SOLUTION MANUAL
Financial Accounting Valix and Peralta Volume One - 2008 Edition 1 CHAPTER 1 Problem 1-1
Problem 1-2
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
D C D D C C B C D A
A A D B D B D C C D
Problem 1-3 1. 2. 3. 4. 5.
C D D A D
Problem 1-4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
A C A A D A D B D D
Problem 1-5
Problem 1-6
Problem 1-7
Problem 1-8
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
A A A D D D B D C D
Problem 1-9 1. 2. 3. 4. 5.
D D C B C
A A C A A A B C A B
D D C A A C D D B D
B B C C A B D D A B
Problem 1-10
Problem 1-11
Problem 1-12
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
A B D B A D C A D A
C B D A F E J G H I
E D B C G H I F J A
2 Problem 1-13 1. Systematic and rational allocation as a matching process 2. Comparability or consistency 3. Monetary unit 4. Income recognition principle 5. Time period 6. Going concern and cost principle 7. Accounting entity 8. Materiality 9. Completeness or standard of adequate disclosure 10. Conservatism or prudence
Problem 1-14 1. Materiality 2. Going concern 3. Income recognition principle 4. Accounting entity 5. Standard of adequate disclosure 6. Comparability 7. Matching principle 8. Cost principle 9. Reliability 10. Time period
Problem 1-15 1. The cost of leasehold improvement should not be recorded as outright expense, but should be amortized as expense over the life of the improvement or life of the lease, whichever is shorter. This is in conformity with the systematic and rational allocation principle of expense recognition. 2. The fact that the customer has not been seen for a year is not a controlling factor to write off the account. If the account is doubtful of collection, an allowance should be set up. It is only when there is proof of uncollectibility that the account should be written off. 3. Advertising cost should be treated as outright expense, by reason of the uncertainty of the benefit that may be derived therefrom in the future, in conformity with “immediate recognition principle”. 4. The balance of the cash surrender value should not be charged to loss. In reality, this is conceived as a prospective receivable if and when the policy is canceled because of excessive premium in the early stage of policy. The CSV should be classified as noncurrent investment. 5. The cost of obsolete merchandise should not be included as part of inventory but charged to expense, as a conservative approach. 6. The excess payment represents goodwill which should not be amortized but subject to impairment. Conservatism dictates that goodwill should be recognized when paid for.
7. The depreciation is not dependent on the amount of profit generated during the year. Depreciation is an allocation of cost and therefore should be provided regardless of the level of earnings.
3 8. An entry should be made to recognize the inventory fire loss, and such loss should be treated as component of income. 9. Revenues and expenses of the canteen should be separated from the revenues and cost of regular business operations in order to present fairly the financial position and performance of the regular operations. 10. The increase in value of land and building should not be taken up in the accounts. The use of revalued amount is permitted only when the revaluation is made by independent and expert appraiser. The expected sales price of P5,000,000 is not necessarily the revalued amount of the land and building. Moreover, increase in value is not an income until the asset is sold.
Problem 1-16 1. Accrual assumption 6. Income recognition principle 2. Going concern assumption 7. Expense recognition principle 3. Asset recognition principle 8. Cause and effect association principle 4. Cost principle 9. Systematic and rational allocation principle 5. Liability recognition principle 10. Immediate recognition principle
Problem 1-17 1. Monetary unit assumption 2. Cost principle 3. Materiality 4. Time period 5. Matching principle
6. Substance over form 7. Income recognition principle 8. Comparability or consistency 9. Conservatism or prudence 10. Adequate disclosure or completeness
Problem 1-18 1. The cost of the asset should be the amount of cash paid. No income should be recognized when an asset is purchased at an amount less than its market value. Revenue arises from the act of selling and not from the act of buying. 2. The entry should be reversed because the pending lawsuit is a mere contingency. The contingent loss is simply disclosed. To be recognized in accordance with conservatism, the contingent loss must be both probable and measurable.
3. The new car should be charged against the president and debited to receivable from officer, because the car is for personal use.
4 4. The entry is incorrect because no revenue shall be recognized until a sale has taken place. 5. Purchased goodwill should be recorded as an asset. Under the new standard, goodwill is not amortized anymore but on each balance sheet date it should be assessed for impairment.
Problem 1-19 1. 2. 3. 4. 6.
Accrual Going concern Accounting entity Monetary unit Time period
5 CHAPTER 2 Problem 2-1 Easy Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash and cash equivalents Accounts receivable Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Long-term investments Intangible asset Total noncurrent assets Total assets
Note 800,000 (1)
450,000 900,000 200,000 2,350,000
(2) (3)
4,400,000 950,000 800,000 6,150,000 8,500,000
LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade and other payables Note payable, short-term debt Total current liabilities Noncurrent liabilities: Mortgage payable, due in 5 years Note payable, long-term debt Total noncurrent liabilities Shareholders’ equity: Share capital, P100 par Share premium Retained earnings Total shareholders’ equity Total liabilities and stockholders’ equity
(4)
450,000 200,000 650,000 1,500,000 500,000 2,000,000 4,000,000 500,000 1,350,000 5,850,000 8,500,000
Note 1 - Prepaid expenses Office supplies Prepaid rent Total prepaid expenses
50,000 150,000 200,000
6 Note 2 - Property, plant and equipment Property, plant and equipment Accumulated depreciation Net book value
5,600,000 (1,200,000) 4,400,000
Note 3 - Intangible asset Patent
800,000
Note 4 - Trade and other payables Accounts payable Accrued expenses Total
350,000 100,000 450,000
Problem 2-2 Simple Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash Trading securities Trade and other receivables Inventories Prepaid expenses Total current assets Noncurrent assets:
Note 420,000 250,000 620,000
(2)
(1) 1,250,000 (3) 20,000
2,560,000
Property, plant and equipment Long-term investments Intangible assets Total noncurrent assets Total assets
(4) (5) (6)
4,640,000 2,000,000 300,000 6,940,000 9,500,000
7 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade and other payables Serial bonds payable - current portion Total current liabilities Noncurrent liabilities: Serial bonds payable - remaining portion Shareholders’ equity: Share capital Share premium Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
Note (7)
620,000 500,000 1,120,000 2,000,000 5,000,000 500,000 880,000 6,380,000 9,500,000
Note 1 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Claim receivable Total
500,000 ( 50,000) 150,000 20,000 620,000
Note 2 - Inventories Finished goods Goods in process Raw materials Factory supplies Total
400,000 600,000 200,000 50,000 1,250,000
Note 3 - Prepaid expenses Prepaid insurance
20,000
Note 4 - Property, plant and equipment Cost 1,500,000 4,000,000 2,000,000 40,000 7,540,000
Land Building Machinery Tools Total
Accum. depr. 1,600,000 1,300,000 2,900,000
Book value 1,500,000 2,400,000 700,000 40,000 4,640,000
8 Note 5 - Long-term investments Investment in bonds Plant expansion fund Total
1,500,000 500,000 2,000,000
Note 6 - Intangible assets Franchise Goodwill Total
200,000 100,000 300,000
Note 7 - Trade and other payables Accounts payable Notes payable Income tax payable Advances from customers Accrued expenses Accrued interest on note payable Employees income tax payable Total
Problem 2-3
300,000 100,000 60,000 100,000 30,000 10,000 20,000 620,000
Exemplar Company Statement of Financial Position December 31, 2008 ASSETS
Current assets: Cash and cash equivalents Trading securities
Note 500,000 280,000
Trade and other receivables Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Long-term investments Intangible assets Other noncurrent assets Total noncurrent assets Total assets
(1)
640,000 1,300,000 70,000 2,790,000
(2) (3) (4) (5)
5,300,000 1,310,000 3,350,000 150,000 10,110,000 12,900,000
9 LIABILITIES AND SHAREHOLDERS’ EQUITY Note Current liabilities: Trade and other payables Noncurrent liabilities: Bonds payable Premium on bonds payable Total noncurrent liabilities
(6)
1,000,000
5,000,000 1,000,000 6,000,000
Shareholders’ equity: Share capital Reserves Retained earnings (deficit) Total shareholders’ equity Total liabilities and shareholders’ equity
(7) (8)
7,000,000 700,000 (1,800,000) 5,900,000 12,900,000
Note 1 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Accrued interest on notes receivable Total
400,000 ( 20,000) 250,000 10,000 640,000
Note 2 - Property, plant and equipment
Land
Cost 1,500,000
Accum. depr. -
Book value 1,500,000
Building Equipment Total
5,000,000 1,000,000 7,500,000
2,000,000 200,000 2,200,000
3,000,000 800,000 5,300,000
Note 3 - Long-term investments Land held for speculation Sinking fund Preference share redemption fund Cash surrender value Total
500,000 400,000 350,000 60,000 1,310,000
Note 4 - Intangible assets Computer software Lease rights Total
3,250,000 100,000 3,350,000
10
Note 5 - Other noncurrent assets Advances to officers, not collectible currently Long-term refundable deposit Total
100,000 50,000 150,000
Note 6 - Trade and other payables Accounts payable Notes payable Unearned rent income SSS payable Accrued salaries Dividends payable Withholding tax payable Total
400,000 300,000 40,000 10,000 100,000 120,000 30,000 1,000,000
Note 7 – Share capital Preference share capital Ordinary share capital Total
2,000,000 5,000,000 7,000,000
Note 8 - Reserves Share premium – preference Share premium – ordinary Total
Problem 2-4
500,000 200,000 700,000
Relax Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash Trade accounts receivable Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Investment in associate Intangible assets Total noncurrent assets Total assets
Note 400,000 750,000 1,000,000 100,000
(1)
2,250,000 (2) (3)
5,600,000 1,300,000 350,000 7,250,000 9,500,000
11 LIABILITIES AND SHAREHOLDERS’ EQUITY Note Current liabilities: Trade and other payables Mortgage note payable-current portion Total current liabilities
(4)
1,750,000
Noncurrent liabilities: Mortgage note payable, remaining position Bank loan payable, due June 30, 2010 Total noncurrent liabilities Shareholders’ equity: Share capital Reserves Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
1,350,000 400,000
1,600,000 500,000 2,100,000
(5)
3,000,000 1,400,000 1,250,000 5,650,000 9,500,000
Note 1 - Trade accounts receivable Accounts receivable Allowance for doubtful accounts Net realizable value Note 2 - Property, plant and equipment
800,000 ( 50,000) 750,000
Cost 500,000 5,000,000 3,000,000 400,000 8,900,000
Land Building Machinery Equipment Total
Accum. depr. 2,000,000 1,200,000 100,000 3,300,000
Book value 500,000 3,000,000 1,800,000 300,000 5,600,000
Note 3 - Intangible assets Trademark Secret processes and formulas Total
150,000 200,000 350,000
Note 4 - Trade and other payables Notes payable Accounts payable Income tax payable Accrued expenses Estimated liability for damages Total
750,000 350,000 50,000 60,000 140,000 1,350,000
12
Note 5 - Reserves Additional paid in capital Retained earnings appropriated for plant expansion Retained earnings appropriated for contingencies Total
300,000 1,000,000 100,000 1,400,000
Problem 2-5 Summa Company Statement of Financial Position December 31, 2008 ASSETS Current assets: Cash Bond sinking fund Trade and other receivables Inventory Prepaid expenses Total current assets Noncurrent assets: Property, plant and equipment Investment property Intangible asset
Note (1) (2)
700,000 2,000,000 830,000 1,200,000 100,000 4,830,000
(3) (4)
5,500,000 700,000 370,000
Total noncurrent assets Total assets
6,570,000 11,400,000 LIABILITIES AND EQUITY Note
Current liabilities: Trade and other payables Bonds payable due June 30, 2009 Total current liabilities
(5)
2,050,000 2,000,000 4,050,000
Noncurrent liability: Deferred tax liability
650,000
Equity: Share capital Reserves Retained earnings Total equity Total liabilities and equity
(6) (7)
3,500,000 500,000 2,700,000 6,700,000 11,400,000
13 Note 1 - Cash Cash on hand Cash in bank
50,000 650,000 700,000
Note 2 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Accrued interest receivable Total
650,000 ( 50,000) 200,000 30,000 830,000
Note 3 - Property, plant and equipment
Land Building Furniture and equipment Total Note 4 - Intangible asset
Cost 1,000,000 5,500,000 2,400,000 8,900,000
Accum. depr. 2,500,000 900,000 3,400,000
Book value 1,000,000 3,000,000 1,500,000 5,500,000
Patent
370,000
Note 5 - Trade and other payables Accounts payable Notes payable Accrued taxes Other accrued liabilities Total
1,000,000 850,000 50,000 150,000 2,050,000
Note 6 – Share capital Authorized share capital, 50,000 shares, P100 par Unissued share capital Issued share capital Subscribed share capital, 10,000 shares Subscription receivable Paid in capital
5,000,000 (2,000,000) 3,000,000 1,000,000 500,000 ( 500,000) 3,500,000
Note 7 - Reserves Share premium Retained earnings appropriated for contingencies Total
300,000 200,000 500,000
14 Problem 2-6 (Functional method) Karla Company Income Statement Year ended December 31, 2008
Note Net sales revenue Cost of sales Gross income Other income Total income Expenses: Selling expenses Administrative expenses Other expenses Income before tax Income tax Net income
(1) (2)
7,700,000 (5,000,000) 2,700,000 400,000 3,100,000
(3) (4) (5) (6)
950,000 800,000 100,000
1,850,000 1,250,000 ( 250,000) 1,000,000
Note 1 – Net sales revenue Gross sales Sales returns and allowances Sales discounts Net sales revenue
7,850,000 ( 140,000) ( 10,000) 7,700,000
Note 2 – Cost of sales Inventory, January 1 Purchases Freight in Purchase returns and allowances Purchase discounts Net purchases Goods available for sale Inventory, December 31 Cost of sales
1,000,000 5,250,000 500,000 ( 150,000) ( 100,000) 5,500,000 6,500,000 (1,500,000) 5,000,000
Note 3 – Other income Rental income Dividend revenue Total other income
250,000 150,000 400,000
15
Note 4 – Selling expenses Freight out Salesmen’s commission Depreciation – store equipment Total selling expenses
175,000 650,000 125,000 950,000
Note 5 – Administrative expenses Officers’ salaries Depreciation – office equipment Total administrative expenses
500,000 300,000 800,000
Note 6 – Other expenses Loss on sale of equipment Loss on sale of investment Total other expenses
50,000 50,000 100,000
Natural method Karla Company Income Statement Year ended December 31, 2008 Net sales revenue Other income Total Expenses: Increase in inventory Net purchases Freight out Salesmen’s commission Depreciation Officers’ salaries Other expenses Income before tax Income tax Net income
Note (1) (2) (3) (4) (5) (6)
7,700,000 400,000 8,100,000 ( 500,000) 5,500,000 175,000 650,000 425,000 500,000 100,000
6,850,000 1,250,000 ( 250,000) 1,000,000
16 Note 1 – Net sales revenue Gross sales Sales returns and allowances Sales discounts Net sales revenue
7,850,000 ( 140,000) ( 10,000) 7,700,000
Note 2 – Other income Rental income Dividend revenue Total other income
Note 3 – Increase in inventory
250,000 150,000 400,000
Inventory, December 31 Inventory, January 1 Increase in inventory
1,500,000 1,000,000 500,000
Note 4 – Net purchases Purchases Freight in Purchase returns and allowances Purchase discounts Net purchases
5,250,000 500,000 ( 150,000) ( 100,000) 5,500,000
Note 5 – Depreciation Depreciation – store equipment Depreciation – office equipment Total
125,000 300,000 425,000
Note 6 – Other expenses Loss on sale of equipment Loss on sale of investment Total
50,000 50,000 100,000
17 Problem 2-7 Masay Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008 Raw materials – January 1 Purchases Raw materials available for use Less: Raw materials – December 31 Raw materials used Direct labor Factory overhead: Indirect labor Superintendence Light, heat and power Rent – factory building
200,000 3,000,000 3,200,000 280,000 2,920,000 950,000 250,000 210,000 320,000 120,000
Repair and maintenance – machinery Factory supplies used Depreciation – machinery Total manufacturing cost Goods in process – January 1 Total Cost of goods in process Less: Goods in process – December 31 Cost of goods manufactured
50,000 110,000 60,000
1,120,000 4,990,000 240,000 5,230,000 170,000 5,060,000
Cost of sales method Masay Company Income Statement Year ended December 31, 2008 Net sales revenue Cost of goods sold Gross income Other income Total income Expenses: Selling expenses Administrative expenses Other expense Income before tax Income tax expense Net income
Note (1) (2)
7,450,000 (5,120,000) 2,330,000 210,000 2,540,000
(3) (4) (5) (6)
830,000 590,000 300,000
1,720,000 820,000 ( 320,000) 500,000
18 Note 1 – Net sales revenue Sales Sales returns and allowances Net sales revenue
(
7,500,000 50,000) 7,450,000
Note 2 – Cost of goods sold Finished goods – January 1 Cost of goods manufactured Goods available for sale Finished goods – December 31 Cost of goods sold
360,000 5,060,000 5,420,000 ( 300,000) 5,120,000
Note 3 – Other income Gain from expropriation Interest income Gain on sale of equipment
100,000 10,000 100,000 210,000
Note 4 – Selling expenses Sales salaries Advertising Depreciation – store equipment Delivery expenses Total
400,000 160,000 70,000 200,000 830,000
Note 5 – Administrative expenses Office salaries Depreciation – office equipment Accounting and legal fees Office expenses Total
150,000 40,000 150,000 250,000 590,000
Note 6 – Other expense Earthquake loss
300,000
19 Nature of expense method Masay Company Income Statement Year Ended December 31, 2008 Net sales revenue Other income Total income Expenses: Decrease in finished goods
Note (1) (2)
7,450,000 210,000 7,660,000
and goods in process Raw materials used Direct labor Factory overhead Salaries Advertising Depreciation Delivery expenses Accounting and legal fees Office expenses Other expense Income before tax Income tax expense Net income
(4)
(3) 130,000 2,920,000 950,000 (5) 1,120,000 (6) 550,000 160,000 (7) 110,000 200,000 150,000 250,000 (8) 300,000
6,840,000 820,000 ( _320,000) 500,000
Note 1 – Net sales revenue Sales Sales returns and allowances Net sales revenue
(
7,500,000 50,000) 7,450,000
Note 2 – Other income Gain from expropriation Interest income Gain on sale of equipment
100,000 10,000 100,000 210,000
Note 3 – Decrease in finished goods and goods in process Finished goods Goods in process Total
January 1 360,000 240,000 600,000
December 31 300,000 170,000 470,000
Decrease 60,000 70,000 130,000
20
Note 4 – Raw materials used Raw materials – January 1 Purchases Raw materials available for use Raw materials – December 31 Raw materials used
200,000 3,000,000 3,200,000 280,000 2,920,000
Note 5 – Factory overhead Indirect labor
250,000
Superintendence Light, heat and power Rent – factory building Repair and maintenance – machinery Factory supplies used Depreciation – machinery Total
210,000 320,000 120,000 50,000 110,000 60,000 1,120,000
Note 6 – Salaries Sales salaries Office salaries Total
400,000 150,000 550,000
Note 7 – Depreciation Depreciation – store equipment Depreciation – office equipment Total
70,000 40,000 110,000
Note 8 – Other expense Earthquake loss
Problem 2-8
300,000
Youth Company Income Statement Year ended December 31, 2008
Net sales revenue Cost of goods sold Gross income Expenses: Selling expenses Administrative expenses Other expense Income before tax Income tax expense Net income
Note (1) (2) (3) (4) (5)
8,870,000 (5,900,000) 2,970,000 690,000 580,000 340,000
1,610,000 1,360,000 ( 360,000) 1,000,000
21 Note 1 – Net sales revenue Sales Sales returns and allowances Net sales revenue
Note 2 – Cost of goods sold
9,070,000 ( 200,000) 8,870,000
Beginning inventory Purchases Transportation in Purchase discounts Goods available for sale Ending inventory Cost of goods sold
1,500,000 5,750,000 150,000 ( 100,000)
5,800,000 7,300,000 (1,400,000) 5,900,000
Note 3 – Selling expenses Depreciation – store equipment Store supplies Sales salaries Total
110,000 80,000 500,000 690,000
Note 4 – Administrative expenses Officers’ salaries Depreciation – building Office supplies Total
400,000 120,000 60,000 580,000
Note 5 – Other expense Uninsured flood loss
340,000
22
Problem 2-9 Christian Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008 Purchases
1,600,000
Freight in Total Increase in raw materials Raw materials used Direct labor Factory overhead: Indirect labor Depreciation – machinery Factory taxes Factory supplies expense Factory superintendence Factory maintenance Factory heat, light and power Total manufacturing cost Decrease in goods in process Cost of goods manufactured
80,000 1,680,000 ( 100,000) 1,580,000 1,480,000 600,000 50,000 130,000 120,000 480,000 150,000 220,000
1,750,000 4,810,000 90,000 4,900,000
Christian Company Income Statement Year Ended December 31, 2008 Note Sales revenue Cost of goods sold Gross income Expenses: Selling expenses Administrative expenses Income before tax Income tax expense Net income
8,000,000 (5,100,000) 2,900,000
(1) (2) (3)
800,000 930,000
1,730,000 1,170,000 ( 170,000) 1,000,000
Note 1 – Cost of goods sold Cost of goods manufactured Decrease in finished goods Cost of goods sold
4,900,000 200,000 5,100,000
23
Note 2 – Selling expenses Sales salaries 520,000
Advertising 120,000 Delivery expense 160,000 Total 800,000
Note 3 – Administrative expenses Office supplies expense 30,000 Office salaries 800,000 Doubtful accounts 100,000 Total 930,000
Problem 2-10 Ronald Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008 Materials – January 1 Purchases Freight on purchases Purchase discounts Materials available for use Less: Materials – December 31 Materials used Direct labor Factory overhead: Heat, light and power Repairs and maintenance Indirect labor Other factory overhead Factory supplies used (300,000 + 660,000 – 540,000) Depreciation – factory building Total manufacturing cost Goods in process – January 1 Total cost of goods in process Less: Goods in process – December 31 Cost of goods manufactured
1,120,000 1,600,000 220,000 ( 20,000)
1,800,000 2,920,000 1,560,000 1,360,000 2,000,000
600,000 100,000 360,000 340,000 420,000 280,000
2,100,000 5,460,000 360,000 5,820,000 320,000 5,500,000
24
Ronald Company Income Statement Year Ended December 31, 2008 Note Net sales revenue Cost of goods sold Gross income Other income Total income Expenses: Selling expenses Administrative expenses Income before tax Income tax expense Net income
(1) (2)
6,980,000 (5,400,000) 1,580,000 160,000
(3)
1,740,000 200,000 340,000
540,000 1,200,000 ( 200,000) 1,000,000
Note 1 – Net sales revenue Sales Sales returns and allowances Net sales revenue
7,120,000 ( 140,000) 6,980,000
Note 2 – Cost of goods sold Finished goods – January 1 Cost of goods manufactured Goods available for sale Finished goods – December 31 Cost of goods sold
420,000 5,500,000 5,920,000 ( 520,000) 5,400,000
Note 3 – Other income Interest revenue
160,000
25 Problem 2-11 Reliable Company Statement of Retained Earnings Year Ended December 31, 2008 Retained earnings – January 1 Prior period error – overdepreciation in 2007 Change in accounting policy from FIFO to weighted average method – credit adjustment Corrected beginning balance Net income Decrease in appropriation for treasury share Total Cash dividends paid to shareholders Current appropriation for contingencies Retained earnings – December 31
200,000 100,000 150,000 450,000 1,300,000 200,000 1,950,000 ( 500,000) ( 100,000) 1,350,000
Problem 2-12 Net income Loss from fire Goodwill impairment Loss on sale of equipment Gain on retirement of bonds payable Gain on life insurance settlement Adjusted net income
3,000,000 ( 50,000) ( 250,000) ( 200,000) 100,000 450,000 3,050,000
Gondola Company Statement of Retained Earnings Year ended December 31, 2008 Balance – January 1 Compensation of prior period not accrued Correction of prior period error – credit Adjusted beginning balance Net income – adjusted Stock dividend Loss on retirement of preference share Appropriated for treasury share Balance – December 31
2,600,000 ( 500,000) 400,000 2,500,000 3,050,000 ( 700,000) ( 350,000) (1,000,000) 3,500,000
26 CHAPTER 3 Problem 3-1 1. 2. 3. 4. 5.
D A A C B
6. 7. 8. 9. 10.
Problem 3-2 D B C C A
1. 2. 3. 4. 5.
D D C A C
6. 7. 8. 9. 10.
D D B D B
Problem 3-3 a. Undeposited collections Cash in bank – PCIB Cash in bank – PCIB (for payroll) Cash in bank - PCIB (savings deposit) Money market instrument – 90 days Total cash and cash equivalents b. Accounts receivable (15,000 + 25,000) Cash in foreign bank Advances to officers Sinking fund cash Trading securities Bank overdraft Cash
60,000 500,000 150,000 100,000 2,000,000 2,810,000 40,000 100,000 30,000 450,000 120,000 50,000 690,000
Problem 3-4 Adjusting entries on December 31, 2008 a. Cash Accounts payable
100,000
b. Cash Accounts payable
50,000
100,000 50,000
c. Accounts receivable Cash
200,000
d. Accounts receivable (20,000 + 60,000 + 30,000)
110,000
200,000
Money market placement Cash in closed bank Advances to employee Pension fund Cash
1,000,000 50,000 30,000 400,000 1,590,000
27 Cash and cash equivalents: Demand deposit (see below) Time deposit – 30 days Petty cash fund Total Demand deposit per book Undelivered check Postdated check delivered Window dressing of collection Adjusted balance
1,450,000 500,000 10,000 1,960,000 1,500,000 100,000 50,000 ( 200,000) 1,450,000
Problem 3-5 1. Cash on hand Postdated check Adjusted cash on hand
500,000 (100,000) 400,000
2. Petty cash fund Unreplenished petty cash expenses Postdated employee check Adjusted petty cash
20,000 ( 2,000) ( 3,000) 15,000
3. Security Bank current account Postdated company check delivered Adjusted balance 4. Cash on hand Petty cash fund Security Bank current account PNB current account No. 1 PNB current account No. 2 BSP Treasury bill – 60 days Total cash and cash equivalents
1,000,000 200,000 1,200,000
(
400,000 15,000 1,200,000 400,000 50,000) 3,000,000 4,965,000
*The BPI Time deposit of P2,000,000 is shown as noncurrent investment because it is restricted for land acquisition. 5. Accounts receivable Cash on hand
100,000 100,000
Expenses Receivable from employee Petty cash fund Security Bank current account Accounts payable
2,000 3,000 5,000 200,000 200,000
28
Problem 3-6 1. Cash on hand NSF customer check Postdated customer check Adjusted on hand
500,000 ( 40,000) ( 60,000) 400,000
2. Currency and coins Check drawn payable to petty cashier Adjusted petty cash
1,000 14,000 15,000
3. Cash in bank Undelivered company check Postdated company check delivered Adjusted cash in bank 4. Accounts receivable (40,000 + 60,000) Cash on hand Advances to employees Cash short or over Petty cash fund Cash in bank (100,000 + 150,000) Accounts payable
2,000,000 100,000 150,000 2,250,000 100,000 100,000 3,000 2,000 5,000 250,000 250,000
Problem 3-7 1. Cash on hand NSF customer check Postdated customer check Adjusted cash on hand 2. Petty cash fund: Currency and coins 3. Philippine Bank current account Undelivered company check Postdated company check delivered Adjusted balance
200,000 ( 35,000) ( 15,000) 150,000 5,000 5,000,000 25,000 45,000 5,070,000
4. Cash on hand Petty cash fund Philippine Bank current Manila Bank current Asia Bank time deposit Total cash and cash equivalent
150,000 5,000 5,070,000 4,000,000 2,000,000 11,225,000
29 5. Accounts receivable Cash on hand
50,000 50,000
Receivable from officer Expenses Cash short or over Petty cash
2,000 12,000 1,000
Philippine Bank current Accounts payable
70,000
15,000 70,000
City Bank current Bank overdraft
100,000 100,000
Problem 3-8 Fluctuating Fund System 1. Petty cash fund Cash in bank
10,000
2. Postage Supplies Transportation Miscellaneous expense Petty cash fund
1,500 5,500 1,200 800
3. Petty cash fund Cash in bank
10,000
1. Petty cash fund Cash in bank
10,000 10,000
2. No entry
9,000 14,000 14,000
Problem 3-9 Fluctuating Fund System 1. Petty cash fund Cash in bank
Imprest Fund System
3. Petty cash fund Postage Supplies Transportation Miscellaneous expense Cash in bank
5,000 1,500 5,500 1,200 800 14,000
Imprest Fund System
10,000 10,000
1. Petty cash fund Cash in bank
10,000 10,000
2. Postage Supplies Petty cash fund
1,500 2,000
2. No entry 3,500 3. No entry
3. Transportation Miscellaneous expense Cash in bank
1,000 500 1,500
4. No entry
Fluctuating Fund System 4. Supplies Accounts payable Petty cash fund
1,000 3,000
5. Petty cash fund Cash in bank
9,000
4,000 9,000
6. Postage Supplies Transportation Petty cash fund 7. Petty cash fund Cash in bank
Problem 3-10
Imprest Fund System
2,000 3,000 4,000 19,000 19,000
Fluctuating Fund System
29 Postage Supplies Transportation Miscellaneous expense Petty cash fund
9,000
6. No entry 9,000
May 2 Petty cash fund Cash in bank
5. Postage 1,500 Supplies 3,000 Transportation 1,000 Miscellaneous expense 500 Accounts payable 3,000 Cash in bank
30
10,000 10,000 1,000 3,000 2,500 1,500 8,000
7. Petty cash fund Postage Supplies Transportation Cash in bank
10,000 2,000 3,000 4,000 19,000
Imprest Fund System May 2 Petty cash fund Cash in bank 29 Postage Supplies Transportation Miscellaneous expense Petty cash fund Petty cash fund Cash in bank
10,000 10,000 1,000 3,000 2,500 1,500 8,000 8,000
8,000 June 30 Supplies Accounts payable Transportation Petty cash fund
2,000 1,000 1,000
July
4,000
1 Petty cash fund
4,000
June 30 Supplies Accounts payable Transportation Petty cash fund
2,000 1,000 1,000 4,000
Supplies Postage Transportation
2,000 1,000 1,000
To reverse the adjustment made on June 30. 15 Petty cash fund Supplies Postage Transportation Miscellaneous expense Cash in bank
5,000 3,500 1,500 1,500 500
July 15 Supplies 1,500 Postage 500 Transportation 500 Miscellaneous expense 500 Petty cash fund Petty cash fund Cash in bank
12,000 12,000
31
Problem 3-11 2008 Nov. 2 30
Dec. 31
2009 Jan. 1
2 31
3,000
12,000
Petty cash fund Cash in bank
10,000
Postage Supplies Petty cash fund Cash in bank
2,000 5,000 10,000
Postage Supplies Special deposit Petty cash fund
3,000 4,000 2,000
Petty cash fund Postage Supplies Special deposit
9,000
10,000
17,000
9,000
3,000 4,000 2,000
No entry Postage Supplies Accounts payable Cash short or over Cash in bank
Problem 3-12 2008 Dec. 1 Petty cash fund Cash in bank
5,000 6,000 7,000 1,000 19,000
Requirement 1 10,000 10,000
20 Selling expenses Miscellaneous expenses Equipment Cash in bank
5,000 2,000 2,000
31 Receivable from employee Selling expenses Transportation Petty cash fund
2,000 1,500 500
9,000
4,000
2009 Jan. 1 Petty cash fund Receivable from employee Selling expenses Transportation
4,000 2,000 1,500 500
32
2009 Jan. 15 No entry 31 Selling expenses Administrative expenses Transportation Purchases Cash in bank
2,000 2,000 1,500 1,200 6,700
Requirement 2 Petty cash Less: Petty cash expenses from December 21, 2008 to January 31, 2009: Selling expenses (1,500 + 500) 2,000 Administrative expenses 2,000 Transportation (500 + 1,000) 1,500 Purchases 1,200 Petty cash before replenishment
Problem 3-13 Answer B
Problem 3-14 Answer C
Problem 3-15 Answer A
Problem 3-16 Answer A
Petty cash fund Undeposited collections Cash in bank Total
50,000 1,100,000 2,500,000 3,650,000
Payroll account Value added tax account Traveler’s check Money order Petty cash fund Total
10,000
6,700 3,300
2,500,000 1,000,000 300,000 700,000 40,000 4,540,000
Problem 3-17 Answer C Checking account #101 Checking account #201
1,750,000 ( 100,000)
Time deposit account 90-day Treasury bill Total cash and cash equivalent
250,000 500,000 2,400,000
Problem 3-18 Answer B Cash in First Bank Change fund Petty cash fund Total
5,000,000 50,000 15,000 5,065,000
Problem 3-19 Answer B Cash balance per book Credit adjustment Adjusted cash balance
6,000,000 (1,600,000) 4,400,000
33 Note receivable Accounts receivable (400,000 + 200,000) Cash
1,000,000 600,000 1,600,000
Problem 3-20 Answer A Checkbook balance Postdated customer check NSF check Undelivered company check Adjusted balance
8,000,000 (2,000,000) ( 500,000) 1,500,000 7,000,000
Problem 3-21 Answer A Cash on hand Cash in bank Petty cash Saving deposit Total deposit
Problem 3-22 Answer B
2,400,000 3,500,000 40,000 2,000,000 7,940,000
Problem 3-23 Answer A
Problem 3-24 Answer A
Problem 3-25 Answer A Cash on hand and in bank Time deposit Saving deposit Total
Problem 3-26 Answer B
5,000,000 6,000,000 1,000,000 12,000,000
Currencies Coins Accommodation check Total
4,000 1,000 6,000 11,000
Problem 3-27 Answer C Coins and currency Replenishment check Total
2,000 4,000 6,000
Problem 3-28 Answer C Total petty cash Currency and coins Amount of replenishment
10,000 ( 3,000) 7,000
34 CHAPTER 4 Problem 4-1 1. 2. 3. 4. 5.
D A B C C
6. 7. 8. 9. 10.
C D C A B
11. 12. 13. 14. 15.
