Correction Of Errors.docx

CORRECTION OF ERRORS 1. Stratton Company has determined its 2014 and 2015 net income figures to be P1,500,000 and P1,100,000, respectively. In a first time audit of the company’s financial statements, you determined the following errors: a) Merchandise inventory was incorrectly determined: P50,000 overstatement for 2014 and P150,000 overstatement for 2012. b) Revenue received in advance in 2014 of P250,000 was credited to a revenue account when received. Of the total. P50,000 was earned in 2014, P120,000 was earned in 2015 and the remainder will be earned in 2013. c) P120,000 gain on sale of plant assets in 2015 was erroneously credited to Accumulated Profits and Losses. What is the corrected net income for the year 2015? P1,240,000 Net income for 2015 a) Overstatement of 2014 inventory Overstatement of 2015 inventory b) Understatement of revenue for 2015 c) Gain on sale-2015 not recognized in net income Correct net income

P1,100,000 50,000 ( 150,000) 120,000 `120,000 P1,240,000

2. Vinn Company reported an Accumulated Profits and Losses balabce of P300,000 at December 31,2014. In June 2015, Vinn discovered that merchandise costing P100,000 had not been included in inventory in its 2014 financial statements. Assume Vinn has 32% tax rate. What amount should Vinn report as adjusted beginning Accumulated Profits and Losses on January 1, 2015? P368,000 Accumulated profits, December 31, 2014, or January 1, 2015 Understatement in inventory for 2014 P100,000 x Net of tax rate x 68% Adjusted accumulated profits, January 1, 2015

P300,000 68,000 P368,000

3. Casper Company reported an Accumulated Profits balance of P400,000 at December 31,2014. In August 2015, Casper Company determined that insurance premiums of P75,000 for the three-year period beginning January 1, 2014, had been paid and fully expensed in 2014. Assume Casper has a 32% income tax rate. What amount should Casper report as adjusted beginning Accumulated Profits in 2015? P434,000 Accumulated profits, December 31, 2014

P400,000

Overstatement of expense x Net of tax rate Adjusted accumulated profits, January 1, 2015

P50,000 x 68%

34,000 P434,000

4. Oakman Company started operations on January 1, 2011. Financial statements for 2014 and 2015 contained the following errors:

Ending inventory Depreciation expense Insurance expense Prepaid insurance

December 31, 2014 P55,000 too high 35,000 too high 25,000 too low 25,000 too high

December 31, 2015 P65,000 too low 25,000 too high -

Additionally, a fully depreciated equipment was sold for P12,000 on December 31, 2015. The sale was not recorded until 2016. No corrections have been made for any of the errors. (Ignore income tax considerations) How much would be the total effect of the errors in Oakman’s 2015 net income? Understated by P157,000

Ending inventory: 2014 too high 2015 too low Depreciation-2014 too high Insurance expense-2014 too low Unrecorded gain Effect on net income

2014

2015

(P55,000)

P 55,000 65,000

35,000 ( 25,000) ________ (P45,000)

25,000 12,000 P157,000

How much would be the understatement in Oakman’s Accumulated Profits balance at December 31, 2015? P112,000 Effect on 2014 net income Effect on 2015 net income Net effect on December 31, 2015 Accumulated Profits

(P 45,000) 157,000 P 112,000

5. On December 30,2014, Mazu Corporation sold merchandise for P75,000 to Nhoreen Company. The terms of the sale were n/30, FOB shipping point. The merchandise was shipped on December 31, 2014, and arrived at Nhoreen Company on January 2, 2015 and the merchandise, sold at 25% markup on coast, was included in Mazu’s inventory at December 31, 2014. As a result, Mazu cost of goods sold for the year ended December 31, 2014 was? Understated by P60,000 The December 31, 2014 inventory was overstated. Therefore, cost of goods sold for 2014 was understated bu P60,000 (P75,000 / 125%)

6. Star Company’s December 31 year-end financial statements had the following errors:

Ending inventory Depreciation expense Unearned rental Prepaid insurance

December 31, 2014 P13,500 understated 3,600 understated 5,000 understated

December 31, 2015 P19,800 overstated 8,000 understated

There was no other errors during the years 2014 or 2015 and no corrections have been made for any of the errors. (Ignore income tax consideration) What is the net effect of the errors on Star’s 2015 net income? Overstated by P20,300

Net Income 2014 2015 Ending inventory: 2014-understated 2015-overstated Depreciation-2014 under Unearned rental-2014 under Prepaid insurance-2015 under Net effect (over) understated

P13,500 ( 3,600) ( 5,000) _______ P 4,900

(P13,500) ( 19,800) 5,000 8,000 (P20,300)

Effect on December 31, 2015 Accumulated Profits P 0 ( 19,800) ( 3,600) 8,000_ (P15,400)

What is the net effect of the errors in Star’s December 31, 2015 accumulated profits balance? Understated by P8,000 What is the net effect of the errors in Star’s December 31, 2015 working capital? Overstated by P11,800

2015 overstatement of inventory 2015 understatement of prepaid insurance Net effect on the working capital (over)

7.

Effect on Working Capital (for 2015) (P19,800) 8,000 (P11,800)

Records showed that as of December 31, 2014, accrued salaries payable of P21,000 were not recorded in Sebby Company’s books. In addition, office supplies on hand of P9,000 at December 31, 2015 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. What is the effect of these two errors? 2015 net income is understated by P30,000 and January 1, 2016 accumulated profits is understated by P9,000.

Net Income 2014 2015

Accumulated Profits January 1, 2016

Unrecorded accrued salaries in 2014 Office supplies on hand in 2015 charged to expense Net effect – (overstated) understated

(P21,000)

P21,000

P

0

________ (P21,000)

9,000 P30,000

9,000 P9,000

8. Isay Corporation started operations on January 1, 2014. Financial statements for the years ended December 31, 2014 and 2015 contained the following errors:

Ending inventory Depreciation expense Insurance expense Prepaid insurance

2014 P240,000 understated 90,000 understated 150,000 overstated 150,000 understated

2015 P225,000 overstated 150,000 understated

Additionally, a fully depreciated equipment was sold for cash of P162,000 on December 31, 2015. The sale was not recorded until 2016. There were no other errors during 2014 or 2015 and no corrections have been made for any of the errors. What is the total effect of the errors in the amount of the working capital at December 31, 2015? (ignore income taxes) Overstated by P63,000

Inventory-2014 under Inventory-2015 over Depreciation-2014 under Prepaid insurance under Gain on sale of equipment Net correction

2014 P240,000 ( 90,000) 150,000 ________ P300,000

2015 (P240,000) ( 225,000) 0 ( 150,000) 162,000 (P453,000)

Working Capital Dec. 31, 2015 (P225,000) 0 0 162,000 (P 63,000)

9. While examining the accounts of Yo Mama Company on December 31, 2015, the following errors were uncovered: a) Dividends of P100,000 had been declared on December 15, 2015 but was not recorded in the books. b) Improvements in buildings and equipment for P480,000 had been debited to expense at the end of April in 2014. Improvements are estimated to have an estimated life of 8 years. c) The company failed to record sales commissions payable amounting to P10,500 and P19,000 at the end of 2014 and 2015, respectively. d) Supplies on hand amounting to P6,000 and P15,000 were not recognized at the end of 2014 and 2015, respectively. What is the net effect of the above errors in the 2014 net income? P435,500 under What is the neteffect of the error in the 2015 net income? P59,500 over

a) Unrecorded dividends b) Leasehold improvements charged to expense understatement of depreciation 2014 (P480,000 / 8 x 8/12) 2015 (P480,000 / 8) c) Unrecorded sales commissions 2014 2015 d) Unrecorded supplies on hand 2014 2015 Net effect

No effect

No effect

P480,000 under 40,000 over P60,000 over 10,500 over

6,000 under _____________ P435,500 under

10,500 under 19,000 over 6,000 over 15,000 under P59,500 over

10. The following errors were discovered in the course of examination of the Doodle Company’s financial records: o Year 2014 wages payable for P34,000 was not recorded. o Accrued vacation pay for the year 2014 for P62,500 was not recorded because the bookkeeper “never learned that you had to do it”. o Insurance for a 12-month period purchased on November 1, 2014 was charged to expense in the amount of P37,200 because “the amount of the check is about the same every year”. What is the net effect of the above errors on the January 1, 2015 accumulated profits? P65,500 over

Unrecorded wages payable Accrued vacation pay for 2014 not recorded Overcharging of insurance expense during 2014 (P37,200 x 10/12) Net effect on the 1/1/15 Accumulated Profits

Accumulated Profits Jan. 1, 2015 Under (Over) (P34,000) ( 62,500) 31,000 (P65,500)

11. Porpol Company discovered the following errors in its financial records at the beginning of the year 2015: a) The physical inventory count on December 31, 2014 excluded a merchandise with a cost of P38,000 that had been temporarily stored in a public warehouse. Porpol uses the periodic inventory system. b) During 2014, a competitor filed a patent infringement suit against Porpol claiming damages of P440,000. The company’s legal counsel hasindicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is P250,000. The company has not reflected or disclosed this situation in the financial statements.

c) A trademark was acquired at the beginning of 2013 for P100,000. No amortization has been recorded since acquisition. It is the company’s policy to amortize all intangibles with a definite life for a maximum of 20 years. At the time of acquisition, the trademark was estimated to have a definite life of 20 years. What is the effect of the above errors on the January 1, 2015 accumulated profits? P222,000 overstated Accumulated Profits, January 1, 2015 Under (Over) P 38,000

a) Company’s inventory, excluded in the physical count b) Failure to recognize a probable & reasonable amount of estimated loss c) Failure to amortize trademarks (P100,000 / 20 x 2) Net effect

(250,000) ( 10,000) (P222,000)

12. While examining the December 31, 2014 financial statements of Sunrise Company, you discovered the following: a) Inventory at January 1, 2014 had been overstated by P30,000 b) Inventory at December 31, 2014 was understated by P50,000 c) During 2014, Sunrise received a P100,000 cash advance from a customer for merchandise to be manufactured and shipped during 2014. The amount was credited to sales revenue. d) The net income reported on the 2014 profit or loss before reflecting any adjustments for the above items is P3,000,000 What is the corrected net income for the year ended December 31, 2014? P2,980,000 Reported net income a) Overstatement of 1/1/14 inventory b) Understatement of 12/31/14 inventory c) Sales for 2015 recognized in 2014 Correct net income, 2014

P3,000,000 30,000 50,000 ( 100,000) P2,980,000

13. Bonjoy Corporation failed to recognize accruals and prepayments since the inception of its business three years ago. The accruals and prepayments at the end of 2014 are given below: Prepaid insurance Accrued wages Rent revenue collected in advance Interest receivables

P60,000 75,000 96,000 81,000

What is the net effect of the above errors in the 2014 net income? P30,000 overstated

Understatement of prepaid insurance

Effect on Net Income Understated (Overstated) P 60,000

Understatement of accrued wages Understatement of rent revenue collected in advance Understatement of interest receivables Overstatement of net income

( 75,000) ( 96,000) 81,000 (P30,000)

14. Maan Company had the following financial statement information:

Revenue Expenses Net income

2012 1,350,000 980,000 370,000

2011 1,000,000 650,000 350,000

Total assets Total liabilities Total owner’s equity

12/31/2012 1,570,000 500,000 1,070,000

12/31/2011 1,050,000 350,000 700,000

Maan failed to record P120,000 of accrued wages at the end of 2011. The wages were recorded and paid in January 2012. The correct accruals were made on December 31, 2012. What is the corrected net income for 2011? 230,000 Net income for 2011 Unrecorded accrued wages – December 31, 2011 Corrected net income for 2011

350,000 (120,000) 230,000

15. What is the corrected net income for 2012? 490,000 Net income for 2012 Accrued wages on 12/31/2011 recorded in 2012 Corrected in net income for 2012

370,000 120,000 490,000

16. What is the correct amount of total liabilities on December 31, 2011? 470,000 Total liabilities – December 31, 2011 Unrecorded accrued wages – December 31, 2011 Correct amount of total liabilities – December 31, 2011

350,000 120,000 470,000

17. What is the correct amount of owner’s equity on December 31, 2012? 1,070,000 Total owner’s equity – December 31, 2012

1,070,000

18. Erich Company manufactures kerosene heaters for home use. The December 31 financial statements contained the following error:

Ending inventory Depreciation

2010 200,000 under 50,000 under

2011 300,000 over

An insurance premium of P150,000 was prepaid in 2010 to cover 2010, 2011 and 2012. The entire amount was charged to expense in 2010. On December 31, 2011, fully depreciated machinery was sold for P250,000 cash but the sale was not recorded until 2012. There were no other errors during 2010 and 2011 and no corrections have been made for any of the errors. Ignoring income tax, what is the net effect of the errors on the retained earnings on December 31, 2011? 50,000 overstated

2010 ending inventory under 2011 ending inventory over 2010 depreciation under Insurance premium Gain on sale of machinery Net correction to income

200,000 ( 50,000) 100,000 --- _ 250,000

Net correction to 2010 net income Net correction to 2011 net income Net correction to retained earnings

(200,000) (300,000) --( 50,000) 250,000_ (300,000) 250,000 (300,000) ( 50,000)

19. Bayle Company is in the process of adjusting its books at the end of 2011. Bayle’s records revealed the following information:  Bayle failed to accrue sales commissions at the end of 200 and 2010 as follows: 2009 2010

220,000 140,000

In each case, the sales commissions were paid and expensed in January of the following year.  Errors in ending inventory for the last three years were discovered to be as follows: 2009 2010 2011

400,000 understated 540,000 overstated 150,000 understated

The unadjusted retained earnings balance on January 1, 2011 is P12,600,000 and the unadjusted net income for 2011 was P3,000,000. Dividends of P1,750,000 were declared during 2011. What is the adjusted net income for 2011? 3,830,000

Unrecorded commissions: 2009 2010 Ending inventory: 2009 under 2010 over 2011 under Net correction to income

2009

2010

2011

(220,000)

220,000 (140,000)

140,000

(400,000) (540,000) ________ (860,000)

540,000 150,000 830,000

400,000 _______ 180,000

Net income per book for 2011 Net correction to income of 2011 Adjusted net income of 2011

3,000,000 830,000 3,830,000

20. What is the adjusted balance of retained earnings on December 31, 2011? 14,000,000 Net correction to income of 2009 Net correction to income of 2010 Net correction to income of prior years

( (

180,000 860,000) 680,000)

Retained earnings – January 1, 2011 Prior period errors Corrected beginning balance Net income for 2011 Dividends declared in 2011 Retained earnings – December 31, 2011

12,600,000 ( 680,000) 11,920,000 3,830,000 ( 1,750,000) 14,000,000

ACCRUAL & CASH BASIS OF ACCOUNTING 1. Yord Company reported revenue of P6,000,000 under the cash basis for the year ended 2014. Additional information was made available: Accounts receivable, December 31, 2013 Accounts receivable, December 31, 2014

P1,250,000 1,375,000

Under the accrual basis, how much should Yord Company report as revenue for 2014? P6,125,000 Cash basis revenue Accounts receivable, 12/31/2014 Accounts receivable, 12/31/2013 Accrual basis revenue

P6,000,000 1,375,000 ( 1,250,000) P6,125,000

2. Dream Company reported total purchases of P2,500,000 in its cash basis financial statement on December 31, 2014. Additional information revealed the following: Accounts payable, January 1, 2014 Accounts payable, December 31, 2014

P 600,000 800,000

Under the accrued basis of measuring revenues and expenses, how much is the total purchases for the year ended December 31, 2014? P2,700,000 Purchases – Cash basis Accounts payable, 12/31/2014 Accounts payable, 01/01/2014 Purchases – Accrual basis

P2,500,000 800,000 600,000 P2,700,000

3. Elsa Company’s professional fees expense account had a balance of P164,000 on December 31, 2014 before considering year-end adjustments relating to the following: Consultants were hired for a special project at a total fee not to exceed P130,000. Elsa has recorded P110,000 of this fee based on billings for work performed in 2014 The attorney’s letter requested by the auditors dated January 30, 2014 indicated that legal fees of P12,000 were billed on January 15, 2015 for work performed in November 2014 and unbilled fees for December 2014 were P14,000. What amount of professional fees expense should Elsa report for the year ended December 31, 2014 profit or loss? P190,000 Professional fees per book Accrued legal fees – November December Adjusted professional fees

P164,000 P12,000 14,000

24,000 P190,000

4. In 2009, Leon Designs Corporation sold a layout design to Laica Inc. and will receive royalties of 20% of future revenues associated with the said layout design. On December 31, 2013, Leon Designs reported royalties receivables of P75,000 from Laica Inc. during 2014, Leon Designs received royalty payments of P200,000. Laica Inc. reported revenues of P1,500,000 in 2014 from the layout design. In its 2014 profit or loss, what amount should Leon Designs report as royalty revenue? P300,000 Reported revenue x royalty rate Royalty revenue

P1,500,000 x 20% P 300,000

5. To maintain sufficient operating cash, Infinity Company frequently borrows from a bank. Below is the summary of loans granted to Infinity with 12% interest rate. The principal and the related

interest are payable at maturity and Infinity was able to repay the loans on scheduled maturity date: Date of Loan November 1, 2013 February 1, 2014 May 1, 2014

Amount P300,000 900,000 480,000

Maturity Date Term of Loan October 31, 2014 1 year July 31, 2014 6 months January 31, 2015 9 months

Infinity records interest expense when the loans are repaid. Accordingly, interest expense of P90,000 was recorded in 2014. If no correction is made, by what amount would 2014 interest expense be understated? P32,400 November loan (P300,000 x 12% x 10/12) February loan (P900,000 x 12% x 6/12) May loan (P480,000 x 12% x 8/12) Interest expense for 2014 Less: Interest recorded Understatement of interest expense

P 30,000 54,000 38,000 P 122,400 90,000 P 32,400

6. Polly Company owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. The following data were taken from the balance sheets of Polly Company: Rentals receivable were P96,000 and P124,000 for 2013 and 2014, respectively; Unearned rentals were P320,000 and P240,000 for 2013 and 2014, respectively During 2014, Polly received P800,000 cash from tenants. What amount of rental should Polly record for 2014? P908,000 Collection of rentals Rental receivables, 2014 Rental receivable, 2013 Unearned rentals, 2013 Unearned rentals, 2014 Rental revenue

P800,000 124,000 ( 96,000) 320,000 ( 240,000) P 908,000

7. Anne Company reported revenue of P3,100,000 in its accrual basis income statement for the year ended December 31. 2014. Additional information were as follows: Accounts receivable, December 31, 2013 Accounts receivable, December 31, 2014

P 700,000 1,100,000

Under the cash basis, how much should Anne report as revenue for 2014? P2,700,000 Revenue – Accrual basis

P3,100,000

Accounts receivable, 2013 Accounts receivable, 2014 Revenue – Cash Basis

700,000 ( 1,100,000) P 2,700,000

8. Sol Company reported revenue of P1,980,000 in its income statement for the year ended December 31, 2014. Additional information was made available: December 31, 2013 Accounts receivable P415,000 Allowance for doubtful accounts 25,000

December 31, 2014 P550,000 40,000

No uncollectible accounts were written off during 2014. Had the cash basis of accounting been used instead, how much would have been reported as receipts for 2014 by Sol Company? P1,845,000 Revenue – accrual Accounts receivable, December 31, 2013 Accounts receivable, December 31, 2014 Collections/Receipts

P1,980,000 415,000 ( 550,000) P1,845,000

9. Chief Company reported total purchases of P3,200,000 in its accrual basis financial statement on December 31, 2014. Additional information revealed the following: Accounts payable, December 31, 2013 Accounts payable, December 31, 2014

P 900,000 1,250,000

What is the amount of purchases under the cash basis on December 31, 2014? P2,850,000 Purchases, accrual P3,200,000 Accounts payable, 12/31/2013 900,000 Less: Accounts payables, 12/31/2014 Purchases, cash basis (payment of A/P)

P4,100,000 1,250,000 P2,850,000

10. Under the accrual basis, rental income of Pido Company for the calendar year 2014 is P600,000. Additional information regarding rental income are presented below: Unearned rental income, January 1, 2014 Unearned rental income, December 31, 2014 Accrued rental income, January 1, 2014 Accrued rental income, December 31, 2014

P50,000 75,000 30,000 40,000

Under the cah basis, how much rental income should be reported by Pido Company in the year 2014? P615,000 Revenue – Accrual basis Accrued rental income, January 1, 2014 Unearned rental income, December 31, 2014

P600,000 30,000 75,000

Accrued rental income, December 31, 2014 Unearned rental income, January 1, 2014 Rental income – Cash basis

( 40,000) ( 50,000) P615,000

11. Red Boys Corporation acquires copyright from authors, paying advance royalties in some cases and in others, paying royalties within 30 days of year-end. Red Boys reported royalty expense of P375,000 for the year ended December 31, 2014. The following data are included in the corporation’s December 31 balance sheet:

Prepaid royalties Royalties payable

2013 P60,000 75,000

2014 P50,000 90,000

Under the cash basis, what amount of royalty expense should report in its 2014 profit or loss? P350,000 Royalties expense – Accrual basis Royalties payable, 2013 Prepaid royalties, 2014 Royalties payable, 2014 Prepaid royalties, 2013 Royalty expense – Cash basis

P375,000 75,000 50,000 ( 90,000) ( 60,000) P350,000

12. Burn Corporation maintains its accounting records on the cash basis but restates its financial statements to the accrual method of accounting. Burn had P600,000 in cash-basis pretax income for 2014. The following information pertains to Burn’s operations for the years ended December 31, 2014 and 2013:

Accounts receivable Accounts payable

2014 P400,000 150,000

2013 P200,000 300,000

Under the accrual method, what amount of income before taxes should Burn report in its December 31, 2014 profit or loss? P950,000 Net income, Cash basis Increase in accounts receivable Decrease in accounts payable Net income, accrual basis

P600,000 200,000 150,000 P950,000

13. At December 31, 2014, the advertising expense account of Apo Company had a balance of P146,000 before any year-end adjustment relating to the following:  

Brochures and leaflets for a sales promotional campaign in January 2015 amounting to P15,000 was included in the P146,000 balance. Airtime for the radio advertisements during December 2014 for P9,000 was billed to Apo on January 2, 2015. Apo paid the full amount on January 9, 2015.

