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INTERMEDIATE ACCOUNTING 1
SECOND GRADING EXAMINATION
KEY ANSWERS

ANSWERS AT A GLANCE:
The Accounting Process
1.     
2.     
3.     
Cash & Cash Equivalents
4.     
5.     
Bank Reconciliation
6.     
7.     
Accounts Receivable
8.     
9.     
10.  
Notes Receivable
11.  
12.  
13.  
Receivables: Add'l. concepts
14.  
15.  
16.  
17.  
18.  
19.  
20. BONUS
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SOLUTIONS:
Chapter 1 - The Accounting Process
1. C
2. D
3. B

Chapter 2 – Cash and Cash Equivalents

4. A
Solution:
Checks drawn but not yet issued to payees 120,000
Customers’ checks dated Dec. 31, 20x1 40,000
SML’s check dated Jan. 15, 20x2 already mailed to payee 16,000
Cash on hand 130,000
Employees’ checks representing unclaimed salaries,
14,000
held by the treasurer
Petty cash fund (fully replenished) 20,000
Total 340,000

5. A

Chapter 3 – Bank Reconciliation

6. C

7. C
Solution:
Bal. per books, end. ₱600,000 Bal. per bank, end. ₱860,000
Add: CM 380,000 Add: DIT 100,000
Less: DM (60,000) Less: OC (40,000)
Add/Less: Book errors - Add/Less: Bank errors -
Adjusted balance ₱920,000 Adjusted balance ₱920,000

Chapter 4 - Accounts Receivable

8. D

9. C
Solution:
Days outstanding Receivable balances % uncollectible Required allowance
(a) (b) (c) = (a) x (b)
0 – 60 180,000 1% 1,800
61 – 120 135,000 2% 2,700
Over 120 150,000 6% 9,000
Totals 465,000   13,500

Allowance for doubtful accounts

3,000 Beg. bal.
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Write-offs 10,500 6,000 Recoveries

15,000 Doubtful accounts expense (squeeze)
End. Bal. 13,500

10. C

Chapter 5 - Notes Receivable

11. C
12. A (15,000+20,000+30,000) = 65,000
13. D

Chapter 6 – Receivables: Additional concepts

14. C
15. D
16. C
17. C

18. D
Solution:
The issue price of the loan at a yield rate of 10% is computed as follows:
Future cash flows PV factors @ 10%, n=3 Present value
Principal 1,000,000 PV of 1 0.75131480090 751,315
Interest 120,000 PV of ord. annuity 2.48685199098 298,422
1,049,737

Original amortization table:

Date Collection Interest income Amortization Present value
1/1/x1 1,049,737
12/31/x1 120,000 104,974 15,026 1,034,711
12/31/x2 120,000 103,471 16,529 1,018,182
12/31/x3 120,000 101,818 18,182 1,000,000

 PV of the restructured loan on December 31, 20x1:

Future cash flow 1,000,000
PV of 1 @10%, n=2 0.8264463
PV of restructured loan – Dec. 31, 20x2 826,446

 Impairment loss on December 31, 20x1:

PV of restructured loan 826,446
Carrying amt. (1,034,711 + 120,000 int. receivable) (1,154,711)
Impairment loss - 12/31/x1 (328,265)

19. B
Solutions:
Date Cash 200,000
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Loans receivable 180,000

Liability on repurchase 20,000
agreement

Chapter 7 – Inventories
20. D
21. A (3,000 cost of purchase + 50 freight-in) = 3,050

22. C
Solution:
Goods located at the warehouse (physical count) 3,400,000
Goods located at the sales department (at cost) 15,800,000
Goods in-transit purchased FOB Shipping Point 1,600,000
Freight incurred under “freight prepaid” for the goods
purchased under FOB Shipping Point 80,000
Total inventory - Dec. 31, 20x1 20,880,000

23. C 17,000 (14,000 + 3,000)

24. B 277 excluding VAT (250 + 20 + 5 + 2).
25. A - (20,000 purchased on a ‘bill and hold’ sale agreement + 35,000 purchased under ‘lay away’ sale
wherein significant payment has been made) = 55,000

26. A
Solution:
Accounts payable
0 Beginning balance
Payments to suppliers 80,000 96,000 Net purchases (squeeze)
Ending balance 16,000

Inventory
Beginning balance 12,000
Net purchases 96,000 108,000 Cost of goods sold (squeeze)
0 Ending balance

27. D
Solution:
Date Balance/Transaction Units Cost
Aug.
Inventory 2,000 ₱36.00
1
7 Purchase 3,000 37.2
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12 Sales (3,600)
21 Purchase 4,800 38
22 Sales (3,800)
29 Purchase 1,600 38.6
Ending inventory 4,000

