INTERMEDIATE ACCOUNTING 1A

MILLAN 2021
CHAPTER 1
THE ACCOUNTING PROCESS

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE (subsidiary ledger)
5. FALSE
6. TRUE
7. FALSE (Credit to a liability account for ₱7. )
The AJE is as follows:
Income 7
Unearned income 7
8. TRUE
9. FALSE (Asset method)
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. C
3. B
(Statement III is incorrect - Transaction approach refers to the
computation of profit or loss as the difference between income
and expenses.)
4. D
5. E
6. B
7. D (C, refers to chart of accounts)
8. C
9. B
10. D
PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL
1. C
Trial balance
Dr. Cr.
Corresponding
Erroneous cash 54,000 45,000 credit
Debit to Corresponding
accounts credit of the debit
receivable to accounts
omitted 5,000 5,000 receivable

Prepaid rent Corresponding

omitted and credit of the debit
listed as credit 34,000 34,000 to Prepaid rent
Prepaid assets
34,000 listed as a credit
Corresponding
debit of the Interest payable
credit to Interest omitted and listed
payable 4,000 4,000 as debit
Interest payable
listed as debit 4,000
118,00
Total Debits 62,000 0 Total Credits
Difference, excess
of total credits
56,000 over total debits
2. B
Dr. Cr.
I. "Should be" 58,762 58,762 "Should be"
"Entry
58,726 made"
II. Sales discount not posted 52 52
III. No net effect on trial
balance - -
IV. Accounts receivable
posted twice 250 250
250
Totals 59,262 59,028
Excess debits 234

3. A
Solution:
Trial balance
Dr. Cr.
Unadjusted balance 15,100 14,500 Unadjusted balance
(a) debit to AR not
posted 2,100
(b) credit to (10,500 (10,50 (b) erroneous credit
purchases not made ) 0) to accounts payable
(c) erroneous credit
to accounts (c) credit to sales
receivable 26,000 26,000 unrecorded
(d) overstatement of
prepaid rent (18,500 -
15,800) (2,700)
Adjusted balance 30,000 30,000
4. A
Solution:
Total credits in adjusted TB (which is equal to total debits)
composed of real and nominal accounts 2,376,000
Total debits in statement of financial position
columns (1,440,80
composed of real accounts only 0)
Total debits representing nominal accounts only 935,200
(1,234,00
Total credits of nominal accounts
0)
Profit – excess of nominal credits over nominal
debits 298,800

5. D
6. A
Expense

prepayments 80,000 35,000 adjustment (squeeze)

45,000 adjusted balance

AJE:
Prepaid asset 35,000
Expense 35,000
7. A
8. C
Solution:
Dr. Cr.
Cash 7,540
Accounts receivable 8,060
Equipment 42,120
Accumulated depreciation 21,762 a
Accounts payable 6,370
Owner's equity 29,588 b
Totals 57,720 57,720
Accumulated depreciation - beg. 21,060
Depreciation expense 702
Accumulated depreciation - end. 21,762 a

Owner's equity - beg. 28,600

Sales 12,480
Depreciation expense (702)
Advertising expense (390)
Other expense (4,940)
Owner's drawings (5,460)
Owner's equity - end. 29,588 b

9. D In a post-closing trial balance, all nominal accounts are

zeroed-out.

10. B
Solutions:
➢ The transactions in 20x2 are recorded as follows:
Sept. Cash 500,000
1, Note receivable (2M ÷ 4) 500,000
20x2 to record the first
installment payment of principal
on the note
Sept. Cash (2M x 12%) 240,000
1, Interest income 240,000
20x2 to record the collection
of interest using nominal account
(i.e., income method)
➢ Adjusted interest income for 20x2:
Interest income from Jan. 1 to Aug. 31, 20x2
(2M x 12% x 8/12) 160,000
Interest income from Sept. 1 to Dec. 31, 20x2
(2M – 500K) x 12% x 4/12 60,000
Adjusted balance of interest income in 20x2 220,000

➢ Adjusted balance of interest receivable as of Dec. 31, 20x2:

(2,000,000 – 500,000) x 12% x 4 /12 60,000

Adjusting entry:
Dec. Interest income 20,000
31, Interest receivable 20,000
20x2
PROBLEM 4: CLASSROOM ACTIVITY
Requirement (a): Adjusting entries

1. Bad debts expense 1,000

Allowance for bad debts 1,000

2. Depreciation expense (100K ÷ 10) 10,000

Accumulated depreciation 10,000

Interest expense (24K x 10% x

3. 3/12) 600

Interest payable 600

4. Rent expense 2,000

Rent payable 2,000

Requirement (b): Worksheet

PROBLEM 5: FOR CLASSROOM DISCUSSION
1. C
2. A
3. C – an external transaction (e.g., sale, purchase, etc.) is less
likely to be overlooked compared to an internal transaction
(e.g., growth of biological asset, etc.) because external
transactions are usually evidenced by supporting business
documents (e.g., O.R., purchase invoice, billing statement,
etc.).

4. D
Choice (a) is incorrect – Posting not transposition
Choice (b) is incorrect – Journal not ledger
Choice (c) is incorrect – Business or source documents not trial
balance
5. B
6. B
7. Solution:
Trial balance
Dr. Cr.
Corresponding credit of
Debit to A/R omitted 6,000 6,000 the debit to A/R

Cash omitted and Corresponding credit of

listed as credit 36,000 36,000 the debit to cash

36,000 Cash listed as a credit

Corresponding debit of Accounts payable

the credit to Accounts omitted and listed as
payable 15,000 15,000 debit
Accounts payable
listed as debit 15,000
Total Debits 30,000 78,000 Total Credits

Difference, excess of
total credits over total
48,000 debits
8. Solution:
Trial balance
Dr. Cr.
Unadjusted total Unadjusted total
debits 71,850 71,550 credits
(a) credit to
inventory omitted (660)
(b) debit to A/R (b) erroneous debit to
not made 6,000 6,000 A/P
(c) erroneous
credit to interest (c) credit to interest
receivable 3,600 3,600 income unrecorded
(d) overstatement of
unearned rent (5,400 -
(360) 5,040)
Adjusted balance 80,790 80,790

9. Solution:
Journal entries:
Liability method Income method
May 1, 20x1 May 1, 20x1
Cash 30,000 Cash 30,000
Unearned rent Rent income
30,000 30,000

Adjusting entries:
Liability method Income method
Dec. 31, 20x1 Dec. 31, 20x1
Unearned rent 20,000 Rent income 10,000
Rent income (30K x 8/12) Unearned rent (30K x 4/12)
20,000 10,000
10. Solution:

Journal entries:
Asset method Expense method
Sept. 1, 20x1 Sept. 1, 20x1
Prepaid insurance 90,000 Insurance expense 90,000
Cash Cash
90,000 90,000

Adjusting entries:
Asset method Expense method
Dec. 31, 20x1 Dec. 31, 20x1
Insurance expense 30,000a Prepaid insurance 60,000b
Prepaid insurance Insurance expense
30,000 60,000
a (90,000 x 4/12) = 25,000; b (90,000 x 8/12) = 75,000

11. Solution:
Requirement (a):
Dec. 31 Sales 800,000
Gain on sale of equipment 30,000
Inventory – end. 40,000
Inventory - beg. 65,000
Purchases 200,000
Freight-in 10,000
Salaries expense 400,000
Depreciation expense 18,000
Income summary 177,000
Dec. 31 Income summary 177,000
Retained earnings 177,000
Requirement (b):
Dec. 31 Retained earnings 28,000
Dividends 28,000

Retained earnings - Jan. 1 162,000

Income summary 177,000
Dividends (28,000)
Retained earnings - Dec. 31 311,000

12. Solutions:
The transactions in 20x2 are recorded as follows:
Sept. Note payable (3.2M ÷ 4 annual 800,000
30, installments) 800,000
20x2 Cash
to record the first installment
payment of principal on the note

Sept. Interest expense (3.2M x 12%) 384,000

30, Cash 384,000
20x2 to record the cash payment
for interest from Sept. 30, 20x1 to
Sept. 30, 20x2 using nominal account
(i.e., expense method)

➢ Adjusted interest expense for 20x2:

Interest expense from Jan. 1 to Sept. 30, 20x2
(3.2M x 12% x 9/12) 288,000
Interest expense from Oct. 1 to Dec. 31, 20x2
(3.2M – 800K) x 12% x 3/12 72,000
Adjusted interest expense - 20x2 360,000

➢ Adjusted interest payable as of Dec. 31 20x2:

(3,200,000 – 800,000) x 12% x 3/12
72,000
Requirement (a): No reversing entries made

Adjusting entry:
Dec. Interest payable 24,000
31, Interest expense 24,000
20x2

Requirement (b): Reversing entries are made

Reversing entry
Jan. 1, Interest payable 96,000
20x2 Interest expense 96,000
(Rev. to record the reversing
JE) entry

Adjusting entry:
Dec. Interest expense 72,000
31, Interest payable 72,000
20x2
 CHAPTER 2
CASH AND CASH EQUIVALENTS

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. TRUE
5. FALSE
6. TRUE
7. FALSE
8. FALSE
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. A (The segregated account to be contributed to the sinking
fund is presented as part of the sinking fund.)

3. B
4. D
5. D
6. D
7. B
8. C

9. A (The receipts for petty cash disbursements that are

already replenished are filed in the accounting department
and not by the petty cash custodian. If the receipts are
returned to the custodian, she would present them again
(and again and again…and many, many more) for
replenishment!)

10. D
PROBLEM 3: EXERCISES
1. Solution:
Cash on hand 320,000
Cash in Bank – current account (1.12M + 192K PDC) 1,312,000
Cash in Bank – peso savings deposit 6,400,000
Adjusted cash balance 8,032,000

2. Solution:
Oct. 1, Petty cash fund 40,000
20x1 Cash in bank 40,000
Oct. 1 No journal entry
to 31,
20x1

➢ Cash count:
Currencies and coins 2,390
Vouchers:
Office supplies 6,880
Transportation expense 12,346
Freight-out 17,627
Telecommunications expense 2,502
Total per count 41,745
Ledger balance 40,000
Cash overage 1,745

Oct. Office supplies expense 6,880

31, Transportation expense 12,346
20x1 Freight-out 17,627
Telecommunications expense 2,502
Cash shortage or overage 1,745
Cash in bank 37,610
3. Answer: ₱2,390 – equal to the currencies and coins.

4. Solutions:
Requirement (a): Petty cash fund included in cash
Currencies and coins 1,020
Check drawn to the order of the petty cash custodian 1,200
Petty cash fund included as part of cash 2,220

Requirement (b): Adjusting journal entry

Dec. Various expenses 26,820
31, Receivable from PCF custodian 960
20x1 Petty cash fund (30K – 27,780
2,220)

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Solution:
Unadjusted balance 8,200,000
Post-dated customer check (82,000)
Post-dated check drawn 40,000
Bank draft (53K x (51.4 - 52.5) (58,300)
Bonds 200,000
Compensating balance (900,000)
Cash and Cash Equivalents – Dec. 31, 20x1 7,399,700
2. A
Solution:
Petty cash fund (15,000 - 9,763) 5,237
Cash on hand 45,000
Cash in bank
7,809,424
Investment in 90-day commercial paper, due
1/26/x2 150,000
Tax fund 56,000
Payroll fund 235,000

Total Cash and Cash equivalents 8,300,661

3. C
Solution:
Petty cash fund 6,000
Cash on hand 65,000
Cash in bank (per ledger) 2,890,000
Customer’s check #392 – dated Jan. 8, 20x2 (20,000)
Athena Co.’s check #567 – dated Dec. 29,
54,000
20x1
NSF check (40,000) 2,884,000
Cash - Dec. 31, 20x1 2,955,000

• Customer’s check #109 was properly included in cash in

bank; thus, no adjustment is necessary.
• Customer’s check #392 is postdated. This should be
excluded from Cash and reverted back to Accounts
receivable.
• Athena Co.’s check #567 is ‘unreleased check’. This should
be included in cash and reverted back to Accounts payable.
• The NSF check should be excluded from cash and reverted
back to Accounts receivable.
4. D
Solution:
Office supplies expense 8,025
Miscellaneous selling expense 11,533
Miscellaneous administrative expense 7,805
Cash short or over 197
Cash in bank (40K – 12,834) 27,166

5. A (see solution above)

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY #1: CASH BALANCE

Solution:
Exhibit No. Amount
Cash on hand 1 5,882.00
Cash in bank - Savings 3 522,277.54
Cash in bank - Current 4 645,353.03
Total cash 1,173,512.57

Notes:
➢ Exhibit 2.1 is a post-dated customer check.
➢ Exhibit 2.2 is an unreleased company check. Although this
check will increase the “Cash in bank” account per records,
it should not be included in the solution above because the
amount of “Cash in bank” in the solution is derived from
the bank statement and not from the Ledger.
➢ The unused credit in Exhibit 5 may be disclosed but it
should not be included in cash.
ACTIVITY #2: PETTY CASH FUND

Solutions:
Requirement (a):
Requirement (b):
JOURNAL

DATE ACCOUNTS Ref. Debit Credit

5,000.0
12.3.20X1 Petty cash fund 0

5,000.0
Cash in bank 0

12.21.20X
1 Office supplies 356.00

Transportation expense 97.00

Advances to employees 600.00

Receivable from 2,810.0

custodian 0

3,863.0
Cash in bank 0
ACTIVITY #3: PETTY CASH FUND – SHORTAGE
Solution:
The students check their own work, grade themselves and
submit their grades to the teacher for recording.
PROBLEM 6: FOR CLASSROOM DISCUSSION
1. Solution:
Checks drawn but not yet issued to payees 120,000
Customers’ checks dated Dec. 31, 20x1 40,000
SML’s check dated Jan. 15, 20x2 already mailed to
16,000
payee
Cash on hand 130,000
Employees’ checks representing unclaimed
salaries, 14,000
held by the treasurer
Petty cash fund (fully replenished) 20,000
Total 340,000

2. Solution:
Treasury bill acquired on Nov. 1, 20x1 300,000
Investment in redeemable preference shares 1,600,000
Three-month time deposit with UCPB - unrestricted 950,000
Total 2,850,000

3. Solution:
Cash on hand (peso) 1,800,000
Cash on hand (2.9M ÷ 50) x 52 3,016,000
Revolving fund 200,000
Cash in bank – BPI 6,000,000
Cash and Cash Equivalents - Dec. 31, 20x1 11,016,000

➢ The contingency fund is a noncurrent asset.

➢ The restricted deposit in foreign bank (i.e., Swiss Savings
Account) is excluded from cash and, preferably presented
as receivable or as “other asset,” depending on the nature
of the restriction. For example, if the restriction is imposed
by the Philippine Government, such as when it results from
a pending litigation, the more appropriate classification
would be “Other assets,” with appropriate disclosure in the
 notes. If the restriction is bank-imposed, the more
appropriate classification would be “Receivable.” Rarely,
that a savings account (foreign or local) qualifies as an
investment, unless the deposit earns interest above the
normal rate for regular savings accounts.

4. Solution:
Piggy Bank savings account 480,000
Piggy Bank checking account (20,000)
Oink Bank checking account (360K - 100K compensating bal.) 260,000
Cash in bank 720,000

 The ₱40,000 compensating balance on the Piggy Bank

savings account is properly included because it is not
restricted.
 The ₱40,000 overdraft on the Piggy Bank checking account
can be offset from the Piggy Bank savings account.
 The ₱100,000 compensating balance on the Oink Bank
checking account is excluded because it is restricted.
 Porky Bank savings account #5100342120, which is legally
restricted, is excluded from cash and presented under
other line item (e.g., ‘Other assets’).
 The overdraft in the Porky Bank checking account is
presented as current liability.

5. Solution:
Oct. 1, Petty cash fund 30,000
20x1 Cash in bank 30,000
Oct. 1
to 31, No journal entry
20x1
Oct. 31, Various expenses 24,260
 20x1 Cash shortage or overage 115
Cash in bank (30,000 – 5,625) 24,375

6. Solution:
Oct. 31, Various expenses 24,260
20x1 Receivable from PCF custodian 115
Petty cash fund (30,000 – 24,375
5,625)

➢ Amount reported in financial statements = 5,625 (equal to

the coins and currencies contained in the PCF box) or
(30,000 imprest balance - 24,375 AJE = 5,625 adjusted
balance).
 Page |1

Chapter 3
Bank Reconciliation

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. FALSE – debit memo
4. TRUE - bank memorandums (debit memos and credit memos)
require reconciling entries in the depositor’s books
5. TRUE
6. FALSE – 100 + 20 CM – 5 NSF = 115
7. TRUE
8. FALSE – 30 + 5 -3 = 32
9. FALSE – as a deduction
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. B
3. D
4. D
5. D
6. C
7. D
8. B – choice (d) is incorrect – “payee” not “drawee”
9. C
10. C

PROBLEM 3: EXERCISES
1. Solutions:
 Page |2

Requirement (a): Bank reconciliation

The bank reconciliation is prepared as follows:
ABC Co.
Bank reconciliation - Bank XYZ (Checking account # 10009087)
September 30, 20x1
Balance per books, Sept. 30 5,313 Bal. per bank statement, Sept. 30 6,200
Credit memo : Deposits in transit 2,418
Collection on note by bank 3,565
Debit memos: Outstanding checks (3,100 - 310) (2,790)
NSF check (1,860)
Bank service charge (62)
Book error: Bank error:
Overstatement of collection
(198) Erroneous debit to ABC account 930
(1,593 – 1,395)
Adjusted balance 6,758 Adjusted balance 6,758

Requirement (b): Adjusting entry

Oct. 3, Cash in bank 1,445
20x1
Accounts receivable (1,860 + 198) 2,058
Bank service charge 62
Note receivable (3,565 + 155) 3,410
Interest income 155

2. Solution:

Bal. per books, end. 280,000 Bal. per bank, end. 320,000
Add: CM 20,000 Add: DIT 75,000
Less: DM (15,000) Less: OC (25,000)
Add/Less: Book errors: Add/Less: Bank errors:
Understatement 45,000 Overstatement (40,000)
Adjusted balance 330,000 Adjusted balance 330,000

3. Solution:
Requirement (a): Bank reconciliation
 Page |3

Bal. per books, end. ₱260,000 Bal. per bank, end. ₱205,000
Add: CM 30,000 Add: DIT 102,500
Less: DM (5,000) Less: OC (22,500)
Add/Less: Book errors Add/Less: Bank errors
Adjusted balance ₱285,000 Adjusted balance ₱285,000

Requirement (b): Adjusting (Reconciling) entries

AJE Cash 30,000

(a) Accounts receivable 30,000
to record the collection of accounts receivable
AJE Accounts receivable 5,000
(d) Cash 5,000
to revert the NSF check back to accounts
receivable

4. Solution:
30-Jul Receipts Disbursements 31-Aug
Per books 132,200 60,000 12,200 180,000
ADD: CM
July 10,000 (10,000)
August 35,000 35,000
LESS: DM
July (7,800) (7,800)
August 8,900 (8,900)
Book errors:
August 2,800 2,800
Adjusted bal. 134,400 87,800 13,300 208,900

30-Jul Receipts Disbursements 31-Aug

Per bank 100,600 89,000 20,600 169,000
 Page |4

ADD: DIT
July 45,000 (45,000)
August 43,800 43,800
LESS: OC
July (11,200) (11,200)
August 3,900 (3,900)

Adjusted bal. 134,400 87,800 13,300 208,900

5. Solution:
31-Mar Receipts Disbursements 30-Apr
Per books 400,000 180,000 40,000 540,000
ADD: CM
March 36,000 (36,000)
April 23,000 23,000
LESS: DM
March (10,000) (10,000)
April 16,000 (16,000)
Book errors:
April (9,000) 9,000
Adjusted bal. 426,000 167,000 37,000 556,000

31-Mar Receipts Disbursements 30-Apr

Per bank 280,000 190,000 30,000 440,000
ADD: DIT
March 169,000 (169,000)
April 136,000 136,000
LESS: OC
March (23,000) (23,000)
April 30,000 (30,000)
Bank errors:
April 10,000 10,000
Adjusted bal. 426,000 167,000 37,000 556,000

6. Solution:
 Page |5

30-Jun Receipts Disbursements 31-Jul

Per books 382,500 180,900 36,400 527,000
ADD: CM
June 74,200 (74,200)
July 262,800 262,800
LESS: DM
June (2,000) (2,000)
July 6,000 (6,000)
Book errors:
June 36,340 (36,340)
July 54,280 (54,280)
Adjusted bal. 491,040 333,160 94,680 729,520

30-Jun Receipts Disbursements 31-Jul

Per bank 365,380 396,340 108,020 653,700
ADD: DIT
June 169,000 (169,000)
July 136,000 136,000
LESS: OC
June (23,000) (23,000)
July 30,000 (30,000)
Bank errors:
June (20,340) (20,340)
July (30,180) (30,180)
Adjusted bal. 491,040 333,160 94,680 729,520

7. Solution:
31-Mar Receipts Disbursements 30-Apr
 Page |6

Per books 396,600 180,000 36,600 540,000

ADD: CM
March 36,000 (36,000)
April 42,000 42,000
LESS: DM
March (10,920) (10,920)
April 16,020 (16,020)
Book errors:
March (27,000) (27,000)
April 9,000 (9,000)
Adjusted bal. 394,680 186,000 23,700 556,980

31-Mar Receipts Disbursements 30-Apr

Per bank 280,900 191,380 26,900 445,380
ADD: DIT
March 46,780 (46,780)
April 131,400 131,400
LESS: OC
March (23,000) (23,000)
April 19,800 (19,800)
Bank errors:
March 90,000 (90,000)
April
Adjusted bal. 394,680 186,000 23,700 556,980
 Page |7

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A (25,650 + 5,900 – 750 – 2,000) = 28,800

2. C
Solution:
Per books, June 30 68,757 Per bank, June 30 54,780
(i) Credit memo (4,500 + 165 - 36) 4,629 (h) Deposits in transit 13,425
(b) Dishonored check (14,265) (d) Outstanding checks (9,885)
(e) Bank charges (210) (g) Bank error 600
(f) NSF checks (1,296)
(a) Book error (4,500 - 3,000) 1,500
(c) Book error (2,895 - 2,700) (195)
Adjusted balance 58,920 Adjusted balance 58,920

3. B (28,000 – 12,000 + 4,000 + 500) = 20,500

4. B (30,140 + 4,000 – 5,200) = 28,940

5. C (27,200 + 450 – 700 + 1,450) = 28,400

6. B (38,000 + 940 – 220 - 90 + 18) = 38,648

7. D (40,000 – 2,000 + 8,000 + 400) = 46,400

8. C (54,075 + 9,375 – 8,625 – 375) = 54,450

9. A (113,000 + 17,200 – 10,800) = 119,400 adjusted balance + 2,400

NSF = 121,800 unadjusted balance of cash per book (squeezed
upwards)
 Page |8

10. A
Solution:
OC
12,600 31-Mar
Disbursements 49,700 42,100 Checks drawn (squeeze)
30-Apr 5,000

CIB - per books

31-Mar 34,900
Collections* 32,400 42,100 Checks drawn
25,200 30-Apr (squeeze)

* (Deposits per bank in April of ₱42,700 less ₱10,300 DIT from last month that
cleared in April) = 32,400

OR

Per bank statement

37,200 31-Mar
Disbursements 49,700 42,700 Deposits
30-Apr 30,200

➢ 30,200 per bank - 5,000 outstanding checks recorded in books

but not yet presented for payment with the bank = 25,200
 Page |9

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY #1: BANK RECONCILIATION

Requirement (A):
ABC Co. PIGGY Bank
(a) Cash in bank 1,000,000 (a) Cash on hand 1,000,000
Cash on hand 1,000,000 Deposit liability 1,000,000

(b) Accounts payable 254,321 (b) No entry

Cash in bank 254,321

(c) No entry (c) Deposit liability 220,320

Cash on hand 220,320

(d) No entry (d) Cash on hand 2,460,660

Deposit liability 2,460,660

(e) Cash on hand 1,952,012 (e) Cash on hand 1,592,012

Accounts receivable 1,952,012 Deposit liability 1,592,012

Cash in bank 1,952,012

Cash on hand 1,952,012
(f) No entry (f) Deposit liability 25,000
Cash on hand 25,000

(g) No entry (g) Deposit liability 1,602

Cash on hand 1,602
(i) Cash in bank 40,000 (i) No entry
Cash on hand 40,000

Requirement (B):
Cash in bank Deposit liability
(a) 1,000,000 1,000,000 (a)
254,321 (b) (c) 220,320
(e) 1,952,012 2,460,660 (d)
(f) 25,000 1,592,012 (e)
(i) 40,000 (g) 1,602
2,737,691 4,805,750

The net difference is ₱2,068,059 (₱4,805,750 – ₱2,737,691).

 P a g e | 10

Requirement (C):
Per books 2,737,691 Per bank 4,805,750
Credit memo (d) 2,460,660 DIT (i) 40,000
Debit memos: OC (b) & (c) (34,001)
NSF check (f) (25,000)
Direct debits (g) (1,602)
Book error (e) (360,000)
Adjusted balance 4,811,749 Adjusted balance 4,811,749

Requirement (D):

Simple entries:
ABC Co.
Cash in bank 2,460,660
Accounts receivable 2,460,660
to record the CM in (d)

Accounts receivable 360,000

Cash in bank 360,000
to correct the book error in (e)

Accounts receivable 25,000

Cash in bank 25,000
to record the dishonored check in (f)

Utilities expense 1,602

Cash in bank 1,602
to record the DM in (g)

Compound entry:
Cash in bank (squeeze) 2,074,058
Utilities expense (g) 1,602
Accounts receivable (d) - (e) - (f) 2,075,660*

* (2,460,660 – 25,000 – 360,000) = 2,074,058

 P a g e | 11

ACTIVITY #2: BANK RECONCILIATION

Check
Date Debits Credits Balance
No.
Nov. 1 10,000.00
Nov. 4 0339 34,000.00 44,000.00
Nov. 9 134 17,000.00 27,000.00
Nov. 12 135 13,000.00 14,000.00
Nov. 13 Cash 16,000.00 30,000.00
Nov. 16 136 8,000.00 22,000.00
Nov. 21 234 52,000.00 74,000.00
Nov. 22 0784 19,000.00 93,000.00
Nov. 29 137 7,600.00 85,400.00
Nov. 30 0846 23,500.00 108,900.00
144,500.00 45,600.00

Bank statement
Period covered: Nov. 1, 20x1 to Nov. 30, 20x1
Date Check No. Debits Credits Balance
Nov. 1 10,000.00
Nov. 5 0339 34,000.00 44,000.00
Nov. 6 0389 78,000.00 122,000.00
Nov. 13 Cash 16,000.00 138,000.00
Nov. 16 135 13,000.00 125,000.00
Nov. 18 984 33,000.00 158,000.00
Nov. 19 136 8,000.00 150,000.00
Nov. 21 234 25,000.00 175,000.00
Nov. 22 0784 19,000.00 194,000.00
Nov. 25 0784 (NSF) 19,000.00 175,000.00
Nov. 28 (DM) 2,000.00 173,000.00
Nov. 30 137 7,600.00 165,400.00
 P a g e | 12

Bank reconciliation:
Per book 108,900.00 Per bank 165,400.00
CM - Nov. 6 (#0389) 78,000.00 DIT - Nov. 30 (#0846) 23,500.00
CM - Nov. 18 (#984) 33,000.00 OC - Nov. 9 (#134) (17,000.00)
NSF - Nov. 25 (#0784) (19,000.00)
DM - Nov. 28 (2,000.00)
Book error -
overstated collection
(#234) (52K - 25K) (27,000.00)
Adjusted balance 171,900.00 Adjusted balance 171,900.00
 P a g e | 13

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Requirement (a):
Per books Per bank
Cash on hand 500,000 Cash on hand 480,000
Accounts receivable 500,000 Deposit liability 480,000

Cash in bank 500,000

Cash on hand 500,000

Accounts payable 200,000 Deposit liability 140,000

Cash in bank 200,000 Cash on hand 140,000

No entry Cash on hand 360,000

Deposit liability 360,000

No entry Deposit liability 40,000

Cash on hand 40,000

Requirement (b):
(1) Deposits in transit: (500,00 – 480,000) = 20,000
(2) Outstanding checks: (200,000 – 140,000) = 60,000
(3) Credit memo = 360,000
(4) Debit memo = 40,000

Requirement (c):
The unadjusted balances are determined as follows:
Cash in bank
June 30, 20x1 100,000
(a) Deposits 500,000 200,000 (b) Checks drawn
400,000 July 31, 20x1

Deposit liability
100,000 June 30, 20x1
(b) Checks encashed 140,000 480,000 (a) Deposits
(d) Payments for bills 40,000 360,000 (c) Customer remittances
July 31, 20x1 760,000
 P a g e | 14

Per books, July 31 400,000 Per bank, July 31 760,000

Credit memo 360,000 Deposits in transit 20,000
Debit memo (40,000) Outstanding checks (60,000)
Adjusted balance 720,000 Adjusted balance 720,000

Requirement (d):

Cash in bank 320,000

Telecommunications expense 40,000
Accounts receivable 360,000

2. Solutions:

Requirement (a):
Bal. per books, end. 7,540 Bal. per bank, end. 8,510
Add: CM (collection of N/R & int.) 780 Add: DIT 1,900
Less: DM (bank service charge) (25) Less: OC (325+100+700) (1,125)
+/-: Book errors +/-: Bank errors -
Overstated disb. (410 - 140) 270
Understated coll’n. (910 - 190) 720
Adjusted balance 9,285 Adjusted balance 9,285

Requirement (b):
Cash in bank 1,745
Bank service charge 25
Note receivable 700
Interest income 80
Accounts payable (410 – 140) 270
Accounts receivable (910 – 190) 720
 P a g e | 15

3. Solution:
Per books 10,460 (squeeze) Per bank, June 30 11,164 (start)

Credit memo 1,120 Deposits in transit 1,340

Debit memo Outstanding checks (1,100)

(16 + 160) (176)

Adjusted balance 11,404 Adjusted balance 11,404

4. Solutions:
Requirement (a):
Deposits in transit
beg. 2,100
April deposits per
April deposits per books 12,889 10,784 bank
4,205 end.

