Chapter 4 - Inventories
CHAPTER 4
INVENTORIES
PROBLEMS
Discussion Question No. 15 (Hamster Company
Goods displayed in the store
Goods stocked in the warehouse, not covered by any sales
contract
Goods purchased, in transit, shipped FOB seller
Goods purchased, in transit, shipped FOB destination
Freight cost on goods received, goods are still unsold
Goods held on consignment
Goods out on consignment
Goods out to customers on approval
Goods in the hands of traveling salesmen
Goods sold with a buyback arrangement for the full selling
price and other costs incurred by the buyer
Unused factory supplies and indirect materials
Goods which require additional processing
Direct materials stocked in the warehouse
Storage costs of goods completed
Insurance premiums paid on stocked goods
Goods completed, manufactured to customer’s specification,
awaiting instruction for delivery by the customer
Freight paid on goods sold
Unused supplies for administrative purposes
Unused store supplies
Goods sold with a right to return granted to buyers, amount of
return is reasonably predictable.
Goods sold under FAS, at the port designated by the buyer
Goods at the port, purchased CIF
Include Exclude
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PROBLEMS
4-1.
(Crossings Company)
Invoice price (150,000 x 0.80 x 0.90)
Freight charge
Total cost of merchandise purchases
4-2.
P 108,000
2,500
P 110,500
(Jane, Inc.)
Reported units on April 30, 2016
Adjustments:
No. 1 item – Purchased FOB shipping point
still in transit not included in purchases
No. 3 item – Sold FOB destination still in transit not
included in inventory
Correct inventory quantity
31
10,200
250
500
10,950
Chapter 4 - Inventories
4-3.
(Orient Trading)
Reported inventory
Merchandise in transit purchased FOB destination
Goods held on consignment
Mark up on goods out on consignment
Sales price
600,000
Cost (600,000÷ 1.5)
400,000
Merchandise in transit to customers FOB destination
400,000 x (100% - 40%)
Merchandise purchased in transit FAS
Correct inventory
4-4.
240,000
150,000
P8,770,000
P 172,000
31,500
12,500
P 216,000
(Centerpoint, Inc.)
Reported inventory
Adjustments:
a.
Goods out on consignment
b.
Goods purchased in transit FOB shipping point
c.
Goods sold in transit FOB shipping point
included in inventory
d.
Goods sold in transit FOB destination
e.
not included in inventory
g.
Goods sold in transit FOB destination
not included in inventory
Correct inventory
4-6.
(200,000)
(Tintin Company)
Physical inventory at December 31, 2016
Merchandise in transit shipped FOB shipping point
Merchandise sold FOB destination still in transit
Correct inventory at December 31, 2016
4-5.
P9,500,000
(420,000)
(500,000)
P 562,500
110,000
27,000
(
85,000)
26,000
37,000
P 677,500
(Mega Company)
FIFO
Weighted average
Moving average
Cost of EI
3,506
3,333
3,370
Cost of Goods Sold
4,550
4,723
4,686
Gross Profit
1,955
1,782
1,819
FIFO
Cost of ending inventory:
275 x 11.75
25 x 11.00
Cost of goods sold:
Cost of goods available for sale
Less ending inventory
Gross profit:
Sales
Less cost of goods sold
Weighted average
Cost of ending inventory:
Cost of goods available for sale
Number of units available for sale
Weighted average cost per unit
Units in ending inventory
Cost of goods sold:
Cost of goods available for sale
Less ending inventory
32
3,231.25
275.00
3,506.25
8,056.25
3,506.25
4,550.00
6,505.00
4,550.00
1,955.00
8,056.25
÷ 725
11.11
x 300
3,333.00
8,056.25
3,333.00
4,723.25
Chapter 4 - Inventories
Gross profit:
Sales
Less cost of goods sold
Moving average
Cost of ending inventory:
Inventory, January 1
Purchase, March 7
Total
Sale, May 20
Sale, June 30
Balance
Purchase, July 15
Total
Sale, September 17
Balance
6,505.00
4,723.25
250 x 10.50 = 2,625.00
200 x 11.00 = 2,200.00
450 x 10.72 = 4,825.00
(120 x 10.72 = 1,286.40)
( 55 x 10.72 = 589.60)
275 x 10.72 = 2,949.00
275 x 11.75 = 3,231.25
550 x 11.24 = 6,180.25
(250 x 11.24 = 2,810.00)
300 x 11.24 =
Cost of goods sold:
Cost of goods available for sale
Less ending inventory
Gross profit:
Sales
Less cost of goods sold
4-7.
4-8.
3,370.25
8,056.25
3,370.25
4,686.00
6,505.00
4,686.00
1,819.00
(Landmark Enterprises)
a.
Cost of ending inventory
1/1
2,400@ 10.75 25,800
1/5
1,900@ 11.35 21,565
4,300@ 11.02 47,365
1/8
2,200@ 11.02 24,244
2,100@ 11.01 23,121
1/24
3,800@ 11.80 44,840
5,900@ 11.52 67,961
1/30
3,600@ 11.52 41,472
2,300@ 11.52 26,489
b.
Cost of goods available for sale (25,800 + 21,565 + 44,840)
Number of units available for sale (2,400 + 1,900 + 3,800)
Weighted average cost per unit
Number of units in ending inventory
Cost of ending inventory
P92,205
÷ 8,100
P 11,38
x 2,300
P26,174
(Rockwell Club, Inc.)
Cost of sales:
Sales (160,500 x 12)
1,926,000
Less gross profit
738,600
Add ending inventory
42,000 x 7.40
310,800
3,000 x 7.20
21,600
Available for sale
Deduct purchases
Inventory, January 1
Average cost per unit (369,750 ÷ 51,000 units)
4-9.
1,781.75
(Mazda Corporation)
(a)
FIFO
Sales
Cost of goods sold
Gross profit
2014
P12,000,000
7,000,000
P 5,000,000
33
Amount
Units
P1,187,400
160,500
332,400
P1,519,800
1,150,050
P 369,750
45,000
205,500
154,500
51,000
P 7.25
2015
P18,800,000
12,760,000
P 6,040,000
2016
P29,400,000
20,250,000
P 9,150,000
Chapter 4 - Inventories
Cost of goods sold:
2014
10,000
2015
3,000
13,000
2016
5,000
19,000
(b)
x 700 =
x 700 = 2,100,000
x 820 = 10,660,000
x 820 = 4,100,000
x 850 = 16,150,000
Weighted average
Sales
Cost of goods sold
Gross profit
2014
P12,000,000
7,000,000
P 5,000,000
7,000,000
12,760,000
20,250,000
2015
P18,800,000
12,845,760
P 5,954,240,
2016
P29,400,000
20,211,360
P 9,188,640
Cost of goods sold:
2014
10,000 x 700
7,000,000
2015
(3,000 x 700) + (18,000 x 820) x 16,000*
12,845,760
21,000
2016
(5,000 x 802.86) + (25,000 x 850) x 24,000*
20,211,360
30,000
*unit costs were rounded off to nearest centavo: 802.86 and 842.14, for
2015 and 2016, respectively.
4-10.
(Sta. Lucia Company)
Reported profit under average method
Difference in inventory using FIFO
Beginning inventory
Ending inventory
Profit under FIFO basis
4-11.
2016
P7,000,000
40,000
P3,640,000
(40,000)
120,000
P5,080,000
(120,000)
650,000
P7,530,000
P26,000
P28,000
P26,000
(Rustan’s Trading)
Product
A
B
C
D
Total
4-13.
2015
P5,000,000
(City Company)
Cost (under FIFO basis)
Net realizable value (40,000 – 12,000)
Lower of cost and net realizable value
4-12.
2014
P3,600,000
Cost
102
45
24
9
NRV
105
42
22
10
Lower
102
42
22
9
Quantity
4,000
6,000
5,500
7,200
Amount
P408,000
252,000
121,000
64,800
P845,800
Dechavez Company
(a) Direct Method
The profit is computed as follows:
Sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Profit
Cost of goods sold:
Beginning inventory
Purchases
Total cost of goods available for sale
Ending inventory
Cost of goods sold
34
2016
P3,200,000
(1,280,000)
P1,920,000
(450,000)
(300,000)
P 1,170,000
P 480,000
1,400,000
P1,880,000
600,000
P1,280,000
2015
P2,900,000
(1,020,000)
P1,880,000
(330,000)
(310,000)
P 1,240,000
P
300,000
1,200,000
P 1,500,000
480,000
P 1,020,000
Chapter 4 - Inventories
(b) Allowance method
The profit is computed as follows:
Sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Decline in NRV
Gain on adjustment of allowance
Profit
2016
P3,200,000
(1,240,000)
P1,960,000
(450,000)
(300,000)
(40,000
__________P 1,170,000
Cost of goods sold:
Beginning inventory
Purchases
Total cost of goods available for sale
Ending inventory
Cost of goods sold
4-14.
P
380,000
1,200,000
P 1,580,000
500,000
P 1,080,000
(Purple Company)
P200,000
194,000
P 6,000
(Powder Blue Company)
Inventory, January 1
Purchases during the year
Cost of goods available for sale
Less Inventory, December 31
Cost of goods sold
4-16.
60,000
P 1,240,000
P 500,000
1,400,000
P1,900,000
(660,000)
P1,240,000
Cost
Net realizable value (204,000 – 10,000)
Loss
4-15.
2015
P2,900,000
(1,080,000)
P1,820,000
(330,000
(310,000)
P1,400,000
6,600,000
P8,000,000
1,200,000
P6,800,000
(Philam Grocers Company)
(a) Cost of product X and product Y
January 1 inventory
Purchases
Sold
December 31 inventory
Unit cost (all coming from latest purchase price, as
ending inventory is less than latest purchases)
Ending inventory at FIFO cost
Product X
2,500 units
7,400 units
(7,000 units)
2,900 units
P125
P362,500
Product Y
1,500 units
4,500 units
(5,000 units)
1,000 units
P98
P98,000
(b)
Sales price (effective 2015) 90% x previous SP
Estimated selling cost
Net realizable value
Lower of cost and net realizable value, per unit
Number of units in ending inventory
Inventory value at lower of cost and NRV
Total inventory value at December 31, 2016
Product X
P135.00
(13.50)
P121.50
P121.50
2,900 units
P352,350
(352,350+98,000)
(c) Cost of goods sold in the statement of comprehensive income
Product X
Product Y
Inventory Jan. 1
P 300,000
P135,000
Purchases
916,600
432,500
Goods available for sale
P1,216,600
P567,500
Ending inventory at cost
362,500
98,000
Cost of goods sold
35
Product Y
P111.60
(11.16)
P100.44
P98
1,000 units
P98,000
= P450,350
Total
P 435,000
1,349,100
P1,784,100
460,500
P1,323,600
Chapter 4 - Inventories
(d)
Inventory at cost
Inventory at lower of cost and NRV
Required allowance
Existing allowance
Gain on adjustment of allowance
(e)
Inventory
Income Summary
P460,500
450,350
P 10,150
15,000
P 4,850
460,500
460,500
(or using the cost of goods sold method)
Inventory, December 31
Cost of goods sold
Purchases
Inventory, January 1
460,500
1,323,600
1,349,100
435,000
Allowance to Reduce Inventory to NRV
Gain on Adjustment of Allowance to
Reduce Inventory to NRV
4-17.
4,850
4,850
(DEC Company)
(a)
(b)
Gross profit is 40% based on sales
Merchandise inventory, January 1, 2016
Purchases for the year
Cost of goods available for sale
Less estimated cost of goods sold (4,200,000 x 60%)
Estimated cost of ending inventory
Physical inventory on December 31, 2016
Estimated cost of the missing inventory
P 450,000
3,150,000
P3,600,000
2,520,000
P 1,080,000
500,000
P 580,000
Gross profit is 40% based on cost of sales
Merchandise inventory, January 1, 2016
Purchases for the year
Cost of goods available for sale
Less estimated cost of goods sold (4,200,000/1.40)
Estimated cost of ending inventory
Physical inventory on December 31, 2016
Estimated cost of the missing inventory
P 450,000
3,150,000
P3,600,000
3,000,000
P 600,000
500,000
P 100,000
4-18.
Estimated cost of goods sold (705,000 – 18,000)/1.20
Add Inventory at July 20, 2016
Cost of goods available for sale
Less net purchases for the period (650,000 – 12,000 + 6,000)
Estimated cost of June 30, 2016 inventory
4-19.
(Manel’s Company)
Merchandise inventory, January 1
Purchases (1,000,000 + 40,000 – 60,000)
Cost of goods available for sale
Estimated cost of goods sold (3,200,000 x 70%)
Estimated ending inventory
Less goods undamaged located in showroom (200,000 + 80,000)
Estimated cost of merchandise destroyed by the flood
4-20.
P572,500
205,000
P777,500
644,000
P133,500
P2,000,000
980,000
P2,980,000
2,240,000
P 740,000
280,000
P 460,000
(Herminia Company)
Inventory, January 1
Purchases
Purchase returns
Total
P 200,000
P5,000,000
(80,000)
36
4,920,000
P5,120,000
Chapter 4 - Inventories
Estimated cost of goods sold (7,380,000 – 180,000) x 60%)
Estimated cost of ending inventory
Goods in transit
Estimated cost of ending inventory
4-21.
(Old Rose Company)
Inventory, January 1, 2016
Purchases
Freight in
Cost of goods available for sale
Estimated cost of goods sold (2,200,000 – 50,000) x 70%
Estimated cost of ending inventory
Inventory per actual count
Shortage in inventory
4-22.
P1,000,000
800,000
20,000
P1,820,000
1,505,000
P 315,000
160,000
P 155,000
(Blazing Red Company)
Inventory, January 1, 2016
Purchases:
Payments to suppliers
Accounts Payable, 8/28/16
Accounts Payable, 1/1/16
Cost of goods available for sale
Estimated cost of goods sold:
Collections from customers
Accounts Receivable, 8/28/16
Accounts Receivable, 1/1/16
Sales
Cost percentage
Estimated cost of ending inventory
Less undamaged goods:
Goods out on consignment
Goods in transit
Estimated inventory fire loss
4-23.
4,320,000
P 800,000
( 100,000)
P 700,000
P 575,400
P1,950,000
491,400
( 352,560)
P3,015,200
515,560
( 522,360)
P3,008,400
70%
P 195,000
69,500
2,088,840
P2,664,240
2,105,880
P 558,360
264,500
P 293,860
(Chic Department Store)
(a)
(FIFO cost basis
Inventory, June 1
Purchases
Available for sale
Sales
Inventory, June 30 at retail
Cost percentage (2,400,000/4,000,000)
Estimated cost of inventory
(b)
Cost
P 355,000
2,400,000
P2,755,000
Retail
P 750,000
4,000,000
P4,750,000
3,500,000
P1,250,000
60%
P 750,000
Cost of goods available for sale
Less estimated cost of ending inventory
Estimated cost of goods sold
P2,755,000
750,000
P2,005,000
Average cost basis
Inventory, June 30 at retail
Cost percentage (2,755,000/4,750,000)
Estimated cost of inventory
Cost of goods available for sale
Less estimated cost of ending inventory
Estimated cost of goods sold
P1,250,000
58%
P 725,000
P2,755,000
725,000
P2,030,000
37
Chapter 4 - Inventories
4-24.
(London Company)
Average cost retail
Cost
Beginning Inventory
P145,000
Purchases
283,920
Additional markups
Markup cancellations
Markdown
Markdown cancellations
________
Total available for sale
P428,920
Cost to retail ratio 428,920/565,600 = 75.8%
Sales, net of sales returns
Ending inventory at retail
Ending inventory at average cost retail (130,800 x 75.8%)
4-25.
(434,800)
130,800
P 99,146
(Alemars Drygoods, Inc.)
Retail
P1,050,000
735,000
80,000
( 15,000)
(105,000)
P1,745,000
(1,050,000)
P 695,000
665,000
P 30,000
Beginning Inventory
Purchases
Markups (1,600 x 50)
Markup cancellations (300 x 50)
Markdowns
Total
Sales Revenue
Ending Inventory, at retail
Physical inventory on January 31, 2016
Inventory shortage at retail value
4-26.
Retail
P160,000
420,800
25,200
(9,200)
(38,100)
6,900
P565,600
(Uniwide Sales)
(a) (1) Average retail
Beginning Inventory
Purchases
Purchase Allowance
Freight In
Departmental Transfers In
Additional Markups
Markup Cancellations
Markdowns (6,000 – 4,500)
Total
Sales
Inventory Shortage
Ending Inventory, at retail
Cost to retail ratio (523,380/671,000)
Ending Inventory, at estimated average cost
Cost
P185,700
339,380
( 11,000)
7,300
2,000
_________
P523,380
Retail
P202,000
458,000
3,000
12,000
( 2,500)
(1,500)
P671,000
(374,000)
(7,000)
P290,000
78%
P226,200
(2) FIFO retail (exclude the beginning inventory in computing the cost ratio)
337,680/469,000 = 72%
Ending inventory at FIFO cost
72% x P290,000
= P208,800
(b) Cost of goods sold
Average
P523,380
(226,200)
P297,180
Goods available for sale
Ending inventory
Cost of goods sold
38
FIFO
P523,380
(208,800)
P314,580
Chapter 4 - Inventories
4-27.
(Grand Central, Inc.)
(a)
Profit reported for 2016
Adjustments:
Overstatement of beginning inventory
Understatement of ending inventory
Goods still in transit shipped to customers FOB destination
recorded as sales (40% x 60,000); related cost was excluded
in ending inventory (40% x 52,000), net
Purchases of 2015 recorded in 2016
Correct net income for 2016
(b)
Understated 2015 ending inventory
Understated 2015 purchases
Net overstatement in 2015 profit
4-28.
