PROBLEM 1: You were assigned to audit the financial statements of PIPINO CORP. for the year ended
December 31, 2014. The liability portion of the company’s balance sheet shows the following
information:
Noncurrent Liabilities
Notes payable
Liability under capital lease
Current Liabilities
Accounts Payable
Warranties Liability
Deferred tax Liability
Total
P7,195,000
2,240,000
1,840,000
42,500
250,000
9,435,000
2,048,000
P11,483,000
Upon further investigation on liabilities account, you discovered the following information:
a. The principal amount of the note payable is P8,000,000 and bears interest at 12% payable
every March 31. The note is dated April 1, 2012 and is due 5 years after issuance. The
prevailing market rate of interest when the notes were issued was at 15%. The entry made by
the client on April 1, 2012 was debit to cash and credit to notes payable for the cash
consideration received. No other entry has been made since apart from the annual interest
payments every March 31, being debited to interest expense and credited to cash.
b. The capitalized lease is for an eight-year period beginning December 31, 2011. Equal annual
payments of P1,200,000 are due of December 31 of each year beginning December 31, 2011.
The implicit rate of the lease known to PIPINO is 10%. The asset was record by the company
as a debit to the liability under capital lease account.
c. The result of purchase cutoff on the company’s purchases transactions from December 15 to
January 15 you have rendered is shown below:
Receiving
Report no.
Invoice Date
Receiving
Report Date
Shipment Terms
65212
65213
65214
65215
65216
65217
65218
65219
65220
65221
65222
12/15/2014
12/17/2014
12/21/2014
12/26/2014
12/30/2014
12/30/2014
12/31/2014
01/02/2014
01/05/2014
01/07/2014
01/10/2014
12/15/2014
12/20/2014
12/21/2014
12/30/2014
01/02/2014
01/02/2014
01/03/2014
01/05/2014
01/10/2014
01/11/2014
01/15/2014
FOB Shipping Point
FOB Shipping Point
FOB Destination
FOB Destination
FOB Shipping Point
FOB Shipping Point
FOB Destination
FOB Buyer
FOB Shipping Point
FOB Shipping Point
FOB Destination
Amount
15,000
16,000
17,500
20,000
30,000
28,000
19,000
30,500
41,000
22,000
25,000
Investigations revealed that the last receiving report recorded in the voucher register was
RR65220.
d. The company has a two-year warranty on its products. The warrant estimates in the past years
were at 5% of the net sales. During the current year because of increased returns the company
decided to increase warranty estimates at 8% of its total net sales, 7% of which is expected to
be incurred during the year of sale and the balance on the year following the year of sale.
Presented below are information relevant to your audit:
Net Sales
Actual Warranty
costs paid
2012
P24,000,000
1,150,000
2013
27,150,000
1,450,000
2014
31,650,000
1,950,000
The company is yet to update its warranty liabilities as of December 31, 2014.
REQUIREMENTS:
1. What is the correct balance of the Notes Payable as of December 31, 2014?
a. 7,314,250
b. 7,451,388
c. 7,568,669
d. 7,609,096
2. What is the initial amount debited to the asset account at the inception of the finance lease?
a. 2,240,000
b. 3,440,000
c. 5,640,000
d. 7,040,000
3. How much is the total noncurrent liabilities to be presented in the 2014 balance sheet?
a. 8,389,565
b. 10,550,813
d. 11,370,709
c. 10,800,813
4. What is the correct Accounts Payable as of December 31, 2014?
a. 1,722,000
b. 1,750,000
c. 1,778,000
d. 1,797,000
5. What is the correct warranties expense in 2014?
a. 582,000
b. 1,582,500
c. 1,950,000
d. 2,532,000
6. How much should be presented as current liabilities in the balance sheet of Pilipino as of
December 31, 2014?
a. 2,289,500
b. 3,871,896
c. 3,109,396
d. 5,539,500
SUGGETED SOLUTIONS:
Requirement 1
According to Valix Effective interest Method is used for computing the balance of notes payable.
Effective interest method involves using the PV of 1 multiplied to the face amount and PV of
ordinary annuity multiplied to interest per year or cash payment per year.
PV of 1 using 15% FMV rate for 5 years is = .4972
PV of ordinary annuity using 15% FMV rate for 5 years is = 3.3522
In order to get the initial carrying value of the Note Computation is as follows
8,000,000 x .4972 =
3,977,413
8,000,000 x 12% =
960,000
960,000 x 3.3522
3,218,068
Initial Carrying Value
7,195,438
To compute the carrying value at December 31, 2014, an amortization table is constructed.
Date
4/1/12
3/31/13
3/31/14
*12/31/14
Payment
Interest Expense
960,000
960,000
*720,000
1,079,322
119,322
1,097,214
137,214
*838,347
118,347
Disparity due to round-off
*Accrued for April to Dec
April – Dec = 9 months
Discount
Carrying amount
7,195,438
7,314,760
7,451,974
7,570,321
(652)
7,569,669 (C)
Payment = 960,000x9/12 = 720,000
Interest Expense = 1,117,796x9/12 = 838,347
Requirement 2
In the information provided, recorded on the books were an outstanding Capital Lease Liability of
2,240,000, this was obtained by decreasing the initial amount debited to the liability by lease
payments per year.
To calculate lease payments:
12/31/11
1,200,000
12/31/12
1,200,000
12/31/13
1,200,000
12/31/14
1,200,000
Total Lease Payments 4,800,000
To compute initial amount debited
Squeeze or Workback
Initial Amount Debited7,040,000 D.
Payments
4,800,000
Remaining
2,240,000
Lease Liability
Requirement 3
Notes Payable
Liability under capital lease
Deferred tax liability
Total
P 7,569,669
2,981,144
250,000
P 10,800,813
Requirement 4
According to Valix purchases and sales should be recognized once the goods in transit are
received when the Shipment Term is FOB Destination; and when the term is FOB Shipping Point
the purchases and sales should be recognized when the goods are in transit. Applying this, it can
be analyzed that certain Purchases in the above information should still not be recorded as
Accounts payable.
In order to compute for the adjusted accounts payable
Unadjusted accounts payable
1,840,000
RR65218 Terms FOB Destination, the goods were received 2015
(19,000)
RR65219 This was recorded in 2014, when it should properly be recorded 2015 (30,500)
RR65220 This was recorded in 2014, when it should properly be recorded 2015 (41,000)
Adjusted accounts payable
1,750,000
B.
Requirement 5
According to PAS 37-Provisions, Contingent Liabilities and Contingent Assets
On the valuation of contingent liabilities:
“The amount recognized as a provision shall be the best estimate of the expenditure required to
settle the present obligation at the end of the reporting period. The best estimate of the
expenditure required to settle the present obligation is the amount that an entity would rationally
pay to settle the obligation at the end of the reporting period or to transfer it to a third party at
that time.”
Analyzing the information given the percentage estimate designated for warranty expense
provision for the current year is 8% of net sales
To compute for warranties expense for the current year:
Net Sales
31,650,000
Warrant estimate percentage
8%
Warranty Expense recognized
in 2014
2,532,000 D.
Requirement 6
Account Payable
Warranties payable
(2,532,000 – 1,950,000
Interest payable
(8M X 12% X 9/12
Current portion of long-term
debt
TOTAL
1,750,000
583,000
720,000
819,896
P 3,871,896
PROBLEM 2: The schedule below shows the account balances of FRANZ Co. at the beginning and end
of the year ended December 31, 2007.
DEBITS
December 31, 2007
December 31, 2006
Cash and cash equivalents
Investment in trading securities
Accounts receivable
Inventories
Prepaid Insurance
Land and Building
Equipment
Discount on bonds payable
Treasury stock
Cost of goods sold
Selling and general expenses
Income taxes
Unrealized loss on trading securities
Loss on sale of equipment
Total debits
666,000
30,000
444,000
873,000
7,500
585,000
933,000
25,500
15,000
1,617,000
861,000
105,000
12,000
3,000
6,159,000
150,000
120,000
300,000
900,000
6,000
585,000
510,000
27,000
30,000
CREDITS
December 31, 2007
December 31, 2006
Allowance for bad debts
Accumulated depreciation-building
Accumulated depreciation-equipment
Accounts payable
Notes payable-current
Accrued expenses payable
Income taxes payable
Unearned revenue
Notes payable-noncurrent
Bonds payable
Deferred tax liability
Ordinary shares, P10 par
Retained earnings appropriated for treasury stock
Retained earnings appropriated for possible building
expansion
Unappropriated retained earnings
Share premium
Sales
Gain on sale of trading securities
Total credits
24,000
78,750
137,250
165,000
210,000
54,000
105,000
3,000
120,000
750,000
141,000
1,078,200
15,000
15,000
67,500
82,500
180,000
60,000
26,100
30,000
27,000
180,000
750,000
150,900
600,000
30,000
114,000
103,800
348,000
2,694,000
36,000
6,159,000
69,000
336,000
15,000
2,628,000
2,628,000
Additional information:
a. All purchases and sales were on account.
b. Equipment with an original cost of P45,000 was sold for P21,000.
c. Selling and general expenses include the following:
Building depreciation
Equipment depreciation
Bad debts expense
Interest expense
11,250
75,750
9,000
54,000
d. A six-month note payable for P150,000 was issued in connection with the purchase of new equipment.
e. The noncurrent note payable requires the payment of P60,000 per year, plus interest until paid.
f. Treasury stock was sold for P3,000 more than its cost.
g. During the year, a 30% stock dividend was declared and issued. At that time, there were 60,000 shares
of P10 par ordinary shares issued. However, 600 of these shares were held as treasury shares at that time
and were prohibited from participating in the stock dividend. Market value of ordinary shares was P50 per
share when the stock dividend was declared.
h. Equipment was overhauled, extending its useful life, at a cost of P18,000. The cost was debited to
Equipment.
REQUIREMENTS:
1. Net income for 2007
a. 135,000
b. 150,900
c. 130, 500
2. Cash dividends declared and paid during 2007
a. 24,000
b. 156,000
c. 22,200
3. Proceeds from issuance of ordinary shares during the year
a. 300,000
b. 330,000
c. 630,000
4. Proceeds from sale of trading securities
a. 78,000
b. 114,000
c. 126,000
5. Accumulated depreciation of equipment sold
a. 21,000
b. 45,000
c. 24,000
6. Cash paid for purchase of equipment
a. 150,000
b. 318,000
c. 450,000
7. Proceeds from sale of treasury shares
a. 18,000
b. 15,000
c. 12,000
8. Net cash provided by operating activities
a. 135,000
b. 261,000
c. 249,000
9. Net cash provided by investing activities
a. 318,000
b. 297,000
c. 183,000
10. Net cash provided by financing activities
a. 564,000
b. 561,000
c. 546,000
d. 132,000
d. 0
d. 808,200
d. 42,000
d. 27,000
d. 300,000
d. 30,000
d. 267,900
d. 279,000
d. 318,000
SOLUTIONS:
Requirement 1
Sales
Gain on sale of trading securities
Less: Cost of Goods Sold
Selling and general expenses
Income Taxes
Unrealized loss on trading securities
Loss on sale of equipment
Net Income
Requirement 2
Unappropriated Retained Earnings, Dec. 31, 2006
Net Income
Decrease in appropriation for treasury shares
Increase in appropriation for possible building expansion
Stock dividend declared (60,000 issued - 600 treasury = 59,400
outstanding x 30% x P10)
Remaining unappropriated retained earnings
Unappropriated Retained Earnings, Dec. 31, 2007, including net
income for 2007
Assumed cash dividends declared and paid during 2007
2,694,000
36,000
(1,617,000)
(861,000)
(105,000)
(12,000)
(3,000)
132,000
336,000
132,000
15,000
(45,000)
(178,200)
259,800
235,800
24,000
Requirement 3
Increase in ordinary shares (1,078,200 - 600,000)
Less: Stock dividend (P10 x 59,400 x 30%)
Par value of additional ordinary shares
478,200
178,200
300,000
Increase in share premium (348,000 - 15,000)
Less: Share premium from resale of treasury shares at more than cost
Share premium from shares issued in 2007
333,000
3,000
330,000
Proceeds from issuance of ordinary shares in 2016 (300,000 + 330,000)
630,000
Requirement 4
Net decrease in investment in trading securities
Less: Unrealized loss on trading securities
Carrying value of trading securities sold
Add: Gain on sale of trading securities
Proceeds from sale of trading securities
90,000
12,000
78,000
36,000
114,000
Requirement 5
Accumulated depreciation- equipment 12/31/2016
Add: Equipment depreciation
Less: Accumulated depreciation- equipment 12/31/2017
Accumulated depreciation sold
82,500
75,750
137,250
21,000
Accumulated Depreciation is also the title of the contra asset account which is credited when
Depreciation Expense is recorded each accounting period. The amount of accumulated depreciation is
used to determine a plant asset's book value (or carrying value).
PAS 16 provides that after initial recognition, an entity shall choose either the cost model or revaluation
model as the accounting policy for property, plant, and equipment.
The cost model means that property, plant and equipment are carried at cost less any accumulated
depreciation and any accumulated impairment loss.
The revaluation model means that property, plant and equipment are carried at revalued amount.
Requirement 6
Net increase in equipment
Sale of equipment
Overhaul of equipment
Purchase of equipment
Less: Note payable issued
Cash paid for purchase
Equipment ending balance
Add: Credits
Less: Debits
Amount of purchased equipment
423,000
45,000
18,000
*450,000
150,000
300,000
933,000
45,000
518,000
450,000
Improvements or betterments, in this scenario, the overhaul, that will increase the service life or the
capacity of the asset are capitalizable.
