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(Intermediate Accounting 16th Edition Stice)

The schedule below shows the account balances of BENEFICIO CORPORATION at the beginning
and end of the year ended December 31, 2015:

DEBITS Dec. 31, 2015 Dec. 31, 2014

Cash and cash equivalents P222,000 P 50,000
Investment in trading securities 10,000 40,000
Accounts receivable 148,000 100,000
Inventories 291,000 300,000
Prepaid insurance 2,500 2,000
Land and building 195,000 195,000
Equipment 305,000 170,000
Discount on bonds payable 8,500 9,000
Treasury shares (at cost) 5,000 10,000
Cost of goods sold 539,000
Selling and general expenses 287,000
Income taxes 35,000
Unrealized loss on trading securities 4,000
Loss on sale of equipment 1,000
Total debits P2,053,000 P 876,000

Allowance for bad debts P 8,000 P 5,000
Accumulated depreciation Building 26,250 22,500
Accumulated depreciation Equipment 39,750 27,500
Accounts payable 55,000 60,000
Notes payable current 70,000 20,000
Miscellaneous expenses payable 18,000 8,700
Taxes payable 35,000 10,000
Unearned revenue 1,000 9,000
Notes payable long-term 40,000 60,000
Bonds payable long-term 250,000 250,000
Deferred income tax liability 47,000 53,300
Ordinary shares, P2 par 359,400 200,000
Retained earnings appropriated for
treasury shares 5,000 10,000
Retained earnings appropriated for
possible building expansion 38,000 23,000
Unappropriated retained earnings 34,600 112,000
Share premium 116,000 5,000
Sales 898,000
Gain on sale of investment securities 12,000
Total credits P2,053,000 P 876,000

Additional information:

a) All purchases and sales were on account.

b) Equipment with an original cost of P15,000 was sold for P7,000.

c) Selling and general expenses include the following:

Building depreciation P 3,750
Equipment depreciation 25,250
Bad debt expense 4,000
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Interest expense 18,000

d) A six-month note payable for P50,000 was issued toward the purchase of new equipment.

e) The long-term note payable requires the payment of P20,000 per year plus interest until

f) Treasury shares were sold for P1,000 more than their cost.

g) During the year, a 30% stock dividend was declared and issued. At that time, there were
100,000 shares of P2 par ordinary shares outstanding. However, 1,000 of these shares
were held as treasury shares at the time and were prohibited from participating in the stock
dividend. Market price was P10 per share when the stock dividend was declared.

h) Equipment was overhauled, extending its useful life, at a cost of P6,000. The cost was
debited to Accumulated DepreciationEquipment.

i) Beneficio has determined that its purchases and sales of trading securities are operating

Based on the given data, calculate the following:

1. Net income for 2015

A. P45,000 B. P50,300 C. P43,500 D. P44,000

2. Cash dividends declared and paid during 2015

A. P8,000 B. P52,000 C. P7,400 D. P 0

3. Proceeds from issuance of ordinary shares in 2015

A. P100,000 B. P110,000 C. P210,000 D. P269,400

4. Proceeds from sale of trading securities

A. P26,000 B. P38,000 C. P42,000 D. P14,000

5. Accumulated depreciation of equipment sold

A. P7,000 B. P15,000 C. P8,000 D. P9,000

6. Cash paid for purchase of equipment

A. P50,000 B. P106,000 C. P150,000 D. P100,000

7. Proceeds from sale of treasury shares

A. P6,000 B. P5,000 C. P4,000 D. P10,000

8. Net cash provided by operating activities

A. P45,000 B. P87,000 C. P83,000 D. P89,300

9. Net cash used in investing activities

A. P106,000 B. P99,000 C. P61,000 D. P93,000

10. Net cash provided by financing activities

A. P188,000 B. P187,000 C. P182,000 D. P106,000
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(Test Bank Intermediate Accounting 14th Edition - Kieso)

The following list of accounts and their balances represents the unadjusted trial balance of
ALTERADO COMPANY at December 31, 2015:

Cash P290,900
Equity investments (trading) 600,000
Accounts receivable 690,000
Allowance for doubtful accounts P 5,000
Inventory 547,200
Prepaid rent 360,000
Plant and equipment 1,600,000
Accumulated depreciation Plant and equipment 147,400
Accounts payable 113,700
Bonds payable 900,000
Ordinary share capital 1,700,000
Retained earnings 971,800
Sales 2,148,000
Cost of goods sold 1,544,000
Freight-out 110,000
Salaries and wages expense 320,000
Interest expense 20,400
Rental income 216,000
Miscellaneous expense 8,900
Insurance expense 110,500
P6,201,900 P6,201,900

Additional data:

1. The balance in the Insurance expense account contains the premium costs of three
Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2014;
Policy 2, original cost of P72,000, 3-year term, taken out on October 1, 2015;
Policy 3, original cost of P13,000, 1-year term, taken out on January 1, 2015.

