SOLUTION MANUAL

Financial Accounting Valix and Peralta

Volume One - 2008 Edition

1 CHAPTER 1

Problem 1-1 Problem 1-2 Problem 1-3 Problem 1-4 1. D 1. A 1. C 1. A 2. C 2. A 2. D 2. C 3. D 3. D 3. D 3. A 4. D 4. B 4. A 4. A 5. C 5. D 5. D 5. D 6. C 6. B 6. A 7. B 7. D 7. D 8. C 8. C 8. B 9. D 9. C 9. D 10. A 10. D 10. D Problem 1-5 Problem 1-6 Problem 1-7 Problem 1-8 1. A 1. A 1. D 1. B 2. A 2. A 2. D 2. B 3. A 3. C 3. C 3. C 4. D 4. A 4. A 4. C 5. D 5. A 5. A 5. A 6. D 6. A 6. C 6. B 7. B 7. B 7. D 7. D 8. D 8. C 8. D 8. D 9. C 9. A 9. B 9. A 10. D 10. B 10. D 10. B Problem 1-9 Problem 1-10 Problem 1-11 Problem 1-12 1. D 1. A 1. C 1. E 2. D 2. B 2. B 2. D 3. C 3. D 3. D 3. B 4. B 4. B 4. A 4. C 5. C 5. A 5. F 5. G 6. D 6. E 6. H 7. C 7. J 7. I 8. A 8. G 8. F 9. D 9. H 9. J

10. A 10. I 10. A

2 Problem 1-13 Problem 1-14 1. Systematic and rational allocation 1. Materiality as a matching process 2. Going concern 2. Comparability or consistency 3. Income recognition principle 3. Monetary unit 4. Accounting entity 4. Income recognition principle 5. Standard of adequate disclosure 5. Time period 6. Comparability 6. Going concern and cost principle 7. Matching principle 7. Accounting entity 8. Cost principle 8. Materiality 9. Reliability 9. Completeness or standard 10. Time period of adequate disclosure 10. Conservatism or prudence Problem 1-15 1. The cost of leasehold improvement should not be recorded as outright expense, but

should be amortized as expense over the life of the improvement or life of the lease, whichever is shorter. This is in conformity with the systematic and rational allocation principle of expense recognition.

2. The fact that the customer has not been seen for a year is not a controlling factor to

write off the account. If the account is doubtful of collection, an allowance should be set up. It is only when there is proof of uncollectibility that the account should be written off.

3. Advertising cost should be treated as outright expense, by reason of the uncertainty

of the benefit that may be derived therefrom in the future, in conformity with “immediate recognition principle”.

4. The balance of the cash surrender value should not be charged to loss. In reality, this

is conceived as a prospective receivable if and when the policy is canceled because of excessive premium in the early stage of policy. The CSV should be classified as noncurrent investment.

5. The cost of obsolete merchandise should not be included as part of inventory but

charged to expense, as a conservative approach. 6. The excess payment represents goodwill which should not be amortized but subject

to impairment. Conservatism dictates that goodwill should be recognized when paid for.

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

3 8. An entry should be made to recognize the inventory fire loss, and such loss should be

treated as component of income. 9. Revenues and expenses of the canteen should be separated from the revenues and

cost of regular business operations in order to present fairly the financial position and performance of the regular operations.

10. The increase in value of land and building should not be taken up in the accounts.

The use of revalued amount is permitted only when the revaluation is made by independent and expert appraiser. The expected sales price of P5,000,000 is not necessarily the revalued amount of the land and building. Moreover, increase in value is not an income until the asset is sold.

Problem 1-16 1. Accrual assumption 6. Income recognition principle 2. Going concern assumption 7. Expense recognition principle 3. Asset recognition principle 8. Cause and effect association principle 4. Cost principle 9. Systematic and rational allocation principle 5. Liability recognition principle 10. Immediate recognition principle Problem 1-17 1. Monetary unit assumption 6. Substance over form 2. Cost principle 7. Income recognition principle 3. Materiality 8. Comparability or consistency 4. Time period 9. Conservatism or prudence 5. Matching principle 10. Adequate disclosure or completeness Problem 1-18 1. The cost of the asset should be the amount of cash paid. No income should be

recognized when an asset is purchased at an amount less than its market value. Revenue arises from the act of selling and not from the act of buying.

2. The entry should be reversed because the pending lawsuit is a mere contingency.

The contingent loss is simply disclosed. To be recognized in accordance with conservatism, the contingent loss must be both probable and measurable.

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

4 4. The entry is incorrect because no revenue shall be recognized until a sale has taken

place. 5. Purchased goodwill should be recorded as an asset. Under the new standard,

goodwill is not amortized anymore but on each balance sheet date it should be assessed for impairment.

Problem 1-19 1. Accrual 2. Going concern 3. Accounting entity 4. Monetary unit 6. Time period

5

CHAPTER 2 Problem 2-1

Easy Company Statement of Financial Position

December 31, 2008

A S S E T S Current assets: Note Cash and cash equivalents 800,000 Accounts receivable 450,000 Inventories 900,000 Prepaid expenses (1) 200,000 Total current assets 2,350,000 Noncurrent assets: Property, plant and equipment (2) 4,400,000 Long-term investments 950,000 Intangible asset (3) 800,000 Total noncurrent assets 6,150,000 Total assets 8,500,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities: Trade and other payables (4) 450,000 Note payable, short-term debt 200,000 Total current liabilities 650,000 Noncurrent liabilities: Mortgage payable, due in 5 years 1,500,000 Note payable, long-term debt 500,000 Total noncurrent liabilities 2,000,000 Shareholders’ equity: Share capital, P100 par 4,000,000 Share premium 500,000 Retained earnings 1,350,000 Total shareholders’ equity 5,850,000 Total liabilities and stockholders’ equity 8,500,000

Note 1 - Prepaid expenses Office supplies 50,000 Prepaid rent 150,000 Total prepaid expenses 200,000 6 Note 2 - Property, plant and equipment Property, plant and equipment 5,600,000 Accumulated depreciation (1,200,000) Net book value 4,400,000 Note 3 - Intangible asset Patent 800,000 Note 4 - Trade and other payables Accounts payable 350,000 Accrued expenses 100,000 Total 450,000 Problem 2-2

Simple Company

Statement of Financial Position December 31, 2008

A S S E T S Current assets: Note Cash 420,000 Trading securities 250,000 Trade and other receivables (1) 620,000 Inventories (2) 1,250,000 Prepaid expenses (3) 20,000 Total current assets 2,560,000 Noncurrent assets:

Property, plant and equipment (4) 4,640,000 Long-term investments (5) 2,000,000 Intangible assets (6) 300,000 Total noncurrent assets 6,940,000 Total assets 9,500,000 7

LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Note Trade and other payables (7) 620,000 Serial bonds payable - current portion 500,000 Total current liabilities 1,120,000 Noncurrent liabilities: Serial bonds payable - remaining portion 2,000,000 Shareholders’ equity: Share capital 5,000,000 Share premium 500,000 Retained earnings 880,000 Total shareholders’ equity 6,380,000 Total liabilities and shareholders’ equity 9,500,000 Note 1 - Trade and other receivables Accounts receivable 500,000 Allowance for doubtful accounts ( 50,000) Notes receivable 150,000 Claim receivable 20,000 Total 620,000 Note 2 - Inventories Finished goods 400,000 Goods in process 600,000 Raw materials 200,000 Factory supplies 50,000 Total 1,250,000 Note 3 - Prepaid expenses Prepaid insurance 20,000

Note 4 - Property, plant and equipment Accum. Book Cost depr. value Land 1,500,000 - 1,500,000 Building 4,000,000 1,600,000 2,400,000 Machinery 2,000,000 1,300,000 700,000 Tools 40,000 - 40,000 Total 7,540,000 2,900,000 4,640,000 8 Note 5 - Long-term investments Investment in bonds 1,500,000 Plant expansion fund 500,000 Total 2,000,000 Note 6 - Intangible assets Franchise 200,000 Goodwill 100,000 Total 300,000 Note 7 - Trade and other payables Accounts payable 300,000 Notes payable 100,000 Income tax payable 60,000 Advances from customers 100,000 Accrued expenses 30,000 Accrued interest on note payable 10,000 Employees income tax payable 20,000 Total 620,000 Problem 2-3

Exemplar Company Statement of Financial Position

December 31, 2008

A S S E T S Current assets: Note Cash and cash equivalents 500,000 Trading securities 280,000

Trade and other receivables (1) 640,000 Inventories 1,300,000 Prepaid expenses 70,000 Total current assets 2,790,000 Noncurrent assets: Property, plant and equipment (2) 5,300,000 Long-term investments (3) 1,310,000 Intangible assets (4) 3,350,000 Other noncurrent assets (5) 150,000 Total noncurrent assets 10,110,000 Total assets 12,900,000

9

LIABILITIES AND SHAREHOLDERS’ EQUITY Note Current liabilities: Trade and other payables (6) 1,000,000 Noncurrent liabilities: Bonds payable 5,000,000 Premium on bonds payable 1,000,000 Total noncurrent liabilities 6,000,000 Shareholders’ equity: Share capital (7) 7,000,000 Reserves (8) 700,000 Retained earnings (deficit) (1,800,000) Total shareholders’ equity 5,900,000 Total liabilities and shareholders’ equity 12,900,000

Note 1 - Trade and other receivables Accounts receivable 400,000 Allowance for doubtful accounts ( 20,000) Notes receivable 250,000 Accrued interest on notes receivable 10,000 Total 640,000 Note 2 - Property, plant and equipment Accum. Book Cost depr. value Land 1,500,000 - 1,500,000

Building 5,000,000 2,000,000 3,000,000 Equipment 1,000,000 200,000 800,000 Total 7,500,000 2,200,000 5,300,000 Note 3 - Long-term investments Land held for speculation 500,000 Sinking fund 400,000 Preference share redemption fund 350,000 Cash surrender value 60,000 Total 1,310,000 Note 4 - Intangible assets Computer software 3,250,000 Lease rights 100,000 Total 3,350,000 10 Note 5 - Other noncurrent assets Advances to officers, not collectible currently 100,000 Long-term refundable deposit 50,000 Total 150,000 Note 6 - Trade and other payables Accounts payable 400,000 Notes payable 300,000 Unearned rent income 40,000 SSS payable 10,000 Accrued salaries 100,000 Dividends payable 120,000 Withholding tax payable 30,000 Total 1,000,000 Note 7 – Share capital Preference share capital 2,000,000 Ordinary share capital 5,000,000 Total 7,000,000 Note 8 - Reserves Share premium – preference 500,000 Share premium – ordinary 200,000 Total 700,000

Problem 2-4

Relax Company

Statement of Financial Position December 31, 2008

A S S E T S

Current assets: Note Cash 400,000 Trade accounts receivable (1) 750,000 Inventories 1,000,000 Prepaid expenses 100,000 Total current assets 2,250,000 Noncurrent assets: Property, plant and equipment (2) 5,600,000 Investment in associate 1,300,000 Intangible assets (3) 350,000 Total noncurrent assets 7,250,000 Total assets 9,500,000

11

LIABILITIES AND SHAREHOLDERS’ EQUITY Note Current liabilities: Trade and other payables (4) 1,350,000 Mortgage note payable-current portion 400,000 Total current liabilities 1,750,000 Noncurrent liabilities: Mortgage note payable, remaining position 1,600,000 Bank loan payable, due June 30, 2010 500,000 Total noncurrent liabilities 2,100,000 Shareholders’ equity: Share capital 3,000,000 Reserves (5) 1,400,000 Retained earnings 1,250,000 Total shareholders’ equity 5,650,000 Total liabilities and shareholders’ equity 9,500,000 Note 1 - Trade accounts receivable Accounts receivable 800,000 Allowance for doubtful accounts ( 50,000) Net realizable value 750,000 Note 2 - Property, plant and equipment

Accum. Book Cost depr. value Land 500,000 - 500,000 Building 5,000,000 2,000,000 3,000,000 Machinery 3,000,000 1,200,000 1,800,000 Equipment 400,000 100,000 300,000 Total 8,900,000 3,300,000 5,600,000 Note 3 - Intangible assets Trademark 150,000 Secret processes and formulas 200,000 Total 350,000 Note 4 - Trade and other payables Notes payable 750,000 Accounts payable 350,000 Income tax payable 50,000 Accrued expenses 60,000 Estimated liability for damages 140,000 Total 1,350,000 12 Note 5 - Reserves Additional paid in capital 300,000 Retained earnings appropriated for plant expansion 1,000,000 Retained earnings appropriated for contingencies 100,000 Total 1,400,000 Problem 2-5

Summa Company

Statement of Financial Position December 31, 2008

A S S E T S

Current assets: Note Cash (1) 700,000 Bond sinking fund 2,000,000 Trade and other receivables (2) 830,000 Inventory 1,200,000 Prepaid expenses 100,000 Total current assets 4,830,000 Noncurrent assets: Property, plant and equipment (3) 5,500,000 Investment property 700,000 Intangible asset (4) 370,000

Total noncurrent assets 6,570,000 Total assets 11,400,000

LIABILITIES AND EQUITY

Note Current liabilities: Trade and other payables (5) 2,050,000 Bonds payable due June 30, 2009 2,000,000 Total current liabilities 4,050,000 Noncurrent liability: Deferred tax liability 650,000 Equity: Share capital (6) 3,500,000 Reserves (7) 500,000 Retained earnings 2,700,000 Total equity 6,700,000 Total liabilities and equity 11,400,000 13 Note 1 - Cash Cash on hand 50,000 Cash in bank 650,000 700,000 Note 2 - Trade and other receivables Accounts receivable 650,000 Allowance for doubtful accounts ( 50,000) Notes receivable 200,000 Accrued interest receivable 30,000 Total 830,000 Note 3 - Property, plant and equipment Accum. Book Cost depr. value Land 1,000,000 - 1,000,000 Building 5,500,000 2,500,000 3,000,000 Furniture and equipment 2,400,000 900,000 1,500,000 Total 8,900,000 3,400,000 5,500,000 Note 4 - Intangible asset

Patent 370,000 Note 5 - Trade and other payables Accounts payable 1,000,000 Notes payable 850,000 Accrued taxes 50,000 Other accrued liabilities 150,000 Total 2,050,000 Note 6 – Share capital Authorized share capital, 50,000 shares, P100 par 5,000,000 Unissued share capital (2,000,000) Issued share capital 3,000,000 Subscribed share capital, 10,000 shares 1,000,000 Subscription receivable ( 500,000) 500,000 Paid in capital 3,500,000 Note 7 - Reserves Share premium 300,000 Retained earnings appropriated for contingencies 200,000 Total 500,000 14 Problem 2-6 (Functional method)

Karla Company

Income Statement Year ended December 31, 2008

Note Net sales revenue (1) 7,700,000 Cost of sales (2) (5,000,000) Gross income 2,700,000 Other income (3) 400,000 Total income 3,100,000 Expenses: Selling expenses (4) 950,000 Administrative expenses (5) 800,000 Other expenses (6) 100,000 1,850,000 Income before tax 1,250,000 Income tax ( 250,000) Net income 1,000,000

Note 1 – Net sales revenue Gross sales 7,850,000 Sales returns and allowances ( 140,000) Sales discounts ( 10,000) Net sales revenue 7,700,000 Note 2 – Cost of sales Inventory, January 1 1,000,000 Purchases 5,250,000 Freight in 500,000 Purchase returns and allowances ( 150,000) Purchase discounts ( 100,000) Net purchases 5,500,000 Goods available for sale 6,500,000 Inventory, December 31 (1,500,000) Cost of sales 5,000,000 Note 3 – Other income Rental income 250,000 Dividend revenue 150,000 Total other income 400,000 15 Note 4 – Selling expenses Freight out 175,000 Salesmen’s commission 650,000 Depreciation – store equipment 125,000 Total selling expenses 950,000 Note 5 – Administrative expenses Officers’ salaries 500,000 Depreciation – office equipment 300,000 Total administrative expenses 800,000 Note 6 – Other expenses Loss on sale of equipment 50,000 Loss on sale of investment 50,000 Total other expenses 100,000

Natural method

Karla Company Income Statement

Year ended December 31, 2008 Note Net sales revenue (1) 7,700,000 Other income (2) 400,000 Total 8,100,000 Expenses: Increase in inventory (3) ( 500,000) Net purchases (4) 5,500,000 Freight out 175,000 Salesmen’s commission 650,000 Depreciation (5) 425,000 Officers’ salaries 500,000 Other expenses (6) 100,000 6,850,000 Income before tax 1,250,000 Income tax ( 250,000) Net income 1,000,000 16 Note 1 – Net sales revenue Gross sales 7,850,000 Sales returns and allowances ( 140,000) Sales discounts ( 10,000) Net sales revenue 7,700,000 Note 2 – Other income Rental income 250,000 Dividend revenue 150,000 Total other income 400,000 Note 3 – Increase in inventory

Inventory, December 31 1,500,000 Inventory, January 1 1,000,000 Increase in inventory 500,000 Note 4 – Net purchases Purchases 5,250,000 Freight in 500,000 Purchase returns and allowances ( 150,000) Purchase discounts ( 100,000) Net purchases 5,500,000 Note 5 – Depreciation Depreciation – store equipment 125,000 Depreciation – office equipment 300,000 Total 425,000 Note 6 – Other expenses Loss on sale of equipment 50,000 Loss on sale of investment 50,000 Total 100,000 17 Problem 2-7

Masay Company Statement of Cost of Goods Manufactured

Year Ended December 31, 2008 Raw materials – January 1 200,000 Purchases 3,000,000 Raw materials available for use 3,200,000 Less: Raw materials – December 31 280,000 Raw materials used 2,920,000 Direct labor 950,000 Factory overhead: Indirect labor 250,000 Superintendence 210,000 Light, heat and power 320,000 Rent – factory building 120,000

Repair and maintenance – machinery 50,000 Factory supplies used 110,000 Depreciation – machinery 60,000 1,120,000 Total manufacturing cost 4,990,000 Goods in process – January 1 240,000 Total Cost of goods in process 5,230,000 Less: Goods in process – December 31 170,000 Cost of goods manufactured 5,060,000 Cost of sales method

Masay Company Income Statement

Year ended December 31, 2008 Note Net sales revenue (1) 7,450,000 Cost of goods sold (2) (5,120,000) Gross income 2,330,000 Other income (3) 210,000 Total income 2,540,000 Expenses: Selling expenses (4) 830,000 Administrative expenses (5) 590,000 Other expense (6) 300,000 1,720,000 Income before tax 820,000 Income tax expense ( 320,000) Net income 500,000 18 Note 1 – Net sales revenue Sales 7,500,000 Sales returns and allowances ( 50,000) Net sales revenue 7,450,000 Note 2 – Cost of goods sold Finished goods – January 1 360,000 Cost of goods manufactured 5,060,000 Goods available for sale 5,420,000 Finished goods – December 31 ( 300,000) Cost of goods sold 5,120,000

Note 3 – Other income Gain from expropriation 100,000 Interest income 10,000 Gain on sale of equipment 100,000 210,000 Note 4 – Selling expenses Sales salaries 400,000 Advertising 160,000 Depreciation – store equipment 70,000 Delivery expenses 200,000 Total 830,000 Note 5 – Administrative expenses Office salaries 150,000 Depreciation – office equipment 40,000 Accounting and legal fees 150,000 Office expenses 250,000 Total 590,000 Note 6 – Other expense Earthquake loss 300,000

19 Nature of expense method

Masay Company Income Statement

Year Ended December 31, 2008

Note Net sales revenue (1) 7,450,000 Other income (2) 210,000 Total income 7,660,000 Expenses: Decrease in finished goods

and goods in process (3) 130,000 Raw materials used (4) 2,920,000 Direct labor 950,000 Factory overhead (5) 1,120,000 Salaries (6) 550,000 Advertising 160,000 Depreciation (7) 110,000 Delivery expenses 200,000 Accounting and legal fees 150,000 Office expenses 250,000 Other expense (8) 300,000 6,840,000 Income before tax 820,000 Income tax expense ( _320,000) Net income 500,000 Note 1 – Net sales revenue Sales 7,500,000 Sales returns and allowances ( 50,000) Net sales revenue 7,450,000 Note 2 – Other income Gain from expropriation 100,000 Interest income 10,000 Gain on sale of equipment 100,000 210,000 Note 3 – Decrease in finished goods and goods in process January 1 December 31 Decrease Finished goods 360,000 300,000 60,000 Goods in process 240,000 170,000 70,000 Total 600,000 470,000 130,000 20 Note 4 – Raw materials used Raw materials – January 1 200,000 Purchases 3,000,000 Raw materials available for use 3,200,000 Raw materials – December 31 280,000 Raw materials used 2,920,000 Note 5 – Factory overhead Indirect labor 250,000

Superintendence 210,000 Light, heat and power 320,000 Rent – factory building 120,000 Repair and maintenance – machinery 50,000 Factory supplies used 110,000 Depreciation – machinery 60,000 Total 1,120,000 Note 6 – Salaries Sales salaries 400,000 Office salaries 150,000 Total 550,000 Note 7 – Depreciation Depreciation – store equipment 70,000 Depreciation – office equipment 40,000 Total 110,000 Note 8 – Other expense Earthquake loss 300,000 Problem 2-8

Youth Company Income Statement

Year ended December 31, 2008 Note Net sales revenue (1) 8,870,000 Cost of goods sold (2) (5,900,000) Gross income 2,970,000 Expenses: Selling expenses (3) 690,000 Administrative expenses (4) 580,000 Other expense (5) 340,000 1,610,000 Income before tax 1,360,000 Income tax expense ( 360,000) Net income 1,000,000 21 Note 1 – Net sales revenue Sales 9,070,000 Sales returns and allowances ( 200,000) Net sales revenue 8,870,000 Note 2 – Cost of goods sold

Beginning inventory 1,500,000 Purchases 5,750,000 Transportation in 150,000 Purchase discounts ( 100,000) 5,800,000 Goods available for sale 7,300,000 Ending inventory (1,400,000) Cost of goods sold 5,900,000 Note 3 – Selling expenses Depreciation – store equipment 110,000 Store supplies 80,000 Sales salaries 500,000 Total 690,000 Note 4 – Administrative expenses Officers’ salaries 400,000 Depreciation – building 120,000 Office supplies 60,000 Total 580,000 Note 5 – Other expense Uninsured flood loss 340,000 22 Problem 2-9

Christian Company

Statement of Cost of Goods Manufactured Year Ended December 31, 2008

Purchases 1,600,000

Freight in 80,000 Total 1,680,000 Increase in raw materials ( 100,000) Raw materials used 1,580,000 Direct labor 1,480,000 Factory overhead: Indirect labor 600,000 Depreciation – machinery 50,000 Factory taxes 130,000 Factory supplies expense 120,000 Factory superintendence 480,000 Factory maintenance 150,000 Factory heat, light and power 220,000 1,750,000 Total manufacturing cost 4,810,000 Decrease in goods in process 90,000 Cost of goods manufactured 4,900,000

Christian Company Income Statement

Year Ended December 31, 2008

Note Sales revenue 8,000,000 Cost of goods sold (1) (5,100,000) Gross income 2,900,000 Expenses: Selling expenses (2) 800,000 Administrative expenses (3) 930,000 1,730,000 Income before tax 1,170,000 Income tax expense ( 170,000) Net income 1,000,000 Note 1 – Cost of goods sold Cost of goods manufactured 4,900,000 Decrease in finished goods 200,000 Cost of goods sold 5,100,000 23 Note 2 – Selling expenses Sales salaries 520,000

Advertising 120,000 Delivery expense 160,000 Total 800,000 Note 3 – Administrative expenses Office supplies expense 30,000 Office salaries 800,000 Doubtful accounts 100,000 Total 930,000

Problem 2-10

Ronald Company

Statement of Cost of Goods Manufactured Year Ended December 31, 2008

Materials – January 1 1,120,000 Purchases 1,600,000 Freight on purchases 220,000 Purchase discounts ( 20,000) 1,800,000 Materials available for use 2,920,000 Less: Materials – December 31 1,560,000 Materials used 1,360,000 Direct labor 2,000,000 Factory overhead: Heat, light and power 600,000 Repairs and maintenance 100,000 Indirect labor 360,000 Other factory overhead 340,000 Factory supplies used (300,000 + 660,000 – 540,000) 420,000 Depreciation – factory building 280,000 2,100,000 Total manufacturing cost 5,460,000 Goods in process – January 1 360,000 Total cost of goods in process 5,820,000 Less: Goods in process – December 31 320,000 Cost of goods manufactured 5,500,000

24

Ronald Company Income Statement

Year Ended December 31, 2008

Note Net sales revenue (1) 6,980,000 Cost of goods sold (2) (5,400,000) Gross income 1,580,000 Other income (3) 160,000

Total income 1,740,000 Expenses: Selling expenses 200,000 Administrative expenses 340,000 540,000 Income before tax 1,200,000 Income tax expense ( 200,000) Net income 1,000,000 Note 1 – Net sales revenue Sales 7,120,000 Sales returns and allowances ( 140,000) Net sales revenue 6,980,000 Note 2 – Cost of goods sold Finished goods – January 1 420,000 Cost of goods manufactured 5,500,000 Goods available for sale 5,920,000 Finished goods – December 31 ( 520,000) Cost of goods sold 5,400,000 Note 3 – Other income Interest revenue 160,000

25 Problem 2-11

Reliable Company Statement of Retained Earnings Year Ended December 31, 2008

Retained earnings – January 1 200,000 Prior period error – overdepreciation in 2007 100,000 Change in accounting policy from FIFO to weighted average method – credit adjustment 150,000 Corrected beginning balance 450,000 Net income 1,300,000 Decrease in appropriation for treasury share 200,000 Total 1,950,000 Cash dividends paid to shareholders ( 500,000) Current appropriation for contingencies ( 100,000) Retained earnings – December 31 1,350,000

Problem 2-12 Net income 3,000,000 Loss from fire ( 50,000) Goodwill impairment ( 250,000) Loss on sale of equipment ( 200,000) Gain on retirement of bonds payable 100,000 Gain on life insurance settlement 450,000 Adjusted net income 3,050,000

Gondola Company Statement of Retained Earnings Year ended December 31, 2008

Balance – January 1 2,600,000 Compensation of prior period not accrued ( 500,000) Correction of prior period error – credit 400,000 Adjusted beginning balance 2,500,000 Net income – adjusted 3,050,000 Stock dividend ( 700,000) Loss on retirement of preference share ( 350,000) Appropriated for treasury share (1,000,000) Balance – December 31 3,500,000

26

CHAPTER 3

Problem 3-1 Problem 3-2 1. D 6. D 1. D 6. D 2. A 7. B 2. D 7. D 3. A 8. C 3. C 8. B 4. C 9. C 4. A 9. D 5. B 10. A 5. C 10. B Problem 3-3 a. Undeposited collections 60,000 Cash in bank – PCIB 500,000 Cash in bank – PCIB (for payroll) 150,000 Cash in bank - PCIB (savings deposit) 100,000 Money market instrument – 90 days 2,000,000 Total cash and cash equivalents 2,810,000 b. Accounts receivable (15,000 + 25,000) 40,000 Cash in foreign bank 100,000 Advances to officers 30,000 Sinking fund cash 450,000 Trading securities 120,000 Bank overdraft 50,000 Cash 690,000 Problem 3-4 Adjusting entries on December 31, 2008

a. Cash 100,000 Accounts payable 100,000 b. Cash 50,000 Accounts payable 50,000 c. Accounts receivable 200,000 Cash 200,000 d. Accounts receivable (20,000 + 60,000 + 30,000) 110,000

Money market placement 1,000,000 Cash in closed bank 50,000 Advances to employee 30,000 Pension fund 400,000 Cash 1,590,000 27 Cash and cash equivalents: Demand deposit (see below) 1,450,000 Time deposit – 30 days 500,000 Petty cash fund 10,000 Total 1,960,000 Demand deposit per book 1,500,000 Undelivered check 100,000 Postdated check delivered 50,000 Window dressing of collection ( 200,000) Adjusted balance 1,450,000 Problem 3-5 1. Cash on hand 500,000 Postdated check (100,000) Adjusted cash on hand 400,000 2. Petty cash fund 20,000 Unreplenished petty cash expenses ( 2,000) Postdated employee check ( 3,000) Adjusted petty cash 15,000 3. Security Bank current account 1,000,000 Postdated company check delivered 200,000 Adjusted balance 1,200,000 4. Cash on hand 400,000 Petty cash fund 15,000 Security Bank current account 1,200,000 PNB current account No. 1 400,000 PNB current account No. 2 ( 50,000) BSP Treasury bill – 60 days 3,000,000 Total cash and cash equivalents 4,965,000 *The BPI Time deposit of P2,000,000 is shown as noncurrent investment because it is restricted for land acquisition. 5. Accounts receivable 100,000 Cash on hand 100,000

Expenses 2,000 Receivable from employee 3,000 Petty cash fund 5,000 Security Bank current account 200,000 Accounts payable 200,000 28 Problem 3-6 1. Cash on hand 500,000 NSF customer check ( 40,000) Postdated customer check ( 60,000) Adjusted on hand 400,000 2. Currency and coins 1,000 Check drawn payable to petty cashier 14,000 Adjusted petty cash 15,000 3. Cash in bank 2,000,000 Undelivered company check 100,000 Postdated company check delivered 150,000 Adjusted cash in bank 2,250,000 4. Accounts receivable (40,000 + 60,000) 100,000 Cash on hand 100,000 Advances to employees 3,000 Cash short or over 2,000 Petty cash fund 5,000 Cash in bank (100,000 + 150,000) 250,000 Accounts payable 250,000 Problem 3-7 1. Cash on hand 200,000 NSF customer check ( 35,000) Postdated customer check ( 15,000) Adjusted cash on hand 150,000 2. Petty cash fund: Currency and coins 5,000 3. Philippine Bank current account 5,000,000 Undelivered company check 25,000 Postdated company check delivered 45,000 Adjusted balance 5,070,000

4. Cash on hand 150,000 Petty cash fund 5,000 Philippine Bank current 5,070,000 Manila Bank current 4,000,000 Asia Bank time deposit 2,000,000 Total cash and cash equivalent 11,225,000 29 5. Accounts receivable 50,000 Cash on hand 50,000 Receivable from officer 2,000 Expenses 12,000 Cash short or over 1,000 Petty cash 15,000 Philippine Bank current 70,000 Accounts payable 70,000

City Bank current 100,000

Bank overdraft 100,000 Problem 3-8

Fluctuating Fund System Imprest Fund System

1. Petty cash fund 10,000 1. Petty cash fund 10,000 Cash in bank 10,000 Cash in bank 10,000 2. Postage 1,500 2. No entry Supplies 5,500 Transportation 1,200 Miscellaneous expense 800 Petty cash fund 9,000 3. Petty cash fund 14,000 3. Petty cash fund 5,000 Cash in bank 14,000 Postage 1,500 Supplies 5,500 Transportation 1,200 Miscellaneous expense 800 Cash in bank 14,000 Problem 3-9

Fluctuating Fund System Imprest Fund System

1. Petty cash fund 10,000 1. Petty cash fund 10,000 Cash in bank 10,000 Cash in bank 10,000

2. Postage 1,500 2. No entry Supplies 2,000 Petty cash fund 3,500 3. No entry 3. Transportation 1,000 Miscellaneous expense 500 Cash in bank 1,500 4. No entry 30

Fluctuating Fund System Imprest Fund System 4. Supplies 1,000 Accounts payable 3,000 5. Postage 1,500 Petty cash fund 4,000 Supplies 3,000 Transportation 1,000 5. Petty cash fund 9,000 Miscellaneous expense 500 Cash in bank 9,000 Accounts payable 3,000 Cash in bank 9,000 6. Postage 2,000 Supplies 3,000 6. No entry Transportation 4,000 Petty cash fund 9,000 7. Petty cash fund 10,000 Postage 2,000 7. Petty cash fund 19,000 Supplies 3,000 Cash in bank 19,000 Transportation 4,000 Cash in bank 19,000 Problem 3-10

Fluctuating Fund System Imprest Fund System May 2 Petty cash fund 10,000 May 2 Petty cash fund 10,000 Cash in bank 10,000 Cash in bank 10,000 29 Postage 1,000 29 Postage 1,000 Supplies 3,000 Supplies 3,000 Transportation 2,500 Transportation 2,500 Miscellaneous expense 1,500 Miscellaneous expense 1,500 Petty cash fund 8,000 Petty cash fund 8,000 Petty cash fund 8,000 Cash in bank 8,000 June 30 Supplies 2,000 June 30 Supplies 2,000 Accounts payable 1,000 Accounts payable 1,000 Transportation 1,000 Transportation 1,000 Petty cash fund 4,000 Petty cash fund 4,000 July 1 Petty cash fund 4,000

Supplies 2,000 Postage 1,000 Transportation 1,000 To reverse the adjustment made on June 30. 15 Petty cash fund 5,000 July 15 Supplies 1,500 Supplies 3,500 Postage 500 Postage 1,500 Transportation 500 Transportation 1,500 Miscellaneous expense 500 Miscellaneous expense 500 Petty cash fund 3,000 Cash in bank 12,000 Petty cash fund 12,000 Cash in bank 12,000

31 Problem 3-11 2008 Nov. 2 Petty cash fund 10,000 Cash in bank 10,000 30 Postage 2,000 Supplies 5,000 Petty cash fund 10,000 Cash in bank 17,000 Dec. 31 Postage 3,000 Supplies 4,000 Special deposit 2,000 Petty cash fund 9,000 2009 Jan. 1 Petty cash fund 9,000 Postage 3,000 Supplies 4,000 Special deposit 2,000 2 No entry 31 Postage 5,000 Supplies 6,000 Accounts payable 7,000 Cash short or over 1,000 Cash in bank 19,000 Problem 3-12

Requirement 1 2008 Dec. 1 Petty cash fund 10,000 Cash in bank 10,000

20 Selling expenses 5,000 Miscellaneous expenses 2,000 Equipment 2,000 Cash in bank 9,000 31 Receivable from employee 2,000 Selling expenses 1,500 Transportation 500 Petty cash fund 4,000 2009 Jan. 1 Petty cash fund 4,000 Receivable from employee 2,000 Selling expenses 1,500 Transportation 500 32 2009 Jan. 15 No entry 31 Selling expenses 2,000 Administrative expenses 2,000 Transportation 1,500 Purchases 1,200 Cash in bank 6,700

Requirement 2 Petty cash 10,000 Less: Petty cash expenses from December 21, 2008 to January 31, 2009: Selling expenses (1,500 + 500) 2,000 Administrative expenses 2,000 Transportation (500 + 1,000) 1,500 Purchases 1,200 6,700 Petty cash before replenishment 3,300 Problem 3-13 Answer B Problem 3-14 Answer C Problem 3-15 Answer A Problem 3-16 Answer A

Petty cash fund 50,000 Payroll account 2,500,000 Undeposited collections 1,100,000 Value added tax account 1,000,000 Cash in bank 2,500,000 Traveler’s check 300,000 Total 3,650,000 Money order 700,000 Petty cash fund 40,000 Total 4,540,000 Problem 3-17 Answer C Checking account #101 1,750,000 Checking account #201 ( 100,000)

Time deposit account 250,000 90-day Treasury bill 500,000 Total cash and cash equivalent 2,400,000 Problem 3-18 Answer B Cash in First Bank 5,000,000 Change fund 50,000 Petty cash fund 15,000 Total 5,065,000 Problem 3-19 Answer B Cash balance per book 6,000,000 Credit adjustment (1,600,000) Adjusted cash balance 4,400,000 33 Note receivable 1,000,000 Accounts receivable (400,000 + 200,000) 600,000 Cash 1,600,000 Problem 3-20 Answer A Checkbook balance 8,000,000 Postdated customer check (2,000,000) NSF check ( 500,000) Undelivered company check 1,500,000 Adjusted balance 7,000,000 Problem 3-21 Answer A Cash on hand 2,400,000 Cash in bank 3,500,000 Petty cash 40,000 Saving deposit 2,000,000 Total deposit 7,940,000 Problem 3-22 Answer B Problem 3-23 Answer A Problem 3-24 Answer A Problem 3-25 Answer A Cash on hand and in bank 5,000,000 Time deposit 6,000,000 Saving deposit 1,000,000 Total 12,000,000 Problem 3-26 Answer B

Currencies 4,000 Coins 1,000 Accommodation check 6,000 Total 11,000 Problem 3-27 Answer C Coins and currency 2,000 Replenishment check 4,000 Total 6,000 Problem 3-28 Answer C Total petty cash 10,000 Currency and coins ( 3,000) Amount of replenishment 7,000 34

CHAPTER 4

Problem 4-1 1. D 6. C 11. C 2. A 7. D 12. B 3. B 8. C 13. A 4. C 9. A 14. C 5. C 10. B 15. C Problem 4-2

Balance per book 65,000 Add: CM for note collected 30,000 Total 95,000 Less: DM for service charge 2,000 Adjusted book balance 93,000 Balance per bank 108,000 Add: Deposit in transit 80,000 Total 188,000 Less: Outstanding checks: No. 102 15,000 105 30,000 107 50,000 95,000 Adjusted bank balance 93,000 Adjusting entries: 1. Cash in bank 30,000

Note receivable 30,000 2. Bank service charge 2,000 Cash in bank 2,000 Problem 4-3 Balance per book 110,000 Add: CM for note collected 45,000 Total 155,000 Less: DM for service charge 5,000 NSF check 10,000 Book error (52,000 – 25,000) 27,000 42,000 Adjusted book balance 113,000

35 Balance per bank 135,000 Add: Deposit in transit 60,000 Erroneous bank debit 8,000 68,000 Total 203,000 Less: Outstanding checks: No. 770 20,000 775 30,000 777 40,000 90,000 Adjusted bank balance 113,000 Adjusting entries: 1. Cash in bank 45,000 Bank service charge 5,000 Note receivable 50,000 2. Bank service charge 5,000 Accounts receivable 10,000 Accounts payable 27,000 Cash in bank 42,000 Problem 4-4 Balance per book 2,840,000 Add: CM for note collected 270,000 Total 3,110,000 Less: DM for service charge 5,000 Adjusted book balance 3,105,000

Balance per bank 3,265,000 Add: Deposit in transit 450,000 Total 3,715,000 Less: Outstanding checks: No. 116 60,000 122 180,000 124 120,000 125 250,000 610,000 Adjusted bank balance 3,105,000 Adjusting entries: 1. Cash in bank 270,000 Bank service charge 10,000

Note receivable 250,000 Interest income 30,000

2. Bank service charge 5,000

Cash in bank 5,000 36 Problem 4-5 Balance per book 5,000,000 Add: Note collected by bank 2,150,000 Total 7,150,000 Less: Bank service charge 50,000 NSF check 500,000 550,000 Adjusted book balance 6,600,000 Balance per bank 4,450,000 Deposit in transit 3,000,000 Total 7,450,000 Less: Outstanding checks 850,000 Adjusted bank balance 6,600,000 Adjusting entries: 1. Cash in bank 2,150,000 Bank service charge 50,000

Note receivable 2,000,000 Interest income 200,000

2. Bank service charge 50,000 Accounts receivable 500,000

Cash in bank 550,000

Problem 4-6 Book balance 1,405,000 Add: Collection of note 2,500,000 Interest on note 150,000 Book error on check no. 175 45,000 2,695,000 Total 4,100,000 Less: Bank service charge 5,000 Payment for light and water 245,000 NSF check 220,000 470,000 Adjusted book balance 3,630,000 Bank balance 5,630,000 Add: Deposit in transit 750,000 Total 6,380,000 Less: Bank error 1,100,000 Outstanding checks 1,650,000 2,750,000 Adjusted bank balance 3,630,000 37 Adjusting entries: 1. Cash in bank 2,695,000 Note receivable 2,500,000 Interest income 150,000 Accounts payable 45,000 2. Bank service charge 5,000 Light and water 245,000 Accounts receivable 220,000 Cash in bank 470,000 Problem 4-7 a. Balance per book – April 30 1,100,000 Credit memo for note collected 60,000 Outstanding checks: No. 1331 40,000 1332 30,000 1334 60,000 1335 10,000 140,000 Total 1,300,000 Less: Bank service charge 5,000

NSF check 25,000 Undeposited collections 270,000 300,000 Balance per bank – April 30 1,000,000 b. Adjusting entries: 1. Cash in bank 60,000 Note receivable 60,000 2. Bank service charge 5,000 Accounts receivable 25,000 Cash in bank 30,000 c. Balance per book – April 30 1,100,000 CM for note collected 60,000 Bank service charge ( 5,000) NSF check ( 25,000) Adjusted cash in bank 1,130,000 38 Problem 4-8 a. Balance per bank 3,500,000 Add: Undeposited collections 550,000 NSF check 50,000 DM for safety deposit 5,000 Unrecorded check 125,000 730,000

