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16

INVENTORY
Problem 16-1 (IAA)

Aman Company provided the following data with respect to its inventory:

Items counted in the bodega


Items included in the count specifically segregated per sale contract
items in receiving department, returned by customer, in good condition
Items ordered and in the receiving deparment, invoice not received
Items ordered, invoice received but goods not received. Freight is on account of seller.
Items shipped today, invoice mailed, FOB shipping point
Items shipped today, invoice mailed, FOB destination
Items currently being used for window display
Items on counter for sale
Items in receiving department, refused by Aman Company because of damage
Items included in count, damaged and unsalable
Items in the shipping department

What is the correct amount of inventory?

a. 5,700,000
b. 6,000,000
c. 5,800,000
d. 5,150,000

Solution 16-1 Answer a

Items counted in the bodega


Items included in the count specifically segregated per sale contract
Items returned by customer
Items ordered and in receiving deparment
Items shipped today, FOB destination
Items for display
Items on counter for sale
Damaged and unsalable items included in count
Items in the shipping department
Problem 16-2 (IAA)

Lunar Company included the following items under inventory:

Materials
Advance for materials ordered
Goods in process
Unexpired insurance on inventory
Advertising catalogs and shipping cartons
Finished goods in factory
Finished goods in entity-owned retails store, including 50% profit on cost
Finished goods in hands of consignees including 40% profit on sales
Finished goods in transit to customer, shipped FOB destination at cost
Finished goods out on approval, at cost
Unsalable finished goods, at cost
Office supplies
Materials in transit, shipped FOB shipping point, excluding rate of P30,000
Goods held on consignment, at sales price, cost P150,000

What is the correct amount of inventory?

a. 5,375,000
b. 5,500,000
c. 5,540,000
d. 5,250,000

Solution 16-2 Answer b

Materials
Goods in process
Finished goods in factory
Finished goods in entity-owned retails store (750,000/150%)
Finished goods in hands of consignees (400,000*60%)
Finished goods in transit
Finished goods out on approval
Materials in transit (330,000 + 30,000)
Correct inventory

Problem16-3 (IAA)

The information below is taken from the records of Ram Company at the end of current year.
Finished goods in storeroom, at cost, including overhead ofP400,000 or 20%.
Finished goods in transit, including freight charge of P20,000, FOB shipping point
Finished goods held by salesmen, at selling price, cost, P100,000
Goods in process, at cost of materials and direct labor
Materials
Materials in transit, FOB destination
Defective materials returned to suppliers
Shipping supplies
Gasoline and oil for testing finished goods
Machine lubricants

What is the correct amount of inventory?

a. 4,000,000
b. 4,170,000
c. 4,270,000
d. 4,090,000

Solution 16-3 Answer b

Finished goods
Finished goods held by salesmen
Goods in process (720,000/80%)
Materials
Factory supplies (110,000 + 60,000)
Correct inventory

Problem 16-4 (IFRS)

Brilliant Company incurred the following costs during the current year:

Cost of purchases based on vendors' invoices


Trade discounts on purchases already deducted from vendors' invoices
Import duties
Freight and insurance on purchases
Other handling costs relating to imports
Salaries of accounting department
Brokerage commission paid to agents for arranging imports
Sales commission paid to sales agents
After-sales warranty costs
What is the total cost of the purchases?

a. 5,700,000
b. 6,100,000
c. 6,700,000
d. 6,500,000

Solution 16-4 Answer c

Cost of purchases 5,000,000


Import duties 400,000
Freight and insurance 1,000,000
Other handling costs 100,000
Brokerage commission 200,000
Total cost of purchases 6,700,000

Problem 16-5 (IFRS)

Corolla Company incurrd the following costs:

Materials 700,000
Storage costs of finished goods 180,000
Delivery to customers 40,000
Irrecoverable purchase taxes 60,000

At what amount should the inventory be measured?

a. 880,000
b. 760,000
c. 980,000
d. 940,000

Solution 16-5 Answer b

Materials 700,000
Irrecoverable purchase taxes 60,000
Total cost of inventory 760,000

Problem 16-6 (IFRS)

Eagle Company incurred the following costs in relation to a certain product:


Diirect materials and labor 180,000
Variable production overhead 25,000
Factory administrative costs 15,000
Fixed production costs 20,000

What is the correct measurement of the product?

a. 205,000
b. 225,000
c. 195,000
d. 240,000

Solution 16-6 Answer d

All costs are inventoriable.

Problem 16-7 (AICPA Adapted)

The following information applied to Fenn Company for the current year:

Merchandise purchase for resale 4,000,000


Freight in 100,000
Freight out 50,000
Purchase returns 20,000
Interest on inventory loan 200,000

What is the inventoriable cost of the purchase?

a. 4,280,000
b. 4,030,000
c. 4,080,000
d. 4,130,000

Solution 16-7 Answer c

Merchandise purchased 4,000,000


Freight In 100,000
Total 4,100,000
Purchase returns (20,000)
Inventoriable cost 4,080,000
Problem 16-8 (AICPA Adapted)

On December 28, 2011, Kerr Company purchase goods costing P500,000. The terms where F.O.B. destination.
Some of the costs incurred in connection with the sale and delivery of the goods where as follows:

Packaging for shipment 10,000


Shipping 15,000
Special handling charges 25,000

These goods were received on December 31, 2011. On December 31, 2011, what total cost for these goods should be inclu

a. 545,000
b. 535,000
c. 520,000
d. 500,000

Solution 16-8 Answer d

When the shipping terms are FOB destination, the seller is responsible for costs incurred in transporting the goods to the bu
such as packaging costs, shipping costs and special handling charges. The amount to be included in the buyer's inventory
cost is the purchase price.

Problem 16-9 (AICPA Adapted)

On December 26, 2011, Branigan Company purchased goods costing P1,000,000. The terms were FOB Shipping point.
The goods were received on December 28, 2011.

Costs incurred by Branigan Company in connection with the purchase and the delivery of the goods were as follows:

Normal freight charge


Handling cost
Insurance on shipment
Abnormal freight charge for express shipping

What is the total cost that Branigan Company should charge to inventory?

a. 1,050,000
b. 1,030,000
c. 1, 055,000
d. 1, 067,000

Solution 16-9 Answer c


Purchase price 1,000,000
Normal freight charge 30,000
Handling cost 20,000
Insurance on shipment 5,000
Total cost of inventory 1,055,000

The abnormal freight charge should be charged to expense.

Problem 16-10 (AICPA Adapted)

Stone Company had the following consignment transaction during December 2011:

Inventory shipped on consignment to Beta Company


Freight paid by Stone
Inventory received on consignment from Alpha Company
Freight paid by Alpha

No sales of consigned goods where made in December 2011. What amount should be included
as consigned inventory on December 31, 2011?

a. 1,200,000
b. 1,250,000
c. 1, 800,000
d. 1,890,000

Solution 16-10 Answer d

Inventory shipped on consignment to Beta


Freight paid by Stone
Total cost of consigned inventory

Problem 16-11 (AICPA Adapted)

Clem Company provided the following for the current year:

Central warehouse
Beginning inventory 1,100,000
Purchases 4,800,000
Freight in 100,000
Transportation to consignees
Freight out 300,000
Ending inventory 1,450,000
What is the cost of sales for the current year?
a. 4,550,000
b. 4,850,000
c. 5,070,000
d. 5,120,000

Solution 16-11 Answer d

Beginning inventory 1,220,000


Purchases 5,400,000
Freight in (100,000 + 50,000) 150,000
Goods available for sale 6,770,000
Ending inventory (1,650,000)
Cost of sales 5,120,000

Problem 16-12 (CGAC)

Brooke Company uses a perpetual inventory system. At the end of 2010, the balance in the inventory account was
P360,000 and P30,000 of those goods included in ending inventory were purchased FOB Shipping point and did not
arrived until 2011. Purchases in 2011 were P3,000,000. The perpetual inventory records showed an ending inventory
of P420,000 for 2011.

A physical count of the goods on hand at the end of 2011 showed an inventory of P380,000. Inventory shortages are
included in cost of goods sold. What amount should be reported in the 2011 income statement for cost of good sold?

a. 2, 940,000
b. 2,980,000
c. 3,000,000
d. 3,010,000

Solution 16-12 Answer b

Inventory- December 31, 2010 360,000


Purchases-2011 3,000,000
Good available for sale 3,360,000
Inventory- December 31, 2011 (380,000)
Cost of good sold 2,980,000

Problem 16-13 (AICPA Adapted)

On December 1,2011, Alt department store received 505 sweaters on consignment from Todd. Todd's cost for the
sweaters was P800 each, and they were priced to sell at P1,000. Alt's commision on consigned goods is 10%. On
December 31, 2011, 5 sweaters remained. In its December 31, 2011 statement of financial position, what amount should
Alt report as payable for consigned goods?

a. 490,000
b. 454,000
c. 450,000
d. 404,000

Solution 16-13 Answer c

Sweaters sold (500 x P1,000) 500,000


Less: Commision (10% x 500,000) 50,000
Payable for consigned goods 450,000

Cash 500,000
Commision Income 50,000
Accounts Payable 450,000

Problem 16-14 (AICPA Adapted)

On October 1, 2011, Grimm Company consigned 40 freezer to Holden Company costing P14,000 each for sale at P20,000
each and paid P16,000 in transportation costs. On December 30, 2011, Holden reported the sale of 10 freezer and remitted
P170,000. The remittance was net of the agreed 15% commision. What amount should Grim recognize as consignment
sales revenue for 2011?

a. 154,000
b. 170,000
c. 196,000
d. 200,000

Solution 16-14 Answer d

Freezer sold (10 x P20,000) 200,000

Problem 16-15 (PHILCPA Adapted)

An analysis of the ending inventory of Lilac Company on December 31, 2011 disclosed the inclusion of the following item

Merchandise in transit purchased on terms:


FOB Shipping point
FOB Destination
Merchandise out on consignment at sales price
(including markup of 30% on cost)
Merchandise sent to customer for approval
(cost of goods, P30,000)
Merchandise held on consignment

What is the reduction of the inventory on December 31, 2011?

a. 355,000
b. 190,000
c. 203,500
d. 222,000

Solution 16-15 Answer b

Merchandise in transit purchased FOB destination


Markup on goods out on consignment (195,000-150,000)
Markup on merchandise for approval
Merchandise held on consignment
Total reduction

Problem 16-16 (AICPA Adapted)

Dean Sportswear regularly buys sweaters form Mill Company and is allowed trade discounts of 20% and 10% from the list
price. Dean made a purchase on March 20, 2011, and received an invoice with a list price of P600,000, a freight charge of
P15,000 and payment terms of 2/10, n/30. What is the cost of the purchase?

a. 432,000
b. 447,000
c. 438,360
d. 435,000

Solution 16-16 Answer b

List price 600,000


Trade discount (20% x 600,000) (120,000)
Balance 480,000
Trade discount (10% x 480,000) (48,000)
Invoice price 432,000
Freight charge 15,000
Total cost of purchase 447,000

Purchases are normally recorded at gross. Thus, the cash discount is ignored.

Problem 16-17 (PHILCPA Adapted)

Hungary Company uses the net method of accounting for cash discounts. In one of its transactions on December 15, 2011,
Hungary sold merchandise with a list price of P2,000,000 to a customer who was given a trade discounts of 20% and
15%. Credit terms were 2/10,n/30. The goods were shipped FOB destination, freight collect. Total freight charge paid by
the customer returned damged goods originally billed at P60,000. What is the net realizable value of this account receivabl
on December 31, 2011?

a. 1,280,000
b. 1,300,000
c. 1,170,000
d. 1,320,000

Solution 16-17 Answer a

List price 2,000,000


Trade discount (20% x 2,000,000) (400,000)
Balance 1,600,000
Trade discount (15% x 1,600,000) (240,000)
Invoice price 1,360,000
Sales return (60,000)
Freight paid by customer (20,000)
Net realizable value of AR 1,280,000

There is no cash discount because the discount period of 10 days has already expired.

Problem 16-18 (AICPA Adapted)

On June 1, 2011, Pitt Company sold merchandise with a list price of P5,000,000 to Burr on account. Pitt allowed trade
discount of 30% and 20%. Credit terms were 2/10,n/30 and the sale was made FOB shipping point. Pitt prepaid P200,000 o
delivery costs for Burr as an accommodation. On June 11, 2011, what amount was received by Pitt form Burr as
remittance in full?

a. 2,744,000
b. 2,940,000
c. 2,944,000
d. 3,140,000

Solution 16-18 Answer c

List price 5,000,000


Trade discounts:
30% x 5,000,000 (1,500,000)
3,500,000
20% x 3,500,000 (700,000)
Invoice price 2,800,000
Cash discount (2% x 2,800,000) (56,000)
Net amount 2,744,000
Add: Reimbursement of delivery cost 200,000
Total remittance from Burr 2,944,000

Problem 16-19 (IAA)

On August 1 of the current year, Stella Company recorded purchases of inventory of P800,000 and P1,000,000
under credit terms of 2/l15,net 30. The payment due on the P800,000 purchase was remitted on August 16.
The payment due on the P1,000,000 purchase was remitted on August 31. Under the net method and the gross
method, these purchases should be included at what respective amount in the determination of cost of goods available for s

Net method Gross method


a. 1,784,000 1,764,000
b. 1,764,000 1,800,000
c. 1,764,000 1,784,000
d. 1,800,000 1,764,000

Solution 16-19 Answer c

Net method 1,800,000


Purchases (800,000 + 1,000,000) (16,000)
Purchase discount taken (2% x 800,000) (20,000)
Purchase discount not taken (2% x 1,000,000) 1,764,000
Net amount

Under the net method, the purchase discount is deducted from purchases regardless of whether taken or not taken.

Gross method
Purchases 1,800,000
Purchase discount taken (16,000)
Net purchases 1,784,000

Under the gross method, the purchases are recorded at gross and only the purchase discount taken is deducted
from purchases in determining cost of goods available for sale.

Problem 16-20 (AICPA Adapted)

Rabb Company records its purchases at gross amount but wishes to change to recording purchases net of purchase
discounts. Discount available on purchases for the current year totaled P100,000. Of this amount, P10,000 is still
available in the accounts payable balance. The balances in the accounts as of and for the year ended December 31,,
before conversion are:

Purchases 5,000,000
Purchase discount taken 40,000
Accounts payable 1,500,000
What is the balance of accounts payable on December 31 after the conversion?

a. 1,490,000
b. 1,460,000
c. 1,440,000
d. 1,410,000

Solution 16-20 Answer a

Accounts payable at gross


Discounts available in the accounts payable balance
Accounts payable at net

Problem 16-21 (PHILCPA Adapted)

Duke Company specializes in the sale of IBM compatibles and software packages. It had the following transactions with
one of its suppliers:

Purchases of IBM compatibles 1,700,000


Purchases of commercial software packages 1,200,000
Returns and allowances 50,000
Purchase discounts taken 17,000

Purchases were made throughout the year on terms 2/10,n/30. All returns and allowances took place within 5 days of
purchase and prior to any payment on account.

How much is the discount lost?

a. 57,000
b. 40,000
c. 17,000
d. 41,000

Solution 16-21 Answer b

Purchases of IBM compatibles 1,700,000


Purchases of commercial software packages 1,200,000
Total 2,900,000
Less: Returns and allowances (50,000)
Net purchases 2,850,000
Discounts available on purchases (2% x 2,850,000) 57,000
Less: Purchase discounts taken 17,000
Discount lost 74,000

Problem 16-22 (AICPA Adapated)

Hero Company's inventory on December 31, 2011 was P6,000,000 based on a physical count of goods priced at
cost and before any necessary year-end adjustments relating to the following:

Included in the physical count were goods billed to a customer FOB shipping point on December 30,2011.
These goods had a cost of P125,000 and were picked up by the carrier on January 7, 2012.

Goods shipped FOB shipping point on December 28, 2011, form a vendor to Hero were received on
January 4, 2012. The invoice cost was P300,000.

What amount should be reported as inventory on December 31, 2011?

a. 5,875,000
b. 6,000,000
c. 6, 175,000
d. 6,300,000

Solution 16-22 Answer d

Physical count
Goods shipped FOB shipping point on December 30, 2011
to Hero and received January 4, 2012
Inventory, December 31, 2011

The goods costing P125,000 are properly included in the December 31, 2011 physical count because they are
shipped FOB shipping point only on January 7, 2012 (picked up by common carrier).

Problem 16-23 (AICPA Adapted)

The physical count conducted in the warehouse of Reverend Company on December 31, 2011 revealed
merchandise with a total cost of P5,000,000. However, further investigation revealed that the following items
were excluded from the count.

Goods sold to a customer, which are being held for the customer to call at the customer's convenience
with a cost of P200,000.

A packing case containing a product costing P500,000 was standing in the shipping room when the physical
inventory was taken.

It was not included in the inventory because it was marked "hold for shipping instructions". The investigation
revealed that the customer's order was dated December 28, 2011, but that the case was shipped and the
customer billed on January 4, 2012.

A special machine costing P250,000, fabricated to order for a customer, was finished and specifically
segregated at the back part of the shipping room on December 31,2011. The customer was billed on that
date and the machine was excluded from inventory although it was shipped on January 2, 2012.

What is the correct amount of inventory that should be reported on December 31, 2011?

a. 5,950,000
b. 5,750,000
c. 5,500,000
d. 5,700,000

Solution 16-23 Answer c

Physical count
Inventory marked "hold for shipping instructions"
Correct amount of inventory

Problem 16-24 (PHILCPA Adapted)

The inventory on hand on December 31, 2011 for Fair Company is valued at a cost of P950,000. The following
items were not included in this inventory amount:

Item 1: Purchased goods in transit, shipped FOB destination, invoice price P30,000 which includes
freight charge of P1,500.

Item 2: Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission
of 20% of the sales price.

Item 3: Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500 which includes
P1,000 freight charge to deliver the goods. Goods are in transit. The entity's selling
price is 140% of cost.

Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000, freight cost, P2,500.

Item 5: Goods out on consignment to Manila Company, sales price P35,000, shipping cost of P2,000.

What is the adjusted cost of the inventory on December 31,2011?

a. 1,042,000
b. 1,043,000
c. 1,040,000
d. 1,073,500

Solution 16-24 Answer a

Inventory per book 950,000


Item 3 (18,500 - 1,000/140%) 12,500
Item 4 (50,000 + 2,500) 52,500
Item 5 (35,000/140% = 25,000 + 2,000) 27,000
Adjusted inventory 1,042,000

Problem 16-25 (IAA)

Baritone Company counted its ending inventory on December 31, 2011. None of the following items were
included when the total amount of the ending inventory was computed:

P150,000 in goods located in the entity's warehouse that are on consignment from another entity.

P200,000 in goods that were sold by the entity and shipped on December 30 and were in transit on December 31, 2011.

The goods were received by the customer on January 2, 2012. Terms were FOB destination.

P300,000 in goods that were purchased by the entity and shipped on December 30 and were in transit on
December 31, 2011.

The goods were received by the entity on January 2, 2012. Terms were FOB shipping point.

P400,000 in goods that were sold by the entity and shipped on December 30 and were in transit on
December 31, 2011.

The goods were received by the customer on January 2, 2012. Terms were FOB shipping point.

The entity's reported inventory before any corrections was P2,000,000. What is the correct amount of
inventory on December 31, 2011?

a. 2,500,000
b. 2,350,000
c. 2,900,000
d. 2,750,000

Solution 16-25 Answer a

Reported inventory 2,000,000


Goods sold in transit, FOB destination 200,000
Goods purchased in transit, FOB shipping point 300,000
Correct amount of inventory 2,500,000

Problem 16-26 (IAA)

Sterling Comapany reported its 2011 year-end inventory at P7,600,000 before the following adjustments:

Goods valued at P1,000,000 are on consignment with a customer. These goods are not included in the year-end inventory
Goods costing P250,000 were received from a vendor on January 12,2012. The goods were shipped on December 31, 20
Goods costing P850,000 were shipped on December 31, 2011, and were delivered to the customer on January 2, 2012. Th
FOB shipping point. The goods were included in ending inventory for 2011 even though the sale was recorded in 2011.
A P350,0000 shipment of goods to a customer on December 31, 2011, terms FOB destination, was not included in the ye
and were delivered to customer on January 8, 2012. The sale was properly recorded in 2012.
An invoice for goods costing P350,000 was received and recorded as a purchase on December 31, 2011. The related goo
on January 2, 2012, and thus were not included in the physical inventory.
Goods valued at P650,000 are on consignment from a vendor.These goods are not included in the year-end inventory.
A P1,050,000 shipment of goods to a customer on December 30, 2011, terms FOB destination, was recorded as a sale in
to the customer on January 6, 2012, were not included in 2011 inventory.

What is the correct inventory on December 31, 2011?

a. 9,100,000
b. 8,100,000
c. 9,950,000
d. 9,450,000

Solution 16-26 Answer a

Inventory before adjustment 7,600,000


Goods out on consignment 1,000,000
Goods purchased, FOB shippin point 250,000
Goods sold , FOB shipping point (850,000)
Goods sold, FOB destination 260,000
Goods sold, FOB destination 840,000
9,100,000

Problem 16-27 (IAA)

A physical count on December 31, 2011 revealed that Joy Company had inventory with a cost of P4,440,000. The Audit id
that the following items were excluded from this amount:

Merchandise of P610,000 is held by Joy on consignment.


Merchadise costing P380,000 was shipped by Joy FOB destination to a customer on December 31, 2011. The customer w
to received the goods on January 5, 2012.
Merchandise costing P460,000 was shipped by Joy FOB shipping point to a customer on December 29, 2011. The custom
to receive the goods on January 5, 2012. Merchandise costing P830,000 shipped by a vendor FOB destination on Decem
received by Joy on January 5, 2012.
Merchandise costing P510,000 purchased FOB shipping point was shipped by the supplier on December 31, 2011 and re
January 5, 2012.

What is the correct inventory on December 31, 2011?

a. 5,300,000
b. 4,690,000
c. 3,800,000
d. 4,920,000

Solution 16-27 Answer a

Physical count
Goods sold in transit, FOB destination
Goods purchased in transit, FOB shipping point
Adjusted inventory

Problem 16-28 (AICPA Adapted)

Mia Company submitted an inventory list on December 31, 2011 which showed a total of P5,000,000.

Excluded from the inventory was merchandise costing P80,000 because it was transferred to the delivery department for
packaging on December 28, 2011and for shipping on January 2, 2012.
The bill of lading and other import documents on a merchandise were delivered by the bank and the trust receipt accepte
entity on December 26, 2011. Taxes and duties have been paid on this shipment but the broker did not deliver the mercha
until January 7, 2012. Delivered cost of the shipment totaled P800,000. This shipment was not included in the inventory
December 31, 2011.
A review of the entity's purchased orders showed a commitment to buy P100,000 worth of merchandise from Myrose Com
This was not included in the inventory because of the goods were received on Januar 3, 1012.
Supplier's invoice for P300,000 worth of merchandise dated December 28, 2011 was received through the mail on Decem
although the goods arrived only on January 4, 2012. Shipment terms are FOB shipping point. This items was included in
December 31, 2011 inventory by the entity.
Goods valued at P20,000 were received from Darlyn Company on December 28, 2011 for approval by Mia. The inventor
included this merhandise in the list but did not place any value on it. On January 4, 2012, thne entity informed the suppl
distance telephone of the acceptance of the goods and the supplier's invoice was received on January 7, 2012.
On December 27, 2011, an order for P25,000 worth of merchandise was placed. This was include in the year-end invento
it was received only on January 5, 2012. The seller shipped the goods FOB destination.

What is the correct inventory on December 31, 2011?


a. 5,855,000
b. 5,055,000
c. 5,555,000
d. 5,830,000

Solution 16-29 Answer a

Inventory per book


Inventory transferred in delivery department
Shipment consumed by bill of lading
Goods in transit, purchased FOB destination
Correct inventory

Problem 16-29 (AICPA Adapted)

The physical count conducted in the warehouse of Leila Company on December 31, 2011 revealed total cost of P3,600,000
However, the following items was excluded from the count:

Goods sold to a customer which are being held for the customer to call for the customer's convenience with a cost of
P200,000.
A packing case containing a product costing P80,000 was standing in the shipping room when the physical inventory was
It was not included in the inventory because it was marked "hold for shipping instruction".
Goods in process costing P300,000 held by an outside processor for further processing.
Goods costing P50,000 shipped by a vendor FOB seller on December 28, 2011 and received by Leila Company on Janua

What is the correct inventory on December 31, 2011?

a. 4,180,000
b. 4,230,000
c. 3,980,000
d. 4,030,000

Solution 16-29 Answer d

Inventory per physical count


Inventory marked "hold for shipping instructions"
Goods in process inventory
Goods shipped FOB seller or FOB shipping point
Correct Inventory

Problem 16-30 (AICPA Adapted)


Black Company's accounts payable on December 31, 2011, totaled P4,500,000 before any necessary year-end adjustments r
the following transactions:

On December 27, 2011, Black wrote and recorded checks to creditors totaling P2,000,000 causing an overdraft of P500,0
Black's bank account on December 31, 2011. The checks were mailed on January 10, 2012.
On December 28, 2011, Black purchased and received goods for P750,000, terms 2/10, n/30. Black records purchases an
payable at net amount. The invoice was recordedand paid January 3, 2012.
Goods shipped F.O.B destination on December 20, 2011 from a vendor to Black were received January 2, 2012. The invo
was P325,000.

On December 31, 2011, what amount should Black report as account payable?

a. 7,575,000
b. 7,250,000
c. 7,235,000
d. 7,553,000

Solution 16-30 Answer c

Accounts payable per book


Undelivered entity checks
Goods purchased and received on December 28, 2011.
Purchase discount ( 2% 750,000)
Total Accounts Payable

The undelivered checks should be adjusted as follows:


Cash 2,000,000
Accounts Payable 2,000,000

Problem16-31 (AICPA Adapted)

Kew Company 's accounts payable balance on December 31, 2011, was P2,200,000 before considering the following data:

Goods shipped to Kew F.O.B. shipping point on December 22, 2011, were lost in transit. The invoice cost of P40,000 wa
On January 7, 2012, Kew filed a P40,000 claim against the common carrier.

On December 27, 2011, a vendor authorized Kew to return, for full credit, goods shipped and billed at P70,000 on Decem
The returned goods were shipped by Kew on December 28, 2011. A P70,000 credit memo was received and recorded by

On December 31, 2011, Kew has a P500,000 debit balance in its accounts payable to Ross, a supplier, resulting from a P
for goods to be manufactured to Kew specifications.

What amount should be reported as accounts payable in the December 31, 2011 statement of financial position?
a. 2,170,000
b. 2,680,000
c. 2,730,000
d. 2,670,000

Solution 16-31 Answer d

Accounts payable per book


Goods shipped FOB shipping point on December 22, 2011 and lost in transit
Purchase returns
Advance payment erroneously debited to accounts payable
Adjusted accounts payable

Kew Company shall suffer the loss of the goods in transit because the goods are shipped FOB shipping point. Appropriatel
Company must file a claim against hte common carrier.

Problem 16-32 (CGAC)

Bakun Company began operations late in 2010. For the first quarter ended March 31, 2011, Bakun made available the follo

Total merchandise purchased through March 15, 2011, recorded at net


Merchandise inventory on December 31, 2010, at selling price

All merchandise was acquired on credit and no payments have been made on accounts payable since the inception of the en
All merchandise is marked to sell at 50% above invoice cost before time discounts of 2/10, n/30. No sales were made n 201
What amount of cash is required to eliminate the current balance in accounts payable?

a. 6,000,000
b. 5,900,000
c. 6,400,000
d. 5,750,000

Solution 16-32 Answer a

Gross purchases through March 15, 2011 (4,900,000/ 98%)


Inventory - December 31, 2010, at cost (1,500,000/ 150%)
Total gross amount to be paid

Problem 16-33 (IFRS)

Aiza Company sells merchandise for P800,000 to a customer on December 31, 2011. The terms of the sale agreement state
is due in one year's time. Aiza has an imputed rate of interest of 9%. What amount of sales revenue should Aiza recognize f
a. 872,000
b. 733,600
c. 800,000
d. 0

Solution 16-33 Answer b

Sales price
Multiply by PV of 1 at 9% for one period
Present Value - actual sales revenue

Problem 16-34 (AICPA Adapted)

Lewis Company's usual sales terms are net 60 days, F.O.B. shipping point. Sales, net of returns and allowances, totaled P9,
ended December 31, 2011, before year-end adjustments.

On December 27, 2011, Lewis authorized a cutromer to return, for full credit, goods shipped and billed at P200,000 on D
The returned goods were received by Lewis on January 4, 2012, and a P200,000 credit memo was issued and recorded o

Goods with an invoice amount of P300,000 were billed and recorded on January 3, 2012. The goods were shipped on De

Goods with an invoice amount of P400,000 were billed and recorded on December 30, 2011. The goods were shipped on

What is the correct amount of net sales for 2011?

a. 9,300,000
b. 9,100,000
c. 9,000,000
d. 8,900,000

Solution 16-34 Answer d

Net sales per book


Sales return
Goods shipped on December 30, 2011 but recorded January 3, 2012
Goods shipped on January 3, 2012 erroneously recorded on December 30, 2011
Adjusted net sales

Problem 16-35 (AICPA Adapted)

Fenn Company had sales of P5,000,000 during December 2011. Experience had shown that merchandise equaling 7% of sa
be returned within 30 days and an additional 3% will be returned within 90 days. Returned merchandise is readily resalable
merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn
its income statement for the month of December 2011?

a. 4,500,000
b. 4,250,000
c. 3,900,000
d. 3,750,000

Solution 16-35 Answer a

Gross Sales 5,000,000


Estimated sales returns (10% x 5,000,000) (500,000)
Net Sales 4,500,000

As a conservative approach, sales revenue should be reduced by the 10% estimated probable sales returns.
However, the estimated exchanges of 15% will not result to reduction of sales.

Problem 16-36 (AICPA Adapted)

On October 1,2011, Acme Company sold 100,000 gallons of heating oil to Kam Company at P30 per gallon. Fifty thousand
on December 15, 2011, and the remaining P50,000 gallons were delivered on January 15, 2012. Payment terms were: 50%
on the first delivery, and the remaining 25% due on the second delivery. What amount of revenue should Acme recognize th
during 2011?

a. 3,000,000
b. 1,500,000
c. 2,250,000
d. 750,000

Solution 16-36 Answer b


(50,00030) 1,500,000

Problem 16-37 (IFRS)

On July 1,2011, Loveluck Company, a manufacturer of office furniture, supplied goods to Kaye Company for P1,200,000
on condition that this amount is paid in full on July 1, 2012. Kaye had earlier rejected an alternative offer from Loveluck
whereby it could have bought the same goods by paying cash of P1,080,000 on July 1,2011.

What amoun should be respectively be recognized as sales revenue and interest income for the year ended June 30, 2012?

a. 1,080,000 and 120,000


b. 1,200,000 and 120,000
c. 1,080,000 and 0
d. 1,200,000 and 0
Solution 16-37 Answer a

Sales price 1,200,000


Cash price - actual sales revenue 1,080,000
Implied interest income 120,000

Problem 16-38 (IFRS)

On July 1,2011, Kathleen Company handed over to a client a new computer system. The contract price for the supply of
the system and after-sales support for 12 months was P800,000. Kathleen estimates the cost of the after-sales support
at P120,000 and it normally marks up such cost by 50% when tendering for support contracts. What is the total
revenue that should be recognized for 2011?

a. 620,000
b. 800,000
c. 710,000
d. 0

Solution 16-38 Answer c

Contract price
Contract price of after-sales support (120,000 x 150%)
Revenue from sale of computer system
Revenue from after-sales support (180,000 x 6/12)
Total revenue

Problem 16-39 (PHILCPA Adapted)

Ilocos Company produced 80,000 kilos of tobacco during the 2011 season. Ilocos sells all of its tobacco to a certain
customer which has agreed to purchase the entire production at the prevailing market price. Recent legislation
assures that the market price will not fall below P100 per kilo during the next two years. The costs of selling and
distributing the tobacco are immaterial and can be reasonably estimated. Ilocos reports its inventory to expected
exit value. During 2011, Ilocos sold and delivered to the customer 60,000 kilos at the market price of P100.
Ilocos sold the remaining 20,000 kilos during 2012 at the market price of P150. What amount of revenue should
Ilocos recognize in 2011?

a. 6,000,000
b. 3,000,000
c. 8,000,000
d. 9,000,000

Solution 16-39 Answer c

Sales revenue in 2011 (80,000 x P100) 8,000,000


Revenue is recognized at the point of production for agricultural, mineral and forest product when a sale is
assured under a forward contract.

The remainder of the sales in 2012 of P1,000,000 (20,000 x P50) is recognized as revenue in 2012 and not a
correction of 2011 revenue.

Problem 16-40 (IFRS)

Beverly Company provides service contracts to customers for maintenance of their electrical system. On
October 1, 2011, it agrees to a four-year contract with a major customer for P1,540,000. Costs over the period
of the contract are reliably estimated at P513,330. What amount of revenue should be recognized for the year
ended December 31, 2011?

a. 385,000
b. 128,330
c. 96,250
d. 32,080

Solution 16-40 Answer c

Revenue from October 1 to December 31, 2011


(1,540,000/4 years = 385,000 x 3/12) 96,250

Problem 16-41 (AICPA Adapted)

Emco Company has the following transactions in 2011:

Emco sells goods to a customer for P50,000 FOB shipping point on December 30, 2011.
Emco sells three pieces of equipment on a contract over a three-year period. The sale price of each piece of
equipment is P100,000. Delivery of each piece of equipment is on February 10 of each year. In 2011, the
customer paid a P200,000 down payment, and will pay P50,000 per year in 2012 and 2013. Collectibility is
reasonably assured.
On June 1, 2011, Emco signs a contract for P200,000 for goods to be sold on account. Payment is to be made
in two installments of P100,000 each on December 1, 2011 and December 1, 2012. The goods are delivered
on October 1, 2011. Collection is reasonably assured and the goods may no be returned.
Emco sells goods to a customer on July 1, 2011 for P500,000. If the customer does not sell the goods to retail
customers by December 31, 2012, the goods can be returned to Emco. The customer sells the goods to retail
customers on October 1, 2012.

