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AUDITING
2016 EDITION
SOLUTION GUIDE
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CHRISTOPHER T. ESPENILLA, CPA MBA
FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO
CITY REVIEWER – REVIEW SCHOOL OF
ACCOUNTANCY, MANILA
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AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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CHAPTER 1: THE AUDIT PROCESS
PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE
1D
11 B
2D
12 C
3D
4A
5D
6B
7B
8A
9D
10 D
PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY
1D
11 C
2D
12 B
3C
13 B
4D
14 D
5D
15 D
6D
16 B
7A
8D
9C
10 E
PROBLEM 3: INTERNAL CONTROL
1C
11 E
2D
12 B
3C
13 D
4C
14 C
5A
15 C
6D
16 C
7C
17 C
8D
18 D
9D
19 D
10 A
20 A
21
22
23
24
25
26
B
A
C
B
C
A
PROBLEM 4: RISK BASED AUDIT PLANNING
1D
11 C
2C
12 B
3D
4B
5B
6B
7C
8A
9D
10 C
CHAPTER 1: THE AUDIT PROCESS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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PROBLEM 5: SUBSTANTIVE TESTING
1B
21 B
2A
22 D
3C
23 B
4C
24 D
5C
25 C
6D
26 C
7C
27 B
8D
28 B
9C
29 B
10 C
30 B
11 A
31 D
12 B
32 A
13 B
33 A
14 A
15 A
16 B
17 A
18 A
19 D
20 A
PROBLEM 6: AUDIT REPORTING
1C
2B
3B
4B
5B
6C
7A
8B
9C
10 C
11 A
12 C
CHAPTER 1: THE AUDIT PROCESS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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CHAPTER 2: AUDIT OF CASH
DISCUSSION PROBLEMS
CHAPTER 2-PROBLEM 1
1B
2D
3A
4B
5D
6D
7D
8D
9D
10 D
11 D
12 B
13 C
14 B
15 B
16 C
17 B
18 D
19 D
20 B
21 C
22 D
23 C
24 D
25 B
AP02-PROBLEM 2: MAPERA CORPORATION
1. Ans. P3,445,000
Current account at Metrobank
Post-dated disbursement check - adjusted to AP
Undelivered disbursement check - adjusted to AP
Adjusted current account at Metrobank
3,250,000
75,000
120,000
3,445,000
2. Ans. P2,250,000
Savings account at Rural Bank
Compensating balance - legally restricted
Adjusted savings account at Rural Bank
2,750,000
(500,000)
2,250,000
3. Ans. Zero
The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset, that is the
company has no bank account with BDO.
4. Ans. P738,000.
Undeposited collections, unadjusted balance
Customer stale check - adjusted to AR
Customer post-dated check - adjusted to AR
Customer DAUD check - Adjusted to AR
Officer's NSF check - Adjusted to AR-nontrade
Adjusted undeposited collections
1,278,000
(180,000)
(125,000)
(155,000)
(80,000)
738,000
5. Ans. P18,500
Bills and coins
Replenishment check
Adjusted petty cash fund as of 12/31/14
7,000
11,500
18,500
6. Ans. P613,500
Travel fund
Interest and dividend fund
Payroll fund
Change fund
Petty cash fund
Adjusted cash fund - Cash and cash equivale
50,000
120,000
400,000
25,000
18,500
613,500
7. Ans. P900,000
Debt security investment due 3/31/15 purchased 12/31/14
Preference shares redeemable on 2/28/15 purchased 12/1/14
Debt and equity securities - Cash and cash equivalent
8. Ans. P7,946,500
Adjusted current account at Metrobank
Adjusted savings account at Rural Bank
Adjusted undeposited collections
Adjusted cash fund - Cash and cash equivalent
Debt and equity securities - Cash and cash equivalent
Cash and cash equivalents, adjusted balance
600,000
300,000
900,000
3,445,000
2,250,000
738,000
613,500
900,000
7,946,500
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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9. Ans. P1,874,500
Customer stale check - adjusted to AR
Customer post-dated check - adjusted to AR
Customer DAUD check - Adjusted to AR
Officer's NSF check - Adjusted to AR-nontrade
Petty cash fund shortage - Adjusted to AR-custodian
Postage stamps - Office supplies
IOU from a key officer - AR-nontrade
Investment in debt security due 1/31/15 purchased 1/1/14
Ordinary shares - Trading securities/FA at FMV through P&L
Current assets (other than cash and cash equivalents)
180,000
125,000
155,000
80,000
1,500
3,000
30,000
900,000
400,000
1,874,500
10. Ans. P1,700,000
Rural bank - compensating balance - Adjusted to Other assets
Pension fund - Adjusted to Long-term Investment
Bond sinking fund - Adjusted to Long-term Investment
Cash in closed bank at recoverable value - Adjusted to Other assets
Ordinary shares - Available-for-sale security/FA at FMV through OCI/L
Non-current assets
11. Ans. P495,000
Current account at BDO - Bank overdraft
Post-dated disbursement check - adjusted to AP
Undelivered disbursement check - adjusted to AP
Credit memo for a purchase return - adjusted to AP
Current liabilities
CHAPTER 2-PROBLEM 3: MANNY CO.
Accountability:
Petty Cash Fund, Imprest balance
Return of an expense advance (a)
Total Accountability
Valid supporting items:
Bills and coins
Unreplenished paid vouchers
Accomodated checks
Dated 12/30
Dated 11/30 - marked NSF
Replenishment check
Petty cash fund shortage
(a) Should be subsequently deposited to the bank.
Cash items as of December 31, 2014
Bills and coins
Return of excess travel expense advance (a)
Unreplenished paid voucher dated 1/2
Accomodated check 12/30
Replenishment check
Adjusted petty cash fund
(a) Should be subsequently deposited to the bank.
4. Adjusting entries:
1 Transportation expense
Repairs and maintenance expense
Entertainment, amusement and representation ex
Due to employees
Petty cash fund
To record unreplenished paid vouchers.
2 Receivable from employee
Petty cash fund
To record NSF accomodated check.
3 Receivable from employee
Petty cash fund
To record petty cash fund shortage.
Petty cash fund, imprest balance
AJE 1.
AJE 2.
AJE 3.
Adjusted petty cash fund
*alternatively, this can be charged to other expense
*classified as short-term investment
500,000
250,000
500,000
150,000
300,000
1,700,000
240,000
75,000
120,000
60,000
495,000
40,000
900
40,900
1. Ans.
13,400
3,700
2,000
1,000
10,000
13,400
(900)
1,000
2,000
10,000
25,500
30,100
10,800 2. Ans.
3. Ans.
500
300
900
1,000
2,700
1,000
1,000
10,800
10,800
40,000
(2,700)
(1,000)
(10,800)
25,500
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CTESPENILLA
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CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY
Ans. P1,630
Accountability:
Total collections, 10/1-10/11 (per OR)
Total bank credits, 10/1-10/11 (per bank statement)
September deposit in transit
September bank charge error (corrected in October)
Undeposited collections as of October 11
Valid supporting items:
Currency and coins
Customer collection checks
9/30/14 - Baguio Corp.
10/3/14 - L. Reyes
10/4/14 - La. Union Corp.
Unused postage (adjusted to supplies)
Vouchers paid out of receipt (adjusted to expense)
Overage
CHAPTER 2-PROBLEM 5: BETTY CO.
Accountability
Petty cash fund, imprest balance
Undeposited collections
Cash collections (per cash sales invoices)
Customer collection checks (depositable only)
Total Accountability
Valid supporting items
Currencies and coins
Customer collection checks (depositable only)
12/30 Errol Corp., Customer
1/2 R. Rarr, Customer
Accomodated checks (whether depositable or not)
12/30 D. Dong, Vice President
1/2 Junior, Employee
Unreplenished Vouchers
Employee IOU's
Petty Cash Shortage
28,840
16,550
(4,500)
(1,400)
12,310
2,350
1,960
1,590
(c)
Receivable from employee
Petty Cash fund
To record employee .
Receivable from employee
Petty Cash fund
To record the petty cash fund shortage.
Imprest balance
AJE (a)
AJE (b)
AJE (c)
Adjusted Petty Cash Fund as of Dec. 31
5,900
110
1,500
19,820
1,630
10,000
1,670
2,500
4,170
14,170 1. Ans.
5,980
1,300
1,200
1,220
312
850
700
AJEs to the Petty Cash Fund:
(a) Expenses
730
Petty Cash Fund
To record unreplenished expense vouchers as of Dec. 31 only.
(b)
10,650
18,190
11,562
2,608 2. Ans.
730
700
700
2,608
2,608
10,000
(730)
(700)
(2,608)
CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO.
Bank Reconciliation Statement 10/31/2014
BANK
Unadjusted Balance, per Bank Statement
144,975
Undeposited collections, excluding missapprop.
10,770
Oustanding checks
(50,550)
Bank error (unrecorded bank charge)
(1,250)
Correct cash in bank balance (2. Ans. )
103,945
(4,038) 3. Ans.
5,962 4. Ans.
BOOK
125,245
8,000
(2,300)
(1,250)
129,695
(25,750)
103,945
Unadjusted Balance per Books
Unrecorded Bank Credits
Unrecorded Bank Debits: NSF Check
Unrecorded Bank Debits: Bank Service Charge
Adjusted balance per books
Cash shortage (1. Ans. )
Correct cash balance
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
AUDITING (2016 EDITION)
CTESPENILLA
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3 Adjusting Entries:
(a) Cash in bank
Accounts receivables
8,000
(b)
Accounts receivables
Cash in bank
2,300
Bank service charge/Other expenses
Cash in bank
1,250
(c)
8,000
2,300
1,250
CHAPTER 2-PROBLEM 7: JADE CORPORATION
Bank Reconciliation 12/31/2014
BANK
792,285
10,500
(75,975)
2,250
729,060
Unadjusted balance
Deposit in transit
Outstanding check
Bank error
Correct cash balance (1. Ans. )
Unadjusted balance per books
Correct cash balance
Net adjustement to cash (12/31)
726,600
729,060
(2,460)
Accountability as of January 15
Unrecorded credit as of 12/31
Book errors in Janaury (audit note b and c)
Adjusted accountability
BOOK
726,600
20,000
(5,000)
31,500
773,100
(44,040)
729,060
Unadjusted balance
Unrecorded credit
Unrecorded debit
Book errors (audit note a.)
Shortage (3. Ans. )
Adjusted balance
2. Ans.
180,500
(20,000)
19,500
180,000
January deposits from January collections
Januray bank credits
Correction of Dec. bank charge error
Dec. deposit in transit
Cash on hand
Expense vouchers
Cash shortage from Jan. 2 - Jan. 15
Add: Cash shortage as of Dec. 31
Total cash shortage as of Jan. 15, 2015
143,895
(2,250)
(10,500)
131,145
10,125
1,125
37,605
44,040
81,645
4. Ans.
CHAPTER 2-PROBLEM 8: PIRA CO.
Proof of Cash, 6/30/2014
Unadjusted balances per bank statement
Deposit in transit, May
Deposit in transit, June (SQUEEZE) 4. Ans.
Outstanding checks, May
Outstanding checks, June (SQUEEZE) 5. Ans.
Bank error, May Overstated disbursement
Adjusted balances
Unadjusted balances per book (1. Ans. )
Unrecorded bank credit: May
Unrecorded bank debits: BSC, May
Unrecorded bank debits: BSC, June
Unrecorded bank debits: NSF Check June
Bank error, May Overstated disbursement
Book error, June Overstated collection
Book error, June Overstated disbursement
Adjusted balances
May 31,
1,836,000
480,000
(1,020,000)
240,000
1,536,000
2. Ans.
May 31,
538,200
600,000
(7,200)
405,000
1,536,000
Receipt
Disbursement
2,496,000
1,224,000
(480,000)
1,317,600
(1,020,000)
2,171,760
(240,000)
3,093,600
2,375,760
Receipt
Disbursement
4,818,600
2,443,200
(600,000)
(7,200)
9,600
144,000
(405,000)
(720,000)
(213,840)
3,093,600
2,375,760
June 30,
3,108,000
1,317,600
(2,171,760)
2,253,840
6. Ans.
June 30,
2,913,600
(9,600)
(144,000)
(720,000)
213,840
2,253,840
3. Ans. No shortage.
CHAPTER 2-PROBLEM 9: KRAME INC.
Proof of Cash
Unadjusted balances, per bank
Undeposited collections - Aug
Undeposited collections - Sept
Outstanding checks - Aug
Outstanding checks - Sept
Bank error - Aug
Unadjusted balances, per book
Unrecorded credit - Aug
Unrecorded credit - Sept
Unrecorded debit - Aug
Unrecorded debit - Sept
Book Error - Aug
Book Error - Sept /Correction - Sept
Shortage/Overage
Augsut 31:
485,000
450,000
Receipt
1,955,000
(450,000)
240,000
(180,000)
(80,000)
675,000
1,745,000
1. Ans.
June 30:
Receipt
640,000
1,795,000
200,000
(200,000)
250,000
(120,000)
(45,000)
675,000
-
(100,000)
1,745,000
Disbursemen September 30:
1,655,000
785,000
(180,000)
220,000
(80,000)
1,615,000
240,000
2. Ans.
(220,000)
3. Ans.
805,000
4. Ans.
Disbursemen July 31:
1,800,000
635,000
250,000
(120,000)
80,000
(45,000)
(100,000)
1,615,000
(80,000)
805,000
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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CHAPTER 2-PROBLEM 10: MANGO COMPANY
Proof of Cash, 4/30/2014
Unadjusted balances per bank statement
Undeposited receipts, March
Undeposited receipts, April
Outstanding checks, March
Outstanding checks, April (excluding certified check)
Bank error, April Overstated disbursement
Adjusted balances
Unadjusted balances per book
Book receipts used to pay creditors in cash
Unrecorded bank credit: March
Unrecorded bank credit: April
Unrecorded bank debits:
NSF check, returned in April recorded in April
NSF check, returned in April not yet recorded
Unrecorded bank debits: BSC, March
Unrecorded bank debits: BSC, April
Bank error, April Understated disbursement
Adjusted balances
March 31,
21,560
9,060
(2,675)
27,945
March 31,
16,545
12,150
Receipt
Disbursement
220,450
218,970
(9,060)
10,120
(2,675)
1,430
(950)
221,510
216,775
April 30,
23,040
Receipt
Disbursement
222,190
216,055
(1,210)
(1,210)
(12,150)
11,640
April 30,
22,680
1,040
(750)
27,945
1. Ans.
221,510
2. Ans.
10,120
(1,430)
950
32,680
11,640
1,040
860
(750)
420
360
216,775
3. Ans.
(860)
(420)
(360)
32,680
4. Ans.
MULTIPLE CHOICE EXERCISES
CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY
Unadjusted cash balance
1. January 5 collection recorded in December
2. Undelivered check disbursements
3. Post-dated customer collection check
4. NSF customer collection check
5. Cash fund for non-current purpose
Adjusted cash balance - current asset
105,600
(15,000)
9,300
(7,800)
(1,500)
(40,000) *classifed as LT Fund Investment
50,600
Ans. B.
CHAPTER 2-EXERCISE 2: BIG BROTHER CORP.
Current account at Bank of the Philippine Islands
Current account at Equitable PCI Bank
Payroll account
Foreign bank account – restricted (in USD) **
Postage stamps
Employee’s post dated check
IOU from a key officer
Credit memo from a vendor for a purchase return
Traveler’s check
Customer’s not-sufficient-funds check
Money orders
Petty cash fund, currencies only
Treasury bills, due 3/31/15 (purchased 12/31/14)
Treasury bills, due 1/31/15 (purchased 1/1/14)
Change fund
Bond sinking fund
6,000,000
(300,000)
1,500,000
60,000
3,000
12,000
30,000
60,000
150,000
45,000
90,000
12,000
600,000
900,000
10,000
1,000,000
Equivalent
6,000,000
*no right of off-set, classified as current liab
1,500,000
3,000,000 *Other Asset at current exchang price
*prepaid expense
*other receivables
*other receivables
*debited to accounts payable
150,000
*accounts receivable
90,000
12,000
600,000
*current investment
10,000
8,362,000
1. Ans .C.
CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY
Accountability:
Petty cash fund, imprest balance
Undeposited collections
Cash sales invoices (17903-18112)
Official receipts
Customer collection check, not yet included
Other collections: Return of expense advance
Other collections: Contribution for Christmas Party
Total Accountability
Valid supporting items:
Bills and coins
Customer collection checks
12/30 T. Otis
12/26 R. Eyes
1/2 O. Liever
12/21 F. Rancisco
Accomodated check
12/29 O. Camp (return of expense advance)
Expense vouchers and IOUs
Petty cash shortage
Asset
1,000,000 *LT fund investment
4,000,000
2. Ans. B.
15,000
100,500
39,537
5,707
145,744
260
9,500
170,504
105,174
11,920
12,505
5,707
13,350
310
260
6,775
156,001
14,503
1. Ans. B.
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
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Cash on hand as of January 5, 2015
Bills and coins
Customer collection checks
Accomodated check
Return of expense advance check
Cash that does not belong to the petty cash fund
Undeposited collections:
Collection checks
Cash collections (100,500+560+1,202)
Return of expense advance
Excess collection from Christmas Party (9,500-6,290)
Cash on hand as of January 5, belonging to the Petty Cash
Vouchers paid after December 31: 1/2/15, PNR
Petty cash fund as of December 31, 2015
105,174
43,482
310
260
149,226
43,482
102,262
(145,744)
(260)
(3,210)
12
35
47 3. Ans. B.
AJEs:
(a) Office supplies expense (150-80)
70
Unused office supplies
80
Receivable from employee
300
Petty cash fund
To record unreplensihed expense vouchers as of December 31.
(b) Receivable from employee
Petty cash fund
To record petty cash shortage
450
14,503
14,503
Reconciliation:
Petty cash fund, imprest balance
AJE (a)
AJE (b)
Petty cash fund, adjusted balance
15,000
(450)
(14,503)
(14,953) 2. ans. B.
47 3. Ans. B.
Notes:
1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be
reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be
regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution).
2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement was made
only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31.
3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check the same
was also part of the valid supporting items. As an additional audit procedure, return of expense advance shall
be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should
be returned back to the general cash of the company.
CHAPTER 2-EXERCISE 4: SILVER COMPANY
Bank Reonciliation Statement 12/31/2014
Unadjusted balance per Bank Statement
Undeposited collections (as being reported)
Outstanding checks (as per complete list)
Correct cash balance per audit (4. Ans. B.)
BANK
12,300
3,000
(850)
14,450
2. Ans. D.
Undeposited collections (as being reported)
Shortage
Accountability for cash on hand
3,000
700
3,700
3. Ans. B.
Correct cash balance per audit
Cash on hand/Undeposited collection
Cash in Bank (excluding Cash on Hand)
14,450
(3,000)
11,450
BOOK
15,000 Unadjusted balance per books
150 Unrecorded bank credit
15,150 Unadjusted balance per books
(700) Shortage 1. Ans. D.
14,450 Adjusted balance per books
CHAPTER 2-EXERCISE 5: HOME CORP.
Bank Reconciliation 12/31/2014
Unadjusted balance
Deposit in transit
Outstanding check
Bank error
Correct cash balance (16. Ans. D)
BANK
1,548,570
21,000
(151,950)
4,500
1,422,120
Accountability as of January 10
Unrecorded credit as of 12/31
Book errors in Janaury (audit note a and b)
Adjusted accountability
January deposits from January collections
Januray bank credits
Correction of Dec. bank charge error
Dec. deposit in transit
Cash and Checks on hand (Depositable)
Expense vouchers
Cash shortage from Jan. 2 - Jan. 10
BOOK
1,239,200
200,000
(10,000)
63,000
1,492,200
(70,080)
1,422,120
Unadjusted balance
Unrecorded credit
Unrecorded debit
Book errors (audit note)
Shortage (17. Ans. C )
Adjusted balance
521,000
(200,000)
39,000
360,000 (18. Ans. B.)
322,790
(4,500)
(21,000)
297,290
23,475
22,250
16,985 (19. Ans. B)
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
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CHAPTER 2-EXERCISE 6: CARRERA INC.
Proof of Cash, July 31, 2014
Unadjusted balances per bank statement
Deposit in transit, June
Deposit in transit, July (SQUEEZE)
Outstanding checks, June
Outstanding checks, July (SQUEEZE)
Bank error, July Overstated disbursement
Adjusted balances
Unadjusted balances per book
Unrecorded bank debits, July Payment of AP
Unrecorded bank debits, July BSC
Unrecorded bank debits, July Payment of NP
Unrecorded bank debits, July NSF
Adjusted balances
Cash in bank, shortage June 30
June 30,
172,590
18,000
Receipt
Disbursement
751,680
903,390
(18,000)
30,000
(52,260)
41,820
(11,880)
763,680
881,070
July 31,
20,880
March 31,
140,330
Receipt
763,680
140,330
763,680
April 30,
249,680
(31,800)
(2,610)
(183,000)
(9,330)
22,940
2,000
4. Ans. C.
(52,260)
138,330
Disbursement
654,330
31,800
2,610
183,000
9,330
881,070
30,000
2. Ans. B.
(41,820) 1. Ans. C.
11,880
20,940
3. Ans. A.
CHAPTER 2-EXERCISE 7: EDILBERTO INC.
Proof of Cash, December 31, 2014
Unadjusted balances per bank statement
Undeposited collections, Nov.
Undeposited collections, Dec.
Outstanding checks, Nov.
Outstanding checks, Dec.
Adjusted balances
Unadjusted balances per book
Unrecorded bank credit: Note Col., Nov.
Unrecorded bank credit: Note Col., Dec.
Unrecorded bank debits: BSC, Nov.
Unrecorded bank debits: BSC, Dec.
NSF Check, return and redeposit, same month*
Adjusted balances
November 30,
535,410
41,005
(138,590)
437,825
November 30,
82,350
359,075
(3,600)
437,825
3. Ans. B.
Receipt
Disbursement December 31,
1,245,540
1,091,865
689,085
(41,005)
64,400
64,400
(138,590)
150,560
(150,560)
1,268,935
1,103,835
602,925
4. Ans. A.
5. Ans. B.
6. Ans. B.
Receipt
Disbursement December 31,
1,182,260
1,063,185
201,425
(359,075)
404,500
404,500
(3,600)
3,000
(3,000)
41,250
41,250
1,268,935
1,103,835
602,925
1. Ans. B.
2. Ans. B.
CHAPTER 2-EXERCISE 8: HALALAN CORP.
Proof of Cash, June 30, 2014
Unadjusted balances per bank statement
Deposit in transit, May
Deposit in transit, June
Outstanding checks, May
Outstanding checks, June
Bank error, June corrected also in June (a)
Adjusted balances
Unadjusted balances per book
Unrecorded bank credit: May
Unrecorded bank debits: BSC, May
Unrecorded bank debits: BSC, June
Unrecorded bank debits: NSF, June 13 (b)
Unrecorded bank debits: NSF, June 30
Adjusted balances
May 31,
652,000
10,000
(20,000)
642,000
May 31,
570,800
72,000
(800)
642,000
Receipt
Disbursement
88,000
63,200
(10,000)
70,000
(20,000)
17,600
(1,000)
(1,000)
148,000
60,800
1. Ans. B.
2. Ans. D.
June 30,
676,800
Receipt
Disbursement
219,000
57,400
(72,000)
(800)
200
1,000
1,000
3,000
148,000
60,800
4. Ans. D.
5. Ans. B.
June 30,
732,400
3. Ans. A.
70,000
(17,600)
729,200
6. Ans. C.
(200)
(3,000)
729,200
Notes:
(a) the error committed by the bank in June was also corrected in June, thus both receipts and disbursements per bank shall be in excess
by P1,000 if compared to receipts and disbursements per books. To reconcile, the same had been deducted from both receipt and disbursements.
(b) the NSF check on June 13 had been redeposited immediately. No entry had been made by the company to reflect the receipt and redeposit
while on the bank side, the NSF check had been recorded both as disbursement (upon learning that it is NSF) and as receipt (upon redeposit).
Thus, to reconcile, the same has been added to both receipts and disbursements per books.
CHAPTER 2-EXERCISE 9: SALUYOT CORP.
Proof of Cash, September 30, 2014
Unadjusted balances per bank statement
Deposit in transit, August
Deposit in transit, September
Outstanding checks, August
Outstanding checks, September
Bank error, Sept. corrected also in Sept.
Bank error, Sept., Overstated receipt
Adjusted balances
August 31,
156,000
2,700
(12,000)
146,700
Receipt
Disbursement September 30,
76,020
29,220
202,800 1. Ans. D.
(2,700)
28,200
28,200
(12,000)
10,800
(10,800)
(300)
(300)
(600)
(600)
100,620
27,720
219,600 5. Ans. B.
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
10 of 155
August 31,
120,000
27,000
(300)
Unadjusted balances per book
Unrecorded bank credit: August
Unrecorded bank debits: BSC, August
Unrecorded bank debits: BSC, September
Unrecorded bank debits: NSF, Sept. 12
Unrecorded bank debits: NSF, Sept. 30
Adjusted balances
420
146,700
CHAPTER 2-EXERCISE 10: WISE COMPANY
1. Ans. B.
December actual collections from customers
Deposit credited by bank in Decemeber
Less: DIT, November
December collections credited in December
DIT, December
100,620
2. Ans. C.
Disbursement September 30,
25,380
221,820 4. Ans. A.
(300)
1,320
420
900
27,720
3. Ans. B.
(1,320)
(900)
219,600
152,500
145,000
(12,500)
(132,500)
20,000
2. Ans. B.
November Bank Service Charge
Decemeber Bank Service Charge
Bank Service Charge recorded per books in Dec.
Unrecorded Bank Service Charge, Dec.
1,500
3,250
(2,500)
2,250
3. Ans. A.
Actual company collections in December
Book error, underfooting cash receipts
Book receipts, December
152,500
(2,500)
150,000
4. Ans. C.
Outstanding checks, December 31
Add: Checks paid by bank in December
Total
Less: Outstanding checks, November 30
Checks issued in December
12,500
130,000
142,500
(16,250)
126,250
5. Ans. D.
Checks issued in December (4)
December
Book disbursements in December
126,250
2,500
128,750
6. Ans. A.
Book balance, December 31
Add: Book disbursements in December (5)
Total
3)
Book balance, November 30
Receipt
127,200
(27,000)
37,500
128,750
166,250
(150,000)
16,250
Proof of Cash, December 31, 2014
Unadjusted balances per bank statement
Deposit in transit, November
Deposit in transit, December
Outstanding checks, November
Outstanding checks, September
Bank error, Dec. Overstated Disbursement
Adjusted balances
Unadjusted balances per book
Unrecorded bank debits: BSC, November
Unrecorded bank debits: BSC, December
Book error, Dec. Understated Receipt
Adjusted balances
November 30.
18,500
12,500
(16,250)
14,750
7. Ans. B.
November 30.
16,250
(1,500)
14,750
CHAPTER 2-EXERCISE 11: I-BOT INC.
1. Ans. A
Total checks issued and recorded in December
November BSC recorded in Decemeber
Total book disbursements, December
377,632
36
377,668
2. Ans. D.
Balance per books, November 30
Total book receipts, December
Total book disbursements, December
Balance per books, December 31,
15,698
371,766
(377,668)
9,796
Receipt
Disbursement December 31,
145,000
137,000
26,500 (SQUEEZE)
(12,500)
20,000
20,000
(16,250)
12,500
(12,500)
(3,750)
3,750
152,500
129,500
37,750
8. Ans. C.
9. Ans D.
10. Ans. B.
Receipt
150,000
2,500
152,500
Disbursement December 31,
128,750
37,500
(1,500)
2,250
(2,250)
2,500
129,500
37,750
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
11 of 155
3. Ans. C.
Check number 3408
Check number 3418
Check number 3419
Outstanding checks, December 31,
440
2,814
5,788
9,042
Proof of Cash, December 31, 2014
November 30.
24,298
3,648
Unadjusted balances per bank statement
Deposit in transit, November
Deposit in transit, December
Outstanding checks, November
Outstanding checks, September
Bank error, Dec. Overstated Disbursement
Bank error, Dec. Understated Disbursement
Adjusted balances
(11,214)
16,732
4. Ans. B.
November 30.
15,698
Unadjusted balances per book
Unrecorded bank credits: Note Coll, Dec.
Unrecorded bank debits: BSC, November
Unrecorded bank debits: BSC, December
Book error, Nov. Over. check 3413 (not yet corr.)
Book error, Nov. Over. Check 3417 (not yet corr.)
Adjusted balances
Receipt
Disbursement December 31,
373,502
380,284
17,516
(3,648)
5,912
5,912
(11,214)
9,042
(9,042)
(480)
480
42
(42)
375,766
377,674
14,824
Receipt
371,766
4,000
(36)
270
800
16,732
375,766
5. Ans. D.
Disbursement December 31,
377,668
9,796
4,000
(36)
42
(42)
270
800
377,674
14,824
6. Ans. C.
7. Ans. A.
CHAPTER 2-EXERCISE 12: HALAL CORP.
Proof of Cash, December 31, 2014
November 30.
685,180
15,260
Unadjusted balances per bank statement
Deposit in transit, November
Deposit in transit, December
Outstanding checks, November
Outstanding checks, September
Bank error, Nov. Overstated Disbursement
Bank error, Dec. Overstated Disbursement
Adjusted balances
(64,140)
1,500
637,800
4. Ans. C.
Unadjusted balances per book
Unrecorded bank credits: Note Coll, Dec.
Unrecorded bank debits: BSC, November
Book error, December, Overstated Disbursement
Reversal of check (stop-payment)**
Adjusted balances
3. Ans. D.
Checks issued prior to Dec.(P64,140- P26,140)
Checks issued in Dec. not yet clearing the bank
Total outstanding checks, December 31
November 30.
637,860
Receipt
Disbursement December 31,
308,120
356,080
637,220 2. Ans. B (SQUEEZE)
(15,260)
16,140
16,140
(64,140)
74,080
(74,080)
(1,500)
(180)
180
307,500
365,840
579,460
6. Ans. B.
Receipt
306,220
2,060
Disbursement December 31,
367,660
576,420 1. Ans. A. (SQUEEZE)
2,060
(60)
(60)
(980)
980
(780)
(780)
637,800
307,500
365,840
579,460
5. Ans. A.
7. Ans. D.
38,000
36,080
74,080
**Note that the entry to record the reversal of the dibursement check in which the company released a stop-payment order to the bank
will result both as a credit and debit in the company's books and will never be reflected as debit and credit on the bank records.
Thus, to reconcile, the same has been deducted both in the receipt and disbursement columns per books.
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
DISCUSSION PROBLEMS
CHAPTER 3-PROBLEM 1
1 A
2 B.
3 A.
4 A.
5 D.
6 B.
7 D.
8 D.
9 D.
10 D.
11 A.
12 C.
13 B.
14 A.
15 A.
16 D.
17 C.
18 B.
19 B.
20 A.
21 A.
22 D.
CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION
1. Ans. P124,500
January 1, balance (credit balance to be adjusted to Advances)
Charge sales
Recovery of previous write-offs
Collections from customers (overpayment credited to Advances)
Write-off of receivables
Sales returnds and allowances (P5,500+P3,000)
Gross Accounts Receivable balance
2. Ans. P107,537
Gross Accounts Receivable
Allowance for Sales Discount (P124,500*50%*25%)*5%
Alowance for Bad Debts:
60 Days past due (P124,500*30%)*10%
>120 Days past due (P124,500*20%)*50%
Amortized cost, 12/31/14
3. Adjusting Journal Entries:
(a) Accounts receivable-trade
Advances from customers
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
124,500
(778)
(3,735)
(12,450)
(16,185)
107,537
9,000
9,000
Sales
Accounts receivable-trade
25,000
Subscriptions receivable (AR-nontrade)
Accounts receivable-trade
60,000
25,000
60,000
Advances from customers
Accounts receivable-trade
5,000
Claims receivable (AR-nontrade)
Accounts receivable-trade
5,000
Advances to employees (AR-nontrade)
Accounts receivable-trade
1,000
5,000
5,000
1,000
Advances to affiliates (Investment)
Accounts receivable-trade
50,000
Advances to suppliers
Accounts receivable-trade
10,000
Accounts receivable-trade
Advances from customers
10,000
Accounts receivable-trade
Claims receivable (AR-nontrade)
115,000
1,250,000
5,000
(1,230,000)
(7,000)
(8,500)
124,500
50,000
10,000
10,000
2,000
2,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
13 of 155
(k) Accounts receivable-trade
Subscriptions receivable (AR-nontrade)
CHAPTER 3-PROBLEM 3: DELL COMPANY
1. Ans. P366,000
Balances
Accounts definitely uncollectible
Advances from customers
Adjusted balances
% Uncollectible
Allowance for Doubtful Accounts
45,000
45,000
Per GL
Per SL
Under 30 d
360,000
360,000
240,000
(6,000)
(6,000)
12,000
12,000
12,000
366,000
366,000
252,000
17,640
-
2. Ans. P22,320; 3. Ans. P17,640
Allowance for Doubtful Accounts, End
Less: Allowance for Doubtful Accounts, Beginning
Add: Write-of off Accounts
Bad debt expense for the year
30-60 d
48,000
48,000
3%
1,440
61-120 d
36,000
36,000
15%
5,400
121-180 d
24,000
24,000
30%
7,200
17,640
(1,320)
6,000
22,320
4. Ans. P330,720
Gross Accounts Receivable
Allowance for Doubtful Accounts
Allowance for Sales Discounts (P252,000*20%)*10%
Allowance for Sales Returns (P252,000*5%)
Amortized Cost, 12/31/14
366,000
(17,640)
(5,040)
(12,600)
330,720
5. Ans. P25,320
Allowance for Doubtful Accounts, End
Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance
Write-of off Accounts
Bad debt expense for the year
17,640
1,680
6,000
25,320
CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATION
Per GL
Per SL
Nov-Dec
Jul-Oct
Jan-Jun
Prior to Jan
Balances
2,270,000
2,270,000
1,140,000
600,000
400,000
130,000
Accounts definitely uncollectible
(30,000)
(30,000)
(30,000)
Adjusted balances
2,240,000
2,240,000
1,140,000
600,000
400,000
100,000
% Uncollectible
1.5%
8%
35%
70%
Allowance for Doubtful Accounts
275,100
17,100
48,000
140,000
70,000
2. Ans.
Per books:
Allowance for DA, Jan. 1
65,000
Add: Interim provisions (P4.5M*2%)
90,000
Recoveries of previous write-off
7,500
Less: Write-off of receivables
(45,000)
Additional write-off
(30,000)
Allowance for DA, Dec. 31 per books
87,500
Allowance for DA, per audit
275,100
Additional DA Expense for the year
187,600
1. Ans. Entry:
Doubtful Accounts Expense
187,600
Allowance for DA
187,600
3. Ans. P1,960,700
Gross Accounts Receivable
Allowance for DA
Allowance for Sales Discount (P700,000*30%)*2%
Amortized Cost, 12/31/14
2,240,000
(275,100)
(4,200)
1,960,700
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
Over 180 d
12,000
(6,000)
6,000
60%
3,600
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
14 of 155
CHAPTER 3-PROBLEM 5: MAHOGANNY CORP.
Customer
Invoice Date
Zulu Inc.
41,993
41,974
41,923
41,855
41,963
41,886
41,853
41,983
41,916
41,825
41,891
41,830
41,703
41,974
Whiskey Co.
Uniform Inc.
Tango Corp.
Romeo Co.
Reconciliation of GL and SL
Balances
Advances from Reomeo Co.
Posting error
Adjsuted balances
Unreconciled difference (1. Ans.)
Adjusted balance (2. Ans.)
Required allowance for Bad Debt as %
Required allowance for Bad Debt
Per GL
13,650,000
500,000
14,150,000
(30,000)
14,120,000
Current
Nov-Dec
550,000
550,000
1,200,000
1,200,000
950,000
420,000
2,000,000
2,000,000
900,000
500,000
1,750,000
1,750,000
600,000
500,000
2,600,000
1,250,000
900,000
(500,000)
13,620,000
5,500,000
1-60 d past
Sept-Oct
Per SL
Current
13,620,000
5,500,000
500,000
600,000
14,120,000
6,100,000
1-60 d past
5,050,000
1,328,500
3. Ans. P378,500
Allowance for BD, ending
Less: Allowance for BD, beg
Bad Debt Expense
4. Ans. P12,791,500
Gross Accounts Receivable
Allowance for BD
Amortized Cost, 12/31/14
Amount
2%
122,000
61-120 d pas >120 d past Credit bal
Jul-Aug
June and prior
950,000
420,000
900,000
500,000
600,000
500,000
2,600,000
1,250,000
900,000
5,050,000
(600,000)
4,450,000
5%
222,500
2,670,000
61-120 d pas >120 d past
2,670,000
900,000
2,670,000
20%
534,000
1,328,500
(950,000)
378,500
14,120,000
(1,328,500)
12,791,500
CHAPTER 3-PROBLEM 6: BONIFACIO INC.
ADJUSTING ENTRIES:
(a) Credit balance:
Accounts receivable
Allowance for bad debts
7,500
7,500
(b) Customer Aye:
No AJE necessary since the remmittance is still in transit as of December 31, 2014.
(c) Customer Bee:
Sales Returns
Accounts payable
Accounts receivable (1-60 days)
Purchases
13,800
13,800
13,800
13,800
(d)
Customer See and Dee: (1. Ans.)
Payment of customer See for a 61-120 days receivable has been deducted from customer Dee's 1-60 days
receivable. Posting error only. No AJE necessary.
(e)
Customer Eee:
Sales
Accounts receivable (1-60 days)
Inventory
Income summary/Cost of sales
(f) Customer Eff:
Sales
Accounts receivable (1-60 days)
Advances from customers
11,600
11,600
8,000
8,000
18,000
14,000
4,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
900,000
900,000
50%
450,000
(500,000)
(500,000)
Credit bal
(500,000)
500,000
-
AUDITING (2016 EDITION)
CTESPENILLA
(g)
(h)
SOLUTIONS GUIDE
15 of 155
Customer Jeeh:
Sales
Accounts receivable (1-60 days)
6,000
Customer Eych:
Sales returns and allowance
Accounts receivable (61-120 days)
1,200
Unadusted balances
(a) Credit balance
(c) Customer Bee
(d) Customer See and Dee
(e) Customer Eee
(f) Customer Eff
(g) Customer Jeeh
(h) Customer Eych
Adjusted balances (2. Ans.)
Required allowance for BD in %
Required allowance for BD (3. Ans.)
4. Ans. P1,844
Allowance for BD, ending
Less: Allowance for BD, beg.
AJE a) Recovery of write-off
Bad Debt Expense
CHAPTER 3-PROBLEM 7: ABC COMPANY
1. Ans. P1,034,711
Principal Amount
Origination cost
Origination fee
FMV of Loan/Initial measurement
6,000
1,200
Per GL
Per SL
1-60 days
61-120 days > 120 days
221,250
221,250
110,625
66,375
51,750
7,500
7,500
(13,800)
(13,800)
(13,800)
16,600
(16,600)
(11,600)
(11,600)
(11,600)
(14,000)
(14,000)
(14,000)
(6,000)
(6,000)
(6,000)
(1,200)
(1,200)
(1,200)
182,150
182,150
81,825
48,575
51,750
2%
10%
20%
16,844
1,636.50
4,857.50
10,350.00
16,844
(7,500)
(7,500)
1,844
1,000,000
57,851
(23,140)
1,034,711
2. Ans. P1,018,182
Amortization table: Loans Receivable/Notes Receivable
Correct Int.
Nominal Int.
January 1, 2014:
December 31, 2014:
103,471
120,000
December 31, 2015:
101,818
120,000
3. Ans. P373,944
Carrying value/Amortized cost 12/31/15
Accured interest, 12/31/15
Total
Present value of new future cash flows at 10% for
3 periods with annuity P300,000*2.48685
Impairment loss 12/31/15
1,000,000
120,000
1,120,000
Amortization
Balance
1,034,711
(16,529) 1,018,182
(18,182)
1,000,000
1
2.48685
746,056
373,944
4. Entries 12/31/16 to 12/31/18 Amortization
table after impairment loss:
Correct Int.
December
December
December
December
31,
31,
31,
31,
2015:
2016:
2017:
2018:
74,606
52,066
27,273
Nominal Int.
-
12/31/16: Cash
300,000
Interest income
Notes receivable/Loans receivable
74,606
225,394
12/31/17: Cash
300,000
Interest income
Notes receivable/Loans receivable
52,066
247,934
12/31/18: Cash
300,000
Interest income
Notes receivable/Loans receivable
27,273
272,727
Amortization
Principal Coll. Balance
746,056
74,606
(300,000)
520,661
52,066
(300,000)
272,727
27,273
(300,000)
0
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
Credit bal.
(7,500)
7,500
-
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
16 of 155
CHAPTER 3-PROBLEM 8: ABC CORP.
1. Ans. P4,754,134 and P4,908,330
(a) DEF Corp, 10% - Trade receivable, Term, Interest-bearing
CORRECT ENTRIES:
Jan. 1, 2013:
Cash
4,754,134
Loans receivable
4,754,134
Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods)
Principal: (5,000,000*0.704961)
3,524,803
0.704961
Interest: (250,000*4.917324)
1,229,331
4.917324
Total
4,754,134
Amortization table: Loans receivable, DEF Corp.
Correct Int.
Nominal Int.
Amortization
Balance
January 1, 2013:
4,754,134
June 30, 2013:
285,248
250,000
35,248
4,789,382
December 31, 2013:
287,363
250,000
37,363
4,826,745
June 30, 2014:
289,605
250,000
39,605
4,866,349
December 31, 2014:
291,981
250,000
41,981 4,908,330
June 30, 2015:
294,500
250,000
44,500
4,952,830
December 31, 2015:
297,170
250,000
47,170
5,000,000
June 30, 2013:
Cash
Interest income
Loans receivable
Interest income
December 31, 2013:
Cash
Interest income
Loans receivable
Interest income
250,000
June 30, 2014:
Cash
250,000
Intrest Income
35,248
35,248
250,000
December 31, 2014:
Cash
250,000
Intrest Income
37,363
37,363
2. Ans. Retroactive adjustement:
Retained earnings, beg
173,255
Loans receiavable
Face value
Less: Proceeds
Add: Nominal interest
Interest income in 2013, per books
Interest income in 2013, per audit (see amo.)
Overstatement in interest income in 2013
Loans receivable
Interest income
Loans receivable
Interest income
250,000
250,000
39,605
39,605
250,000
250,000
41,981
173,255
5,000,000
(4,754,134)
500,000
745,866
572,611
173,255
3. Ans. P2,000,000 and P2,000,000
(b) GHI, 12% - Non-trade receivable (Advances to associate), Term and Interest-bearing
CORRECT ENTRIES
January 1, 2014:
Cash
2,000,000
Loans receivable-Nontrade
2,000,000
*note that the nominal interest and effective interest are the same thus, the face value is also the proceeds (fmv)
December 31, 2014:
Cash
240,000
Interest income (2M*12%)
240,000
*note that since nominal interest and effective interests are the same and since there are no principal collections
yet, the carrying value/amortized cost at 12/31/14 remains the face value.
4. Ans. P2,483,684 and P3,305,785
(c) KLM - Trade receivable, Term and Non-interest-bearing
CORRECT ENTRIES
Janaury 1, 2012:
Cash
2,483,685
Loans receivable
2,483,685
Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods)
Principal: P4,000,000*0.6209213)
2,483,685
0.6209213
Amortization table: Loans receivable, KLM
Correct Int.
Nominal Int.
Amortization
Balance
January 1, 2012:
2,483,685
December 31, 2012:
248,369
248,369
2,732,054
December 31, 2013:
273,205
273,205
3,005,259
December 31, 2014:
300,526
300,526 3,305,785
December 31, 2015:
330,579
330,579
3,636,364
December 31, 2016:
363,636
363,636
4,000,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
41,981
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
17 of 155
December 31, 2012:
Loans receivable
Interest income
248,369
December 31, 2013:
Loans receivable
Interest income
273,205
December 31, 2014:
Loans receivable
Interest income
300,526
248,369
273,205
300,526
5. Ans. Retroactive adjustement:
Retained earnings, beg
994,741
Loans receivable
Principal amount
Less: Proceeds
Interest income rececognized in 2012
Correct interest income in 2012 (see amo.)
Correct interest income in 2013 (see amo.)
Overstatement in interest income in '12 and '13
994,741
4,000,000
(2,483,685)
1,516,315
(248,369)
(273,205)
994,741
6. Ans. P4,780,007 and P4,350,818
(d) NOP, 10% - Trade, Serial and Interest-bearing
CORRECT ENTRIES
January 1, 2014:
Cash
4,780,007
Loans receivable
4,780,007
Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 10 semi-annual periods)
Cash to be collected on:
Principal
Interest
Total
PV factor
Present Value
July 1, 2014:
500,000
250,000
750,000
0.943396
707,547
January 1, 2014:
500,000
225,000
725,000
0.889996
645,247
July 1, 2015:
500,000
200,000
700,000
0.839619
587,733
January 1, 2015:
500,000
175,000
675,000
0.792094
534,663
July 1, 2016:
500,000
150,000
650,000
0.747258
485,718
January 1, 2016:
500,000
125,000
625,000
0.704961
440,600
July 1, 2017:
500,000
100,000
600,000
0.665057
399,034
January 1, 2017:
500,000
75,000
575,000
0.627412
360,762
July 1, 2018:
500,000
50,000
550,000
0.591898
325,544
January 1, 2018:
500,000
25,000
525,000
0.558395
293,157
TOTAL
4,780,007
Amortization table: Loans receivable, NOP
Correct Int.
January 1, 2014:
July 1, 2014:
286,800
January 1, 2015:
259,008
July 1, 2015:
231,049
January 1, 2016:
202,912
July 1, 2016:
174,587
January 1, 2017:
146,062
July 1, 2017:
117,326
January 1, 2018:
88,365
July 1, 2018:
59,167
January 1, 2019:
29,717
July 1, 2014:
Loans receivable
Interest income
Cash
Interest income
Loans receivable
December 31, 2014:
Loans receivable
Interest income
Interest receivable
Interest income
Nominal Int.
250,000
225,000
200,000
175,000
150,000
125,000
100,000
75,000
50,000
25,000
Amortization
36,800
34,008
31,049
27,912
24,587
21,062
17,326
13,365
9,167
4,717
Princ. Coll.
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
36,800
36,800
750,000
250,000
500,000
34,008
34,008
225,000
225,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
Balance
4,780,007
4,316,808
3,850,816
3,381,865
2,909,777
2,434,364
1,955,425
1,472,751
986,116
495,283
(0)
AUDITING (2016 EDITION)
CTESPENILLA
Proceeds from issue 1/1/14
July 1, 2014 amortization
July 1, 2014 principal collection
Dec 31, 2014 amortization
December 31, amortized cost
SOLUTIONS GUIDE
18 of 155
4,780,007
36,800
(500,000)
34,008
4,350,816 *note that the next P500,000 principal collection shall be made on Jan. 1, 2015
SUMMARY
Interest
Interest
Current
Non-current
Income
Recevable
Loans Rec.
Loans Rec.
(a) DEF Corp, 10% - trade
581,586
4,908,330
(b) GHI, 12% - nontrade
240,000
2,000,000
(c) KLM - trade
300,526
3,305,785
(d) NOP - trade
545,809
225,000
4,350,816
Total
1,667,920
225,000
12,564,932
2,000,000
6. Ans.
7. Ans.
8. Ans.
9. Ans.
Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus
trade receivables are always current.
CHAPTER 3-PROBLEM 9: DWARF CORP.
Noncurrent
(a) Note receivable from sale of plant - nontrade
Dec. 31, 2013 balance
4,500,000
Apr. 1, 2014, principal collection
(1,500,000)
Dec. 31, 2104 balance
3,000,000
Int. Receivable: P3,000,000*12%*9/12
Int. Income: (P4.5M*12%*3/12) + (P3M*12%*9/12)
1,500,000
Current
Int. Receivab
Int. Income
1,500,000
270,000
405,000
(b) Note receivable from officer - nontrade
Int. Income (P1,200,000*10%)
1,200,000
-
120,000
(c) Note receivable from sale of equipment - nontrade
Apr. 1, 2014 @FMV=PV of future cash flows at 12% for 2 periods
(P600,000*0.797)
478,200
Dec. 31, 2014: Amo. (478,200*12%*9/12)
43,038
Dec. 31, 2014 amortized cost
521,238
(d) Note receivable from sale of land - nontrade
Jul. 1, 2014 @ FMV=Face (Nominal%=Effective%)
Dec. 31, 2014 balance = Face
Current portion:
Periodic payment (on Jul. 1, 2015)
676,875
Interest expense (upto Jul. 1, 2015
231,000
Long-term portion:
Interest receivable (P2.1M*11%*6/12)
Interst income (P2.1M*11%*6/12)
Total
43,038
521,238
-
-
2,100,000
445,875
1,654,125
445,875
1,654,125
115,500
115,500
4,875,363
1,945,875
385,500
683,538
1. Ans.
2. Ans.
3. Ans.
4. Ans.
Note that per PAS 1, a nontrade receivable is current if it is realizable within 12 months after the reporting period or balance sheet date.
CHAPTER 3-PROBLEM 10: WHISKEY INC.
1. JORNAL ENTRIES
(a) Pledging of AR
June 30, 2014:
Cash (P4M*80%)-(P4M*5%)
Interest expense (P4M*5%)
Loans payable (P4M*80%)
July 31, 2014:
Cash
Sales discount
Accounts receivable
Interest expense (P3.2M*12%*1/12)
Loans payable (balance)
Cash
Sales returns
Accounts receivable
3,000,000
200,000
3,200,000
1,200,000
120,000
1,320,000
32,000
1,168,000
1,200,000
80,000
80,000
SUMMARY:
2. Ans. P1,450,000
ACCOUNTS RECEIVABLE
Jun. 30, bal
4,000,000
1,320,000
80,000
950,000
200,000
Aug. 31, bal
1,450,000
Jul. Coll
Jul Returns
Aug. Coll
Aug. Write-o
3. Ans. P1,152,320
LOANS PAYABLE
3,200,000 Jun. Loan
Jul. Payment
1,168,000
2,032,000 Jul 31. bal
Aug. Paymen
879,680
1,152,320 Aug. 31, ba
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
August 31, 2014:
Cash
Sales discount
Accounts receivable
SOLUTIONS GUIDE
19 of 155
900,000
50,000
950,000
Interest expense (P2,032K*12%*1/12)
Loans payable (balance)
Cash
20,320
879,680
Allowance for BD
Accounts receivable
200,000
(b) Discounting of NR
Cash (Proceeds)
Notes receivable
Interest income (P2M*10%*4/12)
Gain on discounting
Maturity Value:
Principal Amount
Interest (P2M*10%)
2,032,000
900,000
200,000
2,082,667
2,000,000
66,667
16,000
2,000,000
200,000
2,200,000
Proceeds: (Maturity value - Discount)
Maturity Value
Less: Discount: (Maturity value*Discount rate*Remaining term)
(P2,200,000*8%*8/12)
Proceeds from discounting
2,200,000
(117,333)
2,082,667
4. Ans. 0
Since discounting was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the notes receivable has been derecognized/transferred.
5. Ans. P16,000.
Proceeds from discounting/Sales proceeds
Less: Carrying value of Notes Receivabl
Interest from Jan. 1 to May 1 (4 mo.)
(P2,000,000*10%*4/12)
Gain on discounting
CHAPTER 3-PROBLEM 11:VICTORY INC.
1. JORNAL ENTRIES
(a) Assignement of AR
November 1, 2014:
Cash (P1.5M*95%)
Interest expense (P1.5M*5%)
Loans payable
Accounts receivable-Assigned
Accounts receivable
November 30, 2014:
Cash
Sales discount
Accounts receivable-Assigned
Interest expense (P1.5M*12%*1/12)
Loans payable (balance)
Cash
2,082,667
2,000,000
66,667
2,066,667
16,000
1,425,000
75,000
1,500,000
2,000,000
2,000,000
SUMMARY:
2. Ans. P470,000.
ACCOUNTS RECEIVABLE-ASSIGNED
Jun. 30, bal
2,000,000
650,000 Jul. Coll
60,000 Jul Returns
740,000 Aug. Coll
80,000 Aug. Write-o
Aug. 31, bal
470,000
600,000
50,000
650,000
15,000
585,000
3. Ans. P224,150
Jul. Payment
600,000
Aug. Paymen
Sales returns
Accounts receivable-Assigned
August 31, 2014:
Cash
Sales discount
Accounts receivable-Assigned
Interest expense (P915K*12%*1/12)
Loans payable (balance)
Cash
Allowance for BD
Accounts receivable-Assigned
60,000
60,000
700,000
40,000
740,000
9,150
690,850
915,000
700,000
80,000
80,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
LOANS PAYABLE
1,500,000 Jun. Loan
585,000
915,000 Jul 31. bal
690,850
224,150 Aug. 31, ba
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
20 of 155
(b) Factoring of AR
Cash, net (350,000-10,000)
340,000
Receivable from factor
50,000
Allowance for BD
20,000
Loss on Factoring
90,000
Accounts receivable
500,000
Since factoring was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis),
the accounts receivable factored has been derecognized/transferred.
4. Ans. (P90,000)
Net proceeds from factoring (350,000-10,000)
Add: Factor's holdback
Total/Net Sales proceeds from AR
Carrying value of AR
Gross Accounts receivable factored
500,000
Allowance for BD
(20,000)
Loss of Factoring
340,000
50,000
390,000
480,000
(90,000)
MULTIPLE CHOICE EXERCISES
CHAPTER 3-EXERCISE 1: DKNY COMPANY
Trade accounts receivable
(proceeds from assignment
12% Trade notes receivable
Installments receivable, normally due 1 year to two year
merchandise
Claim from insurance company
Subscription receivable due in 60 days,
Accrued interest receivable
Trade
1,550,000
750,000
200,000
600,000
3,100,000
1. Ans. B.
3. Ans. C.
Proceeds from AR factored
Carrying value of AR factored
Loss from factoring
Proceeds from NR discounted:
Maturity value: (Principal + Interest)
Principal
Interest (P300,000*20%*6/12)
Less: Discount (MV*disc%*remaining
(P330,000*40%*6/12)
Proceeds from NR discounted:
Carrying value of NR (no interest)
Loss from discounting
Other - current
300,000
30,000
600,000
20,000
950,000
Total trade & other
4,050,000
2. Ans. D.
250,000
(300,000)
(50,000)
300,000
30,000
330,000
term)
(66,000)
264,000
300,000
(36,000)
Total loss from receivable financing
(86,000)
Note:
(a) The credit balances from customer accounts at P60,000 and P40,000 shall be presented as advances from customers (current
liab.) unless there is right of offset.
