REVIEW MATERIALS

Problem 1
Mary Corporation, an SME 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 Mary Corporation’s
production facility, and Mary agreed to purchase the factory and used machinery from Grace Company
on December 31, 2021. Renovations were necessary to convert the factory for Mary Corporation’s
manufacturing use.

The terms of the agreement required Mary to pay Grace P1,500,000 when renovations started on
January 1, 2022, with the balance to be paid as renovations were completed. The overall purchase price
for the factory and machinery was P10,000,000. The building renovations were contracted to Sombilon
Constructions Company at P2,500,000. The payments made are shown below. The factory was placed
in service on January 1, 2022.

Grace Sombilon
January 1 P 1,500,000 P 625,000
April 1 2,700,000 625,000
October 1 3,300,000 625,000
December 31 2,500,000 625,000
P10,000,000 P 2,500,000

On January 1, 2022, Mary obtained a 2-year, P2 million loan with a 12% interest rate to finance the
renovation of the acquired factory. This is Mary’s only outstanding loan during 2022.

Mary’s 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 Grace P8,000,000 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
Grace’s books at P1,200,000.

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

Land P5,850,000
Building 1,890,000
Machinery 1,260,000

Jade, Mary’s chief engineer estimated that the renovated plant would be used for 15 years, with an
estimated residual value of P900,000. Jade estimated that the productive machinery would have a
remaining useful life of 5 years and residual value of P90,000. Mary’s depreciation policy is to apply the
200% declining balance method for machinery and the 150% declining balance method for the plant.
One-half year’s 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 retired.

Determine the amounts to be recorded on the books of Mary Corporation as of December 31, 2022, for
each of the following properties.
1. Land
2. Building
3. Machinery

Calculate the 2023 depreciation expense for each of the following properties.

4. Building
5. Machinery

Suppose that Mary Corporation is a large company, compute the following:

6. Cost of the Land

7. Cost of the Building
8. Depreciation of the Building

Problem 2
Information concerning Charm Corporation’s intangible assets is as follows:

1. On January 1, 2019, Charm signed an agreement to operate as a franchisee of Lee Company for an
initial franchise fee of P8,500,000. Of this amount, P2,500,000 was paid when the agreement was
signed and the balance is payable in four annual payments of P1,500,000 each beginning January 1,
2020. The agreement provides that the down payment is not refundable and no future services are
required of the franchisor. The implicit interest rate for the loan of this type is 14%. The agreement
also provides that 5% of the revenue from the franchise must be paid to the franchisor annually.
Charm’s revenue from the franchise for 2019 was P9,000,000. Charm estimates the useful life of the
franchise to be ten years.

2. Charm incurred P7,800,000 of experimental and development costs in its laboratory to develop a
patent which was granted on January 2, 2019. Legal fees and other costs associated with registration
of the patent totaled P1,640,000. Charm estimates that the useful life of the patent will be 8 years.

3. A trademark was purchased from Honesto Company for P4,000,000 on July 1, 2016. Expenditures for
successful litigation in defense of the trademark totaling P1,000,000 were paid on July 1, 2019.
Charm estimates that the useful life of the trademark will be 20 years from the date of acquisition.

4. During the current year, Charm incurred the following costs to develop and produce a routine, low-
risk computer software product.

Completion of detailed program design P 3,900,000

Costs incurred for coding and testing to establish technological feasibility 3,000,000
Other coding costs after establishment of technological feasibility 7,200,000
Other testing costs after establishment of technological feasibility 6,000,000
Costs of producing product masters for training materials 4,500,000
Duplication of computer software and training materials from product
masters (3,000 units) 7,500,000
Packaging product (1,500 units) 2,700,000
Questions:

If Charm is an SME,
9. What is the carrying value of the franchise at December 31, 2019?
10. What is the carrying value of the patent at December 31, 2019?
11. What is the carrying value of the trademark on December 31, 2019?
12. What is the initial cost of the computer software?
13. The total expenses resulting from the transactions that would appear on Charm’s income statement
for the year ended December 31, 2019, should be

If Charm is a large company,

14. What is the carrying value of the franchise at December 31, 2019?
15. What is the carrying value of the patent at December 31, 2019?
16. What is the carrying value of the trademark on December 31, 2019?
17. What is the initial cost of the computer software?
18. The total expenses resulting from the transactions that would appear on Charm’s income statement
for the year

Problem 3
On January 2, 2017, Wink Corporation, a large company, received a grant of P20,000,000 to build and
run a power plant in an economically backward area. The secondary condition attached to the grant is
that the entity should directly distribute the necessary needed power to the area at the rate is much
lower than the prevailing power rate in other advance areas. The power plant is to be depreciated using
the straight-line method over a period of 10 years.