Total 4,230,000 Less: Checks outstanding 650,000 Overstatement of creditor’s check 270,000 Understatement of customer’s check 180,000 1,100,000 Balance per book 3,130,000 b. Adjusting entries: 1. Cash in bank 450,000 Accounts payable 270,000 Accounts receivable 180,000 2. Accounts receivable 50,000 Bank service charge 5,000 Accounts payable 125,000 Cash in bank 180,000

c. Balance per book 3,130,000 Overstatement of creditor’s check 270,000 Understatement of customer’s check 180,000 Total 3,580,000 Less: NSF check 50,000 DM for safety box 5,000 Unrecorded check 125,000 180,000 Adjusted book balance 3,400,000 Problem 4-9 Balance per book 2,700,000 Add: Proceeds of bank loan 940,000 Note collected by bank 435,000 1,375,000 Total 4,075,000 Less: Service charge 10,000 Customer’s check charged back 50,000 60,000 Adjusted book balance 4,015,000 39 Balance per bank 4,000,000 Add: Deposit in transit 475,000 Incorrect deposit 90,000 Erroneous bank charge 150,000 Erroneous debit memo 200,000 915,000 Total 4,915,000 Less: Outstanding checks 600,000 Erroneous bank credit 300,000 900,000 Adjusted bank balance 4,015,000 Adjusting entries: 1. Cash in bank 1,375,000 Bank service charge 5,000 Interest expense (60,000 x 1/6) 10,000 Prepaid interest expense 50,000 Loan payable (940,000/94%) 1,000,000 Note receivable 400,000 Interest income 40,000 2. Bank service charge 10,000

Accounts receivable 50,000 Cash in bank 60,000 Problem 4-10 Balance per book (squeeze) 2,120,000 Add: Proceeds of bank loan 500,000 Proceeds of note collected 435,000 935,000 Total 3,055,000 Less: Bank service charge 5,000 NSF check 50,000 55,000 Adjusted book balance 3,000,000 Balance per bank (squeeze) 3,070,000 Add: Deposit in transit 450,000 Bank error (200,000 – 20,000) 180,000 630,000 Total 3,700,000 Less: Outstanding checks (750,000 – 50,000) 700,000 Adjusted bank balance 3,000,000 Adjusting entries: Cash in bank 880,000 Bank service charge (5,000 + 15,000) 20,000 Accounts receivable 50,000 Loan payable 500,000 Notes receivable 400,000 Interest income 50,000 40 Problem 4-11 Balance per book 5,000,000 Add: Proceeds of bank loan 516,000 Total 5,516,000 Less: Understatement of check in payment of account (200,000 – 20,000) 180,000 Petty cash fund 10,000 190,000 Adjusted book balance 5,326,000 Balance per bank 5,500,000 Add: Undeposited collections 300,000 Erroneous bank charge 50,000 Deposit omitted from bank statement 150,000 500,000 Total 6,000,000 Less: Erroneous bank credit 130,000 Outstanding checks 544,000 674,000 Adjusted bank balance 5,326,000 Adjusting entries:

Cash in bank 326,000 Interest expense (84,000 x 2/12) 14,000 Prepaid interest expense 70,000 Accounts payable 180,000 Petty cash fund 4,000 Supplies 2,000 Transportation 3,000 Postage 1,000 Loan payable (516,000/86%) 600,000 Problem 4-12 Balance per book 1,300,000 Add: Overstatement of check number 765 20,000 Check number 555 stopped for payment 10,000 30,000 Total 1,330,000 Less: Service charge 5,000 NSF check 85,000 90,000 Adjusted book balance 1,240,000 Balance per bank 1,200,000 Add: Undeposited collections 275,000 Total 1,475,000 Less: Outstanding checks: Number 761 55,000 762 40,000 763 25,000

764 65,000 765 50,000 235,000

Adjusted bank balance 1,240,000 41 Adjusting entries: 1. Cash in bank 30,000 Accounts payable 20,000 Miscellaneous income 10,000 2. Bank service charge 5,000 Accounts receivable 85,000 Cash in bank 90,000 3. Receivable from cashier 40,000 Accounts receivable 30,000 Sales discounts 10,000 Problem 4-13 a. Bank reconciliation – June 30

Book balance 1,000,000 Add: Credit memo for note collected 300,000 Total 1,300,000 Less: NSF check 100,000 Service charge 4,000 104,000 Adjusted book balance 1,196,000 Bank balance 1,650,000 Add: Deposit in transit 400,000 Total 2,050,000 Less: Outstanding checks 854,000 Adjusted bank balance 1,196,000 Bank reconciliation – July 31 Book balance 1,400,000 Add: Credit memo for bank loan 500,000 Total 1,900,000 Less: Service charge 1,000 Adjusted book balance 1,899,000 Bank balance 2,650,000 Add: Deposit in transit 1,100,000

Total 3,750,000 Less: Outstanding checks 1,851,000 Adjusted bank balance 1,899,000 b. Adjusting entries, July 31 1. Cash in bank 500,000 Bank loan payable 500,000 42 2. Bank service charge 1,000

Cash in bank 1,000 Computation of deposit in transit – July 31 Deposit in transit – June 30 400,000 Add: Deposits during July: Book debits 4,000,000 Less: June credit memo for note collected 300,000 3,700,000 Total 4,100,000 Less: Deposits credited by bank during July: Bank credits 3,500,000 Less: July credit memo for bank loan 500,000 3,000,000 Deposit in transit – July 31 1,100,000

Computation of outstanding checks – July 31 Outstanding checks, June 30 854,000 Add: Checks drawn by company during July: Book credits 3,600,000 Less: June debit memos for NSF check 100,000 Service charge 4,000 104,000 3,496,000 Total 4,350,000 Less: Checks paid by bank during July: Bank debits 2,500,000 Less: July service charge 1,000 2,499,000 Outstanding checks, July 31 1,851,000 Problem 4-14 a. Reconciliation – October 31 Adjusted book balance 600,000 Bank balance 400,000 Add: Deposit in transit 300,000 Total 700,000 Less: Outstanding checks 100,000 Adjusted bank balance 600,000 Reconciliation – November 30 Book balance 1,000,000 Add: Understatement of collection from customer 90,000 Total 1,090,000 Less: Understatement of check disbursement 270,000 Adjusted book balance 820,000 43 Bank balance 930,000 Add: Deposit in transit 190,000 Check of Susan Company charged in error 200,000 390,000 Total 1,320,000 Less: Outstanding checks 400,000 Deposit of Susan Company erroneously credited 100,000 500,000 Adjusted bank balance 820,000 b. Adjusting entries – November 30 1. Cash in bank 90,000 Accounts receivable 90,000

2. Accounts payable 270,000 Cash in bank 270,000 Computation of outstanding checks – October 31 Outstanding checks – October 31 (squeeze) 100,000 Add: Checks issued by depositor: Book disbursements 1,800,000 Understatement of check paid 270,000 2,070,000 Total 2,170,000 Less: Checks paid by bank: Bank disbursements 1,970,000 Check of Susan Company charged in error ( 200,000) 1,770,000 Outstanding checks – November 30 400,000 Computation of deposit in transit – November 30 Deposit in transit – October 31 300,000 Add: Cash receipts deposited during November: Book receipts 2,200,000 Understatement of collection from customer 90,000 2,290,000 Total 2,590,000 Less: Deposits credited by bank during November: Bank receipts 2,500,000 Deposit of Susan Company erroneously credited ( 100,000) 2,400,000 Deposit in transit – November 30 190,000 Problem 4-15 a. Reconciliation on July 1 Adjusted book balance 1,270,000 44 Bank balance 1,720,000 Add: Deposit in transit 500,000 Total 2,220,000 Less: Outstanding checks 950,000 Adjusted bank balance 1,270,000 Reconciliation on July 31 Book balance 470,000 Add: Note collected by bank 1,500,000

Total 1,970,000 Less: Bank service charge 20,000 Adjusted book balance 1,950,000 Bank balance 2,700,000 Add: Deposit in transit 400,000 Total 3,100,000 Less: Outstanding checks: Check # 107 650,000 108 500,000 1,150,000 Adjusted bank balance 1,950,000 b. Adjusting entries on July 31 1. Cash in bank 1,500,000 Note receivable 1,500,000 2. Bank service charge 20,000 Cash in bank 20,000 Computation of deposit in transit – July 1 Deposit in transit – July 1 (squeeze) 500,000 Cash receipts per book 3,400,000 Total 3,900,000 Less: Deposits credited by bank 3,500,000 Deposit in transit – July 31 400,000 Computation of outstanding checks – July 1 Outstanding checks – July 1 (squeeze) 950,000 Checks drawn by depositor 4,200,000 Total 5,150,000 Less: Checks paid by bank 4,000,000 Outstanding checks – July 31 1,150,000 45

Problem 4-16 Balance per book – November 30 500,000 Less: Service charge 10,000 NSF check 50,000 Customer’s note erroneously recorded as cash receipt 100,000 160,000 Adjusted book balance 340,000

Balance per bank – November 30 600,000 Add: Deposit in transit 120,000 Total 720,000 Less: Outstanding checks 380,000 Adjusted bank balance 340,000 Deposit in transit – October 31 45,000 Cash receipts deposited: Book debits 710,000 October collections recorded in November ( 45,000) Customer’s note recorded as cash receipt (100,000) 565,000 Total 610,000 Less: Deposits credited by bank: Bank credits 500,000 Correction of bank error ( 10,000) 490,000 Deposit in transit – November 30 120,000 Outstanding checks – October 31 125,000 Checks issued by depositor: Book credits 1,200,000 October bank service charge ( 5,000) 1,195,000 Total 1,320,000 Checks paid by bank: Bank debits 1,000,000 November bank service charge ( 10,000) November NSF check ( 50,000) 940,000 Outstanding checks – November 30 380,000 Adjusting entry: Bank service charge 10,000 Accounts receivable 50,000 Note receivable 100,000 Cash in bank 160,000 46 Problem 4-17 March 31 Receipts Disbursements April 30 Book balance 200,000 800,000 720,000 280,000 Note collected by bank March 60,000 ( 60,000) April 100,000 100,000 Service charge

March ( 8,000) ( 8,000) April 2,000 ( 2,000) NSF check March ( 20,000) ( 20,000) April 30,000 ( 30,000) Deposit in transit March 31 ( 80,000) 80,000 April 30 (220,000) (220,000) Outstanding checks March 31 178,000 178,000 April 30 (372,000) 372,000 Bank balance 330,000 700,000 530,000 500,000 Problem 4-18 July 31 Receipts Disbursements August 31 Bank balance 800,000 5,000,000 3,940,000 1,860,000 Book error on collection ( 180,000) ( 180,000) Book error on payment ( 540,000) 540,000 Bank error on deposit ( 200,000) ( 200,000) Bank error on payment ( 400,000) 400,000 NSF check: July 100,000 100,000 August ( 50,000) 50,000 Note collected by bank: July ( 200,000) 200,000 August ( 300,000) ( 300,000) Deposit in transit: July 600,000 ( 600,000) August 480,000 480,000 Outstanding checks: July ( 100,000) ( 100,000) August 650,000 ( 650,000) Book balance 1,200,000 4,400,000 3,600,000 2,000,000

47

Problem 4-19 Nov. 30 Receipts Disbursements Dec. 31 Book balance 2,032,000 2,568,000 1,440,000 3,160,000 Bank service charge

November 30 ( 2,000) ( 2,000) December 31 4,000 ( 4,000) Collection of note November 30 ( 200,000) 200,000 December 31 ( 300,000) ( 300,000) Adjusted book balance 1,830,000 2,468,000 1,442,000 2,856,000 Bank balance 1,890,000 2,090,000 1,080,000 2,900,000 Outstanding checks November 30 ( 180,000) ( 180,000) December 31 592,000 ( 592,000) Deposit in transit November 30 80,000 ( 80,000) December 31 498,000 498,000 Check erroneously charged by bank November 30 40,000 ( 40,000) December 31 ( 50,000) 50,000 Adjusted bank balance 1,830,000 2,468,000 1,442,000 2,856,000 Adjusting entry: Bank service charge 4,000 Note receivable 300,000 Cash in bank 304,000

48 Problem 4-20 Sept. 30 Receipts Disbursements Oct. 31

Book balance 1,900,000 1,400,000 2,400,000 900,000 NSF check: September 30 ( 60,000) ( 60,000) October 31 40,000 ( 40,000) Collection of accounts receivable September 30 30,000 ( 30,000) October 31 50,000 50,000 Overstatement of check September 30 90,000 ( 90,000) October 31 ________ ( 120,000) 120,000 Adjusted balance 1,960,000 1,330,000 2,260,000 1,030,000 Bank balance 2,100,000 1,200,000 2,500,000 800,000 Deposit in transit September 30 130,000 ( 130,000) October 31 260,000 260,000 Outstanding checks September 30 ( 270,000) ( 270,000) October 31 30,000 ( 30,000) Adjusted balance 1,960,000 1,330,000 2,260,000 1,030,000 Adjusting entries on October 31 1. Accounts receivable 40,000 Cash in bank 40,000 2. Cash in bank 170,000 Accounts receivable 50,000 Salaries 120,000 49 Problem 4-21 May 31 Receipts Disbursements June 30

Balance per book 2,500,000 5,300,000 5,400,000 2,400,000 Bank service charge: May 31 ( 20,000) ( 20,000) June 30 25,000 ( 25,000) NSF check: June 30 200,000 ( 200,000) Interest collected: June 30 75,000 75,000 Book error: June 30 _________ ( 300,000) 300,000 Adjusted balance 2,480,000 5,375,000 5,305,000 2,550,000 Balance per bank 2,700,000 5,500,000 5,600,000 2,600,000 Deposit in transit May 31 625,000 ( 625,000) June 30 500,000 500,000 Outstanding checks May 31 ( 845,000) ( 845,000) June 30 550,000 ( 550,000) Adjusted balance 2,480,000 5,375,000 5,305,000 2,550,000 Adjusting entries on June 30: 1. Cash in bank 375,000 Interest income 75,000 Equipment 300,000 2. Bank service charge 25,000 Accounts receivable 200,000 Cash in bank 225,000 Problem 4-22 Answer A Balance per book 4,000,000 Bank charges ( 10,000) Customer note collected by bank 1,500,000 Interest on customer note 60,000 NSF customer check ( 250,000) Depositor’s note charged to account (1,000,000) Adjusted book balance 4,300,000 50

Problem 4-23 Answer B Balance per bank 2,000,000 Add: Deposit in transit 200,000 Total 2,200,000 Less: Outstanding checks 400,000 Erroneous bank credit 300,000 700,000 Adjusted bank balance 1,500,000 The adjusted cash in bank can also be computed by starting with the balance per book. Balance per book 850,000 Add: Proceeds of note collected 750,000 Total 1,600,000 Less: NSF checks (150,000 – 50,000) 100,000 Adjusted book balance 1,500,000 Problem 4-24 Answer C Balance per book 8,500,000 Note collected by bank 950,000 Book error (200,000 – 20,000) ( 180,000) NSF check ( 250,000) Bank service charge ( 20,000) Adjusted book balance 9,000,000 Problem 4-25 Answer A Problem 4-26 Answer B Problem 4-27 Answer B Problem 4-28 Answer D Balance per ledger 3,750,000 Service charges ( 50,000) Collection of note 1,500,000 Book error ( 100,000) Unrecorded check for traveling expenses ( 500,000) Adjusted book balance 4,600,000 Balance per bank 6,200,000 Deposit in transit 1,400,000 Total 7,600,000 Outstanding checks (squeeze) 3,000,000 Adjusted bank balance 4,600,000

51 Problem 4-29 Answer B Problem 4-30 Answer A Problem 4-31 Answer C Outstanding checks – May 31 3,000,000 Checks issued by depositor in June: Total credits to cash in June 9,000,000 Service charge in May recorded in June ( 100,000) 8,900,000 Total 11,900,000 Checks paid by bank in June: Checks and charges by bank in June 8,000,000 Service charge in June ( 50,000) NSF check in June (1,000,000) 6,950,000 Outstanding checks – June 30 4,950,000 Problem 4-32 Answer A Balance per book – June 30 2,100,000 Service charges ( 50,000) Collection by bank 550,000 NSF check ( 100,000) Adjusted book balance 2,500,000 Balance per bank – June 30 2,400,000 Deposits outstanding – June 30 500,000 Checks outstanding – June 30 ( 400,000) Adjusted bank balance 2,500,000 Outstanding checks – May 31 100,000 Checks recorded by book in June 2,500,000 Total 2,600,000 Less: Checks recorded by bank in June 2,200,000 Outstanding checks – June 30 400,000 Deposits outstanding – May 31 300,000 Deposits recorded by book in June 1,800,000 Total 2,100,000 Less: Deposits recorded by bank in June 1,600,000 Deposits outstanding – June 30 500,000 Problem 4-33 Answer A Note collected 1,936,000 Book error (1,930,000 – 1,390,000) ( 540,000) NSF check ( 840,000) Service charge ( 47,000) Net debt to cash 509,000

52 Problem 4-34 Answer A Problem 4-35 Answer A Problem 4-36 Answer D Balance per bank – November 30 3,600,000 December deposits 5,500,000 Total 9,100,000 December disbursements (4,400,000) Balance per bank – December 31 4,700,000 Deposit in transit – December 700,000 Outstanding checks – December ( 500,000) Adjusted bank balance – December 31 4,900,000 Balance per book – December 31 (squeeze) 4,300,000 Note collected by bank 1,000,000 NSF check ( 350,000) Service charge ( 50,000) Adjusted book balance 4,900,000 Problem 4-37 Answer A Bank disbursements for July 9,000,000 Outstanding checks – June 30 (1,400,000) Outstanding checks – July 31 1,000,000 Book disbursements for July 8,600,000 Problem 4-38 Answer B Bank receipts for April 6,000,000 Deposits in transit – March 31 (1,000,000) Deposits in transit – April 30 1,500,000 Book receipts for April 6,500,000

53 CHAPTER 5

Problem 5-1 Problem 5-2 Problem 5-3 1. D 6. A 1. A 6. A 1. D 2. D 7. B 2. C 7. D 2. B 3. D 8. C 3. A 8. C 3. C 4. B 9. A 4. A 9. C 4. D 5. A 10. C 5. A 10. D 5. A

Problem 5-4 a. Accounts receivable 775,000 Notes receivable 100,000 Installments receivable 300,000 Advances to suppliers 150,000 Advances to subsidiary 400,000 Claim receivable 15,000 Subscriptions receivable 300,000 Accrued interest receivable 10,000 Customer’s credit balances 30,000 Advances from customers 20,000 Receivables 2,000,000 b. Accounts receivable 775,000 Allowance for doubtful accounts ( 50,000) Notes receivable 100,000 Installments receivable 300,000 Advances to suppliers 150,000 Claim receivable 15,000 Subscription receivable 300,000 Accrued interest receivable 10,000 Total trade and other receivables 1,600,000 c. The advances to subsidiary should be classified as noncurrent and presented as long-term investment.

The customers’ credit balances and advances from customers should be classified as current liabilities and included as part of “trade and other payables”.

Problem 5-5 a. Accounts receivable – January 1 600,000 Charge sales 6,000,000 Total 6,600,000 Less: Collections from customers 5,300,000

Writeoff 35,000 Merchandise returns 40,000 Allowances to customers 25,000 5,400,000 Accounts receivable – December 31 1,200,000 54 b. Subscription receivable 150,000 Deposit on contract 120,000 Claim receivable 60,000 Advances to employees 10,000 Advances to affiliated 100,000 Advances to supplier 50,000 Accounts receivable 490,000 c. Accounts receivable 1,200,000 Claim receivable 60,000 Advances to employees 10,000 Advances to supplier 50,000 Total trade and other receivables 1,320,000 d. The subscriptions receivable should be deducted from subscribed share capital. The deposit on contract should be classified as noncurrent and presented as other noncurrent asset.

The advances to affiliates should be classified as noncurrent and presented as long-term investment.

Problem 5-6 Requirement 1 1. Accounts receivable 3,600,000 Sales 3,600,000 2. Notes receivable 400,000 Accounts receivable 400,000 3. Doubtful accounts 90,000 Allowance for doubtful accounts 90,000 4. Allowance for doubtful accounts 20,000 Accounts receivable 20,000 5. Sales return 15,000 Accounts receivable 15,000

6. Cash 2,450,000 Accounts receivable 2,450,000 7. Sales discount 45,000 Accounts receivable 45,000 8. Cash 150,000 Notes receivable 150,000 55 Requirement 2 Notes receivable 250,000 Requirement 3 Accounts receivable 670,000 Less: Allowance for doubtful accounts 70,000 Net realizable value 600,000

Problem 5-7 FOB destination and freight collect 1. Accounts receivable 500,000 Freight out 10,000 Sales 500,000 Allowance for freight charge 10,000 2. Cash 475,000 Sales discount 15,000 Allowance for freight charge 10,000 Accounts receivable 500,000 FOB destination and freight prepaid 1. Accounts receivable 500,000 Freight out 10,000 Sales 500,000 Cash 10,000 2. Cash 485,000 Sales discount 15,000 Accounts receivable 500,000 FOB shipping point and freight collect 1. Accounts receivable 500,000 Sales 500,000

2. Cash 485,000 Sales discount 15,000 Accounts receivable 500,000

FOB shipping point and freight prepaid 1. Accounts receivable 510,000 Sales 500,000 Cash 10,000 56 2. Cash 495,000 Sales discount 15,000 Accounts receivable 510,000 Problem 5-8 1. Accounts receivable 4,000,000 Sales 4,000,000 2. Cash 1,470,000 Sales discount 30,000 Accounts receivable 1,500,000 3. Cash 1,000,000 Accounts receivable 1,000,000 4. Sales return 100,000 Accounts receivable 100,000 5. Sales return 40,000 Allowance for sales return 40,000

Problem 5-9 Gross method Net method July 1 Accounts receivable 50,000 July 1 Accounts receivable 49,000 Sales 50,000 Sales 49,000

2 Accounts receivable 200,000 2 Accounts receivable 196,000

Sales 200,000 Sales 196,000 12 Cash 196,000 12 Cash 196,000 Sales discount 4,000 Accounts receivable 196,000 Accounts receivable 200,000

30 Cash 50,000 30 Cash 50,000 Accounts receivable 50,000 Accounts receivable 49,000 Sales discount forfeited 1,000 Problem 5-10 a. Credit sales (75% x 5,000,000) 3,750,000 Doubtful accounts (2% x 3,750,000) 75,000 Doubtful accounts 75,000 Allowance for doubtful accounts 75,000 b. Doubtful accounts (1% x 5,000,000) 50,000 Allowance for doubtful accounts 50,000 57 c. Required allowance 80,000 Less: Credit balance of allowance 20,000 Doubtful accounts expense 60,000 Doubtful accounts 60,000 Allowance for doubtful accounts 60,000 d. Required allowance (10% x 500,000) 50,000 Less: Credit balance of allowance 20,000 Doubtful accounts expense 30,000 Doubtful accounts 30,000 Allowance for doubtful accounts 30,000 Problem 5-11 a. Required allowance (5% x 600,000) 30,000 Add: Debit balance in allowance account 10,000 Doubtful accounts expense 40,000 Doubtful accounts 40,000 Allowance for doubtful accounts 40,000 b. Required allowance 50,000 Add: Debit balance in allowance account 10,000 Doubtful accounts expense 60,000 Doubtful accounts 60,000 Allowance for doubtful accounts 60,000 c. Doubtful accounts (2% x 1,900,000) 38,000 Allowance for doubtful accounts 38,000

Problem 5-12 a. Doubtful accounts (3% x 8,000,000) 240,000 Allowance for doubtful accounts 240,000 b. Doubtful accounts 170,000 Allowance for doubtful accounts 170,000 Allowance – January 1 100,000 Doubtful accounts (squeeze) 170,000 Recovery 20,000 Total 290,000 Accounts written off 130,000 Allowance – December 31 (8% x 2,000,000) 160,000 c. Doubtful accounts 210,000 Allowance for doubtful accounts 210,000 58 Allowance – January 1 100,000 Doubtful accounts (squeeze) 210,000 Recovery 20,000 Total 330,000 Accounts written off 130,000 Allowance – December 31 200,000 Problem 5-13 Requirement a 1. Accounts receivable 7,000,000 Sales 7,000,000 2. Cash 2,450,000 Sales discount 50,000 Accounts receivable(2,450,000/98%) 2,500,000 3. Cash 3,900,000 Accounts receivable 3,900,000 4. Allowance for doubtful accounts 30,000 Accounts receivable 30,000 5. Accounts receivable 10,000 Allowance for doubtful accounts 10,000 Cash 10,000 Accounts receivable 10,000 6. Sales return 70,000

Accounts receivable 70,000 Requirement b Doubtful accounts 40,000 Allowance for doubtful accounts 40,000

Rate = 40,000/1,000,000 = 4% Allowance for doubtful accounts – December 31 (4% x 1,500,000) 60,000 Less: Allowance before adjustment 20,000 Doubtful accounts expense 40,000 Requirement c Accounts receivable – December 31 1,500,000 Allowance for doubtful accounts ( 60,000) Net realizable value 1,440,000 59 Problem 5-14 Requirement a

1. Cash 800,000 Accounts receivable 7,200,000 Sales (800,000/10%) 8,000,000 2. Cash 684,000 Sales discount (5% x 720,000) 36,000 Accounts receivable(10% x 7,200,000) 720,000 3. Cash 5,940,000 Accounts receivable 5,940,000 4. Sales discount 10,000 Allowance for sales discount 10,000 5. Sales return 80,000 Accounts receivable 80,000 6. Allowance for doubtful accounts 60,000 Accounts receivable 60,000 Accounts receivable 10,000 Allowance for doubtful accounts 10,000 Cash 10,000 Accounts receivable 10,000

7. Doubtful accounts 70,000 Allowance for doubtful accounts 70,000 Required allowance – December 31 (5% x 2,400,000) 120,000 Less: Allowance before adjustment 50,000 Doubtful accounts 70,000 Rate = 100,000/2,000,000 = 5% Requirement b Accounts receivable 2,400,000 Less: Allowance for doubtful accounts 120,000 Allowance for sales discount 10,000 130,000 Net realizable value 2,270,000 60 Problem 5-15 Requirement a 1. Accounts receivable 2,600,000 Sales (3,070,000 – 470,000) 2,600,000 2. Cash (2,455,000 – 1,455,000) 1,000,000 Accounts receivable 1,000,000 3. Cash 1,455,000 Sales discount 45,000 Accounts receivable (1,455,000/97%) 1,500,000 4. Allowance for doubtful accounts 20,000 Accounts receivable 20,000 5. Cash 470,000 Sales 470,000 6. Sales return and allowances 55,000 Accounts receivable 55,000 7. Sales return and allowances 10,000 Cash 10,000 8. Accounts receivable 5,000 Allowance for doubtful accounts 5,000

Cash 5,000 Accounts receivable 5,000 7. Doubtful accounts 50,000 Allowance for doubtful accounts 50,000 Credit sales 2,600,000 Less: Sales discount 45,000 Sales return and allowances 55,000 100,000 Net credit sales 2,500,000 Doubtful accounts (2,500,000 x 2%) 50,000 Requirement b Accounts receivable 625,000 Less: Allowance for doubtful accounts 60,000 Net realizable value 565,000 61

Problem 5-16 1. Accounts receivable – Jan. 1 1,500,000 4,410,000/98% 4,500,000 Sales 7,935,000 Recovery 15,000 2,475,000/99% 2,500,000 Collections (8,000,000) Sales discount ( 115,000) Sales discount: Writeoff ( 55,000) 2% x 4,500,000 90,000 Sales return ( 30,000) 1% x 2,500,000 25,000 Accounts receivable – Dec. 31 1,250,000 115,000 Problem 5-17 Percent of Required Amount Uncollectible allowance 1. Not yet due 1,700,000 - - 1 – 30 days past due 1,200,000 5% 60,000 31 – 60 days past due 100,000 25% 25,000 61 – 90 days past due 150,000 50% 75,000 Over 90 days past due 1,200,000 100% 120,000 3,270,000 280,000 2. Allowance – January 1 170,000 Receivables 30,000 Doubtful accounts expense (squeeze) 345,000 Total 545,000 Less: Writeoff (235,000 + 30,000) 265,000 Required allowance – December 31 280,000

3. Accounts receivable 3,270,000 Less: Allowance for doubtful accounts 280,000 Net realizable value 2,990,000 Problem 5-18 1. 1,000,000 x 1% 10,000 2. Allowance – January 1 90,000 400,000 x 5% 20,000 Recoveries 20,000 300,000 x 10% 30,000 Doubtful accounts (squeeze) 200,000 200,000 x 25% 50,000 Total 310,000 60,000 x 100% 60,000 Less: Writeoff (100,000 + 40,000) 140,000 1,960,000 170,000 Allowance – December 31 170,000 3. Doubtful accounts 20,000 Allowance for doubtful accounts 20,000 Correct amount 200,000 Recorded (2% x 9,000,000) 180,000 Understatement 20,000 4. Accounts receivable – December 31 1,960,000 Less: Allowance for doubtful accounts 170,000 Net realizable value 1,790,000 62

Problem 5-19 2005 2006 2007 Total 1. Writeoff 26,000 29,000 30,000 85,000 Less: Recoveries 2,000 3,000 4,000 9,000 Net writeoff 24,000 26,000 26,000 76,000 76,000 Percentage to be used in computing the allowance = ------------------- = 2% 3,800,000 2. Credit sales for 2008 3,000,000 Multiply by bad debt percentage 2% Provision for doubtful accounts 60,000 3. Accounts receivable – January 1, 2008 250,000 Add: Credit sales for 2008 3,000,000 Recoveries 5,000 3,005,000 Total 3,255,000 Less: Collections in 2008 2,615,000 Writeoff 40,000 2,655,000 Accounts receivable – December 31, 2008 600,000 4. Allowance for doubtful accounts – January 1 20,000 Add: Doubtful accounts for 2008 60,000 Recoveries 5,000 65,000

Total 85,000 Less: Writeoff 40,000 Allowance for doubtful accounts – December 31 45,000

Problem 5-20 1. Accounts receivable – December 31, 2007 600,000 Add: Sales for 2008 5,000,000 Recovery of accounts written off 10,000 5,010,000 Total 5,610,000 Less: Collection from customers 4,360,000 Accounts written off 50,000 Accounts settled by issuance of note 200,000 4,610,000 Accounts receivable – December 31, 2008 1,000,000 2. Allowance for doubtful accounts – December 31, 2007 30,000 Add: Recovery of accounts written off 10,000 Total 40,000 Less: Accounts written off 50,000 Allowance before adjustment – December 31, 2008 (debit balance) (10,000) 63 3. Required allowance – December 31, 2008 On current accounts (700,000 x 5%) 35,000 On past due accounts (300,000 x 20%) 60,000 Total 95,000 4. Required allowance – December 31, 2008 95,000 Add: Debit balance before adjustment 10,000 Increase in allowance 105,000 5. Doubtful accounts 105,000 Allowance for doubtful accounts 105,000 Problem 5-21 170,000 – 10,000 258,000 – 20,000 Rate in 2007 = ------------------------ = .016 Rate in 2008 = -------------------------- = .017 10,000,000 14,000,000 1. Retained earnings (.016 x 1,250,000) 20,000 Allowance for doubtful accounts 20,000 2. Allowance – January 1 20,000 Recoveries – 2008 10,000 Doubtful accounts – 2008 (squeeze) 92,000 Total 122,000 Less: Writeoff – 2008 88,000

Allowance – December 31 (.017 x 2,000,000) 34,000 3. Accounts receivable 2,000,000 Less: Allowance for doubtful accounts 34,000 Net realizable value 1,966,000 Problem 5-22 1. Allowance – January 1, 2008 500,000 Doubtful accounts recorded (2% x 20,000,000) 400,000 Recovery 50,000 Total 950,000 Less: Writeoff (300,000 + 100,000) 400,000 Allowance balance before adjustment 550,000 2. 5,000,000 x 5% 250,000 2,000,000 x 10% 200,000 1,000,000 x 25% 250,000 500,000 – 100,000 x 75% 300,000 Required allowance – December 31, 2008 1,000,000 3. Doubtful accounts 450,000 Allowance for doubtful accounts (1,000,000 – 550,000) 450,000 64 Problem 5-23 1. Allowance – 1/1/2008 (1% x 2,800,000) 28,000

2. Allowance – 1/1/2008 28,000 Doubtful accounts recorded in 2008 (1% x 3,000,000) 30,000 Recovery 7,000 Total 65,000 Writeoff (27,000) Allowance before adjustment 38,000 3. 300,000 x 1% 3,000 80,000 x 5% 4,000 60,000 x 20% 12,000 25,000 x 80% 20,000 Required allowance – 12/31/2008 39,000 4. Doubtful accounts 1,000 Allowance for doubtful accounts (39,000 – 38,000) 1,000 Problem 5-24 2008 Jan. 1 Loan receivable 4,000,000 Cash 4,000,000

Cash 342,100 Unearned interest income 342,100 Unearned interest income 150,000 Cash 150,000 Dec. 31 Cash 400,000 Interest income 400,000 Unearned interest income 56,948 Interest income 56,948 (10%) (12%) Date Interest received Interest income Amortization Carrying value 01/01/2008 3,807,900 12/31/2008 400,000 456,948 56,948 3,864,848 12/31/2009 400,000 463,782 63,782 3,928,630 12/31/2010 400,000 471,370* 71,370 4,000,000 *12% x 3,928,630 equals 471,435, or a difference of P65 due to rounding. 2009 Dec. 31 Cash 400,000 Interest income 400,000 65 2009 Dec. 31 Unearned interest income 63,782 Interest income 63,782 2010 Dec. 31 Cash 400,000 Interest income 400,000 Unearned interest income 71,370 Interest income 71,370 Cash 4,000,000 Loan receivable 4,000,000 Problem 5-25 2008 Jan. 1 Loan receivable 3,000,000 Cash 3,000,000 Direct origination cost 260,300 Cash 260,300 Cash 100,000 Direct origination cost 100,000

Dec. 31 Cash 240,000 Interest income 240,000 Interest income 50,382 Direct origination cost 50,382 (8%) (6%) Date Interest received Interest income Amortization Carrying value 01/01/2008 3,160,300 12/31/2008 240,000 189,618 50,382 3,109,918 12/31/2009 240,000 186,595 53,405 3,056,513 12/31/2010 240,000 183,487 56,513 3,000,000 2009 Dec. 31 Cash 240,000 Interest income 240,000 Interest income 53,405 Direct origination cost 53,405 2010 Dec. 31 Cash 240,000 Interest income 240,000 66 2010 Dec. 31 Interest income 56,513 Direct origination cost 56,513 Cash 3,000,000 Loan receivable 3,000,000 Problem 5-26 Requirement 1 December 31, 2009 (1,000,000 x .93) 900,000 December 31, 2010 (2,000,000 x .86) 1,720,000 December 31, 2011 (3,000,000 x .79) 2,370,000 Total present value of loan 5,020,000 Requirement 2 Loan receivable – 12/31/2008 6,000,000 Accrued interest (6,000,000 x 8%) 480,000 Total carrying value 6,480,000 Present value of loan 5,020,000

Impairment loss 1,460,000 Requirement 3 2008 Impairment loss 1,460,000 Accrued interest receivable 480,000 Allowance for loan impairment 980,000 2009 Cash 1,000,000 Loan receivable 1,000,000 Allowance for loan impairment 401,600 Interest income (8% x 5,020,000) 401,600 2010 Cash 2,000,000 Loan receivable 2,000,000 Allowance for loan impairment 353,728 Interest income 353,728 Loan receivable – 12/31/2009 5,000,000 Allowance for loan impairment (980,000 – 401,600) ( 578,400) Carrying value – 12/31/2009 4,421,600 Interest income for 2010 (8% x 4,421,600) 353,728 67 2011 Cash 3,000,000 Loan receivable 3,000,000 Allowance for loan impairment 224,672 Interest income 224,672 Loan receivable – 12/31/2010 3,000,000 Allowance for loan impairment (578,400 – 353,672) ( 224,672) Carrying value – 12/31/2010 2,775,328 Interest income for 2011 (8% x 2,775,328) 222,026 Allowance per book 224,672 Difference due to rounding 2,646 Problem 5-27 Requirement 1 December 31, 2009 ( 500,000 x .89) 445,000 December 31, 2010 (1,000,000 x .80) 800,000 December 31, 2011 (2,000,000 x .71) 1,420,000

December 31, 2012 (4,000,000 x .64) 2,560,000 Total present value of loan 5,225,000 Requirement 2 Loan receivable 7,500,000 Accrued interest receivable (12% x 7,500,000) 900,000 Total carrying value 8,400,000 Present value of loan 5,225,000 Impairment loss 3,175,000 Requirement 3 2008 Impairment loss 3,175,000 Accrued interest receivable 900,000 Allowance for loan impairment 2,275,000 2009 Cash 500,000 Loan receivable 500,000 Allowance for loan impairment 627,000 Interest income (12& x 5,225,000) 627,000 2010 Cash 1,000,000 Loan receivable 1,000,000 Allowance for loan impairment 642,240 Interest income 642,240 68

Loan receivable – 12/31/2009 7,000,000 Allowance for loan impairment (2,275,000 – 627,000) (1,648,000) Carrying value – 12/31/2009 5,352,000 Interest income for 2010 (12% x 5,352,000) 642,240

Problem 5-28 December 31, 2011 ( 360,000 x .772) 277,920 Face value of loan 4,000,000 December 31, 2012 ( 360,000 x .708) 254,880 Present value of loan 3,365,360 December 31, 2013 ( 360,000 x .650) 234,000 Impairment loss 634,640 December 31, 2014 (4,360,000 x .596) 2,598,560 Total present value of loan 3,365,360 2008 Cash 360,000 Interest income 360,000 Impairment loss 634,640

Allowance for loan impairment 634,640 2009 Allowance for loan impairment 302,882 Interest income (9% x 3,365,360) 302,882 2010 Allowance for loan impairment 331,758 Interest income (634,640 – 302,882) 331,758 2011 Cash 360,000 Interest income 360,000 2012 Cash 360,000 Interest income 360,000 2013 Cash 360,000 Interest income 360,000 2014 Cash 4,360,000 Interest income 360,000 Loan receivable 4,000,000 Problem 5-29 12/31/2008 Impairment loss 338,500 Allowance for loan impairment 338,500 The remaining term of the loan is 4 years. Accordingly, the present value factor for 4 periods is used. 69 Present value of principal (500,000 x .735) 367,500 Present value of interest (80,000 x 5 = 400,000 x .735) 294,000 Total present value of loan 661,500 Loan receivable 1,000,000 Present value of loan 661,500 Loan impairment loss 338,500 12/31/2009 Allowance for loan impairment 52,920 Interest income (8% x 661,500) 52,920 Problem 5-30 Answer B Accounts receivable-January 1 1,300,000 Credit sales 5,500,000 Collections from customers (5,000,000) Sales return ( 150,000)

Accounts written off ( 100,000) Accounts receivable-December 31 1,550,000 Allowance for doubtful accounts ( 250,000) Allowance for sales return ( 50,000) Net realizable value 1,250,000

Problem 5-31 Answer A Trade accounts receivable 2,000,000 Allowance for doubtful accounts ( 100,000) Claim receivable 300,000 Total trade and other receivables 2,200,000

Problem 5-32 Answer C Accounts receivable (squeeze) 6,700,000 Allowance for doubtful accounts (900,000 – 200,000) ( 700,000) Net realizable value 6,000,000 Problem 5-33 Answer B Allowance – January 1 300,000 Doubtful accounts expense 650,000 Recovery of accounts written off 100,000 Total 1,050,000 Accounts written off 450,000 Allowance – December 31 600,000 70 Problem 5-34 Answer D Allowance – January 1 280,000 Uncollectible accounts expense (squeeze) 100,000 Recovery of accounts written off 50,000 Total 430,000 Accounts written off (230,000) Allowance – December 31 (2,700,000 – 2,500,000) 200,000 Problem 5-35 Answer A Allowance – December 2007 180,000 Doubtful accounts expense 50,000 Total 230,000 Accounts written off (squeeze) 30,000 Allowance – December 2008 200,000

Problem 5-36 Answer B 0 –60 days (1,200,000 x 1%) 12,000 61 – 120 days (900,000 x 2%) 18,000 Over 120 days (1,000,000 x 6%) 60,000 Allowance – December 31, 2008 90,000 Allowance – December 31, 2007 60,000 Uncollectible accounts expense (squeeze) 80,000 Recovery 20,000 Total 160,000 Accounts written off ( 70,000) Allowance – December 31, 2008 90,000 Problem 5-37 Answer D Allowance for sales discount (5,000,000 x 2% x 50%) 50,000 Problem 5-38 Answer A Problem 5-39 Answer B Doubtful accounts expense (3% x 3,000,000 + 10,000) 100,000 Problem 5-40 Answer A Doubtful accounts expense (2% x 7,000,000) 140,000

71 Problem 5-41 Answer A Allowance – January 1 40,000 Doubtful accounts expense (4% x 5,000,000) 200,000 Collection of accounts written off 10,000 Total 250,000 Accounts written off 30,000 Allowance – December 31 220,000 Problem 5-42 Answer D Allowance – January 1 250,000 Doubtful accounts expense (squeeze) 175,000 Total 425,000 Accounts written off 205,000 Allowance – December 31 220,000

Problem 5-43 Answer A Problem 5-44 Answer A

72 CHAPTER 6

Problem 6-1 Problem 6-2 1. C 6. B 1. C 6. A 2. C 7. C 2. D 7. B 3. C 8. B 3. C 8. B 4. A 9. A 4. C 9. B 5. C 10. C 5. B 10. D Problem 6-3 March 1 Cash 2,000,000 Note payable – bank 2,000,000 April 1 Cash 980,000 Sales discount 20,000 Accounts receivable 1,000,000 June 1 Cash 2,000,000 Accounts receivable 2,000,000 Sept. 1 Note payable – bank 2,000,000 Interest expense (12% x 2,000,000 x 6/12) 120,000 Cash 2,120,000 Problem 6-4