2. On September 30, 2015, Alterado received P216,000 rent from its lessee for eighteen-
month lease beginning on that date.

3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a
year are depreciated at half this rate. There were no purchases during the year. On
December 31, 2014, the balance of the Plant and equipment account was P2,400,000.

4. On December 28, 2015, the bookkeeper incorrectly credited Sales for a receipt on account
in the amount of P100,000.

5. At December 31, 2015, salaries and wages accrued but unpaid were P4,200,000.

6. Alterado estimates that 1% of sales will become uncollectible.

7. On August 1, 2015, Alterado purchased, as a short-term investment, 600 P1,000, 7%

bonds of Alendog Corp. at par. The bonds mature on August 1, 2016. Interest payment
dates are July 31 and January 31.

8. On April 30, 2015, Alterado rented a warehouse for P30,000 per month, paying P360,000
in advance.
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1. What are the adjusted balances of the following accounts on December 31, 2015?
Prepaid insurance Insurance expense
A. P 6,000 P104,500
B. 0 110,500
C. 54,000 56,500
D. 66,000 44,500

2. What is the total depreciation expense for the year ended December 31, 2015?
A. P120,000 B. P240,000 C. P200,000 D. P160,000

3. What is the bad debt expense for the year ended December 31, 2015?
A. P15,480 B. P25,480 C. P21,480 D. P20,480

4. What amount of interest and rent income should be reported in the income statement for
the year ended December 31, 2015?
Interest income Rental income
A. P24,500 P 36,000
B. 17,500 180,000
C. 24,500 180,000
D. 17,500 36,000

5. What adjusting entry is necessary on December 31, 2015 for the Prepaid rent account?
A. Rent expense 270,000
Prepaid rent 270,000
B. Prepaid rent 270,000
Prepaid rent 270,000
C. Prepaid rent 240,000
Rent expense 240,000
D. Rent expense 240,000
Prepaid rent 240,000
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(Intermediate Accounting 14th Edition - Kieso)

A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was requested

by your auditor soon after December 31, 2015, showing the additions, retirements,
depreciation, and other data affecting the income of the company in the 4-year period 2012 to
2015, inclusive.

The following data were ascertained.

Balance of Trucks account, Jan. 1, 2012
Truck No. 1 purchased Jan. 1, 2009, cost P180,000
Truck No. 2 purchased July 1, 2009, cost 220,000
Truck No. 3 purchased Jan. 1, 2011, cost 300,000
Truck No. 4 purchased July 1, 2011, cost 240,000
Balance, Jan. 1, 2012 P940,000

The Accumulated DepreciationTrucks account previously adjusted to January 1, 2012, and

entered in the ledger, had a balance on that date of P302,000 (depreciation on the four trucks
from the respective dates of purchase, based on a 5-year life, no salvage value). No charges
had been made against the account before January 1, 2012.

Transactions between January 1, 2012, and December 31, 2015, which were recorded in the
ledger, areas follows.

July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of
which was P400,000. Isidro Mfg. Co. paid the automobile dealer P220,000 cash
on the transaction. The entry was a debit to Trucks and a credit to Cash,
P220,000. The transaction has commercial substance.

Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,

July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged at that
amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk
for P7,000 cash. Isidro Mfg. Co. received P25,000 from the insurance company.
The entry made by the bookkeeper was a debit to Cash, P32,000, and credits to
Miscellaneous Income, P7,000, and Trucks, P25,000.

Entries for depreciation had been made at the close of each year as follows: 2012, P210,000;
2013, P225,000; 2014, P250,500; 2015, P304,000.

