Rizal Technological University

College of Business and Entrepreneurial Technology

704 Boni AA Cor Sacrepante, Mandaluyong, 1550 Metro Manila

ANSWER KEY
FOR
ADVANCED
FINANCIAL
ACCOUNTING AND
REPORTING
(Compilation of Test banks, Reviewers,
Quizzers etc.)
5TH YR BS-ACCOUNTANCY
(2018-2019)

Prof. Macrina Violeta Vicente-Mutuc

1
 TABLE OF CONTENTS
1.0 PARTNERSHIP ACCOUNTING
1.1 Formation 9

1.2 Operations 13

1.3 Dissolution/changes in ownership interest

1.3.1Admission of a new partner

1.3.1.1 By purchase of interest 23

1.3.1.2 By investment 30

1.3.2 Withdrawal, retirement or death of a partner 37

1.4 Liquidation 42

1.4.1 Lump – sum method

1.4.2 Installment method

2.0 CORPORATE LIQUIDATION

2.1 Statement of Affairs 50

2.2 Statement of Deficiency 53

2.3 Statement of Realization and Liquidation 59

3.0 JOINT ARRANGEMENTS (PFRS 11)

3.1 Joint Operations 67

3.2 Joint Venture (equity method) 73

3.3 Accounting for SME 81

4.0 REVENUE RECOGNITION

4.1 Installment Sales

4.1.1 Recognition of gross profit – regular sales versus installment sales 89

4.1.2 Default and Repossession and Trade – in merchandise 92

4.1.3 Financial Statement Presentation 97

4.1.4 PAS 18/ PFRS 15 100

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4.2 Long – term Construction Contracts (PAS 11 / PFRS 15)

4.2.1 Journal entries and determination of revenue, costs and gross profit

4.2.1.1 Percentage of Completion 101

4.2.1.1.1 The proportion that contract costs incurred for

work performed to date bear to the

estimated total contract costs;

4.2.1.1.2 Surveys of work performed; or

4.2.1.1.3 Completion of a physical proportion of the

contract work

4.2.1.2 Cost Recovery Method 104

4.2.2 Financial Statement Presentation 107

4.2.3 Computation of gross amount due from / to customers 109

4.2.4 Accounting for SME 114

4.3 Franchise Operations – Franchisor’s point of view (PAS 18 / PFRS 15)

4.3.1 Journal entries and determination of revenue, costs and gross profit

Initial Franchise Fee (use of accrual method,

4.3.1.1 installment sales method and cost recovery method) 119

Continuing Franchise Fee, Bargain Purchase (option), and 121

4.3.1.2 Commingled Revenue

4.3.1.3 Repossessed Franchise 122

4.3.1.4 Option to Purchase the Franchise Outlet 124

4.3.2 Financial Statement Presentation 124

4.3.3 Accounting for SME 125

4.4 Consignment Sales (PFRS 15) 126

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5.0 ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
5.1 Transactions on the books of the home office and the branch 131

5.2 Reconciliation of reciprocal accounts 136

5.3 Preparation of individual and combined financial statements 143

Special procedures in home office and branch transactions (inter – branch

5.4 transfer of cash and merchandise at cost or at billed price) 148

5.5 Accounting for agency transactions 154

6.0 BUSINESS COMBINATION (PFRS 3)

6.1 Acquisition of assets and liabilities (acquisition method)

6.1.1 Determination of Consideration Transferred 159

6.1.2 Recognition of Acquired Assets and Liabilities 164

Recognition and Measurement of Goodwill and Gain from a Bargain 167

6.1.3 Purchase

6.1.4 Journal Entries 171

6.2 Financial Statement Presentation 172

6.3 Accounting for SME 173

7.0 SEPARATE FINANCIAL STATEMENTS (PAS 27)

Accounting for Investment in Subsidiary (at cost, in accordance with PAS 181
7.1 39/ PFRS 9, and equity method)

7.2 Financial Statement Presentation 182

7.3 Accounting for SME 189

8.0 CONSOLIDATED FINANCIAL STATEMENTS (PFRS 10)

8.1 Consolidated Financial Statement in Subsidiary

8.1.1 Date of acquisition 190

8.1.2 Subsequent to date of acquisition

Net income, dividends, amortization and impairment of 192

8.1.2.1 goodwill

With intercompany transactions (inventories, land and 195

8.1.2.2 depreciable assets)

4
 8.1.3 Determination of:

8.1.3.1 Net Income/ Other Comprehensive Income/ Equity

8.1.3.1.1 Attribution to Equity Holders of Parent/ 200

Controlling or Parent’s Interest

8.1.3.1.2 Non-controlling Interest 209

8.1.3.1.3 Consolidated/ Group 217

8.1.3.2 Retained Earnings/ Common Share / Dividends

8.1.3.2.1 Attributable to Equity Holders of Parent / 227

Controlling or Parent’s Interest/ Consolidated / Group

8.2 Accounting for SME 233

9.0 FOREIGN CURRENCY TRANSACTIONS

Without hedging activities (import, export, lending, and borrowing 236
9.1 transactions)

9.2 Hedging Activities: Hedging Foreign Currency Exposures

9.2.1 Foreign Currency Forward Contacts

Hedges that not requires a Hedge Accounting

9.2.1.1 (undesignated hedges)

9.2.1.1.1 Exposed Asset (import) or Liability (export) 239

Position

9.2.1.1.2 Speculation 242

9.2.1.2 Hedges that requires a Hedge Accounting:

9.2.1.2.1 Fair value hedge

9.2.1.2.1.1 Hedge of a Firm Commitment 248

(purchase or sale transaction)

9.2.1.2.2 Cash flow hedge

9.2.1.2.2.1 Hedge of a Firm Commitment 257

(purchase or sale transaction)

9.2.1.2.2.2 Hedge of a Forecasted Transaction 263

(purchase or sale transaction)

9.2.1.2.3 Hedge of a net investment in foreign entity 266

9.3 Accounting for SME 269

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 TRANSLATION OF FOREIGN CURRENCY FINANCIAL
10.0 STATEMENTS (PAS 21/ PAS 29)
Translation from the Functional Currency to the Presentation Currency 274
10.1 (Closing/ Current Rate Method)

Remeasurement from a Foreign Currency to the Functional Currency 276

10.2 (Temporal Method)

10.3 Restatement of Financial Statements 283

11.0 NOT – FOR – PROFIT ORGANIZATIONS

11.1 Voluntary health and welfare organizations (VHWO) 289

11.2 Hospitals and other health care organizations 292

11.3 Colleges and universities 299

Other not – for – profit organizations such as churches, museums, 304

11.4 fraternity association, etc.

12.0 GOVERNMENT ACCOUNTING – GENERAL FUND

12.1 Basic Concepts in Government Accounting 316

12.2 Budget Process 317

12.3 Journal Entries – Books of National Government Agency 318

13.0 OTHER SPECIAL TOPICS (BASIC KNOWLEDGE)

13.1 Accounting for insurance contracts by insurers (PFRS 4) 319

13.2 Accounting for build, operate & transfer (PFRIC 12) 320

13.3 Effective communications to stakeholders 321

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14.0 COST ACCOUNTING
14.1 System of cost Accumulation or Costing System

Comparison between Actual Costing, Normal Costing 322

14.1.1 and Standard Costing

14.2 Job – order costing system

Cost accumulation procedures – materials, labor and 326

14.2.1 overhead

14.2.2 Journal entries 328

Preparation of statement of goods manufactured and 336

14.2.3 sold

14.2.4 Accounting for scrap, waste, spoilage and rework 338

14.3 Process costing system

Cost accumulation procedures – materials, labor and 342

14.3.1 overhead

14.3.2 Journal entries 360

14.3.3 Preparation of cost of production report 361

14.3.3.1 First – in, first –out (FIFO) method

14.3.3.2 Average method

14.3.4 Accounting for lost units 376

14.3.4.1 Normal lost units

14.3.4.2 Abnormal lost unit

14.4 Backflush costing system (JIT system)

Cost Accumulation procedures – materials, labor & 381

14.4.1 overhead

14.4.2 Journal entries 384

14.5 Service Cost Allocation

14.5.1 Direct method 391

14.5.2 Step – down 393

14.5.3 Reciprocal method 395

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14.6 Activity – based costing system (ABC costing)

Allocation of costs: Traditional Costing versus ABC 397

14.6.1 Costing

Determination of Total Product Costs: Traditional 405

14.6.2 Costing versus ABC costing

14.7 Accounting for joint and by – products

14.7.1 Methods of allocating joint cost to products

14.7.1.1 Market (sales) value method:

14.7.1.1.1 Market value at split – off point 408

approach

14.7.1.1.2 Hypothetical Market Value Approach 418

or Approximated NRV Approach or Net
Realizable Value Method

14.7.1.1.3 Average unit (production output) 425

method

14.7.1.1.4 Weight average method 431

14.7.1.2 Methods of allocating Joint Cost to by- 435

products

14.7.1.2.1 No joint cost allocated to by-product

14.7.1.2.2 With joint costs allocated to by-

product

14.7.1.3 Treatment of by – products 440

Standard Costing (two-way variance excluding mix and yield

14.8 variances)

14.8.1 Computation of Variances 441

14.8.2 Journal Entries and reporting 446

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 PARTNERSHIP ACCOUNTING
Formation

1. C.
Goodwill of Rose, Violet, Patrick and Leo 30,000
Goodwill of Edgar and Fint 10,000
Total 40,000
2. C.
Rose
Unadjusted Capital 50,000
Share in undervalued assets (20,000 x 40%) 8,000
Share in goodwill (30,000 x 40%) 12,000
Adjusted Capital 70,000
3. C.
Rose [50,000 + (2,400 x 40%)] 50,960
Edgar [60,000 - (2,400 x 40%)] 58,800

Adj. Capital Cr. Capital Bonus to firm

Rose, Violet, Patrick and Leo 50,000 47,600 2,400

(20,000+30,000)

Edgar and Fint (8,000 + 10,000) 18,000 20,400 (2,400)

68,000 68,000
4. D.
5. D.
6. A.
7. A.
8. A.
9. A.
10.C.
11.C.

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 12.A.
Adams Baker

Cash P120,000 P200,000

Merchandise 0 320,000

Building 0 840,000

Furniture and equipment 200,000 0

Mortgage loan 0 ( 280,000)

Total Capital P320,000 P1,080,000

13.C.
14.D.
15.A.
16.B.
17.A
18.B.
19.D.
20.C.
Agreed capital 10,000,000
25%
Capital credited to Jessica 3,000,000
Contributed capital of Jessica (800,000)
Additional contribution 2,200,000
21.C.
Robert Sean

Cash 20,000 30,000

Inventory 12,500 15,000

Building 600,000

Furniture and fixture 250,000

Mortgage payable (120,000)

282,500 525,000

22.C.
3/1 140,000 x 4/10 56,000
7/1 180,000 x 1/10 18,000

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 8/1 165,000 x 5/10 82,500
Average Capital 156,500
Multiplied by 10%
Annual interest 15,650
Multiplied by 10/12
Prorated interest for the year 13,042
23.C.
24.A.
25.D.
26.C.
27.A
28.D.
29.C.
30.C.
31.B.
A’s contribution (190,000 – 60,000) 130,000
B’s contribution 100,000
Total capital contribution 230,000
Capital interest of A 60%
Capital credited to A 138,000
Contribution of A 130,000
Bonus to A 8,000
32.C.
Magic = 596,250 – 5,550 = 590,700
Moto = 335,000 – 4,050 – 9,000 = 321,950
33.A.
Magic = 650,000 - 590,700 = 59,300
Moto = 400,000 - 321,950 = 78,050
34.A.
Magic 590,700 Total Capital 921,650

Moto 321,950 Moto’s Capital Interest 40%

Total Capital 921,650 Moto’s credited Capital 365,060

Magic’s Capital Interest 60%

Magic’s credited Capital 547,590

35.A.
Total Agreed Capital of HAyaan Mo (300,000 x 50%) 150,000
Total Contributed Capital of HAyaan Mo 90,000
Cash to be contributed 60,000
36.D.
Total Liabilities 25,000
Total Capital 300,000

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 Total Assets 325,000
37.A.
Required capital of Petmalu (287,500 x 60%) 172,500
Non-cash assets contribution of Petmalu (125,000 – 30,000) 95,000

Cash Contribution 77,500

38.C.
Contribution of Gandara 115,000
Contribution of Petmalu (125,000 – 30,000 + 50,000) 145,000
Total partnership Capital 260,000
39.B.
Total Contributed Capital 210,000
Divided by 2
Petmalu’s Capital 105,000
40.C.
Total Contributed Capital 184,000
Divided by 2
BInos,Capital 92,000

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 PARTNERSHIP ACCOUNTING
OPERATIONS

1. A.
Net income P 25,000
Accrued expenses 1,200
Inventory overstated (3,100)
Purchases not recorded (2,000)
Prepaid income 1,500
Unused supplies 900
Total P 23,500
Multiply by 40%
Share in net income of Jimmy P 9,400
2. A
3. B. P290,000
40,000 = 25,000 + 10% (NI – B - S)
40,000 = 25,000 + 10% (NI – 15,000 – 125,000)
40,000 = 25,000 + .1NI – 14,000
29,000 = .1NI
290,000 = NI
4. D.
Gross income (150,000 – 40,000 + 10,000) 120,000
Expenses 20,000
Net income 100,000

Share 50,000 30,000 20,000

E/ D 40,000 (10,000) 0
Inc. in capital 90,000 20,000 20,000
5. C.
6. C.

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7. A
Average capital
DIAMOND RUBY

40,800 x 12/12 = 40,800 112,000 x 12/12 = 112,000

15,000 x 9/12 = 11,250 20,000 x 5/12 = 8,333.33

Average capital 52,050 Average capital 120,333.33

6% 6%
Interest 3,123 Interest 7,220

DIAMOND RUBY TOTAL

Interest 3,123 7,220 10,343

Bonus 6,966 6,966

Salaries 25,000 30,000 55,000

Net due 5,384 2,307 7,691

40,473 39,527 80,000

Net income 80,000

Interest (10,343)
Total 69,657
x 10%
Bonus 6,966
8. B.
DIAMOND RUBY TOTAL
Beginning 40,800 112,000 152,800
Additional investment 15,000 20,000 35,000
Total Capital 55,800 132,000 187,800
Net income 40,473 39,527 80,000
Drawings (20,800) (20,800) (41,600)
Ending capital 75,473 150,727 226,200

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9. D.

Allocation of net income:

Arthur Baxter Cartwright Total
Interest –10%
of beg. Capital P6,000 P8,000 P10,000 P24,000
Salary 20,000 20,000
Balance/ remainder 1,800 1,800 2,400 6,000
Totals P7,800 P29,800 P12,400 P50,000

Statement of Capital:
Arthur Baxter Cartwright Total
Beginning balance P60,000 P80,000 P100,000 P240,000
Net income 7,800 29,800 12,400 50,000
Drawing (given) ( 5,000) ( 5,000) ( 5,000) ( 15,000)
Ending capital P62,800 P104,800 P107,400 P275,000

10.C.
A B C TOTAL
Bonus* P 4,000 P 4,000
Interest** 1,000 1,000
Salaries 10,000 12,000 22,000
Balances (4:4:2) 6,800 6,800 3,400 17,000
P19,400 P44,000

*B = 10% (NI – B) ** In excess of P100,000

= 10% (44,000 – B) (P110,000 – P100,000) x 10%

=P4,400 - .10B
1.10B = 4,400
B = P4,400

11.A P9,400
Net income per book P25,000
Add (deduct): Adjustments\
Accrued expenses not recorded in 2010 1,200
Inventory overstated in 2011 ( 3,100)
15
 Purchases not recorded in 2011 ( 2,000)
Income received in advanced not adjusted in 2010 1,500
Unused supplies not taken up in 2011 900
Adjusted net income P23,500
Multiply by profit and loss ratio 40%
Profit share of Rosa P 9,400

12.A.
Ryan Sandra Total
Salary for 2014 18,000 18,000
Balance of 2014 income
(25,000 – 18,000 – 4,000) 1,500 1,500 3,000
2013 Adjustment (60:40) 2,400 1,600 4,000
Share In net income 21,900 3,100 25,000

13.B.
Daniel Barry Total
Salaries (10 months) 8,000 10,000 18,000
Interest* 2,800 3,600 6,400
Remaining ( 200) ( 200) ( 400)

Total 10,600 13,400 24,000

Service revenue 50,000

Expenses:
Supplies 17,000
Utilities 4,000
Other misc. expense 5,000 26,000
Net income 24,000

Average Capital Daniel Barry

Beg. Capital 300,000 300,000
Withdrawal on May 2(8mos.) (32,000)
Additional investment on July 1 (6mos.) 60,000
Additional investment on October 1 12,000
Total 280,000 360,000
Divided by 10mos 10 10
Multiply by interest rate 0.12 0.12
Multiply by no of months per year(10/12) 5/6 5/6
16
 Interest 2,800 3,600

14.A.
Kimberly Ericka Julie Grace Total

Salaries 30,000 30,000 30,000 90,000

Interest 12,500 10,000 17,500 15,000 55,000
Bonus 50,625 50,625
Reminder 22,500 30,000 15,000 7,500 75,000
Total 65,000 70,000 83,125 52.500 270,625

Bonus
Total of salaries, interest and balance 220,000
Less: interest of Julie ( 17,500)
Balance net of bonus 202,500
Divided by 0.80
Multiply by bonus 0.20
Bonus 50,625

15.B. same solution in number 14

16.D.
Kimberly Julie Ericka and Grace Total

Salaries 30,000 60,000 90,000

Interest 12,500 17,500 25,000 55,000

Bonus 9,375 9,375

Reminder (27,000) (18,000) (45,000) (90,000)

Total 15,500 8,875 40,000 64,375

Bonus

Total of salaries, interest and balance 55,000

Less: interest of Julie ( 17,500)
Balance net of bonus 37,500
Divided by 0.80

17
 Multiply by bonus 0.20
Bonus 9,375
17. B.
To equate P40,000 to P25,000 plus bonus. The bonus should amount to
P15,000 (P40,000 – P25,000). Based on the foregoing the following should be
developed;
Bonus = 10% (NI – Salaries – Bonus)
P15,000 = .10 [NI – (P100,000 + P25,000) – P15,000]
P15,000 = .10 (NI – P140,000)
P15,000 = .10NI – P14,000
P29,000 / .10= NI
NI = P290,000
Or, Alternatively
P40,000 = P25,000 + .10 (NI – salaries – bonus)
P40,000 = P25,000 + .10 [NI – (P100,000 + P25,000) –
P15,000]
P40,000 = P25,000 + .10 (NI – P140,000)
P40,000 = P11,000 + .10NI – P14,000
P29,000 = .10NI
NI = P290,000
18.B.
19.B.
Bryant Milton Pine Total

Salary 45,000 36,000 81,000

Interest 15,000 12,000 9,000 36,000

Residual (72,000) (24,000) (48,000) (144,000)

Total (57,000) 33,000 ( 3,000) ( 27,000)

20.A.
B = 20% (NI – I – S – B)
B = 20% [168,000 – (8%(150,000)) – 60,000 – B]
B =20% (96,000 – B)
B = 19,200 - .20B
1.20B = 19,200
B = 16,000

18
21.B.
Stones Miles Kiney Total

Bonus 7,500 7,500

Interest 13,500 9,000 6,000 28,500

Residual 15,600 7,800 15,600 39,000

Total 29,100 24,300 21,600 75,000

22.B.
Stones Miles Kiney Total

Bonus 1,500 1,500

Interest 13,500 9,000 6,000 28,500
Residual (6,000) (3,000) (6,000) (15,000)
Total 7,500 7,500 0 15,000
23.B.
Stones Miles Kiney Total
Interest 13,500 9,000 6,000 28,500

Residual (23,400) (11,700) (23,400) (58,800)

Total (9,000) (2,700) (17,400) (30,000)

24.A.
25.B.
Original Capital of Bea (5,000,000 x 50%) 2,500,000
Share NI,2021 (2,000,000 x 20%) 400,000
Withdrawals (300,000)
Bea Capital 12/31/21 2,600,000
Share NI, 2022(1,000,000 x 10%) (100,000)
Withdrawals (200,000)
Bea Capital 12/31/22 2,300,000
26.D.
Lebron Capital 12/31/31 6,500,000
Lebron original contribution (5,000,000)
Withdrawals 1,000,000

19
 Share in NI 2,500,000
Interest (5,000,000 x 20%) (1,000,000)
Share in remainder 1,500,000
Divided by 50%
Total remainder 3,000,000

Income distribution of Kobe:

Interest (2,000,000 x 50%) 400,000
Salaries (30,000 x 12) 360,000
Remainder (3,000,000 x 20%) 600,000
NI 1,360,000

Kobe original contribution 2,000,000

Share in NI 1,360,000
Withdrawals ( 500,000)
Kobe Capital 12/313/1 2,860,000
27.C.
A B C Total
Salary 160,000 40,000 480,000 680,000
Remainder ( 20,000) (100,000) (80,000) (200,000)
Total 140,000 ( 60,000) 400,000 480,000
28.D.
B, capital, 1/1/2020 5,000,000

Withdrawal ( 600,000)

Total 4,400,000

Share in net Income ( 60,000)

B, capital, 12/31/2020 4,340,000

29.C.
30.A.
Solution in No. 29 and 30

TCC TAC Share in net income Ending Capital

A – 10% 2,000,000 2,000,000 100,000 2,100,000

R – 30% 5,000,000 5,000,000 300,000 5,300,000

20
T – 36% 3,000,000 1,800,000 360,000 2,160,000

S – 24% 1,200,000 240,000 1,440,000

Total 10,000,000 10,000,000 1,000,000 11,000,000

31.C.
32.A.
Net decrease in capital (120,000)
Add: Withdrawals 260,000
Total 140,000
Less: Additional investments 50,000
Profit share 90,000
Profit share percentage 30%
Total partnership net profit 300,000
33.C.
34.B.
35.C.
X Y Z TOTAL

Bonus – 10% (44,000 – B) 4,000 4,000

Interest on capital in excess

Of P100,000 1,000 1,000

Salaries of partners 10,000 12,00 22,000

Balance (4:4:2) 6,800 6,800 3,400 17,000

Share in capital 16,800 7,800 19,400 44,000

36.B.
X Y Z TOTAL

Bonus – 10% (22,000 – B) 2,000 2,000

Interest on capital in excess

Of P100,000 1,000 1,000

Salaries of partners 10,000 12,00 22,000

Balance (4:4:2) (1,200) (1,200) ( 600) (3,000)

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 Share in capitaL 8,800 ( 200) 13,400 22,000

37.B.
X Y Z TOTAL

Bonus – 10% (44,000 – B) 2,000 2,000

Interest on capital in excess

Of P100,000 1,000 1,000

Balance – Salary Ratio 8,636 10,364 19,000

Share in capital 8,636 1,000 12,364 22,000

38.C.
Mariano Lucas Total

Salary 10,000 10,000

Bonus to managing partner 1,561 1,561

Balance 8,781 5,268 14,049

Share in capital 20,342 5,268 25,610

39.A.
Total share in Capital 20,342 5,268 25,610
Add: Capital, beginning 125,000 75,000 200,000
Total 145,342 80,268 225,610
Less: Withdrawals 20,000 30,000 50,000
Ending capital 125,342 50,268 175,610
40.D.
Andal Briones Camba Total

Interest on average capital 47,250 23,865 16,235 87,350

Salaries to partners 122,325 82,625 204,950

Balance (139,308) (139,308) (139,308) (417,924)

Net increase (decrease) 30,267 (115,443) ( 40,448) (125,624)

22
23
 DISSOLUTION/ CHANGES IN OWNERSHIP INTEREST
By purchase of interest

1. D.
Equity balance of E 50,000
Amount paid 46,000
Bonus to C & D 4,000
C 120,000 + (3/5 x 4,000) 122,400
D 60,000 + (2/5 x 4,000) 61,600

2. A.
Matt Tim Luke Total
Beginning Capital 45,000 30,000 50,000 125,000
Salaries (3years) 30,000 30,000 30,000 90,000
Bonus (3years) 24,000 24,000
Balance/remaining 40,000 80,000 120,000 240,000
Total 115,000 164,000 200,000

Net income
Y1 125,000
Y2 110,000
Y3 144,000
Total 379,000
Depreciation ( 25,000)
Adjusted net income 354,000
3. B.
Samuel Mona Isabela Total

5 4 1

Beginning balances 150,000 50,000 200,000 400,000

Adjustment of assets

[(150 +200) – (85 x 4)]/60%

(17,000) (13,600) (3,400) (34,000)

Total 133,000 36,400 196,600 366,000

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 4. B.
Samuel Mona Isabel FrancoTotal

5 4 1

Beg. Balance 150,000 50,000 200,000 400,000

Adjustment

[(40,000/20%) – 150,000]/50%

50,000 40,000 10,000 100,000

Total 200,000 90,000 210,000 500,000

Purchase by Franco (40,000) 40,000

Additional investment of Franco 30,000 30,000

Adjusment 3,750 3,000 750 12,500 20,000

Agreed capital 163,750 93,000 210,750 82,500 550,000

5. B.
Samuel Mona Isabel FrancoTotal
5 4 1

Beg. Balance 150,000 50,000 200,000 400,000

Adjustment

[(250,000-(120,000/.25)]/.50

(10,000) (8,000) (2,000) (20,000)

Total 140,000 42,000 198,000 380,000

Purchase by Franco (21,000) (99,000) 120,000

Additional investment of Franco 20,000 20,000

Adjusment 15,000 75,000 3,000 (30,000) 63,000

Agreed capital 155,000 96,000 102,000 110,000 463,000

25
6. A.
7. C.
Dell, Capital (P425,000 x 20%) 85,000
Gore, Capital (P275,000 x 20%) 55,000
Mann, Capital 140,000
8. C.
9. D.
Kardo, capital 60,000
Siyano, capital 20,000
Total 80,000
Multiplied by 20%
Lily, capital 16,000
10.B.
Partner Sold interest Loss share Cash received
Kardo (60,000 x 20%) 12,000 (600) 11,400
Siyano (20,000 x 20%) 4,000 (400) 3,600
Total 16,000 (1,000) 15,000
11.B.
T, Capital 5,000,000
Multiply by % Purchase 40%
S, Capital 1,200,000
12.A.
13.A.
14.B
264,000 – [(278,000 + 418,000 + 192,000) x 1/5] = 86,400
15.A.
Lima 100,000 x 80% = 80,000
Mitra 50,000 x 80% = 40,000
16.A.
Asset revaluation (60,000/20%) – 150,000 150,000
Lima [100,000 + (150,000 x 75%)] 170,000
Mitra [50,000 + (150,000 x 25%)] 70,000
Nova 60,000
17.D.
Felix Elias Total

Original investment 24,000 48,000 72,000

26
 Net profit 5,430 10,860 16,290

Drawings ( 5,050) ( 8,000) (13,050)

Capital balance before transfer to Desta 24,380 50,860 75,240

Required capital (18,810) (37,620) (56,430)

Capital to be transferred to Desta 5,570 13,240 18,810

Excess cash to be distributed based on

Capital ratio (30,000-18,810) 3,730 7,460 11,910

Distribution of cash 9,300 20,700 30,000

18.D.
19.C.
S E C

Capital balances before admission of X 504,000 252,000 84,000

Asset revaluation

[(180,000/20%) – 840,000] 36,000 18,000 6,000

Adjusted capital balance 540,000 270,000 90,000

Multiply by % of unsold interest 80% 80% 80%

Capital balance after admission of X 432,000 216,000 72,000

20.D.
Total capital of new partnership (840,000/75%) 1,120,000
Multiply by % of interest 25%
Amount to be invested by X 280,000
21.C.
Juan Cosme Luna Magno
Capital Balances, April 30, 2016 360,000 225,000 135,000
1/6 interest transferred to Magno (60,000) (37,500) (22,500) 120,000
Balances 300,000 187,500 112,500 120,000

27
 Cash transfers to equalize inv. (100,000) 12,500 87,500

Balances 200,000 200,000 200,000 120,000

22. B.
Agreed capital 330,000
Capital Contribution 315,000
Asset Revaluation 15,000
23. D.
80,000 + 12,000 – 70,000 = 22,000
24. C.
Capital balance before admission of Manalo 80,000
Interest sold to Manalo (80,000 x 15%) (12,000)
Share asset revaluation (15,000 x 3/10) 4,500
Share in the bonus from Manalo (22,000 x 3/10) 6,600
Capital balance after admission of Manalo 79,100

25. A.
The capital balances would be the same as the balances prior to sale of
interest.

26. B.
27. B.
28. D.
Solution for nos. 26-28000’s are omitted)

C D O X Total

Capital balance 150 180 300 630

Transfer of 1/6 int. to X (30) 30

Inv. Of X 150 150

Asset Revaluation 6 6 8 20

Bonus to old partners 6 6 8 (20)

28
Capital bal. after adm. 162 162 316 160 800

29.A.
C 30% x 75% = 22.5%
D 30% x75% = 22.5%
O 40% x 75% = 30%
X 25%
30. C.
31.A.
140,000/ ¼ = 560,000 – (200,000 + 160,000 + 120,000) = 80,000

32.A.
Conde, Capital 90,000
Cuenco, Capital 60,000
Catral, Capital 150,000
33.C.
Other Assets 360,000
Conde, Capital 270,000
Cuenco, Capital 90,000

Conde, Capital (270,000 + 270,000) x 1/3 180,000

Cuenco, Capital (180,000 + 90,000) x 1/3 90,000

Catral, Capital 270,000

34. A.
Locsin, Capital (240,000 x ¼) 60,000
Montes, Capital (120,000 x ¼) 30,000
Nava, Capital 90,000
35. C.
Locsin, Capital (240,000 x 1/3) 80,000
Montes, Capital (120,000 x 1/3) 40,000
Nava, Capital 120,000
36. B.
Other assets 180,000
Locsin, Capital (180,000 x ¾) 135,000

29
 Montes, Capital (180,000 x ¼) 45,000

Locsin, Capital [(240,000 + 135,000 x 1/3] 125,000

Montes, Capital [(120,000 + 45,000) x 1/3] 55,000
Nava, Capital 180,000
37. D.
Loss in the purchased of interest of Anton is not absorbed by the
partnership because it is a personal transaction between Ponce and
Anton.
38. D.
180,000/25% = 720,000 – 600,000 = 120,000
39. B.
Ponce, Capital (300,000 x 25%) 75,000
Salva, Capital (200,000 x 25%) 50,000
Victa, Capital (100,000 x 25%) 25,000
Anton, Capital 150,000
40. B.
Other Assets 120,000
Ponce, Capital 60,000
Salva, Capital 36,000
Victa, Capital 24,000
180,000/25% = 720,000 – 600,000 = 120,000

Ponce, capital 90,000

Salva, Capital 59,000
Victa, Capital 31,000
Anton, Capital 180,000

30
 DISSOLUTION/ CHANGES IN OWNERSHIP INTEREST
By investment

1. C. be it a bonus/valuation, it indicates that new partner investing higher than his

cr proves undervaluation of old partnership.
2. B. P 22,000
Adjustments 8,000
Balances 260,000
Adj. 268,000
Goodwil l 40,000
Total 308,000
Divided by 70%
Total 440,000
Multiply by 30%
Isadora’s Equity 132,000
Less: Noncurrent Asset 110,000
Cash 22,000

3. B. P 48,900
Old capital adjustment P 108,000
New Partner Contribution 55,000
Total 163,000
Multiply by 30%
New Partner’s Capital P 48,900
4. A.
TCC TAC
Ricahrd 200,000 (8,000)
Jason 100,000 (12,000) 88,000
Genesis 100,000 20,000 120,000
400,000 0 400,000
Bonus to Genesis = 5,000
Share of Jason in the residual profit ( 50,000x 40% ) = 20,000
5. D.
Georgina Nelson Loren Fidel

Capital balances 350,000 200,000 90,000 640,000

Adjustment (50,000) (30,000) (20,000) (100,000)

31
 Balances 300,000 170,000 70,000 540,000

TCC TCA
G 300,000 (30,000) 270,000
N 170,000 (8,000) 162,000
L 70,000 38,000 108,000
F 270,000 0 270,000
810,000 0 810,000 (540,000 / 2/3)
6. C.
7. B.
8. C. P35,374 refer to no. 9
9. C. P17,687
Unadjusted capital of CC P33,000

Add (deduct): Adjustments

Allowance for doubtful accounts (3% x P14,200) ( 426)

Increase in merchandise inventory (P23,000 – P20,000) 3,000

Prepaid salary 600

Accrued rent expense ( 800)

Adjusted capital balance of CC P35,374

Divided by: Capital interest of CC 2/3

Total Capital of the partnership P53,061

Less: Adjusted capital balance of CC 35,374

Capital balance of DD P17,687

10.D.
Rosa: 50% x 80% = 40%
Susan:30% x 80% = 24%
Tina 20% x 80% = 16%
Vida 20%
100%

32
 11.C.
12.A.
Goodwill [(P300,000/25%) – P1,000,000] 200,000
Dell, Capital (P200,000 x 3/5) 120,000
Gore, Capital (P200,000 x 2/5) 80,000

Cash 300,000
Mann, Capital 300,000
13.A.
Cash 150,000
Goodwill [(P700,000 / 80%) - P850,000] 25,000
Mann, Capital 175,000
14.C.
15.A
Total agreed capital 20,000,000

Total contributed capital (14,000,000)

Undervalued asset 6,000,000

Total agreed capital 20,000,000

Multiplied by 30%

Capital credited to Ana 6,000,000

Contributed capital of Ana ( 4,000,000)

Bonus to Ana 2,000,000

Liz Capital 2,000,000

Share in the undervaluation (6,000,000 x 60%) 3,600,000

Share in the bonus to Ana (2,000,000 x 60%) (1,200,000)

Liz capital after admission of Ana 4,400,000

16.B.
Kardo 60,000
Siyano 20,000
33
 Lily 15,000
New total capital 95,000
Multiplied by 20%

Lily, capital 19,000

17.C
18.C
19.B
Solution in No. 17, 18 and 19
TCC TAC Bonus Asset revaluation
A 1,000,000 1,400,000 (100,000) 500,000
B 2,500,000 3,100,000 (150,000) 750,000
C 500,000 1,500,000 (250,000) 250,000
D. 1,500,000 2,000,000 500,000 0
Total 5,500,000 8,000,000 - 2,500,000

20.C.
21.B.
22.B.
23.D.
24.B.
25.C.
26.D.
Capital of Mison Prior to the admission 105,000
Share in the bonus from Zamora (15,000 x 50%) 7,500
Capital of Mison in the new partnership 112,500
27.C.
TAC TCC Total

X 180,000 150,000 30,000

Y 210,000 180,000 30,000

Z 195,000 195,000

Total 585,000 525,000 60,000

28.D.
195,000 –(525,000 x 1/3) = 20,000

Bonus to A (20,000 x 50%) 10,000

34
29.A.
Old partner’s capital contribution 600,000
Divided by % of interest of old partners 75%
Total agreed capital 800,000
Multiply by % of interest of new partner 25%
Capital credited of Sison 200,000
Bonus to Sison (70,000)
Cash to be contributed by Sison 130,000
30.B.
Juan Cosme Luna Magno

Capital Balances, April 30, 2016 360,000 225,000 135,000

1/6 interest transferred to Magno (60,000) (37,500) (22,500) 120,000

Balances 300,000 187,500 112,500 120,000

Cash transfers to equalize inv. (100,000) 12,500 87,500

Balances 200,000 200,000 200,000 120,000

Distribution of net profits 3,150 3,150 3,150 3,150

Withdrawals ( 1,500) ( 2,000) ( 1,500) (2,000)

Capital Balances 201,650 201,150 201,650 121,150

31.C.
Agreed Capital (201,650 + 201,150 + 201,650) ÷ ¾ 805,933
Interest of Magno ¼
Required Capital Credit to Magno 201,483
Capital Balance of Magno before investing 121,150
Cash to be invested by Magno 80,333

32.A.
Galang Hizon Istela
Asset revaluation method:
Capital contribution of partners 600,000 480,000 500,000
Asset revaluation 252,000 168,000
Additional depreciation (140,000) (140,000) (140,000)
Capital balances 712,000 508,000 360,000
35
 Bonus method:

Capital contribution of partners 600,000 480,000 500,000

Bonus to old partners 63,000 42,000 (105,000)

Capital balances 663,000 522,000 395,000

Net advantage of bonus method to Istela 35,000

33. A.
Campos Centeno

Capital balances 641,976 728,352

Uncollectible accounts (20,000) (35,000)

Worthless Inventories ( 5,500) ( 6,700)

Other Assets written off ( 2,000) ( 3,600)

Adjusted Capital Balance 614,476 683,052

34.C.
Total Capital (614,476 + 683,052) 1,297,528
Total Liabilities 967,590
Total Assets 2,265,118

35. D.
Total Capital (1,297,528/80%) 1,621,910
Multiply by: interest of Coronel 20%
Contribution of Coronel 324,382

36
 36. D.
Campos Centeno

Capital balances 614,476 683,052

Required capital (1,297,528/2) 648,764 648,764

Cash paid (receive) 34,288 (34,288)

37. C.
Campos Centeno Coronel

Capital balances 614,476 683,052 324,382

Cash paid (receive) 34,288 (34,288)

Net Profit 130,000 130,000 65,000

Drawings (50,000) (65,000) (28,000)

Ending Capital 728,764 713,764 361,382

38. A.
Total capital (3,000,000/ 80%) 3,750,000
Capital interest of Florez 20%

Cash to be contributed of Florez 750,000

39. B
40. C.

37
 DISSOLUTION /CHANGES IN OWNERSHIP INTEREST
Withdrawal, retirement or death of a partner
1. C
2. B
3. A
4. A (P4,000 x 2/5 = P1,600)
5. D (P3,000 / 40% = P7,500)
6. A (P12,000/3 = P4,000)
7. C
8. A

Solution for nos. 7&8 Yumul Yason Ylagan

Interest before retirement P103,000 P 77,000 P180,000

Adjustment of assets to FMV 12,000 12,000 24,000

P115,000 P 89,000 P204,000

Retirement of Yumul (115,000) ( 2,000) ( 4,000)

Capital balance of Ylagan P87,000 P200,000

Amount paid to retiring partner P28,000

9. A
10. D Capital of retiring partner
11. B
Total capital before retirement P110,000
12. C
Total capital after retirement 90,000 20,000

Asset revaluation to retiring partner P 8,000

Fraction of interest of retiring partner ÷ 2/10

Total asset revaluation P40,000

Solution for nos. 10-12

Capital Balance of A before the retirement of C 500,000

Add: Share of A in asset revaluation (250,000 x 10%) 25,000
Capital Balance of A after the retirement of C 525,000

Cash received by C upon retirement 300,000

Capital of C before retirement 200,000
38
Share of C asset revaluation 150,000

Total asset revaluation (150,000 / 60%) 250,000

13. C
14. A Solutions for nos. 13&14

Capital Balance of B before the retirement of C 300,000

Add: Share of B from Bonus given by C (P20,000 x 4/5) 16,000
Capital Balance of B after the retirement of C 316,000

Capital balance of C before retirement 100,000

Cash received by C upon retirement 80,000
Bonus given by C 20,000

15. A
16. A
17. B
18. A
19. D
Solutions for nos. 16-19
16. Bonus Method

Songco, Capital 200,000

Bueno, Capital 60,000
Manzano, Capital 40,000
Cash/Payable to Songco 300,000

17. Asset Revaluation Method

Songco, Capital 200,000

Other Assets (P10,000 ÷ 1/6) 600,000
Bueno, Capital (P50,000 x 3/5) 300,000
Manzano, Capital (P50,000 x 2/5) 200,000
Cash/ Payable to Songco 300,000

39
 18. The bonus method will be preferred by Manzano

19.

Bonus Method Asset Rev

Capital of Manzano after retirement P260,000 P500,000
Additional depreciation 300,000
Capital of Manzano after additional depreciation P260,000 P200,000

Net advantage to Manzano with the use of the P60,000

bonus method

20.B Delfin, Capital 400,000

Damian, Capital 200,000
Dencio, Capital 200,000

Delfin, Capital 400,000

21. A
Cash 320,000
Damian, Capital 40,000
Dencio, Capital 40,000

22. C Other Assets 180,000

Delfin, Capital 400,000
Cash 460,000
Damian, Capital 60,000
Dencio, Capital 60,000
P460,000 – P400,000 = P60,000/ 1/3 =
P180,000

23.A Guzman, Capital January 1 P100,000

Drawing (16,000)
Share in net profit 24,000
Interest of Guzman upon retirement P108,000
Other Assets 40,000
Guzman, Capital 108,000
Cash 120,000
Jorge, Capital 12,000
Lopez, Capital 16,000
P120,000 – P108,000 = P12,000/ 30% =
40
P40,000
24. C

Guzman, Capital 108,000

25. A Jorge, Capital 5,143
Lopez, Capital 6,857
Cash 120,000

26. A Montero, Capital 100,000

Concio, Capital (P8,000 x 3/5) 4,800
Domino, Capital (P8,000 x 2/5) 3,200
Cash 108,000

27.B Montero, Capital 100,000

Concio, Capital (P10,000 x 3/5) 6,000
Domino, Capital (P10,000 x 2/5) 4,000
Cash 90,000

28.C Montero, Capital 100,000

Concio, Capital (P60,000 x 3/6) 30,000
Domino, Capital (P60,000 x 2/6) 20,000
Cash 90,000
Other Assets (P10,000 ÷ 1/6) 60,000

29.D Montero, Capital (P6,000 x 1/6) 1,000

Concio, Capital (P6,000 x 3/6) 3,000
Domino, Capital (P6,000 x 2/6) 2,000
Equipment [(P60,000 x 40%) – P18,000] 6,000

Montero, Capital (P100,000 – P1,000) 99,000

Equipment 18,000
Cash 81,000
30. B Solution for nos. 30-36
31. A Canda, Pardo and Andres
32. C Statement of Changes in Partners’ Equity
33. D For the Period January 1, 2014 to January 1, 2016
34. B
35. C Canda Pardo Andres Total
36. A Original capital, January 1, 2014 P 62,500 P 25,000 P12,500 P100,000
Corrected 2014 net profit 26,375 10,550 5,275 42,200
Drawings (15,000) ( 7,800) (5,200) (28,000)
Capital, January 1, 2015 P 73,875 P 27,750 P12,575 P114,200
Corrected 2015 net profit 10,875 4,350 2,175 17,400
Drawings (15,000) (7,800) (5,200) (28,000)
Capital, January 1, 2015 P 69,750 P 24,300 P 9,550 41
P103,600
Corrected 2016 net loss ( 6,750) (2,700) (1,350) (10,800)
Drawings (10,000) (5,200) (5,200) (20,400)
Capital, January 1, 2016 P 53,000 P 16,400 P 3,000 P 72,400
 Schedule of computation of corrected net profit

2014 2015 2016

Reported net profit (loss) P44,000 P 18,500 P (10,500 )
Understatement of accrued 2014 ( 400 ) 400
37. B expenses
38. B 2015 ( 500 ) 500
39. A 2016 ( 650 )
40. A Understatement of accrued 2014 250 ( 250 )
revenues
2015 100 ( 100 )
 2016 150
Overstatement of inventories 2014 (1,500 ) 1,500
2015 ( 2,000 ) 2,000
2016 ( 2,000 )
Understatement of depreciation ( 150 ) ( 350 ) ( 200 )
exp.
Corrected net profit (loss) P 42,200 P 17,400 P (10,800 )

PARTNERSHIP ACCOUNTING
Liquidation

1. A
Noncash assets 2,000,000
Sale price 1,500,000
Loss on sale 500,000
Liquidation expenses 100,000
Total loss on liquidation 600,000

Capital of A 700,000
Receivable from A (500,000)
2. C Net capital of A 200,000
Share in total loss (60% x 600,000) (360,000)
Debit balance in capital of A (160,000)

3. B
Capital Balance of B before liquidation ( 650,000)
Add: Payable to B 1,000,000
Capital Balance of B after the right of offset 350,000
Less: Share of B in Total Loss on Liquidation (600,000x 10%) 60,000
42
Capital Balance of B after loss on liquidation but before absorption 290,000
of A’s insolvency
Less: Share of B in A’s debit capital balance (P160,000 x 1/4) (40,000)
Cash received by B at the end of partnership liquidation 250,000
Capital Balance of C before liquidation 350,000
Add: Payable to C 100,000
Capital Balance of C after the right of offset 450,000
Less: Share of C in Total Loss on Liquidation (600,000 x 180,000
30%)
Capital Balance of C after loss on liquidation but before 270,000
absorption of A’s insolvency
Less: Share of C in A’s debit capital balance (P160,000 x (120,000)
3/4)
Cash received by C at the end of partnership 150,000
liquidation
4. B

5. D
Capital Balance of C before liquidation 400,000
Less: Share of C in Total Loss in Liquidation during January (P500,000* x (100,000)
20%)
Capital Balance of C after loss on liquidation but before absorption of A’s 300,000
insolvency
Less: Share of C in A’s debit balance (P150,000 x 2/5) (60,000)
Cash received by C at the end of partnership liquidation 240,000

Cash balance before start of liquidation 1,600,000

43
 Add: Net proceeds from sale of noncash asset during January (1,000,000 + 1,100,000
100,000)
Less: Cash paid for liquidation expenses during January (50,000)
Less: Cash paid for liabilities to third person during January (P2,000,000 x (400,000)
20%)
Less: Cash withheld for unpaid liabilities to third persons (P2,000,000 x 80%) (1,600,000)
Less: Cash withheld for estimated future liquidating expenses (150,000)
Cash available for distribution to partners 500,000
Less: Total capital of all partners (100,000+500,000+400,000) (1,000,000)
Total loss on liquidation for the first month of installment 500,000*

6. B
Capital of A before liquidation 100,000
Share in loss on liquidation (50% x 500,000) (250,000)
Debit balance in capital of A (150,000)

7. D
Estimated future liquidating expenses on January 31, 2019 150,000
Add: carrying amount of remaining noncash assets on January 31,
2019 400,000
(1,400,000 – 1,000,000)
Maximum possible loss on January 31, 2019 550,000
B’s share in maximum possible loss (P550,000 x 30%) 165,000

8. C

Cash withheld for future liquidating expenses 150,000

Add: Cash withheld for remaining unpaid liabilities to third persons (P2,000,000 1,600,000
x 80%)
Total cash withheld on January 31, 2019 1,750,000

9. C
10. A
11. A
12. B
13. D
14. C
15. C
16. C
SOLUTION: (13-16)

1. KENNETH KIM KAREN EDGAR TOTAL

44
Beg 55,000 85,000 65,000 75,000 280,000

PNL Ratio 0.40 0.20 0.10 0.30

Total 137,500 425,000 650,000 250,000

225,000

175,000

112,500

Priority 1 112,500 112,500 112,500

Priority 2 22,500 22,500

75,000 35,000 17,500 52,500

Priority 3

142,500 22,500 11,250 33,750 67,500

Total 57,500 51,250 33,750 142,500

Available Cash 325,000

Liabilities (220,000)

Cash Avail.for Dist. 105,000

Priority 1-2 Kenneth Kim Karen Edgar Total

Balance - 35,000 40,000 75,000

10,000 5,000 15,000 30,000

45,000 105,000

2.

Kenneth Kim Karen Edgar Total

Cash received priority 1-2 35,000 40,000 75,000

Priority 3 20,000 10,000 30,000 60,000

Total cash disrtributed to partners 135,000

Liabilities 220,000

Sale of NCAs 355,000

45
3.

Kenneth Kim Karen Edgar Total

Priority 1 22,500 22,500

Priority 2 15,000 7,500 22,500 45,000

1st Distribution 15,000 30,000 22,500 67,500

2nd Distribution

Balance of Priority 2 20,000 10,000 30,000 60,000

Priority 3 22,500 11,250 33,750 67,500

Balance 29,000 14,500 7,250 21,750 72,500

Total 29,000 200,000

4.

