NOTES RECEIVABLE

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

PV of ordinary annuity of 1 ----- “….starting one year hence.”

9. A (a) Future value divided by Present value = Future Value Factor

The rate can be determined in the Future Value of 1 Table by
finding the rate which results to the computed factor.
(b) is wrong because dividing the future value by the present value
results to a Future Value Factor which shall be looked at the Future
Value Table not the PV Table.
(c) is wrong because dividing the present value by the future value
results to a Present Value Factor which shall be looked at the PV
Table.
(d) is wrong because multiplying the present value by the future value
does not result to a relevant amount
11. D
12. D
Solution:
Normal selling price with credit period of one month 120,000
Discount for cash on delivery (10,000)
Cash price equivalent of the goods sold 110,000

13. A
Solution:
Initial measurement: 800,000 x PV of 1 @12%, n=3 = 569,424

Subsequent measurement:
Date Interest income Unearned interest Present value
1/1/x1 230,576 569,424
12/31/x1 68,331 162,245 637,755
12/31/x2 76,531 85,714 714,286
12/31/x3 85,714 - 800,000

14. D (See solution above)

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

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
1/1/20x1 6,074,699
12/31/20x1 2,000,000 728,964 1,271,036 4,803,663
12/31/20x2 2,000,000 576,440 1,423,560 3,380,102
12/31/20x3 2,000,000 405,612 1,594,388 1,785,714
12/31/20x4 2,000,000 214,286 1,785,714 0
16. B (See solution above)
17. B (See solutions above)

18. D (See solutions below)

19. C
Solutions:
Initial measurement: (4M ÷ 4) x PV annuity due of 1 @12%, n=4 = 3,401,831

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 3,401,831
Jan. 1, 20x1 1,000,000 - 1,000,000 2,401,831
Jan. 1, 20x2 1,000,000 288,220 711,780 1,690,051
Jan. 1, 20x3 1,000,000 202,806 797,194 892,857
Jan. 1, 20x4 1,000,000 107,143 892,857 0

The carrying amount of the notes receivable as of December 31, 20x1 is determined as follows:
Carrying amount of notes receivable - Jan. 1, 20x2 1,690,051
Add back: Collection on Jan. 1, 20x2 1,000,000
Carrying amount of notes receivable - Dec. 31, 20x1 2,690,051

20. A (See solution above)

21. D
Solution:
Initial measurement: (2.1M ÷ 6) x PV ordinary annuity of 1 @5%, n=6 = 1,776,492

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 1,776,492
July 1, 20x1 350,000 88,825 261,175 1,515,317
Dec. 31, 20x1 350,000 75,766 274,234 1,241,083
July 1, 20x2 350,000 62,054 287,946 953,137
Dec. 31, 20x2 350,000 47,657 302,343 650,794
July 1, 20x3 350,000 32,540 317,460 333,333
Dec. 31, 20x3 350,000 16,667 333,333 0

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

22. A (See solution above)

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

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

24. C – equal to cash price equivalent.

25. A
Solution:
First trial: (at 10%)
Future cash flows x PV factor at x% = PV of note
 2,400,000 x PV of P1 @ 10%, n=3 = 2,000,000
 (2,400,000 x 0.751315) = 1,803,156 is not equal to 2,000,000
We need a substantially higher amount of present value. Therefore, we need to decrease substantially the
interest rate. Let’s try 6%.

Second trial: (at 6%)

Future cash flows x PV factor at x% = PV of note
 2,400,000 x PV factor at 6%, n=3 = 2,000,000
 (2,400,000 x 0.839619) = 2,015,086 is not equal to 2,000,000
We need a slightly lower amount of present value. Therefore, we need to increase slightly the interest rate.
Let’s try 7%.

Third trial: (at 7%)

Future cash flows x PV factor at x% = PV of note
 2,400,000 x PV factor at 7%, n=3 = 2,000,000
 (2,400,000 x 0.816298) = 1,959,115 is not equal to 2,000,000

In here, we need to perform interpolation. Looking at the values derived above, we can reasonably expect
that the effective interest rate is a rate between 6% and 7%.

To perform the interpolation, we will use the following formula:

x% - 6%
7% - 6%

Where: x% again is the effective interest rate.

The formula was derived based on our expectation that the effective interest rate is somewhere between
6% and 7%.Notice that the lower rate appears in both the numerator and denominator of the formula while
x% appears in the numerator.

Let us substitute the amounts of present values computed earlier on the formula.

2,000,000 - 2,015,086 = (15,086) = 0.2695

1,959,115 - 2,015,086 (55,970)

The amount computed is added to 6% to derive the effective interest rate. The effective interest rate is
6.2695% (6% + .2695%).

If other methods or tools were used, such as a financial calculator or spreadsheet application, the exact
rate is 6.265856927%.

