MODULE 1 CASH & CASH EQUIVALENTS

LEARNING OBJECTIVES:
1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Account for petty cash funds and cash shortages/overages.
4. Prepare a bank reconciliation.

OVERVIEW
Cash is the most liquid of all company assets. It is what a business generally uses to settle
debts and acquire goods. Cash is generally any currency a business owns. Any currency the
business has at its headquarters, branches, or in its bank accounts is included as part of its
cash account on its financial statements.

Acquiring new knowledge

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www.myaccounting-tutor.com
A synchronous discussion for this lesson will be scheduled on AUGUST 11, 2020 (Tuesday 7:30
– 8:30 AM)

Definition
Cash includes legal tender, bills, coins, checks received but not deposited, and checking and
savings accounts. Cash equivalents are any short-term investment securities that have maturity
periods of 90 days or less. These include bank certificates of deposit, banker’s acceptances,
Treasury bills, commercial paper, and other money market instruments.

Cash is the
► Most liquid asset.
► Standard medium of exchange.
► Basis for measuring and accounting for all other items.
► Current asset.

Examples: coin, currency, available funds on deposit at the bank, money orders, certified
checks, cashier’s checks, personal checks, bank drafts and savings accounts.

Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so near their maturity that they present insignificant risk of changes in interest rates.

Examples: Treasury bills, commercial paper, and money market funds.

Restricted Cash
When material in amount:
• Segregate restricted cash from “regular” cash.
• Current assets or non-current assets
Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3)
compensating balances.

Bank Overdrafts
When a company writes a check for more than the amount in its cash account.
• Generally reported as a current liability.
• Offset against cash account only when available cash is present in another account in
the same bank on which the overdraft occurred.

Summary of Cash-Related Items

Cash Controls
Management faces two problems in accounting for cash transactions:
1. Establish proper controls to prevent any unauthorized transactions by officers or
employees.
2. Provide information necessary to properly manage cash on hand and cash
transactions.

Petty Cash Fund System

Petty cash, also known as imprest cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees
for small purchases of office supplies, and numerous similar items.
The accounting procedures for petty cash fund are as follows:

1. Petty cash fund is establish -Record 300 transfer of funds to petty cash:

Petty Cash 300

Cash 300

2. Disbursement out of the petty cash fund

No entries are recorded - Petty cash custodian obtains signed receipts from each
individual to whom he or she pays cash.

Replenishment of petty cash disbursements

3. Custodian receives a company check to replenish the fund.

Office Supplies Expense 42

Postage Expense 53
Entertainment Expense 76
Cash Over and Short 2
Cash 173

To decrease the fund

4. If the company decides that the amount of cash in the petty cash fund is excessive by
50, it lowers the fund balance as follows.

Cash 50
Petty cash 50

5. Adjustment for unreplenished fund at reporting date

When preparing financial statements, any unreplenished petty cash fund should be
adjusted in order not to overstate cash and not to understate expenses.
The adjusting entry is as follows:

Various expense accounts xx

Cash shortage or overage xx
Petty cash fund xx

The cash shortage or overage account (receivable to custodian) is debited when there is
shortage, and credited when there is an overage.

Physical Protection of Cash Balances

Company should
➢ Minimize the cash on hand.
➢ Only have on hand petty cash and current day’s receipts.
➢ Keep funds in a vault, safe, or locked cash drawer.
➢ Transmit each day’s receipts to the bank as soon as practicable.
➢ Periodically prove (reconcile) the balance shown in the general ledger.
 Bank Reconciliation
One of the most common cash control procedures is the bank reconciliation. In
business, every bank statement should be promptly reconciled by a person not
otherwise involved in the cash receipts and disbursements functions. The reconciliation
is needed to identify errors, irregularities, and adjustments for the Cash account. Having
an independent person prepare the reconciliation helps establish separation of duties
and deters fraud by requiring collusion for unauthorized actions.

Using Bank Accounts

To obtain desired control objectives, a company can vary the number and location of
banks and the types of accounts.
► General checking account
► Demand deposit
► Savings deposit

Bank Reconciliation
Schedule explaining any differences between the bank’s and the company’s records of
cash.
Purpose of Bank Reconciliation
The bank reconciliation process offers several advantages including:
• Detecting errors such as double payments, missed payments, calculation errors etc.
• Tracking and adding bank fees and penalties in the books
• Spot fraudulent transactions and theft
• Keeping track of accounts payable and receivables of the business

Pro forma bank reconciliation statement

Angel Co.
Bank Reconciliation
For the Month Ended Aug. 31, 2021
Balance per books, end P xx Balance per bank statement, end P xx
Add: Credit memos (CM) xx Add: Deposit in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Banks errors xx
Adjusted Balance P xx Adjusted balance P xx

Book - Reconciling Items:

Credit memos – are additions made by the bank not representing deposits
made by the depositor (book), and not yet recorded by the depositor.

Examples of credit memos include:

a. Collections made by the bank on behalf of the depositor.
b. Interest income earned by the depositor.
c. Proceed from loan directly credited or added by the bank to the depositor’s account.
d. Unrolled-over matured time deposits transferred by the bank to the depositor’s
account.

Debit memos – are deductions by the bank not representing checks issued
by the depositor.

Examples of debit memos include:

a. Bank service charges representing bank charges for fees, interest, penalties, and
surcharges.
b. No sufficient funds checks (NSF) – these are checks deposited and already added
by the bank to the account, but subsequent returned because of insufficient funds by
the drawer to pay for the check.
c. Automatic debits, such as when the depositor and the bank agree that the bank will
make automatic payments of bills on behalf of the depositor.
d. Payment of loans which the entity (depositor) agreed to be made out directly from its
bank account.

Book errors – errors committed by the depositor (e.g., erroneous recording in the
books).

Bank – Reconciling Items:

Deposit in transit – sometimes called undeposited collection, recognize as deposit

by the book but not yet credited by the bank. Deposit in transit often occur when
deposits are mailed to the bank, deposits place in a night depository, or deposit made
after the bank cut-off.

Outstanding checks – are checks issued and released to the payee

but not yet encashed with the bank.

Outstanding checks exclude the following:

a. Certified checks – the bank when certifying a checks, automatically
debits the depositors accounts.
b. Stale checks – checks that remains outstanding for a relatively long
period of time, are reverted back to cash, and are excluded from the from
outstanding checks.

Bank errors – errors committed by the bank.

a. Credit memos, debit memos and book errors are referred to as book reconciling
items. The depositors should make reconciling entries for those items.
b. Deposit in transit, outstanding checks and book errors are referred to as bank
reconciling items. The depositors does not make reconciling entries for these items.

Bank Reconciliation: A Step-by-Step Guide

You receive a bank statement, typically at the end of each month, from the bank. The
statement itemizes the cash and other deposits made into the checking account of the
business. The statement also includes bank charges such as for account servicing fees.
Once you’ve received it, follow these steps to reconcile a bank statement:
1. COMPARE THE DEPOSITS
Match the deposits in the business records with those in the bank statement. Compare
the amount of each deposit recorded in the debit side of the bank column of the
cashbook with credit side of the bank statement and credit side of the bank column with
the debit side of the bank statement. Mark the items appearing in both the records.

2. ADJUST THE BANK STATEMENTS

Adjust the balance on the bank statements to the corrected balance. For doing this, you
must add deposits in transit, deduct outstanding checks and add/deduct bank errors.
Deposits in transit are amounts that are received and recorded by the business but are
not yet recorded by the bank. They must be added to the bank statement.

3. ADJUST THE CASH ACCOUNT

The next step is to adjust the cash balance in the business account.
Adjust the cash balances in the business account by adding interest or deducting
monthly charges and overdraft fees.
To do this, businesses need to take into account the bank charges, NSF checks and
errors in accounting.

• Bank charges are service charges and fees deducted for the bank’s processing of
the business’ checking account activity. This can include monthly charges or charges
from overdrawing your account. They must be deducted from your cash account. If
you’ve earned any interest on your bank account balance, they must be added to the
cash account.
• An NSF (not sufficient funds) check is a check that has not been honored by the
bank due to insufficient funds in the entity’s bank accounts. This means that the
check amount has not been deposited in your bank account and hence needs to be
deducted from your cash account records.
• Errors in the cash account result in an incorrect amount being entered or an amount
being omitted from the records. The correction of the error will increase or decrease
the cash account in the books.

4. COMPARE THE BALANCES

• After adjusting the balances as per the bank and as per the books, the adjusted
amounts should be the same. If they are still not equal, you will have to repeat the
process of reconciliation again.

• Once the balances are equal, businesses need to prepare journal entries for the
adjustments to the balance per books.
MODULE # 1 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
CASH & CASH EQUIVALENTS

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before AUGUST 14, 2021

1. Tricia Company provided the following information with respect to cash and cash equivalents at year-end:
Checking account on First Bank 1,200,000
Checking account at Second Bank (500,000)CL
Value added tax account 250,000
Money Order 100,000
IOU from president 75,000ADV
No sufficient fund check 150,000REC
Payroll account 750,000
What total amount should be reported as cash at year-end?
a. 2,375,000 b. 2,300.000 c. 1,875,000 d. 1,800,000
Checking account - First Bank 1,200,000
Value added tax account 250,000
Money order 100,000
Payroll account 750,000
Total cash 2300000

2. The following information has been extracted from the accounting records of the SUNFLOWER COMPANY at
December 31, 2021:
Cash on hand (undeposited sales receipts) 40,800
Certificate of time deposit with maturity of 3 months 1,000,000CE
Customer’s note receivable 40,000NR
Reconciled balance in AA Bank checking account (14,000)CL
Reconciled balance in BB Bank checking account 374,000
Balance in CC savings account 342,400
Customer’s postdated check 54,000REC
Employee travel advances 64,000PREPAYMENTS
Cash in bond sinking fund 48,000NCA
Bond sinking fund investments 323,600INVEST
Postage stamps 17,200PREPAYMENTS

What total amount should SUNFLOWER COMPANY report as ‘’Cash’’ at December 31, 2020?
a. 805,200 b. 757,200 c. 743,200 d. 703,200
Cash on hand (undeposited receipts) 40,800
Reconciled balance in BB Bank 374,000
Reconciled balance in CC Bank 342,400
Total cash 757,200.00

3. Your audit of the December 31,2021 financial statements of Dionisio Corp. reveals the following:
 Current Account at Prime Bank
(30,000) CL
Current Account at Prudent Bank 135,000
Treasury Bills (acquired 3 months before maturity) 300,000
Treasury bills (maturity is December 31, 2022) 1,500,000 STI
Payroll account 390,000
Foreign bank account – restricted (translated using
the December 31, 2021 exchange rate) 2,000,000 NCA
Postage stamps 1,250 PREPAYMENTS
Employees postdated check 4,500 ADV/REC
IOU from the vice-president 8,000 ADV
Credit memo from a supplier for a purchase return 8,100 -AP
Traveler’s check
21,000
Money order 12,900
Petty cash fund (3,000 in currency
and expense receipts for 12,000) 15,000

What amount would be reported as “cash and cash equivalents” in the statement of financial
position on December 31, 2021?
a. 840,050 b. 873,900 c. 849,400 d. 861,900

Current account at Prudent bank 135,000

Treasury bills acquired 3 months before maturity 300,000
Payroll account 390,000
Traveler's check 21,000
Money order 12,900
Petty cash fund 3,000
Total cash & cash equivalents 861900

4. A count of the petty cash fund on January 3, 2021 revealed the following composition:

Bills and coins P 7,300

Vouchers:
December 2020 dates 850
January 2021 dates 200
IOUs (all dated December 2020) 4,200
Employee’s check dated December 27, 2020 2,800
Employee’s check dated January 14, 2021 4,250
Unsigned pay envelope payable to an employee (the envelope
has been opened and the money has been removed) 5,000

The balance of petty cash fund per books is P 15,000.

1. How much is the cash shortage or overage?

 a. 350 b. 400 c. 500 d. 550

2. What is the correct amount of petty cash fund to be shown on the statement of financial position as of December
31, 2020?
a. 9,500 b. 10,300 c. 2,800 d. 5,300

Bills & coins pcf 7,300 cib/sal. Pay

Vouchers:
December 2020 dates 850 Misc. expense 850
January 2021 dates 200 1,050
IOU's adv 4,200 Adv to emp 8,450
Employee check dated December 27,2020 pcf 2,800 CSO/Rec 400
Employee check dated January 14, 2021 adv 4,250 PCF 9700
Per count 19600
Accountability:
Petty cash fund - set up 15,000
Unreleased Payroll 5,000 -20,000
Cash shortage -400

Bills and coins (exclusive of other funds) 2,300 (7,300 - 5,000) Petty cash fund
Employee check dated December 27, 2020 2,800 Setup 15,000 9,700 AJE
Vouchers with January 2021 dates 200 -9,700
Correct petty cash balance 5,300 5,300

5. An examination on the morning of January 2, 2021 by the auditor for the Joseph Company discloses the following
items in the petty cash drawer:

Postage stamps P 220.00

Currency and coins 1,156.60 PCF
IOUS from members of the office staff 1,210.00 *
An envelope containing collections for a gift for a departing
employee, with office names attached 350.00 X
Petty cash vouchers for miscellaneous expenses (including a
PCV for stamps purchased for 450.00) 985.00
Employee's check postdated January 15, 2021 1,500.00 *
Employee's check marked "DAIF" 1,890.00 *
Check drawn by Joseph Company to Petty Cash 3,450.00 PCF
P 10,761.60

The ledger account discloses a 10,500 balance for Petty Cash.

1. How much is the cash shortage or overage as of December 31, 2020?

a. P 308.40 b. P 41.60 c. P 88.40 d. P 658.40

2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31, 2020?
a. P 10,761.60 b. P 1,156.60 c. P 4,606.60 d. P 5,141.60
 Total per count 10,761.60
Accountability:
Set-up 10,500.00
Other funds - collection 350.00
Prepayments - unused stamps 220.00 -11,070.00
Cash shortage -308.40

Currency and coins 1,156.60 Petty cash fund

Replenishment check 3,450.00 Setup 10,500 5,893.40 AJE
Total PCF 4,606.60 -5,893.40
4,606.60
JOURNAL ENTRY:
UNUSED POSTAGE 220
ADVANCE 4,600
MISC.EXP 765
CSO 308.40
PCF 5,893.40

6. Ace De la Paz is reviewing the cash accounting for BBQ, Inc. Ace’s review will focus on the petty cash fund account
for the month ended May 31, 2019. She has collected the following information from BBQ’s bookkeeper for this task.
Petty Cash Fund
1. The petty cash fund was established on May 2, 2019, in the amount of 10,000.
2. Expenditures from the fund by the custodian as of May 31, 2019, were evidenced by approved petty
cash vouchers for the following:
Various office supplies 3,920
IOU from employees 1,200
Shipping Charges 2,298
Miscellaneous Expense 1,526
On May 31, 2019, the petty cash fund was replenished and increased to 12,000; currency and coin in the fund at that
time totaled P756.

1. What is the amount of petty cash shortage?

a. 2,300 b. 11,244 c. 300 d. 0

2. The journal entry to record the replenishment and increase in the petty cash fund includes a credit to
a. Cash of 10,944 b. Cash of 11,244 c. Petty cash fund of 10,944 d. Petty cash fund of 11,244
Office supplies expense 3,920 O.S. exp 3,920
IOU from employees 1,200 Adv 1,200
Shipping charges 2,298 Shipping exp 2,298
Miscellaneous expense 1,526 Misc exp 1,526
Currency & coins 756 CSO/Rec 300
Per count 9,700 PCF 2,000
Accountability: CIB 11,244
Setup -10,000
Cash shortage -300
7. On March 1, Therese Company established an imprest petty cash fund for P 20,000 by writing a check drawn against
the checking account. On March 31, the fund contained the following:

Currency and coins 2,550

Receipts for office supplies 6,000
Receipts for transportation 450

On March 31, the entity wrote a check to replenish the fund. What is the amount of replenishment under the imprest
fund system?
a. 20,000 b. 17,450 c. 17,000 d. 6,450
Currency & coins 2,550
Postage 11,000 Postage 11,000
Office supplies 6,000 O.S. exp 6,000
Transportation 450 Transpo 450
Per count 20,000 CIB 17,450
Accountability -20,000
0

8. Oslo Company provided the following data for the purpose of reconciling the cash balance per book with the cash
balance per bank statement on December 31:
Balance per bank statement 2,000,000
Balance per book 850,000
Outstanding checks (including certified check of P100,000) 500,000
Deposit in transit 200,000
December NSF checks 150,000
(of which P50,000 had been redeposited and cleared by December 27)
Erroneous credit to Oslo account representing 300,000
proceeds of loan granted to another entity
Proceeds of note collected by bank for Oslo, 750,000
net of service charge of P20,000

What is the cash in bank to be reported on December 31?

a. 1,400,000 b. 1,500,000 c. 1,450,000 d. 1,800,000
 Book (CIB) AJE:
Dr. + Cr.- #1 CIB/NR
Unadjusted bal. 850,000 100,000 NSF -2 #2 AR/CIB
Notes collected - 1 750,000
Debit 1,600,000
Less: Credit -100,000
Adjusted balance 1,500,000

Bank - liability
Dr. - Cr. + Dr.- Cr.+
Outstanding checks 400,000 2,000,000 Unadjusted bal. 1 1
Erroneous credit 300,000 200,000 DIT
700,000 2,200,000 Credit
-700,000 Less: Dr.
1,500,000 Adjusted balance

9. Cooper Company provided the following data pertaining to the cash transactions and the bank account for August of
the 2020:

Cash balance per book 1, 830,000

Cash balance per bank statement 3,300,000
Bank service charge 5, 000
Debit memo for printed checks 17, 000
Check No.1113 issued to a supplier enter in the accounting
record as 190, 000 but deducted in the bank statement at an
erroneous amount of
90,000
Stolen check without an authorized signature deducted from 82,000
Cooper’s account by the bank in error

Customer’s check returned due to insufficient balance; and is 80,000

not recorded.
Proceeds from a customer’s promissory note, principal
amount of P890,000 collected by the bank but not taken up in
the book’s record with interest 900, 000
Outstanding checks 680, 000
Deposit in August 31 not recorded by bank until September 1, 700, 000
2020
Proceeds from a bank loan on August 30, 2020 , not
recorded in the accounting period, net of interest
674, 000
What is the adjusted cash in bank?
a. 3,030,000 b. 3,000,000 c. 3.302,000 d. 4,500,000
 Book (CIB)
Dr. + Cr.- CIB/NR
Unadjusted bal. 1,830,000 5,000 Bank charges CIB/INT./LP
Notes collected 900,000 17,000 Dr. memo for printing checks BC/CIB
Loans 674,000 80,000 NSF BC/CIB
Debit 3,404,000 102,000 AR/CIB
Less: Credit -102,000
Adjusted balance 3,302,000

Bank - liability
Dr. - Cr. +
Error ch. 1113 100,000 3,300,000 Unadjusted bal.
Outstanding checks 680,000 82,000 Stolen check
780,000 700,000 DIT
4,082,000 Credit
-780,000 Less: Debit
3,302,000 Adjusted balance

10. You are attempting to determine an apparent cash shortage that you believe resulted from an employee’s theft. You
have assembled the following information for the month of March:
Cash balance per books, March 1 115,963.70
Cash receipts for March, per books 246,475.00
Cash disbursements for March, per books 334,709.10
Cash balance, per bank statement, March 31 15,341.40
Deposit in transit, March 31 9,000.00
Outstanding checks, March 31 2,703.80
Bank service charge for March 92.00

What is the amount of the suspected cash shortage?

a. 5,800 b. 6,350 c. 6,000 d. 5,500
Book Bank
Balance per book, 3/1 115,963.70
Receipts for March 246,475.00
Disbursements for March -334,709.10
Balance per bank, March 31 15,341.40
DIT 9,000.00
Outstanding checks -2,703.80
Bank charges -92.00 BC/CIB
Total 27,637.60 21,637.60
Shortage -6,000.00 REC/CIB
Adjusted balance 21,637.60 21,637.60
11. Knights Company received the bank statement for the month of March. However, the closing balance of the account
was unreadable.
Attempts to contact the bank after hours did not secure the desired information.
Feb 28 book balance 2,669,000
Note collected by bank 800,000
Interest earned on note 87,000
NSF check of customer 170,000
Bank service charge 10,000
Other bank service charges 7,000
Outstanding checks 370,000
Deposit of Feb 28 placed in night
depository 105,000
Check issued by Pirates Company
charged to Knight’s 80,000

What is the cash balance per bank statement?

a. 3,369,000 b. 3,184,000 c. 3,554,000 d. 3,269,000
Book to Bank
Balnce per book 2,669,000 170,000 NSF
Collection by bank 800,000 10,000 BC
Interest on notes 87,000 7,000 Other BC
Outstanding checks 370,000 105,000 DIT
Debit 3,926,000 80,000 Error by bank
Less:credit -372,000 372,000
Unadjusted bank 3,554,000
Bank
Outstanding
checks 370,000 3,554,000 Unadjusted
105,000 DIT
80,000 Error by bank
3,739,000 Credit
-370,000 Less: Debit
3,369,000 Adjusted balance

Book
Balance per book 2,669,000 170,000 NSF
Collection by bank 800,000 10,000 BC
Other
Interest on notes 87,000 7,000 BC
Debit 3,556,000 187,000
Less: Credit -187,000
Adjusted balance 3,369,000
12. Tricia Company reported the following accounts on Dec 31, 2020:
Cash on hand 1,000,000
Petty cash fund 50,000
Metrobank current account 2,000,000
DBP current account 1,500,000
BDO current account (overdraft) (200,000)
BSP treasury bill – 150 days 3,000,000
BPI time deposit – 60 days 2,000,000
Bond sinking fund 2,500,000

* The cash on hand included a customer postdated check of 150,000 and postal money order of 50,000
* The petty cash fund included unreplenished petty cash vouchers for 10,000 and an employee check for
5,000 dated January 31, 2021.
* The BPI time deposit is set aside for acquisition of land to be made in early January 2021.
* The bond sinking fund is set aside for payment of bond payable due December 30, 2021.