(b) The cash advances to subsidiary amounting to P800,000 shall be presented as an addition to the investment in subsidiary
account in the parent-company financial statements, thus is presented as LT Investment.
(c) The deposit on contract bids amounting to P500,000 shall be presented as Other Assets in the noncurrent asset portion of SFP.
(d) The advances to stockholders amounting to P2,000,000 is a non-trade, noncurrent receivable, thus is presented as Other Asset.
CHAPTER 3-EXERCISE 2: MORGAN INC.
1. Ans. A.
Allowance for DA, Dec. 31, 2014 (per aging)
Less: Allowance for DA, Jan. 1, 2014
Recovery of previously written-off accounts
Add: Write-off of accounts during the year
Correct Bad Debt Expense
2. Ans. B.
Gross Accounts Receivable
Less: Allowance for DA, Dec. 31, 2014 (per aging)
Amortized cost/Carrying value, Dec. 31, 2014
700,000
(600,000)
(100,000)
375,000
375,000
2,375,000
(700,000)
1,675,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
3,225,300
(169,000)
3,056,300
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
21 of 155
CHAPTER 3-EXERCISE 3: INUYASHA INC.
1. Ans. C.
Year Current
2013
1%
2012
2%
2011
1%
2010
3%
2009
3%
Average uncollectible accounts in
2%
2. Ans. C.
Age of accounts
Current
1 to 30 days past due
31 to 60 days past due
61 to 90 days past due
Over 90 days past due
Total
1 – 30 days PD
6%
8%
4%
5%
2%
5%
PD
PD
9%
10%
11%
12%
8%
10%
days PD
23%
18%
16%
22%
21%
20%
55%
60%
45%
45%
45%
50%
Amount
Allow in %
Required Allow. In Amount
1,686,400
2%
33,728
922,000
5%
46,100
384,800
10%
38,480
153,300
20%
30,660
78,800
50%
39,400
3,225,300
188,368
3. Ans. A.
Gross Accounts Receivable
Allowance for uncollectible accounts
Amortized cost/Net realizable value
3,225,300
(188,368)
3,036,932
CHAPTER 3-EXERCISE 4: MEXICAN CORP.
Reconciliation of GL and SL with Aging of AR
Per GL
Per SL
0-60 days
61-90 days 91-120 days > 120 days
1,230,000
1,223,000
825,000
220,000
50,000
128,000
Write off of AR
(40,000)
(40,000)
(40,000)
Balance
1,190,000
1,183,000
825,000
220,000
50,000
88,000
Unlocated difference*
(7,000)
Adjusted Gross AR
1,183,000
Required Allowance for BD in %
2%
10%
30%
40%
Required Allowance for BD in Amounts
88,700
16,500
22,000
15,000
35,200
1. Ans. C.
*Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail. The adjusting entry shall be:
Sales
7,000
Accounts receivable
7,000
2. Ans. B.
Required allowance for BD, Dec. 31
Less: Allowance for BD, unadjusted balance
Add: Additional write-off per audit
Additional bad debt expense per audit
Bad debt expense per books (P12.8M*2%)
Total bad debt expense per audit
3. Ans. C.
Gross Accounts Receivable
Less: Allowance for BD
Amortized cost/Net realizable value
CHAPTER 3-EXERCISE 5: ROVERS INC.
Customer
Gudang
Tisoy
Gusoy
Naning
Nanong
Balong
Peejong
Total
88,700
(106,000)
40,000
22,700
256,000
278,700
1,183,000
(88,700)
1,094,300
Dec.
Nov.
Oct.
Sept.
Aug. and pri
Invoice date Amount
0-30 days
31-60 days 61-90 days
91-120 days >120 days
9/12/14
139,200
139,200
12/12/14
153,600
153,600
12/2/14
99,200
99,200
11/17/14
185,120
185,120
10/8/14
176,000
176,000
12/8/14
160,000
160,000
10/25/14
44,800
44,800
8/20/14
40,000
40,000
9/27/14
96,000
96,000
8/20/14
71,360
71,360
12/6/14
112,000
112,000
11/29/14
169,440
169,440
1,446,720
524,800
354,560
220,800
235,200
111,360
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
22 of 155
Reconciliation between GL and SL with Aging of AR analysis
Per GL
Per SL
0-30 days
Unadjusted balances
1,466,720
1,446,720
524,800
(a) Write-off of AR-Balong
(71,360)
(71,360)
(b) Posting error
(99,200)
Adjusted balances
1,395,360
1,375,360
425,600
Unreconciled difference
(20,000)
Adjusted balance
1,375,360
Required allowance for BD in %
2%
Required allowanc for BD in amount
120,320
8,512
1. Ans. D.
Allowance for BD, ending
Less: Allowance for BD, unadjusted
Add: Write off of AR-Balong
Bad Debt Expense
31-60 days
354,560
61-90 days
220,800
91-120 days
235,200
99,200
453,760
220,800
235,200
5%
22,688
10%
22,080
20%
47,040
>120 days
111,360
(71,360)
40,000
50%
20,000
120,320
(46,720)
71,360
144,960
2. Ans. C.
3. Ans. C.
Write-off of AR-Balong
Unlocated difference (debited to Sales)
Total adjustments to AR-GL
4. Ans. A.
Gross Accounts Receivable
Allowance for Bad Debts
Amortized cost/Carrying value
5. Ans. B.
AJE to record unreconciled difference:
Sales
Accounts receivable
(71,360)
(20,000)
(91,360)
1,375,360
(120,320)
1,255,040
20,000
20,000
CHAPTER 3-EXERCISE 6: NATASHA INC.
Reconciliation between GL and SL with Aging of AR analysis
Per GL
Per SL
0-1 Month
1-3 Months
3-6 Months
Unadjusted balances
788,000
792,960
372,960
307,280
88,720
(b) Additional write-off (GL only)
(800)
(c) Additional write-off per aging sched
(4,000)
(4,000)
(d) AR with credit balances
10,000
10,000
8,000
2,000
793,200
798,960
380,960
309,280
88,720
Unreconciled difference
5,760
Adjusted balances (3. Ans. C.)
798,960
Allowance for BD in %
1%
2%
3%
Allowance for BD in Amount (4. Ans. A.)
19,057
3,810
6,186
2,662
> 6 Months
24,000
(4,000)
20,000
8,000
12,000
50%
4,000.00
20%
2,400.00
Adjusting entries:
(a) Bad debt expense
1,296
Allowance for bad debt
1,296
To adjust the entry made upon recovery of previously written-off account, credited by the client to Bad Debt Expense account.
(b)
Allowance for bad debt
800
Accounts receivable
To record additional accounts written-off per SL.
800
(c)
Allowance for bad debt
4,000
Accounts receivable
4,000
To record additional accounts written-off per the aging schedule.
(d)
Accounts receivable
8,000
Advances from customers
8,000
To reclassify the credit balances in customer accounts at (0-1 mo.) P8,000 and (1-3 mo.) P2,000.
(e)
Allowance for bad debts
Bad debt expense
Allowance for BD, ending
Less: Allowance for BD, beginning
Recovery of previous write-off
Add: Write off of accounts receivable
Additional write-off per audit
Bad Debt Expense per audit
Bad Debt Expense per books
Overstatement in Bad Debt Expense
10,297
10,297
19,057
(15,250)
(1,296)
6,832
4,000
13,343 1. Ans. C.
23,640
(10,297)
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
23 of 155
(f) Accounts receivable
5,760
Sales
5,760
To adjust the unlocated difference (SL should prevail over GL).
5. Ans. D.
Gross Accounts Receivable
Allowance for BD
Amortized cost/Carrying value
2. Ans. B.
798,960
(19,057)
779,903
CHAPTER 3-EXERCISE 7: SAYOTE INC.
Reconciliation between GL and SL with Aging of AR analysis
Per GL
Per SL
Under 1 mo.
1-6 mo.
Unadjusted balances
1,270,000
1,260,000
540,000
552,000
Credit balance - Kamote (Advances)
12,000
12,000
Credit balance - Kutchay (Posting error
(21,000)
Credit balance - Kalachuchi (Advances)
27,000
27,000
Write-off of accounts
(72,000)
(72,000)
1,237,000
1,227,000
540,000
531,000
Unlocated difference
(10,000)
Adjusted balance (2. Ans. B)
1,227,000
Allowance for BD %
1%
2%
Allowance for BD in Amount (3. Ans A)
46,020
5,400
10,620
Over 6 mo.
228,000
Credit bal.
(60,000)
12,000
21,000
27,000
(72,000)
156,000
36,000
120,000
50%
18,000
10%
12,000
1. Ans. A.
Sales
10,000
Accounts receivable
10,000
To record the unlocated difference (SL should prevail over GL)
4. Ans. D.
Allowance for BD, ending
Less: Allowance for BD, beg.
Add: Write off of AR
Additional write-off per audit
Bad debt expense per audit
Bad debt expense per books
Additional bad debt expense per audit
AJE:
Bad debt expense
Allowance for bad debt
5. Ans. C.
Accounts receivable, Gross
Allowance for bad debts
Amortized cost/Carrying vallue
46,020
(30,000)
24,000
72,000
112,020
72,000
40,020
40,020
40,020
1,227,000
(46,020)
1,180,980
CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY
1. Ans. C.
P30,000*20% = P6,000 - Income is overstated by the gross profit on the sales.
2. Ans. A.
The credit memo should be recorded as of December 31, 2014.
3. Ans. B.
Actual number of units sold to Mr Lazo was 320 (P48,000/P150)
4. Ans. D.
(320*P100) – P48,000 = P16,000.
5. Ans. A.
Receivable from Mr. Sia is correctly stated because the goods are considered sold in 2014
16. Ans. D.
CHAPTER 3-EXERCISE 9: MILK CORP.
Customer
Zulu Inc.
Yankee Co.
Xylon Inc.
Whiskey Co.
Victory Corp.
Uniform Inc.
Dec.
Nov.
Oct.
Sept.
Aug. and pri
Invoice date
Invoice Amount 1-30 days
31-60 days 61-90 days
91-120 days more than 1
12/6/14
42,000
42,000
11/29/14
63,540
63,540
9/27/14
36,000
36,000
8/20/14
26,760
26,760
12/30/14
20,000
20,000
12/8/14
40,000
40,000
10/25/14
31,800
31,800
11/17/14
69,420
69,420
10/9/14
66,000
66,000
12/12/14
57,600
57,600
8/20/14
37,200
37,200
9/12/14
52,200
52,200
542,520
159,600
132,960
97,800
88,200
63,960
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
24 of 155
Reconciliation of GL and SL with Aging of AR analysis
Per GL
Per SL
1-30 days
31-60 days 61-90 days
Unadjusted balances
550,000
542,520
159,600
132,960
97,800
Yankee & Victory: Posting error
26,760
Xylon: FOB Destination
(20,000)
(20,000)
(20,000)
Uniform: Write-off
(52,200)
(52,200)
Adjusted balances
477,800
470,320
166,360
132,960
97,800
Unreconciled difference
(7,480)
Adjusted balance
470,320
Allowance for BD in %
1%
2%
5%
Allowance for BD in Amounts (1. Ans. A.)
31,413
1,664
2,659
4,890
2. Ans. D.
Gross Accounts Receivable
Allowance for BD
Amortized cost/Carrying value
470,320
(31,413)
438,907
3. Ans. A.
Allowance for BD, end
Add: Write off
Debit unadjusted balance
Bad debt expense
31,413
52,200
16,500
100,113
4. Ans. B.
Sales
7,480
Accounts receiavable
7,480
To adjust the unreconciled difference. (SL should prevail over GL)
CHAPTER 3-EXERCISE 10: BROCOLI CORP.
Adjusting entries
a. Accounts payable
Cash - METREBANK
67,500
67,500
b. Accounts receivable (current)
Cash - METREBANK
189,000
c. Cash - METREBANK
Accounts payable
107,550
d. Cash - METREBANK
Accounts payable
115,650
e. Cash - METREBANK
Expense
Loans payable
258,000
42,000
f. Accounts receivable (current)
Cash – BADO
189,000
107,550
115,650
300,000
57,900
57,900
g. Cash – BADO
Overdraft (Liability)
3,207,900
h. Advances to supplier
Purchases
60,000
i. Sales
Accounts receivable
(no adjustment to subsidiary- aging)
3,207,900
60,000
4,500,000
4,500,000
j. Sales return
Accounts receivable
(no adjustment to subsidiary – aging)
225,000
k. Bad debt expense
Allowance for bad debts
880,763
225,000
Customer post-dated check (AJE b)
Customer post-dated check (AJE f)
Collections Received on Dec. 31, 2014 (adj to SL only)
Consigned goods to NITZ (adj to SL only)
Undelivered sales (adj to GL only/ AJE i)
Unrecorded sales returns (adj to GL only/AJE j)
Adjusted Balances
880,763
Gen Ledger
Subs. Ledger
Current
Past due
63,219,000
65,045,790
35,550,000
29,495,790
189,000
189,000
189,000
57,900
57,900
57,900
(2,626,290) (1,000,000) (1,626,290)
(3,925,500) (3,925,500)
(4,500,000)
(225,000)
58,740,900
58,740,900
30,871,400
27,869,500
3. Ans. D.
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
91-120 days more than 1
88,200
63,960
(26,760)
(52,200)
36,000
37,200
10%
3,600
50%
18,600
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
25 of 155
Current
30,871,400
Past Due
27,869,500
Required Allowance, end
Add: Write-offs
Less: Allowance, beg
Interim provision/Bad debt per books
Additional bad debt expense
l. Inventory
Cost of sales
(3,925,500+4,500,000+225,000)*80%
1. Ans. D.
Cash, Unadjusted balance
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Cash, adjusted balance
2%
7%
617,428
1,950,865
2,568,293
521,565
(1,773,195)
(435,900)
880,763
6,920,400
6,920,400
(90,000)
(67,500)
(189,000)
107,550
115,650
258,000
(57,900)
3,207,900
3,284,700
2. Ans. C.
Cash in bank, BADO
(f)
Cash in bank, BADO (total overdraf
(3,150,000)
(57,900)
(3,207,900)
4. Ans. C.
Bad debt expense per books
Additional bad debt expense per audit'
Bad debt expense per audit
435,900
880,763
1,316,663
5. Ans. C.
Gross Accounts Receivable
Allowance for bad debt
Amortized cost/Carrying value
58,740,900
(2,568,293)
56,172,607
6. Ans. D.
Inventory, unadjusted balance
(l)
Inventory, adjusted balance
55,558,140
6,920,400
62,478,540
CHAPTER 3-EXERCISE 11: MYBAGS INC.
NR - total
(a) NR discounted as a sale
(b) NR - 30 days
(c) NR - 90 days (Subscription Receivable)
Int. Inc. (P500,000*16%*2/12)
(d) NR-dishonored (collection w/in 12 months is doubtf
(e) NR - 90 days (Advances to Officer)
(f) NR - 120 days
Int. Inc. (P120,000*16%*108/360)
Total
Recievable-Curr Interest Inco
900,000
500,000
13,333.33
16,000
160,000
120,000
120,000
5,760
1,020,000
1,680,000
35,093
1. Ans. C.
2. Ans. C.
3. Ans. D.
900,000
CHAPTER 3-EXERCISE 12: YZA INC.
1. Ans. A.
Proceeds from the loan (FMV = Present Value of future cash flows at 8% effective rate for 3 periods)
Principal (1,000,000*0.793832)
793,832
0.793832
Interest (60,000*2.577097)
154,626
2.577097
948,458
Principal amount
Add: Origination cost (Squeeze)
Less: Origination fee
Net proceeds/Fair value
1,000,000
28,458
(80,000)
948,458
Amortization table: Loans receivable
Correct Int.
Janaury 1, 2014:
December 31, 2014:
December 31, 2015:
December 31, 2015:
75,877
77,147
78,519
Nominal Int.
60,000
60,000
60,000
Amortization
Balance
948,458
15,877
964,335
17,147
981,481
18,519
1,000,000
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
Interest Rec.
-
13,333
-
5,760
19,093
4. Ans. A.
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
26 of 155
2. Ans. C.
Carrying value/Amortized cost (12/31/15)
Accrued interest (as of 12/31/15)
Total receivables as of 12/31/15
Present value of new cash flows at original eff. % (8%)
Due 12/2016: P300,000*0.925926
277,778
Due 12/2018: P300,000*0.793832
238,150
Impairment loss
981,481
60,000
1,041,481
0.925926
0.793832
515,927
525,554
3. Ans. C.
CHAPTER 3-EXERCISE 13: ISIAH COMPANY
Principal amount
4,000,000
Add: Origination cost
248,000
Less: Origination fees
(374,000)
Initial amount/Fair value/Proceeds
3,874,000
1. Ans. B.
Amortization table: Loans receivable
Correct Int.
December
December
December
December
31,
31,
31,
31,
2013:
2014:
2015:
2016:
358,345
361,892
365,763
2. Ans. D.
Amortized cost/Carrying value (12/31/15)
Accrued interest (12/31/15):
Total receivables as of 12/31/15
Less: Present value of new future cash flows at 9.25%
Due 12/31/2017: (1.4M*0.837832)
1,172,965
Due 12/31/2018: (P1M*0.766895)
766,895
Due 12/31/2019 (P600K*0.701963)
421,178
Due 12/31/2020: (P400K*0.642529
257,012
Impairment loss
3. Ans. B.; 4. Ans. C.
Amortization table: Loans receivable after impairment loss
Correct Int.
December 31, 2015:
December 31, 2016:
242,170
December 31, 2017:
264,570
December 31, 2018:
159,543
December 31, 2019:
81,801
December 31, 2020:
33,867
CHAPTER 3-EXERCISE 14: VISAGE CORP.
1. Ans. A.
Net cash proceeds from factoring (P350,000-P10,000)
Factors holdback
Total/Net sales price of AR factored
Less: Carrying value of AR (P500,000-P20,000)
Loss from factoring
Nominal Int.
Amortization
Balance
3,874,000
38,345 3,912,345
41,892
3,954,237
45,763
4,000,000
320,000
320,000
320,000
3,954,237
320,000
4,274,237
0.915332
0.837832
0.766895
0.701963
0.642529
2,618,049
1,656,188
Nominal Int.
Amortization
-
242,170
264,570
159,543
81,801
33,867
Principal Coll. Balance
2,618,049
2,860,219
1,400,000 1,724,789
1,000,000
884,332
600,000
366,133
400,000
(0)
340,000
50,000
390,000
(480,000)
(90,000)
2. Ans. D.
Assignment is only a loan transaction, thus there is no transfer of receivable.
3. Ans. A.
Accounts receivable-assigned
May collection with sales discount (P200,000+P5,000)
June collection with sales discount (P150,000+P4,000)
Sales returns
Accounts written-off as worthless
Accounts receivable-assigned - June 30
800,000
(205,000)
(154,000)
(30,000)
(20,000)
391,000
4. Ans. B.
Payment
Loans payable balance, May 1
May 31 remittance
June 31 remittance
200,000
150,000
Interest
(Bal*24%*1/12
10,000
6,200
Principal
(Payment-Int)
190,000
143,800
Balance
500,000
310,000
166,200
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
27 of 155
5. Ans. B.
Proceeds from discounting **
Less: Carrying value of Notes
Interest receivable up to Oct. 31 (P600K*12%*4/12
Gain on Discounting
** Proceeds from discounting
Maturity value
Principal amount
600,000
Interest (P600,000*12%*6/12)
36,000
Discount (P636,000*10%*2/12)
Proceeds from discounting
625,400
(600,000)
(24,000)
1,400
636,000
(10,600)
625,400
CHAPTER 3: AUDIT OF RECEIVABLES AND SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
28 of 155
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
DISCUSSION PROBLEMS
CHAPTER 4-PROBLEM 1
1 B.
2 D.
3 D.
4 C.
5 B.
6
7
1A
2D
3C
4B
5A
6B
7D
8D
9B
10 B
11 D
12 A
13 C
CHAPTER 4-PROBLEM 2: NOKIA CORP.
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Unadjusted balances
Purch in transit - FOB, Dest.
Unrecorded purch. returns/allowance
"Bill and Hold" Sales
Goods out on consignment
Sales in transit - FOB, SP
Goods segregated but not yet sold
Purch in transit - FOB, SP
Purch in transit - FOB, SP
Inventory
1,200,000
Acc. Payable Net Sales
Net Purch.
Net Income
790,000
6,050,000
3,300,000
610,000
(120,000)
(120,000)
120,000
(70,000)
(70,000)
(70,000)
(224,000)
(224,000)
70,000
(100,000)
(30,000)
(105,000)
(105,000)
98,000
98,000
170,000
170,000
(170,000)
200,000
200,000
1,169,000
770,000
5,950,000
3,280,000
499,000
1. Ans.
2. Ans.
3. Ans.
4. Ans.
5. Ans.
CHAPTER 4-PROBLEM 3: INGGO CORP.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Unadusted balances
Goods held on consignment, recorded as purchases
Credit balance - Fox Inc. (Advances to supplier)
Sale on approval - not yet valid sale
Sales in transit - FOB Seller (FOB, SP) - no adjustment
Goods out on consignment, recorded as sales
Purchase in transit, FOB Seller (FOB, SP)
Unrecorded freight cost
Purchase discount - Beta Corp. (P795,000*2%)
Inventory financing - Loan to Hote Inc. (not purch)
Inventory
Acc. Payable Sales
Net Income
3,750,000
3,075,000
27,000,000
(465,000)
(465,000)
25,000
66,000
(84,000)
(18,000)
630,000
75,000
3,000
(15,900)
(100,000)
3,943,100
1. Ans.
(750,000)
75,000
6,000
(15,900)
(100,000)
2,600,100
2. Ans.
26,166,000
3. Ans.
CHAPTER 4-PROBLEM 4: TOUR COMPANY
Unadjusted balances
RR #11204
RR #11210
RR #11211
RR #11212
RR #11214
RR #11215
Total/Net Adjustment
Adjusted balances
Purchases
2,543,900
(7,800)
4,000
9,700
12,840
25,640
28,400
72,780
2,616,680
Inventories
354,500
4,000
25,640
28,400
58,040
412,540
2. Ans.
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
(120,000)
(3,000)
(141,000)
4. Ans.
AUDITING (2016 EDITION)
CTESPENILLA
1. Adjusting journal entries:
Purchases
Accounts payable
Inventory
Income summary
SOLUTIONS GUIDE
29 of 155
72,780
72,780
58,040
58,040
3. Ans. P2,439,140
Inventory, Nov. 1, 2013
Net Purchases, as adjusted
Cost of goods avaialble for sale
Inventory, Oct. 31, 2014, as adjusted
Cost of Sales
CHAPTER 4-PROBLEM 5: ABC CORP.
1. Ans. P156,000.
Merchandise Inventory, Jan. 1
Purchaes (Jan. 1 to Oct. 31)
Transportation-in
Purchase returns and allowances
Actual cost of goods available for sale
Less: Estimated cost of sale*
Estimated inventory, October 31
Inventory not damaged by fire
Inventory loss due to fire
*Estimated cost of sale
Gross Sales
Sales returns
Employee discount
Multiply by cost % (100%-30%)
Estimated cost of sale
2. Ans. P48,000.
Merchandise Inventory, Jan. 1
Purchaes (Jan. 1 to Oct. 31)
Transportation-in
Purchase returns and allowances
Actual cost of goods available for sale
Less: Estimated cost of sale*
Estimated inventory, October 31
Inventory not damaged by fire
Inventory loss due to fire
*Estimated cost of sale
Gross Sales
Sales returns
Employee discount
Divide by Selling Price % (100%+25%)
Estimated cost of sale
235,000
2,616,680
2,851,680
(412,540)
2,439,140
120,000
830,000
20,000
(10,000)
1,096,000
(40,000)
24,000
840,000
960,000
(756,000)
204,000
48,000
156,000
1,080,000
70%
756,000
120,000
830,000
20,000
(10,000)
1,096,000
(40,000)
24,000
CHAPTER 4-PROBLEM 6: KAGOME COMPANY
1. Ans. P2,225,000.
Collection on AR
Add: AR, December 31,
Sales returns
Sales discounts
Accounts written-off
Less: AR, January 1
Gross Sales on account
Gross Cash Sales
Gross Sales
1,825,000
270,000
25,000
30,000
20,000
(295,000)
1,875,000
350,000
2,225,000
2. Ans. P1,850,000.
Gross Sales
Less: Sales returns
Sales for inventory estimation
2,225,000
(25,000)
2,200,000
840,000
960,000
(864,000)
96,000
48,000
48,000
1,080,000
125%
864,000
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
30 of 155
3. Ans. P400,000.
Inventory, December 31, 2013
Purchases
1,410,000
Unrcorded purchases
10,000
Advances to suppliers recorded as purch.
(20,000)
Cost of goods available for sale
Less: Estimated cost of sales (P2.2M*60%)
Estimated Inventory, December 31, 2014
4. Ans. P80,000.
Estimated Inventory per audit
Inventory per books
Inventory shortage
320,000
1,400,000
1,720,000
(1,320,000)
400,000
400,000
320,000
80,000
CHAPTER 4-PROBLEM 7: JIM CORPORATION
Unadjusted balances
a) May purchases recorded only in June
b) Unrecorded purch. returns/allow.
c) Advances to suppliers
d) May purch in transit, FOB Dest.
Adjusted balances
Inventory, July 1, 2013
Purchases, 11 months as adjusted
Cost of goods available for sale, 11 months
Inventory, May 31, 2014
d) May purch in transit, FOB Dest.
Cost of sales, 11 months
11 Mo. Purch
675,000
7,500
(1,000)
(2,000)
(5,500)
674,000
12 Mo. Purch
800,000
(1,500)
(2,000)
796,500
87,500
674,000
761,500
95,000
(5,500)
1. Ans. 20%.
Sales, 11 months
Cost of sales, 11 months
Gross profit, 11 months
840,000
672,000
168,000
2. Ans. P98,000.
Sales, 12 months
Sales, 11 months
Sales for the month of June
e) Sales in June at 0% GP
Sales for June at 20% GP
Multiply by Cost%
Cost of sales (Sales at 20%GP)
Add: Cost of sales (Sales at 0%GP)
Total Cost of Sales for June
960,000
(840,000)
120,000
(10,000)
110,000
80%
88,000
10,000
98,000
3. Ans. P114,000.
Inventory, July 1, 2013
Purchases, 12 months
Cost of goods available for sale, 12 months
Less: Cost of sales, 12 months (P672,000+P98,000)
Estimated Inventory, June 30, 2014
CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION
1. Ans. P50,750.
Purchases, Jan. 1 - March 31
Payments to suppliers, Apr. 1 - 15
Cash purchases
2,000
Purchases on account (P8,500-P1,300)
7,200
Purchase returns
(450)
Purchases, Jan. 1 to Aprl 15
89,500
672,000
100%
80%
20%
87,500
796,500
884,000
(770,000)
114,000
42,000
8,750
50,750
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
AUDITING (2016 EDITION)
CTESPENILLA
2. Ans. P105,000.
Sales, Jan 1 - March 31
Collections from customers, Apr. 1 - 15
Add: AR, April 15
Write-off of receivables
Less: AR, March 31
Sales, Jan. 1 - Apr. 15
SOLUTIONS GUIDE
31 of 155
90,400
10,200
26,400
5,000
(27,000)
3. Ans. 45%
Total Sales 2012 and 2013
Cost of sales 2012 and 2013
Gross profit 2012 and 2013
700,000
385,000
315,000
4. Ans. P43,000.
Inventory, Dec. 31, 2013
Purchases, Jan. 1 - Apr. 15
Cost of goods available for sale
Estimated cost of sales (105K*55%)
Estimated Inventory, Apr. 15
50,000
50,750
100,750
57,750
43,000
5. Ans. P39,650.
Estimated Inventory, Apr. 15
NRV of remaining inventory
Inventory Loss
43,000
(3,350)
39,650
14,600
105,000
100%
55%
45%
CHAPTER 4-PROBLEM 9: DIOSAH INC.
Inventory, October 1, 2013
Purchases
Transportation in
Purchase return
Purchase allowance
Purchase discounts
Departmental transfer out
Departmental transfer in
Net Mark up (P290,000-40,000)
Net Mark down (P283,000-P40,000)
Cost of goods available for sale
Less: Inventory, October 1, 2013
COGAS - Inventory, Beg
Cost of goods available for sale at retail
Less: COGAS at retail/Sales
Gross sales
Sales returns
Normal breakages
Discounts to employees
Inventory, End at retail price
Cost
Retail
372,000
620,000
2,910,000
4,452,000
55,000
(27,000)
(45,000)
(18,500)
(15,960)
(135,500)
(175,000)
125,500
165,000
250,000
3,265,540
5,267,000
(243,000)
3,265,540
5,024,000
(372,000)
(620,000)
2,893,540
4,404,000
62% Conservative
65% Average
66% FIFO Retail
5,024,000
4,872,000
(355,000)
50,500
75,500
1. Ans. P236,220.
Inventory, End at retail price
Conservative Cost %
Inventory, End at cost
381,000
62%
236,220
2. Ans. P247,645.
Inventory, End at retail price
Average Cost %
Inventory, End at cost
381,000
65%
247,645
2. Ans. P251,460.
Inventory, End at retail price
FIFO Retail Cost %
Inventory, End at cost
381,000
66%
251,460
(4,643,000)
381,000
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CHAPTER 4-PROBLEM 10: GLORIA CORPORATION
1. Ans. P540,000; P527,000; P430,000.
Finished goods
Item M
Cost
550,000
NRV: Est. Selling Price - Cost to Sell
540,000
Required allowance for write-down
10,000
Lower of Cost or NRV
2. Ans. P240,000; P148,000; P320,000.
Work-in-process
Cost
NRV: Est. Selling Price - Cost to Sell - Cost to Compl.
Required allowance for write-down
Lower of Cost or NRV
Item P
540,000
527,000
13,000
Item Q
430,000
697,000
-
Item M
240,000
240,000
-
Item P
188,000
148,000
40,000
1,520,000
(23,000)
1,497,000
Item Q
320,000
550,750
-
748,000
(40,000)
708,000
3. Ans. P1,105,000.
Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.
A
B
C
Cost
250,000
500,000
400,000
1,150,000
Current purchase price
250,000
480,000
375,000
Required allowance for write-down
20,000
25,000
(45,000)
1,105,000
4. Ans. P855,000.
Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.
X
Y
Z
Cost
400,000
300,000
200,000
900,000
Current purchase price
450,000
275,000
180,000
Required allowance for write-down
25,000
20,000
(45,000)
855,000
5. Ans. P825,000.
Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down.
D
E
Cost
375,000
450,000
825,000
6. Ans. P103,000.
Allowance for WD-FG, ending
Less: Allowance for WD-FG, beg.
Loss on write-down - FG
Allowance for WD-WIP, ending
Less: Allowance for WD-WIP, beg.
Loss on write-down - WIP
Allowance for WD-RM, ending
Less: Allowance for WD-RM, beg.
Loss on write-down - RM
Total loss on inventory write-down
23,000
(10,000)
13,000
40,000
40,000
90,000
(40,000)
50,000
103,000
MULTIPLE CHOICE EXERCISES:
CHAPTER 4-EXERCISE 1:
1. Ans. A.
Cost of goods out on consignment at another company’s store
Goods in transit purchased FOB shipping point
Cost of goods sold with repurchase agreement/Inventory financing
Freight charges on goods purchased
Factory labor costs incurred on goods still unsold
Materials on hand not yet placed into production
Raw materials on which the company has started production
Factory supplies
Costs identified with units completed but not yet sold
Cost of goods in transit sold FOB destination
Total inventories
2,400,000
360,000
900,000
240,000
150,000
1,050,000
840,000
60,000
780,000
120,000
6,900,000
CHAPTER 4-EXERCISE 2: SILANG CORP.
Unadjusted balances
(a)
Cash
Acc. Rec.
963,200
2,254,000
(654,600)
310,000
Merch. Invty Acc. Payable
Accrued Exp. Cost of Sales
6,050,000
4,201,000
60,400
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
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(c-2)
(c-3)
(c-4)
(c-5)
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360,000
372,400
275,000
217,500
(637,500)
130,000
6. Ans. B.
Current Assets
Cash
Accounts receivables
Merchandise inventory
Current Liabilities
Accounts payable
Accrued expense
Working Capital Ratio
668,600
1. Ans. D.
2,564,000
2. Ans. C.
668,600
2,564,000
6,035,000
9,267,600
4,615,900
60,400
6,035,000
3. Ans. C.
217,500
(175,000)
4,615,900
5. Ans. C.
60,400
(275,000)
637,500
(130,000)
(175,000)
57,500
4. Ans. A.
4,676,300
1.98
CHAPTER 4-EXERCISE 3: IVY INC.
a. Goods out on consignment
b. Purch in transit (FOB SP)
c. Sales in transit (FOB SP)
d. Sales in transit (FOB Dest)
e. Purch in transit (FOB Dest)
f. Goods held on consignemnt
g. Sales in transit (FOB Dest)
Net adjustments:
Inventory
AR
Sales
AP
100,000
(140,000)
(140,000)
33,000
(40,000)
16,000
Purchases
33,000
33,000
(22,000)
(22,000)
(50,000)
59,000
1. Ans. A.
(112,000)
(252,000)
2. Ans. B.
(112,000)
(252,000)
11,000
3. Ans. C.
11,000
CHAPTER 4-EXERCISE 4: LONE STAR CORP.
Sales
Purchases
2,815,000
1,500,000
(23,000)
(34,000)
(8,000)
9,000
SI 1024
SI 1025
SI 1026
RR 1115
RR 1118
SI 1023
SI 1021
RR 1119
Adjsuted balance
Inventory
300,000
2,625,000
1. Ans. A.
400,000
1,909,000
2. Ans. B.
32,000
40,000
60,000
400,000
832,000
3. Ans. A.
Invty, end
200,000
Purchases
3,200,000
Cost of Sales
3,160,000
(50,000)
(75,000)
Accts Rec.
Acc. Payable
250,000
200,000
(23,000)
(34,000)
(8,000)
9,000
(50,000)
(75,000)
60,000
4. Ans. D.
401,000
610,000
5. Ans. A.
CHAPTER 4-EXERCISE 5: SOFIA INC.
Unadjusted balance
Beginning of the year:
a. Dec. purchases recorded in Jan.
b. Dec. purchases not included in Invty
End of the year:
a. Unrecorded Dec. sale
b. Dec. purchases recorded in Jan.
c. Dec. purchases not included in Invty
d. Dec. purchases
Adjusted balances
(50,000)
30,000
36,000
24,000
260,000
1. Ans. C.
24,000
3,204,000
2. Ans. D.
Net Income
(50,000)
26,400
50,000
(26,400)
30,000
(36,000)
3,130,400
3. Ans. B.
86,000
(30,000)
36,000
115,600
4. Ans. D.
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
Net Income
(40,000)
(40,000)
16,000
22,000
(50,000)
(112,000)
(204,000)
4. Ans. D.
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CHAPTER 4-EXERCISE 6: BIRD COMPANY
Inventory
Accts Payable
1,870,000
1,415,000
Unadjusted balances
Adjustments: A
B
C
D
E
F
G
H
Adjusted balances
93,000
27,000
49,000
17,000
31,200
8,000
2,095,200
1. Ans. A.
Net Sales
9,693,400
(78,500)
93,000
(67,800)
36,000
16,000
1,560,000
2. Ans. B.
9,547,100
3. Ans. D.
CHAPTER 4-EXERCISE 7:
December recorded sales:
In-tansit FOB, Dest.
Sipment to consignee
In-tansit FOB, Dest.
In-transit FOB, SP
Sipment to consignee
January recorded sales:
In-transit FOB, SP
Adjusted balance
Accts Receiva
276,500
Inventories
425,000
(8,680)
(14,200)
(10,000)
7,240
12,500
Sales
1,320,000
(8,680)
(14,200)
(10,000)
(6,100)
(14,000)
21,000
250,620
1. Ans B.
Cost of Sales
842,000
Gross profit
478,000
(7,240)
(12,500)
(1,440)
(1,700)
(10,000)
(6,100)
(14,000)
6,100
(14,000)
(18,200)
420,440
2. Ans. B.
21,000
1,294,120
3. Ans. A.
18,200
846,560
4. Ans. C.
2,800
447,560
5. Ans. D.
CHAPTER 4-EXERCISE 8: KAMPT COMPANY
Sales
December 2014 recorded sales
1)
3)
4)
5)
7)
8)
January 2015 recorded sales
9)
12)
Net Adjustment
Inventories
(2,000)
(2,000)
(6,900)
(600)
(4,000)
(10,000)
6,000
8,000
(8,900)
1. Ans. A.
(4,000)
(5,500)
(12,100)
2. Ans. A.
CHAPTER 4-EXERCISE 9: MALAGUKU CO.
Unadjusted balances
RR No. 631
RR No. 632
RR No. 633
RR No. 634
RR No. 635
RR No. 636
RR No. 638
RR No. 641
Adjusted balances
Purchases
1,750,000
Inventories
175,000
2,000
(4,000)
9,000
8,000
(6,000)
7,200
4,100
1,751,300
1. Ans. A.
194,000
2. Ans. C
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
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CHAPTER 4-EXERCISE 10: KULA INC.
Inventories
27,000
December 2014 entries
Invoice No. 9176
Invoice No. 0010
Invoice No. 6609
Invoice No. 6610
Invoice No. 0481
Invoice No. 3671
Invoice No. 6098
January 2015, entries
Invoice No. 7711
Invoice No. 9001
Invoice No. 4678
Invoice No. 9981
Invoice No. 7263
Goods held on consignment
Deliveries made to customers after count date
Adjsuted balances
Purchases
650,000
310
180
690
420
(750)
290
(350)
460
315
595
610
(750)
(1,900)
28,220
1. Ans. B.
460
770
315
595
610
651,650
2. Ans. D.
CHAPTER 4-EXERCISE 11: FLORES COMPANY
1. Ans. D.
Per Count
342,400
Unadjusted balances
1
2
3
4
5
6
7
8
9
10
11
Adjsuted balances
Per GL
Per "Tab Run"
384,900
403,300
(500)
(23,900)
(600)
(800)
(800)
4,400
(7,500)
(7,500)
(900)
2,100
(1,200)
700
30,000
374,300
374,300
(1,200)
374,300
2. Ans. D.
CHAPTER 4-EXERCISE 12: ALDER PAINTS
RM Inventory, beg
Purchases
Freight-in
RM available for use
Less: RM Inventory, end
RM used
Direct labor
Factory overhead (45% of Direct labor)
Total manufacturing cost
Add: WIP, beg
Total goods placed into process
less: WIP, end (Squeeze)
Cost of goods manufactured (Squeeze)
Add: Finished goods, beg.
Cost of goods available for sale
less: Finished goods, end
Cost of sales (estimated)**
** Sales
Multiply by Cost rate (100%-32.5%)
Estimated cost of sales
15,000
50,000
5,000
55,000
70,000
(30,000)
40,000
40,000
18,000
98,000
50,000
148,000
56,750
91,250
70,000
161,250
(60,000)
101,250
2. Ans C.
3. Ans. D.
4. Ans. A.
1. Ans. D.
150,000
68%
101,250
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
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CHAPTER 4-EXERCISE 13: NATURAL CORPORATION
Inventory, Jan. 1
Purchases
400,000
Less: Purchase discounts
(40,000)
Purchase returns and allowance
(30,000)
Cost of goods available for sale
Estimated cost of sale
Sales
380,000
Less: Sales returns
(20,000)
Sales for GP method purposes
360,000
Divide by: Selling price %
120%
Estimated ending inventory
Less: Inventory not damaged by fire (in-transit)
Inventory loss
CHAPTER 4-EXERCISE 14: BAGUIO CORP.
1. Ans. C.
Sales
Gross Profit
80,000
330,000
410,000
300,000
110,000 1. Ans. C.
(40,000)
70,000 2. Ans. C.
2011
5,008,000
1,502,400
2012
5,640,000
1,466,400
2013
5,440,000
1,849,600
30%
26%
34%
Gross profit % based on sales
Divide by: 3 years
Average gross profit rate
2. Ans. A.
Collections from customers Jan. 1 to Sept. 1
Add: AR, Sept. 1
Less: AR, Jan. 1
Gross sales (accrual basis)
6,030,400
1,031,120
(1,044,720)
6,016,800
3. Ans.
Payments to suppliers Jan. 1 to Sept. 1
Add: AP, Sept. 1
Less: AP, Jan. 1
Gross purchases (accrual basis)
3,900,000
982,800
(705,120)
4,177,680
4. Ans.
Inventory, Jan. 1
Purchases
Cost of goods available for sale
Less: Estimated cost of sales
Sales
Multiply by: Cost % (100%-30%)
Estimated Inventory, Sept. 1
5. Ans. A.
Estimated Inventory, Sept. 1
Goods out on consignment
Goods in transit as of Sept. 1
Inventory loss
CHAPTER 4-EXERCISE 15: AB CORP.
1. Ans. B.
Sales for 10 months (Jan to Oct) (a)
Cost of Sales 10 months (Jan to Oct) (b)
Gross profit
Total
90%
3
30%
1,150,800
4,177,680
5,328,480
6,016,800
70%
(4,211,760)
1,116,720
1,116,720
390,000
139,000
4,590,000
(2,295,000)
2,295,000
(a) Sales 10 months, unadjusted
Less: Delivery in transit (FOB Dest.)
Adjusted Sales 10 months
Less: Sales returns and allowance
Add: Employee discounts
Normal breakages
Sales 10 months, adjusted (for GP comp only)
529,000
587,720
100%
50%
50%
4,765,000
(75,000)
4,690,000
(300,000)
150,000
50,000
4,590,000
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(b) Beg Inventory
Net purchases (as adjusted:)(c)
Cost of Goods Available for sale (10 months)
Less: Inventory, end (550,00+90,000)
Cost of Sales (10 months)
450,000
2,485,000
2,935,000
(640,000)
2,295,000
(c) Purchases, unadjusted
Add: Purchase in transit FOB shipping point
Freight in
Less: Purchase discount
Purchase returns and allowance
Net purchases (as adjusted)
2,450,000
90,000
60,000
(45,000)
(70,000)
2,485,000
2. Ans. A.
Sales (12 months), as adjusted (for GP Method)(d)
Sales (10 months), as adjusted (for GP Method)
Gross Sales for 2 months (for GP Method)
Less: Sales in Dec. at 10% mark-up on cost
Sales in Dec. at normal 50% mark-up
Multiply by normal Cost %, under normal GP%
Cost of sales at normal GP rate
Add: Cost of sales 10% markup on cost
Total cost of sales for 2 months
6,575,000
(4,590,000)
1,985,000
(110,000)
1,875,000
50%
937,500
100,000
1,037,500
(d) Sales 12 months, unadjusted
Less: Sales returns and allowance (12 months)
Add: Employee discounts (12 months)
Add: Normal breakages (12 months)
Sales 12 months, adjusted
6,750,000
(375,000)
150,000
50,000
6,575,000
3. Ans. D.
2,295,000
1,037,500
3,332,500
solution)
solution)
Total Cost of Sales
4. Ans. B.
Inventory, beginning
Add: Net Purchases (12 months)
Gross Purchases
3,410,000
Freight in
90,000
Purchase discount
(70,000)
Purchase returns and allowance
(100,000)
Cost of Goods Available for Sale (12 months)
Cost of Sales 12 months (see number 3 solution)
Estimated ending inventory
450,000
3,330,000
3,780,000
(3,332,500)
447,500
CHAPTER 4-EXERCISE 16: SURETY CORP.
Beginning inventory
Purchases
Freight in
Purchase returns
Mark-ups
Mark-up cancellations
Cost of goods available for sale - Conserv.
Mark-downs
Mark-down cancellations
Cost of goods available for sale - Average
Less: Beginning inventory
Purchases - FIFO Retail
Cost of goods available for sale at Retail
Less: Cost of sales at Retail/Sales
Sales
Sales returns
Employee discount
Estimated Inventory at Retail
Cost
598,400
3,048,400
80,000
(140,000)
3,586,800
3,586,800
(598,400)
2,988,400
Retail
1,500,000
5,500,000
(180,000)
600,000
(100,000)
7,320,000
(1,300,000)
385,000
6,405,000
(1,500,000)
4,905,000
Cost %
49%
56%
61%
6,405,000
4,470,000
(150,000)
400,000
(4,720,000)
1,685,000
1. Ans. B.
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Estimated Inventory at Retail
Multiply by Cost % - Conservative
Estimated Inventory at Cost
Less: Inventory per count
Inventory shortage
1,685,000
49%
825,650
(649,600)
176,050
2. Ans. C.
Estimated Inventory at Retail
Multiply by Cost % - Conservative
Estimated Inventory at Cost
Less: Inventory per count
Inventory shortage
1,685,000
56%
943,600
(649,600)
294,000
3. Ans. C.
Estimated Inventory at Retail
Multiply by Cost % - Conservative
Estimated Inventory at Cost
Less: Inventory per count
Inventory shortage
1,685,000
61%
1,027,850
(649,600)
378,250
CHAPTER 4-EXERCISE 17: TITANIUM CORP.
Beginning inventory
Purchases
Freight in
Purchase returns
Purchase allowance
Departmental transfer debit
Departmental transfer credit
Abnormal spoilages and breakages
Net markup
Cost of goods available for sale - Conserv.
Net markdown
Cost of goods available for sale - Average
Less: Beginning inventory
Purchases - FIFO Retail
Cost of goods available for sale at Retail
Less: Cost of sales at Retail/Sales
Sales
Sales returns
Employee discount
Normal Spoilage
Estimated Inventory at Retail
Cost
1,020,000
13,072,500
300,000
(450,000)
(270,000)
300,000
(600,000)
(120,000)
13,252,500
13,252,500
(1,020,000)
12,232,500
Retail
1,920,000
22,155,000
Cost %
(750,000)
425,000
(1,200,000)
(200,000)
450,000
22,800,000
(1,425,000)
21,375,000
(1,920,000)
19,455,000
58%
62%
63%
21,375,000
19,800,000
(450,000)
300,000
600,000 (20,250,000)
1,125,000
1. Ans. B.
Estimated Inventory at Retail
Multiply by Cost % - Conservative
Estimated Inventory at Cost
Less: Inventory per count
Inventory shortage
1,125,000
58%
652,500
(400,000)
252,500
2. Ans. A.
Estimated Inventory at Retail
Multiply by Cost % - Conservative
Estimated Inventory at Cost
Less: Inventory per count
Inventory shortage
1,125,000
62%
697,500
(400,000)
297,500
3. Ans. C.
Estimated Inventory at Retail
Multiply by Cost % - Conservative
Estimated Inventory at Cost
Less: Inventory per count
Invntory shortage
1,125,000
63%
708,750
(400,000)
308,750
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
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CHAPTER 4-EXERCISE 18: NANCY INC.
1. Ans.A.
Item Quantity
Unit Cost
Z-01
10,000
Z-02
15,000
Z-03
20,000
Z-04
25,000
Z-05
30,000
Y-01
20,000
Y-02
22,000
Y-03
28,000
Y-04
25,000
Y-05
30,000
2. Ans.
Total Cost
Lower of Cost or NRV
Loss on inventory write-down
NRV
25
22
26
35
30
23
25
30
25
25
Lower of Cost or NRV
20
200,000
22
330,000
26
520,000
32
800,000
30
900,000
22
440,000
25
550,000
25
700,000
25
625,000
15
450,000
5,515,000
20
25
30
32
35
25
22
26
35
30
Total Cost
200,000
375,000
600,000
800,000
1,050,000
3,025,000
22
28
25
30
15
23
25
30
25
25
20
25
30
32
35
22
28
25
30
15
5,981,000
5,515,000
466,000
3. Ans. B.
Class Z: Quantity
Unit Cost
Z-01
10,000
Z-02
15,000
Z-03
20,000
Z-04
25,000
Z-05
30,000
NRV
Total NRV
LCorNRV
250,000
330,000
520,000
875,000
900,000
2,875,000
2,875,000
Class Y:
Y-01
Y-02
Y-03
Y-04
Y-05
2. Ans.
Total Cost
Lower of Cost or NRV
Loss on inventory write-down
20,000
22,000
28,000
25,000
30,000
440,000
616,000
700,000
750,000
450,000
2,956,000
5,981,000
5,831,000
150,000
CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION
Markers
Historical cost
24,000
Selling price
36,000
Estimated cost to complete
(3,000)
Estimated cost to sell
(1,800)
Net realizable value
31,200
Lower of cost or NRV
24,000
1. Ans. B.
Total Cost
Lower of cost or NRV
Loss on write-down
72,880
69,000
3,880
2. Ans. B.
Total Cost
Lower of cost or NRV
Allowance for write-down, end
Allowance for write-down, beg.
Loss on write-down
72,880
69,000
3,880
2,000
1,880
3. Ans. B.
Total Cost
Lower of cost or NRV
Allowance for write-down, end
Allowance for write-down, beg.
Gain on recovery
72,880
69,000
3,880
5,000
(1,120)
Pens
18,880
21,800
(2,620)
(2,180)
17,000
17,000
Pencils
30,000
38,000
(6,200)
(3,800)
28,000
28,000
69,000
4. Ans. C.
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
460,000
550,000
840,000
625,000
750,000
3,225,000
2,956,000
5,831,000
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40 of 155
CHAPTER 4-EXERCISE 20:OCTOBER INC.
1. Ans. B.
Finished goods
Cost
NRV (Selling price - Cost to sell)
Lower of Cost or NRV
Item A
500,000
800,000
500,000
2. Ans. B.
Work-in-process
Direct Materials
Direct Labor
Overhead
Total Cost
Selling price upon completion
Cost to complete
Cost to sell (% of Sellin price)
NRV
Lower of cost or NRV
Item A
Item B
Item C
30,000
45,000
75,000
50,000
65,000
35,000
25,000
40,000
80,000
105,000
150,000
190,000
200,000
250,000
240,000
(50,000)
(60,000)
(40,000)
(40,000)
(75,000)
(24,000)
110,000
115,000
176,000
105,000
115,000
176,000
Item B
Item C
1,200,000
800,000
1,050,000
1,080,000
1,050,000
800,000
3. Ans. B.
RM - Item A (FG not written-down, thus RM - Item A shall not be tested anymore.
RM A-01
RM A-02
Cost
120,000
95,000
RM - Item B
Cost
NRV (Replacement cost)
RM B-01
80,000
100,000
80,000
RM B-02
RM B-03
105,000
110,000
98,000
100,000
98,000
100,000
RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore.
RM C-01
RM C-02
Cost
175,000
40,000
Total Lower of Cost or NRV
2,350,000
396,000
215,000
278,000
215,000
708,000
4. Ans. D.
FG
2,500,000
2,350,000
150,000
Cost
Lower of Cost or NRV
Loss on write-down
5. Ans. B.
Cost
Lower of Cost or NRV
Allowance for WD, ending
Allowance for WD, beginning
Loss on WD(Recovery gain)
2,500,000
2,350,000
150,000
60,000
90,000
WIP
RM
445,000
396,000
49,000
725,000
708,000
17,000
216,000
445,000
396,000
49,000
70,000
(21,000)
725,000
708,000
17,000
17,000
86,000
CHAPTER 4-EXERCISE 21:SOLSONS COMPANY
Quantity
A 360 units
B 24 units
C 28 units
D 43 units
E 400 units
F 70 dozens
G 95 grosses
Cost
3.60/dozen
4.70 each
16.50 each
5.15 each
9.10 each
2.00 each
144.00/gross
NRV
3.64/dozen
4.80 each
16.50 each
5.20 each
8.10 each
2.00 each
s
Amount at Lower of Cost or NRV
108.00 - 360/12per dozen*P3.60
112.80
462.00
221.45
3,240.00
1,680.00 - 70*12 per dozen*P2
12,540.00
18,364.25
Ans. A.
CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
41 of 155
CHAPTER 5: AUDIT OF INVESTMENTS
DISCUSSION PROBLEMS
CHAPTER 5-PROBLEM 1
1D
2A
3C
4C
5C
6D
7A
8A
CHAPTER 5-PROBLEM 2: KILALA CORP.
CASE 1: FA at Amortized Cost
1. Ans.P1,038,896.
January 1, 2014:
Financial asset at amortized cost
Cash
Quoted price (P1M*95%)
Transaction cost
Initial cost
1,038,896
1,038,896
950,000
88,896
1,038,896
Amortization table: FA at Amortized Cost
Correct Int.
(Bal*eff%)
January 1, 2014:
December 31, 2014:
December 31, 2015:
December 31, 2014:
Cash
Interest income
Interest income
FA at amortized cost
2. Ans. P93,501.
December 31, 2015:
Cash
Interest income
Interest income
FA at amortized cost
3. Ans. P92,916.
Nominal Int.
(Princ*nom%)
93,501
92,916
100,000
100,000
Amortization
(6,499)
(7,084)
Balance
1,038,896
1,032,397
1,025,312
100,000
100,000
6,499
6,499
100,000
100,000
7,084
7,084
4. Ans. P1,025,312.
5. Ans. P24,688 gain
Sales proceeds (1/1/16)
Less: Carrying Value/Amortized cost
Realized gain on sale
CASE 2: FA at FMV through Profit or Loss
1. Ans. P950,000.
January 1, 2014:
FA at FMV (P1M*95%)
Expense
Cash
December 31, 2014:
Cash
Interest Income (P1M*10%)
FA at FMV
Unrealized holding gain
Fair Value (12/14): P1M*120%
Carrying value
Unrealized holding gain - P/L
2. Ans. P261,104.
Transaction cost (Expense)
Interest income
Unrealized holding gain
Net investment income
1,050,000
1,025,312
24,688
950,000
88,896
1,038,896
100,000
100,000
250,000
250,000
1,200,000
950,000
250,000
(88,896)
100,000
250,000
261,104
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
December 31, 2015:
Cash
Interest Income (P1M*10%)
Unrealized holding loss
FA at FMV
Fair Value (12/15): P1M*105%
Carrying value
Unrealized holding loss - P/L
3. Ans. (P50,000)
Interest income
Unrealized holding loss
Net investment loss
SOLUTIONS GUIDE
42 of 155
100,000
100,000
150,000
150,000
1,050,000
1,200,000
(150,000)
100,000
(150,000)
(50,000)
4. Ans. P1,050,000.
5. Ans.0
Sales proceeds (1/1/16)
Less: Carrying Value/FMV, 12/31/15
Realized gain on sale
CASE 3: AVAILABLE FOR SALE SECURITY
1. Ans.P1,038,896.
January 1, 2014:
Available for sale security
Cash
Quoted price (P1M*95%)
Transaction cost
Initial cost
1,050,000
1,050,000
-
1,038,896
1,038,896
950,000
88,896
1,038,896
Amortization table: Available for sale security
Correct Int.
