Anda di halaman 1dari 279

SOLUTION MANUAL

Financial Accounting
Valix and Peralta
Volume One - 2008 Edition
1
CHAPTER 1
Problem 1-1

Problem 1-2

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

D
C
D
D
C
C
B
C
D
A

A
A
D
B
D
B
D
C
C
D

Problem 1-3
1.
2.
3.
4.
5.

C
D
D
A
D

Problem 1-4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

A
C
A
A
D
A
D
B
D
D

Problem 1-5

Problem 1-6

Problem 1-7

Problem 1-8

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

A
A
A
D
D
D
B
D
C
D

Problem 1-9
1.
2.
3.
4.
5.

D
D
C
B
C

A
A
C
A
A
A
B
C
A
B

D
D
C
A
A
C
D
D
B
D

B
B
C
C
A
B
D
D
A
B

Problem 1-10

Problem 1-11

Problem 1-12

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

A
B
D
B
A
D
C
A
D
A

C
B
D
A
F
E
J
G
H
I

E
D
B
C
G
H
I
F
J
A

2
Problem 1-13
1. Systematic and rational allocation
as a matching process
2. Comparability or consistency
3. Monetary unit
4. Income recognition principle
5. Time period
6. Going concern and cost principle
7. Accounting entity
8. Materiality
9. Completeness or standard
of adequate disclosure
10. Conservatism or prudence

Problem 1-14
1. Materiality
2. Going concern
3. Income recognition principle
4. Accounting entity
5. Standard of adequate disclosure
6. Comparability
7. Matching principle
8. Cost principle
9. Reliability
10. Time period

Problem 1-15
1. The cost of leasehold improvement should not be recorded as outright expense, but
should be amortized as expense over the life of the improvement or life of the lease,
whichever is shorter. This is in conformity with the systematic and rational allocation
principle of expense recognition.
2. The fact that the customer has not been seen for a year is not a controlling factor to
write off the account. If the account is doubtful of collection, an allowance should
be set up. It is only when there is proof of uncollectibility that the account should be
written off.
3. Advertising cost should be treated as outright expense, by reason of the uncertainty
of the benefit that may be derived therefrom in the future, in conformity with
immediate recognition principle.
4. The balance of the cash surrender value should not be charged to loss. In reality, this
is conceived as a prospective receivable if and when the policy is canceled
because of excessive premium in the early stage of policy. The CSV should be
classified as noncurrent investment.
5. The cost of obsolete merchandise should not be included as part of inventory but
charged to expense, as a conservative approach.
6. The excess payment represents goodwill which should not be amortized but subject
to impairment. Conservatism dictates that goodwill should be recognized when paid
for.

7. The depreciation is not dependent on the amount of profit generated during the
year. Depreciation is an allocation of cost and therefore should be provided
regardless of the level of earnings.

3
8. An entry should be made to recognize the inventory fire loss, and such loss should be
treated as component of income.
9. Revenues and expenses of the canteen should be separated from the revenues and
cost of regular business operations in order to present fairly the financial position and
performance of the regular operations.
10. The increase in value of land and building should not be taken up in the accounts.
The use of revalued amount is permitted only when the revaluation is made by
independent and expert appraiser. The expected sales price of P5,000,000 is not
necessarily the revalued amount of the land and building. Moreover, increase in
value is not an income until the asset is sold.

Problem 1-16
1. Accrual assumption
6. Income recognition principle
2. Going concern assumption 7. Expense recognition principle
3. Asset recognition principle
8. Cause and effect association principle
4. Cost principle
9. Systematic and rational allocation principle
5. Liability recognition principle
10. Immediate recognition principle

Problem 1-17
1. Monetary unit assumption
2. Cost principle
3. Materiality
4. Time period
5. Matching principle

6. Substance over form


7. Income recognition principle
8. Comparability or consistency
9. Conservatism or prudence
10. Adequate disclosure or completeness

Problem 1-18
1. The cost of the asset should be the amount of cash paid. No income should be
recognized when an asset is purchased at an amount less than its market value.
Revenue arises from the act of selling and not from the act of buying.
2. The entry should be reversed because the pending lawsuit is a mere contingency.
The contingent loss is simply disclosed. To be recognized in accordance with
conservatism, the contingent loss must be both probable and measurable.

3. The new car should be charged against the president and debited to receivable
from officer, because the car is for personal use.

4
4. The entry is incorrect because no revenue shall be recognized until a sale has taken
place.
5. Purchased goodwill should be recorded as an asset. Under the new standard,
goodwill is not amortized anymore but on each balance sheet date it should be
assessed for impairment.

Problem 1-19
1.
2.
3.
4.
6.

Accrual
Going concern
Accounting entity
Monetary unit
Time period

5
CHAPTER 2
Problem 2-1
Easy Company
Statement of Financial Position
December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Noncurrent assets:
Property, plant and equipment
Long-term investments
Intangible asset
Total noncurrent assets
Total assets

Note
800,000
(1)

450,000
900,000
200,000
2,350,000

(2)
(3)

4,400,000
950,000
800,000
6,150,000
8,500,000

LIABILITIES AND SHAREHOLDERS EQUITY


Current liabilities:
Trade and other payables
Note payable, short-term debt
Total current liabilities
Noncurrent liabilities:
Mortgage payable, due in 5 years
Note payable, long-term debt
Total noncurrent liabilities
Shareholders equity:
Share capital, P100 par
Share premium
Retained earnings
Total shareholders equity
Total liabilities and stockholders equity

(4)

450,000
200,000
650,000
1,500,000
500,000
2,000,000
4,000,000
500,000
1,350,000
5,850,000
8,500,000

Note 1 - Prepaid expenses


Office supplies
Prepaid rent
Total prepaid expenses

50,000
150,000
200,000

6
Note 2 - Property, plant and equipment
Property, plant and equipment
Accumulated depreciation
Net book value

5,600,000
(1,200,000)
4,400,000

Note 3 - Intangible asset


Patent

800,000

Note 4 - Trade and other payables


Accounts payable
Accrued expenses
Total

350,000
100,000
450,000

Problem 2-2
Simple Company
Statement of Financial Position
December 31, 2008
ASSETS
Current assets:
Cash
Trading securities
Trade and other receivables
Inventories
Prepaid expenses
Total current assets
Noncurrent assets:

Note
420,000
250,000
620,000

(2)

(1)
1,250,000
(3)
20,000

2,560,000

Property, plant and equipment


Long-term investments
Intangible assets
Total noncurrent assets
Total assets

(4)
(5)
(6)

4,640,000
2,000,000
300,000
6,940,000
9,500,000

7
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Trade and other payables
Serial bonds payable - current portion
Total current liabilities
Noncurrent liabilities:
Serial bonds payable - remaining portion
Shareholders equity:
Share capital
Share premium
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity

Note
(7)

620,000
500,000
1,120,000
2,000,000
5,000,000
500,000
880,000
6,380,000
9,500,000

Note 1 - Trade and other receivables


Accounts receivable
Allowance for doubtful accounts
Notes receivable
Claim receivable
Total

500,000
( 50,000)
150,000
20,000
620,000

Note 2 - Inventories
Finished goods
Goods in process
Raw materials
Factory supplies
Total

400,000
600,000
200,000
50,000
1,250,000

Note 3 - Prepaid expenses


Prepaid insurance

20,000

Note 4 - Property, plant and equipment


Cost
1,500,000
4,000,000
2,000,000
40,000
7,540,000

Land
Building
Machinery
Tools
Total

Accum.
depr.
1,600,000
1,300,000
2,900,000

Book
value
1,500,000
2,400,000
700,000
40,000
4,640,000

8
Note 5 - Long-term investments
Investment in bonds
Plant expansion fund
Total

1,500,000
500,000
2,000,000

Note 6 - Intangible assets


Franchise
Goodwill
Total

200,000
100,000
300,000

Note 7 - Trade and other payables


Accounts payable
Notes payable
Income tax payable
Advances from customers
Accrued expenses
Accrued interest on note payable
Employees income tax payable
Total

Problem 2-3

300,000
100,000
60,000
100,000
30,000
10,000
20,000
620,000

Exemplar Company
Statement of Financial Position
December 31, 2008
ASSETS

Current assets:
Cash and cash equivalents
Trading securities

Note
500,000
280,000

Trade and other receivables


Inventories
Prepaid expenses
Total current assets
Noncurrent assets:
Property, plant and equipment
Long-term investments
Intangible assets
Other noncurrent assets
Total noncurrent assets
Total assets

(1)

640,000
1,300,000
70,000
2,790,000

(2)
(3)
(4)
(5)

5,300,000
1,310,000
3,350,000
150,000
10,110,000
12,900,000

9
LIABILITIES AND SHAREHOLDERS EQUITY
Note
Current liabilities:
Trade and other payables
Noncurrent liabilities:
Bonds payable
Premium on bonds payable
Total noncurrent liabilities

(6)

1,000,000

5,000,000
1,000,000
6,000,000

Shareholders equity:
Share capital
Reserves
Retained earnings (deficit)
Total shareholders equity
Total liabilities and shareholders equity

(7)
(8)

7,000,000
700,000
(1,800,000)
5,900,000
12,900,000

Note 1 - Trade and other receivables


Accounts receivable
Allowance for doubtful accounts
Notes receivable
Accrued interest on notes receivable
Total

400,000
( 20,000)
250,000
10,000
640,000

Note 2 - Property, plant and equipment

Land

Cost
1,500,000

Accum.
depr.
-

Book
value
1,500,000

Building
Equipment
Total

5,000,000
1,000,000
7,500,000

2,000,000
200,000
2,200,000

3,000,000
800,000
5,300,000

Note 3 - Long-term investments


Land held for speculation
Sinking fund
Preference share redemption fund
Cash surrender value
Total

500,000
400,000
350,000
60,000
1,310,000

Note 4 - Intangible assets


Computer software
Lease rights
Total

3,250,000
100,000
3,350,000

10

Note 5 - Other noncurrent assets


Advances to officers, not collectible currently
Long-term refundable deposit
Total

100,000
50,000
150,000

Note 6 - Trade and other payables


Accounts payable
Notes payable
Unearned rent income
SSS payable
Accrued salaries
Dividends payable
Withholding tax payable
Total

400,000
300,000
40,000
10,000
100,000
120,000
30,000
1,000,000

Note 7 Share capital


Preference share capital
Ordinary share capital
Total

2,000,000
5,000,000
7,000,000

Note 8 - Reserves
Share premium preference
Share premium ordinary
Total

Problem 2-4

500,000
200,000
700,000

Relax Company
Statement of Financial Position
December 31, 2008
ASSETS
Current assets:
Cash
Trade accounts receivable
Inventories
Prepaid expenses
Total current assets
Noncurrent assets:
Property, plant and equipment
Investment in associate
Intangible assets
Total noncurrent assets
Total assets

Note
400,000
750,000
1,000,000
100,000

(1)

2,250,000
(2)
(3)

5,600,000
1,300,000
350,000
7,250,000
9,500,000

11
LIABILITIES AND SHAREHOLDERS EQUITY
Note
Current liabilities:
Trade and other payables
Mortgage note payable-current portion
Total current liabilities

(4)

1,750,000

Noncurrent liabilities:
Mortgage note payable, remaining position
Bank loan payable, due June 30, 2010
Total noncurrent liabilities
Shareholders equity:
Share capital
Reserves
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity

1,350,000
400,000

1,600,000
500,000
2,100,000

(5)

3,000,000
1,400,000
1,250,000
5,650,000
9,500,000

Note 1 - Trade accounts receivable


Accounts receivable
Allowance for doubtful accounts
Net realizable value
Note 2 - Property, plant and equipment

800,000
( 50,000)
750,000

Cost
500,000
5,000,000
3,000,000
400,000
8,900,000

Land
Building
Machinery
Equipment
Total

Accum.
depr.
2,000,000
1,200,000
100,000
3,300,000

Book
value
500,000
3,000,000
1,800,000
300,000
5,600,000

Note 3 - Intangible assets


Trademark
Secret processes and formulas
Total

150,000
200,000
350,000

Note 4 - Trade and other payables


Notes payable
Accounts payable
Income tax payable
Accrued expenses
Estimated liability for damages
Total

750,000
350,000
50,000
60,000
140,000
1,350,000

12

Note 5 - Reserves
Additional paid in capital
Retained earnings appropriated for plant expansion
Retained earnings appropriated for contingencies
Total

300,000
1,000,000
100,000
1,400,000

Problem 2-5
Summa Company
Statement of Financial Position
December 31, 2008
ASSETS
Current assets:
Cash
Bond sinking fund
Trade and other receivables
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Property, plant and equipment
Investment property
Intangible asset

Note
(1)
(2)

700,000
2,000,000
830,000
1,200,000
100,000
4,830,000

(3)
(4)

5,500,000
700,000
370,000

Total noncurrent assets


Total assets

6,570,000
11,400,000
LIABILITIES AND EQUITY
Note

Current liabilities:
Trade and other payables
Bonds payable due June 30, 2009
Total current liabilities

(5)

2,050,000
2,000,000
4,050,000

Noncurrent liability:
Deferred tax liability

650,000

Equity:
Share capital
Reserves
Retained earnings
Total equity
Total liabilities and equity

(6)
(7)

3,500,000
500,000
2,700,000
6,700,000
11,400,000

13
Note 1 - Cash
Cash on hand
Cash in bank

50,000
650,000
700,000

Note 2 - Trade and other receivables


Accounts receivable
Allowance for doubtful accounts
Notes receivable
Accrued interest receivable
Total

650,000
( 50,000)
200,000
30,000
830,000

Note 3 - Property, plant and equipment

Land
Building
Furniture and equipment
Total
Note 4 - Intangible asset

Cost
1,000,000
5,500,000
2,400,000
8,900,000

Accum.
depr.
2,500,000
900,000
3,400,000

Book
value
1,000,000
3,000,000
1,500,000
5,500,000

Patent

370,000

Note 5 - Trade and other payables


Accounts payable
Notes payable
Accrued taxes
Other accrued liabilities
Total

1,000,000
850,000
50,000
150,000
2,050,000

Note 6 Share capital


Authorized share capital, 50,000 shares, P100 par
Unissued share capital
Issued share capital
Subscribed share capital, 10,000 shares
Subscription receivable
Paid in capital

5,000,000
(2,000,000)
3,000,000
1,000,000
500,000
( 500,000)
3,500,000

Note 7 - Reserves
Share premium
Retained earnings appropriated for contingencies
Total

300,000
200,000
500,000

14
Problem 2-6 (Functional method)
Karla Company
Income Statement
Year ended December 31, 2008

Note
Net sales revenue
Cost of sales
Gross income
Other income
Total income
Expenses:
Selling expenses
Administrative expenses
Other expenses
Income before tax
Income tax
Net income

(1)
(2)

7,700,000
(5,000,000)
2,700,000
400,000
3,100,000

(3)
(4)
(5)
(6)

950,000
800,000
100,000

1,850,000
1,250,000
( 250,000)
1,000,000

Note 1 Net sales revenue


Gross sales
Sales returns and allowances
Sales discounts
Net sales revenue

7,850,000
( 140,000)
( 10,000)
7,700,000

Note 2 Cost of sales


Inventory, January 1
Purchases
Freight in
Purchase returns and allowances
Purchase discounts
Net purchases
Goods available for sale
Inventory, December 31
Cost of sales

1,000,000
5,250,000
500,000
( 150,000)
( 100,000)
5,500,000
6,500,000
(1,500,000)
5,000,000

Note 3 Other income


Rental income
Dividend revenue
Total other income

250,000
150,000
400,000

15

Note 4 Selling expenses


Freight out
Salesmens commission
Depreciation store equipment
Total selling expenses

175,000
650,000
125,000
950,000

Note 5 Administrative expenses


Officers salaries
Depreciation office equipment
Total administrative expenses

500,000
300,000
800,000

Note 6 Other expenses


Loss on sale of equipment
Loss on sale of investment
Total other expenses

50,000
50,000
100,000

Natural method
Karla Company
Income Statement
Year ended December 31, 2008
Net sales revenue
Other income
Total
Expenses:
Increase in inventory
Net purchases
Freight out
Salesmens commission
Depreciation
Officers salaries
Other expenses
Income before tax
Income tax
Net income

Note
(1)
(2)
(3)
(4)
(5)
(6)

7,700,000
400,000
8,100,000
( 500,000)
5,500,000
175,000
650,000
425,000
500,000
100,000

6,850,000
1,250,000
( 250,000)
1,000,000

16
Note 1 Net sales revenue
Gross sales
Sales returns and allowances
Sales discounts
Net sales revenue

7,850,000
( 140,000)
( 10,000)
7,700,000

Note 2 Other income


Rental income
Dividend revenue
Total other income

Note 3 Increase in inventory

250,000
150,000
400,000

Inventory, December 31
Inventory, January 1
Increase in inventory

1,500,000
1,000,000
500,000

Note 4 Net purchases


Purchases
Freight in
Purchase returns and allowances
Purchase discounts
Net purchases

5,250,000
500,000
( 150,000)
( 100,000)
5,500,000

Note 5 Depreciation
Depreciation store equipment
Depreciation office equipment
Total

125,000
300,000
425,000

Note 6 Other expenses


Loss on sale of equipment
Loss on sale of investment
Total

50,000
50,000
100,000

17
Problem 2-7
Masay Company
Statement of Cost of Goods Manufactured
Year Ended December 31, 2008
Raw materials January 1
Purchases
Raw materials available for use
Less: Raw materials December 31
Raw materials used
Direct labor
Factory overhead:
Indirect labor
Superintendence
Light, heat and power
Rent factory building

200,000
3,000,000
3,200,000
280,000
2,920,000
950,000
250,000
210,000
320,000
120,000

Repair and maintenance machinery


Factory supplies used
Depreciation machinery
Total manufacturing cost
Goods in process January 1
Total Cost of goods in process
Less: Goods in process December 31
Cost of goods manufactured

50,000
110,000
60,000

1,120,000
4,990,000
240,000
5,230,000
170,000
5,060,000

Cost of sales method


Masay Company
Income Statement
Year ended December 31, 2008
Net sales revenue
Cost of goods sold
Gross income
Other income
Total income
Expenses:
Selling expenses
Administrative expenses
Other expense
Income before tax
Income tax expense
Net income

Note
(1)
(2)

7,450,000
(5,120,000)
2,330,000
210,000
2,540,000

(3)
(4)
(5)
(6)

830,000
590,000
300,000

1,720,000
820,000
( 320,000)
500,000

18
Note 1 Net sales revenue
Sales
Sales returns and allowances
Net sales revenue

7,500,000
50,000)
7,450,000

Note 2 Cost of goods sold


Finished goods January 1
Cost of goods manufactured
Goods available for sale
Finished goods December 31
Cost of goods sold

360,000
5,060,000
5,420,000
( 300,000)
5,120,000

Note 3 Other income


Gain from expropriation
Interest income
Gain on sale of equipment

100,000
10,000
100,000
210,000

Note 4 Selling expenses


Sales salaries
Advertising
Depreciation store equipment
Delivery expenses
Total

400,000
160,000
70,000
200,000
830,000

Note 5 Administrative expenses


Office salaries
Depreciation office equipment
Accounting and legal fees
Office expenses
Total

150,000
40,000
150,000
250,000
590,000

Note 6 Other expense


Earthquake loss

300,000

19
Nature of expense method
Masay Company
Income Statement
Year Ended December 31, 2008
Net sales revenue
Other income
Total income
Expenses:
Decrease in finished goods

Note
(1)
(2)

7,450,000
210,000
7,660,000

and goods in process


Raw materials used
Direct labor
Factory overhead
Salaries
Advertising
Depreciation
Delivery expenses
Accounting and legal fees
Office expenses
Other expense
Income before tax
Income tax expense
Net income

(4)

(3)
130,000
2,920,000
950,000
(5)
1,120,000
(6)
550,000
160,000
(7)
110,000
200,000
150,000
250,000
(8)
300,000

6,840,000
820,000
( _320,000)
500,000

Note 1 Net sales revenue


Sales
Sales returns and allowances
Net sales revenue

7,500,000
50,000)
7,450,000

Note 2 Other income


Gain from expropriation
Interest income
Gain on sale of equipment

100,000
10,000
100,000
210,000

Note 3 Decrease in finished goods and goods in process


Finished goods
Goods in process
Total

January 1
360,000
240,000
600,000

December 31
300,000
170,000
470,000

Decrease
60,000
70,000
130,000

20

Note 4 Raw materials used


Raw materials January 1
Purchases
Raw materials available for use
Raw materials December 31
Raw materials used

200,000
3,000,000
3,200,000
280,000
2,920,000

Note 5 Factory overhead


Indirect labor

250,000

Superintendence
Light, heat and power
Rent factory building
Repair and maintenance machinery
Factory supplies used
Depreciation machinery
Total

210,000
320,000
120,000
50,000
110,000
60,000
1,120,000

Note 6 Salaries
Sales salaries
Office salaries
Total

400,000
150,000
550,000

Note 7 Depreciation
Depreciation store equipment
Depreciation office equipment
Total

70,000
40,000
110,000

Note 8 Other expense


Earthquake loss

Problem 2-8

300,000

Youth Company
Income Statement
Year ended December 31, 2008

Net sales revenue


Cost of goods sold
Gross income
Expenses:
Selling expenses
Administrative expenses
Other expense
Income before tax
Income tax expense
Net income

Note
(1)
(2)
(3)
(4)
(5)

8,870,000
(5,900,000)
2,970,000
690,000
580,000
340,000

1,610,000
1,360,000
( 360,000)
1,000,000

21
Note 1 Net sales revenue
Sales
Sales returns and allowances
Net sales revenue

Note 2 Cost of goods sold

9,070,000
( 200,000)
8,870,000

Beginning inventory
Purchases
Transportation in
Purchase discounts
Goods available for sale
Ending inventory
Cost of goods sold

1,500,000
5,750,000
150,000
( 100,000)

5,800,000
7,300,000
(1,400,000)
5,900,000

Note 3 Selling expenses


Depreciation store equipment
Store supplies
Sales salaries
Total

110,000
80,000
500,000
690,000

Note 4 Administrative expenses


Officers salaries
Depreciation building
Office supplies
Total

400,000
120,000
60,000
580,000

Note 5 Other expense


Uninsured flood loss

340,000

22

Problem 2-9
Christian Company
Statement of Cost of Goods Manufactured
Year Ended December 31, 2008
Purchases

1,600,000

Freight in
Total
Increase in raw materials
Raw materials used
Direct labor
Factory overhead:
Indirect labor
Depreciation machinery
Factory taxes
Factory supplies expense
Factory superintendence
Factory maintenance
Factory heat, light and power
Total manufacturing cost
Decrease in goods in process
Cost of goods manufactured

80,000
1,680,000
( 100,000)
1,580,000
1,480,000
600,000
50,000
130,000
120,000
480,000
150,000
220,000

1,750,000
4,810,000
90,000
4,900,000

Christian Company
Income Statement
Year Ended December 31, 2008
Note
Sales revenue
Cost of goods sold
Gross income
Expenses:
Selling expenses
Administrative expenses
Income before tax
Income tax expense
Net income

8,000,000
(5,100,000)
2,900,000

(1)
(2)
(3)

800,000
930,000

1,730,000
1,170,000
( 170,000)
1,000,000

Note 1 Cost of goods sold


Cost of goods manufactured
Decrease in finished goods
Cost of goods sold

4,900,000
200,000
5,100,000

23

Note 2 Selling expenses


Sales salaries
520,000

Advertising
120,000
Delivery expense
160,000
Total
800,000

Note 3 Administrative expenses


Office supplies expense
30,000
Office salaries
800,000
Doubtful accounts
100,000
Total
930,000

Problem 2-10
Ronald Company
Statement of Cost of Goods Manufactured
Year Ended December 31, 2008
Materials January 1
Purchases
Freight on purchases
Purchase discounts
Materials available for use
Less: Materials December 31
Materials used
Direct labor
Factory overhead:
Heat, light and power
Repairs and maintenance
Indirect labor
Other factory overhead
Factory supplies used (300,000 + 660,000 540,000)
Depreciation factory building
Total manufacturing cost
Goods in process January 1
Total cost of goods in process
Less: Goods in process December 31
Cost of goods manufactured

1,120,000
1,600,000
220,000
( 20,000)

1,800,000
2,920,000
1,560,000
1,360,000
2,000,000

600,000
100,000
360,000
340,000
420,000
280,000

2,100,000
5,460,000
360,000
5,820,000
320,000
5,500,000

24

Ronald Company
Income Statement
Year Ended December 31, 2008
Note
Net sales revenue
Cost of goods sold
Gross income
Other income
Total income
Expenses:
Selling expenses
Administrative expenses
Income before tax
Income tax expense
Net income

(1)
(2)

6,980,000
(5,400,000)
1,580,000
160,000

(3)

1,740,000
200,000
340,000

540,000
1,200,000
( 200,000)
1,000,000

Note 1 Net sales revenue


Sales
Sales returns and allowances
Net sales revenue

7,120,000
( 140,000)
6,980,000

Note 2 Cost of goods sold


Finished goods January 1
Cost of goods manufactured
Goods available for sale
Finished goods December 31
Cost of goods sold

420,000
5,500,000
5,920,000
( 520,000)
5,400,000

Note 3 Other income


Interest revenue

160,000

25
Problem 2-11
Reliable Company
Statement of Retained Earnings
Year Ended December 31, 2008
Retained earnings January 1
Prior period error overdepreciation in 2007
Change in accounting policy from FIFO to weighted average
method credit adjustment
Corrected beginning balance
Net income
Decrease in appropriation for treasury share
Total
Cash dividends paid to shareholders
Current appropriation for contingencies
Retained earnings December 31

200,000
100,000
150,000
450,000
1,300,000
200,000
1,950,000
( 500,000)
( 100,000)
1,350,000

Problem 2-12
Net income
Loss from fire
Goodwill impairment
Loss on sale of equipment
Gain on retirement of bonds payable
Gain on life insurance settlement
Adjusted net income

3,000,000
( 50,000)
( 250,000)
( 200,000)
100,000
450,000
3,050,000

Gondola Company
Statement of Retained Earnings
Year ended December 31, 2008
Balance January 1
Compensation of prior period not accrued
Correction of prior period error credit
Adjusted beginning balance
Net income adjusted
Stock dividend
Loss on retirement of preference share
Appropriated for treasury share
Balance December 31

2,600,000
( 500,000)
400,000
2,500,000
3,050,000
( 700,000)
( 350,000)
(1,000,000)
3,500,000

26
CHAPTER 3
Problem 3-1
1.
2.
3.
4.
5.

D
A
A
C
B

6.
7.
8.
9.
10.

Problem 3-2
D
B
C
C
A

1.
2.
3.
4.
5.

D
D
C
A
C

6.
7.
8.
9.
10.

D
D
B
D
B

Problem 3-3
a. Undeposited collections
Cash in bank PCIB
Cash in bank PCIB (for payroll)
Cash in bank - PCIB (savings deposit)
Money market instrument 90 days
Total cash and cash equivalents
b. Accounts receivable (15,000 + 25,000)
Cash in foreign bank
Advances to officers
Sinking fund cash
Trading securities
Bank overdraft
Cash

60,000
500,000
150,000
100,000
2,000,000
2,810,000
40,000
100,000
30,000
450,000
120,000
50,000
690,000

Problem 3-4
Adjusting entries on December 31, 2008
a. Cash
Accounts payable

100,000

b. Cash
Accounts payable

50,000

100,000
50,000

c. Accounts receivable
Cash

200,000

d. Accounts receivable (20,000 + 60,000 + 30,000)

110,000

200,000

Money market placement


Cash in closed bank
Advances to employee
Pension fund
Cash

1,000,000
50,000
30,000
400,000
1,590,000

27
Cash and cash equivalents:
Demand deposit (see below)
Time deposit 30 days
Petty cash fund
Total
Demand deposit per book
Undelivered check
Postdated check delivered
Window dressing of collection
Adjusted balance

1,450,000
500,000
10,000
1,960,000
1,500,000
100,000
50,000
( 200,000)
1,450,000

Problem 3-5
1. Cash on hand
Postdated check
Adjusted cash on hand

500,000
(100,000)
400,000

2. Petty cash fund


Unreplenished petty cash expenses
Postdated employee check
Adjusted petty cash

20,000
( 2,000)
( 3,000)
15,000

3. Security Bank current account


Postdated company check delivered
Adjusted balance
4. Cash on hand
Petty cash fund
Security Bank current account
PNB current account No. 1
PNB current account No. 2
BSP Treasury bill 60 days
Total cash and cash equivalents

1,000,000
200,000
1,200,000

400,000
15,000
1,200,000
400,000
50,000)
3,000,000
4,965,000

*The BPI Time deposit of P2,000,000 is shown as noncurrent investment because it is


restricted for land acquisition.
5. Accounts receivable
Cash on hand

100,000
100,000

Expenses
Receivable from employee
Petty cash fund
Security Bank current account
Accounts payable

2,000
3,000
5,000
200,000
200,000

28

Problem 3-6
1. Cash on hand
NSF customer check
Postdated customer check
Adjusted on hand

500,000
( 40,000)
( 60,000)
400,000

2. Currency and coins


Check drawn payable to petty cashier
Adjusted petty cash

1,000
14,000
15,000

3. Cash in bank
Undelivered company check
Postdated company check delivered
Adjusted cash in bank
4. Accounts receivable (40,000 + 60,000)
Cash on hand
Advances to employees
Cash short or over
Petty cash fund
Cash in bank (100,000 + 150,000)
Accounts payable

2,000,000
100,000
150,000
2,250,000
100,000
100,000
3,000
2,000
5,000
250,000
250,000

Problem 3-7
1. Cash on hand
NSF customer check
Postdated customer check
Adjusted cash on hand
2. Petty cash fund:
Currency and coins
3. Philippine Bank current account
Undelivered company check
Postdated company check delivered
Adjusted balance

200,000
( 35,000)
( 15,000)
150,000
5,000
5,000,000
25,000
45,000
5,070,000

4. Cash on hand
Petty cash fund
Philippine Bank current
Manila Bank current
Asia Bank time deposit
Total cash and cash equivalent

150,000
5,000
5,070,000
4,000,000
2,000,000
11,225,000

29
5. Accounts receivable
Cash on hand

50,000
50,000

Receivable from officer


Expenses
Cash short or over
Petty cash

2,000
12,000
1,000

Philippine Bank current


Accounts payable

70,000

15,000
70,000

City Bank current


Bank overdraft

100,000
100,000

Problem 3-8
Fluctuating Fund System
1. Petty cash fund
Cash in bank

10,000

2. Postage
Supplies
Transportation
Miscellaneous expense
Petty cash fund

1,500
5,500
1,200
800

3. Petty cash fund


Cash in bank

10,000

1. Petty cash fund


Cash in bank

10,000
10,000

2. No entry

9,000
14,000
14,000

Problem 3-9
Fluctuating Fund System
1. Petty cash fund
Cash in bank

Imprest Fund System

3. Petty cash fund


Postage
Supplies
Transportation
Miscellaneous expense
Cash in bank

5,000
1,500
5,500
1,200
800
14,000

Imprest Fund System

10,000
10,000

1. Petty cash fund


Cash in bank

10,000
10,000

2. Postage
Supplies
Petty cash fund

1,500
2,000

2. No entry
3,500
3. No entry

3. Transportation
Miscellaneous expense
Cash in bank

1,000
500
1,500

4. No entry

Fluctuating Fund System


4. Supplies
Accounts payable
Petty cash fund

1,000
3,000

5. Petty cash fund


Cash in bank

9,000

4,000
9,000

6. Postage
Supplies
Transportation
Petty cash fund
7. Petty cash fund
Cash in bank

Problem 3-10

Imprest Fund System

2,000
3,000
4,000
19,000
19,000

Fluctuating Fund System

29 Postage
Supplies
Transportation
Miscellaneous expense
Petty cash fund

9,000

6. No entry
9,000

May 2 Petty cash fund


Cash in bank

5. Postage
1,500
Supplies
3,000
Transportation
1,000
Miscellaneous expense
500
Accounts payable
3,000
Cash in bank

30

10,000
10,000
1,000
3,000
2,500
1,500
8,000

7. Petty cash fund


Postage
Supplies
Transportation
Cash in bank

10,000
2,000
3,000
4,000
19,000

Imprest Fund System


May 2 Petty cash fund
Cash in bank
29 Postage
Supplies
Transportation
Miscellaneous expense
Petty cash fund
Petty cash fund
Cash in bank

10,000
10,000
1,000
3,000
2,500
1,500
8,000
8,000

8,000
June 30 Supplies
Accounts payable
Transportation
Petty cash fund

2,000
1,000
1,000

July

4,000

1 Petty cash fund

4,000

June 30 Supplies
Accounts payable
Transportation
Petty cash fund

2,000
1,000
1,000
4,000

Supplies
Postage
Transportation

2,000
1,000
1,000

To reverse the adjustment made


on June 30.
15 Petty cash fund
Supplies
Postage
Transportation
Miscellaneous expense
Cash in bank

5,000
3,500
1,500
1,500
500

July 15 Supplies
1,500
Postage
500
Transportation
500
Miscellaneous expense
500
Petty cash fund
Petty cash fund
Cash in bank

12,000
12,000

31

Problem 3-11
2008
Nov. 2
30

Dec. 31

2009
Jan. 1

2
31

3,000

12,000

Petty cash fund


Cash in bank

10,000

Postage
Supplies
Petty cash fund
Cash in bank

2,000
5,000
10,000

Postage
Supplies
Special deposit
Petty cash fund

3,000
4,000
2,000

Petty cash fund


Postage
Supplies
Special deposit

9,000

10,000

17,000

9,000

3,000
4,000
2,000

No entry
Postage
Supplies
Accounts payable
Cash short or over
Cash in bank

Problem 3-12
2008
Dec. 1 Petty cash fund
Cash in bank

5,000
6,000
7,000
1,000
19,000

Requirement 1
10,000
10,000

20 Selling expenses
Miscellaneous expenses
Equipment
Cash in bank

5,000
2,000
2,000

31 Receivable from employee


Selling expenses
Transportation
Petty cash fund

2,000
1,500
500

9,000

4,000

2009
Jan. 1 Petty cash fund
Receivable from employee
Selling expenses
Transportation

4,000
2,000
1,500
500

32

2009
Jan. 15 No entry
31 Selling expenses
Administrative expenses
Transportation
Purchases
Cash in bank

2,000
2,000
1,500
1,200
6,700

Requirement 2
Petty cash
Less: Petty cash expenses from December 21, 2008 to January 31, 2009:
Selling expenses (1,500 + 500)
2,000
Administrative expenses
2,000
Transportation (500 + 1,000)
1,500
Purchases
1,200
Petty cash before replenishment

Problem 3-13 Answer B

Problem 3-14 Answer C

Problem 3-15 Answer A

Problem 3-16 Answer A

Petty cash fund


Undeposited collections
Cash in bank
Total

50,000
1,100,000
2,500,000
3,650,000

Payroll account
Value added tax account
Travelers check
Money order
Petty cash fund
Total

10,000

6,700
3,300

2,500,000
1,000,000
300,000
700,000
40,000
4,540,000

Problem 3-17 Answer C


Checking account #101
Checking account #201

1,750,000
( 100,000)

Time deposit account


90-day Treasury bill
Total cash and cash equivalent

250,000
500,000
2,400,000

Problem 3-18 Answer B


Cash in First Bank
Change fund
Petty cash fund
Total

5,000,000
50,000
15,000
5,065,000

Problem 3-19 Answer B


Cash balance per book
Credit adjustment
Adjusted cash balance

6,000,000
(1,600,000)
4,400,000

33
Note receivable
Accounts receivable (400,000 + 200,000)
Cash

1,000,000
600,000
1,600,000

Problem 3-20 Answer A


Checkbook balance
Postdated customer check
NSF check
Undelivered company check
Adjusted balance

8,000,000
(2,000,000)
( 500,000)
1,500,000
7,000,000

Problem 3-21 Answer A


Cash on hand
Cash in bank
Petty cash
Saving deposit
Total deposit

Problem 3-22 Answer B

2,400,000
3,500,000
40,000
2,000,000
7,940,000

Problem 3-23 Answer A

Problem 3-24 Answer A

Problem 3-25 Answer A


Cash on hand and in bank
Time deposit
Saving deposit
Total

Problem 3-26 Answer B

5,000,000
6,000,000
1,000,000
12,000,000

Currencies
Coins
Accommodation check
Total

4,000
1,000
6,000
11,000

Problem 3-27 Answer C


Coins and currency
Replenishment check
Total

2,000
4,000
6,000

Problem 3-28 Answer C


Total petty cash
Currency and coins
Amount of replenishment

10,000
( 3,000)
7,000

34
CHAPTER 4
Problem 4-1
1.
2.
3.
4.
5.

D
A
B
C
C

6.
7.
8.
9.
10.

C
D
C
A
B

11.
12.
13.
14.
15.