What amount of sales revenue should be reported in the 2011 income statement?

a. 350,000
b. 850,000
c. 450,000
d. 550,000

Solution16-41 Answer a

Goods sold FOB shipping point


Delivery of one equipment on February 10, 2011
Goods sold on account on October 1, 2011
Total sales revenue

Problem 16-42 (AICPA Adapted)

Marie Company, a distributor of machinery, bought a machine from the manufacturer in November 2011
for P10,000. On December 30, 2011, Marie sold this machine to Zoe Company for P15,000 under the
following terms: 2% discount if paid wihtin thirty days, 1% discount if paid after thirty days but within
sixty days, or payable in full within ninety days if not paid within the discount periods. However, Zoe
had the right to return this machine to Marie if it was unable to resell the machine before expiration of
the ninety-day payment period, in which case Zoe's obligation to Marie would be canceled. In Marie's
net sales for the year ended December 31, 2011, what amount should be included for the sale of this machine?

a. 15,000
b. 14,700
c. 14,850
d. 0

Solution 16-42 Answer d

Problem 16-43 (AICPA Adapted)

On January 1, 2011, Bell Company contracted with the City of Manila to provide custom built desks for the city schools.
The contract made Bell the city's sole supplier and required Bell to supply no less than 4,000 desks and no more than
5,500 desks per year for two years. In turn, the City of Manila agreed to pay a fixed price of P550 per desk. During
2011, Bell produced 5,000 desks for the City of Manila. On December 31, 2011, 500 of these desks were
segregated from the regular inventory and were accepted and awaiting pickup by the City of Manila. The City of
Manila paid Bell P2,250,000 during 2011. What amount should Bell recognize as contract revenue in 2011?

a. 2,250,000
b. 2,475,000
c. 2,750,000
d. 3,025,000

Solution 16-43 Answer c


Contract revenue (5,000 x 550) 2,750,000

Problem 16-44 (AICPA Adapted)

Delicate Company is a wholesale distributor of automotive replacement parts. Inintial amounts taken from
accouting records on December 31, 2011 are as follows:

Inventory on December 31 based on physical count


Accounts payable
Sales

A. Parts held on consignment from another entity to Delicate, the consignee, amounting to P165,000, were
included in the physical count on December 31, 2011, and in accounts payable on December 31, 2011.
B. P20,000 of parts which were purchased and paid for in December 2011, were sold in the last week of
2011 and appropriately recorded as sales of P28,000. The parts were included in the physical count on
December 31, 2011 because the parts were on the loading dock waiting to be picked up by the customer.
C. Parts in transit on December 31, 2011 to customers, shipped FOB shipping point on December 28, 2011,
amounted to P34,000. The customers received the parts on January 6, 2012. Sales of P40,000 to the
customers for the parts were recorded by Delicate on January 2, 2012.
D. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on consignment from Delicate,
at their stores on December 31, 2011.
E. Goods were in transit from a vendor to Delicate on December 31, 2011. The cost of goods was P25,000.
The goods were shipped FOB shipping point on December 29, 2011.

1. What is the correct amount of inventory?


a. 1,300,000
b. 1,320,000
c. 1,334,000
d. 1,090,000

2. What is the correct amount of accounts payable?


a. 835,000
b. 960,000
c. 975,000
d. 860,000

3. What is the correct amount of sales?


a. 9,250,000
b. 9,290,000
c. 9,040,000
d. 9,000,000

Solution 16-44

Question 1 Answer a
Question 2 Answer d

Question 3 Answer c

Inventory Accounts payable


Unadjusted 1,250,000 1,000,000
A (165,000) (165,000)
B (20,000) -
C - -
D 210,000 -
E 25,000 25,000
Adjusted 1,300,000 860,000
4,000,000
100,000
50,000
400,000
300,000
250,000
150,000
200,000
800,000
180,000
50,000
2,500,000

4,000,000
(100,000)
50,000
400,000
150,000
200,000
800,000
(50,000)
250,000
5,700,000
1,400,000
200,000
650,000
60,000
150,000
2,000,000
750,000
400,000
250,000
100,000
50,000
40,000
330,000
200,000

1,400,000
650,000
2,000,000
500,000
240,000
250,000
100,000
360,000
5,500,000
2,000,000
250,000
140,000
720,000
1,000,000
50,000
100,000
20,000
110,000
60,000

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

5,000,000
500,000
400,000
1,000,000
100,000
600,000
200,000
300,000
250,000
O.B. destination.

these goods should be included in the inventory?

nsporting the goods to the buyer,


ed in the buyer's inventory

ere FOB Shipping point.

oods were as follows:

30,000
20,000
5,000
12,000
1,800,000
90,000
1,200,000
50,000

1,800,000
90,000
1,890,000

Held by consignees
120,000
600,000

50,000
80,000
200,000
entory account was
ping point and did not
d an ending inventory

ventory shortages are


for cost of good sold?

Todd's cost for the


goods is 10%. On
tion, what amount should
00 each for sale at P20,000
e of 10 freezer and remitted
cognize as consignment

clusion of the following items:

165,000
100,000

195,000

40,000
35,000

100,000
45,000
10,000
35,000
190,000

f 20% and 10% from the list


600,000, a freight charge of

ons on December 15, 2011,


discounts of 20% and
otal freight charge paid by
ue of this account receivable

ount. Pitt allowed trade


oint. Pitt prepaid P200,000 of
Pitt form Burr as
and P1,000,000

d and the gross


cost of goods available for sale?

taken or not taken.

ken is deducted

ses net of purchase


nt, P10,000 is still
nded December 31,,
1,500,000
(10,000)
1,490,000

ollowing transactions with

place within 5 days of


f goods priced at

mber 30,2011.

6,000,000

300,000
6,300,000

cause they are

ollowing items

en the physical

e investigation
5,000,000
500,000
5,500,000

0. The following

hich includes

ding sales commission

,500 which includes

reight cost, P2,500.

cost of P2,000.
sit on December 31, 2011.

n transit on
ed in the year-end inventory.
hipped on December 31, 2011, terms FOB shipping point.
omer on January 2, 2012. The terms of the invoice were
e sale was recorded in 2011.
n, was not included in the year-end inventory. The goods cost P260,000

er 31, 2011. The related goods, shipped FOB destination, were received

n the year-end inventory.


n, was recorded as a sale in 2011. The goods, costing P840,000 and delivered

of P4,440,000. The Audit identified

er 31, 2011. The customer was expected


cember 29, 2011. The customer was expected
FOB destination on December 31, 2011 was

n December 31, 2011 and received by Joy on

4,410,000
380,000
510,000
5,300,000

the delivery department for

and the trust receipt accepted by the


er did not deliver the merchandise
ot included in the inventory on

erchandise from Myrose Company.

d through the mail on December 30, 2011


t. This items was included in the

proval by Mia. The inventory team


ne entity informed the supplier by long
n January 7, 2012.
lude in the year-end inventory although
5,000,000
80,000
800,000
(25,000)
5,855,000

aled total cost of P3,600,000.

nvenience with a cost of

n the physical inventory was taken.

by Leila Company on January 10, 2012.

3,600,000
80,000
300,000
50,000
4,030,000
ssary year-end adjustments relating to

using an overdraft of P500,000 in

Black records purchases and accounts

ed January 2, 2012. The invoice cost

4,500,000
2,000,000
750,000
(15,000) 735,000
7,235,000

sidering the following data:

e invoice cost of P40,000 was not recorded by Kew.

d billed at P70,000 on December 3, 2011.


as received and recorded by Kew on January 5, 2012

supplier, resulting from a P500,000 advance payment

nancial position?
2,200,000
40,000
(70,000)
500,000
2,670,000

shipping point. Appropriately Kew

kun made available the following information:

since the inception of the entity.


0. No sales were made n 2011.

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

s of the sale agreement state that payment


nue should Aiza recognize from the transaction?
800,000
0.917
733,600

and allowances, totaled P9,200,000 for the year

and billed at P200,000 on December 15, 2011.


o was issued and recorded on the same date.

e goods were shipped on December 30, 2011.

. The goods were shipped on January 3, 2012.

9,200,000
(200,000)
300,000
(400,000)
8,900,000

rchandise equaling 7% of sales will


chandise is readily resalable. In addition,
e. What amount should Fenn report for net sales in
30 per gallon. Fifty thousand gallons were delivered
. Payment terms were: 50% due on October 1,2011, 25%
ue should Acme recognize them from the sale

e Company for P1,200,000


ative offer from Loveluck

year ended June 30, 2012?


ct price for the supply of
the after-sales support
What is the total

800,000
(180,000)
620,000
90,000
710,000

s tobacco to a certain
cent legislation
osts of selling and
ntory to expected
rice of P100.
of revenue should
hen a sale is

012 and not a

over the period


ed for the year

f each piece of
In 2011, the
Collectibility is

ent is to be made
ds are delivered

he goods to retail
e goods to retail
50,000
100,000
200,000
350,000

f this machine?

desks for the city schools.


esks and no more than
50 per desk. During

anila. The City of


nue in 2011?
1,250,000
1,000,000
9,000,000

ber 28, 2011,


Net sales
9,000,000
-
-
40,000
-
-
9,040,000
17
BIOLOGICAL ASSETS
Problem 17-1 (IFRS)

Forester Company on adoption of PAS 41 has reclassified certain assets as biological assets.
The total value of the forest assets is P6,000,000 which comprises:

Freestanding trees 5,100,000


Land under trees 600,000
Roads in forests 300,000
6,000,000

In Forester Company's statement of financial portion, what total amount of the forest
assets shall be classified as biological assets?

a. 5,100,000
b. 5,700,000
c. 5,400,000
d. 6,000,000

Solution 17-1 Answer a

Only the freestanding trees shall be classified as biological assets.

The land under trees and roads in forests shall be included in property, plant and equipment.

Problem 17-2 (IFRS)

Colombia Company is a producer of coffee. The entity is cosidering the valuation of its
harvested coffee beans. Industry practice is to value the coffee beans at market value
and uses as reference a local publication "Accounting for Successful Farms".

On December 31, 2011, the entity has harvested coffee beans costing P3,000,000 and
with fair value less cost to sell of P3,500,000 at the point harvest.

Because of long aging ang maturation process after harvest, the harvested coffee beans
were still on hand on December 31, 2012. On such date, the fair value less cost to sell is
P3,900,000 and the net realizable value is P3,200,000.
What is the meaasurement of the coffee beans inventory on December 31, 2012?

a. 3,000,000
b. 3,500,000
c. 3,200,000
d. 3,900,000

Solution 17-2 Answer c

Fair value measurement stops at the point of harvest and PAS 2 on inventory
applies after such date.

Accordingly, the coffee beans inventory shall be measured at the lower of cost
and net realizable value on December 31, 2012.

The fair value less cost to sell P3,500,000 at the point of harvest is the initial cost
of coffee beans inventory for purposes of applying PAS 2.

The net realizable value of P3,200,000 is the measurement on December 31, 2012
because this is lower than the deemed cost of P3,500,00.

Problem 17-3 (IFRS)

Joan Company provided the following data:

Value of biological asset at acquisition cost on December 31, 2011


Fair valuation surplus on initial recognition at
fair value on December 31, 2011
Change in fair value to December 31, 2012 due
to growth and price fluctuation
Decrease in fair value due to harvest

1. What is the carrying amont of the biological asset on December 31, 2012?

a. 1,400,000
b. 1,310,000
c. 1,300,000
d. 1,490,000

2. What is the gain from change in fair value of biological asset that should be reported
in the 2012 income statement:
a. 100,000
b. 800,000
c. 710,000
d. 10,000

Solution 17-3

Question 1 Answer b

Acquisiton cost - December 31, 2011 600,000


Increase in fair value on initial recognition 700,000
Change in fair value in 2012 100,000
Decrease in fair value due to harvest (90,000)
Carrying amount - December 31, 2012 1,310,000

Question 2 Answer d

Change in fair value in 2012 100,000


Decrease in fair value due to harvest (90,000)
Net gain 10,000

Problem 17-4 (IFRS)

Salve Company is engaged in raising dairy livestock. Information regarding its


activities relating to the dairy livestock is as follows:

Carrying amount on January 1, 2011


Increase due to purchases
Gain arising from change in fair value less cost to
sell attributable to price change
Gain arising from change in fair value less cost to
sell attributable to physical change
Decrease due to sales
Decrease due to harvest

What is the carrying amount of the biological asset on December 31, 2011?

a. 6,950,000
b. 6,000,000
c. 8,000,000
d. 7,150,000
Solution 17-4 Answer a

Carrying amount - January 1, 2011


Increase due to purchases
Gain from change in fair value due to price change
Gain from change in fair value due to physical change
Decrease due to sales
Decrease due to harvest
Carrying amount - December 31, 2011

Problem 17-5 (IFRS)

Honey Company has a herd of 10 2-year old animals on January 1, 2011. Oe animal aged 2.5 years was purchased on
July 1,2011 for P108, and one animal was born on July 1,2011. No animals were sold or disposed of during the year.
the fair value less cost to sell per unit is as follows:

2 - year old animal on January 1 100


2.5 - year old animal on Jaly 1 108
New born animal on July 1 70
2 - year old animal on December 31 105
2.5 - year old animal on December 31 111
New born animal on December 31 72
3 - year old animal on December 31 120
0.5 - year old animal on December 31 80

1. What fair value of the biological assets on December 31, 2011?

a.1,400
b. 1,320
c. 1,440
d. 1,360

2. What is the gain from change in fair value of biological assets that should be recognized in 2011?

a. 222
b. 292
c. 300
d. 332

3. What is the gain from change in fair value due to price change?
a. 292
b. 222
c. 327
d. 55

Solution 17-5

Question 1 Answer a

Fair value of 3 - old animals on December 31


( 11P120)
Fair value of 0.5-year old animals on December 31, the newborn
(1 P8 0)
Total fair value - December 31,2011

Question 2 Answer b

Fair value of 10 animals on January 1 ( 10 P100 )


Acquisition cost of one animal on July 1
Total carrying amount of biological assets - December 31

Fair value on December 31, 2011


Carrying amount
Gain from change in fair value

Question 3 Answer d

Gain from change in fair value due to price change: 50


10 2-year old animals ( 105 100 = 5 10 ) 3
1 2.5-year old animal ( 111108 = 3 1 ) 2
1 newborn on July 1 ( 72 70 = 2 1 ) 55
TOTAL

Gain from change in fair value due to physical change:

10 3-year old animal acquired 1/1/2011


( 120 - 105 = 15 10 ) 150
1 3-year old animal acquired 7/1/2011
( 120 - 111 = 9 1 ) 9
1 0.5-year old born on 7/1/2011 ( 80 - 72 = 8 1 ) 8
1 newborn (70 1 ) 70
TOTAL 237

Price change 55
Physical Change 237
Total gain from change in fair value 292

Problem 17-6 (IFRS)

Farmland Company produces milk on its farms. Thne entity produces 20% of the community's milk that
consumed. Farmland Company own 5 farms and had a stock of 2,100 cows and 1,050 heifers.

The farms produce 800,000 kilograms of milk a year and the average inventory held is 15,000 kilograms of milk.
However, on December 31,2011 the entity is currently holding 50,000 kilograms of milk in powder. On December 31,2011,
The biological assets are:

Purchased before January 1, 2011 ( 3 years old )


Puchased on January 1, 2011 ( 2 years old )
Purchased on July 1, 2011 ( 1.5 years old )

No animals were born or sold durin the current year. The unit fair value less cost to sell is as follows.

January 1, 2011:
1-year old 3,000
2- year old 4,000

July 1, 2011:
1-year old 3,000

December 31, 2011:


1-year old 3,200
2-year old 4,500
1.5-year old 3,600
3-year old 5,000

The entity has had problems during the year. Contaminated milk was sold to customers. As a result,
milk consumption has gone down.

The entiy's business is spread over different parts of the country. The only region affected by the contamination
was Batangas. However, the cattle in this area were unaffected by the contamination and were healthy. The entity
feels that it cannot measure the fair value of the cows in the region because of the problems created by the contamination.
There are 600 cows and 200 heifers in the Batangas farm and all these animals had been purchased on January 1, 2011.
1. What fair value of the biological assets on January 1, 2011?

a. 9,300,000
9,600,000
8,400,000
7,200,000

2. What is the fair value of biological assets purchased on July 1, 2011?

a. 2,250,000
b. 3,000,000
c. 3, 750,000
d. 3,375,000

3. What is the fair value of biological assets on December 31, 2011?

a. 14, 550,000
b. 15, 750,000
c. 15,225,000
d. 11,850,000

5. What is the increase in fair value of biological assets due to physical change?

a. 1,260,000
b. 1,740,000
c. 3,000,000
d. 1,440,000

Solution 17-6

Question 1 Answer a

Cows which are 2 years old on 1/1/2011 ( 2,1004,000 )


Heifers purchased which are 1 year old on 1/1/2011
( 300 3,000 )
Total fair value - January 1,2011

Question 2 Answer a

Heifers purchased which are 1 year old on July 1, 2011


( 750 3,000 ) 2,250,000

Question 3 Answer a
Cows which are 3 years old on 12/31/2011
( 2,100 5,000 ) 10,500,000
Heifers which are 2 years old on 12/31/2011
( 300 4,500 ) 1,350,000
Heifers which are 1.5 years old on 12/31/2011
( 750 3,600 ) 2,700,000
Total fair value- December 31, 2011 14,550,000

Question 4 Answer a

Fair value - December 31, 2011 14,550,000


Fair value - January 1, 2011 (9,300,000)
Fair value - July 1, 2011 (2,250,000)
Increase in fair value 3,000,000

Question 5 Answer b

Increase due to price change:


2,100 ( 5,000 - 4,000 ) 1,050,000
300 ( 3,200 - 3,000 ) 60,000
750 ( 3,200 - 3,000 ) 150,000 1,260,000

Increase due to physical change:


2,100 ( 5,000 - 4,500 )
300 ( 4,500 - 3,200 ) 1,050,000
750 ( 3,600 - 3,200 ) 390,000
300,000 1,740,000
Total increase in fair value 3,000,000

Problem 17-7 (IFRS)

DairyComapny provided the following balances for the year ended December 31,2011:

Cash 500,000
trade and other receivables 1,500,000
Inventories 100,000
Dairy livestok - immature 50,000
Dairy livestock - mature 400,000
Property, plant and equipment, net 1,400,000
Trade and othe payables 520,000
Note payable - long term 1,500,000
Share capital 1,000,000
Retained earnings - January 1 800,000
Fair value of milk produced 600,000
Gain from change in fair value 50,000
Inventories used 140,000
Staff costs 120,000
Depreciation expense 15,000
Other operating expenses 190,000
Income tax Expense 55,000

1. What is the net income for 2011?

a. 650,000
b. 600,000
c. 130,000
d. 185,000

2. What is the fair value of biological assets on December 31, 2011?

a. 550,000
b. 450,000
c. 500,000
d. 400,000

Solution 17-7

Question 1 Answer c

Fair value of the milk produced 600,000


Gain from change in fair value 50,000
Total income 650,000
Inventories used (140,000)
Staff costs (120,000)
Depreciation expense (15,000)
Other operating expenses (190,000)
Income before income tax 185,000
Income tax Expense (55,000)
Net income 130,000

Question 2 Answer b

Dairy livestock - immature 50,000


Dairy livestock - mature 400,000
Fairy value of biological assets 450,000
600,000

700,000

100,000
90,000
5,000,000
2,000,000

400,000

600,000
850,000
200,000
5,000,000
2,000,000
400,000
600,000
(850,000)
(200,000)
6,950,000

was purchased on
of during the year.
1,320

80
1,400

1,000
108
1,108

1,400
1,108
292
grams of milk.
. On December 31,2011,

2,100 cows
300 heifers
750 heifers

ontamination
thy. The entity
d by the contamination.
on January 1, 2011.
8,400,000

900,000
9,300,000
19

GROSS PROFIT METHOD

Problem 19-1 (AICPA Adapted)

Lin Company sells its merchandise at a gross profit of 30%. On June 30, 2011, all
of Lin's inventory was destroyed by fire.

The following figures pertain to Lin's operations for the six months ended June 30, 2011:

Net sales 8,000,000


Beginning inventory 2,000,000
Net purchases 5,200,000

What is the estimated cost of the destroyed inventory?

a. 4,800,000
b. 2,800,000
c. 1,600,000
d. 800,000

Solution 19-1 Answer c

Beginning inventory 2,000,000


Net purchases 5,200,000
Goods available for sale 7,200,000
Less: Cost of sales (8,000,000 x 70%) (5,600,000)
Ending inventory destroyed by fire 1,600,000

In the absence of any contrary statement, the gross profit rate is based on sales. Thus, if
the gross profit rate is 30% on sales, the cost ratio is 70%.

Problem 19-2 (AICPA Adapted)

The following information appears in Olivia Company's records for the year ended December 31,2011:
Inventory, January 1 650,000
Purchases 2,300,000
Purchase returns 80,000
Freight In 60,000
Sales 3,400,000
Sales discounts 20,000
Sales Revenue 30,000

On December 31,2011, a physical inventory revealed that the ending inventory was only P420,000.
The gross profit on sales has remained constant at 30% in recent years. Olivia suspects that some inventory
may have been pilfered by one of the entity's employees. On December 31,2011, what is the estimated
cost of missing inventory?

a 151,000
b. 165,000
c. 420,000
d. 585,000

Solution 19-2 Answer a

Sales 3,400,000
Sales Returns (30,000)
Net sales 3,370,000

The sales discounts are ignored for purposes of estimating inventory under the gross profit method.

Inventory - January 1 650,000


Purchases 2,300,000
Purchase returns (80,000)
Freight In 60,000
GOODS AVAILABLE FOR SALE 2,930,000
Cost of sales ( 70% 3,370,000 ) (2,359,000)
Inventory - December 31 571,000
Physical inventory - December 31 (420,000)
COST OF MISSING INVENTORY 151,000

Problem 19-3 (AICPA Adapted)

On October 31,2011, a flood at Pamel Company's only warehouse caused severe damage to its entire inventory.
Based on the recent history, Pamela has a gross profit of 25 percent of sales.

The following information is availabe from Pamela's records for ten months ended October 31, 2011:
Inventory - January 1 520,000
Purchases 4,120,000
Purchase returns 60,000
Sales 5,600,000
Sales Returns 400,000
Sales allowances 100,000

A physical inventory disclosed usable damaged goods which Pamela estimates can be sold
for P70,000.

Using the gross profit method, what is the estimated cost of goods sold for the ten months ended October 31,2011?

a. 3,360,000
b. 3,830,000
c. 3,900,000
d. 3,825,000

Solution 19-3 Answer c

Sales 5,600,000
Sales Returns (400,000)
Net sales 5,200,000
Cost of goods sold (75% x 5,200,000) 3,900,000

Like sales discounts, sales allowances are ignored in determining net sales under the gross profit method.

Problem 19-4 (AICPA Adapted)

On December 31,2011, a fire at Brock Company's warehouse caused serve damage to its entire inventory.
Brock Company has a gross profit of 30% on cost. The following data are available for nine months ended
September 30, 2011:

Inventory at January 1 1,100,000


Net purchases 6,000,000
Net sales 7,280,000

A physical inventory disclosed usable damaged goods which can be sold for P 100,000.
What is the estimated cost of goods sold for the nine months ended September 30, 2011?

a. 5,500,000
b. 4,970,000
c. 5,096,000
d. 5,600,000

Solution 19-4 Answer d

Cost of Goods sold ( 7,280,000 / 130% ) 5,600,000

Problem 19-5 (AICPA Adapted)

The following information is available for Tonette Company for the current year:

Net sales 3,600,000


Freight In 90,000
Purchase discounts 50,000
Ending Inventory 240,000

The gross margin is 40% of sales. What is the cost of goods available for sale?

a. 1,680,000
b. 1,920,000
c. 2,400,000
d. 2,440,000

Solution 19-5 Answer c

Cost of goods sold ( 60% 3,600,000 ) 2,160,000


Ending inventory 240,000
Cost of goods available for sale 2,400,000

Problem 19-6 (IAA)

On the night of September 30, 2011, a fire destroyed most of the merchandise inventorry of Sonia Company.
All goods were completely destroyed except for partial damaged goods that normally sell for P100,000 and
that had an estimated net realizable value of P25,000 and undamaged goods that normally sell for P60,000.
The following data are available:

Inventory, January 1
Net purchases, January 1 through September 30
Net sales, January 1 through September 30

Total '2010
Net sales 9,000,000 5,000,000
Cost of sales 6,750,000 3,840,000
Gross Income 2,250,000 1,160,000

What is the estimated amount of fire loss on September 30, 2011?

a. 700,000
b. 615,000
c. 630,000
d. 580,000

Solution 19-6 Answer c

Average gross profit rate ( 2,250,000/9,000,000 ) 25%

Inventory - January 1 660,000


Net purchases 4,240,000
Goods available for sale 4,900,000
Cost of sales ( 5,600,000 75% ) (4,200,000)

Inventory - September 30 700,000


Less: Undamaged goods ( 60,000 75% ) 45,000
Realizable value of damaged goods 25,000 70,000
Fire loss 630,000

Problem 19-7 (IAA)

Cool Air Company lost 50% of its inventory by fire on December 31, 2011. No inventory had been
taken on December 31, 2011. The following profit and loss data are available:

2011 2010
Inventory - January 1 1,040,000 840,000
Purchases 3,600,000 2,876,000
Purchase returns 240,000 140,000
Sales 4,060,000 3,900,000
Sales Returns 60,000 100,000

What is the value of the inventory destroyed by fire?

a. 1,600,000
b. 1,760,000
c. 800,000
d. 880,000

Solution 19-7 Answer c

Sales, net 2009 and 2010 7,400,000


Cost of sales:
Inventory - January1, 2009 848,000
Net purchases 2009 and 2010 5,372,000
Goods available for sale 6,220,000
Inventory - December 31, 2010 1,040,000 5,180,000
Gross Profit 2,220,000

Average gross profit rate ( 2,220,000/7,400,000 ) 30%

Inventory - January 1, 2011 1,040,000


Net purchases - 2011 3,360,000
Goods available for sale 4,400,000
Cost of sales ( 70% 4,000,000 ) (2,800,000)
Inventory - December 31, 2011 1,600,000

Fire loss ( 50% 1,600,000 ) 800,000

Problem 19-8 (IAA)

Beyonce Company sells merchandise on a consignment basis to dealers . The selling price of the merchandise
averages 25% above cost. The dealer is paid a 10% commission of the sales price for all sales made. All dealer
sales made on cash basis. The following consignment activities occured during 2011:

Manufacturing cost of goods shipped on consignment


Sales price of merchandise sold by dealers
Payments remitted by dealers after deducting commission

What is the gross profit on sales?

a. 2,400,000
b. 1,920,000
c. 1,700,000
d. 1,220,000

Solution 19-8 Answer b


Sales 9,600,000
Cost of sales ( 9,600,000/ 125% ) 7,680,000
Gross profit 1,920,000

Problem 19-9 (AICPA Adapted)

Steven Company began operations in 2011. For the year ended December 31, 2011, Steven made availbale
the following information:

Total merchandise purchases for the year 7,000,000


Merchandise inventory on December 31 1,400,000
Collection from customers 4,000,000

All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all receivables are
collectible. What is the balance of accounts receivable on December 31, 2011?

a. 1,000,000
b. 3,840,000
c. 5,000,000
d. 5,800,000

Solution 19-9 Answer b

Purchases 7,000,000
Inventory - December 31 (1,400,000)
Cost of goods sold 5,600,000
Markup on cost (40% x 5,600,000) 2,240,000
Sales (140% x 5,600,000) 7,840,000
Collections from customers (4,000,000)
Accounts receivable - December 31 3,840,000

Problem 19-10 (AICPA Adapted)

On December 31, 2011, Empress Company had a fire which completely destroyed the goods in process
inventory. After the fire a physical inventory was taken.

The raw materials were valued at P600,000, the finished goods at P1,000,000 and supplies at P100,000
on December 31, 2011. The inventories on January 1, 2011 consisted of the following:

Finished goods 1,400,000


Goods in process 1,000,000
Raw materials 300,000
Supplies 400,000

Data for 2011 were:

Sales 3,000,000
Purchases 1,000,000
Freight In 100,000
Direct labor 800,000
Manufacturing overhead - 50% of direct labor ?
Average gross profit rate 30%

What is the estimated cost of the goods in process on December 31, 2011 that wre completely
destroyed by fire?

a. 1,300,000
b. 2,100,000
c. 2,000,000
d. 1,700,000

Solution 19-10 Answer a

Raw materials - January 1


Purchases 1,000,000
Freight In 100,000
Raw materials available for use
Less: Raw materials - December 31
Raw materials used
Direct labor
Manufacturing overhead (50% x 800,000)
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)
The amount of goods in process on December 31, 2011 is "squeezed" by simply working back from the
cost of sales.

Problem 19-11 (AICPA Adapted)

In conducting an audit of Romy Company for the year ended June 30, 2011, the entity's CPA observed
the physical inventory at an transaction date, May 31, 2011. The following information was obtained:

Inventory, July 1, 2010 875,000


Physical inventory, May 31, 2011 950,000
Sales for 11 months ended May 31, 2011 8,400,000
Sales for year ended June 30, 2011 9,600,000
Purchases for 11 months ended May 31, 2011 6,750,000
Purchases for year ended June 30, 2011 8,000,000

a. Shipments received in May and included in the physical inventory


but recorded at June purchases
b. Shipments received in unsalable condition and excluded from
physical inventory. Credit memos had not been received nor
had chargebacks to vendors been recorded
Total at May 31, 2011
Total at June 30, 2011 (including the May unrecorded
Chargebacks)
c. Deposit made with vendor and charged to purchases in April, 2011.
Product was shipped in July, 2011.
d. Deposit made with vendor and charged to purchases in May, 2011.
Product was shipped FOB destination, on May 29, 2011 and was
included in May 31, 2011 physical inventory as goods in transit.
e. Through the carelessness of the receiving department a
June shipment was damaged by rain. This shipment was later sold
in June at its cost of

1. What is the cost of goods for the month of June 2011?


a. 980,000
b. 960,000
c. 880,000
d. 780,000

2. What is the June 30, 2011 inventory?


a. 1,240,000
b. 1,140,000
c. 1,160,000
d. 1,340,000

Solution 19-11

Question 1 - Answer a

Physical inventory Purchases up to Purchases up to


May 31, 2011 May 31, 2011 June 30, 2011
Balances 950,000 6,750,000 8,000,000
a - 75,000 -
b - (10,000) (15,000)
c - (20,000) (20,000)
d (55,000) (55,000) -
Adjusted 895,000 6,740,000 7,965,000

Inventory - July 1, 2010 875,000


Purchases up to May 31, 2011 6,740,000
Goods available for sale 7,615,000
Inventory - May 31, 2011 (895,000)
Cost of goods sold 6,720,000
Sales up to May 31, 2011 8,400,000
Cost of goods sold (6,720,000)
Gross profit 1,680,000
Rate (l1,680,000/8,400,000) 20%
Sales for June (9,600,000 - 8,400,000) 1,200,000
Cost of goods sold with profit (1,100,000x80%) 880,000
Cost of goods sold without profit 100,000
Cost of goods sold during June 2011 980,000

Question 2- Answer b

Inventory, July 1, 2010


Purchases for year ended June 30, 2011 (as adjusted)
Goods available for sale
Less: Cost of goods sold
Sales with profit (9,500,000x80%) 7,600,000
Sales without profit 100,000
Inventory, June 30, 2011

Problem 19-12 (AICPA Adapted)

On April 30, 2011, a fire damaged the office of Amaze Company. The following balances were gathered
from the general ledger on March 31, 2011:

Accounts receivable 920,000


Inventory - January 1, 2011 1,880,000
Accounts payable 950,000
Sales 3,600,000
Purchases 1,680,000

An examination of the April bank statement and canceled checks revealed checks written
during the period April-30 as follows:

Accounts payable as of March 31 240,000


April merchandise shipments 80,000
Expenses 160,000

Deposits during the same period amounted to P440,000 which consisted of collections from
customers with the exception of P20,000 refund from a vendor for merchandise returned
in April.
Customers acknowledged indebtedness of P1,040,000 at April 30. Customers owed another
P60,000 that will never be recovered. Of the acknowledged indebtedness, P40,000 may
prove uncollectible.
Correspondence with suppliers revealed unrecorded obligations at April 30, of P340,000
for April merchandise shipment, including P100,000 for shipments in transit on that date.
The average gross profit rate is 40%.
Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of the
inventory was a total loss.