Requirement 1

2008 Oct. 1 Cash 3,600,000 Discount on note payable (10% x 4,000,000) 400,000 Note payable – bank 4,000,000 1 Interest expense (400,000 x 3/12) 100,000 Discount on note payable 100,000 2009 Oct. 1 Note payable – bank 4,000,000 Cash 4,000,000 Dec. 31 Interest expense 300,000 Discount on note payable 300,000

Requirement 2 Current liabilities: Note payable – bank (Note 3) 4,000,000 Discount on note payable ( 300,000) Carrying value 3,700,000

73 Note 3 – Note payable – bank Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000. Problem 6-5 May 1 Accounts receivable – assigned 800,000 Accounts receivable 800,000 1 Cash (640,000 – 20,000) 620,000 Service charge 20,000 Note payable – bank 640,000 5 Sales return 30,000 Accounts receivable – assigned 30,000 10 Cash 490,000 Sales discount (2% x 500,000) 10,000 Accounts receivable – assigned 500,000 June 1 Note payable – bank 490,000 Interest expense (2% x 640,000) 12,800 Cash 502,800 7 Allowance for doubtful accounts 10,000 Accounts receivable – assigned 10,000 20 Cash 200,000 Accounts receivable – assigned 200,000 July 1 Note payable – bank (640,000 – 490,000) 150,000 Interest expense (2% x 150,000) 3,000 Cash 153,000 1 Accounts receivable 60,000 Accounts receivable – assigned 60,000 Accounts receivable – assigned 800,000 Less: Collections 690,000 Sales discount 10,000 Sales return 30,000 Worthless accounts 10,000 740,000 Balance 60,000 Problem 6-6 July 1 Accounts receivable – assigned 1,500,000 Accounts receivable 1,500,000

74 July 1 Cash (1,125,000 – 60,000) 1,065,000 Service charge (4% x 1,500,000) 60,000 Note payable – bank 1,125,000 Aug. 1 Note payable – bank 800,000 Accounts receivable – assigned 800,000 1 Interest expense (2% x 1,125,000) 22,500 Cash 22,500 Sept. 1 Cash 168,500 Interest expense 6,500 Note payable – bank 325,000 Accounts receivable – assigned 500,000 Accounts receivable 200,000 Accounts receivable – assigned 200,000 Collections by bank 500,000 Less: Payment of loan (1,125,000 – 800,000) 325,000 Excess collection 175,000 Less: Interest (2% x 325,000) 6,500 Cash remittance from bank 168,500 Problem 6-7 July 1 Accounts receivable – assigned 500,000 Accounts receivable 500,000 1 Cash (400,000 – 10,000) 390,000 Service charge (2% x 500,000) 10,000 Note payable – bank 400,000 Aug. 1 Cash 330,000 Accounts receivable – assigned 330,000 1 Interest expense (1% x 400,000) 4,000 Note payable – bank 326,000 Cash 330,000 Sept. 1 Cash 170,000 Accounts receivable – assigned 170,000 1 Interest expense (1% x 74,000) 740 Note payable – bank 74,000 Cash 74,740

75 Problem 6-8 Requirement a Dec. 1 Accounts receivable – assigned 1,500,000 Accounts receivable 1,500,000

1 Cash 1,250,000 Service charge 50,000 Note payable – bank 1,300,000 31 Cash 970,000 Sales discount 30,000 Accounts receivable – assigned 1,000,000 31 Interest expense (1% x 1,300,000) 13,000 Note payable – bank 957,000 Cash 970,000 Requirement b The accounts receivable – assigned with a balance of P500,000 should be classified as current asset and included in trade and other receivables. The note payable – bank of P343,000 should be classified and presented as a current liability. The company should disclose the equity in assigned accounts as follows: Accounts receivable – assigned 500,000 Note payable – bank (343,000) Equity in assigned accounts 157,000 Problem 6-9 July 1 Accounts receivable – assigned 800,000 Accounts receivable 800,000 1 Cash (640,000 – 24,000) 616,000 Service charge (3% x 800,000) 24,000 Note payable – bank 640,000 Aug. 1 Interest expense (1% x 640,000) 6,400 Note payable – bank 413,600 Accounts receivable – assigned 420,000 Sept. 1 Cash 91,336 Interest expense 2,264 Note payable – bank 226,400 Accounts receivable – assigned 320,000 76

Accounts receivable 60,000 Accounts receivable – assigned 60,000 Bank loan 640,000 August 1 payment 413,600 Balance 226,400 Collections by bank 320,000 Less: Payment of loan 226,400 Interest (1% x 226,400) 2,264 228,664 Remittance from bank 91,336 Problem 6-10 Cash 400,000 Allowance for doubtful accounts 30,000 Loss on factoring 70,000 Accounts receivable 500,000 Problem 6-11 Cash 5,000,000 Receivable from factor 300,000 Allowance for bad debts 250,000 Loss on factoring 450,000 Accounts receivable 6,000,000 Problem 6-12 Feb. 1 Cash 680,000 Service charge (5% x 800,000) 40,000 Receivable from factor (10% x 800,000) 80,000 Accounts receivable 800,000 15 Sales return and allowances 20,000 Receivable from factor 20,000 28 Cash (80,000 – 20,000) 60,000 Receivable from factor 60,000 Problem 6-13 June 1 Accounts receivable 500,000 Sales 500,000 77

June 3 Cash 340,000 Sales discount (2% x 500,000) 10,000 Commission (5% x 500,000) 25,000 Receivable from factor (25% x 500,000) 125,000 Accounts receivable 500,000 9 Sales return and allowances 50,000 Sales discount (2% x 50,000) 1,000 Receivable from factor 49,000

11 No entry 15 Cash (125,000 – 49,000) 76,000 Receivable from factor 76,000 Problem 6-14 July 26 Cash 750,000 Commission (5% x 1,000,000) 50,000 Receivable from factor (20% x 1,000,000) 200,000 Accounts receivable 1,000,000 July 28 Sales return and allowances 50,000 Receivable from factor 50,000 Aug. 31 Cash 150,000 Receivable from factor 150,000 Problem 6-15 1. Cash 150,000 Service charge (5% x 200,000) 10,000 Receivable from factor (20% x 200,000) 40,000 Accounts receivable 200,000 2. Accounts receivable – assigned 300,000 Accounts receivable 300,000 Cash 225,000 Service charge (5% x 300,000) 15,000 Note payable – bank 240,000 3. Doubtful accounts 35,000 Allowance for doubtful accounts 35,000 Required allowance (5% x 1,300,000) 65,000 Less: Allowance – January 1 30,000 Doubtful accounts 35,000

78

4. The net realizable value of the accounts receivable is included in trade and other receivables and presented as current asset. Accounts receivable – unassigned 1,000,000 Accounts receivable – assigned 300,000 Total 1,300,000 Less: Allowance for doubtful accounts 65,000 Net realizable value 1,235,000 The receivable from factor of P40,000 is also included in trade and other receivables. The note payable – bank of P240,000 is classified and presented as current liability. However, the company should disclose the equity in assigned accounts as follows: Accounts receivable – assigned 300,000 Note payable – bank (240,000) Equity in assigned accounts 60,000 Problem 6-16 Books of Motorway Company 1. Cash 2,250,000 Receivable from factor 300,000 Allowance for doubtful accounts 100,000 Loss on factoring 350,000 Accounts receivable 3,000,000 Gross amount 3,000,000 Holdback (10% x 3,000,000) ( 300,000) Commission (15% x 3,000,000) ( 450,000) Cash received 2,250,000 Sales price (3,000,000 x 85%) 2,250,000 Book value of accounts receivable (3,000,000 – 100,000) 2,900,000 Loss on factoring ( 350,000) 2. Cash 250,000 Receivable from factor 250,000 Accounts receivable factored 3,000,000 Collections by factor 2,500,000 Balance – December 31 500,000 Receivable from factor per book 300,000 Required holdback (10% x 500,000) 50,000 Remittance from factor 250,000 79 Books of Freeway Company (factor)

1. Accounts receivable 3,000,000 Cash 2,250,000 Clients retainer 300,000 Commission income 450,000 2. Cash 2,500,000 Accounts receivable 2,500,000 3. Clients retainer 250,000 Cash 250,000 4. Doubtful accounts 20,000 Allowance for doubtful accounts (4% x 500,000) 20,000 Problem 6-17 Jan. 15 Notes receivable 500,000 Sales 500,000 Feb. 15 Cash 496,875 Interest expense 3,125 Notes receivable discounted 500,000 Principal 500,000 Interest (500,000 x 12% x 6/12) 30,000 Maturity value 530,000 Discount (530,000 x 15% x 5/12) 33,125 Net proceeds 496,875 July 15 Notes receivable discounted 500,000 Notes receivable 500,000 Problem 6-18 March 14 Accounts receivable 2,050,000 Sales 2,050,000 April 7 Notes receivable 2,000,000 Freight out 50,000 Accounts receivable 2,050,000 April 20 Cash 2,001,750 Notes receivable discounted 2,000,000 Interest income 1,750 80

Principal 2,000,000 Add: Interest (2,000,000 x 12% x 60/360) 40,000 Maturity value 2,040,000 Less: Discount (2,040,000 x 15% x 45/360) 38,250 Net proceeds 2,001,750 June 4 Accounts receivable (2,040,000 + 10,000) 2,050,000 Cash 2,050,000 Notes receivable discounted 2,000,000 Notes receivable 2,000,000 July 4 Cash 2,070,000 Accounts receivable 2,050,000 Interest income (2,000,000 x 12% x 30/360 20,000 Problem 6-19 Requirement a April 5 Notes receivable 500,000 Accounts receivable 500,000 19 Cash 501,075 Notes receivable discounted 500,000 Interest income 1,075 Principal 500,000 Add: Interest (500,000 x 12% x 60/360) 10,000 Maturity value 510,000 Less: Discount (510,000 x 14% x 45/360) 8,925 Net proceeds 501,075 May 3 Notes receivable 1,000,000 Accounts receivable 1,000,000 16 Cash 995,000 Interest expense 5,000 Notes receivable discounted 1,000,000 Principal 1,000,000 Less: Discount (1,000,000 x 12% x 15/360) 5,000 Net proceeds 995,000 May 25 Notes receivable 1,500,000 Interest income 4,500 Accounts receivable 1,504,500 81 Principal 1,500,000

Add: Interest (1,500,000 x 12% x 60/360) 30,000 Maturity value 1,530,000 Less: Discount (1,530,000 x 12% x 50/360) 25,500 Net credit 1,504,500 June 7 Accounts receivable (510,000 + 20,000) 530,000 Cash 530,000 Notes receivable discounted 500,000 Notes receivable 500,000 15 Notes receivable 800,000 Sales 800,000 June 18 Cash 532,650 Accounts receivable 530,000 Interest income (530,000 x 12% x 15/360) 2,650 Requirement b – Adjustments on June 30 1. Accrued interest receivable 4,000 Interest income (800,000 x 12% x 15/360) 4,000 Accrued interest on D’s note. 2. Notes receivable discounted 1,000,000 Notes receivable 1,000,000 To cancel the contingent liability on B’s note. This note matured on May 31. Since there is no notice of dishonor it is assumed that the said note is paid on the date of maturity. Problem 6-20 May 1 Notes receivable 200,000 Accounts receivable 200,000 1 Notes receivable 300,000 Accounts receivable 300,000 July 30 Accounts receivable 206,000 Notes receivable 200,000 Interest income (200,000 x 12% x 90/360) 6,000 Aug. 1 Cash 306,075 Note receivable discounted 300,000 Interest income 6,075 82 Principal 300,000

Interest (300,000 x 12% x 6/12) 18,000 Maturity value 318,000 Less: Discount (318,000 x 15% x 3/12) 11,925 Net proceeds 306,075 Sept. 1 Notes receivable 132,000 Accounts receivable 120,000 Interest income 12,000 28 Cash 210,120 Accounts receivable 206,000 Interest income (206,000 x 12% x 60/360) 4,120 Oct. 1 Notes receivable 500,000 Sales 500,000 Nov. 1 Accounts receivable (318,000 + 12,000) 330,000 Cash 330,000 Notes receivable discounted 300,000 Notes receivable 300,000 Dec. 30 Cash 515,000 Notes receivable 500,000 Interest income (500,000 x 12% x 90/360 15,000 31 Cash 336,600 Accounts receivable 330,000 Interest income (330,000 x 12% x 2/12) 6,600 Problem 6-21 2008 Jan. 1 Cash 1,000,000 Notes receivable 6,000,000 Land 5,000,000 Gain on sale of land 2,000,000 Dec. 31 Accrued interest receivable 720,000 Interest income (12% x 6,000,000) 720,000 2009 Dec. 31 Accrued interest receivable 806,400 Interest income (12% x 6,720,000) 806,400 2010 Jan. 1 Cash 7,526,400 Notes receivable 6,000,000 Accrued interest receivable 1,526,400 83

Problem 6-22 Jan. 1 Notes receivable 600,000 Sales 540,000 Unearned interest income 60,000 Dec. 31 Cash 200,000 Notes receivable 200,000 31 Unearned interest income 30,000 Interest income 30,000 Year Notes receivable Fraction Interest income 2008 600,000 6/12 30,000 2009 400,000 4/12 20,000 2010 200,000 2/12 10,000 1,200,000 60,000 Problem 6-23 Face value 900,000 Present value 720,540 Present value (300,000 x 2.4018) 720,540 Cash received 100,000 Unearned interest income 179,460 Sales price 820,540 Cost of generator 700,000 Gross income 120,540 Jan. 1 Cash 100,000 Notes receivable 900,000 Sales 820,540 Unearned interest income 179,460 Dec. 31 Cash 300,000 Notes receivable 300,000 31 Unearned interest income 86,465 Interest income 86,465 Date Collection Interest Principal Present value Jan. 1, 2008 720,540 Dec. 31, 2008 300,000 86,465 213,535 507,005 Dec. 31, 2009 300,000 60,841 239,159 267,846 Dec. 31, 2010 300,000 32,154 267,846 - 84 Problem 6-24

Requirement 1 12/31/2008 Note receivable 2,500,000 Sales (500,000 x 3.99) 1,995,000 Unearned interest income 505,000 12/31/2009 Cash 500,000 Note receivable 500,000 Unearned interest income 159,600 Interest income (8% x 1,995,000) 159,600 Requirement 2 Note receivable (2,500,000 – 500,000) 2,000,000 Unearned interest income (505,000 – 159,600) ( 345,400) Book value – 12/31/2009 1,654,600 Requirement 3 Interest income for 2010 (8% x 1,654,600) 132,368 Problem 6-25 Face value of note 400,000 Present value 284,720 Present value (400,000 x .7118) 284,720 Cash received 125,000 Unearned interest income 115,280 Sales price 409,720 Book value 350,000 Gain on sale 59,720 2008 Jan. 1 Cash 125,000 Notes receivable 400,000 Accumulated depreciation 150,000 Equipment 500,000 Gain on sale of equipment 59,720 Unearned interest income 115,280 Dec. 31 Unearned interest income 34,166 Interest income 34,166 Date Interest income Unearned interest Present value Jan. 01, 2008 115,280 284,720 Dec. 31, 2008 34,166 81,114 318,886 Dec. 31, 2009 38,266 42,848 357,152 Dec. 31, 2010 42,848 - 400,000 2009 Dec. 31 Unearned interest income 38,266 Interest income 38,266 85

2010 Dec. 31 Unearned interest income 42,848 Interest income 42,848 2011 Jan. 1 Cash 400,000 Notes receivable 400,000 Problem 6-26 1/1/2008 Note receivable 9,000,000 Loss on sale of land 250,000 Land 7,000,000 Unearned interest income 2,250,000 PV of note (9,000,000 x .75) 6,750,000 Carrying amount of land 7,000,000 Loss on sale ( 250,000) 12/31/2008 Unearned interest income 675,000 Interest income (10% x 6,750,000) 675,000 12/31/2009 Unearned interest income 742,500 Interest income (10% x 7,425,000) 742,500 12/31/2010 Unearned interest income 832,500 Interest income (2,250,000 – 1,417,500) 832,500 1/1/2011 Cash 9,000,000 Note receivable 9,000,000 Problem 6-27 Answer C Note payable 1,000,000 Discount on note payable (1,000,000 x 10.8%) ( 108,000) Net proceeds 892,000

Discount on note payable 108,000 Amortization from August 1 to December 31 (108,000 x 5/12) ( 45,000) Balance – December 31, 2008 63,000 Note payable 1,000,000 Discount on note payable ( 63,000) Carrying value 937,000 Problem 6-28 Question 1 – Answer A Question 2 - Answer B 86 Problem 6-29 Answer A

Problem 6-30 Answer C Problem 6-31 Answer C Principal 500,000 Principal 200,000 Add: Interest (500,000 x 8%) 40,000 Less: Discount Maturity value 540,000 (200,000 x 10% x 6/12) 10,000 Less: Discount Net proceeds 190,000

(540,000 x 10% x 6/12) 27,000 Net proceeds 513,000 Problem 6-32 Answer A Principal 4,000,000 Interest (4,000,000 x 12% x 90/360) 120,000 Maturity value 4,120,000 Less: Discount (4,120,000 x 15% x 60/360) 103,000 Net proceeds 4,017,000 Principal 4,000,000 Interest revenue 17,000 Problem 6-33 Answer C Problem 6-34 Answer B Principal 600,000 Note receivable – June 30, 2007 1,500,000 Add: Interest Less: Payment on July 1, 2008 500,000 (600,000 x 10% x 6/12) 30,000 Balance – July 1, 2008 1,000,000 Maturity value 630,000 Less: Discount Accrued interest from July 1, 2008 (630,000 x 12% x 4/12) 25,200 to June 30, 2009 (1,000,000 x 8) 80,000 Net proceeds 604,800 Problem 6-35 Answer C Problem 6-36 Answer A First payment on January 1, 2008 600,000 Present value of remaining six payments (600,000 x 4.36) 2,616,000 Correct sales revenue 3,216,000 Problem 6-37 Answer D Problem 6-38 Answer C Note receivable 1,000,000 The note receivable is shown at its value on Unearned interest income ( 435,000) December 31, 2008. Carrying value equal to present value (100,000 x 5.65) 565,000 Face value – remaining nine payments (500,000 x 9) 4,500,000

Present value (500,000 x 6.25) 3,125,000 Unearned interest income 1,375,000

87 Problem 6-39 1. Answer C

Note receivable 6,000,000 Present value of note receivable (6,000,000 x .75) 4,500,000 Unearned interest income 1,500,000 Interest income:

2008 (10% x 4,500,000) 450,000 2009 (10% x 4,950,000) 495,000 2010 (1,500,000 – 450,000 – 495,000) 555,000

Total 1,500,000 2. Answer D Present value of note receivable 4,500,000 Carrying amount of equipment 4,800,000 Loss on sale of equipment ( 300,000) Problem 6-40 Answer B Present value of note receivable (1,000,000 x .712) 712,000 Book value of equipment 800,000 Loss on sale ( 88,000) Interest income for first year (12% x 712,000) 85,440 Problem 6-41 Answer D NR from Hart 1,000,000 NR from Maxx (1,150,000 x .68) 782,000 88

CHAPTER 7

Problem 7-1 Problem 7-2 Problem 7-3 Problem 7-4 Problem 7-5 1. D 1. D 1. B 1. D 1. C 2. B 2. D 2. A 2. C 2. B 3. D 3. A 3. A 3. C 3. A 4. D 4. C 4. C 4. A 4. C

5. D 5. D 5. C 5. A 5. D 6. D 6. A 6. D 6. C 6. D 7. C 7. D 7. C 7. A 7. A 8. A 8. A 8. A 8. C 8. B 9. A 9. A 9. A 9. A 9. B 10. A 10. B 10. D 10. C 10. A Problem 7-6 Items counted in the bodega 4,000,000 Items included in count specifically segregated per sales contract ( 100,000) Items returned by customer 50,000 Items ordered and in receiving department 400,000 Items shipped today, FOB destination 150,000 Items for display 200,000 Items on counter for sale 800,000 Damaged and unsalable items included in count ( 50,000) Items in shipping department 250,000 5,700,000 Problem 7-7 Materials 1,400,000 Goods in process 650,000 Finished goods in factory 2,000,000 Finished goods in company-owned retail store (750,000/150%) 500,000 Finished goods in the hands of consignees (400,000 x 60%) 240,000 Finished goods in transit 250,000 Finished goods out on approval 100,000 Materials in transit (330,000 + 30,000) 360,000 Correct inventory 5,500,000 Problem 7-8 Finished goods 2,000,000 Finished goods held by salesmen 100,000 Goods in process (720,000/80%) 900,000 Materials 1,000,000 Materials returned to suppliers for replacement 100,000 Factory supplies (110,000 + 60,000) 170,000 Correct inventory 4,270,000 89 Problem 7-9 1. Inventory 50,000 Income summary 50,000 2. Accounts payable 75,000 Purchases 75,000 3. Purchases 30,000

Accounts payable 30,000 Inventory 30,000 Income summary 30,000 4. Income summary 90,000 Inventory 90,000 5. Purchases 140,000 Accounts payable 140,000 Problem 7-10 1. EXCLUDE – The term of the shipment is FOB destination. 2. EXCLUDE – The goods are held only for consignment. 3. INCLUDE – There is no perfected sale yet as of December 31, 2008. 4. INCLUDE – The term FOB supplier’s warehouse is synonymous with FOB shipping point. 5. EXCLUDE – There is already a constructive delivery since the article was specifically made according to the customer’s specifications and the article is already completed on December 31, 2008. Problem 7-11 Inventory before adjustment 7,600,000 Goods out on consignment 1,000,000 Goods purchased FOB shipping point 250,000 Goods sold FOB shipping point ( 850,000) Goods sold FOB destination 260,000 Goods sold FOB destination 840,000 Correct December 31 inventory 9,100,000 90 Problem 7-12 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 7-13

Requirement a

Periodic System Perpetual System 1. Purchases 800,000 1. Merchandise inventory 800,000 Accounts payable 800,000 Accounts payable 800,000 2. Accounts payable 50,000 2. Accounts payable 50,000 Purchase returns 50,000 Merchandise inventory 50,000 3. Accounts payable 600,000 3. Accounts payable 600,000 Cash 600,000 Cash 600,000 4. Accounts receivable 1,580,000 4. Accounts receivable 1,580,000 Sales 1,580,000 Sales 1,580,000 5. Sales return 40,000 Cost of sales 790,000 Accounts receivable 40,000 Merchandise inventory 790,000 6. Cash 1,360,000 5. Sales return 40,000 Accounts receivable 1,360,000 Accounts receivable 40,000 7. Inventory-Dec. 31 60,000 Merchandise inventory 20,000 Income summary 60,000 Cost of sales 20,000 (60 x 1,000) 6. Cash 1,360,000 Accounts receivable 1,360,000 7. Inventory shortage 10,000 Merchandise inventory 10,000 Merchandise inventory per book 70,000 Physical count 60,000 Shortage 10,000

Requirement b

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

91 Problem 7-14 Company A List price 500,000 Less: First trade discount (20% x 500,000) 100,000 400,000 Second trade discount (10% x 400,000) 40,000 360,000 Third trade discount (10% x 360,000) 36,000 Invoice price 324,000 Less: Cash discount (2% x 324,000) 6,480 Payment within the discount period 317,520 Company B List price 500,000 Less: Trade discount (35% x 500,000) 175,000 Invoice price 325,000 Less: Cash discount (2% x 325,000) 6,500 Payment within the discount period 318,500 Problem 7-15 Requirement a Gross method Net method 1. Purchases 4,750,000 1. Purchases 4,655,000 Accounts payable 4,750,000 Accounts payable 4,655,000 2. Freight in 250,000 2. Freight in 250,000 Cash 250,000 Cash 250,000 3. Accounts payable 1,650,000 3. Accounts payable 1,617,000 Cash 1,617,000 Cash 1,617,000 Purchase discount 33,000 Accounts payable 2,100,000 Accounts payable 2,058,000 Cash 2,100,000 Purchase discount lost 42,000 Cash 2,100,000 4. No entry 4. Purchase discount lost 20,000 Accounts payable 20,000 (1,000,000 x 2%) 5. Inventory 1,000,000 5. Inventory 981,000 Income summary 1,000,000 Income summary 981,000

92 Requirement b Gross method Net method Purchases 4,750,000 4,655,000 Freight in 250,000 250,000 Total 5,000,000 4,905,000 Less: Purchase discounts 33,000 -___ Goods available for sale 4,967,000 4,905,000 Less: Inventory – December 31 1,000,000 981,000 Cost of sales 3,967,000 3,924,000 Ending inventory: Gross (5,000,000/5) 1,000,000 Net (4,905,000/5) 981,000 Problem 7-16 Gross method Sept. 1 Purchases 650,000 Accounts payable 650,000 1 Freight in 20,000 Accounts payable 20,000

7 Accounts payable 10,000 Purchase returns and allowances 10,000

Oct. 1 Accounts payable 660,000 Cash 660,000 Net method Sept. 1 Purchases 637,000 Accounts payable 637,000 1 Freight in 20,000 Accounts payable 20,000

7 Accounts payable (10,000 x 98%) 9,800 Purchase returns and allowances 9,800

Oct. 1 Accounts payable (657,000 – 9,800) 647,200 Purchase discount lost (2% x 640,000) 12,800 Cash 660,000

93 Problem 7-17 Gross method Net method 1. Merchandise inventory 1,000,000 1. Merchandise inventory 980,000 Accounts payable 1,000,000 Accounts payable 980,000 2. Accounts payable 50,000 2. Accounts payable 50,000 Cash 50,000 Cash 50,000 3. Accounts payable 800,000 3. Accounts payable 784,000 Cash 784,000 Cash (800,000 x 98%) 784,000 Cost of sales 16,000 4. Accounts payable 150,000 4. Accounts payable 146,000 Cash 150,000 Purchase discount lost 4,000 Cash 150,000 5. Cash 1,200,000 5. Cash 1,200,000 Sales 1,200,000 Sales 1,200,000 Cost of sales 700,000 Cost of sales 686,000 Merchandise inventory 700,000 Merchandise inventory 686,000 (1,000,000 x 70%) (980,000 x 70%) Problem 7-18 Units Unit cost Total cost 1. FIFO - periodic Lot No. 4 500 100 50,000 5 14,500 90 1,305,000 15,000 1,355,000 2. Beginning inventory 10,000 80 800,000 Purchases: Lot No. 1 2,000 100 200,000 2 8,000 110 880,000 3 6,000 120 720,000 4 9,500 100 950,000 5 14,500 90 1,305,000 Goods available for sale 50,000 4,855,000 Weighted average (4,855,000/50,000) 15,000 97.10 1,456,500

3. Specific identification Lot 3 6,000 120 720,000 4 9,000 100 900,000 15,000 1,620,000 Goods available Inventory-Dec. 31 Cost of sales FIFO 4,855,000 1,355,000 3,500,000 Weighted average 4,855,000 1,456,500 3,398,500 Specific identification 4,855,000 1,620,000 3,235,000 94 Problem 7-19 Units Unit cost Total cost FIFO December 17 10,000 45 450,000 22 20,000 43 860,000 30,000 1,310,000 Average method December 1 10,000 52 520,000 7 30,000 50 1,500,000 17 60,000 45 2,700,000 22 20,000 43 860,000 Available for sale 120,000 5,580,000 Inventory (5,580,000/120,000) 30,000 46.50 1,395,000 FIFO Average Goods available for sale 5,580,000 5,580,000 Less: Inventory – December 31 1,310,000 1,395,000 Cost of goods sold 4,270,000 4,185,000 Problem 7-20 The stock cards are not prepared anymore. The end results are simply given. Units Unit cost Total cost FIFO Ending inventory 4,000 210 840,000 Cost of sales 2,700,000 Average method Ending inventory 4,000 252.50 1,010,000 Cost of sales 2,530,000

Problem 7-21 Purchases Sales Inventory increment 2006 5,000 4,000 1,000 2007 9,000 7,000 2,000 2008 15,000 12,000 3,000

Total inventory – December 31, 2008 (units) 6,000 Sales 1,200,000 Cost of sales: Inventory – December 31, 2007 (3,000 x 60) 180,000 Purchases 1,125,000 Goods available for sale 1,305,000 Less: Inventory – December 31, 2008 (6,000 x 75) 450,000 855,000 Gross income 345,000 95 Problem 7-22 Units Unit cost Total cost FIFO October 1 15,000 60 900,000 Weighted average – periodic January 1 10,000 40 400,000 April 1 15,000 50 750,000 October 1 25,000 60 1,500,000 Goods available for sale 50,000 2,650,000 Less: Sales 35,000 Ending inventory 15,000 Weighted average (2,650,000/50,000) 15,000 53 795,000 Units Unit cost Total cost Moving average – perpetual January 1 10,000 40 400,000 31 ( 5,000) 40 ( 200,000) Balance 5,000 40 200,000 April 1 15,000 50 750,000 Total 20,000 47.50 950,000 July 31 (18,000) 47.50 ( 855,000) Balance 2,000 47.50 95,000 October 1 25,000 60__ 1,500,000 Total 27,000 59.07 1,595,000 December 31 (12,000) 59.07 ( 708,840) Balance 15,000 59.07 886,160 FIFO Weighted average Inventory – January 1 400,000 400,000 Purchases 2,250,000 2,250,000 Goods available for sale 2,650,000 2,650,000 Less: Inventory – December 31 900,000 795,000 Cost of sales 1,750,000 1,855,000 Cost of sales – Weighted average perpetual January 31 Sale 200,000 July 31 Sale 855,000 December 31 Sale 708,840

Total cost of sales 1,763,840 Problem 7-23 Units Unit cost Total cost FIFO October 1 purchase 300 10,000 3,000,000 96 Units Unit cost Total cost Weighted average January 1 200 7,500 1,500,000 April 5 300 9,000 2,700,000 October 1 500 10,000 5,000,000 Goods available for sale 1,000 9,200,000 Inventory – December 31 (9,200,000/1,000) 300 9,200 2,760,000 FIFO Weighted average Inventory – January 1 1,500,000 1,500,000 Purchases 7,700,000 7,700,000 Goods available for sale 9,200,000 9,200,000 Less: Inventory – December 31 3,000,000 2,760,000 Cost of goods sold 6,200,000 6,440,000 Problem 7-24 Sales 6,000,000 Gross profit (2,400,000) Cost of goods sold 3,600,000 Inventory – July 31 (see below) 928,000 Cost of goods available for sale 4,528,000 Purchases for July (3,174,000) Inventory – July 1 1,354,000 Quantity Unit cost Total cost July 12 1,000 60 60,000 25 14,000 62 868,000 FIFO inventory – July 31 15,000 928,000 Problem 7-25 1. Cost of units available for sale for July 1,452,100 Purchases for July (1,042,100) Cost of inventory – July 1 410,000 Number of units – July 1 (410,000 / P4) 102,500 2. July 1 inventory 102,500 Purchases for July 200,000

Total units available for sale for July 302,500 July 31 inventory ( 60,000) Units sold during the month of July 242,500 3. Average unit cost (1,452,100 / 302,500) 4.80 Inventory – July 31 (60,000 x 4.80) 288,000 Another computation (1,452,100 – 1,164,100) 288,000 97 Problem 7-26 Units Average unit cost Total cost 1. Inventory – December 31, 2007 2007 layer 11,000 138 1,518,000 2. Inventory – December 31, 2006 14,000 1,480,000 Purchases – 2007 12,000 138 1,656,000 Materials available 26,000 3,136,000 Less: Inventory – December 31, 2007 11,000 1,518,000 Raw materials used – 2007 15,000 1,168,000 3. Inventory – December 31, 2008 2008 layer 15,000 153 2,295,000 4. Inventory – December 31, 2007 11,000 1,518,000 Purchases – 2008 20,000 153 3,060,000 Materials available 31,000 4,578,000 Less: Inventory – December 31, 2008 15,000 2,295,000 Raw materials used – 2008 16,000 2,283,000 Problem 7-27 Available for sale 42,000 Units sold (2,800,000/100) 28,000 Ending inventory 14,000 Units Unit cost Total cost FIFO September 5 2,000 43.00 86,000 25 12,000 42.50 510,000 14,000 596,000 Weighted average (1,753,500/42,000) 14,000 41.75 584,500 Average FIFO Available for sale 1,753,500 1,753,500 Less: Ending inventory 584,500 596,000

Cost of sales 1,169,000 1,157,500 (Sch. 1) (Sch. 2) 98 Problem 7-28 2006 2007 2008 Cost of sales – Average 1,500,000 2,000,000 2,400,000 Understatement of ending inventory: 2006 ( 150,000) 150,000 2007 ( 200,000) 200,000 2008 _______ ________ ( 270,000) Cost of sales – FIFO 1,350,000 1,950,000 2,330,000 2006 2007 2008 Sales 3,000,000 4,000,000 4,800,000 Cost of sales – FIFO 1,350,000 1,950,000 2,330,000 Gross income 1,650,000 2,050,000 2,470,000 Operating expenses 800,000 900,000 1,000,000 Operating income 850,000 1,150,000 1,470,000 Proof Net income – Average 700,000 1,100,000 1,400,000 Understatement of ending inventory: 2006 150,000 ( 150,000) 2007 200,000 ( 200,000) 2008 _______ _____ 270,000 Net income – FIFO 850,000 1,150,000 1,470,000 Problem 7-29 Lower of Units cost or NRV Inventory value Materials: R 1,000 100 100,000 S 2,000 250 500,000 T 3,000 300 900,000 Goods in process: X 4,000 480 1,920,000 Y 5,000 620 3,100,000 Finished goods: A 2,000 790 1,580,000 B 2,000 730 1,460,000

Valuation at lower of cost or NRV 9,560,000 99 Problem 7-30 (Lower of cost or NRV) Units Unit cost NRV Inventory value A 1,000 120 150 120,000 B 1,500 110 120 165,000 C 1,200 150 140 168,000 D 1,800 140 160 252,000 E 1,700 130 160 221,000 926,000 Problem 7-31 Product Unit cost NRV Lower of cost or NRV 1 700 650 650 2 475 745 475 3 255 250 250 4 450 740 450 Problem 7-32 Units Unit cost NRV Lower of cost or NRV Appliances: A 500 2,500 2,700 1,250,000 B 300 3,700 3,600 1,080,000 Car accessories C 600 1,400 2,000 840,000 D 800 2,100 2,000 1,600,000 Valuation at lower of cost or NRV 4,770,000 Problem 7-33 1. September 30 (40,000 x 75) 3,000,000 December 31 (10,000 x 90) 900,000 Total FIFO cost 3,900,000 NRV (50,000 x 72) 3,600,000 Loss on inventory writedown 300,000 Inventory – January 1 1,200,000 Purchases 9,400,000 Purchase discount ( 400,000) Goods available for sale 10,200,000 Less: Inventory – December 31 3,900,000 Cost of goods sold before inventory writedown 6,300,000 Loss on inventory writedown 300,000

Cost of goods sold after inventory writedown 6,600,000 2. Inventory – December 31 3,900,000 Income summary 3,900,000 100 Loss on inventory writedown 300,000 Allowance for inventory writedown 300,000 Problem 7-34 a. No adjustment is necessary because the market price is higher than the agreed price.

Any gain on purchase commitment is not recognized. b. No adjustment is necessary because the market price has not declined as of December

31, 2008. The market decline is only a possible loss. c. Loss on purchase commitment (10,000 x 30) 300,000 Estimated liability for purchase commitment 300,000 d. Purchases (100,000 x 150) 1,500,000

Loss on purchase commitment 200,000 Estimated liability for purchase commitment 300,000 Accounts payable (10,000 x 200) 2,000,000 e. Purchases 2,000,000 Estimated liability for purchase commitment 300,000 Accounts payable 2,000,000 Gain on purchase commitment 300,000 Problem 7-35 12/31/2008 Loss on purchase commitment 500,000 Estimated liability for PC 500,000 03/31/2009 Purchase (100,000 x 54) 5,400,000 Estimated liability for PC 500,000 Accounts payable 5,500,000 Gain on purchase commitment 400,000 Problem 7-36 Purchase price 26,850,000 Improving and subdividing cost 43,500,000 Total cost 70,350,000 Sales price Fraction Cost Group 1 (20 x 3,000,000) 60,000,000 60/105 40,200,000

2 (10 x 2,500,000) 25,000,000 25/105 16,750,000 3 (10 x 2,000,000) 20,000,000 20/105 13,400,000 105,000,000 70,350,000 101 Cost per lot Unsold Cost Group 1 (40,200,000/20) 2,010,000 5 10,050,000 2 (16,750,000/10) 1,675,000 4 6,700,000 3 (13,400,000/10) 1,340,000 3 4,020,000 20,770,000 Problem 7-37 Inventory Accounts payable Net sales Unadjusted 1,750,000 1,200,000 8,500,000 1 - - ( 35,000) 2 50,000 50,000 - 3 20,000 - - 4 26,000 - ( 40,000) 5 25,000 - - 6 30,000 - - 7 - 60,000 - 8 10,000 20,000 -_ __ Adjusted 1,911,000 1,330,000 8,425,000 Problem 7-38 Inventory Accounts payable Net sales Unadjusted 1,250,000 1,000,000 9,000,000 1 ( 165,000) ( 165,000) - 2 ( 20,000) - - 3 - - ( 40,000) 4 210,000 - - 5 25,000 25,000 - ___ 1,300,000 860,000 9,040,000 Problem 7-39 1. Biological asset 600,000 Cash 600,000 2. Biological asset 700,000 Gain from change in fair value 700,000 3. Biological asset 100,000 Gain from change in fair value 100,000 4. Loss from change in fair value 90,000 Biological asset 90,000

102 Problem 7-40 Requirement 1 1. To record the purchase of one animal aged 2.5 years on July 1. Biological assets 108 Cash 108 2. To record the birth of one animal on July 1 with fair value of P70. Biological assets 70 Cash 70 3. To record the change in the fair value: Biological assets 222 Cash 222 Fair value of 10 animals on January 1 (10 x P100) 1,000 Newborn animal on July 1 at fair value 70 Acquisition cost of one animal on July 1 108 Total book value of biological assets – December 31 1,178 Fair value of 3-year old animals on December 31 (11 x P120) 1,320 Fair value of 0.5-year old animal on December 31, the newborn (1 x P80) 80 Total fair value – December 31, 2008 1,400 Book value of biological assets – December 31 1,178 Increase in fair value 222 Requirement 2 Statement of financial position : Biological assets 1,400 Income statement: Gain from change in fair value (70 + 222) 292 Problem 7-41 Answer C Physical count 1,500,000 Problem 7-42 Answer D Physical count 2,500,000 Merchandise shipped FOB shipping point on December 30, 2008 from a vendor 100,000 Goods shipped FOB shipping point to a customer on January 4, 2009 400,000

Correct inventory 3,000,000 103 Problem 7-43 Answer D Problem 7-44 Answer D Markup (40% x 500,000) 200,000 Goods received on consignment 400,000 Total reduction 600,000 Problem 7-45 Answer B Inventory shipped on consignment 600,000 Freight paid 50,000 Consigned inventory 650,000 Problem 7-46 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 7-47 Answer A Problem 7-48 Answer A Consignment sales revenue (40 x P10,000) 400,000 Problem 7-49 Answer B Sales (900 x 1,000) 900,000 Commission (10% x 900,000) ( 90,000) Payable to consignor 810,000 Problem 7-50 Answer C List price 900,000 Trade discounts 20% x 900,000 (180,000) 720,000 10% x 720,000 ( 72,000) Invoice price 648,000 Freight 50,000 Cost of purchase 698,000

104 Problem 7-51 Answer B List price 1,000,000 Trade discounts 20% x 1,000,000 ( 200,000) 800,000 10% x 800,000 ( 80,000) Invoice price 720,000 Cash discount (5% x 720,000) ( 36,000) Net amount 684,000 Freight charge 50,000 Total remittance 734,000 Problem 7-52 Answer A Problem 7-53 Answer B Purchases of IBM compatibles 1,700,000 Purchases of commercial software packages 1,200,000 Total 2,900,000 Less: Purchase return ( 50,000) Net purchases 2,850,000 Discounts available on purchases (2% x 2,850,000) 57,000 Less: Purchase discount taken 17,000 Purchase discount lost 40,000 Problem 7-54 Answer D Accounts payable per book 2,000,000 Goods lost in transit, FOB shipping point 100,000 Purchase return ( 50,000) Adjusted balance 2,050,000 Problem 7-55 Answer D Accounts payable per book 900,000 Undelivered checks 400,000 Unrecorded purchases on December 28 (150,000 x 98%) 147,000 Purchase on December 20 (200,000 x 95%) 190,000 1,637,000 Problem 7-56 Answer A Net sales per book 5,000,000 Sales return ( 50,000) Goods shipped on December 31, 2008 300,000 Goods shipped on January 3, 2009 recorded on December 30, 2008 ( 200,000) Adjusted balance 5,050,000 105

Problem 7-57 Answer A Gross sales 4,000,000 Estimated sales return (10% x 4,000,000) ( 400,000) Net sales 3,600,000 Problem 7-58 Answer A Units Unit cost Total cost January 18 15,000 23 345,000 28 10,000 24 240,000 Total FIFO cost 25,000 585,000 Problem 7-59 Answer A (4,500 x 73.50) 330,750 Problem 7-60 Answer A Units Unit cost Total cost January 10 2,000 100 200,000 February 8 3,000 110 330,000 5,000 530,000 Weighted average unit cost (530,000/5,000) 106 Cost of inventory (3,000 x 106) 318,000 Problem 7-61 Answer B Units Unit cost Total cost January 1 40,000 5 200,000 January 17 (35,000) 5 (175,000) Balance 5,000 5 25,000 January 28 20,000 8 160,000 Balance 25,000 7.40 185,000 Problem 7-62 Answer D Units Total cost January 1 200 300,000 April 3 300 525,000 October 1 500 1,000,000 Total 1,000 1,825,000 Less: Sales (400 + 400) 800 Ending inventory 200 Average unit cost (1,825,000/1,000) 1,825 Cost of inventory (200 x 1,825) 365,000 106 Problem 7-63 Answer C Units Unit cost Total cost

