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Handout One Accounting For Financial Statements - 1
Handout One Accounting For Financial Statements - 1
Problem 1. The following elements of Financial Statements are provided from the Trial Balance of Ford Inc. for the year
ended December 31,2011:
Note: The only transactions that affect the retained earnings unappropriated for the year are the net income for 2011 and
dividends declared.
Required: Based on the result of your audit, determine the following as of December 31,2011:
____________1. Total Current Assets
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____________2. Total Noncurrent Assets
____________3. Total Assets
____________4. Total Current Liabilities
____________5. Total Noncurrent Liabilities
____________6. Total Liabilities
____________7. Total Shareholder’s Equity
____________8. Total Retained Earnings – December 31,2011
____________9. Total Retained Earnings – Appropriated - December 31,2011
____________10. Total Retained Earnings – Unappropriated – December 31,2011
____________11. Profit or Loss for the year ended December 31,2011
ACCOUNTING EQUATION
Problem 2. DLSU Co. provided the following data regarding its financial position:
January 1,2013
Current Asset P2,000,000
Current Liability ?
Noncurrent Asset 5,000,000
Noncurrent Liability 3,000,000
Problem 3. The financial statements of Benz Inc. are submitted to the external auditor on February 15,2012. The external
auditor issued the unqualified audit opinion on February 28,2012. The board of directors approved and authorized the
issuance of financial statements on March 15,2012. The stockholder’s ratified the issuance on March 31,2012. The
following events after reporting period of Benz Inc. are presented for the year ended December 31,2011:
a. On December 10,2011, Benz was charged by DENR of Environmental Regulation Violation. On December
31,2011, the defense counsel of Benz believed that it is probable that Benz will lose in the law suit and will be
liable in the range of P1,000,000 to P3,000,000. At that time, there is no best estimate of liability. On March
10,2012, the Supreme Court of the Philippines decided against the defendant Benz and award P2,500,000
amount of damages to DENR.
b. On December 15,2011, Benz was charged by the Benz Labor Union for Unfair Labor Practice in the Labor
Arbitrer. On December 31,2011, the defense counsel of Benz believed that it is reasonably possible that Benz will
lose in the labor dispute. The reasonable estimate of the liability is P1,000,000. On March 20,2012, the Supreme
Court decided in favor of the Benz Labor Union and awarded P1,500,000 amount of damages.
c. On January 10,2012, Benz was charged by Ford of Patent Infringement. On such date, the defense counsel of
Benz believed that it is probable that Benz will lose in the case. On March 12,2012, the Supreme Court ruled in
favor of Ford and awarded P500,000 of damages to the plaintiff.
d. On December 25,2011, Benz filed a civil case against Honda. The defense counsel of Benz believed that it is
probable that Benz will prevail in the civil case. The reasonable amount of damages is P3,000,000. The case was
decided by the Supreme Court on April 1,2012 and awarded P4,000,000 amount of damages to Benz.
e. On November 15,2011, Benz filed a civil case against Toyota. The defense counsel of Benz believed that it is
reasonably possible that Benz will prevail in the civil case. The reasonable amount of damages is P1,800,000.
The case was decided by the Supreme Court on April 10,2012 and awarded P2,500,000 amount of damages to
Benz.
f. On September 30,2011, an employee of Benz filed a civil case against Benz. The defense counsel of Benz
believed that it is remote that Benz will lose the case and the reliable estimate of liability is P200,000. The case
was decided by Supreme Court on March 30,2012 and awarded P300,000 amount of damages to the employee
of Benz.
g. On December 31,2011, Benz has an outstanding receivable from Way Inc. in the amount of P5,000,000. On
March 14,2012, Way Inc. declared bankruptcy and the Court placed the company under receivership. On such
date, the receiver declared that only 40% of the payable of Way will be liquidated.
h. On March 10,2012, the Investment Property of Benz Inc. was razed by fire. The carrying value of such property
on December 31,2011 is P10,000,000.
i. On March 16,2012, the warehouse containing the inventory of Benz Inc. was destroyed by earthquake. The total
from such calamity is P25,000,000.
j. On January 20,2012, Benz Inc. acquired 100% interest of Ferrari Inc. for P100,000,000.