What is the fire loss on April 30?

a. 1,440,000
b. 1,300,000
c. 1,200,000
d. 1,340,000

Solution 19-12 Answer c

Accounts receivable - April 30 1,040,000


Writeoff 60,000
Collections from customers (440,000-20,000) 420,000
Total 1,520,000
Less: Accounts receivable - March 31 (920,000)
Sales for April 600,000
Sales up to March 31 3,600,000
Total Sales 4,200,000
Accounts payable - April 30 for April shipments 340,000
Payment for April merchadise shipments 80,000
Purchases of April 420,000
Purchases up to March 31 1,680,000
Total purchases 2,100,000
Inventory - January 1 1,880,000
Purchases 2,100,000
Purchase returns (20,000)
Goods available for sale 3,960,000
Cost of sales (4,200,000 x 60%) (2,520,000)
Inventory - April 30 1,440,000
Less: Goods in transit 100,000
Salvage value 140,000 (240,000)
Fire loss 1,200,000
mber 31,2011:
hat some inventory
the estimated

e to its entire inventory.

ber 31, 2011:


hs ended October 31,2011?

ross profit method.

entire inventory.
nine months ended
y of Sonia Company.
l for P100,000 and
ly sell for P60,000.

660,000
4,240,000
5,600,000

'2009 '2008
3,000,000 1,000,000
2,200,000 710,000
800,000 290,000

2009
848,000
2,836,000
200,000
3,620,000
20,000
ce of the merchandise
sales made. All dealer

8,800,000
9,600,000
6,300,000
en made availbale

d all receivables are

oods in process

es at P100,000
300,000

1,100,000
1,400,000
(600,000)
800,000
800,000
400,000
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
g back from the

CPA observed
was obtained:

75,000

10,000

15,000

20,000

55,000

100,000
Purchases up to
June 30, 2011
8,000,000
-
(15,000)
(20,000)
-
7,965,000

875,000
7,965,000
8,840,000

(7,700,000)
1,140,000

s were gathered
20

RETAIL METHOD
Problem 20-1 (AICPA Adapted)

On December 31, 2011, the following information was available from Huff Company's accounting records:

Cost Retail
Inventory, January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markups - 210,000
Available for sale 4,900,000 7,000,000

Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the approximate lower
of average cost of market retail method, what is the inventory on December 31, 2011?

a. 1,540,000
b. 1,400,000
c. 1,078,000
d. 980,000

Solution 20-1 Answer d

Cost
Available for sale 4,900,000
Markdowns
Sales
Inventory - December 31
Conservatives cost ratio (4,900/7,000)
Inventory - December 31 at cost

The approximate lower of average cost or market retail method is the same as the consevative
or conventional retail approach.

Problem 20-2 (AICPA Adapted)


Dean Company uses the retail inventory method to estimate its inventory. Data relating to the
inventory computation on December 31, 2011 are as follows:

Cost
Inventory, January 1 720,000
Purchases 4,080,000
Net markups
Sales
Estimated normal shoplifting losses
Net markdowns

Under the average cost retail method, what is the estimated inventory on December 31, 2011?

a. 408,000
b. 600,000
c. 360,000
d. 384,000

Solution 20-2 Answer d

Cost
Inventory - January 1 720,000
Purchases 4,080,000
Net markups
Available for sale - average 4,800,000
Cost ratio ((4,800,000/8,000,000) 60%
Net markdowns
Available for sale - average 4,800,000
Cost ratio (4,800,000/7,500,000) 64%
Sales
Estimated shoplifting losses
Inventory - December 31
Consevative cost (600,000 x 60%) 360,000
Average cost (600,000 x 64%) 384,000

The requirement is the average cost approach.

Problem 20-3 ( IAA )

Caramel Company uses the average retail inventory method. On December 31, 2011, the following information relating to the i

Cost Retail
Inventory - January 1 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase discounts 40,000
Freight in 150,000
Markups 300,000
Markdowns 400,000
Sales 4,400,000
Sales return 100,000
Sales discount 50,000
Sales allowance 30,000

What is the estimated cost of the inventory on December 31, 2011?

a. 400,000
b. 280,000
c. 245,000
d. 315,000

Solution 20-2 Answer b

Cost Retail
Inventory - January 1 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase discounts (40,000)
Freight in 150,000
Markups 300,000
Markdowns (400,000)
GAS - Average ( cost ratio - 70% ) 3,290,000 4,700,000
Net sales ( 4,400,000 - 100,000 ) (4,300,000)
Ending Inventory at retail 400,000

Average cost ( 400,000 70% ) 280,000

Note that the sales discount and sales allowance are ignored in determining the net sales under
the retail method.

Problem 20-4 (PHILCPA Adapted)

Diane Company's inventory records showed the following information on December 31, 2011:

Cost
Inventory - January 1 560,000
Sales
Purchases 4,960,000
Freight in 150,000
Markup
Markup cancelation
Markdown
Markdown cancelation
Estimated normal shrinkage in 2.5% of sales

Diane uses the average cost retail inventory method in estimating the value of its inventory. What is the
estimated cost of inventory on December 31, 2011?

a. 460000
b. 877,500
c. 990000
d. 897,000

Solution 20-3 Answer d

Cost
Inventory - January 1 560,000
Purchases 4,960,000
Freight in 150,000
Markup
Markup cancelation
Available for sale - conservative 5,670,000
Cost ratio (5,670 / 12,600 ) 45%
Markdown
Markdown cancelation
Available for sale - average 5,670,000
Cost ratio (5,670 / 12,600 ) 46%

Sales
Shrinkage (10,000,000 2.5 % )
Inventory - December 31
Consevative cost ( 1,950,000 45% ) 877,500

Average cost ( 1,950,000 46% ) 897,000

Problem 20-5 (AICPA Adapted)


Hutch Company uses thne average cost retail inventory method to account for inventory. The following information relates to o
for the current year:

Cost
Beginning inventory and purchases 6,000,000
Net markups
Net marktowns
Sales

What is the amount should be reported as cost of sales for the current year?

a. 4,800,000
b. 4,875,000
c.5,200,000
d. 5,250,000

Solution 20-5 Answer c

Cost
Beginnning inventory and purchases 6,000,000
Net markups
Net marktowns
Goods available for sale 6,000,000
Cost ratio (6,000/9,000 ) 66 2/3%
Sales
Ending Inventory

Average cost ( 1,200,00066 2/3% )

Goods available for sale


Ending inventory
Cost of sales

Problem 20-6 (PHILCPA Adapted)

On January 1, 2011 the stock inventory of Ron Company was P1,000,000 at the retail and P560,000
at cost. During the current year, the entity registered the following purchases:

Cost 4,000,000
Retail price 6,200,000
Original Markup 2,200,000

The total net sales was P5,400,000. The following reductions were made in the retail price:

To meet price competition 50,000


To dispose of overstock 30,000
Miscellaneous reductions 120,000

During the current year, the selling price of a certain inventory increased from P200 to P300.
This additonal markup applied to 5,000 items but was later canceled on the remaining 1,000 items. What is
the inventory on December 31,2011 using the average cost retail method?

a.2,000,000
b. 2,400,000
c. 1,240,000
d. 1,200,000

Solution 20-6 Answer c

Cost
Inventory - January 1 560,000
Purchases 4,000,000
Markup
Markdown cancelation (1,000 P100 )
Goods available 60% 4,560,000
Markdowns (reduction in retail price)
Goods available - average 62% 4,560,000

Net sales
Inventory - December 31
Consevative cost ( 60% 2,000,000) 1,200,000
Average cost (62% 2,000,000) 1,240,000

Problem 20-7 ( IAA )

Airborne Company uses the cost retail inventory method. The following information is available
for the year ended December 31, 2011.

Inventory - January 1
Net purchases
Departmental transfer - credit
Net markup
Inventory shortage - sales price
Employee discounts
Sales ( including sales of P400,000 of items which were marked down from P500,000)

What is the estimated cost of the inventory on December 31, 2011?

a. 1,950,000
b. 2,600,000
c.1,924,000
d.2,250,000

Solution 20-7 Answer a

Cost Retail
Inventory - January 1 1,650,000 2,200,000
Net purchases 3,725,000 4,950,000
Departmental transfer - credit (200,000) (300,000)
Net markup 150,000
Markdown (500,000 - 400,000) (100,000)
Goods available for sale (75%) 5,175,000 6,900,000

Sales (4,000,000)
Inventory shortage - sales price (100,000)
Employee discounts (200,000)
Inventory - December 31 2,600,000

Average cost (2,600,000 75% ) 1,950,000

Problem 20-8 (AICPA Adapted)

Union Company uses the FIFO retail method of inventory valuation. The following information
is available:

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markups 500,000
Net markdowns 1,000,000
Sales revenue 4,500,000

What is the estimated cost of ending inventory?

a. 1,200,000
b. 1,040,000
c. 1,000,000
d. 960,000

Solution 20-8 Answer a

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio (3,000,000/5,000,000) 60%
Goods available for sale 3,600,000 6,500,000

Sales (4,500,000)
Ending inventory 2,000,000
FIFO cost (2,000,000 x 60%) 1,200,000

Problem 20-9 (IAA)

Groom Company uses the FIFO retail method of inventory valuation. The following information
is available for the current year:

Cost Retail
Inventory - January 1 1,200,000 1,500,000
Net purchases 4,200,000 5,900,000
Net markups 200,000
Net markdowns 100,000
Net sales 5,500,000

What is the estimated cost of ending inventory?

a. 1,400,000
b. 1,550,000
c. 1,440,000
d. 1,460,000

Solution 20-9 Answer b

Cost Retail
Inventory - January1 80% 1,200,000 1,500,000
Purchases 4,200,000 5,900,000
Net markups 200,000
Net markdowns (100,000)
Net purchases (4,200/6,000) 70% 4,200,000 6,000,000
Goods available for sale 5,400,000 7,500,000
Sales (5,500,000)
FIFO inventory - 12/31 (2,000,000x70%) 1,400,000 2,000,000
Inventory - January 1 1,200,000 1,500,000
Increase (70%x500,000) 350,000 500,000
LIFO inventory - 12/31 1,550,000 2,000,000
Retail
7,000,000
(70,000)
(5,530,000)
1,400,000
70%
980,000
Retail
1,000,000
6,300,000
700,000
6,820,000
80,000
500,000

Retail
1,000,000
6,300,000
700,000
8,000,000

(500,000)
7,500,000

(6,820,000)
(80,000)
600,000

formation relating to the inventory was gathered:


Retail
1,400,000
10,000,000
10,320,000

1,000,000
120,000
500,000
100,000

Retail
1,400,000
10,320,000

1,000,000
(120,000)
12,600,000

(500,000)
100,000
12,200,000

(10,000,000)
(250,000)
1,950,000
ng information relates to operations

Retail
9,200,000
400,000
600,000
7,800,000

Retail
9,200,000
400,000
(600,000)
9,000,000

(7,800,000)
1,200,000

800,000

6,000,000
(800,000)
5,200,000
Retail
1,000,000
6,200,000
500,000
(100,000)
7,600,000
(200,000)
7,400,000

(5,400,000)
2,000,000

Cost Retail
1,650,000 2,200,000
3,725,000 4,950,000
200,000 300,000
150,000
100,000
200,000
4,000,000
21
FINANCIAL ASSETS AT FAIR VALUE

Problem 21-1 (IFRS)

Raiza Company acquired a financial asset at its market value of P3,200,000. Broker fees of P200,000
were incurred in relation to the purchase. At what amount should the financial asset initially be recog-
nized respectively if it is classified as at fair market value through profit or loss, or as available for sale?

a. 3,400,000 and 3,200,000


b. 3,200,000 and 3,200,000
c. 3,200,000 and 3,400,000
d. 3,400,000 and 3,400,000

Solution 21-1 Answer c

Financial asset at fair value through profit or loss 3,200,000

Financial asset classified as available for sale


(3,200,000 + 200,000) 3,400,000

Under PAS 39, paragraph 43, any transaction cost is not included as part of the initial measurement of a
financial asset at fair value through profit or loss. Actually, a financial asset at fair value through profit or
loss is classified as held for "trading".

However, any transaction cost is included as part of the initial measurement of a financial asset classified
as "available for sale".

Under PFRS 9, the term "available for sale is now eliminated. The equivalent term is "financial asset at
fair value through other comprehensive other income".

Problem 21-2 (IFRS)

On January 1, 2011, Alexis Company purchased marketable equity securities to be hels as "trading" for
P5,000,000. The entity also paid commission, taxes, and other transaction costs amounting to P200,000.
The securities had a market value of P5,500,000 on December 31, 2011 and the transaction costs that
would be incurred on sale are estimated at P110,000. No securities were sold during 2011. What amount
of unrealized gain or loss on these securities should be reported in the 2011 income statement?

a. 500,000 unrealized gain


b. 500,000 unrealized loss
c. 300,000 unrealized gain
d. 400,000 unrealized gain

Solution 21-2 Answer a

Fair Value 5,500,000


Acquisition cost -- Trading 5,000,000

Unrealized gain -- included in profit or loss 500,000

The transaction costs that would be incurred on sale are ignored because the financial asset held for
trading is measured at fair value and not at fair value less cost to sell.

Problem 21-3 (IFRS)

Carmela Company acquired a financial instrument for P4,000,000 on March 31,2011. The financial instru-
ment is classified as financial asset at fair value through other comprehensive income. The direct acqui-
sition costs incurred amounted to P700,000. On December 31, 2011, the fair value of the instrument was
P5,500,000 and the transaction costs that would be incurred on the sale of the investment are estimated
at P600,000. What gain should be realized in other comprehensive income for the year ended

December 31, 2011?

a. 200,000
b. 900,000
c. 800,000
d. 0

Solution 21-3 Answer c

Fair value -- December 31, 2011 5,550,000


Acquisition cost (4,000,000 + 700,000) 4,700,000
Unrealized gain -- other comprehensive income 800,000

The transaction costs of P600,000 that would be incurred on the sale of the investment are ignored
because the financial asset is measured at fair value and not at fair value less cost to sell.

Problem 21-4 (AICPA Adapted)

On December 31, 2011, Fay Company appropriately reported a P100,000 unrealized loss. There was
no change in 2012 in the composition in the portfolio of marketable equity securities held as financial
asset at fair value through other comprehensive income. Pertinent data are as of follows:
Market value
Security Cost December 31, 2012
A 1,200,000 1,300,000
B 900,000 500,000
C 1,600,000 1,500,000

3,700,000 3,300,000

What amount of loss on these securities should be included in the statement of comprehensive income
for the year ended December 31, 2012 as component of other comprehensive income?

a. 400,000
b. 300,000
c. 100,000
d. 0

Solution 21-4 Answer b

Market value -- (12/31/2012) 3,300,000


Market value -- 12/31/2011 (3,700,000 - 100,000) 3,600,000

Unrealized loss in 2012 ( 300,000 )


Unrealized loss -- 12/31/2011 ( 100,000 )

Cumulative unrealized loss -- 12/31/2012 ( 400,000 )

Only the unrealized loss of P300,000 is shown in the 2012 statement of comprehensive income as
component of other comprehensive income. However, the cumulative unrealized loss P400,000
would appear in the statement of changes in equity.

Actually, if the investment is held as financial asset at fair value through other comprehensive income,
the total or cumulative unrealized gain or loss is always the difference between the market value and
the original acquisition cost.

Market value -- December 31, 2012 3,300,000


Acquisition cost 3,700,000

Cumulative unrealized loss -- December 31, 2012 ( 400,000)

Problem 21-5 (AICPA Adapted)

During 2011, Garr Company purchased marketable equity securities as trading investment. For the
year ended December 31, 2011, the entity recognized an unrealized loss of P230,000. There were no
security transactions during 2012. Pertinent information on December 31, 2012 is as follows:

Security Cost Market value


A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000

In the 2012 income statement , what amount should be reported as unrealized gain or loss?

a. Unrealized gain of P100,000


b. Unrealized loss of P100,000
c. Unrealized loss of P130,000
d. Unrealized gain of P130,000

Solution 21-5 Answer a

Market value -- 12/31/12 4, 120,000


Market value -- 12/31/11 (4,250,000 - 230,000) 4, 020,000

Unrealized gain in 2012 100,000

Problem 21-6 (IAA)

Lagoon Company purchased the following securities during 2011:

Classification Cost Market value


December 31, 2011

Security A Trading 900,000 1,000,000


Security B Trading 1,000,000 1,600,000

On the July 31, 2012 the entiry sold all of the shares of Security B for a total of P1,100,000. On
December 31, 2012, the shares of Security A had a market value of P600,000. No other acitivity
occurred during 2012 in relation to the trading security portfolio. What is the gain or loss on the
sale of Security B on July 31, 2012?

a. 500,000 gain
b. 500,000 gain
c. 100,000 loss
d. 100,000 loss

Solution 21- 6 Answer b

Sale price of Security B 1,100,000


Carrying amount of Security B -- December 31, 2011 1,600,000
Loss on sale of trading securities ( 500,000)
Problem 21-7 (AICPA Adapted)

During 2011, Latvia Company purchased trading securities with the following cost and market value
on Decemebr 31, 2011:

Security Cost Market value


A - 1,000 shares 200,000 300,000
B - 10,000 shares 1,700,000 1,600,000
C - 20,000 shares 3,100,000 2,900,000

5,000,000 4,800,000

Latvia sold 10,000 shares of Security B on January 15, 2012, for P130 per share, incurring P50,000
in brokage commission and taxes. What amount should be reported as loss on sale of trading invest-
ment in 2012?

a. 450,000
b. 400,000
c. 300,000
d. 350,000

Solution 21-7 Answer d

Sale price (10,000 x P130) 1,300,000


Less: Commission and taxes 50,000

Net sale price


Less: Carrying amount of B shares on 12/31/2011 1,600,000

Loss on sale of trading investment ( 350,000)

Problem 21-8 (IAA)

On January 1, 2011, Lebanon Company purchased equity securities to be held as "at fair value through
other comprehensive income". On December 31, 2011, the cost and market values were:

Cost Market
Security X 2,000,000 2,400,000
Security Y 3,000,000 3,500,000
Security Z 5,000,000 4,900,000

On July 1, 2012, Lebanon sold Security X for P2,500,000. What amount of gain on sale of financial
asset should be reported in the 2012 income statement?
a. 500,000
b. 100,000
c. 400,000
d. 0

Solution 21-8 Answer b

Sale price 2,500,000


Carrying amount of Security X 2,400,000
Gain on sale of financial asset 100,000

The Application Guidance of PFRS 9, paragraph B5.12, provides that amounts recognized in other
comprehensive income are not subsequently transferred to profit or loss. The cumulative gain
or loss may however be transferred within equity, meaning retained earnings.

Problem 21-9 (IAA)

On January 1, 2011, Caraga Company purchased equity securities to be held as financial assets
measured "at fair value through other comprehensive income". The cost and market values were:

Cost Market -- 12/31/2011

Security R 3,000,000 3,200,000


Security S 4,000,000 3,500,000
Security T 5,000,000 4,600,000

On January 31, 2012, Caraga Company sold Security R for P3,500,000. What unrealized gain or loss
on the remaining financial assets ahould be reported in the 2012 statement of comprehensive income
as component of other comprehensive income?

a. 600,000 gain
b. 600,000 loss
c. 300,000 gain
d. 300,000 loss

Solution 21-9 Answer c

Fair value of S and T -- December 31, 2012 8,400,000


Fair value of S and T -- December 31, 2011 8,100,000

Unrealized gain in 2012


Unrealized loss on S and T -- December 31, 2011
(9,000,000 - 8,100,000) ( 900,000 )
Cumulative unrealized loss -- December 31, 2012 ( 600,000 )
The unrealized gain of P300,000 is shown in the 2012 statement of comprehensive income as
component of other comprehensive income. However, cumulative unrealized loss of P600,000
would appear in the statement of changes in equity.

Problem 21- 10 (IAA)

During 2011, Little Company purchased trading securities as a short-term investment. The cost
of securities and their market value on December 31, 2011 follow:

Security Cost Market value


A 650,000 750,000
B 1,000,000 540,000
C 2,200,000 2,260,000

Before any adjustment related to these trading securities, Little had net income of P3,000,000 for
2011. What is the net income after making any necessary trading security adjustment?

a. 3,000,000
b. 2,700,000
c. 3,300,000
d. 2,540,000

Solution 21-10 Answer b

Total market value 3,550,000


Total cost 3,850,000
Unrealized loss on trading securities ( 300,000)

Net income before adjustment 3,000,000


Unrealized loss on trading securities ( 300,000)
Adjusted net income 2,700,000

Problem 21-11 (IAA)

On January 1, 2011, Remington Company acquired 200,000 ordinary shares of Universal Company
for P9,000,000. At the time of purchase, Universal Company had outstanding 800,000 shares with a
carrying amount of P36,000,000. On December 31, 2011, the following events took place:

* Universal Company reported net income of P1,800,000 for the calendar year 2011.
* Remington Company received from Universal Company dividend of P0.75 per ordinary share.
* The market value of Universal Company share had temporarily declined to P40.

Remington Company has elected to measure the investment at fair value through other comprehensive
income. What is the carrying of the investment on December 31, 2011?
a. 9,000,000
b. 8,000,000
c. 9,300,000
d. 9,450,000

Solution 21-11 Answer b

Market value 12/21/2011 (200,000 x 40) 8,000,000


Acquisition cost 9,000,000
Unrealized loss on financial asset (1,000,000)

Although the interest is 25%, 200,000 shares divided by 800,000 shares, the equity method is not applied
because the investment is classified as financial asset at fair value through other comprehensive income.

The unrealized loss on the financial asset of P1,000,000 is shown in the statement of comprehensive
income as component of other comprehensive income.

Problem 21-12 (AICPA Adapted)

Neal Company held the following financial assets as trading investments on December 31, 2011:

Cost
100,000 shares of Company A
nonredeemable preference
share capital, par value P75 775,000

7,000 shares of Company B


preference share capital, par value P100,
subject to mandatory redemption
by the issuer at par on
December 31, 2012 690,000 625,000
1,465,000 1,450,000

In the December 31, 2011 statement of financial position, what should be reported as carrying amount
of the investments?

a. 1,400,000
b. 1,450,000
c. 1,465,000
d. 1,475,000

Solution 21-12 Answer b


The nonredeemable preference share is an equity security. The redeemable preference share is
a debt security.
Whether equity or debt security, financial assets held for trading are carried at fair value.

Problem 21-13 (AICPA Adapted)

Information regarding Trinidad Company's portfolio of financial assets at fair value through other
comprehensive income is as follows:

Aggregated cost -- December 31, 2011 1,700,000


Unrealized gains -- December 31, 2011 40,000
Unrealized losses -- December 31, 2011 260,000
Unrealized gains during 2011 300,000

On January 1, 2011, Trinidad reported an unrealized losses of P15,000 as a component of other com-
prehensive income.
In its 2011 statement of changes in equity, Trinidad Company should report what amount of unrealized
loss on these securities?

a. 260,000
b. 220,000
c. 205,000
d. 0

Solution 21-13 Answer b

Unrealized losses 260,000


Unrealized gains 40,000

Net unrealized losses -- December 31, 2011 220,000


Unrealized loss -- January 1, 2011 15,000

Increase in unrealized loss 205,000

The increase in unrealized loss of P205,000 is reported in the statement of comprehensive income as
component of other comprehensive income.

However, the 2011 statement of changes in equity should report the cumulative unrealized loss of
P220,000.

Incidentally, the net realized gains represent the gains from the financial assets that are actually
sold and should shown in the statement of comprehensive income as component of profit or loss.

Problem 21-14 (AICPA Adapted)


The following information was extracted from the December 31, 2011 statement of financial position
of Gil Company:

Noncurrent assets:
Financial asset at fair value 3,700,000

Shareholder's equity:
Unrealized loss on financial asset ( 300,000)

Gil Company paid transaction cost of P100,000 related to the acquisition of the investment. This
amount is capitalized as part of the cost of the investment. The entity elected to measure the
financial asset at fair value through other comprehensive income. What was the historical cost of
the financial asset?

a. 3,700,000
b. 3,400,000
c. 3,900,000
d. 4,000,000

Solution 21-13 Answer d

Historical cost (3,700,000 + 300,000) 4,000,000

Problem 21- 15 (AICPA Adapted)

On July 1, 2011, Bellirose Company purchased P1,000,000 face value 8% bonds for P910,000 plus
accrued interest to yield 10%. The bonds mature on January 1, 2018, pay interest annually on January
1, and are classified as trading securities. On December 31, 2011, the bonds had a market value of
P945,000. On February 13, 2012, Bellirose Company sold the bonds for P920,000. On December 31,
2011 what amount should be reported for short-term investments in trading debt securities?

a. 910,000
b. 920,000
c. 945,000
d. 950,000

Solution 21-15 Answer c

Financial asset fair value 945,000

Problem 21-16 (PAS 39)

On January 1, 2011 Agustin Company purchased bonds with face value of P5,000,000 to be held as
"available for sale". The entity paid P4,600,000 plus transaction costs of P142,000. The bonds mature
on December 31, 2013 and pay 6% interest annually on December 31 each year with 8% effective
yield. The bonds are quoted at 105 on December 31, 2011 and 110 on December 31, 2012. What
amount of cumulative unrealized gain on these bonds should be reported in the 2012 statement of
changes in equity?

a. 500,000
b. 250,000
c. 592, 931
d. 164, 291

Solution 21-16 Answer c

Interest Interest Discount


Date
received income Amortization

1/1/2011
12/31/2011 300,000 379,360 79,360
12/31/2012 300,000 385,709 85,709
12/31/2013 300,000 392,931 92,931

The interest received is equal to 6% multiplied by the face value. The interest income is equal to 8%
multiplied by the carrying amount.

Market value - 12/31/2011 (5,000,000 x 105)


Carrying amount - 12/31/2011 4,821,360

Unrealized gain - December 31, 2011 428,640

Market value-- 12/31/2012 (5,000,000 x 110)


Carrying amount-- 12/31/2012 (4,907,069)
Cumulative unrealized gain -- December 31, 2012 592,931

Under PFRS 9, bonds cannot be classified anymore as "available for sale". Bonds can be classified
only as "financial assets amortized cost" or may be designated as financial assets "at fair value
through profit or loss".
able for sale?

surement of a
ough profit or

asset classified

ncial asset at

trading" for
to P200,000.

What amount
inancial instru-
direct acqui-
strument was
re estimated
000 )
0,000

1,250,000

alue through
Market -- 12/31/2012

--
3,700,000
4,700,000

300,000
3,550,000

3,000,000
is not applied
nsive income.

Market
value

825,000

1,450,000
Carrying
mortization amount

4,742,000
4,821,360
4,907,069
5,000,000

5,250,000

5,550,000
22
INVESTMENT IN EQUITY SECURITIES

Problem 22-1 (AICPA Adapted)

On January 1, 2011, ABC Company purhased 40,000 shares of RST at P100 per share. The invest-
ment in measurement at fair value through other comprehensive income. Brokerage fees measured
to P120,000. A P5 dividend per share of RST had been declared on December 15, 2010 to be paid
on March 31, 2011 to shareholders of record on January 31, 2011. No other transactions occurred
in 2011 affecting the investment in RST shares.

What is the initial measurement of the investment?

a. 4,120,000
b. 4,000,000
c. 3,920,000
d. 3,800,000

Solution 22-1 Answer c

Purchase price (40,000 x 100) 4,000,000


Brokerage 120,000

Total 4,120,000
Less: Purchased dividend (40,000 x 5) 200,000

Cost of investment 3,920,000

The stock was purchased dividend-on, because the date of purchase is January 1, 2011 and divi-
dends were declared on December 15, 2010 to shareholders of record on January 31, 2011.

The purchased dividend is excluded from the cost if investment.

Problem 22-2 (AICPA Adapted)

On January 1, 2011, Adam Company purchased a long-term investment 100,000 ordinary shares of
Mill Company for P40 a share. On December 31, 2011, the market price of Mill's share was P35,
reflecting a temporary decline in market price. On December 28, 2012, Adam sold 80,000 shares of
Mill Company for P30 a share. For the year ended, December 31, 2012, what amount should be
reported as loss on disposal of long-term investment?

a. 1,000,000
b. 900,000
c. 800,000
d. 400,000

Solution 22-1 Answer c

Sales price (80,000 x 30) 2,400,000


Cost of investment sold (80,000 x 40) (3,200,000)

Loss on disposal of investment ( 800,000)

Problem 22-3 (AICPA Adapted)

Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on February
15, 2011. Cobb received a stock dividend of P2,000 shares on March 31, 2011, when the carrying
amount per share on Roe's books was P350 and the market value per share was P400. Roe paid a
cash dividend of P15 per share on September 15, 2011. In the income statement for the year ended
Ocotober 31, 2011, what amount should Cobb reported as dividend income?

a. 980,000
b. 880,000
c. 180,000
d. 150,000

Solution 23-3 Answer c

Original shares 10,000


Stock dividend 2,000

Total shares 12,000

Dividend income (12,000 x P15) 180,000

Problem 22-4 (PHILCPA Adapted)

During 2011, Lawan Company bought the shares of Burwood Company as follows:

June 1 20,000 shares @ 100


December 1 30,000 shares @ 120 3,600,000

The transactions for 2012 are:

January 10 Received cash dividend at P10 per share.


January 20 Received 20% stock dividend.
December 10 Sold 30,000 shares at P125 per share.
If the FIFO approach is used, what is the gain on the sale of the shares?
a. 1,150,000

b. 950,000
c. 150,000
d. 550,000

Solution 22-4 Answer a

FIFO approach June 1 December 1

Original shares 20,000 30,000


Stock dividend -- 20% 4,000 6,000
Total shares 24,000 36,000

Sale price (30,000 x 125) 3,750,000


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 2,600,000
Gain on sale 1,150,000

Average approach

Sale price 3,750,000


Cost of shares sold (30,000/ 60,000 x 5,600,000) 2,800,000
Gain on sale 950,000

Problem 22-5 (AICPA Adapted)

Wood Company owns 20,000 shares of Arlo Company's 200,000 shares of P100 par, 6% cumulative,
nonparticipating preference share capital and 10,000 shares representing 2% ownership of Arlo's
ordinary share capital. During 2011, Arlo declared and paid preference dividends of P2,400,000. No
dividends has been declared or paid during 2010. In addition, Wood received a 5% stock dividend on
ordinary share from Arlo when the quoted market price of Arlo's ordinary share was P10. What
amount should Wood report as dividend income in its 2011 income statement?

a. 120,000
b. 125,000
c. 240,000
d. 245,000

Solution 22- 5 Answer c


Dividend income on preference share
(20,000/200,000 = 10% x 2,400,000) 240,000

Problem 22-6 (AICPA Adapted)

Day Company received dividends from its share investments during the year ended December 31,
2011 as follows:

A stock dividend of P4,000 shares from Parr Company on July 31, 2011 when the market price
of Parr's share was P20. Day owns less than 1% of Parr's share capital.
A cash dividend of P150,000 from Lark Company in which Day owns a 25% interest. A ma-
jority of Lark's director are also directors of Day.

What amount of dividend revenue should Day report in its 2011 income statement?

a. 230,000
b. 150,000
c. 80,000
d. 0

Solution 22-6 Answer d

The stock dividend from Parr Company is not an income. The cash dividend from Lark Company
is not also an income because the interest is 25% and therefore the equity method is used.

Problem 22-7 (AICPA Adapted)

Wray Company provided the following data for 2011:

On September 1, Wray received a P500,000 cash dividend from Seco Company in which Wray
owns a 30% interest.
On October 1, Wray received a P60,000 liquidating dividend from King Company, Wray owns
a 5% interest in King.
Wray owns a 2% interest in Bow Company, which declared a P2,000,000 cash dividend on
November 15, 2011 payable on January 15, 2012.

What amount should Wray report as dividend income for 2011?

a. 600,000
b. 560,000
c. 100,000
d. 40,000

Solution 22-7 Answer d


Cash dividend from Bow Company (2% x 2,000,000) 40,000

The cash dividend from Seco and the liquidating dividend from King are not income but reduction
of the investment account.

Problem 22-8 (AICPA Adapted)

During 2011, Neil Company held 30,000 shares of Brock Company's 100,000 outstanding shares and
6,000 shares of Amal Company's 300,000 outstanding shares. During the year, Neil received P300,000
cash dividend from Brock, P15,000 cash dividend and 3% stock dividend from Amal. The closing
price of Amal share is P150. What amount should be reported as dividend revenue for 2011?

a. 342,000
b. 315,000
c. 442,000
d. 15,000

Solution 22-8 Answer a

Cash dividend from Amal (6,000/300,000 = 2% interest) 15,000

The cash dividend of P300,000 from Brock Company is not an income because the interest is 30%
and therefore the equity method is used.

Problem 22-9 (AICPA Adapted)

On March 1, 2011 Evan Company purchased 10,000 ordinary shares of LV at P80 per share. On
September 30, 2011, Evan received 10,000 stock rights to purchase an additional 10,000 shares at
P90 per share. The stock rights had an expiration date on February 1, 2012. On September 30, 2011,
LVC's share had a market value P95 and the stock right has a market value of P5. What amount
should Evan report in its September 30, 2011 statement of financial position for investment in stock
rights?

a. 150,000
b. 100,000
c. 50,000
d. 60,000

Solution 22-9 Answer c

Initial measurement of stock rights (10,000 rights x 5 ) 50,000

Under PFRS 9, stock rights are now initially measured at fair value.