January 1 8,000 200 1,600,000 8 ( 4,000) 200 ( 800,000) 4,000 200 800,000 20 12,000 240 2,880,000 (3,680,000/16,000 = 230) 16,000 230 3,680,000 Problem 7-64 Answer C Problem 7-65 Answer B Estimated selling price 4,050,000 Cost of disposal ( 200,000) Net realizable value (lower than cost) 3,850,000 Problem 7-66 Answer B Estimated sales price 4,000,000 Cost to complete (1,200,000) Net realizable value 2,800,000 FIFO cost (lower than NRV) 2,600,000 Problem 7-67 Answer B Inventory – January 1 700,000 Purchases 3,300,000 Goods available for sale 4,000,000 Less: Inventory – December 31 600,000 Cost of goods sold before inventory writedown 3,400,000 Loss on inventory writedown 100,000 Cost of goods sold after inventory writedown 3,500,000 Problem 7-68 Answer C Sales price Fraction Allocated cost A (100 x 240,000) 24,000,000 24/60 6,000,000 B (100 x 160,000) 16,000,000 16/60 4,000,000 C (200 x 100,000) 20,000,000 20/60 5,000,000 60,000,000 15,000,000 Problem 7-69 Answer B Problem 7-70 Answer B 107

CHAPTER 8

Problem 8-1 Problem 8-2 1. D 1. D

2. A 2. B 3. B 3. A 4. B 4. C 5. D 5. B 6. C 6. C 7. C 7. A 8. B 8. A 9. D 9. B 10. D 10. A Problem 8-3 Answer A Inventory – January 1 650,000 Purchases 3,200,000 Freight in 50,000 Total 3,250,000 Less: Purchase returns 75,000 3,175,000 Goods available for sale 3,825,000 Less: Cost of sales (4,500,000 x 60%) 2,700,000 Inventory – March 31 1,125,000 Problem 8-4 Answer B Problem 8-5 Answer D Inventory – January 1 500,000 Cost of sales (3,640,000/130%) 2,800,000 Purchases 2,500,000 Goods available for sale 3,000,000 Problem 8-7 Answer A Less: Cost of sales (3,200,000 x 75%) 2,400,000 Inventory – December 31 600,000 Inventory – Jan. 1 1,200,000 Less: Physical inventory 500,000 Purchases 2,000,000 Missing inventory 100,000 Goods available for sale 3,200,000 Less: Inventory – Dec. 31 1,100,000 Problem 8-6 Answer D Cost of goods sold 2,100,000 Gross profit 900,000 Cost of sales (7,000,000 – 1,400,000) 5,600,000 Total sales 3,000,000 Multiply by 140% Less: Cash sales 500,000 Sales 7,840,000 Sales on account 2,500,000 Less: Collections 4,000,000 Accounts receivable–Jan. 1 800,000 Accounts receivable 3,840,000 Total 3,300,000 Less: Collections 2,600,000 Accounts receivable-Dec. 31 700,000

108 Problem 8-8 Answer D Problem 8-9 Answer B Net sales = 1,200,000 x 5 6,000,000 Sales (950,000 x 8) 7,600,000 Cost of sales (1,150,000 x 4) 4,600,000 Inventory – January 1 1,800,000 Gross margin 3,000,000 Purchases 4,500,000

Goods available for sale 6,300,000 Less: Cost of sales (6,000,000 x 60%) 3,600,000 Inventory – December 31 2,700,000 Problem 8-10 Answer B Sales 6,200,000 Less: Sales returns 200,000 Net sales 6,000,000 Cost of sales: Inventory – January 1 1,000,000 Purchases 5,500,000 Freight in 250,000 Total 5,750,000 Less: Purchase returns, allowances and discounts 150,000 5,600,000 Goods available for sale 6,600,000 Less: Inventory – December 31 2,100,000 4,500,000 Gross income 1,500,000 Gross profit rate on cost (1,500,000/4,500,000) 33 1/3% Problem 8-11 Answer A Inventory, January 1 500,000 Purchases 2,000,000 Freight in 100,000 Purchase returns and allowances ( 120,000) Purchase discounts ( 80,000) 1,900,000 Goods available for sale 2,400,000 Less: Cost of sales: Sales 2,200,000 Sales returns ( 100,000) Net sales 2,100,000 Cost of sales (2,100,000/125%) 1,680,000 Inventory, December 31 720,000 Problem 8-12 Answer B Sales – 2007 6,000,000 Cost of sales: Net purchases – 2007 5,500,000 Less: Inventory – December 31, 2007 1,000,000 4,500,000 Gross income 1,500,000 109 Rate in 2007 (1,500,000/6,000,000) 25% Rate in 2008 (25% + 5%) 30% Inventory – January 1, 2008 1,000,000 Net purchases – 2008 7,500,000 Goods available for sale 8,500,000 Less: Cost of sales (9,000,000 x 70%) 6,300,000 Inventory – December 31, 2008 2,200,000

Less: Undamaged merchandise (500,000 x 70%) 350,000 Realizable value of damaged merchandise 10,000 360,000 Fire loss 1,840,000 Problem 8-13 Answer C Problem 8-14 Answer A Sales – 2006 and 2007 7,400,000 Cost of sales: Inventory – January 1, 2006 850,000 Purchases – 2006 and 2007 5,370,000 Goods available for sale 6,220,000 Less: Inventory – December 31, 2007 1,040,000 5,180,000 Gross income 2,220,000 Average rate (2,220,000/7,400,000) 30% Inventory – January 1, 2008 1,040,000 Purchases – 2008 4,360,000 Goods available for sale 5,400,000 Less: Cost of sales (5,000,000 x 70%) 3,500,000 Inventory – December 31, 2008 1,900,000 Less: Goods consigned (300,000 x 70%) 210,000 Goods in transit 190,000 400,000 Fire loss 1,500,000 Problem 8-15 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 Less: Cost of sales (5,600,000 x 75%) 4,200,000 Inventory – September 30 700,000 Less: Undamaged goods (60,000 x 75%) 45,000 Realizable value of damaged goods 25,000 70,000 Fire loss 630,000 110 Problem 8-16 Answer D 3,200,000 Average rate = ------------------- = 40% 8,000,000

Inventory – January 1 500,000 Purchases (1,600,000 + 500,000 – 400,000) 1,700,000 Goods available for sale 2,200,000 Less: Cost of sales: Collections 2,640,000 Accounts receivable – December 31 440,000 Accounts receivable – January 1 ( 480,000) Sales 2,600,000 Cost of sales (2,600,000 x 60%) 1,560,000 Inventory – December 1 640,000 Less: Goods on consignment (200,000 x 60%) 120,000 Salvage value 20,000 140,000 Fire loss 500,000 Problem 8-17 Question 1 Answer A Gross profit rate:

2005 (750,000/3,000,000) 25% 2006 (1,050,000/3,500,000) 30% 2007 (1,295,000/3,700,000) 35% 2008 40%

There seems to be a trend in the gross profit rate, which is a yearly increase of 5%. Thus, it can be safely assumed that the trend continues in 2008. Inventory – January 1 500,000 Net purchases, January 1 – October 15 3,500,000 Goods available for sale 4,000,000 Less: Cost of sales: Sales 3,840,000 Sales return and allowances ( 40,000) Net sales 3,800,000 Cost of sales (3,800,000 x 60%) 2,280,000 Inventory – October 15 1,720,000 Less: Inventory not destroyed 320,000 Fire loss 1,400,000 111 Question 2 Answer D Goods available for sale 4,000,000 Cost of sales (70% x 3,800,000) 2,660,000 Inventory, October 15 1,340,000 Inventory not destroyed 320,000 Fire loss 1,020,000

Problem 8-18 Answer D Problem 8-19 Answer A Problem 8-20 Answer B Net sales in 2007 8,000,000 Less: Cost of sales Beginning inventory 2,000,000 Net purchases in 2007 4,800,000 Goods available for sale 6,800,000 Less: Ending inventory 1,200,000 5,600,000 Gross profit 2,400,000 Gross profit rate (2,400,000/8,000,000) 30% Inventory, January 1, 2008 1,200,000 Net purchases – 2008 4,960,000 Goods available for sale 6,160,000 Less: Cost of sales Sales 7,880,000 Less: Sales return and allowances 80,000 Net sales 7,800,000 Cost of sales (7,800,000 x 70%) 5,460,000 Estimated value of ending inventory 700,000 Less: Cost of inventory not stolen 100,000 Estimated cost of stolen inventory 600,000 112 Problem 8-21 Answer A Raw materials – January 1 300,000 Purchases 1,000,000 Freight in 100,000 1,100,000 Raw materials available for use 1,400,000 Less: Raw Materials – December 31 600,000 Raw materials used 800,000 Direct labor 800,000 Manufacturing overhead (50% x 800,000) 400,000

Total manufacturing cost 2,000,000 Add: Goods in process – January 1 1,000,000 Total goods in process 3,000,000 Less: Goods in process – December 31 (squeeze) 1,300,000 Cost of goods manufactured 1,700,000 Add: Finished goods – January 1 1,400,000 Goods available for sale 3,100,000 Less: Finished goods _ December 31 1,000,000 Cost of sales (70% x 3,000,000) 2,100,000 The amount of goods in process on December 31is computed as simply working back. Problem 8-22

Requirement a Physical inventory Purchases up to Purchases up to May 31, 2008 May 31, 2008 June 30, 2008 Balances 950,000 6,750,000 8,000,000 1 - 75,000 - 2 - ( 10,000) ( 15,000) 3 - ( 20,000) ( 20,000) 4 ( 55,000) ( 55,000) -_ __ Adjusted 895,000 6,740,000 7,965,000 Inventory – July 1, 2007 875,000 Purchases up to May 31, 2008 6,740,000 Goods available for sale 7,615,000 Less: Inventory – May 31, 2008 895,000 Cost of sales 6,720,000 Sales up to May 31, 2008 8,400,000 Cost of sales 6,720,000 Gross profit 1,680,000 Rate (1,680,000/8,400,000) 20%

Requirement b

Sales for year ended June 30, 2008 9,600,000 Less: Sales for 11 months ended May 31, 2008 8,400,000 Sales for June 1,200,000 113 Cost of goods sold with profit (1,100,000 x 80%) 880,000 Cost of goods sold without profit 100,000 Cost of goods sold during June 2008 980,000

Requirement c Inventory, July 1, 2007 875,000

Purchases for year ended June 30, 2008 (as adjusted) 7,965,000 Goods available for sale 8,840,000 Less: Cost of goods sold Sales with profit (9,500,000 x 80%) 7,600,000 Sales without profit 100,000 7,700,000 Inventory, June 30, 2008 1,140,000 Problem 8-23 1. Accounts receivable – April 30 1,040,000 Writeoff 60,000 Collections (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 2. Accounts payable – April 30 for April shipments 340,000 Payment for April merchandise shipments 80,000 Purchases of April 420,000 Purchases up to March 31 1,680,000 Total purchases 2,100,000 3. Inventory – January 1 1,880,000 Purchases 2,100,000 Less: Purchases return 20,000 2,080,000 Goods available for sale 3,960,000 Less: 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 1,200,000 114 Problem 8-24 Answer B

Cost Retail Inventory – January 1 280,000 700,000 Purchases 2,480,000 5,160,000 Freight in 75,000 Markup 500,000 Markup cancellation __ __ __ _ ( 60,000) GAS 2,835,000 6,300,000 Cost ratio (2,835/6,300) 45%

Markdown ( 250,000) Markdown cancellation _ __ _ 50,000 GAS – Average 2,835,000 6,100,000 Sales (5,000,000) Shrinkage (2% x 5,000,000) ( 100,000) Inventory – December 31 1,000,000 Conservative cost (1,000,000 x 45%) 450,000 The “approximate lower of average cost or market” retail is the same as the conservative or conventional retail. Problem 8-25 Answer C

Cost Retail Inventory – January 1 720,000 1,000,000 Purchases 4,080,000 6,300,000 Markup 700,000 Markdown __ _____ ( 500,000) GAS 4,800,000 7,500,000 Cost ratio (4,800/7,500) 64% Sales (5,900,000) Shoplifting losses ( 100,000) Inventory 1,500,000 Average cost (1,500,000 x 64%) 960,000 115 Problem 8-26 Answer D Problem 8-27 Answer A Cost Retail Cost Retail Beginning inventory Beginning inventory 600,000 1,500,000 and purchases 6,000,000 9,200,000 Purchases 3,000,000 5,500,000 Net markup ________ 400,000 Net markups 500,000 GAS 6,000,000 9,600,000 Net markdown __ _____ (1,000,000) Net purchases 3,000,000 5,000,000 Cost ratio (6,000/9,600) = 62.5% Cost ratio (3,000/5,000) = 60% Sales (7,800,000) Net markdown ( 600,000) GAS 3,600,000 6,500,000 Ending inventory 1,200,000 Sales (4,500,000)

Ending inventory 2,000,000 Conservative cost (1,200,000 x 62.5%) 750,000 FIFO cost (2,000,000 x 60%) 1,200,000 Goods available for sale 6,000,000 Less: Ending inventory 750,000 Cost of sales 5,250,000 Problem 8-28 Answer A Cost Retail Inventory – January 1 1,200,000 1,800,000 Purchases 5,600,000 7,200,000 Freight in 400,000 Net markup 1,400,000 Net markdown ________ ( 600,000) Net purchases (6,000/8,000) 75% 6,000,000 8,000,000 Goods available for sale 7,200,000 9,800,000 Sales (7,600,000) Inventory – December 31 2,200,000 FIFO cost (2,200,000 x 75%) 1,650,000 Goods available for sale 7,200,000 Less: Inventory – December 31 1,650,000 Cost of goods sold 5,550,000 Problem 8-29 Answer C Cost Retail Available for sale 4,900,000 7,000,000 Markdown ( 100,000) Sales (5,500,000) Inventory, December 31 1,400,000 Average cost (1,400,000 x 71%) 994,000 Cost ratio (4,900,000 / 6,900,000) 71% 116 Problem 8-30 Cost Retail Inventory, January 1 500,000 770,000 Purchases 3,070,000 4,300,000 Transportation in 70,000 Purchases return ( 25,000) ( 40,000) Purchase discount ( 45,000) Markup 100,000 Cancelation of markup ________ ( 30,000) Goods available for sale – conservative 3,570,000 5,100,000 Cost ratio – conservative (357/510) 70% Markdown ( 350,000) Cancelation of markdown ________ 10,000 Goods available for sale – average cost 3,570,000 4,760,000

Cost ratio – average cost (357/476) 75% Less: Sales 4,000,000 Sales return ( 80,000) 3,920,000 Inventory, December 31 at selling price 840,000 Conservative cost (840,000 x 70%) 588,000 Average cost (840,000 x 75%) 630,000 Problem 8-31 Cost Retail Beginning inventory 340,000 640,000 Purchases 4,500,000 7,300,000 Freight in 100,000 Purchase returns ( 150,000) ( 250,000) Purchase allowances ( 90,000) Departmental transfer in 100,000 160,000 Markup ________ 150,000 Goods available for sale – conventional 4,800,000 8,000,000 Cost ratio (4,800/8,000) 60% Markdown ________ ( 500,000) Goods available for sale – average 4,800,000 7,500,000 Cost ratio (4,800/7,500) 64% Less: Sales 6,600,000 Employee discount 100,000 Spoilage and breakage 200,000 6,900,000 Ending inventory 600,000 Conservative cost (600,000 x 60%) 360,000 Average cost (600,000 x 64%) 384,000 117 Problem 8-32 Cost Retail Beginning inventory 168,000 400,000 Purchases 2,806,000 3,100,000 Freight in 42,000 Markup 300,000 Markup cancellation _______ ( 30,000) Goods available for sale – conservative 3,016,000 3,770,000 Cost ratio (3,016/3,770) 80% Markdown ( 150,000) Markdown cancellation _________ 40,000 Goods available for sale – average 3,016,000 3,660,000 Less: Sales 3,000,000 Shrinkage (4% x 3,000,000) 120,000 3,120,000 Ending inventory 540,000

Conservative cost (540,000 x 80%) 432,000 Physical inventory (500,000 x 80%) 400,000 Shortage 32,000 Inventory, December 31 400,000 Inventory shortage 32,000 Income summary 432,000 Problem 8-33 Cost Retail 1. Opening inventory 1,650,000 2,200,000 Purchases 3,700,000 4,950,000 Freight in 200,000 Purchase allowances ( 100,000) Departmental transfer – credit ( 200,000) ( 300,000) Additional markup 180,000 Markup cancellation ________ ( 30,000) Goods available for sale – conventional 5,250,000 7,000,000 Cost ratio (5,250/7,000) 75% Markdown (500,000 – 400,000) ________ ( 100,000) Goods available for sale – average 5,250,000 6,900,000 Less: Sales 4,000,000 Inventory shortage 100,000 4,100,000 Ending inventory at sales price 2,800,000 Ending inventory at cost (2,800,000 x 75%) 2,100,000 2. Goods available for sale 5,250,000 Less: Ending inventory 2,100,000 Cost of sales 3,150,000 118 Problem 8-34 Cost Retail Inventory, January 1 560,000 1,000,000 Purchases 4,000,000 6,200,000 Markup (5,000 x 100) 500,000 Markup cancelation (1,000 x 100) _________ ( 100,000) Goods available for sale – conservative (60%) 4,560,000 7,600,000 Markdown _________ ( 475,000) Goods available for sale – average (64%) 4,560,000 7,125,000 Net sales (5,200,000) Inventory, December 31 1,925,000 Conservative cost (1,925,000 x 60%) 1,155,000 Average cost (1,925,000 x 64%) 1,232,000

Problem 8-35 Cost Retail Finished goods – January 1 144,000 240,000 Cost of goods manufactured (squeeze 1,200,000 2,000,000 Goods available for sale 1,344,000 2,240,000 Less: Finished goods – December 31 504,000 840,000 Cost of goods sold 840,000 1,400,000 The amount of goods manufactured at retail is determined by simply working back. Goods manufactured at cost Cost ratio = ------------------------------------------------- Goods manufactured at retail = 1,200,000/2,000,000 = 60% Finished goods: January 1 - 240,000 x 60% 144,000 December 31 - 840,000 x 60% 504,000 Problem 8-36 Cost Retail Inventory – January 1, 2008 556,800 928,000 Purchases 4,576,000 7,028,000 Net markup 42,000 Net markdown ________ ( 30,000) Net purchases (65%) 4,576,000 7,040,000 Goods available for sale 5,132,800 7,968,000 Sales (6,840,000) Inventory – December 31, 2008 1,128,000 FIFO inventory (65% x 1,128,000) 733,200 1,128,000 119 Cost Retail Inventory – January 1, 2009 733,200 1,128,000 Purchases 4,760,000 6,812,000 Net markup 56,000 Net markdown ________ ( 68,000) Net purchases (70%) 4,760,000 6,800,000 Goods available for sale 5,493,200 7,928,000 Sales (6,928,000) Inventory – December 31, 2009 1,000,000 FIFO inventory (70% x 1,000,000) 700,000 1,000,000

Problem 8-37 Cost Retail Inventory, January 1, 2008 420,000 600,000 Purchases adjusted for markup and markdown 72% 5,011,200 6,960,000 Goods available for sale 5,431,200 7,560,000 Sales – 2008 (6,839,000) Inventory, December 31, 2008 721,000 FIFO cost (721,000 x 72%) 519,120 Inventory, January 1, 2009 519,120 721,000 Purchases adjusted 70% 4,970,000 7,100,000 Goods available for sale 5,489,120 7,821,000 Sales – 2009 (7,033,000) Inventory, December 31, 2009 788,000 FIFO cost (788,800 x 70%) 551,600

120

CHAPTER 9

Problem 9-1 Problem 9-2 Problem 9-3 1. A 6. D 1. A 6. B 1. D 2. C 7. D 2. D 7. A 2. A 3. C 8. B 3. C 8. C 3. C 4. A 9. B 4. B 9. B 4. A 5. A 10. B 5. C 10. D 5. C Problem 9-4 Cost Market Red 300,000 250,000 White 500,000 700,000 Blue 1,000,000 1,100,000 Green 2,000,000 1,700,000

Total 3,800,000 3,750,000 1. Trading securities 3,800,000 Cash 3,800,000 2. Unrealized loss – trading securities 50,000 Trading securities (3,800,000 – 3,750,000) 50,000 Problem 9-5 1. Unrealized loss – TS 60,000 Trading securities 60,000 2. Cash 140,000 Loss on sale of trading securities 20,000 Trading securities 160,000 3. Trading securities (680,000 – 610,000) 70,000 Unrealized gain – TS 70,000 Carrying amount Market A Common (4,000 x 80) 300,000 320,000 C Preferred (2,000 x 180) 310,000 360,000 610,000 680,000 Problem 9-6 December 31, 2008: Trading securities 500,000 Unrealized gain - TS (2,500,000 – 2,000,000) 500,000 Unrealized loss – AFS 100,000 Available for sale securities 100,000 121 December 31, 2009: Unrealized loss – TS 300,000 Trading securities (2,500,000 – 2,200,000) 300,000 Available for sale securities - AFS 200,000 Unrealized loss – AFS 100,000 Unrealized gain – AFS 100,000 Problem 9-7 December 31, 2008: Unrealized loss – AFS 150,000 Available for sale securities 150,000

December 31, 2009: Available for sale securities – AFS 50,000 Unrealized loss – AFS 50,000 Problem 9-8 1. Unrealized loss – AFS 100,000 Available for sale securities 100,000 2. Cash 2,100,000 Loss on sale of AFS securities 400,000 Available for sale securities 2,000,000 Unrealized loss – AFS 500,000 3. No entry Carrying amount Market XYZ 1,200,000 1,200,000 RST 200,000 200,000 1,400,000 1,400,000 Unrealized loss in 2008 0 Unrealized loss – 12/31/2008 (600,000 – 500,000) ( 100,000) Cumulative unrealized loss – 12/31/2009 ( 100,000)

Total cost (1,000,000 + 500,000) 1,500,000 Market value 1,400,000 Cumulative unrealized loss 100,000

122 Problem 9-9 2008 1. Trading securities 2,900,000 Available for sale securities 3,600,000 Cash 6,500,000 2. Unrealized loss – TS 500,000 Trading securities (2,900,000 – 2,400,000) 500,000 3. Available for sale securities 400,000 Unrealized gain – AFS (3,600,000 – 4,000,000) 400,000 2009 1. Cash 1,000,000 Trading securities (1/2 x 1,400,000) 700,000 Gain on sale of TS 300,000 2. Cash 1,300,000 Unrealized gain – AFS (1/2 x 500,000) 250,000

Available for sale securities (1/2 x 2,500,000) 1,250,000 Gain on sale of AFS securities 300,000 3. Trading securities 300,000 Unrealized gain – TS (2,000,000 – 1,700,000) 300,000 Carrying value Market Security One 700,000 900,000 Security Two 1,000,000 1,100,000 1,700,000 2,000,000 4. Available for sale securities 50,000 Unrealized gain – AFS 50,000 Security Three 1,500,000 1,600,000 Security Four 1,250,000 1,200,000 2,750,000 2,800,000 Security Three 1,600,000 Security Four (1/2 x 2,000,000) 1,000,000 Total cost 2,600,000 Market value 2,800,000 Cumulative unrealized gain – 12/31/2009 200,000 Unrealized gain – AFS 12/31/2008 (400,000 – 250,000) 150,000 Unrealized gain in 2009 50,000 Cumulative unrealized gain – 12/31/2009 200,000 123 Problem 9-10 2008 Jan. 1 Available for sale securities 1,320,000 Cash 1,320,000 Dec. 31 Unrealized loss – AFS 80,000 Available for sale securities 80,000 2009 Dec. 31 Investment equity security 650,000 Unrealized loss – transfer of AFS 70,000 Available for sale securities 650,000 Unrealized loss – AFS 70,000 31 Available for sale securities 110,000 Unrealized loss – AFS 10,000 Unrealized gain – AFS 100,000 Market of W and X – 12/31/2009 700,000 Market of W and X – 12/31/2008 590,000 Increase in value 110,000

Problem 9-11 December 31, 2008 Unrealized loss – TS 400,000 Trading securities 400,000 Available for sale securities – AFS 100,000 Unrealized gain – AFS 100,000 December 31, 2009 Trading securities 900,000 Unrealized gain – TS (5,500,000 – 4,600,000) 900,000 Available for sale securities 200,000 Unrealized gain – AFS (3,300,000 – 3,100,000) 200,000 Problem 9-12 01/01/2008 Trading securities 2,000,000 AFS securities 4,000,000 Cash 6,000,000 12/31/2008 Trading securities 500,000 Unrealized gain – TS 500,000 124 12/31/2008 Unrealized loss – AFS 700,000 AFS securities 700,000 12/31/2009 Trading securities 200,000 Unrealized gain - TS 200,000 Impairment loss – AFS 700,000 Unrealized loss – AFS 700,000 12/31/2010 Unrealized loss – TS 600,000 Trading securities 600,000 AFS securities 900,000 Unrealized gain – AFS (4,200,000 – 3,300,000) 900,000 Problem 9-13 2008 Available for sale securities 6,000,000 Cash 6,000,000

Unrealized loss – AFS 300,000 Available for sale securities (6,000,000 – 5,700,000) 300,000

2009 Unrealized loss – AFS 500,000 Available for sale securities (5,700,000 – 5,200,000) 500,000 Held to maturity securities 5,200,000 Available for sale securities 5,200,000 The total unrealized loss of P800,000 (300,000 + 500,000) will still be reported in equity but it will be subsequently amortized through interest income over the remaining term of the debt securities. Problem 9-14 2008 Jan. 1 Held to maturity securities 3,649,600 Cash 3,649,600 Dec. 31 Cash (8% x 4,000,000) 320,000 Interest income 320,000 31 Held to maturity securities 44,960 Interest income 44,960 Interest income (10% x 3,649,600) 364,960 Interest received 320,000 Amortization 44,960 125 2009 Dec. 31 Cash 320,000 Interest income 320,000 31 Held to maturity securities 49,456 Interest income 49,456 Interest income (10% x 3,694,560) 369,456 Interest received 320,000 Amortization 49,456 31 Available for sale securities 3,744,016 Held to maturity securities 3,744,016 31 Available for sale securities 455,984 Unrealized gain – AFS 455,984 Market value (4,000,000 x 105) 4,200,000 Book value 3,744,016 Unrealized gain 455,984 Problem 9-15

01/01/2008 Available for sale securities 6,500,000 Cash 6,500,000 12/31/2008 Unrealized loss – AFS 750,000 Available for sale securities 750,000 (6,500,000 – 5,750,000) 06/30/2009 Unrealized loss – AFS 450,000 Available for sale securities 450,000 (5,750,000 – 5,300,000) 06/30/2009 Held to maturity securities 5,300,000 Available for sale securities 5,300,000 12/31/2009 No entry is required to recognize the decrease in value of P400,000 (P5,300,000 – P4,900,000). The total unrealized loss of P1,200,000 on the reclassification of AFS securities will continue to be reported as part of equity as a deduction. However, it is amortized through interest income over the remaining life of the debt security starting June 30, 2009. 126 Problem 9-16 Answer A Cost Market A common 1,000,000 800,000 B common 1,500,000 1,800,000 C preferred 2,000,000 1,700,000 D preferred 2,500,000 2,600,000 Total 7,000,000 6,900,000 Problem 9-17 Answer A Cost Market Man 1,000,000 900,000 Kemo 900,000 1,100,000 Penn 1,100,000 800,000 Total 3,000,000 2,800,000 Unrealized loss (3,000,000 – 2,800,000) 200,000 Problem 9-18 Answer A Total market value – December 31, 2008 2,000,000 Total market value – December 31, 2007 1,650,000 Unrealized gain 350,000 Problem 9-19 Answer A Total market value – December 31, 2008 4,500,000

Total market value – December 31, 2007 4,800,000 Unrealized loss in 2008 ( 300,000) Unrealized loss – December 31, 2007 ( 200,000) Total unrealized loss – December 31, 2008 ( 500,000) Problem 9-20 Answer C Market value – December 31, 2008 1,600,000 Market value – December 31, 2007 1,300,000 Unrealized gain in 2008 300,000 Unrealized loss – December 31, 2007 ( 200,000) Net unrealized gain – December 31, 2008 100,000 Problem 9-21 Question 1 – Answer B Market value – December 31, 2008 1,550,000 Market value – December 31, 2007 1,000,000 Unrealized gain – trading 550,000 127 Question 2 – Answer A Market value – December 31, 2008 1,300,000 Market value – December 31, 2007 1,200,000 Unrealized gain in 2008 100,000 Unrealized loss – December 31, 2007 (1,500,000 – 1,200,000) ( 300,000) Net unrealized loss – December 31, 2008 ( 200,000) Problem 9-22 Answer A The unrealized loss of P40,000 on trading securities is shown in the income statement. However, the unrealized loss of P100,000 on available for sale securities is recognized in equity. Problem 9-23 Answer B Unrealized losses 260,000 Unrealized gains 40,000 Net unrealized loss – December 31, 2008 220,000 Problem 9-24 Answer B Net sales price 1,450,000 Unrealized loss related to B ( 150,000) Net amount 1,300,000 Carrying amount of B (1,550,000)

Loss on sale ( 250,000) Net sales price (1,500,000 – 50,000) 1,450,000 Less: Cost of B 1,700,000 Loss on sale ( 250,000) Problem 9-25 Answer C Market value – December 31, 2008 850,000 Market value – December 31, 2007 800,000 Unrealized gain in 2008 50,000 Unrealized loss – December 31, 2007 (200,000) Net unrealized loss – December 31, 2008 (150,000) Problem 9-26 Answer C Available for sale equity securities, at cost 2,200,000 Unrealized loss ( 200,000) Market value 2,000,000 128 Problem 9-27 Answer C 12/31/2007 Unrealized loss - AFS 200,000 Available for sale securities 200,000 (2,000,000 – 1,800,000) 12/31/2008 Available for sale securities 50,000 Unrealized loss – AFS (1,850,000 – 1,800,000) 50,000

129

CHAPTER 10 Problem 10-1 1. C 6. D 2. C 7. B 3. A 8. D 4. A 9. A 5. C 10. C Problem 10-2

Market value Fraction Allocated cost A (8,000 x 100) 800,000 8/41 600,000 B (16,000 x 150) 2,400,000 24/41 1,800,000 C (1,000,000 x 90%) 900,000 9/41 675,000

4,100,000 3,075,000

Investment in A shares 600,000 Investment in B shares 1,800,000 Investment in C Bonds 675,000

Cash 3,075,000

Problem 10-3

Requirement 1

a. Investment in equity securities 309,000 Cash 309,000

b. Investment in equity securities 1,030,000 Cash 1,030,000

Requirement 2

a. Cash 405,000 Loss on sale of investment 32,750 Investment in equity securities 437,750 Lot No. 1 – 1,000 shares 309,000 Lot No. 2 - 500 shares (500/4,000 x 1,030,000) 128,750 437,750

b. Cash 405,000 Investment in equity securities (1,500/5,000 x 1,339,000) 401,700

Gain on sale of investment 3,300

Problem 10-4

July 15 Cash 25,000 Dividend income (5,000 shares x 5) 25,000 130

Dec. 15 Memo – Received 1,000 shares representing 20% stock dividend on 5,000 original shares held. 28 Cash (3,000 shares x 60) 180,000 Investment in equity securities 133,000 Gain on sale of investment 47,000 Lot No. 1 (2,400 shares) 100,000 Lot No. 2 (600/3,600 x 198,000) 33,000 Cost of investment sold 133,000

Problem 10-5

1. Investment in XYZ ordinary shares (40,000 x 50) 2,000,000 Cash 2,000,000

2. Memo – Received 200,000 XYZ ordinary shares as a result of 5 for 1 split of 40,000 original shares.

3. Investment in XYZ preference shares 125,000

Investment in XYZ ordinary shares 125,000 Market value Fraction Cost Ordinary shares (200,000 x 15) 3,000,000 30/32 1,875,000 Preference shares (20,000 x 10) 200,000 2/32 125,000 3,200,000 2,000,000

4. Investment in ABC ordinary shares 300,000 Dividend income (200,000/4 = 50,000 x 6) 300,000

5. Cash (80,000 x 15) 1,200,000 Investment in XYZ ordinary shares (80,000/200,000 x 1,875,000) 750,000 Gain on sale of investment 450,000

Problem 10-6

1. Investment in ANA ordinary shares 300,000 Cash 300,000

2. Investment in Benguet ordinary shares 120,000 Dividend income (2,000 x 60) 120,000

3. Investment in ANA ordinary shares 420,000 Cash 420,000

4. Cash 60,000 Dividend income (12% x P200 = 24 x 5,000 x 1/2) 60,000 131

5. Memo – Received 20,000 new ANA ordinary shares as a result of a 2 for 1 split of 10,000 original shares.

6. Cash (680,000 – 34,000) 646,000 Investment in ANA ordinary shares (8,000/20,000 x 720,000) 288,000 Gain on sale of investment 358,000

Shares Cost

SMC preference share 5,000 1,200,000 Benguet ordinary share 10,000 1,000,000 Benguet ordinary share 2,000 120,000 ANA ordinary share 12,000 432,000 29,000 2,752,000

Problem 10-7

1. Investment in ABC ordinary shares 720,000 Cash 720,000

2. Memo – Received 2,000 shares as 20% stock dividend on 10,000 original shares. Shares now held, 12,000.

3. Cash (2,000 x 70) 140,000 Investment in ABC ordinary shares (2,000/12,000 x 720,000) 120,000 Gain on sale of investment 20,000

4. Investment in ABC preference shares (5,000 x 70) 350,000 Investment in ABC ordinary shares (5,000/10,000 x 600,000) 300,000 Gain on exchange 50,000

5. Investment in ABC ordinary shares 100,000 Cash (5,000 x 20) 100,000

Problem 10-8 a. 2004 Cash 400,000

Investment in equity securities 400,000 2005 Cash 400,000 Dividend income 100,000 Investment in equity securities 300,000 2006 Cash 400,000 Dividend income 150,000 Investment in equity securities 250,000 2007 Cash 400,000 Dividend income 200,000 Investment in equity securities (1,000,000 – 950,000) 50,000 Gain on investment 150,000 132 2008 Cash 400,000 Dividend income 250,000 Gain on investment 150,000

b. The investment account has been totally eliminated as of December 31, 2007 because the liquidating dividends received exceed the cost of investment. Hence, there is no more investment account to be reported in the December 31, 2008 statement of financial position, but such fact should be disclosed in the notes to financial statements to the effect that the company is still the owner of 10,000 shares with a zero cost.

Problem 10-9

1. Investment in equity securities 1,800,000 Cash 1,800,000 2. 10,000 rights

3. Cost of rights (10/200 x 1,800,000) 90,000 4. Stock rights 90,000 Investment in equity securities 90,000

5. Investment in equity securities 390,000 Cash (10,000/5 = 2,000 x 150) 300,000 Stock rights 90,000 6. Cash (10,000 x 10) 100,000 Stock rights 90,000 Gain on sale of rights 10,000 7. Loss on stock rights 90,000 Stock rights 90,000

Problem 10-10 Requirement 1

125 - 100 Theoretical value = --------------------- = 5.00 per right 4 + 1 a. Stock rights (5/125 x 2,100,000) 84,000 Investment in equity securities 84,000 b. Investment in equity securities 709,000 Stock rights 84,000 Cash (25,000/4 = 6,250 x 100) 625,000 133

Requirement 2 125 - 100 Theoretical value = --------------------- = 6.25 per right 4 a. Stock rights (6.25/131.25 x 2,100,000) 100,000 Investment in equity securities 100,000 b. Investment in equity securities 725,000 Stock rights 100,000 Cash 625,000

Problem 10-11 1. Stock rights (10/100 x 3,000,000) 300,000 Investment in equity securities 300,000 2. Investment in equity securities 1,425,000 Stock rights (30,000/40,000 x 300,000) 225,000 Cash (15,000 shares x 80) 1,200,000 3. Cash (6,000 x 10) 60,000 Stock rights (6,000/40,000 x 300,000) 45,000 Gain on sale of rights 15,000

4. Loss on stock rights (4,000/40,000 x 300,000) 30,000 Stock rights 30,000 Shares Cost First acquisition (3,000,000 – 300,000) 40,000 2,700,000 New acquisition 15,000 1,425,000 55,000 4,125,000

Problem 10-12 1. Investment in equity securities 3,200,000 Cash 3,200,000 2. Memo – Received 20,000 shares as stock dividend on 80,000 original shares. Shares now held, 100,000. 3. Cash (100,000 x 5) 500,000 Dividend income 500,000 4. Stock rights (5/40 x 3,200,000) 400,000 Investment in equity securities 400,000 134 5. Cash (40,000 x 5) 200,000 Stock rights (40,000/100,000 x 400,000) 160,000 Gain on sale of rights 40,000 6. Investment in equity securities 600,000 Stock rights (60,000/100,000 x 400,000) 240,000 Cash (60,000/5 = 12,000 x 30) 360,000 7. Cash (80,000 x 35) 2,800,000 Investment in equity securities 2,240,000 (80,000/100,000 x 2,800,000) Gain on sale of investment 560,000 Shares Cost Original acquisition 20,000 560,000 New acquisition 12,000 600,000 32,000 1,160,000 Problem 10-13 2008 Aug. 1 Investment in equity securities 60,000 Cash 60,000 Oct. 1 Investment in equity securities 560,000 Cash 560,000 2009 July 1 Investment in equity securities 480,000 Cash 480,000 Aug. 1 Cash 500,000 Investment in equity securities 340,000 Gain on sale of investment 160,000

Lot 1 (1,000 shares) 60,000 Lot 2 (4,000/8,000 x 560,000) 280,000 Cost of investment sold 340,000 2010 Feb. 1 Received 5,000 shares representing 50% stock dividend on 10,000 remaining shares held. Shares now held, 15,000. Nov. 1 Stock rights 95,000 Investment in equity securities 95,000 Lot 2 – 6,000 rights (10/80 x 280,000) 35,000 Lot 3 – 9,000 rights (10/80 x 480,000) 60,000 Cost of rights received 95,000 135 2010 Dec. 1 Cash (15,000 x 10) 150,000 Stock rights 95,000 Gain on sale of stock rights 55,000 Summary of investments Shares Cost Lot 2 (280,000 – 35,000) 6,000 245,000 Lot 3 (480,000 – 60,000) 9,000 420,000 Total 15,000 665,000

Problem 10-14 Jan. 2 Investment in King Corporation 700,000 Cash 700,000 Mar. 1 Investment in Plastic Company 660,000 Cash 660,000

Apr. 1 Cash (10,000 x 5) 50,000 Dividend income 50,000 July 1 Received 2,000 shares as 20% stock dividend on 10,000 Plastic Company shares originally held. Shares now held, 12,000. Aug. 1 Investment in Makati Corporation 500,000 Cash 500,000 Oct. 1 Received 60,000 new shares of Plastic Company as a result of a 5 for 1 split of 12,000 original shares. 1 Cash (10,000 x 5) 50,000 Dividend income 50,000 31 Stock rights (3/33 x 660,000) 60,000

Investment in Plastic Company 60,000 Nov. 15 Investment in Plastic Company 180,000 Cash (6,000 shares x 20) 120,000 Stock rights 60,000 Dec. 1 Cash (66,000 shares x 5) 330,000 Dividend income 330,000 15 Cash (10,000 shares x 30) 300,000 Investment in Plastic Company 100,000 (10,000/60,000 x 600,000) Gain on sale of investment 200,000 136 Summary of investments Shares Cost King Corporation common 10,000 700,000 Plastic Company common Block 1 50,000 500,000 Block 2 6,000 180,000 Makati Corporation common 10,000 500,000 76,000 1,880,000 Of course, the investments will simply be described as “investments in equity securities” in the balance sheet.