Requirement (b):
Outstanding checks
3,800 beg.
April checks per bank 11,100 13,080 April checks per books
end. 5,780

Requirement (c):
Per books, Mar. 31 24,355 Per bank, Mar. 31 27,995
April note collected 3,000 Deposits in transit 4,205
April bank service charge (35) Outstanding checks (5,780)
April NSF check (900)
Adjusted balance 26,420 Adjusted balance 26,420
 P a g e | 16

5. Solution:
31-Jan Receipts Disbursements 28-Feb
Per books 264,400 120,000 24,400 360,000
ADD: CM
January 30,000 (30,000)
February 52,500 52,500
LESS: DM
January (15,600) (15,600)
February 10,680 (10,680)
Book errors:
January 4,000 (4,000)
February (2,800) (2,800)
Adjusted bal. 282,800 135,700 19,480 399,020

31-Jan Receipts Disbursements 28-Feb

Per bank 201,200 186,940 17,320 370,820
ADD: DIT
January 95,040 (95,040)
February 43,800 43,800
LESS: OC
January (13,440) (13,440)
February 15,600 (15,600)
Adjusted bal. 282,800 135,700 19,480 399,020
 Chapter 4
Accounts Receivable

PROBLEM 1: TRUE OR FALSE

1. FALSE – 1,000 x 70% = ₱700 invoice price
2. FALSE 105
3. FALSE April 2, 20x1
4. TRUE
5. TRUE
6. FALSE - 400
7. FALSE 25
8. FALSE 7
9. TRUE
10. TRUE (121 age – 30 days credit) = 91 days past due

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. D
3. D
4. D
5. B
6. A
7. D
8. A
9. B
10. A - Choice (a) is the best answer. Bad debts are computed on credit
sales (excluding cash sales).

Choice (d) is correct – PFRS 9 encourages a combination of collective

assessment (e.g., aging) and individual assessment (i.e., specific
accounts).
PROBLEM 3: EXERCISES
1. Solution:
Trade receivables:
Accounts receivable 160,000
Add back credit balance in customers' accounts 32,000
Adjusted accounts receivable 192,000
Notes receivable (trade) 16,000
Total trade receivables - Requirement (a) 208,000
Non-trade receivables currently collectible:
Notes receivable (current portion only) 16,000
Dividends receivable 3,200
Advances to suppliers (from debit balance in accounts payable) 19,200
Total current non-trade receivables 38,400
Trade and other receivables - Requirement (b) 246,400

2. Solutions:
Requirement (a):
Journal entry on date of sale:
Accounts receivable 7,084.80 a
Revenue 7,084.80 a
a(10,000 x 80% x 90%) = 7,200 invoice price; [7,200 – (7,200 x 2% x 80%)] =
7,084.80

❖ Subsequent measurement
The adjustment is computed as follows:
Invoice amount (10,000 x 80% x 90%) 7,200
Multiply by: 2%
Total available discount 144
Multiply by: Revised estimate 40%
Discount expected to be taken (revised) 57.60
Invoice amount 7,200
Less: Discount expected to be taken (revised) (57.60)
Transaction price (revised) 7,142.40
Less: Transaction price (initial estimate) (7,084.80)
Adjustment – increase in transaction price 57.60

Year-end adjusting entry:

Accounts receivable 57.60
Revenue 57.60

Requirement (b):
The entity reports account receivable and net revenue of ₱7,142.40
in its year-end financial statements.

3. Solutions:
Requirement (a): Bad debt expense
Total sales 1,320,000
Cash sales (220,000)
Gross credit sales 1,100,000
Sales returns and discounts on credit sales (13,200 – 2,200) (11,000)
Net credit sales 1,089,000
Multiply by: Percentage of net credit sales 2%
Bad debt expense 21,780

Requirement (b): Allowance for doubtful accounts on Dec. 31

Allowance for doubtful accounts
17,600 Jan. 1
Write-off 11,000 2,200 Recovery
21,780 Bad debts expense
Dec. 31 (squeeze) 30,580

Requirement (c): Carrying amount of accounts receivable

Accounts receivable, Dec. 31 – gross 330,000
Allowance for doubtful accounts, Dec. 31 (30,580)
Accounts receivable, Dec. 31 – net 299,420
4. Solutions:
Requirement (a): Bad debt expense
Accounts receivable
Jan. 1 40,000 2,500 Write-off
Net credit sales 135,000 70,000 Collections, exclg. recovery
102,500 Dec. 31 (squeeze)

Accounts receivable, Dec. 31 102,500

Percentage of receivables 5%
Allowance for doubtful accounts - Dec. 31 5,125

Allowance for doubtful accounts

5,000 Jan. 1
Write-off 2,500 500 Recovery
2,125 Bad debts expense (squeeze)
Dec. 31 5,125

Requirement (b): Net realizable value of accounts receivable

Accounts receivable, Dec. 31 – gross 102,500
Allowance for doubtful accounts, Dec. 31 (5,125)
Accounts receivable, Dec. 31 – net 97,375

5. Solution:
(Total Write-offs from 20x1 to 20x3) less (Total
Percentage
= Recoveries from 20x1 to 20x3)
(Jan. 1, 20x4)
Total Net credit sales from 20x1 to 20x3
= [(21K + 30K + 45K) – (3K + 9K + 15K)] ÷ (300K + 480K + 600K)
= (96,000 – 27,000) ÷ 1,380,000
Percentage (Jan. 1, 20x4) = (69,000 ÷ 1,380,000) = 5%

(Total Write-offs from 20x1 to 20x4) less (Total

Percentage
= Recoveries from 20x1 to 20x4)
(Dec. 31, 20x4)
Total Net credit sales from 20x1 to 20x4
= (180,000 – 33,000) ÷ 2,100,000
Percentage (Dec. 31, 20x4) = (147,000 ÷ 2,100,000) = 7%
 Allowance for doubtful accounts
15,000 Jan. 1, 20x4 (5% x 300,000)
20x4 write-offs 84,000 6,000 20x4 recoveries
105,000 Bad debts expense (squeeze)
Dec. 31, 20x4 (7% x 200,000) 42,000

6. Solution:
Receivable % Required
Days past due balances Uncollectible allowance
(a) (b) (a) x (b)
• Not due - 0 to 15 days of age 350,000 None -
• Not due - 16 to 30 days of age 210,000 None -
• 1 - 30 days past due 175,000 3% 5,250
• 31 - 60 days past due 140,000 10% 14,000
• 61 - 90 days past due 105,000 15% 15,750
• 91 - 120 days past due 70,000 35% 24,500
Totals 1,050,000 59,500

Allowance for doubtful accounts

28,000 Beg. bal.
Write-offs 6,000 2,000 Recoveries
35,500 Bad debts expense (squeeze)
End. Bal. 59,500

7. Solutions:
Requirement (a): Unadjusted bad debt expense
Net credit sales 4,200,000
Percentage of credit sales 2%
Unadjusted bad debts expense 84,000
Requirement (b): Allowance for doubtful accounts – Jan. 1, 20x1
Allowance for doubtful accounts
12,600 Jan. 1, 20x1 (squeeze)
Write-offs 79,800 18,900 Recoveries
84,000 Unadjusted bad debts
Dec. 31 unadjusted bal. 35,700

Requirement (c): Required ending balance of the allowance

Receivable % Required
Days outstanding balances uncollectible allowance
(a) (b) (c) = (a) x (b)
• 0 – 60 252,000 1% 2,520
• 61 - 120 (189K – 42K) 147,000 2% 2,940
• Segregated account 42,000 5% 2,100
• Over 120 (210K - 21K) 189,000 6% 11,340
Totals 630,000 18,900

Requirement (d): Adjusted bad debt expense for the year

Allowance for doubtful accounts
12,600 Jan. 1, 20x1 [see req’mt. (b)]
Write-offs (79.8K + 21K) 100,800 18,900 Recoveries
88,200 Adjusted bad debts (squeeze)
Dec. 31, 20x1 bal. 18,900

Requirement (e): Year-end recoverable historical cost

Gross accounts receivable, Dec. 31 before adjustments 651,000
Additional write-off at year-end (21,000)
Gross accounts receivable, Dec. 31 after adjustments 630,000
Allowance for doubtful accounts, Dec. 31 (adjusted) (18,900)
Accounts receivable - net, Dec. 31 611,100
Requirement (f): Year-end adjusting entries
Dec. 31, Allowance for doubtful accounts 21,000
20x1
Accounts receivable 21,000
to record the additional write-off
Dec. 31, Bad debts expense 4,200
20x1
Allowance for doubtful accounts 4,200
to record the additional bad debts

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B Solution:
➢ 300,000 x 80% = 240,000 invoice price;
➢ 240,000 x 5% x 80% = 9,600 discount;
➢ 240,000 – 9,600 = 230,400

2. A - 100,000 x 90% x 97%* = 87,300

*If the customer fully settles the account within 10 days, the
customer cannot take anymore the 1% discount that is available if
he pays within the 11th day and 15th day.

3. B – 250,000 sale price + 20,000 reimbursement of freight =

270,000

4. A (100,000 x 50% x 2%) = 1,000

5. A
Solution:
Allowance for bad debts
10,800 Jan. 1
Write-offs 18,000 13,500 Bad debts expense (450K x 3%)
Dec. 31 6,300

6. D (1,000,000 x 3%) = 30,000

7. A
Solution:
Days Estimated outstanding Amount % uncollectible Allowance
0 - 60 120,000 1% 1,200
61 - 120 90,000 2% 1,800
Over 120 100,000 6% 6,000
9,000

8. C Solution:
Accounts receivable
beg. 150,000
Credit sales 600,000 410,000 Collections, excld. recoveries
9,000 Write-off
331,000 end.

Allowance for bad debts

12,000 beg.
Write-off 9,000 15,000 Bad debts
2,000 Recovery
end. 20,000

Carrying amount = 331,000 – 20,000 = 311,000

9. A Solution:

Accounts receivable
beg. 80,000
Credit sales 150,000 120,000 Collections, excldg. recoveries
10,000 Write-off
100,000 end.

10. B
PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY #1: TOTAL CURRENT RECEIVABLES

Solutions:

Requirement (a): Adjusted accounts receivable

Unadjusted accounts receivable 10,537,089

Credit balance (DEF Co.) 341,236
Sales Order #21022394 20,000
Adjusted accounts receivable 10,898,325

Requirement (b): Total current receivables

Adjusted accounts receivable 10,898,325

Notes receivable (3-month) 35,000
Dividends receivable (10,000 sh. x ₱5) 50,000
Total Current receivables 10,983,325

Requirement (c): Adjusting entries

Accounts receivable 341,236
Advances from customers 341,236
To eliminate the credit balance in DEF Co.’s account

Accounts receivable 20,000

Sales 20,000
To record the unrecorded sales

Notes receivable 35,000

Cash 35,000
To record the loan given to Mr. Wilson

Dividends receivable 50,000

Dividend income 50,000
To accrue the dividends
ACTIVITY #2: JOURNAL ENTRIES

Solutions:
Requirement (a): Journal entries

1) Accounts receivable 20,000

Sales 20,000
To record SI#001101

2)
a. Accounts receivable 3,000
Allowance for bad debts 3,000
To reverse the previous write-off

Cash 3,000
Accounts receivable 3,000
To record the collection of accounts receivable

b. Cash 25,000
Accounts receivable 25,000
To record the collection of accounts receivable

c. Accounts receivable 19,000

Cash 19,000
To record the NSF check

3) Bad debts expense 22,414.88*

Allowance for bad debts 22,414.88
To accrue bad debts for the year

*Unadjusted credit sales 2,221,488

Add: SI#001101 20,000
Adjusted credit sales 2,241,488
Multiply by: 1%
Bad debts expense - 20x1 22,414.88
4) Allowance for bad debts (7K + 2K) 9,000
Accounts receivable 9,000
To record the write-off of accounts

Requirement (b): Adjusted balances of A/R & Allowance

Accounts receivable
Unadjusted 480,000
(1) 20,000
(2a) 3,000 3,000
25,000 (2b)
(2c) 19,000 9,000 (4)
485,000 Adjusted

Allowance for bad debts

12,000 Unadjusted
3,000 (2a)
22,414.88 (3)
(4) 9,000

Adjusted 28,414.88

Requirement (c): Carrying amount of accounts receivable

Accounts receivable 485,000

Allowance for bad debts (28,414.88)
Carrying amount 456,585.12
ACTIVITY #3: DEBTS EXPENSE

Solutions:

Requirement (a):
BDE - 20x2: (9,824,000 x 80% x 2.5%) = 196,480
BDE - 20x1: (2,670,000 x 80% x 2.5%) = 53,400

Requirement (b):

Allowance for bad debts

41,800 12.31.x1 (836K x 5%)
Write-offs 115,000 196,000 BDE - 20x2 (squeeze)
12.31.x2 (2.456M x 5%) 122,800

Allowance for bad debts

- 3.7.x1
Write-offs 12,000 53,800 BDE - 20x1 (squeeze)
12.31.x1 (836K x 5%) 41,800
ACTIVITY #4: AGING (PROVISION MATRIX)

Dear Sir / Ma’am:

The answer is already indicated in the activity (*Hints). The

student will be graded based on his/her creativity and extra effort
in making the report look professional. Suggested criteria:
1. Heading for the report (e.g., Aging Report or Provision
Matrix)
2. All headings, including the cut-off date, are in bold letters
3. Totals are double-ruled
4. The required balance of the allowance is labeled as such
5. The percentages are formatted as percentages (i.e., x%)
6. etc….. (end of thinking capacity ☺)

Sincerely,

Zeus Vernon B. Millan

PROBLEM 6: FOR CLASSROOM DISCUSSION
1. Solution:
Accounts receivable (158K + 15K) 173,000
Allowance for uncollectible accounts (8,000)
Total trade receivables 165,000

Claim for tax refund 12,000

Dividends receivable 220,000
Advances to officers (due in 6 months) 180,000
Total non-trade receivables 412,000
Total current receivables 577,000

Notes receivable (non-trade) 180,000

Advances to affiliates 900,000
Security deposit on a long-term lease 30,000
Total noncurrent receivables 1,110,000

TOTAL RECEIVABLES 1,687,000

2. Solutions:
a. FOB shipping point, freight collect
Dec. 27, -
20x1 No entry
Dec. 31, Accounts receivable 1,600
20x1
Sales 1,600
to record sale on account
Jan. 2, -
20x2 No entry
Jan. 5, Cash 1,600
20x2
Accounts receivable 1,600
to record settlement of accounts receivable

b. FOB destination, freight prepaid

Dec. 27,
20x1 No entry
-
Dec. 31, Prepaid freight 50
20x1
Cash 50
to record prepayment of freight to the carrier
Jan. 2, Accounts receivable 1,600
 20x2 Sales 1,600
to record sale on account
Jan. 2, Freight-out 50
20x2
Prepaid freight 50
to charge the prepaid freight to expense
Jan. 5, Cash 1,600
20x2
Accounts receivable 1,600
to record settlement of accounts receivable

c. FOB shipping point, freight prepaid

Dec. 27,
20x1 No entry
-
Dec. 31, Accounts receivable 1,650
20x1
Sales 1,600
Cash 50
to record sale on account and freight paid on
behalf of the buyer
Jan. 2, -
20x2 No entry
-
Jan. 5, Cash 1,650
20x2
Accounts receivable 1,650
to record collection of account receivable inclusive
of reimbursement for the freight paid

d. FOB destination, freight collect

Dec. 27,
20x1 No entry
-
Dec. 31, -
20x1 No entry
-
Jan. 2, Accounts receivable 1,550
20x2
Freight-out 50
Sales 1,600
to record sale on account and freight
accommodated by the buyer
Jan. 5, Cash 1,550
20x2
Accounts receivable 1,550
to record collection of account receivable net of
reimbursement for the freight
3. Solutions:
Requirement (a): Traditional GAAP

Gross method Net method

1. Sale on account
Accounts receivable 90,000 Accounts receivable 87,300
Sales 90,000 Sales 87,300

(₱100,000 x 90%) (₱100,000 x 90% x 97%)

2. Collection is made within the discount period

Cash 87,300 Cash 87,300
Sales discounts (90K x 3%) 2,700 Accounts receivable 87,300
Accounts receivable 90,000

3. Collection is made beyond the discount period.

Cash 90,000 Cash 90,000
Accounts receivable 90,000 Sales discount forfeited 2,700
Accounts receivable 87,300

Requirement (b.1): PFRS 15

Invoice amount (100,000 x 90%) 90,000
Multiply by: 3%
Total available discount 2,700
Multiply by: 80%
Discount expected to be taken 2,160

Invoice amount 90,000

Less: Discount expected to be taken (2,160)
Transaction price 87,840
1. Sale on account
Accounts receivable 87,840
Revenue 87,840

2. Portion collected within the discount period

Cash (90,000 x 80% x 97%) 69,840
Accounts receivable 69,840

3. Portion collected beyond the discount period

Cash (90,000 x 20%) or (87,840 – 69,840) 18,000
Accounts receivable 18,000

Requirement (b.2): PFRS 15

1. Sale on account
Accounts receivable (100K x 90%) 90,000
Revenue 90,000
Sales discount 2,160
Allowance for sales discount 2,160

2. Portion collected within the discount period

Cash on hand (90,000 x 80% x 97%) 69,840
Allowance for sales discount 2,160
Accounts receivable (90,000 x 80%) 72,000

3. Portion collected beyond the discount period

Cash on hand [(90K x 20%) or remaining balance] 18,000
Accounts receivable 18,000
4. Solution:
Requirement (a):
(a)
Accounts receivable 250,000
Sales 250,000

(b)
Cash 220,000
Accounts receivable 220,000

(c)
Bad debt expense 30,000
Allowance for doubtful accounts 30,000

(d)
Allowance for doubtful accounts 15,000
Accounts receivable 15,000

(e)
Accounts receivable 8,000
Allowance for doubtful accounts 8,000

Cash 8,000
Accounts receivable 8,000

Requirement (b):

Accounts receivable
beg. 120,000
Sales on account 250,000 220,000 Collections, excluding recoveries
15,000 Write-offs
Recovery 8,000 8,000 Collection on recovery
135,000 end.
 Allowance for bad debts
9,000 beg.
Write-off 15,000 30,000 Bad debts
8,000 Recovery
end. 32,000

Requirement (c):
Accounts receivable, end. 135,000
Allowance for bad debts, end. (32,000)
Carrying amount, end. 103,000

5. Solutions:
(a) Percentage of net credit sales
Allowance for bad debts
12,600 beg.
Write-offs 15,800 2,600 Recoveries
16,200 (1) Bad debts [900K – 90K) x 2%]
(2) end. 15,600

Accounts receivable
beg. 180,000
Net credit sales 810,000 15,800 Write-offs
781,000 Collections, excldg. recoveries
193,200 end.

Accounts receivable, Dec. 31 193,200

Allowance for bad debts, Dec. 31 (15,600)
(3) Carrying amount, Dec. 31 177,600
(b) Percentage of ending receivable
Allowance for bad debts
12,600 beg.
Write-offs 15,800 2,600 Recoveries
16,056 (1) Bad debts (squeeze)
(2) end. (193.2K x 8%) 15,456

Accounts receivable, Dec. 31 193,200

Allowance for bad debts, Dec. 31 (15,456)
(3) Carrying amount, Dec. 31 177,744

6. Solution:
Days outstanding Amount % uncollectible Required allowance
0 – 60 190,000 1% 1,900
61 – 90 240,000 3% 7,200
91 - 120 30,000 7% 2,100
Over 120 10,000 10% 1,000
Totals 470,000 12,200

Allowance for bad debts

10,100 beg.
Write-offs 4,600 200 Recoveries
6,500 (1) Bad debts (squeeze)
(2) end. 12,200

Accounts receivable, Dec. 31 470,000

Allowance for bad debts, Dec. 31 (12,200)
(3) Carrying amount, Dec. 31 457,800
 Chapter 5
Notes Receivable

PROBLEM 1: TRUE OR FALSE

1. FALSE – interest receivable = face amount x nominal rate
2. TRUE
➢ (1,241,843 x 110% x 110%) = 1,502,630 carrying amount on Dec. 31, 20x2
➢ 2M face amount - 1,502,630 = 497,370
3. TRUE
4. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)
5. TRUE
6. FALSE 40,000 (400,000 cash price equivalent x 10%)
7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000
8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 + 9,000) x 10% = 9,900
9. FALSE 850,000 (the note is collectible in installments)
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D – a note with below-market interest rate is discounted
2. A
3. C
4. A
5. C
6. C
7. C
8. D
9. B
1st note: 6,000 x 18% = 1,080 interest income;
2nd note: (7,080 ÷ 118%) x 18% = 1,080 interest income

10. B
PROBLEM 3: EXERCISES
1. Solutions:
Initial measurement:
₱1,000,000 x PV of ₱1 @14%, n= 4 = ₱592,080
Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 407,920 592,080
12/31/x1 82,891 325,029 674,971
12/31/x2 94,496 230,533 769,467
12/31/x3 107,725 122,807 877,193
12/31/x4 122,807 0 1,000,000

Requirement (b):
1/1/x1
Note receivable 1,000,000
Unearned interest 407,920
Land 500,000
Gain 92,080

12/31/x1
Unearned interest 82,891
Interest income 82,891

12/31/x2
Unearned interest 94,496
Interest income 94,496

12/31/x3
Unearned interest 107,725
Interest income 107,725

12/31/x4
Unearned interest 122,807
Interest income 122,807

Cash 1,000,000
Note receivable 1,000,000
2. Solutions:
Initial measurement:
₱900,000 x PV of ₱1 @12%, n= 3 = ₱640,602

Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 259,398 640,602
12/31/x1 76,872 182,526 717,474
12/31/x2 86,097 96,429 803,571
12/31/x3 96,429 0 900,000

Requirement (b):
1/1/x1
Note receivable 900,000
Accum. depn. 400,000
Loss 159,398
Unearned interest 259,398
Machinery 1,200,000

12/31/x1
Unearned interest 76,872
Interest income 76,872

12/31/x2
Unearned interest 86,097
Interest income 86,097

12/31/x3
Unearned interest 96,429
Interest income 96,429

12/31/x3
Cash 900,000
Note receivable 900,000
3. Solution:
Initial measurement:
₱250,000 x PV of ₱1 @14%, n= 4 = ₱759,337

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 759,337
12/31/x1 250,000 91,120 158,880 600,457
12/31/x2 250,000 72,055 177,945 422,512
12/31/x3 250,000 50,701 199,299 223,213
12/31/x4 250,000 26,787 223,213 -

Requirement (b):
Current portion = 177,945 (see table above)
Noncurrent portion = 422,512 (see table above)

Requirement (c):
1/1/x1
Note receivable 1,000,000
Loss 240,663
Unearned interest (1M – 759,337) 240,663
Land 1,000,000

12/31/x1
Unearned interest 91,120
Interest income 91,120

Cash 250,000
Note receivable 250,000

12/31/x2
Unearned interest 72,055
Interest income 72,055

Cash 250,000
Note receivable 250,000
12/31/x3
Unearned interest 50,701
Interest income 50,701

Cash 250,000
Note receivable 250,000

12/31/x4
Unearned interest 26,787
Interest income 26,787

Cash 250,000
Note receivable 250,000

4. Solution:
Initial measurement:
₱400,000 x PV of ₱1 @15%, n= 3 = ₱913,290

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 913,290
12/31/x1 400,000 136,994 263,006 650,284
12/31/x2 400,000 97,543 302,457 347,827
12/31/x3 400,000 52,173 347,827 (0)

Requirement (b):
Current portion = 302,457 (see table above)
Noncurrent portion = 347,827 (see table above)

Requirement (c):
1/1/x1
Note receivable 1,200,000
Loss 86,710
Unearned interest (1.2M – 913,290) 286,710
Land 1,000,000
12/31/x1
Unearned interest 136,994
Interest income 136,994

Cash 400,000
Note receivable 400,000

12/31/x2
Unearned interest 97,543
Interest income 97,543

Cash 400,000
Note receivable 400,000

12/31/x3
Unearned interest 52,173
Interest income 52,173

Cash 400,000
Note receivable 400,000

5. Solution:
Initial measurement:
(300,000 x PV of an annuity due of 1 @9%, n=3) = 827,733

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 827,733
1/1/x1 300,000 - 300,000 527,733
1/1/x2 300,000 47,496 252,504 275,229
1/1/x3 300,000 24,771 275,229 (0)

Requirement (b):
Interest income in 20x1 = 47,496 (see table above)
Requirement (c):

1/1/x1
Cash 100,000
Note receivable 900,000
Unearned interest (900K – 827,733) 72,267
Land 800,000
Gain 127,733

1/1/x1
Cash 300,000
Note receivable 300,000

12/31/x1
Unearned interest 47,496
Interest income 47,496

6. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Unearned interest at initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years

Date Collections Interest income Amortization Present value

1/1/x1 1,119,272
12/31/x1 400,000 179,084 (5) 220,916 898,356
12/31/x2 400,000 (6) 143,737 256,263 (7) 642,093
12/31/x3 400,000 102,735 (8) 297,265 344,827
(9) 12/31/x4 400,000 (10) 55,172 344,828 0
7. Solutions:
First step: Place the given information on the amortization table:
Date Collections Interest income Amortization Present value
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000

Second step: Squeeze for the carrying amount of the note on

December 31, 20x1.
Date Collections Interest income Amortization Present value
1/1/x1 911,205
12/31/x1 300,000 720,549*
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000

* (213,534 + 507,015) = 720,549

Third step: Compute for the effective interest rate

EIR = 86,466 ÷ 720,549 = 12%

Fourth step: Squeeze for the other missing information

Date Collections Interest income Amortization Present value
1/1/x1 911,205
12/31/x1 300,000 109,345 190,655 720,549
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000 60,842 239,158 267,857
12/31/x4 300,000 32,143 267,857 -
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. D
Solution:
Interest income - 20x1 (1,200,000 x 10%) 120,000
Interest income - 20x2 [(1,200,000 + 120,000) x 10%] 132,000
Total interest receivable - Dec. 31, 20x2 252,000

2. C (150K – 50K in July 1, 20x5) = 100K balance x 8% = 8,000

3. B (400,000 x PV of 1 @ 10%, n=3) = 300,526 x 10% = 30,053

4. A 480,000 carrying amount – 450,789 present value* = 30,000

loss rounded off
* (600,000 x PV of ₱1 @10%, n=3) = 450,789

5. C
Solution:
Initial measurement: (8M ÷ 4) x PV ordinary annuity of 1 @12%, n=4 =
6,074,699

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
1/1/20x1 6,074,699
12/31/20x1 2,000,000 728,964 1,271,036 4,803,663
12/31/20x2 2,000,000 576,440 1,423,560 3,380,103
12/31/20x3 2,000,000 405,612 1,594,388 1,785,715
12/31/20x4 2,000,000 214,285 1,785,715 0
6. D Solution:
(1M ÷ 5) x PV ordinary annuity of 1 @12%, n=5 = 720,955

Date Collections Interest income Amortization PV

1/1/x1 720,955
12/31/x1 200,000 86,515 113,485 607,470
12/31/x2 200,000 72,896 127,104 480,366
12/31/x3 200,000 57,644 142,356 338,010
12/31/x4 200,000 40,561 159,439 178,571
12/31/x5 200,000 21,429 178,571 0

7. D Solution:

Step 1: Pro-forma amortization table

Date Collections Interest income Amortization PV
1/1/x1 ?
12/31/x1 ? 86,515 ? ?
12/31/x2 ? 72,896 127,104 480,366
12/31/x3 ? ? ? ?
12/31/x4 ? ? ? ?
12/31/x5 ? ? ? ?