What amount should Apo report as advertising expense in its profit or loss for the year ended December 31, 2014? P140,000

Unadjusted balance Prepaid advertising Accrued advertising – December Advertising expense

P146,000 ( 15,000) 9,000 P140,000

14. Greg, a lawyer, maintains his accounting records under the cash basis of accounting. During 2014, Greg collected P200,000 in fees from clients. At December 31, 2014, Greg has accounts receivable of P40,000. At December 31, 2014, Greg had accounts receivable of P60,000 and unearned fees of P5,000. On accrual basis, what was Greg’s service revenue for 2014? P215,000

Collection Accounts receivable, December 31, 2014 Accounts receivable, December 31, 2013 Unearned fees, December 31, 2014 Service revenue, accrual

P200,000 60,000 ( 40,000) ( 5,000) P215,000

15. Icon Publishers offered a contest in which the winner would receive P1,000,000 payable over 20 years. On December 31, 2014, Icon announced the winner of the contest and signed a note payable to the winner for P1,000,000, payable in P50,000 installments every January 2. Also, on December 31, 2014, Icon purchased an annuity for P418,250 to provide the P950,000 prize monies remaining after the first P50,000 installment, which was paid on January 2, 2014. In its 2014 profit or loss, what should Icon report as contest prize expense? P468,250 1st installment of notes payable due 2014 Cost of annuity purchases on December 31, 2014 Contest prize expense for 2014

P 50,000 418,000 P468,250

16. Ara started operating a service proprietorship on April 1, 2014 with an initial cash investment of P120,000. The business provided P38,400 of services in April and received full payment in May. The business incurred expenses of P18,000 in April which were paid in June. During May, Ara drew P6,000 against his capital account. What was the income for the two months ended May 31, 2014 under the following method of accounting? Cash Basis – P38,400; Accrual Basis – P20,400

Revenue Expense Net income

P38,400 0 P38,400

P38,400 ( 18,000) P20,400

17. Spike Corporation pays commissions to its sales agents at the rate of 3% of net sales. Sales agents are not paid salaries but are given monthly advances of P15,000. Advances are changed to commission expense, and reconciliation against commissions are prepared quarterly. Net sales for the year ended March 31, 2014 were P15,000,000. The unadjusted balance in the commissions expense account on March 31, 2014 was P400,000. March advances were paid on April 3, 2014. In its profit or loss for the year ended March 31, 2014, what amount should Spike report as commission expense? P450,000 Sales x Commission rate Commission expense

P15,000,000 x 3% P 450,000

18. On September 1, 2014, Marie began a service proprietorship with an initial investment of P400,000. Marie provided P800,000 of services during September. Collections were made except for P200,000 which were paid the following month. Expenses were incurred in the amount of P400,000, including P100,000 which are to be paid next month. Marie withdrew P60,000 against the capital account. In September 30,2014 financial statement, what amount of capital should be reported under the cash basis accounting? P640,000

Capital, beginning Add: Net income – Cash Basis* Total Less: Withdrawals Capital balances, September 30, 2014 Revenue – cash basis (P800,000 – P200,000) Expenses – cash basis (P400,000 – P100,000) *Net income

P400,000 300,000 P700,000 ( 60,000) P640,000

P600,000 300,000 P300,000

19. During 2011, Kaye Company had P200,000 in cash sales and P3,000,000 in credit sales. The account receivable balances were P4,00,000 and P485,000 at December 31, 2010 and 2011, respectively. If Kaye desires to prepare a cash basis income statement, what amount should be reported as sales for 2011? 3,115,000 Accounts receivable – December 31, 2011 Credit sales Total Less: Accounts receivable – December 31, 2011 Collections Cash sales Total sales – cash basis

400,000 3,000,000 3,400,000 485,000 2,915,000 200,000 3,115,000

20. REED Company, which began operations on January 1, 2010, has elected to use cash basis accounting for tax purposes and accrual basis accounting for its financial statements. Reed reported sales of P1,750,000 and P800,000 in its tax returns for the years ended December 31, 2011 and 2010, respectively. Reed reported accounts receivable of P300,000 and P500,000 on December 31, 2022 and 2010, respectively. What amount should Reed report as sales in its income statement for 2011? 1,550,000 Accounts receivable – December 31, 2011 Add: Sales in 2011 under cash basis Total Less: Accounts receivable – December 31, 2010 Sales – accrual basis

300,000 1,750,000 2,050,000 500,000 1,550,000

JOB ORDER COSTING 1. Under Khayla Company’s job order costing system, manufacturing overhead is applied to workin-process using a predetermined annual overhead rate. During January 2013, Khayla’s transactions included the following: Direct materials issued to production Indirect materials issued to production Manufacturing overhead incurred Manufacturing overhead applied Direct labor costs

P 90,000 8,000 125,000 113,000 107,000

Khayla had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in January 2013? P310,000 Direct materials issued to production Direct labor costs Applied factory overhead

P 90,000 107,000 113,000 P310,000

2. Bal Corporation manufactures rattan furniture sets for export and uses the job order cost system in accounting for its costs. You obtained from the corporation’s books and records the following information for the year ended December 31, 2013:  The work in process inventory on January 1 was 20% less than the work in process inventory on December 31.

 The total manufacturing costs added during 2011 was P900,000 based on actual direct materials and direct labor but with manufacturing overhead applied on actual direct labor pesos.  The manufacturing overhead applied to process was 72% of the direct labor pesos, and it was equal to 25% of the total manufacturing costs.  The cost of goods manufactured, also based on actual direct materials, actual direct labor and applied manufacturing overhead was P850,000. The cost of direct materials used and the work-in-process inventory on December 31, 2013: P362,500 Total manufacturing cost Less: applied factory overhead (25% x P900,000) Prime costs Less: direct labor costs Applied factory overhead Divided by: % of direct labor costs Direct materials used

P900,000 225,000 P675,000

P225,000 72%

312,500 P362,500

3. A company allocates overhead to jobs in process using direct labor costs, raw material costs, and machine hours. The overhead application rates for the current year are: 100% of direct labor 20% of raw materials P117 per machine hours A particular production run incurred the following costs: Direct labor, P8,000 Raw materials, P2,000 A total of 140 machine hours were required for the production run What is the total cost that would be charged to the production run? P24,780 100% x P8,000 of direct labor = 20% x P2,000 of raw materials = P117 x 140 machine hours =

P 8,000 400 16,380 P24,780

4. Crown, Inc had the following information relating to 2013. Budgeted factory overhead Actual factory overhead Applied factory overhead Estimated labor hours

P74,800 78,300 76,500 44,000

If Crown decides to use the actual results from 2013 to determine the 2014 overhead rate, what will be the 2013 overhead rate be? P1,740

The 2013 overhead rate is calculated as P1.70 / DH (P74,800 , 44,000 DLH). Since applied factory overhead is a result of actual DLH times the overhead rate, the actual direct labor hours for 2013 are 45,000 (P76,500 , P1.70). next, the overhead rate for 2014 is P1.74 / DLH (P78,300 + 45,000 DLH)

5. The PDF Company uses a predetermined overhead rate. PDF prepared the following budget at the beginning of the year: Direct labor cost Factory overhead Direct labor hours Machine hours

P12.000 25,000 9,000 1,500

During the month of January, the cost sheet of order number 100 indicates P20 of raw materials, P50 of direct labor, 10 hours of direct labor, and 5 machine hours. Order number 100 consists of 49 units of product. PDF applies overhead based on direct labor cost. What amount of overhead should be applied to order number 100? 104.7 PDF Company applies overhead based on direct labor cost. Since overhead was budgeted at P25,000 and direct labor cost at P12,000, the overhead application rate is P2.083 (P25,000 , P12,000). Since 50 of direct labor was incurred, P104.17 of overhead should be applied (50 x P2.083). alternatively, factory overhead cost is slightly more than twice the direct labor cost (P25,000 / P12,000) and the overhead on a job with 50 of direct labor cost would be slightly more than P100, i.e., P104.17

6. ABC Corporation is a manufacturing company engaged in the production of a single special product known as “Marvel”. Production costs are accumulated with the use of a job0order-cost system. The following information is available as of June 1, 2014: Work-in-process Direct materials inventory

P10,710 48,600

In analyzing the job-order cost sheets, the records disclosed that the composition of the work-inprocess inventory on June 1, 2014 were as follows: Direct materials used Direct labor (900 hours) Factory overhead applied

P 3,960 4,500 2,250 P10,710

The following manufacturing activity occurred during the month of June 2014: Purchased direct materials costing P60,000 Direct labor worked 9,900 hours at P5 per hour Factory overhead of P2.50 per direct labor hour was applied to production At the end of June 2014, the following information was gathered in connection with the inventories:

Inventory of work-in-process: Direct materials used Direct labor (1,500 hours) Factory overhead applied

P12,960 7,500 3,750 P24,210 P51,000

Inventory of direct materials What is the cost of goods manufactured? P118,350 Direct materials inventory, June 1, 2014 Add: Purchases Direct materials available for use Less: Direct materials inventory, June 30, 2014 Direct materials used Direct labor (9,900 hours x P5/hour) Applied factory overhead (9,900 hours x P2.5/hour) Manufacturing cost Add: Work-in-process, June 1, 2014 Total work placed in process Less: Work-in-process, June 30, 2014 Cost of goods manufactured

P 48,600 60,000 P 108,600 51,000 P 57,600 49,500 24,750 P 131,850 10,710 P 142,560 24,210 P 118,350

7. Steady Corporation’s materials purchase during 2014 are P25,590 and materials put into production are direct and indirect materials, respectively, worth P18,500 and P7,090. The total factory payroll is P74,000 of which P50,000 represents direct labor. Other factory overhead costs amount to P32,000. The company applies the actual factory overhead cost to process. Sales, cost of goods sold, and the cost of goods manufactured, respectively, are P130,000, P120,000, and P128,000. By what amount did the company’s closing goods in process inventory exceed its opening goods in process inventory? P3,590 Direct materials Direct labor Actual factory overhead: Indirect Materials Indirect Labor (P74,000 – P50,000) Other factory overhead costs Manufacturing cost Less: cost of goods manufactured Increase in foods-in-process

P 18,500 50,000 P 164,250 225,525 32,000

63,090 P131,590 128,000 P 3,590

Increase in goods in process indicates that the closing goods in process is higher than the opening goods in process. Thus, increase means zero beginning to P3,590 ending.

8. Dan company consumed P450,000 worth of direct materials during May 2014. At the end of the month, the direct materials inventory was P25,000 lower than the May 1 inventory level. How much was the direct materials procured during May 2014? P425,000

Direct materials used Less: decrease in inventory Direct materials purchased

P 450,000 25,000 P 425,000

9. Job No. 027 has, at the end of the second week in April, an accumulated total cost of P4,200. In the third week, P1,010 of direct materials were used on the Job. Twenty (20) hours of direct labor services were applied to the job at a cost of P5 per hour. Manufacturing overhead was applied at the basis of P2.50 per direct labor hour for fixed overhead and P2 per hour for variable overhead. Job No. 027 was only the job completed during the third week. What is the total cost of Job Order No. 027? P5,400 Work-in-process, beginning Added: Direct materials Direct labor (20 hours x P5) Applied factory overhead (20 hours x P4.5) Total cost of Job 027

P4,200 P1,010 100 90

1,200 P5,400

10. The XYZ Corporation manufactures one product and accounts for cost by a job-order cost system. You have obtained the following information for the year ended December 31, 2013 from the corporation’s books and records: Total manufacturing cost added during 2013 based on actual direct materials, actual direct labor and applied factory overhead on actual direct labor cost Cost of goods manufactured based on actual direct materials and direct labor and applied factory overhead

P1,000,000

970,000

Applied factory overhead to work in process based on direct labor cost

75%

Applied factory overhead for the year, based on total manufacturing cost

2%

Beginning work in process inventory was 80% of ending work in process inventory. Compute the cost of direct materials used for the year ended December 31, 2013. P370,000 Direct materials used + Direct labor + Overhead = Manufacturing Cost Direct materials used + Direct labor + (P1,000,000 x 27%) = P1,000,000

DM, used + OH / 75% + P270,000 = P1,000,000 DM, used + P270,000 / 75% + P270,000 = P1,000,000 DM, used + P360,000 + P270,000 = P1,000,000 DM, used = P1,000,000 – P630,000 DM, used = P370,000

11. Red Company incurred the following costs during the month: direct labor, P120,000; factory overhead, P108,000; and direct materials purchases, P160,000. Inventories show the following costs:

Finished goods Work in process Direct materials

Beginning P27,000 61,500 37,500

Ending P30,000 57,500 43,500

How much is the cost of goods manufactured? P386,000 Direct materials, beginning Add: Direct materials purchases Direct materials available for use Less: direct materials, ending Direct materials used Direct labor Factory overhead Manufacturing cost Add: Work-in-process, beginning Total work-placed in process Less: Work-in-process, ending Cost of goods manufactured

P 37,500 160,000 P 197,500 43,500 P 154,000 120,000 108,000 P 382,000 61,500 P 443,500 57,500 P 386,000

12. Nikkon Company, Ic. Estimated its factory overhead at P510,000 for the year, based on a normal capacity of 100,000 direct labor hours. Standard direct labor hours for the year totaled 105,000, while the factory overhead control account at the end of the year showed a balance of P540,000. How much was the underapplied factory overhead for the year? P4,500 Underapplied overhead is the difference between the actual overhead and the applied overhead. The overhead rate per hour is P5.10 (P510,000 budgeted costs, 100,000 budgeted hours). The applied overhead was P535,500 (P5.10 x 105,000 actual hours). The actual overhead incurred of P540,000 less the applied overhead of P535,500 results in P4,500 of underapplied overhead.

13. Wesley Company has underapplied overhead of P45,000 for the year 2014. Before disposition of the underapplied overhead, selected year-end balances from Wesley’s accounting records were: Sales Cost of goods sold Direct materials inventory Work-in-process inventory

P1,200,000 720,000 36,000 54,000

Finished goods inventory

90,000

Under Wesley’s cost accounting system, over-or underapplied overapplied is allocated to appropriate inventories and CGS based on year-end balances in its year-end income statement, What amount should Wesley report of CGS? P757,500

The allocation of underapplied overhead increases CGS. The underapplied overhead of P45,000 for the year should be allocated on a pro rata basis to work-in-process (P54,000), finished goods (P90,000), and CGS (P720,000). The sum of these three items is P864,000. Thus, P37,500 should be allocated to CGS [(P720,000 / 864,000) x P45,000]. CGS after allocation is P757,500 (P37,500 + P720,000). The remaining P7,500 should be allocated proportionately between work-in-process and finished goods.

COST of QUALITY: SPOILAGE AND DEFECTIVE UNITS

14. Kho Company manufactures electric drills to the exacting specifications of various customers. During April 2014, Job 143 for the production of 1,100 drills was completed at the following costs per unit: Direct materials Direct labor Applied factory overhead TOTAL

P10 8 12 P30

Final inspection of Job 143 disclosed 50 defective units and 100 spoiled units. The defective drills were reworked at a total cost of P500, and the spoiled drills were sold to a jobber for P1,500. What would be the unit cost of the good units produced on Job 143? P32 The original production of 1,100 drills cost P33,000 (1,100 drills x P30 per drill). The reworking of the defective drills (i.e. P500) increased the cost total to P33,500. The P1,500 received from the sale of the 100 defective units should be subtracted from the total cost incurred in producing the 1,100 drills. Therefore, the total cost for producing 1,000 good drills equals P32,000 (P33,000 + P500 – P1,500), yielding a unit cost for good drills of P32.

15. Daisy Manufacturing Corporation started 150 units in process on Job Order No.007. The prime costs placed in process consisted of P30,000 and P18,000 for materials and direct labor, respectively, and a pre-determined rate was used to charge factory overhead to production at 133-1/3% of the direct labor cost. Upon completion of the job order, units equal to 20% of the good output were rejected for failing to meet strict quality control requirements. The company sells rejected units as scrap at only 1/3 of production cost, and bills customers at 150% of production cost. If the rejected units were ascribed to company failure, the billing price of Job Order No. 0007 would be? P90,000

Started in process Less: Spoilage Goods output Charged to Work-in-process: Materials Labor Overhead (P18,000 x 133 1/3%) Less: Spoilage Cost (P72,000 , 150 = P480 x 25 units) Net Cost of Production Multiplied by: Billing Price Billing Price

Units 150 ( 25) 125

P30,000 18,000 24,000

% 120% 20% 100%

P72,000 12,000 P60,000 150% P90,000

16. Using the same information in No. 14, and if the rejected units were ascribed to customer action, the billing price of Job Order No. 007 would be? P102,000 Charged to work-in-process Less: Spoilage cost at salvage value (1/3 x P12,000) Net cost of production Multiplied by: Billing Price Billing price

P 72,000 4,000 P 68,000 150% P102,000

17. Hailey Corporation’s Job 123 for the manufacture of 2,200 coats, which was completed during August at the unit costs presented below. Final inspection of Job 123 disclosed 200 spoiled coats which were sold to a jobber for P6,000. Direct materials Direct labor Factory overhead (includes an allowances of P1 for spoiled work)

P20 18 18 P56

Assume that spoilage loss is charged to all production during August. What would be the unit cost of the good coats produced on Job 123? P 56 /unit The unit cost of goods produced includes direct materials, direct labor, and factory overhead. Since the spoilage is included in the calculation of overhead, it must be considered normal and a product cost. Thus, the unit cost remains at P56 since the amount to be deducted from the production cost is equivalent to the original cost per unit. The computation is as follows:

Charged to work-in-process: P56 x 2,200 Less: Spoilage cost: P56 x 200 Net cost of production Divided by: Number of good units produced

P123,200 11,200 P112,000 2,000 P 56/unit

18. Using the same information in #16, assume instead that the spoilage loss is attributable to the exacting specifications of Job 123 and is charged to the specific job. What would be the unit cost of the good coats produced on Job 123? P57.50/unit If the spoilage is charged to this specific job (rather than to factory overhead), the spoilage allowance should be removed from the factory overhead rate. The overhead application rate thus drops to P17 because this job’s spoilage is not typical and will not be averaged with other “typical” jobs. The costs of producing the 2,000 good coats include the costs incurred in the production of the 2,200 coats, less the P6,000 received for the spoiled coats. The unit costs is net cost of production divided by the number of good coats produced (2,000). 2,000 (P20 + P18 + P17) – P6,000 ------------------------------------------------ = P57.50/unit 2,000

SERVICE COST ALLOCATION

19. A company has two service departments (S1 and S2) and two production departments (P1 and P2). Department data for January were as follows:

Costs incurred: Service provided to: S1 S2 P1 P2

S1 P27,000

S2 P18,000

10% 50% 40%

20% 30% 50%

What are the total allocated service department costs to P2 if the company uses the reciprocal method of allocating its service department cost? (Round calculation to the nearest whole number) 23,051 The reciprocal method allocates service department costs to other service departments as well as to production departments by means of simultaneous equations, as shown below. Thus, total service cost allocated to P2 is P23,051 [(40% x P31,224) + (50% x P21,122)]. S1 = = = .98S1 = S1 =

P27,000 + .2S2 P27,000 + [2(P18,000 + 1S1)] P27,000 + P3,600 + .02S1 P30,600 P31,224

S2 = P18,000 + /1(P31.224) = P18,000 + P3,122 S2 = P21,122

20. A hospital has a P100,000 expected utility bill this year. The janitorial, accounting, and orderlies department are services functions to the operating, hospital rooms and laboratories departments. Floor space assigned to each department is Department

Square Footage

Janitorial Accounting Orderlies Operating Hospital Rooms Laboratories

1,000 2,000 7,000 4,000 30,000 6,000 50,000

How much of the P100,000 will eventually become the hospital rooms department total costs, assuming a direct allocation boased on square footage is used? P75,000 The direct method allocates service department costs without regard to service provided to other service department. consequently, the P100,000 utility expense will be apportioned among the three production departments on the basis of square footage. The hospital rooms department’s share will be P75,000 (P100,000 x [30,000 square feet / (4,000 + 30,000 + 6,000) total square feet]).

PROCESS COSTING 1. Borge Company computed the flow of physical units completed for Department M for the month of March 2011 as follows Units completed: From work-in-process on March 2011 From March production

15,000 45,000 60,000

Material are added at the beginning of the process. The 12,000 units of work in process at March 31, 2011, were on 80% complete as to convertion costs. The work-in-process at March 1, 2011 was 60% complete as to conversion costs. Using the FIFO method, the equivalent units for March conversion costs were: 60,600

Quantity Schedule: In process, beginning …………...

Actual 15,000

Work Done

EPCC

Started in process ………………

Accounted for as follows: In process, beginning, F&T ……. Started, F&T ……………………... In process, ending ………………

57,000 72,000

15,000 45,000 12,000 72,000

40% 100% 80%

6,000 45,000 9,600 60,600

2. Cost and statistics for Department 2 at a company manufacturing a single product in three department follows: Work-in-process, October 1: Cost in Department 1…………………………….. P11,380 Cost in Department 2 Materials…………………………………….. None Labor………………………………………… P500 Factory overhead………………………….. 50 Cost in Department 2 in October: Materials……………………………………………. None Labor……………………………………………….. P13,000 Factory overhead…………………………………. 450 Unit in process, October 1, 60% completed As to conversion costs………………………….. 500 Units received from Department 1 in October at P2.60 per unit 6,700 Units completed and transferred to Department 3 in October 6,800 Units in process, October 31, half completed As to conversion costs………………………….. 400 Compute the conversion costs per equivalent unit (rounded to nearest centavo) FIFO: P2.01 Average: P2.00

Quantity Schedule In progress, beginning ………….. Received from Prec. Dept …….... Accounted for as follows – FIFO In progress, beg., F&T ………….. Received, F&T (6,800 – 500) ….. In process, ending ........................ Accounted for as follows – Average Finished and transferred ………. In process, ending ……………....

Conversion Costs per Equivalent Unit:

Work Done

EPCC

500 6,300 400 7,200

40% 100% 50%

200 6,300 200 6,700

6,800 400 7,200

100% 50%

6,800 200 6,700

Actual 500 6,700 7,200

FIFO (P13,000 + P450) / 6,700 …………………………………..

P2.01

Average: (P500 + P50 + P13,000 + P450) / 7,000 …………….

P2.00

3. Earl Company uses process costs system with average costing to account for the production of its only product. The product is manufactured in two departments. Units are started then transferred to the Finishing Department, where they are completed. Units are inspected at the end of the production process in the Forming Department, and the costs of abnormal lost is charged to Factory Overhead Control account or abnormal spoilage expense depending on management prerogative. Data related to August operations in the Forming Department are: Units in the beginning invemtory (60% materials, 35% labor, and 25% overhead)……………….. 1,000 Units started in process this period………………..…. 9,000 Units transferred to Finishing Department This period…………………………………...…….. 8,000 Units in ending inventory (100% materials, 75% labor, and 50% overhead)………………. 1,500 Costs charged to the department: Materials………………….. Direct Labor……………… Factory overhead………..

Beginning Inventory P1,260 770 1,400

Added this period y P36,240 10,780 21,725

Total costs transferred to Finishing Department: P59,600

Quantity Schedule: Actual In process, beginning … 1,000 Started in process …….. 9,000

Work Done

EPMat.

Work EPDone Lab.

Work EPDone CC

10,000 Accounted for as follows: Finished and transferred 8.000 In process, end ………… 1,500 Abnormal lost ………….. 500 10,000

100% 8,000 100% 100% 1,500 75% 100% 500 100% 10,000

8,000 100% 8,000 1,125 50% 750 500 100% 500 9,625 9,250

Total Cost Transferred: Materials: (P1,260 + P36,240) / 10,000 ……………………………………….. P3.75 Direct Labor: (P770 + P10,780) / 9,625 ……………………………………….. 1.20 Overhead: (P1,400 + P21,725) / 9,250 ………………………………………... 2.50 Cost per equivalent unit …………………………………………………………. P7.45 Multiplied by: No. of units transferred …………………………………………. 8,000 P59,600

4. Roy Company manufactures Product x in a two-stage production cycle in Department A and B. materials are added in the beginning process as to the 6,000 units in BWIP and 75% complete as to the 8,000 units in EWIP, 12,000 units were completed and transferred out of Department B during February. An analysis of the costs relating to WIP and production activity in Department B for February follows:

WIP, Fenruary 1: Costs attached Feb. activity: Costs added

Transferred in Costs

Materials Costs

Conversion Costs

P12,000

P2,500

P1,000

P29,000

P5,000

P5,000

The total costs per unit transferred-out for February of Product x, rounded to the Nearest peso: P2.78

Quantity Schedule: In process, beginning ………….. Received from Prec. Dept. Accounted for as follows – FIFO In process, beg. , F&T ………….. Received, F&T (12,000 – 6,000) In process, ending ……………… Accounted for as follows – Average Finished and transferred ……… In process, ending ……………...

Work Done

EPMat.

6,000 6,000 8,000 20,000

100% 100%

50% 6,000 100% 8,000 75% 14,000

3,000 6,000 6,000 15,000

12,000 8,000 20,000

100% 100%

12,000 100% 8,000 75% 20,000

12,000 6,000 18,000

Actual 6,000 14,000 20,000

Work Done

EPCC

Materials – 100% l------------------------------------------------------------------------------------------------------------------------------l 0 50% 75% 100% EUP: Mat. – 0; CC – 50% X-----------------------------------X IP, beg. IP, end EUP: Mat. – 100%; CC – 75% X--------------------------------------------------------------------X

FIFO: In process beg. , F&T Cost last month: (P12,000 + P2,500 + 1,000) ………………………………… P15,500

Cost this month: Materials ……………………………….. -0CC: 3,000 x (P5,000 / 15,000) ……..... 1,000 Received, F&T: 6,000 x [(P29,000 / 14,000) + (P5,500 / 14,000) + (P5,000 / 15,000)] ………………… Total Cost transferred ……………………………………………… Divided by: F&T ……………………………………………………... . Unit Cost transferred ……………………………………………….. Average: Preceding Department: (P12,000 + 29,000) / 20,000 ………….. Current/This Department: Materials (P2,500 + P5,500) / 20,000 ……………………. CC: (P1,000 + P5,000) / 18,000 …………………………...

P16,500 16,785 P33,285 12,000 P2.77

P2.05 .40 .33 P2.78

5. Department Z of the Cobra Mfg. Corporation had the following data for the month of October, 2011: Beginning work in process, 70% complete…………… 40,000 units Started process during the month……………………... 300,000 units Ending work in process, 80% complete………………. 60,000 units The costs of the beginning work in process was P140,000, and the production costs for The month amounted to P1,172,000. How many equivalent production units were completed in October, 2011 using FIFO Method? 300,000

Quantity Schedule: In process, beginning ………………. Started in process ……………………

Accounted for as follows: In process, beginning, F&T ………… Started, F&T …………………………. In process, ending …………………...