1. What is the total depreciation expense for the year ended December 31, 2012?
A. P180,000 B. P198,000 C. P172,000 D. P228,000

2. What is the gain (loss) on trade in of Truck #3 on July 1, 2012?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000

3. What is the net book value of the Trucks on December 31, 2015?
A. P414,000 B. P348,000 C. P228,500 D. P894,000
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4. The total depreciation expense recorded for the 4-year period (2012-2015) is overstated
A. P185,500 B. P265,500 C. P287,500 D. P275,500

5. Assuming that the books have not been closed for 2015, what is the compound journal
entry on December 31, 2015 to correct the companys errors for the 4-year period (2012-
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500
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(Intermediate Accounting 17th Edition Stice)

The TOY COMPANY completed the following transactions during 2015:

Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000
representing property tax for March 1 June 30 which was prepaid by the vendor.
Of the purchase price, 25% is deemed applicable to land and the remaining 75% to
buildings. The Toy Company assumed a mortgage of P4,600,000 on the purchase
and paid cash for the balance.

30 The building acquired necessitates current reconditioning at a cost of P342,000

because previous owners had failed to take care of normal maintenance and repair
requirements on it.

May 15 Garages in the rear of the building were demolished. The Toy Company recovered
P66,000 on the lumber salvage. It then proceeded to construct a warehouse at
P1,013,000, which was almost exactly the same as bids made by construction
companies. Upon completion of construction, city inspectors ordered extensive
modifications to the warehouse as a result of failure on the part of the company to
comply with building safety code. Such modifications, which could have been
avoided, cost P124,000.

June 1 The company exchanged its own ordinary share capital with a market value of
P640,000 (par, P40,000) for a patent and new toy-making machine. The machine
has a market value of P310,000.

July 1 The new machinery for the new building arrived. In addition to the machinery, a
new franchise was acquired from the manufacturer of the machinery to produce toy
robots. Payment was made by issuing the companys own ordinary shares (par,
P1,000,000). The value of the franchise is set at P500,000, while the machines fair
value is P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of P420,000 and
P89,000, respectively. The work was completed and paid for on November 20.

Dec. 31 The business was closed to permit taking the year-end inventory. During this time,
required redecorating and repairs were completed at a cost of P64,000.

After considering the preceding transactions, compute the year-end balances of the following:

1. Buildings
A. P7,289,000 B. P7,511,750 C. P7,413,000 D. P7,635,750

2. Land
A. P2,074,250 B. P2,000,000 C. P2,583,250 D. P2,509,000

3. Machinery
A. P1,070,000 B. P920,000 C. P770,000 D. P931,000

4. Share premium
A. P10,000 B. P500,000 C. P710,000 D. P600,000

5. Intangibles
A. P830,000 B. P500,000 C. P330,000 D. P840,000
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(Intermediate Accounting 17th Edition Stice)

LAFAYETTE CORPORATION, a client, requests that you compute the appropriate balance of its
estimated liability for product warranty account for a statement as of June 30, 2015.

Lafayette Corporation manufactures television components and sells them with a 6-month
warranty under which defective components will be replaced without charge. On December 31,
2014, Estimated Liability for Product warranty had a balance of P620,000. By June 30, 2015,
this balance had been reduced to P120,400 by debits for estimated net cost of components
returned that had been sold in 2014.

The corporation started out in 2015 expecting 7% of the peso volume of sales to be returned.
However, due to the introduction of new models during the year, this estimated percentage of
returns was increased to 10% on May 1. It is assumed that no components sold during a given
month are returned in that month. Each component is stamped with a date at time of sale so
that the warranty may be properly administered. The following table of percentages indicates
the likely pattern of sales returns during the 6-month period of the warranty, starting with the
month following the sale of components.

Percentage of Total
Month Following Sale Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth10% each month 30

Gross sales of components were as follows for the first six months of 2015:

Month Amount Month Amount

January P4,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000

The corporations warranty also covers the payment of freight cost on defective components
returned and on the new components sent out as replacements. This freight cost runs
approximately 5% of the sales price of the components returned. The manufacturing cost of
the components is roughly 70% of the sales price, and the salvage value of returned
components averages 10% of their sales price. Returned components on hand at December
31, 2013, were thus valued in inventory at 10% of their original sales price.

Based on the given information, determine the following:

1. Total estimated returns from the sales made during the first 6 months of 2015
A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500

2. Total estimated returns subsequent to June 30, 2015

A. P678,250 B. P648,850 C. P591,850 D. P615,950

3. Estimated loss on component replacement (in percentage of sales price)

A. 65% B. 75% C. 70% D. 80%

4. Required Estimated Liability for Product Warranty balance at June 30, 2015
A. P301,353 B. P421,753 C. P120,400 D. P77,847

5. Required adjustment to liability account

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A. P301,353 debit C. P421,753 debit

B. P301,353 credit D. P421,753 credit
(Intermediate Accounting 13TH ED - KIESO)

MALOX Specialty Company manufactures three models of gear shift components for bicycles
that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning
operations in 2012, Malox has used normal absorption costing and has assumed a first-in, first-
out cost flow in its perpetual inventory system. The balances of the inventory accounts at the
end of Maloxs fiscal year, November 30, 2015, are shown below. The inventories are stated at
cost before any year-end adjustments.

