PROBLEMS

CHAPTER 7-1
The following information is available on October 31, 2013 to Laguna Company, which is having difficulty
in paying its liabilities as they become due:

Carrying Amount
Cash P 4,000
Accounts eceivble ( net): Current fair value
equal to carrying amount 46,000
Inventorie: Net realizable value, P18,000;
pledged on P21,000 of note payable 39,000
Plant assets: Current fair value,P67,400;
pledged on mortgage note payable 134,000
Accumulated depreciation 27,000
Supplies: Current fair value,P1,500 2,000
Wages payable, all earned during October 2008 5,800
Property taxes payable 1,200
Accounts payable 60,000
Notes payable,21,000 secured by inventories 40,000
Mortgage note payable including accrued
interest of P400 50,400
Common stock,P5 par 100,000
Deficit 59,400

Required:
a. Prepare a statement of affairs
b. Compute the estimated percentage of claims each group of creditors should expect to receive if
Laguna Company petitions for liquidation in bankruptcy.
c. Prepare a Statement of Deficiency to Unsecured Creditor.

Problem 7-2

On January 1, 2013, the records of Michael Anthony, trustee in bankruptcy for VC Coropration,
showedthe following:

Cash P 8,200
Assets Not Realized:
Land 10,000
Buildings 43,000
Equipment 28,000
Patents 4,400
Liabilitites Not Liquidated:
Accounts payable 80,000
Loans payable 40,000
Estate Deficit 26,400

During January, Michael sol equipment having book value of P15,000 for P8,800 and sold the patents for
P12,000. Michael was paid P1,300 as rustee fee and P21,000 s distributd proportionately to the
creditors.

Required:
repare a stement of realization and liquidation for January and statement of financial position and
statement of estate deficit as of January 31, 2013.

Problem 7-3
Rizal Corporation is experiencing difficulty in paying its bills and is considering filing for bankruptcy.
Current data show:

ASSETS BOOK VALUE EXPECTED REALIZABLE

VALUE
Cash P 4,00 P 4,000
Accounts Receivble 40,000 30,000
Inventory- Materials 36,000 27,000
Inventory-Finished goods 50,000 55,000
Prepaid Expenses 1,000 -0-
Land 10,000 42,000
Building 70,000 160,000
Trucks 20,000 6,000
Equipment 45,000 25,000
Intangibles 16,000 -0-
_______
P 292,000
--------------

LIABILITIES SECURED BY
Accounts payable P 77,000
Bank Loan 25,000 80% of receivables
Wages Payable 12,000
Taxes Payable 8,000
Truck Loan 5,000 Truck with P12,000 BV &
P3,500 ERV
Mortgage Payable 43,000 Land and building
Loan Payable 50,000 Finish goods
Stockholder Loan 110,000 Not subordinated to other debt
Stockholders' Equity (38,000)
___________
P 292,000
-------------------

Required: Prepare a statement of affairs.

Problem 7-4
A receiver is appointed for Mapayapa Corporation on November 1, 2013 at which time the following
trial balance was prepared from the general ledger:
Trial Balance
November 1, 2013
______________________________________________________________________________
Cash P 66,000
Notes Receivable 114,000
Accounts Receivable 438,000
Merchandise inventory 291,000
Investments- cost 60,000
Plant and Equipment 1,040,000
Accumulated Depreciation P 170,000
Notes Payable 210,000
Accounts Payable 960,000
Capital Stock-par value 20 300,000
Retained Earnings 369,000
_________ __________
P 2,009,000 P2,009,000
_________ __________
ADDITIONAL DATA:
a. Accrued expenses not recorded as of this date, amount to P20,100, of which P6600 is for property
taxes and 7,200 s for wages for the past mont. (Not more than P600 i owed to any one employee).
b. The investments have a market value of P69,000 and have been pledged as collateral on a nte for
P60,000.
c. Accounts receivable of P180,000 have been assigned as security for the remainder of the notes
payable.
d. It is estimated that 95% of he notes reecivable, 95% of the assigned accounts receivables, an 75% of
the remainingccounts receivable will be collected. A quick sale of the inventory will realize P180,000 amd
of the plant, P330,000. The corporation also owns a patent not recorded on the books which is
expectedto ralize P12,000.