Actual

Work Done

Equivalent Production

30% 100% 80%

12,000 240,000 48,000 300,000

40,000 300,000 340,000

40,000 240,000 60,000 340,000

6. Grace co., a manufacturer of combs, budgeted sales of 125,000 units for the ,on the of April. The following additional information is provided: Number of units Actual inventory at April 1 Work-in-process…………………………………………

None

Finished goods…………………………………………. Budgeted inventory at April 30 Work-in-process (70% processed) ………………….. Finished goods …………………………………………

37,500 8,000 30,000

How many equivalent units of production did Grace budget for April? 123,500 Given that there is no beginning work-in-process, it makes no difference whether FIFO or Average Method is used. The equivalent works of units for April would be as follows Budgeted Sales ………………………………………………………… Add: Finished goods, April 30 ………………………………………... Units available to be sold ……………………………………………... Less: Finished goods, April 1 ………………………………………… Units completed ………………………………………………………… Add: Evuivalent units of production – work-in Process, April 30 (8,000 x 75%) …………………………………… Total uints placed in process …………………………………………. Less: EUP- work in process, April 1 ……………………………………….. Total Expected Equivalent Units of Prod. (EUP) …………………………

125,000 30,000 155,000 37,500 117,500 6,000 123,500 ______123,500

7. Kirin Corporation’s production cycle starts in the Mixing Department. The following information is available for April: Units WIP, April (50% complete) …………………………………… 40,000 Started in April ………………………………………………… 240,000 WIP, April 30 (60% complete) ………………………………. 25,000 Materials are added at 55% stage of completion in the Mixing Department. What are the Equivalent units of production for the month of April? FIFO Materials 280,000

Average Conversion 250,000

Quantity Schedule: In process, beg. ………………….. Started-in process ……………….. Accounted for as follows – FIFO In process, beg. , F&T …………… Started, F&T (280,000 – 40,000 – 25,000) …………… IP, ending ………………………… In process, ending ……………….

Materials 280,000

Actual 40,000 240,000 280,000

Work Done

Cpnversion 270,000 EPMat.

Work Done

EPCC

50%

20,000

40,000

100% 40,000

215,000 25,000 280,000

100% 215,000 100% 100% 25,000 60% 28,000

Materials – 100%

215,000 15,000 250,000

I I------------------------------------------------------------------------------------------------------------------------------I 0 50% 55% 60% 100% EUP: M – 100%; CC – 50%

IP, beg.

X----------------------------------------------------------------X IP, end. EUP: M – 100% ; CC – 60% X------------------------------------------------------------------------------------------X Accounted for as follows – Average Finished and transferred ………

255,000

100% 255,000 100%

In process, ending ……………...

25,000

100% 25,000

280,000

60%

280,000

255,000 15,000 270,000

8. Department A is the first stage of Brick Company’s production cycle. The following information is available for conversion costs for the month of April 2011: Units Work-in-process, beginning (60% complete) ………………. 20,000 Started in April ………………………………………………….. 340,000 Completed in April and transferred to Department B …….. 320,000 Work-in-process, ending (40% complete) ………………….. 40,000 The equivalent units for the conversion cost calculation are: FIFO Average 324,000 336,000

Quantity Schedule: In progress, beg. ………… Started in process ………. Accounted for as follows – FIFO In process, beg. , F&T ………….. Started F&T (320,000 – 20,000) In process, ending ……………… Accounted for as follows – Average Finished and transferred ……… In process, ending ……………...

Work Done

Conversion Cost

20,000 300,000 40,000 360,000

40% 100% 40%

8,000 300,000 16,000 324,000

320,000 40,000 360,000

100% 40%

320,000 16,000 336,000

Actual 20,000 340,000 360,000

9. Bark Company manufactures compact disks. In June 2011, production for 2,000,000 units were started. At the end of the month, the following data were gathered:

Completed units ……………………………………………………. Defective units ……………………………………………………… In process ½ complete …………………………………………….

2,700,000 400,000 800,000

How many units were in process at the beginning of the month? 1,900,000 Quantity Schedule: In progress, beg. (balancing figure) ………………………………. 1,900,000 Started in process ……………………………………………………. 2,000,000 3,900,000 Accounted for as follows: Completed units ……………………………………………………… 2,700,000 In process, ending ………………………………………………….... 800,000 Defective units ………………………………………………………… 400,000 3,900,000 10. The following production information for Dept. B of Joy Products is for the month of May, 2011: Received from Dept. A ………………………………….. Completed and transferred to Dept. C ………………...

600,000 units 500,000 units

Additional information: a. No beginning work process b. Ending work in process is 75% complete c. May’s production costs total P2,760,000 Dept. B’s unit cost of production for May, 2011 is: P4.80

Quantity schedule: Received from Department A … Accounted for as follows: Finished and transferred ………. In process, ending ………………

Actual 600,000

500,000 100,00 0 600,000

Work Done

Equivalent Production

100% 75%

500,00 75,000\ 575,000

Cost per Equivalent Unit: P2,760,000 / 575,000 ……………………………….

P4.80

11. Gayson Company, which had 6,000 units n work-in-process at January 1 that were 60% complete as to conversion costs. During January 20,000 units were completed. At January 31, 8,000 units remained in WIP which were 40% complete as to conversion costs. Materials are added at the beginning of the process. Using the weighted average method, the equivalent units for January for conversion costs were: 23,200

Quantity Schedule:

Actual

Work Done

EP – CC

In process, beg. ……………………. 6,000 Started in process (28,000 – 6,000) 22,000 28,000 Accounted for as follows: Finished and transferred …………. 20,000 In process, ending ……………….... 8,000 28,000

100% 40%

20,000 3,200 23,000

12. The Norton Company manufactures the famous ticktock watch on an assembly line basis. January 1, work-in-process consisted of 5,000 units partially completed. During the month an additional 110,000 units were started and 105,000units were completed, the ending work-inprocess wa 3/5 complete as to conversion cost. Conversion costs are added evenly throughout the process. The following conversion costs were incurred. Beginning costs for work-in-process …………………………… Total current conversion costs …………………………………..

P1,500 273,000

The conversion costs assigned to ending work-in-process totaled P15,360 using the FIFO method of process costing. What was the percentage of completion, as to conversion costs on the 5,000 units in BWIP? 80% Ending work in process is 10,000 (5,000 + 110,00 – 105,000) units which are 3/5 complete representing 6,000 equivalent units of conversion (10,000 x 3/5). Conversion cost per unit is P15,360 / 6,000 units which is P2.56 per unit. Total equivalent conversion units for the month is P273,920 / P2.56/unit = 107,000 units. Total equivalent conversion units are the sum of equivalent units to finish beginning units, units started and completed, and ending equivalent units. Assuming that 100,000 units were started this period and completed, the amount of conversion added to BWIP this period is determent below: 107.000 units = BWIP + units started and completed + EWIP 107,000 units = BWIP + 100,000 + 6,000 units BWIP = 1,000 units this period That means BWIP was equal to 4,000 EUP with respect to conversion, or 80% complete (4,000 + 5,000). 13. During March, Mark Company’s Department Y equivalent unit product costs, computed under the weighted average method, were as followed: Materials ……………………………………………………………. Conversion …………………………………………………………. Transferred-in ……………………………………………………….

P1 3 5

Materials are introduced at the end of the process in Department Y. there were 4,000 Units (40% complete as to conversion costs) in WIP at March 31. The total costs Assigned to the March 31 WIP inventory should be P24,800 The unit cost of EUP under weighted average are already computed. EWIP consists of 4,000 units 40% complete as to conversion costs (1,600 EUP). Since materials are added at the end of the process, there is no material cost, only transferred-in cost.

Cost of in-process, March 31: Cost from preceding dept.: P5 x 400 …………………………………… Cost this dept.: Materials: P1 x 0 ………………………………………………….. CC: P3 x (4,000 x 40%) ………………………………………….

P20,000 0 4,800 P24,800

14. Barkley company adds materials at the beginning of the process in Department N. Data concerning the materials used in March 2011 production are as follows: Work-in-process at March 1 …………………………………….. Started during March …………………………………………….. Completed and transferred to next department during March... Normal spoilage incurred ……………………………………….. Work-in-process at March ……………………………………….

Units 16,000 34,000 36,000 4,000 10,000

The equivalent units for the materials unit cost calculation are: FIFO Average 30,000 46,000

Quantity Schedule: In process, beginning …………………… Started in process ………………………..

Accounted for as follows – FIFO In process, beg. , F&T …………………… Started, F&T (36,000 – 16,000) ………... In process, ending ………………………. Normal lost ………………………………. Accounted for as follows – Average Finished and transferred ………………. In process, ending …………………….... Normal lost ………………………………

Work Done

EP – Mat.

16,000 20,000 10,000 4,000 50,000

100% 100% -

20,000 10,000 30,000

36,000 10,000 4,000 50,000

100% 100% -

36,000 10,000 46,000

Actual 16,000 34,000 50,000

15. Materials are added at the start of the process in Ceasar Company’s blending department, the first stage of the production cycle. The following information is available for July: Units Work-in-process, July 1 (60% complete As to conversion costs) ………………………………. Started in July …………………………………………………. Transferred to the next department …………………………. Lost in production …………………………………………….. Work-in-process, J?uly 31 (50% complete

60,000 150,000 110,000 30,000

As to conversion costs) ……………………………..

70,000

Under Ceasar’s cost accounting system, the costs incurred on the lost units are Absorbed by the remaining good units. What are the equivalent units for the Materials unit cost calculation? FIFO Average 120,000 180,000

Quantity Schedule: In process, beginning …………………… Started in process ……………………….. Accounted for as follows – FIFO In process, beg. , F&T …………………… Started, F&T (110,000 – 60,000) ……..... In process, ending ………………………. Normal lost ……………………………….. Accounted for as follows – Average Finished and transferred ……………….. In-process, ending ………………………. Normal lost ……………………………….

Work Done

EP – Mat.

60,000 50,000 70,000 30,000 210,000

100% 100% -

50,000 70,000 120,000

110,000 70,000 30,000 210,000

100% 100% -

110,000 70,000 180,000

Actual 60,000 150,000 210,000

16. Frank Co. had the following production for the month of June. Work-in-process at June 1 ……………………………………….. Started during June ……………………………………………….. Completed and transferred to finished goods during June…. Abnormal spoilage incurred ……………………………………… Work-in-process during June 30 …………………………………

Units 10,000 40,000 33,000 2,000 15,000

Materials are added of the beginning of the process. As to conversion cost, the Beginning work-in-process was 70% complete and the ending work-in-process was 60% completed. Spoilage are detected at the end of the process. The equivalent units For June, with respect to conversion costs, were as follows: FIFO Average 37,000 44,000

Quantity Schedule: In process, beginning ………………….. Started in process ……………………… Accounted for as follows – FIFO In process, beg. ………………………… Started, F&T ……………………………..

Actual 10,000 40,000 50,000

10,000 23,000

Work Done

EP – CC

30% 100%

3,000 23,000

In process, ending ……………………… Abnormal lost ……………………………

15,000 2,000

60% 100%

9,000 2,000

50,000

37,000

Accounted for as follows – Average Finished and transferred ……………….

33,000

100%

33,000

In process, ending ………………………

15,000

60%

9,000

Abnormal lost …………………………….

2,000

100%

2,000

50,000

44,000

Since abnormal lost happens at the end of the production the work done should be equivalent to 100% because they were determined to be lost when production is already completed. 17. On September 30, work-in-process totaled 9,000 units 60% complete (based on conversion costs added uniformly throughout the department and the material added at the start of the process). a total of 100,000 units were transferred to the next department during October 31, at a total of 8,000 units 40% complete (based on conversion costs) were still in process in Department A. Using the weighted-average cost flow method, which of the following equivalent units should be used in the calculating of costs for October? Equivalent Units Materials Conversion 108,000 103,000 Work EPQuantity Schedule: Actual Done Mat. In process, beginning ………….. 9,000 Started in process ……………… 99,000 108,000 Transfer Costs 108,000

Quantity Schedule Finished and transferred ………. In process, ending ……………....

100,000 8,000 108,000

Work Done

100% 100,000 100% 100% 8,000 40% 108,000

EPCC

100,000 3,200 103,000

18. Information for the month of January concerning Department A, the first stage of Ogden Corporation’s productive cycle, is as follows: BWIP ……………………………………… Current costs…………………………….. Total costs ……………………………….

Materials P8,000 40,000 P48,000

Conversion P6,000 32,000 P38,000

Equivalent units using weighted Average method ………………..

100,000

95,000

Average unit costs ……………………… Goods completed ……………………… EWIP ……………………………………..

P0. 48

P0.40 90,000 units

10,000 units

Materials are added at the beginning of the process. the ending work-in-process is 50% Complete as to conversion costs. How would the total costs accounted for be distributed, Using the weighted average method? Goods Ending WorkCompleted -In-Process P79,200 P6,800 The weighted average method combines the costs in BWIP those for the current period. Materials are added at the beginning of the process and conversion costs are assumed to be incurred uniformly. Equivalent unit and average until cost calculations were given. Completed goods: Materials (P .48 x 90,000) …………………………………………………….. Conversion costs (P. 40 x 90,000) ………………………………………….. Cost of completed goods ……………………………………………………………..

P43,200 36,000 P79,200

Given that conversion costs for EWIP are 50% complete, there are 5,000 (50% x 10,000) equivalent units of conversion cost in ending inventory. Cost of in-process, ending: Materials (P . 48 x 10,000) …………………………………………………... Conversion costs (P .40 x 5,000) ……………………………………………

P4,800 2,000

Cost of EWIP ……………………………………………………………………………

P6,800

19. For the month of May, 2011, the Finishing Dept. of Apple, Inc. had in opening work in process 80% complete units and in ending work in process 50% complete units. Related data for the month follow: Units Conversion cost Work in process, May 1 ………………………….. 50,000 P88,000 Units started, and costs incurred during May … 270,000 572,000 Units completed and transferred during May … 200,000 If the company uses first-in, first-out costing, the conversion cost of the work in process at the end of May would be: P156,000

Quantity Schedule In process, beginning …………………… Started in process ………………………..

Accounted for as follows: In process, beg. , F&T ………………........ Started, F&T (20,000 – 50,000) ………... In process, ending ……………………….

Actual 50,000 270,000 320,000

50,000 150,000 120,000

Work Done

EP – CC

20% 100% 50%

10,000 150,000 60,000

320,000

220,000

Cost of In-process, end: (P572,000 / 220,000) x 60,000 ………………………

P156,000

20. Barnet Company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete as to the 8,000 units in WIP at May 1 and 50% complete as to the 6,000 units in WIP at May 31. During May 1, 12,000 units were completed and transferred to the next production activity for May is as follows: Costs WIP, May 1 ……………………………….. Costs added in May ……………………..

Materials P9,600 15,600

Conversion P4,800 14,400

The total cost per equivalent until for May was: FIFO Average 3.16 2.68

Quantity Schedule: In process, beginning …………… Started in process ………………. Accounted for as follows – FIFO In process, beg. , F&T …………… Started, F&T (12,000 – 8,000) …. In process, ending ………………. Accounted for as follows – Average Finished and transferred ……….. In process, ending ……………….

Work Done

EPMat.

8,000 4,000 6,000 18,000

100% 100%

25% 4,000 100% 6,000 50% 10,000

2,000 4,000 3,000 9,000

12,000 6,000 18,000

100% 100%

12,000 100% 6,000 50% 18,000

12,000 3,000 15,000

Actual 8,000 10,000 18,000

Cost per Equivalent Unit: FIFO: Materials Cost added during May …. P15,600 Divided by: EUP ………….. 10,000 P1.56 Average: In process, beginning …… Cost added during May … Total ………………………. Divided by: EUP …………

P9,600 15,600 P25,200 18,000

CC P14,400 9,000 P1.60

P4,800 14,400 P19,200 15,000

Work Done

EPCC

Total P3.16

P2.68

JOINT AND BY-PRODUCTS 1. Horse Co. manufactures products A and B from a joint process. During October, 2011. Sales values at the point of “split-off” were P50.000 for 4,000 units of product A and P100,000 for 12,000 units of product B. Selling prices per unit are P25.00 and P12.50, respectively, for product A and for product B. Assume that the joint cost allocated to product A by using the market value method was P40,000. The production cost of product B would be reported at: P130,000

Product

MV at Split-off pt. x

Joint % = Costs

A

P50,000

80%* P40,000

B

100,000

80% 80,000

P150,000

+

Furhter Process Cost _

P500,00**

Total + Cost

P130,000

P120,000

*P40,000 / P50,000 = 80% **Ultimate Market value or final sales value: P25 x 4,000 ……………..

P100,000

Less: Market Value at split-off point for Product A …………………….

100,000

Further processing costs of Product B ………………………………….

P50,000

2. Using the same information in No. 1, and assume that the joint cost allocated to product B by using the average cost method was P90,000. The production cost of product A would be reported at: P80,000

Product A B

Units Produced x 4,000 12,000 16,000

Ave. U.C = P7.5 7.5*

Joints Costs + P30,000 90,000 P120,000

Further Proc Total Costs = Cost P50,000** P80,000

*P90,000 , 12,000 = P7.5 **The Ultimate Market Value or Final Sales Value: P25 x 4,000 ……. Less: Market Value at slpit-off point for Product A ………………….. Further processing cost of Product A …………………………………….

P100,000 50,000 P50,000

3. A company manufactures products X and Y using a joint process. the joint processing costs are P10,000. Products X and Y can be sold at split-off for P12,000 and P8,000 respectively. After spilt-off, product X is processed further at a cost of P5,000 and sold for P21,000 whereas product Y is sold without further processing. If the company uses the net realizable value method for allocating joint costs, the joint cost allocated to X is 6,000 Under the net realizable value method, joint costs are allocated based on their relative net realizable value unless sales price quotations are available at split-off. Since split-off sales price quotations are available, the amount of joint costs allocated to product X can be computed as follows:

Product X Y

MV at Split-off P12,000 8,000 P20,000

%* 50% 50%

Joint Costs P6,000 P10,000

*P10,000 / P20,000 4. Crank Corporation, which manufactures two products out of a joint process – Compod and Ultrasene. The joint (common) costs incurred are P250,000 for a standard production run that generates 120,000 gallons of Compod and 80,000 gallons of Ultrasene. Compod sells for P2.00 per gallon while Ultrasene sells for P3.45 per gallon. If there are no additional processing costs incurred after the split-off point, the amount of joint cost of each production run allocated to Compod on a physical-quantity basis is P150,000

Product Compod Ultrasene

Gallons Produced 120,000 80,000 200,000

x

Ave. UC* P1.25 1.25

=

Joint Costs P150,000 100,000 P250,000

*250,000 / 200,000 – P1.25 per gallon 5. Using the same information in No. 4, and if there are no additional processing costs incurred after the split-off, the amount of joint cost of each production run allocated to Ultrasene on a realizable value (gross market value) basis is 130,000

Product Compod Ultrasene

Gallons Produced 120,000 80.000

MV at SoPt. P2,00 3.25

Total MV of SoPt. x %* P240,000 50% 260,000 50% P500,000

=

Joint Costs P 130,000 P250,000

*P250,000 / P500,000 = 50% Since there is no further processing cost given, it is presumed that MV is at split-off point. 6. Using the information in No. 4 and if additional processing costs beyond the split-off point are P.10 per gallon for Compod and P1.10 per gallon for Ultrasene, the amount of joint cost of each production run allocated allocated to Ultrasene on a physical quantity basis is 100,000 The additional processing costs are irrelevant if the allocation is based on physical quantities the joint costs allocated to Ultrasene would be P100,000 (80,000 x P1.25 per gallon). 7. Using the information in No. 4 and if additional processing costs beyond the split-off point are P.10 per gallon for Compod and P1.10 per gallon for Ultrasene, the amount of joint

cost of each production run allocated to Compod on a net realizable value (net market value) basis is P180,000 Since, in this particular number, further processing costs were given, therefore, it is presumed that the market value given is the ultimate or final sales price.

Product Compod Ultrasene

Compod Ultrasene

Gallons Produced 120,000 80,000

Ult. Or Final Sales Price Proc. P2.00 3.25

Total NRV or Hyp. Market Value P228,000 172,000 P400,000

%* 62.5% 62.5%

Further Cost/Gallons P.10 1.10

NRV or Total NRV MV/Gallon or Hy. MV P1.90 P228,000 2.15 172,000 400,000

Joint Costs P142,500 P250,000

*P250,000 / P400,000 = 62.5% 8. Earl Corporation, which manufactures a product that gives rise to a by-product called “Zafa”. The only costs associated with Zafa are selling costs of P1 for each unit sold. Earl accounts for Zafa sales first by deducting its separable costs from such sales. And then by deducting this net amount from cost of sales of the major product. This year, 1,000 unit of Zafa were sold at P4 each. If Earl changes its method of accounting for Zafa sales by showing the net amount as additional sales revenue, Earl’s gross margin will Be unaffected The gross margin equals sales minus cost of sales. Before the change, the net amount was deducted from cost of sales. After the change, the net amount is added to regular sales with no additional increase in cost of goods sold. Hence, the gross marginwill be the same. 9. Using the same information in No. 8, and Earl changes its method of accounting for Zafa sales by showing the net amount as other income Earl’s gross margin will decrease by P3,000 Sales revenue minus cost of goods sold is gross margin. If net revenue from the byproduct is recorded as other income rather than being deducted from cost of goods sold, the gross margin will decrease by P3,000 [1,000 x (P4 sales – P1 cgs)].

10. Using the same information in No. 8, and Earl records the net realizable value for Zafa as inventory as it is produced, what will the per unit value be? P3 The NRV is selling price minus cost to complete and cost to dispose. The selling price of Zala is P4, and the selling costs are P1. Given no completion or additional processing costs, unit net realizable value is P3.

11. Using the same information in No. 8, and Earl sold 1,000 units of Zafa. Assuming that 1,500 units were produced for the year and that net realizable value is recorded as inventory, Earl’s net income will increase by: P4,500 If the 1,500 units of the by-product are recognized at the time of production, net income must increase by P4,500 (P3 unit NRV x 1,500). Ending inventory of Zala reduces cost of sales, and by-products revenue either decreases costs or increases other income

12. Using the same information in No. 8, and Earl records Zafa inventory at net realizable value as it is produced this year, what will be the profit recognized next year on as sale of 500 unit? P0 Because NRV is selling price minus completion and disposal cost, there is no profit upon sale. The sale of 500 units of Zala with an inventory value of P3 per unit will produce no profit (P4 unit selling price 0 P3 inventory cost – P1 selling cost = P0)

13. The characteristic which is most often used to distinguish a product as either a joint product or a by-product is the relative sales value of the products produced in the process. The difference between joint products and by-products lies in their relative sales values. Joint products have relative sales values that are significant in relation to each other. Byproducts have minor sales values compared with the major product(s). 14. Mace Co. manufactures a major product that gives rise to a by-product called May. May’s only separable cost is a P1 selling cost when a unit is sold for P4. Mace accounts for May’s sales by deducting the P3 net amount from the cost of goods sold at the major product. There are no inventories. If Mace were to change its method of accounting for may from by-product to a joint product, what would be the effect on Mace’s overall gross margin? Gross margin increases by P1 for each unit of May sold. The difference between treating the by-product “May” as a joint product against a byproduct would be under the by-product treatment, the selling cost is netted against “May’s” selling price, thus, reducing gross profit whereas under joint product accounting, the selling costs would be deducted below the gross profit like a selling expense.

15. Mann Sawmill manufactures two lumber products from a joint milling process. the two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of P300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for P2 per unit, and each CBL sells for P4 per unit. Assuming no further processing work is done after the split-off point, the amount of joint cost allocated to commercial building lumber (CBL) on a physical quantity allocation basis would be: P180,000

PRODUCT CBL MSB

UNITS PRODUCED X

AVE. U.C.

90,000 60,000 150,000

=

P2.00 2.00

JOINT COSTS P180,000 ___________ P300,000

16. Using the same information in No. 15, and there are no further processing costs incurred after the spilt-off point, the amount of joint cost allocated to the mine support braces (MSB) on a relative sales value basis would be: P75,000

PRODUCT CBL MSB

UNITS PRODUCED X 90,000 60,000

MV. At SOPT. = P4 2

TOTAL MV at SOPT. P360,000 120,000 P480,000

X

%* = 62.5% 62.5%

JOINT COSTS P75,000 P300,000

17. Mugfield Corporation, which manufactures products C, D, and E from a joint process. joint costs are allocated on the basis of relative sales value at split-off. Additional information is presented below: Units produced ………………… Joint costs …………………........ Sales value at split off ………... Additional costs if processed Further …………………. Sales value if processed further

C 6,000 P72,000 ?

D 4,000 ? ?