What is the total amount of cash and cash equivalents?

a. 4,335,000 b. 6,885,000 c. 4,285,000 d. 4,135,000
Cash on hand (1,000,000 - 150,000) 850,000
Petty cash fund (50,000-10,000-5,000) 35,000
Metro bank - current 2,000,000
DBP current 1,500,000
Bondsinking fund 2,500,000
Cash and cash equivalents 6,885,000

13. The petty cash fund (imprest balance of 45,000) of Joseph Company on December 31, 2020 is composed of the
following:

Coins and currencies P 17,000

Petty cash vouchers:
Postage Stamps 1,000
Supplies 2,000
Cash advances to employees 3,000
Employee's check returned by bank marked DAIF 4,000
Replenishment check drawn by the company payable
to the order of Maria Cortez,
petty cash custodian 18,000
Unused postage 500
Check payable to Meralco, for payment of the
company's utility bills 3,500
A sheet of paper with names of employees together with
contribution for a birthday gift of a
co-employee in the amount of 4,500
Total P 53,500

1. How much is the cash shortage or overage as of December 31, 2020? Indicate whether shortage or overage.
a. Overage of 4,000 b. Overage of 4,500 c. Shortage of 4,000 d. 0

2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31, 2020?
a. 38,000 b. 20,000 c. 35,000 d. 17,000
 P - 13 Postage 500
1. Postage exp 500
Per count 53,500 Supp exp 2,000
Accountablity: Adv 7,000
Setup 45,000 PCF 10,000
Prepayments 500
Contribution for birthday 4,500
Meralco bills 3,500 53,500
Shortage 0
PCF
2. Setup 45,000 10,000 AJE
Currencies and coins 17,000 -10,000
Replenishment check 18,000 35,000
Total 35,000

14. You are auditing the cash in bank account of Pamela Manufacturing Company as of December
31, 2020.
Your examination revealed the following:

From the bank statement:

Balance, December 1, 2020 P 876,750
Deposits (20) 9,153,760
Check (64) plus debit memos (8,524,300)
Service charges for new checks ( 2,250)
Balance, December 31, 2020 P 1,503,960
From the company’s records:
CASH
Nov. 1 652,070 Nov. 30 CD 6,654,410
Nov. 30 CR 6,824,290 Dec. 1 – Bank reconciliation 38,400
Dec. 31 CR 9,198,720 Dec. 31 CD 8,574,610
CD – Cash disbursements
CR – Cash receipts

Your review of last month’s bank reconciliation and the current bank statement reveals the
following.
1. Outstanding checks: November 30, 2020 P254,720
December 31, 2020 335,610
2. Deposit in transit: November 30, 2020 164,220
December 31, 2020 209,180
3. Check no 359 for Office Repairs was written for P6,950 but recorded in the cash
disbursements journal as P9,650. The bank deducted the check as P6,950. The error happened
in November and is not yet recorded as of December 31.
4. A check written on the account of the Pamplona Company for P5,830 was deducted by the
bank from the Pamela’s account.
5. Included with the bank statement was debit memorandum dated December 31 for P24,750
for interest on a note(loans) taken out by the Pamela Manufacturing Company on November 30.
6. The service charge for the new checks has not been recorded.
7. The November 30 bank reconciliation showed as reconciling items a service charge of
P3,500 and a customer’s DAIF check for P34,900.

1. How much is the audit adjusted balance of Receipts as of December 31?

a) 9,198,720 b) 9,918,270 c) 9,891,720 d) 9,189,270 e) none of the above
2. How much is the audit adjusted balance of Disbursements as of December 31?
a) 8,601,610 b) 8,610,601 c) 8,601,601 d) 8,610,610 e) none of the above
3. Which is to be included in the audit adjusting entries?
a) Dr: Cash in Bank 2,700 b) Cr: Cash in bank 2,200 c) Dr: Interest expense 24,750
d) None of the above

December
Nov. 30 Receipts Disbursement Dec. 31
Unadjusted bank balance 876,750 9,153,760 8,526,550 1,503,960
O.C. - Nov -254,720 -254,720
Dec 335,610 -335,610
DIT - Nov 164,220 -164,220
Dec 209,180 209,180
Check of Pamplona -5,830 5,830
Adjusted balances 786,250 9,198,720 8,601,610 1,383,360
December
Nov. 30 Receipts Disbursement Dec. 31
Unadjusted book balance 821,950 9,198,720 8,613,010 1,407,660
Error in recording Ch 359 2,700 2,700 CIB/REPAIS EXP
Bank charges:
Nov -3,500 -3,500
Dec 2,250 -2,250 BC/CIB
DAIF - Nov -34,900 -34,900
Interest on loans(NP) 24,750 -24,750 INT EXP/CIB
Adjusted balances 786,250 9,198,720 8,601,610 1,383,360
Undeposited collection
Shortage

2. Exp
Currency and coins Advnces
Undeposited collection CSO
PCF
MODULE 2 RECEIVABLES

LEARNING OBJECTIVES:
1. Define receivables and identify the different types of receivables.
2. Explain accounting issues related to recognition of accounts receivable.
3. Explain accounting issues related to valuation of accounts receivable.
4. Explain accounting issues related to recognition of notes receivable.
5. Explain accounting issues related to valuation of notes receivable.
6. Understand special topics related to receivables.
7. Describe how to report and analyze receivables.

OVERVIEW
A receivable is money owed to a business by its clients and shown on its balance sheet as an
asset. It is one of a series of accounting transactions dealing with the billing of a customer for
goods and services that the customer has ordered. Accounts receivable is an asset which is the
result of accrual accounting. In this case, the firm has delivered products or rendered services
(hence, revenue has been recognized), but no cash has been received, as the firm is allowing
the customer to pay at a later point in time.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com
A synchronous discussion for this lesson will be scheduled on AUGUST 11, 2021

Trade receivables are the total amounts owing to a company for goods or services it has sold,
which are reflected in invoices that the company has issued to its clients, but has not yet
received payments for. Trade receivables are also known as “Account Receivables”.

Accounts receivable (A/R) are assets arising from the sale of goods and/or the rendering of
services on open account in the ordinary course of business, the balance on balance sheet date
showing the amount of revenue resulting from sales on open account and not yet collected at
the end of the accounting period. An open account is an unsecured loan to a customer arising
through credit sales evidenced by a delivery note and invoice, subject to usual trade customs or
specific terms as to discount and payment period. All accounts receivable are trade
receivables.

Notes receivable (N/R) are receivables in the form of unconditional written promises
(promissory notes) to pay specified sums of money at future dates, usually with interest at a
specific rate, arising from cash advances, customers’ purchases on credit, the refinancing of
amounts coming due on accounts receivable, or when money is otherwise loaned. Only the
principal amount of a note is recorded as a note receivable; any interest owed as a result of the
note is recorded as accrued interest.

Non-trade receivables - are the amounts due from third parties for transactions outside its
primary course of business.

Examples of non-trade receivables:

1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits to cover potential damages or losses.
 4. Deposits as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against:
a) Insurance companies for casualties sustained.
b) Defendants under suit.
c) Governmental bodies for tax refunds.
d) Common carriers for damaged or lost goods.
e) Creditors for returned, damaged, or lost goods.
f) Customers for returnable items (crates, containers, etc.).

Financial Statement Presentation

Trade and non-trade receivables that are currently collectible are combined and presented on
the statement of financial position in a single line item described as “Trade and other
receivables” and is presented as current asset.

Initial measurement
Receivables are initial recognized at fair value plus transaction cost. However, trade
receivables that do not have a significant financing component are measured at their
transaction price in accordance with PFRS 15 Revenue from contracts with customers.
Transaction price is “the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods and services to a customer, excluding amounts
collected on behalf of third parties(e.g., some sales taxes).” (PFRS 15. Appendix A)

Subsequent measurement
Accounts receivable are subsequently measured at recoverable historical cost (or net
realizable value).

Recoverable historical cost (net realizable value) represents the amount of cash expected to be
recovered from contractual cash flows of receivable. Net realizable value is normally computed
as the transaction price minus any reduction for uncollectibility or impairment.
Estimating the recoverable historical cost of accounts receivable
When estimating recoverable historical cost (net realizable value) of trade receivable, an entity
considers the following:
a. Sales discounts – discounts available to customers, the amount of receivable
may not be wholly recoverable when it is probable that customers
will avail of the cash discount in the future.
b. Doubtful accounts – doubtful accounts expense is recognized when loss becomes
probable and can be measured reliably. There are three methods of estimating doubtful
accounts, namely: (a) percentage of net credit sales; (b) percentage of receivables; and
(c) aging of receivables.

Percentage-of-Sales Approach
• Percentage based upon past experience and anticipate credit policy.
• Achieves proper matching of costs with revenues.
• Existing balance in Allowance account not considered.

Percentage-of-Receivables Approach
• Not matching.
• Reports receivables at net realizable value.
Companies may apply this method using
► one composite rate, or
► an aging schedule using different rates.

Impairment Evaluation Process

Companies assess their receivables for impairment each reporting period. Possible loss events
are:
1. Significant financial problems of the customer.
2. Payment defaults.
3. Renegotiation of terms of the receivable due to financial difficulty of the
customer.
4. Decrease in estimated future cash flows from a group of receivables since initial
recognition, although the decrease cannot yet be identified with individual assets
in the group.

A receivable is considered impaired when a loss event indicates a negative impact on

the estimated future cash flows to be received from the customer. The impairment
assessment should be performed as follows.
1. Receivables that are individually significant should be considered for impairment
separately.
2. Any receivable individually assessed that is not considered impaired should be
included with a group of assets with similar credit-risk characteristics and
collectively assessed for impairment.
3. Any receivables not individually assessed should be collectively assessed for
impairment.

Notes receivable (N/R) are receivables in the form of unconditional written promises
to pay specified sums of money at future dates, usually with interest at a specific rate, arising
from cash advances, customers’ purchases on credit, the refinancing of amounts coming due on
accounts receivable, or when money is otherwise loaned.

Claims supported by a formal promissory note.

• A negotiable instrument.
• Maker signs in favor of a Payee.
• Interest-bearing (has a stated rate of interest) OR
• Zero-interest-bearing (interest included in face amount).

Generally originate from:

• Customers who need to extend payment period of an outstanding receivable.
• High-risk or new customers.
• Loans to employees and subsidiaries.
• Sales of property, plant, and equipment.
• Lending transactions (the majority of notes).
Initial measurement
Receivables are initially recognized at fair value plus transaction cost. For
measurement purposes, receivables are classified into the following:
a. Short-term receivable
b. Long-term receivable that bears a reasonable interest rate.
c. Long-term receivable that bears no interest (non-interest bearing)
d. Long-term receivables that bears an unreasonable interest rate (below-market interest
rate).

Valuation of Notes Receivable

• Short-Term reporting parallels that for trade accounts receivable.
• Long-Term - impairment tests are often done on an individual assessment basis.
Impairment losses are measured as the difference between the carrying value of
the receivable and the present value of the estimated future cash flows
discounted at the original effective-interest rate.

Summary of initial measurement of notes receivable:

Type of receivable Initial measurement
1. Short-term receivables Fair value plus transaction cost
(trade and nontrade Fair value is equal to:
collectible within a. Face amount; or
one year b. Present value (when the transaction contains significant
financing component); or
c. Transaction price with allowed practical expedient (for
trade receivables).

2. Long term receivables Fair value plus transaction cost

bearing reasonable Fair value is equal to face amount
interest rate

3. Long term non-interest Fair value plus transaction cost

bearing receivables Fair value is equal to the present
value of future cash flows from the
receivable.

4. Long term receivable Fair value plus transaction cost

bearing unreasonable Fair value is equal to the present
interest rate (below- value of future cash flows from
market interest rate) the receivables.

➢ When the cash price equivalent of the non-cash asset given up in exchange for the
receivable is determinable, the fair value of the receivable is equal to the cash price
equivalent, except when the practical expedient allowed by PFRS 15 is applicable.

Subsequent Measurement
Receivable initially measured at face amount are subsequently measured at
recoverable historical cost (net realizable value).

Receivable initially measured at present value are subsequently measured at

amortized cost.
 Amortized cost is the “amount at which the financial asset or financial liability is
measured at initial recognition minus principal repayments, plus or minus the cumulative
amortization using effective interest method of any difference between the initial amount
and maturity amount and, for financial assets adjusted for any loss allowance.” (PFRS 9.
Appendix A)

Derecognition of Receivables
Company may transfer (e.g., sells) a receivables to another company for cash.
Reasons:
• Competition.
• Sell receivables because money is tight.
• Billing / collection are time-consuming and costly.

Transfer accomplished by:

1. Secured borrowing
2. Sale of receivables

Sale without Guarantee

• Purchaser assumes risk of collection.
• Transfer is outright sale of receivable.
• Seller records loss on sale.
• Seller use Due from Factor (receivable) account to cover discounts, returns, and
allowances.

Sale with Guarantee

• Seller guarantees payment to purchaser.
• Transfer is considered a borrowing—sometimes referred to as a failed sale.

Summary of transfers
Determining whether receivables that are transferred can be derecognized and accounted for as
a sale is based on an evaluation of whether the seller has transferred substantially all the risks
and rewards of ownership of the financial asset.

Presentation and analysis

General rule in classifying receivables are:
1. Segregate and report carrying amounts of different categories of receivables.
2. Indicate receivables classified as current and non-current in the statement of financial
position.
3. Appropriately offset the valuation accounts for receivables that are impaired, including a
discussion of individual and collectively determined impairments.
4. Disclose the fair value of receivables in such a way that permits it to be compared with
its carrying amount.
5. Disclose information to assess the credit risk inherent in the receivables by providing
information on:
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from receivables.

Analysis of Receivables

Accounts receivable turn over = Net Sales__________

Average trade receivable (net)
This Ratio used to:
• Assess the liquidity of the receivables.
 • Measure the number of times, on average, a company collects receivables during the
period.

Loans Receivable
Loan receivable is similar to notes receivable in that it is also a claim supported by formal
promise to pay a certain sum of money at specific future date. Loans receivable is more
appropriately used by the financing companies.

Origination cost and fees

Lenders usually incur cost in originating loans. These cost are either direct origination cost
(transaction cost) or indirect origination cost.

The lenders recover these cost from borrowers by charging them origination fees. These fees
include compensation for activities such as evaluating the borrower’s financial condition,
evaluating and recording guarantees, collateral securities and other arrangements, negotiating
the terms, processing documents and closing the transaction.

Accounting for origination cost and fees

Direct origination cost and origination fees are included in the measurement of loans
receivables.

Direct origination cost are initially added to the carrying amount of the loans amortized over
the term of the loans.

Origination fees charged are initially deducted from the carrying amount of loans.

Indirect origination cost are not included in the measurement of receivables, and are
expense immediately.

Initial measurement of loans receivable

The initial carrying amount of loans receivable is the initial cash outlay (Principal loans + Direct
origination cost –origination fee charge), which is equal to the present value of the loans.

Subsequent measurement
Loan receivable initially measured at present value are subsequently measured at amortized
cost.

Impairment Evaluation Process

A financial asset is credit-impaired when one or more events that have a detrimental impact on
the estimated future cash flows of that financial asset have occurred.

Evidence that a financial asset is credit-impaired includes observable data about the following
events:
a) Significant financial difficulty of the issuer or obligator.
b) Breach of contract, such as a default or delinquency in interest or principal payments.
c) The lender for economic or legal reasons relating to the borrowers financial difficulty,
granting of the borrower a concession that the lender would not otherwise consider.
d) It becoming probable that the borrower will enter bankruptcy or other financial
reorganization;
 e) The disappearance of an active market for that financial asset because of the financial
difficulties; or
f) The purchase or origination of a financial asset at a deep discount that reflects the
incurred credit losses.

The impairment loss is computed as the difference between:

a. The asset’s gross carrying amount, and
b. The present value of estimated cash flows discounted at the original effective interest
rate.

The carrying amount of the loan or note receivable before impairments includes any interest
receivable accrued up to the date the loss event has been determined.

The original effective interest rate is the effective interest rate on the date the receivable was
initially recognized.

Impairment loss is deducted from the carrying amount of the impaired loan or note receivable
either directly or through an allowance account.

After impairment, interest income is computed by multiplying the original effective interest rate
by the net carrying amount of the impaired receivable.
MODULE # 2 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
RECEIVABLES
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before AUGUST 14, 2020 (Friday)

1. Angel reported the “receivables” account with a debit balance of 2,000,000

The allowance for doubtful accounts had a credit balance of 60,000 on the same date
Subsidiary details revealed the following:
Trade accounts receivables 800,000
Trade notes receivables 200,000
Advances payments for purchase of merchandise 150,000
Cash advance to subsidiary 300,000
Claims from insurance company 30,000
Subscription receivables due in 60 days 150,000
Accrued interest receivables 90,000

Compute the amount to be presented as “trade and other receivables” under the current assets
a. 1,036,000 b. 1,600,000 c. 1,306,000 d. 1,360,000
Trade accounts receivables 800,000
Trade noted receivables 200,000
Advances payments for purchase of merchandise 150,000
Claim from insurance company 30,000
Subscription receivables due in 60 days 150,000
Accrued interest receivables 90,000
Allowance for Doubtful accounts -60,000
Trade and other receivables (net) 1,360,000
2. The audit of Angel Corporation for the year ended December 31, 2019 revealed that the Accounts Receivable
account consists of the following:
Trade accounts receivable (current) 3,440,000
Past due trade accounts 640,000
Uncollectible accounts to be written off 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments – at cost
The consignee sold goods costing 96,000 for 160,000.
A 10% commission was charged by the consignee and
Remitted the balance to Angel. The cash was received in
January 2020. 320,000
Total 4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of 80,000. It is estimated that
an allowance should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is
bonded. The company has not provided yet for the bad debt expense.
 1. Trade accounts receivable:
a. 4,080,000 b. 3,440,000 c. 4,464,000 d. 3,584,000
Trade accounts receivable (current) 3,440,000
Past due trade accounts 640,000
Notes receivable dishonored 240,000
Consignment goods already sold (P160,000 x 90%) 144,000
Adjusted trade receivables 4,464,000
2. Allowance for doubtful accounts
a. 204,000 b. 216,000 c. 172,000 d. 179,200
Adjusted trade receivables 4,464,000
Less due from consignee -144,000
Basis of allowance for doubtful accounts 4,320,000
Bad debt rate 5%
Required allowance fordoubtful
doubtfulaccounts
accounts 216,000
3. Doubtful accounts expense
a. 264,000 b. 220,000 c. 252,000 d. 227,200
Required allowance for doubtful accounts 216,000
Add write-off of uncollectible accounts 128,000
Total 344,000
Less allowance account before adjustment -80,000
Doubtful accounts expense 264,000

3. Badeth Enterprise provided the following data relating to accounts receivable for 2019:
Accounts Receivable, January 1 850,000
Credit Sales 2,500,000
Sales Return 80,000
Accounts Written off 60,000
Collections from customer 2,125,000
Allowance for sales return 50,000
Estimated uncollectible accounts at 12/31 per aging 110,000

What amount should Badeth report as net realizable value of accounts receivable on December 31, 2019?
a. 1,350,000 b. 1,225,000 c. 1,085,000 d. 925,000
Gross receivable 1,085,000
Less: Allowance for D.A. 110,000
Allowance for sales returns 50,000 -160,000
Net realizable value 925,000

Accounts Receivable
beg. 850,000 80,000 Sales return SRA/AR
AR/Sales Cr. Sales 2,500,000 60,000 W/O Allow/AR
2,125,000 collection Cash/AR
Debit 3,350,000 2,265,000
Less credit -2,265,000
Ending 1,085,000
4. The financial statements of Bimbo International reported the following accounts.

Accounts Receivable – January 1, 2019 1,200,000

Allowance for Uncollectible Accounts – January 1, 2019 60,000

2019 Sales 10,000,000

Collections 8,720,000

The cash collected from customers included a 20,000 recovery from a customer whose account was written off in
prior year. On November 15, a customer settled his overdue account by issuing a 15%, 4-month note for 400,000.
During 2019, account of 100,000 were written off as worthless.

Analysis of the account receivable at December 31, 2019 revealed that 600,000 were considered past due.
Management’s estimate of probable loss on past due accounts is 20% and on current accounts at 5%.

1. Determine the adjusted balance of allowance for uncollectible accounts at December 31, 2019.
a. 50,000 b. 70,000 c. 120,000 d. 190,000
Accounts Receivable 2,000,000
Past due 600,000 x 20% = 120,000
Current 1,400,000 x 5% = 70,000
Required allowance for Doubtful accounts 190,000
2. Determine the uncollectible accounts expense for 2019.
a. 140,000 b. 110,000 c. 230,000 d. 210,000
Allowance for D.A.
Write off 100,000 60,000 Beg.
20,000 Recovery
? 210 D.A. expense
290,000 Credit
-100,000 Less: Debit
190,000 Ending - required allowance
3. Determine the December 31, 2019 Accounts Receivable
a. 800,000 b. 1,200,000 c. 1,920,000 d. 2,000,000
Accounts Receivable
Beg. 1,200,000 8,720,000 Collections Cash/AR
Sales 10,000,000 AR/Allow; Cash/AR
Recovery 20,000 100,000 Write off Allow/AR
400,000 Notes receivable NR/AR
Debit 11,220,000 9,220,000
Less credit -9,220,000
Ending 2,000,000
4. Determine the December 31, 2019 amortized cost of accounts receivable.
a. 1,010,000 b. 1,390,000 c. 1,810,000 d. 2,190,000
Accounts Receivable 2,000,000
Less: Allowance for D.A. -190,000
Net realizable value 1,810,000
5. NR - LT (Interest bearing SR=ER)
Hacienda Santibanez sold a tract of land with a carrying amount of P3,000,000 to Hacienda Portalejo on July 1,
2018. 1,200,000 was collected on the date of sale, and the balance of P2,800,000 is collectible in four annual
installments P902,500, consisting of principal and 11% interest on the unpaid balance. The first annual installment is
due July 1, 2019.

What amount of notes receivable should be classified as current assets on December 31, 2019?
a. 594,500 b. 659,895 c. 781,198 d. 902,500

2. How much should be the interest income for the year December 31, 2019?
a. 121,303 b. 154,000 c. 275,303 d. 308,000
Interest Income 2019:
Jan- June (308,000 x 6/12) = 154,000
July - Dec (242,605 x 6/12) = 121,303
Total 275,303
3. What amount of notes receivable should be classified as noncurrent assets on December 31, 2019?
a. 2,800,000 b. 1,210,500 c. 1,545,605 d. 2,205,500
NR - LT (Interest bearing; SR=ER)
Initial: Face Amount
Subsequent: Face Amount - current/non-current
Annual Interest Carrying
Date Payment 11% Principal Amount
7/1/18 2,800,000
7/1/19 902,500 308,000 594,500 2,205,500 12/31/19
7/1/20 902,500 242,605 659,895 1,545,605
Current Non-current
6. NR: LT (Interest bearing SR<ER)
On December 31, 2019, Green Company finished consultation services and accepted in exchange a promissory note
with a face value of P600,000, a due date of December 31, 2022, and a stated rate of 5%, with interest receivable at
the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable.
Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The
following interest factors are provided:
Interest Rate
Table Factors For Three Periods 5% 10%
Future Value of 1 1.15763 1.33100
Present Value of 1 .86384 .75132
Future Value of Ordinary Annuity of 1 3.15250 3.31000
Present Value of Ordinary Annuity of 1 2.72325 2.48685

1. What is the present value of the note on December 31, 2019?

a. 450,792 b. 530,000 c. 600,000 d. 525,398

2. What is the amount of discount on notes receivable on December 31, 2019?

a. 75,000 b. 52,062 c. 74,602 d. 81,697

3. What is the amount of discount amortized during December 31, 2021?

a. 0 b. 22,540 c. 24,794 d. 27,268
 4 What is the amount of interest income during December 31, 2021?
a. 52,540 b. 54,794 c. 57,268 d. 0
NR: LT (Interest bearing; SR < ER )
Initial: Present Value
Subsequent: Amortized cost
Interest income: CA of notes x ER
Initial:
Prin (600,000 x .75132) 450,792
Interest (30,000 x 2.48685) 74,606
Initial CA / PV 525,398 (1)

Face amount 600,000

PV -525,398
Discount 74,602 (2)

Subsequent: Amortized cost

FA x SR CA x ER Carrying
Date SR 5% ER 10% Amort. Amount
12/31/19 525,398
12/31/20 30,000 52,540 22,540 547,938
12/31/21 30,000 54,794 24,794 572,732
12/31/22 30,000 57,268 27,268 600,000
7. NR: LT (non-interest bearing;lumpsum)
On January 2, 2019, PlayPoh Manufacturing sold equipment with a carrying amount of P480,000 in exchange for a
P600,000 non-interest bearing note due January 2, 2022. There was no established exchange price for the
equipment. The prevailing rate of interest for a note of this type at January 2, 2019 was 10%.