P658,000
71,000
96,000
(3,200)
100,000
P921,800
Effect on 2015 profit
P 71,000 understated
100,000 overstated
P 29,000
(USTFU Company)
(a)
December 31, 2016
Loss on Purchase Commitments
50,000
Estimated Liability on Purchase Commitments
1,000 x (1,200 – 1,150)
50,000
February 28, 2017
Purchases
Estimated Liability on Purchase Commitments
Accounts Payable
1,150,000
50,000
1,200,000
(b)
December 31, 2016
Loss on Purchase Commitments
50,000
Estimated Liability on Purchase Commitments
50,000
February 28, 2017
Purchases
Estimated Liability on Purchase Commitments
Loss on Purchase Commitments
Accounts Payable
1,100,000
50,000
50,000
1,200,000
(c)
December 31, 2016
Loss on Purchase Commitments
50,000
Estimated Liability on Purchase Commitments
50,000
February 28, 2017
Purchases
1,200,000
Estimated Liability on Purchase Commitments
50,000
Accounts Payable
Recovery of Loss on Purchase Commitments
39
1,200,000
50,000
Chapter 4 - Inventories
MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
B
A
D
B
D
MC6
MC7
MC8
MC9
MC10
A
A
D
A
A
MC11
MC12
MC13
MC14
MC15
C
A
A
C
D
MC16
MC17
MC18
MC19
MC20
MC21
A
D
D
C
D
D
Problems
MC22
D
Invoice price (90,000 x .80 x .90)
Freight charge
Total cost of inventory
MC23
C
Invoice price (150,000 x .85 x .90 x .95)
P109,012.50
MC24
A
Invoice price
Cash discount (109,012.50 x 2%)
Cash payment within the discount period
P109,012.50
(2,180.25)
P106,832.25
MC25
B
Purchases of compatibles
Purchases of software package
Returns and allowances
Net purchases
Total discounts available (4,100,000 x 3%)
Purchase discounts taken
Discounts lost
MC26
D
Reported inventory, December 31
Goods still in transit purchased FOB shipping point
Correct amount of inventory
MC27
B
Reported amount of inventory
Goods sold in transit shipped FOB destination not included in
inventory (490,000 – 40,000 = 450,000; 450,000 ÷1.5)
Goods purchased in transit shipped FOB shipping point plus
freight cost (600,000 + 60,000)
Goods out on consignment
(300,000 ÷1.5 = 200,000; 200,000 + 30,000)
Correct inventory, December 31
230,000
P4,190,000
P5,000,000
80,000
800,000
(25,000)
P5,855,000
MC28
C
Reported amount of inventory
Merchandise in the delivery department excluded in inventory
Imported goods not included, trust receipts already accepted
Goods in transit shipped FOB destination included in inventory
Correct merchandise inventory
MC29
B
Inventory taken by physical count
Goods purchased in transit FOB shipping point excluded
Correct amount of inventory
MC30
C
Direct materials
Direct materials purchased in transit, FOB shipping point
Work in process
Finished goods
Goods on consignment (150,000 x 80%)
Total cost of inventory
40
P64,800
5,000
P69,800
P3,280,000
900,000
(80,000)
P4,100,000
P123,000
(27,000)
P 96,000
P1,500,000
50,000
P1,550,000
P3,000,000
300,000
660,000
P77,500
6,000
P83,500
P550,000
90,000
380,000
450,000
120,000
P1,590,000
Chapter 4 - Inventories
MC31
C
Mark up on merchandise on consignment
(104,000 ÷ 1.3 = 80,000; 80,000 x .30)
Goods held on consignment
Mark up on goods out on approval (32,500 – 25,000)
Reduction in inventory at December 31
MC32
A
Sales (3,000 x 35) + (2,000 x 36) + (1,000 x 37)
Cost of sales (4,000 x 25) + (2,000 x 26)
Gross profit on sales
MC33
C
1/12
1/22
Total
1,600 @ 8.00
4,800 @ 9.60
6,400
12,800
46,080
58,880 / 6,400 units
P24,000
56,000
7,500
P87,500
P214,000
152,000
P 62,000
P9.20
Lower – P22
Lower – P52
MC34
B
Confidence: cost 22; NRV = 30 – 3 = 27
Positive attitude: cost 55; NRV = 80 – 28 = 52
MC35
C
Product H 1,000 x 25
Product O 2,000 x 36
Product P 3,000 x 120
Product E 4,000 x 18
Total inventory value
MC36
C
Beginning inventory
Purchases (400,000 + 500,000 + 600,000)
Available for sale
Cost of goods sold (2,240,000 ÷ 1.4)
Cost of inventory before the fire
MC37
C
Inventory, beginning
Purchases (2,550,000 + 250,000 – 300,000)
Cost of goods sold (2.8M + 900,000 – 700,000 = 3.0M sales
3.0M / 1.25
Inventory, ending
Physical inventory
Amount of inventory shortage
(2,400,000)
P280,000
110,000
P170,000
Total cost of goods sold for 2014 and 2015 (1.04M + 1.55M)
Total sales for 2014 and 2015 (1.7M + 2.0M)
Average cost rate (2,590,000/3,700,000)
P2,590,000
P3,700,000
70%
Inventory, January 1, 2016
Purchases
Total cost of goods available for sale
Estimated cost of goods sold (2,500,000 x 70%)
Estimated cost of ending inventory
Cost of merchandise out on consignment (150,000 x 70%)
Cost of goods undamaged (in transit FOB shipping point)
Cost of inventory lost by fire
P 520,000
2,180,000
P2,700,000
1,750,000
P950,000
(105,000)
(95,000)
P750,000
MC38
MC39
B
D
P 25,000
72,000
360,000
72,000
P529,000
Beginning inventory
Net purchases (378,245 – 10,295)
Estimated cost of goods sold (450,200 – 5,100) x 78%*
Estimated cost of ending inventory
Cost of undamaged inventory
Realizable value of damaged merchandise
Estimated fire loss
*Cost rate in 2015
Cost of goods sold (120,160 + 394,366 – 105,650 = 408,876
Net sales (530,180 – 5,980) = 524,200
41
P 600,000
1,600,000
P2,200,000
1,600,000
P 500,000
P180,000
2,500,000
P105,650
367,950
(347,178)
P126,422
(69,738)
(5,000)
P 51,684
= 78%
Chapter 4 - Inventories
MC40
MC 41
C
Direct materials used (400,000 + 1,280,000 – 740,000)
Direct labor
Manufacturing overhead (50% x 960,000)
Total manufacturing cost
Work in process, beginning
Total cost put into process
Cost of goods sold (4.0M x 75%)
P3,000,000
Finished goods, end
1,310,000
Cost of goods available for sale
P4,310,000
Finished goods, beginning
(1,500,000)
Cost of work in process lost by fire
C
Inventory, January 1
Purchases
Purchase returns
Freight in
Available for sale
Cost to retail ratio (1,908,000/3,180,000=60%)
Net sales (2,365,000 – 62,000)
Ending inventory, at retail
Physical count of inventory at retail
Inventory pilferage, at retail
Cost of inventory pilferage (97,000 x 60%)
MC42
Cost
P 617,000
1,281,000
(21,000)
31,000
P1,908,000
D
Inventory, January 1
Purchases
Freight in
Net markups (18,900 – 7,800)
Markdowns
Available for sale
Cost to retail ratio (263,802/376,860 = 70%)
Cost of goods sold (70% x 320,500)
P940,000
960,000
480,000
P2,380,000
1,100,000
P3,480,000
2,810,000
P 670,000
Retail
P1,057,000
2,158,000
(35,000)
___________
P3,180,000
(2,303,000)
P877,000
780,000
P 97,000
P 58,200
Cost
P47,075
213,327
3,400
_________
P263,802
Retail
P70,025
306,375
11,100
(10,640)
P376,860
P224,350
MC43
A
Available for sale at retail
Sales
Ending inventory, at retail
Physical count of inventory
Inventory shortage, at retail
Estimated loss from inventory shortage (16,970 x 70%)
P376,860
(320,500)
P56,360
39,390
P16,970
P11,879
MC44
C
Beginning inventory, at retail
Purchases
Net markups
Net markdowns
Cost of goods available for sale, at retail
Sales revenue
Ending inventory, at retail
Cost to retail ratio (143,000/260,000 = 55%)
Ending inventory, at estimated cost
P60,000
220,000
20,000
(40,000)
P260,000
(180,000)
P80,000
55%
P44,000
MC45
D
Reported profit
Overstated ending inventory
Understated beginning inventory
Understated purchases
Adjusted profit for the year
P600,000
(10,000)
(4,000)
(100,000)
P486,000
42
Chapter 5- Property, Plant and Equipment
CHAPTER 5
PROPERTY, PLANT AND EQUIPMENT
PROBLEMS
5-1.
a.
Cash price is the cost.
P285,000
b.
Downpayment
Notes payable (70,000 x 3.3121)
Cost of machine
P100,000
231,847
P331,847
c.
Purchase price
Appraisal cost
Total cost to be allocated
Allocation:
Land
22,150,000 x 10,000/25,000
Building
22,150,000 x 12,500/25,000
Equipment
22,150,000 x 2,500/25,000
d.
e.
5-2.
P882,000
25,095
P907,095
Purchase price 154,560/1.12
Directly attributable costs 5,000 + 2,000 + 1,500 + 1,800
Total cost
P138,000
10,300
P148,300
(Uy Company)
(49,500,000
(49,500,000
(49,500,000
(49,500,000
x
x
x
x
21,875,000/56,250,000)
20,000,000/56,250,000) + 1,200,000
9,375,000/56,250,000)
5,000,000/56,250,000)
19,250,000
18,800,000
8,250,000
4,400,000
(Chang Corporation)
a.
b.
5-4.
P 8,860,000
P 11,075,000
P 2,215,000
Cash price
1,000,000 x .90 x .98
Present value of the dismantling costs
50,000 x 0.5019
Cost of equipment
Land
Office building
Warehouse
Manager’s residence
5-3.
P22,000,000
150,000
P22,150,000
720,000 x .90
Down payment
Present value of 24 monthly installments
25,000 x 21.2434
Total
P648,000
P150,000
531,085
P681,085
(Planters Company and Producers Company)
Books of Planters Company
Cash
Equipment
Accumulated Depreciation-Building
Gain on Exchange of Building
Building
900,000-540,000=360,000;400,000–360,000=40,000 G
Books of Producers Company
Building
Accumulated Depreciation-Equipment
Loss on Exchange of Equipment
Cash
Equipment
800,000-320,000 = 480,000; 480,000-350,000=130,000 L
43
50,000
350,000
540,000
40,000
900,000
400,000
320,000
130,000
50,000
800,000
Chapter 5- Property, Plant and Equipment
5-5.
(Black Company and Berry Company)
Books of Black Company
Equipment
Accumulated Depreciation-Building
Cash
Building
Books of Berry Company
Building
Accumulated Depreciation-Equipment
Equipment
Cash
5-6.
310,000
540,000
50,000
900,000
530,000
320,000
800,000
50,000
(Abatis Forwarders)
Land
Accumulated Depreciation – Trucks
Trucks
Cash
Gain on Exchange of Trucks
5-7.
10,340,000
4,400,000
`
(Business Processing, Inc.)
Equipment (new) 24,000 + 31,000
Accumulated Depreciation
Loss on Exchange of Equipment
Equipment ((old)
Cash (64,000 – 33,000)
5-8.
55,000
16,000
8,000
48,000
31,000
(a)
King Company
Tooling Machine
Automobile (net)
Gain on Exchange of Automobile
170,000
140,000
30,000
(b)
Princess Company
Machinery (new)
Accumulated Depreciation – Machinery (old)
Loss on Exchange of Machinery
Machinery (old)
Cash
5-9.
12,800,000
340,000
1,600,000
1,200,000
340,000
190,000
850,000
880,000
(Urban Corporation)
Land purchase
Demolition of old building (net of P70,000 salvaged
from demolished building)
Legal fees for land acquisition
Building permit fees
Interest on loan for construction
Building construction costs
Landscaping costs*
Equipment purchased of use in excavation
(800,000 – 640,000)
Fixed overhead allocated to building construction
Total costs
Land
P12,000,000
Land
Improvements
Building
P 230,000
150,000
80,000
270,000
15,000,000
P3,500,000
P12,150,000
P3,500,000
160,000
100,000
P15,840,000
*Landscaping costs may be charged to the land account if there is an indication that such an
expenditure is permanent in nature.
44
Chapter 5- Property, Plant and Equipment
Compensation for injury to construction worker is chargeable to loss; this expenditure could
have been avoided had the company obtained insurance on its workers. If an insurance was
acquired, the amount of premiums paid may be charged to the building being constructed.
Profit on construction is not recognized elsewhere in the accounts.
The self-constructed
asset should be charged for the actual costs incurred in its completion.
The cost of modifications to the new building per instruction by the building inspectors is
charged to loss since this expenditure is not a necessary expense for the asset. This was
incurred as a result of the company’s negligence and could have been avoided had proper
planning been done.
5-10.
(Day Company)
Purchase price of land
Legal fees for purchase contract and recording ownership
Delinquent property taxes on land
Total
5-11.
P4,000,000
150,000
50,000
P4,200,000
(Yu Corporation)
Balances, December 31, 2014
Cash paid on purchase of land
Mortgage assumed on the land
bought including interest at
10%
Legal fees, realty taxes and
documentation expenses
Payment to squatters
Razing costs of old building
Salvage value from building
demolition
Cost of fencing the property
Paid to a contractor for building
erected
Building permit fee
Excavation expenses
Architect’s fees
Invoice cost of machines acquired
Freight, unloading and delivery
charges
Custom duties and other charges
Allowances, hotel
accommodations paid to
technicians during installation
and test runs of machines
Balances, December 31, 2015
Land
P7,000,000
4,500,000
Land
Improvements
P500,000
Buildings
P 9,000,000
Machinery
and
Equipment
P 980,000
5,000,000
50,000
100,000
120,000
(150,000)
500,000
12,000,000
20,000
50,000
150,000
2,000,000
60,000
140,000
P16,550,000
P1,000,000
P21,290,000
400,000
P3,580,000
The interest of P150,000 is an imputed interest and is not reported anywhere in the financial
statements.
The royalty payments of machines purchased are charged to operating expense for the period.
5-12.
(Metro Company)
a.
P4,000,000 x 10%
Less interest income earned on temporary investment of loan
Capitalized interest
45
P400,000
( 125,000)
P275,000
Chapter 5- Property, Plant and Equipment
b.
1,250,000 x 10%
1,250,000 x 10% x 9/12
1,250,000 x 10% x 6/12
1,250,000 x 10% x 3/12
Total interest
Less interest income earned on temporary investment of loan
Capitalized interest
Total construction costs
Total cost of building
c.
Computation of average accumulated expenditures:
1,400,000 x 12/12
1,000,000 x 9/12
1,200,000 x 6/12
1,000,000 x 3/12
400,000 x 0/12
Average accumulated expenditures
Computation of weighted average interest rate:
(10% x 1,600,000) + (12% x 2,000,000)
1,600,000 + 2,000,000
Interest of specific borrowing:
1,800,000 x 10%
Less interest earned
Interest on general borrowing:
3,000,000 – 1,800,000 = 1,200,000
1,200,000 x 11.11%
Capitalized interest
d.
5-13.
P 125,000
93,750
62,500
31,250
P 312,500
40,000
P 272,500
5,000,000
P5,272,500
P1,400,000
750,000
600,000
250,000
---------P3,000,000
11.11%
P180,000
10,000
2,800,000 x 10%
1,600,000 x 10%
2,000,000 x 12%
Total interest on loans
Less capitalized interest 680/6,400 x 3M
Interest expense for 2015
P170,000
133,320
P303,320
P280,000
160,000
240,000
P680,000
318,750
P361,250
(Lim Company)
3,600,000 x 12/12
6,000,000 x 7/12
15,000,000 x 6/12
15,000,000 x 1/12
Average accumulated expenditures
a.
P3,600,000
3,500,000
7,500,000
1,250,000
P15,850,000
Interest on specific borrowing (30,000,000 x 12%)
Less interest revenue earned from temporary
investments of specific borrowing
Capitalized interest
BAT WALANG GENERAL DITO?? AAHH KASI KAPAG 15M-30M? WALA NA? HAHA
b.
Interest on specific borrowing (12,000,000 x 12%)
Less interest revenue earned from temporary
investments of specific borrowing
Interest on general borrowings
15,850,000 – 12M = 3,850,000; 3,850,000 x 12.14%*
Capitalized interest
*6,800,000 ÷ 56,000,000 = 12.14%
46
P 3,600,000
249,000
P 3.351,000
P 1,440,000
249,000
P 1,191,000
467,390
P 1,658,390
Chapter 5- Property, Plant and Equipment
5-14.
(Alondra Corporation)
(a)
Average accumulated expenditures:
4,000,000 x 12/12
8,000,000 x 9/12
12,200,000 x 6/12
8,800,000 x 3/12
7,000,000 x 0/12
Average accumulated expenditures
Weighted average interest rate of general borrowings:
10% x 12,000,000 + 12% x 14,000,000
12,000,000 + 14,000,000
Capitalized interest
Specific borrowing (12% x 17 million)
General borrowings
(18,300,000 – 17,000,000) x 11.08%
Total
(b)
5-15.
(b)
5-17.
= 11.08%
P2,040,000
144,040
P2,184,040
Total cost of building = Total construction cost + capitalized interest cost
= P40,000,000 + P2,184,040
P42,184,040
(Dreamworld Company)
(a)
5-15.