Step 2: Reconstruct some information

Date Collections Interest income Amortization PV
1/1/x1 ?
12/31/x1 200,000 (1) 86,515 ? 607,470 (2)
12/31/x2 200,000 72,896 127,104 480,366
12/31/x3 200,000 ? ? ?
12/31/x4 200,000 ? ? ?
12/31/x5 200,000 ? ? ?

(1M face amount ÷ 5) = 200,000

(1)

(127,104 + 480,366) = 607,470

(2)

* Effective interest rate = 72,896 int. inc. in 20x2 ÷ 607,470 = 12%

Step 3: Reconstruct some more
Date Collections Interest income Amortization PV
1/1/x1 ?
12/31/x1 200,000 86,515 ? 607,470
12/31/x2 200,000 72,896 127,104 480,366
12/31/x3 200,000 57,644 (3) 142,356 338,010
12/31/x4 200,000 ? ? ?
12/31/x5 200,000 ? ? ?

(3) 480,366 x 12% = 57,644

Step 4: Solve for requirement

Unpaid balance of face amount - Dec. 31, 20x3
(1M - 200K - 200K - 200K) 400,000
Carrying amount - Dec. 31, 20x3 338,010
Unamortized discount - Dec. 31, 20x3 61,990

8. C
Solution:
Initial measurement: (1M ÷ 5) x PV of an annuity due of 1 @12%, n=
5 = 807,470

Date Collections Interest income Amortization PV

1/1/x1 807,470
1/1/x1 200,000 - 200,000 607,470
1/1/x2 200,000 72,896 127,104 480,366
1/1/x3 200,000 57,644 142,356 338,010
1/1/x4 200,000 40,561 159,439 178,571
1/1/x5 200,000 21,429 178,571 0

Carrying amt. on Dec. 31, 20x1 = 480,366 + 200,000 = 680,366

9. A
Solution:
Initial measurement: (2.1M ÷ 6) x PV ordinary annuity of 1 @5%, n=6
= 1,776,492
Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 1,776,492
July 1, 20x1 350,000 88,825 261,175 1,515,317
Dec. 31, 20x1 350,000 75,766 274,234 1,241,083
July 1, 20x2 350,000 62,054 287,946 953,137
Dec. 31, 20x2 350,000 47,657 302,343 650,794
July 1, 20x3 350,000 32,540 317,460 333,333
Dec. 31, 20x3 350,000 16,667 333,333 0

Interest income in 20x1 = (88,825 + 75,766) = 164,591

10. B
Solution:
Initial measurement:
PV of P1 @
Date Collections Present value
10%, n= 1 to 3
Dec. 31, 20x1 400,000 0.90909 363,636
Dec. 31, 20x2 300,000 0.82645 247,935
Dec. 31, 20x3 200,000 0.75131 150,262
Totals 900,000 761,833

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 761,833
Dec. 31, 20x1 400,000 76,183 323,817 438,016
Dec. 31, 20x2 300,000 43,802 256,198 181,818
Dec. 31, 20x3 200,000 18,182 181,818 0
11. D
Initial measurement: 1,600,000 – the cash price equivalent

Trial and error:

Working equation:
➢ Future cash flows x PV factor at x% = PV of note
➢ 2,370,470 x PV of 1 x% = 1,600,000

First trial: (at 14%)

➢ 2,370,470 x PV of 1 @ 14%, n=3 = 1,600,000

❖ Conclusion: The effective interest rate is 14%.

Subsequent measurement:
Date Interest income Unearned interest Present value
1/1/x1 770,470 1,600,000
12/31/x1 224,000 546,470 1,824,000
12/31/x2 255,360 291,110 2,079,360
12/31/x3 291,110 (0) 2,370,470

Shortcut: 1,600,000 x 114% x 114% = 2,079,360

12. C
Solution:
Initial measurement:
Present value
Future cash flows factors @12%, n=3 Present value
Principal 3,000,000 0.71178 a 2,135,340
Annual interest (3M x 3%) 90,000 2.40183 b 216,165
Total 2,351,505
a (PV of P1 @12%, n=3)
b (PV of ordinary annuity of P1 @12%, n=3
Subsequent measurement:
Collection Interest
Date Amortization Present value
of interest income
Jan. 1, 20x1 2,351,505
Dec. 31, 20x1 90,000 282,181 192,181 2,543,685
Dec. 31, 20x2 90,000 305,242 215,242 2,758,927
Dec. 31, 20x3 90,000 331,071 241,071 2,999,999

13. C
Solution:
Jan. 1, 20x1 1,200,000
Interest in 20x1 (1.2M x 3%) 36,000
Interest in 20x2 [(1.2M + 36K) x 3%] 37,080
Interest in 20x3 [(1.2M + 36K + 37.080K) x 3%] 38,192
Total future cash flow 1,311,272

Alternative solution:
Face amount of note receivable 1,200,000
FV of P1 @ 3%, n=3 1.092727
Future cash flow 1,311,272

Future cash flow 1,311,272

PV of P1 @12%, n=3 0.71178
PV of note receivable – Jan. 1, 20x1 933,337

14. C
Solution:
The equal annual year-end payments are computed as follows:
PV = Cash Flow x PVF
20,000 = Cash Flow x PV ordinary annuity of 1 @8%, n=5
20,000 = Cash Flow x 3.993
Cash Flow = 20,000 ÷ 3.9927
Cash Flow = 5,009

Total cash flow = 5,009 x 5 years = 25,045

Less: Present value (5,009 x PV ordinary annuity @9%, n=5) =
19,483
Total interest revenue = 5,561 (Answer choice is rounded-off)

15. B
Solution:
PV of 1 @ 12%,
Cash flows
n=3; 4; & 5 PV
1/1/x1 - - -
1/1/x2 - - -
1/1/x3 - - -
1/1/x4 800,000 0.7117802478 569,424
1/1/x5 800,000 0.6355180784 508,414
1/1/x6 800,000 0.5674268557 453,941
Carrying amt. on Jan. 1, 20x1 1,531,779

Date Collections Interest income Amortization PV

1/1/x1 1,531,779
1/1/x2 - 183,813 (183,813) 1,715,592
1/1/x3 - 205,871 (205,871) 1,921,463
1/1/x4 800,000 230,576 569,424 1,352,039
1/1/x5 800,000 162,245 637,755 714,284
1/1/x6 800,000 85,714 714,286 (2)
PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY 1:
The learners perform the activity, grade themselves, and then pass
their scores to the teacher for recording.

ACTIVITY 2:
The learners perform the activity, grade themselves, and then pass
their scores to the teacher for recording.

ACTIVITY 3:
The learners perform the activity and then pass their printed work
to the teacher for grading.

ACTIVITY 4:
The learners perform the activity and then pass their printed work
to the teacher for grading.
PROBLEM 6: FOR CLASSROOM DISCUSSION
1. Solutions:
Initial measurement:
₱133,100 x PV of ₱1 @10%, n= 3 = ₱100,000

Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 33,100 100,000
12/31/x1 10,000 23,100 110,000
12/31/x2 11,000 12,100 121,000
12/31/x3 12,100 - 133,100

Requirement (b):
1/1/x1
Note receivable 133,100
Unearned interest 33,100
Land 100,000

12/31/x1
Unearned interest 10,000
Interest income 10,000

12/31/x2
Unearned interest 11,000
Interest income 11,000

12/31/x3
Unearned interest 12,100
Interest income 12,100

12/31/x3
Cash 133,100
Note receivable 133,100
2. Solutions:

Initial measurement:
₱100,000 x PV ordinary annuity of ₱1 @10%, n=3 = ₱248,685

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 248,685
12/31/x1 100,000 24,869 75,131 173,554
12/31/x2 100,000 17,355 82,645 90,909
12/31/x3 100,000 9,091 90,909 0

Requirement (b):
Current portion = 82,645 (see table above)
Noncurrent portion = 90,909 (see table above)

Requirement (c):
Outstanding balance of face amount (100K x 2) 200,000
Carrying amt. on 12/31/x1 (173,554)
Unearned interest on 12/31/x1 26,446

OR
Unearned interest on 12/31/x1 = Interest income in 20x2 and 20x3:
(17,355 + 9,091) = 26,446

Requirement (d):
1/1/x1
Note receivable 300,000
Accum. depreciation 700,000
Loss 51,315
Unearned interest (300,000 – 248,685) 51,315
Equipment 1,000,000
12/31/x1
Unearned interest 24,869
Interest income 24,869

Cash 100,000
Note receivable 100,000

12/31/x2
Unearned interest 17,355
Interest income 17,355

Cash 100,000
Note receivable 100,000

12/31/x3
Unearned interest 9,091
Interest income 9,091

Cash 100,000
Note receivable 100,000

Requirement (e):
Interest income 24,869
Loss on sale of equipment (51,315)
Net effect on P/L - decrease (26,446)
3. Solutions:

Initial measurement:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 1,094,215
1/1/x1 400,000 - 400,000 694,215
1/1/x2 400,000 69,422 330,578 363,637
1/1/x3 400,000 36,363 363,637 (0)

Requirement (b):
69,422 – see table above.

Requirement (c):
Carrying amt. on 1/1/x2 363,637
Add back: Collection on 1/1/x2 400,000
Carrying amt. on 12/31/x1 763,637
 Chapter 6
Receivables – Additional Concepts

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. TRUE – Direct origination costs increase the carrying amount of a
financial asset. Therefore, direct origination costs decrease the
effective interest rate. This is based on the concept that the
effective interest rate and the present value amount have an
inverse relationship.

3. TRUE
4. FALSE
5. FALSE – original effective interest rate
6. TRUE
7. FALSE
8. TRUE
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B
2. B
3. B
4. D
5. C
6. A
7. C
8. C
9. B
10. D
11. A
12. A
13. B
14. C
15. A
PROBLEM 3: EXERCISES
1. Solution:
Principal amount 2,000,000
Direct origination cost 24,000
Origination fee (₱2,000,000 x 6%) ( 120,000)
Initial carrying amount of loan 1,904,000

❖ Using “trial and error,” effective interest rate is approximately

12%.

Collections Interest Present

Date Amortization
of interests income value
Jan. 1, 20x1 1,904,000
Dec. 31, 20x1 200,000 228,480 28,480 1,932,480
Dec. 31, 20x2 200,000 231,898 31,898 1,964,378
Dec. 31, 20x3 200,000 235,725 35,725 2,000,103

2. Solutions:

July 1, 20x1
July 1, Loan receivable 2,400,000
20x1 Cash 2,400,000
July 1, Impairment loss* 24,000
20x1 Loss allowance 24,000
* Equal to 12-month expected credit losses

December 31, 20x1

Dec. 31, Impairment loss 85,200
20x1 Loss allowance (109.2K** – 24K) 85,200
** Lifetime expected credit losses

Dec. 31, Interest receivable 144,000

20x1 Interest income 144,000
(2.4M x 12% x 6/12)***
*** Interest revenue is computed on the gross carrying amount because the
loan is not credit-impaired (i.e., Stage 2 rather than Stage 3).
December 31, 20x2
Dec. 31, Loss allowance (109.2K – 6K****) 103,200
20x1 Impairment gain 103,200

****12-month expected credit losses – Morning Co. reverts back to

measuring expected credit losses equal to 12-month expected credit
losses because the credit risk has significantly decreased since
initial recognition. This is evidenced by the fact that the 12-month
expected credit losses of ₱6,000 on 12/31/20x2 are lower than the
12-month expected credit loss of ₱24,000 on 7/1/20x1.

Dec. 31, Interest receivable 144,000

20x1 Interest income 144,000
(2.4M x 12% x 6/12)

3. Solutions:
Requirement (a):
The present value of estimated future cash flows is computed as
follows:
Estimated future cash flows
(2M ÷ 2 equal annual installments) 1,000,000
Multiplied by: PV of ordinary annuity at 10%, n= 2 1.7355372
Present value of estimated future cash flows 1,735,537

The carrying amount is computed as follows:

Principal amount 2,000,000
Interest receivable (accrued interest in 20x2) 200,000
Carrying amount of loan before impairment 2,200,000

Present value of estimated future cash flows

(recoverable amount) 1,735,537
Carrying amount of loan before impairment ( 2,200,000)
Impairment loss ( 464,463)
The impairment loss is recorded as follows:
Direct
Dec. Impairment loss 464,463
31, Interest receivable 200,000
20x3 Loan receivable 264,463

Allowance
Dec. Impairment loss 464,463
31, Interest receivable 200,000
20x3 Allowance for impairment loss 264,463

Requirement (b):
Interest Present
Date Collections Amortization
income value
Dec. 31, 20x3 1,735,537
Dec. 31, 20x4 1,000,000 173,554 826,446 909,091
Dec. 31, 20x5 1,000,000 90,909 909,091 -

4. Solutions:
Requirement (a):
Date Cash 180,000
Loss on transfer 20,000
Loans receivable 200,000

Requirement (b):
Date Cash 180,000
Liability on repurchase agreement 180,000

Requirement (c):
Date Cash 180,000
Loss on transfer 20,000
Loans receivable (200K – 20K) 180,000
Liability on repurchase agreement 20,000
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. D Solution:
Martin Bank, the lender:
Principal amount 150,000
Direct loan origination costs 4,000
Origination fee (150K x 4%) (6,000)
Carrying amount 148,000

Duff, the borrower:

Principal amount 150,000
Origination fee (150K x 4%) (6,000)
Carrying amount 144,000

2. C (194,000 x 12.4% x 1/12) = 2,005

3. B
Solution:
Jan. 1, Loan receivable 500,000
20x1
Unrealized loss – “Day 1” difference 182,240
Cash 500,000
Unearned interest (1) 182,240

(1)

Future cash flow 500,000

Multiply by PV of ₱1 @12%, n=4 0.63552
Present value of loan receivable 317,760

Face amount 500,000

Present value of loan receivable (317,760)
Unearned interest income 182,240

❖ The net effect in the 20x1 profit is determined as follows:

Interest income (317,760 x 12%) 38,131
Unrealized loss - "Day 1" difference (182,240)
Net decrease in profit (144,109)
4. A (8,200,000 – 623,246) x 10% = 757,675

5. D Solution:
PV of future cash flows (1.4M x PV ann. due @12%, n=3) 3,766,071
Carrying amount (5,600,000)
Impairment loss (1,833,929)

Date Collections Interest income Amortization Present value

Dec. 31, 20x1 3,766,071
Jan. 1, 20x2 1,400,000 0 1,400,000 2,366,071
Jan. 1, 20x3 1,400,000 283,929 1,116,071 1,250,000
Jan. 1, 20x4 1,400,000 150,000 1,250,000 -

6. C Solution:
❖ The impairment loss is computed as follows:
PV of remaining cash flows 3,568,785 (a)
Less: Carrying amount (4,068,501)(b)
Impairment loss (499,716)

(a) The PV of the remaining cash flows is computed as follows:

Date Cash flows PV of 1 @11% PV factors Present value
1/1/x3 1,000,000 n=0 1 1,000,000
1/1/x4 1,500,000 n=1 0.900900901 1,351,351
1/1/x5 1,500,000 n=2 0.811622433 1,217,434
3,568,785

(b) The carrying amount of the loan is computed as follows:

Initial measurement:
Face amount 4,000,000
Direct origination costs 364,098
Origination fees (240,000)
Initial carrying amount 4,124,098
Subsequent measurement:
Date Collections Interest income Amortization Present value
1/1/x1 4,124,098
12/31/x1 480,000 453,651 26,349 4,097,749
12/31/x2 480,000 450,752 29,248 4,068,501

❖ The interest income in 20x2 is computed as follows:

(3,568,785 – 1,000,000) x 11% = 282,566

7. A Bigco, Inc. has not surrendered control over any amount of

the transferred receivables because it is obligated to
repurchase them.

8. D
Since the transfer of the bond is used only as security for the loan,
and not as a sale of the bond, Dayco would not recognize the bond
in its books at the time of the transfer. The bond would be
recognized in Dayco's books on the date Rayco defaulted. The
bond is measured at fair value.

9. C
Solution:
Year Expected fees Fractions
1 40,000 40/80
2 30,000 30/80
3 10,000 10/80
80,000

60,000 servicing asset x 40/80 fraction in Year 1 = 30,000

amortization

10. C – (750,000 x .02 =15,000 service fee) + (750,000 x .12 x 51/365 =

12,575 interest expense) = total of 27,575
11. C
Maturity value = 500,000 + (500,000 x 8%) = 540,000
Discount = 540,000 x 10% x 6/12 = 27,000
Net proceeds = 540,000 – 27,000 = 513,000

12. A
Maturity value [1M + (1M x 12% x 90/365)] 1,029,589
Protest fee 1,000
Amount transferred to accounts receivable 1,030,589

PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solution:

Initial measurement:
Face amount 5,000,000
Direct loan origination costs 261,986
Origination fees (5M x 2%) (100,000)
Carrying amount - 1/1/x1 5,161,986

Subsequent measurement:
Future cash flows x PV factor @ x% = Present value of note

First trial (using 9%):

➢ Principal of (5,000,000 x PV of 1 @ 9%, n=4) + Interest of
(500,000 x PV of ordinary annuity @ 9%, n=4) = 5,161,986
➢ (5,000,000 x 0.70842521105) + (500,000 x 3.23971987722) =
5,161,986
➢ (3,542,126 + 1,619,860) = 5,161,986 is equal to 5,161,986

➢ The effective interest rate is 9%.

Date Collections Interest income Amortization Present value

1/1/x1 5,161,986
12/31/x1 500,000 464,579 35,421 5,126,565
12/31/x2 500,000 461,391 38,609 5,087,956
12/31/x3 500,000 457,916 42,084 5,045,872
12/31/x4 500,000 454,128 45,872 5,000,000
2. Solution:
Initial measurement: 2M x PV of 1 @ 10%, n=4 = 1,366,027

Jan. 1, Loan receivable 2,000,000

20x1
Unrealized loss (“Day 1” difference) 633,973
Cash 2,000,000
Unearned interest 633,973

3. Solutions:

July 1, 20x1

July 1, Loan receivable 2,000,000

20x1 Cash 2,000,000
July 1, Impairment loss* 20,000
20x1 Loss allowance 20,000

* Equal to 12-month expected credit losses (2.5% x 800,000)

December 31, 20x1

Dec. 31, Impairment loss 71,000

20x1 Loss allowance (91K – 20K) 71,000

Lifetime expected credit losses = (3.0% + 10%) x 700,000 = 91,000

Dec. 31, Interest receivable 100,000

20x1 Interest income (2M x 10% x 6/12)** 100,000

** Interest revenue is computed on the gross carrying amount because the

loan is not credit-impaired (i.e., Stage 2 rather than Stage 3).

December 31, 20x2

Dec. 31, Loss allowance (91K – 5K) 86,000

20x2 Impairment gain 86,000

12-month expected credit losses = (1% x 500,000) = 5,000

Sunny Day Corp. reverts back to measuring expected credit losses
equal to 12-month expected credit losses because the credit risk has
significantly decreased since initial recognition. This is evidenced
by the fact that the 12-month default risk of 1% on 12/31/20x2 is
lower than the 12-month default risk of 2.5% on 7/1/20x1

Dec. 31, Interest receivable 100,000

20x2 Interest income (2M x 10% x 6/12) 100,000

4. Solution:

PV of future cash flows (1M x PV ord. ann. @10%, n=3) 2,486,852

Carrying amount (3M principal + .4M int. receivable) (3,400,000)
Impairment loss (913,148)

Direct Allowance
Dec. 31, 20x1 Dec. 31, 20x1
Impairment loss 913,148 Impairment loss 913,148
Interest receivable 400,000 Interest receivable 400,000
Loan receivable 513,148 Loss allowance 513,148

Date Collections Interest income Amortization Present value

Dec. 31, 20x1 2,486,852
Dec. 31, 20x2 1,000,000 248,685 751,315 1,735,537
Dec. 31, 20x3 1,000,000 173,554 826,446 909,091
Dec. 31, 20x4 1,000,000 90,909 909,091 -

5. Solution:
Nov. Cash 28,000
14,
Liability on repurchase agreement 28,000
20x1

The transfer does not qualify for derecognition because

Athena Co. is required to repurchase the transferred loan. The cash
received on the transfer is recorded as liability.
6. Answer: ₱200,000 – the gross amount. Offsetting is not
applicable because ABC Co. does not intend to settle the
accounts receivable and accounts payable simultaneously. A
financial asset and a financial liability are offset and only the
net amount is presented in the statement of financial position
if the entity has both:
a. a legal right of setoff; and
b. an intention to settle the amounts on a net basis or
simultaneously

7. Solution:

Cash 723,000
Discount on loan payable 27,000
Loans Payable 750,000

8. Solutions:
➢ Journal entries
Notification basis Non-notification basis
1. To record the assignment
Accts. receivable – assigned 900K Accts. receivable – assigned 900K
Accounts receivable 900K Accounts receivable 900K
2. To record the receipt of loan
Cash 723K Cash 723K
Discount on L/P (900M x 3%) 27K Discount on L/P (900M x 3%) 27K
Loan payable 750K Loan payable 750K
3. To record the collections
Cash 350K
No entry yet Sales returns 560
Accts. rec’ble – assigned 350,560
4. To record the write-off
Allowance for bad debts 530 Allowance for bad debts 530
Accts. receivable – assigned 530 Accts. receivable – assigned 530
5. To record the remittance of collections to Sunday, plus interest
Loan payable 350K
Not applicable (see #’s 6 & 7 below) Interest expense (a) 7.5K
Cash 357.5K
6. Sunday Financing Corp. notifies Morning Co. of the collections
Loan payable 350K
Sales returns 560
Accts. rec’ble – assigned 350,560
7. Morning Co. pays the interest
Interest expense (a) 7.5K
Cash 7.5K
(a) (750K x 12% x 1/12) = 7.5K

➢ Equity in assigned receivables

A/R – assigned Loan payable

beg. 900,000 750,000 beg.
350,560 collection payment 350,000
530 write-off
548,910 end. end. 400,000

A/R - assigned (900K - 351,090) 548,910

Loan payable (750K - 350K) (400,000)
Equity in assigned receivables 148,910

9. Solutions:
Requirement (a):

Mug Co.’s books:

Cash (squeeze) 368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱400,000) 24,000
Accounts Receivable 400,000

Coffee Co.’s books:

Accounts Receivable 400,000
Due to Mug 8,000
Financing Revenue 24,000
Cash 368,000
Requirement (b):
Mug Co.’s books:
Cash 368,000
Due from Factor 8,000
Service charge (6% × ₱400,000) 24,000
Loss on recourse obligation 7,000
Accounts Receivable 400,000
Recourse Liability 7,000

10. Solution:
Maturity value = Principal + Interest for the full term of the note
Maturity value = 1,000,000 + (1,000,000 x 12% x 6/12)
Maturity value = 1,060,000

Discount period = unexpired term (or full term – expired term)

Discount period = 6 months – 4 months from July 1 to Nov. 1
Discount period = 2 months

Discount = Maturity value x Discount rate x Discount period

Discount = 1,060,000 x 16% x 2/12
Discount = 28,267

Net proceeds = Maturity value - Discount

Net proceeds = 1,060,000 – 28,267
Net proceeds = 1,031,733

Interest income = accrued interest as of date of discounting

Interest income = 1,000,000 x 12% x 4/12
Interest income = 40,000

Requirement (a): Without recourse basis

Nov. Cash (equal to net proceeds) 1,031,733
1, Loss on discounting (squeeze) 8,267
20x1
Note receivable 1,000,000
Interest income 40,000
Requirement (b): With recourse basis – Conditional sale
Nov. Cash (equal to net proceeds) 1,031,733
1, Loss on discounting (squeeze) 8,267
20x1
Note receivable discounted 1,000,000
Interest income 40,000

Requirement (c): With recourse basis – Secured borrowing

Nov. Cash (equal to net proceeds) 1,031,733
1, Loss on discounting (squeeze) 8,267
20x1
Liability on note discounted 1,000,000
Interest income 40,000
 Chapter 7
Inventories

PROBLEM 1: TRUE OR FALSE

1. TRUE – i.e., finished goods, work in process, and raw materials &
supplies
2. FALSE
3. FALSE – consignor
4. FALSE – e.g., increase in inventory resulting from cash purchases
5. TRUE
6. FALSE (₱3 + ₱4 = ₱7)
7. FALSE (₱2 – the cost of the red apple)
8. FALSE (2 + 3 + 4) / 3 apples x 2 apples on hand = ₱6
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D - Assets used in producing goods (e.g., factory equipment) or in
rendering services (e.g., dental chair) are classified as PPE.

2. D
3. B
4. A
5. C – memo entry
6. A
7. C
8. A
9. D
10. D
11. D
12. D
13. A
14. A
15. C
16. A
17. A
18. C
19. C
20. D
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): FOB shipping point, Freight collect
Dec. 31, Purchases 100,000
20x1 Accounts payable 100,000
Jan. 2, Freight-in 10,000
20x2 Cash 10,000
Jan. 5, Accounts payable 100,000
20x2 Cash 100,000

Requirement (b): FOB destination, Freight prepaid

Dec. 31, No entry -
20x1 -
Jan. 2, Purchases 100,000
20x2 Accounts payable 100,000
Jan. 5, Accounts payable 100,000
20x2 Cash 100,000

Requirement (c): FOB shipping point, freight prepaid

Dec. 31, Purchases 100,000
20x1 Freight-in 10,000
Accounts payable 110,000
Jan. 2, No entry -
20x2 -
Jan. 5, Accounts payable 110,000
20x2 Cash 110,000
Requirement (d): FOB destination, Freight collect
Dec. 31, No entry -
20x1 -
Jan. 2, Purchases 100,000
20x2 Accounts payable 90,000
Cash 10,000
Jan. 5, Accounts payable 90,000
20x2 Cash 90,000

2. Solution:
Perpetual system Periodic system
(a)
Inventory 54,000 Purchases 50,000
Accounts payable 50,000 Freight-in 4,000
Cash 4,000 Accounts payable 50,000
Cash 4,000
(b)
Accounts payable 5,000 Accounts payable 5,000
Inventory 5,000 Purchase returns 5,000

(c)
Accounts receivable 90,000 Accounts receivable 90,000
Sales 90,000 Sales 90,000

Cost of goods sold 30,000 No entry

Inventory 30,000

(d)
Sales returns 6,000 Sales returns 6,000
Accounts receivable 6,000 Accounts receivable 6,000

Inventory 2,000 No entry

Cost of goods sold 2,000
3. Solution:
Effect of error on:
Nature of error
Gross profit COGS
a. Overstatement of beginning inventory Under Over
b. Understatement of purchases Over Under
c. Overstatement of purchase returns Over Under
d. Understatement of purchase returns Under Over
e. Overstatement of ending inventory Over Under
f. Understatement of ending inventory Under Over

4. Solution:

Gross method Net method

Purchase of inventory
Purchases 90,000 Purchases 88,200
Accounts payable 90,000 Accounts payable 88,200

(i) Payment is made within discount period

Accounts payable 90,000 Accounts payable 88,200
Purchase discounts 1,800 Cash 88,200
Cash 88,200

(ii) Payment is made beyond discount period.