Problem 10-15 Answer A Purchase price (4,000 x P100) 400,000 Brokerage 12,000 Total 412,000 Less: Dividend purchased (4,000 x 5) 20,000 Acquisition cost 392,000 Problem 10-16 Answer D

Fair value of asset given (land) 3,000,000 Problem 10-17 Answer D Original shares acquired January 15 50,000 Stock dividend on March 31 (20% x 50,000) 10,000 Total shares 60,000

Dividend income – cash dividend on December 15 (60,000 x 5) 300,000 Problem 10-18 Answer C

Dividend income – cash dividend on July 1 100,000

Original shares on March 1 20,000 Stock dividend on December 1 (10% x 20,000) 2,000 Total shares 22,000

Problem 10-19 Answer B

Original shares on October 1, 2007 40,000 Stock dividend on November 30, 2008 (10%) 4,000 Total shares 44,000 Shares sold on December 31, 2008 ( 4,000) Balance 40,000

137

Sales price 1,000,000 Cost of shares sold (4,000/44,000 x 6,600,000) ( 600,000) Gain on sale 400,000

Problem 10-20 Answer B

Shares received as property dividend (5,000/5) 1,000

Dividend income (1,000 x 100) 100,000

Problem 10-21 Answer D

Cash dividend (10% x 500,000) 50,000 Problem 10-22 Answer A

Dividend income (2,000 x 60) 120,000 Problem 10-23 Answer C

Sales price (80,000 x 30) 2,400,000 Less: Cost of shares sold (80,000 x 40) 3,200,000 Loss on disposal ( 800,000)

Problem 10-24 Answer A June 1 December 1 Original shares 20,000 30,000 Stock dividend – 20% 4,000 6,000 Total shares 24,000 36,000 Sales 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 Problem 10-25 Answer B

Cost of rights (5/100 x 8,000,000) 400,000 Problem 10-26 Answer B

Sales price (50,000 x 10) 500,000 Cost of rights sold (10/100 x 3,600,000) 360,000 Gain on sale of rights 140,000

138 Problem 10-27 Answer B

Cost of rights (18/150 x 500,000) 60,000 Cost paid for new shares (2,500 shares x 90) 225,000 Total cost of new investment 285,000

Cost per share (285,000 / 2,500 shares) 114

Problem 10-28 Answer B

Cost of 2006 rights (4/100 x 180,000) 7,200 Cost of 2007 rights (4/100 x 330,000) 13,200 Total cost of rights 20,400 900 shares x 5 rights 4,500 rights Cash paid (900 x 80) 72,000 Cost of rights exercised 2006 – 2,250 rights 7,200 2007 – 2,250 rights (2,250/3,750 x 13,200) 7,920 Total cost of 900 shares 87,120

139

CHAPTER 11 Problem 11-1 Problem 11-2 Problem 11-3 Problem 11-4 1. A 6. A 1. B 1. D 1. B 2. C 7. C 2. D 2. D 2. C 3. C 8. A 3. B 3. C 3. D 4. A 9. D 4. A 4. A 4. A 5. D 10. B 5. C 5. C 5. A Problem 11-5

Equity method 1. Investment in associate 2,400,000 Cash 2,400,000 Acquisition cost 2,400,000 Net assets acquired (20% x 8,000,000) 1,600,000 Goodwill 800,000 2. Investment in associate 300,000 Investment income (20% x 1,500,000) 300,000 3. Memo – Received 2,000 shares as 10% stock dividend on 20,000 original shares. Shares now held, 22,000. 4. Investment loss 60,000 Investment in associate (20% x 300,000) 60,000 5. Cash (20% x 500,000) 100,000 Investment in associate 100,000 6. Cash (5,500 x 200) 1,100,000 Investment in associate 635,000 Gain on sale of investment 465,000

Sales price 1,100,000 Less: Cost of investment sold (5,500/22,000 x 2,540,000) 635,000 Gain on sale 465,000

Cost method

1. Investment in equity securities 2,400,000 Cash 2,400,000 2. No entry

140 3. Memo – Received 2,000 shares as 10% stock dividend. Shares now held, 22,000. 4. No entry 5. Cash 100,000 Dividend income 100,000 6. Cash 1,100,000 Investment in equity securities (5,500/22,000 x 2,400,000) 600,000 Gain on sale of investment 500,000 Problem 11-6 1. Investment in equity securities 6,000,000 Cash 6,000,000 2. Cash (15% x 4,000,000) 600,000 Dividend income (15% x 3,000,000) 450,000 Investment in equity securities (15% x 1,000,000) 150,000 Problem 11-7 2008 Investment in associate 5,000,000 Cash 5,000,000 Investment in associate 300,000 Investment income (30% x 4,000,000 x 3/12) 300,000 Cash (30% x 3,000,000) 900,000 Investment in associate 900,000 Investment income 50,000 Investment in associate (200,000 x 3/12) 50,000 2009 Investment in associate 1,800,000 Investment income (30% x 6,000,000) 1,800,000 Cash (30% x 5,000,000) 1,500,000 Investment in associate 1,500,000 Investment income 200,000 Investment in associate 200,000

141 Problem 11-8 2006 Jan. 1 Investment in equity securities 1,000,000 Cash 1,000,000 Dec. 31 Cash (15% x 300,000) 45,000 Dividend income 45,000 2007 Dec. 31 Cash (15% x 400,000) 60,000 Dividend income 60,000 2008 Jan. 1 Investment in associate 3,000,000 Cash 3,000,000 1 Investment in associate 75,000 Retained earnings 75,000 Investment income – Equity method (2006 and 2007) 180,000 (15% x 500,000 + 700,000) Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) 105,000 Cumulative effect of change to equity 75,000

1 Investment in associate 1,000,000

Investment in equity securities 1,000,000 (Reclassification)

Dec. 31 Investment in associate 360,000 Investment income (40% x 900,000) 360,000 31 Cash (40% x 600,000) 240,000 Investment in associate 240,000 Problem 11-9 2008 Jan. 1 Investment in associate 8,000,000 Cash 8,000,000 Dec. 31 Investment in associate 1,500,000 Investment income (30% x 5,000,000) 1,500,000 31 Cash (30% x 2,000,000) 600,000 Investment in associate 600,000

142 2009 June 30 Investment in associate 1,800,000 Investment income (30% x 6,000,000) 1,800,000 July 1 Cash 6,000,000 Investment in associate (10,700,000 x 1/2) 5,350,000 Gain on sale of investment 650,000 Oct. 1 Cash (2,500,000 x 15%) 375,000 Dividend income 375,000 1 Available for sale securities 5,350,000 Investment in associate 5,350,000 (Reclassification) Dec. 31 No entry is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest. Problem 11-10 Requirement a 1. Investment in associate 3,500,000 Cash 3,500,000 2. Investment in associate 1,600,000 Investment income (40% x 4,000,000) 1,600,000 3. Cash (40% x 1,000,000) 400,000 Investment in associate 400,000 4. Investment income 150,000 Investment in associate (600,000 / 4) 150,000 Cost 3,500,000 Book value of interest acquired (40% x 7,000,000) 2,800,000 Excess of cost over book value 700,000 Excess attributable to equipment (40% x 1,500,000) ( 600,000) Excess attributable to inventory (40% x 500,000) ( 200,000) Excess net fair value over cost ( 100,000) 5. Investment income 200,000 Investment in associate 200,000 6. Investment in associate 100,000 Investment income 100,000

143 Requirement b Share in net income 1,600,000 Amortization of excess attributable to equipment ( 150,000) Amortization of excess attributable to inventory ( 200,000) Excess net fair value over cost 100,000 Net investment income 1,350,000 Problem 11-11 1. Investment in associate 1,700,000 Cash 1,700,000 2. Investment in associate 260,000 Investment income (40% x 650,000) 260,000 3. Cash (40% x 150,000) 60,000 Investment in associate 60,000 4. Investment in associate 520,000 Revaluation surplus – investee (40% x 1,300,000) 520,000 Note: 1. Cost 1,700,000 Interest acquired (40% x 4,000,000) 1,600,000 Goodwill – not amortized 100,000 2. There is no need to adjust for the difference in depreciation method. If both entities a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference. Problem 11-12 1. Journal entries a. Investment in associate 6,000,000 Cash 6,000,000 b. Investment in associate 750,000 Investment income 750,000 c. Cash 450,000 Investment in associate 450,000 d. Investment income 200,000 Investment in associate 200,000

144 2. Share in net income 750,000 Amortization of patent (2,000,000 / 10) (200,000) Investment income 550,000 3. Acquisition cost 6,000,000 Share in net income (5,000,000 x 15%) 750,000 Share in cash dividend (3,000,000 x 15%) ( 450,000) Amortization of patent (2,000,000 / 10) ( 200,000) Carrying value 6,100,000 Interest acquired (30,000 / 200,000) 15% Acquisition cost 6,000,000 Book value of net assets acquired 4,000,000 Excess of cost applicable to patent 2,000,000 Problem 11-13 1. Journal entries a. Investment in associate 5,000,000 Cash 5,000,000 b. Investment in associate 1,200,000 Investment income 1,200,000 c. Cash 300,000 Investment in associate 300,000 d. Investment income 150,000 Investment in associate 150,000 2. Share in net income 1,200,000 Amortization of depreciable asset (750,000 / 5) ( 150,000) Investment income 1,050,000 3. Acquisition 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 asset (750,000 / 5) ( 150,000) Carrying value of investment 5,750,000 Acquisition cost 5,000,000 Net assets acquired (30% x 12,000,000) 3,600,000 Excess of cost 1,400,000 Excess attributable to depreciable asset (30% x 2,500,000) 750,000 Excess attributable to goodwill 650,000

145 Problem 11-14 1. Journal entries a. Investment in associate 1,000,000 Cash 1,000,000 b. Investment in associate 175,000 Investment income 175,000 c. Cash 75,000 Investment in associate 75,000 d. Investment income 50,000 Investment in associate 50,000 2. Share in net income 175,000 Amortization of excess (25,000 + 25,000) ( 50,000) Investment income 125,000 3. Acquisition cost 1,000,000 Net assets acquired (25% x 3,000,000) 750,000 Excess of cost 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 1,000,000 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) Investment balance 1,050,000 Problem 11-15 1. Share in 2008 net income 900,000 Amortization of excess (400,000 / 20) ( 20,000) Investment income for 2008 880,000 Acquisition cost (20,000 x 120) 2,400,000 Net assets acquired (25% x 8,000,000) 2,000,000 Excess of cost 400,000

146 2. Share in 2008 net income 975,000 Amortization of excess ( 20,000) Investment income for 2009 955,000 3. Acquisition cost 2,400,000 Share in net income: 2008 (25% x 3,600,000) 900,000 2009 (25% x 3,900,000) 975,000 Share in cash dividend: 2008 (20,000 x 16) ( 320,000) 2009 (20,000 x 20) ( 400,000) Amortization of excess: 2008 (400,000 / 20) ( 20,000) 2009 ( 20,000) Investment balance – 12/31/2009 3,515,000 Problem 11-16 Requirement a 1. Memo – Received 500 shares as 10% stock dividend on 5,000 original Dale ordinary shares. Shares now held, 5,500. 2. Cash (5,500 x 20) 110,000 Dividend income 110,000 3. Stock rights (15/150 x 1,600,000) 160,000 Investment in equity securities – Ever 160,000

Cash 200,000 Stock rights 160,000 Gain on sale of stock rights 40,000 4. Investment in associate 5,000,000 Cash 5,000,000 1/1/2007 1/1/2008 Acquisition cost 2,000,000 5,000,000 Net assets acquired: 10% x 16,000,000 1,600,000 20% x 20,000,000 ________ 4,000,000 Goodwill 400,000 1,000,000 Income from Fox investment in 2007 (10% x 4,000,000) 400,000 Less: Dividend income recorded in 2007 – cost method -___ Understatement of income 400,000

147 5. Investment in associate 2,000,000 Investment in equity securities 2,000,000 (Reclassification) 6. Investment in associate 400,000 Retained earnings 400,000 7. Investment in associate 1,800,000 Investment income (30% x 6,000,000) 1,800,000 8. Cash (75,000 x 20) 1,500,000 Investment in associate 1,500,000 Requirement b Noncurrent assets: Investment in equity securities (Note) 2,690,000 Investment in associate – Fox Corporation 7,700,000 Note – Investment in equity securities Dale Corporation, 5,500 shares 1,250,000 Ever Corporation, 10,000 shares 1,440,000 Total cost 2,690,000 Problem 11-17 Answer D Problem 11-18 Answer D Problem 11-19 Answer B Investment in Lax Corporation 3,000,000 Problem 11-20 Answer C Total cash dividend 3,000,000 Cumulative net income 2,500,000 Liquidating dividend 500,000 Cash (10% x 3,000,000) 300,000 Dividend income (10% x 2,500,000) 250,000 Investment in equity securities 50,000 Problem 11-21 Answer B Investment income (20% x 1,600,000) 320,000

148 Problem 11-22 Answer A Investment income (20% x 6,000,000) 1,200,000 Problem 11-23 Answer C Interest (30,000/100,000) 30% Investment income (5,000,000 x 6/12 x 30%) 750,000 Problem 11-24 Answer C Cost 4,000,000 Less: Net assets acquired (40% x 8,000,000) 3,200,000 Excess of cost or goodwill 800,000 Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%) 300,000 Problem 11-25 Answer B Acquisition cost 7,000,000 Share in net income (20% x 1,800,000) 360,000 Share in cash dividend (20% x 600,000) ( 120,000) Amortization of excess (1,000,000/10) ( 100,000) Carrying value 7,140,000 Problem 11-26 Answer A Acquisition cost 4,000,000 Share in net income (10% x 5,000,000) 500,000 Share in cash dividend (10% x 1,500,000) ( 150,000) Carrying value 4,350,000 Problem 11-27 Answer D

Acquisition cost (squeeze) 1,720,000 Share in net income (25% x 1,200,000) 300,000 Share in cash dividend (25% x 480,000) ( 120,000) Carrying value – December 31 1,900,000 Problem 11-28 Answer D Acquisition cost 2,500,000 Less: Book value of net assets acquired (30% x 5,000,000) 1,500,000 Excess of cost over book value 1,000,000 Less: Amount attributable to undervaluation of land (30% x 2,000,000) 600,000 Goodwill 400,000

149 Acquisition cost 2,500,000 Add: Share in net income (30% x 1,000,000) 300,000 Balance, December 31 2,800,000 The excess of cost attributable to the land is not amortized because the land is nondepreciable. The goodwill is not amortized. Problem 11-29 Answer B Acquisition cost – January 1 1,000,000 Acquisition cost – December 31 3,000,000 Total cost 4,000,000 Share in net income (10% x 8,000,000) 800,000 Carrying value 4,800,000 Problem 11-30 Answer C Investment income in 2008 (30% x 6,500,000) 1,950,000 Investment income in 2007 (10% x 6,000,000) 600,000 Less: Dividend income recorded in 2006 (10% x 2,000,000) 200,000 Understatement of income 400,000 Investment in associate 400,000 Retained earnings 400,000 Problem 11-31 Answer A Acquisition cost 5,160,000 Net assets acquired (30% x 11,800,000) 3,540,000 Excess of cost 1,620,000 Attributable to depreciable assets (30% x 2,600,000) 780,000 Attributable to goodwill 840,000 Acquisition cost 5,160,000 Share in net income (30% x 3,600,000) 1,080,000 Share in dividends (30% x 400,000) ( 120,000) Amortization (780,000/4) ( 195,000) Investment balance – December 31 5,925,000 Problem 11-32 Answer B Acquisition cost 2,560,000 Net assets acquired (40% x 5,000,000) 2,000,000 Excess of cost 560,000

150 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 value of investment – 12/31/2008 2,700,000 Problem 11-33 Answer A Net income 5,000,000 Less: Preference dividend (10% x 2,000,000) 200,000 Net income to ordinary shares 4,800,000

Investment income (50% x 4,800,000) 2,400,000 Problem 11-34 Question 1 – Answer B Share in 2008 net income (30% x 800,000) 240,000 Question 2 – Answer B Acquisition cost 2,000,000 Share in net income – 2008 240,000 Cash dividends – 2008 (30% x 500,000) ( 150,000) Book value – December 31, 2008 2,090,000 Question 3 – Answer B Book value – December 31, 2008 2,090,000 Share in net income up to June 30, 2009 (30% x 1,000,000) 300,000 Book value – June 30, 2009 2,390,000 Sales price 1,500,000 Book value sold (2,390,000 x ½) 1,195,000 Gain on sale 305,000

151 Problem 11-35 Answer C Acquisition cost (30,000 x 120) 3,600,000 Deficit on January 1, 2008 (30% x 500,000) ( 150,000) Carrying value of investment – 1/1/2008 3,450,000 Net income for 2008 (30% x 700,000) 210,000 Net income for 2009 (30% x 800,000) 240,000 Cash dividend on 12/31/2009 (30% x 400,000) ( 120,000) Carrying value of investment – 12/31/2009 3,780,000 Another approach Acquisition cost 3,600,000 Share in retained earnings – 12/31/2009 (30% x 600,000) 180,000 Carrying value of investment – 12/31/2009 3,780,000

152 CHAPTER 12

Problem 12-1 1. B 6. C 2. B 7. C 3. A 8. B 4. A 9. B 5. D 10. C Problem 12-2

Bonds held as trading 2008 April 1 Trading securities 2,200,000 Cash 2,200,000 Oct. 1 Cash (2,000,000 x 12% x 6/12) 120,000 Interest income 120,000 Dec. 31 Accrued interest receivable 60,000 Interest income (2,000,000 x 12% x 3/12) 60,000 31 Trading securities 100,000 Unrealized gain – TS 100,000 2009 Jan. 1 Interest income 60,000 Accrued interest receivable 60,000 April 1 Cash 120,000 Interest income 120,000 Oct. 1 Cash 120,000 Interest income 120,000 Dec. 31 Accrued interest receivable 60,000 Interest income 60,000

31 Unrealized loss – TS 340,000 Trading securities (2,300,000 – 1,960,000) 340,000

Bonds held to maturity 2008 April 1 Held to maturity securities 2,200,000 Cash 2,200,000 Oct. 1 Cash 120,000 Interest income 120,000

153 2008 Dec. 31 Accrued interest receivable 60,000 Interest income 60,000 31 Interest income (50,000 x 9/12) 37,500 Held to maturity securities 37,500 2009 Jan. 1 Interest income 60,000 Accrued interest receivable 60,000 April 1 Cash 120,000 Interest income 120,000 Oct. 1 Cash 120,000 Interest income 120,000 Dec. 31 Accrued interest receivable 60,000 Interest income 60,000 31 Interest income (200,000/4) 50,000 Held to maturity securities 50,000 Problem 12-3

Bonds held as trading

Jan. 1 Trading securities 3,761,000 Cash 3,761,000 July 1 Cash 240,000 Interest income (4,000,000 x 12%) 240,000 Dec. 31 Accrued interest receivable 240,000 Interest income 240,000 31 Trading securities 439,000 Unrealized gain – TS (4,200,000 – 3,761,000) 439,000

Bonds held as available for sale Jan. 1 Available for sale securities 3,761,000 Cash 3,761,000 July 1 Cash 240,000 Interest income 240,000

154 July 1 Available for sale securities 23,270 Interest income 23,270 Interest income (3,761,000 x 7%) 263,270 Interest received 240,000 Amortization of discount 23,270 Dec. 31 Accrued interest receivable 240,000 Interest income 240,000 31 Available for sale securities 24,899 Interest income 24,899 Interest income (3,784,270 x 7%) 264,899 Interest accrued 240,000 Amortization of discount 24,899 31 Available for sale securities 390,831 Unrealized gain – AFS 390,831 Market value (4,000,000 x 105) 4,200,000 Book value 3,809,169 Unrealized gain 390,831 Problem 12-4 Aug. 1 Trading securities (5,000,000 x 104) 5,200,000 Interest income (5,000,000 x 12% x 3/12) 150,000 Cash 5,350,000 31 Trading securities (2,000,000 x 98) 1,960,000 Interest income (2,000,000 x 12% x 2/12) 40,000 00 Cash 2,000,0

Nov. 1 Cash (5,000,000 x 12% x 6/12) 300,000 Interest income 300,000 Dec. 1 Cash (1,880,000 + 20,000) 1,900,000 Loss on sale of trading securities 200,000 Trading securities 2,080,000 Interest income (2,000,000 x 12% x 1/12) 20,000 Selling price (2,040,000 – 160,000) 1,880,000 Less: Cost of bonds sold (2,000/5,000 x 5,200,000) 2,080,000 Loss on sale ( 200,000)

155 Dec. 31 Cash (2,000,000 x 12% x 6/12) 120,000 Interest income 120,000 31 Accrued interest receivable (3,000,000 x 12% x 2/12) 60,000 Interest income 60,000 31 Unrealized loss – TS 160,000 Trading securities 160,000 Carrying amount Market Acme bonds (3,000,000 x 98%) 3,120,000 2,940,000 Avco bonds (2,000,000 x 99%) 1,960,000 1,980,000 5,080,000 4,920,000

Current assets: Trading securities, at market value 4,920,000 Problem 12-5 Requirement a March 1 Trading securities (2,000,000 x 93%) 1,860,000 Interest income (2,000,000 x 12% x 1/12) 20,000 Cash 1,880,000 April 1 Trading securities (4,000,000 x 95%) 3,800,000 Interest income (4,000,000 x 12% x 1/12) 40,000 Cash 3,840,000 Aug. 1 Cash (2,000,000 x 12% x 6/12) 120,000 Interest income 120,000 Sept. 1 Cash (4,000,000 x 12% x 6/12) 240,000 00 Interest income 240,0

Oct. 1 Cash (1,010,000 + 10,000) 1,020,000 Interest income (1,000,000 x 12% x 1/12) 10,000 Trading securities 950,000 Gain on sale of trading securities 60,000 Sales price (1,000,000 x 105%) 1,050,000 Less: Brokerage 40,000 Net proceeds 1,010,000 Less: Cost of bonds sold (1,000/4,000 x 3,800,000) 950,000 Gain on sale 60,000

156 Dec. 1 Cash (1,940,000 + 80,000) 2,020,000 Trading securities 1,860,000 Interest income (2,000,000 x 12% x 4/12) 80,000 Gain on sale of trading securities 80,000 Sales price (2,000,000 x 100%) 2,000,000 Less: Brokerage 60,000 Net proceeds 1,940,000 Less: Cost of bonds sold 1,860,000 Gain on sale 80,000 31 Accrued interest receivable (3,000,000 x 12% x 4/12) 120,000 Interest income 120,000 31 Unrealized loss – TS (2,850,000 – 2,700,000) 150,000 Trading securities 150,000 Requirement b Current assets: Trading securities, at market value (3,000,000 x 90) 2,700,000 Problem 12-6 2008 July 1 Trading securities 2,200,000 Commission expense 50,000 Interest income (2,000,000 x 4%) 80,000 Cash 2,330,000 Dec. 31 Unrealized loss – TS 300,000 Trading securities 300,000 Market value (2,000,000 x 95) 1,900,000 Carrying amount 2,200,000 Unrealized loss 300,000 31 Cash (2,000,000) x 8%) 160,000 Interest income 160,000 2009 March 31 Cash 2,140,000 Trading securities 1,900,000 Gain on sale of TS 200,000 Interest income (2,000,000 x 8%) x 3/12) 40,000

157 Problem 12-7 Requirement 1 Discount Date Interest received Interest income amortization Book value 01/01/2008 1,900,500 12/31/2008 160,000 190,050 30,050 1,930,550 12/31/2009 160,000 193,055 33,055 1,963,605 12/31/2010 160,000 196,395 36,395 2,000,000 Requirement 2 2008 Jan. 1 Available for sale securities 1,900,500 Cash 1,900,500 Dec. 31 Cash 160,000 Interest income 160,000 31 Available for sale securities 30,050 Interest income 30,050 31 Available for sale securities 269,450 Unrealized gain – AFS 269,450 Market value (2,000,000 x 110) 2,200,000 Carrying amount 1,930,550 Unrealized gain 269,450 2009 Dec. 31 Cash 160,000 Interest income 160,000 31 Available for sale securities 33,055 Interest income 33,050 31 Available for sale securities 166,945 Unrealized gain 166,945 Market value 12/31/2009 (2,000,000 x 120) 2,400,000 Book value per table – 12/31/2009 1,963,605 Cumulative unrealized gain – 12/31/2009 436,395 Unrealized gain – 12/31/2008 269,450 Increase in 2009 166,945

158 Problem 12-8 Requirement 1 Discount Date Interest received Interest income amortization Book value 01/01/2008 4,742,000 12/31/2008 300,000 379,360 79,360 4,821,360 12/31/2009 300,000 385,709 85,709 4,907,069 12/31/2010 300,000 392,931 92,931 5,000,000 Requirement 2 2008 Jan. 1 Available for sale securities 4,742,000 Cash 4,742,000 Dec. 31 Cash 300,000 Interest income 300,000 31 Available for sale securities 79,360 Interest income 79,360 31 Available for sale securities 428,640 Unrealized gain – AFS 428,640 Market value - 12/31/2008 (5,000,000 x 105) 5,250,000 Book value – 12/31/2008 4,821,360 Unrealized gain – 12/31/2008 428,640 2009 Dec. 31 Cash 300,000 Interest income 300,000 31 Available for sale securities 85,709 Interest income 85,709 31 Cash 5,500,000 Unrealized gain - AFS 428,640 Available for sale securities 5,335,709 Gain on sale of AFS 592,931 Sales price (5,000,000 x 110) 5,250,000 Unrealized gain 428,640 Total 5,928,640 Investment balance – 12/31/2009 5,335,709 Unrealized gain – 12/31/2009 592,931

159 Another computation Sales price 5,250,000 Book value per table – 12/31/2009 4,907,069 Gain on sale 592,931 Problem 12-9

Requirement a 2008 May 1 Held to maturity securities (6,000,000 x 94%) 5,640,000 Interest income (6,000,000 x 12% x 3/12) 180,000 Cash 5,820,000 Aug. 1 Cash 360,000 Interest income (6,000,000 x 12% x 6/12) 360,000 Dec. 31 Accrued interest receivable 300,000 Interest income (6,000,000 x 12% x 5/12) 300,000 31 Held to maturity securities (8,000 x 8) 64,000 Interest income 64,000 May 1, 2008 – February 1, 2012 = 45 months 360,000 / 45 = 8,000 monthly amortization Requirement b 2010 May 1 Held to maturity securities (8,000 x 4) 32,000 Interest income 32,000 1 Cash (6,300,000 + 180,000) 6,480,000 Held to maturity securities 5,832,000 Interest income (6,000,000 x 12% x 3/12) 180,000 Gain on sale of bonds 468,000 Original cost – May 1, 2008 5,640,000 Add: Discount amortization from May 1, 2008 to May 1, 2010 (8,000 x 24 months) 192,000 Book value, May 1, 2010 5,832,000 Selling price (6,000,000 x 105%) 6,300,000 Less: Book value 5,832,000 Gain on sale 468,000

160 Problem 12-10 1. Held to maturity securities 8,598,400 Cash 8,598,400 2. Cash (12% x 8,000,000) 960,000 Interest income 960,000 3. Interest income 100,160 Held to maturity securities 100,160 Interest received 960,000 Interest income (10% x 8,598,400) 859,840 Premium amortization 100,160 Problem 12-11 Year Bond outstanding Fraction Premium amortization 2008 1,000,000 10/30 50,000 2009 800,000 8/30 40,000 2010 600,000 6/30 30,000 2011 400,000 4/30 20,000 2012 200,000 2/30 10,000 3,000,000 150,000 2008 Jan. 1 Held to maturity securities 1,000,000 Cash 1,000,000 June 30 Cash (100,000 x 12% x 6/12) 60,000 Interest income 60,000 Dec. 31 Cash 60,000 Interest income 60,000 31 Interest income 50,000 Held to maturity securities 50,000 31 Cash 200,000 Held to maturity securities 200,000

161 2009 June 30 Cash (800,000 x 12% x 6/12) 48,000 Interest income 48,000 Dec. 31 Cash 48,000 Interest income 48,000 31 Interest income 40,000 Held to maturity securities 40,000 31 Cash 200,000 Held to maturity securities 200,000 Problem 12-12 Year Bond outstanding Fraction Discount amortization 2008 4,000,000 4/10 120,000 2009 3,000,000 3/10 90,000 2010 2,000,000 2/10 60,000 2011 1,000,000 1/10 30,000 10,000,000 300,000 2010 Dec. 31 Cash 240,000 Interest income 240,000 31 Held to maturity securities 60,000 Interest income

60,000

31 Cash 1,000,000 Held to maturity securities 1,000,000 2011 Dec. 31 Cash 120,000 Interest income 120,000 31 Held to maturity securities 30,000 Interest income 30,000 31 Cash 1,000,000 Held to maturity securities 1,000,000

162 Problem 12-13 Bond Months Peso Discount Bond year outstanding outstanding months Fraction amortization 10/01/2008 – 02/01/2009 3,000,000 4 12,000,000 12/48 75,000 02/01/2009 - 02/01/2010 2,000,000 12 24,000,000 24/48 150,000 02/01/2010 – 02/01/2011 1,000,000 12 12,000,000 12/48 75,000 48,000,000 300,000 2008 Oct. 1 Held to maturity securities 2,700,000 Interest income (3,000,000 x 12% x 2/12) 60,000 Cash 2,760,000 Dec. 31 Accrued interest receivable 150,000 Interest income (3,000,000 x 12% x 5/12) 150,000 31 Held to maturity securities 56,250 Interest income (75,000 x 3/4) 56,250 2009 Jan. 1 Interest income 150,000 Accrued interest receivable 150,000 Feb. 1 Cash (3,000,000 x 12% x 6/12) 180,000 Interest income 180,000 1 Cash 1,000,000 Held to maturity securities 1,000,000 Aug. 1 Cash (2,000,000 x 12% x 6/12) 120,000 Interest income 120,000 Dec. 31 Accrued interest receivable 100,000 Interest income (2,000,000 x 12% x 5/12)

100,000

31 Held to maturity securities 156,250 50 Interest income 156,2

From January1 to February 1, 2009 (75,000 x 1/4) 18,750 From February 1 to December 31, 2009 (150,000 x 11/12) 137,500 Total amortization for year 2009 156,250

163 Problem 12-14 Date Interest received Interest income Discount amortization Book value 01/01/2008 3,757,015 12/31/2008 400,000 450,842 50,842 3,807,857 12/31/2009 400,000 456,943 56,943 3,864,800 12/31/2010 400,000 463,776 63,776 3,928,576 12/31/2011 400,000 471,424 71,424 4,000,000 2008 Jan. 1 Held to maturity securities 3,757,015 Cash 3,757,015 Dec. 31 Cash 400,000 Interest income 400,000 31 Held to maturity securities 50,842 Interest income 50,842 Problem 12-15 Date Interest received Interest income Premium amortization Carrying value Jan. 01, 2008 3,111,510 June 30, 2008 120,000 93,345 26,655 3,084,855 Dec. 31, 2008 120,000 92,546 27,454 3,057,401 June 30, 2009 120,000 91,722 28,278 3,029,123 Dec. 31, 2009 120,000 90,877 29,123 3,000,000 2008 Jan. 1 Held to maturity securities 3,111,510 Cash 3,111,510 June 30 Cash 120,000 Interest income 120,000 30 Interest income 26,655 Held to maturity securities 26,655 Dec. 31 Cash 120,000 Interest income 120,000 31 Interest income 27,454 Held to maturity securities 27,454

164 Problem 12-16 1. Journal entries a. Held to maturity securities 7,679,000 Cash 7,679,000 b. Cash (10% x 8,000,000) 800,000 Interest income 800,000 c. Held to maturity securities 121,480 Interest income 121,480 Interest income (7,679,000 x 12%) 921,480 Interest received (8,000,000 x 10%) 800,000 Discount amortization 121,480 d. Cash 2,000,000 Held to maturity securities 2,000,000 2. Cost 7,769,000 Discount amortization 121,480 Annual installment (2,000,000) Book value – 12/31/2008 5,800,480 Problem 12-17 Semiannual nominal interest (5,000,000 x 4%) 200,000 Semiannual effective interest (5,000,000 x 5%) 250,000 Difference 50,000 Multiply by present value of annuity of 1 for 20 periods at 5% 12.462 Discount 623,100 Face value 5,000,000 Discount ( 623,100) Purchase price 4,376,900 Problem 12-18 1. Annual nominal interest (4,000,000 x 16%) 640,000 Annual effective interest (4,000,000 x 12%) 480,000 Difference 160,000 Multiply by present value factor 3.605 Premium 576,800 Face value 4,000,000 Purchase price 4,576,800

165 2. Date Interest received Interest income Premium amortization Book value Jan. 01, 2008 4,576,800 Dec. 31, 2008 640,000 549,216 90,784 4,486,016 Dec. 31, 2009 640,000 538,322 101,678 4,384,338 Dec. 31, 2010 640,000 526,121 113,879 4,270,459 Dec. 31, 2011 640,000 512,455 127,545 4,142,914 Dec. 31. 2012 640,000 497,086 142,914 4,000,000 3. Held to maturity securities 4,576,800 Cash 4,576,800 Cash 640,000 Interest income 640,000 Interest income 90,784 Held to maturity securities 90,784 Problem 12-19 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 of 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 a 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 semiannual interest payments (400,000 x 8.11) 3,244,000 Purchase price or present value of bonds 8,648,800 Journal entries 2008 Jan. 1 Held to maturity securities 8,648,800 Cash 8,648,800 July 1 Cash 400,000 Interest income 400,000 1 Interest income 54,048 Held to maturity securities 54,048

166 Interest received 400,000 Interest income (8,648,800 x 8% x 6/12) 345,952 Premium amortization 54,048 Dec. 31 Accrued interest receivable 400,000 Interest income 400,000 31 Interest income 56,210 Held to maturity securities 56,210 Interest accrued 400,000 Interest income (8,594,752 x 8% x 6/12) 343,790 Premium amortization 56,210 Problem 12-20 1. Principal payment 1,000,000 Interest payment (3,000,000 x 12%) 360,000 Total payment on December 31, 2008 1,360,000 Principal payment 1,000,000 Interest payment (2,000,000 x 12%) 240,000 Total payment on December 31, 2009 1,240,000 Principal payment 1,000,000 Interest payment (1,000,000 x 12%) 120,000 Total payment on December 31, 2010 1,120,000 December 31, 2008 payment (1,360,000 x .91) 1,237,600 December 31, 2009 payment (1,240,000 x .83) 1,029,200 December 31, 2010 payment (1,120,000 x .75) 840,000 Total present value on January 1, 2008 3,106,800 2. Journal entries 2008 Jan. 1 Held to maturity securities 3,106,800 Cash 3,106,800 Dec. 31 Cash 360,000 Interest income 360,000 31 Interest income 49,320 Held to maturity securities 49,320

167 Interest received 360,000 Interest income (3,106,800 x 10%) 310,680 Premium amortization 49,320 Dec. 31 Cash 1,000,000 Held to maturity securities 1,000,000 3. Acquisition cost – 1/1/2008 3,106,800 Premium amortization for 2008 ( 49,320) Annual installment (1,000,000) Carrying value of investment – 12/31/2008 2,057,480 Problem 12-21 1. The present value of the bonds using the interest rate of 11% is as follows: PV of principal (5,000,000 x .6587) 3,293,500 PV of interest (500,000 x 3.1024) 1,551,200 Total present value of cash flows 4,844,700 2. The present value of the bonds using the interest rate of 12% is as follows: PV of principal (5,000,000 x .6355) 3,177,500 PV of interest (500,000 x 3.0373) 1,518,650 Total present value of cash flows 4,696,150 3. X – 11%____ 12% - 11% 4,700,000 – 4,844,700_ 4,696,150 – 4,844,700 _144,700_ = .97 148,550 Effective rate = 11% + .97 = 11.97% 4. Interest income for 2008 (4,700,000 x 11.97%) 562,590 5. Journal entries Held to maturity securities 4,700,000 Cash 4,700,000 Cash (10% x 5,000,000) 500,000 Interest income 500,000

168 Held to maturity securities 62,590 Interest income 62,590 Interest income 562,590 Interest received 500,000 Discounted amortization 62,590 Problem 12-22 Question 1 – Answer A Acquisition cost (4,400,000 – 100,000) 4,300,000 Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15) ( 60,000) Book value – December 31, 2008 4,240,000 Monthly amortization (300,000/75 months) 4,000 Question 2 – Answer B Interest for 2008 (4,000,000 x 10%) 400,000 Amortization of premium (4,000 x 12 months) ( 48,000) Interest income 352,000

Problem 12-23 Answer B Interest for 2008 (2,000,000 x 12%) 240,000 Amortization of discount (100,000/5) 20,000 Interest income 260,000 Problem 12-24 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 12-25 Answer A Acquisition cost – 1/1/2008 3,767,000 Discount amortization for 2008: Interest income (14% x 3,767,000) 527,380 Interest received (12% x 4,000,000) 480,000 47,380 Book value – 12/31/2008 3,814,380

169 Problem 12-26 Answer A Bond year Bond outstanding Fraction Amortization 04/01/2007 – 03/31/2008 4,000,000 4/10 80,000 04/01/2008 – 03/31/2009 3,000,000 3/10 60,000 04/01/2009 – 03/31/2010 2,000,000 2/10 40,000 04/01/2010 – 03/31/2011 1,000,000 1/10 20,000 10,000,000 200,000 Interest for the year 2008: From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12) 120,000 From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12) 270,000 390,000 Amortization of discount for year 2008: From January 1 to March 31, 2008 (80,000 x 3/12) 20,000 From April 1 to December 31, 2008 (60,000 x 9/12) 45,000 65,000 Interest income for year 2008 455,000

Problem 12-27 Answer D Interest income for 2008 (3,756,000 x 10%) 375,600

Problem 12-28 Answer D Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12) 200,000 Problem 12-29 Answer C Interest received (1,000,000 x 10% x 6/12) 50,000 Interest income (1,198,000 x 8% x 6/12) 47,920 Premium amortization 2,080 Acquisition cost – July 1, 2008 1,198,000 Premium amortization ( 2,080) Book value – December 31, 2008 1,195,920

170 Problem 12-30 Answer A Interest accrued (1,000,000 x 8% x 6/12) 40,000 Interest income (906,000 x 10% x 6/12) 45,300 Discount amortization 5,300 Acquisition cost – July 1, 2008 (946,000 - 40,000) 906,000 Discount amortization 5,300 Book value – December 31, 2008 911,300 Problem 12-31 Answer B Acquisition cost – July 1, 2008 4,614,000 Discount amortization from July 1 to December 31, 2008: Interest accrued (5,000,000 x 8% x 6/12) 200,000 Interest income (4,614,000 x 10% x 6/12) 230,700 30,700 Book value – December 31, 2008 4,644,700 Problem 12-32 Answer D Acquisition cost 4,766,000 Discount amortization: Interest income (4,766,000 x 12%) 571,920 Interest received (5,000,000 x 10%) 500,000 71,920 Total 4,837,920 Annual installment on December 31, 2008 (1,000,000) Book value –December 31, 2008 3,837,920 Problem 12-33 Answer A Annual effective (5,000,000 x 14%) 700,000 Annual nominal (5,000,000 x 12%) 600,000 Difference 100,000 Multiply by present value factor using effective rate of 14% 5.216 Discount 521,600 Face value 5,000,000 Purchase price 4,478,400 Problem 12-34 Answer A 12/31/2008 (1,250,000 + 600,000 x .9091) 1,681,835 12/31/2009 (1,250,000 + 450,000 x .8264) 1,404,880 12/31/2010 (1,250,000 + 300,000 x .7513) 1,164,515 12/31/2011 (1,250,000 + 150,000 x .6830) 956,200 5,207,430

171 CHAPTER 13

Problem 13-1 Problem 13-2 Problem 13-3 1. C 1. A 1. A 2. B 2. C 2. A 3. D 3. D 3. B 4. D 4. D 4. A 5. D 5. A 5. B 6. A 6. A 6. A 7. D 7. D 7. D 8. B 8. A 8. A 9. A 9. D 9. A 10. B 10. A 10. D Problem 13-4 2008 Jan. 1 Sinking fund cash 400,000 Cash 400,000 April 1 Sinking fund securities 384,000 Sinking fund cash 384,000 Oct. 1 Sinking fund cash 24,000 Sinking fund income (400,000 x 12% x 6/12) 24,000 Dec. 31 Sinking fund cash 400,000 Cash 400,000 31 Accrued interest receivable 12,000 Sinking fund income (400,000 x 12% x 3/12) 12,000 Sinking fund securities 3,000 Sinking fund income 3,000 Amortization of discount on sinking fund securities for 9 months. (16,000/4 years = 4,000 x 9/12 = 3,000) 31 Retained earnings 439,000 Retained earnings appropriated for sinking fund 439,000

Sinking fund cash 440,000 Sinking fund securities 387,000 Accrued interest receivable 12,000 Total 839,000 Less: Appropriated retained earnings balance 400,000 Additional appropriation 439,000

172 2009 Jan. 1 Sinking fund income 12,000 Accrued interest receivable 12,000 April 1 Sinking fund cash 24,000 Sinking fund income 24,000 1 Sinking fund expenses 12,000 Sinking fund cash 12,000 Oct. 1 Sinking fund cash 24,000 Sinking fund income 24,000 1 Sinking fund securities (4,000 x 9/12) 3,000 Sinking fund income 3,000 1 Sinking fund cash (400,000 x 106%) 424,000 Sinking fund securities 390,000 Gain on sale of securities 34,000 Dec. 31 Sinking fund cash 400,000 Cash 400,000 31 Retained earnings 461,000 Retained earnings appropriated for sinking fund 461,000 Sinking fund cash 1,300,000 Less: Appropriated retained earnings balance 839,000 Additional appropriation 461,000 2010 July 1 Bonds payable 1,000,000 Interest expense 100,000 Sinking fund cash 1,100,000 1 Cash 200,000 Sinking fund cash 200,000 1 Retained earnings appropriated for sinking fund 1,300,000 Retained earnings 1,300,000 Problem 13-5 2008 Jan. 1 Sinking fund cash 2,700,000 Cash 2,700,000 18 Sinking fund securities 2,500,000 Sinking fund cash 2,500,000

173 2008 July 5 Sinking fund expenses 100,000 Sinking fund cash 100,000 Sept. 9 Sinking fund cash 530,000 Loss on sale of securities 70,000 Sinking fund securities 600,000 Dec. 20 Sinking fund cash 150,000 Sinking fund income 150,000 2009 Feb. 12 No entry Dec. 31 Sinking fund cash 270,000 Sinking fund income 270,000 31 Sinking fund cash 2,250,000 Sinking fund securities 1,900,000 Gain on sale of securities 350,000 31 Bonds payable 3,000,000 Sinking fund cash 3,000,000 31 Cash 300,000 Sinking fund cash 300,000 Problem 13-6 1. Sinking fund cash 2,000,000 Cash 2,000,000 2. Sinking fund securities 450,000 Sinking fund cash 450,000 3. Sinking fund securities 400,000 Sinking fund cash 400,000 4. Sinking fund cash 60,000 Sin 0,000 king fund income (500,000 x 12%) 6