The amortization table using 6.2695% as the effective interest rate is presented below.
Date Interest income Unearned interest Present value
Jan. 1, 20x1 400,000 2,000,000
Dec. 31, 20x1 125,390 274,610 2,125,390
 Dec. 31, 20x2 133,251 141,359 2,258,641
Dec. 31, 20x3 141,606 -247 2,400,247

Notice that there is still a slight difference of ₱247. However, if this is deemed immaterial, we can regard
the computed rate as the effective interest rate.

INVENTORIES

1. FALSE 6. TRUE
2. FALSE 7. TRUE
3. FALSE 8. TRUE
4. TRUE 9. FALSE
5. TRUE 10. TRUE
11. D
12. B
13. D
14. D
15. A
16. B
17. A
18. D
19. B
20. A

21. D ₱520,000 + (3 × ₱300,000) = ₱1,420,000.

22. D ₱2,000 – (₱2,000 × .02) = ₱1,960.

23. D (₱32,000 – ₱2,000) × .02 = ₱600.

24. B (₱29,310 + ₱20,600 + ₱28,917) ÷ (3,000 + 2,000 + 2,700) = ₱10.237/unit

₱10.237 × 2,000 = ₱20,474.

25. D.Avg. on 1/6 ₱49,910 ÷ 5,000 = ₱9.982/unit

1/26 ₱53,872 ÷ 5,200 = ₱10.36/unit
₱10.36 × 2,000 = ₱20,720.

26. D 200 + 700 + 140 – 300 = 740 units

(200 × ₱4.20) + (540 × ₱4.40) = ₱3,216.

27. C (750 × ₱3.5) + (1,050 × ₱3.4) = ₱6,195.

28. B ₱31,815 ÷ 9,750 units = ₱3.26

₱3.26 × 1,800 = ₱5,868.

29. C ₱400,000 + ₱16,000 – ₱4,000 = ₱412,000.

30. B ₱90,000 × .8 × .9 = ₱64,800.

INVENTORY ESTIMATION
1. A
Solution:
Accounts payable
3,000 Beginning balance
Payments to suppliers 50,000 49,000 Net purchases (squeeze)
Ending balance 2,000

The computed “Gross purchases” is extended to the “Inventory” T-account as follows:

Inventory
Beginning balance 10,000
Net purchases 49,000
Freight-in 500 52,500 Cost of goods sold *
7,000 End. bal. (squeeze)

*“Cost of goods sold” is computed as follows:

Gross sales 80,000
Sales returns (5,000)
Net sales 75,000
Multiply by: Cost ratio (100% - 20% GPR based on sales) 70%
Cost of goods sold 52,500

Inventory, Sept. 30 (see T-account above) 7,000

Goods in transit (1,000)
Goods out on consignment (1,200)
Salvage value (1,800)
Inventory loss due to flood 3,000

2. D
Solution:
Inventory
Jan. 1 20,000
Net purchases 190,000 192,000 COGS (240K x 100/125)
18,000 Sept. 30 (squeeze)

Inventory, Sept. 30 18,000

Salvaged (20% x 18,000) (3,600)
Partially damaged (50% x 18,000 x 30%) (2,700)
Loss from fire 11,700
3. B
Solution:
Cost Retail
Inventory, January 1 21,750 35,000
Net purchases (a) 129,000 179,250
Departmental transfers-in (debit) 2,500 3,750
Departmental transfers-out (credit) (2,000) (3,000)
Net markups (15,000 – 5,000) 10,000
Net markdowns (30,000 – 7,500) (22,500)
Abnormal spoilage (theft and casualty loss) (12,500) (17,500)
Total goods available for sale 138,750 185,000
Net sales (b) (105,000)
Ending inventory at retail 80,000

(a)
Cost Retail
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts (1,250) -
Purchase returns (13,000) (21,500)
Net purchases 129,000 179,250

The Average cost ratio is computed as follows:

Cost ratio Total goods avail. for sale at cost
= Total goods avail. for sale at sales price or
(Average cost method)
at retail
Average cost ratio = (138,750 ÷ 185,000) = 75%

(b) Net sales is computed as follows:

Sales 109,500
Sales returns (6,250)
Employee discounts 1,250
Normal spoilage 500
Net sales 105,000

The ending inventory at cost is estimated under the Average cost method as follows:
Ending inventory at retail (or at selling price) 80,000
Multiply by: Average cost ratio 75%
Ending inventory at cost 60,000
4. D
Solution:
Based on the solutions from the previous problem, the cost ratio under the FIFO cost method is computed
as follows:
(d) The FIFO cost ratio is computed as follows:
Cost ratio TGAS at cost less beg. inventory at cost
=
(FIFO cost method) TGAS at retail less beg. inventory at retail
FIFO cost ratio = [(138,750 – 21,750) ÷ (185,000 – 35,000)]
= 78%