C
B
A
C
C

Problem 4-2
Balance per book
Add: CM for note collected
Total
Less: DM for service charge
Adjusted book balance
Balance per bank
Add: Deposit in transit
Total
Less: Outstanding checks:
No. 102
105
107
Adjusted bank balance

65,000
30,000
95,000
2,000
93,000
108,000
80,000
188,000
15,000
30,000
50,000

Adjusting entries:
1. Cash in bank

30,000

95,000
93,000

Note receivable

30,000

2. Bank service charge


Cash in bank

2,000
2,000

Problem 4-3
Balance per book
Add: CM for note collected
Total
Less: DM for service charge
NSF check
Book error (52,000 25,000)
Adjusted book balance

110,000
45,000
155,000
5,000
10,000
42,000
113,000

27,000

35
Balance per bank
Add: Deposit in transit
Erroneous bank debit
Total
Less: Outstanding checks:
No. 770
775
777
Adjusted bank balance

135,000
60,000
68,000
203,000

8,000
20,000
30,000
40,000

90,000
113,000

Adjusting entries:
1. Cash in bank
Bank service charge
Note receivable

45,000
5,000
50,000

2. Bank service charge


Accounts receivable
Accounts payable
Cash in bank

5,000
10,000
27,000
42,000

Problem 4-4
Balance per book
Add: CM for note collected
Total
Less: DM for service charge
Adjusted book balance

2,840,000
270,000
3,110,000
5,000
3,105,000

Balance per bank


Add: Deposit in transit
Total
Less: Outstanding checks:
No. 116
122
124
125
Adjusted bank balance

3,265,000
450,000
3,715,000
60,000
180,000
120,000
250,000

610,000
3,105,000

Adjusting entries:
1. Cash in bank
Bank service charge
Note receivable
Interest income
2. Bank service charge
Cash in bank

270,000
10,000
250,000
30,000
5,000
5,000

36
Problem 4-5
Balance per book
Add: Note collected by bank
Total
Less: Bank service charge
NSF check
Adjusted book balance

5,000,000
2,150,000
7,150,000
50,000
550,000
500,000
6,600,000

Balance per bank


Deposit in transit
Total
Less: Outstanding checks
Adjusted bank balance

4,450,000
3,000,000
7,450,000
850,000
6,600,000

Adjusting entries:
1. Cash in bank
Bank service charge
Note receivable
Interest income

2,150,000
50,000

2. Bank service charge


Accounts receivable
Cash in bank

50,000
500,000

2,000,000
200,000

550,000

Problem 4-6
Book balance
Add: Collection of note
Interest on note
Book error on check no. 175
Total
Less: Bank service charge
Payment for light and water
NSF check
Adjusted book balance
Bank balance
Add: Deposit in transit
Total
Less: Bank error
Outstanding checks
Adjusted bank balance

1,405,000
2,500,000
150,000
45,000

2,695,000
4,100,000

5,000
245,000
220,000

470,000
3,630,000

5,630,000
750,000
6,380,000
1,100,000
1,650,000

2,750,000
3,630,000

37
Adjusting entries:
1. Cash in bank
Note receivable
Interest income
Accounts payable

2,695,000
2,500,000
150,000
45,000

2. Bank service charge


Light and water
Accounts receivable
Cash in bank

5,000
245,000
220,000
470,000

Problem 4-7
a. Balance per book April 30
Credit memo for note collected
Outstanding checks:
No. 1331
1332
1334
1335
Total
Less: Bank service charge

1,100,000
60,000
40,000
30,000
60,000
10,000

140,000
1,300,000
5,000

NSF check
Undeposited collections
Balance per bank April 30

25,000
270,000

300,000
1,000,000

b. Adjusting entries:
1. Cash in bank
Note receivable

60,000

2. Bank service charge


Accounts receivable
Cash in bank

5,000
25,000

60,000

30,000

c. Balance per book April 30


CM for note collected
Bank service charge
NSF check
Adjusted cash in bank

1,100,000
60,000
(
5,000)
( 25,000)
1,130,000

38
Problem 4-8
a. Balance per bank
Add: Undeposited collections
NSF check
DM for safety deposit
Unrecorded check
Total
Less: Checks outstanding
Overstatement of creditors check
Understatement of customers check
Balance per book

3,500,000
550,000
50,000
5,000
125,000
650,000
270,000
180,000

730,000
4,230,000
1,100,000
3,130,000

b. Adjusting entries:
1. Cash in bank
Accounts payable
Accounts receivable

450,000

2. Accounts receivable
Bank service charge
Accounts payable
Cash in bank

50,000
5,000
125,000

270,000
180,000

180,000

c. Balance per book


Overstatement of creditors check
Understatement of customers check
Total
Less: NSF check
DM for safety box
Unrecorded check
Adjusted book balance

3,130,000
270,000
180,000
3,580,000
50,000
5,000
180,000
125,000
3,400,000

Problem 4-9
Balance per book
Add: Proceeds of bank loan
Note collected by bank
Total
Less: Service charge
Customers check charged back
Adjusted book balance

2,700,000
940,000
1,375,000
435,000
4,075,000
10,000
60,000
50,000
4,015,000

39
Balance per bank
Add: Deposit in transit
Incorrect deposit
Erroneous bank charge
Erroneous debit memo
Total
Less: Outstanding checks
Erroneous bank credit
Adjusted bank balance

4,000,000
475,000
90,000
150,000
200,000
600,000
300,000

915,000
4,915,000
900,000
4,015,000

Adjusting entries:
1. Cash in bank
Bank service charge
Interest expense (60,000 x 1/6)
Prepaid interest expense
Loan payable (940,000/94%)
Note receivable
Interest income
2. Bank service charge

1,375,000
5,000
10,000
50,000
1,000,000
400,000
40,000
10,000

Accounts receivable
Cash in bank

50,000
60,000

Problem 4-10
Balance per book (squeeze)
Add: Proceeds of bank loan
Proceeds of note collected
Total
Less: Bank service charge
NSF check
Adjusted book balance
Balance per bank (squeeze)
Add: Deposit in transit
Bank error (200,000 20,000)
Total
Less: Outstanding checks (750,000 50,000)
Adjusted bank balance

2,120,000
500,000
435,000
5,000
50,000

935,000
3,055,000
55,000
3,000,000
3,070,000

450,000
180,000

630,000
3,700,000
700,000
3,000,000

Adjusting entries:
Cash in bank
Bank service charge (5,000 + 15,000)
Accounts receivable
Loan payable
Notes receivable
Interest income

880,000
20,000
50,000
500,000
400,000
50,000

40

Problem 4-11
Balance per book
Add: Proceeds of bank loan
Total
Less: Understatement of check in payment of account
(200,000 20,000)
Petty cash fund
Adjusted book balance
Balance per bank
Add: Undeposited collections
Erroneous bank charge
Deposit omitted from bank statement
Total
Less: Erroneous bank credit
Outstanding checks
Adjusted bank balance
Adjusting entries:

5,000,000
516,000
5,516,000
180,000
10,000

190,000
5,326,000
5,500,000

300,000
50,000
500,000
6,000,000
130,000
674,000
544,000
5,326,000

150,000

Cash in bank
Interest expense (84,000 x 2/12)
Prepaid interest expense
Accounts payable
Petty cash fund
Supplies
Transportation
Postage
Loan payable (516,000/86%)

326,000
14,000
70,000
180,000
4,000
2,000
3,000
1,000
600,000

Problem 4-12
Balance per book
Add: Overstatement of check number 765
Check number 555 stopped for payment
Total
Less: Service charge
NSF check
Adjusted book balance
Balance per bank
Add: Undeposited collections
Total
Less: Outstanding checks:
Number 761
762
763
764
765
Adjusted bank balance

1,300,000
20,000
10,000
5,000
85,000

30,000
1,330,000
90,000
1,240,000

1,200,000
275,000
1,475,000
55,000
40,000
25,000
65,000
50,000

235,000
1,240,000

41

Adjusting entries:
1. Cash in bank
Accounts payable
Miscellaneous income

30,000

2. Bank service charge


Accounts receivable
Cash in bank

5,000
85,000

3. Receivable from cashier


Accounts receivable
Sales discounts

40,000
30,000

Problem 4-13
a. Bank reconciliation June 30

20,000
10,000

90,000

10,000

Book balance
Add: Credit memo for note collected
Total
Less: NSF check
Service charge
Adjusted book balance
Bank balance
Add: Deposit in transit
Total
Less: Outstanding checks
Adjusted bank balance

1,000,000
300,000
1,300,000
100,000
104,000
4,000
1,196,000
1,650,000
400,000
2,050,000
854,000
1,196,000

Bank reconciliation July 31


Book balance
Add: Credit memo for bank loan
Total
Less: Service charge
Adjusted book balance

1,400,000
500,000
1,900,000
1,000
1,899,000

Bank balance
Add: Deposit in transit
Total
Less: Outstanding checks
Adjusted bank balance

2,650,000
1,100,000
3,750,000
1,851,000
1,899,000

b. Adjusting entries, July 31


1. Cash in bank
Bank loan payable

500,000
500,000

42
2. Bank service charge
Cash in bank

1,000
1,000

Computation of deposit in transit July 31


Deposit in transit June 30
Add: Deposits during July:
Book debits
Less: June credit memo for note collected
Total
Less: Deposits credited by bank during July:
Bank credits
Less: July credit memo for bank loan
Deposit in transit July 31

400,000
4,000,000
3,700,000
300,000
4,100,000
3,500,000
500,000

3,000,000
1,100,000

Computation of outstanding checks July 31


Outstanding checks, June 30
Add: Checks drawn by company during July:
Book credits
Less: June debit memos for
NSF check
Service charge
Total
Less: Checks paid by bank during July:
Bank debits
Less: July service charge
Outstanding checks, July 31

854,000
3,600,000
100,000
4,000

104,000
2,500,000
1,000

3,496,000
4,350,000
2,499,000
1,851,000

Problem 4-14
a. Reconciliation October 31
Adjusted book balance

600,000

Bank balance
Add: Deposit in transit
Total
Less: Outstanding checks
Adjusted bank balance

400,000
300,000
700,000
100,000
600,000

Reconciliation November 30
Book balance
Add: Understatement of collection from customer
Total
Less: Understatement of check disbursement
Adjusted book balance

1,000,000
90,000
1,090,000
270,000
820,000

43
Bank balance
Add: Deposit in transit
Check of Susan Company charged in error
Total
Less: Outstanding checks
Deposit of Susan Company erroneously credited
Adjusted bank balance

930,000
190,000
390,000
200,000
1,320,000
400,000
500,000
100,000
820,000

b. Adjusting entries November 30


1. Cash in bank
Accounts receivable

90,000
90,000

2. Accounts payable
Cash in bank

270,000
270,000

Computation of outstanding checks October 31


Outstanding checks October 31 (squeeze)
Add: Checks issued by depositor:
Book disbursements
Understatement of check paid
Total
Less: Checks paid by bank:
Bank disbursements
Check of Susan Company charged in error
Outstanding checks November 30

100,000
1,800,000
270,000

2,070,000
2,170,000

1,970,000
1,770,000
( 200,000)
400,000

Computation of deposit in transit November 30


Deposit in transit October 31
Add: Cash receipts deposited during November:
Book receipts
2,200,000
Understatement of collection from customer
90,000
Total
Less: Deposits credited by bank during November:
Bank receipts
2,500,000
Deposit of Susan Company erroneously credited
( 100,000)
Deposit in transit November 30

300,000
2,290,000
2,590,000
2,400,000
190,000

Problem 4-15
a. Reconciliation on July 1
Adjusted book balance

1,270,000

44
Bank balance
Add: Deposit in transit
Total
Less: Outstanding checks
Adjusted bank balance

1,720,000
500,000
2,220,000
950,000
1,270,000

Reconciliation on July 31
Book balance
Add: Note collected by bank

470,000
1,500,000

Total
Less: Bank service charge
Adjusted book balance

1,970,000

Bank balance
Add: Deposit in transit
Total
Less: Outstanding checks:
Check # 107
108
Adjusted bank balance

2,700,000
400,000
3,100,000

20,000
1,950,000

650,000
500,000

1,150,000
1,950,000

b. Adjusting entries on July 31


1. Cash in bank
Note receivable
2. Bank service charge
Cash in bank

1,500,000
1,500,000
20,000
20,000

Computation of deposit in transit July 1


Deposit in transit July 1 (squeeze)
Cash receipts per book
Total
Less: Deposits credited by bank
Deposit in transit July 31

500,000
3,400,000
3,900,000
3,500,000
400,000

Computation of outstanding checks July 1


Outstanding checks July 1 (squeeze)
Checks drawn by depositor
Total
Less: Checks paid by bank
Outstanding checks July 31

950,000
4,200,000
5,150,000
4,000,000
1,150,000

45
Problem 4-16
Balance per book November 30
Less: Service charge
NSF check
Customers note erroneously recorded as cash receipt
Adjusted book balance

500,000
10,000
50,000
100,000

160,000
340,000

Balance per bank November 30


Add: Deposit in transit
Total
Less: Outstanding checks
Adjusted bank balance

600,000
120,000
720,000
380,000
340,000

Deposit in transit October 31


Cash receipts deposited:
Book debits
October collections recorded in November
Customers note recorded as cash receipt
Total
Less: Deposits credited by bank:
Bank credits
Correction of bank error
Deposit in transit November 30
Outstanding checks October 31
Checks issued by depositor:
Book credits
October bank service charge
Total
Checks paid by bank:
Bank debits
November bank service charge
November NSF check
Outstanding checks November 30

45,000
710,000
( 45,000)
(100,000)

565,000
610,000

500,000
( 10,000)

490,000
120,000
125,000

1,200,000
(
5,000)

1,195,000
1,320,000

1,000,000
( 10,000)
( 50,000)

940,000
380,000

Adjusting entry:
Bank service charge
Accounts receivable
Note receivable
Cash in bank

10,000
50,000
100,000
160,000

46
Problem 4-17
Book balance
Note collected by bank
March
April
Service charge

March 31
200,000
60,000

Receipts
800,000
( 60,000)
100,000

Disbursements
720,000

April 30
280,000
100,000

March
April
NSF check
March
April
Deposit in transit
March 31
April 30
Outstanding checks
March 31
April 30
Bank balance

8,000)

( 20,000)
( 80,000)

( 20,000)
30,000
80,000
(220,000)

178,000
700,000

330,000

8,000)
2,000

2,000)

( 30,000)
(220,000)

178,000
(372,000)
530,000

372,000
500,000

Problem 4-18
July 31
Receipts
Disbursements August 31
Bank balance
800,000
5,000,000
3,940,000
1,860,000
Book error on collection
( 180,000)
( 180,000)
Book error on payment
( 540,000)
540,000
Bank error on deposit
( 200,000)
( 200,000)
Bank error on payment
( 400,000)
400,000
NSF check:
July
100,000
100,000
August
( 50,000)
50,000
Note collected by bank:
July
( 200,000)
200,000
August
( 300,000)
( 300,000)
Deposit in transit:
July
600,000
( 600,000)
August
480,000
480,000
Outstanding checks:
July
( 100,000)
( 100,000)
650,000
( 650,000)
August
4,400,000
3,600,000
2,000,000
Book balance
1,200,000

47
Problem 4-19
Nov. 30
Book balance
Bank service charge

2,032,000

Receipts
2,568,000

Disbursements

Dec. 31

1,440,000

3,160,000

November 30
December 31
Collection of note
November 30
December 31
Adjusted book balance

2,000)

( 200,000)
1,830,000

Bank balance
1,890,000
Outstanding checks
November 30
( 180,000)
December 31
Deposit in transit
November 30
80,000
December 31
498,000
Check erroneously charged by bank
November 30
40,000
December 31
Adjusted bank balance
1,830,000

2,000)
4,000

4,000)

200,000
( 300,000)
2,468,000

1,442,000

( 300,000)
2,856,000

2,090,000

1,080,000

2,900,000

( 180,000)
592,000

( 592,000)

80,000)
498,000

40,000)
(

2,468,000

50,000)
1,442,000

50,000
2,856,000

Adjusting entry:
Bank service charge
Note receivable
Cash in bank

4,000
300,000
304,000

48
Problem 4-20
Sept. 30

Receipts

Disbursements

Oct. 31

Book balance
1,900,000
NSF check:
September 30
( 60,000)
October 31
Collection of accounts receivable
September 30
30,000
October 31
Overstatement of check
September 30
90,000
October 31
Adjusted balance
1,960,000
Bank balance
Deposit in transit
September 30
October 31
Outstanding checks
September 30
October 31
Adjusted balance

1,400,000

2,400,000
(

30,000)
50,000

40,000)
50,000

90,000)
________
1,330,000

( 120,000)
2,260,000

120,000
1,030,000

2,100,000

1,200,000

2,500,000

800,000

130,000

( 130,000)
260,000

( 270,000)
1,960,000

60,000)
40,000

900,000

260,000

270,000)
30,000 ( 30,000)
1,330,000
2,260,000 1,030,000

Adjusting entries on October 31


1. Accounts receivable
Cash in bank

40,000
40,000

2. Cash in bank
Accounts receivable
Salaries

170,000
50,000
120,000

49
Problem 4-21

May 31

Receipts

Disbursements

June 30

Balance per book


Bank service charge:
May 31
June 30
NSF check:
June 30
Interest collected:
June 30
Book error:
June 30
Adjusted balance
Balance per bank
Deposit in transit
May 31
June 30
Outstanding checks
May 31
June 30
Adjusted balance

2,500,000
(

5,300,000

20,000)

5,400,000
(

2,400,000

20,000)
25,000

200,000

( 200,000)

75,000
2,480,000

_________
5,375,000

2,700,000

5,500,000

625,000

( 625,000)
500,000

( 845,000)
2,480,000

75,000
(

300,000)
5,305,000

300,000
2,550,000

5,600,000

2,600,000
500,000

(
5,375,000

25,000)

845,000)
550,000
5,305,000

550,000)
2,550,000

Adjusting entries on June 30:


1. Cash in bank
Interest income
Equipment

375,000

2. Bank service charge


Accounts receivable
Cash in bank

25,000
200,000

75,000
300,000

225,000

Problem 4-22 Answer A


Balance per book
Bank charges
Customer note collected by bank
Interest on customer note
NSF customer check
Depositors note charged to account
Adjusted book balance

4,000,000
( 10,000)
1,500,000
60,000
( 250,000)
(1,000,000)
4,300,000

50

Problem 4-23 Answer B


Balance per bank
Add: Deposit in transit
Total
Less: Outstanding checks
Erroneous bank credit
Adjusted bank balance

2,000,000
200,000
2,200,000
400,000
300,000

700,000
1,500,000

The adjusted cash in bank can also be computed by starting with the balance per book.
Balance per book
Add: Proceeds of note collected
Total
Less: NSF checks (150,000 50,000)
Adjusted book balance

850,000
750,000
1,600,000
100,000
1,500,000

Problem 4-24 Answer C


Balance per book
Note collected by bank
Book error (200,000 20,000)
NSF check
Bank service charge
Adjusted book balance

8,500,000
950,000
( 180,000)
( 250,000)
( 20,000)
9,000,000

Problem 4-25 Answer A


Problem 4-26 Answer B
Problem 4-27 Answer B
Problem 4-28 Answer D
Balance per ledger
Service charges
Collection of note
Book error
Unrecorded check for traveling expenses
Adjusted book balance

3,750,000
50,000)
1,500,000
( 100,000)
( 500,000)
4,600,000

Balance per bank


Deposit in transit
Total
Outstanding checks (squeeze)
Adjusted bank balance

6,200,000
1,400,000
7,600,000
3,000,000
4,600,000

51

Problem 4-29 Answer B


Problem 4-30 Answer A
Problem 4-31 Answer C
Outstanding checks May 31
Checks issued by depositor in June:
Total credits to cash in June
Service charge in May recorded in June
Total
Checks paid by bank in June:
Checks and charges by bank in June
Service charge in June
NSF check in June
Outstanding checks June 30

3,000,000
(

9,000,000
100,000)

8,900,000
11,900,000

8,000,000
( 50,000)
(1,000,000)

6,950,000
4,950,000

Problem 4-32 Answer A


Balance per book June 30
Service charges
Collection by bank
NSF check
Adjusted book balance
Balance per bank June 30
Deposits outstanding June 30
Checks outstanding June 30
Adjusted bank balance
Outstanding checks May 31
Checks recorded by book in June
Total
Less: Checks recorded by bank in June
Outstanding checks June 30
Deposits outstanding May 31
Deposits recorded by book in June
Total
Less: Deposits recorded by bank in June
Deposits outstanding June 30

2,100,000
50,000)
550,000
( 100,000)
2,500,000
(

2,400,000
500,000
( 400,000)
2,500,000
100,000
2,500,000
2,600,000
2,200,000
400,000
300,000
1,800,000
2,100,000
1,600,000
500,000

Problem 4-33 Answer A


Note collected
Book error (1,930,000 1,390,000)
NSF check
Service charge
Net debt to cash

1,936,000
( 540,000)
( 840,000)
( 47,000)
509,000

52
Problem 4-34 Answer A

Problem 4-35 Answer A


Problem 4-36 Answer D
Balance per bank November 30
December deposits
Total
December disbursements
Balance per bank December 31
Deposit in transit December
Outstanding checks December
Adjusted bank balance December 31
Balance per book December 31 (squeeze)
Note collected by bank
NSF check
Service charge
Adjusted book balance

3,600,000
5,500,000
9,100,000
(4,400,000)
4,700,000
700,000
( 500,000)
4,900,000
4,300,000
1,000,000
( 350,000)
( 50,000)
4,900,000

Problem 4-37 Answer A


Bank disbursements for July
Outstanding checks June 30
Outstanding checks July 31
Book disbursements for July

9,000,000
(1,400,000)
1,000,000
8,600,000

Problem 4-38 Answer B


Bank receipts for April
Deposits in transit March 31
Deposits in transit April 30
Book receipts for April

6,000,000
(1,000,000)
1,500,000
6,500,000

53
CHAPTER 5
Problem 5-1
1.
2.
3.
4.
5.

D
D
D
B
A

6.
7.
8.
9.
10.

Problem 5-2
A
B
C
A
C

1.
2.
3.
4.
5.

A
C
A
A
A

6.
7.
8.
9.
10.

Problem 5-3
A
D
C
C
D

1.
2.
3.
4.
5.

D
B
C
D
A

Problem 5-4
a. Accounts receivable
Notes receivable
Installments receivable
Advances to suppliers
Advances to subsidiary
Claim receivable
Subscriptions receivable
Accrued interest receivable
Customers credit balances
Advances from customers
Receivables
b. Accounts receivable
Allowance for doubtful accounts
Notes receivable
Installments receivable
Advances to suppliers
Claim receivable
Subscription receivable
Accrued interest receivable
Total trade and other receivables

775,000
100,000
300,000
150,000
400,000
15,000
300,000
10,000
30,000
20,000
2,000,000
(

775,000
50,000)
100,000
300,000
150,000
15,000
300,000
10,000
1,600,000

c. The advances to subsidiary should be classified as noncurrent and presented as


long-term investment.
The customers credit balances and advances from customers should be classified as
current liabilities and included as part of trade and other payables.

Problem 5-5
a. Accounts receivable January 1
Charge sales
Total
Less: Collections from customers

600,000
6,000,000
6,600,000
5,300,000

Writeoff
Merchandise returns
Allowances to customers
Accounts receivable December 31

35,000
40,000
25,000

5,400,000
1,200,000

54
b. Subscription receivable
Deposit on contract
Claim receivable
Advances to employees
Advances to affiliated
Advances to supplier
Accounts receivable
490,000

150,000
120,000
60,000
10,000
100,000
50,000

c. Accounts receivable
Claim receivable
60,000
Advances to employees
10,000
Advances to supplier
Total trade and other receivables

1,200,000

50,000
1,320,000

d. The subscriptions receivable should be deducted from subscribed share capital.


The deposit on contract should be classified as noncurrent and presented as other
noncurrent asset.
The advances to affiliates should be classified as noncurrent and presented as longterm investment.

Problem 5-6
Requirement 1
1. Accounts receivable
Sales

3,600,000
3,600,000

2. Notes receivable
Accounts receivable
3. Doubtful accounts
Allowance for doubtful accounts

400,000
400,000
90,000
90,000

4. Allowance for doubtful accounts


Accounts receivable

20,000

5. Sales return
Accounts receivable

15,000

20,000
15,000

6. Cash
Accounts receivable

2,450,000

7. Sales discount
Accounts receivable

45,000

8. Cash
Notes receivable

2,450,000
45,000
150,000
150,000

55
Requirement 2
Notes receivable

250,000

Requirement 3
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value

670,000
70,000
600,000

Problem 5-7
FOB destination and freight collect
1. Accounts receivable
Freight out
Sales
Allowance for freight charge

500,000
10,000

2. Cash
Sales discount
Allowance for freight charge
Accounts receivable

475,000
15,000
10,000

500,000
10,000

500,000

FOB destination and freight prepaid


1. Accounts receivable
Freight out
Sales
Cash

500,000
10,000

2. Cash
Sales discount
Accounts receivable

485,000
15,000

500,000
10,000

500,000

FOB shipping point and freight collect


1. Accounts receivable
Sales

500,000
500,000

2. Cash
Sales discount
Accounts receivable

485,000
15,000
500,000

FOB shipping point and freight prepaid


1. Accounts receivable
Sales
Cash

510,000
500,000
10,000

56
2. Cash
Sales discount
Accounts receivable

495,000
15,000
510,000

Problem 5-8
1. Accounts receivable
Sales

4,000,000

2. Cash
Sales discount
Accounts receivable

1,470,000
30,000

3. Cash
Accounts receivable

1,000,000

4. Sales return
Accounts receivable

100,000

5. Sales return
Allowance for sales return

40,000

4,000,000

1,500,000
1,000,000
100,000
40,000

Problem 5-9
Gross method

Net method

July 1 Accounts receivable


Sales
49,000

50,000

2 Accounts receivable
Sales
196,000

200,000

12 Cash
196,000
Sales discount
4,000
196,000
Accounts receivable

July 1 Accounts receivable


Sales

49,000

50,000

2 Accounts receivable
Sales

196,000

200,000

12 Cash
196,000
Accounts receivable
200,000

30 Cash
50,000
Accounts receivable
49,000
1,000

50,000

30 Cash
50,000
Accounts receivable
Sales discount forfeited

Problem 5-10
a. Credit sales (75% x 5,000,000)

3,750,000

Doubtful accounts (2% x 3,750,000)


Doubtful accounts
Allowance for doubtful accounts

75,000
75,000
75,000

b. Doubtful accounts (1% x 5,000,000)


Allowance for doubtful accounts

50,000
50,000

57

c. Required allowance
Less: Credit balance of allowance
Doubtful accounts expense
Doubtful accounts
Allowance for doubtful accounts

80,000
20,000
60,000
60,000
60,000

d. Required allowance (10% x 500,000)


Less: Credit balance of allowance
Doubtful accounts expense
Doubtful accounts
Allowance for doubtful accounts

50,000
20,000
30,000
30,000
30,000

Problem 5-11
a. Required allowance (5% x 600,000)
Add: Debit balance in allowance account
Doubtful accounts expense
Doubtful accounts
Allowance for doubtful accounts

30,000
10,000
40,000
40,000
40,000

b. Required allowance
Add: Debit balance in allowance account
Doubtful accounts expense
Doubtful accounts
Allowance for doubtful accounts
c. Doubtful accounts (2% x 1,900,000)
Allowance for doubtful accounts

50,000
10,000
60,000
60,000
60,000
38,000
38,000

Problem 5-12
a. Doubtful accounts (3% x 8,000,000)
Allowance for doubtful accounts

240,000

b. Doubtful accounts
Allowance for doubtful accounts

170,000

240,000
170,000

Allowance January 1
Doubtful accounts (squeeze)
Recovery
Total
Accounts written off
Allowance December 31 (8% x 2,000,000)
c. Doubtful accounts
Allowance for doubtful accounts

100,000
170,000
20,000
290,000
130,000
160,000
210,000
210,000

58
Allowance January 1
Doubtful accounts (squeeze)
Recovery
Total
Accounts written off
Allowance December 31

100,000
210,000
20,000
330,000
130,000
200,000

Problem 5-13
Requirement a
1. Accounts receivable
Sales

7,000,000

2. Cash
Sales discount
Accounts receivable(2,450,000/98%)

2,450,000
50,000

3. Cash
Accounts receivable

3,900,000

7,000,000

2,500,000
3,900,000

4. Allowance for doubtful accounts


Accounts receivable

30,000

5. Accounts receivable
Allowance for doubtful accounts

10,000

Cash
Accounts receivable
6. Sales return

30,000
10,000
10,000
10,000
70,000

Accounts receivable

70,000

Requirement b
Doubtful accounts
Allowance for doubtful accounts

40,000
40,000

Rate = 40,000/1,000,000 = 4%
Allowance for doubtful accounts December 31 (4% x 1,500,000)
Less: Allowance before adjustment
Doubtful accounts expense

60,000
20,000
40,000

Requirement c
Accounts receivable December 31
Allowance for doubtful accounts
Net realizable value

1,500,000
( 60,000)
1,440,000

59
Problem 5-14
Requirement a
1. Cash
Accounts receivable
Sales (800,000/10%)
2. Cash
Sales discount (5% x 720,000)
Accounts receivable(10% x 7,200,000)
3. Cash
Accounts receivable

800,000
7,200,000
8,000,000
684,000
36,000
720,000
5,940,000
5,940,000

4. Sales discount
Allowance for sales discount

10,000

5. Sales return
Accounts receivable

80,000

6. Allowance for doubtful accounts


Accounts receivable

60,000

Accounts receivable
Allowance for doubtful accounts
Cash
Accounts receivable

10,000
80,000
60,000
10,000
10,000
10,000
10,000

7. Doubtful accounts
Allowance for doubtful accounts

70,000
70,000

Required allowance December 31 (5% x 2,400,000)


Less: Allowance before adjustment
Doubtful accounts

120,000
50,000
70,000

Rate = 100,000/2,000,000 = 5%
Requirement b
Accounts receivable
Less: Allowance for doubtful accounts
Allowance for sales discount
Net realizable value

2,400,000
120,000
10,000

130,000
2,270,000

60

Problem 5-15
Requirement a
1. Accounts receivable
Sales (3,070,000 470,000)

2,600,000

2. Cash (2,455,000 1,455,000)


Accounts receivable

1,000,000

3. Cash
Sales discount
Accounts receivable (1,455,000/97%)

1,455,000
45,000
1,500,000

4. Allowance for doubtful accounts


Accounts receivable

2,600,000
1,000,000

20,000
20,000

5. Cash
Sales

470,000

6. Sales return and allowances


Accounts receivable

55,000

7. Sales return and allowances


Cash

10,000

8. Accounts receivable
Allowance for doubtful accounts

470,000
55,000
10,000
5,000
5,000

Cash
Accounts receivable

5,000
5,000

7. Doubtful accounts
Allowance for doubtful accounts

50,000
50,000

Credit sales
Less: Sales discount
Sales return and allowances
Net credit sales

2,600,000
45,000
55,000

100,000
2,500,000

Doubtful accounts (2,500,000 x 2%)

50,000

Requirement b
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value

625,000
60,000
565,000

61
Problem 5-16
1. Accounts receivable Jan. 1
1,500,000
Sales
7,935,000
Recovery
15,000
Collections
(8,000,000)
Sales discount
( 115,000)
Writeoff
( 55,000)
Sales return
( 30,000)
Accounts receivable Dec. 31
1,250,000

Amount
1,700,000
1,200,000
100,000
150,000
1,200,000
3,270,000

2. Allowance January 1
Receivables
Doubtful accounts expense (squeeze)
Total
Less: Writeoff (235,000 + 30,000)
Required allowance December 31

4,500,000

2,475,000/99%

2,500,000

Sales discount:
2% x 4,500,000
90,000
1% x 2,500,000
25,000
115,000

Problem 5-17
1. Not yet due
1 30 days past due
31 60 days past due
61 90 days past due
Over 90 days past due

4,410,000/98%

Percent of
Uncollectible
5%
25%
50%
100%

Required
allowance
60,000
25,000
75,000
120,000
280,000
170,000
30,000
345,000
545,000
265,000
280,000

3. Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value

3,270,000
280,000
2,990,000

Problem 5-18
1. 1,000,000 x 1%
400,000 x 5%
300,000 x 10%
200,000 x 25%
60,000 x 100%
1,960,000

10,000
20,000
30,000
50,000
60,000
170,000

2. Allowance January 1
Recoveries
Doubtful accounts (squeeze)
Total
Less: Writeoff (100,000 + 40,000)
Allowance December 31

3. Doubtful accounts
Allowance for doubtful accounts

90,000
20,000
200,000
310,000
140,000
170,000

20,000
20,000

Correct amount
Recorded (2% x 9,000,000)
Understatement

200,000
180,000
20,000

4. Accounts receivable December 31


Less: Allowance for doubtful accounts
Net realizable value

1,960,000
170,000
1,790,000

62
Problem 5-19
2005
2006
2007
Total
26,000
29,000
30,000
85,000
3,000
4,000
9,000
2,000
26,000
26,000
76,000
24,000
76,000
Percentage to be used in computing the allowance = ------------------- = 2%
3,800,000

1. Writeoff
Less: Recoveries
Net writeoff

2. Credit sales for 2008


Multiply by bad debt percentage
Provision for doubtful accounts
3. Accounts receivable January 1, 2008
Add: Credit sales for 2008
Recoveries
Total
Less: Collections in 2008
Writeoff
Accounts receivable December 31, 2008
4. Allowance for doubtful accounts January 1
Add: Doubtful accounts for 2008
Recoveries

3,000,000
2%
60,000
250,000
3,000,000
5,000
2,615,000
40,000

3,005,000
3,255,000
2,655,000
600,000
20,000

60,000
5,000

65,000

Total
Less: Writeoff
Allowance for doubtful accounts December 31

85,000
40,000
45,000

Problem 5-20
1. Accounts receivable December 31, 2007
Add: Sales for 2008
Recovery of accounts written off
Total
Less: Collection from customers
Accounts written off
Accounts settled by issuance of note
Accounts receivable December 31, 2008

600,000
5,000,000
10,000
4,360,000
50,000
200,000

2. Allowance for doubtful accounts December 31, 2007


Add: Recovery of accounts written off
Total
Less: Accounts written off
Allowance before adjustment December 31, 2008 (debit balance)

5,010,000
5,610,000
4,610,000
1,000,000
30,000
10,000
40,000
50,000
(10,000)

63
3. Required allowance December 31, 2008
On current accounts (700,000 x 5%)
On past due accounts (300,000 x 20%)
Total

35,000
60,000
95,000

4. Required allowance December 31, 2008


Add: Debit balance before adjustment
Increase in allowance

95,000
10,000
105,000

5. Doubtful accounts
Allowance for doubtful accounts

105,000
105,000

Problem 5-21
170,000 10,000
Rate in 2007 = ------------------------ = .016
10,000,000
1. Retained earnings (.016 x 1,250,000)
Allowance for doubtful accounts
2. Allowance January 1
Recoveries 2008
Doubtful accounts 2008 (squeeze)
Total
Less: Writeoff 2008

258,000 20,000
Rate in 2008 = -------------------------- = .017
14,000,000
20,000
20,000
20,000
10,000
92,000
122,000
88,000

Allowance December 31 (.017 x 2,000,000)

34,000

3. Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value

2,000,000
34,000
1,966,000

Problem 5-22
1. Allowance January 1, 2008
Doubtful accounts recorded (2% x 20,000,000)
Recovery
Total
Less: Writeoff (300,000 + 100,000)
Allowance balance before adjustment

500,000
400,000
50,000
950,000
400,000
550,000

2. 5,000,000 x 5%
2,000,000 x 10%
1,000,000 x 25%
500,000 100,000 x 75%
Required allowance December 31, 2008

250,000
200,000
250,000
300,000
1,000,000

3. Doubtful accounts
450,000
Allowance for doubtful accounts (1,000,000 550,000)

450,000

64

Problem 5-23
1. Allowance 1/1/2008 (1% x 2,800,000)

28,000

2. Allowance 1/1/2008
Doubtful accounts recorded in 2008 (1% x 3,000,000)
Recovery
Total
Writeoff
Allowance before adjustment

28,000
30,000
7,000
65,000
(27,000)
38,000

3. 300,000 x 1%
80,000 x 5%
60,000 x 20%
25,000 x 80%
Required allowance 12/31/2008
4. Doubtful accounts
Allowance for doubtful accounts (39,000 38,000)

3,000
4,000
12,000
20,000
39,000
1,000
1,000

Problem 5-24
2008
Jan. 1

Loan receivable
Cash

4,000,000
4,000,000

Dec. 31

Cash
Unearned interest income

342,100

Unearned interest income


Cash

150,000

Cash
Interest income

400,000

342,100
150,000
400,000

Unearned interest income


Interest income
Date
01/01/2008
12/31/2008
12/31/2009
12/31/2010

(10%)
Interest received
400,000
400,000
400,000

56,948
56,948
(12%)
Interest income
456,948
463,782
471,370*

Amortization
56,948
63,782
71,370

Carrying value
3,807,900
3,864,848
3,928,630
4,000,000

*12% x 3,928,630 equals 471,435, or a difference of P65 due to rounding.


2009
Dec. 31

2009
Dec. 31
2010
Dec. 31

Cash
Interest income

400,000
400,000

65
Unearned interest income
Interest income

63,782
63,782

Cash
Interest income
Unearned interest income
Interest income
Cash
Loan receivable

400,000
400,000
71,370
71,370
4,000,000
4,000,000

Problem 5-25
2008
Jan. 1

Loan receivable
Cash

3,000,000
3,000,000

Direct origination cost


Cash

260,300

Cash
Direct origination cost

100,000
100,000

260,300

Dec. 31

Cash
Interest income

240,000
240,000

Interest income
Direct origination cost
Date
01/01/2008
12/31/2008
12/31/2009
12/31/2010
2009
Dec. 31

50,382

(8%)
Interest received

(6%)
Interest income

Amortization

240,000
240,000
240,000

189,618
186,595
183,487

50,382
53,405
56,513

Cash
Interest income
Interest income
Direct origination cost

2010
Dec. 31

50,382

Cash
Interest income

Carrying value
3,160,300
3,109,918
3,056,513
3,000,000

240,000
240,000
53,405
53,405

240,000
240,000

66
2010
Dec. 31

Interest income
Direct origination cost
Cash
Loan receivable

56,513
56,513
3,000,000
3,000,000

Problem 5-26
Requirement 1
December 31, 2009 (1,000,000 x .93)
December 31, 2010 (2,000,000 x .86)
December 31, 2011 (3,000,000 x .79)
Total present value of loan

900,000
1,720,000
2,370,000
5,020,000

Requirement 2
Loan receivable 12/31/2008
Accrued interest (6,000,000 x 8%)
Total carrying value
Present value of loan

6,000,000
480,000
6,480,000
5,020,000

Impairment loss

1,460,000

Requirement 3
2008

2009

Impairment loss
Accrued interest receivable
Allowance for loan impairment

1,460,000

Cash
Loan receivable

1,000,000

Allowance for loan impairment


Interest income (8% x 5,020,000)
2010

Cash
Loan receivable
Allowance for loan impairment
Interest income
Loan receivable 12/31/2009
Allowance for loan impairment (980,000 401,600)
Carrying value 12/31/2009

480,000
980,000
1,000,000
401,600
401,600
2,000,000
2,000,000
353,728
353,728
5,000,000
( 578,400)
4,421,600

Interest income for 2010 (8% x 4,421,600)

353,728

67
2011

Cash
Loan receivable
Allowance for loan impairment
Interest income
Loan receivable 12/31/2010
Allowance for loan impairment (578,400 353,672)
Carrying value 12/31/2010
Interest income for 2011 (8% x 2,775,328)
Allowance per book
Difference due to rounding

3,000,000
3,000,000
224,672
224,672
3,000,000
( 224,672)
2,775,328
222,026
224,672
2,646

Problem 5-27
Requirement 1
December 31, 2009 ( 500,000 x .89)
December 31, 2010 (1,000,000 x .80)
December 31, 2011 (2,000,000 x .71)

445,000
800,000
1,420,000

December 31, 2012 (4,000,000 x .64)


Total present value of loan

2,560,000
5,225,000

Requirement 2
Loan receivable
Accrued interest receivable (12% x 7,500,000)
Total carrying value
Present value of loan
Impairment loss

7,500,000
900,000
8,400,000
5,225,000
3,175,000

Requirement 3
2008

2009

2010

Impairment loss
Accrued interest receivable
Allowance for loan impairment

3,175,000
900,000
2,275,000

Cash
Loan receivable

500,000

Allowance for loan impairment


Interest income (12& x 5,225,000)

627,000
627,000

500,000

Cash
Loan receivable

1,000,000
1,000,000

Allowance for loan impairment


Interest income

642,240
642,240

68
Loan receivable 12/31/2009
Allowance for loan impairment (2,275,000 627,000)
Carrying value 12/31/2009

7,000,000
(1,648,000)
5,352,000

Interest income for 2010 (12% x 5,352,000)

642,240

Problem 5-28
December 31, 2011 ( 360,000 x .772) 277,920
December 31, 2012 ( 360,000 x .708) 254,880
December 31, 2013 ( 360,000 x .650) 234,000
December 31, 2014 (4,360,000 x .596) 2,598,560
Total present value of loan
3,365,360
2008

Face value of loan


Present value of loan
Impairment loss

Cash
Interest income

360,000

Impairment loss

634,640

4,000,000
3,365,360
634,640

360,000

Allowance for loan impairment


2009
2010
2011
2012
2013

2014

634,640

Allowance for loan impairment


Interest income (9% x 3,365,360)

302,882

Allowance for loan impairment


Interest income (634,640 302,882)

331,758

Cash
Interest income

360,000

Cash
Interest income

360,000

Cash
Interest income

360,000

Cash
Interest income
Loan receivable

302,882
331,758
360,000
360,000
360,000
4,360,000
360,000
4,000,000

Problem 5-29
12/31/2008

Impairment loss
Allowance for loan impairment

338,500
338,500

The remaining term of the loan is 4 years. Accordingly, the present value
factor for 4 periods is used.

69
Present value of principal (500,000 x .735)
Present value of interest (80,000 x 5 = 400,000 x .735)
Total present value of loan

367,500
294,000
661,500

Loan receivable
Present value of loan
Loan impairment loss
12/31/2009

Allowance for loan impairment


Interest income (8% x 661,500)

1,000,000
661,500
338,500
52,920
52,920

Problem 5-30 Answer B


Accounts receivable-January 1
Credit sales
Collections from customers
Sales return

1,300,000
5,500,000
(5,000,000)
( 150,000)

Accounts written off


Accounts receivable-December 31
Allowance for doubtful accounts
Allowance for sales return
Net realizable value

( 100,000)
1,550,000
( 250,000)
( 50,000)
1,250,000

Problem 5-31 Answer A


Trade accounts receivable
Allowance for doubtful accounts
Claim receivable
Total trade and other receivables

2,000,000
( 100,000)
300,000
2,200,000

Problem 5-32 Answer C


Accounts receivable (squeeze)
Allowance for doubtful accounts (900,000 200,000)
Net realizable value

6,700,000
( 700,000)
6,000,000

Problem 5-33 Answer B


Allowance January 1
Doubtful accounts expense
Recovery of accounts written off
Total
Accounts written off
Allowance December 31

Problem 5-34 Answer D


Allowance January 1
Uncollectible accounts expense (squeeze)
Recovery of accounts written off
Total
Accounts written off
Allowance December 31 (2,700,000 2,500,000)

300,000
650,000
100,000
1,050,000
450,000
600,000

70
280,000
100,000
50,000
430,000
(230,000)
200,000

Problem 5-35 Answer A


Allowance December 2007
Doubtful accounts expense
Total
Accounts written off (squeeze)
Allowance December 2008

180,000
50,000
230,000
30,000
200,000

Problem 5-36 Answer B


0 60 days (1,200,000 x 1%)
61 120 days (900,000 x 2%)
Over 120 days (1,000,000 x 6%)
Allowance December 31, 2008

12,000
18,000
60,000
90,000

Allowance December 31, 2007


Uncollectible accounts expense (squeeze)
Recovery
Total
Accounts written off
Allowance December 31, 2008

60,000
80,000
20,000
160,000
( 70,000)
90,000

Problem 5-37 Answer D


Allowance for sales discount (5,000,000 x 2% x 50%)

50,000

Problem 5-38 Answer A


Problem 5-39 Answer B
Doubtful accounts expense (3% x 3,000,000 + 10,000)

100,000

Problem 5-40 Answer A


Doubtful accounts expense (2% x 7,000,000)

140,000

71

Problem 5-41 Answer A


Allowance January 1
Doubtful accounts expense (4% x 5,000,000)
Collection of accounts written off
Total
Accounts written off
Allowance December 31

40,000
200,000
10,000
250,000
30,000
220,000

Problem 5-42 Answer D


Allowance January 1
Doubtful accounts expense (squeeze)
Total
Accounts written off
Allowance December 31

250,000
175,000
425,000
205,000
220,000

Problem 5-43 Answer A


Problem 5-44 Answer A

72

CHAPTER 6
Problem 6-1
1.
2.
3.
4.
5.

C
C
C
A
C

6.
7.
8.
9.
10.

Problem 6-2
B
C
B
A
C

1.
2.
3.
4.
5.

C
D
C
C
B

6.
7.
8.
9.
10.