Accounts payable 90,000 Accounts payable 88,200
Cash 90,000 Purchase discount lost 1,800
Cash 90,000

5. Solution:
Inventory, beg. Net purchases Cost of sales Inventory, end.
a. 10,000 198,000 112,000 96,000
b. 36,000 145,000 125,000 56,000
c. 15,000 58,000 64,000 9,000
d. 25,200 112,000 89,200 48,000
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Unadjusted balance 260,000
(a) 11,000
(b) 5,000
(c) (16,000)
(d) 20,000
(e) (4,000)
Correct inventory 276,000

2. C – the amount based on the physical count. No adjustment is

necessary:
• The goods are properly included in inventory because they
were shipped only on July 10, 2002, after the June 30, 2002 cut-
off date.
• The goods purchased FOB destination are properly excluded.

3. D
Solution:
Warehouse Consigned goods Total
Beginning inventory 110,000 12,000
Purchases 480,000 60,000
Freight in 10,000
Transpo. to consignees 5,000
TGAS 600,000 77,000
Ending inventory (145,000) (20,000)
Cost of goods sold 455,000 57,000 512,000

4. D
Mark-up on unsold consigned goods (40K x 40%) 16,000
Goods held on consignment by Opal 27,000
Total reduction in inventory 43,000
5. C Net method [(80K + 100K) x 98%] = 176,000
Gross method (80K x 98%) + 100K = 178,400

6. C
➢ Inventory (380,000 x 98% = 372,400);
➢ Accounts payable: 372,400 initial measurement + 7,600
adjustment on Dec. 31, 20x1 = 380,000

Initial recognition on Dec. 15, 20x1:

Purchases (380,000 x 98%) 372,400
Accounts payable 372,400

Adjusting entry on Dec. 31, 20x1:

Purchase discount lost (380,000 x 2%) 7,600
Accounts payable 7,600

7. A
Solution:
EI: 200,000 x 98% x 10% = 19,600
COGS: 200,000 x 98% x 90% = 176,400

8. C
Solution:
I. Discount is allocated only to the goods sold:
Gross amts. Allocation of discount Net amounts
EI (200K x 10%) 20,000 - 20,000
COGS (200K x 90%) 180,000 3,200 176,800
Total 200,000 3,200

II. Discount is allocated to both EI and COGS:

Gross amts. Allocation of discount Net amounts
EI (200K x 10%) 20,000 320* 19,680
COGS (200K x 90%) 180,000 2,880* 177,120
Total 200,000 3,200
* (3,200 x 10%); (3,200 x 90%)
9. D
Solutions:
FIFO periodic
➢ Ending inventory, in units = 1,400 – 400 + 800 – 900 + 700 – 600
= 1,000 units

In units Unit cost In pesos

Ending inventory 1,000
Allocation to June 24 purchase (700) 30 21,000
Excess allocated to June 14
purchase 300 35 10,500
Ending inventory, in pesos 31,500

➢ TGAS, in pesos:
Date Transaction Quantity Unit Cost In pesos
June 1 Balance fwd. 1,400 24 33,600
14 Purchase 800 35 28,000
24 Purchase 700 30 21,000
TGAS, in pesos 82,600

TGAS in pesos 82,600

Ending inventory, in pesos (31,500)
Cost of goods sold 51,100
FIFO perpetual
➢ SAME AS FIFO PERIODIC

or

Unit
Date Transaction Quantity Cost In pesos
June 1 Balance 1,400 24 33,600
8 Sale 400 24 (9,600)
14 Purchase 800 35 28,000
18 Sale 900 24 (21,600)
24 Purchase 700 30 21,000
29 Sale 600
100 from June 1 24 (2,400)
500 from June 14 35 (17,500)
Ending inventory 31,500
Cost of goods sold (9,600 + 21,600 + 2,400 + 17,500) 51,100

10. A
Solutions:
Weighted average periodic

Weighted Ave. Unit cost = TGAS, in pesos ÷ TGAS, in units

➢ TGAS, in units = 1,400 + 800 + 700 = 2,900 units

Weighted Ave. Unit cost = ₱82,600 (see previous solution) ÷ 2,900

Weighted Ave. Unit cost = ₱28.48

Ending inventory = ₱28.48 x 1,000 units = 28,480

TGAS in pesos 82,600

Ending inventory, in pesos (28,480)
Cost of goods sold 54,120
Weighted average perpetual
Date Transaction Quantity Unit Cost In pesos
June 1 Balance forwarded 1,400 24 33,600
8 Sale (400) (9,600)
14 Purchase 800 35 28,000
Totals 1,800 28.89 52,000
18 Sale (900) (26,001)
24 Purchase 700 30 21,000
Totals 1,600 29.37 46,999
29 Sale (600) (17,622)
Ending inventory 1,000 29,377

Cost of goods sold (9,600 + 26,001 + 17,622) 53,223

11. C
Solution:
FIFO – periodic
Beginning inventory in units 2,000
Net purchases in units (3,000 + 4,800 + 1,900 – 300) 9,400
Total goods available for sale in units 11,400

Total goods available for sale in units 11,400

Quantity of goods sold (4,200 – 600 + 3,800) (7,400)
Ending inventory in units 4,000

Unit Total
Units
cost cost
Ending inventory to be allocated 4,000
Allocated as follows:
From Nov. 29 net purchases
(1,900 - 300) (1,600) ₱38.60 ₱ 61,760
Bal. to be allocated to the next most
2,400
recent purchase date
From Nov. 21 purchase (2,400) 38.00 91,200
Ending inventory at cost - ₱152,960
Total goods available for sale in pesos (see below) 427,760
Ending inventory at cost (152,960)
Cost of goods sold 274,800

❖ TGAS in pesos:
Date Transaction Units Unit cost Total cost
1-Aug Inventory 2,000 ₱ 36.00 ₱ 72,000
7 Purchase 3,000 37.20 111,600
21 Purchase 4,800 38.00 182,400
29 Purchase 1,900 38.60 73,340
30 Purchase return 300 38.60 (11,580)
Total goods available for sale ₱ 427,760

FIFO – perpetual
➢ SAME AS FIFO PERIODIC

12. A
Solution:
Weighted Average - Periodic
Weighted average unit cost = (₱427,760 (a) ÷ 11,400 (a)) = ₱37.52
(a) see previous computations

Ending inventory in units (refer to previous computation) 4,000

Multiply by: Weighted average unit cost 37.52
Ending inventory at cost 150,080

Total goods available for sale in pesos (refer to previous table) 427,760
Ending inventory at cost (150,080)
Cost of goods sold 277,680
Weighted Average – Perpetual
Date Transaction Units Unit cost Total cost
1-Nov Inventory 2,000 ₱36.00 ₱72,000
7 Purchase 3,000 37.20 111,600
Moving average unit cost =
5,000 36.72 183,600
(₱183,600 ÷ 5,000)
12 Sales (4,200) 36.72 (154,224)
15 Purchase 4,800 38.00 182,400
Moving average unit cost =
5,600 37.82 211,776
(₱211,776 ÷ 5,600)
16 Sales returns 600 36.72 22,032
Moving average unit cost =
6,200 37.71 233,808
(₱233,808 ÷ 6,200)
22 Sales (3,800) 37.71 (143, 298)
29 Purchase 1,900 38.60 73,340
30 Purchase returns (300) 38.60 (11,580)
Ending inventory in units & at cost 4,000 ₱ 152,270

Cost of goods sold (Nov. 12, ₱154,224 – ₱22,032 Sales returns + Nov. 22,
₱143,298 = ₱275,490)

13. C
Solution:
❖ Concept: TGAS is the same under LIFO and FIFO.

TGAS in pesos (195,000 LIFO COGS + 65,000 LIFO) 240,000

FIFO Ending inventory in pesos (65,000)
FIFO Cost of goods sold 175,000

14. A
Solution:
Invoice price inclusive of VAT 112,000
VAT (12,000)
Shipping costs 40,000
Transit insurance 12,000
Commission to broker 5,600
Cost of inventory 157,600
15. C
Solution:
Sales 1,000,000
Sales discounts (50,000)
Sales returns (10,000)
Net sales 940,000
Cost of goods sold:
Beginning inventory 60,000
Purchases 500,000
Purchase returns (25,000)
Purchase discounts (10,000)
Freight-in 60,000
TGAS 585,000
Ending inventory (75,000) (510,000)
Gross profit 430,000

The freight-out and commission expense are presented as other

operating expenses; thus, they do not affect the computation of
gross profit.

16. C
Solution:
X Y Z Total
Cost (50 + 5); (30 + 4); (109 + 68) 55 34 177
NRV (56 - 4); (60 - 8); (250 - 75) 52 52 175
Lower 52 34 175
No. of units 3,700 2,500 1,300
Total 192,400 85,000 227,500 504,900

17. D – Raw materials are not written-down if the finished goods

in which they will be incorporated are expected to be sold at
or above cost.
18. B – The recovery in 20x2 of ₱40,000 (490,000 – 450,000) exceeds
the previous write-down. Thus, the amount of reversal
recognized is limited to the previous write down of ₱30,000
(410,000 – 440,000).

19. B
Solution:
Inventory
beg. 60,000
Net purchases, excldg.
freight in 465,000
Freight-in (squeeze) 60,000
510,000 COGS
75,000 end.

OR

Inventory
beg. 60,000
Purchases 500,000 25,000 Purchase returns
Freight-in (squeeze) 60,000 10,000 Purchase discounts
510,000 COGS
75,000 end.

TGAS = 510,000 COGS + 75,000 EI = 585,000;

OR

TGAS = 60,000 BI + (500,000 – 25,000 – 10,000 + 60,000) Net

purchases = 585,000
20. A
Solution:
Inventory
beg. 60,000
Purchases 500,000 25,000 Purchase returns (squeeze)
Freight-in 60,000 10,000 Purchase discounts
510,000 COGS
75,000 end. (585K TGAS – 510K COGS)

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY 1:
Solutions:
(a) The sale terms are FOB SHIPPING POINT and Freight
COLLECT. (see ‘COD’ Cash On Delivery on Bill of Lading)

(b) Journal entry:

(i) Perpetual inventory system:

JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1 (a) Inventory 8,689.29(b)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory

(a) The date of the Bill of Lading, i.e., the date Wictory Liner receives
the goods from XYZ, Inc.
(b) Purchase price net of VAT ₱7,589.29 + Freight (₱900.00 bill of lading

+ ₱200.00 porter fee) = ₱8,689.29 cost of purchase

(ii) Periodic inventory system:
JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1 Purchases 7,589.29 (c)
Freight-in 1,100.00 (d)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory

(c) Purchase price net of VAT

(d) ₱900.00 bill of lading + ₱200.00 porter fee = ₱1,100

ACTIVITY 2:
Solutions:
1. Specific Identification:
a. Ending inventory ₱11.75
b. Cost of goods sold ₱7.00 – the cost of item “broken”

2. FIFO:
a. Ending inventory ₱13.00
b. Cost of goods sold ₱5.75 – the cost of item “happy”

3. Weighted Average Cost:

a. Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25 = ₱12.50
b. Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 = ₱6.25
PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Cost of inventory Net cash payment
Scenarios: on Dec. 31 on Jan. 5
a. FOB Destination,
Freight prepaid None 100,000
b. FOB Shipping point,
Freight collect 100,000* 100,000
c. FOB Destination,
Freight collect None 94,000
d. FOB Shipping point,
Freight prepaid 106,000 106,000

* The ₱6,000 freight-in is recorded on Jan. 2, 20x2 when Entity A

accepts delivery from the carrier. On Jan. 2, 20x2, the total cost of
the inventory would be increased to ₱106,000.
If, however, Entity A receives notice of the shipment cost
from the carrier beforehand, the freight-in would have been
recorded on December 30, 20x1 (shipment date). Accordingly, the
cost of inventory on December 31, 20x1 would be ₱106,000.
Entity A may also want to estimate the freight cost and
records it on Dec. 30, 20x1 or Dec. 31, 20x1. This, however, is
seldom done in practice.

2. Solution:
Unadjusted balance 180,000
(a) Goods received on consignment (30,000)
(d) Unsold goods sent out on consignment (18,000 x 1/2) 9,000
(e) Freight on unsold goods out on consignment (2,000 x 1/2) 1,000
Adjusted balance 160,000
3. Solution:
Inventory Accounts payable
Unadjusted balances 500,000 120,000
(a) 60,000 -
(b) (80,000) (80,000)
(c) 50,000 50,000
(d) 30,000 -
Adjusted balances 560,000 90,000

4. Solution:
a. Inventory on display shelves 100,000
b. Inventory stocked in warehouse 250,000
c. Inventory sold under a bill and hold arrangement (20,000)
d. Inventory purchased on installment basis 30,000
e. Inventory pledged as collateral security for a bank loan 60,000
g. Inventory sold with repurchase agreement 10,000
430,000

5. Solutions:
Requirement (a):
Perpetual system Periodic system
(a)
Inventory 450,000 Purchases 450,000
Accounts payable 450,000 Accounts payable 450,000

(b)
Inventory 25,000 Freight-in 25,000
Cash 25,000 Cash 25,000

(c)
Accounts payable 10,000 Accounts payable 10,000
Inventory 10,000 Purchase returns 10,000

(d)
Accounts receivable 800,000 Accounts receivable 800,000
Sales 800,000 Sales 800,000
 Cost of goods sold 380,000 No entry
Inventory 380,000

(e)
Sales returns 9,000 Sales returns 9,000
Accounts receivable 9,000 Accounts receivable 9,000

Inventory 4,275 No entry

Cost of goods sold 4,275

Requirement (b):

Perpetual system

Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales (380,000 – 4,275) (375,725)
Gross profit 415,275

Periodic system

Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales:
Beginning inventory 20,000
Net purchases (450K + 25K – 10K) 465,000
Total goods avail. for sale 485,000
Ending inventory (109,275) (375,725)
Gross profit 415,275
6. Solution:
Purchase price, gross of trade discount 100,000
Trade discount (20,000)
Non-refundable purchase tax 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Total cost of inventories 102,000

The advertisement costs are selling costs. These are

expensed in the period in which they are incurred.

7. Solution:
Gross method Net method
Jan. 1, 20x1
Purchases 144,000* Purchases 136,800*
Accounts payable 144,000 Accounts payable 136,800

*(₱200,000 x 80% x 90%) *(₱200,000 x 80% x 90% x 95%)

Jan. 10, 20x1

Accounts payable* 72,000 Accounts payable* 68,400
Purchase discounts 3,600 Cash 68,400
(144,000 x ½ x 5%)
Cash** 68,400

*(144K x ½) * (136.8K x ½)
**(144K x ½ x 95%)

Jan. 31, 20x1

Accounts payable* 72,000 Accounts payable 68,400
Cash 72,000 Purchase discount lost 3,600
Cash 72,000
*(144K x ½)
8. Solution:
Requirement (a): FIFO Periodic
Ending inventory, in units = (3,000 + 2,250 + 10,200 – 2,700 – 7,200)
= 5,550

Units Unit cost Total cost

Ending inventory in units 5,550
Allocation to latest purchases:
Jan. 26 2,250 20.60 46,350
Jan. 6 (balance) 3,300 21.50 70,950
Ending inventory in pesos 117,300

TGAS (58,650 + 219,300 + 46,350) 324,300

Less: Ending inventory in pesos (117,300)
COGS 207,000

Requirement (b): FIFO Perpetual

Answers are the same with FIFO Periodic.

OR
Unit
Units Total Cost
Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
January 7, 2002 (2,700) 19.55 (52,785)
January 26, 2002 2,250 20.6 46,350
January 31, 2002 (7,200) * (154,215)*
Ending inventory 5,550 117,300

*The COGS on the Jan. 31 sale is computed as follows:

Units Unit Cost Total Cost
Jan. 31 sale 7,200
Allocation:
From Jan. 1 (3,000 - 2,700) 300 19.55 5,865
From Jan. 6 (balance) 6,900 22 148,350
COGS - Jan. 31 sale 154,215

COGS = (52,785 + 154,215) amounts taken from table above = 207,000

Requirement (c): Weighted Average Cost Periodic
Weighted ave. unit TGAS in pesos
=
cost TGAS in units
Weighted ave. unit (58,650 + 219,300 + 46,350) = 324,300
=
cost (3,000 + 10,200 + 2,250) = 15,450
Weighted ave. unit
= 20.99
cost

Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
Ending inventory in pesos 116,494.50

TGAS in pesos 324,300

Less: Ending inventory in pesos (116,494.50)
COGS 207,805.50

Requirement (d): Weighted Average Cost Perpetual

Unit
Units Total Cost
Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
TGAS 13,200 21.06 277,950
January 7, 2002 (2,700) 21.06 (56,862)
January 26, 2002 2,250 20.6 46,350
TGAS 12,750 20.98 267,438
January 31, 2002 (7,200) 20.98 (151,056)
Ending inventory 5,550 116,382

COGS = (56,862 + 151,056) = 207,918

9. Solutions:
Requirement (a):
Product A Product B Product C Total
Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
Cost 112,000 280,000 336,000

Selling price 210,000 300,000 570,000

Freight-out (10,500) (75,000) (11,400)
NRV 199,500 225,000 558,600

Lower 112,000 225,000 336,000 673,000

Requirement (b):
Product B: (280,000 – 225,000) = 55,000

10. Solution: 200,000 – the amount of write-down in 20x1 because

the 20x2 recovery exceeds the cumulative amount of write-
downs recognized in the previous periods (i.e., 250K recovery
vs. 200K previous write-down).
 Chapter 8
Inventory Estimation

PROBLEM 1: TRUE OR FALSE

1. FALSE – (50,000 gross profit ÷ 150,000 COGS) = 33.33% GPR based
on cost

2. FALSE (40% GPR ÷ 60% COGS) = 66.67%

3. TRUE (33.33% GPR ÷ 133.33% SALES) = 25%

4. FALSE
➢ (10 + 140) = 150 TGAS;
➢ (120 x 100%/120%) = 100 COGS;
➢ 150 – 100 = 50 ending inventory

5. TRUE

Inventory
beg. 20
Net purchases 100 120 COGS (squeeze)
-

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
Choice (a) is incorrect. PAS 2 allows the use of estimates if the estimate
reasonably approximates the cost.
Choice (b) is incorrect. The GPR based on cost is 25% (20% ÷ 80%).
Choice (c) is incorrect. The cost ratio is 80% (100% ÷ 125%).

2. C
3. C
4. A
5. C
PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL
1. D
Solution:
GPR based on sales
Inventory
beg. 80,000
Net purchases
339,000
(340,000 – 4,000 + 12,000) 348,000 COGS (454K – 2K) x 75%
89,000 end.

GPR based on cost

Inventory
beg. 80,000
Net purchases
361,600
(340,000 – 4,000 + 12,000) 348,000 COGS (454K – 2K) x 100% ÷ 125%
66,400 end.

2. D
Solution:
Inventory
beg. 162,000
Net purchases 3,412,000 3,018,600 COGS (4.654M - 10K) x 65%
555,400 end.
(56,000) Goods in-transit
(443,000) Actual inventory
56,400 Loss due to theft
3. D
Solution:
2001
Net sales (788,000 - 16,000) 772,000
Cost of sales:
Inventory, beg. (Jan. 1, 2001) -
Purchases 860,000
Purchase returns & allow. (46,120)
Inventory, end. (Jan. 1, 2002) (173,120) (640,760)
Gross profit - 2001 131,240

GPR on sales - 2001 (131,240 ÷ 772K) 17%

Add: 3%
GPR on sales - 2002 20%

Inventory - 2002
beg. 173,120
Net purchases COGS
(692K - 64.6K) 627,400 652,800 [(836K - 20K) x 80%]
147,720 end.

Ending inventory, 2002 147,720

Less: Cost of undamaged goods (24K selling price x 80%) (19,200)
Less: Salvage value of damaged goods (3,600)
Inventory loss 124,920
4. A
Solution:
Accounts payable Inventory
- beg. beg. 30,000
Payments to Net Net
suppliers 80,000 90,000 purchases purchases 90,000 120,000 COGS
end. 10,000 - end.

5. A
Solution:

6. B
Solution: Raw materials
beg. 11,000
Purchases 150,000 146,000 DM
15,000 end.

WIP
beg. 20,000
Direct materials 146,000
Direct labor 60,000
Factory overhead:
Indirect factory labor 30,000
Taxes and depn. - factory bldg. 10,000
Utilities (60% x 25,000) 15,000 257,000 COGM
24,000 end.
 Finished goods
beg. 12,500
COGM 257,000 260,500 COGS
9,000 end.

7. D
Solutions:
Cost Retail
Inventory at January 1, 2002 45,000 75,000
Purchases 270,000 590,000
Freight-in 6,750
Markups 50,000
Markdowns (20,000)
TGAS 321,750 695,000
Net sales * (612,000)
Ending inventory at retail 83,000

*Net sales 590,000

Add back: Sales discounts 10,000
Normal shrinkage 12,000
Adjusted net sales 612,000

❖ Average cost method

Cost ratio Total goods avail. for sale at cost
(Average cost = Total goods avail. for sale at sales price
method) or at retail
(321,750 ÷ 695,000) = 46.29%

Ending inventory = (83,000 x 46.29%) = 38,420.70

COGS = (321,750 – 38,420.70) = 283,329.30

❖ FIFO cost method
Cost ratio TGAS at cost less beg. inventory at cost
(FIFO cost = TGAS at retail less beg. inventory at
method) retail
(321,750 – 45,000) ÷ (695,000 – 75,000) = 276,750 ÷ 620,000 = 44.64%

Ending inventory = (83,000 x 44.64%) = 37,051.20

COGS = (321,750 – 37,051.20 ) = 284,698.80

8. C
Solution:
Cost Retail
Inventory, January 1 20,000 28,000
Net purchases (a) 103,200 143,400
Departmental transfers-in (debit) 2,000 3,000
Departmental transfers-out (credit) (1,600) (2,400)
Net markups (12,000 - 4,000) 8,000
Net markdowns (24,000 - 6,000) (18,000)
Abnormal spoilage (theft and casualty loss) (10,000) (14,000)
Total goods available for sale 113,600 148,000
Net sales (b) (84,000)
Ending inventory at retail 64,000

(a)
Cost Retail
Purchases 110,600 160,600
Freight-In 4,000 -
Purchase discounts (1,000) -
Purchase returns (10,400) (17,200)
Net purchases 103,200 143,400

(b) Net sales is computed as follows:

Sales 87,600
Sales returns ( 5,000)
Employee discounts 1,000
Normal spoilage 400
Net sales 84,000
 Total goods avail. for sale at cost
Cost ratio
= Total goods avail. for sale at sales price or at
(Average cost method)
retail

Average cost ratio = (113,600 ÷ 148,000) = 76.76%

Ending inventory at retail 64,000

Multiply by: Average cost ratio 76.76%
Ending inventory at cost 49,126

Total goods available for sale at cost 113,600

Ending inventory at cost ( 49,126)
Cost of goods sold 64,474

9. A
Solution:
FIFO cost ratio:
Cost ratio TGAS at cost less beg. inventory at cost
=
(FIFO cost method) TGAS at retail less beg. inventory at retail
FIFO cost ratio = [(113,600 – 20,000) ÷ (148,000 – 28,000)]
= 78%

Ending inventory at retail 64,000

Multiply by FIFO cost ratio 78%
Ending inventory at cost 49,920

Total goods available for sale at cost 113,600

Ending inventory at cost ( 49,920)
Cost of goods sold 63,680
10. A
Solution:
Cost Retail
Inventory, beg. 36,000
Purchases 320,000
Purchase discounts (3,000)
Freight-in 18,000
TGAS 371,000 530,000 (a)

Sales
(a) 454,000
Sales returns (2,000)
Ending inventory @ sales price 78,000
TGAS @ sales price 530,000

Total goods avail. for sale at cost

Cost ratio =
Total goods avail. for sale at sales price

Cost ratio = 371,000 ÷ 530,000 = 70%

Ending inventory @ sales price 78,000

Multiply by: Cost ratio 70%
Ending inventory @ cost 54,600
PROBLEM 4: CLASSROOM ACTIVITY

Inventory
Jan. 1, 20x1 1,064,352
Purchases 482,016 630,644 COGS*
915,724 Jan. 7, 20x1

*Cost of goods sold is computed as follows:

Total sales (Jan. 1 to Jan. 6) 900,920
Multiply by: 70%
COGS 630,644

Inventory, Jan. 7, 20x1 915,724

Less: Goods in transit (Jan. 6 purchase) (126,516)
Less: Cost of undamaged goods (20,000)
Less: Salvage value of partially damaged goods (354 x 2) (708)
Inventory loss 768,500
PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solutions:
GPR based on sales GPR based on cost
Net sales 600,000
Less: COGS 400,000 (200K ÷ 600K) (200K ÷ 400K)
Gross profit 200,000 33.33% 50%

2. Solution: (40% ÷ 60%) = 66.67%

3. Solution: (50% mark-up based on cost ÷ (100% cost + 50%

mark-up) = 33 1/3%

4. Solution: (100% ÷ 142.86%) = 70%

5. Solution:
Accounts payable
30,000 beg.
Payments 480,000 510,000 Net purchases (squeeze)
end. 60,000

Inventory
beg. 80,000
Net purchases 510,000 427,500 COGS (585K - 15K) x 75%
Freight-in 5,000
167,500 end.
(28,000) goods in-transit
(32,000) consigned goods
(2,500) salvage value
105,000 Inventory loss
6. Solution:
Inventory
beg. 80,000
Gross purchases 517,000 3,000 Purchase returns
Freight-in 5,000 4,000 Purchase discounts
COGS
427,500
(585K - 15K) x 100%/133 1/3%
167,500 end.
(33,500) Undamaged (20% x 167.5K)
Salvage value
(25,125)
(50% x 167.5K x 30%)
108,875 Inventory loss

7. Solutions:
Cost Retail
Inventory, beg. 300,000 375,000
Net purchases (a) 1,056,000 1,495,000
Departmental Transfers-In 2,000 3,000
Net mark-ups (20,000 – 2,000) 18,000
Net mark-downs (6,000 – 1,000) (5,000)
Abnormal spoilage (8,000) (11,000)
TGAS 1,350,000 1,875,000
Net sales (b) (1,375,000)
EI @ retail 500,000

(a) @ cost: 1,180,000 + 30,000 - 150,000 - 4,000 = 1,056,000;

@ retail: 1,500,000 – 5,000 = 1,495,000

(b)

Normal spoilage 400

Sales 1,428,000
Sales returns (56,000)
Employee discounts 2,600
Net sales 1,375,000
Cost ratios:

Cost ratio Total goods avail. for sale at cost

=
(Average cost) Total goods avail. for sale at sales price
Average cost ratio = (1,350,000 ÷ 1,875,000) = 72.00%

TGAS at cost less beg. inventory at cost

Cost ratio
= TGAS at retail less beg. inventory at
(FIFO)
retail

FIFO cost ratio = [(1,350,000 – 300,000) ÷ (1,875,000 – 375,000)] =

70.00%

Average FIFO
Cost ratios 72.00% 70.00%
Multiply by: EI @ retail 500,000 500,000
Ending inventory @ cost 360,000 350,000

Average FIFO
TGAS @ cost 1,350,000 1,350,000
Ending inventory @ cost (360,000) (350,000)
Cost of goods sold 990,000 1,000,000
 Chapter 9
Investments

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. FALSE
4. FALSE
5. FALSE – FVOCI only
6. FALSE – financial assets classified as FVPL are initially measured at
fair value; the transaction costs are expensed.
7. TRUE
8. FALSE – OCI section of the statement of comprehensive income
9. FALSE – 110 current fair value – 100 original cost = 10 cumulative
gain, credit
10. FALSE – (15 – 10 = ₱5)

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. D
3. B
4. B
5. D – the equity securities are irrevocably elected to be measured at
FVOCI

6. B
7. D
8. D
9. D
Choice (a) is incorrect. The account is a real account.
Choice (b) is incorrect. The account is presented in equity.
Choice (c) is incorrect. Only the fair value change during the period is
presented in OCI; the cumulative balance is presented in equity.
Choice (d) is correct. Reclassification adjustment to profit or loss is
prohibited.