Required: Based on the result of your audit, provide the treatment of the preceding events after reporting period:
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________________________1. Event A
________________________2. Event B
________________________3. Event C
________________________4. Event D
________________________5. Event E
________________________6. Event F
________________________7. Event G
________________________8. Event H
________________________9. Event I
________________________10. Event J
Problem 4. The income tax rate for the year is 30%. The following income and expense accounts are obtained from the
Trial Balance of Ferrari Inc., which is a diversified company, for the year ended December 31,2011:
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Expense from Law Suit 500,000
Freight Out 200,000
Sales Commission 100,000
Salary of Marketing Department’s employees 100,000
Advertising Expense 500,000
Salary of legal counsel 500,000
Salary of directors and executives 900,000
Salary of accounting department 200,000
Office Supplies used 100,000
Rental Expense on Main building 1,000,000
Utilities Expense 100,000
Extraordinary loss from calamity 300,000
Unrealized holding loss from FLFVPL – due to credit risk 400,000
Realized loss from FLFVPL – due to credit risk 100,000
Unrealized holding loss from FLFVPL – not due to credit risk 200,000
Unrealized holding gain on derivatives designated as fair value hedge 100,000
Unrealized holding loss on derivates designated as cash flow hedge (effective) 300,000
Realized loss on derivatives designated as cash flow hedge (effective) 100,000
Unrealized holding gain on derivatives designated as cash flow hedge (ineffective) 200,000
Unrealized holding gain on derivatives designated as hedge of net investment in
Foreign operation (effective) 500,000
Realized gain on derivatives designated as hedge of net investment in
Foreign operation (effective) 300,000
Translation adjustment debit – Foreign Operation 2,000,000
Transaction gain from foreign exchange transaction 500,000
Unrealized holding gain on Trading Securities 2,000,000
Realized loss on sale of Trading Securities 500,000
Unrealized holding loss on FAFVOCI equity instrument 3,000,000
Realized holding loss on FAFVOCI equity instrument 1,000,000
Unrealized holding gain on FAFVOCI Debt Instruments 2,000,000
Realized gain on sale of FAFVOCI Debt Instruments 1,500,000
Net Remeasurement Gain or Actuarial Gain under Defined Benefit Plan 100,000
Employee Benefit Expense 200,000
Increase in Revaluation Surplus during 2011 2,000,000
Realized Revaluation Surplus during 2011 200,000
1. The depreciation of Property, Plant and Equipment is 60% administrative and 40% selling.
2. The depletion of Wasting Asset is considered part of Other Expenses.
3. The employee benefit expense is 80% administrative and 20% selling.
4. The compensation expense from share option is for administrative department employees while that from share
appreciation rights is for selling department employees.
5. The rental, utilities and office supplies expense is equally divided between administrative and selling departments.
6. Finance cost is separated from other expenses.
7. Ferrari uses the functional or cost of sale format in preparing its Statement of Comprehensive Income.
Required: Based on the result of your audit, determine the following for the year ended December 31,2011:
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declared and paid cash dividends in the amount of P100,000 and distributed property dividends with book value of
P100,000 and fair value of P500,000.
During 2013, the total assets increased to P5,000,000 while the total liabilities increased by P1,800,000. Nothing
affects the total stockholder’s equity accounts except the transactions provided and profit or loss. What is the
profit/(loss) of LLB Inc. for the year ended December 31,2013?
DISCONTINUED OPERATION
Problem 7. On January 1,2013, ABS-CBN, a communication entity, has decided to dispose one of its radio operations
known as DZMM SAIS TRENTA. During 2013, the total revenues from the operation of DZMM is P50,000,000 while its
total operating expenses is P40,000,000. During 2013, the post-tax impairment loss of the assets of DZMM amounts to
P5,000,000. On December 31,2013, DZMM sold one of its satellites with a cost of P5,000,000 and accumulated
depreciation of P2,000,000. The selling price of the satellite is P6,000,000 and its fair value is P4,000,000. During 2013,
DZMM also incurred pre-tax termination costs of P1,000,000 as a result of the discontinuance. The normal corporate
income tax for year 2013 is 30%. What is the single amount to be presented in the line item-discontinued operation
of the 2013 Statement of Comprehensive Income of ABS-CBN?
Problem 9. On January 1,2013, Queen Inc. purchased an equipment for P120,000 with useful life of 4 years and residual
value of P20,000.It is the company’s policy to use 200% Double Declining Balance Method for depreciation of its property,
plant and equipment. On January 1,2014, due to new information, Queen changed its depreciation method from Double
Declining Balance Method to SYD Method. The remaining useful life as of January 1,2014 is 2 years. The residual value
is also revised to P15,000. What is the cumulative effect of these accounting changes in the January 1,2014
Retained Earnings to be presented in the 2014 Statement of Changes in Equity assuming the tax rate is 30%?
