Fernandez, Mary Grace B.

August 5, 2022
BSA - 3

ACCOUNTING 14N
Final Examination – Summer 2022

Problems:

1. Using the information below, prepare in good form a Statement of Cash Flows
under the indirect method for Savage Corporation. Information from the December
31, 2012 and 2011 balance sheets of Savage Corporation are presented below.

2012 2011
Cash P 30,000 P 50,000
Accounts Receivable, net 410,000 460,000
Inventory 300,000 320,000
Prepaid Expenses 20,000 15,000
Long-Term Investments 50,000 25,000
Land 560,000 300,000
Buildings and Equipment 2,000,000 1,900,000
Accumulated Depreciation (800,000) (770,000)
P2,570,000 P2,300,000
vvvvvvvvv vvvvvvvvvv

Accounts Payable P 300,000 P 120,000

Accrued Liabilities 40,000 50,000
Bonds Payable 500,000 800,000
Long-Term Note Payable 150,000 0
Common Stock, P2 par value 200,000 160,000
Paid-in Capital in Excess of Par Value 710,000 550,000
Retained Earnings 670,000 620,000
P 2,570,000 P2,300,000
vvvvvvvvvv vvvvvvvvv

Additional information about 2012 transactions and events:

(a) Sold equipment with a cost of P50,000 and accumulated depreciation of P30,000
for cash of P17,000.

(b) Declared and paid cash dividends of P 60,000.

(c) Issued a P 150,000 long-term note payable for buildings and equipment.

(d) Purchased long-term investments for P 25,000.

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(f) Issued 20,000 shares of P2 par value common stock for P200,000.

ANSWER:
Savage Corporation
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash Flow from operating Activities:

Decrease in Accounts Receivable P 50,000

Decrease in Inventory 20,000
Decrease in Prepaid Expense (5,000)
Decrease in Accounts Payable 180,000
Decrease in Accrued Liabilities (10,000) P 235,000

Cash Flow from Investing Activities:

Sale of Equipment P 17,000
Purchase of Long-Term Investments (25,000)
Purchase of Land (260,000) P (268,000)

Cash Flow from Financing Activities:

Payment of Bonds Payable (300,000)
Issuance of Common Stock 200,000
Payment of Dividends (60,000) P (160,000)

Net Increase/ (Decrease) in Cash P (20,000)

Beginning Cash Balance 50,000
Ending cash balance 30,000

Non-Cash Financing and Investing Transaction:

Issuance of Notes Payable for Building & Equipment P 150,000

2. Abra, Corp., plans to acquire a new machine for P 420,000, in replacement of a

fully depreciated old machine which was acquired at a cost of P300,000, 5 years ago
without any salvage value.
Freight In for the new machine is P 50,000 and additional working capital
needed is P 80,000.
The old machine can be sold for P 20,000. Other equipment with a book
value of P 12,000 can be sold for P 10,000 as a result of the acquisition of the new
machine. Repairs and maintenance of the old machine amounting to P 8,000 can no
longer be incurred. The income tax rate is 25%.

Required : Determine the amount of net investment.

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ANSWER:

Initial Cash Outlay (purchase price) P 420,000

Add: Freight P 50,000
Additional Working Capital 80,000 130,000
Total Cash Outlays P 550,000
Less: Cash Inflows/Cash Savings
Proceeds from sale (old equipment) P 20,000
Proceeds from sale (other equipment) 10,000
Add: Tax savings due to loss (2,000 x 25%) 500 P 30,000
Avoidable repairs P 8,000
Less: Additional Tax Liability (25%) 2,000 6,000 36,500
Net Investment P 586,600

3. Vigan, Inc., acquired an equipment costing P 200,000 which has a useful life of 4
years and without any salvage value. Annual revenue of the new equipment is
P100,000 and annual operating cost is P40,000. The cost of capital is 8% and the
income tax rate is 25%.

Required : Determine the following:

a. Net Cash Flow after tax
b. Payback Period
c. Accounting rate of return on original investment
d. Net Present Value
e. Internal rate of return or discounted rate of return

ANSWER:
a. Net Cash Flow after tax
Incremental Revenue P 100,000
Less: Annual Incremental cost 40,000
Net Cash Inflow before tax 60,000 P 60,000
Less: Depreciation (200,00/4) 50,000
Net Income before tax 10,000
Less: Income Tax (10,000 x 25%) 2,500 2,500
Net Income after Tax 7,500
Add: Depreciation 50,000 _
Net Cash Inflow After Tax P 57,500 P 57,500

b. Payback Period
Payback Period = Net Investment____________
Ave. Annual Net Cash Flow After Tax
= P 200,000
P 57,500
= 3.48 years

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c. Accounting rate of return on original investment

Accounting Rate of Return = Ave. Annual Net Income After Tax

Net Investment
= _P_7,500__
P200,000
= 0.0375 or 3.75%
d. Net Present Value
PV of Annual Cash Inflow for 4 years at 8%
(P57,500 x 3.31213) P 190,447.48
Less: Net Investment 200,000.00
Net Present Value (P 9,552.52)

Decision: Reject the project because the net present value is negative.

e. Internal rate of return or discounted rate of return

PV Factor = Net Investment

Ave. Annual Cash Flow after tax
= P200,000
57,500
= 3.47826

If the PV Factor is3.47826, the Net Present Value of the annual cash flows is equal
to the net investment, where:
3.47826 x ₱ 57,500 = ₱ 200,000

Trace in the PV of an Annuity of P1 received annually or PV of an Annuity of P1:

@ 5% = 3.54595
IRR = 3.47826
@ 7% = 3.38721

Present Value Factor Difference @5% and 7%:

PV Factor @ 5% 3.54595
Less: PV Factor @ 7% 3.38721
Total 0.15874

PV Factor Difference @10% and IRR:

PV Factor @ 5% 3.54595
PV Factor @IRR 3.47826
Total 0.06769

IRR = 5% + ((0.06769/0.15874) x 3%)

= 6.28%

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4. Sagada, Corp. purchased a new machine for P 600,000. The annual cash flow
before taxes as a result of the acquisition of the new machine is as follows:

Year Net Income net of Tax

1 250,000
2 220,000
3 180,000
4 120,000

Salvage Value 100,000

The cost of capital is 20% and income tax rate is 25%.

Required: Determine the following:

a. Net Cash Flow after tax

Year Net Income After Tax + Depreciation = Net Cash Flow After Tax
1 P 250,000 P 125,000 P 375,000
2 P 220,000 P 125,000 P 345,000
3 P 180,000 P 125,000 P 305,000
4 P 120,000 P 125,000 P 245,000

Depreciation = P 600,000 – 100,000

4
= P 125,000

b. Payback Period

Net Investment P 600,000

Less: Cash Flow net of tax (year 1) 375,000
Balance to be recovered P 225,000

Payback Period = 1 year + (p225,000/P345,000)

= 1.65 years

c. Accounting rate of return on original investment

d. Net Present Value
e. Internal rate of return or discounted rate of return
- end of examination –