Cash in the 2nd installment sale 110,000

Cash withhdeld (3,000)

Liquidating expenses (5,000)

Cash available for distribution 102,000

Multiply by P&L Ratio 0.2

Cash received by Kim 20,400

17. A
18. A
19. D
20. B
21. A
22. C
23. B
24. C
25. D
26. B
27. C

46
 28. A
29. A
30. C
31. A Aguilar Benito Casimiro David
32. B Capital balances before liquidation P 11,000 P 10,300 P 13,700 P 9,000
Loan from partners 2,000
Total partners’ interest P 13,000 P 10,300 P 13,700 P 9,000
Loss on realization (P46,000 – (13,600) ( 10,200) ( 6,800) ( 3,400)
P12,000)
Balances P( 600) P 100 P 6,900 P 5,600
Additional loss to partners 600 ( 300) ( 200) ( 100)
Balances -------- P( 200) P 6,700 P 5,500
Additional loss to partners 200 ( 133) ( 67)
Distribution of cash to partners --------- --------- 6,567 5,433
33. A
34. B

Elma, Erica and Edna

Statement of Liquidation
January 1 – 31, 2008

Non-cash C A P I T A L
Cash Assets Liabilities Elma Erica Edna
Profit and loss ratio 3/8 3/8 2/8
Balances before P 80,000 P810,000 P270,000 P60,000 P290,000 P270,000
liquidation
Sale of non-cash 634,000 (810,000) (66,000) ( 66,000) ( 44,000
assets and )
distribution of loss
47
Payment of ( 24,000) ( 9,000) ( 9,000) ( 6,000
liquidation expenses )
Balances P690,000 P270,000 (P15,000) P215,000 P220,000
Payment of liabilities (270,000) (270,000)
Balances P420,000 (P15,000) P215,000 P220,000
Additional investment 15,000 15,000
of Elma
Balances P435,000 P215,000 P220,000
Payment to partners ( 435,000) ( 215,000) ( 220,000)

35. A
36. A
37. B

Elma , Erica and Edna

Statement of Liquidation
January 1 – 31, 2008
Non-cash Note Payable C A P I T A L
Cash Assets to Elma Liabilities Elma Erica Edna
Balances before P 80,000 P810,000 P70,000 P200,000 P60,000 P290,000 P270,000
liquidation
Sale of non-cash 634,000 (810,000) (66,000) ( 66,000) ( 44,000)
assets and
distribution of loss
Payment of (24,000) ( 9,000) ( 9,000) ( 6,000
liquidation expenses )

48
 Balances P690,000 P70,000 P200,000 (P15,000) P215,000 P220,000

Payment of liabilities (200,000) (200,000)

Balances P490,000 P70,000 (P15,000) P215,000 P220,000
Offset of loan
against debit ( 15,000) 15,000
balance in the
capital balance of
Elma
Balances P490,000 P55,000 P215,000 P220,000

Payment to partners (490,000) ( 55,000) (215,000) (220,000)

38. A
39. B
40. C

Elma , Erica and Edna

Statement of Liquidation
January 1 – 31, 2008

NR from Non-cash NP C A P I T A L
Cash Erica Assets to Elma Liabilities Elma Erica Edna
Profit and loss 3/8 3/8 2/8
ratio
Balances before P 80,000 P110,000 P700,000 P70,000 P200,000 P60,000 P290,000 P270,000
liquidation
Sale of non-cash 634,000 (700,000) (24,750) ( 24,750) ( 16,500)
assets and
distribution of

49
loss
Payment of (24,000) ( 9,000) ( 9,000) ( 6,000)
liquidation
expenses
Balances P690,000 P110,000 P70,000 P200,000 P26,250 P256,250 P247,500
Payment of (200,000) (200,000)
liabilities
Balances P490,000 P110,000 P70,000 P26,250 P256,250 P247,500
Offset of
receivable (110,000) ( 110,000)
against credit
balance in the
capital of Erica
Balances P490,000 P70,000 P26,250 P146,250 P247,500
Payment to (490,000) ( 70,000) ( 26,250) ( 146,250) ( 247,500)
partners

 CORPORATE LIQUDATION
Statement of Affairs

1. A
2. C
3. B
4. A
5. A
6. B
7. A
8. A
9. C

50
 Amount received by holder of accounts payable (P100,000 x 40,000
40%)
Amount
Amount received
received by holder
by partially of mortgage
secured loan payablepayable (Fair value of 100,000
340,000
Land)
Less: Fair value of collateral – machinery (300,000)
Note: Theamount
Recovered mortgage
frompayable will be fully
the unsecured collected
portion because
of partially it is fully
secured loans 40,000
secured credit.
payable
Divided by unsecured portion of partially secured loan payable (400,000 – /100,000
300,000)
Recovery percentage on unsecured credits 40%

10. A

11. C

12.D

13.B

Accounts payable 100,000

Add: Unsecured portion of partially secured loan payable (400,000 – 100,000
P300,000)
Total unsecured credits including unsecured portion of partially secured 200,000
loans payable
Multiply by recovery percentage of unsecured credits x 40%
Net free assets 80,000

Amount received by holder of note payable (NRV of Inventory) 250,000

Note: Only the net realizable value of collateral inventory will be received
since there is no available net free asset.

51
 14. D
15. A
16. C
17. B
18. B
19. A
20. C
21. B
22. A
Cash 100,000
Add: Free assets from fully secured mortgage payable (P120,000 – 20,00
P100,000) 0
Total Free assets for unsecured credits with priority 120,000
Amount received by employees for their salary 120,000
Note: Since only P120,000 free assets are available, it must all be given
to employees who are preferred over the government.
23. D
Fully secured Partially Unsecured
secured
Cash P124,200 P222,000 P 59,640 P 360
Inventory 53,000 375,000 79,000
Receivable 13,000
Less:
Unsecured with
priority
Trustee’s salary (9,500) 58,500
Salaries (50,000) 80,000
payable
Taxes (4,000)
Net free assets 126,700
Total 217,860
unsecured
without priority
Recovery percentage: 126,700/217,860 = 58%

Partially secured: 434,640 + 79,360(58%) = P480,669

24. B

Recovery percentage = 25%

A: P124,000 + 9,920 = 133,920; 133,920 – 115,000 = 18,920; 18,920 * 25% = 4,730
TOTAL PAYMENT = P119,730

52
B: P136,000 + 13,600 = 149,600; 149,600 * 25% = P37,400
C: P137,500 + 7,452 = 144,952
D: P12,220

A = partially secured; B = unsecured w/o priority; C = fully secured; D = unsecured

with priority

25. C
26. A
27. B
28. C
29. A
30. A
31. A
32. B
33. D
34. A
35. C
36. B
37. B
38. A
39. C
40. A

 CORPORATE LIQUIDATION
Statement of Deficiency

1. B

2. A

3. D

53
4. C

5. C

Estimated realizable value P4500

Add: (P6,000-P4,500) P1500

Multiply by 80% 1,200

Amount that Merian expect to receive P5,700

6. D

(P560,000/P800,000) = P0.70

7. B

8. C

Total cash to become available (P71,000 + P12,500 + P11,000) P94,500

Total liabilities upon liquidation (P3,000 + P69,000 + P20,000 + P18,000) 110,000

Estimated deficiency to unsecured creditors P(15,500)

9. C

P60,000 + [(P120,000 + P6,000)] – (P30,000 + P35,000) = P121,000

10. B

P20,000 + P80,000 + [P170,000 – (P150,000 + P7,000)] = P113,000 – (P10,000 +

P10,000) = P93,000

11. C

P93,000/P121,000 = 77% rounded

12. D

13. D

14. D

15. C

16. D

54
17. A

18. C

19. B

20. C

21. D

22. D

23. D

24. A

25. B

Amount received by holder of note payable (NRV of Inventory)

P250,000

Note: Only the net realizable value of collateral inventory will be received since there
is no available net free asset.

26. D

Amount received by holder of mortgage payable (Fair value of Land)

P100,000

Note: The mortgage payable will be fully collected because it is fully secured credit.

27. C

Cash P100,000

Add: Free assets from fully secured mortgage payable

(P120,000 – P100,000) 20,000

Total Free assets for unsecured credits with priority P120,000

55
Amount received by employees for their salary P120,000

Note: Since only P120,000 free assets are available, it must all be given to employees
who are preferred over the government.

28. C

29. A

Fully secured creditors P139,000

Partially secured creditors 144,000

Unsecured with priority (21,000+18,000+32,000) 71,000

Unsecured without priority (180,000 x 40%) 72,000

Total paid to creditors P426,000

30. C

Net free assets P125,000

Divided by: Recovery percentage 40%

Total unsecure without priority P312,500

AP and NP liabilities (180,000)

Unsecured without priority from partially secured liab. P132,500

Total paid to partially secured liabilities P144,000

Unsecured portion up to recovery % only (132,500x40%) (53,000)

Paid portion up to extent of asset pledged P91,000

Unsecured without priority from partially secured liab. 132,500

56
Partially secured liabilities P223,500

Fully secured liabilities P139,000

Partially secured liabilities 223,500

Unsecured without priority 71,000

Unsecured without priority 180,000

Total liabilities P613,500

31. C

Cash available P3,060,000

Less prioritized claims:

Fully secured P1,530,000

Partially secured portion 765,000

57
 With priority

Liquidation expense 408,000

Prepaid revenue 51,000

Taxes payable 102,000 2,856,000

Cash available for non-prioritized claims P 204,000

Less Non-prioritized claims

Accounts payable P765,000

Partially unsecured portion 255,000 1,020,000

Deficiency to creditors P 816,000

Recovery rate = P204,000/P1,020,000= 20%

Account payable (765,000x80%) P612,000

Notes payable

Secured portion P765,000 paid -

Unsecured portion P255,000 x 80% 204,000 204,000

Total amount unpaid P816,000

32. A

Accounts payable (P765,000 x 20%) P612,000

Notes payable

Secured portion P765,000 x 100% P765,000

Unsecured portion P255,000 x 20% 51,000 816,000

58
Total amount unpaid P969,000

33. C

Trustee’s fees P408,000

Mortgage payable 1,530,000

Prepaid revenue 51,000

Taxes payable 102,000

Total amount paid at 100% P2,091,000

34. C

35. A

36. A

37. B

38. C

(P45,000 + (P60,000 - P45,000) X 80%) = P57,000

39. D

40. C

59
  CORPORATE LIQUIDATION

Statement of Realization and Liquidation

1. C

2. A

3. C

4. A

5. A

6. B

7. C

8. B

9. A

10. C

11. C

12. D

Fully secured Partially secured Unsecured

Cash P124,200 P222,000 P 59,640 P 360

Inventory 53,000 375,000 79,000

Receivable 13,000

Less: Unsecured with priority

Trustees salary (9,500) 58,500

Salaries payable (50,000) 80,000

Taxes (4,000)

Net free assets 126,700

Total unsecured without priority P217,860

60
Recovery percentage: 126,700/217,860 = 58%

Partially secured: 434,640 + 79,360(58%) = P480,669

13. B

Recovery percentage = 25%

A: P124,000 + 9,920 = 133,920; 133,920 115,000 = 18,920; 18,920 * 25% = 4,730

TOTAL PAYMENT = P119,730

B: P136,000 + 13,600 = 149,600; 149,600 * 25% = P37,400

C: P137,500 + 7,452 = 144,952

D: P12,220

A = partially secured; B = unsecured w/o priority; C = fully secured; D = unsecured

with priority

14. A

15. A

Fully secured creditors P139,000

Partially secured creditors 144,000

Unsecured with priority 71,000 (21,000 + 18,000 + 32,000)

Unsecured without priority 72,000 (180,000 x 40%)

Total paid to creditors P426,000

16. C

Net free assets P125,000

Divided by: Recovery percentage 40%

Total unsecured without priority 312,500

AP and NP liabilities (180,000)

Unsecured without priority from partially secured liabilities 132,500

61
Total paid to partially secured liabilities P144,000

Unsecured portion up to recovery % only (53,000) 132,500 x 40%

Paid portion up to extent of asset pledged 91,000

Unsecured without priority from partially secured liabilities 132,500

Partially secured liabilities P223,500

Fully secured liabilities 139,000

Partially secured liabilities 223,500

Unsecured with priority 71,000

Unsecured without priority 180,000

Total liabilities P613,500

17. B

Cash P3,774,000

Less: Prioritized claims

Taxes payable P382,500

Administrative expense 765,500

Wages payable 1,275,000 2,422,500

Cash for unsecured claims P1,351,500

Less: Unsecured claims

Accounts payable 1,122,000

Notes payable 1,581,000 2,703,000

Deficiency to creditors P1,351,500

Recovery rate: P1,351,000/2,703,000 = 50%

62
18. A

Deficiency to creditors P1,351,500

19. C

Taxes payable P382,500

Administrative expense 765,500

Wages payable 1,275,000

TOTAL P2,422,500 X 100% = P 2,422,500

20. B

Accounts payable 1,122,000

Notes payable 1,581,000

TOTAL P2,703,000 X 50% = P1,351,500

21. D

22. A

23. C

Amount received by partially secured loan payable P340,000

Less: Fair value of collateral- machinery (300,000)

Recovered amount from the unsecured portion of

Partially secured loan payable 40,000

Divided by unsecured portion of partially secured loan

Payable (400,000-300,000) 100,000

Recovery percentage on unsecured claim 40%

Amount received by the holder of accounts payable (P100,000 x 40%) P40,000

63
24. A

Account payable P100,000

Add: Unsecured portion of partially secured loan payable

(400,000-300,000) 100,000

Total unsecured credits including unsecured portion of

partially secured Loans payable P200,000

Multiply by recovery percentage of unsecured credits 40%

Net free assets P80,000

25. B

Mortgage note receivable P35,000

Less: Portion secured by equipment (7,000)

Unsecured portion P28,000

Estimated recovery on secured portion P7,000

Estimated recovery on unsecured portion

(P28,000 x P.30) 8,400

Recovery on mortgage note receivable P15,400

26. A

5,200,000 3,800,000

1,800,000 2,300,000

2,500,000 4,200,000

1,900,000 900,000

850,000 600,000

12,250,000 12,200,000

50,000

64
27. C

1,375,000 1,200,000

750,000 1,375,000

1,875,000 2,250,000

1,700,000 1,1625,000

3,125,000 2,800,000

8,925,000 9,250,000

425,000

28. C

(P45,000 + (P60,000 - P45,000) X 80%) = P57,000

29. C

Cash to become available (P116,000 + P50,000 + P80,000) P246,000

Less Prioritized claims:

Fully secured creditors P70,000

Partially secured creditors (secured portion) 50,000

Liabilities with priority 42,000 162,000

Estimated amount available for unsecured creditors P84,000

Unsecured amounts:

Partially secured (unsecured portion) P80,000

Unsecured creditors 200,000 280,000

Estimated deficiency to unsecured creditors w/out priority (P196,000)

Estimated Recovery Rate (P84,000/P280,000) 30%

Total book value P130,000

65
 Less unsecured portion 50,000 x 100% = P50,000

Unsecured portion P80,000 x 30% = 24,000 P74,000

30. A

Cash P120,000

Mortgage payable to bank secured portion (60,000)

Total P60,000

Note payable to bank secured portion (30,000)

Total P30,000

Priority claims (P16,000+P2,000+P4,000) (22,000)

Available for unsecured nonpriority claims P8,000

31. C

Estimated net cash to be available (P75,760 - P67,000) P8,160

Less: UA (P6,000 + P14,400) 20,400

Estimated deficiency to UC creditors without priority P(12,240)

ERR (P8,160/P20,400) 40%

PSC (TBV) P16,000

- Secured portion 10,000 x 100% = P10,000

- Unsecured portion P6,000 x 40% = 2,400
- Total P12,400

66
32. A

Estimated gross loss (P1,356,000 + P180,000) P1,536,000

Less estimated net gain (P756,000 + P600,000) 1,356,000

Estimated net loss P180,000

Less book value of stockholders’ equity (P1,200,000-P480,000) 720,000

Amount paid to stockholders P540,000

Estimated pro-rata payment to stockholders (P540,000/P720,000) P0.75 to a

peso

33. B

34. A

35. D

36. B

P1,900,000 x 30% = P 570,000

37. B

38. D

39. D

40. B

67
  JOINT ARRANGEMENTS (PFRS 11)

Joint Operations

1. C

2. C

3. A

4. C

[P50,000-(P20,000 + P40,000 + P10,000 + P15,000) = P35,000

5. A

6. B

(P1,200,000/5 years= P240,000 x 50% share) = P120,000

7. D

P300,000 x 1/3 = P100,000

8. B

* The entry in the records of joint operator AA (60%) in relation to Plant assets is:

Plant assets in JO at FV (60% X P90,000) 54,000

?? ??

?? ??

Gain on sale of building 18,000

Plant assets at book value 90,000

9. C

* The entry in the records of joint operator BB (40%) in relation to Plant assets is:

Plant assets in JO at FV ( 40% x P120,000 ) P48,000

Obligation to JO at BV (for services, since he is the contributor),

60% x P65,000 39,000

68
 Gain on provision of services [60% x (P80,000-P65,000)] P9,000

10. A

JO A B

Purchases 40,000 20,000cr 20,000cr

Expenses 8

1,800

42,600 77,000

34,400

11. C

12. C

13. B

14. A

Equipment per books of Joint Operation, 1/1/14 (FV) P200,000

Multiply by 1/3

Each joint operator’s equal share P66,667

Less JJJ’s unrealized gain as of 1/1/14 (P15,000x1/3) 5,000

Same amount (if computed at cost to JJJ: P185,000x1/3) P61,667

15. B

Equipment per books of Joint Operation, 1/1/14 P200,000

Accumulated depreciation 20,000

Equipment per books of Joint Operation, 12/31/14 P180,000

Multiply by 1/3

Each Joint operator’s equal share P60,000

Less JJJ’s unrealized gain as of 12/31/14 (P5,000x90%) 4,500

69
Same amount (if P185,000 x 90%) x 1/3 P55,500

16. C

(P180,000 X 1/3) = P60,000

17. C

Equipment per books of Joint Operation, 1/1/14 (FV) P200,000

Multiply by 1/3

Equipment in JO in balance sheet of each operator, 1/1/14 P66,667

Equipment, net per books of Joint operation, 12/31/14 P180,000

Multiply by 1/3

Equipment in JO in balance sheet of

each operator, 12/31/14 P60,000

18. D

19. B

Total sales P5,000,000

Unsold portion:

A (P1,000,000 x 20%) (200,000)

B (P2,000,000 x 40%) (800,000) (1,000,000)

Total sales balance P4,000,000

Multiply by 50%

Sales revenue P2,000,000

20. B

Current assets P500,000

Add: Land 7,000,000

Total assets of Entity A P7,500,000

21. A

70
Accounts payable (P4,000,000/2) P2,000,000

Loan payable 2,000,000

Total liabilities of Entity B P4,000,000

22. A

23. A

24. C

25. C

26. B

Land owned by Entity A P3,000,000

Add: Interest of Entity A on co-owned inventory

(P1,000,000 x 60%) 600,000

Total assets to be reported by Entity A

concerning its interest in Entity C P3,600,000

27. A

Notes payable owed by Entity B P1,000,000

Add: Interest of Entity B on co-owed accounts payable

(P2,000,000 x 40%) 800,000

Total liabilities to be reported by Entity B concerning

its interest in Entity C P1,800,000

28. C

Sales revenue reported by Entity C P5,000,000

Less: Unsold inventory of Entity A coming from Entity C

(P1,000,000 x 70%) (700,000)

Less: Unsold inventory of Entity B coming from Entity C

71
 (P2,000,000 x 40%) (800,000)

Sales revenue to third persons P3,500,000

Sales revenue to be reported by Entity A

(P3,500,000 x 60%) P2,100,000

29. A

Rental income P2,500,000

Less: Operating expenses (P300,000+P200,000) (500,000)

Depreciation expenses (P30,000,000/20) (1,500,000)

Net income P500,000

30. D

Cost (P30,000,000/3) P10,000,000

Accumulated depreciation (P1,500,000/3) (500,000)

Book value P 9,500,000

31. A

Net income P 500,000

Multiply by 1/3

Share of White P 166,667

32. C

Investment – 2013 P50,000,000

Profit share (P10M – 6M) x 40% ( 1,600,000)

Interest – Bank A, December 31, 2013 P48,400,000

33. C

Investment – 2013 P50,000,000

Profit share – 2013 2,000,000

Profit share – 2014 (P12M – 7M) x 40% 2,000,000

72
Dividends received (P4M x 40%) (1,600,000)

Interest – Bank B, December 31, 2014 P52,400,000

34. C

35. B

36. C

37. B

38. A

39. C

40. A

73
  JOINT ARRANGEMENTS (PFRS 11)

Joint venture (Equity Method)

1. B

2. C

3. B

4. B

5. A

(P100,000 X 25%) = P25,000

6. B

7. B

30% X P100,000 loss incurred by entity Z for the year ended December 31,2011
= P30,000

8. B

Cost of investment P300,000

Less: Share of joint venture’s losses (30,000)

Carrying amount before impairment P270,000

Recoverable amount 265,000

Impairment loss P5,000

9. C

Cost of investment P300,000

Less: Share of joint venture’s losses (30,000)

Carrying amount before impairment P270,000

Accumulated impairment loss 5,000

Recoverable amount P265,000

10. B

74
11. A

12. C

13. B

14. A

Total purchases (P200,000 + P200,000) P400,000

Total expenses (P7,500 + P15,000) 22,500

Total JV account credit balance (P155,000 + P175,000) 330,000

Total joint venture sales P752,500

15. C

JV profit (P5,500 + P18,000 + P752,500 – P400,000 – P22,500) P353,500

Burgos [P200,000 + (P353,500 x 50%) – P5,500] P371,250

16. B

B Joint venture – equity method P6,250,000 + (Rev. P1,250,000 – cost 750,000 =

P500,000 x 40%) = P6,450,000

17. A

Sales (P57,000 + P54,900) P111,900

Cost of sales (P30,000+P30,000-P900-P1,400) 57,700

Gross profit P54,200

Operating expenses (P3,000 + P3,900) 6,900

Net income (P24,900 + P22,400) P47,300

18. D

Amount payable to TERESA [P30,000 + (P47,300 x 50%) – P900] P52,750

Cash held by TERESA (P30,000 + P57,000 – P30,000 – P3,000) 54,000

Excess cash held by TERESA P(1,250)

Amount payable to BEATRIZ [ P30,000+ (P47,300 x 30%) –P1,400]P52,250

75
Cash held by BEATRIZ (P30,000 + P54,900 – P30,000 – P3,900) 51,000

Cash to be received from TERESA P1,250

19. C

At December 31, 2012 each venture must measure its investment in entity M at P0
computed as follows:

Cost of investment P100,000

Loss share 100,000

Investment in entity M, December 31,2012 P 0

In 2012 each venturer does not recognize (P180,000 of its share of entity M’s losses.
The loss recognized by the entity is limited to its investment of P100,000)

20. A

At December 31, 2013 entities A and B must each measure their investment in entity
M at P160,000 computed as follows:

Cost of investment, 2012 P100,000

Loss share 2012 (100,000)

Profit share, 2013:

Profit share, 2013 (30% x P800,000) P 240,000

Unrecognized loss in 2012 (80,000) 160,000

Investment in entity M, December 31, 2013 P160,000

21. C

Investment in JO Tan

15,000 before adj 10,500 27,000

10,500 MI, end 4,500

Bal. 12,000 25,500 net income 10,500 31,500

3,500 NI after salary 21,000

76
22. B

Investment account will be revalued to its FV at year end

23. C

Transaction cost (P92,800 x 3%) (P2,784)

Dividend income (P24,000 x 25%) 6,000

Gain on revaluation (P104,000- P92,800) 11,200

P/L P14,416

24. C

MARIBEL OLGA

Purchases19,200 Sales 42,320 Purchases 12,800 Sales 33,200

Expenses 3,120 Expenses 2,400

22,320 42,320
15,200
33,200

18,000 20,000

Total sales: P42,320 + P33,200 = P75,520

25. B

26. D

Maribel Olga

Investment P19,200 P12,800

Share in Profits

39,250 x .60 23,550

39,250 x .40 15,700

Unsold merchandise (800) (450)

Amount due (NO.15 P41,950 P28,050

77
Cash on hand

42,320 – 3,120 39,200

33,200 – 2,400 30,800

Cash received/ (paid) (NO.16) P2,750 (P2,750)

Sales P75,520

Less: COS

Purchases (19,200 + 12,800) P32,000

Inv. End (800 + 450) (1,250) 30,750

Gross profit P44,770

Less: OPEX (3,120 – 2,400) 5,520

Net profit P39,250

27. B

Joint Venture P15,700

P/L P15,700

28. C

(P2,000,000 X 60%) = P1,200,000

29. B

Investment in JV P400,000

Cash P400,000

30. A

At December 31, 2013 entity M would report its investment in entity Z at P369,000
computed as follows:

Cost of investment, January 1, 2013 (P300,000 + 50,000) P350,000

Profit share (30% x 400,000) 120,000

Unrealized profit (50/150 x 60,000) (6,000)

78
Dividend income (30% x 150,000) (45,000)

Investment in entity Z, December 31, 2013 P419,000

31. D

32. B

33. A

34. C

35. B

Joint Venture X Capital Y, Capital

(1) 200 3,400 (4) 200 (1) 1,000 (2)

(2) 5,000 5,200(4) 4,000 (2) (4) 5,200

(2) 100 1,200(4) (4)3,400 (3) 60 2,250 (8)

100(6) (5) 60

50(7) ( 7) 50 1,870 (8) 5,260 3,250

5,300 9,950 3,510 6,070 2,010

(8)4,650 4,650 JV PROFIT 2,560

Distribution of profit:

X Y Z TOTAL

Services paid to Z for cleaning 50 50

40% commission on sales 1,360 2,080 480 3,920

Balance to X and Y (3:1) 510 170 680 1,360

1,870 2,250 530 4,650

(1) Cost of stand (5) Personal meals (not JV transaction)

(2) Purchases (6) Proceeds from sale of stand to Z

79
(3) Permit fee (7) Unsold merchandise

(4) Sales (8) Profit allocation

36. A

At December 31, 2013 entities A and b must each report its investment in entity Z at
P285,000 computed as follows:

Cost of investment P300,000

Profit share (10/12 x P60,000) x 30% 15,000

Dividend income (30% x P100,000) (30,000)

Investment in entity Z, December 31,2013 P285,000

37. A

Debit to Joint Venture account:

Investment of Santos (12,000 shares@P45) P540,000

Investment of Cruz (8,000 shares@P45) 360,000

Manager’s fee [1% (176,000 + 240,000 + 133,000 + 261,625) 8,106.25

Miscellaneous expenses 1,500

P909,606.25

Credit to Joint Venture account:

Sales (4,000 @P44) P176,000

Sales (6,000 @P40) 240,000

Cash dividend [(12,000 + 8,000 – 4,000 – 6,000) x P2] 20,000

Sales (3,500@P38) 133,000

Sales [(10,000-3,500) + 115% = 7,475 shares x P35] 261,625 830,625

Net loss of the venture P78,981.25

80
38. B

Entity A’s investment in Entity C – 1/1/2018 P1,000,000

Share in 2018 net income of Entity C (2,000,000 x 40%) 80,000

Share in 2018 cash dividend of Entity C (100,000 x 40%) ( 40,000)

Share in 2019 net loss of Entity C (2,000,000 x 40%) ( 800,000)

Carrying amount – December 31, 2019 P240,000

39. B

Entity B’s investment in Entity C P1,500,000

Share in 2018 net income of Entity C (200,000 x 60%) 120,000

Share in 2018 cash dividend of Entity C (100,000 x 60%) (60,000)

Share in 2018 net loss of Entity C (2,000,000 x 60%) (1,200,000)

Carrying amount – December 31, 2019 P360,000

40. D

Investment of Machine, January 1, 2013:

Carrying amount P80,000

Realized gain (P100,000 – 80,000)50% 10,000 P90,000

Profit share (50% x 30,000) 15,000

Realized gain on machine (P10,000/10 yrs) 1,000

Investment account balance, December 31, 2013 P106,000

81
  JOINT ARRANGEMENTS (PFRS 11)

Accounting for SME

1. D

2. C

3. A

4. A

5. B

6. C

7. A

Transaction costs – Expense as incurred under Fair Value Model (P20,000)

Unrealized holding gain on change in fair value 60,000

Dividend income (P30,000 x 50%) 15,000

Effect on net profit under Fair Value Model P55,000

Fair value (10,000 x 56) P560,000

Acquisition cost 500,000

Unrealized gain P60,000

8.D

Initial measurement of Investment under Equity Method

(P500,000 + P20,000) P520,000

Add: Share in net income of Joint Venture (P100,000 x 50%) 50,000

Less: Dividend received from Joint Venture (P30,000 x 50%) ( 15,000)

Investment on December 31, 2018 under equity method P555,000

Note: There is no impairment loss because fair value less cost to sell of P560,000 is
higher than carrying amount.

82
9. A

Carrying amount of Investment under Cost Method (P200,000 + P10,000)

P 210,000

10. B

Share in net income of joint venture (P50,000 x 50%) P25,000

Impairment loss of Investment under equity method (15,000)

Effect on net profit under Equity Method P10,000

Investment in Entity C (200,000 + 10,000) P210,000

Share in 2018 net income of Entity C (50,000 x 50%) 25,000

Share in cash dividend (50% x 10,000) (5,000)

Carrying amount – 12/31/2018 P230,000

Recoverable amount – value in use 215,000

Impairment loss P15,000

11. D

12. A

13. C

14. C

15. A

16. C

17. D

18. C

19. D

20. A

21. C

83
22. C

23. D

24. A

25. B

26. D

27. C

28. B

29. D

2011: CU98,000 because recoverable amount—fair value less costs to sell (CU98,000) is
less than cost (CU101,000).

2012: CU101,000 because cost is less than recoverable amount.

2013: CU86,000 because recoverable amount (CU86,000) is less than cost

(CU101,000).

30. D

31. C

32. D

33. A

The venture is a joint venture (jointly controlled entity). In accordance with their
respective accounting policies for jointly controlled entities the parties recognize their
interest in the venture using either:

 the cost model

 the equity method
 the fair value model.

84
34. B

Additional information:

The parties retain their right to the economic benefits generated from the mineral rights
—the benefits (usually received in the form of minerals) are directly related to the
amount of mineral reserves contributed by each party to the contractual arrangement.
The parties have joint and several liabilities for obligations such as decommissioning,
and also have obligations to reimburse their share of the costs incurred by the operator.
Each party has rights to its share of the joint production equipment and other resources
by directing the use of the equipment for the extraction of minerals. That share of the
equipment and resources is equivalent to each party’s mineral rights as a proportion of
the total mineral rights of the field. Put another way, each party receives benefits from
the assets in proportion to that party’s mineral rights relative to the mineral rights of
the combined field.

35. B

36. A

1 January 2011

Investment in jointly controlled entity (entity X) P10,000

Investment in jointly controlled entity (entity Y) 15,000

Investment in jointly controlled entity (entity Z) 28,000

Cash P53,000

To recognize the acquisition of investments in jointly controlled entities.

37. B

Investment in jointly controlled entity (entity X) P100

Investment in jointly controlled entity (entity Y) 150

Investment in jointly controlled entity (entity Z) 280

Cash P530

85
To recognize the transaction costs incurred to acquire the investments in jointly
controlled entities.

38. C

Assessing whether a venture is governed under joint control among its parties or
whether it is controlled unilaterally by one of its parties is a matter of judgement. As a
result of this assessment, a party may conclude that:

 the venture is governed under joint control (i.e. the venture is a joint
venture)
 it controls the venture (i.e. the venture is a subsidiary accounted for in
accordance with Section 9 Consolidated and Separate Financial Statements)
 it is an investor to the venture. (If the investor has significant influence
(18) then the venture is an associate accounted for in accordance with Section
14 Investments in Associates. If it is determined that the investor does not have
significant influence, then the investment is a financial asset accounted for in
accordance with Section 11 Basic Financial Instruments.)

39. C

Note 2 Accounting policies

Investments in jointly controlled entities are accounted for using the equity method.
The carrying amount of the investment in joint venture is calculated at cost
plus the entity’s subsequent share of the joint venture’s comprehensive
income. If at the end of a reporting period there is an indication that an investment in
a jointly controlled entity may be impaired, the entire carrying amount of the
investment is tested for impairment. If the carrying amount of the investment is found
to be less than its recoverable amount, the carrying amount is reduced to its
recoverable amount and an impairment loss is immediately recognized in profit or loss.

40. D

An investor in a joint venture that does not have joint control shall account for that
investment in accordance with Section 11 or, if it has significant influence in the joint
venture, in accordance with Section 14 Investments in Associates.

86
  REVENUE RECOGNITION
Installment Sales- Recognition of gross profit- regular sales versus
installment sales

1. A
2. B
3. B
4. A
                   2016 2015 2014
Installment Sales 
8,765,625/ 68% P12,890,625
Inst. Rec. beg. P8,387,500 P1,512,500
Inst. Rec. end (9,728,125) (3,025,000)
Collections P 3,162,500 P5,362,500 P1,512,500 (2) P10,037,500
GPR x 32% x 30% x 28%
Realized GP P 1,012,000 (3) P1,608,750 P 423,500 (1) P3,044,250
5. D
2015 installment accounts receivable P 16,250
Multiply by x 30/130 P 3,750
2015 installment accounts receivable P 90,000
Multiply by x 33 1/3 /133 1/3 22,500
Deferred gross profit P26,250
6. A
Downpayment (P545,000 x .2) P109,000
Inst. Collections (P545,000 x 8 x .40) 174,400
Collections in year 1 on Year 1 Inst. Sales P283,400
Multiply by 35/135      
Realized gross profit for Year 1 P 73,474
7. A
Installment sales - Year 2 P785,000
Less Collections in Year 2
DP (P785,000 x .20) P157,000
Installment collection (P785,000 x .80 x .40) 251,200 (408,200)

87
Balance, end of Year 2 P376,800
Multiply by 35/135
Unrealized GP on Year 2 installment sales at the end of Year 2 P 97,689
8. A
Total installment accounts receivable, end of Year 3 P621,640
Multipy by 35/135
Total unrealized gross profit at end of Year 3 P161,166
9. A
Installment Sales, 2015 P25,000
Multiply by GPR 100% - (31,250/62,500) 50% P12,500
Installment Sales, 2016 P62,500
Muliply by 100% - (45,000/100,000) 55% 34,375
Realized Gross Profit P 46,875
10. C
11. D
Installment Accounts Receivable, 2016 P306,520
Multiply by 40%
Unrealized gross profit on 2016 P122,608
12. B
2006 sales - (P17,400 x 36%) P 6,264
2007 sales - P(205,400 - P200 - P25,800) x 39% 69,966
Total gross profit realized in 2016 P76,230
13. B
Installment Contracts Receivable, Jan. 1, 2015 P 344,460
Installment Contracts Receivable, Dec. 31, 2015 ( 67,440)
Repossessed refrigerator P5,400
Collections prior to default (3,200) ( 2,200)
Total P 274,820
Multiply by 34%
Total gross profit on 2015 from collections in 2016 P93,438.80

88
14. B
Installment sales P 400,000
Accounts receivable, December 31, 2011 ( 320,000)
Collections P 80,000
Multply by gross margin based on cost 66.66%
Total P 53,328
Divided by sales rate based on cost 166.66%
Realized gross profit 32,000
Installment sales P400,000
Cost of goods sold (400,000x166.66%) (240,000)
Unrealized gross profit, Jan. 1 2011 P160,000
Realized gross profit (32,000)
Deferred gross profit, Dec. 31, 2011 P128,000     
15. C
16. B
2006 sales - P108,750 x 25% P27,187.50
2007 sales - P120,000 x 27.5% 33,000.00
2008 sales - P 93,750 x 28% 26,250.00
Total P86,437.50
17. B
18. D
2006 sales - P24,000 x 39% P 9,360
2007 sales - (P300,000 - P60,000 - P10,000) x 42% 96,600
2008 sales - (P480,000 - P320,000 - P5,000) x 40% 62,000
Total P167,960
19. A
Collections on 2016 installment contracts P360,000
Multiply by 33 1/3%
Realized gross profit P120,000
20. B

89
21. B
Installmet Receivable, 2015 sales, Dec. 31, 2015 P120,000
Installment Receivable, 2015 Sales (15,000)
Uncollected account on repossession (7,750)
Total P 97,250
Multiply 45%
Total 43,762.50
22. C
Cost of installment sales P263,500
Divided by Installment Sales 425,000
CGS rate 62%
GP rate (100%-62%) 38%
23. A
Installment Sales P425,000
Installment Receivable, 2016 Sales (200,000)
Collections P225,000
Multiply by GP rate 38%
Gross profit realized P 85,500
24. B
Cash sales P 90,000
Charge sales (P180,000/120%) 150,000
Installment sales (P446,400/124%) 360,000
Total sales - cash basis P 600,000
25. B
2014 2015 2016
Installment recl, beg P 74,000 P123,000
Installment sales P446,400
Installment recl, end ( 15,000) ( 45,000) ( 270,000)
Defaulted recl ( 18,000) ( 21,000)
Collections P 41,000 P 57,000 P176,400
26. A
Sales price of Article “A” P400,000
Less Overvaluation on trade -in

90
 Sales price P110,000
Reconditioning cost ( 8,000)
Normal profit ( 22,000)
Market value of trade-in P 80,000
Allowed trade-in value 120,000 40,000
Adjusted sales price P360,000
Cost of Article “A” 270,000
Gross profit P 90,000
Gross profit rate 25%
27. A
Market value of trade-in P80,000
Overallowance of trade-in 40,000
Total P120,000
Multiply by GP rate 25%
Realized GP P30,000
28. A
29. C
30. B
31. B
32. C
33. C
34. C
35. A
36. D
37. A
38. C
39. C

91
40. B
Unadjusted installment sales P400,000
Add: Undervaluation of traded car (P150,000-P50,000) 100,000
Adjusted installment sales P500,000
Less: Cost of production of car 300,000
Adjusted gross profit P200,000
Divided by Adjusted installment sales 500,000
Adjusted gross profit rate based on sales 40%
Installment receivables P400,000
Down payment (25%x400,000) (100,000)
Trade in allowance (50,000)
Installment receivable balance P250,000
Annual installment (250,000/5) P 50,000
Down payment P100,000
Fair value of trade in 150,000
Annual payment- first year 50,000
Total collections in 2018 P300,000
Realized gross profit (40%x300,000) P120,000

92
  REVENUE RECOGNITION
Installment Sales- Default and Repossession and Trade in merchandise

1. B
Market value of repossessed ref (P1,700 x 63%) P1,071
Unrecovered cost (P2,200 x 66%) 1,452
Loss on repossession P 381
2. A
Value assigned to repossessed merchandise:
     2006 sales P 9,000
     2007 sales 13,500 P22,500
Unrecovered cost
      2006 sales - P22,500 x 75% P 16,875
      2007 sales - P24,000 x 72.5% 17,400 34,275
Loss on repossession P11,775
3. B
Value assigned to repossessed merchandise P8,000
Unpaid balance of prior year's installment contracts defaulted P15,000
Multiply by CGS rate 60% (9,000)
Loss on repossession P(1,000)
4. C
Uncollected account of repossession P 7,750
Multiply by 55%
Total P4,262.50
Repossessions (3,000)
Loss on repossession P1,262.50
5. D
6. A
7. A
8. D
9. B
10. A
11. A

93
Estimated resale price 1,458,000
Less: Reconditioning cost 194,400
    Gross profit (P1,458,000x20%) 291,600
Market Value of trade-in 972,000
Sales 6,804,000
Add Underallowance on trade-in      
             Trade-in allowance 960,000
             Less Market Value (972,000) 12,000
Adjusted Sales 6,816,000 100%
Cost of Sales (2,726,000) 40%
Gross Profit 4,089,600 60%
Market Value of trade-in 972,000
Installment cash collection 520,000
Total Collections 1,492,000
Multiply by GPR 60%
Realized Gross Profit 895,200
12. C
Fair value of repossessed inventory P110,000
Unrecovered cost of defaulted installment receivable (P200,000x60%) 120,000
Loss on repossessions P(10,000)
13. C
Trade-in allowance P300,000
Estimated resale price P315,000
Reconditioning cost (25,000)
Gross profit (315,000x10%) (31,500) (258,500)
Overallowance on trade-in P41,500
14. A
Installment account canceled P20,000
Multiply by GP rate(50,000/250,000) 20%
Deferred gross profit written off P4,000
15. D
Installment account canceled P20,000

94
Repossessed merchandise (14,500)
Deferred gross profit written off (4,000)
Loss on repossession P1,500
16. C
Installment account canceled P40,000
Multiply by GP rate(195,000/600,000) 32.5%
Deferred gross profit written off P13,000
17. B
Installment account canceled P40,000
Repossessed merchandise (24,000)
Deferred gross profit written off (13,000)
Loss on repossession P3,000
18. C
19. D
Estimated resale price P280,000
Less: Reconditioning cost P30,000
Gross profit 70,000 (100,000)
Estimated realizable value P 180,000
20. C
Selling price P720,000
Less Overallowance (P300,000 — P180,000) (120,000)
Adjusted selling price P600,000
21. D
22. B
Uncollected installment contract P4,000
Multiply by gross margin 40%
Deferred gross profit written off P1,600
23. A
Uncollected installment contract P4,000
Repossessed merchandise (2,000)
Deferred gross profit written off (1,600)
Loss on defaults P400
24. A

95
25. B
Resale Value P13,500
Divided by 120%
Repossessed merchandise P11,250
26. C
Installment Contracts Receivable P 15,000
Multiply by 20%/120%
Deferred gross profit written off P 2,500
27. A
Installment Contracts Receivable P15,000
Repossessed merchandise (11,250)
Deferred gross profit (2,500)
Loss on repossession P1,250
28. C
29. A
Balance of Installment Contracts Receivable P 8,000
Multiply by 25%/125%
Deffered gross profir written off P 1,600
30. C
31. B
32. A
33. B
34. C
35. C
36. B
37. D
38. A
39. B

96
40. C
Inst. recl balance, Dec. 31, 2007 (P360,000 - P120,000) P240,000
Installment payment, Jan. 1 - Mar. 1 (P20,000 x 3) 60,000
Inst. recl balance, April 1 P180,000
Cost percentage x 75%
Unrecovered cost P135,000
Market value of repossessed mdse. (P13,500 - P800 - P2,700) ( 100,000)
Loss on repossession P 35,000

97
  REVENUE RECOGNITION
Installment Sales- Financial Statement Presentation
1. B
Deferred gross profit before adjustment P38,000
Deferred gross profit after adjustment
2015 - P16,250 x 30/130 P 3,750
2016 - P90,000 x 33 1/3 /133 1/3 22,500 26,250
Realized gross profit P11,750
Operating expenses 1,500
Net income P10,250
2. B
Inst. Accts. Rec., end of year 3
On year 3 installment sales (P968,000 x .80 x .60) P464,640
On Year 2 installment sales (P785,000 x .80 x .25) 157,000
Total installment accounts receivable, end of Year 3 P621,640
3. A
4. B
Sales - regular P187,500
Cost of sales - regular 112,500
Gross profit - regular P 75,000
Realized gross profit (see D1) 46,875
Total gross profit P121,875
Selling expenses 31,250
Net income P 90,625
5. D
Installment Sales, 2016 P610,750
Multiply by CGS rate 60%
CGS P366,450

98
6. A
Inventory, beginning P52,500
Delivered cost of purchases 393,000
Repossessed merchandise 15,000
Cost of goods available for sale P460,500
Less Inventory, end 70,500
Cost of goods sold P390,000
Multiply by 360/600
Cost of installment sales P234,000
7. C
8. C
9. B
10. A
11. A
12. C
13. A
14. C
15. A
Inventory, January 1 P 240,000 
Purchases, including freight-in 1,250,000
Repossessed Merchandise 70,000
Cost of Goods Available for Sale P1,560,000
16. B
Cost of Goods Available for Sale P1,560,000
Less Inventory, December 31 260,000
Cost of Goods Sold P1,300,000
17. B
18. A

99
19. C
Amount of Sales Amount Based on Cash Sales Ratio Allocation of CGS
Cash P300,000 P 300,000 60/400(17) P195,000
Charge 600,000 500,000 100/400 (18) 325,000   
Inst. 1,500,000 1,200,000 240/400(19) 780,000
    P2,400,000 P2,000,000 P1,300,000
20. A
21. B
Cash Sales Charge Sales Installment Sales Total
Sales P300,000 P600,000 P1,500,000 P 2,400,000
Cost of Sales 195,000 325,000 780,000 1,300,000
Gross Profit P105,000 P275,000 P720,000 P 1,100,000
Less Deferred Gross Profit, 2016 sales 460,800 460,800
Realized GP on 2016 sales P105,000 P275,000 P263,200 P 639,200
Add Realized GP on 2014 and 2015 sales 169,500
Total Realized Gross Profit P 808,700
Les: Loss on Repossession
51,000 Realized Gross Profit after loss on repossession
P 757,700 Operating Expenses, including bad debts
465,000 Net Income before Income Tax
P 292,700
Income Tax (292,700x35%) (20) 102,445
Net Income (21) P 190,255
22
22. D 32. A
23. A 33. C
24. B 34. A
25. A 35. D
26. A 36. B
27. B 37. B
28. D 38. D
29. A 39. A
30. C 40. C
31. B

100
  REVENUE RECOGNITION
Installment Sales- PAS 18/ PFRS 15

1. B 21. B
2. A 22. B
3. C 23. D
4. D 24. C
5. D 25. C
6. C 26. D
7. A 27. A
8. C 28. D
9. B 29. C
10. A 30. C
11. A 31. A
12. C 32. B
13. A 33. C
14. C 34. B
15. B 35. A
16. B 36. D
17. D 37. B
18. A 38. C
19. A 39. C
20. A 40. D

101
  REVENUE RECOGNITION
Long-term Construction Contracts- Percentage of completion
1. C
2. B
3. D
4. C
5. B
6. D
Contract Price P20,000,000
Multipy by percentage of completion (3,000,000/15,000,000) 20%
Recogized revenue in 2015 P4,000,0000
7. A 19. D
8. B 20. B
9. B 21. B
10. B 22. B
11. A 23. B
12. C 24. B
13. B 25. A
14. C 26. C
15. D 27. B
16. D 28. C
17. C 29. A
18. D
30. C
Contract price P 15,000,000
Total estimated cost (P4,650,000+P10,850,000) (15,500,000)
Total estimated loss—to be recognized in full P 500,000
31. C
Contract price P3,000,000
Total estimated cost (1,800,000)
Total estimated gross profit P1,200,000
Percentage-of-completion (600/1,800) 331/3%
Gross profit to be recognized in 2007 P 400,000

102
32. B
Contract price P20,000,000
Cost incurred to date P 11,000,000  
Estimated cost to complete 5,000,000 
Total estimated cost P16,000,000
Total estimated gross profit P 4,000,000
Percentage of completion 68.75%
Contract Price P20,000,000 
Multiply by percentage of completion 68.75%
Revenue from long-term construction contracts P13,750,000
33. A
34. D
Recognized revenue P13,750,000
Cost of revenue (11,000,000)
Gross profit P 2,750,000
35. A
36. D
Revenue from long-term construction contracts P13,750,000
Progress Billing on Construction Contract (10,800,000)
Inevtory-Construction in Progess, net of billings P 2,950,000

37. A
38. A
39. B

103
40. B
       To date Recognized in prior year/s To be recognized this year
2014
Recognized revenue P8,000,000 - P8,000,000
Cost of revenue 8,000,000 - 8,000,000
Grossprofit - - -
                        ========== ============ ==========
2015
Recognized revenue P24,000,000 P8,000,000 (38) P16,000,000
Cost of revenue 18,000,000 8,000,000 (39) 10,000,000
Gross profit P 6,000,000 ---------------- P 6,000,000
2016
Recognized revenue P40,000,000 P24,000,000 P16,000,000
Cost of revenue 31,000,000 18,000,000 (40) 13,000,000
Grossprofit P 9,000,000 P 6,000,000 P 3,000,000

104
  REVENUE RECOGNITION
Long-term Construction Contracts- Cost Recovery Method
1. A 12. D
2. A 13. B
3. B 14. D
4. D 15. C
5. D 16. D
6. D 17. D
7. D 18. A
8. A 19. C
9. B 20. D
10. B 21. C
11. D
22. C
Contract price P1,000,000
Total costs in 2018 (360,000+840,000) (1,200,000)
Realized loss 2018 P P(200,000)
Contract price as of 2019 P1,000,000
Total costs as of 2019 (800,000+250,000) 1,050,000
Cumulative gross loss for 2019 P (50,000)
Realized gross loss for 2018 (200,000)
Realized gross profit for 2019 P 150,000

23. A
Progress billings as of December 31, 2020
(1,000,000)x(30%+20%+40%) P900,000
Construction in progress as of December 31, 2020 ( 870,000)
Excess of progress billings over construction in progress
on December 31, 2020 P 30,000

105
24. B
Cumulative billings as of December 31, 2020
(1,000,000)x(30%+20%+40%) P900,000
Mobilization fee deductible from first billing (1,000,000x5%) (50,000)
Total collections of receivables as of December 31, 2020
(120,000+450,000+180,000) (750,000)
Accounts Receivable, 12/31/2020 P100,000
25. A
26. B
27. A
Amount probable to be recovered P10,000,000
Cost incurred to date (11,000,000)
Loss P(1,000,000)
28. C
29. B
30. A
31. A
32. A
33. C
34. D
35. A
36. A
To date Recognized in prior year/s To be recognized this year
2014
Recognized revenue P17,500,000 - P17,500,000
Cost of revenue 17,500,000 - 17,500,000
Grossprofit - - (34) -

106
 ========== ============ ==========
2015
Recognized revenue P31,500,000 P17,500,000 P14,000,000
Cost of revenue 29,250,000 17,500,000 11,750,000
Gross profit P2,250,000 ------------ (35) P2,250,000
2016
Recognized revenue P35,000,000 P31,500,000 P3,500,000
Cost of revenue 31,000,000 29,250,000 1,750,000
Grossprofit P4,000,000 P2,250,000 (36) P1,750,000
37. C
38. D
39. D

                             To date Recognized in prior year/s To be recognized this year

2014
Recognized revenue P8,000,000 - (37) P8,000,000
Cost of revenue 8,000,000 - (38) 8,000,000
Grossprofit - - (39) -
                           ========== ============ ==========
40. B

107
  REVENUE RECOGNITION
Long term construction contract – financial statement presentation

1. B 20.D
2. C 21.C
3. A 22.B
4. B 23.A
5. A 24.D
6. D 25.C
7. C 26.C
8. B 27.B
9. B 28.C
10.D 29.A
11.D 30.D
12.C 31.B
13.D 32.B
14.C 33.A
15.D 34.B
16.B 35.C
17.C 36.C
18.D 37.A
19.C
38.B

Costs incurred to date as of December 31, 2018 440,000

Divided by total cost as of 2018 (440,000+P660,000) /1,100,000

Percentage of completion for 2018 40%

Construction revenue for year 2018 (1,000,000 x 40%) 400,000

39.C
Costs incurred to date as of December 31, 2019 (440,000+680,000) 1,120,000

Divided by total cost as of 2019 (440,000+680,000+280,000) 1,400,000

Percentage of completion for 2019 80%

108
Contract price 1,500,000

Total cost 2019 1,400,000

Gross profit 100,000

Multiply by ____80%

Cumulative realized gross profit 2019 80,000

Add : Realized loss 2018 100,000

Realized gross profit 2019 180,000

Contract price 2018 1,000,000

Total cost 2018 1,100,00

Realized loss for 2018 (100,000)

40. A

Contract price as of December 31, 2019 1,500,000

Multiply by percentage of completion as of December 31, 2019 x 80%

Construction in Progress on December 31, 2019 1,200,00

0

109
  REVENUE RECOGNITION
Computation of gross amount due from to customer

1. C.
Percentage of completion method:

Project 1: 30,000/45,000 = 66.67% x (52,500,000 – 45,000,000) = 5,000,000

Project 2: 37,500,000 - 35,000,000 – 8,700,000 = (6,200,000)

Total (1,200,000)

*Zero profit method will only recognized gross profit upon

completion but losses will be recognized immediately in profit or
loss.