Problem 11. On January 1,2014, IRON Inc. decided to change its accounting policy for costing of its inventory from FIFO
to Weighted Average. The following data are provided:
FIFO WEIGHTED AVERAGE
12/31/2012 P1,000,000 P1,500,000
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12/31/2013 2,000,000 1,000,000
12/31/2014 3,000,000 5,000,000
What is the cumulative effect of this accounting change in the January 1,2014 Retained Earnings to be presented
in 2014 Statement of Changes in Equity assuming the tax rate is 30%?
Problem 12. On January 1,2013, THOR Inc. acquired a building to be held as investment property in the amount of
P3,300,000. The building has a residual value of P300,000 and has a useful life of 6 years. It is the company’s policy to
use cost method for the valuation of its investment property. On January 1,2015, THOR Inc. decided to change its
accounting treatment of its investment property from cost method to fair value method. The following fair values are also
provided:
December 31,2013 P3,500,000
December 31,2014 3,000,000
December 31,2015 3,200,000
What is the cumulative effect of this accounting change in the January 1,2015 Retained Earnings to be presented
in 2015 Statement of Changes in Equity assuming the tax rate is 30%?
Classification of Operating, Investing and Financing Activities. Indicate the proper classification of the following cash
flows by using O for Operating, I for Investing and F for financing.
___Cash paid for the acquisition of merchandise inventory
___Cash received from the sale of available for sale securities
___Cash received from the sale of trading securities
___Cash paid for the acquisition of treasury shares
___Cash paid for salaries of employees and officers
___Cash paid to stockholders as distribution of earnings
___Cash received from investment in associate
___Cash paid for interest on loans payable
___Cash received for interest on notes receivable
___Cash paid for acquisition of call option
___Cash received from the sale of investment property
___Cash paid for acquisition of land to be classified as property, plant and equipment
___Cash received from bank loan
___Cash paid for advances to subsidiary
___Cash received from customers
___Cash paid for utilities
___Cash paid for taxes
___Cash received from investment of stockholders
___Cash paid for acquisition of held to maturity securities
___Cash paid for acquisition of patent
___Cash paid for the disposal of trademark
___Cash paid for acquisition of prepaid insurance
___Cash received from the sale of factory equipment
Direct Method.
Problem 13. The following data are provided by James Inc. for the year ended December 31,2013:
Total Sales P20,000,000
Cash received from cash customers 5,000,000
Factored accounts receivable 1,000,000
Dishonored notes receivable 3,000,000
Interest on dishonored notes receivable 500,000
Recovery of previously written off accounts receivable 300,000
Written off accounts receivable during the year 200,000
Sales discount availed by customers during the year 100,000
Credit memo issued by James Inc. during the year 400,000
Bad debt expense during the year 800,000
The following balances are provided:
Accounts Receivable, January 1,2013 P10,000,000
Net realizable value of AR, January 1,2013 9,500,000
Net realizable value of AR, December 31,2013 12,000,000
What is the total collection from customers for the year ended December 31, 2013?
Problem 14. The following data are provided by Lebron Inc. for the year ended December 31,2013:
12/31/2012 12/31/2013
Trade AR P1,000,000 P2,000,000
Trade NR 3,000,000 3,500,000
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Unearned Revenue 5,000,000 2,000,000
The total revenue reported by Lebron Inc. on its Income Statement for the year ended December 31,2013 is P10,000,000.
What is the total cash collected from customers for the year ended December 31, 2013?
Problem 17. The following information are provided concerning the operating expenses of TY Inc.:
12/31/2010 12/31/2011
Prepaid Expenses 1,000,000 3,000,000
Accrued Expenses 2,000,000 2,500,000
Total Operating Expenses 10,000,000
Acc. Depreciation 3,000,000 4,000,000
Acc. Amortization 2,000,000 2,500,000
a. Non-cash expenses such as amortization expense and depreciation expense are included in the total operating
expenses.
b. During the year, TY sold equipment with a cost of P2,000,000. The net proceeds from the sale of equipment is
P2,100,000 and the gain on disposal is P500,000.
c. During the year, TY sold patent with a cost of P1,000,000. The net proceeds from the sale of patent is P600,000
and the loss on disposal is P200,000.
What is the cash basis operating expenses for the year ended December 31, 2011?
Problem 18. The following information are provided by LA Inc. concerning its interest expense:
12/31/2010 12/31/2011
Prepaid Interest 100,000 150,000
Accrued Interest Payable 250,000 100,000
Discount on Bonds Payable 300,000 150,000
Premium on Bonds Payable 250,000 50,000
The following data are also provided:
a. During 2011, LA extinguished some Bonds Payable originally issued at a discount with a face value of
P1,000,000 through asset swap. The book value of the land given up is P1,100,000 and the fair value is
P1,200,000. The extinguishment of Bonds Payable resulted to a loss of P150,000.
b. During 2011, LA extinguished some Bonds Payable originally issued at a premium with a face value of
P2,000,000 by payment of P2,000,000. The extinguishment resulted to a gain of P100,000.
c. The total interest expense for the year is P2,000,000.
