Chapter 10

Chapter 10
Investments in Debt Securities
PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE
3. TRUE
4. TRUE
5. FALSE
PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a):
Interest Interest Present
Date received income Amortization value
1/1/x1 941,726
1/1/x2 120,000 131,842 11,842 953,568
1/1/x3 120,000 133,499 13,499 967,067
1/1/x4 120,000 135,389 15,389 982,457
1/1/x5 120,000 137,544 17,544 1,000,000
Requirement (b):
(1,000,000 – 967,067) = 32,933 discount
Requirement (c):
1/1/x1
Investment in bonds 967,067
Cash in bank 967,067
12/31/x1
Interest receivable 120,000
Interest income 131,842
1/1/x2
Cash 120,000
12/31/x2
1
2. Solution:
1/1/x1 1,075,939
12/31/x1 120,000 96,834.51 23,165 1,052,774
12/31/x2 120,000 94,749.62 25,250 1,027,523
12/31/x3 120,000 92,477.08 27,523 1,000,000
3. C
4. D
5. D
6. B
7. A
8. A
9. Solutions:
Requirement (a):
Interest Interest
Date received income Amortization Present value
1/1/x1 907,135*
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
12/31/x3 100,000 135,088 35,088 1,000,000
* [827,135 + (1M x 80%)] = 907,135
Requirement (b):
1/1x1
Cash 907,135
12/31/x1
Cash 100,000
12/31/x2
Cash 100,000
2
12/31/x3
Cash 100,000
Cash 1,000,000
Investment in bonds 1,000,000
10. Solution:
1/1/x1 907,135
12/31/x1 100,000 126,999 26,999 934,134
7/1/x2 50,000 65,389 15,389 949,523
7/1/x2
Cash 900,000
Loss on sale of bonds 99,523
11. B
12. Solutions:
Requirement (a):
The annual collections are computed as follows:
Date Principal Interest Collections
12/31/x1 1,000,000 (3M x 10%) 300,000 1,300,000
12/31/x2 1,000,000 (2M x 10%) 200,000 1,200,000
12/31/x3 1,000,000 (1M x 10%) 100,000 1,100,000
Date Collections Interest income Amortization Present value

1/1/x1 2,900,305
12/31/x1 1,300,000 348,037 951,963 1,948,342
12/31/x2 1,200,000 233,801 966,199 982,143
12/31/x3 1,100,000 117,857 982,143 -
Requirement (b):
1/1/x1
Cash 2,900,305
3
12/31/x1
Cash 1,300,000
13. Solutions:
Requirement (a): Interest receivable
20x1: (100,000 x 10%) = 10,000

20x2: (100,000 + 10,000) x 10% = 11,000 + 10,000 from 20x1 = 21,000
Requirement (b):
Date Interest income Discount Present value
1/1/x1 IGNORED 94,738
12/31/x1 11,369 IGNORED 106,107
12/31/x2 12,733 IGNORED 118,839
12/31/x3 14,261 IGNORED 133,100
12/31/x1: (106,107 – 10,000 interest receivable) = 96,107

12/31/x1: (118,839 – 21,000 interest receivable) = 97,839
Requirement (c):
1/1/x1
Cash 94,738
12/31/x1
Investment in bonds (squeeze) 1,369
12/31/x2
14. Solution:
1/1x1
Investment in bonds - FVOCI 907,135
Cash 907,135
4
Amortization table
Interest Interest
1/1/x1 907,135*
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
12/31/x3 100,000 135,088 35,088 1,000,000
12/31/x1
Cash 100,000
Investment in bonds – FVOCI 45,866

Unrealized gain – OCI 45,866
[(1M x 98%) – 934,134]
12/31/x2
Cash 100,000
Fair value - 12/31/x2 1,020,000

Amortized cost - 12/31/x2 964,913
Cumulative balance of gain - 12/31/x2 55,087
Unrealized gain (loss) - OCI in 20x2 9,221

12/31/x3
Cash 100,000
Fair value - 12/31/x3 1,000,000

Amortized cost - 12/31/x3 1,000,000
Cumulative balance of gain - 12/31/x3 -
5
Unrealized gain (loss) - OCI in 20x3 (55,087)
Unrealized loss – OCI 55,087

Cash 1,000,000
15. Solution:

1/1/x1 907,135
12/31/x1 100,000 126,999 26,999 934,134
7/1/x2 50,000 65,389 15,389 949,523
7/1/x2
Fair value - 7/1/x2 900,000

Amortized cost - 7/1/x2 949,523
Cumulative balance of gain - 12/31/x2 (49,523)
Unrealized loss - OCI in 20x2 (95,389)

Cash 900,000
Loss on sale – P/L 99,523
Unrealized loss – OCI 49,523*
*Unrealized gain (loss) - OCI

45,866 12/31/x1
7/1/x2 95,389
bal. (debit) 49,523
6
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,060,747
1/1/x2 140,000 127,290 12,710 1,048,037
1/1/x3 140,000 125,764 14,236 1,033,801
1/1/x4 140,000 124,056 15,944 1,017,857
1/1/x5 140,000 122,143 17,857 1,000,000
Requirement (b):
(1,033,801 - 1,000,000) = 33,801 premium
Requirement (c):
1/1/x1
Cash in bank 1,060,747
12/31/x1
1/1/x2
Cash 140,000
12/31/x2
1/1/x3
Cash 140,000
12/31/x3
1/1/x4
Cash 140,000
7
12/31/x4
1/1/x5
Cash 1,000,000
2. Solution:
Date Amortization
received income value
1/1/x1 1,937,951
12/31/x1 200,000 213,175 13,175 1,951,126
12/31/x2 200,000 214,624 14,624 1,965,749
12/31/x3 200,000 216,232 16,232 1,981,982
12/31/x4 200,000 218,018 18,018 2,000,000
3. Solutions:
Requirement (a):
Interest Interest
received income
1/1/x1 453,567*
12/31/x1 50,000 63,499 13,499 467,066
12/31/x2 50,000 65,389 15,389 482,456
12/31/x3 50,000 67,544 17,544 499,999
*(428,567 + 25,000) = 453,567
Requirement (b):
Interest Interest
received income
1/1/x1 512,656*
12/31/x1 50,000 46,139 3,861 508,795
12/31/x2 50,000 45,792 4,208 504,587
12/31/x3 50,000 45,413 4,587 499,999
*[487,656 + (500,000 x 5%)] =512,656
8
4. Solutions:
Requirement (a):
Date Amortization
1/1/x1 2,096,073*
12/31/x1 280,000 251,529 28,471 2,067,602
12/31/x2 280,000 248,112 31,888 2,035,714
12/31/x3 280,000 244,286 35,714 2,000,000
* (1,996,073 + 100,000) = 2,096,073
Requirement (b):
1/1x1
Cash 2,096,073
12/31/x1
Cash 280,000
12/31/x2
Cash 280,000
12/31/x3
Cash 280,000
Cash 2,000,000
5. Solution:
Date Amortization
1/1/x1 2,096,073
12/31/x1 280,000 251,529 28,471 2,067,602
9/30/x2 210,000 186,084 23,916 2,043,686
9/30/x2
9
Cash 2,400,000
Gain on sale of bonds 146,314
6. Solution:
1/1x1
Investment in bonds - FVOCI 2,096,073
Cash 2,096,073

Date Amortization
1/1/x1 2,096,073*
12/31/x1 280,000 251,529 28,471 2,067,602
12/31/x2 280,000 248,112 31,888 2,035,714
12/31/x3 280,000 244,286 35,714 2,000,000
* (1,996,073 + 100,000) = 2,096,073
12/31/x1
Cash 280,000

[(2M x 102%) – 2,067,602]
12/31/x2
Cash 280,000
Fair value - 12/31/x2 2,080,000

Cumulative balance of loss - 12/31/x1 (27,602)
Unrealized gain - OCI in 20x2 71,888

