BIT International College

Jagna, Bohol

Accounting 15 Jaqueline F. Ampo, CPA

Semi-Final Examination Instructor

Problem No. 1
Sun Company's property, plant, and equipment and related accumulated depreciation accounts had the following
balances at December 31, 2015:

Class of PPE Cost Accumulated Depreciation

Land ₱3,900,000
Buildings 36,000,000 ₱7,962,000
Machinery and equipment 23,250,000 5,886,000
Transportation equipment 3,960,000 2,586,000
Leasehold improvements 6,630,000 3,315,000
Class of PPE Depreciation Method Useful Life
Land improvements Straight-line 12 years
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Transportation equipment 150% declining balance 5 years
Leasehold improvements Straight-line 8 years
Sun computes depreciation to the nearest month. The salvage value of the depreciable assets are considered
immaterial.

Transactions during 2016 and other information are described below:

a) On January 5, 2016, a plant facility consisting of land and a building was purchased from Torotot Company for
₱18,000,000. Of this amount, 20% was allocated to land.

b) On April 3, 2016, new parking lots, streets, and sidewalks at the purchased plant facility were completed at a
total cost of ₱5,760,000. These expenditures had an estimated useful life of 12 years.

c) The leasehold improvements were completed on December 31, 2012, and had an estimated useful life of 8
years. The related lease, which would have terminated on December 31, 2018, was renewable for an additional
4-year term. On April 30, 2016, Sun exercised the renewal option.

d) On July 1, 2016, machinery and equipment were purchased at a total invoice cost of ₱7,500,000. Additional
costs of ₱300,000 for delivery and ₱900,000 for installation were incurred.

e) On August 31, 2016, Sun purchased a new automobile for ₱450,000.

f) On September 29, 2016, a truck with a cost of ₱720,000 and a carrying amount of ₱243,000 on the date of sale
was sold for ₱345,000. Depreciation for 9 months ended September 30, 2016, was ₱70,560.

g) On December 22, 2016, a machine with a cost of ₱510,000 and a carrying amount of ₱89,250 at date of
disposition was scrapped without cash recovery.

Based on the preceding information, calculate the 2016 depreciation expense on each of the following classes of PPE.

1. Land improvements
A. ₱480,000 B. ₱360,000 C. ₱320,000 D. ₱120,000
2. Buildings
A. ₱2,546,280 B. ₱3,024,000 C. ₱1,597,000 D. ₱2,760,000
3. Machinery and equipment
A. ₱2,325,000 B. ₱3,195,000 C. ₱1,597,500 D. ₱2,760,000
4. Transportation equipment
A. ₱363,132 B. ₱454,860 C. ₱433,692 D. ₱527,760
5. Leasehold improvements
A. ₱828,750 B. ₱552,500 C. ₱663,000 D. ₱1,326,000
Solution:

1. Land improvements (P5,760,000 / 12 x 9/12) 360,000 Ans. B

2. Book value, 01/01/16 (P36,000,000 - P7,962,000) 28,038,000

Building acquired Jan. 5, 2016 (P18,000,000 x 80%) 14,400,000
Total 42,438,000
150% declining balance rate (1/25 x 150%) 6%
Building depreciation 2,546,280 Ans. A

3. Machinery and equipment, 01/01/16 (P23,250,000 / 10 yrs) 2,325,000

Purchased, 07/01/2016 ((P7.5M + P0.3M + P0.9 M) / 10 x 6/12) 435,000
Total - Machinery and equipment depreciation 2,760,000 Ans. D

4. Book value, 01/01/16 (P3,960,000 - P2,586,000) 1,374,000

Book value on 01/10/16, of truck sold 09/29/16
(P243,000 + P70,560) (313,560)
Amount subject to depreciation 1,060,440
150% declining balance rate (1/5 x 150%) 30% 318,132
Truck sold 09/29/16 70,560
Automobile purchased 08/31/15 (P450,000 x 30% x 4/12) 45,000
Total - Transportation equipment depreciation 433,692 Ans. C