Sinking fund securities 10,000 Sinking fund income 10,000 Amortization of bond discount (50,000/5 years = 10,000 per year)

174 5. Sinking fund expenses 20,000 Sinking fund cash 20,000 6. Sinking fund securities 400,000 Sinking fund income 10,000 Sinking fund cash 410,000 7. Sinking fund cash 50,000 Sinking fund income (500,000 x 10%) 50,000 8. Sinking fund cash 20,000 Sinking fund income 20,000 9. Sinking fund cash 450,000 Sinking fund securities 400,000 Gain on sale of securities 50,000 10. Retained earnings 2,160,000 Retained earnings appropriated for sinking fund 2,160,000 Composition of fund: Sinking fund cash 1,300,000 Sinking fund securities 860,000 2,160,000 Problem 13-7 1. Sinking fund – trustee 1,000,000 Cash 1,000,000 2. No entry 3. No entry 4. No entry 5. No entry 6. Sinking fund – trustee 140,000 Sinking fund expense 30,000 Sinking fund income (60,000 + 10,000) 70,000 Gain on sale of securities

100,000

7. Bonds payable 1,000,000 Interest expense 100,000 Sinking fund – trustee 1,100,000

175 8. Cash 40,000 Sinking fund – trustee 40,000 Problem 13-8 Annual contribution (5,000,000/6.051) 818,987

Date Interest income Annual contribution Fund balance 12/31/2008 818,987 818,987 12/31/2009 81,899 818,987 1,719,873 12/31/2010 171,987 818,987 2,710,847 12/31/2011 271,085 818,987 3,800,919 12/31/2012 380,094 818,987 5,000,000 Problem 13-9 Annual contribution (2,000,000/5.1051) 391,765 Date Interest income Annual contribution Fund balance

07/01/2008 391,765 391,765 07/01/2009 39,176 391,765 822,706 07/01/2010 82,271 391,765 1,296,742 07/01/2011 129,674 391,765 1,818,181 07/01/2012 181,819 - 2,000,000 Problem 13-10 2008 Jan. 1 Life insurance 60,000 Cash 60,000 2009 Jan. 1 Life insurance 60,000 Cash 60,000 2010 Jan. 1 Life insurance 60,000 Cash 60,000 Dec. 31 Cash surrender value 60,000 Life insurance 20,000 Retained earnings 40,000 2011 Jan. 1 Life insurance 60,000 Cash 60,000

176 Dec. 31 Cash surrender value 24,000 Life insurance 24,000

Balance – December 31, 2011 84,000 Balance – December 31, 2010 60,000 Increase in cash surrender value 24,000 2012 Jan. 1 Life insurance 60,000 Cash 60,000 June 30 Cash surrender value 16,000 Life insurance 16,000 Balance – December 31, 2012 116,000 Balance – December 31, 2011 84,000 Increase in cash surrender value for 2012 32,000 Increase from January 1 to June 30, 2012 (1/2 x 32,000) 16,000 July 31 Cash 2,000,000 Cash surrender value 100,000 Life insurance (60,000 x 6/12) 30,000 Gain on sale of life insurance settlement 1,870,000 Problem 13-11 2007 April 1 Life insurance 60,000 Cash 60,000 Dec. 31 Prepaid life insurance (60,000 x 3/12) 15,000 Life insurance 15,000 2008 Jan. 1 Life insurance 15,000 Prepaid life insurance 15,000 April 1 Life insurance 60,000 Cash 60,000 Dec. 31 Prepaid life insurance 15,000 Life insurance 15,000 2009 Jan. 1 Life insurance 15,000 Prepaid life insurance 15,000

177 April 1 Life insurance 60,000 Cash 60,000

Dec. 31 Prepaid life insurance 15,000 Life insurance 15,000 2010 Jan. 1 Life insurance 15,000 Prepaid life insurance 15,000 April 1 Cash surrender value 60,000 Life insurance 5,000 Retained earnings 55,000 April 1, 2007 – December 31, 2009 (33/36 x 60,000) prior years 55,000 January 1, 2010 – April 1, 2010 (3/36 x 60,000) current period 5,000 Total 60,000 1 Life insurance 60,000 Cash 60,000 Dec. 31 Prepaid life insurance 15,000 Life insurance 15,000 31 Cash surrender value 18,000 Life insurance 18,000 Balance – April 1, 2011 84,000 Balance – April 1, 2010 60,000 Increase from April 1, 2010 to April 1, 2011 24,000 Increase from April 1, 2010 to December 31, 2010 (24,000 x 9/12) 18,000 2011 Jan. 1 Life insurance 15,000 Prepaid life insurance 15,000 April 1 Cash surrender value (18,000 x 3/12) 6,000 Life insurance 6,000 1 Life insurance 60,000 Cash 60,000 July 1 Cash surrender value 8,000 Life insurance 8,000 Balance – April 1, 2012 116,000 Balance – April 1, 2011 84,000 Increase from April 1, 2011 to April 1, 2012 32,000

178 Increase from April 1, 2010 to July 1, 2010 (32,000 x 3/12) 8,000 July 31 Cash 2,000,000 Cash surrender value 92,000 Life insurance (60,000 x 9/12) 45,000 Gain on life insurance settlement 1,863,000 Problem 13-12 2008 Jan. 1 Life insurance 80,000 Cash 80,000 2009 Jan. 1 Life insurance 80,000 Cash 80,000 Dec. 31 Cash 5,000 Life insurance 5,000 31 Cash surrender value 42,000 Life insurance (42,000 x 1/3) 14,000 Retained earnings 28,000 2010 Jan. 1 Life insurance 80,000 Cash 80,000 Dec. 31 Cash 6,000 Life insurance 6,000 31 Cash surrender value 5,000 Life insurance 5,000 Balance – December 31, 2010 47,000 Balance – December 31, 2009 42,000 Increase in cash surrender value 5,000 Problem 13-13 a. Life insurance (10,000 x 6/12) 5,000 Cash surrender value 5,000 b. Prepaid life insurance (28,000 x 1/2) 14,000 Life insurance 14,000 c. Interest expense 4,500 Accrued interest payable (50,000 x 12% x 9/12) 4,500

179 d. Dividend income 2,000 Dividend receivable 2,000 Current assets: Prepaid life insurance 14,000 Investment: Cash surrender value 85,000 Current liabilities: Loan payable 50,000 Accrued interest payable 4,500 Problem 13-14 1. Land held by Eragon for undetermined use 5,000,000 Vacant building 3,000,000 Building owned by a subsidiary Eragon occupied by lessees 1,500,000 Total investment property 9,500,000 2. a. The property held by a subsidiary Eragon in the ordinary course of business in included in inventory. b. The property held by Eragon for use in production is owner-occupied property and therefore part of property, plant and equipment.

c. The land leased by Eragon to a subsidiary under an operating lease is owner- occupied property for purposes of consolidated financial statements. However, from the perspective of separate financial statements of Eragon, the land is an investment

property. d. The property under construction for use as investment property is owner-occupied property until the land is completed. Upon completion, the building becomes investment property. e. The land held for future factory site is owner-occupied property and therefore part of property, plant and equipment. f. The machinery leased out to an unrelated party is part of property, plant and equipment because investment property includes only land and building, and not movable property like machinery. Problem 13-15 Cost model 2008 Depreciation 1,800,000 Accumulated depreciation 1,800,000

180 2009 Depreciation 1,800,000 Accumulated depreciation 1,800,000 2010 Depreciation 1,800,000 Accumulated depreciation 1,800,000

Fair value model 2008 Investment property 5,000,000 Accumulated depreciation 5,000,000 2009 Loss from change in fair value 2,000,000 Accumulated depreciation 2,000,000 2010 Investment property 7,000,000 Gain from change in fair value 7,000,000 Problem 13-16 Answer D Annual deposit (8,000,000 / 4.78) 1,673,640 Problem 13-17 Answer B Annual deposit (9,000,000 / 6.34) 1,419,560 Problem 13-18 Answer A Principal amount 5,000,000 Multiply by future value of 1 for 6 periods at 10% 1.77 Future amount at maturity 8,850,000 Problem 13-19 Answer A Future amount of 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 13-20 Answer A Sinking fund balance – January 1 4,500,000 Add: 2007 investment 900,000 Dividends on investment 150,000 Interest revenue 300,000 1,350,000 Total 5,850,000 Less: Administration costs 100,000 Sinking fund balance – December 31 5,750,000

181 Problem 13-21 Answer C Premium paid – January 1 100,000 Less: Dividend received 15,000 Increase in cash surrender value (270,000 – 245,000) 25,000 40,000

60,000 Life insurance expense for 2008 Problem 13-22 Answer D Premium paid 200,000 Less: Increase in cash surrender value (540,000 – 435,000) 105,000 Life insurance expense 95,000 The dividend of P30,000 is not deducted anymore because it is already part of the increase in cash surrender value. Problem 13-23 Answer A Sinking fund cash 500,000 Sinking fund securities 1,000,000 Accrued interest receivable 50,000 Plant expansion fund 600,000 Cash surrender value 150,000 Land held for capital appreciation 3,000,000 Advances to subsidiary 200,000 Investment in joint venture 2,000,000 7,500,000

182 CHAPTER 14

Problem 14-1 Problem 14-2 Problem 14-3 1. A 1. B 1. B 2. A 2. D 2. C 3. B 3. D 3. D 4. A 4. B 4. C 5. D 5. C 5. C 6. B 6. D 7. C 7. D 8. D 8. A 9. D 9. B 10. A 10. C Problem 14-4 Requirement 1 2008 Jan. 1 Cash 4,000,000 Loan payable 4,000,000 Dec. 31 Interest expense 480,000 Cash (12% x 4,000,000) 480,000 31 Interest rate swap receivable 70,160 Unrealized gain – interest rate swap (80,000 x .877) 70,160 2009 Dec. 31 Interest expense 560,000 Cash (14% x 4,000,000) 560,000 31 Cash 80,000 Interest rate swap receivable 70,160 Unrealized gain – interest rate swap 9,840 31 Loan payable 4,000,000 Cash 4,000,000 31 Unrealized gain – interest rate swap 80,000 Interest expense 80,000 Requirement 2 2008 Jan. 1 Cash 4,000,000 Loan payable 4,000,000

183 2008 Dec. 31 Interest expense 480,000 Cash 480,000 31 Unrealized loss – interest rate swap 36,040 Interest rate swap payable (40,000 x .901) 36,040 2009 Dec. 31 Interest expense 440,000 Cash (11% x 4,000,000) 440,000 31 Interest rate swap payable 36,040 Unrealized loss - Interest rate swap 3,960 Cash 40,000 31 Loan payable 4,000,000 Cash 4,000,000 31 Interest expense 40,000 Unrealized loss - interest rate swap 40,000 Problem 14-5 2008 Jan. 1 Cash 6,000,000 Loan payable 6,000,000 Dec. 31 Interest expense 600,000 Cash (10% x 6,000,000) 600,000 31 Interest rate swap receivable 159,300 Unrealized gain – interest rate swap (180,000 x .885) 159,300 2009 Dec. 31 Interest expense 780,000 Cash (13% x 6,000,000) 780,000 31 Cash 180,000 Interest rate swap receivable 159,300 Unrealized gain – interest rate swap 20,700 31 Loan payable 6,000,000 Cash 6,000,000 31 Unrealized gain – interest rate swap 180,000 Interest expense 180,000

184 Problem 14-6 2008 Jan. 1 Cash 3,000,000 Loan payable 3,000,000 Dec. 31 Interest expense 240,000 Cash (8% x 3,000,000) 240,000 31 Interest rate swap receivable 97,200 Unrealized gain – interest rate swap (30,000 x 3.24) 97,200 Batangas Company will receive P30,000 at the end of 2009 and can expect to receive P30,000 at the end of 2010, 2011 and 2012. Thus, the present value of the four annual payments of P30,000 is recognized on December 31, 2008 as interest rate swap receivable. 2009 Dec. 31 Interest expense 270,000 Cash (9% x 3,000,000) 270,000 31 Cash 30,000 Interest rate swap receivable 30,000 31 Unrealized gain – interest rate swap 30,000 Interest expense 30,000 31 Unrealized gain – interest rate swap 67,200 Interest rate swap receivable (97,200 – 30,000) 67,200 31 Unrealized loss – interest rate swap 160,200 Interest rate swap payable (60,000 x 2.67) 160,200 Batangas Company will make a payment of P60,000 at The end of 2010 by reason of the reduced interest rate and can expect to make payment of P60,000 at the end of 2011 and 2012. Thus, the present value of the three annual payments of P60,000 is recognized on December 31, 2009 as the interest rate swap payable. Problem 14-7

2008

Jan. 1 Cash 5,000,000 Loan payable 5,000,000

185 Dec. 31 Interest expense (10% x 5,000,000) 500,000 Cash 500,000 31 Interest swap receivable 464,000 Unrealized gain – interest swap (5,000,000 x 4% x 2.32) 464,000 2009 Dec. 31 Interest expense (14% x 5,000,000) 700,000 Cash 700,000 31 Cash 200,000 Interest rate swap receivable 200,000 31 Unrealized gain – interest rate swap 200,000 Interest expense 200,000 31 Unrealized gain – interest swap 95,000 Interest rate swap receivable 95,000 Unrealized gain – 12/31/2009 (5,000,000 x 2% x 1.69) 169,000 Unrealized gain per book (464,000 – 200,000) 264,000 Decrease in unrealized gain ( 95,000) 2010 Dec. 31 Interest expense (12% x 5,000,000) 600,000 Cash 600,000 31 Cash 100,000 Interest rate swap receivable 100,000 31 Unrealized gain – interest rate swap 100,000 Interest expense 100,000 31 Unrealized gain – interest swap 24,000 Interest rate swap receivable 24,000 Unrealized gain – 12/31/2010 (5,000,000 x 1% x .90) 45,000 Unrealized gain per book (169,000 – 100,000) 69,000 Decrease in unrealized gain (24,000) 2011 Dec. 31 Interest expense (11% x 5,000,000) 550,000 Cash 550,000 31 Cash 50,000 Interest rate swap receivable 45,000 Unrealized gain – interest rate swap 5,000

186 Dec. 31 Unrealized gain – interest rate swap 50,000 Interest expense 50,000 31 Loan payable 5,000,000 Cash 5,000,000 Problem 14-8 2008 Jan. 1 Cash 5,000,000 Loan payable 5,000,000 Dec. 31 Interest expense (5,000,000 x 8%) 400,000 Cash 400,000 31 Interest swap receivable 249,000 Unrealized gain – interest rate swap 249,000 (5,000,000 x 2% x 2.49) 2009 Dec. 31 Interest expense (5,000,000 x 10%) 500,000 Cash 500,000 31 Cash 100,000 Interest rate swap receivable 100,000 31 Unrealized gain – interest rate swap 100,000 Interest expense 100,000 31 Interest rate swap receivable 107,500 Unrealized gain – interest rate swap 107,500 (5,000,000 x 2% x 2.49) Unrealized gain – 12/31/2009 (5,000,000 x 3% x 1.71) 256,500 Unrealized gain per book (249,000 – 100,000) 149,000 Increase in unrealized gain 107,500 2010 Dec. 31 Interest expense (5,000,000 x 11%) 550,000 Cash 550,000 31 Cash 150,000 Interest swap receivable 150,000 31 Unrealized gain – interest rate swap 150,000 Interest expense 150,000 31 Interest rate swap receivable 71,500 Unrealized gain – interest rate swap 71,500

187 Unrealized gain – 12/31/2010 (5,000,000 x 4% x .89) 178,000 Unrealized gain per book (256,500 – 150,000) 106,500 Increase in unrealized gain 71,500 2011 Dec. 31 Interest expense (5,000,000 x 12%) 600,000 Cash 600,000 31 Cash 200,000 Interest rate swap receivable 178,000 Unrealized gain – interest swap 22,000 31 Unrealized gain – interest swap 200,000 Interest expense 200,000 31 Loan payable 5,000,000 Cash 5,000,000 Problem 14-9 2008 Jan. 31 Cash 1,000,000 Note payable 1,000,000 Dec. 31 Interest expense (1,000,000 x 8%) 80,000 Cash 80,000 31 Note payable 34,760 Gain on note payable 34,760

On every year-end the note payable is measured at fair value. The fair value is equal to the present value of the principal plus the present value of future interest payments.

PV of principal (1,000,000 x .8264) 826,400 PV of interest (80,000 x 1.7355) 138,840 Fair value of note payable – 12/31/2008 965,240 Carrying value of note payable 1,000,000 Decrease in carrying value – gain 34,760 31 Loss on interest rate swap 34,760 Interest rate swap payable 34,760 The derivative which is the interest rate swap is also measured at fair value. The fair value is equal to the present value of the net cash settlement with the speculator.

188 Variable interest (1,000,000 x 10%) 100,000 Fixed interest (1,000,000 x 8%) 80,000 Net cash payment to speculator 20,000 Multiply by PV of an ordinary annuity of 1 at 10% for two periods 1.7355 Fair value of interest swap payable – 12/31/2008 34,760* *20,000 times 1.7355 equals P34,760. There is a difference of P50 due to rounding. The gain on note payable and the loss on interest rate swap are recognized immediately in profit or loss because the interest rate swap is designated as fair value hedge. 2009 Dec. 31 Interest expense 96,524 Cash 80,000 Note payable 16,624

Actually, on December 31, 2008, there is a discount on note payable because the fair value is P965,240 and the face value is P1,000,000. This discount is amortized using the effective interest method.

Interest expense (965,240 x 10%) 96,524 Interest paid (1,000,000 x 8%) 80,000 Amortization of discount – increase in note payable 16,524 31 Note payable 8,792 Gain on note payable 8,792 PV of principal (1,000,000 x .9009) 900,900 PV of interest payment (80,000 x .9009) 72,072 Fair value of note payable – 12/31/2009 972,972 Carrying value of note payable (965,240 – 16,524) 981,764 Decrease in carrying value – gain 8,792 31 Interest rate swap payable 20,000 Cash 20,000 This is the cash payment to the speculator as a result of the increase in market rate of interest on January 1, 2009. 31 Loss on interest rate swap 12,267 Interest rate swap payable 12,267

189 Variable interest (1,000,000 x 11%) 110,000 Fixed interest (1,000,000 x 8%) 80,000 Net cash payment to speculator 30,000 Multiply by PV of 1 at 11% for one period .9009 Fair value of interest rate swap payable – 12/31/2009 27,027 Carrying value of interest rate swap payable (34,760 – 20,000) 14,760 Increase in interest rate swap payable 12,267 2010 Dec. 31 Interest expense 107,028 Cash 80,000 Note payable 27,028 Interest expense (972,972 x 11%) 107,028* Interest paid 80,000 Amortization of discount 27,028 *972,972 x 11% equals P107,027 or a difference of P1 due to rounding to bring the carrying value of the note payable to P1,000,000 on maturity date. 31 Loss on interest rate swap 2,973 Interest rate swap payable 2,973 Final cash payment to speculator 30,000 Carrying value of interest rate swap payable 27,027 Loss on interest rate swap 2,973 31 Interest rate swap payable 30,000 Cash 30,000 Final settlement with the speculator. 31 Note payable 1,000,000 Cash 1,000,000 Repayment of the loan to the bank. Problem 14-10

Requirement 1 2008 Dec. 31 Forward contract receivable 1,500,000 Unrealized gain – forward contract (5,000 x 300) 1,500,000 2009 Jan. 1 Tree inventory (5,000 x 1,800) 9,000,000 Cash 9,000,000

190 1 Cash 1,500,000 Forward contract receivable 1,500,000 1 Unrealized gain – forward contract 1,500,000 Gain on forward contract 1,500,000

Requirement 2 2008 Dec. 31 Unrealized loss – forward contract 500,000 Forward contract payable (5,000 x 100) 500,000 2009 Jan. 1 Tree inventory (5,000 x 1,400) 7,000,000 Cash 7,000,000 1 Forward contract payable 500,000 Cash 500,000 1 Loss on forward contract 500,000 Unrealized loss – forward contract 500,000 Problem 14-11 2008 Dec. 31 Forward contract receivable 893,000 Unrealized gain – forward contract (1,000,000 x .893) 893,000 2009 Dec. 31 Unrealized gain – forward contract 893,000 Forward contract receivable 893,000 Cancelation of the forward contract receivable because of the reduction of market price on December 31, 2009

and January 1, 2010. 31 Unrealized loss – forward contract 500,000 Forward contract payable (100,000 x 5) 500,000 2010 Jan. 1 Fish inventory (100,000 x 75) 7,500,000 Cash 7,500,000 1 Forward contract payable 500,000 Cash 500,000 1 Loss on forward contract 500,000 Unrealized loss – forward contract 500,000

191 Problem 14-12 2008 Dec. 31 Forward contract receivable 500,000 Unrealized gain – forward contract (50,000 x P10) 500,000 2009 March 1 Unrealized gain – forward contract 100,000 Forward contract receivable 100,000 Forward contract receivable – 3/1/2009 (500,000 x P8) 400,000 Forward contract receivable – 12/31/2008 500,000 Decrease in derivative asset (100,000) 1 Cash 400,000 Forward contract receivable 400,000 1 Purchases (500,000 x 58) 2,900,000 Cash 2,900,000 1 Unrealized gain – forward contract 400,000 Gain on forward contract 400,000 Problem 14-13

Requirement 1

2008 Dec. 31 Futures contract receivable 500,000 Unrealized gain – futures contract (50,000 x 10) 500,000 2009 Jan. 1 Purchases 8,000,000 Cash (50,000 x 160) 8,000,000 1 Cash 500,000 Futures contract receivable 500,000 1 Unrealized gain – futures contract 500,000 Gain on futures contract 500,000

Requirement 2 2008 Dec. 31 Unrealized loss – futures contract 250,000 Futures contract payable (50,000 x 5) 250,000 2009 Jan. 1 Purchases 7,250,000 Cash (50,000 x 145) 7,250,000

192 1 Futures contract payable 250,000 Cash 250,000 1 Loss on futures contract 250,000 Unrealized loss - futures contract 250,000 Problem 14-14 2008 Dec. 31 Futures contract receivable 1,500,000 Unrealized gain – futures contract (100,000 x 15) 1,500,000 2009 Jan. 1 Purchases 6,500,000 Cash (100,000 x 65) 6,500,000 1 Cash 1,500,000 Futures contract receivable 1,500,000 1 Unrealized gain – futures contract 1,500,000 Gain on futures contract 1,500,000 Problem 14-15 2008 Dec. 31 Unrealized loss – futures contract 125,000 Futures contract payable (25,000 x 5) 125,000 2009 June 1 Unrealized loss – futures contract 75,000 Futures contract payable 75,000 Futures contract payable – 6/1/2009 (25,000 x P8) 200,000 Futures contract payable – 12/31/2008 125,000 Increase in derivative liability 75,000 1 Futures contract payable 200,000 Cash 200,000 1 Purchases (25,000 x 42) 1,050,000 Cash 1,050,000 1 Loss on futures contract 200,000 Unrealized loss – futures contract 200,000

193 Problem 14-16 Requirement 1 2008 Dec. 31 Call option 50,000 Cash 50,000 2009 July 1 Call option 700,000 Gain on call option 700,000 Fair value of call option (150,000 x 5) 750,000 Payment for call option 50,000

Increase 700,000 2009 July 1 Cash 750,000 Call option 750,000 1 Purchases 5,250,000 Cash (150,000 x 35) 5,250,000 Requirement 2 2008 Dec. 31 Call option 50,000 Cash 50,000 2009 July 1 Purchases 4,200,000 Cash (150,000 x 28) 4,200,000 1 Loss on call option 50,000 Call option 50,000 Problem 14-17 2008 Dec. 1 Call option 20,000 Cash 20,000 Dec. 31 Call option 380,000 Unrealized gain - call option 380,000 Fair value (200,000 x 2) 400,000 Payment for call option 20,000 Increase 380,000

194 2009 June 1 Call option 200,000 Unrealized gain – call option 200,000 Call option – 6/1/2009 (200,000 x P3) 600,000 Call option – 12/31/2008 400,000 Increase in derivative asset 200,000 1 Cash 600,000 Call option 600,000 1 Purchases (200,000 x P28) 5,600,000 Cash 5,600,000 1 Unrealized gain – call option 600,000 Gain on call option 600,000 Problem 14-18 2008 Dec. 1 Put option 100,000 Cash 100,000 2009 Feb. 1 Cash (50,000 x 180) 9,000,000 Sales 9,000,000 1 Loss on put option 100,000 Put option 100,000

With the price above the put option price, on the part of the seller, there is no reason to exercise the option. It is better to sell the product on the open market. Thus, the output option is not exercised on February 1, 2009 and has no value.

Problem 14-19 2008 Sept. 1 Equipment 2,250,000 Accounts payable 2,250,000 Dec. 31 Loss on foreign exchange 50,000 Accounts payable 50,000 Peso equivalent – 12/31/2008 2,050,000 Peso equivalent – 09/01/2008 2,000,000 Loss on foreign exchange 50,000

195 31 Forward contract receivable 50,000 Gain on forward contract 50,000 2009 March 1 Loss on foreign exchange 100,000 Accounts payable 100,000 Peso equivalent – 3/1/2009 2,150,000 Peso equivalent – 12/31/2008 2,050,000 Loss on foreign exchange 100,000 1 Forward contract receivable 100,000 Gain on forward contract 100,000 1 Cash 150,000 Forward contract receivable 150,000 1 Accounts payable (50,000 x 43) 2,150,000 Cash 2,150,000

Problem 14-20 2008 Dec. 31 Forward contract receivable 50,000 Unrealized gain – forward contract ($50,000 x P1) 50,000 2009 March 31 Forward contract receivable 100,000 Unrealized gain – forward contract ($50,000 x P2) 100,000

31 Cash 150,000 Forward contract receivable 150,000 31 Purchases ($50,000 x P43) 2,150,000 Cash 2,150,000 31 Unrealized gain – forward contract 150,000 Purchases 150,000 Problem 14-21 Question 1 Answer B The notional figure is 8,000 kilos and the notional value is 8,000 kilos times the underlying Fixed price of P1,200 per kilo or P9,600,000.

196 Question 2 Answer C Market price – 12/31/2008 1,500 Underlying fixed price 1,200 Derivative asset 300 Forward contract receivable (8,000 x 300) 2,400,000 Present value of derivative asset (2,400,000 x .91) 2,184,000 The present value of P2,184,000 is recognized as forward contract receivable on December 31, 2008 because the amount is collectible on January 1, 2010, one year from December 31, 2008. Question 3 Answer B Market price – 12/31/2009 1,000 Underlying fixed price 1,200 Derivative liability 200 Forward contract payable – 12/31/2009 (8,000 x 200) 1,600,000 Problem 14-22 Answer C Fair value of call option (120 – 100 = 20 x 10,000) 200,000 Problem 14-23 Answer B Exchange rate on July 31 (80,000,000 / 92) 869,565 Strike price (80,000,000 / 100) 800,000 Derivative asset 69,565 Call option payment 10,000 Saving 59,565 Problem 14-24 Question 1 Answer A Camry’s payment to Corolla (5,000,000 x 2%) 100,000 Question 2 Answer C Fair value of interest rate swap (100,000 x .926) 92,600 Problem 14-25 Answer C Notional amount 435,000 Exchange rate on December 31, 2008 (47,850,000 / 115) 416,087 Fair value of forward contract receivable 18,913

197 CHAPTER 15

Problem 15-1 Problem 15-2 Problem 15-3 1. D 1. D 1. A 2. C 2. C 2. C 3. A 3. D 3. A 4. D 4. C 4. A 5. D 5. C 5. D 6. C 6. C 7. A 7. B 8. B 8. C 9. A 9. D 10. C 10. C Problem 15-4 1. Machinery 500,000

Cash 500,000 2. Land (2/5 x 5,500,000) 2,200,000 Building (3/5 x 5,500,000) 3,300,000 Cash 5,500,000 3. Investment in equity security 500,000 Cash 500,000 Delivery equipment (5,000 x 120) 600,000 Investment in equity security 500,000 Gain on exchange 100,000 Taxes and licenses 3,000 Cash 3,000 4. Equipment 1,000,000 Donated capital 1,000,000 Donated capital 25,000 Cash 25,000 5. Land 2,000,000 Building 5,500,000 Share capital (60,000 x 100) 6,000,000 Share premium 1,500,000

198 Problem 15-5 Net method Gross method a. Within the discount period: a. Within the discount period: 1. Machinery 490,000 1. Machinery 500,000 Accounts payable 490,000 Accounts payable 500,000 (500,000 x 98%) 2. Accounts payable 490,000 2. Accounts payable 500,000 Cash 490,000 Cash 490,000 Machinery 10,000 b. Beyond the discount period: b. Beyond the discount period: 1. Machinery 490,000 1. Machinery 500,000 Accounts payable 490,000 Accounts payable 500,000 2. Accounts payable 490,000 2. Accounts payable 500,000 Purchase discount lost 10,000 Purchase discount lost 10,000 Cash 500,000 Cash 500,000 Machinery 10,000 Problem 15-6

2008 Jan. 1 Equipment 580,000 Discount on note payable 120,000

Cash 200,000 Note payable 500,000 Dec. 31 Note payable 100,000 Cash 100,000 31 Interest expense 40,000 Discount on note payable 40,000 Note payable Fraction Amortization 2008 500,000 5/15 40,000 2009 400,000 4/15 32,000 2010 300,000 3/15 24,000 2011 200,000 2/15 16,000 2012 100,000 1/15 8,000 1,500,000 120,000 2009 Dec. 31 Note payable 100,000 Cash 100,000 31 Interest expense 32,000 Discount on note payable 32,000

199 Problem 15-7 Down payment 100,000 Present value of note (200,000 x 3.17) 634,000 Total cost 734,000 2008 Jan. 1 Machinery 734,000 Discount on note payable 166,000 Cash 100,000 Note payable 800,000 Dec. 31 Note payable 200,000 Cash 200,000 31 Interest expense 63,400 Discount on note payable 63,400 Date Payment 10% interest Principal Present value 01/01/2008 634,000 12/31/2008 200,000 63,400 136,600 497,400 12/31/2009 200,000 49,740 150,260 347,140 12/31/2010 200,000 34,714 165,286 181,854 12/31/2011 200,000 18,146 181,854 - 2009 Dec. 31 Note payable 200,000 Cash 200,000 31 Interest expense 49,740 Discount on note payable 49,740 Problem 15-8 1. Building 7,000,000 Cash 1,000,000 Share capital 5,000,000 Share premium 1,000,000 2. Land 1,500,000 Income from donation 1,500,000 3. Machinery (800,000 x 95%) 760,000 Cash 760,000 4. Equipment 200,000 Note payable 200,000

200 Problem 15-9 1. Land (1/4 x 6,000,000) 1,500,000 Building (3/4 x 6,000,000) 4,500,000 Machinery (8/12 x 1,800,000) 1,200,000 Office equipment (4/12 x 1,800,000) 600,000 Delivery equipment 500,000 Cash 8,300,000 2. Land 1,000,000 Building 5,000,000 Machinery 2,000,000 Share capital 6,000,000 Share premium 2,000,000 3. Land 500,000 Donated capital 500,000 4. Machinery (900,000 x 98%) 882,000 Cash 882,000 Machinery 35,000 Cash 35,000 5. Furniture and fixtures (400,000 x .797) 318,800 Discount on note payable 81,200 Note payable 400,000 Problem 15-10 1. Land 1,500,000 Accumulated depreciation 700,000 Equipment – old 2,000,000 Gain on exchange 200,000 Fair value of equipment given 1,500,000 Less: Book value 1,300,000 Gain on exchange 200,000 2. Equipment - new 1,300,000 Accumulated depreciation 700,000 Equipment – old 2,000,000 3. Equipment - new 2,000,000 Accumulated depreciation 700,000 Equipment – old 2,000,000 Cash 500,000 Gain on exchange 200,000

201 Fair value 1,500,000 Cash payment 500,000 Cost of new asset 2,000,000 Fair value 1,500,000 Less: Book value 1,300,000 Gain on exchange 200,000 Problem 15-11 1. Computer 430,000 Inventory (car) 300,000 Cash 50,000 Gain on exchange 80,000 2. Machinery – new (110,000 + 30,000) 140,000 Accumulated depreciation 120,000 Loss on exchange 10,000 Machinery – old 240,000 Cash 30,000 Fair value of asset given 110,000 Book value 120,000 Loss on exchange ( 10,000) Problem 15-12 ABC XYZ Equipment - new 500,000 Equipment – new 500,000 Accumulated depreciation 2,000,000 Accumulated depreciation 1,750,000 Equipment – old 2,400,000 Equipment – old 2,200,000 Gain on exchange 100,000 Gain on exchange 50,000 Problem 15-13 Equipment – new 1,000,000 Loss on exchange 200,000 Accumulated depreciation 1,800,000 Equipment – old 3,000,000 Problem 15-14 Company A Machinery – new (600,000 + 200,000) 800,000 Accumulated depreciation 1,500,000 Machinery – old 2,000,000 Cash 200,000 Gain on exchange (600,000 – 500,000) 100,000

202 Company B Machinery – new (800,000 - 200,000) 600,000 Accumulated depreciation 1,800,000 Cash 200,000 Machinery – old 2,500,000 Gain on exchange (800,000 – 700,000) 100,000 Problem 15-15 Equipment - new 1,400,000 Accumulated depreciation 1,050,000 Loss on exchange 50,000 Equipment – old 1,200,000 Cash 1,300,000 Fair value 100,000 Cash payment (1,600,000 – 300,000) 1,300,000 Cost of new asset 1,400,000 Fair value 100,000 Less: Book value ( 150,000) Loss on exchange ( 50,000) Problem 15-16 Cash price without trade in 1,400,000 Cash payment 980,000 Trade in value 420,000 Less: Book value 400,000 Gain on exchange 20,000 Equipment - new 1,400,000 Accumulated depreciation 600,000 Equipment – old 1,000,000 Cash 980,000 Gain on exchange 20,000 Problem 15-17 Delivery equipment - new 2,300,000 Accumulated depreciation 1,300,000 Loss on exchange 150,000 Input tax 300,000 Insurance 120,000 Taxes and licenses 10,000 Delivery equipment – old 1,500,000 Cash 2,680,000

203 Fair value of asset given 50,000 Cash paid 2,680,000 Total 2,730,000 Less: VAT 300,000 Insurance 120,000 Registration fee 10,000 430,000 Cost of new asset 2,300,000 Fair value 50,000 Book value 200,000 Loss on exchange (150,000) Problem 15-18

Total Finished goods Building 1. Direct labor 6,000,000 4,200,000 1,800,000 Materials 7,000,000 3,000,000 4,000,000 Overhead 2,000,000 2,000,000 -___ 15,000,000 9,200,000 5,800,000 2. Direct labor 6,000,000 4,200,000 1,800,000 Materials 7,000,000 3,000,000 4,000,000 Overhead 2,000,000 135 / 180 x 2,000,000 1,500,000 45 / 180 x 2,000,000 _________ _________ 500,000 15,000,000 8,700,000 6,300,000 3. Direct labor 6,000,000 4,200,000 1,800,000 Materials 7,000,000 3,000,000 4,000,000 Overhead 2,000,000 42 / 60 x 2,000,000 1,400,000 18 / 60 x 2,000,000 _________ _________ 600,000 15,000,000 8,600,000 6,400,000 Problem 15-19 a. Materials 500,000 Direct labor 1,000,000 Overhead 600,000 Cost of machinery 2,100,000 Overhead 3,600,000 Charged to finished goods (75% x 4,000,000) 3,000,000 Charged to machinery 600,000 b. Materials 500,000 Direct labor 1,000,000 Overhead (1/5 x 3,600,000) 720,000 Cost of machinery 2,220,000

204 Direct labor:

Finished goods 4,000,000 4/5 Machinery 1,000,000 1/5 5,000,000 Problem 15-20 Date Expenditure Months Amount January 1 2,000,000 12 24,000,000 June 30 2,000,000 6 12,000,000 December 31 1,000,000 0 -____ 5,000,000 36,000,000 Average expenditures (36,000,000 x 12) 3,000,000 Average capitalization rate (1,060,000 / 8,000,000) 13.25% Expenditures on building 5,000,000 Interest (3,000,000 x 13.25%) 397,500 Total cost of building 5,397,500 Problem 15-21 Average capitalization rate (900,000 / 8,000,000) 11.25% Date Expenditure Months Amount January 1 2,000,000 12 24,000,000 March 31 1,000,000 9 9,000,000 September 30 3,000,000 3 9,000,000 6,000,000 42,000,000 Average expenditures (42,000,000 / 12) 3,500,000 Expenditures on construction 6,000,000 Specific interest cost: Actual interest 240,000 Interest income ( 10,000) 230,000 General interest cost: Average expenditures 3,500,000 Less: Specific borrowing 2,000,000 General borrowing 1,500,000 Capitalization rate 11.25% 168,750 Total cost of building 6,398,750

205 Problem 15-22 Date Expenditure Months Amount January 1 1,500,000 12 18,000,000 March 31 1,000,000 9 9,000,000 June 30 1,000,000 6 6,000,000 September 30 1,000,000 3 3,000,000 December 31 1,000,000 0 -___ 5,500,000 36,000,000 Average expenditures (36,000,000 x 12) 3,000,000 Expenditures on construction 5,500,000 Interest cost (3,000,000 x 11.5%) 345,000 Total cost 5,845,000 Problem 15-23 Date Expenditure Months Amount January 1 1,000,000 12 12,000,000 July 1 2,000,000 6 12,000,000 November 1 3,000,000 2 6,000,000 6,000,000 30,000,000 Average expenditures (30,000,000 / 12) 2,500,000 Average expenditures 2,500,000 Applicable to specific loan (1,000,000) Applicable t general loan 1,500,000 Actual expenditures 6,000,000 Capitalizable interest: Specific (1,000,000 x 10%) 100,000 General (1,500,000 x 12%) 180,000 Total cost of building 6,280,000 Problem 15-24 Date Expenditure Months Amount January 1, 2008 4,000,000 12 48,000,000 April 1, 2008 5,000,000 9 45,000,000 December 1, 2008 3,000,000 1 3,000,000 12,000,000 96,000,000 Average expenditures in 2008 (96,000,000 / 12) 8,000,000 Applicable to specific loan (3,000,000) Applicable t general loan 5,000,000

206 Actual expenditures in 2008 12,000,000 Capitalizable interest in 2008 Specific (3,000,000 x 10%) 300,000 General (5,000,000 x 12%) 600,000 Total cost of building 12,900,000 Date Expenditure Months Amount January 1, 2009 12,900,000 6 77,400,000 March 1, 2009 6,000,000 4 _24,000,000 18,900,000 101,400,000 Average expenditures in 2009 (101,400,000 / 6) 16,900,000 Applicable to specific loan ( 3,000,000) Applicable to general loan 13,900,000 Note that the construction period in 2009 is only 6 months because the building was completed on June 30, 2009. Thus, the average expenditures should be for 6 months only. Actual expenditures in 2009 18,900,000 Capitalizable interest in 2009 Specific (3,000,000 x 10% x 6/12) 150,000 General (13,900,000 x 12% x 6/12) 834,000 Total cost of new building – 6/30/2009 19,884,000 Problem 15-25 1. Cash 30,000,000 Deferred income-government grant 30,000,000 Environmental expenses 2,000,000 Cash 2,000,000 Deferred income-government grant 3,000,000 Income from government grant (2/20 x 30,000,000) 3,000,000 2. Cash 40,000,000 Deferred income-government grant 40,000,000 Building 50,000,000 Cash 50,000,000 Depreciation 2,500,000 Accumulated depreciation (50,000,000 / 20) 2,500,000 Deferred income-government grant 2,000,000 Income from government grant (40,000,000 / 20) 2,000,000

207 3. Land 50,000,000 Deferred income-government grant 50,000,000 Building 80,000,000 Cash 80,000,000 Depreciation 3,200,000 Accumulated depreciation (80,000,000 / 25) 3,200,000 Deferred income-government grant 2,000,000 Income from government grant (50,000,000 / 25) 2,000,000 4. Cash 10,000,000 Income from government grant 10,000,000 Problem 15-26 Answer D Cost of land (5,400,000 x 2/5) 2,160,000 Problem 15-27 Answer B Cash price 950,000 Installation cost 30,000 Total cost 980,000 Problem 15-28 Answer C Cash price 2,000,000 Installation cost 50,000 Total cost 2,050,000 Problem 15-29 Answer B Present value of first note payable (500,000 x 5.65) 2,825,000 Present value of second note payable (3,000,000 x .80) 2,400,000 Total cost of machinery 5,225,000 Problem 15-30 Answer D First payment on December 30, 2008 200,000 Present value of next 7 payments (200,000 x 4.712) 942,400 Total cost of machine 1,142,400 Another computation: PV of annuity of 1 in advance for 8 periods (200,000 x 5.712) 1,142,400

208 Problem 15-31 Answer A Invoice price 700,000 Discount (2% x 700,000) ( 14,000) Freight and insurance 3,000 Cost of assembling and installation 5,000 Total cost 694,000 Problem 15-32 Answer A Equipment: Invoice price 600,000 Discount (5% x 600,000) ( 30,000) 570,000 Land (at its fair value) 1,100,000 Machinery: Acquisition cost 275,000 Installation cost 7,000 Trial run and testing cost 18,000 Construction of base 10,000 310,000 Total 1,980,000 Problem 15-33 Answer B Fair value of asset given 700,000 Cash payment 160,000 Total cost 860,000 Problem 15-34 Answer B Fair value of asset given 2,100,000 Cash payment 400,000 Cost of new inventory 2,500,000 Problem 15-35 Answer A Fair value of asset given 1,500,000 Less: Cost of asset given 1,250,000 Gain on exchange 250,000 Problem 15-36 Answer A Since the old machine has no available fair value, the new machine received in exchange is recorded at its cash price without trade in of P900,000. The average published retail value of the old machine is not necessarily its fair value.