10
12/31/x3
Cash 280,000
Fair value - 12/31/x3 2,000,000

Cumulative balance of gain - 12/31/x3 -
Unrealized loss - OCI in 20x3 (44,286)

Cash 2,000,000
Investment in bonds - FVOCI 2,000,000
7. Solution:
Date Amortization
1/1/x1 2,096,073
12/31/x1 280,000 251,529 28,471 2,067,602
9/30/x2 210,000 186,084 23,916 2,043,686
9/30/x2
Fair value - 9/30/x2 2,400,000

Cumulative balance of loss - 12/31/x1 (27,602)
Unrealized gain - OCI in 20x2 383,916

11
Cash 2,400,000
Gain on sale of bonds 146,314
8. Solutions:
Requirement (a):
The annual collections are computed as follows:
Date Principal Interest Collections
12/31/x1 300,000 (900,000 x 10%) 90,000 390,000
12/31/x2 300,000 (600,000 x 10%) 60,000 360,000
12/31/x3 300,000 (300,000 x 10%) 30,000 330,000

1/1/x1 870,092
12/31/x1 390,000 104,411 285,589 584,503
12/31/x2 360,000 70,140 289,860 294,643
12/31/x3 330,000 35,357 294,643 0.61
Requirement (b):
1/1/x1
Cash 870,092
12/31/x1
Cash 390,000
9. Solutions:
Requirement (a):
20x1: (2,000,000 x 12%) = 240,000
20x2: (2,000,000 + 240,000) x 12% = 268,800 + 240,000 from 20x1 =
508,800
Requirement (b):
1/1/x1 IGNORED 2,111,086
12/31/x1 211,109 IGNORED 2,322,195
12/31/x2 232,219 IGNORED 2,554,414
12/31/x3 255,441 IGNORED 2,809,855
12
12/31/x1: (2,322,195 – 240,000 interest receivable) = 2,082,195
12/31/x1: (2,554,414 – 508,800 interest receivable) = 2,045,614
Requirement (c):
1/1/x1
Cash 2,111,086
12/31/x1
12/31/x2
10. Solution:
Purchase price of bonds = Present value of future cash flows
Purchase price of bonds = ₱7,986,000 x PV of ₱1 @16%, n=3
Purchase price of bonds = ₱5,116,292 (7,986,000 x 0.640658)
11. Solution:
Interest PV of cash Interest Present
Date Amortization
income flow receivable value
(a) =ER x (b) = prev. bal. of (d) = (a) - = PV +
(c)
(b) (b) + (a) (b) (d)
1/1/x1 5,116,292 5,116,292
4/1/x1 204,652 5,320,944 150,000 54,652 5,170,944
Purchase cost of bonds ₱ 5,170,944

Purchased accrued interest (3M x 10% x 3/12) 150,000
Total purchase price or total cash outlay ₱ 5,320,944
OR, simply the PV of cash flow of ₱5,320,944 because this amount

already includes the purchased interest.
13
PROBLEM 4: CLASSROOM ACTIVITIES
ACTIVITY #1:
Solutions:
Requirement (a):
1,000 face amount x 1,000 no. of bonds = 1,000,000
Requirement (b):
1,000,000 – 922,783 = 77,217 discount
Requirement (c):
Cash in bank 922,783
Requirement (d):
NIR = 8%
Requirement (e):
Trial & Error
PV = CF x PVF
There is discount. Therefore, the EIR must be higher than 8%.
First trial: @10% per annum (5% semi-annual)
➢ 922,783 = (1,000,000 x PV of 1 @ 5%, n=10) + (40,000 x PV

ordinary annuity @5%, n=10)
➢ 922,783 = (1,000,000 x 0.61391) + (40,000 x 7.72173)
➢ 922,783 = 613,910 + 308,869
➢ 922,783 approximates 922,779 (a difference of only ₱4.00)
Therefore, the EIR is 10% (per annum).
Requirement (f):
Interest Interest
7/1/x1 922,783.00
1/1/x2 40,000.00 46,139.15 6,139.15 928,922.15
7/1/x2 40,000.00 46,446.11 6,446.11 935,368.26
1/1/x3 40,000.00 46,768.41 6,768.41 942,136.67
7/1/x3 40,000.00 47,106.83 7,106.83 949,243.50
1/1/x4 40,000.00 47,462.18 7,462.18 956,705.68
7/1/x4 40,000.00 47,835.28 7,835.28 964,540.96
1/1/x5 40,000.00 48,227.05 8,227.05 972,768.01
14
7/1/x5 40,000.00 48,638.40 8,638.40 981,406.41
1/1/x6 40,000.00 49,070.32 9,070.32 990,476.73
7/1/x6 40,000.00 49,523.84 9,523.84 1,000,000.57
ACTIVITY #2:
Case #1:
Requirement (a):
7/1/x1
Investment in bonds 10,000.00
Interest income (Interest receivable) 116.67
(10,000 x 7% x 2/12)
Cash in bank 10,116.67
8/1/x1
If “Interest receivable” was debited on 7/1/x1:
Cash in bank (10,000 x 7% x 3/12) 175.00
Interest receivable 116.67
Interest income 58.33
If “Interest income” was debited on 7/1/x1:

Cash in bank (10,000 x 7% x 3/12) 175.00
11/1/x1
Cash in bank (10,000 x 7% x 3/12) 175.00
12/x/x1
Interest receivable (10,000 x 7% x 2/12) 116.67
Requirement (b):
(10,000 x 7% x 6/12) = 350
Requirement (c):
(10,000 x 7% x 2/12) = 116.67
Requirement (d):
(175 + 175) see entries above = 350
15
Case #2:
Requirement (a):
Purchase price:
Cash flows PV Factors Purchase price
10,000.00 0.5584 5,584.00
700.00 7.3601 5,152.07
10,736.07
5/1/2000
Investment in bonds 10,736.07
Cash in bank 10,736.07
Requirement (b):
(10,000 x 7% x 8/12) = 466.67
Requirement (c):
Date receivable income Amortization value
5/1/2000 10,736.07
12/31/2000 466.67 429.44 37.22 10,698.85
Carrying amt. 12.31.2000 10,698.85

Face amount 10,000.00
Premium 12.31.2000 698.85
Case #3:
Requirement (a):
Purchase price of bonds:
(10,000 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07
x 1.07) = 19,671.51 x PV of 1 @8%, n=10 = 9,111.72
Requirement (b):
5/1/2000 to 5/1/2001 10,000 x 7% 700.00
5/1/2001 to 5/1/2002 (10,000 + 700) x 7% 749.00
Total Interest receivable - 5/1/2002 1,449.00
16
Requirement (c):
5/1/2000 IGNORED 9,111.72
5/1/2001 728.94 IGNORED 9,840.65
5/1/2002 787.25 IGNORED 10,627.91
Carrying amt. of bonds and interest receivable 10,627.91

Less: Int. receivable as of 5/1/2002 (see ‘b’ above) (1,449.00)
Carrying amt. of bonds – 5/1/2002 9,178.91
PROBLEM 5: MULTIPLE CHOICE - THEORY

1. A 6. B
2. A 7. A
3. C 8. D
4. A 9. A
5. A
17
PROBLEM 6: COMPUTATIONAL: MULTIPLE CHOICE
1. B (200K x 98%) + 700 = 196,700
2. B (500,000 x8% x 6/12) = 20,000
3. A (946,000 – 40,000) = 906,000 acquisition cost.
Interest Present
Date Collection income Amortization value
7/1/2003 906,000
12/31/2003 40,000 45,300 5,300 911,300
4. B
Solution:
Let us assume that the face amount is 100,000.
Face amount 100,000
Discount (10,000)
Purchase price 90,000
Subsequent amortization of discount 2,000
Carrying amount on date of sale 92,000
Face amount 100,000

Premium 14,000
Sale price 114,000
Carrying amount on date of sale (92,000)
Gain on sale 22,000
5. A
Solution:
Interest receivable
beg. 38,000
Interest revenue 160,500 152,000 Collections
46,500 end.
6. A
7. A
Solution:
Trial & Error