Problem 22-10 (AICPA)


Rice Company owns 30,000 ordinary shares of Wood Company acquired on July 31, 2011 at total
cost of P1,100,000. On December 1, 2011, Rice received 30,000 stock rights from Wood. Each right
entitles the holder to acquire one share at P45. The market price of Wood's share on this date was P50.
and the market price of each right was P10. Rice sold its rights on December 31, 2011 for P450,000
less a P10,000 commission. What amount should be reported as gain from sale the of the rights?

a. 150,000
b. 140,000
c. 250,000
d. 240,000

Solution 22-10 Answer b

Net sale price (450,000 - 10,000) 440,000


Initial cost of rights sold (30,000 x 10) (300,000)
Gain on sale of rights 140,000

Problem 22- 11 (AICPA Adapted)

Adam Company owns 50,000 ordinary shares of Bland Company. These 50,000 shares were purchased
by Adam in 2009 for P120 per share. On August 30, 2011, Bland distributed 50,000 stock rights to
Adam. Adam was entitled to buy one new share of Bland Company for P90 cash and two of these
rights. On August 30, 2011, each share had a market value of P130 and each right had a market value
of P20. What total cost should be recorded for the new shares that Adam acquired by exercising the
rights?

a. 2,250,000
b. 3,250,000
c. 3,050,000
d. 5,550,000

Solution 22-11 Answer b

Initial cost of rights (50,000 x 20) 1,000,000


Cash paid for new shares (25,000 x 90) 2,250,000
Total cost of new shares 3,250,000

Problem 22-12 (ACP)

Excelsia Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the
shareholders to subscribe for 1 share at P100. Jealina Company owns 50,000 shares of Excelsia
Company with total cost P5,000,000. The share is quoted right-on at 125. The stock rights are
accounted for separately. What is the cost of the new investment if all of the stock rights are
exercised by Jealina Company?
a. 1,500,000
b. 1,250,000
c. 1,562,500
d. 1,450,000

Solution 22-12 Answer a

Theoretical value of right (125 - 100 / 4 + 1 ) 5.00


Initial cost of rights (50,000 x 5) 250,000
Cash paid for new shares (50,000 / 4 = 12,500 x 100) 1,250,000
Cost of new investment 1,500,000

Problem 22-13 (ACP)

On January 1, 2011, Mylene Company purchased 50,000 shares of another entity for P3,600,000. On
October 1, 2011, Mylene received 50,000 stock rights from the investee. Each right entitles the share-
holder to acquire one share for P85. The market price of the investee's share was P100 immediately
before the rights were issued and P90 immediately after the rights were issued. On December 1, 2011,
Mylene exercised all stock rights. On December 31, 2011, Mylene sold P25,000 shares at P90 per
share. The stock rights are not accounted for separately.

If the FIFO approach is used, what is the gain on sale of investment that should be recognized in
2011?

a. 450,000
b. 700,000
c. 287,500
d. 125,000

Solution 22-13 Answer a

Shares Cost
Original investment 50,000 3,600,000
New investment acquired through stock
rights (50,000 x 85) 50,000 4,250,000
Total 100,000 7,850,000

FIFO approach

Sale price (25,000 x 90) 2,250,000


Cost of shares sold (25,000 / 50,000 x 3,600,000) 1,800,000

Gain on sale 450,000


Average Approach

Sale price 2,250,000


Cost of shares sold (25,000 / 100,000 x 7,850,000) 1,962,500
Gain on sale 287,500

Problem 22-14 (PHILCPA Adapted)

Christopher Company completed the following transactions in relation to its long-term investment in
Bay Company:

On January 1, 2009, Christopher Company purchased 20,000 shares of Bay Company, P100 par, at
P110 per share. On March 1, 2009, Bay Company issued rights to Christopher Company, each per-
mitting the purchase of 1/4 share at par. No entry was made. The bid price of the share was 140 and
there was no quoted price for the rights.

Christopher Company was advised that it would "lose out on the investment if it did not pay in the
money for the rights". Thus, on April 1, 2009, Christopher Company paid for the new shares char-
ging the payment to the investment account.

Since Christopher Company felt that it had been assessed by Bay Company, the dividends received
from Bay Company in 2009 and 2010 (10% on December 31 each year) are credited to the investment
account until the debt was fully offset.

On January 1, 2011, Christopher Company received 50% stock dividend from Bay Company. On
same date, the shares received as dividend were sold at P160 per share and the proceeds were cre-
dited to income.

December 31, 2011, the shares of Bay Company were split 2 for 1. Christopher Company found that
each new share was worth P5 more than P110 paid for the original shares.

Accordingly, Christopher Company debited the investment account with the additional shares received
at P110 per share and credited income.

On June 30, 2012, Christopher Company sold one-half of the investment at P92 per share and credited
the proceeds to the investment account.

1. What is the balance of the investment on December 31, 2012 as it was kept by Christopher Company?

a. 3,150,000
b. 2,650,000
c. 2,200,000
d. 4,950,000

2. Using the "average method", what is the correct balance of the investment on December 31, 2012?
a. 2,200,000
b. 1,800,000
c. 900,000
d. 0

Solution 22-14
Question 1 Answer b
Shares Cost
1/1/2009 (20,000 x 110) 20,000 2,200,000
4/1/2009 (5,000 x 100) 5,000 500,000
12/31/2009 (10% x 2,500,000) -- (250,000)
12/31/2010 (10% x 2,500,000) -- (250,000)
12/31/2011 (23,000 x 110) 25,000 2,750,000
6/30/2012 (25,000 x 92) (25,000) (2,300,000)
Investment account per book 25,000 2,650,000

Question 2 Answer c

Shares Cost
1/1/2009 (20,000 x 110) 20,000 2,200,000
4/1/2009 (5,000 x 100) 5,000 500,000
1/1/2011 (50% x 25,000) 12,500 --

Balance 37,500 2,700,000


1/1/2011 (12,500 / 37,500 x 2,700,000) (12,500) ( 900,000)

Balance 25,000 1,800,000


12/31/2011 (2 for 1 split) 25,000 --

Balance 50,000 1,800,000


6/30/2012 (1/2 x 1,800,000) ( 25,000) ( 900,000)

Balance December 31, 2012 25,000 900, 000


2,000,000

5,600,000
dividend on
interest. A ma-
ed P300,000
ate was P50.

re purchased

market value
es the share-

mber 1, 2011,
e investment

ares received

and credited

her Company?

r 31, 2012?
Chapter 23
INVESTMENT IN ASSOCIATE

Problem 23-1 (AICPA Adapted)

On January 1, 2011. Saxe Company purchased 20% of Lex Company's ordinary shares outstanding
for P6,000.000. The acquisition cost is equal to the carrying amount of the net assets acquired.
During 2011, Lex reported net income of P7,000,000 and paid cash dividend of P4,000,0000. What is
the balance in the investment in Lex Company on December 31, 2011?

a. 5,200,000
b. 6,000,000
c. 6,600,000
d. 7,400,000

Solution 23-1 Answer c

Acquisition cost 6,000,000


Add: Share in net income (20% x 7,000,000) 1,400,000
Total 7,400,000
Less: Share in cash dividend ( 20% x 4,000,000) 800,000
Investment balance 6,600,000

PAS 28, pargaraph 6, provides that if an investor holds, directly or indirectly through subsidiaries, 20%
or more of the voting power of the investee, it is presumed that the investor does have significant
influence, unless it can be clearly demonstrated that this is not the case.

The equity method of accounting is used if the investment is 20% or more of the of the voting power
of the investee.

Under the equity method, the investment account is increased by the investor's share of the inventee's
earnings and decreased by the investor's share of the investee's losses. Dividend received from the
investee reduces the carrying amount of the investment.

Problem 23-2 (AICPA Adapted)

In January 2011, Farley Company acquired 20% of the outstanding ordinary shares of Davis
Company for 8,000,000. This investment gave Farley the abillity to exercise significant influence
over Davis. The carrying amount of the acquired shares was P6,000,000. The excess of cost over
carrying amount was attributed to a depreciable asset which was undervalued on Davis' statement
of financial positionand which had a remaining useful life of ten years. For the year ended
December 31, 2011, Davis reported net income of P1,800,000 and paid cash dividends of P400,000
and thereafter issued 5% stock dividend. What is the carrying amount of the investment in Davis
Company on December 31, 2011?

a. 7,720,000
b. 7,800,000
c. 8,000,000
d. 8,080,000

Solution 23-2 Answer d

Original cost 8,000,000


Share in net income (20% x 1,800,000) 360,000
Share in cash dividends (20% x 400,000) (80,000)
Amortization of excess of cost (2,000,000 / 10) (200,000)
Carrying amount of investment - December 31, 2011 8080000

Acquisition cost 8000000


Less: Carrying amount of interest acquired 6000000
Excess of cost over carrying amount 2000000

The excess of cost over the carrying amount of the underlying equity acquired which is attributable
to undervaluation of a depreciable asset should be amortized over the remaining useful life of the
depreciable asset.

Such amortization is recorded by debiting investment income and crediting investment in associate.

Problem 23-3 (AICPA Adapted)

On January 1, 2011, Dell Company paid P 18,000,000 for 50,000 ordinary shares of Case Company
which represent a 25% interest in the in the net assets of Case. The acquisition cost is equal to the
carrying amount of the net assets acquired. Dell has the ability to exercise significant influence over
Case. Dell received a dividend of P35 per share from Case in 2011. Case reported net income of
P9,600,000 for the year ended December 31, 2011.

In the December 31, 2011 statement of financial position, what amount should be reported as
investment in Case Company?

a. 22,150,000
b. 20,400,000
c. 18,650,000
d. 18,000,000

Solution 23-3 Answer c

Acquisition cost - January 1 18,000,000


Add: Share in net income ( 25% x 9,600,000) 2,400,000
Total 20,400,000
Less: Cash dividend received( 50,000 x P35) 1,750,000
Carrying amount of investment- December 31 18,650,000

Problem 23-4 (AICPA)

On January 1, 2011, Well Company purchased 10% of Rea Company's outstanding ordinary shares
for P4,000,000. Well is the largest single shareholder in Rea and Well's officers are a majority of
Rea's board of directors. Rea reported net income of P5,000,000 for 2011 and paid dividends of
P1,500,000.

In its December 31, 2011 statement of financial position, what amount should Well report as
investment in Rea?

a. 4,500,000
b. 4,350,000
c. 4,000,000
d. 3,850,000

Solution 23-4 Answer b

PAS 28, paragraph 6, provides that if the investor holds, directly or indirectly through subsidiaries,
less than 20% of the voting power of the investee, it is presumed that the investor does not have
significant influence, unless such influence can be clearly demonstrated.
Wells position as Rea's largest single shareholder and the presence of Well's officers as a majority
of Rea's board of directors demonstrate that Well does have significant influence despite the 10%
ownership. Accordingly, the equity method is used.

Acquisition, January 1 4,000,000


Add; Share in net income (10% x 5,000,000) 500,000
Total 4,500,000
Less: Share in cash dividends (10% x 1,500,000) 150,000
Carrying value of the investment, December 31 4,350,000

Problem 23-5 (AICPA Adapted)

On January 1, 2011, Dyer Company acquired as a long term investment a 20% ordinary share
interest in Eason Company. Dyer paid P7,000,000 for this month when the fair value of Eason's
net assets was P35,000,000. Dyer can exercise significant influence over Eason's operating and
and financial policies. For the year ended December 31, 2011, Eason reported net income of
P4,000,000 and declared and paid cash dividends of P1,600,000.

What amount of revenue from the investment should Dyer report for 2011?

a. 1,120,000
b. 480,000
c. 800,000
d. 320,000

Solution 23-5 Answer c

Share net income (20% x 4,000,000) 800,000

Under the equity method, the investor recognizes as income its share of the investee's earnings.
Cah dividends are not recorded as income but a reduction of the investment account.

Problem 23-6 ( AICPA Adapted)

On July 1, 2011, Denver Company purchased 30,000 shares of Eagle Company's 100,000 outstanding
ordinary shares for P200 per share. On December 15,2011, Eagle paid P400,000 in dividends to its
share ordinary shareholders. Eagle's net icome for the year ended December 31, 2011 was
P1,200,000, earned evenly throughout the year. In its 2011 income statement, what amount of income
from the investment should Denver report?
a. 360,000
b. 180,000
c. 120,000
d. 60,000

Solution 23-6 Answer b

Share in net income from July 1 to December 31, 2011


( 1,200,000 x 6/12 x 30%) 180,000

Interest acquired ( 30,000/100,000) 30%

Problem 23-7 (AICPA Adapted)

On April 1,2011, Ben Company purcahsed 40% of the outstanding ordinary shares of Clarke Company
for P10,000,000. On the date, Clarke's net assets were P20,000,000 and Ben cannot attribute the
excess of the cost of its investment in Clarke over its equity in Clarke's net assets to any particular
factor.

Clarke's 2011 net income is P5,000,000. Ben plans to retain its investment in Clarke indefinitely.
Ben accounts for its investment in Clarke by the equity method.

What is the maximum amount which could be included in Ben's 2011 income before tax to reflect the
"equity in net income of Clarke"?

a. 1,400,000
b. 1,500,000
c. 2,000,000
d. 1,850,000

Solution 23-7 Answer b

Share in net income from April 1 to December 31, 2011


(5,000,000 x 9/12 x 40%) 1,500,000

Acquisition cost 10,000,000


Less: Carrying amount of the assets acquired
(40% x 20,000,000) 8,000,000
Goodwill - not amortized 2,000,000

Problem 23-8 (IAA)

On, January 1,2011, Ronald Company purchased 40% of the outstanding ordinary shares of New
Company equaled P12,500,000. The difference was attributed to equipment which had a carrying
amount of P3,000,000 and a fair market value of P5,000,000 and to building which had a carrying
amount of P2,500,000 and a fair value of P4,000,000. The remaining useful life of the equipment and
building was 4 years and 12 years, respectively. During 2011, New Company reported net income
of P5,000,000 and paid dividends of P2,500,000. What amount should be reported as investment
income for 2011?

a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 1,750,000

Solution 23-8 Answer d

Acquisition cost 6,400,000


Net assets acquired ( 40% x 12, 500,000) 5,000,000
Excess of cost 1,400,000

Excess attributable to equipment (40% X 2,000,000) 800,000


Excess attributable to building (40% X 1,500,000) 600,000
1,400,000

Share in net income (40% x 5,000,000) 2,000,000


Amortiation of excess:
Equipment (800,000/4) (200,000)
Building (600,000/12) (50,000)
1,750,000

Problem 23-9 ( AICPA Adapted)

On January 1, 2011, Kean Company purchased 30% interest in Pod Company for P2,500,000. On this
date Pod's shareholders' equity was P5,000,000. The carrying amount of Pod's identifiable net assets
approximated their fair values, except for land whose fair value exceeded its carrying amount by
P2,000,000. Pod reported net income of P1,000,000 for 2011 and paid no dividends. Kean accounts for
this investment using the equity method.

In its December 31,2011 statement of financial position, what amount should Kean report as
investment in associate?

a. 2,100,000
b. 2,200,000
c. 2,800,000
d. 2,760,000

Solution 23-9 Answer c

Acquisition cost 2,500,000


Less: Carrying amount of net assets acquired
(30% x 5,000,000) 1,500,000
Excess of cost over carrying amount 1,000,000
Less: Amount attributable to undervaluation of land
(30% x 2,000,000) 600,000
Goodwill - not amortized 400,000

Acquisition cost, January 1 2,500,000


Add: Share in net income (30% x 1,000,000) 300,000
Carrying amount of investment 2,800,000

The excess of cost attributable to the land is not amortized because the land is nondepreciable.

Problem 23-10 ( AICPA Adapted)

Sage Company bought 40% of Eve Company's outstanding ordinary shares on January 1,2011, for
P4,000,000. The carrying amount of Eve's net assets at the purchase date totaled P9,000,000. Fair
values and carrying amount were the same for for all the items except for plant and inventory, for
which fair value exceeded their carrying amount by P900,000 and P100,000, respectively. The plant
has an 18-year life. All inventory was sold during 2011. During 2011, Eve reported net income of
P1,200,000 and paid a P200,000 cash dividend.

What amount should Sage repport as investment income in its income statement for the year ended
December 31, 2011?

a. 480,000
b. 420,000
c. 360,000
d. 320,000

Solution 23-10 Answer b

Acquisition cost 4,000,000


Net assets required ( 40% x 9,000,000) (3,600,000)
Excess of cost over carrying amount 400,000

The excess of cost is identified as follows:

Understatement of plant ( 40% x 900,00) 360,000


Understatement of inventory (40% x 100,000) 40,000
Total excess of cost 400,000

Share in net income ( 40% x 1,200,000)


Less: Amortization of excess of cost:
Depreciation of plant (360,000/18) 20,000
Inventory(totally sold) 40,000 60,000
Investment income 420,000

Problem 23-11 (CGAC)

On January 1,2011, Anne Company purchased 20% of the outstanding ordinary shares of Dune
Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000 is payable with 12%
annual interest on December 31, 2012. Anne also paid P500,000 to a business broker who helped find
a suitable business and negotiated the purchase.

At the time of acqusition, the fair values of Dune's identifiable assets and liabilities were equal to
their carrying amounts except for an office building which had a fair value in excess of carrying
amount of P2,000,000 and an estimated life of 10 years. Dune's shareholders' equity on
January 1, 2011 was P13,000,000. During 2011, Dune Company reported net income of P5,000,000
and paid dvidend of P2,000,000.

What amount of income should Anne Company report for 2011 as a result of the investment?

a. 810,000
b. 620,000
c. 960,000
d. 885,000

Solution 23-11 Answer c

Acquisition cost (4,000,000 + 500,000) 4,500,000


Carrying amount of net assets acquired
(20% x 13,000,000) 2,600,000
Excess of cost 1,900,000
Excess attributable to building(20% x 2,000,000) 400,000
Excess attributable to goodwill - not amortized 1,500,000

Share in net income(20% x 5,000,000) 1,000,000


Amortization of excess of cost:
Attributable to building ( 400,000 /10) (40,000)
Investment income 960,000

Problem 23-12 (IAA)

On January 1, 2011, Occidental Company purchased 40% of the outstanding ordinary shares of
Manapla Company for P3,500,000 when the net assets of Manapla amounted to P7,000,000. At
acquisition date, the carrying amounts of the identifiable assets and liabilities of Manapla were equal
to the fair value was P1,500.000 greater than its carrying amount and inventory whose fair value
was P500,000 greater than its cost. The equipment has a remaining life of 4 years and the inventory
was all sold during 2011 and paid no dividends during 2011.Manapla Company reported net income of
P4,000,000 for 2011 and paid no dividends durinG 2011.

What is the maximum amount of the "equity in earning of Manapia Company"?


a. 1,350,000
b. 1,250,000
c. 1,600,000
d. 1,700,000

Solution 23-12 Answer a

Cost 3,500,000
Carrying amount of interest acquired
(40% x 7,000,000) 2,800,000
Excess of cost over carrying amount 700,000
Excess applicable to equipment (40% x 1,500,000) (600,000)
Excess applicable to inventory (40% x 500,000) (200,000)
Excess of fair value cost (100,000)

Any excess of the net fair value of the associate's identifiable net assets is included in investment
income.

Share in net income (40% x 4,000,000) 1,600,000


Excess of fair value over cost 100,000
Excess of cost over carrying amount:
Equipment( 600,000 /4) (150,000)
Inventory - all sold (200,000)
Investment income 1,350,000

Problem 23-13 (IAA)

On January 1, 2011, Bing Companny purchased 30,000 shares of Latt Company's 200,000
outstanding ordinary shares for for 6,000,000. On that date, the carrying amount of the acquired
shares on Latt's books was P4,000,000. Bing attributed the excess of cost over carrying amount to
patent. The patent has remaining useful life of 10 years.

During 2011, Bing's officers gained a majority on Latt's board of directors. Latt reported earnings of
P 5,000,000 for the year ended December 31, 2011, and declared and paid dividend of P3,000,000
during 2011. On December 31, 2011, Latt ordinary share was trading over-the-counter at P15.

What is the carrying amount of the investment in Latt Company on December 31, 2011?
a. 6,000,000
b. 6,100,000
c. 6,300,000
d. 6,750,000

Solution 23-13 Answer b

Acquisition cost 6,000,000


Carrying amount of net assets acquired 4,000,000
Excess of cost applicable to patent 2,000,000

Acquisition cost
Share in net income (5,000,000 x 15%) 6,000,000
Share in cash dividend (3,000,000 x 15%) 750,000
Amortization of patent (2,000,000 /10) (450,000)
Carrying amount of investment (300,000)
6,100,000

Interest acquired(30,000/ 200,000) 15%

The equity is used even if the investment is less than 20% because the officers of the investor entity
are a majority of the bound of the investee entity.

Problem 23-14 (AICPA Adapted)

On July 1, 2011, Miller Company purchased 25% of Wall Company's outstanding ordinary shares and
no goodwill resulted from the purchase. Miller appropriately carries this investment as equity and the
balance in Miller's investment account was P1,900,000 at December 31, 2011. Wall reported net
income of P1,200,000 foe the year ended December 31, 2011, and paid divvidend totaling P480,000 on
December 31, 2011.

How much did Miller pay for its 25% interest in Wall?

a. 1,720,000
b. 2,020,000
c. 1,870,000
d. 2,170,000
Solution 23-14 Answer c

Acquisition cost, July 1 (SQUEEZE) 1,870,000


Add: Share in net income from July 1 to
December 31 (1,200,000 x 6/12 x 25%) 150,000
Total 2,020,000
Less: Share in cash dividend (25% 480,000) 120,000
Investment balance, December 31 1,900,000

The acquisition cost is "squeezed" by working back from the invested balance on December 31,2011.

Moreover, the investor shares only in the net income of the investee from the date of acquisition, July
1, 2011 to December 31, 2011.

In the absence of any statement to the contrary, the net income is earned evenly during the year.

However, the investor shares in full in the dividends paid on December 31, 2011.

Problem 23-15 (IAA)

In January 1, 2011, Cyber company bought 30% of outstanding ordinary shares of Free company for
P5,000,000 cash. Cyber company accounts for this investment by the equity method At the date of
acquisition, Free Company's net assets had a carrying amount of P12,000,000. Depreciable assets with
an average remaining life five years have a current market value that is P2,500,000 in excess of their
carrying amount. The remaining difference between the purchase price and the carrying amount of the
underlying equity cannot be attributed to any identifiable tangible or intangible asset. Accordingly, the
remaining difference is allocated to goodwill. At the end of 2011, Free Company reported net income
of P4,000,000. During 2011, Free Company declared and paid cash dividends of P1,000,000.

What is the carrying amount of the investment in Free Company on December 31, 2011?

a. 5,000,000
b. 5,900,000
c. 5,0750,00
d. 5,400,000

Solution 23-15 Answer c

Acquisition cost 5,000,000


Net assets acquired (30% x 12,000,000) 3,600,000
Excess of cost over carrying amount 1,400,000
Excess attributable to depreciable assets
(30% x 2,500,000) 750,000
Excess of attributable to goodwill 650,000

Aquisition cost 5,000,000


Share in net income (30% x 4,000,000) 1,200,000
Share in cash dividend (30% x 1,000,000) (300,000)
Amortization of depreciable assets (750,000/ 5) (150,000)
Carrying amount of investment 5,750,000

Problem 23-16 (IAA)

Jay Company purchased 35% of Jerry Company on January 1, 2011 for P11,200,000 when Jerry's
carrying amount was P32,400,000. On that day, the market value of the net assets of Jerry company
equaled their carrying amount with the following exceptions:

Carrying amount Market


Equipment 7,000,000 5,600,000
Building 1,600,000 2,600,000

The equipment has a remaining useful lfe of 5 years, and the building has a remaining useful life of 10
years. Jerry reported of P3,200,000 and cash dividends of P1,000,000 for 2011.

What is the investment income that will be reported by Jay Company for 2011?

a. 1,183,000
b. 1,120,000
c. 1,260,000
d. 987,000

Solution 23-16 Answer a

Acquisition cost 11,200,000


Net assets acquuired (35% x 32,400,000) 11,340,000
Excess of carrying amount over cost (140,000)

Equipment - carrying amount higher than market value


(1,400,000 x 35%) (490,000)
Building - market value higher than carrying amount
(1,000,000 x 35%) 350,000
(140,000)

Share in net income (35% x 3,200,000) 1,120,000


Amortization
Overdepreciation of equipment (490,000/ 5) 98,000
Underdepreciation of building (350,000 /10) (35,000)
Investment income 1,183,000

The amortization of the equipment is added because the equipment it overvalued. The amortization
of the building is deducted because the building is undervalued.

Problem 23-17 (IAA)

On January 1, 2011, Bridge Company purchased 25,000 shares of the 1,000,000 outstanding shares of
of River Company for a tortal of P1,000,000. At the time of the purchase, the carrying amount of
River Company's equity was P3,000,000. River Company assets having a market value greater than
carrying amount at the time of the acquisition were as follows:

Carrying amount Market Value Remaining life


Inventory 400,000 500,000 Less than 1 year
Equipment 2,000,000 2,500,000 5 years
Goodwill 0 400,000 Indefinite

River Company's income in 2011 was P700,000. Dividends per share paid by River Company
amounted to P3 in 2011.

What is the carrying amount of Bridge Company's investment in River Company on


December 31, 2011?
a. 1,050,000
b. 1,000,000
c. 1,075,000
d. 1,100,000

Solution 23-17 Answer a

Acquisition cost 1,000,000


Net assets acquired (25% x 3,000,000) 750,000
Excess of cost over carrying amount 250,000

Excess attributable to inventory (25% x 100,000) 25,000


Excess attributable to equipment (25% x 500,000) 125,000
Excess attributable to goodwill (25% x 400,000) 100,000
250,000

Acquisition cost 10,000,000


Share in net income (25% x 700,000) 175,000
Amortization of excess:
Inventory (25,000)
Equipment (125,000/5) (25,000)
Cash dividend (25,000 x 3) (75,000)
Carrying amount of investment 1,050,000

Problem 23-18 (IAA)

Alpha Company acquired 20,000 shares of Beta Company on January 4, 2011 at P120 per share.
Beta Company had 10,000 shares outstanding with a carryong amount of P8,000,000. The difference
between the carrying amount and fair value all Beta Company on January 1, 2011 is attributable to a
broadcast license which is an intagible asset. Beta Company recorded earnings of P3,600,000 and
P3,900,000 for 2011 and 2012, respectively, and paid per-share dividend of P16 in 2011 and P20 in
2012. Alpha Company has a 20-year straight line amortization policy for the broadcast license.

What is the carrying amount of Alpha Company's investment in Beta Company on December 31,2012?

a. 3,515,000
b. 2,400,000
c. 3,555,000
d. 4,275,000

Solution 23-18 Answer a


Acquisition cost (20,000 x 120) 2,400,000
Net assets acquired (25% x 8,000,000) 2,000,000
Excess of cost over carrying amount 400,000

Acquisition cost 2,400,000


Share in net income
2011 (25% x 3,600,000) 900,000
2012 (25% x 3,900,000) 975,000
Share in cash dividend:
2011 ( 20,000 x 16) (320,000)
2012 (20,000 x 20) (400,000)
Amortization of excess:
2011( 400,000/ 20) (20,000)
2012 (20,000)
Carrying amount of investment - December 31, 2012 3,515,000

Problem 23- 19 (IFR$)

Seiko Comoany has 100,000 ordinary shares outstanding. Globe Company acquired 30,000 shares of
of Seiko for P120 per share in 2009. The securities are being held as long term investment. Changes
in retained earnings for Seiko for 2011 and 2012 re as follows:

Retained earnings (deficit), January 1, 2011 (500,000)


Net income for 2011 700,000
Retained earnings, December 31, 2011 200,000
Net income for 2012 800,000
Cash dividend paid on December 30, 2012 (400,000)
Retained earnings, December 31, 2012 600,000

What is the carrying amount Globe Company's investment in Seiko Company on December 31, 2012?

a. 3,600,000
b. 3,930,000
c. 3,780,000
d. 4,800,000
Solution 23-19 Answer c

Acquisition cost (30,000 x 120) 3,600,000


Deficit on January 1,l 2011 (30% x 500,000) (150,000)
Carrying amount of investment - January 1, 2011 3,450,000
Net income for 2011 (30% x 700,000) 210,000
Net income for 2012 (30% 800,000) 240,000
Cash dividend on 12/31/2012 (30% x 400,000) (120,000)
Carrying amount of investment - December 31, 2012 3,780,000

Another approach

Acquuisition cost 3,600,000


Share in retained earnings - December 31, 2012
(30% x 600,000) 180,000
Carrying amount of investment - December 31, 2012 3,780,000

Problem 23-20 (IAA)

On January 1, 2011, Marie Company purchased 40% of the outstanding shares of Lester Company
paying P2,560,000 when the carrying amount of the net assets of Lester equaled P5,000,000. The
difference was attributed to equipment which had a carrying amount of P1,200,000 and a fair value
of P2,000,000, and to building with a carrying amount of P1,000,000 and a fair value of P1,600,000.
The remaining useful life of the equipment and building was 4years and 12 years, respectively.
During 2011, Lester reported net income of P1,600,000 and paid dividends of P1,000,000.

What is the carrying amount of the investment in Lester Company on December 31,2011?

a. 2,550,000
b. 2,700,000
c. 2,800,000
d. 3,050,000

Solution 23-20 Answer b

Acquisition cost 2,560,000


Net assets acquired (40% x 5,000,000) 2,000,000
Excess of cost over carrying amount 560,000

Attributable to equipment (40% x 800,000) 320,000


Attributable to building (40% x 600,000) 240,000
560,000

Acquisition cost 2,560,000


Net income (40% x 1,600,000) 640,000
Cash dividend (40% x 1,000,000) (400,000)
Amortization of excess:
Equipment (320,000 /4) (80,000)
Building (240,000 /12) (20,000)
Carrying amount of investment - December 31, 2011 2,700,000

Problem 23-21 (IFRS)

Chur Company acquired a 40% interest in Film Company for P1,700,000 on January 1, 2011. The
shareholder's equity of Film Company on January 1 and December 31, 2011 is presented below.

January 1 December 31
Share Capital 3,000,000 3,000,000
Revaluation Surplus 1,300,000
Retained Earnings 1,000,000 1,500,000

On January 1, 2011, all the identifiable assets and liabilities of Film Company were recorded at fair
value. Film Company reported profit of P700,000 after income tax expense of P300,000 and paid
dividend of P150,000 to shareholder during the current year.

The revaluation surplus is the result of the revaluation of land recognized by Film Company on
December 31, 2011. Additionally depreciation is provided by Film Company on the diminishing balance
method whereas Chur Company uses the straight line. Had Film Company used the straight, the
accumulated depreciation would be increased by P200,000. the tax rate is 30%.

What is the carrying amount of Chur Company's investment in Film Company on December 31, 2011?
a. 2,440,000
b. 1,700,000
c. 1,920,000
d. 2,230,000

Solution 23-21 Answer a

Acquisition cost 1,700,000


Net assets acquired (40% x 4,000,000) 1,600,000
Goodwill - not amortized 100,000

Acquisition cost 1,700,000


Net income 280,000
Cash dividend (60,000)
Revaluation surplus 520,000
Carrying amount of investment - December 31, 2011 2,440,000

There is no need to adjust for the difference in depreciation method. If both entities have chosen a method
that best reflects the flow of benefits as the assets are consumed, then there is no policy difference.

Problem 23-22 (IFRS)

Aye Company acquired 30% of the issued share capital of Bee Company for P1,000,000 on
January 1, 2011. The accumulated profits of Bee Company on this date totaled P2,000,000. the entities
prepare their financial statements on December 31of each year. The abbreviated statement of financial
position of Bee Company on December 31, 2012 is as follows:

Sundry net assets 6,000,000


Share Capital, P10 par 1,000,000
Share Premium 2,000,000
Retained earnings 3,000,000

The fair value of the net assets of Bee Company at the date of acquisition was P5,000,000. the
recoverable amount of the net assets of Bee Company is deemed to be P7,000,000 on December 31,2012.

What is the carrying amount of the investment in Bee Company on December 31, 2012?

a. 1,800,000
2,100,000
c. 1,500,000
d. 1,000,000
Solution 23-22 Answer a

Investment associate (30% x 6,000,000) 1,800,000

Another approach

Acquisition cost 1,000,000


Post acquisition profits (3,000,000-2,000,000 x 30%) 300,000
Excess net fair value- included in investment income 500,000
Investment in associate 1,800,000

Acquisition cost 1,000,000


Net assets acquired (30% x 5,000,000) 1,500,000
Excess net fair value - included in investment income 500,000

The investment in associate is not impaired because the carrying amount of P1,800,00 is lower than the
recoverable amount of P2,100,000 (30% x 7,000,000).

Probllem 23-23 (AICPA Adapted)

Moss Company owns 20% of Dubro Company's preference share capital and 80% of its ordinary share
capital and 80% of its ordinary share capital on December 31, 2011.

10% cumulative preference share capital 5,000,000


Ordinary share capital 7,000,000

Dubro reported net income P3,000,000 for the year ended December 31, 2011. What is the equity in
earnings of the investee for 2011?

a. 2,000,000
b. 2,400,000
c. 2,100,000
d. 2,300,000

Solution 23-23 Answer a

When an investee has outstanding cumulative preferences share capital, an investor should compute its
share of earnings after deducting the investee's preference dividends, whether or not such dividends are
declared.

Net income 3,000,000


Preference dividend ( 10% x 5,000,000) (500,000)
Net income to ordinary shares 2,500,000

Share in net income - ordinary shares (80% x 2,500,000) 2,000,000

Problem 23-24 (AICPA Adapted)

Green Company owns 30% of the outstanding ordinary shares 100% of the outstanding noncumulative
nonvoting preference shares of Axel Company. In 2011, Axel declared dividend of P1,000,000 on its
ordinary share capital and P600,000 on its preference share capital. What amount of dividend revenue
should Green report in its income statement for 2011?

a. 900,000
b. 300,000
c. 600,000
d. 0

Solution 23-24 Answer c


Only the dividend on preference share capital is recognized as dividend revenue. The equity method is not
applicable to investment in preference shares regardless of the interest.