Requirement 7
Cost of shares sold
Share premium (information f)
Proceeds from sale of treasury shares
15,000
3,000
18,000
If an entity reacquires its own equity instruments, those instruments shall be deducted from equity. No
gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of the entity’s
own equity instruments. Such treasury shares may be acquired and held by the entity or by the other
members of the consolidated group.
Requirement 8
Net income
Depreciation expense (11,250 + 75,750)
Loss on sale of equipment
Unrealized loss on trading securities
Amortization on bond discount (27,000-25,500)
Gain on sale of trading securities
Proceeds from sale of trading securities
Decrease in deferred tax liability
Increase in net accounts receivable
Decrease in inventories
Increase in prepaid insurance
Decrease in accounts payable
Increase in accrues expenses payable
Increase in income taxes payable
Decrease in unearned revenue
Net cash provided by operating activities
132,000
87,000
3,000
12,000
1,500
(36,000)
114,000
(18,900)
(135,000)
27,000
(1,500)
(15,000)
27,900
75,000
(24,000)
249,000
OPERATING ACTIVITIES - PAS 7, par 14
Cash flows from operating activities are primarily derived from the principal revenue-producing activities
of the entity. Therefore, they generally result from the transactions and other events that enter into the
determination of profit or loss. Examples of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other
policy benefits;
(f) cash payments or refunds of income taxes unless they can be specifically identified with financing and
investing activities; and
(g) cash receipts and payments from contracts held for dealing or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss that is included in
recognised profit or loss. The cash flows relating to such transactions are cash flows from investing
activities. However, cash payments to manufacture or acquire assets held for rental to others and
subsequently held for sale as described in paragraph 68A of IAS 16 Property, Plant and Equipment are
cash flows from operating activities. The cash receipts from rents and subsequent sales of such assets are
also cash flows from operating activities.
Requirement 9
Net cash provided by (or used in) investing activities
Acquisition of equipment
Sale of equipment
Note payable issued in connection with purchase of new equipment
Total
(468,000)
21,000
150,000
(297,000)
PAS 7, paragraph 16 provides that separate disclosure of cash flows arising from investing activities is
important because the cash flows represent the extent to which expenditures have been made for
resources intended to generate future income and cash flows. Only expenditures that result in a recognised
asset in the statement of financial position are eligible for classification as investing activities. Examples
of cash flows arising from investing activities are:
(a) cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These
payments include those relating to capitalized development costs and self-constructed property, plant and
equipment;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures
(other than payments for those
instruments considered to be cash equivalents or those held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures
(other than receipts for those instruments considered to be cash equivalents and those held for dealing or
trading purposes);
(e) cash advances and loans made to other parties (other than advances and loans made by a financial
institution);
(f) cash receipts from the repayment of advances and loans made to other parties (other than advances and
loans of a financial institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the payments are classified as financing
activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the receipts are classified as financing
activities.
When a contract is accounted for as a hedge of an identifiable position the cash flows of the contract are
classified in the same manner as the cash flows of the position being hedged.
Requirement 10
Net cash provided by (or used in) financing activities
Cash receipt from issuance of OS
Cash receipt from repurchase of TS
Dividends paid
Cash payment on non-current note payable
Total
630,000
18,000
(24,000)
(60,000)
564,000
PAS 7, paragraph 17 provides that separate disclosure of cash flows arising from financing activities is
important because it is useful in predicting claims on future cash flows by providers of capital to the
entity. Examples of cash flows arising from financing activities are:
(a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the entity’s shares;
(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or longterm borrowings;
(d) cash repayments of amounts borrowed; and
(e) cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
PROBLEM 3: You are engaged to perform an audit of the accounts of the Kampupot Company for its
first year of operations ended December 31, 2011 and have observed the taking of the physical inventory
of the company on December 28, 2011. Only merchandise shipped by the Kampupot Company to
customers up to and including December28, 2012 have been eliminated from the inventory. The inventory
as determined by physical inventory count has been recorded on the books by the company’s controller.
No perpetual inventory records are maintained. All sales are made on an F.O.B. shipping point basis. You
are to assume that all purchase invoices have been correctly recorded.
An excerpt of the company’s trial balance revealed the following information:
₱225,000
127,500
2,543,000
1,125,600
Accounts Receivable
Inventory, Physical Count
Sales
Purchases
The following lists of sales invoice are entered in the sales books for the months of December 2011 and
January 2012 respectively.
SALES INVOICE
AMOUNT
DECEMBER 2011
1. ₱ 3,000
2.
7,000
3.
2,000
4.
6,900
5.
1,000
6.
4,500
7.
4,000
8. 10,000
JANUARY 2012
9.
6,000
10. 3,300
11. 4,000
12. 8,000
SALES INVOICE
DATE
COST OFGOODS
SOLD
DATE SHIPPED
December 21
December 28
December 31
December 26
December 29
November 7
December 31
December 30
₱2,000
6,100
800
7,000
600
8,200
2,400
5,600
December 31, 2011
December 28, 2011
January 3, 2012
January 4, 2012
December 30, 2011
December 1, 2011
January 3, 2012
December 28, 2011
(shipped to consignee)
December 31
December 28
January 2
January 3
4,000
4,400
2,300
5,500
December 30, 2011
January 1, 2012
January 2, 2012
December 31, 2011
REQUIREMENTS: What are the adjusted balances of the following accounts?
1. Sales
a. 2,528,100
b. 2,534,100
c. 2,541,000
d. 2,543,000
2. Accounts Receivable
a. 230,100
b.
224,100
c. 222,100
d. 216,100
3. Inventories
a. 125,500
b. 125,000
c. 123,000
d. 121,000
4. Cost of Sales
a. 1,000,100
b. 1,004,000
c. 1,002,600
d. 1,004,600
SOLUTION:
No.
Sales
Inventories
Cost Of Sales
2,543,000
Accounts
Receivable
225,000
Unadjusted
Balances
1
127,500
998,100*
-
-
(2,000)
2,000
2
3
4
5
6
7
8
9
10
11
12
Adjusted
Balances
(2,000)
(6,900)
(2,000)
(6,900)
(4,000)
(10,000)
6,000
8,000
2,534,100
(4,000)
(10,000)
6,000
8,000
216,100
Beginning Inventory
Add: Purchases
Goods Available for Sale
Less: Ending Inventory
Unadjusted Cost of Sales
(600)
5,600
(4,000)
(5,500)
121,000
600
(5,600)
4,000
5,500
1,004,600
0
1,125,600
1,125,600
127,500
998,100*
UnderIAS/PAS 2, if the term is F.O.B. shipping point, ownership is transferred upon shipment of the
goods and therefore, the goods in transit are the property of the buyer.
Accordingly, the buyer shall legally be responsible for freight charges and other expenses from the point
of shipment to the point of destination.
Explanation for the answers:
No.
Sales
1
No adjustment since
it was already
included in the
December 31, 2011
Sales
2
3
4
The goods sold
amounting to ₱2,000
should be deducted
in December 2011
sales because the
goods were shipped
F.O.B. shipping
point on January 3,
2012
The goods sold
amounting to ₱6,900
should be deducted
in December 2011
sales because the
goods were shipped
F.O.B. shipping
Accounts
Receivable
No adjustment since
it was already
included in the
December 31, 2011
Accounts
Receivables
Inventory
The goods costing
₱2,000 should
bededucted in the
December 28, 2011
physical count
because the goods
are shipped F.O.B.
shipping point on
December 31, 2011
No adjustment since it was recorded correctly
Adjusting Entry:
No adjustment since
Dr. Sales 2,000
it was excluded in
Cr. A/R 2,000
the December 28,
2011 physical count
Adjusting Entry:
Dr. Sales 6,900
Cr. A/R 6,900
No adjustment since
it was excluded in
the December 28,
2011 physical count
Cost of Sales
Adjusting Entry:
Dr. COS
2,000
Cr. Inventory 2,000
No adjustment since it
was excluded in the
December 28, 2011
physical count
No adjustment since it
was excluded in the
December 28, 2011
physical count
5
6
7
8
9
10
11
12
point on January 4,
2012
No adjustment since
it was already
included in the
December 31, 2011
Sales
The goods sold
amounting to ₱4,000
should be deducted
in December 2011
sales because the
goods were shipped
F.O.B. shipping
point on January 3,
2012
The goods sold
amounting to
₱10,000 should be
deducted in
December 2011 sales
because the goods
were consigned only
on December 28,
2011
The goods sold
amounting to ₱6,000
should be added in
December 2011 sales
because the goods
were shipped F.O.B.
shipping point on
December 30, 2011
The goods sold
amounting to ₱8,000
should be added in
December 2011 sales
because the goods
were shipped F.O.B.
shipping point on
December 31, 2011
No adjustment since
it was already
included in the
December 31, 2011
Accounts
Receivables
The goods costing
₱600 should
bededucted in the
December 28, 2011
physical count
because the goods
are shipped F.O.B.
shipping point on
December 30, 2011
No adjustment since it was recorded correctly
Adjusting Entry:
No adjustment since
Dr. Sales 4,000
it was excluded in
Cr. A/R 4,000
the December 28,
2011 physical count
Adjusting Entry:
Dr. COS
600
Cr. Inventory 600
Adjusting Entry:
Dr. Sales 10,000
Cr. A/R 10,000
Adjusting Entry:
Dr. Inventory 5,600
Cr. COS
5,600
The goods costing
₱5, 600 should
beadded in the
December 28, 2011
physical count
because consigned
goods shall be
included in the
consignor’s
inventory until it was
sold by the consignee
Adjusting Entry:
The goods costing
Dr. A/R 6,000
₱4,000 should
Cr. Sales 6,000
bededucted in the
December 28, 2011
physical count
because the goods
are shipped F.O.B.
shipping point on
December 30, 2011
No adjustment since it was recorded correctly
No adjustment since it was recorded correctly
Adjusting Entry:
The goods costing
Dr. A/R 8,000
₱5,500 should
Cr. Sales 8,000
bededucted in the
December 28, 2011
physical count
because the goods
are shipped F.O.B.
shipping point on
December 31, 2011
No adjustment since it
was excluded in the
December 28, 2011
physical count
Adjusting Entry:
Dr. COS
4,000
Cr. Inventory 4,000
Adjusting Entry:
Dr. COS
5,500
Cr. Inventory 5,500
PROBLEM 4: You are auditing the CSI Inc’s investments accounts. In its initial year of operations, the
company has provided you the following information with regard to its stock investment acquisition of
the year:
ABC Corp.
DEF Inc.
GHI Co.
JKL Corp.
MNO Co.
Number of
shares acquired
2000
1500
3000
4000
10000
Recorded
acquisition cost
P240,000
225,000
285,000
200,000
850,000
Additional information:
a. ABC Corp. stocks were acquired on March 1, 2011 at a total cost of P200,000 plus brokerage fees
and commissions to P40,000. Dividends, which were declared on January 25,2011 to
stockholders as of March 20, 2011 were received on April 1 2011 at P20,000. ABC Corp. stocks
were acquired by the company with the intention of designating the same as a financial asset at
fair value through profit or loss. The stocks were selling at P105 per share as of December 31,
2011.
b. DEF Corp were acquired on May 1, 2011 at P150 per share. The company paid brokerage and
commissions amounting to P30,000. The company had neither significance over DEF Corp. nor
does it intend to sell the stocks for short-term profits, thus designated the same as a fair value
through other comprehensive income. The company received a 20% stock dividend on October
11, 2011. The stocks were selling at P160 per share on December 31, 2011.
c. GHI Co. stocks, which were acquired for trading purposes on June 1 2011 at 285,000, were split
5 for 3 on August 15, 2011. On September 30, 2011, the company paid special assessment on the
investment at P25 per share. On December 30, 2011, when the shares had a market value P75 per
share, GHI declared a P5 dividend payable on January 25, 2012.
d. JKL Corp. stocks were acquired on August 1, 2011 classified as financial asset at fair value
through other comprehensive income. JKL Corp. issued 1 share for every 4 shares held in lieu of
a P15 per cash dividends it has previously declared. The stocks were selling at that time at P55
per share. JKL shares were selling at P60 per share on December 31, 2011.
e. MNO Corp stocks were acquired at the beginning of 2011 when MNO Corp. offered its P50 par
value stocks in an IPO in January 2011. All of the MNO Corp’s 50,000 authorized shares were
issued on the same date and remained outstanding as of December 31, 2011. The Company
reported a total comprehensive income of P250,000, which is net of a foreign exchange loss
reported on its OCI/OCL amounting to P50,000. MNO
REQUIREMENTS:
1. How much should the investment in ABC Corp. and DEF Inc. be initially recognized?
a. 240,000: 225,000 b. 180,000: 255,000
c. 200,000: 255,000
d. 200,000: 225,000
2. How much is the correct dividend income to be recognized from investment in stocks of DEF Inc.
and GHI Co., respectively?
a. 46,500: 15,000
b. 0: 25,000
c. 46,500: 25,000
d. 0: 15,000
3. How much is the correct dividend income to be recognized from investment in JKL Corp.?
a. 0
b. 55,000
c. 60,000
d. 220,000
4. How much is the investment income should be reported from investment in MNO Co. stocks?
a. 100,000
b. 50,000
c. 120,000
d. 60,000
5. How much should be reported as investment in stocks classified as trading securities and the
corresponding unrealized holding gain or (loss) to be reported in its income statement?
a. 590,000: 0
b. 585,000: (5,000)
c. 590,000: 5,000
d. 585,000; 0
6. How much should be reported as investment in stocks classified as available-for-sale security and
the corresponding unrealized holding gain or (loss) to be reported in its balance sheet?
a. 510,000; 0
b. 588,000; 78,000
c. 510,000; 78,000
d. 588,000; 0
7. How should the investment in MNO Co. socks be presented in the company’s balance sheet?
a. Investment in associate at 870,000
c. Investment in associates at 780,000
b. Investment in associates at 850,000 d. Available for sale securities at 900,000
ABC
3/1/2011 Investment In Equity Securities (P&L)
Broker's Fee and Commission
Dividend Receivable
180,000
40,000
20,000
Cash
240
4/1/2011 Cash
20,000
Dividend Receivable
12/31/2011 Investment In Equity Securities (P&L)
20,000
30,000
Unrealized Gain (P&L)
30,000
DEF
5/1/2011 Investment in Securities (OCI)
255,000
Cash
255,000
10/11/2011 MEMO: Received 20%stock dividend or 300 shares from DEF
(total shares= 1800,)
12/31/2011 Investment in Securities (OCI)
33,000
Unrealized Gain (OCI)
33,000
GHI
6/1/2011 Investment In Equity Securities (P&L)
285,000
Cash
285,000
8/15/2011 MEMO: Share split of 5:3. Increased total share to 5000 shares at P57 per share
9/30/2011 Investment In Equity Securities (P&L)
125,000
Cash
12/30/2011 Dividend Receivale
125,000
25,000
Dividend Income
13/31/2015 Unrealized Loss (P&L)
25,000
35,000
Investment In Equity Securities (P&L)
35,000
JKL
8/1/2011 Investment in Equity Securities (OCI)
285,000
Cash
Investment in Equity Securities (OCI)
285,000
55,000
Dividend Income
12/31/215 Investment in Equity Securities (OCI)
55,000
45,000
Unrealized Gain
45,000
MNO
Investment in Association
850,000
Cash
Investment in Association
850,000
50,000
Investment Income
50,000
Cash
30,000
Investment in Association
30,000
PFRS 9 paragraph 5.1.1 states "except for trade receivables within the scope of paragraph 5.1.3, at initial
recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus,
in the case of a financial asset or financial liability not at fair value through profit or loss, transaction
costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.
