DE LA SALLE UNIVERSITY

ACCOUNTANCY DEPARTMENT
ADVANCED ACCOUNTING 3 (MODADV3)
First Term 2011-2012
ACCOUNTING PROBLEMS (Part 2)

General Instructions:
1. Read the problems carefully. Answer the requirements and show all necessary computations.
2. For problems requiring calculation of present values, round-off the present value factor to four
decimal places for uniformity.
3. Place your answers in a columnar notebook. Make sure that you have your assignments with
you before coming to class.
UNIT 6. FINANCIAL INSTRUMENTS SPECIAL TOPICS
Problem 32 Issuance and conversion of bonds
On July 1, 2008, Brewster issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds dated July 1 at
an effective annual interest rate (yield) of 12%. Interest is payable every June 30 and December 31. The
bonds are convertible at the investors option into Brewsters common stock at a ratio of 10 shares of common
stock for each bond. It is reliably determined that the bonds effective yield is 16% without the conversion
feature.
On July 1, 2009, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000
shares of Brewsters common stock, which had a fair market value of P105 and a par value of P10at the date
of conversion.
Brewsters accounting year-end is December 31.
Required: Prepare the necessary journal entries in 2008 and 2009.
Problem 33 Issuance and repurchase of convertible bonds
On January 1, 2008, Cai Company issued a 10% convertible bond at par, with a face value of P100,000,
maturing on January 1, 2018. The bond is convertible into ordinary shares of Cai at a conversion price of
P2,500 per share. Interest is payable semi-annually. At date of issue, Cai could have issued non-convertible
debt with a 10-year term bearing an interest rate of 11%.
On January 1, 2011, Cai makes a tender offer to the holder of the convertible debt to repurchase the bond for
P112,000, which the holder accepts. At the date of repurchase, Cai could have issued non-convertible debt
with a 7-year term at an effective-interest rate of 8%.
Required:
1. Prepare the journal entry to record the issuance of the convertible debt on January 1, 2008.
2. Prepare the journal entry to record the repurchase on January 1, 2011.
(Source: Intermediate Accounting, IFRS Edition, Vol, 2 by Kieso, et.al. E16-3, modified)

Problem 34 Mandatorily redeemable preferred shares

Springsteen Co. is the issuer of a tranche of mandatorily redeemable convertible preferred shares that was
issued on the following terms:
Date of issue
Notional amount
Issue price
Coupon rate
Payment of interest
Redemption date

July 1, 2008
P12,000,000
P12,500,000
2% per annum
December 31 and June 30 of each year
June 30, 2013

The prevailing interest rate on pure loan instruments issued by Springsteen Co. on July 1, 2008 is 3% per
annum. The conversion rate is 1 common share for each P1 notional amount of preferred shares.

On December 31, 2010, 50% of the preferred shares was converted into common shares.
Required:
1. Prepare the journal entries for the above transaction for the year ended December 31, 2008.
2. Prepare the journal entries to record the conversion on December 31, 2008.
(Source: Advanced Financial Accounting by Tan, et.al. P8.6, modified)

Problem 35 Non-interest bearing transactions, recognition at fair value

The following are independent situations:
1.

On January 1, 2008, Venetian Tower, Inc. granted P10 million non-interest bearing loan to Tuscan
Tower, Inc., its affiliate (not a parent-subsidiary relationship). The loan will be paid after 5-years.
The market interest for loans with 5-year maturity is 10%.
However, Tuscan Tower repaid P5 million to Venetian Tower on December 31, 2010. The
remaining balance was paid on December 31, 2012.

2.

On January 1, 2008, Venetian Tower, Inc. granted P10 million non-interest bearing loan to Tuscan
Tower, Inc., its subsidiary. The loan will be paid on installment for P2 million every year starting
January 1, 2009 until January 1, 2013. The market interest for loans with 5-year maturity is 10%.

3.

On January 1, 2008, Venetian Tower, Inc. granted a 5-year P1 million non-interest bearing loan to
its employee. The market interest for personal loans with 5-year maturity is 10%. The loan was
repaid at maturity.

4.

On January 1, 2008, Venetian Tower, Inc. sold a land to Tuscan Tower, Inc. for P10 million. As
agreed, Tuscan will pay the purchase price at the end of five years. The market interest for loans
with 5-year maturity is 10%. Assume that the fair value of the land is the same as the present value
of P10 million loan. The entire purchase price was actually paid on December 31, 2010.

5.

On January 1, 2008, Venetian Tower, Inc. leased a land to Tuscan Tower, Inc. for 5 years for P5
million annually, payable in advance every January 1. This is accounted for as an operating lease.
Tuscan Tower paid rental of P5 million for the first year and refundable security deposit of P1
million on January 1, 2008. The market interest rate for a similar five-year loan is 10%. The
security deposit was returned on December 31, 2012.

Required: Prepare journal entries in the books of both the lender and the borrower (except for no. 3 where
entries should be prepared only for the lender) at the time of grant of the loan, end of first year and at the time
of settlement. Assume that the interest rate remains the same for the entire term of the loan.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 2