Problem 23-25 (AICPA Adapted)

On January 1, 2011, Wynn Company bought 15% of Parr Company's ordinary shares outstanding for
P6,000,000. Wynn appropriately accounts for this investment by the cost method. Parr reported net
income of P3,000,000 for 2011 and P9,000,000 for 2012. No dividend was paid in 2011 but Parr paid
dividend of P15,000,000 in 2012. what dividend income should be reported by Wynn in 2012?

a. 1,350,000
b. 2,250,000
c. 1,800,000
d. 450,000

Solution 23-25 Answer b

Dividend income (15% x 15,000,000) 2,250,000

Under the cost method, dividends received are now totally recognized as income. There is no
longer a distinction between preacquisition and postacquisition dividends.

Problem 23-26
Pare Company purchased 10% of Tot Company's 100,000 outstanding ordinary shares on January 1, 2011
for 500,000. On December 31,2011, pare purchased an additional 20,000 shares of Tot for P1,500,000.
there was no goodwill as a result of either acquisition, and Tot had no issued any additional shares during
2011. Tot reported earnings of P3,000,000 for 2011. What is the carrying amount of the investment on
December 31, 2011?

a. 1,700,000
b. 2,000,000
c. 2,300,000
d. 2,900,000

Solution 23-26 Answer c

Cost on January 1 (10%) 500,000


Cost on December 31 (20,000/ 100,000 shares = 20%) 1,500,000
Total acquisition cost 2,000,000
Add: Share in net income (10% x 3,000,000) 300,000
Carrying amount of investment - December 31 2,300,000

The share in the net income is only 10% because the additional 20% interest was acquired only
on December 31, 2011.

Problem 23-27 (AICPA Adapted)

On January 1, 2011, Mega Company aquired 10% of the outstanding ordinary shares of Penny Company.
On January 1, 2012, Mega gained the ability to exeercise significant influence over financial and operating
control of Penny by acquiring an additional 20% of Penny's outstanding ordinary shares. The two
purchases were made at prices proportionate to the value assigned to Penny's net assets, which equaled
their carrying amounts. For the years ended December 31, 2011 and 2012, Penny reported the following:

2011 2012
Dividend paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000

What total amount of revenue should Mega Company include in profir or loss for the year
ended December 31, 2012?

a. 1,000,000
b. 1.950,000
c. 2,350,000
d. 1,550,000

Solution 23-27 Answer c

2012 investment income (30% x 6,500,000) 1,950,000

2011 investment income (10% x 6,000,000) 600,000


Less: Dividend income recorded in 2011
(10% x 2,000,000) 200,000
Effect of change to equity method 400,000

Investment in associate 400,000


Gain on remeasurement to equity 400,000

When an investment qualifies for use of the equity method to investor should adopt the equity method
retroactively.

However, the effect of the change of equity method the investor should now be included in profit or
loss as "gain on remeasurement to equity" and no longer a correction of retained earnings.

Problem 23-28 (AICPA Adapted)

Grant Company acquired 30% of South Company's voting share capital for P2,000,000 on
January 1, 2011. Grant's 30% interest in South gave Grant the abiity to exercise significant influence over
South's operating and financial policies. During 2011, South earned P800,000 and paid dividend of
P500,000. South reported earnings of P1,000,000 for the 6 months ended June 30, 2012, and P2,000,000
for the year ended December 31, 2012. The retained investment is to be held as financial asset at fair
value through other comprehensive income.

1. Before income tax, what amount should Grant include in its 2011 income statement as a result of the
investment?

a. 150,000
b. 240,000
c. 500,000
d. 800,000

2. In Grant's December 31, 2011 statement of financial position, what should be the carrying amount of
the investment?

a. 2,000,000
b. 2,090,000
c. 2,240,000
d. 2,300,000

3. In its 2012 income statement, what amount should Grant report as gain from the sale of half of its
investment?

a. 245,000
b. 305,000
c. 350,000
d. 455,000

4. In its 2012 income statement, what amount should Grant report as gain from remeasurement of its
retained investment?

a. 605,000
b. 405,000
c. 710,000
d. 910,000

Solution 23-28

Question 1 Answer b

Share in 2011 net income (30% x 800,000) 240,000

Question 2 Answer b

Acquisition cost, January 1, 2011 2,000,000


Add: Share in 2011 net income 240,000
Total 2,240,000
Less: Share in 2011 dividend (30% x 500,000) 150,000
Carrying amount of investment, December 31, 2011 2,090,000

Question 3 Answer b

Carrying amount of investment, December 31, 2011 2,090,000


Add: Share in net income from January 1
to June 30, 2012 (30% x 1,000,000) 300,000
Carrying amount of investment, June 30, 2012 2,390,000

Sales price 1,500,000


Cost of investment sold (2,390,000 /2) (1,195,000)
Gain from sale of investment 305,000

Question 4 Answer b
Fair value - July 1,2012 1,600,000
Carrying amount of retained investment 1,195,000
Gain from remeasurement 405,000

Fair Value - December 31,2012 1,800,000


Fair Value - July 1, 2012 1,600,000
Unrealized gain on financial asset 200,000

The unrealized gain of P200,000 is reported as other comprehensive income in the 2012 statement of
comprehensive income because the retained investment is accounted for as financial asset at fair value
through other comprehensive income.

Problem 23-29 (ACP)

On January 1, 2008 , Bart Company acquired as a long term investment for P7,000,000, a 40% interest in
Hall Company when the fair value of Hall's net assets was P17,500,000. Hall Company reported the
following net losses:

2008 5,000,000
2009 7,000,000
2010 8,000,000
2011 4,000,000

On January 1, 2010, Bart Company made cash advances of P2,000,000 to Hall Company. On
December 31, 2011, it is not expected that Bart Company will provide further financial support for Hall
Company. What amount should Bart Company report in 2011 as loss from investment?

a. 1,600,000
b. 4,000,000
c. 1,000,000
d. 600,000

Solution 23-29 Answer c

Original cost 7,000,000


Cash advances 2,000,000
Total 9,000,000
Net loss from 2008 to 2010 (40% x 20,000,000) (8,000,000)
Carrying amount of investment - 12/31/2010 1,000,000
Share in net loss of 2011 (40% x 4,000,000) 1,600,000

Loss to be reported in 2011 should be equal to


the investment balance only 1,000,000

PAS 28, paragraph 2, provides that if under equity method an investor's share of losses of an associate
equals or exceeds the carrying amount of an investment, the investor discontinues recognizing its share of
further losses. The investment is reported at NIL or zero value.

Problem 23-30(IFRS)

On January 1, 2011, Haven Company acquired 20% of the ordinary shares of an associate for
P6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded at fair
value. An analysis of the acquisition showed that goodwill of P300,000 was acquired. The net income and
dividend of the associate for 2011 and 2012 were follows:

2011 2012
Net income 3,000,000 4,000,000
Dividend paid 1,000,000 1,500,000

In Deecember 2011, the associate sold inventory to Haven Company for P900,000. The cost of the
inventory was P600,000. This inventory remained unsold by Haven Company on December 31,2011.
However, it was sold by Haven Company in 2012. In December 2012, the associate hold inventory to
Haven Company for P750,000. The cost of the inventory was P500,000. This inventory remained unsold
by Haven Company on December 31, 2012. In December 2012, Haven Company sold inventory to the
associate at a profit of P400,000 . One-half of this inventory was sold by the associate on
December 3i, 2012.

1. What is the investor's share in the profit of the associate for 2011?

a. 600,000
b. 540,000
c. 660,000
d. 648,000

2. What is the investor's sharein the profit of the associate for 2012?

a. 710,000
b. 800,000
c. 770,000
d. 730,000

3. What is the carrying amount of the investment in associate on Decemkber 31, 2012?

a. 6,870,000
b. 6,000,000
c. 6,900,000
d. 6,810,000

Solution 23-30

Question 1 Answer b

Net income for 2011 3,000,000


Unrealized profit in 12/31/2011 inventory of Haven
(900,000-600,000) (300,000)
Adjusted net income 2,700,000

Investor's share (20% x 2,700,000) 540,000

Another approach

Share in net income ( 20% x 3,000,000) 600,000


Share in unrealized profit (20% x 300,000) (60,000)
Investor's share 540,000

Question 2 Answer c

Net income for 2012 4,000,000


Realized profit in 12/31/2011 inventory of
Haven Company 300,000
Unrealized profit in 12/31/2012 inventory of Haven
Company (750,000 - 500,000) (250,000)
Unrelized profit in 12/31/2012 inventory of associate
(400,000 x 1/2) (200,000)
Adjusted net income 3,850,000

Investor's share 770,000


Question 3 Answer d

Acquisition cost 6,000,000


Share in profit of associate- 2011 540,000
Share in cash dividend- 2011 (20% x 1,000,000) (200,000)
Share in profit of associate - 2012 770,000
Share in cash dividend- 2012 (20% x 1,500,000) (300,000)
Carrying amount - December 31, 2012 6,810,000

Problem 23-31 (IFRS)

Glorious Company acquired 40% interest in an associate, Alta Company, for P5,000,000 on
January 1, 2011. At the acquisition date, there were no differences between fair value and carrying
amount of identifiable assets and liabilities.

Alta Company reported the following net income and divided for 2011 and 2012:

2011 2012
Net income 2,000,000 3,000,000
Dividend paid 800,000 1,000,000

The following transactions occurred between Glorious Company and Alta Company:

* On January 1, 2011, Alta Company sold an equipment costing P500,000 to Glorious Company for
P800,000. Glorious Company applies a 10% straight line depreciation.

* On July1, 2012, Alta Company sold an equipment for P900,000 to Gllorious Company. The carrying
amount of the equipment is P500,000 at the time of sale.

The remaining life of the equipment is 5 years and Glorious Company uses the straight line
depreciation.

* On December 1, 2012, Alta Company sold an inventory to Glorious Company for P2,800,000. The
inventory had a cost of P2,000,000 and was still on hand on December 31,2012.

* On January 1, 2012, Glorious Company sold an equipment to Alta Comapny for P3,000,000. The
equipment had a cost of P2,500,000.

Glorious Company regarded this equipment as inventory whereas Alta Company intended to use it as
noncurrent asset.The remaining useful life of the equipment is 10 years.
1. What is the investor's share in the profit associate for 2011?

a. 692,000
b. 800,000
c. 680,000
d. 920,000

2. What is the investor's share in profit of the associate for 2012?

a. 1,200,000
b. 568,000
c. 520,000
d. 540,000

3. What is the carrying amount of the investment in associate on December 31, 2011?

a. 5,692,000
b. 5,000,000
c. 5,372,000
d. 5,360,000

4. What is the carrying amount of the investment in associate on December 31, 2012?

a. 5,508,000
b. 6,280,000
c. 5,540,000
d. 4,480,000

Solution 23-31

Question 1 Answer a
Net income for 2011 2,000,000
Unrealized profit on sale of equipment sold on
1/1 2011 (800,000 - 500,000) (300,000)
Realized profit on equipment sold on 1/1/2011
(10% x 300,000) 30,000
Adjusted net income 1,730,000

Investor's share (40% x 1,730,000) 692,000

Question-2 Answer b

Net income for 2012 3,000,000


Realized profit on equipment on 1/1 2011
(10% x 300,000) 30,000
Unrealized profit on sale equipment on 7/1/2012
(900,000 - 500,000) (400,000)
Realized profit on equipment sold on 7/1/2012
(400,000 /5 x 1/2) 40,000
Unrealized profit on ending inventory on 12/ 31/2012
(2,800,000 - 2,000,000) (800,000)
Unrealized profit on sale of equipment on 1/1/2012
(3,000,000 - 2,500,000) (500,000)
Realized profit on equipment sold on 1/1/2012
(500,000/ 10) 50,000
Adjusted net income 1,420,000

Investor's share (40% x 1,420,000) 568,000

Question 3 Answer c

Acquisition cost 5,000,000


Share in profit of associate -2011 692,000
Cash dividend - 2011 (40% x 800,000) (320,000)
Carrying amount - December 31, 2011 5,372,000

Question 4 Answer c
Carrying amount -January 1, 2012 5,372,000
Share in profit of associate - 2012 568,000
Cash dividend - 2012 (50% x 1,000,000) (400,000)
Carrying amount - December 31, 2012 5,540,000
Problem 23-32 (IFRS)

On January 1, 2011, Interlude Company acquired a 30% interest in an investee at a cost of P3,200,000.
The equity of the investee on the date of acquisition was P6,000,000, consisting of P4,000,000 share
capital and P2,000,000 retained earnings.

All the identifiable assets and liabilities of the investee were recorded at fair value except for an equipment
with a fair value of P3,000,000 greater than carrying amount. The remainig usseful life of the equipment
is 5 years.

On December 31, 2011, Interlude Company had inventory costing P2,000,000 on hand which had been
purchased from the investee. A profit of P600,000 had been made on the sale.

During the current year the investee reported net income of P4,000,000 and paid dividend of P1,500,000.
The equity of the investee on December 31, 2011 showed the following:

Share Capital 4,000,000


Retained earnings 3,500,000
Retained earning appropriated 1,000,000
Revaluation surplus 2,000,000

The revaluation surplus arose from a revaluation of land made on December 31, 2011. The retained
earnings appropriated arose from a transfer of unappropriated retained earnings to retained earnings
appropriated for contingencies.

1. What is the goodwill arising from the acquisition of the investment in associate?

a. 1,400,000
b. 700,000
c. 500,000
d. 0

2. What is the investment income to be reported by the investor for 2011?


a. 1,200,000
b. 1,020,000
c. 840,000
d. 750,000

3. What is the carrying amount of the investment in associate December 31, 2011?

a. 3,200,000
b. 3,690,000
c. 4,190,000
d. 3,590,000

Solution 23-32

Question 1 Answer c

Acquisition cost 3,200,000


Net assets acquired (30% x 6,000,000) (1,800,000)
Excess of cost 1,400,000
Excess attributable to equipment (30% x 3,000,000) (900,000)
Goodwill 500,000

Question 2 Answer c

Net income for 2011 4,000,000


Unrealized profit on 12/31/2011 inventory (600,000)
Adjusted net income 3,400,000

Investor's share (30% x 3,400,000) 1,020,000


Depreciation of Equipment (900,000/5) (180,000)
Investment income 840,000

Question 3 Answer c

Acquisition cost 3,200,000


Investment income 840,000
Cash dividend (450,000)
Revaluation surplus 600,000
Carrying amount - December 31, 2011 4,190,000
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\
CHAPTER 24
FINANCIAL ASSET AT AMORTIZED COST

PROBLEM 24-1 (AICPA Adpated)


On October 1, 2011, Yost Company purchased P 4,000 of the P 1,000 face value, 10% bonds of Pell Company for
P 4,400,000 which includes accrued interest of P 100,000. The bonds, which mature on January 1, 2018, pay interest
semiannually on January 1 and July 1. Yost uses the straight line method of amortization and appropriately recorded the
bonds as held to maturity. What is the carrying amount of the bonds in the December 31, 2011 statement of financial
position?
a. 4,284,000
b. 4,288,000
c. 4,300,000
d. 4,400,000

Solution 24-1 answer b


October 1, 2011 to January 1, 2018 = 75 months
Cost ( 4,400,000-100,000) 4,300,000
Face Value 4,000,000
Premium 300,000
Monthly amortization (300,000/75) 4,000

Cost 4,300,000
Amortization of premium for October 1
to December 31, 2011 (4,000 x 3) -12,000
Carrying amount- December 31, 2011 4,288,000

Under PFRS 9, the term "held to maturity" is now eliminated. The equivalent term is
"financial asset at amortized cost"

PROBLEM 24- 2 (AICPA Adapted)


Jent Company purchased bonds at a discount of P 100,000. Subsequently, Jent sold these bonds at a premium of
P 140,000. During the period that Jent held this long-term investment, amortization of the discount amounted to
P 20,000. What amount should Jent report as gain on the sale of bonds?

a. 120,000
b. 220,000
c. 240,000
d. 260,000

Solution 24-2 answer b

Premium on sale of bonds 140,000


Unamortized discount ( 100,000- 20,000) 80,000
Gain on sale of bonds 220,000

PROBLEM 24-3 (IAA)


On October 1, 2011, Danica Company purchased P 2,000,000 face value 12% bonds for 98 plus accrued interest and
and brokerage fee. Interest is paid semiannually on January 1 and July 1. Brokerage fee for this transaction was
P 50,000. At what amount should this acquisition of bonds be recorded.

a. 1,960,000
b. 2,010,000
c. 2,020,000
d. 2,070,000

Solution 24-3 answer b

Purchase price (2,000,000 x 98) 1,960,000


Brokerage fee 50,000
Total acquisition cost 2,010,000

The accrued interest of P60,000 (2,000,000 x 12% x 3/12) from July 1 to October 1, 2011 is not part of the cost of
investment.Although, this amount is part of the payment for the bond investment.

PROBLEM 24-4 (IAA)


On January 1, 2011, Venus Company purchased 10% bonds with face value of P5,000,000 plus transaction cost of
P101,500 with a yield rate of 8%. The bonds mature on December 31, 2015 and pay interest annually on December 31.
The carrying amount of the investment on December 21, 2011 using the effective interest method is P5,333,620. What
is the initially acquisition cost of the bond investment?

a. 5,401,500
b. 5,300,000
c. 5,198,500
d. 5,398,500

Solution 24-4 answer a

Carrying amount - December 31, 2011 5,333,620


Add: Nominal Interest ( 5,000,000 x 10%) 500,000
Total 5,833,620
Divide by ( 100+ 8%) 108%
Total acquisition cost 5,401,500

PROBLEM 24-5 (AICPA Adapted)


On January 1, 2011, Carr Company purchased Fay Company 9% bonds with a face amount of P4,000,000 for P3,756,000
to yield 10%. The bonds are dated January 1, 2011, mature on December 21, 2020, and pay interest annually on December 31.
Carr uses the interest method of amortizing bond discount. What total amount should Carr report as interest revenue from the
bond investment for 2011?

a. 400,000
b. 375,600
c. 360,000
d. 344,400

Solution 24-5 answer b

Interest income for 2011 (3,756,000 x 10%) 375,600

Under the interest method, the interest income is computed by multiplying the carryong amount of the bond investment by the
effective rate.

PROBLEM 24-6 (AICPA Adapted)


On July 1, 2011, Cody Company paid P1,198,000 of 10%, 20-year bonds with a face amount of P1,000,000. Interest is
paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody uses the effective interest method to recogniz
interest income from this long-term investment.
What should be reported as the carrying amountof the bonds in the December 31, 2011 statement of financial position?

a. 1,207,900
b. 1,198,000
c. 1,195,920
d. 1,193,050

Solution 24-6 answer c


Interest Interest Premium Carrying
Date received income amortization amount
7/1/2011 1,198,000
12/31/2011 50,000 47,920 2,080 1,195,920

Interest received = Face value x nominal rate


= 1,000,000 x 10% x 6/12
= 50,000

Interest income = Carrying amount x effective rate


= 1,198,000 x 8% x 6/12
= 47,920

The premium amortization is the difference between the interest received and the interest income and is deducted from the
carrying amount to arrive at the balance.
PAS 39, paragraph 46, requires the use of the effective interest method of amortizing discount or premium.

PROBLEM 24-7 (AICPA Adapted)


On January 1, 2011. Purl Company purchased as a long-term investment P5,000,000 face value of Shaw Company's 8% bonds f
P4,562,000.The bonds were purchased to yield 10% interest annually on December 31. Purl uses the interest method of amortiz
What is the carrying amount of the investment (rounded to nearest P100) on December 31, 2012?

a. 4,680,000
b. 4,662,000
c. 4,618,000
d. 4,562,000

Solution 24-7 answer a

Carrying amount- January 1, 2011 4,562,000


Amortization of discount for 2011
Interest income(4,562,000x10%) 456,200
Interest received(5,000,000x8%) 400,000 56,200
4,618,200

Carrying amount- December 31, 2011


Amortization of discount for 2012:
Interest income(4,618,200x10%) 461,820
Interest received(5,000,000x8%) 400,000 61,820
Carrying amount- December 31, 2012 4,680,020

PROBLEM 24-8 (AICPA Adapted)


On July 1,2011, York Company purchased as a long-term investment P1,000,000 of Park Company's 8% bonds for P946,000,
including accrued interest of P 40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2017,
and pay interest annually on January 1. York uses the effective interest method of amortization. On December 31,2011, what
carrying amount should be reported as investment in bonds?

a. 911,300
b. 916,600
c. 953,300
d. 960,600

Solution 24-8 answer a

Purchase price 946,000


Less: accrued interest 40,000
Cost of investment 906,000
Amortization of discount from July 1 to December 31,2011:
Interest income (906,000x10%x 6/12) 45,300
Interest received (1,000,000x8%x6/12) 40,000 5,300
Carrying amount- December 31, 2011 911,300

PROBLEM 24-9 (IAA)


On January 1, 2011, Portugal Company purchased bonds with face value of P8,000,000 for P7,679,000 as a long term investme
stated rate on the bonds is 10% but the bonds are acquired to yield 12%. The bonds mature at the rate of P2,000,000 annually ev
December 31. The entity uses the effective interest method of amortizing discount.
What carrying amount should Portugal Company report as investment in bonds on December 31, 2011?

a. 5,759,250
b. 7,759,250
c. 7,800,480
d. 5,800,480

Solution 24-9 answer d

Interest income (7,679,000 x 12%) 921,480


Interest received (8,000,000 x 10%) 800,000
Discount amortization 121,000

Cost 7,679,000
Discount amortization 121,480
Annual installment -2,000,000
Carrying amount-December 31,2011 5,800,480

PROBLEM 24-10 (AICPA Adapted)


On July 1,2011, East Company purchased as a long term investment P5,000,000 face amount,8% bonds of Rand Company for
P4,615,000 to yield 10% per year. The bonds pay interest semiannually on January 1 and July 1. On December 31,2011, what am
should be reported as interest receivable?

a. 184,000
b. 200,000
c. 230,750
d. 250,000

Solution 24-10 answer b

Accrued interest receivable from July 1 to


December 31, 2011 (5,000,000 x 8% x 6/12) 200,000

The nominal rate of 8% is used in computing accrued interest.


PROBLEM 24-11 (AICPA Adapted)
On July 1, 2011, Pell Company purchased Green Company ten year, 8% bonds with a face amount of P5,000,000 for P4,200,00
The bonds mature on June 30,2019 and pay interest semiannually on June 30 and December 31. Using the interest method, Pell
recorded bond discount amortization of 18,000 for the six months ended December 31, 2011. What amount should be reported a
interest income for 2011?

a. 168,000
b. 182,000
c. 200,000
d. 218,000

Solution 24-11 answer d

Interest received from July 1 to December 31,2011


(5,000,000 x 8% x 6/12) 200,000
Bonds discount amortization for six months 18,000
Interest income for 2011 218,000

PROBLEM 24-12 (AICPA Adapted)


On January 1,2011, Dean Company purchased ten-year bonds with a face value of P1,000,000 and a stated interest rate of 8% p
payable semiannually July 1 and January 1. The bonds were acquired to yield 10%. Present value factors are as follows:

Present value of 1 for 10 periods at 10% 0.386


Present value of 1 for 20 periods at 5% 0.377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity of 1 for 20 periods at 5% 12.462

What is the purchase price of the bonds?

a. 1,124,620
b. 1,100,000
c.1,000,000
d. 875,380

Solution 24-12 answer d

Semiannually nominal interest (1,000,000 x 4%) 40,000


Semiannually effective interest (1,000,000 x 5%) 50,000
Difference 10,000
Multiply by present value of annuity of 1 for 20 periods at 5% 12,462
Discount 124,620
The amount of P124,620 is a discount because the effective rate is higher than nominal rate.
Face value 1,000,000
Discount 124,620
Puchase price 875,380

Another approach

PV of principal (1,000,000 x .377) 377,000


PV of semiannually interest payments
(40,000 x 12.462) 498,480
Total present value 875,480

There is a difference of P100 because of rounding of present value factor.

PROBLEM 24-13 (IAA)


On January 1, 2011, Russia Company purchased 5-year bonds with face value of P8,000,000 and stated interest of 10% per year
payable semiannually January 1 and July 1. The bonds were acquired to yield 8%. Present value factors are:

Present value of an annuity of 1 for 10 periods at 5% 7.72


Present value of an annuity of 1 for 10 periods at 4% 8.11
Present value of 1 for 10 periods at 4% 0.6756

1. What is the purchase price of the bonds?

a. 7,382,400
b. 8,617,600
c. 8,648,800
d. 7,351,200

2. What is the carrying amount of the bond investment on December 31, 2011?

a. 8,594,752
b. 8,540,704
c. 8,538,542
d. 8,302,848

Solution 24-13

Question 1 answer c

Semiannual nominal interest (8,000,000 x 5%) 400,000


Semiannual effective interest (8,000,000 x 4%) 320,000
Difference 80,000
Multiply by PV of annuity 1 for 10 periods at 4% 8.11
Premium 648,800
Face value 8,000,000
Purchase price 8,648,800

The amount of P648,800 is premium because the effective rate is lower than nominal rate.

Another approach

PV of principal (8,000,000 x .6756) 5,404,800


PV of semiannually interest payments (400,000 x 8.11) 3,244,000
Purchase price or present value of bonds 8,648,800

Question 2 answer c

Acquisition cost- January 1, 2011 8,648,800


Amortization of premium- 1/1/2011 to 6/30/2011:
Interest received 400,000
Interest income (4% x 8,594,752 343,790 56,210
Carrying amount- December 31, 2011 8,538,542

PROBLEM 24-14 (ACP)


On January 1, 2011, Tagbilaran Company purchased bonds with face value of P2,000,000. The bonds are dated January 1,2011
mature on January 1, 2015. The interest on the bonds is 10% payable semiannually every June 30 and December 31.. The preva
market rate of interest on the bonds is 12%. The present value of 1 at 6% for 8 periods is .63, and an ordinary annuity of 1 at 6%
8 periods is 6.21. What is the present value of the bonds on January 1, 2011?

a. 1,881,000
b. 1,888,000
c. 1,360,000
d. 1,480,000

Solution 24-14 answer a

The term of the bonds is 4 years and the interest is payable semiannually. Therefore, there are 8 interest periods.

PV of principal (2,000,000 x .63) 1,260,000


PV of semianual interest payments (100,000 x 6.21) 621,000
Present value or market price of bonds 1,881,000

PROBLEM 24-15(IAA)
On January 1, 2011, Arabian Company purchased serial bonds with face value of P3,000,000 and stated 12% interest payable an
every December 31. The bonds are to be held as financial asset at amortized cost with a 10% effective yield. The bonds mature
annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for:
One period 0.91
Two periods 0.83
Three periods 0.75

What is the present value of the serial bonds on January 1, 2011?

a. 3,106,800
b. 3,060,000
c. 3,045,000
d. 3,149,000

Solution 24-15 answer a

Principal payment 1,000,000


Interest payment (3,000,000 x 12%) 360,000
Total payment on December 31,2012 1,360,000

Principal payment 1,000,000


Interest payment (2,000,000 x 12%) 240,000
Total payment on December 31, 2012 1,240,000

Principal payment 1,000,000


Interest payment (1,000,000 x 12%) 120,000
Total payment on December 31, 2013 1,120,000

December 31, 2011 payment (1,360,000 x .91) 1,237,600


December 31, 2012 payment (1,240,000 x .83) 1,029,200
December 31, 2013 payment (1,120,000 x .75) 840,000
Total present value on January 1, 2011 3,106,800

PROBLEM 24-16 (ACP)


On January 1, 2011, Cambodia Company purchased bonds with face value of P5,000,000 at a cost of P4,700,000 to be held as
financial asset at amortized cost. The stated interest is 10% payable annually every December 31. The bonds mature in 4 years o
January 1, 2015.

What amount of interest income should be reported by Cambodia Company for the year ended December 31, 2011 under the
effective interest method?

a. 500,000
b. 470,000
c. 517,000
d. 562,590
Solution 24-16 answer d

Interest income (4,700,000 x 11.97%) 562,590

The bonds are purchased at a discount and therefore, the effective rate must be higher than the 10% nominal rate. The effective
determine through the interpolation process.

The PV of 1 at 11% for 4 periods is .6587, and the PV of an annuity of 1 at 11% for 4 periods is 3.1024. The present value of th
bond using the interest rate of 11% is as follows:

PV of principal (5,000,000 x .6587) 3,293,500


PV of annual interest payments (500,000 x 3.1024) 1,551,000
Total present value cash flows 4,844,000

The PV of 1 at 12% for 4 periods is .6355, and the PV of an annuity of 1 for 4 periods is 3.0373. The present value of the bonds
using the interest rate of 12% is as follows:

PV of principal (5,000,000 x .6355) 3,177,500


PV of annual interest payments (500,000 x 3.0373) 1,518,650
Total present value cash flows 4,696,150

Using a rate of 11% the present value of the bonds is P4,844,700. The cost of P4,700,000 is lower than P4,844,700. This mean
the effective rate is higher than 11%.

Using a rate of 12% the present value of the bonds is P4,696,150. The cost of P4,700,000 is higher than P4,696,150. This mean
the effective rate is lower than 12%.

In conclusion, the effective rate is between 11% and 12%. Thus, the questions is how much more than 11% and how much less
12%?

The effective rate is computed using the interpolation process as follows:


Let X = the effective rate
X= 4,700,000
11%= 4,844,700
12%= 4,696,150

Accordingly, the interest differential is determined as follows:

X - 11%
12% - 11%

The present values applicable to the rates are then substituted.

4,700,000 - 4,844,700
4,646,150 - 4,844,700

144700 =
0.97
148,550

Thus, the effective rate is 11% plus the difference of .97 or 11.97%.
ds of Pell Company for
ry 1, 2018, pay interest
appropriately recorded the
1 statement of financial

ds at a premium of
count amounted to
us accrued interest and
is transaction was

not part of the cost of

us transaction cost of
annually on December 31.
hod is P5,333,620. What

P4,000,000 for P3,756,000


nterest annually on December 31.
port as interest revenue from the

nt of the bond investment by the

of P1,000,000. Interest is
ective interest method to recognize

ment of financial position?

ome and is deducted from the


nt or premium.

ue of Shaw Company's 8% bonds for


uses the interest method of amortization.

mpany's 8% bonds for P946,000,


bonds mature on January 1, 2017,
n. On December 31,2011, what
7,679,000 as a long term investment. The
the rate of P2,000,000 annually every

8% bonds of Rand Company for


1. On December 31,2011, what amount
mount of P5,000,000 for P4,200,000.
31. Using the interest method, Pell
What amount should be reported as

0 and a stated interest rate of 8% per year


alue factors are as follows:
and stated interest of 10% per year
ue factors are:
e bonds are dated January 1,2011 and
e 30 and December 31.. The prevailing
and an ordinary annuity of 1 at 6% for

e 8 interest periods.

and stated 12% interest payable annually


effective yield. The bonds mature at an
cost of P4,700,000 to be held as
31. The bonds mature in 4 years or

d December 31, 2011 under the


e 10% nominal rate. The effective rate is

is 3.1024. The present value of the

73. The present value of the bonds

lower than P4,844,700. This means that

higher than P4,696,150. This means that

more than 11% and how much less than


CHAPTER 25
INVESTMENT PROPERTY

PROBLEM 25-1 (IFRS)


Galore Company ventured into construction of a condominium in Makati which is rated as the largest state-if-the-art
structure. The entity's board of directors decided that instead of selling the condominium, the entity would hold this
property for purposes of earning rentals by letting out space to business executives in the area.

The construction of the condominium was completed and the property was placed in service on January 1, 2011. The
cost of construction was P50,000,000. The useful life of the condominium is 25years and its residual value is P5,000,000.
An independent valuation expert provided the following fair value at each subsequent year-end:

December 31,2011 55,000,000


December 31,2012 53,000,000
December 31,2013 60,000,000

1. Under the cost model, what amount should Galore Company report as depreciation of investment property for 2011?

a. 1,800,000
b. 2,000,000
c. 2,200,000
d. 0

2. Under the fair value method, what amount should Galore Company recognize as gain from change in fair value in 2011?

a. 5,000,000
b. 3,000,000
c. 7,000,000
d. 0

Solution 25-1
Question 1 Answer a

Cost of investment property 50,000,000


Residual value -5,000,000
Depreciable amount 45,000,000
Annual depreciation (45,000,000/25) 1,800,000

Question 2 Answer a

Fair value-December 31, 2011 55,000,000


Cost- January 1, 2011 50,000,000
Gain from change in fair value in 2011 5,000,000
The entry to recognize the gain on December 31, 2011 is:
Investment property 5,000,000
Gain from change in fair value

Fair value- December 31, 2012 53,000,000


Carrying amount- December 31, 2011 55,000,000
Loss from change in fair value in 2012 -2,000,000

The entry to recognize the loss on December 31, 2012 is:


Loss from change in fair value 2,000,000
Investment property

Fair value- December 31, 2013 60,000,000


Carrying amount- December 31, 2012 53,000,000
Gain from change in fair value in 2013 7,000,000

The entry to recognize the gain on December 2013 is:


Investment property 7,000,000
Gain from change in fair value

Note that if the investment property is accounted for under the fair value model, no depreciation is recognized.

PROBLEM 25-2 (IFRS)


Eragon Company and its subsidiaries own the following properties that are accounted for in accordance with PAS 40.