PV = CF x PVF
There is discount. Therefore, the EIR must be higher than 10%.
18
First trial: @12% per annum
➢ 4,639,522 = (5,000,000 x PV of 1 @ 12%, n=5) + (500,000 x PV

ordinary annuity @12%, n=5)
➢ 4,639,522 = (5,000,000 x 0.56743) + (500,000 x 3.604776)
➢ 4,639,522 = 2,837,150 + 1,802,388
➢ 4,639,522 approximates 4,639,538 (a difference of only ₱16.00)
Therefore, the EIR is 12% (per annum).
Interest income in 20x1 = (4,639,522 x 12%) = 556,743
19
Chapter 4
Accounts Receivable

1. FALSE
2. FALSE 105
3. FALSE April 2, 20x1
4. TRUE
5. TRUE
6. FALSE 25
7. FALSE 25
8. FALSE 7
9. TRUE
10. FALSE required balance of allowance

1. D
2. C
3. Solution: (85,000 + 5,000 – 2,000 + 3,000) = 91,000

*Security deposits are normally long-term.
4. C
5. Solution: 550,000 – FOB shipping point
6. C
7. Solutions:
Requirement (a): Traditional GAAP
Gross method Net method

1. Sale on account
Accounts receivable 90,000 Accounts receivable 87,300
Sales 90,000 Sales 87,300
(₱100,000 x 90%) (₱100,000 x 90% x 97%)
2. Collection is made within the discount period

Cash 87,300 Cash 87,300
Sales discounts (90K x 3%) 2,700 Accounts receivable 87,300
Accounts receivable 90,000
20
3. Collection is made beyond the discount period.
Cash 90,000 Cash 90,000
Accounts receivable 90,000 Sales discount forfeited 2,700
Requirement (b.1): PFRS 15

Invoice amount (100,000 x 90%) 90,000
Multiply by: 3%
Total available discount 2,700
Multiply by: 80%
Discount expected to be taken 2,160
Invoice amount 90,000

Less: Discount expected to be taken (2,160)
Transaction price 87,840
1. Sale on account
Revenue 87,840
2. Portion collected within the discount period

Cash (90,000 x 80% x 97%) 69,840
3. Portion collected beyond the discount period

Cash (90,000 x 20%) 18,000
Requirement (b.2): PFRS 15
1. Sale on account
Accounts receivable (100K x 90%) 90,000
Revenue 90,000
Sales discount 2,160
Allowance for sales discount 2,160
2. Portion collected within the discount period

Cash on hand (90,000 x 80% x 97%) 69,840
Allowance for sales discount 2,160
Accounts receivable (90,000 x 80%) 72,000
21
3. Portion collected beyond the discount period
Cash on hand [(90K x 20%) or remaining balance] 18,000
8. 100,000 x 90% x 97%* = 87,300
*If the customer fully settles the account within 10 days, the customer
cannot take anymore the 1% discount that is available if he pays
within the 11th day and 15th day.
9. C
10. Solution:
Requirement (a):
(a)
Sales 250,000
(b)
Cash 220,000
(c)
Bad debt expense 30,000
Allowance for doubtful accounts 30,000
(d)
(e)
Cash 8,000
22
Requirement (b):
Accounts receivable
beg. 120,000
Sales on account 250,000 220,000 Collections, excluding recoveries
15,000 Write-offs
Recovery 8,000 8,000 Collection on recovery
135,000 end.
Allowance for bad debts

9,000 beg.
Write-off 15,000 30,000 Bad debts
8,000 Recovery
end. 32,000
Requirement (c):
Accounts receivable, end. 135,000
Allowance for bad debts, end. (32,000)
Carrying amount, end. 103,000
11. Solutions:
Requirement (a):
(1) Percentage of net credit sales

Sales ₱650,000
Sales returns and allowances (50,000)
Net sales 600,000
Rate 1½%
Bad debt expense ₱ 9,000
Bad Debt Expense 9,000

Allowance for Doubtful Accounts 9,000
23
(2) Percentage of ending receivable
Allowance for doubtful accounts

2,500 beg.
Write-offs - 5,500 Bad debts expense (squeeze)
- Recoveries
end. 8,000a
a (100,000 x 8%) = 8,000

Requirement (b):
(1) Percentage of net credit sales

The entry would not change under the percentage of net credit sales method.
(2) Percentage of ending receivable

The percentage of receivables approach would be affected as follows:
beg. 2,500
Write-offs - 10,500 Bad debts expense (squeeze)
- Recoveries
end. 8,000

12. Solutions:
Requirement (a):
No. of Days Probability Required

Outstanding Amount of Collection Uncollectability Allowance
0-30 days 500,000 0.98 0.02 10,000
31-60 days 200,000 0.9 0.1 20,000
Over 60 days 100,000 0.8 0.2 20,000
24
50,000
Allowance for doubtful

accounts
- beg.
Write- Bad debts expense
offs 5,000 53,000 (squeeze)
2,000 Recoveries
end. 50,000
Bad debt expense 53,000

Allowance for bad debts 53,000
Requirement (b):
50,000 (see computations above)
Requirement (c):
Gross accounts receivable (500K + 200K + 100K) 800,000
Less: Allowance for bad debts (50,000)
Accounts receivable, net – end. 750,000
13. D
14. A
15. D
16. B
17. A
25
1. Solution:
Accounts receivable
beg. 140,000
Credit sales 680,000 568,000 Collections, excluding recoveries
12,000 Write-off
240,000 end.

18,000 beg.
2,000 Recovery
end. 36,000
Carrying amount = 240,000 – 36,000 = 204,000
2. Solution:
Accounts receivable
beg. 150,000
9,000 Write-off
331,000 end.

12,000 beg.
2,000 Recovery
end. 20,000
Carrying amount = 331,000 – 20,000 = 311,000
26
3. Solution:
Accounts receivable
beg. 80,000
10,000 Write-off
100,000 end.
4. Solution:
Accounts receivable
beg. -
Credit sales 360,000 124,000 Collections, including recoveries
22,000 Write-off
Recoveries 6,000
220,000 end.
5. Solution:
Accounts receivable
beg. 220,000
22,000 Write-off
- end.
6. Solutions:
(1)
Doubtful Accounts Expense
(3% x 128,000) - ₱1,220 .................. 2,620
Allowance for Doubtful Accounts ........... 2,620
(2)
Doubtful Accounts Expense ................... 5,374.50
Allowance for Doubtful Accounts ........... 5,374.50
(₱747,000 - ₱18,000 - ₱12,400) x 30% x 2.5% = ₱5,374.50
7. Solutions:
(1)
Doubtful Accounts Expense ................... 35,700
[(3% x ₱590,000) + ₱18,000]
27
(2)
[1.5% x (₱2,180,000 - ₱18,000 - ₱27,000)]
(3)
(₱21,400 + ₱18,000)
8. Solutions:
(1) Bad Debt Expense 4,670
Gross receivables ₱90,000

Rate 6%
Total allowance needed 5,400
Present allowance (730)
Adjustment needed ₱ 4,670
(2) Bad Debt Expense 7,040

Sales ₱360,000
Sales returns and allowances 8,000
Net sales 352,000
Rate 2%
Bad debt expense ₱ 7,040
9. Solution:
Requirement (a): Adjusted doubtful accounts expense

Doubtful
Aging Category Balance Percent Accounts
November-December 2002 ₱2,280,000 2% ₱ 45,600
July-October 2002 1,200,000 15% 180,000
January-June 2002 800,000 25% 200,000
Prior to January 1, 2002 140,000 * 80% 112,000
₱4,420,000 ₱537,600
* ₱260,000 - ₱120,000
28
260,000 Jan. 1, 2002
30,000 Recoveries
W.O. (180K + 120K addt'l) 300,000 547,600 Adj. DAE (squeeze)
Dec. 31, 2002 (aging) 537,600
Requirement (b): Adjusting entry
Credit sales 18,000,000