Finished goods P647,000

Work in process 112,500
Raw materials 264,000
Factory supplies 69,000

The following information relates to Maloxs inventory and operations.

1. The finished goods inventory consists of the items analyzed below.

Cost NRV
Down tube shifter
Standard model P 67,500 P 67,000
Click adjustment model 94,500 89,000
Deluxe model 108,000 110,000
Total down tube shifters 270,000 266,000

Bar end shifter

Standard model 83,000 90,050
Click adjustment model 99,000 97,550
Total bar end shifters 182,000 187,600

Head tube shifter

Standard model 78,000 77,650
Click adjustment model 117,000 119,300
Total head tube shifters 195,000 196,950
Total finished goods P647,000 P650,550

2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on

3. Three-quarters of the bar end shifter finished goods inventory had been pledged as
collateral for a bank loan.

4. One-half of the raw materials balance represents derailleurs acquired at a contracted

price 20 percent above the net realizable value. The net realizable value of the rest of
the raw materials is P127,400.

5. The total net realizable value of the work in process inventory is P108,700.

6. Included in the cost of factory supplies are obsolete items with historical cost of P4,200.
The net realizable value of the remaining factory supplies is P65,900.

7. Malox applies the lower of cost or net realizable value method to each of the three types
of shifters in finished goods inventory. For each of the other three inventory accounts,
Malox applies the lower of cost or net realizable value method to the total of each
inventory account.
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8. Consider all amounts presented above to be material in relation to Maloxs financial

statements taken as a whole.

Based on the preceding information, determine the proper values of the following on November
30, 2015.

1. Finished goods inventory

A. P647,000 B. P643,000 C. P650,550 D. P654,550

2. Work in process inventory

A. P108,300 B. P112,500 C. P108,700 D. P104,500

3. Raw materials inventory

A. P264,000 B. P227,400 C. P242,000 D. P237,400

4. Factory supplies
A. P64,800 B. P65,900 C. P61,700 D. P69,000

5. Which of the following best describes the PAS 2 requirement for applying the same cost
formula to all inventories?
A. When they are purchased from different suppliers.
B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.
Page 11


(IFRS Practical Implementation Guide and Workbook 2 nd edition)

GATAS, INC. produces milk on its farms. It produces 30% of the countrys milk that is
consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500 heifers. The
farms produce 8 million kilograms of milk a year, and the average inventory held is 150,000
kilograms of milk. However, the company is currently holding stocks of 500,000 kilograms of
milk in powder form.

At October 31, 2015, the herds are:

21,000 cows (3 years old), all purchased on or before November 1, 2014

7,500 heifers, average age 1.5 years, purchased on April 1, 2015
3,000 heifers, average age 2 years, purchased on November 1, 2014

No animals were born or sold in the year.

The unit fair values less estimated point-of-sale costs were:

1-year-old animal at October 31, 2015 P3,200
2-year-old animal at October 31, 2015 4,500
1.5-year-old animal at October 31, 2015 3,600
3-year-old animal at October 31, 2015 5,000
1-year-old animal at November 1, 2014 and
April 1, 2015 3,000
2-year-old animal at November 1, 2014 4,000

The company has had problems during the year: Contaminated milk was sold to customers. As
a result, milk consumption has gone down. The government has decided to compensate
farmers for potential loss in revenue from the sale of milk. This fact was published in the
national press on September 1, 2015. Gatas received an official letter on October 10, 2015,
stating that P5 million would be paid to it on January 2, 2016.

The companys business is spread over different parts of the country. The only region affected
by the contamination was Central Visayas, where the government curtailed milk production in
the region. The cattle were unaffected by the contamination and were healthy. The company
estimates that the future discounted cash flow income from the cattle in the Central Visayas
region amounted to P4 million, after taking into account the government restriction order. The
company feels that it cannot measure the fair value of the cows in the region because of the
problems created by the contamination. There are 6,000 cows and 2,000 heifers in the region.
All these animals had been purchased on November 1, 2014. A rival company had offered
Gatas P3 million for these animals after point-of-sale costs and further offered P6 million for the
farms themselves in that region. Gatas has no intention of selling the farms at present. The
company has been applying PAS 41 since November 1, 2014.

