Cash and Cash Equivalents

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Cash and Cash Equivalents
BONAMANA Corporation keeps all its cash in checking account. An examination of the
Company’s accounting records and bank statement for the month ended December 31,2010
revealed the following information:
The cash balance as of December 31,2010 represents
Bank statement balance P84,690
Book balance 85,240
A deposit of P9,500 through the bank’s night depository box on December 29, 2010 did not
appear on the bank statement. The bank statement shows that on December 28,2010, the bank
collected a note for BONAMANA and credited the proceeds of P9,350 to the company’s
account. The proceeds include P350 interest, all of which BONAMANA earned during the
current accounting period, BONAMANA has not yet recorded the collection.
Check outstanding on December 31,2010:
No. 504 P1,500
No. 509 480

NO. 519 720
 BONAMANA discovered that check no. 523, written in December 2010 for P1,830 in
payment to a supplier, had been recorded in the company’s records as P1,380.
 Included with the December 31,2010 bank statement was an NSF check for P2,500 that
BONAMANA had received from SPY company on account on December 19.
BONAMANA has not yet the returned check. The bank statement shows a P150 service
charge for December.
REQUIRED:
1. Corrected cash balance, December 31
2. Increase in cash balance
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3. The adjusting entry would be:
Solution:
Balance per bank statement, December 31 P84,690

Deposit in transit 9500
Outstanding Checks (2,700)
Corrected cash Balance P91,940
Unadjusted balance per books, December 31 (85,240)
Increase in cash balance P 6,250
Adjusting Entry
Cash P6,250
Accounts Payable 450
Accounts Receivable 2,500
Bank service charge 150
Notes receivable P9,000
Interest revenue 350
MOONLIGHT Company has an current account in Zambales Bank. Your audit of the company’s
cash account reveals the following:
a. Balances taken from the company’s general ledger:
a. Cash balance, November 30, 2012 P637,860
b. Cash Balance, December 31,2012 576,420
c. Receipts, December 1-31, 2012 306,220
b. Outstanding checks, November 30,2012
a. (26,140 was paid by bank in December) 64,140
c. Checks written and recorded in December not included

in the checks returned with the December bank statement 36,080
d. Deposit in transit, November 30, 2012 15,260
e. Deposit in transit, December 31,2012 16,140

f. A bank credit memo was issued in December
to correct an erroneous charge made in November 1,500
g. Note collected by bank in December
(company was not informed of the collection) 2,060
h. A check for P2,020 (payable to a supplier) was
i. recorded in the Check Register in December as P3,000 980
a check for P2,240 was charged by the bank
as 2420 in December 180
j. MOONLIGHT Co. issued a stop payment order
to the bank in December. This pertains to a
check written in December which was not
received by the payee. A new check was written and
recorded in the check register in December. The old check was
written off by a journal entry, also in December. 780

k. Bank Service charge, November 30, 2012 60
REQUIRED:
1. Total outstanding checks on December 31, 2012
2. Bank statement balance on November 30, 2012
3. Bank statement balance on December 31, 2012
4. Total bank disbursements for the month of December
SOLUTION:
1. Outstanding check
64,140 - 26,140 + 36080 = P74,080
2.

Nov. 30 Receipts Disbursements Dec.30

Book balances P637,860 306,220 367,660 576,420
Outstanding checks
November 64,140 64,140
December (74,080) 74,080
Deposit in transit
November (15,260) 15,260
December (16,140) (16,140)
Erroneous bank charge in November
(1,500) 1,500
Note Collected by bank in 2,060 2,060
December
Over-book disb. (980) 980

Over-bank disb, 180 (180)
Check stopped payment (780) (780)
Bank service charge (60) (60)
Bank Balances P685,180 P308,120 356,080 637,220
The following information was included in the bank reconciliation for GROWL Company for
June:
Checks and Charges recorded by bank in June (including a June service charge of P300),
P172,100; Service charge made by bank in May and recorded on the books in June, P200;
Total of credits to cash in all journals during June, P198,020; Customer’s NSF check returned in
May and redeposited in June (no entry made on books in either May or June), 2,500;
Outstanding checks at June,P80,600 and deposit in transit in June, P6000.
What were the total outstanding checks at the beginning of June?
Checks paid by the bank
Total disbursements 172,100
Less: Charges not representing checks

NSF P 1,000
Service charge- June 300 1,300 P170,800
Less:
Checks issued by the company:

Total Disbursements P198,020
Service Charge- May 200
Total checks issued 197,820
Less: outstanding checks, end 80,600 117,220
Outstanding checks, beginning P 53,580
RECEIVABLES
PROBLEM 1
The adjusted trial balance of MLL Corporation on December 31, 2013, includes the following
cash and receivables balances.
Cash – Metrobank P2,250,000
Currency on Hand 800,000
Petty Cash Fund 50,000
Cash in bond sinking fund 750,000
Notes receivable (including notes discounted with recourse, P
155,000 1,825,000
Accounts Receivable P4,280,000
Allowance for Doubtful accounts (207,500) 4,072,500
Interest Receivable 26250
Current liabilities reported in the December 31, 2013, statement of financial position included:
Obligation on discounted notes receivable 775,000