Multiply by: 2%
Unadjusted doubtful accounts expense 360,000
Adjusted doubtful accounts expense 547,600
Adjustment (additional expense) 187,600
Doubtful accounts expense 187,600

To increase the allowance for doubtful accounts at
December 31, 2002, resulting from a change in accounting
estimate
10. Solution:
Requirement (a):
Allowance for doubtful

accounts
45,000 Jan. 1
Write-offs 50,000 - Bad debts expense*
3,000 Recoveries
2,000 Dec. 31 (Dr.) - unadjusted
* The problem states that BDE is recognized only at each year-end.
29
Requirement (b):
No. of Days Probability Required

Outstanding Amount of Collection Uncollectibility Allowance
0-30 days 500,000 0.98 0.02 10,000
31-60 days 200,000 0.9 0.1 20,000
Over 60 days 100,000 0.8 0.2 20,000
50,000

Dec. 31 (unadjusted) 2,000
Write-offs - - Recoveries
Bad debts expense
52,000 (squeeze)
Dec. 31 (aging) 50,000
OR

45,000 Jan. 1
Write-offs 50,000 3,000 Recoveries
Bad debts expense
52,000 (squeeze)
Dec. 31 (aging) 50,000
30
ACTIVITY #1: TOTAL CURRENT RECEIVABLES
Solutions:
Requirement (a): Adjusted accounts receivable
Unadjusted accounts receivable 10,537,089

Credit balance (DEF Co.) 341,236
Sales Order #21022394 20,000
Adjusted accounts receivable 10,898,325
Requirement (b): Total current receivables
Adjusted accounts receivable 10,898,325

Notes receivable (3-month) 35,000
Dividends receivable (10,000 sh. x ₱5) 50,000
Total Current receivables 10,983,325
Requirement (c): Adjusting entries

Advances from customers 341,236
To eliminate the credit balance in DEF Co.’s account

Sales 20,000
To record the unrecorded sales
Notes receivable 35,000

Cash 35,000
To record the loan to Mr. Wilson
Dividends receivable 50,000

Dividend income 50,000
To accrued the dividends
31
ACTIVITY #2: JOURNAL ENTRIES
Solutions:
Requirement (a): Journal entries
1) Accounts receivable 20,000

Sales 20,000
To record SI#001101
2)
a. Accounts receivable 3,000
To reverse the previous write-off
Cash 3,000
To record the collection of accounts receivable
b. Cash 25,000
To record the collection of accounts receivable
c. Accounts receivable 19,000

Cash 19,000
To record the NSF check
3) Bad debts expense 22,415*

To accrue bad debts for the year
32
*Unadjusted credit sales 2,221,488
Add: SI#001101 20,000
Adjusted credit sales 2,241,488
Multiply by: 1%
Bad debts expense - 20x1 22,415
4) Allowance for bad debts (7K + 2K) 9,000

To record the write-off of accounts
Requirement (b): Adjusted balances of A/R & Allowance
Accounts receivable
Unadjusted 480,000
(1) 20,000
(2a) 3,000 3,000
25,000 (2b)
(2c) 19,000 9,000 (4)
485,000 Adjusted

12,000 Unadjusted
3,000 (2a)
22,415 (3)
(4) 9,000
Adjusted 28,415
33
Requirement (c): Carrying amount of accounts receivable

Allowance for bad debts (28,415)
Carrying amount 456,585
ACTIVITY #3: DEBTS EXPENSE
Solutions:
Requirement (a):
BDE - 20x2: (9,824,000 x 80% x 2.5%) = 196,480
BDE - 20x1: (2,670,000 x 80% x 2.5%) = 53,400
Requirement (b):

41,800 12.31.x1 (836K x 5%)
Write-offs 115,000 196,000 BDE - 20x2 (squeeze)
12.31.x2 (2.456M x 5%) 122,800

- 3.7.x1
Write-offs 12,000 53,800 BDE - 20x1 (squeeze)
12.31.x1 (836K x 5%) 41,800
34
ACTIVITY #4: AGING (PROVISION MATRIX)
Dear Sir / Ma’am:

The answer is already indicated in the activity (*Hints). The student
will be graded based on his/her creativity and extra effort in making
the report look professional. Suggested criteria:
1. Heading for the report (e.g., Aging Report or Provision
Matrix)
2. All headings, including the cut-off date, are in bold letters
3. Totals are double-ruled
4. The required balance of the allowance is labeled as such
5. The percentages are formatted as percentages (i.e., x%)
6. etc….. (end of thinking capacity A)
Sincerely,
Zeus Vernon B. Millan

1. B 6. A
2. D 7. D
3. D 8. A
4. D 9. B
5. B 10. A*
* Choice (a) is the best answer. Bad debts are computed on credit
sales (excluding cash sales).
Choice (d) is correct – PFRS 9 encourages a combination of

collective assessment (e.g., aging) and individual assessment (i.e.,
specific accounts).
35
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. B (450 x 2%) = 9
2. C 1,000 – 200 sales returns – 9 sales discount = 791
3. A (100,000 x 50% x 2%) = 1,000
4. C (100K + 611K – 591K – 45K) = 75,000
5. A
Solution:
10,800 Jan. 1
Bad debts expense (450K x
Write-offs 18,000 13,500 3%)
Dec. 31 6,300
6. D (1,000,000 x 3%) = 30,000

7. A
Solution:
Days Estimated outstanding Amount % uncollectible Allowance
0 - 60 120,000 1% 1,200
61 - 120 90,000 2% 1,800
Over 120 100,000 6% 6,000
9,000
8. B
Solution:
Accounts receivable at 12/31/x1 - gross 350,000
Accounts receivable at 12/31/x1 - net (325,000)
Allowance for uncollectible accounts - 12/31/x1 25,000
Allowance for uncollectible accounts

30,000 Jan. 1
Write-offs 18,000 2,000 Recoveries
Bad debts expense
11,000 (squeeze)
Dec. 31 25,000
9. C 650K + 2.7M – 75K – 40K – 2.15M = 1.085M

10. D
Solution:
Percentage of credit sales: (1,750,000 x 2%) = 35,000
Percentage of accounts receivable:
16,000 Jan. 1
29,000 Bad debts expense (squeeze)
Dec. 31 (900K x
5%) 45,000
36
37
Chapter 7
Inventories

1. FALSE
2. FALSE
3. FALSE
4. TRUE
5. FALSE (₱3 + ₱4 = ₱7)
6. FALSE (₱2 – the cost of the red apple)
7. FALSE (2 + 3 + 4) / 3 apples x 2 apples on hand = ₱6
8. TRUE
9. TRUE
10. FALSE (₱2 – the amount of write-down in prior periods)

1. D
2. D
3. A
4. A
5. A
6. Solutions:
Cost of inventory Net cash payment
Scenarios: on Dec. 31 on Jan. 5
a. FOB Destination,
Freight prepaid None 100,000
b. FOB Shipping point,
Freight collect 106,000 100,000
c. FOB Destination,
Freight collect None 94,000
d. FOB Shipping point,
Freight prepaid 106,000 106,000
7. D
8. C – memo entry
9. D
38
10. Solution:
Inventory Accounts payable

Unadjusted balances 500,000 120,000
(b) 60,000 -
(c) (80,000) (80,000)
(d) 50,000 50,000
(e) 30,000 -
Adjusted balances 560,000 90,000
11. Solution: 180,000 – 30,000 + [(18,000 + 2,000) x ½] = 160,000
12. Solution:
a. Inventory on display shelves 100,000
b. Inventory stocked in warehouse 250,000
c. Inventory sold under a bill and hold arrangement,
included in the stock of inventory in warehouse (20,000)
d. Inventory purchased in installment sale, physical
possession is obtained but the seller retains legal title
to the goods until full payment of purchase price 30,000
e. Inventory pledged as collateral security for a bank loan 60,000
g. Inventory sold wherein ABC Co. is obligated to
repurchase the inventory at a future date 10,000
430,000
13. A
14. A
15. C
16. D
17. Solutions:
Requirement (a):
Perpetual system Periodic system