E 2,000 ? P30,000

Total 12,000 P120,000 P200,000

P14,000 P140,000

P10,000 P60,000

P6,000 P40,000

P30,000 P240,000

How much of the joint costs should Mugfield allocate to product D? P30,000

C D E

MV at SoPt. P120,000** 50,000 30,000 P200,000

X

%* 60% 60% 60%

=

JOINT COSTS P 72,000 30,000** 18,000 P120,000

*P 120,000 / P200,000 = 60% ** C = P72,000 / 60% = P120,000 ** D = P200,000 – P120,000 – P30,000 – P50,000 ** D’s share in joint costs would be: P50,000 x 60% = P30,000

18. Using the same information in No. 17, and assuming that the 2,000 units of product E were processed further and sold for P40,000, what was Mugfield’s gross profit on the sale? P16,000 Sales of Product E if process further

P40,000

Less: Cost of Sales Joint costs (refer No. 17) Further processing costs Gross profit on sale of Product E

P 18,000 6,000

24,000 P16,000

19. Which of the following components of production are allocable as joint costs when or single manufacturing process produces several salable products? Materials, Labor and Overhead The difference between joint products and by-products lies in their relative sales value compared to other products being produced. The term joint products is used when the relative sales values of the individual products are significant in relation to each other. The term byproducts is used when the products hace a minor sales value as compared with the major product(s).

20. Which of the following is often subject to further processing in order to be salable? By-products – YES; Scrap – No Scrap and by-products are usually similar in nature, both physically and from an accounting point of view. Scrap might even be considered a by-product of a manufacturing process. however, by-products generally have a greater sales value than scrap. And also, scrap rarely receives any additional processing in order to be salable. The moment scrap are further processed, then they are considered as by-products.

PARTNERSHIP 1. The following condensed balance sheet is presented for the partnership of AA, BB, and CC, who share profits and losses in the ratio of 4:3:3, respectively: Cash Other assets AA, loan

P 90,000 830,000 20,000 P 940,000

Accounts payable CC, loan AA, capital BB, capital CC, capital

P 210,000 30,000 310,000 200,000 190,000 P 940,000

Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit FF as a new partner, with a 20% interest. No goodwill or bonus is to be recorded. How much should FF contribute in cash or other assets? P175,000 Total agreed capital of the new partnership (P310,000 + P200,000 + P190,000 / 80%) Less: Contribution of old partners (LL, PP, and QQ) Cash investment of FF

P 875,000 ( 700,000) P 175,000

or, alternately: Total agreed capital of the new partnership Multiplied by: Capital interest of FF

P 875,000 20% P 175,000

2. RR and PP share profits after the provision of annual salary allowances of P14,400 and P13,200, respectively in the ratio of 6:4. However, if partnership’s net income is insufficient to provide for said allowances in full amount, the net income shall be divided equally between the partners. In 2014, the following errors were discovered: Depreciation for 2014 is understated by P2,100 and the inventory on December 31, 2014 is overstated by P11,400. The partnership net income for 2014 was reported to be P19,500. The capital accounts of the partners should be increased (decreased) by: RR, P(6,750); PP. P(6,750) Correcting the allocated net income: Correct allocation of net income, equally Allocation of net income per books, equally Adjustments increased (decreased)

RR PP P 3,000 P 3,000 9,750 9,750 P(6,750) (P6,750)

Total P 6,000 19,500 P13,000

3. Hunt, Rob, Turman, and Kelly own a publishing company that that operate as a partnership. The partnership agreement includes the following:   

Hunt receives a salary of P20,000 and a bonus of 3% of income after all bonuses. Rob receives a salary of P10,000 and a bonus of 2% of income after all bonuses. All partners are to receive 10% interest on their average capital balances.

The average capital balances are as follows: Hunt Rob Turman Kelly

P 50,000 45,000 20,000 47,000

Any remaining profits and losses are to be divided equally among the partners. Determine how a profit of P105,000 would be allocated among the partners.

Salaries Bonus* 10% Interest on Ave. Cap. Balance (equally)

P20,000 3,000 5,000 13,450 P41,450

P10,000 2,000 4,500 13,450 P29,950

P 2,000 13,450 P15,450

P 4,700 13,450 P18,150

P30,000 5,000 16,200 53,800 P105,000

*Bonus = (3% + 2%) (Net Income – Bonus) B = 5% (P105,000 – B) B = P5,250 - .05 B 1.05 B = P5,250 B = P5,250 / 1.05 B = P5,000, therefore Hunt should receive P3,000 (P5,000 x 3/5), while Rob will receive P2,000 (P5,000 x 2/5)

4. AA and DD created a partnership to own and operate a health-food store. The partnership agreement provided that AA receive a salary of P10,000 and DD a salary of P5,000 to recognize their relative time spent in operating the store. Remaining profits and losses were divided 60:40 to AA and DD, respectively. Income for 2013, the forst year of operations, of P13,000 was allocated P8,000 to AA and P4,200 to DD. On January 1, 2014, the partnership agreement was changed to reflect the fact that DD could no longer devote any time to the store’s operations. The new agreement allows AA a salary of P18,000, and the remaining profits and losses are divided equally. In 2014 an error was discovered such that the 2013 reported income was understated by P4,000. The partnership income of P25,000 for 2013 included the P4,000 related to year 2013. In the reported net income of P25,000 for the year 2014, AA and DD would have: Salary Balance: Equally Income for year 2014 only Income for year 2013 (60:40) Reported income for year 2014

AA P18,000 1,500 P19,500 2,400 P21,900

BB P 1,500 P 1,500 1,600 P 3,100

CC P18,000 3,000 P21,000 4,000 P25,000

5. On April 30, 2014, XX, YY and ZZ formed a partnership by combining their separate business proprietorship. XX contributed cash of P75,000. YY contributed property with a P54,000 carrying amount, a P60,000 original cost, and P120,000 fair value. The partnership accepted responsibility for the P52,500 mortgage attached to the property. ZZ contributed equipment with a P45,000 carrying amount, a P112,500 original cost, and P82,500 fair value. The partnership agreement specifies that profits and losses are to be shared equally but in silent regarding capital contributions. Which partner has the largest April 30, 2014, capital balance?

Cash Property Equipment

XX P75,000

YY

ZZ

P120,000 P82,500

Less: Mortgage assumed Capital balances

_______ P75,000

52,500 P 67,500

_______ P82,500

6. On December 1, 2013, EE and FF formed a partnership, agreeing to share for profits and losses in the ratio of 2:3, respectively. EE invested a parcel of land that cost him P25,000. FF invested P30,000 cash. The land was sold for P50,000 on the same date, three hours after formation of the partnership. How much should be the capital balance of EE right after formation? P50,000 In the formation of a partnership, one or more of the partner will contribute noncash assets to the business such as inventory, land or equipment, etc.. Retaining the recorded cost for such asset would be inequitable to any partners investing appreciated property. Therefore, the contribution of noncash assets to a partnership should be recorded based on the fair values. In this case, the fair value of the land would be measured by its sales price on the date of sale, P50,000.

7. On August, AA and BB pooled their assets to form a partnership, with the form to take over their business assets and assume the liabilities. Partners capitals are to be based on net assets transferred after the following adjustments. (Profit and loss are allocated equally.) BB’s inventory is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and P1,500 are to be set up in the books of AA and BB, respectively; and accounts payable of P4,000 is to be recognized in AA’s books. The individual trial balances on August 1, before adjustments are as follows:

Assets Liabilities

AA P75,000 5,000

BB P113,000 34,500

What is the capital of AA and BB after the above adjustments?

Assets Less: Liabilities Unadjusted capital Add (Deduct): Adjustments; Increase in inventory Allowance for doubtful accounts Accounts payable Adjusted capital balances

P 75,000 5,000 P 70,000

P113,000 34,500 P 78,500

( 1,000) ( 4,000) P 65,000

4,000 ( 1,500) ________ P 81,000

8. The capital accounts of the partnership of NN, VV, and JJ on June 1, 2014 are presented below with their respective profit and loss ratios: NN VV JJ

P139,200 208,800 96,000

1/2 1/3 1/6

On June 1, 2011, LL is admitted to the partnership when LL purchased, for P132,000, a proportionate interest from NN and JJ in the net assets and profits of the partnership. As a result of a transaction LL acquired a one-fifth interest in the net assets and profits of the firm. What is the combined gain realized by NN and JJ upon the sale of a portion of their interest in the partnership to LL? P43,200 Amount paid Less: Book value of interest acquired: (P139,200 + P208,800 + P96,000) x 1/5 Gain

P132,000 88,800 P 43,200

The problem is simpler than it appears at first glance because it states that LL acquired a onefifth interest in the firm directly from NN and VV and no goodwill is to be recorded. In other words, this was a transaction between partners.

9. PP contributed P24,000 and CC contributed P48,000 to form a partnership, and they agreed to share profits in the ratio of their original capital contributions. During the first year of operations, they made a profit of P16,290; PP withdrew P5,050 and CC P8,000. At the start of the following year, they agreed to admit GG into the partnership. He was to receive a one-fourth interest in the capital and profits upon payment of P30,000 to PP and CC, whose capital accounts were to be reduced by transfers to GG’s capital account of amounts sufficient to bring them back to their original capital ratio. How should the P30,000 paid by GG be divided between PP and CC?

Capital balances before net income Net income (24:48) or (1/3:2/3) Drawings Capital balances before admission

PP

CC

P24,000 5,430 ( 5,050) P24,380

P48,000 10,860 ( 8,000) P50,860

Amount paid Less: Book value of interest acquired (P75,240 x ¼) Gain of PP and CC

TOTAL P72,000 16,290 ( 13,050) P75,240 P30,000 18,810 P11,190

Therefore, the P30,000 cash should be allocated as follows:

Capital balances before admission Required capital balances [P & L ratio – 1/3:2/3 of P56,430 (P75,240 – P18,810)] Transfer of capital to bring back original ratio Add: Personal gain (refer above), 1/3:2/3 Personal cash distribution

P24,380

P50,860

P75,240

18,810

37,620

56,430

P 5,570 3,730 P 9,300

P13,240 7,460 P20,700

P18,810 11,190 P30,000

10. In the AA-BB partnership, AA and BB had a capital ratio of 3:1 and profit and loss ratio of 2:1, respectively. The bonus method was used to record CC’s admittance as a new partner. What ratio would be used to allocate, to AA and BB, the excess of CC’s contribution over the amount credited to CC’s capital account? AA and BB’s old profit and loss ratio The bonus method implied that the old partner either receive a bonus from the new partner, or they pad a bonus to the new partner. In this case, CC, the new partner invested an amount in excess of the amount credited to CC’s capital account. Accordingly, the excess should be treated as a bonus to AA and BB. This bonus should be treated as an adjustment to the old partners’ capital accounts and should be allocated by using AA and BB’s old profit and loss ratio.

11. Merlin, a partner in the Comelot Partnership, has a 30% participation in partnership profits and losses. Merlin’s capital account has a net decrease of P1,200,000 during the calendar year 2013. During 2013, Merlin withdrew P2,600,000 (charged against his capital account) and contributed property valued at P500,000 to the partnership. What was the net income of the Camelot Pertnership for the year 2013? P3,000,000 Withdrawals Investment Share in net income (balancing figure) Net (decrease) increase

P(2,600,000) 500,000 900,000 P(1,200,000)

Net income of the partnership: P900,000 / 30%

P 3,000,000

12. X, Y and Z, a partnership formed on January 1, 2013 had the following initial investment: X Y Z

-

P100,000 150,000 225,000

The partnership agreement states that profits and losses are to be shared equally by the partners after consideration is made for the following:  Salaries allowed to partners: P60,000 for X, P48,000 for Y and P36,000 for Z.  Average partner’s capital balances during the year shall be allowed 10%. Additional information:  On June 30, 2013 X invested an additional P60,000  Z withdrew P70,000 from the partnership on September 30, 2013.  Share in the remaining partnership profit was P5,000 for each partner. The total partnership capital on December 31, 2013 was: P672,750 Capital, January 2013 Add: Investment

P475,000 60,000

Net income Total Less: Withdrawals Capital, December 31, 2013

207,750 P742,750 70,000 P672,750

13. Jones and smith formed a partnership with each partner contributing the following items:

Cash Building – cost to Jones - Fair value Inventory – cost to Smith - Fair value Mortgage payable Accounts payable

Jones P 80,000 300,000 400,000

Smith P 40,000

200,000 280,000 120,000 60,000

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. What is the balance in each partner’s capital account for financial accounting purposes? Jones Assets at fair value Jones: P800,000 + P400,000 Smith: P400,000 + P280,000 Less: Liabilities assumed Capital

Smith

P480,000 120,000 P360,000

P320,000 60,000 P260,000

14. On January 2, 2013, BB and PP formed a partnership. BB contributed capital of P175,000.00 and PP, P25,000.00. They agreed to share profits and losses 80% and 20% respectively. PP is the general manager and works in the partnership full time and is given a salary of P5,000.00 a month; an interest of 5% of the beginning capital (of both partner) and a bonus of 15% of net income before the salary, interest and the bonus. The profit and loss statement of the partnership for the year ended December 31, 2013 is as follows: Net Sales Cost of goods sold Gross Profit Expenses (including the salary, interest and the bonus) Net income

P 875,000 700,000 P 175,000 143,000 P 32,000

The amount of bonus to PP in 2013 amounted to: Bonus B B B

= = = =

.15 (NI before salaries, interest and bonus) ,15 (NI after salaries, interest and bonus + salaries + interest + bonus) .15 [P32,000 + (5,000 x 12) + (5% x P200,000) + B] .15 [P32,000 + P60,000 + P10,000 + B]

B B B

= .15 [P102,000 + B] = P15,300 + .15B - .15 B = P15,300 .85 B = P15,300 B = P15,000/8.5 B = P18,000

15. A, B, and C are partners in an accounting firm. Their capital account balances at year-end were A P90,000; B P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the following special terms:  Partner C is to receive a bonus of 10% of net income after the bonus.  Interest of 10% shall be paid on that portion of a partner’s capital in excess of P100,000.  Salaries of P10,000 and P12,000 shall be paid to partners A & C respectively. Assuming a net income of P44,000 for the year, the total profit share of Partner C was:

Bonus* Interest: 10% (P110,000 – P100,000) Salaries Balance: 4:4:2

*Bonus B B 1.10B B

= = = = =

P10,000

P 4,000 12,000 3,400 P19,400

P1,000 -

P 4,000 1,000 22,000 17,000 P44,000

10% (NI – Bonus) .10 (P44,000 – B) P4,400 - .10B P4,400 P4,000

16. CC and DD are partners who share profits and losses in the ratio of 7:3, respectively. On October 21, 2013, their respective capital account is as follows: CC DD

P35,000 30,000 P65,000

On that date they agreed to admit EE as a partner with a one-third interest in the capital and profits and losses, and upon his investment of P25,000. The new partnership will begin with a total capital of P90,000. Immediately after EE’s admission, what are the capital balance of CC, DD and EE, respectively? Total agreed capital of the new partnership Less: Total contributed capital (P35,000 + P30,000 + P25,000)

P90,000 90,000 P 0

Following the admission of EE, the partnership began with a total capital of P90,000, and EE received a one-third interest; therefore his capital balance must be credited for P30,000

(P90,000 x 1/3). But EE contributes only P25,000, so the P5,000 difference represents bonus (P30,000 – P25,000) must be debited and allocated to the old partners in the ratio of 7:3: CC [P35,000 – (70% x P5,000)] DD [P30,000 – (30% x P5,000)] EE (P90,000 x 1/3) Total agreed capital

P31,500 28,500 30,000 P90,000

17. The partners’ capital (income-sharing ratio in parentheses) of Nunn, Owen, Park and Quan LLP on May 31, 2014 were as follows: Nunn (20%) Owen (20%) Park (20%) Quan (40%) Total partner’s capital (20%)

P 60,000 80,000 70,000 40,000 P250,000

On may 31, 2014, with the consent of Nunn, Owen and Quan:  Sam Park retired from the partnership and was paid P50,000 cash in full settlement of his interest in the partnership.  Lois Reed was admitted to the partnership with a P20,000 cash investment for a 10% interest in the net assets of Nunn, Owen and Quan. The capital account to be credited to Reed is: Total capital before retirement Less: Retirement of Park Add: Bonus to remaining partners due to retirement of Park Capital balance before the admission of Reed Add: Cash investment of Reed Total agreed capital of the partnership (equal to the contributed capital) Multiplied by: Interest acquired Capital account to be credited to Reed

P250,000 70,000 20,000 P200,000 20,000 P220,000 10% P 22,000

18. MM, NN and OO are partners with capital balances on December 31, 2013 of P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is to take certain equipment with second-hand value of P50,000 and a note for the balance of OO’s interest. The equipment are carried on the books at P65,000. Brand new equipment may cost P80,000. Compute for: (1) OO’s acquisition of the second-hand equipment will result to reduction in capital; (2) the value of the note that will OO get from the partnership’s liquidation. (1) Reduction in capital Equipment at carrying value Equipment at second-hand value (fair value) Decrease in equipment

P 65,000 50,000 P 15,000

Multiply by: Profit and Loss ratio of MM, NN and OO Reduction in capital

(2) Notes payable to OO: Unadjusted capital of OO Less: Share in the decrease of equipment Adjusted capital of OO Less: Equipment received at second-hand value Value of notes payable

1/3 P 5,000

P200,000 5,000 P195,000 50,000 P145,000

19. JJ & KK partnership’s balance sheet at December 31, 2012, reported the following: Total assets Total liabilities JJ, capital KK, capital

P100,000 20,000 40,000 40,000

On January 2, 2013, JJ and KK dissolved their partnership and transferred all assets and liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the net assets was P12,000 more than the carrying amount on the partnership’s books, of which P7,000 was assigned to tangible assets and P5,000 was assigned to goodwill. JJ and KK were each issued 5,000 shares of the corporation’s P1 par value ordinary share. Immediately following incorporation, share premium/additional paid-in-capital in excess of par should be credited for:

Carrying value of net assets (P100,000 – P20,000) Add: Adjustments to reflect fair value Fair value Less: Common stock, P1 par (5,000 shares x 2 x P1) Additional paid-in capital/share premium

P80,000 12,000 P92,000 10,000 P82,000

20. After operating for five years, the books of the partnership of Bo and By showed the following balances: Net assets Bo, capital By, capital

P169,000 110,500 58,500

If liquidation takes place at this point and the net assets are realized at book value, the partners are entitled to: Bo to receive P110,500 & By to receive P58,500 The non-cash assets are realized at book value therefore; there is no gain or loss, in which case partners are entitled to received an amount equivalent to their capital interest.

INSTALLMENT SALES



On January 1, 2011, Art company sold its idle plant facility to Tony, Inc. for P1,050,000.On this date, the plant had a depreciated cost of P735,000. Tony paid P150,000 cash on January 1, 2011 and signed a P900,000 note bearing interest at 10%. The note was payable in three annual installments of P300,000 beginning January 1, 2012. Art appropriately accounted for the sale under the installment method. Tony made a timely payment of the first installment on January 1, 2012 of P390,000 which included interest of P90,000 to date of payment. At December 31, 2012, Art hast deferred gross profit of: P180,000 Installment sales – 2011 Less: Downpayment – 1/1/2011 Installment Collections – 1/1/2011 (P390,000 – P90,000) Installment Accounts Receivable, 12/31/2012 Multiplied by: Gross profit rate (P1,050,000 – P735,000) /P1,050,000 Deferred gross profit end of 2012

P1,050,000 150,000 300,000 P 600,000 30% P 180,000

2. On October 1, 2011, Rodel Corporation, a real estate developer, sold land to Gerry Company for P5,000,000. Gerry paid cash of P600,000 and signed a ten year P4,400,00 note bearing interest at 12%. The carrying amount of the land was P4,000,000 on the date of sale. The note was payable in forty quarterly principal installments of P110,000 beginning January 2, 2012. Rodel appropriately accounts for the sale under the cost recovery method. On January 2, 2012, Gerry paid the first principal installment of P110,000 and interest of P132,000.

For the year ended December 31, 2012, what total amount of income should Rodel recognize from the land sale and the financing: P 0 Carry the value of land, 10/1/2011 Less: Collections from October 1, 2011 to October 1, 2012

P4,000,000

(Principal and interest) Unrecovered cost 12/31/2012

1,548,200 P2,451,800

Profit from sale and interest income recognized

P

0

3. Asser Computer Co. began operation at the beginning of 2012. During the year, it had cash sales of P6,875,000 sales on installment basis of P16,500,000. Asser adds a markup on cost of 25% on cash sales and 50% on installment sales. Installment receivable at the end of 2012 is P6,600,000.

Total realized gross profit for 2012 is: P4,657,000

Realized Gross Profit: Cash sales: P6,875,000 x 25/125 Installment sales: Installment Sales – 2012 Less: Installment Accounts Receivable, end of 2011 Collections on installment sales Multiply by: gross profit – 2012 Total realized gross profit – 2012

P1,375,000 P16,500,000 6,600,000 9,900,000 50/150

3,300,000 P4,675,000

4. The Molino Furniture Company appropriately used the installment sales method in accounting for the following installment sale. During 2011, Molin o sold furniture to an individual for P3,000 at a gross profit of P1,200. On June 1, 2011, this installment account receivable had a balance of P2,200 and it was determined that no further collections would be made . Molino, therefore, repossessed the merchandise. When reacquired, the merchandise was appraised as being worth only P1,000. In order to improve its salability, Bengal incurred costs of P100 for reconditioning. Normal profit on resale is P200. What should be the loss on repossession attributable to this merchandise: P320

Appraised value before reconditioning cost Less: Unrecovered cost: Installment Accounts Receivable, unpaid balance Less deferred gross profit [P2,200 x (1,200/3,000)] 880 Loss on repossession

P1,000 P2,200 1,320 P 320

5. Spicer Corporation has a normal gross profit on installment sales of 30%. A 2009 sale resulted in a default early in 2011. At the date of default, the balance of the installment receivable was P24,000, and the repossessed merchandise had a fair value of P13,500. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on repossession should be: P3,300 loss

Fair value before reconditioning cost Less: Unrecovered cost – Installment accounts receivable, Unpaid balance Less: Deferred gross profit (30% x P24,000) Loss on repossession

P13,500

P24,000 7,200

16,800 P(3,300)

6. Fryman Furniture uses the installment-sales method. No further collections could be made on an account with a balance of P18,000. It was estimated that the repossessed furniture could be sold as is for P5,400, or for P6,300 if P300 were spent reconditioning it. The gross profit rate on the original sale was 40%. The loss on repossession was: P4,800 Fair value before reconditioning costs (P6,300 – P300) Less: Unrecovered cost – Installment accounts receivable, Unpaid balance P8,400 Less: Deferred gross profit (70% x P18,000) 5,880 Gain on repossession

P6,000*

2,520 P180

21.

(1)

(2) 1% x (4) Interest

Dates Collection 9/30/11 9/30/11 P1,600,000 P-010/31/11 220,000 20,000 11/30/11 218,000 18,000 12/31/11 216,000 16,000 1/31/12 214,000 14,000 *monthly collections as to principal.

(3) (1) – (2) Principal P1,600,000 *200,000 200,000 200,000 200,000

(4) (4) – (3) Unpaid Balance P3,600,000 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000

7. On January 1, 2011, Janette Company sold 20,000 square meters of farmland for P600,000 to Michelle, taking in exchange a 10% interest bearing note Janette Company purchased the farmland in 2011 at a cost of P500,000. The note will be paid in three installments of P241,269 including interest each on December 31,2011, 2012, and 201. Shortly, after the sale Janette Company learns distressing news about Michelle’s financial circumstances and because collection is so uncertain and decides to account for the sale using the cost recovery method. Determine the Realized Gross Profit and Interest Income for the year 2012, and Unrecovered Cost as of December 31, 2012, respectively: P -0-; P -0-; P 17,462

Cost, January 1, 2011 ……………………………………………… Less: Collections including interest – 2011 ……………………… Collections including interest -2012 ………………………

P500,000 241,269 241,269

Unrecovered Cost, December 31, 2012 ………………………

P 17,462

Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts. All cash receipts, both interest and principal portions, are applied first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all costs have been recovered, the recognized revenue after the cost recovery represents income (interest and realized gross profit). This method is used only when the circumstances surrounding a sale are so uncertain that earlier recognition is impossible.

8. Johnson Enterprises uses the cost recovery method for all installment sales. Complete the following table:

Installment sales Cost of installments sales Gross profit percentage Cash collections: 2010 sales 2011 sales 2012 sales Realized Gross Profit on Installment Sales

2010 P80,000 ? 38%

2011 P95,000 56,050 ?

2012 P? 68,250 35%

25,000 22, 800

46,000 ?

5,600 32,550

?

?