Land held by Eragon for undetermine use


A vacant building owned by Eragon and to be
leased out under an operating lease
Property held by a subsidiary of Eragon, a real
estate firm, in the ordinary course of business
Property held by Eragon for use in production
Building owned by a subsidiary of Eragon and
for which the subsidiary provideds security
and maintenance services to the leases
Land leased by Eragon to subsidiary under an
operating lease
Property under construction for use as investment
property
Land held for future factory site
Machinery leased out by Eragon to an unrelated
party under an operating lease

What is the total investment property that should be reported in the consolidated statement of financial position of the parent
and its subsidiaries?
Solution 25-2 Answer b

Land for undetermined use


Vacant building to be leased out under an operating lease
Building owned and for which the subsidiary provides
security and maintenance services to the lessees
Property under construction for use as
investment property
Total investment property

The property held by a subsidiary in the ordinary course of business is included in inventory.
The property held for use in production is owner-occupied property and therefore part of property, plant and equipment.

The land leased by the parent to the subsidiary under an operating lease is owner-occupied property for the purposes of consolid
financial statements. However, from the perspective of separate financial statements of the parent, the land is an investment p

Under the amended PAS 40, property under construction for use as investment property is now considered investment property.

The land held for future factory site is owner-occupied property and therefore included in property, plant and equipment.

The machinery leased out to an unrelated party is owner-occupied property because investment property includes only land and
building and not movable property, like machinery.

PROBLEM 25-3 (IFRS)


Bona Company purchased an investment property on January 1, 2009 for P2,200,000. The property had a useful life of 40 years
and on December 31, 2011 had a fair value of P3,000,000. On December 31, 2011, the property was sold for the proceeds of
P2,900,000. Bona Company uses the cost model to account for the investment property.

What is the gain or loss to be recognized for the year ended December 31, 2011 regarding the disposal of the property?

a. 865,000 gain
b. 810,000 gain
c. 100,000 gain
d, 700,000 gain

Solution 25-3 Answer a

Cost- January 1, 2009 2,200,000


Accumulated depreciation (2,200,000/40 x 3) 165,000
Carrying amount-December 31, 2011 2,035,000

Sales price 2,900,000


Carrying amount-December 31, 2011 2,035,000
Gain on disposal of property 865,000
PROBLEM 25-4 (IFRS)
Dayanara Company owns three properties which are classified as investment properties. Details of the properties are as follows:
Initial Fair Value Fair Value
cost 12/31/2011 12/31/2012

Property 1 2,700,000 3,200,000 3,500,000


Property 2 3,450,000 3,050,000 2,850,000
Property 3 3,300,000 3,850,000 3,600,000

Each property was acquired in 2008 with a useful life of 25 years. The entity's accounting policy is to be use the fair value met
investment properties.

What is the gain or loss to be recognized for the year ended December 31, 2012?

a. 189,000 loss
b. 150,000 loss
c. 300,000 gain
d. 450,000 loss

Solution 25-4 Answer b

Fair value Fair Value Gain(loss)


12/31.2011 12/31/2012
Property 1 3,200,000 3,500,000 300,000
Property 2 3,050,000 2,550,000 (200,00)
Property 3 3,850,000 3,600,000 (250,000)
Net loss from change in fair value (150,000)

PROBLEM 25-5 (IFRS)


Mikka company acquired a building on january 1, 2011 for P9,000,000. At that date the building had a useful life of 30 years. O
31, 2011, the fair value of the building was P9,600,000 and on December 31,2012, the fair value is P9,800,000. The building w
as an investment property and accounted for under the cost model.

What amounts should be carried in the statement of financial positions on December 31, 2012 and recognized in profit or loss f
Carrying Amount Profit or loss
a. 8,400,000 300,000 expense
b. 9,000,000 No gain/loss
c. 9,800,000 200,000 gain
d. 8,700,000 300,000 expense

Solution 25-5 Answer a


Cost- January 1,2011 9,000,000
Accumulated depreciation (9,000,000/30 x 2) 600,000
Carrying amount- December 31,2012 8,400,000
Depreciation expense for 2012 (9,000,000/30) 300,000

Problem 25-6 (IFRS)


Crosswind Company has a single investment property which had an original cost of P5,800,000 on January 1, 2009. On Decemb
its fair value was P6,000,000 and on December 31, 2012 it had a fair value of P5,900,000. On acquisition, the property has a us
years.
What should be the expense recognized in Crosswind's profit or loss or the year ended December 31, 2012 under the fair value
and cost model?

Fair Value model Cost model


a. 147,500 145,000
b.100,000 145,000
c. 145000 100,000
d. 100,000 147,500

Fair Value Model

Fair value-December 31, 2012 5,900,000


Fair value-December 31, 2011 6,000,000
Loss from change in fair value -100,000

Cost Model
Depreciation expense for 2012(5,800,000/40) 145,000

Problem 25-7 (IFRS)


Paradise Company's accounting policy with respect to investment properties is to measure them at fair value at the end of each r
period. One of the investment properties are measured at P5,000,000 on December 31, 2011.
The property had been acquired on January 1, 2011 for a total of P7.600,000, made up of P6,900,000 paid to the vendor, P300,
local authority as a property transfer tax and P 400,000 paid to professional advisers. The useful life of the property is 40 years.

What is the amount of gain to be recognized in profir or loss for the year ended December31, 2011 in respect of the investment

a. 400,000
b. 700,000
c. 800,000
d. 590,000

Solution 25-7 Answer a

Fair value 8,000,000


Acquisition cost 7,600,000
Gain from change to fair value 400,000

PROBLEM 25-8 (IFRS)


Rhino Company's a real estate, has a building with a carrying amount of P20,000,000 on December 31, 2011. The building is u
of the entity's administrative staff. On December 31, 2011, the original building had a fair value of P35,000,000. On December
Rhino also had land that was held in the ordinary course of its business. The land had a carrying amount of P10,000,000 and fa
P15,000,000 on December 31, 2011. On such date, Rhino decided tto hold the land for capital appreciation. . Rhino's policy is
investment property at fair value. On December 31, 2011, what amount should Rhino recognize in revaluation surplus and pr
respectively?

a. 5,000,000 and 15,000,000


b. 15,000,000 and 0
c. 15,000,000 and 5,000,000
d. 5,000,000 and 0

Solution 25-8 Answer c

Fair value of building -Dcember 31,2011 33,000,000


Carrying amount -December 31,2011 -20,000,000
Revaluation surplus 15,000,000

PAS 40, paragraph 61, provides that if there is a transfer from owner occupied to investment property to be carried at a fair val
the difference between fair value and carrying amount is accounted for as revaluation of property, plant and equipment.

Fair value of land - December 31, 2011 15,000,000


Carrying amount of land- December 31, 2011 -10,000,000
Gain on reclassification 5,000,000

PAS 40 paragraph 63, provides that if there is a transfer from inventory to investment property to be carried at fair value, the dif
between fare value and carrying amount is recognized in profit or loss.
t state-if-the-art
would hold this

ary 1, 2011. The


value is P5,000,000.

property for 2011?

e in fair value in 2011?


5,000,000

2,000,000

7,000,000

recognized.

nce with PAS 40.

5,000,000

3,000,000

2,000,000
4,000,000

1,500,000

2,500,000

6,000,000
3,500,000

1,000,000

cial position of the parent


5,000,000
3,000,000

1,500,000
6,000,000

15,500,000

plant and equipment.

or the purposes of consolidated


the land is an investment property.

dered investment property.

lant and equipment.

erty includes only land and

had a useful life of 40 years


sold for the proceeds of

al of the property?
e properties are as follows:

o be use the fair value method for

a useful life of 30 years. On December


9,800,000. The building was classified

cognized in profit or loss for 2012?


anuary 1, 2009. On December 31, 2011,
ition, the property has a useful life of 40

2012 under the fair value model

ir value at the end of each reporting

0 paid to the vendor, P300,000 paid to


of the property is 40 years.

n respect of the investment property?


31, 2011. The building is used as officers
35,000,000. On December 31, 2011. Rhino
ount of P10,000,000 and fair value of
ciation. . Rhino's policy is to carry all
evaluation surplus and profir or loss,

y to be carried at a fair value,


ant and equipment.

carried at fair value, the difference


Chapter 26
FUND AND OTHER INVESTMENTS

Problem 26-1 (AICPA Adapted)


The following information relates to a bond sinking fund that Fall Company placed in trust as
required by the underwriter:
Bond sinking fund, January 1, 2011 4,500,000
Additional Investment in 2011 900,000
Dividends on invetsments 150,000
Interest Revenue 300,000
Administration costs 50,000
Carrying amount of bonds payable 8,000,000

What is the carrying amount of the bond sinking fund on December 31. 2011?
a. 5,850,000
b. 5,800,000
c. 5,750,000
d. 5,400,000

Solution 26-1 Answer b.


Sinking fund - January 1,2011 4,500,000
Add: Additonal investment in 2011 900,000
Dividends on investment 150,000
Interest revenue 300,000 1,350,000
Total 5,850,000
less: Administration costs 50,000
Sinking fund - December 31,2011 5,800,000

The income earned on the sinking fund investments should form part of the sinking fund balance.

Problem 26-2 (PHILCPA Adapted)


In January 2011, Cameron Company established a sinking fund in connection with its issue
of bonds due in 2013. A bank was appointed as independent trustee of the fund. On
December 31,2011 the trustee held P364,000 cash in the sinking fund account representing
P300,000 in annual deposits to the fund, and P64,000 of interest earned in Cameron's
statement of financial position on December 31, 2011?

a. No part of the sinking fund should appear in Cameron's statement of financial position.
b. P64,000 should appear as a current asset
c. P364,000 should appear as a current asset
d. P364,000 should appear as a noncurrent asset

Solution 26-2 Answer d


The annual deposits to the fund and the interest earned on those deposits should form part of
the sinking fund to be classified as noncurrent asset.
Problem 26-3 (AICPA Adapted)
On March 15.2011, Ashe Company adopted a plan to accumulate P5,000,000 by September
1, 2015. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10%
compounded annually. Ashe made the first deposit on September 1,2011. Future value factors
are as follows:
Future Value of P1 at 10% for 4 periods 1.46
Future Value of an ordinary annuity of P1 at 10% for 4 periods 4.64
Future Value of an annuity of 1 in advance at 10% for 4 periods 5.11

What is the annual deposit to the fund ?


a. 1,250,000
b. 1,077,500
c. 978,500
d. 730,000

Solution 26-3 Answer c


Annual deposit (5,000,000/5.11) 978,500 (rounded)

The annual deposit is computed by dividing the amount of the fund to be accumulated by the
future value factor. In the case, the future value factor of an annuity in advance is used because
the annual deposit is made at the beginning of each year of the four year period.

Problem 26-4 (AICPA Adopted)


On January 1, 2011, Beal Company adopted a plan to accumulate funds for a new plant
building to be erected beginning Juy 1,2016, at na estimated cost of P6,000,000. Beal intends
to make five equal annual deposits in a fund that will earn interest at 8% compounded annually.
The first deposit is made on July 1,2011. Present value and future value factors are as follows:
Present Value of 1 at 85 for 5 periods 0.68
Present Value of 1 at 8% for 6 periods 0.63
Future Value of an ordinary annuity of 1 at 8% for 5 periods 5.87
Future Value of an annuity of 1 in advance at 8% for 5 periods 6.34

What is the annual deposit to the fund?


a. 1,022,150
b. 816,000
c. 946,400
d. 756,000

Solution 26-4 Answer c


Annual Deposit (6,000,000/6.34) 946,400 (rounded)
The annual deposit is made at the beginning of each year of the five-year period. Thus, the future
value of an annuity of 1 in advance is used.

Problem 26-5 (IAA)


On Jnauary 1, 2011, Mandaue Company adopted a plan to accumulate P5,000,000 by
January 1, 2016. Mandaue plans to make 5 eaual annual annual deposits that will earn interest
at 9% compounded annually. Mandaue made the first deposit on December 31, 2011. The
future value of an ordinary annuity of 1 at 9% for 5 periods is 5.98, and the future value of an
annuity due of 1 at 9% for 5 periods is 6.52. What amount must be deposited annually at the
compound interest to accumulate the desired amount of P5,000,000?
a. 766,871
b. 836,120
c. 664,894
d. 609,756

Solution 26-5 Answer b


Annual deposit (5,000,000/5.98) 836,120

The future value of an ordinary annuity of 1 is used because the annual deposit is made
at the end of each year of the 5-year period.

Problem 26-6 (IAA)


Cebu Company made an investment of P5,000,000 at 10% per annum compounded annually
for 6 years.What is the amount of the investment on the date of maturity? Round off future
value factor to two decimal places.
a. 8,850,000
b.8,050,000
c. 9,750,000
d. 5,500,000

Solution 26-6 Answer a


Principal amount 5,000,000
Multiply by future value of 1 for 6 periods at 10% 1.77
Future value at maturity 8,850,000

Problem 26-7 (IAA)


Mactan Company made investment for 5 years at 12% per annum compounded semiannually
to equal P7,160,000 on the date of maturity. What amount must be deposited now at the
compound interest to provide the desired sum? Round off future value factor to two decimal
places.
a. 4,000,000
b. 4,068,180
c. 4,236,680
d. 3,768,420

Solution 26-7 Answer a


Future Value at maturity 7,160,000
Divide by future value of 1 for 10 periods at 6% 1.79
Initial Investment 4,000,000
The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are 10
interest periods at 6%.
Problem 26-8 (AICPA Adopted)
Ball Company purchased a P1,000,000 ordinary life insurance policy on its present. Ball
Company is the beneficiary under the life insurance policy. The policy year and Ball's accounting
year coincide. Additional data available for the year ended December 31,2011 are as follows:
Cash surrender value, January 1 43,500
Cash surrender value, December 31 54,000
Annual advance premium paid January 1 20,000
Dividend received July 1 3,000

What amount should be reported as life insurance expense for 2011?


a. 6,500
b. 9,500
c. 17,000
d. 20,000

Solution 26-8 Answer a


Annual premium paid 20,000
Less: Increase in cash surrender value 10,500
(54,000-43,500)
Dividend received 3000 13,500
Life insurance expense 6,500

The dividend received is not considered an income but a reduction of life insurance expense.

Problem 26-9 (AICPA Adopted)


Chain Company purchased a P1,000,000 life insurance policy on its president, of which
Chain is the beneficiary Information regarding the policy for the year ended December 31,2011
followes:
Cash surrender value, January 1 87,000
Cash surrender value, December 31 108,000
Annual advance premium paid January 1 40,000
During 2011, dividend of P6000 was applied to increase cash surrender value of the policy.

What amount should Chain report as life insurance expense for 2011?
a. 40,000
b. 25,000
c. 19,000
d. 13,000

Solution 26-9 Answer c


Premium paid 40,000
Less: Increase in cash surrender value
(108,000-87,000) 21,000
Life insurance expense 19000

The dividend of P6,000 is not deducted anymore because it is already part of the increase
in cash surrender value.

Problem 26-10 (IAA)


Slovenia Company insured the life insurance of its President for P2,000,000, the entity being
the beneficiary of the ordinary life insurance policy. The annual premium is P80,000 and the
policy is dated January 1, 2008. The cash surrender value are:
December 31, 2010 15,000
December 31,2011 19,000
The entity follows the calendar year as its fiscal period. The Presidetnt died on October 1,
2011 and the policy is settled on December 31, 2011.

1. What amount should Slovenia Company report as gain on life insurance settlement in its 2011
income statement?
a. 1,962,000
b. 2,000,000
c. 1,961,000
d. 1,981,000

2. What amount should Slovenia Company report as life insurance expense for 2011
a. 80,000
b.60,000
c. 77,000
d. 57,000
Solution 26-10
Question 1 Answer a
Cash surrender value-December 31,2010
Increase in CSV from January 1 to October 1,2011 15,000
(4,000 x 9/12) 3000
cash surrender value- October 1,2011 18,000

Face of policy 2,000,000


Cash surrender value -18,000
Unexpired premium (80,000 x 3/12) -20,000
Gain on life insurance settlement 1,962,000 1,962,000

Question 2 An Answer d
Annual premium piad on January 1, 2011 80,000
Unexpired premium on October 1,2011 (20,000)
Increase in CSV from January 1 to October 1, 2011 (3000)
Life insurance expense for 2011 57,000
Problem 26-11 (ACP)
The following accounts appear on the adjusted trial balance of Grand Company on December
31,2011:
Petty cash fund 10,000
Payroll fund 100,000
Sinking fund cash 500,000
Sinking fund securities 1,000,000
Accrued interest receivable- sinking fun securities 50,000
Plant expansion fund 600,000
Cash surrender value 150,000
Investment property 3,000,000
Advances to subsidiary 200,000
Investment in joint venture 2,000,000

What total amount should be reported as noncurrent investements on December 31, 2011?
a. 7,500,000
b. 4,500,000
c. 7,450,000
d. 2,300,000

Solution 26-11 Answer a


All accounts are noncurrent investments except the petty cash fund and payroll fund.
n October 1,

t in its 2011

?
Chapter 27
DERIVATIVES

Problem 27-1 (IAA)

On January 1, 2011, Pasay Company entered into a two-year P3,000,000 variable interest rate
loan at the prevailing rate of 12%. In 2012, the interest rate is equal to the prevailing interest rate
at the beginning of the year.

The principal loan is payable on December 31, 2012 and the interest rate is payable on December
31 of each year. On January 1, 2011, Pasay Company entered into a "receive variable, pay fixed"
interest swap agreement with a speculator bank designated as a cash flow hedge.

The prevailing interest rate on January 1, 2012 is 14% and the present value of 1 at for one period
is .877. What amount should be reported as "interest rate swap receivable" on December 31, 2011?

a. 60,000
b. 52,620
c. 30,000
d. 0

Solution 27-1 Answer b

Since the interest on January 1, 2012 is 14% which is 2% higher than the fixed rate of 12%, it
means that Pasay Company shall receive P60,000 from the bank on December 31, 2012. This
receivable is recognized as a derivative asset on December 31, 2011 at present value of P52,620
as follows:

Interest rate swap receivable 52,620


Unrealized gain -- interest rate swap
(60,000 x .877) 52,620

Problem 27-2 (IAA)

Imus Company received a two-year variable interest rate loan of P5,000,000 on January 1, 2011.
The interest on the loan is payable on December 31 of each year and the principal is to be repaid
on December 31, 2012.

On January 1, 2011, Imus Company entered into "receivable variable, pay fixed" interest rate swap
agreement with a speculator bank as a cash flow hedge.

The interest rate for 2011 is the prevailing interest rate of 10% and the rate in 2012 is equal to the
prevailing rate on January 1,2012. The market rate of interest on January 1, 2012 is 7% and the
present value of 1 at 7% for one period is .935.

What amount should be reported by Imus Company on December 31, 2011 as "interest rate swap
payable"?

a. 150,000
b. 140,250
c. 100,000
d. 0

Solution 27-2 Answer b

Since the interest rate on January 1, 2012 is 7% which is 3% lower than the fixed rate of 10%, it
means that Imus Company shall pay the bank P150,000 on December 31, 2012 or P5,000,000
times 3%.

The interest rate swap payable is recognized as a derivative liability on December 31, 2011
as follows:

Unrealized loss -- interest rate swap 140,250


Interest rate swap payable
(150,000 x .935) 140,250

Problem 27-3 (IAA)

On January 1, 2011, Taal Company received a 5-year variable interest rate loan of P6,000,000 with
interest payment at the end of each year and the principal to be repaid on December 31, 2015. The
interest rate for 2011 is 8% and the rate in each succeeding year is equal to market interest rate on
January 1 of each year.

On January 1, 2011, Taal Company entered into an interest rate swap agreement with a financial ins-
titution to the effect that Taal will receive a swap payment if the interest on January 1 is more than
8% and will make a swap payment if the interest is less than 8%. The swap payments are made at the
end of the year. This interest rate swap agreement is designated as a cash flow hedge.

On January 1, 2012, the market rate of interest is 9%. The present value of an ordinary annuity of 1
at 9% for four periods is 3.24.

On December 31, 2011, what amount should be reported by Taal Company as "interest rate swap
receivable"?

a. 300,000
b. 240,000
c. 194,400
d. 120,000
Solution 27-3 Answer c

The interest rate on January 1, 2012 is 9% which is 1% higher than a fixed rate of 8%. This means
that Taal Company shall receive an annual interest swap payment from the financial institution of
P6,000,000 times 1% or P60,000.

Since the term of the loan is 5 years and one year already expired, Taal Company shall receive P60,000
at the end of 2012 and can expect to receive P60,000 at the end of 2013, 2014 and 2015.

Thus, the present value of the four annual payments of P60,000 is recognized as interest rate swap
receivable on December 31, 2011 or P60,000 times 3.24 equals P194,400.

Problem 27-4 (IAA)

On January 1, 2011, Trece Company borrowed P5,000,000 from a bank at a variable rate interest for
4 years. Interest will be paid annually to the bank on December 31 and the principal is due on Decem-
ber 31, 2014. Under the agreement, the market rate of interest every January 1 resets the variable rate
for that period and the amount of interest is to be paid on December 31. In conjunction with the loan,
Trece Company entered into a "received variable, pay fixed" interest rate swap agreement with another
bank speculator. The interest rate swap agreement was designated as a cash flow hedge. The market
rates of interest are:

January 1, 2011 10%


January 1, 2012 14%
January 1, 2013 12%
January 1, 2014 11%

The PV of an ordinary annuity of 1 is 2.32 at 14% for these periods, 1.69 at 12% for two periods and
0.90 at 11% for one period.

1. What is the "notional" of the interest rate swap agreement?

a. 5,000,000
b. 2,000,000
c. 2,500,000
d. 500,000

2. What is the derivative asset or liability on December 31, 2011?

a. 464,000 asset
b. 464,000 liability
c. 600,000 asset
d. 600,000 liability
3. What is the derivative asset or liability on December 31, 2012?

a. 200,000 asset
b. 200,000 liability
c. 169,000 asset
d. 169,000 liability

4. What is the derivative asset or liability on December 31, 2013?

a. 45,000 asset
b. 45,000 liability
c. 50,000 asset
d. 50,000 liability

Solution 27-4

Question 1 Answer a

The "notional" of the interest rate swap agreement is equal to the principal amount of the loan or
P 5,000,000.

Question 2 Answer a

The interest rate on January 1, 2012 is 14% which is higher than the underlying fixed rate of 10%.
This means that Trece Company shall receive a swap payment from the bank of 4% times P5,000,000
or P200,000 annually for 2012, 2013 and 2014.

The present value of the three annual payments is P200,000 times 2.32 or P464,000. This amount
is recognized on December 31, 2011 as interest rate swap receivable which is a derivative asset.

Question 3 Answer c

The interest rate on January 1, 2013 is 12% which is higher than the underlying fixed rate of 10%.
This means that Trece Company shall receive a swap payment from the bank of 2% times P5,000,000
or P100,000 annually for 2013 and 2014.

The present value of the two annual payments is P100,000 times 1.69 or P169,000. This amount
must be the interest rate swap receivable on December 31, 2012.

Question 4 Answer a

The interest rate on January 1, 2014 is 11% which is higher than the underlying fixed rate of 10%.
This means that Trece Company shall receive a swap payment of 1% times P5,000,000 or P50,000
on December 31, 2014.
The present value of the P50,000 payment is P50,000 times .90 or P45,000. This amount must be
the interest rate swap receivable on December 31, 2013.

Problem 27-5 (IAA)

On January 1, 2011, Camry Company received a two-year P500,000 loan. The loan calls for interest
payments to be made at the end of each year based on the prevailing market value rate at January 1 of
each year. The interest at January 1, 2011 was 10% Fortuner Company also has a two-year P500,000
loan but Fortuner's loan carries a fixed interest rate of 10%.

Camry Company does not want to bear the risk that interest rates may increase in the second year of
the loan. Fortuner Company believes that rates may decrease and it would prefer to have variable debt.
So the two entities enter into an interest rate swap agreement whereby Fortuner agrees to make
Camry's interest payment in 2012 and Camry likewise agree to make Fortuner's interest payment in
2012. The two entities agree to make settlement payments, for the difference only, on December 31,
2012

1. If the interest rate on January 1, 2012 is 8%, what will be Camry's settlement with Fortuner?

a. 10,000 payment
b. 10,000 receipt
c. 5,000 payment
d. 5,000 receipt

2. What amount will Camry report as fair value of the interest rate swap on December 31, 2011?

a. 500,000
b. 10,000
c. 9,259
d. 9,091

Solution 27-5

Question 1 Answer a

Since the interest rate of 8% on January 1, 2012 is lower than the underlying 10% rate, Camry is re-
quired to pay Fortuner the difference of 2% times P500,000 or P10,000.

Question 2 Answer c

Since the P10,000 payment is to be made on December 31, 2012, it is discounted for one year. The
present value of 1 at 8% for one period is .9259. Thus, the fair value of the interest rate swap payable
on December 31, 2011 is P10,000 times .9259 or P9,259.

Problem 27-6 (IAA)


Tagaytay Company is a golf course developer that constructs approximately 5 courses each year. On
January 1, 2011, Tagaytay Company has agreed to buy 5,000 trees on January 31, 2012 to be planted
in the courses it intends to build. In recent years, the price of trees has fluctuated wildly. On January
1, 2011, Tagaytay entered into a forward contract with a reputable bank. The price is set at P500
per tree.

The derivative forward contract provides that if the market price on January 31, 2012 is more than
P500, the difference is paid by the bank of Tagaytay. On the other hand, if the market price is less than
P500, Tagaytay will pay the difference to the bank. This derivative forward contract was designated as
cash flow hedge. The market price on December 31, 2011 and January 31, 2012 is P800. The appro-
priate discount rate is 8% and the present value of 1 at 8% for one period is .926.

On December 31, 2011, what amount should be recognized by Tagaytay Company as derivative asset
or liability?

a. 1,500,000 asset
b. 1,389,000 liability
c. 1,500,000 liability
d. 1,389,000 asset

Solution 27-6 Answer a


The entry on December 31, 2011 is:

Forward contract receivable 1,500,000


Unrealized gain -- forward contract 1,500,000
(5,000 x P300)

The forward contract receivable is the derivative asset.

The amount is not discounted anymore because it is to be received on January 31, 2012.

The entries on January 31, 2012 are:

Tree inventory (5,000 x P800) 4,000,000


Cash 4,000,000
Cash 1,500,000
Forward contract receivable 1,500,000
Unrealized gain -- forward contract 1,500,000
Gain on forward contract 1,500,000

Problem 27-7 (IAA)

Carmona Grill operates a chain of seafood restaurants. On January 1, 2011, Carmona Grill determined
that it will need to purchase 100,000 kilos of tuna fish on February 1, 2012. Because of the volatile
fluctuation in the price of tuna fish, on January 1, 2011, Carmona negotiated a forward contract with
a reputable financial institution for Carmona Grill to purchase 100,000 kilos of tuna fish on February
1, 2012 at a price of P8,000,000 or P80 per kilo, This forward contract was designated as cash flow
hedge.

On December 31, 2011 and February 1, 2012, the market price of tuna fish per kilo is P75. The appro-
priate discount rate is 6% and the present value of 1 at 6% for one period is .943.

What amount should be recognized by Carmona Grill as derivative asset or liability on December 31,
2011?

a. 471,500 asset
b. 500,000 asset
c. 471,500 liability
d. 500, 000 liability

Solution 27-7 Answer d

The entry on December 31, 2011 to recognize the reduction in the market price is:

Unrealized loss -- forward contract 500,000


Forward contract payable (100,000 x P5) 500,000

The forward contract payable is the derivative liability.

Because of the reduction in the market price on Febraury 1, 2012, Carmona Company shall make a
forward contract payment to the financial institution.

The entries on February 1, 2012 are:

Purchases 7,500,000
Cash (100,000 x P75) 7,500,000

Forward contract payable 500,000


Cash 500,000
Loss on forward contract 500,000
Unrealized loss -- forward contract 500,000

Problem 27- 8 (IAA)

Chavacano Company a seafood restaurant. On October 1, 2011, Chavacano determined that it will
need to purchase 50,000 kilos of deluxe fish on March 1, 2012. Because of the volatile fluctuation
in the price of deluxe fish, on October 1, 2011, Chavacano negotiated a forward contract with a re-
putable for Chavacano to purchase 50,000 kilos of deluxe fish on March 1, 2012 at a price of P50
per kilo or P2,500,000. This forward contract was designated as a cash flow hedge. The derivative
forward contract provides that if the market price of deluxe fish on March 1, 2012 is more than P50,
the difference is paid by the bank to Chavacano. On the other hand, if the market price on March 1,
2012 is less than P50, Chavacano will pay the difference to the bank. On December 31, 2011, the
market price per kilo is P60 and on March 1, 2012, the market price is P58. The appropriate discount
rate is 8%. The present value of 1 is 8% for one period is .93.

1. What is the fair value of the derivative asset or liability on December 31, 2011?

a. 500,000 asset
b. 500,000 liability
c. 465,000 asset
d. 465,000 liability

2. What is the fair value of the derivative asset or liability on March 1, 2012?

a. 400,000 asset
b. 400,000 liability
c. 372,000 asset
d. 372,000 liability

Solution 27-8
Question 1 Answer a

Excess of market price over underlying price 12/31/2011


(60 - 50) 10
Forward contract receivable -- 12/31/2011 (50,000 x 10) 500,000

Question 2 Answer a

Excess of market price over underlying price 3/1/2012


(58 - 50) 8
Forward contract receivable -- 3/1/2012 (50,000 x 8) 400,000

Problem 27- 9 (IAA)

Seaside Company operates a five-star hotel. The entity makes very detailed long-term planning. On
October 1, 2011, Seaside Company determined that it would need to purchase 8,000 kilos of Austra-
lian lobster on January 1, 2013.

Because of the fluctuation in the price of the Australian lobster, on October 1, 2011, the entity nego-
tiated a forward contract with a bank for Seaside to purchase 8,000 kilos of Australian lobster on
January 1, 2013 at a price of P9,600,000. The price of Australian lobster is P1,200 per kilo on October
1, 2011. This forward contract was designated as cash flow hedge. The entity is predicting a drop in
worldwide lobster prices between October 1, 2011 and January 1, 2013.
On December 31, 2011, the price of a kilo of Australian lobster is P1,500. On December 31, 2012,
and January 1, 2013, the price of a kilo of Australian lobster P1,000. The appropriate discount rate
throughout this period is 10%. The present value of 1 at 10% for one period is .91.

1. What is the notional value of the forward contract?

a. 12,000,000
b. 9,600,000
c. 7,200,000
d. 4,800,000

2. What is the derivative asset or liability on December 31, 2011?

a. 2,400,000 asset
b. 2,400,000 liability
c. 2,184,000 asset
d. 2,184,000 liability

3. What is the derivative asset or liability on December 31, 2012?

a. 1,600,000 asset
b. 1,600,000 liability
c. 800,000 asset
d. 800,000 liability

Solution 27-9

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 -- December 31, 2011 1,500


Underlying fixed price 1,200

Derivative asset 300

Forward contract receivable (8,000 x 300) 2,400,000

Present value of a 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, 2011
because the amount is collectible on January 1, 2013, one year from December 31, 2011.
The entry to recognized the derivative asset on December 31, 2011 is:

Forward contract receivable 2,184,000


Unrealized gain -- forward contract 2,184,000

Question 3 Answer b

Market price -- December 31, 2012 1,000


Underlying fixed price 1,200

Derivative liability 200

Forward contract payable -- 12/31/2012 (8,000 x 200 ) 1,600,000

The entry to recognized the derivative liability on December 31, 2012 are:

Unrealized loss -- forward contract 1,600,000


Forward contract payable 1,600,000

Problem 27-1- (IAA)

Indang Company requires 40,000 kilos of soya beans each month in its operations. To eliminate the
price risk associated with the purchase of soya beans, on December 1, 2011, Indang entered into a
futures contract as a cash flow hedge to buy 40,000 kilos of soya beans at P150 per kilo on March
1, 2012.

The market price on December 31, 2011 and March 1, 2012 is P160 per kilo. The appropriate discount
rate is 9% and the present value of 1 at 9% for one period is .917.

What amount should be recognized by Indang Company on December 31, 2011 as derivative asset
or liability?

a. 400,000 asset
b. 400,000 liability
c. 366,800 asset
d. 366,800 liability

Solution 27-10 Answer a

The entry on December 31, 2011 is:

Future contract receivable (40,000 x P10) 400,000


Unrealized gain -- futures contract 400,000
Market price -- December 31, 2011 160
Underlying fixed price 150

Derivative asset 10

The futures contract receivable is the derivative asset.

The entries on March 1, 2012 are:

Purchases 6,400,000
Cash (40,000 x P160) 6,400,000

Cash 400,000
Futures contract receivable 400,000

Unrealized gain -- futures contract 400,000


Gain on futures contract 400,000

Problem 27-11 (IAA)

Naga Company produces bottled grape juice. Grape juice concentrate is typically bought and sold by
the pound. Naga uses 50,000 pounds of grape juice concentrate each month.

On November 1, 2011, Naga entered into a grape juice concentrate futures contract as cash flow
hedge to buy 50,000 pounds of concentrate on February 1, 2012 at a price of P50 per pound.

The market price on December 31, 2011 and February 1, 2012 of the grape juice concentrate is P38
per pound. The appropriate discount rate is 11%. The periodic system is used.

What amount should be recognized by Naga Company aon Decemer 31, 2011 as derivative asset or
liability?

a. 540,540 asset
b. 540,540 liability
c. 600,000 liability
d. 600,000 asset

Solution 27-11 Answer c

The entry on December 31, 2011 is:

Unrealized loss -- futures contract 600,000


Futures contract payable (50,000 x P12) 600,000

Market price -- December 31, 2011 38


Underlying fixed price 50

Derivative liability 12

The futures contract payable is the derivative liability.