1. What is the fair value of the cattle (excluding Central Visayas region) at November 1,
A. P93 million B. P64 million C. P63 million D. P48 million

2. What is the fair value of the cattle (excluding Central Visayas region) at October 31, 2015?
A. P106.5 million B. P113.25 million C. P105.6 million D. P105.75 million

3. What is the increase in fair value of the cattle (excluding Central Visayas region) due to
price change?
A. P10.7 million B. P12.8 million C. P9.2 million D. P16.7 million

4. What is the increase in fair value of the cattle (excluding Central Visayas region) due to
physical change?
A. P9.2 million B. P11.8 million C. P18.55 million D. P9.4 million

5. On October 31, 2015, the cattle in the Central Visayas region would be valued at
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A. P39 million B. P3 million C. P4 million D. P5 million



MINA MINING CO. has acquired a track of mineral land for P27,000,000. Mina Mining estimates
that the acquired property will yield 120,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 6,000 tons of ore will be mined the
first and last year and 12,000 tons every year in between. (Assume 11 years of mining
operations.) The land will have a residual value of P900,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of P1,080,000.
The company estimates that these structures can be used for 15 years but, because they must
be dismantled if they are to be moved, they have no residual value. Mina Mining does not
intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of
P1,800,000. The machinery cost the former owner P4,500,000 and was 50% depreciated when
purchased. Mina Mining estimates that about half of this machinery will still be useful when the
present mineral resources have been exhausted but that dismantling and removal costs will just
about offset its value at that time. The company does not intend to use the machinery
elsewhere. The remaining machinery will last until about one-half the present estimated
mineral ore has been removed and will then be worthless. Cost is to be allocated equally
between these two classes of machinery.

1. What are the estimated depletion and depreciation charges for the first year?
Depletion Depreciation
A. P2,610,000 P189,000
B. P1,305,000 P378,000
C. P2,610,000 P234,000
D. P1,305,000 P189,000

2. What are the estimated depletion and depreciation charges for the 5 th year?
Depletion Depreciation
A. P1,305,000 P378,000
B. P2,610,000 P234,000
C. P2,610,000 P378,000
D. P1,305,000 P234,000

3. What are the estimated depletion and depreciation charges for the 6 th year?
Depletion Depreciation
A. P2,610,000 P378,000
B. P1,305,000 P288,000
C. P1,305,000 P189,000
D. P2,610,000 P288,000

4. What are the estimated depletion and depreciation charges for the 11 th year?
Depletion Depreciation
A. P1,305,000 P99,000
B. P1,305,000 P189,000
C. P2,610,000 P99,000
D. P2,610,000 P234,000

5. What are the depletion and depreciation charges for the first year assuming actual
production of 5,000 tons of mineral ore? (Nothing occurred during the year to cause the
company engineers to change their estimates of either the mineral resources or the life of
the structures and equipment.)
Depletion Depreciation
A. P1,087,500 P157,500
Page 13

B. P1,305,000 P99,000
C. P1,305,000 P189,000
D. P1,087,500 P82,500

DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in the demand
for its products over the last several years. This prompted the company to obtain additional
manufacturing facility. A real estate firm located an available factory near Debbys production
facility, and Debby agreed to purchase the factory and used machinery from Que Company on
October 1, 2014. Renovations were necessary to convert the factory for Debbys manufacturing

The terms of the agreement required Debby to pay Que P1,500,000 when renovations started
on January 1, 2015, with the balance to be paid as renovations were completed. The overall
purchase price for the factory and machinery was P12,000,000. The building renovations were
contracted to Malibay Construction Company at P3,000,000. The payments made, as
renovations progressed during 2015, are shown below. The factory was placed in service on
January 1, 2016.

Que Malibay

January 1 P 1,500,000
April 1 2,700,000 P 900,000
October 1 3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 P3,000,000

On January 1, 2015, Debby obtained a 2-year, P3 million loan with a 12% interest rate to
finance the renovation of the acquired factory. This is Debbys only outstanding loan during

Debbys policy regarding purchases of this nature is to use the appraisal value of the land for
book purposes and prorate the balance of the purchase price over the remaining items. The
building had originally cost Que P9,000,000 and had a net book value of P1,500,000, while the
machinery originally cost P3,750,000 and had a net book value of P1,200,000 on the date of
sale. The land was recorded on Ques books at P1,200,000.

