5. C, D
6. A, C, D 7. D 8. D, E 9. D 10. A, B, C, D
Problem 2 ESAU CORPORATION
A Corporation B Corporation C Corporation D Corporation E Corporation
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
Jan 3 1,000 54,000
8 1,000 60,000
Apr 5 (500) (27,000)
8 1,000 30,000 1,000 36,000
July 15 500 20,000
Dec 8 50
Bal.
before
adj to
FV
500
27,000
1,000
60,000
1.000
30,000
1,000
36,000
550
20,000
Adj 500 (6,000) 2,000 3,000 900
Per
audit
500
27,500
1,000
54,000
1,000
32,000
1,000
39,000
550
20,900
(a) Audit Adjusting Entries:
Financial Assets at FV through P&L 1,000
Dividend Income 1,000
Financial Assets at FV through P&L 1,000
Gain on Sale of FVPL 1,000
Treasury Shares 33,000
Financial Assets at FV through P&L 33,000
Financial Assets at FV through P&L 20,000
Treasury Shares 16,500
Paid in Capital from Treasury Shares 3,500
Dividend Income 2,000
Financial Assets at FV through P&L 2,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
63
Financial Assets at FV through P&L 1,200
Dividend Income 1,200
Dividend Receivable 5,000
Dividend Income 5,000
Financial Assets at FV through P&L 400
Unrealized Gain on FVPL 400
(b) (1) Carrying amount of FVPL (see worksheet above) P173,400
(2) Gain on sale of FVPL = 28,000 – 27,000 = P 1,000
(3) Dividend Income = 1,000 + 1,200 + 5,000 = P 7,200
(4) Unrealized gain or loss on FVPL P 400
Problem 3 HONEY COMPANY
1. Selling price on July 3 P130,000
Dividends included in the selling price 1,000 x 5 (5,000)
Carrying value of shares sold 600,000 x 1000/5,500 shares (109,091)
Gain on Shares sold P15,909
2. Proceeds from sale P140,000
Carrying value of shares sold = 490,909 x 1,000/4,500 (109,091)
Gain on December 4 sale P 30,909
3. Dividend revenue for the year 2017:
November dividends 500 shares x P 5 P22,500
On July 10 sale 1,000 x 5 5,000
Dividends accrued on December 31 ( 3,500 x P5) 35,000
Total dividend income P62,500
4. Adjusted balance of the investment account
shares Peso balance
Market value, January 1 5,000 P600,000
May 31 bonus issue 500
July 10 sale (1,000) (109,091)
Dec 4 sale (1,000) (109,091)
Balances before adjustment to fair value 3,500 381,818
Adjustment to market (84,318)
Balance, December 31, at fair value 3,500 P297,500
Adjusting Entries
Dividend Income 12,000
Trading Securities 12,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
64
Trading Securities 20,909
Gain on Sale of Trading Securities 20,909
Trading Securities 30,909
Gain on Sale of Trading Securities 30,909
Dividends Receivable 35,000
Dividend Income 35,000
Unrealized Loss on Trading Securities 84,318
Unrealized Gain on Trading Securities 12,466
Problem 4 MYRA COMPANY
Shares At cost Unrealized
gains
(losses)
Jan. 1 balances adjusted to Fair value
3,000 @ 80 3,000 P240,000 60,000
8,000 @ 100 8,000 800,000 ---
May 31 4,000 x (120-5) 4,000 460,000
Oct. 31 Sold 5,000 shares (3,000) (240,000)
(2,000) (200,000) 50,000
31 Realized gain transferred to RE (110,000)
Dec. 22 Sold 2,000 shares (2,000) (200,000) 80,000
22 Realized gain transferred to RE (80,000)
31 Adjustment to FV 276,000
Dec. 31 Per Audit 8,000 P 860,000 P 276,000
Investment in Ivan Company 60,000
Unrealized Gain /Loss on Equity Investments–
Other Comprehensive Income
60,000
11,000 x (105 – 5)* = 1,100,000
1,100,000 – 1,040,000 = 60,000
*105 is FV dividends-on
Dividend Income 55,000
Retained Earnings 55,000
Dividends accrued last year.
Dividend Income 20,000
Investment in Ivan 20,000
Dividends included in the purchase price
of March 5 acquisition, acquired
dividends-on. 4,000 x 5 = 20,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
65
Investment in Adams
Dividend Income
Property dividends should be recorded
at fair value
9,000
9,000
Investments in Ivan 50,000
Unrealized Gain/Loss on Equity Investments
- OCI
50,000
Selling price P550,000
Previous carrying value =
fair value on January 1
5,000 x 100 500,000
Unrealized gain – OCI P 50,000
*Unrealized Gain/Loss on Equity Investments – OCI 110,000
Retained Earnings 110,000
3,000 (110 – 80) + 2,000 (110-100) =110,000
Investment in Ivan 80,000
Unrealized Gain/Loss on Equity Investments
- OCI
80,000
Selling price = FV 2,000 x 140 = 280,000
Previous CV = FV, Jan. 1 = 200,000
Unrealized Gain 80,000
Miscellaneous Receivables 280,000
Investment in Ivan (2,000 x 140) 280,000
*Unrealized Gain/Loss on Equity Investments - OCI 80,000
Retained Earnings 80,000
2,000 ( 140 – 100) = 30,000
Investments in Ivan 276,000
Unrealized Gain/Loss on Equity Investments
- OCI
276,000
FV, 12/31/15 = 8,000 x 142 = 1,136,000
Previous CV :
Old = FV, Jan. 1
= 4,000 x 100 = 400,000
New=4,000 x 115 = 460,000 860,000
Unrealized Gain – OCI 276,000
Investments in Adams 1,500
Unrealized Gain/Loss on Equity
Investments – OCI (17 – 16) x 1,500
500
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
66
Note to the Teacher: At the date of sale, the investments at fair value through other comprehensive income are
adjusted to fair value (presumed to be equal to the selling price on the date of sale). Thus, no gain or loss on sale is
recognized in profit or loss. The entry transferring the cumulative unrealized gain or loss (equity account) to the
retained earnings account is optional.
Problem 5 White Corporation
Financial Assets at FV through Profit or Loss
Red Corp Preference Red Corp. Ordinary Blue Ordinary Yellow Ordinary
Shares Peso amt Shares Peso amt Shares Peso amt Shares Peso amt
1/1/15 1,000 450,000 6,000 650,000 2,000 550,000
1/17 (2,500) (270,833)
2/15 200
6/01 (500) (125,000)
10/01 (500) (225,000) 1,500 240,000
Before adj. 500 225,000 1,500 240,000 3,500 379,167 1,700 425,000
Adj to FV 5,500
5,583 (34,000)
MV 12/31 500 230,000 1,500 240,000 3,500 385,000 1,700 391,000
Non-Current Investments
Investment in Associate – Green Company
Acquisition cost P16,000,000
Dividends received 100,000 x P0.50 x 4 (1,000,000)
Income from associate 25% x P10,000,000 2,500,000
Investment in Associate , 12/31/2012 P17,500,000
Gains and losses
On sale of Blue on January 17
Selling price P325,000
Carrying value (P65,000 x 2,500/6,000 270,833
Gain on sale P 54,167
On sale of Yellow
Selling price 500 x P210 P105,000
Carrying value (P550,000 x 500/2200) 125,000
Loss on sale P 20,000
On conversion of Red Preference to Red Ordinary
Market value 1,500 x P160 P240,000
Carrying value P450,000 x 500/1000 225,000
Gain on exchange P 7,500
Dividend Income
On Red preference
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
67
April 6 1,000 x 10% x P200 x 1/2 P10,000
Oct, 6 1,000 x 10% x P200 x 1/2 10,000
On Blue ordinary
June 30 3,500 x P5 17,500
P37,500
Unrealized gains on FVPL (see above working papaer)
P5,500 + 583 – 5,100 = P 983
Income from Associate (Green Company)
25% x P10,000,000 P 2,500,000
Problem 6 Epson Company
(a) Interest Revenue for 2014
P400,000 x 9% x 8/12 = P24,000
Interest Revenue for 2015
P400,000 x 9% x 9/12 P27,000
P300,000 x 9% x 2/12 4,500
P180,000 x 9% x 1/12 1,350
Total for 2014 P 32,850
(b) Unrealized Gains and Losses:
2016: Fair value 12/31/15 107% x 400,000 P428,000
Purchase price
440,000 – (400,000 x 9% x 4/12) 428,000
Unrealized gain P 0
2017: Debt Investments
Fair value 12/31/17 P180,000 x 108% P194,400
Fair value 12/31/16 180,000 x 107% 192,600
Unrealized Gain P 1,800
Equity Investments:
Fair value, 12/31/17 1,000 x 143 P143,000
Initial cost 1,000 x 140 140,000
Unrealized Gain P 3,000
(c) Gains and Losses on Disposal
2015: Oct 1 Proceeds P109,000
Accrued interest
100,000 x 9% x 3/12 ( 2,250)
Selling price P106,750
Carrying value P100,000 x 107% 107,000
Loss on sale P 250
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
68
Nov. 30 Fair value of the ordinary sharesP140,000
Carrying value of bond investment
120,000 x 107% 128,400
Gain on exchange P 11,600
Net gain on sale for the year P11,350
(d) Carrying value of the investment
December 31, 2016= P400,000 x 107% P428,000
December 31, 2017 : P180,000 x 108% P194,400
+ 1,000 x 143 143,000
Total carrying value of debt and equity inv. P 337,400
Problem 7
Total amount paid P547,778
Accrued interest 500,000 x 10% x 2/12 8,333
Initial measurement P539,445
Amortization Table
Date Nominal Interest(5%) Effective Interest (4%) Premium
Amortization
Carrying Value, end
08/1/16 P539,445
11/30/16 P16,667 P14,385 P2,282 537,163
05/31/17 25,000 21,487 3,513 533,650
11/30/17 25,000 21,346 3,654 529,996
05/31/18 25,000 21,200 3,800 526,196
(a) Interest Revenue:
2016: P14,385 + 1/6(P21,487) = P17,966
2017: 5/6(21,487) + 21,346 + 1/6(21,200) = P42,785
(b) Interest Receivable, December 31, 2015
P500,000 x 8% x 1/12 = P4,167
(c) Carrying value
Dec. 31, 2016: P537,163 – 1/6(3,513) = P536,577
Dec. 31, 2017: P529,996 – 1/6(3,800) = P529,363
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
69
Problem 8
Entries that should have been made:
Jan. 21 Investment in Pearl 510,000
Interest Income 6,250
Cash 516,250
Mar. 1 Cash 106,000
Investment in Pearl (510,000 x 100/500) 102,000
Interest Income (100,000 x 9% x 3/12) 2,250
Gain (Loss) on Sale of Trading Securities 1,750
June 1 Cash 18,000
Interest Income 18,000
Nov. 1 Cash 104,750
Gain (Loss) on Sale of Trading Securities 1,000
Investment in Pearl (510,000 x 100/500) 102,000
Interest Income (100,000 x 9% x 5/12) 3,750
Dec. 1 Cash 13,500
Interest Income 13,500
300,000 x 9% x 6/12
31 Interest Receivable 6,750
Interest Income 6,750
300,000 x 9% x 1/12
31 Investment in Pearl 3,000
Unrealized Gains on Trading Securities 3,000
(300,000 x 1.03) – 306,000
Audit Adjustments
Interest Income 6,250
Investment in Pearl 6,250
Investment in Pearl 4,000
Interest Income 2,250
Gain on Sale of TS 1,750
Investment in Pearl 18,000
Interest Income 18,000
Investment in Pearl 2,750
Loss on Sale of TS 1,000
Interest Income 3,750
Investment in Pearl 13,500
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
70
Interest Income 13,500
Dividend Receivable 6,750
Interest Income 6,750
Investment in Pearl 3,000
Unrealized Gains on TS 3,000
Problem 9
Amortization Table
Date Nominal Interest(3%) Effective Interest (4%) Discount
Amortization
Carrying Value, end
January 2, 2017 P1,815,000
June 30, 2017 P60,000 P72,600 P12,600 1,827,600
December 31, 2017 60,000 73,104 13,104 1,840,704
(a) Entries that should have been made:
Jan. 2 Debt Investments – Fulfilled Dreams 6% Bonds 1,815,000
Cash 1,815,000
June 30 Debt Investments – Fulfilled Dreams 6% Bonds 12,600
Cash 60,000
Interest Revenue 72,600
Dec. 31 Debt Investments – Fulfilled Dreams 6% Bonds 13,104
Cash 60,000
Interest Revenue 73,104
31 Debt Investments – Fulfilled Dreams 9% Bonds 109,296
Unrealized Gains/Losses on Debt Investments 109,296
*97.5% x 2,000,000 = 1,950,000
Amortized Cost 1,840,704
Unrealized gain P 109,296
*FV = 195,000/200,000 = 97.5%
Dec. 31 Cash 195,000
Unrealized Gains/Losses on Debt Investments 10,930
Debt Investments – Fulfilled Dreams 6% Bonds 195,000
Gain on Sale of Debt Investments 10,930
(b) Audit Adjustments
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
71
Debt Investments- Fulfilled Dreams 6% Bonds 145,704
Interest Revenue 145,704
Debt Investments- Fulfilled Dreams 6% Bonds 109,296
Unrealized Gains/Losses on Debt Investments 109,296
Unrealized Gains/Losses on Debt Investments 10,930
Gain on Sale of Debt Investments 10,930
SUPPLY THE REQUIRED INFORMATION
1. P12 per share
2. 2,500
3. P0
4. 6,500
5. 350
6. 15,800
7. 55,200
8. 1,600
9. 376,400
10. 3,776,400
11. 0
12. 48,279
13. 2,097,928
14. 365,668
15. 360,000
16. 160,000
17. 35,000 loss
18. 1,970,000
19. 50,000 gain
20. 0
21. 30,000
22. 0
23. 0
24. 15,000 credit
25. 116,000
26. 0
27. 1,816,000
28. 3,333
29. 1,000 gain
30. 500 gain
31. 200 gain
32. 10,600
33. 77,100
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
72
34. 55,000
35. 4,125
36. 111,000
37. 2,293,500
38. 316,500
39. 31,500
40. 4,125
41. 136,300
42. 0
43. 52,900
44. 7,500
45. 758,600
46. 3,133
Final Answers Computations
1. P36,000 or P12 per share
2. P0 Net selling price: (1,000 x 8) - 500 = P7,500
Cost of shares sold P 30,000 x 1,000/6,000 5,000
Gain on sale P 2,500
This gain is not taken to P and L (no recycling).