1. How much should PlayPoh Manufacturing report as interest income in the 2019 profit or loss?
a. 45,078 b. 49,586 c. 54,544 d. 60,000
Initial:
Face Amount 600,000
PV1 0.7513
Initial CA / PV 450,780

Subsequent: Amortized cost

CA xER Carrying
Date Int. IncomeAmount
1/2/19 450,780
12/31/19 45,078 495,858 DISC NR 45,078
12/31/20 49,586 545,444 INT. INC. 45,078
 2. How much should PlayPoh report as gain or loss on sale of equipment in its 2019 profit or loss?
a. 29,220 loss b. 29,220 gain c. 120,000 gain d. 270,000 gain
SP/PV 450,780 NR 600,000.00
Carrying Value of asset sold -480,000 LOSS 29,220
Gain (loss) -29,220 DISC NR 149,220
EQUIPT 480,000
3. What is the carrying value of the note receivable as of December 21, 2019 statement of financial position?
a. 450,780 b. 495,858 c. 545,444 d. 600,000

8. NR: LT (non-interest bearing: Installment)

On December 31, 2019, Lakeshore Company sold for P3,000,000 an old equipment having an original cost of
P5,400,000 and carrying amount of P2,400,000. The terms of the sale were P600, 000 down payment and P1,200,000
payable each year on December 31 of the next two years. The sale agreement made no mention of interest. However,
9% would be a fair rate for this type of transaction. The present value of an ordinary annuity of 1 at 9% for two years is
1.76.

What is the carrying amount of the note receivable on December 31, 2020?
a. 1,009,920 b. 1,102,080 c. 1,200,000 d. 2,302,080
NR: LT (Non-int; Installment)
Initial: Present value
Subsequent: Amortized cost

Installment Payment 1,200,000 SP/PV of Notes 2,112,000 NR 2,400,000

A1 1.76 CA OF EQUIPT -2,400,000 LOSS 288,000
Initial CA /PV 2,112,000 LOSS -288,000 ACCU. DEP3,000,000
DISC NR 288,000
Subsequent: Amortized cost EQUIPT 5,400,000
Annual Interest Carrying
Date Payment 9% Principal Amount
12/31/19 2,112,000
12/31/20 1,200,000 190,080 1,009,920 1,102,080 *** CASH 1,200,000 DISC 190,080
12/31/21 1,200,000 97,920 1,102,080 0 NR 1,200,000 INT. INC 190,080
9. Factoring - AR

Jerome Company sold P 5, 750, 000 in accounts receivable for cash payment of P 4, 950,000. An allowance for bad
debts of P500, 000 had previously been established by the entity in relation to these accounts. To allow adjustments
and possible customer returns the factor withheld 10% of the cash proceeds.

What is the loss on factoring that should be recognized?

a. 300, 000 b. 498, 875 c. 500, 000 d. 800, 000
Factoring w/o recourse - sale transaction (derecognized the asset and recog. Gain (loss)
w/ recourse - loan (continue to recog. The asset and liability related to loans)

Selling Price 4,950,000 Cash 4,950,000

CA of AR: Gross 5,750,000 Allow 500,000
Allow. D.A. -500,000 -5,250,000 Loss 300,000
Loss on Factoring -300,000 AR 5,750,000
 FA 1,500,000 Cash 1,410,000
Fin charges -90,000 FC 90,000
Proceeds 1,410,000 NP 1,500,000

AR-ass 4,000,000
AR 4,000,000
10. Assignment - AR
Loeb Company assigned P 4, 000, 000 of accounts receivables as collateral for a P1, 500, 000 5% loan with a bank.
The entity was also assessed by the bank for a finance charge of 6% on the transaction and is paid up front. What
amount should be recorded as a gain or loss on the transfer of accounts receivables?
a. 150, 000 gain b. 100, 000 gain c. 240, 000 loss d. 0

11. Assignment of AR-

On December 1, 2021, Winterton Company assigned specific accounts receivable totaling P3,000,000 as collateral on
a P2, 500, 000, 12% note from a certain bank. The entity will continue to collect the assigned accounts receivable. In
addition to the interest on the note, the bank also charged a 5% finance charge deducted in advance on the P2, 500,
000 value of the note. The December collections of assigned accounts receivable amounted to P1, 000, 000 less cash
discounts of P50, 000. On December 31, 2021, the entity remitted the collections to the bank in payment for the interest
accrued on December 31, 2021 and the note payable.

1. What amount of cash was received from the assignment of accounts receivable on December 1, 2021?
a. 2, 000, 000 b. 2, 150, 0000 c. 2, 375, 0000 d. 3, 100, 000
Notes Payable 2,500,000 Cash 2,375,000
Finance Fee -125,000 (2.5 x 5%) FC 125,000
Proceeds 2,375,000 NP 2,500,000
2. What is the carrying amount of note on December 31, 2021?
a. 1, 550, 000 b. 1, 575, 000 c. 1, 600, 000 d. 1, 757, 000
Notes Payable 2,500,000 AR-ass 3,000,000
Payment (1M-.05) 950,000 AR 3,000,000
Interest (2.5M x 12% x 1/12) -25,000 -925,000
Notes Payable 12/31 1,575,000 Cash 950,000
3. What amount should be disclosed as the equity of Winterton Company in assigned accounts on December 31, 2021?
a. 425, 000 b. 475, 000 c. 495, 000 d. 525, 000
AR - assigned (3 - 1) 2,000,000 A AR- ass 1,000,000
NP 12/31 -1,575,000 L
Equity in assigned accounts 425,000 Disclosed NP 925,000
INT exp 25,000
Cash 950,000
12. Discounting of notes with recourse
On August 31, 2019, Dundas Company discounted with recourse a note at the bank at discount rate of 15%. The note
was received from the customer on August 1, 2019, is for 90 days, has a face value of 3,700,000, and carries an
interest rate of 12%. The customer paid the note to the bank on October 30, 2019, the date of maturity.

If the discounting is accounted for as a secure borrowing, what is the interest expense to be recognized on August 31,
2019?
a. 21,725 b. 12,725 c. 21,275 d. 11,725
 Discounting- w/ recourse - loan (recog. A & L)
w/o recourse - sale (derecog. Asset & recog. Gain or loss)
1.
Principal 3,700,000
Add: Interest (Prin. X SR x Term) 111,000 (3,700,000 x 12% x 90/360)
Maturity value 3,811,000
Less: Discount (MV x DR X DP) -95,275 (3,811,000 x 15% x 60/360)
Proceeds 3,715,725
2.
Selling Price/Proceeds 3,715,725
CA of Notes Receivable:
Face amount 3,700,000 FA X SR X T
Add: Accrued Interest 37,000 -3,737,000 (3,700,000 x 12% x 30/360)
Loss (w/o rec.)/Interest expense(w/ rec.) -21,275

13. Discounting NR with recourse:

On November 1, 2019, Brampton Company discounted with recourse at 10% a one-year, non-interest bearing,
3,000,000 note receivable maturing on January 31, 2020. The discounting of the note receivable is accounted for as a
conditional sale with recognition of a contingent liability. What amount of contingent liability for this note must be
disclosed in the financial statements for the year ended December 31, 2019?
a. 3,000,000 b. 2,000,000 c. 3,050,000 d. 2,500,000
When discounting of notes receivable is with recourse, the receivable is deducted
from the notes receivable with disclosure of contingent liability. The contingent liability
to be disclosed is the amount to be paid to the financing company should the maker fails to pay.
Principal 3,000,000
Add interest up to maturity 0
Maturity value (disclosed) 3,000,000 Contigent liab - possible obligation (50/50)
- disclosed the posssible liab

14. Discounting NR without recourse

Kings Company accepted from a customer P 2,000,000 face amount, 6- month, 10% note dated January 15, 2021. On
the same date, the entity discounted the note without recourse at a 12% discount rate.

1. What amount of cash was received from discounting?

a. 2,000,000 b. 1,974,000 c. 126,000 d. 100,000

2. What is the loss on note receivable discounting?

a. 32,000 b. 52,000 c. 16,000 d. 26,000
 Principal 2,000,000 fa x sr x term
Add interest up to maturity 100,000 (2,000,000 x 10% x 6/12)
Maturity value 2,100,000 MV X DR XDP
Less : Discount -126,000 (2,100,000 x 12% x 6/12)
Proceeds 1,974,000

2.
Selling Price(proceeds) 1,974,000 Cash 1,974,000
Less: Carrying amount of notes Loss 26,000
Principal 2,000,000 NR 2,000,000
Add accrued interest 0 -2,000,000
Loss(w/o rec): Int exp(w/ rec) -26,000
15. Immediate Bank granted a loan to a borrower on January 1, 2020. The interest is 10% payable annually starting
December 31, 2020. The loan matures in four years on December 31, 2023.

Principal amount 4,000,000

Direct origination cost incurred 100,000
Indirect origination cost incurred 60,000
Origination fee charged 342,000

After considering the direct origination fee incurred and origination fee charged, the effective rate on the loan is
12%

1. What is the carrying amount of the loan receivable on January 1, 2020?

a. 4,000,000 b. 3,758,000 c. 4,253,600 d. 4,001,200
Loans Receivable Principal (4,000,000 x .636) 2,544,000
Initial: PV/Cash outflow Interest (400,000 x 3.037) 1,214,800
Subsequent: Amortized cost PV/ inititial carrying amount 3,758,800
Lender Borrower
Prin. Loan 4,000,000 4,000,000
Direct origination cost incurred 100,000
Origination fee charged -342,000 -342,000
Initial Carrying Amount 3,758,000 3,658,000
2. What is the interest income for 2020?
a. 450,960 b. 457,075 c. 480,000 d. 510,432
FA x SR CA x ER
Date SR 10% ER 12% Amort CA
CA of loans receivable 01/01/2020 3,758,000
Multiply by the ER x 12% 12/31/20 400,000 450,960 50,960 3,808,960
Interest income

16. On December 31, 2019, SUNSHINE Bank has a 5-year loan receivable with a face value of 5,000,000 dated January
1, 2018 that is due on December 31, 2022. Interest on the loan is payable at 9% every December 31.
 The borrower paid the interest that was due on December 31, 2018 but informed the bank that interest accrued in
2019 will be paid at maturity date. There is a high probability that the remaining interest payments will not be paid
because of financial difficulty.

The prevailing market rate of interest on December 31, 2019 is 10%. The PV of 1 for three periods is .772 at 9%, and
.751 at 10%.

What is the loan impairment loss to be recognized on December 31, 2019?

a. 1,695,000 b. 1,590,000 c. 1,242,600 d. 1,357,050
Impairment loss = Carrying amount - Recoverable
CA = Principal + Accrued Interest
Recoverable = FV-CS or VIU whichever is higher

Principal 5,000,000
Add: Accrued Interest (5,000,000 x 9%) 450,000 FA x SR = accrued int
CA of loans receivable 12/31/19 5,450,000
Recoverable (VUI) - old rate 9%
Principal (5M x.772) 3,860,000
Interest (450,000 x .772) 347,400 -4,207,400
Impairment loss 1,242,600

FS 12/31/19 2020 2021 & after

current NC
17. At the beginning of the accounting period, January 1, 2019, Mississauga Company reported the following balances:

Note receivable from an officer 1,950,000

Note receivable from a sale of building 7,125,000

The P7, 125,000 note receivable is dated April 1, 2018, bears interest at 10%. Principal payments of P2, 000, 000 plus
interest are due annually beginning April 1, 2019.

The P1, 950,000 note receivable is dated December 31, 2016, bears interest at 8% and is due on December 31, 2021.
Interest is payable annually on December 31, and all interest payments were made through December 31, 2019.

On July 1, 2019, Mississauga Company sold a parcel of land to Binay Company for P4, 000,000 under an instalment
sale contract. Binay Company made a P1, 200,000 cash down payment on July 1, 2019, and signed a 4-year 10%
note for the P2,900,000 balance. The equal annual payments of principal and interest on the note totaled P878,000,
payable on July 1 of each year from 2020 through 2023.

1. What is the total amount of notes receivable including accrued interest that should be classified as current
assets on December 31, 2019?
a. 3, 117, 375 b. 2,200,000 c. 2,384,375 d. 3,384,000
 FS date 12/31/2019
NR-currentNR - NC
NR from officer 1,950,000
NR from sale of building 2,000,000 3,125,000
Accrued interest (5,125,000 x 10% x 9/12) 384,375 April - Dec
NR from sale of land 588,000 2,312,000
Accrued interest (290,000 x 6/12) 145,000 July to Dec.
3,117,375 7,387,000
2. What is the total amount of notes receivable that should be classified as noncurrent assets on December
31, 2019?
a. 7,300,000 b. 7, 150,000 c. 6,250,000 d. 7,387,000
NR - building - (LT Int.- bearing)
Initial: FA
Subsequent: FA (current/non-current)
Balance 4/1/18 7,125,000
Payment 4/1/19 -2,000,000
Balance 12/31/19 5,125,000
Payment 4/1/20 -2,000,000 c
Balance 3,125,000 nc

NR - land (LTInt.-bearing
Initial: FA
Subsequent: FA
Date A. Payment Int. 10% Principal CA
07/01/2019 2,900,000 12/31/19
07/01/2020 878,000 290,000 588,000 2,312,000
current nc
18. Joshtin Company used the allowance method of accounting for uncollectible accounts. During 2019, the entity had
charged 750,000 to bad debt expense and wrote off accounts receivable of 780,000 as uncollectible. What was the
decrease in working capital?
a. 750,000 b. 780,000 c. 650,000 d. 0
Charges to bad debt expense:
D. A. exp. 750,000
Allow for D. A. 750,000

Accounts written off:

Allow for D.A. 780,000
Accounts Receivable 780,000
19. Kaila World assigned 2,500,000 of accounts receivable as collateral for a 1,700,000 loan with a bank. The bank
assessed a 4% finance fee and charged 6% interest on the note at maturity. What would be the journal entry to record
the transaction?
a. Debit cash 2,432,000, debit finance charge 68,000 and credit note payable 2,500,000
b. Debit cash 2,342,000, debit finance charge 68,000 and credit note payable 2,050,000
c. Debit cash 2,500,000, debit finance charge 68,000 and credit note payable 2,500,000
 d. Debit cash 2,656,000, debit finance charge 86,000 and credit note payable 2,500,000
e. answer not given
Face amount 1,700,000 Cash 1,632,000
Finance charges(1.7 x 4%) -68,000 Finance charges 68,000
Proceeds 1,632,000 Notes payable 1,700,000

AR - assigned 2,500,000
AR 2,500,000
20. Kaila Inc. sold accounts receivable without recourse for 4,275,000. The entity received 4,000,000 cash immediately
from the factor. The remaining 275,000 will be received once the factor verifies that none of the account receivable is
in dispute. The accounts receivable had a face amount of 5,200,000. The entity had previously established an
allowance for bad debts of 230,000 in connection with such accounts.

What amount of loss on factoring should be recognized?

a. 925,000 b. 295,000 c. 695,000 d. 965,000
Selling Price 4,275,000
Less carrying amount -4,970,000
Gain (loss) -695,000

Gross Rec. 5,200,000

less allow for D.A. -230,000
CA/NRV 4,970,000
21. Alberta Company sold an office equipment with a carrying amount of 739,000, receiving a noninterest-bearing note
due in three years with a face amount of 1,300,000. There is no established market value for the equipment. The
interest rate on similar obligations is estimated at 12%. The present value of 1 at 12% for three periods is .712. What
amount should be reported as gain or loss on the sale and interest income for the first year?
Gain (loss) Interest Income
a. 200,000. 288,000
b. 168,600. 110,072
c. 186,600. 111,072
d. 110,072. 186,600
Selling Price(PV of notes 1,300,000 x .712) 925,600
Carrying amount of equipment -739,000
Gain (loss) 186600

Carrying amount of NR 925,600

ER x 12%
Interest income 111,072
22. Got7 Bank granted a 10-year loan to More Company in the amount of P1,500,000 with a stated interest rate of 6%.
Payments are due monthly and are computed to be P16,650. Got7 Bank incurred P40,000 of direct loan origination
cost and P20,000 of indirect loan origination cost. In addition, Got7 Bank charged More Company a 4-point non-
refundable loan origination fee.

1. What is the initial carrying amount of the loan receivable on the part of Got7 Bank?
a. 1,520,000 b. 1,500,000 c. 1,480,000 d. 1,580,000
 2. What is the initial carrying amount of the loan payable on the part of More Company?
a. 1,520,000 b. 1,500,000 c. 1,480,000 d. 1,440,000
Lender Borrower
Face amount 1,500,000 1,500,000
Direct origination cost incurred 40,000
Less origination fee charged -60,000 -60,000
Initial C.A. 1480000 1440000
23. Zoro Company provided the following data relating to accounts receivable for the current year:
Accounts receivable, January 1 3,000,000
Credit sales 6,000,000
Sales returns 500,000
Accounts written off 200,000
Collections from customers 1,000,000
Estimated future sales returns at December 31 75,000
Estimated uncollectible accounts at December 31 per aging 200,000

What amount should be reported as accounts receivable on December 31?

a. 10,700,000 b. 10,975,000 c. 8,000,000 d. 7,300,000
Accounts Receivable
Balance 1/1 3,000,000 500,000 Sales return
Credit sales 6,000,000 200,000 Accounts written off
1,000,000 Collections from customer
Total debit 9,000,000 1,700,000
less credit -1,700,000
AR, end 7,300,000

Gross receivable 7,300,000

Less: allow for D.A. 200,000
allow for future sales return 75,000
allow for future discount 0
allow for future freight 0 -275,000
Net realizable value 7,025,000
24. Dreyar Company provided the following information relating to current operations:

Accounts receivable, January 1 5,000,000

Accounts receivable collected 5,000,000
Cash sales 1,000,000
Inventory, January 1 3,000,000
Inventory, December 31 1,500,000
Purchases 4,000,000
Gross margin on sales 2,000,000

What is the balance of accounts receivable on December 31?

a. 13,500,000 b. 8,500,000 c. 9,500,000 d. 9,000,000. e. 6,500,000
 Accounts Receivable
Balance 1/1 5,000,000 5,000,000 collection
Credit sales 6,500,000
Debit 11500000
Less credit -5,000,000
AR, end 6500000

BI 3,000,000 Sales ? 7.5

Purchases 4,000,000 Less: CGS -5,500,000
Available for sale 7000000 Gross Profit 2,000,000
less ending inventory -1,500,000
CGS 5500000 Toal sales 7,500,000
Less cash sales -1,000,000
Credit sales 6500000
25. Joseph manages an extensive network of boutique hotels in the country. The entity has significant accounts receivable
from three customers, namely:

Kaila's Inn. 4,000,000

Joshtin House 7,800,000
Jerome Hotel 6,000,000
Other accounts receivable not individually significant 3,900,000

The entity has determined that the Joshtin House receivable is impaired by 2,100,000 and the Jerome Hotel receivable
is impaired by 1,900,000. The receivable from the Kaila's Inn is not impaired. The entity has also determined that a
composite rate of 5% is appropriate to measure impairment on all other accounts receivable. What is the total
impairment loss of accounts receivable
a. 5,000,000 b. 4,935,000 c. 4,395,000 d. 4,225,000
Joshtin house 2,100,000
Jerome hotel 1,900,000
Others (3.9 + 4) x 5%= 395,000
Total impairment loss 4,395,000

MODULE 3 INVESTMENT

LEARNING OBJECTIVE:
1. Describe the accounting framework for financial assets.
2. Understand the accounting for debt investments at amortized cost.
3. Understand the accounting for debt investments at fair value.
4. Describe the accounting for the fair value option.
5. Understand the accounting for equity investments at fair value.
6. Explain the equity method of accounting and compare it to the fair value method for
equity investments.
7. Discuss the accounting for impairments of debt investments.
8. Describe the accounting for transfer of investments between categories.
OVERVIEW
PFRS 9 Financial Instruments issued on 24 July 2014 is the replacement of PAS 39 Financial
Instruments: Recognition and Measurement. The Standard includes requirements for recogni-
tion and measurement, impairment, derecognition and general hedge accounting. The IASB
completed its project to replace IAS 39 in phases, adding to the standard as it completed each
phase.

IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest
rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of
the project was separated from the IFRS 9 project due to the longer term nature of the macro
hedging project which is currently at the discussion paper phase of the due process.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com
A synchronous discussion for this lesson will be scheduled on AUGUST 18, 2020 (Tuesday 7:30
– 8:30 AM)

Financial Asset
• Cash.
• Equity investment of another company (e.g., ordinary or preference shares).
• Contractual right to receive cash from another party (e.g., loans, receivables, and
bonds).

IASB requires that companies classify financial assets into two measurement categories—
amortized cost and fair value—depending on the business model.

Measurement Basis
PFRS requires that companies measure their financial assets based on two criteria:
• Company’s business model for managing its financial assets; and
• Contractual cash flow characteristics of the financial asset.

Only debt investments such as receivables, loans, and bond investments that meet the two
criteria above are recorded at amortized cost. All other debt investments are recorded and
reported at fair value.

Debt investments are characterized by contractual payments on specified dates of

• principal and
• interest on the principal amount outstanding.

Companies measure debt investments at

• amortized cost or
• fair value.

Reporting Bond Investment at Amortized Cost

Equity investment represents ownership of ordinary, preference, or other capital shares.
• Cost includes price of the security and transaction cost incidental to acquisition.
• Broker’s commissions and fees are recorded as expense for trading security.

The degree to which one corporation (investor) acquires an interest in the common stock of
another corporation (investee) generally determines the accounting treatment for the
investment subsequent to acquisition.

Levels of Influence
Determine Accounting Methods
Accounting and Reporting for Equity Investments by Category

PFRS allows companies to classify some equity investments as non-trading.

General accounting and reporting rule:
• Investments valued at fair value.
• Record unrealized gains and losses in other comprehensive income.

Example: Equity Investments (OCI)

The accounting entries to record non-trading equity investments are the same as for trading
equity investments, except for recording the unrealized holding gain or loss.
Report the unrealized holding gain or loss as other comprehensive income.

