PROBLEMS

CHAPTER 7-1
The following information is available on October 31, 2013 to Laguna
Company, which is having difficulty in paying its liabilities as they become
due:
Carrying Amount
Cash
P 4,000
Accounts eceivble ( net): Current fair value
equal to carrying amount
46,000
Inventorie: Net realizable value, P18,000;
pledged on P21,000 of note payable
39,000
Plant assets: Current fair value,P67,400;
pledged on mortgage note payable
134,000
Accumulated depreciation
27,000
Supplies: Current fair value,P1,500
2,000
Wages payable, all earned during October 2008
5,800
Property taxes payable
1,200
Accounts payable
60,000
Notes payable,21,000 secured by inventories
40,000
Mortgage note payable including accrued
interest of P400
50,400
Common stock,P5 par
100,000
Deficit
59,400
Required:
a. Prepare a statement of affairs
b. Compute the estimated percentage of claims each group of creditors
should expect to receive if Laguna Company petitions for liquidation in
bankruptcy.
c. Prepare a Statement of Deficiency to Unsecured Creditor.

Problem 7-2
On January 1, 2013, the records of Michael Anthony, trustee in bankruptcy
for VC Coropration, showedthe following:
Cash
Assets Not Realized:
Land
Buildings
Equipment
Patents

P 8,200
10,000
43,000
28,000
4,400

Liabilitites Not Liquidated:

Accounts payable
Loans payable
Estate Deficit

80,000
40,000
26,400

During January, Michael sol equipment having book value of P15,000 for
P8,800 and sold the patents for P12,000. Michael was paid P1,300 as rustee
fee and P21,000 s distributd proportionately to the creditors.
Required:
repare a stement of realization and liquidation for January and statement of
financial position and statement of estate deficit as of January 31, 2013.

Problem 7-3
Rizal Corporation is experiencing difficulty in paying its bills and is
considering filing for bankruptcy. Current data show:
ASSETS
REALIZABLE
Cash
Accounts Receivble
Inventory- Materials
27,000
Inventory-Finished goods
Prepaid Expenses
Land
Building
Trucks
Equipment
Intangibles

LIABILITIES
Accounts payable
Bank Loan
Wages Payable
Taxes Payable

BOOK VALUE

P 4,00
40,000
36,000
50,000
1,000
10,000
70,000
20,000
45,000
16,000
_______
P 292,000
--------------

EXPECTED
VALUE
P 4,000
30,000

55,000
-042,000
160,000
6,000
25,000
-0-

SECURED BY
P 77,000
25,000
12,000
8,000

80% of receivables

Truck Loan

5,000

Mortgage Payable
Loan Payable
Stockholder Loan
debt
Stockholders' Equity

43,000
50,000
110,000

Required:

Truck with P12,000 BV &

P3,500 ERV
Land and building
Finish goods
Not subordinated to other

(38,000)
___________
P 292,000
-------------------

Prepare a statement of affairs.

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

d. It is estimated that 95% of he notes reecivable, 95% of the assigned

accounts receivables, an 75% of the remainingccounts receivable will be
collected. A quick sale of the inventory will realize P180,000 amd of the plant,
P330,000. The corporation also owns a patent not recorded on the books
which is expectedto ralize P12,000.
Required:

Prepare a statement of affairs.

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

CHAPTER 8
Problem 8-1
Under fresh start accounting, a company is coming out of reorganization with
following accounts:
______________________________________________________________________________
BOOK VALUE
FAIR VALUE
Receivables
P80,000
P90,000
Inventory
200,000
210,00
Buildings
300,000
400,000
Liabilities
330,000
300,000
Common stock
20,000
Additional paid in capital
(70,000)
______________________________________________________________________________
The ompany's assets have a reorganization value of P760,000. The owners of
the company before the organization have transferred 80% of the
outstanding stock to the creditors.
Required: Prepare the journal entry that is necessary to adjust the
company's records to fresh start accounting.