P 4,000,000
6,000,000
6,100,000
2,200,000
-----P18,300,000
Average accumulated expenditures for 2016
(300,000 x 12/12) + (450,000 x 4/12)
P 450,000
Average accumulated expenditures for 2017
1,200,000 + (450,000 x 12%)
= 1,254,000 x 9/9
450,000 x 6/9
AAE for 2017
P1,254,000
300,000
P1,554,000
Capitalized interest for 2016 (450,000 x 12%)
P
Capitalized interest for 2017
(1,554,000 x 12% 9/12)
P 139,860
54,000
(Pifer Corporation)
(a)
Materials
Direct labor
Overhead 2,000,000 – (150% x 1,000,000)
Total
P1,250,000
250,000
500,000
P2,000,000
(b)
Materials
Direct labor
Overhead (2,000,000 x 250/1,250)
Total
P1,250,000
250,000
400,000
P1,900,000
(Pioneer Development Corporation)
(a)
Land
Cash
Unearned Income from Government Grant
Building
Cash
3,000,000
50,000
2,950,000
15,000,000
15,000,000
Depreciation Expense
Accumulated Depreciation (15,000,000/20 years)
47
750,000
750,000
Chapter 5- Property, Plant and Equipment
Unearned Income from Government Grant
Income from Government Grant (2,950,000/20 years)
(b)
Property, Plant and Equipment
Land
Less Unearned Income from Government Grant
147,500
147,500
P3,000,000
2,802,500
P 197,500
Alternatively, the unearned income from government grant may be presented as part of
the entity’s liabilities.
5-18.
(Tan Company)
a.
Depreciation charges for 2016 and 2017
1. SL
2. Hrs
worked
3. Units of
output
4. SYD
5. DDB
6. 150%
DB
b.
5-19.
720,000/900,000 units = 0.80/unit
0.80 x 45,000 units = 36,000
720,000 x 8/36 x 9/12 = 120,000
2/8 = 25%
25% x 800,000 x 9/12=150,000
1.5/8 = 18.75%
18.75% x 800,000 x 9/12= 112,500
Carrying amount of the asset at the end of 2017
Depreciation Method
Cost
1. Straight-line
800,000
2. Hours worked
800,000
3. Units of output
800,000
4. SYD
800,000
5. DDB
800,000
6. 150% declining balance
800,000
2017
90,000
7.20 x 6,000 hrs = 43,200
0.80 x 64,000 units = 51,200
720,000 x 7.25/36 =145,000
800,000-150,000=650,000
25% x 650,000 = 162,500
800,000-112,500=687,500
18.75% x 687,500) = 128,906
Accum. Depr.
157,500
79,200
87,200
265,000
312,500
241,406
(De Oro Company)
a.
Method 1 Method 2 -
Method 3 -
b.
5-20.
2016
(800,000 – 80,000) / 8 = 90,000
90,000 x 9/12= 67,500
720,000/100,000 hrs = 7.20/hr.
7.20 x 5,000 hrs = 36,000
Straight-line method
Sum-of-the-years digits method
320,000 ÷ 80,000 = 4 year life
320,000 x 4/10 = 128,000
320,000 x 3/10 = 96,000
150% declining-balance method
1.5 ÷ 4 = 37.5%
37.5% x 340,000
=
37.5% x (340,000-127,500)
=
Straight line method
Sum-of-the-years digits method (320,000 x 2/10)
150% declining balance method
37.5% x (340,000-127,500-79,688)
(Real Company)
a.
2/5 = 40%; 26,400 ÷ 40% = 66,000
b.
12,000 x 5 years = 60,000; 66,000 – 60,000 = 6,000
48
127,500
79,688
P80,000
64,000
49,804
Carrying amount
642,500
720,800
712,800
535,000
487,500
558,594
Chapter 5- Property, Plant and Equipment
c.
Carrying amounts, end of year 3
Straight-line (66,000 – 36,000)
Sum-of-the-years digits (66,000 – 48,000)
Double-declining balance (66,000 – 52,744)
= P30,000
= P18,000
= P13,256
The method with the lowest carrying amount at time of sale will yield the highest amount
of gain on disposal. Therefore, the double-declining balance method will provide the
highest gain on disposal at the end of year 3.
5-22.
5-22.
(Citi Company)
a.
Depreciation Expense for 2016 25% x 1,600,000 x 1/2
P200,000
b.
Sales price
Carrying value on November 30, 2019
Cost
Less accumulated depreciation
1,500,000 x (45/96)
Loss on sale
P300,000
703,125
896,875
P596,875
(Asiaplus Corporation)
(a)
(b)
(c)
(d)
(e)
5-23.
P1,600,000
Depreciation Expense – Equipment
Accumulated Depreciation - Equipment
(82,000-2,000)/10 = P8,000
(33,000-3,000)/6 = 5,000
(22,000-1,000)/7 = 3,000
(18,000 -2,000)/5 = 3,200
Total
P19,200
19,200
19,200
Cash
Accumulated Depreciation – Equipment (3,200 x 4)
Loss on Sale of Equipment Part
Equipment
5,000
12,800
200
Equipment
Cash
20,000
18,000
20,000
Depreciation Expense – Equipment
Accumulated Depreciations – Equipment
19,200
Depreciation Expense – Equipment
Accumulated Depreciation – Equipment
Components 1 – 3 =
P16,000
Component 4 = 20,000/5
4,000
Total depreciation for 2019
P20,000
20,000
19,200
20,000
(Total Company)
a.
b.
c.
Cost
Less accumulated depreciation (1,100,000 ÷ 10) x 4
Carrying amount of the asset, beginning of 5th year
Revised depreciation for the 5th year
760,000-100,000 = 660,000; 660,000 x 6/21
P1,200,000
440,000
P 760,000
P 188,571
Revised depreciation for the 5th year
(760,000 – 60,000) / 5 years
P 140,000
Revised depreciation for the 5th year
760,000 / 4 years
P 190,000
49
Chapter 5- Property, Plant and Equipment
5-24.
(Standard Company)
Cost
Less accumulated depreciation:
2016
20% x 500,000
100,000
2017
20% x 400,000
80,000
2018
20% x 320,000
64,000
2019
20% x 256,000
51,200
Carrying amount, January 1, 2020
Depreciation expense for 2020
204,800 – 10,000 = 194,800; 194,800 ÷ 5 years
5-25.
(b)
Depreciation for 2018
January 1 to August 1
(378,000 – 35,000)/5 x 7/12
August 1 to December 31
(320,800 – 50,000)/(5 – 2) + 2 = 270,800
270,800 / 5 x 5/12
Total
Cost
Less: Accumulated Depreciation (378,000–35,000)/5 x 2
Carrying value, August 1, 2018
Capitalized overhaul costs
Carrying value after overhaul
Depreciation, August 1 – December 31, 2018 (see above)
Depreciation for year 2019
Carrying value, December 31, 2019
P 38,960
P40,017
22,567
P62,584
P378,000
137,200
P240,800
80,000
P320,800
(22,567)
(54,160)
P244,073
(Chu, Inc.)
Accum, depreciation balance, January 1, 2020 (528,000 x 4/8)
Revised depreciation expense for 2020
528,000 – 264,000 = 264,000
264,000/ 2 yrs.
Accumulated depreciation balance, December 31, 2020
5-27.
295,200
P204,800
(Carmi Company)
(a)
5-26.
P500,000
P264,000
132,000
P396,000
(Imaculada Company)
(a)
Accumulated Depreciation
Loss on Disposal of Machine Parts
Machinery
To remove the carrying value
of the replaced engine block
250,000/10 years = 25,000
25,000 x 5.5 years = 137,500
137,500
112,500
Machinery
Cash
320,000
250,000
320,000
To capitalize the cost of replacement
Depreciation Expense
82,875
Accumulated Depreciation
To record depreciation for 2020
50
82,875
Chapter 5- Property, Plant and Equipment
January 1 – July 1, 2020 (prior to replacement)
(1,000,000/10 years) x 6/12
July 1 – December 31, 2020 (after replacement)
Carrying value, July 1
(1M/10) x 4.5 years
450,000
CV of old engine block
(112,500)
Cost of new engine block
320,000
Depreciable carrying value
657,500
Remaining life
÷ 10 yrs
Revised annual depreciation
65,750 x ½
Total depreciation expense for 2020
Alternative computation:
New engine block
320,000/10 = 32,000; 32,000 x 6/12
Replaced engine block
25,000 x 6/12
Remaining parts of machinery
1,000,000 – 250,000 = 750,000
(750,000/10) x 6/12
(750,000/10 years) x 4.5 = 337,500
(337,500/10 years) x 6/12
Total depreciation expense for 2020
(b)
Accumulated Depreciation
Loss on Disposal of Machine Parts
Machinery
320,000/10 years = 32,000
32,000 x 5.5 years = 176,000
176,000
144,000
Machinery
Cash
320,000
32,875
82,875
16,000
12,500
37,500
16,875
82,875
320,000
320,000
Depreciation Expense
Accumulated Depreciation
81,300
81,300
January 1 – July 1, 2020 (prior to replacement)
(1,000,000/10 years) x 6/12
July 1 – December 31, 2020 (after replacement)
Carrying value, July 1
(1M/10) x 4.5 years
450,000
CV of old engine block
(144,000)
Cost of new engine block
320,000
Depreciable carrying value
626,000
Remaining life
÷ 10 yrs
Revised annual depreciation
62,600 x ½
Total depreciation expense for 2020
5-28.
50,000
50,000
31,300
81,300
(Remedios Company)
(a)
(b)
Cost of Leasehold Improvements
Less Accumulated Depreciation
1,200,000/10 years = 120,000 x 4 years
Lease term is 10 years; Useful life is 12 years
Shorter period is 10 years
Carrying value, December 31, 2016
P1,200,000
Carrying value, December 31, 2016
Revised remaining lease term is 11 years (10 – 4 + 5)
Remaining useful life is 8 years (12 – 4)
Shorter period is
Depreciation expense for 2017
P 720,000
51
480,000
P 720,000
P
÷ 8 years
90,000
Chapter 5- Property, Plant and Equipment
5-29.
(Joice Company)
(a)
(b)
(c)
5-30.
P391,498
Carrying value of the asset, December 31, 2016
Cost
P860,000
Less accumulated depreciation
(810,000/9) x 4 years
360,000
Recoverable amount (see a)
Impairment loss
P500,000
420,000
P 80,000
Depreciation expense for 2017 (420,000 -20,000)/5 years
P 80,000
(a)
Value in use (1,500,000 – 700,000) x 3.7908
Residual value (500,000 x 0.6209)
Total
P3,032,640
310,450
P3,343,090
(b)
Carrying value (9,000,000 – 1,500,000)
Recoverable amount (higher between P3,200,000
and P3,343,090)
Impairment loss
P7,500,000
Revised annual depreciation (3,343,090–500,000)/5
P 568,618
3,343,090
P4,156,910
(Lu Company)
Depreciation Expense
56,250
Accumulated Depreciation
To record depreciation expense for 2016
(500,000 – 50,000) / 8
Impairment Loss
131,250
Accumulated Depreciation
To record impairment loss.
Carrying value 500,000 – (56,250 x 3 years)
Recoverable value
Impairment loss
Depreciation Expense
90,000
Accumulated Depreciation
To record depreciation expense for 2017
(200,000 – 20,000) / 2 years
5-32.
P420,000
P420,000
(Island Souvenirs, Inc.)
(c)
5-31.
Recoverable amount is the higher of fair value less cost to sell
and the asset’s value in use
Fair value less cost to sell (450,000 – 30,000)
Value in use
100,000 x 3.7908
P379,080
20,000 x 0.6209
12,418
56,250
131,250
P331,250
200,000
P131,250
90,000
(Twin Head Corporation)
(a)
Depreciation expense
5,600,000 / 16 years
(b)
December 31, 2016
Depreciation Expense
Accumulated Depreciation
Accumulated Depreciation
Recovery of Previous Impairment
2015
350,000
2016
350,000
350,000
350,000
2,100,000
2,100,000
52
Chapter 5- Property, Plant and Equipment
Recoverable amount
Carrying value (5,600,000 – 700,000)
Increase in value
Limit on recovery:
Impairment loss
Recovered impairment
2,400,000 / 16 years = 150,000; 150,000 x 2 years
Limit on recovery
(c)
(d)
5-33.
5-34.
7,500,000
4,900,000
2,600,000
2,400,000
300,000
2,100,000
Cost
Accumulated depreciation (4,400,000 + 700,000 – 2,100,000)
Carrying amount, December 31, 2016
To check: Limit on carrying value without impairment
10,000,000 x 14/20
10,000,000
3,000,000
7,000,000
7,000,000
Depreciation expense for 2017 (7,000,000 / 14 years)
500,000
(Coco Company)
(a)
Cost
Accumulated depreciation 12/31/15 (300,000/10) x 2
Carrying amount 12/31/15 before impairment
Recoverable amount
Impairment loss
P300,000
( 60,000)
P240,000
192,000
P 48,000
(b)
Carrying value 12/31/15 after impairment
2016 depreciation (192,000/8)
Carrying amount 12/31/16 before recovery
P192,000
( 24,000)
P168,000
(c)
Carrying amount before recovery of impairment
New recoverable amount
Increase in value
Limit on recovery
Previous impairment
P48,000
Recovered in 2016 (30,000 – 24,000)
(6,000)
Limit on recovery
P42,000
Impairment recovery to be recognized at 12/31/16
P168,000
222,000
P 54,000
(a)
01/01/14
(b)
12/31/14
12/31/15
(c)
01/01/16
Equipment
Revaluation Surplus
Accumulated Depreciation
3,600,000-2,400,000 = 1,200,000 (50% Inc.)
50% x 4,000,000 = 2,000,000
50% x 1,600,000 = 800,000
P 42,000
2,000,000
1,200,000
800,000
Depreciation Expense
Accumulated Depreciation-Equipment
3,600,000 ÷ 6 yrs = 600,000
Revaluation Surplus
Retained Earnings (1.2M/6)
600,000
Depreciation Expense
Accumulated Depreciation-Equipment
Revaluation Surplus
Retained Earnings
600,000
Accumulated Depreciation-Equipment
Revaluation Surplus
Equipment
600,000
400,000
53
600,000
200,000
200,000
600,000
200,000
200,000
1,000,000
Chapter 5- Property, Plant and Equipment
(d)
12/31/16
Cost
Accum
CV
5-35.
Depreciation Expense
Accumulated Depreciation-Equipment
2M ÷ 4 yrs = 500,000
Revaluation Surplus
Retained Earnings
1.2M-200,000-200,000-400,000=400,000
400,000 ÷ 4 yrs = 100,000
Original
4.000M
1.600M
2.400M
1/1/14
+2.00M
+0.80M
+1.20M
1/1/13
6.000M
2.400M
3.600M
2014 &
2015
+1.20M
-1.20M
12/31/15
6.00M
3.60M
2.40M
500,000
500,000
100,000
100,000
1/1/16
-1.00M
-0.60M
-0.40M
1/1/16
5.00M
3.00M
2.00M
12//31/16
5.00M
3.50M
1.50M
(Samsung Company)
1/1/16
12/31/16
12/31/17
12/31/17
12/31/18
12/31/19
12/31/19
12/31/20
12/31/20
12/31/21
Machinery
Cash
Depreciation Expense (3,600,000/10)
Accumulated Depreciation
Depreciation Expense
Accumulated Depreciation
Machinery
Accumulated Depreciation
Revaluation Surplus
3,600,000
Cost
Machinery
3,600,000
Accumulated Depreciation
720,000
Net
2,880,000
Depreciation Expense (3,120,000 / 8 years)
Accumulated Depreciation
Revaluation Surplus
Retained Earnings (390,000 – 360,000)
Depreciation Expense (3,120,000 / 8 years)
Accumulated Depreciation
Revaluation Surplus
Retained Earnings (390,000 – 360,000)
Accumulated Depreciation
Revaluation Surplus (240,000 – 30,000 – 30,000)
Revaluation Loss
Machinery
New Rev
Machinery
3,350,000
Accumulated Depreciation
1,340,000
Net
2,010,000
Revalued
3,900,000
780,000
3,120,000
390,000
Depreciation Expense (2,010,000 / 6 years)
Accumulated Depreciation
Depreciation Expense
Accumulated Depreciation
Machinery
Accumulated Depreciation
Recovery of Previous Revaluation Loss (P & L)
Revaluation Surplus
Increase in asset value
Unrecovered revaluation loss
Initial revaluation loss
Recovered through lower depreciation
150,000 / 6 = 25,000; 25,000 x 2 years
Revaluation surplus
54
3,600,000
360,000
360,000
360,000
360,000
300,000
60,000
240,000
Increase
300,000
60,000
240,000
390,000
30,000
30,000
390,000
390,000
30,000
30,000
220,000
180,000
150,000
Ledger Bal
3,900,000
1,560,000
2,340,000
550,000
Decrease
550,000
220,000
330,000
335,000
335,000
335,000
335,000
1,150,000
690,000
100,000
360,000
460,000
150,000
50,000
100,000
360,000
Chapter 5- Property, Plant and Equipment
12/31/22
5-36.
5-37.
New Rev
Machinery
4,500,000
Accumulated Depreciation
2,700,000
Net
1,800,000
Check:
Carrying value based on cost (no revaluation loss)
(3,600,000 x 4 years)/10 years
Revalued amount, 12/31/21
Revaluation Surplus
Depreciation Expense (1,800,000/4)
Accumulated Depreciation
Revaluation Surplus (360,000/4)
Retained Earnings
Ledger Bal
3,350,000
2,010,000
1,340,000
1,440,000
1,800,000
360,000
450,000
450,000
90,000
90,000
(Lakers, Inc.)
