Cash and Cash Equivalents
BONAMANA Corporation keeps all its cash in checking account. An examination of the
Company’s accounting records and bank statement for the month ended December 31,2010
revealed the following information:
The cash balance as of December 31,2010 represents
Bank statement balance
P84,690
Book balance
85,240
A deposit of P9,500 through the bank’s night depository box on December 29, 2010 did not
appear on the bank statement. The bank statement shows that on December 28,2010, the bank
collected a note for BONAMANA and credited the proceeds of P9,350 to the company’s
account. The proceeds include P350 interest, all of which BONAMANA earned during the
current accounting period, BONAMANA has not yet recorded the collection.
Check outstanding on December 31,2010:

No. 504
P1,500
No. 509
480
NO. 519
720
BONAMANA discovered that check no. 523, written in December 2010 for P1,830 in
payment to a supplier, had been recorded in the company’s records as P1,380.

Included with the December 31,2010 bank statement was an NSF check for P2,500 that
BONAMANA had received from SPY company on account on December 19.
BONAMANA has not yet the returned check. The bank statement shows a P150 service
charge for December.
REQUIRED:
1. Corrected cash balance, December 31
2. Increase in cash balance
3. The adjusting entry would be:
Solution:
Balance per bank statement, December 31
P84,690
Deposit in transit
9500
Outstanding Checks
(2,700)
Corrected cash Balance
P91,940
Unadjusted balance per books, December 31
(85,240)
Increase in cash balance
P 6,250
Adjusting Entry
Cash
P6,250
Accounts Payable
450
Accounts Receivable
2,500
Bank service charge
150
Notes receivable
P9,000
Interest revenue
350
MOONLIGHT Company has an current account in Zambales Bank. Your audit of the company’s
cash account reveals the following:
a.
b.
Balances taken from the company’s general ledger:
a. Cash balance, November 30, 2012
P637,860
b. Cash Balance, December 31,2012
576,420
c. Receipts, December 1-31, 2012
306,220
Outstanding checks, November 30,2012
a. (26,140 was paid by bank in December)
c.
Checks written and recorded in December not included
64,140
in the checks returned with the December bank statement 36,080
d.
Deposit in transit, November 30, 2012
e.
Deposit in transit, December 31,2012
f.
A bank credit memo was issued in December
15,260
16,140
to correct an erroneous charge made in November
g.
1,500
Note collected by bank in December
(company was not informed of the collection)
h.
A check for P2,020 (payable to a supplier) was
i.
recorded in the Check Register in December as P3,000
2,060
980
a check for P2,240 was charged by the bank
as 2420 in December
j.
180
MOONLIGHT Co. issued a stop payment order
to the bank in December. This pertains to a
check written in December which was not
received by the payee. A new check was written and
recorded in the check register in December. The old check was
written off by a journal entry, also in December.
k.
780
Bank Service charge, November 30, 2012
60
REQUIRED:
1. Total outstanding checks on December 31, 2012
2. Bank statement balance on November 30, 2012
3. Bank statement balance on December 31, 2012
4. Total bank disbursements for the month of December
SOLUTION:
1. Outstanding check
64,140 - 26,140 + 36080 =
2.
P74,080
Nov. 30
Book balances
P637,860
Receipts
Disbursements
306,220
Dec.30
367,660
576,420
Outstanding checks
November
64,140
64,140
December
(74,080)
74,080
Deposit in transit
November
(15,260)
December
15,260
(16,140)
Erroneous bank charge in November
(1,500)
Note Collected by bank in
(16,140)
1,500
2,060
2,060
December
Over-book disb.
(980)
980
Over-bank disb,
180
(180)
Check stopped payment
(780)
Bank service charge
Bank Balances
(60)
P685,180
(780)
(60)
P308,120
356,080
637,220
The following information was included in the bank reconciliation for GROWL Company for
June:
Checks and Charges recorded by bank in June (including a June service charge of P300),
P172,100; Service charge made by bank in May and recorded on the books in June, P200;
Total of credits to cash in all journals during June, P198,020; Customer’s NSF check returned in
May and redeposited in June (no entry made on books in either May or June), 2,500;
Outstanding checks at June,P80,600 and deposit in transit in June, P6000.
What were the total outstanding checks at the beginning of June?
Checks paid by the bank
Total disbursements
Less: Charges not representing checks
172,100
NSF
Service charge- June
P 1,000
300
1,300 P170,800
Less:
Checks issued by the company:
Total Disbursements
P198,020
Service Charge- May
200
Total checks issued
197,820
Less: outstanding checks, end
80,600
Outstanding checks, beginning
117,220
P 53,580
RECEIVABLES
PROBLEM 1
The adjusted trial balance of MLL Corporation on December 31, 2013, includes the following
cash and receivables balances.