Transactions during 2014 included the following:
a) Sales on account were 38,350,000.
b) Cash collected on accounts totaled P28,825,000, including accounts of P4,650,000 with
cash discounts of 2%.
c) Notes received in settlement of accounts totaled P4,125,000.
d) Note receivable discounted as of December 31, 2013, were paid at maturity with the
exception of one P150,000 note on which the company had to pay the bank P154,500,
which include interest and protest fees. It is expected that recovery will be made on this
note early in 2013.
e) Customer notes of P2,925,000 were discounted with recourse during the year, proceeds
from their transfer being P2,925,000. (all discounting transactions were recorded as
loans.) Of this total, P2,400,000 matured during the year without notice of protest.
f) Customer accounts of P436,000 were written off during the year as worthless.
g) Recoveries of bad debts written off in prior years were P101,000.
h) Notes Receivable collected during the year totaled P1,350,000 and interest collected
was 122,500
i) On December 31, accrued interest on note receivable was P31,500.
j) Cash of P1,750,000 was borrowed from Metrobank with accounts receivable of
P2,000,000 being pledged on the loan. Collection of P975,000 has been made on these
receivables (included in the total given in transaction(b)}, and this amount was applied
on December 31, 2013, to payment of accrued interest on the loan of P30,000, and the
balance to the partial payment of the loan
k) The petty cash fund was reimbursed( meaning that cash was removed from the bank
account and in the petty cash fund) based following analysis of expenditure vouchers;
Travel Expense P5,600

Entertainment expense 3,900

Postage expense 4,650

Office supplies expense 8,650
Cash short or over(an income
account) 300
l) Cash of P150,000 was added to bond retirement fund.
m) Currency on hand at December 31, 2013, was P600,000.
n) Total cash payment for all expenses during the year were P34,000,000. Charge to
general expenses.
o) Uncollectible accounts are estimated to be 5% of the December 31. 2013, Accounts
receivable.
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. The total cash to be reported in the company’s December 31, 2013 statement of
financial position
2. The doubtful accounts expense to be reported for the year ended December 31,
2013
3. The net accounts receivable as of December 31, 2013
4. Net trade and other receivable to be reported in the company’s statement of financial
position as of December 31, 2013
Solution:
Account Note Interest

ITEM CASH Receivable Receivable Receivable
A 38,350,000
B 28,825,000 (28,918,000)
C (4,125,000) 4,125,000
D (154,500) (620,500)

E 2925000 (2,400,000)
F (436,000)
G 101,000
H 1,472,500 (1,350,000)
I 31,500
J 775,000
K
L (150,000)
M 600,000
N (34,000,000)
ADJ> 394,000 4,871,000 (245,500) 31,500
balances 2,427,500 4,280,000 1,825,000
PCF 50,000
Adjusted 2,871,500 9,151,000 1,579,500 31,500
1. 2,871,500
2. Doubtful account expense
Required allowance (9,151,000 x

5%) 457,550
Write-off 436,000
Recovery (101,000)
Beginning Balance (207,500)
Doubtful account expense 585,050
3. 9,151,000
4. (9.151,000 - 457,550 + 1,579,500+ 31,500)= 10,304,450
Problem 2
D.O Company started operations in 2006. The company has no allowance for doubtful
accounts. Uncollectible receivables were expensed as written off and recoveries were credited
to income as collected. Data from the company’s records for five years is as follows:
Year Credit Sales Amount Written- Recovery

Off
2006 3,000,000 30,000 0

2007 4,500,000 76,000 5,400
2008 5,900,000 104,000 5,000
2009 6,600,000 130,000 9,600
2010 8,000,000 166,000 10,000
Balances of accounts receivables are as follows:
As of December 31, 2009 P3,000,000
As of December 31, 2010 3,500,000
On March 1, 2010, right after the 2009 financial statements were released, management
realized that company’s policy regarding treatment of bad accounts was not correct, and
decided that an allowance method must be followed. A policy was established to set up an
allowance of doubtful accounts based on the company’s historical debt loss percentage applied
to year-end accounts receivable. The historical bad debts loss percentage shall be recomputed
each year based on the average of all available past years up to maximum of five years.
REQUIRED:
Based on the above and the result of your audit, you are to provide the answers to the following:
1. The amount of allowance for doubtful accounts that should be set up as of January
1,2010 (with corresponding charge to retained earnings)
2. The average percentage of net doubtful accounts to credit sales that should be used in
setting up the 2010 allowance
3. The balance of allowance for doubtful accounts as of December 31,2010