Financial Statement Presentation

EQUITY METHOD
An investment (direct or indirect) of 20 percent or more of the voting shares of an investee
should lead to a presumption that in the absence of evidence to the contrary, an investor has
the ability to exercise significant influence over an investee.

In instances of “significant influence,” the investor must account for the investment using the
equity method.

Controlling Interest - When one corporation acquires a voting interest of more than 50 percent
in another corporation
• Investor is referred to as the parent.
• Investee is referred to as the subsidiary.
• Investment in the subsidiary is reported on the parent’s books as a long-term
investment.
• Parent generally prepares consolidated financial statements.

SUMMARY
MODULE 3 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
INVESTMENT
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before AUGUST 21, 2021

1. JMB Company marketable equity securities to be held as trading for P4,000,000.The entity also paid commission,
taxes and other transaction cost amounting to P300,000. The security had market value of P4,500,000 at the end of
the current year and the transaction cost that would be incurred on sale is estimated at P200,000. What amount of
unrealized gain or loss on these securities should be reported in the 2020 income statement?
a. 0 b. 200,000 c. 500,000 d. 300,000
Trading Sec 4,000,000
1. Comm. Exp 300,000
FV 12/31 4,500,000 Cash 4,300,000
Initial CA (FV) -4,000,000
Unrealized gain (loss) 500,000 Tading Sec 500,000
Unreal. Gain 500,000
2. During 2019, Kachow Company purchased marketable securities as a trading investment.
For the year ended December 31, 2019, the entity recognized an unrealized loss of P350,000.
There were no security transactions during 2020. The entity provided the following information on December 31,
2020:
Security Cost Market Value
A 3,530,000 3,400,000
B 2,650,000 2,700,000
6,180,000 6,100,000

In the 2020 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized loss 80,000 b. Unrealized loss 270,000
c. Unrealized gain 80,000 d. Unrealized gain 270,000
2.
FV 12/31/20 6,100,000
FV12/31/19 (6,180,000 - 350,000) -5,830,000
Unrealized gain (loss) 270,000
3. Georel Company acquired 40,000 ordinary shares on October 1 for P 6,600,000 to be held for trading.

On November 30, the investee distributed a 10% ordinary share dividend when the market price of the share was
P250.

On December 31, the entity sold 4,000 shares for P1,000,000.

What amount should be reported as gain on sale of investment in the current year?
a. 340,000 b. 400,000 c. 500,000 d. 600,000
 3. shrs. Amount
Original shares 10/1 40,000 6,600,000
Stock dividend 11/30 (10%)* 4,000
Total shares 44,000 6,600,000
Shares sold 12/31 (4/44 x 6.6)
Balance 44,000 6,600,000

SP 1,000,000 Cash
CA sold (4/44 x 6.6M) -600,000 TS
Gain (loss) 400,000 Gain
4. At the beginning of current year, Illusion Company acquired an entity instrument for P 4,000,000 to be measured at
fair value through other comprehensive income. The entity incurred direct acquisition cost of 700,000.
At year-end, fair value of the instrument was 5,500,000 and the transaction cost that would be incurred on the sale of
the investment were estimated at 600,000.

What amount of unrealized gain should be recognized in other comprehensive income for the current year?
a. 200,000 b. 900,000 c. 800,000 d. 0
FV 12/31 5,500,000
Initial CA ( FV+TC) -4,700,000
Unrealized gain (loss) 800,000 OCI
5. During 2020, Knickknack Company purchased marketable equity securities to be measured at fair value through
other comprehensive income. On December 31, 2020, the balance in the unrealized loss on these securities was
200,000.

There were no security transaction during 2021. Pertinent data on December 31, 2021 are as follows:
Security Cost Market Value
X 2,100,000 1,600,000
Y 1,850,000 2,000,000
Z 1,050,000 900,000
5,000,000 4,500,000
In the statement of changes in equity for 2021, what amount should be included as cumulative unrealized loss as
component of other comprehensive income?
a. 500,000 b. 300,000 c. 200,000 d. 0
Comprehensive - current
2020: Unrealized loss
2021:
FV 12/31/21 4,500,000
FV 12/31/21 4,500,000 FV 12/31/20 -4,800,000
Original cost -5,000,000 Unreal. Loss -300,000
Cummulative gain (loss) -500,000 SHE -cummulative
6. At the beginning of the current year, Lavish Company purchased 10,000 ordinary shares at P90 per share to be held
for trading. At the year-end, the entity received 2,000 shares of the investee in lieu of cash dividend of P10 per share.
On this date, the investee’s share has a quoted market price of P60 per share.

What amount should be reported as dividend income for the current year?
a. 120,000 b. 100,000 c. 20,000 d. 0

Trading: Shares received in lieu of cash dividend - Income at FV of shares received

Shares in lieu of cash dividend 2,000
FV of shares 'x 60
Dividend Income 120,000
7. Inspiration Company had trading and non-trading investment held throughout 2020 and 2021. The non-trading
investments are measured at fair value through other comprehensive income. The investments had a cost of
3,000,000 for trading and 3,000,000 for non-trading. The investment had the following fair value at year-end
December 31 2020 December 31 2021
Trading 4,000,000 3,800,000
Non Trading 3,200,000 3,700,000

What amount of unrealized gain or loss should be reported in the income statement for 2021?
a. 200,000 gain b. 200,000 loss c. 300,000 gain d. 300,000 loss
FA at FVPL: unrealized gain (loss) – P or L
FA at FVOCI: unrealized gain (loss) - OCI
Trading
FV 12/31/21 3,800,000
FV 12/31/20 -4,000,000
Unrealized gain (loss) -200,000
8. On January 1, 2020, Jerome Company purchased non-trading equity investments which are irrevocably designated
at FVOCI:

Purchase Price Transaction Cost Market Value

December 31, 2020
Security A 1,000,000 100,000 1,500,000
Security B 2,000,000 200,000 2.400,000
Security C 4,000,000 400,000 4,700,000

On July 1, 2021, the entity sold Security C for 5,200,000.

What amount of gain on sale should be recognized in the income statement for 2021?
a. 800,000 b. 500,000 c. 300, 000 d. 0
FA at FVOCI: non-trading

SP 5,200,000 SP 5,200,000
Original cost -4,400,000 CA(adj. to FV) -5,200,000
RE 800,000 Gain or (loss) 0
• 0 is the answer because it is non-trading the gain or loss of a non-trading securities should be reported on the
other comprehensive income/RE and not on the income statement.
 9. During the current year, Veto Company held 30,000 shares of Rock Company's 100,000 outstanding shares and
6,000 shares of Sand Company's 300,000 outstanding shares.
During the current year, Veto received P300,000 cash dividend from Rock, P15,000 cash dividend and 3% stock
dividend from Sand. The closing price of Sand share is P150.

What amount should be reported as dividend revenue for the current year?
a. 342,000 b. 315,000 c. 442,000 d. 15,000
9. Sand 6,000/300,000 = 2%
Investment in Rock: 30,000/100,000 = 30% Investment in Associate
Investment in
Trading
Sand: 6,000/300,000
/ non-trading = 2%
20% or more
Investment Less than 20%
Associate Trading/Non-Trading
Cash dividend return of Dividend Income
Investment

Cash dividend from Sand 15,000

10. Temporal Company owned 50,000 ordinary shares held for trading. These 50,000 were purchased 120 per share.
During the year, the investee distributed 50,000 stock rights to the investor. The investor was entitled to buy one new
share for P90 cash and two of these rights. Each share had a market value of P130 and each right had a market
value of P20 on the date of issue.
What total cost should be recorded for the new shares that are acquired by exercising the rights?
a. 2,250,000 b. 3,250,000 c. 3,050,000 d. 5,500,000
Stock Rights Separate from Investment Not Separate
SR is recognized at FV Memo
50,000SR x 20 = 1,000,000
Exercise of SR:
Exercise price xx
Add: cost of SR used xx
Cost of new investment xx
Exercise price ( 50,000 / 2 x 90) 2,250,000 Investment in stock 3,250,000
Cost of SR (50,000 x 20) 1,000,000 Cash 2,250,000
Cost on new investment 3250000 Investment in SR 1,000,000
11. On January 1, 2021, Chummer Company paid 20,000,000 for 60,000 ordinary shares of Case Company which
represent a 25% interest in the net asset of case. The acquisition cost is equal to the carrying amount of the net assets
acquired. Chummer has the ability to exercise significant influence over Case. Chummer received a dividend of P40
per share from case in 2021. The investee reported net income of 10,000,000 for the year ended December 31, 2021.

On December 31, 2021, what amount should be reported as investment in associate?

a. 24,900,000 b. 20,100,000 c. 22,500,000 d. 17, 700,000
Acquisition cost 1/1 20,000,000 Acq.
Add: Share in NI (10M x 25%) 2,500,000 Share in NI
Total 22,500,000 DR.
Less: cash dividend ( 60,000 x 40) -2,400,000 Less Cr.
Carrying amount of investment 12/31 20,100,000 CA 12/31
 Invest. In Asso. (equity)
20,000,000 2,400,000 Cash dividend(60,000 x 40)
2,500,000 0 Amortiation
22,500,000 2,400,000
-2,400,000
20,100,000
12. On September 1, 2021, Karl Company purchased 30% of the outstanding ordinary shares of Mai’s Corporation for
3,000,000 when the book value of net assets of Mai Corporation was 9,000,000. The fair value of the assets are
equal to their carrying values except for a land which was undervalued by 1,000,000. Mai reported net earnings
throughout the year in the amount of 2,400,000 and paid total dividends of 1,000,000.

What is the maximum amount of income Tender Company could include in its 2021 profit or loss as “income from
investment”?
a. 235,000 b. 207,500 c. 237,500 d. 240,000
P - 12
Investment is Associate
P or L: Share in NI; Gain (loss) on sale of investment
Acq. Price 3,000,000
NI for 4 months (Sept - Dec) CA acq. (9M x 30%) -2,700,000
(2,400,000 x 4/12) 800,000 Ecess payment 300,000
Interest x 30% Land (1M x 30%) -300,000
Investment income 240,000 Excess payment 0
13. An entity purchased 5,000,000 of 8%, 5-year bonds on January 1, 2020 with interest payable on June 30 and
December 31. The bonds were purchased for 5,100,000 plus transaction cost of 108,000 at an effective interest rate
of 7%. The business model for this investment is to collect contractual cash flows and sell the bonds in the open
market. On December 31, 2020, the bonds were quoted at 106.

1. What amount of interest income should be reported for 2020?

a. 400,000 b. 200,000 c. 364,560 d. 363,940

1. FA x SR CA x ER Carrying
Date SR 4% ER 3.5% Amort. Amount
1/1/20 5,208,000
P -13 Debt securities - FA at FVOCI 6/30/20 200,000 182,280 17,720 5,190,280
Initial: FV + TC (5,100,000 + 108,000) 12/31/20 200,000 181,660 18,340 5,171,940
Subsequent: FV
Unrealized gain (loss): OCI (FV-Amortized cost) Jan - June 182,280
Interst income: CA x ER July - Dec. 181,660
5M x 4% Interest income 363940 #1
 2. What is the adjusted carrying amount of the investment on December 31, 2020?
a. 5,300,000 b. 5,171,940 c. 5,174,560 d. 5,000,000
FV 12/31/20 (5M x 106) 5,300,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 2020?
a. 300,000 b. 125,440 c. 128,060 d. 92,000
FV 12/31/20 5,300,000
Amort. Cost -5,171,940
Unrealized gain (loss)- OCI 128,060
14. At the beginning of the current year, Bong Company purchased 40,000 shares of Cora Company’s 200,000
outstanding shares for 6,200,000. On that date, the carrying amount of the acquired shares on Cora’s books was
4,200,000.

Bong allocated the excess of the cost over carrying amount to patent. The patent has reaming life of 10 years.

During the period, Bong’s officers obtain a majority on Cora’s board of directors.
Cora Company reported earnings of 5,100,000 for the current year and declared and paid dividend of 2,800,000 at
year end.

What is the carrying amount of the investment in associate at year end?

a. 6,000,000 b. 6,460,000 c. 6,640,000 d. 4,450,000
Investment in Associate
Interest acquired ( 40,000/200,000) = 20%

Acquisition cost 6,200,000

Carrying amount of net assets acquired -4,200,000
Excess of cost applicable to patent 2,000,000 /10 years= 200,000 Income/Inevest ass
Acquisition cost 6,200,000
Share in NI (5,100,000 x 20%) 1,020,000
Cash dividend (2,800,000 x 20%) -560,000
Amortzation of patent (2,000,000 / 10) -200,000
Carrying amount of investment in associate 6,460,000
15. Fantagio Company purchased 10% bonds with face amount of 7,000,000 for 8,000,000 including transaction cost of
200,000. The bonds provide an effective yield of 8%.

The bonds are quoted at 105 at the end of the year. The company has the policy of using the fair value option (trading).

1. What amount of gain from change in fair value and interest income should be reported in the statement of P or L?
a. 7,350,000 b. 150,000 c. 250,000 d. 200,000

2. What total amount of investment should be reported in the statement of financial position at the end of the year?
a. 200,000 b. 700,000 c. 850,000 d. 560,000 e. 7,350,000
 FV 12/31 7,350,000 (7M x 105) #2- BS - FV 12/31
Initial CA (FV) -7,800,000 (8M- .200)
Gain (loss) from FVC - 450,000

Gain (loss) from FVC -450,000

Interest Income ( 7M x 10%) 700,000
Total income from investment 250,000
16. Temporal Company owned 50,000 ordinary shares held for trading. These 50,000 were purchased 120 per share.
During the year, the investee distributed 50,000 stock rights to the investor. The investor was entitled to buy one new
share for P90 cash and two of these rights. Each share had a market value of P130 and each right had a market
value of P20 on the date of issue. (same as # 10)
What total cost should be recorded for the new shares that are acquired by exercising the rights?
a. 2,250,000 b. 3,250,000 c. 3,050,000 d. 5,500,000
Exercise price (50,000 x 120) 6,000,000
Cost of rights (50,000R x 20) 1,000,000
Cost of new shares 7,000,000
17. On January 1, 2020, Mega Company acquired 10% of the outstanding ordinary shares of Penny Company for
4,000,000. The investment was appropriately accounted for under the cost method.
On January 1, 2021, Mega gained the ability to exercise significant influence over financial and operating control of
Penny by acquiring an additional 20% of Penny’s outstanding ordinary shares for 10,000,000.
The fair value of Penny’s net assets equaled carrying amount. The fair value of the 10% interest on January 1, 2021
was 6,000,000.
For the years ended December 31, 2020 and 2021, the investee reported the following:
2020 2021
Dividend paid 2,000,000 3,000,000
Dividend income 6,000,000 6,500,000
1. What is the investment income for 2020?
a. 200,000 b. 400,000 c. 600,000 d. 300,000
Investment income - Dividend (2M x 10%) 200,000
2. What is the investment income for 2021?
a. 1,300,000 b. 1,950,000 c. 1,000,000 d. 1,900,000
Share in NI (6,500,000 x 30%) 1,950,000
3. What is the carrying amount of the investment in associate on December 31, 2021?
a. 16,000,000 b. 17,050,000 c. 15,050,000 d. 16,700,000

18. On January 1, 2020, Tricia Company purchased equity securities to be held as financial assets measured at fair value
through other comprehensive income.
Cost Market-12/31/2020 Market-12/31/2021
Security R 3,000,000 3,200,000 -
Security S 4,000,000 3,500,000 3,700,000
Security T 5,000,000 4,600,000 4,700,000

On January 31, 2021, the entity sold Security R for P3,500,000.

1. What amount should be recognized directly in retained earnings as a result of the sale of investment in 2021?
a. 500,000 b. 300,000 c. 200,000 d. 0
 SP - Security R 3,500,000
Original cost -3,000,000
RE 500,000
2. What cumulative unrealized gain or loss on the remaining financial assets should be reported in the statement of
changes in equity for 2021?
a. 600,000 gain b. 600,000 loss c. 300,000 gain d. 300,000 loss
FV 12/31/21
Security S 3,700,000
Security T 4,700,000 8,400,000
Original cost
Security S 4,000,000
Security T 5,000,000 -9,000,000
Cumulative unrealized loss 12/31/21 -600,000
19. At year-end, Ozz Company held several investments with the intent of selling them in the near term. The investments
consisted of 1,500,000 10% three-year bonds purchased for 1,350,000 and equity securities purchased for 500,000.
At year-end, the bonds were selling in the open market for 1,600,000 and the equity securities had a market value of
700,000.

What amount should be reported as trading securities?

a. 1,850,000 b. 2,000,000 c. 2,300,000 d. 1,200,000
Bond investment (FV 12/31) 1,600,000
Equity investment (FV 12/31) 700,000
CA 12/31 (FV) 2,300,000
20. Jill Company acquired a financial instrument for 1,000,000 on April 30, 2021. The financial instrument is classified as
financial asset at fair value through other comprehensive income. The direct acquisition cost incurred amounted to
200,000. On December 31, 2021, the fair value of instrument was 2,000,000. What gain should be recognized in
other comprehensive income for the year-ended?
a. 1,000,000 b. 500,000 c. 1,200,000 d. 800,000
FV 12/31 2,000,000
Initial CA (FV+TC) -1,200,000
Unrealized gain (loss) - OCI 800,000
21. LOVER COMPANY buys and sells securities expecting to earn profits on short-term differences in price. During
2020, Lover Company purchased the following trading securities:
Security Cost Fair Value
December 31, 2020
A 195,000 225,000 225
B 300,000 162,000 285
C 660,000 678,000 678
1,155,000 1,065,000 1,188,000
Before any adjustments related to these trading securities, Lover Company had net income of 900,000.

1. What is Lover’s net income after making any necessary trading security adjustments?
a. 900,000 b. 810,000 c. 762,000 d. 948,000
 FV 12/31/20 1,065,000
Initial CA -1,155,000
Unreal. Losss -90,000

NI before adj. 900,000

Unreal. Loss on Trading sec -90,000
Adj. NI 810,000
2. What would Lover’s net income be if the fair value of security B were 285,000?
a. 867,000 b. 900,000 c. 885,000 d. 933,000
FV 12/31 (225+285+678) 1,188,000
Initial CA -1,155,000
Unreal. Gain 33,000

NI before adj. 900,000

Unreal. Gain 33,000
Adjusted NI 933,000
22. Leopard Company purchased P 5, 000, 000 of Bonds at par. The entity has chosen the fair value model for this
investment. At year-end, the entity receives annual interest of P 350, 000 and the fair value of the bonds was 4,705,
000.

What amount should be reported for the bond investment as total income or loss in the income statement?
a. 65, 000 b. 55, 000 c. 295, 000 d. 50, 000
FV 12/31 4,705,000
Initial CA -5,000,000
Unreal. Loss -295,000
Interest income 350,000
Total Income (P or L) 55,000
23. On January 1, 2020, Tricia Company purchased bonds with face amount of 4,000,000. The business model of the
entity in managing the financial asset is not only to collect contractual cash flows that are solely payment of principal
and interest but also to sell the bonds in the open market. The entity paid 4,206,000 for the bond investment. The
bonds mature on December 31, 2022 and pay 10% interest annually on December 31 of each year with 8% effective
yield. The bonds are quoted at 95 on December 31, 2020 and 90 on December 31, 2021.

What amount of cumulative unrealized loss should be reported in the statement of changes in equity on December
31, 2021?
a. 406,000 b. 606,000 c. 473,878 d. 0

FA x 10% CA x 8%
Date SR ER Amort. CA
01/01/2020 4,206,000 FV 12/31 3,600,000 (4M x 90%)
12/31/2020 400,000 336,480 63,520 4,142,480 Amortized cost -4,073,878
12/31/2021 400,000 331,398 68,602 4,073,878 Unrealized gain(loss) -473,878
24. Maxim Company acquired 40,000 ordinary shares on October 1 for 6,600,000 to be held for trading. On November 30,
the investee distributed a 10% ordinary stock dividend when the market price of the share was P250. On December
31, the entity sold 4,000 shares for 1,000,000. (Same as # 3)

What amount should be reported as gain on sale of investment in the current year?
a. 340,000 b. 400,000 c. 500,000 d. 600,000
P-24 SAME AS # 3
S.P. 1,000,000
CA(last FV) 600,000
Gain (loss) 400,000

Shrs. CA
Oct 40,000 6,600,000
SD 10% 4,000
Bal 44,000 6,600,000
25. Puff Co. acquired 40% of Straw, Inc.’s voting common stock on January 2, year 1, for 400,000. The carrying amount
of Straw’s net assets at the purchase date totaled 900,000. Fair values equaled carrying amounts for all items except
equipment, for which fair values exceeded carrying amounts by 100.000. The equipment has a five-year life. During
year 1, Straw reported net income of 150,000. What amount of income from this investment should Puff report in its
year 1 income statement if Puff uses the equity method to account for the investment?
a. 40,000 b. 52,000 c. 56,000 d. 60,000
Acq. Price 400,000
NA acq. (900 x 40%) -360,000
P - 25
Excess payment 40,000 Share in NI (150,000 x 40%) 60,000
Equipt (100 x 40%) -40,000 / 5yrs. = 8,000 Amortization of Equipment -8,000 (100,000 x40%/5)
Excess payment 0 Investment income 52,000

26. Moss Corp. owns 20% of Dubro Corp.’s preferred stock and 80% of its common stock. Dubro’s stock outstanding at
December 31, year 1, is as follows:
10% cumulative preferred stock 100,000 Common stock 700,000 Dubro reported net income of 60,000 for the year
ended December 31, year 1. Assume that Moss does not elect the fair value option to report the investment in Dubro.
What amount should Moss record as equity in earnings of Dubro for the year ended December 31, year 1?
a. 42,000 b. 48,000 c. 48,400 d. 50,000
NI 60,000
NI available to PS(100k x 10%) -10,000 x 20% = 2,000
NI available to OS 50,000 x 80% = 40,000
Total equity earnings 42,000
27. Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, year 1, for 400,000. The carrying
amount of Adams’ net assets at the purchase date totaled 900,000. Fair values and carrying amounts were the same
for all items except for plant and inventory, for which fair values exceeded their carrying amounts by 90,000 and
10,000, respectively. The plant has an eighteen-year life. All inventory was sold during year 1. During year 1, Adams
reported net income of 120,000 and paid a 20,000 cash dividend. Assume that Sage uses the equity method to
account for this investment. What amount should Sage report in its income statement from its investment in Adams
for the year ended December 31, year 1?
a. 48,000 b. 42,000 c. 36,000 d. 32,000
 P - 27 Amortization
Purchase Price 400,000
CA purchased(900,000 x 40%) -360,000
Excess Payment 40,000
Plant (90,000 x 40%) -36,000 / 18 2,000
Inventory (10,000 x 40%) -4,000 4,000
Excess 0 6,000
Share in NI 48,000 (120,000 x 40%) Invest/Income
Less amortization -6,000 Income/Invest
Investment income 42000
28. On January 1, 2020, Royalty Company purchased 9% bonds in the face amount of P6,000,000. The bonds mature
on January 1, 2025 and were purchased for P5,555,000 to yield 11%. The entity classified the bonds as held for
trading and interest is payable annually every December 31. The entity provided the following information about fair
value of the bonds and effective rate:
Fair value Effective rate
December 31, 2020 5,450,000 12%
December 31, 2021 6,155,000 8%

On January 1, 2022, the entity changed the business model for this investment to collect contractual cash flows
composed of principal and interest.
On January 1, 2022, the fair value of the bonds did not change.
1. What is the interest income for 2020?
a. 540,000 b. 610,922 c. 660,000 d. 661,918
Trading - Interest income: FA x SR
FA 6,000,000
SR x 9%
Interest income 540,000
2. What amount of unrealized loss should be recognized in profit or loss for 2020?
a. 500,000 b. 450,000 c. 105,000 d. 0
FV 12/31/2020 5,450,000
Initial CA -5,555,000
Unreal. Gain (loss) -105,000
3. What amount of unrealized gain should be recognized in profit or loss for 2021?
a. 155,000 b. 600,000 c. 705,000 d. 0
FV 12/31/2021 6,155,000
FV 12/31/2020 -5,450,000
Unreal. Gain (loss) 705,000
4. What is the interest income for 2022?
a. 492,400 b. 540,000 c. 480,000 d. 677,050
CA(FV on reclass) 6,155,000
ER x 8%
Interest income 492,400
29. During 2021, Shawn Company purchased 9,000 ordinary shares of Hurontario Company for P16
per share, 6,000 ordinary shares of Eglinton Company for P33 per share and P120,000 of treasury
notes at 101. These investments are intended to be held as ready sources of cash and are
classified as held for trading.
Also in 2021, Shawn purchased 10,500 ordinary shares of Dundas Company for P29 per share.
The securities are classified as available for sale (FA at FVOCI).

