1

On January 1, 2018, Pasay Company entered into a two-year P3,000,000

variable interest rate loan at the prevailing rate of 12%.

On January 1, 2018, Pasay Company entered into a two-year P3, 000,000

variable interest rate loan at the prevailing rate of 12%.
In 2019, the interest rate is equal to the prevailing interest rate at the
beginning of the year.
The principal loan is payable on December 31, 2018 and the interest is
payable on December 31 each year.
On January 1, 2017, Pasay Company entered into a "receive variable, pay
fixed" interest swap agreement with a speculator bank designated as a
cash flow hedge.
The prevailing interest rate on January 1, 2018 is 14% and the present value
of 1 at 14% for one period is .877.
What amount should be reported as interest rate swap receivable on
December 31, 2018?
a. 60,000
b. 52,620
c. 30,000
d. 0

Solution 27-1 Answer b

Since the interest on January 1, 2011 is 14% which is 2% higher than the fixed
rate of 12%, it means that Pasay Company shall receive P 60,000 from the
bank on December 31, 2011. This receivable is recognized as a derivative
asset on December 31, 2010 at present value of P 52,620 as follows:

Interest rate swap receivable 52,620

Unrealized gain-interest swap 52,620
(60,000 x .877)

On December 31, 2011, when the amount of P 60,000 is received from the
bank by Pasay Company, the entry is:

Cash 60,000
Interest swap receivable 52,620
Unrealized gain-interest rate swap 7,380

The unrealized gain on the interest rate swap is then offset against the
interest expense for 2011 as follows:

Unrealized gain-interest rate swap 60,000

Interest expense 60,000
Actually, the entries to record the payment of annual interest for 2011 and
the principal payment are:

Interest expense (3,000,000 x 14%) 420,000

Cash 420,000

Loan payable 3,000,000

Cash 3,000,000

Accordingly, the net interest expense is P 420,000 minus P 60,000 or P360,000

which is equal to the fixed rate of 12% times P3,000,000.

What amount should be reported as interest expense for 2019?

a. 360,000
b. 420,000
c. 390,000
d. 323, 400
Answer
b. 360,000

Solution:
12% x 3,000,000
=360,000
2

Seaside company operates a five-star hotel. The entity makes very detailed
long-term planning. On October 1, 2018, the entity determined that it would
need to purchase 8,000 kilos of Australian lobster on January 1, 2020.

Because of the fluctuation in the price of Australian lobster, on

October 1 ,2010, the entity negotiated a forward contract with a bank for
Seaside to purchase 8,000 kilos of Australian lobster on January 1,2012 at a
price of P9,6000,000. The price of Australian lobster was P1, 200 per kilo on
October 1, 2010. This forward contract was designated as a cash flow
hedge.
The bank has a staff of financial analysts who specialize in
forecasting lobster prices. These analysts are predicting a drop in
worldwide lobster prices between October 1, 2010 and January 1, 2012.

On December 31, 2010, the price of a kilo of Australian lobster is P1,500. On

December 31, 2011 and January 1, 2012, the price of a kilo of Australian
lobster was P1,000. The appropriate discount rate throughout this period is
10%. The present value of 1 at 10% for one period is .91.

1. What is the notional value of the forward contract?

a. 12,000,000
b. 9,600,000
c. 7,200,000
d. 4,800,000

2. What is the derivative asset or liability on December 31, 2010?

a. 2,400,000 asset
b. 2,400,000 liability
c. 2,184,000 asset
d. 2,184,000 liability

3. What is the derivative asset or liability on December 31, 2011?

a. 1,600,000 asset
b. 1,600,000 liability
c. 800,000 asset
d. 800,000 liability
3

Tower Company made the following acquisitions during the year:

A. Purchased for P5,400,000, including appraiser fee of P50,000, a warehouse

building and the land on which it is located.

The land had an appraised value of P2,000,000 and original cost of

P1,400,000. The building had an appraised value of P3,000,000 and original
cost of P2,800,000.

B. Purchased an office building and the land on which it is located for

P7,500,000 cash and assumed an existing P2,500,000 mortgage.

For realty tax purposes, the property is assessed at P9,600,000, 60% of which
is allocated to the building.

What is the total cost of land and building?