Cash – Metrobank
P2,250,000
Currency on Hand
800,000
Petty Cash Fund
50,000
Cash in bond sinking fund
750,000
Notes receivable (including notes discounted with recourse, P
155,000
Accounts Receivable
Allowance for Doubtful accounts
1,825,000
P4,280,000
(207,500)
Interest Receivable
4,072,500
26250
Current liabilities reported in the December 31, 2013, statement of financial position included:
Obligation on discounted notes receivable
775,000
Transactions during 2014 included the following:
a) Sales on account were 38,350,000.
b) Cash collected on accounts totaled P28,825,000, including accounts of P4,650,000 with
cash discounts of 2%.
c) Notes received in settlement of accounts totaled P4,125,000.
d) Note receivable discounted as of December 31, 2013, were paid at maturity with the
exception of one P150,000 note on which the company had to pay the bank P154,500,
which include interest and protest fees. It is expected that recovery will be made on this
note early in 2013.
e) Customer notes of P2,925,000 were discounted with recourse during the year, proceeds
from their transfer being P2,925,000. (all discounting transactions were recorded as
loans.) Of this total, P2,400,000 matured during the year without notice of protest.
f)
Customer accounts of P436,000 were written off during the year as worthless.
g) Recoveries of bad debts written off in prior years were P101,000.
h) Notes Receivable collected during the year totaled P1,350,000 and interest collected
was 122,500
i)
On December 31, accrued interest on note receivable was P31,500.
j)
Cash of P1,750,000 was borrowed from Metrobank with accounts receivable of
P2,000,000 being pledged on the loan. Collection of P975,000 has been made on these
receivables (included in the total given in transaction(b)}, and this amount was applied
on December 31, 2013, to payment of accrued interest on the loan of P30,000, and the
balance to the partial payment of the loan
k) The petty cash fund was reimbursed( meaning that cash was removed from the bank
account and in the petty cash fund) based following analysis of expenditure vouchers;
Travel Expense
Entertainment expense
P5,600
3,900
Postage expense
4,650
Office supplies expense
8,650
Cash short or over(an income
account)
l)
300
Cash of P150,000 was added to bond retirement fund.
m) Currency on hand at December 31, 2013, was P600,000.
n) Total cash payment for all expenses during the year were P34,000,000. Charge to
general expenses.
o) Uncollectible accounts are estimated to be 5% of the December 31. 2013, Accounts
receivable.
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. The total cash to be reported in the company’s December 31, 2013 statement of
financial position
2. The doubtful accounts expense to be reported for the year ended December 31,
2013
3. The net accounts receivable as of December 31, 2013
4. Net trade and other receivable to be reported in the company’s statement of financial
position as of December 31, 2013
Solution:
ITEM
CASH
A
B
Note
Interest
Receivable
Receivable
Receivable
38,350,000
28,825,000
C
D
Account
(28,918,000)
(4,125,000)
(154,500)
4,125,000
(620,500)
E
2925000
(2,400,000)
F
(436,000)
G
101,000
H
1,472,500
(1,350,000)
I
J
31,500
775,000
K
L
(150,000)
M
600,000
N
(34,000,000)
ADJ>
394,000
4,871,000
(245,500)
2,427,500
4,280,000
1,825,000
9,151,000
1,579,500
balances
PCF
Adjusted
31,500
50,000
2,871,500
31,500
1. 2,871,500
2. Doubtful account expense
Required allowance (9,151,000 x
3. 9,151,000
5%)
457,550
Write-off
436,000
Recovery
(101,000)
Beginning Balance
(207,500)
Doubtful account expense
585,050
4. (9.151,000 - 457,550 + 1,579,500+ 31,500)= 10,304,450
Problem 2
D.O Company started operations in 2006. The company has no allowance for doubtful
accounts. Uncollectible receivables were expensed as written off and recoveries were credited
to income as collected. Data from the company’s records for five years is as follows:
Year
Credit Sales
Amount Written-
Recovery
Off
2006
3,000,000
30,000
0
2007
4,500,000
76,000
5,400
2008
5,900,000
104,000
5,000
2009
6,600,000
130,000
9,600
2010
8,000,000
166,000
10,000
Balances of accounts receivables are as follows:
As of December 31, 2009
P3,000,000
As of December 31, 2010
3,500,000
On March 1, 2010, right after the 2009 financial statements were released, management
realized that company’s policy regarding treatment of bad accounts was not correct, and
decided that an allowance method must be followed. A policy was established to set up an
allowance of doubtful accounts based on the company’s historical debt loss percentage applied
to year-end accounts receivable. The historical bad debts loss percentage shall be recomputed
each year based on the average of all available past years up to maximum of five years.
