CA5105: INTERMEDIATE ACCOUNTING I

PRACTICE PROBLEMS

A. COMPUTATION OF CORRECT CASH BALANCE

The accountant of Pikachu Corporation is in the process of preparing the company’s financial
statements for the year ended December 31, 2018. He is trying to determine the correct
balance of cash and cash equivalents to be reported as a current asset on the statement of
financial position. The following items were considered:

 Balances in the company’s bank accounts at Metrobank:

 Current account P 81,000
 Savings account 132,600
 Undeposited customer checks of P22,200 (including a customer check dated January 2,
2019 for P3,000)
 Currency and coins on hand of P3,480
 Savings account at PSBank with a balance of P2,400,000 to be used accumulate cash for
future plant expansion (in 2022)
 Petty cash of P4,000 (currency of P1,200 and unreplenished vouchers of P2,800)
 Compensating balance of P120,000 in its current account with Security Bank. This
represents a 20% holdout for the P600,000 loan taken by Pikachu from the bank. As part
of the loan agreement, Pikachu is legally restricted to withdraw the funds until the loan is
due in 2023
 Treasury bills:
 Issued 11 months ago, purchased by Pikachu two months ago P 90,000
 Purchased 9 months ago, remaining maturity of three months 120,000
 Time deposit of P100,000

1. How much is the correct balance of cash and cash equivalents to be reported in the current
assets section of the statement of financial position?

Cash in bank 213,600

Undeposited customer checks, net of customer's postdated check 19,200
Currency and coins on hand 3,480
Petty cash (only currency and coins) 1,200
Treasury bills
(issued 11 months ago, but purchased by Pikachu 2 months ago) 90,000
Time deposit 100,000

CORRECT CASH BALANCE PER STATEMENT OF FINANCIAL POSITION 427,480

B. PETTY CASH FUND

The auditor of Charmander, Inc. examined the petty cash fund immediately after the close of
the business, July 31, 2018. The petty cash custodian presented the following during the
count:

Currency P 1,650
Petty cash vouchers:
Postage 420
Office supplies 900
Transportation 340
Computer repairs 800
Advances to employee 1,500
Check drawn by Charmander payable to the petty cash custodian 7,200
 Unused postage stamps 300
Employee’s NSF check 1,000
An envelope containing employee contributions marked
“for mid-year party” 1,890
Total P16,000

The general ledger shows an imprest petty cash fund balance of P16,000.

2. How much is the petty cash shortage or overage, if any?

Total items accounted for by the PCF:

Currency 1,650
Petty cash vouchers 3,960
Replenishment check 7,200
Employee's NSF check 1,000 13,810

Total accountability by PCF (imprest balance of PCF in the books) 16,000

PETTY CASH FUND SHORTAGE (2,190)

Notes:

a. Unused postage stamps are not included since the voucher when these supplies were purchased
were already accounted for by the petty cash custodian.
b. Envelope containing money from employees is not an asset by the company.
3. What is the adjusted balance of the petty cash fund as of July 31, 2018?

Currency 1,650
Replenishment check 7,200
ADJUSTED BALANCE OF THE PETTY CASH FUND 8,850

C. BANK RECONCILIATION: ADJUSTED BALANCE METHOD & PETTY CASH FUND

Your audit of the cash account of Bulbasaur Corporation disclosed the following information:

a. Balance of “Cash in Bank” account, Dec. 31, 2018 P35,000

b. Bank statement balance, Dec. 31, 2018 60,000
c. Note collected by the bank in December
(principal plus interest of P800, less collection fee of P200) 27,600
d. Debit memo for a checkbook ?
e. Deposit in transit, Dec. 31, 2018 15,200
f. Outstanding checks 40,600
g. Transposition error made by the bank in entering a deposit
made by Bulbasaur on Dec. 28, 2018
Credited to the bank account as 54,000
Amount appearing on Bulbasaur’s duplicate copy
of the deposit slip 45,000
h. Erroneous bank debit 26,700
 i. Included in the Cash in Bank account is the petty cash fund balance of P10,000. Your
count revealed the following items:

Currency and coins P3,000

Voucher for:
Supplies 2,400
Transportation 100

IOUs 4,000

4. How much is the principal amount of the note collected by the bank in December?

Proceeds from the note collected 27,600

Service charge deducted 200
Interest added from the proceeds (800)
PRINCIPAL AMOUNT OF THE NOTE 27,000
5. What is the adjusted cash in bank balance at December 31, 2018?