16, 050

The Installments sales in 2012: 105,000.00 Installment sales: Cost of Installments Sales: P68,250 / (100%-35%)…… P105,000 9. Using the same information in No. 9, the collection in 2012 for 2011 sales : P43, 700

Cost of installments sales for 2011 Installments Sales ………… P56, 050 Less: Collections in 2011 for 2011 Installment Sales …………… 22, 800 Collections in 2012 for 2011 Installment Sales ( balancing figure) ………………………………… 43, 700 RGP on Installments Sales in 2012 for 2011 Installment Sales ………………………… ………………… P10,450* *RGP on I/S in 2012 …………………………………………………… P16, 050 Less: RGP on I/S in 2012 for 2010 I/S since Cost of P49,600 (No. 2) Is already recovered in 2011 (equivalent to collection)………. 5,600 RGP on I/S in 2012 for 2011 Installment Sales ……………………. P10, 450

10. Using the same information in No. 9, the realized gross profit on installment sales in 2011: 22, 400 Cost of installments sales for 2010 Installment Sales ………… P49,600 Less: Collections in 2010 for 2010 Installment Sales …………. 25,600 Collections in 2011 for 2010 Installment Sales ………… 46,400 RGP on I/S in 2011 for 2010 Installments Sales …………………P22,400 RGP on I/S in 2011 for 2011 I/S: Cost of installment sales for 2011 Installment Sales ………………………………………P56, 050 Less: Collections in 2011 for 2011 I/S ………… 22, 800 Unrecovered Cost in 2011 for 2011 I/S … P33,250 -0RGP on I/S in 2011 ………………………………………………… P22,400

11. Using the same information in No. 9, the realized gross profit on installment sales in 2010: Zero Cost is not yet fully recovered, therefore, no profit should be recognized Cost of installment sales for 2010 Installment Sales ………... P49,600 Less: Collections in 2011 for 2010 Installment Sales ……… 25,600 Unrecovered cost in 2010 for 2011 Installment Sales …… P24,000 12. The Precious Appliance Company started business on January 1, 2013. Separate accounts were established for installment and cash sales. On installment sales, the contract price is 106% of the cash sale price. A standard installment contract is used whereby a down payment of ¼ of the installment price is required, with the balance payable in 15 equal monthly installments. The interest charged per month is 1% of the unpaid cash sales price equivalent. It is recognized in the period earned. Installments receivable and installment sales are recorded at the contract price. When contracts are defaulted, the unpaid balances are charged to Bad Debt Expense. Sales of defaulted merchandise are credited to Bad Debt Expense.

The following data show the results of transactions in 2013: Sales: Cash sales Installment sales Repossessed sales Merchandise inventory, January 1, 2013 Purchases Merchandise inventory, December 31, 2013: New merchandise Repossessed inventory Cash collections on installment contracts: Down payments Subsequent installment including interest of P9,252.84 (average of six monthly installment on all contracts, except on defaulted contracts)

P126,000 265,000 230 58,060 209,300 33,300 180 66,250

79,341

Five contracts totaling to P1060 were defaulted after 3 monthly installment payments. The gross profit percentage in 2013 based on cash sales price equivalent is: 37.75%

Sales Installment Sales at Cash Sales (P265,000 / 1.06) Total Sales at Cash Sales Price Less: Cost of Goods Sold: Merchandise Inventory, 1/1/13 P 58,060 Add: Purchases 209,300 Cost of goods available for sale P 267,360 Less: Merchandise Inventory, 12/31/13 33,300 Gross Profit

P 126,000 250,000 P 376,000

234,060 P 141,940

Gross Profit Percentage: P141,940 / P376,000

37.75%

13. The following selected accounts are taken from the trial balance on December 31, 2012 of Tacloban Company: Accounts receivable – charge sales Installment receivables – 2010 Installment receivables– 2011 Installment receivables – 2012 Merchandise inventory Purchases Freight-in Repossessed merchandise Repossessed loss Cash sales Charge sales Installment sales Deferred gross profit – 2010

P 75,000 15,000 45,000 270,000 52,500 390,000 3,000 15,000 24,000 P 90,000 180,000 446,400 22,200

Deferred gross profit – 2011

39,360

Additional information: a. Gross profit rate on 2010 installment sales was 30% and for 2011, the rate was 32%. b. Installment sales prices exceed cash sales prices by 24% while charge sales prices exceed cash sales prices by 20%. c. The entry for repossessed goods was: Repossessed merchandise P15,000 Repossession loss 24,000 Installment receivables – 2010 P18,000 Installment receivables – 2011 21,000 d. Merchandise on hand at the end of 2012 (new and repossessed was P70,500. (1) If all sales were on cash basis, the total sales for 2012, and (2) The cost of goods sold on installment sales for 2012: (1) 600,000; (2) 234,000 (1) Total Sales for 2012: Cash sales (equivalent to 100%) Installment sales (P446,400/124% = equivalent to 100%) Charges Sales (P180,000/120% = equivalent to 100%)

(2) Cost of Installment Sales for 2012: Merchandise Inventory, 12/31/2011 Add: Purchases Freight-in Repossessed Merchandise Cost of goods available for sale Less: Merchandise Inventory, 12/31/2012 (new repossessed) Cost of goods sold Multiplied by: Based on sales amount (equivalent to cash sales price which is 100% Cost of installment sales

P 90,000 360,000 150,000 P600,000

P 52,500 390,000 3,000 15,000 P460,500 70,500 P390,000 360/600 P234,000

14. Using the same information in No. 14, The cash collections on installment Sales for – 2010 sales Installment Accounts Receivable 1/1 2012 (installment Sales) 2011 : P39,360 / 32% 2010 : P22,200 / 30% P 74,000 Less: Installment Accounts Receivable, 12/31/2012 15,000 Decrease in installment Accounts Receivable Less: Defaults, unpaid balance

P 59,000 18,000

2011 sales

2012 sales

P446,400 P123,000

45,000

270,000

P 78,000 21,000

P176,400 ________

Collections in 2012

P41,000

P 57,000

P176,400

15. The trial balance of LOL Appliance Corporation as of the end of the fiscal year on September 30, 2012 is:

Accounts receivable Accounts payable Allowance for depreciation Capital stock Cash Deferred gross profit – 2011 Equipment Installment contract receivable – 2011 Installment contract receivable – 2012 Installment sales Inventory, September 31, 2011 Loss on repossessions Prepaid expenses Purchases Repossessions Retained earnings Sales Selling and administrative expenses Total

Debit P 100,000 P 100,000 33,750 125,000 46,250 50,000 112,500 12,500 150,000 375,000 62,500 3,750 3,750 435,000 2,000 30,000 312,500

__________ 97,500 P1,026,250

P1,026,250

The post-closing trial balance on September 30, 2011 shows the following balances of certain accounts: Installment contract receivable – 2011 Deferred gross profit – 2011

P 100,000 50,000

The gross profit percentage on regular sales during the year was 30%. The accountant made the following entry for a repossession on a sale of 2011 towards the end of fiscal year: Repossessions Loss in repossessions Installment contract receivable – 2011

P2,500 3,750 P6,250

The inventory of new repossessed merchandise on September 30, 2012 amounted to P75,000 The total realized gross profit for the fiscal year September 30, 2012: P235,625

Installment contract receivable, 9/30/2011 (installment sales) Less: installment contract receivable, 9/30/2012

P100,000

P375,000

12,500

150,000

Decrease in installment contract Receivable Less: Defaults, unpaid balance Collections in 2012 Multiplied by: Gross profit rate Realized gross profit on installment sales Add: Gross profit on Cash Sales – 2012 P312,500 x 30% Realized gross profit in 2012

P 87,500 6,250 P 81,250 50% P 40,625

P225,000 ________ P225,000 45% P101,250

P141,875 93,750 P235,625

16. Using the same information in No. 16, the correcting entry for repossession made on a sale of 2011 is: Value of Repossessed Merchandise Less: Uncovered Cost: Installment Contract Receivable – 2011, unpaid balance Less: Deferred gross profit – 2011 (P6,250 x 50%) Loss on repossession

P2,500

P6,250 3,125

Correcting Entry: Deferred gross profit – 2011 Loss on repossession (P3,750 – P625)

3,125

Entry Made: Repossessions Loss on Repossessions Installment contract receivable – 2011

2,500 3,750

Correct Entry: Repossessions Deferred gross profit – 2011 Loss on repossessions Installment contract receivable – 2011

2,500 3,125 625

3,125 P( 625)

3,125

6,250

6,250

17. Using the same information in No. 16, compute the net income for the fiscal year September 30, 2012: P137,500 Realized gross profit in 2012 Less: Loss in repossession Seling and administrative expenses Net income

P235,625 625 97,500 P137,500

18. Sharon Company uses the installment sales method in accounting for its installment sales. On January 1, 2013, Sharon Company had an installment accounts receivable from Rowena with a balance of P18,000. During 2013, P4,000 was collected from Rowena. When no further collection could be made, the merchandise sold to Rowena was repossessed. The merchandise

had a fair market value of P6,500 after the company spent for P600 for reconditioning of the merchandise. The merchandise was originally sold with a gross profit rate of 40%. Determine the gain or loss on repossession and cost of repossessed merchandise, respectively: P2,500 loss; P6,500 Fair Market Value after reconditioning costs Less: Reconditioning costs Fair Market Value before reconditioning costs Less: Unrecovered cost: Unpaid balance (P18,000 – P4,000) Less: Deferred gross profit (40% x P14,000) Loss on realization

P6,500 600 P5,900 P14,000 5,600

8,400 P2,500

The cost of repossessed merchandise should amount to P6,500 (P5,900 + P600) it should be noted that reconditioning costs is inventoriable.

19. On January 1, 2013, Janette Company sold 20,000 square meters of farmland for P600,000 to Michelle, taking in exchange a 10% interest bearing note Janette Company purchased the farmland in 2013 at a cost of P500,000. The note will be paid in three installments of P241,269 including interest each on December 31, 2013, 2014 and 2015. Shortly, after the sale Janette Company learns distressing news about Michelle’s financial circumstances and because collection is so uncertain and decides to account for the sale using the cost recovery method. Determine the Realized Gross Profit and Interest Income for the year 2014, and Uncovered Cost as of December 31, 2014, respectively. Cost, January 1, 2013 Less: Collections including interest – 2013 Collections including interest – 2014 Uncovered Cost, December 31, 2014

P500,000 241,269 241,269 P 17,462

Activity Based Costing (ABC) and Just in Time Costing System (JIT)

1. Uratex Company manufactures a variety of classroom chairs. Its job-costing system uses an activity-based approach. There are two direct-cost categories (direct materials and direct labor) and three indirect cost pools. The cost pools represent three activity areas at the plant. Manufacturing Activity Area

Materials Handling Cutting Assembly

Budgeted Cost for 2001

P

200,000 2,000,000 2,000,000

Cost Driver Used as Allocation Base

Parts Parts Direct labor hours

Cost-allocation Rate

P

0.25 2.50 25.00

Two styles of chairs were produced in March, the high school chair, and the college chair. Their quantities, direct material costs, and other data for March 2014 are as follows: Units Produced High School Chair College Chair

5,000 100

Direct Material Costs

Number of Parts

P 600,000 25,000

Direct Manufacturing Labor Hours

100,000 3,500

7,500 500

The direct labor rate is P20 per hour. Assume no beginning or ending inventory. What are the unit cost of the high school chair and the college chair? P242.50 and P570.25 respectively

High school chair : Direct Materials Direct labor (7,500 x P20) Overhead: Material handling (100,000 x P0.25) Cutting (100,000 x P2.50) Assembly (7,500 x P25) Total cost Divided by: Units produced Unit Cost

P

P 25,000 250,000 187,500

600,000 150,000

462,500 P 1,212,500 5,000 P 242.50

College chair: Direct Materials Direct Labor (500 x P20) Overhead: Material handling (3,500 x P0.25) Cutting (3,500 x P2.50) Assembly (500 x P25) Total cost Divided by: Units produced Unit costs

P

P

875 8,750 12,500 P P

25,000 10,000

22,125 57,125 100 571.25

2. The Manila Company manufactures and sells packaging machines. It recently used an activitybased approach to refine the job costing system at its Bulacan plant. The resulting job costing system has one direct-cost category (direct materials) and for indirect manufacturing cost pools. These four indirect cost pools and their allocation bases are: Indirect Manufacturing Cost Pool 1. 2. 3. 4.

Material Handling Machining Assembly Inspection

Cost-Allocation Base Component parts Machine-hours Assembly-hours Inspection-hours

Budgeted CostAllocation Base P8 per part P68 per hour P75 per hour P104 per hour

Manila company recently sold 50 can packaging machines to Ilocos Company. Each machine has direct material costs of P3,000 requires 50 component parts, 12 machine-hours, 15 assembly-hours, and 4 inspection hours. Manila Company’s previous costing system had one direct-cost category (direct materials)and one indirect-cost category (manufacturing overhead allocated at the rate of P100 per assemblyhours). In comparison to the traditional costing system used by Manila Company, the total manufacturing cost of the machines sold under the ABC is: P114,850 higher Traditional costing system: Direct Materials (50 x P3,000) Overhead (50 x 15) x P100 Total cost Activity based costing system: Direct Materials Overhead: Material handling (50 x 50) x P8 Machining (50 x 12) x P68 Assembly (50 x 15) x P75 Inspection (50 x 14) x P104 Higher

P P

150,000 75,000 225,000

P P

339,850 114,850

P 150,000 20,000 40,800 56,250 72,800

3. Tamiya Corporation has used a traditional costing system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for its Product X is P275,000. In an attempt to distribute quality control costs more equitable, Tamiya is considering activity-based costing (ABC). The June data shown below have been gathered for Product X.

Activity

5. 6. 7.

Cost Driver

Material handling Type of materials Inspection Number of units Product certification Per order

Cost Rates

P115 per types P1.40 per unit P770 per order

Quantity

12 types 17,500 units 25 orders

What is the monthly quality control assigned to product X using the ABC? P5,255 higher than the traditional costing system

ABC: Material Handling (115 x 12) Inspection (P1.40 x 17,500) Product certification (P770 x 25) Traditional Costing (P275,000 x 14.5%) ABC higher than the traditional costing by

P 1,380 24,500 19,250

P 45,130 39,875 P 5,255

4. Malaysia Inc. accumulated the following cost information for its two products, A and B.

Units Produced Total direct labor hours Set-up cost per batch Batch size Total set-up cost incurred Direct labor hour per unit

Product A 2,000 5,000 P 1,000 100 P 20,000 2

Product B 1,000 20,000 P 2,000 50 P 40,000 1

A traditional costing system would allocate setup costs on the basis of direct labor hours. ABC system would trace costs by spreading the cost per batch over the units in a batch.

An

What is the setup cost per unit of Product A under each costing system. Traditional Costing P4.80

ABC P10

Traditional costing (60,000 ÷ 25,000 x 2 direct labor hours) ABC (1,000 ÷ 100)

P 4.80 P 10.00

5. Believing that its traditional cost system may be providing misleading information. BMW Company is considering an activity based costing approach. It now employs a full cost system and has been applying its manufacturing overhead on the basis of machine hours. The company plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The following data show the manufacturing overhead that is budgeted.

Activity Material Handling Set up costs Machining costs Quality control

Cost Driver No. of parts handled No. of setups Machine hours No. of batches

Budgeted Activity 6,000,000

Budgeted Cost P 720,000

750 30,000 500

315,000 540,000 225,000

Cost, sales, and production data for one of the company’s product for the coming year are as follows: Prime Costs: Direct material cost per unit Direct labor cost per unit, .05 direct hour@P15 per hour Sales and production data: Expected sales Batch size Setups Total parts per finished unit Machine hours required

P4.40 0.75 20,000 units 5,000 units 2 per batch 5 parts 80 machine hours per batch

If the company employs an activity-based costing system, the cost per unit for the product described for the coming year will be: P6.30

Overhead rates: Material Handling (P720,000 ÷ 6,000,000 parts) Setup costs (P315,000 ÷ 750 setups) Machining costs (P540,000 ÷ 30,000 hours) Quality control (P225,000 ÷ 500 batches)

P

0.12 420.00 18.00 450.00

Overhead costs: Material handling (20,000 units x 5 parts) x P0.12 Setup costs activity (20,000 units/ 5,000 x 2 setups) x P420 Machining activity (20,000 units/ 5,000 x 80 hrs.) x P18 Quality Control activity (20,000 units/ 5,000) P450 Total Overhead cost per unit (P22,920/20,000 units) Direct material cost per unit Direct labor cost per unit Total unit cost

P 12,000 3,360 5,760 1,800 P22,920 P P

1.15 4.40 0.75 6.30

6. Edsa Company has materials cost in the June 1 Raw and in Process account of P10,000. Materials received during June of P205,000 and materials cost in June 30 Raw and in Process account of P12,500. The amount to be backflushed from Raw and In process account to Finished Goods account at the end of June would be: P202,500

Raw and in Process inventory, June 1 Materials received during June Raw and in Process inventory, June 30 Amount to be backflushed (raw materials used)

P 10,000 205,000 (12,500) P 202,500

7. The Love Company seeks to streamline the costing system at its Manila plant. It will use a backflush costing system with three trigger points:  Purchase of raw materials  Completion of finished goods  Sale of finished goods There are no beginning inventories. The following data pertain to April 2014: Raw materials purchased Raw materials used Conversion cost incurred Conversion allocated to finished goods Costs transferred to finished goods Costs of goods sold

P880,000 850,000 422,000 400,000 1,250,000 1,190,000

Assume no material variances. The balance of RIP account at the end of April 2014 is: P 30,000

Raw materials purchased (Debit to RIP) Raw materials used (Credit to RIP)

P880,000 850,000

Balance of RIP account

P 30,000

8. The Maganda Manufacturing Company uses a Raw and in process (RIP) Inventory account. At the end of each month, all inventories are counted, their conversion costs components are estimated, and inventory account balances are adjusted accordingly. Raw materials cost is backflushed from RIP account to Finished Goods account. The following data is for the month of August: Beginning balance of RIP account Conversion costs incurred Raw materials purchased Conversion costs allocated Ending balance of RIP account

P 38,700 4,800 680,000 5,300 41,900

The amount of direct materials and conversion costs to be backflushed to finished goods are: P676,800 and P5,300 respectively

RIP account, beginning balance Raw materials purchased RIP account, ending balance Direct materials to be backflushed Conversion costs allocated to be backflushed

P

38,700 680,000 (41,900) P676,800 P

5,300

9. The Action Corporation manufactures electrical meters. For May, there were no beginning inventories of raw materials and no beginning and ending work in process. Action uses a JIT manufacturing system and backflush costing with three trigger points for making entries in the accounting system:  Purchase of raw materials – debited to Raw and in Process account  Completion of finished goods – debited to Finished Goods account  Sale of finished goods Action’s May standard cost per meter are direct materials, P25; and conversion costs, P20. The following data apply to May manufacturing: Raw materials and components purchased P550,000 Conversion costs incurred P440,000 Number of finished units manufactured 21,000 Number of Finished units sold 20,000 The balances of Raw and in Process and Finished Goods inventory accounts at the end of May are: P25,000 and P45,000 respectively Raw materials purchased – Dr. to RIP Direct materials to be backflushed – Cr. To RIP (21,000 x P25) Balance of RIP account Cost of Completed units (21,000 units x P45) Cost of Goods sold (20,000 units x P45)

P550,000 525,000 P 25,000 P945,000 900,000

Balance of Finished Goods inventory account

P 45,000

10. The Malakas Company produces telephones. For June, there were no beginning inventory of raw materials and no beginning and ending work in process. Malakas uses a JIT manufacturing system and backflush costing with two trigger points for making entries in its accounting system:  

Purchase of raw materials Sales of finished goods

Malakas’ standard cost per unit of telephone in June are direct materials, P26; and conversion costs, P15. The following data apply to June production: Raw materials purchased Conversion costs incurred Number of finished units manufactured Number of finished units sold

P5,300,000 3,080,000 200,000 192,000

The balances of Raw and in Process and Cost of Goods Sold accounts at the end of June are: P308,000 and P7,872,000 respectively Raw materials purchased – Dr. to RIP Direct materials to be backflushed (192,000 units x P26) – Cr to RIP Balance of RIP

P5,300,000

Cost of Goods Sold (192,000 units x P41)

P7,872,000

4,992,000 P 308,000

11. Delta Machine Tool Incorporated produces varied product lines without the use of direct labor. An extensive setup procedure is required. Because no single base for a predetermined overhead rate will provide Delta with reliable product cost information, overhead is classified into two cost pools and two predetermined overhead rates are used. For 2014, it is estimated that total overhead costs will consist of P525,000 of overhead related to setups and P900,000 of overhead related to machine usage. Total machine usage is expected to be 3,600 hours for the year, and the total number of setups is expected to be 300. Job RST required parts and materials costing P56,000, 70 hours of machine time, and four setups. What is the cost of Job RST? P80,500 Overhead Rates: Per Machine Hour: P900,000/3,600 machine hours Per Setup: P525,000/300 setups Cost of Job RST: Parts and materials Applied overhead: Machine hours (70 x P250)

P 250 P 1,750

P56,000 P17,500

Setups (4 x P1,750) Total cost of Job RST

7,000

24,500 P80,500

12. The Hudy Manufacturing Company uses a Raw and In Process (RIP) inventory account and expensed all conversion costs to the cost of goods sold account. At the end of each month, all inventories are counted, their conversion cost components are estimated, and inventory account balances are adjusted accordingly. Raw materials cost is backflushed from RIP to finished goods. The following information is for the month of April: Beginning balance of RIP account, including P1,400 conversion cost Raw materials received on credit Ending RIP inventory per physical count, including P1,800 conversion cost estimate

P 31,000 367,000 33,000

What is the amount of materials used to be backflushed from RIP to finished goods: P365,400

Materials in beginning balance of RIP account (P31,000 – P1,400) Add: Materials received on credit Total Less: materials in ending balance of RIP account (P33,000 – P1,800) Materials used to be backflushed from RIP to Finished Goods

P 29,600 367,000 P396,000 31,200 P365,400

13. The HPI manufacturing Company produces only for customer order and most work is shipped within thirty-six hours after the receipt of an order. HPI uses a Raw and In Process (RIP) inventory account and expensed all conversion cost to the cost of goods sold account. At the end of each month, inventory is counted, its conversion cost component is estimated, and the RIP account balance is adjusted accordingly. Raw material cost is backflushed from RIP to Cost of Goods Sold. The following information is for the month of May: Beginning balance of RIP account, including P1,300 of conversion cost Raw materials received on credit Ending RIP inventory per physical count, including P2,100 conversion cost estimate

P 12,300 246,000 12,100

What is the amount of raw materials used to the backflushed from RIP to Cost of Goods Sold? P247,000 Materials in beginning balance of RIP account (P12,300 – P1,300) Add: Raw materials received on credit Total Less: materials in ending balance of RIP account (12,100 – P2,100)

P 11,000 246,000 257,000 10,000

Materials used to be backflushed from RIP to Cost of Goods Sold

P247,000

14. Mike Tuazon general manager of a highly automated coffee production plant in Bulacan has provided the following information for transactions that accured during October. The production plant uses the JIT costing system.     

