FABILANE, JESSA E.

Topic: Cash and Cash equivalents

PROBLEM No.:8

The auditor for SAMANTHA, INC. examined the petty cash fund immediately after the
close of business, July 31, 2018, the end of the company’s natural business year. The
petty cash custodian presented the following during the count:

Currency 1,650
Petty Cash vouchers:
Postage 420
Office Supplies Expense 900
Transportation Expense 340
Computer Repairs 800
Advance to Office Staff 1,500
A check drawn by Samantha, Inc., payable to
the petty cash custodian 7,200
Postage Stamps 300
An employee’s check, returned by bank, marked NSF 1,000
An envelope containing currency of P1,890 for a gift
for a retiring employee 1,890
P16,000

The general ledger shows an imprest petty cash fund balance of P16,000.

Answer:

1. B. Petty cash shortage = P2,190

Currency 1,650
Petty cash vouchers 3,960
Replenishment check 7,200
Employee’s NSF check 1,000
Petty cash accounted 13,810
Petty cash fund per ledger 16,000
Petty cash shortage P2,190

2. D. Petty cash balance, July 31,2018 = P8,850

Currency 1,650
Replenishment check 7,200
Adjusted petty cash balance P8,850
Problem No.:18

Your audit of the cash account of JUNIE CORP. disclosed the following information:

1. Cash in Bank balance per books, Dec. 31, 2018 P35,000

2. Bank statement balance, Dec. 31, 2018 60,000
3. Note collected by bank in December (principal plus
Interest of 800, less collection fee of P200) 27,600
4. Debit memo for checkbook ?
5. Deposits in transit, Dec. 31, 2018 15,200
6. Transposition error made by bank
in recording deposit of December 28:
Correct Amount P45,000
Recorded as 54,000 9,000
7. Erroneous bank debit 26,700
8. Included in the Cash in bank account is petty cash fund
of P10,000. Your count on December 31, 2018, revealed
the following fund items:
Currency and coins P3,000
Supplies 2,400
Transportation 100
IOUs 4,000 9,500
9. Erroneous bank credit 11,000
10. Outstanding checks (including a certified
check of P10,000) 39,400

Answer:

1. A. Principal = P27,000
Principal P27,000
Interest 800
Collection fee (200)
Proceeds P27,600

2. A. Adjusted Cash in Bank, Dec. 31, 2018 = P52,500

Book Bank
Unadjusted balances P35,000 P60,000
Note collected by bank 27,600
Debit memo for checkbook (100)
Deposit in Transit 15,200
Transposition error (9,000)
Erroneous bank debit 26,700
Petty cash fund (10,000)
Erroneous bank credit (11,000)
 Outstanding check excluding certified
check (29,400)
Adjusted balances P52,500 P52,500

3. D. Cost of checkbook = P100

4. B. Petty cash shortage = P500

Petty cash fund P10,000

Petty cash accounted 9,500
Petty cash shortage P500

5. C. Adjusted Petty Cash = P3,000

Currency & coins 3,000

Problem No.: 23

In auditing the HECTOR COMPANY, you obtained the bank statement, cancelled checks,
and other memoranda which relate to the company’s bank account for December 2018.
In reconciling the bank balance with that shown on the company’s books, you observed
the facts set forth below:

1. Balance per bank statement, Dec. 31, 2018 P47,174

2. Balance per books, Dec. 31,2018 19,289
3. Outstanding checks, Dec. 31, 2018 63,000
4. Receipts of Dec. 31,2018, deposited Jan. 2,2019 6,260
5. Service charge for November, per bank memo
of Dec. 15, 2018 1,000
6. Proceeds of bank loan, Dec. 15, 2018,
discounted for 3 months at 18% per
annum, omitted from company books 47,750
7. Deposit of Dec. 22, 2018, omitted from
bank statement 9,170
8. Check of Milano Company, returned on
Dec. 21, 2018, for absence of counter signature
and redeposited with complete signature on
Jan 3,2019, no entry on the books having been
made for the return or redeposit 77,320
9. Error on bank statement in entering deposit
of Dec. 18, 2018:
Correct amount P1,600
Entered in statement 160 1,440
10. Check no. 021261 of Yek Company,
charged by the bank in error to
 company’s account 13,600
11. Proceeds of note of Harthur Co.,
collected by bank, Dec. 10, 2018, not
entered in cash book (principal amount of
P25,000 plus interest of P1,125, less
collection fee) 25,625
12. Erroneous debit memo of Dec. 28,2018,
to charge company’s account with
settlement of bank loan which was paid by
check no. 112170 on same date. 5,000
13. Error on bank statement in entering
Deposit of Dec. 4, 2018:
Entered as P14,200.62
Correct amount 12,400.62 1,800
14. Deposit of Bunso Co. of Dec. 2,2018,
Credited in error to this company 3,500

Answer:

1. A. Principal Loan = P50,000

Proceeds = Principal – Interest
47,750 = P – (P x 18% x 3/12)
47,750 = P – 0.045P
47,750 = 0.955P
P = 47,750/0.955
P = P50,000

2. D. Prepaid Interest = P1,875

Dec. 15,2018 (3 months - .5 months)
Prepaid Interest = 2.5/3 (P50,000*18%*3/12)
= 2.5/3 (2,250)
= P1,875

3. C. Collection Fee = P500

Principal P25,000
Interest Income 1,125
Maturity Value P26,125
Collection fee (500)
Proceeds P25,625
4. A. Cash in Bank, Dec. 31,2018 = P14,344

Book Bank
Unadjusted balances P19,289 P47,174
Outstanding Checks (63,000)
Deposit in Transit 6,260
Service charge (November) (1,000)
Proceeds of bank loan 47,750
Deposit omitted from bank statement 9,170
Check of Milano Company, charged back (77,320)
Error in entering deposit of 12/18/18 1,140
Check of Yek Company charged in error
Hector Company 13,600

Proceeds of note – Harthur Co. 25,625

Erroneous debit memo charged by bank in
Settlement of loan paid by Check
No. 112170 5,000
Error in entering deposit (12/4/18) (1,800)
Deposit of Bunso Co. credited in error
To Hector Company (3,500)
ADJUSTED BALANCES P14,344 P14,344

5. C. Net decrease in Cash in Bank, Dec. 31, 2018 = P4,945

Adjusted cash Balance P14,344

Cash balance per book 19,289
Net adjustment – decrease P 4,945
FABILANE, JESSA E.

Topic: Receivables

Problem No.: 8

LAGUNDI COMPANY applies allowance method to value its accounts receivable. The
company estimates its expected credit loss based on past experience, which indicates
that 1.5% of net credit sales will be uncollectible. Its total sales for the year ended
December 31, 2018, amounted to P4,000,000 Inclusing cash sales of P400,000. After a
thorough evaluation of the accounts receivable from Nolog Company amounting to
P20,000, Lagundi has decided to write off this account before year-end adjustments are
made.

Shown below are Lagundi’s account balances at December 31,2018, before any
adjustments and the P20,000 write off.

Sales P4,000,000
Accounts Receivable 1,500,000
Sales discounts 250,000
Allowance for Credit Loss 33,000
Sales Returns and Allowances 350,000
Expected Credit Loss 0

Lagundi has decided to value its accounts receivable s using the statement of financial
position approach as suggested by its external auditors. Presented below is the aging of
the accounts receivable subsidiary ledger accounts at December 31, 2018.

Less than 61-90 91-120 Over

Accounts Balance 60 Days days days 120 days

Antiporda P100,000 P100,000

Balbakwa 256,000 180,000 76,000
Curdapia 654,000 500,000 154,000
Dagul 50,000 P50,000
Empoy 420,000 ` P420,000
Total P1,480,000 P780,000 P230,000 P420,000 P50,000
% Collectible 99% 95% 85% 60%

Answer:

1. C. No effect on total assets and net income for 2018

The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will

No effect on total assets and net income for 2018

Allowance for Bad Debts 20,000

Accounts Receivable 20,000
 2. C. Expected Credit Loss = P 45,000

Credit Sales P3,600,000

Sales Discounts ` (250,000)
Sales Return and Allowances (350,000)
Net Sales P3,000,000
x 1.5%
Bad Debts Expense P 45,000

3. A. Increase in Allowance for Credit Loss = P44,300

Less than 60 days (780,000 x 1%) P 7,800

61-90 days (230,000 x 5%) 11,500
91-120 days (420,000 x 15%) 63,000
Over 120 days 20,000
Required Allowance for BD P 102,300
Allowance for BD Balance P33,000
Bad Debts 45,000
Write-off (20,000) P 58,000
Increase in Allowance for BD P 44,300

4. D. Net Realizable, Dec. 31, 2018 = P1,377,700

Accounts Receivable P1,480,000
Allowance for Bad Debts (102,300)
Net Realizable Value P1,377,700

5. D. Assesing the allowance for credit loss for reasonableness

Which of the following most likely would give the most assurance concerning the
valuation and allocation assertions of accounts receivable?
- Assessing the allowance for credit loss for reasonableness

Problem No.:13

You are auditing the Accounts Receivable and the related Allowance for credit loss
account for IKEBANA COMPANY.

The following data are available:

General Ledger
Accounts Receivable Allowance for Credit Loss

2018 2018 2018

Dec. 31 424,000 July 31 Write off P8,000 Jan. 1 Balance 10,000
Dec. 31 Provision 24,000
 Summary of Aging Schedule

The summary of the subsidiary ledger balances as of December 31, 2018, is shown
below:

Debit Balances:
Under one month P180,000
One to six months 184,000
Over six months 76,000
P 40,000
Credit Balances:
AA Co. P 4,000 – OK; additional billing in Jan. 2019
BB Co. 7,000 – Should have been credited to DD Co.*
CC Co. 9,000 – Advances on Sales Contract
P20,000
*Account is in “one to six months” classification.
The customer’s ledger is not in agreement with the accounts receivable control.
The client instructs the auditor to adjust the control to the subsidiary ledger
after corrections are made.

Allowance for Credit Loss Requirements

It is agreed that 1 percent is adequate for accounts under one month. Accounts
one to six months are expected to require an allowance of 2 percent. Accounts
over six months are analyzed as follows:

Definitely bad P24,000

Doubtful (estimated to be 50% collectible) 12,000
Apparently good, but slow
(estimated to be 90% collectible) 40,000
Total P76,000

Answer:

1. C. Adjusted balance “1 to 6 months” Receivable = P177,000

1 to 6 months P184,000
BB Co. (7,000)
Balance P177,000

2. B. Adjusted balance “Over 6 months” Receivable = P52,000

Over 6 months P76,000
Write off (24,000)
Balance P52,000

3. C. Accounts Receivable, Dec. 31, 2018 = P409,000

AR, beg. P440,000
 Credit balances 13,000 (20,000 – 7,000)
Write off (24,000)
Balance P409,000

4. B. Required Allowance for Bad Debts = P15,340

Under Amount ( 180,000 x 1%) P1,800
1 to 6 month (177,000 x 2%) 3,540
Over 6 months
12,000 x 50% 6,000
40,000 x 10% 4,000
Required Allowance P15,340

5. A. Increase in Allowance for Bad Debts = P13,340

Required Allowance P15,340
Allowance Balance
Beg. P10,000
Provision 24,000
Write off (24,000)
(8,000) (2,000)
Increase in Allowance for BD P13,340
FERRER, MICHAELA LOUISE M.

Topic: Inventories
Problem No.: 8

The following information was provided the bookkeeper of COW, INC.:

1. Sales for the month of June totaled 286,000 units.

2. The following purchases we’re made in June:

DATE QUANTITY UNIT COST

JUNE 4 50,000 13

JUNE 8 62,500 12.50

JUNE 11 75,000 12.00

JUNE 24 70,000 12.40

3. There were 108,500 units on hand on June 1 with a total cost of 1,450,000

Cow, Inc. uses a periodic FIFO costing system. The company’s gross profit for June was
2,058,750

Answer:

1. Units on hand June 30 = A. 80,000

Beginning Inventory 108,500

Add: Purchases

JUNE 4 50,000

JUNE 8 62,500

JUNE 11 75,000

JUNE 24 70,000 257,500

Total goods available for sale 366,000

Less: Cost of Goods Sold (sales for the month of June) (286,000)

Ending inventory 80,000

2. Cost of ending inventory on June 30 = C. 988,000

 QUANTITY UNIT COST AMOUNT

June 11 Purchase Balance 10,000 12.00 120,000

June 24 Purchase 70,000 12.40 868, 000

Ending Inventory 80,000 988,000

Answer: C

3. Total Cost of Goods Sold = D. 3,661,250

QUANTITY UNIT COST AMOUNT

Beginning Inventory 108,500 P1,450,000

June 4 Purchase 50,000 13.00 650,000

June 8 Purchase 62,500 12.50 781,250

June 11 Purchase 65,000* 12.00 780,000

286,000 P3.661.250

*[(108,500+50,000+62,500)-286,000]

4. Unit Selling Price of 286,000 units = A. P20

Gross profit P2,058,750

Add: Cost of goods sold 3,661.250

Sales 5,720,000

Divide by: units sold 286,000

Sales price per unit P20

5. D. Establishing a proper cutoff for goods received and shipped will ensure

that only goods owned by the client are included in inventory.

Problem No.: 18
SEAL WHOLESALER wholesales food products to independent grocery stores. The
company uses the perpetual inventory system and assigns cost to inventory on a first-in,
first-out basis. Transactions and other related information regarding two of the items
(baked beans and plain flour) carried by Seal are given below for December2018, the last
month of the company's reporting period.

BAKED BEANS PLAIN FLOUR

Unit of packaging Case containing Box containing

25 x 410 g cans 12 x 4 kg bags

Inventory @ Dec. 1 350 cases @ P196 625 boxes @ P384

Purchases 1. Dec. 10: 200 cases 1. December 3: 150

boxes @ P384.50
@ P195
2. December 15: 200
2. Dec. 19:470 cases boxes @ P384.50
@ P197 per case 3. Dec. 29: 240
boxes @ P390

Purchase terms 2/10,n/30, FOB shipping n/30, FOB destination

December sales 730 cases @ P285 950 boxes @ P400

Returns and allowances A customer returned 50 cases As the Dec. 15

that had been shipped in error. purchase was
The customer's account was unloaded, 10 boxes
credited for P14,250. were discovered
damaged. A credit of
P3,845 was received
by Seal Wholesaler.

Physical count at 326 cases on hand 15 boxes on hand

December 31

Explanation of variance No explanation found Boxes purchased on

Dec. 29 still in transit
assumed stolen on Dec. 31

NRV at Dec. 31 P290 per case P385 per box

Answer:

1. Cost of Baked Beans stolen inventory = D. 2,758

Beginning Inventory of Baked Beans 350

Purchases :
December 10 200 cases

December 19 470 cases 670

Sales (730)
Sales returns 50
Balance 340
Ending Physical Count (326)
Lost inventory in units 14

Stolen inventory at cost = 14 cases x 197 = P2,758

2. Cost of Plain Flour inventory, Dec. 31, 2018 = C. 5,767

Ending Inventory at cost (15 boxes on hand x 384.50) P5,767

3. Total cost of Seals Inventory = A. 69,989

Baked Beans (326 cases x P197) P64,222

Plain Flour (15 boxes x P384.50) 5,767

Total Cost P69.989

4. B. Inventories should be stated at the lower of cost and net realizable value.

5. Amount of loss on decline in value of inventory = D. 0

QUANTITY COST NRV LOWER

Baked Beans 326 64,222 94,540 Cost

Plain Flour 15 5,767 5,775 Cost

Problem No. 23

BIRD COMPANY is a manufacturer of small tools. The following information was obtained
from the company's accounting records for the year ended December 31, 2018:

Inventory at December 31,  2018  (based on physical 1,870,000

count in Bird's warehouse at cost on December 31,
2018)
Accounts payable at December 31, 2018 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

1. The physical count included tools billed to a customer FOB shipping point on
December 31, 2018. These tools cost P64,000 and were billed at P78,500. They
were in the shipping area waiting to be picked up by the customer.

2. Goods shipped FOB shipping point by a vendor were in transit on December 31,
2018. These goods with invoice cost of P93,000T were shipped on December 29,
2018.

3. Work in process inventory costing P27,000 was sent to a job contractor for further
processing.

4. Not included in the physical count were goods returned by customers on December
31, 2018. These goods costing P49,000 T were inspected and returned to inventory
on January 7, 2019. Credit memos for P67,800 were issued to the customers at
that date.

5. In transit to a customer on December 31, 2018, were tools costing P17,000

shipped FOB shipping point on December 26, 2018. A sales invoice for P29,400
was issued on January 3, 2019, when Dird Company was notified by the customer
that the tools had been received.

6. At exactly 5:00 pm on December 31, 2018, goods costing P31,200 were received
from a vendor. These were recorded on a receiving report dated January 2, 2019.
The related invoice was recorded on December 31, 2018, but the goods were not
included in the physical count.

7. Included in the physical count were goods received from a vendor on December
27, 2018. However, the related invoice for P36,000 was not recorded because the
accounting department's copy of the receiving report was lost.

8. A monthly freight bill for P32,000 was received on January 3, 2019. It specifically
related to merchandise bought in December 2018, one-half of which was still in the
inventory at December 31, 2018. The freight was not included in either the
inventory or in accounts payable at December 31, 2018.

ANSWER:
NET SALES ACCOUNTS INVENTORY
PAYABLE
 Unadjusted P9,693,400 1,415,000 1,870,000
balances
Adjustments:

1. (78,500)

2. 93,000 93,000

3. 27,000

4. (67,800) 49,000

5. 29,400

6. 31,200

7. 36,000

8. 32,000 16,000

Adjusted 9,576,500 (3) 1,576,000 (4) 2,086,200 (5)

balances

1. Bird’s ending inventory should be increased by = A. 216,200

Inventory per audit. P2,086,200

Inventory per count (1,870.000)

Inventory should be increased by P 216.200

2. Bird’s accounts payable should be increased by = D. 161,000

Accounts payable per audit P1,576,000

Accounts payable per books (1,415,000)

Accounts Payable should be increased by P 161,000

3. Net Sales to be reported at year end of Bird’s income statement should be = B.

9,576,500

4. Accounts payable to be reported at year end of Bird’s financial position should be =

A. P1,576,000

5. Inventory to be reported at year end of Bird’s statement of financial position should

be = B. 2,086,200
FERRER, MICHAELA LOUISE M.

Topic: Investment

Problem No.: 8
BUKIDNON CORP. has a policy of investing idle cash in equity securities. It has made
periodic investments in its principal supplier, Nocon Company. Bukidnon currently owns
12% of Nocon's outstanding ordinary shares.

Cherry Kosme, Bukidnon's assistant controller, has gathered the following information
about the company's investments in equity securities.

1. Bukidnon has trading equity investments in Delta Corp. and Polygon Company.
During 2019, Bukidnon purchased 100,000 shares of Delta Corp. for P4,200,000;
these shares have a fair value of P4,800,000 at December 31, 2019. The
investment in Polygon consists of 50,000 shares acquired in March 2019 at P60 per
share and currently has a value of P2,160,000.
2. Bukidnon's 12% ownership in Nocon Company has a fair value of P66,675,000 on
December 31, 2019.. On initial recognition, Bukidnon made an irrevocable election
to present in other comprehensive income subsequent changes in fair value of this
investment in equity securities. The securities were purchased prior to 2018 for
P67,500,000 and was valued at P64,500,000 on December 31, 2018. Bukidnon has
not changed its holdings in the current year.

ANSWER:

1. Amount of unrealized loss that should be reported on Bukidnon's year end Other
Comprehensive Income = D. 3,000,000

Fair value of Nocon securities, Dec. 31, 2018 P64,500,000

Acquisition cost 67,500,000

Unrealized loss (3,000,000)

2. Amount cumulative unrealized gain/loss that should be reported on Bukidnon's

year end statement of changes in equity = C. Unrealized loss of 825,000

Fair value of Nocon securities, Dec. 31, 2019 66,675,000

Acquisition Cost (67, 500,000)

Cumulative unrealized loss, Dec. 31, 2019 (825,000)

3. Amount of unrealized gain/loss that should be reported on Bukidnon's year end

income statement = B. Unrealized loss of 240,000
COST FAIR VALUE UNREALIZED GAIN/LOSS

Delta Corp. 4,200,000 4,800,000 600,000

Polygon Company 3,000,000 2,160,000 (840,000)

Total 7,200,000 6,960,000 (240,000)

Problem No.:13

STRAWBERRY COMPANY has the following non-trading equity securities on December 31,
2018:

SECURITY SHARES COST FAIR VALUE

Danica Co. 4,500 P220,500 P207,000
ordinary shares
Rose Corp. 15,000 540,000 525,000
ordinary shares
Assunta, Inc. 1,200 180,000 184,800
preference shares
TOTAL P940,500 P916,800

All of the above securities were bought in 2018. On initial recognition, Strawberry made
an irrevocable election to present such securities at fair value through other
comprehensive income. In 2019, the company had the following transactions relating to
its investments:

April 1 Sold the 4,500 ordinary shares of Danica Co. for P65 per share.
May 1 Bought 2,100 ordinary shares of Ríta Corp. at P75 plus broker's
fee of P5,200.

Strawberry's portfolio of non-trading equity securities appeared as follows on December

31, 2019:

SECURITY SHARES COST FAIR VALUE

Danica Co. 15,000 540,000 525,000
ordinary shares
Rose Corp. 2,100 157,500 151,200
ordinary shares
Assunta, Inc. 1,200 180,000 (broker’s 174,000
preference shares fee recorded as
expense)
TOTAL P877,500 P850,200

ANSWER:

1. Gain or loss on sales of Danica’s ordinary share to be reported in the year end
income statement = D.0

Sales price (P65 x 4,500 shares) P292,500

Less: Carrying value, Dec. 31, 2018 (207,000)

Realized gain on sale P 85,500

2. The 2,100 ordinary share purchased in May 1, 2019 should be initially measured at
= C. 162,700

Purchase price (P75 x 2,100 shares) P157,500

Add: Broker's fee 5,200

Total cost P162,700

3. The Investments in non-trading equity securities at year end should be reported at

= A. 850,200

ROA, GYRANNE

Topic: Property, Plant & Equipment

Problem No.: 8

The following items are included in the PPE section of the audited statement of financial
position of DRUMS CORP. as of December 31, 2017:
 Land P 3,450,000
Buildings 13,350,000
Leasehold Improvements 9,900,000
Machinery & Equipment 13,125,000

The following transactions occurred during 2018:

1. Land A was acquired for P 12,750,000. In connection with the acquisition, Drums
paid a P 765,000 commission to a real estate agent. Costs of P 525,000 were
incurred to clear the land. During the course of clearing the land, timber and gravel
were recovered and sold for P 195,000.

2. Land B with an old building was acquired for P 7,500,000. On the acquisition date,
the fair value of the land was P 4,200,000 and the fair value of the building was P
1,800,000. The old building was demolished at a cost of P 615,000 shortly after
acquisition. A new building to be used as an owner-occupied property was
constructed for P 4,950,000 plus the following costs:

Excavation Fees P 570,000

Architectural design fees 165,000
Building permit fee 37,500
Imputed interest on funds used 127,500
during construction (stock financing)

The building was completed and occupied on December 30, 2018.

3. Land C was acquired for P 9,750,000 with the intention of selling it within 12
months from the date of purchase.

4. During December 2018, costs of P1,335,000 were incurred to improve leased office
space. The related lease will terminate December 31, 2020, and is not expected to
be renewed.

5. A group of machines was purchased under a royalty agreement that provides for
payment of royalties based on units of production for the machines. The invoice
price of the machines was P 1,305,000 freight costs were P 49,500, installation
costs were P 36,000, and royalty payments for 2018 were P 262,500.

Based on the preceding information, determine the balances of the following PPE items on
December 31, 2018:

Solution:

2018 Transactions Land Buildings Leasehold Machinery

Improvements &
Equipment
 Beginning Balance 3,450,000 13,350,000 9,900,000 13,125,000
LAND A
Acquisition Cost 12,750,000
Agent Commission 765,000
Net Land Clearing 330,000
(525k-195k)
LAND B
Acquisition Cost
Building(7.5mx18/60 2,250,000
) 5,250,000
Land (7.5m x 42/60) (2,250,000)
Loss on Disposal

NEW BUILDING 615,000

Demolition Cost 4,950,000
Construction Cost 570,000
Excavation Fees 165,000
Architectural Design 37,500
Fees
Building permit fee
LAND C
Land held for sale - -
9,750,000
LEASED OFFICE
SPACE 1,335,000
Improvement on office
space
NEW MACHINERY
Acquisition Cost 1,305,000
Freight Costs 49,500
Installation Cost 36,000
TOTAL 22,545,000 19,687,500 11,235,000 14,515,500

ANSWER:
1. Land – D. 22,545,000
2. Buildings – B. 19,687,500
3. Leasehold Improvements – D. 11,235,000
4. Machinery & Equipment – B. 14,515,500
5. Land C should be reported in the company’s December 31, 2018, statement of
financial position under: C. Non-Current assets held for sale

Problem No.: 18

MARACAS COMPANY constructs its own buildings. In 2017, a total of P 1,228,500 interest
was included as part of the cost of a new building just being completed.
The following is a summary of construction expenditures in 2018:
Accumulated in 2017, including capitalized interest P 18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Total 34,228,500

Maracas has the following outstanding loans at December 31, 2018:

12% note related directly to the new building;
term, 5 years from beginning of construction 10,000,000

General Borrowings:
10% note issued prior to construction of
new building; term, 10 years 5,000,000
8% note issued prior to construction of
new building; term, 5 years 10,000,000

1. Capitalization Rate
ANSWER: A. 8.67%
Solution:
General Principal Borrowing
Borrowings Cost
10% Note 5,000,000 500,000
8% Note 10,000,000 800,000
TOTAL 15,000,000 1,300,000

Capitalization Rate: 1,300,000 / 15,000,000 = .08666666666

2. Average accumulated expenditures in 2018

ANSWER: D. 25,395,167
Solution:
Date Expenditure Fraction Average
Accumulated in 18,228,500 12/12 18,228,500
2017
March 1 7,000,000 10/12 5,833,333
September 1 4,000,000 4/12 1,333,334
December 31 5,000,000 0/12 0
TOTAL 25,395,167

3. Avoidable interest for 2018

ANSWER: D. 2,534,761
Solution:
Specific Borrowing (10,000,000 x 12%) 1,200,000
General Borrowing:
Ave. Expenditures 25,395,167
Related to Specific Borrowing (10,000,000)
Related to General Borrowing 15,395,167
 X Capitalization Rate .0867
P 1,334,761
Total 2,534,761

4. Capitalizable Interest in 2018

ANSWER: A. 2,500,000
Solution:
NOTES Principal Interest Interest
Rate
12% Note 10,000,000 x .12 1,200,000
10% Note 5,000,000 x .10 500,000
8% Note 10,000,000 x .08 800,000
TOTAL ACTUAL INTEREST 2,500,000

5. Total cost of the new building

ANSWER: B. 36,728,500
Solution:
Construction Cost 34,228,500
Capitalized Interest 2,500,000
Total 36,728,500

Problem No.: 23

MANDOLIN CORP. uses different kinds of machines in its manufacturing process. It

constructs some of these machines itself and aquires others from the manufacturers. The
following information relates to two machines that it has recorded in 2018.

Machine A (purchased)

Cash paid for equipment P 250,000

Cost of transporting machine – insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,000
Insurance cost for 2018 4,500
Cost of training for personnel who will use the machine 7,500
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2018 to make
it operate more efficiently 22,500

Machine B (self-constructed)

Cost of materials to construct machine P 210,000

Labor cost to construct machine 129,000
Allocated overhead cost – electricity, factory space, etc. 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Profit saved by self-construction 45,000
Safety inspection cost prior to use 12,000
 1. Cost of machine A
ANSWER: D. 350,500
Solution:
Cash paid for equipment P 250,000
Cost of transporting machine – insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,000
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2018 to make
it operate more efficiently 22,500
TOTAL 350,500

2. Cost of Machine B
ANSWER: C. 483,000
Solution:
Cost of materials to construct machine 210,000
Labor cost to construct machine 129,000
Allocated overhead cost – electricity, factory space, etc. 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Safety inspection cost prior to use 12,000
TOTAL 483,000

3. Which of the following combinations of procedures is an auditor most likely to

perform to obtain evidence about PPE additions?
Answer: A. Inspecting documents and physically examining assets.

ROA, GYRANNE

Topic: Prepayments and Intangible assets

Problem No.: 8

ELGON COMPANY was organized in 2017 and began operations at the beginning of 2018.
The company provides landscaping services. The following costs were incurred prior to
the start of operations:
Legal fees in connection with organization of the company 171,000
Improvements to leased office space prior to occupancy 225,000
Cost of meetings of incorporators to discuss
organizational activities 63,000
Filing fee to incorporate 9,000
468,000

What is the total amount of organization costs that should be reported in Elgon’s income
statement?
ANSWER: A. 243,000
Solution:
Legal fees in connection with organization
of the company 171,000
Cost of meetings of incorporators to discuss
organizational activities 63,000
Filing fee to incorporate 9,000
TOTAL 243,000

Problem No.: 13

MOSES COMPANY’s own research department has an on-going project to develop a new
production process. At the end of 2017, Moses already spent a total of P300,000, of
which P270,000 was incurred before November 1, 2017. On November 1, 2017, the
company’s newly developed production process met the criteria for recognition as an
intangible asset.

During 2018, Moses incurred additional expenditure of P600,000. At the end of 2018, the
recoverable amount of the intangible asset was estimated to be P 570,000, including
future cash outflows to complete the process before it is available for its intended use.

1. At December 31, 2017, the production process should be recognized at a cost of:
ANSWER: C. 30,000

Solution:
Production process cost at Dec. 31, 2017 300,000
Cost incurred before Nov. 1, 2017 (270,000)
TOTAL 30,000

2. What is the total cost of production process at December 31, 2018?

ANSWER: A. 630,000
Solution:
Production process cost as of Dec. 31, 2017 30,000
Addt’l cost incurred 2018 600,000
TOTAL 630,000
 3. How much impairment loss should be recognized by Moses in 2018, in connection
with the new production process?

ANSWER: D. 60,000
Solution:
Production process cost at Dec. 31, 2018 630,000
Recoverable Amount 570,000
TOTAL 60,000

UNSANG, JONEL R.

Topic: Liabilities

Problem No.: 8

OMEGA COMPANY sells its products in expensive, reusable containers. The customer is
charged a deposit for each container delivered and receives a refund for each container
returned within two years after the year of delivery. Omega accounts for the containers
not returned within the time limit as being sold at the deposit amount. Information for
2018 is as follows:

Containers held by
customers at Dec 31, 85,
2017 from deliveries in: 2016 000
24, 325,
2017 000 000
Containers delivered in 430,
2018: 000
Containers delivered in
2018 from deliveries in: 2016 57,
 500
140,
2017 000
157, 354,
2018 000 500

1. How much revenue from customer sales should be recognized for 2018?
Answer: C. 27,500
Solution:
Unreturned containers from 2016 sales: 85,000
Returned containers from 2016 sales: (57,500)
Containers deemed sold from 2016 sales: 27,500

2. What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2018?
Answer: A. 373,000
Solution:
Unreturned and newly shipped Containers 755,000
Returned Containers (354,500)
Unreturned containers deemed sold (27,500)
Liability to customers 373,000

Problem No.: 18

On November 1, 2018, 69 passengers o CANYON AIRLINES Flight No. 143 were injured
upon landing when the plane skidded off the runway. Personal injury suits for damages
totaling 10,000,000 were filed on January 12, 2019, against the airline by 21 injured
passengers. The airline carries no insurance. Legal counsel has studied each suit and
advised Canyon that it can reasonably expect to pay 70% of the damages claimed. The
financial statements for the year ended Dec 31, 2018, were authorized for issue on
February 12, 2019. During the past decade, the company has experienced at least one
accident per year and incurred average damages of 4,100,000.

1. Prepare journal entry that should be made as of December 31, 2018, to recognize the
loss.
Answer:
Loss from uninsured accident 7,000,000
Liability from uninsured accident 7,000,000
Solution:
 It is qualified to be recognized as a liability because it has met the three
recognition requirement of a liability; 1) present obligation, 2) probable outflow of
economic resources and 3) can be estimated reliably.

2. What liability due to the risk of loss from lack of insurance coverage should Canyon
Airlines record or disclose?

Answer: The Company is not required to establish a liability for risk of loss
from lack of insurance coverage. However, the fact that the company is self-
insured will require note disclosure.

Problem No.: 23

At December 31, 2018, KISU COMPANY’s liabilities include the following:

1. P10 million of 10% notes are due on March 31, 2023. The financing agreement
contains a covenant that requires Kisu to maintain current assets at least equal to
200% of its current liabilities. As of December 31, 2018, Kisu has breached this
loan covenant. On February 10, 2019, before Kisu’s financial statements are
authorized for issue, Kisu obtained a period of grace from Mayumi Bank until
January 31, 2020, having convinced the bank that the company’s normal 3 to 1
ratio of current assets to current liabilities will be reestablished during 2019.
2. P15 million of non-cancelable 12% bonds were issued at face value on September
30, 1997. The bonds mature on August 31, 2019. Kisu expects to have sufficient
cash available to redeem the bonds at maturity.
3. P20 million of 10% bonds were issued at face value on June 30, 1999. The bonds
mature on June 30, 2028, but bondholder’s have the option to call (demand
payment on) the bonds on June 30, 2019. However, the call option is not expected
to be exercised given prevailing market conditions.

What portion of Kisu Company’s debt should be reported as a non-current liability?

Answer: D. P0.00
Solution:

1. Although KISU was provided a period of grace which is more than 12 months
after the balance sheet date for the P10 million note, the grace period was
given after the reporting date.
2. The P15 million bonds will mature 8 months after the balance sheet date.
3. Regardless of the market condition, KISU does not have the unconditional right
to defer settlement beyond 12 months after the reporting date.
UNSANG, JONEL R.

Topic: Shareholder’s equity

Problem No.: 8

The LAOS COMPANY wants to raise its working capital. After analysis of the available
options, the company decides to issue 6,000 shares of P30 par preference shares with
detachable warrants. The package of the shares and warrants sells for P120. The
warrants enable the holder to purchase 6,000 shares of P10 par ordinary shares at P40
per share. Immediately following the issuance of the shares, the share warrants are
selling at P10 per share. The market value of the preference shares without the warrants
is P90.

1. What amount should be assigned to the share warrants issued?

Answer: B. 72,000
Solution:
 Market Value:
Shares 540,000
Warrants 60,000
Total MV 600,000
Allocation:
Shares 648,000
Warrants 72,000
Total 720,000
Journal Entry:
Cash 720,000
Preference Share 180,000
APIC – Preference shares 468,000
Share Warrants Outstanding 72,000

2. Assuming that only 80% of the warrants were exercised, the entry to record the
exercise of the warrants should include a:
Answer: A.
Solution:
Cash (40*6000*80%) 192,000
Share Warrants Outstanding (72,000*80%) 57,600
Ordinary Shares (6000*80%*10) 48,000
APIC – Ordinary Shares 201,600
Problem No.: 18

At the beginning of the year 1, an entity grants to a senior executive 3,000 share options,
conditional upon the executive remaining in the entity’s employ until the end of year 3.
The exercise price is P40. However, the exercise price drops to P30 if the entity’s
earnings increase by at least an average of 10 percent per year over the three-year
period.

On grant date, the entity estimates that the fair value of the share options, with an
exercise price of P30, is P15 per option. If the exercise price is P40, the entity estimates
that the share options have a fair value of P12 per option.

During year 1, the entity’s earnings increased by 12 percent, and the entity expects that
earnings will continue to increase at this rate over the next two years. The entity
therefore expects that the earnings target will be achieved, and hence the share options
will have an exercise price of P30.

During year 2, the entity’s earnings increased by 13 percent, and the entity continues to
expect that the earnings target will be achieved.

During year 3, the entity’s earnings increased by only 3 percent, and therefore the
earnings target was not achieved. The executive completes three years’ service, and
therefore satisfies the service condition. Because the earnings target was not achieved,
the 3,000 vested shares options have an exercise price of P40.

1. What is the compensation expense in year 1?

Answer: B. 15,000
2. What is the compensation expense in year 2?
Answer: B. 15,000
3. What is the compensation expense in year 3?
Answer: B. 6,000
4. At the end of year 2, the entity should report share options outstanding of
Answer: C. 30,000
5. What is the cumulative compensation expense for years 1, 2, and 3?
Answer: A. 36,000

Solution:

Yea Cumulative Compensation

r Compensation Expense Expense
1 (P15x3000x1/3) = 15,000
15,000
2 (P15x3000x2/3) = 15,000
30,000
3 (P12x3000) = 36,000 6,000
Problem No.: 23

BANGLADESH COMPANY’s December 31, 2018, audited statement of financial position

reported retained earnings of 150,000. Net income for 2018 was P85,000, and dividends
of P60,000 were declared and paid in 2018. Bangladesh’s accountant discovered that bet
income for 2017 had been understated by P25,000 due to an error in recording
depreciation expense for 2017.

The amount of retained earnings per books as of December 31, 2017 was
Answer: D. 100,000

Solution:

December 2018 Retained Earnings 150,000

Dividends Declared 2018 60,000
Net income 2018 (85,000)
Retrospective adjustment (25,000)
Retained Earnings December 2017 100,000