2. B.
3. A.
Contract Price 210M
Less: Total estimated cost 180M
Estimated profit 30M
Multiply by 90/180
Contract Price earned 15M
4. D.
P1 P2

CP 2,100,000 750,000

TC 900,000 875,000

EST GP 1,200,000 (125,000)

X 66.67%

RGP (RL) 800,000 (125,000)

Less: Expenses 50,000 25,000

NI (NL) 750,000 (150,000)

% = 750,000 + (150,000) = 600,000

Cost recovery = P2 (150,000) + expenses 50,000 P1 = 200,000 loss

110
 5. C.
Contract Price P100,000,000
Multiplied by: Gross profit rate 25%
Estimated Gross profit of the entire contract P 25,000,000
Multiplied by: Percentage of completion for first year 50%
Gross profit realized for current year P 12,500,000
6. D.
7. B.
8. B.
9. C.
10.B.
11.C.
12.D.
13.A.
14.C.
15.D.
Mobilization fee (200,000,000 x 5%) 10,000,000

Billings Collections - net of retention (100,000,000 x 90%) 90,000,000

Total cash collections 100,000,000

16.D.
Cost of materials, labor and overhead 635,200
Materials set aside (specific project) 50,000
Incidental income from surplus materials ( 10,000)
Cost incurred to date 675,200
17.A.
Cost incurred to date 675,200
Total estimated cost (750,000 + 50,000) ÷ 800,000
Percentage of completion 84.40%

Contract Price 1,000,000

Total estimated cost ( 800,000)
Estimated profit 200,000
Multiply by 84.40%
Gross profit 168,800
Operating expense (65,000 + 25,000 + 15,000) (105,000)
NI 63,800
18.A.
Mobilization fee (960,000 x 15%) 144,000
Billings collections – net of contract retention
(960,000 x 90%) 172,800
Total cash collections 316,800
19.B.

111
 20.B.
21.D.
22.C.
23.D.
24.C.
25.D.
26.D.
Contract price 10,500,000
Total estimated cost 7,350,000
Estimated gross profit 3,150,000
Multiplied by 36%
Realized gross profit 1,134,000
27.A.
Contract price 2,100,000

Costs incurred 425,250

Estimated cost 1,599,750

Total estimated costs 2,025,000

Estimated gross profit 75,000

Multiplied by 21%

Realized profit 15,750

28.C.
CP 2,100,000
% of C 64.25%
CIP 1,349,250
CITD (1,394,250)
GPTD ( 45,000)
GPPYs ( 15,750)
GP-2021 ( 60,750)
29.C.
PB 525,000

55% Add’t CP 1,155,000

Adj. PB 1,680,000

PB-2021 ( 330,750)

CIP 1,349,250

30.A.
31.C.

112
 Contract price 1,000,000
Less: Total costs as of 2019 (800,000+250,000) (1,050,000)
Cumulative gross loss for 2019 ( 50,000)
Realized gross loss for 2018 ( 200,000)
Realized gross profit for 2019 150,000

Contract price 1,000,000

Total cost 2018 (360,000+840,000) (1,200,000)

Realized loss 2018 ( 200,000)

32.A.
Progress billings as of 12/31/2020 (1M) x (30%+20%+40%) 900,000
Less: Construction in progress as of 12/31/2020 870,000

Excess of Progress billings over Construction in

progress on 12/31/2020 (30,000)

33.B.
Cumulative billings as of 12/31/2020 (1M) x (30%+20%+40%) 900,000

Mobilization fee deductible from first billing (M x 5%) (50,000)

Total collections of receivable as of December 31, 2020

(120,000+450,000+180,000) (750,000)

Balance of Accounts receivable on December 31, 2020 100,000

34.A.
35.B.
36.C.
37.B.
38. D.
20,000,000 x (3,000,000/15,000,000) = 4,000,000

113
39.A.
Contract price 10,500,000
Less: total estimated cost
Cost incurred to date 3,150,000
Est. cost to complete 6,300,000 9,450,000
Total estimated income 1,050,000
% of completion (3150/9450) 33.33%
Income to be recognized in 2015 350,000

40. B.
Contract price 9,000,000
Total estimated cost 8,100,000
Total estimated income 900,000
% of completion (27/81) 33.33%
Income to be recognized last year 300,000

114
 REVENUE RECOGNTION

Long-term Construction Contract - Accounting for SME

1. D
2. A
List price P1,000

Less: trade discount P200

volume rebate 100
prompt-settlement discount 10
sales tax collected on behalf of the gov’t. 50 360
Revenue from the sale of goods P640
3. D
4. D
5. D
6. C
7. B
Selling price P95,000
Divided by 1.1
Revenue from the sale of goods P86,364.
8. C
Costs incurred to relating to work performed date P900,000
Divided by total expected contract costs 1,100,000
Stage of completion 81.82%.

Contract price P1,000,000

Multiply by stage of completion rate 81.82%
Contract revenue recognized for 2012 P818,182
Less revenue recognized in 2011- limited to
recoverable contract cost 10,000
Revenue recognized in 2012 P808,182

Total expected contract costs P1,100,000

Multiply by stage of completion rate 81.82%
Contract costs recognized in 2012 P900,000
Less cost recognized in 2011 10,000
Cost recognized in 2012 P890,000

115
However, total contract costs are expected to exceed total expected contract
revenue, therefore an additional loss must be recognized in respect of the
onerous contract, i.e. 18.18% (the percentage of future activity on the
contract) × P100,000 the excess of total expected contract costs over total
expected contract revenue = P18,182. Expense = P908,182 (i.e. P890,000
incurred to date + P18,182 in respect of the onerous contract).

9.) A
2011:
Costs incurred relating to work performed to date P200,000
Divided by total expected contract costs 600,000
Stage of completion 33.33%

Stage of completion 33.33%

Multiply by contract price P1,000,000
Contract revenue recognized in 2011 P333,333

2012:
Costs incurred relating to work performed to date P600,000
Divided by total expected contract cost 750,000
Stage of completion 80%

Stage of completion 80%

Multiply by contract price (contract revenue
recognized up to the end of 2012) P1,000,000
Less (contract revenue recognized in 2011) 333,333
Contract revenue recognized in 2012 P466,667

2013:
Contract price P1,000,000
Less (contract revenue recognized up to the end of 2012) 800,000
Contract revenue recognized in 2013 P200,000
10. B
2011:
Costs incurred relating to work performed to date P200,000
Divided by total expected contract costs 600,000
Stage of completion 33.33%

Stage of completion 33.33%

116
Multiply by contract price P1,000,000
Contract revenue recognized in 2011 P333,333

2012:

Costs incurred relating to work performed to date

(P600,000 – P50,000 prepayment) P550,000
Total expected contract costs
(P550,000 + P50,000 prepayment +
P150,000 expected future contract costs) P750,000

Contract costs incurred relating to work performed to date P550,000

Divided by total expected contract costs 750,000
Stage of completion 73.33%

Stage of completion 73.33%

Multiply by contract price (contract revenue recognized
up to the end of 2012) P1,000,000
Less (contract revenue recognized in 2011) 333,333
Contract revenue recognized in 2012 P400,000

2013:
Contract price P1,000,000
Less (contract revenue recognized up to the end of 20X2) 733,333
Contract revenue recognized in 20X3 P266,667
11. C
12. C
13. A
14. D
15. B
16. D
17. C
Costs that cannot be attributed to contract activity or cannot be allocated to a
contract are excluded from the costs of a construction contract. Such costs
include:
(a) general administration costs for which reimbursement is not specified in
the contract;
(b) selling costs;

117
(c) research and development costs for which reimbursement is not specified
in the contract; and
(d) depreciation of idle plant and equipment that is not used on a particular
contract.
18. D
When a contract covers a number of assets, the construction of each asset
shall be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation, and the contractor
and customer are able to accept or reject that part of the contract relating to
each asset; and
(c) the costs and revenues of each asset can be identified.
19. A
A group of contracts, whether with a single customer or with several
customers, shall be treated as a single construction contract when:
(a) the group of contracts is negotiated as a single package;
(b) the contracts are so closely interrelated that they are, in effect, part of a
single project with an overall profit margin; and
(c) the contracts are performed concurrently or in a continuous sequence.
20. C
21. C
For each construction contract in progress at the reporting date the gross
amount due from customers is shown as an asset in the statement of
financial position at the net amount of:
(a) total costs incurred on the contract plus the cumulative recognized profit
(or less the cumulative recognized loss); less
(b) progress billings (i.e. amounts actually invoiced to customers for work
performed on a contract whether or not they have been paid by the
customer).

118
22. C 32. A
23. A 33. C
24. B 34. B
25. B 35. C
26. B 36. D
27. D 37. C
28. D 38. D
29. B 39. C
30. B 40. B
31. B

119
 REVENUE RECOGNTION
Franchise Operations – Initial Franchise Fee

1. A
2. A
3. A
4. C
5. D
6. C
7. C
8. A Deferred revenue: 500,000 * 3.60478 = 1,802,390
9. C
10.B
11.C
12.D Continuing fee (P400,000 x 5%) P20,000
13.A Initial franchise fee P50,000
Add Percentage on revenue (P400,000 x 5%) P20,000
Total revenue P70,000
14.B
15.B
16.C
17.B
18.B Continuing fee (P400,000 x 10%) P40,000
19.D Initial franchise fee P500,000
Add Percentage on revenue (P400,000 x 10%) P 40,000
Total revenue P540,000
20.B Allocated revenue to construction of stall (P400,000 x 20/50) P160,000

Stand-alone selling price Fraction

Construction of stall 200,000 20/50
Purchase of raw materials 250,000 25/50
Trade name 50,000 5/50
500,000
21.C Revenue from delivery of raw materials
[(P400,000 x 25/50) x 3,000/10,000] P60,000
22.B Revenue from use of entity’s trade name
[(P400,000 x 5/50) / 10 years] P4,000
23.C Cash down payment P200,000
Present value of note receivable 240,183

120
 Initial franchise fee revenue P440,183
24.D Cash down payment P200,000
Present value of note receivable 240,183
Initial franchise fee revenue P440,183
Less: Direct cost of initial franchise fee 352,146
Gross profit under accrual basis P 88,037
25.A Interest Income for year 2018 (P240,183 x 12%) P28,822
26.A Contingent franchise fee revenue (P50,000 x 8%) P4,000
27.D Gross profit under accrual basis P88,037
Add: Interest Income for year 2018 (P240,183 x 12%) 28,822
Add: Contingent franchise fee revenue (P50,000 x 8%) 4,000
Less: Indirect cost – Expense as incurred (22,009)
Net income under accrual basis P98,850
28.B
29.C Cash P 400,000
Add payments (P200,000 x 3.6299) 725,980
Total revenue P1,125,980
30.B Cash P 400,000
Add payments (P200,000 x 3.6299) 725,980
Total revenue 1,125,980
Less cost 400,000
Gross profit P 725,980
Add interest (P725,980 x .04) 29,039
Total P 755,019
31.C Down payment P300,000
Multiply by 40%
Total P120,000
32.D
33.B Down payment P300,000
Add payments (P100,000 x 1.336) 133,550
Total revenue P473,550
34.C Down payment P300,000
Add payments (P100,000 x 1.336) 133,550
Total revenue P473,550
Less cost (P5,000,000 x 5%) 250,000
Total P723,550
35.D 38.C
36.A 39.A
37.B 40.C
121
 REVENUE RECOGNITION
Franchise operations- Continuing franchise fee, bargain purchase
option, commingled revenue

1. A

2. B P2,914 x 50,000 = P145,700

3. A

4. B

5. B

6. D Deferred and treated as reduction in Valdez Inc investment

7. A P102,000

8. D P120,000

9. A

10. C Downpayment 700,000

PV of instalment (300,000 x 3.6299) 1,088,790
Cost of franchise (700,000)
Gross profit 1,088,970
Interest income (1,088,970 x .04) 43,559
Net income 1,132,529

122
 REVENUE RECOGNTION
Franchise Operations – Repossessed Franchise

1. A 9. D
2. D 10.A
3. C 11.B
4. A 12.B
5. C 13.A
6. D 14.B
7. D 15.C
8. A 16.A

17.B

2018 2019 2020 Total

Collections 72,500 80,000 62,500
Gross profit rate:
2018: 60,000/240,000 25%
2019: 68,750/250,000 27.5%
2020: 84,000/300,000 _____ _______ 28
__ %

Realized gross profit 18,125 22,000 17,500 57,625

18.C

2018 sale 2019 sale

Unrecovered cost:
Unpaid balance 15,000 16,000
Less: Deferred gross profit
2018: 15,000 x 25% 3,750
2019: 16,000 x 27.5% _______ 4,400
Unrecovered cost 11,250 11,600
Value of repossess merchandise 6,000 9,000
Loss on repossession ( 5,250) ( 2,600) (7,850)

123
19.B

Unadjusted installment sales 400,000

Add: Undervaluation of traded car (P150,000 – P50,000) 100,000
Adjusted installment sales 500,000
Less: Cost of production of car ( 300,000)

Adjusted gross profit 200,000

Divided by Adjusted installment sales /500,000
Adjusted gross profit rate based on sales 40%

Installment receivable 400,000

Down payment 25% x 400,000) (100,000)
Trade in allowance ( 50,000)
Installment receivable balance 250,000

Annual installment (250,000/5) 50,000

Down payment 100,000

Fair value of trade in 150,000
Annual payment – first year 50,000
Total collections 2018 300,000

Realized gross profit 2018 (40% x 300,000) 120,000

20.C

Fair value of repossessed inventory 110,000

Less: Unrecovered cost of defaulted installment receivable (120,000)
(P200,000 x 60%)
Loss on Repossession ( 10,000)
21.C
22.C
23.C
24.B
25.B
26.C
27.C
28.A
29.D

124
  REVENUE RECOGNTION
Franchise Operations – Option to Purchase Franchise Outlet

1. C
2. D
3. B
4. B
5. A
6. B
7. A
8. B
9. A
10.A
11.B

 REVENUE RECOGNITION
Franchise Operations – Financial Statement Presentation

1. C 21.D
2. C 22.B
3. A 23.A
4. C 24.D
5. B 25.B
6. A 26.A
7. C 27.C
8. D 28.A
9. B 29.B
10.A 30.C
11.A 31.A
12.D 32.A
13.A 33.A
14.B 34.C
15.C 35.C
16.A 36.C
17.A 37.D
18.A 38.C
19.A 39.A
20.D 40.A

125
126
 REVENUE RECOGNTION
Franchise Operations – Accounting for SMEs

20.D
1. A 21.B
2. A 22.C
3. C 23.A
4. A 24.A
5. D 25.A
6. A 26.A
7. A 27.A
8. A 28.D
9. A 29.A
10.B 30.D
11.B 31.A
12.C 32.A
13.B 33.A
14.A 34.A
15.A 35.B
16.A 36.A
17.A 37.A
18.B 38.B
19.B 39.B
40.A


127
 REVENUE RECOGNITION
Consignment Sales

1. C
2. B
3. B
4. C
5. A
6. C Under a consignment sales arrangement, the consignor ships merchandise
to the consignee who acts as agent for the consignor in selling the goods. The
goods are in the physical possession of the consignee but remain the property of
the consignor and are included in the consignor’s inventory count. Sales revenue
and the related cost of goods sold from these consigned goods should be
recognized by the consignor only when the merchandise is sold and delivered to
the ultimate borrower. Accordingly, recognition occurs when notification is
received that the consignee has sold the goods.
Answer (A) is incorrect because, at the date of shipment, the goods are still the
property of the consignor. Answers (B) and (D) are incorrect because the
consignee does not recognize sales revenue or cost of goods sold for these
goods. The consignee recognizes commission revenue only when the goods are
sold and delivered to the third party.
7. A
Receipts ( 7 dozens x 12 x P2,000) P168,000
Charges: Expenses P 3,000
Commissions (15% x P168,000) 25,200 28,200
Remittance P139,800

8. A
Sales 7 x 12 x P2,000 P168,000
Cost of Sales 7 x 12 x P1,000 P84,000
Freight 7 x P30 210
Expenses 3,000
Commission P168,000 x 15% 25,200 112,410
P 55,590
9. B

128
10.A
Receipts (215 x P500) P107,500
Less Shipping charges 2,100
Remittance P105,400
11.B
(215 x 40% x P580) + (215 x 60% x P640) – (215 x P24,940
P500) =

12.D P180,000 + P9,000 = P189,000

13.C
14.D
15.D Answer (D) is correct. Under a consignment sales arrangement, the
consignor ships merchandise to the consignee who acts as agent for the
consignor in selling the goods. The goods are in the physical possession of the
consignee but remain the property of the consignor and are included in the
consignor's inventory count. Sales revenue and the related cost of goods sold
from these consigned goods should only be recognized by the consignor when
the merchandise is sold and delivered to the final customer. Accordingly,
recognition occurs when notification is received that the consignee has sold the
goods. Answer (A) is incorrect because the revenue has not been realized or
earned at this time and should not be recognized. Answer (B) is incorrect
because the revenue has not been realized or earned at this time and should not
be recognized. Answer (C) is incorrect because the revenue has not been
realized or earned at this time and should not be recognized.

16.A
17.D The consignee should debit consignment-in for the freight costs.
Consignment-in is a receivable-payable account used by consignees. It
represents the amount payable to the consignor if it has a credit balance. If it
has a debit balance, it reflects the amount receivable from the consignor. Before
consigned goods are sold, expenditures chargeable to the consignor are recorded
in the consignment-in account as receivable. After the consigned goods are sold,
the consignee’s net liability to the consignor is reflected in the account.

Answers (A), (B), and (C) are incorrect because the freight costs constitute a
receivable.
18.B Answer (B) is correct. ABC debits the cash received $43,000 [$50,000
sales - $2,000 advertising - (.10 x $50,000) sales commission]. The advertising

129
 and commission expenses are debited for $2,000 and $5,000, respectively.
Finally, $50,000 of gross revenue is credited.
Answer (A) is incorrect because the freight was paid earlier in the period and
would have been recorded then by a credit to cash and a debit to inventory.
Thus, the freight costs will be released to income via cost of goods sold. Answer
(C) is incorrect because the 10% commission and the advertising costs are
ignored in this answer. Answer (D) is incorrect because the reimbursable
advertising costs are ignored in this answer.

19.A
20.A
21.D
22.C
23.A
24.C
25.D
26.D
27.C

Remittance P64,980
Charges:
Delivery expense P 850
Repairs 2,000 2,850
Total P67,380
÷ 85%
Sales P79,800
28.D

Remittance P64,980
Charges:
Delivery expense P 850
Repairs 2,000 2,850
Total P67,380
÷ 85%
Sales P79,800
Cost of sales 52,000*
Gross profit P27,800
Expenses:
Commission (P79,800 x 15%) P11,970
Repairs (P2,000 x 60/100) 1,200

130
 Delivery 850
Shipping cost (P900 x 260/300) 780 14,800
Consignment profit P13,000

*Sales P79,800
Less Sales of units with defects (200 x 60,000
P300)
Sales of repaired units P19,800
Selling price of repaired units ÷ P330
Number of repaired units that were sold 60
Units sold without repairs 240
Total number of units sold 300
Unit cost x P200
Cost of sales
P52,000
29. B

Sales P79,800
Less Sales of units with defects (200 x 60,000
P300)
Sales of repaired units P19,800
Selling price of repaired units ÷ P330
Number of repaired units that were sold 60
30. C

Cost (40 x P200) P 8,000

Repairs (P2,000 x 40/100) 800
Shipping cost (P900 x 40/300) 120
Value of inventory on consignment P 8,920
31. D

Remittance P68,250
Consignee charges, excluding the 15% commission
(P4,500 + P3,000 + P750) 8,250
Sum of remittances and charges P76,500
÷ 85%
Sales price of 6 refrigerators P90,000

131
32. A

Sales P90,000
Cost of sales (6 x P9000) 54,000
Gross profit P36,000
Expenses:
Commission (P90,000 x 15%) P13,500
Freight-out (P6,000 x 6/10) 3,600
Marketing expense 4,500
Delivery and installation 3,000
Cartage (P750 x 6/10) 450 25,050
Net profit from the sale of consigned P10,950
goods
33. D P90,000 x 15% = P13,500
34. C
35. B
36. C
37. D
38. D
39. B
40. C

132
  ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
TRANSACTIONS
Transactions on the books of the Home Office and the Branch

1. A
2. C
3. B

4. B Deferred profit on TGAS from HO [(14,000+78,400)/140%} x 40% = P26,400

5. C Billed price of shipment (P150,000 x 120%) P180,000

Add: Freight cost paid by Angeles City branch 4,000
Total P184,000

6. C Branch Current Home Office Current

Unadjusted balance P600,000 P469,680
A (4,320)
B 100,000 100,000
C 150,000
D (18,000)
E 42,000
Adjusted Balance P719,680 P719,680

7. A P50,400/120% = P42,000

8. A P90,000 + P36,000 – P2,520 – P50,400/120% = P60,900

9. B Net income (loss) reported by branch (P 7,800)

Realized markup (P90,000 + P36,000 – P2,520 - P50,400
= P73,080) x 20/120 12,180
True net income of the branch P 4,380

10. E

11. A

12. A

13. B
133
14. B In a periodic system, when merchandise is received by a branch from the home
office, the merchandise should be reflected as a shipment from the home office in the
amount of the transfer price, with a corresponding entry to the home office account
to indicate the equity of the home office in the net assets of the branch.

15. D RBNI 280,000-(22,000+1,100)-(220,000+11,000)

-P57,100+(44,000+2,200) P15,000
Plus realized allowance [(22,000+220,000-44,000)/110%]
x 10% 18,000
Total branch net income P33,000

16. C Total Branch Net Income

(P134,400-120,000-10,000+50,400+36,000) = P39,600

17.

18. B

19. B

20. C lnventory of the Branch:

Shipments from home office at billed price P 37,700
X: Ending inventory % 60%
Ending inventory at billed price P 22,620
Add: Freight (P1,300 x 60%) 780
Total P23,400

Or: P39,000 x 60% = P23,400

21. C
Home Office Books:
Davoo Branch 39,000
STB, cost 32,500
Unrealized Profit 5,200
Cash (freight) 1,300

134
 BC - Boguio 19,630
Excess freight 520
BC-Davao 20,150

Davao Branch:
SFHO 37,700
Freight-in 1,300
HOC 39,000

HOC 20,150
SFHO (50%) 18,850
Freight-in 650
Cash (freight) 650

Baguio Branch:
SFHO 18,850
Freight-in 780
HOC 19,630

22. A Sales P74,000

Cost of sales:
Shipments P67,680
Less Inventory, end 9,180 58,500
Gross Profit P15,500
Expenses 6,820
Net Profit P 8,680

23. A

24. D

25. C P17,500 + 8,680 = P 26,180

26. A

27. D Allowance before adjustment (TGAS from HO) P48,000

Less: allowance on current shipment (192,000 x 20%) 38,400
Allowance on the beginning inventory (from HO) P9,600

135
28. B Allowance before adjustment (TGAS from HO) P48,000
Less: allowance on the branch ending inventory (from HO)
[(P40,000-16,000)/120%] x 20% 4,000
Realized allowance (Overstatement of cost of sales in the branch)P44,000

29. C Shipments to branch-loading/allowance for overvaluation

of merchandise before adjustments P39,500
Allowance for overvaluation of ending
inventory (after adjustment) (20,700-8,700)x25/125* (2,400)
Realized mark up on branch merchandise P37,100

*Since there are no shipments in transit and there was no error in recording shipments,
therefore, the shipments from office account was correctly recorded, so, to compute for
the billing price would be: 187,500/150,000 = 25%. Markup on cost would be 25%

30. D Net loss per branch books P(2,270)

Overvaluation of cost of goods sold:
Beginning inventory 0
Shipments 125,000
Returns (15,620)
Cost of goods available for sale at billed price 109,380
Ending inventory at billed price (84,000)
Cost of goods sold at billed price 25,380
Multiplied by mark up .20/1.20 4,230
Adjusted net income P1,960

31. A

32. B In branch accounting, the branch office account on the books of the home
office represents the investment by the home office in the net assets of the
branch, not the branch’s equity in the home office.

33. C When goods are shipped from a home office to a branch at a transfer price
that reflects original cost plus a markup, the branch must record the
shipment at the transfer price. The home office most often reflects the
shipments to branch at original cost. To maintain a reciprocal relationship
between the home office and the branch office accounts, an unrealized profit
in branch inventories account reflects the markup.

136
34. C

35. A Shipment of merchandise to home office P 80,000

Equipment sent to home office 50,000
Expenses assigned to branch by the home office 8,000
Cash remittance to home office (40,000)
Home office account balance P 98,000

36. B Shipments from home office P29,000

Freight in 1,000
Total available for sale P30,000
Multiply 60%
Ending inventory of branch P18,000

Shipments from home office P29,000

Over allowance (4,000)
Shipments from home office at cost 25,000
Freight 1,000
Total available for sale at cost P26,000
Multiply 60%
Ending inventory of branch at cost P15,600

37. B

38. C

39. B Inventory in the published balance sheet, at cost:

Shipments at cost P32,500
Multiply: Ending inventory percentage 60%
Ending inventory at billed price P19,500
Add: Freight (1,300 x 60%) 780
Balance P20,280

40. B Branch Net Income 280,000-(22,000+1,100)-(220,000+11,000)

-P57,100+(44,000+2,200) P15,000
Plus realized allowance [(22,000+220,000-44,000)/110%]
x 10% 18,000
Total branch net income P33,000

137
  ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
TRANSACTIONS
Reconciliation of reciprocal accounts

1. A Branch Acct. HO Acct.

Balances before adjustment P150,000 P117,420
Adjustments:
1. Shipments in transit 37,500
2. HO AR collected by branch 10,500
3. Supplies returned (4,500)
4. Error in recording Br. net income (1,080)
5. Cash to Branch in transit 25,000 25,000
Total P179,920 P179,920

2. D P179,920

3.

4. C Branch Acct. HO Acct.

Balances P43,500 P41,900
Error in recording allowance 60
Advances taken by Pres. (550)
Share in advertising expense 0 900
Total P42,950 P42,950

5.

6. B Unadjusted balance, Branch account P165,920

Adjustments: Item (b) P(10,000)
Item (d) (65,700) (75,700)
Adjusted balance of the reciprocal accounts P90,220

7. A

8. B Home Office Books Branch Current (Dr. )

Unadjusted P590,000
Settlement check (40,000)
Merchandise return (15,000)
General expenses 28,000
Insurance premiums 900
Adjusted Balance P535,000

138
 Branch Books Home Office Current (Cr.)
Unadjusted P506,700
Settlement check (40,000)
Merchandise return (15,000)
General expenses 28,000
Insurance premiums (P600 was recorded) 900
Adjusted Balance P535,000

9. D

10. D
Inv inBranch Home Office
Unadjusted balance P102,000 P52,800
Branch remittance not recorded by home office (12,000)
Shipments not recorded by the branch 24,000
Unrecorded branch expenses 6,000
Customer’s remittance to home not recorded by
the branch (3,600)
Erroneous recording of branch shipments
(51,600-40,800) 10,800
Adjusted balances P90,000 P90,000

11. B Jan. 1, 2013 Jan. 1, 2014

Petty cash fund P 6,000 P 6,000
Accounts receivable 86,000 98,000
Inventory 74,000 82,000
Home Office account balance P166,000 P186,000

12. D

13. A
(Branch Books) (Home Office Books)
Home Office Inv. in Nova Branch
Unadjusted balances P27,350 P25,550
Error in recording shipment to QC branch (12,000)
Error in recording shipment to Nova branch 15,000
Branch AR collected by home office (3,600)
Merchandise returns in transit ( 1,200)
Error in recording branch profit ( 3,600)
Adjusted balances P23,750 P23,750

139
14. C True Branch Net Income P156,000
Less: branch net income as reported by the branch 60,000
Overvaluation of CGS 96,000
Less: Cost of good sold from the home office at BP
Inventory, December 1 P70,000
Shipments from HO 350,000
COGAS P420,000
Less: Inventory, December 31 84,000 336,000
CGS from the home office, at cost P240,000

Billing Price: P336,000/240,000 = 140%

15. C Allowance for overvaluation after adjustment / for December 31 inventory:

P84,000 x 40/140 = P24,000

16. D HO Account Branch Account

Beg. Balances P30,670 P30,670
1. Branch remittances (55,000) (47,800)
2. Shipment to branch 138,000 160,000
3. Home office expense paid by branch (5,700)
4. Branch receivable collected by branch 0 (8,900)
Total P107,970 P133,970

17. D Branch Acct. HO Acct.

Unadjusted balances P 133,970 P 107,970
1. Remittance in transit (7,200)
2. Shipment in transit 22,000
3. Home office expense paid by branch (5,700)
4. Branch receivable collected by branch (8,900)
5. Branch net profit 6,500 6,500
Adjusted Balances P 127,570 P 127,570

18. D (Branch Books) (Home Office Books)

Home Office Investment in Branch
Unadjusted balances, Dec. 31 P 21,320 P 38,600
Remittance in transit (10,400)
Shipment in transit 7,280
Cash collections of home office ( 400) -
Adjusted balances, Dec. 31P 28,200 P 28,200

140
19. C

Unadjusted balance- Investment in Branch account P 85,000

Remittance in transit (10,000)
Shipment in transit (20,000)
Expenses allocated ( 5,000)
Error in recording remittance 3,000
Error in recording shipments ( 9,000)
Unadjusted balance – Home Office account P 44,000

( Branch Books) (HomeOffice Books)

Home Office Investment in Branch
Unadjusted balances, P 44,000 P 85,000
Remittance in transit (10,000)
Shipment in transit 20,000
Expenses allocated 5,000
Unrecorded HO collection of AR (3,000)
Error in recording shipments 9,000 -
Adjusted balances P 75,000 P 75,000

20. C P 53,960- P 75,000 + P90 = P (20,950)

21. C

22. B
Marketing Expense of another branch charged to Butuan P (10,000)
Butuan’s remittance credited to Davao ( 65,700)
Net adjustment in Home Office Banch account P (75,700)

23. B
Fixed account not recorded by Butuan P (53,960)
Inventory transfer recorded twice by Butuan 75,000
Error in recording debit memo 4,650 (90)
Net adjustment in Branch Books P 20,950

24. D Branch Accnt. HO Accnt.

Unadjusted balances P165,920 P111,170
Net adjustment in Branch Account (75,700) (20,950)
Adjusted balances P 90,220 P 90,220

141
25. A
(Branch Books) (Home Office Books)
Home Office Investment in Branch
Unadjusted balances P 440,000 P 496,000
Branch AR collected by Home Office ( 8,000)
Shipments in transit 32,000
Acquisition of furniture (12,000)
Merchandise returns (15,000)
Cash remittance in transit - ( 5,000)
Adjusted balances P 464,000 P 464,000

26. C Sales P528,000

COS, unadjusted 389,000
Gross Profit P139,000
Expenses (190,000)
Net loss, per branch books (P51,000)
RGP 43,900
Net loss, per HO books P(P7,100)

Allowance for overvaluation:

Beg. P7,000
Shipment 59,400
Ending (23,100)
Realized P43,900

27. C

28. A
Unadjusted balance – Investment in Branch account, 12/31 P430,000
Charge for advances by president (5,500)
Erroneous entry for merchandise allowance ( 600)
Share in advertising expense (9,000)Unadjusted
balance – Home Office account, 12/31 P414,900

29. A (Branch Books) (Home Office Books)

Home Office Investment in Branch
Unadjusted balances, 12/31 P 97,350 P 84,000
Shipment in transit 6,150
Collection of HO A/R by branch - 25,000
Error in recording of branch profit - 900
Returns of merchandise in transit - ( 6,400)
Adjusted balances, 12/31 P103,500 P103,500

30. B

142
31. B

32. D Sales P369,600

Cost of goods sold:
Shipments from home office [462,000 x
(100/140)] 330,000
Ending inventory [(138,600 x (100/140)] (99,000) (231,000)
Gross profit P138,600
Expenses (29,700)
Real net income P108,900

33. A Shipment of merchandise to home office P 80,000

Equipment sent to home office 50,000
Expenses assigned to branch by the home office 8,000
Cash remittance to home office (40,000)
Home office account balance P 98,000
34. D

35. D

36. B Home Office Books Branch Current (Dr. )

Unadjusted P590,000
Settlement check (40,000)
Merchandise return (15,000)
General expenses 28,000
Insurance premiums 900
Adjusted Balance P535,000

Branch Books Home Office Current (Cr.)

Unadjusted P506,700
Settlement check (40,000)
Merchandise return (15,000)
General expenses 28,000
Insurance premiums (P600 was recorded) 900
Adjusted Balance P535,000

143
37. A Branch Acct. HO Acct.
Balances before adjustment P150,000 P117,420
Adjustments:
1. Shipments in transit 37,500
2. HO AR collected by branch 10,500
3. Supplies returned (4,500)
4. Error in recording Br. net income (1,080)
5. Cash to Branch in transit 25,000 25,000
Total P179,920 P179,920

38. D P179,920

39. C
Home Office Books Branch Books
(Branch Current- Dr. bal.) (HO Current - Cr. bal.)
Unadjusted balance P150,000 P117,420
Add: (deduct) Adjustments:
In Transit - 37,500
HO A/R collected by br. 10,500
Supplies returned (4,500)
Error in recording Br. NI (1,080)
Cash sent to branch to
General Exp by HO 25,000 25,000
Adjusted Balance P179,920 P179,920

40. D refer to no. 39 for computation

144
  ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
TRANSACTIONS
Preparation of Individual and Combined Financial Statements

1. B Inventory in the published balance sheet, at cost:

Shipments at cost P32,500
Ending inventory % X 60%
Ending inventory at billed price P2,620
Add: Freight (P1,300 x 60%) 780
Total P20,280

2. A P203,500 – (186,120 – 25,245 – 18,755) = P23,870

3. D Home Office Current P 48,125

Branch Income 23,870
Correct branch account - current P 71,995

4.

5. B

6. A

7. A

8. A Sales P112,500
Cost of Sales:
Shipments from home office P120,000
Less Inventory, Dec. 31 30,000 90,000
Gross profit P 22,500
Expenses 8,100
Net Profit P 14,400

9. B P90,000 + P14,400 = P104,400

10. D Branch A Branch B

Assets:
Inventory, January 1 P21,000 P19,000
Imprest branch fund 2,000 1,500
Accounts Receivable, January 1 55,000 43,500
Total Assets P78,000 P64,000
Less: Liabilities 0 0
Home Office Current Account P78,000 P64,000

145
11. B
Assets:
Inventory, December 31 P19,000 P12,000
Imprest branch fund 2,000 1,500
Accounts Receivable, December 31 70,000 53,500
Total Assets P91,000 P67,000
Less: Liabilities 0 0
Home Office Current Account P91,000 P67,000

12. D Profit and loss summary xx

Home Office Current xx

13.B P1,500 + 43,800 + 37,170 = P 82,470

14. D Net Sales (198,720 - 3,600) P 195,120

Cost of sales
Beg. Inventory P 37,170
Shipments 136,000
Goods available for sale P 173,170
End. Inventory 41,370 131,800
Gross Profit P 63,320
Expenses (57,930 + 1,920) 59,850
Net Profit P 3,470

15. B Inventory, 1/1, Home Office P100,000

Inventory, 1/1 Branch Office (P60,000-P9,000*) 51,000
Combined Inventory, 1/1 P151,000

*Deferred profit on the branch beginning inventory from the home office

16. C Inventory, 12/31, Home Office P120,000

Inventory, 12/31 Branch Office
(P85,000+P25,000*-P20,000**) 90,000
Combined Inventory, 12/31 P210,000

* Merchandise Shipment in transit (P380,000 x 125%) - P450,000

** Deferred profit on the branch ending inventory from the home office

17. C Sales P141,000

Cost of goods sold (P120,000 x 3/4 x 125%) 112,500
Gross profit P 28,500
Operating expenses 27,000
Net income reported by the branch P 1,500

146
18. B Sales P 100,000
Cost of sales
Inventory, beg. P21,000
Merchandise from Home Office 61,000
Merchandise available for sale P82,000
Less Inventory, end 19,000 63,000
Gross profit P37,000
Operating Expenses 21,000
Net profit of Branch A P16,000

19. D Branch A Branch B

Imprest branch fund P 2,000 P 1,500
Accounts Receivable, Jan.1 55,000 43,500
Inventory, Jan.1 21,000 19,000
Home Office account P 78,000 P 64,000

20. A

21. C Imprest branch fund P 1,500

Accounts Receivable, Dec. 31 53,000
Inventory, Dec. 31 12,000
Balance of Branch account - current P 67,000

22.

23. B Sales P 80,000

Cost of sales
Inventory, Jan.1 P 19,000
Merchandise from Home office 47,000
Merchandise available for sale P 66,000
Less Inventory, Dec.31 12,000 54,000
Gross profit P 26,000
Operating Expenses 14,300
Net profit of Branch B P 11,700

24. D

25. D
Sales (P100,000-P33,000+P50,000) P 117,000
Less: Cost of goods sold:.
lnventory, beg. [P 15,000 + (P5,500 /110%)
or (P5,500 - P500)] P20,000
Add: Purchases (P50,000 + P7,000) 57,000

147
 COGAS P77,000
Less: lnventory, end
[P11,000 + P1,050 + (P6,000- P1,050]/110% P16,550 60,450
Gross profit P 56,550
Less: Expenses {P20,000 + P6,000 + P5,000) 31,000
Cornbined Net income P25,550

26.

27.

28.

29.

30. B Home office inventory (P160,500 - P10,500) P 150,000

Branch inventory (P108,000/120%) 90,000
Inventories reported in the combined balance sheet P 240,000

31. A P72,500 ÷ (P75,000 + 444,000 -84,000 – 72,500) = 20%

32. D P444,000 / 120% = P370,000

33. A Sales P 600,000

Cost of goods sold (P75,000 + P444,000 - P84,000) (435,000)
Operating expenses (200,000)
Realized markup [P72,500 - (P84,000 x 20/120)] 58,500
Adjusted profit of the branch P 23,500

34. A P84,000 x 20/120 = P14,000

35. A P84,000 – P14,000 = P70,000

36. B
Assets:
Inventory, December 31 P19,000 P12,000
Imprest branch fund 2,000 1,500
Accounts Receivable, December 31 70,000 53,500
Total Assets P91,000 P67,000
Less: Liabilities 0 0
Home Office Current Account P91,000 P67,000

148
37. A Sales P112,500
Cost of Sales:
Shipments from home office P120,000
Less Inventory, Dec. 31 30,000 90,000
Gross profit P 22,500
Expenses 8,100
Net Profit P 14,400

38. D (Branch Books) (Home Office Books)

Home Office Investment in Branch
Unadjusted balances, Dec. 31 P 21,320 P 38,600
Remittance in transit (10,400)
Shipment in transit 7,280
Cash collections of home office ( 400) -
Adjusted balances, Dec. 31P 28,200 P 28,200

39. C Inventory, 12/31, Home Office P120,000

Inventory, 12/31 Branch Office
(P85,000+P25,000-P20,000) 90,000
Combined Inventory, 12/31 P210,000

40. B Inventory, 1/1, Home Office P100,000

Inventory, 1/1 Branch Office (P60,000-P9,000) 51,000
Combined Inventory, 1/1 P151,000

149
  ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
TRANSACTIONS
Special procedures in home office and branch transactions
(inter-branch transfer of cash and merchandise at cost or at billed price)

1. D

2. D

3. B

4. C

5. B Net income as reported by the Branch P20,000

Less: Rental expenses charged by the home office
(P1,000 x 6 months) 6,000
Adjusted NI as reported by the branch P14,000
Add: Overvaluation of CGS
Billed Price
MI, Beginning 0
SFHO 550,000
COGAS 550,000
Less: MI, ending 75,000
CGS, at BP 475,000
Multiply: Mark-up ratio 25/125 95,000
True/Adjusted/Real Branch Net Income P109,000

6. A
True Branch net income P156,000
Less: Branch net income as reported (by the branch) 60,000
Over valuation of Cost of goods sold P96,000
Less: Cost of goods sold from home office at billed price:
Inventory, December 1 P70,000
Shipment from home office 350,000
COG from home office available for sale P420,000
Less: Inventory, December 31 84,000 336,000
Cost of goods sold from home office, at cost P240,000

Billed Price (P336,000/P240,000) 140%

7. B
Allowance for overvaluation after adjustment:
P84,000 x 40/140 = P24,000

150
8. B

9. B

10. C

11. D

12. D

13. D Sales P369,600

Cost of goods sold
Shipments from home office [462,000 x (100/140)] 330,000
Ending inventory [(138,600 x (100/140)] (99,000)
Total P(231,000)
Gross profit 138,600
Expenses (29,700)
Real net income P108,900

14. B

15. D

16. D

17. A P1 ,850,000 – (5,850,000 / 1.2 x 0.2) = P875,000

18. C Sales P112,500

Cost of goods sold
Shipments from home office 120,000
Ending inventory (30,000) (90,000)
Gross profit P22,500
Expenses 8,100
Net income 14,400

Unadjusted Lualhati Home Co. Current P90,000

Net income of the branch 14,400
Adjusted L ualhati Ho me Co. Current/Branch Current P104,400

19. D Charged to the Head Office

20. A

151
21. C

22. C

23. D P13,200 + P350 = P13,550

24. C P11,000 + P350 = P11,350

25. B Inventory in the published balance sheet, ate cost

Shipments at cost P32,500
Multiply:Ending inventory percentage 60%
Ending inventory at billed price P19,500
Add: Freight (1,300 x 60%) 780
Balance P20,280

26. C lnventory of the Branch:

Shipments from home office at billed price P 37,700
Multiply: Ending inventory percentage 60%
Ending inventory ot billed price. P 22,620
Add: Freight (P1,300 x 60%) 780
Total P23,400

27. C Debit Credit

Home Office Books:
Davoo Branch 39,000
STB, cost 32,500
Unrealized Profit 5,200
Cash (freight) 1,300

BC - Boguio 19,630
Excess freight 520
BC-Davao 20,150
Bukidnon Branch:
SFHO 37,700
Freight-in 1,300
HOC 39,000

HOC 20,150
SFHO (50%) 18,850
Freight-in 650
Cash (freight) 650

Baguio Branch:
SFHO 18,850

152
 Freight-in 780
HOC 19,630

28. C

29. A Goods available for sale:

At billed price (P30,000+P180,000) P210,000
At cost (P210,000/120%) 175,000
Balance of Allowance for Overvaluation
account before adjustment P35,000

30. B Inter-company inventory profit (IIP) before closing P66,000

Less: IIP from shipment from home office
Billed price P300,000
Cost (P300,000/125%) 240,000 60,000
IIP from beginning inventory at billed price P 6,000
Divided by ÷25%
Cost of branch’s beginning inventory P24,000

31. C Shipment to branch, at billed price (P375,000x120%) P450,000

Shipping cost 2,000
Total cost 452,000
Sold (50%) 226,000
Branch Inventory – Billed price P226,000

32. B (20% of P30,000)

33. B Sales P 100,000

Cost of sales
Inventory, beg. P21,000
Merchandise from Home Office 61,000
Merchandise available for sale P82,000
Less Inventory, end 19,000 63,000
Gross profit P37,000
Operating Expenses 21,000
Net profit of Branch A P16,000

34. D Branch A Branch B

Imprest branch fund P 2,000 P 1,500
Accounts Receivable, Jan.1 55,000 43,500
Inventory, Jan.1 21,000 19,000
Home Office account P 78,000 P 64,000

35. A

153
36. C Imprest branch fund P 1,500
Accounts Receivable, Dec. 31 53,000
Inventory, Dec. 31 12,000
Balance of Branch account - current P 67,000

37.

38. B Sales P 80,000

Cost of sales
Inventory, Jan.1 P 19,000
Merchandise from Home office 47,000
Merchandise available for sale P 66,000
Less Inventory, Dec.31 12,000 54,000
Gross profit P 26,000
Operating Expenses 14,300
Net profit of Branch B P 11,700

154
39. C

40. A

Home office books Cebu branch books Bacolod branch books

Inv in Bacolod 25,000 Home office 25,000 Cash 25,000
Inv in Cebu 25,000 Cash 25,000 Home office 25,000

Inv in Bacolod 34,300 Home office 34,300 Cash 34,300

Inv in Cebu 34,300 SD 700 Home office 34,300
AR 35,000

Inv in Bacolod 62,500 Home office 212,500 Expenses 62,500

Expenses 150,000 Expenses 37,500 Home office 62,500
Inv in Cebu 212,500 Cash 250,000

Inv in Cebu 253,000 Freight in 3,000

S to branch 200,000S from HO 250,000
Allowance 50,000 Homeoffice 253,000
Cash 3,000

Inv in Bacolod 252,700 Home office 253,000 Ship. fr. HO 250,000

Excess freight 300 S from H 250,000 Freight In 4,200
Inv in Cebu 253,000 Freight In 3,000 Cash 1,500
Home Office 252,700

(Home office books) (Bacolod branch books)

Investment in Cebu Branch Home Office
- 25,000 25,000
34,300 34,300
212,500 62,500
253,000 252,700
253,000 524,800 - 374,500
271,800

Note: These are t- accounts

155
  ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
TRANSACTIONS
Accounting for Agency Transactions

1. B

2. A

3. B Sales P400,000
Cost of sales ( 400,0000 - 70,000) 330,000
Gross profit 70,000
Expenses [30,000 + 10,000 +
(10,000 - 6,000) + 5,000] 49,000
Net profit P 21,000

4. B Sales P46,500
Multiply 70%
Cost of sales w/o freight P32,550
Add freight 1,100
Cost of sales w/ freight P33,650

5. B Sales P46,500
Less Sales Discount (39,690 / 98%) - 39,690 810 P45,690
Cost of sales 33,650
Gross Profit P12,040
Expenses:
Selling P 2,820
Administrative (46,500 x 5%) 2,325
Samples Expenses 1,900 7,045
Net Profit P 4,995

6. C P17,500 + 8,000 +9,250 + (50,000 x 60% x 1/6) = P39,750

7. C Sales P176,000
Cost of sales 105,000
Gross Profit P 71,000
Expenses 39,750
Net Income P 31,250

8. D P 87,00 / 125% = P70,000

9. B Sales P 87,500
Cost of sales 70,000

156
 Gross Profit P 17,500
Expenses (350 + 250) 6,000
Net Income P 11,500

10. D This is recorded when the working fund is replenished.

11. D Sales P868,000

Cost of goods sold:
Purchases P800,000
Merchandise inventory, end 180,000 620,000
Gross profit P248,000
Expenses 198,000
Net income (loss) P50,000

12. B Sales P70,000

Cost of goods sold (P70,000 / 140%) 50,000
Gross profit P20,000
Less: Samples (P8,000 – P6,000) P 2,000
Expenses 2,800 4,800
Net income P15,200

13. A Sales P 100,000

Cost of goods sold 72,000
Gross profit P 28,000
Expenses (P9,000 + P4,500) 13,500
Net income P 14,500

14. A In adopting the imprest system for the agency working fund, the home office
writes a check to the agency for the amount of the fund. Establishment of the
fund is recorded on the home office books by a debit to the Agency working fund
and credit cash. The
agency will request fund replenishment whenever the fund runs low and at the
end of each fiscal period. Such a request is normally accomplished by an
itemized and authenticated statement of disburserments and the paid vouchers.