C B A C C
Problem 4-2 Balance per book Add: CM for note collected Total Less: DM for service charge Adjusted book balance Balance per bank Add: Deposit in transit Total Less: Outstanding checks: No. 102 105 107 Adjusted bank balance
65,000 30,000 95,000 2,000 93,000 108,000 80,000 188,000 15,000 30,000 50,000
Adjusting entries: 1. Cash in bank
30,000
95,000 93,000
Note receivable
30,000
2. Bank service charge Cash in bank
2,000 2,000
Problem 4-3 Balance per book Add: CM for note collected Total Less: DM for service charge NSF check Book error (52,000 – 25,000) Adjusted book balance
110,000 45,000 155,000 5,000 10,000 42,000 113,000
27,000
35 Balance per bank Add: Deposit in transit Erroneous bank debit Total Less: Outstanding checks: No. 770 775 777 Adjusted bank balance
135,000 60,000 68,000 203,000
8,000 20,000 30,000 40,000
90,000 113,000
Adjusting entries: 1. Cash in bank Bank service charge Note receivable
45,000 5,000 50,000
2. Bank service charge Accounts receivable Accounts payable Cash in bank
5,000 10,000 27,000 42,000
Problem 4-4 Balance per book Add: CM for note collected Total Less: DM for service charge Adjusted book balance
2,840,000 270,000 3,110,000 5,000 3,105,000
Balance per bank Add: Deposit in transit Total Less: Outstanding checks: No. 116 122 124 125 Adjusted bank balance
3,265,000 450,000 3,715,000 60,000 180,000 120,000 250,000
610,000 3,105,000
Adjusting entries: 1. Cash in bank Bank service charge Note receivable Interest income 2. Bank service charge Cash in bank
270,000 10,000 250,000 30,000 5,000 5,000
36 Problem 4-5 Balance per book Add: Note collected by bank Total Less: Bank service charge NSF check Adjusted book balance
5,000,000 2,150,000 7,150,000 50,000 550,000 500,000 6,600,000
Balance per bank Deposit in transit Total Less: Outstanding checks Adjusted bank balance
4,450,000 3,000,000 7,450,000 850,000 6,600,000
Adjusting entries: 1. Cash in bank Bank service charge Note receivable Interest income
2,150,000 50,000
2. Bank service charge Accounts receivable Cash in bank
50,000 500,000
2,000,000 200,000
550,000
Problem 4-6 Book balance Add: Collection of note Interest on note Book error on check no. 175 Total Less: Bank service charge Payment for light and water NSF check Adjusted book balance Bank balance Add: Deposit in transit Total Less: Bank error Outstanding checks Adjusted bank balance
1,405,000 2,500,000 150,000 45,000
2,695,000 4,100,000
5,000 245,000 220,000
470,000 3,630,000
5,630,000 750,000 6,380,000 1,100,000 1,650,000
2,750,000 3,630,000
37 Adjusting entries: 1. Cash in bank Note receivable Interest income Accounts payable
2,695,000 2,500,000 150,000 45,000
2. Bank service charge Light and water Accounts receivable Cash in bank
5,000 245,000 220,000 470,000
Problem 4-7 a. Balance per book – April 30 Credit memo for note collected Outstanding checks: No. 1331 1332 1334 1335 Total Less: Bank service charge
1,100,000 60,000 40,000 30,000 60,000 10,000
140,000 1,300,000 5,000
NSF check Undeposited collections Balance per bank – April 30
25,000 270,000
300,000 1,000,000
b. Adjusting entries: 1. Cash in bank Note receivable
60,000
2. Bank service charge Accounts receivable Cash in bank
5,000 25,000
60,000
30,000
c. Balance per book – April 30 CM for note collected Bank service charge NSF check Adjusted cash in bank
1,100,000 60,000 ( 5,000) ( 25,000) 1,130,000
38 Problem 4-8 a. Balance per bank Add: Undeposited collections NSF check DM for safety deposit Unrecorded check Total Less: Checks outstanding Overstatement of creditor’s check Understatement of customer’s check Balance per book
3,500,000 550,000 50,000 5,000 125,000 650,000 270,000 180,000
730,000 4,230,000 1,100,000 3,130,000
b. Adjusting entries: 1. Cash in bank Accounts payable Accounts receivable
450,000
2. Accounts receivable Bank service charge Accounts payable Cash in bank
50,000 5,000 125,000
270,000 180,000
180,000
c. Balance per book Overstatement of creditor’s check Understatement of customer’s check Total Less: NSF check DM for safety box Unrecorded check Adjusted book balance
3,130,000 270,000 180,000 3,580,000 50,000 5,000 180,000 125,000 3,400,000
Problem 4-9 Balance per book Add: Proceeds of bank loan Note collected by bank Total Less: Service charge Customer’s check charged back Adjusted book balance
2,700,000 940,000 1,375,000 435,000 4,075,000 10,000 60,000 50,000 4,015,000
39 Balance per bank Add: Deposit in transit Incorrect deposit Erroneous bank charge Erroneous debit memo Total Less: Outstanding checks Erroneous bank credit Adjusted bank balance
4,000,000 475,000 90,000 150,000 200,000 600,000 300,000
915,000 4,915,000 900,000 4,015,000
Adjusting entries: 1. Cash in bank Bank service charge Interest expense (60,000 x 1/6) Prepaid interest expense Loan payable (940,000/94%) Note receivable Interest income 2. Bank service charge
1,375,000 5,000 10,000 50,000 1,000,000 400,000 40,000 10,000
Accounts receivable Cash in bank
50,000 60,000
Problem 4-10 Balance per book (squeeze) Add: Proceeds of bank loan Proceeds of note collected Total Less: Bank service charge NSF check Adjusted book balance Balance per bank (squeeze) Add: Deposit in transit Bank error (200,000 – 20,000) Total Less: Outstanding checks (750,000 – 50,000) Adjusted bank balance
2,120,000 500,000 435,000 5,000 50,000
935,000 3,055,000 55,000 3,000,000 3,070,000
450,000 180,000
630,000 3,700,000 700,000 3,000,000
Adjusting entries: Cash in bank Bank service charge (5,000 + 15,000) Accounts receivable Loan payable Notes receivable Interest income
880,000 20,000 50,000 500,000 400,000 50,000
40
Problem 4-11 Balance per book Add: Proceeds of bank loan Total Less: Understatement of check in payment of account (200,000 – 20,000) Petty cash fund Adjusted book balance Balance per bank Add: Undeposited collections Erroneous bank charge Deposit omitted from bank statement Total Less: Erroneous bank credit Outstanding checks Adjusted bank balance Adjusting entries:
5,000,000 516,000 5,516,000 180,000 10,000
190,000 5,326,000 5,500,000
300,000 50,000 500,000 6,000,000 130,000 674,000 544,000 5,326,000
150,000
Cash in bank Interest expense (84,000 x 2/12) Prepaid interest expense Accounts payable Petty cash fund Supplies Transportation Postage Loan payable (516,000/86%)
326,000 14,000 70,000 180,000 4,000 2,000 3,000 1,000 600,000
Problem 4-12 Balance per book Add: Overstatement of check number 765 Check number 555 stopped for payment Total Less: Service charge NSF check Adjusted book balance Balance per bank Add: Undeposited collections Total Less: Outstanding checks: Number 761 762 763 764 765 Adjusted bank balance
1,300,000 20,000 10,000 5,000 85,000
30,000 1,330,000 90,000 1,240,000
1,200,000 275,000 1,475,000 55,000 40,000 25,000 65,000 50,000
235,000 1,240,000
41
Adjusting entries: 1. Cash in bank Accounts payable Miscellaneous income
30,000
2. Bank service charge Accounts receivable Cash in bank
5,000 85,000
3. Receivable from cashier Accounts receivable Sales discounts
40,000 30,000
Problem 4-13 a. Bank reconciliation – June 30
20,000 10,000
90,000
10,000
Book balance Add: Credit memo for note collected Total Less: NSF check Service charge Adjusted book balance Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance
1,000,000 300,000 1,300,000 100,000 104,000 4,000 1,196,000 1,650,000 400,000 2,050,000 854,000 1,196,000
Bank reconciliation – July 31 Book balance Add: Credit memo for bank loan Total Less: Service charge Adjusted book balance
1,400,000 500,000 1,900,000 1,000 1,899,000
Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance
2,650,000 1,100,000 3,750,000 1,851,000 1,899,000
b. Adjusting entries, July 31 1. Cash in bank Bank loan payable
500,000 500,000
42 2. Bank service charge Cash in bank
1,000 1,000
Computation of deposit in transit – July 31 Deposit in transit – June 30 Add: Deposits during July: Book debits Less: June credit memo for note collected Total Less: Deposits credited by bank during July: Bank credits Less: July credit memo for bank loan Deposit in transit – July 31
400,000 4,000,000 3,700,000 300,000 4,100,000 3,500,000 500,000
3,000,000 1,100,000
Computation of outstanding checks – July 31 Outstanding checks, June 30 Add: Checks drawn by company during July: Book credits Less: June debit memos for NSF check Service charge Total Less: Checks paid by bank during July: Bank debits Less: July service charge Outstanding checks, July 31
854,000 3,600,000 100,000 4,000
104,000 2,500,000 1,000
3,496,000 4,350,000 2,499,000 1,851,000
Problem 4-14 a. Reconciliation – October 31 Adjusted book balance
600,000
Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance
400,000 300,000 700,000 100,000 600,000
Reconciliation – November 30 Book balance Add: Understatement of collection from customer Total Less: Understatement of check disbursement Adjusted book balance
1,000,000 90,000 1,090,000 270,000 820,000
43 Bank balance Add: Deposit in transit Check of Susan Company charged in error Total Less: Outstanding checks Deposit of Susan Company erroneously credited Adjusted bank balance
930,000 190,000 390,000 200,000 1,320,000 400,000 500,000 100,000 820,000
b. Adjusting entries – November 30 1. Cash in bank Accounts receivable
90,000 90,000
2. Accounts payable Cash in bank
270,000 270,000
Computation of outstanding checks – October 31 Outstanding checks – October 31 (squeeze) Add: Checks issued by depositor: Book disbursements Understatement of check paid Total Less: Checks paid by bank: Bank disbursements Check of Susan Company charged in error Outstanding checks – November 30
100,000 1,800,000 270,000
2,070,000 2,170,000
1,970,000 1,770,000 ( 200,000) 400,000
Computation of deposit in transit – November 30 Deposit in transit – October 31 Add: Cash receipts deposited during November: Book receipts 2,200,000 Understatement of collection from customer 90,000 Total Less: Deposits credited by bank during November: Bank receipts 2,500,000 Deposit of Susan Company erroneously credited ( 100,000) Deposit in transit – November 30
300,000 2,290,000 2,590,000 2,400,000 190,000
Problem 4-15 a. Reconciliation on July 1 Adjusted book balance
1,270,000
44 Bank balance Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance
1,720,000 500,000 2,220,000 950,000 1,270,000
Reconciliation on July 31 Book balance Add: Note collected by bank
470,000 1,500,000
Total Less: Bank service charge Adjusted book balance
1,970,000
Bank balance Add: Deposit in transit Total Less: Outstanding checks: Check # 107 108 Adjusted bank balance
2,700,000 400,000 3,100,000
20,000 1,950,000
650,000 500,000
1,150,000 1,950,000
b. Adjusting entries on July 31 1. Cash in bank Note receivable 2. Bank service charge Cash in bank
1,500,000 1,500,000 20,000 20,000
Computation of deposit in transit – July 1 Deposit in transit – July 1 (squeeze) Cash receipts per book Total Less: Deposits credited by bank Deposit in transit – July 31
500,000 3,400,000 3,900,000 3,500,000 400,000
Computation of outstanding checks – July 1 Outstanding checks – July 1 (squeeze) Checks drawn by depositor Total Less: Checks paid by bank Outstanding checks – July 31
950,000 4,200,000 5,150,000 4,000,000 1,150,000
45 Problem 4-16 Balance per book – November 30 Less: Service charge NSF check Customer’s note erroneously recorded as cash receipt Adjusted book balance
500,000 10,000 50,000 100,000
160,000 340,000
Balance per bank – November 30 Add: Deposit in transit Total Less: Outstanding checks Adjusted bank balance
600,000 120,000 720,000 380,000 340,000
Deposit in transit – October 31 Cash receipts deposited: Book debits October collections recorded in November Customer’s note recorded as cash receipt Total Less: Deposits credited by bank: Bank credits Correction of bank error Deposit in transit – November 30 Outstanding checks – October 31 Checks issued by depositor: Book credits October bank service charge Total Checks paid by bank: Bank debits November bank service charge November NSF check Outstanding checks – November 30
45,000 710,000 ( 45,000) (100,000)
565,000 610,000
500,000 ( 10,000)
490,000 120,000 125,000
1,200,000 ( 5,000)
1,195,000 1,320,000
1,000,000 ( 10,000) ( 50,000)
940,000 380,000
Adjusting entry: Bank service charge Accounts receivable Note receivable Cash in bank
10,000 50,000 100,000 160,000
46 Problem 4-17 Book balance Note collected by bank March April Service charge
March 31 200,000 60,000
Receipts 800,000 ( 60,000) 100,000
Disbursements 720,000
April 30 280,000 100,000
March April NSF check March April Deposit in transit March 31 April 30 Outstanding checks March 31 April 30 Bank balance
(
8,000)
(
( 20,000) ( 80,000)
( 20,000) 30,000 80,000 (220,000)
178,000 700,000
330,000
8,000) 2,000
(
2,000)
( 30,000) (220,000)
178,000 (372,000) 530,000
372,000 500,000
Problem 4-18 July 31 Receipts Disbursements August 31 Bank balance 800,000 5,000,000 3,940,000 1,860,000 Book error on collection ( 180,000) ( 180,000) Book error on payment ( 540,000) 540,000 Bank error on deposit ( 200,000) ( 200,000) Bank error on payment ( 400,000) 400,000 NSF check: July 100,000 100,000 August ( 50,000) 50,000 Note collected by bank: July ( 200,000) 200,000 August ( 300,000) ( 300,000) Deposit in transit: July 600,000 ( 600,000) August 480,000 480,000 Outstanding checks: July ( 100,000) ( 100,000) 650,000 ( 650,000) August 4,400,000 3,600,000 2,000,000 Book balance 1,200,000
47 Problem 4-19 Nov. 30 Book balance Bank service charge
2,032,000
Receipts 2,568,000
Disbursements
Dec. 31
1,440,000
3,160,000
November 30 December 31 Collection of note November 30 December 31 Adjusted book balance
(
2,000)
( 200,000) 1,830,000
Bank balance 1,890,000 Outstanding checks November 30 ( 180,000) December 31 Deposit in transit November 30 80,000 December 31 498,000 Check erroneously charged by bank November 30 40,000 December 31 Adjusted bank balance 1,830,000
(
2,000) 4,000
(
4,000)
200,000 ( 300,000) 2,468,000
1,442,000
( 300,000) 2,856,000
2,090,000
1,080,000
2,900,000
( 180,000) 592,000
( 592,000)
(
80,000) 498,000
(
40,000) (
2,468,000
50,000) 1,442,000
50,000 2,856,000
Adjusting entry: Bank service charge Note receivable Cash in bank
4,000 300,000 304,000
48 Problem 4-20 Sept. 30
Receipts
Disbursements
Oct. 31
Book balance 1,900,000 NSF check: September 30 ( 60,000) October 31 Collection of accounts receivable September 30 30,000 October 31 Overstatement of check September 30 90,000 October 31 Adjusted balance 1,960,000 Bank balance Deposit in transit September 30 October 31 Outstanding checks September 30 October 31 Adjusted balance
1,400,000
2,400,000 (
(
30,000) 50,000
(
40,000) 50,000
90,000) ________ 1,330,000
( 120,000) 2,260,000
120,000 1,030,000
2,100,000
1,200,000
2,500,000
800,000
130,000
( 130,000) 260,000
( 270,000) 1,960,000
(
60,000) 40,000
900,000
260,000
(
270,000) 30,000 ( 30,000) 1,330,000 2,260,000 1,030,000
Adjusting entries on October 31 1. Accounts receivable Cash in bank
40,000 40,000
2. Cash in bank Accounts receivable Salaries
170,000 50,000 120,000
49 Problem 4-21
May 31
Receipts
Disbursements
June 30
Balance per book Bank service charge: May 31 June 30 NSF check: June 30 Interest collected: June 30 Book error: June 30 Adjusted balance Balance per bank Deposit in transit May 31 June 30 Outstanding checks May 31 June 30 Adjusted balance
2,500,000 (
5,300,000
20,000)
5,400,000 (
2,400,000
20,000) 25,000
(
200,000
( 200,000)
75,000 2,480,000
_________ 5,375,000
2,700,000
5,500,000
625,000
( 625,000) 500,000
( 845,000) 2,480,000
75,000 (
300,000) 5,305,000
300,000 2,550,000
5,600,000
2,600,000 500,000
( 5,375,000
25,000)
845,000) 550,000 5,305,000
(
550,000) 2,550,000
Adjusting entries on June 30: 1. Cash in bank Interest income Equipment
375,000
2. Bank service charge Accounts receivable Cash in bank
25,000 200,000
75,000 300,000
225,000
Problem 4-22 Answer A Balance per book Bank charges Customer note collected by bank Interest on customer note NSF customer check Depositor’s note charged to account Adjusted book balance
4,000,000 ( 10,000) 1,500,000 60,000 ( 250,000) (1,000,000) 4,300,000
50
Problem 4-23 Answer B Balance per bank Add: Deposit in transit Total Less: Outstanding checks Erroneous bank credit Adjusted bank balance
2,000,000 200,000 2,200,000 400,000 300,000
700,000 1,500,000
The adjusted cash in bank can also be computed by starting with the balance per book. Balance per book Add: Proceeds of note collected Total Less: NSF checks (150,000 – 50,000) Adjusted book balance
850,000 750,000 1,600,000 100,000 1,500,000
Problem 4-24 Answer C Balance per book Note collected by bank Book error (200,000 – 20,000) NSF check Bank service charge Adjusted book balance
8,500,000 950,000 ( 180,000) ( 250,000) ( 20,000) 9,000,000
Problem 4-25 Answer A Problem 4-26 Answer B Problem 4-27 Answer B Problem 4-28 Answer D Balance per ledger Service charges Collection of note Book error Unrecorded check for traveling expenses Adjusted book balance
3,750,000 50,000) 1,500,000 ( 100,000) ( 500,000) 4,600,000
Balance per bank Deposit in transit Total Outstanding checks (squeeze) Adjusted bank balance
6,200,000 1,400,000 7,600,000 3,000,000 4,600,000
(
51
Problem 4-29 Answer B Problem 4-30 Answer A Problem 4-31 Answer C Outstanding checks – May 31 Checks issued by depositor in June: Total credits to cash in June Service charge in May recorded in June Total Checks paid by bank in June: Checks and charges by bank in June Service charge in June NSF check in June Outstanding checks – June 30
3,000,000 (
9,000,000 100,000)
8,900,000 11,900,000
8,000,000 ( 50,000) (1,000,000)
6,950,000 4,950,000
Problem 4-32 Answer A Balance per book – June 30 Service charges Collection by bank NSF check Adjusted book balance Balance per bank – June 30 Deposits outstanding – June 30 Checks outstanding – June 30 Adjusted bank balance Outstanding checks – May 31 Checks recorded by book in June Total Less: Checks recorded by bank in June Outstanding checks – June 30 Deposits outstanding – May 31 Deposits recorded by book in June Total Less: Deposits recorded by bank in June Deposits outstanding – June 30
2,100,000 50,000) 550,000 ( 100,000) 2,500,000 (
2,400,000 500,000 ( 400,000) 2,500,000 100,000 2,500,000 2,600,000 2,200,000 400,000 300,000 1,800,000 2,100,000 1,600,000 500,000
Problem 4-33 Answer A Note collected Book error (1,930,000 – 1,390,000) NSF check Service charge Net debt to cash
1,936,000 ( 540,000) ( 840,000) ( 47,000) 509,000
52 Problem 4-34 Answer A
Problem 4-35 Answer A Problem 4-36 Answer D Balance per bank – November 30 December deposits Total December disbursements Balance per bank – December 31 Deposit in transit – December Outstanding checks – December Adjusted bank balance – December 31 Balance per book – December 31 (squeeze) Note collected by bank NSF check Service charge Adjusted book balance
3,600,000 5,500,000 9,100,000 (4,400,000) 4,700,000 700,000 ( 500,000) 4,900,000 4,300,000 1,000,000 ( 350,000) ( 50,000) 4,900,000
Problem 4-37 Answer A Bank disbursements for July Outstanding checks – June 30 Outstanding checks – July 31 Book disbursements for July
9,000,000 (1,400,000) 1,000,000 8,600,000
Problem 4-38 Answer B Bank receipts for April Deposits in transit – March 31 Deposits in transit – April 30 Book receipts for April
6,000,000 (1,000,000) 1,500,000 6,500,000
53 CHAPTER 5 Problem 5-1 1. 2. 3. 4. 5.
D D D B A
6. 7. 8. 9. 10.
Problem 5-2 A B C A C
1. 2. 3. 4. 5.
A C A A A
6. 7. 8. 9. 10.
Problem 5-3 A D C C D
1. 2. 3. 4. 5.
D B C D A
Problem 5-4 a. Accounts receivable Notes receivable Installments receivable Advances to suppliers Advances to subsidiary Claim receivable Subscriptions receivable Accrued interest receivable Customer’s credit balances Advances from customers Receivables b. Accounts receivable Allowance for doubtful accounts Notes receivable Installments receivable Advances to suppliers Claim receivable Subscription receivable Accrued interest receivable Total trade and other receivables
775,000 100,000 300,000 150,000 400,000 15,000 300,000 10,000 30,000 20,000 2,000,000 (
775,000 50,000) 100,000 300,000 150,000 15,000 300,000 10,000 1,600,000
c. The advances to subsidiary should be classified as noncurrent and presented as long-term investment. The customers’ credit balances and advances from customers should be classified as current liabilities and included as part of “trade and other payables”.
Problem 5-5 a. Accounts receivable – January 1 Charge sales Total Less: Collections from customers
600,000 6,000,000 6,600,000 5,300,000
Writeoff Merchandise returns Allowances to customers Accounts receivable – December 31
35,000 40,000 25,000
5,400,000 1,200,000
54 b. Subscription receivable Deposit on contract Claim receivable Advances to employees Advances to affiliated Advances to supplier Accounts receivable 490,000
150,000 120,000 60,000 10,000 100,000 50,000
c. Accounts receivable Claim receivable 60,000 Advances to employees 10,000 Advances to supplier Total trade and other receivables
1,200,000
50,000 1,320,000
d. The subscriptions receivable should be deducted from subscribed share capital. The deposit on contract should be classified as noncurrent and presented as other noncurrent asset. The advances to affiliates should be classified as noncurrent and presented as longterm investment.
Problem 5-6 Requirement 1 1. Accounts receivable Sales
3,600,000 3,600,000
2. Notes receivable Accounts receivable 3. Doubtful accounts Allowance for doubtful accounts
400,000 400,000 90,000 90,000
4. Allowance for doubtful accounts Accounts receivable
20,000
5. Sales return Accounts receivable
15,000
20,000 15,000
6. Cash Accounts receivable
2,450,000
7. Sales discount Accounts receivable
45,000
8. Cash Notes receivable
2,450,000 45,000 150,000 150,000
55 Requirement 2 Notes receivable
250,000
Requirement 3 Accounts receivable Less: Allowance for doubtful accounts Net realizable value
670,000 70,000 600,000
Problem 5-7 FOB destination and freight collect 1. Accounts receivable Freight out Sales Allowance for freight charge
500,000 10,000
2. Cash Sales discount Allowance for freight charge Accounts receivable
475,000 15,000 10,000
500,000 10,000
500,000
FOB destination and freight prepaid 1. Accounts receivable Freight out Sales Cash
500,000 10,000
2. Cash Sales discount Accounts receivable
485,000 15,000
500,000 10,000
500,000
FOB shipping point and freight collect 1. Accounts receivable Sales
500,000 500,000
2. Cash Sales discount Accounts receivable
485,000 15,000 500,000
FOB shipping point and freight prepaid 1. Accounts receivable Sales Cash
510,000 500,000 10,000
56 2. Cash Sales discount Accounts receivable
495,000 15,000 510,000
Problem 5-8 1. Accounts receivable Sales
4,000,000
2. Cash Sales discount Accounts receivable
1,470,000 30,000
3. Cash Accounts receivable
1,000,000
4. Sales return Accounts receivable
100,000
5. Sales return Allowance for sales return
40,000
4,000,000
1,500,000 1,000,000 100,000 40,000
Problem 5-9 Gross method
Net method
July 1 Accounts receivable Sales 49,000
50,000
2 Accounts receivable Sales 196,000
200,000
12 Cash 196,000 Sales discount 4,000 196,000 Accounts receivable
July 1 Accounts receivable Sales
49,000
50,000
2 Accounts receivable Sales
196,000
200,000
12 Cash 196,000 Accounts receivable 200,000
30 Cash 50,000 Accounts receivable 49,000 1,000
50,000
30 Cash 50,000 Accounts receivable Sales discount forfeited
Problem 5-10 a. Credit sales (75% x 5,000,000)
3,750,000
Doubtful accounts (2% x 3,750,000) Doubtful accounts Allowance for doubtful accounts
75,000 75,000 75,000
b. Doubtful accounts (1% x 5,000,000) Allowance for doubtful accounts
50,000 50,000
57
c. Required allowance Less: Credit balance of allowance Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts
80,000 20,000 60,000 60,000 60,000
d. Required allowance (10% x 500,000) Less: Credit balance of allowance Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts
50,000 20,000 30,000 30,000 30,000
Problem 5-11 a. Required allowance (5% x 600,000) Add: Debit balance in allowance account Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts
30,000 10,000 40,000 40,000 40,000
b. Required allowance Add: Debit balance in allowance account Doubtful accounts expense Doubtful accounts Allowance for doubtful accounts c. Doubtful accounts (2% x 1,900,000) Allowance for doubtful accounts
50,000 10,000 60,000 60,000 60,000 38,000 38,000
Problem 5-12 a. Doubtful accounts (3% x 8,000,000) Allowance for doubtful accounts
240,000
b. Doubtful accounts Allowance for doubtful accounts
170,000
240,000 170,000
Allowance – January 1 Doubtful accounts (squeeze) Recovery Total Accounts written off Allowance – December 31 (8% x 2,000,000) c. Doubtful accounts Allowance for doubtful accounts
100,000 170,000 20,000 290,000 130,000 160,000 210,000 210,000
58 Allowance – January 1 Doubtful accounts (squeeze) Recovery Total Accounts written off Allowance – December 31
100,000 210,000 20,000 330,000 130,000 200,000
Problem 5-13 Requirement a 1. Accounts receivable Sales
7,000,000
2. Cash Sales discount Accounts receivable(2,450,000/98%)
2,450,000 50,000
3. Cash Accounts receivable
3,900,000
7,000,000
2,500,000 3,900,000
4. Allowance for doubtful accounts Accounts receivable
30,000
5. Accounts receivable Allowance for doubtful accounts
10,000
Cash Accounts receivable 6. Sales return
30,000 10,000 10,000 10,000 70,000
Accounts receivable
70,000
Requirement b Doubtful accounts Allowance for doubtful accounts
40,000 40,000
Rate = 40,000/1,000,000 = 4% Allowance for doubtful accounts – December 31 (4% x 1,500,000) Less: Allowance before adjustment Doubtful accounts expense
60,000 20,000 40,000
Requirement c Accounts receivable – December 31 Allowance for doubtful accounts Net realizable value
1,500,000 ( 60,000) 1,440,000
59 Problem 5-14 Requirement a 1. Cash Accounts receivable Sales (800,000/10%) 2. Cash Sales discount (5% x 720,000) Accounts receivable(10% x 7,200,000) 3. Cash Accounts receivable
800,000 7,200,000 8,000,000 684,000 36,000 720,000 5,940,000 5,940,000
4. Sales discount Allowance for sales discount
10,000
5. Sales return Accounts receivable
80,000
6. Allowance for doubtful accounts Accounts receivable
60,000
Accounts receivable Allowance for doubtful accounts Cash Accounts receivable
10,000 80,000 60,000 10,000 10,000 10,000 10,000
7. Doubtful accounts Allowance for doubtful accounts
70,000 70,000
Required allowance – December 31 (5% x 2,400,000) Less: Allowance before adjustment Doubtful accounts
120,000 50,000 70,000
Rate = 100,000/2,000,000 = 5% Requirement b Accounts receivable Less: Allowance for doubtful accounts Allowance for sales discount Net realizable value
2,400,000 120,000 10,000
130,000 2,270,000
60
Problem 5-15 Requirement a 1. Accounts receivable Sales (3,070,000 – 470,000)
2,600,000
2. Cash (2,455,000 – 1,455,000) Accounts receivable
1,000,000
3. Cash Sales discount Accounts receivable (1,455,000/97%)
1,455,000 45,000 1,500,000
4. Allowance for doubtful accounts Accounts receivable
2,600,000 1,000,000
20,000 20,000
5. Cash Sales
470,000
6. Sales return and allowances Accounts receivable
55,000
7. Sales return and allowances Cash
10,000
8. Accounts receivable Allowance for doubtful accounts
470,000 55,000 10,000 5,000 5,000
Cash Accounts receivable
5,000 5,000
7. Doubtful accounts Allowance for doubtful accounts
50,000 50,000
Credit sales Less: Sales discount Sales return and allowances Net credit sales
2,600,000 45,000 55,000
100,000 2,500,000
Doubtful accounts (2,500,000 x 2%)
50,000
Requirement b Accounts receivable Less: Allowance for doubtful accounts Net realizable value
625,000 60,000 565,000
61 Problem 5-16 1. Accounts receivable – Jan. 1 1,500,000 Sales 7,935,000 Recovery 15,000 Collections (8,000,000) Sales discount ( 115,000) Writeoff ( 55,000) Sales return ( 30,000) Accounts receivable – Dec. 31 1,250,000
Amount 1,700,000 1,200,000 100,000 150,000 1,200,000 3,270,000
2. Allowance – January 1 Receivables Doubtful accounts expense (squeeze) Total Less: Writeoff (235,000 + 30,000) Required allowance – December 31
4,500,000
2,475,000/99%
2,500,000
Sales discount: 2% x 4,500,000 90,000 1% x 2,500,000 25,000 115,000
Problem 5-17 1. Not yet due 1 – 30 days past due 31 – 60 days past due 61 – 90 days past due Over 90 days past due
4,410,000/98%
Percent of Uncollectible 5% 25% 50% 100%
Required allowance 60,000 25,000 75,000 120,000 280,000 170,000 30,000 345,000 545,000 265,000 280,000
3. Accounts receivable Less: Allowance for doubtful accounts Net realizable value
3,270,000 280,000 2,990,000
Problem 5-18 1. 1,000,000 x 1% 400,000 x 5% 300,000 x 10% 200,000 x 25% 60,000 x 100% 1,960,000
10,000 20,000 30,000 50,000 60,000 170,000
2. Allowance – January 1 Recoveries Doubtful accounts (squeeze) Total Less: Writeoff (100,000 + 40,000) Allowance – December 31
3. Doubtful accounts Allowance for doubtful accounts
90,000 20,000 200,000 310,000 140,000 170,000
20,000 20,000
Correct amount Recorded (2% x 9,000,000) Understatement
200,000 180,000 20,000
4. Accounts receivable – December 31 Less: Allowance for doubtful accounts Net realizable value
1,960,000 170,000 1,790,000
62 Problem 5-19 2005 2006 2007 Total 26,000 29,000 30,000 85,000 3,000 4,000 9,000 2,000 26,000 26,000 76,000 24,000 76,000 Percentage to be used in computing the allowance = ------------------- = 2% 3,800,000
1. Writeoff Less: Recoveries Net writeoff
2. Credit sales for 2008 Multiply by bad debt percentage Provision for doubtful accounts 3. Accounts receivable – January 1, 2008 Add: Credit sales for 2008 Recoveries Total Less: Collections in 2008 Writeoff Accounts receivable – December 31, 2008 4. Allowance for doubtful accounts – January 1 Add: Doubtful accounts for 2008 Recoveries
3,000,000 2% 60,000 250,000 3,000,000 5,000 2,615,000 40,000
3,005,000 3,255,000 2,655,000 600,000 20,000
60,000 5,000
65,000
Total Less: Writeoff Allowance for doubtful accounts – December 31
85,000 40,000 45,000
Problem 5-20 1. Accounts receivable – December 31, 2007 Add: Sales for 2008 Recovery of accounts written off Total Less: Collection from customers Accounts written off Accounts settled by issuance of note Accounts receivable – December 31, 2008
600,000 5,000,000 10,000 4,360,000 50,000 200,000
2. Allowance for doubtful accounts – December 31, 2007 Add: Recovery of accounts written off Total Less: Accounts written off Allowance before adjustment – December 31, 2008 (debit balance)
5,010,000 5,610,000 4,610,000 1,000,000 30,000 10,000 40,000 50,000 (10,000)
63 3. Required allowance – December 31, 2008 On current accounts (700,000 x 5%) On past due accounts (300,000 x 20%) Total
35,000 60,000 95,000
4. Required allowance – December 31, 2008 Add: Debit balance before adjustment Increase in allowance
95,000 10,000 105,000
5. Doubtful accounts Allowance for doubtful accounts
105,000 105,000
Problem 5-21 170,000 – 10,000 Rate in 2007 = ------------------------ = .016 10,000,000 1. Retained earnings (.016 x 1,250,000) Allowance for doubtful accounts 2. Allowance – January 1 Recoveries – 2008 Doubtful accounts – 2008 (squeeze) Total Less: Writeoff – 2008
258,000 – 20,000 Rate in 2008 = -------------------------- = .017 14,000,000 20,000 20,000 20,000 10,000 92,000 122,000 88,000
Allowance – December 31 (.017 x 2,000,000)
34,000
3. Accounts receivable Less: Allowance for doubtful accounts Net realizable value
2,000,000 34,000 1,966,000
Problem 5-22 1. Allowance – January 1, 2008 Doubtful accounts recorded (2% x 20,000,000) Recovery Total Less: Writeoff (300,000 + 100,000) Allowance balance before adjustment
500,000 400,000 50,000 950,000 400,000 550,000
2. 5,000,000 x 5% 2,000,000 x 10% 1,000,000 x 25% 500,000 – 100,000 x 75% Required allowance – December 31, 2008
250,000 200,000 250,000 300,000 1,000,000
3. Doubtful accounts 450,000 Allowance for doubtful accounts (1,000,000 – 550,000)
450,000
64
Problem 5-23 1. Allowance – 1/1/2008 (1% x 2,800,000)
28,000
2. Allowance – 1/1/2008 Doubtful accounts recorded in 2008 (1% x 3,000,000) Recovery Total Writeoff Allowance before adjustment
28,000 30,000 7,000 65,000 (27,000) 38,000
3. 300,000 x 1% 80,000 x 5% 60,000 x 20% 25,000 x 80% Required allowance – 12/31/2008 4. Doubtful accounts Allowance for doubtful accounts (39,000 – 38,000)
3,000 4,000 12,000 20,000 39,000 1,000 1,000
Problem 5-24 2008 Jan. 1
Loan receivable Cash
4,000,000 4,000,000
Dec. 31
Cash Unearned interest income
342,100
Unearned interest income Cash
150,000
Cash Interest income
400,000
342,100 150,000 400,000
Unearned interest income Interest income Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010
(10%) Interest received 400,000 400,000 400,000
56,948 56,948 (12%) Interest income 456,948 463,782 471,370*
Amortization 56,948 63,782 71,370
Carrying value 3,807,900 3,864,848 3,928,630 4,000,000
*12% x 3,928,630 equals 471,435, or a difference of P65 due to rounding. 2009 Dec. 31
2009 Dec. 31 2010 Dec. 31
Cash Interest income
400,000 400,000
65 Unearned interest income Interest income
63,782 63,782
Cash Interest income Unearned interest income Interest income Cash Loan receivable
400,000 400,000 71,370 71,370 4,000,000 4,000,000
Problem 5-25 2008 Jan. 1
Loan receivable Cash
3,000,000 3,000,000
Direct origination cost Cash
260,300
Cash Direct origination cost
100,000 100,000
260,300
Dec. 31
Cash Interest income
240,000 240,000
Interest income Direct origination cost Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010 2009 Dec. 31
50,382
(8%) Interest received
(6%) Interest income
Amortization
240,000 240,000 240,000
189,618 186,595 183,487
50,382 53,405 56,513
Cash Interest income Interest income Direct origination cost
2010 Dec. 31
50,382
Cash Interest income
Carrying value 3,160,300 3,109,918 3,056,513 3,000,000
240,000 240,000 53,405 53,405
240,000 240,000
66 2010 Dec. 31
Interest income Direct origination cost Cash Loan receivable
56,513 56,513 3,000,000 3,000,000
Problem 5-26 Requirement 1 December 31, 2009 (1,000,000 x .93) December 31, 2010 (2,000,000 x .86) December 31, 2011 (3,000,000 x .79) Total present value of loan
900,000 1,720,000 2,370,000 5,020,000
Requirement 2 Loan receivable – 12/31/2008 Accrued interest (6,000,000 x 8%) Total carrying value Present value of loan
6,000,000 480,000 6,480,000 5,020,000
Impairment loss
1,460,000
Requirement 3 2008
2009
Impairment loss Accrued interest receivable Allowance for loan impairment
1,460,000
Cash Loan receivable
1,000,000
Allowance for loan impairment Interest income (8% x 5,020,000) 2010
Cash Loan receivable Allowance for loan impairment Interest income Loan receivable – 12/31/2009 Allowance for loan impairment (980,000 – 401,600) Carrying value – 12/31/2009
480,000 980,000 1,000,000 401,600 401,600 2,000,000 2,000,000 353,728 353,728 5,000,000 ( 578,400) 4,421,600
Interest income for 2010 (8% x 4,421,600)
353,728
67 2011
Cash Loan receivable Allowance for loan impairment Interest income Loan receivable – 12/31/2010 Allowance for loan impairment (578,400 – 353,672) Carrying value – 12/31/2010 Interest income for 2011 (8% x 2,775,328) Allowance per book Difference due to rounding
3,000,000 3,000,000 224,672 224,672 3,000,000 ( 224,672) 2,775,328 222,026 224,672 2,646
Problem 5-27 Requirement 1 December 31, 2009 ( 500,000 x .89) December 31, 2010 (1,000,000 x .80) December 31, 2011 (2,000,000 x .71)
445,000 800,000 1,420,000
December 31, 2012 (4,000,000 x .64) Total present value of loan
2,560,000 5,225,000
Requirement 2 Loan receivable Accrued interest receivable (12% x 7,500,000) Total carrying value Present value of loan Impairment loss
7,500,000 900,000 8,400,000 5,225,000 3,175,000
Requirement 3 2008
2009
2010
Impairment loss Accrued interest receivable Allowance for loan impairment
3,175,000 900,000 2,275,000
Cash Loan receivable
500,000
Allowance for loan impairment Interest income (12& x 5,225,000)
627,000 627,000
500,000
Cash Loan receivable
1,000,000 1,000,000
Allowance for loan impairment Interest income
642,240 642,240
68 Loan receivable – 12/31/2009 Allowance for loan impairment (2,275,000 – 627,000) Carrying value – 12/31/2009
7,000,000 (1,648,000) 5,352,000
Interest income for 2010 (12% x 5,352,000)
642,240
Problem 5-28 December 31, 2011 ( 360,000 x .772) 277,920 December 31, 2012 ( 360,000 x .708) 254,880 December 31, 2013 ( 360,000 x .650) 234,000 December 31, 2014 (4,360,000 x .596) 2,598,560 Total present value of loan 3,365,360 2008
Face value of loan Present value of loan Impairment loss
Cash Interest income
360,000
Impairment loss
634,640
4,000,000 3,365,360 634,640
360,000
Allowance for loan impairment 2009 2010 2011 2012 2013
2014
634,640
Allowance for loan impairment Interest income (9% x 3,365,360)
302,882
Allowance for loan impairment Interest income (634,640 – 302,882)
331,758
Cash Interest income
360,000
Cash Interest income
360,000
Cash Interest income
360,000
Cash Interest income Loan receivable
302,882 331,758 360,000 360,000 360,000 4,360,000 360,000 4,000,000
Problem 5-29 12/31/2008
Impairment loss Allowance for loan impairment
338,500 338,500
The remaining term of the loan is 4 years. Accordingly, the present value factor for 4 periods is used.
69 Present value of principal (500,000 x .735) Present value of interest (80,000 x 5 = 400,000 x .735) Total present value of loan
367,500 294,000 661,500
Loan receivable Present value of loan Loan impairment loss 12/31/2009
Allowance for loan impairment Interest income (8% x 661,500)
1,000,000 661,500 338,500 52,920 52,920
Problem 5-30 Answer B Accounts receivable-January 1 Credit sales Collections from customers Sales return
1,300,000 5,500,000 (5,000,000) ( 150,000)
Accounts written off Accounts receivable-December 31 Allowance for doubtful accounts Allowance for sales return Net realizable value
( 100,000) 1,550,000 ( 250,000) ( 50,000) 1,250,000
Problem 5-31 Answer A Trade accounts receivable Allowance for doubtful accounts Claim receivable Total trade and other receivables
2,000,000 ( 100,000) 300,000 2,200,000
Problem 5-32 Answer C Accounts receivable (squeeze) Allowance for doubtful accounts (900,000 – 200,000) Net realizable value
6,700,000 ( 700,000) 6,000,000
Problem 5-33 Answer B Allowance – January 1 Doubtful accounts expense Recovery of accounts written off Total Accounts written off Allowance – December 31
Problem 5-34 Answer D Allowance – January 1 Uncollectible accounts expense (squeeze) Recovery of accounts written off Total Accounts written off Allowance – December 31 (2,700,000 – 2,500,000)
300,000 650,000 100,000 1,050,000 450,000 600,000
70 280,000 100,000 50,000 430,000 (230,000) 200,000
Problem 5-35 Answer A Allowance – December 2007 Doubtful accounts expense Total Accounts written off (squeeze) Allowance – December 2008
180,000 50,000 230,000 30,000 200,000
Problem 5-36 Answer B 0 –60 days (1,200,000 x 1%) 61 – 120 days (900,000 x 2%) Over 120 days (1,000,000 x 6%) Allowance – December 31, 2008
12,000 18,000 60,000 90,000
Allowance – December 31, 2007 Uncollectible accounts expense (squeeze) Recovery Total Accounts written off Allowance – December 31, 2008
60,000 80,000 20,000 160,000 ( 70,000) 90,000
Problem 5-37 Answer D Allowance for sales discount (5,000,000 x 2% x 50%)
50,000
Problem 5-38 Answer A Problem 5-39 Answer B Doubtful accounts expense (3% x 3,000,000 + 10,000)
100,000
Problem 5-40 Answer A Doubtful accounts expense (2% x 7,000,000)
140,000
71
Problem 5-41 Answer A Allowance – January 1 Doubtful accounts expense (4% x 5,000,000) Collection of accounts written off Total Accounts written off Allowance – December 31
40,000 200,000 10,000 250,000 30,000 220,000
Problem 5-42 Answer D Allowance – January 1 Doubtful accounts expense (squeeze) Total Accounts written off Allowance – December 31
250,000 175,000 425,000 205,000 220,000
Problem 5-43 Answer A Problem 5-44 Answer A
72
CHAPTER 6 Problem 6-1 1. 2. 3. 4. 5.
C C C A C
6. 7. 8. 9. 10.
Problem 6-2 B C B A C
1. 2. 3. 4. 5.
C D C C B
6. 7. 8. 9. 10.