Problem 8-2
On July 24, 213, the date the plan of reorganization of Luigi Company was
approved by SEC, Luigi' stockholders' equity was as follows:
______________________________________________________________________________
Common stock, no par or stated value; authorized 100,000 shares,
issued and outstanding 60,000 shares
P 580,000
Deficit
(260,000)
______________________________________________________________________________
Included in Luigi's plan of reorganiztion were the following:
1. Authorize payment of P50,000 unrecorded administrative costs by escrow
agent holding Luigi cash discount.
2. Amend articles of incorporation to change common stock to P1 par from
no-par, no-stated value stock.
3. Exchange 10% unsecured P120,000 promissory note payable to supplier
( interest unpaid for three months) for a 12%, two- year promissory note in
the total amount of unpaid principal and acccrued interest on the 10% note.
4. Pay suppliers 80% centavos on the peso (from Luigi cash acount) for their

claims totaling P100,000.

5. Eliminate deficit against paid-in capital resulting from (2) and gain resulting
from (4).
Required: Assuming the foregiong were completed on July 24,2013, prepare
journal entries (omit explanations) for Luigi Company on that date. Use the
following ledger account titles.
Cash
Interest Payable
Cash with escrow agent
10% note payable
Common stock, no par
12% note payable
Common stock, P1 par
Paid-in capital in excess of par.
Cost of reorganization
Retained earnings (deficit)
Gain from debt discharge Trade accounts payable

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

Accounts Payable
P60,000
Note Payable
100,000
Stockholders' Equity
Common stock
200,000
Retained Earnings
(223,000)
______________________________________________________________________________
Required: Prepare a reorganization statement of financial position in good
form.

Problem 8-4
The Red Company is in the process of emerging from rorganization. The
company will apply fresh start accounting as of December 31,2013. The
company currently has 30,000 shares of common stock outstanding with a
P240,000 par value. As part of the reorganization, the owners will contribute
18,000 shares of this stock back to the company. A deficit balance of P30,000
also is being processed.
The company has the following asset accounts:
______________________________________________________________________________
BOOK VALUE
MARKET VALUE
Account Payable
P100,000
P80,000
Inventory
112,000
90,000
Land and Buildings
420,000
500,000
Equipment
78,000
65,000
______________________________________________________________________________
The company's liabilities will be settled as follows: Assume that all notes will
be issued at reasonable interest rates.
1. Accounts Payable pf P80,000 will be settled with note for 50,000. These
creditors will also get 1,000 shares of the stock cobtributed by the owners.
2. Accrued Expenses of P35,000 will be settled with a note for P40,000.
3. Note payable (due 2015) of 100,000 was fully secured and has not been
renegotiated.
4. Note payable (due 2011) of P200,000 will be settled with a note for
P50,000 and 10,000 shares of stock contributed by the owners.
5. Note payable (due 2012) of P185,000 will be settled with a note for
P71,000 and 7,000 shares of the stock contributed by te owners.
6. Note payable (due 2013) of P200,000 will be settled with a note for
P110,000.
The company has areorganization value of P780,000.
Required: Prepare all of the journal entries for Red Company so that the
company can emerge from the reorganization.

Problem 8-5
The Sun Corporation has gone through reorganization on December 31, 2013.
Onthis date, the company has the following assets ( market valuleis based on
the discounted future cashflows at are anticipated):
______________________________________________________________________________
BOOK VALUE
MARKET VALUE
______________________________________________________________________________
Account Receivable
P20,000
P18,000
Inventory
143,000
111,000
Land and Buildings
250,000
278,000
Machinery
144,000
121,000
Patents
100,000
125,000
______________________________________________________________________________
The company has a reorganization value of P800,000.
The company has 50,000 shares of P10 par value common stock outstanding.
A deficit retained earnings balance of P670,000 also is reported. The owner s
will distribute 30,000 shares of this stock as part of the reorganization plan.
The company's liabilities will be settled as follows:
* Accounts payable (existing at the date on which the order of reorganizzation
was granted) of P180,000 will be settled with an 8%, two- year note for
P35,000.
* Accounts payable (incurred since the date of reorganization was granted)
ofP97,000
will be paid in the regular course of business.
* Note payable - Citibank of P200,000 will be settled with an 8%, five-year
note for P50,000 and 15,000 shares of the stock contributed by the owners.
* Note payable- Metro Bank of P350,000 will be settled with a 7%, eight-year
note for P100,000 and 15,000 shares of the stock contributed by the owners.
Required: Prepare a statement of financial position for the Sun Corporation
upon its emergence fromm the reorganization.