15. B

16. B Sales P220,000

Sales Disc 3,600
COGS 150,000
GP 66,400
Expenses:
Rent 5,000
Delivery 2,500

157
 Misc 2,000
Salaries 15,000
Commission 11,000
Samples 7,500
Advertising 1,000
Net income P22,400

17. C

18. C Sales (P350,000 + P100,000) P450,000

Less: Cost of Goods Sold P450,000
Purchases (P400,000 + 50,000) 90,000 360,000
Gross Profit P90,000
Less: Expenses
Salaries and Commission P70,000
Rent 20,000
Advertising Supplie (P10,000 - 6,000) 4,000
Other Expenses 5,000 99,000
Net Loss (P9,000)

19. A In adopting the imprest system for the agency working fund, the home office
writes a check to the agency for the amount of the fund. Establishment of the fund is
recorded on the home office books by a debit to the Agency working fund and credit
cash. The agency will request fund replenishment whenever the fund runs low and at
the end of each fiscal period. Such a request is normally accomplished by an itemized
and authenticated statement of disbursements and the paid vouchers. Upon sending
the agency a check in replenishment of the fund, the home office debits expense.

20. B

21. B

22. C

23. D

24. D

25. D Allowance before adjustment (TGAS from HO) P48,000

Less: allowance on current shipment (192,000 x 20%) 38,400
Allowance on the beginning inventory (from HO) P9,600

158
26. B Allowance before adjustment (TGAS from HO) P48,000
Less: allowance on the branch ending inventory (from HO)
[(P40,000-16,000)/120%] x 20% 4,000
Realized allowance (Overstatement of cost of sales in the branch)P44,000

27. C Shipments to branch-loading/allowance for overvaluation

of merchandise before adjustments P39,500
Allowance for overvaluation of ending
inventory (after adjustment) (20,700-8,700)x25/125* (2,400)
Realized mark up on branch merchandise P37,100

28. C

29. A Shipment of merchandise to home office P 80,000

Equipment sent to home office 50,000
Expenses assigned to branch by the home office 8,000
Cash remittance to home office (40,000)
Home office account balance P 98,000

30. B Shipments from home office P29,000

Freight in 1,000
Total available for sale P30,000
Multiply 60%
Ending inventory of branch P18,000

Shipments from home office P29,000

Over allowance (4,000)
Shipments from home office at cost 25,000
Freight 1,000
Total available for sale at cost P26,000
Multiply 60%
Ending inventory of branch at cost P15,600

31. B

32. B Sales P400,000

Cost of sales ( 400,0000 - 70,000) 330,000
Gross profit 70,000
Expenses [30,000 + 10,000 +

159
 (10,000 - 6,000) + 5,000] 49,000
Net profit P 21,000

33. B Sales P46,500

Multiply 70%
Cost of sales w/o freight P32,550
Add freight 1,100
Cost of sales w/ freight P33,650

34. B Sales P46,500

Less Sales Discount (39,690 / 98%) - 39,690 810 P45,690
Cost of sales 33,650
Gross Profit P12,040
Expenses:
Selling P 2,820
Administrative (46,500 x 5%) 2,325
Samples Expenses 1,900 7,045
Net Profit P 4,995

35. C P17,500 + 8,000 +9,250 + (50,000 x 60% x 1/6) = P39,750

36. C Sales P176,000

Cost of sales 105,000
Gross Profit P 71,000
Expenses 39,750
Net Income P 31,250

37. D P 87,00 / 125% = P70,000

38. B Sales P 87,500

Cost of sales 70,000
Gross Profit P 17,500
Expenses (350 + 250) 6,000
Net Income P 11,500

39. D This is recorded when the working fund is replenished.

40. A In adopting the imprest system for the agency working fund, the home office
writes a check to the agency for the amount of the fund. Establishment of the
fund is recorded on the home office books by a debit to the Agency working fund
and credit cash. The agency will request fund replenishment whenever the fund
runs low and at the end of each fiscal period. Such a request is normally
accomplished by an itemized and authenticated statement of disbursements and
the paid vouchers.

160
  BUSINESS COMBINATION

Determination of Consideration Transferred

THEORIES

1. B 10. A

2. B 11. A

3. D 12. A

4. A 13. A

5. C 14. A

6. D 15. A

7. C 16. A

8. D 17. A

9. A 18. A

PROBLEMS

19. D

Selling Price P240, 000

Contingent Consideration 5,000
Net Assets P245,000

20. D

Selling price P620, 000

Contingent Consideration 184,000
Total P804,000
Fair Value of Net assets (520,000)
Goodwill P284,000

161
21. D

Goodwill P284,000
Adjustments Contingent Consideration (14,000)
Goodwill 270,000

22. A

23. A

Cash P400

Shares 360

Total P 760

Less: Fair value of net assets acquired 705

Goodwill P55

24. A

Receivables:

Acquirer P480

Acquiree 160

Total P 660

25. A

Inventory:

Acquirer P660

Acquiree 300

Total P 960

162
26. D

Buildings:

Acquirer P1, 200

Acquiree 280

Total P 1,480

27. B

Long-term Liabilities:

Acquirer P1,140

Acquiree 300

Total P 1,440

28. C

Common Stock:

Acquirer P1,200

Issued share 200

Acquiree 0

Total P 1,400

29. A

Retained Ernings:

Acquirer P1,080

Direct cost (15)

Acquiree 0

Total P 1,065

163
30. B

APIC:

Acquirer P-0-

APIC from new shares 160

Stock issue cost (10)

Total P 150

31. D

Cash:

Acquirer P900

Less: Acquired net asset (400)

Direct cost (15)

Stock issue cost (10)

Acquiree 80

Total P 555

32. B

MM Common stocks P1,000,000

MM net assets 1,200,000

Total P2,200,000

33. A

164
34. B

Consideration P160,000

Net assets 180,000

Income (20,000)

35. A

Consideration P160,000

Net assets 180,000

Income (20,000)

36. A

Consideration P800,000

Net assets 1,300,000

Gain P500,000

37. A

38. A

39. A

40. C

Consideration P600,000

Net assets 487,500

Goodwill P112,500

165
  BUSINESS COMBINATION
Recognition of Acquired Assets and Liabilities

THEORIES

1 B 11 A

2 D 12 A

3 B 13 A

4 D 14 A

5 B 15 A

6 C 16 A

7 A 17 A

8 B 18 D

9 A 19 D

10 A 20 D

PROBLEMS

21. C

Selling Price P3,600,000

Contingent Consideration 120,000
Net Assets P3,720,000

22. C

23. A

24. C

Selling price P110,000

BV (140,000)

Loss P30,000

166
25. D

26. D

27. B

(50,000+8,000+100,000)

28. C

Finder's fee P40,000

Accountants fee 10,000

Legal fees 15,000

Salaries 16,000

Closing duplicate facilities 12,000

Cost of shareholder's meeting 14,000

Total expenses P107,000

29. B

Cost of printing stock certificates P7,000

Audit and accountant's fee Related to stock issuance 3,000

SEC registration fee 5,000

Stock listing application fees 4,000

Total P 19,000

30. C

31. C

32. B

33. B

167
34. A

Selling Price P500,000

Consideration 350,000
Net Assets P850,000

35. D

36. C

37. C

38. A

Equipment (180/5) P36,000

Building ( 550/20) 27,500
Net Assets P63,500

39. A

40. A

Selling Price P900,000

Net assets ( 670,000)
Goodwill P230,000

168
  BUSINESS COMBINATION
Recognition and Measurement of Goodwill and Gain from a
Bargain purchase

THEORIES

1 B 13 A

2 B 14 A

3 C 15 C

4 C 16 C

5 A 17 C

6 C 18 B

7 C 19 B

8 C 20 B

9 B 21 C

10 A 22 C

11 C 23 C

12 C

PROBEMS

24. A

Proceeds P620,000

Net Revaluation of Assets (30,000)

Net Assets Acquired (540,000)

Goodwill upon Purchase P 50,000

Existing Goodwill 100,000

Goodwill after purchase P150,000

169
25. C

Proceeds P1,800,000

Research Development (100,000)

Net Revaluation of Assets (100,000)

Net Assets Acquired (1,400,00)

Goodwill upon Purchase P 200,000

26. D

27. B

Proceeds P1,240,000

Net Revaluation of Assets (60,000)

Net Assets Acquired (1,080,000)

Goodwill upon Purchase P 100,000

Existing Goodwill 200,000

Goodwill after purchase P300,000

28. B

Proceeds P 250,000
Fair value- net assets (180,000)

Goodwill P 70,000

29. B

Consideration transferred P80,000

Less: fair value of net identifiable asset acquired: 75,000

Goodwill 5,000

170
30. C

Selling price P110,000

BV (140,000)

Loss P30,000

31. B

Selling price P32,000,000

BV (28,000,000)

Loss P4,000,000

32. A

Consideration(37,000*P40) P1,500,000

Net assets FV (1,600,000)

Gain P100,000

33. D

Consideration (45,000*P40) P1,800,000

Net assets FV (1,600,000)

Gain P200,000

34. C

35. B

171
36. B

Considerations P600,000

FV of net assets (420,000)

Goodwill P180,000

37. C

Broker's fee P50,000

Pre-acquisition audit fee 40,000

General administrative cost 15,000

Legal fees for the combination 32,000

Other acquisition cost 6,000

Total 143,000

38. C

Audit fee for SEC registration of stock issue 46,000

Registration for stocks 5,000

Total 51,000

39. A

40. D

Abel Corp (January-April 11) 80,000

Cain Corp (April 1-December 31) 400,000

Abel Corp (April 1-December 31) 1,320,000

Total P1,800,000

172
 BUSINESS COMBINATION

Journal entries

1 A 21 A

2 B 22 C

3 A 23 B

4 A 24 D

5 B 25 B

6 A 26 A

7 E 27 C

8 D 28 C

9 D 29 A

10 D 30 D

11 D 31 B

12 C 32 D

13 A 33 C

14 C 34 C

15 C 35 A

16 D 36 D

17 B 37 D

18 D 38 D

19 A 39 A

20 A 40 A

173
  BUSINESS COMBINATION
FS Presentation

1. C 23.A
2. B 24.D
3. D 25.D
4. C 26.C
5. B 27.D
6. D 28.B
7. B 29.B
8. A 30.A
9. A 31.C
10.D 32.E
11.D 33.B
12.A 34.A
13.C 35.B
14.A 36.A
15.C 37.B
16.C 38.B
17.D 39.D
18.D 40.C
19.D
20.D
21.A
22.A

174
  BUSINESS COMBINATION

Accounting for SME

1. C 6. A 11. B

2. D 7. D 12. C

3. B 8. B 13. A

4. C 9. D 14. B

5. B 10. D 15. B

16. D

Shareholder's Equity of Larry Corp. P1,517,500

Shares issued 750,000

Less: Indirect acquisition costs 4,000

Stock registration fee for new shares of Larry 6,250 10,250

Stockholders equity in the books of surviving company P2,257,250

17. B.

Cost of Acquisition P760,000

Shareholder's Equity of Glenn Corp. (570,000)

Goodwill P190,000

18. C 23. C

19. A 24. A

20. B 25. A

21. B 26. C

22. A

175
27. D

Cash consideration P 30,000

Add: costs that are directly attributable to

acquisition

Advisory 1,250

Legal 500

Accounting 150

Valuation 100

Cost of the business combination P 32,000

28. D

Fair value of the share consideration P 30,000

Add: costs that are directly attributable to

acquisition

Advisory 1,250

Legal 500

Accounting 150

Valuation 100

Cost of the business combination P 32,000

176
29. A

Present value of the P30,000 deferred patent discounted by 5% per annum for 2 years.
no. Of years discounted
= future value / [(1 + discount rate per annum)

= 30,000/ [(1.05)2]

= P27,211

30. C

Valuation Input
Level

Cash paid immediately 1 10,000

Fair value of the office building 2 50,000

Fair value of two gold bars 1 2,000

Equity instruments of SME A 3 10,000

Equity instruments of Entity C 1 6,000

Total 78,000

31. A

32. D

Patent 2,000

Land 2,500

Equipment 550

Inventory 400

Cash 100 5,550

Payables 180

177
 Provisions (short-term) 220

Provisions (long term) 210

Deferred Tax Liability 568 (1,178)

Total Identifiable net assets 4,372

Non - controlling interest (1,093)

Goodwill 516

Cost of Business 3,795

Combination

33. C

Carrying Carrying Difference Tax

amount amount
20%
SME B Group Fair
Value

Intangible assets (patent) 2,000 2,000 (400)

Land 1,800 2,500 700 (140)

Equipment 500 550 50 (10)

Inventory 300 400 100 (20)

Cash 100 100 - -

Provisions (long-term) (200) (210) (10) 2

Payables (180) (180) - -

Provisions (short term) (220) (220) - -

Total 2,100 4,940 2,840

178
 Total Deferred Tax (568)
Liability

34. B

Cost of Business combination (P3,765+30) P3,795

Less 75% of identifiable assets acquired 3,279

Goodwill P 516

35. A

36. D

Fair Value

Intangible assets (recipes) 800

Plant and Equipment 1,300

Land 2,000

Motor Vehicle 320

Inventory 280

Accounts Receivable 130

Total Assets 4,830

Accounts Payable 700

Bank Loan 1,150

Provisions (short term) 270

Contingent Liability 100

Total liabilities 2,220

Net Identifiable assets acquired 2,610

179
37. A

Purchase Consideration Shares (100 SME A shares x P14) 1,400

Cash paid on the date of acquisition 500

Deferred cash payment ( P500 x 1/1.1) 455

Contingent consideration (EBIT targets) (P500 x 1/(1.1)2 413

Patent 500

Directly attributable costs (excluding shares issue costs) 40

Total Cost of the Business Combination 3,308

38. A

Cost of business combination P 3,308

less: Net assets acquired 2,610

Goodwill P 698

39. D

Net identifiable assets acquired before tax 2,610

effect

Deferred tax liability (322)

Net identifiable assets acquired 2,288

180
 Cost of business combination P 3,308

less: Fair value of net identifiable assets 2,288

acquired

Goodwill P 1,020

40. A

Individual Group Difference Deferred

entity Acquisition Tax
(SME B) date 20%
Carrying carrying
Amount amount

Intangible - 800 800 (160)

assets
(recipes)

Plant and 1,000 1,300 300 (60)

Equipment

Land 1,500 2,000 500 (100)

Motor 300 320 20 (4)

Vehicles

Inventory 200 280 80 (16)

Accounts 150 130 (20) 4

Receivable

Accounts (700) (700) - -

Payable

Bank loan (1,200) (1,150) 50 (10)

Provisions (250) (270) (20) 4

(short

181
 term)

Contingent - (100) (100) 20

liability

Total 1,000 2,610 1,610

Total (322)
deferred
tax
liability

 SEPARATE FINANCIAL STATEMENTS

Accounting For Investment in Subsidiary

182
1. D 22. D

2. A 23. D

3. B 24. A

4. C 25. B

5. A 26. A

6. C 27. D

7. C 28. A

8. D 29. D

9. D 30. B

10. C 31. C

11. B 32. C

12. C 33. B

13. B 34. C

14. B 35. C

15. C 36. B

16. D 37. A

17. C 38. D

18. B 39. B

19. A 40. C

20. A

21. D

183
  SEPARATE FINANCIAL STATEMENTS

Investment in Subsidiary – Financial Statement Presentation

1. A

2. C

3. D

4. C

Accounts Receivable $1,000

Multiply by Exchange Rate - 12/31/2020 40

Book value of Accounts Receivable P40,000

5. C

Prepaid Assets $100

Multiply by Historical rates 20

Book value of Prepaid Assets P2,000

6. A

Cost of Acquisition P800,000

Fair value of S Company's net assets 560,000

Goodwill P240,000

7. A

Fair Value of S company's assets P1,050,000

Goodwill 240,000

Less: cost incurred 65,000

Increase in total assets P1,225,000

184
8. B

Fair value of shares issued P800,000

Less cost incurred 65,000

Increase in total equity P735,000

9. B

Cash P 100,000

Inventory 250,000

Equipment under capital lease 220,000

Land 180,000

Building 300,000

Less: Current liabilities 80,000

Liability under capital lease 140,000

Bond payable 270,000

Fair value of S Company's Net assets P560,000

10. D

11. B

12. A

13. C

14. A

15. A

16. D

185
17. C

PARENT SONS

Retained Earnings, beg. P520,000 P150,000

Net income 120,000 15,000

less: dividends declared 40,000 6,000

Retained Earnings, end P600,000 P159,000

18. C

19. C

PHILIPS SIPS

Retained Earnings, beg. P320,000 P120,000

Net income 145,000 20,000

less: dividends declared 35,000 8,000

Retained Earnings, end P430,000 P132,000

20. C

21. C

22. B

23. B

24. C

25. A

Zigma Co. Standard

Co.

186
 Income Statement

Sales 200,000 112,000

less: other expenses (90,000) (70,000)

less: depreciation expenses (30,000) (17,000)

Income from Standard Co. 25,000 -

Net Income 105,000 25,000

Statement of Retained
Earnings

Beginning Balance 175,000 35,000

Net Income 105,000 25,000

less: Dividends Declared (32,000) (10,000)

Ending Balance 248,000 50,000

Balance Sheet

Current Assets 238,000 95,000

Depreciable Assets 300,000 170,000

less: Accumulated 120,000 85,000

Depreciation

Investment in Standard Co. 100,000

Total Assets 518,000 180,000

26. A

27. D

28. A

187
29. A

30. A

31. C

Pimsol Shipping
Corp.

Income Statement

Sales 175,000 120,000

less: other expenses (85,000) (60,000)

less: depreciation expenses (20,000) (15,000)

Dividend Income 15,000 -

Net Income 85,000 45,000

Statement of Retained
Earnings

Beginning Balance 210,000 100,000

Net Income 85,000 45,000

less: Dividends Declared (30,000) (15,000)

Ending Balance 265,000 130,000

Balance Sheet

Current Assets 160,000 115,000

Depreciable Assets (net) 180,000 135,000

Investment in Shipping Corp. 125,000

Total Assets 465,000 250,000

188
32. A

Elaine's retained earnings, date of acquisition 500,000

less: Elaine's retained earnings, end of the current reporting period 1,400,000

900,000

Multiply by: Controlling interest % 80%

Elaine's retained earnings included in the consolidated 720,000

financial position

33. C

34. C

35. C

Set Net Income P100,000

Multiply by interest acquired 70%

Income from Subsidiary P 70,000

36. A

Price paid for investment in Subsidiary Company P280,000

Less book value of interest acquired:

Common stock P 20,000

Other paid-in capital 80,000

Retained Earnings 150,000

Total stockholders' equity P250,000

Interest acquired 80% 200,000

Excess of cost over book value P 80,000

189
37. B

Investment in Subsidiary P279,000

38. D

Non - controlling Interest Subsidiary Equity

90,000

200,000 + 100,000

= 30% 100%-30% = 70%

39. B

Consolidated Inventory P270,000

Pepper Co. Inventory P125,000

Salt Inc. Inventory 110,000

Total Inventory Book Value P235,000

Adjustments 35,000

Ownership Interest 70% P 50,000

40. A

The building and Equipment's book value was overvalued relative to the fair value.

P320,000 + P160,000 = P480,000 > P459,000

(P21,000/ 70%) = P30,000

190
 SEPARATE FINANCIAL STATEMENTS
Accounting for SME
1. D 21.A
2. C 22.A
3. C 23.A
4. D 24.D
5. C 25.D
6. D 26.A
7. D 27.C
8. C 28.C
9. C 29.D
10.B 30.B
11.B 31.C
12.D 32.B
13.D 33.C
14.D 34.B
15.D 35.A
16.D 36.A
17.A 37.C
18.C 38.D
19.A 39.B
20.C 40.A

191
 CONSOLIDATED FINANCIAL STATEMENTS
Date of Acquisition

1. B 16.B
2. C 17.C
3. A 18.D
4. C 19.C
5. D 20.B.
6. C
21.B
7. B
22.C
8. B
23.C
9. A 24.C
10.A 25.D
11.C 26.B
12.B 27.D
13.C 28.C
14.B 29.A
15.A 30.C
31.D

32. C. P240,000
Cost of investment P 232,000
Less: Goodwill from business combination ( 40,000)
Book value of investment P 192,000
÷ 80%
Underlying book value of T Deck’s net assets P 240,000

33. B. P202,000
Riger net income from operations P 200,000
Dividend revenue (10% x P20,000) 2,000
Net income P 202,000
34. B. P232,000

Riger net income from operations P 200,000

Dividend revenue (40% x P80,000) 32,000
Net income P 232,000

35. B. P264,000
192
Controlling income Ruger + Nina P 280,000
Noncontrolling interest (20% x P80,000) ( 16,000)
Controlling interest P 264,000
36. A. P580,000
P500, 000 book value + 80,000 = P580,000
37. A. P576,000
P600,000 book value - 24,000 = P576,000
38. A. P24,000
P120,000 book value – 96,000 = P24,000
39. A. P60,000
40. A. P250,000

 CONSOLIDATED FINANCIAL STATEMENTS

193
 Subsequent to Date of Acquisition

Net Income, Dividends, Amortization and Impairment of Goodwill

1. A 13.C
2. C 14.A
3. D 15.C
4. B 16.B
5. A 17.B
6. C 18.C
7. C 19.C
8. D 20.D
9. C 21.D
10.A 22.C
11.B 23.C
12.D

24. C. P75,000
Cost of Investment (100%) P310,000
Fair Value of identifiable assets
Cash P 30,000
Merchandise Inventory 75,000
Plant and equipment 190,000
Liabilities ( 60,000) 235,000
Goodwill from business combination P 75,000
25. C. P95,000
Cost of Investment P 975,000
NCI 220,000
Total P1,195,000
FV of SNA 1,100,000
Allocated to Goodwill P 95,000
26. A. 0
Cost of Investment P 275,000
Fair value of investment (P350,000x80%) 280,000
Gain from business combination P 5,000
Therefore, there is no goodwill recognized

27. B. P454,000

194
 Cost of Investment:
Common shares (24,000 x 20) P 480,000
Preferred shares (12,000 x 100) 1,200,000
Cash 240,000 P 1,920,000
Fair value of identifiable net assets acquired:
Accounts receivable P 158,000
Inventory 412,000
Land 540,000
Bldgs. and Equipt. 1,032,000
Current liabilities ( 228,000)
Bonds payable ( 448,000) P 1,466,000
Goodwill from business combination P 454,000
28. B. P1,800,000
Fair value of identifiable net assets acquired:
Current assets P 400,000
Property and equipment 1,600,000
Liabilities ( 400,000) P 1,600,000
Add: Goodwill from business combination 200,000
Cost of Investment P 1,800,000
29. A. P60,000
Average earnings (50,000 + 60,000/2) P 55,000
Normal Earnings 25,000
Excess earnings P 30,000
x 2
Goodwill still be recognized P 60,000
30. B. P400,000
Cost of Investment P 1,700,000
Fair Value of Net Assets 1,300,000
Goodwill P 400,000
31. C. P100,000
Minority interest (MINA) P 35,100
÷ 30%
Stockholders’ equity of subsidiary, Nadir P 117,000
× 70%
Book value of investment P 81,900
Add: Allocated excess to fixed assets 10,000
Allocated excess to goodwill 8,100
Cost of investment P 100,000
32. D. P81,900

195
 Book value of investment or underlying equity in Nadir net assets:
Stockholders’ equity of subsidiary, Nadir (35,100/30%) P 117,000
× 70%
P 81,900

33. B. P25,000
34. B. P500,000
Cost of Investment P 2,500,000
Stockholders’ Equity 2,000,000
Goodwill P 500,000

35. C.
FMV of shares issued by Pyramid (20,000 x P28) P 560,000
Finder’s fees 10,000
Legal and accounting fees 6,000
Total cost of investment P 576,000
36. A. P146,000
Investment cost P 576,000
FV of Sphinx’s net assets (680,000+50,000-300,000) 430,000
Goodwill P 146,000
37. A. P180,000
Normal earnings for similar firms = P1,750,000 × 14% = P245,000
Excess earnings = P290,000 – 245,000 = P45,000
Goodwill = P45,000 × 4 years = P180,000
38. A. P131,117
Goodwill = P45,000 × 2.91371 = P131,117
39. A. P250,000
Goodwill = [P1,300,000 – (P1,750,000 – 700,000)] = P250,000
40. B. P4,860,000
Income from own operations, Carlos Bakery P 3,000,000
Add: Income from Zeus
Share (2,500,000 × 60%) P 1,500,000
Add: Realized mark-up on beg. inventory
(20,000 × 90 × 50%/150% × 60%) 360,000 1,860,000
Consolidated net income P 4,860,000

 CONSOLIDATED FINANCIAL STATEMENTS

196
 Subsequent to Date of Acquisition

With intercompany transactions (Inventories, land & depreciable

assets)

1. A
2. C
3. B
4. C
5. C
6. B
7. D
8. C. P474,400
Cost of sales, Boboy P 380,000
Cost of sales, Homer 210,000
Less: Intercompany sales 2015 (120,000)
Mark-up beginning inventory ( 4,000)
Add: Mark-up on ending inventory 8,400
Consolidated cost of sales P 474,400
9. A. P1,000,000 and P690,000
Sales of Tomas Co. P 800,000
Sales of Badong Co. 300,000
Less: Intercompany sales ( 100,000)
Consolidated Sales P1,000,000

Cost of sales of Tomas Co. P 600,000

Cost of sales of Badong Co. 180,000
Less: Intercompany sales ( 100,000)
Add: Mark-up on ending inventory
(100,000 × 25%) × 40% 10,000
Consolidated cost of sales P 690,000

10. C. P1,000,000 and P696,000

Sales of Tomas Co. P 800,000
Sales of Badong Co. 300,000
Less: Intercompany sales ( 100,000)
Consoliated Sales P1,000,000

197
Cost of sales of Tomas Co. P 600,000
Cost of sales of Badong Co. 180,000
Less: Intercompany sales ( 100,000)
Add: Mark-up on ending inventory
(100,000 × 40%) × 40% 16,000
Consolidated cost of sales P 696,000
11. B. P4,860,000
Income from own operations, Carlos Bakery P 3,000,000
Add: Income from Zeus
Share (2,500,000 × 60%) P 1,500,000
Add: Realized mark-up on beg. inventory
(20,000 × 90 × 50%/150% × 60%) 360,000 1,860,000
Consolidated net income P 4,860,000
12. C. Overstated by P370,000
Intercompany receivable/payable P 120,000
Intercompany profit (750,000-500,000) 250,000
Consolidated current assets overstated by P 370,000
13. A. P1,360,000
Sales to non-affiliates 8,000 units
Gross profit per unit (220-50) × 170
Realized gross profit P1,360,000
14. D. P224,000
Net income reported by P, 2014 P 240,000
Less: Unrealized mark-up on ending inventory 2014
(180,000-130,000) × 40% × 80% ( 16,000)
Consolidated net income P 224,000
15. A. P161,600
Net income reported by P 2015 P 160,000
Add: Realized mark-up on beg. inventory
(180,000-130,000) × 40% × 80% 16,000
Less: Unrealized mark-up on ending inventory
(210,000-150,000) × 63/210 × 80% ( 14,400)
Consolidated net income P 161,600
16. D. P536,428
Cost of sales reported by Belgium (660,000/140%) P 471,428
Cost of sales reported by Hillinger (510,000/120%) 425,000
Less: Intercompany sales (140,000 ÷ 240,000) (380,000)
Add: Unrealized mark-up on ending inventory
Sales to Hillinger (downstream) 42,000 × 40%/140% 12,000
Sales to Belgium (upstream) 48,000 × 20%/120% 8,000
Consolidated cost of sales P 536,428

17. A. P67,600

198
Operating income of Belgium P 70,000
Add: Income (loss) from Hillinger
Share (20,000 x 80%) P 16,000
Less: Unrealized mark-up (downstream) (12,000)
Unrealized mark-up (upstream) 8,000 x 80% ( 6,240) ( 2,400)
Consolidated net income P 67,600
18. A. 15 years
January 1, 2012 to December 31, 2014 = 3 years
Depreciation per year = P60,000/3 years
= P20,000
Price paid by Blank to Grand P 276,000
Add: Debit to truck per eliminating entry 24,000
Original cost of the truck P 300,000
Depreciation per year ÷ 20,000
Original economic life on January 1, 2012 15 years
19. A. P870,000
2014 combined sales P 920,000
Less: 2014 intercomapny sales ( 50,000)
Consolidated sales P 870,000
20. A. P3,000
Selling price P 50,000
Less: Cost of sales 40,000
Original unrealized profit P 10,000
Unsold percentage 30%
Unrealized profit P 3,000
21. B
22. A. P1,025,000
Combined 2015 sales P 1,025,000
Less: 2015 intercompany sales 0
Consolidated sales P 1,025,000
23. D. P477,000
Combined cost of sales P 480,000
Less: 2015 intercompany sales 0
Less: Unrealized profit in the 2015 beg. inventory from 2014 ( 3,000)
Add: Unrealized profit in 2015 ending inventory 0
Consolidated cost of sales P 477,000
24. B. P76,250
Combined cost of sales P 160,000
Less: intercompany sales revenue ( 110,000)
Add: Unrealized profit taken out of inventory
(35,000 x 75%) 26,250
Consolidated cost of sales P 76,250

25. A. P54,250

199
 (P115,000 x 70%) – P26,250 = P 54,250
26. A. P4,000
Selling price P 60,000
Less: Cost of sales ( 48,000)
Unrealized profit P 12,000
Unsold fraction 1/3
Credit inventory P 4,000
27. A. P720,000
P500,000 + 400,000 – 200,000 + 20,000 = P720,000
28. B. P76,000
(120,000 x 80%) – (200,000 x 20% x 50%) = P76,000
29. D. P24,000
Downstream situation.
30. A. overstated by P320
It will be overstated by the amount of the minority interests’ share of the P1,600 of
profit margin in the P9,600 of materials carried over to 2015 = 20% x P1,600 =
P320
31. C. P522,500
Grebe plus Swamp’s separate cost of goods sold = P400,000 + 320,000
= P720,000
Less: Intercompany sales (200,000)
Profit (12,500-10,000) 2,500
Consolidated COGS P522,500
32. B. P12,500
33. A.
34. A. P8,400
Squid’s reported income P 100,000
Less: Unrealized profits in the ending inventory ( 16,000)
Squid’s adjusted income P 84,000
Minority interest percentage 10%
Minority interest income P 8,400
35. B. P22,000
Unrealized profit in inventory:
P132,000 – (P132,000/1.2) = P22,000
36. A. P506,000
Income from Salt for 2015:
Share of Salt’s income (P880,000 x 60%) P 528,000
Less: Unrealized profit in ending inventory ( 22,000)
Income from Salt P 506,000

37. C. P664,000

200
Share of Cliff’s reported net income
P900,000 x 75% P 675,000
Add: Unrealized profit in beginning inventory 27,000
Less: Unrealized profit in ending inventory ( 38,000)
Income from Cliff P 664,000
38. A. P185,000
Sales (P620,000-160,000) P 460,000
Cost of goods sold (117,600)
Expenses (125,000)
Minority interest ( 32,400)
Consolidated net income P 185,000
39. A. P117,600
Combined cost of sales (210,000+72,000) P 282,000
Less: Intercompany sales (160,000)
Less: Unrealized profit in beginning inventory
[49,000 – (49,000/1.4)] ( 14,000)
Add: Unrealized profit in ending inventory
[33,600 – (33,600/1.4)] 9,600
Consolidated cost of goods sold P 117,600
40. B. P150,600
Lapwing separate income: P 100,000
Add: Realized profit in beg. inventory 6,000
Less: Unrealized profit in ending inventory ( 10,000)
Lapwing adjusted separate income P 96,000

Forage separate income:

Separate income as reported P 70,000
Add: Realized beg. inventory profit 8,000
Adjusted Forage income P78,000
Majority percentage 70%
Income from Forage P54,600 54,600
Consolidated net income P150,600

201
 Net Income - Attribution to Equity Holders of Parent/Controlling or
Parents Interest

1. D 6. A
2. D 7. C
3. C 8. B
4. B 9. D
5. D 10.C
11.B
Net Income-Parent P5,000,000

Net Income-Subsidiary 800,000

Downstream Sale 100,000

Upstream Sale 40,000

- (5,000)

Dividends (400,000)

Controlling Interest Attributable to Parent P5,535,000

12.C
Net Income-Parent P230,000

Net Income-Subsidiary 150,000

UP, beg. 6,400

UP, end (14,400)

Consolidated net Income P372,000

Minority Interest (14,200)

Unsold Merchandise 2014 (30,000)

Controlling Interest Attributable to Parent P327,800

202
13.B
Net Income-Parent P230,000

Net Income-Subsidiary 150,000

UP, beg. 6,400

UP, end (14,400)

Consolidated net Income P372,000

Minority Interest (15,000)

Controlling Interest Attributable to Parent P357,000

14.B
Net Income-Parent P215,000

Net Income-Subsidiary 150,000

UP, beg. 0

UP, end (10,000)

Consolidated net Income P355,000

Minority Interest (35,000)

Controlling Interest Attributable to Parent P320,000

15-17. B C & A

2014 2015 2016

Net Income-Parent P300,000 P284,000 P264,000

203
 Net Income-
154,000 149,000 165,000
Subsidiary

UG (50,000) - -

RG - - 50,000

Consolidated net
P404,000 P433,000 P479,000
Income

Minority Interest (30,800) (29,800) (33,000)

Controlling Interest
P373,200 (15) P403,200 (16) P446,000 (17)
Attributable to Parent

18-19. A & D

2015 2016

Net Income-Parent P175,000 P250,000

Net Income-Subsidiary 132,000 197,000

UG (14,000) -

RG 2,000 2,000

Consolidated net Income P295,000 P449,000

Minority Interest (12,000) (19,900)

Controlling Interest
P283,000 (18) P429,100 (19)
Attributable to Parent

20. B

Parent’s Net Income P480,000

Subsidiary’s Net Income 224,000

Realized Mark up in beg. Inventory (112,000/1.40)x40% 32,000

204
 Unrealized Mark up in ending Inventory (84,000/1.40)
(24,000)
x40%)

Upstream Sale 50,000

Downstream Sale (14,000)

RG 2,000

Minority interest income 55,000

Controlling Interest Attributable to Parent P695,000

21. B

Net Income-Parent P3,000,000

Net Income-Subsidiary (2,500,000x60%) 1,500,000

Realized Mark up in beg. Inventory

360,000
(20,000x90x50%/150%x60%)

Controlling Interest Attributable to Parent P4,860,000

22. D

Net Income-Parent P240,000

Unrealized Mark up in beg. Inventory (180,000-130,000) x

(16,000)
40% x 80%

Controlling Interest Attributable to Parent P224,000

23. A

Net Income-Parent P160,000

Realized Mark up in beg. Inventory (180,000-130,000) x

16,000
40% x 80%

205
 Unrealized Mark up on ending inventory (210,000-
(14,400)
150,000) x 63/210 x 80%

Controlling Interest Attributable to Parent P161,600

24. A

Net Income-Parent P70,000

Net Income-Subsidiary (20,000x80%) 16,000

Downstream Sale (12,000)

Upstream sale (8,000x80%) (6,400)

Controlling Interest Attributable to Parent P67,600

25. C

Net Income-Parent P85.000

Net Income-Subsidiary (45,000x60%) 27,000

Unrealized Loss 6,000

Realized Loss(6,000/18 years) (333)

Controlling Interest Attributable to Parent P117,667

26. B

Parent’s Net Income P5,210,000

Subsidiary’s Net Income 2,892,000

Intercompany Dividend (600,000x60%) (360,000)

206
 Upstream- UPEI (91,200)

Upstream- RPBI 151,200

Downstream- UPEI (30,000)

Downstream-RPBI 78,750

Realized profit 1,750,000

- 144,000

Unrealized profit (24,000)

Controlling Interest Attributable to Parent P9,720,750

27. C

Net Income-Parent P1,520,000

Net Income-Subsidiary 170,000

Intercompany Dividend (120,000)

Gain 800,000

Upstream (4,000)

Controlling Interest Attributable to Parent P2,366,000

28. C.

Net Income-Parent P3,950,000

Net Income-Subsidiary 2,288,400

Amortization 114,000

Intercompany Dividend (108,000)

Downstream (360,000)

Controlling Interest Attributable to Parent P5,834,400

207
29. A

Parent’s Net Income P1,560,000

Gain on sale of real estate, 1/1/2016 (60,000)

Realized Gain x ((80% x 600,000)/20)) 24,000

Adjusted internally generated income 984,000

Subsidiary’s net income 750,000

Unrealized profit in ending inventory (40% x P45,000) (18,000)

Consolidated net income 1,716,000

NCI net income (20% x P732,000) 146,400

Controlling Interest Attributable to Parent P1,569,600

30. D

Net Income-Parent P500,000

Net Income-Subsidiary (128,000 x 60%) 76,800

Dividend Income (50,000 x 60%) (30,000)

Realized Gross Profit on downstream sale 20,000

Controlling Interest Attributable to Parent P566,800

208
31. D

Parent’s Net Income P1,260,000

Subsidiary’s Net Income 205,800

Intercompany Dividend (600,000x60%) (126,000)

Upstream- UPEI (18,865)

Downstream- UPEI (12,600)

Downstream-RPBI 42,000

Controlling Interest Attributable to Parent P1,350,335

32. B

Parent’s Net Income P480,000

Subsidiary’s Net Income 224,000

Realized Mark up in beg. Inventory (112,000/1.40)x40% 32,000

Unrealized Mark up in ending Inventory (84,000/1.40)

(24,000)
x40%)

Upstream Sale 50,000

Downstream Sale (14,000)

RG 2,000

209
 Minority interest income 55,000

Controlling Interest Attributable to Parent P695,000

33. A

Parent’s Net Income P3,436,00

Subsidiary’s Net Income 1,380,000

Intercompany Dividend (86,000)

Goodwill 129,000

Upstream 45,000

Unrealized Profit (18,000)

Unrealized Gain (28,000)

Controlling Interest Attributable to Parent P4,858,000

34. C

35. B

36. A

37. B

38. A

39. D

40. A

210
 Net Income
Non-Controlling Interest
1. B
2. C
3. A
4. B or D
5. B
6. D
7. C
8. A
9. B
10.C
11.D
Net Assets (1,100,000x20%) P220,000

Net Income (190,000x20%) 38,000

Dividend (125,000x20%) (25,000)

NCI P233,000

12.C (350,000x20%)
13.C
Net Income of Pablo P90,000

Realized Mark up in beg. Inventory(110,000- 12,000

77,000)x40/110

Unrealized Mark up on ending inventory (120,000- (20,000)

72,000)x50/120

Total P82,000
211
 Minority percent 10%

Minority interest income P8,200

14.B
Net Assets (100,000x25) P25,000

Dividends paid 5,000

Minority Interest P30,000

15-16 B & C

Sales P1,000,000

Expenses (400,000)

Net Income P600,000

Unrealized Mark up (50,000)

Total P350,000

Minority Percent 25%

Minority interest income (15) P85,700

Additional Paid in Capital 600,000

Minority interest (16) P685,700

17. A

Sales P150,000

212
 Cost of Sales (110,000)

Unsold Merchandise P40,000

Minority Percent 25%

Total P10,000

Net Income P150,000

Unsold Merchandise-North star (10,000)

Total P140,000

Minority percent 25%

Minority Interest Income P35,000

18-20 D A & B

2014 2015 2016

Subsidiary’s Net
P154,000 P149,000 P165,000
Income

Minority percent 20% 20% 20%

Non-controlling
P30,800 (18) P29,800 (19) P33,000 (20)
interest

21-22 B & A

2015 2016

Subsidiary’s Net
P150,000 P150,000
Income

Unsold Merchandise
8,000 -
(80,000/2 x 20%)

213
 Minority percent 10% 10%

Minority interest
P14,200(21) P15,000 (22)
income

23-24 A & C

2015 2016

Subsidiary’s Net
P132,000 P197,000
Income

UG (14,000) -

RG (14,000/7) 2,000 2,000-

Adjusted Net
P120,000 P199,000
Income

Minority percent 10% 10%

Minority interest
P12,000(23) P19,900 (24)
income

25. C – Investment acquired (90,000/30%=P300,000x30%=P90,000)

26. A

Beginning NCI (570,000+490,000) P1,060,000

Minority Percent 20%

Total P212,000

Share in Net Income 34,640

Dividends (P52, 400x20%) (40,500)

214
 Non-controlling interest P236,140

27. A

Subsidiary’s Net Income P450,000

RG (90,000x25%) 22,500

RG (180,000x25%) 45,000

Non-controlling interest P517,500

28. C

NCI, beginning P705,000

Another NCI (51,000+10,575-3,120) 58,455

Dividends (90,000x20%) (18,000)

Non-controlling interest P745,455

29. D

Subsidiary’s Net Income P224,000

Realized Mark up in beg. Inventory (112,000/1.40)x40% 32,000

Unrealized Mark up in ending Inventory (84,000/1.40)x

(24,000)
40%)

215
 Downstream Sale (14,000)

Realized Profit 2,000

Minority Percent 25%

Minority interest income P55,000

30. A

Subsidiary’s Net income P200,000

Upstream Sale 10,000

1,250

Non-Controlling Interest P208,750

31. A.

Share Capital P1,000,000

Reserves 900,000

Total P1,900,000

Minority percent (100%-(1,450,000/2,000,000)) 27.5%

Non-Controlling Interest P522,500

32. C

Net Assets P1,885,000

Unrealized Profit (660,000-640,000) (20,000)

Fair Value Adjustment (200,000+(200,000x34/40) 370,000

216
 Total P2,235,000

Minority percent 40%

Non-Controlling Interest P894,000

33-35. A B & D

Jewel Gem Total

Net Assets P190,000 P110,000

Cost of investment in
(100,000)
Gemma

Total P190,000 P115,000

Minority Percent 40% 48%

Non-Controlling
P36,000 (33) P55,200 (34) P91,200(35)
Share

36-38 A B & A

Body Fit Total

Net Assets P70,000 P38,000

Cost of investment in
(30,000)
Fit

Fair Value
10,000 5,000
Adjustment

Total P50,000 P43,000

217
 Minority Percent 20% 44%

Non-Controlling
P10,000 (36) P18,920 (37) P28,920 (38)
Share

39-40. B & A

Fusion Spine Total

Net Assets P268,000 P95,000

Cost of investment in
(50,000)
Fit

Fair Value
46,550 27,550
Adjustment

Impairment of Brand (2,000)

Total P262,550 P122,500

Minority Percent 10% 20%

Non-Controlling
P260,260 (39) P24,510 P50,770 (40)
Share

218
 Net Income
Consolidated Group
1. D
Ordinary shares P4,500,000

Share Premium 1,050,000

Consolidated Retained Earnings (3,150,000+542,070- 3,572,070

120,0000)

Non-controlling interest 745,555

Consolidated Shareholders Equity P9,867,525

2. D (850,000-80,000+8,000)
3. C (1,070,000-6,400-120,000+14,400)
4. C
Intercompany receivable/payable P120,000

Intercompany Profit (750,000-500,000) 250,000

Consolidated current assets - overstated P370,000

5. A
Sales to non-affiliates 8000 units

Gross Profit per unit (220-50) X 170

219
 Realized Gross Profit P1,360,000

6. C
Cost of Sales-Parent P380,000

Cost of Sales-Subsidiary 210,000

Intercompany Sales (120,000)

Mark up on beg. Inventory (100,000-75,000) x 16% (4,000)

Mark up on ending inventory (120,000-96,000) x 35% 8,400

Consolidated Cost of Sales P474,400

7. A
Sales-Parent P800,000

Sales-Subsidiary 300,000

Intercompany Sales (100,000)

Consolidated Sales P1,000,000

8. A
Cost of Sales-Parent P600,000

Cost of Sales-Subsidiary 180,000

Intercompany Sales (100,000)

Mark up on ending inventory (100,000 x 25%) x 40% 10,000

Consolidated Cost of Sales P690,000

9. A
Sales-Parent P800,000

Sales-Subsidiary 300,000

220
 Intercompany Sales (100,000)

Consolidated Sales P1,000,000

10.C
Cost of Sales-Parent P600,000

Cost of Sales-Subsidiary 180,000

Intercompany Sales (100,000)

Mark up on ending inventory (100,000 x 40%) x 40% 16,000

Consolidated Cost of Sales P696,000

Gross Profit Rate of Badong (300,000-(180,000/300,000) 40%

11.C. Failure to eliminate the mark up on ending inventory will overstate the
consolidated ending inventory and will understate the cost of sales, thus,
understating the consolidated net income by P1,800. (60,000 x 30% x 10%)
12.D
Cost of Sales-Parent sold to outsiders (660,000- P371,428
140,000)/140%

Realized Markup (240,000-48,000) x 20%/120% (32,000)

Correct Cost of Sales - Parent P339,428

Cost of Sales-Subsidiary 225,000

Realized Markup (510,000-240,000)/120% (28,000)

Consolidated Cost of Sales P536,428

13.A
Sales-Parent P3,850,000

Sales-Subsidiary 1,610,000

221
 Intercompany Sales (480,000+437,5000) (917,500)

Consolidated Sales P4,612,500

14.C
Sales-Parent P1,946,000

Sales-Subsidiary 1,176,000

Intercompany Sales (917,500)

Realized Profit beg. inv– Downstream Sale (42,000)

Unrealized Profit-ending inv. – Downstream sale 12,600

Unrealized Profit-ending inv- Upstream sale 26,950

Consolidated Cost of Sales P2,202,050

15-1. C C B & A
Sales-Parent P21,500,000

Sales-Subsidiary 10,000,000

Intercompany Sales ((9,400,000)

Consolidated Sales P22,100,000 (17)

Cost of Sales-Parent P13,500,000

Cost of Sales-Subsidiary 1,200,000

Intercompany Sales (9,400,000)

Realized Profit beg. Inventory (252,000+78,750) 182,000

222
 Unrealized Profit-ending Inventory (152,000+30,000) 330,750

Consolidated Cost of Sales P10,151,250 (18)

Consolidated Gross Profit (Consolidated Sales-Cost of

P11,948,750 (15)
Sales)

Operating Expenses-Parent 3,240,000

Operating Expenses-Subsidiary 1,100,000

Amortization 40,000

Consolidated Operating Expenses P4,380,000 (16)

19. D

Share Capital (16,491,000+13,500,000+6,720,000) P36,711,000

Additional Paid in Capital 11,169,000

(1,059,000+6,750,000+3,360,000)

Retained Earnings (7,500,000+2,310,000) 9,810,000

Total Shareholders’ Equity P57,960,000

20. A

Ideal Assets P27,000,000

Superior Assets (2,700,000+12,900,000) 15,600,000

Bright Assets (1,380,000+11,850,000) 13,230,000

Goodwill 5,910,000

Total Assets P61,740,000

21. B

Book Value of Asset P52,500,000

223
 Fair Market Value- Identifiable Asset 19,050,000

Goodwill 5,238,000

Investment (15,480,000)

Acquisition Cost (498,000)

- (252,000)

Total Assets P60,558,000

22. A

Ordinary Shares P20,400,000

Share Premium 9,450,000

Retained Earnings 9,450,000

Non-controlling Interest 2,700,000

Total Shareholders’ Equity P42,000,000

23. D

Ordinary Shares P900,000

Share Premium 2,700,000

Retained Earnings (4,860,000+57,600) 4,917,600

Non-controlling Interest 219,600

Total Shareholders’ Equity P8,737,200

24. A

Book Value of Asset P9,000,000

Fair Market Value – Identifiable net asset 1,188,000

Goodwill 522,000

224
 Investment (1,458,000)

Total Assets P9,252,000

25. B

Shareholder Equity P7,308,000

Issued Share 1,350,000

- (270,000)

Gain 351,000

Gain in Beg. 1,539,000

APIC (19,800)

NCI 828,000

Retained Earnings (304,200)

Total Assets P10,782,000

26. D –Total ARC (848,400+89,000)

27. A

 1,000,000/5 P200,000

 500,000/10 50,000

Total Depreciation Expense P250,000

28. A

 1,000,000-800,000 P200,000

 500,000-325,000 175,000

Total Book Value of Equipment P375,000

225
29. A

Sales-Parent P2,000,000

Sales-Subsidiary 1,000,000

Intercompany Sales during 2020 (400,000)

Consolidated Sales P2,600,000

30. B

Gross Profit of Entity A (2,000,000-1,200,000) P800,000

Gross Profit of Entity B (1,000,000-700,000) 300,000

Realized Gross Profit on beg. Inventory (80,000x25%) 20,000

Unrealized Gross Profit on ending Inventory (120,000- (72,000)

48,000)

Consolidated Gross Profit P1,048,000

31. A

Depreciation of white machinery (40,000/4) P10,000

Depreciation of Black Machinery (180,000/6) 30,000

Total Depreciation Expense P40,000

32. B

White Machinery P200,000

Accumulated Depreciation (40,000)

Carrying Amount – January 1, 2019 P160,000

226
 Depreciation – 2019 (10,000)

Depreciation – 2020 (10,000)

Carrying Amount Dec. 31, 2020 P140,000

Black Machinery P270,000

Accumulated Depreciation (180,000)

Carrying Amount – January 1, 2019 P90,000

Depreciation for six months (30,000x6/12) (15,000)

Carrying Amount Dec. 31, 2020 P75,000

Total Carrying Amount P215,000

33. A

Ordinary shares P1,050,000

Issued shares 350,000

Consolidated Retained Earnings 1,470,000

Consolidated Net Assets P2,870,000

34. D

35. B

36. A

37. C

Cost of Sales-Parent P380,000

Cost of Sales-Subsidiary 210,000

Intercompany Sales (120,000)

227
 Mark up on beginning inventory(100,000-75,000)x16% (4,000)

Mark up on ending inventory (120,000-96,000) x 45% 8,400

Consolidated Cost of Sales P474,400

38. D

Book Value of Asset (475,000-100,000) P375,000

Fair Market Value of assets of Lizette 138,000

Goodwill (96,000-(138,000-25,000)x80% 5,600

Total Assets P581,600

39. D

40. D

228
 Retained Earnings/Common Share/Dividend

Attributable to Equity Holders of Parent/Controlling or

Parent’s Interest/Consolidated/Group

1. D
Retained Earnings beg. P12,000,000

Net Loss- 2016 (500,000 x 70%) (350,000)

Dividends (225,000)

Consolidated Retained Earnings-end P11,425,000

2. D
3. A
Retained Earnings beg. P440,000

Net Income 488,700

Dividends -

Consolidated Retained Earnings-end P928,700

4. C
Retained Earnings beg. P3,150,000

Net Income 542,070

Dividends (120,000)

229
 Consolidated Retained Earnings-end P3,572,070

5. B
Retained Earnings beg. P4,860,000

Net Income 57,600

Dividends -

Consolidated Retained Earnings-end P4,917,600

6. C
Net Income reported by Entity A P1,00,000

Gain on bargain purchased 21,000

Dividend income from Entity B (14,000)

Share in adjusted net income of Entity B 95,200

Consolidated Net income attributable to Parent P1,102,200

RE, January 1, 2018 2,000,000

Dividends (200,000)

Consolidated Retained Earnings P2,902,200

7. C – Retained Earnings of the Parent

8. A- Retained Earnings of the Parent
9. A- Retained Earnings of the Parent
10. A
Elaine’s retained earnings - date of acquisition P500,000

Elaine’s retained earnings – end of reporting period (1,400,000)

Total P900,000

x controlling interest percent 80%

230
 Elaine’s retained earnings P720,000

11.D
12.C
13.A
14.D
15.D
16.D
17.D

18.A
Retained earnings beg. P1,460,000

P Co: share of post- acquisition profits 60%635,000 381,000

S Co: share of post- acquisition profits 30%240,000 72,000

Goodwill impairments to date (40,000+92,000) (132,000)

Total Retained Earnings P720,000

19-20 A & A

P Co. S Co.

