ACC 123: FAR Enhancement

Quiz 1

Part 1. Straight Problem

Problem 1

HYBE Company’s unadjusted trial balance at December 31 included the following accounts:

Debit Credit
Accounts Receivable P1,500,000
Allowance for Doubtful accounts P40,000
Sales 10,000,000
Sales Return and allowances 700,000
The following analysis pertains to the accounts receivable reported in the trial balance:

Classification Balance of A/R Percentage of

Collectible
0–1-month category P500,000 98%
1-6 months category 800,000 95%
Over 6 months 200,000 80%
P1,500,000

Required:

1. HYBE Company estimates its bad debt expense to be 2% of net sales. Determine its bad debt
expense for the year.
2. Assuming its bad debt expense to be 2% of net sales, compute for the allowance for doubtful
account end of the year
3. HYBE company estimates its bad debt expense to be 5% of accounts receivable. Compute for the
allowance for doubtful account end of the year.
4. Assuming its bad debt expense to be 5% of accounts receivable, determine its bad debt expense
for the year.
5. Assuming its bad debt expense to be 5% of accounts receivable, compute for the net realizable
value of the accounts receivable.
6. HYBE company estimates its bad debt expense based on aging, compute for the allowance for
bad debts at the end of the year.
7. Assuming its bad debt expense is based on aging, compute the net realizable value of the
accounts receivable.

ANSWER:

1. Net sales(10,000,000-700,000) 9,300,000

Multiply by: percentage of uncollectible 2%
Bad debt expense 186,000
 2. Allowance for bad debts, beg 40,000
Add: Bad debt expense 186,000
Allowance for bad debt, end 226,000

3. Accounts Receivable, end 1,500,000

Multiply by: percentage of uncollectible 5%
Allowance for bad debts, end 75,000

4. Allowance for bad debts, beg 40,000

Add: Bad debt expense 35,000
Allowance for bad debt, end 75,000

5. Accounts Receivable, end 1,500,000

Less: Allowance for bad debts, end 75,000
Net Realizable value 1,425,000

6. 0-1 month category (500,000x.02) 10,000

1-6 months category (800,000x.05) 40,000
Over 6 months (200,000x.20) 40,000
Allowance for bad debts, end 90,000

7. Accounts receivable, end 1,500,000

Less: Allowance for bad debts, end 90,000
Net Realizable value 1,410,000

Problem 2

On January 1, 2017, HINDI NA AKO SASAMA SA GC KASI GUSTO KO MAGING CPA Company granted a
five-year loan to a borrower amounting to P5,000,000. The loan bears interest of 10% and is collectible
every December 31.

On December 31, 2018, HINDI NA AKO SASAMA SA GC KASI GUSTO KO MAGING CPA Company considers
the loan impaired and that only P4,000,000 principal amount will be collected. No cash was received in
2018. The prevailing rate of interest for the loan of this type is 12%.

HINDI NA AKO SASAMA SA GC KASI GUSTO KO MAGING CPA Company did not accrue the interest on
December 31,2018 and the 4,000,000 will be collectible as follows:

Date Amount
January 1, 2019 P1,000,000
December 31, 2019 2,000,000
December 31, 2020 1,000,000
Required: Compute for the following

8. Loan Impairment loss in 2018

9. Interest income in 2019
10. Carrying amount of the loan, December 31, 2019
ANSWER:

8. Carrying amount of receivable = Principal 5,000,000

Less: Present value of expected cash flow 3,644,600
Loan impairment 12/31/2018 1,355,400

Present value of expected cash flows:

Date Cash flow Present Value factor Total

01/01/2019 P1,000,000 1.000 P1,000,000
12/31/2019 2,000,000 0.9091 1,818,200
12/31/2020 1,000,000 0.8264 826,400
Total present value of future cash flow P3,644,600

Amortization table

Date Annual collection Interest Income Amortization Present value

12/31/2018 3,644,600
01/01/2019 1,000,000 - 1,000,000 2,644,600
12/31/2019 2,000,000 264,460 1,735,540 909,060
12/31/2020 1,000,000 90,906 909,060 -

9. Interest Income = 264,460 (see amortization table)

10. Carrying amount 909,060 (see amortization table)
Problem 3

On December 31, HINDI NA AKO SASAMA SA GC KASI GUSTO KO MAGING CPA Company – Accounts
Receivable balance per ledger of P1,250,000 includes:

1. MasterCard or VISA credit card sale of merchandise to customer P10,000

2. Overpayment to supplier for inventory purchased on account 20,000
3. Insurance claim on automobile accident 2,000
4. Advance to sales manager due in one year 4,000
5. 5-year note receivable due from company president (This was issued by
the president for the loan granted to him.) 300,000
6. Interest due on 5-year note from company president, interest payable
annually 6,000
7. Acceptance of 6 month note for past due-account arising from sale of
inventory 5,000
8. Accrued interest receivable on the note above 100
9. Overpayment by customer of an account receivable (5,000)
10. Account receivable to customer definitely uncollectible 4,000
11. Other trade accounts receivable – unassigned 50,000
12. Trade account receivable – assigned 10,000
13. Note receivable customer (this note is for cash loan made to this customer
collectible in 3 years) 30,000
14. Claim for a tax refund from last year 3,000
15. Prepaid insurance – 4months remaining in the policy period 4,000
16. Advances to or receivables from stockholders, (P100,000 is collectible
currently) 250,000
17. Advances to affiliates 125,000
18. Subscription receivable 150,000
19. Special deposits on contract bids 30,000
20. Dividend receivables 10,000
21. Notes receivable dishonored 5,000
22. Accrued rent receivable 6,000
23. Claims against common carries 4,900
24. Acceptance of 8-month note from employees arising from sale of
inventory 6,000
25. Trade installment receivable due within 16 months, gross of unearned
interest income of P20,000 220,000
TOTAL P1,250,000
Required:

11. Trade accounts receivables as of December 31

12. Trade notes receivables as of December 31
13. Trade and other receivables to be presented in the current asset section of the balance sheet
14. Noncurrent receivables as of December 31
15. Non-trade receivables as of December 31
ANSWER:

11. Item 1 10,000

Item 11 50,000
Item 12 10,000
Item 21 5,000
Item 25 (220k-20k) 200,000
Total Trade AR 275,000

12. Item 7 5,000

Item 24 6,000
Total Trade NR 11,000

13. Total AR 275,000

Total NR 11,000
Item 2 20,000
Item 3 2,000
Item 4 4,000
Item 6 6,000
Item 8 100
Item 14 3,000
Item 16 100,000
Item 20 10,000
Item 22 6,000
Item 23 4,900
Total Trade and Other Receivable CA 442,000

14. Item 5 300,000

Item 13 30,000
Item 16 (250k-100k) 150,000
Item 17 125,000
Item 19 30,000
Total NC Receivables 635,000
OR
Unadjusted AR (net of 20,000
Unearned interest income and 4,000
uncollectible acct) 1,250,000 – 20,000
- 4,000 1,226,000
Add: Item 9 5,000
Less: Prepaid insurance – 4months 4,000
Subscription receivables – non current 150,000
Total trade and other receivables CA 442,000
Total NC Receivables 635,000
 15. Unadjusted AR (net of 20,000
Unearned interest income and 4,000
uncollectible acct) 1,250,000 – 20,000
- 4,000 1,226,000
Add: Item 9 5,000
Less: Prepaid insurance – 4months 4,000
Total Trade AR 275,000
Total Trade NR 11,000
Subscription receivables - noncurrent 150,000
Total Nontrade receivables 791,000

Notes:

 Prepaid insurance for 4 months is a separate item in the current asset section of the statement
of financial position
 Overpayment by customer of an account receivables is a current liability
 Subscription receivables is deducted from the subscribed share capital in the SHE section of the
SFP.

Problem 4

HYBE incurred the following cost in relation to its merchandise inventory:

1. Items in the warehouse during the count P1,090,00

0
2. Items out on consignment at another company’s store 70,000
3. Items sold on an installment basis (bad debts can be reasonably estimated) 40,000
4. Items purchased FOB shipping point that is in transit at December 31 500,000
5. Freight charges on goods purchased above 13,000
6. Items purchased FOB destination that is in transit at December 31 300,000
7. Items sold to another company for which the company signed an agreement to
repurchase at a set price that covers all cost related to the inventory. Total cost
of merchandise is 200,000
8. Items sold where large returns are predictable, at cost 30,000
9. Items sold FOB shipping point that is in transit at December 31, at cost 50,000
10. Items sold FOB destination that is in transit at December 31, at cost 75,000
11. Cost incurred to advertise goods held for resale 10,000
12. Items held on consignment from another company at selling price of P150,000
and cost of 100,000
13. Short term investments in stocks and bonds that will be resold in the near future 125,000
14. Items currently being used for window display 100,000
15. Items on counter for sale 400,000
16. Items on receiving dept., refused by the company because of damage 360,000
17. Items included in the count, damaged and unsalable 150,000
18. Items in receiving dept., returned by customer, in good condition (not included
in the count0 50,000
 19. Merchandise inventories out on approval, at cost 100,000
20. Finished special article goods, made to order (included in the count) 78,000
21. Office supplies 40,000

16. What is the correct amount of Inventory?

ANSWER:

Problem 5

Records of the HINDI NA AKO SASAMA SA GC KASI GUSTO KO MAGING CPA Company show the following
data relative to Product ABC:

Units Unit Cost

April 1 balance 20,000 P10
April 2 Purchase 30,000 12
April 4 Sale 25,000
April 10 Purchase 15,000 14
April 15 Sale 21,000
April 17 Sales Return 1,000
April 28 Purchase 20,000 16.75
Required:

17. Using the weighted average method, how much is the cost of inventory at the end of April?
18. Using the weighted average method, how much is the cost of goods sold in April?
19. Using the moving average method, how much is the cost of inventory at the end of April?
20. Using the moving average method, how much is the cost of goods sold in April?
21. Using the perpetual FIFO method, how much is the cost of inventory at the end of April?
22. Using the perpetual FIFO, how much is the cost of goods sold in April?
23. Using the periodic FIFO method, how much is the cost of inventory at the end of April?
24. Using the periodic FIFO, how much is the cost of goods sold in April?
Problem 6
25. Compute for the cost of inventory lost in fire using the data below:
Inventory, July 1, 2013 P 51, 600
Purchases, July 1, 2013 to Jan. 19, 2014 368,000
Sales, July 1, 2013 to Jan. 19, 2014 583,000
Purchase returns 11,200
Purchase discounts taken 5,800
Freight in 3,800
Sales returns 8,600

A fire destroyed the entire inventory except for purchases in transit, FOB shipping point, of P2,000
and goods having selling price of P4,900 that were salvaged from the fire. The average gross profit
rate on net sales is 40%.

ANSWER:

Beg 51, 600

Net purchases 354,800
TGAS 406, 400
End 61,760 61760
COGS 344,640 2940@ cost
Net Sales 574,400 2000 in transit
GP 56820

Problem 7
26. The HYBE Company was organized on January 1, 2013. On December 31, 2014, the corporation
lost most of its inventory in a warehouse fire just before the year-end count of inventory was to
take place. Data from the records disclosed the following:

2013 2014
Beginning inventory, January 1 P P1,020,000
0
Purchases 4,300,000 3,460,000
Purchases returns and allowances 230,600 323,000
Sales 3,940,000 4,180,000
Sales returns and allowances 80,000 100,000

On January 1, 2014, the Corporations pricing policy was changed so that the gross profit rate
would be three percentage points higher than the one earned in 2013.

Salvaged undamaged merchandise was marked to sell at P120,000 while damaged merchandise
was marked to sell at P80,000 had an estimated realizable value of P18,000.

How much is the inventory loss due to fire?

ANSWER:
2013 2014
Beg Inventory 0 1,020,000
Net Purchases 4,069,400 3,137,000
TGAS 4,069,400 4,157,000
End 1,020,000 1,056,200 1, 056,200
COGS 3,049,400 3,100,800 91,200 @ cost
Net Sales 3,860,000 4,080,000 18,000 NRV
GPR 21% 24% 947,000

Problem 8
27. The records of HYBE Department Store report the following data for the month of January 2014:
Sales P7,100,000
Sales allowance 100,000
Sales returns 500,000
Employee discounts 200,000
Theft and other losses 100,000
Initial markup on purchases 2,900,000
Additional mark up 250,000
Mark up cancellations 100,000
Mark down 600,000
Mark down cancellations 100,000
Freight on purchases 100,000
Purchases at cost 4,500,000
Purchase returns at cost 240,000
Purchase returns at sales price 350,000
Beginning inventory at cost 440,000
Beginning inventory at sales price 800,000

Using the average retail inventory method, HYBE ending inventory is

ANSWER:
Freight on purchases 100,000
Purchases at cost 4,500,000
Purchase returns at cost (240,000)
Beginning inventory at cost 440,000
TGAS @cost 4,800,000

Beginning inventory at sales price 800,000

Purchases at retail 4500000
Purchase returns at sales price 350,000
Total 4950000
Initial markup on purchases 2,900,000
 Additional mark up 250,000
Mark up cancellations 100,000
Total 3,050,000
TGAS @ retail 8000000

Cost Ratio

TGAS @ retail 8000000

Net Sales 6,600,000
End Inv @ retail 1400000
End Inv @ cost 384,000

28. HYBE Corp. values its inventory by using the retail method (FIFO basis, lower of cost or NRV). The
following information is available for the year just ended:

Cost Retail
Beginning inventory P
80,000 P140,000
Purchases 297,000 420,000
Freight-in 4,000 -
Breakage 8,000
Markups (net) 10,000
Markdowns (net) 2,000
Sales 400,000
At what amount would HYBE report its ending inventory?