A
B
B
B
D

Problem 6-3
March 1 Cash

2,000,000
Note payable bank

April

2,000,000

1 Cash
Sales discount
Accounts receivable

June 1 Cash

980,000
20,000
2,000,000

Accounts receivable

Sept. 1 Note payable bank


Interest expense (12% x 2,000,000 x 6/12)
Cash

1,000,000
2,000,000

2,000,000
120,000
2,120,000

Problem 6-4
Requirement 1
2008
Oct. 1 Cash
Discount on note payable (10% x 4,000,000)
Note payable bank
1 Interest expense (400,000 x 3/12)
Discount on note payable
2009
Oct. 1 Note payable bank
Cash

100,000

4,000,000
100,000

4,000,000
4,000,000

Dec. 31 Interest expense


Discount on note payable
Current liabilities:
Note payable bank (Note 3)
Discount on note payable
Carrying value

3,600,000
400,000

300,000

300,000

Requirement 2
4,000,000
( 300,000)
3,700,000

73
Note 3 Note payable bank
Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000.
Problem 6-5
May 1 Accounts receivable assigned
Accounts receivable

800,000

1 Cash (640,000 20,000)


Service charge
Note payable bank

620,000
20,000

5 Sales return
Accounts receivable assigned

30,000

10 Cash
Sales discount (2% x 500,000)
Accounts receivable assigned

490,000
10,000

June 1 Note payable bank


Interest expense (2% x 640,000)
Cash

July

490,000
12,800
10,000

20 Cash
Accounts receivable assigned

200,000

1 Accounts receivable
Accounts receivable assigned
Accounts receivable assigned
Less: Collections
Sales discount
Sales return
Worthless accounts
Balance

640,000
30,000

7 Allowance for doubtful accounts


Accounts receivable assigned

1 Note payable bank (640,000 490,000)


Interest expense (2% x 150,000)
Cash

800,000

500,000

502,800
10,000
200,000

150,000
3,000
153,000
60,000
60,000
800,000
690,000
10,000
30,000
10,000

740,000
60,000

Problem 6-6
July 1 Accounts receivable assigned
Accounts receivable

1,500,000

1,500,000

74
July 1 Cash (1,125,000 60,000)
Service charge (4% x 1,500,000)
Note payable bank

1,065,000
60,000

Aug. 1 Note payable bank


Accounts receivable assigned

800,000

1 Interest expense (2% x 1,125,000)


Cash

22,500

Sept. 1 Cash
Interest expense
Note payable bank
Accounts receivable assigned

168,500
6,500
325,000

Accounts receivable
Accounts receivable assigned

200,000

Collections by bank
Less: Payment of loan (1,125,000 800,000)
Excess collection
Less: Interest (2% x 325,000)
Cash remittance from bank

1,125,000
800,000
22,500

500,000
200,000
500,000
325,000
175,000
6,500
168,500

Problem 6-7
July 1 Accounts receivable assigned
Accounts receivable
1 Cash (400,000 10,000)
Service charge (2% x 500,000)
Note payable bank
Aug. 1 Cash
Accounts receivable assigned
1 Interest expense (1% x 400,000)
Note payable bank
Cash
Sept. 1 Cash
Accounts receivable assigned
1 Interest expense (1% x 74,000)
Note payable bank
Cash

500,000
390,000
10,000
330,000

500,000

400,000
330,000

4,000
326,000
330,000
170,000
740
74,000

170,000

74,740

75

Problem 6-8
Requirement a
Dec. 1 Accounts receivable assigned
Accounts receivable

1,500,000

1 Cash
Service charge
Note payable bank

1,250,000
50,000

31 Cash
Sales discount
Accounts receivable assigned

970,000
30,000

31 Interest expense (1% x 1,300,000)


Note payable bank
Cash

13,000
957,000

1,500,000

1,300,000

1,000,000

970,000

Requirement b
The accounts receivable assigned with a balance of P500,000 should be classified
as current asset and included in trade and other receivables.
The note payable bank of P343,000 should be classified and presented as a current liability.
The company should disclose the equity in assigned accounts as follows:
Accounts receivable assigned
Note payable bank
Equity in assigned accounts

500,000
(343,000)
157,000

Problem 6-9
July

1 Accounts receivable assigned


Accounts receivable

800,000

1 Cash (640,000 24,000)


Service charge (3% x 800,000)
Note payable bank

616,000
24,000

Aug. 1 Interest expense (1% x 640,000)


Note payable bank
Accounts receivable assigned

6,400
413,600

Sept. 1 Cash
Interest expense
Note payable bank
Accounts receivable assigned

91,336
2,264
226,400

800,000

640,000

420,000

320,000
76

Accounts receivable
Accounts receivable assigned

60,000
60,000

Bank loan
August 1 payment
Balance
Collections by bank
Less: Payment of loan
Interest (1% x 226,400)
Remittance from bank

640,000
413,600
226,400
226,400
2,264

320,000
228,664
91,336

Problem 6-10
Cash
Allowance for doubtful accounts
Loss on factoring
Accounts receivable

400,000
30,000
70,000

500,000

Problem 6-11
Cash
Receivable from factor
Allowance for bad debts
Loss on factoring
Accounts receivable

5,000,000
300,000
250,000
450,000

6,000,000

Problem 6-12
Feb. 1 Cash
Service charge (5% x 800,000)
Receivable from factor (10% x 800,000)
Accounts receivable

680,000
40,000
80,000
800,000

15 Sales return and allowances


Receivable from factor

20,000

28 Cash (80,000 20,000)


Receivable from factor

60,000

20,000
60,000

Problem 6-13
June 1 Accounts receivable
Sales

500,000
500,000

77

June 3 Cash
Sales discount (2% x 500,000)
Commission (5% x 500,000)
Receivable from factor (25% x 500,000)
Accounts receivable
9 Sales return and allowances
Sales discount (2% x 50,000)
Receivable from factor

340,000
10,000
25,000
125,000
50,000

500,000
1,000
49,000

11 No entry
15 Cash (125,000 49,000)
Receivable from factor

76,000

76,000

Problem 6-14
July 26 Cash
Commission (5% x 1,000,000)
Receivable from factor (20% x 1,000,000)
Accounts receivable

750,000
50,000
200,000

July 28 Sales return and allowances


Receivable from factor

50,000

Aug. 31 Cash
Receivable from factor

150,000

1,000,000
50,000
150,000

Problem 6-15
1. Cash
Service charge (5% x 200,000)
Receivable from factor (20% x 200,000)
Accounts receivable

150,000
10,000
40,000

2. Accounts receivable assigned


Accounts receivable

300,000

Cash
Service charge (5% x 300,000)
Note payable bank

225,000
15,000

3. Doubtful accounts
Allowance for doubtful accounts
Required allowance (5% x 1,300,000)
Less: Allowance January 1
Doubtful accounts

200,000
300,000

240,000
35,000

35,000
65,000
30,000
35,000
78

4. The net realizable value of the accounts receivable is included in trade and other
receivables and presented as current asset.
Accounts receivable unassigned
Accounts receivable assigned
Total
Less: Allowance for doubtful accounts
Net realizable value

1,000,000
300,000
1,300,000
65,000
1,235,000

The receivable from factor of P40,000 is also included in trade and other receivables.
The note payable bank of P240,000 is classified and presented as current liability.
However, the company should disclose the equity in assigned accounts as follows:
Accounts receivable assigned
Note payable bank
Equity in assigned accounts

300,000
(240,000)
60,000

Problem 6-16
Books of Motorway Company
1. Cash
Receivable from factor
Allowance for doubtful accounts
Loss on factoring
Accounts receivable

2,250,000
300,000
100,000
350,000

3,000,000

Gross amount
Holdback (10% x 3,000,000)
Commission (15% x 3,000,000)
Cash received

(
(

Sales price (3,000,000 x 85%)


Book value of accounts receivable (3,000,000 100,000)
Loss on factoring

2,250,000
2,900,000
( 350,000)

2. Cash
Receivable from factor
Accounts receivable factored
Collections by factor
Balance December 31
Receivable from factor per book
Required holdback (10% x 500,000)
Remittance from factor

Books of Freeway Company (factor)

250,000

3,000,000
300,000)
450,000)
2,250,000

250,000
3,000,000
2,500,000
500,000
300,000
50,000
250,000

79

1. Accounts receivable
Cash
Clients retainer
Commission income

3,000,000

2. Cash
Accounts receivable

2,500,000

3. Clients retainer
Cash
4. Doubtful accounts
Allowance for doubtful accounts (4% x 500,000)

2,250,000
300,000
450,000

250,000
20,000

2,500,000
250,000
20,000

Problem 6-17
Jan. 15 Notes receivable
Sales

500,000

Feb. 15 Cash
Interest expense
Notes receivable discounted

496,875
3,125

500,000

Principal
Interest (500,000 x 12% x 6/12)
Maturity value
Discount (530,000 x 15% x 5/12)
Net proceeds
July 15 Notes receivable discounted
Notes receivable

500,000
500,000
30,000
530,000
33,125
496,875

500,000

500,000

Problem 6-18
March 14 Accounts receivable
Sales

2,050,000

April

7 Notes receivable
Freight out
Accounts receivable

2,000,000
50,000

April 20 Cash
Notes receivable discounted
Interest income

2,001,750

2,050,000

2,050,000
2,000,000
1,750

80

Principal
Add: Interest (2,000,000 x 12% x 60/360)
Maturity value
Less: Discount (2,040,000 x 15% x 45/360)
Net proceeds
June 4

July

2,000,000
40,000
2,040,000
38,250
2,001,750

Accounts receivable (2,040,000 + 10,000)


Cash

2,050,000

Notes receivable discounted


Notes receivable

2,000,000

Cash
Accounts receivable
Interest income (2,000,000 x 12% x 30/360

2,070,000

2,050,000
2,000,000
2,050,000
20,000

Problem 6-19
Requirement a
April 5 Notes receivable
Accounts receivable
19 Cash
Notes receivable discounted
Interest income

500,000
501,075

Principal
Add: Interest (500,000 x 12% x 60/360)
Maturity value
Less: Discount (510,000 x 14% x 45/360)
Net proceeds
May 3 Notes receivable
Accounts receivable
16 Cash
Interest expense
Notes receivable discounted

500,000
1,075
500,000
10,000
510,000
8,925
501,075

1,000,000
1,000,000
995,000
5,000

Principal
Less: Discount (1,000,000 x 12% x 15/360)
Net proceeds
May 25 Notes receivable
Interest income
Accounts receivable

500,000

1,000,000
1,000,000
5,000
995,000

1,500,000
4,500

1,504,500
81

Principal

1,500,000

Add: Interest (1,500,000 x 12% x 60/360)


Maturity value
Less: Discount (1,530,000 x 12% x 50/360)
Net credit
June 7 Accounts receivable (510,000 + 20,000)
Cash
Notes receivable discounted
Notes receivable
15 Notes receivable
Sales
June 18 Cash
Accounts receivable
Interest income (530,000 x 12% x 15/360)

30,000
1,530,000
25,500
1,504,500
530,000
500,000
800,000
532,650

530,000
500,000
800,000
530,000
2,650

Requirement b Adjustments on June 30


1. Accrued interest receivable
Interest income (800,000 x 12% x 15/360)

4,000

4,000

Accrued interest on Ds note.


2. Notes receivable discounted
Notes receivable

1,000,000

1,000,000

To cancel the contingent liability on Bs note. This note matured on May 31.
Since there is no notice of dishonor it is assumed that the said note is paid on
the date of maturity.
Problem 6-20
May

1 Notes receivable
Accounts receivable

200,000

1 Notes receivable
Accounts receivable

300,000

July 30 Accounts receivable


Notes receivable
Interest income (200,000 x 12% x 90/360)

206,000

Aug. 1 Cash
Note receivable discounted
Interest income

306,075

200,000
300,000
200,000
6,000
300,000
6,075
82

Principal

300,000

Interest (300,000 x 12% x 6/12)


Maturity value
Less: Discount (318,000 x 15% x 3/12)
Net proceeds
Sept. 1 Notes receivable
Accounts receivable
Interest income
28 Cash
Accounts receivable
Interest income (206,000 x 12% x 60/360)

18,000
318,000
11,925
306,075
132,000

210,120

Oct. 1 Notes receivable


Sales

500,000

Nov. 1 Accounts receivable (318,000 + 12,000)


Cash

330,000

Notes receivable discounted


Notes receivable
Dec. 30 Cash

31 Cash

Notes receivable
Interest income (500,000 x 12% x 90/360
Accounts receivable
Interest income (330,000 x 12% x 2/12)

120,000
12,000
206,000
4,120
500,000

300,000
515,000

336,600

330,000
300,000
500,000
15,000
330,000
6,600

Problem 6-21
2008
Jan. 1 Cash
Notes receivable
Land
Gain on sale of land
Dec. 31 Accrued interest receivable
Interest income (12% x 6,000,000)
2009
Dec. 31 Accrued interest receivable
Interest income (12% x 6,720,000)
2010
Jan. 1 Cash

Notes receivable
Accrued interest receivable

1,000,000
6,000,000

720,000

806,400

7,526,400

5,000,000
2,000,000
720,000

806,400

6,000,000
1,526,400
83

Problem 6-22
Jan. 1 Notes receivable
Sales
Unearned interest income

600,000

Dec. 31 Cash
Notes receivable

200,000
200,000

31 Unearned interest income


Interest income
Year
2008
2009
2010

540,000
60,000

30,000
30,000

Notes receivable
600,000
400,000
200,000
1,200,000

Fraction
6/12
4/12
2/12

Interest income
30,000
20,000
10,000
60,000

Problem 6-23
Face value
Present value (300,000 x 2.4018)
Unearned interest income

900,000
720,540
179,460

Present value
Cash received
Sales price
Cost of generator
Gross income

Jan. 1 Cash
Notes receivable
Sales
Unearned interest income

100,000
900,000

Dec. 31 Cash

300,000
Notes receivable

820,540
179,460
300,000

31 Unearned interest income


Interest income
Date
Jan. 1, 2008
Dec. 31, 2008
Dec. 31, 2009
Dec. 31, 2010

720,540
100,000
820,540
700,000
120,540

86,465
86,465

Collection

Interest

Principal

300,000
300,000
300,000

86,465
60,841
32,154

213,535
239,159
267,846

Present value
720,540
507,005
267,846
-

84
Problem 6-24

Requirement 1
12/31/2008

Note receivable
Sales (500,000 x 3.99)
Unearned interest income

2,500,000

12/31/2009

Cash
Note receivable

500,000

Unearned interest income


Interest income (8% x 1,995,000)

159,600

1,995,000
505,000
500,000
159,600

Requirement 2
Note receivable (2,500,000 500,000)
Unearned interest income (505,000 159,600)
Book value 12/31/2009

2,000,000
345,400)
1,654,600

Requirement 3
Interest income for 2010 (8% x 1,654,600)

132,368

Problem 6-25
Face value of note
Present value (400,000 x .7118)
Unearned interest income

400,000
284,720
115,280

2008
Jan. 1 Cash
Notes receivable
Accumulated depreciation
Equipment
Gain on sale of equipment
Unearned interest income
Dec. 31 Unearned interest income
Interest income
Date
Jan. 01, 2008
Dec. 31, 2008
Dec. 31, 2009
Dec. 31, 2010

Interest income
34,166
38,266
42,848

2009
Dec. 31 Unearned interest income
Interest income

Present value
Cash received
Sales price
Book value
Gain on sale

284,720
125,000
409,720
350,000
59,720

125,000
400,000
150,000
500,000
59,720
115,280
34,166
Unearned interest
115,280
81,114
42,848
38,266

34,166
Present value
284,720
318,886
357,152
400,000

38,266
85

2010
Dec. 31 Unearned interest income
Interest income

42,848
42,848

2011
Jan. 1 Cash
Notes receivable

400,000

400,000

Problem 6-26
1/1/2008

Note receivable
Loss on sale of land
Land
Unearned interest income

9,000,000
250,000

PV of note (9,000,000 x .75)


Carrying amount of land
Loss on sale

7,000,000
2,250,000
6,750,000
7,000,000
( 250,000)

12/31/2008

Unearned interest income


Interest income (10% x 6,750,000)

675,000

12/31/2009

Unearned interest income


Interest income (10% x 7,425,000)

742,500

12/31/2010

Unearned interest income


Interest income (2,250,000 1,417,500)

832,500

1/1/2011

Cash
Note receivable

9,000,000

675,000
742,500
832,500
9,000,000

Problem 6-27 Answer C


Note payable
Discount on note payable (1,000,000 x 10.8%)
Net proceeds
Discount on note payable
Amortization from August 1 to December 31 (108,000 x 5/12)
Balance December 31, 2008
Note payable
Discount on note payable
Carrying value

1,000,000
( 108,000)
892,000
108,000
( 45,000)
63,000
1,000,000
( 63,000)
937,000

Problem 6-28
Question 1 Answer A
Problem 6-29 Answer A

Question 2 - Answer B

86

Problem 6-30 Answer C


Principal
Add: Interest (500,000 x 8%)
Maturity value
Less: Discount
(540,000 x 10% x 6/12)
Net proceeds

Problem 6-31 Answer C


500,000
40,000
540,000
27,000
513,000

Principal
Less: Discount
(200,000 x 10% x 6/12)
Net proceeds

200,000
10,000
190,000

Problem 6-32 Answer A


Principal
Interest (4,000,000 x 12% x 90/360)
Maturity value
Less: Discount (4,120,000 x 15% x 60/360)
Net proceeds
Principal
Interest revenue
Problem 6-33 Answer C
Principal
Add: Interest
(600,000 x 10% x 6/12)
Maturity value
Less: Discount
(630,000 x 12% x 4/12)
Net proceeds

4,000,000
120,000
4,120,000
103,000
4,017,000
4,000,000
17,000

Problem 6-34 Answer B


600,000
30,000
630,000
25,200
604,800

Note receivable June 30, 2007


Less: Payment on July 1, 2008
Balance July 1, 2008
Accrued interest from July 1, 2008
to June 30, 2009 (1,000,000 x 8)

1,500,000
500,000
1,000,000
80,000

Problem 6-35 Answer C


Problem 6-36 Answer A
First payment on January 1, 2008
Present value of remaining six payments (600,000 x 4.36)
Correct sales revenue

600,000
2,616,000
3,216,000

Problem 6-37 Answer D

Problem 6-38 Answer C

Note receivable
1,000,000
Unearned interest income
( 435,000)
Carrying value equal to present
value (100,000 x 5.65)
565,000

The note receivable is shown at its value on


December 31, 2008.
Face value remaining nine
payments (500,000 x 9)
Present value (500,000 x 6.25)
Unearned interest income

4,500,000
3,125,000
1,375,000
87

Problem 6-39
1. Answer C

Note receivable
Present value of note receivable (6,000,000 x .75)
Unearned interest income

6,000,000
4,500,000
1,500,000

Interest income:
2008 (10% x 4,500,000)
2009 (10% x 4,950,000)
2010 (1,500,000 450,000 495,000)
Total

450,000
495,000
555,000
1,500,000

2. Answer D
Present value of note receivable
Carrying amount of equipment
Loss on sale of equipment

4,500,000
4,800,000
( 300,000)

Problem 6-40 Answer B


Present value of note receivable (1,000,000 x .712)
Book value of equipment
Loss on sale

712,000
800,000
( 88,000)

Interest income for first year (12% x 712,000)

85,440

Problem 6-41 Answer D


NR from Hart

1,000,000

NR from Maxx (1,150,000 x .68)

782,000

88

CHAPTER 7
Problem 7-1
1.
2.
3.
4.

D
B
D
D

Problem 7-2
1.
2.
3.
4.

D
D
A
C

Problem 7-3
1.
2.
3.
4.

B
A
A
C

Problem 7-4
1.
2.
3.
4.

D
C
C
A

Problem 7-5
1.
2.
3.
4.

C
B
A
C

5.
6.
7.
8.
9.
10.

D
D
C
A
A
A

5.
6.
7.
8.
9.
10.

D
A
D
A
A
B

5.
6.
7.
8.
9.
10.

C
D
C
A
A
D

5.
6.
7.
8.
9.
10.

A
C
A
C
A
C

5.
6.
7.
8.
9.
10.

D
D
A
B
B
A

Problem 7-6
Items counted in the bodega
Items included in count specifically segregated per sales contract
Items returned by customer
Items ordered and in receiving department
Items shipped today, FOB destination
Items for display
Items on counter for sale
Damaged and unsalable items included in count
Items in shipping department

4,000,000
( 100,000)
50,000
400,000
150,000
200,000
800,000
( 50,000)
250,000
5,700,000

Problem 7-7
Materials
Goods in process
Finished goods in factory
Finished goods in company-owned retail store (750,000/150%)
Finished goods in the hands of consignees (400,000 x 60%)
Finished goods in transit
Finished goods out on approval
Materials in transit (330,000 + 30,000)
Correct inventory

1,400,000
650,000
2,000,000
500,000
240,000
250,000
100,000
360,000
5,500,000

Problem 7-8
Finished goods
Finished goods held by salesmen
Goods in process (720,000/80%)
Materials
Materials returned to suppliers for replacement
Factory supplies (110,000 + 60,000)
Correct inventory

2,000,000
100,000
900,000
1,000,000
100,000
170,000
4,270,000
89

Problem 7-9
1. Inventory
Income summary

50,000

2. Accounts payable
Purchases

75,000

3. Purchases

30,000

50,000
75,000

Accounts payable

30,000

Inventory
Income summary

30,000

4. Income summary
Inventory

90,000

5. Purchases
Accounts payable

140,000

30,000
90,000
140,000

Problem 7-10
1. EXCLUDE The term of the shipment is FOB destination.
2. EXCLUDE The goods are held only for consignment.
3. INCLUDE There is no perfected sale yet as of December 31, 2008.
4. INCLUDE The term FOB suppliers warehouse is synonymous with FOB shipping point.
5. EXCLUDE There is already a constructive delivery since the article was specifically
made according to the customers specifications and the article is already
completed on December 31, 2008.
Problem 7-11
Inventory before adjustment
Goods out on consignment
Goods purchased FOB shipping point
Goods sold FOB shipping point
Goods sold FOB destination
Goods sold FOB destination
Correct December 31 inventory

7,600,000
1,000,000
250,000
( 850,000)
260,000
840,000
9,100,000

90

Problem 7-12
Inventory per book
Item 3 (18,500 1,000 / 140%)
Item 4 (50,000 + 2,500)
Item 5 (35,000 / 140% = 25,000 + 2,000)
Adjusted inventory

950,000
12,500
52,500
27,000
1,042,000

Problem 7-13
Requirement a

Periodic System
1. Purchases
Accounts payable
800,000

Perpetual System
800,000

2. Accounts payable
Purchase returns
50,000

50,000

3. Accounts payable
Cash

600,000

50,000

4. Accounts receivable
1,580,000
Sales
1,580,000

600,000

1,580,000

2. Accounts payable
50,000
Merchandise inventory
3. Accounts payable
Cash

6. Cash
Accounts receivable
40,000

40,000

1,360,000
1,360,000
60,000

600,000
600,000

4. Accounts receivable

1,580,000

5. Sales return
40,000
Accounts receivable
790,000

7. Inventory-Dec. 31
Income summary
20,000
(60 x 1,000)

1. Merchandise inventory
800,000
800,000
Accounts payable

Sales
Cost of sales
790,000
Merchandise inventory
5. Sales return
Accounts receivable

40,000

Merchandise inventory
20,000
60,000
Cost of sales
6. Cash
1,360,000
Accounts receivable
1,360,000
7. Inventory shortage
10,000
Merchandise inventory

10,000

Merchandise inventory per book


Physical count
Shortage

70,000
60,000
10,000

Requirement b
Periodic System

Perpetual System

Inventory January
90,000
Cost of sales recorded
Purchases
800,000
(790,000 20,000)
770,000
Inventory shortage
Purchase returns
( 50,000) 750,000
10,000
Goods available for sale
840,000
Adjusted cost of sales
780,000
Less: Inventory December 31
60,000
Cost of sales
780,000

91
Problem 7-14
Company A
List price
Less: First trade discount (20% x 500,000)

Third trade discount (10% x 360,000)


Invoice price
Less: Cash discount (2% x 324,000)
Payment within the discount period

500,000
100,000
400,000
40,000
360,000
36,000
324,000
6,480
317,520

Company B
List price
Less: Trade discount (35% x 500,000)
Invoice price
Less: Cash discount (2% x 325,000)
Payment within the discount period

500,000
175,000
325,000
6,500
318,500

Second trade discount (10% x 400,000)

Problem 7-15
Requirement a
Gross method
1. Purchases
4,750,000
Accounts payable
4,655,000
2. Freight in
Cash
250,000

Net method
1. Purchases
4,750,000

250,000

4,655,000
Accounts payable

2. Freight in
250,000

250,000
Cash

3. Accounts payable
1,650,000
3. Accounts payable
Cash
1,617,000
Cash
1,617,000
Purchase discount
33,000
Accounts payable
Cash

2,100,000
2,100,000

4. No entry

5. Inventory
Income summary
981,000

Accounts payable
2,058,000
Purchase discount lost
42,000
Cash
2,100,000
4. Purchase discount lost
Accounts payable
(1,000,000 x 2%)

1,000,000

5. Inventory
1,000,000

1,617,000

20,000

981,000
Income summary

20,000

92
Requirement b
Gross method

Net method

Purchases
Freight in
Total
Less: Purchase discounts
Goods available for sale
Less: Inventory December 31
Cost of sales

4,750,000
250,000
5,000,000
33,000
4,967,000
1,000,000
3,967,000

4,655,000
250,000
4,905,000
-___
4,905,000
981,000
3,924,000

Ending inventory:
Gross (5,000,000/5)
Net (4,905,000/5)

1,000,000

981,000

Problem 7-16
Gross method
Sept. 1 Purchases
Accounts payable

650,000

1 Freight in
Accounts payable

20,000

7 Accounts payable
Purchase returns and allowances

10,000

Oct. 1 Accounts payable


Cash

660,000

650,000
20,000
10,000
660,000

Net method
Sept. 1 Purchases
Accounts payable

637,000

1 Freight in
Accounts payable

20,000

7 Accounts payable (10,000 x 98%)


Purchase returns and allowances
Oct. 1 Accounts payable (657,000 9,800)
Purchase discount lost (2% x 640,000)
Cash

9,800

637,000
20,000
9,800

647,200
12,800
660,000

93

Problem 7-17
Gross method

Net method

1. Merchandise inventory
Accounts payable
980,000

1,000,000

2. Accounts payable
Cash
50,000

50,000

3. Accounts payable
Cash
784,000
Cost of sales

800,000

4. Accounts payable
Cash

150,000

5. Cash
Sales
1,200,000

1,000,000

50,000

784,000

1. Merchandise inventory 980,000


Accounts payable

2. Accounts payable
Cash

50,000

3. Accounts payable
784,000
Cash (800,000 x 98%)

16,000
150,000

1,200,000
1,200,000

Cost of sales
700,000
Merchandise inventory
686,000
(1,000,000 x 70%)

700,000

Problem 7-18
1. FIFO - periodic
Lot No. 4
5
2. Beginning inventory
Purchases: Lot No. 1
2
3
4
5
Goods available for sale
Weighted average (4,855,000/50,000)

4. Accounts payable
Purchase discount lost
Cash
5. Cash
Sales

146,000
4,000
150,000
1,200,000

Cost of sales
686,000
Merchandise inventory
(980,000 x 70%)
Units

Unit cost

Total cost

500
14,500
15,000

100
90

50,000
1,305,000
1,355,000

10,000
2,000
8,000
6,000
9,500
14,500
50,000

80
100
110
120
100
90

800,000
200,000
880,000
720,000
950,000
1,305,000
4,855,000

15,000

97.10

1,456,500

3. Specific identification
Lot 3
4

FIFO
Weighted average
Specific identification

6,000
9,000
15,000
Goods available
4,855,000
4,855,000
4,855,000

120
100

Inventory-Dec. 31
1,355,000
1,456,500
1,620,000

720,000
900,000
1,620,000
Cost of sales
3,500,000
3,398,500
3,235,000
94

Problem 7-19
FIFO
December 17
22
Average method
December 1
7
17
22
Available for sale
Inventory (5,580,000/120,000)

Units

Unit cost

Total cost

10,000
20,000
30,000

45
43

450,000
860,000
1,310,000

10,000
30,000
60,000
20,000
120,000

52
50
45
43

520,000
1,500,000
2,700,000
860,000
5,580,000

46.50

1,395,000

30,000

FIFO
5,580,000
1,310,000
4,270,000

Goods available for sale


Less: Inventory December 31
Cost of goods sold

Average
5,580,000
1,395,000
4,185,000

Problem 7-20
The stock cards are not prepared anymore. The end results are simply given.
Units
FIFO
Ending inventory

Unit cost
210

4,000

Cost of sales
Average method
Ending inventory

Total cost
840,000
2,700,000

252.50

4,000

Cost of sales

1,010,000
2,530,000

Problem 7-21
2006
2007
2008

Purchases
5,000
9,000
15,000

Sales
4,000
7,000
12,000

Inventory increment
1,000
2,000
3,000

Total inventory December 31, 2008 (units)

6,000

Sales
Cost of sales:
Inventory December 31, 2007 (3,000 x 60)
Purchases
Goods available for sale
Less: Inventory December 31, 2008 (6,000 x 75)
Gross income
Problem 7-22

1,200,000
180,000
1,125,000
1,305,000
450,000

855,000
345,000
95

FIFO
October 1

Units

Unit cost

15,000

60

900,000

Weighted average periodic


January 1
April
1
October 1
Goods available for sale
Less: Sales
Ending inventory

10,000
15,000
25,000
50,000
35,000
15,000

40
50
60

400,000
750,000
1,500,000
2,650,000

Weighted average (2,650,000/50,000)

15,000

53

795,000

Moving average perpetual


January 1
31
Balance
April 1
Total
July 31
Balance
October 1
Total
December 31
Balance

Units
10,000
( 5,000)
5,000
15,000
20,000
(18,000)
2,000
25,000
27,000
(12,000)
15,000
FIFO

Inventory January 1
Purchases
Goods available for sale
Less: Inventory December 31
Cost of sales
Cost of sales Weighted average perpetual
January
31 Sale
July
31 Sale
December 31 Sale

400,000
2,250,000
2,650,000
900,000
1,750,000

Unit cost
40
40
40
50
47.50
47.50
47.50
60__
59.07
59.07
59.07

Total cost

Total cost
400,000
( 200,000)
200,000
750,000
950,000
( 855,000)
95,000
1,500,000
1,595,000
( 708,840)
886,160

Weighted average
400,000
2,250,000
2,650,000
795,000
1,855,000
200,000
855,000
708,840

Total cost of sales


Problem 7-23
FIFO
October 1 purchase

Weighted average
January 1
April
5
October 1
Goods available for sale
Inventory December 31 (9,200,000/1,000)

1,763,840
Units

Unit cost

Total cost

300

10,000

3,000,000

Units

Unit cost

96
Total cost

200
300
500
1,000

7,500
9,000
10,000

1,500,000
2,700,000
5,000,000
9,200,000

300

9,200

2,760,000

FIFO
Inventory January 1
Purchases
Goods available for sale
Less: Inventory December 31
Cost of goods sold

Weighted average

1,500,000
7,700,000
9,200,000
3,000,000
6,200,000

1,500,000
7,700,000
9,200,000
2,760,000
6,440,000

Problem 7-24
Sales
Gross profit
Cost of goods sold
Inventory July 31 (see below)
Cost of goods available for sale
Purchases for July
Inventory July 1
July 12
25
FIFO inventory July 31

6,000,000
(2,400,000)
3,600,000
928,000
4,528,000
(3,174,000)
1,354,000
Quantity
1,000
14,000
15,000

Unit cost
60
62

Total cost
60,000
868,000
928,000

Problem 7-25
1. Cost of units available for sale for July
Purchases for July
Cost of inventory July 1
Number of units July 1 (410,000 / P4)
2. July 1 inventory
Purchases for July

1,452,100
(1,042,100)
410,000
102,500
102,500
200,000

Total units available for sale for July


July 31 inventory
Units sold during the month of July

302,500
( 60,000)
242,500

3. Average unit cost (1,452,100 / 302,500)


Inventory July 31 (60,000 x 4.80)

4.80
288,000

Another computation (1,452,100 1,164,100)

288,000
97

Problem 7-26

Units

Average unit cost

1. Inventory December 31, 2007


2007 layer

11,000

2. Inventory December 31, 2006


Purchases 2007
Materials available
Less: Inventory December 31, 2007
Raw materials used 2007

14,000
12,000
26,000
11,000
15,000

3. Inventory December 31, 2008


2008 layer

15,000

4. Inventory December 31, 2007


Purchases 2008
Materials available
Less: Inventory December 31, 2008
Raw materials used 2008

11,000
20,000
31,000
15,000
16,000

138
138

153
153

Total cost
1,518,000
1,480,000
1,656,000
3,136,000
1,518,000
1,168,000
2,295,000
1,518,000
3,060,000
4,578,000
2,295,000
2,283,000

Problem 7-27
Available for sale
Units sold (2,800,000/100)
Ending inventory
FIFO
September 5
25
Weighted average (1,753,500/42,000)
Available for sale
Less: Ending inventory

42,000
28,000
14,000
Units

Unit cost

Total cost

2,000
12,000
14,000

43.00
42.50

86,000
510,000
596,000

14,000

41.75

584,500

Average
1,753,500
584,500

FIFO
1,753,500
596,000

Cost of sales

1,169,000

1,157,500

(Sch. 1)

(Sch. 2)

98
Problem 7-28
Cost of sales Average
Understatement of ending inventory:
2006
2007
2008
Cost of sales FIFO
Sales
Cost of sales FIFO
Gross income
Operating expenses
Operating income
Proof
Net income Average
Understatement of ending inventory:
2006
2007
2008
Net income FIFO

2006
1,500,000

2007
2,000,000

2008
2,400,000

( 150,000)
_______
1,350,000

150,000
( 200,000)
________
1,950,000

200,000
( 270,000)
2,330,000

2006
3,000,000
1,350,000
1,650,000
800,000
850,000

2007
4,000,000
1,950,000
2,050,000
900,000
1,150,000

2008
4,800,000
2,330,000
2,470,000
1,000,000
1,470,000

700,000

1,100,000

1,400,000

150,000)
200,000
_____
1,150,000

( 200,000)
270,000
1,470,000

150,000

_______
850,000

Problem 7-29
Materials:
R
S
T

Units

Lower of
cost or NRV

1,000
2,000
3,000

100
250
300

100,000
500,000
900,000

Goods in process:
X
Y

4,000
5,000

480
620

1,920,000
3,100,000

Finished goods:
A
B

2,000
2,000

790
730

1,580,000
1,460,000

Inventory value

Valuation at lower of cost or NRV

9,560,000

99

Problem 7-30
Units
1,000
1,500
1,200
1,800
1,700

A
B
C
D
E

Unit cost
120
110
150
140
130

NRV
150
120
140
160
160

(Lower of cost or NRV)


Inventory value
120,000
165,000
168,000
252,000
221,000
926,000

Problem 7-31
Product
1
2
3
4

Unit cost
700
475
255
450

NRV
650
745
250
740

Lower of cost or NRV


650
475
250
450

Units

Unit cost

NRV

Lower of cost or NRV

500
300

2,500
3,700

2,700
3,600

1,250,000
1,080,000

Car accessories
C
600
D
800
Valuation at lower of cost or NRV

1,400
2,100

2,000
2,000

840,000
1,600,000
4,770,000

Problem 7-32
Appliances:
A
B

Problem 7-33
1. September 30 (40,000 x 75)
December 31 (10,000 x 90)
Total FIFO cost
NRV (50,000 x 72)
Loss on inventory writedown
Inventory January 1
Purchases
Purchase discount
Goods available for sale
Less: Inventory December 31
Cost of goods sold before inventory writedown
Loss on inventory writedown

3,000,000
900,000
3,900,000
3,600,000
300,000
1,200,000
9,400,000
( 400,000)
10,200,000
3,900,000
6,300,000
300,000

Cost of goods sold after inventory writedown


2. Inventory December 31
Income summary

6,600,000
3,900,000

3,900,000
100

Loss on inventory writedown


Allowance for inventory writedown

300,000

300,000

Problem 7-34
a. No adjustment is necessary because the market price is higher than the agreed price.
Any gain on purchase commitment is not recognized.
b. No adjustment is necessary because the market price has not declined as of December
31, 2008. The market decline is only a possible loss.
c. Loss on purchase commitment (10,000 x 30)
Estimated liability for purchase commitment

300,000

d. Purchases (100,000 x 150)


Loss on purchase commitment
Estimated liability for purchase commitment
Accounts payable (10,000 x 200)

1,500,000
200,000
300,000

e. Purchases
Estimated liability for purchase commitment
Accounts payable
Gain on purchase commitment

2,000,000
300,000

300,000

2,000,000

2,000,000
300,000

Problem 7-35
12/31/2008

Loss on purchase commitment


Estimated liability for PC

500,000

03/31/2009

Purchase (100,000 x 54)


Estimated liability for PC
Accounts payable
Gain on purchase commitment

5,400,000
500,000

500,000

5,500,000
400,000

Problem 7-36
Purchase price
Improving and subdividing cost
Total cost

Group
1
(20 x 3,000,000)

26,850,000
43,500,000
70,350,000
Sales price

Fraction

60,000,000

60/105

Cost
40,200,000

2
3

(10 x 2,500,000)
(10 x 2,000,000)

25,000,000
20,000,000
105,000,000

25/105
20/105

16,750,000
13,400,000
70,350,000
101

Cost per lot

Group
1 (40,200,000/20)
2 (16,750,000/10)
3 (13,400,000/10)

2,010,000
1,675,000
1,340,000

Unsold

Cost

5
4
3

10,050,000
6,700,000
4,020,000
20,770,000

Problem 7-37
Inventory
1,750,000
50,000
20,000
26,000
25,000
30,000
10,000
1,911,000

Accounts payable
1,200,000
50,000
60,000
20,000
1,330,000

Net sales
8,500,000
(
35,000)
(
40,000)
-_ __
8,425,000

Inventory
1,250,000
( 165,000)
( 20,000)
210,000
25,000
1,300,000

Accounts payable
1,000,000
( 165,000)
25,000
860,000

Net sales
9,000,000
( 40,000)
- ___
9,040,000

Unadjusted
1
2
3
4
5
6
7
8
Adjusted
Problem 7-38
Unadjusted
1
2
3
4
5
Problem 7-39
1. Biological asset
Cash

600,000

2. Biological asset
Gain from change in fair value

700,000

3. Biological asset
Gain from change in fair value

100,000

4. Loss from change in fair value


Biological asset

600,000
700,000
100,000
90,000
90,000

102

Problem 7-40
Requirement 1
1. To record the purchase of one animal aged 2.5 years on July 1.
Biological assets
Cash

108
108

2. To record the birth of one animal on July 1 with fair value of P70.
Biological assets
Cash

70
70

3. To record the change in the fair value:


Biological assets
Cash

222

222

Fair value of 10 animals on January 1 (10 x P100)


Newborn animal on July 1 at fair value
Acquisition cost of one animal on July 1
Total book value of biological assets December 31

1,000
70
108
1,178

Fair value of 3-year old animals on December 31 (11 x P120)


Fair value of 0.5-year old animal on December 31, the newborn (1 x P80)
Total fair value December 31, 2008
Book value of biological assets December 31
Increase in fair value

1,320
80
1,400
1,178
222

Requirement 2
Statement of financial position :
Biological assets
Income statement:
Gain from change in fair value (70 + 222)

1,400
292

Problem 7-41 Answer C


Physical count

1,500,000

Problem 7-42 Answer D


Physical count
Merchandise shipped FOB shipping point on December 30, 2008
from a vendor
Goods shipped FOB shipping point to a customer on January 4, 2009

2,500,000
100,000
400,000

Correct inventory

3,000,000
103

Problem 7-43 Answer D


Problem 7-44 Answer D
Markup (40% x 500,000)
Goods received on consignment
Total reduction

200,000
400,000
600,000

Problem 7-45 Answer B


Inventory shipped on consignment
Freight paid
Consigned inventory

600,000
50,000
650,000

Problem 7-46 Answer A


Reported inventory
Goods sold in transit, FOB destination
Goods purchased in transit, FOB shipping point
Correct amount of inventory

2,000,000
200,000
300,000
2,500,000

Problem 7-47 Answer A


Problem 7-48 Answer A
Consignment sales revenue (40 x P10,000)

400,000

Problem 7-49 Answer B


Sales (900 x 1,000)
Commission (10% x 900,000)
Payable to consignor

900,000
( 90,000)
810,000

Problem 7-50 Answer C


List price
Trade discounts 20% x 900,000
10% x 720,000
Invoice price
Freight
Cost of purchase

900,000
(180,000)
720,000
( 72,000)
648,000
50,000
698,000

104
Problem 7-51 Answer B
List price
Trade discounts 20% x 1,000,000
10% x 800,000
Invoice price
Cash discount (5% x 720,000)
Net amount
Freight charge
Total remittance

1,000,000
( 200,000)
800,000
( 80,000)
720,000
( 36,000)
684,000
50,000
734,000

Problem 7-52 Answer A


Problem 7-53 Answer B
Purchases of IBM compatibles
Purchases of commercial software packages
Total
Less: Purchase return
Net purchases

1,700,000
1,200,000
2,900,000
(
50,000)
2,850,000

Discounts available on purchases (2% x 2,850,000)


Less: Purchase discount taken
Purchase discount lost

57,000
17,000
40,000

Problem 7-54 Answer D


Accounts payable per book
Goods lost in transit, FOB shipping point
Purchase return
Adjusted balance

2,000,000
100,000
( 50,000)
2,050,000

Problem 7-55 Answer D


Accounts payable per book
Undelivered checks
Unrecorded purchases on December 28 (150,000 x 98%)
Purchase on December 20 (200,000 x 95%)

900,000
400,000
147,000
190,000
1,637,000

Problem 7-56 Answer A


Net sales per book
Sales return
Goods shipped on December 31, 2008
Goods shipped on January 3, 2009 recorded on December 30, 2008
Adjusted balance

5,000,000
50,000)
300,000
( 200,000)
5,050,000
(

105

Problem 7-57 Answer A


Gross sales
Estimated sales return (10% x 4,000,000)
Net sales

4,000,000
400,000)
3,600,000

Problem 7-58 Answer A


January 18
28
Total FIFO cost

Units
15,000
10,000
25,000

Unit cost
23
24

Total cost
345,000
240,000
585,000

Problem 7-59 Answer A


(4,500 x 73.50)

330,750

Problem 7-60 Answer A


January 10
February 8

Units
2,000
3,000
5,000

Unit cost
100
110

Weighted average unit cost (530,000/5,000)

Total cost
200,000
330,000
530,000
106

Cost of inventory (3,000 x 106)

318,000

Problem 7-61 Answer B


January 1
January 17
Balance
January 28
Balance

Units
40,000
(35,000)
5,000
20,000
25,000

Unit cost
5
5
5
8
7.40

Total cost
200,000
(175,000)
25,000
160,000
185,000

Units
200
300
500
1,000
800
200

Total cost
300,000
525,000
1,000,000
1,825,000

Problem 7-62 Answer D


January 1
April
3
October 1
Total
Less: Sales (400 + 400)
Ending inventory
Average unit cost (1,825,000/1,000)

1,825

Cost of inventory (200 x 1,825)

365,000
106

Problem 7-63 Answer C

Units

Unit cost

Total cost

January 1
8

8,000
( 4,000)
4,000
12,000
16,000

20
(3,680,000/16,000 = 230)

200
200
200
240
230

1,600,000
( 800,000)
800,000
2,880,000
3,680,000

Problem 7-64 Answer C


Problem 7-65 Answer B
Estimated selling price
Cost of disposal
Net realizable value (lower than cost)