209 Problem 15-37 Answer A Average expenditures (20,000,000 / 2) 10,000,000 Multiply y capitalization rate 12% Interest on average expenditures 1,200,000 The capitalizable borrowing cost is limited to the actual borrowing cost incurred. In this case, the computed amount of P1,200,000 is more than the actual borrowing cost of P1,020,000. Accordingly, the capitalizable interest is P1,020,000. Note that in computing the average expenditures, the amount of P20,000,000 is simply divided by 2 because the said amount is incurred evenly during the year ended 2008. Problem 15-38 Answer C Since the actual interest incurred is not given, the interest on the average expenditures is determined. Average expenditures (9,600,000 / 2) 4,800,000 Interest on average expenditures (4,800,000 x 10%) 480,000 Interest income on unexpended portion (320,000) Capitalizable interest 160,000 Problem 15-39 Answer B Accumulated expenditures at the end of two years 3,000,000 Average expenditures in the third year (8,000,000 / 2) 4,000,000 Total 7,000,000 Capitalizable interest (7,000,000 x 9%) 630,000 Problem 15-40 Answer B Average accumulated expenditures 2,500,000 Specific borrowing (1,500,000) Applicable to general borrowing 1,000,000 Specific (6% x 1,500,000) 90,000 General (9% x 1,000,000) 90,000 Capitalizable interest 180,000

210 CHAPTER 16

Problem 16-1 1. C 2. D 3. D 4. D 5. B Problem 16-2 Land Building Cash paid for land and old building 1,000,000 Removal of old building 50,000 Payment to tenants of old building to vacate premises 15,000 Architect fee 200,000 Building permit 30,000 Fee for title search 10,000 Survey before construction 20,000 Excavation 100,000 Cost of new building constructed 6,000,000 Assessment fee 5,000 Cost of grading, leveling and landfill 45,000 Driveways and walks 40,000 Temporary quarters for construction crew 80,000 Temporary building to house tools and materials 60,000 Cost of construction changes _________ 50,000 1,145,000 6,560,000 Note: The cost of replacing windows is treated as expense. Problem 16-3 Land Land Building improvement Cost of land 2,000,000 Legal fees 10,000 Payment of mortgage 50,000 Payment of taxes 20,000 Cost of razing building 30,000 Proceeds from sale of materials ( 5,000) Grading and drainage 15,000 Architect fee 200,000 Payment to contractor 8,000,000 Interest cost 300,000 Driveway and parking lot 40,000 Cost of trees, shrubs and other landscaping 55,000 Cost of installing lights in parking lot 5,000 Premium for insurance _______ 25,000 _______ 2,120,000 8,525,000 100,000

The payment for medical bills and the cost of open house party are outright expenses because they are not a necessary cost of acquiring the land and building. 211 Problem 16-4 Office Factory Land Land building building improvements Purchase price 1,300,000 700,000 Materials 3,200,000 Excavation 100,000 Labor 2,500,000 Remodeling 200,000 Cash discounts ( 60,000) Supervision 30,000 Compensation insurance 50,000 Clerical and other expenses 30,000 Paving of streets 40,000 Plans and specifications 150,000 Legal cost - land 10,000 ________ ________ ______ 1,310,000 900,000 6,000,000 40,000 1. The imputed interest on corporation’s own money is not capitalizable. 2. The payment of claim for injuries not covered by insurance and the legal cost of injury claim are treated as expense. 3. Saving on construction is not recognized. Problem 16-5 Taxes in arrears 50,000 Payment for land 1,000,000 Demolition of old building 100,000 Total cost of land 1,150,000 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 of factory building 5,435,000 Problem 16-6 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 Construction cost of new building 8,000,000

212 Problem 16-7

Land Building Purchase price 1,000,000 4,000,000 Remodeling 150,000 Salvage materials ( 5,000) Grading, leveling and other permanent improvement 50,000 Repairs ________ 10,000 1,050,000 4,155,000

The repairs are capitalized because they are necessary prior to the occupancy and intended use of the building. Problem 16-8 Land Building Machinery Fair value 1,500,000 5,000,000 Repairs 200,000 Remodeling 300,000 Invoice price 1,000,000 Discount ( 20,000) Base _________ _________ 50,000 1,500,000 5,500,000 1,030,000 The driveway and parking lot are charged to land improvements. Problem 16-9 Land Building Machinery Fair value 1,500,000 4,000,000 1,500,000 Repairs 200,000 Special tax assessment 30,000 Platform 70,000 Remodeling 400,000 Purchase price 800,000 Discount ( 40,000) Freight 20,000 Installation _________ _________ 30,000 1,530,000 4,600,000 2,380,000 Problem 16-10 Purchase price 2,000,000 Contract price 6,000,000 Commission 100,000 Plans, specification Legal fees 50,000 and blueprint 100,000 Title guarantee 10,000 Architectural fee 250,000

Cost of razing old building 75,000 Cost of new building 6,350,000 Salvage value of materials ( 5,000) Cost of land 2,230,000 213 Problem 16-11 Leasehold Land Building improvements Machinery Balances, Jan. 1 1,500,000 4,000,000 500,000 1,000,000 Acquisition of land - #621: Purchase price 3,000,000 Commission 60,000 Clearing cost 15,000 Sale of timber and gravel ( 5,000) Acquisition of land - #622: Purchase price 4,000,000 Cost of demolition 300,000 New building: Construction cost 5,000,000 Excavation fee 50,000 Architectural design 150,000 Building permit 40,000 Improvements: Electrical work 350,000 Construction extension (800,000 x 1/2) 400,000 Improvements on office space 650,000 Purchase of new machine: Invoice price 1,750,000 Freight 20,000 Unloading charge _________ _________ _________ __ 30,000 Balances, December 31 8,870,000 9,240,000 1,900,000 2,800,000

The third tract of land should be presented as current asset because it was “classified as held for sale”. Problem 16-12 Land Land improvements Building Machinery Balances, Jan. 1 3,500,000 900,000 7,000,000 1,500,000 Land acquired 1,250,000 Issuance of share capital: 12/36 x 4,500,000 1,500,000 24/36 x 4,500,000 3,000,000 New machinery 3,400,000 New parking lot, street and sidewalk 750,000

Machinery sold ________ ________ _________ ( 500,000) Balances, Dec. 31 6,250,000 1,650,000 10,000,000 4,400,000 The “assessed values” do not represent the fair values of the land and building but are used in allocating the market value of the share capital. 214 Problem 16-13 Problem 16-14 Invoice price 3,000,000 Invoice cost 4,000,000 Cash discount ( 150,000) Discount (5% x 4,000,000) ( 200,000) Freight 50,000 Transportation 40,000 Installation cost 30,000 Installation 100,000 Testing cost 20,000 Trial run-salary of engineer 50,000 2,950,000 Cash allowance ( 60,000) 3,930,000 Problem 16-15 Cost paid (896,000 – 96,000) 800,000 Cost of transporting machine 30,000 Installation cost 50,000 Testing cost 40,000 Safety rails and platform 60,000 Water device 80,000 Cost of adjustment 75,000 Estimated dismantling cost 65,000 Total cost of machine 1,200,000 Note that the estimated dismantling cost is capitalized because the company has a present obligation as required by contract. In the absence of a present obligation, the estimated dismantling cost is not capitalized. Problem 16-16 Second hand market value 2,400,000 Overhaul and repairs 150,000 Installation 80,000 Testing 110,000 Hauling 10,000 Safety device 250,000 3,000,000 Problem 16-17 1. Materials 600,000 Labor 400,000 Installation 60,000 Trial run 30,000 Discount ( 40,000) Overhead 150,000 1,200,000

2. Adjusting entries: 1. Loss on retirement of old machinery 6,000 Machinery (20,000 – 14,000) 6,000 215 2. Purchase discount 40,000 Machinery 40,000 3. Machinery 150,000 Factory overhead 150,000 4. Profit on construction 100,000 Machinery 100,000 5. Tools 90,000 Machinery 90,000 6. Depreciation – tools 10,000 Tools (90,000 / 3 x 4/12) 10,000 7. Machinery 128,600 Accumulated depreciation 40,000 Depreciation – machinery 88,600 Depreciation recorded 128,600 Correct depreciation (1,200,000 / 10 x 4/12) 40,000 Overdepreciation 88,600 Problem 16-18 Initial design fee 150,000 Executive chairs and desks 200,000 Storm windows and installation 500,000 Installation of automatic door opening system 200,000 Overhead crane 350,000 Total capital expenditures 1,400,000 Problem 16-19 1. Accumulated depreciation 400,000 Loss on retirement of building 1,600,000 Building 2,000,000 Building 2,500,000 Cash 2,500,000 Depreciation (8,100,000 / 20) 405,000 Accumulated depreciation 405,000

Building (9,000,000 + 2,500,000 – 2,000,000) 9,500,000 Accumulated depreciation (1,800,000 – 400,000) 1,400,000 Book value 8,100,000 2. Accumulated depreciation (1,960,000 x 20%) 392,000 Loss on retirement of building 1,568,000 Building (2,500,000 x .784) 1,960,000 216 Building 2,500,000 Cash 2,500,000 Depreciation (8,132,000 / 20) 406,600 Accumulated depreciation 406,600 Building (9,000,000 – 1,960,000 + 2,500,000) 9,540,000 Accumulated depreciation (1,800,000 – 392,000) 1,408,000 Book value 8,132,000

Problem 16-20 a. Annual depreciation (8,400,000 / 30) 280,000 Age of building (7,000,000 / 280,000) 25 years b. Building 2,500,000 Cash 2,500,000 c. Building (8,400,000 + 2,500,000) 10,900,000 Less: Accumulated depreciation 7,000,000 Book value 3,900,000 d. Depreciation (3,900,000 / 15) 260,000 Accumulated depreciation 260,000 Original life 30 Less: Expired life 25 Remaining useful life, beginning of current year 5 Add: Extension in life 10 Revised useful life 15 Problem 16-21 1. Building 10,500,000 Cash 10,500,000 2. Depreciation 200,000 Accumulated depreciation 200,000 3. Building 3,000,000

Cash 3,000,000 Accumulated depreciation (2,500,000 / 50 x 2) 100,000 Loss on retirement of building 2,400,000 Cash 2,500,000 4. Depreciation (10,700,000 – 500,000 / 48) 212,500 Accumulated depreciation 212,500 217 Building (10,500,000 + 3,000,000 – 2,500,000) 11,000,000 Accumulated depreciation (400,000 – 100,000) 300,000 Book value – 1/1/2008 10,700,000 Problem 16-22 1. Machinery 5,000,000

Cash 5,000,000 2. Depreciation 450,000 Accumulated depreciation 450,000 3. Depreciation (3,600,000 / 6) 600,000 Accumulated depreciation 600,000 Cost 5,000,000 Accumulated depreciation: 2005 450,000 2006 450,000 900,000 Book value 4,100,000 Residual value 500,000 Remaining depreciable cost – 1/1/2007 3,600,000 4. Machinery 300,000 Cash 300,000 5. Depreciation (3,300,000 / 5) 660,000 Accumulated depreciation 660,000 Cost 5,300,000 Accumulated depreciation (900,000 + 600,000) 1,500,000 Book value – 1/1/2008 3,800,000 Residual value 500,000 Remaining depreciable cost – 1/1/2008 3,300,000 Problem 16-23 1. Depreciation (60,000 x 3/12) 15,000 Accumulated depreciation 15,000

Accumulated depreciation (480,000 + 15,000) 495,000 Loss on retirement of store equipment 105,000 Store equipment 600,000 2. Depreciation (150,000 x 4/12) 50,000 Accumulated depreciation 50,000 218 Cash 100,000 Accumulated depreciation (1,050,000 + 50,000) 1,100,000 Loss on sale of office equipment 300,000 Office equipment 1,500,000 3. Depreciation (600,000 x 5/12) 250,000

Accumulated depreciation 250,000 Delivery equipment – new 5,000,000 Accumulated depreciation 2,650,000 Cash (5,000,000 – 750,000) 4,250,000

Delivery equipment – old 3,000,000 Gain on exchange (750,000 – 350,000) 400,000 Original cost 3,000,000 Less: Accumulated depreciation to date (2,400,000 + 250,000) 2,650,000 Book value 350,000 4. Accumulated depreciation 1,200,000

Office equipment 1,200,000 5. Depreciation (900,000 x 9/12) 675,000 Accumulated depreciation 675,000 Accumulated depreciation (2,700,000 + 675,000) 3,375,000 Fire loss 1,125,000

Machinery 4,500,000 Problem 16-24 1. Discount on bonds payable 500,000 Machinery 500,000 Interest expense (500,000 / 10 x 9/12) 37,500 Discount on bonds payable 37,500 Accumulated depreciation 75,000 Depreciation 75,000

Depreciation for 9 months 600,000 Depreciation for 12 months (600,000 / 9/12) 800,000 Depreciable cost (800,000 x 5 years) 4,000,000 Per book Adjusted Cost 5,000,000 4,500,000 Less: Residual value 1,000,000 1,000,000 Depreciable cost 4,000,000 3,500,000 219 Correct depreciation for 9 months (3,500,000 / 5 x 9/12) 525,000 Less: Depreciation recorded 600,000 Overstatement 75,000 2. Interest expense 300,000 Machinery (3,500,000 – 3,200,000) 300,000 Machinery 150,000 Freight in 150,000 Accumulated depreciation 30,000 Depreciation 30,000 Depreciation per book 700,000 Correct depreciation (3,350,000 / 5) 670,000 Overstatement 30,000 3. Loss on exchange 390,000 Machinery 390,000 Cost per book 3,000,000 Correct cost Trade in value 150,000 Add: Cash paid 2,460,000 2,610,000 Overstatement 390,000 Trade in value 150,000 Less: Book value 540,000 Loss on exchange (390,000) 4. Allowance for doubtful accounts 840,000 Loss on exchange – accounts receivable 60,000 Treasury share 900,000 Per book Machinery 4,200,000

Accounts receivable 4,200,000 Treasury shares 4,200,000 Machinery 4,200,000 Should be Machinery 3,300,000 Allowance for doubtful accounts (20% x 4,200,000) 840,000 Loss on accounts receivable 60,000 Accounts receivable 4,200,000 220 Treasury shares 3,300,000 Machinery 3,300,000

The cost of treasury shares acquired for noncash consideration is usually measured by the recorded amount of the noncash asset surrendered (SFAS No. 18).

Problem 16-25 Answer A Allocated cost of land (2,400,000 / 6,000,000 x 5,500,000) 2,200,000 Property taxes (2,400 / 6,000 x 250,000) 100,000 Cost of survey 5,000 Total cost of land 2,305,000 Incidentally, the cost of the building is: Allocated cost (3,600 / 6,000 x 5,500,000) 3,300,000 Property taxes (3,600 / 6,000 x 250,000) 150,000 Renovation 500,000 Total cost of building 3,950,000 Problem 16-26 Answer A Purchase price 4,000,000 Payments to tenants 200,000 Demolition of old building 100,000 Legal fees 50,000 Title insurance 30,000 Proceeds from sale of materials ( 10,000) Total cost of land 4,370,000 Problem 16-27 Answer D Land Building Purchase price of land 600,000

Legal fees for contract 20,000 Architect fee 80,000 Demolition of old building 50,000 Construction cost _______ 3,500,000 Total cost 670,000 3,580,000 Problem 16-28 Answer D Acquisition price 7,000,000 Option of building acquired 200,000 Repairs 500,000 Total cost 7,700,000 221

Problem 16-29 Answer D Purchase price 250,000 Shipping 5,000 Installation 10,000 Testing 35,000 Total cost 300,000 Problem 16-30 Answer A Problem 16-31 Answer A All expenditures are capitalized. Problem 16-32 Answer A All costs are capitalized. Problem 16-33 Answer C Continuing and frequent repairs 400,000 Repainting of the plant building 100,000 Partial replacement of roof tiles 150,000 Repair and maintenance expense 650,000

Problem 16-34 Answer B Problem 16-35 Answer B

222

CHAPTER 17

Problem 17-1 Problem 17-2 1. A 1. C 2. D 2. A 3. B 3. D 4. D 4. D 5. D 5. D 6. D 6. B 7. D 7. C 8. C 8. B 9. C 9. A 10. B 10. A Problem 17-3

Depreciation Table – Straight Line

Accumulated Year Particular Depreciation depreciation Book value Acquisition cost 635,000 2008 120,000 120,000 515,000 2009 120,000 240,000 395,000 2010 120,000 360,000 275,000 2011 120,000 480,000 155,000 2012 120,000 600,000 35,000 600,000

Depreciation Table – Service Hours Method Accumulated Year Particular Depreciation depreciation Book value

Acquisition cost 635,000 2008 14,000 x 10 140,000 140,000 495,000 2009 13,000 x 10 130,000 270,000 365,000 2010 10,000 x 10 100,000 370,000 265,000 2011 11,000 x 10 110,000 480,000 155,000 2012 12,000 x 10 120,000 600,000 35,000 600,000

Depreciation rate per hour = 600,000 / 60,000 = 10 223

Depreciation Table – Production Method Accumulated Year Particular Depreciation Depreciation Book value

Acquisition cost 635,000 2008 34,000 x 4 136,000 136,000 499,000 2009 32,000 x 4 128,000 264,000 371,000 2010 25,000 x 4 100,000 364,000 271,000 2011 29,000 x 4 116,000 480,000 155,000 2012 30,000 x 4 120,000 600,000 35,000 600,000

Depreciation rate per unit of output = 600,000 / 150,000 = 4

Depreciation Table – Sum of Years’ Digits Accumulated

Year Particular Depreciation depreciation Book value Acquisition cost 635,000 2008 5/15 x 600,000 200,000 200,000 435,000 2009 4/15 x 600,000 160,000 360,000 275,000 2010 3/15 x 600,000 120,000 480,000 155,000 2011 2/15 x 600,000 80,000 560,000 75,000 2012 1/15 x 600,000 40,000 600,000 35,000 600,000

SYD = 1 + 2 + 3 + 4 + 5 = 15

Depreciation Table – Double Declining Balance

Accumulated Year Particular Depreciation depreciation Book value Acquisition cost 635,000 2008 40% x 635,000 254,000 254,000 381,000 2009 40% x 381,000 152,400 406,400 228,600 2010 40% x 228,600 91,440 497,840 137,160 2011 40% x 137,160 54,864 552,704 82,296 2012 82,296 – 35,000 47,296 600,000 35,000 600,000

Fixed rate = 100% / 5 = 20% x 2 = 40%

Problem 17-4 a. Straight line method: 2008 27,500 2009 55,000 224 b. Working hours method: 550,000 Rate per hour = ------------------- = 11 50,000 hours 2008 (3,000 hours x 11) 33,000 2009 (5,000 hours x 11) 55,000 c. Output method:

550,000 Rate per unit = -------------------- = 2.75

200,000 units

2008 (18,000 units x 2.75) 49,500 2009 (22,000 units x 2.75) 60,500 d. Sum of years’ digits: 10 + 1 SYD = 10 (------------) = 55 2 2008 (10/55 x 550,000 x 6/12) 50,000 2009 Jan. 1-June 30 50,000 July 1-Dec. 31 (9/55 x 550,000 x 6/12) 45,000 95,000 e. Double declining balance:

2008 (570,000 x 20% x 6/12) 57,000 2009 (570,000 – 57,000 x 20%) 102,600 Problem 17-5 Fixed rate = 1.00 - .5623 or .4377 2008 (500,000 x .4377) 218,850 2009 (500,000 – 218,850 x .4377) 123,059 2010 (500,000 - 341,909 x .4377) 69,196 2011 (500,000 – 411,105 – 50,000) 38,895 450,000 Problem 17-6 a. Sum of years’ digit April 1, 2008 – March 31, 2009 (1,080,000 x 8/36) 240,000 April 1, 2009 – March 31, 2010 (1,080,000 x 7/36) 210,000 225 Depreciation from April 1 to December 31, 2008 (240,000 x 9/12) 180,000 Depreciation for 2009: January 1 – March 31 (240,000 x 3/12) 60,000 April 1 – December 31 (210,000 x 9/12) 157,500 217,500 b. Double declining balance Fixed rate = 100 / 8 = 12.5 x 2 = 25%

2008 (1,200,000 x 25% x 9/12) 225,000 2009 (1,200,000 – 225,000 x 25%) 243,750 Problem 17-7

a. Service hours method:

960,000 – 60,000

Depreciation rate per hour = ---------------------------- = 112.50 8,000 hours 2008 (1,000 hours x 112.50) 112,500 2009 (2,000 hours x 112.50) 225,000 b. Sum of years’ digits: Sum of half years = 45 2008 (9/45 x 900,000 x 3/6) 90,000 2009 January 1 – March 31 (9/45 x 900,000 x 3/6) 90,000 April 1 – September 30 (8/45 x 900,000) 160,000 October 1 – December 31 (7/45 x 900,000 x 3/6) 70,000 320,000 Problem 17-8 a. Rate per unit (900,000 / 180,000) 5.00 2008 (5,000 x 5) 25,000 2009 (20,000 x 5) 100,000 b. Double declining balance: Fixed rate (100% / 8 x 2) 25% 2008 (920,000 x 25% x 6/12) 115,000 2009 (920,000 – 115,000 x 25%) 201,250 226 c. Sum of years’ digits: July 1 – December 31, 2008 (900,000 x 8/36 x 6/12) 100,000 January 1 – June 30, 2009 (900,000 x 8/36 x 6/12) 100,000 July 1 – December 31, 2009 (900,000 x 7/36 x 6/12) 87,500 Depreciation for 2009 187,500 Problem 17-9

Depreciable Life in Annual Assets Cost Salvage cost years depreciation Machinery 310,000 10,000 300,000 5 60,000 Office equipment 110,000 10,000 100,000 10 10,000 Building 1,600,000 100,000 1,500,000 15 100,000 Delivery equipment 430,000 30,000 400,000 4 100,000 2,450,000 2,300,000 270,000 a. Composite rate = 270,000 / 2,450,000 = 11.02% b. Composite life = 2,300,000 / 270,000 = 8.52 years c. Depreciation 270,000 Accumulated depreciation 270,000 Problem 17-10 Depreciable Life in Annual Assets Cost Salvage cost years depreciation Building 6,100,000 100,000 6,000,000 20 300,000 Machinery 2,550,000 50,000 2,500,000 5 500,000 Equipment 1,030,000 30,000 1,000,000 10 100,000 9,680,000 9,500,000 900,000 a. Composite depreciation rate = 900,000 / 9,680,000 = 9.3% b. Average life = 9,500,000 / 900,000 = 10.56 years c. Depreciation 900,000

Accumulated depreciation 900,000 d. Cash 40,000 Accumulated depreciation 2,510,000

Machinery 2,550,000 e. Depreciation 663,090

Accumulated depreciation (9,680,000 – 2,550,000 x 9.3%) 663,090

227 Problem 17-11 2003 Jan. 1 Machinery 900,000 Cash 900,000 Dec. 31 Depreciation (20% x 900,000) 180,000 Accumulated depreciation 180,000

2004 Dec. 31 Depreciation 180,000 Accumulated depreciation 180,000 2005 Dec. 31 Depreciation 180,000 Accumulated depreciation 180,000 2006 Dec. 31 Depreciation 180,000 Accumulated depreciation 180,000 Cash 10,000 Accumulated depreciation 170,000 Machinery (4 x 45,000) 180,000 2007 Dec. 31 Depreciation (720,000 x 20%) 144,000 Accumulated depreciation 144,000 Cash 15,000 Accumulated depreciation 615,000 Machinery (14 x 45,000) 630,000 2008 Dec. 31 Depreciation 9,000 Accumulated depreciation 9,000 Remaining cost 90,000 Less: Balance of accumulated depreciation 79,000 Book value 11,000 Less: Salvage proceeds 2,000 Maximum depreciation 9,000 Cash 2,000 Accumulated depreciation 88,000 Machinery (4 x 45,000) 90,000

228 Problem 17-12 1. Old machinery overhauled (240,000 + 60,000) 300,000 Accumulated depreciation 2005 (240,000 / 8) 30,000 2006 30,000 2007 30,000

Total 90,000 Book value – January 1, 2008 210,000 Old machinery overhauled (210,000 / 7 years) 30,000 Remaining cost of old machinery (1,152,000 – 240,000 / 8) 114,000 New machinery (460,800 / 8 x 5/12) 24,000 Total depreciation 168,000 2. Old machinery 1,152,000 New machinery 460,800 Cost of overhaul 60,000 Total cost 1,672,800 Accumulated depreciation: Balance – January 1 432,000 Depreciation for 2008 168,000 600,000 Book value – December 31, 2008 1,072,800 Problem 17-13 Main machine (7,500,000 / 10) 750,000 First component – from January 1 to April 1, 2008 (1,200,000 / 6 x 3/12) 50,000 Second component – from April 1 to December 31, 2009 (2,000,000 – 400,000 / 4 x 9/12) 300,000 Total depreciation for 2008 1,100,000 The second component is depreciated over the remaining life of the main machine. The original life is 10 years and 6 years already expired. Thus, the remaining life is 4 years. Problem 17-14 1. Tools 40,000

Cash 40,000 2. Tools 20,000 Cash 20,000 3. Cash 4,000 Tools 4,000 4. Depreciation 46,000 Tools 46,000 Balance of tools account 196,000 Less: Estimated cost on December 31 150,000 Depreciation 46,000 229

Problem 17-15

Retirement method

March 1 Electric meters 250,000 Cash 250,000 1 Cash 20,000 Depreciation 160,000 Electric meters 180,000 July 1 Electric meters 400,000 Cash 400,000 December 1 Electric meters 200,000 Cash 200,000 1 Cash 15,000 Depreciation 135,000 Electric meters 150,000

Replacement method

March 1 Depreciation (250,000 – 20,000) 230,000 Cash 230,000 July 1 Electric meters 400,000 Cash 400,000 December 1 Depreciation (200,000 – 15,000) 185,000 Cash 185,000 Problem 17-16

Retirement method 2008 Tools 120,000 Cash 120,000 Cash (300 x 50) 15,000 Depreciation 45,000 Tools (300 x 200) 60,000 2009 Tools 360,000 Cash 360,000 Cash (700 x 70) 49,000 Depreciation 111,000 Tools 160,000 230 500 x 200 100,000 200 x 300 60,000

Cost of tools retired 160,000

Replacement method 2008 Tools (100 x 300) 30,000 Depreciation (300 x 30) 90,000 Cash 120,000 Cash 15,000 Depreciation 15,000 2009 Tools (200 x 400) 80,000 Depreciation (700 x 400) 280,000 Cash 360,000 Cash 49,000 Depreciation 49,000

Inventory method

2008 Tools 120,000 Cash 120,000 Cash 15,000 Tools 15,000

Depreciation (265,000 – 200,000) 65,000 Tools 65,000

2009 Tools 360,000 Cash 360,000

Cash 49,000 Tools 49,000 Depreciation (511,000 - 350,000) 161,000 Tools 161,000 Problem 17-17 1. Land (350,000 + 450,000) 800,000 Land acquired (380,000 + 25,000 + 45,000) 450,000 2. Depreciation of land improvements (180,000 / 15) 12,000 3. Depreciation of building (4,500,000 – 1,050,000 x 7.5%) 258,750 231 4. Depreciation of machinery and equipment

(1,160,000 – 60,000 / 10) 110,000 (300,000 / 10) 30,000

(60,000 / 10 x 6/12) 3,000 143,000 5. Fixed rate (100% / 3 x 1.5) 50% (1,800,000 – 1,344,000 x 50%) 228,000 Problem 17-18 1. Beginning balance 875,000 Acquisition (150,000 / 750,000 x 1,250,000) 250,000 Total cost of land 1,125,000 Technically, the land for undetermined use is an investment property. 2. Old (7,500,000 – 1,644,500 x 8%) 468,440 New (600,000/750,000 x 1,250,000 = 1,000,000 x 8%) 80,000 Depreciation – building 548,440 3. 2,250,000 / 10 225,000 400,000 / 10 x 6/12 20,000 Depreciation – machinery 245,000 4. Depreciation – leasehold improvements (216,000 – 108,000 / 5 years) 21,600 5. Depreciation – land improvements 192,000 / 12 x 9/12) 12,000 Problem 17-19 1. Old building (4,672,200 x 10%) 467,220 New building Direct cost 2,220,000 Fixed (15,000 x 25) 375,000 Variable (15,000 x 27) 405,000 Total cost 3,000,000 3,000,000 x 10% 300,000 Total depreciation 767,220 Fixed rate (100 / 20 x 2) 10% 232

2. Old machinery (1,380,000 / 10) 138,000 New machinery Invoice cost 356,000 Concrete embedding 18,000 Wall demolition 7,000 Rebuilding of wall 19,000 Total cost 400,000 400,000 / 10 x 6/12 20,000 Total depreciation 158,000 Problem 17-20 Answer A Cost of machinery (cash price) 1,100,000 Less: Residual value 50,000 Depreciable cost 1,050,000 Straight line depreciation (1,050,000 / 10) 105,000 Problem 17-21 Answer B Sales price 2,300,000 Book value: Cost 4,200,000 Accumulated depreciation (3,600,000 / 5 x 3) 2,160,000 2,040,000 Gain 260,000 Problem 17-22 Answer B Accumulated depreciation – 12/31/2007 3,700,000 Add: Depreciation for 2008 550,000 Total 4,250,000 Less: Accumulated depreciation on property, plant and equipment retirements (squeeze) 250,000 Accumulated depreciation – 12/31/2008 4,000,000 Problem 17-23 Answer B Depreciable Annual Cost Salvage cost Life depreciation A 550,000 50,000 500,000 20 25,000 B 200,000 20,000 180,000 15 12,000 C 40,000 40,000 5 8,000 790,000 720,000 45,000 Composite life = 720,000 / 45,000 16 years

233 Problem 17-24 Answer D Invoice price 4,500,000 Cash discount (2% x 4,500,000) ( 90,000) Delivery cost 80,000 Installation and testing 310,000 Total cost 4,800,000 Salvage value 800,000 Depreciable cost 4,000,000 Rate per unit (4,000,000 / 200,000) 20 Depreciation for 2008 (30,000 x 20) 600,000 Problem 17-25 Answer B Cost 4,000,000 Accumulated depreciation 2007 (8/36 x 3,600,000) 800,000 2008 (7/36 x 3,600,000) 700,000 1,500,000 Book value, 12/31/2008 2,500,000 Problem 17-26 Answer B The first three fractions are: 2006 10/55 2007 9/55 2008 8/55 Thus, the 2008 depreciation of P240,000 is equal to 8/55. Depreciable cost (240,000 / 8/55) 1,650,000 Salvage 50,000 Total cost 1,700,000 Problem 17-27 Answer B April 1, 2006 to March 31, 2007 (5/15 x 3,000,000) 1,000,000 April 1, 2007 to March 31, 2008 (4/15 x 3,000,000) 800,000 Accumulated depreciation, March 31, 2008 1,800,000 Problem 17-28 Answer A The accumulated depreciation on December 31, 2007 is recomputed following a certain method. The same is arrived at following the SYD as follows: SYD = 1 + 2 + 3 + 4 + 5 = 15

234 2005 (5/15 x 900,000) 300,000 2006 (4/15 x 900,000) 240,000 2007 (3/15 x 900,000) 180,000 Accumulated depreciation – 12/31/2007 720,000 Accordingly, the SYD is followed for 2008. 2008 depreciation (2/15 x 900,000) 120,000 Problem 17-29 Answer B Straight line rate (100% / 8 years) 12.5% Fixed rate (12.5 x 2) 25% 2007 depreciation (1,280,000 x 25%) 320,000 2008 depreciation (1,280,000 – 320,000 x 25%) 240,000 Problem 17-30 1. 4,000,000 – 2,560,000 x 40% (Answer D) 576,000 2. 1,800,000 x 2/15 (SYD) (Answer A) 240,000 3. Sales price 1,700,000 Book value (2,800,000 – 1,344,000) 1,456,000 Gain (Answer A) 244,000 Problem 17-31 Answer B Straight line rate (100% / 5 years) 20% Fixed rate (20% x 2) 40% 2006 depreciation (5,000,000 x 40%) 2,000,000 2007 depreciation (3,000,000 x 40%) 1,200,000 Accumulated depreciation, December 31, 2007 3,200,000 Depreciation for 2008 – straight line (5,000,000 – 3,200,000 / 3) 600,000 Accumulated depreciation, December 31, 2008 3,800,000 Problem 17-32 Answer A Cost – 1/1/2005 7,200,000 Accumulated depreciation – 12/31/2007 (7,200,000 / 10 x 3) 2,160,000 Book value – 12/31/2007 5,040,000 SYD for the remaining life of 7 years (1 + 2 + 3 + 4 + 5 + 6 + 7) 28

Depreciation for 2008 (5,040,000 x 7/28) 1,260,000 Problem 17-33 Answer B Annual depreciation (1,536,000 / 8) 192,000 235 Problem 17-34 Answer B Fixed rate (100% / 4 x 2) 50% Cost 6,000,000 Depreciation for 2007 (50% x 6,000,000) 3,000,000 Book value – 1/1/2008 3,000,000 Residual value ( 600,000) Maximum depreciation in 2008 2,400,000 Fixed rate in 2008 (100% / 2 x 2) 100% This means that the computers should be fully depreciated in 2008. Since there is a residual value of P600,000, the maximum depreciation for 2008 is equal to the book value of P3,000,000 minus the residual value of P600,000 or P2,400,000.

236

CHAPTER 18 Problem 18-1 Problem 18-2 1. D 1. B 2. A 2. C 3. A 3. C 4. C 4. C 5. A 5. D Problem 18-3 1. Ore property 5,000,000 Cash 5,000,000 2. Ore property 3,000,000 Cash 3,000,000 3. Machinery 4,000,000 Cash 4,000,000 4. Depletion 1,140,000 Accumulated depreciation 1,140,000 8,000,000 – 400,000 = 7,600,000 7,600,000 / 2,000,000 = 3.80 300,000 x 3.80 = 1,140,000 5. Depreciation 600,000 Accumulated depreciation 600,000 4,000,000 / 2,000,000 = 2.00 300,000 x 2.00 = 600,000 Problem 18-4 2008 Rock and gravel property 960,000 Cash 960,000 Depletion (1,000,000 x .40) 400,000 Accumulated depletion 400,000

2009 Rock and gravel property 490,000 Cash 490,000 Depletion (600,000 x .75) 450,000 Accumulated depletion 450,000 237 Total cost (960,000 + 490,000) 1,450,000 Less: Accumulated depletion 400,000 Depletable cost 1,050,000 Divide by estimated remaining output (2,400,000 – 1,000,000) 1,400,000 Revised depletion rate per ton .75 2010 Rock and gravel property 500,000 Cash 500,000 Depletion (700,000 x .44) 308,000 Accumulated depletion 308,000 Total cost 1,450,000 Add: Additional development cost 500,000 Total 1,950,000 Less: Accumulated depletion (400,000 + 450,000) 850,000 Remaining depletable cost 1,100,000 Divide by new estimated remaining output 2,500,000 New depletion rate .44 Problem 18-5 2008 Resource property 3,960,000 Cash 3,960,000 Building 960,000 Equipment 1,240,000 Cash 2,200,000 Depletion (12,000 x 32) 384,000 Accumulated depletion 384,000 Cost of resource property 3,960,000 Less: Residual value 120,000 Depletable cost 3,840,000 Divide by estimated output 120,000 Depletion rate per unit 32 Depreciation (12,000 x 8) 96,000

Accumulated depreciation – building 96,000 960,000 Depreciation rate per unit = ---------------- = 8 120,000 The output method is used in computing the depreciation of the building because the life of the resource property (5 years or 120,000 / 24,000) is shorter than the life of the building (8 years).