10. B
PROBLEM 3: EXERCISES
1. Solution:
Cash on hand 26,000
Dividends fund 30,000
Accounts receivable 30,000
Allowance for bad debts (4,000)
Investment in bonds 24,000
Investment in FVOCI securities 2,000
Investment in subsidiary 26,000
Total financial assets 134,000

2. Solution: (120 – 35) = 85

3. Solution:
The most advantageous market is determined as follows:
Active market #1 Active market #2
Market price 100 120
Transaction costs (5) (5)
Transport costs (10) (35)
Sale proceeds 85 80

❖ Fair value = (100 – 10) = 90

4. Solution:
12/3/x1
Held for trading securities 180,000
Taxes and licenses (4,500 + 3,800) 8,300
Cash 188,300

12/31/x1
Unrealized loss – P/L (150,000 - 180,000) 30,000
Held for trading securities 30,000

12/31/x2
Held for trading securities (200,000 - 150,000) 50,000
Unrealized gain – P/L 50,000
1/5/x3
Cash (92,000 - 3,000) 89,000
Realized loss 1,000
Held for trading securities 90,000

5. Solution:
12/3/x1
Held for trading securities 180,000
Taxes and licenses (4,500 + 3,800) 8,300
Cash 188,300

12/31/x1
Unrealized loss – P/L (150,000 - 180,000) 30,000
Accumulated fair value changes 30,000

12/31/x2
Accumulated fair value changes (200K – 150K) 50,000
Unrealized gain – P/L 50,000

1/5/x3
Cash (92,000 - 3,000) 89,000
Realized loss 1,000
Held for trading securities (original cost) 80,000
Accumulated fair value changes* 10,000

* 90,000 FV 12/31/x2 – 80,000 original cost = 10,000

6. Solution:

Requirement (a):

12/3/x1
FVOCI equity securities 188,300
Cash 188,300
12/31/x1
Unrealized gain (loss) – OCI (150,000 - 188,300) 38,300
FVOCI equity securities 38,300

12/31/x2
FVOCI equity securities (200,000 - 150,000) 50,000
Unrealized gain (loss) – OCI 50,000

1/5/x3
Unrealized gain (loss) – OCI 1,000
FVOCI equity securities [(92,000 - 3,000) – 90,000] 1,000

Cash (92,000 - 3,000) 89,000

FVOCI equity securities [(92,000 - 3,000) – 90,000] 89,000

Unrealized gain (loss) – OCI (see requirement ‘c’ below) 5,200

Retained earnings 5,200

Requirement (b):
Dec. 31, 20x1 Dec. 31, 20x2
Fair value 150,000 200,000
Original cost 188,300 188,300
Cumulative gain (loss) (38,300) 11,700

Requirement (c):
Net selling price of Spandrel Co. shares (92K – 3K) 89,000
Original cost of Spandrel Co. shares (80K + 3.8K) 83,800
Gain in OCI transferred within equity 5,200

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B (105 price in Market B* x 30,000 shares) = 3,150,000

* In the absence of evidence to the contrary, it is presumed that the

market where the entity would normally sell the asset or transfer the
liability is the principal market.
2. C
Solution:
Market New York London
Quoted Price 103 106
Transaction Costs (1) (5)
Net price 102 101

The “most advantageous market” is New York Stock Exchange

and the quoted price in this market is 103.

3. B – ₱2.00 Level 2 input x 1,000 shares = ₱2,000

4. A
➢ (6,000 x 5) fair value – 50,000 initial carrying amt. = (20,000) loss
➢ [(3,000 x 7.5) – 1,500] net proceeds – (30,000 x ½) carrying amt. =
6,000 gain

5. D
Solution:
➢ Dec. 31, 20x1: (24,000 sh. x ₱20) – 200,000 = 280,000 gain
➢ Jan. 3, 20x2: [(24,000 sh. x ₱30) – 12,000] – 480,000 = 228,000 gain

6. A
Solution:
➢ Dec. 31, 20x1: (180,000 – 240,000) = (60,000)
➢ Dec. 31, 20x2: (210,000 – 180,000) = 30,000
➢ Feb. 2, 20x3: (41,200 – 1,200) – 110,000 = (70,000)

7. C – the fair value on Dec. 31, 2003

8. A
Solution:
➢ 200,000 x 101% = 202,000
➢ 202,000 – (200,000 x 98%) = 6,000 gain
➢ (200,000 x 110%) – 202,000 = 18,000 gain
9. C
Solution:
PV Present
Future cash flows PV @10%, n=3 factors value
Principal 200,000 PV of ₱1 0.751315 150,263
Interest (200K x 12%) 24,000 PV of ord. ann. 2.486852 59,684
Fair value on Dec. 31, 20x1 209,947
Carrying amount before adjustment (196,000)
Gain recognized in profit or loss 13,947

10. D
Solution:
Held for trading - 20x1 976,203
Acquisitions during the year 124,450
Total 1,100,653
Held for trading - 20x2 836,234
Net proceeds from sale 223,769
Total 1,060,003
Total net loss from fair value change and sale (40,650)

11. B
Solution:
FVPL FVOCI
Fair value on 12/31/x1 (10,000 x 25) 250,000 250,000
Carrying amount (10,000 x 50); [(10,000 x 50) + 25,000] 500,000 525,000
Loss (250,000) (275,000)

12. C
Solution:
Fair value on 12/31/x1 280,000
Fair value on 12/31/x2 270,000
Unrealized loss recognized in OCI - 20x2 (10,000)

Initial carrying amount (12,000 x 20) + 10,000 250,000

Fair value on 12/31/x2 270,000
Cumulative gain recognized in equity - 12/31/x2 20,000
13. D
Solution:
➢ (6,000 x 5) – (50,000 + 2,500) = (22,500)
➢ [(6,000 x 7.5) – 3,000] – (50,000 + 2,500) = (10,500)

14. B (155,000 – 100,000) = 55,000

15. D 130,000 FV 12/31/03 – 150,000 cost = 20,000

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY #1:

Investment in PLDT shares (FVPL) 47,280

Unrealized gain – P/L 47,280

(100 sh. x 2,364 closing price) = 236,400 - 189,120 = 47,280

ACTIVITY #2:

Requirement (a):
FVPL – because ABC’s business model is neither “hold to collect”
nor “hold to collect and sell.”

Requirement (b):
SYMBOL SHARES PRICE PAID ACQUISITION COST
GLO 250 2,350.00 587,500.00
JFC 1,000 208.80 208,800.00
BDOPBF:PM 10 1,554.67 15,546.70
ABS 10,000 65.20 652,000.00
SNLFMNY:PM 10,000 1.228 12,280.00
1,476,126.70
Requirement (c):
1,478,036.80 (given on the print screen, “VALUE” column)

Requirement (d):
Held for trading securities 1,910.10*
Unrealized gain – P/L 1,910.10

* Given on the print screen of the portfolio.

Requirement (e):

SYMBOL TYPE
GLO EQUITY
JFC EQUITY
BDOPBF DEBT
ABS EQUITY
SNLFMNY DEBT

Requirement (f):
Cash (250 sh. x 2,400 x 95%) 570,000
Loss on sale 23,000
Held for trading securities* 593,000

* Given on the print screen of the portfolio.

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Petty cash fund 10,000
Cash in bank 40,000
Notes receivable 130,000
Discount on note receivable (7,000)
Loans receivable 80,000
Loss allowance on loans receivable (4,000)
Held for trading securities 60,000
Investment in associate 40,000
Plant expansion fund 75,000
Total financial assets 424,000

2. Solutions:

Requirement (a):
Market price in Market #2 265
Less: Transport costs (15)
Fair value 250

Requirement (b):
The ‘most advantageous market’ is determined as follows:
Market #1 Market #2
Market price 270 265
Transaction costs (6) (5)
Transport costs (10) (15)
Sale proceeds 254 245

❖ Market #1 is the ‘most advantageous market’ because the sale

proceeds is higher. The fair value is measured as follows:

Market price in Market #1 270

Less: Transport costs (10)
Fair value 260
3. Solution:
Acquisition Held for trading securities 390,000
Taxes and licenses 18,500
Cash 408,500
Sale Cash [(3,000 x 82) – 12,300] 233,700
Loss 6,300
Held for trading sec. (3,000 x 80) 240,000
Dec. 31, Held for trading securities 22,000
20x1
Gain (a) 22,000

Fair value on 12/31/x1 (10,000 sh. + 5,000 sh. – 3,000 sh.) x ₱81
(a) 972,000
Carrying amount (10,000 sh. x ₱80) beg. + 390,000 Dr. – 240,000 Cr. 950,000
Gain 22,000

Realized loss on sale (6,300)

Unrealized gain on fair value change 22,000
Net gain 15,700

❖ Reconciliation:
Held for trading - beg. 800,000
Acquisitions during the year 390,000
Total 1,190,000
Held for trading - end. 972,000
Net proceeds from sale 233,700
Total 1,205,700
Total net gain from fair value change and sale 15,700

4. Solution:
12/3/x1
Held for trading securities (12,000 x ₱3) 36,000
Commission expense 1,800
Cash 37,800

12/31/x1
Held for trading securities [(12,000 x ₱5) – ₱36,000] 24,000
Unrealized gain – P/L 24,000
1/16/x2
Cash [(12,000 x ₱8) – ₱4,800] 91,200
Held for trading securities (12,000 x ₱5) 60,000
Realized gain 31,200

5. Solution:
12/3/x1
Held for trading securities (12,000 x ₱3) 36,000
Commission expense 1,800
Cash 37,800

12/31/x1
Fair value adjustment [(12,000 x ₱5) – ₱36,000] 24,000
Unrealized gain – P/L 24,000

1/16/x2
Cash [(12,000 x ₱8) – ₱4,800] 91,200
Held for trading securities 36,000
Fair value adjustment 24,000
Realized gain 31,200

6. Solution:
12/3/x1
Investment in equity securities – FVOCI 37,800
[(12,000 x ₱3) + ₱1,800]
Cash 37,800

12/31/x1
Investment in equity securities - FVOCI 22,200
Unrealized gain – OCI [(12,000 x ₱5) – 37,800] 22,200

1/16/x2
Investment in equity securities - FVOCI 31,200
Unrealized gain – OCI [(12,000 x ₱8) – 4,800] – 60,000 31,200

Cash [(12,000 x ₱8) – 4,800] 91,200

Investment in equity securities – FVOCI 91,200
Unrealized gain – OCI (22,200 + 31,200) 53,400
Retained earnings 53,400
 Chapter 10
Investments in Debt Securities

PROBLEM 1: TRUE OR FALSE

1. FALSE – fair value plus transaction costs
2. FALSE
3. TRUE
4. TRUE
5. FALSE – higher because there is discount
6. FALSE - increases
7. TRUE
8. FALSE – same amount of interest income
9. FALSE – Interest income on debt-type FVOCI assets is
calculated using the effective interest method.
10. TRUE – 100 sale price – 80 amortized cost = 20 gain

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. D
3. D
Choice (b) is incorrect. The carrying amount of “term” bonds (as
opposed to “serial” bonds) is reported as noncurrent until a year
before the mature date.

4. A
5. A
6. C
7. A
8. C
9. D
10. A – The investment was acquired at a discount because the
initial carrying amount is less than the face amount (₱86,580 <
₱100,000) and the effective interest rate is higher than the
nominal rate (i.e., 8% > 6%). Therefore, the amortization
increases the carrying amount of the investment each year.
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): Amortization table
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,060,747
1/1/x2 140,000 127,290 12,710 1,048,037
1/1/x3 140,000 125,764 14,236 1,033,801
1/1/x4 140,000 124,056 15,944 1,017,857
1/1/x5 140,000 122,143 17,857 1,000,000

Requirement (b): Journal entries

1/1/x1
Investment in bonds 1,060,747
Cash 1,060,747

12/31/x1
Interest receivable 140,000
Investment in bonds 12,710
Interest income 127,290

1/1/x2
Cash 140,000
Interest receivable 140,000

12/31/x2
Interest receivable 140,000
Investment in bonds 14,236
Interest income 125,764

1/1/x3
Cash 140,000
Interest receivable 140,000

12/31/x3
Interest receivable 140,000
Investment in bonds 15,944
Interest income 124,056
1/1/x4
Cash 140,000
Interest receivable 140,000

12/31/x4
Interest receivable 140,000
Investment in bonds 17,857
Interest income 122,143

1/1/x5
Cash 140,000
Interest receivable 140,000

Cash 1,000,000
Investment in bonds 1,000,000

Requirement (c): Unamortized discount or premium

(1,033,801 - 1,000,000) = 33,801 premium

Requirement (d): Gain or loss on sale

Sale price (1M x 110%) 1,100,000
Transaction costs (40,000)
Net disposal proceeds 1,060,000
Carrying amount on date of sale (see table above) (1,033,801)
Gain on sale 26,199

Jan. Cash [(1M x 110%) - 40K] 1,060,000

1,
Investment in bonds 1,033,801
20x3
Gain on sale (squeeze) 26,199

Requirement (e): Gain or loss on sale

Interest Interest
Date Amortization Present value
received income
1/1/x1 1,060,747
1/1/x2 140,000 127,290 12,710 1,048,037
1/1/x3 140,000 125,764 14,236 1,033,801
7/1/x3 70,000 62,028 7,972 1,025,829
Sale price including accrued interest (1M x 98%) 980,000
Accrued interest (see table above) (70,000)
Sale price excluding accrued interest 910,000
Transaction costs (38,000)
Net disposal proceeds 872,000
Carrying amount on date of sale (see table above) (1,025,829)
Loss on sale (153,829)

July Interest receivable 70,000

1,
Investment in bonds 7,972
20x3
Interest income 62,028
to record the discount amortization
July Cash (1M x 98% – 38K) 942,000
1,
Loss on sale (squeeze) 153,829
20x3
Investment in bonds 1,025,829
Interest receivable 70,000
to record the sale

2. Solutions:
Requirement (a): Amortization table
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,937,950
12/31/x1 200,000 213,175 13,175 1,951,125
12/31/x2 200,000 214,624 14,624 1,965,749
12/31/x3 200,000 216,232 16,232 1,981,981
12/31/x4 200,000 218,019 18,019 2,000,000

Requirement (b): Journal entries

1/1/x1
Investment in bonds 1,937,950
Cash 1,937,950

12/31/x1
Cash 200,000
Investment in bonds 13,175
Interest income 213,175
12/31/x2
Cash 200,000
Investment in bonds 14,624
Interest income 214,624

12/31/x3
Cash 200,000
Investment in bonds 16,232
Interest income 216,232

12/31/x4
Cash 200,000
Investment in bonds 18,019
Interest income 218,019

12/31/x4
Cash 2,000,000
Investment in bonds 2,000,000

Requirement (c): Unamortized discount or premium

(2,000,000 - 1,965,749) = 34,251 discount

Requirement (d): Financial statement presentation

The bonds are presented in Sleek Co.’s 20x2 financial statements
as noncurrent asset because they are collectible only at maturity.
The bonds will be presented as current assets in the 20x3 financial
statements, a year before the maturity date.

Requirement (e): Gain or loss on sale

Sale price (2M x 98%) 1,960,000
Transaction costs (40,000)
Net disposal proceeds 1,920,000
Carrying amount on date of sale (see table above) (1,965,749)
Loss on sale (45,749)

Jan. Cash [(2M x 98%) - 40K] 1,920,000

1,
Loss on sale (squeeze) 45,749
20x3
Investment in bonds 1,965,749
Requirement (f): Gain or loss on sale
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,937,950
12/31/x1 200,000 213,175 13,175 1,951,125
12/31/x2 200,000 214,624 14,624 1,965,749
7/1/x3 100,000 108,116 8,116 1,973,865

Sale price including accrued interest (2M x 1/2 x 108%) 1,080,000

Accrued interest (100,000 x 1/2) (50,000)
Sale price excluding accrued interest 1,030,000
Transaction costs (20,000)
Total 1,010,000
Carrying amount on date of sale (1,973,865 x 1/2) (986,933)
Gain on sale 23,067

July Interest receivable 100,000

1,
Investment in bonds 8,116
20x3
Interest income 108,116
to record the discount amortization
July Cash (2M x ½ x 108% – 20K) 1,060,000
1,
Investment in bonds (1,973,865 x ½) 986,933
20x3
Interest receivable (100K x ½) 50,000
Gain on sale (squeeze) 23,067
to record the sale

3. Solution:
April Investment in bonds (2M x 98%) 1,960,000
1, Interest income (2M x 12% x 3/12) 60,000
20x1
Cash (2M x 98% + 60K) 2,020,000
4. Solutions:
Requirement (a): Journal entries
The total annual collections are computed as follows:
Interest on outstanding Total
Date Principal
principal balance collections
a b c=a+b
Dec. 31, 20x1 1,000,000 (4,000,000 x 12%) = 480,000 1,480,000
Dec. 31, 20x2 1,000,000 (3,000,000 x 12%) = 360,000 1,360,000
Dec. 31, 20x3 1,000,000 (2,000,000 x 12%) = 240,000 1,240,000
Dec. 31, 20x4 1,000,000 (1,000,000 x 12%) = 120,000 1,120,000

Amortization table - installment:

Interest Present
Date Collections income Amortization value
Jan. 1, 20x1 4,166,027
Dec. 31, 20x1 1,480,000 416,603 1,063,397 3,102,630
Dec. 31, 20x2 1,360,000 310,263 1,049,737 2,052,893
Dec. 31, 20x3 1,240,000 205,289 1,034,711 1,018,182
Dec. 31, 20x4 1,120,000 101,818 1,018,182 -

Jan. Investment in bonds at amortized cost 4,166,027

1,
Cash 4,166,027
20x1
Dec. Cash 1,480,000
31,
Interest income 416,603
20x1
Investment in bonds at amortized cost 1,063,397
Dec. Cash 1,360,000
31,
Interest income 310,263
20x2
Investment in bonds at amortized cost 1,049,737
Dec. Cash 1,240,000
31,
Interest income 205,289
20x3
Investment in bonds at amortized cost 1,034,711
Dec. Cash 1,120,000
31,
Interest income 101,818
20x4
Investment in bonds at amortized cost 1,018,182
Requirement (b): Current and Noncurrent portions on 12/31/20x1
Current portion on 12/31/x1: 1,049,737
Noncurrent portion on 12/31/x1: 2,052,893

5. Solutions:

Requirement (a): Interest receivable

20x1: (100,000 x 10%) = 10,000
20x2: (100,000 + 10,000) x 10% = 11,000 + 10,000 from 20x1 = 21,000

Requirement (b): Investment

Date Interest income Discount Present value
1/1/x1 IGNORED 94,738
12/31/x1 11,369 IGNORED 106,107
12/31/x2 12,733 IGNORED 118,839
12/31/x3 14,261 IGNORED 133,100

12/31/x1: (106,107 – 10,000 interest receivable) = 96,107

12/31/x1: (118,839 – 21,000 interest receivable) = 97,839

Requirement (c): Journal entries

1/1/x1
Investment in bonds 94,738
Cash 94,738

12/31/x1
Interest receivable 10,000
Investment in bonds (squeeze) 1,369
Interest income 11,369

12/31/x2
Interest receivable 11,000
Investment in bonds (squeeze) 1,733
Interest income 12,733

12/31/x3
Interest receivable [(100K + 10K + 11K) x 10%] 12,100
Investment in bonds (squeeze) 2,161
Interest income 14,261
12/31/x3
Cash 133,100
Interest receivable 33,100
Investment in bonds 100,000

6. Solution:
➢ Initial measurement:

1/1x1
Investment in bonds - FVOCI 907,135
Cash 907,135

➢ Subsequent measurement:
Interest Interest
Date received income Amortization Present value
1/1/x1 907,135
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
12/31/x3 100,000 135,087 35,087 1,000,000

12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999

Investment in bonds – FVOCI 45,866

Unrealized gain (loss) – OCI 45,866
[(1M x 98%) – 934,134]

12/31/x2
Cash 100,000
Investment in bonds - FVOCI 30,779
Interest income 130,779

Investment in bonds – FVOCI 9,221

Unrealized gain (loss) – OCI 9,221*
 * Fair value - 12/31/x2 1,020,000
Amortized cost - 12/31/x2 964,913
Cumulative balance of gain - 12/31/x2 55,087
Cumulative balance of gain - 12/31/x1 45,866
Unrealized gain - OCI in 20x2 9,221

➢ Sale:

1/1/x3
Unrealized gain (loss) – OCI [1M x (101% - 102%)] 10,000
Investment in bonds – FVOCI 10,000

Cash (1M x 101%) 1,010,000

Investment in bonds - FVOCI 1,010,000

Unrealized gain (loss) – OCI 45,087**

Gain on sale 45,087

** Net proceeds (1M x 101%) 1,010,000

Amortized cost – 1/1/x3 (see table above) 964,913
Cumulative gain in equity/Reclassification adjustment – 1/1/x3 45,087
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A (946,000 – 40,000) = 906,000 acquisition cost.

Interest Present
Date Collection income Amortization value
7/1/2003 906,000
12/31/2003 40,000 45,300 5,300 911,300

2. A
Solution:
Interest
Date Interest income Amortization Present value
received
1/1/x1 453,567*
12/31/x1 50,000 63,499 13,499 467,066
12/31/x2 50,000 65,389 15,389 482,455
12/31/x3 50,000 67,545 17,545 500,000

*(428,567 + 25,000) = 453,567

3. B
Solution:
Interest income in 20x2 = 65,389 (see table above)
Carrying amount on 12/31/20x2 = (100 x ₱5,000 x 102%) = 510,000

4. B
Solution:
Net proceeds [(100 x 5,000 x 102%) – 15K] 495,000
Amortized cost – 1/1/x3 (see table above) 482,455
Gain on sale /Reclassification adjustment – 1/3/x3 12,545

5. B (500,000 x8% x 6/12) = 20,000

6. A
Solution:
Interest receivable
beg. 38,000
Interest revenue 160,500 152,000 Collection of interest
46,500 end.

7. D
Solution:
Initial measurement:
[487,656 + (500,000 x 5%)] = 512,656

Trial and error:

➢ Future cash flows x PV factor at x% = Present value
➢ (500K x PV of ₱1 @ x%, n=3) + (1M x 12% x PV of an ordinary
annuity of ₱1 @ x%, n=3) = 512,656

There is premium because the carrying amount is greater than the

face amount (512,656 > 500,000). Therefore, the effective interest rate must be
lower than the 10% nominal rate.

First trial: (using 9%)

➢ (.5M x PV of ₱1 @ 9%, n=3) + (.5M x 10% x PV of an ordinary annuity of
₱1 @ 9%, n=4) = 512,656
➢ (.5M x 0.77218348005) + (50,000 x 2.53129466611) = 512,656
➢ (386,092 + 126,565) = 512,656 is equal to 512,656

❖ The effective interest rate is 9%.

Interest
Date Interest income Amortization Present value
received
1/1/x1 512,656
12/31/x1 50,000 46,139 3,861 508,795
12/31/x2 50,000 45,792 4,208 504,587
12/31/x3 50,000 45,413 4,587 500,000
8. D – (504,587 carrying amt. – 500,000 face amt.) = 4,587
premium

9. C
Solution:
Fair value - 12/31/x2 (.5M x 104%) 520,000
Amortized cost - 12/31/x2 (see table above) 504,587
Cumulative balance of gain in equity – 12/31/x2 15,413
Cumulative balance of gain in equity – 12/31/x1(1) 1,205
Unrealized gain - OCI (20x2) 14,208

(1) [(.5M x 102%) - 508,795] = 1,205 gain

10. A
Solution:
Interest
Date Interest income Amortization Present value
received
1/1/x1 512,656
12/31/x1 50,000 46,139 3,861 508,795
12/31/x2 50,000 45,792 4,208 504,587
7/1/x3 25,000 22,706 2,294 502,293

Sale price including accrued interest (.5M x 1/2 x 103%) 257,500

Accrued interest (25K x 1/2) (12,500)
Sale price excluding accrued interest 245,000
Transaction costs (7,000)
Total 238,000
Carrying amount on date of sale (502,293 x ½) (251,147)
Loss on sale (13,147)
11. A
Solution:

Trial & Error

PV = CF x PVF

There is discount. Therefore, the EIR must be higher than 10%.

First trial: @12% per annum

4,639,522 = (5,000,000 x PV of 1 @ 12%, n=5) + (500,000 x PV
ordinary annuity @12%, n=5)
➢ 4,639,522 = (5,000,000 x 0.56743) + (500,000 x 3.604776)
➢ 4,639,522 = 2,837,150 + 1,802,388
➢ 4,639,522 approximates 4,639,538 (a difference of only ₱16.00)

❖ The EIR is 12%.

Interest
Date Interest income Amortization Present value
received
1/1/x1 4,639,522
12/31/x1 500,000 556,743 56,743 4,696,265

➢ (5M x 98%) - 4,696,265 = 203,735 unrealized gain

12. C – [(1M x 98%) - (1M x 12% x 1/12)] = 970,000

The purchased interest is only for 1 month because the last interest
payment date was on July 1, and the bonds were acquired on
August 1.
13. B
Solution:
PV Present
Future cash flows PV @ 7%, n=6 factors value
Principal 1,000,000 PV of ₱1 0.666342 666,342
Interest 60,000 PV of ordinary annuity of ₱1 4.766540 285,992
952,334

When cash flows are due on semi-annual basis, the period

(‘n’) is doubled because there are two semi-annual installments in
a year. Furthermore, both the nominal and effective interest rates
are divided by two because interest rates are normally stated on a
per annum basis.

14. D
Solution:
➢ Initial measurement:
Purchase price (6M x 96%) 5,760,000
Transaction costs 40,610
Initial carrying amount 5,800,610

➢ Trial and error:

Future cash flows x PV factor at x% = Present value

The future cash flows are determined as follows:

Principal + Interest on
Date Total collections
outstanding principal balance

Dec. 31, 20x1 2,000,000 + (6,000,000 x 10%) 2,600,000

Dec. 31, 20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31, 20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

Trial: (using 12%)

Future cash flows x PV factor at x% = Present value
(2,600,000 x PV of ₱1 @12%, n=1) + (2,400,000 x PV of ₱1 @12%, n=2) +
(2,200,000 x PV of ₱1 @12%, n=3) = 5,800,610
(2.6M x 0.892857) + (2.4M x 0.797194) + (2.2M x 0.711780) = 5,800,610
5,800,610 (2,321,428 + 1,913,266 + 1,565,916) is equal to 5,800,610

❖ The effective interest rate is 12%.

Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 5,800,610
Dec. 31, 20x1 2,600,000 696,073 1,903,927 3,896,683
Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285
Dec. 31, 20x3 2,200,000 235,714 1,964,286 0

15. D
Solution:
Interest on outstanding Total
Date Principal
principal balance collections
a b c=a+b
July 1, 20x1 1,200,000 (3,000,000 x 5%) = 150,000 1,350,000
Dec. 31, 20x1 800,000 (1,800,000 x 5%) = 90,000 890,000
July 1, 20x2 600,000 (1,000,000 x 5%) = 50,000 650,000
Dec. 31, 20x2 400,000 (400,000 x 5%) = 20,000 420,000

Total collections PV of ₱1 PVF Present value

1,350,000 PV of ₱1 @ 6%, n=1 0.943396 1,273,585
890,000 PV of ₱1 @ 6%, n=2 0.889996 792,096
650,000 PV of ₱1 @ 6%, n=3 0.839619 545,752
420,000 PV of ₱1 @ 6%, n=4 0.792094 332,679
2,944,112
16. C
Solution:
Present
Date Interest received Interest income Amortization value
1/1/x1 907,135*
12/31/x1 100,000 126,999 26,999 934,134
7/1/x2 50,000 65,389 15,389 949,523

* (827,135 + 80,000) = 907,135

➢ Amortized cost:
Net selling price [(1M x 94%) – 40K] 900,000
Interest receivable (50,000)
Total 850,000
Amortized cost – 1/1/x3 (see table above) 949,523
Loss on sale (99,523)

➢ FVOCI:
Net selling price [(1M x 94%) – 40K] 900,000
Interest receivable (50,000)
Total 850,000
Amortized cost – 1/1/x3 (see table above) 949,523
Cumulative loss in equity/Reclassification adjustment – 1/1/x3 (99,523)

Supporting journal entries: FVOCI

1/1/x1
Investment in bonds – FVOCI (827,135 + 80,000) 907,135
Cash 907,135

12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999

Investment in bonds – FVOCI 45,866

Unrealized gain (loss) – OCI 45,866
[(1M x 98%) – 934,134]
7/1/x2
Interest receivable 50,000
Investment in bonds - FVOCI 15,389
Interest income 65,389

Unrealized gain (loss) – OCI 145,389*

Investment in bonds – FVOCI 145,389

* Sale price - 12/31/x2 (1M x 94%) 940,000

Interest receivable (50,000)
Transaction costs (40,000)
Total 850,000
Amortized cost - 7/1/x2 (see table above) 949,523
Cumulative balance of loss in equity – 7/1/x2 (99,523)
Less: Cumulative balance of gain in equity – 12/31/x1 45,866
Unrealized loss - OCI (20x2) (145,389)

Cash 900,000
Interest receivable 50,000
Investment in bonds - FVOCI (see T-account below) 850,000

Loss on sale 99,523

Unrealized gain (loss) – OCI (see T-account below) 99,523

Investment in bonds - FVOCI

1/1/x1 907,135
12/31/x1 26,999
12/31/x1 45,866
12/31/x1 980,000
7/1/x2 15,389
145,389 7/1/x2
7/1/x2 850,000
850,000 7/1/x2
-
 Unrealized gain (loss) – OCI
45,866 12/31/x1
45,866 12/31/x1 - gain, Cr. Bal.
7/1/x2 145,389
7/1/x2 - loss, Dr. bal. 99,523
99,523 7/1/x2
-

17. B
Solution:
➢ Trial and error

Future cash flows x PV factor at x% = Present value

Future cash flow = (6M x 110% x 110% x 110%) = 7,986,000

Trial: (using 16%)

7,986,000 x PV of ₱1 @16%, n=3 = 5,116,292
5,116,292 (7,986,000 x 0.64065767352) is equal to 5,116,292

❖ The effective interest rate is 16%.

Shortcut:
Present value - 12/31/x2 (5,116,292 x 116% x 116%) 6,884,483
Interest receivable [(6M x 10%) + (6M x 110% x 10%)] (1,260,000)
Carrying amount of investment - 12/31/x2 5,624,483

Longcut:
Interest PV of cash Interest Amorti- Present
Date income flow receivable zation value
(a) =ER x (b) = prev. (d) =
(c) = PV + (d)
(b) bal. + (a) (a) - (c)
1/1/x1 5,116,292 5,116,292
12/31/x1 818,607 5,934,899 600,000 218,607 5,334,899
12/31/x2 949,584 6,884,483 660,000 289,584 5,624,483
12/31/x3 1,101,517 7,986,000 726,000 375,517 6,000,000
18. C
Solution:
Date Interest income Present value
Jan. 1, 20x1 1,725,218
Dec. 31, 20x1 51,757 1,776,975
Dec. 31, 20x2 53,309 1,830,284
Dec. 31, 20x3 54,909 1,885,192
Dec. 31, 20x4 56,556 1,941,748
Dec. 31, 20x5 58,252 2,000,000

➢ (2M par + 200K premium) - 1,885,192 = 314,808 gain

Shortcut:
[(1,700,000 + 25,218) x 103% x 103% x 103%] vs. 2.2M = 314,808 gain

19. B
Solution:
Let us assume that the face amount is 100,000.
Face amount 100,000
Discount (10,000)
Purchase price 90,000
Subsequent amortization of discount 2,000
Carrying amount on date of sale 92,000

Face amount 100,000

Premium 14,000
Sale price 114,000
Carrying amount on date of sale (92,000)
Gain on sale 22,000
20. B
Solution:

Effective interest rate: (244,286 interest income in 20x3 ÷ 2,035,714

present value on 12/31/x2) = 12%

Face amount: 2,035,714 present value on 12/31/x2 + (280,000 –

244,286) = 2,000,000 present value at maturity date

The completed amortization table is as follows:

Interest Interest
Date Amortization Present value
received income
1/1/x1 2,096,073
12/31/x1 280,000 251,529 28,471 2,067,602
12/31/x2 280,000 248,112 31,888 2,035,714
12/31/x3 280,000 244,286 35,714 2,000,000

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY #1:
Solutions:
Requirement (a):
1,000 face amount x 1,000 no. of bonds = 1,000,000

Requirement (b):
1,000,000 – 922,783 = 77,217 discount

Requirement (c):
Investment in bonds 922,783
Cash 922,783

Requirement (d):
NIR = 8%
Requirement (e):
Trial & Error
PV = CF x PVF

There is discount. Therefore, the EIR must be higher than 8%.

First trial: @10% per annum (5% semi-annual)

➢ 922,783 = (1,000,000 x PV of 1 @ 5%, n=10) + (40,000 x PV

ordinary annuity @5%, n=10)
➢ 922,783 = (1,000,000 x 0.61391) + (40,000 x 7.72173)
➢ 922,783 = 613,910 + 308,869
➢ 922,783 approximates 922,779 (a difference of only ₱4.00)

Therefore, the EIR is 10% (per annum).

Requirement (f):
Date Interest received Interest income Amortization Present value
7/1/x1 922,783.00
1/1/x2 40,000.00 46,139.15 6,139.15 928,922.15
7/1/x2 40,000.00 46,446.11 6,446.11 935,368.26
1/1/x3 40,000.00 46,768.41 6,768.41 942,136.67
7/1/x3 40,000.00 47,106.83 7,106.83 949,243.50
1/1/x4 40,000.00 47,462.18 7,462.18 956,705.68
7/1/x4 40,000.00 47,835.28 7,835.28 964,540.96
1/1/x5 40,000.00 48,227.05 8,227.05 972,768.01
7/1/x5 40,000.00 48,638.40 8,638.40 981,406.41
1/1/x6 40,000.00 49,070.32 9,070.32 990,476.73
7/1/x6 40,000.00 49,523.27* 9,523.27* 1,000,000.00*

* The last figures are ‘squeezed’ to make the amortized cost at maturity date
exactly equal to 1M and eliminate the difference due to rounding-off.
ACTIVITY #2:

Case 1:
Requirement (a):
7/1/x1
Investment in bonds 10,000.00
Interest income (Interest receivable) 116.67
(10,000 x 7% x 2/12)
Cash 10,116.67

8/1/x1
If “Interest receivable” was debited on 7/1/x1:
Cash (10,000 x 7% x 3/12) 175.00
Interest receivable 116.67
Interest income 58.33

If “Interest income” was debited on 7/1/x1:

Cash (10,000 x 7% x 3/12) 175.00
Interest income 175.00

11/1/x1
Cash (10,000 x 7% x 3/12) 175.00
Interest income 175.00

12/31/x1
Interest receivable (10,000 x 7% x 2/12) 116.67
Interest income 116.67

Requirement (b):
(10,000 x 7% x 6/12) = 350

Requirement (c):
(10,000 x 7% x 2/12) = 116.67
Requirement (d):
(175 + 175) see entries above = 350

Case 2:

Requirement (a):
5/1/2000
Investment in bonds 10,736.07
Cash 10,736.07

Requirement (b):
(10,000 x 7% x 8/12) = 466.67

Requirement (c):
Interest Interest
Date receivable income Amortization Present value
5/1/2000 10,736.07
12/31/2000 466.67 429.44 37.23 10,698.84

Carrying amt. 12.31.2000 10,698.84

Face amount 10,000.00
Premium 12.31.2000 698.84

Case 3:

Requirement (a):

5/1/2000 to 5/1/2001 10,000 x 7% 700.00

5/1/2001 to 5/1/2002 (10,000 + 700) x 7% 749.00
Total Interest receivable - 5/1/2002 1,449.00

Requirement (b):
Date Interest income Discount Present value
5/1/2000 IGNORED 9,111.72
5/1/2001 728.94 IGNORED 9,840.65
5/1/2002 787.25 IGNORED 10,627.91

Carrying amt. of bonds and interest receivable 10,627.91

Less: Int. receivable as of 5/1/2002 (see ‘a’ above) (1,449.00)
Carrying amt. of bonds – 5/1/2002 9,178.91

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a):
Present
Date Interest received Interest income Amortization value
1/1/x1 941,725
1/1/x2 120,000 131,842 11,842 953,567
1/1/x3 120,000 133,499 13,499 967,066
1/1/x4 120,000 135,389 15,389 982,455
1/1/x5 120,000 137,545 17,545 1,000,000

Requirement (b):
(1,000,000 – 967,066) = 32,934 discount

Requirement (c):
1/1/x1
Investment in bonds 941,725
Cash 941,725

12/31/x1
Interest receivable 120,000
Investment in bonds 11,842
Interest income 131,842

1/1/x2
Cash 120,000
Interest receivable 120,000
12/31/x2
Interest receivable 120,000
Investment in bonds 13,499
Interest income 133,499

1/1/x3
Cash 120,000
Interest receivable 120,000

12/31/x3
Interest receivable 120,000
Investment in bonds 15,389
Interest income 135,389

1/1/x4
Cash 120,000
Interest receivable 120,000

12/31/x4
Interest receivable 120,000
Investment in bonds 17,545
Interest income 137,545

1/1/x5
Cash 120,000
Interest receivable 120,000

Cash 1,000,000
Investment in bonds 1,000,000

2. Solution:
Interest Present
Date received Interest income Amortization value
1/1/x1 1,075,939
12/31/x1 120,000 96,835 23,165 1,052,774
12/31/x2 120,000 94,750 25,250 1,027,524
12/31/x3 120,000 92,476 27,524 1,000,000
3. Solution:
Mar. Investment in bonds (2M x 98%) – 60,000 1,900,000
31,
Interest income (₱2M x 12% x 3/12) 60,000
20x1
Cash (2M x 98%) 1,960,000

4. Solution:
Purchase price (2M x 95%) 1,900,000
Commission 40,510
Initial carrying amount 1,940,510

Trial and error:

There is discount. Therefore, the effective interest rate must be
higher than the nominal rate of 12%.

First trial: (using 13%)

Future cash flows x PV factor at x% = Present value
➢ (2M x PV of ₱1 @ 13%, n=4) + (2M x 12% x PV of an ordinary
annuity of ₱1 @ 13%, n=4) = 1,940,510
➢ 1,226,637 + 713,873 = 1,940,510
➢ 1,940,510 is equal to 1,940,510

❖ The effective interest rate is 13%.

5. Solution:
Interest Interest Present
Date Amortization
received income value
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
Dec. 31, 20x4 240,000 257,700 17,700 2,000,000

Sale price (2M x 92% x 1/2) 920,000

Transaction costs (46,000)
Net disposal proceeds 874,000
Carrying amount on date of sale (1,982,300 x ½) (991,150)
Loss on sale (117,150)

Jan. Cash [(2M x 92% x 1/2) - 46K] 874,000

1,
Loss on sale (squeeze) 117,150
20x4
Investment in bonds (1,982,300 x ½) 991,150

6. Solution:
Interest Interest Present
Date Amortization
received income value
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
July 1, 20x4 120,000 128,850 8,850 1,991,150

Sale price including accrued interest (2M x 92%) 1,840,000

Accrued interest (see table above) (120,000)
Sale price excluding accrued interest 1,720,000
Transaction costs (82,000)
Net disposal proceeds 1,638,000
Carrying amount on date of sale (see table above) (1,991,150)
Loss on sale (353,150)

July Interest receivable 120,000

1,
Investment in bonds at amortized cost 8,850
20x4
Interest income 128,850
to record the discount amortization
July Cash (2M x 92% – 82K) 1,758,000
1,
Loss on sale (squeeze) 353,150
20x4
Investment in bonds at amortized cost 1,991,150
Interest receivable 120,000
to record the sale
7. Solution:
Purchase price of bonds = Present value of future cash flows

Future cash flows PV factors Present value

Principal 2,000,000 0.751315 1,502,630
Interest 240,000 2.486852 596,844
Estimated purchase price on Jan. 1, 20x1 2,099,474

8. Solution:
Requirement (a):
Principal + Interest on
Date Total collections
outstanding principal balance
Dec. 31, 20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
Dec. 31, 20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31, 20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 5,800,610
Dec. 31, 20x1 2,600,000 696,073 1,903,927 3,896,683
Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285
Dec. 31, 20x3 2,200,000 235,715 1,964,285 0

Requirement (b):
Current portion of serial bonds 1,932,398
Noncurrent portion of serial bonds 1,964,285
Total carrying amount of serial bonds – Dec. 31, 20x1 3,896,683

9. Solution:
Interest Unearned Present value of
Date
income interest cash flow
a = b x 16% b = previous bal. + a
1/1/x1 5,116,292
IGNORED

12/31/x1 818,607 5,934,899

12/31/x2 949,584 6,884,483
12/31/x3 1,101,517 7,986,000
 12/31/x1 12/31/x2
Present value (Principal and interest receivable) 5,934,899 6,884,483
Interest receivable (6Mx10%); [600K+(6M x 110% x 10%)](600,000) (1,260,000)
Carrying amount of investment (Principal) 5,334,899 5,624,483

Alternative solution: Longcut

Interest
Interest PV of cash Amorti- Present
Date receiva
income flow zation value
ble
(a) =ER x (b) = prev. bal. (d) = (a) - = PV +
of (b) + (a)
(c)
(b) (b) (d)
1/1/x1 5,116,292 5,116,292
12/31/x1 818,607 5,934,899 600,000 218,607 5,334,899
12/31/x2 949,584 6,884,483 660,000 289,584 5,624,483
12/31/x3 1,101,517 7,986,000 726,000 375,517 6,000,000

Alternative solution: Shortcut

➢ (5,116,292 x 116%) – 600,000 = 5,334,899
➢ (5,116,292 x 116% x 116%) – 1,260,000 = 5,624,483

10. Solution:
➢ Initial recognition:
Jan. 1, Investment in bonds – FVOCI 1,049,737
20x1
Cash 1,049,737

➢ Subsequent measurement (Dec. 31, 20x1):

Interest Interest Present
Date received income Amortization value
Jan. 1, 20x1 1,049,737
Dec. 31, 20x1 120,000 104,974 15,026 1,034,711
Dec. 31, 20x2 120,000 103,471 16,529 1,018,182
Dec. 31, 20x3 120,000 101,818 18,182 1,000,000

Dec. 31, Cash 120,000

20x1
Interest income 104,974
Investment in bonds – FVOCI 15,026
Dec. 31, Unrealized gain (loss) – OCI* 14,711
20x1
Investment in bonds – FVOCI 14,711

* Fair value - 12/31/x1 (1M x 102%) 1,020,000

Amortized cost - 12/31/x1 (see table above) 1,034,711
Unrealized loss - OCI (14,711)

➢ Subsequent measurement (Dec. 31, 20x2):

Dec. 31, Cash 120,000
20x2
Interest income 103,471
Investment in bonds – FVOCI 16,529
Dec. 31, Investment in bonds – FVOCI 46,529
20x2
Unrealized gain (loss) – OCI** 46,529

** Fair value - 12/31/x2 (1M x 105%) 1,050,000

Amortized cost - 12/31/x2 (see table above) 1,018,182
Cumulative balance of gain in equity – 12/31/x2 31,818
Less: Cumulative balance of loss in equity – 12/31/x1 (14,711)
Unrealized gain - OCI 46,529(a)
(a) Positive amount minus a negative amount results to addition.

➢ Derecognition
Jan. Unrealized gain (loss) – OCI (a) 10,000
4,
Investment in bonds – FVOCI 10,000
20x3
to recognize the change in fair value
Jan. Cash 1,040,000
4,
Investment in bonds – FVOCI 1,040,000
20x3
to derecognize the investment
Jan. Unrealized gain (loss) – OCI (b) 21,818
4,
Gain on sale – P/L (b) 21,818
20x3
to derecognize the cumulative fair value gains

(a) [1M x (104% - 105%)] = 10,000

(b)

Net proceeds (1M x 104%) 1,040,000

Amortized cost – 1/1/x3 (see table above) 1,018,182
Cumulative gain in equity/Reclassification adjustment – 1/4/x3 21,818
The movements in the accounts are analyzed as follows:
Investment in bonds – FVOCI
1/1/x1 1,049,737
15,026 12/31/x1 amortization
14,711 12/31/x1 fair value change
12/31/x1 1,020,000
16,529 12/31/x2 amortization
12/31/x2 fair value change 46,529
12/31/x2 1,050,000
10,000 1/4/x3 fair value change
1,040,000 1/4/x3 derecognition
0

Unrealized gain (loss) - OCI

12/31/x1 Loss in OCI 14,711

12/31/x1 – Loss (Debit bal.) 14,711
46,529 12/31/x2 Gain in OCI
31,818 12/31/x2 – Gain (Credit bal.)
1/4/x3 Loss in OCI 10,000
Reclassification adj. to P/L 21,818 1/4/x3 derecognition
0
Chapter 11
Investments – Additional Concepts

PROBLEM 1: TRUE OR FALSE

FALSE – Day 1
TRUE
FALSE
FALSE
TRUE
FALSE
FALSE
TRUE
FALSE
TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

C
C
D
C
D
C
A
D
D
A
PROBLEM 3: EXERCISES
Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. FVPL asset 2,000
29, Payable
No entry
20x1 2,000

Dec. FVPL asset 4 Receivable 4

31, Unrealized gain – P/L Unrealized gain – P/L
20x1 4 4

Jan. FVPL asset 2 FVPL asset 2,006

4, Payable 2,000 Receivable
20x2 Unrealized gain – P/L 4
2 Unrealized gain – P/L
Cash 2
2,000 Cash
2,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. FVOCI asset 2,000
29, Payable
No entry
20x1 2,000

Dec. FVOCI asset 4 Receivable 4

31, Unrealized gain – OCI Unrealized gain – OCI
20x1 4 4

Jan. FVOCI asset 2 FVOCI asset 2,006

4, Payable 2,000 Receivable
20x2 Unrealized gain – OCI 4
2 Unrealized gain – OCI
Cash 2
2,000 Cash
 2,000

(c) Financial asset measured at amortized cost

Date Trade date accounting Settlement accounting
Dec. Amortized cost asset
29, 2,000
20x1 Payable No entry
2,000

Dec.
31, No entry No entry
20x1
Jan. Payable 2,000 Amortized cost asset
4, Cash 2,000
20x2 2,000 Cash
2,000

Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. Receivable 2,020 FVPL asset 20
29, FVPL asset Unrealized gain – P/L
20x1 2,000 20
Realized gain on sale
20
 Dec.
31, No entry No entry
20x1
Jan. Cash 2,020 Cash 2,020
4, Receivable FVPL asset
20x2 2,020 2,020

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. FVOCI asset 20 FVOCI asset 20
29, Unrealized gain – OCI Unrealized gain – OCI
20x1 20 20

Receivable 2,020
FVOCI asset
2,020

Unrealized gain – OCI 20

Realized gain on sale
20
Dec. No entry No entry
31,
20x1
Jan. Cash 2,020 Cash 2,020
4, Receivable FVOCI asset
20x2 2,020 2,020

Unrealized gain – OCI

20
Realized gain on sale
20

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Receivable 2,020 No entry
 29, Amortized cost asset
20x1 2,000
Realized gain on sale
20

Dec.
31, No entry No entry
20x1
Jan. Cash 2,020 Cash 2,020
4, Receivable Amortized cost asset
20x2 2,020 2,000
Realized gain on sale
20

Solutions:

(a): Amortized cost to FVPL

Jan. FVPL asset 120,000
1, Amortized cost asset 100,000
20x3 Gain on reclassification 20,000

(b): FVPL to Amortized cost

Jan. FVPL asset 20,000
1, Unrealized gain – P/L 20,000
20x3
Jan. Amortized cost asset 120,000
1, FVPL asset 120,000
20x3

(c): Amortized cost to FVOCI

Jan. FVOCI asset 120,000
1, Amortized cost asset 100,000
20x3 Gain on reclassification – OCI 20,000
(d): FVOCI to Amortized cost
Jan. FVOCI asset 20,000
1, Unrealized gain – OCI 20,000
20x3
Jan. Amortized cost asset (squeeze) 95,000
1, Unrealized gain – OCI (5K + 20K) 25,000
20x3 FVOCI asset 120,000

(e): FVPL to FVOCI

Jan. FVPL asset 20,000
1, Unrealized gain – P/L 20,000
20x3
Jan. FVOCI asset 120,000
1, FVPL asset 120,000
20x3

(f): FVOCI to FVPL

Jan. FVOCI asset 20,000
1, Unrealized gain – OCI 20,000
20x3
Jan. FVPL asset 120,000
1, FVOCI asset 120,000
20x3
Jan. Unrealized gain – OCI 25,000
1, Gain on reclassification – P/L 25,000
20x3
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
A
The reclassification date is Jan. 1, 20x3. The bonds are amortized
up to this date as follows:
Interest Interest Present
Date received income Amortization value
Jan. 1, 20x1 951,963
Jan. 1, 20x2 100,000 114,236 14,236 966,199
Jan. 1, 20x3 100,000 115,944 15,944 982,143
Jan. 1, 20x4 100,000 117,857 17,857 1,000,000

Jan. FVPL asset (1M x 104%) 1,040,000

1, Amortized cost asset 982,143
20x3 Gain on reclassification (squeeze) 57,857

A
New carrying amount - fair value on reclassification 1,040,00
date 0
1,000,00
Face amount 0
Premium - Excess of carrying amount over face
amount 40,000

Supporting journal entries:

Jan. FVPL asset [1M x (104% - 103%)] 10,000
1, Unrealized gain – P/L 10,000
20x3
Jan. Amortized cost asset (1M x 104%) 1,040,000
1, FVPL asset 1,040,000
20x3

C
Jan. FVOCI asset (1M x 104%) 1,040,000
1, Amortized cost asset 982,143
20x3 Gain on reclassification – OCI 57,857

A
☺ Shortcut:
The initial measurement of the AC on reclassification date is equal
to the amortized cost of ₱982,143 (see amortization table). This is
based on the concept that ”the financial asset is measured as if it
had always been measured at amortized cost.”

☺ Longcut:
Jan. FVOCI asset [1M x (104% - 103%)] 10,000
1, Unrealized gain – OCI 10,000
20x3 to record the fair value change on
reclassification date
Jan. Amortized cost asset (squeeze) 982,143
1, Unrealized gain – OCI (a) 57,857
20x3 FVOCI asset 1,040,000
to record the reclassification

(a) Carrying amount – Jan. 1, 20x3 (after fair value

adjustment) 1,040,000
Amortized cost – Jan. 1, 20x3 (see amort. table) 982,143
Cumulative gain in OCI/Equity, incldg. gain on
1/1/x3 57,857

(a) Alternative method:

Carrying amount – Dec. 31, 20x3 (1M x 103%) 1,030,000
Amortized cost – Dec. 31, 20x3 (see amort. table) 982,143
Cumulative gain in OCI/Equity, incldg. gain on
1/1/x3 47,857
Add: Gain on 1/1/x3 (see entry above) 10,000
Cumulative gain in OCI/Equity, incldg. gain on 57,857
1/1/x3

D – fair value on reclassification date

Supporting journal entries:

Jan. FVPL [1M x (104% - 103%)] 10,000
1, Unrealized gain – P/L 10,000
20x3
Jan. FVOCI asset 1,040,000
1, FVPL 1,040,000
20x3
A
Carrying amount – Jan. 1, 20x3 (after fair value 1,040,00
adjustment) 0
Amortized cost – Jan. 1, 20x3 (see amort. table) 982,143
Cumulative gain in OCI/Equity, incldg. gain on 1/1/x3 57,857

Supporting journal entries:

Jan. FVOCI asset 10,000
1, Unrealized gain - OCI [1M x (104% 10,000
20x3 - 103%)]
Jan. FVPL asset 1,040,000
1, FVOCI asset 1,040,000
20x3
Jan. Unrealized gain – OCI 57,857
1, Gain on reclassification – P/L 57,857
20x3

A
Dec. Impairment loss – P/L (the 12-mo. 10,000
31, ECL) 30,000
20x1 Unrealized loss – OCI (squeeze) 40,000
Investment in bonds – FVOCI
[(2M x 98%) – 2M]
B (10,000 + 12,000) x ₱10 = 220,000
The shares in lot 3 are acquired after the date of record. The seller,
and not John Myung, will receive the related cash dividends.

A – the non-cash asset’s fair value

B - ₱44 ex-dividend price x 6,000 shares = 264,000

C (2,800 x ₱100) = 280,000

D – only a memo entry is made

C
FIFO method
Origin
Date of al Share New Acqui New
Lo acquisiti shares dividen shares -sition cost per
t on held ds held cost sh.
(b) = (a) (c) = (a)
(a) x 10% + (b) (d) (d) ÷ (c)
July 1, ₱ 60.0
1 19x7 10,000 1,000 11,000 660,000 0
Sept. 21, 40.0
2 19x9 12,000 1,200 13,200 528,000 0
Totals 2,200

Total share dividends 2,200 x ½ = 1,100 shares sold.