Entries on February 1, 2012 are:

Purchases 1,900,000
Cash (50,000 x P38) 1,900,000

Futures contract payable 600,000


Cash 600,000

Loss on futures contract 600,000


Unrealized loss -- futures contract 600,000

Problem 27-12 (IAA)

Taal Company requires 25,000 pounds of copper each month in its operations. To eliminate the price
risk associated with copper purchases, on December 1, 2011, Taal Company entered into a futures
contract as a cash flow hedge to buy 25,000 pounds of copper on June 1, 2012. The futures price
is P50 per pound.

The futures contract is managed through an exchange, so Taal does not know the other party on the
other side of the contract. As with most derivative contracts, this futures contract is settled by an ex-
change of cash on June 1, 2012 based on the price of copper on that date.

The market price per pound is P45 on December 31, 2011 and P42 on June 1, 2012.

What is the derivative asset or liability on December 31, 2011?

a. 125,000 asset
b. 125,000 liability
c. 200,000 asset
d. 200,000 liability

Solution 27-12 Answer b

Market price -- December 31, 2011 45


Underlying fixed price 50
Derivative liability 5

Futures contract payable -- 12/31/2011 (25,000 x 5) 125,000

Market price -- June 1, 2012 42


Underlying fixed price 50

Derivative liability 8

Futures contract payable -- June 1, 2012 (25,000 x 8) 200,000


Futures contract payable -- December 31, 2011 125,000
Increase in derivative liability on June 1, 2012 75,000

Problem 27-13 (IAA)

Legaspi Company produces colorful 100% cotton T-shirts that are very popular among youth. The
entity uses 150,000 kilos of cotton each month in its production process. In accordance with the enti-
ty's long-term planning, the entity normally procures one month supply of cotton to be used in its
production process. On December 31, 2011, Legaspi Company purchased a call option as cash flow
hedge to buy 150,000 kilos of cotton on July 1, 2012. The call option price is P30 per kilo. The
entity paid P50,000 for the call option. The market price of cotton on July 1, 2012 is P35 per kilo.
What amount should be recognized by Legaspi Company as gain on call option in 2012?

a. 750,000
b. 700,000
c. 375,000
d. 350,000

Solution 27-13 Answer b

Fair value of call option on 7/1/2012 (150,000 x P5) 750,000


Call option payment ( 50,000)

Gain on call option 700,000

The entry on December 31, 2011 for the payment of the call option is:

Call option 50,000


Cash 50,000

The entries on July 1, 2012 are:

Call option 700,000


Unrealized gain -- call option 700,000
Cash 750,000
Call option 750,000

Purchases 5,250,000
Cash (150,000 x P35) 5,250,000

Unrealized gain -- call option 700,000


Gain on call option 700,000

Problem 27-14 (IAA)

Bicol Company uses approximately 200,000 units of raw material in its manufacturing operations.
On December 31, 2011, Bicol Company purchased a call option to buy 200,000 units of the raw
material on July 1, 2012 at a price of P25 per unit. The entity paid P20,000 for the call option. Bicol
designated the call option as a cash flow hedge against price fluctuation for its July purchase. The
market price of the raw material on July 1, 2012 is P22 per unit.

What amount should be recognized by Bicol Company as loss on call option in 2012?

a. 600,000
b. 550,000
c. 650,000
d. 20,000

Solution 27-14 Answer d

The loss on call option is equal only to the payment of P20,000. Since the market price has decreased
on July 1, 2012, the call option is not exercised but simply ignored. Remember that a call option is
a right and not an obligation.

The entry to record the payment of the option on December 31, 2011 is:

Call option 20,000


Cash 20,000

The entries on July 1, 2012 are:

Raw materials purchases 4,400,000


Cash (200,000 x P22) 4,400,000

Loss on call option 20,000


Call option 20,000

Problem 27-15 (IAA)


Sorsogon Company uses approximately 300,000 units of raw materials in its manufacturing
operations. On December 1, 2011,Sorsogon Company purchased a call option to buy 300,000 units
of raw materials on March 1,2012 at a price of P25 per unit.
Sorsogon paid P50,000 for the call option and designated the call option as a cash flow hedge
against price fluctuation for its March purchase.
On December 31,2011, the market price of the raw material is P27 per unit and on March 1,2012,
the market price is P28.

What is the derivative asset or liability on December 31,2011?


a. 600,000 asset
b. 600,000 liability
c.900,000 asset
d. 900,000 liability

Solution 27-15 Answer a


Market price-December 31, 2011 27
Underlying fixed price 25
Derivative Asset 2

Call option -December 31,2011 (300,000x2) 600,000

Market price-March 1,2012 28


Underlying fixed price 25
Derivative Asset 3

Call option-March 1, 2012 (300,000x3) 900,000


Call option-December 31,2011 600,000
Increase fair value in 2012 300,000

Problem 27-16 (IFRS)


Vivien Company purchases approximately 500,000 bushels of oats each month.
On December 1,2011 Vivien purchase an option to purchase 500,000 bushels of oats on March 1,
2012 at a market price of P100 per bushel which is the market price of bushel on December 1,
2011. Vivien had to pay P100,000 to purchase the call option which it is designated as a cash flow
hedge against price increase for its March 1,2012 purchase of oats.
On December 31, 2011, the price of oats is P95 per bushel. Because there is still time for the
price to potential rise above P100 per bushel before the option expire, the option has a value
of P40,000 on December 31,2011. On March 1, 2012, the price of oats is P104 per bushel.
What is the gain on call \option that should be reported in the 2012 statement of comprehensive
income? a. 2,000,000
b. 1,900,000
c. 1,960,000
d. 1,940,000

Solution 27-16 Answer b


Call option-December 1,2011 100,000
Fair Value of call option- December 31,2011 40,000
Unrealized loss on call option on 2011 60,000

Fair value of call option- 3/1/2012 (500,000 x 4) 2,000,000


Fair value call option- December 31, 2011 -40,000
Gain in call option in 2012 1,960,000
Unrealized loss on call option in 2011 60,000
Net gain on call option in 2012 1,900,000

Another approach
Fair value of call option-3/1/2012 2,000,000
Call option payment -100,000
Net gain on call option in 2012 1,900,000

Problem 27-17 (IAA)


Hazel Company enters into a call option contract with a bank on January 1, 2011. This contract
gives the entity to purchase 10,000 shares at P100 pesos per share. The option expires on
April 30, 2011. The shares are trading at P100 per share on January1, 2011, at which Hazel pays
P10,000 for the call option.The market price per share is P120 on April 30, 2011, and the time
value of option has not changed. In order to settle the option contract, what would Hazel most
likely do?
a. Pay the bank P200,000
b. Purchasethe shares at P100 per share and sell the shares at P120 per share to the bank
c. Receive P200,000 from the bank
d. Receive P190,000 from the bank
Solution 27-17 Answer c
Fair value of call option (120-100) 20
Call option receipt (10,000 x 20) 200,000

Problem 27-18 (IAA)


Janina Company regularly hedge its purchase requirements and the sale of its finished products
in futures market. On December 1, 2011, Janina Company entered into the following three
contracts designated as a cash flow hedge:
Future Price Market Price
Type of contract Quantity 1/1/2011 12/31/2011
Purchase sugar 20,000 60 75
Purchase milk 50,000 100 91
Sell ice cream 30,000 220 195

All three contracts are to be settled on January 1, 2012.

What is the derivative asset or liability on December 31,2011?


a. 300,000 asset
b. 600,000 liability
c. 900,000 asset
d. 1,050,000 liability

Solution 27-18 Answer b


Sugar- "purchase" (20,000 x 15) 300,000
Milk- "purchase" (50,000 x 9) 450,000
Ice Cream- "sell" (30,000 x 25) 750,000
Futures contract receivable - 12/31/2011 600,000

Problem 27-19 (IAA)


On June 30 of the current year, Ester Company entered into a firm commitment to purchase
specialized equipment from Nagasaki Company for Y80,000,000 on August 31. The exchange
rate on June 30 is Y100=$1. To reduce the exchange rate risk that could increase the cost of the
equipment in US Dollars, Ester pays $12,000 for the call option contract. This contract gives Ester
Y80,000,000 at an exchange rate of Y100=$1 on August 31.
On August 31, the exchange rate is Y93=$1.

What amount in US dollars did Ester Company save by purchasing the call option?
a. 12,000
b. 48,215
c. 60,215
d. Ester Company would have been better off not to have purchased the call option.

Solution 27-19 Answer b


Dollar equivalent-August 31 (80,000,000/93) 860,215
Dollar equivalent-June 30 (80,000,000/100) 800,000

Total saving 60,215


Payment for call option 12,000 12,000
Net saving-gain on call option 48,215

Problem 27-20 (IFRS)


Oriental Company has the Philippine peso as its financial currency. The entity expects to
purchase goods from USA for $50,000 on March 31, 2012. Accordingly, the entity is exposed
If the dollar increase before the purchase takes place,the entity will have to pay more pesos to
obtain the to a foreign currency risk. $50,000 that will have to pay for goods.
On October 1, 2011 Oriental Company entered into a foreign currency forward contract with
a bank speculator to purchase $50,000 is six months for a fixed amount of P2,050,000 or P41 to $1.
This contract forward is designated as cash flow hedge of the entity's exposure to increase
in dollar exchange rate. On December 31,2011, the exchange rate is P42 to $1 and on
March 31,2012 the exchange rate id P44 to $1
What is the derivative asset or liability on Decmeber 31,2011?
a. 150,000 asset
b. 150,000 liability
c. 50,000 asset
d. 50,000 liability

Solution 27-20 Answer c


Peso equivalent- Decmenber 31,2011 ($50,000 x 42) 2,100,000
Pese equivalent- October 1,2011 2,050,000
Forward contract receivable - December 31,2011 50,000

Peso equivalent- March 31,2012 ($50,000 x 44) 2,200,000


Peso equivalent- December 31,2011 2,100,000
Increase i n derivative asset 100,000

1. To recognize the derivative asset on December 31, 2011:

Forward contract receivable 50,000


Unrealized gain-forward contract 50,000

2. To recognize the increase in derivative asset on March 31, 2012:

Forward contract receivable 100,000


Unrealized gain-forward contract 100,000

Problem 27-21 (IAA)


On November 1, 2011 Cassandra Company sold some limited edition art prints to Noritake
Company for Y47,850,000 to be paid on January 1, 2012.The current exchange rate on
November 1, 2011 was Y110=$1, so the total payment at the current exchange rate qould be
equal to $435,000. Cassandra entered into a forward contract with a large bank to guarantee
the number of dollars to be received. According to the terms of the contract, if Y47,850,000
is worth less than $435,000, the bank will pay Cassandra the difference in cash. Likewise,
if Y47,850,000 is worth more than $435,000, Cassandra must pay the bank the difference in
cash. The exchange rate on December 31, 2011 is Y120=$1.

What amount in US dollars will Cassandra report as derivative asset or liability on December
31,2011?
a. 398,750 asset
b. 398,750 liability
c. 36,250 asset
d. 36,250 liability

Solution 27-21 Answer c

Dollar equivalent- November 1,2011 435,000


Dollar equivalent- 12/31/2011 (47,850,000/120) 398,750
Forward contract receivable-December 31,2011 36,250
riable interest rate
prevailing interest rate

payable on December
e variable, pay fixed"

e of 1 at for one period


on December 31, 2011?

xed rate of 12%, it


ber 31, 2012. This
ent value of P52,620

0 on January 1, 2011.
incipal is to be repaid

ixed" interest rate swap

in 2012 is equal to the


2012 is 7% and the
as "interest rate swap

e fixed rate of 10%, it


012 or P5,000,000

ecember 31, 2011

oan of P6,000,000 with


ecember 31, 2015. The
market interest rate on

ment with a financial ins-


January 1 is more than
payments are made at the

an ordinary annuity of 1

as "interest rate swap


rate of 8%. This means
financial institution of

mpany shall receive P60,000


014 and 2015.

ized as interest rate swap

a variable rate interest for


principal is due on Decem-
y 1 resets the variable rate
conjunction with the loan,
wap agreement with another
h flow hedge. The market

12% for two periods and


amount of the loan or

ying fixed rate of 10%.


k of 4% times P5,000,000

r P464,000. This amount


is a derivative asset.

ying fixed rate of 10%.


k of 2% times P5,000,000

P169,000. This amount

ying fixed rate of 10%.


P5,000,000 or P50,000
This amount must be

The loan calls for interest


t value rate at January 1 of
has a two-year P500,000

ase in the second year of


prefer to have variable debt.
uner agrees to make
ner's interest payment in
e only, on December 31,

ment with Fortuner?

December 31, 2011?

g 10% rate, Camry is re-

unted for one year. The


interest rate swap payable
y 5 courses each year. On
ry 31, 2012 to be planted
uated wildly. On January
The price is set at P500

y 31, 2012 is more than


he market price is less than
contract was designated as
2012 is P800. The appro-

mpany as derivative asset

ary 31, 2012.

Carmona Grill determined


. Because of the volatile
d a forward contract with
s of tuna fish on February
designated as cash flow

per kilo is P75. The appro-

liability on December 31,

Company shall make a

determined that it will


the volatile fluctuation
ward contract with a re-
2012 at a price of P50
w hedge. The derivative
1, 2012 is more than P50,
market price on March 1,
ecember 31, 2011, the
The appropriate discount

long-term planning. On
ase 8,000 kilos of Austra-

1, 2011, the entity nego-


of Australian lobster on
P1,200 per kilo on October
ity is predicting a drop in
On December 31, 2012,
ppropriate discount rate

s the underlying fixed

ble on December 31, 2011


mber 31, 2011.
rations. To eliminate the
, Indang entered into a
P150 per kilo on March

o. The appropriate discount

2011 as derivative asset


ically bought and sold by

contract as cash flow


of P50 per pound.

juice concentrate is P38

11 as derivative asset or
ns. To eliminate the price
y entered into a futures
2012. The futures price

w the other party on the


ntract is settled by an ex-
ular among youth. The
accordance with the enti-
otton to be used in its
call option as cash flow
is P30 per kilo. The
1, 2012 is P35 per kilo.
tion in 2012?
nufacturing operations.
0,000 units of the raw
for the call option. Bicol
r its July purchase. The

market price has decreased


mber that a call option is
28
PROPERTY, PLANT & EQUIPMENT

Problem 28-1 (AICPA Adapted)

At the beginning of the current year, Town Company purchased for P5,400,000, including appraisers fee
of P50,000, a warehouse building and the land on which it is located. The following data were available
concerning the property:

Current Appraised Value


Land 2,000,000
Warehouse building 3,000,000
5,000,000

a. 2,140,000
b. 1,800,000
c. 2,000,000
d. 2,160,000

Solution 28 - 1 Answer D

Cost of land (2/5 x 5,400,000)

When a group of assets is acquired for a lump sum price, the total cost should be allocated to the
individual assets based on their relative fair value or appraised value.

Problem 28-2 (AICPA Adapted)

On August 1, 2011, Bamco Company purchased a new machine on deferred payment basis. A down
payment of P100,000 was made and 4 monthly installments of P250,000 each are to be made beginning
on September 1, 2011. The cash equivalent price of the machine was P950,000. Bamco incurred and paid
installation costs amounting to P30,000. What is the amount to be capitalized as cost of the machine?

a. 950,000
b. 980,000
c. 1,100,000
d. 1,130,000

Solution 28-2 Answer B

Cash Price
Installation cost
Total cost
Problem 28-3 (AICPA Adapted)

Josey Company entered into a contract to acquire a new machine for its factory. The machine, which had
a cash price of P2,000,000 was paid as follows:

Down payment
Note payable in 3 equal annual installments
20,000 ordinary shares with a par value of
P25 and fair value of P40 per share

Prior to the machines use, installation cost of P50,000 was incurred. The machine has an estimated
residual value of P100,000. What is the initial cost of the machine?

a. 2,000,000
b. 2,400,000
c. 2,050,000
d 2,450,000

Solution 28-3 Answer C

Cash price
Installation cost
Total cost

Problem 28-4 (ACP)

Anxious Company acquired two items of machinery as follows:

* On December 31, 2011, Anxious Company purchased a machine in exchange for a noninterest bearing
note requiring ten payments of P500,000. The first payment was made on December 31, 2012, and the
others are due annually on December 31. The prevailing rate of interest for this type of note at date of
issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65
for ten periods.

* On December 31, 2011, Anxious Company acquired used machinery by issuing the seller a two-year,
noninterest-bearing note for P3,000,000. In recent borrowing, Anxious has paid a 12% interest for this
type of note. The present value of 1 at 12% for 2 years is .80 and the present value of an ordinary annuity
of 1 at 12% for 2 years is 1.69.

What is the total cost of the machinery?

a. 5,065,000
b. 5,225,000
c. 5,565,000
d. 8,235,000

Solution 28-4 Answer B

Present value of first note payable (500,000 x 5.65)


Present value of second note payable (3,000,000 x .80)

In the absence of cash price, the cost of asset acquired by installment is equal to the present value of the
total installment payments.

The present value factor of an ordinary annuity of 1 is used in computing the present value of first note
payable because the note is payable by installment.

The present value factor of 1 is used in computing the present value of the second note payable
because the note is payable lump sum after 2 years.

Problem 28-5 (AICPA Adapted)

On December 31, 2011, Bart Company purchased a machine in exchange for a noninterest bearing note
requiring eight payments of P200,000. The first payment was made on December 31, 2011, and the others
are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note
was 11%. Present value factors are as follows:

PV of an ordinary annuity of 1 at 11% for 8 periods


PV of an annuity of 1 in advance at 11% for 8 periods

What amount should be recorded as initial cost of the machine?

a. 1,600,000
b. 1,029,200
c. 1,400,000
d. 1,142,400

Solution 28-5 Answer D

Present value of future payments (200,000 x 5.712)

The PV of an annuity of 1 in advance is used because the machine was purchased on December 31,
2011 and the first payment was made on December 31, 2011.

Problem 28-6 (IAA)

Dawson Company has received a donation of land from a rich local philanthropist. The land originally
had a cost of P1,000,000. On the date of the donation, the land had a market value of P1,500,000 and an
assessed value of 1,200 000. What amount of income should be recognized from the donation?

a. 1,500,000
b. 1,200,000
c. 1,000,000
d. 0

Solution 28-6 Answer A

Capital gifts or grants from nonshareholders shall be recorded as income at their fair value when they
are received or receivable.

Problem 28-7 (AICPA Adapted)

Precious Company had the following property acquisition during the current year:

* Acquired a tract of land with an existing building in exchange for 50,000 shares of Precious Company
with P100 par value that had a market price of P120 per share on the date of acquisition. The last property
tax bill indicated assessed value of P2,400,000 for the land and P600,000 for the building. Shortly after
acquisition the building was razed at cost of P100,000 in anticipation of a new building construction in
the current year.

* Received land from a major shareholder as an inducement to locate a plant in the city.
No payment was required but recious paid P50,000 for legal expenses for land tranfsfer. The land is
fairly valued at P1,000,000.

What is the total increase in land as a result of the cquisitions?

a. 7,000,000
b. 6,100,000
c. 7,150,000
d. 7,100,000

Solution 28-7 Answer D

First land:
Fair value of shares issued (50,000x120) 6,000,000
Cost of razing the old building 100,000
Second land
Total Cost

If shares are issued for noncash consideration, the proceeds should be measured by the fair value
of the consideration received or the fair value of the shares issued in the absence of the fair value of
the consideration given.
Contributions received from shareholders should be recorded at fair value with the credit going to
donate capital. However, the legal expenses for the transfer of the donated proerty should not be
capitalized but deducted from donated capital.

Problem 28-8 (IAA)

Lax Company recently acquired two items of equipment. The transactions ared described as follows:

* Acquired a press at an invoice price of P 3,000.00 subject to a 5% cash discount which was taken
Costs of freight and insurance during shipment were P 50,000 and installation cost amounted
to P 200,000.00.

* Acquired a welding machine at an invoice price of P 2,000,000.00 subject to a 10% cash discount
which was not taken. Additional welding supplies were acquired at a cost of P 100,000.00

What is the total increase in the equipment account as a result of the transactions?

a. 4,900,000
b. 5,000,000
c. 5,100,000
d. 5,200,000

Solution 28-8 Answer A

First equipment:
Invoice price 3,000,000.00
Discount taken - 5% (150,000.00)
Freight ad Insurance 50,000.00
Installation Cost 200,000.00
Second equipment:
Invoice price 2,000,000.00
Discount not taken - 10% (200,000.00)
Total cost

Cash discounts, whether taken or not taken, trade discounts and rebates are deducted in arriving at the
cost of property, plant and equipment.

The welding supplies on the second equipment should not be capatilized but reported as prepaid expenses.

Problem 28-9 (IAA)

Jazz Company purchased land with a current market value of P2,400,000. The carrying amount of the land was
P1,305,0000. In exchange for the land, Jazz used 20,000 ordinary shares with par value if P100 and
market value of P140 per share. The shares are traded in an established stock exchange. What amount
should Jazz record as cost of the land?

a. 1,305,000
b. 2,000,000
c. 2,400,000
d. 2,800,000

Solution 28 9 Answer C

Current market value of land

Problem 28 10 (IFRS)

Kirk Company purchased equipment by making a down payment of P400,000 and issuing a not payable
for P1,800,000. A payment of P600,000 is to be made at the end of each year for three years. The
applicable rate of interest is 8%. The present value of an ordinary annuity of 1 for three years at 8% is
2.58, and the present value for the future amount of a single sum for three years at 8% is .735. Shipping
charges for the equipment of P200,000 and installation charges of P350,000 were incurred.

What is the capitalized cost of equipment?

a. 1,948,000
b. 2,148,000
c. 2,498,000
d. 2,750,000

Solution 28 10 Answer C

Down payment
Present value of note payable (600,000 x 2.58)
Shipping
Installation
Cost of equipment

Problem 28 11 (IAA)

Figaro Company acquired land and paid in full issuing P600,000 of its 10 percent bonds payable and
40,000 ordinary shares with par value of P10. The shares was selling at P19 and the bonds were trading at
102. What amount should Figaro record as cost of the land?

a. 988,000
b. 1,000,000
c. 1,372,000
d. 1,387,200
Solution 28 11 Answer C

Fair value of bonds payable (600,000 x 102)


Fair value of shares (40,000 x 19)
Total cost of land

Problem 28 12 (AICPA Adapted)

On September 1, 2011 Ron Company issued 100,000 treasury shares with P25par value for a parcel of
land to be held for a future plant site. The treasury shares were acquired by Ron at a cost of P30 per share.
Rons share had a fait market value of P40 on September 1, 2011. Ron received P50,000 from the sale of
scrap when an existing structure on the site was razed. At what amount should the land be initially
measured?

a. 4,000,000
b. 3,950,000
c. 3,000,000
d. 2,500,000

Solution 28 12 Answer B

Fair value of treasury shares (100,000 x P40)


Scrap value of existing structure
Cost of land

The market value of the treasury shares is used because the land has no known fair value.

Problem 28 13 (PHILCPA Adapted)

Fairmont Company, a public entity issued 5,000 ordinary shares with P1,000 per value for a building. The
following information relates to the exchange.

Carrying amount of building


Face value of insurance policy for building
Current quoted price of share

What is the initial cost of the building?

a. 5,000,000
b. 17,000,000
c. 22,000,000
d. 20,000,000

Solution 28 13 Answer C
Fair value of shares issued (5,000 x 4,400)

Problem 28 14 (AICPA Adapted)

In October on the current year, Ewing Company exchanged an old packing machine, which cost P1,
200,000 and was 50% depreciated, for another used machine and paid a cash difference of P160, 000. The
fair value of the old packaging machine was determined to be P700,000.

What is the cost of the machine acquired in the exchange on the books of Ewing Company?

a. 860,000
b. 700,000
c. 760,000
d. 540,000

Solution 28 14 Answer A

Fair value of old machine


Cash payment
Cost of new machine

PAS 16, paragraph 24, provides that an item of property, plant and equipment acquired in a nonmonetary
exchange or combination of monetary and nonmonetary exchange is measured at fair value of the asset
given up plus cash payment, unless the exchange transaction lacks commercial substance or the fair value
of either the asset given up or asset is no reliably measurable.

Problem 28 15 (AICPA Adapted)

Caine Motor Sales exchange a car from its inventory for a computer to be used as a long term asset. The
following information relates to this exchange:

Carrying amount of the car


List selling price of the car
Fair value of the computer
Fair value of the computer

What amount of gain should Caine recognize on the exchange?

a. 260,000
b. 160,000
c. 200,000
d. 0

Solution 28 15 Answer B
Fair value of computer
Less: Cash paid by Caine
Fair value of car asset given
Less: Carrying amount of car

Problem 28 16 (AICPA Adapted)

At the beginning of the current year, Bell Company exchanged an old machine with a book value of
P390,000 and a fair value of P350,000 and paid P100,000 cash for another used machine having a list
price if P500,000. At what amount should the machine acquired in the exchange be recorded on the books
of Bell?

a. 450,000
b. 460,000
c. 490,000
d. 500,000

Solution 28 16 Answer A

Fair value of old machine


Cash payment
Cost of new machine

Problem 28-17 (AICPA Adapted)

Eagle Company owns a tract of land that it purchased in 2008 for P2,000,000. The land is held as a future
plant site and has a fair value of P2,800,000 on July 1, 2011. Hall Company also owans a tract of land held
as a future plant site. Hall paid P3,600,000 for the land in 2009 and the land has a fair value of P3,800,000 on
July 1, 2011. On this date, Eagle exchaged its land and paid P1,00,000 cash for the land owned by Hall. The
configuration of cash flows from land acquired is expected to be significant differently from the configuration
cash flows of the land exchanged. At what amount should Eagle record the land acquired in the exchange?

a. 2,800,000
b. 3,000,000
c. 3,200,000
d. 3,800,000

Solution 28-17 Answer D

Fair value of land given - Eagle


Cash paid by Eagle
Total Cost
Problem 28-18 (AICPA Adapted)

During the current year, Beam Company paid P100,000 cash and traded inventory, which had a carrying
amount of P2,000,000 and a fair value of P2,100,000, for other inventory in the same line of business with
a fair value of P2,200,000. What amount should Beam record as cost of the inventory received in exchange?

a. 2,000,000
b. 2,100,000
c. 2,200,000
d. 2,300,000

Solution 28-18 Answer C

Fair value of invetory given


Add: Cash payment
Total cost of inventory received

Problem 28-19 (AICPA Adapted)

Yola Company and Zaro Company are fuel oil distributors. To facilitate the delivery of oil to their customers,
Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro
P300,000 to compensate for a difference in the grade of oil. It is reliably determined that the exchange lacks
commercial substance. On the date of the exchange, cost and market value of the oil were as follows:

Yola Company
Cost 1,000,000
Market value 1,200,000

1. What amount should Yola Company record as cost of the oil inventory received in exchanged?

a. 1,000,000
b. 1,200,000
c. 1,300,000
d. 1,500,000

2. What amount should Zaro Company record as cost of the oil inventory received in exchanged?

a. 1,400,000
b. 1,500,000
c. 1,100,000
d. 1,200,000

Solution 28 19

Questuion 1 Answer C
Cost of oil inventory given
Add: Cash payment
Total cost of oil inventory received

Questuion 2 Answer C

Cost of oil inventory given


Less: Cash received
Cost of oil inventory received

The exchange transactions in measured at the carrying amount of the asset given up adjusted by the cash
involved if the the exchange lacks commercial substance.

Problem 28-20 (AICPA Adapted)

Amiable Company exchanged a truck with a carrying amount of P1,200,000 and a fair value of P2,000,000 for
a truck and P200,000 cash. The cash flows from the new truck are not expected to be significantly different
from the cash flows of the old truck. The fair value of the truck received was P1,800,000. At what
amount should Amiable record the truck received in the exchange?

a. 2,000,000
b. 1,400,000
c. 1,000,000
d. 1,800,000

Solution 28- 20 Answer C

Carrying amount of truck given


Cash received
Cost of new truck

Problem 28-21 (AICPA Adapted)

At the beginning of the current year, Winn Company traded in an old machine having a carrying amount of
P1,680,000 and paid a cash difference of P600,000 for a new machine having a cash price of P2,050,000.

What amount of loss should Winn recognize on the exchange?

a. 600,000
b. 230,000
c. 370,000
d. 0

Solution 28-21 Answer B


Cash price of new machine
Less: Cash payment
Fair value of old machine
Less: Carrying amount
Loss on exchange

Problem 28-22 (CGAC)

Prince Company and Albert Company, two unrelated entities, agreed to exchange tractors trailers.
Information relating to these assets is as follows:

Prince
Original acquisition cost 1,500,000
Accumulated depreciation 700,000
Fair value on the date of exchange 900,000

In accordance with the agreement, Albert will pay P750,000 in cash to Prince which is the difference in
fair value.

1. What amount should Prince Company record as cost of the asset received in exchange?

a. 150,000
b. 750,000
c. 950,000
d. 650,000

2. What amount should Albert Company record as cost of the asset received in exchange?

a. 900,000
b. 830,000
c. 150,000
d. 230,000

Solution 28-22

Question 1 Answer A

Fair value of Prince (recipient)


Less: Cash received
Cost of new asset received in exchange

Question 2 Answer A

Fair value of Albert (payor)


Add: Cash payment
Cost of new asset received in exchange

Problem 28-23 (AICPA Adapted)

On January 1, 2011, Wilbur Company traded in an old machine for a newer model. Data relative to the old
and new machines follow:

Old Machine
Orignal cost
Accumulated depreciation on January 1, 2011
Average published retail value

New Machine
List price
Cash price without trade in
Cash paid with trade in

What amount should be recognized as cost of the new machine acquired in the exchange?

a. 900,000
b. 950,000
c. 980,000
d. 1,000,000

Solution 28-23 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.

Incidentally, the loss on exchaage is computed as follows:

Cash price without trade in


Less:Cash paid with trade in
Trade in value of old machine
Less: Carrying amount
Loss on exchange

Problem 28-24 (IAA)

Jilmar Company acquired a elivery truck, making payment of P2,680,000 analyzed as follows:

Price of truck
Charge for extra equipment
Value added tax - recoverable
Insurance for one year
Motor vehicle registration
Total
Trade in alue of old truck
Cash paid

The cost of the old truck was P1,500,000 with carrying amount of P200,000 and fair value of P50,000.

What is the cost of the new truck acquired in the exchange?

a. 2,300,000
b. 2,680,000
c. 2,250,000
d. 2,550,000

Solution 28-24 Answer A

Cash paid
Value added tax
Insurance
Motor vehicle registration
Capitalized cash payment
Fair vaalue of old truck
Cost of new truck

Problem 28-25 (PHILCPA Adapted)

Taiwan Company fabricated equipment for its office use at the entity's plant during the current year. The
following data were taken from the entity's records:

Material
Finished goods 1,000,000
Office equipment 600,000

Factory overhead amounted to P1,200,000. Normal poduction of finished goods is P50,000 units. Due to
the fabrication of the office equpment, finished goods produced totaled 35,000 units only in the current year.
The office equipment is to be charged with the overhead which would have been apportioned to the 15,000
units whhich were not produced.

What is the total cost of office equipment after the apportionment of factory overhead?

a. 1,100,000
b. 1,400,000
c. 1,460,000
d. 2,300,000

Solution 28-25 Answer C

Materials
Direct Labor
Overhead (15,000/50,000x1,200,000)
Total cost of office equipment

In the absence of any statement, the overhead is allocated on the basis of direct labor as follows:

Materials
Direct Labor
Overhead (500,000/2,000,000x1,200,000)
Total cost of office equipmet
ding appraisers fee
data were available

Seller's Original Cost

1,400,000
2,800,000
4,200,000

2,160,000

tal cost should be allocated to the

basis. A down
e made beginning
co incurred and paid
of the machine?

950,000
30,000
980,000
machine, which had

400,000
1,200,000

800,000
2,400,000

s an estimated

2,000,000
50,000
2,050,000

noninterest bearing
31, 2012, and the
of note at date of
ine periods and 5.65

seller a two-year,
% interest for this
an ordinary annuity
2,825,000
2,400,000
5,225,000

resent value of the

nt value of first note

note payable

erest bearing note


2011, and the others
or this type of note

5.146
5.712

1,142,400

n December 31,

he land originally
P1,500,000 and an
donation?

r value when they

Precious Company
on. The last property
ding. Shortly after
ng construction in

ty.
er. The land is

6,100,000
1,000,000
7,100,000

e fair value
he fair value of
redit going to
ould not be

bed as follows:

which was taken


mounted

% cash discount
00.00

3,100,000.00

1,800,000.00
4,900,000.00

in arriving at the

as prepaid expenses.

ng amount of the land was


ue if P100 and
ge. What amount

2,400,000

uing a not payable


e years. The
ee years at 8% is
% is .735. Shipping

400,000
1,548,000
200,000
350,000
2,498,000

nds payable and


onds were trading at
612,000
760,000
1,372,000

ue for a parcel of
ost of P30 per share.
000 from the sale of
d be initially

4,000,000
(50,000)
3,950,000

e for a building. The

17,500,000
20,000,000
4,400
22,000,000

which cost P1,


ce of P160, 000. The

700,000
160,000
860,000

d in a nonmonetary
value of the asset
nce or the fair value

ong term asset. The

600,000
900,000
860,000
100,000
860,000
100,000
760,000
600,000
160,000

book value of
hine having a list
ecorded on the books

350,000
100,000
450,000

nd is held as a future
ns a tract of land held
r value of P3,800,000 on
nd owned by Hall. The
y from the configuration
ired in the exchange?