(Bal*eff%)
January 1, 2014:
December 31, 2014:
December 31, 2015:
December 31, 2014:
Cash
Interest income
Interest income
Available for sale security
Available for sale security
Unrealized holding gain-OCI
Fair Value (12/14): P1M*120%
Amortized cost (12/14)
Unrealized holding gain - OCI of SCI
2. Ans. P93,501
Interest income - P/L (2014)
December 31, 2015:
Cash
Interest income
Interest income
Available for sale security
Unrealized holding loss - OCL of SCI
Available for sale security
Fair Value (12/15): P1M*105%
Amortized cost (12/15)
Unrealized holding gain - SHE, end
Unrealized hoding gain - SHE, beg
Unrealized holding loss - OCL of SCI
3. Ans. (P142,916)
Unrealized holding loss - OCL of SCI (201
4. Ans. P24,688.
Unrealized holding gain - SHE, end
Nominal Int.
(Princ*nom%)
93,501
92,916
100,000
100,000
Amortization
(6,499)
(7,084)
Balance
1,038,896
1,032,397
1,025,312
100,000
100,000
6,499
6,499
167,603
167,603
1,200,000
1,032,397
167,603
93,501
100,000
100,000
7,084
7,084
142,916
142,916
1,050,000
1,025,312
24,688
167,603
(142,916)
(142,916)
24,688
5. Ans. P1,050,000.
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
6. Ans. P24,688 gain
Sales proceeds (1/1/16)
Less: Carrying Value/Amortized cost
Realized gain on sale
SOLUTIONS GUIDE
43 of 155
1,050,000
1,050,000
CHAPTER 5-PROBLEM 3: SOTA CORPORATION
CASE 1: FA at Amortized Cost
1. Ans. P10,758,157.
January 1, 2014:
Financial asset at amortized cost
10,758,157
Cash
10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921)
6,209,213
Interest (P1,200,000*3.790787)
4,548,944
Initial cost
10,758,157
0.620921
3.790787
Amortization table: FA at Amortized Cost
Correct Int.
(Bal*eff%)
January 1, 2014:
December 31, 2014:
December 31, 2015:
June 30, 2016:
December 31, 2014:
Cash
Interest income
Interest income
FA at amortized cost
2. Ans. P1,075,816.
December 31, 2015:
Cash
Interest income
Interest income
FA at amortized cost
3. Ans. P1,063,397.
Nominal Int.
(Princ*nom%)
1,075,816
1,063,397
524,869
1,200,000
1,200,000
600,000
Amortization
(124,184)
(136,603)
(75,131)
Balance
10,758,157
10,633,973
10,497,370
10,422,239
1,200,000
1,200,000
124,184
124,184
1,200,000
1,200,000
136,603
136,603
4. Ans. P10,497,370.
5. Ans. P622,239 loss
Sales proceeds (6/30/16)
Less: Carrying Value/Amortized cost
Accrued interest
Realized loss on sale
10,400,000
(10,422,239)
(600,000)
(622,239)
CASE 2: FA at FMV through Profit or Loss
1. Ans. P10,758,157.
January 1, 2014:
FA at FMV
10,758,157
Cash
10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921)
6,209,213
Interest (P1,200,000*3.790787)
4,548,944
Initial cost
10,758,157
December 31, 2014:
Cash
Interest Income (P10M*12%)
1,200,000
1,200,000
FA at FMV
213,759
Unrealized holding gain
213,759
Fair Value (12/14)**
10,971,916
Carrying value
10,758,157
Unrealized holding gain - P/L
213,759
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425)
7,084,252
Interest: (P1,200,000*3.239720)
3,887,664
FMV (12/14)
10,971,916
2. Ans. P1,413,759.
Interest income
Unrealized holding gain
Net investment income
0.620921
3.790787
0.708425
3.239720
1,200,000
213,759
1,413,759
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
December 31, 2015:
Cash
Interest Income (P10M*12%)
SOLUTIONS GUIDE
44 of 155
1,200,000
1,200,000
FA at FMV
58,923
Unrealized holding gain - P/L
58,923
Fair Value (12/15)**
11,030,839
Carrying value
10,971,916
Unrealized holding gain - P/L
58,923
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832)
7,938,322
Interest: (P1,200,000*2.577097)
3,092,516
FMV (12/15)
11,030,839
3. Ans. P1,258,923.
Interest income
Unrealized holding gain
Net investment income
0.793832
2.577097
1,200,000
58,923
1,258,923
4. Ans. P11,030,839.
5. Ans. P1,230,839 loss
Sales proceeds (6/30/16)
Less: Carrying Value/Amortized cost
Accrued interest
Realized loss on sale
10,400,000
(11,030,839)
(600,000)
(1,230,839)
CASE 3: AVAILABLE FOR SALE SECURITY
1. Ans. P10,758,157.
January 1, 2014:
Available for sale security
10,758,157
Cash
10,758,157
FMV = Present value of future cash flows at 10% effective rate for 5 periods.
Principal (P10,000,000*0.620921)
6,209,213
Interest (P1,200,000*3.790787)
4,548,944
Initial cost
10,758,157
0.620921
3.790787
Amortization table: Available for sale security
Correct Int.
(Bal*eff%)
January 1, 2014:
December 31, 2014:
December 31, 2015:
December 31, 2014:
Cash
Interest income
Interest income
Available for sale security
Nominal Int.
(Princ*nom%)
1,075,816
1,063,397
1,200,000
1,200,000
December 31, 2015:
Cash
Interest income
Interest income
Available for sale security
(124,184)
(136,603)
Balance
10,758,157
10,633,973
10,497,370
1,200,000
1,200,000
124,184
124,184
Available for sale security
337,943
Unrealized holding gain-OCI
337,943
Fair Value (12/14)**
10,971,916
Amortized cost (12/14)
10,633,973
Unrealized holding gain - OCI of SCI
337,943
**FMV = Present value of remaining cash flows at 9% for 4 periods.
Principal: (P10,000,000*0.708425)
7,084,252
Interest: (P1,200,000*3.239720)
3,887,664
FMV (12/14)
10,971,916
2. Ans. P1,075,816.
Interest income - P/L (2014)
Amortization
0.708425
3.239720
1,075,816
1,200,000
1,200,000
136,603
136,603
Available for sale security
195,526
Unrealized holding gain-OCI of SCI
195,526
Fair Value (12/15): P1M*105%
11,030,839
Amortized cost (12/15)
10,497,370
Unrealized holding gain - SHE, end
533,468
Unrealized hoding gain - SHE, beg
337,943
Unrealized holding gain - OCI of SCI
195,526
**FMV = Present value of remaining cash flows at 8% for 3 periods.
Principal: (P10,000,000*0.793832)
7,938,322
Interest: (P1,200,000*2.577097)
3,092,516
FMV (12/15)
11,030,839
0.793832
2.577097
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
45 of 155
3. Ans. P195,526.
Unrealized holding gain - OCI of SCI (201
195,526
4. Ans. P533,468
Unrealized holding gain - SHE, end
533,468
5. Ans. P11,030,839.
6. Ans. P622,239 loss
Sales proceeds (6/30/16)
Less: Carrying Value/Amortized cost
Accrued interest
Realized loss on sale
CHAPTER 5-PROBLEM 4: ABC COMPANY
1. Ans. P35,479.
FMV (12/31/14)
Carrying value
Unrealized holding gain - P/L
10,400,000
(136,603)
10,263,397
6,229,862
6,194,383
35,479
2. Ans. P6,229,862.
3. Ans. 0.
The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period. Thus,
there shall be no gain or loss resulting from transfer on December 31, 2015. Instead what shall be recognized is the unrealized
holding gain or loss from the FA's remeasurement since it will still be treated as FA at FMV at the end of 2015.
December 31, 2015: Entry upon remeasurement as FA at FMV
Unrelized holding loss - P/L
15,870
FA at FMV
January 1, 2016: Entry upon transfer to FA at Amortized Cost
FA at amortized cost (FMV 12/15)
6,213,992
FA at FMV (CV)
15,870
6,213,992
4. Ans. P6,213,992. (As FA at FMV)
5. Ans. P6,111,111.
Amortization table: FA at Amortized cost at 8% effective rate:
Correct Int.
Nominal Int.
(Bal*eff%)
(Princ.*nom%)
December 31, 2015:
December 31, 2016:
497,119
600,000
December 31, 2017:
488,889
600,000
CHAPTER 5-PROBLEM 5: ABC COMPANY
1. Ans. P6,151,877.
Amortization table: FA at amortized cost at 9%
Correct Int.
Nominal Int.
(Bal*eff%)
(Princ.*nom%)
January 1, 2014:
December 31, 2014:
557,494
600,000
December 31, 2015:
553,669
600,000
2. Ans. (P138,865)
Proceeds from sale (P5,897,249*4/6)
Carrying value (P6,105,546*4/6)
Realized loss on partial sale
Amortization
(102,881)
(111,111)
Amortization
(42,506)
(46,331)
Balance
6,213,992
6,111,111
6,000,000
Balance
6,194,383
6,151,877
6,105,546
3,931,499
4,070,364
(138,865)
3. Ans. 0.
The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period.
Thus, there shall be no gain or loss resulting from transfer on December 31, 2015.
4. Ans. P7,345.
Unrealized gain/loss on transfer on Janaury 1, 2016:
FMV of remaining investment (P5,897,249*2/6)
1,965,750
Carrying value of remaining inv. (P6,105,546*2/6)
2,035,182
Unrealized gain/loss on remeasurement on December 31, 2016:
FMV (12/31/16)
1,973,094
CV (FMV at 12/31/15)
1,965,750
Net unrealized holding gain or loss in the 2016 profit or loss
(69,432)
7,345
(62,088)
5. Ans. P1,973,094.
CHAPTER 5-PROBLEM 6: BET CO.
Amortization table: FA at amortized cost at 10%.
Correct Int.
Nominal Int.
(Bal.*Eff%)
(Princ*Nom%)
January 1, 2014:
December 31, 2014:
924,184
800,000
December 31, 2015:
936,603
800,000
Amortization
124,184
136,603
Balance
9,241,843
9,366,027
9,502,630
CHAPTER 5: AUDIT OF INVESTMENTS
1
2
5,144,032.92
1,069,958.85
6,213,992
AUDITING (2016 EDITION)
CTESPENILLA
1. Ans. P4,667,769.
Amortized cost, December 31, 2015:
Accrued interest, December 31, 2015:
Present value of new future cash flows at
Principal: (P10M*75%)*0.751315
Impairment loss
SOLUTIONS GUIDE
46 of 155
9,502,630
800,000
10,302,630
10%
5,634,861
4,667,769
2. Ans. P6,198,347.
Amortization table: FA at amortized cost after impairment:
Correct Int.
(Bal.*Eff%)
December 31, 2015: After Impairment
December 31, 2016:
563,486
3. Ans. P1,239,669.
Amortized cost, December 31, 2016
Present value of revised cash flows at 10%
Principal (P10M*90%)*0.826446
Impairment recovery gain
Nominal Int.
(Princ*Nom%)
-
Alpha
Beta
Total
Unrealized holding gain - P&L
2. Ans.
Unrealized holding loss - OCL of SCI
FA at FMV through OCI/L
Charlie, FMV (12/14)
Carrying value, including transaction cost
Unrealized holding loss - OCL of SCI
Amortization
563,486
Balance
5,634,861
6,198,347
6,198,347
7,438,017
1,239,669
4. Ans. P8,181,818.
Amortization table: FA at amortized cost after impairment recovery:
Correct Int.
Nominal Int.
(Bal.*Eff%)
(Princ*Nom%)
December 31, 2016: After Impairment recovery
December 31, 2017:
743,802
-
CHAPTER 5-PROBLEM 7: ABC CORPORATION
1. Ans.
FA at FMV
Unrealized holding gain
0.7513148
0.826446
Amortization
743,802
Balance
7,438,017
8,181,818
25,000
25,000
FMV (12/14) CV (excluding transaction cost)
300,000
250,000
475,000
500,000
775,000
750,000
25,000
30,000
30,000
850,000
880,000
(30,000)
3. Ans.
No entry to remeasure investment in associate to FMV since Investment in Assoc. is accounted for under equity method.
4. Ans.
FA at FMV
Unrealized holding gain - P&L
Alpha
Beta
Total
Unrealized holding gain - P&L
5. Ans.
Unrealized holding loss - OCL of SCI
FA at FMV through OCI/L
Charlie, FMV (12/15)
Carrying valuu (FMV 12/14)
Unrealized holding loss - OCL of SCI
100,000
100,000
FMV (12/15) CV (FMV 12/14)
350,000
300,000 *reclassification is not allowed, thus Alpha is still
525,000
475,000
regarded as FA at FMV through OCI/L.
875,000
775,000
100,000
100,000
100,000
750,000
850,000
(100,000)
6. Ans. P875,000.
7. Ans. P750,000.
8. Ans. P3,260,000.
Delta Securities - Investment in Associate
Acquisition cost, including transaction cost
Share from net income (P2.5M*25%)
Share from forex loss (P500K*25%)
Share from dividends (P200K*25%)
Carrying value, 12/31/14
Additional Investment
Share from net income (P1.9M*30%)
Share from forex gain (P600K*30%)
Share from dividends (P300K*30%)
Carrying value, 12/31/15
1,650,000
625,000
(125,000)
(50,000)
2,100,000
500,000
570,000
180,000
(90,000)
3,260,000
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
47 of 155
CHAPTER 5-PROBLEM 8: ETC INC.
Case 1: PAS 39
1. Ans. P51,000.
Aye Co.
Bee Inc.
Si Corp.
Unrealized holding loss - SHE
2. Ans. (P30,000)
Proceeds from sale (15,000*P8)
Original cost (P300,000/30,000)*15,000
Realized loss on sale
FMV (12/13) Cost
50,000
250,000
30,000
330,000
(51,000)
45,000
300,000
36,000
381,000
120,000
150,000
(30,000)
3. Ans. (P72,000)
Bee Inc.
Si Corp.
Impairment loss - P&L
FMV (12/14) Cost
90,000
24,000
114,000
(72,000)
150,000
36,000
186,000
4. Ans. P15,000.
Aye Co.
Bee Inc.
Si Corp.
Unrealized holding gain - SHE
FMV (12/14) Cost/Impaired value
60,000
45,000
90,000
90,000
24,000
24,000
174,000
159,000
15,000
5. Ans. P174,000.
Case 2: PFRS 9
1. Ans. P51,000.
Aye Co.
Bee Inc.
Si Corp.
Unrealized holding loss - SHE
FMV (12/13) CV
50,000
250,000
30,000
330,000
(51,000)
45,000
300,000
36,000
381,000
2. Ans. None.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the
carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment
shall be transferred directly to RE.
3. Ans. None
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.
4. Ans. P15,000.
Aye Co.
Bee Inc.
Si Corp.
Unrealized holding loss - SHE
FMV (12/14)
60,000
90,000
24,000
174,000
(57,000)
Cost
45,000
150,000
36,000
231,000
5. Ans. P174,000.
CHAPTER 5-PROBLEM 9: ETC INC.
Case 1: PAS 39
1. Ans. None.
Once equity security investment categorized as financial asset through OCI/L has been impaired due to permanent decline, any
recovery from the previous impairment shall not be recognized in the profit or loss, but shall be recognized as unrealized holding
gain in the OCI/L.
2. Ans. P300,000 and P141,000.
Aye Co.
Bee Inc.
Si Corp.
Unrealized holding gain - SHE
FMV (12/15) Cost/Impaired value
75,000
45,000
175,000
90,000
50,000
24,000
300,000
159,000
141,000
Case 2: PFRS 9
1. Ans.
No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding loss in
the OCI/L.
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48 of 155
2. Ans. P300,000 and P69,000.
Aye Co.
Bee Inc.
Si Corp.
Unrealized holding gain - SHE
FMV (12/15)
Cost
75,000
175,000
50,000
300,000
69,000
CHAPTER 5-PROBLEM 10: SHIPO CO.
1. Ans. P2,000,000.
Acquisition price
Book value of net assets acquired (P48M*25%)
Total excess
Identifiable asset:
Depreciable asset: (P1.2M*25%)
300,000
Land (P6M*25%)
1,200,000
Unidentifiable asset/Goodwill
Divide by:
Total Goodwill based on 25% interest of Shipo
2. Ans. P2,670,000
Share from net income (P10.8M*25%)
Less: Understated Depr (P300,000/10y)
Share from net income
3. Ans. P16,345,000.
Initial cost
Share from net income
Share from UHGain-OCI (P800K*25%)
Share from dividends (P2.1M*25%)
Carrying value, 12/31/14
45,000
150,000
36,000
231,000
14,000,000
(12,000,000)
2,000,000
1,500,000
500,000
25%
2,000,000
2,700,000
(30,000)
2,670,000
14,000,000
2,670,000
200,000
(525,000)
16,345,000
4. Ans. P805,000.
Realized
6,750,000
Proceeds from portion sold (25,000*40%)*(P680-P5)
Fair value of remaining portion to be reclassified:
(25,000*60%)*P680
Carrying value of Investment in Associate:
Sold (P16,345,000*40%)
Reclassified (P16,345,000*60%)
Gain on cessation before recycling of OCI/L
Recycling of OCI to P&L
Sold (P200,000*40%)
Reclassified (P200,000*60%)
Total cessation gain - P&L
Unrealized
10,200,000
10,200,000
(9,807,000)
393,000
(6,538,000)
(9,807,000)
605,000
(6,538,000)
212,000
80,000
292,000
5. Ans.
Total
6,750,000
120,000
513,000
6. Ans.
80,000
120,000
805,000
7. Ans. P171,000.
#shares
Proportionate interest before dilution
Proportionate interest after dilution
Decrease in interest
25,000
25,000
#shares outs.
100,000
125,000
Share from increase in capital due to share issuance:
(25,000sh*P680)*20%
Prorated CV of portion deemed sold:
P16,345,000*(5%/25%)
Gain on dilution before recycling of OCI/OCL
Recycling of OCI to P&L: P200,000*(5%/25%)
Gain on dilution
% interest
25%
20%
5%
3,400,000
(3,269,000)
131,000
40,000
171,000
CHAPTER 5-PROBLEM 11: ANALEN INC.
Case 1: “Cost-Based Approach, with Catch-up Adjustment”:
1. Ans. P110,000.
Share from Net income, Jan to Jun, 2015 (P300,000*10%)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%)
Share from Net Income in 2015
30,000
80,000
110,000
CHAPTER 5: AUDIT OF INVESTMENTS
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SOLUTIONS GUIDE
49 of 155
2. Ans. P3,176,000.
January 1, 2014 Cost (10%)
Share from Net Income, 2014 (P400,000*10%)
Share from Dividends, Oct. 1, 2014 (10,000*P0.90)
Carrying value, 12/31/14 had equity method been used
Share from Net income, Jan to Jun, 2015 (P300,000*10%)
Share from Dividends, Apr. 1, 2015 (10,000*P1.10)
Additional investment, July 1, 2015 (30%)
Share from Dividends, Oct. 1, 2015 (40,000*P1.35)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%)
Carrying value, 12/31/2015
700,000
40,000
(9,000)
731,000
30,000
(11,000)
2,400,000
(54,000)
80,000
3,176,000
Case 2: “Cost-Based Approach, without Catch-up Adjustment”:
1. Ans. P91,000.
Dividends Income, April 1, 2015 (10,000*P1.10)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%)
Share from Net Income in 2015
2. Ans. P3,126,000.
January 1, 2014 Original Cost (10%)
Additional investment, July 1, 2015 (30%)
Share from Dividends, Oct. 1, 2015 (40,000*P1.35)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%)
Carrying value, 12/31/2015
11,000
80,000
91,000
700,000
2,400,000
(54,000)
80,000
3,126,000
Case 3: ““Fair Market Value Approach, without Catch-up Adjustment”
1. Ans. P91,000.
Dividends Income, April 1, 2015 (10,000*P1.10)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%)
Share from Net Income in 2015
2. Ans. P3,226,000.
Original Investment at prevailing FMV on July 1, 2015 (10%)
10,000sh*(P2.4M/30K)
Additional investment, July 1, 2015 (30%)
Share from Dividends, Oct. 1, 2015 (40,000*P1.35)
Share from Net Income, Aug to Dec, 2015 (P200,000*40%)
Carrying value, 12/31/2015
11,000
80,000
91,000
800,000
2,400,000
(54,000)
80,000
3,226,000
- the prevailing FMV is based on the current
selling price of the additional shares.
CHAPTER 5-PROBLEM 12: KIKIO CORPORATION
Case 1: Fair Value Method
1. Ans. P12,500,000.
Fair Market Value 12/31/2014
12,500,000
2. Ans. P2,000,000.
Fair Market Value 12/31/2014
Carrying value (Acquisition cost 1/1/2014
Unrealized holding loss - P&L
12,500,000
10,500,000
2,000,000
3. Ans. P11,000,000.
Fair Market Value 12/31/2015
11,000,000
4. Ans. (P1,500,000)
Fair Market Value 12/31/2015
Carrying value (FMV, 12/31/2014)
Unrealized holding loss - P&L
5. Ans. P10,000,000.
June 30, 2016 FMV
11,000,000
12,500,000
(1,500,000)
P10,000,000
6. Ans. (P1,000,000)
June 30, 2016 FMV upon reclassification
Carrying value (FMV 12/31/15)
Unrealized holding loss - P&L
10,000,000
11,000,000
(1,000,000)
7. Ans. (P1,000,000)
Proceeds from sale
Carrying value (FMV 12/31/15)
Realized loss from sale
10,000,000
(11,000,000)
(1,000,000)
Case 2: Cost Method
1. Ans. P9,450,000.
Cost
Accum Depr: (P10.5M/10)*1yr
Carrying value
10,500,000
(1,050,000)
9,450,000
*lower than FMV, P12.5M, thus not impaired.
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
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SOLUTIONS GUIDE
50 of 155
2. Ans. P8,400,000.
Cost
Accum Depr: (P10.5M/10)*2yrs
Carrying value
10,500,000
(2,100,000)
8,400,000 *lower than FMV, P10.5M, thus not impaired.
3. Ans. P7,875,000 and None.
Cost
Accum Depr: (P10.5M/10)*2.5yrs
Carrying value, July 1, 2016
10,500,000
(2,625,000)
7,875,000 *lower than FMV, P10M, thus not impaired.
4. Ans. P2,125,000.
Proceeds from sale
Carrying value, July 1, 2016
Realized gain from sale
10,000,000
(7,875,000)
2,125,000
CHAPTER 5-PROBLEM 13: PULITZER INC.
January 1, 2010:
Life insurance expense
Cash
180,000
180,000
January 1, 2011:
Life insurance expense
Cash
180,000
January 1, 2012:
Life insurance expense
Cash
180,000
December 31, 2012:
Cash surrender value
Retained earnings (180,000*2/3)
Life insurance expense
January 1, 2013:
Life insurance expense
Cash
July, 2013:
Cash
Life insurance expense
December 31, 2013:
Cash surrender value
Life insurance expense
CSV, Dec. 31, 2013
CSV, Dec. 31, 2012
Increase in CSV for 2013
January 1, 2014:
Life insurance expense
Cash
August, 2014:
Cash
Life insurance expense
September 30, 2014:
Cash surrender value
Life insurance expense
CSV, 12/31/2014
CSV, 12/31/2013
Increase for the year
Multiply by: 9months/12months
Increase up to 9/30/14
December 1, 2014:
Cash
Cash surrender value (9/30/14)
Life insurance expense (180,000*3/12)
Gain on life insurance policy settlement
180,000
180,000
180,000
120,000
60,000
180,000
180,000
5,000
5,000
60,000
60,000
240,000
180,000
60,000
180,000
180,000
7,000
7,000
37,500
37,500
290,000
240,000
50,000
75%
37,500
5,000,000
277,500
45,000
4,677,500
*unexpired portion as of date of death
1. Ans. P180,000; P120,000; P115,000.
Annual insurance premium
Increase in cash surrender value
Dividends from CSV
Life insurance expense
2011
180,000
180,000
2012
180,000
(60,000)
120,000
2013
180,000
(60,000)
(5,000)
115,000
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
51 of 155
2. Ans. P0; P180,000; P240,000
3. Ans. P90,500.
Annual insurance premium
Unexpired insurance premium as of date of death
Dividend from CSV
Increasein CSV up to date of death
Life insurance expense, 2014
180,000
(45,000)
(7,000)
(37,500)
90,500
4a) Ans. P4,677,500
4b) Ans. None.
MULTIPLE CHOICE EXERCISES:
CHAPTER 5-EXERCISE 1:
1. Ans. C.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
profits/losses
Debt security of another company quoted in an active market. Business
model of the company has an objective to hold debt securities for shortterm profits.
Total financial asset at FMV through P&L
100,000
100,000
200,000
2. Ans. A.
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains or losses in the
other comprehensive income/losses
150,000
3. Ans. B.
Debt security of another company quoted in an active market. Business
model of the company has an objective of collecting contractual cashflows from the bonds which are primarily in the form of interests and
principal.
500,000
4. Ans. B.
20% Equity securities of another company quoted in an active market
500,000
5. Ans. D.
51% Equity securities of another company quoted in an active market
1,400,000
6. Ans. B.
Real property held for speculation purposes
Real property of a manufacturing business being leased out to another party
under operating lease
Land held for undetermined future use
Real property being developed as an investment property
700,000
900,000
800,000
300,000
Total Investment Property
2,700,000
CHAPTER 5-EXERCISE 2: PINAY CORP.
1. Ans. A.
Proceeds (50,000*58)
Carrying Value (50,000*55)
Realized gain
2,900,000
2,750,000
150,000
2. Ans. C.
Proceeds (15,000*59)
Original Cost (15,000*60)
Realized loss
885,000
900,000
(15,000)
3. Ans. D.
Proceeds
Accrued interest
Carrying Value (P2,035,182/2)
Realized gain
1,100,000
(50,000)
(1,017,591) *half of the carrying value which is the fair value on 12.31.13
32,409
FMV=Present value of future cash flows at 9% yield rate
Principal (P2,000,000*0.84168)
1,683,360
Interest (P200,000*1.759111)
351,822
CV/FMV 12/31/2013
2,035,182
4. Ans. A.
Proceeds
Accrued interest
Carrying Value (P1,973,866/2)
Realized gain
Amortization table:
1/1/13:
12/31/13:
6/30/14:
2,000,000
200,000
0.8416800
1.7591112
1,100,000
(50,000)
(986,933) **half of the carrying value which is the amortized cost on 6/30/14
63,067
Correct interst
5. Ans A.
Alpha shares (FMV through P/L) - (50,000sh*62)
214,624
108,116
Nominal Inters
200,000
100,000
Amortization
14,624
8,116
Balance
1,951,126
1,965,750
1,973,866
3,100,000
CHAPTER 5: AUDIT OF INVESTMENTS
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SOLUTIONS GUIDE
52 of 155
6. Ans. B.
Alpha sahres (FMV through P/L)
Delta bonds (FMV through P/L)
Total Current Investment
3,100,000
982,143
4,082,143
FMV=Present value of remaining future cash flows at yield rate 12%
Principal (P1,000,000*0.892857)
892,857
1,000,000
Interest (P100,000*0.892857)
89,286
100,000
982,143
***
0.892857
0.8928571
CHAPTER 5-EXERCISE 3: BENSHOPPE INC.
1. Ans. C.
2. Ans. C.
CV/Cost
540,000 (29.50-2-0.50)*20,000sh
1,080,000 (27.50-.50)*40,000sh
1,923,000 (1,973,000-50,000)
3,543,000
Unrealized holding gain - IS
121,948
Financial assets at FMV through P&L
3,664,948
See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual prevailing effective rate)
Principal (2M*0.8072)
1,614,433
1
Interest (100,000*3.5052)
350,515
*
1,964,948
3. Ans. C.
Investment in Dee Shares (Associate)
Intial cost (6/30/14)
2,400,000
Share from dividends
(250,000)
Share from net income
280,000 (2,240,000*6/12)*25%
Investment in Assoc Balance
2,430,000
Aye Corp. Shares
Bee Inc. Shares
See Co. 10%, 2M Bonds*
4. Ans. B.
Transactions costs - Expense
Aye Corp. Shares
Bee Inc. Shares
Dividend income - Bee Inc.
Interest income - See Co.
Unrealized holding gain - FA
Share from net income - Dee Corp.
Total/Net Investment income
5. Ans. D.
See Co Bonds at amortized cost
Dee Corp. Shares - Assoc.
Total noncurrent investmetns
FMV 12/14
700,000
1,000,000
1,964,948
3,664,948
(10,000)
(20,000)
120,000
50,000
121,948
280,000
541,948
1,930,690
2,430,000
4,360,690
Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct Int.
Nominal Int.
Amortization
October 1, 2014:
December 31, 2014:
57,690
50,000
7,690
Balance
1,923,000 *excluding accrued interest
1,930,690
Alternative Solution: Financial asset at amortized cost: See Co 10%, 2M Bonds
Amortized cost shall be PV of cash flows using original effetive rate (6% semi-annually)
Principal (2,000,000*0.7921)
1,584,187
0.7921
Interest (100,000*3.4651)
346,511
3.4651
Amortized cost, 12/31/14
1,930,698
6. Ans. D.
Transactions costs - Expense
Aye Corp. Shares
Bee Inc. Shares
Dividend income - Bee Inc.
Interest income - See Co.
Unrealized holding gain - FA
Share from net income - Dee Corp.
Total/Net Investment income
(10,000)
(20,000)
120,000
57,690 *(1,923,000*12%*3/12)
80,000 UHG from Aye and Bee only
280,000
507,690
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
CTESPENILLA
CHAPTER 5-EXERCISE 4: SITAW CORP.
1. Ans. A.
Proceeds from sale of half of SIBUY bonds
Amortized cost October 16, (face value)
Realized gain on sale
SOLUTIONS GUIDE
53 of 155
51,250,000
50,000,000
1,250,000
2. Ans. B.
PATATAS (1M*P64)
BAWA (250,000*P74)
Unrealized holding gain - SHE
FMV
Cost
64,000,000
62,000,000 *reclassification to FA through P&L not allowed.
18,500,000
20,000,000
82,500,000
82,000,000
500,000
3. Ans. C.
Interest from SIBUY bonds (Apr. 15 to Oct. 15): P100M*10%*6/12
Interest from remaining SIBUY bonds (Oct. 15 - Dec. 31): P50M*10%*2.5/12
Cash dividends from PATATAS
Total interest and dividends income, 2013
4. Ans. A.
Proceeds from sale of half of PATATAS (500,000sh*P65)
Original cost (P62,000,000/2)
Realized gain on sale, under PAS 39
32,500,000
31,000,000
1,500,000
5. Ans. D.
Proceeds from sale of all BAWA shares (250,000sh*P78)
Original cost
Realized loss on sale, under PAS 39
19,500,000
20,000,000
(500,000)
CHAPTER 5-EXERCISE 5: MARIAH CORP.
1. Ans. A.
Proceeds from sale (9,000*65)
Original cost
Realized gain on sale (PAS 39)
5,000,000
1,041,667
1,500,000
7,541,667
585,000
441,000
144,000
2. Ans. C.
DEF Corp. Shares
GHI Corp.Shares
JKL Shares
Unrealized holding gain - SHE
FMV (12/14)
Cost
1,140,000
1,080,000
348,000
360,000
323,400
325,400
1,811,400
1,765,400
46,000
3. Ans. A.
IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES
FMV (12/14)
CV (FMV 12/13)
DEF Corp. Shares
1,140,000
1,050,000
GHI Corp.Shares
348,000
369,600
JKL Shares
323,400
315,000
1,811,400
1,734,600
Unrealized holding gain - SHE
76,800
4. Ans. B.
IF JKL SHARES IS INVESTMENT IN ASSOCIATE:
Initial cost (including transaction cost)
Share from dividends (0.75*4200)
Sahre from net income (450,000*20%*8/12)
Carrying Value, 12.31.14
CHAPTER 5-EXERCISE 6: ANGEL CORP.
1. Ans. D.
Uno shares
Dos shares
Tres shares
Quatro bonds
**FMV=Present value of cash flows at 8%
Principal (P2,000,000*0.85734)
Interest (P200,000*1.783265)
Total Fair Value
325,400
(3,150)
60,000
382,250
Fair Value
Dec. 31, 2014
Dec. 31, 2014 Total FMV
10,000
160
1,600,000
11,000
105
1,155,000
18,000
140
2,520,000
2,000,000
8% yield
2,071,331 *
7,346,331
2,000,000
200,000
1,714,678
356,653
2,071,331
Carrying values before year-end remeasurement
# of shares
CV Dec. 31,
Uno shares
10,000
145
Dos shares
11,000
72.73
Tres shares
18,000
100
Quatro bonds
2,000,000
12% yield
Total Carrying Value
1,450,000
800,000
1,800,000
1,903,927 **
5,953,927
CHAPTER 5: AUDIT OF INVESTMENTS
0.85734
1.783265
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CTESPENILLA
SOLUTIONS GUIDE
54 of 155
**Acquisition cost=Present value of cash flows at 12%
Principal (P2,000,000*0.711780)
1,423,560
Interest (P200,000*2.401831)
480,366
Total Fair Value
1,903,927
Unrealized holding gain - P&L
2. Ans. B.
Fair market value, Dec. 31, 2014
Carrying value
Unrealized holding gain - P&L
3. Ans. B.
Proceeds from sale:
Dos shares (10,000*P100)
Tres shares (18,000*140)
Carrying value of shares sold:
Dos shares (10,000*80)
Tres shares (18,000*100)
Realized gain on sale - P&L
2,000,000
200,000
2,000,000
200,000
0.711780
2.401831
7,346,331
5,953,927
1,392,404
1,000,000
2,520,000
3,520,000
800,000
1,800,000
2,600,000
920,000
4. Ans. A.
Aggregate Fair Value (12/31/14) Equity Securities only
Original Cost of Equity Securities:
# of shares Cost including
Dec. 31, 2014
Trans. Cost
Uno shares
10,000
150
Dos shares
11,000
74.55
Tres shares
18,000
108
Total Cost
Unrealized holding gain - OCI
5,275,000
Total cost
1,500,000
820,000
1,950,000
4,270,000
1,005,000
5. Ans. B.
Amortized cost of Quatro bonds (12/31/12)
Correct Interes
1/1/12: Orig Cost (12% yield rate)
12/31/12:
Nominal Intere
228,471
Amortization
200,000
CHAPTER 5-EXERCISE 7: DUMBO INC.
1. Ans. B.
Proceeds from sale plus accrued interest
(P500,000*98%)+(P500,000*12%*11/12)
Carrying value (Initial cost, excluding accrued interest and transaction cost)
Total cash consideration paid
1,044,258
Accrued interest (P1M*12%*6/12)
(60,000)
Transaction cost (rec. as expense)
(10,000)
974,258
Prorata: portion sold
50%
Accrued interest: (P500,000*12%*11/12)
Realized gain on sale
2. Ans. C.
Proceeds from sale: ABC (15,000*P15)
XYZ (5,000*P13)
Carrying value:
ABC: 15,000*(P21.50-P1.50)
XYZ: 5,000*(20,000*(P13-P1.50))/23,000
Realized loss on sale
225,000
65,000
Balance
1,903,927
28,471
1,932,398
545,000
(487,129)
(55,000)
2,871
290,000
300,000
50,000
350,000
(60,000)
3. Ans. D.
ABC (25,000sh*P18)
XYZ (18,000sh*P15)
DEF at 11% yield rate
Principal (P500,000*0.9009009)
Interest (P60,000*0.9009009)
FMV 12/31/14 CV
450,000
270,000
450,450
54,054
Unrealized holding gain - P&L
(a) Initial cost ABC (40,000*P20)
CV of 15,000 shares sold
Effect of cash div. in lieu of stock div.
CV ABC, 12/31/14
0.9009009
504,505
1,224,505
140,709
487,129
1,083,796
800,000
(300,000)
(83,333) (b)
416,667
(b) CV of ABC before cash div. in lieu of stock div.
Divide by: # of shares (25,000+5,000)
CV of ABC after cash div. in lieu of stock div.
Multiply by: Remaining shares
Carrying value, 12/31/14
(c) Initial cost DEF (20,000*P11.50)
CV of shares sold on 8/5
CV DEF 12/31/14
416,667 (a)
180,000 (c)
500,000
30,000
16.67
25,000
416,667
230,000
(50,000)
180,000
CHAPTER 5: AUDIT OF INVESTMENTS
0.85734
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4. Ans. B.
Interest income (6/30 to 12/1): P1,000,000*12%*5/12)
Interest income (12/1 - 12/31): P500,000*12%*1/12
Interest income from bond investment
50,000
5,000
55,000
5. Ans. A.
Stock dividend does not result to dividend income and accounted only through memo entry.
Cash in lieu of share dividends is accounted through the "as if" approach, that is, as if shares were received and were as if sold
for the cash dividend received.
6. Ans. D.
FMV 12/31/14
450,000
270,000
ABC (25,000sh*P18)
XYZ (18,000sh*P15)
DEF at 11% yield rate
Principal (P500,000*0.9009009)
Interest (P60,000*0.9009009)
Total
450,450
54,054
CHAPTER 5-EXERCISE 8: NYU CORP.
1. Ans. D.
Proceeds from sale on 11/5
SMC: (400sh*P230)
ABI: (800sh*P325)
Original cost:
SMC: (400sh*P260)
ABI: (800sh*P330)
Realized loss on sale, under PAS 39
504,505
1,224,505
92,000
260,000
352,000
104,000
264,000
368,000
(16,000)
2. Ans. A.
Proceeds from sale on 12/31 (P300,000*95%)
Amortized cost (P551,033*3/5)
Realized loss on sale of bonds
*Amortized cost: 12/31/14
285,000
330,620
(45,620)
Correct Int.
(Bal*9%)
March 31, 2014:
December 31, 2014: (9months)
Nominal Int.
(Princ*12%)
37,688
45,000
*
Amortization
(7,312)
Balance
558,345
551,033
3. Ans. B.
SMC (600sh*P275)
ABI (1,200sh*P340)
TDI (P200,000*95%)
Unrealized holding loss-OCI
FMV 12/31/14
Cost/Amortized cost
165,000
156,000
(600sh*P260)
408,000
396,000
(1,200sh*P330)
190,000
220,413
(P551,033*2/5)
763,000
772,413
(9,413)
4. Ans. C.
CHAPTER 5-EXERCISE 9: VEGAS CORP.
1. Ans. C.
Proceeds from sale of DEF (4,000sh*P138)
CV (FMV 12/31/13): 4,000sh*(P1,056,500/8,000sh)
Realized gain on sale
552,000
528,250
23,750
2. Ans. D.
Proceeds from sale of JKL (4,000sh*P124)
Cost: 4,000sh*(P1,180,000/10,000)
Realized gain on sale
496,000
472,000
24,000
132
3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the
carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment
shall be transferred directly to RE.
4. Ans. D.
FA at FMV through P&L
ABC (13,000*P153.20)
DEF (4,000*P137)
GHI (P500,000*82.22%)
PQR (P400,000*98%)
Unrealized holding gain - P&L
FMV (12/31/14
1,991,600
548,000
411,100
392,000
3,342,700
84,950
CV
1,984,000 (P1,525,000+P459,000)
528,250 (4,000sh*(P1,056,500/8,000sh))
373,500
372,000 (P400,000*93%)
3,257,750
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
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5. Ans. D.
FA at FMV through OCI/L
JKL (6,000sh*P110.50)
MNO (20,000sh*P44)
Unrealized holding loss - SHE
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FMV (12/31/14
663,000
880,000
1,543,000
(145,000)
Cost
708,000
980,000
1,688,000
CHAPTER 5-EXERCISE 10: JACK CORP.
1. Ans. C.
Proceeds from sale of Wan shares (5,000sh*P60)
CV: (P1,145,000/20,000sh)*5,000sh
Realized gain on sale - P&L
6,000sh*(P1,180,000/10,000sh)
300,000
286,250
13,750
2. Ans. C.
Proceeds from sale of Tri shares (25,000sh*P30)
Cost: (25,000sh*P35)
Realized loss on sale, under PAS 39
750,000
875,000
(125,000)
3. Ans. D.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the
carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment
shall be transferred directly to RE.
4. Ans. C.
FMV of Poor shares
Cost
Impairment loss - P&L
800,000
1,400,000
(600,000)
5. Ans. D.
No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether
permanent or temporary shall be recognized in the OCI/L.
6. Ans. C.
Proceeds from sale of Seeks shares (10,000*P45)
Cost (P1,000,000/20,000sh)*10,000sh
Realized loss on sale, under PAS 39
450,000
500,000
(50,000)
7. Ans. A.
There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be
remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the
carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment
shall be transferred directly to RE.
8. Ans. C.
FA at FMV through P&L
Wan ordinary shares
Too preference shares
Unrealized holding loss - P&L
9. Ans. C.
FA at FMV through OCI/L, under PAS
Poor preference shares
Five ordinary shares
Seeks ordinary shares
Unrealized holding gain - SHE
10. Ans. A.
FA at FMV through OCI/L, under PFRS
Poor preference shares
Five ordinary shares
Seeks ordinary shares
Unrealized holding loss - SHE
FMV 12/31/14 CV (FMV 12/31/13)
825,000
858,750 (P1,145,000/20,000sh)*5,000sh
650,000
700,000
1,475,000
1,558,750
(83,750)
39 FMV 12/31/14
800,000
1,500,000
900,000
3,200,000
150,000
9 FMV 12/31/14
800,000
1,500,000
900,000
3,200,000
(450,000)
COST
800,000 *Impaired value under PAS 39
1,250,000
1,000,000
3,050,000
COST
1,400,000 *No impairment loss under PFRS 9
1,250,000
1,000,000
3,650,000
11. Ans. C.
12. Ans. C.
CHAPTER 5-EXERCISE 11: EBC CO.
1. Ans. C.
Fair Market Value, 12/31/2013
Fair Market Value last remeasurement date, 12/31/2012 (see 1. below)
10% BS Treasury bond at cost (purchased in the current year)
Unrealized Holding Loss
*Cost (P25,250 + 32,450)
P57,700
FMV adjustment credit balance
(500)
57,200
P160,300
P57,200
103,250
160,450
P150
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2. Ans. B.
Fair Market Value, 12/31/2014
Fair Market Value, last remeasurement date 12/31/2013
Unrealized Holding Loss
3. Ans. A.
Face Value, 10% BS Treasury Bonds
Multiply by: Interest rate
Annual interest
Mulitiply by: Months outstanding
Interest income
P161,100
160,300
(800)
2009
P100,000
10%
10,000
2/12
P1,667
2010
P100,000
10%
10,000
12/12
P10,000
4. Ans. C.
Fair Market Value of the Inv. portfolio, 12/31/2014
P161,100
CHAPTER 5-EXERCISE 12: HART CORP.
1. Ans. C.
July 5 sale
Proceeds from sale (450*1,000)
CV of shares sold (570,000/2,000)*1,000
Oct. 11 sale
Proceeds from sale (150*1,000)
CV of shares sold (285,000/3,000)*1,000
SHARES
P450,000
(285,000)
165,000
P150,000
(95,000)
2. Ans. C.
June 1 sale
Proceeds from sale (195*20,000)
Cost of shares sold (P3,000,000-P90,000)
Nov. 20
Proceeds from sale (3,700,000 – 300,000)
Cost of shares sold (7,500,000/50,000)*20,000
SHARES
55,000
220,000
P3,900,000
2,910,000
P3,400,000
3,000,000
3. Ans. D.
BLACK INC.
FMV (12/31/2014) 2,000*150
Carrying value (285,000/3,000)*2,000
WHITE INC.
FMV (12/31/2014) 30,000*190
Carrying value (7,500,000/50,000)*30,000
UNREALIZED HOLDING GAIN – P&L
300,000
190,000
5,700,000
4,500,000
4. Ans. D.
BLACK INC.: FMV (12/31/2014) 2,000*150
WHITE INC.: FMV (12/31/2014) 30,000*190
300,000
5,700,000
CHAPTER 5-EXERCISE 13: CSI INC.
1. Ans. B.
Acquisition cost, excluding transaction cost
Less: Dividends recievable (shares acquired "Div.-on")
Initial cost - ABC Shares
200,000
(20,000)
180,000
2. Ans. B.
Acquisition cost (1,500sh*P150)
Add: Transaction cost
Initial cost - DEF Shares
225,000
30,000
255,000
990,000
400,000
1,390,000
110,000
1,200,000
1,310,000
6,000,000
3. Ans. D.
No dividend income shall be recognized from the share dividends received from DEF.
4. Ans. B.
# of GHI shares after share split
Multiply by: cash div. per share
Dividend income from cash dividends
5,000
5
25,000
5. Ans. B.
Shares in lieu of cash dividends (4,000sh/4)
Fair value of shares
Dividend income (shares in lieu of cash)
1,000
55
55,000
6. Ans. C.
Financial asset at FMV through P&L
ABC (2,000sh*P105)
GHI (5,000sh*P75)
Unrealized holding loss - P&L
FMV, 12/31
210,000
375,000
585,000
(5,000)
CV
180,000
410,000 (P285,000+(5,000sh*P25))
590,000
CHAPTER 5: AUDIT OF INVESTMENTS
AUDITING (2016 EDITION)
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7. Ans. C.
Financial asset at FMV through OCI/L
DEF (1,500sh+300sh)*P160
JKL (4,000sh+1,000sh)*P60
Unrealized holding gain - SHE
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FMV, 12/31
288,000
300,000
588,000
78,000
Cost
255,000
255,000
510,000
8. Ans. B.
Investment in Associate - MNO shares
Initial cost, January 1, 2014
Share from net income (P600,000*20%)
Share from forex loss (P100,000*20%)
Share from dividends (10,000sh*P12)
Carrying value, 12/31/14
(P200,000+(1,000sh*P55)
850,000
120,000
(20,000)
(120,000)
830,000
CHAPTER 5-EXERCISE 14: PRINCE INC.
1. Ans. A.
Dividend income from Queen Corp. in 2014 (300,000*10%)
P30,000
*note: Queen shares is only 10% (100,000/1,000,000), thus shall be accounted for as AFS.
Investment income for investment in AFS shall be through dividends declared by Queen.
2. Ans. C.
Share from net income of King Inc. 2013 (650,000*25%)
162,500
Understatement in Depr expense (500,000/5)*25%
(25,000)
Share from net income of King Inc. 2013
137,500
*note: King shares is only 25% (250,000/1,000,000), thus shall be accounted for as Associate Investment under equity method.
3. Ans. C.
Fair Value of Queen Corp shares 12/31/2014 (100,000*6.50)
4. Ans. C.
Acquisition cost (January 1, 2013) (250,000*10)
Share from net income: 2013
CV of Investment (12/31/13)
Share from net income: 2014
Share from dividends: 2014 (100,000*25%)
CV of Investment (12/31/14)
P650,000
2,500,000
137,500
2,637,500
37,500
(25,000)
2,650,000
5. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14 (100,000*6.50)
Fair value of Queen Sahres (AFS), 12/31/13 (100,000*7.00)
Unrealized Holding Loss – SCI
vs Rec. Value (FV:250,000*12) P3,000,000 – no imp.
vs Rec. Value (FV:250,000*15) P3,750,000 – no imp.
P650,000
700,000
P50,000
6. Ans. C.
Fair value of Queen Shares (AFS), 12/31/14
Original cost of Queen Shares, 1/1/13 (100,000*5)
Unrealized Holding Gain (Cumulative)- SHE/BS
650,000
500,000
150,000
CHAPTER 5-EXERCISE 15: ISUZU CORP.
1. Ans. A.
Acquisition cost
BV of Net Assets acquired (P6.4M*30%)
Total excess of acqusition cost over book value
Excess attributable to Depreciable asset (P640K*30%)
Excess attributable to Goodwill
2,592,000
1,920,000
672,000
192,000
480,000
2. Ans. C.
Share from the net income of associate (P1,280K*30%)
Understatement in depr: (P192,000/8yrs)
Investment Income
384,000
(24,000)
360,000
3. Ans. A.
Acquistion cost
Share from dividends (P6*40,000sh)
Share from net income
Carrying value, 12/31/14
Recoverable amount/Fair value less cost to sell:
(40,000shares*P64)
Impairment loss
2,592,000
(240,000)
360,000
2,712,000
2,560,000
152,000
4. Ans. B.
Share from net income
Impairment loss
Net amount to be reported in the income statement
360,000
(152,000)
208,000
5. Ans. B.
Dividend income (P6*40,000sh)
Unrealized holding loss - P&L
Net amount to be reported in the income statement
FMV, 12/31/14 (40,000*P64)
2,560,000
Carrying value (Cost)
2,592,000
Unrealized holding loss-P&L
(32,000)
240,000
(32,000)
208,000
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6. Ans. C.
CHAPTER 5-EXERCISE 16: PACQUIAO CORP.
1. Ans. D.
Net income
Less: PS share in net income (10%*P50*100,000)
OS share in net income
Multiply by: Proportionate interest (50,000sh/200,000sh)
Share from net income before adjustments
Understatement in Depr: (P4M*25%)/5yrs
Adjusted share from Net Income
2,500,000
500,000
2,000,000
25%
500,000
(200,000)
300,000
2. Ans. D.
Acquisition cost, January, 2014 (50,000sh*P325)
Share from net income in 2014
Carrying value, Decmeber 31, 2014
16,250,000
300,000
16,550,000
3. Ans. C.
Net income
Multiply by: Proportionate interest (50,000sh/200,000sh)
Share from net income before adjustments
Understatement in Depr: (P4M*25%)/5yrs
Adjusted share from Net Income
2,500,000
25%
625,000
(200,000)
425,000
4. Ans. C.
Acquisition cost, January, 2014 (50,000sh*P325)
Share from net income in 2014
Carrying value, Decmeber 31, 2014
CHAPTER 5-EXERCISE 17: IFFY CORP.
1. Ans.
Share from net income (P4.8M*30%)
Understatement depr. (P1.6M/5)*30%
Investment Income - P&L
16,250,000
425,000
16,675,000
1,440,000
(96,000)
1,344,000
2. Ans. D.
Share from other comp. loss (800,000*30%)
3. Ans. C.
Acquisition price
Share from net income (4.8M*30%)
Understatement depr. (1.6M/5)*30%
Share from other comp. loss (800,000*30%)
Share from dividends (1,500,000*30%)
Carrying Value, 12/31/14
(240,000)
5,000,000
1,440,000
(96,000)
1,344,000
(240,000)
(450,000)
5,654,000
4. Ans. B.
CESSATION:
Proceeds from sale (18,000*210)
FMV of remaining share relassified to FA at FMV (12,000*210)
Total
Less: Carrying Value of Investment in Assoc. before cessation
Gain before recycling of OCLoss
Recycling of OCloss
Total cessation loss - IS
3,780,000
2,520,000
6,300,000
5,654,000
646,000
(240,000)
406,000
5. Ans. D.
6. Ans. D.
DILUTION:
# shares held
# shares outstanding
% of interest
Before Dilution
30,000
100,000
30%
Share from increase in Assoc.'s net assets (25,000*210)*24%
Carrying value of Investment as if given up (5,654,000*6/30)
Gain on dilution before recycling of OCLoss
Recycling of Ocloss (240,000*6/30)
Total cessation loss - IS
CHAPTER 5-EXERCISE 18: BLACK CORP.
1. Ans. A.
Acquistion cost (300,000sh*P20)
BV of Net Asset (P16M*30%)
Excess of acq. cost over book value
Excess attrib. to identifiable assets
Land (P800,000*30%)
Building (P1,200,000*30%)
Excess attrib to Goodwill
After Dilution
30,000
125,000
24%
1,260,000
(1,130,800)
129,200
(48,000)
81,200
6,000,000
4,800,000
1,200,000
240,000
360,000
600,000
CHAPTER 5: AUDIT OF INVESTMENTS
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2. Ans. A.
Share from net income (P2.5M*30%)
Understatement in Depr: (360,000/5yrs)
Investment income - P&L
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750,000
(72,000)
678,000
3. Ans. D.
Investment income - P&L
Share from Unrealized holding loss - OCL (P500K*30%)
Net amount to be reported in the SCI
4. Ans. B.
Acquisition cost
Share from dividends (P800,000*30%)
Share from net income
Share from OCL (P500,000*30%)
Carrying value, 12/31/14
678,000
(150,000)
528,000
6,000,000
(240,000)
678,000
(150,000)
6,288,000
5. Ans. B.
Number of shares owned
Total outstanding shares
Before Dil.
After Dil.
Decrease
300,000
300,000
1,000,000
1,200,000
30%
25%
5%
Share from the increase in White's capital as a result of share issue:
(200,000sh*P30)*25%
1,500,000
CV of investment deemed sold:
(P6,228,000*(5%/30%))
(1,048,000)
Dilution gain before recycling of OCL
452,000
Recycling of OCL (P150,000*(5%/30%))
(25,000)
Adjusted dilution gain (True Sale)
427,000
6. Ans. B.
Share from the increase in White's capital as a result of share issue:
(200,000sh*P30)*25%
1,500,000
CV of investment, excluding goodwill deemed sold:
(P6,228,000-P600,000)*(5%/30%)
(948,000)
Dilution gain before recycling of OCL
552,000
Recycling of OCL (P150,000*(5%/30%))
(25,000)
Adjusted dilution gain
527,000
7. Ans. C.
Number of shares owned
Total outstanding shares
Before Cess.
After Cess.
300,000
180,000
1,000,000
1,000,000
30%
18%
Realized
Unrealized
3,600,000
5,400,000
(2,515,200)
(3,772,800)
1,084,800
1,627,200
Proceeds from poriton sold (120,000shares*P30)
FMV of remaining portion to be reclassified to FA at FMV
Less: CV of portion sold (P6,228,000*120/300)
CV of portion reclassified (P6,228,000*180/300)
Cessation gain/loss before recycling of OCI/L
Recycling of OCL:
Portion sold (P150,000*120/300)
Portion reclassified (P150,000*180/300)
Adjsuted cessation gain
(60,000)
1,024,800
(90,000)
1,537,200
Total
3,600,000
5,400,000
(2,515,200)
(3,772,800)
2,712,000
(60,000)
(90,000)
2,562,000
8. Ans. A.
CHAPTER 5-EXERCISE 19: GREENDAY INC.