The following values were determined based on appraisal conducted by independent appraisers
at the time of acquisition.

Land P8,700,000
Building 3,150,000
Machinery 1,350,000

Gin G. Neer, Debbys chief engineer estimated that the renovated plant would be used for 15
years, with an estimated residual value of P900,000. Neer estimated that the productive
machinery would have a remaining useful life of 5 years and residual value of P90,000. Debbys
depreciation policy is to apply the 200% declining balance method for machinery and the 150%
declining balance method for the plant. One-half years depreciation is taken in the year the
plant is placed in service and one-half year is allowed when the property is disposed of or
Page 14

Determine the amounts to be recorded on the books of Debby Corp. as of December 31, 2015,
for each of the following properties.

1. Land
A. P7,909,000 B. P8,700,000 C. P9,060,000 D. P10,909,000

2. Building
A. P5,670,000 B. P6,223,600 C. P3,223,600 D. P5,310,000

3. Machinery
A. P1,227,300 B. P1,098,000 C. P1,335,300 D. P990,000

Calculate the 2016 depreciation expense for each of the following properties.

4. Building
A. P238,500 B. P311,180 C. P283,500 D. P265,500

5. Machinery
A. P180,000 B. P198,000 C. P219,600 D. P227,460
Page 15



Presented below are two independent situations. Answer the questions at the end of each

GARLA HOME IMPROVEMENTS installs replacement siding, windows, and louvered glass doors
for single family homes and condominium complexes in Quezon City. The company is in the
process of preparing its annual financial statements for the fiscal year ended May 31, 2015, and
Jimmy Lansang, controller for GARLA, has gathered the following data concerning inventory.

At May 31, 2015, the balance in GARLAs Raw Materials Inventory account was P1,224,000, and
the Allowance to Reduce Inventory to NRV had a credit balance of P82,500. Lansang
summarized the relevant inventory cost and market data at May 31, 2015, in the schedule

Cost Sales Price Net Realizable Value

Aluminum siding P 210,000 P 192,000 P 168,000
Cedar shake siding 258,000 282,000 254,400
Louvered glass doors 336,000 559,200 504,900
Thermal windows 420,000 464,400 420,000
P1,224,000 P1,497,600 P1,347,300

1. What amount should be reported as Allowance to Reduce Inventory to Net Realizable

Value at May 31, 2015?
A. P168,900 B. P45,600 C. P273,600 D. P123,300

2. What amount of gain or loss should be recorded for the year ended May 31, 2015, due to
the change in the Allowance to Reduce Inventory to Net Realizable Value?
A. P36,900 gain B. P86,400 loss C. P40,800 loss D. P82,500 gain

MANGO BANGGO purchased a mango farm in August 2015 for P2,250,000. The purchase was
risky because the growing season was coming to an end, the mangoes must be harvested in
the next few weeks, and Mango has limited experience in carrying off a mango harvest.

At the end of the first quarter of operations, Mango is feeling pretty good about his early
results. The first harvest was a success; 30,000 kilos of mangoes were harvested with a value
of P90,000 (based on current local commodity prices at the time of harvest). The fair value of
Mangos mango farm has increased by P45,000 at the end of the quarter. After storing the
mangoes for a short period of time, Mango was able to sell the entire harvest for P105,000.

3. What amount of gain should be recognized on the change in fair value of Mangos mango
A. P150,000 B. P45,000 C. P90,000 D. P135,000

4. At what amount should the mangoes harvested be initially recorded on Mangos books?
A. P90,000 B. P105,000 C. P60,000 D. P150,000

5. What is the total effect on income for the quarter related to Mangos biological asset and
agricultural produce?
A. P150,000 B. P45,000 C. P15,000 D. P60,000
Page 16


(IFRS for SMEs Training Modules Modules 14, 18 and 21)

The following independent cases relate to different SMALL AND MEDIUM-SIZED ENTITIES

Case 1

On January 1, 20X4, SME A acquired a trademark for a line of products in a separate acquisition
from a competitor for P300,000. SME A expected to continue marketing the line of products
using the trademark indefinitely. An analysis of (i) product life cycle studies, (ii) market,
competitive and environmental trends, and (iii) brand extension opportunities provides evidence
that the line of trademarked products may generate net cash inflows for the acquiring entity for
an indefinite period. Because management is unable to estimate the useful life of the
trademark, SME A amortizes the cost of the trademark over 10 years (i.e., its presumed useful
life) using the straight-line method.