2,800,000
1,000,000
3,800,000
hich had a carrying
line of business with
received in exchange?

2,100,000
100,000
2,200,000

f oil to their customers,


g the oil. Yola paid Zaro
hat the exchange lacks
were as follows:

Zaro Company
1,400,000
1,500,000

inventory received in exchanged?

l inventory received in exchanged?


1,000,000
300,000
1,300,000

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

adjusted by the cash

r value of P2,000,000 for


e significantly different
000. At what

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

a carrying amount of
price of P2,050,000.
2,050,000
600,000
1,450,000
1,680,000
(230,000)

tors trailers.

Albert
800,000
720,000
150,000

s the difference in

hange?

hange?

900,000
750,000
150,000

150,000
750,000
900,000

ata relative to the old

800,000
600,000
170,000

1,000,000
900,000
780,000

nge?

nge is recorded
he old machine is not

900,000
780,000
120,000
200,000
(80,000)

2,500,000
50,000
300,000
120,000
10,000
2,980,000
(300,000)
2,680,000

value of P50,000.

2,680,000
(300,000)
(120,000)
(10,000)
2,250,000
50,000
2,300,000

e current year. The

Direct Labor
1,500,000
500,000

0,000 units. Due to


only in the current year.
ortioned to the 15,000
600,000
500,000
360,000
1,460,000

r as follows:

600,000
500,000
300,000
1,400,000
29
GOVERNMENT GRANT

Problem 29 1 (IFRS)

On January 1, 2011, Sagada Company received a grant of P25,000,000 from the American government
in order to defray safety and environmental costs within the area where the entity is located.

The safety and environmental costs are expected to be incurred over four years, respectively, P2,000,000,
P4,000,000, P6,000,000 and P8,000,000.

How much income from the government grant should be recognized in 2011?

a. 25,000,000
b. 2,000,000
c. 2,500,000
d. 6,250,000

Solution 29 1 Answers C

Year Costs Fraction Income


2011 2,000,000 2/20 2,500,000
2012 4,000,000 4/20 5,000,000
2013 6,000,000 6/20 7,500,000
2014 8,000,000 8/20 10,000,000
20,000,000 25,000,000

PAS 20, paragraph 12, provides that government grants are recognized as income over the pe
necessary to match them with the related costs which they are intended to compensate on a systematic basics.

Problem 29 2 (IFRS)

On January 1, 2011, Valiant Company received a grant P60,000,000 to compensate for costs to be
incurred in planting tree over a period of 5 years Valiant Company will incur such costs at P2,000,000 for
2011, P4,000,000 for 2012, P6,000,000 for 2013, P8,000,000 for 2014 and P10,000,000 for 2015. How
much income from the government grant should be recognized for 2011?

a. 12,000,000
b 8,000,000
c. 6,000,000
d. 4,000,000

Solution 29 2 Answer D
Income (2/30 x 60,000,000) 4,000,000

Problem 29 3 (PAS 20)

On January 1, 2011, Beseo Company received a grant of P10, 000, 000 from the Australian government
for the construction of a laboratory and research facility with an estimated cost of P15, 000, 000 and
useful life of 5 years. The laboratory and research facility was completed and ready for its intended use on
January 1, 2012. What amount should Beseo Company include in its 2012 income statement as income
from the government grant?

a. 10,000,000
b. 2,000,000
c. 1,000,000
d. 0

Solution 29 3 Answer B

Income from government grant (10, 000,000/5)

PAS 20, paragraph 17, provided that grants related to depreciable assets are usually recognized as
income over the periods and in proportion to the depreciation of the related assets.

Problem 29 4 (IFRS)

Intelligent Company received a government grant of P15, 000, 000 to install and run a windwill in an
economically backward area. The entity had estimated that such a windmill would costs P25, 000, 000 to
construct. The secondary condition attached to the grant is that the entity shall hire labor in the area where
the windmill is located. The construction was completed on January 1, 2011. The windmill is to be
depreciated using the straight line method over a period of 10 years. How much income from the
government grant is recognized for 2011?

a. 1,500,000
b. 3,000,000
c. 2,500,000
d. 5,000,000

Solution 29 4 Answer A

Income from government grant (15,000 ,000/10)

Problem 29 5 (PAS 20)

On January 1, 2011, Barling Company is granted a large tract of land in the Cordillera region by the
Philippine government. The fair value of the land is P40, 000, 000. Barling Company is required by the
grant to construct chemical research facility and employ only personnel residing in the Cordillera region.
The estimated costs of the facility was completed and ready for its intended use on January 1, 2012. What
amount should Barling Company recognized in 2012 as income from government grant?

a. 40,000,000
b. 4,500,000
c. 4,000,000
d. 0

Solution 29 5 Answer C

Income from government grant (40, 000,000/10)

PAS 20, paragraph 18, provides that grants related to nondepreciable assets requiring fulfilment of
certain conditions are recognized as income over the periods which bear the cost of meeting the
conditions.

Problem 29 6 (IFRS)

On January 1, 2011, Citimart Company was granted by local government authority 5,000 hectares of land
located near the slums outside the city limits. The condition attached to this grant was that Citimart shall
clean up this land and lay roads by employing laborers from the village where the land is located. The
entire operation will take 3 years and is estimated to cost P10, 000, 000. This amount will be spent P2,000,000
for 2011, P 2, 000, 000 for 2012, and P6, 000, 000 for 2013. The fair value of this land is P12,000,000.

What is the income from government grant that should be recognized for 2011?

a. 4,000,000
b. 2,400,000
c. 4,800,000
d. 0

Solution 29 6 Answer B

Income from government grant (2/10 x 12,000,000)

Problem 29 7 (IFRS)

On January 1, 2011, Exuberant Company received a consolidated grant of P12,000,000. Three fourths of
the grant will be utilized to purchase a college building for students for underdeveloped countries. The
balance of the grant is for subsidizing the tuition costs of those students for four years from date of grant.

The building was purchased in January 2011 and is to be depreciated using the straight line method over
10 years. The tuition costs paid in 2011 amounted to P600,000. How much income from government
grant should be recognized for 2011?
a. 1,200,000
b. 3,000,000
c. 1,650,000
d. 1,050,000

Solution 29 7 Answer C

Grant released to asset (12,000,000 x = 9, 000, 000 /10)


Grant released to income (12, 000, 000 x = 3, 000, 000/4)
Income from government grant

Problem 29 8 (PAS 20)

On January 1, 2011, Sabangan Company received a grant of P6, 000, 000 from the British government to
compensate from massive losses incurred because of a recent tsunami. The grant was made for purpose of
giving immediate financial support to the entity. It will take Sabangan Company 2 years to reconstruct it
assets destroyed by the tsunami. How much income from the government grant should be recognized by
Sabangan in 2011?

a. 10,000,000
b. 5,000,000
c. 2,500,000
d. 0

Solution 29 8 Answer A

PAS 20, paragraph 20, provides that a government grant that becomes received as compensation for
expenses already incurred or for the purpose of giving financial support to the entity with no related
future costs is recognized as income of the period in which it becomes receivable or when received.

Problem 29 9 (IFRS)

Kate Company purchased a varnishing machine for P3, 000, 000 on January 1, 2011. The entity received
a government grant of P500, 000 in respect of this asset. The accounting policy is to depreciate the asset
over 4 years on a straight line basis and to treat the grant as deferred income. How much income from the
government grant is recognized for 2011?

a. 500,000
b. 125,000
c. 250,000
d. 0

Solution 29 9 Answer B

Income from government grant (500,000/4)


Problem 29 10 (IFRS)

Paula Company purchased a varnishing machine for P6, 000, 000 on January 1, 2011. The entity received
a government grant of P540, 000 in respect of this asset. The accounting policy is to depreciate the asset
over 4 years on a straight line basis and to treat the grant as deferred income. What should be reported as
carrying amount of the machine and deferred income, respectively, on December 31, 2012?

a. 3, 000, 000 270, 000


b. 4, 500, 000 405, 000
c. 3, 270, 000 270, 000
d. 3, 000, 000 540, 000

Solution 29 10 Answer A

Cost
Accumulated depreciation (6, 000, 000 / 4 x 2)
Carrying amount December 31, 2012

Deferred income
Income earned (540, 000 / 4 x 2)
Deferred income December 31, 2012

Problem 29 11 (IFRS)

Peach Company purchased a machine for P7, 000, 000 on January 1, 2011 and received a government
grant of P1, 000, 000 toward the capital cost. The machine is to be depreciated on a straight line basis
over 5 years and estimated to have residual value of P500, 000 at the end of this period. The accounting
policy is to treat the grant as a deferred income.

1. What is the carrying amount of the asset in December 31, 2012?

A. 4, 200, 000
B. 5, 700, 000
C. 4, 400, 000
D. 3, 900, 000

2. What is the deferred income on December 31, 2012?

A. 400, 000
B. 800, 000
C. 600, 000
D. 0

Solution 29 11
Question 1 Answer C

Acquisition cost
Accumulated depreciation (7,000,000 500, 000/5x2)
Carrying amount December 31, 2012

Question 2 Answer C

Government grant
Income recognized for 2011 (1,000,000 /5x2)
Deferred income December 31, 2012

Problem 29 12 (IFRS)

Betty Company purchased a jewel polishing machine for P3, 600, 000 on January 1, 2011 and received a
government grant of P500, 000 toward the capital cost. The accounting policy is to treat the grant as a
reduction in the cost of the asset. The machine is to be depreciated on a straight line basis over 8 years
estimated to have a residual value of P50, 000 at the end of this period. What is depreciation of the
machine for 2011?

A. 387,500
B. 762, 500
C. 443, 750
D. 381, 250

Solution 29 12 Answer D

Cost
Government grant
Net Cost
Residual value
Depreciable amount
Annual depreciation (3,050,000/8)

Problem 29 13 (IFRS)

On January 1, 2011, Darwin Company purchased a plating machine for P5, 400, 000. Darwin received a
government part of P400, 000 toward this capital cost. The machine is to be depreciated on a 20%
reducing balance basis over 10 years. The estimated residual value is P200,000. The accounting policy is
to treat the government grant as a reduction in the cost of the asset. What is the carrying amount of the
machine on December 31, 2012?

A. 4, 000, 000
B. 4, 040, 000
C. 3, 456, 000
D. 3, 200, 000

Solution 29 13 Answer D

Acquisition cost net of grant (5,400,000400,000)


Accumulated depreciation:
2011 (20%x5,000,000) 1,000,000
2012 (20%x4,000,000) 800,000

Problem 29 14 (IFRS)

On January 1, 2011, Easy Company received a grant of P1, 500, 000 from the government to subsidize
tuition fees for a period of 5 years. On January 1, 2013, the entity violated certain conditions attached to
the grant, and therefore had to repay such grant to the government. What amount should be recognized as
loss resulting from the repayment of the grant in 2013?

A. 1, 500, 000
B. 900, 000
C. 600, 000
D. 0

Solution 29 14 Answer C

Total grant received


Income recognized in 2011 and 2012 (1,500,000/5x2)
Deferred income December 31, 2012

PAS 20, paragraph 32, provides that repayment of government grant shall be accounted for as a change in
accounting estimate. The repayment of grant related to income shall be applied first to the unamortized
deferred income and any balance shall be recognized in profit or loss.

The entry on January 1, 2013 is as follows:

Deferred income government grant 900,000


Loss on repayment of government grant 600,000
Cash

Problem 29 15 (IFRS)

Tiger Company received a government grant related to depreciable asset five years ago on January 1,
2006 in the amount of P1, 000, 000. This grant was deducted from the capital cost of asset purchased at a
total amount of P6, 000, 000 on the same date with a useful life of 10 years and residual value. On
January 1, 2011, the entire P 1, 000, 000 became repayable due to lack of compliance with the conditions
attached to the grant. What is the depreciable expense to be recognized for 2011?
A. 1, 500, 000
B. 1, 600, 000
C. 1, 100, 000
D. 600, 000

Solution 29 15 Answer C

Depreciable in 2011 in the absence of the grant (6,000,000/10)


Cumulative additional depreciation that would have been recognized
in prior years in the absence of the grant (1,000,000/10x5)
Total depreciation in 2011

PAS 20, paragraph 32, provides that repayment of grant related to an asset shall be recognized by
increasing the carrying amount of the asset or reducing the deferred income by the amount repayable. The
cumulative additional depreciation that would have been recognized to date in the absence of the grant
shall be recognized in profit or loss immediately.

Problem 29 16 (IFRS)

Tarhata Company received a government grant of P2, 000, 000 related to a factory building that it bought
in January 2011. The entitys policy is to treat the grant as deferred income. Tarhata Company acquired
the building from an industrialist identified by the government. If Tarhata Company did not purchased the
building, which was located in the slums of the city, it would have been repossessed by the government
agency. Tarhata Company purchased the building for P12, 000, 000. The useful life of the building is 10
years with no residual value. On January 1, 2013, the entire amount of the government grant became
repayable by reason of noncompliance with conditions attached to the grant.

What is the loss to be recognized resulting from the repayment of the grant in 2013?

A. 1, 200, 000
B. 2, 000, 000
C. 1, 400, 000
D. 400, 000

Solution 29 16 Answer D

Total grant received


Income recognized in 2011 and 2012 (2,000,00 /10x2)
Deferred income government grant

Deferred income government grant 1,600,000


Loss on repayment of government grant 400,000
Cash
n government

y, P2,000,000,

are recognized as income over the periods


systematic basics.

ts to be
P2,000,000 for
r 2015. How
n government
00, 000 and
intended use on
nt as income

2,000,000

nized as

dwill in an
25, 000, 000 to
n the area where
is to be
om the

1,500,000

on by the
quired by the
dillera region.
y 1, 2012. What

4,000,000

ilment of
g the

ectares of land
Citimart shall
ocated. The
be spent P2,000,000
P12,000,000.

2,400,000

hree fourths of
untries. The
m date of grant.

e method over
overnment
900,000
750,000
1,650,000

government to
e for purpose of
reconstruct it
ecognized by

nsation for
h no related
received.

ntity received
ciate the asset
ncome from the

125,000
entity received
ciate the asset
be reported as

6,000,000
3,000,000
3,000,000

540,000
270,000
270,000

government
ht line basis
he accounting
7,000,000
(2,600,000)
4,400,000

1,000,000
(400,000)
600,000

and received a
he grant as a
over 8 years
on of the

3,600,000
(500,000)
3,100,000
(50,000)
3,050,000
381,250

win received a
n a 20%
nting policy is
mount of the
5,000,000

1,800,000
3,200,000

to subsidize
ns attached to
e recognized as

1,500,000
(600,000)
900,000

as a change in
unamortized

1,500,000

January 1,
purchased at a
lue. On
the conditions
600,000

500,000
1,100,000

zed by
repayable. The
of the grant

g that it bought
any acquired
t purchased the
government
building is 10
nt became

2,000,000
400,000
1,600,000

2,000,000
Chapter 30
Land and Building

Problem 30-1 (AICPA Adapted)

On December, 1,2011, Boyd Company purchased a P4,000,000 tract of land for a factory site.
Boyd razed an old building on the property and sold the materials is salvaged from the demolition.
Boyd incurred additinal costs and realized salvage proceeds during December 2011as follows:

Demolition of old building


Legal fees for purchase contract and recording ownership
Title guarantee insurance
Proceeds from sale of salvaged materials

In the December 31,2011 statement of financial position, what should be reported


as carryimg amount of the land?

a. 4,380,000
b. 4,400,000
c. 4,180,000
d. 4,200,000

Solution 30-1 Answer a

Purchase price 4,000,000


Demolition of old building 200,000
Legal fees for purchase contract 150,000
Title guarantee insurance 50,000
Proceeds from sale of salvaged materials (20,000)

Carrying amount of land 4,380,000

Problem 30-2 (AICPA Adapted)

On March 1, 2011, Kay Company purchased for P4,500,000 a tract of land as a factory site. An existing
building on tne property was razed and construction was begun on a new factory building in
April 2011. Additional data are available as follows:

Cost of razing old building 300,000


Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New Building construction cost 8,000,000

What is the cost of factory building?

a. 9,250,000
b. 9450,000
c.8,950,000
d. 9,150,000

Solution 30-2 Answer c

Architect fee 950,000


New Building construction cost 8,000,000
Total cost of new building 8,950,000

Problem 30-3 (AICPA Adapted)

During the current year, Burr Company had the following transactions pertaining to its new
office building:

Purchase price of land 600,000


Legal fees for contract to purchase land 20,000
Architect fee 80,000
Demolition of old building on site 50,000
Sales of scrap from old building 30,000
Construction cost of new building (fully completed) 3,500,000

In Burr's year-end statement of finacial position, what amounts should be reported as cost of land
and cost of building?

Land Building
a. 600,000 3,600,000
b. 620,000 3,600,000
c. 640,000 3,580,000
d. 650,000 3,620,000

Solution 30-3 Answer c

Land Building
Purchase price of land 600,000
Legal fees for contract 20,000
Architect fee 80,000
Demolition of old building 50,000
Sale of scrap (30,000)
Construction cost 3,500,000
Total cost 640,000 3,580,000

Problem 30-4 (PHILCPA Adapted)

Biliran Company incurred the following costs at the beginning of the current year:

Cost of land 1,000,000


Cost of building 4,000,000
Remodeling and repair prior to occupancy 500,000
Escrow fee 100,000
Clearing, leveling and landfill 250,000
Property tax for period prior to acquisition 150,000
Real state commission 300,000

What is the cost of building?

a. 4,500,000
b. 4,740,000
c. 4,800,000
d. 4,940,000

Solution 30-4 Answer d

Escrow fee 100,000


Property tax 150,000
Real state commission 300,000
Cost to be allocated 550,000
Cost of building 4,000,000
Remodeling and repairs 500,000
Allocated cost (550,000 4/5) 440,000
Total cost of building 4,940,000

Problem 30-5 (PHILCPA Adapted)


Siquijor Company was organized in June 2011. The land and building account revealed the following details:

June 1 Organization fees paid to the state


30 Landsite and old building
30 Corporate organization cost
July 1 Title clearance fee
August 31 Cost of razing old building
Sept. 1 Salaries of Siquijor Executives
Dec. 31 Real state tax
31 Cost of New building completed and occupied
on this date

The building acquired on June 30,2011 was valued at P350,000.


The entity paid P100,000 for the demolition of the old building and then sold the scrap for
P10,000 and credited the proceeds to miscellaneous revenue.
The entity executives did not participate in the construction of the new building.
The real estate tax was for the 6-month period ended December 31, 2011 and was assessed
on the land.

What is the cost of land?

a. 3,150,000
b.3,140,000
c. 2,850,000
d. 3,250,000

Solution 30-5 Answer b

Purchase price 3,000,000


Title clearance fee 50,000
Cost of razing old building 100,000
Scrap value of old building (10,000)
Total cost of land 3,140,000

Problem 30-6 (PHILCPA Adapted)

Tanzania Company has decided to expand its operations and has purchased land in Smallville
for construction of a new manufacturing plant. The following costs were incurred in purchasing
the property and constructing the building.

Land purchase price 2,500,000


Payment of delinquent property taxes 100,000
Title search and insurance 50,000
Special assessment for city improvement on water
and sewer 150,000
Building permit 30,000
Cost to destroy existing building on land (10,000
worth of salvaged material used in new building) 60,000
Contract cost of new building 7,000,000
Architect fee 200,000
Sidewalk and parking lot 100,000
Fire insurance on building - 1 year 40,000

What amount should be reported as cost of the land and building, respectively?

a. 2,850,000 and 7,240,000


b. 2,800,000 and 7,290,000
c. 2,700,000 and 7,240,000
d. 2,850,000 and 7,230,000

Solution 30-6 Answer a

Land
Purchase price 2,500,000
Property tax 100,000
Title search 50,000
Special assessment 150,000
Building permit
Cost to destroy old building 60,000
Salvaged material used in new building (10,000)
Contract cost of new building
Architect fee
Total cost 2,850,000

Problem 30-7 (AICPA Adapted)

At the befinning of the current year, Leonora Company purchased a parcel of land as a factory site for
P3,200,000. An old building on the property was demolished and construction started on a new building
that was completed at the end of current year. Costs incurred on the construction project are as follows:

Demolition of old building 210,000


Architect fee 300,000
Legal fee-title investigation 40,000
Construction cost 8,500,000
Imputed interest based on stock financing 140,000
Landfill for building site 190,000
Clearing of trees from building site 100,000
Temporary building used for construction activities 290,000
Land survey 40,000
Excavation for basement 130,000
Salvaged material from demolition 20,000
Timber sold 30,000

What is the cost of land and building, repectively?

a. 3,730,000 and 9,220,000


b. 3,630,000 and 9,320,000
c. 3,860,000 and 9,090,000
d. 3,760,000 and 9,190,000

Solution 30-7 Answer a

Purchase price of land 3,200,000


Demolition of old building 210,000
Legal fee-title investigation 40,000
Landfill 190,000
Clearing of trees 100,000
Land survey 40,000
Salvaged material from demolition (20,000)
Timber sold (30,000)
Total cost of land 3,730,000

Architect fee 300,000


Construction cost 8,500,000
Temporary building 290,000
Excavation for basement 130,000
Total cost of new building 9,220,000

Problem 30-8 (PHILCPA Adapted)

At the beginning of the current year, certain accoutns included in property, plant and equipment
of Rock Company had the following balances:
Land 2,200,000
Building 6,500,000

During the current year, the following transactions occured:

A piece of land was acquired for P1,500,000. To be able to acquire the land, P90,000 was paid to a
real estate agent, P15,000 was incurred to clear the land. During the course of clearing the land,
timber and gravel were recovered and sold for P25,000.
A second piece of land with a building was acquired for P1,000,000. The appraiser valued the
land at P200,000 and the building at P100,000. Shortly after acquisition, the building was demolished
at a cost fo P20,000. A new building was constructed at a cost of P5,000,000 plus the following costs:

Excavation fee 60,000


Architectural fee 80,000
Building permit fee 20,000

A third piece of land was acquired for P1,400,000 and was held for undetermined use.

What total cost of land should be reported in the statement of financial position under property,
plant and equipmetn?

a. 6,200,000
b. 4,800,000
c.4,825,000
d. 4,780,000

Solution 30-8 Answer b

Balance of land account on January 1


First piece of land acquired:
Cost 1,500,000
Payment to real estate agent 90,000
Cost clearing land 15,000
Timber and gravel recovered (25,000)
Second piece of land acquired:
Cost 1,000,000
Cost of demolition 20,000
Total cost of land under property, plant
and equipment

The third piece of land acquired is classified as investment property.


Problem 30-9 (IAA)

Alice Company made the following expenditures:

Architect fee on new building 100,000


Payment of building contractor 6,000,000
Payment of medical bills of employees injured 10,000
Cost of paving driveway and parking lot 30,000
Cost of installing lights in parking lot 5,000
Premium on insurance during construction 25,000
Cost of open house party to celebrate 40,000

What is the cost of new building?

a. 6,135,000
b. 6,125,000
c. 6,170,000
d. 6,210,000

Solution 30-9 Answer b

Architect fee 100,000


Payment to building contractor 6,000,000
Premium on insurance during construction 25,000
Total cost of new building 6,125,000

Problem 30-10 (IFRS)

Isabela Company incureed the following costs during the current year:

Option fee for land acquired 10,000


Option fee for land not acquired 10,000
Taxes in arrears on building on land 50,000
Payment for land 1,000,000
Demolition of old building, net of salvage of P10,000 100,000
Architect fee 230,000
Payment to city hall for approval of building construction 120,000
Contract price for factory building 5,000,000
Safety fence around construction site 35,000
Safety inspection on building 30,000
Removal of safety fence after completion of building 20,000
New fence surrounding the factory 80,000
Driveways, parking bays and safety lighting 550,000

What is the cost of land and building, repectively?

a. 1,150,000 and 5,435,000


b. 1,160,000 and 5,435,000
c. 1,160,000 and 5,535,000
d. 1,060,000 and 5,535,000

Solution 30-10 Answer b

Land Building
Option fee for land acquired 10,000
Taxes in arrears 50,000
Payment for land 1,000,000
Demolition of old building 100,000
Architect fee 230,000
Payment to city hall 120,000
Contract price 5,000,000
Safety fence around construction site 35,000
Safety inspection on building 30,000
Removal of safety fence 20,000
Total cost 1,160,000 5,435,000

Problem 30-11 (IAA)

Rolex Company, new formed entity, incurred the following expenditures related to land and building.

Cash paid for land and dilapidated building 1,000,000


Removal of old building 50,000
Payment of tenants for vacating old problem 15,000
Architect fee for new building 200,000
Building permit for new constuction 30,000
Fee for title search 10,000
Survey before construction of new building 20,000
Excavation before new construction 100,000
New building constructed 6,000,000
Assessment by City for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Driveways and walks to new building from street
( part of building plan ) 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of changes during construction to make new building
more energy efficient 50,000
Cost of windows broken by Vandals 25,000
Cost of trees shrubs and other land skaping 70,000
New fence surrounding the building 200,000

1. What is the cost of land?

a. 1,145,000
b. 1,215,000
c. 1,130,000
d.1,080,000

2. what is the cost of the new building?

a. 6,510,000
b. 6,560,000
c. 6,585,000
d. 6,420,000

3. What is the cost of land improvement?

a. 270,000
b. 200,000
c. 310,000
d. 240,000

Solution 30-11

Quesion 1 Answer a

Cash paid 1,000,000


Removal of old building 50,000
Payment of tenants 15,000
Fee for title search 10,000
Survey before construction 20,000
Assessment for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Total cost of land 1,145,000

Quesion 2 Answer b

Architect fee 200,000


Building permit 30,000
Excavation 100,000
New building constructed 6,000,000
Driveways and walks to building 40,000
Temporary quarters for crew 80,000
Temporary building to house tools and materials 60,000
Cost of construction changes 50,000
Total cost of new building 6,560,000

Quesion 3 Answer a

Cost of trees shrubs and other land skaping 70,000


New fence surrounding the building 200,000
Total cost of land improvement 270,000

The cost of windows broken by vandals should be charge to expense.

Problem 30-12 (IAA)

Altitude Company purchased a plot of land fo P2,00,000 as a plant site. There was a small office
building on the plot, conservatively appraised at P700,000 which the entity will continue to use
with some modification and renovation. The entity decided to construct a factory bilding and
incurred the following cost:

Materials and supplies 3,000,000


Excavation 100,000
Labor on construction 2,500,000
Cost remodeling office building 200,000
Legal cost of conveying land 10,000
Imputed interest on entity's own money used
during construction 120,000
Cash discounts on materials purchased, not taken 60,000
Supervision by management 70,000
Compensation insrance premium from workers 20,000
Clerical and other expenses related to construction 30,000
Paving of streets and sidewalks 40,000
Plans and specification 140,000
Payment for claims for injuries not covered by insurance 25,000
Legal cause of injury claim 15,000
Saving on construction 200,000

1. What is the initial cost of land?

a. 1,310,000.
b. 1,300,000
c. 1,350,000
d. 1,410,000

2. What is the initial cost of office building?

a. 1,050,000
b. 900,000
c. 700,000
d. 850,000

3. What is the initial cost factory building?

a. 5,720,000
b. 5,920,000
c. 5,800,000
d. 5,600,000

Solution 30-12

Quesion 1 Answer a

Purchase price ( 2,000,000 - 700,000 ) 1,300,000


Legal cost of conveying land 10,000
Total cost of land 1,310,000

Quesion 2 Answer b

Purchase price 700,000


Cost of remodeling 200,000
Total cost of office building 900,000
Quesion 3 Answer c

Materials and supplies 3,000,000


Excavation 100,000
Labor on construction 2,500,000
Cash discounts (60,000)
Supervision by management 70,000
Compensation insurance 20,000
Clerical and other expenses 30,000
Plans and specification 140,000
Total cost of Factory Building 5,800,000

The imputed interest is not is capitalizable. Only interest actually incurred on construction
shall be capitalized.

The payment of claim for injuries and the legal cost of inquiry claim are treated as
outright expense.

Saving on construction is not recognized.

Problem 30-13 (PHILCPA Adapted)

On December 31,2011, the property, plant and equipment of Pearl Company included the following:

Plant assets acquired from Zee Company 7,500,000


Repairs made on building prior to occupancy 200,000
Special tax assessment 30,000
Construction of plotform for machineries 70,000
Remodeling of office space in building including new
partitions and walls 400,000
Purchase of new machinery 800,000
Total property, plant and equipment 9,000,000

In exchange for the plant assets of Zee Company, Pearl Company issued 50,000 shares with P100 per
value. On the date of purchase, the share had a qouted price of P150 and the plant assets had the
following fair value:

Land 500,000
Building 4,000,000
Machinery 1,500,000
1. What is the cost of land?

a. 530,000
b. 500,000
c. 625,000
d. 655,000

2. What is the cost of building?

a. 4,400,000
b. 4,600,000
c. 5,600,000
d. 5,400,000

3. What is the cost of machinery?

a. 2,300,000
b. 2,675,000
c. 2,370,000
d. 2,745,000

Solution 30-13

Question 1 Answer a

Fair value 500,000


Special tax assessment 30,000
Total cost of land 530,000

Question 2 Answer b

Fair value 4,000,000


Repairs 200,000
Remodeling of office space 400,000
Total cost of building 4,600,000

Question 3 Answer c

Fair value 1,500,000


Contruction of platform 70,000
New machinery 800,000
Total cost of machinery 2,370,000
Assets acquired by issuing shares are measured at their fair value.

Problem 30-14 (IAA)

Paragon Company incurred the following costs during the current year in relation to property,
plant and equipment:

Cash paid for purchase of land


Mortgage assumed on the land purchased, including interest of 8%
Real realtor's commission
Legal fees realty taxes and documentation expenses
Amount paid to relocate persons squatting on the property
Cost of tearing down an old building on the land
Amount recovered from the salvage of the old building demolished
Cost of fencing the property
Amount paid to the constructor for the building constructed
Building permit fee
Excavation
Architect fee
Interest that would have been earned had the money used during the
period of construction been invested in the money market
Invoice cost of machine acquired
Freight, unloading and delivery charges
Custom duties and other charges
Allowances and hotel accommudation, paid to foriegn technicians
during installation and testrun the machine

1. What amount should be capitalized as cost of land?

a. 4,000,000
b. 4,110,000
c. 4,150,000
d. 3,000,000

2. What amount should be capitalized as cost of building?

a. 5,300,000
b. 5,410,000
c. 5,450,000
d. 5,560,000
3. What amount should be capitalized as cost of machine?

a. 2,600,000
b. 2,000,000
c. 2,200,000
d. 2,560,000

Solution 30-14

Quesion 1 Answer a

Cash paid for land 2,500,000


Mortgage assumed 1,000,000
Commission 300,000
Legal fees realty taxes and documentation 50,000
Cost relocating squatters 100,000
Demolition of old building 200,000
Amount recovered from the salvage of the old building (150,000)
Cost of land 4,000,000

Question 2 Answer a

Amount paid to the constructor 5,000,000


Building permit fee 50,000
Excavation 50,000
Architect fee 200,000
Cost of building 5,300,000

Question 3 Answer a

Invoice cost 2,000,000


Freight 60,000
Custom duties and other charges 140,000
Allowances and hotel accommudation 400,000
Cost of machine 2,600,000

The cost of fencing the property is classified as land improvement while interest that would have
been earned is an opportunity cost which is not recorded.

Problem 30-15 (IAA)

Excelsior Company was incorporated on January 1, 2011 but began activities on July 1, 2011. The land and
building account on December 31, 2011 as follows:

January 31 Land and building


Feb. 28 Cost of removal of all building
May 1 Partial payment on new construction
May 1 Legal fees paid
June 1 Second payment on new construction
June 1 Insurance premium
June 1 Special tax assessment
June 30 General expenses
July 1 Final payment on new construction

To acquire land and building, the entity paid P800,000 cash and issued 8,000 preference shares wiht
par value of P100 and fair value of P150. Legal fees covered organization cost of P15,000, title examination
of land purchased of P10,000, and legal work of P25,000 in connection with construction contract.
Insurance premium covered the building for a 2-year term beginning May 1, 2011. Special tax assessment
was for street improvements that are permanent in nature. General expenses included the president's
salary of P220,000 and the plant superintendent's salary of P100,000.

1. What is the cost of land?

a. 1,760,000
b. 2,160,000
c. 2,000,000
d. 2,100,000

2. What is the cost of building?

a. 2,165,000
b. 2,065,000
c. 2,000,000
d. 2,305,000

Solution 30-15

Question 1 Answer b

Cash paid 800,000


Fair value of preference shares (8,000 x 150) 1,200,000
Removal of old building 90,000
Title examination 10,000
Special assessment 60,000
Cost of land 2,160,000
Note that the amount recorded for the land and building considered only the par value
of the shares.

Quesion 2 Answer b

Total payment on construction


(700,000 + 400,000 +900,000) 2,000,000
Legal expense on construction contract 25,000
Insurance during construction period (480,000/2x2/12) 40,000
Cost of building 2,065,000

The capitalized insurance premium is only for 2 months from May 1 to July 1, 2011. The general expenses
and organization cost are outright expenses.
200,000
150,000
50,000
20,000
wing details:

150,000
3,000,000
300,000
50,000
100,000
600,000
90,000

8,000,000
Building

30,000

10,000
7,000,000
200,000
7,240,000
2,200,000

1,580,000

1,020,000

4,800,000
2,500,000
1,000,000
300,000
50,000
100,000
200,000
150,000
110,000
5,000,000
50,000
50,000
200,000

150,000
2,000,000
60,000
140,000

400,000
1,600,000
90,000
700,000
50,000
400,000
480,000
60,000
320,000
900,000