(a)
Cost
Accumulated depreciation 12/31/16 (100,000/10)
Net
Revalued amount
Revaluation surplus 12/31/16
P100,000
( 10,000)
90,000
112,500
P 22,500
(b)
Carrying amount 12/31/18 (112,500 x 7/9)
Recoverable amount
Decrease in value
Remaining balance of Revaluation Surplus (22,500 x 7/9)
Impairment loss in profit or loss
P 87,500
67,375
P 20,125
( 17,500)
P 2,625
(c)
As of 1/1/19
Depreciation expense for 2019 (67,375/7)
Net before revaluation on 12/31/19
Revalued amount
Increase in value
Unrecovered impairment loss (2,625 x 6/7)
Revaluation surplus, December 31, 2019
To check: CV without impairment, cost model
100,000 x 6/10
Revaluation surplus, December 31, 2019
Revalued amount, December 31, 2019
P67,375
( 9,625)
57,750
73,000
P15,250
( 2,250)
P13,000
P60,000
13,000
P73,000
(Allied Company)
Purchase price
Residual value
Development costs incurred and capitalized during 2014
Depletable cost 1/1/15
Estimated supply of mineral resources
Depletion expense per ton in 2015
Number of tons removed during 2015
Depletion expense for 2015
P4,450,000
( 650,000)
750,000
P4,550,000
÷3,500,000
P
1.30
x 550,000
P 715,000
Depletable cost, January 1, 2015 (see above)
Less depletion expense for 2015
Add development costs incurred and capitalized during 2016
Depletable cost for 2016
Revised estimated supply of mineral resource, 2016
Revised depletion rate per ton
Number of tons removed during 2016
Depletion expense for 2016
P4,550,000
( 715,000)
961,000
P4,796,000
÷4,360,000
P
1.10
700,000
P 770,000
55
Increase
1,150,000
690,000
460,000
Chapter 5- Property, Plant and Equipment
5-38.
5-39.
(Ong Exploration Company)
Purchase price
Development costs
Salvage value
Restoration costs at present value (2,500,000 x 0.4632)
Depletable cost
Estimated recovery from the property
Depletion rate per metric ton
Resources extracted during 2016
Depletion expense for 2016
P45,000,000
1,500,000
( 6,000,000)
1,158,000
P41,658,000
÷10,000,000
P
4.1658
x 1,000,000
P 4,165,800
Depletable cost, 2016 (see above)
Depletion expense for 2016
Development costs in 2017
New depletable cost for 2017
Remaining number of metric tons (9,250,000-1,000,000)
Revised depletion per metric ton (rounded)
Number of metric tons removed during 2017
Depletion expense for 2017
P41,658,000
( 4,165,800)
750,000
P38,242,200
÷ 8,250,000
P
4.64
x 1,500,000
P 6,960,000
(Family Mining Company)
Depletion rate per ton:
4,000,000 + 400,000 – 200,000
1,400,000 tons
P3.00
Depreciation expense per ton:
300,000 – 20,000
1,400,000 tons
P0.20
(a)
(b)
(c)
Cost of ending inventory
2,000 units x 6 months
Production cost per unit
(8.00 + 3.00 + 0.20)
Ending Inventory, December 31, 2016
12,000
x 11.20
P134,400
Cost of goods sold
18,000 units x 6 months
Production cost per unit
Cost of goods sold for 2016
Depletable cost in 2016
Less depletion expense for 2016
20,000 units x 6 months
Depletion rate per ton
New depletable cost for 2017
Revised estimated recovery at January 1, 2017
Revised depletion rate for 2017
108,000
x 11.20
P1,209,600
P4,200,000
120,000
x 3.00
Depreciable cost in 2016
Less depreciation expense for 2016 (120,000 units x 0.20)
Depreciable cost for 2017
Revised estimated recovery at January 1, 2017
Revised depreciation rate for 2017
5-40.
360,000
P3,840,000
÷ 800,000
P
4.80
P
(
P
÷
P
280,000
24,000)
256,000
800,000
0.32
(Dungeon Mining)
(a)
7,500,000/1,000,000 = 7.50/ton; 7.50 x 100,000 = P750,000 each year
(Note: mining period, which is 10 years, 1,000,000/100,000, is shorter than the useful
life in years; hence, unit of output method is used.)
56
Chapter 5- Property, Plant and Equipment
(b)
Cost
Less depreciation expense for the 1st and 2nd years
Less depreciation for the 3rd and 4th years
6M/8yrs = 750,000; 750,000 x 2 years
Carrying value at the end of the 4th year
P7,500,000
(1,500,000)
(1,500,000)
P4,500,000
(During shutdown period, the depreciation shall be computed based on remaining life, on
a time-factor basis, generally straight-line.)
(c)
150,000 tons/ year x 6 years = 900,000
4,500,000/900,000 = 5/ton; 5 x 150,000
P 750,000
With new estimate of annual production, mining period is shorter, at the beginning of the
fifth year. The company shall compute depreciation using unit of output.
(d)
5-41.
Carrying value at the end of the 4th year
Less depreciation expense for the 5th and 6th years
Carrying value at the end of the 6th year
P4,500,000
(1,500,000)
P3,000,000
(Yap Machine Shop)
(a)
1.
2.
3.
4.
5.
6.
7.
Cash
Accumulated Depreciation-Building
Loss on Disposal of Assets
Land
Building
1,700,000
450,000
150,000
800,000
1,500,000
Cash
Accumulated Depreciation-Equipment
Loss on Disposal of Assets
Equipment
120,000
250,000
30,000
Equipment
Cash
298,000
400,000
298,000
Land
Income from Donated Asset
Cash
8,000,000
7,800,000
200,000
Building
Cash
240,000
Equipment
Accumulated Depreciation-Equipment
Gain on Disposal of Assets
Equipment
Cash
150,000
15,000
240,000
Building
Cash
22,000
40,000
103,000
28,000,000
28,000,000
(b)
Beginning balance
(3)
(4)
(5)
(6)
(7)
Total
Balance
Property, Plant and Equipment (Net)
2,150,000 (1)
298,000 (2)
8,000,000
240,000
125,000
28,000,000
39,053,000 Total
36,813,000
57
1,850,000
150,000
2,000,000
Chapter 5- Property, Plant and Equipment
5-42.
(Pat Corporation)
(a)
(b)
Depreciation and amortization expense for year ended December 31, 2016
Buildings
1.5/25 = 6%; (12,000,000-2,631,000) x 6%
P 562,140
Machinery and Equipment
Based on beginning balance (9,000,000 x 10%)
P900,000
Less depreciation of machine destroyed
230,000 x 10% x 9/12
17,250
P 882,750
New machine
2,800,000 + 50,000 + 250,000=310,000
3,100,000 x 10% x 6/12
155,000
Total
P1,037,750
Automotive Equipment
Based on beginning balance
P180,000
Less depreciation of car traded (180,000 x 2/10)
36,000
P 144,000
New car (240,000 x 4/10)
96,000
Total
P 240,000
Leasehold Improvement (1,680,000 x 8/80)
P 168,000
Gain ( loss) from disposal of assets
Car traded in
Fair value of car traded in (240,000 – 200,000)
Book value of car traded
Machine destroyed by fire
Insurance recovery
Book value of machine (230,000 x 4/10 )
Net gain from disposal of assets
P 40,000
54,000
P155,000
92,000
P(14,000)
63,000
P 49,000
MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
MC6
MC7
B
B
C
C
C
A
C
MC8
MC9
MC10
MC11
MC12
MC13
MC14
B
C
B
B
A
D
D
MC15
MC16
MC17
MC18
MC19
MC20
MC21
B
B
D
B
B
D
D
MC22
MC23
MC24
MC25
MC26
MC27
MC28
B
D
B
D
D
C
A
MC29
MC30
MC31
MC32
MC33
MC34
MC35
C
B
D
C
C
C
D
Problems
MC36
D
Allocated cost of the building (14,400,000 x 5/20)
MC37
C
Purchase price of new cooler
Freight charge
Installation cost
Total cost of new cooler
MC38
D
Cost of equipment is the fair value of FVPL exchanged, 1,000 shares x
34 = 34,000; The excess over most recent fair value (34 – 30) is taken
to profit or loss.
MC39
D
Depreciation expense for 2016
(800,000 – 20,000) x 12/78 x 9/12
P3,600,000
P200,000
3,000
6,000
P209,000
58
P90,000
Chapter 5- Property, Plant and Equipment
MC40
MC41
C
D
Cost of equipment
Accumulated depreciation
2016
90,000
2017 780,000 x 11.25/78
112,500
Carrying value, December 31, 2017
Cost of land
Expenses of land survey
Expenses for search of land title
Total cost of land
MC43
MC44
MC45
C
C
C
C
202,500
P597,500
P4,500,000
30,000
6,000
P4,536,000
Building permit fee
Temporary building to house materials and construction workers
Demolition of old building
Payments to tenants to vacate premises
Interest on construction loan
Cost of paving parking lot adjoining building
Excavation expenses for building foundation
Construction costs
Total cost of building
MC42
P800,000
Interest on specific borrowing
1,800,000 x 10% = 180,000
Interest revenue on temporary investment of borrowings
Net interest cost on specific borrowing
Interest on general borrowings
2,500,000 – 1,800,000 = 700,000; 700,000 x 9%
Total capitalized interest
Interest on specific borrowing
4,000,000 x 10% x 6/12
Interest on general borrowings
4,750,000 – 4,000,000 = 750,000; 750,000 x 12% x 6/12
Total capitalized interest
Average accumulated expenditures
1.0M + (4.0M ÷ 2) = 3.0M
Interest on specific borrowing (2.0M x 10%)
Interest on general borrowings (3.0M – 2.0M = 1.0M; 1.0M x 11%*)
Total capitalized interest
*Weighted average interest rate
12% x 5.0M = 600,000; 8.5% x 2.0M = 170,000
600,000 + 170,000 = 770,000; 770,000/7.0M = 11%
P 10,000
50,000
40,000
60,000
90,000
45,000
150,000
9,800,000
P10,245,000
P180,000
(45,000)
P135,000
63,000
P198,000
P200,000
45,000
P245,000
P200,000
110,000
P310,000
Fair value of Bancnet’s asset
Cash received by Bancnet
Cost of office equipment (or the fair value of Megalink’s asset)
P20,000
(3,000)
P17,000
Fair value
Carrying value of Bancnet’s asset (40,000 – 30,000)
Gain on exchange
P20,000
10,000
P10,000
P14,500
16,800
P 2,300
MC46
B
Fair value of asset given up (20,500 – 6,000)
Carrying value of asset given up
Loss on exchange
MC47
A
Total annual depreciation
112,500 + 66,000 + 9,625 + 13,250
Total depreciable cost
4,500,000 + 1,320,000 + 77,000 + 53,000
Composite life (5,950,000/201,375)
59
P201,375
5,950,000
29.5 years
Chapter 5- Property, Plant and Equipment
MC48
MC49
MC50
MC51
A
D
C
A
Total cost of the assets in the group
4,800,000 + 1,400,000 + 82,000 + 53,000 = 6,335,000
Composite rate based on cost
201,375 / 6,335,000
3.18%
Depreciation of factory building on third year using straight line
4,500,000 ÷ 40 yrs.
Depreciation of small tools on third year using sum-of-the-years’ digits
77,000 x 6/36
Sales price
Carrying amount of machine
Cost
Accumulated depreciation
228,000/120 mos = 1,900/mo; 1,900 x 63 mos.
Gain on sale
P112,500
P12,833
P130,000
240,000
119,700
120,300
P 9,700
MC52
C
SYD 270,000 x (8+7)/36
Straight line (270,000/8 = 33,750; 33,750 x 2
Excess of SYD over SL accumulated depreciation
P112,500
67,500
P 45,000
MC53
B
Depreciation expense for 2016
1.5/5 = 30% rate; 600,000 x 30% x ½ = 90,000
600,000 – 90,000 = 510,000; 510,000 x 30%
P153,000
MC54
B
Factory building (260,000 – 20,000) ÷ 40
Plant equipment (240,000 x .90 x .90 x .10)
Other fixtures
(72,000 x 2/10)
P 6,000
P19,440
P14,400
MC55
A
Reported accumulated depreciation is 72,000 which agrees with the use
of sum-of-the years digits method, computed as follows:
90,000 x (5+4+3)/15 = 72,000
Hence, depreciation expense for 2016 (4th year) is 90,000 x 2/15
P12,000
MC56
C
This is an adjusting event after the reporting date.
recognized in 2016, loss computed as:
Carrying value
Net realizable value/Impaired value
Impairment loss
The loss is
P200,000
65,000
P135,000
MC57
A
Carrying value (900,000 – 420,000)
Recoverable amount
Impairment loss
P480,000
300,000
P180,000
MC58
D
Accumulated depreciation prior to impairment
Impairment loss credited to accumulated depreciation
Depreciation expense for the year after impairment (300,000/3 years)
Accumulated depreciation balance, December 31, 2016
P420,000
180,000
100,000
P700,000
MC59
D
Depreciable cost (42,000 ÷ 7/55)
Residual value
Acquisition cost
P330,000
5,000
P335,000
MC60
C
Cost of building
Carrying value, December 31, 2016
Accumulated depreciation for period July 1, 2012 to December 31,
2016 (or 4.5 years)
Depreciation per year (5,445,000/4.5 years)
Cost of building
Depreciable cost (1,210,000 x 40 years)
Residual value
60
P49,200,000
43,755,000
P 5,445,000
P 1,210,000
P49,200,000
48,400,000
P 800,000
Chapter 5- Property, Plant and Equipment
MC61
C
Purchase price
Salvage value
Estimated restoration costs
Depletable cost
Depletion rate per ton (55,200,000/2,400,000)
MC62
A
Depletable cost (3,400,000 – 200,000 + 800,000)
Estimated removable ore
Depletion rate per ton
Number of tons sold during the period
Depletion expense included in cost of goods sold
MC63
B
Depletion expense
3,600,000 ÷ 800,000 = 4.50; 4.50 x 60,000
Depreciation expense
96,000 – 6,000 = 90,000
90,000 ÷ 800,000 = 0.1125
0.1125 x 60,000
MC64
D
No depletion expense is recognized for quarry no. 1. The asset is not
owned.
Depletion expense for quarry no. 2
1M– 300,000 = 700,000
700,000 ÷ 100 M = 0.007/ton; 0.007 x 1,380,000
P54,000,000
(6,000,000)
7,200,000
P55,200,000
P23.00
P4,000,000
÷ 4,000,000
P1.00
375,000
P375,000
P270,000
P6,750
P0
P9,660
MC65
B
Cost
Accumulated depletion (0.007 x 40 million
Carrying amount, beginning of 2016
Revised estimated recoverable tons
Revised depletion charge per ton
Depletion expense for 2016 (0.21 x 1,380,000 tons)
P700,000
280,000
P420,000
÷ 20,000,000
P0.21
P28,980
MC66
C
Cost
Accumulated depreciation
(8,600,000-600,000) ÷ 40 yrs = 200,000; 200,000 x 5 yrs.
Carrying value, beginning of 2016
Revised depreciation charge (7,600,000 – 600,000) / 30 years
P8,600,000
1,000,000
P7,600,000
P 233,333
MC67
D
Sales price
Carrying value, December 31, 2016 (7,600,000 – 233,333)
Gain on sale
P7,500,000
7,366,667
P 133,333
MC68
C
Fair market value
Carrying value 4,000,000 – (160,000 x 10 years)
Revaluation surplus
P3,240,000
2,400,000
P 840,000
MC69
B
Estimated useful life is 25 years (4,000,000/160,000)
Remaining life is 15 years (25 – 10)
Revised depreciation expense for 2016 (3,240,000/15 years
MC70
B
Cost
Accumulated depreciation (160,000 x 9 years)
Carrying value
Impairment loss
Recoverable amount, December 31, 2015
Depreciation expense for 2015 (2,060,000/16 years)
Carrying value, December 31, 2016
Fair market value
Increase in value
Unrecovered impairment loss (500,000 x 15/16)
Revaluation surplus, December 31, 2016
61
P216,000
P4,000,000
1,440,000
P2,560,000
(500,000)
P2,060,000
128,750
P1,931,250
3,240,000
P1,308,750
468,750
P 840,000
Chapter 5- Property, Plant and Equipment
MC71
A
Cost
Accumulated depreciation (360,000/6 = 60,000; 60,000 x 2.5 years
Carrying value
Recoverable value
Impairment loss
MC72
D
Recoverable value
Depreciation expense for the year (70,000/3.5 years)
Carrying amount, December 31, 2016
MC73
C
Accumulated depreciation, December 31, 2015 (1,800,000 – 600,000)
Depreciation expense for 2016 (600,000/3 years)
Accumulated depreciation, December 31, 2016
MC74
C
Replacement cost
Accumulated depreciation based on appraisal
3,000,000 – 300,000 = 2,700,000
2,700,000/10 = 270,000; 270,000 x 4 years
Appraised value/Fair value
Book value (1,500,000 – 600,000)
Revaluation surplus
1,080,000
P1,920,000
900,000
P1,020,000
Annual depreciation subsequent to revaluation
1,920,000 ÷ 6 yrs. or 2,700,000 ÷ 10 yrs.
P270,000
MC75
B
62
P360,000
150,000
P210,000
70,000
P140,000
P70,000
20,000
P50,000
P1,200,000
200,000
P1,400,000
P3,000,000
Chapter 6 - Intangible Assets
CHAPTER 6
INTANGIBLE ASSETS
Discussion Question No. 21
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
6-1.
6-2.
Expense, cost of internally developed publishing title is not allowed to be capitalized.