BANK BOOK
Unadjusted balances 60,000 35,000
Proceeds from note collected 27,600
Debit memo for the cost of checkbook (SQUEEZED) (300)
Deposit in transit 15,200
Outstanding checks (40,600)
Erroneous bank credit (9,000)
Erroneous bank debit 26,700
Petty cash fund (not included in the reconciliation) (10,000)
ADJUSTED BALANCES 52,300 52,300
6. How much is the cost of the checkbook?

Debit memo for the cost of checkbook (SQUEEZED) (300)

7. What is the amount of petty cash shortage at December 31, 2018?

Currency and coins 3,000

Vouchers for:
Supplies 2,400
Transportation 100 2,500
IOUs (referring to an advance made to an employee) 4,000
Total items accounted for by the PCF 9,500
Total accountabiliity (imprest balance of the PCF) 10,000
PETTY CASH FUND SHORTAGE (500)
8. How much is the adjusted petty cash balance at December 31, 2018?

Currency and coins 3,000

D. ACCOUNTING FOR ACCOUNTS RECEIVABLE

A portion of the sales journal of Squirtle Company for year 2018 are as follows:

Date Customer Amount Credit terms

December 10, 2018 Abra, Inc. P 700,000 3/10, n/30
December 23, 2018 Kadabra, Inc. 900,000 2/10, n/30
December 27, 2018 Alakazam, Inc. 1,500,000 1/15, n/35

9. Under the gross method, how much will Squirtle recognize as sales discounts for the year
ended December 31, 2018? Assume that any account whose discount period has not yet
expired is still expected to be collected within the discount period.

Customers expected to still pay within the discount period:

Customer Amount of sale Discount rate Sales discount

Kadabra, Inc. 900,000 2% 18,000
Alakazam, Inc. 1,500,000 1% 15,000
TOTAL SALES DISCOUNTS (GROSS METHOD) 33,000

Under the gross method, for those accounts expected to be collected within the
discount period, recognize an allowance for sales discounts at year-end.

10. Under the net method, how much will Squirtle recognize as sales discounts forfeited for
the year ended December 31, 2018?

Customers that did not pay within the discount period:

Sales discount
Customer Amount of sale Discount rate forfeited
Abra, Inc. 700,000 3% 21,000

11. Under the allowance method, how much is the balance of “allowance for sales discount”
account as of December 31, 2018? Assume that these are the only customers that have
not yet paid their accounts.

Customers with outstanding receivables as of year-end:

Customer Amount of sale Discount rate Sales discount

Kadabra, Inc. 900,000 2% 18,000
Alakazam, Inc. 1,500,000 1% 15,000
TOTAL ALLOWANCE FOR SALES DISCOUNTS 33,000

E. CREDIT CARD SALES

Eevee, Inc. total credit sales for the year ended December 31, 2018 are as follows:

Credit card company Amount

Diners Club P 5,500,000
Mastercard 2,900,000
Visa 2,800,000
 Credit card receipts are subject to the following service charges:

Credit card company Service Charge

Diners Club 5%
Mastercard 3%
Visa 2%

Remittances from Diners Club and Mastercard were already received by Eevee during the
year, while Eevee expects that Visa will remit the collections on January 7, 2019.

12. How much is the balance of Eevee’s accounts receivable as of December 31, 2018?

Credit card company Amount

Visa 2,744,000

Note: Using the “association of costs with related revenues” principle, since the collection
of the proceeds from the credit card company is certain, Eevee, at year-end, shall adjust
for the service charge and offset it against the accounts receivable.

13. How much is Eevee’s total cash receipts from its credit card sales in 2018?

Credit Card Net of service

Company Amount of sale charge Proceeds
Diner's Club 5,500,000 95% 5,225,000
Mastercard 2,900,000 97% 2,813,000
TOTAL CASH COLLECTIONS FROM CC SALES 8,038,000

14. How much is the total credit card service charge recognized by Eevee for the year ended
December 31, 2018?

Credit Card
Company Amount of sale Service charge Proceeds
Diner's Club 5,500,000 5% 275,000
Mastercard 2,900,000 3% 87,000
Visa 2,800,000 2% 56,000
TOTAL SERVICE CHARGE FROM CC SALES 418,000

F. NON-INTEREST BEARING NOTE

On March 1, 2019, Caterpie, Inc. sold one of its vehicles with a cost of P3,500,000 and
accumulated depreciation of P1,800,000. Caterpie received a three-year, non-interest bearing
note for P2,200,000 payable on February 28, 2022. There is no readily available fair value for
the vehicle, but notes of similar amount and tenor are issued at a prevailing rate of 9%.