4,050,000
( 200,000)
3,850,000

Problem 7-66 Answer B


Estimated sales price
Cost to complete
Net realizable value

4,000,000
(1,200,000)
2,800,000

FIFO cost (lower than NRV)

2,600,000

Problem 7-67 Answer B


Inventory January 1
Purchases
Goods available for sale
Less: Inventory December 31
Cost of goods sold before inventory writedown
Loss on inventory writedown
Cost of goods sold after inventory writedown

700,000
3,300,000
4,000,000
600,000
3,400,000
100,000
3,500,000

Problem 7-68 Answer C


Sales price
24,000,000
16,000,000
20,000,000
60,000,000

A (100 x 240,000)
B (100 x 160,000)
C (200 x 100,000)

Fraction
24/60
16/60
20/60

Allocated cost
6,000,000
4,000,000
5,000,000
15,000,000

Problem 7-69 Answer B


Problem 7-70 Answer B

107
CHAPTER 8
Problem 8-1
1. D

Problem 8-2
1. D

2. A
3. B
4. B
5. D
6. C
7. C
8. B
9. D
10. D

2. B
3. A
4. C
5. B
6. C
7. A
8. A
9. B
10. A

Problem 8-3 Answer A


Inventory January 1
Purchases
Freight in
Total
Less: Purchase returns
Goods available for sale
Less: Cost of sales (4,500,000 x 60%)
Inventory March 31
Problem 8-4 Answer B
Inventory January 1
Purchases
Goods available for sale
Less: Cost of sales (3,200,000 x 75%)
Inventory December 31
Less: Physical inventory
Missing inventory

3,200,000
50,000
3,250,000
75,000

3,175,000
3,825,000
2,700,000
1,125,000

Problem 8-5 Answer D


500,000
2,500,000
3,000,000
2,400,000
600,000
500,000
100,000

Problem 8-6 Answer D


Cost of sales (7,000,000 1,400,000)
Multiply by
Sales
Less: Collections
Accounts receivable

650,000

5,600,000
140%
7,840,000
4,000,000
3,840,000

Cost of sales (3,640,000/130%) 2,800,000


Problem 8-7 Answer A
Inventory Jan. 1
Purchases
Goods available for sale
Less: Inventory Dec. 31
Cost of goods sold
Gross profit
Total sales
Less: Cash sales
Sales on account
Accounts receivableJan. 1
Total
Less: Collections
Accounts receivable-Dec. 31

1,200,000
2,000,000
3,200,000
1,100,000
2,100,000
900,000
3,000,000
500,000
2,500,000
800,000
3,300,000
2,600,000
700,000

108
Problem 8-8 Answer D

Problem 8-9 Answer B

Net sales = 1,200,000 x 5

6,000,000

Inventory January 1
Purchases

1,800,000
4,500,000

Sales (950,000 x 8)
Cost of sales (1,150,000 x 4)
Gross margin

7,600,000
4,600,000
3,000,000

Goods available for sale


Less: Cost of sales (6,000,000 x 60%)
Inventory December 31

6,300,000
3,600,000
2,700,000

Problem 8-10 Answer B


Sales
Less: Sales returns
Net sales
Cost of sales:
Inventory January 1
Purchases
Freight in
Total
Less: Purchase returns, allowances and discounts
Goods available for sale
Less: Inventory December 31
Gross income

6,200,000
200,000
6,000,000
1,000,000
5,500,000
250,000
5,750,000
150,000

5,600,000
6,600,000
2,100,000

Gross profit rate on cost (1,500,000/4,500,000)

4,500,000
1,500,000
33 1/3%

Problem 8-11 Answer A


Inventory, January 1
Purchases
Freight in
Purchase returns and allowances
Purchase discounts
Goods available for sale
Less: Cost of sales:
Sales
Sales returns
Net sales
Cost of sales (2,100,000/125%)
Inventory, December 31

2,000,000
100,000
( 120,000)
(
80,000)

2,200,000
100,000)
2,100,000

500,000

1,900,000
2,400,000

1,680,000
720,000

Problem 8-12 Answer B


Sales 2007
Cost of sales:
Net purchases 2007
Less: Inventory December 31, 2007
Gross income
Rate in 2007 (1,500,000/6,000,000)
Inventory January 1, 2008
Net purchases 2008
Goods available for sale
Less: Cost of sales (9,000,000 x 70%)
Inventory December 31, 2008

6,000,000
5,500,000
1,000,000

25%

Rate in 2008 (25% + 5%)

4,500,000
1,500,000
109
30%
1,000,000
7,500,000
8,500,000
6,300,000
2,200,000

Less: Undamaged merchandise (500,000 x 70%)


Realizable value of damaged merchandise
Fire loss

350,000
10,000

360,000
1,840,000

Problem 8-13 Answer C


Problem 8-14 Answer A
Sales 2006 and 2007
Cost of sales:
Inventory January 1, 2006
Purchases 2006 and 2007
Goods available for sale
Less: Inventory December 31, 2007
Gross income

7,400,000
850,000
5,370,000
6,220,000
1,040,000

Average rate (2,220,000/7,400,000)

5,180,000
2,220,000
30%

Inventory January 1, 2008


Purchases 2008
Goods available for sale
Less: Cost of sales (5,000,000 x 70%)
Inventory December 31, 2008
Less: Goods consigned (300,000 x 70%)
Goods in transit
Fire loss

210,000
190,000

1,040,000
4,360,000
5,400,000
3,500,000
1,900,000
400,000
1,500,000

Problem 8-15 Answer C


Average gross profit rate (2,250,000/9,000,000)
Inventory January 1
Net purchases
Goods available for sale
Less: Cost of sales (5,600,000 x 75%)
Inventory September 30
Less: Undamaged goods (60,000 x 75%)
Realizable value of damaged goods
Fire loss

25%
660,000
4,240,000
4,900,000
4,200,000
700,000
45,000
25,000

70,000
630,000

110
Problem 8-16 Answer D
Average rate

3,200,000
------------------8,000,000

40%

Inventory January 1
Purchases (1,600,000 + 500,000 400,000)
Goods available for sale
Less: Cost of sales:
Collections
Accounts receivable December 31
Accounts receivable January 1
Sales

500,000
1,700,000
2,200,000
2,640,000
440,000
( 480,000)
2,600,000

Cost of sales (2,600,000 x 60%)


Inventory December 1
Less: Goods on consignment (200,000 x 60%)
Salvage value
Fire loss

1,560,000
640,000
120,000
20,000

140,000
500,000

Problem 8-17
Question 1 Answer A
Gross profit rate:
2005 (750,000/3,000,000)
2006 (1,050,000/3,500,000)
2007 (1,295,000/3,700,000)
2008

25%
30%
35%
40%

There seems to be a trend in the gross profit rate, which is a yearly increase of 5%. Thus, it can
be safely assumed that the trend continues in 2008.
Inventory January 1
Net purchases, January 1 October 15
Goods available for sale
Less: Cost of sales:
Sales
Sales return and allowances
Net sales
Cost of sales (3,800,000 x 60%)
Inventory October 15
Less: Inventory not destroyed
Fire loss

500,000
3,500,000
4,000,000
(

3,840,000
40,000)
3,800,000
2,280,000
1,720,000
320,000
1,400,000
111

Question 2 Answer D
Goods available for sale
Cost of sales (70% x 3,800,000)
Inventory, October 15
Inventory not destroyed
Fire loss

4,000,000
2,660,000
1,340,000
320,000
1,020,000

Problem 8-18 Answer D


Problem 8-19 Answer A
Problem 8-20 Answer B
Net sales in 2007
Less: Cost of sales
Beginning inventory
Net purchases in 2007
Goods available for sale
Less: Ending inventory
Gross profit

8,000,000
2,000,000
4,800,000
6,800,000
1,200,000

Gross profit rate (2,400,000/8,000,000)


Inventory, January 1, 2008
Net purchases 2008
Goods available for sale
Less: Cost of sales
Sales
Less: Sales return and allowances
Net sales

5,600,000
2,400,000
30%
1,200,000
4,960,000
6,160,000

7,880,000
80,000
7,800,000

Cost of sales (7,800,000 x 70%)


Estimated value of ending inventory
Less: Cost of inventory not stolen
Estimated cost of stolen inventory

5,460,000
700,000
100,000
600,000

112
Problem 8-21 Answer A
Raw materials January 1
Purchases
Freight in
Raw materials available for use
Less: Raw Materials December 31
Raw materials used
Direct labor
Manufacturing overhead (50% x 800,000)

1,000,000
100,000

300,000
1,100,000
1,400,000
600,000
800,000
800,000
400,000

Total manufacturing cost


Add: Goods in process January 1
Total goods in process
Less: Goods in process December 31 (squeeze)
Cost of goods manufactured
Add: Finished goods January 1
Goods available for sale
Less: Finished goods _ December 31
Cost of sales (70% x 3,000,000)

2,000,000
1,000,000
3,000,000
1,300,000
1,700,000
1,400,000
3,100,000
1,000,000
2,100,000

The amount of goods in process on December 31is computed as simply working back.
Problem 8-22

Balances
1
2
3
4
Adjusted

Requirement a
Physical inventory
May 31, 2008
950,000
( 55,000)
895,000

Purchases up to
May 31, 2008
6,750,000
75,000
(
10,000)
(
20,000)
(
55,000)
6,740,000

Purchases up to
June 30, 2008
8,000,000
(
15,000)
(
20,000)
-_ __
7,965,000

Inventory July 1, 2007


Purchases up to May 31, 2008
Goods available for sale
Less: Inventory May 31, 2008
Cost of sales

875,000
6,740,000
7,615,000
895,000
6,720,000

Sales up to May 31, 2008


Cost of sales
Gross profit

8,400,000
6,720,000
1,680,000

Rate (1,680,000/8,400,000)

20%
Requirement b

Sales for year ended June 30, 2008


Less: Sales for 11 months ended May 31, 2008
Sales for June

Cost of goods sold with profit (1,100,000 x 80%)


Cost of goods sold without profit
Cost of goods sold during June 2008

9,600,000
8,400,000
1,200,000
113
880,000
100,000
980,000

Requirement c
Inventory, July 1, 2007

875,000

Purchases for year ended June 30, 2008 (as adjusted)


Goods available for sale
Less: Cost of goods sold
Sales with profit (9,500,000 x 80%)
Sales without profit
Inventory, June 30, 2008

7,965,000
8,840,000
7,600,000
100,000

7,700,000
1,140,000

Problem 8-23
1. Accounts receivable April 30
Writeoff
Collections (440,000 20,000)
Total
Less: Accounts receivable March 31
Sales for April
Sales up to March 31
Total sales

1,040,000
60,000
420,000
1,520,000
920,000
600,000
3,600,000
4,200,000

2. Accounts payable April 30 for April shipments


Payment for April merchandise shipments
Purchases of April
Purchases up to March 31
Total purchases

340,000
80,000
420,000
1,680,000
2,100,000

3. Inventory January 1
Purchases
Less: Purchases return
Goods available for sale
Less: Cost of sales (4,200,000 x 60%)
Inventory April 30
Less: Goods in transit
Salvage value
Fire loss

1,880,000
2,100,000
20,000

100,000
140,000

240,000
1,200,000

114

Problem 8-24 Answer B


Cost
280,000
2,480,000
75,000

Inventory January 1
Purchases
Freight in
Markup
Markup cancellation
GAS
Cost ratio (2,835/6,300)

2,080,000
3,960,000
2,520,000
1,440,000

__ __ __ _
2,835,000
45%

Retail
700,000
5,160,000
500,000
( 60,000)
6,300,000

Markdown
Markdown cancellation
GAS Average

_ __ _
2,835,000

Sales
Shrinkage (2% x 5,000,000)
Inventory December 31

( 250,000)
50,000
6,100,000
(5,000,000)
( 100,000)
1,000,000

Conservative cost (1,000,000 x 45%)

450,000

The approximate lower of average cost or market retail is the same as the conservative or
conventional retail.
Problem 8-25 Answer C
Cost
720,000
4,080,000

Inventory January 1
Purchases
Markup
Markdown
GAS

__ _____
4,800,000

Cost ratio (4,800/7,500)

64%

Sales
Shoplifting losses
Inventory

(5,900,000)
( 100,000)
1,500,000

Average cost (1,500,000 x 64%)

960,000

Problem 8-26 Answer D


Beginning inventory
and purchases
Net markup
GAS

Problem 8-27 Answer A

Cost

Retail

6,000,000
________
6,000,000

9,200,000
400,000
9,600,000

Cost ratio
(6,000/9,600) = 62.5%
Sales
Net markdown
Ending inventory

Retail
1,000,000
6,300,000
700,000
( 500,000)
7,500,000

Beginning inventory
Purchases
Net markups
Net markdown
Net purchases

115

Cost
600,000
3,000,000

Retail
1,500,000
5,500,000
500,000
__ _____ (1,000,000)
3,000,000 5,000,000

Cost ratio
(3,000/5,000) = 60%
(7,800,000)
( 600,000)
1,200,000

GAS
Sales

3,600,000

6,500,000
(4,500,000)

Conservative cost
(1,200,000 x 62.5%)

Ending inventory
750,000

Goods available for sale


Less: Ending inventory
Cost of sales

6,000,000
750,000
5,250,000

FIFO cost
(2,000,000 x 60%)

Problem 8-28 Answer A


Inventory January 1
Purchases
Freight in
Net markup
Net markdown
Net purchases (6,000/8,000)
Goods available for sale
Sales
Inventory December 31

2,000,000
1,200,000

Cost
1,200,000
5,600,000
400,000
75%

FIFO cost (2,200,000 x 75%)

Retail
1,800,000
7,200,000
1,400,000
600,000)
8,000,000
9,800,000
(7,600,000)
2,200,000

________
6,000,000
7,200,000

1,650,000

Goods available for sale


Less: Inventory December 31
Cost of goods sold

7,200,000
1,650,000
5,550,000

Problem 8-29 Answer C


Cost
4,900,000

Available for sale


Markdown
Sales
Inventory, December 31
Average cost (1,400,000 x 71%)
Cost ratio (4,900,000 / 6,900,000)

Retail
7,000,000
( 100,000)
(5,500,000)
1,400,000

994,000
71%
116

Problem 8-30
Inventory, January 1
Purchases
Transportation in
Purchases return
Purchase discount
Markup
Cancelation of markup
Goods available for sale conservative
Cost ratio conservative (357/510)
Markdown
Cancelation of markdown
Goods available for sale average cost

Cost
500,000
3,070,000
70,000
( 25,000)
( 45,000)

70%

________
3,570,000
________
3,570,000

Retail
770,000
4,300,000
(

40,000)

100,000
30,000)
5,100,000

( 350,000)
10,000
4,760,000

Cost ratio average cost (357/476)


Less: Sales
Sales return
Inventory, December 31 at selling price

75%
(

Conservative cost (840,000 x 70%)


Average cost
(840,000 x 75%)

4,000,000
80,000)

3,920,000
840,000

588,000
630,000

Problem 8-31
Beginning inventory
Purchases
Freight in
Purchase returns
Purchase allowances
Departmental transfer in
Markup
Goods available for sale conventional
Cost ratio (4,800/8,000)
Markdown
Goods available for sale average
Cost ratio (4,800/7,500)
Less: Sales
Employee discount
Spoilage and breakage
Ending inventory

60%

Cost
340,000
4,500,000
100,000
( 150,000)
( 90,000)
100,000
________
4,800,000
________
4,800,000

Retail
640,000
7,300,000
( 250,000)
160,000
150,000
8,000,000
( 500,000)
7,500,000

64%
6,600,000
100,000
200,000

Conservative cost (600,000 x 60%)


Average cost
(600,000 x 64%)

6,900,000
600,000

360,000
384,000

117

Problem 8-32
Beginning inventory
Purchases
Freight in
Markup
Markup cancellation
Goods available for sale conservative
Cost ratio (3,016/3,770)
Markdown
Markdown cancellation
Goods available for sale average
Less: Sales
Shrinkage (4% x 3,000,000)
Ending inventory

Cost
168,000
2,806,000
42,000

80%

_______
3,016,000

Retail
400,000
3,100,000
(
(

_________
3,016,000
3,000,000
120,000

300,000
30,000)
3,770,000
150,000)
40,000
3,660,000

3,120,000
540,000

Conservative cost (540,000 x 80%)


Physical inventory (500,000 x 80%)
Shortage

432,000
400,000
32,000

Inventory, December 31
Inventory shortage
Income summary

400,000
32,000

432,000

Problem 8-33
1. Opening inventory
Purchases
Freight in
Purchase allowances
Departmental transfer credit
Additional markup
Markup cancellation
Goods available for sale conventional
Cost ratio (5,250/7,000)
Markdown (500,000 400,000)
Goods available for sale average

Cost
1,650,000
3,700,000
200,000
( 100,000)
( 200,000)

75%

Retail
2,200,000
4,950,000

________
5,250,000

( 300,000)
180,000
( 30,000)
7,000,000

________
5,250,000

( 100,000)
6,900,000

Less: Sales
Inventory shortage
Ending inventory at sales price

4,000,000
100,000

Ending inventory at cost (2,800,000 x 75%)

2,100,000

2. Goods available for sale


Less: Ending inventory
Cost of sales

4,100,000
2,800,000

5,250,000
2,100,000
3,150,000
118

Problem 8-34
Inventory, January 1
Purchases
Markup (5,000 x 100)
Markup cancelation (1,000 x 100)
Goods available for sale conservative
Markdown
Goods available for sale average

Cost
560,000
4,000,000
(60%)
(64%)

_________
4,560,000
_________
4,560,000

Net sales
Inventory, December 31
Conservative cost (1,925,000 x 60%)
Average cost
(1,925,000 x 64%)

Retail
1,000,000
6,200,000
500,000
( 100,000)
7,600,000
( 475,000)
7,125,000
(5,200,000)
1,925,000

1,155,000
1,232,000

Problem 8-35
Cost
144,000
1,200,000
1,344,000
504,000
840,000

Finished goods January 1


Cost of goods manufactured (squeeze
Goods available for sale
Less: Finished goods December 31
Cost of goods sold

Retail
240,000
2,000,000
2,240,000
840,000
1,400,000

The amount of goods manufactured at retail is determined by simply working back.


Cost ratio

=
=
=

Goods manufactured at cost


------------------------------------------------Goods manufactured at retail
1,200,000/2,000,000
60%

Finished goods:
January 1 - 240,000 x 60%
Problem 8-36
Inventory January 1, 2008
Purchases
Net markup
Net markdown
Net purchases (65%)
Goods available for sale

144,000

December 31 - 840,000 x 60%


Cost
556,800
4,576,000
________
4,576,000
5,132,800

Sales
Inventory December 31, 2008
FIFO inventory (65% x 1,128,000)

504,000

Retail
928,000
7,028,000
42,000
( 30,000)
7,040,000
7,968,000
(6,840,000)
1,128,000

733,200

1,128,000
119

Inventory January 1, 2009


Purchases
Net markup
Net markdown
Net purchases (70%)
Goods available for sale

Cost
733,200
4,760,000
________
4,760,000
5,493,200

Sales
Inventory December 31, 2009
FIFO inventory (70% x 1,000,000)

Retail
1,128,000
6,812,000
56,000
( 68,000)
6,800,000
7,928,000
(6,928,000)
1,000,000

700,000

1,000,000

Problem 8-37
Inventory, January 1, 2008
Purchases adjusted for markup and markdown
Goods available for sale

72%

Cost
420,000
5,011,200
5,431,200

Retail
600,000
6,960,000
7,560,000

Sales 2008
Inventory, December 31, 2008

(6,839,000)
721,000

FIFO cost (721,000 x 72%)

519,120

Inventory, January 1, 2009


Purchases adjusted
Goods available for sale

70%

519,120
4,970,000
5,489,120

721,000
7,100,000
7,821,000

Sales 2009
Inventory, December 31, 2009

(7,033,000)
788,000

FIFO cost (788,800 x 70%)

551,600

120

CHAPTER 9
Problem 9-1
1.
2.
3.
4.
5.

A
C
C
A
A

6.
7.
8.
9.
10.

Problem 9-4
Red
White
Blue
Green

Problem 9-2
D
D
B
B
B

1.
2.
3.
4.
5.

A
D
C
B
C

6.
7.
8.
9.
10.

Problem 9-3
B
A
C
B
D

1.
2.
3.
4.
5.
Cost
300,000
500,000
1,000,000
2,000,000

D
A
C
A
C
Market
250,000
700,000
1,100,000
1,700,000

Total

3,800,000

1. Trading securities
Cash

3,800,000

2. Unrealized loss trading securities


Trading securities (3,800,000 3,750,000)

50,000

3,750,000
3,800,000
50,000

Problem 9-5
1. Unrealized loss TS
Trading securities
2. Cash
Loss on sale of trading securities
Trading securities
3. Trading securities (680,000 610,000)
Unrealized gain TS
A Common (4,000 x 80)
C Preferred (2,000 x 180)
Problem 9-6

60,000
60,000
140,000
20,000
70,000
Carrying amount
300,000
310,000
610,000

160,000
70,000
Market
320,000
360,000
680,000

December 31, 2008:


Trading securities
Unrealized gain - TS (2,500,000 2,000,000)

500,000

Unrealized loss AFS


Available for sale securities

100,000

500,000
100,000
121

December 31, 2009:


Unrealized loss TS
Trading securities (2,500,000 2,200,000)

300,000

Available for sale securities - AFS


Unrealized loss AFS
Unrealized gain AFS

200,000

300,000
100,000
100,000

Problem 9-7
December 31, 2008:
Unrealized loss AFS
Available for sale securities

150,000
150,000

December 31, 2009:


Available for sale securities AFS
Unrealized loss AFS

50,000

50,000

Problem 9-8
1. Unrealized loss AFS
Available for sale securities

100,000

2. Cash
Loss on sale of AFS securities
Available for sale securities
Unrealized loss AFS

2,100,000
400,000

3. No entry
XYZ
RST

100,000

2,000,000
500,000
Carrying amount
1,200,000
200,000
1,400,000

Unrealized loss in 2008


Unrealized loss 12/31/2008 (600,000 500,000)
Cumulative unrealized loss 12/31/2009

Market
1,200,000
200,000
1,400,000
0
( 100,000)
( 100,000)

Total cost (1,000,000 + 500,000)


Market value
Cumulative unrealized loss

1,500,000
1,400,000
100,000
122

Problem 9-9
2008
1. Trading securities
Available for sale securities
Cash

2,900,000
3,600,000

2. Unrealized loss TS
Trading securities (2,900,000 2,400,000)

500,000

3. Available for sale securities


Unrealized gain AFS (3,600,000 4,000,000)

400,000

2009
1. Cash
Trading securities (1/2 x 1,400,000)
Gain on sale of TS
2. Cash
Unrealized gain AFS (1/2 x 500,000)

6,500,000
500,000
400,000

1,000,000
700,000
300,000
1,300,000
250,000

Available for sale securities (1/2 x 2,500,000)


Gain on sale of AFS securities
3. Trading securities
Unrealized gain TS (2,000,000 1,700,000)
Security One
Security Two
4. Available for sale securities
Unrealized gain AFS
Security Three
Security Four

1,250,000
300,000
300,000
Carrying value
700,000
1,000,000
1,700,000
50,000
1,500,000
1,250,000
2,750,000

Security Three
Security Four (1/2 x 2,000,000)
Total cost
Market value
Cumulative unrealized gain 12/31/2009

2009
Dec. 31 Investment equity security
Unrealized loss transfer of AFS
Available for sale securities
Unrealized loss AFS
31 Available for sale securities
Unrealized loss AFS
Unrealized gain AFS
Market of W and X 12/31/2009
Market of W and X 12/31/2008
Increase in value

50,000
1,600,000
1,200,000
2,800,000

150,000
50,000
200,000
123

Problem 9-10

Dec. 31 Unrealized loss AFS


Available for sale securities

Market
900,000
1,100,000
2,000,000

1,600,000
1,000,000
2,600,000
2,800,000
200,000

Unrealized gain AFS 12/31/2008 (400,000 250,000)


Unrealized gain in 2009
Cumulative unrealized gain 12/31/2009

2008
Jan. 1 Available for sale securities
Cash

300,000

1,320,000
1,320,000
80,000
80,000
650,000
70,000
650,000
70,000
110,000

10,000
100,000
700,000
590,000
110,000

Problem 9-11
December 31, 2008
Unrealized loss TS
Trading securities
Available for sale securities AFS
Unrealized gain AFS
December 31, 2009
Trading securities
Unrealized gain TS (5,500,000 4,600,000)
Available for sale securities
Unrealized gain AFS (3,300,000 3,100,000)

400,000
100,000

900,000
200,000

400,000
100,000

900,000
200,000

Problem 9-12
01/01/2008

12/31/2008

Trading securities
AFS securities
Cash
Trading securities
Unrealized gain TS

2,000,000
4,000,000
6,000,000
500,000
500,000

124
12/31/2008

Unrealized loss AFS


AFS securities

700,000

12/31/2009

Trading securities
Unrealized gain - TS

200,000

Impairment loss AFS


Unrealized loss AFS

700,000

Unrealized loss TS
Trading securities

600,000

AFS securities
Unrealized gain AFS (4,200,000 3,300,000)

900,000

12/31/2010

700,000
200,000
700,000
600,000
900,000

Problem 9-13
2008

Available for sale securities


Cash
Unrealized loss AFS
Available for sale securities (6,000,000 5,700,000)

6,000,000
300,000

6,000,000
300,000

2009

Unrealized loss AFS


Available for sale securities (5,700,000 5,200,000)
Held to maturity securities
Available for sale securities

500,000
500,000
5,200,000
5,200,000

The total unrealized loss of P800,000 (300,000 + 500,000) will still be reported in equity but it will
be subsequently amortized through interest income over the remaining term of the debt
securities.
Problem 9-14
2008
Jan. 1 Held to maturity securities
Cash
Dec. 31 Cash (8% x 4,000,000)
Interest income
31 Held to maturity securities
Interest income

3,649,600
320,000
44,960

Interest income (10% x 3,649,600)


Interest received
Amortization

3,649,600
320,000
44,960
364,960
320,000
44,960
125

2009
Dec. 31 Cash
Interest income
31 Held to maturity securities
Interest income

320,000
49,456

Interest income (10% x 3,694,560)


Interest received
Amortization
31 Available for sale securities
Held to maturity securities
31 Available for sale securities
Unrealized gain AFS
Market value (4,000,000 x 105)
Book value
Unrealized gain
Problem 9-15

320,000
49,456
369,456
320,000
49,456

3,744,016
3,744,016
455,984

455,984
4,200,000
3,744,016
455,984

01/01/2008

Available for sale securities


Cash

6,500,000

12/31/2008

Unrealized loss AFS


Available for sale securities
(6,500,000 5,750,000)

750,000

06/30/2009

Unrealized loss AFS


Available for sale securities
(5,750,000 5,300,000)

450,000

06/30/2009

Held to maturity securities


Available for sale securities

5,300,000

12/31/2009

No entry is required to recognize the decrease


in value of P400,000 (P5,300,000 P4,900,000).

6,500,000
750,000

450,000

5,300,000

The total unrealized loss of P1,200,000 on the reclassification of AFS securities will continue to
be reported as part of equity as a deduction. However, it is amortized through interest
income over the remaining life of the debt security starting June 30, 2009.

Problem 9-16 Answer A


A common
B common
C preferred
D preferred
Total
Problem 9-17 Answer A
Man
Kemo
Penn
Total
Unrealized loss (3,000,000 2,800,000)

126
Cost
1,000,000
1,500,000
2,000,000
2,500,000
7,000,000

Market
800,000
1,800,000
1,700,000
2,600,000
6,900,000

Cost
1,000,000
900,000
1,100,000
3,000,000

Market
900,000
1,100,000
800,000
2,800,000
200,000

Problem 9-18 Answer A


Total market value December 31, 2008
Total market value December 31, 2007
Unrealized gain

2,000,000
1,650,000
350,000

Problem 9-19 Answer A


Total market value December 31, 2008

4,500,000

Total market value December 31, 2007


Unrealized loss in 2008
Unrealized loss December 31, 2007
Total unrealized loss December 31, 2008

4,800,000
( 300,000)
( 200,000)
( 500,000)

Problem 9-20 Answer C


Market value December 31, 2008
Market value December 31, 2007
Unrealized gain in 2008
Unrealized loss December 31, 2007
Net unrealized gain December 31, 2008

1,600,000
1,300,000
300,000
( 200,000)
100,000

Problem 9-21
Question 1 Answer B
Market value December 31, 2008
Market value December 31, 2007
Unrealized gain trading

1,550,000
1,000,000
550,000
127

Question 2 Answer A
Market value December 31, 2008
Market value December 31, 2007
Unrealized gain in 2008
Unrealized loss December 31, 2007 (1,500,000 1,200,000)
Net unrealized loss December 31, 2008

1,300,000
1,200,000
100,000
( 300,000)
( 200,000)

Problem 9-22 Answer A


The unrealized loss of P40,000 on trading securities is shown in the income statement.
However, the unrealized loss of P100,000 on available for sale securities is recognized in
equity.
Problem 9-23 Answer B
Unrealized losses
Unrealized gains
Net unrealized loss December 31, 2008

260,000
40,000
220,000

Problem 9-24 Answer B


Net sales price
Unrealized loss related to B
Net amount
Carrying amount of B

1,450,000
( 150,000)
1,300,000
(1,550,000)

Loss on sale

( 250,000)

Net sales price (1,500,000 50,000)


Less: Cost of B
Loss on sale

1,450,000
1,700,000
( 250,000)

Problem 9-25 Answer C


Market value December 31, 2008
Market value December 31, 2007
Unrealized gain in 2008
Unrealized loss December 31, 2007
Net unrealized loss December 31, 2008

850,000
800,000
50,000
(200,000)
(150,000)

Problem 9-26 Answer C


Available for sale equity securities, at cost
Unrealized loss
Market value

2,200,000
( 200,000)
2,000,000
128

Problem 9-27 Answer C


12/31/2007

Unrealized loss - AFS


Available for sale securities
(2,000,000 1,800,000)

200,000

12/31/2008

Available for sale securities


Unrealized loss AFS (1,850,000 1,800,000)

50,000

200,000

50,000

129

CHAPTER 10
Problem 10-1
1.
2.
3.
4.
5.

C
C
A
A
C

6.
7.
8.
9.
10.

D
B
D
A
C

Problem 10-2
A (8,000 x 100)
B (16,000 x 150)
C (1,000,000 x 90%)
Investment in A shares
Investment in B shares
Investment in C Bonds
Cash

Market value
800,000
2,400,000
900,000
4,100,000

Fraction
8/41
24/41
9/41
600,000
1,800,000
675,000

Allocated cost
600,000
1,800,000
675,000
3,075,000

3,075,000

Problem 10-3
Requirement 1
a. Investment in equity securities
Cash

309,000

b. Investment in equity securities


Cash

1,030,000

Requirement 2

309,000
1,030,000

a. Cash
Loss on sale of investment
Investment in equity securities

405,000
32,750
437,750

Lot No. 1 1,000 shares


Lot No. 2 - 500 shares (500/4,000 x 1,030,000)

309,000
128,750
437,750

b. Cash
Investment in equity securities (1,500/5,000 x 1,339,000)
Gain on sale of investment

405,000

401,700
3,300

Problem 10-4
July 15

Cash
Dividend income (5,000 shares x 5)

Dec. 15

Memo Received 1,000 shares representing 20%


stock dividend on 5,000 original shares held.

28

25,000

Cash (3,000 shares x 60)


Investment in equity securities
Gain on sale of investment

25,000
130

180,000
133,000
47,000

Lot No. 1 (2,400 shares)


Lot No. 2 (600/3,600 x 198,000)
Cost of investment sold

100,000
33,000
133,000

Problem 10-5
1. Investment in XYZ ordinary shares (40,000 x 50)
Cash

2,000,000

2,000,000

2. Memo Received 200,000 XYZ ordinary shares as a result


of 5 for 1 split of 40,000 original shares.
3. Investment in XYZ preference shares
Investment in XYZ ordinary shares
Ordinary shares (200,000 x 15)
Preference shares (20,000 x 10)
4. Investment in ABC ordinary shares
Dividend income (200,000/4 = 50,000 x 6)

125,000
Market value
3,000,000
200,000
3,200,000

Fraction
30/32
2/32
300,000

5. Cash (80,000 x 15)


1,200,000
Investment in XYZ ordinary shares (80,000/200,000 x 1,875,000)
Gain on sale of investment

125,000
Cost
1,875,000
125,000
2,000,000
300,000
750,000
450,000

Problem 10-6
1. Investment in ANA ordinary shares
Cash

300,000

2. Investment in Benguet ordinary shares


Dividend income (2,000 x 60)

120,000

3. Investment in ANA ordinary shares


Cash

420,000

4. Cash
Dividend income (12% x P200 = 24 x 5,000 x 1/2)

60,000

300,000
120,000
420,000
60,000
131

5. Memo Received 20,000 new ANA ordinary shares as a


result of a 2 for 1 split of 10,000 original shares.
6. Cash (680,000 34,000)
Investment in ANA ordinary shares (8,000/20,000 x 720,000)
Gain on sale of investment
SMC preference share
Benguet ordinary share
Benguet ordinary share
ANA ordinary share
Problem 10-7
1. Investment in ABC ordinary shares
Cash

646,000

Shares
5,000
10,000
2,000
12,000
29,000
720,000

288,000
358,000
Cost
1,200,000
1,000,000
120,000
432,000
2,752,000

720,000

2. Memo Received 2,000 shares as 20% stock dividend on


10,000 original shares. Shares now held, 12,000.
3. Cash (2,000 x 70)
140,000
Investment in ABC ordinary shares (2,000/12,000 x 720,000)
Gain on sale of investment

120,000
20,000

4. Investment in ABC preference shares (5,000 x 70)


Investment in ABC ordinary shares (5,000/10,000 x 600,000)
Gain on exchange

350,000

300,000
50,000

5. Investment in ABC ordinary shares


Cash (5,000 x 20)

100,000

Problem 10-8
a. 2004

Cash

400,000

100,000

Investment in equity securities

400,000

2005

Cash
Dividend income
Investment in equity securities

400,000

2006

Cash
Dividend income
Investment in equity securities

400,000

2007

Cash
400,000
Dividend income
Investment in equity securities (1,000,000 950,000)
Gain on investment

100,000
300,000
150,000
250,000
200,000
50,000
150,000
132

2008

b.

Cash
Dividend income
Gain on investment

400,000

250,000
150,000

The investment account has been totally eliminated as of December 31, 2007 because
the liquidating dividends received exceed the cost of investment. Hence, there is no
more investment account to be reported in the December 31, 2008 statement of
financial position, but such fact should be disclosed in the notes to financial statements
to the effect that the company is still the owner of 10,000 shares with a zero cost.

Problem 10-9
1. Investment in equity securities
Cash

1,800,000

1,800,000

2. 10,000 rights
3. Cost of rights (10/200 x 1,800,000)

90,000

4. Stock rights
Investment in equity securities

90,000

5. Investment in equity securities


Cash (10,000/5 = 2,000 x 150)
Stock rights

390,000

6. Cash (10,000 x 10)


Stock rights
Gain on sale of rights

100,000

7. Loss on stock rights


Stock rights

90,000
300,000
90,000
90,000
10,000

90,000
90,000

Problem 10-10

Requirement 1

125 - 100
Theoretical value = --------------------- = 5.00 per right
4+1
a. Stock rights (5/125 x 2,100,000)
Investment in equity securities

84,000

b. Investment in equity securities


Stock rights
Cash (25,000/4 = 6,250 x 100)

709,000

84,000
84,000
625,000
133
Requirement 2

125 - 100
Theoretical value = --------------------- = 6.25 per right
4
a. Stock rights (6.25/131.25 x 2,100,000)
Investment in equity securities

100,000

b. Investment in equity securities


Stock rights
Cash

725,000

100,000
100,000
625,000

Problem 10-11
1. Stock rights (10/100 x 3,000,000)
Investment in equity securities
2. Investment in equity securities
Stock rights (30,000/40,000 x 300,000)
Cash (15,000 shares x 80)

300,000
1,425,000
225,000

1,200,000

3. Cash (6,000 x 10)


Stock rights (6,000/40,000 x 300,000)
Gain on sale of rights

60,000

4. Loss on stock rights (4,000/40,000 x 300,000)


Stock rights

30,000

First acquisition (3,000,000 300,000)


New acquisition

300,000

45,000
15,000

Shares
40,000
15,000
55,000

30,000
Cost
2,700,000
1,425,000
4,125,000

Problem 10-12
1. Investment in equity securities
Cash

3,200,000

3,200,000

2. Memo Received 20,000 shares as stock dividend on


80,000 original shares. Shares now held, 100,000.
3. Cash (100,000 x 5)
Dividend income

500,000

4. Stock rights (5/40 x 3,200,000)


Investment in equity securities

400,000

500,000
400,000

134
5. Cash (40,000 x 5)
Stock rights (40,000/100,000 x 400,000)
Gain on sale of rights

200,000

6. Investment in equity securities


Stock rights (60,000/100,000 x 400,000)
Cash (60,000/5 = 12,000 x 30)

600,000

7. Cash (80,000 x 35)


Investment in equity securities
(80,000/100,000 x 2,800,000)
Gain on sale of investment
Original acquisition
New acquisition

160,000
40,000

2,800,000

240,000
360,000
2,240,000
560,000

Shares
20,000
12,000
32,000

Cost
560,000
600,000
1,160,000

Problem 10-13
2008
Aug. 1
Oct. 1
2009
July 1
Aug. 1

Investment in equity securities


Cash

60,000

Investment in equity securities


Cash

560,000

Investment in equity securities


Cash

480,000

Cash
Investment in equity securities
Gain on sale of investment

500,000

60,000
560,000
480,000
340,000
160,000

Lot 1 (1,000 shares)


Lot 2 (4,000/8,000 x 560,000)
Cost of investment sold
2010
Feb. 1
Nov. 1

60,000
280,000
340,000

Received 5,000 shares representing 50% stock dividend on


10,000 remaining shares held. Shares now held, 15,000.
Stock rights
Investment in equity securities

95,000

Lot 2 6,000 rights (10/80 x 280,000)


Lot 3 9,000 rights (10/80 x 480,000)
Cost of rights received

2010
Dec. 1

95,000
35,000
60,000
95,000
135

Cash (15,000 x 10)


Stock rights
Gain on sale of stock rights

Summary of investments
Lot 2 (280,000 35,000)
Lot 3 (480,000 60,000)
Total

150,000
95,000
55,000
Shares
6,000
9,000
15,000

Cost
245,000
420,000
665,000

Problem 10-14
Jan. 2

Investment in King Corporation


Cash

700,000

Mar. 1

Investment in Plastic Company


Cash

660,000

Apr. 1

Cash (10,000 x 5)
Dividend income

July 1

Received 2,000 shares as 20% stock dividend on


10,000 Plastic Company shares originally held.
Shares now held, 12,000.

Aug. 1 Investment in Makati Corporation


Cash

50,000

700,000
660,000
50,000

500,000
500,000

Oct. 1 Received 60,000 new shares of Plastic Company


as a result of a 5 for 1 split of 12,000 original shares.
1 Cash (10,000 x 5)
Dividend income
31 Stock rights (3/33 x 660,000)

50,000
50,000
60,000

Investment in Plastic Company

60,000

Nov. 15 Investment in Plastic Company


Cash (6,000 shares x 20)
Stock rights

180,000

Dec. 1 Cash (66,000 shares x 5)


Dividend income

330,000

15 Cash (10,000 shares x 30)


Investment in Plastic Company
(10,000/60,000 x 600,000)
Gain on sale of investment

300,000

120,000
60,000
330,000
100,000
200,000

136
Summary of investments
King Corporation common
Plastic Company common
Block 1
Block 2
Makati Corporation common

Shares
10,000

Cost
700,000

50,000
6,000
10,000
76,000

500,000
180,000
500,000
1,880,000

Of course, the investments will simply be described as investments in equity


securities in the balance sheet.
Problem 10-15 Answer A
Purchase price (4,000 x P100)
Brokerage
Total
Less: Dividend purchased (4,000 x 5)
Acquisition cost

400,000
12,000
412,000
20,000
392,000

Problem 10-16 Answer D


Fair value of asset given (land)

3,000,000

Problem 10-17 Answer D


Original shares acquired January 15
Stock dividend on March 31 (20% x 50,000)
Total shares
Dividend income cash dividend on December 15 (60,000 x 5)

50,000
10,000
60,000
300,000

Problem 10-18 Answer C


Dividend income cash dividend on July 1

100,000

Original shares on March 1


Stock dividend on December 1 (10% x 20,000)
Total shares

20,000
2,000
22,000

Problem 10-19 Answer B


Original shares on October 1, 2007
Stock dividend on November 30, 2008 (10%)
Total shares
Shares sold on December 31, 2008
Balance

40,000
4,000
44,000
( 4,000)
40,000

137
Sales price
Cost of shares sold (4,000/44,000 x 6,600,000)
Gain on sale

1,000,000
( 600,000)
400,000

Problem 10-20 Answer B


Shares received as property dividend (5,000/5)

1,000

Dividend income (1,000 x 100)

100,000

Problem 10-21 Answer D


Cash dividend (10% x 500,000)

50,000

Problem 10-22 Answer A


Dividend income (2,000 x 60)

120,000

Problem 10-23 Answer C


Sales price (80,000 x 30)
Less: Cost of shares sold (80,000 x 40)
Loss on disposal
Problem 10-24 Answer A
Original shares
Stock dividend 20%
Total shares

2,400,000
3,200,000
( 800,000)
June 1
20,000
4,000
24,000

Sales price (30,000 x 125)


Cost of shares sold:
From June 1 24,000 shares
2,000,000
From December 1 6,000 shares (6,000 / 36,000 x 3,600,000) 600,000

December 1
30,000
6,000
36,000
3,750,000
2,600,000

Gain on sale

1,150,000

Problem 10-25 Answer B


Cost of rights (5/100 x 8,000,000)

400,000

Problem 10-26 Answer B


Sales price (50,000 x 10)
Cost of rights sold (10/100 x 3,600,000)
Gain on sale of rights

500,000
360,000
140,000

138
Problem 10-27 Answer B
Cost of rights (18/150 x 500,000)
Cost paid for new shares (2,500 shares x 90)
Total cost of new investment
Cost per share (285,000 / 2,500 shares)

60,000
225,000
285,000
114

Problem 10-28 Answer B


Cost of 2006 rights (4/100 x 180,000)
Cost of 2007 rights (4/100 x 330,000)
Total cost of rights
900 shares x 5 rights
Cash paid (900 x 80)
Cost of rights exercised
2006 2,250 rights
2007 2,250 rights (2,250/3,750 x 13,200)
Total cost of 900 shares

7,200
13,200
20,400
4,500 rights
72,000
7,200
7,920
87,120

139
CHAPTER 11
Problem 11-1
1.
2.
3.
4.
5.

A
C
C
A
D

6.
7.
8.
9.
10.