4

Bertz Company exchanged a delivery truck costing P1,000,0000 for a parcel

of land. The truck had a carrying amount of P650,000 and a fair value
P500,000
5

On January 1, 2019, Goddess Company purchased a plating machine for

P5,400,000. The entity received a government grant of P400,000 toward the
asset cost. The machine is to be depreciated on a 20% reducing balance
basis over 10 years with residual value of P200,000. The accounting policy is
to treat the government grant as a reduction in the cost of the asset.
6

During the current year, burr company had the following transactions pertaining
to a new office building
7

Rolex Company incurred the following expenditures related to land and building
8
9

Sun comp
10 (refer to 16)
11

Jade Company acquired a new milling machine on April 1, 2012. The

machine has a special component that required replacement before the
end of the useful life. The asset was originally recorded in two accounts,
one representing the main unit and the other for the special component.
Depreciation is recorded by the straight line method and residual value is
disregarded.

On April 1, 2018, the special component is scrapped and is replaced with a

similar component. This new component is expected to have a residual
value of approximately 20% of cost at the end of the useful life of the main
unit, and because of materiality, the residual value will be considered in
calculating depreciation.
What is the total depreciation for 2018?

A. 1,100,000
B. 1,087,500
C. 1,350,000
D. 1,175,000
12
 On June 30, 2019, Louisiana Company reported the following
information:

Equipment at cost 5,000,000

Accumulated depreciation 1,500,000

The equipment was measured using the cost model and depreciated
on a straight line basis over a 10-year period.
On December 31, 2019, the management decided to change the basis
of measuring the equipment from the cost model to the revaluation model.

The equipment had a fair value of P4,550,000 with remaining useful

life of 5 years on December 31, 2019.

1. What amount should be reported as pre tax revaluation surplus on

December 31, 2019?
a. 1,050,000
b. 1,300,000
c. 1,500,000
d. 2,000,000

Cost - June 30, 2019 5,000,000

Accumulated depreciation 1,500,000)
Carrying amount - June 30, 2019 3,500,000
Depreciation from July I to December 31, 2019
(5,000,000/10 x 6/12) (250,000)
Carrying amount - December 31, 2019 3,250,000
Fair value - December 31, 2019 4,550,000
Carrying amount - December 31, 2019 3,250,000
Revaluation surplus - December 31, 2019 1,300,000

2. What amount should be recorded as depreciation of the equipment for

2020?
a. 500,000
b. 910,000
c. 455,000
d. 650,000

(4,550,000 / 5 years) = 910,000

3. What amount should be reported as pretax revaluation surplus on

December 31, 2020?
a. 1,170,000
b. 1,040,000
c. 390,000
d. 845,000

Revaluation surplus – December 31, 2019 1,300,000

Realization of revaluation surplus in 2020
(1,300,000/5 years) 1,300,000 (260,000)
Revaluation surplus - December 31, 2020 1,040,000
13
In 2018, Lepanto Mining Company purchased property with natural
resources for P28,000,000. The property had a residual value of P5,000,000.

However, the entity is required to restore the property to the original

condition at a discounted amount of P2,000,000.
In 2018, the entity spent P1,000,000 in development cost and P3,000,000 in
building on the property.

The entity does not anticipate that the building will have utility after the
natural resources are removed.
In 2019, an amount of P1,000,000 was spent for additional development on
the mine. The tonnage mined and estimated remaining tons are:

Tons extracted Tons remaining

2018 0 10,000,000
2019 3,000,000 7,000,000
2020 3,500,000 2,500,000

1. What amount should be recognized as depletion for 2019?

a. 6,900,000
b. 9,600,000
c. 8,100,000
d. 8,400,000

Purchase price 28,000,000

Estimated restoration cost 2,000,000
Development cost - 2018 1,000,000
Development cost - 2019 1,000,000
Total cost 32,000,000
Residual value ( 5,000,000)
Depletable amount 27,000,000
Tons extracted in 2019 3,000,000
Remaining tons - December 31, 2019 7,000,000
Total estimated output - January 1, 2019 10,000,000
Rate in 2019 (27,000,000 /10,000,000) 2.70
Depletion for 2019 (3,000,000 x 2.70) 8,100,000