The ending inventory at cost is estimated under the FIFO cost method as follows:
Ending inventory at retail 80,000
Multiply by: FIFO cost ratio 78%
Ending inventory at cost 62,400

INVESTMENTS IN DEBT SECURITIES

1. B 6. B
2. C 7. D
3. D 8. C
4. D 9. D
5. C 10. A
11. A (See amortization table below)
12. B (See amortization table below)
Solution:
Date Collections Interest income Amortization Present value
1/1/x1 4,198,948
12/31/x1 480,000 419,895 60,105 4,138,843

13. B (4,000,000 x 98%) – (4,000,000 x 12% x 3/12) = 3,800,000

14. B
Solution:
Acquisition cost (4M x 98%) 3,920,000
Direct cost 204,000
Initial carrying amount 4,124,000

“Trial and error” approach:

Future cash flows x PV factor at x% = Present value
(4M x PV of P1 @ x%, n=4) + (4M x 12% x PV of an ordinary annuity of P1 @ x%, n=4) = 4,124,000

There is premium because the carrying amount is greater than the face amount. Therefore, the effective
interest rate must be lower than the nominal rate of 12%.

First trial: (using 11%)

Future cash flows x PV factor at x% = PV or initial carrying amount
 (4M x PV of P1 @ 11%, n=4) + (4M x 12% x PV of an ordinary annuity of P1 @ 11%, n=4) =
4,124,000
 (4M x 0.658731) + (480,000 x 3.102446) = 4,124,000
 (2,634,924 + 1,489,174) = 4,124,098 approximates 4,124,000 (a difference of only P98)
If the difference of P98 is judged immaterial, then 11% is deemed the effective interest rate.

15. C = 1M x 98%

16. A Solution:

Amortization table
Interest
Date received Interest income Amortization Present value
1/1/x1 907,135
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
12/31/x3 100,000 135,088 35,088 1,000,000

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

17. B (See table above)

18. D 0 - the entity uses the settlement date accounting

19. C
Solution:
Date Collections Interest income Amortization Present value
1/1/x1 3,807,853
12/31/x1 400,000 456,942 56,942 3,864,795
12/31/x2 400,000 463,775 63,775 3,928,571
12/31/x3 400,000 471,428 71,428 3,999,999

(4M x 104%) – 3,864,795 = 295,205

20. B Theoretical/Parity value = (80 – 60) / (4 + 1) = 4;

10,000 x 4 = 40,000

INVESTMENTS

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

11. B
12. A
13. D
14. C
15. D
16. C
17. B
18. D
19. D
20. D
21. D
22. C
13. B
14. B
15. B
16. A
Solution:
Market A Market B
Quoted price 500 600
Related transaction cost (25) (150)
Net selling price 475 450

The more advantageous market is Market A and the quoted price in this market is P500.

17. D [(400,000 x PV of 1 @10%, n=4) + (400,000 x 12% x PV ordinary annuity of 1 @10%, n=4) = 425,359
– 392,000 =

The fair value of the bonds on Dec. 31, 20x1 is computed as follows:
Present
Future cash flows PV @10%, n=3 PV factors value
Principal 400,000 PV of P1 0.751315 300,526
Interest (400K x 12%) 48,000 PV of ordinary annuity 2.486852 119,369
Fair value as of December 31, 20x1 419,895

(419,895 – 392,000) = 27,895

18. D – The investment is FVOCI. Any unrealized gain (loss) is recognized in OCI and not P/L.

19. B (300,000 – 360,000) = (60,000)

20. A (400,000 FV 12/31/x2 – 360,000 cost) = 40,000 unrealized gain

INVESTMENT IN ASSOCIATE
1. C 6. B
2. B 7. D
3. D 8. D
4. C 9. B
5. A 10. A

11. C
12. B
13. D – The fair value on December 31, 2004 is not given
 14. B ₱135,000 + (₱50,000 × .3) – (₱20,000 × .3) = ₱144,000.
15. A (370,000 + 80,000) = 450,000 net assets x 30% = 135,000
16. A
Purchase price (squeeze)
Fair value of net assets acquired 135,000
(370,000 + 80,000) = 450,000 net assets x 30%] (135,000)
Goodwill 0
17. A (370,000 + 80,000) = 450,000 net assets x 25%] = 112,500

18. A
Investment in associate
12/31/2003 (squeeze) 72,500
Sh. in profit 50,000 10,000 Cash dividends
112,500* 12/31/2004

*(370,000 + 80,000) = 450,000 net assets x 25%] = 112,500

19. C

Investment in associate
1/1/2004 98,500
Sh. In profit (squeeze) 24,000 10,000 Cash dividends
112,500* 12/31/2004

*(370,000 + 80,000) = 450,000 net assets x 25%] = 112,500

24,000 ÷ 25% = 96,000

20. C ₱180,000 + (₱120,000 × 20%) – (₱30,000 × 20%) = ₱198,000.