3. P0 Selling price 1,000 x 8.50 P8,500
Cost of shares sold 5.000
Unrealized Gain taken to OCI P3,500
None of the gain or loss shall be transferred to P and L.
4. P6,500 Property dividends 5,000/5 x P2.50 P2,500
Cash dividends 5,000 x 0.80 4,000
Total dividend income P6,500
5. P350 500 (3.20 – 2.50) P 350
6. P15,800
OCI- Unrealized Gain or Loss on Equity Investments
01-01 Balance P6,000
03-17 1,000/6,000 x P6,000 (1,000)
11-30 1,000/6,000 x 6,000 (1,000)
12-31 Fair value
6,000 x P 9.20 = P55,200
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
73
Cost (See WP below) 35,400
Cumulative Unrealized Gain 19,800
Balance before adjustment to FV
6,000 – 1,000 – 1,000 4,000
Unrealized gain this year in OCI 15,800 (ITEM #6)
Cumulative balance in equity, Dec. 31 P19,800
7. P55,200 6,000 x 9.20 P55,200
8. P1,600 500 X 3.20 P 1,600
Equity Investments at FV through OCI– Y Company Ordinary
Date Shares Total Cost Gain(loss) Dividend Income
01-01-17 3,000 P30,000
01-12-17 3,000
03-17-17 (1,000) (5,000) P2,500
06-30-17 1,000 x P2.50 = P2,500
10-01-17 2,000 15,400*
10-20-17 5,000 x 0.80= 4,000
11-30-17 (1,000) (5,000) 3,500
12-31-17 Balances
6,000
P35,400
P6,000
P6,500
2,000 (8.50 - .80 dividends on) = 15,400
FVPL – B Co. Ordinary
Date Shares Total CV Gain(loss) Dividend Income
06-30-14 1,000 P2,500
9-10-14 (500) (1,250) 150
12-31-14 UGL
500 x (3.20 – 2.50)
350
12-31-14 balances 500 shares P1,600
Unrealized Gain or Loss on Equity Investments at Fair Value through Other Comprehensive Income
01/01/17 Balance P6,000
03-17 1,000/6,000 x P6,000 (1,000)
11-30 1,000/6,000 x 6,000 (1,000)
12-31 Fair value
6,000 x P 9.20 = P55,200
Cost 35,400
Cumulative Unrealized Gain 19,800
Balance before adjustment to FV
6,000 – 1,000 – 1,000 4,000
Unrealized gain this year in OCI 15,800
Cumulative balance in equity, Dec. 31 P19,800
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
74
Items 9 through 14:
Kristine Company
Interest Date
9%Interest Paid
10%Effective
Interest
Discount
Amortization
Amortized Cost,
End
Jan. 2, 2016 P3,760,000
June 30, 2016 P180,000 188,000 P8,000 3,768,000
Dec. 31, 2016 P180,000 188,400 8,400 3,776,400
June 30, 2017 P180,000 188,820 8,820 3,785,220
Dec. 31, 2017 P180,000 189,261 9,261 3,794,481
June 30, 2018 P180,000 189,724 9,724 3,804,205
Dec. 31, 2018 P180,000 190,210 10,210 3,814,415
Final Answers Computations
9. P376,400 P188,000 + 188,400 = P376,400
10. P3,776,400
11. P0
12. P48,279 Selling price on November 30, 2014 (1.8M x 98%) P1,764,000
Carrying amount
June 30, 2014 3,804,205 x 1.8/4 = P1,711,892
Amortization June 30 – Nov 30
10,210 x 1.8/4 x 5/6 = 3,829 1,715,721
Gain on sale on November 30 P 48,279
13. P2,097,928 P2,200,000/4,000,000 x 3,814,415 = P2,097,928
The reclassification shall be treated in the first reporting period
subsequent to the change in the business model.
14. P365,668 Interest income for 2018
January 1 to June 30 P189,724
July 1 to November 30 190,210 x 5/6 = 158,508
December 1 to 31 P190,210 x 2.2/4 x 1/6 17,436
Total interest income P 365,668
Items 15 through 19
15. P360,000 P4,000,000 x 9% = P360,000
16. P160,000 (98% x P4,000,000) – 3,760,000 = P160,000
17. P35,000 loss
Total proceeds P1,960,000
Accrued interest 2,000,000 x 9% x 5/12 ( 75,000)
Selling price P1,885,000
CV 96% x 2,000,000 1,920,000
Loss on sale of FVPL P 35,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
75
18. P1,970,000 2M x .985 = P1,970,000
19. P50,000
Fair value, 12/31/18 P1,970,000
Fair value, 12/31/17 2,000,000 x .96 1,920,000
Unrealized gain for 2018 P 50,000
Items 20 through 22
Power Cast Company
Cost of investment P1,800,000
Underlying equity 20% x P6,000,000 1,200,000
Excess of cost P 600,000
Undervaluation in land 20% x 750,000 (150,000)
Undervaluation in equipment 20% x 200,000 (40,000)
Undervaluation in inventory 20% x 30,000 ( 6,000)
Goodwill P 404,000_
25. P116,000 Income from Associate
Initial share (800,000 – 160,000) x 20% P128,000
Amortization
Depreciation on Equipment 40,000/5 x 9/12 ( 6,000)
Inventory ( 6,000)
Income from Associate P116,000
26. P0 Dividends received from associate should be credited to the Investment account.
27. P1,816,000 Cost of investment P1,800,000
Dividends received ( 100,000)
Income from Associate 116,000
Carrying value of investment P1,816,000
Items 23 through 28
Boracay Co. ordinary Bohol Company ordinary 8% treasury bonds
# of shares Amount # of shares Amount Face Amount
1/1/12 bal. 1,000 P 25,000 3,000 P18,000 P50,000 P50,000
1/31 (200) ( 5,000)
6/30 600
7/8 (300) (1,500)
8/1 (20,000) (20,000)
12/31 bal.
before Fair
Value adj.
800
P20,000
3,300
P16,500
30,000
P30,000
Adj to FV 4,000 6,600
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
76
12/31 per
audit
800 shares
P24,000
3,300
P23,100
P30,000
P30,000
23. P3,333 Interest Income
January 1 to July 31 P50,000 x 8% x 7/12 = P2,333
August 1 to Dec. 31 P30,000 x 8% x 5?12 = 1,000
Total interest income for 2017 P3,333
24. P1,000 gain Net selling price P6,000
Carrying value P25,000 x 200/1,000 (5,000)
Gain on sale P 1,000
25. P18,300 gain Selling price P 2,000
Carrying value P18,000 x 300/3,600 ( 1,500)
Gain on sale P 500
26. P200 gain Cash received P21,000
Interest for 6 months (20,000 x 8% x 6/12) ( 800)
Selling price P20,200
Carrying value 20,000
Gain on sale P 200
27. P10,600 See above worksheet: P4,000 + P6,600 P10,600
28. P77,100 See above worksheet: P24,000 PP23,100 + P30,000 = P77,100
Items 29 through 34
29. P55,000 P1,040,000 – P985,000 = P55,000
30. P4,125 From Alaska: 5,500 x P0.75 = P4,125
31. P111,000 P370,000 x 30% = P111,000
32. P2,293,500 Fair value of old 25,000 shares: P1,520,000 x 25,000/50.000 = P760,000
Purchase price of new 50,000 shares 1,520,000
Initial cost of 75,000 shares P2,280,000
Income from associate 111,000
Dividends received (75,000 x 1.30) ( 97,500)
Carrying value, December 31, 2013 P2.293,500
38. P316,500 Alaska 5,500 x 23 P126,500
Bahamas 10,000 x 19 190,000
Total fair value P316,500
33. P31,500 Fair value P316,500
Cost : 125,000 + 160,000 285,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
77
Cumulative balance of UGL P 31,500
34. P115,125 P111,000 + P4,125 = P115,125
Items 35 through 40
Financial Assets at Fair Value through Profit or Loss
Seattle Ordinary Grunge Preference Cobain Ordinary
Shares Amount Shares Amount Shares Amount
1/1/17 2,000 P28,400 1,200 P78,000
20% bonus 400
Sale (400) (4,733)
Purchase 1,500 P31,500
12/31 bal.
