Chapter 11

Multiple Choice Problems

7. c
• The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain on the liability
side of the balance sheet. When L Inc., prepares a balance sheet, the unrealized gain will be offset against the pipeline such
that the pipeline’s net cost is P19,404,000 (P21,000,000 – {P1,680,000 – P84,000})). As the net cost of the pipeline is being
amortized, the unrealized gain account is also being amortized. In effect, the unrealized gain is being brought into income
over the life of the pipeline. As the pipeline is being used to generate revenue on transactions with outsiders, the operator’s
own share of the unrealized gain is being recognized in net income. This is similar to what happened in Chapter 18
(Intercompany Sales of Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a
depreciable asset were realized over the life of the depreciable asset.
Incidentally, the share of L Inc. in net income of the joint operation would be as follows:

Revenue (30% x P23,100,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 6,930,000

Less: Operating expenses (30% x P14,000,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200,000
Amortization expense: P70,000,000 x 30% = P21,000,000 / 20 years. . . . . . . . . . . 1,050,000
Add: Gain on steel pipes [70%* x (P21,000,000 – P15,400,000)] . . . . . . . . . . . . . . . . . 3,920,000
Realized gain – amortization**(P1,680,000/20 years). . . . . . . . . . . . . . . . . . . . . . . _____84,000
Net Income of L. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,684,000
* PFRS 11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it
is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such
a transaction only to the *extent of the other parties’ interests in the joint operation.”
** Sales price of P21,000,000 – P15,400,000, cost of steel pipes = P5,600,000 x 30% = P1,680,000
8. b
9. b
Cash
Work-in-Process
Contribution – XX 252,000 84,000 Machinery and equipment
Labor 120,960 302,400 to Finished Goods
Contribution – YY 252,000 117,600 Labor
Materials 80,640
Bank loan 84,000 16,800 Machinery and equipment
Factory Overhead – heat, etc. 218,400
70,560 Accounts payable
Factory Overhead– depreciation 13,440
218,400 Factory overhead control
Balance, 12/31/x4 131,040
Balance, 12/31/x4 80,640
10. c
December 31, 20x4
Assets
Current Assets
Cash P 80,640
Finished goods inventory 33,600
Work-in-Process inventory 131,040
Materials inventory 28,560
Total current assets P 273,840
Non-current Assets
Equipment P 134,400
Less: Accumulated depreciation 13,440 120,960
Total Assets P394,800

Liabilities and Net Assets

Current Liabilities
Accrued payroll P 3,360
Accounts payable 38,640 P 42,000
Non-current Liabilities
Bank loan payable P 84,000
Loan payable – machinery and equipment 33,600 __117,600
Total Liabilities P 159,600
Net Assets _235,200
Total Liabilities and Net Assets P 394,800