Units Unit cost Total cost

Ending inventory 4,000

From Aug. 29 purchase (1,600) 38.6 61,760

Balance 2,400

From Aug. 21 purchase (2,400) 38 91,200

As allocated - 152,960

28. D Same with FIFO periodic

29. B
Solution:
Total
Date Balance/Transaction Units Cost
cost
1-Jul Inventory 2,000 36.00 72,000
7 Purchase 3,000 37.00 111,000
21 Purchase 5,000 37.88 189,400
29 Purchase 1,600 38.11 60,976
Total goods available for sale 11,600 433,376
Average cost = 433,376 ÷ 19,000 = 22.81

Dat
Balance/Transaction Units
e
1-Jul Inventory 2,000
7 Purchase 3,000
12 Sales (3,600)
21 Purchase 5,000
22 Sales (3,800)
29 Purchase 1,600
Ending inventory 4,200
Average cost 37.36
Ending inventory in
pesos 156,912

30. C
Solution:
Dat Transaction Units Cost Total cost
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e
1-Jul Inventory 2,000 36.00 72,000
7 Purchase 3,000 37.00 111,000

Total 5,000 36.60 183,000

12 Sales (3,600) (131,760)

36.60
21 Purchase 5,000 37.88 189,400

Total 6,400 37.60 240,640

22 Sales (3,800) (142,880)

37.60
29 Purchase 1,600 38.11 60,976
Ending
 
inventory 4,200 158,736

Chapter 8 – Inventory estimation

31. A (80,000 + 560,000) – (776,000 x 100%/125%) = 19,200
32. C (3,600,000 x 60%) = 2,160,000 COGS + 240,000 EI = 2,400,000
33. D (270,000 + 7,600) ÷ (600,000 + 40,000 – 20,000) = 44.77%
(80,000 + 600,000 + 40,000 – 20,000 – 580,000) x 44.77% = 53,724

Chapter 9 – Investments
34. B
35. C
36. A – The “hold to collect” business model remains appropriate even when sales of financial assets
occur because of increase in credit risk.

37. C
Held for trading securities 7,000
   Unrealized Gain on Trading Securities 7,000

38. C
Solution:
Market A B
Quoted Price 76 74
Transaction Costs (5) (2)
Net price 71 72

The “most advantageous” market is Market B and the quoted price in this market is 74.

39. B (20,000 shares x 27) = 540,000

40. C (82K + 132K + 28K) = 242,000 total fair value
41. A
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Chapter 10 – Investments in Debt Securities

42. A

43. A
Date Collections Interest income Amortization Present value
1/1/x1 3,807,853
12/31/x1 400,000 456,942 56,942 3,864,795

44. B (See amortization table above)

45. B

Date Collections Interest income Amortization Present value

1/1/x1 1,099,474
12/31/x1 140,000 109,947 30,053 1,069,421
12/31/x2 140,000 106,942 33,058 1,036,364
12/31/x3 140,000 103,636 36,364 1,000,000

46. D

Sale price 480,000

Transaction costs (15,000)
Net proceeds 465,000
Carrying amount of portion sold:
(1,069,421 see table in previous problem x 1/2) (534,711)
Loss on sale (69,711)

47. A (100,000 x 102%) = 102,000

Chapter 11 – Investments: Additional Concepts

48. A

49. A
12/29/20x2
Receivable 4,040
Held for trading securities 4,000
Gain on sale 40

50. B
12/29/20x2
Held for trading securities 40
Unrealized gain – P/L 40

51. A - Reclassification from FVOCI (election) to held for trading is not permitted.
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52. C
 The present value of the estimated future cash flows as of December 31, 20x2 is computed as
follows:
Future cash flows ₱2,000,000
Multiply by: PV of ₱1 @ 12%, n=3 0.711780
Present value of estimated future cash flows ₱1,423,560

 The carrying amount of the impaired financial asset is determined as follows:

Date Interest received Interest income Amortization Present value

Jan. 1, 20x1 1,903,927

Dec. 31, 20x1 200,000 228,471 28,471 1,932,398
Dec. 31, 20x2 200,000 231,888 31,888 1,964,286
Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

 The impairment loss is computed as follows:

Present value of estimated future cash flows ₱1,423,560
Carrying amount (1,964,286)
Impairment loss (₱ 540,726)

Chapter 12 – Other Long-term Investments

53. D
54. B (1M x 3.10585) = 3,105,850

Chapter 13 – Basic Derivatives

55. C
56. D

57. A
Solution:
Fixed purchase price (₱600 x 1,000) 600,000
Purchase price at current market price (₱700 x 1,000) 700,000
Derivative asset - receivable from broker 100,000

58. B
Solution:
Fixed selling price ₱25,000
Selling price at current spot rate (1M ÷ 35) 28,571
Excess – payment to broker (₱3,571)

59. B
Solution:
Fixed selling price ₱25,000
Selling price at current spot rate (1M ÷ 50) 20,000
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Deficiency - receipt from broker ₱ 5,000

60. C
Solution:
Fixed selling price ₱25,000
Selling price at current spot rate (1M ÷ 45) 22,222
Fair value of forward contract – receivable (asset) ₱ 2,778