A B B B D
Problem 6-3 March 1 Cash
2,000,000 Note payable – bank
April
2,000,000
1 Cash Sales discount Accounts receivable
June 1 Cash
980,000 20,000 2,000,000
Accounts receivable
Sept. 1 Note payable – bank Interest expense (12% x 2,000,000 x 6/12) Cash
1,000,000 2,000,000
2,000,000 120,000 2,120,000
Problem 6-4 Requirement 1 2008 Oct. 1 Cash Discount on note payable (10% x 4,000,000) Note payable – bank 1 Interest expense (400,000 x 3/12) Discount on note payable 2009 Oct. 1 Note payable – bank Cash
100,000
4,000,000 100,000
4,000,000 4,000,000
Dec. 31 Interest expense Discount on note payable Current liabilities: Note payable – bank (Note 3) Discount on note payable Carrying value
3,600,000 400,000
300,000
300,000
Requirement 2 4,000,000 ( 300,000) 3,700,000
73 Note 3 – Note payable – bank Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000. Problem 6-5 May 1 Accounts receivable – assigned Accounts receivable
800,000
1 Cash (640,000 – 20,000) Service charge Note payable – bank
620,000 20,000
5 Sales return Accounts receivable – assigned
30,000
10 Cash Sales discount (2% x 500,000) Accounts receivable – assigned
490,000 10,000
June 1 Note payable – bank Interest expense (2% x 640,000) Cash
July
490,000 12,800 10,000
20 Cash Accounts receivable – assigned
200,000
1 Accounts receivable Accounts receivable – assigned Accounts receivable – assigned Less: Collections Sales discount Sales return Worthless accounts Balance
640,000 30,000
7 Allowance for doubtful accounts Accounts receivable – assigned
1 Note payable – bank (640,000 – 490,000) Interest expense (2% x 150,000) Cash
800,000
500,000
502,800 10,000 200,000
150,000 3,000 153,000 60,000 60,000 800,000 690,000 10,000 30,000 10,000
740,000 60,000
Problem 6-6 July 1 Accounts receivable – assigned Accounts receivable
1,500,000
1,500,000
74 July 1 Cash (1,125,000 – 60,000) Service charge (4% x 1,500,000) Note payable – bank
1,065,000 60,000
Aug. 1 Note payable – bank Accounts receivable – assigned
800,000
1 Interest expense (2% x 1,125,000) Cash
22,500
Sept. 1 Cash Interest expense Note payable – bank Accounts receivable – assigned
168,500 6,500 325,000
Accounts receivable Accounts receivable – assigned
200,000
Collections by bank Less: Payment of loan (1,125,000 – 800,000) Excess collection Less: Interest (2% x 325,000) Cash remittance from bank
1,125,000 800,000 22,500
500,000 200,000 500,000 325,000 175,000 6,500 168,500
Problem 6-7 July 1 Accounts receivable – assigned Accounts receivable 1 Cash (400,000 – 10,000) Service charge (2% x 500,000) Note payable – bank Aug. 1 Cash Accounts receivable – assigned 1 Interest expense (1% x 400,000) Note payable – bank Cash Sept. 1 Cash Accounts receivable – assigned 1 Interest expense (1% x 74,000) Note payable – bank Cash
500,000 390,000 10,000 330,000
500,000
400,000 330,000
4,000 326,000 330,000 170,000 740 74,000
170,000
74,740
75
Problem 6-8 Requirement a Dec. 1 Accounts receivable – assigned Accounts receivable
1,500,000
1 Cash Service charge Note payable – bank
1,250,000 50,000
31 Cash Sales discount Accounts receivable – assigned
970,000 30,000
31 Interest expense (1% x 1,300,000) Note payable – bank Cash
13,000 957,000
1,500,000
1,300,000
1,000,000
970,000
Requirement b The accounts receivable – assigned with a balance of P500,000 should be classified as current asset and included in trade and other receivables. The note payable – bank of P343,000 should be classified and presented as a current liability. The company should disclose the equity in assigned accounts as follows: Accounts receivable – assigned Note payable – bank Equity in assigned accounts
500,000 (343,000) 157,000
Problem 6-9 July
1 Accounts receivable – assigned Accounts receivable
800,000
1 Cash (640,000 – 24,000) Service charge (3% x 800,000) Note payable – bank
616,000 24,000
Aug. 1 Interest expense (1% x 640,000) Note payable – bank Accounts receivable – assigned
6,400 413,600
Sept. 1 Cash Interest expense Note payable – bank Accounts receivable – assigned
91,336 2,264 226,400
800,000
640,000
420,000
320,000 76
Accounts receivable Accounts receivable – assigned
60,000 60,000
Bank loan August 1 payment Balance Collections by bank Less: Payment of loan Interest (1% x 226,400) Remittance from bank
640,000 413,600 226,400 226,400 2,264
320,000 228,664 91,336
Problem 6-10 Cash Allowance for doubtful accounts Loss on factoring Accounts receivable
400,000 30,000 70,000
500,000
Problem 6-11 Cash Receivable from factor Allowance for bad debts Loss on factoring Accounts receivable
5,000,000 300,000 250,000 450,000
6,000,000
Problem 6-12 Feb. 1 Cash Service charge (5% x 800,000) Receivable from factor (10% x 800,000) Accounts receivable
680,000 40,000 80,000 800,000
15 Sales return and allowances Receivable from factor
20,000
28 Cash (80,000 – 20,000) Receivable from factor
60,000
20,000 60,000
Problem 6-13 June 1 Accounts receivable Sales
500,000 500,000
77
June 3 Cash Sales discount (2% x 500,000) Commission (5% x 500,000) Receivable from factor (25% x 500,000) Accounts receivable 9 Sales return and allowances Sales discount (2% x 50,000) Receivable from factor
340,000 10,000 25,000 125,000 50,000
500,000 1,000 49,000
11 No entry 15 Cash (125,000 – 49,000) Receivable from factor
76,000
76,000
Problem 6-14 July 26 Cash Commission (5% x 1,000,000) Receivable from factor (20% x 1,000,000) Accounts receivable
750,000 50,000 200,000
July 28 Sales return and allowances Receivable from factor
50,000
Aug. 31 Cash Receivable from factor
150,000
1,000,000 50,000 150,000
Problem 6-15 1. Cash Service charge (5% x 200,000) Receivable from factor (20% x 200,000) Accounts receivable
150,000 10,000 40,000
2. Accounts receivable – assigned Accounts receivable
300,000
Cash Service charge (5% x 300,000) Note payable – bank
225,000 15,000
3. Doubtful accounts Allowance for doubtful accounts Required allowance (5% x 1,300,000) Less: Allowance – January 1 Doubtful accounts
200,000 300,000
240,000 35,000
35,000 65,000 30,000 35,000 78
4. The net realizable value of the accounts receivable is included in trade and other receivables and presented as current asset. Accounts receivable – unassigned Accounts receivable – assigned Total Less: Allowance for doubtful accounts Net realizable value
1,000,000 300,000 1,300,000 65,000 1,235,000
The receivable from factor of P40,000 is also included in trade and other receivables. The note payable – bank of P240,000 is classified and presented as current liability. However, the company should disclose the equity in assigned accounts as follows: Accounts receivable – assigned Note payable – bank Equity in assigned accounts
300,000 (240,000) 60,000
Problem 6-16 Books of Motorway Company 1. Cash Receivable from factor Allowance for doubtful accounts Loss on factoring Accounts receivable
2,250,000 300,000 100,000 350,000
3,000,000
Gross amount Holdback (10% x 3,000,000) Commission (15% x 3,000,000) Cash received
( (
Sales price (3,000,000 x 85%) Book value of accounts receivable (3,000,000 – 100,000) Loss on factoring
2,250,000 2,900,000 ( 350,000)
2. Cash Receivable from factor Accounts receivable factored Collections by factor Balance – December 31 Receivable from factor per book Required holdback (10% x 500,000) Remittance from factor
Books of Freeway Company (factor)
250,000
3,000,000 300,000) 450,000) 2,250,000
250,000 3,000,000 2,500,000 500,000 300,000 50,000 250,000
79
1. Accounts receivable Cash Clients retainer Commission income
3,000,000
2. Cash Accounts receivable
2,500,000
3. Clients retainer Cash 4. Doubtful accounts Allowance for doubtful accounts (4% x 500,000)
2,250,000 300,000 450,000
250,000 20,000
2,500,000 250,000 20,000
Problem 6-17 Jan. 15 Notes receivable Sales
500,000
Feb. 15 Cash Interest expense Notes receivable discounted
496,875 3,125
500,000
Principal Interest (500,000 x 12% x 6/12) Maturity value Discount (530,000 x 15% x 5/12) Net proceeds July 15 Notes receivable discounted Notes receivable
500,000 500,000 30,000 530,000 33,125 496,875
500,000
500,000
Problem 6-18 March 14 Accounts receivable Sales
2,050,000
April
7 Notes receivable Freight out Accounts receivable
2,000,000 50,000
April 20 Cash Notes receivable discounted Interest income
2,001,750
2,050,000
2,050,000 2,000,000 1,750
80
Principal Add: Interest (2,000,000 x 12% x 60/360) Maturity value Less: Discount (2,040,000 x 15% x 45/360) Net proceeds June 4
July
4
2,000,000 40,000 2,040,000 38,250 2,001,750
Accounts receivable (2,040,000 + 10,000) Cash
2,050,000
Notes receivable discounted Notes receivable
2,000,000
Cash Accounts receivable Interest income (2,000,000 x 12% x 30/360
2,070,000
2,050,000 2,000,000 2,050,000 20,000
Problem 6-19 Requirement a April 5 Notes receivable Accounts receivable 19 Cash Notes receivable discounted Interest income
500,000 501,075
Principal Add: Interest (500,000 x 12% x 60/360) Maturity value Less: Discount (510,000 x 14% x 45/360) Net proceeds May 3 Notes receivable Accounts receivable 16 Cash Interest expense Notes receivable discounted
500,000 1,075 500,000 10,000 510,000 8,925 501,075
1,000,000 1,000,000 995,000 5,000
Principal Less: Discount (1,000,000 x 12% x 15/360) Net proceeds May 25 Notes receivable Interest income Accounts receivable
500,000
1,000,000 1,000,000 5,000 995,000
1,500,000 4,500
1,504,500 81
Principal
1,500,000
Add: Interest (1,500,000 x 12% x 60/360) Maturity value Less: Discount (1,530,000 x 12% x 50/360) Net credit June 7 Accounts receivable (510,000 + 20,000) Cash Notes receivable discounted Notes receivable 15 Notes receivable Sales June 18 Cash Accounts receivable Interest income (530,000 x 12% x 15/360)
30,000 1,530,000 25,500 1,504,500 530,000 500,000 800,000 532,650
530,000 500,000 800,000 530,000 2,650
Requirement b – Adjustments on June 30 1. Accrued interest receivable Interest income (800,000 x 12% x 15/360)
4,000
4,000
Accrued interest on D’s note. 2. Notes receivable discounted Notes receivable
1,000,000
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 Accounts receivable
200,000
1 Notes receivable Accounts receivable
300,000
July 30 Accounts receivable Notes receivable Interest income (200,000 x 12% x 90/360)
206,000
Aug. 1 Cash Note receivable discounted Interest income
306,075
200,000 300,000 200,000 6,000 300,000 6,075 82
Principal
300,000
Interest (300,000 x 12% x 6/12) Maturity value Less: Discount (318,000 x 15% x 3/12) Net proceeds Sept. 1 Notes receivable Accounts receivable Interest income 28 Cash Accounts receivable Interest income (206,000 x 12% x 60/360)
18,000 318,000 11,925 306,075 132,000
210,120
Oct. 1 Notes receivable Sales
500,000
Nov. 1 Accounts receivable (318,000 + 12,000) Cash
330,000
Notes receivable discounted Notes receivable Dec. 30 Cash
31 Cash
Notes receivable Interest income (500,000 x 12% x 90/360 Accounts receivable Interest income (330,000 x 12% x 2/12)
120,000 12,000 206,000 4,120 500,000
300,000 515,000
336,600
330,000 300,000 500,000 15,000 330,000 6,600
Problem 6-21 2008 Jan. 1 Cash Notes receivable Land Gain on sale of land Dec. 31 Accrued interest receivable Interest income (12% x 6,000,000) 2009 Dec. 31 Accrued interest receivable Interest income (12% x 6,720,000) 2010 Jan. 1 Cash
Notes receivable Accrued interest receivable
1,000,000 6,000,000
720,000
806,400
7,526,400
5,000,000 2,000,000 720,000
806,400
6,000,000 1,526,400 83
Problem 6-22 Jan. 1 Notes receivable Sales Unearned interest income
600,000
Dec. 31 Cash Notes receivable
200,000 200,000
31 Unearned interest income Interest income Year 2008 2009 2010
540,000 60,000
30,000 30,000
Notes receivable 600,000 400,000 200,000 1,200,000
Fraction 6/12 4/12 2/12
Interest income 30,000 20,000 10,000 60,000
Problem 6-23 Face value Present value (300,000 x 2.4018) Unearned interest income
900,000 720,540 179,460
Present value Cash received Sales price Cost of generator Gross income
Jan. 1 Cash Notes receivable Sales Unearned interest income
100,000 900,000
Dec. 31 Cash
300,000 Notes receivable
820,540 179,460 300,000
31 Unearned interest income Interest income Date Jan. 1, 2008 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2010
720,540 100,000 820,540 700,000 120,540
86,465 86,465
Collection
Interest
Principal
300,000 300,000 300,000
86,465 60,841 32,154
213,535 239,159 267,846
Present value 720,540 507,005 267,846 -
84 Problem 6-24
Requirement 1 12/31/2008
Note receivable Sales (500,000 x 3.99) Unearned interest income
2,500,000
12/31/2009
Cash Note receivable
500,000
Unearned interest income Interest income (8% x 1,995,000)
159,600
1,995,000 505,000 500,000 159,600
Requirement 2 Note receivable (2,500,000 – 500,000) Unearned interest income (505,000 – 159,600) Book value – 12/31/2009
(
2,000,000 345,400) 1,654,600
Requirement 3 Interest income for 2010 (8% x 1,654,600)
132,368
Problem 6-25 Face value of note Present value (400,000 x .7118) Unearned interest income
400,000 284,720 115,280
2008 Jan. 1 Cash Notes receivable Accumulated depreciation Equipment Gain on sale of equipment Unearned interest income Dec. 31 Unearned interest income Interest income Date Jan. 01, 2008 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2010
Interest income 34,166 38,266 42,848
2009 Dec. 31 Unearned interest income Interest income
Present value Cash received Sales price Book value Gain on sale
284,720 125,000 409,720 350,000 59,720
125,000 400,000 150,000 500,000 59,720 115,280 34,166 Unearned interest 115,280 81,114 42,848 38,266
34,166 Present value 284,720 318,886 357,152 400,000
38,266 85
2010 Dec. 31 Unearned interest income Interest income
42,848 42,848
2011 Jan. 1 Cash Notes receivable
400,000
400,000
Problem 6-26 1/1/2008
Note receivable Loss on sale of land Land Unearned interest income
9,000,000 250,000
PV of note (9,000,000 x .75) Carrying amount of land Loss on sale
7,000,000 2,250,000 6,750,000 7,000,000 ( 250,000)
12/31/2008
Unearned interest income Interest income (10% x 6,750,000)
675,000
12/31/2009
Unearned interest income Interest income (10% x 7,425,000)
742,500
12/31/2010
Unearned interest income Interest income (2,250,000 – 1,417,500)
832,500
1/1/2011
Cash Note receivable
9,000,000
675,000 742,500 832,500 9,000,000
Problem 6-27 Answer C Note payable Discount on note payable (1,000,000 x 10.8%) Net proceeds Discount on note payable Amortization from August 1 to December 31 (108,000 x 5/12) Balance – December 31, 2008 Note payable Discount on note payable Carrying value
1,000,000 ( 108,000) 892,000 108,000 ( 45,000) 63,000 1,000,000 ( 63,000) 937,000
Problem 6-28 Question 1 – Answer A Problem 6-29 Answer A
Question 2 - Answer B
86
Problem 6-30 Answer C Principal Add: Interest (500,000 x 8%) Maturity value Less: Discount (540,000 x 10% x 6/12) Net proceeds
Problem 6-31 Answer C 500,000 40,000 540,000 27,000 513,000
Principal Less: Discount (200,000 x 10% x 6/12) Net proceeds
200,000 10,000 190,000
Problem 6-32 Answer A Principal Interest (4,000,000 x 12% x 90/360) Maturity value Less: Discount (4,120,000 x 15% x 60/360) Net proceeds Principal Interest revenue Problem 6-33 Answer C Principal Add: Interest (600,000 x 10% x 6/12) Maturity value Less: Discount (630,000 x 12% x 4/12) Net proceeds
4,000,000 120,000 4,120,000 103,000 4,017,000 4,000,000 17,000
Problem 6-34 Answer B 600,000 30,000 630,000 25,200 604,800
Note receivable – June 30, 2007 Less: Payment on July 1, 2008 Balance – July 1, 2008 Accrued interest from July 1, 2008 to June 30, 2009 (1,000,000 x 8)
1,500,000 500,000 1,000,000 80,000
Problem 6-35 Answer C Problem 6-36 Answer A First payment on January 1, 2008 Present value of remaining six payments (600,000 x 4.36) Correct sales revenue
600,000 2,616,000 3,216,000
Problem 6-37 Answer D
Problem 6-38 Answer C
Note receivable 1,000,000 Unearned interest income ( 435,000) Carrying value equal to present value (100,000 x 5.65) 565,000
The note receivable is shown at its value on December 31, 2008. Face value – remaining nine payments (500,000 x 9) Present value (500,000 x 6.25) Unearned interest income
4,500,000 3,125,000 1,375,000 87
Problem 6-39 1. Answer C
Note receivable Present value of note receivable (6,000,000 x .75) Unearned interest income
6,000,000 4,500,000 1,500,000
Interest income: 2008 (10% x 4,500,000) 2009 (10% x 4,950,000) 2010 (1,500,000 – 450,000 – 495,000) Total
450,000 495,000 555,000 1,500,000
2. Answer D Present value of note receivable Carrying amount of equipment Loss on sale of equipment
4,500,000 4,800,000 ( 300,000)
Problem 6-40 Answer B Present value of note receivable (1,000,000 x .712) Book value of equipment Loss on sale
712,000 800,000 ( 88,000)
Interest income for first year (12% x 712,000)
85,440
Problem 6-41 Answer D NR from Hart
1,000,000
NR from Maxx (1,150,000 x .68)
782,000
88
CHAPTER 7 Problem 7-1 1. 2. 3. 4.
D B D D
Problem 7-2 1. 2. 3. 4.
D D A C
Problem 7-3 1. 2. 3. 4.
B A A C
Problem 7-4 1. 2. 3. 4.
D C C A
Problem 7-5 1. 2. 3. 4.
C B A C
5. 6. 7. 8. 9. 10.
D D C A A A
5. 6. 7. 8. 9. 10.
D A D A A B
5. 6. 7. 8. 9. 10.
C D C A A D
5. 6. 7. 8. 9. 10.
A C A C A C
5. 6. 7. 8. 9. 10.
D D A B B A
Problem 7-6 Items counted in the bodega Items included in count specifically segregated per sales contract Items returned by customer Items ordered and in receiving department Items shipped today, FOB destination Items for display Items on counter for sale Damaged and unsalable items included in count Items in shipping department
4,000,000 ( 100,000) 50,000 400,000 150,000 200,000 800,000 ( 50,000) 250,000 5,700,000
Problem 7-7 Materials Goods in process Finished goods in factory Finished goods in company-owned retail store (750,000/150%) Finished goods in the hands of consignees (400,000 x 60%) Finished goods in transit Finished goods out on approval Materials in transit (330,000 + 30,000) Correct inventory
1,400,000 650,000 2,000,000 500,000 240,000 250,000 100,000 360,000 5,500,000
Problem 7-8 Finished goods Finished goods held by salesmen Goods in process (720,000/80%) Materials Materials returned to suppliers for replacement Factory supplies (110,000 + 60,000) Correct inventory
2,000,000 100,000 900,000 1,000,000 100,000 170,000 4,270,000 89
Problem 7-9 1. Inventory Income summary
50,000
2. Accounts payable Purchases
75,000
3. Purchases
30,000
50,000 75,000
Accounts payable
30,000
Inventory Income summary
30,000
4. Income summary Inventory
90,000
5. Purchases Accounts payable
140,000
30,000 90,000 140,000
Problem 7-10 1. EXCLUDE – The term of the shipment is FOB destination. 2. EXCLUDE – The goods are held only for consignment. 3. INCLUDE – There is no perfected sale yet as of December 31, 2008. 4. INCLUDE – The term FOB 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 Goods out on consignment Goods purchased FOB shipping point Goods sold FOB shipping point Goods sold FOB destination Goods sold FOB destination Correct December 31 inventory
7,600,000 1,000,000 250,000 ( 850,000) 260,000 840,000 9,100,000
90
Problem 7-12 Inventory per book Item 3 (18,500 – 1,000 / 140%) Item 4 (50,000 + 2,500) Item 5 (35,000 / 140% = 25,000 + 2,000) Adjusted inventory
950,000 12,500 52,500 27,000 1,042,000
Problem 7-13 Requirement a
Periodic System 1. Purchases Accounts payable 800,000
Perpetual System 800,000
2. Accounts payable Purchase returns 50,000
50,000
3. Accounts payable Cash
600,000
50,000
4. Accounts receivable 1,580,000 Sales 1,580,000
600,000
1,580,000
2. Accounts payable 50,000 Merchandise inventory 3. Accounts payable Cash
6. Cash Accounts receivable 40,000
40,000
1,360,000 1,360,000 60,000
600,000 600,000
4. Accounts receivable
1,580,000
5. Sales return 40,000 Accounts receivable 790,000
7. Inventory-Dec. 31 Income summary 20,000 (60 x 1,000)
1. Merchandise inventory 800,000 800,000 Accounts payable
Sales Cost of sales 790,000 Merchandise inventory 5. Sales return Accounts receivable
40,000
Merchandise inventory 20,000 60,000 Cost of sales 6. Cash 1,360,000 Accounts receivable 1,360,000 7. Inventory shortage 10,000 Merchandise inventory
10,000
Merchandise inventory per book Physical count Shortage
70,000 60,000 10,000
Requirement b Periodic System
Perpetual System
Inventory – January 90,000 Cost of sales recorded Purchases 800,000 (790,000 – 20,000) 770,000 Inventory shortage Purchase returns ( 50,000) 750,000 10,000 Goods available for sale 840,000 Adjusted cost of sales 780,000 Less: Inventory – December 31 60,000 Cost of sales 780,000
91 Problem 7-14 Company A List price Less: First trade discount (20% x 500,000)
Third trade discount (10% x 360,000) Invoice price Less: Cash discount (2% x 324,000) Payment within the discount period
500,000 100,000 400,000 40,000 360,000 36,000 324,000 6,480 317,520
Company B List price Less: Trade discount (35% x 500,000) Invoice price Less: Cash discount (2% x 325,000) Payment within the discount period
500,000 175,000 325,000 6,500 318,500
Second trade discount (10% x 400,000)
Problem 7-15 Requirement a Gross method 1. Purchases 4,750,000 Accounts payable 4,655,000 2. Freight in Cash 250,000
Net method 1. Purchases 4,750,000
250,000
4,655,000 Accounts payable
2. Freight in 250,000
250,000 Cash
3. Accounts payable 1,650,000 3. Accounts payable Cash 1,617,000 Cash 1,617,000 Purchase discount 33,000 Accounts payable Cash
2,100,000 2,100,000
4. No entry
5. Inventory Income summary 981,000
Accounts payable 2,058,000 Purchase discount lost 42,000 Cash 2,100,000 4. Purchase discount lost Accounts payable (1,000,000 x 2%)
1,000,000
5. Inventory 1,000,000
1,617,000
20,000
981,000 Income summary
20,000
92 Requirement b Gross method
Net method
Purchases Freight in Total Less: Purchase discounts Goods available for sale Less: Inventory – December 31 Cost of sales
4,750,000 250,000 5,000,000 33,000 4,967,000 1,000,000 3,967,000
4,655,000 250,000 4,905,000 -___ 4,905,000 981,000 3,924,000
Ending inventory: Gross (5,000,000/5) Net (4,905,000/5)
1,000,000
981,000
Problem 7-16 Gross method Sept. 1 Purchases Accounts payable
650,000
1 Freight in Accounts payable
20,000
7 Accounts payable Purchase returns and allowances
10,000
Oct. 1 Accounts payable Cash
660,000
650,000 20,000 10,000 660,000
Net method Sept. 1 Purchases Accounts payable
637,000
1 Freight in Accounts payable
20,000
7 Accounts payable (10,000 x 98%) Purchase returns and allowances Oct. 1 Accounts payable (657,000 – 9,800) Purchase discount lost (2% x 640,000) Cash
9,800
637,000 20,000 9,800
647,200 12,800 660,000
93
Problem 7-17 Gross method
Net method
1. Merchandise inventory Accounts payable 980,000
1,000,000
2. Accounts payable Cash 50,000
50,000
3. Accounts payable Cash 784,000 Cost of sales
800,000
4. Accounts payable Cash
150,000
5. Cash Sales 1,200,000
1,000,000
50,000
784,000
1. Merchandise inventory 980,000 Accounts payable
2. Accounts payable Cash
50,000
3. Accounts payable 784,000 Cash (800,000 x 98%)
16,000 150,000
1,200,000 1,200,000
Cost of sales 700,000 Merchandise inventory 686,000 (1,000,000 x 70%)
700,000
Problem 7-18 1. FIFO - periodic Lot No. 4 5 2. Beginning inventory Purchases: Lot No. 1 2 3 4 5 Goods available for sale Weighted average (4,855,000/50,000)
4. Accounts payable Purchase discount lost Cash 5. Cash Sales
146,000 4,000 150,000 1,200,000
Cost of sales 686,000 Merchandise inventory (980,000 x 70%) Units
Unit cost
Total cost
500 14,500 15,000
100 90
50,000 1,305,000 1,355,000
10,000 2,000 8,000 6,000 9,500 14,500 50,000
80 100 110 120 100 90
800,000 200,000 880,000 720,000 950,000 1,305,000 4,855,000
15,000
97.10
1,456,500
3. Specific identification Lot 3 4
FIFO Weighted average Specific identification
6,000 9,000 15,000 Goods available 4,855,000 4,855,000 4,855,000
120 100
Inventory-Dec. 31 1,355,000 1,456,500 1,620,000
720,000 900,000 1,620,000 Cost of sales 3,500,000 3,398,500 3,235,000 94
Problem 7-19 FIFO December 17 22 Average method December 1 7 17 22 Available for sale Inventory (5,580,000/120,000)
Units
Unit cost
Total cost
10,000 20,000 30,000
45 43
450,000 860,000 1,310,000
10,000 30,000 60,000 20,000 120,000
52 50 45 43
520,000 1,500,000 2,700,000 860,000 5,580,000
46.50
1,395,000
30,000
FIFO 5,580,000 1,310,000 4,270,000
Goods available for sale Less: Inventory – December 31 Cost of goods sold
Average 5,580,000 1,395,000 4,185,000
Problem 7-20 The stock cards are not prepared anymore. The end results are simply given. Units FIFO Ending inventory
Unit cost 210
4,000
Cost of sales Average method Ending inventory
Total cost 840,000 2,700,000
252.50
4,000
Cost of sales
1,010,000 2,530,000
Problem 7-21 2006 2007 2008
Purchases 5,000 9,000 15,000
Sales 4,000 7,000 12,000
Inventory increment 1,000 2,000 3,000
Total inventory – December 31, 2008 (units)
6,000
Sales Cost of sales: Inventory – December 31, 2007 (3,000 x 60) Purchases Goods available for sale Less: Inventory – December 31, 2008 (6,000 x 75) Gross income Problem 7-22
1,200,000 180,000 1,125,000 1,305,000 450,000
855,000 345,000 95
FIFO October 1
Units
Unit cost
15,000
60
900,000
Weighted average – periodic January 1 April 1 October 1 Goods available for sale Less: Sales Ending inventory
10,000 15,000 25,000 50,000 35,000 15,000
40 50 60
400,000 750,000 1,500,000 2,650,000
Weighted average (2,650,000/50,000)
15,000
53
795,000
Moving average – perpetual January 1 31 Balance April 1 Total July 31 Balance October 1 Total December 31 Balance
Units 10,000 ( 5,000) 5,000 15,000 20,000 (18,000) 2,000 25,000 27,000 (12,000) 15,000 FIFO
Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of sales Cost of sales – Weighted average perpetual January 31 Sale July 31 Sale December 31 Sale
400,000 2,250,000 2,650,000 900,000 1,750,000
Unit cost 40 40 40 50 47.50 47.50 47.50 60__ 59.07 59.07 59.07
Total cost
Total cost 400,000 ( 200,000) 200,000 750,000 950,000 ( 855,000) 95,000 1,500,000 1,595,000 ( 708,840) 886,160
Weighted average 400,000 2,250,000 2,650,000 795,000 1,855,000 200,000 855,000 708,840
Total cost of sales Problem 7-23 FIFO October 1 purchase
Weighted average January 1 April 5 October 1 Goods available for sale Inventory – December 31 (9,200,000/1,000)
1,763,840 Units
Unit cost
Total cost
300
10,000
3,000,000
Units
Unit cost
96 Total cost
200 300 500 1,000
7,500 9,000 10,000
1,500,000 2,700,000 5,000,000 9,200,000
300
9,200
2,760,000
FIFO Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of goods sold
Weighted average
1,500,000 7,700,000 9,200,000 3,000,000 6,200,000
1,500,000 7,700,000 9,200,000 2,760,000 6,440,000
Problem 7-24 Sales Gross profit Cost of goods sold Inventory – July 31 (see below) Cost of goods available for sale Purchases for July Inventory – July 1 July 12 25 FIFO inventory – July 31
6,000,000 (2,400,000) 3,600,000 928,000 4,528,000 (3,174,000) 1,354,000 Quantity 1,000 14,000 15,000
Unit cost 60 62
Total cost 60,000 868,000 928,000
Problem 7-25 1. Cost of units available for sale for July Purchases for July Cost of inventory – July 1 Number of units – July 1 (410,000 / P4) 2. July 1 inventory Purchases for July
1,452,100 (1,042,100) 410,000 102,500 102,500 200,000
Total units available for sale for July July 31 inventory Units sold during the month of July
302,500 ( 60,000) 242,500
3. Average unit cost (1,452,100 / 302,500) Inventory – July 31 (60,000 x 4.80)
4.80 288,000
Another computation (1,452,100 – 1,164,100)
288,000 97
Problem 7-26
Units
Average unit cost
1. Inventory – December 31, 2007 2007 layer
11,000
2. Inventory – December 31, 2006 Purchases – 2007 Materials available Less: Inventory – December 31, 2007 Raw materials used – 2007
14,000 12,000 26,000 11,000 15,000
3. Inventory – December 31, 2008 2008 layer
15,000
4. Inventory – December 31, 2007 Purchases – 2008 Materials available Less: Inventory – December 31, 2008 Raw materials used – 2008
11,000 20,000 31,000 15,000 16,000
138 138
153 153
Total cost 1,518,000 1,480,000 1,656,000 3,136,000 1,518,000 1,168,000 2,295,000 1,518,000 3,060,000 4,578,000 2,295,000 2,283,000
Problem 7-27 Available for sale Units sold (2,800,000/100) Ending inventory FIFO September 5 25 Weighted average (1,753,500/42,000) Available for sale Less: Ending inventory
42,000 28,000 14,000 Units
Unit cost
Total cost
2,000 12,000 14,000
43.00 42.50
86,000 510,000 596,000
14,000
41.75
584,500
Average 1,753,500 584,500
FIFO 1,753,500 596,000
Cost of sales
1,169,000
1,157,500
(Sch. 1)
(Sch. 2)
98 Problem 7-28 Cost of sales – Average Understatement of ending inventory: 2006 2007 2008 Cost of sales – FIFO Sales Cost of sales – FIFO Gross income Operating expenses Operating income Proof Net income – Average Understatement of ending inventory: 2006 2007 2008 Net income – FIFO
2006 1,500,000
2007 2,000,000
2008 2,400,000
( 150,000) _______ 1,350,000
150,000 ( 200,000) ________ 1,950,000
200,000 ( 270,000) 2,330,000
2006 3,000,000 1,350,000 1,650,000 800,000 850,000
2007 4,000,000 1,950,000 2,050,000 900,000 1,150,000
2008 4,800,000 2,330,000 2,470,000 1,000,000 1,470,000
700,000
1,100,000
1,400,000
150,000) 200,000 _____ 1,150,000
( 200,000) 270,000 1,470,000
150,000
(
_______ 850,000
Problem 7-29 Materials: R S T
Units
Lower of cost or NRV
1,000 2,000 3,000
100 250 300
100,000 500,000 900,000
Goods in process: X Y
4,000 5,000
480 620
1,920,000 3,100,000
Finished goods: A B
2,000 2,000
790 730
1,580,000 1,460,000
Inventory value
Valuation at lower of cost or NRV
9,560,000
99
Problem 7-30 Units 1,000 1,500 1,200 1,800 1,700
A B C D E
Unit cost 120 110 150 140 130
NRV 150 120 140 160 160
(Lower of cost or NRV) Inventory value 120,000 165,000 168,000 252,000 221,000 926,000
Problem 7-31 Product 1 2 3 4
Unit cost 700 475 255 450
NRV 650 745 250 740
Lower of cost or NRV 650 475 250 450
Units
Unit cost
NRV
Lower of cost or NRV
500 300
2,500 3,700
2,700 3,600
1,250,000 1,080,000
Car accessories C 600 D 800 Valuation at lower of cost or NRV
1,400 2,100
2,000 2,000
840,000 1,600,000 4,770,000
Problem 7-32 Appliances: A B
Problem 7-33 1. September 30 (40,000 x 75) December 31 (10,000 x 90) Total FIFO cost NRV (50,000 x 72) Loss on inventory writedown Inventory – January 1 Purchases Purchase discount Goods available for sale Less: Inventory – December 31 Cost of goods sold before inventory writedown Loss on inventory writedown
3,000,000 900,000 3,900,000 3,600,000 300,000 1,200,000 9,400,000 ( 400,000) 10,200,000 3,900,000 6,300,000 300,000
Cost of goods sold after inventory writedown 2. Inventory – December 31 Income summary
6,600,000 3,900,000
3,900,000 100
Loss on inventory writedown Allowance for inventory writedown
300,000
300,000
Problem 7-34 a. No adjustment is necessary because the market price is higher than the agreed price. Any gain on purchase commitment is not recognized. b. No adjustment is necessary because the market price has not declined as of December 31, 2008. The market decline is only a possible loss. c. Loss on purchase commitment (10,000 x 30) Estimated liability for purchase commitment
300,000
d. Purchases (100,000 x 150) Loss on purchase commitment Estimated liability for purchase commitment Accounts payable (10,000 x 200)
1,500,000 200,000 300,000
e. Purchases Estimated liability for purchase commitment Accounts payable Gain on purchase commitment
2,000,000 300,000
300,000
2,000,000
2,000,000 300,000
Problem 7-35 12/31/2008
Loss on purchase commitment Estimated liability for PC
500,000
03/31/2009
Purchase (100,000 x 54) Estimated liability for PC Accounts payable Gain on purchase commitment
5,400,000 500,000
500,000
5,500,000 400,000
Problem 7-36 Purchase price Improving and subdividing cost Total cost
Group 1 (20 x 3,000,000)
26,850,000 43,500,000 70,350,000 Sales price
Fraction
60,000,000
60/105
Cost 40,200,000
2 3
(10 x 2,500,000) (10 x 2,000,000)
25,000,000 20,000,000 105,000,000
25/105 20/105
16,750,000 13,400,000 70,350,000 101
Cost per lot
Group 1 (40,200,000/20) 2 (16,750,000/10) 3 (13,400,000/10)
2,010,000 1,675,000 1,340,000
Unsold
Cost
5 4 3
10,050,000 6,700,000 4,020,000 20,770,000
Problem 7-37 Inventory 1,750,000 50,000 20,000 26,000 25,000 30,000 10,000 1,911,000
Accounts payable 1,200,000 50,000 60,000 20,000 1,330,000
Net sales 8,500,000 ( 35,000) ( 40,000) -_ __ 8,425,000
Inventory 1,250,000 ( 165,000) ( 20,000) 210,000 25,000 1,300,000
Accounts payable 1,000,000 ( 165,000) 25,000 860,000
Net sales 9,000,000 ( 40,000) - ___ 9,040,000
Unadjusted 1 2 3 4 5 6 7 8 Adjusted Problem 7-38 Unadjusted 1 2 3 4 5 Problem 7-39 1. Biological asset Cash
600,000
2. Biological asset Gain from change in fair value
700,000
3. Biological asset Gain from change in fair value
100,000
4. Loss from change in fair value Biological asset
600,000 700,000 100,000 90,000 90,000
102
Problem 7-40 Requirement 1 1. To record the purchase of one animal aged 2.5 years on July 1. Biological assets Cash
108 108
2. To record the birth of one animal on July 1 with fair value of P70. Biological assets Cash
70 70
3. To record the change in the fair value: Biological assets Cash
222
222
Fair value of 10 animals on January 1 (10 x P100) Newborn animal on July 1 at fair value Acquisition cost of one animal on July 1 Total book value of biological assets – December 31
1,000 70 108 1,178
Fair value of 3-year old animals on December 31 (11 x P120) Fair value of 0.5-year old animal on December 31, the newborn (1 x P80) Total fair value – December 31, 2008 Book value of biological assets – December 31 Increase in fair value
1,320 80 1,400 1,178 222
Requirement 2 Statement of financial position : Biological assets Income statement: Gain from change in fair value (70 + 222)
1,400 292
Problem 7-41 Answer C Physical count
1,500,000
Problem 7-42 Answer D Physical count Merchandise shipped FOB shipping point on December 30, 2008 from a vendor Goods shipped FOB shipping point to a customer on January 4, 2009
2,500,000 100,000 400,000
Correct inventory
3,000,000 103
Problem 7-43 Answer D Problem 7-44 Answer D Markup (40% x 500,000) Goods received on consignment Total reduction
200,000 400,000 600,000
Problem 7-45 Answer B Inventory shipped on consignment Freight paid Consigned inventory
600,000 50,000 650,000
Problem 7-46 Answer A Reported inventory Goods sold in transit, FOB destination Goods purchased in transit, FOB shipping point Correct amount of inventory
2,000,000 200,000 300,000 2,500,000
Problem 7-47 Answer A Problem 7-48 Answer A Consignment sales revenue (40 x P10,000)
400,000
Problem 7-49 Answer B Sales (900 x 1,000) Commission (10% x 900,000) Payable to consignor
900,000 ( 90,000) 810,000
Problem 7-50 Answer C List price Trade discounts 20% x 900,000 10% x 720,000 Invoice price Freight Cost of purchase
900,000 (180,000) 720,000 ( 72,000) 648,000 50,000 698,000
104 Problem 7-51 Answer B List price Trade discounts 20% x 1,000,000 10% x 800,000 Invoice price Cash discount (5% x 720,000) Net amount Freight charge Total remittance
1,000,000 ( 200,000) 800,000 ( 80,000) 720,000 ( 36,000) 684,000 50,000 734,000
Problem 7-52 Answer A Problem 7-53 Answer B Purchases of IBM compatibles Purchases of commercial software packages Total Less: Purchase return Net purchases
1,700,000 1,200,000 2,900,000 ( 50,000) 2,850,000
Discounts available on purchases (2% x 2,850,000) Less: Purchase discount taken Purchase discount lost
57,000 17,000 40,000
Problem 7-54 Answer D Accounts payable per book Goods lost in transit, FOB shipping point Purchase return Adjusted balance
2,000,000 100,000 ( 50,000) 2,050,000
Problem 7-55 Answer D Accounts payable per book Undelivered checks Unrecorded purchases on December 28 (150,000 x 98%) Purchase on December 20 (200,000 x 95%)
900,000 400,000 147,000 190,000 1,637,000
Problem 7-56 Answer A Net sales per book Sales return Goods shipped on December 31, 2008 Goods shipped on January 3, 2009 recorded on December 30, 2008 Adjusted balance
5,000,000 50,000) 300,000 ( 200,000) 5,050,000 (
105
Problem 7-57 Answer A Gross sales Estimated sales return (10% x 4,000,000) Net sales
(
4,000,000 400,000) 3,600,000
Problem 7-58 Answer A January 18 28 Total FIFO cost
Units 15,000 10,000 25,000
Unit cost 23 24
Total cost 345,000 240,000 585,000
Problem 7-59 Answer A (4,500 x 73.50)
330,750
Problem 7-60 Answer A January 10 February 8
Units 2,000 3,000 5,000
Unit cost 100 110
Weighted average unit cost (530,000/5,000)
Total cost 200,000 330,000 530,000 106
Cost of inventory (3,000 x 106)
318,000
Problem 7-61 Answer B January 1 January 17 Balance January 28 Balance
Units 40,000 (35,000) 5,000 20,000 25,000
Unit cost 5 5 5 8 7.40
Total cost 200,000 (175,000) 25,000 160,000 185,000
Units 200 300 500 1,000 800 200
Total cost 300,000 525,000 1,000,000 1,825,000
Problem 7-62 Answer D January 1 April 3 October 1 Total Less: Sales (400 + 400) Ending inventory Average unit cost (1,825,000/1,000)
1,825
Cost of inventory (200 x 1,825)
365,000 106
Problem 7-63 Answer C
Units
Unit cost
Total cost
January 1 8
8,000 ( 4,000) 4,000 12,000 16,000
20 (3,680,000/16,000 = 230)
200 200 200 240 230
1,600,000 ( 800,000) 800,000 2,880,000 3,680,000
Problem 7-64 Answer C Problem 7-65 Answer B Estimated selling price Cost of disposal Net realizable value (lower than cost)
4,050,000 ( 200,000) 3,850,000
Problem 7-66 Answer B Estimated sales price Cost to complete Net realizable value
4,000,000 (1,200,000) 2,800,000
FIFO cost (lower than NRV)
2,600,000
Problem 7-67 Answer B Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of goods sold before inventory writedown Loss on inventory writedown Cost of goods sold after inventory writedown
700,000 3,300,000 4,000,000 600,000 3,400,000 100,000 3,500,000
Problem 7-68 Answer C Sales price 24,000,000 16,000,000 20,000,000 60,000,000
A (100 x 240,000) B (100 x 160,000) C (200 x 100,000)
Fraction 24/60 16/60 20/60
Allocated cost 6,000,000 4,000,000 5,000,000 15,000,000
Problem 7-69 Answer B Problem 7-70 Answer B
107 CHAPTER 8 Problem 8-1 1. D
Problem 8-2 1. D
2. A 3. B 4. B 5. D 6. C 7. C 8. B 9. D 10. D
2. B 3. A 4. C 5. B 6. C 7. A 8. A 9. B 10. A
Problem 8-3 Answer A Inventory – January 1 Purchases Freight in Total Less: Purchase returns Goods available for sale Less: Cost of sales (4,500,000 x 60%) Inventory – March 31 Problem 8-4 Answer B Inventory – January 1 Purchases Goods available for sale Less: Cost of sales (3,200,000 x 75%) Inventory – December 31 Less: Physical inventory Missing inventory
3,200,000 50,000 3,250,000 75,000
3,175,000 3,825,000 2,700,000 1,125,000
Problem 8-5 Answer D 500,000 2,500,000 3,000,000 2,400,000 600,000 500,000 100,000
Problem 8-6 Answer D Cost of sales (7,000,000 – 1,400,000) Multiply by Sales Less: Collections Accounts receivable
650,000
5,600,000 140% 7,840,000 4,000,000 3,840,000
Cost of sales (3,640,000/130%) 2,800,000 Problem 8-7 Answer A Inventory – Jan. 1 Purchases Goods available for sale Less: Inventory – Dec. 31 Cost of goods sold Gross profit Total sales Less: Cash sales Sales on account Accounts receivable–Jan. 1 Total Less: Collections Accounts receivable-Dec. 31
1,200,000 2,000,000 3,200,000 1,100,000 2,100,000 900,000 3,000,000 500,000 2,500,000 800,000 3,300,000 2,600,000 700,000
108 Problem 8-8 Answer D
Problem 8-9 Answer B
Net sales = 1,200,000 x 5
6,000,000
Inventory – January 1 Purchases
1,800,000 4,500,000
Sales (950,000 x 8) Cost of sales (1,150,000 x 4) Gross margin
7,600,000 4,600,000 3,000,000
Goods available for sale Less: Cost of sales (6,000,000 x 60%) Inventory – December 31
6,300,000 3,600,000 2,700,000
Problem 8-10 Answer B Sales Less: Sales returns Net sales Cost of sales: Inventory – January 1 Purchases Freight in Total Less: Purchase returns, allowances and discounts Goods available for sale Less: Inventory – December 31 Gross income
6,200,000 200,000 6,000,000 1,000,000 5,500,000 250,000 5,750,000 150,000
5,600,000 6,600,000 2,100,000
Gross profit rate on cost (1,500,000/4,500,000)
4,500,000 1,500,000 33 1/3%
Problem 8-11 Answer A Inventory, January 1 Purchases Freight in Purchase returns and allowances Purchase discounts Goods available for sale Less: Cost of sales: Sales Sales returns Net sales Cost of sales (2,100,000/125%) Inventory, December 31
2,000,000 100,000 ( 120,000) ( 80,000)
(
2,200,000 100,000) 2,100,000
500,000
1,900,000 2,400,000
1,680,000 720,000
Problem 8-12 Answer B Sales – 2007 Cost of sales: Net purchases – 2007 Less: Inventory – December 31, 2007 Gross income Rate in 2007 (1,500,000/6,000,000) Inventory – January 1, 2008 Net purchases – 2008 Goods available for sale Less: Cost of sales (9,000,000 x 70%) Inventory – December 31, 2008
6,000,000 5,500,000 1,000,000
25%
Rate in 2008 (25% + 5%)
4,500,000 1,500,000 109 30% 1,000,000 7,500,000 8,500,000 6,300,000 2,200,000
Less: Undamaged merchandise (500,000 x 70%) Realizable value of damaged merchandise Fire loss
350,000 10,000
360,000 1,840,000
Problem 8-13 Answer C Problem 8-14 Answer A Sales – 2006 and 2007 Cost of sales: Inventory – January 1, 2006 Purchases – 2006 and 2007 Goods available for sale Less: Inventory – December 31, 2007 Gross income
7,400,000 850,000 5,370,000 6,220,000 1,040,000
Average rate (2,220,000/7,400,000)
5,180,000 2,220,000 30%
Inventory – January 1, 2008 Purchases – 2008 Goods available for sale Less: Cost of sales (5,000,000 x 70%) Inventory – December 31, 2008 Less: Goods consigned (300,000 x 70%) Goods in transit Fire loss
210,000 190,000
1,040,000 4,360,000 5,400,000 3,500,000 1,900,000 400,000 1,500,000
Problem 8-15 Answer C Average gross profit rate (2,250,000/9,000,000) Inventory – January 1 Net purchases Goods available for sale Less: Cost of sales (5,600,000 x 75%) Inventory – September 30 Less: Undamaged goods (60,000 x 75%) Realizable value of damaged goods Fire loss
25% 660,000 4,240,000 4,900,000 4,200,000 700,000 45,000 25,000
70,000 630,000
110 Problem 8-16 Answer D Average rate
=
3,200,000 ------------------8,000,000
=
40%
Inventory – January 1 Purchases (1,600,000 + 500,000 – 400,000) Goods available for sale Less: Cost of sales: Collections Accounts receivable – December 31 Accounts receivable – January 1 Sales
500,000 1,700,000 2,200,000 2,640,000 440,000 ( 480,000) 2,600,000
Cost of sales (2,600,000 x 60%) Inventory – December 1 Less: Goods on consignment (200,000 x 60%) Salvage value Fire loss
1,560,000 640,000 120,000 20,000
140,000 500,000
Problem 8-17 Question 1 Answer A Gross profit rate: 2005 (750,000/3,000,000) 2006 (1,050,000/3,500,000) 2007 (1,295,000/3,700,000) 2008
25% 30% 35% 40%
There seems to be a trend in the gross profit rate, which is a yearly increase of 5%. Thus, it can be safely assumed that the trend continues in 2008. Inventory – January 1 Net purchases, January 1 – October 15 Goods available for sale Less: Cost of sales: Sales Sales return and allowances Net sales Cost of sales (3,800,000 x 60%) Inventory – October 15 Less: Inventory not destroyed Fire loss
500,000 3,500,000 4,000,000 (
3,840,000 40,000) 3,800,000 2,280,000 1,720,000 320,000 1,400,000 111
Question 2 Answer D Goods available for sale Cost of sales (70% x 3,800,000) Inventory, October 15 Inventory not destroyed Fire loss
4,000,000 2,660,000 1,340,000 320,000 1,020,000
Problem 8-18 Answer D Problem 8-19 Answer A Problem 8-20 Answer B Net sales in 2007 Less: Cost of sales Beginning inventory Net purchases in 2007 Goods available for sale Less: Ending inventory Gross profit
8,000,000 2,000,000 4,800,000 6,800,000 1,200,000
Gross profit rate (2,400,000/8,000,000) Inventory, January 1, 2008 Net purchases – 2008 Goods available for sale Less: Cost of sales Sales Less: Sales return and allowances Net sales
5,600,000 2,400,000 30% 1,200,000 4,960,000 6,160,000
7,880,000 80,000 7,800,000
Cost of sales (7,800,000 x 70%) Estimated value of ending inventory Less: Cost of inventory not stolen Estimated cost of stolen inventory
5,460,000 700,000 100,000 600,000
112 Problem 8-21 Answer A Raw materials – January 1 Purchases Freight in Raw materials available for use Less: Raw Materials – December 31 Raw materials used Direct labor Manufacturing overhead (50% x 800,000)
1,000,000 100,000
300,000 1,100,000 1,400,000 600,000 800,000 800,000 400,000
Total manufacturing cost Add: Goods in process – January 1 Total goods in process Less: Goods in process – December 31 (squeeze) Cost of goods manufactured Add: Finished goods – January 1 Goods available for sale Less: Finished goods _ December 31 Cost of sales (70% x 3,000,000)
2,000,000 1,000,000 3,000,000 1,300,000 1,700,000 1,400,000 3,100,000 1,000,000 2,100,000
The amount of goods in process on December 31is computed as simply working back. Problem 8-22
Balances 1 2 3 4 Adjusted
Requirement a Physical inventory May 31, 2008 950,000 ( 55,000) 895,000
Purchases up to May 31, 2008 6,750,000 75,000 ( 10,000) ( 20,000) ( 55,000) 6,740,000
Purchases up to June 30, 2008 8,000,000 ( 15,000) ( 20,000) -_ __ 7,965,000
Inventory – July 1, 2007 Purchases up to May 31, 2008 Goods available for sale Less: Inventory – May 31, 2008 Cost of sales
875,000 6,740,000 7,615,000 895,000 6,720,000
Sales up to May 31, 2008 Cost of sales Gross profit
8,400,000 6,720,000 1,680,000
Rate (1,680,000/8,400,000)
20% Requirement b
Sales for year ended June 30, 2008 Less: Sales for 11 months ended May 31, 2008 Sales for June
Cost of goods sold with profit (1,100,000 x 80%) Cost of goods sold without profit Cost of goods sold during June 2008
9,600,000 8,400,000 1,200,000 113 880,000 100,000 980,000
Requirement c Inventory, July 1, 2007
875,000
Purchases for year ended June 30, 2008 (as adjusted) Goods available for sale Less: Cost of goods sold Sales with profit (9,500,000 x 80%) Sales without profit Inventory, June 30, 2008
7,965,000 8,840,000 7,600,000 100,000
7,700,000 1,140,000
Problem 8-23 1. Accounts receivable – April 30 Writeoff Collections (440,000 – 20,000) Total Less: Accounts receivable – March 31 Sales for April Sales up to March 31 Total sales
1,040,000 60,000 420,000 1,520,000 920,000 600,000 3,600,000 4,200,000
2. Accounts payable – April 30 for April shipments Payment for April merchandise shipments Purchases of April Purchases up to March 31 Total purchases
340,000 80,000 420,000 1,680,000 2,100,000
3. Inventory – January 1 Purchases Less: Purchases return Goods available for sale Less: Cost of sales (4,200,000 x 60%) Inventory – April 30 Less: Goods in transit Salvage value Fire loss
1,880,000 2,100,000 20,000
100,000 140,000
240,000 1,200,000
114
Problem 8-24 Answer B Cost 280,000 2,480,000 75,000
Inventory – January 1 Purchases Freight in Markup Markup cancellation GAS Cost ratio (2,835/6,300)
2,080,000 3,960,000 2,520,000 1,440,000
__ __ __ _ 2,835,000 45%
Retail 700,000 5,160,000 500,000 ( 60,000) 6,300,000
Markdown Markdown cancellation GAS – Average
_ __ _ 2,835,000
Sales Shrinkage (2% x 5,000,000) Inventory – December 31
( 250,000) 50,000 6,100,000 (5,000,000) ( 100,000) 1,000,000
Conservative cost (1,000,000 x 45%)
450,000
The “approximate lower of average cost or market” retail is the same as the conservative or conventional retail. Problem 8-25 Answer C Cost 720,000 4,080,000
Inventory – January 1 Purchases Markup Markdown GAS
__ _____ 4,800,000
Cost ratio (4,800/7,500)
64%
Sales Shoplifting losses Inventory
(5,900,000) ( 100,000) 1,500,000
Average cost (1,500,000 x 64%)
960,000
Problem 8-26 Answer D Beginning inventory and purchases Net markup GAS
Problem 8-27 Answer A
Cost
Retail
6,000,000 ________ 6,000,000
9,200,000 400,000 9,600,000
Cost ratio (6,000/9,600) = 62.5% Sales Net markdown Ending inventory
Retail 1,000,000 6,300,000 700,000 ( 500,000) 7,500,000
Beginning inventory Purchases Net markups Net markdown Net purchases
115
Cost 600,000 3,000,000
Retail 1,500,000 5,500,000 500,000 __ _____ (1,000,000) 3,000,000 5,000,000
Cost ratio (3,000/5,000) = 60% (7,800,000) ( 600,000) 1,200,000
GAS Sales
3,600,000
6,500,000 (4,500,000)
Conservative cost (1,200,000 x 62.5%)
Ending inventory 750,000
Goods available for sale Less: Ending inventory Cost of sales
6,000,000 750,000 5,250,000
FIFO cost (2,000,000 x 60%)
Problem 8-28 Answer A Inventory – January 1 Purchases Freight in Net markup Net markdown Net purchases (6,000/8,000) Goods available for sale Sales Inventory – December 31
2,000,000 1,200,000
Cost 1,200,000 5,600,000 400,000 75%
FIFO cost (2,200,000 x 75%)
Retail 1,800,000 7,200,000 1,400,000 600,000) 8,000,000 9,800,000 (7,600,000) 2,200,000
________ 6,000,000 7,200,000
(
1,650,000
Goods available for sale Less: Inventory – December 31 Cost of goods sold
7,200,000 1,650,000 5,550,000
Problem 8-29 Answer C Cost 4,900,000
Available for sale Markdown Sales Inventory, December 31 Average cost (1,400,000 x 71%) Cost ratio (4,900,000 / 6,900,000)
Retail 7,000,000 ( 100,000) (5,500,000) 1,400,000
994,000 71% 116
Problem 8-30 Inventory, January 1 Purchases Transportation in Purchases return Purchase discount Markup Cancelation of markup Goods available for sale – conservative Cost ratio – conservative (357/510) Markdown Cancelation of markdown Goods available for sale – average cost
Cost 500,000 3,070,000 70,000 ( 25,000) ( 45,000)
70%
________ 3,570,000 ________ 3,570,000
Retail 770,000 4,300,000 (
40,000)
(
100,000 30,000) 5,100,000
( 350,000) 10,000 4,760,000
Cost ratio – average cost (357/476) Less: Sales Sales return Inventory, December 31 at selling price
75% (
Conservative cost (840,000 x 70%) Average cost (840,000 x 75%)
4,000,000 80,000)
3,920,000 840,000
588,000 630,000
Problem 8-31 Beginning inventory Purchases Freight in Purchase returns Purchase allowances Departmental transfer in Markup Goods available for sale – conventional Cost ratio (4,800/8,000) Markdown Goods available for sale – average Cost ratio (4,800/7,500) Less: Sales Employee discount Spoilage and breakage Ending inventory
60%
Cost 340,000 4,500,000 100,000 ( 150,000) ( 90,000) 100,000 ________ 4,800,000 ________ 4,800,000
Retail 640,000 7,300,000 ( 250,000) 160,000 150,000 8,000,000 ( 500,000) 7,500,000
64% 6,600,000 100,000 200,000
Conservative cost (600,000 x 60%) Average cost (600,000 x 64%)
6,900,000 600,000
360,000 384,000
117
Problem 8-32 Beginning inventory Purchases Freight in Markup Markup cancellation Goods available for sale – conservative Cost ratio (3,016/3,770) Markdown Markdown cancellation Goods available for sale – average Less: Sales Shrinkage (4% x 3,000,000) Ending inventory
Cost 168,000 2,806,000 42,000
80%
_______ 3,016,000
Retail 400,000 3,100,000 ( (
_________ 3,016,000 3,000,000 120,000
300,000 30,000) 3,770,000 150,000) 40,000 3,660,000
3,120,000 540,000
Conservative cost (540,000 x 80%) Physical inventory (500,000 x 80%) Shortage
432,000 400,000 32,000
Inventory, December 31 Inventory shortage Income summary
400,000 32,000
432,000
Problem 8-33 1. Opening inventory Purchases Freight in Purchase allowances Departmental transfer – credit Additional markup Markup cancellation Goods available for sale – conventional Cost ratio (5,250/7,000) Markdown (500,000 – 400,000) Goods available for sale – average
Cost 1,650,000 3,700,000 200,000 ( 100,000) ( 200,000)
75%
Retail 2,200,000 4,950,000
________ 5,250,000
( 300,000) 180,000 ( 30,000) 7,000,000
________ 5,250,000
( 100,000) 6,900,000
Less: Sales Inventory shortage Ending inventory at sales price
4,000,000 100,000
Ending inventory at cost (2,800,000 x 75%)
2,100,000
2. Goods available for sale Less: Ending inventory Cost of sales
4,100,000 2,800,000
5,250,000 2,100,000 3,150,000 118
Problem 8-34 Inventory, January 1 Purchases Markup (5,000 x 100) Markup cancelation (1,000 x 100) Goods available for sale – conservative Markdown Goods available for sale – average
Cost 560,000 4,000,000 (60%) (64%)
_________ 4,560,000 _________ 4,560,000
Net sales Inventory, December 31 Conservative cost (1,925,000 x 60%) Average cost (1,925,000 x 64%)
Retail 1,000,000 6,200,000 500,000 ( 100,000) 7,600,000 ( 475,000) 7,125,000 (5,200,000) 1,925,000
1,155,000 1,232,000
Problem 8-35 Cost 144,000 1,200,000 1,344,000 504,000 840,000
Finished goods – January 1 Cost of goods manufactured (squeeze Goods available for sale Less: Finished goods – December 31 Cost of goods sold
Retail 240,000 2,000,000 2,240,000 840,000 1,400,000
The amount of goods manufactured at retail is determined by simply working back. Cost ratio
= = =
Goods manufactured at cost ------------------------------------------------Goods manufactured at retail 1,200,000/2,000,000 60%
Finished goods: January 1 - 240,000 x 60% Problem 8-36 Inventory – January 1, 2008 Purchases Net markup Net markdown Net purchases (65%) Goods available for sale
144,000
December 31 - 840,000 x 60% Cost 556,800 4,576,000 ________ 4,576,000 5,132,800
Sales Inventory – December 31, 2008 FIFO inventory (65% x 1,128,000)
504,000
Retail 928,000 7,028,000 42,000 ( 30,000) 7,040,000 7,968,000 (6,840,000) 1,128,000
733,200
1,128,000 119
Inventory – January 1, 2009 Purchases Net markup Net markdown Net purchases (70%) Goods available for sale
Cost 733,200 4,760,000 ________ 4,760,000 5,493,200
Sales Inventory – December 31, 2009 FIFO inventory (70% x 1,000,000)
Retail 1,128,000 6,812,000 56,000 ( 68,000) 6,800,000 7,928,000 (6,928,000) 1,000,000
700,000
1,000,000
Problem 8-37 Inventory, January 1, 2008 Purchases adjusted for markup and markdown Goods available for sale
72%
Cost 420,000 5,011,200 5,431,200
Retail 600,000 6,960,000 7,560,000
Sales – 2008 Inventory, December 31, 2008
(6,839,000) 721,000
FIFO cost (721,000 x 72%)
519,120
Inventory, January 1, 2009 Purchases adjusted Goods available for sale
70%
519,120 4,970,000 5,489,120
721,000 7,100,000 7,821,000
Sales – 2009 Inventory, December 31, 2009
(7,033,000) 788,000
FIFO cost (788,800 x 70%)
551,600
120
CHAPTER 9 Problem 9-1 1. 2. 3. 4. 5.
A C C A A
6. 7. 8. 9. 10.
Problem 9-4 Red White Blue Green
Problem 9-2 D D B B B
1. 2. 3. 4. 5.
A D C B C
6. 7. 8. 9. 10.
Problem 9-3 B A C B D
1. 2. 3. 4. 5. Cost 300,000 500,000 1,000,000 2,000,000
D A C A C Market 250,000 700,000 1,100,000 1,700,000
Total
3,800,000
1. Trading securities Cash
3,800,000
2. Unrealized loss – trading securities Trading securities (3,800,000 – 3,750,000)
50,000
3,750,000 3,800,000 50,000
Problem 9-5 1. Unrealized loss – TS Trading securities 2. Cash Loss on sale of trading securities Trading securities 3. Trading securities (680,000 – 610,000) Unrealized gain – TS A Common (4,000 x 80) C Preferred (2,000 x 180) Problem 9-6
60,000 60,000 140,000 20,000 70,000 Carrying amount 300,000 310,000 610,000
160,000 70,000 Market 320,000 360,000 680,000
December 31, 2008: Trading securities Unrealized gain - TS (2,500,000 – 2,000,000)
500,000
Unrealized loss – AFS Available for sale securities
100,000
500,000 100,000 121
December 31, 2009: Unrealized loss – TS Trading securities (2,500,000 – 2,200,000)
300,000
Available for sale securities - AFS Unrealized loss – AFS Unrealized gain – AFS
200,000
300,000 100,000 100,000
Problem 9-7 December 31, 2008: Unrealized loss – AFS Available for sale securities
150,000 150,000
December 31, 2009: Available for sale securities – AFS Unrealized loss – AFS
50,000
50,000
Problem 9-8 1. Unrealized loss – AFS Available for sale securities
100,000
2. Cash Loss on sale of AFS securities Available for sale securities Unrealized loss – AFS
2,100,000 400,000
3. No entry XYZ RST
100,000
2,000,000 500,000 Carrying amount 1,200,000 200,000 1,400,000
Unrealized loss in 2008 Unrealized loss – 12/31/2008 (600,000 – 500,000) Cumulative unrealized loss – 12/31/2009
Market 1,200,000 200,000 1,400,000 0 ( 100,000) ( 100,000)
Total cost (1,000,000 + 500,000) Market value Cumulative unrealized loss
1,500,000 1,400,000 100,000 122
Problem 9-9 2008 1. Trading securities Available for sale securities Cash
2,900,000 3,600,000
2. Unrealized loss – TS Trading securities (2,900,000 – 2,400,000)
500,000
3. Available for sale securities Unrealized gain – AFS (3,600,000 – 4,000,000)
400,000
2009 1. Cash Trading securities (1/2 x 1,400,000) Gain on sale of TS 2. Cash Unrealized gain – AFS (1/2 x 500,000)
6,500,000 500,000 400,000
1,000,000 700,000 300,000 1,300,000 250,000
Available for sale securities (1/2 x 2,500,000) Gain on sale of AFS securities 3. Trading securities Unrealized gain – TS (2,000,000 – 1,700,000) Security One Security Two 4. Available for sale securities Unrealized gain – AFS Security Three Security Four
1,250,000 300,000 300,000 Carrying value 700,000 1,000,000 1,700,000 50,000 1,500,000 1,250,000 2,750,000
Security Three Security Four (1/2 x 2,000,000) Total cost Market value Cumulative unrealized gain – 12/31/2009
2009 Dec. 31 Investment equity security Unrealized loss – transfer of AFS Available for sale securities Unrealized loss – AFS 31 Available for sale securities Unrealized loss – AFS Unrealized gain – AFS Market of W and X – 12/31/2009 Market of W and X – 12/31/2008 Increase in value
50,000 1,600,000 1,200,000 2,800,000
150,000 50,000 200,000 123
Problem 9-10
Dec. 31 Unrealized loss – AFS Available for sale securities
Market 900,000 1,100,000 2,000,000
1,600,000 1,000,000 2,600,000 2,800,000 200,000
Unrealized gain – AFS 12/31/2008 (400,000 – 250,000) Unrealized gain in 2009 Cumulative unrealized gain – 12/31/2009
2008 Jan. 1 Available for sale securities Cash
300,000
1,320,000 1,320,000 80,000 80,000 650,000 70,000 650,000 70,000 110,000
10,000 100,000 700,000 590,000 110,000
Problem 9-11 December 31, 2008 Unrealized loss – TS Trading securities Available for sale securities – AFS Unrealized gain – AFS December 31, 2009 Trading securities Unrealized gain – TS (5,500,000 – 4,600,000) Available for sale securities Unrealized gain – AFS (3,300,000 – 3,100,000)
400,000 100,000
900,000 200,000
400,000 100,000
900,000 200,000
Problem 9-12 01/01/2008
12/31/2008
Trading securities AFS securities Cash Trading securities Unrealized gain – TS
2,000,000 4,000,000 6,000,000 500,000 500,000
124 12/31/2008
Unrealized loss – AFS AFS securities
700,000
12/31/2009
Trading securities Unrealized gain - TS
200,000
Impairment loss – AFS Unrealized loss – AFS
700,000
Unrealized loss – TS Trading securities
600,000
AFS securities Unrealized gain – AFS (4,200,000 – 3,300,000)
900,000
12/31/2010
700,000 200,000 700,000 600,000 900,000
Problem 9-13 2008
Available for sale securities Cash Unrealized loss – AFS Available for sale securities (6,000,000 – 5,700,000)
6,000,000 300,000
6,000,000 300,000
2009
Unrealized loss – AFS Available for sale securities (5,700,000 – 5,200,000) Held to maturity securities Available for sale securities
500,000 500,000 5,200,000 5,200,000
The total unrealized loss of P800,000 (300,000 + 500,000) will still be reported in equity but it will be subsequently amortized through interest income over the remaining term of the debt securities. Problem 9-14 2008 Jan. 1 Held to maturity securities Cash Dec. 31 Cash (8% x 4,000,000) Interest income 31 Held to maturity securities Interest income
3,649,600 320,000 44,960
Interest income (10% x 3,649,600) Interest received Amortization
3,649,600 320,000 44,960 364,960 320,000 44,960 125
2009 Dec. 31 Cash Interest income 31 Held to maturity securities Interest income
320,000 49,456
Interest income (10% x 3,694,560) Interest received Amortization 31 Available for sale securities Held to maturity securities 31 Available for sale securities Unrealized gain – AFS Market value (4,000,000 x 105) Book value Unrealized gain Problem 9-15
320,000 49,456 369,456 320,000 49,456
3,744,016 3,744,016 455,984
455,984 4,200,000 3,744,016 455,984
01/01/2008
Available for sale securities Cash
6,500,000
12/31/2008
Unrealized loss – AFS Available for sale securities (6,500,000 – 5,750,000)
750,000
06/30/2009
Unrealized loss – AFS Available for sale securities (5,750,000 – 5,300,000)
450,000
06/30/2009
Held to maturity securities Available for sale securities
5,300,000
12/31/2009
No entry is required to recognize the decrease in value of P400,000 (P5,300,000 – P4,900,000).
6,500,000 750,000
450,000
5,300,000
The total unrealized loss of P1,200,000 on the reclassification of AFS securities will continue to be reported as part of equity as a deduction. However, it is amortized through interest income over the remaining life of the debt security starting June 30, 2009.
Problem 9-16 Answer A A common B common C preferred D preferred Total Problem 9-17 Answer A Man Kemo Penn Total Unrealized loss (3,000,000 – 2,800,000)
126 Cost 1,000,000 1,500,000 2,000,000 2,500,000 7,000,000
Market 800,000 1,800,000 1,700,000 2,600,000 6,900,000
Cost 1,000,000 900,000 1,100,000 3,000,000
Market 900,000 1,100,000 800,000 2,800,000 200,000
Problem 9-18 Answer A Total market value – December 31, 2008 Total market value – December 31, 2007 Unrealized gain
2,000,000 1,650,000 350,000
Problem 9-19 Answer A Total market value – December 31, 2008
4,500,000
Total market value – December 31, 2007 Unrealized loss in 2008 Unrealized loss – December 31, 2007 Total unrealized loss – December 31, 2008
4,800,000 ( 300,000) ( 200,000) ( 500,000)
Problem 9-20 Answer C Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain in 2008 Unrealized loss – December 31, 2007 Net unrealized gain – December 31, 2008
1,600,000 1,300,000 300,000 ( 200,000) 100,000
Problem 9-21 Question 1 – Answer B Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain – trading
1,550,000 1,000,000 550,000 127
Question 2 – Answer A Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain in 2008 Unrealized loss – December 31, 2007 (1,500,000 – 1,200,000) Net unrealized loss – December 31, 2008
1,300,000 1,200,000 100,000 ( 300,000) ( 200,000)
Problem 9-22 Answer A The unrealized loss of P40,000 on trading securities is shown in the income statement. However, the unrealized loss of P100,000 on available for sale securities is recognized in equity. Problem 9-23 Answer B Unrealized losses Unrealized gains Net unrealized loss – December 31, 2008
260,000 40,000 220,000
Problem 9-24 Answer B Net sales price Unrealized loss related to B Net amount Carrying amount of B
1,450,000 ( 150,000) 1,300,000 (1,550,000)
Loss on sale
( 250,000)
Net sales price (1,500,000 – 50,000) Less: Cost of B Loss on sale
1,450,000 1,700,000 ( 250,000)
Problem 9-25 Answer C Market value – December 31, 2008 Market value – December 31, 2007 Unrealized gain in 2008 Unrealized loss – December 31, 2007 Net unrealized loss – December 31, 2008
850,000 800,000 50,000 (200,000) (150,000)
Problem 9-26 Answer C Available for sale equity securities, at cost Unrealized loss Market value
2,200,000 ( 200,000) 2,000,000 128
Problem 9-27 Answer C 12/31/2007
Unrealized loss - AFS Available for sale securities (2,000,000 – 1,800,000)
200,000
12/31/2008
Available for sale securities Unrealized loss – AFS (1,850,000 – 1,800,000)
50,000
200,000
50,000
129
CHAPTER 10 Problem 10-1 1. 2. 3. 4. 5.
C C A A C
6. 7. 8. 9. 10.
D B D A C
Problem 10-2 A (8,000 x 100) B (16,000 x 150) C (1,000,000 x 90%) Investment in A shares Investment in B shares Investment in C Bonds Cash
Market value 800,000 2,400,000 900,000 4,100,000
Fraction 8/41 24/41 9/41 600,000 1,800,000 675,000
Allocated cost 600,000 1,800,000 675,000 3,075,000
3,075,000
Problem 10-3 Requirement 1 a. Investment in equity securities Cash
309,000
b. Investment in equity securities Cash
1,030,000
Requirement 2
309,000 1,030,000
a. Cash Loss on sale of investment Investment in equity securities
405,000 32,750 437,750
Lot No. 1 – 1,000 shares Lot No. 2 - 500 shares (500/4,000 x 1,030,000)
309,000 128,750 437,750
b. Cash Investment in equity securities (1,500/5,000 x 1,339,000) Gain on sale of investment
405,000
401,700 3,300
Problem 10-4 July 15
Cash Dividend income (5,000 shares x 5)
Dec. 15
Memo – Received 1,000 shares representing 20% stock dividend on 5,000 original shares held.
28
25,000
Cash (3,000 shares x 60) Investment in equity securities Gain on sale of investment
25,000 130
180,000 133,000 47,000
Lot No. 1 (2,400 shares) Lot No. 2 (600/3,600 x 198,000) Cost of investment sold
100,000 33,000 133,000
Problem 10-5 1. Investment in XYZ ordinary shares (40,000 x 50) Cash
2,000,000
2,000,000
2. Memo – Received 200,000 XYZ ordinary shares as a result of 5 for 1 split of 40,000 original shares. 3. Investment in XYZ preference shares Investment in XYZ ordinary shares Ordinary shares (200,000 x 15) Preference shares (20,000 x 10) 4. Investment in ABC ordinary shares Dividend income (200,000/4 = 50,000 x 6)
125,000 Market value 3,000,000 200,000 3,200,000
Fraction 30/32 2/32 300,000
5. Cash (80,000 x 15) 1,200,000 Investment in XYZ ordinary shares (80,000/200,000 x 1,875,000) Gain on sale of investment
125,000 Cost 1,875,000 125,000 2,000,000 300,000 750,000 450,000
Problem 10-6 1. Investment in ANA ordinary shares Cash
300,000
2. Investment in Benguet ordinary shares Dividend income (2,000 x 60)
120,000
3. Investment in ANA ordinary shares Cash
420,000
4. Cash Dividend income (12% x P200 = 24 x 5,000 x 1/2)
60,000
300,000 120,000 420,000 60,000 131
5. Memo – Received 20,000 new ANA ordinary shares as a result of a 2 for 1 split of 10,000 original shares. 6. Cash (680,000 – 34,000) Investment in ANA ordinary shares (8,000/20,000 x 720,000) Gain on sale of investment SMC preference share Benguet ordinary share Benguet ordinary share ANA ordinary share Problem 10-7 1. Investment in ABC ordinary shares Cash
646,000
Shares 5,000 10,000 2,000 12,000 29,000 720,000
288,000 358,000 Cost 1,200,000 1,000,000 120,000 432,000 2,752,000
720,000
2. Memo – Received 2,000 shares as 20% stock dividend on 10,000 original shares. Shares now held, 12,000. 3. Cash (2,000 x 70) 140,000 Investment in ABC ordinary shares (2,000/12,000 x 720,000) Gain on sale of investment
120,000 20,000
4. Investment in ABC preference shares (5,000 x 70) Investment in ABC ordinary shares (5,000/10,000 x 600,000) Gain on exchange
350,000
300,000 50,000
5. Investment in ABC ordinary shares Cash (5,000 x 20)
100,000
Problem 10-8 a. 2004
Cash
400,000
100,000
Investment in equity securities
400,000
2005
Cash Dividend income Investment in equity securities
400,000
2006
Cash Dividend income Investment in equity securities
400,000
2007
Cash 400,000 Dividend income Investment in equity securities (1,000,000 – 950,000) Gain on investment
100,000 300,000 150,000 250,000 200,000 50,000 150,000 132
2008
b.
Cash Dividend income Gain on investment
400,000
250,000 150,000
The investment account has been totally eliminated as of December 31, 2007 because the liquidating dividends received exceed the cost of investment. Hence, there is no more investment account to be reported in the December 31, 2008 statement of financial position, but such fact should be disclosed in the notes to financial statements to the effect that the company is still the owner of 10,000 shares with a zero cost.
Problem 10-9 1. Investment in equity securities Cash
1,800,000
1,800,000
2. 10,000 rights 3. Cost of rights (10/200 x 1,800,000)
90,000
4. Stock rights Investment in equity securities
90,000
5. Investment in equity securities Cash (10,000/5 = 2,000 x 150) Stock rights
390,000
6. Cash (10,000 x 10) Stock rights Gain on sale of rights
100,000
7. Loss on stock rights Stock rights
90,000 300,000 90,000 90,000 10,000
90,000 90,000
Problem 10-10
Requirement 1
125 - 100 Theoretical value = --------------------- = 5.00 per right 4+1 a. Stock rights (5/125 x 2,100,000) Investment in equity securities
84,000
b. Investment in equity securities Stock rights Cash (25,000/4 = 6,250 x 100)
709,000
84,000 84,000 625,000 133 Requirement 2
125 - 100 Theoretical value = --------------------- = 6.25 per right 4 a. Stock rights (6.25/131.25 x 2,100,000) Investment in equity securities
100,000
b. Investment in equity securities Stock rights Cash
725,000
100,000 100,000 625,000
Problem 10-11 1. Stock rights (10/100 x 3,000,000) Investment in equity securities 2. Investment in equity securities Stock rights (30,000/40,000 x 300,000) Cash (15,000 shares x 80)
300,000 1,425,000 225,000
1,200,000
3. Cash (6,000 x 10) Stock rights (6,000/40,000 x 300,000) Gain on sale of rights
60,000
4. Loss on stock rights (4,000/40,000 x 300,000) Stock rights
30,000
First acquisition (3,000,000 – 300,000) New acquisition
300,000
45,000 15,000
Shares 40,000 15,000 55,000
30,000 Cost 2,700,000 1,425,000 4,125,000
Problem 10-12 1. Investment in equity securities Cash
3,200,000
3,200,000
2. Memo – Received 20,000 shares as stock dividend on 80,000 original shares. Shares now held, 100,000. 3. Cash (100,000 x 5) Dividend income
500,000
4. Stock rights (5/40 x 3,200,000) Investment in equity securities
400,000
500,000 400,000
134 5. Cash (40,000 x 5) Stock rights (40,000/100,000 x 400,000) Gain on sale of rights
200,000
6. Investment in equity securities Stock rights (60,000/100,000 x 400,000) Cash (60,000/5 = 12,000 x 30)
600,000
7. Cash (80,000 x 35) Investment in equity securities (80,000/100,000 x 2,800,000) Gain on sale of investment Original acquisition New acquisition
160,000 40,000
2,800,000
240,000 360,000 2,240,000 560,000
Shares 20,000 12,000 32,000
Cost 560,000 600,000 1,160,000
Problem 10-13 2008 Aug. 1 Oct. 1 2009 July 1 Aug. 1
Investment in equity securities Cash
60,000
Investment in equity securities Cash
560,000
Investment in equity securities Cash
480,000
Cash Investment in equity securities Gain on sale of investment
500,000
60,000 560,000 480,000 340,000 160,000
Lot 1 (1,000 shares) Lot 2 (4,000/8,000 x 560,000) Cost of investment sold 2010 Feb. 1 Nov. 1
60,000 280,000 340,000
Received 5,000 shares representing 50% stock dividend on 10,000 remaining shares held. Shares now held, 15,000. Stock rights Investment in equity securities
95,000
Lot 2 – 6,000 rights (10/80 x 280,000) Lot 3 – 9,000 rights (10/80 x 480,000) Cost of rights received
2010 Dec. 1
95,000 35,000 60,000 95,000 135
Cash (15,000 x 10) Stock rights Gain on sale of stock rights
Summary of investments Lot 2 (280,000 – 35,000) Lot 3 (480,000 – 60,000) Total
150,000 95,000 55,000 Shares 6,000 9,000 15,000
Cost 245,000 420,000 665,000
Problem 10-14 Jan. 2
Investment in King Corporation Cash
700,000
Mar. 1
Investment in Plastic Company Cash
660,000
Apr. 1
Cash (10,000 x 5) Dividend income
July 1
Received 2,000 shares as 20% stock dividend on 10,000 Plastic Company shares originally held. Shares now held, 12,000.
Aug. 1 Investment in Makati Corporation Cash
50,000
700,000 660,000 50,000
500,000 500,000
Oct. 1 Received 60,000 new shares of Plastic Company as a result of a 5 for 1 split of 12,000 original shares. 1 Cash (10,000 x 5) Dividend income 31 Stock rights (3/33 x 660,000)
50,000 50,000 60,000
Investment in Plastic Company
60,000
Nov. 15 Investment in Plastic Company Cash (6,000 shares x 20) Stock rights
180,000
Dec. 1 Cash (66,000 shares x 5) Dividend income
330,000
15 Cash (10,000 shares x 30) Investment in Plastic Company (10,000/60,000 x 600,000) Gain on sale of investment
300,000
120,000 60,000 330,000 100,000 200,000
136 Summary of investments King Corporation common Plastic Company common Block 1 Block 2 Makati Corporation common
Shares 10,000
Cost 700,000
50,000 6,000 10,000 76,000
500,000 180,000 500,000 1,880,000
Of course, the investments will simply be described as “investments in equity securities” in the balance sheet. Problem 10-15 Answer A Purchase price (4,000 x P100) Brokerage Total Less: Dividend purchased (4,000 x 5) Acquisition cost
400,000 12,000 412,000 20,000 392,000
Problem 10-16 Answer D Fair value of asset given (land)
3,000,000
Problem 10-17 Answer D Original shares acquired January 15 Stock dividend on March 31 (20% x 50,000) Total shares Dividend income – cash dividend on December 15 (60,000 x 5)
50,000 10,000 60,000 300,000
Problem 10-18 Answer C Dividend income – cash dividend on July 1
100,000
Original shares on March 1 Stock dividend on December 1 (10% x 20,000) Total shares
20,000 2,000 22,000
Problem 10-19 Answer B Original shares on October 1, 2007 Stock dividend on November 30, 2008 (10%) Total shares Shares sold on December 31, 2008 Balance
40,000 4,000 44,000 ( 4,000) 40,000
137 Sales price Cost of shares sold (4,000/44,000 x 6,600,000) Gain on sale
1,000,000 ( 600,000) 400,000
Problem 10-20 Answer B Shares received as property dividend (5,000/5)
1,000
Dividend income (1,000 x 100)
100,000
Problem 10-21 Answer D Cash dividend (10% x 500,000)
50,000
Problem 10-22 Answer A Dividend income (2,000 x 60)
120,000
Problem 10-23 Answer C Sales price (80,000 x 30) Less: Cost of shares sold (80,000 x 40) Loss on disposal Problem 10-24 Answer A Original shares Stock dividend – 20% Total shares
2,400,000 3,200,000 ( 800,000) June 1 20,000 4,000 24,000
Sales price (30,000 x 125) Cost of shares sold: From June 1 – 24,000 shares 2,000,000 From December 1 – 6,000 shares (6,000 / 36,000 x 3,600,000) 600,000
December 1 30,000 6,000 36,000 3,750,000 2,600,000
Gain on sale
1,150,000
Problem 10-25 Answer B Cost of rights (5/100 x 8,000,000)
400,000
Problem 10-26 Answer B Sales price (50,000 x 10) Cost of rights sold (10/100 x 3,600,000) Gain on sale of rights
500,000 360,000 140,000
138 Problem 10-27 Answer B Cost of rights (18/150 x 500,000) Cost paid for new shares (2,500 shares x 90) Total cost of new investment Cost per share (285,000 / 2,500 shares)
60,000 225,000 285,000 114
Problem 10-28 Answer B Cost of 2006 rights (4/100 x 180,000) Cost of 2007 rights (4/100 x 330,000) Total cost of rights 900 shares x 5 rights Cash paid (900 x 80) Cost of rights exercised 2006 – 2,250 rights 2007 – 2,250 rights (2,250/3,750 x 13,200) Total cost of 900 shares
7,200 13,200 20,400 4,500 rights 72,000 7,200 7,920 87,120
139 CHAPTER 11 Problem 11-1 1. 2. 3. 4. 5.
A C C A D
6. 7. 8. 9. 10.
A C A D B
Problem 11-2
Problem 11-3
Problem 11-4
1. 2. 3. 4. 5.
1. 2. 3. 4. 5.
1. 2. 3. 4. 5.
B D B A C
Problem 11-5
D D C A C
B C D A A
Equity method
1. Investment in associate Cash
2,400,000
Acquisition cost Net assets acquired (20% x 8,000,000) Goodwill
2,400,000 2,400,000 1,600,000 800,000
2. Investment in associate Investment income (20% x 1,500,000)
300,000
300,000
3. Memo – Received 2,000 shares as 10% stock dividend on 20,000 original shares. Shares now held, 22,000. 4. Investment loss Investment in associate (20% x 300,000) 5. Cash (20% x 500,000) Investment in associate
60,000 100,000
6. Cash (5,500 x 200) Investment in associate Gain on sale of investment
1,100,000
Sales price Less: Cost of investment sold (5,500/22,000 x 2,540,000) Gain on sale
60,000 100,000 635,000 465,000 1,100,000 635,000 465,000
Cost method 1. Investment in equity securities Cash 2. No entry
2,400,000 2,400,000
140 3. Memo – Received 2,000 shares as 10% stock dividend. Shares now held, 22,000. 4. No entry 5. Cash Dividend income 6. Cash Investment in equity securities (5,500/22,000 x 2,400,000) Gain on sale of investment
100,000 1,100,000
100,000 600,000 500,000
Problem 11-6 1. Investment in equity securities Cash 2. Cash (15% x 4,000,000) Dividend income (15% x 3,000,000) Investment in equity securities (15% x 1,000,000)
6,000,000 600,000
6,000,000 450,000 150,000
Problem 11-7 2008
Investment in associate Cash
5,000,000
Investment in associate Investment income (30% x 4,000,000 x 3/12)
300,000
Cash (30% x 3,000,000) Investment in associate
900,000
Investment income Investment in associate (200,000 x 3/12) 2009
5,000,000
Investment in associate Investment income (30% x 6,000,000)
300,000 900,000 50,000 50,000 1,800,000 1,800,000
Cash (30% x 5,000,000) Investment in associate
1,500,000
Investment income Investment in associate
200,000
1,500,000 200,000
141 Problem 11-8 2006 Jan. 1 Investment in equity securities Cash Dec. 31 Cash (15% x 300,000) Dividend income 2007 Dec. 31 Cash (15% x 400,000) Dividend income 2008 Jan. 1 Investment in associate Cash 1 Investment in associate Retained earnings
1,000,000 45,000
60,000
Dec. 31 Investment in associate Investment income (40% x 900,000) 31 Cash (40% x 600,000) Investment in associate
45,000
60,000
3,000,000 3,000,000 75,000
Investment income – Equity method (2006 and 2007) (15% x 500,000 + 700,000) Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) Cumulative effect of change to equity 1 Investment in associate Investment in equity securities (Reclassification)
1,000,000
1,000,000
360,000 240,000
75,000 180,000 105,000 75,000
1,000,000
360,000 240,000
Problem 11-9 2008 Jan. 1
Investment in associate Cash
Dec. 31 Investment in associate Investment income (30% x 5,000,000) 31 Cash (30% x 2,000,000) Investment in associate
8,000,000 1,500,000 600,000
8,000,000 1,500,000 600,000
142
2009 June 30 Investment in associate Investment income (30% x 6,000,000)
1,800,000
July
6,000,000
Oct.
1 Cash Investment in associate (10,700,000 x 1/2) Gain on sale of investment 1 Cash (2,500,000 x 15%) Dividend income 1
Dec. 31
Available for sale securities Investment in associate (Reclassification)
1,800,000 5,350,000 650,000 375,000 5,350,000
375,000 5,350,000
No entry is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest.
Problem 11-10 Requirement a 1. Investment in associate Cash
3,500,000
2. Investment in associate Investment income (40% x 4,000,000)
1,600,000
3. Cash (40% x 1,000,000) Investment in associate
400,000
4. Investment income Investment in associate (600,000 / 4)
150,000
3,500,000 1,600,000 400,000 150,000
Cost Book value of interest acquired (40% x 7,000,000) Excess of cost over book value Excess attributable to equipment (40% x 1,500,000) Excess attributable to inventory (40% x 500,000) Excess net fair value over cost
3,500,000 2,800,000 700,000 ( 600,000) ( 200,000) ( 100,000)
5. Investment income Investment in associate
200,000
6. Investment in associate Investment income
100,000
200,000 100,000
143
Requirement b Share in net income Amortization of excess attributable to equipment Amortization of excess attributable to inventory Excess net fair value over cost Net investment income
1,600,000 ( 150,000) ( 200,000) 100,000 1,350,000
Problem 11-11 1. Investment in associate Cash 2. Investment in associate Investment income (40% x 650,000) 3. Cash (40% x 150,000) Investment in associate 4. Investment in associate Revaluation surplus – investee (40% x 1,300,000)
1,700,000 260,000 60,000 520,000
1,700,000 260,000 60,000 520,000
Note: 1. Cost Interest acquired (40% x 4,000,000) Goodwill – not amortized
1,700,000 1,600,000 100,000
2. There is no need to adjust for the difference in depreciation method. If both entities a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference.
Problem 11-12 1. Journal entries a. Investment in associate Cash
6,000,000
b. Investment in associate Investment income
750,000
c. Cash Investment in associate
450,000
d. Investment income Investment in associate
200,000
6,000,000 750,000 450,000 200,000
144 2. Share in net income Amortization of patent (2,000,000 / 10) Investment income
750,000 (200,000) 550,000
3. Acquisition cost Share in net income (5,000,000 x 15%) Share in cash dividend (3,000,000 x 15%) Amortization of patent (2,000,000 / 10) Carrying value
6,000,000 750,000 ( 450,000) ( 200,000) 6,100,000
Interest acquired (30,000 / 200,000)
15%
Acquisition cost Book value of net assets acquired Excess of cost applicable to patent
6,000,000 4,000,000 2,000,000
Problem 11-13 1. Journal entries a. Investment in associate Cash
5,000,000
b. Investment in associate Investment income
1,200,000
c. Cash Investment in associate
300,000
d. Investment income Investment in associate
150,000
5,000,000 1,200,000 300,000 150,000
2. Share in net income Amortization of depreciable asset (750,000 / 5) Investment income
1,200,000 ( 150,000) 1,050,000
3. Acquisition cost Share in net income (30% x 4,000,000) Share in cash dividend (30% x 1,000,000) Amortization of depreciable asset (750,000 / 5) Carrying value of investment
5,000,000 1,200,000 ( 300,000) ( 150,000) 5,750,000
Acquisition cost Net assets acquired (30% x 12,000,000) Excess of cost Excess attributable to depreciable asset (30% x 2,500,000) Excess attributable to goodwill
5,000,000 3,600,000 1,400,000 750,000 650,000
145 Problem 11-14 1. Journal entries a. Investment in associate Cash
1,000,000
b. Investment in associate Investment income
175,000
c. Cash Investment in associate
75,000
d. Investment income Investment in associate
50,000
2. Share in net income Amortization of excess (25,000 + 25,000) Investment income 3. Acquisition cost Net assets acquired (25% x 3,000,000) Excess of cost Excess attributable to inventory (25% x 100,000) Excess attributable to equipment (25% x 500,000) Excess attributable to goodwill (25% x 400,000) Acquisition cost Share in net income (25% x 700,000) Amortization of excess: Inventory Equipment (125,000 / 5) Cash dividend (25,000 x 3) Investment balance
1,000,000 175,000 75,000 50,000 175,000 ( 50,000) 125,000 1,000,000 750,000 250,000 25,000 125,000 100,000 250,000 1,000,000 175,000 ( 25,000) ( 25,000) ( 75,000) 1,050,000
Problem 11-15 1. Share in 2008 net income Amortization of excess (400,000 / 20) Investment income for 2008 Acquisition cost (20,000 x 120) Net assets acquired (25% x 8,000,000) Excess of cost
900,000 ( 20,000) 880,000 2,400,000 2,000,000 400,000
146 2. Share in 2008 net income Amortization of excess Investment income for 2009
975,000 ( 20,000) 955,000
3. Acquisition cost Share in net income: 2008 (25% x 3,600,000) 2009 (25% x 3,900,000) Share in cash dividend: 2008 (20,000 x 16) 2009 (20,000 x 20) Amortization of excess: 2008 (400,000 / 20) 2009 Investment balance – 12/31/2009
2,400,000 900,000 975,000 ( 320,000) ( 400,000) ( 20,000) ( 20,000) 3,515,000
Problem 11-16 Requirement a 1. Memo – Received 500 shares as 10% stock dividend on 5,000 original Dale ordinary shares. Shares now held, 5,500. 2. Cash (5,500 x 20) Dividend income
110,000
3. Stock rights (15/150 x 1,600,000) Investment in equity securities – Ever
160,000
Cash Stock rights Gain on sale of stock rights 4. Investment in associate Cash Acquisition cost Net assets acquired: 10% x 16,000,000 20% x 20,000,000 Goodwill Income from Fox investment in 2007 (10% x 4,000,000) Less: Dividend income recorded in 2007 – cost method Understatement of income
110,000 160,000 200,000
5,000,000
160,000 40,000 5,000,000
1/1/2007 2,000,000
1/1/2008 5,000,000
1,600,000 ________ 400,000
4,000,000 1,000,000 400,000 -___ 400,000
147 5. Investment in associate Investment in equity securities (Reclassification) 6. Investment in associate Retained earnings
2,000,000 2,000,000 400,000
7. Investment in associate Investment income (30% x 6,000,000)
1,800,000
8. Cash (75,000 x 20) Investment in associate
1,500,000
400,000 1,800,000 1,500,000
Requirement b Noncurrent assets: Investment in equity securities (Note) Investment in associate – Fox Corporation
2,690,000 7,700,000
Note – Investment in equity securities Dale Corporation, 5,500 shares Ever Corporation, 10,000 shares Total cost
1,250,000 1,440,000 2,690,000
Problem 11-17 Answer D Problem 11-18 Answer D Problem 11-19 Answer B Investment in Lax Corporation
3,000,000
Problem 11-20 Answer C Total cash dividend Cumulative net income Liquidating dividend Cash (10% x 3,000,000) Dividend income (10% x 2,500,000) Investment in equity securities
3,000,000 2,500,000 500,000 300,000 250,000 50,000
Problem 11-21 Answer B Investment income (20% x 1,600,000)
320,000
148 Problem 11-22 Answer A Investment income (20% x 6,000,000)
1,200,000
Problem 11-23 Answer C Interest (30,000/100,000) Investment income (5,000,000 x 6/12 x 30%)
30% 750,000
Problem 11-24 Answer C Cost Less: Net assets acquired (40% x 8,000,000) Excess of cost or goodwill Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%)
4,000,000 3,200,000 800,000 300,000
Problem 11-25 Answer B Acquisition cost Share in net income (20% x 1,800,000) Share in cash dividend (20% x 600,000) Amortization of excess (1,000,000/10) Carrying value
7,000,000 360,000 ( 120,000) ( 100,000) 7,140,000
Problem 11-26 Answer A Acquisition cost Share in net income (10% x 5,000,000) Share in cash dividend (10% x 1,500,000) Carrying value
4,000,000 500,000 ( 150,000) 4,350,000
Problem 11-27 Answer D Acquisition cost (squeeze) Share in net income (25% x 1,200,000) Share in cash dividend (25% x 480,000) Carrying value – December 31
1,720,000 300,000 ( 120,000) 1,900,000
Problem 11-28 Answer D Acquisition cost Less: Book value of net assets acquired (30% x 5,000,000) Excess of cost over book value Less: Amount attributable to undervaluation of land (30% x 2,000,000) Goodwill
2,500,000 1,500,000 1,000,000 600,000 400,000
149 Acquisition cost Add: Share in net income (30% x 1,000,000) Balance, December 31
2,500,000 300,000 2,800,000
The excess of cost attributable to the land is not amortized because the land is nondepreciable. The goodwill is not amortized.
Problem 11-29 Answer B Acquisition cost – January 1 Acquisition cost – December 31 Total cost Share in net income (10% x 8,000,000) Carrying value
1,000,000 3,000,000 4,000,000 800,000 4,800,000
Problem 11-30 Answer C Investment income in 2008 (30% x 6,500,000)
1,950,000
Investment income in 2007 (10% x 6,000,000) Less: Dividend income recorded in 2006 (10% x 2,000,000) Understatement of income Investment in associate Retained earnings
600,000 200,000 400,000 400,000
400,000
Problem 11-31 Answer A Acquisition cost Net assets acquired (30% x 11,800,000) Excess of cost Attributable to depreciable assets (30% x 2,600,000) Attributable to goodwill
5,160,000 3,540,000 1,620,000 780,000 840,000
Acquisition cost Share in net income (30% x 3,600,000) Share in dividends (30% x 400,000) Amortization (780,000/4) Investment balance – December 31
5,160,000 1,080,000 ( 120,000) ( 195,000) 5,925,000
Problem 11-32 Answer B Acquisition cost Net assets acquired (40% x 5,000,000) Excess of cost
2,560,000 2,000,000 560,000
150 Attributable to equipment (40% x 800,000) Attributable to building (40% x 600,000) Acquisition cost Net income (40% x 1,600,000) Cash dividend (40% x 1,000,000) Amortization of excess: Equipment (320,000 / 4) Building (240,000 / 12) Carrying value of investment – 12/31/2008
320,000 240,000 560,000 2,560,000 640,000 ( 400,000) ( (
80,000) 20,000) 2,700,000
Problem 11-33 Answer A Net income Less: Preference dividend (10% x 2,000,000) Net income to ordinary shares
5,000,000 200,000 4,800,000
Investment income (50% x 4,800,000)
2,400,000
Problem 11-34 Question 1 – Answer B Share in 2008 net income (30% x 800,000)
240,000
Question 2 – Answer B Acquisition cost Share in net income – 2008 Cash dividends – 2008 (30% x 500,000) Book value – December 31, 2008
2,000,000 240,000 ( 150,000) 2,090,000
Question 3 – Answer B Book value – December 31, 2008 Share in net income up to June 30, 2009 (30% x 1,000,000) Book value – June 30, 2009
2,090,000 300,000 2,390,000
Sales price Book value sold (2,390,000 x ½) Gain on sale
1,500,000 1,195,000 305,000
151 Problem 11-35 Answer C Acquisition cost (30,000 x 120) Deficit on January 1, 2008 (30% x 500,000) Carrying value of investment – 1/1/2008 Net income for 2008 (30% x 700,000) Net income for 2009 (30% x 800,000) Cash dividend on 12/31/2009 (30% x 400,000) Carrying value of investment – 12/31/2009
3,600,000 ( 150,000) 3,450,000 210,000 240,000 ( 120,000) 3,780,000
Another approach Acquisition cost Share in retained earnings – 12/31/2009 (30% x 600,000) Carrying value of investment – 12/31/2009
3,600,000 180,000 3,780,000
152
CHAPTER 12 Problem 12-1 1. 2. 3. 4. 5.
B B A A D
6. 7. 8. 9. 10.
C C B B C
Problem 12-2
Bonds held as trading
2008 April 1 Trading securities Cash
2,200,000
Oct. 1 Cash (2,000,000 x 12% x 6/12) Interest income Dec. 31 Accrued interest receivable Interest income (2,000,000 x 12% x 3/12) 31 Trading securities Unrealized gain – TS
120,000 60,000 100,000
2009 Jan. 1 Interest income Accrued interest receivable
60,000 100,000
60,000 120,000
Oct. 1 Cash Interest income
120,000
120,000
Dec. 31 Accrued interest receivable Interest income 31 Unrealized loss – TS Trading securities (2,300,000 – 1,960,000)
Oct. 1 Cash Interest income
120,000
60,000
April 1 Cash Interest income
2008 April 1 Held to maturity securities Cash
2,200,000
60,000 340,000
120,000 60,000 340,000
Bonds held to maturity 2,200,000 2,200,000 120,000 120,000
153 2008 Dec. 31 Accrued interest receivable Interest income 31 Interest income (50,000 x 9/12) Held to maturity securities 2009 Jan. 1 Interest income Accrued interest receivable
60,000 37,500
60,000
April 1 Cash Interest income
120,000
Oct. 1 Cash Interest income
120,000
Dec. 31 Accrued interest receivable Interest income 31 Interest income (200,000/4) Held to maturity securities
60,000 50,000
60,000 37,500
60,000 120,000 120,000 60,000 50,000
Problem 12-3 Bonds held as trading Jan. 1 Trading securities Cash July
3,761,000
1 Cash Interest income (4,000,000 x 12%)
Dec. 31 Accrued interest receivable Interest income 31 Trading securities Unrealized gain – TS (4,200,000 – 3,761,000)
240,000 240,000 439,000
3,761,000 240,000 240,000 439,000
Bonds held as available for sale Jan. 1 Available for sale securities Cash July
1 Cash Interest income
3,761,000 240,000
3,761,000 240,000
154 July
1 Available for sale securities Interest income
23,270 23,270
Interest income (3,761,000 x 7%) Interest received Amortization of discount Dec. 31 Accrued interest receivable Interest income 31 Available for sale securities Interest income
263,270 240,000 23,270 240,000 24,899
Interest income (3,784,270 x 7%) Interest accrued Amortization of discount 31 Available for sale securities Unrealized gain – AFS
240,000 24,899 264,899 240,000 24,899
390,831 390,831
Market value (4,000,000 x 105) Book value Unrealized gain
4,200,000 3,809,169 390,831
Problem 12-4 Aug. 1 Trading securities (5,000,000 x 104) Interest income (5,000,000 x 12% x 3/12) Cash
5,200,000 150,000
31 Trading securities (2,000,000 x 98) Interest income (2,000,000 x 12% x 2/12) Cash
1,960,000 40,000
Nov. 1 Cash (5,000,000 x 12% x 6/12) Interest income Dec. 1 Cash (1,880,000 + 20,000) Loss on sale of trading securities Trading securities Interest income (2,000,000 x 12% x 1/12) Selling price (2,040,000 – 160,000) Less: Cost of bonds sold (2,000/5,000 x 5,200,000) Loss on sale
300,000
5,350,000
2,000,000 300,000
1,900,000 200,000 2,080,000 20,000 1,880,000 2,080,000 ( 200,000)
155 Dec. 31 Cash (2,000,000 x 12% x 6/12) Interest income
120,000 120,000
31 Accrued interest receivable (3,000,000 x 12% x 2/12) Interest income 31 Unrealized loss – TS Trading securities
60,000 60,000 160,000
Carrying amount Acme bonds (3,000,000 x 98%) Avco bonds (2,000,000 x 99%)
3,120,000 1,960,000 5,080,000
Current assets: Trading securities, at market value
160,000 Market 2,940,000 1,980,000 4,920,000
4,920,000
Problem 12-5 Requirement a March 1 Trading securities (2,000,000 x 93%) Interest income (2,000,000 x 12% x 1/12) Cash
1,860,000 20,000
April
3,800,000 40,000
Aug.
1 Trading securities (4,000,000 x 95%) Interest income (4,000,000 x 12% x 1/12) Cash
1,880,000
1 Cash (2,000,000 x 12% x 6/12) Interest income
120,000
Sept. 1 Cash (4,000,000 x 12% x 6/12) Interest income
240,000
Oct. 1 Cash (1,010,000 + 10,000) Interest income (1,000,000 x 12% x 1/12) Trading securities Gain on sale of trading securities Sales price (1,000,000 x 105%) Less: Brokerage Net proceeds Less: Cost of bonds sold (1,000/4,000 x 3,800,000) Gain on sale
3,840,000 120,000
240,000
1,020,000 10,000 950,000 60,000 1,050,000 40,000 1,010,000 950,000 60,000
156 Dec. 1 Cash (1,940,000 + 80,000) Trading securities Interest income (2,000,000 x 12% x 4/12) Gain on sale of trading securities
2,020,000 1,860,000 80,000 80,000
Sales price (2,000,000 x 100%) Less: Brokerage Net proceeds Less: Cost of bonds sold Gain on sale
2,000,000 60,000 1,940,000 1,860,000 80,000
31 Accrued interest receivable (3,000,000 x 12% x 4/12) Interest income
120,000
31 Unrealized loss – TS (2,850,000 – 2,700,000) Trading securities
150,000
120,000 150,000
Requirement b Current assets: Trading securities, at market value (3,000,000 x 90)
2,700,000
Problem 12-6 2008 July 1 Trading securities Commission expense Interest income (2,000,000 x 4%) Cash Dec. 31 Unrealized loss – TS Trading securities
2,200,000 50,000 80,000 2,330,000 300,000 300,000
Market value (2,000,000 x 95) Carrying amount Unrealized loss 31 Cash (2,000,000) x 8%) Interest income 2009 March 31 Cash Trading securities Gain on sale of TS Interest income (2,000,000 x 8%) x 3/12)
1,900,000 2,200,000 300,000 160,000
160,000
2,140,000 1,900,000 200,000 40,000
157 Problem 12-7 Requirement 1 Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010
Interest received
Interest income
160,000 160,000 160,000
190,050 193,055 196,395
Discount amortization 30,050 33,055 36,395
Book value 1,900,500 1,930,550 1,963,605 2,000,000
Requirement 2 2008 Jan. 1 Available for sale securities Cash Dec. 31 Cash Interest income
1,900,500 160,000
31 Available for sale securities Interest income
30,050
31 Available for sale securities Unrealized gain – AFS
269,450
Market value (2,000,000 x 110) Carrying amount Unrealized gain 2009 Dec. 31 Cash Interest income
160,000 30,050 269,450 2,200,000 1,930,550 269,450
160,000
31 Available for sale securities Interest income
33,055
31 Available for sale securities Unrealized gain
166,945
Market value 12/31/2009 (2,000,000 x 120) Book value per table – 12/31/2009 Cumulative unrealized gain – 12/31/2009 Unrealized gain – 12/31/2008 Increase in 2009
1,900,500
160,000 33,050 166,945 2,400,000 1,963,605 436,395 269,450 166,945
158
Problem 12-8 Requirement 1 Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010
Interest received
Interest income
300,000 300,000 300,000
379,360 385,709 392,931
Discount amortization 79,360 85,709 92,931
Book value 4,742,000 4,821,360 4,907,069 5,000,000
Requirement 2 2008 Jan. 1 Available for sale securities Cash Dec. 31 Cash Interest income
4,742,000 300,000
31 Available for sale securities Interest income
79,360
31 Available for sale securities Unrealized gain – AFS
428,640
Market value - 12/31/2008 (5,000,000 x 105) Book value – 12/31/2008 Unrealized gain – 12/31/2008 2009 Dec. 31 Cash Interest income 31 Available for sale securities Interest income 31 Cash Unrealized gain - AFS Available for sale securities Gain on sale of AFS Sales price (5,000,000 x 110) Unrealized gain Total Investment balance – 12/31/2009 Unrealized gain – 12/31/2009
4,742,000 300,000 79,360 428,640 5,250,000 4,821,360 428,640
300,000 85,709
300,000 85,709
5,500,000 428,640 5,335,709 592,931 5,250,000 428,640 5,928,640 5,335,709 592,931
159 Another computation Sales price Book value per table – 12/31/2009 Gain on sale
5,250,000 4,907,069 592,931
Problem 12-9 Requirement a 2008 May 1 Held to maturity securities (6,000,000 x 94%) Interest income (6,000,000 x 12% x 3/12) Cash
5,640,000 180,000
Aug. 1 Cash Interest income (6,000,000 x 12% x 6/12)
360,000
Dec. 31 Accrued interest receivable Interest income (6,000,000 x 12% x 5/12)
300,000
31 Held to maturity securities (8,000 x 8) Interest income
64,000
5,820,000 360,000 300,000 64,000
May 1, 2008 – February 1, 2012 = 45 months 360,000 / 45 = 8,000 monthly amortization
Requirement b 2010 May 1 Held to maturity securities (8,000 x 4) Interest income 1 Cash (6,300,000 + 180,000) Held to maturity securities Interest income (6,000,000 x 12% x 3/12) Gain on sale of bonds
32,000 32,000 6,480,000 5,832,000 180,000 468,000
Original cost – May 1, 2008 Add: Discount amortization from May 1, 2008 to May 1, 2010 (8,000 x 24 months) Book value, May 1, 2010
5,640,000 192,000 5,832,000
Selling price (6,000,000 x 105%) Less: Book value Gain on sale
6,300,000 5,832,000 468,000
160 Problem 12-10 1. Held to maturity securities Cash
8,598,400 8,598,400
2. Cash (12% x 8,000,000) Interest income
960,000
3. Interest income Held to maturity securities
100,160
960,000 100,160
Interest received Interest income (10% x 8,598,400) Premium amortization
960,000 859,840 100,160
Problem 12-11 Year
Bond outstanding
Fraction
2008 2009 2010 2011 2012
1,000,000 800,000 600,000 400,000 200,000 3,000,000
10/30 8/30 6/30 4/30 2/30
2008 Jan. 1 Held to maturity securities Cash
Premium amortization 50,000 40,000 30,000 20,000 10,000 150,000
1,000,000 1,000,000
June 30 Cash (100,000 x 12% x 6/12) Interest income
60,000
Dec. 31
Cash Interest income
60,000
Interest income Held to maturity securities
50,000
31 31
Cash
60,000 60,000 50,000 200,000
Held to maturity securities
200,000
161 2009 June 30 Cash (800,000 x 12% x 6/12) Interest income
48,000
Dec. 31 Cash Interest income
48,000
48,000 48,000
31 Interest income Held to maturity securities
40,000
31 Cash Held to maturity securities
200,000
40,000 200,000
Problem 12-12 Year 2008 2009 2010 2011
Bond outstanding 4,000,000 3,000,000 2,000,000 1,000,000 10,000,000
2010 Dec. 31 Cash Interest income 31 Held to maturity securities Interest income 31 Cash Held to maturity securities 2011 Dec. 31 Cash Interest income 31 Held to maturity securities Interest income 31 Cash Held to maturity securities
Fraction 4/10 3/10 2/10 1/10
Discount amortization 120,000 90,000 60,000 30,000 300,000 240,000 60,000 1,000,000
240,000 60,000 1,000,000
120,000 120,000 30,000 30,000 1,000,000 1,000,000
162 Problem 12-13 Bond Months Peso Bond year outstanding outstanding months 10/01/2008 – 02/01/2009 3,000,000 4 12,000,000 02/01/2009 - 02/01/2010 2,000,000 12 24,000,000 02/01/2010 – 02/01/2011 1,000,000 12 12,000,000 48,000,000
Fraction 12/48 24/48 12/48
2008 Oct. 1 Held to maturity securities Interest income (3,000,000 x 12% x 2/12) Cash Dec. 31 Accrued interest receivable Interest income (3,000,000 x 12% x 5/12) 31 Held to maturity securities Interest income (75,000 x 3/4)
2009 Jan. 1 Interest income Accrued interest receivable Feb. 1 Cash (3,000,000 x 12% x 6/12) Interest income 1 Cash
2,700,000 60,000
Discount amortization 75,000 150,000 75,000 300,000
2,760,000
150,000 150,000 56,250 56,250
150,000 150,000 180,000 180,000 1,000,000
Held to maturity securities
1,000,000
Aug. 1 Cash (2,000,000 x 12% x 6/12) Interest income
120,000
Dec. 31 Accrued interest receivable Interest income (2,000,000 x 12% x 5/12)
100,000
31 Held to maturity securities Interest income From January1 to February 1, 2009 (75,000 x 1/4) From February 1 to December 31, 2009 (150,000 x 11/12) Total amortization for year 2009
156,250
120,000 100,000 156,250 18,750 137,500 156,250
163 Problem 12-14 Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 2008 Jan. 1
Interest received
Interest income
Discount amortization
400,000 400,000 400,000 400,000
450,842 456,943 463,776 471,424
50,842 56,943 63,776 71,424
Held to maturity securities Cash
Dec. 31 Cash
3,757,015 400,000
Interest income
31 Held to maturity securities Interest income
50,842
Book value 3,757,015 3,807,857 3,864,800 3,928,576 4,000,000
3,757,015 400,000 50,842
Problem 12-15 Date Jan. 01, 2008 June 30, 2008 Dec. 31, 2008 June 30, 2009 Dec. 31, 2009
Interest received
Interest income
120,000 120,000 120,000 120,000
93,345 92,546 91,722 90,877
2008 Jan. 1 Held to maturity securities Cash June 30 Cash Interest income 30 Interest income Held to maturity securities Dec. 31 Cash Interest income 31 Interest income Held to maturity securities
Premium amortization Carrying value 3,111,510 26,655 3,084,855 27,454 3,057,401 28,278 3,029,123 29,123 3,000,000 3,111,510 3,111,510 120,000 120,000 26,655 26,655 120,000 27,454
120,000 27,454
164 Problem 12-16 1. Journal entries a. Held to maturity securities Cash
7,679,000 7,679,000
b. Cash (10% x 8,000,000) Interest income
800,000
c. Held to maturity securities Interest income
121,480
800,000 121,480
Interest income (7,679,000 x 12%) Interest received (8,000,000 x 10%) Discount amortization d. Cash Held to maturity securities 2. Cost Discount amortization Annual installment Book value – 12/31/2008
921,480 800,000 121,480 2,000,000
2,000,000 7,769,000 121,480 (2,000,000) 5,800,480
Problem 12-17 Semiannual nominal interest (5,000,000 x 4%) Semiannual effective interest (5,000,000 x 5%) Difference Multiply by present value of annuity of 1 for 20 periods at 5% Discount Face value Discount Purchase price
200,000 250,000 50,000 12.462 623,100 5,000,000 ( 623,100) 4,376,900
Problem 12-18 1. Annual nominal interest (4,000,000 x 16%) Annual effective interest (4,000,000 x 12%) Difference Multiply by present value factor Premium Face value Purchase price
640,000 480,000 160,000 3.605 576,800 4,000,000 4,576,800
165 2. Date Interest received Jan. 01, 2008 Dec. 31, 2008 640,000 Dec. 31, 2009 640,000 Dec. 31, 2010 640,000 Dec. 31, 2011 640,000 Dec. 31. 2012 640,000
Interest income 549,216 538,322 526,121 512,455 497,086
3. Held to maturity securities Cash Cash Interest income Interest income Held to maturity securities
Premium amortization 90,784 101,678 113,879 127,545 142,914
Book value 4,576,800 4,486,016 4,384,338 4,270,459 4,142,914 4,000,000
4,576,800 4,576,800 640,000 640,000 90,784 90,784
Problem 12-19 Semiannual nominal interest (8,000,000 x 5%) Semiannual effective interest (8,000,000 x 4%) Difference Multiply by PV of annuity of 1 for 10 periods at 4% Premium Face value Purchase price
400,000 320,000 80,000 8.11 648,800 8,000,000 8,648,800
The amount of P648,800 is a premium because the effective rate is lower than nominal rate. Another approach PV of principal (8,000,000 x .6756) PV of semiannual interest payments (400,000 x 8.11) Purchase price or present value of bonds
5,404,800 3,244,000 8,648,800
Journal entries 2008 Jan. 1 Held to maturity securities Cash July
1 Cash Interest income 1 Interest income Held to maturity securities
8,648,800 8,648,800 400,000 400,000 54,048 54,048
166 Interest received Interest income (8,648,800 x 8% x 6/12) Premium amortization Dec. 31 Accrued interest receivable Interest income 31 Interest income Held to maturity securities
400,000 345,952 54,048 400,000 56,210
Interest accrued Interest income (8,594,752 x 8% x 6/12) Premium amortization
400,000 56,210 400,000 343,790 56,210
Problem 12-20 1. Principal payment Interest payment (3,000,000 x 12%) Total payment on December 31, 2008
1,000,000 360,000 1,360,000
Principal payment Interest payment (2,000,000 x 12%) Total payment on December 31, 2009
1,000,000 240,000 1,240,000
Principal payment Interest payment (1,000,000 x 12%) Total payment on December 31, 2010
1,000,000 120,000 1,120,000
December 31, 2008 payment (1,360,000 x .91) December 31, 2009 payment (1,240,000 x .83) December 31, 2010 payment (1,120,000 x .75) Total present value on January 1, 2008
1,237,600 1,029,200 840,000 3,106,800
2. Journal entries 2008 Jan. 1 Held to maturity securities Cash Dec. 31 Cash Interest income 31 Interest income Held to maturity securities
3,106,800 3,106,800 360,000 360,000 49,320 49,320
167 Interest received Interest income (3,106,800 x 10%) Premium amortization Dec. 31 Cash
Held to maturity securities
360,000 310,680 49,320 1,000,000
3. Acquisition cost – 1/1/2008 Premium amortization for 2008 Annual installment Carrying value of investment – 12/31/2008
1,000,000 3,106,800 ( 49,320) (1,000,000) 2,057,480
Problem 12-21 1. The present value of the bonds using the interest rate of 11% is as follows: PV of principal (5,000,000 x .6587) PV of interest (500,000 x 3.1024) Total present value of cash flows
3,293,500 1,551,200 4,844,700
2. The present value of the bonds using the interest rate of 12% is as follows: PV of principal (5,000,000 x .6355) PV of interest (500,000 x 3.0373) Total present value of cash flows 3.
3,177,500 1,518,650 4,696,150
X – 11%____ 12% - 11% 4,700,000 – 4,844,700_ 4,696,150 – 4,844,700 _144,700_ 148,550
= .97
Effective rate = 11% + .97 = 11.97% 4. Interest income for 2008 (4,700,000 x 11.97%)
562,590
5. Journal entries Held to maturity securities Cash Cash (10% x 5,000,000) Interest income
4,700,000 500,000
4,700,000 500,000
168 Held to maturity securities Interest income
62,590
62,590
Interest income Interest received Discounted amortization
562,590 500,000 62,590
Problem 12-22 Question 1 – Answer A Acquisition cost (4,400,000 – 100,000) Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15) Book value – December 31, 2008 Monthly amortization (300,000/75 months)
(
4,300,000 60,000) 4,240,000 4,000
Question 2 – Answer B Interest for 2008 (4,000,000 x 10%) Amortization of premium (4,000 x 12 months) Interest income
400,000 ( 48,000) 352,000
Problem 12-23 Answer B Interest for 2008 (2,000,000 x 12%) Amortization of discount (100,000/5) Interest income
240,000 20,000 260,000
Problem 12-24 Answer B Premium on sale of bonds Unamortized discount (100,000 – 20,000) Gain on sale of bonds
140,000 80,000 220,000
Problem 12-25 Answer A Acquisition cost – 1/1/2008 Discount amortization for 2008: Interest income (14% x 3,767,000) Interest received (12% x 4,000,000) Book value – 12/31/2008
3,767,000 527,380 480,000
47,380 3,814,380
169 Problem 12-26 Answer A Bond year
Bond outstanding
04/01/2007 – 03/31/2008 04/01/2008 – 03/31/2009 04/01/2009 – 03/31/2010 04/01/2010 – 03/31/2011
4,000,000 3,000,000 2,000,000 1,000,000 10,000,000
Interest for the year 2008: From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12) From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12) Amortization of discount for year 2008: From January 1 to March 31, 2008 (80,000 x 3/12) From April 1 to December 31, 2008 (60,000 x 9/12) Interest income for year 2008
Fraction 4/10 3/10 2/10 1/10
120,000 270,000 20,000 45,000
Amortization 80,000 60,000 40,000 20,000 200,000
390,000 65,000 455,000
Problem 12-27 Answer D Interest income for 2008 (3,756,000 x 10%)
375,600
Problem 12-28 Answer D Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12)
200,000
Problem 12-29 Answer C Interest received (1,000,000 x 10% x 6/12) Interest income (1,198,000 x 8% x 6/12) Premium amortization Acquisition cost – July 1, 2008 Premium amortization Book value – December 31, 2008
50,000 47,920 2,080 1,198,000 ( 2,080) 1,195,920
170 Problem 12-30 Answer A Interest accrued (1,000,000 x 8% x 6/12) Interest income (906,000 x 10% x 6/12) Discount amortization
40,000 45,300 5,300
Acquisition cost – July 1, 2008 (946,000 - 40,000) Discount amortization Book value – December 31, 2008
906,000 5,300 911,300
Problem 12-31 Answer B Acquisition cost – July 1, 2008 Discount amortization from July 1 to December 31, 2008: Interest accrued (5,000,000 x 8% x 6/12) Interest income (4,614,000 x 10% x 6/12) Book value – December 31, 2008
4,614,000 200,000 230,700
30,700 4,644,700
Problem 12-32 Answer D Acquisition cost Discount amortization: Interest income (4,766,000 x 12%) Interest received (5,000,000 x 10%) Total Annual installment on December 31, 2008 Book value –December 31, 2008
4,766,000 571,920 500,000
71,920 4,837,920 (1,000,000) 3,837,920
Problem 12-33 Answer A Annual effective (5,000,000 x 14%) Annual nominal (5,000,000 x 12%) Difference Multiply by present value factor using effective rate of 14% Discount Face value Purchase price
700,000 600,000 100,000 5.216 521,600 5,000,000 4,478,400
Problem 12-34 Answer A 12/31/2008 (1,250,000 + 600,000 x .9091) 12/31/2009 (1,250,000 + 450,000 x .8264) 12/31/2010 (1,250,000 + 300,000 x .7513) 12/31/2011 (1,250,000 + 150,000 x .6830)
1,681,835 1,404,880 1,164,515 956,200 5,207,430
171
CHAPTER 13 Problem 13-1
Problem 13-2
Problem 13-3
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
C B D D D A D B A B
A C D D A A D A D A
A A B A B A D A A D
Problem 13-4 2008 Jan. 1 Sinking fund cash Cash April 1 Sinking fund securities Sinking fund cash Oct. 1 Sinking fund cash Sinking fund income (400,000 x 12% x 6/12) Dec. 31 Sinking fund cash Cash 31 Accrued interest receivable Sinking fund income (400,000 x 12% x 3/12) Sinking fund securities Sinking fund income
400,000
400,000
384,000 384,000 24,000 24,000 400,000 400,000 12,000 12,000 3,000 3,000
Amortization of discount on sinking fund securities for 9 months. (16,000/4 years = 4,000 x 9/12 = 3,000) 31 Retained earnings Retained earnings appropriated for sinking fund Sinking fund cash Sinking fund securities Accrued interest receivable Total Less: Appropriated retained earnings balance Additional appropriation
439,000 439,000 440,000 387,000 12,000 839,000 400,000 439,000
2009 Jan. 1 Sinking fund income Accrued interest receivable April 1 Sinking fund cash Sinking fund income 1 Sinking fund expenses Sinking fund cash Oct. 1 Sinking fund cash Sinking fund income 1 Sinking fund securities (4,000 x 9/12) Sinking fund income 1 Sinking fund cash (400,000 x 106%) Sinking fund securities Gain on sale of securities Dec. 31 Sinking fund cash Cash 31 Retained earnings Retained earnings appropriated for sinking fund
172 12,000 12,000 24,000 24,000 12,000 24,000 3,000 424,000
400,000 461,000
Sinking fund cash Less: Appropriated retained earnings balance Additional appropriation 2010 July 1 Bonds payable Interest expense Sinking fund cash 1 Cash Sinking fund cash 1 Retained earnings appropriated for sinking fund Retained earnings
12,000 24,000 3,000 390,000 34,000 400,000 461,000 1,300,000 839,000 461,000
1,000,000 100,000
1,100,000
200,000 200,000 1,300,000 1,300,000
Problem 13-5 2008 Jan. 1 18
Sinking fund cash Cash
2,700,000
Sinking fund securities Sinking fund cash
2,500,000
2,700,000 2,500,000
173 2008 July 5 Sept. 9
Sinking fund expenses Sinking fund cash
100,000
Sinking fund cash Loss on sale of securities Sinking fund securities
530,000 70,000
Dec. 20 Sinking fund cash Sinking fund income
100,000
600,000 150,000 150,000
2009 Feb. 12 No entry Dec. 31 Sinking fund cash Sinking fund income
270,000 270,000
31 Sinking fund cash Sinking fund securities Gain on sale of securities
2,250,000
31 Bonds payable Sinking fund cash
3,000,000
31 Cash Sinking fund cash
300,000
1,900,000 350,000 3,000,000 300,000
Problem 13-6 1. Sinking fund cash Cash
2,000,000
2. Sinking fund securities Sinking fund cash
450,000
3. Sinking fund securities Sinking fund cash
400,000
4. Sinking fund cash Sinking fund income (500,000 x 12%) Sinking fund securities Sinking fund income
60,000 10,000
Amortization of bond discount (50,000/5 years = 10,000 per year)
2,000,000 450,000 400,000 60,000 10,000
174 5. Sinking fund expenses Sinking fund cash
20,000
6. Sinking fund securities Sinking fund income Sinking fund cash
400,000 10,000
20,000
7. Sinking fund cash Sinking fund income (500,000 x 10%)
50,000
8. Sinking fund cash Sinking fund income
20,000
9. Sinking fund cash Sinking fund securities Gain on sale of securities 10. Retained earnings Retained earnings appropriated for sinking fund
450,000
410,000 50,000 20,000 400,000 50,000
2,160,000 2,160,000
Composition of fund: Sinking fund cash Sinking fund securities
1,300,000 860,000 2,160,000
Problem 13-7 1. Sinking fund – trustee Cash
1,000,000 1,000,000
2. No entry 3. No entry 4. No entry 5. No entry 6. Sinking fund – trustee Sinking fund expense Sinking fund income (60,000 + 10,000) Gain on sale of securities 7. Bonds payable Interest expense Sinking fund – trustee
140,000 30,000 70,000 100,000 1,000,000 100,000
1,100,000
175 8. Cash Sinking fund – trustee
40,000 40,000
Problem 13-8 Annual contribution (5,000,000/6.051) Date 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012
Interest income 81,899 171,987 271,085 380,094
818,987 Annual contribution 818,987 818,987 818,987 818,987 818,987
Fund balance 818,987 1,719,873 2,710,847 3,800,919 5,000,000
Problem 13-9 Annual contribution (2,000,000/5.1051) Date 07/01/2008 07/01/2009 07/01/2010 07/01/2011 07/01/2012
Interest income 39,176 82,271 129,674 181,819
391,765 Annual contribution 391,765 391,765 391,765 391,765 -
Fund balance 391,765 822,706 1,296,742 1,818,181 2,000,000
Problem 13-10 2008 Jan. 1 Life insurance Cash
60,000
2009 Jan. 1 Life insurance Cash
60,000
2010 Jan. 1 Life insurance Cash
60,000
Dec. 31 Cash surrender value Life insurance Retained earnings 2011 Jan. 1 Life insurance Cash
60,000
60,000
60,000
60,000
60,000 20,000 40,000
60,000
176 Dec. 31 Cash surrender value Life insurance
24,000 24,000
Balance – December 31, 2011 Balance – December 31, 2010 Increase in cash surrender value 2012 Jan. 1 Life insurance Cash June 30 Cash surrender value Life insurance
84,000 60,000 24,000 60,000 60,000 16,000 16,000
Balance – December 31, 2012 Balance – December 31, 2011 Increase in cash surrender value for 2012
116,000 84,000 32,000
Increase from January 1 to June 30, 2012 (1/2 x 32,000) July 31 Cash Cash surrender value Life insurance (60,000 x 6/12) Gain on sale of life insurance settlement
16,000 2,000,000
100,000 30,000 1,870,000
Problem 13-11 2007 April 1 Life insurance Cash Dec. 31 Prepaid life insurance (60,000 x 3/12) Life insurance 2008 Jan. 1 Life insurance Prepaid life insurance
60,000 15,000
15,000
April 1 Life insurance Cash
60,000
Dec. 31 Prepaid life insurance Life insurance
15,000
2009 Jan. 1 Life insurance Prepaid life insurance
60,000 15,000
15,000 60,000 15,000
15,000
15,000
April 1 Life insurance Cash
60,000
Dec. 31 Prepaid life insurance Life insurance
15,000
2010 Jan. 1 Life insurance Prepaid life insurance April 1 Cash surrender value Life insurance Retained earnings
15,000 60,000
April 1, 2007 – December 31, 2009 (33/36 x 60,000) prior years January 1, 2010 – April 1, 2010 (3/36 x 60,000) current period Total 1 Life insurance Cash
60,000
Dec. 31 Prepaid life insurance Life insurance
15,000
31 Cash surrender value Life insurance
18,000
177 60,000
15,000
15,000 5,000 55,000 55,000 5,000 60,000 60,000 15,000 18,000
Balance – April 1, 2011 Balance – April 1, 2010 Increase from April 1, 2010 to April 1, 2011
84,000 60,000 24,000
Increase from April 1, 2010 to December 31, 2010 (24,000 x 9/12)
18,000
2011 Jan. 1 Life insurance Prepaid life insurance April 1 Cash surrender value (18,000 x 3/12) Life insurance 1 Life insurance Cash July 1 Cash surrender value Life insurance Balance – April 1, 2012 Balance – April 1, 2011 Increase from April 1, 2011 to April 1, 2012
15,000 15,000 6,000 6,000 60,000 60,000 8,000 8,000 116,000 84,000 32,000
178 Increase from April 1, 2010 to July 1, 2010 (32,000 x 3/12) July 31 Cash Cash surrender value Life insurance (60,000 x 9/12) Gain on life insurance settlement
8,000 2,000,000
92,000 45,000 1,863,000
Problem 13-12 2008 Jan. 1 Life insurance Cash
80,000
2009 Jan. 1 Life insurance Cash
80,000
Dec. 31 Cash Life insurance 31 Cash surrender value Life insurance (42,000 x 1/3) Retained earnings
80,000 5,000 5,000 42,000
2010 Jan. 1 Life insurance Cash
80,000
Dec. 31 Cash
6,000
14,000 28,000
80,000
Life insurance 31 Cash surrender value Life insurance
80,000
6,000 5,000 5,000
Balance – December 31, 2010 Balance – December 31, 2009 Increase in cash surrender value
47,000 42,000 5,000
Problem 13-13 a. Life insurance (10,000 x 6/12) Cash surrender value
5,000
b. Prepaid life insurance (28,000 x 1/2) Life insurance
14,000
c. Interest expense Accrued interest payable (50,000 x 12% x 9/12)
4,500
5,000 14,000 4,500
d. Dividend income Dividend receivable
2,000
179 2,000
Current assets: Prepaid life insurance
14,000
Investment: Cash surrender value
85,000
Current liabilities: Loan payable Accrued interest payable
50,000 4,500
Problem 13-14 1. Land held by Eragon for undetermined use Vacant building Building owned by a subsidiary Eragon occupied by lessees Total investment property
5,000,000 3,000,000 1,500,000 9,500,000
2. a. The property held by a subsidiary Eragon in the ordinary course of business in included in inventory. b. The property held by Eragon for use in production is owner-occupied property and therefore part of property, plant and equipment. c. The land leased by Eragon to a subsidiary under an operating lease is owneroccupied property for purposes of consolidated financial statements. However, from the perspective of separate financial statements of Eragon, the land is an investment property. d. The property under construction for use as investment property is owner-occupied property until the land is completed. Upon completion, the building becomes investment property. e. The land held for future factory site is owner-occupied property and therefore part of property, plant and equipment. f. The machinery leased out to an unrelated party is part of property, plant and equipment because investment property includes only land and building, and not movable property like machinery.
Problem 13-15 Cost model 2008
Depreciation Accumulated depreciation
1,800,000 1,800,000
2009
Depreciation Accumulated depreciation
1,800,000
2010
Depreciation Accumulated depreciation
1,800,000
180 1,800,000 1,800,000
Fair value model 2008
Investment property Accumulated depreciation
5,000,000
2009
Loss from change in fair value Accumulated depreciation
2,000,000
2010
Investment property Gain from change in fair value
7,000,000
5,000,000 2,000,000 7,000,000
Problem 13-16 Answer D Annual deposit (8,000,000 / 4.78)
1,673,640
Problem 13-17 Answer B Annual deposit (9,000,000 / 6.34)
1,419,560
Problem 13-18 Answer A Principal amount Multiply by future value of 1 for 6 periods at 10% Future amount at maturity
5,000,000 1.77 8,850,000
Problem 13-19 Answer A Future amount of maturity Divide by future value of 1 for 10 periods at 6% Initial investment
7,160,000 1.79 4,000,000
The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are 10 interest periods at 6%.
Problem 13-20 Answer A Sinking fund balance – January 1 Add: 2007 investment Dividends on investment Interest revenue Total Less: Administration costs Sinking fund balance – December 31
900,000 150,000 300,000
4,500,000 1,350,000 5,850,000 100,000 5,750,000
181 Problem 13-21 Answer C Premium paid – January 1 Less: Dividend received Increase in cash surrender value (270,000 – 245,000) Life insurance expense for 2008
15,000 25,000
100,000 40,000 60,000
Problem 13-22 Answer D Premium paid Less: Increase in cash surrender value (540,000 – 435,000) Life insurance expense
200,000 105,000 95,000
The dividend of P30,000 is not deducted anymore because it is already part of the increase in cash surrender value.
Problem 13-23 Answer A Sinking fund cash Sinking fund securities Accrued interest receivable Plant expansion fund Cash surrender value Land held for capital appreciation Advances to subsidiary Investment in joint venture
500,000 1,000,000 50,000 600,000 150,000 3,000,000 200,000 2,000,000 7,500,000
182
CHAPTER 14 Problem 14-1
Problem 14-2
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
A A B A D B C D D A
Problem 14-3
B D D B C D D A B C
1. 2. 3. 4. 5.
B C D C C
Problem 14-4 Requirement 1 2008 Jan. 1 Cash
4,000,000 Loan payable
Dec. 31 Interest expense Cash (12% x 4,000,000) 31 Interest rate swap receivable Unrealized gain – interest rate swap (80,000 x .877) 2009 Dec. 31 Interest expense Cash (14% x 4,000,000) 31 Cash
Interest rate swap receivable Unrealized gain – interest rate swap
31 Loan payable Cash 31 Unrealized gain – interest rate swap Interest expense
4,000,000 480,000 480,000 70,160 70,160 560,000 80,000
4,000,000 80,000
560,000 70,160 9,840 4,000,000 80,000
Requirement 2 2008 Jan. 1 Cash
4,000,000 Loan payable
4,000,000
183 2008 Dec. 31 Interest expense Cash 31 Unrealized loss – interest rate swap Interest rate swap payable (40,000 x .901) 2009 Dec. 31 Interest expense Cash (11% x 4,000,000) 31 Interest rate swap payable Unrealized loss - Interest rate swap Cash 31 Loan payable Cash 31 Interest expense Unrealized loss - interest rate swap
480,000 36,040
480,000 36,040
440,000 440,000 36,040 3,960 4,000,000 40,000
40,000 4,000,000 40,000
Problem 14-5 2008 Jan. 1 Cash
6,000,000 Loan payable
Dec. 31 Interest expense Cash (10% x 6,000,000)
6,000,000 600,000 600,000
31 Interest rate swap receivable 159,300 Unrealized gain – interest rate swap (180,000 x .885) 2009 Dec. 31 Interest expense Cash (13% x 6,000,000) 31 Cash
Interest rate swap receivable Unrealized gain – interest rate swap
31 Loan payable Cash 31 Unrealized gain – interest rate swap Interest expense
780,000 180,000
6,000,000 180,000
159,300
780,000 159,300 20,700 6,000,000 180,000
184
Problem 14-6 2008 Jan. 1 Cash
Loan payable
Dec. 31 Interest expense Cash (8% x 3,000,000) 31 Interest rate swap receivable Unrealized gain – interest rate swap (30,000 x 3.24)
3,000,000 240,000 97,200
3,000,000 240,000 97,200
Batangas Company will receive P30,000 at the end of 2009 and can expect to receive P30,000 at the end of 2010, 2011 and 2012. Thus, the present value of the four annual payments of P30,000 is recognized on December 31, 2008 as interest rate swap receivable. 2009 Dec. 31 Interest expense Cash (9% x 3,000,000) 31 Cash
Interest rate swap receivable
270,000 30,000
31 Unrealized gain – interest rate swap Interest expense
30,000
31 Unrealized gain – interest rate swap Interest rate swap receivable (97,200 – 30,000)
67,200
31 Unrealized loss – interest rate swap Interest rate swap payable (60,000 x 2.67)
160,200
270,000 30,000 30,000 67,200
160,200
Batangas Company will make a payment of P60,000 at The end of 2010 by reason of the reduced interest rate and can expect to make payment of P60,000 at the end of 2011 and 2012. Thus, the present value of the three annual payments of P60,000 is recognized on December 31, 2009 as the interest rate swap payable.
Problem 14-7 Jan.
2008 1 Cash Loan payable
5,000,000
5,000,000
185 Dec. 31 Interest expense (10% x 5,000,000) Cash 31 Interest swap receivable Unrealized gain – interest swap (5,000,000 x 4% x 2.32) 2009 Dec. 31 Interest expense (14% x 5,000,000) Cash
500,000 500,000 464,000 464,000 700,000 700,000
31 Cash Interest rate swap receivable
200,000
31 Unrealized gain – interest rate swap Interest expense
200,000
31 Unrealized gain – interest swap Interest rate swap receivable
200,000 200,000 95,000 95,000
Unrealized gain – 12/31/2009 (5,000,000 x 2% x 1.69) Unrealized gain per book (464,000 – 200,000) Decrease in unrealized gain 2010 Dec. 31 Interest expense (12% x 5,000,000) Cash
169,000 264,000 ( 95,000) 600,000
31 Cash Interest rate swap receivable
100,000
31 Unrealized gain – interest rate swap Interest expense
100,000
31 Unrealized gain – interest swap Interest rate swap receivable
31 Cash Interest rate swap receivable Unrealized gain – interest rate swap
100,000 100,000
24,000 24,000
Unrealized gain – 12/31/2010 (5,000,000 x 1% x .90) Unrealized gain per book (169,000 – 100,000) Decrease in unrealized gain 2011 Dec. 31 Interest expense (11% x 5,000,000) Cash
600,000
45,000 69,000 (24,000) 550,000 50,000
550,000 45,000 5,000
Dec. 31 Unrealized gain – interest rate swap Interest expense 31 Loan payable Cash
50,000 5,000,000
186 50,000 5,000,000
Problem 14-8 2008 Jan. 1 Cash Loan payable Dec. 31 Interest expense (5,000,000 x 8%) Cash 31 Interest swap receivable Unrealized gain – interest rate swap (5,000,000 x 2% x 2.49) 2009 Dec. 31 Interest expense (5,000,000 x 10%) Cash
5,000,000 400,000
249,000
500,000 100,000
31 Unrealized gain – interest rate swap Interest expense
100,000
31 Interest rate swap receivable Unrealized gain – interest rate swap (5,000,000 x 2% x 2.49)
107,500
Unrealized gain – 12/31/2009 (5,000,000 x 3% x 1.71) Unrealized gain per book (249,000 – 100,000) Increase in unrealized gain
500,000 100,000 100,000 107,500 256,500 149,000 107,500
550,000
31 Cash Interest swap receivable
150,000
31 Unrealized gain – interest rate swap Interest expense
150,000
31 Interest rate swap receivable Unrealized gain – interest rate swap
400,000
249,000
31 Cash Interest rate swap receivable
2010 Dec. 31 Interest expense (5,000,000 x 11%) Cash
5,000,000
550,000 150,000 150,000
71,500 71,500
187 Unrealized gain – 12/31/2010 (5,000,000 x 4% x .89) Unrealized gain per book (256,500 – 150,000) Increase in unrealized gain 2011 Dec. 31 Interest expense (5,000,000 x 12%) Cash
178,000 106,500 71,500 600,000
31 Cash Interest rate swap receivable Unrealized gain – interest swap
200,000
31 Unrealized gain – interest swap Interest expense
200,000
31 Loan payable Cash
600,000 178,000 22,000 200,000
5,000,000
5,000,000
Problem 14-9 2008 Jan. 31 Cash Note payable
1,000,000 1,000,000
Dec. 31 Interest expense (1,000,000 x 8%) Cash
80,000
31 Note payable Gain on note payable
34,760
80,000 34,760
On every year-end the note payable is measured at fair value. The fair value is equal to the present value of the principal plus the present value of future interest payments. PV of principal (1,000,000 x .8264) PV of interest (80,000 x 1.7355) Fair value of note payable – 12/31/2008 Carrying value of note payable Decrease in carrying value – gain 31 Loss on interest rate swap Interest rate swap payable
826,400 138,840 965,240 1,000,000 34,760 34,760
34,760
The derivative which is the interest rate swap is also measured at fair value. The fair value is equal to the present value of the net cash settlement with the speculator.
188 Variable interest (1,000,000 x 10%) Fixed interest (1,000,000 x 8%) Net cash payment to speculator Multiply by PV of an ordinary annuity of 1 at 10% for two periods Fair value of interest swap payable – 12/31/2008
100,000 80,000 20,000 1.7355 34,760*
*20,000 times 1.7355 equals P34,760. There is a difference of P50 due to rounding. The gain on note payable and the loss on interest rate swap are recognized immediately in profit or loss because the interest rate swap is designated as fair value hedge. 2009 Dec. 31 Interest expense Cash Note payable
96,524 80,000 16,624
Actually, on December 31, 2008, there is a discount on note payable because the fair value is P965,240 and the face value is P1,000,000. This discount is amortized using the effective interest method. Interest expense (965,240 x 10%) Interest paid (1,000,000 x 8%) Amortization of discount – increase in note payable 31 Note payable Gain on note payable
96,524 80,000 16,524 8,792
PV of principal (1,000,000 x .9009) PV of interest payment (80,000 x .9009) Fair value of note payable – 12/31/2009 Carrying value of note payable (965,240 – 16,524) Decrease in carrying value – gain 31 Interest rate swap payable Cash
8,792 900,900 72,072 972,972 981,764 8,792
20,000 20,000
This is the cash payment to the speculator as a result of the increase in market rate of interest on January 1, 2009. 31 Loss on interest rate swap Interest rate swap payable
12,267 12,267
189 Variable interest (1,000,000 x 11%) Fixed interest (1,000,000 x 8%) Net cash payment to speculator Multiply by PV of 1 at 11% for one period Fair value of interest rate swap payable – 12/31/2009 Carrying value of interest rate swap payable (34,760 – 20,000) Increase in interest rate swap payable 2010 Dec. 31 Interest expense Cash Note payable
107,028
Interest expense (972,972 x 11%) Interest paid Amortization of discount
110,000 80,000 30,000 .9009 27,027 14,760 12,267
80,000 27,028 107,028* 80,000 27,028
*972,972 x 11% equals P107,027 or a difference of P1 due to rounding to bring the carrying value of the note payable to P1,000,000 on maturity date. 31 Loss on interest rate swap Interest rate swap payable
2,973 2,973
Final cash payment to speculator Carrying value of interest rate swap payable Loss on interest rate swap 31 Interest rate swap payable Cash
30,000 27,027 2,973 30,000
30,000
Final settlement with the speculator. 31 Note payable Cash
1,000,000 1,000,000
Repayment of the loan to the bank.
Problem 14-10
Requirement 1
2008 Dec. 31 Forward contract receivable Unrealized gain – forward contract (5,000 x 300)
1,500,000
2009 Jan. 1 Tree inventory (5,000 x 1,800) Cash
9,000,000
1,500,000
9,000,000
190 1 Cash Forward contract receivable
1,500,000
1 Unrealized gain – forward contract Gain on forward contract
1,500,000
1,500,000 1,500,000
Requirement 2 2008 Dec. 31 Unrealized loss – forward contract Forward contract payable (5,000 x 100) 2009 Jan. 1 Tree inventory (5,000 x 1,400) Cash
500,000 500,000 7,000,000
1 Forward contract payable Cash
500,000
1 Loss on forward contract Unrealized loss – forward contract
500,000
7,000,000 500,000 500,000
Problem 14-11 2008 Dec. 31 Forward contract receivable 893,000 Unrealized gain – forward contract (1,000,000 x .893)
893,000
2009 Dec. 31 Unrealized gain – forward contract Forward contract receivable
893,000
893,000
Cancelation of the forward contract receivable because of the reduction of market price on December 31, 2009 and January 1, 2010. 31 Unrealized loss – forward contract Forward contract payable (100,000 x 5) 2010 Jan. 1 Fish inventory (100,000 x 75) Cash
500,000 500,000 7,500,000
1 Forward contract payable Cash
500,000
1 Loss on forward contract Unrealized loss – forward contract
500,000
7,500,000 500,000 500,000
191
Problem 14-12 2008 Dec. 31 Forward contract receivable Unrealized gain – forward contract (50,000 x P10)
500,000
2009 March 1 Unrealized gain – forward contract Forward contract receivable
100,000 100,000
Forward contract receivable – 3/1/2009 (500,000 x P8) Forward contract receivable – 12/31/2008 Decrease in derivative asset 1 Cash Forward contract receivable 1 Purchases (500,000 x 58) Cash
Problem 14-13
400,000 500,000 (100,000) 400,000 2,900,000
1 Unrealized gain – forward contract Gain on forward contract
500,000
400,000
400,000 2,900,000 400,000
Requirement 1
2008 Dec. 31 Futures contract receivable Unrealized gain – futures contract (50,000 x 10) 2009 Jan. 1 Purchases Cash (50,000 x 160)
500,000
8,000,000
1 Cash Futures contract receivable
500,000
1 Unrealized gain – futures contract Gain on futures contract
500,000
500,000
8,000,000 500,000 500,000
Requirement 2 2008 Dec. 31 Unrealized loss – futures contract Futures contract payable (50,000 x 5) 2009 Jan. 1 Purchases Cash (50,000 x 145)
250,000 250,000 7,250,000
7,250,000
192 1 Futures contract payable Cash
250,000
1 Loss on futures contract Unrealized loss - futures contract
250,000
250,000 250,000
Problem 14-14 2008 Dec. 31 Futures contract receivable Unrealized gain – futures contract (100,000 x 15)
1,500,000
2009 Jan. 1 Purchases Cash (100,000 x 65)
6,500,000
1,500,000
6,500,000
1 Cash Futures contract receivable
1,500,000
1 Unrealized gain – futures contract Gain on futures contract
1,500,000
1,500,000 1,500,000
Problem 14-15 2008 Dec. 31 Unrealized loss – futures contract Futures contract payable (25,000 x 5) 2009 June 1 Unrealized loss – futures contract Futures contract payable
125,000 125,000 75,000
Futures contract payable – 6/1/2009 (25,000 x P8) Futures contract payable – 12/31/2008 Increase in derivative liability 1 1 1
Futures contract payable Cash Purchases (25,000 x 42) Cash Loss on futures contract Unrealized loss – futures contract
75,000 200,000 125,000 75,000
200,000 200,000 1,050,000 1,050,000 200,000 200,000
193 Problem 14-16 Requirement 1 2008 Dec. 31 Call option Cash 2009 July 1 Call option Gain on call option
50,000
700,000 700,000
Fair value of call option (150,000 x 5) Payment for call option Increase 2009 July 1 1
Cash Call option Purchases Cash (150,000 x 35)
50,000
750,000 50,000 700,000 750,000 5,250,000
750,000 5,250,000
Requirement 2 2008 Dec. 31 Call option Cash 2009 July 1 Purchases Cash (150,000 x 28) 1 Loss on call option Call option
50,000 50,000 4,200,000 50,000
4,200,000 50,000
Problem 14-17 2008 Dec. 1 Call option Cash Dec. 31 Call option Unrealized gain - call option Fair value (200,000 x 2) Payment for call option Increase
20,000 380,000
20,000 380,000 400,000 20,000 380,000
2009 June 1 Call option Unrealized gain – call option
194 200,000 200,000
Call option – 6/1/2009 (200,000 x P3) Call option – 12/31/2008 Increase in derivative asset 1
Cash Call option
1
Purchases (200,000 x P28) Cash
1
Unrealized gain – call option Gain on call option
600,000 400,000 200,000 600,000 5,600,000 600,000
600,000 5,600,000 600,000
Problem 14-18 2008 Dec. 1 Put option Cash 2009 Feb. 1 Cash (50,000 x 180) Sales 1
Loss on put option Put option
100,000
100,000
9,000,000 9,000,000 100,000 100,000
With the price above the put option price, on the part of the seller, there is no reason to exercise the option. It is better to sell the product on the open market. Thus, the output option is not exercised on February 1, 2009 and has no value.
Problem 14-19 2008 Sept. 1 Equipment Accounts payable Dec. 31 Loss on foreign exchange Accounts payable Peso equivalent – 12/31/2008 Peso equivalent – 09/01/2008 Loss on foreign exchange
2,250,000 50,000
2,250,000 50,000 2,050,000 2,000,000 50,000
195 31 Forward contract receivable Gain on forward contract 2009 March 1 Loss on foreign exchange Accounts payable
50,000 50,000 100,000
Peso equivalent – 3/1/2009 Peso equivalent – 12/31/2008 Loss on foreign exchange
2,150,000 2,050,000 100,000
1 Forward contract receivable Gain on forward contract
100,000
1
150,000
1
Cash Forward contract receivable Accounts payable (50,000 x 43) Cash
100,000
100,000 150,000 2,150,000 2,150,000
Problem 14-20 2008 Dec. 31 Forward contract receivable Unrealized gain – forward contract ($50,000 x P1)
50,000
2009 March 31 Forward contract receivable Unrealized gain – forward contract ($50,000 x P2)
100,000
31 Cash Forward contract receivable 31 Purchases ($50,000 x P43) Cash 31 Unrealized gain – forward contract Purchases
50,000
150,000 2,150,000 150,000
100,000 150,000 2,150,000 150,000
Problem 14-21 Question 1 Answer B The notional figure is 8,000 kilos and the notional value is 8,000 kilos times the underlying Fixed price of P1,200 per kilo or P9,600,000.
Question 2 Answer C Market price – 12/31/2008 Underlying fixed price Derivative asset
196 1,500 1,200 300
Forward contract receivable (8,000 x 300)
2,400,000
Present value of derivative asset (2,400,000 x .91)
2,184,000
The present value of P2,184,000 is recognized as forward contract receivable on December 31, 2008 because the amount is collectible on January 1, 2010, one year from December 31, 2008. Question 3 Answer B Market price – 12/31/2009 Underlying fixed price Derivative liability Forward contract payable – 12/31/2009 (8,000 x 200)
1,000 1,200 200 1,600,000
Problem 14-22 Answer C Fair value of call option (120 – 100 = 20 x 10,000)
200,000
Problem 14-23 Answer B Exchange rate on July 31 (80,000,000 / 92) Strike price (80,000,000 / 100) Derivative asset Call option payment Saving
869,565 800,000 69,565 10,000 59,565
Problem 14-24 Question 1 Answer A 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 Exchange rate on December 31, 2008 (47,850,000 / 115) Fair value of forward contract receivable
435,000 416,087 18,913
197
CHAPTER 15 Problem 15-1
Problem 15-2
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
D C A D D C A B A C
Problem 15-3
D C D C C C B C D C
1. 2. 3. 4. 5.
A C A A D
Problem 15-4 1. Machinery Cash 2. Land (2/5 x 5,500,000) Building (3/5 x 5,500,000) Cash 3. Investment in equity security Cash Delivery equipment (5,000 x 120) Investment in equity security Gain on exchange Taxes and licenses Cash 4. Equipment Donated capital Donated capital Cash 5. Land Building Share capital (60,000 x 100) Share premium
500,000 2,200,000 3,300,000
500,000
5,500,000
500,000 600,000
500,000 500,000 100,000
3,000 3,000 1,000,000 1,000,000 25,000 25,000 2,000,000 5,500,000
6,000,000 1,500,000
198
Problem 15-5 Net method
Gross method
a. Within the discount period:
a. Within the discount period:
1. Machinery Accounts payable (500,000 x 98%)
490,000
2. Accounts payable Cash
490,000
490,000
490,000
b. Beyond the discount period: 1. Machinery Accounts payable
490,000
2. Accounts payable Purchase discount lost Cash
490,000 10,000
1. Machinery Accounts payable
500,000
2. Accounts payable Cash Machinery
500,000
490,000
500,000
1. Machinery 500,000 Accounts payable
500,000
2. Accounts payable 500,000 Purchase discount lost 10,000 Cash Machinery
500,000 10,000
2008 Jan. 1 Equipment Discount on note payable Cash Note payable
580,000 120,000 200,000 500,000
Dec. 31 Note payable Cash
100,000
31 Interest expense Discount on note payable
2009 Dec. 31 31
490,000 10,000
b. Beyond the discount period:
Problem 15-6
2008 2009 2010 2011 2012
500,000
Note payable 500,000 400,000 300,000 200,000 100,000 1,500,000
Note payable Cash Interest expense Discount on note payable
40,000 Fraction 5/15 4/15 3/15 2/15 1/15
100,000 40,000
Amortization 40,000 32,000 24,000 16,000 8,000 120,000 100,000 32,000
100,000 32,000
199 Problem 15-7 Down payment Present value of note (200,000 x 3.17) Total cost 2008 Jan. 1
100,000 634,000 734,000
Machinery Discount on note payable Cash Note payable
734,000 166,000 100,000 800,000
Dec. 31 Note payable Cash
200,000
31 Interest expense Discount on note payable Date 01/01/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011
Payment 200,000 200,000 200,000 200,000
2009 Dec. 31 Note payable Cash 31 Interest expense Discount on note payable
63,400 10% interest 63,400 49,740 34,714 18,146
Principal 136,600 150,260 165,286 181,854
200,000 63,400
Present value 634,000 497,400 347,140 181,854 200,000 49,740
200,000 49,740
Problem 15-8 1. Building Cash Share capital Share premium
7,000,000
2. Land Income from donation
1,500,000
3. Machinery (800,000 x 95%) Cash
760,000
4. Equipment Note payable
200,000
1,000,000 5,000,000 1,000,000 1,500,000 760,000 200,000
200
Problem 15-9 1. Land (1/4 x 6,000,000) Building (3/4 x 6,000,000) Machinery (8/12 x 1,800,000) Office equipment (4/12 x 1,800,000) Delivery equipment Cash
1,500,000 4,500,000 1,200,000 600,000 500,000
2. Land Building Machinery Share capital Share premium
1,000,000 5,000,000 2,000,000 6,000,000 2,000,000
3. Land Donated capital
500,000
4. Machinery (900,000 x 98%) Cash
882,000
Machinery Cash 5. Furniture and fixtures (400,000 x .797) Discount on note payable Note payable
8,300,000
35,000
500,000 882,000 35,000
318,800 81,200 400,000
Problem 15-10 1. Land Accumulated depreciation Equipment – old Gain on exchange
1,500,000 700,000
Fair value of equipment given Less: Book value Gain on exchange
2,000,000 200,000 1,500,000 1,300,000 200,000
2. Equipment - new Accumulated depreciation Equipment – old
1,300,000 700,000
3. Equipment - new Accumulated depreciation Equipment – old Cash Gain on exchange
2,000,000 700,000
2,000,000
2,000,000 500,000 200,000
201 Fair value Cash payment Cost of new asset
1,500,000 500,000 2,000,000
Fair value Less: Book value Gain on exchange
1,500,000 1,300,000 200,000
Problem 15-11 1. Computer Inventory (car) Cash Gain on exchange
430,000
2. Machinery – new (110,000 + 30,000) Accumulated depreciation Loss on exchange Machinery – old Cash
140,000 120,000 10,000
300,000 50,000 80,000
Fair value of asset given Book value Loss on exchange
240,000 30,000 110,000 120,000 ( 10,000)
Problem 15-12 ABC Equipment - new 500,000 Accumulated depreciation 2,000,000 Equipment – old 2,400,000 Gain on exchange 100,000
XYZ Equipment – new 500,000 Accumulated depreciation 1,750,000 Equipment – old 2,200,000 Gain on exchange 50,000
Problem 15-13 Equipment – new Loss on exchange Accumulated depreciation Equipment – old
1,000,000 200,000 1,800,000 3,000,000
Problem 15-14 Company A Machinery – new (600,000 + 200,000) Accumulated depreciation Machinery – old Cash Gain on exchange (600,000 – 500,000)
800,000 1,500,000 2,000,000 200,000 100,000
202 Company B Machinery – new (800,000 - 200,000) Accumulated depreciation Cash Machinery – old Gain on exchange (800,000 – 700,000)
600,000 1,800,000 200,000 2,500,000 100,000
Problem 15-15 Equipment - new Accumulated depreciation Loss on exchange Equipment – old Cash
1,400,000 1,050,000 50,000
1,200,000 1,300,000
Fair value Cash payment (1,600,000 – 300,000) Cost of new asset
100,000 1,300,000 1,400,000
Fair value Less: Book value Loss on exchange
100,000 ( 150,000) ( 50,000)
Problem 15-16 Cash price without trade in Cash payment Trade in value Less: Book value Gain on exchange Equipment - new Accumulated depreciation Equipment – old Cash Gain on exchange
1,400,000 980,000 420,000 400,000 20,000 1,400,000 600,000 1,000,000 980,000 20,000
Problem 15-17 Delivery equipment - new Accumulated depreciation Loss on exchange Input tax Insurance Taxes and licenses Delivery equipment – old Cash
2,300,000 1,300,000 150,000 300,000 120,000 10,000
1,500,000 2,680,000
203 Fair value of asset given Cash paid Total Less: VAT Insurance Registration fee Cost of new asset
300,000 120,000 10,000
Fair value Book value Loss on exchange
Problem 15-18 1. Direct labor Materials Overhead 2. Direct labor Materials Overhead 135 / 180 x 2,000,000 45 / 180 x 2,000,000 3. Direct labor Materials Overhead 42 / 60 x 2,000,000 18 / 60 x 2,000,000
50,000 2,680,000 2,730,000 430,000 2,300,000 50,000 200,000 (150,000)
Total 6,000,000 7,000,000 2,000,000 15,000,000 6,000,000 7,000,000 2,000,000 _________ 15,000,000 6,000,000 7,000,000 2,000,000 _________ 15,000,000
Finished goods 4,200,000 3,000,000 2,000,000 9,200,000
Building 1,800,000 4,000,000 -___ 5,800,000
4,200,000 3,000,000
1,800,000 4,000,000
1,500,000 _________ 8,700,000
500,000 6,300,000
4,200,000 3,000,000
1,800,000 4,000,000
1,400,000 _________ 8,600,000
600,000 6,400,000
Problem 15-19 a. Materials Direct labor Overhead Cost of machinery Overhead Charged to finished goods (75% x 4,000,000) Charged to machinery b. Materials Direct labor Overhead (1/5 x 3,600,000) Cost of machinery
500,000 1,000,000 600,000 2,100,000 3,600,000 3,000,000 600,000 500,000 1,000,000 720,000 2,220,000
204 Direct labor: Finished goods Machinery
4,000,000 1,000,000 5,000,000
4/5 1/5
Problem 15-20 Date January 1 June 30 December 31
Expenditure
Months
Amount
2,000,000 2,000,000 1,000,000 5,000,000
12 6 0
24,000,000 12,000,000 -____ 36,000,000
Average expenditures (36,000,000 x 12)
3,000,000
Average capitalization rate (1,060,000 / 8,000,000)
13.25%
Expenditures on building Interest (3,000,000 x 13.25%) Total cost of building
5,000,000 397,500 5,397,500
Problem 15-21 Average capitalization rate (900,000 / 8,000,000) Date January 1 March 31 September 30
11.25%
Expenditure
Months
Amount
2,000,000 1,000,000 3,000,000 6,000,000
12 9 3
24,000,000 9,000,000 9,000,000 42,000,000
Average expenditures (42,000,000 / 12)
3,500,000
Expenditures on construction Specific interest cost: Actual interest Interest income General interest cost: Average expenditures Less: Specific borrowing General borrowing Capitalization rate Total cost of building
6,000,000 240,000 ( 10,000) 3,500,000 2,000,000 1,500,000 11.25%
230,000
168,750 6,398,750
205 Problem 15-22 Date January 1 March 31 June 30 September 30 December 31
Expenditure 1,500,000 1,000,000 1,000,000 1,000,000 1,000,000 5,500,000
Months 12 9 6 3 0
Amount 18,000,000 9,000,000 6,000,000 3,000,000 -___ 36,000,000
Average expenditures (36,000,000 x 12)
3,000,000
Expenditures on construction Interest cost (3,000,000 x 11.5%) Total cost
5,500,000 345,000 5,845,000
Problem 15-23 Date January 1 July 1 November 1
Expenditure 1,000,000 2,000,000 3,000,000 6,000,000
Months 12 6 2
Amount 12,000,000 12,000,000 6,000,000 30,000,000
Average expenditures (30,000,000 / 12)
2,500,000
Average expenditures Applicable to specific loan Applicable t general loan
2,500,000 (1,000,000) 1,500,000
Actual expenditures Capitalizable interest: Specific (1,000,000 x 10%) General (1,500,000 x 12%) Total cost of building
6,000,000 100,000 180,000 6,280,000
Problem 15-24 Date January 1, 2008 April 1, 2008 December 1, 2008
Expenditure 4,000,000 5,000,000 3,000,000 12,000,000
Average expenditures in 2008 (96,000,000 / 12) Applicable to specific loan Applicable t general loan
Months 12 9 1
Amount 48,000,000 45,000,000 3,000,000 96,000,000 8,000,000 (3,000,000) 5,000,000
206 Actual expenditures in 2008 Capitalizable interest in 2008 Specific (3,000,000 x 10%) General (5,000,000 x 12%) Total cost of building Date January 1, 2009 March 1, 2009
Expenditure 12,900,000 6,000,000 18,900,000
12,000,000 300,000 600,000 12,900,000 Months
Amount
6 4
77,400,000 _24,000,000 101,400,000
Average expenditures in 2009 (101,400,000 / 6) Applicable to specific loan Applicable to general loan
16,900,000 ( 3,000,000) 13,900,000
Note that the construction period in 2009 is only 6 months because the building was completed on June 30, 2009. Thus, the average expenditures should be for 6 months only. Actual expenditures in 2009 Capitalizable interest in 2009 Specific (3,000,000 x 10% x 6/12) General (13,900,000 x 12% x 6/12) Total cost of new building – 6/30/2009
18,900,000 150,000 834,000 19,884,000
Problem 15-25 1. Cash Deferred income-government grant
30,000,000 30,000,000
Environmental expenses Cash
2,000,000
Deferred income-government grant Income from government grant (2/20 x 30,000,000)
3,000,000
2. Cash Deferred income-government grant Building Cash
2,000,000 3,000,000 40,000,000 40,000,000 50,000,000 50,000,000
Depreciation Accumulated depreciation (50,000,000 / 20)
2,500,000
Deferred income-government grant Income from government grant (40,000,000 / 20)
2,000,000
2,500,000 2,000,000
207 3. Land Deferred income-government grant Building Cash
50,000,000 50,000,000 80,000,000 80,000,000
Depreciation Accumulated depreciation (80,000,000 / 25)
3,200,000
Deferred income-government grant Income from government grant (50,000,000 / 25)
2,000,000
4. Cash Income from government grant
10,000,000
3,200,000 2,000,000 10,000,000
Problem 15-26 Answer D Cost of land (5,400,000 x 2/5)
2,160,000
Problem 15-27 Answer B Cash price Installation cost Total cost
950,000 30,000 980,000
Problem 15-28 Answer C Cash price Installation cost Total cost
2,000,000 50,000 2,050,000
Problem 15-29 Answer B Present value of first note payable (500,000 x 5.65) Present value of second note payable (3,000,000 x .80) Total cost of machinery
2,825,000 2,400,000 5,225,000
Problem 15-30 Answer D First payment on December 30, 2008 Present value of next 7 payments (200,000 x 4.712) Total cost of machine
200,000 942,400 1,142,400
Another computation: PV of annuity of 1 in advance for 8 periods (200,000 x 5.712)
1,142,400
208 Problem 15-31 Answer A Invoice price Discount (2% x 700,000) Freight and insurance Cost of assembling and installation Total cost
700,000 ( 14,000) 3,000 5,000 694,000
Problem 15-32 Answer A Equipment: Invoice price Discount (5% x 600,000) Land (at its fair value) Machinery: Acquisition cost Installation cost Trial run and testing cost Construction of base Total
600,000 ( 30,000) 275,000 7,000 18,000 10,000
570,000 1,100,000
310,000 1,980,000
Problem 15-33 Answer B Fair value of asset given Cash payment Total cost
700,000 160,000 860,000
Problem 15-34 Answer B Fair value of asset given Cash payment Cost of new inventory
2,100,000 400,000 2,500,000
Problem 15-35 Answer A Fair value of asset given Less: Cost of asset given Gain on exchange
1,500,000 1,250,000 250,000
Problem 15-36 Answer A Since the old machine has no available fair value, the new machine received in exchange is recorded at its cash price without trade in of P900,000. The average published retail value of the old machine is not necessarily its fair value.
209 Problem 15-37 Answer A
Average expenditures (20,000,000 / 2) Multiply y capitalization rate Interest on average expenditures
10,000,000 12% 1,200,000
The capitalizable borrowing cost is limited to the actual borrowing cost incurred. In this case, the computed amount of P1,200,000 is more than the actual borrowing cost of P1,020,000. Accordingly, the capitalizable interest is P1,020,000. Note that in computing the average expenditures, the amount of P20,000,000 is simply divided by 2 because the said amount is incurred evenly during the year ended 2008.
Problem 15-38 Answer C Since the actual interest incurred is not given, the interest on the average expenditures is determined. Average expenditures (9,600,000 / 2) Interest on average expenditures (4,800,000 x 10%) Interest income on unexpended portion Capitalizable interest
4,800,000 480,000 (320,000) 160,000
Problem 15-39 Answer B Accumulated expenditures at the end of two years Average expenditures in the third year (8,000,000 / 2) Total Capitalizable interest (7,000,000 x 9%)
3,000,000 4,000,000 7,000,000 630,000
Problem 15-40 Answer B Average accumulated expenditures Specific borrowing Applicable to general borrowing Specific (6% x 1,500,000) General (9% x 1,000,000) Capitalizable interest
2,500,000 (1,500,000) 1,000,000 90,000 90,000 180,000
210 CHAPTER 16 Problem 16-1 1. 2. 3. 4. 5.
C D D D B
Problem 16-2
Land Building Cash paid for land and old building 1,000,000 Removal of old building 50,000 Payment to tenants of old building to vacate premises 15,000 Architect fee 200,000 Building permit 30,000 Fee for title search 10,000 Survey before construction 20,000 Excavation 100,000 Cost of new building constructed 6,000,000 Assessment fee 5,000 Cost of grading, leveling and landfill 45,000 Driveways and walks 40,000 Temporary quarters for construction crew 80,000 Temporary building to house tools and materials 60,000 Cost of construction changes _________ 50,000 6,560,000 1,145,000
Note: The cost of replacing windows is treated as expense. Problem 16-3 Cost of land Legal fees Payment of mortgage Payment of taxes Cost of razing building Proceeds from sale of materials Grading and drainage Architect fee Payment to contractor Interest cost Driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing lights in parking lot Premium for insurance
Land 2,000,000 10,000 50,000 20,000 30,000 ( 5,000) 15,000
Building
Land improvement
200,000 8,000,000 300,000
_______ 2,120,000
25,000 8,525,000
40,000 55,000 5,000 _______ 100,000
The payment for medical bills and the cost of open house party are outright expenses because they are not a necessary cost of acquiring the land and building.
211
Problem 16-4
Purchase price Materials Excavation Labor Remodeling Cash discounts Supervision Compensation insurance Clerical and other expenses Paving of streets Plans and specifications Legal cost - land
Land 1,300,000
10,000 1,310,000
Office Factory Land building building improvements 700,000 3,200,000 100,000 2,500,000 200,000 ( 60,000) 30,000 50,000 30,000 40,000 150,000 ________ ________ ______ 900,000 6,000,000
40,000
1. The imputed interest on 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 Payment for land Demolition of old building Total cost of land
50,000 1,000,000 100,000 1,150,000
Architect fee Payment to city hall Contract price Safety fence around construction site Safety inspection on building Removal of safety fence Total cost of factory building
230,000 120,000 5,000,000 35,000 30,000 20,000 5,435,000
Problem 16-6 Purchase price Title clearance fee Cost of razing old building Scrap value of old building Total cost of land Construction cost of new building
3,000,000 50,000 100,000 ( 10,000) 3,140,000 8,000,000
212 Problem 16-7 Purchase price Remodeling Salvage materials Grading, leveling and other permanent improvement Repairs
Land 1,000,000
Building 4,000,000 150,000 ( 5,000)
50,000 ________ 1,050,000
10,000 4,155,000
The repairs are capitalized because they are necessary prior to the occupancy and intended use of the building.
Problem 16-8 Fair value Repairs Remodeling Invoice price Discount Base
Land 1,500,000
Building 5,000,000 200,000 300,000
Machinery
1,000,000 20,000) _________ _________ 50,000 5,500,000 1,030,000 1,500,000 (
The driveway and parking lot are charged to land improvements.
Problem 16-9 Fair value Repairs Special tax assessment Platform Remodeling Purchase price Discount Freight Installation
Land Building Machinery 4,000,000 1,500,000 200,000 30,000 70,000 400,000 800,000 ( 40,000) 20,000 _________ _________ 30,000 4,600,000 2,380,000 1,530,000
1,500,000
Problem 16-10 Purchase price Commission Legal fees Title guarantee
2,000,000 100,000 50,000 10,000
Contract price 6,000,000 Plans, specification and blueprint 100,000 Architectural fee 250,000
Cost of razing old building Salvage value of materials Cost of land
75,000 ( 5,000) 2,230,000
Cost of new building
6,350,000
213 Problem 16-11 Land Balances, Jan. 1 Acquisition of land - #621: Purchase price Commission Clearing cost Sale of timber and gravel Acquisition of land - #622: Purchase price Cost of demolition New building: Construction cost Excavation fee Architectural design Building permit Improvements: Electrical work Construction extension (800,000 x 1/2) Improvements on office space Purchase of new machine: Invoice price Freight Unloading charge Balances, December 31
1,500,000
Building
Leasehold improvements
Machinery
4,000,000
500,000
1,000,000
3,000,000 60,000 15,000 ( 5,000) 4,000,000 300,000 5,000,000 50,000 150,000 40,000 350,000 400,000 650,000 1,750,000 _________ 8,870,000
_________ 9,240,000
_________ 1,900,000
20,000 __ 30,000 2,800,000
The third tract of land should be presented as current asset because it was “classified as held for sale”.
Problem 16-12
Land Land improvements
Balances, Jan. 1 3,500,000 Land acquired 1,250,000 Issuance of share capital: 12/36 x 4,500,000 1,500,000 24/36 x 4,500,000 New machinery New parking lot, street and sidewalk
900,000
Building
Machinery
7,000,000
1,500,000
3,000,000 3,400,000 750,000
Machinery sold Balances, Dec. 31
________ ________ _________ 1,650,000 10,000,000 6,250,000
(
500,000) 4,400,000
The “assessed values” do not represent the fair values of the land and building but are used in allocating the market value of the share capital.
214 Problem 16-13 Invoice price Cash discount Freight Installation cost Testing cost
Problem 16-14 3,000,000 Invoice cost 4,000,000 ( 150,000) Discount (5% x 4,000,000) ( 200,000) 50,000 Transportation 40,000 30,000 Installation 100,000 Trial run-salary of engineer 50,000 20,000 Cash allowance ( 60,000) 2,950,000 3,930,000
Problem 16-15 Cost paid (896,000 – 96,000) Cost of transporting machine Installation cost Testing cost Safety rails and platform Water device Cost of adjustment Estimated dismantling cost Total cost of machine
800,000 30,000 50,000 40,000 60,000 80,000 75,000 65,000 1,200,000
Note that the estimated dismantling cost is capitalized because the company has a present obligation as required by contract. In the absence of a present obligation, the estimated dismantling cost is not capitalized.
Problem 16-16 Second hand market value Overhaul and repairs Installation Testing Hauling Safety device
2,400,000 150,000 80,000 110,000 10,000 250,000 3,000,000
Problem 16-17 1. Materials Labor Installation Trial run Discount Overhead
600,000 400,000 60,000 30,000 ( 40,000) 150,000 1,200,000
2. Adjusting entries: 1. Loss on retirement of old machinery Machinery (20,000 – 14,000)
6,000 6,000
215 2. Purchase discount Machinery
40,000 40,000
3. Machinery Factory overhead
150,000
4. Profit on construction Machinery
100,000
150,000 100,000
5. Tools Machinery
90,000
6. Depreciation – tools Tools (90,000 / 3 x 4/12)
10,000
7. Machinery Accumulated depreciation Depreciation – machinery
90,000 10,000 128,600 40,000 88,600
Depreciation recorded Correct depreciation (1,200,000 / 10 x 4/12) Overdepreciation
128,600 40,000 88,600
Problem 16-18 Initial design fee Executive chairs and desks Storm windows and installation Installation of automatic door opening system Overhead crane Total capital expenditures
150,000 200,000 500,000 200,000 350,000 1,400,000
Problem 16-19 1. Accumulated depreciation Loss on retirement of building Building Building Cash Depreciation (8,100,000 / 20) Accumulated depreciation
400,000 1,600,000 2,000,000 2,500,000 2,500,000 405,000 405,000
Building (9,000,000 + 2,500,000 – 2,000,000) Accumulated depreciation (1,800,000 – 400,000) Book value 2. Accumulated depreciation (1,960,000 x 20%) Loss on retirement of building Building (2,500,000 x .784)
9,500,000 1,400,000 8,100,000 392,000 1,568,000 1,960,000
216 Building Cash Depreciation (8,132,000 / 20) Accumulated depreciation
2,500,000 2,500,000 406,600 406,600
Building (9,000,000 – 1,960,000 + 2,500,000) Accumulated depreciation (1,800,000 – 392,000) Book value
9,540,000 1,408,000 8,132,000
Problem 16-20 a. Annual depreciation (8,400,000 / 30)
280,000
Age of building (7,000,000 / 280,000)
25 years
b. Building Cash
2,500,000 2,500,000
c. Building (8,400,000 + 2,500,000) Less: Accumulated depreciation Book value d. Depreciation (3,900,000 / 15) Accumulated depreciation
10,900,000 7,000,000 3,900,000 260,000 260,000
Original life Less: Expired life Remaining useful life, beginning of current year Add: Extension in life Revised useful life
30 25 5 10 15
Problem 16-21 1. Building Cash 2. Depreciation Accumulated depreciation 3. Building
10,500,000 10,500,000 200,000 200,000 3,000,000
Cash Accumulated depreciation (2,500,000 / 50 x 2) Loss on retirement of building Cash 4. Depreciation (10,700,000 – 500,000 / 48) Accumulated depreciation
3,000,000 100,000 2,400,000 2,500,000 212,500 212,500
217 Building (10,500,000 + 3,000,000 – 2,500,000) Accumulated depreciation (400,000 – 100,000) Book value – 1/1/2008
11,000,000 300,000 10,700,000
Problem 16-22 1. Machinery Cash
5,000,000 5,000,000
2. Depreciation Accumulated depreciation
450,000
3. Depreciation (3,600,000 / 6) Accumulated depreciation
600,000
Cost Accumulated depreciation: 2005 2006 Book value Residual value Remaining depreciable cost – 1/1/2007
450,000 600,000 5,000,000 450,000 450,000
4. Machinery Cash
300,000
5. Depreciation (3,300,000 / 5) Accumulated depreciation
660,000
900,000 4,100,000 500,000 3,600,000 300,000 660,000
Cost Accumulated depreciation (900,000 + 600,000) Book value – 1/1/2008 Residual value Remaining depreciable cost – 1/1/2008
5,300,000 1,500,000 3,800,000 500,000 3,300,000
Problem 16-23 1. Depreciation (60,000 x 3/12) Accumulated depreciation
15,000 15,000
Accumulated depreciation (480,000 + 15,000) Loss on retirement of store equipment Store equipment 2. Depreciation (150,000 x 4/12) Accumulated depreciation
495,000 105,000 600,000 50,000 50,000
218 Cash Accumulated depreciation (1,050,000 + 50,000) Loss on sale of office equipment Office equipment 3. Depreciation (600,000 x 5/12) Accumulated depreciation Delivery equipment – new Accumulated depreciation Cash (5,000,000 – 750,000) Delivery equipment – old Gain on exchange (750,000 – 350,000)
100,000 1,100,000 300,000 1,500,000 250,000 250,000 5,000,000 2,650,000 4,250,000 3,000,000 400,000
Original cost Less: Accumulated depreciation to date (2,400,000 + 250,000) Book value 4. Accumulated depreciation Office equipment 5. Depreciation (900,000 x 9/12) Accumulated depreciation Accumulated depreciation (2,700,000 + 675,000) Fire loss Machinery
3,000,000 2,650,000 350,000
1,200,000 1,200,000 675,000 675,000 3,375,000 1,125,000 4,500,000
Problem 16-24 1. Discount on bonds payable Machinery
500,000 500,000
Interest expense (500,000 / 10 x 9/12) Discount on bonds payable
37,500
Accumulated depreciation Depreciation
75,000
37,500 75,000
Depreciation for 9 months Depreciation for 12 months (600,000 / 9/12) Depreciable cost (800,000 x 5 years) Cost Less: Residual value Depreciable cost
600,000 800,000 4,000,000 Per book 5,000,000 1,000,000 4,000,000
Adjusted 4,500,000 1,000,000 3,500,000
219 Correct depreciation for 9 months (3,500,000 / 5 x 9/12) Less: Depreciation recorded Overstatement
525,000 600,000 75,000
2. Interest expense Machinery (3,500,000 – 3,200,000)
300,000 300,000
Machinery Freight in
150,000 150,000
Accumulated depreciation Depreciation
30,000 30,000
Depreciation per book Correct depreciation (3,350,000 / 5) Overstatement
700,000 670,000 30,000
3. Loss on exchange Machinery Cost per book Correct cost Trade in value Add: Cash paid Overstatement
390,000 390,000 3,000,000 150,000 2,460,000
Trade in value Less: Book value Loss on exchange 4. Allowance for doubtful accounts Loss on exchange – accounts receivable Treasury share Per book Machinery
2,610,000 390,000 150,000 540,000 (390,000)
840,000 60,000 900,000 4,200,000
Accounts receivable Treasury shares Machinery Should be Machinery Allowance for doubtful accounts (20% x 4,200,000) Loss on accounts receivable Accounts receivable
4,200,000 4,200,000 4,200,000 3,300,000 840,000 60,000 4,200,000
220 Treasury shares Machinery
3,300,000 3,300,000
The cost of treasury shares acquired for noncash consideration is usually measured by the recorded amount of the noncash asset surrendered (SFAS No. 18).
Problem 16-25 Answer A Allocated cost of land (2,400,000 / 6,000,000 x 5,500,000) Property taxes (2,400 / 6,000 x 250,000) Cost of survey Total cost of land
2,200,000 100,000 5,000 2,305,000
Incidentally, the cost of the building is: Allocated cost (3,600 / 6,000 x 5,500,000) Property taxes (3,600 / 6,000 x 250,000) Renovation Total cost of building
3,300,000 150,000 500,000 3,950,000
Problem 16-26 Answer A Purchase price Payments to tenants Demolition of old building Legal fees Title insurance Proceeds from sale of materials Total cost of land
4,000,000 200,000 100,000 50,000 30,000 ( 10,000) 4,370,000
Problem 16-27 Answer D Purchase price of land
Land 600,000
Building
Legal fees for contract Architect fee Demolition of old building Construction cost Total cost
20,000 80,000 50,000 _______ 670,000
3,500,000 3,580,000
Problem 16-28 Answer D Acquisition price Option of building acquired Repairs Total cost
7,000,000 200,000 500,000 7,700,000
221 Problem 16-29 Answer D Purchase price Shipping Installation Testing Total cost
250,000 5,000 10,000 35,000 300,000
Problem 16-30 Answer A Problem 16-31 Answer A All expenditures are capitalized.
Problem 16-32 Answer A All costs are capitalized.
Problem 16-33 Answer C Continuing and frequent repairs Repainting of the plant building Partial replacement of roof tiles Repair and maintenance expense
400,000 100,000 150,000 650,000
Problem 16-34 Answer B Problem 16-35 Answer B
222 CHAPTER 17 Problem 17-1
Problem 17-2
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
A D B D D D D C C B
Problem 17-3
C A D D D B C B A A
Depreciation Table – Straight Line Year
Particular Acquisition cost
Depreciation
2008 2009 2010 2011 2012
120,000 120,000 120,000 120,000 120,000 600,000
Accumulated depreciation 120,000 240,000 360,000 480,000 600,000
Book value 635,000 515,000 395,000 275,000 155,000 35,000
Depreciation Table – Service Hours Method Year 2008 2009 2010 2011 2012
Particular Acquisition cost 14,000 x 10 13,000 x 10 10,000 x 10 11,000 x 10 12,000 x 10
Depreciation 140,000 130,000 100,000 110,000 120,000 600,000
Accumulated depreciation
Book value 635,000 495,000 365,000 265,000 155,000 35,000
140,000 270,000 370,000 480,000 600,000
Depreciation rate per hour = 600,000 / 60,000 = 10
223 Depreciation Table – Production Method Year 2008 2009 2010 2011 2012
Particular Acquisition cost 34,000 x 4 32,000 x 4 25,000 x 4 29,000 x 4 30,000 x 4
Depreciation 136,000 128,000 100,000 116,000 120,000 600,000
Accumulated Depreciation 136,000 264,000 364,000 480,000 600,000
Book value 635,000 499,000 371,000 271,000 155,000 35,000
Depreciation rate per unit of output = 600,000 / 150,000 = 4 Depreciation Table – Sum of Years’ Digits Accumulated
Year 2008 2009 2010 2011 2012
Particular Acquisition cost 5/15 x 600,000 4/15 x 600,000 3/15 x 600,000 2/15 x 600,000 1/15 x 600,000
Depreciation 200,000 160,000 120,000 80,000 40,000 600,000
depreciation 200,000 360,000 480,000 560,000 600,000
Book value 635,000 435,000 275,000 155,000 75,000 35,000
SYD = 1 + 2 + 3 + 4 + 5 = 15 Depreciation Table – Double Declining Balance
Year 2008 2009 2010 2011 2012
Particular Acquisition cost 40% x 635,000 40% x 381,000 40% x 228,600 40% x 137,160 82,296 – 35,000
Depreciation 254,000 152,400 91,440 54,864 47,296 600,000
Accumulated depreciation 254,000 406,400 497,840 552,704 600,000
Book value 635,000 381,000 228,600 137,160 82,296 35,000
Fixed rate = 100% / 5 = 20% x 2 = 40% Problem 17-4 a. Straight line method: 2008 2009
27,500 55,000
224 b. Working hours method: 550,000 Rate per hour = ------------------- = 11 50,000 hours 2008 (3,000 hours x 11) 2009 (5,000 hours x 11) c. Output method: 550,000 Rate per unit = -------------------- = 2.75 200,000 units
33,000 55,000
2008 (18,000 units x 2.75) 2009 (22,000 units x 2.75)
49,500 60,500
d. Sum of years’ digits: 10 + 1 SYD = 10 (------------) = 55 2 2008 (10/55 x 550,000 x 6/12)
50,000
2009 Jan. 1-June 30 July 1-Dec. 31 (9/55 x 550,000 x 6/12)
50,000 45,000 95,000
e. Double declining balance: 2008 (570,000 x 20% x 6/12) 2009 (570,000 – 57,000 x 20%)
57,000 102,600
Problem 17-5 Fixed rate = 1.00 - .5623 or .4377 2008 2009 2010 2011
(500,000 x .4377) (500,000 – 218,850 x .4377) (500,000 - 341,909 x .4377) (500,000 – 411,105 – 50,000)
218,850 123,059 69,196 38,895 450,000
Problem 17-6 a. Sum of years’ digit April 1, 2008 – March 31, 2009 (1,080,000 x 8/36) April 1, 2009 – March 31, 2010 (1,080,000 x 7/36)
240,000 210,000
225 Depreciation from April 1 to December 31, 2008 (240,000 x 9/12)
180,000
Depreciation for 2009: January 1 – March 31 (240,000 x 3/12) April 1 – December 31 (210,000 x 9/12) b. Double declining balance Fixed rate = 100 / 8 = 12.5 x 2 = 25%
60,000 157,500 217,500
2008 (1,200,000 x 25% x 9/12) 2009 (1,200,000 – 225,000 x 25%)
225,000 243,750
Problem 17-7 a. Service hours method: 960,000 – 60,000 Depreciation rate per hour = ---------------------------- = 112.50 8,000 hours 2008 (1,000 hours x 112.50) 2009 (2,000 hours x 112.50)
112,500 225,000
b. Sum of years’ digits: Sum of half years
=
45
2008 (9/45 x 900,000 x 3/6) 2009 January 1 – March 31 (9/45 x 900,000 x 3/6) April 1 – September 30 (8/45 x 900,000) October 1 – December 31 (7/45 x 900,000 x 3/6)
90,000 90,000 160,000 70,000 320,000
Problem 17-8 a. Rate per unit (900,000 / 180,000) 2008 (5,000 x 5) 2009 (20,000 x 5)
5.00 25,000 100,000
b. Double declining balance: Fixed rate (100% / 8 x 2) 2008 (920,000 x 25% x 6/12) 2009 (920,000 – 115,000 x 25%)
25% 115,000 201,250
226 c. Sum of years’ digits: July 1 – December 31, 2008 (900,000 x 8/36 x 6/12) January 1 – June 30, 2009 (900,000 x 8/36 x 6/12) July 1 – December 31, 2009 (900,000 x 7/36 x 6/12) Depreciation for 2009
Problem 17-9
100,000 100,000 87,500 187,500
Assets Machinery Office equipment Building Delivery equipment
Cost 310,000 110,000 1,600,000 430,000 2,450,000
Salvage 10,000 10,000 100,000 30,000
Depreciable cost 300,000 100,000 1,500,000 15 400,000 2,300,000
Life in years 5 10 4
Annual depreciation 60,000 10,000 100,000 100,000 270,000
a. Composite rate = 270,000 / 2,450,000 = 11.02% b. Composite life
= 2,300,000 / 270,000 =
8.52 years
c. Depreciation Accumulated depreciation
270,000 270,000
Problem 17-10 Assets Building Machinery Equipment
Cost 6,100,000 2,550,000 1,030,000 9,680,000
Salvage 100,000 50,000 30,000
Depreciable cost 6,000,000 2,500,000 1,000,000 9,500,000
Life in Annual years depreciation 20 300,000 5 500,000 10 100,000 900,000
a. Composite depreciation rate = 900,000 / 9,680,000 = 9.3% b. Average life = 9,500,000 / 900,000 = 10.56 years c. Depreciation Accumulated depreciation d. Cash Accumulated depreciation Machinery e. Depreciation Accumulated depreciation (9,680,000 – 2,550,000 x 9.3%)
900,000 900,000 40,000 2,510,000 2,550,000 663,090 663,090
227 Problem 17-11 2003 Jan. 1 Machinery Cash Dec. 31 Depreciation (20% x 900,000) Accumulated depreciation
900,000 900,000 180,000 180,000
2004 Dec. 31 Depreciation Accumulated depreciation
180,000
2005 Dec. 31 Depreciation Accumulated depreciation
180,000
2006 Dec. 31 Depreciation Accumulated depreciation
180,000
180,000
180,000
180,000
Cash Accumulated depreciation Machinery (4 x 45,000)
10,000 170,000 180,000
2007 Dec. 31 Depreciation (720,000 x 20%) Accumulated depreciation Cash Accumulated depreciation Machinery (14 x 45,000)
144,000 144,000 15,000 615,000 630,000
2008 Dec. 31 Depreciation Accumulated depreciation
9,000 9,000
Remaining cost Less: Balance of accumulated depreciation Book value Less: Salvage proceeds Maximum depreciation Cash Accumulated depreciation Machinery (4 x 45,000)
90,000 79,000 11,000 2,000 9,000 2,000 88,000 90,000
228
Problem 17-12 1. Old machinery overhauled (240,000 + 60,000) Accumulated depreciation 2005 (240,000 / 8) 2006 2007
300,000 30,000 30,000 30,000
Total Book value – January 1, 2008
90,000 210,000
Old machinery overhauled (210,000 / 7 years) Remaining cost of old machinery (1,152,000 – 240,000 / 8) New machinery (460,800 / 8 x 5/12) Total depreciation 2. Old machinery New machinery Cost of overhaul Total cost Accumulated depreciation: Balance – January 1 Depreciation for 2008 Book value – December 31, 2008
30,000 114,000 24,000 168,000 1,152,000 460,800 60,000 1,672,800 432,000 168,000
600,000 1,072,800
Problem 17-13 Main machine (7,500,000 / 10) First component – from January 1 to April 1, 2008 (1,200,000 / 6 x 3/12) Second component – from April 1 to December 31, 2009 (2,000,000 – 400,000 / 4 x 9/12) Total depreciation for 2008
750,000 50,000 300,000 1,100,000
The second component is depreciated over the remaining life of the main machine. The original life is 10 years and 6 years already expired. Thus, the remaining life is 4 years.
Problem 17-14 1. Tools
40,000 Cash
40,000
2. Tools
20,000 Cash
20,000
3. Cash Tools
4,000 4,000
4. Depreciation Tools
46,000 46,000
Balance of tools account Less: Estimated cost on December 31 Depreciation
196,000 150,000 46,000
229 Problem 17-15 Retirement method
March
1 Electric meters Cash
250,000 250,000
1 Cash Depreciation Electric meters July
20,000 160,000 180,000
1 Electric meters Cash
400,000
December 1 Electric meters Cash
200,000
400,000 200,000
1 Cash Depreciation Electric meters
15,000 135,000 150,000
Replacement method March July
1 Depreciation (250,000 – 20,000) Cash 1 Electric meters Cash
2008 Tools Cash Cash (300 x 50) Depreciation Tools (300 x 200) 2009 Tools Cash Cash (700 x 70) Depreciation Tools
230,000 400,000 400,000
December 1 Depreciation (200,000 – 15,000) Cash
Problem 17-16
230,000
185,000 185,000
Retirement method 120,000 120,000 15,000 45,000 60,000 360,000 360,000 49,000 111,000 160,000
230 500 x 200 200 x 300
100,000 60,000
Cost of tools retired
160,000 Replacement method
2008 Tools (100 x 300) Depreciation (300 x 30) Cash
30,000 90,000 120,000
Cash Depreciation
15,000 15,000
2009 Tools (200 x 400) Depreciation (700 x 400) Cash
80,000 280,000 360,000
Cash Depreciation
49,000 49,000 Inventory method
2008 Tools Cash
120,000
Cash Tools
15,000
Depreciation (265,000 – 200,000) Tools
65,000
120,000 15,000 65,000
2009 Tools Cash
360,000
Cash Tools
49,000
Depreciation (511,000 - 350,000) Tools
360,000 49,000 161,000 161,000
Problem 17-17 1. Land (350,000 + 450,000) Land acquired (380,000 + 25,000 + 45,000)
800,000 450,000
2. Depreciation of land improvements (180,000 / 15)
12,000
3. Depreciation of building (4,500,000 – 1,050,000 x 7.5%)
258,750
231 4. Depreciation of machinery and equipment
(1,160,000 – 60,000 / 10) (300,000 / 10) (60,000 / 10 x 6/12)
110,000 30,000 3,000 143,000
5. Fixed rate (100% / 3 x 1.5)
50%
(1,800,000 – 1,344,000 x 50%)
228,000
Problem 17-18 1. Beginning balance Acquisition (150,000 / 750,000 x 1,250,000) Total cost of land
875,000 250,000 1,125,000
Technically, the land for undetermined use is an investment property. 2. Old (7,500,000 – 1,644,500 x 8%) New (600,000/750,000 x 1,250,000 = 1,000,000 x 8%) Depreciation – building
468,440 80,000 548,440
3. 2,250,000 / 10 400,000 / 10 x 6/12 Depreciation – machinery
225,000 20,000 245,000
4. Depreciation – leasehold improvements (216,000 – 108,000 / 5 years)
21,600
5. Depreciation – land improvements 192,000 / 12 x 9/12)
12,000
Problem 17-19 1. Old building (4,672,200 x 10%) New building Direct cost Fixed (15,000 x 25) Variable (15,000 x 27) Total cost 3,000,000 x 10% Total depreciation Fixed rate (100 / 20 x 2)
467,220 2,220,000 375,000 405,000 3,000,000 300,000 767,220 10%
232
2. Old machinery (1,380,000 / 10) New machinery Invoice cost Concrete embedding Wall demolition Rebuilding of wall Total cost 400,000 / 10 x 6/12 Total depreciation
138,000 356,000 18,000 7,000 19,000 400,000 20,000 158,000
Problem 17-20 Answer A Cost of machinery (cash price) Less: Residual value Depreciable cost
1,100,000 50,000 1,050,000
Straight line depreciation (1,050,000 / 10)
105,000
Problem 17-21 Answer B Sales price Book value: Cost Accumulated depreciation (3,600,000 / 5 x 3) Gain
2,300,000 4,200,000 2,160,000
2,040,000 260,000
Problem 17-22 Answer B Accumulated depreciation – 12/31/2007 Add: Depreciation for 2008 Total Less: Accumulated depreciation on property, plant and equipment retirements (squeeze) Accumulated depreciation – 12/31/2008
Problem 17-23 Answer B A B C
Cost 550,000 200,000 40,000 790,000
Salvage 50,000 20,000
Composite life = 720,000 / 45,000
Depreciable cost Life 500,000 180,000 40,000 720,000
3,700,000 550,000 4,250,000 250,000 4,000,000
Annual depreciation 20 25,000 15 12,000 5 8,000 45,000 16 years
233 Problem 17-24 Answer D Invoice price Cash discount (2% x 4,500,000) Delivery cost Installation and testing Total cost Salvage value Depreciable cost
4,500,000 90,000) 80,000 310,000 4,800,000 800,000 4,000,000 (
Rate per unit (4,000,000 / 200,000)
20
Depreciation for 2008 (30,000 x 20)
600,000
Problem 17-25 Answer B Cost Accumulated depreciation 2007 (8/36 x 3,600,000) 2008 (7/36 x 3,600,000) Book value, 12/31/2008
4,000,000 800,000 700,000
1,500,000 2,500,000
Problem 17-26 Answer B The first three fractions are: 2006 2007 2008
10/55 9/55 8/55
Thus, the 2008 depreciation of P240,000 is equal to 8/55. Depreciable cost (240,000 / 8/55) Salvage Total cost
1,650,000 50,000 1,700,000
Problem 17-27 Answer B April 1, 2006 to March 31, 2007 (5/15 x 3,000,000) April 1, 2007 to March 31, 2008 (4/15 x 3,000,000) Accumulated depreciation, March 31, 2008
1,000,000 800,000 1,800,000
Problem 17-28 Answer A The accumulated depreciation on December 31, 2007 is recomputed following a certain method. The same is arrived at following the SYD as follows: SYD = 1 + 2 + 3 + 4 + 5 = 15
234 2005 (5/15 x 900,000) 2006 (4/15 x 900,000) 2007 (3/15 x 900,000) Accumulated depreciation – 12/31/2007
300,000 240,000 180,000 720,000
Accordingly, the SYD is followed for 2008. 2008 depreciation (2/15 x 900,000)
120,000
Problem 17-29 Answer B Straight line rate (100% / 8 years) Fixed rate (12.5 x 2) 2007 depreciation (1,280,000 x 25%) 2008 depreciation (1,280,000 – 320,000 x 25%)
12.5% 25% 320,000 240,000
Problem 17-30 1. 4,000,000 – 2,560,000 x 40%
(Answer D)
576,000
2. 1,800,000 x 2/15 (SYD)
(Answer A)
240,000
(Answer A)
1,700,000 1,456,000 244,000
3. Sales price Book value (2,800,000 – 1,344,000) Gain
Problem 17-31 Answer B Straight line rate (100% / 5 years) Fixed rate (20% x 2) 2006 depreciation (5,000,000 x 40%) 2007 depreciation (3,000,000 x 40%) Accumulated depreciation, December 31, 2007 Depreciation for 2008 – straight line (5,000,000 – 3,200,000 / 3) Accumulated depreciation, December 31, 2008
20% 40% 2,000,000 1,200,000 3,200,000 600,000 3,800,000
Problem 17-32 Answer A Cost – 1/1/2005 Accumulated depreciation – 12/31/2007 (7,200,000 / 10 x 3) Book value – 12/31/2007
7,200,000 2,160,000 5,040,000
SYD for the remaining life of 7 years (1 + 2 + 3 + 4 + 5 + 6 + 7)
28
Depreciation for 2008 (5,040,000 x 7/28)
1,260,000
Problem 17-33 Answer B Annual depreciation (1,536,000 / 8)
192,000
235 Problem 17-34 Answer B Fixed rate (100% / 4 x 2) Cost Depreciation for 2007 (50% x 6,000,000) Book value – 1/1/2008 Residual value Maximum depreciation in 2008 Fixed rate in 2008 (100% / 2 x 2)
50% 6,000,000 3,000,000 3,000,000 ( 600,000) 2,400,000 100%
This means that the computers should be fully depreciated in 2008. Since there is a residual value of P600,000, the maximum depreciation for 2008 is equal to the book value of P3,000,000 minus the residual value of P600,000 or P2,400,000.
236 CHAPTER 18 Problem 18-1
Problem 18-2
1. 2. 3. 4. 5.
1. 2. 3. 4. 5.
D A A C A
B C C C D
Problem 18-3 1. Ore property Cash
5,000,000
2. Ore property Cash
3,000,000
3. Machinery Cash
4,000,000
4. Depletion Accumulated depreciation
1,140,000
5,000,000 3,000,000 4,000,000 1,140,000
8,000,000 – 400,000 = 7,600,000 7,600,000 / 2,000,000 = 3.80 300,000 x 3.80 = 1,140,000 5. Depreciation Accumulated depreciation
600,000 600,000
4,000,000 / 2,000,000 = 2.00 300,000 x 2.00 = 600,000
Problem 18-4 2008
Rock and gravel property Cash
960,000
Depletion (1,000,000 x .40) Accumulated depletion
400,000
960,000 400,000
2009
Rock and gravel property Cash
490,000
Depletion (600,000 x .75) Accumulated depletion
450,000
490,000 450,000
237 Total cost (960,000 + 490,000) Less: Accumulated depletion Depletable cost Divide by estimated remaining output (2,400,000 – 1,000,000) Revised depletion rate per ton 2010
1,450,000 400,000 1,050,000 1,400,000 .75
Rock and gravel property Cash
500,000
Depletion (700,000 x .44) Accumulated depletion
308,000
500,000 308,000
Total cost Add: Additional development cost Total Less: Accumulated depletion (400,000 + 450,000) Remaining depletable cost Divide by new estimated remaining output New depletion rate
1,450,000 500,000 1,950,000 850,000 1,100,000 2,500,000 .44
Problem 18-5 2008
Resource property Cash
3,960,000
Building Equipment Cash
960,000 1,240,000
Depletion (12,000 x 32) Accumulated depletion
3,960,000
2,200,000 384,000 384,000
Cost of resource property Less: Residual value Depletable cost Divide by estimated output Depletion rate per unit Depreciation (12,000 x 8)
3,960,000 120,000 3,840,000 120,000 32 96,000
Accumulated depreciation – building
96,000
960,000 Depreciation rate per unit = ---------------- = 8 120,000 The output method is used in computing the depreciation of the building because the life of the resource property (5 years or 120,000 / 24,000) is shorter than the life of the building (8 years).
238 Depreciation Accumulated depreciation (1,240,000 / 4 years = 310,000)
310,000 310,000
The straight line method is used for the heavy equipment because the life of 4 years is shorter than the life of the resource property of 5 years. 2009
Depletion Accumulated depletion (25,000 x 32)
800,000 800,000
Depreciation (25,000 x 8) Accumulated depreciation – building
200,000
Depreciation Accumulated depreciation – equipment
310,000
200,000 310,000
Problem 18-6 2008
Ore property Cash Ore property Estimated liability for restoration cost
2009
2010
5,400,000 5,400,000 450,000 450,000
Mine improvements Cash
8,000,000
Depletion (600,000 x 2.60) Accumulated depletion
1,560,000
Depreciation (600,000 x 4) Accumulated depreciation
2,400,000
Depletion (400,000 x 1.60) Accumulated depletion Depletable cost
8,000,000 1,560,000 2,400,000 640,000 640,000 5,200,000
Less: 2009 depletion Balance (3,640,000 / 2,275,000 = 1.60)
1,560,000 3,640,000
Mine improvements Cash
770,000 770,000
Depreciation (400,000 x 2.80) Accumulated depreciation
1,120,000 1,120,000
Cost (8,000,000 + 770,000) Less: Accumulated depreciation Book value (6,370,000 / 2,275,000 = 2.80)
8,770,000 2,400,000 6,370,000
239
Problem 18-7 Depletion rate (5,000,000 / 1,000,000) Depreciation rate (8,000,000 / 1,000,000)
5.00 8.00
First year Depletion (200,000 x 5) Depreciation (200,000 x 8)
1,000,000 1,600,000
Second year Depletion (250,000 x 5) Depreciation (250,000 x 8)
1,250,000 2,000,000
Third year Depletion Depreciation (Schedule A)
none 550,000
Schedule A – Computation of depreciation for third year Cost of equipment Less: Accumulated depreciation Book value – beginning of third year by remaining useful life in years (10 – 2) for third year
8,000,000 3,600,000 4,400,000 Divide Depreciation 8 550,000
Fourth year Depletion (100,000 x 5) Depreciation (Schedule B)
500,000 700,000
Schedule B – Computation of depreciation for fourth year Cost of equipment Less: Accumulated depreciation Book value – beginning of fourth year
8,000,000 4,150,000 3,850,000
Original estimate of resource deposits Less: Extracted in first and second years Remaining output
1,000,000 tons 450,000 550,000 tons
Depreciation rate per unit (3,850,000 / 550,000) Depreciation for third year (100,000 x 7)
7.00 700,000
Problem 18-8 1. Retained earnings Accumulated depletion Total Less: Capital liquidated Depletion in ending inventory (5,000 x 20) Maximum dividend
1,500,000 2,500,000 4,000,000 1,800,000 1,900,000 100,000 2,100,000
240 2. Retained earnings Capital liquidated Dividends payable
1,800,000 200,000 2,000,000
Problem 18-9 1. Cash (50,000 x 110) Share capital (50,000 x 100) Share premium
5,500,000
2. Resource property Cash
3,000,000
3. Mining equipment Cash
800,000
4. Cash (85,000 x 50) Sales
4,250,000
5. Mining and other direct cost Administrative expenses Cash
2,268,000 500,000
6. Depletion Accumulated depletion (3,000,000 / 1,000,000 x 90,000) 7. Depreciation (90,000 x .80) Accumulated depreciation - mining equipment
5,000,000 500,000 3,000,000 800,000 4,250,000
2,768,000 270,000 270,000 72,000 72,000
Depreciation rate (800,000 / 1,000,000) = .80 8. Inventory, December 31 (5,000 x 29)
145,000
Profit and loss
145,000
Mining labor and other direct costs Depletion Depreciation Total production costs incurred Divide by number of units extracted Unit cost
2,268,000 270,000 72,000 2,610,000 90,000 29
241 Multinational Company Income Statement Year ended December 31, 2008 Sales Cost of sales Mining labor and other direct costs Depletion Depreciation Total production cost Less: Inventory, December 31 Gross income Administrative expenses Net income
4,250,000 2,268,000 270,000 72,000 2,610,000 2,465,000 145,000 1,785,000 500,000 1,285,000
Multinational Company Statement of Financial Position December 31, 2008 Assets Current assets: Cash Inventory Noncurrent assets: Resource property Less: Accumulated depletion Mining equipment Less: Accumulated depreciation Total assets
3,182,000 145,000 3,000,000 2,730,000 270,000 800,000 728,000 72,000
3,327,000
3,458,000 6,785,000
Equity Share capital Share premium Retained earnings Total equity
5,000,000 500,000 1,285,000 6,785,000
Retained earnings Add: Accumulated depletion Total Less: Unrealized depletion in ending inventory (5,000 x 3) Maximum dividend
1,285,000 270,000 1,555,000 15,000 1,540,000
Retained earnings Capital liquidated Dividends payable
1,285,000 255,000 1,540,000
242 Problem 18-10 1. Purchase price Road construction Improvements and development costs Total cost Residual value Depletable cost
50,000 5,000,000 750,000 5,800,000 ( 600,000) 5,200,000
Depletion rate per unit (5,200,000 / 4,000,000) Depletion for 2008 (500,000 x 1.30)
1.30 650,000
Depletable cost Depletion in 2008 Remaining depletable cost Development costs in 2009 Total depletable cost – 1/1/2009
5,200,000 ( 650,000) 4,550,000 1,300,000 5,850,000
Original estimated tons Additional estimate Total estimated tons Extracted in 2008 Remaining tons – 1/1/2009
4,000,000 3,000,000 7,000,000 ( 500,000) 6,500,000
New depletion rate per unit (5,850,000 / 6,500,000)
.90
Depletion for 2009 (1,000,000 x .90) 2. Cost of buildings Residual value Depreciable cost Depreciation rate per unit (1,800,000 / 4,000,000) Depreciation for 2008 (500,000 x .45)
900,000 2,000,000 ( 200,000) 1,800,000 .45 225,000
In the absence of any statement to the contrary, the output method is used in computing depreciation of mining equipment. Depreciable cost Depreciation for 2008 Remaining depreciable cost Additional building in 2009 Total depreciable cost – 1/1/2009 New depreciation rate per unit (1,950,000 / 6,500,000) Depreciation for 2009 (1,000,000 x .30)
Problem 18-11 2008
No depletion because there is no production.
2009
Purchase price Estimated restoration cost Development cost – 2008 Development cost – 2009 Total cost Residual value Depletable cost Rate in 2009 (27,000,000 / 10,000,000) Depletion in 2009 (3,000,000 x 2.70)
2010
Tons extracted in 2010 Tons remaining in 12/31/2010 Total estimated output – 1/1/2010 New rate in 2010 (27,000,000 – 8,100,000/6,000,000) Depletion in 2010 (3,500,000 x 3.15)
Problem 18-12 Answer B
1,800,000 ( 225,000) 1,575,000 375,000 1,950,000 .30 300,000
243
28,000,000 2,000,000 1,000,000 1,000,000 32,000,000 ( 5,000,000) 27,000,000 2.70 8,100,000 3,500,000 2,500,000 6,000,000 3.15 11,025,000
Acquisition cost Development cost Estimated restoration cost Total cost Less: Residual value Depletable cost Rate per unit (28,800,000 / 1,200,000) Depletion for 2008 (60,000 x 24)
26,400,000 3,600,000 1,800,000 31,800,000 3,000,000 28,800,000 24 1,440,000
Problem 18-13 Answer C Depletion rate per unit (9,200,000 / 4,000,000)
2.30
Problem 18-14 Answer C Rate per unit (46,800,000 – 3,600,000 / 2,160,000) Depletion in cost of goods sold (240,000 x 20)
20 4,800,000
244 Problem 18-15 Answer D Acquisition cost Less: Residual value Depletable cost Less: Accumulated depletion – 12/31/2007 (7,000,000 / 10,000,000 = .70 x 4,000,000) Remaining depletable cost – 1/1/2008 New depletion rate (4,200,000 / 7,500,000) Depletion for 2008 (1,500,000 x .56)
10,000,000 3,000,000 7,000,000 2,800,000 4,200,000 .56 840,000
Problem 18-16 Answer B Depletable cost Depletion for 2007 (33,000,000 / 4,000,000 = 8.25 x 200,000) Balance – 1/1/2008
33,000,000 ( 1,650,000) 31,350,000
Production in 2008 New estimate – 12/31/2008 New estimate – 1/1/2008
225,000 5,000,000 5,225,000
Depletion for 2008 (31,350,000 / 5,225,000 = 6 x 225,000)
1,350,000
Problem 18-17 Question 1 – Answer A Purchase price Less: Residual value Depletable cost Depletion rate (12,000,000 / 1,500,000) Depletion for 2008 (150,000 x 8) Production (25,000 x 6)
14,000,000 2,000,000 12,000,000 8.00 1,200,000 150,000
Question 2 – Answer C Production from July 1 to December 31, 2008 (25,000 x 6) Annual production (25,000 x 12) Estimated life of mine (1,500,000 / 300,000)
150,000 tons 300,000 tons 5 years
Since the life of the mine is shorter than the life of the equipment, the output method is used in computing depreciation.
245 Equipment Less: Residual value Depreciable cost Rate per unit (7,500,000 / 1,500,000) Depreciation for 2008 (150,000 x 5)
8,000,000 500,000 7,500,000 5.00 750,000
Problem 18-18 Answer C Purchase price Development costs in 2007 Total cost Residual value Depletable cost Rate in 2007 (8,100,000 / 2,000,000) Depletion for 2007 (200,000 x 4.05) Depletable cost Depletion in 2007 Balance Development costs in 2008
9,000,000 300,000 9,300,000 1,200,000 8,100,000 4.05 810,000 8,100,000 ( 810,000) 7,290,000 135,000
Depletable cost in 2008
7,425,000
Rate in 2008 (7,425,000 / 1,650,000)
4.50
Depletion for 2008 (300,000 x 4.50)
1,350,000
246 CHAPTER 19 Problem 19-1 1. 2. 3. 4. 5.
C B D C C
6. 7. 8. 9. 10.
B C A B A
Problem 19-2 1. Appreciation (7,200,000 – 4,500,000)
2,700,000
2. Book value (4,500,000 – 900,000)
3,600,000
3. Depreciated replacement cost (7,200,000 x 80%)
5,760,000
4. Revaluation surplus (5,760,000 – 3,600,000)
2,160,000
Problem 19-3 1. Annual depreciation on cost (750,000 / 5)
150,000
Original life (3,000,000 / 150,000) 2. Equipment Accumulated depreciation Revaluation surplus 3. Depreciation (4,800,000 / 20) Accumulated depreciation 4. Revaluation surplus Retained earnings (1,350,000 / 15)
20 years 1,800,000 450,000 1,350,000 240,000 240,000 90,000 90,000
Problem 19-4 1. Annual depreciation on cost (9,000,000 / 25)
360,000
Age of asset (3,600,000 / 360,000) 2. Machinery Accumulated depreciation (40% x 6,000,000) Revaluation surplus 3. Depreciation (9,000,000 / 15) Accumulated depreciation
10 years 6,000,000 2,400,000 3,600,000 600,000 600,000
247 4. Revaluation surplus Retained earnings (3,600,000 / 15)
240,000 240,000
Problem 19-5 Proportional approach 1. Building Accumulated depreciation Revaluation surplus 2. Depreciation (8,000,000 / 40) or (6,000,000 / 30) Accumulated depreciation
3,000,000 750,000 2,250,000 200,000 200,000
Gross replacement cost (6,000,000 / 75%) 8,000,000 3. Revaluation surplus Retained earnings (2,250,000 / 30)
75,000 75,000
Elimination approach 1. Accumulated depreciation Building
1,250,000 1,250,000
Building (6,000,000 – 3,750,000) Revaluation surplus
2,250,000 2,250,000
2. Depreciation (6,000,000 / 30) Accumulated depreciation
200,000 200,000
3. Revaluation surplus Retained earnings
75,000 75,000
Problem 19-6 1. Equipment Accumulated depreciation Revaluation surplus
2,700,000
2. Depreciation (7,500,000 / 10) Accumulated depreciation
750,000
3. Revaluation surplus (2,200,000 / 10) Retained earnings
500,000 2,200,000 750,000 220,000 220,000
4. Cash Accumulated depreciation Equipment Gain on sale of equipment
8,000,000 2,250,000 9,200,000 1,050,000
248 Revaluation surplus (2,200,000 - 220,000) Retained earnings
1,980,000 1,980,000
Problem 19-7 1. Building Accumulated depreciation Revaluation surplus
10,000,000
2. Depreciation (13,000,000 / 5) Accumulated depreciation
2,600,000
3. Revaluation surplus Retained earnings (6,000,000 / 5)
4,000,000 6,000,000 2,600,000 1,200,000 1,200,000
Problem 19-8 Building Accumulated depreciation
Cost 3,000,000 600,000 2,400,000
Replacement cost 5,000,000 1,000,000 4,000,000
Appreciation 2,000,000 400,000 1,600,000
Accumulated depreciation on cost (3,000,000 x 20%)
600,000
Life of asset (100% / divided by 4%)
25 years
Percent of accumulated depreciation (5 years / 25)
20%
Gross replacement cost (4,000,000 / 80%)
5,000,000
Accumulated depreciation on replacement cost (5,000,000 x 20%)
1,000,000
a. “Should be entry: Building Accumulated depreciation Revaluation surplus
2,000,000 400,000 1,600,000
b. Correcting entry: Building Retained earnings Accumulated depreciation Revaluation surplus
1,000,000 1,000,000
c. Depreciation (4,000,000 / 20) Accumulated depreciation
200,000
400,000 1,600,000 200,000
249 d. Revaluation surplus Retained earnings (1,600,000 / 20)
80,000 80,000
Problem 19-9 1. Accumulated depreciation Machinery
800,000
2. Retained earnings Revaluation surplus
400,000
800,000 400,000
Problem 19-10 Land Building Accumulated depreciation (25,000,000 x 3/25)
Cost 5,000,000
Replacement cost 10,000,000
Appreciation 5,000,000
25,000,000
45,000,000
20,000,000
3,000,000
(45,000,000 x 3/25) Machinery Accumulated depreciation (10,000,000 x 3/5) (15,000,000 x 3/5)
Equipment Accumulated depreciation (3,000,000 x 3/10) (4,200,000 x 3/10)
_________ 22,000,000
5,400,000 39,600,000
10,000,000
15,000,000
6,000,000 __________ 4,000,000
2,400,000 17,600,000 5,000,000
3,000,000 9,000,000 6,000,000 2,000,000
Cost 3,000,000
Replacement cost 4,200,000
900,000 _________ 2,100,000
1,260,000 2,940,000
a. Land Building Machinery Equipment Accumulated depreciation – building Accumulated depreciation – machinery Accumulated depreciation – equipment Revaluation surplus
5,000,000 20,000,000 5,000,000 1,200,000
b. Depreciation Accumulated depreciation – building Accumulated depreciation – machinery Accumulated depreciation – equipment
5,220,000
Appreciation 1,200,000 _ 360,000 840,000
2,400,000 3,000,000 360,000 25,440,000 1,800,000 3,000,000 420,000
250 Building: Cost (22,000,000 / 22) Appreciation (17,600,000 / 22)
1,000,000 800,000
1,800,000
Machinery: Cost (4,000,000 / 2) Appreciation (2,000,000 / 2)
2,000,000 1,000,000
3,000,000
Equipment: Cost (2,100,000 / 7) Appreciation (840,000 / 7) Total depreciation c. Revaluation surplus Retained earnings (800,000 + 1,000,000 + 120,000) d. Property, plant and equipment (at revalued amounts):
300,000 120,000
420,000 5,220,000
1,920,000 1,920,000
Land Building Machinery Equipment Total Less: Accumulated depreciation Net carrying value
10,000,000 45,000,000 15,000,000 4,200,000 74,200,000 20,880,000 53,320,000
The following disclosure should be made in the notes to financial statements: Cost Land Building Machinery Equipment Total Accumulated depreciation Net carrying value
5,000,000 25,000,000 10,000,000 3,000,000 43,000,000 13,200,000 29,800,000
Replacement cost 10,000,000 45,000,000 15,000,000 4,200,000 74,200,000 20,880,000 53,320,000
Schedule of Accumulated Depreciation Cost 4,000,000 8,000,000 1,200,000 13,200,000
Building Machinery Equipment
251
Problem 19-11 Answer B Building Accumulated depreciation
Replacement cost 7,200,000 12,000,000 1,680,000 20,880,000
Cost 5,000,000 1,250,000 3,750,000
Replacement cost 8,000,000 2,000,000 6,000,000
Sound value 5,000,000 18,750,000 2,500,000
Book value 2,000,000 11,250,000 1,500,000
Appreciation 3,000,000 750,000 2,250,000
Problem 19-12 Answer B Land Building (75% x 25,000,000) Machinery (50% x 5,000,000)
Revaluation surplus 3,000,000 7,500,000 1,000,000 11,500,000
Problem 19-13 Answer D Fair value – December 31, 2008 Net book value – December 31, 2008 Revaluation surplus
450,000 302,500 142,500
Problem 19-14 Question 1 Question 2 Question 3
Answer A Answer B Answer B
Problem 19-15 1. 2. 3. 4. 5.
A C B A A
6. 7. 8. 9. 10.
A A D D D
11. 12. 13. 14. 15.
A A A D A
Problem 19-16 1. Impairment loss Accumulated depreciation Cost Accumulated depreciation Book value – January 1 Recoverable value Impairment loss 2. Depreciation (1,500,000 / 3) Accumulated depreciation
900,000 900,000 4,500,000 2,100,000 2,400,000 1,500,000 900,000 500,000 500,000
252 3. Cost Accumulated depreciation (2,100,000 + 900,000 + 500,000) Book value – December 31
4,500,000 3,500,000 1,000,000
Problem 19-17 1. Impairment loss Accumulated depreciation Cost – January 1 Accumulated depreciation (2,500,000 – 500,000 / 8 x 2) Book value – January 1
1,125,000 1,125,000 2,500,000 500,000 2,000,000
Recoverable value Impairment loss
875,000 1,125,000
2. Depreciation Accumulated depreciation (875,000 – 125,000 / 2)
375,000 375,000
3. Cost Accumulated depreciation (500,000 + 1,125,000 + 375,000) Book value – December 31
2,500,000 2,000,000 500,000
Problem 19-18 1. Offer price 25,000,000 5,000,000 30,000,000
Cost of dismantling and removal assumed by the bidder Fair value less cost to sell Present value of future cash flows Less: Estimated liability Value in use
33,000,000 5,000,000 28,000,000
Carrying amount 39,000,000 Less: Estimated liability 5,000,000 Adjusted carrying amount 34,000,000 Recoverable amount – fair value less cost to sell, being the higher amount 30,000,000 Impairment loss 4,000,000 PAS 36, paragraph 78, provides that the fair value less cost to sell is equal to the estimated selling price plus the estimated liability assumed by the buyer. The standard further provides that to perform a meaningful comparison between the carrying amount and recoverable amount, the estimated liability assumed by the buyer is deducted in determining both the value in use and carrying amount of the asset. 2. Impairment loss Accumulated depreciation
4,000,000 4,000,000
253 Problem 19-19 1. 2008 2009 2010 2011 Total value in use
Net cash inflows 18,000,000 15,000,000 15,000,000 12,000,000 60,000,000
PV factor .930 .857 .794 .735
Present value 16,740,000 12,855,000 11,910,000 8,820,000 50,325,000
2. The recoverable amount is the value in use of P50,325,000 because this is higher than the
fair value less cost to sell of P48,000,000. 3. Impairment loss Accumulated depreciation (65,000,000 – 50,325,000)
14,675,000
4. Depreciation Accumulated depreciation (50,325,000 / 4)
12,581,250
14,675,000 12,581,250
Problem 19-20 1. Depreciation Accumulated depreciation (10,000,000 / 10)
1,000,000 1,000,000
2. Depreciation Accumulated depreciation
1,000,000
3. Impairment loss Accumulated depreciation
2,000,000
4. Depreciation Accumulated depreciation (6,000,000 / 8) 5. Accumulated depreciation Gain on impairment recovery
1,000,000 2,000,000 750,000 750,000 1,750,000 1,750,000
Cost – 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 2) Book value – 12/31/2007 Impairment loss – 2007 Adjusted book value – 12/31/2007 Depreciation – 2008 (6,000,000 / 8) Book value – 12/31/2008 Cost – 1/1/2006 Accumulated depreciation (10,000,000 / 10 x 3) Book value – 12/31/2008 (assuming no impairment) Recorded book value Gain on reversal of impairment
10,000,000 2,000,000 8,000,000 2,000,000 6,000,000 750,000 5,250,000 10,000,000 3,000,000 7,000,000 5,250,000 1,750,000
254 The fair value or recoverable value of P7,500,000 cannot exceed the “book value” that would have been determined assuming no impairment is recognized.
Problem 19-21 1. Impairment loss Accumulated depreciation (35,000,000 – 30,000,000)
5,000,000
2. Depreciation
6,000,000
5,000,000
Accumulated depreciation (30,000,000 / 5)
6,000,000
Observe that the undiscounted net cash flows from the asset amount to P37,500,000 for 5 years. This amount is more than the book value of the machinery. Under American Standard, no impairment loss should be recognized in this case. However, under the PAS 36, if the recoverable amount is less than carrying amount, an impairment loss is recognized, regardless of the amount of undiscounted cash flows whether less than or more than the carrying amount. PAS 36 has totally rejected the concept of undiscounted cash flows for impairment purposes.
Problem 19-22 1. Value in use (1,500,000 x 5.65) 2. Impairment loss Accmulated depreciation
8,475,000 8,250,000 8,250,000
Buildings Accumulated depreciation (22,500,000 / 20 x 6) Book value – 1/1/2008 Fair value – higher than value in use Impairment loss 3. Depreciation Accumulated depreciation (10,000,000 / 10)
25,000,000 6,750,000 18,250,000 10,000,000 8,250,000 1,000,000 1,000,000
Problem 19-23 1. Value in use (800,000 x 3.99) 2. Impairment loss Accumulated depreciation
3,192,000 308,000 308,000
Machinery Accumulated depreciation Book value – 1/1/2008 Present value of cash flows – higher than fair value Impairment loss 3. Depreciation Accumulated depreciation (3,192,000 / 5)
5,000,000 1,500,000 3,500,000 3,192,000 308,000 638,400 638,400
255 Problem 19-24 1. Total carrying amount Value in use Impairment loss 2. Impairment loss allocated to goodwill
5,000,000 3,600,000 1,400,000 500,000
Impairment loss allocated to the other assets
900,000 1,400,000
When an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order: a. First, to the goodwill, if any. b. Then, to all other assets of the unit prorata based on their carrying amount. Building Inventory Trademark
Carrying amount 2,000,000 1,500,000 1,000,000 4,500,000
3. Impairment loss Goodwill Accumulated depreciation – building Inventory Trademark
Fraction 20/45 15/45 10/45
Loss 400,000 300,000 200,000 900,000
1,400,000 500,000 400,000 300,000 200,000
Problem 19-25 1. Carrying amount Value in use Impairment loss
16,000,000 11,000,000 5,000,000
2. Allocation of impairment loss Building (8/16 x 5,000,000) Equipment (4/16 x 5,000,000) Inventory (4/16 x 5,000,000)
2,500,000 1,250,000 1,250,000 5,000,000
Observe that after allocating the P2,500,000 loss to the building, the carrying amount of the building would be P5,500,000 which is lower than its fair value of P6,500,000. Accordingly, only P1,500,000 loss is allocated to the building and the balance of P1,000,000 is reallocated to the equipment and inventory prorata.
256 Allocated loss Reallocated loss (4/8 x 1,000,000) (4/8 x 1,000,000)
Building 2,500,000 (1,000,000) _________
Equipment 1,250,000 500,000 _________
Inventory 1,250,000 500,000
Impairment loss 3. Impairment loss Accumulated depreciation – building Accumulated depreciation – equipment Inventory
1,500,000
1,750,000
1,750,000
5,000,000 1,500,000 1,750,000 1,750,000
Problem 19-26 All 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 Accumulated depreciation, December 31, 2007 (100,000 x 3) Book value, December 31, 2007 Recoverable value Impairment loss
800,000 300,000 500,000 200,000 300,000
The loss is recorded as follows: Impairment loss Accumulated depreciation Cost Accumulated depreciation (300,000 + 300,000) Recoverable value, January 1, 2008 Depreciation for 2008 (200,000 / 5) Book value, December 31, 2008
300,000 300,000 800,000 600,000 200,000 40,000 160,000
Problem 19-31 Answer B From August 31, 2005 to May 31, 2008 is a period of 33 months. Thus, the remaining life of the machine is 27 months, 60 months original life minus 33. Depreciation for the month of June 2008 (1,350,000 / 27 months)
50,000
258 Cost Accumulated depreciation – 5/31/2008 (3,200,000 – 500,000 x 33/60) Book value – 5/31/2008 Fair value
3,200,000 1,485,000 1,715,000 1,350,000
Impairment loss
365,000
Problem 19-32 Answer B Cost – January 1, 2004 Accumulated depreciation, December 31, 2007 (900,000 / 10 x 4) Book value, December 31, 2007 Depreciation for 2008 (640,000 – 40,000 / 4) Book value, December 31, 2008
1,000,000 360,000 640,000 150,000 490,000
Problem 19-33 Answer C Book value, 1/1/2008 Depreciation for 2008 (1,600,000 / 4) Book value, 12/31/2008 Sales price-recoverable value Impairment loss
2,400,000 400,000 2,000,000 650,000 1,350,000
Problem 19-34 Answer C Depreciation for 2008 (10% x 2,000,000) Cost – 1/2/2004 Accumulated depreciation - 12/31/08 (200,000 x 5) Book value-12/31/2008 Estimated cost of disposal Impairment loss
200,000 2,000,000 1,000,000 1,000,000 50,000 1,050,000
Problem 19-35 Answer C Cost Accumulated depreciation – 1/1/2008 (2,000,000 – 100,000 / 10 x 2.5) Book value – 1/1/2008 Fair value Impairment loss
2,000,000 475,000 1,525,000 600,000 925,000
Problem 19-36 Answer C Cost – 12/31/2004 Accumulated depreciation – 8/31/2008 (2,400,000 / 96 months x 44) Book value – 8/31/2008 Fair value Impairment loss
2,800,000 1,100,000 1,700,000 1,500,000 200,000
259 Problem 19-37 Answer C Carrying value Decommissioning cost Adjusted carrying value Fair value less cost to sell – higher (20,000,000 less 1,000,000)
28,000,000 ( 8,000,000) 20,000,000 19,000,000
Impairment loss
1,000,000
Value in use Decommissioning cost Adjusted value in use
26,000,000 ( 8,000,000) 18,000,000
Problem 19-38 Answer C Carrying value – 12/31/2007 Depreciation for 2008 (20%) Carrying value – 12/31/2008 Carrying value – 12/31/2008 (assuming no impairment) Reversal of impairment loss
7,000,000 (1,400,000) 5,600,000 7,200,000 1,600,000
260 CHAPTER 20 Problem 20-1
Problem 20-2
1. D
1. A
6. D
6. B
2. 3. 4. 5.
C D A D
7. 8. 9. 10.
A D D B
2. 3. 4. 5.
A C D D
7. 8. 9. 10.
B D D D
Problem 20-3 2008 Jan. 1 Patent Cash
255,000 255,000
Dec. 31 Amortization of patent Patent (255,000 / 20)
12,750 12,750
2009 Dec. 31 Amortization of patent Patent
12,750
2010 Jan. 5 Legal expense Cash
90,000
12,750
90,000
Dec. 31 Amortization of patent Patent
12,750 12,750
2011 Jan. 1 Patent Cash
510,000 510,000
Dec. 31 Amortization of patent Patent
42,750 42,750
On original cost On competing patent (510,000 / 17)
12,750 30,000 42,750
Problem 20-4 2008 2011
Research and development expense Cash
510,000
Patent
720,000
510,000
Cash
720,000
261 Amortization of patent (720,000 / 16) Patent
45,000 45,000
2012
Patent
540,000 Cash
540,000
Amortization of patent Patent
81,000 81,000
On related patent On competing patent (540,000 / 15)
45,000 36,000 81,000
Problem 20-5 2008 2009
Research and development expense Cash
250,000 250,000
Patent
60,000 Cash
60,000
Amortization of patent Patent (60,000 / 10) 2010
6,000 6,000
Patent
600,000 Cash
600,000
Original cost New patent Total cost Less: Amortization for 2008 Balance – January 1, 2009 Amortization of patent (654,000 / 15) Patent 2011
Amortization of patent Patent Patent written off Patent Balance – 1/1/2010 Less: Amortization 2010 2011 Unamortized cost
60,000 600,000 660,000 6,000 654,000 43,600 43,600 43,600 43,600 566,800 566,800 654,000 43,600 43,600
87,200 566,800
262
Problem 20-6 1. Patent Cash
7,140,000 7,140,000
2. Amortization of patent Patent (7,140,000 / 15)
476,000 476,000
3. Amortization of patent Patent (5,712,000 / 7)
816,000 816,000
4. Acquisition cost Amortization for 2005, 2006 and 2007 (476,000 x 3) Carrying amount – 1/1/2008 Amortization for 2008 Carrying amount – 12/31/2008
7,140,000 (1,428,000) 5,712,000 ( 816,000) 4,896,000
Problem 20-7 1. Patent Cash 2. Amortization of patent Patent (900,000 / 10) 3. Patent written off Patent
900,000 900,000 90,000 90,000 540,000 540,000
Cost Amortization for 2005, 2006, 2007 and 2008 (90,000 x 4) Carrying amount – 12/31/2008
900,000 (360,000) 540,000
Problem 20-8 1. Patent Cash 2. Legal expenses Cash 3. Amortization of patent Patent X (1,200,000 / 8) Y (2,000,000 / 5) Z (3,000,000 / 6)
6,200,000 6,200,000 450,000 450,000 1,050,000 1,050,000 150,000 400,000 500,000 1,050,000
263
Problem 20-9 1. Retained earnings Patent
500,000
2. Patent Retained earnings
510,000
500,000 510,000
3. No adjustment. 4. Loss on damages Legal expense Accrued liabilities
100,000 30,000
5. Patent Retained earnings
24,500
130,000 24,500
Amortization per book (500,000 – 450,000) Correct amortization for 2007 (510,000 / 20) Overamortization 6. Amortization of patent Patent
50,000 25,500 24,500 25,500 25,500
Problem 20-10 2008
Copyright Cash
285,000
Amortization of copyright Copyright
150,000
285,000 150,000
285,000 / 95,000 = 3 per copy 50,000 x 3 = 150,000 2009
Amortization of copyright Copyright (30,000 x 3)
90,000 90,000
Problem 20-11 1. Copyright Retained earnings
240,000 240,000
Cost of copyright Less: Amortization (300,000 / 5) Book value 2. Amortization of copyright Copyright
300,000 60,000 240,000 60,000 60,000
264
Problem 20-12 1. Copyright Patent Retained earnings
620,000 400,000 1,020,000
Copyright 1 Less: Amortization from 1/1/2004 to 12/31/2007 (400,000 / 20 x 4) Book value
400,000 80,000 320,000
Copyright 2 Less: Amortization from 7/1/2005 to 12/31/2007 (360,000 / 15 x 2.5) Book value
360,000 60,000 300,000
Patent Less: Amortization for 2006 and 2007 (500,000 / 10 x 2) Book value
500,000 100,000 400,000
2. Amortization of copyright (20,000 + 24,000) Amortization of patent Copyright Patent
44,000 50,000 44,000 50,000
Problem 20-13 Books of Franchisee 1. Franchise Cash
6,000,000 6,000,000
2. Amortization of franchise Franchise (6,000,000 / 20)
300,000 300,000
3. Cash Sales
25,000,000 25,000,000
4. Franchise fee expense Cash (25,000,000 x 5%)
1,250,000 1,250,000
Problem 20-14 Books of Franchisee 1. Franchise Cash Note payable 2. Note payable (15,000,000 / 4) Interest expense (15,000,000 x 10%)
20,000,000 5,000,000 15,000,000 3,750,000 1,500,000
Cash
5,250,000
265 3. There is no amortization because the franchise is for an indefinite period.
Problem 20-15 Books of Franchisee 1. Franchise (3,000,000 + 3,790,000) Discount on note payable Cash Note payable
6,790,000 1,210,000 3,000,000 5,000,000
Note payable Present value of note (1,000,000 x 3.79) Implied interest
5,000,000 3,790,000 1,210,000
2. Amortization of franchise Franchise (6,790,000 / 10) 3. Note payable Cash 4. Interest expense (10% x 3,790,000) Discount on note payable
679,000 679,000 1,000,000 1,000,000 379,000 379,000
Problem 20-16 Requirement a 1. Leasehold improvement – building Cash
5,000,000 5,000,000
2. Rent expense (50,000 x 12) Cash
600,000
3. Depreciation (5,000,000 / 10) Accumulated depreciation
500,000
600,000 500,000
Requirement b Accumulated depreciation Loss on leasehold cancelation Leasehold improvement – building
2,500,000 2,500,000 5,000,000
Problem 20-17 1. Rent expense
1,200,000
Prepaid rent Cash
1,200,000 2,400,000
266 2. Leasehold Cash
2,000,000 2,000,000
3. Leasehold improvement Cash
500,000
4. Amortization of leasehold Leasehold (2,000,000 / 5)
400,000
5. Depreciation (500,000 / 5) Accumulated depreciation
100,000
500,000 400,000 100,000
Problem 20-18 1. Leasehold Cash
1,000,000
2. Rent expense (150,000 x 12) Cash
1,800,000
1,000,000 1,800,000
3. Leasehold improvement Cash
400,000
4. Leasehold improvement Cash
100,000
5. Amortization of leasehold Leasehold (1,000,000 / 10)
100,000
6. Depreciation Accumulated depreciation
400,000 100,000 100,000 60,000 60,000
400,000 / 10 100,000 / 5
40,000 20,000 60,000
Problem 20-19 1. Rent expense Cash
600,000
2. Leasehold Cash
100,000
600,000 100,000
3. Leasehold improvement Cash
200,000
4. Leasehold improvement Cash
50,000
200,000 50,000
267 5. Amortization of leasehold Leasehold (100,000 / 5)
20,000
6. Depreciation Accumulated depreciation
52,500
20,000 52,500
200,000 / 5 50,000 / 4
40,000 12,500 52,500
Problem 20-20 1. Amortization of patent Accumulated amortization (1,920,000 – 240,000 / 6)
280,000
2. Trademark (800,000 x 3/4) Noncompetition agreement Cash
600,000 200,000
280,000
800,000
3. Amortization of noncompetition agreement Accumulated amortization (200,000 / 5)
40,000
4. Royalty expense Cash
50,000
40,000 50,000
Problem 20-21 1. Acquisition cost Net assets acquired Goodwill 2. Cash Accounts receivable Inventory Property, plant and equipment Goodwill Accounts payable Note payable – bank Cash
Problem 20-22
7,500,000 (4,600,000) 2,900,000 50,000 800,000 1,350,000 4,300,000 2,900,000 900,000 1,000,000 7,500,000
1. Acquisition cost Net assets acquired at fair value Goodwill
6,000,000 (3,300,000) 2,700,000
Total assets at fair value Total liabilities Net assets acquired at fair value
5,300,000 2,000,000 3,300,000
268 2. Cash Accounts receivable Inventory Patent Property, plant and equipment Goodwill Accounts payable Cash
50,000 500,000 1,500,000 250,000 3,000,000 2,700,000 2,000,000 6,000,000
Problem 20-23 1. Cash Inventory In-process R and D Total assets Total liabilities Net assets Acquisition cost Net assets acquired at fair value Goodwill
1,000,000 500,000 5,000,000 6,500,000 3,000,000 3,500,000 8,000,000 (3,500,000) 4,500,000
The goodwill includes the fair value of the assembled workforce of P1,200,000. The assembled workforce is not accounted for separately as an asset. 2. Cash Inventory In process R and D Goodwill Accounts payable Notes payable Cash
1,000,000 500,000 5,000,000 4,500,000 2,600,000 400,000 8,000,000
Problem 20-24 1. Average earnings Divide by Net assets including goodwill Less: Net assets before goodwill Goodwill
250,000 10% 2,500,000 1,700,000 800,000
2. Average earnings Less: Normal earnings (8% x 1,700,000) Excess earnings Divide by Goodwill
250,000 136,000 114,000 15% 760,000
269 3. Average earnings Less: Normal earnings (10% x 1,700,000) Excess earnings Multiply by Goodwill
250,000 170,000 80,000 5 400,000
4. Excess earnings Multiply by Goodwill
80,000 5.65 452,000
Problem 20-25 Average earnings or prior years (1,500,000 / 3) Increase in average earnings (10% x 500,000) Total Less: Patent amortization (500,000 / 5 years) Earnings for goodwill computation a. Average future earnings Divide by Net assets including goodwill Less: Net assets excluding goodwill Goodwill
500,000 50,000 550,000 100,000 450,000 450,000 8% 5,625,000 5,000,000 625,000
b. Average earnings Less: Normal earnings (8% x 5,000,000) Average excess earnings Divide by Goodwill
450,000 400,000 50,000 10% 500,000
c. Goodwill (50,000 x 3.17)
158,500
Problem 20-26 a. Average earnings Expected increase (1,000,000 – 900,000) Total Less: Normal earnings (4,800,000 x 10%) Excess earnings
750,000 100,000 850,000 480,000 370,000
Goodwill (370,000 x 4) Shareholders’ equity per book Less: Recorded goodwill Net assets before goodwill
1,480,000 5,000,000 200,000 4,800,000
b. Goodwill (370,000 / 20%)
1,850,000
270 Problem 20-27 1. Share capital Retained earnings Total shareholders’ equity Less: Recorded goodwill Net assets before goodwill
2,000,000 1,500,000 3,500,000 1,000,000 2,500,000
Average earnings (1,200,000 + 150,000 / 3) Less: Normal earnings (10% x 2,500,000) Excess earnings Divide by Goodwill 2. Net assets before goodwill Goodwill Purchase price
450,000 250,000 200,000 16% 1,250,000 2,500,000 1,250,000 3,750,000
Problem 20-28 1. Value in use Net assets including goodwill at carrying amount Impairment loss 2. Impairment loss Goodwill
38,000,000 42,000,000 ( 4,000,000) 4,000,000 4,000,000
Problem 20-29 1. Value in use Net assets including goodwill at carrying amount Impairment loss 2. Impairment loss Goodwill Accounts receivable Inventory Accumulated depreciation
60,000,000 75,000,000 (15,000,000) 15,000,000 5,000,000 2,000,000 3,000,000 5,000,000
The remaining impairment loss of P10,000,000, after deducting the loss applicable to goodwill, is allocated to the other noncash assets on a prorata basis.
Problem 20-30 1. Present value of indefinite cash flows (200,000 / 10%) Trademark Impairment loss
2,000,000 6,000,000 (4,000,000)
271 Present value of cash flows from cash generating unit (9,000,000 x 8.51) 76,590,000 Net assets including goodwill at carrying amount 80,000,000 Impairment loss ( 3,410,000) 2. Impairment loss Trademark Goodwill
7,410,000 4,000,000 3,410,000
Problem 20-31 1. Total carrying amount Value in use Impairment loss 2. Impairment loss Goodwill Accumulated depreciation – building (25/45 x 270,000) Inventory (15/45 x 270,000) Trademark (5/45 x 270,000)
5,000,000 4,230,000 770,000 770,000 500,000 150,000 90,000 30,000
Problem 20-32 12/31/2008 1/1/2009 7/1/2009 11/1/2009
R and D expense Cash
2,500,000
R and D expense Cash
1,200,000
R and D expense Cash
500,000
Patent
350,000
2,500,000 1,200,000 500,000
Cash 11/15/2009
Patent
350,000 800,000
Cash
800,000
12/31/2009
Patent
100,000 Cash
100,000
Problem 20-33 1. Product costs which are associated wit inventory items are: Duplication of computer software and training materials Packaging product Total inventory
2,500,000 900,000 3,400,000
2. The costs incurred from the time of technological feasibility to the time when product costs are incurred should be capitalized as computer software cost.
Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing product masters for training materials Total costs to be capitalized
272 2,400,000 2,000,000 1,500,000 5,900,000
3. Completion of detail program design Cost incurred for coding and testing to establish technological feasibility Total costs charged as expense
1,300,000 1,000,000 2,300,000
Problem 20-34 1. Designing and planning Code development Testing Total R and D expense in 2008
1,000,000 1,500,000 __500,000 3,000,000
The cost of producing the product master of P2,500,000 is capitalized as software cost to be subsequently amortized. 2. Cost of producing the software program in 2009 Amortization of software cost (2,500,000 / 4) Total expense in 2009
1,000,000 625,000 1,625,000
Problem 20-35 Answer C Cost Accumulated amortization from 2005 to 2007 (357,000 / 15 x 3) Book value – 12/31/2007 Amortization for 2008 (285,600 / 7) Book value – 12/31/2008
Problem 20-36 Answer C
357,000 71,400 285,600 40,800 244,800
Cost 1/1/2003 Accumulated depreciation – 12/31/2007 (6,000,000 / 15 x 5) Book value – 1/1/2008 Amortization for 2008 (4,000,000 / 5)
6,000,000 2,000,000 4,000,000 800,000
Problem 20-37 Answer C Cumulative earnings Less: Gain on sale Adjusted cumulative earnings
550,000 50,000 500,000
273 Average earnings (500,000 / 5) Divide by capitalization rate Net assets including goodwill Less: Net assets before goodwill Goodwill
100,000 10% 1,000,000 750,000 250,000
Problem 20-38 Answer C Net assets Multiply by excess rate (16% minus 10%) Excess earnings Multiply by present value factor Goodwill
1,800,000 6% 108,000 3.27 353,160
Problem 20-39 Answer D Purchase price Less: Goodwill Net assets before goodwill Estimated annual earnings (squeeze) Less: Normal earnings (4,500,000 x 10%) Excess or superior earnings Divide by capitalization rate Goodwill
5,000,000 500,000 4,500,000 550,000 450,000 100,000 20% 500,000
Problem 20-40 Answer C Accounts receivable Inventory Equipment Short-term payable
2,000,000 500,000 500,000 (2,000,000)
Net assets at fair value
1,000,000
Acquisition cost Net assets at fair value Goodwill
5,000,000 (1,000,000) 4,000,000
Problem 20-41 Answer A Problem 20-42 Answer C Downpayment Present value of annual payment for 4 years (1,000,000 x 2.91) Cost of franchise
2,000,000 2,910,000 4,910,000
274 Problem 20-43 Answer A Design costs Legal fees of registering trademark Registration fee with Patent Office Total cost of trademark
1,500,000 150,000 50,000 1,700,000
Problem 20-44 Answer B Original lease Extension Total life Less: Years expired (2006 and 2007) Remaining life Life of improvement (shorter) Leasehold improvement Less: Depreciation for 2008 (540,000 / 15) Book value
12 years 8 20 2 18 years 15 years 540,000 36,000 504,000
Problem 20-45 Answer D Depreciation (3,600,000 / 6)
600,000
Problem 20-46 Answer C Depreciation of equipment Materials used
135,000 200,000
Compensation costs of personnel Outside consulting fees Indirect costs allocated
500,000 150,000 250,000 1,235,000
Problem 20-47 Answer A Modification to the formulation of a chemical product Design of tools, jigs, molds and dies Laboratory research Total research and development expense
135,000 170,000 215,000 520,000
Problem 20-48 Answer D All costs are charged to R and D expense.
275 Problem 20-49 Answer A Trademark Value in use (120,000 / 6%) Impairment loss
3,000,000 2,000,000 1,000,000
Patent Amortization for 2008 (2,000,000 / 5) Book value – 12/31/2008 Value in use (500,000 x 3.47) Impairment loss
2,000,000 400,000 1,600,000 1,735,000 -_ _
Problem 20-50 Answer B Carrying amount of net assets Value in use (8,000,000 x 1.5) Impairment loss – applicable to goodwill
16,000,000 12,000,000 4,000,000