Case 1: “Cost-Based Approach, with Catch-up Adjustment”:
1. Ans. C.
Share from net income under Equity Method in 2014 (P1,250,000*15%)
Dividend income recognized under FMV Method in 2014 (P3.50*7,500sh)
Rertroactive adjustment to RE, beg 2015
187,500
26,250
161,250
2. Ans. A.
Share from net income (Jan. 1 - June 30, 2015): P700,000*15%
Share from net incoem (Jul. 1 - Dec. 31, 2015): P800,000*25%
Total investment income in 2015
105,000
200,000
305,000
3. Ans. A.
Acquistion cost, January 1, 2014
Share from dividends, Aug. 1, 2014 (P3.50*7,500sh)
Share from net income in 2014 (P1,250,000*15%)
Carrying value, Dec. 31, 2014 (Equity Method)
Share from dividends, Apr. 5, 2015 (P4.50*7,500sh)
Share from net income (Jan. 1 - Jun. 30, 2015)
Acquisition cost, July 1, 2015
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh)
Share from net incoem (Jul. 1 - Dec. 31, 2015)
Carrying value, Dec. 31, 2015
1,400,000
(26,250)
187,500
1,561,250
(33,750)
105,000
1,000,000
(68,750)
200,000
2,763,750
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Case 2: “Cost-Based Approach, without Catch-up Adjustment”:
4. Ans. A.
No retroactive adjustment to RE, beg under the Cost-based approach without catch-up adjustement. Instead, whatever is the
original cost of the original investment before gaining significant influence shall be its deemed cost.
5. Ans. D.
Dividend income, Apr. 5, 2015 (P4.50*7,500)
Share from net incoem (Jul. 1 - Dec. 31, 2015)
Total investment income in 2015 (Cost-based w/o catch-up adj.)
6. Ans. D.
Acquistion cost, January 1, 2014 (deemed cost)
Acquisition cost, July 1, 2015
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh)
Share from net incoem (Jul. 1 - Dec. 31, 2015)
Carrying value, Dec. 31, 2015
33,750
200,000
233,750
1,400,000
1,000,000
(68,750)
200,000
2,531,250
Case 3: “Fair Market Value Approach, without Catch-up Adjustment”:
7. Ans. A.
No retroactive adjustment to RE, beg under the FMV-based approach without catch-up adjustement. Instead, the original
investment shall be remeasured at prevailing fair value at the date significant influence is gained.
8. Ans. D.
Dividend income, Apr. 5, 2015 (P4.50*7,500)
Share from net incoem (Jul. 1 - Dec. 31, 2015)
Total investment income in 2015 FMV-based w/o catch-up adj.)
9. Ans. C.
FMV of original investment, July 1, 2015 (7,500sh*P200)
Acquisition cost, July 1, 2015
Share from dividends, Oct. 1, 2015 (P5.50*12,500sh)
Share from net incoem (Jul. 1 - Dec. 31, 2015)
Carrying value, Dec. 31, 2015
*FMV/Acq. Price of new investment (10%)
Divide by: # of shares
Assumed FMV, July 1, 2015
33,750
200,000
233,750
1,500,000 *
1,000,000
(68,750)
200,000
2,631,250
1,000,000
5,000
200
CHAPTER 5-EXERCISE 20: ORION CORP.
1. Ans. C.
Investments in Bonds:
Proceeds (PV of future cash flows, effective rate: 10%)
Principal: (4,000,000*0.6830)
2,732,054
Interest: (480,000*3.1699)
1,521,535
Intial fair value (1/1/13)
4,253,589
0.6830
3.1699
Correct Interes Nominal Intere Amortization
January 1, 2013:
December 31, 2013:
December 31, 2014:
December 31, 2015:
December 31, 2016:
425,359
419,895
413,884
407,273
2. Ans. A.
Face Value of bonds
Consideration given up (FMV)
Debit to/Reduction in interest income per books
Nominal interest collected/Credited to interest income
Interest income in 2013 per books:
Correct interst income (see amortization table)
Understatement in interest income in 2013
480,000
480,000
480,000
480,000
(54,641)
(60,105)
(66,116)
(72,727)
4,253,589
4,198,948
4,138,843 7. C.
4,072,727
4,000,000
4,000,000
4,253,589
(253,589)
480,000
226,411
425,359
198,948
3. Ans. A.
FMV of bonds, Dec. 31, 2014 at 9% effective rate: (a)
4,211,093
FMV of bonds, Dec. 31, 2013 at 11% effective rate: (b)
4,097,749
Unrealized holding gain - P&L
113,345
(a) FMV of bonds, Dec. 31, 2014 = PV of remaining cash flows at 9%
effective rate for 2 periods.
Principal: P4,000,000*0.841680
3,366,720
0.841680
Interest: P480,000*1.759111
844,373
1.759111
4,211,093
(b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11%
effective rate for 23periods.
Principal: P4,000,000*0.731191
2,924,766
0.731191
Interest: P480,000*2.443715
1,172,983
2.443715
4,097,749
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4. Ans. C.
Investment in Associate (20%)
Acquisition cost
BV of net assets acquired (P25M*20%)
Excess of Acquisition cost (Attrib. to Depr. Asset)
5,800,000
5,000,000
800,000 *
September 30, 2013 Acquisition Cost
Share from Dividends, 2013
Share from NI, 2013 (3.8M*20%)*3/12
*Understatement in Depr (800K/10)*3/12
December 31, 2013 Carrying Value
Share from Dividends, 2014
Share from NI, 2014 (5.2M*20%)
*Understatemetn in Depr (800K/10)
Share from OCL (400,000*20%)
Share from OCI (300,000*20%)
December 31, 2013 Carrying Value
5,800,000
(80,000)
190,000
(20,000)
1,040,000
(80,000)
5. Ans. A.
Dividend income (2*40,000)
Unrealized holding gain (155-145)*40,000
Investment income per books in 2013
Investment income per audit in 2013 (see analysis)
Retroactive adjustement to RE, beg
6. Ans. B.
CESSATION:
Number of shares owned
Number of outstanding shares
960,000
(80,000)
60,000
6,670,000
80,000
400,000
480,000
170,000
310,000
Before Cess.
40,000
200,000
20%
Proceeds from sale (169*10,000)
Fair value of remaining Investment (169*30,000)
CV of investment
Portion sold: (6,670,000*10/40)
Portion reclassified: (6,670,000*30/40)
Cessation gain, before recycling of OCI/L
Recycling of OCI
Recycling of OCL
Total cessation gain/loss
170,000
5,890,000
(160,000)
After Cess.
30,000
200,000
15%
Realized
Unrealized
1,690,000
5,070,000
(1,667,500)
22,500
15,000
(20,000)
17,500
7. Ans. B.
Fair Value on Reclass date (6/30/14)
Carrying Value/Depreciation Cost (6/30/14)
Revaluation Surplus (OCI) on Reclass
3,600,000
3,250,000
350,000
8. Ans. D.
FMV, Investment property, 12/31/14
CV, (FMV upon reclass on 6/30/2014)
Unrealized holding loss - P&L
3,200,000
3,600,000
(400,000)
(5,002,500)
67,500
45,000
(60,000)
52,500
Total
1,690,000
5,070,000
(1,667,500)
(5,002,500)
90,000
60,000
(80,000)
70,000
CHAPTER 5-EXERCISE 21: JUDE CORPORATION
1. Ans. C.
Present value of the installment payments at 12% effective rate:
Downpayament
1
1,000,000
Balance (P4,000,000/4yrs)*3.037349)
3.0373493
3,037,349
Option money related to property acquired
314,779
Property taxes in arrears as of January 1, 2012
147,872
Initial cost of the property
4,500,000
2. Ans. D.; 3. Ans. B.
Cost (Jan. 1, 2012)
Accum depr, Dec. 31, 2013 (4.5M/25yrs)*2yrs.
Depreciated cost
Recoverable amount/Fair market value
Impairment loss
4. Ans. A.; 5. Ans. C.
Recoverable amount 12/31/13
Depr 2014: P4.1M/23years
Carrying value, before impairment recovery
Carrying value had there been no impairment:
(P4.5M*22/25)
Impairment recovery - P&L
4,500,000
360,000
4,140,000
4,100,000
40,000
4,100,000
(178,261)
3,921,739
3,960,000
38,261
6. Ans. A.
PPE to IP
If a property is transferred from PPE to IP, and the FMV method is used to value IP, any decrease on the reclassification date shall be
recognized as impairment loss in the profit or loss. Any increase in the value, however, on the reclassification date shall be recognized in the
OCI as Revaluation Surplus, following PAS 16, PPE.'
FMV, 12/31/14 upon reclass to IP
Carrying value (Depr. Cost: P4.5M*22/25)
Revaluation surplus - OCI
4,300,000
3,960,000
340,000
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7. Ans. D.
IP to PPE
If a property is transferred from IP to PPE, and the FMV mehtod is used to value IP, any decrease or increase in the value of the
property on the transfer date shall be recognized in the profit or loss.
FMV, 12/31/14 upon reclass to PPE
4,300,000
Carrying value (FMV 12/31/13)
4,100,000
Gain on the transfer - P&L
200,000
CHAPTER 5-EXERCISE 22: DADO COMPANY
1. Ans. B.
Annual premium, 2014: (P8,000*12mo)
Less: Increase in CSV for 2014: (P25,200*1/3)
Life insurance expense, 2014
96,000
(8,400)
87,600
2. Ans. D.
Annual premium, 2015: (P8,000*12mo)
Less: Increase in CSV for 2015 (P30,000-P25,200)
Dividend from CSV
Life insurance expense, 2015
96,000
(4,800)
(8,000)
83,200
3. Ans. C.
Annual premium, 2016: (P8,000*12mo)
Less: Increase in CSV for 2016 (P39,600-P30,000)
Dividend from CSV
Life insurance expense, 2016
96,000
(9,600)
(9,600)
76,800
4. Ans. D.
Insurance premium up to date of death (P8,000*10mo)
Less: Increase in CSV up to date of death (P50,400-P39,600)*10/12
Dividend from CSV in 2017
Life insurance expense, 2017
80,000
(9,000)
(11,200)
59,800
5. Ans. A.
Life insurance policy
4,000,000
CV of CSV as of October 31, 2017:
CSV, Dec. 31, 2016
39,600
Increase up to Oct. 31, 2017:
9,000
48,600
Gain on life insurance policy settlement
3,951,400
Observe that since the insurance premium are payable monthly, it is assumed that after death on October 31, 2017, no additional
insurance premium had been paid.
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CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT
DISCUSSION PROBLEMS
CHAPTER 6-PROBLEM 1
1 C.
2 C.
3 D.
4 A.
5 D.
6 C.
7 D.
8 B.
9 A.
10 C.
11 B.
12 A.
13 C.
14 D.
15 C.
16 D.
17 C.
18 C.
CHAPTER 6-PROBLEM 2: BACOLOD INC.
Land
Land Impr.
15,600,000
208,000
24,000
Purchase of land
Land survey
Fees for search of title for land
Building construction permit fee
Temporary quarters for construction workers
Payments to tenants of the old building
Cost of to raze the old building
Excavation of the land
Special assessment of the gov. for road projects
Cost of construction
Cost of paving parking lot, driveway and sidewalks
List price of Machinery and equipment purchased
Trade discount taken on the machinery
Cost of freight and handling
Cost of testing the equipment
Income from the testing of machinery
Buidling
Mach. & Eq.
140,000
430,000
184,000
940,000
400,000
80,000
78,000,000
1,600,000
4,567,000
(127,000)
50,000
125,000
(65,000)
15,912,000
1,600,000
80,094,000
4,550,000
1. Ans.
2. Ans.
3. Ans.
4. Ans.
Note: (a) The demolition of the old building is preferably capitalized as cost of the new building as per PIC Q&A 2012-012.
(b) The income from the car park during construction is from an unrelated activity unnecessary for the construction of the building.
The income shall be recognzied as outright income in the P&L and shall not affect the cost of the constructed building.
CHAPTER 6-PROBLEM 3: MIRAM COMPANY
Land
Organization fees - outright expense
Land and Building (Prorata)*
Option payments (P250K-50K)*
Broker's fees*
Remodelling cost of the building
Salaries of executives
Stock bonus - Organization expense
Property taxes - in arrears (P240K*6/12)*
Property taxes - 2014 expense (P240K*6/12)
*FMV of Land
FMV of Building
Total
Building
1,512,000
160,000
88,320
378,000
40,000
22,080
60,000
Adj. to NI
(120,000)
(50,000)
(360,000)
(300,000)
96,000
24,000
1,856,320
1. Ans.
1,800,000
450,000
2,250,000
524,080
2. Ans.
1
0
1
CHAPTER 6-PROBLEM 4: ABC CORPORATION
a. Land
Initial cost, Jan., 2014
Present value of installment payments at 10% effective rate:
Downpayment
Balance: (P8M/5yrs)*3.790787
3.790787
2,000,000
6,065,259
8,065,259
(120,000)
(950,000)
3. Ans.
2.a. Ans.
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b. Building
Initial cost, Jan., 2014
FMV of shares issued (100,000sh*P70)
Accum. Depr, Dec. 31, 2014: (P7M*10%)
Carrying value, Dec. 31, 2014
7,000,000
(700,000) 1.a. Ans.
6,300,000 2.b. Ans.
c.1. Equipment A
Initial cost, Jan., 2014
Cash price equivalent (P2M*90%)
Accum. Depr., Dec. 31, 2014: (P1.8M-P180K)*5/15
Carrying value, Dec. 31, 2014
1,800,000
(540,000) 1.b. Ans.
1,260,000 2.c. Ans.
c.2. Equipment B
Initial cost, July 1, 2014
Purchase price
Import duties and nonrefundable taxes
Installation cost
PV of future retirement cost at 10% effective % for 5 yrs
(P161,051*0.6209213)
Intial cost, July 1, 2014
Accum. Depr., Dec. 31, 2014: (P4.4M-440K)*5/15*6/12
Carrying value, Dec. 31, 2014
4,000,000
250,000
50,000
100,000
0.6209213
4,400,000
(660,000) 1.c. Ans.
3,740,000 2.d. Ans.
c.3. Equipment C
Initial cost, September 1
Fair value of asset accepted as donation
1,200,000
Accum. Depr., Dec. 31, 2014 (P1.2M-120K)*5/15*4/12
(120,000) 1.d. Ans.
Carrying value, Dec. 31, 2014
1,080,000 2.e. Ans.
*note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is
credited, any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost.
d. Furniture and fixture
Initial cost, Jan., 2014
Cash price upon acquistion
Accum Depr., Dec. 31, 2014 (P3.2M-P320K)/10yrs
Carrying value, Dec. 31, 2014
3,200,000
(288,000) 1.e. Ans.
2,912,000 2.f. Ans.
CHAPTER 6-PROBLEM 5:
Case 1: ABC CORP.
1. Ans. P39,792.
Actual borrowing cost (Jul. 1 - Nov. 31): P1M*12%*5/12
Income from temporary investments (Jul. 1 - Nov. 31)
July: (P1,000,000-P100,000)*5%*1/12
August: (P1,000,000-P250,000)*5%*1/12
September (P1,000,000-P550,000)*5%*1/12
October (P1,000,000-P750,000)*5%*1/12
November (P1,000,000-P900,000)*5%*1/12
Net capitalizable borrowing cost
2. Ans. P70,000.
Interest expense (Jan. 2 - Jun. 30): P1M*12%*6/12
Interest expene (Dec. 1 - Dec. 31): P1M*12%*1/12
Interest expense for 2014
Case 2: PAN CORP.
1. Ans. P4,856,223.
Actual borrowing cost from Specific Borrowing:
1st Quarter: P34M*12%*3/12
2nd Quarter: (P35.020M*12%*3/12)
3rd Quarter: (P36,070,600*12%*3/12)
4th Quarter: (P37,152,718*12%*3/12)
Borrowing cost from General Borrowing
Weighted average actual expenditure*
Less: Proceeds from specific borrowing
WAAE financed by general borrowing
Multiply by: Weighted Ave. Gen Borr. %**
Capitalizable borrowing cost
*January 1
April 1
July 31
October 1
December 31
Total
50,000
3,750
3,125
1,875
1,042
417
(10,208)
39,792
60,000
10,000
70,000
1,020,000
1,050,600
1,082,118
1,114,582
39,316,667
(34,000,000)
5,316,667
11.08%
Cost incurred
8,000,000
19,000,000
24,400,000
27,600,000
14,000,000
4,267,300
588,923
4,856,223
#mo. to 12/31 Peso*Mos.
12
96,000,000
9
171,000,000
5
122,000,000
3
82,800,000
471,800,000
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Divide by: 12 months
Weighted average actual expenditure
12
39,316,667
**Actual General Borrowing Cost
P24,000,000*10%
2,400,000
P28,000,000*12%
3,360,000
Divide by: Proceeds from Gen. Borr. (P24M+P28M)
Weighted average genearl borrowing %
2. Ans. P5,171,077.
Actual General Borrowing Cost
Less: Capitalizable Gen. Borr. Cost
Gen. Borr. Cost. - Interest Expense
*note that the entire actual borrowing cost
3. Ans. P97,856,223.
*January 1
April 1
July 31
October 1
December 31
Capitalizable borrowing cost
Carrying value, 12/31/14
5,760,000
52,000,000
0
5,760,000
(588,923)
5,171,077
from specific borrowing had been entirely capitalized.
8,000,000
19,000,000
24,400,000
27,600,000
14,000,000
4,856,223
97,856,223
CHAPTER 6-PROBLEM 6: KELSON CORP.
1. Ans. P254,628
Depreciation of Old Buildings (3,600,000-796,200)*6%
Depreciation of New Building (1,800,000-360,000)*6%
Depreciation expense – BUILDINGS
168,228
86,400
254,628
2. Ans. P36,000.
Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12
36,000
3. Ans. P276,000.
Depreciation of Old Machinery (2,325,000/10)
Depreciation of New Machinery (870,000/10)*6/12
Depreciation expense – MACHINERY AND EQUIPMENT
232,500
43,500
276,000
4. Ans. P66,300.
Leasehold improvement carrying value (12/31/2013)
Divide by: Remaining useful life: 8yrs-3yrs=5yrs
(shorter than the remaining extended lease term: 3yrs+5yrs=8yrs)
Depreciation expense – LEASEHOLD IMPROVEMENT
5. Ans. P43,369.
Delivery Equipment: Book value, Jan. 1, 2014
Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014
Balance subject to depreciation
Multiply by 150% declining rate (1/5)*150%
Depreciation on the Remaining Delivery Equipment
Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12
Depn on truck sold on Sept. 30,
Total Depreciation expense – DELIVERY EQUIPMENT
CHAPTER 6-PROBLEM 7: GANADO CORPORATION
1.a. P56,214.
Buidling, CV Jan. 1, 2014
Multiply by: 150%Dbrate over 25 years
Depreciation expense - Building
331,500
5
66,300
137,400
(31,356)
106,044
30%
31,813
4,500
7,056
43,369
*P24,300+P7,056
936,900
6%
56,214
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1.b. Ans. P103,775.
Depr. on Disposed Mach.: P23,000/10yrs*3/12
Depr. on New Mach.: P310,000/10yrs*6/12
Depr. on Remaining Mach.: P877,000/10yrs
Depreciation expense - Mach&Eqpt
575
15,500
87,700
103,775
1.c. Ans. P21,000.
Depr. on New Auto: P12,000*4/10
Depr. on Remaining Auto:**
Depr on Auto had there been no change
Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10)
Depr Expense - Automotive Equipment
4,800
18,000
(1,800)
2.a. Ans. P319,314.
Accum. Depr - Building, Jan. 1, 2014
Depr for the year
Accum. Depr - Building, Dec. 31, 2014
263,100
56,214
319,314
2.b. Ans. P342,275.
Accum. Depr - Mach&Eqpt, Jan. 1, 2014
Accum. Depr of M&E disposed on Apr 1,
Depr for the year
Accum. Depr - M&E Dec. 31, 2014
250,000
(11,500)
103,775
342,275
2.c. Ans. P99,300.
Accum. Depr - Auto. Eqpt. Jan. 1, 2014
Accum. Depr of Auto. Eqpt. Disp. on Jan. 1,
Depr for the year
Accum. Depr - M&E Dec. 31, 2014
16,200
21,000
84,600
(6,300)
21,000
99,300
3. Ans. P11,500.
CV on the date of fire (P23,000*5/10)
11,500
Recoverable value
Impairment loss due to fire
11,500
Note: The reimbursement received from insurance company is recognized as a separate transaction, thus income from insurance
settlement shall be recognized separately.
4. Ans. (P700)
Fair value of asset received
Cash paid to equalize exchange
Assumed fair value of asset given-up
CV of asset given up
Loss on trade-in
12,000
(10,000)
2,000
2,700
(700)
CHAPTER 6-PROBLEM 8: MALIK CORP.
1.a. Ans. P732,000.
Replacement of wooden roof to brick roof
Major improvement on electrical wiring system
Storm windows and screens installation
Automatic door-opening system installation
Total amount capitalizable to Building or Building Improvements
300,000
70,000
162,000
200,000
732,000
1.b. Ans. P690,000.
Replacement of retired factory equipment
Rearrangement cost to ensue a more efficient production
Overhead crane in the assembly department
Total amount capitalizable to Equipment
500,000
120,000
70,000
690,000
1.c. Ans.
Acquistion of furniture
50,000
2. Ans. P1195,000.
Repainting of building
Routinary repairs to building
Replacements of minor gears
Service contract of office equipment
Sealing of roof leaks in the factory
Total repairs and maintenance expense
60,000
50,000
20,000
40,000
25,000
195,000
CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT
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CHAPTER 6-PROBLEM 9: BONBON COMPANY
1. Ans. P3,640,000.
Cost, Jan. 2005
Accum. Depr, Dec. 31, 2014: (P5.2M-P520K)*10/30
Carrying value, Dec. 31, 2014
5,200,000
(1,560,000)
3,640,000
2. Ans. P1,645,700.
Present value of future net cash flows at 10% effective rate for 15 years remaining life:
From continued use: P200,000*7.60608)
7.606080
1,521,216
From eventual disposal: P520,000*0.239392)
124,484
Value in Use
0.239392
1,645,700
3. Ans. P1,645,700.
Value in Use
1,645,700
FMV less Cost to sell
1,560,000
Recoverable value shall be the Value in Use, since it is higher.
4. Ans. P1,994,300.
Carrying value, Dec. 31, 2014
Recoverable amount
Impairment loss
3,640,000
1,645,700
1,994,300
5. Ans. P75,047.
Carrying value, Dec. 31, 2014 after impairment
Less: Salvage value
Depreciable cost
Divide by: remaining useful life
Depreciation expense
1,645,700
520,000
1,125,700
15
75,047
CHAPTER 6-PROBLEM 10: LEGASPI CORP.
1. Ans. P5,518,855.
Present value of future net cash flows at 5% effective rate for 4 years remaining life:
From continued use:
7.606080
2015: (P4,500,000-P1,680,000)*0.952381
2,685,714
0.952381
2016: (P4,800,000-P2,520,000)*0.907029
2,068,027
0.907029
2017: (P3,900,000-P3,300,000)*0.863838
518,303
0.863838
2018: (P1,200,000-P900,000)*0.822702
246,811
0.822702
From eventual disposal: 0
Value in Use
0.239392
5,518,855
2. Ans. P5,518,855.
Value in Use
5,518,855
FMV less Cost to sell
5,070,000
Recoverable value shall be the Value in Use, since it is higher.
3. Ans. P1,861,145.
Carrying value, Dec. 31, 2014
Recoverable amount
Impairment loss
7,380,000
5,518,855
1,861,145
CHAPTER 6-PROBLEM 11: NAIA COMPANY
1. Ans. P150,000.
Replacement cost
Mulitply by condition % (7yrs/10yrs)
Fair value/Sound value/Depr. Repl. Cost
Fair value, 12/31/14
Divide by: remaining life
Depreciation expense, 2015
1,500,000
70%
1,050,000
1,050,000
7
150,000
2. Ans. P180,000.
Fair value, 12/31/14
Carrying value, 12/31/14 (P1.2M*7/10)
Revaluation surplus, 12/31/14
Transferred to RE in 2015 (210K/7yrs)
Revaluation surplus, 12/31/15
1,050,000
840,000
210,000
(30,000)
180,000
3. Ans. P900,000.
Fair value, 12/31/14
Depr in 2014
Carrying value, 12/31/15
1,050,000
(150,000)
900,000
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4. Ans. P50,000 and P150,000.
Proceeds from sale
Carrying value, 12/31/16 (P1,050,000*5/7)
Gain on sale - P&L
800,000
(750,000)
50,000
Revaluation surplus balance, 12/31/16 (210,000*5/7)
5. Ans. P565,714.
Fair market value, 12/31/14
Carrying value, 12/31/14
Revaluation surplus, 12/31/14
Divide by: remaining life
Annual transfer to RE
Revaluation surplus, 12/31/15
150,000
1,500,000
840,000
660,000
7
94,286
565,714
CHAPTER 6-PROBLEM 12: PEPSI CORP.
1. Ans. P2,000,000.
Carrying value, 12/31.2012 (P24M-P8M)
Recoverable amount (higher)*
Impairment loss
Value is use
FMV less cost to sell
16,000,000
14,000,000
2,000,000
-provide additional depr. for 2012 (P18M/9yrs)
14,000,000 higher
13,500,000
2. Ans. P1,750,000.
Carrying value, 1/1/13 after impairment
Divide by: remaining useful life
Annual depreciation after impairment
14,000,000
8
1,750,000
3. Ans. P1,500,000.
Recoverable amount/FMV
Carrying value had there been no impairment: (P16M*6yrs/8yrs)
Increase over CV had there been no impariment is ignored under cost method.
15,000,000
12,000,000
3,000,000
Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method.
Carrying value had there been no impairment: (P16M*6yrs/8yrs)
12,000,000
Carrying value based on the impaired value: (P14M*6yrs/8yrs)
10,500,000
Gain on impairment recovery - P&L
1,500,000
- whether under cost or FMV method, the gain on impairment recovery is recognized in the P&L.
4. Ans. P2,000,000.
Carrying value had there been no impairment (cost method)
Divide by: remaining useful life
Annual depreciation after recovery, cost method
12,000,000
6
2,000,000
5. Ans. None.
The property had been transferred from PPE to Investment property, where the property is measured under FMV model. Under the FMV
model of valuing investment properties, no depreciation is provided, instead the propety is remeasured at each balance sheet date at
their prevailing FMV. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss.
CHAPTER 6-PROBLEM 13: RAM CORP.
1. Ans. P500,000.
Fair Value/Soud Value, 1/1/2014
Carrying Value, 1/1/2014 (P5M*8yrs/10yrs)
Revaluation Surplus, 1/1/2014
4,500,000
4,000,000
500,000
2. Ans. P562,500.
Carrying value after revaluation, 1/1/14
Divide by: remaining useful life
Annual depr. after revaluation
4,500,000
8
562,500
3. Ans. P700,000.
Carrying value based on revalued amount, 1/1/17 (P4.5M*5yrs/8yrs)
2,812,500
Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs)
2,500,000
Reversal of revaluation surplus in the OCI
312,500
Incidentally, this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus
to retained earnings. (P500,000*5yrs/8yrs)
Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs)
Recoverable value/FMV, 1/1/17
Impairment loss - P&L
4. Ans. P360,000.
Carrying value after impairment loss, 1/1/17
Divide by remaining useful life:
Revised annual depr. after impairment loss
2,500,000
1,800,000
700,000
1,800,000
5
360,000
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MULTIPLE CHOICE EXERCISES:
CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY
1. Ans. C.; 2. Ans. C.
Land and building acquisition price
Property taxes in arrears, Jan. 1, 2014: (P20,000*1yr/2yrs)
Option payment on property acquired only
Cost of removal of old buidling
Partial payment on constructed building
Legal fees
Insurance during construction only: (P24,000*4/12)
Second payment on constructed building
General expense - related to construction
Final payment on constructed building
Land
1,308,000
10,000
15,000
4,000
1,337,000
2. Ans. D.
Correct cost of Building, July 1, 2014
Divide by: useful life
Annual depreciation
Multiply by: 6months/12 months in 2014
Depreciation for 2014
Building
22,000
700,000
1,500
8,000
600,000
12,000
200,000
1,543,500
1,543,500
25
61,740
6/12
30,870
CHAPTER 6-EXERCISE 2: MILDEN COMPANY
1. Ans. C.; 2. Ans. C.
Land
2,500,000
Acquisition price
Cost of razing old building
Proceeds from sale of salvaged materials
Title insurance and legal fees to purchase land
Architect’s fees
New building construction cost
300,000
(30,000)
150,000
2,650,000
CHAPTER 6-EXERCISE 3: BOND COMPANY
1. Ans. B.
Actual borrowing cost from Specific Borrowing: P10M*12%
Borrowing cost from General Borrowing
Weighted average actual expenditure*
25,395,167
Less: Proceeds from specific borrowing
(10,000,000)
WAAE financed by general borrowing
15,395,167
Multiply by: Weighted Ave. Gen Borr. %**
8.67%
Capitalizable borrowing cost
Actual borrowing cost (P1.2M+P500K+P800K)
*January 1
March 1
September 1
December 31
Total
Divide by: 12 months
Weighted average actual expenditure
Building
1,200,000
1,334,248
2,534,248
2,500,000
Cost incurred #mo. to 12/31
18,228,500
12
7,000,000
10
4,000,000
4
5,000,000
-
**Actual General Borrowing Cost
P5,000,000*10%
P10,000,000*8%
Divide by: Proceeds from Gen. Borr. (P10M+P5M)
Weighted average genearl borrowing %
500,000
800,000
600,000
15,000,000
15,870,000
lower
Peso*Mos.
218,742,000
70,000,000
16,000,000
304,742,000
12
25,395,167
1,300,000
15,000,000
0
2 .Ans. A.
Since actual borrowing cost was fully capitalizable, no borrowing cost shall be recognized as outright expense for 2014.
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3. Ans. B.
January 1
March 1
September 1
December 31
Capitalizable borrowing cost
Carrying value, 12/31/14
18,228,500
7,000,000
4,000,000
5,000,000
2,500,000
36,728,500
CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATION
Machine A:
Carrying Value, 1/1/14 (P30,000*80%*80%
Salvage value
Depreciable carrying value
Divide by: 8 years
Depreciation expense
19,200
(5,000)
14,200
8
1,775
Ans. B.
Machine B:
Carrying value, 1/1/4/14 (P50,000-P25,000)
Salvage value
Depreciable carrying value
Divide by: remaining useful life (4yrs+2yrs)
Depreciation expense
25,000
(5,000)
20,000
6
3,333
Ans. B.
Machine C:
Depreciation expense, 2014 (P20,000*60%*40%)
4,800
CHAPTER 6-EXERCISE 5: DELITE CORP.
1. Ans. A.
Machinery AB001
Carrying Value 1/1/14 (6M*10/20)
Less: Salvage value
Depreciable carrying value
Divide by: Extended remaining life
Depreciation expense in 2014
3,000,000
(600,000)
2,400,000
15
160,000
2. Ans. C.
Machinery DE020
Cost 1/1/12
Less: Salvage value
Depreciable cost
Divide by: Useful life
Annual Depreciation
6,790,000
(500,000)
6,290,000
20
314,500
Capitalizable cost on 1/1/14
Divide by: Remaining life
Additional Depreciation
Total Depreciation in 2014
Ans. B.
486,000
18
27,000
341,500
3. Ans. C.
Machinery GH033
Cost 7/1/14
Down payment:
Balance: (3M*2.577097)
Initial Cost (Cash Price/Present Value)
Multply by: Double Decl. Bal rate
Multiply by (6months/12months)
Depreciation in 2014 (6 mo.)
1,000,000
7,731,291
8,731,291
25%
1/2
1,091,411
4. Ans. A.
Wasting Asset
Cost
Restoration cost
Salvage value
Depletable cost
Divide by: Useful life (output)
Depletion rate:
Mulitply by: Actual production
Total Depletion
18,000,000
2,000,000
(1,000,000)
19,000,000
7,600,000
2.50
1,200,000
3,000,000
5. Ans. B.
Depletion rate:
Mulitply by: Actual sales
Depletion expense
2.50
900,000
2,250,000
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CHAPTER 6-EXERCISE 6: JERSEY CORP.
1. Ans. D.
Building
Machinery
Equipment
Cost
6,100,000
2,550,000
1,030,000
Total
9,680,000
Depreciation expense
Divide by: Total cost
Composite depreciation rate
900,000
9,680,000
9.30%
2. Ans. A.
Depreciable cost
Divide by: Depreciation expense
Composite life
9,500,000
900,000
10.56
3. Ans. B.
Total cost
Multiply by: Composite depr. rate
Depreciation expense
9,680,000
9.30%
900,000
Salvage
100,000
50,000
30,000
Depr. Cost
6,000,000
2,500,000
1,000,000
9,500,000
Life in years
20
5
10
Depr. Exp.
300,000
500,000
100,000
900,000
4. Ans. C.
Building
Equipment
6,100,000
1,030,000
Total
Multiply by: Composite depr. rate
Depreciation expense
7,130,000
9.30%
662,913
CHAPTER 6-EXERCISE 7: GRANNY INC.
1. Ans. B.
Tools disposed, 2014
Cost of earlier purchase (From beg. Invty)
Total
Less: Proceeds from sale (300*10)
Depreciation
Tools disposed, 2015: 700
Cost of earlier purchases (500*40)
Cost of next earlier purchase (200*60)
Less: Proceeds from sale (700*14)
Depreciation
2. Ans. D.
Tools disposed, 2014
Cost of later purchase (2006 purchase)
Total
Less: Proceeds from sale (300*10)
Depreciation
Tools disposed, 2015: 700
Cost of latest purchases (2015 purchase)
Total
Less: Proceeds from sale (700*14)
Depreciation
300
40
12,000
(3,000)
9,000
20,000
12,000
(9,800)
22,200
300
60
18,000
(3,000)
15,000
700
80
56,000
(9,800)
46,200
3. Ans. C.
2014
32,000
24,000
56,000
(40,000)
16,000
(3,000)
13,000
Beginning inventory
Purchases
Cost of tools available for use
Ending inventory
Balance
Less: Proceeds from sale
Depreciation expense
CHAPTER 6-EXERCISE 8: COCO COMPANY
1. Ans. A.
Proceeds from sale of Mach. Aye
Carrying Value as of date of disposal
Original Cost
**Accum. Depr.: 638,000*(45/55)
Gain on sale
2015
40,000
72,000
112,000
(35,000)
77,000
(9,800)
67,200
260,000
700,000
(522,000)
178,000
82,000
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2. Ans. A.
Machinery Bee (Cost)
Accum Depr (1/1/14)
(960,000/15,000hrs)*11,000hrs
Carrying Value, 1/1/14
1,020,000
(704,000)
316,000
Mach. Bee (Depr Carrying Value): (316,000-36,000)
Div. by: Revised remaining useful life (18,000-11,000)
Depreciation rate per hour
Multiply by: Actual hours used in 2014
Depreciation Expense in 2014
3. Ans. B.
Mach. See (Cost)
Accum Depr (1/1/14)
**(1.5M/15)*3yrs
Carrying Value (1/1/14)
**as per policy, no depreciation on year of
280,000
7,000
40.00
2,100
84,000
1,600,000
(300,000)
1,300,000
acquisition; full on year of disposal
Mach See (Depr Carrying Value): 1.3M-100,000
Divide by: Revised remaining useful life
Depreciation Expense in 2014
4. Ans. C.
Carrying Value of remaining machineries:
Cost:
Machinery Bee
Machinery See
Machinery Dee
Machinery Eff
Accum. Depr:
Bee: (704,000+84,000)
See: (300,000+120,000)
Dee: (1.6M*20%)+(1,280K*20%)
Eff: (440K*20%)
Carrying value as of December 31, 2014
CHAPTER 6-EXERCISE 9: PQR CORP.
1. Ans. A.
Building, CV 1/1/14
Multiply by: Double decl. bal. rate (20yrs)
Depreciation expense - Building
2. Ans. A.
Depreciation - Machinery
Disposed Mach: P2.4M/10yrs*6/12
New Mach: P1.45M/10yrs*6/12
Remaining Mach: P12.6M/10yrs
Depreciation expense - Machinery
3. Ans. B.
Depreciation - Furniture and Fixture
Disposed F&F: P1.8M*6/55*2/12
New F&F: P2.2M*10/55*6/12
Remaining F&F: P4.2M*6/55
Depreciation expense - F&F
1,200,000
10
120,000
1,020,000
1,600,000
1,600,000
440,000
(788,000)
(420,000)
(576,000)
(88,000)
5. Ans. D.
Proceeds from sale
Carrying value of F&F sold, 3/1/14
Loss on sale of F&F
(1,872,000)
2,788,000
5,904,900
10%
590,490
120,000
72,500
1,260,000
1,452,500
32,727
200,000
458,182
690,909
Present value of installment price at 8% effective rate:
P2.4M/3yrs*2.577097
2,061,678
Freight and handling cost
138,322
Total initial cost of new F&F
2,200,000
4. Ans. D.
Fair market value of asset given-up
Carrying value of asset given-up, 6/30/14
(P2.4M*5.5yrs/10yrs)
Loss on trade-in
4,660,000
2.577097
1,250,000
(1,320,000)
(70,000)
400,000
(654,545)
(254,545)
Cost
Accum Depr, 12/31/13 (P1.8M*34/55)
Depr. up to 3/1/14 (P1.8M*6/55*2/12)
Carrying value, 3/1/14
1,800,000
(1,112,727)
(32,727)
654,545
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CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP.
1. Ans. C.
Debit
January 1, 2010 (A, B, C)
September 30, (D) (18,000+6,000)
October 31, (D)
November 30, (D)
December 31, (D)
December 31, Depreciation (20% of bal)
January 31, 2011 (D)
February 28, (D)
March 31, (D)
April 30, (D)
May 31, (D)
June 30, (D)
June 30, (E)
July 31 (D)
August 30, (D)
December 31, Depreciation (20% of bal)
June 30, 2012 (F) (P279,000-P129,000)
December 31, Depreciation (20% of bal)
January 1, 2013: (P75,000-P3,750)
December 31, Depreciation (20% of bal)
October 1, 2014:
December 31, Depreciation (20% of bal)
Credit
409,200
24,000
18,000
18,000
18,000
(97,440)
18,000
18,000
18,000
18,000
18,000
18,000
240,000
18,000
18,000
(154,752)
150,000
(153,802)
(71,250)
(108,791)
(24,000)
(82,233)
Balance
409,200
433,200
451,200
469,200
487,200
389,760
407,760
425,760
443,760
461,760
479,760
497,760
737,760
755,760
773,760
619,008
769,008
615,206
543,956
435,165
411,165
328,932
2. Ans. A.; 6. Ans. C.
Correct cost
Equipment A
Equipment B
Equipment C
Equipment D: Cash price equiv.+Trans. Cost
Equipment E: Cash price equiv. (net of disc.)
Equipment F: at FMV
Correct CV, 12/31/14
157,200
120,000
132,000
186,000
235,200
279,000
3. Ans. B.
Proceeds from sale of C, net
CV of C, 1/1/2013: P132,000*2yrs/5yrs
Gain on sale of C
71,250
52,800
18,450
4. Ans. D.
Proceeds from sale of B
CV of B, 10/1/14: P120,000*0.25yrs/5yrs
Gain on sale of B
24,000
(6,000)
18,000
5. Ans. C.
FMV of A, (Asset given-up):
CV of A, 6/30/12: P157,200*2.5yrs/5yrs
Gain on trade-in
129,000
(78,600)
50,400
CHAPTER 6-EXERCISE 11: ROLLING CORP.
1. Ans. B.
Proceeds
Carrying Value (1.5M*80%*80%*80%)-64,000**
Loss on disposal of old Factory equipment
Date of Disp
1/1/10:
1/1/10:
1/1/10:
9/30/14:
6/30/11:
6/30/12:
6/30/12:
10/1/14:
1/1/13:
-
Cond. % as of
12/31/14:
0.75yrs/5yrs
1.5yrs/5yrs
2.5yrs/5yrs
CV as of
12/31/14:
27,900
70,560
139,500
237,960
250,000
704,000 **depreciation for 5 months in 2014
(454,000)
2. Ans. A.
Downpayment
PV of Balance, at 10% for four periods:
P250,000*3.169865
Incidental costs (freight and installation)
PV of future retirement cost, at 10% for 10 period:
P227,041*0.385543
Initial cost of new Factory equipment
P1,000,000
792,466
120,000
87,534
P2,000,000
3. Ans. C
Fair value of asset given up (1,200,000-500,000)
*Book value of asset given up
Gain on trade-in
4. Ans. D.
Building (10,000,000*90%)*12/120
Building Improvement (780,000*12/78)
Total Depr. – Building & Improv.
Date of Acq
700,000
355,000
345,000
Cost
Accum Depr (3 yrs + 7 mo.
Carrying Value
1,000,000
645,000
355,000
900,000
- building being deprecated on its 4th year.
120,000 - over the remaining life of building which is 12 years.
1,020,000
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Depr. Exp.
2014
18,000
37,200
47,040
55,800
158,040
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5. Ans. C.
Disposed: (1,500,000*80%*80%*80%*20%)*5/12)
New: (2,000,000*20%*7/12)
Balance: (6,500,000**80%*80%*80%*20%)
Total Depreciation – Factory Equipment
6. Ans. C.
Disposed: (1,000,000*90%)/5*7/12
New: (1,200,000*90%)/5*5/12
Balance (4,000,000*90%)/5
Total Depreciation – Automotive
64,000
233,333
665,600
962,933
105,000
90,000
720,000
915,000
7. Ans. D.
Cost
Land
Building and Improvements
Factory Equipment
Automotive Equipment
Total
5,000,000
10,780,000
8,500,000
5,200,000
Accum Depr.
4,170,000
4,070,933
2,970,000
CV
5,000,000
6,610,000
4,429,067
2,230,000
18,269,067
CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY
1. Ans. C.
Equipment per audit: (P100,000*0.92593)
Equipment per books, Feb. 1, 2014
Adjustment to Equipment account
2. Ans. D.
Building per audit: at FMV
Buidling per books, June 1, 2014
Adjustment to Building account
92,593
100,000
(7,407)
0.92593
650,000
500,000
150,000
3. Ans A.
Per audit: Prorata based on relative FMV
Per books, Apr. 1, 2015
Adjustement to Inventory and Fixtures
4. Ans. A.
Per audit, Land at FMV
Per books, September, 2015
Adjustment to Land
Inventory
75,893
85,000
(9,107)
Fixtures
49,107
55,000
(5,893)
Total
125,000
140,000
(15,000)
48,500
48,500
5. Ans. B.
Per audit, Machinery at FMV
Per books, October 12, 2015
Adjustment to Machinery
40,000
45,000
(5,000)
6. Ans. A.
Equipment, Correct cost (see #1)
Divide by: Useful life
Depreciation expense, 2015
92,593
10
9,259
7. Ans. A.
Building, Correct cost (see #2)
Divide by: Useful life
Depreciation expense, 2015
650,000
25
26,000
8. Ans.A.
Fixtures, Correct cost (see #3)
Divide by: Useful life
Depreciation expense, 2015
49,107
10
4,911
9. Ans. A.
Machinery, Correct cost (see #5)
Divide by: Useful life
Depreciation expense, 2015
40,000
10
4,000
CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY
1. Ans. D.; 2. Ans. C.
Allocation of lump sum price in proportion to fair values:
Land A (135/1,350 x P12,300,000)
Building A (1,215/1,350 x P12,300,000)
Total
P1,230,000
11,070,000
P12,300,000
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3. Ans. B.
Cost of Building A
Less: Salvage value
Depreciable cost
Divide by: Annual depreciation
Estimated life
P11,070,000
(600,000)
10,470,000
261,750
40 years
4. Ans. A.
Depreciation expense on Building A for the year
Ended September 30, 2016
261,750
Same as prior year because straight-line method is used in depreciating Building A.
5. Ans. D.
Fair value of Land on acquisition date = FMV of shares P1,125,000 *Demolition cost
shall be charged to the cost of the new constructed Building.
6. Ans. D.
Since Builidng B is not yet available for use as of September 30, 2016, no depreciation shall be provided yet.
7. Ans. A.
Donated equipment, at fair value
P450,000
8. Ans. D.
Depreciation expense—Donated equipment, for the year ended September 30, 2015:
Cost
P450,000
150% declining balance rate (1/10 x 150%)
X 15%
Depreciation expense
P67,500
9. Ans. C.
Depreciation expense—Donated equipment, for the year ended September 30, 2016:
Book value, Oct. 1, 2015 (P450,000-P67,500)
P382,500
150% declining balance rate (1/10 x 150%)
X 15%
Depreciation expense
P57,375
10. Ans. B.
Total cost as recorded
Less: Normal repairs and maintenance
Correct cost of Machinery A
P2,473,500
223,500
P2,250,000
11. Ans. C.
Depreciation expense—Machinery A for the year ended September 30, 2015:
(P2,250,000-P90,000=P2,160,000 x 8/36)
P480,000
12. Ans. A.
Depreciation expense—Machinery A, for the year ended September 30, 2016:
(P2,160,000 x 7/36 x 4/12)
P140,000
13. Ans. C.
Down payment
First installment payment on October 1, 2015
Present value of succeeding 10 nstallment payments
(P90,000 x 6.710)
Total cost of Machinery B
P86,000
90,000
603,900
P780,000
14. Ans. B.
Depreciation expense-Machinery B, for the year ended Septmeber 30, 2016:
(P780,000/20years)
39,000
CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC.
1. Ans. D.
Book value of plant and equipment,
End of 2016 (P120 million x 5/8)
P75 million
2. Ans. A.
Book value of purchased technology (Patent)
(P60 million x 3/6)
P30 million
3. Ans. D.
Plant and equipment:
Book value
Recoverable value (FMV)
Impairment loss
P75 million
50 million *cash flow is undiscounted, thus not useful
P25 million
4. Ans. C.
Purchased technology:
Book value
Recoverable value (FMV)
Impairment loss
P30 million
10 million *cash flow is undiscounted thus not useful
P20 million
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CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION
1. Ans. A.
Factory: (P1,800,000*24/30)
1,440,000
Building: (P10,000,000*14/20)
7,000,000
2. Ans. B.
Present value of future net cash flows from the CGU's:
Continued use: P1,050,000*4.9676
5,215,980
3. Ans. A.
Carrying value of CGU:
Factory: (P1,800,000*24/30)
Building: (P10,000,000*14/20)
Total
Recoverable value/Value in use
Impairment loss
1,440,000
7,000,000
8,440,000
5,215,980
3,224,020
*FMV not determinable
4. Ans. B.
Factory
Carrying value before impairment loss:
1,440,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020
(550,070)
Building (7,000,000/8,440,000)*P3,224,020
Carrying value after impairment loss
889,930
Machinery
7,000,000
(2,673,950)
4,326,050
5. Ans. B.
Factory
Machinery
Carrying value before impairment loss:
1,440,000
7,000,000
Impairment allocated, prorata (relative book value before impairment)
Factory (1,440,000/8,440,000)*P3,224,020
(550,070)
Building (7,000,000/8,440,000)*P3,224,020
(2,673,950)
Carrying value after impairment loss
889,930
4,326,050
*lower than FMV P4.5M
Additional impairment to Factory
(173,950)
173,950
Carrying value after reallocation of impairment loss
715,980
4,500,000
Observe that the carrying value of the individual assets comprising the CGU should not result to an amount that is
lower than the higher between the individual assets' Recoverable Value or Zero.
CHAPTER 6-EXERCISE 16: MARGOT CORPORATION
1. Ans. A.
Cost of machineries
Accum. Depr. (609,000-49,000)*3yrs/8yrs
Carrying values, 12/31/14
2. Ans. B.
Present value of future net cash flows from:
Use: 2015: P141,000*0.909091
2016: P114,000*0.826446
2017: P30,000*0.751315
2018: P15,000*0.683013
2019: P10,000*0.620921
Disposal: 2019: P49,000*0.620921
Value in use
3. Ans. C.
Value in use
FMV less cost to sell
4. Ans. D.
Carrying value
Recoverable amount
Impairment loss
609,000
(210,000)
399,000
128,182
94,215
22,539
10,245
6,209
291,816
300,000
261,391
30,425
291,816
0.909091
0.826446
0.751315
0.683013
0.620921
higher
399,000
(300,000)
99,000
5. Ans. B.
Value in use
FMV less cost to sell
291,816
275,000
6. Ans. D.
Carrying value
Recoverable amount
Impairment loss
399,000
(291,816)
107,184
higher
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CHAPTER 6-EXERCISE 17: REVO CORP.
1. Ans. C.
Fair Market Value
Cost
(Impairment loss)/Revaluation Surplus
Land A
Land B
8,000,000
16,000,000
(10,000,000)
(12,000,000)
(2,000,000)
4,000,000
P&L
OCI
2. Ans. C.
Fair Market Value
Cost
(Impairment loss)/Revaluation Surplus
Fair Market Value
CV
Total increase/decrease in value
Land A
Land B
12,000,000
11,000,000
(10,000,000)
(12,000,000)
2,000,000
(1,000,000)
OCI
P&L
12,000,000
11,000,000
(8,000,000)
(16,000,000)
4,000,000
(5,000,000)
2,000,000
(4,000,000)
Recovery gain Reversal of RS
Impairment loss from Land B
Recovery gain from Land A
Net gain from Lands
(1,000,000)
2,000,000
1,000,000
3. Ans. B.
Fair Market Value
Cost
(Impairment loss)/Revaluation Surplus
Fair Market Value
CV
Total increase/decrease in value
Land A
Land B
11,000,000
15,000,000
(10,000,000)
(12,000,000)
3,000,000
OCI
OCI
11,000,000
15,000,000
(12,000,000)
(11,000,000)
(1,000,000)
4,000,000
(1,000,000)
1,000,000
Reversal of RS Recovery gain
Revaluation surplus from Land B
Reversal of revaluaiton surplus for Land A
Net OCI for the year
3,000,000
(1,000,000)
2,000,000
CHAPTER 6-EXERCISE 18: LABANOS CORP.
1. Ans. C.
Carrying value (P500,000-P90,000)
Recoverable value
Impairment loss
410,000
(338,000)
72,000
2. Ans. B.
CV after impairment loss
2014 Depr: (338,000-50,000)/8yrs
CV, 12/31/14
338,000
(36,000)
302,000
3. Ans. C.
Replacement depreciable cost (P555,000-50,000)
Multiply by: Condition percent (6yrs/10yrs)
Depreciable FMV, Depreciable Sound Value
Salvage value
Fair value/Sound value
505,000
6/10
303,000
50,000
353,000
4. Ans. A.
Fair value/Sound Value
CV had there been no impairment (P500,000-P180,000)
Revaluation surplus
353,000
320,000
33,000
CV had there been no impairment (P500,000-P180,000)
CV based on impaired value (P338,000-P72,000)
Recovery gain - P&L
320,000
266,000
54,000
5. Ans. C.
RS, 12/31/16: (P33,000*7years/8years)
28,875
*note that the remaining life of the asset after revaluation is (12years-4years) 8 years.
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CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS
DISCUSSION PROBLEMS
CHAPTER 7-PROBLEM 1
1 A.
2 B.
3 C.
CHAPTER 7-PROBLEM 2:
Ans. P3,700,000.
Purchase of a franchise
Goodwill acquired in the purchase of a business
Legal costs incurred in securing a patent
Cost of purchasing a patent from an inventor
Cost of purchasing a copyright
Cost of purchasing a trademark
software
Total Intangible Assets
CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP.
1. Ans.
2008:
Research and development expense
2009:
Research and development expense
2010:
Patent ABC amo. (P100,000/20yrs)*9/12
Research and development expense
2011:
Patent ABC amo. (P100,000/20yrs)
Research and development expense
2012:
Patent ABC amo. (P100,000/20yrs)
Patent DEF amo. (P375,000/12.5yrs)
Research and development expense
Legal fees - successful defense
2013:
Patent ABC amo. (P100,000/20yrs)
Patent DEF amo. (P375,000/12.5yrs)
Patent GHI amo. (P350,000/16yrs)*6/12
2014:
Patent ABC amo. (P100,000/20yrs)
Patent DEF amo. (P375,000/12.5yrs)
Patent GHI amo. (P350,000/16yrs)
Research and development expense
1,200,000
640,000
70,000
500,000
900,000
290,000
100,000
3,700,000
418,000
520,000
3,750
125,000
128,750
5,000
450,000
455,000
5,000
30,000
500,000
42,600
577,600
5,000
30,000
10,938
45,938
5,000
30,000
21,875
360,000
416,875
2. Ans. P680,938.
Cost
100,000
375,000
350,000
Patent ABC
Patent DEF
Patent GHI
Total
CHAPTER 7-PROBLEM 4: GARY INC.
1. Ans.
2011: Amortization (P640,000/10yrs)
2012: Amortization (P640,000/10yrs)
2013: Amortization:
Original Patent (P640,000-P128,000)/12 years
Related Patent (P120,000/12 years)
Total Amortization
2014: Amortization:
Original Patent (P640,000-P128,000)/12 years
Related Patent (P120,000/12 years)
Total Amortization
Condition %
Acq. Date
12/31/14:
4/1/2010:
15.75y/20y
12/31/2011: 9.5y/12.5y
7/1/2013:
14.5y/16y
CV
12/31/14:
78,750
285,000
317,188
680,938
64,000
64,000
42,667
10,000
52,667
42,667
10,000
52,667
2. Ans. P386,565.; 3. Ans. (P140,102).
Value in use/Present value of future net cash flows at 8% for 3 years.
P150,000*2.577097
386,565
2.577097
Carrying value, 12/31/14
Original and Related patent cost
760,000
Amortization, 12/31/14
(233,333)
526,667
Impairment loss
(140,102)
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4. Ans. P128,855.
CV, 1/1/15 after impairment
Divide by: Remaining life
Amortization, 2015
386,565
3
128,855
CHAPTER 7-PROBLEM 5: COLGATE COMPANY
Case 1:
1. Ans. P1,439,756.
Franchise, Jan. 1, 2014
Downpayment
600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712
1,748,227
Less: Amo, 2014 (2,348,227/10yrs)
Carrying value, 12/31/2014
Value in use/PV of net cash flows at 10% for 9yrs:
P250,000*5.759024
5.759024
Impairment loss
2. Ans. P476,000.
Patent, Jan., 2014
Amortization, 2014 (544,000/8yrs)
Carrying value, 12/31/14
2.913712
1,439,756
673,649
544,000
(68,000)
476,000
3. Ans. P389,474.
Trademark, Jan., 2012
Amortization, 2012 (P1M/10yrs)
Carrying value, 12/3/12
Value in use/PV of net cash flows at 9% for 9yrs:
P200,000*5.995247
Impairment loss
1,000,000
(100,000)
900,000
5.995247
Trademark, Jan., 2013
Amortization, 2013 (P1M/10yrs)
Carrying value, 12/3/13
Value in use/PV of net cash flows at 9.5% for 8yrs:
P200,000*5.433436
5.433436
Impairment loss
Trademark, Jan., 2014
Amortization, 2014 (P1M/10yrs)
Carrying value, 12/3/14
Value in use/PV of net cash flows at 10% for 7yrs:
P80,000*4.868419
4.868419
Impairment loss
4. Ans. P2,858,150.
Fanchise:
Amortization
Impairment loss
Interest expense (P1,748,227*14%)
Continuing franchise fee (P18M*5%)
Patent:
Amortization
Trademark:
Amortization
Impairment loss
Legal fees - successful defense
Total expenses
2,348,227
(234,823)
2,113,405
234,823
673,649
244,752
900,000
1,199,049
900,000
(100,000)
800,000
1,086,687
800,000
(100,000)
700,000
389,474
310,526
2,053,223
68,000
100,000
310,526
326,400
736,926
2,858,150
Case 2:
1. Ans. P2,348,227.
Franchise, Jan. 1, 2014
Downpayment
600,000
PV of Balance a 14% for 4 periods.