(a)
Inventory 450,000 Purchases 450,000
Accounts payable 450,000 Accounts payable 450,000
(b)
Inventory 25,000 Freight-in 25,000
39
Cash 25,000 Cash 25,000
(c)
Inventory 10,000 Purchase returns 10,000
(d)
Sales 800,000 Sales 800,000
Cost of goods sold 380,000 No entry

Inventory 380,000
(e)
Sales returns 9,000 Sales returns 9,000
Inventory 4,275 No entry

Cost of goods sold 4,275
Requirement (b):
Perpetual system
Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales (375,725)
Gross profit 415,275
Periodic system
Sales 800,000
Sales returns (9,000)
Net sales 791,000
40
Cost of sales:
Beginning inventory 20,000
Net purchases 465,000
Total goods avail. for sale 485,000
Ending inventory (109,275) (375,725)
Gross profit 415,275
18. D
19. B
20. D
21. D
22. E
23. Solution:
Purchase price, gross of trade discount 100,000

Trade discount (20,000)
Non-refundable purchase tax 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Total cost of inventories 102,000
The advertisement costs are selling costs. These are

expensed in the period in which they are incurred.
24. Solution:
Gross method Net method

Jan. 1, 20x1
Purchases 144,000* Purchases 136,800*
*(₱200,000 x 80% x 90%) *(₱200,000 x 80% x 90% x 95%)
Jan. 10, 20x1

Accounts payable* 72,000 Accounts payable* 68,400
41
Purchase discounts 3,600 Cash 68,400
(144,000 x ½ x 5%)
Cash** 68,400
*(144K x ½) * (136.8K x ½)
**(144K x ½ x 95%)
Jan. 31, 20x1

Accounts payable* 72,000 Accounts payable 68,400
Cash 72,000 Purchase discount lost 3,600
Cash 72,000
*(144K x ½)
25. C
26. D
27. Solutions:
Requirement (a): FIFO Periodic

Ending inventory, in units = (3,000 + 2,250 + 10,200 – 2,700 – 7,200) = 5,550
Units Unit cost Total cost

Ending inventory in units 5,550
Allocation to latest purchases:
Jan. 26 2,250 20.60 46,350
Jan. 6 (balance) 3,300 21.50 70,950
Ending inventory in pesos 117,300
TGAS (58,650 + 219,300 + 46,350) 324,300

Less: Ending inventory in pesos (117,300)
COGS 207,000
Requirement (b): FIFO Perpetual

Answers are the same with FIFO Periodic.
OR
Unit
Units Total Cost
Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
January 7, 2002 (2,700) 19.55 (52,785)
42
January 26, 2002 2,250 20.6 46,350
January 31, 2002 (7,200) * (154,215)*
Ending inventory 5,550 117,300
*The COGS on the Jan. 31 sale is computed as follows:

Units Unit Cost Total Cost
Jan. 31 sale 7,200
Allocation:
From Jan. 1 (3,000 - 2,700) 300 19.55 5,865
From Jan. 6 (balance) 6,900 22 148,350
COGS - Jan. 31 sale 154,215
COGS = (52,785 + 154,215) amounts taken from table above = 207,000
Requirement (c): Weighted Average Cost Periodic

TGAS in pesos
Weighted ave. unit cost =
TGAS in units
(58,650 + 219,300 + 46,350) = 324,300
Weighted ave. unit cost =
(3,000 + 10,200 + 2,250) = 15,450
Weighted ave. unit cost = 20.99
Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
TGAS in pesos 324,300

Less: Ending inventory in pesos (116,495)
COGS 207,805
Requirement (d): Weighted Average Cost Perpetual

Unit
Units Total Cost
Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
TGAS 13,200 21.06 277,950
January 7, 2002 (2,700) 21.06 (56,862)
January 26, 2002 2,250 20.6 46,350
TGAS 12,750 20.98 267,438
January 31, 2002 (7,200) 20.98 (151,056)
43
COGS = (56,862 + 151,056) = 207,918
28. C
29. Solution:
Requirement (a):
Product A Product B Product C Total
Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
Cost 112,000 280,000 336,000
Selling price 210,000 300,000 570,000

Freight-out (10,500) (75,000) (11,400)
NRV 199,500 225,000 558,600
Lower 112,000 225,000 336,000 673,000
Requirement (b):
Product B: (280,000 – 225,000) = 55,000
30. Solution: 200,000 – the amount of write-down in 20x1 because

the 20x2 recovery exceeds the cumulative amount of write-downs
recognized in the previous periods.
44
1. Solution:
Unadjusted balance 260,000
(a) 11,000
(b) 5,000
(c) (16,000)
(d) 20,000
(e) (4,000)
Correct inventory 276,000
2. Solution:
(a) Inventory (140,000 x 98%) 137,200
Accounts payable 137,200
(b) Accounts payable (137.2K x 75%) 102,900

Cash 102,900
(c) Accounts payable (137.2K x 25%) 34,300

Purchase discount lost (140K x 2% x 25%) 700
Cash (140,000 x 25%) 35,000
3. Solution:
June 11 Purchases (.98 × ₱9,000) 8,820
Accounts Payable 8,820
15 Accounts Payable (.98 × ₱1,000) 980
Purchase Returns and Allowances 980
30 Purchase Discounts Lost (.02 × ₱8,000) 160
Accounts Payable 160
4. Solution:
Requirement (a):
Purchases 196,000
45
(.98 × ₱200,000 = ₱196,000.)
Payment within the discount period:

Cash 156,800
(₱200,000 – ₱40,000 = ₱160,000 x .98 = ₱156,800.)
Payment beyond the discount period:

Accounts Payable (40K x 98%) 39,200
Purchase Discounts Lost (40K x 2%) 800
Cash 40,000
Requirement (b):
(1) Net method:

Ending inventory (200,000 x 98% x 10%) ₱19,600
Cost of goods sold (200,000 x 98% x 90%) ₱176,400
(2) Gross method:

(A) Discount is allocated only to the goods sold:
Gross amts. Allocation of discount Net amounts

EI (200K x 10%) 20,000 - 20,000
COGS (200K x 90%) 180,000 3,200 176,800
Total 200,000 3,200
(B) Discount is prorated to both the goods sold and ending

inventory:
Gross amts. Allocation of discount Net amounts

EI (200K x 10%) 20,000 320* 19,680
COGS (200K x 90%) 180,000 2,880* 177,120
Total 200,000 3,200
* (3,200 x 10%; 3,200 x 90%)
46
5. Solutions:
Requirement (a): FIFO periodic

➢ Ending inventory, in units = 1,400 – 400 + 800 – 900 + 700 – 600
= 1,000 units
In units Unit cost In pesos

Ending inventory 1,000
Allocation to June 24 purchase (700) 30 21,000
Excess allocated to June 14
purchase 300 35 10,500
Ending inventory, in pesos 31,500
➢ TGAS, in pesos:
Date Transaction Quantity Unit Cost In pesos
June 1 Balance fwd. 1,400 24 33,600
14 Purchase 800 35 28,000
24 Purchase 700 30 21,000
TGAS, in pesos 82,600

Ending inventory, in pesos (31,500)
Requirement (b): FIFO perpetual
Unit
Date Transaction Quantity Cost In pesos
June 1 Balance 1,400 24 33,600
8 Sale 400 24 (9,600)
14 Purchase 800 35 28,000
47
18 Sale 900 24 (21,600)
24 Purchase 700 30 21,000
29 Sale 600
100 from June 1 24 (2,400)
500 from June 14 35 (17,500)
Cost of goods sold (9,600 + 21,600 + 2,400 + 17,500) 51,100
Requirement (c): Weighted average periodic
Weighted Ave. Unit cost = TGAS, in pesos ÷ TGAS, in units
➢ TGAS, in units = 1,400 + 800 + 700 = 2,900 units
Weighted Ave. Unit cost = ₱82,600 (see previous solution) ÷ 2,900