UNIT 7. DERIVATIVES AND HEDGING ACTIVITIES

Problem 36 Identifying a hedge
Kanesville Company is still new at using derivatives to hedge business risk. Kanesville has entered into five
derivative agreements in an attempt to hedge five specific items. The derivatives, and associated items, are
briefly described here:
a. US dollars futures contract. If the Philippine peso value of US$100,000 is higher than P5.4 million
on July 31, Kanesville must pay the difference; if the Philippine peso value is less than P5.4
million, Kanesville receives the difference. This futures contract is intended to hedge a
US$100,000 account payable due to be paid on July 31
b. Copper forward contract. If the price of copper is more than P60.25 per pound on August 31,
Kanesville must pay the difference (multiplied by 100,000 pounds); if the price is less than P60,
Kanesville receives the difference. This forward contract is intended to hedge Kanesvilles
expected purchases of copper (as a raw material) for the month of August.
c. Japanese yen futures contract. If the Philippine peso value of Y5 million is higher than P2.6 million
on July 15, Kanesville receives the difference; if the Philippine peso value is less than P2.6 million,
Kanesville must pay the difference. This futures contract is intended to hedge Kanesville expected
purchase of some equipment from a Japanese company on July 15 for Y2.5 million.
d. Interest rate swap. If the interest rate on March 31 of next year is more than 12%, Kanesville
receives the difference (on a principal amount of P110 million); if the interest rate is less than 12%,
Kanesville must pay the difference. This interest rate swap is intended to hedge a P110 million
variable-rate loan. The loan is expected to be fully repaid this year on May 10.
e. Call option on Williams Company stock. If the price of a share of Williams Company stock is more
than P60 on September 24, Kanesville receives the difference (multiplied by 25,000 shares); if the
price of the stock is less than P60, the option is worthless and will be allowed to expire. This call
option is intended to hedge an investment in 25,000 shares of William Company stock.
Required: For each of these five pairs (derivate and associated item), state whether the derivative serves as
an effective hedge. Explain your answer.
th

(Source: Intermediate Accounting by Stice, et.al., 16 ed., P19-39, modified)

Problem 37 Swap
On January 1, 2008, Kindall Company received a 5-year, P2,000,000 loan with interest payments occurring at
the end of each year and the principal to be repaid on December 31, 2012. The interest rate for the first year is
the prevailing market rate of 10%, and the rate in each succeeding year will be equal to the market interest rate
on January 1 of that year. In conjunction with this loan, Kindall enters into an interest rate swap whereby, in
each year of the loan, starting 2009, Kindall will receive a swap payment (based on P2,000,000) if the January
1 interest rate is more than 10% and will make a swap payment if the rate is less than 10%. The swap
payments are made at the end of the year.
On January 1, 2009, the interest rate is 12%, and on December 31, 2009, the interest is 9%.
Required: Prepare all journal entries necessary on Kindalls books in 2008 and 2009 to record this loan and the
interest rate swap. For purposes of estimating future swap payments, assume that the current
interest rate is the best forecast of the future interest rate.
th

(Source: Intermediate Accounting by Stice, et.al., 16 ed., P19-40, modified)

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 3

Problem 38 Forward contract

Megan Rose Cuisine operates a chain of fine seafood restaurants. The company makes very detailed longterm planning. On December 1, 2008, Megan Rose determined that it would need to purchase 1,000,000
pounds of deluxe fish on January 1, 2010. Because of the fluctuations in the price of deluxe fish, on October 1
the Company negotiated a special forward contract with Angela Investment Bank for Megan Rose to purchase
1,000,000 pounds of deluxe fish on January 1, 2010, at a price of P16 million. The price of deluxe fish was
P16 per pound on October 1. Angela Investment Bank has a staff of financial analysts who specialize in
forecasting fish prices. These analysts are predicting a drop in worldwide fish prices between October 1, 2008,
and January 1, 2010.
On December 31, 2008, the price of a pound of deluxe fish is P20. On December 31, 2009, the price of a
pound of deluxe fish is P11. The appropriate discount rate throughout this period is 10%.
Required:
1. Prepare all journal entries necessary on Megan Roses books in 2008, 2009, and 2010 to record the
forward contract and the purchase of the fish. For purposes of estimating future settlement payments
under the forward contract, assume that the current price of fish is the best forecast of the future
price.
2. Determine the balances of Forward contract (derivatives) as of December 31, 2008, 2009 and 2010,
and the gain or loss charged directly to profit and loss and to other comprehensive income for the
year ended December 31, 2008, 2009 and 2010.
th

(Source: Intermediate Accounting by Stice, et.al., 16 ed., P19-41, modified)

Problem 39 Futures contract

Yokochan Bakeries specializes in making cakes, cookies, and other pastries out of rice flour which they grind
themselves. Yokochan anticipates purchasing 40,000 kilograms of rice on January 31, 2009. On November 1,
2008, Yokochan entered into a futures contract with Sagara Growers to hedge against the risk of rising prices
of rice.
The spot prices of rice and the prices of rice futures contracts are as follows:
Spot price of rice per
kilogram
November 1, 2008
December 31, 2008
January 31, 2009

P50
55
57

Futures price of rice per

kilogram for January 31,
2009 delivery
P52
54
58

Yokochan purchases the rice and settles the futures contract on January 31, 2009.
Required:
1. Prepare the necessary entries on Yokochans books from November 1, 2008 to January 31, 2009
on the above transactions.
2. Determine the balances of Futures contract (derivatives) as of December 31, 2008, and the gain or
loss charged directly to profit and loss and to other comprehensive income for the year ended
December 31, 2008.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 4

Problem 40 Option
On March 1, 2008, East West Airlines, Inc. purchased an at-the-money call option on 100,000 barrels of jetfuel oil with an exercise price of P40 per barrel for delivery on May 31, 2008. East West paid a premium of
P200,000 for the call option. The following are the quoted spot prices for the jet-fuel oil and the call option
from March 1, 2008 to May 31, 2008:
Spot price of
Jet-fuel oil
March 1, 2008
March 31, 2008
April 30, 2008
May 31, 2008

P40 per barrel

P42 per barrel
P45 per barrel
P44 per barrel

Price of May 31, 2008

Call Option
P2 per barrel
P3 per barrel
P6 per barrel
P4 per barrel

The option contract was to hedge against the forecasted purchase of 100,000 barrels of jet-fuel oil on May 31,
2008. The option contract was an effective hedge as the critical terms matched and the time value of the
option contract was excluded from the hedging relationship. The contract would be settled on a net basis.
East West financial year-end is April 30.
Required:
1. Calculate the time value and the intrinsic value of the option contract on March 31, 2008, April 30,
2008 and May 31, 2008.
2. Prepare the necessary entries relating to the above transaction.
(Source: Advanced Financial Accounting by Tan, et.al. P9.2, modified)

Problem 41 Embedded derivatives

On January 1, 2008, Chamomile Corporation issued a purchase order (PO) to import inventories worth
US$100,000 from Orchard Singapore, Inc. The inventories are expected to be received on March 1, 2008.
The spot exchange rate on January 1, 2008 is US$1 = P42 and the forward rate on March 1, 2008 is US$1 =
P45.
The inventories were delivered on March 1, 2008. The invoice was issued on the same date. The spot
exchange rate on said date was US$1 = P44. On March 31, 2008, the spot exchange rate was US$1 = P43.
The entire purchase price was paid on April 20, 2008 when the spot exchange rate was US$1 = P46.
Chamomiles functional currency is in Philippine peso while Orchards functional currency is in Singaporean
dollars. Chamomile adopts a fiscal year accounting period which ends every March 31.
Required:
1. Prepare all the journal entries from January to April 2008. Use the invoice date approach.
2. Assume that Chamomile purchased equipment with an estimated useful life of 5 years. The
equipment is available for use on March 1, 2008. Chamomile depreciates the equipment on a
monthly basis. Prepare all the journal from January to April 2008. Use the invoice date approach.
3. Why is there a need to bifurcate the contract (i.e., to split the contract into a purchase and derivative
transaction)?

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 5

Problem 42 Hedge of net investment

On January 1, 2006, Cambell acquired an 80% interest in the capital stock of Systech, Ltd., a foreign company
with paid-up capital of FC2,000,000 and retained earnings of FC300,000. Subsequent to the date of
acquisition, the FC began to depreciate against the peso and on January 1, 2008, Cambell entered into a 12month forward contract to sell FC2,240,000 to hedge the investment.
The equity section of Systech,Ltd.s balance sheet as of December 31, 2007 is as follows:
Capital stock
Retained earnings

FC2,000,000
800,000

The exchange rates on certain dates are as follows:

Spot rate
(P/FC)
January 1, 2008
March 31, 2008
June 30, 2008
September 30, 2008

December 31, 2008

Forward rate

P1.800
P1.785
P1.765
P1.750

P1.780
P1.770
P1.755
P1.742

Cambell designated the forward contract as a hedge of the net investment in Systech and excluded the time
value of the forward contract from the hedging relationship. Ignore discounting.
Cambells financial year-end is September 30. Cambells functional currency is the Philippine peso.
Required:
1. Prepare all the journal entries from January to September 2008.
2. Show the effects of the transactions in the financial statements of Cambell Corporation for the
year ended September 30, 2008.
(Source: Advanced Financial Accounting by Tan, et.al. P9.15, modified)

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 6

UNIT 8. INCOME TAXES

Problem 43 Identification of temporary differences
The following independent items may have different accounting and tax treatment:
a.

During 2008, Brendan Fraser, Inc. sold goods on account for US$125,000. The foreign
exchange rate at the time of sale is US$1 = P40. On December 31, 2008, the purchase price
was not yet paid and the foreign exchange rate is US$1 = P41.60. The corporate income tax
rate is 40%.

b.

On December 31, 2008, Almond Sansrival Corporations inventories of P2,500,000 are valued
at their net realizable values in its balance sheet in accordance with PAS 2. However, these
inventories cost P2,700,000. The corporate income tax rate is 30%.

c.

Chocolate Cake, Inc. has investment in club shares of P1,200,000, at cost, as of December 31,
2008. However, said investment has a fair value of P1,500,000 as of the same date. As
required under PAS 39, the investment should be valued at fair value. The sale of club shares
is subject to capital gains tax of 5% for the first P100,000 gain, and 10% in excess of the first
P100,000 gain. (Gain means selling price less cost.)

d.

On December 31, 2008, Antonio Banderas, Inc. tested its trademark for impairment. The
trademark, with an indefinite life, was acquired on July 1, 2007 for P500,000. As of December
31, 2008, the trademark had a recoverable amount of P350,000. No impairment loss was
recognized in prior years. The corporate income tax rate is 25%.

e.

On January 1, 2008, Harry Potter, Inc., a manufacturing company, acquired a building for
P2,000,000. The said building is held for rent only. Harry Potter adopts the fair value model in
accounting for investment property pursuant to PAS 40. As of December 31, 2008, the building
had a fair value of P2,200,000. However, for income tax purposes, the building is depreciated
using the straight line method for 10 years. The gain that may be realized by Harry Potter if the
building is sold will be subject to the 20% corporate income tax. Also, the related depreciation
is tax deductible for purposes of computing the 20% corporate income tax.

f.

On January 1, 2008, Crunchy Crme bought an equipment for P1,000,000. The equipment
has a useful life of 5 years and it is depreciated using the straight-line method for financial
accounting purposes. However, said expenditure and the related depreciation will never be
deductible for income tax purposes. The corporate income tax rate is 25%.

g.

Lord of the Rings, Inc. has investment in associate of P5,000,000. This is accounted for under
the equity method. This investment account consists of P4,000,000 original cost of investment
and the remaining P1,000,000 pertains to the share in income of the associate. When dividend
is distributed, it is subject to 10% income tax.

h.

Sharon Stone, Inc. recognized a goodwill from acquisition of a company for P1,000,000 in
2007. No impairment loss was recognized in 2007. However, on December 31, 2008, it was
determined that the cash generating unit where goodwill belongs is impaired. Impairment loss
of P400,000 was recognized as of December 31, 2008.

Required:
Identify which of the above items are temporary differences, and which are permanent differences. For
temporary differences:
1. Determine the asset or liability account affected in the balance sheet.
2. Determine the difference between the carrying amount of the asset/liability in the balance sheet and
the tax base as of December 31, 2008.
3. Determine the amount of deferred tax asset or deferred tax liability to be recognized as of December
31, 2008.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 7

Problem 44 Deferred tax assets and liabilities

Healthy Water Company, Inc. is has a service concession agreement with the government to supply water in
South Luzon. As such, it adopts IFRIC 12. The following are the carrying amounts of some of the assets and
liabilities of Healthy Water as of December 31, 2008, which may have deferred income tax implication:
1.

Cash - P1,000,000. All cash are denominated in Philippine peso. There are no cash in foreign
currency.

2.

Accounts receivables P2,500,000. This is net of allowance for doubtful accounts. The beginning
balance of allowance for doubtful accounts amounts to P400,000, additional allowance recognized
during the year amounts to P300,000 while accounts written-off amounts to P200,000. Accounts
written-off are tax deductible. The allowance for doubtful accounts is expected to be written-off equally
in 2009 and 2010.

3.

Intangible assets P5,500,000. These assets are recognized at fair values under IFRIC 12 and
amortized using the straight-line method over the concession period of 12 years. Amortization during
the year amounts to P500,000. However, for income tax purposes, no intangible assets are
recognized, instead, fixed assets are recognized. The beginning balance of fixed assets recognized for
income tax purposes amounts to P3,500,000 (net of depreciation using the straight-line method).
These assets have remaining useful life of 7 years from the beginning of 2007. There were
acquisitions of fixed assets during the year of P500,000 having useful life of 5 years. Healthy Water
recognized full-year depreciation in the year of acquisition for income tax purposes.

4.

Concession fees payable P3,219,732. These represent the concession fees to be paid by Healthy
Water to the Water Regulatory Agency. This represents the present value of the liability using the 12%
discount rate and it is expected that this will be paid at the end of 2017. The amount already considers
the interest expense recognized for the year. However, for income tax purposes, the concession fees
are recognized as deductible expense when paid. There were no concession fees paid this year.

5.

Pension payable P2,000,000. This represents the amount still payable to the retirement fund and
this is recognized pursuant to PAS 19. During the year, additional pension expense recognized
amounts to P500,000 and contributions amount to P300,000. For income tax purposes, pension
expense are tax deductible when actually contributed to the pension plan. Healthy Water expects to
contribute the liability equally over 5 years.

6.

Provision for potential tax liability P800,000. This represents the potential tax exposures arising from
certain transactions. Additional provisions recognized during the year amounts to P300,000. No taxes
were settled arising from these provisions. However, these provisions are non-tax deductible even if
these are already settled with the tax authorities

Water Company has financial income before income tax of P500,000. The enacted tax rates are as follows:
2007 to 2009
2010 to 2011
2012 and onwards

30%
35%
40%

Required:
1. Determine the taxable income, current tax expense, deferred income tax asset/liability, deferred tax
expense/benefit of Healthy Water for the year ended/as of December 31, 2008.
2. Prepare all the necessary journal entries for 2008.
3. Prepare a partial income statement beginning with "Income before income taxes" for the year ended
December 31, 2008.
4. Prepare a partial balance sheet as of December 31, 2008.
5. Prepare a disclosure in the financial statements under the following forms:
a. Numerical reconciliation between tax expense (income) and the product of accounting income
multiplied by the tax rate.
b. Numerical reconciliation between the average effective tax rate and the applicable tax rate.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 8

Problem 45 Realizability of deferred tax assets; net operating loss carryover

Squid Corporation was incorporated on January 1, 2008. It started its commercial operations on March 1,
2008. For the year ended December 31, 2008, it has sales of P20,000,000, cost of sales of P17,000,000,
selling and administrative expenses of P5,000,000, and other income of P1,000,000. Selling and
administrative expenses include non-deductible entertainment expense of P500,000 while other income
includes interest income exempt from tax of P200,000.
The companys balance sheet as of December 31, 2008 showed equipment at revalued amount of P1,500,000,
accounts receivable of P1,200,000, loans payable of P2,000,000 and warranty liability of P500,000. The
following are the related information:
1. Equipment, which has 5 years remaining life, is subjected to straight line depreciation based on
revalued amount for financial accounting purposes but the basis for tax purposes is the
historical cost (book value for tax purposes based on historical cost is P1,000,000).
2. Accounts receivable is valued net of allowance for impairment of P200,000. It is expected to
be written-off in 2009 (60%) and 2010 (40%).
3. Loans payable pertains to US$50,000 loans which was obtained during the year when the
foreign exchange rate was US$1 = P42. The entire amount of the loan will be settled in 2013.
4. Squid expects to pay 90% of warranty liability in 2009 and the remaining 10% in 2010.
The corporate income tax rate 25% in 2008, 30% in 2009, 35% in 2010, and thereafter. The tax loss incurred
during a taxable year can be carried over in the next three subsequent years.
Squid expects that it will be incurring tax loss of P500,000 in 2009 and P200,000 in 2010 (after considering all
temporary differences, including the reversals mentioned above, but before tax loss carryovers). However, it
expects to derive taxable income of P800,000 in 2011 (after considering all temporary differences, including
the reversals mentioned above, but before tax loss carryovers).
Required:
1. Determine the taxable income (loss), current tax expense, deferred income tax asset/liability, deferred
tax expense/benefit, and unrecognized deferred tax asset for the year ended/as of December 31, 2008.
2. Prepare all the necessary journal entries for 2008.
3. Prepare a partial income statement beginning with "Income before income taxes" for the year ended
December 31, 2008.
4. Prepare a partial balance sheet as of December 31, 2008.
5. Prepare a disclosure in the financial statements under the following forms:
a. Numerical reconciliation between tax expense (income) and the product of accounting income
multiplied by the tax rate.
b. Numerical reconciliation between the average effective tax rate and the applicable tax rate.
1.

Prepare a numerical reconciliation between tax expense (income) and the product of accounting
income multiplied by the tax rate. Show your computations.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 9

Problem 46 Deferred tax assets and liabilities, change in enacted tax rates
Superman Corporation had a financial income before income tax of P500,000 for the year ended December
31, 2008. Dividend income from investment in a domestic corporation of P20,000 was reported as part of
other income and non-deductible entertainment, amusement and representation expense of P10,000 was
reported as part of selling expenses.
The partial balance sheet of Superman with corresponding tax bases is as follows:
Assets

Accounting

Tax Bases

Machinery and Equipment

Cost
Accumulated Depreciation
Accumulated Impairment Loss
Net

P400,000
(200,000)
(50,000)
P150,000

P400,000
(200,000)
-0P200,000

Construction in Progress

P500,000

P420,000

Accounts Receivables
Allowance for Doubtful Accounts
Net

P350,000
(40,000)
P310,000

P350,000
-0P350,000

Only the above accounts resulted into temporary differences for purposes of accounting for deferred income
taxes. The following are the additional information:
a.

Accumulated Impairment Loss

Balance, 1/1,2008
Add: Impairment loss recognized during the year
Balance, 12/31/2008

P 30,000
20,000
P 50,000

Superman expects to dispose the machinery and equipment in 2010.

b.

Construction in Progress
Balance, 1/1/2008
Add: Capital Expenditures
Interest Capitalized under PAS 23
Balance, 12/31/2008

-0420,000
80,000
P500,000

For tax purposes, the interest will be claimed as outright expense in 2008. It is expected that
the asset will be used and depreciated starting 2009 for 10 years. Superman uses the straight
line method of depreciation.
c.

Allowance for Doubtful Accounts

Balance, 1/1/2008
Add: Provision for doubtful accounts
Total
Less: Accounts Written-Off
Balance, 12/31/2008

P 35,000
25,000
P 60,000
20,000
P 40,000

The accounts written-off will be claimed as deduction for income tax purposes in 2008.
The balance of deferred tax asset account as of January 1, 2008 amounts to P19,500. This pertains to the
accumulated impairment loss and allowance for doubtful accounts. This was set-up using the 30% income tax
since the corporate income tax rate is currently 30%. However, with the enactment of the new law, the
corporate income tax rate is increased to 35% beginning January 1, 2009 and onwards.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 10

Required:
1.
2.
3.
4.

Compute Supermans taxable income, current tax expense, deferred tax expense (benefit) for
the year ended December 31, 2008, and deferred tax asset (liability) as of December 31, 2008.
Prepare the journal entries to record income taxes for 2008.
Prepare a partial income statement for Superman beginning with "Income before income taxes"
for the year ended December 31, 2008.
Prepare the following reconciliations:
a. Numerical reconciliation between tax expense (income) and the product of accounting
income multiplied by the tax rate.
b. Numerical reconciliation between the average effective tax rate and the applicable tax rate
(round-off the percentages to the nearest two decimal places).

Problem 47 Net operating loss carryover; adjustments in deferred taxes

Kate Winslet Enterprises, Inc. had a loss before tax of P100,000 for the year ended December 31, 2008, its
first year of operations. The following items were included in the computation of the loss:
Bad-debts expense
Warranty expense

P 20,000
10,000

The bad-debt expense relates to the impairment of accounts receivable with carrying amount of P200,000 as
of December 31, 2008.
Under the current tax law, net operating losses (tax losses) can be carried over in the next three taxable years
as deduction against gross income for purposes of the normal income tax. Kate Winslet expects to realize
taxable income in 2009 and thereafter, and it will be able to utilize the entire 2008 net operating loss (NOL) and
other deductible temporary differences.
On December 31, 2009, Kate Winslet had financial income before tax of P40,000. The following are the
temporary differences:
Bad-debts written-off
Warranty expense
Warranties paid

P 15,000
12,000
8,000

The bad-debt expense relates to the impairment of accounts receivable with carrying amount of P250,000 as
of December 31, 2009.
Kate Winslet is allowed to utilize 2008 NOL as tax deduction in 2009. The unutilized portion can still be carried
over in the next two years. Kate Winslet expects to utilize the balance of the 2008 NOL in 2010.
On December 31, 2010, Kate Winslet incurred a loss before tax of P50,000. The following are the temporary
differences:
Warranty expense
Warranties paid

P 15,000
10,000

Because of adverse business conditions, it does not expect to realize any taxable income for the next five
years. Accordingly, Kate Winslet does not expect benefit from the NOLs and other deductible temporary
differences.
The normal income tax rate is 35%.
Required:
1.
2.

Prepare the journal entries to record the deferred tax assets and income tax expense (benefit), if
any, (including adjustments) from 2008 to 2010.
Prepare partial income statements for Kate Winslet beginning with "Income (loss) before income
taxes" for the years ended December 31, 2008, 2009 and 2010.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 11

Problem 48 Deferred tax assets and liabilities, excess minimum corporate income tax (MCIT) credits
Walsh Trading computed pretax financial income of P220,000 for its first year of operations ended December
31, 2008. However, its gross income amounts to P10,000,000. It is subject to the regular corporate income
tax (RCIT) or the 2% minimum corporate income tax (MCIT), whichever is higher. The RCIT is calculated
based on taxable income while MCIT is calculated based on gross income. If MCIT is higher than RCIT, the
excess of MCIT over RCIT can be carried over as credit against the corporations RCIT liability in the next two
taxable years.
In preparing the income tax return for the year, the tax accountant determined the following differences
between 2008 financial income and taxable income:
(1)
(2)
(3)
(4)

Nondeductible expenses .............................

Nontaxable revenues ...............................
Unrealized foreign exchange gains on loans payable....
Accrued warranty expenses in the books that had not be deductible from
taxable income in 2005 ..

P40,000
14,000
70,000
80,000

The above items affect only the calculation of taxable income but these will not affect the calculation of gross
income.
The unrealized foreign exchange gains are expected to be reported for tax purposes in the following pattern
(partial loan settlement):
2009 ....................................................
2010 ....................................................
2011 ....................................................

P14,000
32,000
24,000
P70,000

The loans payable as of December 31, 2008 amounts to P2,430,000 and it will be settled partially over 5 years
(P500,000 annually).
On the other hand, the future warranty payments are expected to occur in the following pattern:
2009 ....................................................
2010 ....................................................
2011 ....................................................
2012 ....................................................

P14,000
36,000
18,000
12,000
P80,000

The enacted regular corporate income tax rates for this year and the next three years are as follows:
2008 ....................................................
2009 ....................................................
2010 ....................................................
2011 ....................................................
2012 ....................................................

40%
35%
32%
30%
34%

Walsh Trading expects to generate net income in the future in order to benefit from deductible temporary
differences. However, it expects that its MCIT will be higher than RCIT in 2009 while RCIT will be higher than
MCIT in 2010 and onwards. It was estimated that its RCIT will be P50,000 in 2009 and P80,000 in 2010.
Required:
1. Determine the taxable income, current tax expense, deferred income tax asset/liability, deferred tax
expense/benefit of Walsh Trading as of December 31, 2008.
2. Prepare all the necessary journal entries for 2008 in Walsh Trading books.
3. Prepare a partial income statement for Walsh Trading beginning with "Income before income taxes" for
the year ended December 31, 2008.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 12

Problem 49 Excess minimum corporate income tax (MCIT) credits

As of December 31, 2008, Julia Roberts, Inc. had a normal income tax liability of P350,000 and minimum
corporate income tax (MCIT) liability of P500,000. Under the current income tax law, the excess MCIT over
the normal income tax can be carried over as credit against normal income tax in the next three subsequent
years. Julia expects to pay the normal income tax liability in the next three years.
In 2009, the financial performance of Julia was not good brought about by the change in economic conditions.
It had a normal income tax liability of P260,000 and MCIT liability of P450,000. Julia expects to pay MCIT in
2010 and 2011, while it expects to pay the normal income tax of P100,000 in 2012.
Required:
1.
2.

Prepare journal entries to record income taxes, deferred income taxes and payment of income
taxes in 2008 and 2009.
Determine the total income tax expense in 2008 and 2009.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 13

UNIT 9. FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

Problem 50 Restatement of statement of financial position, monetary assets and liabilities
BoConcept, Inc. operates in a hyperinflationary economy. The following are the related balance sheet
accounts at historical cost as of December 31, 2008:
Cash in bank
Accounts receivables
Advances to employees
Advances to affiliates
Inventory, at cost
Prepayments
Property, plant and equipment
Available for sale securities
Patent
Accounts payable
Accrued expenses
Advances from customers
Estimated warranties payable
Finance lease payable
Bonds payable
Deferred tax liability
Common shares
Retained earnings

P 1,300,000
2,500,000
500,000
1,500,000
2,000,000
200,000
1,500,000
500,000
1,100,000
1,000,000
1,200,000
500,000
700,000
2,000,000
3,000,000
600,000
1,000,000
1,000,000

Additional information:
a. Accounts receivables are net of accumulated impairment loss of P200,000. These receivables
pertain to current receivables. The companys average collection period is 30 days.
b. Advances to employees pertain to advances for travel which are subject to liquidation. These
pertain to advances incurred within the last six months.
c. Advances to affiliates are related to the companys intercompany sales. These are paid within 60
days.
d. The inventories are valued at cost. However, its net realizable value as of December 31, 2008 is
P1,800,000. The companys inventory turnover is 30 days.
e. Prepayments include prepaid rentals (P150,000), which will be applied as future rentals, and utility
deposits which are refundable. The prepaid rentals were paid beginning of the year while the utility
deposits were paid beginning of 2006.
f. Property, plant and equipment were acquired on January 1, 2005. Impairment loss was recognized
these year for these assets since the recoverable amount is less than the carrying amount. These
assets were already recognized at recoverable amount.
g. Available for sale securities were purchased on January 1, 2007.
h. Patent has an indefinite life. This was already subjected to impairment test at the end of the year
and no impairment loss was recognized. The patent was acquired on January 1, 2007.
i. Accounts payable pertains to trade purchases within the last 30 days and this is payable within 60
days.
j. Advances from customers were received within the last 30 days and these are refundable at the
end of 2009.
k. Estimated warranties payable were recognized at December 31, 2008 for the warranties that will be
incurred within the next 6 months.
l. Finance lease payable pertains to equipment acquired under finance lease on January 1, 2008.
m. Bonds payable were incurred on January 1, 2007 and payable at the end of 2011.
n. Common shares were issued on December 31, 2005.
The general price index moved as follows:
2004
2005
2006
2007
2008

Advance Accounting 3 (MODADV3)

Accounting Problems

December 31
120
130
160
250
350

First Term 2011-2012

Page 14

Assume that the price index on a year to year increased proportionately over time.
Required:
1. Compute the total monetary assets as of December 31, 2008.
2. Compute the total monetary liabilities as of December 31, 2008.
3. Prepare the statement of financial position as of December 31, 2008 pursuant to PAS 29.
Problem 51 Restatement of income statement
The historical income statement data of Wishbone Company for 2008 are provided below:
Sales
Inventory January 1
Purchases
Inventory December 31
Reversal of impairment loss on patent
Interest income on loans and advances
Selling expenses
Administrative expenses
Pension expense
Impairment loss on fixed assets
Bad debts expense

P5,500,000
350,000
1,000,000
500,000
100,000
125,000
600,000
500,000
300,000
200,000
150,000

The sales are earned and the expenses are incurred evenly throughout the year. The interest income on loans
and advances were not yet collected as of year-end. The beginning and ending inventories were acquired last
week of each year where the price indices are the same as the year-end index. The depreciation pertains to
assets acquired 3 years ago when the price index was 120. The general prices indices are as follows:
January 1, 2008
December 31, 2008
Average price index for 2008

160
230
190

The income rate is 30% and it is payable the subsequent year.

Required: Prepare an income statement for the year ended December 31, 2008 under historical cost and under
PAS 29.
Problem 52 Restatement of statement of financial position, income statement, purchasing power gain or loss
Best Value, Inc. provided the following financial statements based on historical costs as of and for the year
ended December 31, 2008:
Best Value, Inc.
Statement of Financial Position
December 31, 2008
Assets
Cash
Accounts receivable
Allowance for doubtful accounts
Inventories
Land
Building (net of accumulated depreciation)
Equipment (net of accumulated depreciation)
Trademark (net of accumulated amortization)
Investment property
Available for sale securities
Total
Advance Accounting 3 (MODADV3)
Accounting Problems

500,000
750,000
(40,000)
350,000
800,000
960,000
400,000
420,000
200,000
360,000
4,700,000
First Term 2011-2012
Page 15

Liabilities
Accounts payable
Notes payable
Bonus payable
Pension liability
Capital stock
Additional paid-in capital
Retained earnings

500,000
300,000
350,000
400,000
1,500,000
500,000
1,150,000
4,700,000

Best Value, Inc.

Statement of Income and Retained Earnings
For the year ended December 31, 2008
Sales
Cost of sales
Inventory, January 1
Purchases
Goods available for sale
Less: Inventory, December 31
Gross profit
Other income
Increase in fair value of investment property
Gain on sale of scraps and other assets
Total income
Expenses
Selling expenses
Administrative expenses
Depreciation and amortization expense
Interest expense
Income before income tax
Less: Income tax expense
Net Income
Other comprehensive income
Unrealized gain on available for sale securities
Actuarial loss
Comprehensive income
Retained earnings, January 1
Retained earnings, December 31

Advance Accounting 3 (MODADV3)

Accounting Problems

3,500,000

1,900,000
1,600,000

250,000
2,000,000
2,250,000
350,000

75,000
30,000
1,705,000
P

500,000
250,000
240,000
30,000
P
P

70,000
(40,000)
P
P

1,020,000
685,000
205,500
479,500

30,000
509,500
640,500
1,150,000

First Term 2011-2012

Page 16

Additional information:
a. Prices rose evenly throughout the year. The price indices are as follows:
January 1, 2007
P120
December 31, 2007
160
December 31, 2008
190
b. Sales (including scraps and other assets) were earned and expenses were incurred evenly throughout
the year except for depreciation and amortization.
c. Inventories were reported at cost using FIFO. Inventory turnover for 2007 and 2008 is 30 days.
Average price index for the month of December 2007 is 157 and December 2008 is 187.50.
d. Land, building and trademark were acquired in 2006 when the price index was 110.
e. Equipment was acquired on January 1, 2007.
f. Investment property pertains to land held for capital appreciation.
g. Capital stock pertains to shares issued at a premium when the price index was 100.
h. Depreciation and amortization expense consist of the following:
Depreciation on building
P 80,000
Depreciation on equipment
100,000
Amortization of trademark
60,000
i. Interest on notes payable was paid on December 31, 2008.
j. Income tax was paid in January 2009.
k. Balances of certain asset and liability accounts as of January 1, 2008 are as follows:
Cash
P400,000
Accounts receivable
600,000
Allowance for doubtful accounts
(30,000)
Accounts payable
360,000
Notes payable
300,000
Bonus payable
270,000
Required:
1. Compute the gain or loss on purchasing power for the year ended December 31, 2008.
2. Prepare the statement of financial position as of December 31, 2008, statement of comprehensive
income and retained earnings for the year ended December 31, 2008 pursuant to PAS 29.
Problem 53 Restatement of statement of comprehensive income
The Fishburn Company is preparing a statement of comprehensive income for the year ended December 31,
2008 pursuant to PAS 29. Fishburn adopts IFRIC 12 since it has a build-operate-transfer (BOT) contract with
the government for the construction of an expressway. The company recognized intangible assets in its books
for the contract. It was recognized at the time the company entered into the BOT contract with the government.
The expressway was completed on June 30, 2008 and it started operating the said expressway on July 1, 2008.
The general price index as of December 31, 2008 is 250 while the average price index for the year is 200. The
following are the income statement accounts:
Construction revenue
P1,500,000
Toll revenues
2,000,000
Cost of construction
600,000
Direct costs
500,000
Amortization intangible asset
300,000
Selling expenses
500,000
Administrative expenses
400,000
Depreciation expense
200,000
Interest expense
100,000
Increase in fair value of AFS
350,000
Increase in value of investment property
250,000
The toll revenues were earned, construction and other costs, and expenses (except depreciation and
amortization) were incurred evenly throughout the year. The depreciation expense was for assets purchased
when the index was 130 and the interest expense is on bonds issued (at par) when the index was 120. The
price index was 110 when the company entered into a BOT contract with the government. The tax rate is 30%.
Taxes and interest are paid the subsequent year.
Required: Prepare statement of comprehensive income under historical cost and PAS 29.

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 17

UNIT 10. ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS

Problem 54 Journal entries voluntary health and welfare organizations
At the beginning of 2008, the citizens of San Juan created Share Shop, a voluntary health and welfare
organization. Share receives donations of money, nonperishable groceries, and household items from
contributors. The food and household items are distributed free of charge to families on the basis of need.
Share allocates expenses 80% to community service and 20% to management and general services, unless
otherwise noted.
Share has one paid administrator with a yearly salary of P146,000. An accountant donates accounting
services to Share that have a fair value of P9,000 and are allocated to management and general. Work is also
performed by regular volunteers whose services cannot be measured.
A local transit company has provided free warehouse space for the operations of Share Shop. Fair value of
rent for the warehouse is P30,000 a year. Utilities of P18,000 are paid by Share for 2008.
During the year, Share purchased supplies for P3,000. At December 31, 2008, the supplies inventory was
insignificant. Expenses incurred in determining which families were eligible for Shares services and other
accounting and reporting expenses totaled P60,000.
Donated assets for 2008 included nonperishable groceries with a fair value of P600,000 and household items
with a fair value of P400,000. During the year, Share Shop distributed three-fourths of the groceries and half
of the household items. No portion of these distributions was allocated to management and general services.
In addition to the donated assets, Share received cash donations of P100,000 and pledges of P200,000. Share
estimated that 10% of the pledges would be uncollectible. At year-end 2008, P150,000 of the pledges had
been collected. Share estimates that only P10,000 of the remaining pledges will be uncollectible.
The town council of San Juan made a P250,000 grant to Share Shop that will be paid in January 2009.
Required: Prepare summary entries for Share Shop for 2008.
th

(Source: Advanced Accounting by Beams, et.al., 9 ed., P21-2, modified)

Problem 55 Journal entries not-for-profit health care organization

The Fort Collins Health Center is a nongovernmental not-for-profit health care organization. During March
2008, the following occurred:
1.
2.
3.
4.
5.
6.

Gross charges at established rates for services rendered to patients amounted to P1,023,000. The
clinic had contractual adjustments with insurers and Medicare of P300,000. Bad debts are
estimated at 2%.
The health center receives premium revenue from capitation agreements totaling P540,000.
The center also receives revenue from the pharmacy housed in its building for P600,000.
The center paid salaries and wages allocated to functional categories as follows: nursing services,
P350,000; other professional services, P110,000; general services, P100,000; fiscal services,
P20,000; and administrative services, P200,000.
The health center receives a government grant for P120,000. The money must be used for medical
equipment.
Supplies costing P130,000 were purchased during the month, and P67,000 in nursing supplies were
used.

Required: Prepare journal entries to account for these transactions. Include net asset classifications, where
applicable.
th

(Source: Advanced Accounting by Beams, et.al., 9 ed., P21-8, modified)

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 18

Problem 56 Statement of operations not-for-profit health care organizations

The following selected items were taken from the accounts of Hometown Memorial Hospital, a not-for-profit
hospital, at December 31, 2008:
Debits
Administrative services
Contractual allowances
Depreciation
Employee discounts
General services
Loss on sale of assets
Nursing services
Other professional services
Impairment of receivables

P 310,000
400,000
200,000
100,000
290,000
50,000
1,000,000
500,000
150,000

Donated medicines
Income from investment in affiliate
Patient service revenues
Television rentals to patients
Unrestricted donations
Unrestricted income from investments
of endowment funds
Restricted donations for fixed asset purchases
Restricted donations for specific operating purposes

300,000
80,000
2,500,000
50,000
200,000

Credits

270,000
300,000
100,000

Expenses of P80,000 were for purposes for which restricted donations were available. Fixed assets costing
P97,000 were purchased from donations restricted for their purchase.
Required: Prepare a statement of operations for Hometown Memorial Hospital at December 31, 2008.
th

(Source: Advanced Accounting by Beams, et.al., 9 ed., P21-3, modified)

Problem 57 Journal entries and statement of activities not-for-profit college

The following information relates to revenues and expenses for a private not-for-profit college:
Tuition and Fees
Total assessed
Tuition waivers

P 2,000,000
120,000

Appropriations
National government
Local government

800,000
300,000

Auxiliary enterprises
Sales
Expenses

500,000
480,000

Endowment income
Restricted to research
Unrestricted
Private gifts and grants
Restricted to student scholarships
Unrestricted

Advance Accounting 3 (MODADV3)

Accounting Problems

70,000
20,000
300,000
80,000

First Term 2011-2012

Page 19

Expenses
Instruction
2,100,000
Research
100,000
Student services
120,000
Operation of plant
180,000
Scholarships (does not include tuition waivers)
200,000
th

(Source: Advanced Accounting by Beams, et.al., 9 ed., P21-4, modified)

Required: Prepare journal entries and a statement of activities for the college.
Problem 58 Statement of activities nongovernmental not-for-profit organization
The following information was taken from the accounts and records of Community Society, a nongovernmental
not-for-profit organization. The balances are as of December 31, 2008, unless otherwise stated.
Unrestricted support contributions
Unrestricted support membership dues
Unrestricted revenues investment income
Temporarily restricted gain on sale of investment
Expenses education
Expenses research
Expenses fund raising
Expenses management and general
Restricted support contributions
Restricted revenues investment income
Permanently restricted support contributions
Unrestricted net assets, January 1, 2008
Temporarily restricted net assets, January 1, 2008
Permanently restricted net assets, January 1, 2008

P 3,000,000
400,000
83,000
5,000
300,000
2,300,000
223,000
117,000
438,000
22,500
37,000
435,000
5,000,000
40,000

The unrestricted support from contributions was all received in cash during the year. Additionally, the society
received pledges totaling P425,000. The pledges should be collected during 2009, except for the estimated
uncollectible portion of P16,000. The society spent P3,789,000 of restricted resources on construction of a
major capital facility during 2008, and P500,000 of research expenses were for research financed from
restricted donations.
Required: Prepare the statement of activities for the Community Society for 2008.
th

(Source: Advanced Accounting by Beams, et.al., 9 ed., P21-5, modified)

Problem 59 Financial statements not-for-profit organization

The adjusted trial balance of Children Association, a non-for-profit organization, on December 31, 2008, were
as follows:

Cash
Pledges receivable
Bequest receivable
Allowance for doubtful pledges
Interest receivable
Investments, at fair value
Accounts payable and accrued expenses
Deferred revenues
Restricted fund balance
Designated fund balance
Undesignated fund balance

Advance Accounting 3 (MODADV3)

Accounting Problems

Unrestricted Fund
Credit
Debit
40,000
12,000

Restricted Fund
Debit
Credit
9,000
5,000

3,000
1,000
100,000
50,000
2,000

1,000
3,000

12,000
26,000

First Term 2011-2012

Page 20

Contributions revenue
Membership dues revenue
Program service fees revenue
Investment income
Hearing-impaired children's program
expenses
Vision-impaired children's program
expenses
Management and general expenses
Fund-raising expenses
Provision for doubtful pledges
Totals

Unrestricted Fund
Credit
Debit
320,000
25,000
30,000
10,000

Restricted Fund
Debit
Credit
15,000

120,000
150,000
45,000
8,000
2,000
478,000

4,000
1,000
478,000

19,000

19,000

Required: Prepare the financial statements (excluding statement of cash flows) for Children Association as of,
and for the year ended December 31, 2008.
(Source: Advanced Accounting by Guerrero, et.al., 2006 ed., P22-5, modified)

Advance Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

Page 21