During 2021, Shawn received the following interest and dividend payment on its investments:

Hurontario Company P1 per share dividend

Eglinton Company P3 per share dividend
Dundas Company P2 per share dividend
Treasury notes 6% annual interest earned for 6 months

Fair values of the securities at December 31, 2021, were as follows:

Hurontario Company P20 per share

Eglinton Company P22 per share
Dundas Company P26 per share
Treasury notes 102

On March 23, 2022, the 6,000 ordinary shares of Eglinton were sold for P17 per share. On June
30, 2022, the treasury notes were sold 100.5 plus accrued interest.

Fair values of remaining securities at December 31, 2022, are as follows:

Hurontario Company P20 per share
Dundas Company P33 per share
Based on the above and the result of your audit, determine the following:
1. Total dividend income in 2021
a. 48,000 c. 27,000
b. 21,000 d. 0
Hurontario 9,000 x1 9,000
Eglinton 6,000 x 3 18,000
Dundas 10,500 x 2 21,000
Total Dividend Income in 2021 48,000
2. Carrying amount of Trading Securities as of December 31, 2021
a. 434,400 c. 463,200
b. 342,000 d. 717,900
Hurontario 9,000 x 20 180,000
Eglinton 6,000 x 22 132,000
Treasury notes 120,000 x102 122,400
CA 12/31/21 (FV) 434,400
3. Unrealized loss to be recognized in 2021 profit or loss
a. 49,800 c. 27,600
b. 28,800 d. 0
FV 12/31/21 of trading securities 434,400
CA:
Hurontario 9,000 x 16 144,000
Eglinton (6,000 x 33) 198,000
TN (120,000 x 101) 121,200 463,200
Unrealized gain (loss) -28,800
 4. Total realized loss on sale of securities in 2022
a. 96,600 c. 29,400
b. 5,400 d. 31,800
Eglinton - TS
SP (6,000 x 17) 102,000
less: CA (last MV) -132,000
Loss on sale -30,000
Treasury notes:
SP (120,000 x 100.5) 120,600
less: CA -122,400 -1,800
Total loss -31,800
5. Net unrealized gain in accumulated other comprehensive income in equity as of December
31, 2022
a. 42,000 c. 63,000
b. 73,500 d. 0
FV of Dundas share 12/31/22 (10,500 x 33) 346,500
Original cost (10,500 x 29) -304,500
Cummulative gain (loss)-OCI 42,000
OCI - Comprehensive Income (current)
FV 12/31/22 346,500 2021:
FV12/31/21 (10,500 x 26) -273,000 FV 12/31/21 273,000
Unreal. Gain 73,500 Initial CA. -304,500
Unreal. Loss -31,500
30. On June 1, 2021, Edna Corporation purchased as a long term investment (FA at amortized cost)
4,000 of the 1,000 face value, 8% bonds of Mayet Corporation. The bonds were purchased to
yield 10% interest. Interest is payable semi-annually on December 1 and June 1. The bonds
mature on June 1, 2027. Edna uses the effective interest method of amortization. On November
1, 2022, Edna sold the bonds for a total consideration of 3,925,000. Edna intended to hold these
bonds until they matured, so year-to-year market fluctuations were ignored in accounting for
bonds.

Based on the above and the result of your audit, answer the following: (Round off present value
factors to four decimal places)

1. The purchase price of the bonds on June 1, 2021 is

a. 3,645,328 c. 3,696,736
b. 3,691,132 d. 3,624,596
Principal (4M x .5568) 2,227,200
Interest (160,000 x8.8633) 1,418,128
Purchase Price 3,645,328
Cash
CA x ER FA x SR Int. income
Date ER 5% SR 4% Amort. C. A.
6/1/21 3,645,328 Invest in bonds
12/1/21 182,266 160,000 22,266 3,667,594 *** Interest Inc.
6/1/22 183,380 160,000 23,380 3,690,974 *
12/01/2022 184,549 160,000 24,549 3,715,523
2. The interest income for the year 2021 is
a. 215,850 c. 212,829
b. 215,521 d. 211,612
6/1/21 to 11/30/21 182,266
12/1/21 to 12/31/21 30,563 (183,380 x 1/6)
Interest Income for 2021 212,829
3. The carrying amount of the investment in bonds as of December 31, 2021 is
a. 3,725,919 c. 3,719,986
b. 3,649,541 d. 3,671,491
CA 12/1/21 3,667,594
Amort. - December (23,380 x 1/6) 3,897
CA 12/31/21 3,671,491
4. The interest income for the year 2022 is
a. 306,608 c. 311,218
b. 310,715 d. 304,748
Jan - May 2022 (183,380 X 5/6) 152,817
June - Nov 1, 2022 (184,549 X 5/6) 153,791
Interest Income 2022 306,608
5. The gain on sale of investment in bonds on November 1, 2022 is
a. 21,196 c. 27,632
b. 80,235 d. 104,045
Total Proceeds 3,925,000
Less: Accrued interest(160,000 x 5/6) -133,333
Selling Price 3,791,667
Les: CA 11/1/22 -3,711,432
Gain (loss) 80,235

CA 6/1/22 3,690,974
Add: Discount amort - June - Nov 1
(24,549 x 5/6) 20,458
CA 11/1/22 3,711,432
MODULE 4
INVENTORY – Revised

Problem

1. Angel Company provided the following data:

Items counted in the bodega 4,000,000

Items included in the count specifically segregated
per sale contract 100,000
Items in receiving department, returned by customer,
in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, invoice received but goods not
received. Freight is on account of seller 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items on receiving department, refused because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000

What is the correct amount of inventory?

a. 5,700,000
b. 6,000,000
c. 5,800,000
d. 5,150,000
Items counted in the bodega 4,000,000
Items included in countspecifically
specificallysegregated
segregated -100,000
Items returned by customer 50,000
Items ordered and in receiving
receivingdepartment
dept. 400,000
Items shipped today, FOB destination 150,000
Items for window display 200,000
Items on counter for sale 800,000
Damage and and
unsalable
unsalableitems
included
included
in count
in count -50,000
Items in the shipping department 250,000
Adjusted balance 5,700,000
2. In connection with your audit of the Angel Manufacturing Company, you reviewed its inventory
as of December 31, 2019 and found the following items:

(a) A packing case containing a product costing 100,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it was
marked “Hold for shipping instructions.” The customer’s order was dated December 18, but the
case was shipped and the customer billed on January 10, 2020.
 (b) Merchandise costing 600,000 was received on December 28, 2019, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.

(c) Merchandise received on January 6, 2020, costing 700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2019. Because it was not on hand during the inventory count, it was not included.

(d) A special machine costing 200,000, fabricated to order for a particular customer, was
finished in the shipping room on December 30. The customer was billed for 300,000 on that
date and the machine was excluded from inventory although it was shipped January 4, 2020.

(e) Merchandise costing 200,000 was received on January 6, 2020, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2019, FOB destination.

(f) Merchandise costing 150,000 was sold on an installment basis on December 15. The
customer took possession of the goods on that date. The merchandise was included in
inventory because Angel still holds legal title. Historical experience suggests that full payment
on installment sale is received approximately 99% of the time.

(g) Goods costing 500,000 were sold and delivered on December 20. The goods were included
in the inventory because the sale was accompanied by a purchase agreement requiring Angel
to buy back the inventory in February 2020.

Based on the above and the result of your audit, how much of these items should be included in
the inventory balance at December 31, 2019?
a. 1,300,000
b. 800,000
c. 1,650,000
d. 1,050,000
Unshipped goods (a) 100,000
Purchased merchandise shipped FOB shipping point © 700,000
Goods used as collateral for loan (g) 500,000
Total 1,300,000
Note: special order, custom built or made to order, once finish the tittle is transferred to the buyer
- Inventory sold with buy back provision shall be recognized as part of inventory, as the
inventory was just use as collateral to a loan.
3. Ozz Company provided the following information for the current year:
Units Unit cost Total cost
January 1 Inventory on hand 200 1,500 300,000
April 3 Purchase 300 1,750 525,000
October 1 Purchase 500 2,000 1,000,000
The entity sold 400 units on June 25 and 400 on December 10. What is the weighted average
cost of the inventory at year-end?
a. 350,000
b. 400,000
c. 730,000
 d. 365,000
Units Cost
Beg. Inventory 200 300,000
Purchases - April 3 300 525,000
- Oct. 1 500 1,000,000
Available for sale 1,000 1,825,000
Units sold -800
Ending Inventory 200

Weighted average cost = Available for sale at cost / units available for sale
= 1,825,000/1,000
= 182.5
Ending Inventory = 200 x 182.50
= 365,000
Cost of goods sold = 800 x 182.50
= 1,460,000

4. JP Company has two products in the inventory.

Product X Product Y
Selling price 1,500,000 2,000,000
Materials and conversion
costs 1,000,000 1,200,000
General administration
costs 200,000 300,000
Estimated selling costs 400,000 500,000

At the year-end, the manufacture of items of inventory has been completed but no selling costs
have yet been incurred.

What is the measurement of Product X and Product Y?

a. 1,000,000 and 1,200,000
b. 1,100,000 and 1,500,000
c. 1,500,000 and 2,000,000
d. 500,000 and 800,000
Subsequent valuation: Cost or NRV whichever is lower
NRV = Estimated SP - (CC + CS)
Product X Product Y
Materials and conversion cost 1,000,000 1,200,000
Selling price 1,500,000 2,000,000
less: selling cost -400,000 -500,000
Net realizable value 1,100,000 1,500,000
Measurement lower of cost or NRV 1,000,000 1,200,000
5. The Starla Corporation applies the lower of cost or net realizable value (NRV) inventory. Data
regarding the items in work-in-process inventory are shown below:
Shorts Pants
Historical cost P56,640 P90,000
Selling Price 108,800 108,000
Estimated cost to complete 14,400 20,400
Replacement Cost 50,400 95,400
Normal profit margin as percentage of selling price 25% 10%

Under the lower cost or NRV rule, the pants should be valued at?
a. 67,800
b. 90,000
c. 87,600
d. 95,400
Pants:
Cost 90,000
NRV:
Estimated SP 108,000
Less: Estimated cost to complete -20,400
NRV 87,600
Lower of Cost or NRV 87,600 lower

6. On November 15, 2021, Angel Company entered into a commitment to purchase 10,000 pillows
on February 15, 2022 at a price of P310 per piece. On December 31, 2021, the market price of
pillow is 270 per piece. On February 15, 2022, the price of pillow is P300 per piece. What is the
gain on purchase commitment to be recognized on February 15, 2022?
a. 400,000
b. 100,000
c. 300,000
d. 0
Delivery date
loss - recognized
Commitment date FS date gain - recognized,but limited to gain
no entry loss - recognized Fe. 15. 2022
gain - disclosed 3.5
Nov. 15, 2021 Dec. 31, 2021 MI 3,100,000
3.1M 3M Liab 100,000
loss 100,000 Gain 100,000
Liab 100,000 Cash 3,100,000
7. Tricia Company’s accounting records indicated the following information for 2020:
Inventory, January 1 700,000
Purchases 3,000,000
Sales 3,500,000
 A physical inventory taken on December 31, 2020 resulted in an ending inventory of 700,000.
The gross profit on sales has remained constant at 25% in recent years. The entity suspects
some inventory may have been taken by a new employee.

On December 31, 2020, what is the estimate cost of missing inventory?

a. 300,000
b. 375,000
c. 700,000
d. 0
Inventory estimates:
Gross Profit method(Sales - CS = GP)
Beg. Invty. xx 700,000
Add: net purchases xx 3,000,000
Available for sale xx 3,700,000
Less: cost of sales (xx) -2,625,000 (3.5 x 75%)
Estimated Inventory before lossx x 1,075,000
Per count (undamage/damage)(xx) -700,000
Loss xx 375,000
Sales 100%
CS ? 75%
GP 25%
8. On September 30, a tsunami destroyed a retail location of Waliyha Clothing including the entire
inventory on hand at the location. The inventory on hand as of October 31 totaled 480,000.
From October 31 until the time of the hurricane, the company made purchases of 53,000 and
had sales of 458,000. Assuming the rate of gross profit to selling price is 70%, what is the
approximate value of the inventory that was destroyed?
a. 137,933
b. 181,500.
c. 205,000.
d. 395,600
Beg. Invty. xx 480,000
Add: net purchases xx 53,000
Available for sale xx 533,000
Less: cost of sales (xx) -137,400 (458,000 x 30%)
Estimated Inventory before lossx x 395,600
Per count (undamage/damage)(xx) 0
Loss xx 395,600
Sales 100%
CS ? 30%
GP 70%
9. You obtained the following information in connection with your audit of Tricia Corporation:
Cost Retail
Beginning inventory P1,987,200 P2,760,000
Sales 7,812,000
Purchases 4,688,640 6,512,000
Freight in 94,560
Mark ups 720,000
Mark up cancellations 120,000
Markdown 240,000
Markdown cancellations 40,000
Tricia Corp. uses the retail inventory method in estimating the values of its inventories.
Based on the above and the result of your audit, answer the following:
1. The cost ratio to be used considering the provisions of PAS 2 is
a. 68.58%
b. 69.20%
c. 70.00%
d. 75.78%

2. The estimated ending inventory at retail is

a. P2,300,000
b. P2,060,000
c. P1,940,000
d. P1,860,000

3. The estimated ending inventory at cost is

a. P1,412,786
b. P1,275,588
c. P1,302,000
d. P1,287,120

4. The estimated cost of goods sold is

a. P5,468,400
b. P5,494,812
c. P5,357,614
d. P4,685,117
 Average method = Available for sale at cost 6,770,400/9,672,000 = 70%
Avail. At retail + MU - MD

Average:
Cost Retail Cost Retail
Beg. Inventory xx xx 1,987,200 2,760,000
Purchases xx xx 4,688,640 6,512,000
Purchase return (xx) (xx)
Freight xx 94,560
Purchase allowance (xx)
Purch. Discount (xx)
MU xx 600,000 (720-120)
MD ________ (xx) -200,000 (240-40)
Avail for sale xx xx 6,770,400 9,672,000 Cost ratio 70%
Sales (xx) -7,812,000
Sales return xx
Employee discount (xx)
Normal losses (xx)
Ending Invty at retail xx 1,860,000
EI at cost (xx) -1,302,000 EI at retail x Cost ratio
CGS xx 5,468,400 (1,860,000 x 70%)
10. Joseph Factory started operations in 2021. Joseph manufactures bath towels. 60% of the
production are “Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250
per dozen. During 2021, 6,000 dozens were produced at an average cost of P360 per
dozen. The inventory at the end of the year was as follows:

220 dozens “Class A” @ P360 P 79,200

300 dozens “Class B” @ P360 108,000
P187,200

QUESTIONS:
Using the relative sales value method, which management considers as a more equitable basis
of cost distribution, answer the following:

1. How much of the total cost should be allocated to “Class A”?

a. P1,296,000
b. P1,620,000
c. P1,284,324
d. P 925,714

2. How much of the total cost should be allocated to “Class B”?

a. P540,000
b. P875,676
c. P 864,000
d. P1,234,286
Relative sales value method

Total Production cost (6,000 x 360) = 2,160,000

Allocation: FV Allocation of cost
Class A (6,000 x 60% = 3,600 x 500) = 1,800,000 /2,400,000 x 2,160,000 = 1,620,000
Class B (6,000 x 40% = 2,400 x 250) = 600,000 /2,400,000 x 2,160,000 = 540,000
Total 2,400,000 2,160,000
3. How much is the value of inventory as of December 31, 2021?
a. P187,200
b. P187,946
c. P117,000
d. P166,500

4. How much is the cost of sales for the year 2021?

a. P1,972,800
b. P1,993,500
c. P2,043,000
d. P1,972,054
Cost per unit: Cost/doz
Class A (1,620,000/3,600) = 450
Class B (540,000 /2,400) = 225

Ending Inventory: CS
Class A (220 x 450) 99,000 (3,380 x 450) 1,521,000
Class B (300 x225 ) 67,500 (2,100 x 225) 472,500
EI 12/31 166,500 1,993,500
5. How much is the gross profit for the year 2021?
a. P242,200
b. P406,500
c. P221,500
d. P242,946
Cost of sales:
Total production cost (6,000 x 360) 2,160,000
less: EI -166,500
Cost of sales 1,993,500

Sales
Class A (3,600 - 220) x 500) = 1,690,000
Class B (2,400 - 300) x 250) = 525,000
Total Sales 2,215,000
Less: Cost of sales -1,993,500
Gross Profit 221,500
11. A fire destroyed Jerome Company's inventory on October 31. On January 1, the inventory had a
cost of 3,500,000. During the period January 2 to October 31, the entity had net purchases of
8,500,000 and net sales of 17,000,000. Undamaged inventory at the date of fire had a cost of
170,000. The mark up on cost is 66 2/3%. What was the cost of inventory destroyed by fire?
a. 1,630,000
b. 1,970,000
c. 1,550,000
d. 5,170,000
Sales 166.67% 17M
less: CS 100% 10,200,000
Gross Margin 66.67%

Beg. Invty. 3,500,000

Purchases 8,500,000
Available for sale 12,000,000
Less: CS (17M / 166.675) -10,200,000
Estimated E! 1,800,000
Undamage inventory -170,000
Inventory destroyed by fire 1,630,000
12. Jerome Company conducted a physical count on December 31, 2020 which revealed total cost
of 5,000,000.

However, the following items were excluded from the count:

• Goods costing 100,000 shipped by a vendor FOB shipping point on December 29, 2020
and received by Jerome Company on January 12, 2021.
• Goods in process costing 550,000 held by an outside processor for further processing.
• Goods sold to a customer which is being held for the customer to call for at the customer's
convenience with a cost of 400,000.
• A packing case containing a product costing 150,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it was
marked "hold for shipping instructions".

What is the correct inventory on December 31, 2020?

a. 6,200,000
b. 5,800,000
c. 5,650,000
d. 5,000,000
Inventory per physical count 5,000,000
Goods purchased in transit, FOB-SP 100,000
Goods in process 550,000
Inventory marked "hold for shipping instructions" 150,000
Adjusted Inventory balance 12/31 5,800,000
13. In year 2021, a division experienced fire in which it destroyed all of inventory except for P55,000
of inventory measured at cost. Additional Data available are below:

2020 2021 (to date of fire)

Sales P850,000 P510,000
Purchases 560,000 305,000
Cost of goods sold 425,000
Ending inventory 95,000

What is the approximate inventory lost to the fire?

a. 55,000
b. 90,000
c. 145,000
d. 400,000
2021
Beg. Invty. 95,000
Purchases 305,000
Available for sale 400000
Less: Cost of goods sold(510,000 x 50%) -255,000
Estimated Inventory before fire 145000
Less: Inventory not destroyed -55,000
Fire loss 90000
2020:
Sales 100% 850,000
Less CS 50% -425,000
Gross Profit 50% 425,000

14. A retailer imported goods at a cost of P 260,000, including P 40,000 non-refundable import
duties and P 20,000 refundable purchase taxes. The risks and rewards of ownership of the time
imported goods were transferred to the retailer upon collection of the goods from the harbor
warehouse. The retailer was required to pay for the goods upon collection. The retailer incurred
P 10,000 to transport the goods to its retail outlet and a further P 4,000 in delivering the goods
to its customer. Further selling costs of P 6,000 were incurred in selling the goods.

What amount should the inventory be valued?

a. 240,000
b. 250,000
c. 260,000
d. 270,000
Total purchse price 260,000
Refundable tax -20,000
Transport cost 10,000
Total cost 250,000
 15. The following audited balances pertain to Kaila Company
Accts. Payable:
Jan.1, 2020 286, 924
Dec.31, 2020 737, 824
Inventory balance:
Jan. 1, 2020 815, 386
Dec.31, 2020 488, 874
Cost of goods sold-2020 1, 859, 082

How much was paid by Kaila Company to its supplier in 2020?

a. 1, 081, 670
b. 1, 065, 900
c. 1, 071, 678
d. 1, 097, 000
Accounts Payable
Payment ? 1,081,670 286,924 Beg.
1,532,570 ? Purchases
1,081,670 1,819,494 Total Credit
-1,081,670 less: debit
737,824 End

Beg. Invty. 815,386

Purchases ? 1,532,570 (2,347,956 -815,386)
Available for sale 2,347,956
less: EI -488,874
Cost of goods sold 1,859,082
16. Mavis, Inc., owner of a trading company, engaged your services as auditor. There is a discrepancy
between the company’s income and the sales volume. The owner suspects that the staff is
committing theft. You are to determine whether or not this is true. Your investigations revealed
the following.

1. Physical inventory, taken December 31, 2020 under your observation showed that cost was
P265,000 and net realizable value (NRV), P244,000. The inventory on January 1, 2020
showed cost of P390,000 and net realizable value of P375,000. It is the corporation’s practice
to value inventory at “lower of cost or NRV.” Any loss between cost and NRV is included
in “Other expenses.”

2. The average gross profit rate was 40% of net sales.

3. The accounts receivable as of January 1, 2020 were 135,000. During 2020, accounts
receivable written off during the year amounted to 10,000. Accounts receivable as of
December 31, 2020 were 375,000.