Weighted Ave. Unit cost = ₱28.48
Ending inventory = ₱28.48 x 1,000 units = 28,480

Ending inventory, in pesos (28,480)
Requirement (d): Weighted average perpetual
Date Transaction Quantity Unit Cost In pesos

June 1 Balance forwarded 1,400 24 33,600
8 Sale (400) (9,600)
14 Purchase 800 35 28,000
Totals 1,800 28.89 52,000
18 Sale (900) (26,001)
48
24 Purchase 700 30 21,000
Totals 1,600 29.37 46,999
29 Sale (600) (17,622)
Cost of goods sold (9,600 + 26,001 + 17,622) 53,223
6. Answers:
Inventory, beg. Net purchases Cost of sales Inventory, end.
a. 10,000 198,000 112,000 96,000
b. 36,000 145,000 125,000 56,000
c. 15,000 58,000 64,000 9,000
d. 25,200 112,000 89,200 48,000
49
ACTIVITY #1:
Solutions:
(a) The term of sale is FOB SHIPPING POINT. Indicator: the freight is
chargeable to ABC Co. (COD – CASH ON DELIVERY).
(b) The freight term is Freight COLLECT.
(c) Journal entry:

JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1(a) Inventory / Purchases 8,689.29(b)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory
(a)
The date of the Bill of Lading – shipment date.
(b)
Purchase price net of VAT ₱7,589.29 + Freight (₱900.00 bill of lading +
₱200.00 porter fee) = ₱8,689.29 cost of purchase
ACTIVITY #2:
Solutions:
1. Compute for the following using the Specific Identification method:
a. Cost of goods sold ₱7.00 – the cost of item “broken”
b. Ending inventory ₱11.75
2. Compute for the following using the FIFO method:

a. Cost of goods sold ₱5.75 – the cost of item “happy”
b. Ending inventory ₱13.00
3. Compute for the following using the Weighted Average Cost method:
a. Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 = ₱6.25
b. Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25 = ₱12.50
50
PROBLEM 5: THEORY
1. B
2. B
3. B
4. C
5. B
6. B
7. D
8. B
9. A
10. C
11. D
12. A
13. D
14. A
15. A
16. A
17. A
18. C
19. C
20. D
51
PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL
1. A
2. C Net method [(80K + 100K) x 98%] = 176,000

Gross method (80K x 98%) + 100K = 178,400
3. B 100K x 80% = 80,000
4. C 300,000 + 7,500 – 1,500 = 306,000
5. A
Solution:
Inventory
beg. 160,000 10,000 Purchase Disc.
Purchases 530,000 465,000 COGS (squeeze)
215,000 end.
6. A
Solution:
Inventory
beg. 30,000
Purchases 40,000 5,000 Purchase Ret. and Allow.
Freight-In 5,000 4,000 Purchase Disc.
51,000 COGS
15,000 end.
7. C
Solution:
beg. 35,000
Purchases 35,000
Freight-In 5,000
Purchase Ret. and Allow. (2,000)
Purchase Disc. (4,000)
Net purchases 34,000
TGAS 69,000
8. D
Solution:
TGAS 55,000
Beginning Inventory (20,000)
Purchases (41,000)
Purchase Returns and Allowances 3,000
Purchase Discounts 4,000
52
Freight-in 1,000
9. C
Solution:
TGAS 55,000
COGS (22,000)
10. D
Solution:
Date Balance/Transaction Units Cost
Aug. 1 Inventory 2,000 ₱36.00
7 Purchase 3,000 37.2
12 Sales (3,600)
21 Purchase 4,800 38
22 Sales (3,800)
29 Purchase 1,600 38.6

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
11. D Same with FIFO periodic

12. B
Solution:
Total
Date Balance/Transaction Units Cost
cost
1-Jul Inventory 2,000 72,000
36.00
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
53
Date Balance/Transaction Units
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
Average cost 37.36
13. C
Solution:
Date Transaction Units Cost Total cost
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) 36.60 (131,760)
21 Purchase 5,000 37.88 189,400
Total 6,400 37.60 240,640
22 Sales (3,800) 37.60 (142,880)
29 Purchase 1,600 38.11 60,976
14. A
Solution:
Ending inventory in units is computed as follows:
Units
beg. 10
January 6 Purchase 4
January 10 Sale (5)
January 20 Sale (10)
Ending inventory 10
Total goods available for sale in pesos is computed as follows:

beg. 10 20 200
January 6 Purchase 4 25 100
54
TGAS 25 630
FIFO ending inventory in pesos is computed as follows:

Ending inventory 10
From Jan. 25 purchase (4) 30.0 120
Balance 6
From Jan. 15 purchase (6) 30 180
As allocated - 300
FIFO cost of goods sold is computed as follows:

TGAS 630
Ending inventory (300)
COGS 330
15. A
Solution:
TGAS in pesos (see previous solution) 630
Divide by: TGAS in units (see previous solution) 25
Average unit cost 25.20
Multiply by: EI in units (see previous solution) 10
Average EI 252.00
TGAS in pesos (see previous solution) 630

Average EI (252)
COGS 378
16. C
Solution:
Total goods available for sale is computed based on information
under LIFO as follows:
Cost of goods sold (LIFO) 195,000
Ending inventory in pesos (LIFO) 45,000
Total goods available for sale 240,000
Using the concept that total goods available for sale is the same
under both FIFO and LIFO, the FIFO cost of goods sold is simply
squeezed as follows:
LIFO FIFO
TGAS in pesos 240,000 240,000 extended from LIFO
Ending inventory in pesos (45,000) (65,000) given information
55
Cost of goods sold 195,000 175,000 squeezed
17. C No adjustment is necessary for the foregoing.

• The goods are properly included in inventory because they were
shipped only on July 10, 2002, after the June 30, 2002 cut-off
date.
• The goods purchased FOB destination are properly excluded
from inventory because they are not yet received as of cut-off
date.
56
Chapter 11
Investments – Additional Concepts

1. FALSE
2. TRUE
3. TRUE
4. TRUE
5. TRUE
16. B
17. D
18. Solutions:
Requirement (a) Held for trading securities
Date Trade date accounting Settlement accounting
Dec. Held for trading securities 1,000
29, Accounts payable 1,000
20x1
No entry
to record the purchase of investment
Dec. Held for trading securities 750 Accounts receivable 750
31, Unrealized gain – P/L 750 Unrealized gain – P/L 750
20x1
to record the fair value change to record the fair value change
Jan. Unrealized loss – P/L 250 Held for trading securities 1,500
3, Accounts payable 1,000 Unrealized loss – P/L 250
20x2 Held for trading securities 250 Accounts receivable 750
Cash 1,000 Cash 1,000
to record the settlement of the to record the purchase of investment
purchase transaction
Requirement (b) FVOCI securities

Dec. FVOCI securities 1,000
20x1
No entry
Dec. FVOCI securities 750 Accounts receivable 750
31, Unrealized gain – OCI 750 Unrealized gain – OCI 750
20x1
to record the fair value change to record the fair value change
57
Jan. Unrealized loss – OCI 250 FVOCI securities 1,500
3, Accounts payable 1,000 Unrealized loss – OCI 250
20x2 FVOCI securities 250 Accounts receivable 750
Cash 1,000 Cash 1,000
Requirement (c) Amortized cost

Dec. Investment in bonds 1,000
20x1 No entry
Dec.
31, No entry No entry
20x1
Jan. Accounts payable 1,000 Investment in bonds 1,000
3, Cash 1,000 Cash 1,000
20x2
19. Solutions:
Requirement (a) Held for trading securities
Dec. Accounts receivable 1,000 Unrealized loss – P/L 200
29, Realized loss on sale 200 Held for trading securities 200
20x1 Held for trading securities 1,200 to adjust the carrying amount of the
to derecognize the investment sold investment sold to fair value as of
and to recognize the gain on disposal trade date
Dec.
20x1
Jan. Cash 1,000 Cash 1,000
3, Accounts receivable 1,000 Held for trading securities 1,000
20x2
to record the settlement of the sale to derecognize the investment sold
transaction and to record the settlement of the
sale transaction
Requirement (b) FVOCI securities