PFRS 9 Paragraph 5.7.1b states that “a gain or loss on a financial asset or financial liability that is
measured at fair value shall be recognised in profit or loss unless it is an investment in an equity
instrument and the entity has elected to present gains and losses on that investment in
othercomprehensive income”.
5.7.1A Dividends are recognised in profit or loss only when:
(a) the entity’s right to receive payment of the dividend is established;
(b) it is probable that
will flow to the entity; and
the
economic
benefits
(c) the amount of the dividend can be measured reliably.
* Special Assessments are additional contribution of the shareholders.
DESIGNATION
ABC
DEF
GHI
JKL
MNO
Trading
AFS
Trading
AFS
Associates
Carrying
Amount
210,000
288,000
375,000
240,000
870,000
Unrealizrd
gain or (loss)
30,000
33,000
(35,000)
45,000
0
associated
with
the
dividend
PROBLEM 5: You have been engaged for the audit of Ayala Company for the year ended December 31,
2011. The Ayala Company is engaged in the wholesale business and makes all sales at 30% gross profit
based on sales price.
Portion of the client’s sales and purchases accounts for the calendar year 2011 follow:
Sales
Date
Reference
12/31
Closing entry
Amount
4,313,000
Date
Balance
12/27
Reference
Amount
Forwarded
SI #706
12/28
4,000,000
60,000
SI #708
80,000
12/28
SI #709
50,000
12/31
SI #710
40,000
12/31
SI #711
45,000
12/31
SI #712
38,000
4,313,000
Purchases
Date
Reference
Forwarded
4,313,000
Amount
Date
Reference
3,200,000
12/31
Closing Entry
12/28
RR #903
12/30
RR #905
110,000
12/31
RR #906
150,000
12/31
RR #907
175,000
Amount
3,735,000
100,000
3,735,000
3,735,000
RR = Receiving Report
SI = Sales Invoice
You observed the physical inventory count in the warehouse on December 31, 2011, and was satisfied
that it was properly taken.
When performing sales and purchases cut-off test, you found out that on December 31, 2011;
A – The last receiving report used was No. 907
B – The last sales invoice with actual shipment of goods was No. 709
The following additional information were gathered:
1. Included in the physical inventory were goods purchased and received on receiving report No. 904
but the invoice of which was received on January 3, 2012. Cost was90, 000.
2. In the warehouse at December 31, 2011, were good for which the customer advanced cash, but were
held pending shipping instructions from the customer. The goods are covered by the sales invoice
No. 706 and were not included in the inventory.
3. The company uses the railroad facilities of PNR for its purchase or sales shipments. On the evening
of December 31, 2011, there were 3 cars on the Ayala Company siding:
A. Car No. 1 was unloaded on January 2, 2012 and received on receiving report No. 905. The
freight was paid by the vendor.
B. Car No. 2 was loaded and sealed on December 31, 2011, and was switched off the company’s
siding on January 2, 2012. These goods were billed on sales invoice No. 708 and the freight
was paid by Ayala.
C. Car No. 3 was loaded and sealed on December 31, 2011, and was switched off the company’s
siding on January 2, 2012. The sales price was 120,000 and freight was paid by the customer.
This order was covered by sales invoice No. 707.
4. The trucks were damaged in Quezon Province thus temporarily stranded at December 31, 2011, on the
railroad siding Train Trip No. 13 on December 31, 2011. In the Train Cars were goods in transit to a
customer in Bicol. The goods were billed on sales invoice No. 709 and the terms were FOB
Destination.
5. In transit to Ayala on December 31, 2011, were goods received on receiving report No. 910. The
freight was properly deducted from the purchase price of 31,000.
6. Included in the physical inventory were goods damaged which were exposed to rain while in transit
and deemed unsalable. The invoice cost for the goods which were shipped FOB Seller was 10,000.
7. In transit to Ayala on December 31, 2011 were goods acknowledged on receiving report No. 915. The
freight of 2,500 was paid by the supplier. The supplier’s invoice shows a total price of 37,500 and
properly included the freight charge.
REQUIREMENTS:
1. Prepare audit working papers adjusting entries as of December 31, 2011.
2. Adjusted balances of:
a) Sales
b) Purchases
A
4,000,000
3,735,000
B
4,080,000
3,770,000
C
4,120,000
3,825,000
D
4,123,000
3,860,000
3. Net adjustments to:
a) Accounts
Receivable
b) Accounts Payable
c) Inventory
d) Net income
A
313,000
B
253,000
C
183,000
D
123,000
35,000
364,500
31,000
decrease
90,000
354,500
86,000
decrease
125,000
319,500
95,000
decrease
127,500
285,500
121,000
decrease
SOLUTIONS:
Adjusting Journal Entries:
1. Purchases were not yet recorded.
Purchases
Accounts Payable
90,000
90,000
2. Although there was an advanced payment, it was not covered by a special sale agreement nor a bill
and hold. Thus, not a valid sale.
Sales
Advances from Customers
60,000
Inventory
42,000
60,000
Cost of Sales (60,000 x 70%)
42,000
3. Properly recorded purchase but was excluded during the physical count. Goods were at the company’s
siding.
Inventory
110,000
Cost of Sales
No shipment yet but already invoiced.
Sales
Accounts Receivable
80,000
Inventory
Cost of Sales (80,000 x 70%)
56,000
110,000
80,000
56,000
No sale yet but goods were excluded in the count.
Inventory
Cost of Sales (120,000 x
70%)
84,000
84,000
4. Terms FOB Destination and goods still in transit.
Sales
Accounts Receivable
50,000
Inventory
Cost of Sales (50,000 x 70%)
35,000
50,000
35,000
5. No adjusting journal entry. Item was properly excluded.
6. Net realizable value of goods damaged and unsalable is zero.
Impairment Loss
Inventory
10,000
10,000
7. Freight was properly included in the supplier’s invoice. Thus, terms FOB Shipping Point.
Purchases
Freight In
Accounts Payable
35,000
2,500
37,500
There was no actual shipment of goods for sales invoice Nos. 710, 711, and 712.
Sales
Accounts Receivable
123,000
123,000
Adjusted Balances
Unadjusted Balance
1
2
3
Sales
₱4,313,000
(60,000)
(80,000)
Purchases
₱3,735,000
90,000
4
7
Adjusted Balance
(50,000)
(123,000)
4,000,000
35,000
3,860,000
Net Adjustments
A/R
1
2
A/P
90, 000
INVENTORY
42,000
110,000
3
(80,000)
56,000
84,000
4
(50,000)
35,000
(10,000)
6
7
(123,000)
Net Adjustments
(253,000)
37,500
127,500
37,500
354,500
NET INCOME
(90,000)
(60,000)
42,000
110,000
(80,000)
56,000
84,000
(50,000)
35,000
(10,000)
(123,000)
(35,000)
(2,500)
37,500
(86,000)
PAS 2 paragraph 10 provides that cost of inventories shall comprise all costs of purchase, costs of
conversion, and other costs incurred in bringing the inventories to their present location and condition.
PAS 2 paragraph 28 further states that the cost of inventories may not be recoverable if those inventories
are damaged.
According to paragraph 34, when inventories are sold, the carrying amount of those inventories shall be
recognized as an expense in the period in which the related revenue is recognized.
PROBLEM 6: At December 31, 2015, certain accounts included in the property, plant and equipment
section of the SPEED COMPANY’s statement of financial position had the following balances:
Land
P3,000,000
Buildings
24,000,000
Leasehold Improvements
3,500,000
Machinery and Equipment
1,400,000
During 2016 the following transactions occurred:
Land site number 621 was acquired for P2,000,000. Additionally, to acquire the land, Speed paid a
P60,000 commission to a real estate agent. Costs of P15,000 were incurred to clear the land for the
intended use but not to make room for the construction of a new building. During the course of clearing
the land, timber and gravel were recovered and sold for P5,000.
A second tract of land (site number 622) with a building was acquired from another entity in exchange for
100,000 Speed ordinary shares. On the acquisition date, the shares had a closing market price of P45 on a
stock exchange. Current appraised Values for the land and building, respectively, are P1,200,000 and
P2,100,000. Shortly after acquisition, the building was demolished at a cost of P30,000 to make room for
the construction of new building. A new building was constructed for P10,500,000 plus the following
costs:
Excavation fees
P110,000
Architectural design fees
380,000
Building permit fee
10,000
Imputed interest on funds used during construction
60,000
The building was completed and occupied on September 30, 2016.
A third tract of land (site number 623) was acquired for P6,000,000 and was classified as held for sale.
Extensive work was done to a building occupied by Speed under a lease agreement that expires on
December 31, 2023. The total cost of the work was P1,250,000, which consisted of the following:
Leasehold Improvements
Cost
Estimated Useful Life
Painting of ceilings
P100,000
1 year
Electrical work
350,000
10 years
Construction of extension to current working area
800,000
30 years
The lessor paid one-half of the costs incurred in connection with the extension to the current working
area.
During December 2016, cost of P650,000 were incurred to improve leased office space. The related lease
will terminate on December 31, 2018, and is not expected to be renewed.
A group of new machines was purchased under a royalty agreement which provides for payment of
royalties based on units of production for the machines. The invoice price of the machines was P750,000,
freight costs were P20,000, unloading charges were P15,000, and royalty payments for 2016 were
P130,000.
REQUIREMNENTS:
1. What is the December 31, 2106, balance of the Land account that should be shown as part of
property, plant, and equipment in the statement of financial position?
A. P6,270,000
B. P6,470,000
C. P6,570,000
D. P12,570,000
2. What is then total cost of building on December 31, 2016?
A. P35,000,000
B. P35,030,000
C. P35,040,000
D. P37,430,000
3. What is the total cost of leasehold improvements on December 31, 2016?
A. P4,250,000
B. P4,900,000
C. P5,000,000
D. P5,300,000
4. What is the total cost of machinery and equipment on December 31, 2016?
A. P2,170,000
B. P2,185,000
C. P2,315,000
D. P2,415,000
5. How much should be reported as part of expenses (excluding depreciation) in the income statement
for the year ended December 31, 2016?
A. P130,000
B. P190,000
C. P230,000
D. P290,000
SUGGESTED SOLUTIONS:
Requirement 1:
Land, beginning
Add: Land site 621
Purchase price
Commission to real agent
Cost of clearing the land
Salvage value
Land site 622
Land, 12/31/2016
P 3,000,000
P 2,000,000
60,000
15,000
(5,000)
2,070,000
1,200,000
P 6,270,000
Note:
 According to PAS 16, paragraph 16, “The cost of an item of property, plant and equipment
comprises:
 its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates.
 any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management.
 the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity incurs
either when the item is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce inventories during
that period.
o
In paragraph 17, examples of directly attributable costs are given as follows:
 costs of employee benefits (as defined in IAS 19 Employee Benefits) arising
directly
from the construction or acquisition of the item of
property, plant and equipment;
 costs of site preparation;
 initial delivery and handling costs;
 installation and assembly costs;
 costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that
location and condition (such as samples produced when testing equipment); and
 professional fees.
 Paragraph 10 of PFRS 2 provides that for equity-settled share-based payment transactions, the
entity shall “measure the goods or services received, and the corresponding increase in equity,
directly, at the fair value of the goods or services received, unless that fair value cannot be
estimated reliably”. If the fair value of the goods or services received cannot estimate reliably by
the entity, the measurement of the goods or services received, and the corresponding increase in
equity shall be by reference to the fair value of the equity instruments granted.
Requirement 2:
Building, beginning
Add: Demolition cost
New building
Construction cost
Excavation fees
Architectural design fees
Building permit fee
Building, 12/31/2016
P 24,000,000
30,000
P 10,500,000
110,000
380,000
10,000
11,000,000
P 35,030,000
Note:
 PIC Interpretation:
The demolition cost minus salvage value is capitalized as cost of the new building if the
old building is demolished immediately to make room for construction of a new building.