4. The doubtful accounts expense for 2010
Solution:
Question 1:


Year Credit Sales Amount Written-Off Recovery NET
2006 3,000,000 30,000 0 30,000
2007 4,500,000 76,000 5,400 70,600
2008 5,900,000 104,000 5,000 99,000
2009 6,600,000 130,000 9,600 120,400
20,000,000 340,000 20,000 320,000
Net accounts written off 320,000

Divided by credit sales 20,000,000
Percentage of uncollectible accounts 1.60%
Allowance for doubtful accounts,1/1/10(3,000,000x1.6%) P48,000
Question 2:
Year Credit Sales Amount Written-Off Recovery NET

2006 3,000,000 30,000 0 30,000
2007 4,500,000 76,000 5,400 70,600
2008 5,900,000 104,000 5,000 99,000
2009 6,600,000 130,000 9,600 120,400
2010 8,000,000 166,000 10,000 156,000
28,000,000 506,000 30,000 476,000
Net accounts written off 476,000

Divided by credit sales 28,000,000
Percentage of uncollectible accounts 1.70%
Question 3:
Allowance for doubtful accounts,12/31/10(3,500,000x1.7%) P59,500
Question 4:
Required allowance, 12/31/2010 59,500
Accounts written off in 2010 166,000
Bad debts recoveries 10,000

Allowance for doubtful, 1/1/10 48,000

Doubtful account expense in 2010 P167,500
PROBLEM 3
On February 1, 2011, XOXO Corporation factored receivables with a carrying amount of

P2,000,000 to Moonlight Corporation. XOXO Corporation assesses a finance charge of 3% of
the receivable and retains 5% of the receivables.
Question 1: If the factoring is treated as sale, what amount of loss from sale should the
company report in its 2011 statement of comprehensive income for the year 2011?
Question 2: Assume that XOXO Corporation retained significant amount of risks and rewards of
ownership and had a continuing involvement on the factored financial asset, what amount of
loss from factoring should the company recognize?
Solution:
Question 1:
Amount factored P2,000,000
Less: Finance Charge (2,000,000 x 3%) 60,000
Holdback(2,000,000 x 5%) 100,000 160,000
Amount received 1,840,000

Add: New Asset received(holdback) 100,000
Total consideration received 1,940,000
Less: Carrying value of the receivable equal to face 2,000,000
Loss on factoring 60,000
Question 2: NONE.
INVENTORIES

The MAMA COMPANY is an importer and wholesaler. Its merchandise of purchased from a
number of suppliers and is warehoused until sold to consumers.
In conducting his audit for the year ended December 31, 2012, the company’s CPA determined
that the system of internal control was good. Accordingly, he observed the physical inventory at
an interim date, November 30, 2012, instead of at year-end.
The following information was obtained from the general ledger:
Inventory, January 1, 2012 P117,000
Inventory, November 30, 2012 292,500
Sales for eleven months ended November 30, 2012 1,040,000
Sales for the year ended December 31, 2012 1,235,000
Purchases for eleven months ended November 30, 2012
(before audit adjustments) 936,000
Purchases for year ended December 31, 2012(before
audit adjustment) 1,053,000
Additional information:
a) Goods received on November 28 but recorded as
purchases in December 13,000
b) Deposits made in October 2012 for purchases
to be made in 2013 but charged to Purchases 18,200
c) Defective merchandise returned to suppliers:
a. Total at November 30, 2012 6,500
b. Total at December 31, 2012, excluding
November items 9,100
The returns have not been recorded pending receipt of credit memos from the suppliers.
The defective goods were not included in the inventory.
d) Goods shipped in November under FOB destination
And received in December recorded as

purchases in November 24,050
e) Through the carelessness of the client’s
warehouseman, certain goods were damaged
in December and sold in the same month

at its cost. 26,000
f) Audit of the client’s November inventory
summary revealed the following:
Items duplicated 3,900
Purchases in transit:
Under FOB shipping point 15,600

Under FOB destination 24,050
Items counted but not included in the inventory
Summary 9,100
Errors in extension that overvalued 5,200
REQUIRED:
1. Correct amount of net purchases up to November 30, 2012

2. Correct amount of net purchases up to December 31, 2012
3. Correct amount of net purchases for the month of December 2012
4. Correct inventory on November 30, 2012
5. Gross income for eleven months ended December 31, 2012
6. Cost of sale ratio for eleven months ended November 30,2012
7. Total cost of goods sold for the amount of December 2012?
8. Estimated inventory on December 31, 2012
SOLUTION:
UP TO
Nov. 30 Dec. 31

Per books 936,000 1,053,000

November purchase recorded in
December 13,000
October deposits recorded as purchases (18,200) (18,200)
Defective items returned (6,500) (15,600)
December purchases recorded in
November (24,050)
P900,250 P1,019,200
1. P900,250
2. P1,019,200
3. P1,019,200- P900,250= 118,950