ANSWER:

28. Cost Ratio= TGAS –Beginning @ cost/ TGAS- Beginning @ retail

=301,000/ 428,000
=70%

GAS @ retail 568,000

Sales 400,000

Ending Inv @ retail 168,000 x 70%= 117,600

Problem 9

On January 1, 2018, HINDI NA AKO SASAMA SA GC KASI GUSTO KO MAGING CPA Company owns 15,000
ordinary shares representing 15% of the shares outstanding of INDEPENDENT NA AKO Company. The
ordinary shares were acquired on November 12, 2017 at a cost of P1,500,000 and have a fair value of
P1,600,000 on December 31, 2017. On January 2, 2018, HINDI NA AKO SASAMA SA GC KASI GUSTO KO
MAGING CPA Company sold half of its investment for P100 per share incurring a brokerage and
commission expense of P20,000.
Required:

CASE 1: Classified at Fair value through profit or loss

29. Unrealized gain (or loss) on December 31, 2017 to be presented in the statement of financial
position.
30. Gain (or loss) on sale on January 2, 2018 to be recognized in the profit or loss

CASE 2: Classified at Fair value through other comprehensive income

31. Unrealized gain (or loss) on December 31, 2017 to be presented in the statement of financial
position.
32. Gain or loss on sale on January 2, 2018 to be recognized directly in the retained earnings

ANSWER:

Problem 10

HYBE company owns 8,000 convertible preference shares of which was acquired in 2017 at a cost of
P400,000. On December 31, 2017, the fair value of the preference shares was P430,000

Required:

33. Assume that the investment is to be held as trading securities and also assume that on
August 31, 2018, HYBE company recorded a transfer of all shares to FVOCI when the fair
value was P55. How much is the gain or loss on reclassification in 2018?
34. Assume that the investment is to be held as FVOCI securities also assumes that on August
31, 2018, HYBE company recorded a transfer of all shares to trading securities when the fair
value was P55. How much is the gain or loss on reclassification in 2018?

ANSWER:
Problem 11

On January 1, 2017, HYBE Co. acquired a 5-year bonds with a total face value of P5,000,000 for
P5,379,079. The bonds carry an interest of 12% per year payable every December 31. The bonds are to
be appropriately classified as held for trading. On December 31, 2017, the bonds are quoted at 104%.

On January 3, 2018, the ½ of the bonds were sold at 105.

On November 1, 2018, HYBE Co changed its business model. It was determined that the remaining
investment in bonds should be reclassified to financial asset measured at amortized cost on
reclassification date. On December 31, 2018, the bonds are quoted at 102.

On January 1, 2019, the bonds were quoted at 104.

Required:

35. How much is the interest income for 2017?

36. How much is the unrealized gain (loss) in 2017 to be recognized in the profit or loss?
37. How much is the realized gain (loss) on sale in 2018 to be recognized in the profit or loss?
38. How much is the interest income for 2018?
39. How much is the gain (loss) on reclassification to be recognized in the profit or loss on
January 1, 2019?
40. Assume instead that the bonds are reclassified to FVOCI, how much is the gain or loss on
reclassification to be recognized in the profit or loss on January 1, 2019?

ANSWER:
 Problem 12

HYBE company bought an incomplete research and development project from another company for
P400,000 (considered to be a fair value) on January 1, 2018. The purchase price has been analyzed as
follows:

Research P100,000
Development 300,000

Subsequent expenditure has been incurred on this project as follows:

Research Further research into possible markets was

considered necessary P200,000

Development Incurred evenly through out the year. All

recognition criteria for capitalization as a
development asset were met on June 1, 2018 P480,000

Required:

41. How much should be shown as Research and development expense?

42. How much should be shown under the heading “Intangible Asset under Development”?

ANSWER:
Problem 13

On January 1, 2018, HYBE Company bought a trademark from BIGHIT Company for P5000,000. HYBE
retained an independent consultant who estimated the trademark’s life to be indefinite. Its carrying
amount in BIGHIT’s accounting record was P800,000. In HYBE’s December 31, 2018 statement of
financial position, what amount should be reported as trademark?

ANSWER:

Problem 14

On June 20, 2018, HYBE signed an agreement to operate as a franchise of BIGHIT Printers for an initial
franchise fee of P6,000,000. The same date, HYBE paid P2,000,000 and agreed to pay the balance in four
equal annual payments of P1,000,000 beginning July 1, 2019. The down payment is not refundable and
no future services are required of the franchisor. HYBE can borrow at 14% for a loan of this type. Present
and future value factors are as follows:
Present value of 1 at 14% for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91

HYBE should record the acquisition cost of the franchise on June 30, 2018

ASNWER:

Problem 15

HYBE Company engaged your services to compute the compute the goodwill in the purchase of another
entity which provided the following:
Net Income Net Assets
2016 P1,000,000 P3,900,000
2017 1,250,000 4,350,000
2018 1,950,000 4,500,000

Goodwill is measured by capitalizing excess earning at 25% with normal return on average net assets at
20%. How much is the purchase price for the other entity?

ANSWER