Raw materials costing P300,000 were purchased. All materials costing P300,000 were requisitioned for production Direct labor costs of P200,000 were incurred Actual factory overhead costs amounted to P995,000 Conversion costs allocated totaled P1,300,000. This includes the direct labor cost.  All units are completed and immediately sold What is the over-allocated or under-allocated conversion costs for the month? P105,000

Actual factory overhead Direct labor costs incurred Total actual conversion costs Conversion costs allocated to production Over-allocated conversion costs

P 995,000 200,000 P1,195,000 1,300,000 P 105,000

15. Using the same information, assuming no adjustment has been made for over-allocated or under-allocated conversion cost, what is the balance of the cost of goods sold account on October 31? P1,600,000 Materials used to be backflushed from RIP to CGS Applied conversion costs to production Cost of Goods Sold balance, October 31

P 300,000 1,300,000 P1,600,000

16. Basilio Company has a cycle time of 3days, uses a RIP account, and changes all conversion costs to Cost of Goods Sold. At the end of each month, all inventories are counted, their conversion costs components are estimated, and inventory account balances are adjusted. Raw material cost is bachflushed from RIP to Finished Goods. The following information is for June: Beginning balance of RIP account, including P3,000 of conversion costs Beginning balance of finished goods account including P10,000 of conversion costs Raw materials received on credit Direct labor cost, P375,000; FOH applied P450,000 Ending RIP inventory per physical count, including P4,500 of conversion costs Ending finished goods inventory per physical count, including P8,750 of conversion costs What is the conversion costs of units sold in June? P824,750

P 29,250 30,000 562,500 825,000 32,000 26,250

Total conversion costs Adjustments: Increase in conversion cost in RIP (P4,500 – P3,000) Decrease in conversion costs in FG (P10,000 – P8,750) Conversion costs of units sold in June

P 825,000 (

1,500)

1,250 P824,750

17. If Mike Company has material cost of P100,000 in the June 1 RIP inventory account, and P12,500 in the June 30 RIP inventory account and the amount of raw materials used backflushed from RIP inventory account on June 30 is P202,500. What is the amount of raw materials purchased on credit for the month of June? P205,000 Raw materials backflushed from RIP account Materials in RIP inventory, June 30 Materials in RIP inventory, June 1 Raw materials purchased on credit during June

P202,500 12,500 ( 10,000) P205,000

18. A company has identified the following overhead costs and cost drivers for the coming year: Overhead Item

Cost Drivers

Budgeted Cost

Machine setup Inspection Material handling Engineering

# of setups # of inspections # of material moves Engineering hours

P 20,000 P 130,000 P 80,000 P 50,000 P 280,000

Bud. Act. Level 200 6,500 8,000 1,000

The following information was collected on three jobs that were completed during the year:

Direct materials Direct labor Units completed Number of setups Number of inspections Number of material moves Engineering hours

Job 101 P5,000 P2,000 100 1 20 30 10

Job 102 P12,000 P 2,000 50 2 10 10 50

Job 103 P8,000 P4,000 200 4 30 50 10

Budgeted direct labor cost was P100,000 and budgeted direct material cost was P280,000 If the company uses activity-based costing, how much overhead cost should be allocated to Job 101? P1,300 ABC allocates overhead costs more precisely than traditional methods. It identifies the activities associated with the incurrence of costs, determines the cost driver for each activity, and allocates cost accordingly. Thus the cost per setup is P100 (P20,000 / 200), per inspection

P20 (P130,000 / 6,500), per material move P10 (P80,000 / 8,000), and per engineering hour P50 (P50,000 / 1,000). The overhead allocated to Job 101 is therefore P1,300 [(1 setup x P100 + (20 inspections x P20) + (30 material moves x P10) + (10 engineering hours x P50)]. 19. Using the same information in No. 18, compute the cost of each unit of Job 102 ActivityBased Costing: P340 The overhead costs for the activities are P100 per setup, P20 per inspection, P10 per material move, and P50 per engineering hour. Thus, overhead allocated to Job 102 is P3,000 [(2 setups x P100) + (10 inspections x P20) + (10 material moves x P10) + (50 engineering hours x P50)]. The production cost of Job 102 is P17,000 (P12,000 DM + P2,000 DL + P3,000 OH), and the cost per unit is P340 (P17,000 / 50).

20. Using the same information in No. 19, assuming the company prices its products at 140% of cost and the company uses Activity-Based Costing the price of each unit of Job 103 would be: P98 The costs per job for the activities are P100 per setup, P20 per inspection, P10 per material move, and P50 per engineering hour. Overhead allocated to Job 103 is P2,000 [(4 setups x P100 + (30 inspections x P20) + (50 material moves x P10) + (10 engineering hours x P50)]. Hence, the production cost of Job 103 is P14,000 (P8,000 DM + P4,000 DL + P2,000 OH), the cost per unit is P70 (P14,000 / 200), and the price is P98 (140% x P70).

FRANCHISE ACCOUNTING 1. On April 1, 2014, Motorola, Inc. entered into a franchise agreement with a local businessman. The franchisee paid P45,000 and gave a P30,000, 8%, 3 year nots payable with interest due annually on March 31. Motorola recorded the P75,000 initial franchise fee as revenue on April 1, 2014. On December 30, 2014, the franchisee decided not to open the outlet under Motorola’s name. Motorola cancelled the franchisee’s note and refunded P24,000 less accrued interest on the note, of the P45,000 paid on April 1, what entry should Motorola make on December 30, 2014? Revenue from Franchise Fees 75,000 Interest Income 1,800 Cash 22,200 Notes Receivable 30,000 Revenue from Repossessed Franchise 21,000 Since initial franchise fee of P75,000 was initially recognized as revenue on April 1, then to cancel the franchise, simply debit the Revenue account. Interest Income: P30,000 x 8% x 9/12 = P1,800 Cash paid: P24,000 – P1,800 = P22,200

2.

On January 1, 2014, Brownie Delight, Inc. entered into a franchise agreement with a company allowing the company to do business under Brownie Delight’s name. Brownie Delights had performed substantially all required services by January 1, 2014, and the franchisee paid the initial franchise fee of P70,000 in full on that date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of P6,000 annualy, of wich 20% must be spent on advertising by Brownie Delight. What entry should Brownie Delight make on January 1, 2014 to record the receipt of the initial franchise fee and the continuing franchise fee for 2014? Cash 76,000 Franchise Fee Revenue 70,000 Revenue from Continuing Franchise Fee 4,800 Unearned Franchise Fee 1,200 Initial Franchise Fee of P70,000: CASH YES YES P70,000 REVENUE

Services Period of Refund Status

3.

On September 1, 2014, Cindy Company entered into franchise agreement with two franchisees. The agreements required an initial fee payment of P700,000 plus four P300,000 payments due every four (4) months, the first payment due December 31, 2014. The market interest rate is 12%. The initial deposit is refundable until substantial performance has been completed. The following table describes each agreement:

Franchisee A B

Probability of Full Collection Likely Doubtful

Services Performed by Franchisor Dec. 31, 2014 Substantially 25%

Total Costs Incurred to Dec. 31, 2014 P700,000 N/A

The present and future value tables for four (4) periods were as follows: Present value of P1 Present value of an ordinary annuity of P1 Future value of P1 Future value of an ordinary annuity of P1

0.8548 3.6299 1.1699 4.2465

What amount of net income to be reported in 2014, assuming P1,000,000 was received from each franchisee during the year: Franchisee A – P1,132,529; Franchisee B – P43,559

Franchise A: Since there is already a substantial performance of the services it also follows that the period of refund has been expired and the note is likely (reasonably assured) to be collected, therefore, the full initial franchise fee is recognized as revenue.

The above circumstances imply that the full accrual method could be used: Franchise Revenue: Downpayment PV of installment: P300,000 x 3.6299 Total Less: Cost of Franchise Gross profit Add: Interest Income (P1,088,970 x 4%) Net Income

P

700,000 1,088,970 P1,788,970 700,000 P1, 088,970 43,559 P1,132,529

Franchise B: Since there is no substantial performance of services rendered it also follows that the period of refund has not yet been expired and at the same time there is doubtful of collection. Therefore, no initial franchise fee is recognized as revenue in 2014. However, because the forst payment of P300,000 was made, interest income of P43,599 would be recognized (P1,088,970 x 4%)

4.

Saisaki Co. grants a franchise to Mity for an initial franchise fee of P1,000,000. The agreement provides that Saisaki has the option within one year to acquire franchisee’s business, and it seems certain that Saisaki will exercise this option. On Saisaki’s books, how should the initial fee be recorded? reduction inSaisaki investment when the option is exercised.

5.

Deferred and treated as

SSR Restaurant Inc., sold a fastfood restaurant franchise to Shar. The sale agreement, signed on January 2, 2014, called for a P30,000 down payment plus two P10,000 annual payments, representing the value of initial purchase services rendered by SSR Restaurant. In addition, the agreement required the franchisee to pay 5% of its gross revenue to the franchisor; this was deemed sufficient to cover the cost and provide a reasonable profit margin on counting franchise services to be performed by SSR Restaurant. The restaurant opened early in 2014, and its sales for the year amounted to P500,000. Assuming a 10% interest rate is appropriate, SSR Restaurant’s 2014 total revenue will be: (the present value of an annuity of P1 at 10% for two periods in 1.7355) P74,090 Franchise Revenue: Initial franchise fee: Downpayment PV of Installment (P10,000 x 1.7355) Continuing Franchise Fee: 5% x P500,000 Total Franchise Revenue Add: Interest Income (10% x P17,355) Total Revenue

P30,000 17,355

P47,355

25,000 P72,355 1,735 P74,090

6.

DJ Builders’ Enterprises, a franchisor, charges franchisees a “franchise fee: of P500,000. Of this amount, a nonrefundable P200,000 is paid upon the signing of the contract with the balance payable in three equal installments after each year thereafter. DJ Builders’ will assist in locating a suitable business site, conduct a market study, oversee the construction of facilities, and provide initial training for employees. On December 1, 2013, DJ Builders’ signed a franchising agreement for the U-belt are. By the end of 2013, it was determined that the substantial performance of the initial services had cost DJ Builders’ a total of P150,000 and that collection of the balance of the franchise fee has been reasonably assured. In its 2013 income statement, DJ Builders’ should repot franchise revenue and net income of P500,000 and P350,000 respectively. Franchise Revenue Less: Cost of Franchise Net income

7.

P 500,000 150,000 P 350,000

At the beginning of the year, AJD got the franchise of Tony’s, a known steak house of upscale patronage. The franchise agreement required a P500,000 franchise fee payable P100,000 upon signing of the franchise and the balance in four annual installments starting the end of the current year. At present value using 12% as discount rate, the four installments would approximate P199,650. The fees once paid are refundable. The franchise may be cancelled subject to the provisions of the agreement. Should there be unpaid franchise fee attributed to the balance of main fee, same would become due and demandable upon cancellation. Further, the franchisor is entitled to a 5% fee on gross sales payable monthly within the first ten days of the following month. The Credit Investigation Bureau rated AJD as AAA credit rating. The balance of the franchise fee was guaranteed by a commercial bank. The first year of operations yielded gross sales of P9,000,000. Tony’s earned franchise fees for the first year is: P450,000 Since the initial franchise fee is refundable, therefore, no amount from the P500,000 initial franchise fee be considered as revenue. The only revenue to be recognized is continuing franchise fee of P450,000 (5% x P9,000,000).

8.

Ruby Fruits Corporation enters into a franchise agreement with Rodel on June 1, 2011. As per agreement, Rodel is to pay Ruby an up-front franchise fee of P1,000,000 and subsequent annual franchise fees of P50,000 over the next four years. Cost of initial franchise services rendered by Ruby during the year is P250,000 and estimates the cost of subsequent annual services to be P100,000. Ruby expects a profit of 20% on subsequent services. Rodel paid the annual fee for 2012 and Ruby rendered annual services for that year. In its December 31, 2012 income statement, the realized franchise revenue to be reported by Ruby is: P50,000

Upon receipt of Continuing Franchise Fee for 2011: Cash

50,000 Revenue from CFF Unearned CFF (50% x P50,000) CFF (P50,000 x 4) Less: Costs Profit

25,000 25,000

P200,000 100,000 50% P .

When costs of CFF had been rendered (with 20% markup): Unearned CFF 25,000 Revenue from CFF

25,000

Cost of CFF [P25,000 – (P25,000 x .80]) 20,000 Cash or Accounts payable, etc. Unearned CFF P25,000 100% Costs of CFF 20,000 80% Profit P . 20%

20,000

Therefore, at the end of 2012, the realized revenue amounted to P50,000: Revenue from CFF (upon receipt of cash) Revenue from CFF (when continuing services had been rendered) Total realized franchise revenue

9.

P25,000 25,000 P50,000

Nena’s Lechon, Inc. franchiser, entered into franchise agreement with Aling Nena, franchisee. On Marche 31, 2014. The total franchise fee is P500,000, of which P100,000 is payable upon signing and the balance in four equal annual installments. The downpayment is refundable n the event the franchisor fails to render services and none thus far had been rendered. When Nena’s prepares its financial statements on March 31, 2014, the franchise fee revenue to be reported is: P 0 The franchise fee revenue should be zero, since, no substantial performance of service had been performed (and the downpayment is still refundable).

10.

Ferragamo’s entered into a franchise agreement with Rusty. As per agreement on July 1, 2014, Rusty is to pay Ferragamo an up-front franchise fee of P1,000,000 and subsequent annual franchise fees of P50,000 over the next four years. Cost of initial franchise services rendered by Ferragamo’s during the year is P250,000 which is substantial, and is estimates the cost of subsequent annual services to be P10,000. Rusty paid the annual franchises fee for 2015, and Ferragamo’s rendered the services for the year. In its December 31, 2015 income statement, the amount of realized franchise fee revenue to be reported by Ferragamo’s is: P50,000

In 2014, the initial franchise fee of P1,000,000 is recognized as revenue. Therefore, in 2015 the only amount of revenue to be recognized is the P50,000, the continuing franchisee fee.

11.

On May 31, 2013 , Kenny received P200,000 from Rogers representing the down payment on the franchise agreement signed on that date. Rogers issued promissory notes for the balance of P1,000,000, payable in four equal semi-annual installments. Franchise services are substantially completed by Kenny on semi-annual installment due on November 20, 2013 at an aggregate cost of P900,000. The first semi-annual installment due on November 30, 2013 was appropriately paid by Rogers. Accordingly, Kenny uses the accrual method in recording franchise revenue. In its December 31, 2013 financial statements, how much would Kenny report as deferred franchise revenue for the year? P 0 Substantial performance of the services had been rendered, the period of refund has been expired (problem is silent), and the collectability of the note is reasonably assured (problem is silent). Therefore, the initial franchisee fee is considered revenue and no amount is allotted to unearned franchisee revenue.

12.

Amy, Inc. enters into an agreement with Ronald’s Co., clothing the later with full authority to operate as its franchise for a period of ten years. An initial franchise fee of P275,000, among others, was stipulated in the contract and was promptly paid during the year 2013. Assuming that Amy was able to perform the initial services during 2013, what is the franchise revenue to be recognized in its year-end income statement? P275,000

13.

On September 31, 2013, Criselda’s Inc. received from Ambo P550,000 representing franchise fee. Franchise services were immediately started by Criselda’s and these were completed on October 31, 2013 at cost amounting to P330,000. The franchise fee revenue to be reported by Criselda’s in its October 31, 2013 income statement is: P550,000 Substantial performance had been rendered in 2013 and the remaining conditions are assumed to have been met. Therefore, P550,000 is recognized as franchise fee revenue. The cost P330,000 is not deducted to compute the franchise fee revenue because the requirement is franchise revenue and not gross profit or net income.

14.

PJD Enterprises, a franchisor, charges franchisees a franchise fee of P500,000. Of this amount, a nonrefundable P200,000 is paid upon the signing of the contract with the balance payable in three equal installments after each year thereafter starting 2013. PJD will assist in locating a suitable business site conduct a market study, oversee the construction of facilities, and provide initial training for employees. On October 1, 2013, PJD entered into a franchising agreement to cover an entirely new untested area. By December 31, 2013, PJD had substantially completed and rendered appropriate services at a total cost of P150,000 but, somehow, has raised some doubts on the collectability of the balance of the franchise fee. In its 2013 income statement, PJD Enterprises should recognize profit of: P350,000

Collection in 2013 Multiplied by: Gross profit rate [100% - (P150,000 / P500,000)] Realized gross profit in 2013

15.

P200,000 70% P140,000

On January 3, 2013, PP Services, Inc. signed an agreement authorizing CC Company to operate as a franchisee over a 20-year period for an initial franchise fee of P50,000 received when the agreement was signed. CC commenced operation on July 1, 2013, at which date all of the initial services required of PP had been performed. The agreement also provides that CC must pay annually to PP a continuing franchise fee equal to 5% of the revenue from the franchise. CC’s franchise revenue for 2013 was P400,000. For the year ended December 31, 2013, how much should PP record as revenue from franchise fees in respect of CC’s franchise? P70,000 Initial franchise fee Continuing franchise fee (5% x P400,000) Revenue from franchise

16.

P50,000 20,000 P70,000

On December 31, 2013, RR Inc. authorized Fay to operate as a franchisee for an initial franchise fee of P75,000. Of this amount, P30,000 was received upon signing the agreement, and the balance, represented by a note, is due in three annual payments of P15,000 each, beginning December 31, 2014. The present value of December 31, 2013 of the three annual payments appropriately discounted is P36,000. According to the agreements, the nonrefundable down payment represents a fair measure of the services already performed by RR, however, substantial future services are required of RR. Collectability of the note is reasonably certain. On December 31, 2013. RR should record unearned franchise fees in respect of the Fay franchise of P36,000 The P30,000 down payment received by RR Inc. represents the earned franchise fee revenue in 2013 since the problem already stated that the nonrefundable downpayment represents a fair measure of the services already performed by RR, Inc. the present value of the three annual payments to be received in the future of P36,000, should be reported as of December 31, 2013 as unearned franchise fees: Incidentally, the entry would be: Cash 30,000 Notes Receivable 45,000 Unearned interest income Franchise revenue Unearned franchise revenue

17.

9,000 30,000 36,000

Ruby Co. charges new franchisees an initial fee of P2,500,000. Of this amount, P1,000,000 is payable in cash when the agreement is signed, and the remainder is to be paid in three equal annual installments which are evidenced by interest-bearing promissory notes. In consideration therefore, Ruby Co. will assist in locating the business site, conduct a market study to estimate earnings potentials, supervise construction of a building, and provide initial training to employees.

On December 3, 2013, Ruby Co. entered into a franchising agreement with Jade, Inc. by the end of the year, Ruby Co. has completed about 25% of the initial services at a cost of P150,000 and it has ascertained that collection of the notes is reasonably assured. For 2013, Ruby Co. should recognized franchise revenue of: P 0 Since 25% completion of initial services is not substantial, therefore, the P2,500,000 initial franchise fee lacks one condition in order to be recognized as revenue.

18.

Shake, Inc. granted a franchise to Drake for the greenbelt area. Drake was to pay a franchise fee of P100,000 payable in five equal annual installments starting with the payment upon signing of the agreement. The franchisee was to pay monthly 1% of gross sales of the preceding month. Should the operation of the outlet prove to be unprofitable in the first year of operations the franchise fee may be cancelled with whatever obligation owing Shake, Inc. in connection with the P100,000 franchise fee, waived. On the same year of granting the initial franchise fee, the first year operation generated a gross sales of P500,000 which is considered to be profitable operations. For the first year, Shake, Inc. earned franchise fee of: P105,000 Initial franchise fee Continuing franchise fee (1% x P500,000)

19.

P100,000 5,000 P105,000

Tony awarded its Cebu franchise to Jara Co. for a total fee of P100,000. Of the said amount, P50,000 was payable upon the signing of the agreement and the balance in two equal annual payments. The contact provided that in the event the first year would result in an operating loss, the franchising agreement may be cancelled. No services had so far been rendered. The entry to record the granting of the Cebu franchise by Tony to Jara Co was as follows: Obviously, at the time of signing the contract, substantial performance of services has not yet been rendered, unless otherwise stated. So the P100,000 initial franchise fee is not a revenue but unearned franchise revenue.

20. Swabe, Inc. charges an initial franchise fee of P500,000 for the right to operate as a franchise of Swabe. Of this amount, P100,000 is payable when the agreement was signed and the balance is payable in a noninterest bearing note in five annual payments of P80,000 each. In return for the initial franchise fee, the franchisor will help locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide the book keeping services. The credit rating of the franchise indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P80,000 each discounted at 8% is P319,416.80. the discount represents the interest revenue to be accrued by the franchisor over the payment period. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectability of the note is reasonably assured and substantial performance has accrued: EARNED P419,416.80

Cash Note at present value

P100,000.00 319,416.80 P419,316.80

CONSTRUCTION ACCOUNTING 1. Jenny Construction Co. has two projects for which it reported, as of December 31, 2013 the following information: In thousand pesos: Contract price 2011: Cost incurred Percent completed 2012: Cost incurred Percent completed

Proj. A P4,800 P3,400 75% P1,250 25%

Proj.B P860

P140 15%

Using percentage-of-completion method of revenue recognition, gross profit on ProjectA to be recognized in 2013 would be: P200,000 Contract Price Multiplied by: Percentage-of-completion – output Recognized Revenue to date Less: Recognized Revenue in prior year Recognized Revenue in current year, 2013 Less: Cost incurred each year (for 2013 only) Recognized gross profit in current year, 2013

P4,800,000 75% P3,600,000 0 P3,600,000 3,400,000 P 200,000

2. Lovely Construction Co. was engaged on October 1, 2013 to construct a building for a contract price of P8,400,000 payable in 5 installments. 1/5 of the contract price was to be paid upod completion of each quarter of the work, the final payment being due within 10 days after acceptance of the completed project. By December 29, 2013, 3/4 of the building had been completed whereupon the third billing was made in accordance with the term of the contract (cash had been received on the previous billings). During 2013, a total of P4,200,000 had been disbursed by Lovely for costs incurred and, at year-end, outstanding accounts payable for materials purchases totaled P1,000,000. Lovely expected that an additional P1,800,000 would be required to complete the project. Using the percentage-of-completion method on an output basis proportion method, the gross profit to be recognized in the 2013 income state would be: P1,050,000

Contract Price Less: Total Estimated Costs:

P8,400,000

Costs Incurred to date (P4,200,000 + P1,000,000) Add: Estimated Costs to complete Estimated gross profit Multiplied by: Percentage-of-completion – output Recognized gross profit to date Less: Recognized gross profit in prior year Recognized gross profit in current year, 2013

P5,200,000 1,800,000

7,000,000 P1,400,000 3/4 P1,050,000 -0. P1,050,000

3. Using the same information in No.2, percentage-of-completion output method-actual costs approach, the gross profit to be recognized in 2013 income statement would be: P1,100,000 Contract Price Multiplied by: Percentage-of-completion – output Recognized revenue to date Less: Recognized Revenue in prior year Recognized revenue in current year, 2013 Less: Cost incurred each year (for 2013) Recognized gross profit in current year, 2013

P8,400,000 3/4 P6,300,000 -0- . P6,300,000 5,200,000 P1,100,000

4. On September 30, 2013, Jojo Co, Inc was awarded the contract to build a 1,000-room hotel for 120 million. Among others, the parties agreed the following:   

10% mobilization fee (deductible from “final billing”) payable within ten days from the signing of the contract; Retention of 10% on all billings (to be paid with the final billing, upon completion and acceptance of the project); and Progress billings are to be paid within 2 weeks upon acceptance.

By the end of 2013, the company had presented one progress billing, corresponding to 10% completion, which was evaluated and accepted by the client on December 29, 2013 for payment in January of the next year. In 2013, assuming use of the percentage-of-completion method of accounting. Jojo Co., Inc. received cash a total fee of: P12,000,000 Contract Price Multiplied by: Mobilization Fee Cash Received

P120,000,000 10% P 12,000,000

5. Cocaine Builders, Inc. employs the cost-to-cost method in determining the percentage of completion for revenue recognition. the company’s records show the following information on a recently completed project for a contract price of P5,000,000.

Cost incurred to date Gross profit (loss)

2010 P900,000 100,000

2011 P2,550,000 350,000

2012 ? (50,000)

Compute the (1) estimated costs to complete the project at December 31, 2011 and (2) the actual cost incurred during the year 2012 (1) 1,700,000; (2) 2,050,000 Estimated cost to complete the project at December 31, 2012: Recognized gross profit in 2011 Add: Recognized gross profit in prior year – 2010 Recognized gross profit to date in 2011 (cumulative) Add: Costs incurred to date in 2011 (cumulative) Recognized revenue to date (cumulative) Divided by: Contract Price Percentage of completion

P 350,000 100,000 P 450,000 2,550,000 P3,000,000 P5,000,000 60%

Therefore, the traditional formula to compute the % of completion would be as follows: Cost Incurred to date - 2011 % of Completion = ------------------------------------------------Total Estimated Cost – 2011

60%

=

T. E C =

P2,550,000 --------------------T. E. C. P4,250,000

Total Estimated Costs – 2011 Less: Cost to date – 2011 Cost incurred in 2011

Cost incurred in 2012: Contract Price Less: Total Estimated gross profit (P100,000 + P350,000 – P50,000) Total estimated cost (or total actual cost) Less: Cost incurred to date – 2011 (cumulative) Cost incurred in 2011

P4,250,000 2,550,000 P1,700,000

P5,000,000 400,000 P4,600,000 2,550,000 P2,050,000

6. In 2011, AJD Construction Co. was contracted to build Village Company’s private road network for P100 million. The project was estimated to be completed in two years, and the contract provided for:   

5% mobilization fee (to be conducted from the last billing) payable within 15 days after the signing of the contract, 10% retention provision on all billings, and Payment of progress billings within 10 days from acceptance.

AJD, which uses the percentage-of completion method of accounting, estimated a 25% gross margin on the project. By the end of 2011, AJD had presented progress billings corresponding to 50% completion all of the progress billings presented in 2011 was accepted, except the last one for 10% which was accepted on January 2, 1012 with the exception of one bill for 8% which was due on January 7, 2012, all of the billings accepted in 2011 were settled payments made by Village Company in 2011 amounted to: P33,800,000 Mobilization Fee: P100,000,000 x 5% Collections on Progress Billings: Contract Price Multiplied by: Progress Billings (net of late billings of 10% and 8%) Billings, net Multiplied by: Collection % (Net of 10% contract retention) Collections / Payments

P5,000,000 P100,000,000 32% P 32,000,000 90%

28,800,000 P33,800,000

8. In 2011, Joey Builders was contracted to build the private road network of Althea Subdivision for P100 million. The project was expected to be finished in 2 years, and the contract provided for: o o o

5% mobilization fee (to be deducted from the last billing), payable within 15 days from the contract signing. A retention provision of 10% on all billings, payable with the final bill after the completed project is accepted. Payment of progress billings within 7 days from acceptance.