4. Per count P292,500
Items duplicated (3,900)
In transit under FOB destination (24,050)
Items counted but not included in list 9,100
Overvaluation – extension errors (5,200)
P268,450
5. Sales P1,040,000
Cost of sales:
Inventory, Jan, 1 117,000
Net Purchases 900,250
GAFS 1,017,250
Inventory, Nov. 30 (268,450) 748,800
Gross Income P291,200
6. Cost ratio (748,800/1,040,000) 72%

7. Regular sales (P169,000 x 72%) 121,680
Sale of damaged items 26,000
Cost of goods sold for December P147,680
8. Inventory, Nov. 30 268,450

December net purchases 118,950
Cost of goods sold (147,680)
Estimated inventory, Dec. 31 P 239,720
On September 15, 2011, a fire destroyed a significant portion of merchandise inventory of
GOODBYE SUMMER Corporation. The following information was available from the records of
the company:
January 1, 2011
2010
To Date of Fire
Sales P900,400 P1,060,360
Sales Returns and allowances 10,200 11,960
Purchases 756,490 810,952
Purchase returns and allowances 20,590 22,220
Beginning Inventory 211,120 240,320
The company determined the cost of inventory not damaged to be P139, 476. Damaged
merchandise, which cost P30,000, had an estimated realizable value of P10,000.
REQUIRED:
1. Gross profit percentage
2. Estimated ending inventory at cost
3. Estimated fire loss
Solution:
Sales, 2010 1,060,360

Less: Sales return and allowances 11,960
Net Sales, 2010 1,048,400 100%
Less: Cost of Sales, 2010
Beginning inventory 240,320

Add: Purchases 810,952
Purchase return &
Allowances (22,220)
Less: Ending Inventory (211,300) 817,752 78%
Gross Profit 230,648 22
Beginning inventory, 2011 211,300

Add: Net purchases
Purchases 756,490
Purchase returns & allowances (20,590) 735,900
TGAS P947,200
Less: Estimated COS
Sales 900,040
Sales Return & Allowances (10,200)

Net Sales 890,200
X Cost ratio .78 694,356
Estimated ending Inventory at cost P252,844
Less: Undamaged Inventory P139,476
Net realizable value of
damaged inventory 10,000 149,476
Estimated Fire Loss P51,684

The OVERDOSE Corporation uses the lower of cost or net realizable value inventory. Data
regarding the items in work-in-Process inventory are presented below
Markers Pens
Historical cost P48,000 P37,760
Selling Price 36,000 43,600
Estimated cost to complete 9600 9600
Replacement Cost 41,600 33,600
Normal Profit Margin 25% 25%
Required:
1. What is the amount of markers inventory to be reported in Savior’s statement of financial
position?
2. What is the amount of pens inventory to be reported in Savior’s statement of financial
position?
Solution:
1. COST(lower) 48,000
NRV:
Selling Price 72,000
Less: Estimated cost to complete (9,600) 62,400
2. COST 37,760
NRV:
Selling Price 43,600
Less: Estimated cost to complete (9,600) 34,000
PROPERTY, PLANT & EQUIPMENT
Problem 1

On January 1, 2010, SBS Corporation purchased a tract of land (site number 345) with a
building for P6,000,000. SBS paid real estate broker’s commission of P150,000, legal fees of
60,000, and a title guarantee insurance of P18,000. The closing statement indicated that the
land value was P5,000,000 and the building value was P1,000,000. Shortly after acquisition, the
building was razed at a cost of 75,000.
SBS entered into a P3,000,000 fixed price contract with the TAO BUILDERs, Inc. on March 1,
2010 for the construction of an office building on land site number 123. The building was
completed and occupied on September 30, 2011. Additional construction costs were incurred as
follows:
Plans, specifications and blueprints..................120,000
Architects’ fees for design and supervision...........250,000
The building is estimated to have a forty-year life from date of -completion and will be
depreciated using the 150%-declining-balance method.
To finance the construction cost, SBS borrowed 3,000,000 on March 1,2010. The loan is
payable in ten equal annual installments of P300,000 plus interest at the rate of 14%, SBS’
average amounts of accumulated building construction expenditures were as follows:
For the period March 1 to December 31, 2010 900,000
For the period January 1 to September 30,2011 2,300,000
REQUIRED:
1. Total cost of land account
2. If borrowing cost is added to the asset constructed, what is the capitalized cost of the office
building?
3. Depreciation to be recognized on December 31,2011.
Solution:

1. Acquisition cost 6,000,000
Real estate tax 150,000
Legal fees 60,000
Title Guarantee 18,000

Cost of razing the building 75,000
Cost of Land 6,303,000
2. Contract Price P3,000,000
Plans, specification and blueprint 120,000
Architect Fees 250,000
Borrowing cost(900,000 x 14% x 10/12) 105,000
(2,300,000 x 14% X 9/12) 241,500

Cost of Building 3,716,500
3. (1/40 x 1.5) 3.75%
(3,716,500 x 3.75% x 3/12) P34,842
Problem 2
The CRAZY-IN-LOVE company acquired a tract of land containing an extractable natural

resource. The company is required by its purchase to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological surveys estimate that the
land will have a value of 1,200,000 after restoration. Relevant cost information follows:
Land P9,000,000
Estimated restoration costs 1,800,000
Question 1: If the company maintains no inventories of extracted materials, how much should
be charged to depletion expense per ton of extracted material assuming the amount of
estimated restoration cost was already recognized as a liability?