Retained Earnings, beg. P885,000 P390,000

Unrealized Profit (20,000) -

Retained earnings profits at

(200,000) (150,000)
acquisition

Fair Value Adjustments (30,000) -

Post-Acquisition Profits P635,000 (19) P240,000 (20)

21. D

231
 Retained earnings beg. P485,000

Beta Co: share of post- acquisition profits 72,500

(72.5%x100,000)

Total Retained Earnings P557,500

22. A

23-24 C & A

Jewell Gem

Retained Earnings, beg. P90,000 P65,000

Pre-acquisition retained
(45.000) (40,000)
Earnings

Retained Earnings, end P45,000 (23) P25,000 (24)

25. A

Retained earnings - Parent P560,000

J Co: share of post- acquisition profits 60%x45,000 27,000

G Co: share of post- acquisition profits 52%x25,000 13,000

Total Retained Earnings attributable to parent P600,000

26-27. D & A

Body Fit

Retained Earnings, beg. P25,000,000 P10,000,000

Fair Value Movement (1,000,000) -

232
 Pre-acquisition retained
(10.000,000) (6,000,000)
Earnings

Post –Acquisition Profits P14,000,000 (26) P4,000,000 (27)

28. C

Retained earnings beg. P135,000,000

Pension scheme (100,000)

Convertible bonds (2,300-1,800) (500,000)

Exchange of plant asset 3,000,000

Body Co: share of post- acquisition retained earnings 11,200,000

80%x14,000

Fit Co: share of post- acquisition profits 56%x4,000 (2,240,000)

Total Retained Earnings P150,840,000

29-30. A & C

Fusion Spine

Retained Earnings, beg. P138,000,000 P35,000,000

Fair Value Movement (2,450,000) (1,450,000)

Impairment Loss (2,000,000) -

Pre-acquisition retained (136,000,000) (30,000,000)

233
 Earnings

Post –Acquisition Profits P(2,450,000) (29) P3,550,000 (30)

31. A

Retained earnings beg. P120,000,000

Fusion Co: share of post- acquisition profits (2,210,000)

(2,450x90%)

Spine Co: share of post- acquisition profits80%x3,550 2,840,000

Share of profit associate(24-20)x40% (1,600,000)

Total Retained Earnings P122,200,000

32-34 A B & A

Y Z W
‘million ‘million ‘million

Retained earnings beg. 210 30 17

Intragroup profit of (15)

inv.

Fair Value Adjustments 2

Retained earnings (120) (20) (7)

@acquisition

Post-acquisition profits 96 (3) 10

35. A ‘million

Retained earnings beg. 1,050

Y Co: share of post- acquisition profits (2/3x96) 64

234
 w Co: share of post- acquisition profits60%x3 2

Z Co: share of post- acquisition profits (20%X10) (2)

Total Retained Earnings P1114million

36. C

37. B

38. B

39. B

40. B

 CONSOLIDATED FINANCIAL STATEMENTS

Accounting for SME

1. A Carrying Amount P 300,000

Recoverable Amount (265,000)

Impairment Loss P (35,0000)

2. B Recoverable Amount P 265,000

3. B Loss of Entity Z P1,000,000

Multiply by percentage of ordinary shares 30%

Loss sharing P (30,000)

4. B Carrying Amount P 300,000

Loss sharing (30,000)

Recoverable Amount (265,000)

Impairment Loss P (5,000)

235
5. B Recoverable Amount P 265,000

6. A Carrying Amount P 300,000

Fair value (275,000)

Expense P 25,000

7. C Fair value P 275,000

8. B Unrealized Gain P 18,000

Dividends 8,400

Transaction Costs ( 1,850)

Profit P 18,550

236
9. A Dividends P 3,150

Impairment Loss (12,600)

Loss in the Income Statement P (9,450)

10. C Share in Net Income P 6,300

Impairment Loss (2,625)

Profit P 3,675

11. B Acquisition Cost P 60,900

Impairment Loss (1,750)

Investment – end P 59,150

12. D Acquisition Cost P 58,000

Dividends (5,250)

Loss sharing (5,675)

Investment – end P 47,075

13. B

14. A Investment – beginning P 500,000

Share in Net Income 100,000

Dividends (30,000)

Impairment Loss (20,000)

Investment – ending P 550,000

15. D Investment P 500,000

16. B Investment – beginning P 500,000

Share in Net Income 100,000

Investment – ending P 650,000

237
17. A 29. B

18. D 30. C

19. B 31. B

20. D 32. B

21. A 33. B

22. D 34. C

23. C 35. C

24. C 36. B

25. D 37. D

26. C 38. A

27. D 39. C

28. C 40. D

238
  FOREIGN CURRENCY TRANSACTIONS
Without hedging activities (import, export, lending and borrowing
transactions)

1. B Nov. 2, 2012 spot rate P .4245

Dec. 31, 2013 spot rate (.4295)

Forex loss per unit P .005

Multiply by foreign currency 50,000

Forex Loss P ( 250)

2. D Dec. 31, 2013 – ACE’s year end P 240,000

July 1, 2014 - Date Repaid (280,000)

Forex Loss P (40,000)

3. D Principal P 328,000

Amount on due date (312,000)

Forex Loss P (16,000)

4. D Accounts Receivable P 120 ,000

Prepaid Insurance 55,000

Copyright 75,000

Amount included in FIL-AM P 250,000

5. D April 8 Exchange rate $ 1.54

May 8 Exchange rate 1.43

Forex loss per unit $ .11

Multiply by foreign currency 35,000

Forex Loss P ( 3,850)

239
6. D Collection – Feb.18, 2018 $ 144,000

Receivable ( 132,000)

Forex Gain $ 12,000

7. A

8. D

9. D

10. C

11. A

12. C

13. D

14. D

15. C

16. D

17. B

18. A

19. A Receivable – Dec. 31, 2017 $ 8,000

Receivable – March 2, 2018 ( 6,900)

Forex Loss $ (1,100)

20. D Value of Loan – April 1 $ 97,000

Value of Loan – Dec. 31 (103,000)

Forex Loss $ (6,000)

21. D Value of Loan – Dec. 31 $ 103,000

Value of Loan – April 1, 18 ( 105,000)

Forex Loss $ (2,000)

240
22. B

23. C

24. B

25. B

26. D

27. A

28. B

29. D

30. C

31. A Sales £ 1,500,000

Multiply by weighted average rate $ 1.5873

Total Sales $ 2,380,950

32. B Receivable £ 280,000

Multiply by exchanged rate for Dec. 31 $ 1.6129

Total Receivable $ 451,612

33. A

34. D

35. A

36. A

37. A

38. C

39. B

40. A

241
Hedges that not requires a Hedge Accounting

Exposed Asset (import) or Liability (export) Position

1. C Spot rate – Dec. 16, 17 $ 0.00090

Spot rate – Dec. 31, 17 0.00092

Forex gain per unit $ .0002

Multiply by foreign currency 10,000,000

Forex gain $ 200

2. A Spot rate – Dec. 16, 17 $ 0.00090

Spot rate – Jan. 15, 18 0.00095

Forex gain per unit $ .0005

Multiply by foreign currency 10,000,000

Forex gain $ 500

3. D

4. D

5. C Note Amount – Oct. 1, 17 $ 870,000

Note Amount – Dec. 31, 17 ( 860,000)

Forex Gain $ 10,000

6. D Note Amount – Dec. 31, 17 $ 860,000

Note Amount – Oct. 1, 18 ( 881,000)

Forex Loss $ ( 21,000)

7. D Note Amount – Oct. 15, 17 $ 308,000

Note Amount – Dec. 31, 17 ( 295,000)

Forex Gain $ 13,000

242
8. D Note Amount – Dec. 31, 17 $ 295,000

Note Amount – Oct. 15, 18 ( 299,000)

Forex Loss $ ( 4,000)

9. D

10. D

11. D

12. A Inventory – Nov. 1, 2017 $ 120,000

Multiply by exchange rate – Dec. 31, 17 .20

Inventory – Dec. 31, 2018 $ 24,000

13. D Inventory – Nov. 1, 2017 $ 120,000

Multiply by avergae rate .24

Inventory – Dec. 31, 2018 $ 28,800

14. A

15. A

16. D

17. D

18. C

19. D

20. B

21. C

22. A

23. D

24. D

243
25. D

26. D

27. C

28. D

29. C

30. C

31. D

32. D

33. C

34. D

35. D

36. D

37. B

38. D

39. D

40. B

244
Hedges that not requires a Hedge Accounting

Speculation

1. D Inventory Sold £ 10,000

Multiply by spot rate $ 1.7241

Total Sales $ 17,241

2. D Sales – Dec.1 $ 17,241

Sales – Dec. 31 (18,182)

Forex Gain $ 941

3. B Sales – Dec.31 $ 18,182

Sales – Jan. 30 (16,666)

Forex Loss 1 $ (1516)

4. A Foreign Currency $ 2,000,000

Multiply by spot rate – May 8 1.25

Accounts Payable $ 2,500,000

5. C Accounts Payable – May 8 $ 2,500,000

Accounts Payable – May 31 (2,520,000)

Forex Loss $ 20,000

6. D Foreign Currency $ 2,000,000

Multiply by spot rate – June 7 1.20

Accounts Payable - June 7 $ 2,400,000

7. B 0, since there is no cost, there is no value for the contract on June 1.

8. D 0, since there is no cost, there is no value for the contract on Dec 1.

245
9. B Ordered parts cost $ 100,000

Multiply by spot rate – June 12 .28

Amount of Inventory $ 28,000

10. C

11. B

12. D Ordered parts cost Rs 100,000

Multiply by spot rate – Aug. 7 $ .28

Amount of Inventory $ 2,800

13. D Ordered parts cost ฿ 1,000,000

Multiply by spot rate $ .028

Accounts Payable $ 28,000

14. C

15. C

16. C Forward Contract Receivable – Dec.1, 2018 P 480,000

Forward Contract Receivable – Dec.31, 2018 ( 510,000)

Forward Contract Gain P 30,000

17. B Accounts Payable – November 30, 2018 P 450,000

Accounts Payable – December 31, 2018 (500,000)

Foreign Currency Loss P (50,000)

18. B November 1, 2020 90-day forward rate P 82,000

December 31, 2020 30-day forward rate (92,000)

Forward Contract Loss P (10,000)

19. B Forward Rate P 56.50

Spot Rate – March 31, 2018 ( 56.32)

246
 Forex Loss per unit P .18

Multiply by foreign currency 5,000

Forex Loss P (900)

20. D 90-day future rate - Nov.1 P 0.78

30-day future rate – Dec.31 (0.82)

Forex Loss per unit P .04

Multiply by foreign currency 10,000

Forex Loss P (400)

21. A Forward Rate – Oct.1 P 0.53

Forward Rate – Dec. 31 (0.58)

Forex Loss per unit P .05

Multiply by foreign currency 1,000,000

Forex Loss P (50,000)

22. B Forward Rate – Oct.1 P 0.53

Forward Rate – Dec. 31 (0.58)

Forex Gain per unit P .05

Multiply by foreign currency 1,000,000

Forex Gain P 50,000

23. C Forward Rate – Oct.1 P 0.53

Forward Rate – Dec. 31 (0.58)

Forex Loss per unit P .05

Multiply by foreign currency 1,000,000

Forex Loss (Liability) P (50,000)

247
24. C

25. D None, since there is no transaction yet.

26. A Foreign Currency ¥ 1,000,000

Multiply by forward rate – Dec. 31 P .58

Foreign Currency Receivables P 580,000

27. A Spot rate – December 31, 2017 P .56

Spot rate – March 31, 2018 (.57)

Forex Gain per unit P .01

Multiply by foreign currency 1,000,000

Forex Gain P 10,000

28. B Forward rate – December 31, 2017 P .58

Spot rate – March 31, 2018 (.57)

Forex Loss per unit P .01

Multiply by foreign currency 1,000,000

Forex Loss P (10,000)

29. D Spot rate – March 31, 2018 P .57

Forward rate – October 1, 2017 (.53)

Forex Gain per unit P .04

Multiply by foreign currency 1,000,000

Firm Commitment account balance P 40,000

30. B Forward rate – October 1, 2017 P .53

Multiply by foreign currency 1,000,000

Value of Equipment P 530,000

248
31. A Forward Rate – Oct. 12, 2017 P 3.15

Forward Rate – Dec. 11, 2017 (2.98)

Forex Loss per unit P .17

Multiply by foreign currency 1,000,000

Forex Loss P (17,000)

32. B Forward Rate – Oct. 12, 2017 P 3.15

Forward Rate – Dec. 11, 2017 (2.98)

Forex Gain per unit P .17

Multiply by foreign currency 1,000,000

Forex Gain P 17,000

33. D Foreign Currency ฿ 100,000

Multiply by spot rate – Dec. 11, 2017 P 3

Sales P 300,000

Forex Gain – Dec. 11, 2017 17,000

Total Sales P 309,000

34. C Spot rate- Dec. 12, 2017 P 3.09

Multiply by Foreign Currency 100,000

Accounts Receivable P 309,000

35. B Spot rate – Dec. 11, 2017 P 3.00

Spot rate – Dec. 31, 2017 (3.09)

Forex Gain per unit P .09

Multiply by Foreign Currency 100,000

Forex Gain P 9,000

249
36. A Forward Rate – Dec. 12, 2017 P 3.15

Forward Rate – Dec. 31, 2017 (3.08)

Forex gain per unit P .07

Multiply by Foreign Currency 100,000

Forex Gain P 7,000

37. D Spot rate – Dec. 20, 2018 P 2.97

Forward rate – Dec. 11, 2017 (2.98)

Forex Loss per unit P .01

Multiply by Foreign Currency 100,000

Forex Loss P (1,000)

38. B Spot rate – Dec. 31, 2017 P 55.6

Spot rate – March 1, 2014 (55.10)

Forex Gain per unit P .5

Multiply by foreign currency 10,000

Forex Gain P 5,000

39. D Forward Rate – Dec. 31, 2017 P 56.5

Spot rate - March 1, 2018 (55.10)

Forex Gain per unit P 1.4

Multiply by foreign currency 10,000

Forex Gain P 14,000

40. A

250
Hedges that require a Hedge Accounting:

Fair Value Hedge

Hedge of a Firm Commitment (Purchase or Sale Transaction)

Multiple Choice

11 C 21 B 31 A
12 C 22 C 32 A
13 C 23 A 33 D
14 D 24 B 34 A
15 C 25 D 35 A
16 C 26 D 36 D
17 A 27 B 37 A
18 C 28 D 38 A
19 D 29 B 39 A
20 B 30 A 40 A

Problem-solving

15. C – fair value hedge

Hedged Item/Commitment:
* 10/02/2017: Original forward rate (180 days) P 0.53
12/31/2017: Current (remaining) forward rate (90 days)   0.58
Forex loss per unit P 0.05
Multiplied by: Number of foreign currencies 1,000,000
Foreign exchange loss due to hedged item/commitment P 50,000

Hedge Instrument:
10/02/2017: Original forward rate (180 days) P 0.53
12/31/2017: Current (remaining) forward rate (90 days)   0.58
Forex loss per unit P 0.05
Multiplied by: Number of foreign currencies 1,000,000
Foreign exchange gain due to forward contract P 50,000

Net gain (loss) P 0

251
This hedge is called a “perfect” hedge and the hedge is considered to be highly
effective which satisfies the 80% - 125% acceptable range.

This criteria of 80% - 125% note under PFRS 9 was already removed

The forward rate generally differs from the spot rate, but as one moves closer to the
expiration date (or settlement date) the difference between the spot rate and the
forward rate for the remaining period of the contract becomes smaller and smaller so
that at the expiration date, the forward rate will have converged with the spot rate.

Protecting against an adverse change in the exchange rate between the order date
(commitment date) and the transaction date is hedging a firm foreign-currency
denominated commitment.

16. C – fair value hedge

The entry to record the foreign exchange loss due to hedged item/commitment on
December 31, 2017 would be:

Foreign Exchange Loss – Firm Commitment 50,000

Foreign Currency Exchange Firm Commitment (a liability) 50,000

The Firm Commitment account is a temporary account for an unrecognized firm

commitment firm, if it has a debit balance, it is shown in the asset section of the
balance sheet; when it has a credit balance, as it is in this problem, it is shown in the
liability section.

17. A

October 2, 2017: (no initial fair value – PAS 39 par. 43) P 0

December 31, 2017:
10/02/2017: Original Forward Rate (180 days) P 0.53
12-31-2017: Current remaining forward rate (90 days) 0.58
Forex gain per unit P 0.05
X: No. of yens 1,000,000
Forex gain on forward contract P 50,000

Fair value of forward contract P 50,000

252
18. C

Fair value of forward contract, 12/31/2017 (a receivable) P 50,000

3/31/2018 Loss forward contract/hedging instrument
[(P0.58-P0.57) x 1,000,000] 10,000
Fair value of forward contract, net, 3/31/2018 (a receivable P 40,000

19. D – fair value hedge

December 31, 2017 balance of Foreign Currency Exchange

Firm Commitment Account (a liablility) P 50,000
March 31, 2018: Foreign Currecncy Exchange Firm
Commitment Account (a receivable)
12/31/2017: Current (remaining) forward rate (180 days) P 0.58
3/31/2018: Spot rate*   0.57
Forex gain per foreign currency unit P 0.01
X: Number of foreign currencies   1,000,000
Foreign exchange gain due to hedged item/commitment P 10,000
   
Balance of Firm Commitment, March 31, 2018
(a net liability account) P 40,000

*If the date of transaction and date of settlement of forward contract falls on the same
date, obviously the spot rate and the current (remaining) forward rate should also be
the same.

20. B

PAS 39 / PFRS 9 states that “When an entity enters into firm commitment to acquire an
asset or assume a liability that results from the entity meeting the firm commitment
attributable to the hedged risk that was recognized in the balance sheet.”

Incidentally the entries to record on:

The date of transaction (date of purchase and delivery of equipment) would be:

Equipment (spot rate, 3/31/18, P .57 x 1,000,000) 570,000

Cash or Investment in Foreign Currency 570,000

253
To remove the carrying amount of the firm commitment from the balance sheet and
adjust the initial carrying amount of the equipment that results from the firm
commitment.

Foreign Currency Exchange

Firm Commitment 40,000

Equipment 40,000

Or, alternatively:

Equipment 530,000

Foreign Current Exchange Firm Commitment

(net liability) 40,000

Cash or Investment in Foreign Currency 570,000

Note that the Foreign Currency Exchange Firm Commitment account of P40,000 (a
liability) is effectively transferred to asset acquired. The value of the equipment should
be the original forward rate on the October 2, 2017 (date of hedging). P0.53 (P0.53 x
1,000,000 = P530,000).

21. B – fair value hedge

P1.30 spot rate (on delivery date/transaction date) x 200,000 baht = P260,000

22. C – fair value hedge

Incidentally the entries to record on:

The date of transaction (date of purchase and delivery of equipment) would be:

Equipment (spot rate, 11/30/2017, P1.30 x 200,000) 260,000

Cash or Investment in Foreign Currency 260,000

To remove the carrying amount of the firm commitment from the balance sheet and
adjust the initial carrying amount of the equipment that results from the firm
commitment.

Foreign Currency Exchange

Firm Commitment* 10,000

254
 Equipment 10,000

*The foreign currency exchange rate gain due to hedged item/commitment was
computed as follows:

10/01/2017: Current forward rate P 1.35

11/30/2018: Spot rate   1.30
Forex gain per foreign currency P 0.05
X:Number of foreign currency 200,000
Foreign exchange gain due to hedged item/commitment P 10,000

If the date of transaction and date of settlement of forward contract falls on the same
date, obviously the spot rate and the current (remaining) forward rate should also be
the same.

23. A

Levin is a buyer of goods, and a seller of foreign currency under a forward contract.
Hedging is setting aside a fund to a bank or financial institution that is willing to absorb
any gain or loss resulting from a hedged transaction.

It is called a hedged transaction because, no matter what the spot rates are, the buyer
(or seller) who made a hedged contract, he would be paying (or receiving) the stated
amount in the hedge contract.

FC Receivable FC Payable
(¥400,400 x P0.55) 220,220
(¥400,400 x P0.50) 200,200

As a buyer of goods (hedged transaction), he would be recording his payable using

current rates. So, on December 31, his payable is 400400 x 0.50. You use the forward
rates because it was done through a forward contract.

As a seller of forex (hedging instrument), he would be recording the value of the

forward contract at its value upon incepcion (December 1). So, it would be 400,400 x
0.55.

24. B

The focus was the forward contract, which was entered into on 12/12, the forward rate
was 0.60.

255
The report period being asked was 12/31, the forward rate was 0.63.

Profit or loss is computed as (0.60 - 0.63) x 225000 = 6750.

The transaction is a purchase, so the hedging instrument was a receivable. The value
increased, so it was a gain.

25. D

A - Forward contract receivable is (P46 x $93,750) = P 4,312,500.

B - It was a net forex gain, not loss.

C - Zero, it was only the transaction date. No changes yet on the forex.

Forward
Payable Contract
@ spot rate Receivable
Oct. 1 43 44.00
Dec. 31 47 Loss 4 46.00 Gain 2 Net loss 2
Jan. 30 50 Loss 3 50.00 Gain 4 Net gain 1
(on settlement
date)
x 93750

The rate used in the forward contract on Jan. 30 (settlement date) is actually the spot
rate. It just so happens that the spot rate and the forward rate are both 50. Just keep
in mind that it's the spot rate to be used in there.

26. D

Forex gain or loss on firm commitment on Dec. 31 (46.70 minus 44.30) x 15750 =
37,800

S Company is a seller, from that transaction it will have a receivable. The value of forex
using the forward rates increased, so it's a gain.

256
27. B

Forward rate P 1.65

Spot rate   1.60
Decrease exchange
P 0.05
rate
100,00
Baht
0
(5,000
Forex gain (loss) P
)

28. D

Spot rate
12/1/2013 (P6.01 x 1,000,000 Franc) P 6,010,000
12/31/2013 (P6.16 x 1,000,000 Franc)   6,160,000 P (150,000)
60-day futures
12/1/2013 (P6.06 x 1,000,000 Franc) P 606,000
12/31/2013 (P6.07 x 1,000,000 Franc)   6,070,000 10,000
Net forex gain (loss) P (140,000)

29. B

12/31/2013 Forex gain

[$5,000 x (P56.50-P56.60)] P 500
3/31/2014 Forex loss
Forward rate
($5,000 x P56.60) P 283,000
Spot rate
($5,000 x P56.32)   284,600   1,400
Net forex gain (loss) P (900)
30. A

90-day futures 1/1/2013 P 0.78

30-day futures 12/31/2013 0.82
Forex exchange rate P 0.04
x: foreign currency units 10,000
Forex loss P (400)

31. A

257
Foreign currency translation gain (loss) should be included in the Profit and Loss.

32. A
June 30 [400,000 FC x (P1.381 - P1.370)] P 4,400
July 31 [400,000 FC x (P1.385 - P1.381)] 1,600
Net forex loss P 6,000
33. D

June 30
(P2,600 - P1,400) P 1,200
July 31
[400,000 - (P1.385 - P1.375) - P2,600] 1,400
Net gain P 2,600

34. A

Down payment
(50,000 FC x P1.350) P 67,500
Balance due
(400,000 x P1.370) 548,000
Cost of Machinery P 615,500

35. A

36. D

Forward
Contract Option
Gain (loss) commitment
[100,000 FC x (P1.250 - P1.320)] P (7,000) P (7,000)
Gain on hedging instrument
[100,000 FC x (P1.320 - P1.250 )] 7,000 7,000
Gain (loss) excluded from hedge effectiveness
[100,000 FC x (P1.270 - P1.250 )] (2,000)
Premium paid is on time value (2,100)
Loss effect on earnings P (2,000) P (2,100)

258
37. A

Dec. 1, 2013 Dec. 31, 2013

Australian dollars 70,000 70,000
divided by Accounts receivable (A$) 42,000 41,700
A$ 1.667 1.679

38. A

Australian dollars 70,000

multiplied by 30-day forward rate P 0.57
Foreign Currency Payable to Bank P 39,900

39. A

Peso receivable from Metro Bank – P40,600

40. A

Foreign Currency Receivable from Bank 82,000

divided by KRW 400,000
Direct exchange rate P 0.205

259
Hedges that requires a Hedge Accounting

Cash Flow Hedge

Hedge of a Firm Commitment (Purchase or Sale Transaction)

Multiple Choices

1 A 11 A 21 B 31 A
2 D 12 B 22 C 32 A
3 B 13 D 23 B 33 A
4 D 14 A 24 C 34 A
5 C 15 D 25 D 35 D
6 B 16 B 26 A 36 B
7 E 17 A 27 C 37 C
8 B 18 B 28 C 38 B
9 C 19 D 29 D 39 B
10 C 20 A 30 D 40 B

Problem-solving

1. D – cash flow hedge

2. A – cash flow hedge

10/02/2017: Original forward rate (180 days) P 0.53

3. D 12-31/2017:
cash flow hedge
Current (remaining) forward rate (90 days) 0.58
 
Forex gain per unit P 0.05
Multiplied by: Number of foreign currencies 1,000,000
Foreign exchange gain due to forward contract P 50,000

4. B
Incidentally, the entries to record on:

The date of transaction (date of purchase and delivery of equipment) would be

Equipment (spot rate, 3/31/18, P.57 x 1,000,000) 570,000

Cash or Investment in Foreign Currency 570,000

To remove the gain recognized in other comprehensive income and the initial
carrying amount of the equipment that results from the hedged transaction by
this amount.

260
 Other Comprehensive Income – gain 40,000*

Equipment 40,000

10/02/2017: Original Forward rate (6 months) P 0.53

3/31/2018: Spot rate*   0.57
Forex gain per foreign currency P 0.04
X: No. of yens 1,000,000
Forex gain P 40,000

*If the date of transaction and date of settlement of forward contract fall on the
same date, obviously the spot rate and the current (remaining) forward rate
should also be the same.

Or, alternatively:

Equipment 530,000

Other Comprehensive Income – gain 40,000

Cash or Investment in Foreign Currency 570,000

Note that the Other Comprehensive Income account of P40,000 is effectively

transferred to asset acquired. The value of the equipment should be the original
forward rate on the October 2, 2017 (date of hedging). P.53 (P.53 x 1,000,000 =
P530,000)

In summary, the result of these accounting entries is as follows:

Equipment 530,000

Cash or Investment in Foreign Currency 530,000

Which reflects the starting presumption, i.e. that Asser Tamayo, Inc. had
effectively fixed the purchase price of its machine at P530,000. However, the
route to get to this position may also seem slightly convulated.

5. A

261
 Receivable Futures contract
@ spot rate payable
Nov. 1 51.30 50.50
Dec. 31 52.60 Gain 1.3 52.40 Loss 1.9 Net loss 0.6
Jan. 31 51.80 Loss 0.8 51.80 Gain 0.6 Net loss
(0.2 x 315000)
63000

The rate to be used in the futures contract is 90-day futures on Nov. 1, since there are
90 days before settlement date; 30-day futures on Dec. 31, since there are 30 days
before settlement, and spot rate on settlement date.

6. B
Forex gain or loss on the forward contract on Feb 28 (62.05 minus 62.35) x
625000 = 187500

SBC company is the buyer, it has a payable. The forward contract would then be
a receivable. As such, the decrease in rates would mean a loss.

Payable Futures contract

spot rate receivable
Dec. 1 61.55 60.75
Dec. 31 62.85 62.35
Feb. 28 62.05 62.05 Loss 0.3
7. D
$.05 × C$150,000 = $7,500

8. A
$.04 × C$150,000 = $6,000

9. B
$.03 × C$150,000 = $4,500

10.C
Strike Price $.97 × C$150,000 = $145,500

11.B
12.C
13.D

262
 [$1.41 - $1.37 = $.04 × €400,000 = $16,000 Discount] & [$1.41 - $1.36 = $.05
× €400,000 = $20,000 Adjustment at Delivery]

14.A
P5,000,000

15.C
Variable rate on Jan. 1, 2016 0.01
Underlying interest rate 0.06
Difference   0.04

Net cash settlement

(P5,000,000 x 4%) P 200,000
PV of ordinary annuity 2.49
Derivative asset P 498,000

16.C

Variable rate on Jan. 1, 2017 0.08

Underlying interest rate 0.06
Difference   0.02

Net cash settlement

(P5,000,000 x 2%) P 100,000
PV of ordinary annuity 1.78
Derivative asset P 178,000

17.D

Variable rate on Jan. 1, 2016 0.06

Underlying interest rate 0.10
Difference   0.04

Net cash settlement

(P5,000,000 x 4%) P 200,000
PV of ordinary annuity 2.67
Derivative liability P 534,000

18. D
Variable rate on Jan. 1, 2017 0.07
Underlying interest rate 0.10
Difference   0.03

Net cash settlement 263

(P5,000,000 x 3%) P 150,000
PV of ordinary annuity 1.81
Derivative liability P 241,500
 19. A
Principal P 5,000,000
multiplied by interest rate 0.06
Interest Expense P 300,000

20.A
Market Price, Dec. 31, 2015 P 110
Underlying Price   100
Difference 10
Payment for call option 50,000
Net cash settlement P 500,000

21.A
Market Price, July 1, 2016 P 115
Underlying Price   100
Difference 15
Payment for call option 50,000
Net cash settlement P 750,000

22.C
Call option is not exercise because the market price on July 1, 2016 is lower than
the call price.
23.D
24.B
Australian lobster - kilos 8,000
multiplied by price per kilo P 1,200
Notional Value of forward contract P 9,600,000

25.C
Market Price, Dec. 31, 2015 P 1,500
Underlying Price   1,200
Difference P 300

Net cash settlement

(8,000 kilos x P300) P 2,400,000 264
Present value 0.91
Derivative asset P 2,184,000
26. B
Market Price, Dec. 31, 2016 P 1,000
Underlying Price   1,200
Difference P 200
No. of kilos 8,000
Net cash settlement P 1,600,000

27. B
Increase in Fair value:
Fair value of call option P 2,500,000
(500,000 bushels x P5)
Payment for call option   (100,000) P 2,400,000
Decrease in Fair value:
Fair value of call option
(500,000 bushels x P4) P 2,000,000
Call option, Dec. 31, 2015   2,500,000   500,000
Gain on call option P 1,900,000

28.B
Purchase milk
(50,000 units x P9) P 450,000
Purchase ice cream
(30,000 units x P25) (750,000)
Purchased sugar
(20,000 units x P15) 300,000
Derivative asset P 600,000

265
Hedges that requires a Hedge Accounting

Cash flow hedge

Hedge of a Forecasted Transaction (Purchase or Sale

Transaction)

Multiple Choices

1 D 11 D 21 B 31 B
2 D 12 D 22 C 32 A
3 E 13 D 23 A 33 C
4 D 14 C 24 A 34 B
5 D 15 C 25 A 35 A
6 B 16 A 26 A 36 A
7 B 17 B 27 C 37 A
8 C 18 A 28 D 38 A
9 C 19 A 29 A 39 A
10 C 20 A 30 D 40 A

Problem-solving

1. A
The loss on the forward contract is reported in other comprehensive income.
2. B
The total gain on the forward contract is ($1.30 - $1.26) x €100,000 = $4,000.
Changes in the value of the forward are reported in other comprehensive income
until the hedged forecasted transaction is reported in income. In this case, the
forecasted transaction results in sales revenue, reported in 2011.
3. C
Changes in the value of the forward contract remain in other comprehensive
income until the merchandise is sold. The merchandise is reported at the spot
rate at the date of purchase, $1.42.
4. A
Changes in the value of the forward are reported in other comprehensive
income. The $100 loss on the payable is exactly offset by a reclassification of
$100 out of other comprehensive income, so there is no net effect on income.
5. A
At the end of the year, other comprehensive income has a credit balance of
$100. When the merchandise is sold, it is reclassified as a reduction in cost of

266
 goods sold; $14,100,000 = $14,200,000 - $100,000.

6. A
The equipment is recorded at the spot rate of $1.35 x €100,000 = $135,000,
adjusted for the $6,000 [= $1.35 - $1.29) x €100,000] gain on the forward
contract.

7. A
Cost of the Option Contract $4,000
8. C
$2.17 - $2.13 = $.04 × £250,000 = $10,000 Positive Adjustment
9. D
Cost of the Option Contract $5,000
10.A
11.D
12.B
Option Expense is the Balance Sheet Fair Value of the Option for 2014 = $1,600
13.A
$2.01 - $2.00 = $.01 × £100,000 = $1,000 Adjustment to AOCI for 2014
14.C
£100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment =
$201,000 COGS
15.B
[£100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option
in 2014] = $201,600
16.A
FC Receivable from Exchange Dealer
(500,000 euros x $1.01) 505,000
Dollars Payable to Exchange Dealer 505,000
17.A
Foreign exchange loss – Other Comprehensive
Income (Balance Sheet) 10,000
FC Receivable to Exchange Dealer 10,000
To record a gain on the change in forward contract (500,000 x ($1.01-$0.99))

267
18.A
Foreign exchange loss – Other Comprehensive
Income (Balance Sheet) 5,000
FC Receivable to Exchange Dealer 5,000
To adjust the forward contract to its market value of $20,000.

The change in value of the forward contract [($.99 12/31 spot rate less $0.98
January 31, 2004 spot rate) x 500,000 euros] is $5,000.
19.A
Investment in FC (500,000 euros) 490,000
Dollars Payable to Exchange Dealer 505,000
FC Receivable from Exchange Dealer 490,000
Cash 505,000
To settle with the trader
20.A
21.A
Suppose that in February, the inventory is sold for $600,000. The entries to
record the sale and to reclassify the amounts from Other Comprehensive Income
(a $15,000 loss, including $10,000 loss at December 31, 2003 plus the $5,000
additional loss at January 31, 2004) into earnings are as follows:
Cash 600,000
Cost of goods sold 490,000
Sales 600,000
Inventory 490,000
To record the sale

Cost of goods sold (Income Statement) 15,000

Foreign exchange loss – Other Comprehensive
Income (Balance Sheet) 15,000
To reclassify the amounts from accumulated other comprehensive income
into earnings (cost of goods sold).

268
Hedges that requires a Hedge Accounting

Hedge of a Net Investment in Foreign Entity

Multiple Choice

1 C 11 D 21 D 31 D
2 B 12 A 22 A 32 C
3 B 13 D 23 A 33 B
4 A 14 C 24 A 34 B
5 B 15 A 25 A 35 D
6 B 16 D 26 A 36 C
7 C 17 C 27 A 37 A
8 A 18 A 28 D 38 A
9 A 19 A 29 A 39 B
10 A 20 C 30 A 40 B

Problem-solving

1. A

2012 2013

Assets P 361,781,250 P 407,906,250

2012 - Loss P 6,000,000

2013 - Gain 15,093,750 Liabilities 240,656,250 256,500,000
Cumulative Common
adjustment P 9,093,750 stock 77,625,000 77,625,000
Retained
earnings 52,500,000 64,687,500
Dividends 3,000,000

P (6,000,000) P 9,093,750
2. A
No. of rupee 25,000
Multiplied by exchange rate P 1.24
Income from subsidiary P 31,000

3. D

No. of rupee 5,000

Multiplied by exchange rate P 1.30
269
Income from subsidiary P 6,500
4. C
Pesos rupee
Goodwill 42,000 35,000
Impairment (4,340) (3,500)
Balance 37,660 31,500

rupee - lower 31,500

multiplied by exchange rate P 1.32
Translation Goodwill P 41,580

5. B

Translation adjustment from

translating the trial balance P 12,000
Translation adjustment from
translating the goodwill 3,920
Total translation adjustment P 15,920

6. B

Investment in Subsidiary account, Jan. 1, 2013 P 1,600,000

Share in Subsidiary net income
(800,000 Yen x 70% x P0.57) 319,200
Translation adjustment
(P25,000 x 70%) 17,500
Share of Subsidiary dividends
(50,000 Yen x 70% x P0.59) (20,650)
Investment in Subsidiary account, Dec. 31, 2013 P 1,916,050

7. D

270
8. C
NZ dollar rate Peso
Net Assets, Jan. 1, 2013 20,000 P 15 P 30,000
Net Income 10,000 19 190,000
Net Assets, Dec. 21, 2013 30,000 490,000
Net Assets at current rate 30,000 4 630,000
Translation adjustment - P 140,000

9. A
Exchange
Yen Peso
rate
Net Assets Beg. 200,000 0.44 88,000
Net Income 200,000 0.46 92,000
Net Assets translated at rate
During the year 400,000 180,000
At the end of the year 400,000 0.48 192,000
OCI - translation adjustment - credit -   (12,000)

10.A

Fair value of the forward contract $ 4,000

Value of the expected sale (3,800)
Amount should be recognized in current income $ 200

11.B
$3,800 value of the expected sale

12.B
Converted value of Pinco's long-term debt $ 42,000
translated value of Sinco's balance sheet (40,000)
Amount should be recognized in current income $ 2,000
271
 FOREIGN CURRENCY TRANSACTIONS

Accounting for SME

1. B
2. C
3. D
4. F
5. C
6. B
7. B
8. A

DR Loss on net monetary position CU 400,000

Cr Equity CU 400,000

9. A
10.C
11.B
12.C
13.A
14.D
15.D
16.D
17.A
18.C
19.B

Month Nominal Accumulated Restatement Restated

amount inflation to year factor amount
(a) end (c) = [1+(b)] [(c) x (a)]
(b)

January 250,000 *79.59% 1.7959 448,964

272
 February 250,000 71.03% 1.7103 427,585

March 250,000 62.89% 1.6289 407,224

April 250,000 55.13% 1.5513 387,832

May 250,000 47.75% 1.4775 369,364

June 250,000 40.71% 1.4071 351,775

July 250,000 34.01% 1.3401 335,024

August 250,000 27.63% 1.2763 319,070

September 250,000 21.55% 1.2155 303,877

October 250,000 15.76% 1.1276 289,406

November 250,000 10.25% 1.1025 275,625

December 250,000 5.00% 1.05 262,500

Total 4,178,246

*[(1+5%)^12) – 1} = 0.7959

20.B
Land CU 240,000
Gain on net monetary position CU 240,000
To recognized land restatement
(CU 300,000 x 80%)

Loss on monetary position CU 280,000

Equity CU 280,000
To recognized equity restatement
(CU 350,000 x 80%)

Net effect of monetary position is therefore a loss of CU 40,000

21.B

Revenue CU 80,000

273
 Loss on net monetary position 40,000

Profit for the year CU 40,000

22.A

Retail outlet at FCU FCU 500,000

Multiply by spot rate at march 1 1/2

Retail outlet at CU CU 250,000

23.A

Bank loan FCU 500,000

Multiply by: interest rate 5%

Period over 12 months 10/12

Divided by average spot rate on 20X0 CU 2.2

Accrued interest on 20X0 CU 9,470

24.B

Bank loan FCU 500,000

Multiply by: interest rate 5%

Period over 12 months 10/12

Divided by spot rate on December 31, 20X0 CU 2.4

Translated accrued interest CU 8,681

Less accrued interest 9,470

274
 Foreign exchange loss CU ( 789)

25.A

Retail outlet at FCU FCU 500,000

Multiply by spot rate on December 31 1/2.4

Retail outlet on December 31, 20X0 CU 208,333

Less acquisition cost at CU 250,000

Foreign exchange gain CU 41,667

26.C

Retail outlet CU 250,000

Divide by: useful life 20 years

Period over 12 months 10/12

Depreciation on 20X0 CU 10,417

27.A

Recoverable amount at FCU FCU 550,000

Divide by spot rate on December 31, 20X0 2.4

Recoverable amount at CU CU 229,167

Less carrying amount of retail outlet 239,583

Impairment loss CU 10,416

28.D

Bank loan FCU 500,000

Multiply by: interest rate 5%

Period over 12 months 2/12

275
 Divided by average spot rate on 20X1 CU 2.3

Accrued interest on 20X1 CU 1,812

29.A

Carrying amount of Retail outlet CU 229,617

Divide by: new useful life 230 months

Multiply by 12 months

Depreciation on 20X0 CU 11,957

30.C
Foreign exchange gain 18,480
Accrued interest on bank loan 11,282
Bank loan 208,333
Cash 238,095
To recognise foreign exchange gain on settlement of the foreign bank loan (FCU
500,000 ÷ 2.1)

31.D
32.B
33.D
34.B
35.C
36.D
37.B
38.B
39.B
40.D

276
 Translation from a functional currency to the presentation currency
(closing/ current rate method)

1. C

Depreciation of equipment P120,000

Provision for doubtful accounts 80,000

Rent 200,000

Amortization of copyrights 50,000

Total expense P450,000

Multiply by Average exchange rate .44

Expenses to be reflected to Adelle’s 2016 consolidated income

statement P198,000

2. D

Depreciation of equipment P120,000

Provision for doubtful accounts 80,000

277
 Rent 200,000

Amortization of copyrights 50,000

Total expense P450,000

Multiply by exchange rate (12/31/2016) .40

Expenses to be reflected to Adelle’s 2016 consolidated income

statement P180,000

17.D
18.D
19.C
20.D
21.C
22.D
23.B
24.C
25.A
26.B
3. A
27.D
4. B
28.C
5. A
29.B
6. A
30.D
7. A
31.A
8. B
32.C
9. D
33.B
10.B
34.A
11.A
35.D
12.D
36.A
13.B
37.B
14.B
38.A
15.C
39.D
16.D
40.A

278
 Remeasurement from a foreign currency to the functional
currency (temporal method

1. A
2. D

Marketable equity securities at FC 100,000

Multiply by exchange rate at Dec. 31, 2010 P.19

Marketable equity securities at Peso P19,000

Inventory at FC 100,000

Multiply by exchange rate at Dec. 31, 2010 P.19

Inventory at Peso P19,000

3. C

Marketable equity securities at FC 100,000

Multiply by exchange rate at Dec. 31, 2010 P.19

279
 Marketable equity securities at Peso P19,000

Inventory at FC 100,000

Multiply by exchange rate at April 1, 2010 0.16

Inventory at Peso P16,000

4. B
5. B
6. A
7. C
8. D
9. B
10.D
11.D
12.D
13.C

Retained earnings, beg. Balance P 325,000

Translated net income (@ weighted average rate) 180,000

Total P 505,000

Less translated dividend declared (@ current rate 30,000

Retained earnings, end. Balance P 475,000

DEBIT in balance sheet:

Translated assets (@ Current rate) P 1,460,000

CREDIT in balance sheet:

Translated liabilities (@ Current rate) P 450,000

Translated Common stock (@ historical rate) 660,000

280
 Adjusted retained earnings 475,000 (1,585,000)

Cumulative translation adjustment (debit) P 125,000

14.A

Sales 90,000

Cost of goods sold (80,000)

Depreciation (1,500)

Other operating expenses (5,750)

Net income 2,750

Multiply by average for 2021 P 67.50

Translated net income P 185,625

Retained earnings, beg. P 119,500

Translated Net income 185, 625

Retained earnings, end. P 305125

Debit in balance sheet

Translated assets (21,750 x P 67.60) P 1,470,300

Credit in balance sheet

Translated liabilities (11,500 x P 67.60) P 777,400

Translated ordinary shares (5,000 x P 67.20) 336,000

Retained earnings, end. 305,125

Cumulative translation adjustment (credit) P 51,775

15.B

281
 Cumulative translation adjustment – 2020 (credit) P 50,000

Translation adjustment (credit) 1775

Cumulative translation adjustment – 2021 (credit) P 51,775

16.A

Net assets, January 1 375,000

Net income for 2022 75,000

Dividends paid for 2022 (25,000)

Total assets 425,000

282
 Debit in balance sheet

Translated assets (425,000 x P 8.50) P3,612,500

Credit in balance sheet

Translated Net assets (375,000 x P 8.60) P 3,225,000

Translated Net income (75,000 x P 8.55) 641,250

Translated Dividends paid (25,000 x P 8.54) (213,500) (3,652,750)

Cumulative translation adjustment – 2021 (debit) P 40,250

Loan payable 150,000

Multiply by: ( P 8.55 – 8.5) P 0.05

Translation adjustment P 7500

Cumulative translation adjustment - 2021 (debit) P 14,087.50

Translation adjustment for 2022 (credit) (7,500)

Cumulative translation adjustment – 2022 (debit) P 6,587.50

17.A
18.B
19.C
20.B
21.D

Ending inventory 25,000

Multiply by exchange currency at 12/31/15 ( P1/2LCU P 0.05

Translated inventory P 12,500

22.C

Inventory, beg. 40,000

283
 Purchases 300,000

Inventory, end. (30,000)

Cost of goods sold 310,000

Multiply by average exchange rate P .5745

Translated inventory P 178,095

23.C
24.A
25.B
Accounts receivable 2,000
Foreign exchange gain 2,000
[$20,000 x (46.70 – 46.60)]
26.B

Accounts receivable – 1/1/14 P934,000

Cash to be collected on sale 936,000

Foreign exchange gain P 2,000

27.D

Sale in transaction 2 (LCU 40,00 x P 23.48) P 939,200

Sale in transaction 4 (LCU 5,00,000 x P 1.24) 6,200,000

Accounts receivable – 12/31/18 P 7,139,200

28.B

Purchases in transaction 1 (LCU 80,000 x P 5.15) P 412,000

Purchases in transaction 3 (LCU 60,00 x P 4.55) 273,000

Accounts payable – 12/31/18 P 685,000

29.C

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 Transaction 1 [LCU 80,000 x (P 5.15 – P4.86)] (debit) P (23,200)

Transaction 2 [LCU 40,000 x (P 23.48 – P 24.56)] (debit) (43,200)

Transaction 3 [LCU 60,000 x (P 4.55 – P 4.81)] (credit) 15,600

Transaction 4 [LCU 5,000,000 x (P 1.24 – P1.15)] (credit) 450,000

Net gain from foreign fluctuations P 399,200

30.A
11/16 – NO ENTRY
12/16 – Accounts Receivable 325,000
Sales 325,000
(10,000 x P 32.50)
12/31 – Accounts receivable 10,000
Foreign exchange gain 10,000
[10,000 x (P33.50 – P 32.50)
1/15 – Cash 330,000
Foreign exchange loss 5,000
Accounts receivable 335,000
(10,000 x P 33.00)
31.A

Sales at Canadian dollars C$ 10,000

Multiply by buying spot rate at date of balance sheet P 33.50

Accounts receivable P 335,000

32.C

Sales at Canadian dollars C$ 10,000

Multiply by buying spot rate at date of shipment P 32.50

Sales P 325,000

33.D
See entries in number 31
34.A

Accounts payable US$ 10,000

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 Multiply by selling spot rate at December 31, 2013 P 51.00

Translated Accounts Payable P 510,000

35.B

Equipment US$ 10,000

Multiply by selling spot rate at December 16, 2013 P 50.00

Translated equipment P 500,000

36.D
Foreign Exchange loss 10,000
Accounts payable 10,000
37.D
Equipment 500,000
Accounts payable 500,000
38.A
Accounts payable 510,000
Cash 505,000
Foreign exchange gain 5,000

39.A
40.B

286
 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

Restatement of financial statements

1. A

Net assets at 12/31/19 at Closing rate 2019 ($19,200 x P43) P825,600

Ordinary shares at date of issuance rate (5000 x 40) (200,000)

Preference shares at date of issuance rate (8,000 x 42) (336,000)

Translated retained earnings 12/31/19 (300,000)

Cumulative translation adjustment 2019 loss (debit) in OCI P (10,400)

Net assets at 12/31/20 at 12/31/20 rate ($20,000 x 45) P900,000

Ordinary shares at date of issuance rate (5000 x 40) (200,000)

Preference shares at date of issuance rate (8,000 x 42) (336,000)

Translated retained earnings 12/31/20

[300,000+(1,000x44)-(200x41)] (335,800)

Cumulative translation adjustment 2020 gain (credit) in OCI P (28,200)

Cumulative translation adjustment 2019 loss (debit) in OCI P (10,400)

Translation adjustment gain (credit) for year 2020 38,600

Cumulative translation adjustment 2020 gain (credit) in OCI P (28,200)

287
2. B

Cost of inventory at FC P100,000

Multiply by exchange rate on Dec. 31, 2009 0.17

Cost of inventory at Peso P17,000

3. C

Cost of inventory at FC P100,000

Multiply by exchange rate on Jan. 17, 2010 0.18

Cost of goods sold P18,000

4. D

General price index at Jan. 1, 2009 P210

Less price index at Jan 1, 2006 90

Balance P120

Divided by price index at the date of acquisition 90

Inflation rate 133.33%

5. A

Equity after restatement 270

Less share capital after restatement 170

Retained earnings after restatement 100

*any revaluation surplus that arose from previous periods is eliminated

7. B
6. A 8. D

288
9. A 20.A
10.D 21.C
11.B 22.A
12.B 23.A
13.A 24.C
14.B 25.A
15.D 26.B
16.D 27.D
17.D 28.B
18.C 29.B
19.B 30.C

31.D

Translated at current
rate

Accounts receivable P 120,000

Prepaid expenses 55,000

Property and equipment 275,000

P
Total 450,000

32.A

Depreciation H$ 12,000

Bad debts 8,000

Rent 20,000

Total expenses H$ 40,000

Multiply by average exchange rate P 5.80

Translated expense P 232,000

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 Solution for 33 to 38

Dollars Exchange Pesos

Debits Credits rate Debits Credits

Cash $ 30,000 P 49 P 1,470,000

Accounts receivable 18,000 49 882,000

Land and buildings 100,000 49 4,900,000

Accounts payable $ 18,000 49 P 882,000

Bonds payable – 10% 45,000 49 2,205,000

Capital stock 50,000 35 1,750,000

Retained earnings, Jan. 1 30,000 Given 1,230,000

Dividends 5,000 46 230,000

Sales 75,000 47 3,525,000

Cost of sales & exp. 65,000 47 3,055,000

Sub-totals $ 218,000 $ 218,000 P 10,537,000 P 9,592,000

Cum. Transl. gain 945,000

Totals $ 218,000 $ 218,000 P 10,537,000 P 10,537,000

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Income statement and Retained earnings Dollars Pesos

Sales $ 75,000 P 3,525,000

Less: Cost of sales and exp. 65,000 3,055,000

Net income $ 10,000 P 470,000

Add: Retained earnings, Jan. 1 30,000 1,230,000

Total $ 40,000 P 1,700,000

Less: Dividends 5,000 230,000

Retained Earnings, Dec. 31 $ 35,000 P 1,470,000

Balance Sheet Dollars Pesos

Cash $ 30,000 P 1,470,000

Accounts receivable 18,000 882,000

Land and buildings 100,000 4,900,000

Total Assets $ 148,000 P 7,252,000

Accounts payable $ 18,000 P 882,000

Bonds payable 45,000 2,205,000

Capital stock 50,000 1,750,000

Retained Earnings, Dec. 31 35,000 1,470,000

Subtotal $ 148,000 P 6,307,000

Cumulative translation gain/loss - 945,000

Total liabilities and Stockholder’s Equity $ 148,000 P 7,252,000

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 33.C
34.A
35.B
36.A
37.A
38.C

39.A

Cost of goods sold 70,000

Multiply by weighted average rate P 1.50

Translated cost of goods sold P 105,000

40.A

Inventory - December 31, 2013 20,000

Multiply by exchange rate at Dec. 31 P 1.45

Translated Inventory – December 31, 2013 P 29,000

 NOT FOR PROFIT ORGANIZATIONS

Voluntary health and welfare organizations (VHWO)

1. B

2. D

3. B

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4. D

5. C

6. D- Pledges are recognized in income in the period in which they are receivable. One-
half of the P100,000 is receivable in 2011, or P50,000, 20% of which, P10,000, is
uncollectible resulting in net contributions to be recognized in the amount of P40,000 in
2011

7. C – The testator had stipulated that the P200,000 certificate be held to maturity and
that interest revenue be used to finance salaries for the pre-school program. As a
result, the P16,000 in interest income would be considered restricted to that purpose.
Since the testator had placed no other restrictions on the use of bequest, the remaining
amounts are unrestricted. An action by the board of trustees designating that P40,000
be used for the future purchase of the equipment for the pre-school program would be
considered a designation and the P40,000 would be reported as unrestricted funds
designated for the pre-school program.