before adj to
FV
2,000
P23,667
1,200
P78,000
1,500
P31,500
Unrealized
Gains (Losses)
4,333
(1,200)
Per audit 2,000 P28,000 1,200 P76,800 1,500 P31,500
41. P136,300 28,000 + 76,800 + 31,500 = 136,300
42. P0 Cash dividend from Grunge should have been recorded as income in 2011.
43. P52,900 Cost (800 x P50) + P5,400 = P45,400
Share in profit 50,000 x 20% x 9/12 7,500
Investment in Associate, Dec. 31 P52,900
44. P7,500 50,000 x 20% x 9/12 = P 7,500
45. 758,600 764,000 – 5,400 = P758,600
46. 3,133 See above worksheet : 4,333 – 1,200 P 3,133
A-MAGS CORPORATION
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
78
Selling and Administrative Expenses 2,000
Advances to Officers and Employees 1,500
Cash – Petty cash fund 3,500
Other Assets 130,000
Cash in Bank 130,000
Cash in Bank – PCI Bank – Current 5,000
Accounts Payable 5,000
Cash in Bank 45,000
Other Current Liabilities (Bank Overdraft) 45,000
Accounts Receivable – Past Due 20,000
Cash in Bank – PCI Bank 20,000
Accounts Receivable 15,000
Customer Credit Balances 15,000
Allowance for Doubtful Accounts 10,250
Accounts Receivable – Past due 10,250
Advances to Officers and Employees 3,500
Accounts Receivable 3,500
Sales 30,000
Discount on Notes Receivable 30,000
Notes Receivable – Non-Current 120,000
Interest Income 24,337
Notes Receivable 120,000
Discount on Notes Receivable – Non- current 24,337
Discount on Notes Receivable (30,000 x 5/12) 12,500
Discount on Notes Receivable – Non-current (95,663 x 12% x 10/12) 9,566
Interest Income 22,066
Interest Receivable 4,057
Interest Income 4,057
40,000 x 16% x 36/360 = 640
75,000 x 20% x 82/360 = 3,417
Total 4,057
Inventories 22,500
Accounts Payable 22,500
Sales 80,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
79
Advances from Customers 24,000
Accounts Receivable – Not yet due 56,000
Accounts Receivable – not yet due (182,000 x 60% x 125%) 136,500
Sales 136,500
Inventories ( 182,000 x 40%) 72,800
Cost of Sales 72,800
Selling and Administrative Expenses 5,460
Accrued Expenses 182,000 x 60% x 5%) 5,460
Other Current Assets (80% x 28,000) 22,400
Loss due to Flood 5,600
Inventories 28,000
Equipment 15,000
Cost of sales 15,000
Selling and Administrative Expenses 1,500
Accumulated Depreciation (15,000/5 x 6/12) 1,500
AR – Total AR – Not due
Per client P424,000 P187,000
Adjustments 20,000
15,000
(10,250)
(3,500)
(56,000) (56,000)
136,500 136,500
P525,750 P267,500
Operating Expenses 363
Allowance for Doubtful Accounts 363
Total Accounts Receivable P525,750
Accounts Receivable not yet due (267,500)
Accounts Receivable past due P258,250
Provision rate for past due accounts 5%
Required allowance P 12,913
Existing allowance ( 22,800 – 10,250) 12,550
Additional doubtful accounts expense P 363
Investments in Associate – Johnny Walker 280,000
Equity Investments – FVPL 89,000
Investment in Equity Securities 369,000
Investment in Associate – Johnny Walker 150,000
Income from Associate 150,000
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
80
Dividend Income 12,000
Investments in Equity Securities 12,000
Investment in Equity Securities 16,800
Equity Investments – FV (43,200 x 400/1,200) 14,400
Gain on Sale of Equity Investments 2,400
Treasury Stock 45,000
Investments in Equity Securities 45,000
Dividend Income 30,000
Investment in Associate 30,000
Equity Investments – FVPL 18,000
Unrealized Gain on FVPL 18,000
December 31 Fair values:
San Miguel 500 x 50 P 25,000
Asia Brewery 800 x 38 30,400
La Tondena 1,200 x 31 37,200 P92,600
Previous carrying value
San Miguel P28,000
Asia Brewery 43,200 – 14,400 28,800
La Tondena 17,800 74,600
Unrealized gain P 18,000
1. P491,500
2. P92,600
3. P525,750
4. P12,913
5. P6,500
6. P295,000
7. P12,500
8. P4,057
9. P5,000
10. P1,347,300
11. P5,500
12. P0
13. P400,000
14. P213,500
15. P257,629
16. P399,500
17. P275,000
18. P15,000
19. P24,000
20. P153,450
SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS
81
21. P122,960
22. P52,500
23. P490,873
24. P55,000
25. P0
26. P4,677,163
27. P3,682,361
28. P643,126
29. P9,000
30. P35,923
31. P18,000
32. P14,400
33. P0
34. P5,600
35. P150,000
36. 157,980
37. P368,619
38. 363
39. 9,566
40. 5612,724
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
81
MULTIPLE CHOICE - THEORIES
1. B 2. B 3. A 4. B 5. D 6. A 7. A 8. C 9. D 10. A
Problem 1 (Pretzy/ Pine Company)
Correct cost Recorded Cost Difference Land 25.8M x 8.4/28 P7,740,000 P7,000,000 P 740,000 Building 25.8M x 14/28 12,900,000 9,000,000 3,900,000 Equipment 25.8M x 5.6/28 5,160,000 4,000,000 1,160,000 Adjusting Entries: 1. Land 740,000 Building 3,900,000 Equipment 1,160,000 Other Operating Expenses 5,000,000 Salaries and Commission Expense 800,000 2. Depreciation Expense – Building 130,000
Depreciation Expense – Equipment 77,333 Accumulated Depreciation – Building 116,667 Accumulated Depreciation – Equipment 77,333 5% x 3,900,000 x 8/1 2 = P130,000 10% x 1,160,000 x 8/12 = 77,333 Problem 2 (Gay Company)
Discount on Notes Payable (5% x 850,000) 42,500 Equipment 42,500 Problem 3 Dionella Company
a. Machinery Machinery Tools Raw materials used in construction P176,000 – 4,000 P172,000 Labor 50,000 Cost of installation 10,000 Materials spoiled in trial runs 5,000 Incremental overhead due to machine construction 25,000 Decommissioning cost 40,000 x .56447 22,579 Purchase of machine tools P15,000 Correct Cost P284,579 P15,000 b. Adjusting entries: Machinery 1,579 Loss on Disposal of Old Machine 3,000 Purchase Discounts 4,000 Profit on Construction 24,000 Machinery Tools 15,000 Accumulated Depreciation – Machinery (old) 120,000 Factory Overhead Control 25,000 Provision for Machine Dismantling 22,579 Machinery (old) 120,000 Depreciation Expense – Machinery 158 Accumulated Depreciation – Machinery 158 (284,579 x 10%) – 28,300 = 158
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
82
Problem 6 Flames Company
Accumulated Depreciation – Machine (40,000/10 x 6) 24,000 Loss on Replacement of Machine Parts 16,000 Machinery 40,000 Machinery 50,000 Repairs Expense 50,000 Accumulated Depreciation 5,750 Depreciation Expense 5,750 Cost P200,000 Removed part ( 40,000) Replacement 50,000 Revised gross cost P210,000 Accumulated depreciation, 12/31/11 200,000/10 x 6 120,000 Removed accumulated depreciation ( 24,000) (96,000)
Carrying value after overhaul P114,000
2017 depreciation 114000/(10-6+4) P 14,240 Recorded depreciaition 20,000 Adjustment P 5,750 Problem 5 Ethan Corporation
Land Building Others Organization Fees P50,000 Org’n Exp. Land site and old building P8,150,000 Corporate organization costs 30,000 Org’n Exp Title clearance fees 25,000 Cost of razing old building 220,000 Sale of scrap ( 25,000) Salaries 300,000 Salaries Exp Stock bonus to corporate promoters 100,000 Org’n Exp. (or –
APIC) Real estate tax 25,000 Taxes Expense Cost of construction P18,000,000 Total correct cost P8,175,000 P18,195,000
Adjusting Entries Land 8,175,000 Building 18,195,000 Organization Expenses 180,000 Taxes Expense 25,000 Miscellaneous Revenues 25,000 Administrative Salaries 300,000 Land, Buildings and Equipment 26,900,000
(NOTE TO THE TEACHER: The Philippine Interpretations Committee’s Interpretation on the demolition cost of the building is applied. The net demolition cost is capitalized and charged to the building account, since demolition is preparatory to construction of the building.
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
83
Problem 6 Electro Corporation
Correct cost: Down payment P50,000 PV of future payments P100,000 x 3.6048 360,480 Total cost P410,480 Correct Depreciation 410,480 / 15 x ½ P13,683 Adjusting Entries: Discount on Notes Payable (500,000 – 360,480) 139,520 Machine 139,520 Interest Expense 36,048 Discount on Notes Payable 36,048 360,480 x 12% x 10/12 Accumulated Depreciation 4,650 Depreciation Expense 4,650 13,683 – 18,333 Problem 7 Silver Company
Equipment Accumulated Depreciation Balance, 1/01/17 P 750,000 P300,000 6/01/17 Purchase of Asset 16 P200,000 + 7,000 207,000 10/01/17 Sold Asset 10 ( 150,000) 150,000 x 10% x 5 ( 75,000) Depreciation for 2015 807,000 x 10% ___ __ 80,700 Balances, December 31, 2017 P807,000 P 305,700 Adjusting Entries: Accumulated Depreciation 75,000 Loss on Sale of Equipment 57,000 Equipment 8,000 – (1,000 - 400) 132,000 Net proceeds P20,000 – 2,000 P 18,000 Carrying value P150,000 – 75,000 75,000 Loss on sale P 57,000 Equipment 7,000 Repairs and Maintenance 4,000 Freight In 3,000 Accumulated Depreciation – Equipment 12,500 Depreciation Expense – Equipment 12,500 80,700 – 93,200
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
84
Problem 8 Conquer Company
Equipment Accumulated Depreciation January 1 Balances P 500,000 P 225,000 May 1 Acquisition (P160,000 x .98)+5,000 161,800 Oct. 1 Sale (100,000) 100,000 x 10% x 4 ( 40,000) Dec. 31 Depreciation (500,000 – 100,000) x 10% P40,000 100,000 x 10% x ½ 5,000 161,800 x 10% x ½ 8,090 ___ 53,090 December 31, 2017 Balances P561,800 P 238,090 Adjusting Entries Equipment 1,800 Discounts Lost 3,200 Repairs and Maintenance 5,000 Loss on Sale of Equipment 30,000 Accumulated Depreciation 40,000 Equipment 70,000 Accumulated Depreciation 9,910 Depreciation Expense 9,910 63,000 – 53,090
Problem 9 Berol Giant Corporation Note that IAS 17 is still applied in the solution, as IFRS 16 Leasing shall apply
effective 2019. Audit Adjusting Entries Rent Expense (50,000 x 9/12) 375,000 Prepaid Rent 125,000 Finance Lease Liability 3,540,000 Machinery and Equipment 4,040,000 Profit on Construction 150,000 Building 150,000 Land Improvement 500,000 Land 500,000 Accumulated Depreciation – Machinery and Equipment 2,880,000 Gain on Sale of Machinery 680,000 Machinery and Equipment 4,800,000 – 2,600,000 2,200,000 Cost P4,800,000 Accumulated depreciation 480,000/10 x 6 2,880,000 Carrying value P1,920,000 Proceeds 2,600,000 Gain on Sale of M and E P 680,000 Land 6,000,000 Building 24,000,000 Unearned Income from Government Grant 30,000,000 Depreciation Expense – Building 511,667 Accumulated Depreciation – Building 511,667
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
85