238 Depreciation 310,000

Accumulated depreciation 310,000 (1,240,000 / 4 years = 310,000) The straight line method is used for the heavy equipment because the life of 4 years is shorter than the life of the resource property of 5 years. 2009 Depletion 800,000 Accumulated depletion (25,000 x 32) 800,000 Depreciation (25,000 x 8) 200,000 Accumulated depreciation – building 200,000 Depreciation 310,000 Accumulated depreciation – equipment 310,000

Problem 18-6 2008 Ore property 5,400,000 Cash 5,400,000 Ore property 450,000 Estimated liability for restoration cost 450,000 Mine improvements 8,000,000 Cash 8,000,000 2009 Depletion (600,000 x 2.60) 1,560,000 Accumulated depletion 1,560,000 Depreciation (600,000 x 4) 2,400,000 Accumulated depreciation 2,400,000 2010 Depletion (400,000 x 1.60) 640,000 Accumulated depletion 640,000 Depletable cost 5,200,000

Less: 2009 depletion 1,560,000 Balance (3,640,000 / 2,275,000 = 1.60) 3,640,000 Mine improvements 770,000 Cash 770,000 Depreciation (400,000 x 2.80) 1,120,000 Accumulated depreciation 1,120,000 Cost (8,000,000 + 770,000) 8,770,000 Less: Accumulated depreciation 2,400,000 Book value (6,370,000 / 2,275,000 = 2.80) 6,370,000 239 Problem 18-7 Depletion rate (5,000,000 / 1,000,000) 5.00 Depreciation rate (8,000,000 / 1,000,000) 8.00 First year

Depletion (200,000 x 5) 1,000,000 Depreciation (200,000 x 8) 1,600,000 Second year Depletion (250,000 x 5) 1,250,000 Depreciation (250,000 x 8) 2,000,000 Third year Depletion none Depreciation (Schedule A) 550,000 Schedule A – Computation of depreciation for third year Cost of equipment 8,000,000 Less: Accumulated depreciation 3,600,000 Book value – beginning of third year 4,400,000 Divide by remaining useful life in years (10 – 2) 8 Depreciation for third year 550,000 Fourth year Depletion (100,000 x 5) 500,000 Depreciation (Schedule B) 700,000 Schedule B – Computation of depreciation for fourth year Cost of equipment 8,000,000 Less: Accumulated depreciation 4,150,000 Book value – beginning of fourth year 3,850,000

Original estimate of resource deposits 1,000,000 tons Less: Extracted in first and second years 450,000 Remaining output 550,000 tons Depreciation rate per unit (3,850,000 / 550,000) 7.00 Depreciation for third year (100,000 x 7) 700,000 Problem 18-8 1. Retained earnings 1,500,000 Accumulated depletion 2,500,000 Total 4,000,000 Less: Capital liquidated 1,800,000 Depletion in ending inventory (5,000 x 20) 100,000 1,900,000 Maximum dividend 2,100,000 240 2. Retained earnings 1,800,000 Capital liquidated 200,000 Dividends payable 2,000,000 Problem 18-9 1. Cash (50,000 x 110) 5,500,000 Share capital (50,000 x 100) 5,000,000 Share premium 500,000 2. Resource property 3,000,000 Cash 3,000,000 3. Mining equipment 800,000 Cash 800,000 4. Cash (85,000 x 50) 4,250,000 Sales 4,250,000 5. Mining and other direct cost 2,268,000 Administrative expenses 500,000 Cash 2,768,000 6. Depletion 270,000 Accumulated depletion (3,000,000 / 1,000,000 x 90,000) 270,000 7. Depreciation (90,000 x .80) 72,000 Accumulated depreciation - mining equipment 72,000 Depreciation rate (800,000 / 1,000,000) = .80 8. Inventory, December 31 (5,000 x 29) 145,000

Profit and loss 145,000 Mining labor and other direct costs 2,268,000 Depletion 270,000 Depreciation 72,000 Total production costs incurred 2,610,000 Divide by number of units extracted 90,000 Unit cost 29

241

Multinational Company Income Statement

Year ended December 31, 2008

Sales 4,250,000 Cost of sales Mining labor and other direct costs 2,268,000 Depletion 270,000 Depreciation 72,000 Total production cost 2,610,000 Less: Inventory, December 31 145,000 2,465,000 Gross income 1,785,000 Administrative expenses 500,000 Net income 1,285,000

Multinational Company

Statement of Financial Position December 31, 2008

Assets

Current assets: Cash 3,182,000 Inventory 145,000 3,327,000 Noncurrent assets: Resource property 3,000,000 Less: Accumulated depletion 270,000 2,730,000 Mining equipment 800,000 Less: Accumulated depreciation 72,000 728,000 3,458,000 Total assets 6,785,000

Equity Share capital 5,000,000 Share premium 500,000 Retained earnings 1,285,000 Total equity 6,785,000 Retained earnings 1,285,000 Add: Accumulated depletion 270,000 Total 1,555,000 Less: Unrealized depletion in ending inventory (5,000 x 3) 15,000 Maximum dividend 1,540,000 Retained earnings 1,285,000 Capital liquidated 255,000

Dividends payable 1,540,000 242 Problem 18-10 1. Purchase price 50,000 Road construction 5,000,000 Improvements and development costs 750,000 Total cost 5,800,000 Residual value ( 600,000) Depletable cost 5,200,000 Depletion rate per unit (5,200,000 / 4,000,000) 1.30 Depletion for 2008 (500,000 x 1.30) 650,000 Depletable cost 5,200,000 Depletion in 2008 ( 650,000) Remaining depletable cost 4,550,000 Development costs in 2009 1,300,000 Total depletable cost – 1/1/2009 5,850,000 Original estimated tons 4,000,000 Additional estimate 3,000,000 Total estimated tons 7,000,000 Extracted in 2008 ( 500,000) Remaining tons – 1/1/2009 6,500,000 New depletion rate per unit (5,850,000 / 6,500,000) .90

Depletion for 2009 (1,000,000 x .90) 900,000 2. Cost of buildings 2,000,000 Residual value ( 200,000) Depreciable cost 1,800,000 Depreciation rate per unit (1,800,000 / 4,000,000) .45 Depreciation for 2008 (500,000 x .45) 225,000

In the absence of any statement to the contrary, the output method is used in computing depreciation of mining equipment. Depreciable cost 1,800,000 Depreciation for 2008 ( 225,000) Remaining depreciable cost 1,575,000 Additional building in 2009 375,000 Total depreciable cost – 1/1/2009 1,950,000 New depreciation rate per unit (1,950,000 / 6,500,000) .30 Depreciation for 2009 (1,000,000 x .30) 300,000

243 Problem 18-11 2008 No depletion because there is no production. 2009 Purchase price 28,000,000 Estimated restoration cost 2,000,000 Development cost – 2008 1,000,000 Development cost – 2009 1,000,000 Total cost 32,000,000 Residual value ( 5,000,000) Depletable cost 27,000,000 Rate in 2009 (27,000,000 / 10,000,000) 2.70 Depletion in 2009 (3,000,000 x 2.70) 8,100,000 2010 Tons extracted in 2010 3,500,000 Tons remaining in 12/31/2010 2,500,000 Total estimated output – 1/1/2010 6,000,000 New rate in 2010 (27,000,000 – 8,100,000/6,000,000) 3.15 Depletion in 2010 (3,500,000 x 3.15) 11,025,000 Problem 18-12 Answer B

Acquisition cost 26,400,000 Development cost 3,600,000 Estimated restoration cost 1,800,000 Total cost 31,800,000 Less: Residual value 3,000,000 Depletable cost 28,800,000 Rate per unit (28,800,000 / 1,200,000) 24 Depletion for 2008 (60,000 x 24) 1,440,000 Problem 18-13 Answer C Depletion rate per unit (9,200,000 / 4,000,000) 2.30 Problem 18-14 Answer C Rate per unit (46,800,000 – 3,600,000 / 2,160,000) 20 Depletion in cost of goods sold (240,000 x 20) 4,800,000 244 Problem 18-15 Answer D Acquisition cost 10,000,000 Less: Residual value 3,000,000 Depletable cost 7,000,000 Less: Accumulated depletion – 12/31/2007

(7,000,000 / 10,000,000 = .70 x 4,000,000) 2,800,000 Remaining depletable cost – 1/1/2008 4,200,000 New depletion rate (4,200,000 / 7,500,000) .56 Depletion for 2008 (1,500,000 x .56) 840,000 Problem 18-16 Answer B Depletable cost 33,000,000 Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000) ( 1,650,000) Balance – 1/1/2008 31,350,000 Production in 2008 225,000 New estimate – 12/31/2008 5,000,000 New estimate – 1/1/2008 5,225,000 Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000) 1,350,000

Problem 18-17 Question 1 – Answer A Purchase price 14,000,000 Less: Residual value 2,000,000 Depletable cost 12,000,000 Depletion rate (12,000,000 / 1,500,000) 8.00 Depletion for 2008 (150,000 x 8) 1,200,000 Production (25,000 x 6) 150,000 Question 2 – Answer C Production from July 1 to December 31, 2008 (25,000 x 6) 150,000 tons Annual production (25,000 x 12) 300,000 tons Estimated life of mine (1,500,000 / 300,000) 5 years Since the life of the mine is shorter than the life of the equipment, the output method is used in computing depreciation. 245 Equipment 8,000,000 Less: Residual value 500,000 Depreciable cost 7,500,000 Rate per unit (7,500,000 / 1,500,000) 5.00 Depreciation for 2008 (150,000 x 5) 750,000 Problem 18-18 Answer C Purchase price 9,000,000 Development costs in 2007 300,000 Total cost 9,300,000 Residual value 1,200,000 Depletable cost 8,100,000 Rate in 2007 (8,100,000 / 2,000,000) 4.05 Depletion for 2007 (200,000 x 4.05) 810,000 Depletable cost 8,100,000 Depletion in 2007 ( 810,000) Balance 7,290,000 Development costs in 2008 135,000

Depletable cost in 2008 7,425,000 Rate in 2008 (7,425,000 / 1,650,000) 4.50 Depletion for 2008 (300,000 x 4.50) 1,350,000 246

CHAPTER 19

Problem 19-1 1. C 6. B 2. B 7. C 3. D 8. A 4. C 9. B 5. C 10. A Problem 19-2 1. Appreciation (7,200,000 – 4,500,000) 2,700,000 2. Book value (4,500,000 – 900,000) 3,600,000 3. Depreciated replacement cost (7,200,000 x 80%) 5,760,000 4. Revaluation surplus (5,760,000 – 3,600,000) 2,160,000 Problem 19-3 1. Annual depreciation on cost (750,000 / 5) 150,000

Original life (3,000,000 / 150,000) 20 years 2. Equipment 1,800,000

Accumulated depreciation 450,000 Revaluation surplus 1,350,000 3. Depreciation (4,800,000 / 20) 240,000 Accumulated depreciation 240,000 4. Revaluation surplus 90,000 Retained earnings (1,350,000 / 15) 90,000 Problem 19-4 1. Annual depreciation on cost (9,000,000 / 25) 360,000 Age of asset (3,600,000 / 360,000) 10 years 2. Machinery 6,000,000 Accumulated depreciation (40% x 6,000,000) 2,400,000 Revaluation surplus 3,600,000 3. Depreciation (9,000,000 / 15) 600,000 Accumulated depreciation 600,000 247 4. Revaluation surplus 240,000 Retained earnings (3,600,000 / 15) 240,000 Problem 19-5

Proportional approach 1. Building 3,000,000 Accumulated depreciation 750,000 Revaluation surplus 2,250,000 2. Depreciation (8,000,000 / 40) or (6,000,000 / 30) 200,000 Accumulated depreciation 200,000 Gross replacement cost (6,000,000 / 75%) 8,000,000 3. Revaluation surplus 75,000 Retained earnings (2,250,000 / 30) 75,000

Elimination approach 1. Accumulated depreciation 1,250,000 Building 1,250,000

Building (6,000,000 – 3,750,000) 2,250,000 Revaluation surplus 2,250,000 2. Depreciation (6,000,000 / 30) 200,000 Accumulated depreciation 200,000 3. Revaluation surplus 75,000 Retained earnings 75,000 Problem 19-6 1. Equipment 2,700,000 Accumulated depreciation 500,000 Revaluation surplus 2,200,000 2. Depreciation (7,500,000 / 10) 750,000 Accumulated depreciation 750,000 3. Revaluation surplus (2,200,000 / 10) 220,000 Retained earnings 220,000 4. Cash 8,000,000 Accumulated depreciation 2,250,000 Equipment 9,200,000 Gain on sale of equipment 1,050,000 248 Revaluation surplus (2,200,000 - 220,000) 1,980,000

Retained earnings 1,980,000 Problem 19-7 1. Building 10,000,000 Accumulated depreciation 4,000,000 Revaluation surplus 6,000,000 2. Depreciation (13,000,000 / 5) 2,600,000 Accumulated depreciation 2,600,000 3. Revaluation surplus 1,200,000 Retained earnings (6,000,000 / 5) 1,200,000 Problem 19-8 Replacement Cost cost Appreciation

Building 3,000,000 5,000,000 2,000,000 Accumulated depreciation 600,000 1,000,000 400,000 2,400,000 4,000,000 1,600,000

Accumulated depreciation on cost (3,000,000 x 20%) 600,000 Life of asset (100% / divided by 4%) 25 years Percent of accumulated depreciation (5 years / 25) 20% Gross replacement cost (4,000,000 / 80%) 5,000,000 Accumulated depreciation on replacement cost (5,000,000 x 20%) 1,000,000 a. “Should be entry:

Building 2,000,000 Accumulated depreciation 400,000 Revaluation surplus 1,600,000 b. Correcting entry: Building 1,000,000 Retained earnings 1,000,000 Accumulated depreciation 400,000 Revaluation surplus 1,600,000 c. Depreciation (4,000,000 / 20) 200,000 Accumulated depreciation 200,000 249 d. Revaluation surplus 80,000 Retained earnings (1,600,000 / 20) 80,000 Problem 19-9 1. Accumulated depreciation 800,000

Machinery 800,000 2. Retained earnings 400,000 Revaluation surplus 400,000 Problem 19-10 Replacement Cost cost Appreciation

Land 5,000,000 10,000,000 5,000,000 Building 25,000,000 45,000,000 20,000,000 Accumulated depreciation (25,000,000 x 3/25) 3,000,000

(45,000,000 x 3/25) _________ 5,400,000 2,400,000 22,000,000 39,600,000 17,600,000

Machinery 10,000,000 15,000,000 5,000,000 Accumulated depreciation (10,000,000 x 3/5) 6,000,000 (15,000,000 x 3/5) __________ 9,000,000 3,000,000 4,000,000 6,000,000 2,000,000 Replacement Cost cost Appreciation

Equipment 3,000,000 4,200,000 1,200,000 Accumulated depreciation (3,000,000 x 3/10) 900,000 (4,200,000 x 3/10) _________ 1,260,000 _ 360,000 2,100,000 2,940,000 840,000 a. Land 5,000,000 Building 20,000,000 Machinery 5,000,000 Equipment 1,200,000

Accumulated depreciation – building 2,400,000 Accumulated depreciation – machinery 3,000,000 Accumulated depreciation – equipment 360,000 Revaluation surplus 25,440,000 b. Depreciation 5,220,000 Accumulated depreciation – building 1,800,000 Accumulated depreciation – machinery 3,000,000 Accumulated depreciation – equipment 420,000 250 Building: Cost (22,000,000 / 22) 1,000,000 Appreciation (17,600,000 / 22) 800,000 1,800,000 Machinery: Cost (4,000,000 / 2) 2,000,000 Appreciation (2,000,000 / 2) 1,000,000 3,000,000 Equipment: Cost (2,100,000 / 7) 300,000 Appreciation (840,000 / 7) 120,000 420,000 Total depreciation 5,220,000 c. Revaluation surplus 1,920,000 Retained earnings (800,000 + 1,000,000 + 120,000) 1,920,000 d. Property, plant and equipment (at revalued amounts):

Land 10,000,000 Building 45,000,000 Machinery 15,000,000 Equipment 4,200,000 Total 74,200,000 Less: Accumulated depreciation 20,880,000 Net carrying value 53,320,000 The following disclosure should be made in the notes to financial statements: Replacement

Cost cost Land 5,000,000 10,000,000 Building 25,000,000 45,000,000 Machinery 10,000,000 15,000,000 Equipment 3,000,000 4,200,000 Total 43,000,000 74,200,000 Accumulated depreciation 13,200,000 20,880,000 Net carrying value 29,800,000 53,320,000

Schedule of Accumulated Depreciation Replacement Cost cost Building 4,000,000 7,200,000 Machinery 8,000,000 12,000,000 Equipment 1,200,000 1,680,000 13,200,000 20,880,000 251 Problem 19-11 Answer B Replacement Cost cost Appreciation

Building 5,000,000 8,000,000 3,000,000 Accumulated depreciation 1,250,000 2,000,000 750,000 3,750,000 6,000,000 2,250,000 Problem 19-12 Answer B

Sound Book Revaluation alue value surplus

vand 0

g 75% x 25,000, 0) 1

L 5,000,000 2,000,000 3,000,00Buildin ( 00 18,750,000 11,250,000 7,500,000 Machinery (50% x 5,000,000) 2,500,000 1,500,000 ,000,000 11,500,000

Problem 19-13 Answer D Fair value – December 31, 2008 450,000 Net book value – December 31, 2008 302,500 Revaluation surplus 142,500 Problem 19-14 Question 1 Answer A Question 2 Answer B Question 3 Answer B Problem 19-15 1. A 6. A 11. A 2. C 7. A 12. A 3. B 8. D 13. A 4. A 9. D 14. D 5. A 10. D 15. A Problem 19-16 1. Impairment loss 900,000 Accumulated depreciation 900,000 Cost 4,500,000 Accumulated depreciation 2,100,000 Book value – January 1 2,400,000 Recoverable value 1,500,000 Impairment loss 900,000 2. Depreciation (1,500,000 / 3) 500,000 Accumulated depreciation 500,000 252 3. Cost 4,500,000 Accumulated depreciation (2,100,000 + 900,000 + 500,000) 3,500,000 Book value – December 31 1,000,000 Problem 19-17 1. Impairment loss 1,125,000 Accumulated depreciation 1,125,000 Cost – January 1 2,500,000 Accumulated depreciation (2,500,000 – 500,000 / 8 x 2) 500,000 Book value – January 1 2,000,000

Recoverable value 875,000 Impairment loss 1,125,000 2. Depreciation 375,000 Accumulated depreciation (875,000 – 125,000 / 2) 375,000 3. Cost 2,500,000 Accumulated depreciation (500,000 + 1,125,000 + 375,000) 2,000,000 Book value – December 31 500,000 Problem 19-18 1. Offer price 25,000,000 Cost of dismantling and removal assumed by the bidder 5,000,000 Fair value less cost to sell 30,000,000 Present value of future cash flows 33,000,000 Less: Estimated liability 5,000,000 Value in use 28,000,000 Carrying amount 39,000,000 Less: Estimated liability 5,000,000 Adjusted carrying amount 34,000,000 Recoverable amount – fair value less cost to sell, being the higher amount 30,000,000 Impairment loss 4,000,000 PAS 36, paragraph 78, provides that the fair value less cost to sell is equal to the estimated selling price plus the estimated liability assumed by the buyer. The standard further provides that to perform a meaningful comparison between the carrying amount and recoverable amount, the estimated liability assumed by the buyer is deducted in determining both the value in use and carrying amount of the asset. 2. Impairment loss 4,000,000 Accumulated depreciation 4,000,000 253 Problem 19-19 1. Net cash inflows PV factor Present value 2008 18,000,000 .930 16,740,000 2009 15,000,000 .857 12,855,000 2010 15,000,000 .794 11,910,000 2011 12,000,000 .735 8,820,000 60,000,000 Total value in use 50,325,000 2. The recoverable amount is the value in use of P50,325,000 because this is higher than the

fair value less cost to sell of P48,000,000. 3. Impairment loss 14,675,000 Accumulated depreciation (65,000,000 – 50,325,000) 14,675,000 4. Depreciation 12,581,250 Accumulated depreciation (50,325,000 / 4) 12,581,250 Problem 19-20 1. Depreciation 1,000,000 Accumulated depreciation (10,000,000 / 10) 1,000,000 2. Depreciation 1,000,000 Accumulated depreciation 1,000,000 3. Impairment loss 2,000,000 Accumulated depreciation 2,000,000 4. Depreciation 750,000 Accumulated depreciation (6,000,000 / 8) 750,000 5. Accumulated depreciation 1,750,000 Gain on impairment recovery 1,750,000 Cost – 1/1/2006 10,000,000 Accumulated depreciation (10,000,000 / 10 x 2) 2,000,000 Book value – 12/31/2007 8,000,000 Impairment loss – 2007 2,000,000 Adjusted book value – 12/31/2007 6,000,000 Depreciation – 2008 (6,000,000 / 8) 750,000 Book value – 12/31/2008 5,250,000 Cost – 1/1/2006 10,000,000 Accumulated depreciation (10,000,000 / 10 x 3) 3,000,000 Book value – 12/31/2008 (assuming no impairment) 7,000,000 Recorded book value 5,250,000 Gain on reversal of impairment 1,750,000 254 The fair value or recoverable value of P7,500,000 cannot exceed the “book value” that would have been determined assuming no impairment is recognized. Problem 19-21 1. Impairment loss 5,000,000 Accumulated depreciation (35,000,000 – 30,000,000) 5,000,000 2. Depreciation 6,000,000

Accumulated depreciation (30,000,000 / 5) 6,000,000

Observe that the undiscounted net cash flows from the asset amount to P37,500,000 for 5 years. This amount is more than the book value of the machinery. Under American

Standard, no impairment loss should be recognized in this case. However, under the PAS 36, if the recoverable amount is less than carrying amount, an impairment loss is recognized, regardless of the amount of undiscounted cash flows whether less than or more than the carrying amount. PAS 36 has totally rejected the concept of undiscounted cash flows for impairment purposes. Problem 19-22 1. Value in use (1,500,000 x 5.65) 8,475,000 2. Impairment loss 8,250,000 Accmulated depreciation 8,250,000 Buildings 25,000,000 Accumulated depreciation (22,500,000 / 20 x 6) 6,750,000 Book value – 1/1/2008 18,250,000 Fair value – higher than value in use 10,000,000 Impairment loss 8,250,000 3. Depreciation 1,000,000 Accumulated depreciation (10,000,000 / 10) 1,000,000 Problem 19-23 1. Value in use (800,000 x 3.99) 3,192,000 2. Impairment loss 308,000 Accumulated depreciation 308,000 Machinery 5,000,000 Accumulated depreciation 1,500,000 Book value – 1/1/2008 3,500,000 Present value of cash flows – higher than fair value 3,192,000 Impairment loss 308,000 3. Depreciation 638,400 Accumulated depreciation (3,192,000 / 5) 638,400 255 Problem 19-24 1. Total carrying amount 5,000,000 Value in use 3,600,000 Impairment loss 1,400,000 2. Impairment loss allocated to goodwill 500,000

Impairment loss allocated to the other assets 900,000 1,400,000 When an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order:

a. First, to the goodwill, if any. b. Then, to all other assets of the unit prorata based on their carrying amount.

Carrying amount Fraction Loss Building 2,000,000 20/45 400,000 Inventory 1,500,000 15/45 300,000 Trademark 1,000,000 10/45 200,000 4,500,000 900,000 3. Impairment loss 1,400,000 Goodwill 500,000 Accumulated depreciation – building 400,000 Inventory 300,000 Trademark 200,000 Problem 19-25 1. Carrying amount 16,000,000 Value in use 11,000,000 Impairment loss 5,000,000 2. Allocation of impairment loss Building (8/16 x 5,000,000) 2,500,000 Equipment (4/16 x 5,000,000) 1,250,000 Inventory (4/16 x 5,000,000) 1,250,000 5,000,000

Observe that after allocating the P2,500,000 loss to the building, the carrying amount of the building would be P5,500,000 which is lower than its fair value of P6,500,000. Accordingly, only P1,500,000 loss is allocated to the building and the balance of P1,000,000 is reallocated to the equipment and inventory prorata. 256 Building Equipment Inventory Allocated loss 2,500,000 1,250,000 1,250,000 Reallocated loss (1,000,000) (4/8 x 1,000,000) 500,000 (4/8 x 1,000,000) _________ _________ 500,000

Impairment loss 1,500,000 1,750,000 1,750,000 3. Impairment loss 5,000,000 Accumulated depreciation – building 1,500,000 Accumulated depreciation – equipment 1,750,000 Inventory 1,750,000 Problem 19-26 All Unimart’s stores are in different locations and probably have different customer profile. So although Smart is managed at the corporate level, Smart generates cash inflows that are largely independent from those of the other Unimart’s stores. Therefore, it is likely that Smart in itself is a cash generating unit. Problem 19-27 It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced to a certain extent by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, decisions to abandon titles are made on an individual basis. Accordingly, the individual magazine titles generate cash inflows that are largely independent from one another and therefore, each magazine title is a separate cash generating unit. Problem 19-28

Case 1 1. A is separate cash generating unit because there is an active market for A’s products. 2. Although there is an active market for the products of B and C, cash inflows from B and C depend on the allocation of production across two countries. It is unlikely that cash inflows from B and C can be determined individually. Therefore, B and C, together should be treated as a cash generating unit.

257

Case 2 a. A cannot be treated as a separate cash generating unit because its cash inflows

depend on the sales of the final product by B and C, since there is no active market for A’s product.

b. As a consequence, A, B and C, together, and therefore, Maximus Company, as a whole,

should be treated as the largest single cash generating unit. Problem 19-29 The primary purpose of the building is to serve as a corporate asset supporting Litmus Company’s manufacturing operations. Therefore, the building in itself cannot be considered to generate cash inflows that are largely independent of the cash inflows from the entity as a whole. In this case, the cash generating unit is Litmus Company as a whole. The building is not held for investment. Thus, it is not appropriate to determine the value in use of the building based on the cash inflows of related rent. Problem 19-30 Answer C Cost, January 1, 2005 800,000 Accumulated depreciation, December 31, 2007 (100,000 x 3) 300,000 Book value, December 31, 2007 500,000 Recoverable value 200,000 Impairment loss 300,000 The loss is recorded as follows: Impairment loss 300,000 Accumulated depreciation 300,000 Cost 800,000 Accumulated depreciation (300,000 + 300,000) 600,000 Recoverable value, January 1, 2008 200,000 Depreciation for 2008 (200,000 / 5) 40,000 Book value, December 31, 2008 160,000 Problem 19-31 Answer B From August 31, 2005 to May 31, 2008 is a period of 33 months. Thus, the remaining life of the machine is 27 months, 60 months original life minus 33. Depreciation for the month of June 2008 (1,350,000 / 27 months) 50,000 258 Cost 3,200,000 Accumulated depreciation – 5/31/2008 (3,200,000 – 500,000 x 33/60) 1,485,000 Book value – 5/31/2008 1,715,000 Fair value 1,350,000

Impairment loss 365,000 Problem 19-32 Answer B Cost – January 1, 2004 1,000,000 Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4) 360,000 Book value, December 31, 2007 640,000 Depreciation for 2008 (640,000 – 40,000 / 4) 150,000 Book value, December 31, 2008 490,000 Problem 19-33 Answer C Book value, 1/1/2008 2,400,000 Depreciation for 2008 (1,600,000 / 4) 400,000 Book value, 12/31/2008 2,000,000 Sales price-recoverable value 650,000 Impairment loss 1,350,000 Problem 19-34 Answer C Depreciation for 2008 (10% x 2,000,000) 200,000 Cost – 1/2/2004 2,000,000 Accumulated depreciation - 12/31/08 (200,000 x 5) 1,000,000 Book value-12/31/2008 1,000,000 Estimated cost of disposal 50,000 Impairment loss 1,050,000 Problem 19-35 Answer C Cost 2,000,000 Accumulated depreciation – 1/1/2008 (2,000,000 – 100,000 / 10 x 2.5) 475,000 Book value – 1/1/2008 1,525,000 Fair value 600,000 Impairment loss 925,000 Problem 19-36 Answer C Cost – 12/31/2004 2,800,000 Accumulated depreciation – 8/31/2008 (2,400,000 / 96 months x 44) 1,100,000 Book value – 8/31/2008 1,700,000 Fair value 1,500,000 Impairment loss 200,000 259 Problem 19-37 Answer C Carrying value 28,000,000 Decommissioning cost ( 8,000,000) Adjusted carrying value 20,000,000 Fair value less cost to sell – higher (20,000,000 less 1,000,000) 19,000,000

Impairment loss 1,000,000 Value in use 26,000,000 Decommissioning cost ( 8,000,000) Adjusted value in use 18,000,000 Problem 19-38 Answer C Carrying value – 12/31/2007 7,000,000 Depreciation for 2008 (20%) (1,400,000) Carrying value – 12/31/2008 5,600,000 Carrying value – 12/31/2008 (assuming no impairment) 7,200,000 Reversal of impairment loss 1,600,000

260 CHAPTER 20

Problem 20-1 Problem 20-2 1. D 6. D 1. A 6. B

2. C 7. A 2. A 7. B 3. D 8. D 3. C 8. D 4. A 9. D 4. D 9. D 5. D 10. B 5. D 10. D Problem 20-3 2008 Jan. 1 Patent 255,000 Cash 255,000 Dec. 31 Amortization of patent 12,750 Patent (255,000 / 20) 12,750 2009 Dec. 31 Amortization of patent 12,750 Patent 12,750 2010 Jan. 5 Legal expense 90,000 Cash 90,000 Dec. 31 Amortization of patent 12,750 Patent 12,750 2011 Jan. 1 Patent 510,000 Cash 510,000 Dec. 31 Amortization of patent 42,750 Patent 42,750 On original cost 12,750 On competing patent (510,000 / 17) 30,000 42,750 Problem 20-4 2008 Research and development expense 510,000 Cash 510,000 2011 Patent 720,000 Cash 720,000 261

Amortization of patent (720,000 / 16) 45,000 Patent 45,000

2012 Patent 540,000 Cash 540,000 Amortization of patent 81,000 Patent 81,000 On related patent 45,000 On competing patent (540,000 / 15) 36,000 81,000 Problem 20-5 2008 Research and development expense 250,000 Cash 250,000 2009 Patent 60,000 Cash 60,000 Amortization of patent 6,000 Patent (60,000 / 10) 6,000 2010 Patent 600,000 Cash 600,000 Original cost 60,000 New patent 600,000 Total cost 660,000 Less: Amortization for 2008 6,000 Balance – January 1, 2009 654,000 Amortization of patent (654,000 / 15) 43,600 Patent 43,600 2011 Amortization of patent 43,600 Patent 43,600 Patent written off 566,800 Patent 566,800 Balance – 1/1/2010 654,000 Less: Amortization 2010 43,600 2011 43,600 87,200 Unamortized cost 566,800 262

Problem 20-6 1. Patent 7,140,000 Cash 7,140,000 2. Amortization of patent 476,000 Patent (7,140,000 / 15) 476,000 3. Amortization of patent 816,000 Patent (5,712,000 / 7) 816,000 4. Acquisition cost 7,140,000 Amortization for 2005, 2006 and 2007 (476,000 x 3) (1,428,000) Carrying amount – 1/1/2008 5,712,000 Amortization for 2008 ( 816,000) Carrying amount – 12/31/2008 4,896,000 Problem 20-7 1. Patent 900,000 Cash 900,000 2. Amortization of patent 90,000 Patent (900,000 / 10) 90,000 3. Patent written off 540,000 Patent 540,000 Cost 900,000 Amortization for 2005, 2006, 2007 and 2008 (90,000 x 4) (360,000) Carrying amount – 12/31/2008 540,000 Problem 20-8 1. Patent 6,200,000 Cash 6,200,000 2. Legal expenses 450,000 Cash 450,000 3. Amortization of patent 1,050,000 Patent 1,050,000 X (1,200,000 / 8) 150,000 Y (2,000,000 / 5) 400,000 Z (3,000,000 / 6) 500,000 1,050,000

263 Problem 20-9 1. Retained earnings 500,000

Patent 500,000 2. Patent 510,000 Retained earnings 510,000 3. No adjustment. 4. Loss on damages 100,000 Legal expense 30,000 Accrued liabilities 130,000 5. Patent 24,500

Retained earnings 24,500 Amortization per book (500,000 – 450,000) 50,000 Correct amortization for 2007 (510,000 / 20) 25,500 Overamortization 24,500 6. Amortization of patent 25,500

Patent 25,500 Problem 20-10 2008 Copyright 285,000 Cash 285,000 Amortization of copyright 150,000 Copyright 150,000 285,000 / 95,000 = 3 per copy 50,000 x 3 = 150,000 2009 Amortization of copyright 90,000 Copyright (30,000 x 3) 90,000 Problem 20-11 1. Copyright 240,000

Retained earnings 240,000 Cost of copyright 300,000 Less: Amortization (300,000 / 5) 60,000 Book value 240,000 2. Amortization of copyright 60,000

Copyright 60,000

264 Problem 20-12 1. Copyright 620,000 Patent 400,000

Retained earnings 1,020,000 Copyright 1 400,000 Less: Amortization from 1/1/2004 to 12/31/2007 (400,000 / 20 x 4) 80,000 Book value 320,000 Copyright 2 360,000 Less: Amortization from 7/1/2005 to 12/31/2007 (360,000 / 15 x 2.5) 60,000 Book value 300,000 Patent 500,000 Less: Amortization for 2006 and 2007 (500,000 / 10 x 2) 100,000 Book value 400,000 2. Amortization of copyright (20,000 + 24,000) 44,000 Amortization of patent 50,000

Copyright 44,000 Patent 50,000 Problem 20-13

Books of Franchisee 1. Franchise 6,000,000

Cash 6,000,000 2. Amortization of franchise 300,000 Franchise (6,000,000 / 20) 300,000 3. Cash 25,000,000 Sales 25,000,000 4. Franchise fee expense 1,250,000 Cash (25,000,000 x 5%) 1,250,000 Problem 20-14

Books of Franchisee 1. Franchise 20,000,000 Cash 5,000,000 Note payable 15,000,000 2. Note payable (15,000,000 / 4) 3,750,000 Interest expense (15,000,000 x 10%) 1,500,000

Cash 5,250,000 265 3. There is no amortization because the franchise is for an indefinite period. Problem 20-15 Books of Franchisee 1. Franchise (3,000,000 + 3,790,000) 6,790,000 Discount on note payable 1,210,000 Cash 3,000,000 Note payable 5,000,000 Note payable 5,000,000 Present value of note (1,000,000 x 3.79) 3,790,000 Implied interest 1,210,000 2. Amortization of franchise 679,000 Franchise (6,790,000 / 10) 679,000 3. Note payable 1,000,000 Cash 1,000,000 4. Interest expense (10% x 3,790,000) 379,000 Discount on note payable 379,000 Problem 20-16 Requirement a 1. Leasehold improvement – building 5,000,000 Cash 5,000,000 2. Rent expense (50,000 x 12) 600,000 Cash 600,000 3. Depreciation (5,000,000 / 10) 500,000 Accumulated depreciation 500,000 Requirement b Accumulated depreciation 2,500,000 Loss on leasehold cancelation 2,500,000

Leasehold improvement – building 5,000,000 Problem 20-17 1. Rent expense 1,200,000

Prepaid rent 1,200,000 Cash 2,400,000 266 2. Leasehold 2,000,000 Cash 2,000,000 3. Leasehold improvement 500,000 Cash 500,000 4. Amortization of leasehold 400,000 Leasehold (2,000,000 / 5) 400,000 5. Depreciation (500,000 / 5) 100,000 Accumulated depreciation 100,000 Problem 20-18 1. Leasehold 1,000,000 Cash 1,000,000 2. Rent expense (150,000 x 12) 1,800,000 Cash 1,800,000 3. Leasehold improvement 400,000 Cash 400,000 4. Leasehold improvement 100,000 Cash 100,000 5. Amortization of leasehold 100,000 Leasehold (1,000,000 / 10) 100,000 6. Depreciation 60,000 Accumulated depreciation 60,000 400,000 / 10 40,000 100,000 / 5 20,000 60,000 Problem 20-19 1. Rent expense 600,000 Cash 600,000 2. Leasehold 100,000 Cash 100,000

3. Leasehold improvement 200,000 Cash 200,000 4. Leasehold improvement 50,000

Cash 50,000 267 5. Amortization of leasehold 20,000 Leasehold (100,000 / 5) 20,000 6. Depreciation 52,500 Accumulated depreciation 52,500 200,000 / 5 40,000 50,000 / 4 12,500 52,500 Problem 20-20 1. Amortization of patent 280,000 Accumulated amortization (1,920,000 – 240,000 / 6) 280,000 2. Trademark (800,000 x 3/4) 600,000 Noncompetition agreement 200,000 Cash 800,000 3. Amortization of noncompetition agreement 40,000 Accumulated amortization (200,000 / 5) 40,000 4. Royalty expense 50,000 Cash 50,000 Problem 20-21 1. Acquisition cost 7,500,000 Net assets acquired (4,600,000) Goodwill 2,900,000 2. Cash 50,000 Accounts receivable 800,000 Inventory 1,350,000 Property, plant and equipment 4,300,000 Goodwill 2,900,000 Accounts payable 900,000 Note payable – bank 1,000,000 Cash 7,500,000 Problem 20-22

1. Acquisition cost 6,000,000 Net assets acquired at fair value (3,300,000) Goodwill 2,700,000 Total assets at fair value 5,300,000 Total liabilities 2,000,000 Net assets acquired at fair value 3,300,000 268 2. Cash 50,000 Accounts receivable 500,000 Inventory 1,500,000 Patent 250,000 Property, plant and equipment 3,000,000 Goodwill 2,700,000 Accounts payable 2,000,000 Cash 6,000,000 Problem 20-23 1. Cash 1,000,000 Inventory 500,000 In-process R and D 5,000,000 Total assets 6,500,000 Total liabilities 3,000,000 Net assets 3,500,000 Acquisition cost 8,000,000 Net assets acquired at fair value (3,500,000) Goodwill 4,500,000 The goodwill includes the fair value of the assembled workforce of P1,200,000. The assembled workforce is not accounted for separately as an asset. 2. Cash 1,000,000 Inventory 500,000 In process R and D 5,000,000 Goodwill 4,500,000 Accounts payable 2,600,000 Notes payable 400,000 Cash 8,000,000 Problem 20-24 1. Average earnings 250,000 Divide by 10% Net assets including goodwill 2,500,000 Less: Net assets before goodwill 1,700,000 Goodwill 800,000

2. Average earnings 250,000 Less: Normal earnings (8% x 1,700,000) 136,000 Excess earnings 114,000 Divide by 15% Goodwill 760,000 269 3. Average earnings 250,000 Less: Normal earnings (10% x 1,700,000) 170,000 Excess earnings 80,000 Multiply by 5 Goodwill 400,000 4. Excess earnings 80,000 Multiply by 5.65 Goodwill 452,000 Problem 20-25 Average earnings or prior years (1,500,000 / 3) 500,000 Increase in average earnings (10% x 500,000) 50,000 Total 550,000 Less: Patent amortization (500,000 / 5 years) 100,000 Earnings for goodwill computation 450,000 a. Average future earnings 450,000 Divide by 8% Net assets including goodwill 5,625,000 Less: Net assets excluding goodwill 5,000,000 Goodwill 625,000 b. Average earnings 450,000 Less: Normal earnings (8% x 5,000,000) 400,000 Average excess earnings 50,000 Divide by 10% Goodwill 500,000 c. Goodwill (50,000 x 3.17) 158,500 Problem 20-26 a. Average earnings 750,000 Expected increase (1,000,000 – 900,000) 100,000 Total 850,000 Less: Normal earnings (4,800,000 x 10%) 480,000 Excess earnings 370,000

Goodwill (370,000 x 4) 1,480,000 Shareholders’ equity per book 5,000,000 Less: Recorded goodwill 200,000 Net assets before goodwill 4,800,000 b. Goodwill (370,000 / 20%) 1,850,000 270 Problem 20-27 1. Share capital 2,000,000 Retained earnings 1,500,000 Total shareholders’ equity 3,500,000 Less: Recorded goodwill 1,000,000 Net assets before goodwill 2,500,000 Average earnings (1,200,000 + 150,000 / 3) 450,000 Less: Normal earnings (10% x 2,500,000) 250,000 Excess earnings 200,000 Divide by 16% Goodwill 1,250,000 2. Net assets before goodwill 2,500,000 Goodwill 1,250,000 Purchase price 3,750,000 Problem 20-28 1. Value in use 38,000,000 Net assets including goodwill at carrying amount 42,000,000 Impairment loss ( 4,000,000) 2. Impairment loss 4,000,000

Goodwill 4,000,000 Problem 20-29 1. Value in use 60,000,000 Net assets including goodwill at carrying amount 75,000,000 Impairment loss (15,000,000) 2. Impairment loss 15,000,000 Goodwill 5,000,000 Accounts receivable 2,000,000 Inventory 3,000,000 Accumulated depreciation 5,000,000

The remaining impairment loss of P10,000,000, after deducting the loss applicable to goodwill, is allocated to the other noncash assets on a prorata basis. Problem 20-30 1. Present value of indefinite cash flows (200,000 / 10%) 2,000,000 Trademark 6,000,000 Impairment loss (4,000,000) 271 Present value of cash flows from cash generating unit (9,000,000 x 8.51) 76,590,000 Net assets including goodwill at carrying amount 80,000,000 Impairment loss ( 3,410,000) 2. Impairment loss 7,410,000 Trademark 4,000,000 Goodwill 3,410,000 Problem 20-31 1. Total carrying amount 5,000,000 Value in use 4,230,000 Impairment loss 770,000 2. Impairment loss 770,000 Goodwill 500,000 Accumulated depreciation – building (25/45 x 270,000) 150,000 Inventory (15/45 x 270,000) 90,000 Trademark (5/45 x 270,000) 30,000

Problem 20-32 12/31/2008 R and D expense 2,500,000 Cash 2,500,000 1/1/2009 R and D expense 1,200,000 Cash 1,200,000 7/1/2009 R and D expense 500,000 Cash 500,000 11/1/2009 Patent 350,000 Cash 350,000 11/15/2009 Patent 800,000 Cash 800,000

12/31/2009 Patent 100,000 Cash 100,000 Problem 20-33 1. Product costs which are associated wit inventory items are: Duplication of computer software and training materials 2,500,000 Packaging product 900,000 Total inventory 3,400,000 2. The costs incurred from the time of technological feasibility to the time when product costs are incurred should be capitalized as computer software cost. 272

Other coding costs after establishment of technological feasibility 2,400,000 Other testing costs after establishment of technological feasibility 2,000,000 Costs of producing product masters for training materials 1,500,000 Total costs to be capitalized 5,900,000

3. Completion of detail program design 1,300,000 Cost incurred for coding and testing to establish technological feasibility 1,000,000 Total costs charged as expense 2,300,000 Problem 20-34 1. Designing and planning 1,000,000 Code development 1,500,000 Testing __500,000 Total R and D expense in 2008 3,000,000 The cost of producing the product master of P2,500,000 is capitalized as software cost to be subsequently amortized. 2. Cost of producing the software program in 2009 1,000,000 Amortization of software cost (2,500,000 / 4) 625,000 Total expense in 2009 1,625,000 Problem 20-35 Answer C Cost 357,000 Accumulated amortization from 2005 to 2007 (357,000 / 15 x 3) 71,400 Book value – 12/31/2007 285,600 Amortization for 2008 (285,600 / 7) 40,800 Book value – 12/31/2008 244,800 Problem 20-36 Answer C

Cost 1/1/2003 6,000,000 Accumulated depreciation – 12/31/2007 (6,000,000 / 15 x 5) 2,000,000 Book value – 1/1/2008 4,000,000 Amortization for 2008 (4,000,000 / 5) 800,000 Problem 20-37 Answer C Cumulative earnings 550,000 Less: Gain on sale 50,000 Adjusted cumulative earnings 500,000 273 Average earnings (500,000 / 5) 100,000 Divide by capitalization rate 10% Net assets including goodwill 1,000,000 Less: Net assets before goodwill 750,000 Goodwill 250,000 Problem 20-38 Answer C Net assets 1,800,000 Multiply by excess rate (16% minus 10%) 6% Excess earnings 108,000 Multiply by present value factor 3.27 Goodwill 353,160 Problem 20-39 Answer D Purchase price 5,000,000 Less: Goodwill 500,000 Net assets before goodwill 4,500,000 Estimated annual earnings (squeeze) 550,000 Less: Normal earnings (4,500,000 x 10%) 450,000 Excess or superior earnings 100,000 Divide by capitalization rate 20% Goodwill 500,000 Problem 20-40 Answer C Accounts receivable 2,000,000 Inventory 500,000 Equipment 500,000 Short-term payable (2,000,000)

Net assets at fair value 1,000,000 Acquisition cost 5,000,000 Net assets at fair value (1,000,000) Goodwill 4,000,000 Problem 20-41 Answer A Problem 20-42 Answer C Downpayment 2,000,000 Present value of annual payment for 4 years (1,000,000 x 2.91) 2,910,000 Cost of franchise 4,910,000 274 Problem 20-43 Answer A Design costs 1,500,000 Legal fees of registering trademark 150,000 Registration fee with Patent Office 50,000 Total cost of trademark 1,700,000 Problem 20-44 Answer B Original lease 12 years Extension 8 Total life 20 Less: Years expired (2006 and 2007) 2 Remaining life 18 years Life of improvement (shorter) 15 years Leasehold improvement 540,000 Less: Depreciation for 2008 (540,000 / 15) 36,000 Book value 504,000 Problem 20-45 Answer D Depreciation (3,600,000 / 6) 600,000 Problem 20-46 Answer C Depreciation of equipment 135,000 Materials used 200,000

00

Compensation costs of personnel 500,000 Outside consulting fees 150,000 Indirect costs allocated 250,0 1,235,000

Problem 20-47 Answer A Modification to the formulation of a chemical product 135,000 Design of tools, jigs, molds and dies 170,000 Laboratory research 215,000 Total research and development expense 520,000 Problem 20-48 Answer D All costs are charged to R and D expense. 275 Problem 20-49 Answer A Trademark 3,000,000 Value in use (120,000 / 6%) 2,000,000 Impairment loss 1,000,000 Patent 2,000,000 Amortization for 2008 (2,000,000 / 5) 400,000 Book value – 12/31/2008 1,600,000 Value in use (500,000 x 3.47) 1,735,000 Impairment loss -_ _ Problem 20-50 Answer B Carrying amount of net assets 16,000,000 Value in use (8,000,000 x 1.5) 12,000,000 Impairment loss – applicable to goodwill 4,000,000