A
C
A
D
B

Problem 11-2

Problem 11-3

Problem 11-4

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

B
D
B
A
C

Problem 11-5

D
D
C
A
C

B
C
D
A
A

Equity method

1. Investment in associate
Cash

2,400,000

Acquisition cost
Net assets acquired (20% x 8,000,000)
Goodwill

2,400,000
2,400,000
1,600,000
800,000

2. Investment in associate
Investment income (20% x 1,500,000)

300,000

300,000

3. Memo Received 2,000 shares as 10% stock dividend on


20,000 original shares. Shares now held, 22,000.
4. Investment loss
Investment in associate (20% x 300,000)
5. Cash (20% x 500,000)
Investment in associate

60,000
100,000

6. Cash (5,500 x 200)


Investment in associate
Gain on sale of investment

1,100,000

Sales price
Less: Cost of investment sold (5,500/22,000 x 2,540,000)
Gain on sale

60,000
100,000
635,000
465,000
1,100,000
635,000
465,000

Cost method
1. Investment in equity securities
Cash
2. No entry

2,400,000
2,400,000

140
3. Memo Received 2,000 shares as 10% stock dividend.
Shares now held, 22,000.
4. No entry
5. Cash
Dividend income
6. Cash
Investment in equity securities (5,500/22,000 x 2,400,000)
Gain on sale of investment

100,000
1,100,000

100,000
600,000
500,000

Problem 11-6
1. Investment in equity securities
Cash
2. Cash (15% x 4,000,000)
Dividend income (15% x 3,000,000)
Investment in equity securities (15% x 1,000,000)

6,000,000
600,000

6,000,000
450,000
150,000

Problem 11-7
2008

Investment in associate
Cash

5,000,000

Investment in associate
Investment income (30% x 4,000,000 x 3/12)

300,000

Cash (30% x 3,000,000)


Investment in associate

900,000

Investment income
Investment in associate (200,000 x 3/12)
2009

5,000,000

Investment in associate
Investment income (30% x 6,000,000)

300,000
900,000
50,000
50,000
1,800,000
1,800,000

Cash (30% x 5,000,000)


Investment in associate

1,500,000

Investment income
Investment in associate

200,000

1,500,000
200,000

141
Problem 11-8
2006
Jan. 1 Investment in equity securities
Cash
Dec. 31 Cash (15% x 300,000)
Dividend income
2007
Dec. 31 Cash (15% x 400,000)
Dividend income
2008
Jan. 1 Investment in associate
Cash
1 Investment in associate
Retained earnings

1,000,000
45,000

60,000

Dec. 31 Investment in associate


Investment income (40% x 900,000)
31 Cash (40% x 600,000)
Investment in associate

45,000

60,000

3,000,000
3,000,000
75,000

Investment income Equity method (2006 and 2007)


(15% x 500,000 + 700,000)
Dividend income Cost method (2006 and 2007) (45,000 + 60,000)
Cumulative effect of change to equity
1 Investment in associate
Investment in equity securities
(Reclassification)

1,000,000

1,000,000

360,000
240,000

75,000
180,000
105,000
75,000

1,000,000

360,000
240,000

Problem 11-9
2008
Jan. 1

Investment in associate
Cash

Dec. 31 Investment in associate


Investment income (30% x 5,000,000)
31 Cash (30% x 2,000,000)
Investment in associate

8,000,000
1,500,000
600,000

8,000,000
1,500,000
600,000

142

2009
June 30 Investment in associate
Investment income (30% x 6,000,000)

1,800,000

July

6,000,000

Oct.

1 Cash
Investment in associate (10,700,000 x 1/2)
Gain on sale of investment
1 Cash (2,500,000 x 15%)
Dividend income
1

Dec. 31

Available for sale securities


Investment in associate
(Reclassification)

1,800,000
5,350,000
650,000
375,000
5,350,000

375,000
5,350,000

No entry is required for the share in net income


because the investor is now using the fair value
method by reason on the reduced 15% interest.

Problem 11-10
Requirement a
1. Investment in associate
Cash

3,500,000

2. Investment in associate
Investment income (40% x 4,000,000)

1,600,000

3. Cash (40% x 1,000,000)


Investment in associate

400,000

4. Investment income
Investment in associate (600,000 / 4)

150,000

3,500,000
1,600,000
400,000
150,000

Cost
Book value of interest acquired (40% x 7,000,000)
Excess of cost over book value
Excess attributable to equipment (40% x 1,500,000)
Excess attributable to inventory (40% x 500,000)
Excess net fair value over cost

3,500,000
2,800,000
700,000
( 600,000)
( 200,000)
( 100,000)

5. Investment income
Investment in associate

200,000

6. Investment in associate
Investment income

100,000

200,000
100,000

143

Requirement b
Share in net income
Amortization of excess attributable to equipment
Amortization of excess attributable to inventory
Excess net fair value over cost
Net investment income

1,600,000
( 150,000)
( 200,000)
100,000
1,350,000

Problem 11-11
1. Investment in associate
Cash
2. Investment in associate
Investment income (40% x 650,000)
3. Cash (40% x 150,000)
Investment in associate
4. Investment in associate
Revaluation surplus investee (40% x 1,300,000)

1,700,000
260,000
60,000
520,000

1,700,000
260,000
60,000
520,000

Note:
1. Cost
Interest acquired (40% x 4,000,000)
Goodwill not amortized

1,700,000
1,600,000
100,000

2. There is no need to adjust for the difference in depreciation method. If both entities
a method that best reflects the flow of benefits as the assets are consumed, then
there is no policy difference.

Problem 11-12
1. Journal entries
a. Investment in associate
Cash

6,000,000

b. Investment in associate
Investment income

750,000

c. Cash
Investment in associate

450,000

d. Investment income
Investment in associate

200,000

6,000,000
750,000
450,000
200,000

144
2. Share in net income
Amortization of patent (2,000,000 / 10)
Investment income

750,000
(200,000)
550,000

3. Acquisition cost
Share in net income (5,000,000 x 15%)
Share in cash dividend (3,000,000 x 15%)
Amortization of patent (2,000,000 / 10)
Carrying value

6,000,000
750,000
( 450,000)
( 200,000)
6,100,000

Interest acquired (30,000 / 200,000)

15%

Acquisition cost
Book value of net assets acquired
Excess of cost applicable to patent

6,000,000
4,000,000
2,000,000

Problem 11-13
1. Journal entries
a. Investment in associate
Cash

5,000,000

b. Investment in associate
Investment income

1,200,000

c. Cash
Investment in associate

300,000

d. Investment income
Investment in associate

150,000

5,000,000
1,200,000
300,000
150,000

2. Share in net income


Amortization of depreciable asset (750,000 / 5)
Investment income

1,200,000
( 150,000)
1,050,000

3. Acquisition cost
Share in net income (30% x 4,000,000)
Share in cash dividend (30% x 1,000,000)
Amortization of depreciable asset (750,000 / 5)
Carrying value of investment

5,000,000
1,200,000
( 300,000)
( 150,000)
5,750,000

Acquisition cost
Net assets acquired (30% x 12,000,000)
Excess of cost
Excess attributable to depreciable asset (30% x 2,500,000)
Excess attributable to goodwill

5,000,000
3,600,000
1,400,000
750,000
650,000

145
Problem 11-14
1. Journal entries
a. Investment in associate
Cash

1,000,000

b. Investment in associate
Investment income

175,000

c. Cash
Investment in associate

75,000

d. Investment income
Investment in associate

50,000

2. Share in net income


Amortization of excess (25,000 + 25,000)
Investment income
3. Acquisition cost
Net assets acquired (25% x 3,000,000)
Excess of cost
Excess attributable to inventory (25% x 100,000)
Excess attributable to equipment (25% x 500,000)
Excess attributable to goodwill (25% x 400,000)
Acquisition cost
Share in net income (25% x 700,000)
Amortization of excess:
Inventory
Equipment (125,000 / 5)
Cash dividend (25,000 x 3)
Investment balance

1,000,000
175,000
75,000
50,000
175,000
( 50,000)
125,000
1,000,000
750,000
250,000
25,000
125,000
100,000
250,000
1,000,000
175,000
( 25,000)
( 25,000)
( 75,000)
1,050,000

Problem 11-15
1. Share in 2008 net income
Amortization of excess (400,000 / 20)
Investment income for 2008
Acquisition cost (20,000 x 120)
Net assets acquired (25% x 8,000,000)
Excess of cost

900,000
( 20,000)
880,000
2,400,000
2,000,000
400,000

146
2. Share in 2008 net income
Amortization of excess
Investment income for 2009

975,000
( 20,000)
955,000

3. Acquisition cost
Share in net income:
2008 (25% x 3,600,000)
2009 (25% x 3,900,000)
Share in cash dividend:
2008 (20,000 x 16)
2009 (20,000 x 20)
Amortization of excess:
2008 (400,000 / 20)
2009
Investment balance 12/31/2009

2,400,000
900,000
975,000
( 320,000)
( 400,000)
( 20,000)
( 20,000)
3,515,000

Problem 11-16
Requirement a
1. Memo Received 500 shares as 10% stock dividend on
5,000 original Dale ordinary shares. Shares now
held, 5,500.
2. Cash (5,500 x 20)
Dividend income

110,000

3. Stock rights (15/150 x 1,600,000)


Investment in equity securities Ever

160,000

Cash
Stock rights
Gain on sale of stock rights
4. Investment in associate
Cash
Acquisition cost
Net assets acquired:
10% x 16,000,000
20% x 20,000,000
Goodwill
Income from Fox investment in 2007 (10% x 4,000,000)
Less: Dividend income recorded in 2007 cost method
Understatement of income

110,000
160,000
200,000

5,000,000

160,000
40,000
5,000,000

1/1/2007
2,000,000

1/1/2008
5,000,000

1,600,000
________
400,000

4,000,000
1,000,000
400,000
-___
400,000

147
5. Investment in associate
Investment in equity securities
(Reclassification)
6. Investment in associate
Retained earnings

2,000,000
2,000,000
400,000

7. Investment in associate
Investment income (30% x 6,000,000)

1,800,000

8. Cash (75,000 x 20)


Investment in associate

1,500,000

400,000
1,800,000
1,500,000

Requirement b
Noncurrent assets:
Investment in equity securities (Note)
Investment in associate Fox Corporation

2,690,000
7,700,000

Note Investment in equity securities


Dale Corporation, 5,500 shares
Ever Corporation, 10,000 shares
Total cost

1,250,000
1,440,000
2,690,000

Problem 11-17 Answer D


Problem 11-18 Answer D
Problem 11-19 Answer B
Investment in Lax Corporation

3,000,000

Problem 11-20 Answer C


Total cash dividend
Cumulative net income
Liquidating dividend
Cash (10% x 3,000,000)
Dividend income (10% x 2,500,000)
Investment in equity securities

3,000,000
2,500,000
500,000
300,000
250,000
50,000

Problem 11-21 Answer B


Investment income (20% x 1,600,000)

320,000

148
Problem 11-22 Answer A
Investment income (20% x 6,000,000)

1,200,000

Problem 11-23 Answer C


Interest (30,000/100,000)
Investment income (5,000,000 x 6/12 x 30%)

30%
750,000

Problem 11-24 Answer C


Cost
Less: Net assets acquired (40% x 8,000,000)
Excess of cost or goodwill
Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%)

4,000,000
3,200,000
800,000
300,000

Problem 11-25 Answer B


Acquisition cost
Share in net income (20% x 1,800,000)
Share in cash dividend (20% x 600,000)
Amortization of excess (1,000,000/10)
Carrying value

7,000,000
360,000
( 120,000)
( 100,000)
7,140,000

Problem 11-26 Answer A


Acquisition cost
Share in net income (10% x 5,000,000)
Share in cash dividend (10% x 1,500,000)
Carrying value

4,000,000
500,000
( 150,000)
4,350,000

Problem 11-27 Answer D


Acquisition cost (squeeze)
Share in net income (25% x 1,200,000)
Share in cash dividend (25% x 480,000)
Carrying value December 31

1,720,000
300,000
( 120,000)
1,900,000

Problem 11-28 Answer D


Acquisition cost
Less: Book value of net assets acquired (30% x 5,000,000)
Excess of cost over book value
Less: Amount attributable to undervaluation of land (30% x 2,000,000)
Goodwill

2,500,000
1,500,000
1,000,000
600,000
400,000

149
Acquisition cost
Add: Share in net income (30% x 1,000,000)
Balance, December 31

2,500,000
300,000
2,800,000

The excess of cost attributable to the land is not amortized because the land is
nondepreciable. The goodwill is not amortized.

Problem 11-29 Answer B


Acquisition cost January 1
Acquisition cost December 31
Total cost
Share in net income (10% x 8,000,000)
Carrying value

1,000,000
3,000,000
4,000,000
800,000
4,800,000

Problem 11-30 Answer C


Investment income in 2008 (30% x 6,500,000)

1,950,000

Investment income in 2007 (10% x 6,000,000)


Less: Dividend income recorded in 2006 (10% x 2,000,000)
Understatement of income
Investment in associate
Retained earnings

600,000
200,000
400,000
400,000

400,000

Problem 11-31 Answer A


Acquisition cost
Net assets acquired (30% x 11,800,000)
Excess of cost
Attributable to depreciable assets (30% x 2,600,000)
Attributable to goodwill

5,160,000
3,540,000
1,620,000
780,000
840,000

Acquisition cost
Share in net income (30% x 3,600,000)
Share in dividends (30% x 400,000)
Amortization (780,000/4)
Investment balance December 31

5,160,000
1,080,000
( 120,000)
( 195,000)
5,925,000

Problem 11-32 Answer B


Acquisition cost
Net assets acquired (40% x 5,000,000)
Excess of cost

2,560,000
2,000,000
560,000

150
Attributable to equipment (40% x 800,000)
Attributable to building (40% x 600,000)
Acquisition cost
Net income (40% x 1,600,000)
Cash dividend (40% x 1,000,000)
Amortization of excess:
Equipment (320,000 / 4)
Building (240,000 / 12)
Carrying value of investment 12/31/2008

320,000
240,000
560,000
2,560,000
640,000
( 400,000)
(
(

80,000)
20,000)
2,700,000

Problem 11-33 Answer A


Net income
Less: Preference dividend (10% x 2,000,000)
Net income to ordinary shares

5,000,000
200,000
4,800,000

Investment income (50% x 4,800,000)

2,400,000

Problem 11-34
Question 1 Answer B
Share in 2008 net income (30% x 800,000)

240,000

Question 2 Answer B
Acquisition cost
Share in net income 2008
Cash dividends 2008 (30% x 500,000)
Book value December 31, 2008

2,000,000
240,000
( 150,000)
2,090,000

Question 3 Answer B
Book value December 31, 2008
Share in net income up to June 30, 2009 (30% x 1,000,000)
Book value June 30, 2009

2,090,000
300,000
2,390,000

Sales price
Book value sold (2,390,000 x )
Gain on sale

1,500,000
1,195,000
305,000

151
Problem 11-35 Answer C
Acquisition cost (30,000 x 120)
Deficit on January 1, 2008 (30% x 500,000)
Carrying value of investment 1/1/2008
Net income for 2008 (30% x 700,000)
Net income for 2009 (30% x 800,000)
Cash dividend on 12/31/2009 (30% x 400,000)
Carrying value of investment 12/31/2009

3,600,000
( 150,000)
3,450,000
210,000
240,000
( 120,000)
3,780,000

Another approach
Acquisition cost
Share in retained earnings 12/31/2009 (30% x 600,000)
Carrying value of investment 12/31/2009

3,600,000
180,000
3,780,000

152

CHAPTER 12
Problem 12-1
1.
2.
3.
4.
5.

B
B
A
A
D

6.
7.
8.
9.
10.

C
C
B
B
C

Problem 12-2

Bonds held as trading

2008
April 1 Trading securities
Cash

2,200,000

Oct. 1 Cash (2,000,000 x 12% x 6/12)


Interest income
Dec. 31 Accrued interest receivable
Interest income (2,000,000 x 12% x 3/12)
31 Trading securities
Unrealized gain TS

120,000
60,000
100,000

2009
Jan. 1 Interest income
Accrued interest receivable

60,000
100,000

60,000
120,000

Oct. 1 Cash
Interest income

120,000

120,000

Dec. 31 Accrued interest receivable


Interest income
31 Unrealized loss TS
Trading securities (2,300,000 1,960,000)

Oct. 1 Cash
Interest income

120,000

60,000

April 1 Cash
Interest income

2008
April 1 Held to maturity securities
Cash

2,200,000

60,000
340,000

120,000
60,000
340,000

Bonds held to maturity


2,200,000
2,200,000
120,000
120,000

153
2008
Dec. 31 Accrued interest receivable
Interest income
31 Interest income (50,000 x 9/12)
Held to maturity securities
2009
Jan. 1 Interest income
Accrued interest receivable

60,000
37,500

60,000

April 1 Cash
Interest income

120,000

Oct. 1 Cash
Interest income

120,000

Dec. 31 Accrued interest receivable


Interest income
31 Interest income (200,000/4)
Held to maturity securities

60,000
50,000

60,000
37,500

60,000
120,000
120,000
60,000
50,000

Problem 12-3
Bonds held as trading
Jan. 1 Trading securities
Cash
July

3,761,000

1 Cash
Interest income (4,000,000 x 12%)

Dec. 31 Accrued interest receivable


Interest income
31 Trading securities
Unrealized gain TS (4,200,000 3,761,000)

240,000
240,000
439,000

3,761,000
240,000
240,000
439,000

Bonds held as available for sale


Jan. 1 Available for sale securities
Cash
July

1 Cash
Interest income

3,761,000
240,000

3,761,000
240,000

154
July

1 Available for sale securities


Interest income

23,270
23,270

Interest income (3,761,000 x 7%)


Interest received
Amortization of discount
Dec. 31 Accrued interest receivable
Interest income
31 Available for sale securities
Interest income

263,270
240,000
23,270
240,000
24,899

Interest income (3,784,270 x 7%)


Interest accrued
Amortization of discount
31 Available for sale securities
Unrealized gain AFS

240,000
24,899
264,899
240,000
24,899

390,831
390,831

Market value (4,000,000 x 105)


Book value
Unrealized gain

4,200,000
3,809,169
390,831

Problem 12-4
Aug. 1 Trading securities (5,000,000 x 104)
Interest income (5,000,000 x 12% x 3/12)
Cash

5,200,000
150,000

31 Trading securities (2,000,000 x 98)


Interest income (2,000,000 x 12% x 2/12)
Cash

1,960,000
40,000

Nov. 1 Cash (5,000,000 x 12% x 6/12)


Interest income
Dec. 1 Cash (1,880,000 + 20,000)
Loss on sale of trading securities
Trading securities
Interest income (2,000,000 x 12% x 1/12)
Selling price (2,040,000 160,000)
Less: Cost of bonds sold (2,000/5,000 x 5,200,000)
Loss on sale

300,000

5,350,000

2,000,000
300,000

1,900,000
200,000
2,080,000
20,000
1,880,000
2,080,000
( 200,000)

155
Dec. 31 Cash (2,000,000 x 12% x 6/12)
Interest income

120,000
120,000

31 Accrued interest receivable (3,000,000 x 12% x 2/12)


Interest income
31 Unrealized loss TS
Trading securities

60,000
60,000
160,000

Carrying amount
Acme bonds (3,000,000 x 98%)
Avco bonds (2,000,000 x 99%)

3,120,000
1,960,000
5,080,000

Current assets:
Trading securities, at market value

160,000
Market
2,940,000
1,980,000
4,920,000

4,920,000

Problem 12-5
Requirement a
March 1 Trading securities (2,000,000 x 93%)
Interest income (2,000,000 x 12% x 1/12)
Cash

1,860,000
20,000

April

3,800,000
40,000

Aug.

1 Trading securities (4,000,000 x 95%)


Interest income (4,000,000 x 12% x 1/12)
Cash

1,880,000

1 Cash (2,000,000 x 12% x 6/12)


Interest income

120,000

Sept. 1 Cash (4,000,000 x 12% x 6/12)


Interest income

240,000

Oct. 1 Cash (1,010,000 + 10,000)


Interest income (1,000,000 x 12% x 1/12)
Trading securities
Gain on sale of trading securities
Sales price (1,000,000 x 105%)
Less: Brokerage
Net proceeds
Less: Cost of bonds sold (1,000/4,000 x 3,800,000)
Gain on sale

3,840,000
120,000

240,000

1,020,000
10,000
950,000
60,000
1,050,000
40,000
1,010,000
950,000
60,000

156
Dec. 1 Cash (1,940,000 + 80,000)
Trading securities
Interest income (2,000,000 x 12% x 4/12)
Gain on sale of trading securities

2,020,000
1,860,000
80,000
80,000

Sales price (2,000,000 x 100%)


Less: Brokerage
Net proceeds
Less: Cost of bonds sold
Gain on sale

2,000,000
60,000
1,940,000
1,860,000
80,000

31 Accrued interest receivable (3,000,000 x 12% x 4/12)


Interest income

120,000

31 Unrealized loss TS (2,850,000 2,700,000)


Trading securities

150,000

120,000
150,000

Requirement b
Current assets:
Trading securities, at market value (3,000,000 x 90)

2,700,000

Problem 12-6
2008
July 1 Trading securities
Commission expense
Interest income (2,000,000 x 4%)
Cash
Dec. 31 Unrealized loss TS
Trading securities

2,200,000
50,000
80,000
2,330,000
300,000
300,000

Market value (2,000,000 x 95)


Carrying amount
Unrealized loss
31 Cash (2,000,000) x 8%)
Interest income
2009
March 31 Cash
Trading securities
Gain on sale of TS
Interest income (2,000,000 x 8%) x 3/12)

1,900,000
2,200,000
300,000
160,000

160,000

2,140,000
1,900,000
200,000
40,000

157
Problem 12-7
Requirement 1
Date
01/01/2008
12/31/2008
12/31/2009
12/31/2010

Interest received

Interest income

160,000
160,000
160,000

190,050
193,055
196,395

Discount
amortization
30,050
33,055
36,395

Book value
1,900,500
1,930,550
1,963,605
2,000,000

Requirement 2
2008
Jan. 1 Available for sale securities
Cash
Dec. 31 Cash
Interest income

1,900,500
160,000

31 Available for sale securities


Interest income

30,050

31 Available for sale securities


Unrealized gain AFS

269,450

Market value (2,000,000 x 110)


Carrying amount
Unrealized gain
2009
Dec. 31 Cash
Interest income

160,000
30,050
269,450
2,200,000
1,930,550
269,450

160,000

31 Available for sale securities


Interest income

33,055

31 Available for sale securities


Unrealized gain

166,945

Market value 12/31/2009 (2,000,000 x 120)


Book value per table 12/31/2009
Cumulative unrealized gain 12/31/2009
Unrealized gain 12/31/2008
Increase in 2009

1,900,500

160,000
33,050
166,945
2,400,000
1,963,605
436,395
269,450
166,945

158

Problem 12-8
Requirement 1
Date
01/01/2008
12/31/2008
12/31/2009
12/31/2010

Interest received

Interest income

300,000
300,000
300,000

379,360
385,709
392,931

Discount
amortization
79,360
85,709
92,931

Book value
4,742,000
4,821,360
4,907,069
5,000,000

Requirement 2
2008
Jan. 1 Available for sale securities
Cash
Dec. 31 Cash
Interest income

4,742,000
300,000

31 Available for sale securities


Interest income

79,360

31 Available for sale securities


Unrealized gain AFS

428,640

Market value - 12/31/2008 (5,000,000 x 105)


Book value 12/31/2008
Unrealized gain 12/31/2008
2009
Dec. 31 Cash
Interest income
31 Available for sale securities
Interest income
31 Cash
Unrealized gain - AFS
Available for sale securities
Gain on sale of AFS
Sales price (5,000,000 x 110)
Unrealized gain
Total
Investment balance 12/31/2009
Unrealized gain 12/31/2009

4,742,000
300,000
79,360
428,640
5,250,000
4,821,360
428,640

300,000
85,709

300,000
85,709

5,500,000
428,640
5,335,709
592,931
5,250,000
428,640
5,928,640
5,335,709
592,931

159
Another computation
Sales price
Book value per table 12/31/2009
Gain on sale

5,250,000
4,907,069
592,931

Problem 12-9
Requirement a
2008
May 1 Held to maturity securities (6,000,000 x 94%)
Interest income (6,000,000 x 12% x 3/12)
Cash

5,640,000
180,000

Aug. 1 Cash
Interest income (6,000,000 x 12% x 6/12)

360,000

Dec. 31 Accrued interest receivable


Interest income (6,000,000 x 12% x 5/12)

300,000

31 Held to maturity securities (8,000 x 8)


Interest income

64,000

5,820,000
360,000
300,000
64,000

May 1, 2008 February 1, 2012 = 45 months


360,000 / 45 = 8,000 monthly amortization

Requirement b
2010
May 1 Held to maturity securities (8,000 x 4)
Interest income
1 Cash (6,300,000 + 180,000)
Held to maturity securities
Interest income (6,000,000 x 12% x 3/12)
Gain on sale of bonds

32,000
32,000
6,480,000
5,832,000
180,000
468,000

Original cost May 1, 2008


Add: Discount amortization from May 1, 2008 to
May 1, 2010 (8,000 x 24 months)
Book value, May 1, 2010

5,640,000
192,000
5,832,000

Selling price (6,000,000 x 105%)


Less: Book value
Gain on sale

6,300,000
5,832,000
468,000

160
Problem 12-10
1. Held to maturity securities
Cash

8,598,400
8,598,400

2. Cash (12% x 8,000,000)


Interest income

960,000

3. Interest income
Held to maturity securities

100,160

960,000
100,160

Interest received
Interest income (10% x 8,598,400)
Premium amortization

960,000
859,840
100,160

Problem 12-11
Year

Bond outstanding

Fraction

2008
2009
2010
2011
2012

1,000,000
800,000
600,000
400,000
200,000
3,000,000

10/30
8/30
6/30
4/30
2/30

2008
Jan. 1 Held to maturity securities
Cash

Premium amortization
50,000
40,000
30,000
20,000
10,000
150,000

1,000,000
1,000,000

June 30 Cash (100,000 x 12% x 6/12)


Interest income

60,000

Dec. 31

Cash
Interest income

60,000

Interest income
Held to maturity securities

50,000

31
31

Cash

60,000
60,000
50,000
200,000

Held to maturity securities

200,000

161
2009
June 30 Cash (800,000 x 12% x 6/12)
Interest income

48,000

Dec. 31 Cash
Interest income

48,000

48,000
48,000

31 Interest income
Held to maturity securities

40,000

31 Cash
Held to maturity securities

200,000

40,000
200,000

Problem 12-12
Year
2008
2009
2010
2011

Bond outstanding
4,000,000
3,000,000
2,000,000
1,000,000
10,000,000

2010
Dec. 31 Cash
Interest income
31 Held to maturity securities
Interest income
31 Cash
Held to maturity securities
2011
Dec. 31 Cash
Interest income
31 Held to maturity securities
Interest income
31 Cash
Held to maturity securities

Fraction
4/10
3/10
2/10
1/10

Discount amortization
120,000
90,000
60,000
30,000
300,000
240,000
60,000
1,000,000

240,000
60,000
1,000,000

120,000
120,000
30,000
30,000
1,000,000
1,000,000

162
Problem 12-13
Bond
Months
Peso
Bond year
outstanding outstanding months
10/01/2008 02/01/2009 3,000,000
4
12,000,000
02/01/2009 - 02/01/2010 2,000,000
12
24,000,000
02/01/2010 02/01/2011 1,000,000
12
12,000,000
48,000,000

Fraction
12/48
24/48
12/48

2008
Oct. 1 Held to maturity securities
Interest income (3,000,000 x 12% x 2/12)
Cash
Dec. 31 Accrued interest receivable
Interest income (3,000,000 x 12% x 5/12)
31 Held to maturity securities
Interest income (75,000 x 3/4)

2009
Jan. 1 Interest income
Accrued interest receivable
Feb. 1 Cash (3,000,000 x 12% x 6/12)
Interest income
1 Cash

2,700,000
60,000

Discount
amortization
75,000
150,000
75,000
300,000

2,760,000

150,000
150,000
56,250
56,250

150,000
150,000
180,000
180,000
1,000,000

Held to maturity securities

1,000,000

Aug. 1 Cash (2,000,000 x 12% x 6/12)


Interest income

120,000

Dec. 31 Accrued interest receivable


Interest income (2,000,000 x 12% x 5/12)

100,000

31 Held to maturity securities


Interest income
From January1 to February 1, 2009 (75,000 x 1/4)
From February 1 to December 31, 2009 (150,000 x 11/12)
Total amortization for year 2009

156,250

120,000
100,000
156,250
18,750
137,500
156,250

163
Problem 12-14
Date
01/01/2008
12/31/2008
12/31/2009
12/31/2010
12/31/2011
2008
Jan. 1

Interest received

Interest income

Discount amortization

400,000
400,000
400,000
400,000

450,842
456,943
463,776
471,424

50,842
56,943
63,776
71,424

Held to maturity securities


Cash

Dec. 31 Cash

3,757,015
400,000

Interest income

31 Held to maturity securities


Interest income

50,842

Book value
3,757,015
3,807,857
3,864,800
3,928,576
4,000,000

3,757,015
400,000
50,842

Problem 12-15
Date
Jan. 01, 2008
June 30, 2008
Dec. 31, 2008
June 30, 2009
Dec. 31, 2009

Interest received

Interest income

120,000
120,000
120,000
120,000

93,345
92,546
91,722
90,877

2008
Jan. 1 Held to maturity securities
Cash
June 30 Cash
Interest income
30 Interest income
Held to maturity securities
Dec. 31 Cash
Interest income
31 Interest income
Held to maturity securities

Premium amortization Carrying value


3,111,510
26,655
3,084,855
27,454
3,057,401
28,278
3,029,123
29,123
3,000,000
3,111,510
3,111,510
120,000
120,000
26,655
26,655
120,000
27,454

120,000
27,454

164
Problem 12-16
1. Journal entries
a. Held to maturity securities
Cash

7,679,000
7,679,000

b. Cash (10% x 8,000,000)


Interest income

800,000

c. Held to maturity securities


Interest income

121,480

800,000
121,480

Interest income (7,679,000 x 12%)


Interest received (8,000,000 x 10%)
Discount amortization
d. Cash
Held to maturity securities
2. Cost
Discount amortization
Annual installment
Book value 12/31/2008

921,480
800,000
121,480
2,000,000

2,000,000
7,769,000
121,480
(2,000,000)
5,800,480

Problem 12-17
Semiannual nominal interest (5,000,000 x 4%)
Semiannual effective interest (5,000,000 x 5%)
Difference
Multiply by present value of annuity of 1 for 20 periods at 5%
Discount
Face value
Discount
Purchase price

200,000
250,000
50,000
12.462
623,100
5,000,000
( 623,100)
4,376,900

Problem 12-18
1. Annual nominal interest (4,000,000 x 16%)
Annual effective interest (4,000,000 x 12%)
Difference
Multiply by present value factor
Premium
Face value
Purchase price

640,000
480,000
160,000
3.605
576,800
4,000,000
4,576,800

165
2. Date
Interest received
Jan. 01, 2008
Dec. 31, 2008
640,000
Dec. 31, 2009
640,000
Dec. 31, 2010
640,000
Dec. 31, 2011
640,000
Dec. 31. 2012
640,000

Interest income
549,216
538,322
526,121
512,455
497,086

3. Held to maturity securities


Cash
Cash
Interest income
Interest income
Held to maturity securities

Premium amortization
90,784
101,678
113,879
127,545
142,914

Book value
4,576,800
4,486,016
4,384,338
4,270,459
4,142,914
4,000,000

4,576,800
4,576,800
640,000
640,000
90,784
90,784

Problem 12-19
Semiannual nominal interest (8,000,000 x 5%)
Semiannual effective interest (8,000,000 x 4%)
Difference
Multiply by PV of annuity of 1 for 10 periods at 4%
Premium
Face value
Purchase price

400,000
320,000
80,000
8.11
648,800
8,000,000
8,648,800

The amount of P648,800 is a premium because the effective rate is lower than
nominal rate.
Another approach
PV of principal (8,000,000 x .6756)
PV of semiannual interest payments (400,000 x 8.11)
Purchase price or present value of bonds

5,404,800
3,244,000
8,648,800

Journal entries
2008
Jan. 1 Held to maturity securities
Cash
July

1 Cash
Interest income
1 Interest income
Held to maturity securities

8,648,800
8,648,800
400,000
400,000
54,048
54,048

166
Interest received
Interest income (8,648,800 x 8% x 6/12)
Premium amortization
Dec. 31 Accrued interest receivable
Interest income
31 Interest income
Held to maturity securities

400,000
345,952
54,048
400,000
56,210

Interest accrued
Interest income (8,594,752 x 8% x 6/12)
Premium amortization

400,000
56,210
400,000
343,790
56,210

Problem 12-20
1. Principal payment
Interest payment (3,000,000 x 12%)
Total payment on December 31, 2008

1,000,000
360,000
1,360,000

Principal payment
Interest payment (2,000,000 x 12%)
Total payment on December 31, 2009

1,000,000
240,000
1,240,000

Principal payment
Interest payment (1,000,000 x 12%)
Total payment on December 31, 2010

1,000,000
120,000
1,120,000

December 31, 2008 payment (1,360,000 x .91)


December 31, 2009 payment (1,240,000 x .83)
December 31, 2010 payment (1,120,000 x .75)
Total present value on January 1, 2008

1,237,600
1,029,200
840,000
3,106,800

2. Journal entries
2008
Jan. 1 Held to maturity securities
Cash
Dec. 31 Cash
Interest income
31 Interest income
Held to maturity securities

3,106,800
3,106,800
360,000
360,000
49,320
49,320

167
Interest received
Interest income (3,106,800 x 10%)
Premium amortization
Dec. 31 Cash

Held to maturity securities

360,000
310,680
49,320
1,000,000

3. Acquisition cost 1/1/2008


Premium amortization for 2008
Annual installment
Carrying value of investment 12/31/2008

1,000,000
3,106,800
(
49,320)
(1,000,000)
2,057,480

Problem 12-21
1. The present value of the bonds using the interest rate of 11% is as follows:
PV of principal (5,000,000 x .6587)
PV of interest (500,000 x 3.1024)
Total present value of cash flows

3,293,500
1,551,200
4,844,700

2. The present value of the bonds using the interest rate of 12% is as follows:
PV of principal (5,000,000 x .6355)
PV of interest (500,000 x 3.0373)
Total present value of cash flows
3.

3,177,500
1,518,650
4,696,150

X 11%____
12% - 11%
4,700,000 4,844,700_
4,696,150 4,844,700
_144,700_
148,550

= .97

Effective rate = 11% + .97


= 11.97%
4. Interest income for 2008 (4,700,000 x 11.97%)

562,590

5. Journal entries
Held to maturity securities
Cash
Cash (10% x 5,000,000)
Interest income

4,700,000
500,000

4,700,000
500,000

168
Held to maturity securities
Interest income

62,590

62,590

Interest income
Interest received
Discounted amortization

562,590
500,000
62,590

Problem 12-22
Question 1 Answer A
Acquisition cost (4,400,000 100,000)
Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15)
Book value December 31, 2008
Monthly amortization (300,000/75 months)

4,300,000
60,000)
4,240,000
4,000

Question 2 Answer B
Interest for 2008 (4,000,000 x 10%)
Amortization of premium (4,000 x 12 months)
Interest income

400,000
( 48,000)
352,000

Problem 12-23 Answer B


Interest for 2008 (2,000,000 x 12%)
Amortization of discount (100,000/5)
Interest income

240,000
20,000
260,000

Problem 12-24 Answer B


Premium on sale of bonds
Unamortized discount (100,000 20,000)
Gain on sale of bonds

140,000
80,000
220,000

Problem 12-25 Answer A


Acquisition cost 1/1/2008
Discount amortization for 2008:
Interest income (14% x 3,767,000)
Interest received (12% x 4,000,000)
Book value 12/31/2008

3,767,000
527,380
480,000

47,380
3,814,380

169
Problem 12-26 Answer A
Bond year

Bond outstanding

04/01/2007 03/31/2008
04/01/2008 03/31/2009
04/01/2009 03/31/2010
04/01/2010 03/31/2011

4,000,000
3,000,000
2,000,000
1,000,000
10,000,000

Interest for the year 2008:


From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12)
From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12)
Amortization of discount for year 2008:
From January 1 to March 31, 2008 (80,000 x 3/12)
From April 1 to December 31, 2008 (60,000 x 9/12)
Interest income for year 2008

Fraction
4/10
3/10
2/10
1/10

120,000
270,000
20,000
45,000

Amortization
80,000
60,000
40,000
20,000
200,000

390,000
65,000
455,000

Problem 12-27 Answer D


Interest income for 2008 (3,756,000 x 10%)

375,600

Problem 12-28 Answer D


Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12)

200,000

Problem 12-29 Answer C


Interest received (1,000,000 x 10% x 6/12)
Interest income (1,198,000 x 8% x 6/12)
Premium amortization
Acquisition cost July 1, 2008
Premium amortization
Book value December 31, 2008

50,000
47,920
2,080
1,198,000
(
2,080)
1,195,920

170
Problem 12-30 Answer A
Interest accrued (1,000,000 x 8% x 6/12)
Interest income (906,000 x 10% x 6/12)
Discount amortization

40,000
45,300
5,300

Acquisition cost July 1, 2008 (946,000 - 40,000)


Discount amortization
Book value December 31, 2008

906,000
5,300
911,300

Problem 12-31 Answer B


Acquisition cost July 1, 2008
Discount amortization from July 1 to December 31, 2008:
Interest accrued (5,000,000 x 8% x 6/12)
Interest income (4,614,000 x 10% x 6/12)
Book value December 31, 2008

4,614,000
200,000
230,700

30,700
4,644,700

Problem 12-32 Answer D


Acquisition cost
Discount amortization:
Interest income (4,766,000 x 12%)
Interest received (5,000,000 x 10%)
Total
Annual installment on December 31, 2008
Book value December 31, 2008

4,766,000
571,920
500,000

71,920
4,837,920
(1,000,000)
3,837,920

Problem 12-33 Answer A


Annual effective (5,000,000 x 14%)
Annual nominal (5,000,000 x 12%)
Difference
Multiply by present value factor using effective rate of 14%
Discount
Face value
Purchase price

700,000
600,000
100,000
5.216
521,600
5,000,000
4,478,400

Problem 12-34 Answer A


12/31/2008 (1,250,000 + 600,000 x .9091)
12/31/2009 (1,250,000 + 450,000 x .8264)
12/31/2010 (1,250,000 + 300,000 x .7513)
12/31/2011 (1,250,000 + 150,000 x .6830)

1,681,835
1,404,880
1,164,515
956,200
5,207,430

171

CHAPTER 13
Problem 13-1

Problem 13-2

Problem 13-3

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
B
D
D
D
A
D
B
A
B

A
C
D
D
A
A
D
A
D
A

A
A
B
A
B
A
D
A
A
D

Problem 13-4
2008
Jan. 1 Sinking fund cash
Cash
April 1 Sinking fund securities
Sinking fund cash
Oct. 1 Sinking fund cash
Sinking fund income (400,000 x 12% x 6/12)
Dec. 31 Sinking fund cash
Cash
31 Accrued interest receivable
Sinking fund income (400,000 x 12% x 3/12)
Sinking fund securities
Sinking fund income

400,000

400,000

384,000
384,000
24,000
24,000
400,000
400,000
12,000
12,000
3,000
3,000

Amortization of discount on sinking fund securities


for 9 months. (16,000/4 years = 4,000 x 9/12 = 3,000)
31 Retained earnings
Retained earnings appropriated for sinking fund
Sinking fund cash
Sinking fund securities
Accrued interest receivable
Total
Less: Appropriated retained earnings balance
Additional appropriation

439,000
439,000
440,000
387,000
12,000
839,000
400,000
439,000

2009
Jan. 1 Sinking fund income
Accrued interest receivable
April 1 Sinking fund cash
Sinking fund income
1 Sinking fund expenses
Sinking fund cash
Oct. 1 Sinking fund cash
Sinking fund income
1 Sinking fund securities (4,000 x 9/12)
Sinking fund income
1 Sinking fund cash (400,000 x 106%)
Sinking fund securities
Gain on sale of securities
Dec. 31 Sinking fund cash
Cash
31 Retained earnings
Retained earnings appropriated for sinking fund

172
12,000
12,000
24,000
24,000
12,000
24,000
3,000
424,000

400,000
461,000

Sinking fund cash


Less: Appropriated retained earnings balance
Additional appropriation
2010
July 1 Bonds payable
Interest expense
Sinking fund cash
1 Cash
Sinking fund cash
1 Retained earnings appropriated for sinking fund
Retained earnings