Intangible
Expense
Intangible
Intangible
Prepaid expense
With alternative use, PPE; otherwise, unrecoverable cost, R and D expense
Charged to RE
Expense
Intangible
Intangible
Expense
Expense, copyright shall be written off in profit or loss
Expense
Expense
PPE
Expense
Expense
PROBLEMS
(Amsterdam Enterprises, Inc.)
(a)
Special equipment (600,000 – 460,000)
Research salaries
Costs of testing prototype
R & D Expense
P140,000
51,300
70,800
P262,100
(b)
Fees paid to Phil. Patent Office
Drawings required by the patent office
Legal costs of filing patent
Patent cost, January 1, 2016
Less amortization of patent for years 2016 and 2017
(59,700/ 10) x 2 yrs.
Patent carrying value, December 31, 2017
P
7,500
14,100
38,100
P 59,700
(c)
Patent carrying value at December 31, 2018 (59,700 x 7/10)
Remaining estimated useful life at January 1, 2019
Amortization expense for year 2019
P 41,790
÷
5
P 8,358
(d)
Carrying value, January 1, 2019
Less amortization expense for 2019
Carrying value, December 31, 2019
P41,790
8,358
P33,432
11,940
P 47,760
(May Company)
Patents
Cost
P192,000
Less accumulated amortization 36,000+(156,000/8) 55,500
License
Cost (100 x 600 x 2/3)
P 40,000
Less accumulated amortization (40,000/4)
10,000
Trademark
Cost (100 x 600 x 1/3)
P 20,000
Less accumulated amortization (20,000/4)
5,000
Goodwill (12M – 9M)
Total intangible assets
63
P 136,500
30,000
15,000
3,000,000
P3,181,500
Chapter 6 - Intangible Assets
6-3.
(July, Inc.)
2009
Jan. 3
Patents
Cash
2009-2010
Dec. 31
196,000
196,000
Amortization Expense – Patents (196,000/10)
Accumulated Amortization-Patents
19,600
Legal Fees
Cash
28,000
Amortization Expense
Accumulated Amortization-Patents
19,600
Patents
Cash
60,000
Amortization Expense
Accumulated Amortization-Patents
196,000 – (19,600 x 5) = 98,000
(98,000 + 60,000) / 10 = 15,800
15,800
19,600
2011
Jan. 1
2011-2013
Dec. 31
28,000
19,600
2014
Jan. 1
2014-2016
Dec. 31
60,000
15,800
2017
July 1
1
6-4.
Amortization Expense
Accumulated Amortization-Patents
15,800 x 6/12 = 7,900
7,900
Loss from Write off of Patents
Accumulated Amortization-Patents
Patents
196,000 + 60,000 = 256,000
98,000 + (15,800 x 3.5 yrs) = 153,300
102,700
153,300
256,000
(ToGo Company)
Carrying value
Recoverable value
150,000/10% = 1,500,000 x 80%
300,000/10% = 3,000,000 x 20%
Impairment loss
6-5.
7,900
P4,000,000
P1,200,000
600,000
1,800,000
P2,200,000
(Boston Company)
(a)
Amortization expense for 2014 (500,000/5) x ½
P 50,000
(b)
Carrying amount, December 31, 2015 (500,000 – 150,000)
Estimated recoverable amount
Impairment loss at December 31, 2015
P350,000
150,000
P200,000
(c)
Written down value of patent at December 31, 2015
Less amortization for 2016
150,000 / 3
Carrying amount at December 31, 2016
P150,000
Sound value at January 1, 2017
Carrying amount at December 31, 2016
Increase in value
Impairment loss
Recovery of previous impairment loss through lower
amortization (100,000 – 50,000)
Revaluation surplus in 2017
P600,000
100,000
P500,000
(d)
64
50,000
P100,000
P200,000
50,000
150,000
P350,000
Chapter 6 - Intangible Assets
6-6.
(Summer Company)
2014
R & D Expense
Cash
500,000
Patents
Cash
Amortization Expense
Accumulated Amortization-Patents
120,000
500,000
2015
Jan. 1
Dec. 31
120,000
12,000
12,000
2016
Jan. 1
Patents
Cash
1,200,000
1,200,000
2016-2017
Dec. 31
Amortization Expense
Accumulated Amortization-Patents
(120,000-12,000) + 1,200,000 = 1,308,000
1,308,000/15 = 87,200
87,200
87,200
2017
Dec. 31
6-7.
Loss from Write down of Patents
Accumulated Amortization
Patents
1,320,000
(April Company)
Laboratory research
Modification of formulation
Testing
Searching for application
Depreciation of equipment (280,000/5)
R & D costs for 2016
6-8.
1,133,600
186,400
P 68,000
26,000
24,000
19,000
56,000
P193,000
(Autumn Company)
a.
2016
Franchise
Cash
Dec. 31
31
b.
Dec. 31
6,250,000
6,250,000
Franchise Fee Expense (5% x 10,000,000)
Cash /Accrued Expenses
500,000
Amortization Expense
Accumulated Amortization-Franchise
6,250,000/10 = 625,000; 625,000 x 1/2
312,500
Amortization Expense
Accumulated Amortization-Patents
750,000 x 9.5/10 = 712,500; 712,500/5
142,500
500,000
312,500
142,500
c.
R & D Expense
Equipment
Accumulated Depreciation-Equipment
Cash
2,300,000
1,000,000
100,000
3,200,000
200,000+1.4M+600,000+100,000=2.3M; (1M.5) x ½=100,000
6-9.
(Global Computer Corporation)
(a)
(b)
R & D Expense
Software Costs
Cash
800,000
500,000
Amortization Expense
Accumulated Amortization-Software Costs
125,000
1,300,000
0.5M/4 = 125,000 (higher); 0.5M x 1/5 = 100,000
65
125,000
Chapter 6 - Intangible Assets
6-10.
(Sun Company)
(a)
(b)
(c)
2016
Jan. 1
Dec. 31
31
2017
Jan. 1
6-11.
P 500,000
746,070
P1,246,070
Amortization Expense for 2016
1,246,070 / 10 yrs
P 124,607
Franchise
Discount on Notes Payable
Cash
Notes Payable
Interest Expense
Discount on Notes Payable (10% x 746,070)
Amortization Expense
Accumulated Amortization-Franchise
1,246,070
153,930
500,000
900,000
74,607
74,067
124,607
124,607
Notes Payable
Cash
300,000
300,000
(Winter Company)
(a)
(b)
6-12.
Downpayment
Present value of future payments
300,000 x 2.4869
Total cost
Cash purchase price
Fair value of net assets
(1,000,000 + 1,700,000 + 5,900,000 – 2.360,000)
Goodwill
Trade Receivables
Inventory
Property, Plant and Equipment
Goodwill
Current Liabilities
Noncurrent Liabilities
Cash
P7,000,000
6,240,000
P 760,000
1,000,000
1,700,000
5,900,000
760,000
760,000
1,600,000
7,000,000
(Bagong Silangan Company)
(a)
Recoverable amount of the CGU
Carrying amount of the CGU, including goodwill
Impairment loss
Impairment Loss
Goodwill
(b)
300,000
300,000
Recoverable amount of the CGU
Carrying amount of the CGU, including goodwill
Impairment loss
Credited to goodwill
Decrease in value of identifiable noncurrent assets
Impairment loss
Goodwill
Land (5/13 x
Accumulated
Accumulated
Accumulated
P13,100,000
13,400,000
P
300,000
P12,400,000
13,400,000
P 1,000,000
400,000
P
600,000
1,000,000
600,000)
depreciation – Building (6.2/13 x 600,000)
amortization – Patents (1/13 x 600,000)
amortization – Trademarks (.8/13 x 600,000)
66
400,000
230,769
286,154
46,154
36,923
Chapter 6 - Intangible Assets
MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
D
D
C
B
B
MC6
MC7
MC8
MC9
MC10
A
C
D
A
D
MC11
MC12
MC13
MC14
MC15
B
D
B
D
C
MC16
MC17
MC18
MC19
MC20
B
A
B
D
C
Problems
MC21
D
Patents
Franchise
Total cost of intangible assets
P244,000
100,000
P344,000
MC22
C
Initial franchise fee
MC23
C
Trademarks
Patents
Total intangible assets
P750,000
150,000
P900,000
MC24
B
Initial payment
Present value of four annual payments (100,000 x 2.91)
Cost of franchise
P200,000
291,000
P491,000
MC25
B
Patent (1,200,000 x 2/50)
Copyright (750,000/10 = 75,000; 75,000 x 2/12)
Franchise (60,000 x 2/12)
Total amortization amount for 2015
P48,000
12,500
10,000
P70,500
MC26
B
Patent A (125,000 ÷ 10 = 12,500;
Patent B (272,500 ÷ 5 = 54,500 x ½)
Patent C (656,200 ÷ 17)
Total patent amortization expense
P12,500
27,250
38,600
P78,350
MC27
C
Amortization expense for 2013 (340,000 ÷ 10 = 34,000 x ½)
P17,000
MC28
C
Cost
Accumulated amortization (34,000 x 1.5 years)
Carrying value, January 1, 2015
MC29
B
Revised amortization expense for 2016 (289,000 ÷ 5)
MC30
A
There is no capitalized cost of the asset that will be subject to
amortization.
P1,000,000
MC31
C
Laboratory research
Testing for evaluation of new products
Modification of formulation of plastic products
Searching for application of new research findings
Total research and development expense
MC32
B
Depreciation of equipment
Materials used in R & D
Compensation cost of personnel in R & D
Outside consulting fees for R & D work
Indirect costs appropriately allocated to R & D
Total research and development expense
67
P340,000
51,000
P289,000
P57,800
P0
P68,000
24,000
6,000
19,000
P117,000
P210,000
300,000
400,000
220,000
260,000
P1,390,000
Chapter 6 - Intangible Assets
MC33
C
Patent amortization expense (152,000 ÷ 8)
MC34
A
Loss from patent obsolescence (1,440,000 x 1.5/10)
MC35
A
Cost of Patent A only (40,000 + 5,000)
MC36
C
Patent amortization expense for 2015 (900,000 / 10 years)
Loss on obsolescence 900,000 - (90,000 x 4 years)
Charge against income during 2015
MC37
C
Accumulated amortization (1,500,000 ÷ 30)
P50,000
MC38
D
Patent amortization for 2011 (480,000 ÷ 10)
P48,000
MC39
A
Carrying amount, beginning of 2012 (480,000 x 5/10)
Additional capitalized cost
New depletable cost
Revised remaining life
Patent amortization expense for 2012
P240,000
200,000
P440,000
÷ 10 years
P44,000
MC40
B
New depletable cost (see No. 39)
Depletion for 3.5 years (44,000 x 3.5 years)
Carrying amount at time of obsolescence /Loss
P440,000
154,000
P286,000
MC41
B
Cost of patent
Accumulated amortization (270,000/10 = 27,000; 27,000 x 4)
Carrying amount, beginning of 2015
Revised depreciation expense for 2015 (162,000/3)
Patent, net of accumulated amortization, December 31, 2015
OR 270,000 x 6/10 x 2/3 = 108,000
P270,000
108,000
P162,000
54,000
P108,000
MC42
C
SL =1/5 = 20%
Revenue = 25%
Depreciation is the higher rate, 25%; thus carrying amount is
MC43
MC44
MC45
C
C
A
P19,000
P216,000
P45,000
P 90,000
540,000
P630,000
75%
SL rate = ¼ = 25%
Revenue = 2.4M/12M = 20%
Amortization in 2016: Higher rate is 25%; 25% x 6M
P1,500,000
Cumulative amortization under straight line
2/4 = 50%
Cumulative amortization under revenue method
2.4M + 4.2M = 6.6M; 6.6M/12M = 55%
Amortization in 2017:
55% x 6M = 3.3M; 3.3M – 1.5M
P1,800,000
SL rate = 1/5 = 20%
Revenue = 1,500,000 ÷ 5,000,000 = 30%
Higher is 30%; 30% x 2,500,000
P750,000
MC46
C
Purchase price
Fair value of net assets (115.0M – 52.5M)
Goodwill
P70,000,000
62,500,000
P7,500,000
MC47
B
Goodwill
P1,000,000
68
Chapter 7 – Investments in Equity Securities and Debt Securities
CHAPTER 7
INVESTMENTS IN EQUITY SECURITIES AND DEBT SECURITIES
PROBLEMS
7-1.
(Victoria Corporation)
Year 1
(a)
(b)
Equity Investments –FVPL
Other Expenses
Cash
Equity Investments – FVPL
Unrealized Gains on Equity
Investments – Profit or Loss
150,000
3,750
153,750
30,000
30,000
Year 2
(a)
(b)
7-2.
Cash
94,000
Gain on Sale of Equity
Investments – FVPL
Equity Investments – FVPL
Equity Investments – FVPL
Unrealized Gains on Equity
Investments – Profit or Loss
4,000
90,000
6,000
6,000
(Victory Company)
Year 1
(a)
(b)
Equity Investments at FV through OCI 153,750
Cash
Equity Investments at FV through OCI
26,250
Unrealized Gains and Losses on
Equity Investments - OCI
153,750
26,250
Year 2
(a)
(b)
7-3.
Equity Investments at FV through OCI
10,000
Unrealized Gains and Losses on
Equity Investments - OCI
Cash
94,000
Loss on Sale of Equity Investments
1,000
Equity Investments at FV
through OCI
Equity Investments at FV through OCI
Unrealized Gains and Losses on
Equity Investments - OCI
10,000
95,000
1,000
1,000
(A Company)
a.
b.
c.
d.
e.
Cash
18,000
Dividend Revenue
18,000
2,400 shares x 7.50
Memo entry.
Received additional 600 shares of B Corp. ordinary shares as
bonus issue on 2,400 shares previously held.
Equity Investments - A Preference
150,000
Dividend Revenue
150,000
600 x 250 =
150,000
Memo entry. Received additional shares of B Corp. ordinary shares on a 4-for-1
stock split of the 2,400 shares previously held. Total shares now held: 9,600.
Equity Investments - C Ordinary
20,000
Dividend Revenue
20,000
2,400/6 = 400 shares x 50
69
Chapter 7 – Investments in Equity Securities and Debt Securities
7-4.
(Inn Corporation)
(a)
7-5.
December 31, Year 2 ledger balance (30,000 shares x 65)
Year 3
Memo: Received 6,000 shares of NPA Co. ordinary
as 20% bonus issue on the 30,000 shares
previously held.
Cash (15,000 x 70)
1,050,000
Equity Investments – FVPL
Gain on Sale of Equity Investments
1,950,000 x 15,000/36,000 = 812,500
Equity Investments – FVPL
374,500
Unrealized Gain on Equity Investments
at FVPL
21,000 x 72
1,512,000
1,950,000 – 812,500
1,137,500
Unrealized gain
374,500
(b)
Gain on sale
Unrealized gain on equity investments at FVPL
Total amount reported in profit or loss
(c)
Equity Investments at Fair Value
P1,950,000
812,500
237,500
374,500
P237,500
374,500
P612,000
P1,512,000
(Inna Corporation)
(a)
(b)
(c)
(d)
December 31, Year 2 ledger balance (30,000 x P65)
Cost
Unrealized Gain or Loss on Equity Investments - OCI
Year 3
Memo: Received 6,000 shares of NPA Co. ordinary
as 20% bonus issue on the 30,000 shares
previously held.
Equity Investments at Fair Value through OCI
237,500
Unrealized Gain or Loss on Equity
Investments – OCI
15,000 sh x 70
1,050,000
1,950,00 x 15/36
812,500
Unrealized gain
237,500
Cash (15,000 x 70)
1,050,000
Equity Investments at FV through OCI
Unrealized Gain or Loss on Equity
Investments – OCI
300,000
Retained Earnings
(150,000 + 570,000) x 15,000/36,000
Equity Investments at FV through OCI
42,000
Unrealized Gain on Equity Investments
at FV through OCI
21,000 x (72 - 70)
None
Equity Investments at Fair Value through OCI
Unrealized Gain or Loss in Equity , 12/31/ Year 3
(150,000 + 570,000 – 300,000 + 42,000)
Fair value, December 31, Year 3
Cost (1,800,000 x 21,000/36,000)
Unrealized Gain (Loss) in Equity
70
P1,950,000
1,800,000
P 150,000
237,500
1,050,000
300,000
42,000
P1,512,000
P 462,000
P1,512,000
1,050,000
P 462,000
Chapter 7 – Investments in Equity Securities and Debt Securities
7-6.
(Gypsy Corporation)
(a)
(b)
P0. No gain or loss is reported in profit or loss.
Cumulative balance of Unrealized Gains and Losses
(in equity)
- see below
Monterey Preference
Garcia Ordinary
Barney Corporation
7-7.
# of
shares
3,500
1,000
3,000
Cost
P133,000
180,000
177,000
P490,000
P 35,000
FV, 12/31/
Year 3
P135,000
190,000
200,000
P525,000
(Melody Corporation)
(a)
Unrealized Gains or Losses on Equity Investments through OCI
Fair value (1,250 x 85)
P106,250
Cost
110,000
Unrealized Loss, end of Year 1
P 3,750
Total FV, Dec. 31, Year 2 (2,000 x 90)
Total cost (110,000 + 60,000)
Cumulative balance, end of Year 2
(b)
P180,000
170,000
P 10,000
Amount taken to OCI
Fair value (1,250 x 85)
Cost
Unrealized Loss for Year 1
P106,250
110,000
P 3,750
Fair value (2,000 x 90)
Carrying value/Cost (106,250+60,000)
Unrealized gain for Year 2
(c)
7-8.