Question 2: if the company maintains no inventories of extracted materials, how much should be
charged to depletion expense per ton of extracted material assuming the amount of estimated
restoration cost has yet to be recognized?
Solution:
Question 1
Cost 9,000,000
Estimated restoration cost 1,800,000
Estimated Salvage value (1,200,000)
Depletable cost P9,600,000
Divided by life in units 2,000,000

Depletion per unit P 4.80
Question 2
Cost P9,000,000
Estimated salvage value (1,200,000)
Depletable cost 7,800,000
Divided by life in units 2,000,000

Depletion per unit P 3.90
Problem 3
On January 1, 2008, CHEN Company purchased an asset for P1,000,000, worth an estimated
useful life of 10 years. Straight-line method of depreciation is to be used. On January 1, 2010, it

was properly determined that the recoverable amount of the asset is P640, 000. On January 1,
2011, it was properly computed that the recoverable of the asset is P740,000.

Question 1: Under the cost model for long lived assets, what are the amounts to be reported in
the income statement and shareholder’s equity respectively, immediately on January 1, 2011?
Question 2 under the revaluation model for long lived assets, what are the amounts to be
reported in the profit or loss and shareholder’s equity on January 1, 2011?
Solution:
Question 1: 140,000; NONE
Historical cost – January 1,2008 1,000,000
Accumulated depreciation from 1/1/08
To 1/1/10(1,000,00 x 2/10) 200,000
Carrying value on January 1, 2010 800,000
Recoverable Value Carrying Value

As of January 1, 2010 640,000 800,000
Depreciation for 2010:
(640,000/8 years 80,000 100,000
Carrying amount 560,000 700,000
QUESTION 2: 140,000; 40,000
Recoverable value – January 1, 2011 P740,000
Less: Carrying amount based on its previous recoverable
Amount 560,000
Increase in the value of the asset 180,000
Carrying amount-01/01/11(based on historical cost) 700,000
Carrying amount-01/1/11( based on its previous fair value) 560,000
Reversal of impairment loss recognized as income in the income statement
140,000
Question 2:
Recoverable value- January 1, 2011 P740,000
Less: Carrying amount based on its previous

recoverable amount 560,000
Increase in the value of the asset 180,000
Less: Reversal of impairment loss recognized previously:
Recoverable – January 1, 2011 560,000

Carrying value on January 1,2011 700,000 140,000
Revaluation surplus to be reported in the shareholder’s
Equity 40,000
INTANGIBLES AND PREPAYMENTS
******
During 2010, JAR OF HEARTS COMPANY purchased a building site for its proposed
research and development laboratory at a cost of P1,560,000. Construction of the building was
started in 2010. The building was completed on December 31, 2011, at a cost of P7,280,000
and was placed in service on January 2, 2012. The estimated useful life of the building for
depreciation was to be employed and there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development
group will result in long- term benefits (I.e. at least 10 years to the corporation. However, JAR
OF HEARTS fails to demonstrate how such projects will generate probable future economic
benefits. The remaining projects either benefit the current period or are abandoned before

completion. A summary of the number of projects and the directs incurred in conjunction with
the research and development activities for 2012 appears below
Upon recommendation of the research and development group, JAR OF HEARTS
Company acquired a patent for manufacturing rights at a cost of P2,080,000.
The patent was acquired on April 1 2011, and has an economic life of 10 years.
Number of Salaries and employee Other Expenses(excluding

depreciation Charges)
Projects benefits
Completed projects with long-term
benefits 30 2,340,000 1,300,000

Abandoned projects or projects that
benefit the current period 20 1,690,000 390,000
Projects in process – results
indeterminate 10 1,040,000 312,000
Total 60 5,070,000 2,002,000
REQUIRED:
1. The total research and development expenses for 2012.
2. What is the amount of patent amortization for 2012?
3. What is the book value of the building on December 31, 2012?
4. What is the carrying value of the patent at December 31, 2012?
Solution:
1. Salaries and employee benefits P5,070,000

Depreciation – building (7,280,000/20 years) 364,000
Other expenses 2,002,000
Total research and development expenses 7,436,000
2. Patent amortization for 2012(P2,080,000/10 years) P208,000

3. Costs of building P7,280,000
Less: Accumulated depreciation, December 31, 2012
(7,280,000/20 years) 364,000

Book value, December 31, 2012 P6,916,000
4. Cost of patent purchased April 1, 2011 P2,080,000
Less: Amortization:
April 1 – Dec. 31, 2011
(P2,080,000/10 x 9/12) P156,000
Jan. 1 – Dec. 31,2012
(P2,080,000/10) 208,000 364,000