In 20X7, a competitor unexpectedly revealed a technological breakthrough that is expected to

result in a product, that when launched by the competitor, will extinguish for SME As patented
product-line. Demand for SME As patented product-line is expected to remain strong until
December 20X9, when the competitor is expected to launch its new product.

On December 31, 20X7, SME A assessed the recoverable amount of the trademark at P50,000.
SME A intends to continue manufacturing the patented products until December 31, 20X9. SME
A has a December 31 financial year-end.

Case 2

SME B gives warranties at the time of sale to purchasers of its product. Under the terms of the
contract of sale, SME B undertakes to make good, by repair or replacement, manufacturing
defects that become apparent within one year from the date of sale. On the basis of
experience, it is probable (i.e., more likely than not) that there will be some claims under the

At December 31, 20X1, SME B appropriately recognized P50,000 warranty provision. SME B
incurred and charged P140,000 against the warranty provision in 20X2. P80,000 of this related
to warranties for sales made in 20X2. The increase during 20X2 in the discounted amount
recognized as a provision at December 31, 20X2 arising from the passage of time is P2,000.

At December 31, 20X2, SME B estimated that it would incur expenditures in 20X3 to meet its
warranty obligations at December 31, 20X2, as follows:

5 percent probability of P400,000

20 percent probability of P200,000
50 percent probability of P80,000
25 percent probability of P20,000

Assume for simplicity that the 20X3 cash flows for warranty repairs and replacements take
place, on average, on June 30, 20X3.

An appropriate discount rate is 10 percent per year. An appropriate risk adjustment factor to
reflect the uncertainties in the cash flow estimates is an increment of 6 percent to the
probability-weighted expected cash flows.
Page 17

SME B is also the defendant in a breach of patent lawsuit. Its lawyers believe there is a 70
percent chance that SME B will successfully defend the case. However, if the court rules in
favor of the claimant, the lawyers believe that there is a 60 percent chance that the entity will
be required to pay damages of P2 million (the amount sought by the claimant) and a 40
percent chance that the entity will be required to pay damages of P1 million (the amount that
was recently awarded by the same judge in a similar case). Other amounts of damages are

The court is expected to rule in late December 20X3. There is no indication that the claimant
will settle out of court.

A 7 percent risk adjustment factor to the cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimates. An appropriate discount rate is 10 percent per year.

Case 3

On January 1, 20X1, SME AA acquired 25 percent of the equity of each of entities BB, CC and
DD for P10,000, P15,000 and P28,000, respectively. SME AA has significant influence over
entities BB, CC and DD. Transaction costs of 1 percent of the purchase price of the shares
were incurred by SME AA.

On January 2, 20X1, entity BB declared and paid dividends of P1,000 for the year ended 20X0.
On December 31, 20X1, entity CC declared a dividend of P8,000 for the year ended 20X1. The
dividend declared by entity CC was paid in 20X2.

For the year ended December 31, 20X1, entities BB and CC recognized profit of respectively
P5,000 and P18,000. However, entity DD recognized a loss of P20,000 for that year.

Published price quotations do not exist for the shares of entities BB, CC and DD. Using
appropriate valuation techniques, SME AA determined the fair value of its investment in entities
BB, CC and DD at December 31, 20X1 as P13,000, P29,000 and P15,000, respectively. Costs to
sell are estimated at 5 percent of the fair value of the investments.

Based on the above information, calculate the following:

1. Trademark amortization for the year ended December 31, 20X7

A. P90,000 B. P70,000 C. P30,000 D. P 0

2. Impairment loss to be recognized for the trademark at December 31, 20X7

A. P90,000 B. P50,000 C. P130,000 D. P60,000

3. The carrying amount of the warranties provision at December 31, 20X2

A. P88,000 B. P50,000 C. P52,000 D. P106,000

4. The amount of loss on litigation that should be reported by SME B at December 31, 20X2
A. P1,000,000 B. P1,070,000 C. P1,019,050 D. P 0
Page 18

Assume SME AA measures all its investments in associates using the cost

5. The amount of impairment loss that SME AA should recognize at December 31, 20X1
A. P13,750 B. P14,030 C. P9,030 D. P 0

6. The net amount to be recognized by SME AA in profit or loss for the year ended December
31, 20X1
A. P11,780 B. P14,030 C. P2,000 D. P2,250

Assume SME AA measures all its investments in associates using the equity
method. Assume that there is neither implicit goodwill nor fair value

7. The amount of impairment loss that SME AA should recognize at December 31, 20X1
A. P13,750 B. P14,030 C. P9,030 D. P 0

8. The net amount to be recognized by SME AA in profit or loss for the year ended December
31, 20X1
A. P8,280 B. P6,030 C. P6,780 D. P2,250

Assume SME AA measures all its investments in associates after initial

recognition using the fair value model.