REQUIRED:
Based on the above and the result of your audit, you are to provide the answers to the following:
1. The amount of allowance for doubtful accounts that should be set up as of January
1,2010 (with corresponding charge to retained earnings)
2. The average percentage of net doubtful accounts to credit sales that should be used in
setting up the 2010 allowance
3. The balance of allowance for doubtful accounts as of December 31,2010
4. The doubtful accounts expense for 2010
Solution:
Question 1:
Year
Credit Sales
Amount Written-Off
Recovery
NET
2006
3,000,000
30,000
0
30,000
2007
4,500,000
76,000
5,400
70,600
2008
5,900,000
104,000
5,000
99,000
2009
6,600,000
130,000
20,000,000
9,600
340,000
120,400
20,000
320,000
Net accounts written off
320,000
Divided by credit sales
20,000,000
Percentage of uncollectible accounts
1.60%
Allowance for doubtful accounts,1/1/10(3,000,000x1.6%)
P48,000
Question 2:
Year
Credit Sales
Amount Written-Off
Recovery
NET
2006
3,000,000
30,000
0
30,000
2007
4,500,000
76,000
5,400
70,600
2008
5,900,000
104,000
5,000
99,000
2009
2010
6,600,000
130,000
9,600
120,400
8,000,000
166,000
10,000
156,000
28,000,000
506,000
30,000
476,000
Net accounts written off
476,000
Divided by credit sales
28,000,000
Percentage of uncollectible accounts
1.70%
Question 3:
Allowance for doubtful accounts,12/31/10(3,500,000x1.7%)
P59,500
Question 4:
Required allowance, 12/31/2010
Accounts written off in 2010
Bad debts recoveries
59,500
166,000
10,000
Allowance for doubtful, 1/1/10
48,000
Doubtful account expense in 2010
P167,500
PROBLEM 3
On February 1, 2011, XOXO Corporation factored receivables with a carrying amount of
P2,000,000 to Moonlight Corporation. XOXO Corporation assesses a finance charge of 3% of
the receivable and retains 5% of the receivables.
Question 1: If the factoring is treated as sale, what amount of loss from sale should the
company report in its 2011 statement of comprehensive income for the year 2011?
Question 2: Assume that XOXO Corporation retained significant amount of risks and rewards of
ownership and had a continuing involvement on the factored financial asset, what amount of
loss from factoring should the company recognize?
Solution:
Question 1:
Amount factored
Less: Finance Charge (2,000,000 x 3%)
Holdback(2,000,000 x 5%)
P2,000,000
60,000
100,000
160,000
Amount received
Add: New Asset received(holdback)
Total consideration received
Less: Carrying value of the receivable equal to face
Loss on factoring
Question 2: NONE.
INVENTORIES
1,840,000
100,000
1,940,000
2,000,000
60,000
The MAMA COMPANY is an importer and wholesaler. Its merchandise of purchased from a
number of suppliers and is warehoused until sold to consumers.
In conducting his audit for the year ended December 31, 2012, the company’s CPA determined
that the system of internal control was good. Accordingly, he observed the physical inventory at
an interim date, November 30, 2012, instead of at year-end.
The following information was obtained from the general ledger:
Inventory, January 1, 2012
P117,000
Inventory, November 30, 2012
292,500
Sales for eleven months ended November 30, 2012
Sales for the year ended December 31, 2012
1,040,000
1,235,000
Purchases for eleven months ended November 30, 2012
(before audit adjustments)
936,000
Purchases for year ended December 31, 2012(before
audit adjustment)
1,053,000
Additional information:
a) Goods received on November 28 but recorded as
purchases in December
13,000
b) Deposits made in October 2012 for purchases
to be made in 2013 but charged to Purchases
18,200
c) Defective merchandise returned to suppliers:
a. Total at November 30, 2012
6,500
b. Total at December 31, 2012, excluding
November items
9,100
The returns have not been recorded pending receipt of credit memos from the suppliers.
The defective goods were not included in the inventory.
d) Goods shipped in November under FOB destination
And received in December recorded as
purchases in November
24,050
e) Through the carelessness of the client’s
warehouseman, certain goods were damaged
in December and sold in the same month
at its cost.
f)
26,000
Audit of the client’s November inventory
summary revealed the following:
Items duplicated
3,900
Purchases in transit:
Under FOB shipping point
15,600
Under FOB destination
24,050
Items counted but not included in the inventory
Summary
9,100
Errors in extension that overvalued
5,200
REQUIRED:
1. Correct amount of net purchases up to November 30, 2012
2. Correct amount of net purchases up to December 31, 2012
3. Correct amount of net purchases for the month of December 2012
4. Correct inventory on November 30, 2012
5. Gross income for eleven months ended December 31, 2012
6. Cost of sale ratio for eleven months ended November 30,2012
7. Total cost of goods sold for the amount of December 2012?
8. Estimated inventory on December 31, 2012
SOLUTION:
UP TO
Nov. 30
Dec. 31
Per books
936,000
1,053,000
November purchase recorded in
December
13,000
October deposits recorded as purchases
(18,200)
(18,200)
(6,500)
(15,600)
Defective items returned
December purchases recorded in
November
(24,050)
P900,250
P1,019,200
1. P900,250
2. P1,019,200
3. P1,019,200- P900,250= 118,950
4. Per count
P292,500
Items duplicated
(3,900)
In transit under FOB destination
(24,050)
Items counted but not included in list
9,100
Overvaluation – extension errors
(5,200)
P268,450
5. Sales
P1,040,000
Cost of sales:
Inventory, Jan, 1
Net Purchases
GAFS
Inventory, Nov. 30
117,000
900,250
1,017,250
(268,450)
748,800
Gross Income
P291,200
6. Cost ratio (748,800/1,040,000)
7. Regular sales (P169,000 x 72%)
72%
121,680
Sale of damaged items
Cost of goods sold for December
8. Inventory, Nov. 30
26,000
P147,680
268,450
December net purchases
118,950
Cost of goods sold
(147,680)
Estimated inventory, Dec. 31
P 239,720
On September 15, 2011, a fire destroyed a significant portion of merchandise inventory of
GOODBYE SUMMER Corporation. The following information was available from the records of
the company:
January 1, 2011
To Date of Fire
Sales
Sales Returns and allowances
Purchases
Purchase returns and allowances
Beginning Inventory
2010
P900,400
P1,060,360
10,200
11,960
756,490
810,952
20,590
22,220
211,120
240,320
The company determined the cost of inventory not damaged to be P139, 476. Damaged
merchandise, which cost P30,000, had an estimated realizable value of P10,000.
REQUIRED:
1. Gross profit percentage
2. Estimated ending inventory at cost
3. Estimated fire loss
Solution:
Sales, 2010
1,060,360
Less: Sales return and allowances
11,960
Net Sales, 2010
1,048,400
100%
Less: Cost of Sales, 2010
Beginning inventory
Add: Purchases
240,320
810,952
Purchase return &
Allowances
Less: Ending Inventory
(22,220)
(211,300)
Gross Profit
817,752
78%
230,648
22%
Beginning inventory, 2011
211,300
Add: Net purchases
Purchases
Purchase returns & allowances
756,490
(20,590)
735,900
TGAS
P947,200
Less: Estimated COS
Sales
900,040
Sales Return & Allowances
(10,200)
Net Sales
X Cost ratio
890,200
.78
Estimated ending Inventory at cost
Less: Undamaged Inventory
694,356
P252,844
P139,476
Net realizable value of
damaged inventory
Estimated Fire Loss
10,000
149,476
P51,684
The OVERDOSE Corporation uses the lower of cost or net realizable value inventory. Data
regarding the items in work-in-Process inventory are presented below
Markers
Historical cost
Selling Price
Estimated cost to complete
Replacement Cost
Pens
P48,000
P37,760
36,000
43,600
9600
9600
41,600
33,600
25%
25%
Normal Profit Margin
Required:
1. What is the amount of markers inventory to be reported in Savior’s statement of financial
position?
2. What is the amount of pens inventory to be reported in Savior’s statement of financial
position?
Solution:
1. COST(lower)
48,000
NRV:
Selling Price
72,000
Less: Estimated cost to complete
(9,600)
62,400
2. COST
37,760
NRV:
Selling Price
43,600
Less: Estimated cost to complete
(9,600)
PROPERTY, PLANT & EQUIPMENT
Problem 1
34,000
On January 1, 2010, SBS Corporation purchased a tract of land (site number 345) with a
building for P6,000,000. SBS paid real estate broker’s commission of P150,000, legal fees of
60,000, and a title guarantee insurance of P18,000. The closing statement indicated that the
land value was P5,000,000 and the building value was P1,000,000. Shortly after acquisition, the
building was razed at a cost of 75,000.
SBS entered into a P3,000,000 fixed price contract with the TAO BUILDERs, Inc. on March 1,
2010 for the construction of an office building on land site number 123. The building was
completed and occupied on September 30, 2011. Additional construction costs were incurred as
follows:
Plans, specifications and blueprints..................120,000
Architects’ fees for design and supervision...........250,000
The building is estimated to have a forty-year life from date of -completion and will be
depreciated using the 150%-declining-balance method.
To finance the construction cost, SBS borrowed 3,000,000 on March 1,2010. The loan is
payable in ten equal annual installments of P300,000 plus interest at the rate of 14%, SBS’
average amounts of accumulated building construction expenditures were as follows:
For the period March 1 to December 31, 2010
For the period January 1 to September 30,2011
900,000
2,300,000
REQUIRED:
1. Total cost of land account
2. If borrowing cost is added to the asset constructed, what is the capitalized cost of the office
building?
3. Depreciation to be recognized on December 31,2011.
Solution:
1. Acquisition cost
6,000,000
Real estate tax
150,000
Legal fees
60,000
Title Guarantee
18,000
Cost of razing the building
75,000
Cost of Land
6,303,000
2. Contract Price
P3,000,000
Plans, specification and blueprint
120,000
Architect Fees
250,000
Borrowing cost(900,000 x 14% x 10/12)
105,000
(2,300,000 x 14% X 9/12)
241,500
Cost of Building
3,716,500
3. (1/40 x 1.5)
3.75%
(3,716,500 x 3.75% x 3/12)
P34,842
Problem 2
The CRAZY-IN-LOVE company acquired a tract of land containing an extractable natural
resource. The company is required by its purchase to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological surveys estimate that the
land will have a value of 1,200,000 after restoration. Relevant cost information follows:
Land
Estimated restoration costs
P9,000,000
1,800,000
Question 1: If the company maintains no inventories of extracted materials, how much should
be charged to depletion expense per ton of extracted material assuming the amount of
estimated restoration cost was already recognized as a liability?