Unrealized
Gain (Loss)
P 2,000
10,000
23,000
P35,000
P180,000
166,250
P 13,750
Memo: Received 2,000 stock rights from Music, Inc. for the purchase of one
share for every five rights submitted at P80 per share.
Equity Investments at FV through OCI
30,000
Cash
24,000
Investment Income
6,000
300 x 100 = 30,000
300 x 80 = 24,000
Cash
2,250
Investment Income
2,250
500 x 4.50
Equity Investments at FV through OCI
15,400
Unrealized Gains and Losses on
Equity Investments – OCI
15,400
2,300 x 98 = 225,400
225,400 – (180,000 + 30,000)=15,400
(Anti Corporation)
(a)
Cash
50,000
Investment Income (10,000 x 5)
(b)
Equity Investments at FVPL (2,000 x 75)
Cash (2,000 x 50)
Investment Income
Equity Investments at FVPL
Unrealized Gain on Equity
Investments – Profit or Loss
71
50,000
150,000
100,000
50,000
90,000
90,000
Chapter 7 – Investments in Equity Securities and Debt Securities
Market value (12,000 shares x 78)
Carrying value before this
adjustment (660,000 + 150,000)
Unrealized gain
7-9.
936,000
810,000
126,000
(Tolits Corporation)
(a)
Year 2
a.
b.
c.
d.
e.
f.
g.
h.
i.
Equity Investments at FV through OCI–Diana
Ordinary
Cash
Memorandum entry. Received 500 additional
shares of Diana ordinary shares as a result of 2for-1 split.
Equity Investments at FV through OCI – Smith
Preference
Cash
(1,000 x 120) + 1,200
Equity Investments at FV through OCI - Diana
Ordinary
Unrealized Gains and Losses on Equity
Investments at FV - OCI
15,000/250 = 60; 54,000/1,000 = 54
(60 – 54) x 1,000 shares = 6,000
Cash
Equity Investments at FV through OCI – Diana
Ordinary
(60,000 / 1,000) x 250 shares
Memorandum entry. Received 750 stock rights
from Diana for the purchase of one share for every
two rights submitted at P55 per share.
Equity Investments at FV through OCI – Diana
Ordinary
Cash
Investment Income
60% x 750 = 450; 450/2 = 225 shares
225 x 61 = 13,725; 225 x 55 = 12,375
225 x (61 – 55) = 1,350
Cash
Investment Income
750 – 450 = 300; 300 x 3 = 900
Equity Investments at FV through OCI – Diana
Ordinary
Unrealized Gains and Losses on Equity
Investments at FV - OCI
225 x (64 – 61) = 675
Cash (100 x 64)
Equity Investments at FV through OCI –
Diana Ordinary
Cash (1,000 x 100 x 8%)
Dividend Revenue
Unrealized Gains and Losses on Equity
Investments - OCI
Equity Investments at FV through OCI – Diana
ordinary
Equity Investments at FV through OCI - Smith
Market
CV
Diana 1 (875 sh)
54,250 53,000*
Smith (1,000 x 115)
115,000 121,200
Total
169,250 174,200
72
54,000
54,000
121,200
121,200
6,000
6,000
15,000
15,000
13,725
12,375
1,350
900
900
675
675
6,400
6,400
8,000
8,000
4,950
1,250
6,200
Unreal
1,250
(6,200)
(4,950
Chapter 7 – Investments in Equity Securities and Debt Securities
*Original Diana shares 500 shares at P108
2-for-1 split
500 shares
1,000 shares at P54
Adjust prior to sale
Balance
1,000 shares at P60
Sale
(250 shares
Balance
750 shares at P60
Exercise of rights
225 shares at P61
Adjust prior to sale
Sale
(100 shares at P64
Balance
875 shares
(b)
7-10.
Investment income (1,350 + 900)
Dividends revenue
Total income
P54,000
-____
P54,000
6,000
P60,000
15,000)
P45,000
13,725
675
6,400)
P53,000
P 2,250
8,000
P10,250
(Carlo Company)
Year 2
Apr. 1
May 15
July 10
Nov. 30
Dec. 31
31
7-11.
Cash (5,000 x 25)
Loss on Sale of Equity Investments
Equity Investments at FVPL – Avi Ordinary
Equity Investments at FV through OCI – Ghio
Preference
Cash (600 x 50) + 550
Memorandum entry.
Received 4,000 additional
shares of Darrel ordinary representing a 20%
bonus issue. Shares now held are 24,000.
Cash (1 x 24,000)
Dividend Revenue
Unrealized Loss on Equity Investments – Profit or
Loss
Equity Investments at FVPL – Avi Ordinary
5,000 x 26 = 130,000; 130,000 – 139,000
Equity Investments at FV through OCI - Darrel
Equity Investments at FV through OCI - Ghio
Unrealized Gains and Losses on Equity
Investments - OCI
FV
CV
Change in FV
Darrel 480,000
370,000
110,000
Ghio
31,200
30,550
650
Total
511,200
400,550
110,650
125,000
14,000
139,000
30,550
30,550
24,000
24,000
9,000
9,000
110,000
650
110,650
(Hostel Company)
(a)
1.
2.
3.
4.
5.
(b)
Investment in Associates
Cash
Investment in Associates (20% x 1.5M)
Share in Profit of Associates
Memo.
Received 2,000 additional shares of
Atlanta ordinary as 10% bonus issue. Shares
now held are 22,000.
Investment in Associates (20% x 3M)
Share in Profit of Associates
Cash (20% x 1M)
Investment in Associates
Investment cost
Share in profit – 2016
Share in profit – 2017
Share in dividends
Carrying amount, December 31, 2017
73
2,000,000
2,000,000
300,000
300,000
600,000
600,000
200,000
200,000
P2,000,000
300,000
600,000
(200,000)
P2,700,000
Chapter 7 – Investments in Equity Securities and Debt Securities
7-12.
(Byron, Inc.)
2016
Jan. 1
Dec. 31
31
7-13.
Investment in Associates – Pirates Ordinary
Cash
Investment in Associates – Pirates Ordinary
Share in Profit of Associates
30% x 3,600,000
Cash (30% x 400,000)
Investment in Associates – Pirates Ordinary
5,160,000
5,160,000
1,080,000
1,080,000
120,000
120,000
(Barbie, Inc.)
(a)
2016
Mar. 1
Dec. 31
31
31
(b)
7-14.
Investment in Associates – Kitchie
Cash
Cash (30% x 800,000)
Investment in Associates – Kitchie
Investment in Associates – Kitchie
Share in Profit of Associates
(1.2M x 10/12) x 30%
Share in Profit of Associates – Kitchie
Investment in Associates – Kitchie
Amortization of undervaluation of assets
(30% x 750,000) / 5 yrs. = 45,000
45,000 x 10/12 = 37,500
50,000 x 30% = 15,000
37,500 + 15,000 = 52,500
1,365,000
1,365,000
240,000
240,000
300,000
300,000
52,500
52,500
Acquisition cost, March 1, 2016
Cash dividends received
Share in reported profit of associate
Adjustment in reported profit
Investment carrying value, December 31, 2016
Income reported by Barbie from its investment in associates:
(300,000 – 52,500)
P1,365,000
( 240,000)
300,000
( 52,500)
P1,372,500
P 247,500
(Richmonde Corporation)
(a)
Year 1
Jan. 1
Dec. 31
31
Year 2
Jan. 1
1
Equity Investments at FV through OCI – Pen
Cash
Cash
Dividend Revenue
10% x 2,000,000
Equity Investments at FV through OCI – Pen
Unrealized Gains and Losses on Equity
Investments - OCI
Investment in Associates – Pen, Inc. (at FV)
Equity Investments at FV through OCI – Pen
Unrealized Gains and Losses on Equity
Investments at FV - OCI
Retained Earnings
Investment in Associates – Pen, Inc.
Cash
74
900,000
900,000
200,000
200,000
480,000
480,000
1,380,000
1,380,000
480,000
480,000
2,600,000
2,600,000
Chapter 7 – Investments in Equity Securities and Debt Securities
Investment in Associates – Pen, Inc.
Share in Profit of Associates (30% x 6,500,000)
Cash
Investment in Associates (30% x 3,000,000)
Dec. 31
31
(b)
7-15.
1,950,000
1,950,000
900,000
900,000
Cost transferred from Equity Investments at FV
Additional investment
Share in profit
Cash dividends received
Carrying amount, December 31, Year 2
1,380,000
2,600,000
1,950,000
(900,000)
5,030,000
(E Corporation)
(a)
Year 1
Jan.
1
Aug. 1
Dec. 31
Investment in Associates – F Company
Cash (50,000 x 165)
Cash
Investment in Associates – F Company
Investment in Associates – F Company
Share in Profit of Associates
25% x 680,000
8,250,000
8,250,000
210,000
210,000
170,000
170,000
Year 2
Dec. 31
31
Cash
Investment in Associates – F Company
Investment in Associates – F Company
Share in Profit of Associates – F Company
25% x 1,000,000
240,000
240,000
250,000
250,000
Year 3
Jan. 2
2
Dec. 31
31
Cash (20,000 x 175)
Investment in Associates – F Company
Gain on Sale of Investment in Associates
Acquisition cost
8,250,000
Share in profit (Year1)
170,000
Cash dividends received (Year1)
(210,000)
Cash dividends received (Year2)
(240,000)
Share in profit (Year 2)
250,000
Investment carrying amount
8,220,000
Portion sold
20/50
CV of investment sold
3,288,000
Equity Investments at FV through OCI
Investment in Associates – F Company
Investment Income
30,000 x 175 = 5,250,000
8,220,000 – 3,288,000 = 4,932,000
5,250,000 – 4,932,000 = 318,000
Cash
Dividend Revenue
Equity Investments at FV through OCI
Unrealized Gains and Losses on Equity
Investments – OCI
30,000 x (190 - 175)
(b)
Cost/Carrying Value, beg of year
Income from associates
Cash dividends received
Sale of shares
Carrying value, end of year
Market value 30,000 x 190
75
3,500,000
3,288,000
212,000
5,250,000
4,932,000
318,000
120,000
120,000
450,000
Year 1
Year 2
P8,250,000 P8,210,000
170,000
250,000
(210,000
(240,000)
P8,210,000
450,000
Year 3
P8,220,000
P5,700,000
Chapter 7 – Investments in Equity Securities and Debt Securities
7-16.
1.
2.
3.
4.
5.
6.
7-17.
A and B
A
B and C
A and B
C
C
B
A, B, and C
C
B
A
(Abu Company)
(a) Date
01/01/Y1
12/31/Y1
12/31/Y2
12/31/Y3
12/31/Y4
12/31/Y5
*rounded off.
(b)
Y1
Jan. 1
Dec. 31
Y2
Dec. 31
7-18.
7.
8.
9.
10.
11.
Interest
Received
Interest Revenue
Premium
Amortization
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,158,450
1,152,633
1,146,002
1,138,442
1,129,827*
41,550
47,367
53,998
61,558
70,173*
Debt Investments at Amortized Cost
Cash
Cash
Debt Investments at Amortized Cost
Interest Revenue
8,274,646
Cash
Debt Investments at Amortized Cost
Interest Revenue
1,200,000
Carrying Value
8,274,646
8,233,096
8,185,729
8,131,731
8,070,173
8,000,000
8,274,646
1,200,000
41,550
1,158,450
47,367
1,152,633
(South Company)
(a)
(1) Securities are classified as at amortized cost
To facilitate computation, a partial amortization table is presented below.
Interest
Interest
Amortization
Date
Received
Revenue
of Discount
Amortized Cost
June 1, Year 1
3,691,500
Dec 1, Year 1
160,000
184,575
24,575
3,716,075
June 1, Year 2
160,000
185,804
25,804
3,741,879
Dec. 1, Year 2
160,000
187,094
27,094
3,768,973
June 1, Year 3
160,000
188,449
28,449
3,797,422
Dec. 1, Year 3
160,000
189,871
29,871
3,827,293
June 1, Year 4
160,000
191,365
31,365
3,858,658
Dec. 1, Year 4
160,000
192,933
32,933
3,891,591
Year 1
June 1
Dec. 1
31
Debt Investments at Amortized
Cash
Cash
Debt Investments at Amortized
Interest Revenue (see above
Interest Receivable
Debt Investments at Amortized
Interest Revenue
160,000 x 1/6 = 26,667
25,804 x 1/6 = 4,301
76
Cost
3,691,500
3,691,500
Cost
table)
Cost
160,000
24,575
184,575
26,667
4,301
30,968
Chapter 7 – Investments in Equity Securities and Debt Securities
Year 2
Jan. 1
June 1
Dec. 1
31
Interest Revenue
Interest Receivable
Debt Investments at Amortized Cost
Cash
Debt Investments at Amortized Cost
Interest Revenue (see above table)
Cash
Debt Investments at Amortized Cost
Interest Revenue (see above table)
Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue
160,000 x 1/6 = 26,667
28,449 x 1/6= 4,742
30,968
26,667
4,301
160,000
25,804
185,804
160,000
27,094
187,094
26,667
4,742
31,409
31
(2) Securities are classified as at fair value through profit and loss.
Year 1
June 1
Dec. 1
31
31
Debt Investments at FVPL
Cash
Cash
Interest Revenue (4M x 8% x ½)
Interest Receivable
Interest Revenue (4M x 8% x 1/12)
Debt Investments at FVPL
Unrealized Gain on Debt Investments at
FVPL
4M x 0.97 = 3,880,000
3,880,000 – 3,691,500 = 188,500
3,691,500
3,691,500
160,000
160,000
26,667
26,667
188,500
188,500
Year 2
Jan. 1
June 1
Dec. 1
31
Dec.31
Interest Receivable
Interest Revenue
26,667
Cash
Interest Revenue
160,000
Cash
Interest Revenue
160,000
Interest Receivable
Interest Revenue
26,667
Debt Investments at FVPL
Unrealized Gain on Debt Investments at
FVPL
4M x 0.99 = 3,960,000
3,960,000 – 3,880,000 = 80,000
80,000
26,667
160,000
160,000
26,667
80,000
(3) Securities are classified as at Fair Value Through Other Comprehensive Income
Year 1
June 1
Dec. 1
Debt Investments at FV through OCI
Cash
Cash
Debt Investments at Fair Value through OCI
Interest Revenue (see table)
77
3,691,500
3,691,500
160,000
24,575
184,575
Chapter 7 – Investments in Equity Securities and Debt Securities
Dec.31
Dec. 31
Interest Receivable
Debt Investments at Fair Value through OCI
Interest Revenue
Fair Value Adjustment – Debt Investments
at FV through OCI
Unrealized Gain on Debt Investments at
FVPL
Amortized cost
3,716,075 + 4,301 = 3,720,376
3,880,000–3,720,376 = 159,624
26,667
4,301
30,968
159,624
159,624
Year 2
Jan. 1
June 1
Dec. 1
31
31
(b)
Interest Revenue
Interest Receivable
Debt Investments at FV through OCI
30,968
26,667
4,301
Cash
Debt Investments at Amortized Cost
Interest Revenue (see table)
160,000
25,804
Cash
Debt Investments at Amortized Cost
Interest Revenue (see table)
160,000
27,094
Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue
160,000 x 1/6 = 26,667
28,449 x 1/6= 4,742
26,667
4,742
185,804
187,094
31,409
Fair Value Adjustment – Debt Investments
at FV through OCI
Unrealized Gain on Debt Investments at
FVPL
Amortized cost
3,768,973 + 4,741 = 3,773,715
3,960,000 –3,773,715 =186,285
186,285 – 159,624 = 26,661
26,661
26,661
Journal entry/entries to record sale of investment on November 1, Year 4.
(1) Securities are classified as at amortized cost.
Nov. 1
1
Debt Investments at Amortized Cost
Interest Receivable
Interest Revenue 192,933 x 5/6
32,933 x 5/6 = 27,444
27,444
133,333
160,777
Cash
Loss on Sale of Debt Investments at Amortized
Cost
Interest Receivable
Debt Investments at Amortized Cost
CV of Debt Investments sold:
As of June 1, Year 4
Amortization June 1 to
Nov. 1, Year 4
As of Nov. 1, Year 4
Sales price
Loss on sale
78
3,858,658
27,444
3,886,102
3,791,667
94,435
3,925,000
94,435
133,333
3,886,102
Chapter 7 – Investments in Equity Securities and Debt Securities
(2) Securities are classified as at fair value through profit or loss
Nov. 1
Cash
Loss on Sale of Debt Investments at FVPL
Interest Revenue
Debt Investments at FVPL
3,925,000
128,333
133,333
3,920,00
0
Acc. Int. = 4M x 8% x 5/12 = 133,333
Sales price (3,925,000–133,333) 3,791,667
Carrying value (4 M x 0.98)
3,920,000
Loss on sale
128,333
(3) Securities are classified as at Fair Value through Other Comprehensive Income
Nov. 1
Debt Investments at FV through OCI (32,933 x 5/6)
Interest Receivable
Interest Revenue (192,933 x 5/6)
1
27,444
133,333
160,777
Unrealized Gains/Losses on Debt Investments at
FV through OCI
Fair Value Adjustment – Debt Investments
at FV through OCI
3,858,658 + (32,933 x 5/6) = 3,886,102
3,886,102 – 3,791,667 = 94,435 decline
94,435 + 186,285 = 280,720
1
Cash
Loss on Sale of Debt Investments
Interest Receivable
Debt Investments at FV through OCI
Loss on sale: 3,791,667-3,886,102 = 94,435
280,720
280,720
3,925,000
94,435
Fair Value Adjustment – Debt Investments at FV
through OCI
Unrealized Gain/Losses on Debt Investments
at FV through OCI
7-19.