The power plant was completed at the end of year 2017 at a cost of P50,000,000 and started producing
and distributing power to the backward area at rate which is at par that of the prevailing rates in other
advance areas.

On June 30, 2019, the national government demanded P15,000,000 from Wink Corporation for the
repayment of the grant due to the nonfulfillment of the conditions. Wink paid the national government
on July 1, 2019.

Questions:
19. What is the carrying value of the power plant as of July 1, 2019 immediately after the repayment
was made assuming at the time of initial recognition the grant received was recognized as a
deferred income?

20. What is the carrying value of the power plant as of July 1, 2019 immediately after the repayment
was made assuming at the time of initial recognition the grant received was recognized as a
reduction of the related asset?

21. What total amount of income should Wink Corporation recognize in 2019 related to grant if the
grant is recognized initially as income?
22. If the grant was treated as reduction to the asset account, what is the total income should Wink
Corporation recognized in 2019?

If Wink Corporation is an SME,

23. What is the carrying value of the power plant as of July 1, 2019 immediately after the repayment
was made assuming at the time of initial recognition the grant received was recognized as a
reduction of the related asset?

24. What total amount of income should Wink Corporation recognize in 2019 related to grant if the
grant is recognized initially as income?

25. If the grant was treated as reduction to the asset account, what is the total income should Wink
Corporation recognized in 2019?

Problem 4
In line with your audit of Len Corp’s investment accounts as of December 31,2015, you ascertained the
following information:

Investment type CV Per books

Investment in bonds P8,000,000
Investment in stocks 6,200,000
Investment property 3,500,000

Audit notes:

a. The investment in bonds which shall mature on December 31,2017 were acquired in January 1,2013
when the prevailing market rate of interest was at 12%. Interest at 10% is collectible from the bonds
every December 31. The acquisition was recorded by the client as debit to Investment in bonds at
face value with the difference between the face value and the total consideration given up to interest
income. Interest collected from 2013 to 2015 were appropriately recorded. No other entry relating to
the investment was made by the clients. Further investigation revealed that the company business
model with regard debt security investment has an objective of collecting contractual cash flows. The
prevailing market rate of interest was at 11%, 9% and 9.5% at the end of 2013, 2014, and 2015
respectively.

b. The investment in stocks is for 10,000 shares of Telecom Corp.’s ordinary shares acquired in
September 30, 2014. The shares were originally acquired at P145 per share. The book value of the
net assets of Telecom Corp. on this date was at P20M and its total outstanding shares was at
160,000. Telecom’s depreciable assets with average remaining life of 10 years were understated on
this date.

The fair value of Telecom Corp.’s shares were at P155 per share at the end of 2014. The company
recorded the remeasurement (from the acquisition cost to fair value) of the investment at the end of
2014 and recognized the same as unrealized holding gain in the 2015 profit/loss. The only other entry
made by the client related to the investment was the receipt of P2 per share dividend by the end of
2014 and P4 per share dividend in 2015 as dividend income.
 Further investigation revealed the following relevant information:
Telecom Corp. 2014 2015
Net income for the year P3,800,000 P5,200,000
Foreign exchange loss – OCL - 400,000
Unrealized holding gain – OCI 300,000
Fair value 155 per share 169 per share

c. The investment property was a building-factory converted on June 30, 2015 as a property for lease
since the company decided to discontinue its production segment. The factory was originally
acquired at P6M on January 1,2010 and was depreciated using straight-line method over a 10-year
useful life. The company elected to use the fair value method in measuring its investment property.
The fair value of the building on June 30,2015 was at P3.2M. on December 31,2015 the fair value of
the building is at P3M.

Required:
26. What is the correct carrying value of the investment in bonds as of December 31, 2015?
27. What is the correct carrying value of the investment in stocks as of December 31, 2014?
28. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit of
the investment in stocks?
29. How much should be recognized in the statement of comprehensive income upon the
reclassification of the building from PPE to Investments?