Correct depreciation Old P12,000,000/ 25 P480,000 Improvement 1,600,000/12 x ½ 66,667 Donated 24,000,000/25 x ½ 480,000 Correct depreciation P1,026,667 Per client 515,000 Adjustment P 511,667 Unearned Income from Government Grant 600,000 Income from Government Grant 600,000 30,000,000/25 x ½ Accumulated Depreciation – Machinery and Equipment 312,000 Depreciation Expense – Machinery and Equipment 312,000 Correct depreciation – Machinery and Equipment (38,500,000 – 4,800,000)/10 = P3,370,000 4,800,000 / 10 x ½ 240,000 Total P3,610,000 Per client 3,922,000 Adjustment P 312,000 Depreciation Expense – Land Improvements 25,000 Accumulated Depreciation – Land Improvements 25,000 500,000 / 10 x ½ = 25,000 b. Adjusted balances: 1. Land P48,250,000 2. Land Improvements 500,000 3. Accumulated Depreciation – Land Improvements 25,000 4. Buildings 37,600,000 5. Accumulated Depreciation – Buildings 7,026,667 6. Machinery and Equipment 33,700,000 7. Accumulated Depreciation – Machinery and Equipment 18,055,000 8. Unearned Income from Government Grant 29,400,000 9. Depreciation Expense – Land Improvements 25,000 10. Depreciation Expense – Buildings 1,026,667 11. Depreciation Expense – Machinery and Equipment 3,610,000 12. Amortized Income from Government Grant 600,000 Problem 10 Malabon Company
Schedule of Depreciation Expense
A. Building Method – 150% declining balance Depreciation rate = 1.5/25 = 6% Old (P12,000,000 – P2,654,000) x 6% P560,760 New P12,800,000 x 6% 768,000 2017 Depreciation – Building P1,328,760 B. Machinery and Equipment Method – straight-line Useful life – 10 years Old including scrapped in December P7,750,000/10 P775,000 New P290,000/10 x 6/12 14,500 2017 Depreciation – Machinery P789,500
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
86
C. Automobiles and Trucks Method - 150% declining balance Depreciation rate = 1.5/5 = 30% Old (not sold) (P13,200,000 – P8,620,000) = P4,580,000 P4,580,000 – (P810,000 + 235,200) x 30% P1,060,440 Sold 235,200 New P650,000 x 30% x 4/12 65,000 2017 Depreciation – Automobiles and Trucks P1,360,640 D. Leasehold Improvements Method – straight line Useful life – 8 years Lease term : original 6 years upon completion of the improvement Remaining useful life = 8 – 3 = 5 years Remaining lease term = 6 – 3 + 4 = 7 years 2017 Depreciation: (P2,210,000 – 1,105,000) / 5 = P 221,000 E. Land Improvements Method – straight-line Useful life – 12 years 2017 Depreciation: P1,920,000 / 12 x 9/12 P 120,000
b. Adjusted Balances: 1. Land P16,200,000 2. Land Improvements 1,920,000 3. Accumulated Depreciation – Land Improvements 120,000 4. Building 24,800,000 5. Accumulated Depreciation – Buildings 3,892,760 6. Machinery and Equipment 7,870,000 7. Accumulated Depreciation – Machinery and Equipment 2,611,250 8. Automobiles and Trucks 5,258,750 9. Accumulated Depreciation – Automobiles and Trucks 3,059,360 10. Leasehold Improvements 2,210,000 11. Accumulated Depreciation – Leasehold Improvements 1,326,000 Problem 11
Adjusting Entries
a. Depreciation Expense – Machine A 15,750 Accumulated Depreciation 15,750 Cost P105,000 Acc. Depreciation 1/1/12 105,000 / 12 x 3 ( 26,250) Carrying amount 1/1/12 P 78,750 78,750 / 5 = P 15,750 b. Depreciation Expense – Machine B 40,000 Accumulated Depreciation – Machine B 40,000 P240,000 / 6 = P 40,000 Impairment Loss 15,000 Accumulated Depreciation – Machine B 15,000 Carrying value 12/31/17 P240,000 x 3.5/6 P140,000 Recoverable amount 125,000 Impairment loss P 15,000
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c. Depreciation Expense – Building A 590,625 Accumulated Depreciation – Building A 590,625 Carrying value 1/1/17 P6,300,000 x 15/20 = P4,725,000 2017 Depreciation = P4,725,000 x 15/120 = P 590,625 d. Retained Earnings 175,000 Accumulated Depreciation – Building B 175,000 Carrying value 12/31/16 P5,250,000 x 7/10 = P3,675,000 Recoverable amount 3,500,000 Impairment loss in 2016 P 175,000 Depreciation Expense – Building B 500,000 Accumulated Depreciation – Building B 500,000 3,500,000 / 7 = P 500,000 Accumulated Depreciation – Building B 100,000 Gain - Recovery of Previous Impairment 100,000 Carrying value, 12/31/17 3,500,000 – 500,000 = P3,000,000 Recoverable amount 3,100,000 Increase in value P 100,000 Limit on recovery 175,000 x 6/7 P 150,000
e. Depreciation Expense – Building 300,000
Accumulated Depreciation – Building 300,000 12,000,000 / 20 x 6/12
Investment Property – Land 8,000,000 Investment Property – Building 12,000,000 Accumulated Depreciation – Building (PPE) (12M/20 x 4.5)2,700,000 Land 6,500,000 Building 12,000,000 Revaluation Surplus 4,200,000 Investment Property – Land 500,000 Investment Property – Building 400,000 Fair Value Gain on Investment Property 900,000
Problem 12 Gotham Company
As of December 31, 2016 Based on Cost Based on
Revalued Amt. Balance of Revaluation Surplus
Land P15,000,000 P20,000,000 P5,000,000 Building, net of accumulated depreciation
14,000,000
20,000,000
6,000,000
(a) Depreciation expense on the building for the year 2017: P20,000,000 / 20 years = P1,000,000 (b) Revaluation surplus transferred to Retained Earnings = P6,000,000 / 20 = P300,000 (c) Balance of revaluation surplus at December 31, 2017 statement of financial position =
Based on Previous Revaluation
Based on New Revalued Amt.
Difference
Land P20,000,000 P22,000,000 P2,000,000 Building, net of accumulated
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depreciation 19,000,000 21,850,000 2,850,000
Balance of Revaluation Surplus at December 31, 2017 statement of financial position: 12/31/16 Balance Realized in 2017 New Revaluation 12/31/17 Final
Pertaining to land P5,000,000 ---------- P2,000,000 P7,000,000 Pertaining to building 6,000,000 (300,000) 2,850,000 8,550,000 Total P11,000,000 P(300,000) P4,850,000 P15,550,000
Problem 13 (Ecstacy Company)
Adjusting Entries Franchise 420,000 Prepaid Rent 280,000 Retained Earnings (54,000 + 150,000) 204,000 Patents 750,000 Research and Development Expense (1,000,000 – 90,000) 910,000 Formula (or Patent) 90,000 Legal Fees 80,000 Intangible Assets 2,734,000 Retained Earnings (3/24 x 280,000) 35,000 Rent Expense (1/2 x 280,000) 140,000 Prepaid Rent 175,000 Retained Earnings (6/60 x 420,000) 42,000 Amortization Expense – Franchise 84,000 Accumulated Amortization – Franchise 126,000
Amortization Expense – Patents 62,500
Accumulated Amortization – Patents 62,500 750,000 /10 x 10/12
Problem 14 (Cheryl Corporation) Adjusting Entries Research and Development Expense 940,000 Patents 75,000 Rent Expense (91,000 x 5/7) 110,000 Prepaid Rent (91,000 – 65,000) 130,000 General and Administrative Expense 36,000 Discount on Bonds Payable 84,000 Advertising and Promotions Expenses 90,000 Other Operating Expenses 240,000 Share Premium – Ordinary Share 250,000 Intangible Assets 1,455,000 Amortization of Patents 7,500 Accumulated Amortization – Patents 7,500
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Problem 15 (Kookabar Enterprises) Retained Earnings 525,000 Patents 525,000 750,000 x 7/10 = 525,000 Patents 4,975,000 Accumulated Amortization – Patents 4,975,000 To reinstate the gross cost of the patents and related Accumulated Amortization (5,500,000 – 525,000) ÷ 7/14 Total cost is therefore P9,950,000 Accumulated amortization = 9,950,000 x 7/14 = P4,975,000 Cost of Goods Sold 910,714 Accumulated Amortization – Patents 910,714 (P2,100,000 – 1,050,000) / 3 years =P 350,000 (P9,95,000 – 2,100,000) / 14 years = 560,714 2017 Amortization P 910,714 Selling and Administrative Expenses 450,000 Franchise Agreement 450,000 Selling and Administrative Expenses 100,000 Accumulated Amortization – Franchise Agreement 100,000 50,000 /5 = 10,000 Retained Earnings 440,000 Organization Costs 440,000 Retained Earnings (45,000 + 100,000) 145,000 Goodwill 145,000 Problem 16 (Yuka Sato Corporation)
Equipment 34,700 Patents 34,700 Cost of Goods Sold 5,500 Accumulated Amortization – Patents 5,500 93,500 / 17 = 5,500 Impairment Loss – Licensing Agreement No. 1 42,000 Accumulated Impairment – Licensing Agreement 1 42,000 70% x 60,000 = 42,000 Licensing Agreement No. 2 4,000 Unearned Revenue 4,000 Selling and Administrative Expenses 6,000 Accumulated Amortization – Licensing Agreement No. 2 6,000 60,000 / 10 = 6,000 Retained Earnings 30,000 Goodwill 30,000 Equipment 15,000 Miscellaneous Receivables 6,100 Leasehold Improvements 21,100
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Retained Earnings 1,500 Cost of Goods Sold 1,500 Accumulated Depreciation – Leasehold Improvements 3,000 15,000/ 10 = 1,500 Retained Earnings 32,000 Organization Costs 32,000
Problem 17 Genuine Company (1) Audit Adjusting Entries
Patents 200,000 Accumulated Amortization – Patents 200,000 Professional Fees and Other Legal Expenses 120,000 Patents 120,000 Amortization of Patents 100,000 Accumulated Amortization – Patents 100,000 Impairment Loss – Patents 169,288 Accumulated Amortization – Patents 169,288 Carrying value before impairment P700,000 Value in use = 140,000 x 3.7908 = 530,712 Impairment loss P169,288
Professional Fees and Other Legal Expenses 70,000 Trademarks 70,000 Amortization of Trademarks (150,000/2) 75,000 Accumulated Amortization – Trademarks 75,000 Discount on Notes Payable 166,020 Franchise 166,020 Face value of the note P800,000 Present value when issued 200,000 x 3.1699 633,980 Initial discount P166,020 Retained Earnings 63,398 Interest Expense 49,738 113,136 Discount on Notes Payable Date Periodic Payment Interest Principal Bal. of Principal 1/1/16 P633,980 12/31/16 P200,000 P63,398 P136,602 497,378 12/31/17 200,000 49,738 150,262 347,116 Franchise 16,602 Retained Earnings 16,602 Franchise 83,398 Accumulated Amortization 83,398
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Amortization of Franchise 83,398 Accumulated Amortization – Franchise 83,398 Correct cost of franchise = 200,000 + 633,980 = 833,980 Recorded amortization ( 10 year life) 100,000 Correct amortization 833,980/10 83,398 Adjustment 16,602 Retained Earnings 40,000 Organization Costs 40,000 Goodwill (285,000/ 19 ) 15,000 Retained Earnings 15,000 Advertising Expense 165,000 Goodwill 165,000 (2.) Adjusted Balances
(a) Gross cost of patents ……………………………………………………………………….P1,000,000 (b) Carrying value of patents, December 31, 2016…………………………………….. 800,000 (c) Amortization of patents for 2017………………………………………………………. 100,000 (d) Impairment loss on patents – 2017…………………………………………………… 169,288 (e) Amortization of patents for the year 2018 = 530,712/5 ……………………….. 106,142 (f) Total expenses relating to the Trademark = 70,000 + (1/2 x 150,000) ………………………………………….……………… 145,000 (g) Correct cost of the franchise……………………………………………………………… 833,980 (h) Interest expense for 2017 relating to the Notes Payable………………………. 49,738 (i) Discount on notes payable, 12/31/17 = 166,020 – 113,136…………………… 52,884 (j) Carrying value of the Franchise, 12/31/17 (833,980 – 166,796)……………… 667,184 (k) Initial cost of goodwill 285,000 ÷ 19/20 ………………………………………… 300,000 (l) Goodwill on December 31, 2017………………………………………………………… 300,000 (m) Net adjustment to Retained Earnings, 1/1/17……………………………………… 71,796 dr.