Joey Builders, which uses the percentage-of-completion method of accounting for income, estimated a 25% gross margin on the project. By the end of the year, Joey Builders had presented progress billings to Althea corresponding to 50% completion. Althea accepted all the bills presented, except one for 10% which was accepted o January 5 of next year. With the exception of the second to the last billing for 8% which was due January 3 of next year, all accepted billings were settled. In 2011, Joey Builders realized gross profit from the project the amount of: P12,500,000 Contract Price Multiplied by: Gross Profit Rate Estimated gross profit at the entire contract Multiplied by: Percentage of Completion for first year Realized Gross Profit in current year

P100,000,000 25% P 25,000,000 50% P 12,500,000

9. Dasma Corporation entered into a construction agreement in 2012 that called for a contract price of P9,600,000. At the beginning of 2013, a change order increased the initial contract price by P480,000. The company uses the percentage-of completion basis of revenue recognition. in relation to the project, the following are obtained;

Cost incurred to date

2012 P4,920,000

2013 P8,640,000

Estimated costs to complete Billings made Collection made

4,920,000 5,280,000 4,380,000

2,160,000 8,520,000 7,500,000

What gross profit (loss) should Dasma Corp. recognize in 2013?

Contract price

2011 P9,600,000

2012 P10,080,000

Less: Total Estimated Costs: Costs incurred to date Add: Estimated costs to complete Total estimated costs Estimated gross profit Multiplied by: percentage of completion Recognized gross profit to date Less: Recognized gross profit in prior year Recognized gross profit each year

P4,920,000 4,920,000 P9,840,000 P(240,000) 100% P(240,000) _________ P(240,000)

P 8,640,000 2,160,000 P10,800,000 P( 720,000) 100% P( 720,000) ( 240,000) P( 480,000)

10. During 2011, Rizza started work on a P3,000,000 fixed-price construction contract. Any costs incurred are expected to be recoverable. The accounting records disclosed the following date for the year ended December 31, 2011; Costs incurred Estimated cost to complete Progress billings

P 930,000 2,170,000 1,100,000

How much should Rizza have recognized in 2011? Contract Price Less: Total Estimated Costs P 930,000 Cost incurred to date 2,170,000 Add: Estimated costs to complete

P3,000,000 3,100,000 P( 100,000)

11. Daryl Construction Company has consistently used the percentage-of-completion method of recognizing income. During 2011, Daryl entered into a fixed-price contract to construct an office building for P10,000,000. Information relating to the contract is as follows:

Percentage of completion Estimated total cost at completion Income recognized (cumulative)

12/31/2011 20% P7,500,000 500,000

12/31/2012 60% P8,000,000 1,200,000

Contract costs incurred during 2012 were P3,300,000 Cost incurred to date, 12/31/2011 P7,500,000 x 20%

P1,500,000

Less: Cost incurred to date, 12/31/2012: P8,000,000 x 60% Cost incurred during 2012

4,800,000 P3,300,000

12. The October 1, 2010, Neo Corp. enters a contract to build a sport arena which it estimated would cost P3,120,000. Neo bills its clients at cost plus 20% and recognized construction revenue on a percentage-of-completion basis. Data on this project for 2010, 2011 and 2012 follow:

2010 2011 2012

Est’d Costs to Complete P2,054,000 1,315,600 -

Costs Incurred P 546,000 998,400 1,575,600

Neo Corps.’ Gross profit on the project for 2012 is P146.640

Contract Price (P3,120,000 x 120%) Total Estimated Costs: Cost incurred each year Add: Costs incurred in prior year Costs incurred to date Add: Estimated costs to complete Total estimated costs Estimated gross profit Multiplied by: percentage of completion Recognized gross profit to date Less: Recognized gross profit in prior year Recognized gross profit each year

2011 P3,744,000

2012 P3,744,000

P 998,400 546,000 P1,544,400 1,315,600 P2,860,000 884,000 54% P 477,360 - . P 477,360

P1,575,600 1,544,400 P3,120,000 _________ P3,120,000 P 624,000 100% P 624,000 477,360 P 146,640

Less:

13. The Matibay Construction Corporation uses the percentage-of-completion method of recognizing income from long-term construction contracts. In 2010 Matibay entered into a fixedprice contract to construct a bridge for P30,000,000. Estimated costs to complete the construction and contract cost incurred up to 2010 were as follows:

As of December 31, 2010 As of December 31, 2011 As of December 31, 2012

Cumulative costs incurred P 2,000,000 11,000,000 20,000,000

Estimated costs to complete P16,000,000 11,000,000 4,000,000

What is the percentage of completion during the year 2012? 33 1/3%

Costs incurred to date Add: Estimated costs to complete Total estimated cost

P11,000,000 P20,000,000 11,000,000 4,000,000 P22,000,000 P24,000,000

Percentage of completion Cost incurred to date / TEC

50%

83 ½ %

Percentage of completion as of 12/31/2012 Less: Percentage of completion as of 12/31/2011 Percentage of completion in 2012

83 ½ % 50% 33 1/3 %

14. THE Kirby Construction Company has consistently used the cost recovery method – construction accounting method of recognizing income (zero-profit approach) In 2011, it began a construction project to erect a building for P3,000,000. The project was completed during 2012, under this method, the accounting records disclosed the following: (ANY COST INCURRD ARE EXPECTED TO BE RECOVERABLE)

Progress billing during the year Costs incurred during the year Collection on billings during the year Estimated costs to complete the project

P1,100,000 900,000 900,000 1,800,000

P1,900,000 1,800,000 2,100,000 -

The company should recognized revenue for the year amount to;

Recognized Revenue Less: Cost of long-term construction contract Recognized gross profit each year

P900,000 900,000 P 0

P2,100,000 1,800,000 P 300,000

15. The following date relate to a construction job started by Jay Company during 2011: Total contract price Actual costs during 2011 Estimated remaining costs Billed to customer during 2011 Received from customer during 2011

P100,000 20,000 40,000 30,000 20,000

Any costs incurred are expected to be recoverable. Under the cost recovery methodconstruction accounting (zerp-profit approach). What amount should Jay Company recognize as gross profit for 2011: P0 Recognized Revenue in 2011 Less; Cost of long-term construction (cost incurred in 2011) Recognized gross profit in current year – 2011

P20,000 20,000 0

16. During 2011, Mitch Corporation started a construction job with a total contract price of P600,000. Any costs incurred are expected to be recoverable. The job was completed on December 15, 2012. Additional data are as follows;

Actual costs incurred Estimated remaining costs Billed to customer Received from customer

2011 P225,000 225,000 240,000 225,000

2012 255,000 360,000 375,000

Under the cost recovery method of construction accounting, what amount should Mitch recognize as gross profit for 2011 and 2012/

Recognized revenue Less: Cost of long-term construction contract Recognized gross profit in current year

2011 P225,000 225,000 P 0

2012 P375,000 255,000 P120,000

17. Aibee Construction Company has consistently used the percentage-of-completion method. On January 10, 2011, Aibee began work on a P6,000,000 construction contract. At the inception date, the estimated cost of construction was P4,500,000. The following data relate to the progress of the contract: Income recognized at 12/31/2011 Cost incurred 1/10/2011 through 12/31/2012 Estimated cost to complete at 12/31/2012

600,000 3,600,000 1,200,000

How much income should Aibee recognize for the year ended December 31, 2012? 300,000 Contract Price Less: Total Estimated Costs: Costs incurred to 1/10/11 – 12/31/12 Add: Estimated costs to complete Estimated gross profit Multiplied by: percentage-of-completion Recognized gross profit to date Less: Recognized gross profit in prior year Recognized gross profit each year – 2012

6,000,000

3,600,000 1,200,000

4,800,000 1,200,000 36/48 900,000 600,000 300,000

18. MM Construction Company has consistently used the percentage-of-completion method of recognizing income. During 2011, MM started work on a P3,000,000 construction contract which was completed in 2012. The accounting records provided the following data:

Progress billings Costs incurred each year Collections Estimated cost to complete

1,100,000 900,000 700,000 1,800,000

1,900,000 1,800,000 2,300,000

How much income should MM have recognized in 2012? 200,000 Contract Price

3,000,000

3,000,000

Less: Total Estimated Costs: Costs incurred each year Add: Cost incurred each in prior years Cost incurred to date Add: Estimated costs to complete Total estimated costs Estimated gross profit Multiplied by: percentage-of-completion Recognized gross profit to date Less: Recognized gross profit in prior year Recognized gross profit each year

900,000 ________ 900,000 1,800,000 2,700,000 300,000 9/27 100,000 ________ 100,000

1,800,000 900,000 2,700,000 ________ 2,700,000 300,000 100% 300,000 100,000 200,000

19. Atom Inc. has entered into a very profitable fixed price contract for constructing a high-rise building over a period of three years. It incurs the following costs relating to the contract during the first year:      

Cost of material = 2.5 million Site labor cost = 2.0 million Agreed administrative costs as per contract to be reimbursed by the customer = 1 million Depreciation of the plant used for the construction = 0.05 million Marketing costs for selling apartments, when they are ready = 1,0 million

Total estimated cost of the project = 18 million The percentage of completion of this contract at the year-end is: 33 1/3% (=6.0/18.0) Costs incurred to date: Materials Direct labor Overhead Administrative costs reimbursable Depreciation during construction Divided by: Total estimated costs Percentage of completion

2,500,000 2,000,000 1,000,000 500,000

6,000,000 18,000,000 33 1/3 %

20. IOM Builders, Inc. has consistently used the percentage-of-completion method of accounting for construction-type contracts. During 2011, IOM started work on a P9,000,000 fixed-price construction that was completed in 2012, IOM accounting records disclosed the following:

Cumulative contract costs incurred Estimated total costs at completion

12/31/2011 3,900,000 7,800,000

12/31/2012 6,300,000 8,100,000

How much income would IOM have recognized on this contract for the year ended December 31, 2012? 100,000

Contract Price Less: Total Estimated Costs: Estimated gross profit Multiplied by: percentage-of-completion Recognized gross profit to date Less: Recognized gross profit in prior year Recognized gross profit each year – 2012

9,000,000 7,800,000 1,200,000 39/78 600,000 ________ 600,000

9,000,000 8,100,000 900,000 63/81 700,000 600,000 100,000

CORPORATE LIQUIDATION

1. Philippine National Bank holds a P500,000 note secured by a building owned by Luigi Software, which has a filled for bankruptcy. If the property has a book value of P600,000 and a fair market value of P450,000, what is the best way to describe the notes held by Philippine National Bank? The bank has a. b. c. d.

A secured claim of P500,000. An unsecured claim of P500,000. A secured claim of P450,000 and unsecured claim of P50,000. A secured claim of P50,000 and unsecured claim of P50,000.

Answer: c The 500,000 notes payable to PNB is considered as partially secured liabilities wherein a property with a fair market value of P450,000 is used as collateral. Therefore, PNB is secured to receive P450,000 because of the property while the balance of P50,000 of the notes is unsecured.

2. A and B Inc. owes the Xylo Corporation P60,000 on account, which is secured by accounts receivable with a book value of P50,000. The unsecured portion is considered a claim under the bankruptcy law, A and B has filed for bankruptcy. Its statement of affairs lists the accounts receivable securing the Xylo account with an estimated realizable value of P45,000. If the dividend to general unsecured creditors is 80%, how much can Xylo expect to receive? a. P60,000 b. 58,000

c. P57,000 d. 48,000

Answer: c The P60,000 owes to Xylo Corp. is considered a partially secured liabilities. Accounts receivable with a realizable value of P45,000 is pledge to secure the

liability. Therefore, the estimated amount to be paid to Xylo Corp. would be as follows: Accounts Receivable at net realizable value Add: Portion of free assets used to pay the unsecured amount: (P60,000 – P45,000) x .80 Estimated amount to be paid to partially secured Liabilities

P45,000 12,000 P57,000

3. P Corporation is a parent, having purchased 60% of S Company’s common stock at par value for P600,000. S Company is in financial difficulty. The parent granted an unsecured loan of P200,000 to the subsidiary. An accounting statement of affairs for S Company shows a dividend of 30%. P Corporation can expect to receive on the loan of appropriately: a. P120,000 b. 60,000

c. P36,000 d. 0

Answer: b Since the P Corp. expect to recover P.30 for every P1 liability. Therefore, the unsecured liability of S Company that would be paid were as follows: Unsecured loan Multiplied by: Expected recovery per peso of unsecured creditors

P200,000 30% P 60,000

4. P Corporation is a parent, having purchased 60% of S Company’s common stock at par value for P 600,000. S Company is in financial difficulty. The parent granted as unsecured loan of P 200,000 to the subsidiary. An accounting statement of affairs for S Company shows a dividend of 30%. P Corporation can expect to receive payment for its investment in S Company of approximately: a. P600,000 b. 180,000

c. P108,000 d. 0

Answer: d This problem is similar to No. 3 except that the question involves payment for its investment in S Company. Remember that receivables and payables transacted between parent and subsidiary still exist on their separate balance sheet. So, when collection or payment is made, it will still be journalized in the usual manner, like an ordinary collection or payment of an account which does not affect at all investment in subsidiary account.

5. Kent Inc. has forced into bankruptcy and has begun to liquidate. Unsecured claims will be paid at the rate of 40 cents on the peso. Apex Co. holds a non-interest bearing note receivable from Kent in the amount of P100,000, collateralized by machinery with a liquidation value of P25,000. The total amount to be realized by Apex on this note receivable is: a. P25,000 b. 40,000

c. P55,000 d. 65,000

Answer: c Apex Co. has a secured claim for the P25,000 liquidation value of the machinery. The remaining P75,000 (P100,000 note – P25,000) is an unsecured claim. Given that unsecured claims will be paid at the rate of P.40 cents on the peso, therefore, Apex will receive: Machinery at liquidation value Add: Portion of free assets used to pay the unsecured amount: (P100,000 – P25,000) x 40%

P25,000 30,000 P55,000

6. Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the peso. Hale holds a P30,000 non-interest bearing note receivable from Seco collateralized by an asset with a book value of P35,000 and a liquidation value of P5,000. The amount to be realized by Hale on this note is a. P5,000 b. 12,000

c. P15,000 d. 17,000

Answer: c Claims of secured creditors be satisfied before any unsecured claims are paid. Hale is a secured creditor in the amount of P5,000 (the liquidation value of the collateral). The remainder of Hale’s claim (P30,000 – P5,000 = P25,000) is an unsecured claim, because it is not secured by any collateral. Therefore, Hale, will receive a total of P15,000 on this note: Asset at liquidation value Add: Portion free assets is used to pay the unsecured amount: (P30,000 – P5,000) x .40

P 5,000 10,000 P 15,000

7. Blueprint Inc. signed a note payable to its bank for P10,000. Accrued interest on the note on February 28, 2004 amounts to P250. The note is secured by inventory with a book value of P12,000. The inventory is sold for P8,000 and unsecured creditors receive 30 percent of their claims. The bank should receive the following amount in settlement of the note and interest: a. P10,250 b. 10,000

c. P8,675 d. 8,000

Answer: c Inventory at selling price Add: Portion free assets used to pay the unsecured amount (P10,250 – P8,000) x 30%

P 8,000 675 P 8,675

8. The trust for Ardolio, Inc. prepares a statement of affairs which shows that unsecured creditors whose claims total P60,000 may expect to receive approximately P36,000 if assets are sold for the benefit of creditors.    

Michael is an employee who is owed P750. Meldcan holds a note for P1,000 on which interest of P50 is accrued; nothing has been pledged on the note. Compboy holds a note of P6,000 on which interest of P300 is accrued; securities with a book value of P6,500 and a present market value P5,000 are pledged on the note. Serpor holds a note for P2,500 on which interest of P150 is accrued property with a book value of P2,000 and a present market value of P3,000 is pledged on the note.

How much may each of the following creditors hope to receive?

a. b. c. d.

Michael P 0 90 350 750

Meldcan P 0 0 1,050 630

Compboy P 0 6,300 5,780 5,780

Serpor P 0 2,390 0 2,650

Answer: d Michael’s salary is an unsecured with priority, therefore he receives the full amount. Meldcan: P1,050 x (P36,000 / P60,000)= P630 Compboy: P5,000 + (P6,300 – P5,000) x 60% = P5,780 Serpor: Fully secured creditor, receive P2,650 (P2,500 + P150)

9. Erap Co. filed a voluntary bankruptcy petition on August 15, 2008, and the statement of affairs reflects the following amounts:

Assets: Assets pledged with fully secured creditors Assets pledged with partially secured Creditors Free assets

Liabilities: Liabilities with priority Fully secured creditors Partially secured creditors Unsecured creditors

Book Value

Estimated Current Value

P 300,000

P 370,000

180,000 420,000 P 900,000

120,000 320,000 P 810,000

P70,000 260,000 200,000 540,000 P1,070,000

Assume that the assets are converted to cash at the estimated current values and the business is liquidated. What amount of cash will be available to pay unsecured nonpriority claims? a. P240,000 b. 280,000

c. P320,000 d. 360,000

Answer: d The total amount to pay all unsecured claims, including priority claims, is the cash obtained from free assets (P320,000) and any excess cash available from free assets pledged with fully secured creditors after they are used to satisfy those claims (P370,000 – P260,000 = P110,000). Therefore, the amount of cash to pay unsecured non-priority claims: Assets pledged to fully secured creditors, at current value Less: Fully secured creditors Excess cash from assets pledged to fully secured creditors Add: Free assets, at current value Total free assets Less: Liabilities with priority Net free assets

P370,000 260,000 P110,000 320,000 P430,000 70,000 P360,000

10. Zamora and Co., Inc. purchased a Cadillac automobile with little cash down and signed a note, secured by the Cadillac, for 48 easy monthly payments. When the company files for bankruptcy, the balance due on the Cadillac amount to P6,000,000. The car has a book value of P8,000,000 and a net realizable value of P4,000,000. The unsecured creditors of Zamora and co. can expect to receive 50 percent of their claims. In the liquidation, the bank that holds the note on the Cadillac should receive: a. P6,000,000 b. 5,000,000

c. P4,000,000 d. 3,000,000

Answer: b Car-cadillac, at net realizable value Add: Portion of free assets used to pay unsecured Amount; (P6,000,000 – P4,000,000) x 50%

P4,000,000 1,000,000 P5,000,000

11. The following data are provided by the Troubled Company: Assets at book value Assets at net realizable value Liabilities at book value: Fully secured mortgage Unsecured accounts and notes payable Unsecured liabilities: Interest on bank notes Estimated cost of administering estate

P150,000 105,000 60,000 70,000 500 6,000

The count has appointed a trustee to liquidate the company. The journal entry made by trustee to record the assets and liabilities should include an estate deficit of: a. P31,500 b. 31,000

c. P25,500 d. 25,000

Answer: c To compute the estate deficit before the actual realization and liquidation is simply to formulate the basic accounting equation, i.e. Assets = Liabilities + Stockholder’s equity. Therefore: Assets, at net realizable value Less: Liabilities Per books Add: Unrecorded interest

P105,000 P130,000 500

130,500

Estate (deficit) equity before realization and liquidation

P( 25,500)

12. Using the same information in Number 11, the statement of affairs prepared by the trustee at this time should include an estimated deficiency to unsecured creditors of: a. P45,000 b. 39,000

c. P31,500 d. 25,500

Answer: c Total assets at net realizable value P105,000 Less: Fully secured liabilities 60,000 Total free assets P 45,000 Less: Unsecured creditors with priority – Administrative expenses 6,000 Net free assets P 39,000 Less: Unsecured creditors without priority Unsecured accounts and notes payable P70,000 Interest on bank notes 500 70,500 Estimated deficiency to unsecured creditors P(31,500)

13. Nah Lugi Corporation is in bankruptcy and is being liquidated by a court-appointed trustee. The financial report that follow was prepared by the trustee just before the final cash distribution; Assets: Cash Approved claims: Mortgage payable (secured by property that was sold for P50,000) Accounts payable, unsecured Administrative expenses payable, Unsecured Salaries payable, unsecured

P100,000

P 80,000 50,000 8,000 2,000 P140,000

The administrative expenses are for trustees and other costs of administering the debtor corporation’s estate.

How should the P100,000 be distributed to the following creditors? Unsecured Creditors Partially Secured With Priority CreditorsWithout Priority a. b. c. d.

P

10,000 5,000 10,000

Unsecured Creditors

P 80,000 80,000 65,000 65,000

P20,000 10,000 25,000 25,000

Answer: d Cash available P100,000 Less: Mortgage payable secured by property 50,000 Amount available to unsecured creditors P 50,000 Less: Unsecured creditors with priority Administrative expenses P 8,000 Salaries payable 2,000 10,000 Net free assets or amount available to Unsecured creditors with priority P 40,000 Expected recovery percentage of unsecured creditors P40,000 / (P80,000 – P50,000) + P50,000 P .50 Therefore, the cash is distributed as follows: Unsecured creditors with priority Partially secured creditors: Property at selling price Add: Portion of free assets used to pay the unsecured amount (P80,000 – P50,000) x 50% Unsecured Creditors without priority P50,000 x .50 P100,000

P 10,000 P 50,000

15,000

65,000 25,000

14. The following data were taken from the statement of affairs for Liquo Company: Assets pledged for fully secured liabilities (fair value, P75,000) P 90,000 Assets pledged to partially secured liabilities (fair value, P52,000) 74,000 Free assets (fair value, P40,000) 70,000 Unsecured liabilities with priority 7,000 Fully secured liabilities 30,000 Partially secured liabilities 60,000 Unsecured liabilities without priority 112,000 Compute the: (1) total estimated deficiency to unsecured creditors, and (2) the expected recovery per peso unsecured claims.

a. (1) 42,000; (2) P.65 b. (1) 3,000; (2) P.98

c. (1) P 0; (2) P1.00 d. (1) P42,000; (2) P .70

Answer: a Estimated deficiency to unsecured creditors: Assets pledged to fully secured liabilities, at fair value Less: Fully secured liabilities Add: Free Assets, at fair value Total free assets to unsecured liabilities Less: Unsecured liabilities with priority Net free assets Less: Unsecured liabilities: Partially secured liabilities P 60,000 Less: Assets pledged to partially Secured liabilities, fair value 52,000 Unsecured liabilities without priority Total unsecured liabilities Estimated deficiency to unsecured liabilities

P 75,000 30,000 45,000 40,000 P 85,000 7,000 P 78,000

P 8,000 112,000 P120,000 P 42,000

15. Katherine, a CPA, has prepared a statement of affairs. Assets which there are no claims or liens are expected to produce P70,000, which must be allocated to unsecured claims of all classes totaling P105,000. The following are some of the claims outstanding: 1. Accounting fees for Katherine, P1,500 2. An unrecorded note for P1,000, on which P60 of interest has accrued, held by Angie. 3. A note for P3,000 secured by P4,000 receivables, estimated to be 60% collectible held by Joy. 4. A P1,500 note, on which P30 of interest has accrued, held by Joyots. Property with a book value of P1,000 and a market value of P1,800 is pledged to gurantee payment of principal and interest. 5. Unpaid income taxes of P3,500. Compute the estimated payment to partially secured creditors: a. P1,060 c. P2,490 b. 1,950 d. 2,790 Answer: d Total free assets P 70,000 Less: Unsecured Creditors with Priority: Administrative expenses – accounting fees P1,500 Unpaid income taxes 3,500 5,000 Net free assets P 65,000 Total Unsecured Creditors without Priority:

Total Unsecured Claims of all classes Less: Unsecured Creditors with Priority Total Unsecured Creditors without Priority % of Recovery; P65,000 / P100,000 = 65% Estimated payment to partially secured creditors: Realizable value of A/R (60% x P4,000) Add: Unsecured Portion: 65% (P3,000 – P2,400) Total

P105,000 5,000 P100,000

P 2,400 390 P 2,790

16. Palubog Co. is insolvent and its statement of affairs shows the following information: Estimated gains on realization of assets Estimated losses on realization of assets Additional assets Additional liabilities Capital Stock Deficit

P1,440,000 2,000,000 1,280,000 960,000 2,000,000 1,200,000

The pro-rate payment on the peso to stockholders (estimated amount ot be recovered by stockholders) is: a. P.30 b. .43

c. P .57 d. .70

Answer: d Estimated losses on realization of assets P2,000,000 Less: Estimated gains on realization of assets P1,440,000 Additional assets 1,280,000 2,720,000 Estimated net (gain) or loss in assets realization P (720,000) Add: Additional liabilities 960,000 Estimated net (gain) or loss P 240,000 Less: Stockholder’s equity: Capital Stock P2,000,000 Deficit 1,200,000 800,000 Estimated amount to be recovered by stockholders P 560,000 Therefore, the pro-rate payment on the peso is: Estimated amount to be recovered by stockholders=P560,000 = P.70 Stockholder’s Equity P800,000

17. Zero Na Corp. has been undergoing liquidation since January 1. As of March 31, its condensed statement of realization and liquidation is presented below: Assets: Assets to be realized Assets acquired Assets realized Assets not realized

P1,375,000 750,000 1,200,000 1,375,000

Liabilities: Liabilities liquidated Liabilities not liquidated Liabilities to be liquidated Liabilities assumed

P1,875,000 1,700,000 2,250,000 1,625,000

Revenue and Expenses: Supplementary Charges Supplementary Credits

P3,325,000 2,800,000

The net gain (loss) for the three-month period ending March 31 is: a. P250,000 b. (325,000)

c. P425,000 d. 750,000

Answer: c Statement of Realization and Liquidation Credits: Assets realized Assets not realized Liabilities to be liquidated Supplementary credits* 2,800,000 Total credits Statement of Realization and Liquidation Debits: Assets to be realized Assets acquired Liabilities liquidated Liabilities not liquidated Supplementary charge** Net gain for the three month period

P1,200,000 1,375,000 2,250,000 P9,250,000

P1,375,000 750,000 1,875,000 1,700,000 3,125,000 P 425,000

*Supplementary credits are revenue or income items such as sales, interest income etc. **Supplementary debits are cost and expense items such as purchases, expenses, etc.