 The cost of a self-constructed asset is determined using the same principles as for an acquired
asset. (PAS 16, paragraph 22)
The cost of self-constructed property, plant and equipment includes:
 Direct cost of materials
 Direct cost of labor
 Indirect cost and incremental overhead specifically identifiable or traceable to the
construction
 The imputed interest is not capitalizable. Only interests actually incurred on construction shall be
capitalized.
Requirement 3:
Leasehold improvements, beginning
Add: Electrical work
Construction of extension (P 800,000 x ½)
Improvement of leased office space
Leasehold improvements
P 3,500,000
350,000
400,000
650,000
P 4,900,000
Note:
 Leasehold improvements are additions, alternations, or remodeling on a leased property. Such
improvements normally revert to the lessor at the end of the lease term. Leasehold improvements
are normally presented as part of property, plant and equipment (i.e., fixed assets) in the noncurrent assets section on the balance sheet.
 When you pay for leasehold improvements, capitalize them if they exceed the
corporate capitalization limit. If not, charge them to expense in the period incurred. If you
capitalize these expenditures, then amortize them over the shorter of their useful life or the
remaining term of the lease. The remaining term of the lease for amortization purposes can be
extended into additional lease renewal periods if the renewal is reasonably assured (such as when
there is a bargain renewal option).
 Technically, you are amortizing leasehold improvements rather than depreciating them. The
reason is that the landlord owns the improvements, so you are only exercising an intangible right
to use the improvements during the term of the lease - and intangible assets are amortized, not
depreciated.
 Leasehold improvements should be amortized over the life of the improvement or the lease term,
whichever is shorter.
Requirement 4:
Machinery and equipment, beginning
Add: New machines
Invoice price
P 750,000
Freight costs
20,000
Unloading charges
15,000
Machinery and equipment, 12/31/2016
P 1,400,000
785,000
P 2,185,000
Requirement 5:
Painting of ceilings
Royalty payments
Total expenses
Note:
Royalty payment is an expense.
P 100,000
130,000
P 230,000
PROBLEM 7: The TGR Company commenced operations on January 1, 2011.
machinery account is shown below.
Date
Jan. 1, 2011 Purchase
Particulars
Sept. 30, 2011 Purchase on installment
Payments from Sept. to Dec.
Oct. 3, 2011 Freight and installation
Dec. 31, 2011 Depreciation
2012 Installment payments for acquisition
on Sept. 30, 2011
June 30, 2012 Purchase
Dec. 31, 2012 Depreciation
June 30, 2013 Acquisition – trade in of old machine
Dec. 31, 2013 Depreciation
Jan. 1, 2014 Sale
Dec. 31, 2014 Depreciation
Oct. 1, 2015 Sale
Dec. 31, 2015 Depreciation
Debit
P157,200
120,000
132,000
Credit
The company’s
Balance
P409,200
72,000
6,000
P97,440
144,000
240,000
154,752
150,000
153,802
71,250
108,791
24,000
82,233
481,200
487,200
389,760
533,760
773,760
619,008
769,008
615,206
543,956
435,165
411,165
328,932
The details of the transactions are as follows:
a) On September 30, 2011, a machine was purchased on an installment basis. The list price was
P180,000, but 12 payments of P18,000 each were made by the company. Only the monthly payments
were recorded in the machinery account starting with September 30, 2011. Freight and installation
charges of P6,000 were paid and charged to the machinery account on October 3, 2011.
b) On June 30, 2012, a machine was purchased for P240,000, 2/10, n/30, and recorded at P240,000 when
paid for on July 5, 2012.
c) On June 30, 2013, the machine acquired for P157,200 was traded for a larger one having a list price
of P279,000. Allowance of P129,000 was received on the old machine, the balance of the list price
being paid in cash and charged to the machinery account.
d) On January 1, 2014, the machine acquired on January 1, 2011 with cost of P132,000 was sold for
P75,000. The cost of removal and crating totaled P3,750.
e) On October 1, 2015, the machine purchased on January 1, 2011 was sold for P24,000 cash.
Assume a 5-year useful life for TGR Company’s machinery.
REQUIREMENTS:
1. What is the total amount of gain on the sale/trade-in of the machinery acquired on January 1, 2011?
A. P50,400
B. P40,200
C. P36,450
D. P86,850
2. What is the adjusted balance of the Machinery account on December 31, 2015?
A. P694,200
B. P705,000
C. P700,200
D. P703,950
3. What is the adjusted balance of the Accumulated depreciation account on December 31, 2015?
A. P465,600
B. P457,140
C. P462,240
D. P397,740
4. What is the correct total depreciation provision for the years 2011-2015?
A. P737,400
B. P734,040
C. P728,940
D. P669,540
5. The entry to correct the depreciation provision for the years 2011-2015 should include a debit (credit)
to
Depreciation Expense
Retained Earnings
A.
P75,807
P61,215
B.
(P18,492)
P79,707
C.
P18,492
(P79,707)
D.
P75,807
P55,249
SUGGESTED SOLUTIONS:
Requirement 1:
Trade-in – June 30, 2013
Cost
P157,200
Accum. Depreciation, 1/1/11 – 6/30/13 (P157,200 x 20% x 2.5 yrs.)
78,600
Carrying value
78,600
Trade-in value
129,000
Sale – Jan. 1, 2014
Cost
P132,000
Accum. Depreciation, 1/1/11 – 1/1/14 (P132,000 x 20% x 3 yrs.)
79,200
Carrying value
52,800
Net proceeds
71,250
Sale – October 1, 2015
Cost
P120,000
Accum. Depreciation, 1/1/11 – 10/1/15 (P120,000 x 20% x 4 9/12)
114,000
Carrying value
6,000
Proceeds
24,000
Total gain
P50,400
18,450
18,000
P86,850
 According to PAS 16, if the PPE was acquired on installment basis, the asset shall be recorded at
the cash price. The excess of the installment price over the cash price is treated as an interest to be
amortized over the credit period.
And when acquired on account subject to a cash discount, the cost of the asset is equal to the
invoice price minus discount, regardless of whether the discount is taken or not. But when the PPE is
traded with commercial substance, the new asset is recorded in the following order of priority: a.
Fair value of asset given plus cash payment, b. Trade in value of asset plus cash payment.
 Paragraph 71 provides that the gain or loss arising from the derecognition of a PPE shall be
determined as the difference between the net disposal proceeds, if any, and the carrying amount
of the item.
Requirement 2:
Machine acquired on Sept. 30, 2011 (P180,000 + P6,000)
Machine acquired on June 30, 2012 (P240,000 x 98%)
Machine acquired on June 30, 2014 (list price)
Total
P186,000
235,200
279,000
P700,200
 Under PAS 16, when acquired on account subject to a cash discount, the cost of the asset is equal
to the invoice price minus discount, regardless of whether the discount is taken or not. But when
the PPE is traded with commercial substance, the new asset is recorded in the following order of
priority: a. Fair value of asset given plus cash payment, b. Trade in value of asset plus cash
payment.
Requirement 3:
Machine acquired on:
Sept. 30, 2011 (P186,000 x 20% x 4 3/12)
June 30, 2012 (P235,200 x 20% x 3 6/12)
June 30, 2013 (P279,000 x 20% x 2 6/12)
Accumulated depreciation, December 31, 2015
P158,100
164,640
139,500
P462,240
 Under paragraph 60 and 61. The depreciation method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity and the depreciation
method applied shall be reviewed at least at each year.
Requirement 4:
Date of
Acquisition
Cost
2011
1/1/11 P157,200
P31,440
120,000
24,000
132,000
26,400
9/30/11
186,000
9,300
6/30/12
235,200
0
6/30/13
279,000
0
Correct depreciation
P91,140
Depreciation per client 97,440
Over (under)statement P 6,300
2012
2013
2014
2015
Total
P31,440
P15,720
P0
P 0 P 78,600
24,000
24,000
24,000
18,000
114,000
26,400
26,400
0
0
79,200
37,200
37,200
37,200
37,200
158,100
23,520
47,040
47,040
47,040
164,640
0
27,900
55,800
55,800
139,500
P142,560 P178,260 P164,040 P158,040 P734,040
154,752
153,802
108,791
82,233
597,018
P 12,192 (P 24,458) (P 55,249) (P 75,807) (P 137,022)
 Under paragraph 60 and 61. The depreciation method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity and the depreciation
method applied shall be reviewed at least at each year.
Requirement 5:
Depreciation expense (2015)
Retained earnings (2011 – 2014)
Accumulated depreciation
75,807
61,215
137,022
 Under paragraph 60 and 61. The depreciation method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity and the depreciation
method applied shall be reviewed at least at each year.
PROBLEM 8: You are auditing the financial statements of Art Inc. for the year 2011.
The details of the company’s Accumulated Profit account, before any adjustments, are as follows:
ACCUMULATED PROFIT
Date
Particulars
01.01.2009
Balance
12.31.2009
Net income for the year
10.31.2010
Dividends paid
04.01.2010
Paid in Capital in excess of par
08.30.2010
Gain on retirement of preference
12.31.2010
Net loss for the year
01.31.2011
Dividends paid
12.31.2011
Net loss for the year
Debit
Credit
465,000
210,000
135,000
96,750
307,500
150,000
248,250
Balance
870,000
1,335,000
1,125,000
1,260,000
1,356,750
1,049,250
899,250
651,000
Your examination disclosed the following:
a. The following were omitted at the end of each year:
2011
2010
2009
2008
Accrued income
11,700
9,300
8,400
7,050
Prepayments
14,250
11,100
9,300
12,750
Unearned income
14,400
13,350
11,700
10,350
Accrued expenses
13,500
13,050
10,950
8,100
b. Dividends had been declared in 2009 and in 2010 but were not recorded until paid the following year.
Dividends declared in December 2011,but paid and recorded only in 2012 amounted to P125,000.
c. The company received transportation equipment as donation from one of its stockholders on September
30, 2010. As of the date of donation, the equipment has a historical cost of P1,125,000; a remaining
useful life of 3 years and a fair value of P360,000. The only entry made at the date of the donation was the
entry expensing P45,000, which is the fee paid to effect the transfer of ownership.
d. The company purchased a machine worth P405,000 on April 30, 2008. The company charged the
purchase to expense. The machine has an estimated life of 3 years. The company uses the straightline
method and the machine has an estimated life of 3 years.
e. The physical count of the merchandise inventory had been understated by P96,000 and by P66,750 at
the end of 2009 and 2011, respectively.
f. The merchandise inventories, which were in transit at the end of 2010 and 2011 amounting to P51,000
and P48,900; respectively were not included in the physical and were not likewise recorded as purchases.
These were purchased under FOB shipping point.
REQUIREMENTS:
1. What is the correct accumulated profit as of December 31, 2008?
a. 871,350
c. 1,186,350
b. 1,276,350
d. 1,141,350
2. What is the correct net income for the year ended December 31, 2009?
a. 554,700
c. 419,700
b. 323,700
d. 559,650
3. What is the correct accumulated profit balance as of December 31, 2010?
a. 721,500
c. 511,500
b. 616,500
d. 361,500
4. What is the correct net loss for the year ended December 31, 2011?
a. 177,450
c. 222,450
b. 342,450
d. 267,450
SUGGESTED SOLUTIONS:
RE
Unadjusted balances
a.1 Accrued Income
2008
2009
2010
2011
a.2 Prepayments
2008
2009
2010
2011
a.3 Unearned Income
2008
2009
2010
2011
a.4 Accrued Expenses
2008
2009
2010
2011
Profit
2008
P870,000
2009
P465,000
7,050
(7,050)
8,400
12,750
(10,350)
(8,100)
(12,750)
9,300
10,350
(11,700)
8,100
(10,950)
c. Unrecorded transportation
equipment received as
donation on Sept.30,2010
Expenses paid
d. Purchase of Machinery,
expensed on April 30,
2008
Unrecorded Depreciation
e. Understatement of
Inventory
2009
2011
Loss
2010
(P307,500)
(8,400)
9,300
(9,300)
11,100
11,700
(13,350)
10,950
(13,050)
Loss
2011
(P248,250)
(9,300)
11,700
(11,100)
14,200
13,350
(14,400)
13,050
(13,500)
45,000
(30,000)
(120,000)
(135,000)
(135,000)
(45,000)
96,000
(96,000)
405,000
(90,000)
66,750
f. Understatement of
Inventory and Purchases
2010
51,000
(51,000)
2011
Adjusted Balances
P1,186,350
Retained Earnings, Jan.01,2009 as adjusted
Net Income for 2009
Dividends declared
Retained Earnings, Dec.31,2009
Net Loss for 2010
Dividends declared
Retained Earnings, Dec.31,2010
Net Loss for 2011
Retained Earnings, Dec.31,2011
P419,700
(51,000)
51,000
48,900
(48,900)
(P524,550) (P342,500)
P1,186,350
419,700
(210,000)
P1,396,050
(524,550)
(150,000)
P 721,500
(342,500)
P 379,000
PROBLEM 9: MNO Inc. reported the following information in its long term liability portion of its
Statements of Financial Position for the period ended December 31, 2013:
12% Bonds Payable
P5,500,000
10% Notes Payable – Bank
2,500,000
Deferred Taxes Liability, net
340,000
Audit notes:
The bonds payable with face value of P5M was issued with a conversion =option into 20,000, P100 par
value ordinary shares at any time up to its maturity on June 30, 2018. There were issued on June 30, 2013
when the prevailing yield rate on similar debt security without conversion option was 10%. The company
recorded the transaction as a debit to Cash and credit to Bonds Payable for the total consideration
received. Interests are being paid semi-annually every December 31, and June 30 and were recorded
appropriately. No further entries were made by the client affecting the carrying value of the bonds.