CHAPTER 9

Problem 9-1
Diana's Furniture sells furniture and electronic items. Th majority of its
business is on credit, and the following information is available relating to
salestransactions for 2011, 2012, and 2013.
______________________________________________________________________________

2011

2012
P104,000

2013s
P116,000

Installment sales (net of interest)

P121,000
Gross profit rates
38%
41%
39%
Cash collections on installment sales:
Principal-2011
57,200
29,120
15,000
Principal-2012
71,920
26,680
Principal-2013
76,230
Interest-2011
17,870
3,030
Interest-2012
9,780
6,610
18,142
Interest-2013
6,378
______________________________________________________________________________
Required : Prepare the journal entries for the year 2011, 2012, and 2013
assuming Diana's Furniture uses the installment sales method for revenue
recognition and records receivables net of interest.

Problem 9-2
Charles Corporation has been using the cash method of revenue recognition
since its first year of operation in 2012. All sales are made on accountwith
notes receivable given by the customers. The Statement of Comprehensive
Income for 2012 and 2013 presented the following amounts:
______________________________________________________________________________
2012
2013
Revenues-collection on principal
P32,000
P50,000
Revenues- interest
3,600
5,500
Cost of goods purchases (includes increase
in inventory of goods on hand of P2,000
in 2012 and P8,000 in 2013
45,200
52,020
______________________________________________________________________________
The balances due on the notes at the end of year were as follows:
______________________________________________________________________________
2012
2013
______________________________________________________________________________
Notes receivable- 2012
62,000
36,000
Notes receivable- 2013
-060,000
Unearned interest income- 2012
7,167
5,579

Unearned interest income- 2013

-08,043
______________________________________________________________________________

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

Problem 9-3
The statement of financial position of Good Buy Mart on January 1, 2013 is
shown below.
_____________________________________________________________________________
Assets
Liabilities and Equity
_____________________________________________________________________________
Cash
40,000
Accounts Payable
60,000
Merchandise Inventory
240,000
Deferred gross profit on
Accounts receivable
22,000
installment sales- 2011
24,000
Allowance for doubtful
Deferred gross profit on
accounts
(2,000)
installment sales- 2012
58,800
Installment contracts
Capital stock
406,000
receivables- 2011
60,000
Retained earnings
151,200
Installment contracts
receivable- 2012
140,000
Other Assets
200,000
_______
_________
P 700,000
P700,000
_______
_________
______________________________________________________________________________
Summary of transactions during 2013 are:
______________________________________________________________________________
Sales:
Regular (on credit)
P600,000
Installments
200,000
Purchases of merchandise (cash)
476,000
Ending inventory (periodic basis)
260,000
Cost of installment sales
114,000

Selling expenses
210,000
Allowance for doubtful accounts
1/4 of 1% of regular sales
Collections:
Regular accounts
560,000
2011 installment accounts
40,000
2012 installment accounts
80,000
2013 installment accounts
110,000
_____________________________________________________________________________
Required:
1. Compute the gross profit rates of 2011, 2012, and 2013.
2. Prepare the journal entries for 2013 including the adjusting and closing
entries at
December 31.
3. Prepare statemen of comprehensive income not showing installment sales
for 2013.
4. Prepare statement of financial position as of December 31, 2013.
NOTE: Disregard interest.

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

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

CHAPTER 10
Problem 10-1
The Builders COnstruction Company contracted to construct a building for
P450,000. Construction began in2012 and the project was completed in 2013.
Cost information for the project is as follows:
______________________________________________________________________________
2012
2013
______________________________________________________________________________
Costs incurred
P200,000
P120,000
Estimated costs to complete
100,000
-0______________________________________________________________________________
Builders uses the percentage-of-completion method for recognizing income
on the contract.
Required:
(a) Determine the amount of income that the company should recognize in
2012 and 2013.
(b) Prove the amount of income you have computed in (a) by computing the
total income on the contract and comparing it with the incomes you have

computed in 2012 and 2013.