FIFO cost allocation: (1,000 x 60) + (100 x 40) = 64,000
 Date Cash (2,200 x ½ x ₱25) 27,500
Loss on sale of investment 36,500
Investment in stocks (at cost) 64,000

Average method
Total cost (660K + 528K + 264K) 1,452,000
Divide by: Total shares (10,000 + 12,000 + 6,000 + 2,200) 30,200
Average cost per share 48.08
Multiply by: No. of shares sold (2,200 x 1/2) 1,100
Cost allocated to the shares sold 52,888

Date Cash (2,200 x ½ x ₱25) 27,500

Loss on sale of investment 25,388
Investment in stocks (at cost) 52,888

B (1,000 stock rights x 5 fair value per stock right) = 5,000

D
Scenario A: Rights-on

T/P Fair value of share rights-on - Subscription price

value of =
1 right No. of rights needed to purchase one share + 1

75 - 45
T/P value of 1 right =
5+1

T/P value of 1 right = 5

Initial measurement of stock rights received: (20,000 x 5) = 100,000

Scenario B: Ex-rights

Fair value of share ex-rights - Subscription

T/P value of
= price
1 right
No. of rights needed to purchase one share

65 - 45
T/P value of 1 right =
5

T/P value of 1 right = 4

Initial measurement of stock rights received: (20,000 x 4) = 80,000

Scenario C: Investment measured at cost

Zero – the stock rights received are recorded through memo entry
only.
PROBLEM 5: FOR CLASSROOM DISCUSSION
Solutions:
(a) FVPL
Date Trade date accounting Settlement date accounting
Dec. FVPL asset 1,000
29, Payable No entry
20x1 1,000
Dec. FVPL asset 750 Receivable 750
31, Unrealized gain – P/L Unrealized gain – P/L
20x1 750 750
Jan. Unrealized loss – P/L 250 FVPL asset 1,500
3, Payable 1,000 Unrealized loss – P/L 250
20x2 FVPL asset Receivable
250 750
Cash Cash
1,000 1,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. FVOCI asset 1,000
29, Payable No entry
20x1 1,000
Dec. FVOCI 750 Receivable 750
31, Unrealized gain – OCI Unrealized gain – OCI
20x1 750 750

Jan. Unrealized loss – OCI 250 FVOCI asset 1,500

3, Payable 1,000 Unrealized loss – OCI 250
20x2 FVOCI asset Receivable
250 750
Cash Cash
1,000 1,000

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Amortized cost asset 1,000 No entry
29, Payable
20x1 1,000

Dec.
31, No entry No entry
20x1
Jan. Payable 1,000 Amortized cost asset 1,000
3, Cash Cash
20x2 1,000 1,000

Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. Receivable 1,000 Unrealized loss – P/L 200
29, Loss on sale 200 FVPL asset
20x1 FVPL asset 200
1,200
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Receivable FVPL asset
20x2 1,000 1,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. Unrealized loss – OCI 200 Unrealized loss – OCI 200
29, FVOCI asset FVOCI asset
20x1 200 200

Receivable 1,000
FVOCI asset
1,000
 Loss on sale
200
Unrealized loss - OCI
200
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Receivable FVOCI asset
20x2 1,000 1,000

Loss on sale
200
Unrealized loss - OCI
200

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Receivable 1,000
29, Loss on sale 200
No entry
20x1 Amortized cost asset
1,200
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Receivable Loss on sale 200
20x2 1,000 Amortized cost asset
1,200
Solutions:

(a): Amortized cost to FVPL

Jan. FVPL asset 240,000
1, Amortized cost asset 200,000
20x3 Gain on reclassification – P/L 40,000

(b): FVPL to Amortized cost

Jan. FVPL asset 40,000
1, Unrealized gain – P/L 40,000
20x3
Jan. Amortized cost asset 240,000
1, FVPL asset 240,000
20x3

(c): Amortized cost to FVOCI

Jan. FVOCI asset 240,000
1, Amortized cost asset 200,000
20x3 Gain on reclassification – OCI 40,000

(d): FVOCI to Amortized cost

Jan. FVOCI asset 40,000
1, Unrealized gain – OCI 40,000
20x3
Jan. Amortized cost asset (squeeze) 190,000
1, Unrealized gain – OCI (10K + 40K) 50,000
20x3 FVOCI asset 240,000

(e): FVPL to FVOCI

Jan. FVPL asset 40,000
1, Unrealized gain – P/L 40,000
20x3
Jan. FVOCI asset 240,000
1, FVPL asset 240,000
20x3
(f): FVOCI to FVPL
Jan. FVOCI asset 40,000
1, Unrealized gain – OCI 40,000
20x3
Jan. FVPL asset 240,000
1, FVOCI asset 240,000
20x3
Jan. Unrealized gain – OCI 50,000
1, Gain on reclassification – P/L 50,000
20x3

Solution:
Dec. Impairment loss – P/L 9,000
31, Unrealized loss – OCI 21,000
20x1 Investment in bonds – FVOCI 30,000

Solutions:
Case 1: Amortized cost to FVPL – Cessation of impairment
Jan. FVPL asset 490,000
1, Loss allowance 6,000
20x3 Loss on reclassification – P/L 4,000
(squeeze) 500,000
Amortized cost asset

Case 2: FVPL to AC – Commencement of impairment

Jan. Unrealized loss – P/L 10,000
1, FVPL asset 10,000
20x3 to record the change in fair
value on reclassification date
Jan. Amortized cost asset 490,000
1, FVPL asset 490,000
20x3 to record the reclassification
Jan. Impairment loss – P/L 4,000
1, Loss allowance 4,000
20x3 to record the commencement
of accounting for impairment

Case 3: Amortized cost to FVOCI – Retention of impairment

Jan. FVOCI asset 490,000
1, Loss allowance 6,000
20x3 Loss on reclassification - OCI 4,000
Amortized cost asset 500,000

Case 4: FVOCI to Amortized cost – Retention of impairment

Jan. Impairment loss 6,000
1, Unrealized loss – OCI 4,000
20x3 FVOCI asset 10,000
to recognize the impairment
loss and change in fair value on
reclassification date
Jan. Amortized cost asset (squeeze) 500,000
1, FVOCI asset 490,000
20x3 Loss allowance 6,000
Unrealized loss – OCI 4,000
to record the reclassification

Case 5: FVPL to FVOCI – Commencement of impairment

Jan. Unrealized loss – P/L 10,000
1, FVPL asset 10,000
20x3 to record the change in fair
value on reclassification date
Jan. FVOCI asset 490,000
1, FVPL asset 490,000
20x3 to record the reclassification
Jan. Impairment loss – P/L 4,000
1, Unrealized gain (loss) - OCI 4,000
20x3 to record the commencement
of accounting for impairment
Case 6: FVOCI to FVPL – Cessation of impairment
Jan. Impairment loss 6,000
1, Unrealized loss – OCI 4,000
20x3 FVOCI asset 10,000
to recognize the impairment
loss and change in fair value on
reclassification date
Jan. FVPL asset 490,000
1, FVOCI asset 490,000
20x3 to record the reclassification
Jan. Loss on reclassification – P/L 4,000
1, Unrealized loss – OCI 4,000
20x3 to record the reclassification
adjustment to P/L

Solution:
Dat Cash 400,000
e Dividend income 400,000
Dat Inventory 240,000
e Dividend income 240,000
Dat Investment in FVOCI securities 260,000
e Unrealized gain – OCI 260,000

Solution:
April
1, No entry (Memo entry only)
20x1
April Cash [(20,000 sh. x 5%) x ₱224] 224,000
30, Investment in stocks (a) 110,000
20x1 Gain on sale of investment 114,000

(a) {2,310,000 x [(20,000 x 5%) / (20,000 x 105%)} = 110,000 cost

allocated to the shares sold
Solutions:
Requirement (a): Dividend-on
May 5, Investment in FVOCI securities 3,600,000
20x1 (a) 400,000
Dividend income (20 x 20,000 4,000,000
sh.)
Cash (200 x 20,000 sh.)
May Cash 400,000
31, Dividend income 400,000
20x1

(a) (200 purchase price - 20 dividend) x 20,000 sh. = 3,600,000

Requirement (b): Ex-dividend

May Investment in FVOCI securities 4,000,000
21, Cash (200 x 20,000 sh.) 4,000,000
20x1
May
31, No entry
20x1

Solution:
Sept. Stock rights (1,000 rts. x ₱5) 5,000
30, Unrealized gain – P/L 5,000
20x1
Dec. Stock rights [1,000 x (₱6 - ₱5)] 1,000
31, Unrealized gain – P/L 1,000
20x1

Solution:

T/P = FV of share right-on - Subscription price

 value of
1 right No. of rts. needed to purchase one share + 1

T/P 40 - 30
value of =
1 right 4+1

Theoretical/parity value of 1 right = ₱2

Dec. Stock rights (10,000 x ₱2) 20,000

25, Unrealized gain – P/L 20,000
20x1
Chapter 12
Other Long-term Investments

PROBLEM 1: TRUE OR FALSE

TRUE
FALSE
FALSE
FALSE
FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

C
C
D
C
D

PROBLEM 3: EXERCISE
Solution:
(a) 1/1/x1
Prepaid Insurance 50,000
Cash 50,000

Insurance expense 50,000

Prepaid Insurance 50,000

(b) 12/31/x3
Cash surrender value 18,000
Insurance expense 6,000
Retained earnings 12,000

(c) 4/1/x4
Cash 4,000
Insurance expense 4,000
(d) 12/31/x4
Cash surrender value 3,000
Insurance expense 3,000

(e) 1/1/x5
Prepaid Insurance 50,000
Cash 50,000

(f) 4/15/x5
Cash 1,000,000
Cash surrender value 23,750*
Prepaid Insurance (50K x 9/12) 37,500
Gain on settlement of life insurance 938,750

*21,000 + [(32,000 – 21,000) x 3/12] = 23,750

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

B (450,000 + 90,000 + 15,000 + 30,000 – 5,000) = 580,000

C (1,000,000 ÷ 5.11) = 195,700

C [40,000 – (108,000 – 87,000) increase in cash surrender value

taking into account the dividends received] = 19,000

B
Solution:
Total annual premiums paid (4,000 x 4 yrs.) 16,000
Total life insurance expense (12,800)
Investment in cash surrender value 3,200

A
PROBLEM 5: FOR CLASSROOM DISCUSSION
Solution:

Jan. 1, 20x1
Prepaid insurance 50,000
Cash 50,000

Dec. 31, 20x1

Insurance expense 50,000
Prepaid insurance 50,000

December 31, 20x3

Cash surrender value 90,000
Insurance expense 30,000
Retained earnings 60,000

September 1, 20x4
Cash 3,000
Insurance expense 3,000

December 31, 20x4

Cash surrender value 20,000
Insurance expense 20,000

Jan. 1, 20x5
Prepaid insurance 50,000
Cash 50,000

Aug. 1, 20x5
Cash 5,000,000
Prepaid insurance (50K x 6/12) 25,000
Cash surrender value 120,000
{110K + [(130K – 110K) x 6/12]}
Gain on life insurance 4,855,000
Chapter 13
Basic Derivatives

PROBLEM 1: TRUE OR FALSE

FALSE
FALSE
TRUE
FALSE
TRUE
TRUE
TRUE
TRUE
TRUE
TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

B
D
C
A
B
B
C
B
D
D
PROBLEM 3: EXERCISES
Solutions:

Dec. 1, 20x1 (Contract date)

Hedged item – None Forward contract (Derivative)

Dec. 1, 20x1
No entry

Dec. 31, 20x1 (Reporting date)

The value of the derivative is computed as follows:

Purchase price under the fwd. contract (1,000 x

250) 250,000
Purchase price in the market (1,000 x 285) 285,000
Gain/ Derivative asset 35,000

The entry on December 31, 20x1 is as follows:

Hedged item – None Forward contract (Derivative)
Dec. 31, 20x1
Forward contract (asset)…..35K
Gain on forward
contract....35K
[ (285 - 250) x 1,000]

to record the value of the

derivative

Jan. 15, 20x2 (Settlement date)

Gross settlement
Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2
Inventory (coffee beans)..245K
Loss on forward contract…40K
 Cash………………….
…...250K
(1,000 x 250 agreed price)
Forward contract
(asset)......35K

to record the purchase of 1,000

kilograms of coffee beans at the
pre-agreed sale price of P250
per kilogram

Net cash settlement

Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2
Loss on forward
contract…..40K
Cash [(250 – 245) x
1,000]…….5K
Forward contract
(asset)......35K

to record the net cash

settlement of the forward
contract

Solutions:
Dec. 15, 20x1 (Contract date)
Hedged item – None Forward contract (Derivative)
Dec. 15, 20x1
No entry

Dec. 31, 20x1 (Reporting date)

Hedged item – None Forward contract (Derivative)
Dec. 31, 20x1
Loss on forward
 contract....2,500
Forward contract
(liability)…..2,500
[ (1.25 – 1.50) x 10,000]

to record the value of the

derivative

Jan. 15, 20x2 (Settlement date)

Gross settlement
Jan. 15, 20x2
Cash - foreign currency..
16,000
(10K x 1.60)
Forward contract (liability).
2,500
Cash - local currency….….
15,000
(10K x 1.50)
Gain on forward contract....
3,500
[(1.60 – 1.25) x 10K]

Net cash settlement

Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2 Jan. 15, 20x2
Cash [(1.60 – 1.50) x 10K]…..
1,000
Forward contract (liability).
2,500
Gain on forward contract....
3,500
Solution:
Hedged item – None Futures contract (Derivative)
Dec. 1, 20x1
Deposit with broker ……..10K

Cash………………………..10K

to record the initial margin

deposit with the broker

Hedged item – None Futures contract (Derivative)

Dec. 31, 20x1
Futures contract (asset)...200K
Gain on futures
contract…..200K
[(100 - 98) x 100,000]

to record the value of the

derivative computed as the
change in the underlying
multiplied by the notional
amount.

Hedged item – None Futures contract (Derivative)

Jan. 31, 20x2
Loss on futures contract….500K
[(98 – 103) x 100K]
Deposit with broker…….....
10K
Futures contract (asset)….
200K
Cash ………………………
290K*

to record the net cash

 settlement of the futures
contract.

* (103 – 100) x 100,000 = 300,000 less 10,000 deposit = 290,000 net

cash payment

Solution:
Hedged item – None Put option (Derivative)
Mar. 1, 20x1
Put option ……..…….. 720
Cash………..………………
720

Hedged item – None Put option (Derivative)

June 30, 20x1
Put option ……..…….. 60,000
[(180 – 120) x 1,000]
Gain on put option……….
60,000

to record the increase in the fair

value of the put option due to
the increase in intrinsic value.

June 30, 20x1

Loss on put option……….540
(720 – 180)
Put
option……………………..540

to record the decrease in the fair

value of the put option due to
the decrease in time value.

Hedged item – None Put option (Derivative)

July 1, 20x1
 Cash…………………60,000
[(180 – 120) x 1,000]
Loss on call option….... 180
Call option
……..……..…..60,180
(720 + 60,000 – 540)

to record the net settlement of

the call option contract.

Solution:
Hedged item – None Put option (Derivative)
July 7, 20x4 July 7, 20x4
Put option ……..…….. 170
Cash………..………………
170

Hedged item – None Put option (Derivative)

Sept. 30, 20x4 Sept. 30, 20x4
No entry 1

Sept. 30, 20x4

Loss on put option……….82
(170 – 88)
Put
option……………………..82

to record the decrease in the fair

value of the put option due to
 the decrease in time value.

1 The option is out of the money (i.e., the entity is better off selling
in the market at the market price of $54 rather than exercising the
put option and sell at $50).

The entity need not recognize a loss from the change in intrinsic
value because the option is not designated as a hedging
instrument. Only the change in the time value is accounted for.
The maximum loss that would be recognized in an option is the
premium paid (i.e., $170) which is equal to the time value of the
option on initial recognition.

Hedged item – None Put option (Derivative)

Dec. 31, 20x4 Dec. 31, 20x4
No entry (see explanation
above)

Dec. 31, 20x4

Loss on put option……….53
(88 - 35)
Put
option……………………..53

to record the decrease in the fair

value of the put option due to
the decrease in time value.

Hedged item – None Put option (Derivative)

Jan. 31, 20x5 Jan. 31, 20x5
No entry (see explanation
above)

Jan. 31, 20x5

Loss on put option……….35
(35 - 0)
 Put
option……………………..35

to record the decrease in the fair

value of the put option due to
the decrease in time value.

The movements in the put option account are analyzed as follows:

Put option
7/7/x4 170
82 9/30/x4
53 12/31/x4
35 1/31/x5
-

Solution:

Hedged item – None Interest rate swap (Derivative)

Jan. 1, 20x2 Jan. 1, 20x2
No entry

Analysis:

The net cash settlement on the swap is determined as follows:

20x2
Receive variable (1M x 8%) 80,000
Pay 9% fixed (90,000)
Net cash settlement – payment (10,000)

Net cash settlements – payment

10,000
(each due on Dec. 31, 20x2 and Dec. 31, 20x3)
PV of ordinary annuity of 1 @ 8%, n=2 1.78326
Fair value of derivative - 12/31/x1 (asset) 17,833

Dec. 31, 20x1 Dec. 31, 20x1

Loss on int. rate swap….17,883
Interest rate swap…..
17,883

to recognize the change in the

fair value of the interest rate
swap

Dec. 31, 20x2 Dec. 31, 20x2

Interest rate swap…..10,000
Cash……….
10,000

to record the periodic net cash

settlement on the interest rate
swap - (see previous
computation)
The net cash settlement in 20x3 is determined as follows:
20x3
Receive variable (1M x 12%) 120,000
Pay 9% fixed 90,000
Net cash settlement – receipt 30,000

Net cash receipt (due on Dec. 31, 20x3 – maturity date) 30,000
Multiply by: PV of 1 @12%, n=1 0.892857
Fair value of derivative - 12/31/x2 (asset) 26,786

The change in the fair value of the interest rate swap is

determined as follows:

Fair value of interest rate swap – Dec. 31, 20x2 - asset 26,786
Less: Carrying amount of interest rate swap – Dec. 31,
20x2 (17,833 liability – 10,000 net cash settlement) -
liability 7,833
Change in fair value – gain 34,619

Hedged item – None Interest rate swap (Derivative)

Dec. 31, 20x2
Interest rate swap……34,619
Gain on int. rate
swap…34,619

to recognize the change in the

fair value of the interest rate
swap

Hedged item – None Interest rate swap (Derivative)

 Dec. 31, 20x3
Cash…………………30,000
Interest rate
swap………26,786
Gain on int. rate
swap…...3,214

to record the final net cash

settlement on the interest rate
swap

Solutions:
Requirement (a):
Receive fixed (12% x 3,000,000) = 360,000
Pay variable (9% x 3,000,000) = 270,000
Net receipt = 90,000
90,000 x PV of 1 @9%, n=1 = 82,569 asset

Requirement (b):
Cash 90,000
Interest rate swap 82,569
Gain 7,431

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

B
Solution:
Fixed purchase price (₱600 x 1,000) 600,000
Purchase price at current market price (₱550 x
550,000
1,000)

Derivative liability - payable to broker (50,000)

A – (52 – 50) x 100,000 = 200,000 asset

D
Solution:
Loss on forward contract (squeeze) 300,000
Cash [(49 – 50) x 100,000] 100,000
Forward contract (see previous solution)
200,000

Alternative solution: (49 – 52) x 100,000 = 300,000 loss

A (40 – 65) x 20,000 = 500,000 gain

C
Solution:
Derivative asset (liability) on Dec. 31, 20x1:
(45 – 47) x 20,000 = (40,000) liability

Net settlement on Feb. 2, 20x1:

(45 – 44) x 20,000 = 20,000 receipt

B (1.20 – 1.27) x 1,000,000 = 70,000 loss

C (200,000 liability ÷ 100,000 euros) = 2 increase in rate; 60 + 2 = 62

C [(100 – 97) x 10,000 units] + 20,000 initial margin deposit = 50,000

receipt

B
Solution:

"Long" futures contract:

560,00
Fixed purchase price (2,800 x 200) 0
Purchase price at current market price (2,800 x 504,00
180) 0
(56,000
Unfavorable – Payable to broker
)

"Short" futures contract:

299,00
Fixed selling price (1,300 x 230) 0
Selling price at current market price (1,300 x 286,00
220) 0
Favorable – Receivable from broker 13,000

(43,000
Net derivative liability )

B
Initial recognition
Call option 15,000
Cash 15,000

Reporting date
Loss on call option 10,000
(499 – 500) x 10,000
Call option 10,000

Expiration date
Loss on call option 5,000*
Call option 5,000
*The balance of the option premium: 15,000 – 10,000 loss on
reporting date.

B
Solution:
Payment without the call option (¥80M ÷ ¥93) 860,215.05
Payment by exercising the call option (¥80M ÷ ¥100) 800,000.00
Savings 60,215.05
Less: Cost of call option (12,000.00)
Net savings 48,215.05

D
Solution:
Payment without the call option (¥80M ÷ ¥105) 761,904.76
Payment by exercising the call option (¥80M ÷ ¥100) 800,000.00
Loss if the option is exercised (38,095.24)

C
Solution:
Analysis for Cougar:
Cougar swaps its variable interest payment for Aggie’s fixed
interest payment; or
Cougar pays Aggie’s fixed interest and receives variable interest
from Aggie; or
Pay fixed; receive variable.

Pay fixed (10% x 500K) (50,000)

Receive variable (8% x 500K) 40,000
Net payment on 12/31/2003 (10,000)

D
Pay fixed (10% x 500K) (50,000)
Receive variable (12% x 500K) 60,000
Net receipt on 12/31/2003 10,000

B
Pay fixed (10% x 500K) (50,000)
Receive variable (12% x 500K) 60,000
Net receipt on 12/31/2003 10,000
Multiply by: PV of 1 @12%, n=1 0.892857
Derivative asset - 12/31/2002 8,929
PROBLEM 5: FOR CLASSROOM DISCUSSION
Solutions:

Dec. 15, 20x1 (Contract date)

Hedged item – None Forward contract (Derivative)
Dec. 15, 20x1
No entry

Dec. 31, 20x1 (Reporting date)

The value of the derivative is computed as follows:
Purchase price under the forward contract (10,000 x
1.24) 12,400
Purchase price in the market (10,000 x 1.27) 12,700
Gain/ Derivative asset 300

Dec. 31, 20x1

Forward contract (asset).. 300
Gain on forward contract..
300
[(1.27 forward rate – 1.24
forward rate) x 10K]

Jan. 15, 20x2 (Settlement date)

Gross settlement
Jan. 15, 20x2
Cash - foreign currency.. .13,000
(10K x 1.30)
Cash - local
currency….….12,400
Forward contract (asset)…
300
Gain on forward contract....
300
 [(1.30 – 1.27) x 10K]

Net cash settlement

Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2 Jan. 15, 20x2
Cash [(1.30 – 1.24) x 10K]…..
600
Forward contract (asset)…
300
Gain on forward contract....
300
[(1.30 – 1.27) x 10K]

Solution:
Hedged item – None Futures contract (Derivative)
Dec. 1, 20x1
Deposit with broker …….. 10K
Cash………………………..
10K

to record the initial margin

deposit with the broker

Hedged item – None Futures contract (Derivative)

Dec. 31, 20x1
Futures contract (asset)... 20K
Gain on futures contract…..
20K
 [(100 - 98) x 10,000]

to record the value of the

derivative computed as the
change in the underlying
multiplied by the notional
amount.

Hedged item – None Futures contract (Derivative)

Jan. 31, 20x2
Cash ……………………… 40K
Deposit with broker……....
10K
Futures contract (asset)….
20K
Gain on futures contract…
10K
[(98 - 97) x 10,000]

to record the net cash

settlement of the futures
contract.

Solution:

Hedged item – None Call option (Derivative)

Mar. 1, 20x1
Call option ……..…….. 400
Cash………..………………
400

Hedged item – None Call option (Derivative)

June 30, 20x1
Call option ……..…….. 20,000
[(120 – 100) x 1,000]
 Gain on call option……….
20,000

to record the increase in the fair

value of the call option due to
the increase in intrinsic value.

June 30, 20x1

Loss on call option……….300
(400 – 100)
Call
option……………………..300

to record the decrease in the fair

value of the call option due to
the decrease in time value.

Hedged item – None Call option (Derivative)

July 1, 20x1
Cash…………………20,000
[(120 – 100) x 1,000]
Loss on call option…....100
Call option
……..……..…..20,100
(400 + 20,000 – 300)

to record the net settlement of

the call option contract.

Solution:
Analysis:

Jan. 1, 20x1
Hedged item – None Interest rate swap (Derivative)
Jan. 1, 20x1
No entry

Dec. 31, 20x1

The net cash settlement on the swap is determined as follows:
20x1 20x2
Receive variable (1M x 12% & 15%) 120,000 150,000
Pay 12% fixed 120,000 120,000
Net cash settlement - receipt - 30,000

The net cash settlement in 20x2 is discounted to determine the fair

value of the derivative on Dec. 31, 20x1:
30,000 x PV of 1 @ 15%, n=1 = 26,087 (asset)

Hedged item – None Interest rate swap (Derivative)

Dec. 31, 20x1
 Interest rate swap…..26,087
Gain on int. rate
swap…..26,087

to recognize the change in the

fair value of the interest rate
swap

Dec. 31, 20x2

Hedged item – None Interest rate swap (Derivative)
Dec. 31, 20x2
Cash…………………30,000
Interest rate
swap……....26,087
Gain on int. rate
swap…...3,913

to record the net cash

settlement of the interest rate
swap
 Chapter 11
Investments – Additional Concepts

PROBLEM 1: TRUE OR FALSE

1. FALSE – Day 1
2. TRUE
3. FALSE
4. FALSE
5. TRUE
6. FALSE
7. FALSE
8. TRUE
9. FALSE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. C
3. D
4. C
5. D
6. C
7. A
8. D
9. D
10. A
PROBLEM 3: EXERCISES
1. Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. FVPL asset 2,000
29, Payable 2,000 No entry
20x1

Dec. FVPL asset 4 Receivable 4

31, Unrealized gain – P/L 4 Unrealized gain – P/L 4
20x1

Jan. 4, FVPL asset 2 FVPL asset 2,006

20x2 Payable 2,000 Receivable 4
Unrealized gain – P/L 2 Unrealized gain – P/L 2
Cash 2,000 Cash 2,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. FVOCI asset 2,000
29, Payable 2,000 No entry
20x1

Dec. FVOCI asset 4 Receivable 4

31, Unrealized gain – OCI 4 Unrealized gain – OCI 4
20x1

Jan. 4, FVOCI asset 2 FVOCI asset 2,006

20x2 Payable 2,000 Receivable 4
Unrealized gain – OCI 2 Unrealized gain – OCI 2
Cash 2,000 Cash 2,000
(c) Financial asset measured at amortized cost
Date Trade date accounting Settlement accounting
Dec. Amortized cost asset 2,000
29, Payable 2,000 No entry
20x1

Dec.
31, No entry No entry
20x1

Jan. 4, Payable 2,000 Amortized cost asset 2,000

20x2 Cash 2,000 Cash 2,000

2. Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. Receivable 2,020 FVPL asset 20
29, FVPL asset 2,000 Unrealized gain – P/L 20
20x1
Realized gain on sale 20
Dec.
31, No entry No entry
20x1

Jan. 4, Cash 2,020 Cash 2,020

20x2 Receivable 2,020 FVPL asset 2,020

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. FVOCI asset 20 FVOCI asset 20
29, Unrealized gain – OCI 20 Unrealized gain – OCI 20
20x1

Receivable 2,020
FVOCI asset 2,020

Unrealized gain – OCI 20

Realized gain on sale 20
Dec. No entry No entry
31,
20x1
 Jan. Cash 2,020 Cash 2,020
4, Receivable 2,020 FVOCI asset 2,020
20x2

Unrealized gain – OCI 20

Realized gain on sale 20

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Receivable 2,020 No entry
29, Amortized cost asset 2,000
20x1
Realized gain on sale 20

Dec.
31, No entry No entry
20x1

Jan. Cash 2,020 Cash 2,020

4, Receivable 2,020 Amortized cost asset 2,000
20x2
Realized gain on sale 20

3. Solutions:

(a): Amortized cost to FVPL

Jan. FVPL asset 120,000
1,
Amortized cost asset 100,000
20x3
Gain on reclassification 20,000

(b): FVPL to Amortized cost

Jan. FVPL asset 20,000
1,
Unrealized gain – P/L 20,000
20x3
Jan. Amortized cost asset 120,000
1,
FVPL asset 120,000
20x3
 (c): Amortized cost to FVOCI
Jan. 1, FVOCI asset 120,000
20x3
Amortized cost asset 100,000
Gain on reclassification – OCI 20,000

(d): FVOCI to Amortized cost

Jan. 1, FVOCI asset 20,000
20x3
Unrealized gain – OCI 20,000
Jan. 1, Amortized cost asset (squeeze) 95,000
20x3
Unrealized gain – OCI (5K + 20K) 25,000
FVOCI asset 120,000

(e): FVPL to FVOCI

Jan. FVPL asset 20,000
1,
Unrealized gain – P/L 20,000
20x3
Jan. FVOCI asset 120,000
1,
FVPL asset 120,000
20x3

(f): FVOCI to FVPL

Jan. 1, FVOCI asset 20,000
20x3
Unrealized gain – OCI 20,000
Jan. 1, FVPL asset 120,000
20x3
FVOCI asset 120,000
Jan. 1, Unrealized gain – OCI 25,000
20x3
Gain on reclassification – P/L 25,000
 PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. A
The reclassification date is Jan. 1, 20x3. The bonds are amortized
up to this date as follows:
Interest Interest Present
Date received income Amortization value
Jan. 1, 20x1 951,963
Jan. 1, 20x2 100,000 114,236 14,236 966,199
Jan. 1, 20x3 100,000 115,944 15,944 982,143
Jan. 1, 20x4 100,000 117,857 17,857 1,000,000

Jan. FVPL asset (1M x 104%) 1,040,000

1,
Amortized cost asset 982,143
20x3
Gain on reclassification (squeeze) 57,857

2. A
New carrying amount - fair value on reclassification date 1,040,000
Face amount 1,000,000
Premium - Excess of carrying amount over face amount 40,000

Supporting journal entries:

Jan. FVPL asset [1M x (104% - 103%)] 10,000
1,
Unrealized gain – P/L 10,000
20x3
Jan. Amortized cost asset (1M x 104%) 1,040,000
1,
FVPL asset 1,040,000
20x3

3. C
Jan. 1, FVOCI asset (1M x 104%) 1,040,000
20x3
Amortized cost asset 982,143
Gain on reclassification – OCI 57,857
4. A
☺ Shortcut:
The initial measurement of the AC on reclassification date is equal
to the amortized cost of ₱982,143 (see amortization table). This is
based on the concept that ”the financial asset is measured as if it
had always been measured at amortized cost.”