4. Outstanding purchase invoices amounted to 300,000 at the end of 2020. At the beginning of
2020 they were 375,000.

5. Receipts from customers during 2020 amounted to 3,000,000.

 6. Disbursements to merchandise creditors amounted to 2,000,000.

Based on the above and the result of your audit, determine the following:

1. The total sales in 2020 is

a. 3,240,000 c. 3,250,000
b. 3,230,000 d. 2,770,000
1. AR
beg. 135,000 10,000 w/o allow/AR
Sales ?3.25M 3,000,000 collections cash/ar
Dr. 3,385,000 3,010,000
-Cr. -3,010,000
Ending 375,000

2. The total purchases in 2020 is

a. 2,000,000 c. 1,950,000
b. 2,075,000 d. 1,925,000
2. AP
Payments 2,000,000 375,000 beg.
?1.925 Purchases
2,300,000 Cr.
-2,000,000 -Dr.
300,000 Ending

3. The amount of inventory shortage as of December 31, 2020 is

a. 106,000 c. 100,000
b. 175,000 d. 0
Inventory, 1/1 (cost) 390,000
Add: Purchases 1,925,000
Available for sale 2,315,000
Less: CS (3,250,000 x 60%) -1,950,000
Estimated Invty. 12/31 (cost) 365,000
Per count -265,000
Estimated inventory shortage 100,000
17. A recent fire severely damaged Penguin Company’s administration building and destroyed
many of its financial records. You have been contracted by Penguin’s management to
reconstruct as much financial information as possible for the month of July. You learn that
Penguin makes a physical inventory count at the end of each month to determine monthly
ending inventory values. You also find out that the company applies the average cost method.

You are able to gather the following information by examining various documents:
Inventory, July 31 150,000 units
Total cost of goods available for
sale in July 356,400
Cost of goods sold during July 297,000
Gross profit on sales for July 303,000
 Cost of inventory, July 1 P0.35 per unit

The following are Penguin’s July purchases of merchandise:

Date Quantity Unit Cost
July 6 180,000 P0.40
12 150,000 0.41
16 120,000 0.42
17 150,000 0.45

1. Number of units on hand July 1

a. 450,000 b. 848,571
c. 169,714 d. 300,000

2. Units sold during July

a. 600,000 b. 300,000
c. 750,000 d. 450,000
3. Unit cost of inventory at July 31
a. 0.35 b. 0.396
c. 0.419 d. 0.279
Unit Total AVE. = Cost of goods avail. For sale
Units Cost Cost Units avail for sale
Beg. Invty. 7/1 300,000 0.35 105,000 0.396
Purchases 600,000 251,400
Available for sale 900,000 356,400 /900,000= 0.396
Less: Ending Invty. -150,000 0.396 -59,400
Units sold/CS 750,000 297,000
18. Dundas Mart uses the average retail inventory method. The following information is available for
the current year:

Cost Retail
Beginning inventory P 1,100,000 P 2,200,000
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net markups 600,000
Net markdowns 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000
Based on the above and the result of your audit, answer the following:

1. The cost ratio using the average retail inventory method is

a. 58.13% c. 62.00%
b. 61.07% d. 60.00%

2. The estimated ending inventory at retail is

a. 3,000,000 c. 2,800,000
b. 3,600,000 d. 3,650,000

3. The estimated ending inventory at cost is

a. 1,743,945 c. 1,832,143
b. 2,198,571 d. 1,800,000

4. The estimated cost of goods sold is

a. 15,267,857 c. 15,000,000
b. 14,901,429 d. 15,056,055

5. If the inventory at retail based on physical count at December 31 is P1,700,000, the estimated
inventory shortage is
a. 780,000 c. 755,709
b. 793,929 d. 0
Problem 18 Cost ratio:
Ave. retail = Available for sale at cost FIFO = Net purchases at cost
Avail. At retail + MU - MD Net purch at retail + MU-MD
Cost Retail
Beginning inventory 1,100,000 2,200,000
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns -600,000 -1,000,000
Purchase allowances -300,000
Departmental tranfer in 400,000 800,000
Net MU 600,000
Net MD -900,000
Available for sale 16,800,000 28,000,000 Cost ratio =16.8/28 = 60%
Sales -24,700,000
Sales returns 350,000
Employee discounts -600,000
Loss from breakage -50,000
Ending invetory at retail 3,000,000
EI, at cost -1,800,000 EI at retail x cost ratio
Cost of sales 15,000,000

EI at cost 1,800,000
Per count at cost (1.7M x 60%) -1,020,000
Estimated inventory shortage 780,000

MODULE 5 PROPERTY, PLANT & EQUIPMENT

LEARNING OBJECTIVES:
1. Describe property, plant, and equipment.
2. Identify the costs to include in initial valuation of property, plant, and equipment.
3. Describe the accounting problems associated with self-constructed assets.
4. Describe the accounting problems associated with interest capitalization.
5. Understand accounting issues related to acquiring and valuing plant assets.
6. Describe the accounting treatment for costs subsequent to acquisition.
7. Describe the accounting treatment for the disposal of property, plant, and equipment.

OVERVIEW
PAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of
property, plant and equipment. Property, plant and equipment is initially measured at its cost,
subsequently measured either by using a cost or revaluation model, and depreciated so that its
depreciable amount is allocated on a systematic basis over its useful life.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com
A synchronous discussion for this lesson will be scheduled on September 1, 2020 (Tuesday 7:30
– 8:30 AM)

Property, plant, and equipment is defined as tangible assets that are held for use in
production or supply of goods and services, for rentals to others, or for administrative purposes;
they are expected to be used during more than one period.
• “Used in operations” and not for resale.
• Long-term in nature and usually depreciated.
• Possess physical substance.

Includes:
▪ Land,
▪ Building structures (offices, factories, warehouses), and
▪ Equipment (machinery, furniture, tools).

INITIAL VALUATION

Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing
it to the location and condition necessary for its intended use.

SUBSEQUENT VALUATION
Companies value property, plant, and equipment in subsequent periods using either the
◆ cost method or
◆ fair value (revaluation) method.

Cost of Land
Includes all costs to acquire land and ready it for use. Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on the property;

Improvements with limited lives, such as private driveways, walks, fences, and parking lots,
are recorded as Land Improvements and depreciated.
• Land acquired and held for speculation is classified as an investment.
• Land held by a real estate concern for resale should be classified as inventory.

Cost of Buildings
Includes all costs related directly to acquisition or construction. Cost typically include:
(1) materials, labor, and overhead costs incurred during construction and
(2) professional fees and building permits.

Cost of Equipment
Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically
include:
(1) purchase price,
(2) freight and handling charges
(3) insurance on the equipment while in transit,
(4) cost of special foundations if required,
(5) assembling and installation costs, and
 (6) costs of conducting trial runs.

Illustration 1: The expenditures and receipts below are related to land, land improvements, and
buildings acquired for use in a business enterprise. Determine how the following should be
classified:
Classification
(a) Money borrowed to pay building contractor Notes payable
(b) Payment for construction from note proceeds Building
(c) Cost of land fill and clearing Land
(d) Delinquent real estate taxes on property assumed Land
(e) Premium on 6-month insurance policy during construction Building
(f) Refund of 1-month insurance premium because construction
completed early (Building)
(g) Architect’s fee on building Building
(h) Cost of real estate purchased as a plant site
(land 200,000 and building 50,000) Land/Building
(i) Commission fee paid to real estate agency Land
(j) Installation of fences around property Land Improvements
(k) Cost of razing and removing building Building
(l) Proceeds from salvage of demolished building (Building)
(m) Cost of parking lots and driveways Land
Improvements

Self-Constructed Assets
Costs typically include:
(1) Materials and direct labor
(2) Overhead can be handled in two ways:
1. Assign no fixed overhead
2. Assign a portion of all overhead to the construction process.
Companies use the second method extensively.

Interest Costs During Construction

• PFRS requires — capitalizing actual interest (with modification).
• Consistent with historical cost.
• Capitalization considers three items:
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.

Qualifying Assets
Require a substantial period of time to get them ready for their intended use.
• Assets under construction for a company’s own use.

Capitalization Period
Begins when:
1. Expenditures for the asset have been made.
2. Activities for readying the asset are in progress .
3. Interest costs are being incurred.
 Ends when:
The asset is substantially complete and ready for use.

Amount to Capitalize
Capitalize the lesser of:
1. Actual interest costs
2. Avoidable interest - the amount of interest that could have been avoided if expenditures for
the asset had not been made.

Valuation Issues

Cash Discounts — Whether taken or not — generally considered a reduction in the cost of
the asset.

Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded
at the present value of the consideration exchanged.

Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of
their fair market values.

Issuance of Shares — The market value asset received or the shares issued if asset fair
value is not clearly determinable.

Acquisition by exchange

Exchanges of Nonmonetary Assets

Ordinarily accounted for on the basis of:
• the fair value of the asset given up or
• the fair value of the asset received,
whichever is clearly more evident.

Companies should recognize immediately any gains or losses on the exchange when the
transaction has commercial substance.

Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows change as a result of the
transaction.

That is, if the two parties’ economic positions change, the transaction has commercial
substance.

Exchange Lacks Commercial Substance.

Assume that exchange lacks commercial substance. That is, the economic position of Interstate
did not change significantly as a result of this exchange, the asset is recognized based on the
carrying amount of asset given up, no recognition for gain or loss.

Summary of Gain and Loss Recognition on Exchanges of Non-Monetary Assets

The gain or loss is the difference between the

 fair value of asset given and its carrying amount.

Disclosure include:
• nature of the transaction(s),
• method of accounting for the assets exchanged, and
• gains or losses recognized on the exchanges.

Government Grants
Grants are assistance received from a government in the form of transfers of resources to a
company in return for past or future compliance with certain conditions relating to the operating
activities of the company.

PFRS requires grants to be recognized in income (income approach) on a systematic basis

that matches them with the related costs that they are intended to compensate.

Cost Subsequent to Acquisition

Recognize costs subsequent to acquisition as an asset when the costs can be
• measured reliably and
• it is probable that the company will obtain future economic benefits.

Future economic benefit would include increases in

1. useful life,
2. quantity of product produced, and
3. quality of product produced.
 Derecognition of PPE

A company may retire plant assets voluntarily or dispose of them by

• sale,
• exchange,
• involuntary conversion, or
• abandonment.
Depreciation must be taken up to the date of disposition.

MODULE 5 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
PPE
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before September 4, 2020 (Friday)

1. Adbans Corp. uses different kinds of machines in its manufacturing process. It constructs some of these machines
itself and acquires others from the manufacturers. The following information relates to two machines that it has
recorded in 2021.

Machine A (purchased)

Cash paid for equipment P250,000

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 2021 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 2021 to make it operate more
efficiently 22,500

Machine B (self-constructed)

Cost of materials to construct machine P210, 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. What is the cost of machine A?

a. 380,500 b. 358,000 c. 328,000 d. 350,500
Cash paid for equipment 250,000
Transportation cost 9,000
Installation cost 15,000
Testing cost 12,000

Cost of safety rails and platforms

18,000
Cost of water devices to keep
machine cool 24,000
Cost of adjustments 22,500
Total cost 350,500
2. What is the cost of machine B?
a. 471,000 b. 417,000 c. 483,000 d. 438,000
Cost of materials 210,000
Labor cost 129,000
Overhead cost 66,000
Interest cost 30,000
Installation cost 36,000
Safety inspection cost 12,000
Total cost 483,000
2. Begonia Company installed a new equipment at the production facility and incurred the following costs:
Initial delivery and handling cost 400,000
Cost of site preparation 700,000
Cost of equipment per supplier’s invoice 3,000,000
Consultants used for advice on the acquisition of equipment 800,000
Interest charges paid to supplier for deferred credit 300,000
Estimated dismantling cost to be incurred as required by contract 350,000
Operating losses before commercial production 450,000

What total amount should be capitalized as cost of the equipment?

a. 5,250,000 b. 5,550,000 c. 4,900,000 d. 5,100,000
3. Truepa Company incurred the following costs at the beginning of the current year:
Cost of land 10,000,000
Cost of building 11,500,000
Remodeling and repairs prior to occupancy 600,000
Escrow fee 300,000
Property tax for period prior to acquisition 150,000
Real estate commission 70,000
What is the cost of the building?
a. 12,370,000 b. 12,260,000 c. 12,620,000 d. 12,378,140
P-3 Land Building
Acquisition cost 10,000,000 11,500,000
Remodeling and repairs 600,000
Allocation of trnasaction cost:
Land (520,000 x 10/21.5) 241,860
Building (520,000 x 11.5/21.5) 278,140
Total cost 10,241,860 12,378,140
Transaction cost to acquire:
Escrow fee 300,000 L 10 /21.5 x 520,000
Property tax 150,000 B 11.5 /21.5 x 520,000
Real estate commision 70,000 Total 21.5
Total transaction cost 520,000
4. Choco Company incurred the following expenditures related to the construction of a new home office:
Cost of Land, which included usable old apartment
building with fair value of P200,000 3,000,000
Legal fees, including fee for title search 20,000
Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 30,000loss
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Premium for insurance on building during construction 22,000
Cost of open house party to celebrate opening of building 80,000

1. What is the cost of land?

a. 2,720,000 b. 2,915,000 c. 3,205,000 d. 2,950,000

2. What is the cost of building?

 a. 7,517,000 b. 7,537,000 c. 7,495,000 d. 7,525,000

3. What is the cost of land improvement?

a. 200,000 b. 203,000 c. 143,000 d. 0

Land
P-4 Land Building Improvement
Cost of Land, which included usable old apartment 2,800,000
building with fair value of P200,000 *200,000 loss written off
Legal fees, including fee for title search 20,000
Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Payment of medical bills of employees accidentally '-loss
injured while inspecting building construction 30,000 loss
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Premium for insurance on building during construction 22,000
Cost of open house party to celebrate opening of building - expense 80,000
Total cost 2,915,000 7,517,000 143,000

5. At year-end, Hecker Company provided the following information about property, plant, & equipment:

Plant assets acquired from Krom Company 8,000,000

Repairs made on building prior to occupancy 250,000
Special tax assessment 40,000
Construction of platform for machinery 70,000
Remodeling of office space in building including
new partitions and walls 500,000
Purchase of new machinery 900,000
Total property, plant and equipment 9,760,000

In exchange for the plant assets of Krom Company, Hecker Company issued 50,000 shares with P100 par value. On
the date of purchase, the share had a quoted price of P150 and the plant assets had the following fair value:

Land 600,000
Building 4,500,000
Machinery 2,000,000

1. What is the cost of Building?

a. 5,250,000 b. 5,500,000 c. 5,000,000 d. 4,500,000

2. What is the cost of Land?

a. 600,000 b. 640,000 c. 670,000 d. 690,000

3. What is the cost of machinery?

 a. 2,900,000 b. 2,000,000 c. 2,970,000 d. 2,830,000
Acquisition by issuing shares (PS,OS & TS)
asset acquired shall be recorded based on:
1. FV of asset received
2. FV of shares issued
3. Par value of shares issued

Building Land Machinery

FV acquired 4,500,000 600,000 2,000,000
Repairs made on building prior to occupancy 250,000
Special tax assessment 40,000
Construction of platform for machinery 70,000
Remodeling of office space in building including
new partitions and walls 500,000
Purchase of new machinery 900,000
Total 5,250,000 640,000 2,970,000

6. JK Company had the following property acquisitions during the current year:

Acquired a tract of land in exchange for 100,000 shares of Peniel Company with 100 par value that had a market
price of P500 per share on the date of acquisition. The last property tax bill indicated assessed value of 2,400,000 for
the land.

Received land from a major shareholder as an inducement to locate a plant in the city. No payment was acquired but
the entity paid 50,000 for legal expenses for land transfer. The land is fairly valued at 2,000,000.

What is the total increase in land as a result of acquisitions?

a. 2,400,000 b. 52,000,000 c. 2,000,000 d. 10,000,000.
FV of shares (100,000 x 500) 50,000,000
FV of Land - Donation 2,000,000
Increase in Land 52,000,000

7. Euphoria Company acquired a land full by issuing 400,000 10 percent bonds payable and 40,000 ordinary shares
with par value of P5. The share was selling at P15 and the bonds were trading at 105.

What amount should be recorded as cost of the land?

a. 42,760,000 b. 79,800,000 c. 42,761,000 d. 1,020,000
Fair value of bond payable (400,000 x 105%) 420,000
Fair value of shares (40,000 x 15) 600,000
Total cost of land 1,020,000
 8. Wook Company entered into a contract to acquire a new machine which had a cash price of 2,000,000.

Down payment 400,000

Note payable in 3 equal annual installments 1,200,000
20,000 ordinary shares with a par value of P25
and fair value of P40 per share 800,000
2,400,000

Prior to use, installation cost of 50,000 was incurred. The machine has an estimated residual value of 100,000.

What is the initial cost of the machine?

a. 2,000,000 b. 2,400,000 c. 2,050,000 d. 2,450,000.
Cash price 2,000,000
Installation cost 50,000
Total cost 2,050,000
9. On January 2, 2021, Bell Corporation traded is a used delivery truck with a carrying amount of 540,000 for a new
delivery truck having a list price of 1,600,000 and paid a cash difference of 750,000 to the dealer. The used truck had
a fair value of 600,000 on the date of the exchange.
At what amount should the new truck be recorded on Bell’s book?
a. 1,060,000 b. 1,290,000 c. 1,350,000 d. 1,600,000
Fair Value of truck surrendered 600,000
Cash Paid to dealer 750,000
Value of new truck received 1,350,000 Truck - new 1,350,000
Truck - old 540,000
FV given 600,000 Cash 750,000
BV given - 540,000 Gain 60,000
Gain 60,000
10. National Motor Sales exchanged a car from its inventory for a computer to be used as a long term asset. The
following information relates to this exchange that took place on July 31, 2021:
Carrying amount of the car 300,000
Listed selling price of the car 450,000
Fair value of the computer 430,000
Cash difference paid by National 50,000
On July 31, 2021, what amount of profit should National recognize on this exchange?
a. 0 b. 80,000 c. 100,000 d. 130,000
 Acquisition by exhange( with commercial substance)
1. FV given + cash payment - cash received 11. Matalino Company
2. FV received received a government grant for
3. CA given + cash payment - cash received 45,000,000 to install and run a windmill in
Recognize gain on Exchange: an economically backward area. The entity
FV given xx had estimated that such a windmill will cost
CA given (xx) 65,000,000 to construct. The secondary
Gain (loss) on exchange xx
attached to the grant is that the entity shall
Computer (Fair value rec)
hire a labor in the area where the windmill
430,000
Cash payment - 50,000
is located. The construction was
FV given 380,000
completed on January 1, 2021. The
CA given - 300,000 windmill is to be depreciated using the
Gain on exchange 80,000 straight line method over a period of 10
years. What amount of income from the
government grant should be recognized in 2021?
a. 1,500,000 b. 2,500,000 c. 3,500,000 d. 4,500,000
P-11
Income from government grant (45M /10) 4,500,000

12. Clause Co. purchased a varnishing machine for 4,000,000 on January 1, 2021. The entity received a government
grant of 840,000 in respect of this asset. The accounting policy is to depreciate the asset over 4 years on a straight
line method basis and to treat the grant as deferred income.

1. What amount should be reported as deferred grant income on December 31, 2022?
a. 420,000 b. 720,000 c. 840,000 d. 120,000
Deferred Grant income 840,000
Income Earned (840,000/4x2) -420,000
Deferred Grant Income - Dec. 31,2021 420,000
2. What is the carrying amount of the machine on December 31, 2022?
a. 2,000,000 b. 3,000,000 c. 2,420,009 d. 3,160,000
Cost 4,000,000
Accumulated Depreciation (4M/4x2) - 2,000,000
Carrying Amount-Dec. 31 ,2022 2,000,000

13. The Calvin Company self-constructed an asset for its own use. Construction started on January 1, 2020 and the
asset was completed on December 31, 2020. Costs incurred during the year were as follows:
January 1- P400, 000; April 1- P500,000; August 1 - P480,000; December 1- P180,000

1. What is the average accumulated expenditures for the self-constructed asset?

a. 1, 560,000 b. 990,000 c. 870,000 d. 780,000
1. 1/1 400,000 x 12/12 = 400,000
4/1 500,000 x 9/12 = 375,000
'8/1 480,000 x 5/12 = 200,000
12/1 180,000 x 1/12 = 15,000
Weighted ave. expenditures 990,000
2. If the company had a two-year, 18% loan of P500,000, specifically obtained finance the asset construction, what
is the capitalized interest added to the of the self-constructed asset?
 a. 90,000 b. 140, 000 c. 178.200 d. 280, 800
Specific borrowings 500,000 x 18% = 90,000
3. Assuming that in addition to the specific borrowing, prior to the construction, the company had a general
borrowing amounting to P600,000 with interest of 20% and a two-year term that was used in part In the self-
construction, what is the total cost of the self-constructed asset?
a. 1, 770,000 b. 1, 748,000 c. 2, 650,000 d. 1.560, 000
Ave. expenditures 990,000
SB 90,000 x 18% = 16,200
GB 600,000 x 20% = 120,000
Capitalized interest 136,200
Cost of Construction
(400 + 500 + 480 + 180) 1,560,000 1,560,000
Total cost 1,696,200
4. Assuming that the total construction costs of P1, 560,000 were incurred evenly during the construction period,
and the company has the following outstanding obligations prior to the start of the construction:

Specific borrowing P700.000, 16%. Due January 1, 2023 General borrowing P500.000. 18%, due January}, 2022

What is the total capitalized interest?

a. 126, 400 b. 130, 000 c. 112, 000 d. 218, 000
Ave. expenditures (1,560,000/2) 780,000
SB 700,000 x 16% = 112,000
GB 500,000 x 18%= 90,000
Capitalized interest 202,000

14. The following data relate to a piece of equipment owned by Burberry Company.
Acquisition date - July 1, 2020; Cost - P125,000; Estimated residual value - P5,000; Estimated service life - 5 years;
Estimated service hours - 10,000; Estimated productive output in units - 24,000

1. Under the straight line method, what is the assets depreciation expense for the year ended December 31.2020?
a. 25, 000 b. 24, 000 c. 12, 500 d. 12, 000

2. Under the sum-of the year’s digits method, what Is the depreciation expense for the year ended December 31,
2021?
a. 36, 000 b. 56, 000 c. 60, 000 d. 72, 000

3. Under the double-declining balance method. What is the asset's carrying amount for December 31, 2022?
a. 36,000 b. 34, 560 c. 27,000 d. 24, 000

4. Under the service hours method what is the asset's depreciation rate per hour?
a. 12.00 b. 12.50 c. 5.21 d. 5.00

5. Under the productive output method and assuming that the equipment produced 3,000 units and 7,500 units in
2020 and 2021. Respectively, what is the accumulated depreciation balance far the asset at December 31, 2021?
a. 72, 500 b. 67, 500 c. 52, 500 d. 37, 500

15. La’Place Printing Company incurred the following costs:

 Purchase of collating and stapling attachment 900,000
Installation of attachment 350,000
Replacement parts for overhaul of press 250,000
Labor and overhead in connection with overhaul 100,000

The overhaul resulted in significant increase in production. Neither the attachment nor the overhaul increased the
estimated useful life of the press.