Problem 18 Amortization of Patents (1,200,000/12) 100,000 Accumulated Amortization – Patents 100,000 Amortization of Copyrights (1,400,000/10) 140,000 Accumulated Amortization – Copyrights 140,000 Amortization of Computer Software (400,000/10 x 6/12) 40,000 Accumulated Amortization – Software 40,000 Share Premium 2,000,000 Intellectual Capital 2,000,000 Retained Earnings 90,000 Amortization of Goodwill 90,000 Accumulated Amortization – Goodwill 180,000
Multiple Choice
1. B 23. B 2. A 24. C 3. C 25. D 4. A 26. D 5. C 27. A 6. B 28. B 7. B 29. A 8. P16,830,000 30. D
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9. P14,499,000 31. B 10. P144,990 32. C 11. D 33. C 12. B 34. C 13. D 35. B 14. D 36. A 15. C 37. B 16. C 38. C 17. B 39. C 18. C 40. B 19. B 41. B 20. C 42. D 21 C 43. A 22 B 44. C 45. D 46. C Supporting computations: 1. B P300,000/10 x 7/12 = P17,500 (300,000 x 6/10) + 36,000 x 5/12 8 11,250 Depreciation expense for 2016 P 28,750 2. A Carrying value as of August 1, 2017 P180,000 Overhaul costs 36,000 Depreciation – Aug. 1 – Dec. 31, 2017 ( 11,250)
- January 1 – June 30, 2018 216,000 / 8 x 6/12 ( 13,500)
Carrying value, June 30, 2018 P191,250 Proceeds from sale 185,000 Loss from sale P 6,250 3. C Correct depletion for 2017
P4,860,000 / 1,620,000 x (15,000 tons x 6 months) = P270,000 Recorded depletion 405,000 Overstatement in depletion P135,000
4. A Estimated useful life in years = 15 years Estimated mining period = 1,620,000 / 15,000 = 108 months or 9 years Use unit of output method, since mining period is shorter than life in years Correct depreciation = (P600,000 x 90%) / 1,620,000 x 90,000 tons P 30,000 Recorded depreciation 40,000 Overstatement in depreciation P 10,000 5. C Remaining machines at December 31, 2017 = Machines 2 and 4 only Cost allocated to Machine 2 P1,200,000 x 500,000/1,500,000 P 400,000 Accumulated Depreciation of Machines 2 and 4 Machine 2 400,000 x 5/10 = P200,000 Machine 4 500,000 / 10 x 6/12 = 25,000 Total P225,000
6. B Depreciation Expense for 2017: Machine 2 P400,000/10 P40,000 Machine 3 P480,000/10 x 6/12 24,000 Machine 4 P500,000/10 x 6/12 25,000 2014 Depreciation P 89,000
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7. B Fair value of Machine 3 P500,000 – 200,000 P300,000 Carrying value of machine 3 Cost P480,000 Accumulated depreciation 48,000 x 4.5 216,000 264,000 Gain on sale P 36,000 8. Land Building Cash paid P12,000,000 FV of shares issued 40,000 x 107 4,280,000 Cost of removal of old buildings P 320,000 Legal cost to obtain title 150,000 Legal work for construction contract 159,000 Insurance premium during period of construction 240,000 x 2/24 20,000 Special tax assessment 400,000 Construction costs (6,000,000 + 4,o00,000 + 4,000,000) ________ 14.000,000 Correct cost P16,830,000 P 14,499,000 9. Correct cost of building P14,499,000 10. Depreciation for 2015 = P14,499,000 / 50 x 6/12 P 144,990 11 through 14 Audit Adjusting Entries: Buildings and Equipment 10,000 Accumulated Depreciation – Buildings and Equipment 30,000 Gain on Exchange of Buildings and Equipment 10,000 Buildings and Equipment 50,000 Buildings and Equipment 10,000 Accumulated Depreciation – Buildings and Equipment 60,000 Buildings and Equipment 70,000 Buildings and Equipment 240,000 Loss on Exchange of Buildings and Equipment 80,000 Buildings and Equipment 320,000 11. D Net decrease in cost of buildings and equipment P180,000 12. B Net decrease in accumulated depreciation P 90,000 13. D Cost assigned to equipment received P20,000 carrying value + cash paid of P10,000 = P 30,000 14. D Net gain on exchange (see audit adjustments) P830,000 15. C Land as Property, Plant and Equipment P8,000,000 + 4,000,000 + 7,000,000 = P19,000,000 16. C Building as Property, Plant and Equipment P12,000,000 + P16,000,000 = P28,000,000 17. B Depreciation Expense – Investment Property (P8,000,000 / 20) x ½ = P 200,000 18. C Equipment P24,000,000 – 800,000 = P23,200,000 19. B Accumulated Depreciation – Equipment P8,000,000 – 320,000 = P 7,680,000
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20. C Investment Property Land of P6,000,000 + Building, P7,800,000 = P13,800,000
21. C 7,500,000 + 8,500,000 = P16,000,000 22. B Carrying value
Cost P800,000 Accumulated depreciation (P320,000 – P20,000) 300,000 Carrying value P500,000
Fair value less cost to sell (520,000 – 50,000) P 470,000 Hence, the assets held for sale shall be measured at the lower amt. P470,000 23. B Impairment loss 500,000 – 470,000 = P 30,000 24. C 1,500,000 + 1,800,000 P3,300,000 25. D 860,000 + 5,000,000 = P5,860,000
26. D 3,000,000 + 2,000,000 + 2,500,000 + 540,000 = P8,040,000
27. A Eggs P100,000 P 100,000
28. B Machinery, December 31, 2015
12/31/14 P9,100,000 01/03/2015 5,920,000 08/28/2015 ( 4,300,000) Balance 12/31/15 P10,720,000
29. A Accumulated Depreciation – Machinery 12/31/2015
12/31/14 P4,820,000 08/28/15 (3,172,500) 12/31/15 Depreciation for 2015 2,394,000 12/31/15 Balance P 4,041,500
30. D Vehicles 12/31/2015 12/31/2014 P 4,680,000 06/22/15 1,620,000 12/31/2015 P 6,300,000
31. C Accumulated Depreciation – Vehicles
12/31/2014 P 1,965,600 12/31/2014 Depreciation for 2015 On beg. Bal. not sold (4,680,000 – 1965,600) x 40% = P 1,085,760 New = 1,620,000 x 40% x 6/12 324,000 1,409,760 P3,375,360
32. C Depreciation Expense – Machinery (2015) Machine 1 ( P4,300,000 – 250,000) / 5 x 8/12 = P 540,000 Machine 2 (4,800,000 – 300,000) / 6 = 750,000 Machine 3 (5,920,000 – 400,000 ) / 5 = 1,104,000 Total depreciation expense, machinery for 2015 P2,394,000
33. C Gain or loss on vehicle sold on May 25, 2016 Cost of vehicle sold P2,340,000 Accumulated depreciation 12/31/2014 P982,800 2015 depreciation 1,085,800 / 2 = 542,900 2016 depreciation 814,300 x 40% x 5/12 135,700 1,661,400 Carrying value P 678,600 Selling price 660,000 Loss on sale P 18,600
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34. C Accum. Depreciation – Building, Dec. 31, 2015
12/31/2014 P2,861,400 2015 and 2016 depreciation 903,600 x 2 years 1,807,200 Accumulated depreciation, building 12/31/2016 P4,668,600
35. B Depreciation Expense – Machine 2 (2017) Cost of Machine 2 P4,800,000 Accumulated depreciation – 12/31/2016 (4,800,000 – 300,000) / x 59 months/ 72 months = 3,687,500 Carrying value 12/31/16 P1,112,500 Overhaul cost 1,200,000 Carrying value after overhaul P2,312,500 Depreciation expense – 2017 (P2,312,500 – 500,000) / 4 = P453,125
36. A Carrying value of land, December 31, 2017 P8,100,000
37. B Accumulated Depreciation – Land Improvements, Dec. 31, 2017 (550,000/10) x 1.5 = P 82,500
38. C (100,000 X 98%) + 5,000 = P103,000
39. C Carrying value = 180,000 – 180,000 x 10% x 7.5 P 45,000 Selling price 54,000 Gain on sale P 9,000
40. B 2015 Depreciation
(500,000 – 180,000) x 10% = P 32,000 180,000 x 10% x 9/12 = 13,500 103,000 x 10% x 9/12 = 7,725 Total P 53,225
41. B 500,000 – 180,000 + 103,000 P423,000
42. D 2,000,000 x 9/10 x 1/5 = P 360,000 43. A 42,000 + 100,000 + 102,000 = P 244,000
44. C Cost = 180,000 + (336,000/112%) = P480,000
(P480,000 /10 ) ( 48,000) Carrying value of franchise, 12/31/2017 P432,000
45. D 125,000 + 48,000 + 27,000 = P200,000 46. C 300,000 + (36,000 x 9/12 ) = P 327,000
Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS
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Summative Exercise
Elegant Builders
Audit Adjustments:
Other Receivables 5,600
Representation and Advertising 5,200
Supplies Expense 3,054
Repairs and Maintenance 6,500
Petty Cash Fund 20,354
Accounts Receivable – Current 84,200
Bank Charges 2,100
Cash 600
Trade Payables 86,900
Accounts Receivable 36,000
Allowance for Doubtful Accounts 36,000
Sales 35,000
Accounts Receivable – current 35,000
Sales 20,000
Accounts Receivable – current 20,000
Accounts Receivable 14,000
Advances from Customers 14,000
Other Non-current Financial Assets 120,000
Accounts Receivable 120,000
Sales 145,000
Accounts Receivable – current 145,000
Purchases 60,000
Trade Payables 60,000
Doubtful Accounts Expense 162,364
Allowance for Doubtful Accounts 162,364
Inventory, end 2,693,200\
Cost of goods sold 5,887,200
Net Purchases 6,555,000
Inventory, beginning 2,025,400
Other Operating Income 86,400
Trading Securities – PS Bank 86,400
Trading Securities – SM 8,000
Gain on Sale of Trading Securities 8,000
Trading Securities – PS Bank 93,600
Trading Securities – SM 50,000
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Unrealized Gains on Trading Securities 143,600
Equipment 14,600
Transportation Expense 3,600
Repairs and Maintenance 11,000
Depreciation and Amortization 1,825
Accumulated Depreciation – Equipment 1,825
14,600 / 8 = 1,825
Accumulated Depreciation – Leasehold Improvements 19,333
Depreciation and Amortization 19,333
Utilities Expense 44,400
Salaries Expense 26,350
Repairs and Maintenance 3,820
Trade Payables and Accrued Expenses 74,570
Interest Expense 12,205
Interest Payable 12,205
Other Operating Income 1,040,000
Additional Paid in Capital 1,000,000
Land 40,000
Retained Earnings 1,650,000
Dividends Payable 1,650,000
Income Tax Expense 142,354
Income Tax Payable 142,354 1. D 375,250 – 84,200 = 291,050 2. A 546,750 – 226,000 – 900 = 319,850 3. A 4. D 6 years which is 12 – 6; shorter than 10 – 6 + 6 5. B see audit adjustments Answer
6. Petty cash fund 4,646
7. Cash in bank 3,471,200
8. Trading securities, at cost 650,000
9. Trading securities, at market 793,600
10. Unrealized gain or loss on trading securities 143,600 gain
11. Accounts receivable 4,614,200
12. Allowance for doubtful accounts 352,284