P2.4M/4yrs*2.913712
1,748,227
2,348,227
Carrying value, 12/31/2014
2,348,227
Value in use/PV of net cash flows at 10% for an indefinite period:
P250,000/10%
5.759024
2,500,000
Impairment loss
2. Ans. P476,000.
Patent, Jan., 2014
Amortization, 2014 (544,000/8yrs)
Carrying value, 12/31/14
544,000
(68,000)
476,000
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3. Ans. P800,000.
Trademark, Jan., 2012
1,000,000
Carrying value, 12/3/12
1,000,000
Value in use/PV of net cash flows at 9% for an indefinite period:
P200,000/9%
5.995247
2,222,222
Impairment loss
Trademark, Jan., 2013
1,000,000
Carrying value, 12/3/13
1,000,000
Value in use/PV of net cash flows at 9.5% for an indefinte period:
P200,000/9.5%
5.433436
2,105,263
Impairment loss
Trademark, Jan., 2014
1,000,000
Carrying value, 12/3/14
1,000,000
Value in use/PV of net cash flows at 10% for an indefinite period:
P80,000/10%
4.868419
800,000
Impairment loss
200,000
4. Ans. P1,739,152.
Fanchise:
Interest expense (P1,748,227*14%)
Continuing franchise fee (P18M*5%)
Patent:
Amortization
Trademark:
Impairment loss
Legal fees - successful defense
Total expenses
CHAPTER 7-PROBLEM 6: PJ CORP.
1. Ans. P1,500,000.
Acquisition Cost
FMV of Net Assets
Goodwill
2. Ans. P1,950,000; Ans. P8,450,000.
FMV of Net Assets
Excess earnings in % (12%-9%)
Excess earings
Goodwill (P195,000*10yrs)
FMV of Net Assets
Acquisition cost
3. Ans. P1,625,000; Ans. P8,125,000.
Goodwill (P195,000/12%)
FMV of Net Assets
Acquisition cost
244,752
900,000
1,144,752
68,000
200,000
326,400
526,400
1,739,152
8,000,000
6,500,000
1,500,000
6,500,000
3%
195,000
1,950,000
6,500,000
8,450,000
1,625,000
6,500,000
8,125,000
4. Ans. P1,200,000; Ans. P7,800,000.
Average/Normal Earnings of DA Inc. (P6.5M*12%)
Divide by: Capitalization rate
Acquisition cost
FMV of Net Assets
Goodwill
5. Ans. P1,198,191; Ans. P7,698,191.
Present value of excess earnings at 10% for 10 years:
Goodwill: P195,000*6.144567
1,198,191
FMV of Net Assets
6,500,000
Acquisition cost
7,698,191
CHAPTER 7-PROBLEM 7: KAREN CORPORATION
Accumulated profits 2010-2014
Less: Gain on sale of equipment in 2012
Accum. Operating Profits 2010-2014
Divide by:
Annual average operating profits
Add: Annual presidents bonus
Less: Inrease in depr. exp. (P350,000/5yrs)
Projected average operating profits
Less: Average/Normal earnings of industry (P2.6M*10%)
Projected excess earnings
780,000
10%
7,800,000
6,500,000
1,300,000
6.144567
1,800,000
(200,000)
1,600,000
5
320,000
50,000
(70,000)
300,000
(260,000)
40,000
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FMV
Current Asset
Noncurrent Asset (excluding GW)
Land
Depr. Asset
Liabilities
Net Assets
BV
700,000
550,000
950,000
1,850,000
(900,000)
2,600,000
950,000
1,500,000
(900,000)
2,100,000
1. Ans. P200,000; P160,000; P400,000; P151,631.
a) Purchase of excess earnings
Goodwill (P40,000*5yrs)
200,000
b) Capitalization of excess earnings
Goodwill (P40,000/25%)
160,000
c) Capitalzation of average earnings
Projected annual average oper. Profits
300,000
Divide by: Capitalization rate
10%
Acquisition cost/price
3,000,000
Less: FMV of Net Asset
(2,600,000)
Goodwill
400,000
d) Present value method
Goodwill: (P40,000*0.3.79079)
151,631
2. Ans.
a) Purchase of excess earnings
FMV of Net Assets
Goodwill
Acquisition cost/price
b) Capitalization of excess earnings
FMV of Net Assets
Goodwill (P40,000/25%)
Acquisition cost/price
c) Capitalzation of average earnings
Projected annual average oper. Profits
Divide by: Capitalization rate
Acquisition cost/price
d) Present value method
FMV of Net Assets
Goodwill: (P40,000*0.3.79079)
Acquisition cost/price
Difference
150,000
350,000
-
3.79079
2,600,000
200,000
2,800,000
2,600,000
160,000
2,760,000
300,000
10%
3,000,000
2,600,000
151,631
2,751,631
3. Ans. Option d)
For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill.
CHAPTER 7-PROBLEM 8: ABC CORPORATION
1. Ans. P1,000,000.
ABC
Acquisition price
FMV of net assets (4 CGUs)
Goodwill (prorated)**
DEF
800,000
200,000
1,500,000
375,000
GHI
700,000
175,000
JKL
1,000,000
250,000
5,000,000
4,000,000
1,000,000
Before impairment, 12/31/14
Cash* shall be excluded in determining the CV of the CGU (not included in the "other assets" within the scope of PAS 36)
Factory equipment
100,000
240,000
100,000
200,000
Office Equipment
250,000
490,000
120,000
200,000
Building
500,000
900,000
400,000
700,000
Goodwill**
200,000
375,000
175,000
250,000
Carrying value of CGU
1,050,000
2,005,000
795,000
1,350,000
Value in use:
ABC: P149,726*6.144567
920,000
DEF: P289,242*7.606080
2,200,000
GHI: P76,490*6.144567
470,000
JKL: P161,440*6.813692
950,000
Impairment loss
130,000
325,000
400,000
CGU-ABC
Impairment loss
Chargeable to Goodwill-ABC
CGU-DEF
Impairment loss
130,000
(130,000)
-
CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS
6.144567
7.606080
6.813692
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CGU-GHI
Impairment loss
Chargeable to Goodwill-GHI
Balance to allocated to other assets
Factory equipment (100,000/620,000)
Office equipment (120,000/620,000)
Building (400,000/620,000)
CV, after impairment
CGU-JKL
Impairment loss
Chargeable to Goodwill-GHI
Balance to allocated to other assets
Factory Equipment (200,000/1,100,000)
Office equipment (200,000/1,100,000)
Building (700,000/1,100,000)
100,000
120,000
400,000
325,000
(175,000)
150,000
(24,194)
(29,032)
(96,774)
200,000
200,000
700,000
400,000
(250,000)
150,000
(27,273)
(27,273)
(95,455)
75,806
90,968
303,226
CV, after impairment
2. Ans. P395,000.
After impairment, 12/31/14
Cash
Factory equipment
Office Equipment
Building
Goodwill**
Carrying value of CGU
ABC
50,000
100,000
250,000
500,000
70,000
970,000
3. Ans. P605,000.
Goodwill, before impairment
Goodwill, after impairment
Impairment loss charged to goodwill
DEF
100,000
240,000
490,000
900,000
375,000
2,105,000
172,727
172,727
604,545
GHI
75,806
90,968
303,226
470,000
JKL
172,727
172,727
604,545
950,000
TOTAL
150,000
588,534
1,003,695
2,307,771
445,000
4,495,000
1,000,000
445,000
555,000
4. Ans. P258,064.
5. Ans. P604,546.
CHAPTER 7-PROBLEM 9: EDD CORP.
1. Ans. P510,000.
2014 Rental expense
2014 Amortization of leaserights
(P300,000/10yrs)
480,000
30,000
2. Ans. P63,158.
Cost of leasehold improvement
Divide by: Remaining lease term: 9.5yrs
Annual depreciation
Multiply by:
Depreciation expense, 2014
510,000
1,200,000
9.50 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs.
126,316
6/12
63,158
3. Ans. P60,150.
Carrying value, 1/1/2019
(P1,200,000*5yrs/9.5yrs)
Divide by: Remaining useful life
Depreciation expense, 2019
631,579
10.50
60,150
CHAPTER 7-PROBLEM 10: MUSAR CORP.
1. Ans. P139,375.
Salaries of staff working on research project
Computer program services
Allocated general expenses (P175,500*25%)
Total research and development expense
*remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended
remaining lease term (10-5yrs+10yrs), 15yrs.
78,000
17,500
43,875
139,375
2. Ans. P2,480.
Patent, initial cost
Divide by: useful life
Amortization expense
24,800
10
2,480
3. Ans. P22,320.
Patent (24,800-2480)
22,320
CHAPTER 7-PROBLEM 11: BITS AND BYTES INC.
1. Ans. P1,253,600.
Salaries and wages of programmers doing research
Expenses prior to establishment of tech. feasibility
Total research and development expense
940,000
313,600
1,253,600
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2. Ans. P330,000.
Expenses after technical feasibility is established
330,000
3. Ans. P100,500.
Amortization of computer software (330,000/3yrs)
Cost to produce and prepare software for sale
Cost of goods produced
Portion of goods remaining on hand
Cost of ending inventory
110,000
225,000
335,000
30%
100,500
4. Ans. P117,000.
Amortization of computer software:
P330,000*(P2,000,000/P4,000,000)
Cost to produce and prepare software for sale
Cost of goods produced
Portion of goods remaining on hand
Cost of ending inventory
165,000
225,000
390,000
30%
117,000
CHAPTER 7-PROBLEM 12: HARRY CORP.
Prepayment
Rent
Security Deposit
1-year rent
Lease bonus
Inurance
Fire insurance
Property insurance
Advertising
Office supplier
Advances to officers
Idle office equipment
Bond redemption fund
Exp.-2014
Miscellaneous
50,000
220,000
55,000
20,000
5,000
12,500
56,250
25,000
25,000
37,500
18,750
50,000
90,000
135,000
25,000
545,000
393,750
2. Ans.
- Receivable
- Receivable/Other asset
- Other asset
- LT Investment
221,250
1. Ans.
MULTIPLE CHOICE EXERCISES:
CHAPTER 7-EXERCISE 1:
Purchased recipes and secret formulas
Licensing, royalty, and stand still agreement
Operating and broadcast rights
Goodwill purchased in a business combination
A license to manufacture a steroid by means of a government grant
Initial franchise fees paid
Cost of purchasing a patent from an inventor
Legal cost in securing a patent
Cost of purchasing a trademark
Amount paid to a lessor for the exclusive right to rent a facility under an
operating lease agreement for a period of 10 years
Total intangibles including goodwill
CHAPTER 7-EXERCISE 2: DOHA CORPORATION
1. Ans. A.
CV, Patent, 12/31/14: P444,000*9yrs/10yrs
399,600
2. Ans. C.
CV, Franchise, 12/31/14: P252,000*6.5yrs/8yrs
204,750
3. Ans. B.
Prepaid rent, 12/31/14: P168,000*0.75yrs/2yrs
63,000
4. Ans. D.
Amortization of franchise, 2013 (P252,000/8yrs)*6/12
Rent expense, 2013 (P168,000/2yrs)*3/12
Net loss including organization expense in 2013
Retroactive adjustment to RE,beg. 2013
5. Ans. B.
Amortization of franchise, 2014 (P252,000/8yrs)
Rent expense, 2014 (P168,000/2yrs)
Amortization of patent, 2014 (P444,000/10yrs)
Cost to develop a secret formula
Legal fees - successful defense
Research and development expense, 2014
Total expense in 2014
150,000
300,000
112,000
500,000
150,000
175,000
137,000
70,000
250,000
100,000
1,944,000
15,750
21,000
96,000
132,750
31,500
84,000
44,400
450,000
75,900
960,000
1,645,800
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CHAPTER 7-EXERCISE 3: ALYSSA CORP.
1. Ans. B.
Franchise:
Carrying Value/Cost (no definite life)
Recoverable value/Value in use:
(180,000/12%)
Impairment loss in 2014
1,260,000
1,500,000
-
Carrying Value/Cost (no definite life)
Recoverable value/Value in use:
(150,000/12%)
Impairment loss in 2014
no impairment in 2013
1,260,000
1,250,000
10,000
2. Ans. B.
Patent:
Cost (1/1/14)
Amortization: (2,220K/10yrs)
Carrying Value (12/14)
Recoverable value/Value in use
(337,822*5.32825)
Impairment loss
2,220,000
(222,000)
1,998,000
1,800,000
198,000
3. Ans. A.
2013 expenses:
Rent expense (840,000/2)*3/12
Net loss for the year
Retroactive adjustment to RE, Beg
0
5.328250
105,000
480,000
585,000
4. Ans. A.
2014 expenses:
Impairment loss on Franchise
Rent expense for 2014
Amortization on Patent
Impairment loss on Patent
Cost of developing recepe
Legal fees on patent defense
Total expense
10,000
420,000
222,000
198,000
2,250,000
379,500
3,479,500
CHAPTER 7-EXERCISE 4: STU CORPORATION
1. Ans. B.
Patent, Correct Cost, 1/2013
Amortization (2013-2014): P3,740,000*2yrs/20yrs
Carrying value, 12/31/14
3,740,000
(374,000)
3,366,000
2. Ans. D.
License, Correct Cost, 1/2012
Amortization (2012-2014): P2,160,000*3yrs/10yrs
Carrying value, 12/31/14
2,160,000 -Training cost is recognized as outright expense.
(648,000)
1,512,000
3. Ans. B.
Training cost, expense in 2012 per audit
Amortization expense (2012-2013) per audit: P2,160,000*2yrs/10yrs
Prior period expense, per audit
Amortization expnse (2012-2013) per books: P2,400,000*2yrs/10yrs
Retroactive adjustment, debit, to RE, beg. 2014
240,000
432,000
672,000
480,000
192,000
4. Ans. C.;
Trademark, Correct CV, 12/31/14
1,280,000 - Trademark is with indefinite life, thus no amortization.
Recoverable value/Value in use:
- Successful defense cost is recognized as outright expense.
PV of Future net cash flows at 9% for an indefinite period:
P90,000/9%
1,000,000
Impairment loss
280,000
5. Ans. C.
Depreciation on the Leasehold Improvement
P900,000/5yrs * 10/12
Amortization of Leaserights; P400,000/10yrs
Total expense
CHAPTER 7-EXERCISE 5: NICOLE CORP.
1. Ans. D.
Legal and other professional fees to process the patent
application (useful life is 15 years), Jan., 2007
150,000 - Depr. is over useful life since it is shorter than remaining lease term.
40,000
190,000
660,000
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2. Ans. B.
CV, Dec. 31, 2007: P660,000*14/15
616,000
3. Ans. C.
Amortization expense 2012:
Original Patent: P660,000/15yrs
Competing Patent: P220,000/11yrs
Total amortization, 2012
44,000
20,000
64,000
4. Ans. A.
Original Patent, CV, Dec. 31, 2011:
P660,000*10/15
Competing Patent, CV, Dec. 31, 2011:
P220,000*10/11
440,000
200,000
5. Ans. D.
Original Patent, CV, 1/1/2012
Competing Patent, CV, 1/1/2012
Related Patent, 1/1/2012
Total Patent, 1/1/2012
Divide by: Extended remaining life (10yrs+3yrs)
Revised amortization expense, 2012
640,000
440,000
200,000
335,000
975,000
13
75,000
6. Ans. B.
CV, 12/31/13 (P975,000*11/13)
825,000
7. Ans. B.
CV, 12/31/14 (P975,000*10/13)
Recoverable value
Impairment loss
750,000
750,000
CHAPTER 7-EXERCISE 6: DEF CORP.
1. Ans. D.
Patent, 12/31/14 (before amortization), per books
CV of Repairs cost capitalized in 1/1/2011
P75,000*6yrs/9yrs
Patent, 12/31/14 (before amortization), per audit
CV of Patent with revised useful life:
P210,000*6yrs/14yrs
CV of remaining Patent with the same useful life
550,000
(50,000)
500,000
90,000
410,000
Amortization of patent with revised life: (P90,000/2yrs)
Amortization of patent w/o change in life: (P410,000/6yrs)
Total amortization expense, 2014
2. Ans. A.
Patent, 12/31/14 (before amortization), per audit
Correct amortization for 2014
Patent, 12/31/14 after amortization
45,000
68,333
113,333
500,000
(113,333)
386,667
3. Ans. B.
The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.
CHAPTER 7-EXERCISE 7: AMFURST CORP.
1. Ans. C.
FRANCHISE: TERM 10 YEARS
Initial franchise fee (PV)
Down payment
Balance (800,000*2.321632)
Less: Amortization:
CV 12/31/14
Recoverable Value/Value in Use
(400,000*5.32825)
Impairment loss
Amortization (2,457,306/10)
Impairment loss
Interest expense (1,857,306*14%)
Continuing franchise fee (12M*5%)
Total expense
3. Ans. B.
PATENT: 8 YEARS:
Cost 1/1/2014
Amortization (545,000/8)
Carrying Value 12/31/2014
Recoverable value
(120,000*4,563757)
Impairment loss
600,000
1,857,306
2,457,306
245,731
2,211,575
2,131,300
80,275
245,731
80,275
260,023
600,000
1,186,028
2. Ans. C.
FRANCHISE: INDEFINITE
Initial franchise fee (PV)
Down payment
1 Balance (800,000*2.321632)
2.321632
Recoverable amount/Value in use
(400,000/12%)
Impairment loss
0
5.3282498 Amortization
Impairment loss
Interest expense (1,857,306*14%)
Continuing franchise fee (12M*5%)
Total expense
545,000
68,125
476,875
517,750
547,651
-
0
CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS
600,000
1,857,306
2,457,306
3,333,333
260,023
600,000
860,023
AUDITING (2016 EDITION)
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4. Ans. C.
LEASE AGREEMENT:
Rent expense for 2014
Amortizatin of lease rights (150,000/5yrs)
Depr of improvement (450,000/4.5yrs)*6/
Total expense
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200,000
30,000
50,000
280,000
CHAPTER 7-EXERCISE 8: SAHARA CORP.
1. Ans. D.
*No capitalizable internally developed intangible yet since one of criteria for capitalization (i.e. how future economic benefits shall be
derived) has not been met. Under PAS 38, Intangibles, the following criteria should be strictly complied with if to capitalize development
cost of an internally generated intangible:
1. Establishment of technical feasibility
2. Intention to complete the project and to either sell/use the result of the project.
3. Ability to complete the project and to either sell/use the result of the project.
4. Availability of resources to complete the project.
5. How probable future economic benefits can be derived from the intangible.
6. Ability to reliably estimate future cost to be incurred to complete the intangible.
2. Ans D.
Salaries and other employee benefits
Other expenses
Depreciation on Building (11.2M/20yrs)
Total R&D Expense
3. Ans. B.
Patent cost
Useful life
Amortization for 2014
4. Ans. A
Building cost
Accum Depr (11.2M/20)
CV 12/31/14
5. Ans. B.
Patent cost
Amortization in 2013: (3.2M/10yrs)*9/12
Amortization in 2014
CV 12/31/14
7,800,000
3,080,000
560,000
11,440,000
3,200,000
10
320,000
11,200,000
(560,000)
10,640,000
3,200,000
(240,000)
(320,000)
2,640,000
CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES
1. Ans. B.
Franchise, CV, 12/31/14
550,000
Recoverable value/ Value in use
(P67,500/15%)
Impairment loss
*No definite life, thus no amortization
*Continuing franchise fee is recgonized as outright expense.
450,000 *PV of future net cash flows from continued use at 15% for an indefinite period.
100,000
2. Ans. 0.
Organization cost is recognized as outright expense.
3. Ans. C.
Excess of cost over net assets of entrprise acquired in 2012
200,000
*No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost.
CHAPTER 7-EXERCISE 10: CAN CORP.
Projected profits for the next four years:
2014: (6M*1.2)
2015: (7.2M*1.2)
2016: (8.64M*1.2)
2017: (10.368M*1.2)
Total
Divide by:
Projected average earnings
Average/Normal earnings at industry rate:
Fair market Value of Net Assets
Current Asset (9M+4.8M)
Investments at FMV
PPE, net
Current liabilities
Noncurrent liabilities
FMV of net assets
Multiply by: industry rate of return
Average/Normal earnings at industry rate
Projected average excess earnings
7,200,000
8,640,000
10,368,000
12,441,600
38,649,600
4
9,662,400
13,800,000
9,000,000
24,000,000
(4,800,000)
(6,000,000)
36,000,000
18%
6,480,000
9,662,400
6,480,000
3,182,400
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1. Ans. D.
Projected average excess earnings
Divide by: Capitalization rate
Goodwill:
Add: Fair value of net assets
Acquisition price
3,182,400
18%
17,680,000
36,000,000
53,680,000
2. Ans. A.
Projected average excess earnings
Multiply by: # of years
Goodwill
Add: Fair value of net assets
Acquisition price
3,182,400
4
12,729,600
36,000,000
48,729,600
3. Ans. A.
Projected average earnings
Divide by: Capitalization rate
Acquisition price
9,662,400
20%
48,312,000
4. Ans. C.
Projected average excess earnings
Multiply by: PV factor at 15%, 4 periods
Goodwill
Add: Fair value of net assets
Acquisition price
3,182,400
3
9,085,683
36,000,000
45,085,683
CHAPTER 7-EXERCISE 11: T CORPORATION
1. Ans. B.
Acquisition Price, January 1, 2013
FMV of Identifiable Net Asset
Goodwill (Allocated, Prorata: FMV of NA)
Total
10,000,000
8,000,000
2,000,000
Country A
2,000,000
500,000
Country B
1,500,000
375,000
Country C
4,500,000
1,125,000
2. Ans. A.
Value in use=Present value of future net cash flows from CGU Country C:
Estim. Future net cash flows before impairment event
1,500,000
Effect of new legislation (cutting by 40% imports to Country C)
60%
Estim. Future net cash flows after impairment event
900,000
Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C
4.771584
Value in use
4,294,426
*observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal.
3. Ans. A.
Carrying Value of Country C's, Assets
Factory equipment
Store Equipment
Building
Goodwill
Payables
Value in use/Recoverable value
Impairment loss
4. Ans. C.; 5. Ans. C.
Impairment loss
Allocation of loss:
Goodwill of Country C
Balance to other asset, prorata:
Factory equipment
Store equipment
Building
Payables
6. Ans. D.
Impairment loss
Allocation of loss:
Goodwill of Country C
Balance to other asset, prorata:
Factory equipment
Store Equipment
Building
Payables
2,500,000
1,500,000
2,700,000
1,125,000
(700,000)
7,125,000
4,294,426
2,830,574
**observe that payables is deducted since, estimate of cashflows
also included cash flows related to payable.
2,830,574
2,500,000
1,500,000
2,700,000
(700,000)
(1,125,000)
1,705,574
(636,408)
1,863,592 CV after impairment
(381,845)
1,118,155 CV after impairment
(687,321) 2,012,679
CV after impairment
(700,000) *liabilities are not impaired.
2,830,574
1,800,000
1,500,000
2,700,000
(700,000)
(1,125,000)
1,705,574
(458,214)
(381,845)
(687,321)
1,341,786
1,118,155 Should not be lower than its Rec. Value, P1.4M
2,012,679
(700,000) *liabilities are not impaired.
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Reallocation of impairment loss:
Impairment loss
Allocation of loss:
Goodwill of Country C
Balance to other asset, prorata:
Cash
Factory equipment
Store Equipment
Building
Payables
2,830,574
700,000
1,800,000
1,500,000
2,700,000
(700,000)
(1,125,000)
1,705,574
(642,230)
(100,000)
(963,345)
700,000 *no impairment allocated to cash
1,157,770 CV after impairment
1,400,000 Should not be lower than its Rec. Value, P1.4M
1,736,655 CV after impairment
(700,000) *liabilities are not impaired.
Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable
amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the
property and equipment, prorata.
6. Ans. C.
Cash
Allocation of loss:
Goodwill of Country C
Balance to other asset, prorata:
Factory equipment
Store Equipment
Building
Payables
-
1,800,000
1,500,000
2,700,000
(700,000)
CHAPTER 7-EXERCISE 12: ABC CORPORATION
1. Ans. B.
Fair value less cost to sell
(100,000)
(100,000)
(458,214)
(381,845)
(687,321)
5,250,000
1,341,786
1,118,155 Not be lower than its Rec. Value, P1M
2,012,679
(700,000) *liabilities are not impaired.
higher
Value in use/PV of future net cash flows at 8% for 5 periods:
Use: P1,252,282*3.992710
2. Ans. A.
Carrying value of CGU
Factory equipment
Office equipment
Building
Goodwill
Recoverable value/FMV less cost to sell
Impairment loss
3. Ans. C.
Impairment loss
Allocated to:
Goodwill
Balance to other assets, prorata
Factory equipment
Office equipment
Building
4. Ans. C.
Impairment loss
Allocated to:
Goodwill
Balance to other assets, prorata
Factory equipment
Office equipment
Building
Reallocation of Impairment loss
Impairment loss
Allocated to:
Goodwill
Balance to other assets, prorata
Factory equipment
Office equipment
Building
3.992710
1,750,000
1,475,000
2,725,000
500,000
5,000,000
included in the determination of the fair value less cost to sell.
6,450,000
5,250,000
1,200,000
1,200,000
1,750,000
1,475,000
2,725,000
(500,000)
700,000
(205,882)
(173,529)
(320,588)
1,544,118
1,301,471
2,404,412
1,200,000
1,750,000
1,475,000
2,725,000
(500,000)
700,000
(205,882)
(173,529)
(320,588)
1,544,118 *Should not be lower than 1.6M
1,301,471 *Office Equipment CV should not be lower than P1.4M
2,404,412
1,200,000
1,750,000
1,475,000
2,725,000
(500,000)
700,000
(150,000)
(75,000)
(475,000)
1,600,000
1,400,000
2,250,000
CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY
1. Ans. B.
Cost incurred prior to establishment of capitalization criteria on Nov. 1, 2014
2. Ans. C.
Capitalizable cost, after Nov. 1, 2014
Recoverable amount, Dec. 31, 2014
Impairment loss
540,000
60,000
500,000
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3. Ans. D.; 4. Ans. C.
Capitalizable cost, after Nov. 1, 2014
Additional capitalizable cost, 2015
Total cost as of Dec. 31, 2015
Recoverable amount, Dec. 31, 2015
Impairment loss
60,000
1,200,000
1,260,000
1,140,000
120,000
CHAPTER 7-EXERCISE 14: LAS VEGAS INC.
1. Ans. C.
Amortization of Patent (600,000/10)
Amortization of Copyright (1,200,000*1.5M/5M)
Total amortization (Patent and Copyright)
P60,000
360,000
P420,000
2. Ans. A.
Amortization of Software (300,000/240)*100
Amortization of Franchise (480,000/10)
Continuing franchise fee (2,500,000*.05)
Total expenses related to computer software and franchise
P125,000
48,000
125,000
P298,000
3. Ans. A.
Total research and development costs (all costs in item f)
P433,000
4. Ans. C.
Patent (600,000*9/10)
Copyright (1,200,000-360,000)
Tradename
Computer software (300,000-125,000)
Franchise (480,000*9/10)
Goodwill
Total carrying value of intangible, 12/31/15
P540,000
840,000
1,050,000
175,000
432,000
2,700,000
P5,737,000
CHAPTER 7-EXERCISE 15: BOHOL CORPORATION
1. a) Ans. A.; b) Ans. D.; c) Ans. B.; d) Ans. B.
Project 123 is entirely research and development, thus no capitalizable intangible, unless qualified under PAS 38 capitalization criteria.
The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not
qualified yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense.
The second Patent is useful for many projects, thus only the amortization is recognized as R&D Expense. The balance shall
be reflected as Intangible asset.
Patent, CV, June 30, 2014: (P16,200*9/10)
14,580
Copyright:
Cost
Copyright ABC
Copyright XYC
Goodwill
Acquisition cost
FMV, Net Assets acquired
Goodwill, initial recognition
Note that since there are no indication of
Acq. Date
30,000 1/2/2010:
33,000 7/15/2011:
Condition %
6/30/2014:
20.5yrs/25yr
12yrs/15yrs
CV
6/30/2014:
24,600
26,400
51,000
1,582,000
1,560,000
22,000
GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired.
2. Ans. D.
Salaries of staff doing research
Patent solely for Project AM123
Depr. on Equipment for various projects (10,000/5yrs)
Amo. on Patent for various projects (16,200/10yrs)
Cost of pilot models
Total R&D Expense
3. Ans. A.
Amortization Expense: ABC (30,000/25yrs)
Amortization Expense: XYC (33,000/15yrs)
Total amortization expense on copyrights
18,500
12,000
2,000
1,620
8,950
43,070
1,200
2,200
3,400
4. Ans. A.
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CHAPTER 7-EXERCISE 16: TAILOR CORP.
Searching for applications of new research findings
Radical modification of the formulation of a glassware production
Laboratory research aimed at discovery of new knowledge
Testing for evaluation of new products
Materials consumed in research and development projects
Consulting fees paid to outsiders for research and projects
Personnel costs of persons involved in research and devt projects
Indirect costs reasonably allocable to research and devt projects
Design, construction, and testing of preproduction prototypes and
models
expense
57,000
78,000
204,000
72,000
177,000
300,000
384,000
150,000
870,000
2,292,000
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CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
DISCUSSION PROBLEMS
CHAPTER 8-PROBLEM 1
1 B.
2 C.
3 B.
4 C.
5 D.
6 C/B.
7 B.
8 D.
9 A.
10 A.
11 B.
12 C.
13 D.
14 D.
15 B.
16 B.
17 B.
18 B.
19 C.
CHAPTER 8-PROBLEM 2: MERMAID COMPANY
Current
Accounts payable, adjusted for the debit balance (Advances to suppliers)
Note payable - trade only
Salaries payable
SSS payable
Pag-ibig payable
Medicare payable
Wittholding taxes payable
VAT payable
Advance from customers (AR with credit balances)
Serial bonds payable, payable P1M, semi-annyally
Accrued interest on bonds payable
Estimated warranties payable
Estimated liability for environmenta damages
Unearned rental income, for 3 years starting Jan. 1, 2015
Cash advances from shareholders
Total
660,000
500,000
800,000
30,000
5,000
15,000
60,000
120,000
50,000
2,000,000
300,000
420,000
50,000
50,000
5,060,000
1. Ans.
Noncurrent
8,000,000
100,000
200,000
8,300,000
2. Ans.
CHAPTER 8-PROBLEM 3: JOJO INC.
a) P1M short-term notes payable, due Feb. 7, 2015
b) P500,000 short term debt, due June 1, 2015
c) P500,000 notes payable, due June 15, 2015
d) P1M bonds payable, due Dec. 31, 2018
Interest on the bonds payable P1M*10%
Current
Noncurrent
1,000,000
500,000
20,000
480,000
1,000,000
100,000
2,620,000
480,000
1. Ans.
2. Ans.
Notes: For item a, there was no indication that the right to refinance already existed as of the balance sheet date. Thus, while there was a
LT-refinancing agreement completed after the balance sheet date, the liability is still current as of Dec. 31, 2014.
For item b, the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date.
For item c, the right existed already as of the balance sheet date, however, since the amount of the loan to be used to
refinance the currently maturing obligation is expected only at 80% of P600,000, that is P480,000 only P480,000 of the
currently maturing obligation is expected to be refinanced on a long-term basis.
For item d, while the grace period was agreed upon as of the balance sheet date (Dec. 31), the grace period is short-term only.
CHAPTER 8-PROBLEM 4: TARBUCK INC.
Ans. P4,120,000.
Unadjusted balances
Goods received on Dec. 30 (valid purch.)
Goods in-transit, FOB Dest (not valid purch.)
Payments to suppliers, checks released Dec. 30 (valid payment)
Payments to suppliers, checks not yet released as of Dec. 31 (not valid)
Purchase returns (valid Dec. transaction)
Credit balance (Advances to suppliers)
Adjusted balances
Per GL
4,450,000
(520,000)
200,000
(50,000)
40,000
4,120,000
Per SL
4,020,000
400,000
(300,000)
4,120,000
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CHAPTER 8-PROBLEM 5: RONNIE COMPANY
Required Estimated Expense (500u*80%*P8,000)
Less: Actual cost incurred
Estimated warranties payable
1. Ans.:
Warranties expense
Estimated warranties payable
3,200,000
(1,250,000)
1,950,000
1,950,000
1,950,000
2. Ans. P3,200,000.
3. Ans. P1,950,000.
CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND
Analysis
2014
Estimated warranties payable, beg.
Required estimated expense:
2014: 5,000units*30%*P500
2015: 6,000units*30%*P500
Actual cost incurred for the year
Estimated warranties payable, end
2015
425,000
750,000
(325,000)
425,000
1. Ans.
Audit adjusting entry in 2015:
Retained earnings (add'l exp. in 2014)
Warranties expense
Estimated warranties payable
900,000
(650,000)
675,000
425,000
250,000
675,000
2. Ans. P750,000.
3. Ans. P900,000.
4. Ans. P425,000.
5. Ans. P675,000.
CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP.
Analysis:
Required estimated expense:
Vacuum Cleaners: (P45M*30%)/P15,000*(P2,250-P500)
Stand Fan: (P45M*40%)/P12,500*(P1,500-P300)
Actual cost incurred/Actual redemption:
Vacuum Cleaners: (1,000u-175u)*(P2,250-P500)
Stand Fan: (1,500u-125u)*(P1,500-P300)
Estimated premiums payable, end
VC
SF
Total
1,575,000
1,728,000
3,303,000
(1,650,000)
78,000
(3,093,750)
209,250
(1,443,750)
131,250
1. Ans. P3,303,000.
2. Ans. P209,250.
CHAPTER 8-PROBLEM 8: NOKIA CORP.
2014
Collection for unearned service contract
25% earned in the first contract year:
6 months in 2014
6 months in 2015
30% earned in the second contract year:
6 months in 2015
6 months in 2016
45% earned in the third contract year:
6 months in 2016
6 months in 2017
Service contract earned for each year
Balance unearned at the end of each year:
2015
2016
2017
400,000
100,000
50,000
50,000
120,000
60,000
60,000
180,000
90,000
50,000
350,000
1. Ans.
110,000
240,000
2. Ans.
150,000
90,000
3. Ans.
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
90,000
90,000
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CHAPTER 8-PROBLEM 9: SAN MIG CORP.
1. Ans. P337,500.
2013 leaves:
55employees*4weeks*5days
25employees*2weeks*5days
Total 2013 unused leaves:
Multiply by: Salary rate in 2013
Liability for compensated absences/Salaries payable
2. Ans. P453,750.
2013 leaves:
55employees*4weeks*5days
25employees*2weeks*5days
Total 2013 unused leaves:
Less: Exercised in 2014
Unexercised in 2014, thus forfeited by year-end 2014
2014 leaves:
30employees*6weeks*5days
25employees*5weeks*5days
30employees*3weeks*5days
10employees*2weeks*5days
Total cummulative unused leaves by 12/31/2014
Less: Expired unused leaves from 2013:
Unused leaves still exerciseable
Mulitply by: Current salary rate, 2014
Liability for compensated absences/Salaries payable
1,100
250
1,350
250
337,500
days
days
days
1,100
250
1,350
925
425
days
days
days
days
days
900
625
450
100
2,075
(425)
1,650
275
453,750
days
days
days
days
days
unaccrued, thus expense in 2013 was understated.
2. Ans.
CHAPTER 8-PROBLEM 10: BARO CORP.
1. Ans. B.
Damages occurred in 2014, thus is a present obligation. The outflow of benefits is probable and the most reliable
estimate is P400,000. Since the lawyers estimate that the reasonably possible outflow may be upto P700,000,
additional contingent liabiltiy should be disclosed at P300,000.
2. Ans. C.
The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract
(10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous as of the
balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous.
Entry:
Loss on purchase commitment (P100-P60)*10,000
Estimated liability on purchase commitment
400,000
400,000
3. Ans. D.
The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37)
while virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16)
4. Ans. C.
The contingent asset that is probable is disclosed.
CHAPTER 8-PROBLEM 11: MOATS COMPANY
Proceeds from issue of bonds=PV of future cash flows at 4% semi-annual effective rate for 10 periods:
Principal: P1,000,000*0.675564
675,564
0.675564
Interest: P50,000*8.110896
405,545
8.110896
1,081,109
Amortization tabe: Bonds payable:
Correct Int.
Nominal Int.
Amortization
Balance
(CV*4%)
(P1M*5%)
March 1, 2014:
1,081,109
September 1, 2014:
43,244
50,000
(6,756)
1,074,353
March 1, 2015:
42,974
50,000
(7,026)
1,067,327
September 1, 2015:
42,693
50,000
(7,307)
1,060,021
March 1, 2016:
42,401
50,000
(7,599)
1,052,421
Correct entries:
March 1, 2014:
Cash
Bonds payable
Premium on bonds payable
1,081,109
1,000,000
81,109
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September 1, 2014:
Interest expense
Cash
Premium on bonds payable
Interest expense
December 31, 2014:
Interest expense
Interest payable
(P1,000,000*10%*4/12)
Premium on bonds payable
Interest expense
Correct interest (P1,074,353*8%*4/12)
Nominal interest accrued (P1,000,000*10%*4/12)
Amortization
1. Ans: Adjusting Entries:
Bonds payable
Premium on bonds payable
Interest expense
Interest expense
Interest payable
50,000
50,000
6,756
6,756
33,333
33,333
4,684
4,684
28,649
33,333
(4,684)
81,109
69,669
11,440
33,333
33,333
2. Ans. P71,894.
Interest expense (Mar. 1 - Sept. 1)
P1,081,109*8%*6/12
Interst expense (Sept. 1 - Dec. 31)
P1,074,353*8%*4/12
Interest expense, 2014
43,244
28,649
71,894
3. Ans. P1,069,669.
Amortized cost, Sept. 1, 2014 (see table)
Amortization up to Dec. 31, 2014 (see entries)
Amortized cost, Dec. 31, 2014
4. Ans. P10,021.
Retirement price
Amortized cost, Sept. 30, 2015:
Accrued interst (P1M*10%*1/12)
Gain on retirement of bonds
1,050,000
(1,058,754)
(1,267)
(10,021)
Amortized cost, Sept. 1, 2015 (see table)
Amortization up to Sept. 30:
Correct interest (P1,060,021*8%*1/12)
Nominal interest (P1,000,000*10%*1/12)
Amortized cost, Sept. 1, 2015
Entry:
Bonds payable
Premium on bonds payable
Interest expense
Cash
Gain on retirement of bonds
CHAPTER 8-PROBLEM 12: MNO INC.
1. Ans. P1,245,000.
Accounts payable, unadjusted balance
RR 2903 - on consignment
RR 2904 - in transit, FOB SP
Accounts payable, adjusted
1,074,353
(4,684)
1,069,669
1,060,021
7,067
(8,333)
(1,267)
1,058,754
1,000,000
58,754
1,267
1,050,000
10,021
1,240,000
(30,000)
35,000
1,245,000
2. Ans. P720,000.
Required warranty expense, 2013: (2,500u*40%*P900)
Actual cost
Warranties liability, Dec. 31, 2013
Required warranty expense, 2014: (3,000u*40%*P900)
Actual cost
Warranties liability, Dec. 31, 2014
900,000
(560,000)
340,000
1,080,000
(700,000)
720,000
3. Ans. P2,099,474.
Proceeds from bond issue/FMV 1/1/13 = PV of future cash flows at 10% for 5 years.
Principal: P2,000,000*0.620921
1,241,843
Interest: P240,000*3.790787
909,789
2,151,631
0.620921
3.790787
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Amortization table: Bonds payable
Correct Int.
(Bal*10%)
January 1, 2013:
December 31, 2013:
December 31, 2014:
215,163
212,679
4. Ans. P78,505.
Net income before any adjustments:
Understated accounts payable/purchases
Understated warranties payable/warranties expense
Overstatement in interest expense in 2014
Adjusted net income 2014, before bonus
Nominal Int.
(Face*12%)
240,000
240,000
Amortization
(24,837)
(27,321)
Balance
2,151,631
2,126,795
2,099,474
1,557,679
(5,000)
(380,000)
27,321
1,200,000
B = 10% (NI - Tx - B);
Tx = 30%(NI - B)
B = 10% (1.2M - (30%(1.2M - B) - B)
B = P78,505.
5. Ans. P785,046.
Adjusted net income 2014, before bonus
Less: Bonus
Net income before 30% tax
Income tax expense
Net Income after tax
1,200,000
(78,505)
1,121,495
(336,448)
785,046
CHAPTER 8-PROBLEM 13: MAMALOLA CORP.
1. Ans. P443,000.
Accounts payable, unadjusted balance
Shipments from consignor (recorded)
Shipments-in-transit, FOB Destination (recorded)
Shipment-in-transit, FOB SP (not yet recorded)
Accounts payable, adjusted
460,000
(42,000) AJE 1: Accounts Payable
(30,000)
Purchases
55,000
443,000
2. Ans. P248,700.
Warranty expense in 2013 (1,250*70%)*P350
Less: Actual warranty cost incurred in 2011
Warranties payable, 2013
Warranty expense in 2014 (1,410*70%)*P350
Less: Actual warranty cost incurred in 2014
Warranties payable, 2012
306,250
(153,000) AJE 2: Warranties Expense
153,250
Warranties payable
345,450
(250,000)
248,700
17,000
17,000
95,450
95,450
3. Ans. P222,750.
2013 unused leaves forwarded to 2015 (625-(700-200))*
125
2014 unused leaves forwarded to 2015
550 AJE 3: Salaries payable
Total unused leaves that may be forwarded to 2053
675
Salaries expense
Multiply by current salary rate in 2014: (268,500/895days)*1
330
(268,500-222,750)
Salaries payable (Liab for compensated absences)
222,750
*any unused prior to 2013 leaves are forfieted by the end of 2014
45,750
4. Ans. P1,600,000.
*There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probable proceeds
from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis.
5. Ans. P130,841.
Unajdusted net income
AJE 1: Overstated purchases
AJE 2: Understated warranty expense
AJE 3: Overstated salaries expense
Adjusted net income
B = 10% (NI - B - TX)
TX = 30% (NI - B)
2,032,700
17,000
(95,450)
45,750
2,000,000
B = 10% (2,000,000 - B - 30%(2,000,000 - B))
B = 140,000 - .07B
1.07B = 140,000
Bonus = P130,841
CHAPTER 8-PROBLEM 14: SANTOS CORP.
1. Ans. P402,104.
Proceeds from convertible bond issue (P8M*110%)
Less: FMV of bonds without conversion option = PV of future cash flows
from the bonds at 10% for 3 years:
Principal: P8,000,000*0.751315
6,010,518
Interest: P960,000*2.486852
2,387,378
Residual amount/APIC from bond coversion privilege
8,800,000
8,397,896
402,104
0.751315
2.4868520
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2. Ans. P8,277,686.
Amortization table: Bonds payable
Correct Int.
(Bal.*10%)
January 1, 2014:
December 31, 2014:
December 31, 2015:
December 31, 2016:
839,790
827,769
814,545
3. Ans.
Entry upon conversion:
Alt1 Bonds payable
Premium on bonds payable
Ordinary shares (8,000*50*P10)
Share premium
Nominal Int.
(Face*12%)
960,000
960,000
960,000
Amortization
(120,210)
(132,231)
(145,455)
Balance
8,397,896
8,277,686
8,145,455
8,000,000
8,000,000
277,686
4,000,000
4,277,686
Alt2 Bonds payable
Premium on bonds payable
APIC-Bond conversion privilege
Ordinary shares (8,000*50*P10)
Share premium
8,000,000
277,686
402,104
4,000,000
4,679,790
Note: Both alternatives are acceptable under PAS 39.
4. Ans. P65,455.
Total
Retirement price
CV, Bonds payable, 1/1/16
CV, APIC - Bond coversion privilege
Gain on retirement of convertible bonds
Entry:
Bonds payable
Premium on bonds payable
APIC - Bond conversion privilege
Cash
Gain on retirement of bonds (profit/loss)
APIC/Share premium
Bonds Payable APIC-BCP
(at FMV, 102) (Residual)
8,320,000
8,080,000
240,000
8,145,455
402,104
65,455
162,104
to profit/los to APIC
8,000,000
145,455
402,104
8,320,000
65,455
162,104
CHAPTER 8-PROBLEM 15: DIRT CORP.
1. Ans. P379,264.
Proceeds from bond with warrants issue
Less: FMV of bonds without conversion option = PV of future cash flows
from the bonds at 5% for 8 semi-annual periods:
Principal: P2,000,000*0.676839
1,353,679
Interest: P80,000*6.4632128
517,057
Residual amount/Ordinary Share Warrants Outstanding
2. Ans. P1,898,486.
Amortization table: Bonds payable
Correct Int.
(Bal.*10%)
January 1, 2014:
July 1, 2014:
January 1, 2015:
93,537
94,214
3. Ans. P257,559.
Entry upon exericise of warrants:
Cash (2,000*5w)*60%*P55
Ordinary share warrants outstanding(60%)
Ordinary shares (6,000shares*P50)
Share premium
4. Ans.
Entry upon expiration of remaining warrants:
Ordinary share warrants outstanding(40%)
Share premium/APIC - Expired warrants
Nominal Int.
(Face*12%)
80,000
80,000
2,250,000
0.676839
6.4632128
1,870,736
379,264
Amortization
13,537
14,214
Balance
1,870,736
1,884,273
1,898,486
330,000
227,559
300,000
257,559
151,706
151,706
CHAPTER 8-PROBLEM 16:
CASE 1:
Periodic rentals (March to December); (40,000*10mo)
Amortization of lease bonus (120,000/5yrs)*10/12
Rent Expense
400,000
20,000
420,000
CASE 2:
Annual rental
Amortization of lease bonus (100,000/8yrs)
Contingent rental (P2.5M-P2M)*5%
Rent Expense
300,000
12,500
25,000
337,500
CASE 3:
Total lease payments: P30,000*(60mo - 9mo)
1,530,000
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Divide by: 5 years
Annual rental expense
Mulitply by: 11mo/12mo
Rent expense for 2014
Less: Amount paid for the year (Nov. and Dec.)
Accrued rent expense, 12/31
CASE 4:
Total lease payments: P40,000*(120mo-3mo
Divide by: 10 years
Annual rental expense
Multiply by: 4mo/12mo
Rent expense for 2014
Leasehold improvement cost
Divide by: 5 years
Annual depreciation expense
Mulitply by: 3mo/12mo
Total expense for 2014
5
306,000
11/12
280,500
(60,000)
220,500
4,680,000
10
468,000
4/12
156,000
300,000
5
60,000
3/12
CASE 5:
Total lease collection:
First two years: (P2,000*100*2yrs)
Last two years: (P3,000*100*2yrs)
Divide by: 4 years
Annual rental income
Multiply by: 9mo/12mo
Rent income for the period ended 9/30/14
Amount collected in 2014
Unearned rental income
400,000
600,000
CASE 6:
Gross rental income
Amortization of direct lease expense (150,000/5years)
Depreciation expense
Property taxes
Net rental income
CHAPTER 8-PROBLEM 17:
CASE 1:
Minimum lease payments in arrears
Multiply by: PV factor of 1 at 10% for 10 periods in arrears
Initial cost of the asset
CASE 2:
Minimum lease payment in advance
Multiply by: PV factor of 1 at 10% for 8 period in advance
Initial cost of the asset
Divide by: 12 yrs (life since title passes to the lessee)
Depreciation expense
15,000
171,000
1,000,000
4
250,000
9/12
187,500
200,000
(12,500)
500,000
(30,000)
(120,000)
(90,000)
260,000
200,000
6.1450
1,229,000
96,000
5.8680
563,328
12
46,944
CASE 3:
Minimum lease payment
Periodic payments in advance
400,000
Multiply by: PV factor of 1 at 14% for 10 period in advance
5.9500
2,380,000
Bargain purchase option
200,000
Multiply by: PV factor of 1 at 14% for 10 period without ann
0.2700
54,000
Initial cost of the asset
2,434,000
Less: Depreciation (2,434,000/12 years)
(202,833) *
Carrying value as of 12/31/14
2,231,167
*note that the depreciation is based on the useful life since ownership
will be transferred to the lessee
CASE 4:
Amortization table:
Periodic Paymen Interest
Dec. 31, 2014: (P3,165,000 - P500,000)
Dec. 31, 2015:
Dec. 31, 2016:
500,000
500,000
316,500
298,150
CHAPTER 8-PROBLEM 18: ANGLO INC.
Entries made, under finance lease:
December 31, 2013:
Building*
3,379,512
Cash
500,000
Lease liability
2,879,512
*PV of MLP 10% for 10 years in advance: (lower than FMV of asset)
(P500,000*6.7590238)
0
Principal
Balance
3,165,000
183,500
2,981,500
201,850
2,779,650
5.759024
6.7590238
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Amortization table (per books): Finance Lease
Periodic Paymen Correct Int.
December 31, 2013:
December 31, 2014:
December 31, 2014:
Interest expense
Lease liability
Cash
Depreciation expense
Accumulated Depreciation
(P3,379,512/10years)
500,000
287,951
Principal
212,049
Balance
2,879,512
2,667,463
287,951
212,049
500,000
337,951
337,951
AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000) The
lease agreement does not qualify as finance, thus should have been accounted for only under operating lease.
Correct entries, under operating lease.
December 31, 2013:
Prepaid rent
Cash
500,000
500,000
January 1, 2014:
Rent expense
Prepaid rent
500,000
December 31, 2014:
Prepaid rent
Cash
500,000
500,000
500,000
1. Ans. P125,902.
Expenses per books
Interest on finance lease liability
287,951
Depreciation expense
337,951
Expense per audit
Overstatement in expense/Understatement in NI
625,902
500,000
125,902
2. Ans. None.
CHAPTER 8-PROBLEM 19: LACTUM INC.
Entries made per books, operating lease:
January 1, 2014:
Rent expense
Cash
150,000
150,000
April 1, 2014:
Rent expense
Cash
150,000
July 1, 2014:
Rent expense
Cash
150,000
October 1, 2014:
Rent expense
Cash
150,000
150,000
150,000
150,000
AUDIT ANALYSIS:
1. There is no transfer of ownership.
2. There is no bargain purchase option.
3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.
4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388) The
lease agreement does qualify as finance, thus should have been accounted for only under finance lease.
Correct entries per audit, finance lease
January 1, 2014:
Building*
4,185,388
Cash
150,000
Lease liability
4,035,388
*PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888)
26.9025888
0.4619482
27.9025888
Amortization table: Finance lease liabilty:
Periodic Paymen Correct Int.
January 1, 2014:
April 1, 2014:
July 1, 2014:
October 1, 2014:
150,000
150,000
150,000
80,708
79,322
77,908
Principal
69,292
70,678
72,092
Balance
4,035,388
3,966,096
3,895,418
3,823,326
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Janaury 1, 2015:
April 1, 2015:
July 1, 2015:
October 1, 2015:
150,000
150,000
150,000
150,000
April 1, 2014:
Interest expense
Lease liability
Cash
80,708
69,292
July 1, 2014:
Interest expense
Lease liability
Cash
79,322
70,678
October 1, 2014:
Interest expense
Lease liability
Cash
77,908
72,092
December 31, 2014:
Interest expense
Interest payable
76,467
76,467
74,996
73,496
71,966
73,533
75,004
76,504
78,034
3,749,793
3,674,789
3,598,285
3,520,250
150,000
150,000
150,000
76,467
Depreciation expense
418,539
Accumulated depreciation
418,539
(P4,185,388/10years) * no transfer of ownership, thus depr shall be over term.
1. Ans. P132,943.
Expense per books
Rent expense (P150,000*4qtrs)
Expense per audit:
Interest expense
Depreciation expense
Understatement in Expense/Overstatement
600,000
314,405
418,539
Net Income
2. Ans. P3,823,326.
Lease liability, 12.31.14
Interest payable, 12.31.14
732,943
(132,943)
3,823,326
76,467
3. Ans. P303,076.
Principal due from January 1, 2015 to December 31, 2015 (see amortization table)
Janaury 1, 2015:
73,533
April 1, 2015:
75,004
July 1, 2015:
76,504
October 1, 2015:
78,034
Current portion of lease liability
303,076
CHAPTER 8-PROBLEM 20:
CASE 1:
1. Ans. P60,000.
Sales price
Fair market value
Deferred gain on sale
420,000
(420,000)
-
Fair market vaue
Carrying value
Realized gain on sale
420,000
(360,000)
60,000
2. Ans. 40,000.
Sales price
Fair market value
Deferred gain on sale
420,000
(380,000)
40,000
Fair market vaue
Carrying value
Realized gain on sale
380,000
(360,000)
20,000
3. Ans. 100,000.
Sales price
Fair market value
Deferred gain on sale
420,000
(320,000)
100,000
Fair market vaue
Carrying value
Realized loss on sale
4. Ans. 60,000.
Sales price
Fair market value
Ignored
Sales price
320,000
(360,000)
(40,000)
420,000
(450,000)
(30,000)
420,000
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Carrying value
Realized loss on sale
(360,000)
60,000
CASE 2:
1. Ans. P80,000.
Sales price
Fair market value
Deferred loss on sale
400,000
(480,000)
(80,000) * since the future rentals is below rent, there is an expected future benefit
from the asset being sold at a loss.
480,000
(540,000)
(60,000)
Fair market vaue
Carrying value
Realized loss on sale
2. Ans. P40,000.
Sales price
Fair market value
Realized loss on sale
400,000
(480,000)
(80,000) * since the future rentals is at market rate of rent, there is no expected
future benefit from the asset sold at a loss.
480,000
(540,000)
(60,000)
Fair market vaue
Carrying value
Realized loss on sale
Total realized loss
(140,000)
CASE 3:
1. Ans. 626,667.
Interest expense on finance lease liab (600,000*10%)
60,000
Depreciation on the leased-back asset (600,000/3yrs)
600,000
Amortization of deferred gain on sale (100,000/3yrs)
(33,333) - gain on a sale and leaseback (finance) is fully deferred and
Net amount recognized in the profit or loss
626,667
amortized over lease term.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.