61. B (Receive 15% - Pay 12%) = 3% net receipt x 1,000,000 = 30,000 receipt

62. A
Solution:
Receive variable (1M x 9%) 90,000
Pay 8% fixed 80,000
Net cash settlement - receipt (due annually over the next 4 yrs.) 10,000
Multiply by: PV ordinary annuity @9%, n=4 3.23972
Fair value of interest rate swap - asset 32,397

63. C
Solution:
Receive variable (1M x 12%) 120,000
Pay 8% fixed 80,000
Net cash settlement - receipt (due annually over the next 3 yrs.) 40,000
Multiply by: PV ordinary annuity @12%, n=3 2.40183
Fair value of interest rate swap - asset 96,073

Chapter 14 – Investments in Associates

64. B
65. B (80,000 x 30%) = 24,000

66. B
Investment in associate
Purchase price 200,000
Share in profit (20x2) 24,000 15,000 Dividends (20x2)
209,000 12/31/x2

67. B
Investment in associate
Purchase price 200,000
Sh. in profit (20x2) 24,000 15,000 Dividends (20x2)
Sh. in profit (Jan. to June 20x3) 30,000
239,000 7/1/20x3
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Sale price 150,000

Carrying amount of investment sold (239K x 50%) (119,500)
Gain on sale 30,500

68. B [50,000 ÷ (100,000 + 50,000)] = 33 1/3% x 900,000 = 300,000

69. B - 4M x 20% = 800,000

70. A
Shares presently held 50,000
Potential voting rights 30,000
Total shares 80,000
Divide by: Outstanding shares after conversion of bonds (300K + 30K) 330,000
Assumed ownership interest 24.24%

 Significant influence is presumed to exist because the assumed ownership interest meets the 20%
threshold.

Investment in associate
Jan. 1, 20x1 1,200,000  
Sh. in profit Cash dividends
1,100,000 50,000
(6.6M x 16.666667%*) (300K x 16.666667%)
     
2,250,000 Dec. 31, 20x1

* 50,000 actual shares held ÷ 300,000 actual outstanding shares = 16.666667%

71. A
Investment in associate 800,000
Investment in preference shares 400,000
Advances to associate 200,000
Interest in the associate -12/31/x1 (before adjustment) 1,400,000
Share in 20x1 loss: (5.6M x 20%) = 1,120,000 vs. 1,400,000 limit (1,120,000)
Remaining limit – 12/31/x1 280,000
Share in 20x2 loss: (2M x 20%) = 400,000 vs.280,000 limit (280,000)
Remaining limit – 12/31/x1 0
Share in 20x3 loss: (400K x 20%) = 80,000 vs. 0 limit 0

Additional losses in 20x3:

Constructive obligation incurred in favor of associate 480,000
Payments made on behalf of associate 320,000
Additional losses recognized in 20x3 800,000

Share in 20x4 profit:

Share in profit of assoc. before adjustment (4M x 20%) 800,000
Losses not recognized:
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- 20x2: (280,000 limit - 400,000 share) (120,000)

- 20x3: (80,000 limit - 0 share) (80,000)
Share in profit of associate as adjusted - 20x4 600,000

72. A
Solution:
Recoverable amount (FVLCD - higher) 1,440,000
Carrying amount of investment (1,600,000)
Impairment loss (160,000)

Chapter 15 – PPE (Part 1)

73. A
Land used as plant site 50,000
Building used as office 500,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Apple trees (held to bear fruits) 6,000
Total property, plant and equipment 2,132,000

74. A (120,000 + 10,000) = 130,000

75. D
Machine 1: (202,000 x 60/240) = 50,500
Machine 2: (202,000 x 80/240) = 67,333
Machine 3: (202,000 x 100/240) = 84,167

76. D
Land Old building New building
Lump-sum price 48,000,000 - -
Title guarantee 80,000 - -
Option paid 24,000 - -
Payments to tenants 48,000 - -
Cost of razing old building - - 240,000
Proceeds from salvaged mats. - - (60,000)
Fair value of mats. - - -
Construction cost of new bldg. - - 34,000,000
Totals 48,152,000 - 34,180,000

77. B
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Equipment: 4,400,000 – fair value of asset received with no adjustment for cash paid
Gain (Loss):
Date Equipment – new 4,400,000
Accumulated depreciation 800,000
Cash 600,000
Equipment – old 4,000,000
Gain on exchange 600,000

78. A
  Land Office bldg. Factory bldg. Others
Lump sum price 1,300,000 700,000
Materials and sup. 3,000,000
Excavation 100,000
Labor on construction 2,500,000
Cost of remodeling 200,000
Legal cost 10,000
Imputed interest ignored
Cash discounts (60,000)
Supervision by mgmt. 70,000
Comp. ins. prem. 20,000
Clerical and other 30,000
Paving of st. land imp.
Plans & specifications 140,000
Payment for claim expensed
Legal cost of injury expensed
Saving ignored
Totals 1,310,000 900,000 5,800,000

79. B see solution above

80. C see solution above

BONUS QUESTION:
81. D