12,000
24,000
3,000
390,000
34,000
400,000
461,000
1,300,000
839,000
461,000

1,000,000
100,000

1,100,000

200,000
200,000
1,300,000
1,300,000

Problem 13-5
2008
Jan. 1
18

Sinking fund cash


Cash

2,700,000

Sinking fund securities


Sinking fund cash

2,500,000

2,700,000
2,500,000

173
2008
July 5
Sept. 9

Sinking fund expenses


Sinking fund cash

100,000

Sinking fund cash


Loss on sale of securities
Sinking fund securities

530,000
70,000

Dec. 20 Sinking fund cash


Sinking fund income

100,000

600,000
150,000
150,000

2009
Feb. 12 No entry
Dec. 31 Sinking fund cash
Sinking fund income

270,000
270,000

31 Sinking fund cash


Sinking fund securities
Gain on sale of securities

2,250,000

31 Bonds payable
Sinking fund cash

3,000,000

31 Cash
Sinking fund cash

300,000

1,900,000
350,000
3,000,000
300,000

Problem 13-6
1. Sinking fund cash
Cash

2,000,000

2. Sinking fund securities


Sinking fund cash

450,000

3. Sinking fund securities


Sinking fund cash

400,000

4. Sinking fund cash


Sinking fund income (500,000 x 12%)
Sinking fund securities
Sinking fund income

60,000
10,000

Amortization of bond discount (50,000/5 years = 10,000 per year)

2,000,000
450,000
400,000
60,000
10,000

174
5. Sinking fund expenses
Sinking fund cash

20,000

6. Sinking fund securities


Sinking fund income
Sinking fund cash

400,000
10,000

20,000

7. Sinking fund cash


Sinking fund income (500,000 x 10%)

50,000

8. Sinking fund cash


Sinking fund income

20,000

9. Sinking fund cash


Sinking fund securities
Gain on sale of securities
10. Retained earnings
Retained earnings appropriated for sinking fund

450,000

410,000
50,000
20,000
400,000
50,000

2,160,000
2,160,000

Composition of fund:
Sinking fund cash
Sinking fund securities

1,300,000
860,000
2,160,000

Problem 13-7
1. Sinking fund trustee
Cash

1,000,000
1,000,000

2. No entry
3. No entry
4. No entry
5. No entry
6. Sinking fund trustee
Sinking fund expense
Sinking fund income (60,000 + 10,000)
Gain on sale of securities
7. Bonds payable
Interest expense
Sinking fund trustee

140,000
30,000
70,000
100,000
1,000,000
100,000

1,100,000

175
8. Cash
Sinking fund trustee

40,000
40,000

Problem 13-8
Annual contribution (5,000,000/6.051)
Date
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012

Interest income
81,899
171,987
271,085
380,094

818,987
Annual contribution
818,987
818,987
818,987
818,987
818,987

Fund balance
818,987
1,719,873
2,710,847
3,800,919
5,000,000

Problem 13-9
Annual contribution (2,000,000/5.1051)
Date
07/01/2008
07/01/2009
07/01/2010
07/01/2011
07/01/2012

Interest income
39,176
82,271
129,674
181,819

391,765
Annual contribution
391,765
391,765
391,765
391,765
-

Fund balance
391,765
822,706
1,296,742
1,818,181
2,000,000

Problem 13-10
2008
Jan. 1 Life insurance
Cash

60,000

2009
Jan. 1 Life insurance
Cash

60,000

2010
Jan. 1 Life insurance
Cash

60,000

Dec. 31 Cash surrender value


Life insurance
Retained earnings
2011
Jan. 1 Life insurance
Cash

60,000

60,000

60,000

60,000

60,000
20,000
40,000

60,000

176
Dec. 31 Cash surrender value
Life insurance

24,000
24,000

Balance December 31, 2011


Balance December 31, 2010
Increase in cash surrender value
2012
Jan. 1 Life insurance
Cash
June 30 Cash surrender value
Life insurance

84,000
60,000
24,000
60,000
60,000
16,000
16,000

Balance December 31, 2012


Balance December 31, 2011
Increase in cash surrender value for 2012

116,000
84,000
32,000

Increase from January 1 to June 30, 2012 (1/2 x 32,000)


July 31 Cash
Cash surrender value
Life insurance (60,000 x 6/12)
Gain on sale of life insurance settlement

16,000
2,000,000

100,000
30,000
1,870,000

Problem 13-11
2007
April 1 Life insurance
Cash
Dec. 31 Prepaid life insurance (60,000 x 3/12)
Life insurance
2008
Jan. 1 Life insurance
Prepaid life insurance

60,000
15,000

15,000

April 1 Life insurance


Cash

60,000

Dec. 31 Prepaid life insurance


Life insurance

15,000

2009
Jan. 1 Life insurance
Prepaid life insurance

60,000
15,000

15,000
60,000
15,000

15,000

15,000

April 1 Life insurance


Cash

60,000

Dec. 31 Prepaid life insurance


Life insurance

15,000

2010
Jan. 1 Life insurance
Prepaid life insurance
April 1 Cash surrender value
Life insurance
Retained earnings

15,000
60,000

April 1, 2007 December 31, 2009 (33/36 x 60,000) prior years


January 1, 2010 April 1, 2010 (3/36 x 60,000) current period
Total
1 Life insurance
Cash

60,000

Dec. 31 Prepaid life insurance


Life insurance

15,000

31 Cash surrender value


Life insurance

18,000

177
60,000

15,000

15,000
5,000
55,000
55,000
5,000
60,000
60,000
15,000
18,000

Balance April 1, 2011


Balance April 1, 2010
Increase from April 1, 2010 to April 1, 2011

84,000
60,000
24,000

Increase from April 1, 2010 to December 31, 2010 (24,000 x 9/12)

18,000

2011
Jan. 1 Life insurance
Prepaid life insurance
April 1 Cash surrender value (18,000 x 3/12)
Life insurance
1 Life insurance
Cash
July 1 Cash surrender value
Life insurance
Balance April 1, 2012
Balance April 1, 2011
Increase from April 1, 2011 to April 1, 2012

15,000
15,000
6,000
6,000
60,000
60,000
8,000
8,000
116,000
84,000
32,000

178
Increase from April 1, 2010 to July 1, 2010 (32,000 x 3/12)
July 31 Cash
Cash surrender value
Life insurance (60,000 x 9/12)
Gain on life insurance settlement

8,000
2,000,000

92,000
45,000
1,863,000

Problem 13-12
2008
Jan. 1 Life insurance
Cash

80,000

2009
Jan. 1 Life insurance
Cash

80,000

Dec. 31 Cash
Life insurance
31 Cash surrender value
Life insurance (42,000 x 1/3)
Retained earnings

80,000
5,000
5,000
42,000

2010
Jan. 1 Life insurance
Cash

80,000

Dec. 31 Cash

6,000

14,000
28,000

80,000

Life insurance
31 Cash surrender value
Life insurance

80,000

6,000
5,000
5,000

Balance December 31, 2010


Balance December 31, 2009
Increase in cash surrender value

47,000
42,000
5,000

Problem 13-13
a. Life insurance (10,000 x 6/12)
Cash surrender value

5,000

b. Prepaid life insurance (28,000 x 1/2)


Life insurance

14,000

c. Interest expense
Accrued interest payable (50,000 x 12% x 9/12)

4,500

5,000
14,000
4,500

d. Dividend income
Dividend receivable

2,000

179
2,000

Current assets:
Prepaid life insurance

14,000

Investment:
Cash surrender value

85,000

Current liabilities:
Loan payable
Accrued interest payable

50,000
4,500

Problem 13-14
1. Land held by Eragon for undetermined use
Vacant building
Building owned by a subsidiary Eragon occupied by lessees
Total investment property

5,000,000
3,000,000
1,500,000
9,500,000

2. a. The property held by a subsidiary Eragon in the ordinary course of business in included
in inventory.
b. The property held by Eragon for use in production is owner-occupied property and
therefore part of property, plant and equipment.
c. The land leased by Eragon to a subsidiary under an operating lease is owneroccupied property for purposes of consolidated financial statements. However, from
the perspective of separate financial statements of Eragon, the land is an investment
property.
d. The property under construction for use as investment property is owner-occupied
property until the land is completed. Upon completion, the building becomes
investment property.
e. The land held for future factory site is owner-occupied property and therefore part of
property, plant and equipment.
f. The machinery leased out to an unrelated party is part of property, plant and
equipment because investment property includes only land and building, and not
movable property like machinery.

Problem 13-15
Cost model
2008

Depreciation
Accumulated depreciation

1,800,000
1,800,000

2009

Depreciation
Accumulated depreciation

1,800,000

2010

Depreciation
Accumulated depreciation

1,800,000

180
1,800,000
1,800,000

Fair value model


2008

Investment property
Accumulated depreciation

5,000,000

2009

Loss from change in fair value


Accumulated depreciation

2,000,000

2010

Investment property
Gain from change in fair value

7,000,000

5,000,000
2,000,000
7,000,000

Problem 13-16 Answer D


Annual deposit (8,000,000 / 4.78)

1,673,640

Problem 13-17 Answer B


Annual deposit (9,000,000 / 6.34)

1,419,560

Problem 13-18 Answer A


Principal amount
Multiply by future value of 1 for 6 periods at 10%
Future amount at maturity

5,000,000
1.77
8,850,000

Problem 13-19 Answer A


Future amount of maturity
Divide by future value of 1 for 10 periods at 6%
Initial investment

7,160,000
1.79
4,000,000

The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are
10 interest periods at 6%.

Problem 13-20 Answer A


Sinking fund balance January 1
Add: 2007 investment
Dividends on investment
Interest revenue
Total
Less: Administration costs
Sinking fund balance December 31

900,000
150,000
300,000

4,500,000
1,350,000
5,850,000
100,000
5,750,000

181
Problem 13-21 Answer C
Premium paid January 1
Less: Dividend received
Increase in cash surrender value (270,000 245,000)
Life insurance expense for 2008

15,000
25,000

100,000
40,000
60,000

Problem 13-22 Answer D


Premium paid
Less: Increase in cash surrender value (540,000 435,000)
Life insurance expense

200,000
105,000
95,000

The dividend of P30,000 is not deducted anymore because it is already part of the increase
in cash surrender value.

Problem 13-23 Answer A


Sinking fund cash
Sinking fund securities
Accrued interest receivable
Plant expansion fund
Cash surrender value
Land held for capital appreciation
Advances to subsidiary
Investment in joint venture

500,000
1,000,000
50,000
600,000
150,000
3,000,000
200,000
2,000,000
7,500,000

182

CHAPTER 14
Problem 14-1

Problem 14-2

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

A
A
B
A
D
B
C
D
D
A

Problem 14-3

B
D
D
B
C
D
D
A
B
C

1.
2.
3.
4.
5.

B
C
D
C
C

Problem 14-4
Requirement 1
2008
Jan. 1 Cash

4,000,000
Loan payable

Dec. 31 Interest expense


Cash (12% x 4,000,000)
31 Interest rate swap receivable
Unrealized gain interest rate swap (80,000 x .877)
2009
Dec. 31 Interest expense
Cash (14% x 4,000,000)
31 Cash

Interest rate swap receivable


Unrealized gain interest rate swap

31 Loan payable
Cash
31 Unrealized gain interest rate swap
Interest expense

4,000,000
480,000
480,000
70,160
70,160
560,000
80,000

4,000,000
80,000

560,000
70,160
9,840
4,000,000
80,000

Requirement 2
2008
Jan. 1 Cash

4,000,000
Loan payable

4,000,000

183
2008
Dec. 31 Interest expense
Cash
31 Unrealized loss interest rate swap
Interest rate swap payable (40,000 x .901)
2009
Dec. 31 Interest expense
Cash (11% x 4,000,000)
31 Interest rate swap payable
Unrealized loss - Interest rate swap
Cash
31 Loan payable
Cash
31 Interest expense
Unrealized loss - interest rate swap

480,000
36,040

480,000
36,040

440,000
440,000
36,040
3,960
4,000,000
40,000

40,000
4,000,000
40,000

Problem 14-5
2008
Jan. 1 Cash

6,000,000
Loan payable

Dec. 31 Interest expense


Cash (10% x 6,000,000)

6,000,000
600,000
600,000

31 Interest rate swap receivable


159,300
Unrealized gain interest rate swap (180,000 x .885)
2009
Dec. 31 Interest expense
Cash (13% x 6,000,000)
31 Cash

Interest rate swap receivable


Unrealized gain interest rate swap

31 Loan payable
Cash
31 Unrealized gain interest rate swap
Interest expense

780,000
180,000

6,000,000
180,000

159,300

780,000
159,300
20,700
6,000,000
180,000

184

Problem 14-6
2008
Jan. 1 Cash

Loan payable

Dec. 31 Interest expense


Cash (8% x 3,000,000)
31 Interest rate swap receivable
Unrealized gain interest rate swap (30,000 x 3.24)

3,000,000
240,000
97,200

3,000,000
240,000
97,200

Batangas Company will receive P30,000 at the end of


2009 and can expect to receive P30,000 at the end of
2010, 2011 and 2012. Thus, the present value of the four
annual payments of P30,000 is recognized on December 31,
2008 as interest rate swap receivable.
2009
Dec. 31 Interest expense
Cash (9% x 3,000,000)
31 Cash

Interest rate swap receivable

270,000
30,000

31 Unrealized gain interest rate swap


Interest expense

30,000

31 Unrealized gain interest rate swap


Interest rate swap receivable (97,200 30,000)

67,200

31 Unrealized loss interest rate swap


Interest rate swap payable (60,000 x 2.67)

160,200

270,000
30,000
30,000
67,200

160,200

Batangas Company will make a payment of P60,000 at


The end of 2010 by reason of the reduced interest rate
and can expect to make payment of P60,000 at the end
of 2011 and 2012. Thus, the present value of the three
annual payments of P60,000 is recognized on December 31,
2009 as the interest rate swap payable.

Problem 14-7
Jan.

2008
1 Cash
Loan payable

5,000,000

5,000,000

185
Dec. 31 Interest expense (10% x 5,000,000)
Cash
31 Interest swap receivable
Unrealized gain interest swap
(5,000,000 x 4% x 2.32)
2009
Dec. 31 Interest expense (14% x 5,000,000)
Cash

500,000
500,000
464,000
464,000
700,000
700,000

31 Cash
Interest rate swap receivable

200,000

31 Unrealized gain interest rate swap


Interest expense

200,000

31 Unrealized gain interest swap


Interest rate swap receivable

200,000
200,000
95,000
95,000

Unrealized gain 12/31/2009 (5,000,000 x 2% x 1.69)


Unrealized gain per book (464,000 200,000)
Decrease in unrealized gain
2010
Dec. 31 Interest expense (12% x 5,000,000)
Cash

169,000
264,000
( 95,000)
600,000

31 Cash
Interest rate swap receivable

100,000

31 Unrealized gain interest rate swap


Interest expense

100,000

31 Unrealized gain interest swap


Interest rate swap receivable

31 Cash
Interest rate swap receivable
Unrealized gain interest rate swap

100,000
100,000

24,000
24,000

Unrealized gain 12/31/2010 (5,000,000 x 1% x .90)


Unrealized gain per book (169,000 100,000)
Decrease in unrealized gain
2011
Dec. 31 Interest expense (11% x 5,000,000)
Cash

600,000

45,000
69,000
(24,000)
550,000
50,000

550,000
45,000
5,000

Dec. 31 Unrealized gain interest rate swap


Interest expense
31 Loan payable
Cash

50,000
5,000,000

186
50,000
5,000,000

Problem 14-8
2008
Jan. 1 Cash
Loan payable
Dec. 31 Interest expense (5,000,000 x 8%)
Cash
31 Interest swap receivable
Unrealized gain interest rate swap
(5,000,000 x 2% x 2.49)
2009
Dec. 31 Interest expense (5,000,000 x 10%)
Cash

5,000,000
400,000

249,000

500,000
100,000

31 Unrealized gain interest rate swap


Interest expense

100,000

31 Interest rate swap receivable


Unrealized gain interest rate swap
(5,000,000 x 2% x 2.49)

107,500

Unrealized gain 12/31/2009 (5,000,000 x 3% x 1.71)


Unrealized gain per book (249,000 100,000)
Increase in unrealized gain

500,000
100,000
100,000
107,500
256,500
149,000
107,500

550,000

31 Cash
Interest swap receivable

150,000

31 Unrealized gain interest rate swap


Interest expense

150,000

31 Interest rate swap receivable


Unrealized gain interest rate swap

400,000

249,000

31 Cash
Interest rate swap receivable

2010
Dec. 31 Interest expense (5,000,000 x 11%)
Cash

5,000,000

550,000
150,000
150,000

71,500
71,500

187
Unrealized gain 12/31/2010 (5,000,000 x 4% x .89)
Unrealized gain per book (256,500 150,000)
Increase in unrealized gain
2011
Dec. 31 Interest expense (5,000,000 x 12%)
Cash

178,000
106,500
71,500
600,000

31 Cash
Interest rate swap receivable
Unrealized gain interest swap

200,000

31 Unrealized gain interest swap


Interest expense

200,000

31 Loan payable
Cash

600,000
178,000
22,000
200,000

5,000,000

5,000,000

Problem 14-9
2008
Jan. 31 Cash
Note payable

1,000,000
1,000,000

Dec. 31 Interest expense (1,000,000 x 8%)


Cash

80,000

31 Note payable
Gain on note payable

34,760

80,000
34,760

On every year-end the note payable is measured at fair value. The fair value is
equal to the present value of the principal plus the present value of future interest
payments.
PV of principal (1,000,000 x .8264)
PV of interest (80,000 x 1.7355)
Fair value of note payable 12/31/2008
Carrying value of note payable
Decrease in carrying value gain
31 Loss on interest rate swap
Interest rate swap payable

826,400
138,840
965,240
1,000,000
34,760
34,760

34,760

The derivative which is the interest rate swap is also measured at fair value. The
fair value is equal to the present value of the net cash settlement with the
speculator.

188
Variable interest (1,000,000 x 10%)
Fixed interest (1,000,000 x 8%)
Net cash payment to speculator
Multiply by PV of an ordinary annuity of 1 at 10% for two periods
Fair value of interest swap payable 12/31/2008

100,000
80,000
20,000
1.7355
34,760*

*20,000 times 1.7355 equals P34,760. There is a difference of P50 due to rounding.
The gain on note payable and the loss on interest rate swap are recognized
immediately in profit or loss because the interest rate swap is designated as fair
value hedge.
2009
Dec. 31 Interest expense
Cash
Note payable

96,524
80,000
16,624

Actually, on December 31, 2008, there is a discount on note payable because


the fair value is P965,240 and the face value is P1,000,000. This discount is
amortized using the effective interest method.
Interest expense (965,240 x 10%)
Interest paid (1,000,000 x 8%)
Amortization of discount increase in note payable
31 Note payable
Gain on note payable

96,524
80,000
16,524
8,792

PV of principal (1,000,000 x .9009)


PV of interest payment (80,000 x .9009)
Fair value of note payable 12/31/2009
Carrying value of note payable (965,240 16,524)
Decrease in carrying value gain
31 Interest rate swap payable
Cash

8,792
900,900
72,072
972,972
981,764
8,792

20,000
20,000

This is the cash payment to the speculator as a result of the increase in market
rate of interest on January 1, 2009.
31 Loss on interest rate swap
Interest rate swap payable

12,267
12,267

189
Variable interest (1,000,000 x 11%)
Fixed interest (1,000,000 x 8%)
Net cash payment to speculator
Multiply by PV of 1 at 11% for one period
Fair value of interest rate swap payable 12/31/2009
Carrying value of interest rate swap payable (34,760 20,000)
Increase in interest rate swap payable
2010
Dec. 31 Interest expense
Cash
Note payable

107,028

Interest expense (972,972 x 11%)


Interest paid
Amortization of discount

110,000
80,000
30,000
.9009
27,027
14,760
12,267

80,000
27,028
107,028*
80,000
27,028

*972,972 x 11% equals P107,027 or a difference of P1 due to rounding to bring the


carrying value of the note payable to P1,000,000 on maturity date.
31 Loss on interest rate swap
Interest rate swap payable

2,973
2,973

Final cash payment to speculator


Carrying value of interest rate swap payable
Loss on interest rate swap
31 Interest rate swap payable
Cash

30,000
27,027
2,973
30,000

30,000

Final settlement with the speculator.


31 Note payable
Cash

1,000,000
1,000,000

Repayment of the loan to the bank.

Problem 14-10

Requirement 1

2008
Dec. 31 Forward contract receivable
Unrealized gain forward contract (5,000 x 300)

1,500,000

2009
Jan. 1 Tree inventory (5,000 x 1,800)
Cash

9,000,000

1,500,000

9,000,000

190
1 Cash
Forward contract receivable

1,500,000

1 Unrealized gain forward contract


Gain on forward contract

1,500,000

1,500,000
1,500,000

Requirement 2
2008
Dec. 31 Unrealized loss forward contract
Forward contract payable (5,000 x 100)
2009
Jan. 1 Tree inventory (5,000 x 1,400)
Cash

500,000
500,000
7,000,000

1 Forward contract payable


Cash

500,000

1 Loss on forward contract


Unrealized loss forward contract

500,000

7,000,000
500,000
500,000

Problem 14-11
2008
Dec. 31 Forward contract receivable
893,000
Unrealized gain forward contract (1,000,000 x .893)

893,000

2009
Dec. 31 Unrealized gain forward contract
Forward contract receivable

893,000

893,000

Cancelation of the forward contract receivable because


of the reduction of market price on December 31, 2009
and January 1, 2010.
31 Unrealized loss forward contract
Forward contract payable (100,000 x 5)
2010
Jan. 1 Fish inventory (100,000 x 75)
Cash

500,000
500,000
7,500,000

1 Forward contract payable


Cash

500,000

1 Loss on forward contract


Unrealized loss forward contract

500,000

7,500,000
500,000
500,000

191

Problem 14-12
2008
Dec. 31 Forward contract receivable
Unrealized gain forward contract (50,000 x P10)

500,000

2009
March 1 Unrealized gain forward contract
Forward contract receivable

100,000
100,000

Forward contract receivable 3/1/2009 (500,000 x P8)


Forward contract receivable 12/31/2008
Decrease in derivative asset
1 Cash
Forward contract receivable
1 Purchases (500,000 x 58)
Cash

Problem 14-13

400,000
500,000
(100,000)
400,000
2,900,000

1 Unrealized gain forward contract


Gain on forward contract

500,000

400,000

400,000
2,900,000
400,000

Requirement 1

2008
Dec. 31 Futures contract receivable
Unrealized gain futures contract (50,000 x 10)
2009
Jan. 1 Purchases
Cash (50,000 x 160)

500,000

8,000,000

1 Cash
Futures contract receivable

500,000

1 Unrealized gain futures contract


Gain on futures contract

500,000

500,000

8,000,000
500,000
500,000

Requirement 2
2008
Dec. 31 Unrealized loss futures contract
Futures contract payable (50,000 x 5)
2009
Jan. 1 Purchases
Cash (50,000 x 145)

250,000
250,000
7,250,000

7,250,000

192
1 Futures contract payable
Cash

250,000

1 Loss on futures contract


Unrealized loss - futures contract

250,000

250,000
250,000

Problem 14-14
2008
Dec. 31 Futures contract receivable
Unrealized gain futures contract (100,000 x 15)

1,500,000

2009
Jan. 1 Purchases
Cash (100,000 x 65)

6,500,000

1,500,000

6,500,000

1 Cash
Futures contract receivable

1,500,000

1 Unrealized gain futures contract


Gain on futures contract

1,500,000

1,500,000
1,500,000

Problem 14-15
2008
Dec. 31 Unrealized loss futures contract
Futures contract payable (25,000 x 5)
2009
June 1 Unrealized loss futures contract
Futures contract payable

125,000
125,000
75,000

Futures contract payable 6/1/2009 (25,000 x P8)


Futures contract payable 12/31/2008
Increase in derivative liability
1
1
1

Futures contract payable


Cash
Purchases (25,000 x 42)
Cash
Loss on futures contract
Unrealized loss futures contract

75,000
200,000
125,000
75,000

200,000
200,000
1,050,000
1,050,000
200,000
200,000

193
Problem 14-16
Requirement 1
2008
Dec. 31 Call option
Cash
2009
July 1 Call option
Gain on call option

50,000

700,000
700,000

Fair value of call option (150,000 x 5)


Payment for call option
Increase
2009
July 1
1

Cash
Call option
Purchases
Cash (150,000 x 35)

50,000

750,000
50,000
700,000
750,000
5,250,000

750,000
5,250,000

Requirement 2
2008
Dec. 31 Call option
Cash
2009
July 1 Purchases
Cash (150,000 x 28)
1 Loss on call option
Call option

50,000
50,000
4,200,000
50,000

4,200,000
50,000

Problem 14-17
2008
Dec. 1 Call option
Cash
Dec. 31 Call option
Unrealized gain - call option
Fair value (200,000 x 2)
Payment for call option
Increase

20,000
380,000

20,000
380,000
400,000
20,000
380,000

2009
June 1 Call option
Unrealized gain call option

194
200,000
200,000

Call option 6/1/2009 (200,000 x P3)


Call option 12/31/2008
Increase in derivative asset
1

Cash
Call option

Purchases (200,000 x P28)


Cash

Unrealized gain call option


Gain on call option

600,000
400,000
200,000
600,000
5,600,000
600,000

600,000
5,600,000
600,000

Problem 14-18
2008
Dec. 1 Put option
Cash
2009
Feb. 1 Cash (50,000 x 180)
Sales
1

Loss on put option


Put option

100,000

100,000

9,000,000
9,000,000
100,000
100,000

With the price above the put option price, on the part of the
seller, there is no reason to exercise the option. It is better to
sell the product on the open market. Thus, the output option
is not exercised on February 1, 2009 and has no value.

Problem 14-19
2008
Sept. 1 Equipment
Accounts payable
Dec. 31 Loss on foreign exchange
Accounts payable
Peso equivalent 12/31/2008
Peso equivalent 09/01/2008
Loss on foreign exchange

2,250,000
50,000

2,250,000
50,000
2,050,000
2,000,000
50,000

195
31 Forward contract receivable
Gain on forward contract
2009
March 1 Loss on foreign exchange
Accounts payable

50,000
50,000
100,000

Peso equivalent 3/1/2009


Peso equivalent 12/31/2008
Loss on foreign exchange

2,150,000
2,050,000
100,000

1 Forward contract receivable


Gain on forward contract

100,000

150,000

Cash
Forward contract receivable
Accounts payable (50,000 x 43)
Cash

100,000

100,000
150,000
2,150,000
2,150,000

Problem 14-20
2008
Dec. 31 Forward contract receivable
Unrealized gain forward contract ($50,000 x P1)

50,000

2009
March 31 Forward contract receivable
Unrealized gain forward contract ($50,000 x P2)

100,000

31 Cash
Forward contract receivable
31 Purchases ($50,000 x P43)
Cash
31 Unrealized gain forward contract
Purchases

50,000

150,000
2,150,000
150,000

100,000
150,000
2,150,000
150,000

Problem 14-21
Question 1 Answer B
The notional figure is 8,000 kilos and the notional value is 8,000 kilos times the underlying
Fixed price of P1,200 per kilo or P9,600,000.

Question 2 Answer C
Market price 12/31/2008
Underlying fixed price
Derivative asset

196
1,500
1,200
300

Forward contract receivable (8,000 x 300)

2,400,000

Present value of derivative asset (2,400,000 x .91)

2,184,000

The present value of P2,184,000 is recognized as forward contract receivable on December


31, 2008 because the amount is collectible on January 1, 2010, one year from December 31,
2008.
Question 3 Answer B
Market price 12/31/2009
Underlying fixed price
Derivative liability
Forward contract payable 12/31/2009 (8,000 x 200)

1,000
1,200
200
1,600,000

Problem 14-22 Answer C


Fair value of call option (120 100 = 20 x 10,000)

200,000

Problem 14-23 Answer B


Exchange rate on July 31 (80,000,000 / 92)
Strike price (80,000,000 / 100)
Derivative asset
Call option payment
Saving

869,565
800,000
69,565
10,000
59,565

Problem 14-24
Question 1 Answer A
Camrys payment to Corolla (5,000,000 x 2%)

100,000

Question 2 Answer C
Fair value of interest rate swap (100,000 x .926)

92,600

Problem 14-25 Answer C


Notional amount
Exchange rate on December 31, 2008 (47,850,000 / 115)
Fair value of forward contract receivable

435,000
416,087
18,913

197

CHAPTER 15
Problem 15-1

Problem 15-2

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

D
C
A
D
D
C
A
B
A
C

Problem 15-3

D
C
D
C
C
C
B
C
D
C

1.
2.
3.
4.
5.

A
C
A
A
D

Problem 15-4
1. Machinery
Cash
2. Land (2/5 x 5,500,000)
Building (3/5 x 5,500,000)
Cash
3. Investment in equity security
Cash
Delivery equipment (5,000 x 120)
Investment in equity security
Gain on exchange
Taxes and licenses
Cash
4. Equipment
Donated capital
Donated capital
Cash
5. Land
Building
Share capital (60,000 x 100)
Share premium

500,000
2,200,000
3,300,000

500,000

5,500,000

500,000
600,000

500,000
500,000
100,000

3,000
3,000
1,000,000
1,000,000
25,000
25,000
2,000,000
5,500,000

6,000,000
1,500,000

198

Problem 15-5
Net method

Gross method

a. Within the discount period:

a. Within the discount period:

1. Machinery
Accounts payable
(500,000 x 98%)

490,000

2. Accounts payable
Cash

490,000

490,000

490,000

b. Beyond the discount period:


1. Machinery
Accounts payable

490,000

2. Accounts payable
Purchase discount lost
Cash

490,000
10,000

1. Machinery
Accounts payable

500,000

2. Accounts payable
Cash
Machinery

500,000

490,000

500,000

1. Machinery
500,000
Accounts payable

500,000

2. Accounts payable
500,000
Purchase discount lost 10,000
Cash
Machinery

500,000
10,000

2008
Jan. 1 Equipment
Discount on note payable
Cash
Note payable

580,000
120,000
200,000
500,000

Dec. 31 Note payable


Cash

100,000

31 Interest expense
Discount on note payable

2009
Dec. 31
31

490,000
10,000

b. Beyond the discount period:

Problem 15-6

2008
2009
2010
2011
2012

500,000

Note payable
500,000
400,000
300,000
200,000
100,000
1,500,000

Note payable
Cash
Interest expense
Discount on note payable

40,000
Fraction
5/15
4/15
3/15
2/15
1/15

100,000
40,000

Amortization
40,000
32,000
24,000
16,000
8,000
120,000
100,000
32,000

100,000
32,000

199
Problem 15-7
Down payment
Present value of note (200,000 x 3.17)
Total cost
2008
Jan. 1

100,000
634,000
734,000

Machinery
Discount on note payable
Cash
Note payable

734,000
166,000
100,000
800,000

Dec. 31 Note payable


Cash

200,000

31 Interest expense
Discount on note payable
Date
01/01/2008
12/31/2008
12/31/2009
12/31/2010
12/31/2011

Payment
200,000
200,000
200,000
200,000

2009
Dec. 31 Note payable
Cash
31 Interest expense
Discount on note payable

63,400
10% interest
63,400
49,740
34,714
18,146

Principal
136,600
150,260
165,286
181,854

200,000
63,400

Present value
634,000
497,400
347,140
181,854
200,000
49,740

200,000
49,740

Problem 15-8
1. Building
Cash
Share capital
Share premium

7,000,000

2. Land
Income from donation

1,500,000

3. Machinery (800,000 x 95%)


Cash

760,000

4. Equipment
Note payable

200,000

1,000,000
5,000,000
1,000,000
1,500,000
760,000
200,000

200

Problem 15-9
1. Land (1/4 x 6,000,000)
Building (3/4 x 6,000,000)
Machinery (8/12 x 1,800,000)
Office equipment (4/12 x 1,800,000)
Delivery equipment
Cash

1,500,000
4,500,000
1,200,000
600,000
500,000

2. Land
Building
Machinery
Share capital
Share premium

1,000,000
5,000,000
2,000,000
6,000,000
2,000,000

3. Land
Donated capital

500,000

4. Machinery (900,000 x 98%)


Cash

882,000

Machinery
Cash
5. Furniture and fixtures (400,000 x .797)
Discount on note payable
Note payable

8,300,000

35,000

500,000
882,000
35,000

318,800
81,200
400,000

Problem 15-10
1. Land
Accumulated depreciation
Equipment old
Gain on exchange

1,500,000
700,000

Fair value of equipment given


Less: Book value
Gain on exchange

2,000,000
200,000
1,500,000
1,300,000
200,000

2. Equipment - new
Accumulated depreciation
Equipment old

1,300,000
700,000

3. Equipment - new
Accumulated depreciation
Equipment old
Cash
Gain on exchange

2,000,000
700,000

2,000,000

2,000,000
500,000
200,000

201
Fair value
Cash payment
Cost of new asset

1,500,000
500,000
2,000,000

Fair value
Less: Book value
Gain on exchange

1,500,000
1,300,000
200,000

Problem 15-11
1. Computer
Inventory (car)
Cash
Gain on exchange

430,000

2. Machinery new (110,000 + 30,000)


Accumulated depreciation
Loss on exchange
Machinery old
Cash

140,000
120,000
10,000

300,000
50,000
80,000

Fair value of asset given


Book value
Loss on exchange

240,000
30,000
110,000
120,000
( 10,000)

Problem 15-12
ABC
Equipment - new
500,000
Accumulated depreciation 2,000,000
Equipment old
2,400,000
Gain on exchange
100,000

XYZ
Equipment new
500,000
Accumulated depreciation 1,750,000
Equipment old
2,200,000
Gain on exchange
50,000

Problem 15-13
Equipment new
Loss on exchange
Accumulated depreciation
Equipment old

1,000,000
200,000
1,800,000
3,000,000

Problem 15-14
Company A
Machinery new (600,000 + 200,000)
Accumulated depreciation
Machinery old
Cash
Gain on exchange (600,000 500,000)

800,000
1,500,000
2,000,000
200,000
100,000

202
Company B
Machinery new (800,000 - 200,000)
Accumulated depreciation
Cash
Machinery old
Gain on exchange (800,000 700,000)

600,000
1,800,000
200,000
2,500,000
100,000

Problem 15-15
Equipment - new
Accumulated depreciation
Loss on exchange
Equipment old
Cash

1,400,000
1,050,000
50,000

1,200,000
1,300,000

Fair value
Cash payment (1,600,000 300,000)
Cost of new asset

100,000
1,300,000
1,400,000

Fair value
Less: Book value
Loss on exchange

100,000
( 150,000)
( 50,000)

Problem 15-16
Cash price without trade in
Cash payment
Trade in value
Less: Book value
Gain on exchange
Equipment - new
Accumulated depreciation
Equipment old
Cash
Gain on exchange

1,400,000
980,000
420,000
400,000
20,000
1,400,000
600,000
1,000,000
980,000
20,000

Problem 15-17
Delivery equipment - new
Accumulated depreciation
Loss on exchange
Input tax
Insurance
Taxes and licenses
Delivery equipment old
Cash

2,300,000
1,300,000
150,000
300,000
120,000
10,000

1,500,000
2,680,000

203
Fair value of asset given
Cash paid
Total
Less: VAT
Insurance
Registration fee
Cost of new asset

300,000
120,000
10,000

Fair value
Book value
Loss on exchange

Problem 15-18
1. Direct labor
Materials
Overhead
2. Direct labor
Materials
Overhead
135 / 180 x 2,000,000
45 / 180 x 2,000,000
3. Direct labor
Materials
Overhead
42 / 60 x 2,000,000
18 / 60 x 2,000,000

50,000
2,680,000
2,730,000
430,000
2,300,000
50,000
200,000
(150,000)

Total
6,000,000
7,000,000
2,000,000
15,000,000
6,000,000
7,000,000
2,000,000
_________
15,000,000
6,000,000
7,000,000
2,000,000
_________
15,000,000

Finished goods
4,200,000
3,000,000
2,000,000
9,200,000

Building
1,800,000
4,000,000
-___
5,800,000

4,200,000
3,000,000

1,800,000
4,000,000

1,500,000
_________
8,700,000

500,000
6,300,000

4,200,000
3,000,000

1,800,000
4,000,000

1,400,000
_________
8,600,000

600,000
6,400,000

Problem 15-19
a. Materials
Direct labor
Overhead
Cost of machinery
Overhead
Charged to finished goods (75% x 4,000,000)
Charged to machinery
b. Materials
Direct labor
Overhead (1/5 x 3,600,000)
Cost of machinery

500,000
1,000,000
600,000
2,100,000
3,600,000
3,000,000
600,000
500,000
1,000,000
720,000
2,220,000

204
Direct labor:
Finished goods
Machinery

4,000,000
1,000,000
5,000,000

4/5
1/5

Problem 15-20
Date
January
1
June
30
December 31

Expenditure

Months

Amount

2,000,000
2,000,000
1,000,000
5,000,000

12
6
0

24,000,000
12,000,000
-____
36,000,000

Average expenditures (36,000,000 x 12)

3,000,000

Average capitalization rate (1,060,000 / 8,000,000)

13.25%

Expenditures on building
Interest (3,000,000 x 13.25%)
Total cost of building

5,000,000
397,500
5,397,500

Problem 15-21
Average capitalization rate (900,000 / 8,000,000)
Date
January
1
March
31
September 30

11.25%

Expenditure

Months

Amount

2,000,000
1,000,000
3,000,000
6,000,000

12
9
3

24,000,000
9,000,000
9,000,000
42,000,000

Average expenditures (42,000,000 / 12)

3,500,000

Expenditures on construction
Specific interest cost:
Actual interest
Interest income
General interest cost:
Average expenditures
Less: Specific borrowing
General borrowing
Capitalization rate
Total cost of building

6,000,000
240,000
( 10,000)
3,500,000
2,000,000
1,500,000
11.25%

230,000

168,750
6,398,750

205
Problem 15-22
Date
January
1
March
31
June
30
September 30
December 31

Expenditure
1,500,000
1,000,000
1,000,000
1,000,000
1,000,000
5,500,000

Months
12
9
6
3
0

Amount
18,000,000
9,000,000
6,000,000
3,000,000
-___
36,000,000

Average expenditures (36,000,000 x 12)

3,000,000

Expenditures on construction
Interest cost (3,000,000 x 11.5%)
Total cost

5,500,000
345,000
5,845,000

Problem 15-23
Date
January
1
July
1
November 1

Expenditure
1,000,000
2,000,000
3,000,000
6,000,000

Months
12
6
2

Amount
12,000,000
12,000,000
6,000,000
30,000,000

Average expenditures (30,000,000 / 12)

2,500,000

Average expenditures
Applicable to specific loan
Applicable t general loan

2,500,000
(1,000,000)
1,500,000

Actual expenditures
Capitalizable interest:
Specific (1,000,000 x 10%)
General (1,500,000 x 12%)
Total cost of building

6,000,000
100,000
180,000
6,280,000

Problem 15-24
Date
January 1, 2008
April 1, 2008
December 1, 2008

Expenditure
4,000,000
5,000,000
3,000,000
12,000,000

Average expenditures in 2008 (96,000,000 / 12)


Applicable to specific loan
Applicable t general loan

Months
12
9
1

Amount
48,000,000
45,000,000
3,000,000
96,000,000
8,000,000
(3,000,000)
5,000,000

206
Actual expenditures in 2008
Capitalizable interest in 2008
Specific (3,000,000 x 10%)
General (5,000,000 x 12%)
Total cost of building
Date
January 1, 2009
March 1, 2009

Expenditure
12,900,000
6,000,000
18,900,000

12,000,000
300,000
600,000
12,900,000
Months

Amount

6
4

77,400,000
_24,000,000
101,400,000

Average expenditures in 2009 (101,400,000 / 6)


Applicable to specific loan
Applicable to general loan

16,900,000
( 3,000,000)
13,900,000

Note that the construction period in 2009 is only 6 months because the building
was completed on June 30, 2009. Thus, the average expenditures should be for
6 months only.
Actual expenditures in 2009
Capitalizable interest in 2009
Specific (3,000,000 x 10% x 6/12)
General (13,900,000 x 12% x 6/12)
Total cost of new building 6/30/2009

18,900,000
150,000
834,000
19,884,000

Problem 15-25
1. Cash
Deferred income-government grant

30,000,000
30,000,000

Environmental expenses
Cash

2,000,000

Deferred income-government grant


Income from government grant (2/20 x 30,000,000)

3,000,000

2. Cash
Deferred income-government grant
Building
Cash

2,000,000
3,000,000
40,000,000
40,000,000
50,000,000
50,000,000

Depreciation
Accumulated depreciation (50,000,000 / 20)

2,500,000

Deferred income-government grant


Income from government grant (40,000,000 / 20)

2,000,000

2,500,000
2,000,000

207
3. Land
Deferred income-government grant
Building
Cash

50,000,000
50,000,000
80,000,000
80,000,000

Depreciation
Accumulated depreciation (80,000,000 / 25)

3,200,000

Deferred income-government grant


Income from government grant (50,000,000 / 25)

2,000,000

4. Cash
Income from government grant

10,000,000

3,200,000
2,000,000
10,000,000

Problem 15-26 Answer D


Cost of land (5,400,000 x 2/5)

2,160,000

Problem 15-27 Answer B


Cash price
Installation cost
Total cost

950,000
30,000
980,000

Problem 15-28 Answer C


Cash price
Installation cost
Total cost

2,000,000
50,000
2,050,000

Problem 15-29 Answer B


Present value of first note payable (500,000 x 5.65)
Present value of second note payable (3,000,000 x .80)
Total cost of machinery

2,825,000
2,400,000
5,225,000

Problem 15-30 Answer D


First payment on December 30, 2008
Present value of next 7 payments (200,000 x 4.712)
Total cost of machine

200,000
942,400
1,142,400

Another computation:
PV of annuity of 1 in advance for 8 periods (200,000 x 5.712)

1,142,400

208
Problem 15-31 Answer A
Invoice price
Discount (2% x 700,000)
Freight and insurance
Cost of assembling and installation
Total cost

700,000
( 14,000)
3,000
5,000
694,000

Problem 15-32 Answer A


Equipment:
Invoice price
Discount (5% x 600,000)
Land (at its fair value)
Machinery:
Acquisition cost
Installation cost
Trial run and testing cost
Construction of base
Total

600,000
( 30,000)
275,000
7,000
18,000
10,000

570,000
1,100,000

310,000
1,980,000

Problem 15-33 Answer B


Fair value of asset given
Cash payment
Total cost

700,000
160,000
860,000

Problem 15-34 Answer B


Fair value of asset given
Cash payment
Cost of new inventory

2,100,000
400,000
2,500,000

Problem 15-35 Answer A


Fair value of asset given
Less: Cost of asset given
Gain on exchange

1,500,000
1,250,000
250,000

Problem 15-36 Answer A


Since the old machine has no available fair value, the new machine received in exchange
is recorded at its cash price without trade in of P900,000. The average published retail value
of the old machine is not necessarily its fair value.