5. Book value, 01/01/16 (P6,630,000 - 3,315,000) 3,315,000

Useful life of leasehold improvements (8 - 3) 5
Depreciation - Leasehold improvements 663,000 Ans. C
Problem No. 2

The following information pertains to Tekken Company's intangible assets:

1. On January 1, 2016, Tekken signed an agreement to operate as a franchisee of Max & Jess Food Chain, Inc. for
an initial franchise fee of ₱1,500,000. Of this amount, ₱300,000 was paid when the agreement was signed and
the balance is payable in 4 annual payments of ₱300,000 each, beginning January 1, 2017. The agreement
provides that the down payment is not refundable and no future services are required of the franchisor. The
present value at January 1, 2013, of the 4 annual payments discounted at 14% (the implicit rate for a loan of
this type) is ₱874,000. The agreement also provides that 5% of the revenue from the franchise must be paid to
the franchisor annually. Tekken's revenue form the franchise for 2016 was ₱19,000,000. Tekken estimates the
useful life of the franchise to be 10 years.

2. Tekken incurred ₱1,300,000 of experimental and development costs in its laboratory to develop a patent which
was granted on January 2, 2016. Legal fees and other costs associated with registration of the patent totaled
₱272,000. Tekken estimates that the useful life of the patent will be 8 years.

3. A trademark was purchased from Banawe Company for ₱640,000 on July 1, 2013. Expenditures for successful
litigation in defense of the trademark totaling ₱163,200 were paid on July 1, 2016. Tekken estimates that the
useful life of the trademark will be 20 years from the date of acquisition.

1. What is the carrying value of the franchise at December 31, 2016?

2. What is the carrying value of the patent at December 31, 2016?
3. What is the carrying value of the trademark at December 31, 2016?
4. The total expenses resulting from the transactions that would appear on Tekken's income statement for the
year ended December 31, 2016?

Problem No. 3
On December 1, 2016, Ken Corporation leased office space for five years at a monthly rental of ₱10,000. On that
date, Ken paid the lessor the following amounts:

Rent security deposit ₱25,000

First month's rent 10,000
Last month's rent 10,000
Nonrefundable payment (reimburses lessor
for modifications to the leased premises) 60,000
₱105,000
The entire amount of ₱105,000 was charged to rent expense in 2016. What portion of the payments should Ken have
deferred to years subsequent to 2016?
A. ₱35,000 B. ₱85,000 C. ₱94,000 D. ₱95,000

Problem No. 4
On January 1, 2016, Hazel, Inc. issued for ₱939,000, one thousand of its 9%, ₱1,000 bonds. The bonds were issued to
yield 10%. The bonds are dated January 1, 2016, and mature on December 31, 2022. Hansel uses the interest
method of amortizing bond discount. In its December 31, 2016, balance sheet, Hansel should report unamortized
bond discount of

A. ₱57,100.00 B. ₱54,900.00 C. ₱51,610.00 D. ₱51,000.00

Solution: PROBLEM NO. 2
1. Down payment 300,000
Present value of 4 annual payments 874,000
Total cost of franchise 1,174,000

Less: amortization for 2015 (P1,174,000 / 10) 117,400

Carrying value of franchise, 12/31/15 1,056,600
2. Cost of securing patent on Jan. 2, 2015 272,000
Less: amortization for 2015 (P272,000 / 8) 34,000
Carrying value of patent 12/31/15 238,000

3. Cost of trademark 640,000

Less: Amortization, 07/01/12 - 12/31/15

(P640,000 / 20 x 42/12) 112,000
Carrying value of trademark 12/31/15 528000

4. Interest expense (P874,000 x 14%) 122,360

Amortization of franchise 117,400
Amortization of patent 34,000
Amortization of trademark (P272,000 / 8) 32000

Franchise fee (P19,000,000 x 5%) 950,000

Total 1,255,760

Solution: Problem No. 3

Rent expense 105,000

Less: Rent expense per audit

Last month's rent

Nonrefundable payment amortization 10,000
(P60,000 / 5 x 1/12) 1,000 11,000
Amount to be deferred 94,000 Ans. C