Carrying value, Dec. 31,2012 P1,716,000
LIVE-IT-UP CORPORATION was organized in 2011. Its accounting records include only one
account for all intangible assets. The following is a summary of the debit entries that have been
recorded and posted during 2011 and 2012:
INTANGIBLE ASSETS
July 1, 2011 8- year franchise; expires June 30, 2019 P126,000

Oct, 1, 2011 Advance payment on leasehold (term of lease is 2 years) 84,000
Dec. 31, 2011 Net loss for 2011 including incorporation fee, P3,000, and 48,000
related legal fees of organizing, P15,000(all fees incurred in
2011)
Jan. 2, 2012 Acquired patent (10-year life 222,000
Mar. 1, 2012 Cost of developing a secret formula 225,000
Apr. 1, 2012 Goodwill purchased 835,200
July 1, 2012 Legal fee for successful defense of patent purchased above 37,950
Oct, 1, 2012 Research and development costs 480,000
Ignore income tax effects.
REQUIRED:

1. The unamortized patent cost at December 31, 2012
2. The unamortized franchise cost at December 31, 2012
3. The amount of prepaid rent to be reported in KIKITAT’s December 31, 2012, statement
of financial position.
4. The adjusting entries on December 31, 2012, should include a net debit to the retained
earnings account of
5. As a result of the adjustments at December 31, 2012, the total charges against
KIKIKTAT’s 2012 income should be
SOLUTION:
1. Cost of patent, Jan. 2, 2012 P222,000

Less: Amortization for 2012(222,000/10 years) 22,200
Unamortized patent cost 199,800
2. Cost franchise, July 1, 2011 P126,000
Less: Amortization, July 1, 2011 – Dec. 31, 2012
(P126,000/8 x 6/12) 23,625
Unamortized franchise cost, Dec. 31, 2012 P102,375
3. Prepaid rent, December 31, 2012(P84,000 x 9/24) P 31,500
4. December 31, 2011 48,000
(126,000/8x6/12) 7,875
(84,000x3/24) 10,500
Net debit to R/E 66,375
5. Research and development expense 705,000
Legal Fees expense 37,950

Franchise amortization 15,750
Rent expense 42,000
Patent amortization expense 22,200
TOTAL 822,900

*******
On January 2, 2002, SNSD Company spent P480,000 to apply for and obtain a patent
on a newly developed product. The patent had an estimates useful life of 10 years, at the
beginning of 2006, the company spent P144,000 in successfully prosecuting an attempted
patent infringement. At the beginning of 2007, the company purchased for P280,000 a patent
that was expected to prolong the life of its original patent by 5 years. On July 1, 2010, a
competitor obtained rights to a patent that made the company’s patent obsolete.
REQUIRED:
1. Carrying amount of patent as of December 31, 2006

2. Amortization of patent in 2007
3. Carrying amount of patents as of December 31,2009
4. Loss on patent obsolescence in 2010
Solution
1. Cost of patent P480,000
Less: Accumulated Amortization ( 480,000 x5/10) 240,000
Carrying amount of patent, 12/31/06 240,000
2. Amortization of original patent (240,000/10) P24,000
Amortization on related patent (280,000/10) 28,000
Total amortization in 2007 52,000
3. Original patent (240,000 x 7/10) P168,000
Related patent (280,000 x 7/10) 196,000
Carrying amount of patents, 12/31/09 364,000
4. Carrying amount of patents, 12/31/09 364,000
Less: Amortization, 1/1/10 to 7/10:
Original patent (P240,000/10 x 6/12) P12,000
Related patent (280,000/10 x 6/12) 14,000 26,000
Loss on patent obsolescence P338,000

Problem no.1
In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010
you are called upon to verify the accounts payable transactions. You find that the company does
not make use of a voucher register but enters all merchandise purchases in a Purchases
Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary
ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable
balance in the company’s general ledger. An analysis of the account disclosed the following:
Trade creditors, credit balances P1,363,000
Trade creditors, debit balances 63,000
Net P 1,300,000
Estimated warranty on products sold 100,000
Customer’s deposits 9,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P 1,500,000
A further analysis of the “Trade Creditors” debit balances indicates:

Date Items Amount
Miscellaneous debit balances prior to
2007 No information available due to loss
of records in a fire. P 3,000
03/03/07 Manila Co. – Merchandise returned for credit,
but the company is now out of business 8,000
06/10/09 Cebu Corp. – Merchandise returned but Cebu
says “never received” 7,000
07/10/10 Jolo Distributors – Allowance granted on
defective merchandise after the invoice
was paid 5,000
10/10/10 Bulacan Co – Overpayment of invoice 12,000
12/05/10 Advance to Zambales Co. This company agrees
to supply certain articles on a cost
– plus basis 24,000