What total amount of the costs should be capitalized?

a. 1,600,000 b. 900,000 c. 1,500,000 d. 0

16. Sapphire Sky Company provided the following information with respect to a building:
· The building was acquired January 1, 2016 at cost of 3,000,000. It has an estimated useful life of 12 years
and salvage value of 150,000. The method of depreciation used was double declining method.
· The building was renovated on January 1, 2019 at a cost of 800,000. The residual value became 200,000.
· On January 1, 2020, the management decided to change the method being used to straight line method.

What is the depreciation of the building for December 2019?

a. 439,351.85 b. 304,513.89 c. 493,351.58 d. 340,513.98 e. 563,580

17. Kohlman Corporation owns machinery with a book value of 190,000. The machinery has a fair value less costs to sell
is 175,000, and its value-in-use is 170,000. Kohlman should recognize a loss on impairment of
a. -0- b. 5,000 c. 15,000 d. 20,000

18. On January 1, 2021, Fredrichs Inc. purchased equipment with a cost of 3,060,000, a useful life of 12 years and no
salvage value. The company uses straight-line depreciation. At December 31, 2021, the company determines that
impairment indicators are present. The fair value less cost to sell the asset is estimated to be 2,600,000. The asset’s
value-in-use is estimated to be 2,365,000. There is no change in the asset’s useful life or salvage value

1. The 2021 income statement will report Loss on Impairment of

a. 0 b. 205,000 c. 440,000 d. 460,000

2. The 2022 (second year) income statement will report depreciation expense for the equipment of
a. 216,667 b. 236,364 c. 255,000 d. 260,000

19. On January 1, 2021, ShareMoLang Company reported the following account balances:
Cost Accumulated depreciation
 Land 50,000,000
Building 300,000,000 90,000,000

The land and building were revalued on January 1, 2021 and the evaluation revealed the following sound value:
Land 70,000,000
Building 315,000,000

There were no additions or disposals during 2021. Depreciation is computed on the straight line. The estimated life of
the building is 20 years.

1. Before income tax, what amount should be recognized as revaluation surplus on January 1, 2021?
a. 125,000,000 b. 105,000,000 c. 385,000,000 d. 315,000,000

2. What is the depreciation for 2021?

a. 22,500,000 b. 15,000,000 c. 15,750,000 d. 27,500,000

3. What amount should be reported as revaluation surplus on December 31, 2021?

a. 117,500,000 b. 125,000,000 c. 105,000,000 d. 119,750,000

20. On January 1, 2018, Spiderman Company paid 10,000,000 for property containing natural resources of 3,000,000
tons. The present value of the estimated cost of restoring the land is 800,000 and the land will have a value of
600,000 after it is restored for suitable use.

Building and bunk houses were build costing 8,000,000 it is use as a storage of mining equipment and houses for
the miners. Its expected useful life is 10 years with no residual value.
Operations began on January 1, 2019 and resources removed totaled 500,000 tons. During 2020, it is discovered
that available resource will total 1,500,000 tons.

At the beginning of 2020, 800,000 development cost were incurred, and only 200,000 tons are extracted.

1. What is the depreciation for the year ended December 31, 2019 assuming that it uses a straight line method of
depreciation.
a. 800,000 b. 1,700,000 c. 888,888 d. 900,000

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

a. 1,800,000 b. 1,600,000 c. 1,700,000 d. 1,500,000

3. What is the depletion for the year ended December 31, 2020?
a. 1,240,000 b. 1,300,000 c. 1,200,000 d. 1,340,000

21. You noted during your audit of the Gearset Company that the company carried out a number of transactions involving
the acquisition of several assets. All expenditures were recorded in the following single asset account, identified as
Property and equipment:
 Property and equipment
Acquisition price of land and building P 960,000
Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage
during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,800
P1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values involved, the building is
worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to
Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased and P10,000 related
to those not purchased. The old machinery was sold at book value.

Based on the above and the result of your audit, determine the adjusted balance of the following:

1. Land
a. 644,000 b. 322,000 c. 326,000 d. 424,000

2. Building
a. 644,000 b. 1,040,000 c. 1,044,000 d. 722,000

3. Machinery
a. 317,032 b. 318,512 c. 323,400 d. 321,832

22. On January 1, 2020, SAMSON MFG. CO. began construction of a building to be used as its office headquarters. The
building was completed on June 30, 2021.

Expenditures on the project were as follows:

January 3, 2020 2,500,000

March 31, 2020 3,000,000
June 30, 2020 4,000,000
October 31, 2020 3,000,000
January 31, 2021 1,500,000
March 31, 2021 2,500,000
May 31, 2021 3,000,000
SB
On January 3, 2020, the company obtained a P5 million construction loan with a 10% interest rate. The
loan was outstanding all of 2020 and 2021. The company’s other interest-bearing debts included a long-
term note of P25 million with an 8% interest rate, and a mortgage of P15 million on another building
with an interest rate of 6%. Both debts were outstanding during all of 2020 and 2021. The company’s
fiscal year-end is December 31.

1. What is the amount of capitalizable interest in 2020?

a. 3,400,000 b. 1,043,750 c. 663,125 d. 500,000
 2. What is the amount of capitalizable interest in 2021?
a. 630,625 b. 654,663 c. 361,707 d. 799,663

3. What amount of interest should be expensed in 2020?

a. 2,736,875 b. 2,356,250 c. 2,900,000 d. 0

4. What amount of interest should be expensed in 2021?

a. 2,769,375 b. 3,038,293 c. 2,600,337 d. 2,745,337

5. What is the total cost of the building (including the interest capitalized in 2020 and 2021)?
a. 24,600,000 b. 20,817,788 c. 20,905,457 d. 20,630,625

23. Martin Company acquires a new manufacturing equipment on January 1, 2021 on installment basis. The deferred
payment contract provides for a down payment of 300,000 and an 8-year note for 3,104,160. The note is to be paid in
8 equal annual installment payments of 388,020, including 10% interest. The payments are to be made on December
31 of each year, beginning December 31, 2021. The equipment has a cash price equivalent of 2,370,000. Martin’s
financial year-end is December 31.

1. What is the acquisition cost of the equipment?

a. 2,804,160 b. 3,404,160 c. 2,370,000 d. 3,104,160

2. The amount to be recognized on January 1, 2021 as discount on note payable is

a. 1,034,160 b. 310,416 c. 0 d. 827,160

3. The amount of interest expense to be recognized in 2021 is

a. 310,416 b. 188,898 c. 0 d. 207,000

24. On January 2, 2021, Marvex Company replaced its old high pressure steam boiler with a more efficient oil-burning
boiler. The following information was available on that date:

Carrying amount of old boiler 40,000

Fair value of old boiler 10,000
Purchase and installation price of the new boiler 500,000

The old boiler was sold to a heating contractor for 10,000. How much should Marvex capitalize as the cost of the new
boiler?
a. 500,000 b. 490,000 c. 470,000 d. 460,000

25. Brainless Company received a government grant of 15,000,000 to install and run a windmill in an economically
backward area. The entity had estimated that such a windmill would cost 25,000,000 to construct. The secondary
condition attached to the grant is that the entity shall hire labor in the area where the windmill is to locate. The
construction was completed on January 1, 2021 .The windmill is to be depreciated using the straight line method over
a period of 10 years.

What amount of grant income should be recognized for 2021?

a. 1,500,000 b. 3,000,000 c. 2,500,000 d. 5,000,000
26. Collaboration Incorporated purchased a new building at a cost of 7,500,000 on January 1, 2015. Depreciation was
computed on the straight line basis at 4% per year. On January 1, 2020, the building was revalued at fair value of
9,300,000.

1. What is the depreciation for 2020?

a. 456,000 b. 465,000 c. 435,000 d. 445,000

2. What is the revaluation surplus on December 31, 2020?

a. 3,135,000 b. 3,145,000 c. 3,200,000 d. 3,315,000

27. On January 1, 2020, Alaska Company borrowed 6,450,000 at an annual interest rate of 7.5% to finance specifically
the cost of building a plant. Construction commenced on January 1, 2020 with a cost 8,000,000. The entity earned
300,000 interest income from its fund. The plant was completed on December 31, 2020. What amount of interest
should be capitalized?
a. 483,750 b. 300,000 c. 220,000 d. 183,750

28. On January 2, 2019, Marlborough Company received a grant of 60,000,000 to compensate for costs to be incurred in
planting trees over a period of 5 years. The entity will incur such cost at 2,000,000 for 2019, 4,000,000 for 2020,
6,000,000 for 2021, 8,000,000 for 2022, and 10,000,000 for 2023.

What amount of grant income should be recognized for 2020?

a. 6,000,000 b. 4,000,000 c. 12,000,000 d. 8,000,000

29. Queen Company purchased land as factory site for 5,000,000. The entity paid 700,000 to tear down an old building
on the land for construction of new building. Legal fee of 20,000 incurred for title investigation and purchased
contract. Architect fee was 200,000, title insurance amounted to 70,000 and insurance during construction is
100,000, excavation cost was 40,000. The contractor was paid 5,890,000. Assessment for the pavement is 25,000.
Interest cost during construction was 55,000.

What is the cost of the building?

a. 5,890,000 b. 5,915,000 c. 5,850,000 d. 5,250,000 e. 6,985,000

30. On January 2, 2021, Q. Tong Inc. purchased equipment with a cost of 10,440,000, a useful life of 10 years and no
salvage value. The company uses straight-line depreciation. At December 31, 2021 and December 31, 2022, the
company determines that impairment indicators are present. The following information is available for impairment
testing at each year end:

12/31/2021 12/31/2022
Fair value less costs to sell 9,315,000 8,850,000
Value-in-use 9,350,000 8,915,000
There is no change in the asset’s useful life or salvage value. The 2022 income statement will report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of 435,000.
c. Recovery of Impairment Loss of 40,889.
d. Recovery of Impairment Loss of 603,889.
MODULE 5 PROPERTY, PLANT & EQUIPMENT

LEARNING OBJECTIVES:
8. Describe property, plant, and equipment.
9. Identify the costs to include in initial valuation of property, plant, and equipment.
10. Describe the accounting problems associated with self-constructed assets.
11. Describe the accounting problems associated with interest capitalization.
12. Understand accounting issues related to acquiring and valuing plant assets.
13. Describe the accounting treatment for costs subsequent to acquisition.
14. Describe the accounting treatment for the disposal of property, plant, and equipment.

OVERVIEW
PAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of
property, plant and equipment. Property, plant and equipment is initially measured at its cost,
subsequently measured either by using a cost or revaluation model, and depreciated so that its
depreciable amount is allocated on a systematic basis over its useful life.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com
A synchronous discussion for this lesson will be scheduled on September 1, 2020 (Tuesday 7:30
– 8:30 AM)

Property, plant, and equipment is defined as tangible assets that are held for use in
production or supply of goods and services, for rentals to others, or for administrative purposes;
they are expected to be used during more than one period.
• “Used in operations” and not for resale.
• Long-term in nature and usually depreciated.
• Possess physical substance.

Includes:
▪ Land,
▪ Building structures (offices, factories, warehouses), and
▪ Equipment (machinery, furniture, tools).

INITIAL VALUATION

Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing
it to the location and condition necessary for its intended use.

SUBSEQUENT VALUATION
Companies value property, plant, and equipment in subsequent periods using either the
◆ cost method or
◆ fair value (revaluation) method.

Cost of Land
Includes all costs to acquire land and ready it for use. Costs typically include:
(5) purchase price;
(6) closing costs, such as title to the land, attorney’s fees, and recording fees;
 (7) costs of grading, filling, draining, and clearing;
(8) assumption of any liens, mortgages, or encumbrances on the property;

Improvements with limited lives, such as private driveways, walks, fences, and parking lots,
are recorded as Land Improvements and depreciated.
• Land acquired and held for speculation is classified as an investment.
• Land held by a real estate concern for resale should be classified as inventory.

Cost of Buildings
Includes all costs related directly to acquisition or construction. Cost typically include:
(3) materials, labor, and overhead costs incurred during construction and
(4) professional fees and building permits.

Cost of Equipment
Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically
include:
(7) purchase price,
(8) freight and handling charges
(9) insurance on the equipment while in transit,
(10) cost of special foundations if required,
(11) assembling and installation costs, and
(12) costs of conducting trial runs.

Illustration 1: The expenditures and receipts below are related to land, land improvements, and
buildings acquired for use in a business enterprise. Determine how the following should be
classified:
Classification
(g) Money borrowed to pay building contractor Notes payable
(h) Payment for construction from note proceeds Building
(i) Cost of land fill and clearing Land
(j) Delinquent real estate taxes on property assumed Land
(k) Premium on 6-month insurance policy during construction Building
(l) Refund of 1-month insurance premium because construction
completed early (Building)
(g) Architect’s fee on building Building
(h) Cost of real estate purchased as a plant site
(land 200,000 and building 50,000) Land/Building
(i) Commission fee paid to real estate agency Land
(j) Installation of fences around property Land Improvements
(k) Cost of razing and removing building Building
(n) Proceeds from salvage of demolished building (Building)
(o) Cost of parking lots and driveways Land
Improvements

Self-Constructed Assets
Costs typically include:
(3) Materials and direct labor
(4) Overhead can be handled in two ways:
1. Assign no fixed overhead
2. Assign a portion of all overhead to the construction process.
 Companies use the second method extensively.

Interest Costs During Construction

• PFRS requires — capitalizing actual interest (with modification).
• Consistent with historical cost.
• Capitalization considers three items:
4. Qualifying assets.
5. Capitalization period.
6. Amount to capitalize.

Qualifying Assets
Require a substantial period of time to get them ready for their intended use.
• Assets under construction for a company’s own use.

Capitalization Period
Begins when:
4. Expenditures for the asset have been made.
5. Activities for readying the asset are in progress .
6. Interest costs are being incurred.

Ends when:
The asset is substantially complete and ready for use.

Amount to Capitalize
Capitalize the lesser of:
3. Actual interest costs
4. Avoidable interest - the amount of interest that could have been avoided if expenditures for
the asset had not been made.

Valuation Issues

Cash Discounts — Whether taken or not — generally considered a reduction in the cost of
the asset.

Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded
at the present value of the consideration exchanged.

Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of
their fair market values.

Issuance of Shares — The market value asset received or the shares issued if asset fair
value is not clearly determinable.

Acquisition by exchange

Exchanges of Nonmonetary Assets

Ordinarily accounted for on the basis of:
• the fair value of the asset given up or
 • the fair value of the asset received,
whichever is clearly more evident.

Companies should recognize immediately any gains or losses on the exchange when the
transaction has commercial substance.

Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows change as a result of the
transaction.

That is, if the two parties’ economic positions change, the transaction has commercial
substance.

Exchange Lacks Commercial Substance.

Assume that exchange lacks commercial substance. That is, the economic position of Interstate
did not change significantly as a result of this exchange, the asset is recognized based on the
carrying amount of asset given up, no recognition for gain or loss.

Summary of Gain and Loss Recognition on Exchanges of Non-Monetary Assets

The gain or loss is the difference between the

fair value of asset given and its carrying amount.

Disclosure include:
• nature of the transaction(s),
• method of accounting for the assets exchanged, and
• gains or losses recognized on the exchanges.

Government Grants
Grants are assistance received from a government in the form of transfers of resources to a
company in return for past or future compliance with certain conditions relating to the operating
activities of the company.

PFRS requires grants to be recognized in income (income approach) on a systematic basis

that matches them with the related costs that they are intended to compensate.

Cost Subsequent to Acquisition

Recognize costs subsequent to acquisition as an asset when the costs can be
• measured reliably and
• it is probable that the company will obtain future economic benefits.

Future economic benefit would include increases in

4. useful life,
5. quantity of product produced, and
6. quality of product produced.
Derecognition of PPE

A company may retire plant assets voluntarily or dispose of them by

• sale,
• exchange,
• involuntary conversion, or
• abandonment.
Depreciation must be taken up to the date of disposition.
MODULE 5 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
PPE
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before September 4, 2020 (Friday)

1. Adbans Corp. uses different kinds of machines in its manufacturing process. It constructs some of these machines
itself and acquires others from the manufacturers. The following information relates to two machines that it has
recorded in 2021.

Machine A (purchased)

Cash paid for equipment P250,000

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 2021 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 2021 to make it operate more
efficiently 22,500

Machine B (self-constructed)

Cost of materials to construct machine P210, 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. What is the cost of machine A?

a. 380,500 b. 358,000 c. 328,000 d. 350,500
 Cash paid for equipment 250,000
Transportation cost 9,000
Installation cost 15,000
Testing cost 12,000

Cost of safety rails and platforms

18,000
Cost of water devices to keep
machine cool 24,000
Cost of adjustments 22,500
Total cost 350,500
2. What is the cost of machine B?
a. 471,000 b. 417,000 c. 483,000 d. 438,000
Cost of materials 210,000
Labor cost 129,000
Overhead cost 66,000
Interest cost 30,000
Installation cost 36,000
Safety inspection cost 12,000
Total cost 483,000
2. Begonia Company installed a new equipment at the production facility and incurred the following costs:
Initial delivery and handling cost 400,000
Cost of site preparation 700,000
Cost of equipment per supplier’s invoice 3,000,000
Consultants used for advice on the acquisition of equipment 800,000
Interest charges paid to supplier for deferred credit 300,000
Estimated dismantling cost to be incurred as required by contract 350,000
Operating losses before commercial production 450,000

What total amount should be capitalized as cost of the equipment?

a. 5,250,000 b. 5,550,000 c. 4,900,000 d. 5,100,000

3. Truepa Company incurred the following costs at the beginning of the current year:
Cost of land 10,000,000
Cost of building 11,500,000
Remodeling and repairs prior to occupancy 600,000
Escrow fee 300,000
Property tax for period prior to acquisition 150,000
Real estate commission 70,000
What is the cost of the building?
a. 12,370,000 b. 12,260,000 c. 12,620,000 d. 12,378,140
 P-3 Land Building
Acquisition cost 10,000,000 11,500,000
Remodeling and repairs 600,000
Allocation of trnasaction cost:
Land (520,000 x 10/21.5) 241,860
Building (520,000 x 11.5/21.5) 278,140
Total cost 10,241,860 12,378,140
Transaction cost to acquire:
Escrow fee 300,000 L 10 /21.5 x 520,000
Property tax 150,000 B 11.5 /21.5 x 520,000
Real estate commision 70,000 Total 21.5
Total transaction cost 520,000
4. Choco Company incurred the following expenditures related to the construction of a new home office:
Cost of Land, which included usable old apartment
building with fair value of P200,000 3,000,000
Legal fees, including fee for title search 20,000
Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 30,000loss
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Premium for insurance on building during construction 22,000
Cost of open house party to celebrate opening of building 80,000

1. What is the cost of land?

a. 2,720,000 b. 2,915,000 c. 3,205,000 d. 2,950,000

2. What is the cost of building?

a. 7,517,000 b. 7,537,000 c. 7,495,000 d. 7,525,000

3. What is the cost of land improvement?

a. 200,000 b. 203,000 c. 143,000 d. 0
 Land
P-4 Land Building Improvement
Cost of Land, which included usable old apartment 2,800,000
building with fair value of P200,000 *200,000 loss written off
Legal fees, including fee for title search 20,000
Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Payment of medical bills of employees accidentally '-loss
injured while inspecting building construction 30,000 loss
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Premium for insurance on building during construction 22,000
Cost of open house party to celebrate opening of building - expense 80,000
Total cost 2,915,000 7,517,000 143,000

5. At year-end, Hecker Company provided the following information about property, plant, & equipment:

Plant assets acquired from Krom Company 8,000,000

Repairs made on building prior to occupancy 250,000
Special tax assessment 40,000
Construction of platform for machinery 70,000
Remodeling of office space in building including
new partitions and walls 500,000
Purchase of new machinery 900,000
Total property, plant and equipment 9,760,000

In exchange for the plant assets of Krom Company, Hecker Company issued 50,000 shares with P100 par value. On
the date of purchase, the share had a quoted price of P150 and the plant assets had the following fair value:

Land 600,000
Building 4,500,000
Machinery 2,000,000

1. What is the cost of Building?

a. 5,250,000 b. 5,500,000 c. 5,000,000 d. 4,500,000

2. What is the cost of Land?

a. 600,000 b. 640,000 c. 670,000 d. 690,000

3. What is the cost of machinery?

a. 2,900,000 b. 2,000,000 c. 2,970,000 d. 2,830,000
 Acquisition by issuing shares (PS,OS & TS)
asset acquired shall be recorded based on:
1. FV of asset received
2. FV of shares issued
3. Par value of shares issued

Building Land Machinery

FV acquired 4,500,000 600,000 2,000,000
Repairs made on building prior to occupancy 250,000
Special tax assessment 40,000
Construction of platform for machinery 70,000
Remodeling of office space in building including
new partitions and walls 500,000
Purchase of new machinery 900,000
Total 5,250,000 640,000 2,970,000

6. JK Company had the following property acquisitions during the current year:

Acquired a tract of land in exchange for 100,000 shares of Peniel Company with 100 par value that had a market
price of P500 per share on the date of acquisition. The last property tax bill indicated assessed value of 2,400,000 for
the land.

Received land from a major shareholder as an inducement to locate a plant in the city. No payment was acquired but
the entity paid 50,000 for legal expenses for land transfer. The land is fairly valued at 2,000,000.

What is the total increase in land as a result of acquisitions?

a. 2,400,000 b. 52,000,000 c. 2,000,000 d. 10,000,000.
FV of shares (100,000 x 500) 50,000,000
FV of Land - Donation 2,000,000
Increase in Land 52,000,000

7. Euphoria Company acquired a land full by issuing 400,000 10 percent bonds payable and 40,000 ordinary shares
with par value of P5. The share was selling at P15 and the bonds were trading at 105.

What amount should be recorded as cost of the land?

a. 42,760,000 b. 79,800,000 c. 42,761,000 d. 1,020,000
Fair value of bond payable (400,000 x 105%) 420,000
Fair value of shares (40,000 x 15) 600,000
Total cost of land 1,020,000
 8. Wook Company entered into a contract to acquire a new machine which had a cash price of 2,000,000.

Down payment 400,000

Note payable in 3 equal annual installments 1,200,000
20,000 ordinary shares with a par value of P25
and fair value of P40 per share 800,000
2,400,000

Prior to use, installation cost of 50,000 was incurred. The machine has an estimated residual value of 100,000.