Required: Prepare a statement of affairs.

Problem 7-5
The carrying vlues and estimated fair values of the assets of Lexos,Inc. are:
_____________________________________________________________________________
CARRYING VALUE FAIR VALUE
Cash P 16,000 P 16,000
Accounts Receivable 60,000 60,000
Inventory 90,000 65,000
Land 100,000 80,000
Building 220,000 160,000
Equiipment ( net) 250,000 100,000
_________ _________
P736,000 P471,000
_________ _________
Debts of Lexos, Inc. are:
______________________________________________________________________________
Accounts Payable P 95,000
Wages Payable (all have priority) 9,500
Taxes Payable 14,000
Notes Payable (secured by receivables and inventory) 190,000
Interests on Notes Payable 5,000
Bonds Payable( secured by land and building) 220,000
Interest on Bonds Payable 11,000
_____________
Total P 544,000
_____________
Required :
a. Prepare a schedule to calculate the net estimated amount available for general unsecured creditors.
b. Compute the percentage divivdend to general unsecured creditors.
c. Prepare a schedule showing the amount to be paid each of the creditor groups upon distribution of
the P471,000 estimated to boe realized.
CHAPTER 8

Problem 8-1
Under fresh start accounting, a company is coming out of reorganization with following accounts:
______________________________________________________________________________
BOOK VALUE FAIR VALUE

Receivables P80,000 P90,000

Inventory 200,000 210,00
Buildings 300,000 400,000
Liabilities 330,000 300,000
Common stock 20,000
Additional paid in capital (70,000)
______________________________________________________________________________
The ompany's assets have a reorganization value of P760,000. The owners of the company before the
organization have transferred 80% of the outstanding stock to the creditors.

Required: Prepare the journal entry that is necessary to adjust the company's records to fresh start
accounting.

Problem 8-2
On July 24, 213, the date the plan of reorganization of Luigi Company was approved by SEC, Luigi'
stockholders' equity was as follows:
______________________________________________________________________________
Common stock, no par or stated value; authorized 100,000 shares,
issued and outstanding 60,000 shares P 580,000
Deficit (260,000)
______________________________________________________________________________
Included in Luigi's plan of reorganiztion were the following:

1. Authorize payment of P50,000 unrecorded administrative costs by escrow agent holding Luigi cash
discount.
2. Amend articles of incorporation to change common stock to P1 par from no-par, no-stated value stock.
3. Exchange 10% unsecured P120,000 promissory note payable to supplier ( interest unpaid for three
months) for a 12%, two- year promissory note in the total amount of unpaid principal and acccrued
interest on the 10% note.
4. Pay suppliers 80% centavos on the peso (from Luigi cash acount) for their claims totaling P100,000.
5. Eliminate deficit against paid-in capital resulting from (2) and gain resulting from (4).

Required: Assuming the foregiong were completed on July 24,2013, prepare journal entries (omit
explanations) for Luigi Company on that date. Use the following ledger account titles.
 Cash Interest Payable
Cash with escrow agent 10% note payable
Common stock, no par 12% note payable
Common stock, P1 par Paid-in capital in excess of par.
Cost of reorganization Retained earnings (deficit)
Gain from debt discharge Trade accounts payable

Problem 8-3
The Jade Corporation is in the process of going through reorganization. As of December 31, 2013, the
company's accountant has determined the following information.
______________________________________________________________________________
BOOK VALUE MARKET VALUE
ASSETS:
Cash P23,000 P23,000
Inventory 45,000 47,000
Land 140,000 210,000
Buildings 220,000 260,000
Equipment 154,000 157,000
______________________________________________________________________________
ALLOWED EXPECTED
CLAIMS SETTLEMENT
______________________________________________________________________________Liabilitie
s as of the date of reorganization
Accounts Payable P123,000 P20,000
Accrued Expenses 30,000 4,000
Income taxes payable 22,000 18,000
Note payable (due 2013, secured by land) 100,000 100,000
Note payable (due 2015) 170,000 80,000
Liabilities since the date of reorganization
Accounts Payable P60,000
Note Payable 100,000
Stockholders' Equity
Common stock 200,000
Retained Earnings (223,000)
______________________________________________________________________________Require
d: Prepare a reorganization statement of financial position in good form.