Dec. Accounts receivable 1,000 Unrealized loss – OCI 200
29, Realized loss on sale 200 FVOCI securities 200
20x1 FVOCI securities 1,200 to adjust the carrying amount of the
to derecognize the investment sold investment sold to fair value as of
and to recognize the gain on disposal trade date
Dec.
20x1
58
3, Accounts receivable 1,000 FVOCI securities 1,000
20x2
to record the settlement of the sale to derecognize the investment sold
transaction and to record the settlement of the
sale transaction
Retained earnings 200

Realized loss on sale 200
to transfer the accumulated unrealized

gain to profit or loss as a
reclassification adjustment
Requirement (c) Amortized cost

Dec. Accounts receivable 1,000
29, Realized loss on sale 200
20x1 Investment in bonds 1,200
No entry
to derecognize the investment sold
and to recognize the gain on
disposal
Dec.
20x1
3, Accounts receivable 1,000 Realized loss on sale 200
20x2 Investment in bonds 1,200
to record the settlement of the sale
transaction to derecognize the investment sold, to
record the settlement of the sale
transaction and to recognize the gain
on disposal
20. B
21. D
22. Solutions:
Scenario (a): Amortized cost to FVPL

Jan. FVPL asset 120,000
1, Amortized cost asset 100,000
20x3
Gain on reclassification (squeeze) 20,000
Scenario (b): FVPL to Amortized cost

1, Unrealized gain – P/L 20,000
20x3
Jan. Amortized cost asset 120,000
59
1, FVPL asset 120,000
20x3
Scenario (c): Amortized cost to FVOCI (mandatory)

Jan. FVOCI asset 120,000
20x3
Gain on reclassification – OCI 20,000
Scenario (d): FVOCI (mandatory) to Amortized cost

1, Unrealized gain – OCI 20,000
20x3
Jan. Amortized cost asset (squeeze) 95,000
1,
Unrealized gain – OCI (5K + 20K) 25,000
20x3
FVOCI asset (FV on reclassification date) 120,000
Scenario (e): FVPL to FVOCI (mandatory)

20x3
1,
FVPL asset 120,000
20x3
Scenario (f): FVOCI (mandatory) to FVPL

20x3
1,
FVOCI asset 120,000
20x3
Jan. Unrealized gain – OCI 25,000
1,
Gain on reclassification – P/L 25,000
20x3
23. D
24. Solutions:
Dec. Impairment loss – P/L 3,000

31, Unrealized loss – OCI (squeeze) 7,000
20x1
Dec. Interest receivable 10,000
60
31, Interest income 10,000
20x1
25. Solution: (200/1,000) x 30,000 = 6,000
26. Solution: (200 stock rights x ₱5.50) = 1,100
27. C
28. A
61
12. Solutions:
Requirement (a): Reclassification date

The reclassification date is January 1, 20x3.
Requirement (b): Journal entry on reclassification date

Interest Interest
received income
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
Jan. 1, Held for trading securities 2,080,000

20x3 (2M x 104%)
Investment in bonds at
amortized cost 1,964,286
Gain on reclassification 115,714
13. Solutions:
Requirement (a):
Jan. Held for trading securities 20,000
1, [2M x (104% - 103%)]
20x3 Unrealized gain – P/L 20,000
Jan. Investment in bonds at amortized
1, cost (2M x 104%) 2,080,000
20x3 Held for trading securities 2,080,000
Requirement (b):
Carrying amount (fair value) at date of reclassification 2,080,000
Face amount (2,000,000)
Difference – Premium 80,000
62
14. Solution:
1/1/x2
FVPL asset 6,000
Unrealized gain – P/L 6,000
Amortized cost asset 226,000

FVPL asset 226,000
15. Solutions:
Scenario (a): Amortized cost to FVPL

20x3
Gain on reclassification (squeeze) 40,000
Scenario (b): FVPL to Amortized cost

20x3
Jan. Amortized cost asset 240,000
1,
FVPL asset 240,000
20x3
Scenario (c): Amortized cost to FVOCI (mandatory)

20x3
Gain on reclassification – OCI 40,000
Scenario (d): FVOCI (mandatory) to Amortized cost

20x3
Jan. Amortized cost asset (squeeze) 190,000
1,
Unrealized gain – OCI (10K + 40K) 50,000
20x3
FVOCI asset (FV on reclassification date) 240,000
Scenario (e): FVPL to FVOCI (mandatory)

20x3
1,
FVPL asset 240,000
20x3
63
Scenario (f): FVOCI (mandatory) to FVPL
20x3
1,
FVOCI asset 240,000
20x3
Jan. Unrealized gain – OCI 50,000
1,
Gain on reclassification – P/L 50,000
20x3
16. Solutions:
Dec. Impairment loss – P/L 9,000

31, Unrealized loss – OCI 21,000
20x1
Dec. Interest receivable 30,000
31, Interest income 30,000
20x1
64
1. A 6. D 11. B
2. C 7. D
3. C 8. D
4. B 9. D
5. D 10. C
65
PROBLEM 5: COMPUTATIONAL: MULTIPLE CHOICE
8. B (1,000 stock rights x 5 fair value per stock right) = 5,000
9. C (140,000 x 15%) = 21,000 dividend revenue
10. A 6,000 dividend revenue
11. A - Reclassification from FVOCI (election) to held for trading is not

permitted.
66
Chapter 5
Notes Receivable

1. TRUE
2. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)
3. TRUE
4. TRUE
5. TRUE
6. FALSE 40,000
7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000
8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 +
9,000) x 10% = 9,900
9. FALSE 850,000 (the note is collectible in installments)
10. TRUE
PROBLEM 2: CLASSROOM DISCUSSION