What is the cash paid for interest for the year ended December 31, 2011?
What is the total cash paid for taxes for the year ended December 31, 2013?
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Interest receivable P3,000,000 P2,000,000
Unearned interest 2,000,000 2,500,000
Interest revenue for year 2013 12,000,000
What is the total collected interest for the year ended December 31, 2013?
Problem 21. The following information are provided concerning the interest income of AT Inc. for 2011:
12/31/2010 12/31/2011
Unearned Interest Income 200,000 100,000
Accrued Interest Income 400,000 500,000
Discount on Bonds Rec. 500,000 300,000
Premium on Bonds Rec. 400,000 100,000
What is the total cash collected from interest for the year ended December 31, 2011?
Problem 22. The following information are provided regarding the Retained Earnings of AIM Inc.:
12/31/2010 12/31/2011
Retained Earnings 2,500,000 2,000,000
Cash Dividends Payable 3,500,000 1,000,000
1. On January 1,2011, AIM changed its inventory costing method from FIFO to Weighted Average. The FIFO cost
on January 1, 2011 is P1,000,000 while the Weighted Average Cost is P2,000,000. The tax rate is 30%.
2. On June 1,2011, AIM reissued treasury shares with a total cost of P1,000,000 in the amount of P500,000. There
was no share premium arising from treasury shares transaction at the time of re-issuance of treasury shares.
3. On December 31,2011, AIM declared cash dividends and property dividends. The book value of property
dividends at that date is P400,000 while the fair value is P600,000.
4. The adjusted net income for 2011 was P1,500,000.
G. Investing Activity
Problem 23. The following information are provided affecting JT’s Land:
12/31/2010 12/31/2011
Land 2,000,000 1,000,000
The following notes are also provided:
1. On January 1,2011, JT purchased land by paying P100,000 in cash.
2. On February 1,2011, JT received a land from government with a book value P200,000 and fair value of P300,000.
3. On March 1,2011, JT issued 10,000 ordinary shares in exchange of a land with a fair value of P400,000. The fair
value of ordinary shares is P30 per share and the par value is P10.
4. On April 1, 2011, JT sold land to another company. In exchange to the lan, JT received a promissory note of
P500,000.
5. On May 1,2011, JT sold land to the government for cash. JT realized P200,000 gain on disposal of land.
What is the net cash inflow (outflow) from investing activitiy for 2011?
Problem 24. The following information are provided affecting DV’s Noncurrent Asset:
12/31/2010 12/31/2011
Machinery & Equip. 3,500,000 1,500,000
Patent 3,000,000 1,000,000
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Accumulated Dep. 500,000 300,000
Accumulated Amort. 600,000 200,000
What is the net cash inflow (outflow) from investing activity for 2011?
Problem 25. The following information are provided affecting JD’s Investment in Associate with a 20% ownership:
12/31/2010 12/31/2011
Investment in Associate 2,000,000 1,000,000
3. JD Inc. received a property dividend and cash dividend for the year. The book value of the property dividend is
P200,000 while the fair value is P300,000.
Assuming the company presents dividend received as part of Operating Activity, What is the amount of cash
received from Investment in Associate?
Indirect Method
Problem 26. The following summarized data are provided from the Statement of Financial Position and Income Statement
of Miami Heat Inc. STATEMENT OF FINANCIAL POSITION
Current Asset Section Current Liability Section
12/31/2012 12/31/2013 12/31/2012 12/31/2013
Cash and CE P1,000,000 P2,000,000 Accounts Payable P2,000,000 P3,000,000
Trading Securities 300,000 200,000 Accrued Expenses 1,000,000 500,000
AR, net 500,000 300,000 Income tax payable 500,000 600,000
Inventory 1,500,000 2,500,000 Interest payable 300,000 100,000
INCOME STATEMENT
Net Sales P10,200,000
Less: Cost of Goods Sold (5,000,000)
Gross Profit P 5,200,000
Less: Operating Expenses (including P200,000 depreciation
and bad debt expense of P100,000) ( 2,000,000)
Net Operating Income P 3,200,000
Add: Gain on sale of investment property 700,000
Holding gain on trading securities 200,000
Less: Amortization of patent (300,000)
Realized loss on sale of trading securities (100,000)
Loss on sale of factory equipment (400,000)
Income before interest and tax P 3,300,000
Less: Loss on interest expense (100,000)
Net income before tax P 3,200,000
Less income tax expense 960,000
Net Income P 2,240,000
What is the net cash flow from operating activities for the year ended December 31, 2013?