(c) Prepare the journal entries required at the end of each year to recognized
that year's income.

Problem 10-2
R. Ramos Construction Company began operations on January 1, 2013.
During the year, R. Ramos entered into a contract with LUE Company to
construct a manufacturing facility. At thr time, R. Ramos estimated that is
would take five yrs. to complete the facility at a total cost of P4,800,000. The
total contract price for the construction of the facility is P5,800,000.
During 2013 R.Ramos incurred P1,250,000 in construction costs related to the
project. Because of rising material and labor costs, the estimated cost to
complete the contract at the end of 2013 is P3,750,000. LUE was billed and
paid 30% on the contract price in acordance with the contract agreement.
Required:
Prepare schedules to compute the amount of grss profit to the recognized for
the year ended December 31,2013, and the amount to beshown as "cost of
uncompleted contract in excess of related billings" or "billings on
uncompleted contracts in excess of related costs" at December 31, 2013,
under each of the following methods:
(a) Zero Profit Mettohd
(b) Percentage-of-completion method.
Provide supporting computations.

Problems 10-3
PP Construction Company has contracted to buid an office building. The
construction is scheduled to brgin on January 1, 2010, and the estimated time
of completionis Julyy 1, 2013. The building cost is estimated to be
P50,000,000 and this will be billed at P55,000,000. The following data relate
to the construction period.
______________________________________________________________________________
2010
2011
2012
2013
______________________________________________________________________________
Cost to date
P15,000,000
P25,000,000
P35,000,000
P50,000,000

Estimated cost tocomplete

35,000,000 25,000,000 15,000,000 -0Progress billings to date
7,000,000 20,000,000 35,000,000
55,000,000
Cash collected to date
7,000,000 18,000,000 30,000,000
55,000,000
______________________________________________________________________________
Required:
(a) Compute the estimated income for the year 2012 and 2013.
(b) Prepare the necessary journal entries for PP Construction Company for the
year 2012 and 2013.

Problem 10-4
LL Construction Company recognizes income under the percentage-ofcompletion method on its long-term contracts. During 2011, the company
entered in a fixed-price contract to construct a bridge for P15,000,000.
Contract costs incurred and estimated costs to complete the bridge were:
______________________________________________________________________________
CUMULATIVE
ESTIMATED
CONTRACT COSTS INCURRED
COSTS TO COMPLETE
At Dec.31,2011
P1,000,000
P8,000,000
At Dec.31,2012
5,500,000
5,500,000
At Dec.31,2013
10,000,000
2,000,000
______________________________________________________________________________
Required:
(a) Prepare a scheduleto determine the estimated percentage of completion
the end of each year. ( Round percentage to the nearest two decimal points.)
(b) Perpare a schedule to determine the amount of income to be recognized
each year.
(c) Prepare journal entriesto record transactions for 2011 using the
percentage-of-completion method, assuming that LL billed its client
P1,325,000 in 2011 which P1,200,000 has been collected by the end of the
year.

Problems 10-5
GG mall builders was recently awarded a P14,000,000 contract to construct a

shopping mall for Rustan Inc. GG Mall Builders estimates it will take 42
months to complete the contract. The company uses the cost-to-cost method
to estimate profits.
The following information details the actual and estimated costs for the year
2010-2013:
______________________________________________________________________________
YEAR
ACTUAL COST
ESTIMATED COST
CURRENT YEAR
TO COMPLETE
______________________________________________________________________________
2010
P6,500,000
P6,800,000
2011
3,300,000
3,900,000
2012
2,400,000
1,900,000
2013
1,700,000
-0______________________________________________________________________________
Required:
1. Compute the revenue,cost, and gross profit to be recognized for each
years 2010-2013 under the percentage-of-completion method.
2. Give the journal entries for each of the years 2010- 2013 to record the
information from (1).