2. Ans. 141,269
Rent expense
Realized gain on sale (P600,000 - P500,000)
Net amount recognized in the profit/loss
*note that the lease back agreement is acconted
241,269
(100,000) *Selling price is at FMV
141,269
for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.
CASE 4:
1. Ans. 115,000.
Interest expense on finance lease liab (150,000*10%)
15,000
Depreciation on the leased-back asset (150,000/3yrs)
50,000
Realized loss on sale
50,000 *loss on sale is fully realized since it is an indication of
Net amount recognized in the profit or loss
115,000
asset impairement.
*note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life.
2. Ans. P158,205.
Rent expense
58,205
Realized loss on sale (P200,000 - P150,000)
100,000 *Selling price is at FMV (no expected future benefit)
Net amount recognized in the profit/loss
158,205
*note that the lease back agreement is acconted for as operating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs.
CHAPTER 8-PROBLEM 21:
CASE 1:
Minimum lease collections
Multiply by: PV factor of 1 at 12% for 5 years with annuity
Present value of minimum lease collection
Cost of the asset/FMV of asset (Under Direct Finance)
Add: Direct finance lease cost
Initial investment on the lease agreeement
200,000
3.604776
720,955
1
700,000
20,955
720,955
Amortization table:
Periodic Coll.
January 1, 2015:
December 31, 2015:
December 31, 2016:
December 31, 2017:
December 31, 2018:
December 31, 2019:
200,000
200,000
200,000
200,000
200,000
Interest Inc.
Principal
(CV * 12%)
86,515
113,485
72,896
127,104
57,644
142,356
40,561
159,439
21,429
178,571
Balance
720,955
607,470
480,366
338,010
178,571
(0)
1. Ans. 0.
Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset
since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer.
*Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amount receivable.
Entry upon inception/Sale of asset:
Finance lease receivable
Asset
Cash
720,955
700,000
20,955
2. Ans. 72,896.
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Entry upon periodic collections:
Dec. 31, 2015:
Cash
Interest income
Finance lease receivable
200,000
86,515
113,485
Dec. 31, 2016:
Cash
Interest income
Finance lease receivable
200,000
72,896
127,104
3. Ans. 480,366.
See amortization table above.
CASE 2:
Minimum lease collections
Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance
Present value of minimum lease collection = Sales Price
Cost of the asset
Gross profit on sale
200,000
4.169865
833,973
600,000
233,973
1
Amortization table:
Periodic Coll.
January
January
January
January
January
1,
1,
1,
1,
1,
2015:
2016:
2017:
2018:
2019:
200,000
200,000
200,000
200,000
Interest Inc.
(CV * 10%)
63,397
49,737
34,711
18,182
Principal
136,603
150,263
165,289
181,818
Balance
633,973
497,370
347,107
181,818
0
1. Ans. 233,973.
Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the
difference between the Sales Price of the asset and its Cost on the company's books.
*Direct lease costs incurred under sales type lease is recognized as outright expense
Entry upon inception/Sale of asset:
Finance lease receivable
Sales
833,973
833,973
Entry to recognize cost of sales, if perpetual inventory is used:
Cost of sales
600,000
Inventory
Entry to recognize the direct lease expense:
Expense
Cash
20,000
20,000
2. Ans. 49,737.
Entry upon accrual of interest and periodic collections:
Dec. 31, 2015:
Interest receivable
63,397
Interest income
Jan. 1, 2016:
Cash
Interest receivable
Finance lease receivable
Dec. 31, 2016:
Interest receivable
Interest income
Jan. 1, 2017:
Cash
Interest receivable
Finance lease receivable
600,000
63,397
200,000
63,397
136,603
49,737
49,737
200,000
49,737
150,263
3. Ans. 497,370.
See amortization table
CASE 3:
Minimum lease collections
Multiply by: PV factor of 1 at 10% for 5 years with annuity
Present value of minimum lease collection
Guaranteed residual value
Multiply by: PV factor of 1 at 10% years w/o annuity
Present value of the guaranteed residual value
Total Sales Price of the asset = Total Lease Receivable
400,000
3.790787
1,516,315
100,000
0.620921
62,092
1,578,407
Amortization table:
Periodic Coll.
January 1, 2015:
December 31, 2015:
December 31, 2016:
Interest Inc.
(CV * 10%)
400,000
157,841
400,000
133,625
Principal
242,159
266,375
Balance
1,578,407
1,336,248
1,069,872
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
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December
December
December
December
31,
31,
31,
31,
SOLUTIONS GUIDE
103 of 155
2017:
2018:
2019:
2019: Guaranteed RV
400,000
400,000
400,000
100,000
106,987
77,686
45,455
293,013
322,314
354,545
100,000
776,860
454,545
100,000
0
1. Ans. P1,578,407.
Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the
guaranteed residual value is added to the total sales price of the asset.
*Direct lease expense under sales type lease is recognized as outright operating expense.
Entry upon inception/Sale of asset:
Finance lease receivable
Sales
1,578,407
1,578,407
2. Ans. P1,000,000.
Entry to recognize cost of sales, if perpetual inventory is used:
Cost of sales
1,000,000
Inventory
Entry to recognize the direct lease expense:
Expense
Cash
50,000
50,000
3. Ans. 578,407.
Total Sales Price of the Asset
Less: Cost of the asset/FMV of asset
Gross Profit on Sale
4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash
Interest income
Finance lease receivable
Dec. 31, 2016:
Cash
Interest income
Finance lease receivable
1,000,000
1,578,407
(1,000,000)
578,407
400,000
157,841
242,159
400,000
133,625
266,375
CASE 4:
Minimum lease collections
400,000
Multiply by: PV factor of 1 at 10% for 5 years with annuity
3.790787
Present value of minimum lease collection = Sales Price of the
asset
*Since the residual value is unguaranteed, that portion of the asset is not
1,516,315
deemed sold. Thus was not included in the sales price.
Minimum lease collections
400,000
Multiply by: PV factor of 1 at 10% for 5 years with annuity
3.790787
Present value of minimum lease collection
1,516,315
Guaranteed residual value
100,000
Multiply by: PV factor of 1 at 10% years w/o annuity
0.620921
Present value of the guaranteed residual value
62,092
Total Lease receivable.
1,578,407
*Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership), the unguaranteed residual value
which will be received at the expiration of the lease term is still added to the receivable.
Total cost of the asset
Less: Present value of the unguaranteed residual value
Net cost of the asset sold
*Since the residual value is unguaranteed, that portion of the
is therefore deducted from the cost of the inventory sold.
1,000,000
(62,092)
937,908
aset is not deemed sold. The PV of the unguaranteed residual value
Amortization table:
Periodic Coll.
January 1, 2015:
December 31, 2015:
December 31, 2016:
December 31, 2017:
December 31, 2018:
December 31, 2019:
December 31, 2019: Guaranteed RV
1. Ans. P1,516,315.
Entry upon inception/Sale of asset:
Finance lease receivable
Sales
400,000
400,000
400,000
400,000
400,000
100,000
Interest Inc.
(CV * 10%)
157,841
133,625
106,987
77,686
45,455
Principal
242,159
266,375
293,013
322,314
354,545
100,000
Balance
1,578,407
1,336,248
1,069,872
776,860
454,545
100,000
0
1,516,315
1,516,315
2. Ans. P937,908.
Entry to recognize cost of sales, if perpetual inventory is used:
Finance lease recievable
62,092
Cost of sales
937,908
Inventory
1,000,000
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
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Entry to recognize the direct lease expense:
Expense
Cash
50,000
50,000
3. Ans. 578,407.
Total Sales Price of the Asset
Less: Cost of the asset/FMV of asset
Gross Profit on Sale
4. Ans. P133,625.
Entry upon periodic collections:
Dec. 31, 2015:
Cash
Interest income
Finance lease receivable
Dec. 31, 2016:
Cash
Interest income
Finance lease receivable
CHAPTER 8-PROBLEM 22: ABC CO.
Reconciliation:
Net income before any differences
Permanent Differences:
Nondeductible expenses
Nontaxable income
Net income after permanent differences
Temporary Differences:
Future Deductible amounts
Accrued warranties
Advances from customers
Provision for probable losses
Future Taxable Amounts
Prepaid rent
Taxable income
1. Ans. P4,340,000.
Taxable income
Mulitply by: Current tax rate
Current tax expense
1,516,315
(937,908)
578,407
400,000
157,841
242,159
400,000
133,625
266,375
10,000,000
100,000
(500,000)
9,600,000
250,000
500,000
900,000
400,000
1,650,000
(400,000)
10,850,000
10,850,000
40%
4,340,000
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
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2. Ans. P3,840,000.
Net income after permanent differences
Multiply by: Constant tax rate
Total tax expense
9,600,000
40%
3,840,000
3. Ans. P660,000.
Future deductible amounts
Mulitply by: Constant tax rate
Deferred tax asset
1,650,000
40%
660,000
4. Ans. P160,000.
Future taxable amounts
Mulitply by: Constant tax rate
Deferred tax liability
400,000
40%
160,000
To reconcile:
Current tax expense
Add: Deferred tax expense (FTA)
Less: Deferred tax benefit (FDA)
Total tax expense
4,340,000
160,000
(660,000)
3,840,000
5. Ans. P3,902,500.
If tax rate in the future is expected to change (at 35%):
Current tax expense (P10.85M*40%)
Add: Deferred tax expense (FTA:P400,000*35%)
Less: Deferred tax benefit (FDA:P1,650,000*35%)
Total tax expense
6. Ans. P140,000.
Future taxable amounts
Mulitply by: Futre tax rate
Deferred tax liability
4,340,000
140,000
(577,500)
3,902,500
400,000
35%
140,000
7. Ans. P577,500.
Future deductible amounts
Mulitply by: Constant tax rate
Deferred tax asset
1,650,000
35%
577,500
CHAPTER 8-PROBLEM 23:XYZ CO.
Reconciliation:
Net income before any differences
Permanent Differences:
Nondeductible expenses
Nontaxable income
Net income after permanent differences
Temporary Differences:
Increase in Future Deductible for the year:
Cummulative FDA, ending
Cummulative FDA, beginning
Decrease in Future Taxable Amount for the year:
Cummulative FTA, ending
Cummulative FTA, beginning
Taxable income
5,000,000
150,000
(50,000)
5,100,000
1,600,000
1,200,000
500,000
800,000
1. Ans. P2,320,000
Taxable income
Mulitply by: Current tax rate
Current tax expense
5,800,000
40%
2,320,000
2. Ans. P2,040,000.
Net income after permanent differences
Multiply by: Constant tax rate
Total tax expense
5,100,000
40%
2,040,000
3. Ans. P660,000.
Cummulative Future Deductible Amt, end
Mulitply by: Constant tax rate
Deferred tax asset
4. Ans. P200,000.
Cummulative Future Taxable Amt, end
Mulitply by: Constant tax rate
Deferred tax liability
To reconcile:
Current tax expense
Less: Deferred tax benefit ( dec in FTA)
Less: Deferred tax benefit (inc in FDA)
Total tax expense
400,000
300,000
5,800,000
1,600,000
40%
640,000
500,000
40%
200,000
2,320,000
(120,000) (decrease in deferred tax liability)
(160,000)
2,040,000
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CHAPTER 8-PROBLEM 24: JAPS CORP.
1. Ans. P1,270,000.
Service costs
Current service cost
Past service cost recognized for the year
Loss on settlment:
Payments to early retirees
CV of accrued benefits of early ret.
Net interest (income)expense
Interest on ABO (P10,080,000*12%)
Interset on PA (P9,450,000*12%)
Pension expense (Profit or loss)
855,000
120,000
800,000
650,000
150,000
1,209,600
(1,134,000)
Net remeasurement gain/loss (Other comprehensive Income/loss)
Actuarial gain on PA (a)
Actuarial loss on ABO (b)
(216,000)
285,400
Total pension expense
1,125,000
75,600
1,200,600
2. Ans.
69,400
3. Ans.
1,270,000
(a) Actuarial gain/loss on Plan asset
Plan asset, beginning balance
Add: Contribution for the year
Interest on PA (P9,450,000*12%)
Less: Settlements at scheduled retirement
Settlements to early retirees
Balance
Plan asset, at FMV at the year-end
Actuarial gain on plan asset
9,450,000
1,200,000
1,134,000
(1,400,000)
(800,000)
9,584,000
9,800,000
216,000
(b) Actuarial gain/loss on Accumulated Benefit Obligation
ABO, beginning balance
10,080,000
Add: Current service cost
855,000
Past service cost for the year
120,000
Interest on ABO (P10,080,000*12%)
1,209,600
Less: Benefits settled, at scheduled ret.
(1,400,000)
Benefits settled, early retirees
(650,000)
Balance
10,214,600
ABO, present value, ending balance
10,500,000
Actuarial loss on AB0
285,400
4. Ans. P700,000.
To reconcile:
Accrued pension, beg
Pension expense (total)
Total
Contribution to the plan for the year
Accrued pension, end
ABO, end
Plan asset, end
Accrued pension end
630,000
1,270,000
1,900,000
(1,200,000)
700,000
10,500,000
(9,800,000)
700,000
CHAPTER 8-PROBLEM 25: IRELAND CORP.
1. Ans. P620,000.
Service costs
Current service cost
Net interest (income)expense
Interest on ABO (P2,980,000*8%)
Interset on PA (P3,200,000*8%)
Pension expense (Profit or loss)
480,000
238,400
(256,000)
Net remeasurement gain/loss (Other comprehensive Income/loss)
Actuarial loss on PA
Actuarial loss on ABO
Effect of ceiling**
Total pension expense
80,000
30,000
47,600
(17,600)
462,400 2. Ans.
157,600
3. Ans.
620,000
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
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Plan asset, beginning balance
Add: Contribution for the year
Interest on PA (P3,200,000*8%)
Less: Settlements at scheduled retirement
Balance
Less: Actuarial loss on PA
Plan asset, FMV, end
3,200,000
750,000
256,000
(560,000)
3,646,000
(80,000)
3,566,000
ABO, beginning balance
Add: Current service cost
Interest on ABO (P2,980,000*8%)
Less: Benefits settled, at scheduled ret.
Balance
Add: Actuarial loss on ABO
ABO, present value, end
2,980,000
480,000
238,400
(560,000)
3,138,400
30,000
3,168,400
Plan asset at fair value, end
ABO at present value, end
Prepaid pension, end
Asset Ceiling (lower)
Remeasurement loss/Effect of ceiling
3,566,000
3,168,400
397,600
350,000
47,600 **
4. Ans. P350,000.
To reconcile:
Prepaid pension, beg (ceiling was higher)
Pension expense (total)
Total
Contribution to the plan for the year
Prepaid pension, end (ceiling is lower)
(220,000)
620,000
400,000
(750,000)
(350,000)
MULTIPLE CHOICE EXERCISES:
CHAPTER 8-EXERCISE 1: PROBE INC.
ITEM
a. Accounts payable – trade, P170,000 + 30,000
b. Notes payable – trade, P70,000
Interest on Notes: 50,000*15%*4/12
20,000*15%*2/12
c. Advance receipts from customers,
d. Containers deposit
e. Notes payable – BPI , P200,000/5
i. Convertible bonds
j. Notes payable – officers
k. Salaries and wages (68,000*15/30)
m. Output VAT, net of Input (246,000 – 164,000)
n. Accounts receivable, credit balance
0. Cash in banks (overdraft) 115,000 – (125,000+55,000)
r. Estimated warranty costs on goods sold
s. Installment notes payable, P75,000 *1/3
t. Provision for losses (25,000 + 75,000) / 2
u. Deferred tax liability
TOTAL
Liabilities
P200,000
70,000
2,500
500
100,000
50,000
40,000
Liabilities
160,000
1,000,000
40,000
34,000
82,000
12,300
65,000
46,000
25,000
50,000
P817,300
1. Ans. C.
50,000
150,000
P1,360,000
2. Ans. B.
P2,177,300
3. Ans. A.
CHAPTER 8-EXERCISE 2: CUT INC.
Bonds payable:
7/1/2008: (P4,000,000*98%)
Cummulative discount amortization:
P80,000/10yrs*5.75yrs
Accrued interest on bonds (P4M*7%*3/12)
Accrued interest on notes payable
Current portion of notes payable
Noncurrent portion of notes payabe
Warranties liability (P55,000+P145,000-P130,000)
Trade payables
Payroll related items
Taxes payable
Other accruals
Cash dividends payable (P0.40*2,500,000shares)
Noncurrent
Current
3,920,000
46,000
3,966,000
70,000
90,000
600,000
2,400,000
6,366,000
1. Ans. B.
Note: Stock dividends payable is classifed as capital and not as liability.
CHAPTER 8-EXERCISE 3: RADO INC.
Ans. A.
Estimated Warranties Payable, beginning balance
Required Estimated Expense (7,250,000-150,000)*5%
Less: Actual cost incurred for the year
Estimated Warranties Payable, ending balance
70,000
325,000
193,000
535,000
50,000
1,000,000
2,933,000
2. Ans. A.
P225,000
355,000
(415,500)
P164,500
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
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CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT
1. Ans. C.; 2. Ans. B.
Total sales – home furniture
Divide by:
Total premium distributable
Multiply by: estimated redemption
Estimated redemption
Multiply by, net cost of premiums (340-50)
Estimated premium expense
Premiums liability, beg
Total
Actual redemption (9,600,000/2,000)*290
Estimated premiums liability, end
3. Ans. B.
Estimated warranty liability, beginning
Total sales – kitchen applicances
Multiply by:
Estimated warranties expense
Actual warranty costs during the year`
Estimated warranty liability, end
2,176,000
86,400,000
5%
4,320,000
(2,624,000)
3,872,000
CHAPTER 8-EXERCISE 5: ABRA COMPANY
1. Ans. C.
2013 unused leaves by the end of 2014 (850days-550days)
2014 unused leaves by the end of 2014
Total unused leaves by the end of 2014
Multiply by probable exercise rate
Leaves that will probably materialize
Multiply by: 2014 current salary rate
Accrued compensated absences per audit
2. Ans. D.
Unadjusted net income
Understatement in accrued comp. abs./salaries expense
Adjusted net income
B = 15% (NI - B - Tx); Tx = 35% (NI - B)
B = 15% (NI - B - 35%(NI - B)
B = P111,892.
28,800,000
2,000
14,400
60%
8,640
290
2,505,600
716,000
3,221,600
(1,392,000)
1,829,600
818,675
65%
300
500
800
80%
640
400
256,000
1,277,500
(18,000)
1,259,500
122,801
0.09750
1,147,608
745,945
1.0975
111,892
CHAPTER 8-EXERCISE 6: ASCOT INC.
Audit notes:
a. Since there is no right of offset, the advances to sppliers should be reclassifed as an
asset: AJE 1:
Advances to suppliers
55,000
Accounts payable
55,000
1. Ans. C.
b.
Required premiums expense: (40,000*75%)/5*(P95-P25)
Actual cost/Actual redemption (5,000-1,250)*(P95-P25)
Estimated premiums liability, per audit
Estimated premiums liabilty, per books
Net adjustment
AJE 2:
Premiums expense
38,750
Estimated premiums liability
2. Ans. A.
c.
Cummulative unused leaves 12/31/14
Less: 2012 leaves (forfeited
Leaves that can be carried forward to 2015
Exercise rate (per past experience)
Cummulative leaves that will probably be exercised
Multiply by: 2014 current salary rate
Accrued salaries - compensated absences, per audit
Accrued salaries - compensated absences, per books
Net adjustment
AJE 3:
Accrued salaries
76,000
Salaries expense
420,000
(262,500)
157,500
118,750
38,750
38,750
750
(50)
700
80%
560
400
224,000
300,000
(76,000)
76,000
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3. Ans. A.
Unadjusted net income before bonus and tax
AJE 2: Understated premiums expense
AJE3: Overstated salaries expense
Adjusted net income before bonus and tax
B = 15% (NI - Tx - B)
Tx = 30% (NI - B)
B = 15%(NI - 30%(NI - B) - B)
B = 15%(1,052,381 - 30%(1,052,381 - B) - B)
B = 110,500/1.105
B = 100,000
AJE 4:
Accrued salaries
Salaries expense
(100,000-96,460)
1,015,131
(38,750)
76,000
1,052,381
5,540
5,540
4. Ans. A.
Net Income before tax (1,052,381 - 100,000)
952,381
Less: Income tax (952,381*30%)
(285,714)
Net Income after tax
666,667
AJE 5:
Income tax expense (current)
285,714
Income tax payable
285,714
d.
The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.
ENTRY:
Income tax expense (deferred)
250,000
Deferred tax liability
250,000
5. Ans. B.
e.
The refinancing agreement was completed as of December 31, 2014, thus there is a right to refinance the liablity on a longterm basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of
the fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis.
The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus
will still be presented as current as of December 31, 2014.
CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC.
1. Ans. A.
Accounts Payable, unadjusted
Receiving report number 2634 (Unrecorded purchase)
Receiving report number 2636 (Purchase in transit)
Accounts Payable, adjusted
250,000
12,500
10,000
272,500
2. Ans. D.
Warranties liability, unadjusted
Warranty expense, 2014 (10,550,000*6%)
Total
Less: Actual warranties paid
Warranties liability, adjusted (12/2014)
3. Ans. A.
Legal services
Medical services
Payroll (12/21/ - 12/31) : 14,400 *8/12
Royalties
(800,000*12%*3/12)
Total accruals
10,000
633,000
643,000
(310,000)
333,000
4,600
5,500
9,600
3,900
24,000
47,600
4. Ans. A.
Amortization Table: Lease Liability
13.59032634
Payment
(Bal.*2%)
Principal
Balance
Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326)
3,397,582
June 30, 2014:
250,000
135,903
114,097
3,283,485
December 31, 2014:
250,000
131,339
118,661
3,164,824
June 30, 2015:
250,000
126,593
123,407
3,041,417
December 31, 2015:
250,000
121,657
128,343
2,913,074
Current portion Long-term Portion
5. Ans. A.
Amortization Table: Bonds Payable
Nominal
Effective
Amortization
Balance
Balance
851,706
September 30, 2014:
42,585
48,000
(5,415)
846,291
March 31, 2015:
42,315
48,000
(5,685)
840,606
Carrying value as of Dec. 31, 2014:
Balance, September 30, 2014
Amortization up to 12/31/14: P5,685*3/12:
Amortized cost as of December 31, 2014:
846,291
(2,843)
843,449
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CHAPTER 8-EXERCISE 8: DETOX INC.
1. Ans. D.
Accounts Payable, unadjusted
RR# 1015 (purchase in transit – FOB Destination)
RR# 1013 (goods received on December 30, 2014)
RR# 1016 (purchase in transit – FOB Shipping point)
Accounts payable, adjusted
534,000
(35,000)
65,000
40,000
604,000
2. Ans. C.
Required estimated expense 2013: (50,000/5)*40%*(P160-P50)
Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50)
Estimated premiums payable, 12/31/2013
Required estimated expense 2014: (60,000/5)*40%*(P160-P50)
Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50)
Estimated premiums payable, 12/31/2014
3. Ans. D.
Proceeds from issuance of bonds on 1/1/2013
Fair value of bonds at 12% effective rate*
APIC – Bond Conversion Privilege
*PV of future cash flows at 12% for 3 periods:
Principal: 2,000,000 * 0.711780
Interest: 200,000 * 2.40183
Total present value = Fair value
Amortization table: Bonds payable
Jan. 1, 2013:
Dec. 31, 2103:
Dec. 31, 2014:
440,000
(198,000)
242,000
528,000
(561,000)
209,000
P2,050,000
1,903,927
P146,073
P1,423,560
480,366
P1,903,927
Correct Int.
Nominal Int.
228,471
231,888
200,000
200,000
Amortization
28,471
31,888
Balance
1,903,927
1,932,398
1,964,286
4. Ans. A.
Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14:
DR: Bonds payable
1,000,000
DR: APIC – Bond conv. priv.
73,036
CR:
Discount on bonds payable
17,857
CR:
Ordinary shares (10,000*50)
500,000
CR:
Share premium
555,179
5. Ans. B.
Present value of the minimum lease payment at
implicit lease rate, 8% for 5 periods: (600,000*3.9927)
Fair market value of the leased asset at inception of lease
Amortization table: Lease liability
Date
Jan. 1, 2014:
Dec. 31, 2014:
Dec. 31, 2015:
Periodic Paymts
600,000
600,000
6. Ans. C.
Present value of MLP on 1/1/14
Divide by: Term (no transfer of ownership)
Depreciation expense in 2014
P2,395,626
2,400,000 *100%, thus Finance lease
Interest
Principal
191,650
158,982
408,350
441,018
Balance
2,395,626
1,987,276
1,546,258
P2,395,626
5 years
P479,125
CHAPTER 8-EXERCISE 8: PIPINO CORP.
1. Ans. C.
Amortization table: Notes Payable
Date
Correct Interest Interest
Amortization
Balance
April 1, 2012:
P7,195,000
March 31, 2013:
1,079,250
960,000
119,250
7,314,250
March 31, 2014:
1,097,138
960,000
137,138
7,451,388
December 31, 2014:
838,281*
720,000*
118,281*
P7,569,669
*9 months only up to December 31, 2014
2. Ans. D.
12/31/2014
payments starting 12/31/2011
12/31/2011 = Fair market value of the
Amortization table: Finance Lease Liability
Date
December 31, 2011:
December 31, 2011:
December 31, 2012:
December 31, 2013:
December 31, 2014:
December 31, 2015:
P2,240,000
4,800,000
P7,040,000
Payment
1,200,000
1,200,000
1,200,000
1,200,000
Interest
584,000
522,400
545,640
380,104
Principal
1,200,000
616,000
677,600
745,360
819,896
Current
Balance
P7,040,000
5,840,000
5,224,000
4,546,400
3,801,040 Liab. balance
2,981,144
Noncurrent
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3. Ans. C.
Notes payable
Liability under capital lease – Long term**
Deferred tax liability
Total long term liabilities
P7,569,669
2,981,144
250,000
P10,800,813
4. Ans. B.
Accounts payable, unadjusted balance
RR# 65218, purchase in transit, FOB Destination
RR# 65219, purchase in transit, FOB Buyer (Destination)
RR# 65220, goods received only after the December 31
Accounts payable, adjusted balance
P1,840,500
(19,000)
(30,500)
(41,000)
P1,750,000
5. Ans. D.
2014 Sales
sales
Warranties expense in 2014
P31,650,000
8%
P2,532,000
6. Ans. B.
Accounts payable
Warranties payable (2,532,000 – 1,950,000)
Interest payable on notes (8,000,000*12%*9/12)
Current portion of Long term liability under capital lease
Total current liabilities
1,750,000
582,000
720,000
819,896
P3,871,896
CHAPTER 8-EXERCISE 9: ADELAIDA INC.
1. Ans. D.
Tote bags actually distributed in 2014
Estimated premiums liability at the end of 2013, in tote bags
Estimated premiums liability at the end of 2014, in tote bags
Estimated premiums expense in 2014, in tote bags
Multiply by: Net expense per tote bag (P25 – P5)
Estimated premiums expense in 2014
19,000
(7,000)
5,000
17,000
P20
P340,000
2. Ans. C.
The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset:
Estimated premiums payable, 2014 (5,000 * P20)
P100,000
Multiply by tax rate:
30%
Deferred tax asset (Noncurrent Asset)
P30,000
The temporary difference from excess tax depreciation over financial depreciation is future taxable amount
creating Deferred Tax Liability:
Deferred tax liability (Noncurrent Liability): P150,000*30%
P45,000
3. Ans. D.
Accounts payable, as adjusted (P540,000 + P50,000)
Estimated premiums payable, 2014 (5,000 * P20)
Current liabilities
P590,000
100,000
P690,000
4. Ans. A.
Proceeds from bond issuance (the amount credited per entry made)
Fair value of bonds without the conversion option (at 8% effective rate)*
Equity component/ APIC from Bond Conversion Privilege
Present value of Principal: P8,000,000*0.680583
P3,402,916
Present value of Interest:
500,000*3,99271
1,996,355
Fair value of the bonds without the conv. Option
P5,399,271
P5,500,000
5,399,271
P100,729
Amortization Table: Bonds Payable
Correct Int.
January 1, 2014:
December 31, 2014:
December 31, 2015:
Upon assumed conversion: 1/2016:
431,942
426,497
5. Ans. D.
Carrying value of bonds up to 12/31/2015
APIC- Bond Conversion Priv.
Total Par Value of Shares (5,000*10*50)
Share Premium from conversion
Nominal Int.
500,000
500,000
Amortization
(68,058)
(73,503)
Balance
5,399,271
5,331,213
5,257,710
5,257,710
100,729
(2,500,000)
2,858,439
6. Ans. B.
Upon assumed retirement: 1/2016:
Carrying value of bonds up to 12/31/2015
Fair value of bonds without the conversion option at 12% effective rate:
Present value of principal: P5,000,000*0.711780
3,558,901
Present value of interest:
500,000*2.401831
1,200,916
Gain on retirement of bonds (profit or loss)
5,257,710
4,759,817
497,893
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CHAPTER 8-EXERCISE 11:
Ans. C.
Case 1:
a. The obligating event is the damages occurring in 2014, thus is present obligation.
b. The outflow of economic benefits is probable.
c. The amount of liability is reliably measurable given a range of amounts without best estimate.
Thus, accrue obligation at the mid-range (P500,000+P1,500,000)/2 = P1,000,000.
Case 2:
a. The obligating event is the guarantee agreement completed in 2014, thus is present obligation.
b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the
balance sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event.
c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.
Thus, accrue obligation at best estimate P2,000,000.
Case 3:
a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there
are no claims yet.
b. The outflow of economic benefit is probable.
c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However, since
there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be
a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over
the portion to be reimbursed by the insurance company.
Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company
will be reimbursing the company for anything in excess of the deductible clause.
Case 4:
a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no
present obligation yet.
Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event.
CHAPTER 8-EXERCISE 12: LABANDERA INC.
1. Ans. B.
Class A Laundry appliance sales (280,000,000*60%)
Divide by
Number of coupons distributed
Multiply by: probable redemption
Coupons that will probably be redeemed
Divide by: number of coupons to acquire 1 premium
Estimated number of premiums to be redeemed
Number of premiums actually redeemed (1,680,000/400)
Liability for premiums in units
Liability for premium in peso (840*4,100)
P168,000,000
P50
3,360,000
60%
2,016,000
400
5,040
(4,200)
840
3,444,000
2. Ans. D.
Class B Laundry appliance sales (280,000,000*40%)
Multiply by: Estimated warranty cost as % of sales
Estimated warranty expense for 2014
P112,000,000
3%
P3,360,000
3. Ans. C.; 4. Ans. A.; 5. Ans. A.
Unadjusted net income
Adjustment for additional premium expense
Adjustment for additional warranties expense
Adjusted net income
Less: Bonus
Income tax (35%)
Net income
80,164,000
(3,444,000)
(1,720,000)
75,000,000
(2,480,916)
(25,381,679)
47,137,405
Bonus = 5% (75,000,000 – 35%(75,000,000 – B))
B = 5% (48,750,000 + .35B)
B = 2,437,500 + .0175B
0.9825B = 2,437,500
B = 2,480,916
CHAPTER 8-EXERCISE 13: LUZON COMPANY
1. Ans. B.
Estimated warranty expense (30,000u*60%*P1,500)
Actual cost incurred
Estimated warranties payable
Tax = 35% (75,000,000 -2,480,916)
T = 25,381,679
27,000,000
(19,500,000)
7,500,000
2. Ans. D.
a. The obligating event is the environmental damages occuring in 2014, thus is present obligation.
b. The outflow of future economic benefits is probable.
c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per
the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event)
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3. Ans. B.
PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776)
Fair market value of leased asset at inception:
Amortization table:
Present value of MLP
January 1, 2012:
January 1, 2013:
January 1, 2014:
Janaury 1, 2015:
Periodic paymt
800,000
800,000
800,000
800,000
4. Ans. B.
PV of MLP, Jan. 1, 2012 (Asset capitalized)
Multiply by condition percent (over term), Dec. 31, 2014:
Carrying value of leased asset, Dec. 31, 2014
3,683,821
4.604776
4,000,000
92% More than 90%, thus Finance
Interest Exp. Principal
Balance
3,683,821
800,000
2,883,821
346,059
453,941
2,429,879
291,586
508,414
1,921,465 Liab balance
230,576
569,424
1,352,041
Accrued interest
3,683,821
3/6
1,841,910
5. Ans. A.
Allocation of issue price on January 1, 2014:
Total issue price
FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods:
Principal: P4,000,000*0.7049605
2,819,842
Interest: P200,000*4.9173243
983,465
Residual amount allocated to APIC-Bond conversion privilege
4,250,000
3,803,307
446,693
0.7049605
4.9173243
Amortization table: Bonds payable
Correct Int.
January 1, 2014:
June 30, 2014:
December 31, 2014:
Nominal Int.
228,198
229,890
200,000
200,000
Carrying value of converted bonds, Dec. 31, 2014 (P3,861,396*3/4)
Carrying value of APIC-Bond conversion privilege (P446,693*3/4)
Less: Par value of issuable shares: (50,000sh*3/4)*P50
Share premium/APIC
Amortization
Balance
3,803,307
28,198
3,831,505
29,890
3,861,396
2,896,047
335,020
(1,875,000)
1,356,067
CHAPTER 8-EXERCISE 14: MNO INC.
1. Ans. B.
Proceeds from issuance of convertible bonds
FMV of bonds w/out conv. option at 5% for 10 semi-annual periods:
PV of Principal: P5,000,000*0.613913
3,069,566
PV of Interest:
300,000*7.721734
2,316,520
Equity portion (APIC -Bond Conv. Priv.)
5,500,000
5,386,086
113,914
2. Ans. C.
Total
Bonds @ FV*
APIC@Residual
2,500,000
2,365,267
134,733
2,644,659
56,957
(279,392)
77,776
profit/loss
APIC/Share premium
Retirement Price
Carrying Value** (5,289,319*50%); (113,914*50%)
P&L Loss/ Cap. Gain
*FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods.
PV of Principal 2,500,000*0.62275
1,556,874
PV of Interest: 150,000*5.389289
808,393
Fair value of bonds w/out conv. priv
2,365,267
Amortization Table: Bonds Payable
June 30, 2013:
December 31, 2013:
June 30, 2014:
December 31, 2014:
3. Ans .C.
Interest from Bonds Payable
from 1/1 - 6/30 (see amortiz.)
from 7/1 - 12/31 (see amortiz.)
Interest from Notes Payable
from 1/1 - 8/31 (2.5M*10%*8/12)
from 9/1 - 12/31 (2M*10%*4/12)
Total interest expense
4. Ans. B.
Fin. Inc. after permanent diff
FDAAB for the period
FTALE for the period
Taxable income
Mulitply by tax rate
Current Tax Expense
Correct
Nominal
269,304
267,770
266,158
300,000
300,000
300,000
267,770
266,158
533,928
166,667
66,667
Amortization
(30,696)
(32,230)
(33,842)
Balance
5,386,087
5,355,391
5,323,161
5,289,319 **
233,333
767,261
1,000,000
100,000
(500,000)
600,000
40%
240,000
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5. Ans. D.
Cum. Temp Diff (FTALE)
Multiply tax rate
Deferred Tax Liability
1,550,000
40%
620,000
6. Ans. D.
Bonds Payable (half - see amor.)
Notes payable - long term
Deferred tax liabilty
Total noncurrent liability
2,644,659
1,500,000
620,000
4,764,659
CHAPTER 8-EXERCISE 15: KURT CORP.
1. Ans. C.
Proceeds from issuance (at face value)
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.772183
3,088,734
PV of Interest:
240,000*2.531295
607,511
Equity component/APIC-Bond Conversion
2. Ans. D.
Amortization table: Bonds Payable
January 1,
December 31,
December 31,
December 31,
2014:
2014:
2015:
2016:
4,000,000
3,696,245
303,755
Correct Int. Nominal Int.
(Princ.*6%)
(CV*9%)
332,662
240,000
341,002
240,000
350,092
240,000
3. Ans. B.
Bonds Payable, CV at 1/1/2016 (see amortization table)
APIC-Bonds Conversion Privilege
Total
Multiply by exercise rate: (3,000/4,000)
Prorated CV of BP and APIC-Bond Conv. Priv.
Less:Par value of issuable shares (3,000*40) *P10
Share premium from assumed conversion
4. Ans. A.
Proceeds from issuance (at face value, net of transaction cost)
Fair value of bonds at effective rate 9% for 3 periods
PV of Principal: P4,000,000*0.741162
2,964,648
PV of Interest: P240,000*2.465123
591,630
Equity component/APIC-Bond Conversion
Amo.
92,662
101,002
110,092
Balance
3,696,245
3,788,907
3,889,908
4,000,000 53. Ans. D.
3,889,908
303,755
4,193,663
3/4
3,145,247
(1,200,000)
1,945,247
P3,848,531
3,556,278
P292,253
5. Ans. B.
Total
P4,000,000
Bonds @ FV*
APIC (Res. Val.)
3,889,908
110,092
3,837,104
292,253
52,804
(182,161)
retirement loss capital gain
*FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period.
PV of Principal 4,000,000*0.917431
P3,669,725
PV of Interest: 240,000*0.917431
220,183
Fair value of bonds w/out conv. priv
P3,889,908
Retirement Price
Carrying Value
P&L Loss/ Cap. Gain
Amortization table: Bonds Payable
January 1, 2014:
December 31, 2014:
December 31, 2015:
December 31, 2016:
Correct Int.
373,409
387,417
402,896
CHAPTER 8-EXERCISE 16: TRY CORP.
Reconciliation:
Net income before any differences
Permanent Differences:
Nondeductible expenses: Life insurance expense
Nontaxable income: Dividend income
Net income after permanent differences
Temporary Differences:
Future Deductible amounts
Estimated litigation loss
600,000
Unearned retnal income
300,000
Future Taxable Amounts
Installment receivable
1,200,000
Taxable income
1. Ans. A.
Net income after permanent differences
Multiply by: Constant tax rate
Total tax expense
2. Ans. C.
Taxable income
Mulitply by: Current tax rate
Nominal Int.
240,000
240,000
240,000
Amo.
133,409
147,417
162,896
Balance
3,556,278
3,689,687
3,837,104
4,000,000
10,000,000
300,000
(500,000)
9,800,000
900,000
(1,200,000)
9,500,000
9,800,000
33%
3,234,000
9,500,000
33%
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3,135,000
3. Ans. A.
Future deductible amounts
Mulitply by: Constant tax rate
Deferred tax asset
900,000
33%
297,000
4. Ans. B.
Future taxable amounts
Mulitply by: Constant tax rate
Deferred tax liability
1,200,000
33%
396,000
To reconcile:
Current tax expense
Add: Deferred tax expense (FTA)
Less: Deferred tax benefit (FDA)
Total tax expense
3,135,000
396,000
(297,000)
3,234,000
5. Ans. B.
Current tax expense; P9,500,000*33%
Add: Deferred tax expense (FTA): P1,200,000*35%
Less: Deferred tax benefit (FDA): P900,000*35%
Total tax expense
CHAPTER 8-EXERCISE 17: COSINE CORP.
Reconciliation:
Net income before any differences
Permanent Differences:
Nondeductible expenses: Life insurance expense
Nontaxable income: Dividend income
Net income after permanent differences
Temporary Differences:
Future Deductible amounts
Warranty provision
Future Taxable Amounts
Prepaid advertising
Excess tax depr. over finanicial depr.
Taxable income
1. Ans. B.
Taxable income
Mulitply by: Current tax rate
Current tax expense
3,135,000
420,000
(315,000)
3,240,000
12,000,000
400,000
(1,200,000)
11,200,000
600,000
500,000
400,000
600,000
33%
198,000
3. Ans. D.
Future taxable amounts
Mulitply by: Constant tax rate
Deferred tax liability
900,000
33%
297,000
CHAPTER 8-EXERCISE 18: BONCHON CORP.
Service costs
Current service cost
Net interest (income)expense
Interest on ABO (P3,000,000*6%)
Interset on PA (P2,800,000*6%)
Pension expense (Profit or loss)
(900,000)
10,900,000
10,900,000
32%
3,488,000
2. Ans. A.
Future deductible amounts
Mulitply by: Constant tax rate
Deferred tax asset
4. Ans. D.
To reconcile:
Current tax expense
Add: Deferred tax expense (FTA)
Less: Deferred tax benefit (FDA)
Total tax expense
600,000
3,488,000
297,000
(198,000)
3,587,000
160,000
180,000
(168,000)
12,000
172,000
2. Ans. B.
Net remeasurement gain/loss (Other comprehensive Income/loss)
Actuarial gain on PA (a)
(106,000)
Actuarial loss on ABO (b)
442,000
336,000
3. Ans. C.
Total pension expense
508,000
1. Ans. D.
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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(a) Actuarial gain/loss on Plan asset
Plan asset, beginning balance Add:
Contribution for the year
2,800,000
210,000
168,000
Interest on PA (P2,800,000*6%) Less:
Settlements at scheduled retirement
Balance
Plan asset, at FMV at the yearend Actuarial gain on plan asset
(300,000)
2,878,000
2,984,000
106,000
(b) Actuarial gain/loss on Accumulated Benefit Obligation
ABO, beginning balance
3,000,000
Add: Current service cost
160,000
Interest on ABO (P3,000,000*6%)
180,000
Less: Benefits settled, at scheduled ret.
(300,000)
Balance
3,040,000
ABO, present value, ending balance
3,482,000
Actuarial loss on AB0
442,000
4. Ans. B.
To reconcile:
Accrued pension, beg
Pension expense (total)
Total
Contribution to the plan for the year
Accrued pension, end
200,000
508,000
708,000
(210,000)
498,000
ABO, end
Plan asset, end
Accrued pension end
3,482,000
(2,984,000)
498,000
CHAPTER 8-EXERCISE 19: DEE CORP.
Service costs
Current service cost
Settlement gain:
Settlement price other ben. settled
PV of other benefits settled
Net interest (income)expense
Interest on ABO (P7,500,000*10%)
Interset on PA (P7,000,000*10%)
Pension expense (Profit or loss)
1,400,000
400,000
(500,000)
750,000
(700,000)
Net remeasurement gain/loss (Other comprehensive Income/loss)
Actuarial gain on PA
Actual return on plan asset
840,000
Estimated return (Interest on PA)
(700,000)
Actuarial gain on ABO
Total pension expense
7,000,000
1,200,000
700,000
(1,500,000)
(400,000)
7,000,000
140,000
7,140,000
5. Ans. A.
ABO, beginning balance
Add: Current service cost
Interest on ABO (P7,500,000*10%)
Less: Benefits settled, at scheduled ret.
PV of additional benefits settled
Balance
Add: Actuarial gain on ABO
ABO, present value, end
7,500,000
1,400,000
750,000
(1,500,000)
(500,000)
7,650,000
(200,000)
7,450,000
To reconcile:
Prepaid pension, beg
Pension expense (total)
Total
Contribution to the plan for the year
Accrued pension, end
(140,000)
(200,000)
1,300,000
50,000
1,350,000
2. Ans. A.
(340,000) 3. Ans. D.
1,010,000
4. Ans. B.
Plan asset, beginning balance
Add: Contribution for the year
Interset on PA (P7,000,000*10%)
Less: Settlements at scheduled retirement
Settlement price of addl ben. Settled
Balance
Less: Actuarial gain on PA
Plan asset, FMV, end
4. Ans. B.
Plan asset at fair value, end
ABO at present value, end
Accrued pension expense, end
(100,000)
1. Ans. D.
7,140,000
7,450,000
(310,000)
500,000
1,010,000
1,510,000
(1,200,000)
310,000
CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
DISCUSSION PROBLEMS
CHAPTER 9-PROBLEM 1
1A
2 D
3 D
4B
5 C
6B
CHAPTER 9-PROBLEM 2: SB CORP.
Correct entries to record transactions in 2013:
(a) Cash (50,000*P150)
Ordinary shares (50,000*P100)
Share premium-OS
7,500,000
5,000,000
2,500,000
(b) Building
Preference shares (20,000*P50)
Share premium-PS
1,200,000
(c) Income summary
Retained earnings
5,540,000
1,000,000
200,000
5,540,000
Correct entries to record transactions in 2014:
(a) Treasury shares (20,000*P160)
Cash
3,200,000
3,200,000
(b) Cash
2,800,000
Ordinary shares (10,000*P100)
Share premium-OS (P1,960,000-P1,000,000)
Preference shares (10,000*P50)
Share premium-PS (P840,000-P500,000)
(c) Cash, net (5,000*P85)-P25,000
Preference shares (5,000*P50)
Share premium-PS
1,000,000 *Allocation:
960,000
Ordinary
500,000
Preference
340,000
Total
FMV (total)
Rato
1,750,000
750,000
2,500,000
70%
30%
Amount Allocated
1,960,000
840,000
2,800,000
400,000
250,000
150,000
(d) Cash
5,000,000
Bonds payable
Premium on bonds payable (P2,200,000-P2,000,000)
Ordinary shares (15,000*P100)
Share premium-OS (P2,800,000-P1,500,000)
2,000,000 *Allocation:
200,000
Bonds pay. @ Fair value
1,500,000
Ordinary @ Residual
1,300,000
(e) Cash (8,000*P185)
Treasury shares (8,000*P160)
Share premium-TST
1,480,000
1,280,000
200,000
(f) Ordinary shares (7,000*P100)
Share premium-OS (7,000*P50)
Share premium-TST
Treasury shares (7,000*160)
700,000
350,000
70,000
Amount Allocated
2,200,000
2,800,000
5,000,000
*share premium from original issuance (P150-P100)
1,120,000
(g) Income summary
Retained earnings
4,530,000
4,530,000
(h) Retained earnings
Retained earnings appropriated for Treasury
800,000
800,000
Summary
(a) Ordinary share issuance in 2013
(b) Preference share issuance in 2013
(c) Net income in 2013
(a) Treasury shares reacquired in 2014
(b) Ordinary and Preference shares issue
(c) Preference shares issuance in 2014
(d) Ordinary shares issued with Bonds
(e) Treasury shares reissuance in 2014
(f) Treasury shares retirement in 2014
(g) Net income in 2014
(h) Appropriation for treasury
Adjusted 12/31/14 balances
Share capital:
Ordinary Shares
Preference Shares
Additional paid-in capital:
Share premium-OS
Share premium-PS
Share premium-TST
Total Contributed Capital
Retained earnings - appropriated
Retained earnings - unappropriated
Treasury shares at cost
Total Stockholders' Equity
Ordinary Sh,
5,000,000
Preference Sh. Sh. Prem-OS Sh. Prem-PS
Sh. Prem-TST
2,500,000
1,000,000
200,000
RE-unapp
RE-app
TS
5,540,000
(3,200,000)
1,000,000
500,000
250,000
960,000
1,500,000
1,300,000
(700,000)
(350,000)
6,800,000
1. Ans.
1,750,000
2. Ans.
6,800,000
1,750,000
8,550,000
4,410,000
690,000
130,000
4,410,000
3. Ans.
340,000
150,000
200,000
(70,000)
690,000
4. Ans.
130,000
1,280,000
1,120,000
4,530,000
(800,000)
9,270,000
7. Ans.
5,230,000 5. Ans.
13,780,000 6. Ans.
800,000
9,270,000
(800,000)
23,050,000 8. Ans.
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
800,000
800,000
(800,000)
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
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CHAPTER 9-PROBLEM 3: GLORIETTA INC.
Correct entries to record transactions in 2013:
(a) Land
Ordinary shares (100,000*P10)
Share premium-OS
1,400,000
1,000,000
400,000
(b) Cash (50,000*P50)
Preference shares (50,000*P20)
Share premium-PS
2,500,000
1,000,000
1,500,000
(c) Income summary
Retained earnings
540,000
540,000
Correct entries to record transaction in 2014:
(a) Preference shares (20,000*P20)
Share premium-PS (20,000*P30)
Ordinary shares (80,000*P10)
Share premium-OS
400,000
600,000
*Share premium from the original issuance of preference shares in 2013
800,000
200,000
(b) Building (@fair value)
Ordinary shares (25,000*P10)
Share premium-OS (P625,000-P250,000)
Preference shares (20,000*P20)
Share premium-PS (P575,000-P400,000)
1,200,000
(c) Cash, net (5,000*52)-P12,000
Preference shares (5,000*P20)
Share premium-PS
248,000
(d) Treasury shares (10,000*P22)
Cash
220,000
*Allocation:
250,000
Ordinary @Fair value (25,000*P25)
625,000
375,000
Preference @Residual amount
575,000
400,000
Fair value of Building
1,200,000
175,000 Note that the Building's fair value was more
clearly determinable that the
fair value of the securities issued, since while the fair value of ordinary shares
were determinable at P25, the fair value of preference shares is not clearly
100,000
determinable since it is highly speculative or volatile.
148,000
220,000
(e) Cash (2,000*P20)
Retained earnings
Treasury shares (2,000*P22)
40,000
4,000
(f)
50,000
20,000
40,000
44,000
Ordinary shares (5,000*P10)
Share premium-OS
Retained earnings
Treasury shares (5,000*P22)
*Share premium from original issuance computed as:
(P400,000/100,000)*5,000
110,000
(g) Income summary
Retained earnings
830,000
830,000
(h) Retained earinings
Retained earinings appropriated for Treasury
66,000
66,000
Summary
(a) Ordinary share issuance in 2013
(b) Preference share issuance in 2013
(c) Net income in 2013
(a) Conversion of PS to OS in 2014
(b) Ordinary and Preference shares issue
(c) Preference shares issuance in 2014
(d) Reacquisition of Treasury
(e) Treasury shares reissuance in 2014
(f) Treasury shares retirement in 2014
(g) Net income in 2014
(h) Appropriation for treasury
Adjusted 12/31/14 balances
Share capital:
Ordinary Shares
Preference Shares
Additional paid-in capital:
Share premium-OS
Share premium-PS
Total Contributed Capital
Retained earnings - appropriated
Retained earnings - unappropriated
Treasury shares at cost
Total Stockholders' Equity
CHAPTER 9-PROBLEM 4: BULACAN CO.
Correct entries:
1. Ans. P450,000.
(a) Cash
Bonds payable
Premium on bonds payabe
Ordinary share warrants outstanding
(b) Cash (4,000sh*P70)
Accumulated profits
Treasury shares (4,000sh*P75)
Ordinary Sh,
1,000,000
Preference Sh. Sh. Prem-OS
400,000
1,000,000
Sh. Prem-PS
RE-unapp
RE-app
TS
1,500,000
540,000
800,000
250,000
(400,000)
400,000
100,000
(50,000)
(600,000)
175,000
148,000
(20,000)
2,000,000
1. Ans.
1,100,000
2. Ans.
2,000,000
1,100,000
3,100,000
955,000
1,223,000
200,000
375,000
955,000
3. Ans.
1,223,000
4. Ans.
(4,000)
(40,000)
830,000
(66,000)
1,260,000
7. Ans.
2,178,000 5. Ans.
5,278,000 6. Ans.
66,000
1,260,000
(66,000)
6,538,000 8. Ans.
5,700,000
5,000,000
250,000
450,000
280,000
20,000
300,000
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
(220,000)
44,000
110,000
66,000
66,000
(66,000)
AUDITING (2016 EDITION)
CTESPENILLA
Ordinary shares (1,000*P50)
Share premium-OS (P250K/50Ksh)*1K
Accumulated profits
Treasury shares (1,000sh*P75)
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50,000
5,000
20,000
75,000
(c) Memo: 49,000share rights were issued to 49,000 shares outstanding.
2. Ans. P276,000.
(d) Cash (5,000*60%)/5w*P60
Ordinary share warrants (P450K*60%)
Ordinary shares (600sh*P50)
Share premium-OS
3. Ans. P45,000.
(e) Cash (40,000/10)*P55
Ordinary shares (4,000*P50)
Share premium-OS
(f) Income summary
Accumulated profits
36,000
270,000
30,000
276,000
220,000
200,000
20,000
1,250,000
1,250,000
Summary:
Prefence Sh
Balances, January 1,
(a) Warrants issuance
(b) Treasury reissue
Tresaury retirement
(c) Share rights issue (memo entry)
(d) Warrants exercise
(e) Rights exercise
(f) net Income
Balances, December 31,
1,000,000
1,000,000
CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES.
(a) Entry made:
Cash
130,000
Treasury shares
Correct entry:
Cash
Share premium-TST
Treasury shares (P363,000/605)*325
1. Ans. Adjusting entry:
Share premium-TST
Treasury shares
(b) Entry made:
Cash
Preference shares (6,000sh*50)
Share premium-PS
(c) Entry made:
Cash (700sh*P440)*40%
Subscription receivable
Orinary shares subscribed
Correct entry:
Cash (700sh*P440)*40%
Subscription receivable
Ordinary shares subscribed (700sh*P20)
Share premium-OS
3. Ans. Adjsuting entry:
Ordinary shares subscribed
Share premium-OS
500,000
450,000
(50,000)
(5,000)
30,000
200,000
6,000
20,000
2,680,000
4. Ans.
971,000
5. Ans.
Treasury
2450000
(375,000)
(20,000)
(20,000)
300,000
75,000
1,250,000
3,660,000
-
Total
6,075,000
450,000
280,000
36,000
220,000
1,250,000
8,311,000
6. Ans.
130,000
65,000
65,000
650,000
300,000
350,000
300,000
220,000
130,000
Allocation: Prorata
Pref. Sh. (6Ksh*P80)
Warrants (12Kw*P10)
480,000
120,000
600,000
130,000
130,000
123,200
184,800
308,000
123,200
184,800
14,000
294,000
294,000
294,000
158,400
Correct entry:
Cash
Subscriptions receivable
158,400
4. Ans. Adjusting entry:
Ordinary shares subscribed
Ordinary shares
APIC/Sh Prem. Accum. Prof.
195,000
(d) Entry made:
Cash
Subscriptions receivable
Ordinary shares subscribed (600sh*P20)
Ordinary shares
2,500,000
130,000
65,000
Correct entry:
Cash
650,000
Preference shares
Share premium-PS (P650K*80%)-PAR
Ordinary share warrants outstanding (P650K*20%)
2. Ans. Adjusting entry:
Share premium-PS
Ordinary share warrants outstanding
Ordinary Sh
158,400
158,400
12,000
12,000
12,000
12,000
(e) Entry made:
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
80%
20%
AUDITING (2016 EDITION)
CTESPENILLA
Cash (4,000*2sh*P400)
Ordinary shares
Correct entry:
Cash
Ordinary share warrants (P130K*4/12)
Ordinary shares (4,000*2sh*P20)
Share premium-OS
5. Ans. Adjusting entry:
Ordinary shares
Ordinary share warrants outstandin
Share premium-OS
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120 of 155
3,200,000
3,200,000
3,200,000
43,333
160,000
3,083,333
3,040,000
43,333
6. Ans.
(f) Correct entry/Adjusting entry
Cash (P184,800-P158,400)+P5,000
Miscellaneous expense
Subscription receivable
3,083,333
31,400
5,000
26,400
Ordinary shares subscribed
Ordinary shares (100*P20)
CHAPTER 9-PROBLEM 6: PUNK INC.