Half of the bonds were retired on December 31, 2014 at par value. The prevailing yield rate on similar
debt instrument without the conversion option on this date was at 14%. The transaction is yet to be
recorded at year end.
The 10% note payable to the bank is dated September 1, 2013 and is payable at the rate of P500,000,
annually every September 1 of each year starting 2014. Interests are also payable annually every
September 1.
The deferred tax liability at the beginning of the year resulted to the following cumulative temporary
differences as of December 31, 2013:
Cumulative temporary difference creating future
taxable amount
Cumulative temporary difference creating future
deductible amount
P 1,050,000
200,000
At the end of the year the balance of the cumulative temporary differences were:
Cumulative temporary difference creating future
taxable amount
P 1,550,000
Cumulative temporary difference creating future
300,000
deductible amount
Income Tax is at 40%.
REQUIREMENTS:
1. What is the equity portion of the Convertible Bonds?
a.
b.
None
113,914
c.
d.
120,921
500,000
2. How much should be recognized in the profit or loss as a result of the retirement of half of the
bonds at the end of 2014?
a.
144,659
c.
279,392
b.
201,618
d.
77,776
3. What is the total interest expense for 2014?
a.
b.
233,333
533,928
c.
d.
767,261
770,407
4. Assuming the total financial income after permanent difference is at P1,000,000, what is the total
current tax expense for 2014?
a.
100,000
c.
400,000
b.
240,000
d.
560,000
5. How much deferred tax should be presented separately in the non-current liability portion of the
Statement of Financial Position?
a.
340,000
c.
500,000
b.
420,000
d.
620,000
6. How much is the total long-term liability to be presented in the 2014 Statement of Financial
Position?
a.
5,144,659
c.
4,644,659
b.
5,264,659
d.
4,764,659
SUGGESTED SOLUTIONS:
1-(1+.05)-10 = PV of ordinary annuity of 1 for 10 periods
.05
7.7217
(1+.05)-10
= PV of 1 for 10 periods
0.6139
5,000,000 x 0.6139
P 3,069,500Proceeds
5,000,000 x 6% x 7.7217
Liability component of
convertible bonds
Date
P 5,500,000
2,316,510Less: Liability component
Equity component of convertible
bonds
P 5,386,010
Interest Paid
Interest Expense
Premium
5,386,010
P 133,990
Carrying Value
Amortization
6/30/2013
300,000
5,386,010
12/31/2013
300,000
269,300
30,700
5,355,310
6/30/2014
300,000
267,766
32,234
5,323,076
12/31/2014
300,000
266,154
33,846
5,289,230
Total Carrying amount of bonds
P
5,289,230
÷2
Carrying amount of bonds retired
2,500,000 x 0.62275
P
P 1,556,875Carrying Amount
2,500,000 x 6% x 5.38929
Fair Value of Bonds
P 2,644,415
808,394Less: Fair Value of Bonds
P 2,365,269Loss on retirement of Bonds
Long Term Component of Notes Payable
Add: Short term Component
P
2,500,000
500,000
Total Notes Payable
x
2,644,415
3,000,000
Interest Rate
10%
Total Interest
300,000
Interest on Notes for 2014
500,000 x 8/12
Less: Interest on Notes for 2013
300,000 x 4/12
Actual Interest Expense for 2014
P
100,000
P
Interest Expense of Bonds, Jan to Jun
267,766
Interest Expense of Bonds, Jul to Dec
266,154
Interest Expense of Notes
233,333
Total Interest Expense
767,235
Taxable income for 2014
333,333
233,333
P
1,000,000
Future taxable temporary amount, Jan 1, 2014
1,050,000
Future taxable temporary amount, Jan 1, 2014
(1,550,000)
Future taxable deductible amount, Dec 31, 2014
(200,000)
2,365,269
P 279,346
Future taxable deductible amount, Dec 31, 2014
300,000
Pre-tax Accounting Income
600,000
x
Income tax rate
40%
Total Current Tax Expense
240,000
Cumulative future taxable amount
P
1,550,000
× income tax rate
40%
Non-current deferred tax
Carrying amount of bonds
Non-current Notes Payable – Bank
Non-current deferred tax
Total Non-current liability
620,000
P
2,644,415
1, 500,000
620,000
4,764,415
The equity component is the residual amount between the proceeds and the liability component of the
financial instrument. According to par 15 of PAS 32:
“The issuer of a financial instrument shall classify the instrument, or its component parts, on initial
recognition as a financial liability, a financial asset or an equity instrument in accordance with the
substance of the contractual arrangement and the definitions of a financial liability, a financial asset and
an equity instrument”.
The process in computing the gain or loss in early retirement of the convertible bonds is in accordance
with PAS 32 AG33 which states that
“When an entity extinguishes a convertible instrument before maturity through an early redemption or
repurchase in which the original conversion privileges are unchanged, the entity allocates the
consideration paid and any transaction costs for the repurchase or redemption to the liability and equity
components of the instrument at the date of the transaction. The method used in allocating the
consideration paid and transaction costs to the separate components is consistent with that used in the
original allocation to the separate components of the proceeds received by the entity when the convertible
instrument was issued, in accordance with paragraphs 28–32.”
According to the book of Uberita, C., Practical Accounting I (2015)
When convertible debt instrument id retired prior to maturity, the total redemption price or repurchase
price and any transaction costs should be allocated between the liability component and the equity
component.
He further explained that “the reason why the allocation process is needed is consistent with that used in
the original allocation to separate components of the proceeds received when the convertible instrument
was issued. Any amount of gain or loss related to the equity component is recognized in the profit or loss
statement while the gain or loss related to the equity component is recognized in the equity.”
The initial measurement to notes payable is in accordance to the PFRS 9 which states that “in the case of
a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to
the acquisition of the financial asset”
Deferred tax taxes are measured in accordance to par 5 of PAS 12 which states that,
“Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable
temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:



deductible temporary differences;
the carryforward of unused tax losses; and
the carryforward of unused tax credits.
Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base. Temporary differences may be either:


taxable temporary differences, which are temporary differences that will result in taxable
amounts in determining taxable profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled; or
deductible temporary differences, which are temporary differences that will result in amounts
that are deductible in determining taxable profit (tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled.
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.”
Presentation is liabilities should be presented in the Financial position as current and non-current
according to PAS 1 par. 60 to 61
“An entity shall present current and non-current assets, and current and non-current liabilities, as
separate classifications in its statement of financial position”
“an entity shall disclose the amount expected to be recovered or settled after more than twelve months for
each asset and liability line item that combines amounts expected to be recovered or settled:


no more than twelve months after the reporting period, and
more than twelve months after the reporting period”
Liabilities that do not qualify as Current liability shall be classified as Non-current in accordance to the
criteria os PAS 1 par. 69
“An entity shall classify a liability as current when:




it expects to settle the liability in its normal operating cycle;
it holds the liability primarily for the purpose of trading;
the liability is due to be settled within twelve months after the reporting period; or
it does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period (see paragraph 73). Terms of a liability that could, at the
option of the counterparty, result in its settlement by the issue of equity instruments do not
affect its classification.
An entity shall classify all other liabilities as non-current.”
PROBLEM 10: In the course of your audit of Probe Inc. for the year ended December 31, 2014, you took
note of the following information:
ITEM
AUDIT NOTES
Accounts payable – trade, ₱170,000
This amount is net of ₱30,000 accounts with debit
balances
Notes payable – trade, ₱70,000
The notes are all with five-month term bearing interest at
15%. ₱50,000 from the notes is dated September 1, while
the rest are dated November 3.
Advance receipts from customers
₱100,000
The goods pertaining to these advances will be delivered
in 2015.
Containers Deposit, ₱50,000
This is an amount received from customers for returnable
containers.
Notes Payable – BPI, ₱200,000
This is a long-term note for five years and are being paid
off at the rate of ₱4,000 per month (monthly payment
include interest).
Dividends in arrears on cumulative
preferred stock, ₱20,000
The company is yet to declare dividends since its last
declared and distributed dividends in 2015.
Stock dividends payable on common
stocks, ₱37,200
Liabilities under guarantee agreement, This pertains to Probe’s guarantee of its employees’ bank
₱45,000
loans. As per past experience, employees unlikely default
on their loan payments.
Convertible bonds, ₱1,000,000
1,000 bonds is convertible to 10 ordinary shares. Amount
due on December 31, 2017.
Notes Payable – Officers, ₱40,000
This is due in six months.
Salaries and Wages
Payroll for the period December 16, 2014 to January 15,
2015 amounted to ₱68,000.
Notes Receivables, ₱30,000
This note has been discounted in a bank on a withoutrecourse basis, where the company received cash of
₱24,000.
Output VAT, ₱246,000
Input VAT on purchases and other operating expenses
amounted to ₱164,000.
Accounts Receivable, ₱215,000
The accounts receivable is net of ₱12,300 customer
credit balances.
Cash in banks, ₱115,000
The company’s cash in banks include a cash balance
with BPI amounting to ₱125,000; with PNB amounting
to ₱55,000, and; an overdraft balance with BDO.
Common stock warrants outstanding
Amount to date, ₱250,000
Common stock-options outstanding
Amount to date, ₱150,000
Estimated warranty costs on goods
sold, ₱46,000
This pertains to warranty costs on goods sold in 2013
and 2014.
Instalment notes payable, ₱75,000
This is for the equipment purchases, only one-third is
due in 2015.
Provision for losses
During the year, one of the manufacturing equipment of
the company exploded injuring an employee. The
employee filed claims for damages on November 3.there
has still been no resolution yet on the case as of the
balance sheet date. The company lawyers however
believe that it is probable that the company will be liable
between ₱25,000 and ₱75,000.
Deferred tax liability, ₱150,000
This refers to deferred tax liabilities on cumulative
temporary difference on taxable income and financial
income which will reverse evenly over the next year.
REQUIREMENTS:
1. How much is the total current liabilities?
A. 767,000
B. 814,300
2. How much is the total noncurrent liabilities?
A. 1,285,000
B. 1,360,000
3. How much is the total liabilities?
B. 2,127,300
A. 2,177,300
C. 817,300
D. 892,300
C. 1,429,000
D. 1,760,000
C. 2,246,300
D. 2,252,300
SUGGESTED SOLUTIONS:
ITEM
CURRENT LIABILITIES
NONCURRENT LIABILITIES
a
200,000*
-
b
70,000
3,000**
-
c
100,000
-
d
50,000
-
e
40,000***
160,000
f
-
-
g
-
-
h
-
-
i
-
1,000,000
j
40,000
-
k
34,000****
-
l
-
-
m
82,000*****
-
n
12,300
-
o
65,000
-
p
-
-
q
-
-
r
46,000
-
s
25,000******
50,000
t
50,000
-
u
-
150,000
TOTAL
817,300
1,360,000
*170,000+30,000
**(50,000x15%x4/12)+(20,000x15%x2/12)
***(200,000/5)
****68000x15/30
*****246,000-164,000
******75000x1/3
Current Liabilities
817,300
Noncurrent Liabilities
1,360,000
TOTAL LIABILITIES
2,177,300
Under IAS/PAS 1 paragraph 69, an entity shall classify a liability as current when:

it expects to settle the liability in its normal operating cycle;

it holds the liability primarily for the purpose of trading;

the liability is due to be settled within twelve months after the reporting period; or

It does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period (see paragraph 73). Terms of a liability that could, at the option
of the counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
An entity shall classify all other liabilities as non-current.
PROBLEM 11: LAPAYAT CORPORATION, a client, requests that you compute the appropriate
balance of its estimated liability for product warranty account for a statement as of June 30, 2017.
Lapayat Corporation manufactures television components and sells them with a 6-month warranty under
which defective components will be replaced without charge. On December 31, 2016, Estimated Liability
for Product warranty had a balance of P 620, 000. By June 30, 2017, this balance had been reduced to P
120, 400 by debits for estimated net cost of components returned that had been sold in 2016.
The corporation started out in 2017 expecting 7% of the peso volume of sales to be returned. However,
due to the introduction of new models during the year, this estimated percentage of returns was increased
to 10% on May 1. It is assumed that no components sold during a given month are returned in that month.
Each component is stamped with a date at time of sale so that the warranty may be properly administered.
The following table of percentages indicates the likely pattern of sales returns during the 6-month period
of the warranty, starting with the month following the sale of components.
Month Following Sale
Percentage of Total
Returns Expected
First
Second
Third
Fourth through sixth – 10% each month
30%
20
20
30
100%
Gross sales of components were as follows for the first six months of 2017:
Month
Amount
January
P 4, 200, 000
February
4, 700, 000
March
3, 900, 000
April
P 3, 250, 000
May
2, 400, 000
June
1, 900, 000
The corporation’s warranty also covers the payment of freight cost on defective components returned and
on the new components sent out as replacements. This freight cost runs approximately 5% of the sales
price of the components returned. The manufacturing cost of the components is roughly 70% of the sales
price, and the salvage value of returned components averages 10% of their sales price.
Returned components on hand at December 31, 2016, were thus valued in inventory at 10% of their
original sales price.