8. D – According to FASB 116, contributions are reported as revenue in the year

received even though there are donor-imposed use or time restrictions on the
contribution. Since Mr. Charles contributions was use restricted, the contribution would
be reported as temporarily restricted revenue on the statement of activities for the year
ended December 31, 2017. This reporting is in accordance with FASB 117.

9. D – According to FASB 116, donor restricted contributions are revenues in the year
the contribution is made, not in the year contribution is spent. According to FASB 117,
contributions which are restricted temporarily should be reported on the statement of
activities as temporarily restricted revenues.

10. C – According to FASB 116 gifts long lives assets should be reported as unrestricted
support if the organization has an accounting policy which does not imply a time
restriction on such gifts

293
11. B - According to FASB 116, contributions are reported as revenue in the year
received, whether the donors place time or use restrictions on the resources. According
to FASB 117, net assets should be disclosed according to whether they are unrestricted,
temporarily restricted net assets for the year ending December 31, 2017

12. C- Temporarily restricted net assets; 6/30/2017

Time restriction (until 8/2017) P10,000

Purpose restriction ( for fund raising activities) 25,000

Total 35,000

Less: Reslassified to unrestricted since it was 25,000

Already expended P10,000©

13. D - According to FASB 116, a multiyear pledge should be reported at its present
value. According to FASB 117, if there is a time restriction on the pledge, the pledge
should be reported as temporarily restricted revenue in the year the pledge is given. In
Faith Haven's situation the pledge should be reported as temporarily restricted revenue
in 2011. The pledge should be reported at its present value. This amount is calculated
by using teh present value of an ordinary annuity factor for 5 periods at 6%: P1,000 x
4.212376 = P4,212 rounded.

14. C - According to FASB 117, a statement of functional expenses is required for

voluntary health and welfare organizations. Other private nonprofit organizations are
encouraged to disclose this information, but they are not required to.

15. D 17. B

16. B 18. A

294
19. D 26. A

20. A 27. B

21. A 28. C

22. B 29. A

23. A 30. B

24. A 31. C

25. D

32. B- Under AICPA FASB SFAS 117, reclassifications result from expiration of donor-
imposed restriction.

When a donor-imposed condition is satisfied, the conditional promise to give asset

becomes unconditional and there is an increase in appropriate classification of net
assets depending on the restriction placed upon the asset by donor.

33. B

34. D

35. A

36. D

37. D

38. D

39. C

40. D- Pledges are recognized in income in the period in which they are receivable.
One-half of the P100,000 is receivable in 2011, or P50,000, 20% of which, P10,000, is
uncollectible resulting in net contributions to be recognized in the amount of P40,000 in
2011

295
  NOT FOR PROFIT ORGANIZATIONS

Hospitals and other health care organizations

1. Required: The classification of monies derived from educational programs of a

hospital.
(D) Revenues of a hospital are classified as patient service revenue and other revenue.
Other revenue includes the usual ongoing operating revenues derived by hospitals from
sources other than patient care and services. Major sources of other revenue are
student tuition and fees and revenue recognized upon expenditure of donor restricted
gifts, grants, or subsidies for specific purposes such as research and education. Thus,
the monies received from an educational program conducted by a hospital should be
classified as other revenue.
Answer (A) is incorrect because ancillary service revenue is included under
patient service revenues. Answer (B) is incorrect because educational program revenue
is not directly related to patient care and is, therefore, not includible in patient service
revenues. Answer (C) is incorrect because nonoperating gains typically arise from
activities such as sales of investments or fixed assets, or investment income.

2. Required: The item(s), if any, that are ongoing or central transactions for a not-for-
profit hospital.
(B) Revenue from health care services include inpatient and outpatient services
provided directly to patients for their medical care. The resulting revenues derive from
furnishing room and board and nursing services. Health care service revenues are also
earned by the operating room, recovery room, labor and delivery room, and other
ancillary departments that give patient care.
Answers (A), (C), and (D) are incorrect because room and board fees from
patients and recovery room fees are ongoing or central transactions.

3. Required: The classification of revenue from cafeteria meals.

(D) Other revenues are derived from services other than providing health care services
or coverage to patients, residents, or enrollees. This category includes proceeds from
sale of cafeteria meals and guest trays to employees, medical staff, and visitors.
Answer (A) is incorrect because revenues from cafeteria sales are accounted for
separately and not as a component of any related expenses. Answer (B) is incorrect
because “ancillary service revenues” is not a proper classification for hospital revenues.
Answer (C) is incorrect because patient service revenues are health care service
revenues.

296
4. Required: The definition of restricted net assets.
(D) In health care organization accounting, the term “restricted” is used to describe
resources that have been restricted as to their use by the donors or grantors of those
resources. Temporarily restricted net assets are those donor-restricted net assets that
can be used by the not-for-profit organization for their specified purpose once the
donor’s restriction is met. Permanently restricted net assets (for example, endowment
funds) are those with donor restrictions that do not expire with the passage of time and
cannot be removed by any actions taken by the entity.
Answer (A) is incorrect because donor restrictions are not removable by the
board. Temporary restrictions expire by passage of time or by actions by the entity
consistent with the donor’s restrictions. Answer (B) is incorrect because board-
designated restrictions are board-removable. Answer (C) is incorrect because income
generated by restricted net assets can be restricted for specific purposes.

5. Required: The accounting for a donation of medicine.

(D) Contributions of noncash assets that are not long-lived are reported at fair value in
the statement of operations. Donated medicines, office supplies, and other materials
that normally would be purchased by a hospital should be credited at fair value as other
revenue because they directly relate to ongoing major operation but are not derived
from services directly provided to patients.
Answer (A) is incorrect because donated assets should be recorded at their fair
value when received. Answers (B) and (C) are incorrect because this donation should
be credited to another revenue account or a gain account.

6. Required: The health care revenues of a hospital.

(C) Health care services revenues are derived from services other than health care
provided to patients and residents. Other revenues may include cafeteria sales, tuition
from educational programs, donated medicine, and office space rentals. However,
contributions either unrestricted or for a specific purpose, are treated as gains unless
fund-raising is an ongoing major activity of the hospital. They are recognized at fair
value.
Answers (A), (B), and (D) are incorrect because revenues from educational
programs are other revenues, but unrestricted gifts are usually gains.

7. Required: The true statement about external reporting by a health care organization.

297
 (B) The basic financial statements of a health are organization include a balance sheet,
a statement of operations, a statement of changes in equity or net assets, and a
statement of cash flows.
Answer (A) is incorrect because fund accounting may be used for internal
purposes but is not required or encouraged for external reporting. Answer (C) is
incorrect because the statement of changes in equity or net assts may be combined
with the statement of operations. Answer (D) is incorrect because the statement of
operations all HCOs, including NPOs, should report a performance indicator and other
changes in net assets.

8. C - Amounts discharged to patients 384,000 Contractual adjustments

(90,000) Net patient service revenue 294,000

9. C

10. B

11. C- Health Care Organizations, provides that for contractual adjustments and
discounts is recognized on the accrual basis and deducted from gross patient service
revenue to determine net patient revenue. Bad debts expense is reported as an
operating expense, not as a contra to gross patient service revenue.

Thus:
Gross patient service revenue 980,000 Contractual adjustments (115,000)
Allowance for discounts - employees (15,000) Net Patient Service Revenue
850,000

12. B

13. B

14. B

15. B- Patient service revenues are recognized at established rates on an accrual basis,
P8, 000,000. The discharge method is not acceptable according to generally accepted
accounting principles.

298
16. B - Donated supplies are recorded by the hospital as a debit to supplies and a
credit to other operating revenues of P10,000. Supplies is directly used for hospitals
principal operations.

17. C- An unrestricted bequest is a revenue derived from some source other than
operations and would be recorded as a non-operating revenue of P100,000.

18. D- Since Cebu Hospital does not have control over the endowment fund and will
only receive income earned on the P100,000, Cebu Hospital would make no entry to
record the establishment of the endowment. A memo entry would be sufficient to
enable the endowment to be disclosed.

19. A- The unrestricted bequest would be accounted for as non-operating revenue. The
amount to be recognized will be the fair value of the stock, regardless of the testator's
basis.

20. C- In 2011, the investments would have been written down from P300,000 to
P290,000 resulting in a valuation allowance of P10,000. In 2012, they would have been
further written down to P250,000 with an increase in the valuation allowance of
P40,000.

21. A- To be considered restricted, assets must be restricted by parties outside the

hospital, not within the hospital or its board of directors. As a result, both the plant
assets of P10,000,000 and the board-designated funds of P2,000,000 would be
considered unrestricted.

22. A- Gifts, grants, and bequests that are received by a hospital and are not restricted
by donors are reported in the statement of revenues and expenses as non-operating
revenues.

299
23. D- Endowment resources, including pure endowment funds in which the principal
may not be expended, and term endowment funds in which principal may be expended
upon release of the prohibition on such expenditure, are accounted for as restricted
funds when they are received.

24. D- Since the P10,000 donation is being held in permanent trust by the bank, it is
not an asset of the hospital and would not be recorded in the accounting records. it
would, however, be disclosed.

25. C - Since the investment is carried on the books at P50,000 in the investments
account, a a-edit is necessary to that account to remove the investment. Capital gains
and losses are treated as adjustments to principal, not as income, to the credit for the
P70,000 goes to the endowment fund balance, not to revenue.

26. D- When a fixed asset, such as land, is donated to a hospital without any
restrictions, the value is generally added directly to the fund balance of the general
fund. The land will be recorded at its fair value, P400,000. Since it is subject to a
liability in this case, the mortgage payable will be recorded in the amount of P150,000.
The net amount of P250,000 will be added to the fund balance.

27. A- When goods which a hospital would otherwise have to purchase are donated,
they are reported as an operating expense and simultaneously as other operating
revenues before to No. 17 for further discussion.

28. A - The AICPA Audit and Accounting Guide. Health Care Organizations, provides
that for contractual adjustments and discounts is recognized on the accrual basis and
deducted from gross patient service revenue to determine net patient revenue. Bad
debts expense is reported as an operating expense, not as a contra to gross patient
service revenue. Thus:

Gross patient service revenue P980,000

300
 Less: Contractual adjustments 100,000

Allowance for discounts - employees 15,000

Net Patient Service Revenue P865,000 (a)

29. D- The AICPA Audit and Accounting Guide, Health Core Organizations, charity care
does not qualify for recognition as receivables or revenue in the financial statements.
According to the AICPA Audit and Accounting Guide, Health Care Organizations
management's policy for providing charity care, as well as the level of charity care
provided, should be disclosed in the financial statements.

30. C- According to the AICPA Audit and Accounting Guide, Health Care Organizations,
a hospital's other revenue, gains, and losses are derived from services other than
providing health care services or coverage to patients. Other revenue, gains, and losses
typically include interest and dividends which are unrestricted as well as proceeds from
sales at gift shops and snack bars. Cash contributions from donors which are restricted
to the acquisition of capital assets during 2012 are not reported on the statement of
operations for 2011. The capital contribution should be reported on the statement of
changes in net assets for the year ended December 31, 2011 as an increase in
temporarily restricted net assets.

31. B- Expirations of donor-imposed restriction on temporarily restricted net assets

should be reported on the statement of operations as "net assets released from
restrictions". Both the P50, 000 and P250, 000 was spent in 2012, so, reclassification
would be necessary.

32. A- Cash flows from operating activities would include both the cash received from
patient service revenue of P300,000 and the cash received from gift shop sales of
P25,000. According to FASB No. 117, cash received from investment income that is
restricted by donors for the acquisition of long-lived plant assets should be reported as
financing activities.

301
33. B- The P750,000 and P50,000 are classified as part of operating activities since,
they are not restricted for any purpose. Refer to Nos. 8 and 33 for further discussion.

34. B

35. C- The P250,000 gift shop revenue is unrestricted revenue because the governing
board has control of this revenue. Thus:

Unrestricted net assets P250,000

Increase in unrestricted net assets due to reclassification 50,000

P300,000

Less: Expenses incurred 50,000

P250,000 (c)

36. D- In order for resources of a hospital to be categorized as restricted, the

restrictions must be externally imposed, such as by a donor, grantor, or other source of
the resources, and not subject to alteration by the board.

37. C- A hospital prepares four statements comparable to the balance sheet, income
statement, retained earnings statement, and statement of cash flows prepared by a
business enterprise. They include the balance sheet, the statement of operations, the
statement of changes in net assets, and the statement of cash flows.

38. A- A hospital must segregate items that are unrestricted from those that are
restricted. In addition, the balance sheet must provide information about liquidity, by
either sequencing assets according to the nearness of their conversion to cash or
classifying them as current and noncurrent.

39. A- Property, plant and equipment of a not-for-profit hospital is part of the hospital's
unrestricted funds.

302
40. C- Fixed asset contributions are added directly to the unrestricted net assets
balance of a hospital. They are normally used for general operations.

 NOT FOR PROFIT ORGANIZATIONS

Colleges and Universities

1. D

2. B

3. A

4. C

5. A

6. C

7. A

8. B

COMPUTATION:

Assets P 5,000,000
Less: Liabilities (including deferred revenues of P 100,000) P 3,000,000
Fund Balance P 2,000,000

9. C - All items presented would be included in plant funds at July 31, 2009

10. B

Computation:

303
 Income on unrestricted endowment received P 300,000
Income on restricted endowment expended P 75,000
Total endowment income P 375,000

11. A –

REQUIRED: Institutional support expenditures are those of central administration.

Scholarship and fellowship are student aid expenditures. And the P 200,000 is
operation and maintenance of plant expenditures. Therefore, the amount to be
included as institutional support would be P 50,000 (administrative data processing).

12. C- Regular or Pure endowment Funds are those whose principal has been specified
by the donor as nonexpendable therefore, the amount to classify as regular
endowment would be P500, 000.

13. C

14. B- The net asset balance is equal to assets minus liabilities or P5,000,000 -
P3,000,000 = P2,000,000. Deferred revenues are considered liabilities and are properly
included.

15. B- The university will recognize the total amount of tuition and fees earned net of
cancellations of P300,000 - 7,000 = P293,000. The P3,000 of tuition remissions granted
to faculty members' families will be treated as an expense item.

16. D- Revenues include the tuition assessed less any refunds, or P1,700,000. The
scholarships of P150,000 and the tuition remissions of P50,000 are treated as
expenditures and classified as student aid.

17. A- Revenues will include all gifts whether restricted or not.

Current fund revenues will include all unrestricted gifts, P500,000, other unrestricted
resources earned during the period, and restricted current funds to the extent that they
have been expended for current operating purposes, P200,000. Current fund revenues
do not include restricted current funds received but not expended, nor resources which

304
are restricted by outside parties to loan funds, endowment or term endowment funds,
annuity and life income funds, plant funds, or agency

18. C- Restricted gifts are recognized as revenues in the epriod in which they are
expended. Unrestricted gifts are recognized as revenues whether they are expended or
not. As a result, the expended restricted gifts of P100,000 will be recognized as
revenues as well as the expended unrestricted gifts of P600,000 and the unexpended
unrestricted gifts of P75,000 for a total of P100,000 + P600,000 + P75,000 = P775,000.

19. C- A regular endowment fund is one in which the amounts contributed may not be
spent, but the earnings are available to the college or university, which would be the
case with the nonexpendable endowment of P500,000. Since the P300,000 amount is
ultimately expendable and the P100,000 is an amount designated from current funds,
neither would be a regular endowment.

20. A- Since the trust fund is being administered by a separate trustee, the college will
not account for it. As interest is remitted to the college, it will be reported with a debit
to cash. The amount is restricted by the donor to be used for the specific purpose of
supporting student scholarships and, as a result will be considered restricted current
funds. It will be recorded as deferred revenue since the amount received is not to be
reported as revenues until it is spent.

21. D- When funds have been designated for a purpose by the trustees, rather than
being legally restricted, they are accounted for in a quasi-endowment fund. The
P100,000 retained and invested for scholarship grants would be included in the fund
balance. In addition, other amounts retained, such as the P6,000 in ecimigs which had
not been disbursed as of 12/31/2011, would also be included in the fund balance for a
total of P106,000.

22. B- The P5,000,000 contributions from alumni for the science building should be
reported as temporary restricted revenue since it is restricted as to its purpose.

The P1,000,000 contribution should be classified as permanently restricted since it was

invested indefinitely.

The P50,000 earnings will be used for scholarship and should be reported as temporary
restricted since it is restricted as to its purpose.

23. B- Reclassifications are reported on the statement of activities as "net assets

released from restrictions." Net assets released from restrictions of P15,000 are
reported as a negative amount for temporarily restricted net assets in 2012, while net

305
assets released from restrictions of P15,000 are reported as a positive amount for
unrestricted net assets for 2012. The P15,000 of travel expense is reported on the
statement of activities as an expense for 2012. According to FASB 117, all expenses are
reported on the statement of activities as decreases in unrestricted net assets. This
means that the use of the donation for faculty travel had no effect on unrestricted net
assets in 2012. Note that, when the donation was received in 2011, temporarily
restricted net assets increased by P15,000 on the statement of activities prepared for
2011.

24. A- Since the P25,000 contribution is intended for a purpose (purpose restriction),
therefore, it is classified as a temporarily restricted revenues.

25. A- All of the accounts are classified under plant funds.

26. D- The P500,000 and P100,000 are classified as unrestricted revenues and
therefore, they are port of operating activities in the statement of cash flows.

The P300,000 donations is classified as part of financing activities, since it is intended

for long-term purposes.

27. C- The current funds group of a not-for-profit private university include the current
restricted fund and the current unrestricted fund. Annuity funds and Loan funds are
different types of funds and are riot part of the current funds group.

28. D The plant fund of a university accounts for plant assets in the investment in plant
funds, and for funds restricted for future expenditures in the unexpended plant funds.
Additionally, funds for the retirement of indebtedness and funds for renewals and
replacements may be created.

29. D- A not-for-profit private university will typically have a current fund, a plant fund,
loan funds, endowment funds, and agency funds.

30. D- Loan funds consist of loans made to students, faculty, or staff. Life income funds
are funds contributed to a university requiring that the income be paid to a beneficiary
with the principal restricted for some time after which it becomes available to the
institution. Both types of funds may be encountered in a not-for-profit university.

31. C- Amounts received by a college which can be spent, but only in specific ways, are
included in restricted current funds. This would include dividends received from
securities which must be spent on faculty travel. 1 he contribution of securities which
must be held in perpetuity will take place in endowment funds.

306
32. A- College plant funds include unexpended plant funds, funds for renewals and
replacements, funds for retirement of indebtedness, and investment in plant. Restricted
current funds do riot include funds related to plant.

33. A- An endowment fund is used to account for funds received from donors where the
principal is nonexpendable.

34. B- A loan fund of a college is established for resources that are to be loaned to
students, faculty, or staff it is not for loans, notes, or bonds payable to others.

35. A

36. D

37. C

38. C

39. B

40. A

307
  NOT FOR PROFIT ORGANIZATIONS

Other Not-for-Profit Organizations such as churches, museums,

fraternity association, etc.

1. C

REQUIRED: The statements included in a complete set of financial statements of

not-for-profit organizations.
DISCUSSION: (C) SFAS 117 states that “a complete set of financial statements of a
not-for-profit organizations shall include a statement of financial position as of the
end of the reporting period, a statement of activities and a statement of cash flows
for the reporting period, and accompanying notes to financial statements.”
Answer (A) is incorrect because the statement of financial position should be as
of the end of the reporting period. Answer (B) is incorrect because SFAS 117 does
not specify how the statement of cash flows is to be prepared. Answer (D) is
incorrect because the statement of financial position should be as of the end of the
reporting period, and comparative statements are not required.

2. A

REQUIRED: The focus of SFAS 117.

DISCUSSION: (A) SFAS 117 is intended to promote the relevance,
understandability, and comparability of financial statements issued by not-for-profit
organizations by requiring that certain basic information be reported. The focus of
the financial statements required by SFAS 117 is on the not-for-profit organization
as a whole.
Answers (B), (C), and (D) are incorrect because, according to SFAS 117, the
focus is on the not-for-profit organization as a whole and on reporting assets,
liabilities, and net assets; changes in net assets; flows of economic resources; cash
flows, borrowing and repayment of borrowing, and other factors affecting liquidity;
and service efforts.

308
3. A

REQUIRED: The classes of net assets reported in a statement of financial position

of a not-for-profit organization.
DISCUSSION: (A) SFAS 117, Financial Statements of Not-for-Profit Organizations,
requires a not-for-profit organization to report amounts for all three classes:
permanently restricted net assets, temporarily restricted net assets, and unrestricted
net assets. Information regarding the nature and amounts of permanently or
temporarily restricted net assets should be provided by reporting amounts on the
face of the statement or by including details in the notes to financial statements.
Answers (B), (C), and (D) are incorrect because a not-for-profit organization
should report amounts for all three classes.

4. C

REQUIRED: The reporting of expenses in a not-for-profit organization’s statement of

activities.
DISCUSSION: (C) In a statement of activities, revenues and expenses ordinarily
should be reported as gross amounts. Revenues may be reported as increases in
either unrestricted or restricted (temporarily or permanently) net assets. Expenses
ordinarily should be reported as decreases in unrestricted net assets. However,
investment revenues, reported as increases in unrestricted or restricted net assets,
may be reported net of related fees such as custodial fees and investment advisory
fees provided that these fees are disclosed either on the face of the statement or in
the related notes.
Answers (A), (B), and (D) are incorrect because not-for-profit organizations
should report expenses as decreases in unrestricted net assets. Expenses do not
decrease permanently and temporarily restricted net assets.

5. A

REQUIRED: The asset held by a nonprofit organization for which depreciation should
be recognized.
DISCUSSION: (A) SFAS 93, Recognition of Depreciation by Not-for-Profit
Organizations, requires all nonprofit organization to recognize the cost of using up
long-lived tangible assets (depreciation) in their general purpose external financial
statements. Hence, a building used for religious activity is ordinarily depreciable.

309
 Answers (B) and (C) are incorrect because depreciation does not have to be
recognized for certain works of art and historical treasures whose economic benefit
or service potential is used up so slowly that their estimated useful lives are
extraordinarily long. Answer (D) is incorrect because land is normally not
depreciated by any organization.

6. D-

REQUIRED: The reporting of a transfer to an NPO with a direction that the assets
be used to aid a specific beneficiary.
DISCUSSION: (D) SFAS 136, Transfer of Assets to a Not-for-Profit Organization or
Charitable Trust that Raises or Holds Contributions for Others, applies when a donor
makes a contribution to a recipient entity that agrees either to user the assets for
the benefit of another entity designated by the donor or to transfer the assets of the
beneficiary. The recipient entity should recognize the receipt of the assets as a
contribution if the donor explicitly grants the entity variance power to redirect the
use of the assets or if the recipient and the beneficiary are financially interrelated.
However, if neither of these conditions applies, the recipient entity should recognize
the fair value of the assets as a liability/

Answers (A), (B), and (C) are incorrect because the recipient has not been granted
variance power, and the recipient and beneficiary are not financially interrelated
organizations. Thus, the transfer should be accounted for as a liability.

7. B

REQUIRED: The circumstances under which a contribution of artifacts to be sold

need not be recognized.
DISCUSSION: (B) Contributions of such items as art works and historical treasures
need not be capitalized and recognized as revenues if they are added to collections
that are (1) subject to a policy that requires the proceeds of sale of collection items
to be used to acquire another collection items; (2) protected, kept unencumbered,
cared for, and preserved; and (3) held for public exhibition, education, or research
for public service purposes rather than financial gain (SFAS 116).

310
 Answers (A), (C), and (D) are incorrect because, if the proceeds are used to
support general museum activities, repair existing collections, or purchase buildings
to house collections, the contribution must be recognized.

8. D

REQUIRED: The classification(s), if any, of contributions received by not-for-profit

organizations.
DISCUSSION: (D) SFAS 116 requires that contributions received by not-for-profit
organizations be reported as restricted support or unrestricted support.
Contributions with donor-imposed restrictions are reported as restricted support.
Restricted support increases permanently restricted net assets or temporarily
restricted net assets. Contributions without donor-imposed restrictions are reported
as unrestricted support.
Answers (A), (B), and (C) are incorrect because not-for-profit organizations must
record contributions as unrestricted support or restricted support.

9. C

REQUIRED: The timing of recognition of a conditional promise to give.

DISCUSSION: (C) A conditional promise to give is one that depends on the
occurrence of a specified future, uncertain event to establish the promisor’s
obligations. It is recognized when the conditions are substantially met, i.e., when
the conditional promise becomes unconditional. If the possibility is remote that the
condition will not be met, the recognition criterion is satisfied.

Answers (A) and (B) are incorrect because receipt of the promise is not sufficient for
recognition of a contribution. Answer (D) is incorrect because the possibility that
the condition will not be met must be remote before a contribution is recognized

10. C

REQUIRED: The amount at which a contribution of electricity should be recorded by

the donee.
DISCUSSION: (C) SFAS 116 defines a contribution of utilities, such as electricity, as
a contribution of other assets, not a contribution of services. A simultaneous receipt
and use of utilities should be recognized as both an unrestricted revenue and an

311
 expense in the period of receipt and use. The revenue and expense should be
measured at estimated fair value. This estimate can be obtained from the rate
schedule used by the utility company to determine rates charged to a similar
customer.
Answers (A), (B), and (D) are incorrect because the simultaneous receipt and use of
electricity should be recorded as an unrestricted revenue and an expense in the
period of receipt and use

11. C

REQUIRED: The classification of a gift to be invested in perpetuity.

DISCUSSION: (C) A donor-imposed restriction limits the use of contributed assets.
This gift is unconditional in the sense that no condition is imposed on the transfer,
but it includes a permanent restriction on the use of the assets. Under SFAS 117,
the gift should therefore be classified as an increase in permanently restricted net
assets.
Answers (A), (B), and (D) are incorrect because the donor stipulated that the gift
invested in perpetuity, a permanent restriction.

12. D

REQUIRED: The classification of expended dividend income generated from

investments held in perpetuity.
DISCUSSION: (D) SFAS 117 and 124 require that income from donor-restricted
permanent endowments be classified as an increase in temporarily restricted or
permanently restricted net assets if the donor restricts its use. However, if the
donor-imposed restrictions are met in the same reporting period as the gains and
investment income are recognized, the gains and income may be reported as
increases in unrestricted net assets, provided that the organization has a similar
policy for reporting contributions received, reports on a consistent basis from
period to period, and adequately discloses its accounting policy. The temporary
restriction on the $50,000 of investment income was met by expenditure in
2001, the year the gain and income were recognized. Thus, the dividend
revenue may be classified as an increase in either unrestricted or temporarily
restricted net assets, depending on the NPO’s accounting policy

312
 Answers (A), (B), and (C) are incorrect because investment income may be reported
as an increase in either unrestricted or temporarily restricted net assets in these
circumstances.

13. B

REQUIRED: The classification of unrealized gain from investments held in

perpetuity.
DISCUSSION: SFAS 117 and 124 permit the recognition of gains and investment
income as increases in unrestricted net assets if the donor-imposed restrictions are
met in the same reporting period as the gains and investment income are
recognized, provided that the organization has a similar policy for reporting
contributions received, reports on a consistent basis from period to period, and
adequately discloses its accounting policy. The temporary restriction on the income
was met by expenditure in 2001, the year the income and the gain were recognized.
Thus, consistent with its policy, the NPO should treat the gain as an increase in
unrestricted net assets. Given that the donor of the endowment allows the NPO to
choose suitable investments and that no permanent restriction is imposed on the
gain by the donor or by the law, the classification of the gain is the same as that of
the income.
Answers (A), (C), and (D) are incorrect because NPO’s policy is to report the gain as
an increase in unrestricted net assets if the donor restriction is met in the period the
gain and income are recognized.

14. B

REQUIRED: The classification of unexpended dividend income generated from

investments held in perpetuity.
DISCUSSION: (B) SFAS 117 requires that gains and investment income from donor-
restricted permanent endowments be classified as increases in temporarily restricted
net assets if the donor restricts the use of these resources to a specific purpose that
either expires with the passage of time or can be met by actions of the organization.
The restriction is temporary because it will expire when the income is expended in a
future period.
Answers (A), (C), and (D) are incorrect because the donor-imposed restriction is
temporary. It will expire when the income is expended. Moreover, the income
cannot be classified as unrestricted because recognition and the expiration of the
restriction do not occur in the same period.

313
 Answers (A), (C), and (D) are incorrect because the donor-imposed restriction is
temporary. It will expire when the income is expended. Moreover, the income
cannot be classified as unrestricted because recognition and the expiration of the
restriction do not occur in the same period

15. B

REQUIRED: The classification of an unrealized gain on investments held in

perpetuity.
DISCUSSION: (B) given that the NPO has the discretion to choose suitable
investments (as opposed to holding specific securities in perpetuity), the gain is not
permanently restricted absent a donor stipulation or a legal requirement. Rather,
the gain has the same classification as the income. The latter is temporarily
restricted because it is to be expended in a future period. Hence, the gain is also
temporarily restricted.
Answers (A), (C), and (D) are incorrect because the income and the gain are
temporarily restricted.

16. C

REQUIRED: The contributed services to be capitalized.

DISCUSSION: (C) Contributions of services by the professional carpenters should be
capitalized. Under SFAS 116, the contributions of services requiring specialized
skills, such as those of carpenters, electricians, etc., should be recognized if they are
provided by individuals possessing those skills and would typically need to be
purchased if not provided by donation. SFAS 116 also requires that donated
services creating or enhancing nonfinancial assets be recognized even though
specialized skills are not involved. Because the members’ labor helped rebuild the
church, their contributions of services also should be capitalized.
Answers (A), (B), and (D) are incorrect because the church members’ donated labor
and the services of the professional carpenters should be capitalized.

17. B

314
 REQUIRED: The correct accounting treatment of combined fund-raising and
educational materials or program services costs.
DISCUSSION: (B) When fund-raising costs are combined with program services
costs or educational materials, the total of these combined services should be
systematically and rationally allocated between the programs and fund-raising.
Answer (A) and (C) are incorrect because costs that do not completely relate to one
category should be allocated. Answer (D) is incorrect because the costs must be
allocated to the proper programs to which they relate.

18. C

REQUIRED: The valuation of donated equity securities.

DISCUSSION: (C) In its statement of financial position, a not-for-profit organization
should measure the following investments at fair value: (1) equity securities with
readily determinable fair values and (2) debt securities. Thus, the total change in
the fair value of the donated securities from the date of receipt to the balance sheet
date must be reported in the statement of activities (SFAS 12ld measure the
following investments at fair value: (1) equity securities with readily determinable
fair values and (2) debt securities. Thus, the total change in the fair value of the
donated securities from the date of receipt to the balance sheet date must be
reported in the statement of activities (SFAS 124).
Answers (A), (B), and (D) are incorrect because all investments to which SFAS 124
applies are reported at fair value.

19. B

REQUIRED: The expense classification for management and general expenses in the
statement of activities.
DISCUSSION: (B) Two functional categories of expenses for an NPO are program
services and supporting services expenses. Supporting services expenses, which do
not relate to the primary mission of the organization, may be further subdivided into
(1) management and general expenses, (2) fund-raising expenses, and (3)
membership development costs.
Answer (A) is incorrect because a direct reduction of fund balance would be the
result of a transfer or a refund to a donor. Moreover, fund accounting
information is not required to be externally reported. Answer (C) is incorrect
because program services expenses related directly to the primary mission of the
NPO. Answer (D) is incorrect because only costs directly related to a certain

315
 source of support, such as a special event or estimated uncollectible pledges,
may be offset against revenue.

20. A

REQUIRED: The proper accounting for a split-interest agreement.

DISCUSSION: (A) An NPO should report an irrevocable split-interest agreement.
Assets under the control of the NPO are recorded at fair value at the time of initial
recognition, and the contribution is recognized as revenue. Because the NPO has a
remainder interest, it should not recognize revenue from receipt of the income of
the trust. Thus, the NPO should recognize revenue of $200,000 (the presumed fair
value of the contributed cash).
Answer (B) is incorrect because the contribution is not reduced by the income paid
to the donor. Answer (C) is incorrect because the income paid to the donor is not
revenue of the NPO. Answer (D) is incorrect because the contribution should be
recognized at fair value.

21. B

REQUIRED: The true statement about pooling of investments by an NPO.

DISCUSSION: (B) Investment pools, including investments from contributions with
different restrictions, are created for portfolio management. Ownership interests are
assigned (ordinarily in terms of units) to the pool categories (participants) based on
the market value of the cash and securities obtained from each participant. Current
market value also determines the units allocated to additional assets placed in the
pool and to value withdrawals. Investment income, realized gains and losses, and
recognized unrealized gains and losses are allocated based on the units assigned.
Answer (A) is incorrect because pooling of investments is allowed to obtain
investment flexibility and reduce risk. Answers (C) and (D) are incorrect because no
prohibition exists as to the types of investments that may be pooled.

22. A

23. C

316
24. C

25. (c) Funds are considered to be restricted funds only when they are restricted by
donors or others as to the specific purposes for which the funds are to be used. This
would be the case of the P200,000 bequest. When funds are designated for a specific
purpose by the Board of Trustees or some other internal body are considered
unrestricted funds as is the case with-the P100,000 designated for college scholarships.

26. (a) A gift of donated property is recognized at its fair market value on the date of
the gift. Depreciation is recorded over its useful life. As a result, an asset will be
recorded in the amount of P30,000 to be depreciated over 10 years with annual
depreciation of P3,000.

27. (c) Fund raising, general, and administrative expenses are classified as supporting
services. Program services are for costs directly related to the organizational purposes.

28. (c) The cost of printing the annual report and the cost of an audit performed by a
CPA firm would be other general and administrative expenses. Since the merchandise is
being sent to encourage contributions, it would be a cost of fund-raising and reported
as such in the activity statement.

29. (c) Since the church will have the use of the principal after mal Lush dies, but will
have no right to the income during her life, the church will recognize the principal
balance of P100,000. The amount cannot be used currently, however, and will be
recorded as deferred support.

30. (b) The P150,000 paid to full-time staff will clearly be included in salary and wage
expenses for the organization. The P10,000 value of the services donated by the two
volunteers replacing the full-time secretary will also be recognized as salary and wage
expenses with an offsetting credit to support. The services volunteered for special

317
events by employees of local businesses would not be reported as salary and wage
expenses for reasons that there is no employer-employee relationship that. The total
amount to be reported will be P160.000.

31. (c) Pledges are recognized net of uncollectible amounts. Since total pledges are
P350,000, but 10% is expected to be uncollectible, pledges receivable will be recorded
in teh amount of P350,000, but an allowance for uncollectibility of 10% or P35,000 will
be established. The net amount of P315,000 will be reported as pledges receivable.

32. (a) Temporarily restricted revenues:

Purpose restriction (for research) P50,000

Less: Reclassified to unrestricted since it was already expended for equipment 35,000

P15,000
(a)

33. (d) The designation of unrestricted net assets by the board of Eddie Museum for the
building addition does not change the classification of the net assets which were
designated. the assets designated were unrestricted before the designation, and they
remain unrestricted after the designation by the board.

34. (b) Interest earned on board-designated investments is reported as unrestricted

revenue. When the governing board of a not-for-profit organization places restrictions
on assets, they are restricting the use of unrestricted net assets. Therefore, income
earned on board-designated investments represents increase in unrestricted net assets.
Unconditional promises to give are reported in the period the pledges are made or
received not in the period of each collection. However, since the contributions will not
be received until 2012, the contributions should be reported as an increase in
temporarily restricted net assets on the statement of activities for 2011 because of this
time restriction.

318
35. (d) According to FASB 117, donations of works of an for which the donor stipulated
a specified purpose and which are to be preserved and not be sold, represent
permanently restricted net assets. Since the museum's policy is to capitalize all
donations of art, Ms. Florendo donation should be reported as an increase in
permanently restricted net assets on the statement of activities.

36. (b) Quasi-endowment funds are established by the governing board of an

organization using unrestricted net assets. Therefore, the assets in the quasi
endowment should be included in the unrestricted net assets category.

37. (c) A temporary restriction is a donor-imposed restriction that permits the donee
organization to use up or expend the donated assets as specified, it is satisfied either
by the passage of time or by actions of the organizations involved. Accordingly, the
P5,000,000 contribution of Night Co. shares represents temporarily restricted net assets
until the shares are sold and the proceeds used to erect a public viewing building. The
P2,000,000 contribution of Night Co. shares represents permanently restricted net
assets because the shares are to be retained permanently.

38. (c) All expenses are presented as unrestricted on the statement of activities. 90. (c)
the restriction imposed is temporary (purchase new computer equipment purpose
restriction) not a permanent one.

39. (d) A statement of financial position for a nonprofit entity, like a library, should
report net assets according to whether the net assets are unrestricted, temporarily
restricted, or permanently restricted.

40. (a) According to FASB 1 17, the net assets of term endowments should be reported
as temporarily restricted, while the net assets of regular endowments should be
reported as permanently restricted. The net assets of term endowments are temporarily
restricted because the donor of a term endowment stipulates that the endowment last

319
only a specific number of years. Donors of regular endowments intend that these
endowments last indefinitely; hence, the net assets are permanently restricted.

 GOVERNMENT ACCOUNTING – GENERAL FUND

Basic Concepts in Government Accounting

1. A 11.C 21.B 31.C

2. B 12.D 22.A 32.C

3. C 13.C 23.C 33.C

4. B 14.B 24.D 34.B

5. C 15.E 25.C 35.B

6. D 16.A 26.E 36.A

7. D 17.B 27.B 37.A

8. B 18.C 28.B 38.C

9. A 19.A 29.D 39.D

10. D 20.B 30.A 40.D

320
 Government Accounting – General Fund

Budget Process

1. A 11.C 21.B 31.D

2. B 12.B 22.C 32.D

3. C 13.A 23.A 33.D

4. D 14.C 24.C 34.B

5. A 15.A 25.A 35.C

6. A 16.D 26.C 36.A

7. B 17.B 27.B 37.C

8. C 18.C 28.B 38.B

9. A 19.D 29.D 39.C

10. A 20.A 30.B 40.A

321
 GOVERNMENT ACCOUNTING – GENERAL FUND

Journal Entries – Books of National Government Agency

1. D 11.D 21.B 31.A

2. B 12.C 22.B 32.A

3. A 13.B 23.B 33.A

4. D 14.B 24.A 34.A

5. C 15.D 25.E 35.A

6. C 16.B 26.A 36.C

7. A 17.B 27.A 37.B

8. D 18.D 28.B 38.E

9. C 19.A 29.B 39.B

10. C 20.D 30.A 40.A

322
 OTHER SPECIAL TOPICS (BASIC KNOWLEDGE)
Accounting For Insurance Contracts by Insurers (PFRS 4)

1. D 11.C 21.A 31.A

2. B 12.B 22.A 32.B

3. C 13.D 23.B 33.C

4. D 14.C 24.A 34.C

5. A 15.B 25.B 35.D

6. D 16.A 26.C 36.D

7. D 17.B 27.D 37.B

8. B 18.A 28.B 38.A

9. A 19.C 29.B 39.D

10. C 20.B 30.A 40.C

323
 OTHER SPECIAL TOPICS (BASIC KNOWLEDGE)
ACCOUNTING FOR BUILD, OPERATE AND TRANSFER (PFRIC 12)

1. B 11.D 21.B 31.D

2. A 12.D 22.C 32.C

3. B 13.C 23.C 33.C

4. A 14.C 24.C 34.A

5. C 15.D 25.D 35.A

6. A 16.A 26.D 36.A

7. B 17.C 27.A 37.B

8. B 18.A 28.D 38.B

9. A 19.B 29.A 39.C

10. C 20.B 30.B 40.C

324
 OTHER SPECIAL TOPICS (BASIC KNOWLEDGE)
Effective Communications to Stakeholders

1. A 11.B 21.D 31.D

2. A 12.C 22.D 32.B

3. C 13.A 23.A 33.C

4. B 14.B 24.A 34.C

5. A 15.A 25.C 35.A

6. D 16.D 26.B 36.A

7. C 17.C 27.B 37.C

8. B 18.D 28.A 38.C

9. C 19.A 29.B 39.A

10. B 20.D 30.D 40.C

325
SYSTEM OF COST ACCUMULATION OR COSTING SYSTEM

Comparison Between Actual Costing, Normal Costing, Standard Costing

1. D
2. A
3. C
4. B
5. B
6. D
7. D
8. E
9. D
10.A
11.D
12.A
13.A
14.E
15.C
16.B
17.A
18.D

P240= 1,600 (x - P3.60)

326
 1,600 x = P240 + P5,760

x= P3.75

19.C
20.D
21.B
22.C

P4,200 = P3.75 (x - 10,000)

P3.75 x = P4,200 + P37,500

x = 11,120

23.D

$240 + . 25( 240 )

= $20 / unit
30 ÷ 2

24.B

Actual factory overhead........................... P575,000

Budget allowance:

Variable factory overhead (52,000 x P6) P312,000

Budgeted fixed overhead.................... 250,000 562,000

Controllable variance............................... P 13,000

unfavorable

25.B

Budget allowance based on standard hours allowed

327
 [(52,000 x P6) + P250,000]................................. P562,000

Factory overhead applied at standard........................ 572,000

Volume variance....................................................... P (10,000) favorable

26.C

Actual factory overhead............................ P178,500

Budget allowance:

Variable for actual hours

(121,000 x P.50)........................... P 60,500

Fixed.................................................. 110,000 170,500

Spending variance.................................... P 8,000

unfavorable

27.A

Budget allowance for actual hours

[(121,000 x P.50) + P110,000]............ P170,500

Budget allowance for standard hours:

Variable (130,000 x P.50).................... P 65,000

Fixed.................................................. 110,000 175,000

Variable efficiency variance....................... P (4,500) favorable

28.E
29.A
30.C

328
31.D

P3,000 = x (30,000 - 29,000)

1,000 x = P3,000

x = P3

y= P2.80 - P3.00(30,000)

y= (P6,000) favorable

32.A

x = P5.10 [7,800 - (2,000 x 4)]

x = (P1,020) favorable

33.D
34.D

x = P10 [2,000 - (900 x 2)]

x = P2,000 unfavorable

35.C
36.D
37.D

Variable budget allowance for actual hours (2,100 x P3). . P6,300

Variable budget allowance for standard hours

(P3 x 1,000 x 2)....................................................... 6,000

.............................................................................. P 300
.............................................................unfavorable

329
 38.A
39.D
40.B

 JOB ORDER COSTING SYSTEM

Cost Accumulation Procedures

1. E

2. C

3. A

4. D

5. A

6. D

7. B

8. A

9. E

10. A

11. A

330
12. D

13. C

14. A

15. C

16. B

17. B

18. C

19. D

20. E

21. A

22. D

23. C

24. E

25. D

SUPPORTING CALCULATION: P10,400 + P8,000 + P8,800 = P27,200

SUPPORTING CALCULATION: P27,200 + P2,400 - P1,800 = P27,800

26. B

SUPPORTING CALCULATION: P27,800 + P1,200 - P1,000 = P28,000

27. A

28. D

29. C

331
30. B

31. C

32. B

33. B

34. B

35. A

36. E

37. A

38. D

39. D

40. A

 JOB ORDER COSTING SYSTEM

Journal Entries

1. Materials........................................................ 28,000
Accounts Payable....................................... 28,000

2. Work in Process............................................. 21,000

Materials.................................................... 21,000

3. Factory Overhead Control............................... 3,200

Materials.................................................... 3,200

4. Payroll........................................................... 31,000
Accrued Payroll.......................................... 31,000

332
Accrued Payroll.................................................... 31,000

Cash.......................................................... 31,000

Work in Process.................................................... 15,500

Factory Overhead Control..................................... 2,500

Marketing Expenses Control.................................. 7,500

Administrative Expenses Control............................ 5,500

Payroll....................................................... 31,000

5. Factory Overhead Control............................... 12,000

Accounts Payable....................................... 12,000

6. Work in Process............................................. 17,700

Factory Overhead Control........................... 17,700

7. Finished Goods.............................................. 58,000

Work in Process.......................................... 58,000

8. Accounts Receivable...................................... 88,000

Sales......................................................... 88,000

Cost of Goods Sold (25,000 + 58,000 - 18,000)..... 65,000

Finished Goods........................................... 65,000

9. Materials...................................................... 40,000

333
 Accounts Payable......................................... 40,000

10.Work in Process............................................ 30,000

Factory Overhead Control................................. 1,000

Materials...................................................... 31,000

11.Payroll (P38,000 + P10,000).......................... 48,000

Accrued Payroll............................................ 48,000

12.Work in Process............................................ 38,000

Factory Overhead Control................................. 10,000

Payroll......................................................... 48,000

13.Finished Goods............................................. 90,000

Work in Process........................................... 90,000

Accounts Receivable..................................... 200,000

Sales [P100,000 + (100% of P100,000)]....... 200,000

Cost of Goods Sold........................................... 100,000

Finished Goods............................................ 100,000

14.Raw Materials Inventory P 25,000

Accounts Payable 25,000

Purchased materials on account

15.Work In Process Inventory 23,000

Raw Materials Inventory 23,000

334
 Record direct materials used (P9,000+ 14,000)

16.Overhead 1,000
Raw Materials Inventory 1,000

Record indirect materials used

17.Work In Process Inventory 20,000

Factory Payroll 20,000

Record direct labor used (P4,000+ 16,000)

18.Overhead 2,000
Factory Payroll 2,000

Record indirect labor used

19.Work In Process Inventory 9,850

Overhead 9,850

Record overhead applied (P1,750+ 8,100)

20.Finished Goods Inventory 27,950

Work In Process Inventory 27,950

Record completion of Job 16

(Beg. WIP P13,200 + DM 9,000 + DL 4,000 + OH 1,750)

21.Accounts Receivable9,000
Sales 9,000

335
 Record sale of Job 105 for P9,000 on account

22.Cost of goods sold 5,500

Finished Goods Inventory 5,500

Record total cost of Job 105 now sold

23.Overhead 6,800
Accounts Payable 4,300

Accum. Depreciation 2,500

Record actual overhead costs incurred

24.
Material inventory P4,000,000

Accounts payable P4,000,000

26.