☺ Longcut:
Jan. FVOCI asset [1M x (104% - 103%)] 10,000
1,
Unrealized gain – OCI 10,000
20x3
to record the fair value change on reclassification
date
Jan. Amortized cost asset (squeeze) 982,143
1,
Unrealized gain – OCI (a) 57,857
20x3
FVOCI asset 1,040,000
to record the reclassification

(a) Carrying amount – Jan. 1, 20x3 (after fair value adjustment) 1,040,000
Amortized cost – Jan. 1, 20x3 (see amort. table) 982,143
Cumulative gain in OCI/Equity, incldg. gain on 1/1/x3 57,857

(a) Alternative method:

Carrying amount – Dec. 31, 20x3 (1M x 103%) 1,030,000
Amortized cost – Dec. 31, 20x3 (see amort. table) 982,143
Cumulative gain in OCI/Equity, incldg. gain on 1/1/x3 47,857
Add: Gain on 1/1/x3 (see entry above) 10,000
Cumulative gain in OCI/Equity, incldg. gain on 1/1/x3 57,857

5. D – fair value on reclassification date

Supporting journal entries:

Jan. FVPL [1M x (104% - 103%)] 10,000
1,
Unrealized gain – P/L 10,000
20x3
Jan. FVOCI asset 1,040,000
1,
FVPL 1,040,000
20x3
6. A
Carrying amount – Jan. 1, 20x3 (after fair value adjustment) 1,040,000
Amortized cost – Jan. 1, 20x3 (see amort. table) 982,143
Cumulative gain in OCI/Equity, incldg. gain on 1/1/x3 57,857

Supporting journal entries:

Jan. 1, FVOCI asset 10,000
20x3
Unrealized gain - OCI [1M x (104% - 103%)] 10,000
Jan. 1, FVPL asset 1,040,000
20x3
FVOCI asset 1,040,000
Jan. 1, Unrealized gain – OCI 57,857
20x3
Gain on reclassification – P/L 57,857

7. A
Dec. Impairment loss – P/L (the 12-mo. ECL) 10,000
31,
Unrealized loss – OCI (squeeze) 30,000
20x1
Investment in bonds – FVOCI 40,000
[(2M x 98%) – 2M]

8. B (10,000 + 12,000) x ₱10 = 220,000

The shares in lot 3 are acquired after the date of record. The seller,
and not John Myung, will receive the related cash dividends.

9. A – the non-cash asset’s fair value

10. B - ₱44 ex-dividend price x 6,000 shares = 264,000

11. C (2,800 x ₱100) = 280,000

12. D – only a memo entry is made

13. C
FIFO method
Original New Acqui-
Date of shares Share shares sition New cost
Lot acquisition held dividends held cost per sh.
(a) (b) = (a) x 10% (c) = (a) + (b) (d) (d) ÷ (c)
1 July 1, 19x7 10,000 1,000 11,000 ₱ 660,000 60.00
2 Sept. 21, 19x9 12,000 1,200 13,200 528,000 40.00
Totals 2,200

➢ Total share dividends 2,200 x ½ = 1,100 shares sold.

➢ FIFO cost allocation: (1,000 x 60) + (100 x 40) = 64,000

Date Cash (2,200 x ½ x ₱25) 27,500

Loss on sale of investment 36,500
Investment in stocks (at cost) 64,000

Average method
Total cost (660K + 528K + 264K) 1,452,000
Divide by: Total shares (10,000 + 12,000 + 6,000 + 2,200) 30,200
Average cost per share 48.08
Multiply by: No. of shares sold (2,200 x 1/2) 1,100
Cost allocated to the shares sold 52,888

Date Cash (2,200 x ½ x ₱25) 27,500

Loss on sale of investment 25,388
Investment in stocks (at cost) 52,888

14. B (1,000 stock rights x 5 fair value per stock right) = 5,000
15. D
Scenario A: Rights-on

T/P value Fair value of share rights-on - Subscription price

=
of 1 right No. of rights needed to purchase one share + 1
75 - 45
T/P value of 1 right =
5+1
T/P value of 1 right = 5

Initial measurement of stock rights received: (20,000 x 5) = 100,000

Scenario B: Ex-rights

T/P value of Fair value of share ex-rights - Subscription price

=
1 right No. of rights needed to purchase one share
65 - 45
T/P value of 1 right =
5
T/P value of 1 right = 4

Initial measurement of stock rights received: (20,000 x 4) = 80,000

Scenario C: Investment measured at cost

Zero – the stock rights received are recorded through memo entry
only.
PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solutions:
(a) FVPL
Date Trade date accounting Settlement date accounting
Dec. FVPL asset 1,000
29, Payable 1,000 No entry
20x1
Dec. FVPL asset 750 Receivable 750
31, Unrealized gain – P/L 750 Unrealized gain – P/L 750
20x1
Jan. 3, Unrealized loss – P/L 250 FVPL asset 1,500
20x2 Payable 1,000 Unrealized loss – P/L 250
FVPL asset 250 Receivable 750
Cash 1,000 Cash 1,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. FVOCI asset 1,000
29, Payable 1,000 No entry
20x1
Dec. FVOCI 750 Receivable 750
31, Unrealized gain – OCI 750 Unrealized gain – OCI 750
20x1
Jan. 3, Unrealized loss – OCI 250 FVOCI asset 1,500
20x2 Payable 1,000 Unrealized loss – OCI 250
FVOCI asset 250 Receivable 750
Cash 1,000 Cash 1,000

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Amortized cost asset 1,000
29, Payable 1,000 No entry
20x1
Dec.
31, No entry No entry
20x1
Jan. 3, Payable 1,000 Amortized cost asset 1,000
20x2 Cash 1,000 Cash 1,000
2. Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. Receivable 1,000 Unrealized loss – P/L 200
29, Loss on sale 200 FVPL asset 200
20x1 FVPL asset 1,200
Dec.
31, No entry No entry
20x1
Jan. 3, Cash 1,000 Cash 1,000
20x2 Receivable 1,000 FVPL asset 1,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. Unrealized loss – OCI 200 Unrealized loss – OCI 200
29, FVOCI asset 200 FVOCI asset 200
20x1
Receivable 1,000
FVOCI asset 1,000

Loss on sale 200

Unrealized loss - OCI 200
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Receivable 1,000 FVOCI asset 1,000
20x2
Loss on sale 200
Unrealized loss - OCI 200
(c) Amortized cost
Date Trade date accounting Settlement accounting
Dec. Receivable 1,000
29, Loss on sale 200 No entry
20x1 Amortized cost asset 1,200
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Receivable 1,000 Loss on sale 200
20x2 Amortized cost asset 1,200
 3. Solutions:

(a): Amortized cost to FVPL

Jan. FVPL asset 240,000
1,
Amortized cost asset 200,000
20x3
Gain on reclassification – P/L 40,000

(b): FVPL to Amortized cost

Jan. FVPL asset 40,000
1,
Unrealized gain – P/L 40,000
20x3
Jan. Amortized cost asset 240,000
1,
FVPL asset 240,000
20x3

(c): Amortized cost to FVOCI

Jan. 1, FVOCI asset 240,000
20x3
Amortized cost asset 200,000
Gain on reclassification – OCI 40,000

(d): FVOCI to Amortized cost

Jan. 1, FVOCI asset 40,000
20x3
Unrealized gain – OCI 40,000
Jan. 1, Amortized cost asset (squeeze) 190,000
20x3
Unrealized gain – OCI (10K + 40K) 50,000
FVOCI asset 240,000

(e): FVPL to FVOCI

Jan. FVPL asset 40,000
1,
Unrealized gain – P/L 40,000
20x3
Jan. FVOCI asset 240,000
1,
FVPL asset 240,000
20x3

(f): FVOCI to FVPL

Jan. 1, FVOCI asset 40,000
20x3
Unrealized gain – OCI 40,000
Jan. 1, FVPL asset 240,000
20x3
FVOCI asset 240,000
Jan. 1, Unrealized gain – OCI 50,000
20x3
Gain on reclassification – P/L 50,000

4. Solution:
Dec. Impairment loss – P/L 9,000
31,
Unrealized loss – OCI 21,000
20x1
Investment in bonds – FVOCI 30,000

5. Solutions:
Case 1: Amortized cost to FVPL – Cessation of impairment
Jan. FVPL asset 490,000
1,
Loss allowance 6,000
20x3
Loss on reclassification – P/L (squeeze) 4,000
Amortized cost asset 500,000

Case 2: FVPL to AC – Commencement of impairment

Jan. Unrealized loss – P/L 10,000
1,
FVPL asset 10,000
20x3
to record the change in fair value on
reclassification date
Jan. Amortized cost asset 490,000
1,
FVPL asset 490,000
20x3
to record the reclassification
Jan. Impairment loss – P/L 4,000
1,
Loss allowance 4,000
20x3
to record the commencement of accounting for
impairment

Case 3: Amortized cost to FVOCI – Retention of impairment

Jan. FVOCI asset 490,000
1,
Loss allowance 6,000
20x3
Loss on reclassification - OCI 4,000
Amortized cost asset 500,000
Case 4: FVOCI to Amortized cost – Retention of impairment
Jan. Impairment loss 6,000
1,
Unrealized loss – OCI 4,000
20x3
FVOCI asset 10,000
to recognize the impairment loss and change in
fair value on reclassification date
Jan. Amortized cost asset (squeeze) 500,000
1,
FVOCI asset 490,000
20x3
Loss allowance 6,000
Unrealized loss – OCI 4,000
to record the reclassification

Case 5: FVPL to FVOCI – Commencement of impairment

Jan. Unrealized loss – P/L 10,000
1,
FVPL asset 10,000
20x3
to record the change in fair value on
reclassification date
Jan. FVOCI asset 490,000
1,
FVPL asset 490,000
20x3
to record the reclassification
Jan. Impairment loss – P/L 4,000
1,
Unrealized gain (loss) - OCI 4,000
20x3
to record the commencement of accounting for
impairment

Case 6: FVOCI to FVPL – Cessation of impairment

Jan. Impairment loss 6,000
1,
Unrealized loss – OCI 4,000
20x3
FVOCI asset 10,000
to recognize the impairment loss and change in
fair value on reclassification date
Jan. FVPL asset 490,000
1,
FVOCI asset 490,000
20x3
to record the reclassification
Jan. Loss on reclassification – P/L 4,000
1,
Unrealized loss – OCI 4,000
20x3
to record the reclassification adjustment to P/L
6. Solution:
Date Cash 400,000
Dividend income 400,000
Date Inventory 240,000
Dividend income 240,000
Date Investment in FVOCI securities 260,000
Unrealized gain – OCI 260,000

7. Solution:
April 1,
No entry (Memo entry only)
20x1
April Cash [(20,000 sh. x 5%) x ₱224] 224,000
30, Investment in stocks (a) 110,000
20x1 Gain on sale of investment 114,000
(a)
{2,310,000 x [(20,000 x 5%) / (20,000 x 105%)} = 110,000 cost allocated to the
shares sold

8. Solutions:
Requirement (a): Dividend-on
May 5, Investment in FVOCI securities (a) 3,600,000
20x1 Dividend income (20 x 20,000 sh.) 400,000
Cash (200 x 20,000 sh.) 4,000,000
May 31, Cash 400,000
20x1 Dividend income 400,000
(a) (200 purchase price - 20 dividend) x 20,000 sh. = 3,600,000

Requirement (b): Ex-dividend

May 21, Investment in FVOCI securities 4,000,000
20x1 Cash (200 x 20,000 sh.) 4,000,000
May 31,
No entry
20x1
9. Solution:
Sept. 30, Stock rights (1,000 rts. x ₱5) 5,000
20x1 Unrealized gain – P/L 5,000
Dec. 31, Stock rights [1,000 x (₱6 - ₱5)] 1,000
20x1 Unrealized gain – P/L 1,000

10. Solution:

T/P value FV of share right-on - Subscription price

=
of 1 right No. of rts. needed to purchase one share + 1

T/P value 40 - 30
=
of 1 right 4+1

Theoretical/parity value of 1 right = ₱2

Dec. 25, Stock rights (10,000 x ₱2) 20,000

20x1
Unrealized gain – P/L 20,000
 Chapter 12
Other Long-term Investments

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE
3. FALSE
4. FALSE
5. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. C
3. D
4. C
5. D

PROBLEM 3: EXERCISE
1. Solution:
(a) 1/1/x1
Prepaid Insurance 50,000
Cash 50,000

Insurance expense 50,000

Prepaid Insurance 50,000

(b) 12/31/x3
Cash surrender value 18,000
Insurance expense 6,000
Retained earnings 12,000

(c) 4/1/x4
Cash 4,000
Insurance expense 4,000
(d) 12/31/x4
Cash surrender value 3,000
Insurance expense 3,000

(e) 1/1/x5
Prepaid Insurance 50,000
Cash 50,000

(f) 4/15/x5
Cash 1,000,000
Cash surrender value 23,750*
Prepaid Insurance (50K x 9/12) 37,500
Gain on settlement of life insurance 938,750

*21,000 + [(32,000 – 21,000) x 3/12] = 23,750

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B (450,000 + 90,000 + 15,000 + 30,000 – 5,000) = 580,000

2. C (1,000,000 ÷ 5.11) = 195,700

3. C [40,000 – (108,000 – 87,000) increase in cash surrender value

taking into account the dividends received] = 19,000

4. B
Solution:
Total annual premiums paid (4,000 x 4 yrs.) 16,000
Total life insurance expense (12,800)
Investment in cash surrender value 3,200

5. A
PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solution:

Jan. 1, 20x1
Prepaid insurance 50,000
Cash 50,000

Dec. 31, 20x1

Insurance expense 50,000
Prepaid insurance 50,000

December 31, 20x3

Cash surrender value 90,000
Insurance expense 30,000
Retained earnings 60,000

September 1, 20x4
Cash 3,000
Insurance expense 3,000

December 31, 20x4

Cash surrender value 20,000
Insurance expense 20,000

Jan. 1, 20x5
Prepaid insurance 50,000
Cash 50,000

Aug. 1, 20x5
Cash 5,000,000
Prepaid insurance (50K x 6/12) 25,000
Cash surrender value 120,000
{110K + [(130K – 110K) x 6/12]}
Gain on life insurance 4,855,000
 Chapter 13
Basic Derivatives

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B
2. D
3. C
4. A
5. B
6. B
7. C
8. B
9. D
10. D
PROBLEM 3: EXERCISES
1. Solutions:

➢ Dec. 1, 20x1 (Contract date)

Hedged item – None Forward contract (Derivative)

Dec. 1, 20x1
No entry

➢ Dec. 31, 20x1 (Reporting date)

The value of the derivative is computed as follows:

Purchase price under the fwd. contract (1,000 x 250) 250,000

Purchase price in the market (1,000 x 285) 285,000
Gain/ Derivative asset 35,000

The entry on December 31, 20x1 is as follows:

Hedged item – None Forward contract (Derivative)
Dec. 31, 20x1
Forward contract (asset)…..35K
Gain on forward contract....35K
[ (285 - 250) x 1,000]

to record the value of the derivative

➢ Jan. 15, 20x2 (Settlement date)

Gross settlement
Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2
Inventory (coffee beans)..245K
Loss on forward contract…40K
Cash…………………. …...250K
(1,000 x 250 agreed price)
Forward contract (asset)......35K

to record the purchase of 1,000 kilograms of

coffee beans at the pre-agreed sale price of
P250 per kilogram
Net cash settlement
Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2
Loss on forward contract…..40K
Cash [(250 – 245) x 1,000]…….5K
Forward contract (asset)......35K

to record the net cash settlement of the

forward contract

2. Solutions:
➢ Dec. 15, 20x1 (Contract date)
Hedged item – None Forward contract (Derivative)
Dec. 15, 20x1
No entry

➢ Dec. 31, 20x1 (Reporting date)

Hedged item – None Forward contract (Derivative)
Dec. 31, 20x1
Loss on forward contract....2,500
Forward contract (liability)…..2,500
[ (1.25 – 1.50) x 10,000]

to record the value of the derivative

➢ Jan. 15, 20x2 (Settlement date)

Gross settlement
Jan. 15, 20x2
Cash - foreign currency.. 16,000
(10K x 1.60)
Forward contract (liability). 2,500
Cash - local currency….…. 15,000
(10K x 1.50)
Gain on forward contract.... 3,500
[(1.60 – 1.25) x 10K]
Net cash settlement
Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2 Jan. 15, 20x2
Cash [(1.60 – 1.50) x 10K]….. 1,000
Forward contract (liability). 2,500
Gain on forward contract.... 3,500

3. Solution:
Hedged item – None Futures contract (Derivative)
Dec. 1, 20x1
Deposit with broker ……..10K
Cash………………………..10K

to record the initial margin deposit with the

broker

Hedged item – None Futures contract (Derivative)

Dec. 31, 20x1
Futures contract (asset)...200K
Gain on futures contract…..200K
[(100 - 98) x 100,000]

to record the value of the derivative computed

as the change in the underlying multiplied by
the notional amount.

Hedged item – None Futures contract (Derivative)

Jan. 31, 20x2
Loss on futures contract….500K
[(98 – 103) x 100K]
Deposit with broker……..... 10K
Futures contract (asset)…. 200K
Cash ……………………… 290K*

to record the net cash settlement of the futures

contract.

* (103 – 100) x 100,000 = 300,000 less 10,000 deposit = 290,000 net cash payment
4. Solution:
Hedged item – None Put option (Derivative)
Mar. 1, 20x1
Put option ……..…….. 720
Cash………..……………… 720

Hedged item – None Put option (Derivative)

June 30, 20x1
Put option ……..…….. 60,000
[(180 – 120) x 1,000]
Gain on put option………. 60,000

to record the increase in the fair value of the

put option due to the increase in intrinsic
value.

June 30, 20x1

Loss on put option……….540
(720 – 180)
Put option……………………..540

to record the decrease in the fair value of the

put option due to the decrease in time value.

Hedged item – None Put option (Derivative)

July 1, 20x1
Cash…………………60,000
[(180 – 120) x 1,000]
Loss on call option….... 180
Call option ……..……..…..60,180
(720 + 60,000 – 540)

to record the net settlement of the call option

contract.
5. Solution:
Hedged item – None Put option (Derivative)
July 7, 20x4 July 7, 20x4
Put option ……..…….. 170
Cash………..……………… 170

Hedged item – None Put option (Derivative)

Sept. 30, 20x4 Sept. 30, 20x4
No entry 1

Sept. 30, 20x4

Loss on put option……….82
(170 – 88)
Put option……………………..82

to record the decrease in the fair value of the

put option due to the decrease in time value.

1 The option is out of the money (i.e., the entity is better off selling in the
market at the market price of $54 rather than exercising the put option and
sell at $50).

The entity need not recognize a loss from the change in intrinsic value
because the option is not designated as a hedging instrument. Only the
change in the time value is accounted for. The maximum loss that would be
recognized in an option is the premium paid (i.e., $170) which is equal to the
time value of the option on initial recognition.

Hedged item – None Put option (Derivative)

Dec. 31, 20x4 Dec. 31, 20x4
No entry (see explanation above)

Dec. 31, 20x4

Loss on put option……….53
(88 - 35)
Put option……………………..53

to record the decrease in the fair value of the

put option due to the decrease in time value.
 Hedged item – None Put option (Derivative)
Jan. 31, 20x5 Jan. 31, 20x5
No entry (see explanation above)

Jan. 31, 20x5

Loss on put option……….35
(35 - 0)
Put option……………………..35

to record the decrease in the fair value of the

put option due to the decrease in time value.

The movements in the put option account are analyzed as follows:

Put option
7/7/x4 170
82 9/30/x4
53 12/31/x4
35 1/31/x5
-

6. Solution:

Hedged item – None Interest rate swap (Derivative)

Jan. 1, 20x2 Jan. 1, 20x2
No entry

❖ Analysis:
The net cash settlement on the swap is determined as follows:
20x2
Receive variable (1M x 8%) 80,000
Pay 9% fixed (90,000)
Net cash settlement – payment (10,000)

Net cash settlements – payment

10,000
(each due on Dec. 31, 20x2 and Dec. 31, 20x3)
PV of ordinary annuity of 1 @ 8%, n=2 1.78326
Fair value of derivative - 12/31/x1 (asset) 17,833

Dec. 31, 20x1 Dec. 31, 20x1

Loss on int. rate swap….17,883
Interest rate swap….. 17,883

to recognize the change in the fair value of the

interest rate swap

Dec. 31, 20x2 Dec. 31, 20x2

Interest rate swap…..10,000
Cash………. 10,000

to record the periodic net cash settlement on

the interest rate swap - (see previous
computation)
The net cash settlement in 20x3 is determined as follows:
20x3
Receive variable (1M x 12%) 120,000
Pay 9% fixed 90,000
Net cash settlement – receipt 30,000

Net cash receipt (due on Dec. 31, 20x3 – maturity date) 30,000
Multiply by: PV of 1 @12%, n=1 0.892857
Fair value of derivative - 12/31/x2 (asset) 26,786

The change in the fair value of the interest rate swap is

determined as follows:

Fair value of interest rate swap – Dec. 31, 20x2 - asset 26,786
Less: Carrying amount of interest rate swap – Dec. 31, 20x2
(17,833 liability – 10,000 net cash settlement) - liability 7,833
Change in fair value – gain 34,619

Hedged item – None Interest rate swap (Derivative)

Dec. 31, 20x2
Interest rate swap……34,619
Gain on int. rate swap…34,619

to recognize the change in the fair value of the interest rate

swap

Hedged item – None Interest rate swap (Derivative)

Dec. 31, 20x3
Cash…………………30,000
Interest rate swap………26,786
Gain on int. rate swap…...3,214

to record the final net cash settlement on the interest rate swap
7. Solutions:
Requirement (a):
➢ Receive fixed (12% x 3,000,000) = 360,000
➢ Pay variable (9% x 3,000,000) = 270,000
➢ Net receipt = 90,000
➢ 90,000 x PV of 1 @9%, n=1 = 82,569 asset

Requirement (b):
Cash 90,000
Interest rate swap 82,569
Gain 7,431

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Fixed purchase price (₱600 x 1,000) 600,000
Purchase price at current market price (₱550 x 1,000) 550,000
Derivative liability - payable to broker (50,000)

2. A – (52 – 50) x 100,000 = 200,000 asset

3. D
Solution:
Loss on forward contract (squeeze) 300,000
Cash [(49 – 50) x 100,000] 100,000
Forward contract (see previous solution) 200,000

Alternative solution: (49 – 52) x 100,000 = 300,000 loss

4. A (40 – 65) x 20,000 = 500,000 gain

 5. C
Solution:
I. Derivative asset (liability) on Dec. 31, 20x1:
(45 – 47) x 20,000 = (40,000) liability

II. Net settlement on Feb. 2, 20x1:

(45 – 44) x 20,000 = 20,000 receipt

6. B (1.20 – 1.27) x 1,000,000 = 70,000 loss

7. C (200,000 liability ÷ 100,000 euros) = 2 increase in rate; 60 + 2 =

62

8. C [(100 – 97) x 10,000 units] + 20,000 initial margin deposit =

50,000 receipt

9. B
Solution:
"Long" futures contract:
Fixed purchase price (2,800 x 200) 560,000
Purchase price at current market price (2,800 x 180) 504,000
Unfavorable – Payable to broker (56,000)
"Short" futures contract:
Fixed selling price (1,300 x 230) 299,000
Selling price at current market price (1,300 x 220) 286,000
Favorable – Receivable from broker 13,000
Net derivative liability (43,000)
10. B
Initial recognition
Call option 15,000
Cash 15,000

Reporting date
Loss on call option 10,000
(499 – 500) x 10,000
Call option 10,000

Expiration date
Loss on call option 5,000*
Call option 5,000

*The balance of the option premium: 15,000 – 10,000 loss on

reporting date.

11. B
Solution:
Payment without the call option (¥80M ÷ ¥93) 860,215.05
Payment by exercising the call option (¥80M ÷ ¥100) 800,000.00
Savings 60,215.05
Less: Cost of call option (12,000.00)
Net savings 48,215.05

12. D
Solution:
Payment without the call option (¥80M ÷ ¥105) 761,904.76
Payment by exercising the call option (¥80M ÷ ¥100) 800,000.00
Loss if the option is exercised (38,095.24)
13. C
Solution:
Analysis for Cougar:
 Cougar swaps its variable interest payment for Aggie’s fixed
interest payment; or
 Cougar pays Aggie’s fixed interest and receives variable
interest from Aggie; or
 Pay fixed; receive variable.

Pay fixed (10% x 500K) (50,000)

Receive variable (8% x 500K) 40,000
Net payment on 12/31/2003 (10,000)

14. D
Pay fixed (10% x 500K) (50,000)
Receive variable (12% x 500K) 60,000
Net receipt on 12/31/2003 10,000

15. B
Pay fixed (10% x 500K) (50,000)
Receive variable (12% x 500K) 60,000
Net receipt on 12/31/2003 10,000
Multiply by: PV of 1 @12%, n=1 0.892857
Derivative asset - 12/31/2002 8,929
PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solutions:

➢ Dec. 15, 20x1 (Contract date)

Hedged item – None Forward contract (Derivative)
Dec. 15, 20x1
No entry

➢ Dec. 31, 20x1 (Reporting date)

The value of the derivative is computed as follows:
Purchase price under the forward contract (10,000 x 1.24) 12,400
Purchase price in the market (10,000 x 1.27) 12,700
Gain/ Derivative asset 300

Dec. 31, 20x1

Forward contract (asset).. 300
Gain on forward contract.. 300
[(1.27 forward rate – 1.24 forward rate) x
10K]

➢ Jan. 15, 20x2 (Settlement date)

Gross settlement
Jan. 15, 20x2
Cash - foreign currency.. .13,000
(10K x 1.30)
Cash - local currency….….12,400
Forward contract (asset)… 300
Gain on forward contract.... 300
[(1.30 – 1.27) x 10K]
Net cash settlement
Hedged item – None Forward contract (Derivative)
Jan. 15, 20x2 Jan. 15, 20x2
Cash [(1.30 – 1.24) x 10K]….. 600
Forward contract (asset)… 300
Gain on forward contract.... 300
[(1.30 – 1.27) x 10K]

2. Solution:
Hedged item – None Futures contract (Derivative)
Dec. 1, 20x1
Deposit with broker …….. 10K
Cash……………………….. 10K

to record the initial margin deposit with the

broker

Hedged item – None Futures contract (Derivative)

Dec. 31, 20x1
Futures contract (asset)... 20K
Gain on futures contract….. 20K
[(100 - 98) x 10,000]

to record the value of the derivative computed

as the change in the underlying multiplied by
the notional amount.

Hedged item – None Futures contract (Derivative)

Jan. 31, 20x2
Cash ……………………… 40K
Deposit with broker…….... 10K
Futures contract (asset)…. 20K
Gain on futures contract… 10K
[(98 - 97) x 10,000]

to record the net cash settlement of the futures

contract.
3. Solution:

Hedged item – None Call option (Derivative)

Mar. 1, 20x1
Call option ……..…….. 400
Cash………..……………… 400

Hedged item – None Call option (Derivative)

June 30, 20x1
Call option ……..…….. 20,000
[(120 – 100) x 1,000]
Gain on call option………. 20,000

to record the increase in the fair value of the

call option due to the increase in intrinsic
value.

June 30, 20x1

Loss on call option……….300
(400 – 100)
Call option……………………..300

to record the decrease in the fair value of the

call option due to the decrease in time value.

Hedged item – None Call option (Derivative)

July 1, 20x1
Cash…………………20,000
[(120 – 100) x 1,000]
Loss on call option…....100
Call option ……..……..…..20,100
(400 + 20,000 – 300)

to record the net settlement of the call option

contract.
4. Solution:

Analysis:

➢ Jan. 1, 20x1
Hedged item – None Interest rate swap (Derivative)
Jan. 1, 20x1
No entry

➢ Dec. 31, 20x1

The net cash settlement on the swap is determined as follows:
20x1 20x2
Receive variable (1M x 12% & 15%) 120,000 150,000
Pay 12% fixed 120,000 120,000
Net cash settlement - receipt - 30,000

The net cash settlement in 20x2 is discounted to determine the fair

value of the derivative on Dec. 31, 20x1:
➢ 30,000 x PV of 1 @ 15%, n=1 = 26,087 (asset)
 Hedged item – None Interest rate swap (Derivative)
Dec. 31, 20x1
Interest rate swap…..26,087
Gain on int. rate swap…..26,087

to recognize the change in the fair value of the

interest rate swap

➢ Dec. 31, 20x2

Hedged item – None Interest rate swap (Derivative)
Dec. 31, 20x2
Cash…………………30,000
Interest rate swap……....26,087
Gain on int. rate swap…...3,913
to record the net cash settlement of the
interest rate swap