Problem 8-4
The Red Company is in the process of emerging from rorganization. The company will apply fresh start
accounting as of December 31,2013. The company currently has 30,000 shares of common stock
outstanding with a P240,000 par value. As part of the reorganization, the owners will contribute 18,000
shares of this stock back to the company. A deficit balance of P30,000 also is being processed.
The company has the following asset accounts:
______________________________________________________________________________
BOOK VALUE MARKET VALUE
Account Payable P100,000 P80,000
Inventory 112,000 90,000
Land and Buildings 420,000 500,000
Equipment 78,000 65,000
______________________________________________________________________________The
company's liabilities will be settled as follows: Assume that all notes will be issued at reasonable interest
rates.

1. Accounts Payable pf P80,000 will be settled with note for 50,000. These creditors will also get 1,000
shares of the stock cobtributed by the owners.
2. Accrued Expenses of P35,000 will be settled with a note for P40,000.
3. Note payable (due 2015) of 100,000 was fully secured and has not been renegotiated.
4. Note payable (due 2011) of P200,000 will be settled with a note for P50,000 and 10,000 shares of
stock contributed by the owners.
5. Note payable (due 2012) of P185,000 will be settled with a note for P71,000 and 7,000 shares of the
stock contributed by te owners.
6. Note payable (due 2013) of P200,000 will be settled with a note for P110,000.

The company has areorganization value of P780,000.

Required: Prepare all of the journal entries for Red Company so that the company can emerge from the
reorganization.

Problem 8-5
The Sun Corporation has gone through reorganization on December 31, 2013. Onthis date, the company
has the following assets ( market valuleis based on the discounted future cashflows at are anticipated):
______________________________________________________________________________
BOOK VALUE MARKET VALUE
______________________________________________________________________________
Account Receivable P20,000 P18,000
Inventory 143,000 111,000
Land and Buildings 250,000 278,000
Machinery 144,000 121,000
Patents 100,000 125,000
______________________________________________________________________________The
company has a reorganization value of P800,000.
The company has 50,000 shares of P10 par value common stock outstanding. A deficit retained earnings
balance of P670,000 also is reported. The owner s will distribute 30,000 shares of this stock as part of
the reorganization plan.

The company's liabilities will be settled as follows:

* Accounts payable (existing at the date on which the order of reorganizzation was granted) of P180,000
will be settled with an 8%, two- year note for P35,000.
* Accounts payable (incurred since the date of reorganization was granted) ofP97,000
will be paid in the regular course of business.
* Note payable - Citibank of P200,000 will be settled with an 8%, five-year note for P50,000 and 15,000
shares of the stock contributed by the owners.
* Note payable- Metro Bank of P350,000 will be settled with a 7%, eight-year note for P100,000 and
15,000 shares of the stock contributed by the owners.

Required: Prepare a statement of financial position for the Sun Corporation upon its emergence fromm
the reorganization.

CHAPTER 9

Problem 9-1
Diana's Furniture sells furniture and electronic items. Th majority of its business is on credit, and the
following information is available relating to salestransactions for 2011, 2012, and 2013.
______________________________________________________________________________
2011 2012 2013s
Installment sales (net of interest) P104,000 P116,000 P121,000
Gross profit rates 38% 41% 39%
Cash collections on installment sales:
Principal-2011 57,200 29,120 15,000
Principal-2012 71,920 26,680
Principal-2013 76,230
Interest-2011 17,870 3,030
Interest-2012 9,780 6,610 18,142
Interest-2013 6,378
______________________________________________________________________________
Required : Prepare the journal entries for the year 2011, 2012, and 2013 assuming Diana's Furniture
uses the installment sales method for revenue recognition and records receivables net of interest.

