PROBLEM 1 - Computation of Net Income

The following are changes in all the account balances of MONACO COMPANY during the year ended
December 31, 2018, except for retained earnings.
Increased (Decreased)

Cash P395,000
Accounts receivable (net) 948,000
Inventory (500,000)
Investments (235,000)
Accounts payable (255,000)
Bonds payable 410,000
Ordinary share capital 300,000
Share premium 20,000

There were no entries in the retained earnings account except for net income and a dividend declaration
of P295,000 which was paid in the current year.

QUESTION:

1. What is Monaco`s net income for the current year?

SOLUTION:

Net increase in net assets P453,000

Add: Dividends paid 295,000
Less: Addtl investment
Increase in O/S P300,000
Increase in S/P 20,000 320,000
Net Income P428,000
PROBLEM 2- Advertising Expenses

The balance of LUXEMBOURG COMPANY's advertising expense account at December 31, 2018, was
P264,000 before any necessary year-end adjustment relating to the following:
1. Included in the P264,000 is the P75,000 cost of product posters for sales promotional campaign
in January 2019.
2. Radio advertisements broadcast during December 2018 were billed to Luxembourg on January
3, 2019. Luxembourg paid the P30,000 invoice on January 15,2019.

QUESTION:
1. What is the amount of advertising expense that should be reported by Luxembourg in its
December 31, 2018, income statement?

SOLUTION:
Advertising Expense per books P264,000
Add: Advertising cost incurred during Dec 2018 30,000
Less: Prepaid advertising cost for 2019 75,000
Adjusted advertising expense P219,000

PROBLEM 3 - Write – off of Patent

On January 3, 2015, NETHERLANDS CORP. purchased a patent for a new consumer product for P450,000.
At the time of purchase, the patent was valid for 13 years. However, the patent's useful life was
estimated to be only 10 years due to the competitive nature of the product. On December 31, 2018, the
product was permanently withdrawn from the market under governmental order because of a potential
health hazard in the product.

QUESTION:
1. What is the amount that should be charged against income during 2018, assuming amortization
is recorded at the end of each year?

SOLUTION:

Cost of Patent P450,000

Less: Amortization Jan 2015 to Dec 2017 (450k x 3/10) 135,000
Unamortized cost Dec 31, 2018 P315,000