9. The increase in fair value that SME AA should recognize in profit or loss for the year ended
December 31, 20X1
A. P4,000 B. P3,470 C. P1,150 D. P620

10. The carrying amount of the investment in associates under each of the following
Cost Equity Fair Value
Model Method Model
A. P38,970 P43,000 P57,000
B. 38,970 52,030 54,150
C. 39,500 43,000 57,000
D. 39,500 52,030 54,150
Page 19


(Intermediate Accounting 17Th Edition Stice)

HIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The bank has
requested audited financial statements. Hiatts financial statements have never been audited
before. It has prepared the following comparative financial statements for the years ended
December 31, 2015 and 2014.


December 31, 2015 and 2014
2015 2014
Current assets:
Cash and cash equivalents P1,205,000 P 800,000
Accounts receivable 1,960,000 1,480,000
Allowance for bad debts (185,000) (90,000)
Inventory 1,035,000 1,010,000
Total current assets 4,015,000 3,200,000
Noncurrent assets:
Property, plant, and equipment 835,000 847,500
Accumulated depreciation (608,000) (532,000)
Total noncurrent assets 227,000 315,500
Total assets P4,242,000 P3,515,500

Liabilities and Shareholders Equity

Accounts payable P 607,000 P 980,500
Shareholders equity:
Ordinary shares, P20 par value;
150,000 shares authorized;
65,000 shares issued and outstanding 1,300,000 1,300,000
Retained earnings 2,335,000 1,235,000
Total shareholders equity 3,635,000 2,535,000
Total liabilities and shareholders equity P4,242,000 P3,515,500


For the Years Ended December 31, 2015 and 2014

2015 2014
Sales P5,000,000 P4,500,000
Cost of goods sold 2,150,000 1,975,000
Gross income 2,850,000 2,525,000
Operating expenses:
Selling expenses 1,150,000 1,025,000
Administrative expenses 600,000 525,000
Total operating expenses 1,750,000 1,550,000
Net income P1,100,000 P 975,000
Page 20

The 2015 audit revealed the following facts:

a. On January 5, 2014, Hiatt Textile Corporation had charged a 5-year insurance premium to
expense. The premium totaled P31,000.

b. The amount of loss due to bad debts has steadily decreased over the last 2 years. Hiatt
Textile Corporation has decided to reduce the amount of bad debt expense from 2% to 1
% of sales, beginning with 2015. (A charge of 2% has already been made for 2014.)

c. Hiatt Textile Corporation uses the periodic inventory system. The following are the
inventory errors for the last 2 years.
2014 - Ending inventory overstated by P75,500
2015 - Ending inventory overstated by P99,000

d. An equipment costing P150,000 was acquired on January 3, 2014. The purchase was
recorded by a charge to operating expense. The equipment has a useful life of 10 years
and a residual value of P25,000. Hiatt Textile Corporation uses the straight-line method in
depreciating its assets.

e. Assume that the books for 2015 have not yet been closed. Ignore tax implications.

Based on the above information, answer the following:

1. The December 31, 2015 adjusting entry to correct the expensing of insurance premium
paid is
A. Prepaid insurance 18,600
Insurance expense 6,200
Retained earnings 24,800
B. Prepaid insurance 18,600
Retained earnings 18,600
C. Insurance expense 18,600
Retained earnings 18,600
D. Insurance expense 6,200
Retained earnings 6,200

2. The December 31, 2015 adjusting entry to correct the expensing of the equipment
purchased on January 3, 2014 should include a credit to
A. Accumulated depreciationP12,500.
B. Retained earningsP137,500.
C. EquipmentP12,500.
D. Depreciation expenseP12,500.

3. The December 31, 2015 adjusting entry to correct the inventory errors should include a
debit to
A. Cost of goods soldP99,000.
B. InventoryP23,500.
C. Retained earningsP75,500.
D. Cost of goods soldP75,500.

4. What is Hiatts corrected net income for the year ended December 31, 2014?
A. P1,012,200 B. P1,212,800 C. P786,800 D. P1,061,800

5. What is Hiatts corrected net income for the year ended December 31, 2015?
A. P1,095,200 B. P1,129,800 C. P1,082,800 D. P1,107,800

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