CHAPTER 11

Problem 11-1
On January 2, 2013, Mr. A. Cion entered into a franchise agreement with
Jolibi, Inc. to sell JOlibi products. The agreement provides of an initial
franchise fee of P20,000,000, payable as follows: P12,000,000 cash to be
paid upon signing of the contract, and the balance in four equal annual
payments every December 31. Mr. A. Cion signs 10% interesr-bearing note for
the balance. The agreement further provides that the franchisor will assist
the franchisee in locating th business site, designing and supervision in the
construction of the building, and trainig of management and employees. The
agreement also provides taht hte franchisee must pay a continuing franchise
fees equal to 5% of its monthly gross sales.
On July 31, 2013, the franchisor completed the initial services required in the
contract at a costs of P2,000,000. The franchisee commenced the business
opertations on November 2, 2013. The gross salesreported by the franchisee

to the franchisor are: November sales, P580,000; and December sssles

P720,000.
Required:
Prepare all entries for 2013 in the books of the franchisor under the following
assumptions:
a. The collection of the note is reasonably assured.
b. the collection f the note is not reasonably assured.

Problem 11-2
On January 5, 2013, Ms. Nancy Lee signed a agreement to operate as a
franchisee of Street Pizza, Inc. for an initial franchise fee of P1,600,000. Of
this amount P600,000 was paid when the agreement ws signed and the
balance payable in five annual pyments of 200,000 beginning December 31,
2013 Ms. Lee signed a non- interest bearing note fo the balance. Ms. Lee's
credit rating indicates that it can borrow money at 20% interestfor a loan of
this type. The present value of an annuity of P1 at 20% for 5 periods is
P2.9906. The contrat includes a continuing francjise feees of 5 % of the
franchisee's gross sales, to be collected monthly.
On November 25, 2013, the franchisor substantially performed the initial
services provided in the contract at a cost of P179,718. The franchise
commenced operations on Decemberis P80,000.
Required: Prepare all entries on the books of the franchisor for 2013:
a. Assuming hte collection of the note is reasonably assured.
b. Assuming the collection of the note is not reasonably assured.

Problem 11-3
Mario's Restaurant Inc. franchises its name to diffferent people in Metro
Manila The franchise agreement requires the frachisee to make an initial
payment of P1,200,000 and sign a P320,000, non-interest bearing note on
the agreement date. The note is to be paid in annual payments of P80,000,
each beginning one year from the agreement date. Current interest rates
are to be 10%. The franchisor agrees to make market studies, find a location,
train the employees,and perform a few other relatively minor services. The
following transactions describe the relationship with Ms. Sunshine, a
franchisee:
2012

July 1 : Entered into franchise agreement.

Sept. 1 : Completed a market study at a cost of P50,000.
Nov.15 : Found suitable location. Service cost, P30,000.
2013
Jan. 10 : Completed training program for employees, cost P50,000.
Feb. 1 : Franchise outlet opened and commenced opertions.
July 1 : Received first annual payment.
Required: Prepare journal entries in the books of Mario's Restaurant, Inc. in
2012 and 2013 to record the above transactions including adjusting entries at
December 31, 2013.

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

Problem 11-5
Ms. Jasmin Sy purchased a franchise from Goldilock, Inc. The franchise
agreement provides an initial franchise fee of P4,500,000, payable as folows:
P1500,000 at the date of signing. The expected date of signing is January 2,
2013. A continuing fee of 2% of gross sales is also to be paidto the franchisor.
Total sales for the year reported by the franchisee amounts to P2,000,000.
Costs associated with the initial franchise fee ar as follows:
(a) Tilte to kitchen equipment, with a cost os P1,500,000,is to be transferred
to the franchisee on the day the agreement is signed. The fair market value

value of the equipment is P1,800,000.

(b) An additional P500,000 fo initial services are incurred on January 18,
2013.
There are no associated continuing costs.
Required:
a. Prepare schedules in good from to determine the timing and amount of
revenues through December 31, 2013.
b. Prepare all journal entries on the books of the franchisor to record the
transactionsfor the first year of the contract.