12/05/10 Goods returned for credit and adjustments on
price after the invoices were paid; credit memos
from supplier not yet received 4,000
63,000
Your next step is to check the invoices in both the paid and the unpaid invoice files against
ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated
December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January
2011. Upon inquiry, you discover that the merchandise covered by this invoice was received
and sold, but the original invoice apparently has not been received.
In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000
were prepared and entered in the Cash Disbursements Journal of December, but these checks
were not issued until January 10, 2011.
The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not
taken up by the company under audit during the year 2010. These goods are included in your
adjusted inventory.
1. The Accounts payable – Trade balance at December 31, 2010 should be
2. The net adjustment to Purchases should include a

3. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to
4. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to
5. Auditor confirmation of accounts payable balances at the end of the reporting period may be
necessary because
A. There is likely to be other reliable external evidence to support the balances
B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-
payment
C. This is a duplication of cutoff test
D. Accounts payable at the end of reporting period may not be paid before the audit is
completed.
Solution:
1. (1,363,000 + 45,000 + 63,000 + 6,000 = 1,477,000
2. Net debit 10,000
3. 18,000
4. Advances to supplier - 24,000
5. A

Problem 2
You were able to obtain the following from the accountant for Maverics Corp. Related to the
companys liability as of December 31, 2010.
Accounts payable P 650,000
Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds Payable 2,000,000
The following additional information pertains to these liabilities:
a. All trade notes payable are due within six months of the balance sheet date.
b. Bank notes payable include two separate notes payable Allied Bank.
(1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable
every six months.
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010
Mavericks negotiated a written agreement with Allied Bank to replace the note with

2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on
December 31, 2010
c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of
the note give the holder the right to demand immediate payment of the company fails to
make a monthly interest payment within 10 days of the date the payment is due. As of
December 31, 2010, Mavericks is three months behind in paying its required interest
payment.
d. The 12% mortgage note was issued May 1, 2001, with a term of 20 years. The current
principal amount due is P 1,500,000. Principal and interest payable annually on April 30,
A payment of P220,000 is due April 30, 2011. The payment includes interest of P
180,000.
e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable
semi-annually every June 30 and December 31.
Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2010 is
2. The portion of the Notes payable – bank to be reported under current liabilities as of
December 31, 2010 is
3. Total current liabilities as of December 31, 2010 is
4. Total noncurrent liabilities as of December 31, 2010 is
Solution:
1. 300,000 x 8% x 4/12 = 8,000
600,000 x 10% x 3/12 = 15,000
1,500,000 x 12% x 8/12 = 120,000
Interest Payable 143,000
2. Note payable to bank P300,000
3. Accounts Payable P650,000

Notes Payable – trade 190,000
Notes payable – bank 300,000
Wages and Salaries payable 15,000
Interest payable 143,000

Mortgage note payable 640,000
Bond payable 2,000,000
Total current Liabilities 3,938,000
4. Note payable-bank p500,000
Mortgage note payable
(1,500,000 – 40,000) 1,460,000
1,960,000
On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value
11% bonds date January 1 at an effective annual interest rate (yield) of 9%. Interest is payable
each December 31. Wizards uses the effective interest method of amortization. On December
31, 2010. The 2,000 bonds were extinguished early through acquisition on the Open Market by
Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its
P1,000 face value, 10% convertible bonds at pat. Interest is payable every June 30 and
December 31. On the date of issue, the prevailing market interest rate for similar debt without
the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds
tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a
fair value of P105 and a par value of P1 at the date of conversion.
Shareholders’ quity
EMERALD Company reported the following shareholders’ equity on January 1, 2013.
Share Capital, 1,500,000 shares 1,500,000

Share Premium 15,000,000
Retained Earnings 8,100,000
Treasury Shares, 100,000 at cost (900,000)
All of the outstanding and treasury shares were originally issued in 2011 for 11 per share. The
treasury shares are reacquired on March 31, 2012. During 2013, the following events or
transactions occurred relating to shareholders’ equity:
 February 15 – Issued 400,000 shares for P12.5 per share

 June 15 – Declared a cash dividend of P0.20 per share to shareholders of record
on April 15. This was the first dividend ever declared.
September – The president retired, the entity purchased from the retiring


president 100,000 shares for P13.00 per share which was equal to market value
on this date. These shares were cancelled.
 December 15 – Declared a cash dividend ofP0.20 per share to shareholders of

record on January 2, 2014.
On December 31, 2013, the entity is being sued by two separate parties for patent
infringement. The management and outside legal counsel share the following opinion regarding
these suits:
Suit Likelihood of losing the suit Estimated Loss

#1 Reasonably possible 600,000
#2 Probable 400,000
Required:
1. What is the increase in share premium arising from the issuance of 400,000 shares
on February 15?

2. What is the decrease in share premium arising from the retirement of 100,000
shares on September 15?
3. What amount of loss contingencies should be appropriated by a charge to
unappropriated retained earnings?