Problem 27. ASUS Corporation has recently decided to go public and has hired you as an independent CPA. One
statement that the entity is anxious to have prepared is a statement of cash flows. Financial statements of ASUS for
2010 and 2009 are provided below.
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Statement of Financial Position
12/31/2010 12/31/2009
Cash 153,000 72,000
Accounts Receivable 135,000 81,000
Merchandise Inventory 144,000 180,000
PPE (net of Acc. Dep. of P120,000 and P114,000 as
of 12/31/2010 and 12/31/2009, respectively) 108,000 246,000
540,000 579,000
Income Statement
For the Year Ended December 31,2010
Sales 3,150,000
Cost of sales 2,682,000
Gross profit 468,000
Selling expenses 225,000
Administrative expenses 72,000 297,000
Income from operations 171,000
Interest expense 27,000
Profit before taxes 144,000
Income taxes 36,000
Profit or loss 108,000
2. Assuming the same data provided in number 59, what is the net cash provided (used) by investing
activities?
a. (132,000) c. 18,000
b. 90,000 d. (108,000)
3. Assuming the same data provided in number 59, what is the net cash provided (used) by financing
activities?
a. (90,000) c. 18,000
b. (162,000) d. 72,000
Interim Reporting
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Problem 28. NYY Inc. prepares quarterly interim financial reports. On February 14, 2013, the company incurred a
calamity loss resulting from an earthquake in the amount of P200,000. The calamity loss was paid by the company on
November 1,2013. How much calamity loss shall be recognized in the interim income statements for the 1st
quarter, 2nd quarter, 3rd quarter and 4th quarter, respectively?
Problem 29. NYM Inc. prepares quarterly interim financial reports. On the March 31,2013, the following data for inventory
are provided:
Cost P2,000,000
Estimated selling price 2,500,000
Gross profit rate based on sale 20%
Estimated cost to complete 300,000
Estimated cost to sell 400,000
On June 30,2013, the following data for inventory are also provided:
Cost P2,000,000
Estimated selling price 3,000,000
Gross profit rate based on sale 20%
Estimated cost to complete 200,000
Estimated cost to sell 400,000
How much loss on inventory writedown shall be recognized in the interim income statements for the 1st
quarter, 2nd quarter, 3rd quarter and 4th quarter, respectively? How much gain on reversal of loss on inventory
writedown shall be recognized in the interim income statements for the 1st quarter, 2nd quarter, 3rd quarter and 4th
quarter, respectively?
Problem 30. BYN Inc. prepares quarterly interim financial reports. On January 1, 2013, the company paid P200,000 for
advertisement which will benefit the whole year 2013. On April 1,2013, the company incurred repairs and maintenance in
the amount of P300,000 and paid it on December 15,2013. The repairs and maintenance will only benefit the remainder of
the year. How much advertising expense shall be recognized in the interim income statements for the 1st quarter,
2nd quarter, 3rd quarter and 4th quarter, respectively? How much repairs and maintenance expense shall be
recognized in the interim income statements for the 1st quarter, 2nd quarter, 3rd quarter and 4th quarter,
respectively?
Problem 31. LAA Inc. prepares quarterly interim financial reports. The company provides bad debt expense 10% based
on credit sales for the quarter. The company estimated that the total bad debt expense for year 2013 is P200,000. The
company recognized bad debt expense for the 1st, 2nd, and 3rd quarter in the amount of P30,000, P50,000 and P80,000
respectively. During the 4th quarter, the total credit sales is P600,000 and the company wrote off P50,000 accounts
receivables. How much bad debt expense shall be recognized in the 4th quarter income statement?
Operating Segment
Problem 32. LAD Inc. has several operating segments. The following data are provided concerning its segments:
Segment Total Assets Total External Revenue Total Internal Revenue Profit/(Loss)
A P2,000,000 P 50,000 P 550,000 P 50,000
B 100,000 200,000 100,000 20,000
C 200,000 30,000 270,000 (100,000)
D 3,000,000 20,000 180,000 30,000
E 700,000 100,000 1,900,000 (200,000)
Problem 33. TBR Inc. is considering providing disclosures for its major customers. The following data are provided
concerning its operating segments:
Segment T Total External Revenue Total Internal Revenue
A P 500,000 P 100,000
B 200,000 50,000
C 300,000 150,000
D 100,000 180,000
E 400,000 20,000
What is the minimum revenue to be provided by a customer to be considered a major customer which will
require disclosures from TBR Inc.?
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