Round off your answers to the nearest peso:

15. How much is the gain or loss on sale of transportation equipment on March 1, 2019?

Fair value of transportation equipment

(equal to present value of cash flows from the note) 1,698,840
Carrying value of transportation equipment
(cost less accumulated depreciation) 1,700,000
LOSS ON SALE OF TRANSPO EQUIPMENT (1,160)
 16. How much is the interest income recognized by Caterpie for the year ended December
31, 2020?

9%
Date Interest income CV of the note
1-Mar-19 1,698,840
28-Feb-20 152,896 1,851,736
28-Feb-21 166,656 2,018,392
28-Feb-22 181,608 2,200,000

Interest income from Jan. - Feb. 2020 25,483 based on 28-Feb-20 amortization
Interest income from Mar. - Dec. 2020 138,880 based on 28-Feb-21 amortization
TOTAL INTEREST INCOME, 2020 164,363

17. How much is current portion of the notes receivable as of December 31, 2019?

Zero. Since the note is expected to be collected on Feb. 28, 2022, which is beyond 12
months from the date of the reporting period, there is no current portion as of December
31, 2019.

G. NOTE RECEIVABLE WITH AN UNREASONABLY HIGH INTEREST RATE

On January 1, 2019, Haunter Company sold a piece of land carried in its books at P8,000,000
in exchange for a 12% promissory note with a face amount of P9,000,000. The note is payable
in annual installments of P3,000,000 plus accrued interest every December 31, starting
December 31, 2019. There is no established cash price for the land but the prevailing interest
rate for a note of this type is 8%.

Round off your answers to the nearest peso:

Supporting schedule for this problem:

8% 12%
Nominal Premium
Date Effective interest interest amortization Principal CV of note
1-Jan-19 9,633,996
31-Dec-19 770,720 1,080,000 309,280 3,000,000 6,324,716
31-Dec-20 505,977 720,000 214,023 3,000,000 3,110,693
31-Dec-21 248,855 360,000 110,693 3,000,000 -
18. How much is the gain or loss on sale of land on January 1, 2019?

12% 8%
PVF factor
Nominal based on PV of cash
Date Principal interest Total cash flows market interest flows
31-Dec-19 3,000,000 1,080,000 4,080,000 0.9259 3,777,672
31-Dec-20 3,000,000 720,000 3,720,000 0.8573 3,189,156
31-Dec-21 3,000,000 360,000 3,360,000 0.7938 2,667,168
TOTAL PRESENT VALUE OF CASH FLOWS 9,633,996

Fair value of land (equal to present value of cash flows from the note) 9,633,996
Carrying value of the land 8,000,000
GAIN ON SALE OF LAND 1,633,996
19. How much is the total interest collected from the note as of December 31, 2019?

Total interest collected on the note for December 31, 2019 is P1,080,000, which is based
on the stated rate on the note.
20. How much is the interest income recognized in the statement of comprehensive income
for the year ended December 31, 2020?
 Total interest income to be recognized in the SCI for December 31, 2020 is P505,977, which
is based on the effective interest income.

21. How much of the carrying value of the note is classified as non-current as of December
31, 2019?

Total carrying value of the note to be classified as non-current as of Dec. 31, 2019 is
P3,110,693, portion that is collectible beyond 12 months from the date of the reporting
period.

H. ESTIMATING BAD DEBTS EXPENSE

After examination of the records of Lapras, Inc., you determined the following year-end
amounts:

2019 2018
Net credit sales P 2,500,000 P 1,750,000
Accounts receivable 550,000 510,000
Allowance for doubtful accounts 150,000 96,000
Written-off accounts during the previous 27,000 -
year but was subsequently recovered
Accounts written off 35,000

On December 31, 2019, the company changed its accounting estimate of computing the
required balance of its allowance for bad debts at 20% of year-end accounts receivable.

Supporting schedule for this problem:

Before change in After change in

estimate estimate
Allowance for doubtful accounts, January 1, 2019 96,000 96,000
BAD DEBTS EXPENSE FOR THE YEAR (SQUEEZED) 62,000 22,000
Recoveries during the year 27,000 27,000
Accounts written off (35,000) (35,000)
Allowance for doubtful accounts, December 31, 2019 150,000 110,000
22. How much is the bad debts expense for the year ended December 31, 2019, before the
change in estimate?

