CHAPTER 12: events after reporting period ANSWER KEY

Problem 1

Snorlax Technologies produces computer software that Turtwig Solutions sells. Snorlax
receives a royalty of 15% of sales. Turtwig Solutions pays royalties to Snorlax
Technologies on a semi-annual basis on May 1 for sales made in July through
December of the previous year and on November 1 for sales made in January through
June of the current year.

Royalty expense for Turtwig Solutions and royalty income for Snorlax Technologies in
the amount of P600,000 were accrued on December 31, 2017. Cash in the amounts of
P600,000 and P1,000,000 was paid and received on May 1 and November 1, 2018,
repectively. Software sales during the July to December 2018 period totaled
P15,000,000.

Required:

1. Calculate the amount of royalty expense for Turtwig Solutions and royalty
income for Snorlax during 2018.

2. Record the adjusting entry that each entity made on December 31, 2018

Problem 2

Prepare the adjusting entry for Dalisay Cargo under each of the following for the year
ending December 31, 2018:

a. Paid P24,000 for a 1 year fire insurance to commence on September 1. The

amount of premium was debited to Prepaid Insurance.
b. Borrowed P100,000 by issuing a 1 year note with 7% annual interest to Century
Savings Bank in October 1, 2018.
c. Paid P160,000 cash to purchase a delivery van (surplus) on January 1. The van
was expected to have a 3 year life and a P10,000 salvage value. Depreciation is
computed on a straight line basis.
d. Received an P18,000 cash advance for a contract to provide services in the
future. The contract required a 1 year commitment, starting April 1.
e. Purchased P6,400 of supplies on account. At year end, P750 of supplies
remained on hand.
 f. Invested P90,000 cash in a certificate of deposit that paid 4% annual interest.
The certificate was acquired on May 1 and carried a 1 year term to maturity.
g. Paid P78,000 cash in advance on September 1 for a 1 year lease on office
space.

Problem 3

On June 30, 2018, the end of fiscal year, the following information is available to Luka
Doncic’s accountants for making adjusting entries:

a. Among the liabilities of the entity is a P2,400,000 mortgage payable. On June 30,
the accrued interest on this mortgage amounted to P120,000.
b. Assume that on, July 2, a Friday, the entity, which is on five-day workweek and
pays employees weekly, paid its regular salaried employees P192,000
c. On June 29, the entity completed negotiations and signed a contract to provide
services to a new client at an annual rate of P36,000.
d. The supplies account showed a beginning balance of P16,150 and purchases
during the year of P37,660. The year end inventory revealed supplies on hand of
P11,860.
e. The prepaid insurance account showed the following entries on June 30:
Beginning balance P15,300
January 1 29,000
May 1 33,660
The beginning balance represents the unexpired portion of a one year policy
purchased in April of the previous year. The January 1 entry represented a new
one year policy, and the May 1 entry is the additional coverage of three year
policy.

f. The following table contains the cost and annual depreciation for buildings and
equipment, all of which were purchased before the current year:
Account Cost Annual depreciation
Buildings 1,850,000 73,000
Equipment 2,180,000 218,000

g. On June 1, the entity completed negotions with another client andt accepted an
advance of P210,000 for services to be performed in the next year. The
P210,000 was credited to unearned service revenues.
h. The entity calculated that as at June 30 it had earned P35,000 on a P75,000
contract that will be completed and billed in August.