1. Ans. P83,333.
FMV of options (100emp*100opt)*P25
Divide by: Vesting period
Salaries expense, 2014
2,000
2,000
Entry:
Salaries expense
83,333
Ordinary share options outstanding
83,333
2. Ans. P58,333.
Revised FMV of options (85emp*100opt)*P25
Multiply by: 2years/3 years
Cummulative salaries expense as of Dec. 31, 2015
Less: Prior year's salaries expense
Salaries expense, 2015
212,500
2/3
141,667
Entry:
(83,333)
Salaries expense
58,333
58,333
Ordinary share options outstanding
58,333
3. Ans. P33,333.
Final FMV of options (70emp*100opt)*P25
Less: Prior years' cummulative salaries expense
Salaries expense, 2016
175,000
(141,667)
33,333
Entry:
Salaries expense
33,333
Ordinary share options outstanding
33,333
Entry:
Salaries expense
66,667
Ordinary share options outstanding
66,667
2. Ans. P58,333.
Revised FMV of options (100-25emp)*100opt*P25
Multiply by: 2years/3 years
Cummulative salaries expense as of Dec. 31, 2015
Less: Prior year's salaries expense
Salaries expense, 2015
187,500
2/3
125,000
Entry:
(66,667)
Salaries expense
58,333
58,333
Ordinary share options outstanding
58,333
3. Ans. P50,000.
Final FMV of options (70emp*100opt)*P25
Less: Prior years' cummulative salaries expense
Salaries expense, 2016
175,000
(125,000)
50,000
50,000
4. Ans. P210,000.
Entry upon exercise of all options:
Cash (7,000sh*P25)
Ordinary share options oustanding
Ordinary shares (7,000sh*P20)
Share premium
250,000
3
83,333
175,000
175,000
140,000
210,000
CHAPTER 9-PROBLEM 7: PUNK INC.
1. Ans. P66,667.
Estimated FMV of options (100-20emp)*100opt*P25
Divide by: Vesting period
Salaries expense, 2014
200,000
3
66,667
Entry:
Salaries expense
50,000
Ordinary share options outstanding
4. Ans. P50,000.
Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market basedcondition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the
services were received, thus, salaries expense shall be recognized.
Entry:
Salaries expense
50,000
Ordinary share options outstanding
50,000
Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity.
Entry:
Ordinary share options outstanding
175,000
Retained earnings/APIC-Unexercised options
175,000
5. Ans. P120,833.
Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are
accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 years.
Final FMV of options, Dec. 2015 (75emp*100opt)*P25
187,500
Less: Prior years' cummulative salaries expense
(66,667)
Salaries expense, 2015
120,833
CHAPTER 9-PROBLEM 8 : PUNK INC.
1. Ans. P62,500.
Dec. 31, 2014: Is the non-market based condition achievable?
Actual sales, 2014
75,000,000
Multiply by: 120% estimated increase
120%
Projected sales, 2015
90,000,000
Multiply by: 120% estimated increase
120%
Projected sales, 2016
108,000,000
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
AUDITING (2016 EDITION)
CTESPENILLA
Minimum required sales
Note that the estimated sales in 2016
SOLUTIONS GUIDE
121 of 155
100,000,000 Thus, achievable.
is P108M, thus the estimated number of options per employee shall be 100.
Est. FMV of options vested (100-25emp)*100opt.*P25
Divide by: Vesting period
Salaries expense, 2014
187,500 Entry:
3
Salaries expense
62,500
62,500
Ordinary share options outstanding
62,500
2. Ans. P137,500.
Dec. 31, 2015: Is the non-market based condition achievable?
Actual sales, 2015
110,000,000
Multiply by: 120% estimated increase
120%
Projected sales, 2016
132,000,000
Minimum required sales
100,000,000 Thus, achievable.
Note that the estimated sales in 2016
is P132M, thus the estimated number of options per employee shall be 150.
Revised FMV of options (100-20emp)*150opt*P25
Multiply by: 2years/3 years
Cummulative salaries expense as of Dec. 31, 2015
Less: Prior year's salaries expense
Salaries expense, 2015
300,000
2/3
200,000 Entry:
(62,500)
Salaries expense
137,500
137,500
Ordinary share options outstanding
137,500
3. Ans. P220,000.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual sales, 2016
150,000,000
Minimum required sales
100,000,000 Thus, achieved, therefore options are exercisable.
Note that the actual sales in 2016 is
P150M, thus the final number of options per employee shall be 200.
Final FMV of options (100-16emp)*200opt*P25
Less: Prior years' cummulative salaries expense
Salaries expense, 2016
4. Ans. P504,000.
Entry upon exercise of all options:
Cash (16,800sh*P25)
Ordinary share options outstanding
Ordinary shares (16,800sh*P20)
Share premium
420,000 Entry:
(200,000)
Salaries expense
220,000
220,000
Ordinary share options outstanding
220,000
420,000
420,000
336,000
504,000
CHAPTER 9-PROBLEM 9 : PUNK INC.
1. Ans. P100,000.
Dec. 31, 2014: Has the non-market based condition been achieved at the end of 2014?
Actual increase in sales, 2014 (P81M-75M)/75M
8%
Minimum required increase in sales, 2014
10% Thus, not achieved.
Is the non-market based condition achievable by the end of 2015?
Estimated average increase in sales in 2014 and 2015: (8%+16%)/2
Minimum required average increase in sales (2014 -2015)
Est. FMV of options vested (10-2emp)*1,000opt.*P25
Divide by: Vesting period
Salaries expense, 2014
12%
12% Thus, achievable, VP is 2 years.
200,000 Entry:
2
Salaries expense
100,000
100,000
Ordinary share options outstanding
100,000
2. Ans. P33,333.
Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015?
Actual increase in sales, 2014 (P81M-75M)/75M
8%
Actual inrease in sales, 2015 (P92.23M-81M)/81M
14%
Actual average increase in sales (2014 and 2015)
11%
Minimum required average increase in sales (2014 - 201
12% Thus, not achieved.
Is the non-market based condition achievable by the end of 2015?
Estimated average increase in sales in 2014 and 2015: (8%+14%+20%)/3
Minimum required average increase in sales (2014 - 2016)
Revised FMV of options (10-2emp)*1,000opt*P25
Multiply by: 2years/3 years
Cummulative salaries expense as of Dec. 31, 2015
Less: Prior year's salaries expense
Salaries expense, 2015
200,000
2/3
133,333 Entry:
(100,000)
Salaries expense
33,333
33,333
Ordinary share options outstanding
3. Ans. P41,667.
Dec. 31, 2016: Has the non-market based condition been achieved?
Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M
Actual average increase in sales (2014-2016) (8%+14%+20%)/3
Minimum required average increase in sales (2014 - 2016)
Final FMV of options (10-3emp)*1,000opt*P25
Less: Prior years' cummulative salaries expense
Salaries expense, 2016
14%
14% Thus, achievable, VP is 3 years.
175,000
(133,333)
41,667
33,333
20%
14%
14% Thus, the condition has bee achieved.
Options are exercisable.
Entry:
Salaries expense
41,667
Ordinary share options outstanding
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41,667
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4. Ans. P210,000.
Entry upon exercise of all options:
Cash (7,000sh*P25)
Ordinary share options outstanding
Ordinary shares (7,000sh*P20)
Share premium
175,000
175,000
140,000
210,000
CHAPTER 9-PROBLEM 10 : MYX CO.
1. Ans. P603,333.
End of 2014: Is the non-market based condition achievable?
Projected 2016 sales: (P210M*120%*120%)
328,125,000
Minimum required 2016 sales
250,000,000 Achievable, number of SARs is 10,000.
Estimated FMV of SARS, 2014 (10,000sars*P74)
Divide by: Vesting period
Salaries expense, 2014
740,000 Entry:
3
Salaries expense
246,667
SAR payable
246,667
246,667
End of 2015: Is the non-market based condition achievable?
Projected 2016 sales: (P410M*120%)
640,625,000
Minimum required 2016 sales
250,000,000 Achievable, number of SARs is 15,000.
Estimated FMV of SARS, 2015 (15,000sars*P85)
Multiply by: 2years/3 years
Cummulative salaries expense as of Dec. 31, 2015
Less: Prior year's salaries expense
Salaries expense, 2015
1,275,000
2/3
850,000 Entry:
(246,667)
Salaries expense
603,333
SAR payable
603,333
603,333
2. Ans. P1,050,000.
End of 2016: Has the non-market based condition been achieved?
Actual 2016 sales
760,000,000
Minimum required 2016 sales
250,000,000 Achieved, number of SARs is 20,000.
Final FMV of SARS (20,000sars*P95)
Less: Prior years' cummulative salaries expense
Salaries expense, 2016
1,900,000 Entry:
(850,000)
Salaries expense
1,050,000
SAR payable
3. Ans.
Entry upon exercise in 2017 at prevailing FMV P98.
SAR payable
1,900,000
Salaries expense
60,000
Cash (20,000sars*P98)
4. Ans. P1,800,000.
SAR payable at prevaiing FMV (20,000sars*P90)
Entry to remeasure the SAR at the end of 2017:
SAR payable
100,000
Salaries expense/Income from SAR reversal
(P95 - P90)*20,000SARS
CHAPTER 9-PROBLEM 11 : DARK COMPANY
1. Ans.
Retained earnings (10%*90,000sh)*P14
Share dividends payable (9,000sh*P10)
Share premium
Share dividends payable
Ordinary shares
2. Ans.
Retained earnings (25%*99,000sh)*P10
Share dividends payable (24,750sh*P10)
Share dividends payable
Ordinary shares
2. Ans.
Stock dividends payable
Ordinary shares (46,000sh*P10)
Fractional warrants outstanding (4,000*P10)
3. Ans.
Fractional warrants outstanding
Ordinary shares (3,600sh*P10)
1,050,000
1,960,000
1,800,000
100,000
126,000
90,000
36,000
90,000
90,000
247,500
247,500
247,500
247,500
3. Ans. P1,337,500.
Ordinary shares, beginning balance
10% share dividends (90,000sh*10%)*P10
25% share dividends (99,000sh*25%)*P10
Ordinary shares, ending balance
CHAPTER 9-PROBLEM 12 : CHRIS COMPANY
1. Ans.
Retained earnings (10%*500,000)*P25
Stock dividends payable (50,000sh*P10)
Share premium
1,050,000
1,000,000
90,000
247,500
1,337,500
2,500,000
500,000
2,000,000
500,000
460,000
40,000
36,000
36,000
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4. Ans.
Fractional warrants outstanding
Share premium - Expired fractional warrants
5. Ans. P1,099,200.
Oustanding shares, beginning
Ordinary share dividends distributed
Shares issued from fractional warrants
Total outstanding shares
Multiply by: Cash dividends
Dividends from earnings
4,000
4,000
500,000
46,000
3,600
549,600
2
1,099,200
Entry:
Retained earnings
1,099,200
Capital liquidated (549,600*P1)
549,600
Dividends payable
1,648,800
Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE.
CHAPTER 9-PROBLEM 13 : ABC INC.
1. Ans. P900,000.
Declaration:
Retained earnings
Property dividends payable
Noncurrent asset held for disposal
Accum. depr (P800,000*1/10)
Building (PPE)
900,000
900,000
720,000
80,000
800,000
2. Ans. P700,000.
Balance sheet date: December 31, 2014
Property dividends payable
Retained earnings
FMV at 12/31/14
Dividends payable, CV
Adjustment to RE
700,000
900,000
(200,000)
Loss
Noncurrent asset held for disposal
FMV less cost to sell, NCAHFD
CV, upon reclass
Loss on remeasurement - P&L
700,000
720,000
(20,000)
200,000
200,000
20,000
20,000
3. Ans. None.
Note that the increase or decrease in the property dividends payable is charged to RE.
4. Ans. P100,000.
Distribution:
Retained earnings
Property dividends payable
Final FMV, 1/31/2015
Dividends payable, CV (FMV 12/201
Adjustment to RE
100,000
100,000
800,000
700,000
100,000
Property dividends payable
800,000
Noncurrent asset held for disposal
Gain on settlement of property dividends - P&L
CHAPTER 9-PROBLEM 14: JKL CORP.
Correct entries:
(a) Accumulated profits, beg
Cash
Preference shares (40,000*P1)
Ordinary shares (20,000*P0.50)
Total cash dividends
(b) Treasury shares (80,000/4,000= P20)
Cash
700,000
100,000
50,000
50,000
40,000
10,000
50,000
80,000
80,000
(c) Memo: Share split up 1 is to 2:
From 20,000 shares issued to 40,000 shares issued; From P5 par to P2.50 par
From 4,000 treasury shares to 8,000 treasury shares; From P20 cost per treasury to P10 per treasury
(d) Equipment
Treasury shares (2,800*P10)
Share premium-TST
(e) Cash (10,000*P15)
Preference shares (10,000*P10)
Share premium-PS
(f)
Accumulated profits (34,800*10%)*P6
Share dividends payable (3,480*P2.50)
Share premium-OS
Share dividends payable
Ordinary shares
1. Ans. NO EFFECT.
50,000
28,000
22,000
150,000
100,000
50,000
20,880
2. Ans.
8,700
12,180
8,700
8,700
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(g) Accumulated profits
Cash dividends payable
Preference shares (50,000*P1)
Ordinary shares (38,280*P0.25)
Total cash dividends
59,570
(h) Income summary
Accumulated profits
--
940,000
940,000
Accumulated profits
52,000
Accumulated profits appropriated for treasury
Summary:
January 1, 2014 balances
(a) Retroactive adjustment, 2013 dividends
(b) Treasury shares reacquisition
(c) Share split - No Effect
(d) Treasury shares reissue
(e) Preference shares issue
(f) 10% stock dividends
(g) 2014 cash dividends
(h) 2014 net income
-- Appropriation for treasury
December 31, 2014 balances
Preference Sh
400,000
d)
e)
c)
d)
500,000
Accum. P.-App
Accum. Prof
1,200,000
(50,000)
Treasury
28,000
12,180
108,700
50,000
204,180
22,000
Ordinary Sh.
1,000,000
Share Prem.
100,000
52,000
52,000
(20,880)
(59,570)
940,000
(52,000)
1,957,550
4. Ans.
17,400
17,400
100,000
50,000
50,000
Retained earnings
Accounts payable/Liabilities
150,000
Ordinary shares (P5*100,000sh)
Share premium
500,000
Share premium
Retained earnings
550,000
150,000
500,000
550,000
Assets
1,150,000
(100,000)
(50,000)
Liabilities
300,000
150,000
1,000,000
1. Ans.
450,000
1,000,000
400,000
600,000
Retained earnings
Inventories
SHE
850,000
(100,000)
(50,000)
(150,000)
550,000
2. Ans.
Repl. Cost
Repl AD
Sound Value
(500,000)
500,000
2,500,000
(1,000,000)
1,500,000
500,000
(550,000)
50,000
3. Ans.
Ret. Earnings
(250,000)
(100,000)
(50,000)
(150,000)
550,000
4. Ans.
1,500,000 Cost
(600,000) AD
900,000 Carrying Value
75,000
75,000
Retained earnings
Accounts payable/Liabilities
175,000
Revaluation surplus
Retained earnings
500,000
Balances, before quasi-reorganization
a) Write-down of PPE
b) Write-down of Inventory
c) Accrual of additional Liability
d) Write-off of deficit
Balances, after quasi-reorganization
Sh. Prem-TS
22,000
CASE 2:
Entries:
a) PPE - Appraisal Increase
Accum Depr - Appraisal Increase
Revaluation surplus
b)
Sh. Prem-OS
192,000
50,000
8,700
Retained earnings
Inventories
Balances, before quasi-reorganization
a) Write-down of PPE
b) Write-down of Inventory
c) Accrual of additional Liability
d) Recapitalization
e) Write-off of deficit
Balances, after quasi-reorganization
Sh. Prem-PS
100,000
CHAPTER 9-PROBLEM 15: TRUST CORPORATION
CASE 1:
Entries:
a) Retained earnings
100,000
Accum Depr
c)
52,000
Ordinary Sh
100,000
(80,000)
5. Ans.
Accumulated profits
Share dividends payable
Computed as: (34,800*20%*P2.50)
b)
3. Ans.
59,570
50,000
9,570
59,570
175,000
500,000
Assets
1,150,000
600,000
(75,000)
Liabilities
300,000
175,000
1,675,000
1. Ans.
CHAPTER 9-PROBLEM 16: SPURS INC.
1. Ans. Dr. P150,000.
Debit to RE, per books
Debit to RE, per audit (15%*100,000sh)*P110
Adjustment to RE (additional debit)
475,000
SHE
850,000
600,000
(75,000)
(175,000)
1,200,000
2. Ans.
Ordinary Sh.
1,000,000
Share Prem.
100,000
Rev. Surplus
Ret. Earnings
(250,000)
600,000
1,000,000
100,000
3. Ans.
(500,000)
100,000
4. Ans.
1,500,000
1,650,000
(150,000)
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
(75,000)
(175,000)
500,000
5. Ans.
(52,000)
AUDITING (2016 EDITION)
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125 of 155
2. Ans. P9,100,000.
Unadjusted Net Income, per books
Inventory fire loss
Impairment loss on PPE
Loss on sale of Equipment
Gain on retirement of bonds
Unrealized holding gain on FA
Increase in beg. Inventory under FIFO
Increase in end. Inventory under FIFO
Adjusted Net Income, per audit
9,000,000
(150,000)
(750,000)
(200,000)
300,000
700,000
(100,000)
300,000
9,100,000
3. Ans. P6,400,000.
Retained earnings, beginning
Correction of prior period error
Change in policy (Ave to FIFO)
Retained earnings, beg. as restated
7,800,000
(1,500,000)
100,000
6,400,000
4. Ans. P10,650,000.
Retained earnings, beg. as restated
15% stock dividend declaration
Loss on retirement of Treasury (P1,050,000-P850,000)
Reserve for plant expansion
Adjusted Net Income
Retained earnings, ending balance
6,400,000
(1,650,000)
(200,000)
(3,000,000)
9,100,000
10,650,000
5. Ans. P1,100,000.
Excess over par on share dividends (P1,650,000-P1,500,000)
Loss on retirement of treasury
Excess over par on share issuance
Proceeds from sale of donated shares
Net/Total adjustment to Additional Paid-in Capital
150,000
(850,000)
1,000,000
800,000
1,100,000
MULTIPLE CHOICE EXERCISES:
CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC.
1. Ans. A.
Ordinary shares issued (40,000sh*P20)
Ordinary shares subscribed (5,000sh*P20)
Preference shares issued (6,000sh*P100)
Preference shares subscribed (900sh*P100)
Share premium from ordinar shares
Issued
Subscribed (P56-P20)*5,000sh
Share premium from preference shares
Issued
Subscribed (P140-P100)*900
Share premium from treasury shares
Ordinary share warrants outstanding
Total contributed capital
800,000
100,000
600,000
90,000
920,000
180,000
224,000
36,000
2. Ans. A.
Revaluation surplus
Unrealized holding gain - AFS
Translation reserves (credit)
Unrealized capital/Other comprehensive income
3. Ans. B.
Contributed capital
Accum. other comprehensive income
Accumulated profits
Stockholders' equity
1,100,000
260,000
8,000
40,000
2,998,000
240,000
6,000
100,000
346,000
2,998,000
346,000
820,000
4,164,000
CHAPTER 9-EXERCISE 2: ALPHA CORPORATION
1. Ans. D.
Authorized ordinary shares at P10 par value
Unissued ordinary shares
Ordinary shares issued
900,000
(500,000)
P400,000
2. Ans. D.
Authorized preference shares at P50 par value
Unissued preference shares
Preference shares issued
400,000
100,000
P300,000
3. Ans. C.
Additional paid-in capital on ordinary shares
Additional paid-in capital on preference shares
Additional paid in capital on sale of treasury shares
Ordinary share warrants outstanding
Donated capital
Total Additional Paid-in Capital
460,000
112,000
4,000
20,000
25,000
P621,000
4. Ans. D.
Ordinary shares issued
Preference shares issued
20,000
15,000
Total Additional Paid-in Capital
Total Contributed Capital
P400,000
300,000
30,000
30,000
621,000
P1,381,000
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5. Ans. C.
Ordinary shares issued
Preference shares issued
Ordinary shares subscribed
Preference shares subscribed
Total Legal Capital (Par value of issued and subs.)
6. Ans. C.
Total Contributed Capital
income:
Unrealized holding gain-AFS
Revaluation increment in properties
Accumulated profits:
Accumulated profits – unappropriated
Reserve for bond sinking fund
Total Stockholder’s equity
P400,000
300,000
50,000
45,000
P795,000
1,381,000
3,000
100,000
410,000
220,000
P2,114,000
CHAPTER 9-EXERCISE 3: TABUK CORPORATION
Entry Made
Correct Entry
Cash
900,000
Cash
900,000
O.S.
300,000
O.S.
300,000
P.S.
450,000
P.S.
450,000
Retained earnings
150,000
Share Prem – PS
117,000
Share Prem – OS
33,000
Cash
Other expense
Treasury Stock
225,000
37,500
262,500
O.S.
600,000
Treasury Stock
350,000
Retained Earnings
250,000
No entry
Adjusting Journal Entry
Retained Earnings
150,000
Share Prem – PS
117,000
Share Prem – OS
33,000
1. Ans. C.
Cash
225,000
Share Prem – TS
37,500
Treasury Stock
262,500
Share Prem. – TS
37,500
Retained Earnings
37,500
*books are already closed.
2. Ans. D.
O.S.
600,000
Share Prem – OS
90,000
Treasury Stock
350,000
Share Prem – TS
340,000
Share Prem. – OS
90,000
Retained Earnings
250,000
Share Premium – TS
340,000
3. Ans. C.
Cash
Subs Rec.
Opex
Interest income
Cash
425,000
Subs Rec.
350,000
Retained earnings
75,000
*books are already closed.
4. Ans. A.
425,000
350,000
50,000
25,000
CHAPTER 9-EXERCISE 4: NEVADA SQUARE
1. Ans. D.
Retained earnings, Jan. 1, 2014
P30,000,000
Cash dividends
(2,800,000)
Stock dividends (100,000*P68) (a)
(6,800,000)
Property dividends (800,000/2)*P25 (b)
(10,000,000)
Net income for the year
60,000,000
Retained earnings, Dec. 31, 2014
P16,400,000
(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.
(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.
2. Ans. B.
Ordinary shares, January 1, 2014
P14,000,000
Stock dividends issuance (100,000*20)
2,000,000
Ordinary shares, December 31, 2014
P16,000,000
*share split is accounted through memo entry only, aggregate par value remains the same.
3. Ans. C.
Share premium, January 1, 2014
Share premium from share dividends
(6,800,000 – 2,000,000)
Share Premium, December 31, 2014
4,800,000
P12,800,000
4. Ans. B.
Preference shares
Ordinary shares
Share premium
Retained earnings
Retained earnings, Dec. 31, 2014
P10,000,000
16,000,000
12,800,000
16,400,000
P55,200,000
P8,000,000
CHAPTER 9-EXERCISE 5: MISAMIS INC.
1. Ans. B.
Number of options estimated to vest (200opt*100emp)
Multiply by Market value of Options
Total Options Outstanding
Multiply by (2012 & 2013)
Total Accum. Comp. Exp. as of 12.31.2013
20,000
30
600,000
2/3
400,000
2. Ans. D.
Proceeds from exercise of rights (60,000–5,000)/5*130
Par value of Ordinary shares issued (11,000*100)
Share premium
P1,430,000
1,100,000
P330,000
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3. Ans. B.
Share premium from ordinary shares
Share premium from exercise of warrants
Share premium from exercise of rights
Ordinary share options outstanding (20,000*30)
Ordinary share warrants outstanding (750,000*50%)
Total APIC
4. Ans. D.
Accumulated profits, beginning
Retroactive adjustment to retained earnings
Appropriation for dividends (71,000 * 5)
Net income, 2014 (2,500,000 – 200,000)
Accumulated profits, end
P1,000,000
575,000
330,000
P1,905,000
600,000
375,000
P2,880,000
P3,000,000
(400,000)
(355,000)
2,300,000
P4,545,000
CHAPTER 9-EXERCISE 6: SANTIAGO INC.
1. Ans. B.
The share options are under a variable option plan with a non-market based condition, thus:
2014:
VP 1 year achieved if 2014 Rev>=15M; Actual 2014 Rev, P14.5M – not achieved.
VP 2 years achievable if 2015 Rev>=18M; Estimated 2014 Rev, (P14.5M*125%) = 18.125M – achievable.
Number of options: (68-8)*500
30,000
Fair value of options on grant date
P18
Estimated value of services over 2 years
P540,000
Divide by: Vesting period
2 years
Salaries expense, 2014
P270,000
2. Ans. D.
2015:
VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved.
VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable.
Number of options: (65-5)*500
30,000
Fair value of options on grant date
P18
Estimated value of services over 3 years
P540,000
Multiply by: 2/3
2/3
2015
P360,000
Less: Prior years’ salaries expense
(270,000)
Salaries expense, 2015
P90,000
3. Ans. C.
2016:
VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved.
Final number of options: 63*500
31,500
Fair value of options on grant date
P18
Final value of services over 3 years
P567,000
Multiply by: 3/3
3/3
Accumulated salaries expense as of 2016
P567,000
Less: Prior years’ salaries expense
(360,000)
Salaries expense, 2016
P207,000
4. Ans. A.
Final number of options: 63*500
Options exercised in 2017: 45*500
Options forfeited in 2017 3*500
Remaining options as of 12/31/17
Multiply by fair value on grant date
Carrying value of options outstanding 12/31/17
5. Ans. C.
Entry upon exercise of 45*500 = 22,500 options:
Cash (22,500*P35)
Ordinary share options outstanding
(22,500*18)
Ordinary shares (22,500*P20)
Share premium
31,500
(22,500)
(1,500)
7,500
P18
P135,000
787,500
405,000
450,000
742,500
CHAPTER 9-EXERCISE 7: PANDORA CORP.
1. Ans. B.
The share options are under a variable option plan with a market based condition, thus the achievability of the condition is
not a matter to consider in determining annual salaries expense:
2014:
Number of options: (600-5-45)*100
55,000
Fair value of options on grant date
P5
Estimated value of services over 3 years
P275,000
Divide by: Vesting period
3 years
Salaries expense, 2014
91,667
2. Ans. A.; 3. ans. C.
2015:
Number of options: (600-5-20-35)*100
Fair value of options on grant date
Estimated value of services over 3 years
Multiply by: 2/3
Accumulated salaries expense as of 2015
Less: Prior years’ salaries expense
Salaries expense, 2015
54,000
P5
P270,000
2/3
P180,000
(91,667)
P88,333
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
AUDITING (2016 EDITION)
CTESPENILLA
4. Ans. A.
2016:
Final number of options: (600-5-20-30)*100
Fair value of options on grant date
Final value of services over 3 years
Multiply by: 3/3
Accumulated salaries expense as of 2016
Less: Prior years’ salaries expense
Salaries expense, 2016
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54,500
P5
P272,500
3/3
P272,500
(180,000)
P92,500
CHAPTER 9-EXERCISE 8: JUBEE CORP.
1. Ans. B.
The share options are under a variable option plan with a non-market based condition, thus:
2014:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. 12% – achievable.
Number of options: (100*80%)*200
16,000
Fair value of options on grant date
P40
Estimated value of services over 3 years
640,000
Divide by: Vesting period
3 years
Salaries expense, 2014
P213,333
2. Ans. C.
2015:
Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable.
Number of options: (100*85%)*300
25,500
Fair value of options on grant date
P40
Estimated value of services over 3 years
1,020,000
Multiply by: 2/3
2/3
Accumulated salaries expense as of 2015
P680,000
Less: Prior years’ salaries expense
(213,333)
Salaries expense, 2015
P466,667
3. Ans. D.
2016:
Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived.
Final number of options: (100-14)*300
25,800
Fair value of options on grant date
P40
Final value of services over 3 years
P1,032,000
Multiply by: 3/3
3/3
Accumulated salaries expense as of 2016
P1,032,000
Less: Prior years’ salaries expense
(680,000.0)
Salaries expense, 2016
P352,000
4. Ans. A.
Entry upon exercise of 60% of the options (25,800*60% = 15,480 options):
Cash (15,480*P120)
1,857,600
Ordinary share options outstanding
(15,480*40)
619,200
Ordinary shares (15,480*P100)
1,548,000
Share premium
928,800
5. Ans. B.
Entry upon expiration of 40% of the options (25,800*40% = 10,320 options):
Ordinary share options outstanding
(10,320*40)
412,800
Share premium – Expired options
412,800
CHAPTER 9-EXERCISE 9: KALINGA CO.
1. Ans. A.
The share appreciation rights are under a variable plan with a non-market based condition, thus:
2014:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable.
Estimated number of SAR: (20-4)*10,000
160,000
Estimated FMV of SAR at year-end
P6
Estimated value of services over 3 years
P960,000
Divide by: Vesting period
3 years
Salaries expense, 2014
P320,000
2. Ans. D.
2015:
Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable
Estimated number of SAR: (20-4)*10,000
160,000
Estimated FMV of SAR at year-end
P6.75
Estimated value of services over 3 years
P1,080,000
Multiply by: 2/3
2/3
Accumulated salaries expense as of 2015
P720,000
Less: Prior years’ salaries expense
(320,000)
Salaries expense, 2015
400,000
3. Ans. B; 4 Ans. D.
2016:
Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved.
Final number of SAR 15*20,000
300,000
Fair value of options on grant date
P7
Est. value of services over 3 years
P2,100,000
Multiply by: 3/3
3/3
Accumulated salaries expense as of 2016
P2,100,000
Less: Prior years’ salaries expense
(720,000)
Salaries expense, 2016
P1,380,000
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AUDITING (2016 EDITION)
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CHAPTER 9-EXERCISE 10: SANS CORP.
CORRECT ENTRIES:
Land (1.8M*30%)
Building (1.8M*70%)
Ordinary Shares
Share premium
540,000
1,260,000
500,000
1,300,000
Subsription receivable
Ordinary shares subscribed
Share premium
420,000
Treasury shares (5,000 sh)
Cash
125,000
Cash
Subscription receivable
252,000
Ordinary share subscribed
Ordinary shares
120,000
200,000
220,000
125,000
252,000
120,000
MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par
8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price
5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit
Cash
RE
Treasury shares (10,000*6.25)
40,000
22,500
62,500
2. Ans. C.
Compensation expense
SAR Payable
(7*4,000*P15)/5years
84,000
84,000
3. Ans. C.
RE
Cash Dividends Payable
Shares Outstanding
Shares Subscribed
Total
Multiply by cash div rate
Total Cash dividends
270,000
270,000
238,000
32,000
270,000
1
270,000
Income Summary
RE
1,500,000
1,500,000
Summary
January 15,
March 1,
June 1,
July 15,
September 2,
December 30,
December 31,
Appropriation for TS
Adj. Balances
CHAPTER 9-EXERCISE 11: ROXXY CORP.
1. Ans. D.
OS
500,000
OS-Subs
200,000
TS
TOTAL
620,000
1. Ans. B.
(120,000)
80,000
1,520,000
4. Ans. C.
(22,500)
(270,000)
1,500,000
(62,500)
1,145,000
5. Ans. C
62,500
(62,500)
3,365,000
6. Ans. D.
Ordinary Sh.
Sh Prem - OS
2013 transactions:
A. Cash dividend declaration (June 15, 2013)
B. Share issue for cash
C. Reacquisition of Treasury Shares
D. Stock Dividend Declaration
2. Ans. C.
Share premium - OS
Share premium - Treasury-OS
Total Share premium
RE
(125,000)
120,000
Prior to 2013:
A. Share issue for cash
3,800,000
B. Share issue for land
200,000
C. Share subsription/issue
400,000
D. Cash dividend declaration (Dec. 15, 2012)
2014 transaction:
A. Reissue of TS
Balances: June 30, 2014
Share Prem.
1,300,000
220,000
80,000
Sh Prem- TS Treasury Share Shares Outstanding
7,980,000
680,000
1,280,000
380,000
20,000
40,000
440,000
312,000
440,000
8,000
(8,000)
22,000
462,000
(78,000)
234,000
2,000
464,000
288,000
220,000
924,000
4,700,000
11,152,000
6,000
6,000
11,152,000
6,000
11,158,000
3. Ans C.
Retained earnings, June 30, 2013
Net Income for 2014 fiscal year
Stock Dividends to OS (Dec. 2013)
(440,00sh*5%*P52)
Cash Dividends to PS (Dec. 2013)
(200,000*P1)
Voluntary approp. for sinking fund
Legal approp. for treasury shares (equal to cost)
Retained earnings, unappropriated June 30, 2014
2,760,000
160,000
(1,144,000)
(200,000)
(200,000)
(234,000)
1,142,000
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
AUDITING (2016 EDITION)
CTESPENILLA
4. Ans. A.
Ordinary Shares
Preference Shares
Share Premium - OS
Share Premium - PS
Share Premium - Treasury (OS)
RE, appropriated
RE, unappropriated
Treasury Shares at cost
Total SHE, June 30, 2014
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4,700,000
5,000,000
11,152,000
3,800,000
6,000
434,000
1,142,000
(234,000)
26,000,000
CHAPTER 9-EXERCISE 12: GLORIA CORPORATION
ENTRIES:
a) OS (30,000*5)
150,000
Share premium - OS
150,000
Treasury shares
Share premium - TST
1. Ans. C.
b) RE (10,000*70)
Property dividends payable
RE (10,000*5)
Property dividends payable
2. Ans. A.
Property dividends payable
Trading securities @CV
Gain/Income
270,000
30,000
700,000
700,000
50,000
50,000
750,000
680,000
70,000
c) Memo: 1M share rights were received; 1 OS: 4 SR plus P11
Cash (840K/4)*11
2,310,000
OS (210K*5)
Share premium - OS
d) RE (100,000*2)
OSWO
Cash (80,000*8)
OSWO (200,000*80%)
OS (80,000*5)
Share premium - OS
e) RE (1.8M*10%)
Dividends payable
200,000
200,000
640,000
160,000
400,000
400,000
180,000
180,000
f) Available for sale securities
110,000
UHGain - OCI (SCI/SHE)
UHLoss - AFS 12/31/13
UHLoss - AFS 12/31/14
Decrease in UHL or UHGain for the year
g) RE, beg
Income tax expense
Rent income
h) Income summary
RE
SUMMARY
January 1 balances
a) Treasury shares retirement
b) Property dividends
c) Stock rights exerise
d) Options (prior period error)
Options exercise
e) Cash dividends
f) UHGain - AFS for the year
g)Prior period error
h) Net Income for the year
December 31, balances
1,050,000
1,260,000
110,000
245,000
(135,000)
110,000
275,000
225,000
500,000
2,600,000
2,600,000
PS
1,800,000
OS
3,590,000
(120,000)
1,050,000
1,260,000
200,000
240,000
UHLoss
(245,000)
RE
4,000,000
TS
(270,000)
270,000
(750,000)
400,000
(200,000)
(180,000)
110,000
1,800,000
6,450,000
3. Ans. B.
5. Ans. A; 7. Ans. C.
Preference share
Ordinary shares
APIC
Contributed Capital
Unrealized holding loss – SHE
Accumulated profits - Total
Total Stockholders’ Equity
APIC
5,150,000
(150,000)
5,170,000
4. Ans. B.
(135,000)
(275,000)
2,600,000
5,195,000
6. Ans. D.
1,800,000
6,450,000
5,170,000
13,420,000
(135,000)
5,195,000
P18,480,000
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CHAPTER 9-EXERCISE 13: RAJA CORPORATION
OS
Beginning balance
4,000,000
Jan. 5
100,000
Jan. 16
Feb. 20
Feb. 25
200,000
Mar. 1
1,140,000
Apr. 1 Split (no entry)
May. 30
Jul. 1
778,500
Aug. 1
Dec. 31
Appropriation for TS
Ending balance
6,218,500
1. Ans. A.
Sh. Prem.
RE-app
RE-unapp
1,700,000
6,000,000
60,000
(164,000)
TS
(1,000,000)
280,000
(1,140,000)
200,000
2,335,500
4,575,500
2. Ans. A.
500,000
(3,114,000)
(238,740)
2,150,000
(500,000)
2,993,260
3. Ans. C.
500,000
500,000
(500,000)
TOTAL
11,700,000
160,000
(164,000)
(1,000,000)
480,000
700,000
(238,740)
2,150,000
13,787,260
4. Ans. C.
CHAPTER 9-EXERCISE 14: APAYAO CORPORATION
ASSETS
Cash and cash equivalents (325,000 + 75,000)
Accounts receivable (275,000 + 100,000)
Marketable securities, at FMV as of 12/31/06 (955,000 – 600,000)
Prepayments
Land
Building (600,000 – 50,000)
Machinery and equipment (330,000 – 110,000)
TOTAL
LIABILITIES AND CAPITAL
Current liab. (325,000+75,000+100,000+3,000–50,000–100,000)
Non-current liabilities (250,000 + 50,000)
Ordinary shares, (50,000 – 5,000 + 4,000) * 25
Share premium (750,000 – 75,000 + 140,000)
Contributed capital
Reserve for self insurance
Reserve for treasury shares (50*5,000)
Accum.profits (625,000–3,000–100,000–140,000–50,000–250,000)
Treasury shares (50,000*5,000)
TOTAL
400,000
375,000
355,000
50,000
900,000
550,000
220,000
353,000
300,000
1,180,000 1. Ans. B.
1,670,000
2,850,000 5. Ans. A.
2. Ans. B
653,000
1,225,000
815,000
2,040,000 3. Ans. A.
75,000
250,000
82,000
(250,000)
4. Ans. D.
2,197,000
2,850,000
CHAPTER 9-EXERCISE 15: WHISPER INC.
May, 2012 balances
Net income, 2012
July 23, 2013 share issue
October 2 stock dividends (800,000*5%)
Net income, 2013
February, 2014 treasury stock
June, reissuance of treasury
October, issuance of stocks thru rights exercise (250,000*2)
November, issuance of stacks thru rights exercise (400,000*2)
December 15, cash dividends: (2,125,000*.30)
December 31, retirement of TS
Net income, 2014
Balances
#of Shares
Outstanding
300,000
Ordinary Sh.
Issued
P3,000,000
APIC
P300,000
500,000
40,000
5,000,000
400,000
1,250,000
40,000
(30,000)
15,000
500,000
800,000
5.000,000
8,000,000
45,000
1,500,000
2,400,000
P125,000
(440,000)
350,000
(637,500) 1. Ans. C.
(100,000)
2,125,000
P21,300,000
10,000
P5,545,000
2. Ans. A.
4. Ans. A.
Ordinary shares issued
Additional paid-in capital
Retained earnings
Treasury shares (5,000*9)
Total stockholders’ equity
Retained
Earnings
800,000
P197,500
3. Ans. C.
P21,300,000
5,545,000
197,500
(45,000)
P26,997,500
CHAPTER 9-EXERCISE 16: GREY CO.
1. Ans. A.
Contributed capital in excess of par value
Donated capital (from stockholder)
Recapitalization (reduction in par value)
Additional paid in capital
2. Ans. D.; 3. Ans. A.
2010 – 2013 Net income
2010 – 2013 Cash dividends
Correction of error (note 2)
Refund of prior year’s income tax
Net income, 2014
50% share dividend, 2014
Retained earnings, total
Retained earnings, appropriated (60,000*4)
Retained earnings, unappropriated
P18,000
15,000
1,500,000
P1,533,000
P2,400,000
(1,560,000)
6,000
27,000
510,000
(750,000)
P633,000
240,000
P393,000
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AUDITING (2016 EDITION)
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CHAPTER 9-EXERCISE 17: SCURBS CORPORATION
ADJUSTING JOURNAL ENTRIES
a. Ordinary shares
180,000
Share premium
b. Retained earnings
Share dividends payable
h. PPE
Retained earnings
36,000
180,000
3,300
150,000
i. Retained earnings
Accumulated Depr.
j. Depreciation expense
Accumulated Depr
3,300
150,000
c. Allowance for bad debt
Bad debt expense
30,000
d. Marketable securities
Retained earnings
9,000
30,000
k.
9,000
e. Unrealized loss (IS)
Marketable securities
57,000
f. Retained earnings
Income summary
12,000
g. Income summary
Inventory, end
18,300
Accumulated depr
PPE
Gain on sale of PPE
57,000 l. Prepayment
Insurance expense
Retained earnings
12,000
36,000
3,300
3,300
52,500
45,000
7,500
2,700
2,700
5,400
18,300
SUMMARY:
1. Ans. A.
Total assets, 2014 unadjusted
(c) Decrease in allowance for bad debt
(d) Increase in value of marketable sec. in 2013
(e) Decrease in value of marketable sec. in 2014
(g) Decreasein inventory, end 2014
(h) Understatement in PPE in 2013
(i) Depreciation of PPE in item h, in 2013
(j) Depreciation of PPE in tem h, in 2014
(k) Correction error: PPE
disposal in 2014
(l) Correcrion of error: prepayment
Total assets, 2014 adjusted
2,545,200
30,000
9,000
(57,000)
(18,300)
36,000
(3,300)
(3,300)
7,500
2,700
2,548,500
2. Ans. B.; 3. Ans. D.
Unadjusted net income,
(c) Decrease in bad debts in 2014
(d) Increase in value of marketable sec. in 2013
(e) Decrease in value of marketable sec. in 2014
(f) Overstatement in inventory, end 2013
(g) Understatement in inventory, end 2014
(h) Overstatement of repairs expense in 2013
(i) Understatement in depreciation in 2013
(j) Understatement in depreciation in 2014
(k) Understatement in gain on sale of equipment, 2014
(l) Overstatement of insurance expense, 2013
Understatement of insruance expense, 2014
Adjusted Net Income
2013
585,000
2014
660,000
30,000
9,000
(12,000)
(57,000)
12,000
(18,300)
36,000
(3,300)
(3,300)
7,500
5,400
620,100
4. Ans. D.
Unadjusted Retained Earnings, end 2014
Prior period errors: (P585,000-P620,100)
Overstatemetn in 2014 Net Income (P660,000-P628,200)
Unrecorded dividend declaration (b)
Adjusted Retained Earnings, end 2014
(2,700)
628,200
1,401,000
35,100
(31,800)
(150,000)
1,254,300
CHAPTER 9-EXERCISE 18: GBC INC.
1. Ans. D.
Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends.
2. Ans. B.
Shares issued
Less: treasury (1,000,000/50)
Outstanding shares
Multiply by
Dividends distributable, small
Multiply by fair value
Appropriation for share dividends
100,000
(20,000)
80,000
10%
8,000
42
336,000
3. Ans. B.
a. Total net income since incorporation
b. Total cash dividends paid
c. Impairment on property declared as dividend (600,000 – 450,000)
Appropriation for property dividend at impaired value
e. Correct valuation of share dividends
h. Appropriated for plant expansion
i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000)
l. Appropriated for remaining treasury shares at cost P50/share
Correct Unappropriated Accumulated Profits balance
P3,200,000
(150,000)
(150,000)
(450,000)
(336,000)
(700,000)
(140,000)
(1,000,000)
P274,000
4. Ans. A.
5. Ans. D.
d. Proceeds from sale of donated stocks
e. Share premium from share dividends
f. Gain on treasury share transaction
i. Loss on treasury share reissue (debit
j. Share premium in excess of par from
k. Share issuance expense
APIC
150,500
136,000
375,000
(375,000)
215,000
(45,000)
456,500
CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY
AUDITING (2016 EDITION)
CTESPENILLA
CHAPTER 9-EXERCISE 19: MAMA CORP.
ENTRIES: PROPERTY DIVIDENDS
Declaration: Retained earnings
Dividends payable
Payment:
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900,000
900,000
Noncurrent Asset Held
Loss
Equipment
900,000
300,000
Retained earnings
Dividends payable
100,000
1,200,000
100,000
Dividends payable
1,000,000
Noncurrent Asset Held for Disposal
Gain
900,000
100,000
ENTRIES STOCK DIVIDENDS
Declaration: Retained earnings
(200,000*10%)*42
840,000
Dividends payable (20,000*25)
Share premium
500,000
340,000
Payment:
Dividends payable
Ordinary shares
1. Ans. A.
2. Ans. D.
3. Ans. A.
500,000
500,000
4. Ans. D.
a. Total net income since 2013
b. Cash dividends since 2013
c. Property Dividends (see entries above)
Adjustments to Net income in relation to the property dividends
Loss on reclassification of Equipment to held for disposal
Gain on settlement of the property dividends
d. Capital loss from treasury shares reissue (300,000-400,000)
e. Stock dividends (see entries above)
g. Appropriation for plant expansion
*Appropriation for treasury stock (30,000*P40)
Accumulated profits - unappropriated balance
CHAPTER 9-EXERCISE 20: TAR CO.
1. Ans. A.
Net income, unadjusted
Profit sharing of employees
Proceeds from life insurance
Gain on sale of property
NET INCOME
300,000
(30,000)
150,000
23,000
443,000
2. Ans. A.
Accumulated profits, beginning
Correction of prior period error
Dividends to ordinary
Dividends to preference
Appropriation for bond redemption
Correct net income
ACCUM PROFITS, UNAPP.
200,000
(15,000)
(50,000)
(40,000)
(20,000)
443,000
518,000
3. Ans. A.
APIC, unadjusted
Gain on sale of treasury, net
Donation from stockholder
Gain on sale of own shares
APIC
100,000
3,000
52,000
12,000
167,000
6,400,000
(300,000)
(1,000,000)
(300,000)
100,000
(100,000)
(840,000)
(700,000)
(1,200,000)
2,060,000
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CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
DISCUSSION PROBLEMS
CHAPTER 10-PROBLEM 1: ABC CORPORATION
Current
Cash
Accounts receivable
Allowance for doubtful accounts
Dividend receivable (a)
Prepaid expenses
Inventory
Financial assets at fair value (a)
Land (b)
Building in process (b)
Patent
Machinery and equipment
Accumulated depreciation
Discount on bonds payable
Accounts payable
Accrued expenses
Note payable, 10% (c)
Accrued interest on notes payable (c)
Bonds payable
Accrued interest on bonds payable (d)
Share capital
Accumulated profits (b), (c), (d)
Treasury shares (a)
Adjusted balances
800,000
750,000
50,000
160,000
1,000,000
690,000
Asset
800,000
750,000
(50,000)
40,000
160,000
1,000,000
400,000
Noncurrent
Asset
Current
Liabiliti
es
Noncurrent
SHE
Liabilities
525,000
4,950,000
200,000
1,500,000
(300,000)
5,500,000
200,000
1,500,000
300,000
200,000
900,000
150,000
250,000
(200,000)
900,000
150,000
250,000
52,500
2,000,000
2,000,000
60,000
3,000,000
4,150,000
3,100,000
1. Ans.
Audit notes:
(a) Financial asset at fair value, unadjusted
Treasury shares
Dividend receivable
Financial asset at fair value, adjusted
6,875,000
2. Ans.
1,412,500
3. Ans.
1,800,000
690,000
(250,000)
(40,000)
400,000
(b) Building in progress, unadjusted
Land including property taxes in arrears
Property tax expense
Building in progress, adjusted
5,500,000
(525,000)
(25,000) *charged to RE
4,950,000
(c) Notes payable, principal
250,000
Interest in 2013 (P250,000*10%)
Interest in 2014 (P275,000*10%)
Total interest payable on notes
25,000
27,500 *charged to RE
52,500 *charged to RE
(d) Accrued interest on bonds payable (P2,000,000*12%*3/12)
4. Ans. P3,762,500.
Accumulated profits, unadjusted
(b) Property taxes for the current year
(c) Interest on notes in 2013
Interest on notes in 2014
(d) Unaccrued interest on bonds in 2014
Appropriation for Treasury shares
Accum. Profits, unappropriated, adjusted
60,000
4,150,000
(25,000)
(25,000)
(27,500)
(60,000)
(250,000)
3,762,500
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
3,000,000
4,012,500
(250,000)
6,762,500
5. Ans.
AUDITING (2016 EDITION)
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CHAPTER 10-PROBLEM 2: RCW CORP.
Cash
Accounts receivable
Allowance for doubtful accounts
Inventories at cost (NRV is P900,000)
Land, plant site
Land, for speculation at FMV (Note a)
Building
Accumulated depreciation – building
Equipment
Accumulated depreciation – equipment
Investment in associate
Prepaid expenses
Notes payable
Accounts payable
Income tax payable
Accrued expenses
Mortgage payable, P100,000 quarterly
Estimated liability for damages
Retained earnings app. for plant expansion
Retained earnings app. for contingencies
Share capital
Share premium
Retained earnings, unappropriated
Trademark
Secret processes and formulas
Bank loan payable – June 30, 2015 (Note b)
Def. tax asset, net def. tax liability, P50,000
Adjusted balances
CHAPTER 10-PROBLEM 3: SCR COMPANY
400,000
800,000
50,000
1,000,000
500,000
1,200,000
3,800,000
2,000,000
3,400,000
1,300,000
1,300,000
100,000
750,000
350,000
50,000
60,000
2,000,000
140,000
1,000,000
100,000
3,000,000
300,000
1,350,000
150,000
200,000
500,000
100,000
Noncurrent
Asset
Asset
Asset
6,200,000
(600,000)
(1,000,000)
(200,000)
(600,000)
100,000
800,000
Total comprehensive income
Liabilities
(100,000)
750,000
350,000
50,000
60,000
400,000
140,000
1,600,000
1,000,000
100,000
3,000,000
300,000
1,350,000
150,000
200,000
Noncurrent
Asset
11,800,000
600,000
1,000,000
150,000
7,400,000
2. Ans.
Current
Liabilities
2,000,000
1,750,000
3. Ans.
Noncurrent
Liabilitie
s
2,000,000
500,000
50,000
2,150,000
4. Ans.
SHE
14,000,000
(200,000)
(600,000)
(100,000)
(800,000)
12,500,000
2. Ans.
140,000
350,000
70,000
100,000
1,740,000
3. Ans.
500,000
(140,000)
(300,000)
(100,000)
1,460,000
4. Ans.
300,000
14,000,000
5. Ans.
12,230,000
(6,560,000)
5,670,000
170,000
210,000
6,050,000
(3,470,000)
2,580,000
(774,000)
1,806,000 4. Ans.
560,000
2,366,000
Statement of Comprehensive Income (Expenses according to nature)
Note #
Net Sales
Note 1
Share from net income of associate
Note 3
Other income
Note 4
SHE
100,000
CHAPTER 10-PROBLEM 4: ABC COMPANY
Statement of Comprehensive Income (Expenses according to function)
Note #
Net Sales
Note 1
Less: Cost of Sales
Note 2
Gross profit
Share from net income of associate
Note 3
Other income
Note 4
Total income
Less: Operating expenses
Selling expenses
Note 5
1,820,000
General and administrative expenses
Note 6
850,000
Interest expense
400,000
Unrealized holding loss from financial asset
400,000
Net income before tax
Income tax expense (30%)
Net income after tax
Other comprehensive income/loss:
Unrealized holding gain on financial asset, net of tax
Revaluation surplus, net of tax
Foreign translation gain, net of tax
Noncurrent
500,000
1,200,000
3,800,000
(2,000,000)
3,400,000
(1,300,000)
1,300,000
(500,000)
140,000
4,700,000
1. Ans.
Current
Liabiliti
es
400,000
800,000
(50,000)
900,000
2,150,000
1. Ans.
Curre
nt
Unadjusted balances
Restricted foreign deposit
Investment property at cost
Loss on inventory write-down
Treasury shares
Store supplies
Financial asset at fair value through profit/loss
Share premium
Unearned leasehold income -current portion
Stock dividends payable
Serial bonds payable - current portion
Adjusted balances
Current
5. Ans.
12,230,000
170,000
210,000
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
5,650,000
5. Ans.
AUDITING (2016 EDITION)
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Total income before expenses
Less: Operating expenses
(Increase)Decrease in inventories
Net purchases
Depreciation
Salaries
Supplies
Utilities
Rent
Advertising
Freight-out
Interest expense
Unrealized holding loss on financial asset
Net income before tax
Income tax expense (30%)
Net income after tax
12,610,000
Note 7
Note 2
Other comprehensive income/loss:
Unrealized holding gain on financial asset, net of tax
Revaluation surplus, net of tax
Foreign translation gain, net of tax
390,000
5,140,000
1,200,000
900,000
600,000
400,000
200,000
150,000
250,000
400,000
400,000
140,000
350,000
70,000
Total comprehensive income
(10,030,000)
2,580,000
(774,000)
1,806,000 4. Ans.
560,000
2,366,000
SUPPLEMENTARY NOTES:
Note 1: Net Sales
Gross sales
Less: Sales returns and allowances
Sales discounts
Net Sales
3. Ans
5. Ans.
13,000,000
(520,000)
(250,000)
12,230,000
Note 2: Cost of Sales
Raw materials inventory, January 1,
Add: Net purchases
Gross purchases
Add: Freight-in
Less: Purchase returns and allowances
Purchase discounts
Raw materials available for use
Less: Raw materials, December 31,
Raw materials used
Direct labor (P900,000*30%)
Factory overhead:
Depreciation (P1,200,000*40%)
Supplies (P600,000*20%)
Utilities (P400,000*40%)
Total manufacturing cost
Add: Work-in process inventory, January 1,.
Cost of goods placed into process
Less: Work-in process inventory, December 31
Cost of goods manufactured
Add: Finished goods inventory, January 1,
Cost of goods available for sale
Less: Finished goods inventory, December 31,
Cost of goods sold
1,150,000
5,400,000
200,000
(310,000)
(150,000)
480,000
120,000
160,000
Note 3: Share from Net Income of Associate
XYZ Inc. Net Income for 2014
Proportionate share
Share from net income of associate
850,000
20%
170,000
Note 4: Other income
Rent income
Royalty income
Total other income
120,000
90,000
210,000
5,140,000
6,290,000
(800,000)
5,490,000
270,000
760,000
6,520,000
920,000
7,440,000
(1,100,000)
6,340,000
1,200,000
7,540,000
(980,000)
6,560,000
1. Ans.
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
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Note 5: Selling Expenses
Depreciation (P1,200,000*35%)
Salaries (P900,000*40%)
Supplies (P600,000*50%)
Utilities (P400,000*35%)
Rent expense
Advertising expense
Freight out
Total selling expenses
420,000
360,000
300,000
140,000
200,000
150,000
250,000
1,820,000
Note 6: General and Administrative Expenses
Depreciation (P1,200,000*25%)
Salaries (P900,000*30%)
Supplies (P600,000*30%)
Utilities (P400,000*25%)
Total general and administrative expenses
Note 7: Increase/Decrease in Inventories
Inventories, January 1:
Raw materials
Work-in process
Finished goods
Inventories, December 31:
Raw materials
Work-in process
Finished goods
Decrase in inventories
2. Ans.
300,000
270,000
180,000
100,000
850,000
1,150,000
920,000
1,200,000
800,000
1,100,000
980,000
3,270,000
2,880,000
390,000
CHAPTER 10-PROBLEM 5: UTV CORP.