What is the initial cost of the machine?

a. 2,000,000 b. 2,400,000 c. 2,050,000 d. 2,450,000.
Cash price 2,000,000
Installation cost 50,000
Total cost 2,050,000
9. On January 2, 2021, Bell Corporation traded is a used delivery truck with a carrying amount of 540,000 for a new
delivery truck having a list price of 1,600,000 and paid a cash difference of 750,000 to the dealer. The used truck had
a fair value of 600,000 on the date of the exchange.
At what amount should the new truck be recorded on Bell’s book?
a. 1,060,000 b. 1,290,000 c. 1,350,000 d. 1,600,000
Fair Value of truck surrendered 600,000
Cash Paid to dealer 750,000
Value of new truck received 1,350,000 Truck - new 1,350,000
Truck - old 540,000
FV given 600,000 Cash 750,000
BV given - 540,000 Gain 60,000
Gain 60,000
10. National Motor Sales exchanged a car from its inventory for a computer to be used as a long term asset. The
following information relates to this exchange that took place on July 31, 2021:
Carrying amount of the car 300,000
Listed selling price of the car 450,000
Fair value of the computer 430,000
Cash difference paid by National 50,000
On July 31, 2021, what amount of profit should National recognize on this exchange?
a. 0 b. 80,000 c. 100,000 d. 130,000
Acquisition by exhange( with commercial substance)
1. FV given + cash payment - cash received
2. FV received
3. CA given + cash payment - cash received
Recognize gain on Exchange:
FV given xx
CA given (xx)
Gain (loss) on exchange xx

Computer (Fair value rec) 430,000

Cash payment - 50,000
FV given 380,000
CA given - 300,000
Gain on exchange 80,000
11. Matalino Company received a government grant for 45,000,000 to install and run a windmill in an economically
backward area. The entity had estimated that such a windmill will cost 65,000,000 to construct. The secondary attached
to the grant is that the entity shall hire a labor in the area where the windmill is located. The construction was completed
on January 1, 2021. The windmill is to be depreciated using the straight line method over a period of 10 years. What
amount of income from the government grant should be recognized in 2021?
a. 1,500,000 b. 2,500,000 c. 3,500,000 d. 4,500,000
P-11
Income from government grant (45M /10) 4,500,000

12. Clause Co. purchased a varnishing machine for 4,000,000 on January 1, 2021. The entity received a government
grant of 840,000 in respect of this asset. The accounting policy is to depreciate the asset over 4 years on a straight
line method basis and to treat the grant as deferred income.

1. What amount should be reported as deferred grant income on December 31, 2022?
a. 420,000 b. 720,000 c. 840,000 d. 120,000
Deferred Grant income 840,000
Income Earned (840,000/4x2) -420,000
Deferred Grant Income - Dec. 31,2021 420,000
2. What is the carrying amount of the machine on December 31, 2022?
a. 2,000,000 b. 3,000,000 c. 2,420,009 d. 3,160,000
Cost 4,000,000
Accumulated Depreciation (4M/4x2) - 2,000,000
Carrying Amount-Dec. 31 ,2022 2,000,000

13. The Calvin Company self-constructed an asset for its own use. Construction started on January 1, 2020 and the
asset was completed on December 31, 2020. Costs incurred during the year were as follows:
January 1- P400, 000; April 1- P500,000; August 1 - P480,000; December 1- P180,000

1. What is the average accumulated expenditures for the self-constructed asset?

a. 1, 560,000 b. 990,000 c. 870,000 d. 780,000
1. 1/1 400,000 x 12/12 = 400,000
4/1 500,000 x 9/12 = 375,000
'8/1 480,000 x 5/12 = 200,000
12/1 180,000 x 1/12 = 15,000
Weighted ave. expenditures 990,000
2. If the company had a two-year, 18% loan of P500,000, specifically obtained finance the asset construction, what
is the capitalized interest added to the of the self-constructed asset?
a. 90,000 b. 140, 000 c. 178.200 d. 280, 800
Specific borrowings 500,000 x 18% = 90,000
3. Assuming that in addition to the specific borrowing, prior to the construction, the company had a general
borrowing amounting to P600,000 with interest of 20% and a two-year term that was used in part In the self-
construction, what is the total cost of the self-constructed asset?
a. 1, 770,000 b. 1, 748,000 c. 2, 650,000 d. 1.560, 000
 Ave. expenditures 990,000
SB 90,000 x 18% = 16,200
GB 600,000 x 20% = 120,000
Capitalized interest 136,200
Cost of Construction
(400 + 500 + 480 + 180) 1,560,000 1,560,000
Total cost 1,696,200
4. Assuming that the total construction costs of P1, 560,000 were incurred evenly during the construction period,
and the company has the following outstanding obligations prior to the start of the construction:

Specific borrowing P700.000, 16%. Due January 1, 2023 General borrowing P500.000. 18%, due January}, 2022

What is the total capitalized interest?

a. 126, 400 b. 130, 000 c. 112, 000 d. 218, 000
Ave. expenditures (1,560,000/2) 780,000
SB 700,000 x 16% = 112,000
GB 500,000 x 18%= 90,000
Capitalized interest 202,000

14. The following data relate to a piece of equipment owned by Burberry Company.
Acquisition date - July 1, 2020; Cost - P125,000; Estimated residual value - P5,000; Estimated service life - 5 years;
Estimated service hours - 10,000; Estimated productive output in units - 24,000

1. Under the straight line method, what is the assets depreciation expense for the year ended December 31.2020?
a. 25, 000 b. 24, 000 c. 12, 500 d. 12, 000
SL = 125,000 - 5,000 = 24,000 x 6/12
5 = 12,000
2. Under the sum-of the year’s digits method, what Is the depreciation expense for the year ended December 31,
2021?
a. 36, 000 b. 56, 000 c. 60, 000 d. 72, 000
5 /15 x (125,000 - 5,000)= 40,000
4 /15 x 120,000 = 32,000
2. 3
2021: Jan-June (40,000 x 6/12) 20,000 2
July - Dec (32,000 x 6/12) 16,000 1
Depreciation expense 2021 36,000 15
3. Under the double-declining balance method. What is the asset's carrying amount for December 31, 2022?
a. 36,000 b. 34, 560 c. 27,000 d. 24, 000
 DDR = 1/5 x 2 = 40%
Depreciation = DDR x RBV
1st - July'20 - June '21 (40% x 125,000) = 50,000 50,000
2nd - July '21 - June '22 (40% x 75,000) = 30,000 30,000
3rd - July 1'22 - June '23 (40% x 45,000) = 18,000 x 6/12 = 9,000
Accu. Depreciation 12/31/22 89,000
Cost 7/1/20 125,000
A.D. (50,000 + 30,000 + 9,000) - 89,000
Carrying amount 12/31/22 36,000
4. Under the service hours method what is the asset's depreciation rate per hour?
a. 12.00 b. 12.50 c. 5.21 d. 5.00
SHM = C-SV
# hrs.
= 125,000 - 5,000
10,000 hrs.
= 12/hr
5. Under the productive output method and assuming that the equipment produced 3,000 units and 7,500 units in
2020 and 2021. Respectively, what is the accumulated depreciation balance far the asset at December 31, 2021?
a. 72, 500 b. 67, 500 c. 52, 500 d. 37, 500
POM = C - RV/# UNITS
= 125,000 - 5,000
24,000
= 5/u
2,020 3,000 X 5= 15,000
2,021 7,500X5= 37,500
Accu depr 52,500
15. La’Place Printing Company incurred the following costs:

Purchase of collating and stapling attachment 900,000

Installation of attachment 350,000
Replacement parts for overhaul of press 250,000
Labor and overhead in connection with overhaul 100,000

The overhaul resulted in significant increase in production. Neither the attachment nor the overhaul increased the
estimated useful life of the press.

What total amount of the costs should be capitalized?

a. 1,600,000 b. 900,000 c. 1,500,000 d. 0
Collating and stapling macine 900,000
Installation 350,000
Overhaul 250,000
Labor 100,000
Capitalized cost 1,600,000
16. Sapphire Sky Company provided the following information with respect to a building:
· The building was acquired January 1, 2016 at cost of 3,000,000. It has an estimated useful life of 12 years
and salvage value of 150,000. The method of depreciation used was double declining method.
· The building was renovated on January 1, 2019 at a cost of 800,000. The residual value became 200,000.
· On January 1, 2020, the management decided to change the method being used to straight line method.

What is the depreciation of the building for December 2019?

a. 439,351.85 b. 304,513.89 c. 493,351.58 d. 340,513.98 e. 563,580
Cost, 1/1/2016 3,000,000
Accu deprn: DDM= DDR x RBV
2016: (3M x 2/12) = - 500,000
2017: (3M-.5) x 2/12 = - 416,667 Life 12
2018: (3M -.5- 416,667) x 2/12= - 347,223 Used - 3
Accu deprn - 1,263,890 - 1,263,890 RL 9
CA 1/1/19 1,736,110 2,019 - 1
Renovation cost 800,000 RL 1/2020 8
Revised CA 2,536,110
DR 2/9
Depreciation 2019 563,580
17. Kohlman Corporation owns machinery with a book value of 190,000. The machinery has a fair value less costs to sell
is 175,000, and its value-in-use is 170,000. Kohlman should recognize a loss on impairment of
a. -0- b. 5,000 c. 15,000 d. 20,000
CA of asset 190,000
Recoverable (FV-CS) -175,000
Impairment loss 15000
18. On January 1, 2021, Fredrichs Inc. purchased equipment with a cost of 3,060,000, a useful life of 12 years and no
salvage value. The company uses straight-line depreciation. At December 31, 2021, the company determines that
impairment indicators are present. The fair value less cost to sell the asset is estimated to be 2,600,000. The asset’s
value-in-use is estimated to be 2,365,000. There is no change in the asset’s useful life or salvage value

1. The 2021 income statement will report Loss on Impairment of

a. 0 b. 205,000 c. 440,000 d. 460,000
Cost 1/1/21 3,060,000
Depreciation 2021 (3.06M/12) -255,000
CA 12/31/21 2805000
Recoverable (FV-CS) -2,600,000
Impairment loss 205000
2. The 2022 (second year) income statement will report depreciation expense for the equipment of
a. 216,667 b. 236,364 c. 255,000 d. 260,000
Deprn. After Impairment: Recoverable / RL 2,600,000
Recoverable
RL (12-1) '/ 11
Depreciation for 2022 236,364
19. On January 1, 2021, ShareMoLang Company reported the following account balances:
Cost Accumulated depreciation
Land 50,000,000
Building 300,000,000 90,000,000

The land and building were revalued on January 1, 2021 and the evaluation revealed the following sound value:
Land 70,000,000
Building 315,000,000

There were no additions or disposals during 2021. Depreciation is computed on the straight line. The estimated life of
the building is 20 years.

1. Before income tax, what amount should be recognized as revaluation surplus on January 1, 2021?
a. 125,000,000 b. 105,000,000 c. 385,000,000 d. 315,000,000
1. Sound Carrying Revaluation
Value Amount Surplus
Land 70,000,000 50,000,000 20,000,000
Building 315,000,000 210,000,000 105,000,000
Total 1/1/21 385,000,000 260,000,000 125,000,000
2. What is the depreciation for 2021?
a. 22,500,000 b. 15,000,000 c. 15,750,000 d. 27,500,000
Depreciation after revaluation = Sound value / RL
Life of Bldg 20
Use (90/300) = 30% -6
RL 14

Sound value 315,000,000

RL / 14 yrs.
Depreciation 2021 22,500,000
3. What amount should be reported as revaluation surplus on December 31, 2021?
a. 117,500,000 b. 125,000,000 c. 105,000,000 d. 119,750,000
Revaluation surplus 1/1/21 125,000,000
Realized ( RS/RL)
(105M / 14) -7,500,000
Revaluation surplus 12/31/21 117,500,000
20. On January 1, 2018, Spiderman Company paid 10,000,000 for property containing natural resources of 3,000,000
tons. The present value of the estimated cost of restoring the land is 800,000 and the land will have a value of
600,000 after it is restored for suitable use.

Building and bunk houses were build costing 8,000,000 it is use as a storage of mining equipment and houses for
the miners. Its expected useful life is 10 years with no residual value.
Operations began on January 1, 2019 and resources removed totaled 500,000 tons. During 2020, it is discovered
that available resource will total 1,500,000 tons.

At the beginning of 2020, 800,000 development cost were incurred, and only 200,000 tons are extracted.
 1. What is the depreciation for the year ended December 31, 2019 assuming that it uses a straight line method of
depreciation.
a. 800,000 b. 1,700,000 c. 888,888 d. 900,000
Deprn on Bldg & Bunk houses = 8,000,000/10
= 800,000
2. What amount should be reported as depletion for 2019?
a. 1,800,000 b. 1,600,000 c. 1,700,000 d. 1,500,000
Depletion = (10,000,000 + 800,000) - 600,000
3,000,000
= 3.40/ton
500,000
Depletion =1,700,000
(10,000,000 + 800,000) - 600,000
3. What is the depletion for the year ended December 31, 2020?
a. 1,240,000 b. 1,300,000 c. 1,200,000 d. 1,340,000
Cost 10,800,000
Depletion 2019 -1,700,000
Carrying amount 9100000

Revised depletion = (9.1 + .8)-.6

1.5
= 6.20/ton
Depletion for 2020 = x 200,000
= 1,240,000
21. You noted during your audit of the Gearset Company that the company carried out a number of transactions involving
the acquisition of several assets. All expenditures were recorded in the following single asset account, identified as
Property and equipment:
Property and equipment
Acquisition price of land and building P 960,000
Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage
during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,800
P1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values involved, the building is
worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to
Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased and P10,000 related
to those not purchased. The old machinery was sold at book value.
 Based on the above and the result of your audit, determine the adjusted balance of the following:

1. Land
a. 644,000 b. 322,000 c. 326,000 d. 424,000

2. Building
a. 644,000 b. 1,040,000 c. 1,044,000 d. 722,000

3. Machinery
a. 317,032 b. 318,512 c. 323,400 d. 321,832
Land Building Mach
Acquisition 320,000 640,000
Option money 2,000 4,000
Cash price of Mach 312,032 (318,400 x 98%)
Freight 5,000
Remodeling 400,000
322,000 1,044,000 317,032

B 2 /3 x 960,000 =
L 1 /3 x 960,000 =
3
22. On January 1, 2020, SAMSON MFG. CO. began construction of a building to be used as its office headquarters. The
building was completed on June 30, 2021.

Expenditures on the project were as follows:

January 3, 2020 2,500,000

March 31, 2020 3,000,000
June 30, 2020 4,000,000
October 31, 2020 3,000,000
January 31, 2021 1,500,000
March 31, 2021 2,500,000
May 31, 2021 3,000,000
SB
On January 3, 2020, the company obtained a P5 million construction loan with a 10% interest rate. The
loan was outstanding all of 2020 and 2021. The company’s other interest-bearing debts included a long-
term note of P25 million with an 8% interest rate, and a mortgage of P15 million on another building
with an interest rate of 6%. Both debts were outstanding during all of 2020 and 2021. The company’s
fiscal year-end is December 31.

1. What is the amount of capitalizable interest in 2020?

a. 3,400,000 b. 1,043,750 c. 663,125 d. 500,000
Average expenditures 2020
1/3/20 2.5 x 12/12 = 2,500,000
3/31/20 3 x 9/12 = 2,250,000
6/30/20 4 x 6/12 = 2,000,000
10/31/20 3 x 2/12 = 500,000
Average expenditures 2020 7,250,000

Actual Interest
SB (5M x 10%) 500,000
GB (25 x 8%) 2,000,000
(15 x 6%) 900,000 2,900,000
Actual interest 3,400,000
2. What is the amount of capitalizable interest in 2021?
a. 630,625 b. 654,663 c. 361,707 d. 799,663
Ave. Int. on GB = 2.9 / 40
= 7.25%

Ave. Expenditures 7,250,000

SB 5,000,000 x 10% = 500,000
GB 2,250,000 x 7.25% = 163,125
Avoidable *** 663,125 Lower
Ave. expenditures 2021
1/1 (12.5 + 663,125)x6/6 13,163,125
1/31 1.500,000 x 5/6 1,250,000
3/31 2,500,000 x 3/6 1,250,000
5/31 3,000,000 x 1/6 500,000
Ave. expenditures 2021 16,163,125
SB (5M x 10% x 6/12) 5,000,000 x 10% x 6/12 = 250,000
GB (16,163,125 - 5m) x 7.25%x6/12 11,163,125 x 7.25% x 6/12 = 404,663
Avoidable 654,663 lower
3. What amount of interest should be expensed in 2020?
a. 2,736,875 b. 2,356,250 c. 2,900,000 d. 0
Total actual interest 2020 3,400,000
Capitalized -663,125
Interest expense 2,736,875
4. What amount of interest should be expensed in 2021?
a. 2,769,375 b. 3,038,293 c. 2,600,337 d. 2,745,337
Total actual interest 2021 3,400,000
Capitalized -654,663
Interest expense 2,745,337
5. What is the total cost of the building (including the interest capitalized in 2020 and 2021)?
a. 24,600,000 b. 20,817,788 c. 20,905,457 d. 20,630,625
 Actual expenditures 19,500,000
Capitalized interest
(663,125 + 654,663) 1,317,788
Total cost of building 20,817,788
23. Martin Company acquires a new manufacturing equipment on January 1, 2021 on installment basis. The deferred
payment contract provides for a down payment of 300,000 and an 8-year note for 3,104,160. The note is to be paid in
8 equal annual installment payments of 388,020, including 10% interest. The payments are to be made on December
31 of each year, beginning December 31, 2021. The equipment has a cash price equivalent of 2,370,000. Martin’s
financial year-end is December 31.

1. What is the acquisition cost of the equipment?

a. 2,804,160 b. 3,404,160 c. 2,370,000 d. 3,104,160
Cash Price 2,370,000
2. The amount to be recognized on January 1, 2021 as discount on note payable is
a. 1,034,160 b. 310,416 c. 0 d. 827,160
Cost of equipment 2,370,000
Less: Down Payment -300,000
Amount assigned to NP - PV 2,070,000
Face amount -3,104,160
Discount on NP -1,034,160
3. The amount of interest expense to be recognized in 2021 is
a. 310,416 b. 188,898 c. 0 d. 207,000
CA of NP-PV 2,070,000
ER 10%
Interest expense 207,000
24. On January 2, 2021, Marvex Company replaced its old high pressure steam boiler with a more efficient oil-burning
boiler. The following information was available on that date:

Carrying amount of old boiler 40,000

Fair value of old boiler 10,000
Purchase and installation price of the new boiler 500,000

The old boiler was sold to a heating contractor for 10,000. How much should Marvex capitalize as the cost of the new
boiler?
a. 500,000 b. 490,000 c. 470,000 d. 460,000
Cash Price including installation 500,000
25. Brainless Company received a government grant of 15,000,000 to install and run a windmill in an economically
backward area. The entity had estimated that such a windmill would cost 25,000,000 to construct. The secondary
condition attached to the grant is that the entity shall hire labor in the area where the windmill is to locate. The
construction was completed on January 1, 2021 .The windmill is to be depreciated using the straight line method over
a period of 10 years.

What amount of grant income should be recognized for 2021?

a. 1,500,000 b. 3,000,000 c. 2,500,000 d. 5,000,000
Grant income ( 15,000,000 / 10) 1,500,000
26. Collaboration Incorporated purchased a new building at a cost of 7,500,000 on January 1, 2015. Depreciation was
computed on the straight line basis at 4% per year. On January 1, 2020, the building was revalued at fair value of
9,300,000.

1. What is the depreciation for 2020?

a. 456,000 b. 465,000 c. 435,000 d. 445,000
Sound value 9,300,000 Life 25
RL / 20 Expired(4% x 5yrs = 20%) -5
Depreciation 465,000 RL 20
2. What is the revaluation surplus on December 31, 2020?
a. 3,135,000 b. 3,145,000 c. 3,200,000 d. 3,315,000
Sound Value(FV) 9,300,000
CA (7,500,000 x 80%) -6,000,000
Revaluation Surplus 1/1/20 3,300,000 Cost 7,500,000
Realized ( 3,300,000/20) -165,000 AD (7.5 x 4% x 5 yrs.) -1,500,000
Revaluation Surplus 12/31/20 3,135,000 CA,1/1/2020 6,000,000
27. On January 1, 2020, Alaska Company borrowed 6,450,000 at an annual interest rate of 7.5% to finance specifically
the cost of building a plant. Construction commenced on January 1, 2020 with a cost 8,000,000. The entity earned
300,000 interest income from its fund. The plant was completed on December 31, 2020. What amount of interest
should be capitalized?
a. 483,750 b. 300,000 c. 220,000 d. 183,750
SB (6,450,000 x 7.5%) 483,750
Interest Income -300,000
Capitalizable interest 183750
28. On January 2, 2019, Marlborough Company received a grant of 60,000,000 to compensate for costs to be incurred in
planting trees over a period of 5 years. The entity will incur such cost at 2,000,000 for 2019, 4,000,000 for 2020,
6,000,000 for 2021, 8,000,000 for 2022, and 10,000,000 for 2023.

What amount of grant income should be recognized for 2020?

a. 6,000,000 b. 4,000,000 c. 12,000,000 d. 8,000,000
2019 2M
2020 4 Income (60M x 4/30)= 8,000,000
8,000,000
2021 6
2022 8
2023 10
30
29. Queen Company purchased land as factory site for 5,000,000. The entity paid 700,000 to tear down an old building
on the land for construction of new building. Legal fee of 20,000 incurred for title investigation and purchased
contract. Architect fee was 200,000, title insurance amounted to 70,000 and insurance during construction is
100,000, excavation cost was 40,000. The contractor was paid 5,890,000. Assessment for the pavement is 25,000.
Interest cost during construction was 55,000.

What is the cost of the building?

a. 5,890,000 b. 5,915,000 c. 5,850,000 d. 5,250,000 e. 6,985,000
 Demolition cost 700,000
Architect fee 200,000
Insurance during construction 100,000
Excavation 40,000
Payment to contractor 5,890,000
Interest during construction 55,000
Cost of building 6,985,000
30. On January 2, 2021, Q. Tong Inc. purchased equipment with a cost of 10,440,000, a useful life of 10 years and no
salvage value. The company uses straight-line depreciation. At December 31, 2021 and December 31, 2022, the
company determines that impairment indicators are present. The following information is available for impairment
testing at each year end:

12/31/2021 12/31/2022
Fair value less costs to sell 9,315,000 8,850,000
Value-in-use 9,350,000 8,915,000

There is no change in the asset’s useful life or salvage value. The 2022 income statement will report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of 435,000.
c. Recovery of Impairment Loss of 40,889.
d. Recovery of Impairment Loss of 603,889.
P - 30 CA w/ Impairment
Cost 1/2/21 10,440,000
Depreciation -1,044,000 CA w/o impairment
CA 12/31/21 9,396,000
Recoverable -9,350,000 Cost 1/2/21 10,440,000
Impairment losss 46,000 AD(10.044/10x2) -2,088,000
CA 12/31/22 8,352,000
CA 1/1/22 9,350,000
Depreciation
(9,350,000/9) -1,038,889 CA w/o Imp 8,352,000
CA 12/31/22 8,311,111 ** CA with Imp -8,311,111
Maximium gain 40,889