Solution: Problem No. 4

Balance of bond discount, 01/01/15 (P1M - P939,000) 61,000

Amortization:
 Nominal interest 90,000
Effective interest 93,900 (3,900)

Unamortized bond discount 57,100.00

 BIT International College
Jagna, Bohol

Accounting 15 Jaqueline F. Ampo, CPA

Semi-Final Examination Instructor

Problem No. 5

On January 1, 2016, Narra Corp. purchased debt securities for cash of ₱765,540. The securities have a face value of
₱600,000, and they mature in 15 years. The securities carry fixed interest of 10%, that is receivable semiannually, on
June 30 and December 31. The prevailing market interest rate on these debt securities is 7% compounded
semiannually. Narra Corp. intends and has the financial resources to hold those securities to maturity.

1. The carrying value of the debt securities on December 31, 2016, at amortized cost using the effective interest
rate method is
A. ₱771,840 B. ₱759,016 C. ₱765,540 D. ₱600,000
2. The interest income to be reported for 2016 using the effective interest rate method is
A. ₱66,524 B. ₱6,524 C. ₱60,000 D. ₱53,476

Problem No. 6

You are engaged to audit the December 31, 2016, financial statements of Milan Company, a manufacturer of
household appliances. Your audit disclosed the following situations.

1. In June 2016, the company began producing and selling a new line of dishwasher. By the end of the year, it had
sold 120,000 to various dealers for ₱15,000 each. The product was sold under a 1-year warranty, and the
company estimates warranty costs to be ₱750 per dishwasher. Milan had paid out ₱30 million in warranty
expenses as of December 31, 2016, which is also the amount shown as warranty expense in its income
statement for the current year.

2. In response to your letter of audit inquiry, Milan's lawyer informed you that the company is involved in a
lawsuit for violating environmental laws regulating hazardous waste. Although the litigation is pending, Milan's
lawyer is certain that Milan will most probably have to pay cleanup costs and fines of ₱5,500,000. Milan
neither accrued nor disclosed this loss in the financial statements.

3. Milan is the defendant in a patent infringement suit by Megan Yang over Milan's use of a hydraulic compressor
in several of its manufactured appliances. Milan's lawyer informed you that if the suit goes against your audit
client, the loss may be as much as ₱10 million. However, the lawyer believes that the loss of this suit is only
possible. Milan did not in any way disclose this pending litigation in its financial statements.

1. What amount of warranty expense should be shown on Milan's income statement for the year ended
December 31, 2016?
A. ₱30,000,000 B. ₱0 C. ₱60,000,000 D. ₱90,000,000

2. What amount of warranty liability should be shown on Milan's statement of financial position as of December
31, 2016?
A. ₱60,000,000 B. ₱90,000,000 C. ₱30,000,000 D. ₱0

3. What amount of lawsuit liability should be reported as a provision on Milan's December 31, 2016, statement of
financial position?
A. ₱10,000,000 B. ₱5,500,000 C. ₱15,500,000 D. ₱0
 Solution: Problem No. 5

1. Carrying value, Jan. 1, 2015 765,540

Amortization of premium, Jan-Jun
Nominal interest (P600,000 x 10% x 1/2) 30,000
Effective interest (P765,540 x 7% x 1/2) 26,794 3,206
Carrying value, Jun. 30, 2015 762,334
Amortization of premium, Jan-Jun
Nominal interest (P600,000 x 10% x 1/2) 30,000
Effective interest (P762,334 x 7% x 1/2) 26,682 3,318
Carrying value, Dec. 31, 2015 759,016 Ans. B

2. Interest income for 2015 (P26,794 + P26,682) 53,476 Ans. D

Solution: Problem No. 6

1. Warranty expense (P750 x 120,000) 90,000,000 Ans. D

2. Warranty liability (P90,000,000 - P30,000,000) 60,000,000 Ans. A

3. Environmental cleanup liability 5,500,000 Ans. B