Bad debts expense before change in estimate is P62,000.

23. How much is the overstatement or understatement of bad debts expense for 2019?

As a result of the change in estimate, the bad debts for 2019 is overstated by P40,000.

24. How much is the amortized cost of the accounts receivable as of December 31, 2019?

December 31, 2019:

Accounts receivable 550,000

Allowance for doubtful accounts (110,000)
AMORTIZED COST 440,000

I. FACTORING OF ACCOUNTS RECEIVABLES

On December 5, 2018, Psyduck, Inc. sold its accounts receivable amounting to P2,000,000
(amortized cost is P1,500,000) to a finance company at a price amounting to 90% of the
 amortized cost of accounts receivable. To cover for returns and other account adjustments,
the finance company withheld 10% of the proceeds.

25. How much is the proceeds from the factoring of receivables at December 5, 2018?

Proceeds from the factoring of receivables 1,350,000

Less: factor's holdback (10% of proceeds) 135,000
NET PROCEEDS FROM FACTORING, Dec. 5, 2018 1,215,000

26. How much is the receivable from the factor as of December 5, 2018?

Factor’s holdback equal to 10% of proceeds or P135,000.

27. How much is the loss on factoring?

Cash 1,215,000
Receivable from factor 135,000
Allowance for doubtful accounts 500,000
LOSS ON FACTORING 150,000
Accounts receivable 2,000,000

Selling price of factored receivables 1,350,000

Carrying value of the factored receivables 1,500,000
LOSS ON FACTORING (150,000)

J. DISCOUNTING OF NOTES RECEIVABLE

On September 1, 2019, Magikarp, Inc. received from a customer an 120-day, P850,000

promissory note with a stated interest rate of 9%. Twenty days after, as part of its liquidity
requirements, Magikarp decided to discount the note with the bank. The bank discounted the
note at 11%. Assume that one year is equal to 360 days.

Round off your answers to the nearest peso:

28. How much is the maturity value of the note to be discounted?

Principal 850,000
Interest (Principal x 9% x 120/360) 25,500
MATURITY VALUE OF THE NOTE 875,500

29. How much is Magikarp’s liability arising from the discounted note, assuming the
discounting is with recourse?

Maturity value of the note 875,500

Discount (Maturity value x 11% x 100/360) (26,751)
PROCEEDS FROM DISCOUNTING 848,749

The proceeds will also be the liability from the discounted note assuming the
discounting is made WITH RECOURSE.
K. IMPAIRMENT LOSS ON RECEIVABLES

Jigglypuff, Inc. has an outstanding P12,000,000 loan from BDO Unibank. Due to external
and internal conditions affecting the company, Jigglypuff experienced declining profitability
and cash flows and is likely to default on its obligation to BDO. Accrued interest on the loan
as of December 31, 2019, the maturity date and date of restructuring, is P1,200,000 based
on the stated rate of 10%. The prevailing market rate for similar obligations at the date of
restructuring is 9%. BDO has not previously recognized any impairment loss on Jigglypuff’s
outstanding loan.

In an effort to collect from the soon-to-be defaulted loan, BDO and Jigglypuff agreed to
restructure the terms of the loan as follows:

a. Reduction of principal to P10,000,000

b. Condonation of half of the accrued interest on the old loan
c. Extension of the maturity date to December 31, 2021, two years after the original
maturity date
d. Reduction of interest rate to 8% of the restructured carrying amount of the loan (new
principal amount plus any accrued interest from the old loan), payable annually on
December 31.

30. How much is the impairment loss to be recognized by BDO Unibank as a result of the
restructuring?

Computation of present value from the restructured loan:

PV of cash
Amount PV factor flows
Principal 10,000,000 0.8264 8,264,000
Interest * 848,000 1.7355 1,471,704
PRESENT VALUE OF CASH FLOWS FROM RESTRUCTURED LOAN 9,735,704

* Computation of annual interest collection

New principal amount 10,000,000

Outstanding accrued interest 600,000
Carrying amount of the restructured loan 10,600,000
New stated interest rate 8%
ANNUAL INTEREST COLLECTION 848,000

Carrying value of the loan to be derecognized 13,200,000

Present value of cash flows from restructured loan 9,735,704
IMPAIRMENT LOSS 3,464,296

Entry to record the restructuring:

Notes receivable - restructured 10,600,000

Loss on impairment of notes receivable 3,464,296
Notes receivable - old 12,000,000
Interest receivable 1,200,000
Discount on restructured notes receivable 864,296