2. What amount should be recognized as depletion for 2020?

a. 10,150,000
b. 11,025,000
c. 15,750,000
d. 9,450,000

Tons extracted in 2020 3,500,000

Tons remaining on December 31, 2020 2,500,000
Total estimated output - January 1, 2020 6,000,000
Original depletable amount 27,000,000
Depletion in 2019 (8,100,000)
Remaining depletable amount 18,900,000
New rate in 2020 (18,900,000/6,000,000) 3.15
Depletion for 2020 (3,500,000 x 3.15) 11,025,000
14
On March 31, 2019, Mariel Company purchased the right to remove gravel
from an old rock quarry. The gravel is to be sold as roadbed for highway
construction. The cost of the quarry right was P1,640,000 with estimated
salable rock of 200,000 tons. During 2019, the entity loaded and sold 40,000
tons of rock. On January 1, 2020, the entity estimated that 200,000 tons still
remained. During 2020, the entity loaded and sold 80,000 tons.

1. What amount should be recorded as depletion for 2018?

a. 410,000
b. 328,000
c. 307,500
d. 246,000

Question 1 Answer b
Rate per ton (1,640,000/200,000) 8.20
Depletion for 2019 ( 40,000 x 8.20) 328,000

2. What amount should be recorded as depletion for 2019?

a. 540,000
b. 656,000
c. 524,800
d. 557,600
Question 2 Answer c
Cost of rock quarry 1,640,000
Depletion for 2019 ( 328,000)
Remaining depletable amount 1,312,000
New rate per ton (1,312,000 / 200,000) 6.56
Depletion for 2020 ( 80,000 x 6.56) 524,800
15

At the beginning of the current year, Vorst Company purchased a

mineral mine for P26,400,000 with removable ore estimated at 1,200,000 tons.
After it has extracted all the ore, the entity will be required by law to
restore the land to its original condition at an estimated cost of P2,100,000.
The present value of the estimated restoration cost is P1,800,000.
The entity believed that it will be able to sell the property afterwards
for P3,000,000. During the current year, the entity incurred P3,600,000 of
development cost preparing the mine for production, removed 80,000 tons
of ore and sold 60,000 tons.

What total amount of depletion should be recorded for the current year?
a. 1,920,000
b. 1,440,000
c. 1,940,000
d. 1,455,000

Acquisition cost 26,400,000

Development cost 3,600,000
Estimated restoration cost at present value 1,800,000
Total cost 31,800,000
Residual value (3,000,000)
Depletable amount 28,800,000
Rate per unit (28,800,000/1,200,000) 24
Depletion for the current year (80,000 x 24) 1,920,000
Depletion included in cost of goods sold (60,000 x 24) 1,440,000
16

On January 1, 2018, London Company purchased a large quantity of

personal computers. The cost of these computers was P6,000,000.

On the date of purchase, the management estimated that the computers

would last approximately four years and would have a residual value at
that time of P600,000. The entity used the double declining balance method.

During January 2019, the entity realized that technological advancements

had made the computers virtually obsolete and that they would have to be
replaced. The management changed the remaining useful life of the
computers to two years.

What is the depreciation expense for 2019?

a. 3,000,000
b. 2,400,000
c. 1,500,000
d. 1,200,000

Solution Problem 10-9

Fixed rate (100% / 4 x 2) 50%

Cost 6,000,000
Depreciation for 2018 (50% x 6,000,000) 3,000,000
Carrying amount - January 1, 2019 3,000,000
Residual value (600,000)
Maximum depreciation in 2019 2,400,000

Fixed rate in 2019 (100% / 2 x 2) 100%

17

Frey Company purchased a machine for P4,500,000 on January 1, 2018. The

machine has an estimated useful life of four years and a residual value of
P500,000. The machine is being depreciated using the sum of the years'
digits method.
1. What is the accumulated depreciation on December 31, 2020?
a. 1,600,000
b. 2,800,000
c. 1,200,000
d. 3,150,000

2. What is the carrying amount on December 31, 2020?

a. 2,900,000
b. 2,700,000
c. 1,700,000
d. 1,350,000

Question 2 Answer c
SYD =1 +2+ 3+4=10
Acquisition cost 4,500,000
Less: Accumulated depreciation
2019 (4/10 x 4,000,000) 1,600,000
2020 (3/10 x 4,000,000) 1,200,000 (2,800,000)
Carrying amount - December 31, 2020 1,700,000