Cash and cash equivalents
Bank overdraft
Accounts receivable
Allowance for doubtful accounts
Raw materials
Goods in process
Finished goods
Financial assets at fair value through OCI
Land, at fair market value 12/31/14
Building
Accumulated depreciation – building
Plant and equipment
Accumulated depreciation – Plant and Eqpt.
Patent
Goodwill, recognized in Jan. 2013
Note payable, bank – due June 30, 2015
Note payable, bank – due June 30, 2016
Accounts payable
Employee benefit provisions
Warranty liabilities
Income tax payable
Deferred tax liability
Accumulated profits, January 1, 2014
Revaluation surplus on Land, January 1, 2014
Unrealized gain on financial assets, 1/1/14
Share capital
Share premium,
Sales
Revaluation surplus on Land during the year
Unrealized gain on financial asset for the year
Cost of sales
Selling expenses
Administrative expenses
Finance cost
Income tax expense
Dividend declared and paid
Balances
Net Income
Current Asset
400,000
400,000
100,000
900,000
900,000
40,000
(40,000)
560,000
560,000
600,000
600,000
1,400,000
1,400,000
2,500,000
1,000,000
6,000,000
1,600,000
2,400,000
400,000
800,000
1,400,000
1,300,000
2,100,000
1,000,000
180,000
80,000
120,000
280,000
3,600,000
360,000
280,000
5,000,000
1,000,000
10,000,000
140,000
100,000
6,000,000
1,960,000
500,000
100,000
160,000
3,820,000
1. Ans.
Noncurrent
Assets
Current
Liabilities
Noncurrent
Liabilities
100,000
2,500,000
1,000,000
6,000,000
(1,600,000)
2,400,000
(400,000)
800,000
1,400,000
1,300,000
2,100,000
1,000,000
180,000
80,000
120,000
280,000
12,100,000
2. Ans.
2,780,000
3. Ans.
2,380,000
4. Ans.
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
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Continued…
Net Income
Cash and cash equivalents
Bank overdraft
Accounts receivable
Allowance for doubtful accounts
Raw materials
Goods in process
Finished goods
Financial assets at fair value through OCI
Land, at fair market value 12/31/14
Building
Accumulated depreciation – building
Plant and equipment
Accumulated depreciation – Plant and Eqpt.
Patent
Goodwill, recognized in Jan. 2013
Note payable, bank – due June 30, 2015
Note payable, bank – due June 30, 2016
Accounts payable
Employee benefit provisions
Warranty liabilities
Income tax payable
Deferred tax liability
Accumulated profits, January 1, 2014
Revaluation surplus on Land, January 1, 2014
Unrealized gain on financial assets, 1/1/14
Share capital
Share premium,
Sales
Revaluation surplus on Land during the year
Unrealized gain on financial asset for the year
Cost of sales
Selling expenses
Administrative expenses
Finance cost
Income tax expense
Dividend declared and paid
Balances
Net Income
Total Comprehensive Income
Accumulated Profits
Stockholders' Equity
Total Compre.
Income
360,000
280,000
5,000,000
1,000,000
10,000,000
140,000
100,000
(1,000,000)
1,280,000
1,280,000
1,520,000
6. Ans.
2. Ans. P2,025,000.
Cost of goods sold
Increase in inventory (P2,700,00-P1,575,000)
Purchases
Increase in accounts payable (P2,250,000-P1,350,000)
Cash disbursed for purchases
P1,800,000
1,125,000
2,925,000
(900,000)
P2,025,000
P6,750,000)
Add: Cost of equipment sold
Purchase of equipment
1,280,000
3,880,000
P7,935,000
(450,000)
P7,485,000
4. Ans. P2,160,000.
Purchase of equipment
Sale of land
Sale of equipment
Cash used in investing activities
140,000
100,000
(6,000,000)
(1,960,000)
(500,000)
(100,000)
(160,000)
CHAPTER 10-PROBLEM 6: THEODORE COMPANY
1. Ans. P7,485,000.
Sales revenue
Increase in accounts receivable (P1,800,000-P1,350,000)
Collections from customers
3. Ans. P4,185,000. Collections from
customers Cash disbursed for
purchases Cash paid for operating
expenses Cash provided by
operating activities
SHE
3,600,000
5. Ans.
Operating expenses
(900,000-675,000)
Cash paid for operating expenses
Accum. Profits
3,880,000
10,760,000
7. Ans.
P1,500,000
(225,000)
P1,275,000
P7,485,000
(2,025,000)
(1,275,000)
P4,185,000
(P2,700,000) 1
495,000
45,000
(P2,160,000)
P1,800,000
900,000
P2,700,000
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
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Increase in lease-liability—Land
1,800,000)
Carrying value of land sold
Add: Gain on sale of land
Proceeds from sale of land
P450,000
225,000
225,000
270,000
P495,000
(P900,000x10%)
Less: Loss on sale of equipment
Proceeds from sale of equipment
P90,000
45,000
45,000
5. Ans. P1,350,000.
dividends paid
(P1,350,000)
CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY
1. Ans. P920,000.
Net income
Adj: Non-operating (gain)/loss
Gain on sale of LT investment (P135,000-P100,000)
Adj: Non-cash (income)/expenses
Depreciation expense
Adj: Decrease/(Increase) in Working Capital
Inventory, increase
Accounts payable and accrued liabilities, decrease
Cash provided by operating activities
(80,000)
(5,000)
920,000
2. Ans. P1,005,000.
Proceeds from sale of Building
Proceeds from sale of LT Investment
Purchase of Plant assets (P700,000+600,000-110,000)
Purchase of Available for sale securities
Cash used in investing activities
350,000
135,000
(1,190,000)
(300,000)
(1,005,000)
3. Ans. P205,000.
Proceeds from share issuance
Proceeds from short-term bank debt
Payment of dividends (P500,000-160,000)
Cash provided by financing activities
790,000
(35,000)
250,000
220,000
325,000
(340,000)
205,000
Summary:
Cash provided by operating activities
Cash used in investing activities
Cash provided by financing activities
Increase in cash for the year
920,000
(1,005,000)
205,000
120,000
CHAPTER 10-PROBLEM 8: ABC CORP.
STATEMENT OF CHANGES IN EQUITY
Share Capital
January 1, balances
Share issuance
Treasury shares reaquisition
Treasury shares retirement
Dividends declaration:
Share dividends (20%*65,000sh)*P50
Cash dividends (P12*5,000)+(P3*78,000)
Appropriations:
Plant expansion
Treasury shares
Comprehensive income
Net income
Other comprehensive income
December 31, balances
3,000,000
1,000,000
(100,000)
Reserves
2,540,000
Accumulate
d
Profits-Unapp
4,000,000
(300,000)
120,000
(20,000)
650,000
Treasury
Shares
(650,000)
(294,000)
400,000
180,000
(200,000)
2,900,000
2. Ans.
9,540,000
1,000,000
(300,000)
(294,000)
(400,000)
(180,000)
-
1,200,000
4,550,000
1. Ans.
Total SHE
3,676,000
3. Ans.
(180,000)
1,200,000
(200,000)
10,946,000
4. Ans.
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
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CHAPTER 10-PROBLEM 9: GLORIA CORPORATION
STATEMENT OF CHANGES IN EQUITY
Share Capital
January 1, balances
Prior period adjustment:
Unrecorded 2011-2013 options
Overstatement in rent income in 2013
Share issuance from exercise of rights
Share issuance from exercise of options
Treasury shares retirement
Dividends declaration:
Property dividends (10,000sh*P75)
Cash dividends (P10%*P100*18,000sh)
Reversal of appropriation
Treasury shares
Comprehensive income
Net income
Other comprehensive income
December 31, balances
6,950,000
Reserves
3,615,000
200,000
1,050,000
400,000
(150,000)
Accumulate
d
ProfitsUnapp
3,730,000
Treasury
Shares
(270,000)
(200,000)
(275,000)
1,260,000
240,000
(120,000)
270,000
(750,000)
(180,000)
(270,000)
110,000
5,035,000
2. Ans.
14,025,000
(275,000)
2,310,000
640,000
(750,000)
(180,000)
270,000
-
2,600,000
8,250,000
1. Ans.
Total SHE
5,195,000
3. Ans.
-
2,600,000
110,000
18,480,000
MULTIPLE CHOICE EXERCISES:
CHAPTER 10-EXERCISE 1: KALAMANSI INC.
1. Ans. A.
Cash (184,920 – 101,920)
Accounts receivable (84,480 – 4,125)
Inventory at NRV (90,000*80%)
Prepaid Insurance
Total current assets
P83,000
80,355
72,000
12,000
P247,355
2. Ans. A.
Land
Building, net (375,000 – 45,000)
Furniture and fixtures, net (114,600 – 34,600)
Total PPE
P167,000
330,000
80,000
P577,000
3. Ans. C.
Accounts payable
Interest payable
Advances
Short term portion of serial bonds
Total Current liabilities
9. c.
P23,595
8,405
12,000
50,000
P94,000
4. Ans. C.
Unappropriated retained earnings
(75,125–72,000)
Appropriated for bond treatment
Total retained earnings
P295,000
(3,125)
50,000
P341,875
5. Ans. B.
Share capital (4,000*10)
Paid-in capital in excess of par
Total retained earnings
Total SHE
P40,000
430,00
341,875
P811,875
CHAPTER 10-EXERCISE 2:ETT INC.
Unadjusted balances
Bank overdraft
Allowance for bad debts/bad debt expense
Increase in FMV of financial asset at fair value
Inventory write-down (to NRV which is lower)
Goodwill
Salaries payable/Salaries expense
Mortgage payable
Interest payable
Accumulated depreciation on the building
Current tax payable
Adjusted balances
Current Asset
8,000,000
200,000
(260,000)
150,000
(100,000)
(200,000)
Assets
3,600,000
Liabilities
3,000,000
200,000
Liabilitie
s
200,000
Accum. Profits
2,000,000
(260,000)
150,000
(100,000)
(260,000)
150,000
(100,000)
(500,000)
(500,000)
(600,000)
(600,000)
200,000
500,000
4,000,000
400,000
(600,000)
7,790,000
1. Ans. D.
SHE
8,400,000
7,600,000
2. Ans. B.
4,000,000
400,000
200,000
4,300,000
3. Ans. D.
(200,000)
4,000,000
4. Ans. B.
7,090,000
5. Ans. C.
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
690,000
6. Ans. C.
AUDITING (2016 EDITION)
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CHAPTER 10-EXERCISE 3: JACOB CORPORATION
ASSETS
Cash and cash equivalents (325,000+75,000)
Accounts receivable (275,000+100,000)
Marketable securities (955,000-600,000)
Prepayments
TOTAL CURRENT ASSETS
Land
Building
Reserve for depreciation – Building
Machinery and equipment
Reserve for depreciation – Machinery and equipment
TOTAL NONCURRENT ASSETS
TOTAL ASSETS
LIABILITIES AND CAPITAL
Current liabilities (325,000+75,000+100,000+3,000-50,000-100,000)
Non-current liabilities (250,000+50,000)
TOTAL LIABILITIES
Ordinary shares, P25 par, 45,000 shares issued (1,250,000-125,000)
Share dividends payable (4,000sh*25)
Share premium (750,000+(4,000sh*(60-25))-((750,000/50,000)*5,000sh)
TOTAL CONTRIBUTED CAPITAL
Reserve for self insurance
Reserve for treasury shares
Accumulated profits (625,000-3,000-100,000-140,000-50,000-250,000)
Treasury shares (500,000-250,000)
TOTAL SHE
TOTAL
400,000
375,000
355,000
50,000
P1,180,000 1. Ans. B.
900,000
600,000
(50,000)
330,000
(110,000)
1,670,000
2,850,000 2. Ans. A.
353,000 3. Ans. B.
300,000 4. Ans. C.
P653,000
1,125,000
100,000
815,000
2,040,000
75,000
250,000
82,000
(250,000)
2,197,000 5. Ans. A.
2,850,000
CHAPTER 10-EXERCISE 4: REESE CORP.
1. Ans. B.
Cash
775,000
Accounts receivable (net)
2,695,000
Inventory
2,085,000
Total current assets
5,555,000
Note that the installment receivable from customer is classified as current since it is a trade payable.
2. Ans. A.
Accounts payable and accrued liabilities
Income taxes payable (654,000-525,000)
Total current liabilities
1,701,000
129,000
1,830,000
3. Ans. C.
Retained earnings, 1/1/14
Net sales and other revenues
Costs and expenses
Net income before tax
Income tax expense (30%)
Net Income for the year
Retained earnings, 12/31/14
3,450,000
13,360,000
11,180,000
2,180,000
(654,000)
1,526,000
4,976,000
CHAPTER 10-EXERCISE 5: TORRES COMPANY
Current
1,765,000
(300,000)
(600,000)
(500,000)
365,000
Cash
Compensating balance
Bond retirement
Contingency fund
Account receivable
Credit balance
Advances to officers (past due)
Current portion of past due:
2015: (P100,000 x .917431))
Non-current portion:
2016:(P200,000 × .84168)
2017: (P300,000 × .77218)
Mdse. sent on consignment:
(P100,000 × 125%)
Due from consignee:
(P75,000 ×125% × 92% - P3,000)
930,007
45,000
(600,000)
83,250
425,000
Inventory
On consignment (P100,000 × 25%)
750,000
25,000
775,000
Non-current
300,000 Other Assets
600,000 LT Investment
500,000 LT Investment
1. Ans. D.
91,743
168,336 Other Assets
231,654 Other Assets
(125,000)
Investment
Financial Asset at Fair value through P&L
Prepaid expense
Increase in value of AFS
Total
170,000
30,000
1,765,000
4. Ans. B.
2. Ans. A.
3. Ans B.
763,000
(150,000)
(30,000)
50,000
633,000 LT Investment
2,432,990
5. Ans. D.
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
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CHAPTER 10-EXERCISE 6: KATZ CORP.
Cost of Sales
Sales
Purchases
Sales discount
Purchase discount
Sales returns and allowance
Purchase returns and allowance
Correction of merchandise inventory,
beginning error, net of income tax – credit
Merchandise Inventory, January 1 (adjusted)
Merchandise Inventory, December 31
Distribution costs
General and administrative expenses
Interest expense
debt
tax – credit
income tax
value through other comprehensive income or
losses, net of income tax
Investment income – equity method
Gain on expropriation of asset
Income tax expense
value of P5,300,000
Dividends declared
Accumulated profits, January 1, 2014
Cost of Sales
Net Income
Other Comprehensive Income
Total Comprehensive Income
Accumulated Profits, Dec. 31, 2014
53,000,000
32,000,000
2,000,000
1,200,000
1,000,000
800,000
400,000
3,400,000
3,500,000
5,000,000
4,000,000
2,000,000
500,000
1,250,000
700,000
Depreciation for 2014
2. Ans. D.
Proceeds from sale of equipment
Loan to Ari Co.
Principal collection of loan receivable
Net cash used in investing activities
Total Com.
Income
(2,000,000)
(1,000,000)
(800,000)
400,000
3,400,000
(3,500,000)
(5,000,000)
(4,000,000)
(2,000,000)
500,000
1,250,000
700,000
(550,000)
3,000,000
2,000,000
(5,000,000)
(500,000)
(1,300,000)
4,200,000
(29,900,000)
9,100,000
2. Ans. B.
1,400,000
3. Ans. B.
9,100,000
1,400,000
10,500,000
4. Ans. C.
P925,000
375,000
(12,500)
(75,000)
100,000
(337,500)
150,000
(50,000)
P1,075,000
312,500
62,500
P375,000
P100,000
(750,000)
93,750
P556,250
3. Ans. A.
Net cash used in financing activities (Dividends paid)
(P250,000)
CHAPTER 10-EXERCISE 8:RAVEN CORPORATION
1. Ans. D.
Sales
10,776,000
Cost of goods
sold Gross profit
Gain on sale of trading
securities Total
Selling and administrative expenses
Unrealized holding loss on trading
securities Loss on sale of equipment
Net income before
tax Income taxes
Net income after tax
(6,468,000)
4,308,000
144,000
4,452,000
(3,444,000)
(48,000)
(12,000)
948,000
(420,000)
528,000
2. Ans. A.
Accumulated profits, unapp., Jan 1, 2014 Less:
Increase in appropriations for expansion
Stock dividends declaration (237,600*30%)*P10
Accumulated profits, unapp. Dec. 31
Less: Net income for the year Reversal
of approp for Treasury
Cash dividend declaration
Accumulated
Profits
(1,200,000)
29,900,000
1. Ans. B.
Increase in accumulated depreciation (2,912,500-2,600,000)
Accumulated depreciation of equipment sold (150,000-87,500)
Other Comp.
Income
32,000,000
550,000
3,000,000
2,000,000
5,000,000
4,800,000
1,300,000
4,200,000
CHAPTER 10-EXERCISE 7: NAM COMPANY
1. Ans. B.
Net income
Depreciation (see note below)
Gain on sale of equipment (P100,000-P87,500)
Share from net income of associate (P300,000*25%)
Decrease in accounts receivable
Increase in inventories
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
Net Income
53,000,000
1,344,000
(180,000)
(712,800)
(943,200)
528,000
60,000
96,000
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
9,100,000
12,400,000
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
143 of 155
3. Ans. C.
Share capital, Dec. 31, 2014
Share premium, Dec. 31, 2014
Total
Less:
Share capital, Dec. 31, 2013
Share premium, Dec. 31, 2013
4,312,800
1,392,000
5,704,800
Increase in Share capital and share premium
Share dividends (237,600*30%)*10
Share premium from treasury shares reissue
Proceeds from issuance of shares
2,400,000
60,000
2,460,000
3,244,800
(712,800)
(12,000)
2,520,000
4. Ans. B.
Decrease in Trading securities
Add:Gain on sale of Trading securities
Unrealized loss on trading securities
Proceeds from sale of Trading securities
360,000
144,000
(48,000)
456,000
5. Ans. C.
Proceeds from sale of equipment
Add: Loss on sale of equipment
Carrying Value of eqiupment sold
84,000
12,000
96,000
6. Ans. D.
Equipment, end
Equipment, beg
Increase in equipment
Add: Cost of disposed equipment
Total equipment acquired during the year
Equipment acquired through note issuance
Overhaul on equipment
Total cash payment made for equipment acquisition]
7. Ans. A.
Decrase in treasury shares (120,000 - 60,000)
Share premium on treasury shares reissue
Proceeds from treasury shares reissue
8. Ans. C.
Net Income
Non cash expenses/income
Depreciation expense - Bldg
Depreciaiton expense - Equipment
Bad debt expense
Amortization of bond discount
Income tax benefit (Decrease in Def. tax liab)
Non operating income/expense
Loss on sale of equipment
Changes in working capital
Trading security
Accounts receivable
Inventories
Prepaid Insurance
Accounts payable
Accrued expenses
Income tax payable
Unearned Income
Net cash provided by operating activities
9. Ans. B.
Purchase of equipment
Overhaul of equipment
Sale of equipment
10. Ans. A.
Payment of serial notes payable
Share issuance
Treasury shares reissuance
Payment of dividends
3,732,000
2,040,000
1,692,000
180,000
1,872,000
(600,000)
(72,000)
1,200,000
60,000
12,000
72,000
528,000
45,000
303,000
36,000
6,000
(75,600)
12,000
360,000
(576,000)
108,000
(6,000)
(60,000)
111,600
300,000
(96,000)
996,000
(1,200,000)
(72,000)
84,000
(1,188,000)
(240,000)
2,520,000
72,000
(96,000)
2,256,000
CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
144 of 155
CHAPTER 11: ERROR CORRECTION AND CASH;ACCRUAL
DISCUSSION PROBLEMS
CHAPTER 11-PROBLEM 1: SAFARI COMPANY
2012 NI
(15,000)
A. Accrued expense, under 2012
Accrued expense, under 2013
Accrued expense, under 2014
B. Accrued income, under 2012
Accrued income, under 2013
Accrued income, under 2014
C. Prepaid expense, under 2012
Prepaid expense, under 2013
Prepaid expense, under 2014
D. Unearned income, under 2012
Unearned income, under 2013
Unearned income, under 2014
EFFECT OF ERRORS
8,000
16,000
(11,000)
2013 NI
15,000
(7,000)
(8,000)
9,000
(16,000)
12,000
11,000
(13,000)
(2,000)
1. Ans.
3,000
2. Ans.
2012 NI
(50,000)
2013 NI
50,000
(30,000)
2014 NI
7,000
(22,000)
2014 RE, BEG 2014 RE, END
(7,000)
(22,000)
(9,000)
5,000
9,000
(12,000)
6,000
12,000
13,000
(10,000)
(22,000)
3. Ans.
2014 WC
(22,000)
5,000
5,000
6,000
6,000
(13,000)
1,000
4. Ans.
(10,000)
(21,000)
5. Ans.
(10,000)
(21,000)
6. Ans.
CHAPTER 11-PROBLEM 2: MASIGLA COMPANY
A. Ending Inventory, over 2012
Ending Inventory, over 2013
Ending Inventory, over 2014
B. Ending Invenotry, under 2012
Ending Invenotry, under 2013
Ending Invenotry, under 2014
C. AR/Sales, under 2012
AR/Sales, under 2013
AR/Sales, under 2014
D. AP/Purchases, under 2012
AP/Purchases, under 2013
AP/Purchases, under 2014
E. Equipment, under/Expense, over per year
Depr Expense, under (2012 Equipment)
Depr Expense, under (2013 Equipment)
Depr Expense, under (2014 Equipment)
EFFECT OF ERRORS
12,000
25,000
(15,000)
200,000
(20,000)
152,000
1. Ans.
(12,000)
14,000
(25,000)
22,000
15,000
(12,000)
240,000
(20,000)
(24,000)
218,000
2. Ans.
2014 NI
2014 RE, BEG 2014 RE, END
30,000
(40,000)
(30,000)
(14,000)
8,000
14,000
(22,000)
16,000
22,000
12,000
(10,000)
220,000
(20,000)
(24,000)
(22,000)
134,000
3. Ans.
(40,000)
(40,000)
8,000
8,000
16,000
16,000
(12,000)
440,000
(40,000)
(24,000)
370,000
4. Ans.
(10,000)
660,000
(60,000)
(48,000)
(22,000)
504,000
5. Ans.
CHAPTER 11-PROBLEM 3: AMICI COMPANY
Unadjusted balances
A. Salaries payable, under 2013
Salaries payable, under 2014
Accrued interest income, under 2013
Accrued interest income, under 2014
Unearned rental income, under 2013
Unearned rental income, under 2014
Prepaid insurance, under 2013
Prepaid insurance, under 2014
B. Advances from customers, under 2013
Advances from customers, under 2014
C. Advances to suppliers, under 2013
Advances to suppliers, under 2014
D. Equipment, over/Expense under (each year
Depr Expense, over (on 2013 Equipment)
Depr Expense, over (on 2014 Equipment)
ADJUSTED BALANCES/EFFECT OF ERRORS
2014 WC
2013 NI
2014 NI
2014 RE, BEG 2014 WC
245,000
310,000
(12,000)
12,000
(12,000)
(5,000)
(5,000)
4,000
(4,000)
4,000
3,000
3,000
(14,000)
14,000
(14,000)
(15,000)
(15,000)
3,000
(3,000)
3,000
5,000
5,000
(31,000)
31,000
(31,000)
(25,000)
(25,000)
10,000
(10,000)
10,000
7,000
7,000
(60,000)
(80,000)
(60,000)
12,000
12,000
12,000
16,000
157,000
268,000
(88,000)
(30,000)
1. Ans.
2. Ans.
3. Ans.
5. Ans.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
(10,000)
(26,000)
6. Ans.
AUDITING (2016 EDITION)
CTESPENILLA
Retained earnings, beg 2013
Adjusted NI, 2013
Dividends declared and paid in 2013
Retained earnings, end 2013
Adjusted NI, 2014
Dividends declared and paid in 2014
Retained earnings, end 2014
SOLUTIONS GUIDE
145 of 155
157,000
(75,000)
82,000
268,000
(75,000)
275,000
CHAPTER 11-PROBLEM 4: SOLID COMPANY
1. Ans. P2,255,000.
Cash basis sales
Add: AR, ending balance
Sales discounts
Sales returns, no refund
Total
Less: AR, beginning balances
Accrual basis gross sales
1,980,000
550,000
80,000
60,000
2,670,000
(415,000)
2,255,000
2. Ans. P2,260,000.
Cash basis sales
Add: AR, ending balance
Sales discounts
Sales returns, no refund
Write-off of AR
Total
Less: AR, beginning balances
Recovery of previous write-off
Accrual basis gross sales
1,980,000
550,000
80,000
60,000
25,000
2,695,000
(415,000)
(20,000)
2,260,000
CHAPTER 11-PROBLEM 5: DEISEL CORP.
1. Ans. P2,800,000.
Cash basis purchases
Add: AP, ending balance
Purchase discounts
Purchase returns, no refund
Total
Less: AP, beginning balance
Accrual basis gross purchases
2,500,000
800,000
45,000
55,000
3,400,000
(600,000)
2,800,000
2. Ans. P2,600,000.
Gross purchases
Less: Purchase discount
Purchase returns
Net purchases
Add: Inventory, beginning
Cost of goods available for sale
Less: Inventory, end
Cost of sales
2,800,000
(45,000)
(80,000)
2,675,000
250,000
2,925,000
(325,000)
2,600,000
CHAPTER 11-PROBLEM 6: BECKER COMPANY
Ans. P215,000
Cash basis royalty income
Add: Royalty receivables, ending
Unearned royalties, beginning
Total
Less: Royalty receivables, beginning
Unearned royalties, ending
Accrual basis royalty income
200,000
85,000
60,000
345,000
(90,000)
(40,000)
215,000
CHAPTER 11-PROBLEM 7: XYZ COMPANY
Ans. P305,000
Cash basis royalty expense
Add: Royalty payables, ending
Prepaid royalties, beginning
Total
Less: Royalty payables, beginning
Prepaid royalties, ending
Accrual basis royalty income
300,000
75,000
55,000
430,000
(80,000)
(45,000)
305,000
6. Ans.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
146 of 155
CHAPTER 11-PROBLEM 8: BACOLOD CORP.
1. P10,550,000.
Total collections from charge customers
2,550,000
Allowance for BD, beg
Add: AR, ending balance
1,200,000
Add: Bad debt expense
AR written-off
75,000
Recovery of write-off
Total
3,825,000
Total
Less: AR, beginning balance
(750,000)
Less: AR write-off (SQZ)
Recovery of previous write-off
(25,000)
Accrual basis gross sales
3,050,000
Allowance for BD, end
Add: gross cash sales
7,500,000
Total gross sales/Net sales
10,550,000
*Note that since there are no sales discounts or sales returns and allowances, gross sales is also net sales.
2. Ans. P5,670,000.
Cash purchases
Credit purchases
Total gross purchases
Less: Purchase discounts
Purchase returns
Net purchases
Add: Inventory, beginning
COGAS
Less: Inventory, ending
Cost of Sales
3. Ans. P345,600.
CV, 1/1/14: (P3M*90%*80%*80%)
Multiply by: Ddbal rate
Depreciation expense, 2014
4. Ans. P2,304,400.
Net Sales
Cost of sales
Gross profit
Interest income (a)
Total income
Operating expenses (b)
Depreciation expense
Bad debt expense
Net income
175,000
5,100,000
1,200,000
6,300,000
(210,000)
(120,000)
5,970,000
1,500,000
7,470,000
(1,800,000)
5,670,000
1,728,000
20%
345,600
10,550,000
(5,670,000)
4,880,000
90,000
4,970,000
(2,220,000)
(345,600)
(100,000)
2,304,400
(a) Interest collected
Less: Accrued interest income, Beg
Interest income, accrual basis
120,000
(30,000)
90,000
(b) Operating expenses, cash basis
Add: Accrued expense, ending
Less: Prepaid expense, ending
Operating expense, accrual basis
2,250,000
60,000
(90,000)
2,220,000
CHAPTER 11-PROBLEM 9: CUTTING EDGE.
Cash collections from customer on account
Add: AR, increase
Sales discount
Sales returns, without refund
AR written-off
Less: NR-trade, decrease
Recovery of previous write-off
Gross Sales on Account
Gross cash sales
Gross Sales
Less: Sales discounts
Sales returns (Total)
Net Sales
125,000
100,000
25,000
250,000
(75,000)
6,000,000
1,480,000
80,000
120,000
240,000
(800,000)
(72,000)
7,048,000 1. Ans.
1,200,000
8,248,000 2. Ans.
(80,000)
(320,000)
7,848,000 3. Ans.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
Cash paid to suppliers on account
Add: Notes payable-trade increase
Purchase discount
Purchase returns, without refund
Less: Accounts payable, decrease
Gross Purchases on Account
Gross cash purchases
Gross Purchases
Less; Purchase discount
Purchase returns (total)
Net Purchases
SOLUTIONS GUIDE
147 of 155
4,800,000
800,000
140,000
200,000
(600,000)
5,340,000
1,000,000
6,340,000
(140,000)
(320,000)
5,880,000
4. Ans.
5. Ans.
6. Ans.
CHAPTER 11-PROBLEM 10: GLASS CO.
1. Ans. P251,636.
Cost of sales (P340,000 total sales * 60%)
Add: Merchandise Inventory, November 15
Purchases
Less: Accounts payable – trade, November 15
Payments for purchases
P204,000
93,920
P297,920
46,284
P251,636
2. Ans. P254,620
Sales
Less: Accounts receivable – trade, November 15
Collections from sales
P340,000
85,380
P254,620
3. Ans. P121,612.
CASH ACCOUNTABILITY:
RECEIPTS
Issuance of ordinary shares (P300,000 + P20,000)
Mortgage payable
Note payable – bank
Collections from sale (from number 2)
Total
DISBURSEMENTS
Real property
Furniture and Fixtures (P29,000 – P6,000)
Expenses
Purchases (from number 1)
Total
CASH BALANCE
CASH AS ACCOUNTED:
Bank balance, November 15
Add: Undeposited collections
Total
Less: Outstanding checks
CASH SHORTAGE as of November 15, 2014
CHAPTER 11-PROBLEM 11: EDU COMPANY
1. Ans. P11,430,000.
Total deposits per bank statement
Cash receipts from share issuance
Proceeds of bank loan, directly credited to account
Deposits from cash collections from customers
Collections from customers which were used to
pay directly disbursements
Utilities
Salaries
Supplies
Dividends
Undeposited collections on hand
Total collections from customers
2. Ans. P14,535,000.
Cash collections from customers
Add: AR, ending
Less: Advances from customers, ending
Accrual basis gross sales
P320,000
80,000
32,000
254,620
686,620
P200,000
23,000
60,756
251,636
P535,392
P151,228
P26,328
5,140
P31,468
1,852
29,616
P121,612
12,600,000
(1,800,000)
(1,800,000)
9,000,000
360,000
360,000
720,000
540,000
1,980,000
450,000
11,430,000
11,430,000
3,240,000
(135,000)
14,535,000
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
148 of 155
3. Ans. P9,738,000.
Total deposits per bank statement
Cash in bank, end per bank statement
Total disbursements per bank statement
Add: Outstanding checks
Less: Payments of bank loan and interest
Payments of installment due on equipment
Total cash payments made to suppliers
4. Ans. P10,998,999.
Cash payments to suppliers
Add: Accounts payable, ending
Accrual basis gross purchases
5. Ans. P8,280,000
Gross purchases/Net purchases
Inventory, end
Cost of sales
6. Ans. P3,070,000.
Gross sales/Net sales
Cost of sales
Gross profit
Operating expenses
Utilities (P360,000+40,000)
Salaries (P360,000+25,000)
Supplies (P720,000-150,000)
Depreciation - Bldg (P16.2M/15yrs)
Depreciation - Eqpt (P1.44M/5yrs)
Bad debt expense
Interest expense - loan (P90,000+30,000)
Interst expense, instal. (P1.602M-P1.44M)
Net Income
12,600,000
(900,000)
11,700,000
180,000
(540,000)
(1,602,000)
9,738,000
9,738,000
1,260,000
10,998,000
10,998,000
(2,718,000)
8,280,000
14,535,000
(8,280,000)
6,255,000
400,000
385,000
570,000
1,080,000
288,000
180,000
120,000
162,000
(3,185,000)
3,070,000
MULTIPLE CHOICE EXERCISES:
CHAPTER 11-EXERCISE 1: BEE CO.
1. Ans. C.
Depreciation per books: P250,000/8yrs (a)
Additional depreciation on capitalizable
major repairs (220,000/11yrs) (b)
Depreciation expense per audit
(a)
31,250
20,000
P51,250
The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years, thus on 12/31/14 the
expired life is (5+3), 8 years. Depreciation per books is computed as: Accum Depr/Expired Life
(b) The major repairs cost should have been capitalized on 1/1/12 and depreciated over the remaining
useful life of the related asset. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books),
P500,000/31,250 = 16 years.
Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years.
Unadjusted balances
a. Unearned rent income, under 2014
b. Salaries payable, under 2011
Salaries payable, under 2012
Salaries payable, under 2013
Salaries payable, under 2014
c. Unused supplies, under 2011
Unused supplies, under 2012
Unused supplies, under 2013
Unused supplies, under 2014
d. Repairs expense, over 2012
Depreciation expense, under 2012-2014
Adjusted balances
NI 2012
NI 2013
P100,000
P145,000
2,500
(5,500)
(3,500)
6,500
220,000
(20,000)
P300,000
2. Ans D.
5,500
(7,500)
(6,500)
3,700
(20,000)
P120,200
3. Ans B.
NI 2014 RE, beg 2014
P185,000
(6,500)
7,500
(4,700)
(3,700)
7,100
(20,000)
P164,700
4. Ans D.
WC, 2014
(6,500)
(7,500)
(4,700)
3,700
7,100
220,000
(40,000)
P176,200
5. Ans A.
(P4,100)
6. Ans B.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
149 of 155
CHAPTER 11-EXERCISE 2: LOG CORP.
2013
Unadjusted pretax income
P4,545,000
a. 2013 sales overstatement
(1,719,000)
b. 2013 inventory understatement
388,800
2014 inventory overstatement
c. Understatement in interest expense due to amortization of bond discount: (a)
2013:
10,640,250*7% = 744,818
Less:
11,250,000*6% = 675,000
(69,818)
2014:
10,710,068*7% = 749,705
Less:
11,250,000*6% = 675,000
d. Ordinary repairs
(382,500)
2014
P3,483,000
1,719,000
(388,800)
(255,000)
(74,705)
(423,000)
Overstatement in depreciation:
Amount capitalized in 2013: 382,500*20%
76,500
Balance of amt. cap. in 2013: 306,000*20%
61,200
Amount capitalized in 2015: 423,000*20%
84,600
ADJUSTED PRETAX INCOME
P2,838,982
1. Ans. C.
P4,206,295
2. Ans. A.
(a) The loan was originated on 1/1/12 at P10,575,000 (11,250,000-675,000). Discount amo. by 12/31/12 therefore shall be:
Correct interest (10,575,000*7%)
740,250
Less: Nominal interest (11,250,000*6%)
675,000
2012 Amortization:
65,250
Carrying value of Bonds, 12/31/12 (10,575,000+65,250), P10,640,250
CHAPTER 11-EXERCISE 3: LOT INC.
1. Ans. B.
Accumulated depreciation per books (Machine XYZ): 400,000*3/10
120,000
Less: Accumulated depreciation per audit : 450,000*3/10
(135,000)
Adjustment related to the under depn for 3 years (2011 to 2014)
Add: Debit to accum depn attributed to old equipment traded in (2011)
15,000
150,000
credit
debit
NET ADJUSTMENT TO ACCUM DEPN ACCOUNT
135,000
debit
Depreciation expense for the period: Cost
450,000
Accum depn, adjusted
135,000
Carrying value
315,000
Divide by: Revised remaining useful life
5 years
DEPRECIATION FOR THE YEAR (Mach XYZ)
63,000
2. Ans. A.
Carrying value, 1/1/2014: 393,750*10/12
Multiply by: 150% declining balance rate: (1/6)*150%
DEPRECIATION EXPENSE (Mach UVW)
328,125
25%
82,031
3. Ans. D.
Carrying value, 1/1/2014: 4,500,000*17/20
Less: Salvage value
Depreciable cost
Multiply by: SYD rate
3,825,000
50,000
3,775,000
12/78
DEPRECIATION EXPENSE
580,769
Carrying value, 1/1/2014
3,825,000
Depreciation for 2014
BUILDING CARRYING VALUE 12/2014
580,769
3,244,231
CHAPTER 11-EXERCISE 4: INSULAR CORP.
Retained earnin Net income (2014)
a.
IGNORED (COUNTERBALANCED)
b. AR/Sales, under 2013 (over in 2014)
c.
Insurance expense, under 2013 & 2014
d. Accrued interest expense, under 2013
e. Depreciation, under 2013 & 2014
Net adjustments
Unadjusted Net Income
Adjusted 2014 net income
120,000
(57,600)
7,200
(117,600)
(48,000)
1. Ans. D.
(120,000)
(86,400)
(7,200)
(117,600)
(331,200)
1,750,000
1,418,800
2. Ans. D.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
150 of 155
CHAPTER 11-EXERCISE 5: KUTING CORP.
2013
2014
(NET INCOME)
(NET INCOME)
Omitted prepayments, 2013
Omitted prepayments, 2014
Salaries and wages, 2013
Salaries and wages, 2014
Accrued interest income, 2013
Accrued interest income, 2014
Advances from customers, 2013
Advances from customers, 2014
Capital expenditure, 2013
Depn on cap. ex. in 2013
Capital expenditure, 2014
Depn on cap ex in. 2014
Total under (overstatement)
256,000
(582,400)
172,800
(313,600)
376,000
(18,800)
(110,000)
(256,000)
205,200
582,400
(520,000)
(172,800)
142,000
313,600
(374,000)
(37,600)
348,000
(17,400)
213,400
1. Ans C.
2014
WORKING
CAPITAL
2014
RETAINED
EARNINGS
205,200
205,200
(520,000)
(520,000)
142,000
142,000
(374,000)
(374,00)
376,000
(56,400)
348,000
(17,400)
103,400
3. Ans A.
(546,800)
2. Ans D.
CHAPTER 11-EXERCISE 6: GHI INC.
Unadjusted balances
a. Salaries payable, under 2013
Salaires payable, under 2014
b. Inventory, over 2013
c. Prepaid insurance, under 2014
d. Interest receivable, under 2014
e. Overstatement in gain on eqpt sale, 2014
f. Overstatement in expense in 2013
Depr, under 2013 (1.3M/10yrs)
Depr, under 2014 (1.3M/10yrs)
Inc. from grant, under 2013 (1.2M/10)
Inc. from grant, under 2013 (1.2M/10)
Adjusted balances
2013 NI
1,750,000
(100,000)
2014 NI
2015 RE, Beg
2,000,000
100,000
(140,000)
(140,000)
(190,000)
190,000
120,000
120,000
20,000
20,000
(160,000)
(160,000)
100,000
100,000
(130,000)
(130,000)
(130,000)
(130,000)
120,000
120,000
120,000
120,000
1,550,000
2,120,000
(80,000)
1. Ans. A.
2. Ans. A.
3. Ans. A.
4. Ans. D.
Correct cost of Building (P1.2M+100K+200K)
Accum depr: (P1.5M*2/10)
Correct carrying value of Building 12/31/14
1,500,000
(300,000)
1,200,000
CHAPTER 11-EXERCISE 7: BABY INC.
2012
Net Income
600,000
(90,000)
Balance
a. 2012 Accured expense understated
2013 Accrued expense understated
2014 Accrued expense understated
2012 Accrued rental income understate
40,000
2013 Accrued rental income understated
2014 Accrued rental income understated
2012 Prepaid expense understated
20,000
2013 Prepaid expense understated
2014 Prepaid expense understated
b. 2012 Equipment charged to expense
400,000
2012/2013/2014 Depreciation understa
(80,000)
2014 Equipment charged to expense
2014 Depreciation understated
c. Cash dividends charged to other expens
100,000
*Land accepted as a donation from a stockholder (APIC)
* Loss on inventory due to flood
990,000
1. Ans. C.
2013
Net Income
750,000
90,000
(110,000)
(40,000)
45,000
(20,000)
30,000
(80,000)
150,000
2014
Net Income
300,000
2014
RE, Beg
110,000
(98,000)
(110,000)
(45,000)
50,000
45,000
(30,000)
35,000
30,000
(80,000)
550,000
(110,000)
200,000
400,000
(160,000)
(400,000)
815,000
(50,000)
832,000
2. Ans. B.
(195,000)
3. Ans. D.
2014
RE, End
2,000,000
2014
WC
(98,000)
(98,000)
50,000
50,000
35,000
400,000
(240,000)
550,000
(110,000)
35,000
(400,000)
2,187,000
4. Ans. A.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
(13,000)
5. Ans. A.
AUDITING (2016 EDITION)
CTESPENILLA
CHAPTER 11-EXERCISE 8: ROXAS INC.
1. Ans. C.
Depreciable cost, Old bulding
Divide by: Total Useful Life
Depreciation Expense, Old building
Depreciable cost, Extension (Addition)
Divide by: Remaining life (20 – 5)
Total Depreciation expense
SOLUTIONS GUIDE
151 of 155
P3,000,000
20 *
P150,000
P750,000
15
50,000
P200,000
Accumulated Depreciation, 12/31/200
Divide by, Expired life as of 12/31/2010 (5 +2.5)
Annual Depreciation
P1,125,000
7.5
P150,000
Depreciable cost, Building
Divide by: Annual Depreciation
Total useful life
P3,000,000
150,000
20 years *
Unadjusted net income
a. Salary Accruals: 2011
Salary accruals, 2012
Salary accruals, 2013
Salary accruals, 2014
b. Inventory, 12/13 overstatement
c. Inventory, 12/14 understatement
Purchases, 12/14 understatement
d. Prepaid insurance: 2011
Prepaid insurance, 2012
Prepaid insurance, 2013
Prepaid insurance, 2014
e. Interest receivable: 2012
Interest receivable, 2013
Interest receivable, 2014
f. Gain on sale of equipment in 2014, overstatement
g. Capitalizable cost in 2012
Understatement in depreciation 2012-2014
Adjusted Net Income
2012
P1,500,000
95,000
(110,000)
2013
1,750,000
110,000
(100,000)
(190,000)
(75,000)
100,000
20,000
750,000
(25,000)
P2,255,000
2. Ans. C.
(100,000)
115,000
(20,000)
25,000
2014
2,000,000
100,000
(140,000)
190,000
(150,000)
150,000
(115,000)
120,000
(25,000)
30,000
(160,000)
(50,000)
P1,540,000
3. Ans. A.
(50,000)
P1,950,000
4. Ans. D.
2012 NET
INCOME
381,000
2013 NET
INCOME
450,000
42,000
2014 NET
INCOME
385,500
-42,000
-69,000
45,000
12,000
-12,000
15,000
CHAPTER 11-EXERCISE 9: GKNB CORP
Unadjusted balances
a. Understatement of ending inventory, 12/31/2013
Overstatement of ending inventory, 12/31/2014
b. Overstatement in 2014 purchases
c. Understatement of sales, 2012
Understatement of sales, 2013
Understatement of sales, 2014
d. Understatement of salaries expense, 2012
Understatement of salaries expense, 2013
e. 2013 stock dividend charge to expense
f. Overstatement in rent expense, 2013
Understatement in rent expense, 2014
g. Understatement in gain on retirement of bonds (a)
Adjusted balances
-30,000
30,000
-42,000
30,000
15,000
-15,000
10,500
42,000
-6,000
37,800
P363,000
528,000
388,800
1. Ans. B.
2. Ans. C.
3. Ans. B.
(a) Gain on the retirement of bonds should be an outright income or loss. Total gain on retirement is
(P360,000-P318,000), P42,000. The client recognized only 1/10 of the amount as an amortization
over 10 years deducted from interest. Thus effectively, only 9/10 of the amount needs to be added to current net income.
4. Ans. A.
Net income, 2012 per books
Net income, 2013 per books
Total accumulated profits, 1/1/2014, per books
Net income, 2012 per audit
Net income, 2013 per audit
Total accumulated profits, 1/1/2014 per audit
Understatement of accumulated profits, 1/1/2014
Correct appropriation of accum profits for share div in item e
Net adjustment (increase/credit)
381,000
450,000
831,000
363,000
528,000
891,000
60,000
(39,000)
21,000
5. Ans. C.
Entry made for item e:
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
152 of 155
Other expense
Ordinary shares
30,000
30,000
Correct entry:
Accumulated profits
Ordinary shares
Share premium
39,000
30,000
9,000
Adjusting entry:
Accumulated profits
Share premium
9,000
9,000
CHAPTER 11-EXERCISE 10: WWEE COMPANY
2013 net income
Unadjusted bal.
a. Policy change: Inventory 2013
Inventory 2014
b. Overstatement in depn in 2014 (a)
c. Error correction – Borrowing Cost
Adjusted balances
(a)Depreciation per books (2014), Double Decl.
Depreciation per audit, Straight line
CV, 1/1/14: (P350,000/20%)
Less: Salvage
Depreciable cost
Divide By: remaining life
Overstatement in Depreciation
300,000
100,000
25,000
P425,000
1. Ans. A.
2014 net
RE,beg 2014
income
1,700,000
1,150,000
-100,000
100,000
90,000
10,000
75,000
25,000
P1,775,000 P1,275,000
2. Ans. C.
3. Ans. D.
RE, end 2014
2,350,000
90,000
10,000
100,000
P2,550,000
4 . Ans. C.
P350,000
P1,750,000
(50,000)
P1,700,000
5 yrs
340,000
P10,000
5. Ans. C.
CHAPTER 11-EXERCISE 11: KRIS COMPANY
1. Ans. A.
Sales, accrual basis
Add: Decrease in accounts receivable
Cash received from customers
2. Ans. C.
Cost of sales
Less: Decrease in inventory
Purchases, accrual basis
Add: Decrease in accounts payable
Cash paid to suppliers
10,350,000
540,000
10,890,000
7,050,000
450,000
6,600,00
412,500
7,012,500
3. Ans. D.
Total operating expense, accrual basis
Add: Increase in prepaid expense
Decrease in accrued expense
Total
Less: Depreciation expense (non-cash expense)
Cash payments for operating expenses
4. Ans. B.
Cash received from customers
Cash paid to suppliers
Cash paid for operating expenses
Cash provided by Operating activities
1,725,000
255,000
150,000
2,130,000
90,000
2,040,000
10,890,000
(7,012,500)
(2,040,000)
1,837,500
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
153 of 155
CHAPTER 11-EXERCISE 12: PROTER COMPANY
1. Ans. B.
Excess of cash receipts over cash disbursements
Adjustments: a) Depreciation
b) Prepaid insurance (5,400*2/3)
c) Unearned rent income
d) Salaries payable
e) Interest receivable
f) Accrued accounting fees
ACCRUAL NET INCOME
136,500
-31,500
3,600
-21,000
-8,400
9,510
-1,500
87,210,
2. Ans. D.
c) Unearned rent income
d) Salaries payable
f) Accrued accounting fees
TOTAL LIABILITIES
21,000
8,400
1,500
30,900
CHAPTER 11-EXERCISE 13: UKG INC.
1. Ans. A.
Beginning invty
Purchases (sqz)
Cost of sales
COST OF SALES
186,000
348,000
174,000Ending invty
360,000
ACCOUNTS PAYABLE
Payments
2. Ans. C.
AR, beginning
Sales on account
AR, ending balance
116,000AP, beginning
348,000Purchases
120,000AP, ending
344,000
ACCOUNTS RECEIVABLE
96,000
600,000
586,000Collections
110,000
3. Ans. A.
Present value of principal (200,000*0.456387)
Present value of interest, semiannual (10,000*13.59032)
Amortization, June 30, 2014 (227,180*4%) – 10,000
Amortization, December 31, 2014 (226,267*4%) – 10,000
Carrying value, December 31, 2014
4. Ans. D.
Effective interest as of 6/30/14
(227,180*4%)
Effective interest 12/31/14 (226,267*4%)
Total interest expense
CHAPTER 11-EXERCISE 14: WOWIE CORP.
1. Ans. C.
Cash collected from customers
Add: AR, ending
Deduct: AR, beginning
Sales Accrual basis
P227,180
(913)
(949)
P225,318
9,087
9,051
P18,138
5. Ans. B.
Unadjusted net income
Overstatement in other expenses **
Overstatement in interest expense (20,000 – 18,138)
Correct net income
Accrual basis
Increase in prepayments
Cash basis
P91,277
135,903
25,000
2,000
1,862
P28,862
**Other Expenses
164,000
4,000
166,000
2,000 Increase in accrued utilities
10,000,000
4,000,000
6,400,000
7,600,000
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
SOLUTIONS GUIDE
154 of 155
2. Ans. A.
Total payments to suppliers
Deduct: payments to suppliers for 2013 invoices
Balance: payments to suppliers for 2014 invoices
Add: Accounts payable, ending balance
Purchases, accrual basis
13,618,000
4,632,000
8,986,000
2,621,000
11,607,000
3. Ans. B.
Wages paid
Add: Wages payable, ending balance
Deduct: Wages payable, beginning bal.
Wages expense, accrual basis
3,050,000
125,000
85,000
3,090,000
4. Ans. B.
Advertising expenses paid
Add: Advertising supplies, beg bal.
Accrued advertising, ending bal.
Deduct: Advertising supplies, end. bal.
Accrued advertising, beg. Bal.
Advertising expense, accrual basis
300,000
35,000
40,000
75,000
14,250
285,750
5. Ans. B.
Insurance premium paid
Add: Prepaid insurance, beg bal.
Less: Unexpired insurance, ending bal.
Insurance expense, accrual basis
125,000
25,000
41,000
109,000
CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION
1. Ans. A.
Cash sales
Collections from accounts receivable
Collections from trade notes receivable
Add: Sales returns and allowances (no refund)
Increase in Accounts receivable
Total
Less: Decrease in Notes receivable
Gross Sales
Less: Sales returns (total)
Net sales, per audit
2. Ans. C.; 3. Ans. B.
Cash purchases
Payments of accounts payable
Add: Purchase returns and allowances (no refund)
Increase in Accounts payable
Gross Purchases
Less: Purchase returns and allowances (total)
Net purchases, per audit
Add: Decrease in inventory
Cost of Sales, per audit
4. Ans. C.; 5. Ans. A.
Net sales, per audit
Less: Cost of Sales, per audit
Gross Profit
Interest income
Total
Less: Expense
Insurance (700,000-200,000)
Salaries(10,000,000-300,000)
Depreciation (100,000+800,000)
Other expenses
Net income
CHAPTER 11-EXERCISE 16: ALASKA INC.
1. Ans. D.
Sales, accrual basis 2014
Add: Accounts receivable, beg.
Less: Accounts receivable, end
AR written-off during the year
Cash collections from customers
3,000,000
30,000,000
2,400,000
1,000,000
16,500,000
35,400,000
800,000
1,400,000
37,600,000
(600,000)
P37,000,000
(1,200,000)
35,800,000
17,500,000
300,000
400,000
18,200,000
(800,000)
17,400,000
1,000,000
18,400,000
P35,800,000
(18,400,000)
P17,400,000
200,000
P17,600,000
500,000
9,700,000
900,000
1,500,000
(12,600,000)
P5,000,000
4,849,200
270,000
(297,000)
(43,200)
4,779,000
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY
AUDITING (2016 EDITION)
CTESPENILLA
2. Ans. B.
Cost of sales, accrual basis 2014
Add: Inventory, end
Less: Inventory, beg
Purchases, accrual basis 2014
Add: Accounts payable, beg.
Less: Accounts payable, end
Cash payments to suppliers
3. Ans. A.
Interest expense, accrual basis 2014
Less: Amortization of bond discount
Cash payments for ineterest
4. Ans. D.
Selling expense, accrual basis 2014
Less: 1/3 of depreciation expense
(13,500*1/3)
Bad debt expense
Cash payments for selling expense
CHAPTER 11-EXERCISE 17: ALAMAT COMPANY
1. Ans. B.
Cash sales
Add: Accounts receivable, end
Total
Less: Advances from customers, end
Gross/Net Sales
SOLUTIONS GUIDE
155 of 155
2,250,000
279,000
(423,000)
2,106,000
139,500
(225,000)
2,020,500
38,700
(4,500)
34,200
1,273,500
(4,500)
(45,000)
1,224,000
4,400,000
100,000
4,500,000
(25,000)
4,475,000
2. Ans. B.; 3. Ans. B.
Cash purchases
Add: Accounts payable, end
Total
Less: Purchase for president (adj to advances)
Gross/Net Purchases
Less: Inventory, end
Cost of Sales, per audit
4. Ans. A.
Net sales, per audit
Less: Cost of Sales, per audit
Gross Profit
Less: Expense
Add: Accrued expense, end
Deduct, supplies, end
Prepaid insurance, end
Equipment
Depreciation (100,000/10)*6/12
Interest expense (100,000*12%*4/12)
Net income
4,200,000
80,000
4,280,000
(10,000)
4,270,000
(500,000)
3,770,000
4,475,000
(3,770,000)
705,000
560,000
20,000
(5,000)
(15,000)
(100,000)
CHAPTER 11-EXERCISE 18: TITANIUM COMPANY
Cash, Jan. 1 balance
Collections from customers:'
Sales on Account
17,628,510
Less: AR, April 16
(1,327,650)
Sales allowances
(54,990)
Add: AR, Jan. 1
678,690
Payments of merchandise to suppliers:
Merchandise purchases
10,845,780
Less: AP, April 16
(621,900)
Add: AP, Jan. 1
344,160
(10,568,040)
Purchase of furniture
(9,000)
Expenses paid
(5,597,490)
Cash dividends paid
(120,000)
Total disbursements
Total accountability
Less: Cash in bank, net of outstanding check
Cash shortage
Less: Chargeable against the bank (for encashing the obviou
Cash shortage chargeable against the cashier
(460,000)
(5,000)
(4,000)
P236,000
16,924,560 2. Ans. A.
1. Ans. C.
(16,294,530) 3. Ans. C.
728,040 4. Ans. A.
(296,490)
431,550
(300,000)
131,550 5. Ans. B.
CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY