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APPLIED

AUDITING
With Comprehensive
Review of Philippine Financial
Reporting Standards (PFRSs)

A guide in applying auditing procedures to specific


accounts of the financial statements.

E READER AND PC.Compatible in Acrobat


TEACHERS MANUAL
2017
Edition

By

DARRELL JOE O. ASUNCION, MBA, CPA


MARK ALYSON B. NGINA, CMA, CPA
RAYMUND FRANCIS A. ESCALA, MBA, CPA
Dear fellow teacher,

This “Teacher’s Manual” should be used solely by the


teacher and for classroom purposes only. This manual
should NOT be reproduced either manually (e.g.,
printing or photocopy) or electronically (e.g., copying or
uploading in the net) without our written consent (or the
publisher’s written authorization).

If you have comments, queries or suggestions, please do


not hesitate to contact us at:
Telephone: 074-2441894
Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286
Mark Alyson B. Ngina – 0915-510-7281
Raymund Francis A. Escala – 0917-715-1226
E Email PC.Compatible
READER ad:ANDappliedauditingnea@gmail.com.in Acrob
at

Thanks and God bless.

Sincerely,

Darrell Joe O. Asuncion, MBA, CPA


Mark Alyson B. Ngina, CMA, CPA
Raymund Francis A. Escala, MBA, CPA
Table of Contents

CHAPTER 5: CASH TO ACCRUAL............................................................................... 4


CHAPTER 6: CORRECTION OF ERRORS............................................................... 19
CHAPTER 8: CASH AND CASH EQUIVALENTS .................................................. 29
CHAPTER 10: LOANS AND RECEIVABLES .......................................................... 52
CHAPTER 12: INVENTORIES .................................................................................... 86
CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT
IN EQUITY SECURITIES ............................................................................................ 117
CHAPTER 15: INVESTMENT IN DEBT SECURITIES ...................................... 133
CHAPTER 16 INVESTMENT IN ASSOCIATE..................................................... 142
CHAPTER 18 PROPERTY, PLANT AND EQUIPMENT................................... 157
CHAPTER 19 WASTING ASSETS........................................................................... 183
CHAPTER 20 INVESTMENT PROPERTY ............................................................ 189
CHAPTER 22AND
E READER ASSETSPC.Compatible
INTANGIBLE..................................................................... in
Acrobat
CHAPTER 23 REVALUATION,195 IMPAIRMENT AND NONCURRENT ASSET
HELD FOR SALE ........................................................................................................... 208
CHAPTER 25 INTRODUCTION TO LIABILITIES............................................. 225
CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING.. 239
CHAPTER 27 LEASE ................................................................................................... 259
CHAPTER 29 SHAREHOLDERS’ EQUITY............................................................ 285
CHAPTER 30 BOOK VALUE AND EARNINGS PER SHARE .......................... 308
CHAPTER 32 STATEMENT OF FINANCIAL POSITION AND
COMPREHENSIVE INCOME ..................................................................................... 320
CHAPTER 33 STATEMENT OF CASH FLOWS................................................... 339
Chapter 5: Cash to Accrual

CHAPTER 5: CASH TO ACCRUAL

PROBLEM 5-1 (Computation of Sales under cash basis)


Accounts receivable/Notes receivable trade/Advances from customers
Beg. balance – AR 200,000 180,000 Balance end - AR
Beg. balance – NR 240,000 170,000 Balance end - NR
Balance end - Advances 40,000 55,000 Beg. balance - Advances
Sales on account 600,000 4,000 Sales ret. and allowance
Recoveries - 2,000 Sales discounts
Collections including
666,000 recoveries
3,000 Write-off
Total 1,080,000 1,080,000

Suggested answer: A

PROBLEM 5-2 Computation of Bad Debts

Allowance for bad debts


Ending balance 40,000 25,000 Beginning balance
Write-off 8,000 21,000 Bad debts expense
E READER AND PC.Compatible in Acrobat 2,000 Recoveries
Total 48,000 48,000

Suggested answer: C

PROBLEM 5-3 (Computation of Purchases)


Accounts Payable / Notes Payable / Advances to Suppliers
Payments 800,000 200,000 Beg. balance - AP
Purchase ret. and allow. 6,000 400,000 Beg. balance - NP
Purchase discount 3,000 68,000 Balance end - Advances
Beg. balance - Advances 50,000 651,000 Purchases (gross)
Balance end – AP 250,000
Balance end – NP 210,000
Total 1,319,000 1,319,000
Suggested answer: A

4
Chapter 5: Cash to Accrual

PROBLEM 5-4 Computation of Cost of Sales

Accounts Payable (AP) / Notes Payable (NP)


Payments 800,000 200,000 Beg. balance - AP
Purchase ret. and allow. 6,000 - Beg. balance - NP
Purchase discount 3,000 859,000 Purchases (gross)
Balance end - AP 250,000
Balance end - NP -
Total 1,059,000 1,059,000

Merchandise Inventory
Beginning balance 400,000 210,000 Ending balance
Net purchases 860,000 1,050,000 Cost of sales
Total 1,260,000 1,260,000
Computation of the net purchases:
Gross purchases on account 859,000
Add cash purchases 10,000
Total 869,000
Less: Purchase returns and allowances 6,000
Purchase discount 3,000
Net purchases 860,000
E READER
Suggested AND
answer: B PC.Compatible in Acrobat

PROBLEM 5-5 (Computation of Income Other Than Sales)


Rent Receivable/Unearned rent income
Beg. Balance - Rent 200,000 250,000 Balance end - Rent
Receivable Receivable
Balance end - Unearned 30,000 90,000 Beg. Balance – Unearned
rent income rent income
Rent Income (squeeze) 770,000 660,000 Collections
Total 1,000,000 1,000,000

Suggested answer: B

PROBLEM 5-6 (Computation of Expenses in General)


Prepaid Rent/Rent payable
Beg. Balance - Prepaid 250,000 Balance end - Prepaid
200,000 Rent
Balance
Salaries end - Accrued 65,000 80,000 Beg. Balance – Rent
Salaries payable
Payments 850,000 785,000 Rent Expense
Total 1,115,000 1,115,000

5
Chapter 5: Cash to Accrual

Suggested answer: C

PROBLEM 5-7 (Computation of Cost of Machine Acquired and Sold)

Question No. 1
Carrying amount of equipment sold 25,000
Add: Accumulated depreciation 15,000
Cost 40,000

Question No. 2
Equipment
Beg. Balance 100,000 120,000 Balance end
Cost of PPE acquired 60,000 40,000 Cost of PPE disposed
(squeeze)
Total 160,000 160,000

Accumulated depreciation
Balance end 18,000 15,000 Beg. Balance
Accumulated depreciation 18,000 Depreciation expense
of PPE disposed 15,000

E READER
Total AND PC.Compatible
33,000 33,000 in Acrobat
SUMMARY OF ANSWERS:
1. D 2. A

PROBLEM 5-8
Question No. 1
Prepaid Insurance
Beg. Balance 7,500 6,000 Balance end
Payments 41,500 43,000 Expenses (squeeze)
Total 49,000 49,000

Question No. 2
Interest Receivable
Beg. Balance 14,500 3,700 Balance end
Income (squeeze) 112,700 123,500 Collections
Total 127,200 127,200

6
Chapter 5: Cash to Accrual

Question No. 3
Salaries payable
Balance end 61,500 53,000 Beg. Balance
Payments 481,000 489,500 Expenses
Total 542,500 542,500

Question No. 4
Accounts receivable trade
Beg. Balance 415,000 550,000 Balance end
Sales 1,980,000 1,845,000 Collections (squeeze)
Total 2,395,000 2,395,000

Question No. 5
Accounts receivable trade
Beg. Balance 415,000 550,000 Balance end
Sales 1,980,000 1,820,000 Collections (squeeze)
25,000 Write-off
Total 2,395,000 2,395,000

E READER AND
Question No. 6 PC.Compatible in Acrobat
Accounts receivable trade
Beg. Balance 415,000 550,000 Balance end
Sales 1,980,000 1,840,000 Collections (squeeze)
Recoveries 20,000 25,000 Write-off
Total 2,415,000 2,415,000

SUMMARY OF ANSWERS:
1. C 2. B 3. C 4. A 5. A 6. B

PROBLEM 5-9
Question No. 1
Accounts/Notes receivable trade
Decrease in A/R 100,000 100,000 Increase in N/R
Sales on account 4,260,000 10,000 Write-off
(squeeze) 4,200,000 Collections
30,000 Sales discounts
20,000 Sales ret. and allow.
Total 4,360,000 4,360,000

7
Chapter 5: Cash to Accrual

Question No. 2
Accounts payable
Cash paid to creditors 2,800,000 200,000 Decrease in Accounts
payable
Purchase discounts 40,000 2,650,000 Gross purchases
(squeeze)
Purchase returns 10,000
Total 2,850,000 2,850,000

Question No. 3
Merchandise inventory
Decrease in Inventory 25,000 40,000 Purchase discounts
Gross purchases 2,650,000 10,000 Purchase returns
2,625,000 Cost of sales (squeeze)
Total 2,675,000 2,675,000

Question No. 4
Rental receivable/Unearned Rent Income
Rental revenue 454,000 14,000 Increase in Rental
(squeeze) receivable
40,000 Decrease in Unearned
E READER AND PC.Compatible in Acrobat rental
400,000 Collections from tenants
Total 454,000 454,000

Question No. 5
Prepaid interest/Interest Payable
Decrease in Prepaid 5,500 114,000 Interest expense
interest (squeeze)
Increase in Interest

Interest paid 8,500


100,000
payable
Total 114,000 114,000

SUMMARY OF ANSWERS:
1. D 2. D 3. A 4. A 5. D

8
Chapter 5: Cash to Accrual

PROBLEM 5-10
Question No. 1
Accounts Receivable/Notes receivable trade
Beg. Balance – A/R 200,000 250,000 Bal. end – A/R
Beg. Balance – N/R 300,000 100,000 Bal. end – N/R
Sales on account 1,000,000 20,000 Sales ret. and allow.
(squeeze) 10,000 Sales discount
1,120,000 Collections
Total 1,500,000 1,500,000

Question No. 2
Accounts payable/Notes payable
Balance end – A/P 25,000 50,000 Beg. Balance – A/P
Balance end – N/P 75,000 100,000 Beg. Balance – N/P
Purchase returns and 650,000 Gross purchases
40,000 (squeeze)
Purchase
allow discount 10,000
Payments 650,000
Total 800,000 800,000

E READERpurchases
AND PC.Compatible
inGross 650,000 Acrobat
Less: Purchase ret and allow 40,000
Purchase discounts 10,000 50,000
Net Purchases 600,000

Question No. 3
Sales 1,000,000
Less: Sales ret and allow 20,000
Sales discounts 10,000 30,000
Net Sales 970,000
Less: Cost of Sales
Merchandise inventory beg. 200,000
Add: Net Purchases
Purchases 600,000
Add: Freight-in -
Gross Purchases 650,000
Less: Purch. Ret and allow 40,000
Purchase discounts 10,000 600,000
Total goods available for sale 800,000
Less: Merchandise inventory, end 100,000 700,000
Gross Income / Gross Profit 270,000
9
Chapter 5: Cash to Accrual

Question No. 4
Prepaid/Accrued Salaries
Beg. Balance -Prepaid 100,000 125,000 Balance end - Prepaid
Salaries Salaries
Balance end - Accrued 50,000 75,000 Beg. Balance - Accrued
Salaries Salaries
Payments 350,000 300,000 Salaries expense
(squeeze)
Total 500,000 500,000

Question No. 5
Accrued rent/Unearned rent
Beg. Balance - Accrued 40,000 Balance end - Accrued
70,000 rent
Balance
rent end - Unearned 40,000 80,000 Beg. Balance - Unearned
rent rent
Rent income (squeeze) 490,000 300,000 Collection of rent
Total 600,000 600,000

SUMMARY OF ANSWERS:
1. A 2. B 3. C 4. B 5. B
E READER AND PC.Compatible in Acrobat
PROBLEM 5-11
Question No. 1
Accounts receivable trade
Beg. Balance 200,000 300,000 Balance end
Recoveries 8,000 20,000 Sales discounts
Sales (squeeze) 1,570,000 1,408,000 Collections including
recoveries (1,498,000-
80,000+20,00-30,000)
50,000 Accounts written-off
Total 1,778,000 1,778,000

Sales 1,570,000
Less: Sales discount 20,000
Net Sales 1,550,000
Question No. 2
Accounts payable trade
Payment (1,210,000- 150,000 Beg. Balance
20,000+30,000) 1,210,000 1,170,000 Purchases (squeeze)
Purchase ret. and allow. 10,000
Balance end 100,000
10
Chapter 5: Cash to Accrual

Total 1,320,000 1,320,000

Purchases 1,170,000
Less: Purchases discount 10,000
Net Purchases 1,160,000

Question No. 3
Merchandise inventory
Beg. Balance 380,000 330,000 Balance end
Net Purchases 1,210,000 Cost of Sales (squeeze)
1,160,000
(1,170,000-10,000)
Total 1,540,000 1,540,000

Question No. 4
Rent Receivable
Beg. Balance 70,000 80,000 Balance end
Rent income (squeeze) 130,000 120,000 Collections
Total 200,000 200,000

E READER AND
Question No. 5 PC.Compatible
Allowance for Doubtful accounts
in Acrobat
Accounts written off 50,000 20,000 Beg. Balance
Balance end 30,000 52,000 Doubtful account
expense(squeeze)
8,000 Recoveries
Total 80,000 80,000

SUMMARY OF ANSWERS:
1. B 2. B 3. B 4. A 5. A

PROBLEM 5-12 Comprehensive


Question No. 1
Accounts receivable trade
Beg. Balance 500,000 750,000 Balance end
Professional fees 5,250,000 5,000,000 Collections
(squeeze)
Total 5,750,000 5,750,000

11
Chapter 5: Cash to Accrual

Question No. 2
Professional Fees (See No. 1) 5,250,000
Less: Rent expense (1.2M +100,000) 1,300,000
Supplies expense
(800,000+300,000-250,000) 850,000
Other operating expense 750,000
Interest expense (1M x 12% x 9/12) 90,000
Depreciation expense (2,500,000/10) 250,000 3,240,000
Net income 2,010,000

Question No. 3
Cash 1,500,000
Accounts Receivable 750,000
Supplies 250,000
Total Current Assets 2,500,000

Question No. 4
Furniture and fixtures 2,500,000
Less: Accumulated Depreciation
(125,000 + 250,000) 375,000
Total Noncurrent Assets 2,125,000

E READER AND
Question No. 5 PC.Compatible in Acrobat
Total current assets (See No. 3) 2,500,000
Total noncurrent assets (See No. 4) 2,125,000
Total Assets 4,625,000

Question No. 6
Notes Payable 1,000,000
Accrued rent 100,000
Accrued interest on notes payable
(1,000,000 x 12% x 9/12) 90,000
Total Current Liabilities 1,190,000

Question No. 7
Total assets (See No. 5) 4,625,000
Less: Total liabilities (See No. 6) – all are
current 1,190,000
Total Owner’s Equity 3,435,000

SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. A 5. A 6. C 7. B

12
Chapter 5: Cash to Accrual

PROBLEM 5-13
Question No. 1
Accounts receivable trade
Beg. Balance 124,000 146,000 Balance end
Sales on account 13,000 Sales discount
(squeeze) 1,535,000 1,500,000 Collections
Total 1,659,000 1,659,000

Sales on account 1,535,000


Add: Cash sales 160,000
Total sales 1,695,000
Question No. 2
Gross sales (see No. 1) 1,695,000
Less: Sales discount 13,000
Net sales 1,682,000

Question No. 3
Accounts Payable
Payments 1,206,000 382,000 Beg. Balance
Balance end 410,000 1,234,000 Purchases (squeeze)
E READER
Total AND 1,616,000 1,616,000
PC.Compatible in Acroba
t
Purchases on account 1,234,000
Add: Cash purchases 120,000
Total Purchases 1,354,000

Question No. 4
Merchandise Inventory
Beg. Balance 186,000 190,000 Balance end
Net purchases 1,354,000 1,350,000 Cost of sales (squeeze)
Total 1,540,000 1,540,000

Question No. 5
Prepaid9,600
G&A/Accrued G&A
Interest
Beg. Balance - Prepaid 8,400Balance end - Prepaid
Interest
Balance end – Accrued 9,000 7,000 Beg. Balance – Accrued
Interest Interest
Payments 204,000 207,200 Expenses
Total 222,600 222,600
13
Chapter 5: Cash to Accrual

Question No. 6
General and administrative expense (see No. 5) 207,200
Depreciation expense 84,000
Warranty expense 6,400
Total operating expense 297,600
Question No. 7
Selling price of land 20,000
Less: Book value of land 16,000
Gain on sale of land 4,000
Question No. 8
Selling Price 12,000
Less Book value
Cost 25,000
Less: Accumulated depreciation 16,000 9,000
Gain on sale of warehouse equipment 3,000
Question No. 9
Selling Price 42,000
Less: Book value
Cost 48,000
Less: Accumulated depreciation 20,000 28,000
Gain on sale of boiler 14,000
E READER AND PC.Compatible in Acrobat
Question No. 10
Net Sales 1,682,000
Less: Cost of Sales 1,350,000
Gross Profit 332,000
Less: Operating expenses 297,600
Gain on sale (14,000+3,000+4,000) 21,000
Net income 55,400

SUMMARY OF ANSWERS:
1. B 2. C 3. D 4. A 5. B
6. A 7. A 8. C 9. B 10. A

PROBLEM 5-14 Comprehensive


Question No. 1
Accounts receivable trade
Beg. Balance 150,000 200,000 Balance end
Sales (squeeze) 800,000 10,000 Sales returns
740,000 Collections
Total 950,000 950,000

14
Chapter 5: Cash to Accrual

Question No. 2
Sales on account 800,000
Add: Cash sales 100,000
Total sales 900,000
Less: Sales returns and allowances 10,000
Net sales 890,000
Less: Cost of sales (squeeze) 390,000
Gross profit (200,000/40%) 500,000

Merchandise inventory
Beg. Balance 190,000 220,000 Balance end
Net Purchases (squeeze) 420,000 390,000 Cost of Sales
Total 610,000 610,000

Question No. 3
Accounts Payable trade
Payments (squeeze) 470,000 230,000 Beg. Balance - Accounts
payable
Purchase returns and 428,000 Gross purchases
8,000 (420,000+8,000)
Balance end – Accounts 180,000
E READER AND PC.Compatible in Acrobat
allowances
payable
Total 658,000 658,000

Question No. 4
Total payment of Accounts payable and admin expenses 518,000
Less: Payment of Accounts payable 470,000
Payment of admin expenses 48,000

Question No. 5
Payment of admin expenses 48,000
Divided by: Percentage of cash expenses to total admin
expense 80%
Total admin expenses 60,000
Add: Selling expenses 200,000
Total selling and administrative expense 260,000

Question No. 6
Total administrative expenses 60,000
Less: Payment of administrative expense 48,000
Non-cash administrative expenses 12,000
Less: Depreciation for building
(440,000 x 60% x 5% x 9/12) 9,000
15
Chapter 5: Cash to Accrual

Depreciation for furniture and fixtures 3,000


Divided by: Number of months used over 12 months 6/12
Annual depreciation 6,000
Divided by: Depreciation rate 10%
Cost of Furniture and Fixtures (no residual value) 60,000

SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. A 5. C 6. A

PROBLEM 5-15
Question No. 1
Cash Receipts:
From customers 360,000
From issue of ordinary shares 100,000
From bank loan 100,000 560,000
Cash disbursements:
Purchase of inventory 300,000
Rent 15,000
Salaries 30,000
Utilities 5,000
Insurance 3,000
E READER equipmentin AND
PC.Compatible
Purchase of
Acrobat
393,000 and furniture
40,000
Cash 167,000

Question Nos. 2 and 3


Current assets
Cash 167,000
Inventories 100,000
Prepaid rent (1,000 x 3) 3,000
Total current assets (No. 2) 270,000
Noncurrent assets
Property, plant and equipment 40,000
Less accumulated depreciation 4,000 36,000
Total assets (No. 3) 306,000

Question No. 4
Accounts payable 20,000
Utilities payable 1,000
Loans payable 100,000
Interest on loans payable (100,000 x 12% x 9/12) 9,000
Total current liabilities 130,000

16
Chapter 5: Cash to Accrual

Question No. 5
Ordinary shares 100,000
Retained earnings (net income) 176,000
Shareholders’ equity 176,000
SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. D 5. A

PROBLEM 5-16
Question No. 1
Notes receivable – December 31 210,000
Accounts receivable – December 31 950,000
Collection of notes and accounts 2,950,000
Note receivable discounted 200,000
Total 4,310,000
Less: Notes receivable – January 1 200,000
Accounts receivable – January 1 740,000 940,000
Sales on account 3,370,000

Question No. 2
Notes payable – December 31 580,000
Less: Note payable – bank 300,000
E READER ANDPC.Compatible in
Notes payable– trade 280,000
Acroba
t
Accounts payable – December 31 750,000
Payment of notes and accounts 2,100,000
Total 3,130,000
Less: Notes payable – January 1 750,000
Accounts payable – January 1 600,000 1,350,000
Purchases on account 1,780,000

Question No. 3
Equipment – January 1 1,000,000
Add: Acquisition 280,000
Total 1,280,000
Less: Equipment – December 31 1,200,000
Depreciation 80,000

Question No. 4
Interest accrued on note issued to bank (300,000 x 12% x 10/12) 30,000
Interest expense 30,000

Question No. 5
Volks Company
Income Statement
Year ended December 31, 2016
17
Chapter 5: Cash to Accrual

Sales 3,370,000
Cost of sales:
Inventory – January 1 1,600,000
Purchases 1,780,000
Goods available for sale 3,380,000
Less: Inventory – December 31 1,500,000 1,880,000
Gross income 1,490,000
Expenses:
*Expenses 820,000
Depreciation 80,000
**Loss on sale of investment 50,000
***Loss on note receivable discounted 10,000
Interest expense 30,000 990,000
Net income 500,000

*Expenses paid 790,000


Add: Prepaid expenses – January 1 120,000
Accrued expenses – December 31 50,000
Total 960,000
Less: Prepaid expenses – December 31 100,000
Accrued expenses – January 1 40,000 140,000
Expenses 820,000
E READER AND PC.Compatible in Acrobat
**Sales price 250,000
Less: Cost of investment sold 300,000
Loss on sale of investment ( 50,000)

***Loss on note receivable discounted (200,000 – 190,000) 10,000

OR
Retained earnings – December 31 600,000
Add: Dividends 400,000
Total 1,000,000
Less: Retained earnings – January 1 500,000
Net income 500,000

SUMMARY OF ANSWERS:
1. A 2. A 3. C 4. C 5. D

18
Chapter 6: Correction of Errors

CHAPTER 6: CORRECTION OF ERRORS

PROBLEM 6-1 Income Statement and SFP Errors


Questions Nos. 1-6
2016 2017
RE, end RE, end
Net Workin of the Net Workin of the
income g capital year income g capital year
Unadjusted
balances 200,000 180,000 200,000 160,000 260,000 360,000
1 - - - - - -
2 - - - - - -
Adjusted
balances 200,000 180,000 200,000 160,000 260,000 360,000

Questions No. 7
Assuming errors were discovered in 2016
ADJUSTING ENTRIES Debit Credit
1) Miscellaneous income 25,000
Rent income 25,000

2) Notes payable 28,000


E READER AND PC.Compatible 28,000
Accounts payable
in Acrobat
Assuming errors were discovered in 2017
ADJUSTING ENTRIES Debit Credit
1) No entry

2) No entry

Assuming errors were discovered in 2018


ADJUSTING ENTRIES Debit Credit
1) No entry

2) No entry

SUMMARY OF ANSWERS:
1. A 2. B 3. A 4. C 5. C 6. C

19
Chapter 6: Correction of Errors

PROBLEM 6-2 Counterbalancing Errors


Questions Nos. 1-6
2016 2017
Net Workin Net Workin
income g capital R/E income g capital R/E
Unadjusted
balances 200,000 180,000 200,000 160,000 260,000 360,000
1 (15,000) (15,000) (15,000) 15,000 -
2 20,000 20,000 20,000 (20,000) -
3 6,000 6,000 6,000 (6,000) -
4 (7,500) (7,500) (7,500) 7,500 -
Adjusted
balances 203,500 183,500 203,500 156,500 260,000 360,000

Question No. 7
A. Errors were discovered in 2016
ADJUSTING ENTRIES Debit Credit
1) Interest expense 15,000
Interest payable 15,000
2) Interest receivable 20,000
Interest income 20,000
3) Prepaid insurance 6,000
Insurance expense6,000
E READER
4) AND PC.Compatible
Rent revenue
7,500
in Acrobat
Unearned rent revenue 7,500
B. Errors were discovered in 2017
Assuming errors are discovered when the cash flows related to the
transactions were processed and books are still open
ADJUSTING ENTRIES Debit Credit
1) Retained earnings 15,000
Interest expense 15,000
2) Interest income 20,000
Retained earnings 20,000
3) Insurance expense 6,000
Retained earnings 6,000
4) Retained earnings 7,500
Rent revenue 7,500
When books are already closed, no necessary adjusting entries to be
made.
C. Errors were discovered in 2018
No necessary adjusting entries to be made.
SUMMARY OF ANSWERS:
1. C 2. B 3. C 4. C 5. B 6. C
20
Chapter 6: Correction of Errors

PROBLEM 6-3 Counterbalancing Errors


Questions Nos. 1-6
2015 2016
Net Workin Net Workin
income g capital R/E, end income g capital R/E, end
Unadjusted
balances 200,000 180,000 200,000 160,000 260,000 360,000
1 (60,000) (60,000) (60,000) 60,000 - -
2 80,000 80,000 80,000 (80,000) - -
3 (20,000) (20,000) (20,000) 20,000 - -
Adjusted
balances 200,000 180,000 200,000 160,000 260,000 360,000

Question No. 7
A. Errors were discovered in 2016
ADJUSTING ENTRIES Debit Credit
1) Purchases 60,000
Accounts payable 60,000
2) Accounts receivable 80,000
Sales 80,000
3) Cost of sales 20,000
Inventory 20,000
E READER AND PC.Compatible in Acrobat
B. Errors were discovered in 2017
Assuming errors are discovered when the cash flows related to the
transactions were processed and books are still open
ADJUSTING ENTRIES Debit Credit
1) Retained earnings 60,000
Purchases 60,000
2) Sales 80,000
Retained earnings 80,000
3) Retained earnings 20,000
Inventory, beginning 20,000
If books are already closed, no necessary adjusting entries to be made.

C. Errors were discovered in 2018


No necessary adjusting entries to be made.

SUMMARY OF ANSWERS:
1. C 2. B 3. C 4. B 5. C 6. B

21
Chapter 6: Correction of Errors

PROBLEM 6-4 Noncounterbalancing Errors


Questions Nos. 1-6
2016 2017
RE, end RE, end
Net Workin of the Net Workin of the
income g capital year income g capital year
Unadjusted
balances 200,000 180,000 200,000 160,000 260,000 360,000
1. (30,000) (30,000) (30,000) (6,000) (36,000) (36,000)
2. 20,000 20,000 20,000 10,000 30,000 30,000
3. 12,000 - 12,000 - - 12,000
4. 150,000 - 150,000 (50,000) - 100,000
5. (12,000) - (12,000) - - (12,000)
6. (15,000) - (15,000) 5,000 - (10,000)

Adjusted
balances 325,000 170,000 325,000 119,000 254,000 444,000

Question No. 7
A. Errors were discovered in 2016
ADJUSTING ENTRIES Debit Credit
1) Insurance expense 30,000
Prepaid insurance 30,000
2) Unearned rent income 20,000
Rent incomePC.Compatiblein
E READER AND
20,000Acroba
t
3) Accumulated depreciation 12,000
Depreciation expense 12,000
4) Building improvements 200,000
Repairs expense 200,000
Depreciation expense 50,000
Accumulated depreciation 50,000
5) Other income 20,000
Accumulated depreciation 48,000
Gain on sale 8,000
Building 60,000
6) Repairs expense 20,000
Building 20,000
Accumulated depreciation 5,000
Depreciation expense 5,000
B. Errors were discovered in 2017
ADJUSTING ENTRIES Debit Credit
1) Retained earnings 30,000
Insurance expense 6,000
Prepaid insurance 36,000
22
Chapter 6: Correction of Errors

2) Unearned rent income 30,000


Retained earnings 20,000
Rent income 10,000
3) Accumulated depreciation 12,000
Retained earnings 12,000
4) Building improvements 200,000
Retained earnings 200,000
Depreciation expense 50,000
Retained earnings 50,000
Accumulated depreciation 100,000
5) Retained earnings 12,000
Accumulated depreciation 48,000
Building 60,000
6) Retained earnings 20,000
Building 20,000
Accumulated depreciation 10,000
Retained earnings 5,000
Depreciation expense 5,000
C. Errors were discovered in 2018
E READER ANDADJUSTINGENTRIES
PC.Compatible
Debit in
CreditAcroba
t
1) Retained earnings 36,000
Prepaid insurance 36,000
2) Unearned rent income 30,000
Retained earnings 30,000
3) Accumulated depreciation 12,000
Retained earnings 12,000
4) Building improvements 200,000
Retained earnings 200,000
Depreciation expense 50,000
Retained earnings 100,000
Accumulated depreciation 150,000
5) Retained earnings 12,000
Accumulated depreciation 48,000
Building 60,000
6) Retained earnings 20,000
Building 20,000
Accumulated depreciation 10,000
Retained earnings 10,000
23
Chapter 6: Correction of Errors

SUMMARY OF ANSWERS:
1. D 2. A 3. D 4. A 5. A 6. D

PROBLEM 6-5 Comprehensive


Questions Nos. 1-3
Effects of error in
Net income Working
2015 2016 Capital
1) MI over, NI over 10,000 (10,000)
MI under, NI under (8,000) (8,000)
2) Purchases over, NI under (20,000) 20,000
(40,000) (40,000)
3) Sales over, NI over 20,000 (20,000)
70,000 70,000
4) Expenses over, NI under (80,000)
Depreciation exp under, NI over 20,000
5) Other income over 20,000
*Loss under, NI over 5,000
Adjustment (45,000) 32,000 22,000
Computation of loss:
Selling Price 20,000
Less: Book value
E READER AND PC.Compatible
Cost
40,000 in Acroba
t
Less: Accumulated depreciation 15,000 25,000
Loss on sale (5,000)
Question No. 4
Effect of errors to Retained Earnings in 2016
Understatement to 2015 net income 45,000
Overstatement to 2016 net income 32,000
Net understatement to 2016 retained earnings 13,000
Questions No. 5
ADJUSTING ENTRIES Debit Credit
1) Retained earnings, beg 10,000
Merchandise inventory, beg 10,000
Merchandise inventory, end 8,000
Cost of Sales 8,000
2) Purchases 20,000
Retained earnings 20,000
Advances supplier 40,000
Purchases 40,000
3) Retained earnings, beg 20,000
Sales 20,000
24
Chapter 6: Correction of Errors

Sales 70,000
Advances customers 70,000
4) Depreciation expense 20,000
Improvements 100,000
Accumulated depreciation 40,000
Retained earnings 80,000
5) Accumulated depreciation 15,000
Retained earnings, beg 25,000
Equipment 40,000
SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. A 5. C

PROBLEM 6-6 Comprehensive


Questions Nos. 1-5
12/31/2
2015 2016 016
Net Workin Net Workin
Income g capital Income g capital R/E
Ending Inventory 2015
understated, NI (6,000) (6,000) 6,000 - -
understated
Ending Inventory 2016
E READER AND
overstated, NI overst
10,000
in Acrobat
10,000
10,000
Depreciation
ated exp. 2015
overstated, NI (11,000) - - - (11,000)
understated
Depreciation exp. 2016
overstated, NI (7,000) - (7,000)
understated
Accrued expense
understated, NI 4,500 4,500 (4,500) - -
overstated 2015
Accrued expense
understated, NI 7,500 7,500 7,500
overstated 2016
Prepaid expense
understated, NI (5,000) (5,000) 5,000 - -
understated 2015
Prepaid expense
understated, NI (12,000) (12,000) (12,000)
understated 2016
Accrued revenues
understated, NI (3,000) (3,000) (3,000)
understated 2016
Deferred revenues
understated, NI 1,200 1,200 (1,200) - -
overstated 2015
Total (16,300) 5,300 800 2,500 (15,500)
25
Chapter 6: Correction of Errors

SUMMARY OF ANSWERS:
1. D 2. D 3. A 4. A 5. C

PROBLEM 6-7

Note to professor:
Item letter b - On December 31, “f” should be December 31, 2016.
Item letter e - Additional industrial robots were acquired at the beginning of
20X0 (should be 2015).

Adjusting entries:
a) Prepaid Insurance (₱35,000 / 5 x 2) 14,000
Insurance Expense (₱35,000 / 5 x 1) 7,000
Retained Earnings (₱35,000 / 5 x 3) 21,000
b) Retained earnings, beginning 25,000
Merchandise Inventory, beginning 25,000
c) Retained earnings, beg 15,500
Commission expense 15,500
d) This is not an error, rather it is a
E READER AND PC.Compatible in Acrobat
change in accounting estimate.
e) Equipment 100,000
Accumulated depreciation
(₱100,000/10 x 2) 20,000
Retained earnings 80,000
Depreciation expense (₱100,000/10) 10,000
Accumulated depreciation 10,000

Question No. 5
Item a 21,000
Item b (25,000)
Item c (15,500)
Item d -
Item e 80,000
Net adjustment to retained earnings (E) 60,500

SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. B 5. (E)

26
Chapter 6: Correction of Errors

PROBLEM 6-8
Net
Income CA NCA CL RE
Unadjusted
balances 200,000 1,570,400 1,365,600 636,000 300,000
1. Advtg exp
over, NI under 50,000
2. Advances rec.
as sales
2016 60,000
2017 (100,000) 100,000 (100,000)
3. Advances rec.
as purchases
2016 (50,000)
2017 80,000 80,000 80,000
4. Gain
understated 64,000 64,000
Cost under (336,000)
Accumulated
depreciation 400,000
Depr. Over, NI
under 13,600 13,600 13,600
5. Rent revenue
E READER AND PC.Compatible
20,000 inunder
(60,000) Acroba
60,000
t
6. Bad debts
exp under
(5% x 480K)-
16,000) (8,000) (8,000) (8,000)
7. Purchases
under 20,000
EI under 20,000
8. Ins. Exp.
Under, NI over 15,000 15,000
Adjusted
balances 344,600 1,662,400 1,443,200 696,000 424,600

SUMMARY OF ANSWERS:
1. C 2. C 3. D 4. A 5. D

27
Chapter 8: Cash and Cash Equivalents

CHAPTER 8: CASH AND CASH EQUIVALENTS

PROBLEM 8-1 Cash and Cash Equivalents


Current account at Metrobank 1,000,000
Payroll account 250,000
Petty cash fund (₱2,000 in currency) 2,000
Postal money order 15,000
Traveler’s check 25,000
Treasury bills, due 3/31/2018 (purchased 12/31/2017) 100,000
Treasury warrants 150,000
Undelivered check 100,000
Company’s postdated check 50,000
Stale check issued 25,000
Total cash and cash equivalents (E) 1,717,000

PROBLEM 8-2 Cash and Cash Equivalents


Reported cash and cash equivalents 6,325,000
Certificate of deposits with maturity of 120 days (500,000)
Postdated check (125,000)
Adjusted cash and cash equivalents P5,700,000

E READER AND PC.Compatible in Acrobat


Suggested answer: A

PROBLEM 8-3 Cash and Cash Equivalents


Bills and coins on hand ₱105,560
Checking Account Balance in Bank of Philippine Island 44,000
Money order 1,600
Petty cash (₱4,000 - ₱1,650) 2,350
Traveler’s check 44,800
Total ₱198,310
Suggested answer: (E)

PROBLEM 8-4 Cash and Cash Equivalents


Cash on hand ₱ 80,000
Checking account No. 143 - BPI 200,000
Checking account No. 155 - BPI (30,000)
*Securities classified as cash equivalents 3,600,000
Checking account No. 155 - BPI ₱ 3,850,000
*Breakdown of securities classified as cash equivalents
Date Maturity
Securities: Acquired Date Amount
120-day Certificate of Deposit 12/10/2016 01/31/2017 P 600,000
BSP-Treasury Bills (No.2) 10/31/2016 01/20/2017 1,000,000
28
Chapter 8: Cash and Cash Equivalents

Money Market Funds 11/21/2016 02/10/2017 2,000,000


Suggested answer: A

PROBLEM 8-5 Cash and Cash Equivalents


Bank cheque account P 58,400
Bank savings account (collectible immediately) 23,440
Cash 10,000
Treasury bonds – maturing in 2 months 8,500
Cash and cash equivalents P 100,340
Suggested answer: B

PROBLEM 8-6 Cash and Cash Equivalents


Petty cash fund (70,000-15,000-5,000) 50,000
Current account – Metro Bank (4,000,000+100,000) 4,100,000
Cash and cash equivalents P4,150,000
Suggested answer: C

PROBLEM 8-7 Effective Interest Rate


E READER AND
Question No. 1 PC.Compatible in Acrobat
Let X = Principal amount of the loan
Principal X
Less: Compensating balance 5%X
Add: Current balance 50,000
Amount needed P3,375,000
X-.05X+50,000 = 3,375,000
.95X = 3,375,000-50,000
.95X/.95 = 3,325,000/.95
X = 3,500,000

Question No. 2
Annual interest payment (3,500,000 x 12%) 420,000
Interest income on the loan proceeds in the
compensating balance [3.5M-3,375,000) x 4%] 5,000
Net interest 415,000
Divide by loan proceeds (3,500,000-175,000) 3,375,000
Effective interest rate 12.30%
Suggested answers:
1. C 2. C

29
Chapter 8: Cash and Cash Equivalents

PROBLEM 8-8 Petty Cash Fund

Requirement No. 1: Working Paper for the Petty Cash Fund


Petty Cash Count Sheet
January 3, 2017; 9:00 AM
Denomination Quantity Total
Bills ₱200 10 ₱ 2,000
100 20 2,000
20 40 800
Coins 10 10 100
5 9 45
1 804 804
.25 1,410 352.50
.10 1,520 152
.05 810 40.5
Total Bills and Coins ₱ 6,258
Checks for Deposits:
Maker Date Payee Amount
W. Ally, Cashier 12/28/17 ABC Company 500
I.O.U's Date Amount
E READER AND 12/19/17
A. Braham, janitor PC.Compatible
250 in Acrobat
R. Tica, clerk 12/20/17 150
P. Du, Bookkeeper 12/22/17 200
Total 600
Vouchers:
Payee Date Account charged Amount
J. Cruz, messenger 12/14/17 Advances to employees 125.00
Cid Bookstore 12/15/17 Supplies 150.00
Dalin Liner 12/19/17 Freight-out 192.00
Bureau of Posts (stamps) 12/20/17 Supplies 300.00
A. Bala, carpenter 12/21/17 Repairs 450.00
Total 1,217.00
Bills and coins ₱ 6,258
Checks for deposit 500
I.O.U’s 600
Vouchers paid 1,217
Unused stamps 50
Total Petty Cash Accounted 8,625
Less: Petty cash Accountabilities 12,600
Petty Cash Shortage (3,975)

30
Chapter 8: Cash and Cash Equivalents

Petty cash accountabilities


Petty cash imprest balance 12,000
Unclaimed payroll 600
Petty cash accountabilities 12,600
Acknowledgment
I hereby acknowledge that the above petty cash fund items were counted in my
presence and the same were returned to me intact. I further acknowledge a petty cash
short of three thousand nine hundred seventy-five (₱3,975). I have no other fund
accountabilities.
W. Ally
Petty Cash Custodian

Requirement No. 2
ADJUSTING ENTRIES Debit Credit
1) Employee advances 600
Petty cash fund 600
2) Expenses 1,217
Office supplies 50
Petty cash fund 1,267
3) Cash short or over 3,975
E READERPettycash
AND fund PC.Compatible
3,975 in Acroba
t
4) Cash short or over 3,975
Petty cash fund 3,975

Requirement No. 3
Bills and coins ₱ 6,258
Checks for deposit 500
Total Petty Cash Fund ₱ 6,758

PROBLEM 8-11 Bank Reconciliation


Oct. 31 Receipts Disb Nov. 30
Unadjusted bank bal 18,005 17,709 25,620 10,094
Erroneous bank credit (500) (500)
DIT: October 1,790 (1,790)
November 3,600 3,600
OC: October (6,681) (6,681)
Nov. (760+1,868) 2,628 (2,628)
13,114 19,019 21,567 10,566
Unadjusted book bal 11,534 18,269 21,575 8,228
Credit memo Oct. 1,600 1,600
Nov. 750 750
31
Chapter 8: Cash and Cash Equivalents

NSF-Nov 665 (665)


BSC: Oct (20) (20)
Nov 22 (22)
35 (35)
Check No. 148
overstated
disbursement (1,000) 1,000
Check No. 150
understated
disbursement 270 (270)
13,114 19,019 21,567 10,566
SUMMARY OF ANSWERS:
1. B 2. A 3. B 4. D 5. A

PROBLEM 8-12 Deposit in Transit


Deposit in transit, beg P 50,000
Add: Book debits for the month P 400,000
Less: CM recorded this month 5,000
Error – check received (Jan) 36,000
Error – check issued (Jan) 27,000
Add: Error – check received (Feb) 16,000 348,000
E READER AND PC.Compatible in
Total 398,000 Acrob
at
Less: Bank debits for this month P 360,000
Less: CM for this month 6,000
Erroneous bank credit - Feb 2,500
Erroneous bank charge - Jan 1,000 350,500
Deposit in transit, end P 47,500
Suggested answer: A

PROBLEM 8-13 Outstanding Checks


Outstanding checks, beg (squeeze) P 12,880
Add: Book credits for the month P 85,800
Less: Error in recording 1,800
Service charge recorded 30 83,970
Total 96,850
Less: Bank debits for this month P 97,650
Less: NSF check returned 2,300
DM for this month 3,000 92,350
Outstanding checks, end P 4,500
Suggested answer: A

32
Chapter 8: Cash and Cash Equivalents

PROBLEM 8-14 Proof of Cash


Question No. 1
Outstanding checks, beg. 100,000
Add: Checks issued 2,500,000
Total 2,600,000
Less: Checks paid by the bank 2,200,000
Outstanding checks, end 400,000

Question No. 2
Deposits in transit, beg 300,000
Add: Deposits made 1,800,000
Total 2,100,000
Less: Deposits acknowledged by the bank 1,600,000
Deposits in transit, end 500,000
31-May Receipts Disb. 30-Jun
Unadjusted bal-bank 2,600,000 *2,190,000 **2,410,000 2,380,000
Deposit in transit-May
31 300,000 (300,000)
-June 30 500,000 500,000
Outstanding checks-
May 31 (100,000) (100,000)
E READER AND PC.Compatible in (400,000)
-June 30 Acrobat 400,000
(60,000)
Erroneous bank credit (60,000)
Erroneous bank charge 40,000 (40,000)
Adjusted balances 2,780,000 2,350,000 2,650,000 2,480,000
*(1,600,000+40,000+550,000)
**(2,200,000+60,000+50,000+100,000)
31-May Receipts Disb. 30-Jun
Unadjusted bal-book 2,190,000 ***2,400,000 2,500,000 2,090,000
Bank service charge-
May 31 (10,000) (10,000)
-June 30 50,000 (50,000)
CM for collection-May
31 600,000 (600,000)
-June 30 550,000 550,000
NSF checks for June 30 100,000 (100,000)
Adjusted balances 2,780,000 2,350,000 2,650,000 2,480,000
***(1,800,000+600,000)

SUMMARY OF ANSWERS:
1. A 2. B 3. A 4. A 5. A

33
Chapter 8: Cash and Cash Equivalents

PROBLEM 8-15 Proof of Cash


Question No. 2
Outstanding checks, beg. 150,000
Add Checks issued
Book disb. 1,500,000
Less DM last mo 110,000
Error last mo. C T M
Under of CD -
Over of CR - 1,390,000
Total 1,540,000
Less checks issued
Bank disb. 1,300,000
less DM this mo 75,000
Error last mo. C T M
Under of CD -
Erroneous B Cr-LM 45,000
Erroneous B CH-TM 30,000 1,150,000
Outstanding checks, end 390,000

Deposits in transit, beg 200,000


Add deposits made
E READER AND PC.Compatible in Acrobat
Book receipts
Less: CM last month
1,300,000
125,000
Error last mo. C T M
Under of CR (21K-12K) 9,000
Over of CD 1,166,000
Total 1,366,000
Less: Deposits acknowledged by the bank
Bank receipts 1400000
Less: CM this month 150,000
Error last mo. C T M
Under of CR
Erroneous B CH-LM 20,000
Erroneous B Cr-TM 17,000 1,213,000
Deposits in transit, end 153,000

BANK 31-May Receipts Disb. 30-Jun


Unadjusted bal-bank 1,250,000 1,400,000 1,300,000 1,350,000
Deposit in transit-May 31 200,000 (200,000)
-June 30 153,000 153,000
Outstanding checks-May 31 (150,000) (150,000)
-June 30 390,000 (390,000)
Erroneous bank credit-May
31 (45,000) (45,000)
-June 30 (17,000) (17,000)
34
Chapter 8: Cash and Cash Equivalents

Erroneous bank charge-


May 31 20,000 (20,000)
-June 30 (30,000) 30,000
Adjusted balances 1,275,000 1,316,000 1,465,000 1,126,000
BOOK 31-May Receipts Disb. 30-Jun
Unadjusted bal-book 1,251,000 1,300,000 1,500,000 1,051,000
NSF-May 31 (110,000) (110,000)
-June 30 75,000 (75,000)
CM for collection-May 31 125,000 (125,000)
-June 30 150,000 150,000
Under of CR-May 9,000 (9,000)
Adjusted balances 1,275,000 1,316,000 1,465,000 1,126,000
SUMMARY OF ANSWERS:
1. C 2. D 3. C 4. D 5. A 6. D

PROBLEM 8-16 Proof of Cash


Question No. 1
Beg. Bal., 7/1 P 128,384
Add: Cash receipts for July 1,364,858
Cash receipts for Aug. 1,839,744
Total P3,332,986
E READER AND PC.Compatible in
Less: Cash disbursement for July
1,330,882 Acrobat
Cash disbursement for Aug. 1,712,892
Bank reconciliation item 750
Unadjusted balance P 288,462
Question No. 2
Outstanding check, Aug. 31 P 67,122
Add: Checks paid by the bank
Bank debits except serv. charge P1,702,830
Less: Erroneous bank charge 1,166
DM on Interest on note 4,950 1,696,714
Total P1,763,836
Less: Checks issued by the company
this August 1,712,892
Outstanding check, July 31 P 50,944

Questions No 3 to 5
BANK 31-Jul Receipts Disb. Aug. 31
Unadjusted balances 180,250 1,830,752 *1,702,918 308,084
Outstanding checks
July 31 ( 50,944) ( 50,944)
August 31 67,122 ( 67,122)
Deposit in transit
July 31 32,844 ( 32,844)
35
Chapter 8: Cash and Cash Equivalents

August 31 41,836 41,836


Erroneous bank charge - - ( 1,166) 1,166
Adjusted Balances 162,150 1,839,744 1,717,930 283,964
(*1,702,830 + 88)

BOOK 31-Jul Receipts Disb. Aug. 31


Unadjusted balances P162,360 P1,839,744 **P1,713,642 P288,462
Error in recording check
no. 216 taken up as
P1,930 but should be
P1,390 (1,930-1,390) 540 540
DM for int. on note 4,950 ( 4,950)
Bank service charge
July 31 ( 52) ( 52)
August 31 88 ( 88)
NSF for July 31 ( 698) - ( 698) -
Adjusted balances P162,150 P1,839,744 P1,717,930 P283,964
**(1,712,892+750)
SUMMARY OF ANSWERS:
1. A 2. C 3. A 4. B 5. A

PROBLEM 8-17 Proof


of Cash
E READER AND
Question No 1 PC.Compatible in Acrobat
Outstanding check
Check Nos. 144 P 1,500
149 8,000
150 12,000
Total P 21,500
Alternatively, it may also be computed as follows:
Outstanding check, beg P 7,000
Add: Checks issued 75,000
Total P 82,000
Less: Checks paid by the bank
Bank Debits P 113,000
Less: DM for this month
NSF checks (10,000+40,000) 50,000
Bank service charge 2,000
Error Correction 500 60,500
Outstanding checks, end P 21,500
Question No 2
Unadjusted rec. per bank P 171,500
Deposit in transit:
November 30 (11,000)
December 31 20,000

36
Chapter 8: Cash and Cash Equivalents

Error correction (500)


NSF check, no entry on the books when returned
and redeposited ( 40,000)
Adjusted balance P 140,000
Question No 3
Unadjusted disbursement, per bank P 113,000
Outstanding checks
November 30 (7,000)
December 31 21,500
Error correction (500)
NSF check, no entry on the
books on the returned and redeposit ( 40,000)
Adjusted balance P 87,000
Question No 4
Unadjusted bank bal. P 127,500
Deposit in transit
November 30
December 31 20,000
Outstanding checks
November 30
December 31 ( 21,500)
E READER AND PC.Compatible in Acroba
Adjusted bal.
No 5
P126,000

t
Question
Zero, adjusted bank and book balance on December 31 is the same.

PROOF OF CASH
Nov. 30 Receipts Disb. Dec. 31
Unadjusted bank balance 69,000 171,500 113,000 *127,500
Deposit in transit
November 30 11,000 (11,000)
December 31 *20,000 20,000
Outstanding checks
November 30 (7,000) (7,000)
December 31 21,500 (21,500)
Error correction (500) (500)
NSF check, no entry on the
books on the return and
redeposit (40,000) (40,000)
Adjusted bal. 73,000 140,000 87,000 126,000
* (69,000+171,500-113,000)
** (18,000+2,000)
Nov. 30 Receipts Disb. Dec. 31
Unadjusted book balance 66,000 113,800 85,000 94,800
Credit memo for note
collected
37
Chapter 8: Cash and Cash Equivalents

November 30 8,800 (8,800)


December 31 35,000 35,000
Bank service charge
November 30 (1,800) (1,800)
December 31 2,000 (2,000)
Adjusted bal. 73,000 140,000 87,000 126,000
SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. B 5. A

PROBLEM 8-18 Proof of Cash


Question No. 1
Outstanding checks, beg P 16,250
Add: Checks issued this month
Book disbursements (squeeze) P128,750
Less: DM recorded this month 2,500 126,250
Total 142,500
Less: Checks paid by the bank P 133,750
Erroneous bank charge 3,750 130,000
Outstanding checks, end P 12,500

Question No. 2
ANDbeg PC.Compatible Pin
E READERin transit,Deposit 12,500Acroba
t
Add: Deposits made by the company 152,500
Total 165,000
Less: Deposits acknowledged by the bank 145,000
Deposit in transit, end P 20,000

Question No. 3
Unadjusted cash in bank balance per ledger P 37,500
Add: Under-footing of cash receipts 2,500
Total 40,000
Less: Unrecorded bank service charges
(3,250 +1,500-2,500) 2,250
Adjusted cash in bank balance, 12/31 P 37,750

Question No. 4
Bank service charges per
bank statement in December P 3,250
Less: Bank service charge in December
recorded in December
Total BSC recorded in the books Dec P 2,500
Less: BSC in Nov. recorded in Dec. 1,500 1,000
Unrecorded BSC charge in December P 2,250

38
Chapter 8: Cash and Cash Equivalents

Question No. 5
Unadjusted cash in bank, November (squeeze) P 16,250
Add: Book Receipts (152,500 - 2,500) 150,000
Total 166,250
Less: Book disbursements 128,750
Unadjusted cash in bank, December P 37,500

Unadjusted cash in bank, November (squeeze) P 16,250


Less: BSC in November 1,500
Adjusted cash in bank, December P 14,750

SUMMARY OF ANSWERS:
1. C 2. D 3. C 4. D 5. B

PROBLEM 8-19 Proof of Cash


Question No. 1
Outstanding checks, beg (squeeze) P 8,000
Add: Checks issued this month
Book disbursements P 148,000
Less: DM recorded this month 2,500 145,500
Total 153,500
Less: Bank disbursements
P 150,000
E READER AND PC.Compatible in Acroba
Add: Paid out in currency
2,000
t
Less: NSF redeposited 3,000
DM for this month 1,500 147,500
Outstanding checks, end P 6,000
Question Nos. 2 to 5
BANK Sept. 30 Receipts Disb. Oct. 31
Unadj. balance - bank 100,000 200,000 150,000 150,000
Undeposited collections:
September 30 5,000 (5,000)
October 31 7,000 7,000
Outstanding checks:
September 30 (8,000) (8,000)
October 31 6,000 (6,000)
Paid out in currency 2,000 2,000
Adjusted balances 97,000 201,000 147,000 151,000

BOOK Sept. 30 Receipts Disb. Oct. 31


Unadj. balance - book 91,500 196,000 148,000 139,500
Customer’s notes
collected:
September 30 8,000 (8,000)
October 31 13,000 13,000
Bank service charge:
39
Chapter 8: Cash and Cash Equivalents

September 30 (2,500) (2,500)


October 31 1,500 1,500
Adjusted balances 97,000 201,000 147,000 151,000
SUMMARY OF ANSWERS:
1. B 2. A 3. A 4. A 5. A

PROBLEM 8-20 Proof of Cash


Question No. 1
Account No. 143: Bank Book
Unadjusted balances P1,000,000 P1,099,400
Deposit in transit *80,000
Misplaced check ( 20,000)
Outstanding check (**60,000)
Undelivered check 15,000
Note charged by the bank - ( 74,400)
Adjusted balance P1,020,000 P1,020,000
*(100,000 - 20,000, Misplaced check)
**(75,000 - 15,000, Undelivered check)

Question No. 2
Total Outstanding checks:
E READER AND PC.Compatible
Account No.14360,000 in Acrobat
*Account No.144 1,860,000
Total outstanding check P 1,920,000

*Outstanding check for Account No. 144 is computed as follows:


Outstanding checks, beg P 250,000
Add: Checks issued this month
Book Credits P3,500,000
Less: BSC November 10,000 3,490,000
Total P 3,740,000
Less: Checks paid by the bank
Bank Debits P2,000,000
Less: BSC December 20,000
NSF check 100,000 1,880,000
Outstanding checks, end P1,860,000

Question Nos. 3 to 4
December
Nov. 30 Receipts Disb. Dec. 31
Unadjusted bank balance 2,200,000 1,000,000 2,000,000 1,200,000
Deposit in transit:
November 30 90,000 (90,000)
December 31 **240,00 240,000

40
Chapter 8: Cash and Cash Equivalents

0
Outstanding check:
November 30 (250,000) (250,000)
December 31 1,860,000 (1,860,000)
Erroneous bank charge -
November 20,000 (20,000)
Adjusted balances 2,060,000 1,130,000 3,610,000 (420,000)

Unadjusted book
balance 1,980,000 1,420,000 3,500,000 (100,000)
Bank service charge:
November 30 (10,000) (10,000)
December 31 20,000 (20,000)
Unrecorded collections -
November 30 90,000 (90,000)
Uncollected customer's
note already recorded
as cash receipt (200,000) (200,000)
NSF - December 31 100,000 (100,000)
Adjusted balances 2,060,000 1,130,000 3,610,000 (420,000)

**Deposit in transit, beg P 90,000


E READER AND PC.Compatible in Acrobat
Add: Deposit made by the co. this month
Book Debits P1,420,000
Less: Unrecorded collection 90,000
Customer’s note recorded as
cash receipts 200,000 1,130,000
Total P1,220,000
Less: Deposits acknowledged by the bank
Bank Credits P1,000,000
Less: Erroneous bank charge 20,000 980,000
Outstanding checks, end P 240,000
Question No. 5
Adjusted balances:
Account No. 143 P1,020,000
Account No. 144 ( 420,000)
Total adjusted balances P 600,000
SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. B 5. C

PROBLEM 8-21 Proof of Cash


Question No. 1
RCBC Account Book Bank
Unadjusted balance P 165,000 P 125,000
41
Chapter 8: Cash and Cash Equivalents

Credit memo for note collected 6,000


Bank service charge (1,000)
Deposit in transit 60,000
Outstanding checks (25,000+20,000) (45,000)
Unrecorded disbursement ( 30,000) -
Adjusted balance P 140,000 P 140,000
Question Nos. 2-3
Equitable PCI Bank Book Bank
Unadjusted bal. (squeeze) P 62,000 P 93,000
Credit memo for note coll. 10,000
Bank service charge ( 2,000)
Deposit in transit (15,000+20,000+50,000*) 85,000
Outstanding checks ( 28,000)
Unrecorded transfer (30,000+50,000*) 80,000 -
Adjusted balance P 150,000 P150,000
*fund transfer No. 4 (Included both as unrecorded transfer and deposit in
transit)
Question No. 4
Outstanding checks:
RCBC Account (25,000+20,000) P 45,000
Equitable PCI Bank 28,000
E READER AND PC.Compatible in Acroba
Total outstanding checks
No. 5
P 73,000

t
Question
Fund transfer No. 1 is recorded in the disbursing book during December while it
only cleared in the disbursing bank in January.
SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. B 5. B

PROBLEM 8-22 Proof of Cash


BOOK Jan. 31 Receipts Disb Feb. 28
Unadjusted balances-books 200,000 150,000 80,000 270,000
Credit Memo-January 9,000 (9,000) - -
Credit Memo-February - 13,000 - 13,000
BSC check-January (100) - (100) -
BSC check-February - - 150 (150)
Check of the company issued in 700 - - 700
January was mutilated and
returned by the payee. A
replacement check was issued.
Both checks were entered in the
Check register but no entry was
made to cancel the mutilated
check, P700.
42
Chapter 8: Cash and Cash Equivalents

The company issued a stop - (1,200) (1,200) -


payment order to the bank in
February for check issued in
February which was not
received by the payee. A new
check was written and recorded
in the Check register in
February. The old check was
written off by a journal entry
also in February, P1,200.
Adjusted balances 209,600 152,800 78,850 283,550

BANK Jan. 31 Receipts Disb Feb. 28


Unadjusted balances-bank 206,600 159,000 88,650 276,950
Deposit in transit-January 10,000 (10,000) - -
Deposit in transit-February - 11,000 - 11,000
Outstanding checks-January (4,200) - (4,200) -
Outstanding checks-February - - 1,800 (1,800)
Erroneous bank credit-January (6,000) - (6,000) -
Erroneous bank credit-February - (4,000) - (4,000)
Erroneous bank charge-January 3,200 (3,200) - -
Erroneous bank charge- - - (1,400) 1,400
E READER AND
February
Adjusted balances 209,600 152,800
in Acrobat
78,850
283,550
SUMMARY OF ANSWERS:
1. D 2. C 3. C 4. A 5. C

PROBLEM 8-23 Computation of Cash Shortage


Question No. 1
Unadjusted bank bal. P 225,400
Less: Outstanding checks (8,434+4,300+
6,524+ 9,551.50+4,577+5,961) (39,347.50)
Add: Undeposited receipts 35,000
Adjusted bank balance P221,052.50

Question No. 2
Unadjusted book bal. P242,310.50
Credit memo for notes collection 30,000
Credit memo for int. 900
Balance (cash accountability) P273,210.50

Question No. 3
Adjusted bank bal. (Cash accounted) P221,052.50

43
Chapter 8: Cash and Cash Equivalents

Less: Cash in bank bal. (cash accountability) 273,210.50


Shortage (P52,158.00 )
SUMMARY OF ANSWERS:
1. B 2. D 3. B

PROBLEM 8-24 Computation of Cash Shortage


Question No. 1
Unadjusted bank bal. P 42,400
Outstanding checks ( 11,500)
Undeposited collections 5,000
Adjusted bank balance P 35,900

Question No. 2
Unadjusted book bal. P 46,500
Credit memo proceeds clean draft 900
Debit memo for bank service charge ( 100)
Balance (cash accountability) P 47,300

Question No. 3
Adjusted bank bal. (Cash accounted) P 35,900
Cash in bank bal. (cash accountability) 47,300
E READER AND PC.Compatible in Acrobat
Shortage as of June 30 (P11,400)

Question No. 4
Additional cash shortage from July 1-15
July collection per duplicate O.R. P 18,800
Less: collections in July that were deposited in
July
Collection per duplicate slips P 11,000
Less :Undeposited collection, June 30 5,000 6,000
Cash that should be on hand on July 15 P 12,800
Less: Actual cash on hand on July 15 4,800
Cash shortage from July 1-15 P 8,000

Question No. 5
Understatement of cash in bank per books (46,500-45,600) P 900
Overstatement of cash in bank per bank (44,000-42,400) 1,600
Understatement of outstanding checks (11,500-3600) 7,900
Overstatement of undeposited collections (5,100-5,000) 100
Non-recording of credit memo-proceeds of clean draft 900
Cash shortage as of June 30 P11,400
SUMMARY OF ANSWERS:
1. C 2. D 3. B 4. D 5. D

44
Chapter 8: Cash and Cash Equivalents

PROBLEM 8-25 Computation of Cash Shortage


Question No. 1
Deposit in transit, unadjusted bal. P 175,250
Less: Customer's Post-dated check 50,000
Adjusted Deposit in transit P 125,250

Question No. 2
Outstanding checks, unadjusted balance P 246,760
Less: Unreleased check ( 14,750)
Company's post-dated check ( 37,210)
Adjusted Outstanding checks P 194,790

Question No. 3
Unadjusted bal. per bank P 350,000
Add: Deposit in transit (No. 1) 125,250
Less: Outstanding checks (No. 2) (194,790)
Erroneous bank credit ( 30,000)
Adjusted cash in bank bal. P 250,460

Question No. 4
Unadjusted bal. per books P 293,500
Add: Credit memo for note coll. 15,000
E READER AND Unreleased check PC.Compatible in
14,750 Acroba
t
Company's post-dated check 37,210
Total P 360,460
Less: Customer's post-dated check (50,000)
Cash in bank per books bal. P 310,360
Less: Adjusted cash in bank balance 250,460
Cash shortage (P60,000)

Question No. 5
Unadjusted bal. per books P293,500
Less: Adjusted cash in bank balance 250,460
Net adjustments P 43,040
SUMMARY OF ANSWERS:
1. B 2. D 3. B 4. C 5. A
45
Chapter 10: Loans and Receivables

CHAPTER 10: LOANS AND RECEIVABLES

Note to professor: Page 257.


ILLUSTRATION: Sales Discount (PAS 18 vs. PFRS 15)
SOLUTION: (PAS 18)
Accounts receivable ₱100,000
Sales (instead of allowance for sales discount) ₱100,000

PROBLEM 10-1 Trade and other receivables


Trade Trade and other Noncurrent
Receivables receivables Asset
1 277,000 277,000 -
2 150,000 150,000 -
3 - 10,000 -
4 - 30,000 -
5 - - 110,000
6 - 15,000 -
7 70,000 70,000 -
8 - 80,000 220,000
9 100,000 100,000 -
Adjusted bal. 597,000 1. C 732,000 2. C 330,000

E READER ANDDifferentFreight
PROBLEM 10-2 PC.Compatible
terms in Acro
bat
Question No. 1
FOB Destination, freight prepaid
Invoice price of merchandise sold 300,000
Less: Invoice price of merchandise returned -
Net invoice price 300,000
Less: Sales discount (300,000 x 2%) 6,000
Collection before freight 294,000
Less: Freight payment - FOB Destination, freight collect -
Add: Freight payment - FOB shipping point, freight prepaid -
Total Net Cash Collection (B) 294,000
Question No. 2
FOB Destination, freight collect
Invoice price of merchandise sold 300,000
Less: Invoice price of merchandise returned -
Net invoice price 300,000
Less: Sales discount (300,000 x 2%) 6,000
Net Payment before freight 294,000
Less: Freight payment - FOB Destination, freight collect 5,000
Add: Freight payment - FOB shipping point, freight prepaid -
Total Net Cash Collection (A) 289,000

47
Chapter 10: Loans and Receivables

Question No. 3
FOB Shipping point, freight prepaid
Invoice price of merchandise sold 300,000
Less: Invoice price of merchandise returned -
Net invoice price 300,000
Less: Sales discount (300,000 x 2%) 6,000
Net Receipt before freight 294,000
Less: Freight payment - FOB Destination, freight collect -
Add: Freight payment - FOB shipping point, freight prepaid 5,000
Total Net Cash Collection (C) 299,000

Question No. 4
FOB Shipping point, freight prepaid
Invoice price of merchandise sold 300,000
Less: Invoice price of merchandise returned -
Net invoice price 300,000
Less: Sales discount (300,000 x 2%) 6,000
Collection before freight 294,000
Less: Freight payment - FOB Destination, freight collect -
Add: Freight payment - FOB shipping point, freight prepaid -
Total Net Cash Collection (B) 294,000
SUMMARY OF ANSWERS:
E READER
1. B 2. 3. 4. B
AND PC.Compatible in Acroba
t
PROBLEM 10-3 Gross method and Net method
List price P 100,000
Less: Trade discounts
15%: (100,000 x 15%) 15,000
20%: (100,000 – 15,000) x 20% 17,000 32,000
Invoice price, gross of discount (C) 68,000
Less: Sales discount (68,000 x 3%) 2,040
Invoice price, net of discount (D) P 65,960

SUMMARY OF ANSWERS:
1. C 2. D

PROBLEM 10-4 Computation of Percentage of Bad Debts Expense


CASE 1
Credit Sales Accounts written off Recoveries
2013 ₱ 1,500,000 ₱ 20,000 ₱ 15,000
2014 2,000,000 40,000 20,000
2015 3,500,000 270,000 15,000
7,000,000 330,000 50,000
48
Chapter 10: Loans and Receivables

2016 2,000,000 65,000 30,000


9,000,000 395,000 80,000
2017 3,000,000 85,000 40,000
12,000,000 480,000 120,000

Question No. 1
Accounts written off minus Recoveries
Percentage =
Total credit sales
Total years from 2013 to 2017:
₱480,000 - ₱120,000
Percentage =
₱12,000,000
Percentage = 3.00 %

Question No. 2
Bad debts expense = 3% x ₱3,000,000
= ₱90,000

Question No. 3
Allowance for Bad debts
Write off 85,000 400,000 Beg. Balance
Balance end (squeeze) 445,000 90,000 Bad debts exp
40,000 Recovery
E READER AND PC.Compatible in Acrobat 520,000 520,000

CASE 2
Question No.4
Accounts written off minus Recoveries
Percentage =
Total credit sales
Total years from 2013 to 2015 (years should exclude the last two years):
₱330,000 - ₱50,000
Percentage =
₱7,000,000
Percentage = 4 %

Question No. 5
Bad debts expense = 4% x P3,000,000
= ₱120,000

Question No. 6
Credit Sales BD exp Recoveries Write-off Net AB
2016 2,000,000 80,000 65,000 30,000 115,000
2017 3,000,000 120,000 85,000 40,000 165,000
Allowance for BD (D) 280,000

49
Chapter 10: Loans and Receivables

CASE 3
Question No. 7
Percentage of bad
Total credit
Accounts written salesRecoveries
off minus
=
debts to AR
Total years from 2013 to 2016:
Percentage of bad
9,000,000
₱395,000 - ₱80,000
=
Percentage
debts to=AR
3.5%
Percentage of bad
Total credit
Accounts written salesRecoveries
off minus
=
Totaldebts
yearstofrom
AR 2013 to 2017:
Percentage of bad
₱12,000,000
₱480,000 - ₱120,000
=
Percentage
debts to=AR
3%

Question Nos. 8 and 9


Allowance for Bad debts
Balance end
(3,000,000 x 3.5%)
Beg. Balance
Write off x 3%)
(3,400,000 85,000
102,000 (D)105,000
42,000 Bad debts exp (squeeze)
E READER AND PC.Compatible in Acrobat 40,000 Recovery
187,000 187,000

SUMMARY OF ANSWERS:
Case 1 Case 2 Case 3
1. B 4. D 7. C
2. B 5. D 8. D
3. B 6. D 9. C

PROBLEM 10-5 Aging Based on Outstanding Receivables


Question No. 1
Categories
Percent Amount
Uncollectible
0-30 days Balance
500,000 2% 10,000
(No. of Days)
31-60 days 600,000 3% 18,000
61-90 days 750,000 5% 37,500
over 91 days 300,000 10% 30,000
Totals 2,150,000 95,500
Allowance for Bad debts
Balance end 95,500 40,000 Beg. balance
50
Chapter 10: Loans and Receivables

(see above table)


Write off 12,000 Recoveries
(23,000+100,000) 123,000 166,500 Bad debts exp (squeeze)
218,500 218,500
Question No. 2
Accounts receivable, end (see above table) 2,150,000
Less: Allowance for doubtful accounts, end 95,500
Net Realizable Value 2,054,500
SUMMARY OF ANSWERS:
1. A 2. A

PROBLEM 10-6 Aging Based On Days Past Due


Question No. 1
Overdue accounts % uncollectible Balance Allowance
For less than 31 days 5.00% 300,000 15,000
From 31-60 days 6.00% 220,000 13,200
From 61-90 days 8.00% 150,000 12,000
From 91-120 days 15.00% 60,000 9,000
For over 121 days 20.00% -
Required allowance for doubtful accounts 49,200
E READER AND
Question No. 2 PC.Compatible in Acrobat
Allowance for Bad debts
Balance end 49,200 20,000 Beg. balance
29,200 Bad debts exp (squeeze)
158,000 158,000

SUMMARY OF ANSWERS:
1. A 2. A

PROBLEM 10-7 Interest-bearing Note with Realistic Interest Rate


Requirement No. 1
*Selling price P 100,000
Less: Carrying amount of machinery
Cost 500,000
Less: Accumulated depreciation 350,000 150,000
Loss on sale (P 50,000)
*Note: The selling price is equal to the face amount, which is likewise equal to
the present value of the note since the note bears an annual interest rate that is
similar with the market rate.

51
Chapter 10: Loans and Receivables

Requirement No. 2
Interest income = (100,000 x 10%) = P10,000

Requirement No. 3
Zero. The principal amount is collectible beyond one year from the reporting
date and thus, reported as non-current.

Requirement No. 4
P100,000. The entire principal amount of notes receivable is treated as
noncurrent asset since it is collectible beyond one year from the reporting date.
Journal entries are as follows:
01/01/2016 Notes receivable 100,000
Accumulated depreciation 350,000
Loss on sale 50,000
Machinery 500,000
\

12/31/2016 Cash 10,000


Interest income 10,000

PROBLEM 10-8 Interest-bearing Note with Unrealistic Interest Rate,


Interest Is Payable Annually, One-Time Collection of Principal

E READER AND
Question No. 1 PC.Compatible in
Present value of principal (2,000,000 x 0.7118) Acrobat
P 1,423,600
Add: Present value of interest payments
(2,000,000 x 10% x 2.4018) 480,366
Total present value / Selling price 1,903,966
Less: Carrying amount of machinery
Cost 1,000,000
Less: Accumulated depreciation 150,000 850,000
Gain on sale P1,053,966

Question Nos. 2 to 5
Amortization table
Date Interest Interest Discount Carrying
Collections Income Amortization amount
01/01/2016 1,903,960
12/31/2016 200,000 228,475 28,475 1,932,435
12/31/2017 200,000 231,892 31,892 1,964,327
12/31/2018 200,000 235,704 35,672 2,000,000
The total amount of 1,932,435 is reported as noncurrent receivable since it is
due to be collected beyond twelve months from the end of the reporting period.
SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. A 5. C
52
Chapter 10: Loans and Receivables

PROBLEM 10-9 Interest-bearing Note with Unrealistic Interest Rate,


Interest Is Payable Semi-Annually, One-Time Collection of Principal
Question No. 1
Present value of principal (2,000,000 x 0.7050) P 1,410,000
Add: Present value of interest payments
(2,000,000 x 5% x 4.9173) 491,730
Total present value / Selling price 1,901,730
Less: Carrying amount of machinery
Cost 1,000,000
Less: Accumulated depreciation 150,000 850,000
Gain on sale P1,051,730

Amortization table
Date Interest Interest Discount Carrying
Collections Income Amortization amount
01/01/2016 1,901,730
07/31/2016 100,000 114,104 14,104 1,915,834
12/31/2016 100,000 114,950 14,950 1,930,784
07/31/2017 100,000 115,847 15,815 1,946,599
12/31/2017 100,000 116,796 16,796 1,963,395
E READER AND
07/31/2018 100,000
17,804
117,804 in Acrobat
1,981,198
12/31/2018 100,000 118,602 18,802 2,000,000

Question No. 2
Interest income up to 07/31/2016 114,104
Interest income up to 12/31/2016 114,950
Total interest income 229,054

Question No. 3
1,930,784. See amortization table above.

Question No.s 4 and 5


The total amount of 1,932,435 is reported as noncurrent receivable since it is
due to be collected beyond twelve months from the end of the reporting period.

SUMMARY OF ANSWERS:
1. B 2. B 3. B 4. A 5. D

PROBLEM 10-10 Interest-bearing Note with Unrealistic Interest Rate,


Uniform Collection of Principal

Question No. 1

53
Chapter 10: Loans and Receivables

Computation of present value of all payments:


Present
Total PV
Interest collections
Total
0.8929 Principal
600,000 180,000 780,000 696,462
value factor collections
0.7972 600,000 120,000 720,000 573,984
0.7118 600,000 60,000 660,000 469,788
Total present value 1,740,234
Total present value / Selling price 1,740,234
Less: Carrying amount of machinery
Cost 1,000,000
Less: Accumulated depreciation 150,000 850,000
Gain on sale P890,234
Amortization table
Date Interest Interest Amortizatio Principal Carrying
Collections Income n collections amount
01/01/16 1,740,234
12/31/16 180,000 208,828 28,828 600,000 1,169,062
12/31/17 120,000 140,287 20,287 600,000 589,350
12/31/18 60,000 70,651 10,651 600,000 -

Question No. 2
E READER AND PC.Compatible in Acrobat
208,828. See amortization table above.

Question No. 3
1,169,062. See amortization table above.

Question No. 4
Principal collections – 2017 600,000
Less: Amortization – 2017 20,287
Current portion – 12/31/2016 579,713

Question No. 4
Carrying value – 12/31/2016 1,169,062
Less: Current portion – 12/31/2016 579,713
Non-current portion – 12/31/2016 589,350

SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. B 5. A

PROBLEM 10-11 Non-interest-bearing Note with Unrealistic Interest Rate,


Non-Uniform Collection of Principal
Question No. 1
Computation of present value of all payments:
54
Chapter 10: Loans and Receivables

Total
PV factor collections Total PV
0.8929 1,000,000 892,900
0.7972 600,000 478,320
0.7118 200,000 142,360
Total present value of the notes 1,513,580
Total present value / Selling price 1,513,580
Less: Carrying amount of machinery
Cost 1,000,000
Less: Accumulated depreciation 150,000 850,000
Gain on sale P663,580

Question Nos. 2 to 5
Amortization table
Interest Amortizatio Principal Carrying
Date
income n Collections amount
01/01/16 1,513,580
12/31/16 181,630 181,630 1,000,000 695,210
12/31/17 83,425 83,425 600,000 178,635
12/31/18 21,382 21,365 200,000 -

Question No. 2
181,630. SeeAND
E READER above.
amortizationPC.Compatible in Acrob
at
Question No. 3
695,210. See amortization table above.

Question No. 4
Principal collections – 2017 600,000
Less: Amortization – 2017 83,425
Current portion – 12/31/2016 516,575

Question No. 5
Carrying value – 12/31/2016 695,210
Less: Current portion – 12/31/2016 516,575
Non-current portion – 12/31/2016 178,635
SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. B 5. D

PROBLEM 10-12 Noninterest-bearing Note, One-Time Collection of


Principal
Question No. 1
Total present value (1,800,000 x 0.7118) 1,281,240
55
Chapter 10: Loans and Receivables

Less: Carrying amount of machinery


Cost 1,000,000
Less: Accumulated depreciation 150,000 850,000
Gain on sale P431,240

Amortization table
Date Interest Income Amortization Carrying amount
01/01/16 1,281,240
12/31/16 153,749 153,749 1,434,989
12/31/17 172,199 172,199 1,607,187
12/31/18 192,812 192,812 1,800,000
Question No. 2
153,749. See amortization table above.
Question No. 3
1,434,989. See amortization table above.
Question No. 4 and 5
The total amount of 1,434,989 is reported as noncurrent receivable since it is
due to be collected beyond twelve months from the end of the reporting period.
SUMMARY OF ANSWERS:
1. B 2. B 3. A 4. B 5. A
E READER AND PC.Compatible in Acrobat
PROBLEM 10-13 Computation of Annual Payment or Collection
CASE 1: Based on the original data
Requirement No. 1
Present value of the notes
Annual collection =
Present value of ordinary annuity for 3 periods
1,500,000
Annual collection =
2.4018
Annual collection = P624,532
Requirement No. 2
Interest income (1,500,000 x 12%) = P180,000

CASE 2
Requirement No. 1
Present value of the notes
Annual collection =
Present value of annuity due for 3 periods
1,500,000
Annual collection =
2. 6901
Annual collection = P557,600
56
Chapter 10: Loans and Receivables

Requirement No. 2
Interest income (1,500,000 – 557,600) x 12% = P113,088

PROBLEM 10-14

Accounts receivable ₱250,000


Sales ₱250,000
Sales discount ₱250,000 x 3% x 40%) 3,000
Allowance for sales discount 3,000
Cash (₱250,000 x 50% x 97%) 121,250
Allowance for sales discount 3,000
Sales discount [₱250,000 x (50% - 40%) x 3%] 750
Accounts receivable (₱250,000 x 50%) 125,000
On December 31, 2016, the receivable then is included in the statement of
financial position as follows:
Accounts receivable, end ₱ 250,000
Less: Allowance for sales discount 3,000
Net realizable value ₱ 247,000

SOLUTION: (PFRS 15)


E READER AND PC.Compatible100,000
Accounts receivable in₱
Acroba
t
Refund liability ₱ 1,000
Sales [₱100,000 – (₱100,000 x 2% x 50%) 99,000
Cash (₱100,000 x 60% x 98%) 58,800
Sales discount [₱100,000 x (60% - 50%) x 2%] 200
Refund liability 1,000
Accounts receivable (₱100,000 x 60%) 60,000
On December 31, 2016, the receivable then is included in the statement of
financial position as follows:
Accounts receivable = Net realizable value ₱ 100,000

PROBLEM 10-15
SOLUTION:
Requirement No. 1 PAS 18
2017:
Dec. 31 Accounts receivable ₱ 550,000
Sales ₱ 550,000
Cost of sales 300,000
Merchandise inventory 300,000
Sales returns (₱550,000 x 30%) 165,000
57
Chapter 10: Loans and Receivables

Allowance for sales return 165,000


2018:
Jan. 5 Cash [₱550,000 - (45% x ₱550,000)] 302,500
Sales returns [(45%-30%) x ₱550,000] 82,500
Allowance for sales returns 165,000
Accounts receivable 550,000
Requirement No. 2 PAS 18
2017:
Dec. 31 No journal entry. No revenue is recognized because the company
cannot estimate reliably any future returns.
2018:
Feb. 1 Accounts receivable ₱ 550,000
Sales ₱ 550,000
Cost of sales 300,000
Merchandise inventory 300,000
Note: Revenue is recognized since the time period for rejecting/accepting has
elapsed.

Requirement No. 1 PFRS 15


2017:
Dec. 31 Accounts receivable ₱385,000
E READER AND PC.Compatible in ₱38Acrobat
Sales [₱550,000 x (100%-30%)]
5,000
Cost of sales (₱300,000 x 70%) 210,000
Asset for right to recover product to be 90,000
returned
Merchandise inventory 300,000
2018:
Jan. 5 Cash [₱550,000 - (45% x ₱550,000)] 302,500
Sales returns [(45%-30%) x ₱550,000] 82,500
Accounts receivable ₱385,000
Merchandise inventory 135,000
Cost of sales 45,000
Asset for right to recover product to 90,000
be returned
Requirement No. 2 PFRS 15
2017:
Dec. 31 Asset for right to recover product to be

Merchandise inventory 300,000 300,000


returned
2018:
Feb. 1 Accounts receivable ₱ 550,000
Sales ₱ 550,000
58
Chapter 10: Loans and Receivables

Cost of sales 300,000


Asset for right to recover product to
300,000
be returned
PROBLEM 10-16 Impairment of Receivable, One-time Collection of
Principal
CASE NO. 1
Question No. 1
Principal 16,000,000
Add: Accrued interest receivable 1,600,000 17,600,000
Less: *Present value of expected cash flows 7,705,280
Loan impairment (A) 9,894,720
*Computation of present value of all payments:
PV factor Total collections Total PV
0.9091 1,600,000 1,454,560
0.8264 3,200,000 2,644,480
0.7513 4,800,000 3,606,240
Total present value of the notes 7,705,280
Question Nos. 2 to 3
Amortization table
E READER AND PC.Compatible
Interest inCarrying
Acrobat
Date Collections Income Amortization amount
12/31/2015 7,705,280
12/31/2016 1,600,000 770,528 829,472 6,875,808
12/31/2017 3,200,000 687,581 2,512,419 4,363,389
12/31/2018 4,800,000 436,339 4,363,389 -

CASE NO. 2
Question No. 4
Carrying value – 12/31/2015 (see table below) 15,458,634
Less: *Present value of expected cash flows 7,705,280
Loan impairment (B) 9,894,720
Amortization table
Interest
Received Interest Carrying
Date Or Accrued Income Amortization amount
01/01/2013 ₱14,846,080
12/31/2013 1,600,000 1,781,530 181,530 15,027,610
12/31/2014 1,600,000 1,803,313 203,313 15,230,923
12/31/2015 1,600,000* 1,827,711 227,710 15,458,634
*Interest accrued.
59
Chapter 10: Loans and Receivables

12/31/2015 Accrued interest receivable 1,600,000


Interest income 1,600,000
Unearned interest income 227,710
Interest income 227,710

CASE NO. 3
Question No. 5
Carrying value – 12/31/2015 (see table below) 17,058,634
Less: *Present value of expected cash flows 7,705,280
Loan impairment (C) 9,353,354
Amortization table
Interest
Received Interest Carrying
Date Or Accrued Income Amortization amount
01/01/2013 ₱14,846,080
12/31/2013 1,600,000 1,781,530 181,530 15,027,610
12/31/2014 1,600,000 1,803,313 203,313 15,230,923
12/31/2015 1,827,711 1,827,711 17,058,634

12/31/2015 Unearned interest income 1,827,711


Interest income 1,827,711
E READER AND PC.Compatible in Acrobat
CASE NO. 4
Question No. 6
Carrying value – 12/31/2015 (see table below) 15,458,634
Less: *Present value of expected cash flows 7,705,280
Loan impairment C) 9,894,720
Amortization table
Interest
Received Interest Carrying
Date Or Accrued Income Amortization amount
01/01/2013 ₱14,846,080
12/31/2013 1,600,000 1,781,530 181,530 15,027,610
12/31/2014 1,600,000 1,803,313 203,313 15,230,923
12/31/2015 1,600,000 1,827,711 227,710 15,458,634
12/31/2015 Cash 1,600,000
Interest income 1,600,000
Unearned interest income 227,710
Interest income 227,710

SUMMARY OF ANSWERS:

60
Chapter 10: Loans and Receivables

1. A 2. B 3. B 4. B 5. C 6. C

PROBLEM 10-17 Reversal of Impairment Loss


Question No. 1
Present value of expected cash flows P 654,552
vs. Would have been present value if there was no
impairment 600,000
Lower 600,000
Less: Actual amortized cost 396,681
Gain on reversal of impairment loss (A) P 203,319
Question No. 2
Present value of expected cash flows P 654,552
Less: Actual amortized cost 396,681
Gain on reversal of impairment loss (D) P 257,871
Question No. 3
Interest income (600,000 x 10%) (B) P 60,000
Question No. 4
Interest income (654,552 x 10%) (A) P 65,455

SUMMARY OF ANSWERS:
E READER
1. 2. 3. B 4. A
AND PC.Compatible in Acroba
t
PROBLEM 10-18 Pledge of Receivable
Principal amount borrowed P 900,000
Less: One year interest deducted in advance (900,000 x 10%) ( 90,000)
Cash received on December 1 (B) P810,000

PROBLEM 10-19 Assignment of Accounts Receivable


Question No. 1
Principal amount borrowed P 150,000
Less: Finance fee (150,000 x 5%) ( 7,500)
Cash received on December 1 (D) P142,500
Question No. 2
Notes payable P150,000
Less: Principal payment
Remittance 95,000
Less: Interest (150,000 x 12% x 3/12) ( 1,500) 93,500
Notes payable – December 31 (C) P 56,500
Question No. 3
61
Chapter 10: Loans and Receivables

Accounts receivable – assigned (200,000 – 100,000) P 100,000


Less: Notes payable ( 56,500)
Equity in assigned account (C) P 43,500
SUMMARY OF ANSWERS:
1. D 2. C 3. C

PROBLEM 10-20 Factoring of Receivables


Entries to record transactions
Option Accounts Debit Credit
One Cash (400,000 x 90%) 360,000
Receivable from factor
(25,000 – [5% x 400,000]) 5,000
Loss on sale of receivables (squeeze) 35,000
Notes payable 400,000
Two Cash (400,000 x 90%) 360,000
Receivable from factor
(25,000 – [4% x 400,000]) 9,000
Loss on sale of receivables (squeeze) 34,000
Notes payable 400,000
Estimated recourse liability 3,000
E READER AND
SUMMARY OF PC.Compatible in Acrobat
ANSWERS:
1. B 2. C

PROBLEM 10-21 Notes Receivable Discounting and Notes Receivable


Dishonored
CASE NO. 1
Question No. 1
Principal P 600,000.00
Add: Interest over full credit period (600,000 x 9% x 90/360) 13,500.00
Maturity value 613,500.00
Less: Discount (613,500 x 12% x 65/360) 13,292.50
Net proceeds from discounting (C) P 600,207.50
Question No. 2
Net proceeds from discounting P 600,207.50
Less: Carrying amount on date of discounting
Principal 600,000.00
Add: Interest (600,000 x 9% x 25/360) 3,750.00 603,750.00
Loss on notes receivable discounting (A) (P 3,542.50)
CASE NO. 2
Question No. 3
62
Chapter 10: Loans and Receivables

Loss of P3,524.50. The amount of loss to be recognized is computed in a


similar way as to that of discounted note without recourse. (A)
Question No. 4
Maturity value of the note P 613,500
Add: Protest fee and other bank charges 5,000
Cash received on December 1 (C) P618,500
CASE NO. 3
Question No. 5
Interest expense of P3,524.50. The amount of interest expense is computed
in a similar way as to that of discounted note without recourse or conditional
sale. (A)
Question No. 6
Maturity value of the note P 613,500
Add: Protest fee and other bank charges 5,000
Cash received on December 1 (C) P618,500
SUMMARY OF ANSWERS:
1. C 2. A 3. A 4. C 5. A 6. C

PROBLEM 10-22 Discounting “Own” Note


Question No. 1
E READER payable AND PC.Compatiblein Note Acrob
P 250,000
at
Less: Discount on note payable (250,000 x 12%) ( 30,000)
Carrying amount – Date of issuance P 220,000
Effective interest rate = Discount/Net proceeds
= 30,000/220,000
= 13.60% (D)
Question No. 2
Entry to record transaction
Cash 220,000
Discount on notes payable 30,000
Notes payable 250,000
SUMMARY OF ANSWERS:
1. D 2. B

63
Chapter 10: Loans and Receivables

COMPREHENSIVE PROBLEMS
PROBLEM 10-23
Question No. 1
Credit Sales Accounts written off Recoveries
2013 2,220,000 52,000 4,300
2014 2,450,000 59,000 7,500
2015 2,930,000 60,000 7,200
7,600,000 171,000 19,000
Accounts written off minus Recoveries
Percentage =
Total credit sales
Total years from 2013 to 2015:
171,000 - 19,000
Percentage =
7,600,000
Percentage = 0.02 or 2%

Question No. 2
Doubtful accounts expense (3,000,000 x 2%) = P60,000

Question No. 3
Reported doubtful account expense (bad debts written off) P 62,000
Less: Correct doubtful account expense (see No. 2) ( 60,000)
E READER AND PC.Compatible in Acrobat
Overstatement in doubtful account expenses P 2,000

Question No. 4
Accounts receivable trade
Beg. Balance 418,000 645,600 Balance end
Sales on account 3,000,000 62,000 Write-off
2,710,400 Collections excluding
advance from customers
Total 3,418,000 3,418,000

Question No. 5
Allowance for Doubtful accounts
Accounts written off 62,000 15,200 Beg. Balance
Balance end 21,600 60,000 Doubtful accounts expense
8,400 Recoveries
Total 83,600 83,600

SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. B 5. A

64
Chapter 10: Loans and Receivables

PROBLEM 10-24
Question No. 1
Unadjusted accounts receivable, Dec. 1 (squeeze) P 21,800
Add: Adjusted net sales 255,000
Total 276,800
Less: Collections, net of discounts 156,800
Estimated uncollectible accounts charged to AR in Dec. 30,000
Unadjusted accounts receivable, Dec. 31 P 90,000
Subsidiary ledger balance, Dec. 1 P 59,000
Less: AR controlling account, Dec. 1 (see above) 21,800
Add: Estimated uncollectible account
charged to AR in Dec. 6,000 27,800
Customers’ credit balance (D) P31,200

Question No. 2
Collection, net of discount P 156,800
Divide by: (100%-2%) 98%
Total credit to AR for collection (A) P160,000

Question No. 3
Customer credit balance, Dec. 1 P 31,200
Less: sale to customer with credit balance 10,000
E READER AND
Customer Credit balance, PC.Compatible in Acrob
Dec. 31 (A) 21,200
at
Question No. 4
Unadjusted Sales, balance P 260,000
b) Sales, FOB shipping pt., not yet recorded 10,000
c) Sales, FOB destination ( 15,000)
Adjusted Sales balance (A) P 255,000

Question No. 5
Subsidiary ledger, balance, 12/1 P 59,000
Add: Adjusted Sales in December 255,000
Freight prepaid by the company 1,000
Total P 315,000
Less: total credit to AR for coll. 160,000
Adjusted accounts receivable in Dec. (B) P 155,000

SUMMARY OF ANSWERS:
1. D 2. A 3. A 4. A 5. B

65
Chapter 10: Loans and Receivables

PROBLEM 10-25
Question No. 1
Balance Accounts
Dec. 31 Not due 1-60 days 61-120 days Over 120
1 12,000 3,000 8,000 1,000
2 22,000 22,000
4 20,000 10,000 10,000
5 55,000 2,220 52,780
6 7,500 7,500
116,500 27,220 68,280 11,000 10,000
Multiply by: 0.50% 2% 5% 50%
136.10 1,365.60 550 5,000.00
Question Nos. 2 and 3
Required balance (P136.10+P1,365.60+P550+P5,000) P 7,051.70
Less: Allowance for doubtful accounts, beginning 5,000.00
Doubtful accounts expense P 2,051.70

Question Nos. 4 and 5


Interest Accrued interest
Interest income income income
(120,000 X 6% X 2/12) P 1,200 P -
E READER AND PC.Compatible in Acrobat
(100,000 X 6% X 1/12)
Interest income
500
P 1,700
500
P 500

SUMMARY OF ANSWERS:
1. D 2. C 3. B 4. D 5. A

PROBLEM 10-26
Question No. 1
Principal 4,000,000
Origination fees received (342,100)
Direct origination cost incurred 150,020
Initial Carrying amount of the loan 3,807,920

Question No. 2
By trial and error, 12% interest rate will have a present value equal to the
initial carrying amount of the loan.
Present value of Prin. (4,000,000 x .7118) 2,847,200
Present value of Int. (4M x 10% x 2.4018) 960,720
Present value of Loan Receivable 3,807,920

66
Chapter 10: Loans and Receivables

Question Nos. 3 and 4


Interest Carrying
Date Collections Income Amortization amount
01/01/2016 3,807,920
31/12/2016 400,000 456,950 56,950 3,864,870
31/12/2017 400,000 463,784 63,784 3,928,655
31/12/2018 400,000 471,439 71,346 4,000,000

Question No. 5
Zero, As of December 31, 2016, the entire loan proceeds will be collectible on
December 31, 2018, that is two years from the reporting date.
SUMMARY OF ANSWERS:
1. A 2. C 3. B 4. A 5. A

PROBLEM 10-27
Question No. 1
Annual Cash PV
Date flows factor Amount
Dec. 31, 2015 P1,750,000 0.9091 P 1,590,925
Dec. 31, 2016 2,000,000 0.8264 1,652,800
Dec. 31, 2017 1,750,000 0.7513 1,314,775
E READER AND PC.Compatible in Acrobat
Total 4,558,500

Question No. 2
Carrying amount of the loan P 5,500,000
Less: Present value of the loan 4,558,500
Impairment loss P 941,500

Question Nos. 3 to 5
Interest Reduction to Carrying
Date Payment Income Principal amount
12/31/2014 P4,558,500
12/31/2015 P1,750,000 P455,850 P1,294,150 3,264,350
12/31/2016 2,000,000 326,435 1,673,565 1,590,785
12/31/2017 1,750,000 159,079 1,590,785 -

SUMMARY OF ANSWERS:
1. C 2. A 3. B 4. A 5. C

67
Chapter 10: Loans and Receivables

PROBLEM 10-28
Question Nos. 1 to 4
Accounts Allow Mdse. Net Cost of
Receivable for DA Inventory Sales Sales
Unadjusted balances 300,000 3,000 400,000 1,000,000 800,000
2) Sale return (30,000) (30,000)
Cost of return
Merchandise
(30,000 x 80%) 24,000 (24,000)
3)Sales FOB shipping
point
not recorded as
Sale 40,000 40,000
Cost of mdse sold
(40,000 x 80%) (32,000) 32,000
4) Goods shipped
FOB
Destination recorded
as sale (50,000) (50,000)
Cost of goods
(50,000 x 80%) 40,000 (40,000)
6) Doubtful accts exp (12,000)
Adjusted bal. 260,000 15,000 432,000 960,000 768,000

E READER
Question receivable
No. 5
Accounts ANDdoubtful
P 260,000
PC.Compatible
accounts ( in Acrobat
Less: Allowance for 15,000)
Net realizable value P245,000
SUMMARY OF ANSWERS:
1. B 2. B 3. B 4. B 5. C

PROBLEM 10-29
Question No. 1
Estimated
Classification Balance
Percentage Amount
1-60 days P 1,000,000 1% P 10,000
61-120 days 400,000 5% 20,000
121-180 days 300,000 10% 30,000
181-360 days 200,000 25% 50,000
More than one year 60,000 80% 48,000
Totals P 1,960,000 P 158,000

Question No. 2
Accounts receivable, adjusted (see no. 1) P 1,960,000
Less: Allowance for doubtful accounts, end (see no. 1) 158,000
Net realizable value P1,802,000
68
Chapter 10: Loans and Receivables

Question No. 3
Doubtful accounts per books (9,000,000 x 2%) P 180,000
Less: *Adjusted doubtful accounts expense 188,000
Understatement of doubtful accounts (P 8,000)

*Adjusted doubtful account expense


Allowance for Doubtful accounts
Write off (100,000+40,000) 140,000 90,000 Beg. Balance
Balance end (required) 158,000 20,00 Recoveries
188,000 Doubtful account expense

Total 298,000 298,000

Question No. 4
Total carrying value P3,000,000
Less: **Present value of the loan 2,790,000
Impairment loss P 210,000
*Computation of present value
Annual Cash flow PV factor Total
P1,000,000 1.00 P 1,000,000
E READER AND PC.Compatible in Acrobat
1,000,000
1,000,000
0.93
0.86
930,000
860,000
Total Present value of the loan P 2,790,000
Question No. 5
Interest Amortizatio Carrying
Date Collections Income n amount
01/01/2016 2,790,000
12/31/2016 1,000,000 1,000,000 1,790,000
12/31/2017 1,000,000 143,200 856,800 933,200
SUMMARY OF ANSWERS:
1. A 2. B 3. D 4. B 5. B

PROBLEM 10-30
Question No. 1
Accounts receivable, unadjusted balance
Per subsidiary ledger P1,660,000
Note receivable included in the AR (200,000)
Factored Accounts receivable (160,000)
Sales FOB shipping point 100,000
Adjusted AR balance P1,400,000

69
Chapter 10: Loans and Receivables

Question No. 2
Allowance for doubtful accts, beg. P 100,000
Add: Doubtful accounts (P15,000,000 + P100,000) x 1% 151,000
Total P 251,000
Less: Accounts written off 28,000
Allowance for doubtful accts, end P 223,000
Question No. 3
Unadjusted Net Sales P15,000,000
Add: Sales, FOB shipping point 100,000
Total Sales P 15,100,000
Multiply by: rate 1%
Doubtful accounts P 151,000
Question No. 4
No effect. The audit adjustments did not result to any changes to inventory
account.
Question No. 5
Sales, FOB shipping point P 100,000
SUMMARY OF ANSWERS:
1. D 2. A 3. D 4. D 5. A

E READER AND PC.Compatible in Acrobat


PROBLEM 10-31
Question No. 1
Accounts receivable factored P 400,000
Less: Service charge (400,000 x 5%) 20,000
Receivable from factor (400,000 x 20%) 80,000 100,000
Customers’ credit balance P300,000
Question No. 2
Principal P 300,000
Add: Interest over full credit period (300,000 x 12% x 6/12) 18,000
Maturity value 318,000
Less: Discount (318,000 x 12% x 3/12) 11,925
Net proceeds from discounting P 306,075
Question No. 3
Maturity value of the notes (see item in No. 2) 318,000
Add: Protest fee 12,000
Total cash paid/Amount to be debited to AR P 330,000
Question No. 4
Note payable (80% x P600,000) 480,000
Less: Service fee (5% x P600,00) 30,000
Cash received P 450,000
70
Chapter 10: Loans and Receivables

Question No. 5
Total Cash paid (see No. 3) 330,000
Add: Interest income (P330,000 x 12% x 2/12) 6,600
Cash received P 336,600
Question No. 6
Accounts receivable-unassigned
(2,000,000-3000,000-400,000-600,000) P 700,000
Add: Accounts receivable assigned 600,000
Total 1,300,000
Less: Less: Allowance for doubtful accounts (1,300,000 x 5%) 65,000
Net realizable value P1,235,000
SUMMARY OF ANSWERS:
1. B 2. C 3. A 4. B 5. D 6. D

PROBLEM 10-32
Question Nos. 1 to 3 days to
60 and 61 90 Over
days90
Total below days
Unadjusted Balance,
12/31/2016 1,900,000 1,000,000 500,000 400,000
E READER AND PC.Compatible in Acrobat
Adjustments:
Write Off (40,000)
(40,000)
Unrecorded sale 50,000 50,000
NSF Check 20,000 20,000
In transit shipment –
FOB Destination (45,000) (45,000)
Consignment (45,000) (45,000)
Erroneous unit price (7,500) (7,500)
Adjusted balance,
12/31/2016 1,832,500 930,000 492,500 410,000
Percentage of Uncollectibility 4% 5% 10%
Required allowance,
12/31/2016 108,825 37,200 24,625 41,000

Question No. 4
Allowance for Doubtful accounts
Write off 40,000 100,000 Beg. Balance
Balance end (required) 102,825 - Recoveries
42,825 Doubtful account expense
(squeeze)
Total 142,825 142,825

71
Chapter 10: Loans and Receivables

Item Accounts Debit Credit


1 Allowance for bad debts 40,000
Accounts receivable 40,000
2 Accounts receivable 50,000
Sales 50,000
3 Accounts receivable 20,000
Cash in bank 20,000
4 Sales 45,000
Accounts receivable 45,000
5 Sales 45,000
Accounts receivable 45,000
6 Sales 7,500
Accounts receivable 7,500
SUMMARY OF ANSWERS:
1. C 2. D 3. D 4. D 5. C

PROBLEM 10-33
Question Nos. 1 and 3
E READER AND PC.Compatible in Acroba
Adjusting entries for Accounts receivable
t
Item Accounts Debit Credit
1 Accounts receivable 20,000
Allowance for doubtful accounts 20,000
2 Sales discount 16,000
Accounts receivable 16,000
3 Accounts receivable 120,000
Allowance for doubtful accounts 120,000
4 Accounts receivable 30,000
Allowance for doubtful accounts 30,000
Miscellaneous income 30,000
Accounts receivable 30,000
Accounts receivable
Beg. Balance 220,000 2,720,000 Balance end
(20,000+200,000)
Sales 4,000,000 30,00 Recoveries
Recoveries 30,000 *1,500,000 Collections, gross of
discount

72
Chapter 10: Loans and Receivables

Total 4,250,000 4,250,000

*Collections from customers excluding recoveries


Collections without discount 700,000
Add: Collections with discount 784,000
Cash discount availed (784,000/98% x 2%) 16,000
Total collections excluding recoveries P 1,500,000

Allowance for Doubtful accounts


20,000 Beg. Balance
Balance end 170,000 30,000 Recoveries
120,000 Doubtful account expense

Total 170,000 170,000

Accounts receivable 2,720,000


Less: Allowance for bad debts 170,000
Net realizable value P 2,550,000

Question Nos. 2, 4 and 5


Adjusting entries for Loans receivable
E READER AND
Item Debit Credit
Accounts PC.Compatible in Acrob
at
1 Loan Receivable 400,000
Interest income 400,000
2 Unearned interest income 45,382
Interest income 45,382
Principal 4,000,000
Direct origination cost incurred 11,520
Direct origination fees received (300,000)

Interest Carrying
Date Collections Income Amortization amount
01/01/2015 3,711,520
12/31/2015 400,000 445,382 45,382 3,756,902
12/31/2016 400,000 450,828 50,828 3,807,731
12/31/2017 400,000 456,928 56,928 3,864,658
12/31/2018 400,000 463,759 63,759 3,928,417
12/31/2019 400,000 471,410 71,583 4,000,000
Initial carrying amount 3,711,520
1. B 2. C 3. D 4. D 5. A
73

Amortization table at 12% Effective Rate

SUMMARY OF ANSWERS:
Chapter 10: Loans and Receivables

PROBLEM 10-34
Question No. 1
Unrecorded gain on sale of machinery – 2015 (see below) 90,183
Unrecorded interest income – receivable from sale of machinery
(240,183 x 12%) 28,822
Unrecorded accrued interest – receivable from sale of plant
(1,500,000 x 12% x 9/12) 135,000
Net adjustment to R/E – 01/01/16 (B) 254,005
Cash consideration 200,000
Add: Present value of future cash flows (2.4018 x 100,000) 240,183
Total selling price 440,183
Less: Carrying value of machine (800,000 – 450,000) 350,000
Gain on sale of machine 90,183

Amortization table (receivable from sale of machinery):


Interest Carrying
Date Collections Income Amortization amount
01/01/2015 240,183
12/31/2015 100,000 28,822 71,178 169,005
12/31/2016 100,000 20,281 79,719 89,286
12/31/2017 100,000 10,714 89,286 -
E READER AND PC.Compatible in Acrobat
Question No. 2
Interest income from note receivable:
Sale of machinery (169,005 x 12%) 20,281
Sale of plant [(1,500,000 x 12% 3/12) + (1M x 12% x 9/12) 135,000
Sale of equipment (170,750 x 10% x 9/12) 12,806
Total interest income (C) 168,087

Question No. 3
Current portion of note receivable from:
Sale of machinery (see amortization table above) 89,286
Sale of plant 500,000
Total current portion (B) 589,286

Question No. 4
Non-current portion of note receivable from:
Sale of plant 500,000
Sale of equipment (170,750 + 12,806) 183,556
Total non-current portion (D) 683,556

Question No. 5
Interest income from sale of machine 20,281
74
Chapter 10: Loans and Receivables

Interest income from sale of plant (180,000 – 135,000) (45,000)


Interest income from sale of equipment 12,806
Net overstatement of income (D) (11,912)

SUMMARY OF ANSWERS:
1. B 2. C 3. B 4. D 5. D

E READER AND PC.Compatible in Acrobat

75
Chapter 12: Inventories

CHAPTER 12: INVENTORIES

PROBLEM 12-1 Cost of Purchase


Purchase price based on vendors’ invoices 1,250,000
Brokerage commission paid to agents for arranging imports 50,000
Import duties 100,000
Freight and insurance on purchases 250,000
Other handling costs relating to imports 25,000
Total cost of purchase (B) P1,675,000
Note that the trade discount was already deducted in arriving at the vendor’s
invoice.

PROBLEM 12-2 Inventoriable Cost


Materials ₱ 350,000
Irrecoverable purchase taxes 30,000
Labor 120,000
Variable production overhead 50,000
Fixed production costs 40,000
Cartage in 8,000
Total (C) ₱598,000
E READER AND PC.Compatible in Acrobat
PROBLEM 12-3 Rebates
Question No. 1
Invoice price (no VAT is charged on these goods) ₱ 850,000
Less: Rebate offered to the entity by the supplier 10,000
Inventoriable cost (B) ₱ 840,000

Question No. 2
Inventoriable cost (C) ₱ 850,000

PROBLEM 12-4 FREIGHT TERMS & FOREIGN EXCHANGE


Question No. 1 Free on Board
Cost of inventory ($100,000 x ₱45) ₱4,500,000
ForEx loss (₱46.875 - ₱45) x 100,000 (A) 187,500

Question No. 2 Cost, Insurance and Freight


Cost of inventory ($100,000 x ₱45.625) ₱4,562,500
ForEx loss (₱46.875 - ₱45.625) x 100,000 (D) 125,000

76
Chapter 12: Inventories

PROBLEM 12-5 MANUFACTURING COST


Question No. 1
Variable cost:
Direct labor (₱3 x 3 DLH x 100,000 units) ₱ 900,000
Direct materials (₱2 excluding VAT x 100,000 units) 200,000
Fixed Cost (₱100,000 / 100,000 normal capacity) x 100,000 actual 100,000
Total cost (C) ₱1,200,000

Question No. 2
Variable cost:
Direct labor (₱3 x 3 DLH x 120,000 units) ₱1,080,000
Direct materials (₱2 excluding VAT x 120,000 units) 200,000
Fixed Cost (₱100,000 / 120,000 actual capacity) x 100,000 actual 100,000
Total cost (C) ₱1,420,000

Question No. 3
Variable cost:
Direct labor (₱3 x 3 DLH x 80,000 units) ₱ 720,000
Direct materials (₱2 excluding VAT x 80,000 units) 160,000
Fixed Cost (₱100,000 / 100,000 normal capacity) x 80,000 actual 80,000
Total cost (D) ₱ 960,000

E READER AND
PROBLEM 12-6 ItemsPC.Compatible
to be Included
warehouse in the
during the count
Inventory
in Acrobat
1 Items in the P1,090,000
2 Items out on consignment at another company's store 70,000
Items purchased FOB shipping point that are in transit at
4 December 31 500,000
5 Freight charges on goods purchased above 13,000
Items sold to another company, for which our company
has signed an agreement to repurchase at a set price that
covers all costs related to the inventory. Total cost of
7 merchandise is 200,000
Items sold FOB destination that are in transit at December
10 31, at cost 75,000
14 Items currently being used for window display 100,000
15 Items on counter for sale 400,000
17 Items included in thedept.,
count, damaged and unsalable (150,000)
receiving
(not thereturned
count) by customer, in good
18 condition included in 50,000
19 Merchandise inventories out on approval, at cost 100,000
Finished special article goods, made to order (included in
20 the count) (78,000)
Total (A) P2,370,000

77
Chapter 12: Inventories

The following items would not be reported as inventory:


3 Cost of goods sold in the income statement 40,000
6 Not reported in the financial statements 300,000
8 Cost of goods sold in the income statement 30,000
9 Cost of goods sold in the income statement 50,000
11 Advertising exp. In the income statement 10,000
12 Not reported in the financial statements 100,000
13 Temporary investments in the current
assets section of the balance sheet 125,000
16 Not reported in the financial statements 360,000
21 Office supplies in the current asset
section of the balance sheet 40,000

PROBLEM 12-7 Accounts Payable


Unadjusted balance 1,800,000
Goods acquired in transit, FOB shipping point 100,000
Goods lost in transit 50,000
Adjusted Accounts Payable (A) P1,950,000
The journal entry on item 2 would include the following:
Purchases / Inventory 50,000
Accounts Payable 50,000
E READER AND
To record the on December 20.
PC.Compatible in Acroba
purchase
t
Query: For F/S presentation on December 31, is the goods lost in transit be
presented as part of inventory?
Answer: No, since the inventories were lost in transit and it is improper to
report inventories that is not existing (i.e. it violates the existence assertion).
Thus the journal entry at December 31 if no claim was filed and the common
carrier has yet to acknowledge the claim may include a:
Loss on goods lost in transit (preferably presented as 50,000
other expense and not as cost of goods sold)
Inventory / Purchases 50,000
And on the next year (January 5), when the claim was filed and acknowledged
by the common carrier, the journal entry will be:
Claims from common carrier 50,000
Gain on reimbursement of lost inventory 50,000
To record the claim against common carrier on January 5.
78
Chapter 12: Inventories

PROBLEM 12-8 Consigned Goods


Inventory shipped on consignment to Lomasoc 360,000
Freight by Desiree to Lomasoc 18,000
Total Inventoriable cost (D) P 378,000

PROBLEM 12-9 Gross method vs. Net method


CASE NO 1: Gross method
Date Accounts Debit Credit
01/02 Purchases (100,000 x [1-20%]) 80,000
Accounts payable 80,000
01/12 Accounts payable 80,000
Cash (80,000 x [1-98%]) 78,400
Purchase discount 1,600
01/14 Accounts payable 80,000
Cash 80,000
CASE NO 2: Net method
Date Accounts Debit Credit
01/02 Purchases (100,000 x [1-20%]
x [1-2%]) 78,400
E READER AND payable
78,400
PC.Compatible in Acroba
Accounts
t
01/12 Accounts payable 78,400
Cash (80,000 x [1-98%]) 78,400
01/14 Accounts payable 78,400
Purchase discount lost 1,600
Cash 80,000

SUMMARY OF ANSWERS:
CASE NO. 1 CASE NO. 2
1. B 5. C
2. C 6. C
3. D 7. A
4. A 8. D

PROBLEM 12-10 Cost Formulas - Different Methods


Question Nos. 1 and 2
Weighted average Total goods available for sale (in peso value)
Weighted average =
unit cost
Total goods available for sale (in units)
Weighted average = 1,105,000
79
Chapter 12: Inventories

unit cost 85,000


Weighted average unit cost = P13/unit
Inventory end (40,000 x 13) = P520,000 (C)
Cost of goods sold (20,000+5,000+21,000–1,000) x 13 = P585,000 (C)

Question Nos. 3 and 4


Moving average
Units Unit cost Total cost
April 1 balance 20,000 10 200,000
Apr. 2 Purchase 30,000 12 360,000
Balance 50,000 11 560,000
Apr. 4 Sale (25,000) 11 (280,000)
Balance 25,000 11 280,000
Apr. 10 Purchase 15,000 14 210,000
Balance 40,000 12 490,000
Apr. 15 Sales (21,000) 12 (257,250)
Balance 19,000 12 232,750
Apr. 17 Sales return 1,000 12 12,250
Apr. 28 Balance 20,000 245,000
Apr. 28 Purchase 20,000 16.75 335,000
Balance 40,000 15 580,000
Inventory end = P580,000 (A)
E READER AND PC.Compatible in Acrobat
Cost of goods sold (280,000 + 257,250 – 12,250) = P525,000 (A)

Question Nos. 5 and 6


FIFO
Units Unit cost Total cost
April 1 balance 20,000 10 200,000
Apr. 2 Purchase 30,000 12 360,000
Apr. 4 (25,000 units sold) From Apr. 1 (20,000) 10 (200,000)
From Apr. 2 (5,000) 12 (60,000)
Balance from Apr. 2 25,000 12 300,000
Apr. 10 Purchase 15,000 14 210,000
Apr. 15 (21,000 units sold) From Apr. 2 (21,000) 12 (252,000)
Balance from April 2 4,000 12 48,000
Balance from April 10 15,000 14 210,000
Apr. 17 Sales return 1,000 12 12,000
Balance
Balance from April 2 5,000 12 60,000
Balance from April 10 15,000 14 210,000
Apr. 28 Purchase 20,000 17 335,000
Total Balance 40,000 605,000
Inventory end = P605,000 (B)
Cost of goods sold (200,000 + 60,000 + 252,000 – 12,000) = P500,000 (B)
Question Nos. 7 and 8
Note that inventory and cost of goods sold under FIFO periodic and perpetual is
the same.
80
Chapter 12: Inventories

SUMMARY OF ANSWERS:
1. C 2. C 3. A 4. A 5. B 6. B 7. B 8. B

PROBLEM 12-11 Lower of Cost or Net Realizable Value

Question No. 1 Raw Materials


Supply of steel (used for motorbikes) Write-down
Cost ₱ 40,000
More profitable (as is) 25,000 ₱ 15,000
Supply of aluminum (used for bicycles)
Cost ₱ 60,000
More profitable (completed product) 50,000 10,000
Total write-down (C) ₱ 25,000

Question No. 2 Work-in-process


Incomplete motorbikes Write-down
Cost ₱ 30,000
More profitable (completed product) 25,000 ₱ 5,000
Incomplete bicycles
Cost ₱ 50,000
More profitable (as is) 60,000 -
E READER AND
Total write-down ₱ (D)
PC.Compatible in5,000Acrob
at
Question No. 3 Finished goods
Motorbikes Write-down
Cost ₱ 80,000
More profitable (completed product) 60,000 ₱ 20,000
Bicycles
Cost ₱ 80,000
More profitable (completed product) 110,000 -
Total write-down (C) ₱ 20,000

Question No. 4 Adjusted COGS


Cost of goods sold before write-down ₱450,000
Add: Write-down
Raw materials 25,000
Work-in-process 5,000
Finished goods 20,000
Adjusted cost of goods sold (C) ₱500,000
81
Chapter 12: Inventories

PROBLEM 12-12 Purchase Commitment


CASE NO. 1
Date Accounts Debit Credit
11/15 No entry
12/31 Loss on purchase commitment (20,000 x [25-20]) 100,000
Estimated liability for purchase commitment 100,000
03/15 Purchases (25,000 x 25) 500,000
Estimated liability for purchase commitment 100,000
Accounts payable/Cash 500,000
Gain on purchase commitment 100,000
CASE NO. 2
Date Accounts Debit Credit
11/15 No entry
12/31 No entry
03/15 Purchases (25,000 x 25) 500,000
Accounts payable/Cash 500,000

PROBLEM 12-15 Purchase Commitment


Date Accounts Debit Credit
E READER
3/31 No AND
entry PC.Compatible in Acrobat
12/31 Loss on purchase commitment (1,200,000-1,000,000) 200,000
Estimated liability for purchase commitment 200,000
04/30 Purchases 1,200,000
Estimated liability for purchase commitment 200,000
Accounts payable/Cash 1,200,000
Gain on purchase commitment 200,000

SUMMARY OF ANSWERS:
1. B 2. A

PROBLEM 12-13 Inventory Estimation - Gross Profit Rate Method


Sales 3,400,000
Less: Sales returns (30,000)
Net Sales excluding Sales discount 3,370,000
Multiply by: Cost ratio (1-30%) 70%
Cost of Goods sold 2,359,000
Inventory, January 1 650,000
Add: Net Purchases
Purchases 2,300,000
Add: Freight-in 60,000
82
Chapter 12: Inventories

Less: Purchase returns (80,000) 2,280,000


Total Goods available for sale 2,930,000
Less: Cost of goods sold (2,359,000)
Merchandise inventory that should be on hand 571,000
Less: Actual merchandise inventory on hand (420,000)
Cost of Missing inventory (A) 151,000

PROBLEM 12-14 Inventory Estimation: Average Method - Retail Method


Computation of cost ratio:
Cost Retail
Inventory at January 1 250,000 375,000
Purchases 1,325,000 1,750,000
Net markups - 200,000
Net markdowns - (75,000)
Totals 1,575,000 2,250,000
Cost ratio (1,575,000 / 2,250,000) = 70%
Computation of Inventory end at retail
Balance up to markdowns (see above computation) 2,250,000
Less: Sales 1,500,000
Estimated normal shrinkage (1,500,000 x 5%) 75,000
E READER in
AND PC.Compatible
normal shoplifting losses
Estimated 50,000
Acroba
t
Inventory end at retail P 625,000
Computation of Cost of goods sold
Total goods available for sale at cost 1,575,000
Less: Inventory end at cost (625,000 x 70%) 437,500
Cost of Sales (B) 1,137,500

PROBLEM 12-15 Inventory Estimation: FIFO Method - Retail Method


Computation of cost ratio:
Cost Retail
Purchases 292,500 400,000
Net markups - 75,000
Net markdowns - (25,000)
Totals 292,500 450,000
Cost ratio (292,500 / 450,000) = 65%
Computation of Inventory end at retail
Balance up to markdowns (see above computation) 450,000
Add: Inventory beginning 100,000
Less: Sales 375,000
Inventory end at retail P 175,000
83
Chapter 12: Inventories

Multiply: Cost ratio 65%


Inventory end at cost (A) P113,750

PROBLEM 12-17
Question No. 1
A EI over (P129-P119) x 4,000 40,000
B EI under (70,000)
C EI over 100,000
Overstatement of ending inventory 70,000 (C)
Question No. 2
D. Ending inventory understated (140,000) (B)
Question Nos. 3 and 4
2015 2016
Unadjusted balance 1,000,000 1,200,000
A. EI over, NI over (P129-P119) x 4,000 (40,000) 40,000
B. EI under, NI under 70,000 (70,000)
C. EI over, NI over (100,000) 100,000
D. EI under, NI under 140,000
Adjusted balances 930,000 1,410,000
(A) (C)
E READER AND PC.Compatible in Acrobat
Question No. 5
Unadjusted net income (1,000,000+1,200,000) 2,200,000
Less: Adjusted net income (930,000+1,410,000) 2,340,000
Net adjustment to income-understated (140,000) (D)
SUMMARY OF ANSWERS:
1. C 2. B 3. A 4. C 5. D

PROBLEM 12-18
Question Nos. 1 and 2
Ledger
Count
Physical
Balances prior to adjustment PBalance
314,800 P 293,600
Add: Goods in transit sold, FOB destination 3,200 3,200
Less: unrecorded sale ( 8,400) -
Less: unrecorded purchase returns ( 6,000) -
Less: goods held on consignment - ( 8,800)
Add: unrecorded purchase 3,640- -
Add: Goods in transit purchased, FOB shipping point 1,600
Add: Goods out on consignment - 14,800
Adjusted balances P 307,240 P 304,400

84
Chapter 12: Inventories

(A) (C)
Question No. 3
Adjusted balances, per ledger P 307,240
Adjusted balances, physical count 304,400
Inventory shortage P 2,840 (B)

SUMMARY OF ANSWERS:
1. A 2. C 3. B

PROBLEM 12-19
Note to the professor: Use the following guide questions in answering this
question:
1. Accounts Payable and related accounts
Was there a valid purchase?
Was the purchase recorded?
Were the inventories INCLUDED in the count?
2. Accounts Receivable and related accounts
Was there a valid sale?
Was the sale recorded?
Were the inventories EXCLUDED in the count?

E READER
SOLUTION:AND PC.Compatible in Acrobat
Ending
Income
Unadjusted balances 550,000 1,000,000 600,000 450,000 120,000
Net
679 Inventory Sales Purchases AP
680
681
682 Purch over, COS over, NI
under (46,740) (46,740) (46,740)
EI over, COS under, NI
over (46,740) 46,740
683 EI over, COS under, NI
over (4,500) (4,500)
684 Purch under, NI over 1,060 1,060 (1,060)
685 No, No, No
686 No, No, No
310 Yes, Yes, Yes
311 Sales over, NI over (560) (560)
EI under, NI under (560 x
70%) 392 392
312 Sales over, NI over (31,940) (31,940)
EI under, NI under (31,940
x 70%) 22,358 22,358
313 Sales over, NI over (6,350) (6,350)
EI under, NI under (6,350
x 70%) 4,445 4,445
314 Sales over, NI over (1,930) (1,930)
315 No, No, No
316 No, No, No
85
Chapter 12: Inventories

317 No, No, No


318
Net adjustment (24,045) (40,780) (45,680) (45,680) (19,145)
Adjusted balances 525,955 959,220 554,320 404,320 100,855
(A) (A) (A) (A) (D)

SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. A 5. D

PROBLEM 12-20
Ending Accounts Accounts
inventory receivable payable Sales Net income
Unadjusted
balance P220,000 P104,000 P138,000 P1,010,000 P180,400
A (20,000) 20,000
B (10,000) (10,000)
C 50,000 (64,000) (64,000) (14,000)
D 14,000 (16,000) (16,000) (2,000)
E ( 24,000) ( 24,000)
Adjusted P 250,000 P24,000 P108,000 P930,000 P160,400
(A) (C) (D) (D) (A)

SUMMARY OF ANSWERS:
1. A 2. C 3. D 4. D 5. A
E READER AND PC.Compatible in Acrobat
PROBLEM 12-21
Accounts Accounts Net
Inventory payable Receivable Net Sales Purchases Net income
Unadjusted
balances 250,000 400,000 1,000,000 4,000,000 2,500,000 600,000
A - - - - - -
B 35,000 - - - - 35,000
C 4,000 4,000 - - 4,000 -
D (25,000) - 40,000 40,000 - 15,000
E 10,000 - - - - 10,000
F - - (30,000) (30,000) - (30,000)
G 34,000 - (68,000) (68,000) - (34,000)
H - - (10,000) (10,000) - (10,000)
I - - - (90,000) - (90,000)
J 60,000 60,000 - - 60,000 -
Adjusted
balances 368,000 464,000 932,000 3,842,000 2,564,000 496,000

SUMMARY OF ANSWERS:
1. C 2. C 3. A 4. A 5. D 6. D

86
Chapter 12: Inventories

PROBLEM 12-22
Questions No. 1 to 5
R/E Sales EI A/P CGS
2016 Purchases under, CGS 36,000
under, NI over, RE over
2017 Purchases over, CGS 36,000
over
2016 EI under, NI under, RE (32,000)
under
2017 BI under, CGS under (32,000)
Sales under (20,000)
Purchases under, CGS under (24,000)
(24,000)
EI under, CGS over (8,000) 8,000
Purchases under, CGS under (4,000) (4,000)
EI under, CGS over (4,000) 4,000
Total 4,000 (20,000) (12,000) (28,000) (12,000)
Legend:
BI - Beginning inventory
EI - Ending inventory
NI - Net Income
CGS - Cost of goods sold
RE - Retained earnings – 12/31/2016 or 01/01/2017
4,000 – overstated
E READER AND PC.Compatible in Acroba
(4,000) – understated
t
Note: The effect of errors on December 2016 and January 2017 has no effect on
the ending balance of the accounts payable on December 31, 2017 since the
payable is expected to be settled before the end of the year.

