VILLAMOR, NOEL FINANCIAL ACCOUNTING AND REPORTING

TORRE, MARTIN INTERMEDIATE ACCOUNTING 1

Problem 1 (Current assets)

An entity provided the following trial balance on June 30, 2021:
Cash overdraft ( 100,000) Share capital 3,000,000
Property, plant and equipment, net 1,500,000 Prepaid expenses 200,000

Accounts receivable, net 650,000 Share premium 500,000

Accounts payable and accrued expenses 700,000 Land held for resale 2,000,00
Inventory 1,400,000 Retained earnings 1,660,000
Checks amounting to P600,000 were written to vendors and recorded on June 30 resulting in cash
overdraft of P200,000. The checks were mailed on July 9. Land held for resale was sold for cash on July
15. The financial statements were issued on July 31. On June 30, 2015, what total amount should be
reported as current assets?
a. 4,500,000
b. 4,750,000
c. 4,150,000
d. 2,750,000

Answer B
Cash (600,000 -100,000 overdraft) 500,000
Accounts Receivable 650,000
Inventory 1,400,000
Prepaid expenses 200,000
Land held for resale 2,000,000
Total current assets 4,750,000

Problem 2 (Total assets)

An entity was incorporated on January 1, 2021 with proceeds from the issuance of P7, 500,000 in shares
and borrowed funds of P1,100,000. During the first year of operations, revenue from sales and
consulting amounted to P820, 000, and operating costs and expenses totaled P640,000. On December
15, the entity declared a P50,000 cash dividend, payable to shareholders on January 15, 2022. No
additional activities affected owners’ equity in 2021. The liabilities increased to P1,500,000 by December
31, 2021. What amount should be reported as total assets on December 31, 2021?
a. 9,130,000
b. 9,180,000
c. 6,130,000
d. 8,750,000
Answer A
Liabilities 1,500,000
Share capital 7,500,000
Retained earnings 130,000
Total liabilities and equity 9,130,000

Revenue from sales and consulting 820,000

Operating costs and expenses ( 640,000)
Net income 180,000
Dividend declared ( 50,000)
Retained earnings 130,000

Problem 3 (Retail inventory method)

On December 31, 2021, an entity provided the following information:
Cost Retail
Inventory, January 1 937,500 1,115,000
Purchases 4,305,000 5,775,000
Additional Markup 100,000

Sales for the year totaled P5, 500,000. Markdown amounted to P100,000. Under the lower of cost and
NRV retail method, what is the inventory on December 31, 2021?

a. 1,056,400
b. 1,390,000
c. 994,000
d. 1,042,500

Answer D
Cost Retail
Inventory – January 1 937,500 1,115,000
Purchases 4,305,000 5,775,000
Additional markup 100,000
Goods available for sale 5,242,500 6,990,000
Conservative cost ratio (4,900,000 / 7,000,000) 75%
Sales (5,500,000)
Markdown ( 100,000)
Ending inventory at retail 1,390,000
At cost (75% x 1,390,000) 1,042,500

The lower of average cost or NRV retail method is the same as the conservative or conventional method.
Thus, the markdown is ignored in computing the cost ratio.
Problem 4 (Gross profit method)
An entity budgeted the following sales.
June July August
Sales on Account 1,890,000 1,900,000 1,900,000
Cash Sales 150,000 200,000 260,000
All merchandise is marked up to sell at invoice cost plus 20%. Merchandise inventory at the beginning of
each month is 30% of that month's projected cost of goods sold. What is the amount of anticipated
purchases for July?
a. 1,632,000
b. 2,076,000
c. 1,700,000
d. 1,765,000

Answer D
Cost of goods sold:
June (2,040,000 / 120%) 1,700,000
July (2, 100,000 / 120%) 1,750,000
August (2,160,000 / 120%) 1,800,000
Inventory – July 1 (30% x 1,750,000) 525,000
Purchases (SQUEEZE) 1,765,000
Goods available for sale 2,290,000
Inventory – July 31 (30% x 1,800,000) ( 540,000)
Cost of goods sold - July 1 1,750,000

The amount of purchases for July is computed by working back from the cost of goods sold.

Problem 5 (Intangible assets)

On January 1, 2019, an entity purchased patent at a cost of P2,150,000 at which date the remaining legal
life was 10 years. On January 1, 2015, the useful life of the patent was determined to be only 7 years
from the date of acquisition. On January 1, 2021, the entity paid P800,000, of which three-fourths was
for a trademark, and one-fourth was for the other entity’s agreement not to compete for a 5-year period
in the line of business covered by the trademark. The entity considered the life of the trademark
indefinite. Moreover, the entity agreed to pay P50,000 to the other entity as consulting fee each year for
5 years payable every January 1. What is the amortization of intangible assets for 2021?

a. 394,000
b. 544,000
c. 554,000
d. 384,000
Answer A
Patent - January 1, 2019 2,150,000
Amortization for 2019 and 2020 (2,150,000 / 10 x 2) ( 430,000)
Carrying amount – January 1, 2021 1,720,000

Purchase price 1,000,000

Trademark (3/4 x 1,000,000) ( 750,000)
Noncompetition agreement 250,000

Patent (1,720,000 / 5 years remaining) 344,000

Noncompetition agreement (250,000 / 5 years) 50,000
Total amortization for 2021 394,000

The patent has a remaining life of 5 years because the revised life is 7 years from the date of acquisition
and two years already expired.
The trademark is not amortized because the life is indefinite.
The annual consulting fee is an outright expense.