13. Other Receivables – current 30,600
14. Merchandise inventory 2,693,200
15. Prepaid expenses 60,920
16. Land 5,960,000
17. Equipment 934,600
18. Accumulated Depreciation – Equipment 691,825
19. Net book value of leasehold improvements 193,333
20. Other Non-current Financial Assets 120,000
21. Trade Payables and Accrued Expenses 1,681.475
22. Notes Payable and Accrued Interest 912,205
23. Dividends Payable 1,650,000
24. Income Tax Payable 142,354
25. Additional Paid in Capital 1,950,000
26. Retained Earnings 482,161
27 Net Sales 9,000,000
28 Net Purchases 5,887,200
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29. Salaries and Commissions 1,226,350
30. Repairs and Maintenance 59,320
31. Supplies Expense 73,054
32. Bank Charges 14,100
33. Interest Expense 76,205
34 Other Operating Income 151,600
35 Transportation Expense 1,400
36 Depreciation and Amortization 135,492
37 Doubtful Accounts Expense 162,364
38. Representation & Advertising 325,200
39. Ordinary Share Capital 11,000,000
40. Profit 332,161
Solutions – Chapter 8 Liabilities
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MULTIPLE CHOICE – THEORY
1. D 2. D 3. B 4. C 5. A 6. C 7. B 8. A 9. C 10. A
Problem 1
1. A 2. D 3. A 4. A,B,C,D 5. B,C 6. C, D 7. B, C,E 8. C,E 9. C,D 10. B,C,E 11. D,E 12. D, E
Problem 2 Jade Corporation
A. Transaction Entries April 1 Truck 6,000,000 Cash 1,000,000 Notes Payable 5,000,000 May 1 Cash 18,760,000 Notes Payable 18,760,000 Aug. 1 Retained Earnings 300,000 Dividends Payable 300,000 Sept. 10 Dividends Payable 300,000 Cash 300,000 Dec. 15 Purchases 1,470,000 Accounts Payable 1,470,000 Dec. 1 – 31 Cash/Accounts Receivable 6,832,000 Sales 6,100,000 Output VAT (VAT Payable) 732,000 B. Adjusting Entries Dec. 31 Interest Expense 450,000 Interest Payable 450,000 5,000,000 x 12% x 9/12 = 270,000
31 Interest Expense 1,250,667 Interest Payable 1,250,667 18,760,000 x 10% x 8/12 31 Discounts Lost 30,000
Accounts Payable 30,000
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Current Liab. Non-Current Liab Accounts Payable P 1,500,000 12% Notes Payable 5,000,000 10% Notes Payable 2,000,000 – 1,876,000 124,000 18,760,000 – 124,000 18,636,000 Interest Payable 450,000 + 1,250,667 1,700,667 VAT Payable 732,000 Total P9,056,667 P18,636,000
Problem 3 Hannah Corporation
(a) Interest Payable
2,000,000 x 8% x 4/12 P 53,333 6,000,000 x 10% x 3/12 150,000 6,150,000 x 10% x 2/12 102,500 4,500,000 x 12% x 8/12 360,000 10,000,000 x 8% x 6/12 400,000 Total Interest Payable P 1,065,833
(b)
Current Liabilities Accounts Payable P 1.650,000 Notes Payable – trade 1,200,000 Notes Payable – Bank 2,000,000 10% Mortgage Note Payable (with notes to FS) 6,000,000 Bonds Payable 10,000,000 Interest Payable 1,065,833 Wages and Salaries Payable 350,000 Total Current Liabilities P 22,265,833 Non-Current Liabilities Refinanced Note Payable, due in 2015 (with note to FS) P6,000,000 12% Mortgage Notes Payable, due in 2023 4,500,000 Total Non-Current Liabilities P10,500,000 Total Non-Current Liabilities P32,765,833 Notes to FS
The 10% Mortgage Note Payable was issued November 1, 2009, with a term of 10years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a quarterly interest payment within 10 days of the date the payment is due. As of December 31, 2014, the entity is already two months behind in paying its required interest payment. Hence, the note is reclassified as a current liability.
The P6,000,000 Note Payable, was originally due on January 2, 2015. On December 30, 2014, The entity negotiated a written agreement with the First Bank to replace this note with a 2-year P6,000,000 10% note, which was issued on January 2, 2015.
Solutions – Chapter 8 Liabilities
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Problem 4 (Charity, Inc.)
Premium Expense (2,000,000 x 30%)/10 x P5 = P300,000 Inventory of Premiums ( 36,000 – 28,000) x P5 = P 40,000 Estimated Premium Claims Outstanding Expected distribution (2,000,0000 x 30%)/10 60,000 Actual distribution (28,000) Still to be distributed 32,000 Cost of each premium x P5 Premium Claims Outstanding P160,000 Audit Adjustment: Inventory of Premiums 40,000 Premium Expense ( 300,000 – 180,000) 120,000 Estimated Premium Claims Outstanding 160,000 Problem 5 (Evergreen)
Audit Adjustments: Loss on Damages 1,200,000 Provision for Construction Damages 1,200,000 Loss on Pending Lawsuit 1,800,000 Provision for Damage on Pending Lawsuit 1,800,000 Loss on Product Defects 1,500,000 Provision for Cost of Product Withdrawal 1,500,000 (1,800,000 + 1,200,000) / 2 Warranty Expense 800,000 Provision for Warranties 800,000 P1,000,000 x 30% = P300,000 5,000,000 x 10% = 500,000 0 x 60% 0 Total P800,000
Solutions – Chapter 8 Liabilities
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Problem 6 SM Department Store
Correct balance of Unearned Revenue for Gift Certificates Outstanding P300,000 – P15,000 – P200,000 = P85,000 Adjusting entry Unearned Revenue for Gift Certificates Outstanding 215,000 Sales 200,000 Miscellaneous Income – Expired Gift Certificates 15,000 Problem 7 Glorietta Company
Date Effective Interest
(7%) Nominal Interest
(6%) Discount
Amortization Amortized cost,
end Jan. 2, 2014 P4,470,303 July 1, 2014 P 312,921 300,000 12,921 4,483,224 Jan. 1, 2015 313,826 300,000 13,826 4,497,050 July 1, 2015 314,794 300,000 14,794 4,511,844 Jan. 1, 2016 315,829 300,000 15,829 4,527,673 July 1, 2016 316,937 300,000 16,937 4,544,610 Jan. 1, 2017 318,123 300,000 18,123 4,562,733 July 1, 2017 319,391 300,000 19,391 4,582,124 Jan. 1, 2018 320,749 300,000 20,749 4,602,873
1. Bonds Payable per client P5,000,000 Bonds Payable redeemed 1,000,000* Bonds Payable, per audit P4,000,000 *Cash payments = Redemption price + Accrued interest 1,110,000 = 1.08Face + ( Face x 12% x 3/12) 1,110,000 = 1.08Face + (.03Face) Face = 1,110,000/1.10 Face of bonds redeemed = P1,000,000 2. Carrying value of P4M bonds on December 31, 2017 P4,602,873 x 4M/5M = P3,682,298 Face value of bonds still outstanding 4,000,000 Bond Discount, per audit P 317,702 3. Bond Interest Expense for the year 2017 January 1 to June 30 P319,391 July 1 to October 1 P 320,749 x 3/6 160,375 October 1 to December 31 P320,749 x 4M/5M x 3/6 128,300 Interest Expense for 2014 P608,066
Solutions – Chapter 8 Liabilities
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4. Carrying value of P1M bonds on July 1, 2017 P4,582,124 x 1M/5M P 916,425 Discount amortized, July 1 to October 1 P20,749 x 1M/5M x 3/6 2,075 Carrying value of bonds redeemed P918,500 Retirement price P1,000,000 x 108% 1,080,000 Loss on bond retirement P161,500 5. Balance of Interest Payable on December 31, 2017 P4,000,000 x 12% x 6/12 P240,000
Audit Adjusting Entry Bonds Payable 1,000,000 Interest Expense 8,065 Loss on Bond Redemption 161,500 Retained Earnings 392,430 Bonds Payable Redeemed 1,110,000 Bond Discount 211,995 Interest Payable 240,000 Charge to Retained Earnings Interest Paid before 2017 P1,500,000 Correct interest expense in periods prior to 2017 1,892,430 Effect of prior period errors P 392,430
Problem 8 (Lucky Corporation)
(a) Audit Adjusting entries Land 8,009,700 Discount on Notes Payable 2,490,300 Accrued Liabilities – Land Purchase 1,500,000 Notes Payable (3,000,000 x 4) 12,000,000 Interest Expense 237,743 Discount on Notes Payable 237,743 9,509,700 x 10% x 3/12 (b) Correct Cost of Land Down payment P2,000,000 PV of 4 future payments = P2,633,875 x 3.037351 8,000,000 Cost of land P10,000,000 (c) Current Liab. Non-Current Liab Notes Payable P3,000,000 P9,000,000 Discount on Notes Payable (713,227) (1,539,330) Amortized Cost P2,286,773 P7,460,670
Solutions – Chapter 8 Liabilities
107
(d) Correct Interest Expense for 2017 P9,509,700 x 10% x 3/12 P 237,743
Problem 9 (Refresh Mint Company)
Cost of the leased asset: 300,000 x 7.2469 = P2,174,070 Amortization Table Date Periodic
Payment Applied to Interest (8%)
Applied to Principal
Balance of Principal
May 1, 2016 P2,174,070 May 1, 2016 P300,000 P300,000 1,874,070 May 1, 2017 300,000 149,926 150,074 1,723,996 May 1, 2018 300,000 137,920 162,080 1,561,916
2016 2017 Interest Expense 149,926 x 8/12 P99,951 149,926 – 99,951 P49,975 137,920 x 8/12 91,947 Depreciation Expense (2,174,070 – 20,000)/ 12 = 179,506 Annual 119,671 179,506 Taxes and Insurance 13,333 20,000 Total Correct Expense P232,955 Recorded Expense 320,000 Adjustment to Retained Earnings P87,045
(a) Audit Adjustments Leased Equipment 2,174,070 Prepaid Taxes and Insurance 6,667 Finance Lease Liability 1,874,070 Accumulated Depreciation 119,671 Interest Payable 99,951 Retained Earnings 87,045 To establish correct beginning balances Finance Lease Liability 150,074 Interest Payable 99,951 Interest Expense 49,975 Taxes and Insurance Expense (20,000 x 9/12) 20,000 Rent Expense 320,000
Solutions – Chapter 8 Liabilities
108
Depreciation Expense – Leased Equipment 179,506 Accumulated Depreciation – Leased Equipment 179,506 Interest Expense 91,947 Interest Payable 91,947
(b) Current Liabilities and Non-current Liabilities Current Non-cuurent Principal P162,080 P1,561,916 Interest Payable 91,947 0 Total P254,027 P1,561,916
Problem 10 Timex Company
(a) 1. Interest payable = P5,000,000 x 8% x 6/12 P 200,000 2. Income Tax Expense: Current P6,000,000 x 30% P1,800,000 Deferred: Increase in deferred tax liability P1,500,000 x 30% 450,000 Total income tax expense P2,250,000 3. Deferred Tax Liability = P4,500,000 x 30% P1,350,000 (b) Current Liabilities: Accounts Payable P 350,000 Dividends Payable 500,000 Current Portion of Finance Lease Liability 620,920 Interest Payable on Bonds 200,000 Income Tax Payable 6,000,000 x 30% 1,800,000 Total Current Liabilities P3,470,920 (c) Non-current Liabilities: Non-current Portion of Finance Lease Liability P3,169,880 Bonds Payable, net of discount of P348,002 4,651,998 Deferred Tax Liability 1,350,000 Total Non-current Liabilities P9,171,878 MULTIPLE CHOICE 1. D 2. D 3. A 4. C 5. A 6. D
