Problem 1: Investments

On January 1, 2010, Balanga Company sold equipment to Sakuragi Company of Japan for
$1,000,000 with payment to be received on two years on January 1, 2012. On January 1, 2010,
the exchange rate is $0.50=P1. On the same date, Balanga enters into a futures contract and
agrees to sell #1,000,000 on January 1, 2012 at the rate of $0.50=P1.
On December 31,2010, the exchange rate is $0.47= P1. On December 31,2011, the exchange rate
is $0.55= P1. The appropriate discount rate throughout this period is 10%.
Questions:
Based on the above and the result of your audit, answer the following:
1. The amount of sales revenue to be recognized in 2010 is?
2. The carrying amount the accounts receivable on December 31, 2010?
3. The gain on foreign currency in 2010 is?
4. The derivative liability (futures contract payable) on December 31, 2010 is?
5. The derivative assets (futures contract receivable) on December 31, 2011 is?
Answers:
1. P1,652,800
2. P1,934,255
3. P116,175
4. P116,056
5. P181,818
Solutions:
1. Sales ($1,000,000/0.5*0.8264) = P1,652,800
2. Accounts Receivable, 12/31/10
($1,000,000/.47*0.9091) = P1,934,255
3. Accounts Receivable. 1/1/10 ($1,000,000/.5*0.8264) P1,652,800
Interest Income (1,652,800*10%) 165,280
Balance, 12/31/10 1,818,080
Accounts Receivable, 12/31.10 (see sol. No. 2) (1,934,255)
Gain on foreign currency P116,175
4. Peso equivalent of futures contract, 12/31/10
($1,000,000/.47) P2,127,660
National amount ($1,000,000/.5) (2,000,000)
Expected payment to counterparty 127,660
Present value of P1 at 10% for 1 period 0.9091
Futures contract payable, 12/31/10 ` P 116,056
5. Peso equivalent of future contract, 12/31/11
($1,000,000/.55) P1,818,182
National amount ($1,000,000/.5) 2,000,000
Future contract receivable, 12/31/11 P 181,818
Problem 2: Audit of Property, Plant and Equipment

Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the
Aliaga’s property and equipment transactions:

Cost of land, which included an old apartment building

appraised at P300,000 P3,000,000
Apartment building mortgage assumed, including related
interest due at the time of purchase 80,000
Delinquent property taxes assumed by Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new
building more energy efficient 90,000
Interest cost on specific borrowing incurred during construction 360,000
Payment of medical bills of employees accidentally injured
while inspecting building construction 18,000
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new
building 50,000
cost of windows broken by vandals distracted by the
celebration 12,000

Questions:

Based on the above and the result of your audit, determine the following:

1. Cost of land
2. Cost of building
 3. Cost of land improvement
4. Amount that should be expensed when incurred
5. Total depreciable property and equipment

Answer:
1. P3,270,000
2. P10,810,
3. P72,000
4. P80,000
5. P10,882,000

Solution:
1. Cost of land P3,000,000
Apartment building mortgage assumed, including
related interest due at the time of purchase 80,000
Deliquent property taxes assumed by Aliaga 30,000
Payment to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials (10,000)
Fee for title search 25,000
Survey before construction of new building 20,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Total cost of land P3,270,000

2. Architects fee for new building P60,000

Building permit for new construction 40,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new
building more energy efficient 90,000
Interest cost on specific borrowing incurred
during construction 360,000
premium for insurance on building during construction 30,000
total cost of building P10,810,000
3. Cost of paving driveway and parking lot P60,000
Cost of installing lights in parking lot 12,000
Total cost of land improvements P72,000

4. Payment of medical bills of employees P18,000

Cost of open house party 50,000
Cost of windows broken by vandals 12,000
Total cost amount that should be expensed P80,000

5. Building (see sol. No.2) P10,810,000

Land improvements (see sol. No.3) 72,000
Total depreciable PPE P10,882,000
 Problem 3: Intangible Assets

Famy Manufacturing Corporation was incorporated on January 3, 2009. The

corporation’s financial statements for its year’s operations were not examined by a CPA.
You have been engaged to examine the financial statements for the year ended December
31, 2010, and your examination is substantially completed. The corporation’s adjusted
trial balance appears as follows:

FAMY MANUFACTURING CORPORATION

Adjusted Trial Balance
December 31,2010

Debit Credit
110,000
Accounts Receivable 685,000
Allowance for doubtful accounts 5,000
Inventories 385,000
Machinery 750,000
Equipment 290,000
Accumulated Depreciation 100,000
Patents 1,020,000
Prepaid expenses 105,000
Organization costs 290,000
Goodwill 240,000
Licensing Agreement 1 500,000
Licensing agreement 2 590,000
Accounts payable 1,475,000
Unearned revenue 125,000
Share capital 3,170,000
Retained earnings, 1/1/2010 170,000
Sales revenue 6,685,000
Cost of good sold 4,540,000
Selling and general expenses 1,730,000
Interest expense 35,000
Loss on typhoon 120,000
Totals P11,560,000 P11,560,000

The following information relates to accounts that may still require adjustment:
a. Patents for Famy’s manufacturing process were acquired January 2,2010 for P680,000.
An additional P340,000 was spent in December 2010 to improve machinery covered by
the patents and was debited to the patents account. Depreciation on operational assets has
 been properly recorded for 2010 in accordance with Famy’s practice, which provides a
full year’s depreciation for property on hand as of June 30 and no depreciation otherwise.
Famy uses the straight-line method for all depreciation and amortization.
b. The balance in the organization costs included costs incurred during the organization
period. Famy has exercised its option to amortized organization cost over a five-year
period beginning January 1, 2009, for income tax purposes and will amortize these costs
for accounting purposes in the same manner. No amortization has yet been recorded.
c. On January 3, 2009, Famy purchased licensing agreement 1, which was believed to have
a 20-year useful life. The balance in the licensing agreement 1 account includes its
purchase price of P480,000 and costs of of P20,000 related to the acquisition. On January
1,2010, Famy bought licensing agreement 2, which has a life expectancy of 10 years. The
balance in the licensing agreement 2 account included the P580,000 purchase price and
P20,000 in acquisition costs, but it has been reduced by a credit of P10,000 for the
advance collection of 2011 revenue from the agreement. No amortization on agreement 2
has been recorded.

In early 2010, an explosion caused a permanent 60%reduction in expected revenue-

producing value of licensing agreement1. No entries have been made during 2009 or
2010 amortization or for the explosion in 2010.
d. The balance in the goodwill account includes (1) P80,000 paid December 30,2009, for an
advertising program that management believes will assist in increasing Famy’s sales over
a period of three to five years following the disbursement and
(2)legal expenses of P160,000 incurred for Famy’s corporation January 3,2009. No
amortization has ever been recorded on the goodwill.

Questions:
Based on the above and the result of your audit, determine the adjusted carrying amount of the
following as of December 31,2010:
1. Patents
2. Organization Costs
3. Licensing agreement 1
4. Licensing agreement 2
5. Goodwill
Answers:
1. P646,000
2. P0
3. P180,000
4. P540,000
5. P0
Solution:
1. Unadjusted Patents, 12/31/10 1,020,000
Expenditures chargeable to machinery ( 340,000)
Adjusted costs of Patents 680,000
Amortization in 2010(P680,000/20) ( 34,000)
Carrying amount of Patents,12/31/10 P646,000

2. Start-up, pre-opening and pre-operating cost should be expensed when incurred.

3. Unadjusted licensing agreement no. 1, 12/31/10 500,000

Amortization in 2009 (P500,000/20) ( 25,000)
Carrying amount, 12/31/09 475,000
Casualty loss (P475,000*60%) (285,000)
Carrying amount, after casualty loss 190,000
Amortization in 2010 (P190,000/19) ( 10,000)
Carrying amount, 12/31/10 180,000

4. Unadjusted licensing agreement no.2, 12/31/10 590,000

Advance collection erroneously deducted 10,000
Adjusted cost of licensing agreement no.2 600,000
Amortization in 2010 (P600,000/10) ( 60,000)
Carrying amount, 12/31/10 540,000

5. The expenditures for advertising and legal expenses should be expensed when incurred.