4. What amount of cash dividend should be charged against unappropriated retained
earnings in 2013?
5. What amount should be reported in the notes to financial statement as restriction on
retained earnings because of acquisition of treasury shares?
SOLUTION:
1. 400,000 x 11.50 = 4,600,000
2. 100,000 x 10 = 1,000,000
3. SUIT no.1 is a possible loss which require disclosure that can be done by appropriation
of Retained Earnings
4. 1,800,000 x .2 = 360,000
1,700,000 x .2 = 340,000
Total cash dividend 700,000

5. Treasury shares, at cost P900,000
**********************************************************************
You are a senior accountant responsible for the annual audit of LOBERIAL CO. for the year
ended December 31, 2012. The information available to you is presented below. You may
assume that any pertinent information not presented below has already been checked and
found satisfactory.
Excerpts from trial balance, December 31, 2012
Credit
Retained Earnings P93,000

Allowance for decline in value of inventory

36500
Share capital (5,000 shares) 500,000
The books have not been closed, but all adjusting entries which the company expects to make
have been posted. Their trial balance shows a P60,000 net income for the year.
Ledger details of Retained Earnings:
Retained Earnings
08/06/12 CD 2,000 12/31/11 Balance 134,500
10/10/12 J 10,000 4/29/12 CR 500
12/31/12 J 30,000
Note: The balance at 12/31/11 agrees with last year’s working papers.
Analysis of selected cash receipts:
Date Account Credited Amount

4/29/12 Share Capital 10,500 Sold 100 par shares
Retained Earnings 500 at 105
10/10/12 Building 530,000 See corollary entry
dated 10/10/12
Analysis of selected cash disbursements:
Date Account Debited Amount Explanation

08/06/12 Retained Earnings 2,000 Freak accident to
company truck not
covered by insurance:
repairs by DJ Repairs

Selected Entries in the general journal:
Date Entry and Explanation Debit Credit

10/10/12 Accumulated Depreciation 370,000
Retained Earnings 10,000
Building 380,000
Sale of main office
building
12/31/12 Retained Earnings 30,000
Allowance for decline in
Value of Inventory 30,000

Provision to value at lower
of cost and net realizable
value
Based on the preceding information, determine the following:
1. Loss on sale of building
2. Share capital balance
3. Share premium balance at December 31,2012
4. Net income for 2012
SOLUTION:
1. (910,000 – 370,000) – 570,000 = P10,000
2. 500,000
3. 500
4. (60,000-10,000-2,000-30,000) = P18,000
****************************************************************

The Perseverance Corporation has requested you to audit its financial statements for the year
2005. During your audit, Perseverance presented to you its balance sheet as of December 31,
2004 containing the following capital section:
Preferred stock P10 par; 60,000 shares authorized and issued, of which 6,000
are treasury shares costing P90,000 and shown as an asset
P600,000
Common stock, par value P4; 600,000 shares authorized, of which
450,000 are issued and outstanding 1,800,000
Additional paid in capital (P5 per share on preferred stock
issued in 2000) 300,000
Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
P6,000,000
Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2005.
Perseverance credited the proceeds to the Preferred Stock account. The treasury
shares as of December 31, 2004 were acquired in one purchase in 2004.
2) The preferred stock carries an annual dividend of P1 per share. The dividend is
cumulative. As of December 31, 2004, unpaid cumulative dividends amounted to P5 per
share. The entire accumulation was liquidated in June, 2005, by issuing to the preferred
stockholders 54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December 1, 2005 to preferred
stockholders of record December 15, 2005. The dividend is payable on January 15,
2006.
4) At December 31, 2005, the Allowance for Doubtful Accounts Receivable and Reserve for
Depreciation had balances of P25,000 and P1,050,000, respectively.
5) On March 1, 2005, the Reserve for Fire Insurance was increased by P60,000; Retained
Earnings was debited.

6) On December 31, 2005, the Reserve for Fire Insurance was decreased by P30,000,
which represents the carrying value of a machine destroyed by fire on that date.
Estimated fire cleanup costs of P6,000 does not appear on the records.
7) The December 31, 2004 Retained Earnings consists of the following:
Donated land from a stockholder (Market value on date of donation) P450,000
Gains from treasury stock transactions 51,000
Earnings retained in business 1,749,000
P2,250,000
8) Net income for the year ended December 31, 2005 was P1, 297,500 per company’s
records.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2005. (Disregard tax implications)
1. Preferred stock
2. Common stock
3. Additional paid in capital
4. Appropriated retained earnings
5. Unappropriated retained earnings
6. Treasury stock
7. Total stockholders’ equity
SOLUTION:
1. Preferred stock 600,000
2. Common stock 2,016,000
3. Additional paid in capital 864,000
4. Appropriated retained earnings 303,000
5. Unappropriated retained earnings 2,578,500

6. Treasury stock 45,000

7. Total stockholders’ equity 6,316,500

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