Solutions – Chapter 8 Liabilities
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7. B 8. D 9. C 10. B 11. B 12. C 13. C 14. B 15. B 16. D 17. D 18. B 19. B 20. B 1. D 550,000 + 4,700,000 + 5,000,000 + 4,000,000 = 14,250,000 Total issue price P5,500,000 Issue price attributable to the debt P5,000,000 x 0.6209 = P3,104,500 400,000 x 3.7908= 1,516,320 4,620,820 Issue price attributable to the conversion privilege P 879,180 2. D Issue price attributable to the debt P4,620,820
Date Effective Interest (10%)
Nominal Interest (8%)
Discount Amortization
Amortized cost, end
Jan. 2, 2015 P4,620,820 Dec. 31, 2015 P462,082 P400,000 P 62,082 4,682,902 Dec. 31, 2016 468,290 400,000 68,290 4,751,192 Dec. 31, 2017 475,119 400,000 75,119 4,826,311 3. A Carrying value of the bonds on December 31, 2015 P4,682,902 4. C Interest expense for 2016 = P 468,290 5. A Conversion of P2,000,000 on January 1, 2017 Bonds Payable 2,000,000 Paid in Capital from Bond Conversion Privilege (879,180 x 2/5) 351,672 Discount on Bonds Payable (248,808 x 2/5) 99,523 Ordinary Share Capital (P2,000,000/P1,000 x 8 x 100) 1,600,000 Share Premium 652,149 6. D Retirement price P2,000,000 x 105% P2,100,000 Carrying value of P2,000,000 bonds 4,751,192 x 2/5 1,900,477 Loss in profit or loss P 199,523 7 B Interest expense for 2012 if P2,000,000 bonds were retired P475,119 x 3/5 = P 285,072
Solutions – Chapter 8 Liabilities
110
Items 8 through 11 8. D Annual rate = 70,000/500,000 = 14% 9. C Carrying value on January 1, 2017 = 555,738 + 1,562 = 557,300 Effective interest, January 1 to June 30 = 35,000 – 1,562 = 33,438 Effective semiannual rate = 33,438 / 557,300 = 6% Effective annual rate = 6% x 2 = 12% 10. B Premium amortization – July 1 to Dec. 31, 2017 Nominal P35,000 Effective = 6% x 555,738 33,344 Amortization P 1,656 Premium amortization – January 1 to Dec. 31 1,562 Total amortization for 2017 P 3,218 11. B Interest expense for 2017 = 33,438 + 33,344 = P66,782 12. C 1,500,000 x 12% = P180,000 2,500,000 x 12% x 6/12 = 150,000 Total Interest Expense recorded P330,000 13. C 1,500,000 x 12% x 10/12 = P150,000 2,500,000 x 12% x 6/12 = 150,000 1,000,000 x 12% x 8/12 = 80,000 Total P380,000 14. B Face P1,000,000 Interest payable 1,000,000 x 12% x 8/12 = 80,000 Total P1,080,000 Items 15 through 20 15. B Accounts payable, per client P5,000,000 Debit balance in suppliers’ account 200,000 Shipments from cruise 300,000 Goods held on consignment ( 90,000) Accounts payable, per audit P5,410,000 16. D 70,642 x 1/2 = P 35,321
Solutions – Chapter 8 Liabilities
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17. D Total proceeds P1,100,000 Accrued interest 1,000,000 x 11% x 6/12 ( 55,000) Retirement price P1,045,000 Carrying value As of 12/31/09 2,101,506 x ½ P1,050,753 Amortization 30,864 x 1M/2M x 6/12 ( 7,716) 1,043,037 Loss P 1,963 18. B P4,000,000 x .75131 = P3,005,240 Date Interest Expense Carrying Value 9/30/15 P 3,005,240 9/30/16 300,524 3,305,764 9/30/17 330,576 3,636,340 9/30/18 363,660 4,000,000 Carrying value as of 9/30/17 P3,636,340 Amortization 363,660 x 3/12 90,915 Carrying value 12/31/2017 P3,727,255 19. B P240,000 20. B 5,000,000 (10%) + 2,000,000 (25%) = P1,000,000 21 – 25
Interest Date
Interest Paid
Effective Interest
Premium
Amortization
Amortized Cost, End
March 31, 2015 P10,772,144
Sept. 30, 2015 600,000 538,607 61,393 10,710,751
March 31, 2016 600,000 535,538 64,462 10,646,289
Sept. 30, 2016 600,000 532,314 67,686 10,578,603
March 31, 2017 600,000 528,930 71,070 10,507,533
Sept. 30, 2017 600,000 525,377 74,623 10,432,910
March 31, 2018 600,000 521,646 78,354 10,354,556
21. D P10,000,000 – P3,000,000 = P7,000,000 22. D Carrying value of remaining bonds, 9/30/2017 P10,432,910 x 7/10 P7,303,037 Amortization of premium 9/30 to 12/31/2017 P78,354 x 7M/10M x 3/6 ( 27,424) Carrying value of remaining bonds 12/31/2017 P7,275,613 Face value or remaining bonds 7,000,000 Premium on bonds payable, 12/31/17 P 275,613 23. C P7,000,000 x 12% x 3/14 P 210,000
Solutions – Chapter 8 Liabilities
112
24. B January 1 to March 31 P528,930 x 3/6 P264,465 April 1 to September 30 525,377 October 1 to Dec. 31 521,646 x 7/10 x 3/6 182,576 Total interest expense for 2017 P972,418 25. A Carrying value of bonds retired: As of Sept. 30, 2014 P10,432,910 x 3/10 P3,129,873 Retirement price P3,000,000 x 102% 3,060,000 Gain on retirement of bonds P 69,873
CHAPTER 9 - SHAREHOLDERS’ EQUITY
MULTIPLE CHOICE – THEORY
1. B 2. D 3. D 4. B 5. B 6. A 7. C 8. B
PROBLEMS Problem 1 Imation Company Audit Adjusting Entries: Treasury Shares 12,000 Share Premium 12,000 2,400 (140-135) = 12,000 Retained Earnings (687,280 – 497,600 207,680 Ordinary Shares 479,600 Ordinary Share Dividend Distributable 484,000 Share Premium _ Excess over Stated Value 203,280 4,840 x 142 = 687,280 4,840 x 100 = 484,000 Retained Earnings (Income Tax Expense) 300,000 Income Tax Payable 300,000 Problem 2 Cebu Trading Company Total income since incorporation P630,000 Cash dividends paid ( 195,000) Total value of bonus issue distributed ( 45,000) Correct balance of retained earnings P 390,000 Problem 3 Emem Corporation Balance, January 1 P1,590,000 Profit for the year 860,000 Dividends ( 750,000) Retained Earnings, December 31 P1,700,000 Appropriated for Plant Expansion P 150,000 Unappropriated 1,550,000 Total Retained Earnings P 1,700,000
Chapter 9 – Shareholders’ Equity
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Problem 4 Pathways Corporation Contributed Capital Preference Share, P100 par, 10,000 shares authorized, 4,000 shares issued P400,000 Ordinary Share, P50 par, 15,000 shares authorized, 8,000 shares issued, 7,700 shares outstanding 400,000 Share Premium 118,000 Total Contributed Capital P918,000 Retained Earnings Appropriated For Treasury Shares P19,800 For General Contingencies 75,000 Unappropriated 160,400 235,400 Total P1,153,400 Less: Treasury Shares, at cost (300 shares) ( 19,800) Cumulative Other Comprehensive Income Unrealized Gain on Available for Sale Securities 50,000 Total Shareholders’ Equity P 1,183,600 Share premium : 7,000 x P7 P49,000 1,000 x 12 12,000 4,000 x 13 52,000 Reissue of treasury shares – preference 5,000 Total additional paid in capital P118,000 Retained earnings: Accumulated profit P610,000 Cash dividends paid ( 312,600) Bonus issue ( 1,000 x 62) ( 62,000) Total Retained Earnings P235,400
Chapter 9 – Shareholders’ Equity
114
Problem 5 Moreno Corporation Date
Preference Share Ordinary Share APIC
Retained Earnings
Treasury Shares Shares Amount Shares Amount Shares Amount
1/1/17 15,000 300,000 4,160,000 1,100,000 4,000 150,000 1/15/17 800 40,000 4,000 2/1/17 1,500 30,000 33,000
3/15/17 (18,750) 4/15/17 200 8,600 4/30/17 10,000 200,000 200,000
5/1/17 2,230 44,600 78,050 (122,650) 5/31/17 41,100 (43,220) (2,150) (81,450) 9/15/17 ( 39,995)
12/31/17 500,000 12/31/17
balances
800
40,000
28,730
574,600
4,516,150
1,415,380
2,050
77,150
Supporting Computations and Entries March 15 dividends (16,500 – 4,000) x 1.50 = P18,750 Apr. 30 entry Share Options Outstanding (APIC 10,000 x 6) 60,000 Cash (10,000 x 40) 400,000 Ordinary Share (10,000 x 20) 200,000 Share Premium – Ordinary 260,000 Net increase in APIC = 260,000 – 60,000 = 200,000 May 1 bonus issue: Ordinary shares issued 26,500 Treasury ( 4,200) Outstanding shares 22,300 Charge to Retained Earnings 2,230 x P55= P122,650 Par value of bonus issue 2,230 x 20 = ( 44,600) Credit to additional paid in capital P 78,050 May 31 Sale of Treasury Shares Selling price 2,150 shares x P57 P122,550 Cost of treasury shares sold: 150 @ P43 P6,450 2,000 shares 75,000 81,450 Additional paid in capital from this sale P 41,100 September 15 dividends: On ordinary share : (28,730 - 2,050) x P1.50 = P40,020 On preference share: 8% x 40,000 = 3,200 Total P43,220
Chapter 9 – Shareholders’ Equity
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Problem 6 Ghette Company Entries for the quasi-reorganization: Retained Earnings 180,000 Inventory (215,000 – 190,000) 25,000 Property, Plant and Equipment (875,000 – 720,000) 155,000 Cash 600,000 Share Premium 600,000 Ordinary Share Capital, P25 par 2,500,000 Ordinary Share Capital, P15 par 1,500,000 Share Premium 1,000,000 Share Premium 930,000 Retained Earnings (750,000 + 180,000) 930,000
Shareholders’ Equity Ordinary Share Capital, P15 par, 100,000 shares P1,500,000 Share Premium (1,750,000 + 600,000 + 1,000,000 - 930,000) 2,420,000 Total Shareholders’ Equity P3,920,000 Problem 7 LTC Company
LTC Company Statement of Comprehensive Income
For the Years Ended December 31, 2017 and 2016
2017 2016 Sales P3,000,000 P2,540,000 Cost of goods sold 1,420,000 1,150,000 Gross profit P1,580,000 P1,390,000 Selling expenses (350,000) (210,000) General and administrative expenses (260,000) (220,000) Profit before income tax P 970,000 960,000 Income tax expense 291,000 336,500 Profit P 679,000 P 623,500
Chapter 9 – Shareholders’ Equity
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2016 Cost of Goods Sold – weighted average Cost of goods sold under FIFO P1,140,000 Difference in beginning inventory 30,000 Difference in ending inventory ( 20,000) Cost of goods sold as restated P 1,150,000 2016 income tax expense Before restatement P 339,500 Adjustment due to change in inventory costing procedure (1,150,000 – 1,140,000) x 30% ( 3,000) 2013 income tax expense as restated P 336,500