Question 2: if the company maintains no inventories of extracted materials, how much should be
charged to depletion expense per ton of extracted material assuming the amount of estimated
restoration cost has yet to be recognized?
Solution:
Question 1
Cost
9,000,000
Estimated restoration cost
Estimated Salvage value
1,800,000
(1,200,000)
Depletable cost
Divided by life in units
P9,600,000
2,000,000
Depletion per unit
P
4.80
Question 2
Cost
P9,000,000
Estimated salvage value
(1,200,000)
Depletable cost
Divided by life in units
Depletion per unit
7,800,000
2,000,000
P
3.90
Problem 3
On January 1, 2008, CHEN Company purchased an asset for P1,000,000, worth an estimated
useful life of 10 years. Straight-line method of depreciation is to be used. On January 1, 2010, it
was properly determined that the recoverable amount of the asset is P640, 000. On January 1,
2011, it was properly computed that the recoverable of the asset is P740,000.
Question 1: Under the cost model for long lived assets, what are the amounts to be reported in
the income statement and shareholder’s equity respectively, immediately on January 1, 2011?
Question 2 under the revaluation model for long lived assets, what are the amounts to be
reported in the profit or loss and shareholder’s equity on January 1, 2011?
Solution:
Question 1: 140,000; NONE
Historical cost – January 1,2008
1,000,000
Accumulated depreciation from 1/1/08
To 1/1/10(1,000,00 x 2/10)
200,000
Carrying value on January 1, 2010
800,000
Recoverable Value
As of January 1, 2010
Carrying Value
640,000
800,000
80,000
100,000
560,000
700,000
Depreciation for 2010:
(640,000/8 years
Carrying amount
QUESTION 2: 140,000; 40,000
Recoverable value – January 1, 2011
P740,000
Less: Carrying amount based on its previous recoverable
Amount
560,000
Increase in the value of the asset
Carrying amount-01/01/11(based on historical cost)
180,000
700,000
Carrying amount-01/1/11( based on its previous fair value) 560,000
Reversal of impairment loss recognized as income in the income statement
140,000
Question 2:
Recoverable value- January 1, 2011
Less: Carrying amount based on its previous
P740,000
recoverable amount
560,000
Increase in the value of the asset
180,000
Less: Reversal of impairment loss recognized previously:
Recoverable – January 1, 2011
560,000
Carrying value on January 1,2011
700,000
140,000
Revaluation surplus to be reported in the shareholder’s
Equity
40,000
INTANGIBLES AND PREPAYMENTS
******
During 2010, JAR OF HEARTS COMPANY purchased a building site for its proposed
research and development laboratory at a cost of P1,560,000. Construction of the building was
started in 2010. The building was completed on December 31, 2011, at a cost of P7,280,000
and was placed in service on January 2, 2012. The estimated useful life of the building for
depreciation was to be employed and there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development
group will result in long- term benefits (I.e. at least 10 years to the corporation. However, JAR
OF HEARTS fails to demonstrate how such projects will generate probable future economic
benefits. The remaining projects either benefit the current period or are abandoned before
completion. A summary of the number of projects and the directs incurred in conjunction with
the research and development activities for 2012 appears below
Upon recommendation of the research and development group, JAR OF HEARTS
Company acquired a patent for manufacturing rights at a cost of P2,080,000.
The patent was acquired on April 1 2011, and has an economic life of 10 years.
Number of
Salaries and employee
Projects
benefits
Other Expenses(excluding
depreciation Charges)
Completed projects with long-term
30
2,340,000
1,300,000
20
1,690,000
390,000
indeterminate
10
1,040,000
312,000
Total
60
5,070,000
2,002,000
benefits
Abandoned projects or projects that
benefit the current period
Projects in process – results
REQUIRED:
1. The total research and development expenses for 2012.
2. What is the amount of patent amortization for 2012?
3. What is the book value of the building on December 31, 2012?
4. What is the carrying value of the patent at December 31, 2012?
Solution:
1. Salaries and employee benefits
Depreciation – building (7,280,000/20 years)
P5,070,000
364,000
Other expenses
2,002,000
Total research and development expenses
7,436,000
2. Patent amortization for 2012(P2,080,000/10 years)
P208,000
3. Costs of building
P7,280,000
Less: Accumulated depreciation, December 31, 2012
(7,280,000/20 years)
364,000
Book value, December 31, 2012
P6,916,000
4. Cost of patent purchased April 1, 2011
P2,080,000
Less: Amortization:
April 1 – Dec. 31, 2011
(P2,080,000/10 x 9/12)
P156,000
Jan. 1 – Dec. 31,2012
(P2,080,000/10)
208,000
Carrying value, Dec. 31,2012
364,000
P1,716,000
LIVE-IT-UP CORPORATION was organized in 2011. Its accounting records include only one
account for all intangible assets. The following is a summary of the debit entries that have been
recorded and posted during 2011 and 2012:
INTANGIBLE ASSETS
July 1, 2011
8- year franchise; expires June 30, 2019
P126,000
Oct, 1, 2011
Advance payment on leasehold (term of lease is 2 years)
84,000
Dec. 31, 2011
Net loss for 2011 including incorporation fee, P3,000, and
48,000
related legal fees of organizing, P15,000(all fees incurred in
2011)
Jan. 2, 2012
Acquired patent (10-year life
222,000
Mar. 1, 2012
Cost of developing a secret formula
225,000
Apr. 1, 2012
Goodwill purchased
835,200
July 1, 2012
Legal fee for successful defense of patent purchased above
37,950
Oct, 1, 2012
Research and development costs
480,000
Ignore income tax effects.
REQUIRED:
1.
The unamortized patent cost at December 31, 2012
2.
The unamortized franchise cost at December 31, 2012
3.
The amount of prepaid rent to be reported in KIKITAT’s December 31, 2012, statement
of financial position.
4.
The adjusting entries on December 31, 2012, should include a net debit to the retained
earnings account of
5.
As a result of the adjustments at December 31, 2012, the total charges against
KIKIKTAT’s 2012 income should be
SOLUTION:
1. Cost of patent, Jan. 2, 2012
P222,000
Less: Amortization for 2012(222,000/10 years)
22,200
Unamortized patent cost
199,800
2. Cost franchise, July 1, 2011
P126,000
Less: Amortization, July 1, 2011 – Dec. 31, 2012
(P126,000/8 x 6/12)
23,625
Unamortized franchise cost, Dec. 31, 2012
P102,375
3. Prepaid rent, December 31, 2012(P84,000 x 9/24)
4. December 31, 2011
48,000
(126,000/8x6/12)
(84,000x3/24)
P 31,500
7,875
10,500
Net debit to R/E
5. Research and development expense
66,375
705,000
Legal Fees expense
Franchise amortization
37,950
15,750
Rent expense
Patent amortization expense
TOTAL
42,000
22,200
822,900
*******
On January 2, 2002, SNSD Company spent P480,000 to apply for and obtain a patent
on a newly developed product. The patent had an estimates useful life of 10 years, at the
beginning of 2006, the company spent P144,000 in successfully prosecuting an attempted
patent infringement. At the beginning of 2007, the company purchased for P280,000 a patent
that was expected to prolong the life of its original patent by 5 years. On July 1, 2010, a
competitor obtained rights to a patent that made the company’s patent obsolete.
REQUIRED:
1.
Carrying amount of patent as of December 31, 2006
2.
Amortization of patent in 2007
3.
Carrying amount of patents as of December 31,2009
4.
Loss on patent obsolescence in 2010
Solution
1. Cost of patent
P480,000
Less: Accumulated Amortization ( 480,000 x5/10)
240,000
Carrying amount of patent, 12/31/06
240,000
2. Amortization of original patent (240,000/10)
P24,000
Amortization on related patent (280,000/10)
28,000
Total amortization in 2007
52,000
3. Original patent (240,000 x 7/10)
P168,000
Related patent (280,000 x 7/10)
196,000
Carrying amount of patents, 12/31/09
364,000
4. Carrying amount of patents, 12/31/09
364,000
Less: Amortization, 1/1/10 to 7/10:
Original patent (P240,000/10 x 6/12)
P12,000
Related patent (280,000/10 x 6/12)
14,000
Loss on patent obsolescence
26,000
P338,000
Problem no.1
In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010
you are called upon to verify the accounts payable transactions. You find that the company does
not make use of a voucher register but enters all merchandise purchases in a Purchases
Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary
ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable
balance in the company’s general ledger. An analysis of the account disclosed the following:
Trade creditors, credit balances
P1,363,000
Trade creditors, debit balances
63,000
Net
Estimated warranty on products sold
P 1,300,000
100,000
Customer’s deposits
Due to officers and shareholders for advances
9,000
50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases)
41,000
P 1,500,000
A further analysis of the “Trade Creditors” debit balances indicates:
Date
Items
Amount
Miscellaneous debit balances prior to
2007
No information available due to loss
of records in a fire.
03/03/07
P 3,000
Manila Co. –Merchandise returned for credit,
but the company is now out of business 8,000
06/10/09
Cebu Corp. – Merchandise returned but Cebu
says “never received”
07/10/10
7,000
Jolo Distributors – Allowance granted on
defective merchandise after the invoice
was paid
5,000
10/10/10
Bulacan Co – Overpayment of invoice
12/05/10
Advance to Zambales Co. This company agrees
to supply certain articles on a cost
–plus basis
24,000
12,000
12/05/10
Goods returned for credit and adjustments on
price after the invoices were paid; credit memos
from supplier not yet received
4,000
63,000
Your next step is to check the invoices in both the paid and the unpaid invoice files against
ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated
December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January
2011. Upon inquiry, you discover that the merchandise covered by this invoice was received
and sold, but the original invoice apparently has not been received.