Problem 9-2
Charles Corporation has been using the cash method of revenue recognition since its first year of
operation in 2012. All sales are made on accountwith notes receivable given by the customers. The
Statement of Comprehensive Income for 2012 and 2013 presented the following amounts:
______________________________________________________________________________
2012 2013
Revenues-collection on principal P32,000 P50,000
Revenues- interest 3,600 5,500
Cost of goods purchases (includes increase
in inventory of goods on hand of P2,000
in 2012 and P8,000 in 2013 45,200 52,020
______________________________________________________________________________The
balances due on the notes at the end of year were as follows:
______________________________________________________________________________
2012 2013
______________________________________________________________________________
Notes receivable- 2012 62,000 36,000
Notes receivable- 2013 -0- 60,000
Unearned interest income- 2012 7,167 5,579
Unearned interest income- 2013 -0- 8,043
______________________________________________________________________________

Required : GIve the journal entries for 2012 and 2013, assuming the installment sales method was used
rather than the cash method.

Problem 9-3
The statement of financial position of Good Buy Mart on January 1, 2013 is shown below.
_____________________________________________________________________________
Assets Liabilities and Equity
_____________________________________________________________________________
Cash 40,000 Accounts Payable 60,000
Merchandise Inventory 240,000 Deferred gross profit on
Accounts receivable 22,000 installment sales- 2011 24,000
Allowance for doubtful Deferred gross profit on
accounts (2,000) installment sales- 2012 58,800
Installment contracts Capital stock 406,000
receivables- 2011 60,000 Retained earnings 151,200
Installment contracts
receivable- 2012 140,000
Other Assets 200,000
 _______ _________
P 700,000 P700,000
_______ _________
______________________________________________________________________________
Summary of transactions during 2013 are:
______________________________________________________________________________
Sales:
Regular (on credit) P600,000
Installments 200,000
Purchases of merchandise (cash) 476,000
Ending inventory (periodic basis) 260,000
Cost of installment sales 114,000
Selling expenses 210,000
Allowance for doubtful accounts 1/4 of 1% of regular sales
Collections:
Regular accounts 560,000
2011 installment accounts 40,000
2012 installment accounts 80,000
2013 installment accounts 110,000
_____________________________________________________________________________
Required:
1. Compute the gross profit rates of 2011, 2012, and 2013.
2. Prepare the journal entries for 2013 including the adjusting and closing entries at
December 31.
3. Prepare statemen of comprehensive income not showing installment sales for 2013.
4. Prepare statement of financial position as of December 31, 2013.
NOTE: Disregard interest.

Problem 9-4
Edward, Inc. uses the installment method of gross profit recognition. The following table pertains to its
operations from 2011 to 2013:
______________________________________________________________________________
2011 2012 2013
______________________________________________________________________________
Installment sales P50,000 P80,000 (7)
Cost of installment sales(1) (5) 91,800
Gross profit (2) (6) 28,200
Gross profit percentage (3) 25% (8)
2011 sales (4) 25,000 10,000
2012 sales 20,000 50,000
2013 sales 45,000
Realized gross profit 1,100 10,500 (9)
______________________________________________________________________________

Required : Complete the above table.

Problem 9-5
The following table pertains to Jacob, Inc. which uses the cost recovery method for all installment sales.
______________________________________________________________________________
2011 2012 2013
______________________________________________________________________________
Installment sales P92,000 P103,000 (1)
Cost of installment sales(2) 62,830 74,750
Gross profit percentage 36% (3) 35%
2011 sales 27,200 48,300 12,200
2012 sales 36,600 (4)
2013 sales 43,450
Realized gross profit on
instlalment sales (5) (6) 19,250
______________________________________________________________________________

Required: Complete the above table.

CHAPTER 10

Problem 10-1
The Builders COnstruction Company contracted to construct a building for P450,000. Construction began
in2012 and the project was completed in 2013. Cost information for the project is as follows:
______________________________________________________________________________
2012 2013
______________________________________________________________________________Costs
incurred P200,000 P120,000
Estimated costs to complete 100,000 -0-
______________________________________________________________________________
Builders uses the percentage-of-completion method for recognizing income on the contract.

Required:
(a) Determine the amount of income that the company should recognize in 2012 and 2013.
(b) Prove the amount of income you have computed in (a) by computing the total income on the
contract and comparing it with the incomes you have computed in 2012 and 2013.
(c) Prepare the journal entries required at the end of each year to recognized that year's income.