REQUIREMENTS:
1. Total estimated returns from the sales made during the first 6 months of 2017
A. P 1, 481, 500
B. P 1, 651, 000
C. P 1, 424, 500
D. P 1, 553, 500
C. P 591, 850
D. P 615, 950
2. Total estimated returns subsequent to June 30, 2017
A. P 678, 250
B. P 648, 850
3. Estimated loss on component replacement (in percentage of sales price)
A. 65%
B. 75%
C. 70%
D. 80%
4. Required Estimated Liability for Product Warranty balance at June 30, 2017
A. P 301, 353
B. P 421, 753
C. P 120, 400
D. P 77, 847
5. Required adjustment to liability account
A. P 301, 353 debit
B. P 421, 753 debit
C. P301, 353 credit
D. P421, 753 credit
SUGGESTED SOLUTIONS:
Requirement 1: Answer: D
Month
Sales
Estimated Returns
(based on Sales)
January
P 4, 200, 000
x
7%
P 294, 000
February
4, 700, 000
x
7
329, 000
March
3, 900, 000
x
7
273, 000
April
3, 250, 000
x
7
227, 500
May
2, 400, 000
x
10
240, 000
June
1, 900, 000
x
10
190, 000
TOTAL
P 1, 553, 500
PAS 37 states that “an entity must recognise a provision if, and only if a present obligation (legal or
constructive) has arisen as a result of a past event (the obligating event), payment is probable ('more
likely than not'), and the amount can be estimated reliably.”
Requirement 2: Answer: B
Month
January
Estimated
Returns
(based on Sales)
P 294, 000
February 329, 000
March
273, 000
April
227, 500
May
240, 000
June
190, 000
TOTAL
Percentage of Total Returns
Expected
July –
Dec
Estimated
Returns
Feb
Mar
Apr
May
Jun
30%
20%
20%
10%
10%
x
10%
P 29, 400
30
20
20
10
x
20
65, 800
30
20
20
x
30
81, 900
30
20
x
50
113, 750
30
x
70
168, 000
x
100
190, 000
P 648, 850
PAS 37 states that provision for warranties is recognized when an obligating event occurs (sale of product
with a warranty and probable warranty claims will be made).
Requirement 3: Answer: A
Cost
70%
Add: Freight cost
5
Less: Salvage value
10
Estimated loss on component replacement
65%
PAS 37 states that provisions are “measured at the best estimate of the expenditures required to satisfy the
obligation at the end of the reporting period, that is, the amount that an entity would rationally pay to
settle the obligation at the balance sheet date or to transfer it to a third party.”
Requirement 4: Answer: B
Estimated returns at June 30, 2017
P 648, 850
Multiply by: Estimated loss on component replacement
Estimated liability for product warranty at June 30, 2017
65%
P 421, 753
PAS 37 states that “provisions for large populations of events (warranties, customer refunds) are
measured at a probability-weighted expected value.”
Requirement 5: Answer: B
Estimated Liability for Product Warranty
6/30/17 Unadjusted balance
Adjustment (squeeze)
6/30/17 Adjusted balance
P 120, 400
301, 353
P 421, 753
PAS 37 states that provisions are reviewed, adjusted and remeasured at each balance sheet date.
PROBLEM 12: On January 1, 2016, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000
face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is
payable each December 31. Wizards uses the effective interest method of amortization. On December 31,
2017, the 2,000 bonds were extinguished early through acquisition in the open market by Wizards for
P1,980,000 plus accrued interest.
On July 1, 2016, Wizards issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par.
Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest
rate of similar debt without the conversion option is 12%. On July 1, 2017, an investor in Wizards’
convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards’ ordinary shares,
which had a fair value of P105 and a par value of P1 at the date of conversion.
Based on the above and the result of your audit, determine the following: (Round off present value factors
to four decimal places.)
REQUIREMENTS:
1. The issue price of the 2,000 5-year, P1,000 face value bonds on January 1, 2016 is
A. 2,155,500
B. 2,000,000
C. P1,844,400
D. P2,147,800
2. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31,2016, is
A. P1,898,400
B. P2,129,500
C. P2,000,000
D. P2,121,100
3. The gain on early retirement of bonds on December 31, 2017, is
A. P20,000
B. P112,000
C. P121,200
D. P0
4. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31, 2016, is
A. P4,605,800
B. P5,000,000
C. P4,732,875
D. P4,615,400
5. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2017, will increase share
premium by
A. P1,485,000
B. P1,374,600
C. P1,415,054
D. P1,377,697
SUGGESTED SOLUTIONS:
Requirement 1:
Present value of principal (2M x .6499)
1,299,800
Present value of interest payments (220,000 x 3.8897)
Issue price of FV bonds 1/1/2016
855,734
2,155,500 A
The sum of the carrying amounts assigned to the liability (present value of expected cash flows) and
equity components (proceeds) on initial recognition is always equal to the fair value that would be
ascribed to the instrument as a whole.
Requirement 2:
Date
Int. Paid
(11%)
Int. Exp. (9%)
Amortization
1/1/2016
Balance
2,155,500
12/31/2016
220,000
193,995
26,005
2,129,500 B
12/31/2017
220,000
191,655
28,345
2,101,200
Amortization of discount reduces the balance in the contra account to bonds payable and results in an
increase in carrying amount of bonds payable. Amortization reduces the balance in discount on bonds
payable account such that at the maturity the bonds payable's carrying amount is equal to its face value.
Requirement 3:
Retirement Price
1,980,000
Carrying Value 12/31/2017
2,101,200
Gain on retirement
121,200 C
The stated book value (or carry value for a discount or premium bond) will most likely be the same as
market value for which the company repurchased the bond. This difference creates an extraordinary gain
or loss for the repurchasing company. If the price paid to retire the bonds is greater the carrying amount
of bonds the company needs to record a loss on retirement. On the other hand, if the price paid is less than
the carrying amount of the bonds at retirement the company records a gain on retirement of bonds.
Requirement 4:
Date
Int. Paid
(10%)
Int. Exp. (6%)
Amortization
7/1/2016
Balance
4,580,950
12/31/2016
250,000
274,857
24,850
4,605,800 A
7/1/2017
250,000
276,348
26,340
4,632,140
Amortization of discount reduces the balance in the contra account to bonds payable and results in an
increase in carrying amount of bonds payable. Amortization reduces the balance in discount on bonds
payable account such that at the maturity the bonds payable's carrying amount is equal to its face value.
Requirement 5:
CV of bonds
4,632,140
x
Total consideration
1,389,642
Par value of OS
(15,000)
Share premium
1,374,642 B
On the conversion date, the carrying value of the bonds converted is used to measure the ordinary shares
issued. No gain or less is recognized. The excess of the consideration from the par value of the ordinary
shares shall be credited to the Share Premium account.
PROBLEM 12: An entity grants to an employee the right to choose either 1,000 phantom shares (i.e., a
right to a cash payment equal to the value of 1,000 shares) or 1,200 shares with a par value of P10 per
share. The grant is conditional upon the completion of three years’ service. If the employee chooses the
share alternative, the shares must be held for three years after vesting date.
At grant date, the entity’s share price is P50 per share. At the end of year 1, 2 and 3, the share price is
P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next three years. After
taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant
date fair value of the share alternative is P48 per share.
At the end of year 3, the employee chooses:
Scenario 1: The cash alternative
Scenario 2: The equity alternative
REQUIREMENTS:
Based on the preceding information, answer the following:
1. What is the total fair value of the equity component as a result of the share-based payment
transaction with settlement alternatives?
A. P0
B. P2,400
C. P7,600
D. P10,000
2. What is the compensation expense in year 1?
A. P17,333
B. P19,333
C. P19,866
D. P23,334
3. What is the compensation expense in year 2?
A. P17,333
B. P19,333
C. P19,866
D. P21,867
4. What is the compensation expense in year 3?
A. P19,333
B. P19,866
C. P23,334
D. P25,867
5. If the employee has chosen the cash alternative, the amount to be paid at the end of year 3 should
be
A. P52,000
B. P55,000
C. P60,000
D. P67,600
6. If the employee has chosen the share alternative, the amount of share premium to be recognized is
A. P7,600
B. P55,600
C. P60,000
D. P67,600
SUGGESTED SOLUTIONS:
Requirement 1: Answer: C
Fair value of the equity alternative (P48 x 1,200 shares)
P57,600
Fair value of the cash alternative (P50 x 1,000 phantom shares)
(50,000)
Fair value of equity component
P 7,600
Requirements 2-6:
Year
1
Liability
Equity
(P52 x 1,000 x 1/3)
Compensation
Expense
P17,333
(P7,600 x 1/3)
Equity
P -
Liability
P17,333
2,533
2,533
-
.
P19,866
P2,533
P17,333
P19,333
-
P19,333
2,533
2,533
-
(P55 x 1,000 x 2/3) –
2
P17,333
(P7,600 x 1/3)
P21,866
P5,066
.
P36,666
(P60 x 1,000) – 36,666
3
(P7,600 x 1/3)
P23,334
-
23,334
2,534
2.534
-
P25,868
P7,600
P60,000
.
End of Year 3:
Scenario 1 – Cash of P60,000 paid
Totals
Scenario 2 – 1,200 shares issued
Totals
________
-
.
P67,600
P7,600
P0
________
60,000
(60,000)
P67,600
P67,600
P0
Final accounting
Scenario 1 – Cash of P60,000 paid
Accrued salaries payable
60,000
Share options outstanding
7,600
Cash
Share premium
Scenario 2 – 1,200 shares issued
(60,000)
60,000
7,600
Accrued salaries payable
60,000
Shares options outstanding
7,600
Share capital (P10 x 1,200)
12,000
Share premium (balancing)
55,600
1. Compensation expense in year 1:
C
P19,866
2. Compensation expense in year 2:
D
P21,867
3. Compensation expense in year 3:
D
P25,867
4. Amount to be paid at the end of year 3: C
P60,000
5. Amount of share premium to be
recognized:
B
P55,600
PROBLEM 13: A CPA was engaged by BIRDIE Company in 2017 to examine its books and records and
to make whatever corrections are necessary. An examination of the accounts discloses the following:
a) Dividends had been declared on December 15 in 2015 and 2016 but had not been entered in the
books until paid.
b) Improvements in buildings and equipment of P97,200 had been debited to expense at the end of
April 2014. Improvements are estimated to have 12-year life. The company uses the straight line
method in recording depreciation and computes depreciation to the nearest month.
c) The physical inventory of merchandise had been understated by P28,800 at the end of 2015 and
by P42,750 at the end of 2016.
d) The merchandise inventories at the end of 2016 and 2017 did not include merchandise that was
then in transit and to which the company had title. These shipments of P18,900 and P26,100 were
recorded as purchases in January of 2017 and 2018, respectively.
e) The company had failed to record sales commissions payable of P32,400 and P9,900 at the end of
2016 and 2017, respectively.
f) The company had failed to recognize supplies on hand of P7,650 and P15,480 at the end of 2016
and 2017, respectively.
The retained earnings account appeared as shown below on the date the CPA began the examination.
Retained Earnings
Date
Item
Debit
Credit
Balance
2015
Jan. 1
Balance
P585,000
Dec. 31
Net income for the year
837,000
P252,000
2016
Jan. 10
Dividends paid
P139,500
697,500
Mar. 6
Stock sold – excess over par
Dec. 31
Net loss for the year
160,200
726,300
Jan. 10
Dividends paid
139,500
586,800
Dec. 31
Net loss for the year
173,700
413,100
189,000
886,500
2017
REQUIREMENTS:
1. What is the corrected 2015 net income?
A. P215,100
B. P272,700
C. P364,500
D. P372,600
2. What is the corrected 2016 net loss?
A. P160,200
B. P162,900
C. P179,100
D. P198,000
3. What is the corrected 2017 net loss?
A. P168,120
B. P187,020
C. P194,220
D. P213,120
4. What is the corrected retained earnings on December 31, 2016?
A. P302,400
B. P491,400
C. P549,180
D. P678,600
5. What is the corrected retained earnings on December 31,2017?
A. P108,180
B. P189,000
C. P278,280
D. P297,180
SUGGESTED SOLUTIONS:
2015
2016
2017
P252,000
(P160,200)
(P173,700)
B. Depreciation (P97,200 / 12 years)
(8,100)
(8,100)
(8,100)
C. Merchandise inventory understated
28,800
(28,800)
Net income/loss balance
(42,750)
42,750
(32,400)
32,400
E. Unrecorded sales commissions
payable
(9,900)
F. Unrecognized supplies on hand
7,650
(7,650)
15,480
Corrected net income/loss
P272,700
(P179,100)
(P194,220)
Retained Earnings
2015
Retained Earnings 2014
P5,400 P585,000
P139,500 P676,800
97,200
272,700
P676,800
P810,000
Retained Earnings
2017
Retained Earnings 2016
P139,500 P810,000
P194,220 P491,400
179,100 (179,100)
P491,400
P297,180
1. Net Income:
B
P272,700
2. Net Loss;
C
P179,100
3. Net Loss:
C
P194,220
4. Retained Earnings, 12/31/16
B
P491,400
5. Retained Earnings, 12/31/17
D
P297180
PROBLEM 14: You are auditing the 2014 liabilities of Bat Inc. which follows the calendar year
financial statements reporting. The following information were available with regards to its currently
maturing obligation:
On December 31, 2014, Bat Inc. had P1M of short-term notes payable due February 7, 2015. On January
15, 2015, the company issued bonds with a face value of P900,000 at 96; brokerage fees and other costs
of issuance were P3,450. On January 22, 2015, the proceeds from the bond issue plus additional cash held
by the company on December 31, 2014 were used to liquidate the P1M of short-term notes.
Another short-term debt in the form of notes payable totaling to P500,000 were due on June 1, 2015. On
February 2, 2015, Batali entered an agreement with National Life Insurance Co. where National will lend
Batali P400,000 payable in 5 years at 14%, the proceeds of which is intended to be used to partly
refinance the said notes. The money will be available to the company on May 20, 2015.
Another P500,000 notes payable is due on June 15, 2015. At the financial statement date December 31,
2014, Batali signed an agreement to borrow up to P500,000 to refinance the notes payable on a long-term
basis. The financing agreement called for borrowings not to exceed 80 per cent of the value of the
collateral Batali was providing. At the date of issue of the December 31, 2014 financial statements, the
value of the collateral was P600,000 and was not expected to fall below this amount during 2015.