In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000
were prepared and entered in the Cash Disbursements Journal of December, but these checks
were not issued until January 10, 2011.
The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not
taken up by the company under audit during the year 2010. These goods are included in your
adjusted inventory.
1. The Accounts payable – Trade balance at December 31, 2010 should be
2. The net adjustment to Purchases should include a
3. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to
4. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to
5. Auditor confirmation of accounts payable balances at the end of the reporting period may be
necessary because
A. There is likely to be other reliable external evidence to support the balances
B. Correspondence with the audit clients attorney will reveal all legal action by vendors for nonpayment
C. This is a duplication of cutoff test
D. Accounts payable at the end of reporting period may not be paid before the audit is
completed.
Solution:
1.
(1,363,000 + 45,000 + 63,000 + 6,000 = 1,477,000
2.
Net debit 10,000
3. 18,000
4. Advances to supplier - 24,000
5. A
Problem 2
You were able to obtain the following from the accountant for Maverics Corp. Related to the
companys liability as of December 31, 2010.
Accounts payable
Notes payable – trade
Notes payable – bank
Wages and salaries payable
Interest payable
P 650,000
190,000
800,000
15,000
?
Mortgage notes payable – 10%
600,000
Mortgage notes payable – 12%
1,500,000
Bonds Payable
2,000,000
The following additional information pertains to these liabilities:
a. All trade notes payable are due within six months of the balance sheet date.
b. Bank notes payable include two separate notes payable Allied Bank.
(1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable
every six months.
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010
Mavericks negotiated a written agreement with Allied Bank to replace the note with
2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on
December 31, 2010
c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of
the note give the holder the right to demand immediate payment of the company fails to
make a monthly interest payment within 10 days of the date the payment is due. As of
December 31, 2010, Mavericks is three months behind in paying its required interest
payment.
d. The 12% mortgage note was issued May 1, 2001, with a term of 20 years. The current
principal amount due is P 1,500,000. Principal and interest payable annually on April 30,
A payment of P220,000 is due April 30, 2011. The payment includes interest of P
180,000.
e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable
semi-annually every June 30 and December 31.
Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2010 is
2. The portion of the Notes payable – bank to be reported under current liabilities as of
December 31, 2010 is
3. Total current liabilities as of December 31, 2010 is
4. Total noncurrent liabilities as of December 31, 2010 is
Solution:
1. 300,000 x 8% x 4/12
=
8,000
600,000 x 10% x 3/12 =
15,000
1,500,000 x 12% x 8/12 =
120,000
Interest Payable
143,000
2. Note payable to bank
3. Accounts Payable
P300,000
P650,000
Notes Payable – trade
190,000
Notes payable – bank
300,000
Wages and Salaries payable
15,000
Interest payable
143,000
Mortgage note payable
640,000
Bond payable
Total current Liabilities
4. Note payable-bank
2,000,000
3,938,000
p500,000
Mortgage note payable
(1,500,000 – 40,000)
1,460,000
1,960,000
On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value
11% bonds date 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, 2010. The 2,000 bonds were extinguished early through acquisition on the Open Market by
Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its
P1,000 face value, 10% convertible bonds at pat. Interest is payable every
June 30 and
December 31. On the date of issue, the prevailing market interest rate for similar debt without
the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds
tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a
fair value of P105 and a par value of P1 at the date of conversion.
Shareholders’ Equity
EMERALD Company reported the following shareholders’ equity on January 1, 2013.
Share Capital, 1,500,000 shares
1,500,000
Share Premium
15,000,000
Retained Earnings
8,100,000
Treasury Shares, 100,000 at cost
(900,000)
All of the outstanding and treasury shares were originally issued in 2011 for 11 per share. The
treasury shares are reacquired on March 31, 2012. During 2013, the following events or
transactions occurred relating to shareholders’ equity:

February 15 – Issued 400,000 shares for P12.5 per share

June 15 – Declared a cash dividend of P0.20 per share to shareholders of record
on April 15. This was the first dividend ever declared.

September – The president retired, the entity purchased from the retiring
president 100,000 shares for P13.00 per share which was equal to market value
on this date. These shares were cancelled.

December 15 – Declared a cash dividend ofP0.20 per share to shareholders of
record on January 2, 2014.
On December 31, 2013, the entity is being sued by two separate parties for patent
infringement. The management and outside legal counsel share the following opinion regarding
these suits:
Suit Likelihood of losing the suit
Estimated Loss
#1
Reasonably possible
600,000
#2
Probable
400,000
Required:
1.
What is the increase in share premium arising from the issuance of 400,000 shares
on February 15?
2.
What is the decrease in share premium arising from the retirement of 100,000
shares on September 15?
3.
What amount of loss contingencies should be appropriated by a charge to
unappropriated retained earnings?
4.
What amount of cash dividend should be charged against unappropriated retained
earnings in 2013?