Problem 10-2
R. Ramos Construction Company began operations on January 1, 2013. During the year, R. Ramos
entered into a contract with LUE Company to construct a manufacturing facility. At thr time, R. Ramos
estimated that is would take five yrs. to complete the facility at a total cost of P4,800,000. The total
contract price for the construction of the facility is P5,800,000.

During 2013 R.Ramos incurred P1,250,000 in construction costs related to the project. Because of rising
material and labor costs, the estimated cost to complete the contract at the end of 2013 is P3,750,000.
LUE was billed and paid 30% on the contract price in acordance with the contract agreement.

Required:
Prepare schedules to compute the amount of grss profit to the recognized for the year ended December
31,2013, and the amount to beshown as "cost of uncompleted contract in excess of related billings" or
"billings on uncompleted contracts in excess of related costs" at December 31, 2013, under each of the
following methods:
(a) Zero Profit Mettohd
(b) Percentage-of-completion method.
Provide supporting computations.

Problems 10-3
PP Construction Company has contracted to buid an office building. The construction is scheduled to
brgin on January 1, 2010, and the estimated time of completionis Julyy 1, 2013. The building cost is
estimated to be P50,000,000 and this will be billed at P55,000,000. The following data relate to the
construction period.
______________________________________________________________________________
2010 2011 2012 2013
______________________________________________________________________________
Cost to date P15,000,000 P25,000,000 P35,000,000 P50,000,000
Estimated cost tocomplete 35,000,000 25,000,000 15,000,000 -0-
Progress billings to date 7,000,000 20,000,000 35,000,000 55,000,000
Cash collected to date 7,000,000 18,000,000 30,000,000 55,000,000
______________________________________________________________________________

Required:
(a) Compute the estimated income for the year 2012 and 2013.
(b) Prepare the necessary journal entries for PP Construction Company for the year 2012 and 2013.

Problem 10-4
LL Construction Company recognizes income under the percentage-of- completion method on its long-
term contracts. During 2011, the company entered in a fixed-price contract to construct a bridge for
P15,000,000. Contract costs incurred and estimated costs to complete the bridge were:
______________________________________________________________________________
CUMULATIVE ESTIMATED
CONTRACT COSTS INCURRED COSTS TO COMPLETE
At Dec.31,2011 P1,000,000 P8,000,000
At Dec.31,2012 5,500,000 5,500,000
At Dec.31,2013 10,000,000 2,000,000
______________________________________________________________________________

Required:
(a) Prepare a scheduleto determine the estimated percentage of completion the end of each year.
( Round percentage to the nearest two decimal points.)
(b) Perpare a schedule to determine the amount of income to be recognized each year.
(c) Prepare journal entriesto record transactions for 2011 using the percentage-of-completion method,
assuming that LL billed its client P1,325,000 in 2011 which P1,200,000 has been collected by the end of
the year.

Problems 10-5
GG mall builders was recently awarded a P14,000,000 contract to construct a shopping mall for Rustan
Inc. GG Mall Builders estimates it will take 42 months to complete the contract. The company uses the
cost-to-cost method to estimate profits.

The following information details the actual and estimated costs for the year 2010-2013:
______________________________________________________________________________
YEAR ACTUAL COST ESTIMATED COST
CURRENT YEAR TO COMPLETE
______________________________________________________________________________
2010 P6,500,000 P6,800,000
2011 3,300,000 3,900,000
2012 2,400,000 1,900,000
2013 1,700,000 -0-
______________________________________________________________________________

Required:
1. Compute the revenue,cost, and gross profit to be recognized for each years 2010-2013 under the
percentage-of-completion method.
2. Give the journal entries for each of the years 2010- 2013 to record the information from (1).

CHAPTER 11

Problem 11-1
On January 2, 2013, Mr. A. Cion entered into a franchise agreement with Jolibi, Inc. to sell JOlibi
products. The agreement provides of an initial franchise fee of P20,000,000, payable as follows:
P12,000,000 cash to be paid upon signing of the contract, and the balance in four equal annual
payments every December 31. Mr. A. Cion signs 10% interesr-bearing note for the balance. The
agreement further provides that the franchisor will assist the franchisee in locating th business site,
designing and supervision in the construction of the building, and trainig of management and
employees. The agreement also provides taht hte franchisee must pay a continuing franchise fees equal
to 5% of its monthly gross sales.