Assuming that the financial statements of Batali were authorized to be issued on March 31, 2015:
1.
How much liabilities above are short-term as of the balance sheet date?
a. 1,500,000
2.
b. 1,520,000
c. 1,980,000
d. 2,000,000
How much liabilities above are long-term as of the balance sheet date?
a. 2,000,000
b. 1,500,000
c. 980,000
d. 480,000
SUGGESTED SOLUTIONS:
CURRENT
NONCURRENT
a P1,000,000 short-term notes payable due
on February 7, 2015
P1,000,000
b P500,000 short-term notes payable due on
June 1, 2015
500,000
c P500,000 notes payable due on June 15,
2015 refinanced (600,000 x 80%)
20,000
480,000
P1,520,000
P480,000
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when it is expected to be
settled in its normal operating cycle;held primarily for the purpose of trading;due to be settled within
twelve months after the reporting period, even if the original term was for a period longer than twelve
months, and agreement to refinance, or to reschedule payments, on a long-term basis is completed after the
reporting period and before the financial statements are authorized for issue; the entity does not have an
unconditional right to defer settlement of the liability for at least twelve months after the reporting period
However, if the refinancing on a long-term basis is completed on or before the end of the reporting period,
the refinancing is an adjusting event and therefore the obligation is classified as noncurrent.
An entity shall classify all other liabilities as non-current
PROBLEM 15: The TERRAN COMPANY acquired several small companies at end of 2016 and based,
on the acquisition, reported the following intangibles in its December 31, 2016, statement of financial
position:
Patent
Php 200,000
Copyright
400,000
Tradename
350,000
Computer software
100,000
Goodwill
900,000
The company’s accountant determines the patent has an expected life of 10 years and no expected
residual value, and that it will generate approximately equal benefits each year. The company expects to
use the copyright and trade name for the foreseeable future. The accountant knows that the computer
software is used in the company’s 120 sales offices. The company has replaced the software in 60 offices
in 2017, and expects to replace the software in 40 more offices in 2018 and the remainder in 2019.
On December 31, 2017, there are no indications of impairment of patent and computer software. The
following information relates to the other intangible assets.
a. Because of the rampant piracy, the copyright is expected to generate cash flows of just Php 8,000 per
year.
b. The trade name is expected to generate cash flows of Php 15,000 per year.
c. The goodwill is associated with Terran’s SCV Manufacturing reporting unit. The cash flows expected
to be generated by the SCV Manufacturing reporting unit is Php 200,000 per year for the next 25 years.
The reporting unit has a carrying amount of Php 3,000,000.
Based on the above and the result of your audit, determine the following: (Assume that the appropriate
discount rate for all items is 5%)
REQUIREMENTS:
1. Total amortization of intangible assets in 2017.
a. Php 70,000
c. Php 107,500
b. Php 88,750
d. Php 20,000
2. Total loss on impairment in 2017
a. Php 457,470
c. Php 471,220
b. Php 530,280
d. Php 433,720
3. Carrying amount of the goodwill on December 31, 2017.
a. Php 900,000
c. Php 855,000
b. Php 718,780
d. Php 659,720
4. Carrying amount of other intangible assets on December 31, 2017.
a. Php 690,000
c. Php 640,000
b. Php 980,000
d. Php 706,667
SOLUTIONS:
1.
Patent
(200,000/10)
Computer Software
(100,000 x 60/120)
TOTAL AMORTIZATION
Php 20,000
50,000
Php 70,000
Explanation:
According to PAS 38, paragraph 97, the depreciable amount of an intangible asset with a finite
useful life shall be allocated on a systematic basis over its useful life. Amortization shall begin
when the asset is available for use, ie when it is in the location and condition necessary for it to
be capable of operating in the manner intended by management.
Trade name and copy rights are not amortized because it is stated in PAS 38, paragraph 107, that
an intangible asset with an indefinite useful life shall not be amortized.
2.
Copy right
400,000- (8,000/5%)
Trade name
350,000- (15,000/5%)
Goodwill
3,000,000- (14.0939 x 200,000)
Total impairment loss
Php 240,000
50,000
181,220
Php 471,220
Explanation:
As stated in PAS 38, paragraph 107 and 108, an intangible asset with an indefinite useful
life shall not be amortised.
In accordance with IAS 36, an entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its recoverable amount with its
carrying amount
(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.
3.
Carrying value before impairment
Impairment loss
Carrying Value
Php 900,000
( 181,220)
Php 718,780
Explanation:
Under PAS 38, paragraph 107, An intangible asset with an indefinite useful life shall not
be amortised.
In accordance with IAS 36, an entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its recoverable amount with its
carrying amount
(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.
4.
Patent
(200,000 – 20,000 )
Computer software
(100,000 – 50,000 )
Trade name
(350,000 – 50,000)
Copy right
(400,000 – 240,000)
Total carrying amount of Intangibles
Php 180,000
50,000
300,000
160,000
Php 690,000
Explanation:
Good will is not recognized as part of intangible assets because it is defined as
“unidentifiable” for it cannot be sold, transferred, licensed, rented or exchange
separately. (Source Financial Accounting 1, Volume 2, page 1392)
The Standard states that an asset meets the identifiability criterion in the definition of
an intangible asset when it:
(a) is separable, ie capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, asset or liability; or
(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
The new carrying value of the intangible assets at the end of the period is the
difference between its original amount less the amortization or impairment loss
recognized for the year.
PROBLEM 16:
The following information pertains to Colgate Company’s intangible assets:
a. On January 1, 2014, the company signed an agreement to operate as a franchise of Hapee Inc.,
for an initial franchise fee of P3,000,000. Of the amount, P600,000 was paid when the
agreement was signed and the balance payable in 4 annual equal payments at the beginning of
each year starting 2015. The agreement provides that the down payments is not refundable and
that no future services are required of the franchisor. The discount rate appropriate to the
agreement is 14% which is the implicit rate to similar loans. The agreement provides for a 5%
continuing franchise fee based on the revenue of the franchisee. Colgate had a total revenues of
P18M in 2014. The company further estimates that the net future cash flows from continued use
of the franchise is at P250,000 annually.
b. Colgate also incurred P2,600,000 prior to 2014 of experimental and development cost in its
laboratory to develop a patent which was granted by the government at the beginning of 2014.
Legal fees and other costs associated with its registration totaled P544,000. The company
estimates that the useful life of the patent was eight years.
c. A trademark was purchased from another company for P1,000,000 on January 1, 2012.
Expenditures totaling to P326,400 for successfully defending the trademark was incurred in
July 1, 2014. By the end of 2012 and 2013, estimates place future net annual cash flows from
the trademark at P200,000 for its remaining life. By the end of 2014, the estimates had been
revised to P80,000 because of a recent technological development in the industry.
d. The prevailing market rate of interest were at 9%, 9.5% and 10% at the end of 2012, 2013 and
2014, respectively.
REQUIREMENTS:
Case 1: Assuming that the intangible assets had the following definite life from date of acquisition:
Franchise, 10 years
Patent, 8 years
Trademark, 10 years
Determine the following:
1. What is the carrying value of the franchise at the end of 2014?
a. 1,439,756
c. 2,348,227
b. 2,113,405
d. 2,500,000
2. What is the carrying value of the patent at the end of 2014?
a. 544,000
c. 516,800
b. 476,000
d. 512,000
c.
3. What is the carrying value of the trademark at the end of 2014?
a. 389,474
c. 750,000
b. 700,000
d. 800,000
Case 2: Assuming that the intangible assets had the following life from date of acquisition:
Franchise, indefinite
Patent, 8 years
Trademark, indefinite
Determine the following:
1. What is the carrying value of the franchise at the end of 2014?
a. 1,439,756
c. 2,348,227
b. 2,113,405
d. 2,500,000
2. What is the carrying value of the patent at the end of 2014?
a. 544,000
c. 516,800
b. 476,000
d. 512,000
3. What is the carrying value of the trademark at the end of 2014?
a. 389,474
c. 750,000
b. 700,000
d. 800,000
SOLUTIONS:
CASE 1:
Requirement #1
Franchise – Jan. 01, 2014
Downpayment:
PV of balance a 14% for 4 annual
equal payments (2,400,000/4yrs x 2.913712)
Less: Amortization 2014: P2,348,227/10yrs.
Carrying amount, Dec. 31, 2014
PV of net cash flows at 10% for 9yrs/Value in use
(250,000 x 5.759024)
Impairment Loss
Requirement #2
Patent – Jan. 2014
Amortization 2014: (544,000/8yrs.)
Carrying value, Dec. 31, 2014
Requirement #3
Trademark – Jan. 2012
Amortization, 2012 (1,000,000/10yrs.)
Carrying value, Dec.31, 2012
PV of net cash flows at 9% for 9yrs/Value in use
(200,000 x 5.995247)
Impairment Loss
P 600,000
1,748,227
P2,348,227
(234,823)
P2,113,405
(1,439,756) A
P 673,649
P544,000
(68,000)
P476,000 B
P1,000,000
(100,000)
P 900,000
(1,199,049)
-
Trademark – Jan. 2013
Amortization, 2013 (1,000,000/10yrs.)
Carrying value, Dec.31, 2013
PV of net cash flows at 9.5% for 8yrs/Value in use
(200,000 x 5.433436)
Impairment Loss
P 900,000
(100,000)
P 800,000
Trademark – Jan. 2014
Amortization, 2014 (1,000,000/10yrs.)
Carrying value, Dec.31, 2014
PV of net cash flows at 10% for 7yrs/Value in use
(80,000 x 4.868419)
Impairment Loss
P 800,000
(100,000)
P 700,000
(1,086,687)
-
(389,474) A
P 310,526
CASE 2:
Requirement #1
Franchise – Jan. 01, 2014
Downpayment:
PV of franchise @ 14% for 4 annual
equal payments (2,400,000/4yrs x 2.913712)
Carrying amount, Dec. 31, 2014
PV of net cash flows at 10% for 9yrs/Value in use
(250,000/10%)
Impairment Loss
Requirement #2
Patent – Jan. 2014
Amortization 2014: (544,000/8yrs.)
Carrying value, Dec. 31, 2014
Requirement #3
Trademark – Jan. 2012
Carrying value, Dec.31, 2012
PV of net cash flows at 9% for an unidentifiable
period/Value in use (200,000/9%)
Impairment Loss
P 600,000
1,748,227
P2,348,227 C
(2,500,000)
-
P544,000
(68,000)
P476,000 B
P1,000,000
P1,000,000
(2,222,222)
-
Trademark – Jan. 2013
Carrying value, Dec.31, 2013
PV of net cash flows at 9.5% for an unidentifiable
period/Value in use (200,000/9.5%)
Impairment Loss
P1,000,000
P1,000,000
Trademark – Jan. 2014
Carrying value, Dec.31, 2014
PV of net cash flows at 10% for an unidentifiable
period/Value in use (80,000/10%)
Impairment Loss
P1,000,000
P1,000,000
(2,105,263)
-
( 800,000) D
P 200,000
According to PAS 38, an intangible asset with an indefinite useful life shall not be amortized.
In accordance with PAS 36, an entity is required to test an intangible asset with an indefinite useful life
for impairment by comparing its recoverable amount with its carrying amount
a. annually, and
b. whenever there is an indication that the intangible asset may be impaired
PROBLEM 17:
You were able to gather the following from the December 31, 2008 trial balance of RHEA INC. in
connection with your audit of the company:
Petty cash fund
Cash on hand
Cash in bank – Metrobank current
Cash in bank – BDO Acct. No. 1
Cash in bank – BDO Acct. No. 2
Cash in bank – Coco bank savings
Time Deposits – BPI
50, 000
1, 500, 000
4, 000, 000
3, 160, 000
(160, 000)
4, 500, 000
2, 000, 000
The petty cash fund consisted of the following items as of December 31, 2008:
Currency and coins
10, 000
Employees’ vales
8, 000
Currency in an enveloped marked “collections
of charity” with names attached
1, 600
Unreplenished petty cash vouchers
6, 500
Check drawn by RHEA, payable to the petty cashier
20, 000
Unuse postage stamps
1, 500
P 52, 000
Cash on hand represents undeposited collections as of December 3, 2018 and includes the following
items:
a. Customer’s check for P160,000 returned by bank on December 26, 2008 due to insufficient fund
but subsequently redeposited and cleared by the bank on January 3, 2009.
b. Customer’s check for P80,000 dated January 2, 2009, received on December 29, 2008.
c. A customer check for P90,000 dated June 1, 2008 received on the same date and yet to be
redeposited since the same has been missing.
d. Postal money orders receieved from customers, P100,000.
Included among the checks drawn by RHEA against the Metrobank current account and recorded in
December 2008 are the following:
a. Check written on December 29, 2008 dated January 2, 2009, delivered to payee on December 29,
2008, P160,000.
b. Check written and dated December 29, 2008 and delivered to payee on January 2, 2009, P200,
000.
The credit balance in the BDO Current Account No. 2 represents checks drawn in excess of the deposit
balance. These checks were still outsatnding at December 31, 2008.
The savings account deposit in Coco Bank has been set by the board of directors for acquisition of new
computers. This account is expected to be disturbed in the next 3 months from the balance sheet date.
The time deposit with BPI was purchased on November 1, 2008 and shall mature on November 1, 2009.
REQUIREMENTS:
Determine the audited balances of the following:
1. Petty cash fund
B. 30,000
B. 36,000
C. 10,000
2. Petty cash shortage/overage
A. 4,000 short
B. 5,500 short
C. 2,000 over
3. Cash on hand
A. 1, 070,000
B. 1, 170, 000
C. 1, 260,000
4. Cash in bank – Metrobank current
A. 4, 000,000
B. 4, 160, 000
C. 4, 200,000
5. Cash and cash equivalents to be reported in the 2006 balance sheet
A. 8, 560,000
B. 8, 566,000
C. 10,560, 000
D. 24,500
D. 500 over
D. 1, 500, 000
D. 4, 360, 000
D. 15, 060,500
SOLUTIONS:
The petty cash fund is composed of the money (currency and coins, etc.) set aside by the
business to pay small expenses which cannot be conveniently paid through checks.