5.
What amount should be reported in the notes to financial statement as restriction on
retained earnings because of acquisition of treasury shares?
SOLUTION:
1.
400,000 x 11.50 = 4,600,000
2.
100,000 x 10 = 1,000,000
3.
SUIT no.1 is a possible loss which require disclosure that can be done by appropriation
of Retained Earnings
4.
1,800,000 x .2 =
360,000
1,700,000 x .2 =
340,000
Total cash dividend 700,000
5.
Treasury shares, at cost
P900,000
**********************************************************************
You are a senior accountant responsible for the annual audit of LOBERIAL CO. for the year
ended December 31, 2012. The information available to you is presented below. You may
assume that any pertinent information not presented below has already been checked and
found satisfactory.
Excerpts from trial balance, December 31, 2012
Credit
Retained Earnings
P93,000
Allowance for decline in value of inventory
36500
Share capital (5,000 shares)
500,000
The books have not been closed, but all adjusting entries which the company expects to make
have been posted. Their trial balance shows a P60,000 net income for the year.
Ledger details of Retained Earnings:
Retained Earnings
08/06/12
CD
2,000
12/31/11
Balance
134,500
10/10/12
J
10,000
4/29/12
CR
500
12/31/12
J
30,000
Note: The balance at 12/31/11 agrees with last year’s working papers.
Analysis of selected cash receipts:
Date
Account Credited
Amount
4/29/12
Share Capital
10,500
Sold 100 par shares
Retained Earnings
500
at 105
Building
530,000
See corollary entry
10/10/12
dated 10/10/12
Analysis of selected cash disbursements:
Date
Account Debited
Amount
Explanation
08/06/12
Retained Earnings
2,000
Freak accident to
company truck not
covered by insurance:
repairs by DJ Repairs
Selected Entries in the general journal:
Date
Entry and Explanation
Debit
10/10/12
Accumulated Depreciation
370,000
Retained Earnings
Credit
10,000
Building
380,000
Sale of main office
building
12/31/12
Retained Earnings
30,000
Allowance for decline in
Value of Inventory
30,000
Provision to value at lower
of
cost
and net realizable
value
Based on the preceding information, determine the following:
1. Loss on sale of building
2. Share capital balance
3. Share premium balance at December 31,2012
4. Net income for 2012
SOLUTION:
1. (910,000 – 370,000) – 570,000 = P10,000
2. 500,000
3. 500
4. (60,000-10,000-2,000-30,000) =
P18,000
****************************************************************
The Perseverance Corporation has requested you to audit its financial statements for the year
2005. During your audit, Perseverance presented to you its balance sheet as of December 31,
2004 containing the following capital section:
Preferred stock P10 par; 60,000 shares authorized and issued, of which 6,000
are treasury shares costing P90,000 and shown as an
asset
P600,000
Common stock, par value P4; 600,000 shares authorized, of which
450,000 are issued and outstanding
1,800,000
Additional paid in capital (P5 per share on preferred stock
issued in 2000)
300,000
Allowance for doubtful accounts receivable
12,000
Reserve for depreciation
840,000
Reserve for fire insurance
198,000
Retained earnings
2,250,000
P6,000,000
Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2005.
Perseverance credited the proceeds to the Preferred Stock account. The treasury
shares as of December 31, 2004 were acquired in one purchase in 2004.
2) The preferred stock carries an annual dividend of P1 per share. The dividend is
cumulative. As of December 31, 2004, unpaid cumulative dividends amounted to P5 per
share. The entire accumulation was liquidated in June, 2005, by issuing to the preferred
stockholders 54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December 1, 2005 to preferred
stockholders of record December 15, 2005. The dividend is payable on January 15,
2006.
4) At December 31, 2005, the Allowance for Doubtful Accounts Receivable and Reserve for
Depreciation had balances of P25,000 and P1,050,000, respectively.
5) On March 1, 2005, the Reserve for Fire Insurance was increased by P60,000; Retained
Earnings was debited.
6) On December 31, 2005, the Reserve for Fire Insurance was decreased by P30,000,
which represents the carrying value of a machine destroyed by fire on that date.
Estimated fire cleanup costs of P6,000 does not appear on the records.
7) The December 31, 2004 Retained Earnings consists of the following:
Donated land from a stockholder (Market value on date of donation)
P450,000
Gains from treasury stock transactions
Earnings retained in business
51,000
1,749,000
P2,250,000
8) Net income for the year ended December 31, 2005 was P1, 297,500 per company’s
records.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2005. (Disregard tax implications)
1. Preferred stock
2. Common stock
3. Additional paid in capital
4. Appropriated retained earnings
5. Unappropriated retained earnings
6. Treasury stock
7. Total stockholders’ equity
SOLUTION:
1. Preferred stock 600,000
2. Common stock 2,016,000
3. Additional paid in capital 864,000
4. Appropriated retained earnings 303,000
5. Unappropriated retained earnings 2,578,500
6. Treasury stock 45,000
7. Total stockholders’ equity 6,316,500