Work in process—PK03 P2,800,000

Inventories P2,800,000

27.

Manufacturing overheads P400,000

Inventories P400,000

28.

336
 Work in process—PK03 P3,000,000

Cash P3,000,000

29.

Manufacturing overheads P1,000,000

Cash P1,000,000

30.

Manufacturing overheads P2,500,000

Accounts payable P2,500,000

31.

Work in process—PK03 P3,000,000

Manufacturing overheads P3,000,000

32.

Finished goods P8,800,000

Work in process—PK03 P8,800,000

33.

Accounts receivable P11,440,000

Revenue P11,440,000

34.

337
 Cost of goods sold P900,000

Manufacturing overheads P900,000

35.

Cost of goods sold expense 750,000  

     Purchases   450,000

     Inventory   300,000

36.

Cost of goods sold expense 875,000  

     Purchases   350,000

     Inventory   525,000

37.

  Debit Credit

Inventory 100,000  

Cost of goods sold 50,000  

338
     Overhead cost pool   150,000

38.

  Debit Credit

Direct material inventory 3000  

Accounts Payable  2900

     Overhead cost pool   100

39.

  Debit Credit

Direct material inventory 9000  

Direct material price 150

variance

     Accounts payable   9150

40.

  Debit Credit

Direct material inventory 9000  

339
 Direct material price 240
variance

     Accounts payable   8760

 JOB ORDER COSTING SYSTEM

Preparation Statement of Goods Manufactured And Sold

1. C 12.B
2. A 13.A
3. A 14.C
4. C 15.C
5. B 16.C
6. D 17.A
7. D 18.B
8. C 19.A
9. B 20.B
10.D 21.B
11.D

22.D

340
 Raw materials used P365

Add ending inventory of raw materials 85

Materials available during the year P450

Less beginning inventory of raw materials 90

Purchases of raw materials during the year P360

23.C

Total manufacturing costs during the year P680

Add beginning work in process inventory 50

Total P730

Less ending work in process inventory 65

Cost of goods manufactured during the year P665

24.C

Beginning finished goods inventory P100

Add cost of goods manufactured during the year (P680 + P50 - P65) 665

Total cost of goods available for sale P765

Less ending finished goods inventory 90

Cost of goods sold during the year P675

341
 25.B 33.C
26.B 34.A
27.C 35.A
28.A 36.C
29.C 37.C
30.A 38.B
31.A 39.B
32.B 40.B

 JOB ORDER COSTING SYSTEM

Accounting For Scrap, Waste, Spoilage, Rework

1. A
2. B
3. A
4. D
5. C
6. A
7. B
8. C
9. B
10.C
11.C
12.B

342
 13.C
14.D
15.B
16.D

17. Recognized Ignored

Cost to account for P155,000 P155,000

Divided by equivalent units 2,500 2,000

Cost per equivalent unit P 62 P 77.50

18.Assigned to good units completed:

(1,500× P62) P93,000

(1,500 × P77.50) P116,250

19. Transferred out P93,000 Finished P116,250

Normal spoilage (500 × P62) 31,000 0

Total P124,000 P116,250

20. Ending work-in-process inventory:

(500 × P62) P 31,000

(500 × P77.50) P38,750

21. B

Explanation:

Calculation for

Recognized Problem # Ignored

Cost to account for: P200,000 P200,000

Divided by equivalent units 8,000 5,000

Cost per equivalent unit P 25.00 (1) P 40.00

343
Assigned to:

Good units completed

(4,000 × P25; P40) P 100,000 P 160,000

Normal spoilage

(3,000× P25) 75,000 0

Costs transferred out 175,000 (2/3) 160,000

WIP ending inventory

(1,000 × P25; P40) 25,000 (4) 40,000

Cost accounted for: P200,000 P200,000

22.

Explanation:

D) Calculation for

Recognized Problem # Ignored

Cost to account for: P200,000 P200,000

Divided by equivalent units 8,000 5,000

Cost per equivalent unit P 25.00 (1) P 40.00

Assigned to:

Good units completed

344
(4,000 × P25; P40) P 100,000 P 160,000

Normal spoilage

(3,000× P25) 75,000 0

Costs transferred out 175,000 (2/3) 160,000

WIP ending inventory

(1,000 × P25; P40) 25,000 (4) 40,000

Cost accounted for: P200,000 P200,000

23.

Explanation:

B) Calculation for

Recognized Problem # Ignored

Cost to account for: P200,000 P200,000

Divided by equivalent units 8,000 5,000

Cost per equivalent unit P 25.00 (1) P 40.00

Assigned to:

Good units completed

(4,000 × P25; P40) P 100,000 P 160,000

Normal spoilage

(3,000× P25) 75,000 0

Costs transferred out 175,000 (2/3) 160,000

WIP ending inventory

345
(1,000 × P25; P40) 25,000 (4) 40,000

Cost accounted for: P200,000 P200,000

24. B 33. C

25. C 34. B

26. C 35. C

27. D 36. D

28. B 37. B

29. D 38. D

30. A 39. A

31. D 40. D

32. D

 PROCESS COSTING SYSTEM

Cost accumulation procedures- materials, labor and overhead

1. B
2. B
3. C
4. C
SUPPORTING CALCULATION:  60% ($2 + $3) = $3

5. D
6. E

SUPPORTING CALCULATION: 7,000 units transferred out + 6,000 units in ending

inventory = 13,000 units

346
7. E
8. D
9. E
10. E
11. A
12. C

SUPPORTING CALCULATION:

Materials unit cost = $27,000 ÷ (7,000 + 3,000) = $2.70

Conversion unit cost = $39,950 ÷ [7,000 + 50%(3,000)] = $4.70

Costs transferred = 7,000($2.70 + $4.70) = $51,800

13. D

14. E

SUPPORTING CALCULATION:  8,000 + .60(8,000) = 12,800 units

15. E

16. E

17. A

18. C

19. C

SUPPORTING CALCULATION:

Materials = 40,000 + 240,000 = 280,000

Conversion = (280,000 - 25,000) + .6(25,000) = 270,000

20. B

SUPPORTING CALCULATION:  ($12,800 + $69,700) ÷ (85,000 + 14,000) = $.833

347
because the contribution should be recognized at fair value.

21. B

SUPPORTING CALCULATION:

($3,000 + $25,560) ÷ (44,000 + 12,000) = $.51

$.51 x 12,000 = $6,120

22. E

SUPPORTING CALCULATION:

Transferred-in costs = $41,000 ÷ 20,000 = $2.05

Materials cost = $8,000 ÷ 20,000 = .40

Conversion cost = $6,000 ÷ 18,000 =    .33

$2.78

23. A

SUPPORTING CALCULATION:  20,000 + .75(8,000) = 26,000

24. D

SUPPORTING CALCULATION:  $5(4,000) + $3(4,000 x .4) = $24,800

25. B

26. C

27. A

28. B

348
29. A

SUPPORTING CALCULATION:  (15,000 x .4) + 45,000 + (12,000 x .8) = 60,600

30. D

SUPPORTING CALCULATION:

Materials = 30,000 + 8,000 = 38,000

Conversion = (10,000 x .2) + 30,000 + (8,000 x .6) = 36,800

31. E

SUPPORTING CALCULATION:

(20,000 x .4) + 300,000 + (40,000 x .4) = 324,000

PROBLEM 1:

SOLUTION

Fort Myers Corporation

Partial Cost of Production Report

For May, 19--

Mixing Department Cooking Department

Total Equivalent Unit Total Equivalent Unit

Cost Units    Cost Cost Units    Cost

349
Cost from preceding

department   50,000 $ 66,500 50,000 $1.33

Cost added by department

Materials $14,000 50,000 $ 0.282 $ 14,000 50,000 $ 0.28

Labor 40,000 50,000 0.80 20,000 50,000 0.40

Factory overhead 12,500 50,000 0.25 15,000 50,000 0.30

Total cost added $ 66,500 $ 1.33 $ 49,000 $0.98

Total cost to be accounted

for $ 66,500 $ 1.33 $ 115,500 $2.31

1$28,000 x 1/2 = $14,000

2$14,000 ÷ 50,000 units = $.28

PROBLEM 2

SOLUTION

(1) Work in process—Sanding Department 800

Work in process—Polishing Department (1,000 units x 1/2) 500

Finished goods 600

Units of materials in all inventories, Dec. 31 1,900

350
(2) Work in process—Sanding Department (800 units x 3/4) 600

Work in process—Polishing Department 1,000*

Finished goods   600*

Units of Sanding Dept.'s direct labor in all inventories, December 31 2,200

* All Sanding Department direct labor would be in all of these units or else they never
would have been transferred.

PROBLEM 3

SOLUTION

(1) Materials: ($100,000 + $304,000) / 40,000 units* = $10.10 per unit

Labor: ($125,400 + $407,100) / 37,500 units* = $14.20 per unit

Factory overhead: ($173,500 + $407,750) / 37,500 units = $15.50 per unit

*Equivalent production:

Materials: 33,000 + 2,000 + 5,000 = 40,000 units

Labor and factory overhead: 33,000 + 2,000 + (1/2 x 5,000) = 37,500 units

(2) Units in process at end of period:

Completed and on hand (2,000 x $39.80) $ 79,600

Materials (5,000 units x $10.10) 50,500

Labor (5,000 units x 1/2 x $14.20) 35,500

351
 Factory overhead (5,000 units x 1/2 x $15.50) 38,750

$ 204,350

PROBLEM 4

SOLUTION

Work in Process — Department A 25,000

Work in Process — Department B 20,000

Materials 45,000

Work in Process — Department A 40,000

Work in Process — Department B 35,000

Payroll 75,000

Work in Process — Department A 90,000

Work in Process — Department B 35,000

Applied Factory Overhead 125,000

Work in Process — Department B 225,000

Work in Process — Department A 225,000

Finished Goods Inventory 360,000

Work in Process — Department B 360,000

352
PROBLEM 5

SOLUTION

Isogen Corporation

Planning Department

Cost of Production Report

For September, 19--

Quantity Schedule Materials Labor Overhead Quantity

Beginning inventory 3,000

353
Received from Cutting Department 7,500

10,500

Transferred to Finishing Department 8,500

Ending inventory 75% 50% 50% 2,000

10,500

Total Equivalent Unit

Cost Charged to Department Cost  Units*   Cost

Beginning inventory:

Cost from preceding department $ 15,500

Materials 7,800

Labor 3,200

Factory overhead 9,975

Total cost in beginning inventory $  36,475

Cost added during period:

Cost from preceding department $ 63,250 10,500 $ 7.50

Materials 20,700 10,000 2.85

Labor 16,750 9,500 2.10

Factory overhead 39,900 9,500 5.25

Total cost added during period $ 140,600

Total cost charged to the department$ 177,075 $ 17.70

% Unit Total

354
Cost Accounted for as Follows Units Complete Cost Cost

Transferred to Finishing

Department 8,500 100% $17.7 $150,450

Work in process,

ending inventory:

Cost from preceding

department 2,000 100 7.50 $ 15,000

Materials 2,000 75 2.85 4,275

Labor 2,000 50 2.10 2,100

Factory overhead 2,000 50 5.25  5,250    26,625

Total cost accounted for $177,075

* Total number of equivalent units required in the cost accounted for section
determined as follows:

Prior

Dept. Cost Materials Labor Overhead

Equivalent units transferred out 8,500 8,500 8,500 8,500

Equivalent units in ending inventory 2,000 1,500 1,000 1,000

Total equivalent units 10,500 10,000 9,500 9,500

PROBLEM 6

SOLUTION

355
 Carlson Chemical Company

Blending Department

Cost of Production Report

For October, 19--

Quantity Schedule Materials Labor Overhead Quantity

Beginning inventory 2,000

Received from Mixing Department 4,000

Added to process in Blending Department 12,000

18,000

Transferred to Bottling Department 14,000

Ending inventory 100% 40% 40% 4,000

18,000

Total Equivalent Unit

Cost Charged to Department Cost   Units*    Cost

Beginning Inventory:

Cost from preceding department $ 2,300

Materials 720

Labor 1,150

Factory overhead 2,100

Total cost in beginning inventory $ 6,270

356
Cost added during period:

Cost from preceding department $ 11,200 18,000 $ .75

Materials 2,520 18,000 .18

Labor 2,750 15,600 .25

Factory overhead 5,700 15,600 .50

Total cost added during period $ 22,170

Total cost charged to the department $ 28,440 $ 1.68

% Unit
Total

Cost Accounted for as Follows Units Complete Cost Cost

Transferred to Bottling

Department 14,000 100% $1.68

$23,520

Work in process,

ending inventory:

Cost from preceding

department 4,000 100 .75 $3,000

Materials 4,000 100 .18 720

Labor 4,000  40 .25 400

Factory overhead 4,000   40 .50   800

  4,920

Total cost accounted for $ 28,440

* Total number of equivalent units required in the cost accounted for section
determined as follows:

357
 Prior

Dept. Cost Materials Labor

Overhead

Equivalent units transferred out 14,000 14,000 14,000

14,000

Equivalent units in ending inventory 4,000 4,000 1,600 1,600

Total equivalent units 18,000 18,000 15,600

15,600

PROBLEM 7

SOLUTION

Labor and

Factory

Materials Overhead

Units transferred out 19,000 19,000

Less beginning inventory (all units) 8,000 8,000

358
Units started and finished this period 11,000 11,000

Add beginning inventory (work this period):

Materials (8,000 units x 1/4) 2,000

Labor and factory overhead (8,000 units x 1/2) 4,000

Add ending inventory:

Materials (4,000 units x 1/2) 2,000

Labor and factory overhead (4,000 units x 1/4) 1,000

Equivalent production 15,000 16,000

PROBLEM 8

SOLUTION

Handy Tool Corporation

Assembly Department

Cost of Production Report

For November, 19--

Quantity Schedule Materials Labor Overhead Quantity

Beginning inventory 90% 80% 80% 1,000

359
Received from Shaping Department 3,000

4,000

Transferred to Finishing Department 2,800

Ending inventory 50 40 40 1,200

4,000

Total Equivalent Unit

Cost Charged to Department Cost    Units*    Cost

Beginning inventory:

Cost from preceding department $ 23,600

Materials 7,700

Labor 3,500

Factory overhead 4,900

Total cost in beginning inventory $ 39,700

Cost added during period:

Cost from preceding department $ 29,250 3,000 $ 9.75

Materials 13,375 2,500 5.35

Labor 9,672 2,480 3.90

Factory overhead 16,616 2,480 6.70

Total cost added during period $ 68,913

Total cost charged to the department $ 108,613 $ 25.70

% Unit Total

360
Cost Accounted for as Follows Units Complete Cost Cost

Transferred to Finished Goods:

Beginning inventory $39,700

Cost to complete:

Materials 1,000   10% $  5.35 535

Labor 1,000   20 3.90 780

Factory overhead 1,000   20 6.70 1,340 $ 42,355

Started and completed this

period 1,800 100 25.70 46,260

Total cost transferred to

Finished Goods $88,615

Work in process,

ending inventory:

Cost from preceding

department 1,200 100% $  9.75 11,700

Materials 1,200  50 5.35 3,210

Labor 1,200   40 3.90 1,872

Factory overhead 1,200   40 6.70 3,216

19,998

Total cost accounted for $ 108,613

* Number of equivalent units of cost added during the current period determined as
follows:

Prior

Dept. Cost Materials Labor Overhead

361
To complete beginning inventory 0 100 200 200

Started and completed this period 1,800 1,800 1,800 1,800

Ending inventory 1,200   600    480    480

Total equivalent units 3,000 2,500 2,480 2,480

PROBLEM 9

SOLUTION:

Department 2
Cost of Production Report
For the Month of June, 19___

Quantity Schedule:

Units received from department 1 12,000

Units transferred to finished goods 7,000

Units still in process (50% materials, 25% conversion) 5,000

Cost Charged to the Department: Total cost Unit cost

Cost from preceding department:

     Transferred in during the month (12,000 units) $16,320 $1.36

——- ——

Cost added by department:

     Materials $43,415 $4.57

362
     Labor 56,100 6.80

     Factory overhead 58,575 7.10

——- ——-

     Total cost added $158,090 $18.47

——– ——-

Total cost to be accounted for $174,410 $19.83

Cost Accounted for as Follows:

Transferred to finished goods (7,000 × $19.83) $138,810

Work in process ending inventory:

Cost from preceding department $6,800

Materials (5,000 × 50% ×$4.75) 11,425

363
 Labor (5,000 × 25% ×$6.80) 8,500

Factory overhead (5,000× 25% × $7.10) 8,875

——– 35,600

——–

Total cost accounted for $174,410

Additional computations:

Equivalent production:

Materials = 7,000 + (5,000 × 50%) = 9,500 units

Labor and factory overhead = 7,000 + (5,000 × 25%) = 8,250 units

 PROCESS COSTING SYSTEM

Journal Entries

1. D 11.A
2. B 12.C
3. C 13.C
4. D 14.C
5. C 15.D
6. D 16.C
7. A 17.B
8. D 18.A
9. D 19.C
10.D 20.C

364
 21.C 31.C
22.D 32.C
23.B 33.A
24.C 34.A
25.D 35.D
26.D 36.A
27.D 37.A
28.D 38.B
29.A 39.D
30.D 40.C

 PROCESS COSTING SYSTEM

FIFO and Average Method

1. D 11.B
2. A 12.D
3. B 13.D
4. B 14.D
5. B 15.A
6. B 16.C
7. A 17.B
8. D 18.C
9. B 19.A
10.D 20.B

365
21.A
22.A
Solution:
Units transferred Out 5,500
Less: Units in Beg. Inventory (300)
Units Started and Completed 5,200
23.C
Solution
Beg. Work in process 1500
Add: units started 9000
Less: Units transferred Out 7000
Ending Work in Process 3500
24.C
Solution:
Beginning Work in Process 5000
Add: Units started 54000
Less: Units transferred Out 47000
Ending Work in Process 12000

25.B
Solution:

The material is added at the beg. Of the process; therefore there are 22,000
equivalent units of material.

26. A
Solution:

Beg Work in Process 500 0%

-

Add: Completion of units in Process 500 20%

100

Units Started and Completed 2,950 100%

2,950

Ending Work in Process 350 70%

245

366
 Equivalent Units of Production 3,295

27. C
Solution:
Beg Work in Process 6,000
Add: Units started 24,000
Les: Units transferred Out 21,500
Ending Work in Process 8,500

28.D
Solution:

Material Costs

Beginning P23,400

Current Period P31,500

54,900 / 30,000 = 1.83 per unit

29.B
Solution:

Equivalent Units:
Beginning Inventory (6,000/30%) P1,800
Started and Completed 15,500
Ending Inventory (8,500 * 10% 850
18,150 / 76,956 = 4.24 per unit
30. B
Solution:
Wreaths completed from BWIP 500
Wreaths started and completed 4400
4900

31. D
Solution:
Units transferred out 4,900
Cost per unit P 1.70
Total P 8,330

32.C
Solution:

367
 The transferred-in cost component is the 8,000 units that were transferred
in.

33.A
Solution:

Materials: Decorating: FIFO Units % completed Equivalent Units

Beginning Work in Process 600 20% 120

Add: units started and 7700 100% 7,700

Completed

Add: Ending Work in Process 300 50% 150

Equivalent Units of production 7,970

34.B
Solution:

Conversion: Decorating: FIFO Units % completed Equivalent Units

Beginning Work in Process 600 10% 60

Add: Units started and 7,700 100% 7,700

completed

Add: Ending Work in Process 300 75% 225

Equivalent Units of Production 7,985

35.A
Solution:

Current Costs Equivalent Units Cost/Equivalent Unit

P 67,745 7,970 P 8.50

36.C
Solution:

368
 Current costs Equivalent Units Cost/Equivalent Unit

P 95,820 7,985 P12.00

37. C
Solution:

Costs to complete Beg Units Percent to Cost per Total

Inventory Complete Unit

Materials 600 20% P 8.00 P960

Conversion 600 10% P 15.00 P900

Total Costs to P 1,860

Complete

38.A
Solution:
Units started this period 32,000
Less: Ending Work in process 2,500
Units started and completed this period 29,500

39.A
Solution:
Materials are added at the beginning of the process. 32,000 units were
started in the current period; therefore there are 32,000 equivalent units for
materials.

40.B
41.B
Solution:
Equivalent Units:
Beginning Inventory (7000 * 100%) 7,000
Started and completed (29,500) 29,500

369
 Ending Inventory (2500 * 25%) 625

37,125 equivalent units

42.C
Solution:
Beginning Work in Process 10,000
Units Started 120,000
Total Units 130,000

43.D
Solution:

BWIP: Materials P 24,500

BWP: Conversion 68,905

Current Period: Materials 75,600

Current Period: Conversion 130,000

Total Costs P 299,058

44.A
Solution:
Units started this period 120,000
Less: Ending Work in Process 8,200
Units started and completed this period 111,800
45. D
Solution:
Equivalent Inventory (10,000 * 100%) 10,000
Started and completed (111,800) 111,800
Ending Inventory (8,200 * 25%) 8,200
130,000 equivalent units

46. B
Solution:
Equivalent Units:
Beginning Inventory 0
Started and Completed 111,800
Ending Inventory (8,200 * 25%) 8,200
120,000 equivalent units

370
47.C
Solution:

Beginning Work in Process 10,000 45% 4,500

Add: Completion of Unit in 10,000 55% 5,500

Process

Units started and completed 111,800 100% 111,800

Ending Work in Process 8,200 80% 6,500

Equivalent Units of Production 128,360

48.D
Solution

Beginning Work in Process 10,000 45% 4,500

Add: Completion of Unit in 10,000 55% 5,500

Process

Units started and completed 111,800 100% 111,800

Ending Work in Process 8,200 80% 6,500

Equivalent Units of Production 128,360

49.C
Solution:
Material Costs:
Beginning P 24,500
Current Period P 75,600
P 100,000 / 130,000 = P .77 per unit

50.C
Solution:
Conversion Costs:
Beginning P 68,905
Current Period 130,053
198,958 / 128,60 = P 1.55 per unit.

371
51.D
Solution:

Units Completed Costs per equivalent Total

Unit

121,800 (1.55 + .77) = P 2.32 P 282,576

52.A

Solution:
Conversion Costs:
Beginning (Ignored)
Current Period 130,053
130,053 / 123,860 = P 1.05 per unit
53.A

Solution:

Units Completed Costs per Equivalent Total

Unit

121,800 (1.05 / .63) = P1.68 P 204,624

54.B

Solution:

Weighted Average Material A Material B

Beginning Work in Process 700 700

Units started and Completed 1,500 1,500

Ending Work in Process 500 250

EUP Materials 2,700 2,450

55.C

372
 Solution:

Weighted Average Material A Material B

Beginning Work in Process 0 490

Units started and Completed 1,500 1,500

Ending Work in Process 500 250

EUP Materials 2,000 2,240

56.A

Solution:

FIFO

Beginning Work in Process (700 * 40%) 700

Units started and completed 1,500

Ending Work in Process (500 * 80%) 400

2,600

57.B

Solution:

FIFO

Beginning Work in Process (700 * 40%) 280

Units started and completed 1,500

Ending Work in Process (500 * 80%) 400

2180

58.A

373
 Solution:
Weighted Average: Material A
Beginning P 14,270
Current Period P 40,000
P 54,270 / 2,700 = P20.10 per unit

59.C

Solution:

Materials A Costs Equivalent Units Average Cost per EUP

(Current Period)

P 40,000 2,000 P20,000

60.B

Solution:

Materials B costs Equivalent Units Average Cost per EUP

(Current Period)

P 70,000 2,240 P 31.25

61.D

Solution:

Materials B Costs Equivalent Units Average Cost per EUP

(Beginning Inventory
and Current Period)

P 75, 950 2, 450 P 31.00

62.B

Solution:

374
 Conversion Costs Equivalent Units Average Cost per EUP
(Current Period)

P 98,100 2,180 P 45.00

63.A

Solution:

Conversion Costs Equivalent Units Average Cost per EUP

(Beginning WIP and
current Period)

P 98,100 + P 5,640 2,600 P 39.90

64.C

Solution:

Materials: Weighted Average Units % Eq. Units

Complete

Beginning Work in Process 14,500 100% 14,500

Add: Unit started and completed 51,500 100% 51,500

Ending Work in Process 16,000 100% 16,000

Abnormal Spoilage 2,500 100% 2,500

Equivalent Units of Production 84,500

65.B

Solution:

Conversion: Weighted Average Units % Eq. Units

Complete

Beginning Work in Process 14,500 100% 14,500

375
 Add: Unit started and completed 51,500 100% 51,500

Ending Work in Process 16,000 60% 9,600

Abnormal Spoilage 2,500 100% 2,500

Equivalent Units of Production 78,100

66.A

Solution:
Weighted Average: materials
Beginning P 25,100
Current Period P 120,000
P 145,100 / 84,500 = P 1.72 per
unit

67.C

Solution:
Weighted Average Conversion:
Beginning P 50, 000
Current Period 300,000
P 350,000 / 78,100 = 4.48 per
unit

68.D

Solution:
No costs ae assigned to normal, continuous spoilage. Higher costs are
assigned to good units produced.

69.D

Solution:

Equivalent Units Cost per Equivalent Unit Total

376
 16,000 P 1.75 P 28,000

9,600 P 4.55 P 43,680

P 71,680

70.D

Solution:

Materials: FIFO Units % Eq. Units

Complete

Beginning Work in Process - 0% -

Add: Unit started and completed 51,500 100% 51,500

Ending Work in Process 16,000 100% 16,000

Abnormal Spoilage 2,500 100% 2,500

Equivalent Units of Production 70,000

71.B

Solution:

Conversion: FIFO Units % Eq. Units

Complete

Beginning Work in Process 14,500 25% 3,650

Add: Unit started and completed 51,500 100% 51,500

Ending Work in Process 16,000 60% 9,600

Abnormal Spoilage 2,500 100% 2,500

377
 Equivalent Units of Production 67,225

72.C

Solution:
FIFO: Materials

Current Period P 120,000/ 120,000 / 70,000 units = 1.71 per unit

73.A

Solution:
FIFO: Conversion

Current Period P 300,000/ 300,000/ 67,225 units = 4.46 per unit.

74. A.

Solution:

Transferred Out Units: FIFO Equivalent Cost per Total

Units Equivalent
Unit

Beginning Work in Process 75,100

Add: Completion of beginning 3,625 4.75 17,219

Inventory

Units started and completed 51,500 6.25 321,875

Equivalent unit of production 414,194

75.A

378
 Solution:

Materials : FIFO Equivalent Cost per Total

Units Equivalent
Unit

Beginning Work in process - 0% 0

Add: Unit started and completed 77,000 100% 77,000

Normal spoilage 3,500 100% 3,500

Abnormal Spoilage 5,000 100% 5,000

Ending Work in process 14,500 100% 14,500

Equivalent Units of production 100,000

76.D

Solution:

Conversion: FIFO Equivalent Cost per Total

Units Equivalent
Unit

Beginning Work in process 20,000 65% 13,000

Add: Unit started and completed 77,000 100% 77,000

Normal spoilage 3,500 75% 2,625

Abnormal Spoilage 5,000 75% 3,750

Ending Work in process 14,500 70% 10,250

Equivalent Units of production 106,525

77.C

Solution:

379
 Absorbed spoilage is a period cost

Materials 5,000 * P1.00 P 5,000

Conversion Costs 3,750 * P 1.50 P 5,625

Total Abnormal Spoilage P 10,625

78.B

Solution:

Transferred Out Units: FIFO Equivalent Cost per Total

Units Equivalent
Unit

Beginning Work in process 25,000

Add: Completion of beginning 13,000 1.50 19,500

Inventory

Add: Unit started and completed 77,000 2.50 192,500

Normal spoilage 3,500 1.00 3,500

Abnormal Spoilage 2,625 1.50 3,938

Equivalent Units of production 244,438

79.A.

380
 SUPPORTING CALCULATION: 20,000 + .75(8,000) = 26,000

80.D

SUPPORTING CALCULATION: P5 (4,000) + P3(4,000 x .4) = P24,800

381
 PROCESS COSTING SYSTEM
Accounting for normal and abnormal lost units

1. C 12.C
2. C 13.D
3. D 14.D
4. D 15.A
5. C 16.B
6. D 17.A
7. A 18.A
8. B 19.D
9. C 20.D
10.D 21.B
11.D
22.D
Solution:
Direct materials P 42,500
Direct labor 65,250
FOH 78,300
Direct materials – rework 13,550
Direct labor – rework 15,250
FOH – rework 18,300
Total cost 233,150
Cost per unit (233150/450) P518.11

23.C
Solution:

Direct materials P450,000

Direct labor 520,000
OH (5.50*120000) 660,000
Less: Disposal value (24,000)
Total cost of good units 1,606,000

24.C
25.C
26.D

382
27.C
28.D
29.A
30.A

Solution: Total spoilage = 2,000 + 8,000 – 7,500 – 1,700 = 800 units

31.B

Solution: Normal Spoilage = 10% (7,500) = 750 units

32.A

Solution: Abnormal spoilage = 800 – 750 = 50 units

33.C

Solution:
Unit Material Cost = 14,000 + 58, 000 / 7,500 + 1,700 + 800 = 7.20

34.A

Solution:
Unit Conversion Cost = 20,000 + 104,500 / 7,500 + 800 + 60% (1,700)
= 13.3584 + 7.20
= 20.5584

35.A

Solution:
Units completed (7,500 * 20.5584) 154,188
Normal Spoilage 12,419
Total cost transferred to the next dept. 166,607

36.C

383
 Solution:
Cost transferred to the lost account ( 50 * 20.5584) 828

37.D

Solution: 800 * 4 = 3,200

38.A
39.A
40.A

Solution:
Unit material cost = 58,000 / 7,500 – 2,000 + 1,700 + 800
= P 7.250

41.C

Solution:
Unit Conversion Cost = 104,500 / 7,500 – 75% (2,000) + 60% (1,700) + 800
= 13.3631 + 7.250
= 20.6132

42.A
43.D

Solution: 50 (20.6132) = 831

44.C

Solution: 800 * 4 = 3,200

45.A

Solution: 196,500 * 7.571 = 196,500

46.A

384
47.D

Solution: (12,000 + 102,600) / (9,200+ 600+ 200) = 11.46

48.B

Solution: 61,000 / (9,200 + 200) = 6.4894

49.C

Solution: (20,000 + 210,000) / [9,200 + (80%) 600 + 200] = 23.2794

50.A

Solution: (9,200) (40) + (200) (40) = 376,000

51.C

Solution: Beg WIP 32,000

Additional material 6,000
Additional conversion 9,200
47,200
Started and completed 336,000
Cost transferred to next department P383,200

52.C

Solution: 102,600 / (9,200 – 1,000 + 600 + 200) = 11.40

53.B

Solution: 61,000 / (9,200 – 0 + 0 + 200) = 6.4894

385
54.A

Solution: 210,000 / [9,200 - 600 + 80%(600) + 200] = 22.6293

55.C

Solution: Solution: Beg WIP 32,000

Additional material 6,000
Additional conversion 8,000
46,000
Started and completed 302,400
Cost transferred to next department P348,400

56.D

Solution: (P36) (9,200 + 200) = P338,400

57.C 69.D
58.D 70.B
59.D 71.A
60.C 72.B
61.D 73.B
62.D 74.C
63.A 75.C
64.B 76.C
65.C 77.D
66.C 78.C
67.A 79.D
68.D 80.D

386
 BACKFLUSH COSTING (JIT SYSTEM)
Cost Accumulation procedures- material, labor, overhead
1. D
2. A
3. C
4. C
5. D
6. B

2,000
= 4 days
500
7. D
8. D
9. A
10.B 30% x 1/2 x $300,000 = $45,000
11.A
12.C 50% x 20% x $75,000 = $7,500
13.D 50% x 20% x (10 x 100 x $75) = $7,500
14.B $25 x 5 x 250 = $31,250
15.B $25 x (50% x 100 x 10%) x (1/2 x 500) = $31,250
16.D
17.A
18.C
19.D
20.B
21.B
22.A
23.D
24.A
25.D
26.B
27.D
28.A
29.B
Carrying cost savings = 33% x reduction in average cost of WIP

= 33% x 50% x past average cost of WIP

= .33 x .5 x (15 x 200 x $40)

387
 = $19,800

30.B
Savings in cost of defects = $20 x reduction in the number of defective units

= $20 x (50% x 200 x 10%) x (.20 x 100)

= $20 x 10 x 20

= $4,000

31.C
32.D
The average lead time will be 26 days, calculated as follows:

Reduction of vendor lead time = 1/3 x 21 days = 7 days

Reduction of time in WIP= 3/4 of present time in WIP

= 3/4 x 16 days

= 12 days

New lead time = present lead time - reductions

= 45 days - (7 days + 12 days)

= 26 days

33.A

Equivalent production = 5,000 + (.50 x 40 ) = 5,020 units

$250,525
= $49 . 905 per unit
5,020

388
34.A

$250,000
= $50 per unit
5,000
35.B

Units started = 5,000 + 40 - 35 = 5,005

$250,000
= $49. 950 per unit
5,005

36.A 40 x .50 x 49.905 = 998

37.B 40 x .50 x 50.000 = 1000

38.C 40 x .50 x 49.950 = 999
39.C
40.C

389
  BACKFLUSH COSTING (JIT SYSTEM)

Journal Entries

1. A
2. C
3. D
Supporting computation for 1-3

Journal entries involving the RIP account are:

Raw and In Process........................................................... 680,000

Accounts Payable.......................................................... 680,000

This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed, because they remain a part of RIP.

Finished Goods.................................................................. 676,800

Raw and In Process....................................................... 676,800

This entry backflushes material cost from RIP to Finished Goods. This is a post
deduction. The calculation is:

Material in August 1 RIP balance........................................ $ 38,700

Material received during August.......................................... 680,000

$718,700

Material in August 31 RIP, per physical count...................... 41,900

Amount to be backflushed.................................................. $676,800

Raw and In Process........................................................... 500

Cost of Goods Sold........................................................ 500

Conversion cost in RIP is adjusted from the $4,800 of August 1 to the $5,300
estimate at August 31. The offsetting entry is made to Cost of Goods Sold, where
all conversion costs were charged during August.

390
 4. A
5. C
6. D
Supporting Computation for 4-6

Journal entries involving the RIP account are:

Raw and In Process........................................................... 187,000

Accounts Payable........................................................ 187,000

This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed because they remain a part of RIP.

Cost of Goods Sold............................................................ 187,800

Raw and In Process....................................................... 187,800

This entry backflushes material cost from RIP to Cost of Goods Sold. This is a
postdeduction. The calculation is:

Material in June 1 RIP balance............................................ $ 7,600

Material received during June............................................. 187,000

$194,600

Material in June 30 RIP, per physical count......................... 6,800

Amount to be backflushed.................................................. $187,800

Raw and In Process........................................................... 200

Cost of Goods Sold........................................................ 200

Conversion cost in RIP is adjusted from the $900 of June 1 to the $1,100 estimate at
June 30. The offsetting entry is made to Cost of Goods Sold, where all conversion
costs were charged during June.

7. A
8. C
9. C
10.C

391
Supporting Computation for 7-10

Raw and In Process........................................................... 173,000

Accounts Payable.......................................................... 173,000

Finished Goods.................................................................. 172,550

Raw and In Process...................................................... 172,550

To backflush material cost from RIP to Finished Goods. This is a postdeduction.

The calculation is:

Material in May 1 RIP balance............................................. $ 4,900

Material received during May.............................................. 173,000

$177,900

Material in May 31 RIP, per physical count.......................... 5,350

Amount to be backflushed.................................................. $172,550

Cost of Goods Sold............................................................ 173,200

Finished Goods............................................................ 173,200

To backflush material cost from Finished Goods to Cost of Goods Sold. This is a
postdeduction. The calculation is:

Material in May 1 finished goods......................................... $ 4,000

Material backflushed from RIP............................................ 172,550

$176,550

Material in May 31 finished goods, per physical count.......... 3,350

Amount to be backflushed.................................................. $173,200

Cost of Goods Sold............................................................ 200

Raw and In Process........................................................... 250

392
Finished Goods.................................................................. 450

Conversion cost in RIP is adjusted from $600 of May 1 to the $850 estimate at May
31. Conversion cost in Finished Goods is adjusted from the $2,000 at May 1 to the
$1,550 estimate at May 31.

11.A 20. A
12.A 21. A
13.C 22. A
14.C 23. B
15.C 24. C
16.B 25. D
17.B 26. A
18. B 27. C
19. A
28. D
Supporting Computation for 26-28

Journal entries involving the RIP account are:

Raw and In Process........................................................... 680,000

Accounts Payable.......................................................... 680,000

This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed, because they remain a part of RIP.

Finished Goods.................................................................. 676,800

Raw and In Process....................................................... 676,800

This entry backflushes material cost from RIP to Finished Goods. This is a post
deduction. The calculation is:

Material in August 1 RIP balance........................................ $ 38,700

Material received during August.......................................... 680,000

$718,700

393
 Material in August 31 RIP, per physical count...................... 41,900

Amount to be backflushed.................................................. $676,800

Raw and In Process........................................................... 500

Cost of Goods Sold........................................................ 500

Conversion cost in RIP is adjusted from the $4,800 of August 1 to the $5,300
estimate at August 31. The offsetting entry is made to Cost of Goods Sold, where
all conversion costs were charged during August.

29.A
30.C
31.D
Supporting Computation for 29-31

Journal entries involving the RIP account are:

Raw and In Process........................................................... 187,000

Accounts Payable........................................................ 187,000

This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed because they remain a part of RIP.

Cost of Goods Sold............................................................ 187,800

Raw and In Process....................................................... 187,800

This entry backflushes material cost from RIP to Cost of Goods Sold. This is a
postdeduction. The calculation is:

Material in June 1 RIP balance............................................ $ 7,600

Material received during June............................................. 187,000

$194,600

Material in June 30 RIP, per physical count......................... 6,800

Amount to be backflushed.................................................. $187,800

Raw and In Process........................................................... 200

394
 Cost of Goods Sold........................................................ 200

Conversion cost in RIP is adjusted from the $900 of June 1 to the $1,100 estimate at
June 30. The offsetting entry is made to Cost of Goods Sold, where all conversion
costs were charged during June.

32.A
33.C
34.C
35.C
Supporting Computation for 32-35

Raw and In Process........................................................... 173,000

Accounts Payable.......................................................... 173,000

Finished Goods.................................................................. 172,550

Raw and In Process...................................................... 172,550

To backflush material cost from RIP to Finished Goods. This is a postdeduction.

The calculation is:

Material in May 1 RIP balance............................................. $ 4,900

Material received during May.............................................. 173,000

$177,900

Material in May 31 RIP, per physical count.......................... 5,350

Amount to be backflushed.................................................. $172,550

Cost of Goods Sold............................................................ 173,200

Finished Goods............................................................ 173,200

395
To backflush material cost from Finished Goods to Cost of Goods Sold. This is a
postdeduction. The calculation is:

Material in May 1 finished goods......................................... $ 4,000

Material backflushed from RIP............................................ 172,550

$176,550

Material in May 31 finished goods, per physical count.......... 3,350

Amount to be backflushed.................................................. $173,200

Cost of Goods Sold............................................................ 200

Raw and In Process........................................................... 250

Finished Goods.................................................................. 450

Conversion cost in RIP is adjusted from $600 of May 1 to the $850 estimate at May
31. Conversion cost in Finished Goods is adjusted from the $2,000 at May 1 to the
$1,550 estimate at May 31.

36.A
37.A
38.A
39.A
40.B

396
  SERVICE COST ALLOCATION

Direct Method

1. C
2. A
3. C
4. D
5. A
6. A
7. C
8. B
9. D
10.C
11.A
12.D
13.B
14.A
15.B $100,000 × 90,000 / (90,000 + 100,000) = $47,368
16.D $150,000 × 2,000 / (2,000 + 2,500) = $66,667
17.A-The direct method does not allocate support department’s cost to other
support departments.
18.A
19.B
20.C
Computation for 18-20

Direct Method
Fabricating Assembly Finishing Total
No. of employees 30 40 20 90
Service percentage 33.33% 44.44% 22.22% 100.00%
Square feet 10,000 28,000 15,000 53,000
Service percentage 18.87% 52.83% 28.30% 100.00%
Admin. cost allocation*$16,666.67 $22,222.22 $11,111.11 $50,000.00
Janitorial cost all0.**5,660.38 15,849.06 8,490.57 30,000.00
Direct overhead cost 40,000.00 50,000.00 25,000.00
Total overhead cost $62,327.05 $88,071.28 $44,601.68
Div. by direct labor hrs.÷   5,000 ÷   6,000 ÷   2,000
Dep. OH rate per DLH$   12.47 $   14.68 $   22.30
**Departmental employee % × $50,000
**Departmental square feet % × $30,000

397
21.A
22.D
23.C
24.B
25.B
26.A
27.D
28.C
29.B
30.A
31.A
32.B
33.C
34.A
35.A
36.A
37.A
38.A
39.A
40.C

398
 Service Cost Allocation

Step Down

1. C 18.D
2. C 19.B
3. A 20.A
4. A 21.A
5. A 22.A
6. D 23.C
7. C 24.B
8. A 25.A
9. C 26.A
10.D 27.C
11.B 28.A
12.A 29.A
13.A 30.B
14.A 31.D
15.D 32.D
16.C 33.A
17.B
34.A
35.B $275,000 × 125 / (5 + 125 + 100) = $149,457
36.D $250,000 + ($275,000 × 5) / (5 + 125 + 100) × 1,500 / (3,500 + 1,500) =
$255,978 × 1,500 / 5,000 = $76,793
37.B -The Repair Department performs allocation first. Thus, the Tool Department
will receive cost allocation of ($35,000 × 1/40) = $875.
38.A
39.B
40.C

Computation for 38-40

399
 Service Proportion Table
Admin. Janitorial Fabricating Assembly Finishing
Total
No. of employees................. 10 30 40 20 100
Service percentage............ 10.00% 30.00% 40.00% 20.00% 100.00%
Square feet.......................... 2,000 10,000 28,000 15,000 55,000
Service percentage............ 3.64% 18.18% 50.91% 27.27% 100.00%
Sequential Cost Allocation
Admin. Janitorial Fabricating Assembly Finishing
Total
Direct overhead cost.......... $ 50,000) $30,000) $40,000 $50,000 $25,000
First step: 
Allocate admin. costs............ $(50,000)$ 5,000) $15,000 $20,000 $10,000
Second step: 
Allocate janitorial costs
Determine allocation percentages:
Square feet................... 10,000 28,000 15,000 53,000
Allocation percentage..... 18.87% 52.83% 28.30% 100.00%
Janitorial cost allocation.... $(35,000) $6,604 $18,491 $9,906 $35,000
Total overhead costs............ $0) $0) $61,604 $88,491 $44,906
Divided by direct labor hours ÷ 5,000 ÷ 6,000 ÷ 2,000
Departmental OH rate per DLH $ 12.32 $ 14.75$ 22.45

 SERVICE COST ALLOCATION

Reciprocal Method

400
 1. D
2. D
3. D
4. C
5. B
6. D
7. D
8. D
9. C
10.D
11.C
12.A
13.B
14.D
15.B
16.C
17.B
18.D
19.A
20.C
21.D
22.C
23.C
24.D
25.D
26.D
27.A
28.B
29.B
30.A
31.B
32.C
Supporting Computation for 30-31
Service Proportion Table
Admin. JanitorialFabricatingAssemblyFinishing
Total
No. of employees................. 10 30 40 20 100
Service percentage............ 10.00% 30.00% 40.00% 20.00%
100.00%
Square feet.......................... 2,000 10,000 28,000 15,000 55,000
Service percentage............ 3.64% 18.18% 50.91% 27.27%
100.00%
Simultaneous equations can be created based on the service proportion table above.
A = $50,000 +.0364J J = $30,000 + 0.1A
where A = Administration Department total
costs
J = Janitorial Department total costs
A = $50,000 + .0364 × ($30,000 + 0.1A)
A = $50,000 + $1,092 + 0.00364A J = $30,000 + (0.1 × $51,279)
0.99636A = $51,092 J = $30,000 + $5,128
A = $51,279 J = $35,128

Reciprocal Cost Allocation

Admin. Janitorial Fabricating Assembly Finishing
Direct overhead cost $50,000.00)$30,000.00)$40,000.00 $50,000.00 $25,000.00
Admin. cost allocation (51,279.00) 5,127.90) 15,383.70 20,511.60 10,255.80
401
Janitorial cost allocation  1,277.38) (35,128.00)   6,386.91  17,883.35   9,580.36
Total overhead costs $0) $0) $61,770.61 $88,394.95 $44,836.16
Direct labor hours................. ÷   5,000 ÷   6,000 ÷   2,000
Departmental overhead rate. $   12.35 $   14.73 $   22.42
33.C
34.B
35.D
36.D
37.C
38.A
39.B
40.C

 ACTIVITY-BASED COSTING SYSTEM (ABC COSTING)

Allocation of costs: traditional costing versus ABC costing

Solution:

1. C
The traditional approach lumps all the overhead costs into one pool and allocates
it based on one activity. 
402
          Allocation Rate:($96,000 + $180,000 + $34,000)/[(700 x 2) x (2,000 x
3.3) = $38.75       
        Amount allocated to each 'Fred': $38.75 x 2 hours per unit = $77.50
2. A
Setups: $96,000 x 36/48 = $  72,000

Assembly: $180,000 x 3,000/5,000 = 108,000

Packaging: $34,000 x 400/1,000 =   13,600

Overhead allocated to all Barneys $193,600

Units of Barney to be produced     2,000

Cost per unit of barney $96.80

3. B
4. A
 $250,000/5,000 = $50 per DLH
5. A
$50 per DLH x 2 DLH per Bert = $100
6. C
7. A
8. B
9. C
Overhead rate = [$1,225,000 + $175,000]/175,000 = $8 per direct labor hour

Overhead cost per unit:

  Product A Product B Product C

Direct labor hours 25,000 10,000 140,000

Overhead rate x $8 x $8  x $8 

Total factory overhead $200,000 $80,000 $1,120,000

Number of units /  10,000 /   2,000 /   50,000

Cost per unit $20.00 $40.00 $22.40

403
 10.A
Overhead rate = $261,780/3,000DLH  =  $ 87.26/DLH                    
      Allocated overhead:
                      Product A:  $87.26 * 1DLH=  $87.26
                       Product B:  $87.26 * 2DLH=  $174.52  
11. B
Activity center
rates:
Setups $27,140/46  =  $590 / setup

Maintenance $183,040/4,160  =  $44/sq. ft.