133,333
3,886,102
94.435
94,435
(Grow Company)
(1)
Classified as at Amortized Cost
Date
1/1/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
Nom Int
Amortization Table
Effect Int
Prem Amort
120,000
120,000
120,000
106,339
104,973
103,471
13,661
15,027
16,529
Amortized cost, end
1,063,394
1,049,733
1,034,706
1,018,177
(a)
Carrying value, 12/31/Year 2 (see table)
(b)
Sales price
P 606,000
Carrying value, 1/1/Year 3 (1,034,706 x 6/10 P620,824
Amortization 1/1/Year 3 – 4/1/Year 3
16,529 x 3/12 x 600/1000
(2,479) 618,345
Loss on sale
P 12,345
(c)
Interest income for Year 3:
Jan 1 to Mar 31 103,471 x 3/12
Apr 1 to Dec 31 103,471 x 400/1000 x 9/12
Total interest income for Year 3
P
Carrying value, 12/31/Y3 (1,018,177 x 400/1000)
P 407,271
(d)
79
P1,034,706
P
25,868
31,041
56,909
Chapter 7 – Investments in Equity Securities and Debt Securities
(2)
Classified as Debt Investments at FV through Profit or Loss
(3)
(a)
Interest income (1,000,000 x 12%)
P 120,000
(b)
Sales price (600,000 x 1.01)
Carrying value, 12/31/Year 2 (600,000 x 1.06)
Loss on sale
P 606,000
636,000
P 30,000
(c)
Carrying value, 12/31/Year 2 (FV) (1,000,000 x 1.06) P1,060,000
Carrying value, 12/31/Year 3 (400,000 x 1.04)
P 416,000
Classified as at Fair Value Through Other Comprehensive Income
(a)
Carrying value, 12/31/Year 2 (1M x 1.06)
(1,034,760 + 25,240 FV Adj)
P1,060,000
(b)
Sales price
Amortized cost
Loss on sale
P 606,000
618,345
P 12,345
(c)
Interest income for Year 3:
Jan 1 to Mar 31 103,471 x 3/12
Apr 1 to Dec 31 103,471 x 400/1000 x 9/12
Total interest income for Year 3
(d)
7-20.
Fair value, December 31, Year 3 (400,000 x 1.04)
Amortized cost, December 31, Year 3
1,018,177 x 4/10
Cumulative amount of unrealized gains/loss
P
P
25,868
31,041
56,909
P 416,000
P
407,270
8,730
(Powerpuff Company)
Feb. 1
April 1
July 1
Oct. 1
Dec. 31
31
Equity Investments - FVPL – Blossom Ordinary
Cash
Debt Investments – FVPL – Peach Co. Bonds
Cash
Debt Investments – FVPL – Buttercup Bonds
Interest Receivable (150,000 x 12% x 4/12)
Cash
Cash
Interest Income (1,000,000 x 10% x 6/12)
Interest Receivable
Interest Income
1M x 10% x 3/12 = 25,000
150,000 x 12% x 6/12 = 9,000
25,000 + 9,000 = 34,000
Unrealized Loss on Investments at FVPL
Equity Investments – FVPL - Blossom Ordinary
Debt Investments – FVPL - Buttercup Bonds
Debt Investments – FVPL - Peach Bonds
Cost
Blossom Ordinary
374,000
Peach 10% Bonds
1,010,000
Buttercup 12% Bonds
150,000
1,534,000
80
374,000
374,000
1,010,000
1,010,000
150,000
6,000
156,000
50,000
50,000
34,000
34,000
11,000
6,000
3,000
Fair value
380,000
990,000
153,000
1,523,000
20,000
UGL
6,000
(20,000)
3,000
(11,000)
Chapter 7 – Investments in Equity Securities and Debt Securities
7-21.
(Narito Company)
Jan.
Dec.
Dec.
Dec.
Dec.
Dec.
Date
1, Year 1
31, Year 1
31, Year 2
31, Year 3
31, Year 4
31, Year 5
Year 1
Jan. 1
Dec. 31
Nominal
Interest
7,000
7,000
7,000
7,000
7,000
Amortization Table
Effective
Interest
5,433
5,355
5,272
5,186
5,094
Premium
Amortization
1,567
1,645
1,728
1,814
1,906
Amortized Cost,
End
108,660
107,093
105,448
103,720
101,906
100,000
Debt Investments at Amortized Cost – Wolf Bonds
Cash
Cash
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income
108,660
Cash
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income
7,000
Cash
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income
Impairment Loss on Debt Investments
Debt Investments at Amortized Cost – Wolf Bonds
Carrying value, Dec. 31, Year 3
P103,720
Present value of future cash inflows
100,000 x 0.9070
90,700
4,500 x 1.8594
8,367
99,067
Impairment Loss
P 4,653
7,000
Cash
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income
4,500
453
Cash
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income
4,500
480
108,660
7,000
1,567
5,433
Year 2
Dec. 31
1,645
5,355
Year 3
Dec. 31
1,728
5,272
4,653
4,653
Year 4
Dec. 31
4,953
Year 5
Dec. 31
Date
Dec. 31, Year 3
Dec. 31, Year 4
Dec. 31, Year 5
7-22.
1.
2.
3.
4.
5.
B and C
A
B and C
A
B and C
4,980
Revised Amortization Table
Nominal
Effective
Discount
Interest
Interest
Amortization
4,500
4,500
6.
7.
8.
9.
10.
4,953
4,980*
A
A
A
C
B and C
81
453
480*
11.
12.
13.
14.
15.
Amortized Cost,
End
99,067
99,520
100,000
B
B and C
A
A
C
Chapter 7 – Investments in Equity Securities and Debt Securities
7-23.
Raffy Company)
To facilitate computation, a partial amortization table is presented below.
Interest
Interest
Amortization
HTM
Date
Received
Revenue
of Discount
Carrying Value
June 1, 2010
5,353,150
Dec. 31, 2010
350,000
312,267
37,733
5,315,417
Dec. 31, 2011
600,000
531,542
68,458
5,246,959
Dec. 31, 2012
600,000
524,696
75,304
5,171,655
Dec. 31, 2013
600,000
517,166
82,834
5,088,821
2010
June 1
Dec. 31
Held to Maturity Securities – Blessie Corp. Bonds
Interest Revenue (5M x 12% x 5/12)
Cash
Cash
Interest Revenue
Held to Maturity Securities – Blessie
5,353,150
250,000
5,603,150
600,000
562,267
37,733
2011
Dec. 31
Cash
Interest Revenue
Held to Maturity Securities – Blessie
600,000
Cash
Interest Revenue
Held to Maturity Securities – Blessie
600,000
Interest Receivable (3M x 12% x 8/12)
Held to Maturity Securities – Blessie
Interest Revenue (517,166 x 3/5 x 8/12)
240,000
531,542
68,458
2012
Dec. 31
524,696
75,304
2013
Sept. 1
1
Sept. 1
Dec. 31
31
Cash (3,090,000 + 240,000)
Gain on sale of HTM Securities
Interest Receivable
Held to Maturity Securities – Blessie
CV of HTM securities sold:
As of 12/31/11 (5,171,655 x 3/5)
Amort from 1/1/12-9/1/12
CV as of 9/1/12
Sales price
Gain on sale
33,134
206,866
3,330,000
20,141
240,000
3,069,859
3,102,993
33,134
3,069,859
3,090,000
20,141
Available for Sale Securities – Blessie
Held to Maturity Securities
5,171,655 – 3,102,993 = 2,068,662
2,068,662
Cash
Interest Revenue
Available for Sale Securities – Blessie
2M x 12% = 240,000
5,171,655 – 3,102,993 = 2,068,662
2,068,662 x 10% = 206,866
240,000 – 206,866 = 33,134
240,000
Market Adjustment – AFS
Unrealized Gain or Loss on AFS
Amortized cost
2,068,662 – 33,134
P2,035,528*
Market value 2M x 103.5%
2,070,000
Market Adjustment
P 34,472
*or 5,088,821 x 2/5 = P2,035,528
82
2,068,662
206,866
33,134
34,472
34,472
Chapter 7 – Investments in Equity Securities and Debt Securities
7-24.
(Grow Company)
Amortization Table
Nom Int
Effect Int
Date
1/1/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
(a)
106,339
104,973
103,471
Amortized cost, end
1,063,394
1,049,733
1,034,706
1,018,177
13,661
15,027
16,529
Market value, 12/31/ Year 2 (1.06 x 1M)
Amortized cost, 12/31/Year 2
Unrealized Gain or Loss (In Equity)
Interest income for Year 2
Market value, 12/31/Year 3 (1.04 x 400,000)
Amortized cost (1,018,177 x 4/10)
Unrealized Gain on 12/31/Year 3
(b)
(c)
7-25.
120,000
120,000
120,000
Prem Amort
P1,060,000
1,034,706
P
25,394
P 104,973
P 416,000
407,271
P
8,729
(Naruto Company)
Amortization Table
Jan.
Dec.
Dec.
Dec.
Dec.
Dec.
(a)
(b)
(c)
(d)
Date
1, 2010
31, 2010
31, 2011
31, 2012
31, 2013
31, 2014
Nominal
Interest
Effective Interest
Premium
Amortization
7,000
7,000
7,000
7,000
7,000
5,433
5,355
5,272
5,186
5,094
1,567
1,645
1,728
1,814
1,906
Amortized Cost,
End
108,660
107,093
105,448
103,720
101,906
100,000
Interest income for 2010
P 5,433
Carrying amount at December 31, 2011 (amortized cost)
P105,448
After the sale, the investment shall be reclassified as AFS, applying tainting rule
in IAS 39.
Fair value of remaining 105,650 x 40/100
P42,260
Amortized cost of remaining 103,720 x 40/100
41,488
Unrealized gain in equity, December 31, 2011
P
772
Interest income for 2013 5,186 x 40/100
P 2,074
MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
B
B
A
A
C
MC6
MC7
MC8
MC9
MC10
D
B
A
A
B
MC11
MC12
MC13
MC14
MC15
A
C
C
C
C
MC16
MC17
A
D
Problems
MC18
B
Total market, December 31, 2017
Total market, December 31, 2016
Gain reported in 2017 profit or loss
MC19
B
Market value, December 31, 2016
Acquisition cost, January 1, 2016
Unrealized loss taken to profit or loss
83
P535,000
525,000
P 10,000
P1,750,000
2,000,000
P 250,000
Chapter 7 – Investments in Equity Securities and Debt Securities
MC20
C
Market value, December 31, 2016
Investment cost on January 1, 2015 (2.0M + 50,000)
Unrealized gain (cumulative) reported in statement of financial
position, December 31, 2016
P2,100,000
2,050,000
P 50,000
MC21
D
Asia Textile (600 x 440)
RJ Company (2,000 x 138)
Total fair value, December 31, Year 2
Total fair value, December 31, Year 1 (270,000 + 280,600)
Decrease in fair value (debit)
P264,000
276,000
P540,000
550,600
P 10,600
MC22
A
Purchase price (1,000 x 150)
Brokerage fee (no indication as trading; hence, FVOCI)
Total cost
Cash dividends declared prior to acquisition of invest (10 x 1,000 sh)
Investment in equity securities
P150,000
2,250
P152,250
(10,000)
P142,250
MC23
C
Acquisition cost (10,000 x 150)
Share in profit (20% x 3M) – (10,000 x 50)
Cash dividends received (10,000 x 50)
Investment carrying value, December 31
MC24
D
Number of shares held prior to exercise of rights
Lot A
800 x 1.2 = 960; 960 – 500 = 460
Lot B
= 600
Number of rights required to buy one new share
New ordinary shares acquired through exercise of rights
MC25
C
Income from sale of 500 rights (500 x 20 = 10,000; 10,000 – 500
Income from exercise of rights
Fair value of new shares acquired (106 x 620)
65,720
Exercise/subscription price (106 x 450)
47,700
Total income from investments
*Income from exercise should have been the excess of fair value on
date of exercise over the subscription price. Since there is no fair
value given at date of exercise, the fair value nearer to this date was
used.
P1,500,000
600,000
(500,000)
P1,600,000
1,060
÷ 10
106
P9,500
18,020*
P27,520
MC26
B
Revised cost per share after receipt of 10% bonus issue (88 ÷ 1.10)
MC27
D
Dividend revenue (1.50 x 100,000)
Unrealized gain taken to profit or loss (100,000 x 68) - 6,000,000
Total amount recognized in profit or loss
P150,000
800,000
P950,000
MC28
B
Share in profit of associate (20% x 1.0M) =
P200,000
MC29
B
Acquisition cost
Dividends received (3.00 x 40,000)
Share in reported profit (25% x 640,000)
Investment carrying value
MC30
B
Fair values, December 31, Year 2
(1,000 x 140) + (900 x 170) + (800 x 200)
Fair values, December 31, Year 1
(1,000 x 130) + (900 x 180) + (800 x 220)
Increase in unrealized loss during the year 2
MC31
A
Unrealized loss balance, December 31, Year 1 (150 – 130) x 1,000
Increase in unrealized loss during Year 2
Unrealized loss account (accumulated) reported in equity
84
P80
P1,200,000
(120,000)
160,000
P1,240,000
P453,000
468,000
P 15,000
P20,000
15,000
P35,000
Chapter 7 – Investments in Equity Securities and Debt Securities
MC32
B
Share in reported income (40% x 450,000)
Adjustment for excess of fair value over book value of depreciable
assets (150,000 ÷ 12)
Adjusted income from investment
P180,000
(12,500)
P167,500
MC33
A
Cost of investment (25,000 x 180)
Share in income (2,400,000 – 480,000) x 25%
Dividends received (60,000 + 60,000)
Carrying value, December 31, 2015
P4,500,000
480,000
(120,000)
P4,860,000
MC34
A
CV at date of reclassification is equal to FV (15,000 x 2000)
P3,000,000
MC35
B
Selling price (10,000 x 200)
Carrying amount of investment sold (4,860,000 x 10,000/25,000)
Gain on sale
MC36
A
No income is recognized upon receipt of bonus issue.
MC37
C
Fair market value of original shares (10%)
Additional acquisition on December 31, 2016
Investment amount, December 31, 2016
MC38
B
Share in reported profit (40% x 1.2M)
Adjustment for excess in fair value of plant (40% x 900,000) ÷ 18
Adjustment for excess in fair value of inventory (40% x 100,000)
Adjusted share in profit
MC39
C
Acquisition cost ,000,000 + 420,000 – (40% x 200,000) = 4,340,000
Adjusted share in profit
Cash dividends received (40% x 200,000)
Investment carrying value, December 31, 2016
MC40
B
Share in reported profit (20% x 5.5M)
Adjustment for excess in fair value of inventory (20% x 1,000,000)
Adjusted share in profit
MC41
B
Investment acquisition cost
Adjusted share in profit
Cash dividends received (20% x 1,500,000)
Investment carrying value, December 31, 2016
P3,700,000
900,000
(300,000)
P4,300,000
MC42
A
Cost of investment (1.04 x 1M)
Accrued interest receivable (1.0M x 12% x 4/12)
P1,040,000
P 40,000
MC43
C
Interest income/Effective interest (8,750,000 x 5%)
MC44
C
Acquisition cost
Amortization of discount (3,692,000 x 5%) – (4.0M x 4%)
Investment carrying value, December 31, Year 2
MC45
C
Interest income/Effective interest (3,692,000 x 5%)
P184,600
MC46
B
Investment cost
Amortization of discount (912,400 x 10%) – (1M x 8%)
Investment carrying value
P912,400
11,240
P823,640
85
P2,000,000
1,944,000
P 56,000
P0
P 750,000
1,500,000
P2,250,000
P480,000
(20,000)
(40,000)
P420,000
P4,000,000
420,000
(80,000)
P4,340,000
P1,100,000
(200,000)
P 900,000
P437,500
P3,692,000
24,600
P3,716,600
Chapter 7 – Investments in Equity Securities and Debt Securities
MC47
D
Total proceeds from sale of bonds
Accrued interest included (8.0M x .08 x 6/12)
Selling price
Carrying value of bond investment sold
Acquisition cost
Amortization, June 1, Year 1
Effective interest (7,383,000 x 5%) 369,150
Nominal interest (8.0M x 4%)
320,000
Carrying value, June 1, Year 2
Amortization, June 1, Year 2
Effective interest (7,342,150 x 5%) 371,608
Nominal interest
320,000
Gain on sale
P7,850,000
320,000
P7,530,000
7,383,000
49,150
7,342,150
51,608
7,483,758
P 46,242
MC48
D
Carrying amount is equal to FV
MC49
B
Interest income is equal to nominal interest (500,000 x 4%)
MC50
D
Sales price
Carrying amount of investment sold
Loss on sale
P460,000
472,500
P 12,500
MC51
C
Sales price (3,000 x 120)
Cost of shares sold (average cost approach)
560,000 x 3,000/6,000
Gain on sale
P360,000
Sales price
Cost of shares sold (FIFO)
June 10 lot (2,400 shares)
December 5 (360,000 x 600/3,600)
Gain on sale
P360,000
MC52
D
86
P472,500
P20,000
280,000
P 80,000
P200,000
60,000
260,000
P100,000
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
CHAPTER 8
INVESTMENT PROPERTY, OTHER NONCURRENT FINANCIAL ASSETS
AND NONCURRENT ASSETS HELD FOR SALE
Discussion Question No. 12
(a), (b), (c), (e), (g), (o), (r) with option to or not to report as investment property
(d)
(f)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(p)
(q)
not shown in the financial statements (with Finance Lease Receivable)
Property, Plant and Equipment
Property, Plant and Equipment, until consummation of lease
Inventories
Inventories
Construction in Progress (Inventories)
Property, Plant and Equipment
Property, Plant and Equipment
Property, Plant and Equipment
Property, Plant and Equipment
not shown, unless leased under finance lease (PPE)
PROBLEMS
8-1.