209
Problem 15-37 Answer A

Average expenditures (20,000,000 / 2)


Multiply y capitalization rate
Interest on average expenditures

10,000,000
12%
1,200,000

The capitalizable borrowing cost is limited to the actual borrowing cost incurred. In this case,
the computed amount of P1,200,000 is more than the actual borrowing cost of P1,020,000.
Accordingly, the capitalizable interest is P1,020,000. Note that in computing the average
expenditures, the amount of P20,000,000 is simply divided by 2 because the said amount is
incurred evenly during the year ended 2008.

Problem 15-38 Answer C


Since the actual interest incurred is not given, the interest on the average expenditures is
determined.
Average expenditures (9,600,000 / 2)
Interest on average expenditures (4,800,000 x 10%)
Interest income on unexpended portion
Capitalizable interest

4,800,000
480,000
(320,000)
160,000

Problem 15-39 Answer B


Accumulated expenditures at the end of two years
Average expenditures in the third year (8,000,000 / 2)
Total
Capitalizable interest (7,000,000 x 9%)

3,000,000
4,000,000
7,000,000
630,000

Problem 15-40 Answer B


Average accumulated expenditures
Specific borrowing
Applicable to general borrowing
Specific (6% x 1,500,000)
General (9% x 1,000,000)
Capitalizable interest

2,500,000
(1,500,000)
1,000,000
90,000
90,000
180,000

210
CHAPTER 16
Problem 16-1
1.
2.
3.
4.
5.

C
D
D
D
B

Problem 16-2

Land
Building
Cash paid for land and old building
1,000,000
Removal of old building
50,000
Payment to tenants of old building to vacate premises
15,000
Architect fee
200,000
Building permit
30,000
Fee for title search
10,000
Survey before construction
20,000
Excavation
100,000
Cost of new building constructed
6,000,000
Assessment fee
5,000
Cost of grading, leveling and landfill
45,000
Driveways and walks
40,000
Temporary quarters for construction crew
80,000
Temporary building to house tools and materials
60,000
Cost of construction changes
_________
50,000
6,560,000
1,145,000

Note: The cost of replacing windows is treated as expense.


Problem 16-3
Cost of land
Legal fees
Payment of mortgage
Payment of taxes
Cost of razing building
Proceeds from sale of materials
Grading and drainage
Architect fee
Payment to contractor
Interest cost
Driveway and parking lot
Cost of trees, shrubs and other landscaping
Cost of installing lights in parking lot
Premium for insurance

Land
2,000,000
10,000
50,000
20,000
30,000
(
5,000)
15,000

Building

Land
improvement

200,000
8,000,000
300,000

_______
2,120,000

25,000
8,525,000

40,000
55,000
5,000
_______
100,000

The payment for medical bills and the cost of open house party are outright expenses
because they are not a necessary cost of acquiring the land and building.

211

Problem 16-4

Purchase price
Materials
Excavation
Labor
Remodeling
Cash discounts
Supervision
Compensation insurance
Clerical and other expenses
Paving of streets
Plans and specifications
Legal cost - land

Land
1,300,000

10,000
1,310,000

Office
Factory
Land
building building
improvements
700,000
3,200,000
100,000
2,500,000
200,000
(
60,000)
30,000
50,000
30,000
40,000
150,000
________
________
______
900,000
6,000,000

40,000

1. The imputed interest on corporations own money is not capitalizable.


2. The payment of claim for injuries not covered by insurance and the legal cost of injury
claim are treated as expense.
3. Saving on construction is not recognized.

Problem 16-5
Taxes in arrears
Payment for land
Demolition of old building
Total cost of land

50,000
1,000,000
100,000
1,150,000

Architect fee
Payment to city hall
Contract price
Safety fence around construction site
Safety inspection on building
Removal of safety fence
Total cost of factory building

230,000
120,000
5,000,000
35,000
30,000
20,000
5,435,000

Problem 16-6
Purchase price
Title clearance fee
Cost of razing old building
Scrap value of old building
Total cost of land
Construction cost of new building

3,000,000
50,000
100,000
(
10,000)
3,140,000
8,000,000

212
Problem 16-7
Purchase price
Remodeling
Salvage materials
Grading, leveling and other permanent improvement
Repairs

Land
1,000,000

Building
4,000,000
150,000
(
5,000)

50,000
________
1,050,000

10,000
4,155,000

The repairs are capitalized because they are necessary prior to the occupancy and
intended use of the building.

Problem 16-8
Fair value
Repairs
Remodeling
Invoice price
Discount
Base

Land
1,500,000

Building
5,000,000
200,000
300,000

Machinery

1,000,000
20,000)
_________
_________
50,000
5,500,000
1,030,000
1,500,000
(

The driveway and parking lot are charged to land improvements.

Problem 16-9
Fair value
Repairs
Special tax assessment
Platform
Remodeling
Purchase price
Discount
Freight
Installation

Land
Building
Machinery
4,000,000
1,500,000
200,000
30,000
70,000
400,000
800,000
( 40,000)
20,000
_________
_________
30,000
4,600,000
2,380,000
1,530,000

1,500,000

Problem 16-10
Purchase price
Commission
Legal fees
Title guarantee

2,000,000
100,000
50,000
10,000

Contract price 6,000,000


Plans, specification
and blueprint
100,000
Architectural fee
250,000

Cost of razing old building


Salvage value of materials
Cost of land

75,000
(
5,000)
2,230,000

Cost of new building

6,350,000

213
Problem 16-11
Land
Balances, Jan. 1
Acquisition of land - #621:
Purchase price
Commission
Clearing cost
Sale of timber and gravel
Acquisition of land - #622:
Purchase price
Cost of demolition
New building:
Construction cost
Excavation fee
Architectural design
Building permit
Improvements:
Electrical work
Construction extension
(800,000 x 1/2)
Improvements on office space
Purchase of new machine:
Invoice price
Freight
Unloading charge
Balances, December 31

1,500,000

Building

Leasehold
improvements

Machinery

4,000,000

500,000

1,000,000

3,000,000
60,000
15,000
(
5,000)
4,000,000
300,000
5,000,000
50,000
150,000
40,000
350,000
400,000
650,000
1,750,000
_________
8,870,000

_________
9,240,000

_________
1,900,000

20,000
__ 30,000
2,800,000

The third tract of land should be presented as current asset because it was classified as held
for sale.

Problem 16-12

Land
Land
improvements

Balances, Jan. 1
3,500,000
Land acquired
1,250,000
Issuance of share capital:
12/36 x 4,500,000
1,500,000
24/36 x 4,500,000
New machinery
New parking lot, street and
sidewalk

900,000

Building

Machinery

7,000,000

1,500,000

3,000,000
3,400,000
750,000

Machinery sold
Balances, Dec. 31

________
________
_________
1,650,000
10,000,000
6,250,000

500,000)
4,400,000

The assessed values do not represent the fair values of the land and building but are used
in allocating the market value of the share capital.

214
Problem 16-13
Invoice price
Cash discount
Freight
Installation cost
Testing cost

Problem 16-14
3,000,000
Invoice cost
4,000,000
( 150,000)
Discount (5% x 4,000,000)
( 200,000)
50,000
Transportation
40,000
30,000
Installation
100,000
Trial run-salary of engineer
50,000
20,000
Cash allowance
( 60,000)
2,950,000
3,930,000

Problem 16-15
Cost paid (896,000 96,000)
Cost of transporting machine
Installation cost
Testing cost
Safety rails and platform
Water device
Cost of adjustment
Estimated dismantling cost
Total cost of machine

800,000
30,000
50,000
40,000
60,000
80,000
75,000
65,000
1,200,000

Note that the estimated dismantling cost is capitalized because the company has a present
obligation as required by contract. In the absence of a present obligation, the estimated
dismantling cost is not capitalized.

Problem 16-16
Second hand market value
Overhaul and repairs
Installation
Testing
Hauling
Safety device

2,400,000
150,000
80,000
110,000
10,000
250,000
3,000,000

Problem 16-17
1. Materials
Labor
Installation
Trial run
Discount
Overhead

600,000
400,000
60,000
30,000
(
40,000)
150,000
1,200,000

2. Adjusting entries:
1. Loss on retirement of old machinery
Machinery (20,000 14,000)

6,000
6,000

215
2. Purchase discount
Machinery

40,000
40,000

3. Machinery
Factory overhead

150,000

4. Profit on construction
Machinery

100,000

150,000
100,000

5. Tools
Machinery

90,000

6. Depreciation tools
Tools (90,000 / 3 x 4/12)

10,000

7. Machinery
Accumulated depreciation
Depreciation machinery

90,000
10,000
128,600
40,000
88,600

Depreciation recorded
Correct depreciation (1,200,000 / 10 x 4/12)
Overdepreciation

128,600
40,000
88,600

Problem 16-18
Initial design fee
Executive chairs and desks
Storm windows and installation
Installation of automatic door opening system
Overhead crane
Total capital expenditures

150,000
200,000
500,000
200,000
350,000
1,400,000

Problem 16-19
1. Accumulated depreciation
Loss on retirement of building
Building
Building
Cash
Depreciation (8,100,000 / 20)
Accumulated depreciation

400,000
1,600,000
2,000,000
2,500,000
2,500,000
405,000
405,000

Building (9,000,000 + 2,500,000 2,000,000)


Accumulated depreciation (1,800,000 400,000)
Book value
2. Accumulated depreciation (1,960,000 x 20%)
Loss on retirement of building
Building (2,500,000 x .784)

9,500,000
1,400,000
8,100,000
392,000
1,568,000
1,960,000

216
Building
Cash
Depreciation (8,132,000 / 20)
Accumulated depreciation

2,500,000
2,500,000
406,600
406,600

Building (9,000,000 1,960,000 + 2,500,000)


Accumulated depreciation (1,800,000 392,000)
Book value

9,540,000
1,408,000
8,132,000

Problem 16-20
a. Annual depreciation (8,400,000 / 30)

280,000

Age of building (7,000,000 / 280,000)

25 years

b. Building
Cash

2,500,000
2,500,000

c. Building (8,400,000 + 2,500,000)


Less: Accumulated depreciation
Book value
d. Depreciation (3,900,000 / 15)
Accumulated depreciation

10,900,000
7,000,000
3,900,000
260,000
260,000

Original life
Less: Expired life
Remaining useful life, beginning of current year
Add: Extension in life
Revised useful life

30
25
5
10
15

Problem 16-21
1. Building
Cash
2. Depreciation
Accumulated depreciation
3. Building

10,500,000
10,500,000
200,000
200,000
3,000,000

Cash
Accumulated depreciation (2,500,000 / 50 x 2)
Loss on retirement of building
Cash
4. Depreciation (10,700,000 500,000 / 48)
Accumulated depreciation

3,000,000
100,000
2,400,000
2,500,000
212,500
212,500

217
Building (10,500,000 + 3,000,000 2,500,000)
Accumulated depreciation (400,000 100,000)
Book value 1/1/2008

11,000,000
300,000
10,700,000

Problem 16-22
1. Machinery
Cash

5,000,000
5,000,000

2. Depreciation
Accumulated depreciation

450,000

3. Depreciation (3,600,000 / 6)
Accumulated depreciation

600,000

Cost
Accumulated depreciation:
2005
2006
Book value
Residual value
Remaining depreciable cost 1/1/2007

450,000
600,000
5,000,000
450,000
450,000

4. Machinery
Cash

300,000

5. Depreciation (3,300,000 / 5)
Accumulated depreciation

660,000

900,000
4,100,000
500,000
3,600,000
300,000
660,000

Cost
Accumulated depreciation (900,000 + 600,000)
Book value 1/1/2008
Residual value
Remaining depreciable cost 1/1/2008

5,300,000
1,500,000
3,800,000
500,000
3,300,000

Problem 16-23
1. Depreciation (60,000 x 3/12)
Accumulated depreciation

15,000
15,000

Accumulated depreciation (480,000 + 15,000)


Loss on retirement of store equipment
Store equipment
2. Depreciation (150,000 x 4/12)
Accumulated depreciation

495,000
105,000
600,000
50,000
50,000

218
Cash
Accumulated depreciation (1,050,000 + 50,000)
Loss on sale of office equipment
Office equipment
3. Depreciation (600,000 x 5/12)
Accumulated depreciation
Delivery equipment new
Accumulated depreciation
Cash (5,000,000 750,000)
Delivery equipment old
Gain on exchange (750,000 350,000)

100,000
1,100,000
300,000
1,500,000
250,000
250,000
5,000,000
2,650,000
4,250,000
3,000,000
400,000

Original cost
Less: Accumulated depreciation to date (2,400,000 + 250,000)
Book value
4. Accumulated depreciation
Office equipment
5. Depreciation (900,000 x 9/12)
Accumulated depreciation
Accumulated depreciation (2,700,000 + 675,000)
Fire loss
Machinery

3,000,000
2,650,000
350,000

1,200,000
1,200,000
675,000
675,000
3,375,000
1,125,000
4,500,000

Problem 16-24
1. Discount on bonds payable
Machinery

500,000
500,000

Interest expense (500,000 / 10 x 9/12)


Discount on bonds payable

37,500

Accumulated depreciation
Depreciation

75,000

37,500
75,000

Depreciation for 9 months


Depreciation for 12 months (600,000 / 9/12)
Depreciable cost (800,000 x 5 years)
Cost
Less: Residual value
Depreciable cost

600,000
800,000
4,000,000
Per book
5,000,000
1,000,000
4,000,000

Adjusted
4,500,000
1,000,000
3,500,000

219
Correct depreciation for 9 months (3,500,000 / 5 x 9/12)
Less: Depreciation recorded
Overstatement

525,000
600,000
75,000

2. Interest expense
Machinery (3,500,000 3,200,000)

300,000
300,000

Machinery
Freight in

150,000
150,000

Accumulated depreciation
Depreciation

30,000
30,000

Depreciation per book


Correct depreciation (3,350,000 / 5)
Overstatement

700,000
670,000
30,000

3. Loss on exchange
Machinery
Cost per book
Correct cost
Trade in value
Add: Cash paid
Overstatement

390,000
390,000
3,000,000
150,000
2,460,000

Trade in value
Less: Book value
Loss on exchange
4. Allowance for doubtful accounts
Loss on exchange accounts receivable
Treasury share
Per book
Machinery

2,610,000
390,000
150,000
540,000
(390,000)

840,000
60,000
900,000
4,200,000

Accounts receivable
Treasury shares
Machinery
Should be
Machinery
Allowance for doubtful accounts (20% x 4,200,000)
Loss on accounts receivable
Accounts receivable

4,200,000
4,200,000
4,200,000
3,300,000
840,000
60,000
4,200,000

220
Treasury shares
Machinery

3,300,000
3,300,000

The cost of treasury shares acquired for noncash consideration is usually


measured by the recorded amount of the noncash asset surrendered (SFAS No. 18).

Problem 16-25 Answer A


Allocated cost of land (2,400,000 / 6,000,000 x 5,500,000)
Property taxes (2,400 / 6,000 x 250,000)
Cost of survey
Total cost of land

2,200,000
100,000
5,000
2,305,000

Incidentally, the cost of the building is:


Allocated cost (3,600 / 6,000 x 5,500,000)
Property taxes (3,600 / 6,000 x 250,000)
Renovation
Total cost of building

3,300,000
150,000
500,000
3,950,000

Problem 16-26 Answer A


Purchase price
Payments to tenants
Demolition of old building
Legal fees
Title insurance
Proceeds from sale of materials
Total cost of land

4,000,000
200,000
100,000
50,000
30,000
(
10,000)
4,370,000

Problem 16-27 Answer D


Purchase price of land

Land
600,000

Building

Legal fees for contract


Architect fee
Demolition of old building
Construction cost
Total cost

20,000
80,000
50,000
_______
670,000

3,500,000
3,580,000

Problem 16-28 Answer D


Acquisition price
Option of building acquired
Repairs
Total cost

7,000,000
200,000
500,000
7,700,000

221
Problem 16-29 Answer D
Purchase price
Shipping
Installation
Testing
Total cost

250,000
5,000
10,000
35,000
300,000

Problem 16-30 Answer A


Problem 16-31 Answer A
All expenditures are capitalized.

Problem 16-32 Answer A


All costs are capitalized.

Problem 16-33 Answer C


Continuing and frequent repairs
Repainting of the plant building
Partial replacement of roof tiles
Repair and maintenance expense

400,000
100,000
150,000
650,000

Problem 16-34 Answer B


Problem 16-35 Answer B

222
CHAPTER 17
Problem 17-1

Problem 17-2

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

A
D
B
D
D
D
D
C
C
B

Problem 17-3

C
A
D
D
D
B
C
B
A
A

Depreciation Table Straight Line


Year

Particular
Acquisition cost

Depreciation

2008
2009
2010
2011
2012

120,000
120,000
120,000
120,000
120,000
600,000

Accumulated
depreciation
120,000
240,000
360,000
480,000
600,000

Book value
635,000
515,000
395,000
275,000
155,000
35,000

Depreciation Table Service Hours Method


Year
2008
2009
2010
2011
2012

Particular
Acquisition cost
14,000 x 10
13,000 x 10
10,000 x 10
11,000 x 10
12,000 x 10

Depreciation
140,000
130,000
100,000
110,000
120,000
600,000

Accumulated
depreciation

Book value
635,000
495,000
365,000
265,000
155,000
35,000

140,000
270,000
370,000
480,000
600,000

Depreciation rate per hour = 600,000 / 60,000 = 10

223
Depreciation Table Production Method
Year
2008
2009
2010
2011
2012

Particular
Acquisition cost
34,000 x 4
32,000 x 4
25,000 x 4
29,000 x 4
30,000 x 4

Depreciation
136,000
128,000
100,000
116,000
120,000
600,000

Accumulated
Depreciation
136,000
264,000
364,000
480,000
600,000

Book value
635,000
499,000
371,000
271,000
155,000
35,000

Depreciation rate per unit of output = 600,000 / 150,000 = 4


Depreciation Table Sum of Years Digits
Accumulated

Year
2008
2009
2010
2011
2012

Particular
Acquisition cost
5/15 x 600,000
4/15 x 600,000
3/15 x 600,000
2/15 x 600,000
1/15 x 600,000

Depreciation
200,000
160,000
120,000
80,000
40,000
600,000

depreciation
200,000
360,000
480,000
560,000
600,000

Book value
635,000
435,000
275,000
155,000
75,000
35,000

SYD = 1 + 2 + 3 + 4 + 5 = 15
Depreciation Table Double Declining Balance

Year
2008
2009
2010
2011
2012

Particular
Acquisition cost
40% x 635,000
40% x 381,000
40% x 228,600
40% x 137,160
82,296 35,000

Depreciation
254,000
152,400
91,440
54,864
47,296
600,000

Accumulated
depreciation
254,000
406,400
497,840
552,704
600,000

Book value
635,000
381,000
228,600
137,160
82,296
35,000

Fixed rate = 100% / 5 = 20% x 2 = 40%


Problem 17-4
a. Straight line method:
2008
2009

27,500
55,000

224
b. Working hours method:
550,000
Rate per hour = ------------------- = 11
50,000 hours
2008 (3,000 hours x 11)
2009 (5,000 hours x 11)
c. Output method:
550,000
Rate per unit = -------------------- = 2.75
200,000 units

33,000
55,000

2008 (18,000 units x 2.75)


2009 (22,000 units x 2.75)

49,500
60,500

d. Sum of years digits:


10 + 1
SYD = 10 (------------) = 55
2
2008 (10/55 x 550,000 x 6/12)

50,000

2009 Jan. 1-June 30


July 1-Dec. 31 (9/55 x 550,000 x 6/12)

50,000
45,000
95,000

e. Double declining balance:


2008 (570,000 x 20% x 6/12)
2009 (570,000 57,000 x 20%)

57,000
102,600

Problem 17-5
Fixed rate = 1.00 - .5623 or .4377
2008
2009
2010
2011

(500,000 x .4377)
(500,000 218,850 x .4377)
(500,000 - 341,909 x .4377)
(500,000 411,105 50,000)

218,850
123,059
69,196
38,895
450,000

Problem 17-6
a. Sum of years digit
April 1, 2008 March 31, 2009 (1,080,000 x 8/36)
April 1, 2009 March 31, 2010 (1,080,000 x 7/36)

240,000
210,000

225
Depreciation from April 1 to December 31, 2008 (240,000 x 9/12)

180,000

Depreciation for 2009:


January 1 March 31 (240,000 x 3/12)
April 1 December 31 (210,000 x 9/12)
b. Double declining balance
Fixed rate = 100 / 8 = 12.5 x 2 = 25%

60,000
157,500
217,500

2008 (1,200,000 x 25% x 9/12)


2009 (1,200,000 225,000 x 25%)

225,000
243,750

Problem 17-7
a. Service hours method:
960,000 60,000
Depreciation rate per hour = ---------------------------- = 112.50
8,000 hours
2008 (1,000 hours x 112.50)
2009 (2,000 hours x 112.50)

112,500
225,000

b. Sum of years digits:


Sum of half years

45

2008 (9/45 x 900,000 x 3/6)


2009 January 1 March 31 (9/45 x 900,000 x 3/6)
April 1 September 30 (8/45 x 900,000)
October 1 December 31 (7/45 x 900,000 x 3/6)

90,000
90,000
160,000
70,000
320,000

Problem 17-8
a. Rate per unit (900,000 / 180,000)
2008 (5,000 x 5)
2009 (20,000 x 5)

5.00
25,000
100,000

b. Double declining balance:


Fixed rate (100% / 8 x 2)
2008 (920,000 x 25% x 6/12)
2009 (920,000 115,000 x 25%)

25%
115,000
201,250

226
c. Sum of years digits:
July 1 December 31, 2008 (900,000 x 8/36 x 6/12)
January 1 June 30, 2009 (900,000 x 8/36 x 6/12)
July 1 December 31, 2009 (900,000 x 7/36 x 6/12)
Depreciation for 2009

Problem 17-9

100,000
100,000
87,500
187,500

Assets
Machinery
Office equipment
Building
Delivery equipment

Cost
310,000
110,000
1,600,000
430,000
2,450,000

Salvage
10,000
10,000
100,000
30,000

Depreciable
cost
300,000
100,000
1,500,000
15
400,000
2,300,000

Life in
years
5
10
4

Annual
depreciation
60,000
10,000
100,000
100,000
270,000

a. Composite rate = 270,000 / 2,450,000 = 11.02%


b. Composite life

= 2,300,000 / 270,000 =

8.52 years

c. Depreciation
Accumulated depreciation

270,000
270,000

Problem 17-10
Assets
Building
Machinery
Equipment

Cost
6,100,000
2,550,000
1,030,000
9,680,000

Salvage
100,000
50,000
30,000

Depreciable
cost
6,000,000
2,500,000
1,000,000
9,500,000

Life in Annual
years
depreciation
20
300,000
5
500,000
10
100,000
900,000

a. Composite depreciation rate = 900,000 / 9,680,000 = 9.3%


b. Average life = 9,500,000 / 900,000 = 10.56 years
c. Depreciation
Accumulated depreciation
d. Cash
Accumulated depreciation
Machinery
e. Depreciation
Accumulated depreciation (9,680,000 2,550,000 x 9.3%)

900,000
900,000
40,000
2,510,000
2,550,000
663,090
663,090

227
Problem 17-11
2003
Jan. 1 Machinery
Cash
Dec. 31 Depreciation (20% x 900,000)
Accumulated depreciation

900,000
900,000
180,000
180,000

2004
Dec. 31 Depreciation
Accumulated depreciation

180,000

2005
Dec. 31 Depreciation
Accumulated depreciation

180,000

2006
Dec. 31 Depreciation
Accumulated depreciation

180,000

180,000

180,000

180,000

Cash
Accumulated depreciation
Machinery (4 x 45,000)

10,000
170,000
180,000

2007
Dec. 31 Depreciation (720,000 x 20%)
Accumulated depreciation
Cash
Accumulated depreciation
Machinery (14 x 45,000)

144,000
144,000
15,000
615,000
630,000

2008
Dec. 31 Depreciation
Accumulated depreciation

9,000
9,000

Remaining cost
Less: Balance of accumulated depreciation
Book value
Less: Salvage proceeds
Maximum depreciation
Cash
Accumulated depreciation
Machinery (4 x 45,000)

90,000
79,000
11,000
2,000
9,000
2,000
88,000
90,000

228

Problem 17-12
1. Old machinery overhauled (240,000 + 60,000)
Accumulated depreciation
2005 (240,000 / 8)
2006
2007

300,000
30,000
30,000
30,000

Total
Book value January 1, 2008

90,000
210,000

Old machinery overhauled (210,000 / 7 years)


Remaining cost of old machinery (1,152,000 240,000 / 8)
New machinery (460,800 / 8 x 5/12)
Total depreciation
2. Old machinery
New machinery
Cost of overhaul
Total cost
Accumulated depreciation:
Balance January 1
Depreciation for 2008
Book value December 31, 2008

30,000
114,000
24,000
168,000
1,152,000
460,800
60,000
1,672,800
432,000
168,000

600,000
1,072,800

Problem 17-13
Main machine (7,500,000 / 10)
First component from January 1 to April 1, 2008 (1,200,000 / 6 x 3/12)
Second component from April 1 to December 31, 2009
(2,000,000 400,000 / 4 x 9/12)
Total depreciation for 2008

750,000
50,000
300,000
1,100,000

The second component is depreciated over the remaining life of the main machine. The
original life is 10 years and 6 years already expired. Thus, the remaining life is 4 years.

Problem 17-14
1. Tools

40,000
Cash

40,000

2. Tools

20,000
Cash

20,000

3. Cash
Tools

4,000
4,000

4. Depreciation
Tools

46,000
46,000

Balance of tools account


Less: Estimated cost on December 31
Depreciation

196,000
150,000
46,000

229
Problem 17-15
Retirement method

March

1 Electric meters
Cash

250,000
250,000

1 Cash
Depreciation
Electric meters
July

20,000
160,000
180,000

1 Electric meters
Cash

400,000

December 1 Electric meters


Cash

200,000

400,000
200,000

1 Cash
Depreciation
Electric meters

15,000
135,000
150,000

Replacement method
March
July

1 Depreciation (250,000 20,000)


Cash
1 Electric meters
Cash

2008 Tools
Cash
Cash (300 x 50)
Depreciation
Tools (300 x 200)
2009 Tools
Cash
Cash (700 x 70)
Depreciation
Tools

230,000
400,000
400,000

December 1 Depreciation (200,000 15,000)


Cash

Problem 17-16

230,000

185,000
185,000

Retirement method
120,000
120,000
15,000
45,000
60,000
360,000
360,000
49,000
111,000
160,000

230
500 x 200
200 x 300

100,000
60,000

Cost of tools retired

160,000
Replacement method

2008 Tools (100 x 300)


Depreciation (300 x 30)
Cash

30,000
90,000
120,000

Cash
Depreciation

15,000
15,000

2009 Tools (200 x 400)


Depreciation (700 x 400)
Cash

80,000
280,000
360,000

Cash
Depreciation

49,000
49,000
Inventory method

2008 Tools
Cash

120,000

Cash
Tools

15,000

Depreciation (265,000 200,000)


Tools

65,000

120,000
15,000
65,000

2009 Tools
Cash

360,000

Cash
Tools

49,000

Depreciation (511,000 - 350,000)


Tools

360,000
49,000
161,000
161,000

Problem 17-17
1. Land (350,000 + 450,000)
Land acquired (380,000 + 25,000 + 45,000)

800,000
450,000

2. Depreciation of land improvements (180,000 / 15)

12,000

3. Depreciation of building (4,500,000 1,050,000 x 7.5%)

258,750

231
4. Depreciation of machinery and equipment

(1,160,000 60,000 / 10)


(300,000 / 10)
(60,000 / 10 x 6/12)

110,000
30,000
3,000
143,000

5. Fixed rate (100% / 3 x 1.5)

50%

(1,800,000 1,344,000 x 50%)

228,000

Problem 17-18
1. Beginning balance
Acquisition (150,000 / 750,000 x 1,250,000)
Total cost of land

875,000
250,000
1,125,000

Technically, the land for undetermined use is an investment property.


2. Old (7,500,000 1,644,500 x 8%)
New (600,000/750,000 x 1,250,000 = 1,000,000 x 8%)
Depreciation building

468,440
80,000
548,440

3. 2,250,000 / 10
400,000 / 10 x 6/12
Depreciation machinery

225,000
20,000
245,000

4. Depreciation leasehold improvements (216,000 108,000 / 5 years)

21,600

5. Depreciation land improvements 192,000 / 12 x 9/12)

12,000

Problem 17-19
1. Old building (4,672,200 x 10%)
New building
Direct cost
Fixed (15,000 x 25)
Variable (15,000 x 27)
Total cost
3,000,000 x 10%
Total depreciation
Fixed rate (100 / 20 x 2)

467,220
2,220,000
375,000
405,000
3,000,000
300,000
767,220
10%

232

2. Old machinery (1,380,000 / 10)


New machinery
Invoice cost
Concrete embedding
Wall demolition
Rebuilding of wall
Total cost
400,000 / 10 x 6/12
Total depreciation

138,000
356,000
18,000
7,000
19,000
400,000
20,000
158,000

Problem 17-20 Answer A


Cost of machinery (cash price)
Less: Residual value
Depreciable cost

1,100,000
50,000
1,050,000

Straight line depreciation (1,050,000 / 10)

105,000

Problem 17-21 Answer B


Sales price
Book value:
Cost
Accumulated depreciation (3,600,000 / 5 x 3)
Gain

2,300,000
4,200,000
2,160,000

2,040,000
260,000

Problem 17-22 Answer B


Accumulated depreciation 12/31/2007
Add: Depreciation for 2008
Total
Less: Accumulated depreciation on property, plant and
equipment retirements (squeeze)
Accumulated depreciation 12/31/2008

Problem 17-23 Answer B


A
B
C

Cost
550,000
200,000
40,000
790,000

Salvage
50,000
20,000

Composite life = 720,000 / 45,000

Depreciable
cost
Life
500,000
180,000
40,000
720,000

3,700,000
550,000
4,250,000
250,000
4,000,000

Annual
depreciation
20
25,000
15
12,000
5
8,000
45,000
16 years

233
Problem 17-24 Answer D
Invoice price
Cash discount (2% x 4,500,000)
Delivery cost
Installation and testing
Total cost
Salvage value
Depreciable cost

4,500,000
90,000)
80,000
310,000
4,800,000
800,000
4,000,000
(

Rate per unit (4,000,000 / 200,000)

20

Depreciation for 2008 (30,000 x 20)

600,000

Problem 17-25 Answer B


Cost
Accumulated depreciation
2007 (8/36 x 3,600,000)
2008 (7/36 x 3,600,000)
Book value, 12/31/2008

4,000,000
800,000
700,000

1,500,000
2,500,000

Problem 17-26 Answer B


The first three fractions are:
2006
2007
2008

10/55
9/55
8/55

Thus, the 2008 depreciation of P240,000 is equal to 8/55.


Depreciable cost (240,000 / 8/55)
Salvage
Total cost

1,650,000
50,000
1,700,000

Problem 17-27 Answer B


April 1, 2006 to March 31, 2007 (5/15 x 3,000,000)
April 1, 2007 to March 31, 2008 (4/15 x 3,000,000)
Accumulated depreciation, March 31, 2008

1,000,000
800,000
1,800,000

Problem 17-28 Answer A


The accumulated depreciation on December 31, 2007 is recomputed following a certain
method. The same is arrived at following the SYD as follows:
SYD = 1 + 2 + 3 + 4 + 5 = 15

234
2005 (5/15 x 900,000)
2006 (4/15 x 900,000)
2007 (3/15 x 900,000)
Accumulated depreciation 12/31/2007

300,000
240,000
180,000
720,000

Accordingly, the SYD is followed for 2008.


2008 depreciation (2/15 x 900,000)

120,000

Problem 17-29 Answer B


Straight line rate (100% / 8 years)
Fixed rate (12.5 x 2)
2007 depreciation (1,280,000 x 25%)
2008 depreciation (1,280,000 320,000 x 25%)

12.5%
25%
320,000
240,000

Problem 17-30
1. 4,000,000 2,560,000 x 40%

(Answer D)

576,000

2. 1,800,000 x 2/15 (SYD)

(Answer A)

240,000

(Answer A)

1,700,000
1,456,000
244,000

3. Sales price
Book value (2,800,000 1,344,000)
Gain

Problem 17-31 Answer B


Straight line rate (100% / 5 years)
Fixed rate (20% x 2)
2006 depreciation (5,000,000 x 40%)
2007 depreciation (3,000,000 x 40%)
Accumulated depreciation, December 31, 2007
Depreciation for 2008 straight line (5,000,000 3,200,000 / 3)
Accumulated depreciation, December 31, 2008

20%
40%
2,000,000
1,200,000
3,200,000
600,000
3,800,000

Problem 17-32 Answer A


Cost 1/1/2005
Accumulated depreciation 12/31/2007 (7,200,000 / 10 x 3)
Book value 12/31/2007

7,200,000
2,160,000
5,040,000

SYD for the remaining life of 7 years (1 + 2 + 3 + 4 + 5 + 6 + 7)

28

Depreciation for 2008 (5,040,000 x 7/28)

1,260,000

Problem 17-33 Answer B


Annual depreciation (1,536,000 / 8)

192,000

235
Problem 17-34 Answer B
Fixed rate (100% / 4 x 2)
Cost
Depreciation for 2007 (50% x 6,000,000)
Book value 1/1/2008
Residual value
Maximum depreciation in 2008
Fixed rate in 2008 (100% / 2 x 2)

50%
6,000,000
3,000,000
3,000,000
( 600,000)
2,400,000
100%

This means that the computers should be fully depreciated in 2008. Since there is a residual
value of P600,000, the maximum depreciation for 2008 is equal to the book value of
P3,000,000 minus the residual value of P600,000 or P2,400,000.

236
CHAPTER 18
Problem 18-1

Problem 18-2

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.

D
A
A
C
A

B
C
C
C
D

Problem 18-3
1. Ore property
Cash

5,000,000

2. Ore property
Cash

3,000,000

3. Machinery
Cash

4,000,000

4. Depletion
Accumulated depreciation

1,140,000

5,000,000
3,000,000
4,000,000
1,140,000

8,000,000 400,000 = 7,600,000


7,600,000 / 2,000,000 = 3.80
300,000 x 3.80
= 1,140,000
5. Depreciation
Accumulated depreciation

600,000
600,000

4,000,000 / 2,000,000 = 2.00


300,000 x 2.00
= 600,000

Problem 18-4
2008

Rock and gravel property


Cash

960,000

Depletion (1,000,000 x .40)


Accumulated depletion

400,000

960,000
400,000

2009

Rock and gravel property


Cash

490,000

Depletion (600,000 x .75)


Accumulated depletion

450,000

490,000
450,000

237
Total cost (960,000 + 490,000)
Less: Accumulated depletion
Depletable cost
Divide by estimated remaining output (2,400,000 1,000,000)
Revised depletion rate per ton
2010

1,450,000
400,000
1,050,000
1,400,000
.75

Rock and gravel property


Cash

500,000

Depletion (700,000 x .44)


Accumulated depletion

308,000

500,000
308,000

Total cost
Add: Additional development cost
Total
Less: Accumulated depletion (400,000 + 450,000)
Remaining depletable cost
Divide by new estimated remaining output
New depletion rate

1,450,000
500,000
1,950,000
850,000
1,100,000
2,500,000
.44

Problem 18-5
2008

Resource property
Cash

3,960,000

Building
Equipment
Cash

960,000
1,240,000

Depletion (12,000 x 32)


Accumulated depletion

3,960,000

2,200,000
384,000
384,000

Cost of resource property


Less: Residual value
Depletable cost
Divide by estimated output
Depletion rate per unit
Depreciation (12,000 x 8)

3,960,000
120,000
3,840,000
120,000
32
96,000

Accumulated depreciation building

96,000

960,000
Depreciation rate per unit = ---------------- = 8
120,000
The output method is used in computing the depreciation of the building
because the life of the resource property (5 years or 120,000 / 24,000) is
shorter than the life of the building (8 years).

238
Depreciation
Accumulated depreciation
(1,240,000 / 4 years = 310,000)

310,000
310,000

The straight line method is used for the heavy equipment because the life of
4 years is shorter than the life of the resource property of 5 years.
2009

Depletion
Accumulated depletion (25,000 x 32)

800,000
800,000

Depreciation (25,000 x 8)
Accumulated depreciation building

200,000

Depreciation
Accumulated depreciation equipment

310,000

200,000
310,000

Problem 18-6
2008

Ore property
Cash
Ore property
Estimated liability for restoration cost

2009

2010

5,400,000
5,400,000
450,000
450,000

Mine improvements
Cash

8,000,000

Depletion (600,000 x 2.60)


Accumulated depletion

1,560,000

Depreciation (600,000 x 4)
Accumulated depreciation

2,400,000

Depletion (400,000 x 1.60)


Accumulated depletion
Depletable cost

8,000,000
1,560,000
2,400,000
640,000
640,000
5,200,000

Less: 2009 depletion


Balance (3,640,000 / 2,275,000 = 1.60)

1,560,000
3,640,000

Mine improvements
Cash

770,000
770,000

Depreciation (400,000 x 2.80)


Accumulated depreciation

1,120,000
1,120,000

Cost (8,000,000 + 770,000)


Less: Accumulated depreciation
Book value (6,370,000 / 2,275,000 = 2.80)

8,770,000
2,400,000
6,370,000

239

Problem 18-7
Depletion rate
(5,000,000 / 1,000,000)
Depreciation rate (8,000,000 / 1,000,000)

5.00
8.00

First year
Depletion
(200,000 x 5)
Depreciation (200,000 x 8)

1,000,000
1,600,000

Second year
Depletion
(250,000 x 5)
Depreciation (250,000 x 8)

1,250,000
2,000,000

Third year
Depletion
Depreciation (Schedule A)

none
550,000

Schedule A Computation of depreciation for third year


Cost of equipment
Less: Accumulated depreciation
Book value beginning of third year
by remaining useful life in years (10 2)
for third year

8,000,000
3,600,000
4,400,000
Divide
Depreciation
8
550,000

Fourth year
Depletion (100,000 x 5)
Depreciation (Schedule B)

500,000
700,000

Schedule B Computation of depreciation for fourth year


Cost of equipment
Less: Accumulated depreciation
Book value beginning of fourth year

8,000,000
4,150,000
3,850,000

Original estimate of resource deposits


Less: Extracted in first and second years
Remaining output

1,000,000 tons
450,000
550,000 tons

Depreciation rate per unit (3,850,000 / 550,000)


Depreciation for third year (100,000 x 7)

7.00
700,000

Problem 18-8
1. Retained earnings
Accumulated depletion
Total
Less: Capital liquidated
Depletion in ending inventory (5,000 x 20)
Maximum dividend

1,500,000
2,500,000
4,000,000
1,800,000
1,900,000
100,000
2,100,000

240
2. Retained earnings
Capital liquidated
Dividends payable

1,800,000
200,000
2,000,000

Problem 18-9
1. Cash (50,000 x 110)
Share capital (50,000 x 100)
Share premium

5,500,000

2. Resource property
Cash

3,000,000

3. Mining equipment
Cash

800,000

4. Cash (85,000 x 50)


Sales

4,250,000

5. Mining and other direct cost


Administrative expenses
Cash

2,268,000
500,000

6. Depletion
Accumulated depletion (3,000,000 / 1,000,000 x 90,000)
7. Depreciation (90,000 x .80)
Accumulated depreciation - mining equipment

5,000,000
500,000
3,000,000
800,000
4,250,000

2,768,000
270,000
270,000
72,000
72,000

Depreciation rate (800,000 / 1,000,000) = .80


8. Inventory, December 31 (5,000 x 29)

145,000

Profit and loss

145,000

Mining labor and other direct costs


Depletion
Depreciation
Total production costs incurred
Divide by number of units extracted
Unit cost

2,268,000
270,000
72,000
2,610,000
90,000
29

241
Multinational Company
Income Statement
Year ended December 31, 2008
Sales
Cost of sales
Mining labor and other direct costs
Depletion
Depreciation
Total production cost
Less: Inventory, December 31
Gross income
Administrative expenses
Net income

4,250,000
2,268,000
270,000
72,000
2,610,000
2,465,000
145,000
1,785,000
500,000
1,285,000

Multinational Company
Statement of Financial Position
December 31, 2008
Assets
Current assets:
Cash
Inventory
Noncurrent assets:
Resource property
Less: Accumulated depletion
Mining equipment
Less: Accumulated depreciation
Total assets

3,182,000
145,000
3,000,000
2,730,000
270,000
800,000
728,000
72,000

3,327,000

3,458,000
6,785,000

Equity
Share capital
Share premium
Retained earnings
Total equity

5,000,000
500,000
1,285,000
6,785,000

Retained earnings
Add: Accumulated depletion
Total
Less: Unrealized depletion in ending inventory (5,000 x 3)
Maximum dividend

1,285,000
270,000
1,555,000
15,000
1,540,000

Retained earnings
Capital liquidated
Dividends payable

1,285,000
255,000
1,540,000

242
Problem 18-10
1. Purchase price
Road construction
Improvements and development costs
Total cost
Residual value
Depletable cost

50,000
5,000,000
750,000
5,800,000
( 600,000)
5,200,000

Depletion rate per unit (5,200,000 / 4,000,000)


Depletion for 2008 (500,000 x 1.30)

1.30
650,000

Depletable cost
Depletion in 2008
Remaining depletable cost
Development costs in 2009
Total depletable cost 1/1/2009

5,200,000
( 650,000)
4,550,000
1,300,000
5,850,000

Original estimated tons


Additional estimate
Total estimated tons
Extracted in 2008
Remaining tons 1/1/2009

4,000,000
3,000,000
7,000,000
( 500,000)
6,500,000

New depletion rate per unit (5,850,000 / 6,500,000)

.90

Depletion for 2009 (1,000,000 x .90)


2. Cost of buildings
Residual value
Depreciable cost
Depreciation rate per unit (1,800,000 / 4,000,000)
Depreciation for 2008 (500,000 x .45)

900,000
2,000,000
( 200,000)
1,800,000
.45
225,000

In the absence of any statement to the contrary, the output method is used in computing
depreciation of mining equipment.
Depreciable cost
Depreciation for 2008
Remaining depreciable cost
Additional building in 2009
Total depreciable cost 1/1/2009
New depreciation rate per unit (1,950,000 / 6,500,000)
Depreciation for 2009 (1,000,000 x .30)

Problem 18-11
2008

No depletion because there is no production.