Inspections $51,600/344  =  $150/inspection  

Allocated overhead:

  Product A Product B

Setups (20 * $590) $11,800 (26 * $590) $15,340

Maintenance (1,620 * $44) 71,280 (2,540 * $44) 111,760

Inspections (56 * $150)     8,400 (288 * $150)    43,200

    91,480   170,300

Units      *   500        *1,250

Overhead per
  $    182.96   $   136.24
unit

12.A
$600/400 x 1.5 hours = $2.25
13.A
[$100,000/500 x 2] = $400
14.D
 [$24,000/1,200] x 10 = $200
15.C
 [$1,000,000/500,000] = $2.00 per machine hour
16.A

404
 Direct material $30,000

Direct labor (3,000 x $15) 15,000

Overhead setups (4,000 x 2) 8,000

Security 5,000

General overhead ($500 x 3 hrs.)    1,500

Total $59,500

17. A
$50 x 12 =  $600
 Ordering: $22,500/450 = $50 per PO

 Depreciation: $29,120/1,040 = $28 per machine hour $28 x 32 =    928

 Quality control: $5,600/28 = $200 per inspection $200 x 2 =    400

Total $1,928

18.B

Total overhead cost: $22,500 + $29,120 + $5,600 = $47,220

Allocation rate: $57,220/$143,050 = $0.40 per DL$  

Overhead allocation to one batch: $0.40 x $4,400 = $1,76

19.B

Single rate allocation:  Two pool allocation:

   Mixing: 1 hour x $2.80 = $2.80    Mixing: 1 hour x $4 = $4.00

   Baking: 3 hours x $2.80 = $7.40    Baking: 3 hours x $2 = $6.00

      Total cost allocated  = $10.20      Total cost allocated = $10.00

Results: overcosted under traditional (too much allocated to product A using

traditional allocation.

405
 20.C

Estimated $120,000 + $210,000 + $94,000

MOH = = $100/DLH
Estimated DLH 4,240 DLH

         $100/DLH x 2.6 DLH = $260 for each 'Bill'

21.A

Machine $120,000/60 = $2,000/setup

setups
Assembly  $210,000/20,000 = $10.50/sf

Packaging    $94,000/1,000 = $94/crate

Cost for al Hillarys:  

$2,000/setup x 45 setups = $90,000  

$10.50/sf x 6,000 sf = 63,000  

  $94/crate x 700 crates = 65,800  

  Total MOH cost for all HIllarys: $218,800  

  Cost per Hillary:    

            $218,800/800 = $273.50

Materials
  ordering cost/number of POs = $12,600/600  
= $21/PO 22.A
    Blue widget allocation: $21/PO x 18 purchase orders = $    378
Estimated overhead costs/ DL cost = $1.50 per DL$  
   
   Blue widgets = $1.50 x [140 DLH x $16/hr.] = $3,360
Materials handling/number of crates = $42,000/21,000 =
Overhead cost of each blue widget = $3,360/1,000 = $3.36  
$2/crate

    Blue widget allocation: $2/crate x 1,500 crates = 3,000

23.B
   
 
Quality control/number of inspections = $32,400/900 =
  
$36/inspection

    Blue widget allocation: $36/inspection x 14 inspections =     504

406
Total overhead applied to blue widgets $3,882

Overhead cost of each blue widget = $3,882/1,000 = $3.88

 24. C
($16,500 + $24,000 + $36,000)/4,500 DLH = $17 per DLH
$17 x 900 DLH = $15,300

25.C
Setups: $16,500/250 = $66/ setup     $66 x 24 setups = $1,584

Quality control: $24,000/400 = $60/ inspection $60 x 60 inspections = $3,600

Fabrication: $36000/3,600 = $10/ run $10 x 900 runs = $9,000

  Total = $14,184

26.D
 $    28,000   = $56 per requisition             x 150 requsitions =  $  8,400

          500      

          x 3,600 square feet

 $   120,000       = $10 per sq. foot =      36,000

       12,000      

407
  $    72,000    = $360 per service call              x 180 calls =       64,800

            200    total   $109,200

    number of units 4,000

     cost per unit    $27.30

27.C

Setups 45 x $360 per setup = $16,200

Purchase orders 525 x $2 per order = 1,050

Product testing 340 x $10 per test = 3,400

Template etching 32 x $40 per etching = 1,280

Facilities 8,000 x $2.50 per sf = 20,000

   TOTAL $41,930

28.A
[$72,000 + $160,000 + $80,000]/10,400 DLH = $30.00 per DLH

29. A
$30.00 per DLH x 3 hours = $90

30.D
Machine setups $72,000/192 setups =  $375 per setup x 144 setups =

Maintenance $160,000/4,800 sf =  $33.33 per sf x 3,360 sf =

Packaging $80,000/5,000 crates =  $16.000 per crate x 2,000 crates =

   Total for all Barbie's  

   Per each Barbie: $198,000/1,600 =

31.D
Setup: $50,000 x 4/40 = $5,000

Inspection: $80,000 x 50/400 = 10,000

Packaging: $28,000 x 300/1500 = 5,600

408
Total $20,600

32.C
From Dept. 1: 1,500/(1,000 + 1,500) x $400,000 = $240,000

     

From Dept. 2: 300/(300 + 100) x $100,000 = 75,000

     

From Dept. 3: 300/(200 + 300) x $500,000 = 300,000

  TOTAL $615,000

33. B
34. A
35. B
36. D
Direct material $30,000

Direct labor (3,000 x $15) 15,000

Overhead setups (4,000 x 2) 8,000

Security 5,000

General overhead ($500 x 3 hrs.)    1,500

Total $59,500

37.B
$104,500 x 20,000/100,000 = $20,900

38.A
39. B
Machine Setup  $60,800/320 x 140 = $26,600

Materials Handling  $88,200/4,200 x 3,000 = $63,000

Electric Power  $40,000/20,000 x 2,000 = $4,000

  Total allocated to all buckets = $93,600

409
   Per unit cost = $93,600/20,000 buckets = $4.68

40.C

410
 ACTIVITY-BASED COSTING SYSTEM

Determination of total product costs: Traditional costing and ABC

costing

1. E
2. C
Activity 1 (P20,000 x 100/500) P 4,000
Activity 2 (P37,000 x 800/1,000) 29,600
Activity 3 (P91,200 x 800/3,800) 19,200
Total allocated cost P52,800
÷ number of units 8,000
Cost per unit P 6.60

3. A
Activity costs, Patient 2:
Room and meals (3 x P150) P 450
Radiology (2 x P95) 190
Pharmacy (1 x P28) 28
Chemistry lab (2 x P85) 170
Operating room (1 x P550) 550
Total P1,388
4. D
5. B
Prime costs P 900,000
Applied overhead ( P600,000 / 75,000 DLH x 75,700) 605,600
Total cost P1,505,600
÷ Units produced 100,000
Unit cost P 15.06
6. A P 15.06
7. D
8. C
9. A
10.E
11.E

411
12.D
High $ 100,000 5,000
Low 80,000 2,500
Difference $ 20,000 2,500
Variable rate = $20,000  2,500 = $8.00/direct labor hour
13.A
14.B
15.B
16.C
17.D
18.A
19.A
20.E
21.A
22.D
23.B
24.C
25.C
26.A
The existing system allocated 3,000/30,000 = 10% of all overhead to Product A
last year; but A accounted for only 25/500 = 5% of batch-level activity. So, with
respect to batch-level costs only, the existing system overstated A's cost
last year by a total of:

(10% - 5%) x $100,000 = $5,000 overstatement

27.A
$1,500,000 of overhead divided by 50,000 machine hours = $30 per machine
hour
28.D
29.A
30.C
31.A
32.A
33.B
34.C
Product Costs from Existing Cost System
Overhead Rate:
$1,500,000 of overhead divided by 50,000 machine hours = $30 per machine
hour
412
 Nifty So-So Total
Direct material $ 100,000 $ 310,000 $
410,000
Direct labor 50,000 350,000 400,000
Overhead:
$30 x 3,000 90,000
$30 x 47,000 1,410,000
1,500,000
Total cost $ 240,000 $ 2,070,000 $ 2,310,000
Units produced 500 15,500
Cost per unit $ 480.00 $ 133.55

Product Costs from Activity-Based Costing System

Overhead Rate:
$250,000 setup related costs divided by 200 setups = 1,250 per setup
$350,000 design related costs divided by 10,000 design hours = $35 per design
hour
$900,000 of other overhead divided by 50,000 machine hours = $18 per
machine hour

Nifty So-So Total

Direct material $ 100,000 $ 310,000 $ 410,000
Direct labor 50,000 350,000 400,000
Overhead:
$1,250 x 120 setups 150,000
$1,250 x 80 setups 100,000 250,000
$35 x 6,000 design hours 210,000
$35 x 4,000 design hours 140,000 350,000
$18 x 3,000 machine hours 54,000
$18 x 47,000 machine hours 846,000 900,000
Total cost $ 564,000 $ 1,746,000 $ 2,310,000
Units produced 500 15,500
Cost per unit $ 1,128.00 $ 112.65

35.D 38.C
36.D 39.A
37.A 40.C

413
 Methods of allocating joint cost to products

Market (sales) value method

Market Value at split- off point approach

1. C. -If Sonimad were to process the MSB further, they would incur an
additional cost of P100,000. They would also be able to sell the 60,000 units
for P3 more per unit. This is an additional P180,000 in revenue. When
reduced by the additional costs, Sonimad would increase their contribution
by P80,000 if they further processed the MSB. By not processing the MSB
further, their contribution would be P80,000 less.
2. A. -In order to allocate the joint costs using the physical-quantity basis, we
need to determine the total physical quantity that was produced. There were
180,000 gallons of LS and 120,000 gallons of SS. In total there were 300,000
gallons, of which SS comprised 40%. Therefore, SS should receive 40% of
the P420,000 in joint costs. This is P168,000.

3. D. -Joint products are identifiable at the split-off point and they have
significant sales value.

4. B. In order to allocate the costs using the relative sales value method, we
need to know the total relative sales value. There are 60,000 units of MSB
that will be sold at P2 each for a total value of P120,000. There are 90,000
units of CBL that will be sold for P4 each, for a total value of P360,000. The
total sales value of both products is P480,000, and MSB represents 25% of
this total sales value. The joint costs are P300,000 and MSB should be
allocated 25%, or P75,000, of the joint costs.

5. B.-In order to allocate joint costs based on the relative sales value of the
output, we need calculate the sales value of the output for each product. For
Two Oil it is P6,000,000 (300,000 barrels produced × P20 each). For Six Oil it
is P7,200,000 (240,000 barrels produced × P30 each). For Distillates it is
P1,800,000 (120,000 barrels produced × P15 each). In total, this is
P15,000,000, of which Two Oil is 40%. Therefore, Two Oil will be allocated
40% of the P10,000,000 in joint costs, or P4,000,000.

6. B.- In order to calculate the total cost of Product S, we need to know how
much of the joint costs will be allocated to Product S. In order to allocate

414
 joint costs based on the sales value at the split off point, we need to
determine the sales value at the split off point for each item. For R it is
P250,000 (2,500 units produced × P100). For S it is P400,000 (5,000 units ×
P80). For T it is P150,000 (7,500 × P20). In total this is P800,000, of which
Product S is 50%.

Therefore, 50% of the joint costs should be allocated to Product S. Joint costs
were P720,000, so Product S receives P360,000. For the company it is more
beneficial to process product S further because it gains greater incremental
revenue after further production. Thus, we need to add the P150,000 of
processing costs after the split off point to determine the total cost of Product S
as P510,000.

7. C
MV of by-product Zest 5

Less: Selling and administrative expense 2

Operating profit 1

Share in joint cost per unit 2

x Units
produced 1,000
Share in joint
cost 2,000

8. A.-The proportion of the process costs apportioned to

product B is [(3,000 × 80)/(2,500 × 40) + (3,000 × 80)].
Thus, P192,000 × 24/34 = P135,529.

9. A-The correct answer remains P135,529 (option A) because where there is a

market value at the split-off point, it is irrelevant what happens in any further
processing. In any case, the net realizable values cannot be calculated
because the costs of the further processing are not given in the question.

10. D-Market value in this situation requires the calculation of the net realizable

415
 value of each product because the joint products cannot be sold at the split-
off point.

The net realizable value per unit of product A is P48 (selling price P60 less P12
further processing cost) and of product B is P88 (selling price P104 less P16
further processing cost). The proportion of the process costs apportioned to
product B is [(3,000 × 88)/(2,500 × 48) + (3,000 × 88)].
Thus, P192,000 × 264/384 = P132,000.

11.B-A product should be sold at the split-off point if there is not any
incremental profit from processing the product further. As long as the process
as a whole is profitable, it is irrelevant if an individual product is not
profitable. It has to be assumed, in this example, that the process as a whole
is profitable.

The incremental profit/(loss) from further processing is calculated as:

Product A Product B

P per unit P per unit

Incremental revenue 8.00 (32.00 – 24.00) 10.00 (48.40 – 38.40)

Incremental cost 8.60 12.20

Incremental profit/(loss) (0.60) (2.20)

12.B. Entire production of accounting period

13.A. Sales value at split off method

14.D. Ignore the joint cost in making the decision

15. D
A 30,000*15,000/(15,000+60,000)

416
 16. C
B 30,000 – 6,000

17.C
Product Sales value at SO point Joint Costs
V-1 P420,000@60% P252,000

18.B
Product Joint Cost Further Total Costs
Processing
Costs

W-1 P62,500 P50,000 P112,000

19.B
Product Joint Cost Further Total Costs
Processing
Costs

W-2 P125,000 P75,000 P200,000

20.B

Product Joint Cost Further Total Costs

Processing
Costs

W-1 P62,500 P125,000 P187,500

21.C
Product MV at Split-off Joint costs Further Process Total Cost
point Cost

B P100,000*80% P80,000 P50,000 P130,000

417
 22.C
MV at Joint
SoPt. X %* Costs

C P120,000 60% P72,000

D 50,000 60% 30,000 **

E 30,000 60% 18,000

P200,000 P120,000

*P120,000/P200,000= 60%

**D's share in joint costs would be : P50,000X60%=P30,000

23.C
Sales of product E if
process further P40,000

Less: Cost of Sales

Joint Costs P18,000

Further
processing costs 6,000 24,000

Gross Profit on sale P16,000

418
 24.C
Sales of product W if process
further P78,000

Less: Cost of Sales

Joint Costs P36,000

Further processing costs 12,000 48,000

Gross Profit on sale of Product

W P30,000

25. D
Total Joint Costs = P375,000-P50,000=P325,000

Final MV FPC HMV Joint Costs

W P192,500 0 P192,500 P125,125

X 82,500 0 82500 53,265

Y 165,000 P50,000 115,000 74,750

Z 110,000 0 110,000 71,500

550,000 P50,000 500,000 325,000

419
 NRV
26.B
Lead (20,000-8,000) P12,000

Copper (40,000-1,000) 39,000

Manganese (30,000-
6,000) 24,000

Total P75,000

Joint Cost to Copper (39,000*.80)= P31,200

27.C
MV at SoPt. X %* Joint Costs

P P60,000** 60% P36,000

Q ?

R P15,000  

P100,000 P60,000

*P60,000/P100,000=

**P36,000/60%=P60,0
00

28. Market value in this situation requires the calculation of the net realizable
value of each product because the joint products cannot be sold at the split-
off point.

The net realizable value per unit of product A is P48 (selling price P60 less
P12 further processing cost) and of product B is P88 (selling price P104 less
P16 further processing cost). The proportion of the process costs apportioned
to product A is [(2,500 × 48)/(3,000 × 88) + (2,500 × 48)].
Thus, P192,000 × 120/384 = P60,000.

420
 29.C
Sales of product W if process
further P538,000

Less: Cost of Sales

Joint Costs P252,000

Further processing costs 88,000 340,000

Gross Profit on sale of Product W P198,000

30.A
Sales of product W if process
further P320,000

Less: Cost of Sales

Joint Costs P162,000

Further processing costs 30,000 192,000

Gross Profit on sale of Product W P128,000

31.A

A 50,000*20,000/(20,000+80,000)

32. C
B 50,000 – 6,000

33.D

Product Sales value at SO point Joint Costs

M-1 P500,000@70% P350,000

421
 34.A

Product Sales value at SO point Joint Costs

M-2 P300,000@70% P210,000

35.C

Product Sales value at SO point Joint Costs

M-3 P100,000@70% P70,000

36.C
MV at Joint
SoPt. X %* Costs

C P120,000 60% P72,000 **

D 50,000 60% 30,000

E 30,000 60% 18,000

P200,000 P120,000

*P120,000/P200,000= 60%

**C's share in joint costs would be : P120,000X60%=P72,000

37.D
MV at Joint
SoPt. X %* Costs

C P120,000 60% P72,000

D 50,000 60% 30,000 **

E 30,000 60% 18,000

P200,000 P120,000

*P120,000/P200,000= 60%

422
**E's share in joint costs would be : P30,000X60%=P18,000

38.B
39.B
40.C

MV at Joint
SoPt. X %* Costs

75.5 P113,25
X P150,000 % 0

75.5
Y 350,000 % 264,250

75.5
Z 400,000 % 302,000

P679,50
P900,000 0

423
Methods of allocating joint cost to products

Market (sales) value method

Hypothetical market value approach or approximated net
realizable value approach

1. C. -Usually the sales revenue from the sale of a by-product is accounted for as
a reduction of the common costs that are allocated to the other products.

2. A-The NRV is calculated as sales price minus costs required to complete and
dispose of the item. In order to allocate joint costs using NRV we first need to
calculate the NRV for each of the two products. There are
60,000 units of MSB that will be sold for P5 each after further processing, or
P300,000. There are also P100,000 of additional costs that will be incurred, so
the NRV of MSB is P200,000. There are only 80,000 good units of CBL produced
because 10,000 units are damaged in further processing. These units will be sold
for P10 each, or a total of P800,000. However, there are also additional costs of
P200,000, making the NRV of CBL only P600,000. In total there is an NRV of
P800,000, of which CBL makes up 75%. Therefore, CBL should receive 75% of
the joint costs, or P225,000. The question is the total cost that would be
assigned to a CBL unit. In addition to the joint costs, we also need to include the
additional processing costs of P200,000. In
total, then, there are P425,000 of costs that need to be allocated to the 80,000
units of CBL. This is P5.3125 per unit.

3. C.- The NRV is calculated as sales price minus costs required to complete and
dispose of the item. In order to allocate joint costs using NRV we first need to
calculate the NRV for each of the two products. This process is easier in this
question because there are no further costs to worry about so their NRV is
simply equal to their selling price. There are 180,000 gallons of LS that will sell
for P2.40 per gallon, or P432,000 total. There are 120,000 gallons of SL that will
sell for P3.90 per gallon, P468,000 in total. Together, these two products have a
NRV of P900,000, of which LS represents 48%. Therefore, LS should be allocated

424
 48% of the joint costs. The joint costs were P420,000 and LS's share of this is
P201,600.

4. D.-The joint costs to be allocated total P5,000 (P2,000 to purchase Duo and
P3,000 to process it into Big and Mini). The net realizable value for Giant is (600
× P17) minus the additional processing costs of P1,000, which equals P9,200.
The sales price for Mini will be used as its net realizable value in this allocation,
since it will not be processed further. That is (200 × P4), or P800. The total of
the two values is P10,000 (P9,200 + P800), and Giant's NRV of P9,200
represents 92% of that. Therefore, 92% of the joint cost of P5,000, or P4,600,
will be allocated to Giant.

However, the question asks for the total cost of producing Giant, not just the
amount of the joint cost allocated to Giant. In addition to the joint cost of
P4,600, there will be P1,000 of additional processing costs incurred by Giant.
Therefore, the total cost of producing Giant is P4,600 + P1,000, or P5,600.

5. A. - Net realizable value (NRV) is calculated as the selling price minus future
costs to complete and dispose. For Alfa, the NRV is P2 per pound, or P20,000 in
total. For Betters, the NRV is P8 per pound, or P40,000 in total. Together, these
two products have P60,000 of NRV. Of this, 33% is Alfa and 67% is Betters.
Therefore, Betters will get 2/3 of the joint allocable costs. The joint costs to
allocate are the P93,000 and because they do not inventory the by-product, all
P93,000 of the joint costs need to be allocated. Betters is to receive 2/3 of this,
or P62,000.

6. A.- The NRV of an item is calculated as the selling price minus the costs to
complete and dispose. In order to allocate joint costs based on NRV, we need to
calculate the total NRV that all of the joint products have at the split off point. In
this question there are no further processing costs, so we will use the sales price
as the NRV. One pound of cheese has a sales price of P2 and there were 450
pounds, so this is P900 of NRV. One pound of whey has a sales price of P.80 and
there will be only 375 pounds of whey that will be able to be sold, so this is P300
(the whey that will not be sold will bring no NRV to the company since the sales
price is P0). In total there are P1,200 of NRV, and the cheese accounts for 75%
of it 900 ÷ 1,200). This means that the cheese will get 75% of the common
costs. Now we need to calculate the common costs. They are made up of P200
of milk, P400 of labor and P400 of overhead. This is P1,000 and 75% of it is
P750. The other P250 will go to the whey.

7. C.- The NRV is calculated as sales price minus costs required to complete and
dispose of the item. In order to allocate joint costs using NRV we first need to

425
 calculate the NRV for each of the two products. We can do this on a per unit
basis as follows: The selling price of LS is P2.40 per gallon, but there are
additional processing costs of P1.40 per gallon. This leaves an NRV of P1 per
gallon of LS.

Since there are 180,000 of LS, the NRV for LS is P180,000. Doing the same for
SS, we get an NRV of P3 per gallon (P3.90 selling price P.90 additional costs)
and with 120,000 gallons this is a total NRV of P360,000. In total there is
P540,000 of NRV, and SS makes up 2/3 of the total NRV. Therefore, SS should
receive 2/3 of the P420,000 joint costs, or P280,000.

8. D.- Because both products can be sold at the split off point, we must use the
relative sales values at the split-off point in order to allocate the joint costs, even
though one product will be processed further. Using the relative sales value
method, we will allocate the P10,000 of joint costs to the different products.
Since product X has a sales value at split off of P12,000 and Y has a sales value
at split off of P8,000, the total sales value is P20,000. 60% of this is from
product X, so product X will receive 60%, or P6,000, of the joint costs.

9. C.- Net realizable value (NRV) is calculated as the selling price minus future costs
to complete and dispose. For Alfa, the NRV is P2 per pound, or P20,000 in total.
For Betters, the NRV is P8 per pound, or P40,000 in total. Together, these two
products have P60,000 of NRV. Of this, 33% is Alfa and 67% is Betters.
Therefore, Alfa will get 1/3 of the joint allocable costs. The joint costs to allocate
are the P93,000 in joint costs reduced by the P3,000 of revenue that will be
received from the sale of the by-product. (The process of inventorying the by-
product requires that the P3 per unit sales value is debited to inventory and the
corresponding credit is a reduction of the production costs.) So, P90,000 needs
to be allocated, and 1/3 of this is P30,000.

10.B. - The NRV of an item is calculated as the selling price minus the costs to
complete and dispose. In order to allocate joint costs based on NRV, we need to
calculate the total NRV that all of the joint products have at the split off point.
We will make these calculations based on one ton of raw materials. We can do
this because the answer is in %, not in the dollar amount. F1 has an NRV of P2
per unit and there are 5 units, so this is P10 of NRV.

F2 has an NRV of P5 per unit and there are 2 units, so this is P10 of NRV. F3 has
an NRV of P10 per unit and there are three units, so this is P30 of NRV. In total
there is P50 of NRV and the NRV of F1 is 20% of this amount.

426
11.

Apportioned Joint Cost for Caustic Soda:

= (Total Joint Cost/Total Net realizable value)*Net realizable value

(P100,000/140,000)*P60,000

P42,857

12.
Apportioned Joint Cost for Chlorine:

= (Total Joint Cost/Total Net realizable value)*Net realizable value

(P100,000/140,000)*P80,000

P57,143
13. A.
Net
realizable value method
14.D.
15.B.
16.A

Final sales P38,000

Less: Separable Costs 18,000

NRV P20,000

17.B
18.B
19.C
20.D

A 30,000*11,000/(11,000+58,000)

B 30,000 – 4,783

427
21.

a. Work in Process Inventory-Fertilizer Pellets P400,000

Work in Process Inventory-Joint Products P400,000

22.

a. Work in Process Inventory-Fertilizer Pellets P200,000

Various Accounts P200,000

23.

a. Finished Goods Inventory-Fertilizer Pellets P600,000

Work in Process Inventory-Fertilizer Pellets P600,000

24.

a. Accounts Receivable P600,000

Finished Gods Inventory P600,000

25. B

Ultimate of Final Total Ultimate Further NRV or

Product Unit Produced Market Value Market Value – Proc. Costs= Hy. MV

Wet 1,600 P200 P320,000 P100,000 P220,000

Dry 800 400 320,000 140,000 180,000

P400,000

NRV/ Hy. MV x % = Joint Costs

Wet P220,000 30% P 66,000 (b)

Dry 180,000 __________

P400,000 P120,000

*P120,000/P400,000

428
26. D - P120,000-66,000=P54,000

27. A

Allocation of Raw Materials based on units produced:

Product Units Produced Ave. UC Raw Materials

R 25,000 (5/10) P.24* P 60,000

S 15,000 (3/10) .24 36,000

T 10,000 (2/10) .24 24,000

50,000 P120,000

*P120,000 / 50,000 = P24

Allocation of conversion costs based on MV approach:

Units Ult. MVI Total Ult. Further NRV or

Product Produced x Final S. P. = or Final S. P. - Proc. Costs = Hy. M.V.

R 25,000 P10 P250,000 P30,000 P220,000

S 15,000 12 180,000 20,000 160,000

T 10,000 15 150,000 30,000 120,000

P500,000

NRV / Conv. Raw Further proc. Total

Hy. M. V. x %* = Costs + Materials + Costs = Costs

R P220,000 40% P88,000 P60,000 P30,000 P178,000

S 160,000 40% 64,000 36,000 20,000 120,000

T 120,000 40% 48,000 24,000 30,000 102,000

P500,000 P200,000

Unit Cost: Total Cost = P178,000 = P7.12 (a)

Units Produced 25,000

429
*P200,000 / P500,000 = 40%

28. C

Sales of Product S (refer to No. 5) …………………………………………. P180,000

Less: Cost of Sales (same with total costs since

Production = Sales), refer to No. 5 ……………………………….. 120,000

Gross profit ………………………………………………………………………… P 60,000 (C)

29. A

Sales of Product T (refer to no. 5) ………………………………………... P150,000

Less: Cost of Sales (refer to No. 5) ………………………………………. 102,000

Gross profit ……………………………………………………………………….. P 48,000

Less: Operating expenses (20% x P150,000) ……………………….. 30,000

Net Income ………………………………………………………………………. P 18,000 (a)

30. C P50,00*60%=P30,000

31. A- No profit is recognized on by-product sales in 2012 since by-product was

produced in 2011 in which case the net realizable value was disposed in that particular
year but not 2012.

32. D. - Because both products can be sold at the splitoff point, we must use the
relative sales values at the splitoff point in order to allocate the joint costs, even though
one product will be processed further. Using the relative sales value method, we will
allocate the P10,000 of joint costs to the different products. Since product X has a sales
value at splitoff of P12,000 and Y has a sales value at splitoff of P8,000, the total sales
value is P20,000. 60% of this is from product X, so product X will receive 60%, or
P6,000, of the joint costs. (Question 29 - CIA 1185 IV-11 - Joint Products and
Byproducts)

33. D - NRV: 38,000-18,000=P20,000

34. D. Relevant Cost

35. C. incremental cost

36. A. Gross margin percentage

430
37. A. Net realizable value

38. A. Unit Net realizable value

39.C
40.D
A 30,000*11,000/(11,000+58,000)

B 30,000 – 4,783

Methods of allocating joint cost to products

Market (sales) value method

Average Unit (production output) method

1. D. -Using physical quantity, there are a total of 15,000 pounds of Alfa and
Betters. Of this, 2/3 is Alfa and 1/3 is Betters. Therefore, Alfa will receive 2/3 of
the joint costs. The joint costs are P93,000, but because the by-product is
being inventoried, this needs to be reduced by the P3,000 revenue from selling
by-product. Therefore, there is a total of P90,000 that needs to be allocated
and 2/3 of this is P60,000.

2. C.- There are a total of P10,000,000 in joint costs that need to be allocated.
Under the physical output basis we first need to calculate the total physical
output. There were 660,000 barrels produced. Six Oil represented 240,000
barrels, or 36.36% of the total output. Therefore, Six Oil should get 36.36%,
or P3,636,363 of the joint costs. Note: if you used only 36%, you get a close,
but not exact answer.

3. A.- In this question the first thing we need to do is to reduce the joint costs that
need to be allocated by the sales value of the by-product. The sales value of the
by-product is P120,000 and this will reduce the costs to allocate to P2,400,000.
These costs are to be allocated based upon the physical volume of the two
products. Product 1 has a volume of 90,000 pounds and Product 2 has a volume
of 150,000 pounds. In total this is 240,000 pounds and since the 2nd product is
150,000 pounds, the allocation is as follows: P2,400,000 × (150,000 / 240,000)
= P1,500,000.

4. A.- In order to allocate the joint costs using the physical-quantity basis, we
need to determine the total physical quantity that was produced. There
were 180,000 gallons of LS and 120,000 gallons of SS. In total there were
300,000 gallons, of which LS comprised 60%. Therefore, LS should receive
431
 60% of the P420,000 in joint costs. This is P252,000. Note: Because this
used the physical quantity as the allocation basis, the information about
further processing costs was not necessary since that is used in calculating
the Net Realizable Value.

5. A. -In order to allocate the costs using the physical quantity method, we need to
know the total physical quantity. There are 60,000 units of MSB and 90,000 units
of CBL. There are 150,000 total units and CBL represents 60% of the total units.
The joint costs are P300,000 and CBL should be allocated 60%, or P180,000, of
the joint costs.

6. C.- When physical quantities are used to allocate joint costs, it is possible that
the costs that are allocated to the units do not have a corresponding relationship
to the value.

7. A. -The proportion of the process costs apportioned to product B is

3,000/(2,500 + 3,000)].

Thus, P192,000 × 3/5.5 = P104,727.

8. A
Coke

Output in tonnes 3,500

Wastage in tonnes 146

Total weight in tonnes 3,646

Joint Cost @ P15 per

tonne 54,690

Tar
9. B
Output in tonnes 1,200

Wastage in tonnes 50

Total weight in tonnes 1,250

432
 Joint Cost @ P15 per
tonne 18,750

10.C
Sulphate of
Ammonia

Output in tonnes 52

Wastage in tonnes 2

Total weight in tonnes 54

Joint Cost @ P15 per

tonne 810

11.A

Benzol

Output in tonnes 48

Wastage in tonnes 2

Total weight in tonnes 50

Joint Cost @ P15 per

tonne 750

12.A

433
 Coke 200/4,800*3,500=146

13.A

Tar 200/4,800*1,200=50

14.B
Sulphate of ammonia 200/4,800*52=2

15.B

Benzol 200/4,800*48=2

16.C

Apportioned joint cost:1200/2000*100,000=P60,000

17.D

Apportioned joint cost:800/2000*100,000=P40,000

18. A

Apportioned joint cost:10,000/25,000*75,000=P30,000

19.A

Apportioned joint cost:15,000/25,000*75,000=P45,000

20. D

Apportioned joint cost:150,000/240,000*2,520,000=P1,575,000

21. A

Apportioned joint cost:240,000/660,000*10,000,000=P3,636,000

22.B

434
Apportioned joint cost:80,000/200 000*2,500,000=P1,000,000

23.D

All of the above

24.A

Apportioned joint cost:4,000/15,000*50,000=P13,333

25. C

Apportioned joint cost:5,000/15,000*50,000=P16,667

26.D

Apportioned joint cost:1,000/15,000*50,000=P3,333

27.A

Apportioned joint cost:3,000/15,000*50,000=P10,000

28. C

Apportioned joint cost:2,000/15,000*50,000=P6,667

29. B

Apportioned joint cost:80,000/205,000*30,000=P11,707

30. C

Apportioned joint cost:125,000/205,000*30,000=P18,293

31. D

Apportioned joint cost:60,000/240,000*1,000,000=P250,000

32. A

Apportioned joint cost:100,000/240,000*1,000,000=P416,667

33. B

Apportioned joint cost:80,000/240,000*1,000,000=P333,333

435
34.A

Apportioned joint cost:2,000/12,000*1,200,000=P240,000

35. A

Apportioned joint cost:10,000/12,000*1,200,000=P1,000,000

36. B

Apportioned joint cost:50,000/205,000*600,000=P144,000

37. C

Apportioned joint cost:40,000/205,000*600,000=P120,000

38.D

Apportioned joint cost:80,000/205,000*600,000=P234,000

39.A

Apportioned joint cost:25,000/205,000*600,000=P72,000

40. B

Apportioned joint cost:10,000/205,000*600,000=P30,000

436
Methods of allocating joint cost to products
Market (sales) value method
Weighted average method

1. B. -The NRV of an item is calculated as the selling price minus the costs to complete
and dispose. In order to allocate joint costs based on NRV, we need to calculate the
total NRV that all of the joint products have at the split off point. We will make these
calculations based on one ton of raw materials. We can do this because the answer
is in %, not in the dollar amount. F1 has an NRV of P2 per unit and there are 5
units, so this is P10 of NRV. F2 has an NRV of P5 per unit and there are 2 units, so
this is P10 of NRV. F3 has an NRV of P10 per unit and there are three units, so this
is P30 of NRV. In total there is P50 of NRV and the NRV of F1 is 20% of this
amount.

2. D-The total calories of Alfa are 44,000,000 and the total calories of Betters are
56,000,000. In total, this is 100,000,000 calories, of which Better is 56%. The total
joint costs to allocate are P90,000. This is made up of the P93,000 in joint costs
reduced by the inventoried sales value of the by-product. Betters is to receive 56%
of this P90,000, or P50,400.

3. C. -The market value of Alfa is P40,000 and the gross market value of Betters is
P50,000. In total, this is P90,000. If the sales value of the by-product is inventoried,
the total joint costs to allocate are P90,000. Of this, P40,000 would be allocated to
Alfa.

437
4. D.-All of the above methods are acceptable approaches to accounting for by-
products.

438
5. C.- The primary reason for allocating joint costs is for inventory valuation for financial
reporting.

6. A. -materials, labor, and overhead

7. D. - constant gross margin percentage method.
8. A. -a by-product.

9. D. -None of the above

10.A.
Units Ave. Unit Joint Further Proc. Total
Product produced Cost Costs Cost cost
*P90,000/12,000=P7.
A 4,000 P7.5 P30,000 50,000** P80,000
5
B 12,000 P7.5 90,000
**Ultimate market value or final sales: P10,000
P25X4,000 16,000 120,000

Less: Market value at split-off point for 50,000

product A

P50,000

1. D

Product Ave. Unit Joint Further Proc. Total

Cost Costs Cost cost
Units
produced

A 4,000 P7.5 P30,000

B 12,000 P7.5 90,000 50,000** P140,000

16,000 120,000

*P90,000/12,000=P7.
5

**Ultimate market value or final sales: P150,000

P12.50X12,000

Less:Market value at split-off point for 100,000

product A 439

P50,000
11.C
Average Cost per unit :P300,000/50,000=P6

12.D
Average Cost per unit :P200,000/400,000=P5

13.A
Average Cost per unit :P100,000/10,000=P10

14.A
Average Cost per unit :P100,000/30,000=P3.33

15.B
Average Cost per unit :P85,000/40,000=P2.13
16.A
Average Cost per unit :P100,000/30,000=3.33

17.C
Allocated joint cost: 85/215*50,000=P19,767

18.D
Allocated joint cost: 130/215*50,000=P30,232

19.D. All of the above

20.D. None of the above
21.A
Allocated joint cost:120,000/300,000*420,000=P168,000

22.C
5,000*11,200=56,000,000
xP0.0009

P50,400

23.B
10,000*4,400=44,000,000
X P0.0009

P39,600

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24.C
Apportioned cost:50/200*70,000=P17,500

25.D
Apportioned cost:150/200*70,000=P52,500

26.D
Unit cost:175,000/50,000=P3.5

27.D
Unit cost:100,000/40,000=P2.5

28.A
Unit cost:250,000/80,000=P3.13

29.C
Unit cost:75,000/25,000=P3.00
30.C
Total cost: 3,000/10,000*250,000+50,000=P125,000
31.C
Total cost: 4,000/10,000*250,000+75,000=P175,000
32.C
Total cost:3,000/10,000*250,000+125,000=P200,000
33.A
Physical measure of units of output
34.C
Revenues of several product
35.A.
36.A. Marketing costs at point of sale
37.A.
38.B
39.C

441
METHODS OF ALLOCATING JOINT COSTS TO BY-PRODUCTS

1. C.- To determine when a product should be sold, we need to look at the costs to
manufacture further and the incremental revenue that will be received by
manufacturing further. The costs incurred after the split-off point are the costs of
further manufacture and are therefore relevant to this decision. (Question 19 -
CMA 1292 3-4 - Joint Products and Byproducts)

2. A. By-products

3. D
If the by-product is accounted for at time of production, by product inventory is
recorded at its selling price (or NRV in this case, given separable by-product
costs) because by-products usually do not receive an allocation of joint costs.
Thus, the by-product’s cost of sales is zero. Assuming sales of the by-product
reduced joint costs, the cost of sales of the gasoline was P100,000 (P120,000
cost to split-off –P30,000 sales of the by-product +P25,000 additional by-product
costs – P15,000 EI). Refer to No. 38 for further discussion.

Answer (A) is incorrect because the cost of sales of the by-product is P0. The
cost of sales of the gasoline equals P105,000 if the NRV of the by-product is
treated as other revenue. Answer (B) is incorrect because P115,000 ignores the
P15,000 ending inventory. Answer (C) is incorrect because allocating joint costs
to by-product based on relative sales value is not cost effective and by-product
cost of sales should be P0.

4. B
The difference between treating the by-product “May” as a joint product against
a by-product would be under the by-product treatment, the selling cost is netted
against “May’s” selling price, thus, reducing gross profit whereas under joint
product accounting, the selling costs would be deducted below the gross profit
like a selling expense.

Thus, if the change to joint-product accounting were made, gross profit would
increase and (b) therefore is correct.

5. A
The gross margin equals sales minus cost of sales. Before the change, the net
amount was deducted from the cost of sales (i.e., it increased the gross margin).

442
 After the change, the net amount is added to regular sales with no additional
increase in cost of goods sold. Hence, the gross margin will be the same.

Answers (b), (c) and (d) are incorrect because the change in accounting method
has no effect on gross margin.

6. C
Sales revenue minus cost of goods sold is gross margin. If the net revenue from
the by-product is recorded as other income rather than being deducted from cost
of goods sold, the gross margin will decrease by P3,000 [1,000 x (P4 sales – P1
CGS)]

Answer (a) is incorrect because gross margin will be affected. Answer (b) is
incorrect because the gross margin will decrease by P3,000. Answer (d) is
incorrect because P4,000 is the gross amount of Zafa sales.

7. C
The NRV is selling price minus cost to complete and cost to dispose. The selling
price of Zafa is P4 and the selling costs are P1. Given no completion or additional
processing costs, unit net realizable value is P3.

Answer (a) is incorrect because P1 is the selling cost. Answer (b) is incorrect
because the unit net realizable value is P3. Answer (d) is incorrect because P4 is
the selling price of Zafa.

8. B
If the 1,500 units of the by-product are recognized at the time of production, net
income must increase by P4,500 (P3 unit NRV x 1,500). Ending inventory of Zafa
reduces cost of sales and by-product revenue either decreases costs or increases
other income.

Answer (a) is incorrect because P6,000 is the potential gross revenue from Zafa.
Answer (c) is incorrect because P3,000 is the net revenue from sales of 1,000
units. Answer (d) is incorrect because P1,500 equals 1,500 units times the P1
unit selling cost.

443
 9. A
Because net realizable value is selling price minus completion and disposal cost,
there is no profit upon sale. The sale of 500 units of Zafa with an inventory value
of P3 per unit will produce no profit (P4 unit selling price – P3 inventory cost –
P1 selling cost =P0).

Answer (b) is incorrect because P500 equals 500 units times the P1 selling cost.
Answer (c) is incorrect because P1,000 is the selling cost of 1,000 units. Answer
(d) is incorrect because P1,500 is the P3 inventory cost multiplied by the 500
units sold.

10.A
Total Production Cost P99,538
*Cost per Kilo =------------------------------- = --------------- = P78.50 per kilo
Total kilos Produced 1,268

% of Selling Exp. To Sales Price: P2,460 /P49,200 = 5%

Sales Selling Exp. Market

Product Price (S.P.x5%) (S.P. less Sell. Exp.) Cost* LCM Inv. Amt.
Ma,Ri,Sa P100 P 5 P 95 P78.5 P78.5 478
P37,523
Co 35 1.75 33. 25 78.5 33.25 220 7,315
P44,838

11.A. Scrap

12.B. waste

13.C. By-products

14.D. Joint Products

15.A. Physical Measurement Method

16.B. Net Realizable method

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17.C. Approximated Net realizable value at split-off allocation

18.A. Realized value Approach

19.A. Physical measures of output

20.B. Currency units of value

21.C. revenues of several products

22.D. approximated Net Realizable Value

23.A.
Dr Work in Process Inventory

Cr Various accounts

24.A.Marketing Cost at point of sale

25.D. all of the above
26.D.None of the above
27.C
Apportioned cost: 50,000/200,000*70,000= P17,500

28.D
Apportioned cost: 150,000/200,000*70,000= P52,500

29.D
Unit Cost: 175,000/50,000=P3.5

30.D
Unit cost: 100,000/40,000=P2.5

31.A
Unit Cost: 250,000/80,000=P3.13

32.C
Unit cost: 75,000/25,000=P3.00
33.B
When two or more separate products are produced by a common manufacturing
process from a common input, the outputs from the process are called joint
products. The common costs of two or more joint products with significant
values are generally allocated to the joint products based upon the products’ net

445
 realizable values at the point they became separate products.

34. C. -If Sonimad were to process the MSB further, they would incur an additional
cost of P100,000. They would also be able to sell the 60,000 units for P3 more
per unit. This is an additional P180,000 in revenue. When reduced by the
additional costs, Sonimad would increase their contribution by P80,000 if they
further processed the MSB. By not processing the MSB further, their
contribution would be P80,000 less.

35.D. -Joint products are identifiable at the split-off point and they have significant
sales value.

36.B

A product should be sold at the split-off point if there is not any incremental
profit from processing the product further. As long as the process as a whole is
profitable, it is irrelevant if an individual product is not profitable. It has to be
assumed, in this example, that the process as a whole is profitable.

The incremental profit/(loss) from further processing is calculated as:

Product A Product B

P per unit P per unit

Incremental revenue 8.00 (32.00 – 24.00) 10.00 (48.40 – 38.40)

Incremental cost 8.60 12.20

Incremental profit/(loss) (0.60) (2.20)

37.B. Entire production of accounting period

38.A. Sales value at split off method

39.D. Ignore the joint cost in making the decision

40.A. materials, labor, and overhead

446
 ACCOUNTING FOR JOINT AND BY-PRODUCTS

TREATMENT OF BY-PRODUCTS

1. D 21.D
2. B 22.B
3. B 23.E
4. A 24.C
5. D 25.A
6. E 26.D
7. E 27.A
8. C 28.A
9. D 29.E
10.A 30.B
11.B 31.A
12.A 32.C
13.B 33.A
14.B 34.C
15.D 35.D
16.C 36.C
17.E 37.C
18.A 38.B
19.C 39.B
20.A 40.C

447
 STANDARD COSTING

Computation of variances

1. B
Mix variance P450 U
Yield variance 150 U
Quantity variance P600 U
2. D
3. A
Total standard cost P72,000
÷ Std qty for actual production (14,400 x 4) 57,600
Standard price per unit of materials P1.25

The usage variance is P3,000 unfavorable. The standard price is P1.25. Using the
formula for Usage variance, the difference in quantity may be computed as
follows:

Usage variance = Difference in quantity x Std. price

3,000 U = Difference in quantity x P1.25

Difference in quantity = 3,000 ÷ P1.25
= 2,400 unfavorable
If the difference in quantity is unfavorable, the actual quantity is greater than the
standard quantity:
Standard quantity (14,400 x 4) 57,600
Add unfavorable difference in quantity 2,400
Actual quantity used 60,000 units

Price Variance = (AP – SP) x AQ

= ([P126,000 ÷ 84,000] – P1.25) x 60,000
= P15,000 unfavorable

4. D
Actual price (P10,080 ÷ 4,200) P2.40
Standard price 2.50

448
 Difference in prices – favourable P 0.10
X actual quantity purchased 4,200
Price variance – favourable P 420

5. C
Actual time – hours 4,100
Less standard time (1,000 x 4) 4,000
Difference in time – unfavorable 100
X standard rate per hour P 12
Efficiency variance – unfavorable P1,200

6. C
Controllable variance (P100 F + P400 U + P2,000 U) = 2,300 U
7. B
Spending variance (P100 F + P2,000 U) = P1,900 U
8. A
9. D
10.D

Actual variable overhead P4,100

Actual time x std. var. rate (2,100 x P2) 4,200
Spending variance – favorable P 100

Actual time x std. var. rate (2,100 x P2) P4,200

Std. variable overhead [(19,000 x 0.1) x P2] 3,800
Efficiency variance – unfavorable P 400

Actual fixed overhead P22,000

Less budgeted fixed overhead 20,000
Fixed spending variance – unfavorable P 2,000

Budgeted fixed overhead P20,000

Less standard fixed overhead
[1,900 x (P20,000/20,000 x 0.1)] 19,000
Volume variance – unfavorable P 1,000

11.A
12.C
13.D
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14.B
Var. cost (4,800*P66) P310,800
Fixed cost 80,000
Budgeted cost for actual production P396,800
15.C
Actual production 4,800
Multiply Std, cost per unit P 82
Total std. cost P393,600
16.B
Actual costs P400,000
Less total std. cost 393,600
Variance (Unfavorable) P 6,400
17.E
18.A
$87,000+[($87,000/$87,000+$348,000)-$12,500]*[($87,000/$87,000+
$348,000)-$15,000] = $86,500
19.C
$130,500+[($130,500/$130,500+$739,500)-$20,000]*[($130,500/$130,500+
$739,500)-$5,000] = $132,750
20.B
$348,000 + $739,500 + $591,600 + ($15,000 x .85) - ($2,500 x .80) - .85
($6,000) = $1,684,750
21.B
100,000 x $.78 = $78,000
22.D
8,000 x 4 x $3.60 = $115,200
23.A
26,000 - (8,000 x 3 x $1) = $2,000
24.C
The variance would be allocated only to finished goods and cost of goods sold.
25.A
(5,600 x $40) + (5,600 x $49.20) = $499,520
26.C
(800 x $40) + (800 x .75 x $49.20) = $61,520
27.C
$4,200 = $3.75 (x - 10,000)
$3.75 x = $4,200 + $37,500

450
 x = 11,120

28.D
$240+.25(240)/30÷2 = $20/unit
29.B
Actual factory overhead $ 575,000
Budget allowance:
Variable factory overhead (52,000 x $6) $312,000
Budgeted fixed overhead 250,000 562,000
Controllable variance (unfavourable) $13,000
30.B
Budget allowance based on standard hours allowed
[(52,000 x $6) + $250,000] $ 562,000
Factory overhead applied at standard 572,000
Volume variance (favourable) $ (10,000)
31.C
Actual factory overhead $ 178,500
Budget allowance:
Variable for actual hours
(121,000 x $.50) $ 60,500
Fixed 110,000 170,500
Spending variance (unfavorable) $ 8,000
32.A
Budget allowance for actual hours
[(121,000 x $.50) + $110,000] $ 170,500
Budget allowance for standard hours:
Variable (130,000 x $.50) $ 65,000
Fixed 110,000 175,000
Variable efficiency variance (favourable) $ (4,500)

33.D
$3,000 = x (30,000 - 29,000)
1,000 x = $3,000
x = $3
y = $2.80 - $3.00(30,000)
y = ($6,000) favourable
34.A
x = $5.10 [7,800 - (2,000 x 4)]
x = ($1,020) favourable
451
35.D
x = $10 [2,000 - (900 x 2)]
x = $2,000 unfavorable
36.D
Variable budget allowance for actual hours (2,100 x $3) $ 6,300
Variable budget allowance for standard hours
($3 x 1,000 x 2) 6,000
$ 300
37.C
38.B
39.D
40.A

452
STANDARD COSTING

JOURNAL ENTRIES AND REPORTING

1. B 21.A
2. D 22.C
3. B 23.B
4. D 24.B
5. E 25.D
6. D 26.D
7. A 27.E
8. D 28.D
9. E 29.A
10.C 30.D
11.D 31.A
12.B 32.A
13.C 33.E
14.A 34.C
15.C 35.B
16.E 36.A
17.C 37.D
18.A 38.B
19.D 39.E
20.D 40.A

453
2,000
= 4 days
500