SUMMARY OF ANSWERS:
1. C 2. B 3. B 4. D 5. C

PROBLEM 12-23
Question No. 1
Sales (475,000/80%) P593,750 100%
Less: Cost of sales 475,000 80%
Gross profit 118,750 20%
Inventory (in units)
Beg. Balance (60,000/P3) 20,000 25,000 Balance end (squeeze) or
(125,000/5)
Purchases 100,000 95,000 Cost of sales (475,000/5)
Total 120,000 120,000

Inventory (in peso amount)


87
Chapter 12: Inventories

Beg. Balance (squeeze) 60,000 125,000 Balance end (squeeze)


Purchases 540,000 475,000 Cost of sales
Total 600,000 600,000

Weighted average unit cost = TGAS (peso) / TGAS (units)


Weighted average unit cost (P600,000/120,000) = P5/unit
SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. A 5. B

PROBLEM 12-24
Question No. 1
The cumulative effect on change in accounting policy on January 1, 2016 or
December 31, 2015 Retained Earnings is understatement of 100,000, which is
the understatement of Ending Inventory on December 31, 2015. (B)

Question No. 2
Net income – weighted average P3,250,000
Beginning inventory under, CGS under, Net income over (150,000)
Ending inventory under, CGS over, Net income under 100,000
E READER AND PC.Compatible (B)in Acrobat
Adjusted net income – FIFO P3,200,000

Question No. 3
Computation of units sold:
Beginning inventory – units 10,000
Add: Total purchases – units 100,000
Total goods available for sale – units 110,000
Less: Units sold (P6,400,000 / P80/unit) 80,000
Ending inventory in units 30,000
The 30,000 ending inventory comes from the last two purchases as follows:
Units Unit cost Total cost
From 4th quarter purchases 10,000 68 680,000
From 3rd quarter purchases 20,000 66 1,320,000
Total 30,000 (B) 2,000,000

Question No. 4
Cost (refer to no. 3) 2,000,000
Net realizable value [(P70 – P5) x 30,000] 1,950,000
Loss on inventory write-down (B) 50,000

Question No. 5
Beginning inventory – FIFO 500,000
Add: Net Purchases (P6,480,000 – 980,000) 5,500,000
88
Chapter 12: Inventories

Total goods available for sale 6,100,000


Less: Ending inventory at cost (see no. 3) 2,000,000
Cost of goods sold at cost 4,100,000
Add: Loss on inventory write-down (see no. 4) 50,000
Cost of goods sold after inventory write-down (A) 4,150,000

SUMMARY OF ANSWERS:
1. B 2. B 3. B 4. B 5. A

PROBLEM 12-25
Question No. 1
(10,500 - 1,000 + 3,000) = 12,000 units
No. of units Unit cost Total
3,000 14 P 42,000
2,000 13 26,000
4,000 15 60,000
3,000 16 48,000
12,000 P 176,000 (A)

Question No. 2
E READER AND PC.Compatible
(4,500+700+600)=5,800 units
No. of units Unit cost Total
in Acrobat
1,800 19 P 34,200
1,800 20 36,000
1,200 21 25,200
1,000 22 22,000
5,800 P 117,400 (A)
Question No. 3
T-shirts:
Net realizable value NRV Cost Lower
(12,000 x (P16-(10% x P16)) P172,800 P176,000 P 172,800
Jackets:
(5,800 x (P22-(10%xP22) 114,840 117,400 114,840
Lower of cost or NRV P287,640 P 293,400 P 287,640
Question No. 4
Total cost (see no. 3) P 293,400
Less: Lower of cost or NRV (see no. 3) 287,640
Loss on inventory write-down (B) P 5,760
Question No. 5
Beginning inventories:
T-shirts (9,000 x P11) P 99,000
Jackets (5,000 x P15) 75,000 P 174,000
89
Chapter 12: Inventories

Add:*Total purchases (299,500 + 183,900) 483,400


Total goods available for sale P 657,400
Less: Merchandise inventory at cost 293,400
Cost of sales before inventory write-down P 364,000
Add: Loss on inventory write-down 5,760
Cost of sales after inventory write-down (B) P369,760
*T-shirts
4,000 P12 P 48,000
3,000 12 36,000
2,500 13 32,500
3,500 14 49,000
2,000 13 26,000
4,000 15 60,000
3,000 16 48,000
22,000 P 299,500

Jackets
900 P16 P 14,400
1,100 18 19,800
1,500 19 28,500
2,000 19 38,000
1,800 20 36,000
E READER AND PC.Compatible in Acrobat
1,200
1,000
21
22
25,200
22,000
9,500 P 183,900

SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. B 5. B

PROBLEM 12-26
This T-Account of Raw Materials will be the same under the three different
cases:
Raw Materials
Beginning balance 600,000 1,200,000 Balance end
Net Purchases 2,200,000 1,600,000 Direct materials used
Total 2,800,000 2,800,000

CASE NO. 1
Question No. 1
GP Rate: 2013 2014 2015 2016
Gross Profit 2,000,000 3,500,000 4,000,000
Divide by: Sales 1,700,000 2,800,000 3,000,000
Gross Profit Rate 0.15 0.20 0.25 0.30
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Chapter 12: Inventories

The trend of gross profit for the past three years increases by 5% each year;
thus, if the trend continues, the gross profit for 2016 will be 30%. The cost ratio
then would be 70% (100% - 30%). Therefore, the cost of goods sold is
computed as follows:
Sales 6,000,000
Multiply by: Cost Ratio 0.70
Cost of goods sold 4,200,000 (B)

Question No. 2
Finished Goods
Beginning balance 2,800,000 2,000,000 Balance end
Cost of goods 4,200,000 Cost of goods sold
manufactured 3,400,000
Total 6,200,000 6,200,000

Work in Process
Beginning balance 2,000,000 2,600,000 Balance end (A)
Direct materials used 1,600,000 Cost of goods
Direct labor 1,600,000 3,400,000 manufactured
Factory overhead 800,000
E READER AND
Total 6,000,000 6,000,000

PC.Compatible in Acroba
t
Computation of factory overhead:
Direct labor cost 1,600,000
Multiply by: Predetermined rate 50%
Factory overhead 800,000

CASE NO. 2:
Question No. 3
GP Rate: 2013 2014 2015 2016
Gross Profit 340,000 630,000 1,000,000
Divide by: Sales 2,000,000 3,500,000 4,000,000
Gross Profit Rate 0.17 0.18 0.25 0.20
The GP rate in 2016 is computed as follows:
16% + 18% + 25%
Gross Profit Rate =
3
= 20%
The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goods
sold is computed as follows:
Sales 6,000,000
Multiply by: Cost Ratio 0.80
Cost of goods sold 4,800,000 (B)
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Chapter 12: Inventories

Question No. 4
Finished Goods
Beginning balance 2,800,000 2,000,000 Balance end
Cost of goods 4,800,000 Cost of goods sold
manufactured 4,000,000
Total 6,800,000 6,800,000

Work in Process
Beginning balance 2,000,000 2,000,000 Balance end (A)
Direct materials used 1,600,000 Cost of goods
Direct labor 1,600,000 4,000,000 manufactured
Factory overhead 800,000
Total 6,000,000 6,000,000

CASE NO. 3:
Question No. 5
The gross profit for 2016 is computed based on the overall gross profit for 2014
and 2015:
800,000 + 1,000,000
Gross Profit Rate =
3,500,000 + 4,000,000
E READER AND PC.Compatible in Acrobat
=
1,800,000
7,500,000
Gross Profit Rate = 24%
The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goods
sold is computed as follows:
Sales 6,000,000
Multiply by: Cost Ratio 0.76
Cost of goods sold 4,560,000 (A)

Question No. 6
Finished Goods
Beginning balance 2,800,000 2,000,000 Balance end
Cost of goods 4,560,000 Cost of goods sold
manufactured 3,760,000
Total 6,560,000 6,560,000

Work in Process
Beginning balance 2,000,000 2,240,000 Balance end (A)
Direct materials used 1,600,000 Cost of goods
Direct labor 1,600,000 3,760,000 manufactured
Factory overhead 800,000

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Chapter 12: Inventories

Total 6,000,000 6,000,000

SUMMARY OF ANSWERS:
1. B 2. A 3. B 4. A 5. A 6. A

PROBLEM 12-27
Question No. 1
Accounts payable
Balance end 250,000 555,000 Beg. Balance
Purchase ret. and allow. 70,000 3,000,000 Purchases
Purchase discounts 80,000 100,000 Freight-in
Payments to supplier 3,255,000
(squeeze)
Total 3,655,000 3,655,000

Question No. 2
Direct materials inventory
Beg. Balance 200,000 320,000 Balance end
Net purchases 2,950,000 2,830,000 Direct materials used
E READER
Total AND 3,150,000 3,150,000
PC.Compatible in Acroba
t
Purchases 3,000,000
Add: Freight-in 100,000
Gross Purchases 3,100,000
Less: Purchase returns and allow 70,000
Purchase discounts 80,000
Net Purchases 2,950,000
Question No. 3
Work in process
Beg. Balance 250,000 280,000 Balance end
Direct materials used 2,950,000 4,375,000 Cost of goods
Direct labor 900,000 manufactured
Factory overhead 675,000
Total 4,655,000 4,655,000

Question No. 4
Sales P5,100,000 120%
Less: Cost of sales (5,000,000/120%) 4,250,000 100%
Gross profit 850,000 20%
93
Chapter 12: Inventories

Note: Do not deduct sales discount from the gross sales since sales discount
does not constitute actual return of merchandise.
Question No. 5
Finished goods
Beg. Balance 400,000 525,000 Balance end
Cost of goods 4,375,000 4,250,000 Cost of goods sold
manufactured
Total 4,775,000 4,775,000

Estimated finished goods 525,000


Less: Cost of goods out on consignment 20,000
Salvage value 10,000
Inventory fire loss 495,000

Question No. 6
Cost of goods sold (80% x P5,100,000) = P4,080,000

Question No. 7
Sales (5,100,000-100,000) P5,000,000 100%
Less: Cost of sales (80% x P5,100,000) 4,080,000 80%
Gross profit 1,000,000 20%
E READER AND PC.Compatible in Acrobat
Finished goods
Beg. Balance 400,000 695,000 Balance end
Cost of goods 4,375,000 4,080,000 Cost of goods sold
manufactured
Total 4,775,000 4,775,000

Estimated finished goods 695,000


Less: Cost of goods out on consignment 20,000
Salvage value 10,000
Inventory fire loss 665,000

SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. B 5. B 6. A 7. A

PROBLEM 12-28
Question No. 1
Accounts payable, March 31 2,370,000
Less: Payment in April 300,000
Total 2,070,000
Accounts payable for April Purchases
94
Chapter 12: Inventories

Total purchases 600,000


Less: Payment in April 200,000 400,000
Total (B) 2,470,000

Question No. 2
Purchases, as of March 31 4,200,000
Add: Purchases in April 600,000
Gross purchases 4,800,000
Less: Purchase returns 12,000
Net purchases (B) 4,788,000

Question No. 3
Accounts receivable
Beg. Balance 2,700,000 3,000,000 Bal. end
Collections including
Sales on account 1,488,000 938,000 recoveries
Recoveries 0 250,000 Writeoff
0 Sales returns
4,188,000 4,188,000

Net Sales
Sales as of March 31 9,040,000
E READER AND
April Sales 1,488,000
PC.Compatible in Acroba
t
Less: Sales return 100,000 1,388,000
Net Sales (C) 10,428,000

Question No. 4
Net Sales 10,428,000
Multiply by: Cost ratio 60%
Cost of Sales (C) 6,256,800
Cost of Sales 9,000,000 10,500,000
Divide by: Gross Profit 9,000,000 4,500,000
50.000% 30.000%
Average gross profit = (50%+30%)/2 = 40%
Cost ratio = 100% - 40% = 60%

Question No. 5
Estimated inventory 3,031,200
Less: Shipment in transit 40,000
Undamaged goods at cost 120,000
Salvage value 25,000
Inventory fire loss (C) 2,846,200

SUMMARY OF ANSWERS:
95
Chapter 12: Inventories

1. B 2. B 3. C 4. C 5. C

PROBLEM 12-29
Questions No. 1 and 2
Purchases ending
11 mos 12 mos
Unadjusted balance 2,700,000 3,200,000
Shipment in Nov. included in December purchases 30,000 -
Unsalable shipments received (4,000) (6,000)
Deposits in October shipped February (8,000) (8,000)
Deposits made vendor in November (22,000) -
Adjusted balance 2,696,000 2,186,000
1. (D) 2. (D)

Question No. 3
Beginning inventory – January 1, 2015 350,000
Add: Purchases for 11 months (see No. 1) 2,696,000
Less: Ending inventory – Nov. 30, 2015 (360,000- 358,000
22,000 + 20,000)
Cost of sales 2,688,000 (A)

E READER AND PC.Compatible in Acrobat


Cost ratio (5,736,000 / 6,720,000) = 80%

Question No. 4
Sales ending December 31, 2015 3,840,000
Less: Sales ending Nov. 30, 2015 (3.4M-40,000) 3,360,000
Sales – December 2015 480,000
Less: Sales at cost 40,000
Sales in December 2015 made at a profit 440,000
Multiply: Cost ratio (2,688,000 / 3,360,000) 80%
Cost of sales made at profit 352,000
Add: Cost of sales made at cost 40,000
Total Cost of Sales -December 392,000 (A)

Question No. 5
Beginning inventory – Nov. 30, 2015 358,000
Add: Purchases for December (3,186,000 – 2,696,000) 490,000
Less: Cost of Sales – December 392,000
Ending inventory – December 31, 2015 456,000 (A)
SUMMARY OF ANSWERS:
1. D 2. D 3. A 4. A 5. A

PROBLEM 12-30

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Chapter 12: Inventories

Cost Retail
Inventory, Jan 1 300,000 1,200,000
Purchases 6,000,000 8,500,000
Purchase returns (400,000) (800,000)
Purchase discounts (150,000) -
Purchase allowance (50,000) -
Freight-in 20,000 -
Departmental Transfer-In 600,000 1,100,000
Departmental Transfer-Out (560,000) (1,334,000)
Totals 5,760,000 8,666,000

Basis of computation of cost ratios


Totals 5,760,000 8,666,000
Markups 600,000
Markup cancellations (50,000)
Basis of computation (conservative) 5,760,000 9,216,000
Markdown (316,000)
Markdown cancellations 100,000
Basis of computation (average) 5,760,000 9,000,000

Cost ratios:
Conservative
E READER
Cost ratio AND
=
5,760,000
PC.Compatible in Acro
bat 9,216,000
Cost ratio = 62,50%

Average
5,760,000
Cost ratio =
9,000,000
Cost ratio = 64%

FIFO
5,760,000 – 300,000
Cost ratio =
9,000,000 – 1,200,000
Cost ratio = 70%

Estimated ending inventory @ retail – for all methods


TGAS @ retail under average method 9,000,000
Sales (7,000,000)
Sale returns 700,000
Normal Shrinkage (500,000)
Estimated ending inventory @ retail 2,200,000
97
Chapter 12: Inventories

Question Nos. 1 to 6
Ending inventory at cost Cost of goods sold
Cost method (EI @ retail x cost ratio) (TGAS @cost – EI @cost)
Conservative (62.5%) P 1,375,000 4,385,000
FIFO (70%) 1,540,000 4,220,000
Average (64%) 1,408,000 4,352,000

SUMMARY OF ANSWERS:
1. A 2. B 3. B 4. C 5. C 6. D

PROBLEM 12-31
Question No. 1
Subsidiary General
Ledger Ledger
Unadjusted bal. P 760,000 P 1,020,000
Undelivered sales ( 100,000)
Valid Sales 60,000
Sales FOB destination ( 100,000)
NSF check 50,000 50,000
Collection by the bank ( 60,000) ( 60,000)
Sales in 2015 recorded in 2016 DR No. 38740 3,360 3,360
E READER AND PC.Compatible
( in
( Acroba
Receivable ins. Co DRNo. 38741 10,080) 10,080)
t
Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200) ( 19,200)
Adjusted balance (D) P 784,080 P 784,080
Question No. 2
Current:
Unadjusted beginning Balance 97,500
Add: Valid Sales in 2015 (60,000 + 3,360) 63,360
Total 160,860
Less: Receivable ins. Co (DR # 38741) 10,080
Sales in 2016 recorded in 2015 (DR # 38743) 19,200
Current Accounts Receivable balance 131,580
Past Due:
Adjusted Accounts Receivable balance (see no. 1) 784,080
Less: Current Accounts Receivable balance 131,580
Past due Accounts Receivable *652,500
*or (662,500+50,000-60,000)
Age classification Amount Percentage Total

Current 131,580 6 7,894.80


Past due 652,500 10 65,250.00
Allowance for doubtful accounts (A) 73,144.80

98
Chapter 12: Inventories

Question No. 3
Allowance for doubtful accounts, beginning 7,000.00
Less: Accounts written off -
Less: Allowance for doubtful accounts, ending 73,144.80
Doubtful accounts expense (A) 66,144.80
Question No. 4
Unadjusted Merchandise Inventory, ending 316,000
Add: Cost of merchandise sold of DR # 38743(19,200/120%) 16,000
Doubtful accounts expense (B) 332,000
Question No. 5
Unadjusted Net Sales balance P 3,000,000
Undelivered sales ( 100,000)
Sales FOB destination ( 100,000)
Sales in 2015 recorded in 2016 DR No. 38740 3,360
Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200)
Adjusted balance (B) P 2,784,160
SUMMARY OF ANSWERS:
1. D 2. A 3. A 4. B 5. B
PROBLEM 12-33
Accounts Accts. Net Net
E READER
Unadj.
AND PC.Compatible in Acrobat
Inventory
625,000
payable
500,000
Receivable Net Sales
500,000 4,500,000
Purchases income
1,607,500 1,086,000
(77,500) (77,500) - - (77,500) -
(11,000) - - - - (11,000)
- - 20,000 20,000 - 20,000
105,000 - - - - 105,000
12,500 12,500 - - 12,500 -
1,000 1,000 - - 1,000 -
(2,650) (2,650) - - (2,650) -
Adj. 652,350 433,350 520,000 4,520,000 1,540,850 1,200,000
SUMMARY OF ANSWERS:
1. D 2. B 3. B 4. B 5. C
PROBLEM 12-34
SUMMARY OF ANSWERS:
1. C 2. A 3. A 4. A 5.
PROBLEM 12-35
SUMMARY OF ANSWERS:
1. C 2. D 3. D 4. D 5. B
PROBLEM 12-36
SUMMARY OF ANSWERS:
1. A 2. A 3. C 4. C 5. B

99