2009

Purchase price
Estimated restoration cost
Development cost 2008
Development cost 2009
Total cost
Residual value
Depletable cost
Rate in 2009 (27,000,000 / 10,000,000)
Depletion in 2009 (3,000,000 x 2.70)

2010

Tons extracted in 2010


Tons remaining in 12/31/2010
Total estimated output 1/1/2010
New rate in 2010 (27,000,000 8,100,000/6,000,000)
Depletion in 2010 (3,500,000 x 3.15)

Problem 18-12 Answer B

1,800,000
( 225,000)
1,575,000
375,000
1,950,000
.30
300,000

243

28,000,000
2,000,000
1,000,000
1,000,000
32,000,000
( 5,000,000)
27,000,000
2.70
8,100,000
3,500,000
2,500,000
6,000,000
3.15
11,025,000

Acquisition cost
Development cost
Estimated restoration cost
Total cost
Less: Residual value
Depletable cost
Rate per unit (28,800,000 / 1,200,000)
Depletion for 2008 (60,000 x 24)

26,400,000
3,600,000
1,800,000
31,800,000
3,000,000
28,800,000
24
1,440,000

Problem 18-13 Answer C


Depletion rate per unit (9,200,000 / 4,000,000)

2.30

Problem 18-14 Answer C


Rate per unit (46,800,000 3,600,000 / 2,160,000)
Depletion in cost of goods sold (240,000 x 20)

20
4,800,000

244
Problem 18-15 Answer D
Acquisition cost
Less: Residual value
Depletable cost
Less: Accumulated depletion 12/31/2007
(7,000,000 / 10,000,000 = .70 x 4,000,000)
Remaining depletable cost 1/1/2008
New depletion rate (4,200,000 / 7,500,000)
Depletion for 2008 (1,500,000 x .56)

10,000,000
3,000,000
7,000,000
2,800,000
4,200,000
.56
840,000

Problem 18-16 Answer B


Depletable cost
Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000)
Balance 1/1/2008

33,000,000
( 1,650,000)
31,350,000

Production in 2008
New estimate 12/31/2008
New estimate 1/1/2008

225,000
5,000,000
5,225,000

Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000)

1,350,000

Problem 18-17
Question 1 Answer A
Purchase price
Less: Residual value
Depletable cost
Depletion rate (12,000,000 / 1,500,000)
Depletion for 2008 (150,000 x 8)
Production (25,000 x 6)

14,000,000
2,000,000
12,000,000
8.00
1,200,000
150,000

Question 2 Answer C
Production from July 1 to December 31, 2008 (25,000 x 6)
Annual production (25,000 x 12)
Estimated life of mine (1,500,000 / 300,000)

150,000 tons
300,000 tons
5 years

Since the life of the mine is shorter than the life of the equipment, the output method is used
in computing depreciation.

245
Equipment
Less: Residual value
Depreciable cost
Rate per unit (7,500,000 / 1,500,000)
Depreciation for 2008 (150,000 x 5)

8,000,000
500,000
7,500,000
5.00
750,000

Problem 18-18 Answer C


Purchase price
Development costs in 2007
Total cost
Residual value
Depletable cost
Rate in 2007 (8,100,000 / 2,000,000)
Depletion for 2007 (200,000 x 4.05)
Depletable cost
Depletion in 2007
Balance
Development costs in 2008

9,000,000
300,000
9,300,000
1,200,000
8,100,000
4.05
810,000
8,100,000
( 810,000)
7,290,000
135,000

Depletable cost in 2008

7,425,000

Rate in 2008 (7,425,000 / 1,650,000)

4.50

Depletion for 2008 (300,000 x 4.50)

1,350,000

246
CHAPTER 19
Problem 19-1
1.
2.
3.
4.
5.

C
B
D
C
C

6.
7.
8.
9.
10.

B
C
A
B
A

Problem 19-2
1. Appreciation (7,200,000 4,500,000)

2,700,000

2. Book value (4,500,000 900,000)

3,600,000

3. Depreciated replacement cost (7,200,000 x 80%)

5,760,000

4. Revaluation surplus (5,760,000 3,600,000)

2,160,000

Problem 19-3
1. Annual depreciation on cost (750,000 / 5)

150,000

Original life (3,000,000 / 150,000)


2. Equipment
Accumulated depreciation
Revaluation surplus
3. Depreciation
(4,800,000 / 20)
Accumulated depreciation
4. Revaluation surplus
Retained earnings (1,350,000 / 15)

20 years
1,800,000
450,000
1,350,000
240,000
240,000
90,000
90,000

Problem 19-4
1. Annual depreciation on cost (9,000,000 / 25)

360,000

Age of asset (3,600,000 / 360,000)


2. Machinery
Accumulated depreciation (40% x 6,000,000)
Revaluation surplus
3. Depreciation (9,000,000 / 15)
Accumulated depreciation

10 years
6,000,000
2,400,000
3,600,000
600,000
600,000

247
4. Revaluation surplus
Retained earnings (3,600,000 / 15)

240,000
240,000

Problem 19-5
Proportional approach
1. Building
Accumulated depreciation
Revaluation surplus
2. Depreciation (8,000,000 / 40) or (6,000,000 / 30)
Accumulated depreciation

3,000,000
750,000
2,250,000
200,000
200,000

Gross replacement cost (6,000,000 / 75%) 8,000,000


3. Revaluation surplus
Retained earnings (2,250,000 / 30)

75,000
75,000

Elimination approach
1. Accumulated depreciation
Building

1,250,000
1,250,000

Building (6,000,000 3,750,000)


Revaluation surplus

2,250,000
2,250,000

2. Depreciation (6,000,000 / 30)


Accumulated depreciation

200,000
200,000

3. Revaluation surplus
Retained earnings

75,000
75,000

Problem 19-6
1. Equipment
Accumulated depreciation
Revaluation surplus

2,700,000

2. Depreciation (7,500,000 / 10)


Accumulated depreciation

750,000

3. Revaluation surplus (2,200,000 / 10)


Retained earnings

500,000
2,200,000
750,000
220,000
220,000

4. Cash
Accumulated depreciation
Equipment
Gain on sale of equipment

8,000,000
2,250,000
9,200,000
1,050,000

248
Revaluation surplus (2,200,000 - 220,000)
Retained earnings

1,980,000
1,980,000

Problem 19-7
1. Building
Accumulated depreciation
Revaluation surplus

10,000,000

2. Depreciation (13,000,000 / 5)
Accumulated depreciation

2,600,000

3. Revaluation surplus
Retained earnings (6,000,000 / 5)

4,000,000
6,000,000
2,600,000
1,200,000
1,200,000

Problem 19-8
Building
Accumulated depreciation

Cost
3,000,000
600,000
2,400,000

Replacement
cost
5,000,000
1,000,000
4,000,000

Appreciation
2,000,000
400,000
1,600,000

Accumulated depreciation on cost (3,000,000 x 20%)

600,000

Life of asset (100% / divided by 4%)

25 years

Percent of accumulated depreciation (5 years / 25)

20%

Gross replacement cost (4,000,000 / 80%)

5,000,000

Accumulated depreciation on replacement cost (5,000,000 x 20%)

1,000,000

a. Should be entry:
Building
Accumulated depreciation
Revaluation surplus

2,000,000
400,000
1,600,000

b. Correcting entry:
Building
Retained earnings
Accumulated depreciation
Revaluation surplus

1,000,000
1,000,000

c. Depreciation (4,000,000 / 20)


Accumulated depreciation

200,000

400,000
1,600,000
200,000

249
d. Revaluation surplus
Retained earnings (1,600,000 / 20)

80,000
80,000

Problem 19-9
1. Accumulated depreciation
Machinery

800,000

2. Retained earnings
Revaluation surplus

400,000

800,000
400,000

Problem 19-10
Land
Building
Accumulated depreciation
(25,000,000 x 3/25)

Cost
5,000,000

Replacement
cost
10,000,000

Appreciation
5,000,000

25,000,000

45,000,000

20,000,000

3,000,000

(45,000,000 x 3/25)
Machinery
Accumulated depreciation
(10,000,000 x 3/5)
(15,000,000 x 3/5)

Equipment
Accumulated depreciation
(3,000,000 x 3/10)
(4,200,000 x 3/10)

_________
22,000,000

5,400,000
39,600,000

10,000,000

15,000,000

6,000,000
__________
4,000,000

2,400,000
17,600,000
5,000,000

3,000,000
9,000,000
6,000,000
2,000,000

Cost
3,000,000

Replacement
cost
4,200,000

900,000
_________
2,100,000

1,260,000
2,940,000

a. Land
Building
Machinery
Equipment
Accumulated depreciation building
Accumulated depreciation machinery
Accumulated depreciation equipment
Revaluation surplus

5,000,000
20,000,000
5,000,000
1,200,000

b. Depreciation
Accumulated depreciation building
Accumulated depreciation machinery
Accumulated depreciation equipment

5,220,000

Appreciation
1,200,000
_ 360,000
840,000

2,400,000
3,000,000
360,000
25,440,000
1,800,000
3,000,000
420,000

250
Building:
Cost (22,000,000 / 22)
Appreciation (17,600,000 / 22)

1,000,000
800,000

1,800,000

Machinery:
Cost (4,000,000 / 2)
Appreciation (2,000,000 / 2)

2,000,000
1,000,000

3,000,000

Equipment:
Cost (2,100,000 / 7)
Appreciation (840,000 / 7)
Total depreciation
c. Revaluation surplus
Retained earnings (800,000 + 1,000,000 + 120,000)
d. Property, plant and equipment (at revalued amounts):

300,000
120,000

420,000
5,220,000

1,920,000
1,920,000

Land
Building
Machinery
Equipment
Total
Less: Accumulated depreciation
Net carrying value

10,000,000
45,000,000
15,000,000
4,200,000
74,200,000
20,880,000
53,320,000

The following disclosure should be made in the notes to financial statements:


Cost
Land
Building
Machinery
Equipment
Total
Accumulated depreciation
Net carrying value

5,000,000
25,000,000
10,000,000
3,000,000
43,000,000
13,200,000
29,800,000

Replacement
cost
10,000,000
45,000,000
15,000,000
4,200,000
74,200,000
20,880,000
53,320,000

Schedule of Accumulated Depreciation


Cost
4,000,000
8,000,000
1,200,000
13,200,000

Building
Machinery
Equipment

251

Problem 19-11 Answer B


Building
Accumulated depreciation

Replacement
cost
7,200,000
12,000,000
1,680,000
20,880,000

Cost
5,000,000
1,250,000
3,750,000

Replacement
cost
8,000,000
2,000,000
6,000,000

Sound
value
5,000,000
18,750,000
2,500,000

Book
value
2,000,000
11,250,000
1,500,000

Appreciation
3,000,000
750,000
2,250,000

Problem 19-12 Answer B


Land
Building (75% x 25,000,000)
Machinery (50% x 5,000,000)

Revaluation
surplus
3,000,000
7,500,000
1,000,000
11,500,000

Problem 19-13 Answer D


Fair value December 31, 2008
Net book value December 31, 2008
Revaluation surplus

450,000
302,500
142,500

Problem 19-14
Question 1
Question 2
Question 3

Answer A
Answer B
Answer B

Problem 19-15
1.
2.
3.
4.
5.

A
C
B
A
A

6.
7.
8.
9.
10.

A
A
D
D
D

11.
12.
13.
14.
15.

A
A
A
D
A

Problem 19-16
1. Impairment loss
Accumulated depreciation
Cost
Accumulated depreciation
Book value January 1
Recoverable value
Impairment loss
2. Depreciation (1,500,000 / 3)
Accumulated depreciation

900,000
900,000
4,500,000
2,100,000
2,400,000
1,500,000
900,000
500,000
500,000

252
3. Cost
Accumulated depreciation (2,100,000 + 900,000 + 500,000)
Book value December 31

4,500,000
3,500,000
1,000,000

Problem 19-17
1. Impairment loss
Accumulated depreciation
Cost January 1
Accumulated depreciation (2,500,000 500,000 / 8 x 2)
Book value January 1

1,125,000
1,125,000
2,500,000
500,000
2,000,000

Recoverable value
Impairment loss

875,000
1,125,000

2. Depreciation
Accumulated depreciation (875,000 125,000 / 2)

375,000
375,000

3. Cost
Accumulated depreciation (500,000 + 1,125,000 + 375,000)
Book value December 31

2,500,000
2,000,000
500,000

Problem 19-18
1. Offer price
25,000,000
5,000,000
30,000,000

Cost of dismantling and removal assumed by the bidder


Fair value less cost to sell
Present value of future cash flows
Less: Estimated liability
Value in use

33,000,000
5,000,000
28,000,000

Carrying amount
39,000,000
Less: Estimated liability
5,000,000
Adjusted carrying amount
34,000,000
Recoverable amount fair value less cost to sell, being the higher amount 30,000,000
Impairment loss
4,000,000
PAS 36, paragraph 78, provides that the fair value less cost to sell is equal to the estimated
selling price plus the estimated liability assumed by the buyer.
The standard further provides that to perform a meaningful comparison between the
carrying amount and recoverable amount, the estimated liability assumed by the buyer is
deducted in determining both the value in use and carrying amount of the asset.
2. Impairment loss
Accumulated depreciation

4,000,000
4,000,000

253
Problem 19-19
1.
2008
2009
2010
2011
Total value in use

Net cash inflows


18,000,000
15,000,000
15,000,000
12,000,000
60,000,000

PV factor
.930
.857
.794
.735

Present value
16,740,000
12,855,000
11,910,000
8,820,000
50,325,000

2. The recoverable amount is the value in use of P50,325,000 because this is higher than the

fair value less cost to sell of P48,000,000.


3. Impairment loss
Accumulated depreciation (65,000,000 50,325,000)

14,675,000

4. Depreciation
Accumulated depreciation (50,325,000 / 4)

12,581,250

14,675,000
12,581,250

Problem 19-20
1. Depreciation
Accumulated depreciation (10,000,000 / 10)

1,000,000
1,000,000

2. Depreciation
Accumulated depreciation

1,000,000

3. Impairment loss
Accumulated depreciation

2,000,000

4. Depreciation
Accumulated depreciation (6,000,000 / 8)
5. Accumulated depreciation
Gain on impairment recovery

1,000,000
2,000,000
750,000
750,000
1,750,000
1,750,000

Cost 1/1/2006
Accumulated depreciation (10,000,000 / 10 x 2)
Book value 12/31/2007
Impairment loss 2007
Adjusted book value 12/31/2007
Depreciation 2008 (6,000,000 / 8)
Book value 12/31/2008
Cost 1/1/2006
Accumulated depreciation (10,000,000 / 10 x 3)
Book value 12/31/2008 (assuming no impairment)
Recorded book value
Gain on reversal of impairment

10,000,000
2,000,000
8,000,000
2,000,000
6,000,000
750,000
5,250,000
10,000,000
3,000,000
7,000,000
5,250,000
1,750,000

254
The fair value or recoverable value of P7,500,000 cannot exceed the book value that
would have been determined assuming no impairment is recognized.

Problem 19-21
1. Impairment loss
Accumulated depreciation (35,000,000 30,000,000)

5,000,000

2. Depreciation

6,000,000

5,000,000

Accumulated depreciation (30,000,000 / 5)

6,000,000

Observe that the undiscounted net cash flows from the asset amount to P37,500,000 for 5
years. This amount is more than the book value of the machinery. Under American
Standard, no impairment loss should be recognized in this case. However, under the
PAS 36, if the recoverable amount is less than carrying amount, an impairment loss is
recognized, regardless of the amount of undiscounted cash flows whether less than or
more than the carrying amount. PAS 36 has totally rejected the concept of
undiscounted cash flows for impairment purposes.

Problem 19-22
1. Value in use (1,500,000 x 5.65)
2. Impairment loss
Accmulated depreciation

8,475,000
8,250,000
8,250,000

Buildings
Accumulated depreciation (22,500,000 / 20 x 6)
Book value 1/1/2008
Fair value higher than value in use
Impairment loss
3. Depreciation
Accumulated depreciation (10,000,000 / 10)

25,000,000
6,750,000
18,250,000
10,000,000
8,250,000
1,000,000
1,000,000

Problem 19-23
1. Value in use (800,000 x 3.99)
2. Impairment loss
Accumulated depreciation

3,192,000
308,000
308,000

Machinery
Accumulated depreciation
Book value 1/1/2008
Present value of cash flows higher than fair value
Impairment loss
3. Depreciation
Accumulated depreciation (3,192,000 / 5)

5,000,000
1,500,000
3,500,000
3,192,000
308,000
638,400
638,400

255
Problem 19-24
1. Total carrying amount
Value in use
Impairment loss
2. Impairment loss allocated to goodwill

5,000,000
3,600,000
1,400,000
500,000

Impairment loss allocated to the other assets

900,000
1,400,000

When an impairment loss is recognized for a cash generating unit, the loss is
allocated to the assets of the unit in the following order:
a. First, to the goodwill, if any.
b. Then, to all other assets of the unit prorata based on their carrying amount.
Building
Inventory
Trademark

Carrying amount
2,000,000
1,500,000
1,000,000
4,500,000

3. Impairment loss
Goodwill
Accumulated depreciation building
Inventory
Trademark

Fraction
20/45
15/45
10/45

Loss
400,000
300,000
200,000
900,000

1,400,000
500,000
400,000
300,000
200,000

Problem 19-25
1. Carrying amount
Value in use
Impairment loss

16,000,000
11,000,000
5,000,000

2. Allocation of impairment loss


Building (8/16 x 5,000,000)
Equipment (4/16 x 5,000,000)
Inventory (4/16 x 5,000,000)

2,500,000
1,250,000
1,250,000
5,000,000

Observe that after allocating the P2,500,000 loss to the building, the carrying amount of
the building would be P5,500,000 which is lower than its fair value of P6,500,000.
Accordingly, only P1,500,000 loss is allocated to the building and the balance of P1,000,000
is reallocated to the equipment and inventory prorata.

256
Allocated loss
Reallocated loss
(4/8 x 1,000,000)
(4/8 x 1,000,000)

Building
2,500,000
(1,000,000)
_________

Equipment
1,250,000
500,000
_________

Inventory
1,250,000
500,000

Impairment loss
3. Impairment loss
Accumulated depreciation building
Accumulated depreciation equipment
Inventory

1,500,000

1,750,000

1,750,000

5,000,000
1,500,000
1,750,000
1,750,000

Problem 19-26
All Unimarts stores are in different locations and probably have different customer profile. So
although Smart is managed at the corporate level, Smart generates cash inflows that are
largely independent from those of the other Unimarts stores. Therefore, it is likely that Smart in
itself is a cash generating unit.

Problem 19-27
It is likely that the recoverable amount of an individual magazine title can be assessed. Even
though the level of advertising income for a title is influenced to a certain extent by the other
titles in the customer segment, cash inflows from direct sales and advertising are identifiable
for each title. In addition, decisions to abandon titles are made on an individual basis.
Accordingly, the individual magazine titles generate cash inflows that are largely
independent from one another and therefore, each magazine title is a separate cash
generating unit.

Problem 19-28
Case 1
1. A is separate cash generating unit because there is an active market for As products.
2. Although there is an active market for the products of B and C, cash inflows from B and
C depend on the allocation of production across two countries. It is unlikely that cash
inflows from B and C can be determined individually. Therefore, B and C, together
should be treated as a cash generating unit.

257
Case 2
a. A cannot be treated as a separate cash generating unit because its cash inflows
depend on the sales of the final product by B and C, since there is no active market for
As product.

b. As a consequence, A, B and C, together, and therefore, Maximus Company, as a whole,


should be treated as the largest single cash generating unit.

Problem 19-29
The primary purpose of the building is to serve as a corporate asset supporting Litmus
Companys manufacturing operations. Therefore, the building in itself cannot be considered
to generate cash inflows that are largely independent of the cash inflows from the entity as a
whole. In this case, the cash generating unit is Litmus Company as a whole.
The building is not held for investment. Thus, it is not appropriate to determine the value in
use of the building based on the cash inflows of related rent.

Problem 19-30 Answer C


Cost, January 1, 2005
Accumulated depreciation, December 31, 2007 (100,000 x 3)
Book value, December 31, 2007
Recoverable value
Impairment loss

800,000
300,000
500,000
200,000
300,000

The loss is recorded as follows:


Impairment loss
Accumulated depreciation
Cost
Accumulated depreciation (300,000 + 300,000)
Recoverable value, January 1, 2008
Depreciation for 2008 (200,000 / 5)
Book value, December 31, 2008

300,000
300,000
800,000
600,000
200,000
40,000
160,000

Problem 19-31 Answer B


From August 31, 2005 to May 31, 2008 is a period of 33 months. Thus, the remaining life of the
machine is 27 months, 60 months original life minus 33.
Depreciation for the month of June 2008 (1,350,000 / 27 months)

50,000

258
Cost
Accumulated depreciation 5/31/2008 (3,200,000 500,000 x 33/60)
Book value 5/31/2008
Fair value

3,200,000
1,485,000
1,715,000
1,350,000

Impairment loss

365,000

Problem 19-32 Answer B


Cost January 1, 2004
Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4)
Book value, December 31, 2007
Depreciation for 2008 (640,000 40,000 / 4)
Book value, December 31, 2008

1,000,000
360,000
640,000
150,000
490,000

Problem 19-33 Answer C


Book value, 1/1/2008
Depreciation for 2008 (1,600,000 / 4)
Book value, 12/31/2008
Sales price-recoverable value
Impairment loss

2,400,000
400,000
2,000,000
650,000
1,350,000

Problem 19-34 Answer C


Depreciation for 2008 (10% x 2,000,000)
Cost 1/2/2004
Accumulated depreciation - 12/31/08 (200,000 x 5)
Book value-12/31/2008
Estimated cost of disposal
Impairment loss

200,000
2,000,000
1,000,000
1,000,000
50,000
1,050,000

Problem 19-35 Answer C


Cost
Accumulated depreciation 1/1/2008 (2,000,000 100,000 / 10 x 2.5)
Book value 1/1/2008
Fair value
Impairment loss

2,000,000
475,000
1,525,000
600,000
925,000

Problem 19-36 Answer C


Cost 12/31/2004
Accumulated depreciation 8/31/2008 (2,400,000 / 96 months x 44)
Book value 8/31/2008
Fair value
Impairment loss

2,800,000
1,100,000
1,700,000
1,500,000
200,000

259
Problem 19-37 Answer C
Carrying value
Decommissioning cost
Adjusted carrying value
Fair value less cost to sell higher (20,000,000 less 1,000,000)

28,000,000
( 8,000,000)
20,000,000
19,000,000

Impairment loss

1,000,000

Value in use
Decommissioning cost
Adjusted value in use

26,000,000
( 8,000,000)
18,000,000

Problem 19-38 Answer C


Carrying value 12/31/2007
Depreciation for 2008 (20%)
Carrying value 12/31/2008
Carrying value 12/31/2008 (assuming no impairment)
Reversal of impairment loss

7,000,000
(1,400,000)
5,600,000
7,200,000
1,600,000

260
CHAPTER 20
Problem 20-1

Problem 20-2

1. D

1. A

6. D

6. B

2.
3.
4.
5.

C
D
A
D

7.
8.
9.
10.

A
D
D
B

2.
3.
4.
5.

A
C
D
D

7.
8.
9.
10.

B
D
D
D

Problem 20-3
2008
Jan. 1 Patent
Cash

255,000
255,000

Dec. 31 Amortization of patent


Patent (255,000 / 20)

12,750
12,750

2009
Dec. 31 Amortization of patent
Patent

12,750

2010
Jan. 5 Legal expense
Cash

90,000

12,750

90,000

Dec. 31 Amortization of patent


Patent

12,750
12,750

2011
Jan. 1 Patent
Cash

510,000
510,000

Dec. 31 Amortization of patent


Patent

42,750
42,750

On original cost
On competing patent (510,000 / 17)

12,750
30,000
42,750

Problem 20-4
2008
2011

Research and development expense


Cash

510,000

Patent

720,000

510,000

Cash

720,000

261
Amortization of patent (720,000 / 16)
Patent

45,000
45,000

2012

Patent

540,000
Cash

540,000

Amortization of patent
Patent

81,000
81,000

On related patent
On competing patent (540,000 / 15)

45,000
36,000
81,000

Problem 20-5
2008
2009

Research and development expense


Cash

250,000
250,000

Patent

60,000
Cash

60,000

Amortization of patent
Patent (60,000 / 10)
2010

6,000
6,000

Patent

600,000
Cash

600,000

Original cost
New patent
Total cost
Less: Amortization for 2008
Balance January 1, 2009
Amortization of patent (654,000 / 15)
Patent
2011

Amortization of patent
Patent
Patent written off
Patent
Balance 1/1/2010
Less: Amortization
2010
2011
Unamortized cost

60,000
600,000
660,000
6,000
654,000
43,600
43,600
43,600
43,600
566,800
566,800
654,000
43,600
43,600

87,200
566,800

262

Problem 20-6
1. Patent
Cash

7,140,000
7,140,000

2. Amortization of patent
Patent (7,140,000 / 15)

476,000
476,000

3. Amortization of patent
Patent (5,712,000 / 7)

816,000
816,000

4. Acquisition cost
Amortization for 2005, 2006 and 2007 (476,000 x 3)
Carrying amount 1/1/2008
Amortization for 2008
Carrying amount 12/31/2008

7,140,000
(1,428,000)
5,712,000
( 816,000)
4,896,000

Problem 20-7
1. Patent
Cash
2. Amortization of patent
Patent (900,000 / 10)
3. Patent written off
Patent

900,000
900,000
90,000
90,000
540,000
540,000

Cost
Amortization for 2005, 2006, 2007 and 2008 (90,000 x 4)
Carrying amount 12/31/2008

900,000
(360,000)
540,000

Problem 20-8
1. Patent
Cash
2. Legal expenses
Cash
3. Amortization of patent
Patent
X (1,200,000 / 8)
Y (2,000,000 / 5)
Z (3,000,000 / 6)

6,200,000
6,200,000
450,000
450,000
1,050,000
1,050,000
150,000
400,000
500,000
1,050,000

263

Problem 20-9
1. Retained earnings
Patent

500,000

2. Patent
Retained earnings

510,000

500,000
510,000

3. No adjustment.
4. Loss on damages
Legal expense
Accrued liabilities

100,000
30,000

5. Patent
Retained earnings

24,500

130,000
24,500

Amortization per book (500,000 450,000)


Correct amortization for 2007 (510,000 / 20)
Overamortization
6. Amortization of patent
Patent

50,000
25,500
24,500
25,500
25,500

Problem 20-10
2008

Copyright
Cash

285,000

Amortization of copyright
Copyright

150,000

285,000
150,000

285,000 / 95,000 = 3 per copy


50,000 x 3
= 150,000
2009

Amortization of copyright
Copyright (30,000 x 3)

90,000
90,000

Problem 20-11
1. Copyright
Retained earnings

240,000
240,000

Cost of copyright
Less: Amortization (300,000 / 5)
Book value
2. Amortization of copyright
Copyright

300,000
60,000
240,000
60,000
60,000

264

Problem 20-12
1. Copyright
Patent
Retained earnings

620,000
400,000
1,020,000

Copyright 1
Less: Amortization from 1/1/2004 to 12/31/2007 (400,000 / 20 x 4)
Book value

400,000
80,000
320,000

Copyright 2
Less: Amortization from 7/1/2005 to 12/31/2007 (360,000 / 15 x 2.5)
Book value

360,000
60,000
300,000

Patent
Less: Amortization for 2006 and 2007 (500,000 / 10 x 2)
Book value

500,000
100,000
400,000

2. Amortization of copyright (20,000 + 24,000)


Amortization of patent
Copyright
Patent

44,000
50,000
44,000
50,000

Problem 20-13
Books of Franchisee
1. Franchise
Cash

6,000,000
6,000,000

2. Amortization of franchise
Franchise (6,000,000 / 20)

300,000
300,000

3. Cash
Sales

25,000,000
25,000,000

4. Franchise fee expense


Cash (25,000,000 x 5%)

1,250,000
1,250,000

Problem 20-14
Books of Franchisee
1. Franchise
Cash
Note payable
2. Note payable (15,000,000 / 4)
Interest expense (15,000,000 x 10%)

20,000,000
5,000,000
15,000,000
3,750,000
1,500,000

Cash

5,250,000

265
3. There is no amortization because the franchise is for an indefinite period.

Problem 20-15
Books of Franchisee
1. Franchise (3,000,000 + 3,790,000)
Discount on note payable
Cash
Note payable

6,790,000
1,210,000
3,000,000
5,000,000

Note payable
Present value of note (1,000,000 x 3.79)
Implied interest

5,000,000
3,790,000
1,210,000

2. Amortization of franchise
Franchise (6,790,000 / 10)
3. Note payable
Cash
4. Interest expense (10% x 3,790,000)
Discount on note payable

679,000
679,000
1,000,000
1,000,000
379,000
379,000

Problem 20-16
Requirement a
1. Leasehold improvement building
Cash

5,000,000
5,000,000

2. Rent expense (50,000 x 12)


Cash

600,000

3. Depreciation (5,000,000 / 10)


Accumulated depreciation

500,000

600,000
500,000

Requirement b
Accumulated depreciation
Loss on leasehold cancelation
Leasehold improvement building

2,500,000
2,500,000
5,000,000

Problem 20-17
1. Rent expense

1,200,000

Prepaid rent
Cash

1,200,000
2,400,000

266
2. Leasehold
Cash

2,000,000
2,000,000

3. Leasehold improvement
Cash

500,000

4. Amortization of leasehold
Leasehold (2,000,000 / 5)

400,000

5. Depreciation (500,000 / 5)
Accumulated depreciation

100,000

500,000
400,000
100,000

Problem 20-18
1. Leasehold
Cash

1,000,000

2. Rent expense (150,000 x 12)


Cash

1,800,000

1,000,000
1,800,000

3. Leasehold improvement
Cash

400,000

4. Leasehold improvement
Cash

100,000

5. Amortization of leasehold
Leasehold (1,000,000 / 10)

100,000

6. Depreciation
Accumulated depreciation

400,000
100,000
100,000
60,000
60,000

400,000 / 10
100,000 / 5

40,000
20,000
60,000

Problem 20-19
1. Rent expense
Cash

600,000

2. Leasehold
Cash

100,000

600,000
100,000

3. Leasehold improvement
Cash

200,000

4. Leasehold improvement
Cash

50,000

200,000
50,000

267
5. Amortization of leasehold
Leasehold (100,000 / 5)

20,000

6. Depreciation
Accumulated depreciation

52,500

20,000
52,500

200,000 / 5
50,000 / 4

40,000
12,500
52,500

Problem 20-20
1. Amortization of patent
Accumulated amortization (1,920,000 240,000 / 6)

280,000

2. Trademark (800,000 x 3/4)


Noncompetition agreement
Cash

600,000
200,000

280,000

800,000

3. Amortization of noncompetition agreement


Accumulated amortization (200,000 / 5)

40,000

4. Royalty expense
Cash

50,000

40,000
50,000

Problem 20-21
1. Acquisition cost
Net assets acquired
Goodwill
2. Cash
Accounts receivable
Inventory
Property, plant and equipment
Goodwill
Accounts payable
Note payable bank
Cash

Problem 20-22

7,500,000
(4,600,000)
2,900,000
50,000
800,000
1,350,000
4,300,000
2,900,000
900,000
1,000,000
7,500,000

1. Acquisition cost
Net assets acquired at fair value
Goodwill

6,000,000
(3,300,000)
2,700,000

Total assets at fair value


Total liabilities
Net assets acquired at fair value

5,300,000
2,000,000
3,300,000

268
2. Cash
Accounts receivable
Inventory
Patent
Property, plant and equipment
Goodwill
Accounts payable
Cash

50,000
500,000
1,500,000
250,000
3,000,000
2,700,000
2,000,000
6,000,000

Problem 20-23
1. Cash
Inventory
In-process R and D
Total assets
Total liabilities
Net assets
Acquisition cost
Net assets acquired at fair value
Goodwill

1,000,000
500,000
5,000,000
6,500,000
3,000,000
3,500,000
8,000,000
(3,500,000)
4,500,000

The goodwill includes the fair value of the assembled workforce of P1,200,000.
The assembled workforce is not accounted for separately as an asset.
2. Cash
Inventory
In process R and D
Goodwill
Accounts payable
Notes payable
Cash

1,000,000
500,000
5,000,000
4,500,000
2,600,000
400,000
8,000,000

Problem 20-24
1. Average earnings
Divide by
Net assets including goodwill
Less: Net assets before goodwill
Goodwill

250,000
10%
2,500,000
1,700,000
800,000

2. Average earnings
Less: Normal earnings (8% x 1,700,000)
Excess earnings
Divide by
Goodwill

250,000
136,000
114,000
15%
760,000

269
3. Average earnings
Less: Normal earnings (10% x 1,700,000)
Excess earnings
Multiply by
Goodwill

250,000
170,000
80,000
5
400,000

4. Excess earnings
Multiply by
Goodwill

80,000
5.65
452,000

Problem 20-25
Average earnings or prior years (1,500,000 / 3)
Increase in average earnings (10% x 500,000)
Total
Less: Patent amortization (500,000 / 5 years)
Earnings for goodwill computation
a. Average future earnings
Divide by
Net assets including goodwill
Less: Net assets excluding goodwill
Goodwill

500,000
50,000
550,000
100,000
450,000
450,000
8%
5,625,000
5,000,000
625,000

b. Average earnings
Less: Normal earnings (8% x 5,000,000)
Average excess earnings
Divide by
Goodwill

450,000
400,000
50,000
10%
500,000

c. Goodwill (50,000 x 3.17)

158,500

Problem 20-26
a. Average earnings
Expected increase (1,000,000 900,000)
Total
Less: Normal earnings (4,800,000 x 10%)
Excess earnings

750,000
100,000
850,000
480,000
370,000

Goodwill (370,000 x 4)
Shareholders equity per book
Less: Recorded goodwill
Net assets before goodwill

1,480,000
5,000,000
200,000
4,800,000

b. Goodwill (370,000 / 20%)

1,850,000

270
Problem 20-27
1. Share capital
Retained earnings
Total shareholders equity
Less: Recorded goodwill
Net assets before goodwill

2,000,000
1,500,000
3,500,000
1,000,000
2,500,000

Average earnings (1,200,000 + 150,000 / 3)


Less: Normal earnings (10% x 2,500,000)
Excess earnings
Divide by
Goodwill
2. Net assets before goodwill
Goodwill
Purchase price

450,000
250,000
200,000
16%
1,250,000
2,500,000
1,250,000
3,750,000

Problem 20-28
1. Value in use
Net assets including goodwill at carrying amount
Impairment loss
2. Impairment loss
Goodwill

38,000,000
42,000,000
( 4,000,000)
4,000,000
4,000,000

Problem 20-29
1. Value in use
Net assets including goodwill at carrying amount
Impairment loss
2. Impairment loss
Goodwill
Accounts receivable
Inventory
Accumulated depreciation

60,000,000
75,000,000
(15,000,000)
15,000,000
5,000,000
2,000,000
3,000,000
5,000,000

The remaining impairment loss of P10,000,000, after deducting the loss


applicable to goodwill, is allocated to the other noncash assets on a
prorata basis.

Problem 20-30
1. Present value of indefinite cash flows (200,000 / 10%)
Trademark
Impairment loss

2,000,000
6,000,000
(4,000,000)

271
Present value of cash flows from cash generating unit (9,000,000 x 8.51)
76,590,000
Net assets including goodwill at carrying amount
80,000,000
Impairment loss
( 3,410,000)
2. Impairment loss
Trademark
Goodwill

7,410,000
4,000,000
3,410,000

Problem 20-31
1. Total carrying amount
Value in use
Impairment loss
2. Impairment loss
Goodwill
Accumulated depreciation building (25/45 x 270,000)
Inventory (15/45 x 270,000)
Trademark (5/45 x 270,000)

5,000,000
4,230,000
770,000
770,000
500,000
150,000
90,000
30,000

Problem 20-32
12/31/2008
1/1/2009
7/1/2009
11/1/2009

R and D expense
Cash

2,500,000

R and D expense
Cash

1,200,000

R and D expense
Cash

500,000

Patent

350,000

2,500,000
1,200,000
500,000

Cash
11/15/2009

Patent

350,000
800,000

Cash

800,000

12/31/2009

Patent

100,000
Cash

100,000

Problem 20-33
1. Product costs which are associated wit inventory items are:
Duplication of computer software and training materials
Packaging product
Total inventory

2,500,000
900,000
3,400,000

2. The costs incurred from the time of technological feasibility to the time when
product costs are incurred should be capitalized as computer software cost.

Other coding costs after establishment of technological feasibility


Other testing costs after establishment of technological feasibility
Costs of producing product masters for training materials
Total costs to be capitalized

272
2,400,000
2,000,000
1,500,000
5,900,000

3. Completion of detail program design


Cost incurred for coding and testing to establish technological feasibility
Total costs charged as expense

1,300,000
1,000,000
2,300,000

Problem 20-34
1. Designing and planning
Code development
Testing
Total R and D expense in 2008

1,000,000
1,500,000
__500,000
3,000,000

The cost of producing the product master of P2,500,000 is capitalized as


software cost to be subsequently amortized.
2. Cost of producing the software program in 2009
Amortization of software cost (2,500,000 / 4)
Total expense in 2009

1,000,000
625,000
1,625,000

Problem 20-35 Answer C


Cost
Accumulated amortization from 2005 to 2007 (357,000 / 15 x 3)
Book value 12/31/2007
Amortization for 2008 (285,600 / 7)
Book value 12/31/2008

Problem 20-36 Answer C

357,000
71,400
285,600
40,800
244,800

Cost 1/1/2003
Accumulated depreciation 12/31/2007 (6,000,000 / 15 x 5)
Book value 1/1/2008
Amortization for 2008 (4,000,000 / 5)

6,000,000
2,000,000
4,000,000
800,000

Problem 20-37 Answer C


Cumulative earnings
Less: Gain on sale
Adjusted cumulative earnings

550,000
50,000
500,000

273
Average earnings (500,000 / 5)
Divide by capitalization rate
Net assets including goodwill
Less: Net assets before goodwill
Goodwill

100,000
10%
1,000,000
750,000
250,000

Problem 20-38 Answer C


Net assets
Multiply by excess rate (16% minus 10%)
Excess earnings
Multiply by present value factor
Goodwill

1,800,000
6%
108,000
3.27
353,160

Problem 20-39 Answer D


Purchase price
Less: Goodwill
Net assets before goodwill
Estimated annual earnings (squeeze)
Less: Normal earnings (4,500,000 x 10%)
Excess or superior earnings
Divide by capitalization rate
Goodwill

5,000,000
500,000
4,500,000
550,000
450,000
100,000
20%
500,000

Problem 20-40 Answer C


Accounts receivable
Inventory
Equipment
Short-term payable

2,000,000
500,000
500,000
(2,000,000)

Net assets at fair value

1,000,000

Acquisition cost
Net assets at fair value
Goodwill

5,000,000
(1,000,000)
4,000,000

Problem 20-41 Answer A


Problem 20-42 Answer C
Downpayment
Present value of annual payment for 4 years (1,000,000 x 2.91)
Cost of franchise

2,000,000
2,910,000
4,910,000

274
Problem 20-43 Answer A
Design costs
Legal fees of registering trademark
Registration fee with Patent Office
Total cost of trademark

1,500,000
150,000
50,000
1,700,000

Problem 20-44 Answer B


Original lease
Extension
Total life
Less: Years expired (2006 and 2007)
Remaining life
Life of improvement (shorter)
Leasehold improvement
Less: Depreciation for 2008 (540,000 / 15)
Book value

12 years
8
20
2
18 years
15 years
540,000
36,000
504,000

Problem 20-45 Answer D


Depreciation (3,600,000 / 6)

600,000

Problem 20-46 Answer C


Depreciation of equipment
Materials used

135,000
200,000

Compensation costs of personnel


Outside consulting fees
Indirect costs allocated

500,000
150,000
250,000
1,235,000

Problem 20-47 Answer A


Modification to the formulation of a chemical product
Design of tools, jigs, molds and dies
Laboratory research
Total research and development expense

135,000
170,000
215,000
520,000

Problem 20-48 Answer D


All costs are charged to R and D expense.

275
Problem 20-49 Answer A
Trademark
Value in use (120,000 / 6%)
Impairment loss

3,000,000
2,000,000
1,000,000

Patent
Amortization for 2008 (2,000,000 / 5)
Book value 12/31/2008
Value in use (500,000 x 3.47)
Impairment loss

2,000,000
400,000
1,600,000
1,735,000
-_ _

Problem 20-50 Answer B


Carrying amount of net assets
Value in use (8,000,000 x 1.5)
Impairment loss applicable to goodwill

16,000,000
12,000,000
4,000,000