18. Using the same information on No. 17, compute the ending cash balance of cash account assuming that common stock and deficit are P1,500,000 and P500,000, respectively. a. P425,000 b. P575,000

c. P1,325,000 d. P1,375,000

Answer: c The solution simply utilize the basic accounting equation of Assets = Liabilities + Stockholder’s Equity (SHE), thus: Common Stock P1,500,000 Deficits (500,000) Stockholder’s Equity (SHE) P1,000,000 Add: Liabilities not liquidated 1,700,000 Total Liabilities and SHE P2,700,000 Less: Assets not realized (or end) 1,375,000 Cash balance, ending P1,325,000

Items 19 to 20 are based on the following data: 19. The Palubog Company has decided to seek liquidation after previous restructuring and quasi-reorganization attempts failed. The company has the following condensed balance sheet as of May 1, 2011: AssetsLiabilities and Stockholder’s Equity Cash Receivables (net) Inventory 60,000 Prepaid Expenses Plant Assets 180,000 Goodwill 60,000 Deficit Total P702,000

P 12,000Accrued Payroll P 40,000 280,000 Loans from officer 50,000 70,000 Accounts Payable 1,000Equipment loan payable 360,000 300,000 Business loan payable 39,000

Common Stock

(48,000) P702,000

Total

The equipment loan payable is secured by specific plant assets having a book value of P300,000 and a realizable value of P350,000. Of the account payable, P40,000 is secured by inventory which has a cost of P40,000 and a liquidation

value of P44,000. The balance of the inventory has a realizable value of P32,000. Receivables with a book value and market value of P100,000 and P80,000 respectively have been pledged as collateral on the business loan payable. The balance of the receivables have a realizable value of P150,000. Assuming trustee expenses of P12,000 in addition to recorded liabilities, which of the remaining unsecured creditors has the next higher order of priority. a. Accrued Payroll b. Equipment loan payable

c. Loan from officer d. Business loan payable

Answer: a Claims of unsecured creditors must be satisfied to whatever extent possible in the following order of priority: 1. Expenses to administer the estate 2. Unpaid salaries, etc. 20. The realizable value of assets pledged with fully secured creditors is: a. P459,000 b. 44,000

c. P40,000 d. 489,000

Answer: b Of all the assets listed only inventory is classified as an asset pledged to fully secured creditors with a realizable value of P44,000 (book value of accounts payable is P40,000).

CASH FLOW 1. In 2011, Art Company had the following financial data: Cash revenue Cash expenses Depreciation expense Income before income tax Income tax expense Net income

8,000,000 4,000,000 2,000,000 2,000,000 500,000 1,500,000

At the beginning of 2012, the entity purchased additional assets at a cost of P5,000,000 on cash basis. Each year, these assets provide additional cash revenue of P5,000,000 and incur cash expenses of P2,000,000. The assets have a 10-year life and the entity

uses the straight line depreciation for all assets. The existing assets produced the same cash revenue and incur the same expenses as in 2011. The income tax is paid every April 15 of each year. What is the net cash provided by operating activities for the current year? 6,500,000 Revenue (8,000,000 + 5,000,000) Expenses (4,000,000 + 2,000,000) Income tax for 2011 paid on April 15, 2012 Net cash provided by operating activities

13,000,000 ( 6,000,000) ( 500,000) 6,500,000

2. The cash balance of Darwin Company on January 1, 2011 was P8,000,000. During 2011, the changes in certain accounts were: Accounts receivable Inventory Accounts payable

2,000,000 increase 1,500,000 decrease 3,000,000 decrease

Total sales and cost of goods old were P30,000,000 and P20,000,000 respectively. All sales and purchases were made on credit. Various expenses of P5,000,000 were paid in cash. There were no other pertinent transactions. What is the cash balance on December 31, 2011? 9,500,000 Cash balance – January 1 Increase in accounts receivable Decrease in inventory Decrease in accounts payable Sales Cost of goods sold Expenses Cash balance – December 31

8,000,000 ( 2,000,000) 1,500,000 ( 3,000,000) 30,000,000 (20,000,000) ( 5,000,000) 9,500,000

3. BUMPER Company’s statement of cash flows for the current year shows cash flow from operations of P1,840,000. Depreciation expense Accounts receivable increase Inventory decrease Accounts payable decrease What is the net income for the current year? 1,360,000

400,000 120,000 280,000 80,000

Net income Depreciation Accounts receivable increase Inventory decrease Accounts payable decrease Cash flow from operations

1,360,000 400,000 ( 120,000) 280,000 ( 80,000) 1,840,000

4. Claire Company reported interest expense in 2011 and 2010 of P1,500,000 and P1,200,000, respectively. The balance in accrued interest payable at the end of 2011, 2010 and 2009 was P600,000, P700,000 and P500,000, respectively. In addition, a note to Claire Company’s 2011 financial statements included the following: Interest costs related to construction in progress are capitalized as incurred. The entity capitalized P300,000 and P250,000 of interest costs during the year 2011 and 2010, respectively. What amount of interest was paid in 2011 net of the amount capitalized as construction in progress? 1,600,000 Interest expense in 2011 Accrued interest payable - December 31, 2011 Accrued interest payable – December 31, 2010 Interest paid in 2011

1,500,000 ( 600,000) 700,000 1,600,000

5. Lance Company provided the following for the current year: Net income Noncash adjustments: Depreciation Increase in accounts receivable Decrease in inventory Decrease in accounts payable Net cash flow from operating activities

6,000,000 900,000 ( 500,000) 4,000,000 (1,200,000) 9,200,000

Lance reported revenue from customers of P7,500,000 for the current year. What amount of cash was received from the customers? 7,000,000

Sales Increase in accounts receivable Cash received from customer

7,500,000 ( 500,000) 7,000,000

6. Sarah Company reported bonds payable of P4,700,000 on December 31, 2010 and P5,000,000 on December 31, 2011. During 2011, Sarah issued P2,000,000 of bonds payable in exchange for equipment. There was no amortization of premium or discount during the year. What is the payment for redemption of bonds payable? 1,700,000 Bonds payable – December 31, 2010 Bonds payable issued in 2011 Bonds payable – December 31, 2011 Cash paid for bonds redemption in 2011

4,700,000 2,000,000 (5,000,000) 1,700,000

7. Cloudy Company provided the following information:

Retained earnings Dividend payable Net income

2011 3,000,000 1,200,000 2,000,000

2010 2,500,000 1,800,000

What amount was paid for dividends during the current year? 2,100,000 Retained earnings – 2010 Net income for 2011 Total Retained earnings – 2011 Dividends declared in 2011 Dividends payable – 2010 Dividends payable – 2011 Cash paid for dividends in 2011

2,500,000 2,000,000 4,500,000 (3,000,000) 1,500,000 1,800,000 (1,200,000) 2,100,000

8. Sam Company provided the following for the current year: Purchase of real estate for cash Sale of investment securities for cash Dividend paid Issuance of ordinary shares for cash Purchase of patent for cash Payment of bank loan Increase in customer’s deposit Issuance of bonds payable for cash

5,500,000 5,000,000 6,000,000 2,500,000 1,250,000 1,500,000 200,000 3,000,000

What is the net cash provided by financing activities? 3,500,000

Cash borrowed from bank Dividend paid Issuance of ordinary shares for cash Payment of bank loan Issuance of bonds payable Net cash provided – financing

5,500,000 (6,000,000) 2,500,000 (1,500,000) 3,000,000 3,500,000

9. What is the net cash used in investing activities? (1,750,000) Purchase of real estate Sale of investment securities Purchase of patent for cash Net cash provided – investing

(5,500,000) 5,000,000 (1,250,000) (1,750,000)

10. Dan Company collected the following data for the current year: Gain on sale of equipment Proceeds from sale of equipment Purchase of bond investment (FV P2,000,000) Amortization of bond discount Dividend declared Dividend paid Proceeds from sale of treasury shares (cost P650,000)

60,000 100,000 1,800,000 20,000 450,000 380,000 750,000

What is the net cash provided by financing activities? 370,000 Dividends paid Proceeds from sale of treasury shares Net cash provided by financing activities

( 380,000) 750,000 370,000

11. What is the net cash used in investing activities? 1,700,000 Proceeds from sale of equipment Purchase of bond investment Net cash provided in investing activities

100,000 (1,800,000) (1,700,000)

12. Jazz Company provided the following for the current year: Increase in long-term debt Purchase on treasury shares Depreciation and amortization

5,000,000 1,000,000 1,500,000

Gain on sale of equipment Proceeds from issuance of share capital Purchase of equipment for cash Proceeds from sale of equipment Payment of cash dividend Net income Increase (decrease) in working capital account: Accounts receivable Inventory Trade accounts and notes payable Income tax payable Cash balance, January 1

500,000 4,000,000 7,000,000 2,000,000 2,500,000 8,000,000 2,000,000 (3,500,000) 4,000,000 (4,500,000) 6,000,000

What is the net cash provided by operating activities? 10,000,000 Net income Increase in account receivable Decrease in inventory Increase in accounts and notes payable Decrease in income tax payable Depreciation and amortization Gain on sale of equipment Net cash provided – operating

8,000,000 (2,000,000) 3,500,000 4,000,000 (4,500,000) 1,500,000 ( 500,000) 10,000,000

13. What is the net cash used in investing activities? (5,000,000) Purchase of equipment for cash Proceeds from sale of equipment Net cash used – investing

(7,000,000) 2,000,000 (5,000,000)

14. What is the net cash provided by financing activities? 5,500,000 Increase in long-term debt Purchase of treasury shares Proceeds from issuance of share capital Payment of cash dividend Net cash provided – financing

5,000,000 (1,000,000) 4,000,000 (2,500,000) 5,500,000

18. Zan Company provided the following data:

Trade accounts receivable, net Inventory

840,000 1,500,000

780,000 1,400,000

Accounts payable

950,000

980,000

 Total sales were P12,000,000 for 2011 and P11,000 for 2010. Cash sales were 20% of total sales each year. Cost of goods sold was P8,400,000 for 2011.  Variable general and administrative expenses for 2011 were P1,200,000. They have varied in proportion to sales, 50% have been paid in the year incurred and 50% the following year. Unpaid G&A expenses are not included in accounts payable.  Fixed G&A expenses, including P350,000 depreciation and P50,000 bad debt, totaled P1,000,000 each year. 80% of fixed G&A expenses involving cash were paid in the year incurred and 20% the following year. Each year there was a P50,000 bad debt estimate and a P50,000 writeoff. Unpaid G&A expenses are not included in accounts payable. What is the cash collected from customers during 2011? 12,010,000 Accounts receivable – 2010 Sales – 2011 Total Accounts receivable – 2011 Writeoff Cash collections in 2011

`840,000 12,000,000 12,840,000 ( 780,000) ( 50,000) 12,010,000

19. What cash disbursed during 2011 for purchases? 8,270,000 Accounts payable – 2010 Purchases Total Accounts payable – 2011 Payment of accounts payable in 2011

950,000 8,300,000 9,250,000 ( 980,000) 8,270,000

20 What is the cash disbursed during 2011 for expenses? 1,750,000 Fixed expenses Depreciation Bad debt expense Fixed expenses paid in 2011 Variable expenses paid 2011: 2011 (1,200,000 x 50%) 2010 (1,100,000 x 50%) Total cash disbursement for expenses

1,000,000 ( 350,000) ( 50,000) 600,000 600,000 550,000 1,750,000

SINGLE ENTRY 1. On January 1, 2011, the capital of Console Company was P1,700,000 and on December 31, 2011 the capital was P2,400,000. During the current year, Console withdrew merchandise with carrying amount of P100,000 and sales value of P180,000, and [aid a P1,000,000 note payable business with interEst of 12% for 6 months with a check drown on a proposal checking account. What is the net income or loss for 2011? P260,000 loss Capital – December 31 Add: Withdrawal – Merchandise @ carrying amount Total Less: Capital – January 1 1,700,000 Additional Investment 1,060,000 Net Loss

P2,400,000 100,000 P2,500,000 2.760,000 P( 260,000)

The additional investment is determined as follows: Payment of note payable out of personal checking account Interest (1,000,000 x 12% x 6/12) Total

P1,000,000 60,000 P1,060,000

2. The December 31, 2011 statement of financial position of Melisa Company showed shareholder’s equity of P5,000,000. The share capital of P3,000,000 remained unchanged during the year. Transactions during the year which affected the equity were:    

An adjustment of retained earnings for 2010 overdepreciation Gain on sale of treasury shares Dividend declared, of which P400,000 was paid Net income for 2011

P100,000 300,000 600,000 800,000

What is the balance of retained earnings on January 1, 2011? P1,400,000 Retained earnings – January Add: Net Income Prior period error of 2010 Overdepreciation Total Less: Dividend declared

1,400,000 800,000 100,000

900,000 2,300,000 600,000

Retained earnings – December 31

1,700,000

3. Audrey Company provided the following data:

Share capital (P100 par value) Share premium Retained earnings

12/31/10 5,000,000 1,500,000 3,000,000

12/31/11 5,500,000 2,500,000 4,500,000

During 2011, the entity declared and paid cash dividend of P1,000,000 and also declared and issued a stock dividend. There were no other changes in equity during 2011. What is the net income for 2011? P4,000,000 Increase in share capital (5,500,000 – 5,000,000) Increase in share premium (2,500,000 – 1,500,000) Stock dividend Retained earnings – December 31, 2011 Stock dividend Cash dividend Total Retained earnings – December 31, 2010 Net income

500,000 1,000,000 1,500,000 4,500,000 1,500,000 1,000,000 7,000,000 (3,000,000) 4,000,000

4. Sunshine Company had total assets of P4,000,000 and shareholders’ equity of P2,080,000 at the beginning of the year. During the year, assets increased by P520,000 and liabilities decreased by P820,000. What is the shareholders’ equity at the end of the year? P3,420,000

Increase in assets Decrease in liabilities Net increase in equity Shareholders’ equity – beginning Shareholders’ equity – ending

Effect on equity 520,000 820,000 1,340,000 2,080,000 3,420,000

5. Trend Company provided the following information for the current year: Net loss

100,000

Total assets on December 31 Share capital on December 31 Share premium Dividends declared

3,000,000 1,000,000 500,000 700,000

The debt-to-equity ratio (liabilitites over equity) is 50% on December 31. What is the balance of retained earnings on January 1? 1,300,000 Shareholders’ equity (3,000,000 / 150%) Less: Contributed capital (1,000,000 + 500,000) Retained earnings – December 31

2,000,000 1,500,000 500,000

Retained earnings – January 1 Net loss Dividends declared Retained earnings – December 31

1,300,000 ( 100,000) ( 700,000) 500,000

6. Easy Company’s beginning and ending total liabilities were P840,000 and P1,000,000, respectively. At year-end, owners’ equity was P2,600,000 and total assets were P200,000 larger than at the beginning of the year. If new share capital issed exceeded dividends paid by P240,000, what is the net income (loss) for the year? 200,000 loss Increase Increase in asset 200,000 Increase in liabilities (1,000,000 – 840,000) (160,000) Increase in owners’ equity 40,000 Excess of share capital issued over dividends paid (240,000) Net loss (200,000)

7. The following changes in Vela Company’s account balances occurred during the current year:

Assets Liabilities Share capital Share premium

Increase 8,900,000 2,700,000 6,000,000 600,000

Except for a P1,300,000 dividend payment and the year’s earnings, there were no changes in retained earnings for the year. What is the net income for the current year? P900,000

Increase in assets Increase in liabilities Net increase in equity Add: dividend Total Less: Increase in share capital Increase in share premium Net income

8,900,000 (2,700,000) 6,200,000 1,300,000 7,500,000 6,000,000 600,000

6,600,000 900,000

8. An analysis of the records of Isabel Company disclosed changes in account balances for the current year and the supplementary data listed below. Cash Accounts receivable Merchandise inventory Accounts payable

480,000 decrease 300,000 increase 3,100,000 increase 420,000 increase

During the year, Isabel borrowed P4,000,000 in notes from the bank and paid off notes of P3,000,000 and interest of P240,000. Interest of P100,000 is accrued on December 31. There was no interest payable at the beginning of the year. In the current year, Isabel transferred certain trading securities to the business and these were sold for P1,500,000 to finance purchase of merchandise. Isabel made weekly withdrawals in the current year of P10,000. What is the net income for the current year? P420,000

Decrease in cash Increase in accounts receivable Increase in inventory Increase in accounts payable Increase in notes payable (4,000,000 – 3,000,000) Increase in accrued interest payable

Net increase in equity Add: Withdrawals (10,000 x 52 weeks) Total Less: Additional investment (sale of securities) Net income

Effect on equity Increase Decrease 480,000 300,000 3,100,000 420,000 1,000,000 ________ 100,000 3,400,0002,000,000 1,400,000 520,000 1,920,000 1,500,000 420,000

9. Selected information for Marbel Company for the year follows: Cash balance, January 1 Accounts receivable, January 1 Collections from customers Shareholders’ equity, January 1 Total assets, January 1 Total assets, December 31 Cash balance, December 31 Accounts receivable, December 31 Total liabilities, December 31

130,000 190,000 2,100,000 380,000 750,000 880,000 160,000 360,000 390,000

What is the net income for the current year? 110,000 Total assets – December 31 Total liabilities – December 31 Shareholders’ equity – December 31 Shareholders’ equity – January 1 Net income

880,000 390,000 490,000 380,000 110,000

10. The changes in all the account balances of Mac Company for the current year, except for retained earnings, are as follows:

Cash Accounts receivable, net Inventory Investments Accounts payable Bonds payable Share capital Share premium

Increase (Decrease) 790,000 240,000 1,270,000 ( 470,000) ( 380,000) 820,000 1,250,000 130,000

There were no entries in the retained earnings account except for net income and a dividend declaration of P190,000 which was paid in the current year. What is the net income for the current year? 200,000

Increase in cash Increase in accounts receivable Increase in inventory

790,000 240,000 1,270,000

Decrease investments Decrease in accounts payable Increase in bonds payable Net increase in equity Add: Dividend declared Total Less: Increase in share capital Increase in share premium Net income

( 470,000) 380,000 ( 820,000) 1,390,000 190,000 1,580,000 1,250,000 130,000

1,380,000 200,000

11. Daisy Santos started a retail merchandise business on January 1, 2011. During the fiscal year ended December 31, 2011, the entity paid trade creditors P2,000,000 and suffered a net loss of P350,000. The ledger account pre-closing balances on December 31, 2011 include the following: Accounts receivable Accounts payable Capital (total investment in cash) Expenses (paid in cash) Merchandise (unadjusted debit balance)

600,000 750,000 2,000,000 100,000 700,000

There were no withdrawals. All sales and purchases were on credit. The merchandise account is debited for purchases and credited for sales. What is the amount of sales for the year? 2,050,000 Accounts payable – December 31 Payments to trade creditors Total purchases Less: Unadjusted debit balance of merchandise account Sales

750,000 2,000,000 2,750,000 700,000 2,050,000

12. What is the cash balance on December 31, 2011? 1,350,000 Cash – January 1 (investment) Collections of AR (2,050,000 – 600,000) Total Less: Payment of account payable Payment of expenses Cash – December 31

2,000,000 1,450,000 3,450,000 2,000,000 100,000

2,100,000 1,350,000

13. What is the merchandise inventory on December 31, 2011? 450,000 Sales Cost of Sales: Purchases Merchandise inventory – 12/31 Gross loss Expenses Net Loss

2,050,000 2,750,000 ( 450,000)

2,300,000 ( 250,000) ( 100,000) ( 350,000)

14. Complex Company kept very limited records. On January 1, 2011, Complex Company started business and issued share capital, 60,000 shares with P100 par, for the following considerations: Cash Building (useful life, 15 years) Land

500,000 4,500,000 1,500,000 6,500,000

An analysis of the bank statements showed total deposits, including the original cash investment of P3,500,000. The balance in the bank statement on December 31, 2011, was P250,000, out there were checks amounting to P50,000 dated in December but not paid by the bank until January of next year. Cash on hand on December 31, 2011 was P125,000 including customers’ deposit of P75,000. During the year, Complex Company borrowed P500,000 from the bank and repaid P125,000 and P25,000 interest. The proceeds of the loan were credited to the bank account of Complex Company. Disbursements paid in cash during the year were as follows: Utilities Salaries Supplies Taxes Dividends

100,000 100,000 175,000 25,000 150,000 550,000

An inventory of merchandise taken on December 31, 2011 showed P755,000 of merchandise. Tickets for accounts receivable totaled P900,000 but P50,000 of that amount may prove uncollectable. Unpaid supplies invoices for merchandise amounted to P350,000.

Equipment with a cash price of P400,000 was purchased in early January on a one-year installment basis. During the year, checks for the downpayment and all maturing installments totaled P445,000. The equipment has a useful life of 5 years. What is the total cash on December 31, 2011? 325,000 Cash in bank per book Outstanding checks Adjusted cash in bank Cash on hand Total cash – December 31, 2011

250,000 ( 50,000) 200,000 125,000 325,000

15. What is the amount of sales for the year? 4,000,000 Initial cash investment Proceeds of loan Collection of accounts receivable Total deposits

500,000 500,000 2,500,000 3,500,000

Customers’ deposit Collections of accounts receivable Total Disbursements in cash Cash on hand – December 31, 2011

75,000 600,000 675,000 ( 550,000) 125,000

Accounts receivable – December 31, 2011 Collections deposited Collections not deposited Total

900,000 2,500,000 600,000 4,000,000

16. What is the amount of purchases for the year? 3,055,000 Total deposits Total disbursements in check Cash in bank – December 31, 2011

3,500,000 (3,300,000) 200,000

Payment of loan Interest on loan Payment for equipment Interest on equipment Payment of accounts payable Total disbursements in check

125,000 25,000 400,000 45,000 2,705,000 3,300,000

Accounts payable – December 31, 2011

350,000

Payment of account payable Total purchases

2,705,000 3,055,000

17. What is the net income for the year? 800,000 Sales Cost of sales: Purchases Inventory – December 31, 2011 Gross income Expenses: Utilities Salaries Supplies Taxes Doubtful accounts Depreciation – building (4,500,000/15) Depreciation – equipment (400,000/5) Interest expense (25,000 + 45,000) Net income

4,000,000 3,055,000 ( 755,000)

100,000 100,000 175,000 25,000 50,000 300,000 80,000 70,000

2,300,000 1,700,000

900,000 800,000

18. What is the amount of total assets on December 31, 2011? 7,950,000 Cash Accounts receivable Allowance for doubtful accounts Inventory Land Building Accumulated depreciation – building Equipment Accumulated depreciation – equipment Total assets

325,000 900,000 ( 50,000) 755,000 1,500,000 4,500,000 ( 300,000) 400,000 ( 80,000) 7,950,000

Liabilities Shareholders’ equity Total liabilities and shareholders’ equity

800,000 7,150,000 7,950,000

19. What is the amount of total liabilities on December 31, 2011? 800,000 Accounts payable Loans payable – bank (500,000 – 125,000) Customers’ deposit

350,000 375,000 75,000

Total liabilities

800,000

20. What is the amount of shareholders’ equity on December 31, 2011? 7,150,000 Share capital (60,000 x P100) Share premium (6,500,000 – 6,000,000) Retained earnings Total shareholders’ equity

6,000,000 500,000 650,000 7,150,000

Net income Dividends paid Retained earnings

800,000 ( 150,000) 650,000