LTC Company Statement of Changes in Equity
For the Years Ended December 31, 2017 and 2016
Ordinary Share Retained Earnings
Total
Balances, January 1, 2016 P 1,000,000 P600,000 P1,600,000 Cumulative effect of changing from FIFO costing to weighted average, net of applicable income tax of P9,000 (30,000 x 70%)
21,000
21,000 Dividends (400,000) (400,000) Profit for the year 623,500 623,500 Balance, December 31, 2016 P1,000,000 P 844,500 P
1,844,500 Profit for the year 2017 679,000 679,000 Balances, December 31, 2017 P1,000,000 P1,523,500 P2,523,500
Problem 8 Northwest Corporation Reported profit P120,000 Loss from fire ( 2,625) Write off of goodwill ( 26,250) Loss on sale of equipment ( 24,150) Gain on early retirement of bonds 7,525 Gain on insurance policy settlement 5,250 Corrected profit P 79,750 Retained Earnings, January 1 P263,200 Stock dividends ( 70,000) Loss on retirement of preference shares ( 35,000) Officers’ compensation in prior period ( 162,750) Other correction of errors 25,025 Corrected profit (see above) 79,750 Corrected retained earnings, Dec. 31 P100,225
Chapter 9 – Shareholders’ Equity
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MULTIPLE CHOICE - PROBLEMS
Items 1 through 5 1. B Balance, December 31, 2017 P 750,000 Mar. 31 4,500 x 3 13,500 June 30 ( 250,000 + 4,500 – 6,000) / 10 = 24,850 shares 24,850 shares x P3 74,550 Sept. 30 P2,000,000/P1,000 x 2 shares = 4,000 shares 4,000 shares x P3 12,000 Balance, Dec. 31 P 850,050 2. C RE, January 1, 2017 P 480,000 Profit 600,000 Understatement in depreciation 40,000 x 65% ( 26,000) Balance, December 31, 2017 P 1,054,000 3. B Issue price P2,000,000 Attributable to the debt PV of face = P2,000,000 x 0.32197 = P 643,940 PV of interest = P200,000 x 5.65022 1,130,044 1,773,984 Amount credited to equity P 226,016 4. B Interest expense for 2017 = 1,773,984 x 12% x 9/12 = P 159,659 5. C Effective interest for 2017 P159,659 Nominal interest 200,000 x 9/12 150,000 Amortization P 9,659 Carrying value, April 1 1,773,984 Carrying value, Dec. 31 P1,783,645 6. A Correct balance of Retained Earnings 485,000 – 200,000 + 324,000 – 300,000 + 451,000 = P760,000 7. C Total share premium 150,000 + 100,000 = P 250,000 8. D Ordinary share P2,000,000 Additional paid in capital 250,000 Retained earnings 760,000 Revaluation surplus (appraisal increase) 300,000 Total shareholders’ equity P3,310,000 9. A Preference share = P6,000,000 – (4,000 x P200) = P5,200,000 10. C Ordinary share = 200,000 shares x P25 par = P5,000,000
Chapter 9 – Shareholders’ Equity
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11. B APIC, January 1, 2017 P3,300,000 Cancelled upon retirement of preference P1,800,000 / 30,000 x 4,000 ( 240,000) From sale of treasury shares 6,000 x (45 – 37.50) 45,000 Sale of donated shares 2,000 x 48 96,000 APIC, December 31, 2015 P3,201,000 12. C Ordinary shares outstanding Issued = 100,000 x 2 200,000 Treasury (8,000 x 2) – 6,000 + 4,000 – 2,000 = 12,000 Outstanding 188,000 13. C Retained Earnings January 1, 2017 P2,200,000 Excess of retirement price over issue price 280 – (200 + 60 share premium per share) x 4,000 ( 80,000) Profit 1,850,000 Balance, December 31, 2017 P3,970,000 There is no number 14 15. D Ordinary shares issued: January 1, 2017 90,000 Mar. 6 – 20 1,400 Nov. 3 55 x 10 shares 550 Total shares issued 91,950 Par value per share P 2 December 31, 2015 balance P183,900 16. D Share premium January 1, 2017 balance P1,820,00 Mar. 6 1,400 x 42 58,800 Nov. 3 (see entry below) 24,200 Dec. 31 balance P1,903,000 Issue price of bonds 90,000 x 103% P 92,700 Issue price of debt 90,000 x 97% = 87,300 Value assigned to 90 share warrants P 5,400 Entry upon exercise of 55 warrants Share warrants issued (5,400 x 55/90) 3,300 Cash 550 x 40 22,000 Ordinary share (550 x 2) 1,100 Share premium 24,200
Chapter 9 – Shareholders’ Equity
119
17. D Paid in capital from treasury shares Sales price 650 x P40 P 26,000 Cost = P72,600/1,210 x 650 39,000 Deduction from previous APIC from treasury shares P 13,000 Previous balance of APIC 22,500 APIC from Treasury shares P 9,500 18. C Ordinary Share Warrants Outstanding Issue Price of bonds and warrants P90,000 x 103% P92,700 Fair value of bonds ex-warrants 87,300 Value initially assigned to warrants P 5,400 Value of warrants exercised (5,400 x 55/90) ( 3,300) Value of remaining warrants P 2,100 19. A Cost of remaining treasury shares Cost of 1,210 treasury shares originally held P 72,600 Cost of treasury shares sold ( 72,600 x 650 / 1,210) ( 39,000) Cost of remaining treasury shares P 33,600 20 – 28 See worksheet 20. D 21. D 22. B 23. C 24. A 25. B 26. C 27. A 28. D
Chapter 9 – Shareholders’ Equity
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Date
Preference Share Ordinary Share APIC
Retained Earnings
Treasury Shares Shares Amount Shares Amount Shares Amount
1/1/17 9,000 P900,000 600,000 P600,000 P1,200,000 P3,198,000 1/6/17 22,500 22,500 348,750 1/31 40,500 2/22 7,500 P180,000 2/28 21,000 21,000 525,000 4/30 – 5/31
(920,000)
8/31 (12,000) (3,000) (72,000) 9/14 450 450 (1,350)
5,400
11/30 (1,278,900) 12/15 ( 54,000) 12/31 (42,000) 12/31 1,800,000 12/31 bal.
9,000 P900,000 643,950 P643,950 P2,118,300 P2,691,100 4,500 P108,000
January 31: Value assigned to warrants 1,350,000 x (98% - 95%) = P40,500 (classified as APIC) Entry on Sept. 15 Cash (450 x 10) 4,500 Share Warrants Outstanding (APIC) 1,350 Ordinary Share 450 Share Premium – Ordinary Share 5,400 SUMMATIVE EXERCISE – CONQUEST MOTORS CORPORATION Correction: Fair values given for Amity, Bold and Courteous should have been on December 31, 2017 instead of 12/31/15. Operating Expenses 2,200 Petty Cash Fund 2,200 Materials Inventory 9,000 Cash - Materials Acquisition Fund 9,000 Other Financial Assets 350,000 Cash (in Bank) 350,000 Cash (in Bank) 12,000 Salaries Payable 12,000 Goods in Process Inventory 900 Cash 900 Operating Expenses 1,000
Chapter 9 – Shareholders’ Equity
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Cash 1,000 Notes Payable 300,000 Interest Expense 18,000 Cash 318,000 Other Income (Dividend Revenue) 6,600 Trading Securities 6,600 Dividend Receivable 2,000 Other Income 2,000 Trading Securities 12,800 Unrealized Gain on Trading Securities 12,800 Repossessed Inventory (Finished Goods Inventory) 69,000 Impairment Loss – Installment Receivable 69,000 Materials Inventory 18,000 Accounts Payable 18,000 Goods in Process Inventory 69,600 Applied Factory Overhead 69,600 Factory Overhead Control 30,000 Operating Expenses 20,000 Accumulated Depreciation – Building 50,000 (Discount on) Notes Payable 12,000 Equipment 10,800 Operating Expenses 1,200 Interest Expense 67,500 Operating Expenses 67,500 Interest Expense 22,500 Interest Payable 22,500 Share Capital 80,000 Retained Earnings 80,000 Share Capital 250,000 Share Premium 250,000 Retained Earnings 348,000 Dividends Payable 348,000
Chapter 9 – Shareholders’ Equity
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Operating Expenses 115,000 Accrued Operating Expenses 115,000 Applied Factory Overhead 747,600 Overapplied Factory Overhead 11,600 Factory Overhead Control 736,000 Overapplied Factory Overhead 11,600 Cost of Goods Sold 11,600 Income Statement Correct Balances: Sales P3,476,000 Cost of goods sold 2,344,900 Gross profit P 1,131,100 Operating Expenses ( 609,500) Impairment Loss – Receivable ( 61,000) Other Income 55,400 Unrealized Gains on Trading Securities 12,800 Other Expenses and Losses ( 36,500) Income before interest and taxes P 492,300 Interest expense 108,000 Income before income tax P 384,300 Income tax expense 115,290 Profit P 269,010 Balance sheet accounts Current Assets Cash P1,015,900 Trading Securities 214,800 Installment Accounts Receivable 340,000 Dividend receivable 2,000 Receivable from officers 54,000 Inventories 485,500 Prepaid expenses 40,000 Total current assets P2,152,200 Non-current Assets Property, Plant and Equipment, at cost P5,409,200 Accumulated Depreciation 186,000 Net carrying value P5,223,200 Other Non-Current Financial Assets 512,000 Total Non-current assets 5,735,200 Total Assets P7,887,400 Current Liabilities Accounts payable P 508,000
Chapter 9 – Shareholders’ Equity
123
Salaries payable 12,000 Notes payable 538,000 Accrued expenses 115,000 Dividends payable 348,000
Interest payable 22,500 Income tax payable 115,290 Total current liabilities P1,658,790 Non-current liabilities Notes payable 1,000,000 Total liabilities P2,658,790 Shareholders’ Equity Share Capital P2,900,000 Share Premium 1,450,000 Retained Earnings 878,610 5,228,610 Total Liabilities and Shareholders’ Equity P7,887,400
MULTIPLE CHOICE – THEORY
1. B 2. D 3. B 4. B 5. A 6. D
7. D 8. B
PROBLEM 1
A B C D
1. Accounts Receivable 531,000 590,000 690,000 790,000
2. Allowance for Uncollectible Accounts 53,100 59,000 69,000 79,000
3. Prepaid Insurance 14,850 17,250 19,950 24,450
4. Prepaid Rent 180,000 120,000 60,000 40,000
5. Interest Receivable 63,000 31,500 26,250 21,000
6. Trading Securities 693,000 700,000 707,000 726,250
7. Plant and Equipment at cost 860,000 1,560,000 2,300,000 3,860,000
8. Accumulated Depreciation 386,000 459,000 533,400 607,400
9. Total current liabilities 1,145,700 245,700 215,700 155,700
10. Cost of sales 1,576,200 1,730,250 1,620,200 1,483,000
11. Selling and Administrative Expenses
1,065,350 1,060,250 1,085,750 1,138,750