The check drawn by the entity to the order of the petty cash custodian (check drawn by
RHEA) is actually a replenishment check and therefore part of cash.
A cash shortage occurs when the cash count shows cash which is less than the balance per
book. This transaction is reflected in a journal entry:
Cash short
5,500
Cash
5,500
The customer’s NSF check, postdated check and the missing check are all reverted back to
the accounts receivable therefore excluding them from the total cash on hand.
Postdated checks received cannot be considered as cash yet because theses checks are
unacceptable by the bank for deposit and immediate credit or outright encashment.
The postdated check of P 160,000 and the undelivered check of P 200,000 should be restored
to cash in bank by debiting Cash in Bank and crediting Accounts Payable.
A bank overdraft should not be offset against other bank accounts with debit balances.
However, this rule is with exception. The bank overdraft of one account can be netted in
another if they belong in the same bank.
The time deposit is not a cash equivalent because the term is for one year.
The cash in bank (Coco bank savings) restricted for buying new computers is classified as a
noncurrent investment because it is set aside for the acquisition of a noncurrent asset and not
for the payment of a current liability.
Postage stamps are not considered as part of cash and cash equivalents because they are not
accepted for deposit nor are they readily convertible to cash.
PROBLEM 18:
The balance sheet of DWARF CORP reported the following long-term receivables as of December
31,2007:
Note receivable from sale of plant P 4,500,000 Note receivable from officer 1,200,000
In connection with your audit, you were able to gather the following transactions during 2008 and other
information pertaining to the company’s long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual
installments of P 1,500,000 plus interest on the unpaid balance every April 1. The initial principal and
interest payment was made on April 1,2008.
b. The note receivable from officer is dated December 31,2007, earns interest at 10% per annum, and is
due on December 31,2008. The principal and interest were received on December 31,2008.
c. The corporation sold a piece of equipment to SNOW INC. on April 1,2008, in exchange for an P
600,000 non-interest bearing note due on April 1,2010. The note had no ready market, and there was no
established exchange price for the equipment. The prevailing interest rate for a note of this type at April
1,2008 was 12%. The present value factor of 1 for two periods at 12% is 0.797 while the present value
factor of ordinary annuity of 1 for two periods at 12% is 1.690.
d. A tract of land was sold by the corporation to WHITE CO. on July 1,2008, for P 3,000,000, under an
installment sale contract. White signed a 4-year 11% note for P 2,100,000 on July 1,2008, in addition to
the down payment of P 900,000. The equal annual payments of principal and interest on the note will be P
676,875 payable on July 1,2009,2010,2011, and 2012. The land had an established cash price of P
3,000,000, and its cost to the corporation was P 2,250,000. The collection of the installments on this note
is reasonably assured.
REQUIREMENTS:
1. How much is the total noncurrent notes receivables as of December 31,2008?
A. 6,778,200 B. 4,832,325 C. 4,875,363 D. 3,675,363
2. How much is the total current portion of long-term notes receivable as of December 31,2008?
A. 1,945,875 B. 2,176,875 C. 1,500,000 D. 0
3. What is the accrued interest receivable as of December 31,2008?
A. 385,500
B. 428,538
C. 270,000
D. 505,500
4. What is the correct interest income for the year 2008?
A. 640,500
B. 818,538
C. 683,538
D. 756,000
SOLUTIONS:
Conceptually, notes receivables shall be measured initially at present value. However, short-term
notes receivable are measured at face value while the initial measurement of long-term notes will
depend on whether the notes are interest-bearing (face value) or non-interest bearing (present
value).
PROBLEM 19:
Thomas Company has the following equity securities classified as available for sale at December 31,
2016:
Fair Value
Cost
12/31/16
12/31/15
50,000 ordinary shares
P1,600,000
P1,500,000
P1,400,000
of OK Corp.
100,000 ordinary
1,700,000
1,900,000
1,600,000
shares of PA
All of the securities had been purchased in 2015. In 2017, Thomas completed the following securities
transactions:
 January 1 – purchased P1,000,000 8% bonds of X Corporation for P924 ,164 (including
broker’s commission of P50,000). Interest is payable annually every January 1. The bonds mature
on January 1, 2022.
 March 1 – sold 50,000 shares of OK Corp @ P35 less fees of P15,000.
 December 1 – bought 6,000 shares of BA Stores @ P50 less fees of P5,500. These shares are
held for trading.
The fair values of the securities appeared as follows on December 31, 2017:
Fair Value
100,000 shares of PA
P2,000,00
6,000 shares of BA stores
315,000
X Corporation Bonds
980,000
REQUIREMENTS:
Based on the above and the result of your audit, answer the following:
1. In relation to investment in shares classified as available for sale, the net amount to be recognized in
2017 profit or loss is
a. Nil
c. P150,000
b. P235,000
d. P135,000
2. In relation to investment in shares classified as held for trading, the net amount to be recognized in
2017 profit or loss is
a. P20,500
c. P9,500
b. P15,000
d. Nil
3. Assuming the investment in bonds was acquired for the purpose of selling it in the near term, the net
amount to be recognized in 2017 profit or loss is
a. P135,836
c. P92,416
b. P105,836
d. Nil
4. Assuming the investment in bonds is available for sale, the net amount to be recognized in 2017 profit
or loss is
a. P135,836
c. P92,416
b. P105,836
d. Nil
5. Assuming the investment in bonds was acquired for the purpose of holding it until maturity, the net
amount to be recognized in 2017 profit or loss is
a. P135,836
c. P92,416
b. P105,836
d. Nil
SOLUTIONS:
1. 50,000 shares of OK Corp Sold @ P35
P1,750,000
Legal Fees
(15,000)
Proceeds
1,735,000
Cost of OK Corp
(1,600,000)
Gain on Sale of OK Corp
P135,000 (D)
2. 6,000 shares of BA Stores bought @P50
P300,000
Fair Value @ Dec. 31, 2017
315,000
Unrealized Gain
15,000
Legal Fees incurred in purchasing 6,000 shares
(5,500)
V Net amount to be recognized in 2017 profit or loss P9,500 (C)
3. Fair Value of X Corp Bonds
Carrying Amount of Bonds
Unrealized Gain
Interest on Bonds (1,000,000 x 8%)
Net amount to be recognized in 2017 profit or loss
P980,000
(924,164)
55,836
80,000
P135,836 (A)
The bonds were acquired for the purpose of selling it in the near term. Thus, it is classified as
FA@FVTPL held for trading which changes in Fair Value is recognized in P/L as well as the interest on
bonds using the nominal interest rate.
4. Effective Interest on Note is 10%
Carrying Amount of Bonds
Multiplied by 10% ratre
Interest Income
924,164
10%
P92,416 (C)
The basic theory I to find the effective rate that would equate the acquisition cost and the present value of
the future cash flows from the bonds.
Using Interpolation, the effective interest rate was found to be 10%. Using the present value table, the PV
of 1 @ 10% for 5 periods is 0.6209 and the PV of annuity of 1 @ 10% for 5 periods is 3.7908.
PV of Principal
PV of future interest payments
Total PV OF Cash Flows
(P 1,000,000 x .6209)
(P 1,000, 000 x 8%) x 3.7908
P 620,900
303,264
P 924,164
If investment in bonds is available for sale; thus, it is recognized as Financial Assets-Available for Sale
where at initial measurement it is fair value plus transaction costs, then subsequent measurement is fair
value unless a hedge item and changes in fair value is recognized in equity, unless a hedge item. Amounts
in equity recycled to profit or loss when the asset is derecognized.
5. Effective Interest on Note is 10%
Carrying Amount of Bonds
Multiplied by 10% ratre
Interest Income
924,164
10%
P92,416 (C)
If investment in bonds is recognized as Investments held-to-maturity; thus, it is measured as Financial
Assets @ Amortized Cost. Unrealized gain and loss are not recognized simply because such investments
are not reported at fair value. PFRS 9, Paragraph 5.7.2, provides that gain and loss on financial asset
measured at amortized cost and is not part of hedging relationship shall be recognized in profit or loss
when the financial assets are derecognized, sold, impaired or reclassified, and through the amortization
process.
PROBLEM 20:
Wall, Inc., is a public enterprise whose shares are traded in the over-the-counter market. At December 31,
2016, Wall had 6,000,000 authorized shares of P10 par value ordinary shares, of which 2,000,000 shares
were issued and outstanding. The shareholder’s equity accounts at December 31, 2016, had the following
balances.
Ordinary Shares P 20,000,000
Share Premium 7,500,000
Retained Earnings 6,470,000
Transactions during 2017 and other information relating to the shareholder’s equity accounts were as
follows:
1. On January 5, 2017, Wall issued at P54 per share, 100,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each share of preference is convertible, at the option of
the holder, into two ordinary shares. Wall had 600,000 authorized preference shares.
2. On February 1, 2017, Wall reacquired 20,000 of its ordinary shares for P16 per share. Wall uses
the cost method to account for treasury shares.
3. On April 30, 2017, Wall sold 500,000 shares (previously unissued) of P10 par value ordinary
shares to the public at P17 per share.
4. On June 18, 2017, Wall declared a cash dividend of P1 per ordinary shares, payable on July 12,
2017, to shareholders of record on July 1, 2017.
5. On November 10, 2017, Wall sold 10,000 treasury shares for P21 per share.
6. On December 14, 2017, Wall declared the yearly cash dividend on preference shares, payable on
January 14, 2018, to shareholders of record on December 31, 2017.
7. On January 20, 2018, before the books were closed for 2017, Wall became aware that the ending
inventories at December 31, 2016, were understated by P300,000 (the aftertax effect on 2016 net
income was P210,000). The appropriate correcting entry was recorded the same day.
8. After correcting the beginning inventory, net income for 2017 was P4,500,000.
REQUIREMENTS:
Based on the above and the result of your audit, answer the following:
1. The Retained Earnings balance as of January 1, 2017 is
a. P6,680,000
b. P6,260,000
c. P6,770,000
d. P6,170,000
2. The Retained Earnings balance as of December 31, 2017 is
a. P8,520,000
b. P8,340,000
c. P7,830,000
d. P8,250,000
3. The total share premium as of December 31, 2017 is
a. P11,510,000
b. P11,450,000
c. P11,050,000
d. P11,000,000
4. The total shareholder’s equity as of December 31, 2017 is
a. P49,540,000
b. P49,700,000
c. P49,450,000
d. P49,504,000
5. An Auditor usually obtains evidence of stockholder’s equity transactions by reviewing the entity’s
a. Minutes of board of directors meetings
b. Transfer agent’s records
c. Canceled stock certificates
d. Treasury stock certificate book.
SOLUTIONS:
Questions 1-4
Retained Earnings 01/01/17
P 6,470,000
Correction on understatement
of ending Inventory on 12/31/16
210,000
Corrected Retained Earnings Balance on 01/01/17
P 6,680,000 (1)
--------------------------------------------------------------------------------------------------Preference Share Capital
P 5,000,000
Ordinary Share Capital
25,000,000
Share Premium
11,450,000 (3)
Retained Earnings:
Appropriated
P 160,000
Unappropriated
8,090,000
8,250,000 (2)
Treasury Shares
(160,000)
Total Equity
P49,540,000 (4)
Journal Entries Affecting the Equity Accounts during 2017
01/05 Cash (100,000 shares x P54)……………………………………………………..5,400,000
Preference Share Capital (100,000 x P50)……………………………. 5,000,000
Share Premium (excess over par PS)…………………………………… 400,000
02/01 Treasury Shares (20,000 x P16)……………………………………………………320,000
Cash………………………………………………………………………………
……. 320,000
04/30 Cash (500,000 shares x P17)……………………………………………………..8,500,000
Ordinary Share Capital (500,000 shares x 10)……………….………..5,000,000
Share Premium (excess over par 0S)……………………………….….3,500,000
06/18 Retained Earnings……………………………………………………………......2,480,000
Dividends Payable .................................................................................2,480,000
[(2,000,000 + 500,000 – 20,000) x P1] = 2,480,000
11/10 Cash (10,000 x P21)……………………………………………………………..... 210,000
Treasury Shares at cost (10,000 x P16)………………………………….60,000
Share Premium (Treasury Share Transaction)…………………………...50,000
12/15 Retained Earnings (5,000,000 x 9%) ...................................................................... 450,000
Dividends Payable - Preference .............................................. ………...450,000
12/31 Inventory 01/01/17 ...................................................................................................300,000
Retained Earnings ...................................................................................210,000
Income Tax Payable .................................................................................90,000
12/31 Profit and Loss Summary......................................................................................4,500,000
Retained Earnings ................................................................ ………..4,500,000
02/01 Retained Earnings.....................................................................................................320,000
Retained Earnings Appropriated (cost of TS) .......................................320,000
PAS 32 par 33 If an entity reacquires its own equity instruments, those instruments (“treasury shares”)
shall be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale,
issue or cancellation of an entity’s own equity instruments. Such treasury shares may be acquired and
held by the entity or by other members of the consolidated group. Consideration paid or received shall be
recognized directly in equity.
PAS 32 par 35 Interest, dividends, losses and gains relating to a financial instrument or a component that
is a financial liability shall be recognized as income or expense in profit or loss. Distribution to holders of
an entity instrument shall be recognized by the entity directly in equity. Transaction costs of an equity
transaction shall be accounted for as a deduction from equity.