(Sebastian Corporation)
a.
b.
8-2.
Purchase price
Commission to real estate agent
Costs of clearing the land (net of timber and gravel recovered
amounting to P65,000)
Total cost
.
Down payment
Market value of shares issued (20,000 x 240)
Present value of non-interest bearing note issued
(2,000,000 x 2.4869)
Total cost of land and building
Cost allocated to land (30% x 13,773,800)
Cost allocated to building (70% x 13,773,800)
70,000
P 9,100,000
P 4,000,000
4,800,000
4,973,800
P13,773,800
P 4,132,140
P 9,641,660
(Precious Realty Corporation)
1/2/16
12/31/16
8-3.
P 8,600,000
430,000
Buildings
Accumulated Depreciation – Building Held as
Investment Property
Buildings Held as Investment Property
Accumulated Depreciation - Buildings
Depreciation Expense – Buildings
Accumulated Depreciation - Buildings
8,200,000
4,200,000
8,200,000
4,200,000
200,000
200,000
(Absolute Corporation)
Cost Model
(a)
Investment Property at December 31, 2016
Land
Building
Cost
Accumulated Depreciation
20,000,000/40 x 3
Total Investment Property
87
P 5,000,000
P20,000,000
1,500,000
18,500,000
P23,500,000
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
(b)
Amounts and Accounts Taken to Profit or Loss
Rent Revenue
Depreciation Expense
Administrative and Security Salaries
Property Taxes
Maintenance
Profit
P 3,000,000
(500,000)
(200,000)
(120,000)
(340,000)
P 1,960,000
Fair Value Model
(a)
Investment Property at December 31, 2016
Land
Building
Total Investment Property
(b)
8-4.
Amounts and Accounts Taken to Profit or Loss
Rent Revenue
Change in Fair Value of Investment Property
Land
Building
Depreciation Expense
Administrative and Security Salaries
Property Taxes
Maintenance
Profit
P3,000,000
800,000
1,000,000
(500,000)
(200,000)
(120,000)
(340,000)
P3,760,000
(Adam Company)
(a)
(b)
Cost Model
Land Held as Investment Property
Building Held as Investment Property
Accum. Depr. – Building
Land
Building
Accumulated Depreciation – Bldg Held
as Investment Property
Fair Value Model
Land Held as Investment Property
Land
Revaluation Surplus
Building Held as Investment Property
Accum. Depreciation-Building
Building
Accum. Depr. – Building Held as
Investment Property
Revaluation Surplus
35M/50M = 70%; 42M/70% = 60M
60M – 42M = 18M; 42M – 35M = 7M
8-5.
P 6,800,000
20,000,000
P26,800,000
(Raymond Company)
1.
Building Construction Fund Cash
Cash
2.
Building Expansion Fund Securities
Building Expansion Fund Cash
88
20.0M
50.0M
15.0M
20.0M
50.0M
15.0M
28.0M
20.0M
8.0M
60.0M
15.0M
50.0M
18.0M
7.0M
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
3.
Building Expansion Fund Securities
Interest Receivable – Building Expansion Fund
Building Expansion Fund Cash
4.
Building Expansion Fund Cash
Dividend Income
5.
Building Expansion Fund Expenses
Building Expansion Fund Cash
6.
Building Expansion Fund Cash
Interest Receivable – Building Expansion Fund
Interest Income
7.
Building Expansion Fund Securities
Building Expansion Fund Cash
8.
Building Expansion Fund Cash
Building Expansion Fund Securities
Gain on Sale of Building Expansion Fund Securities
Interest Income
9.
Building Expansion Fund Cash
Dividend Income
10.
Building Expansion Fund Cash
Building Expansion Fund Securities
Gain on Sale of Building Expansion Fund Securities
11.
Buildings
Building Expansion Fund Cash
12.
Cash
Building Expansion Fund Cash
8-6.
(Cordero Corporation)
(a)
Required semiannual deposit
= P15,000,000/ FV of annuity of 1 discounted at 4% for 20 periods
= P15,000,000 / 29.7781 = P503,726
(b)
1/2/16
Bond Sinking Fund Cash
Cash
503,726
503,726
6/30/16
Bond Sinking Fund Cash
Cash
Interest Income (503,726 x 4%)
12/31/16
Bond Sinking Fund Cash
Cash
Interest Income
4% ( 503,726 + 523,875) = 41,104
8-7.
523,875
503,726
20,149
544,830
503,726
41,104
(Dorina Company)
(a)
Entries for 2013 through 2017
7/01/13 Prepaid Life Insurance
Cash
120,000
120,000
89
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
12/31/13 Life Insurance Expense (120,000 X 6/12)
Prepaid Life Insurance
60,000
60,000
06/30/14 Prepaid Life Insurance
Cash
120,000
12/31/14 Life Insurance Expense
Prepaid Life Insurance
120,000
06/30/15 Prepaid Life Insurance
Cash
120,000
12/31/15 Life Insurance Expense
Prepaid Life Insurance
120,000
06/30/16 Prepaid Life Insurance
Cash
120,000
12/31/16 Life Insurance Expense
Prepaid Life Insurance
120,000
120,000
120,000
120,000
120,000
120,000
120,000
12/31/16 Cash Surrender Value*
Life Insurance Expense
36,000
36,000
06/30/17 Prepaid Life Insurance
Cash
120,000
12/31/17 Life Insurance Expense
Prepaid Life Insurance
120,000
120,000
120,000
Cash Surrender Value
Life Insurance Expense
13,000
13,000
03/31/18 Life Insurance Expense
Prepaid Life Insurance
30,000
30,000
Receivable from Insurance Company
Prepaid Life Insurance
Cash Surrender Value
Gain on Insurance Settlement
4,000,000
30,000
49,000
3,921,000
*The cash surrender value of life insurance may be recognized on the anniversary date
(June 30, 2016 and every June 30 thereafter). No proportionate adjustment, however, is
necessary at year end because there is no actual increase in cash surrender between
anniversary dates.
(b) If the president or his heirs were the beneficiaries of the policy, the premiums paid shall
be charged to employees benefit expense and no cash surrender value will be set up by
the company.
8-8.
(Solidbank)
(a)
P10,000,000 x 0.3220 = P3,220,000
(b)
Interest Income in 2016 = 12% x P3,220,000 = P386,400
(c)
1/1/16
Advances to Officers
Prepaid Compensation Expense
Cash
90
3,220,000
6,780,000
10,000,000
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
12/31/16 Advances to Officers
Interest Revenue
Compensation Expense
Prepaid Compensation Expense
6,780,000/10
12/31/17 Advances to Officers
Interest Revenue
(3,220,000 + 386,400) x 12%
Compensation Expense
Prepaid Compensation Expense
(d)
8-9.
(b)
678,000
678,000
432,768
432,768
678,000
678,000
Amortized Cost, December 31, 2017 = 3220,000 + 386,400 + 432,768 = 4,039,168
12/31/16 Machinery Group Held For Sale
Accumulated Depreciation – Machinery
Impairment Loss – Machinery
Machinery
Machinery Tools
Machinery Parts
1,400,000
1,200,000
200,000
07/17/17 Cash (1,520,000 – 60,000)
Machinery Group Held For Sale
Gain on Sale of Machinery
1,460,000
2,200,000
380,000
220,000
1,400,000
60,000
(Invecargill Ltd.)
(a)
(b)
(c)
8-11.
386,400
(Patriarch, Inc.)
(a)
8-10.
386,400
08/01/16 Impairment Loss – Equipment
Loss from Decline in NRV of Inventory
Accumulated Depr- Equipment
Inventory
Assets Held for Sale
Accumulated Depreciation
Impairment Loss
Plant
Equipment
Inventory
Goodwill
02/01/17 Cash (380,000 – 30,000)
Assets Held For Sale
15,000
5,000
15,000
5,000
350,000
95,000
30,000
220,000
160,000
75,000
20,000
350,000
350,000
Cost = 42,000 ÷(3/5) = 70,000 Accumulated Depreciation = 70,000 – 42,000 = 28,000
(a)
Mar. 31 Depreciation Expense (14,000 x 3/12)
Accumulated Depreciation
Asset Held for Sale
Impairment Loss
Accumulated Depreciation
Equipment
91
3,500
3,500
36,000
2,500
31,500
70,000
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
(b)
Dec. 31 Asset Held for Sale
Recovery of Previous Impairment
2,500
Dec. 31 Impairment Loss
Asset Held for Sale
1,000
2,500
1,000
MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
C
C
A
B
B
MC6
MC7
MC8
MC9
MC10
C
C
D
B
A
MC11
MC12
MC13
MC14
MC15
B
B
A
D
B
MC16
MC17
MC18
A
B
A
Problems
MC19
B
Land for undetermined future use
Vacant building to be leased out under operating lease
Total investment property in the consolidated statement
MC20
A
Transfer is from owner-occupied property; excess of fair value
over carrying amount (28M-20M and 35M-30M) is credited to
revaluation surplus.
P10 million
20 million
P30 million
P0
MC21
D
Fair value at time of transfer 20,000,000 – 15,000,000
Carrying value
Amount taken to profit or loss
MC22
D
Carrying value (18,000,000 x 39/40)
Depreciation expense (18,000,000/40 years)
P17,550,000
P 450,000
MC23
C
Fair value FV
Gain (20,000,000 – 18,000,000)
P20,000,000
P 2,000,000
MC24
A
Annual insurance premium
Increase in cash surrender value (115,000 – 80,000)
Life insurance expense for the year
MC25
C
Carrying amount of the note on June 30, 2015
(2,000,000 x 0.7972)
Amortization of discount for six months (1,594,400 x 12% x 6/12)
Carrying amount of the note on December 31, 2015
MC26
B
Cash surrender value, January 1
Increase in cash surrender value (200,000 – 160,000)
Cash surrender value, December 31
MC27
D
Net annual premium (40,000 – 6,000)
Increase in cash surrender value (108,000 – 87,000)
Life insurance expense
MC28
B
Bond sinking fund, January 1
Additional investment to the fund
Dividend revenue on equity securities investments
Interest revenue on debt securities investments
Administration costs
Bond sinking fund, December 31
92
P20 million
15 million
P 5 million
P110,000
35,000
P75,000
P1,594,400
95,664
P1,690,064
P100,000
40,000
P200,000
P34,000
21,000
P13,000
P2,250,000
450,000
75,000
150,000
(25,000)
P2,900,000
Chapter 8 – Investment Property, Other Non-current Financial Assets & Non-current Assets
Held for Sale
MC29
C
Desired accumulated fund 5,000,000/ 5.11 = 978,500
Future amount of annuity in advance at 10% for 4 periods
Annual deposit
MC30
D
Asset is measured at the lower of carrying value and fair value
less cost to sell (9.0M – 1.5M = 7.5M) or 8.0M
P5,000,000
÷ 5.11
P978,500
P7,500,000
MC31
D
Selling price less cost to sell (9,200,000 – 1,300,000)
Carrying amount (lower)
Profit (increase)
P7,900,000
7,500,000
P 400,000
MC32
C
Fair value less cost to sell, December 31 (5,500,000 – 300,000)
Fair value less cost to sell, June 30 (4,500,000 – 300,000)
Increase in fair value less cost to sell
Amount of gain, however, is limited to the previous loss
recognized on June 30 (5,000,000 – 4,200,000)
P5,200,000
4,200,000
P1,000,000
93
P 800,000
Chapter 9 – Biological Assets
CHAPTER 9
BIOLOGICAL ASSETS
PROBLEMS
9-1.
1.
2.
3.
4.
5.
9-1.
6.
7.
8.
9.
10.
D
C
C
D
A
11.
12.
13.
14.
15.
E (Land Impr)
A
C
D
D
16.
17.
18.
19.
20.
C
B
C
A
D
(ABC Farms)
(a)
(b)
9-2.
A
C
D
B
A
Carrying value of Biological Assets, 12/31/15
Cost of biological assets purchased during 2016
Fair valuation loss on initial recognition
Change in fair value due to biological transformation and
price fluctuations
Decrease in fair value due to harvest
Biological Assets, 12/31/16
P2,800,000
3,200,000
( 150,000)
Loss on initial recognition at FV less cost to sell
Increase in FV less costs to sell
P 150,000
P2,000,000
2,000,000
(1,000,000)
P6,850,000
(Ranchero Corporation)
(a)
(b)
Balance of Biological Assets at December 31, 2015
3 years old = 2,000 x P44,000
P88,000,000
2 years old = 1,500 x P35,000
52,500,000
Increase in fair value
2,000 x (P55,000 – P44,000)
P22,000,000
1,500 x (P47,000 – P35,000)
18,000,000
Balance, December 31, 2016 (at FV less cost to sell)
Increase in FV less cost to sell due to
(1) Price Change :
3 year old cows 2,000 x (P47,000 – P44,000)
2 year old heifers 1,500 x (P37,500 – P35,000)
Increase in FV due to Price Change
(2) Physical Change
4 year old cows 2,000 x (P55,000 – P47,000)
3 year old cows 1,500 x (47,000 – P37,500)
Increase in FV due to Physical Change
(c)
(d)
FV less costs to sell at December 31, 2016
4 year old cows 2,000 x P55,000
3 year old cows 1,500 x P47,000
FV less cost to sell at December 31, 2016
P140,500,000
40,000,000
P180,500,000
P6,000,000
3,750,000
P9,750,000
P16,000,000
14,250,000
P30,250,000
P110,000,000
70,500,000
P180,500,000
Entry at year-end
Biological Assets
40,000,000
Gain – Increase in FV less CTS due to Price Change
9,750,000
Gain – Increase in FV less CTS due to Physical Change
30,250,000
94
Chapter 9 – Biological Assets
9-3.
(a)
Price Change
2 year-old animals on Jan. 1
10 x (P10,500 – P10,000)
2.5 year-old animal on July 1 1 x (P11,100 – P10,800)
Animal born on July 1
1 x (P7,200 – P7,000)
Change in FV less CTS due to Price Change
Physical Change
3 year-old animals on 12/31 10 x (P12,000 – P10,500)
3 year old animal on 12/31 1 x (P12,000 – P11,100)
Born on July 1 (upon birth)
On December 31 P8,000 – P7,200
Change in FV less CTS due to Physical Change
(b) Entries for the Year
2016
July 1 Biological Assets
Cash
Purchased one animal.
P5,000
300
200
P5,500
P15,000
900
7,000
800
P23,700
10,800
10,800
1 Biological Assets
7,000
Increase in FV less CTS due to Physical Change
7,000
Dec 31 Biological Assets
22,200
Increase in FV less CTS due to Price Change
5,500
Increase in FV less CTS due to Physical Change
(23,700 – 7,000)
16,700
31 Cash {2 x (13,500 – 1,500)
Biological Assets
(c)
24,000
24,000
Balance, 1/1/16 10 animals x P10,000
Purchase
Change in FV less CTS due to Price Change
Change in FV less CTS due to Physical Change
(including the birth of one animal)
Sale at FV less CTS
Balance, December 31, 2016
(d)
23,700
(24,000)
P116,000
The balance at December 31, 2016 is composed of the following:
3 year old animals 9 animals x P12,000
P108,000
1 year old animal
1 animal x P8,000
8,000
Total
P116,000
MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
P100,000
10,800
5,500
B
D
C
D
D
D
B
B
MC9
MC10
MC11
MC12
MC13
MC14
MC15
95
B
A
B
B
B
C
A
Chapter 9 – Biological Assets
Problems
MC16
C
Carrying amount, January 1
Livestock purchased
Increase in FV less cost to sell due to physical changes
Increase in FV less cost to sell due to price changes
Livestock sold
Carrying amount, December 31
P450,000
250,000
220,000
64,000
(290,000)
P694,000
MC17
C
Increase in FV less cost to sell due to physical changes
Increase in FV less cost to sell due to price change
Amount included in gross income
P220,000
64,000
P284,000
MC18
C
25 cattle x (15,000-13,000)
5 newborn x (7,000 – 5,000)
5 newborn x 4,000
Gain arising from change in FV due to physical change
P50,000
10,000
20,000
P80,000
MC19
A
25 cattle x (13,000 – 12,000)
5 newborn x (5,000 – 4,000)
Gain arising from change in FV due to price change
P25,000
5,000
P30,000
MC20
D
25 cattle (25 x 15,000) + (5 x 7,000) = 410,000
Newborn (5 x 7,000)
Total biological assets, December 31, 2016
P375,000
35,000
P410,000
MC21
B
Gain arising from change in FV due to physical change
Gain arising from change in FV due to price change
Gross income
P80,000
30,000
P100,000
MC22
B
Price of the assets in an active market
Estimated brokers’ and dealers’ commission
Biological assets
MC23
A
Carrying value, January 1
Assets purchased
Gain from change in FV less cost to sell due to price change
Gain from change in FV less cost to sell due to physical change
Decrease due to sales
Decrease due to harvest
Carrying value, December 31
MC24
C
Fair value 350,000-10,000 = 340,000
Estimated cost to sell
Initial value
P350,000
(10,000)
P340,000
MC25
C
Fair value 330,000 – 10,000 = 320,000
Estimated cost to sell
Inventory value at December 31
P330,000
(10,000)
P320,000
MC26
C
Net selling price (345,000 – 9,500)
Inventory value at December 31
Profit on sale
P335,500
320,000
P 15,500
96
P5,000,000
(50,000)
P4,950,000
P10,000,000
4,000,000
800,000
1,500,000
(2,000,000)
(500,000)
P13,800,000