On July 31, 2013, the franchisor completed the initial services required in the contract at a costs of
P2,000,000. The franchisee commenced the business opertations on November 2, 2013. The gross
salesreported by the franchisee to the franchisor are: November sales, P580,000; and December sssles
P720,000.

Required:
Prepare all entries for 2013 in the books of the franchisor under the following assumptions:
a. The collection of the note is reasonably assured.
b. the collection f the note is not reasonably assured.

Problem 11-2
On January 5, 2013, Ms. Nancy Lee signed a agreement to operate as a franchisee of Street Pizza, Inc. for
an initial franchise fee of P1,600,000. Of this amount P600,000 was paid when the agreement ws signed
and the balance payable in five annual pyments of 200,000 beginning December 31, 2013 Ms. Lee signed
a non- interest bearing note fo the balance. Ms. Lee's credit rating indicates that it can borrow money at
20% interestfor a loan of this type. The present value of an annuity of P1 at 20% for 5 periods is P2.9906.
The contrat includes a continuing francjise feees of 5 % of the franchisee's gross sales, to be collected
monthly.

On November 25, 2013, the franchisor substantially performed the initial services provided in the
contract at a cost of P179,718. The franchise commenced operations on Decemberis P80,000.

Required: Prepare all entries on the books of the franchisor for 2013:
a. Assuming hte collection of the note is reasonably assured.
b. Assuming the collection of the note is not reasonably assured.

Problem 11-3
Mario's Restaurant Inc. franchises its name to diffferent people in Metro Manila The franchise
agreement requires the frachisee to make an initial payment of P1,200,000 and sign a P320,000, non-
interest bearing note on the agreement date. The note is to be paid in annual payments of P80,000,
each beginning one year from the agreement date. Current interest rates
are to be 10%. The franchisor agrees to make market studies, find a location, train the employees,and
perform a few other relatively minor services. The following transactions describe the relationship with
Ms. Sunshine, a franchisee:

2012
July 1 : Entered into franchise agreement.
Sept. 1 : Completed a market study at a cost of P50,000.
Nov.15 : Found suitable location. Service cost, P30,000.

2013
Jan. 10 : Completed training program for employees, cost P50,000.
Feb. 1 : Franchise outlet opened and commenced opertions.
July 1 : Received first annual payment.

Required: Prepare journal entries in the books of Mario's Restaurant, Inc. in 2012 and 2013 to record
the above transactions including adjusting entries at December 31, 2013.

Problem 11-4
Triple G, Inc. sells franchises for fast foods outlets in different pars of Mindanao. One such contract has
been signed on January 10,2013. The agreement provides for an initial franchise fee of P6,000,000 by
the franchisee at the signing of the contract. The franchisor's initial services costs are P2,250,000, to be
incurred uniformly over the six-month period prior to te scheduled opening date of July 15, 2013. No
future payments are to be made by the franchisee, although there will be continuing franchise fees of
P180,000 per year for continuing services to be rendered by the franchiso. The normal return for the
franchisor on continuing operations involving ottter such franchise outlet is 10%.

Required:
Prepare journal entries on the books of the franchisor to record all transactions through July 15,2013.
Support your entries with the necessary computations.

Problem 11-5
Ms. Jasmin Sy purchased a franchise from Goldilock, Inc. The franchise agreement provides an initial
franchise fee of P4,500,000, payable as folows: P1500,000 at the date of signing. The expected date of
signing is January 2, 2013. A continuing fee of 2% of gross sales is also to be paidto the franchisor. Total
sales for the year reported by the franchisee amounts to P2,000,000.

Costs associated with the initial franchise fee ar as follows:

(a) Tilte to kitchen equipment, with a cost os P1,500,000,is to be transferred to the franchisee on the day
the agreement is signed. The fair market value value of the equipment is P1,800,000.
(b) An additional P500,000 fo initial services are incurred on January 18, 2013.

There are no associated continuing costs.

Required:
a. Prepare schedules in good from to determine the timing and amount of revenues through December
31, 2013.
b. Prepare all journal entries on the books of the franchisor to record the transactionsfor the first year of
the contract.