1. A
2. C
3. Solutions:
Initial measurement:
₱133,100 x PV of ₱1 @10%, n= 3 = ₱100,000
Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 33,100 100,000
12/31/x1 10,000 23,100 110,000
12/31/x2 11,000 12,100 121,000
12/31/x3 12,100 - 133,100
Requirement (b):
1/1/x1
Note receivable 133,100
Unearned interest 33,100
Land 100,000
12/31/x1
67
12/31/x2
12/31/x3
12/31/x3
Cash 133,100
4. C
5. Solutions:
₱100,000 x PV ordinary annuity of ₱1 @10%, n=3 = ₱248,685
Requirement (a):
1/1/x1 248,685
12/31/x1 100,000 24,869 75,132 173,554
12/31/x2 100,000 17,355 82,645 90,909
12/31/x3 100,000 9,091 90,909 (0)
Requirement (b):
Current portion = 82,645 (see table above)
Noncurrent portion = 173,554 (see table above)
Requirement (c):
Interest income in 20x2 and 20x3: (17,355 + 9,091) = 26,446
OR
Outstanding balance of face amount (100K x 2) 200,000
Carrying amt. on 12/31/x1 (173,554)
Unearned interest on 12/31/x1 26,446
Requirement (d):
1/1/x1
Accum. depreciation 700,000
Loss (squeeze) 51,315
Unearned interest (300,000 – 248,685) 51,315
Equipment 1,000,000
12/31/x1
68
Cash 100,000
12/31/x2
Cash 100,000
12/31/x3
Cash 100,000
6. D
7. Solutions:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215
Requirement (a):
1/1/x1 1,094,215
1/1/x1 400,000 - 400,000 694,215
1/1/x2 400,000 69,421 330,579 363,636
1/1/x3 400,000 36,364 363,636 (0)
Requirement (b):
69,421 – see table above.
69
1. Solutions:
₱1,000,000 x PV of ₱1 @14%, n= 4 = ₱592,080
Requirement (a):
1/1/x1 407,920 592,080
12/31/x1 82,891 325,029 674,971
12/31/x2 94,496 230,533 769,467
12/31/x3 107,725 122,807 877,193
12/31/x4 122,807 0 1,000,000
Requirement (b):
1/1/x1
Note receivable 1,000,000
Land 500,000
Gain 92,080
12/31/x1
12/31/x2
12/31/x3
12/31/x4
Cash 1,000,000
2. Solutions:
₱900,000 x PV of ₱1 @12%, n= 3 = ₱640,602
Requirement (a):
1/1/x1 259,398 640,602
70
12/31/x1 76,872 182,526 717,474
12/31/x2 86,097 96,429 803,571
12/31/x3 96,429 0 900,000
Requirement (b):
1/1/x1
Accum. depn. 400,000
Loss 159,398
Machinery 1,200,000
12/31/x1
12/31/x2
12/31/x3
12/31/x3
Cash 900,000
3. Solution:
₱250,000 x PV of ₱1 @14%, n= 4 = ₱759,337
Requirement (a):
1/1/x1 759,337
12/31/x1 250,000 91,120 158,880 600,457
12/31/x2 250,000 72,055 177,945 422,512
12/31/x3 250,000 50,701 199,299 223,214
12/31/x4 250,000 26,786 223,214 -
Requirement (b):
Requirement (c):
71
1/1/x1
Unearned interest (1M – 759,337) 240,663
Land 1,000,000
12/31/x1
Cash 250,000
12/31/x2
Cash 250,000
12/31/x3
Cash 250,000
12/31/x4
Cash 250,000
4. Solution:
₱400,000 x PV of ₱1 @15%, n= 3 = ₱913,290
Requirement (a):
1/1/x1 913,290
12/31/x1 400,000 136,994 263,006 650,284
12/31/x2 400,000 97,543 302,457 347,826
12/31/x3 400,000 52,174 347,826 (0)
72
Requirement (b):
Requirement (c):
1/1/x1
Unearned interest (1.2M – 913,290) 286,710
Land 1,000,000
12/31/x1
Cash 400,000
12/31/x2
Cash 400,000
12/31/x3
Cash 400,000
5. Solution:
(300,000 x PV of an annuity due of 1 @9%, n=3) = 827,733
Requirement (a):
1/1/x1 827,733
1/1/x1 300,000 - 300,000 527,733
1/1/x2 300,000 47,496 252,504 275,229
1/1/x3 300,000 24,771 275,229 (0)
73
Requirement (b):
Interest income in 20x1 = 47,496 (see table above)
Requirement (c):
1/1/x1
Cash 100,000
Unearned interest (900K – 827,733) 72,267
Land 800,000
Gain (squeeze) 127,733
1/1/x1
Cash 300,000
12/31/x1
6. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Unearned interest at initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years

1/1/x1 1,119,272
12/31/x1 400,000 179,084 220,916 898,356
12/31/x2 400,000 143,737 256,263 642,093
12/31/x3 400,000 102,735 297,265 344,827
12/31/x4 400,000 55,172 344,828 0
7. Solutions:
First step: Place the given information on the amortization table:
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000
74
Second step: Squeeze for the carrying amount of the note on December 31,
20x1.
1/1/x1 911,205
12/31/x1 300,000 720,549*
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000
* (213,534 + 507,015) = 720,549
Third step: Compute for the effective interest rate

EIR = 86,466 ÷ 720,549 = 12%
Fourth step: Squeeze for the other missing information

1/1/x1 911,205
12/31/x1 300,000 109,345 190,655 720,549
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000 60,842 239,158 267,857
12/31/x4 300,000 32,143 267,857 -
75
ACTIVITY 1:
The learners perform the activity, grade themselves, and then pass their
scores to the teacher for recording.
ACTIVITY 2:
The learners perform the activity, grade themselves, and then pass their
scores to the teacher for recording.
ACTIVITY 3:
The learners perform the activity and then pass their printed work to the
teacher for grading.
ACTIVITY 4:
The learners perform the activity and then pass their printed work to the
teacher for grading.
76
1. D 6. D 11. A
2. B 7. D 12. B
3. D 8. C 13. C
4. B 9. C 14. D
5. C 10. C 15. A

1. B (400,000 x .75) = 300,000 x 10% = 30,000
2. A (60,000 x PV annuity due @10%, n=7) = 321,600 rounded off
3. B (600,000 x PV of ₱1 @10%, n=3) = 450,789 x 10% = 45,000
rounded off
4. A 480,000 carrying amount – 450,789 present value = 30,000
loss rounded off
5. D Maxx note (10,000 x 1.1593 Future Value of ₱1 @3%, n=5) =
11,593 future value x .680 = 7,883. The answer choice is rounded
off
6. C (150K – 50K in July 1, 20x5) = 100K balance x 8% = 8,000
7. C (500,000 x 12% x 2/12) = 10,000
8. B (5,009 x 5) = 25,045 total cash flows from the note receivable
less 19,485 present value = 5,560
9. C (10,000 x PV of an annuity due of ₱1 @8%, n=10) = 72,468
less 10,000 first installment on Dec. 30, 20x4 = 62,469. Answer
choice is rounded-off
10. C
Solution:
The equal annual year-end payments are computed as follows:
PV = Cash Flow x PVF
20,000 = Cash Flow x PV ordinary annuity of 1 @8%, n=5
20,000 = Cash Flow x 3.993
Cash Flow = 20,000 ÷ 3.9927
Cash Flow = 5,009
Total cash flow = 5,009 x 5 years = 25,045

Less: Present value (5,009 x PV ordinary annuity @9%, n=5) =
19,483
Total interest revenue = 5,561 (Answer choice is rounded-off)
77
Chapter 8
Inventory Estimation

1. FALSE - 56.25% [36% ÷ (100% - 36%)]
2. TRUE (40% ÷ 140%)
3. TRUE
4. FALSE – 74.07% (100% + 135%)
5. FALSE - ₱80
1. Solutions:
a) 200,000 – (160,000 x 100%/150%) = 93,333
b) 200,000 – (160,000 x 40%) = 136,000
c) 200,000 – (160,000 x 100%/125%) = 72,000
d) 200,000 – (160,000 x 60%) = 104,000
2. Solution:
2001
Net sales (788,000 - 16,000) 772,000
Cost of sales:
Inventory, beg. (Jan. 1, 2001) -
Purchases 860,000
Purchase returns & allow. (46,120)
Inventory, end. (Jan. 1, 2002) (173,120) (640,760)

Gross profit - 2001 131,240
GPR on sales - 2001 (131,240 ÷ 772K) 17%

Add: 3%
78
GPR on sales - 2002 20%
Inventory - 2002
beg. 173,120
Net purchases COGS
(692K - 64.6K) 627,400 652,800 [(836K - 20K) x 80%]
147,720 end.
Ending inventory, 2002 147,720

Less: Cost of undamaged goods (24K selling price x 80%) (19,200)
Less: Salvage value of damaged goods (3,600)
Inventory loss 124,920
3. Solutions:
Cost Retail
Inventory at January 1, 2002 45,000 75,000
Purchases 270,000 590,000
Freight-in 6,750
Markups 50,000
Markdowns (20,000)
TGAS 321,750 695,000
Net sales * (612,000)
Ending inventory at retail 83,000
*Sales 600,000
Estimated normal shrinkage 12,000
Net sales 612,000
Requirement (a): Average cost method

Cost ratio Total goods avail. for sale at cost
= Total goods avail. for sale at sales price or
(Average cost method)
at retail
(321,750 ÷ 695,000) = 46.29%
Ending inventory = (83,000 x 46.29%) = 38,420.70
79
COGS = (321,750 – 38,420.70) = 283,329.30
Requirement (b): FIFO cost method

Cost ratio TGAS at cost less beg. inventory at cost
=
(FIFO cost method) TGAS at retail less beg. inventory at retail
(321,750 – 45,000) ÷ (695,000 – 75,000) = 276,750 ÷ 620,000 = 44.64%
Ending inventory = (83,000 x 44.64%) = 37,051.20

COGS = (321,750 – 37,051.20 ) = 284,698.80
1. Solution:
Inventory, January 1 ...................... ₱ 62,000
Purchases (₱114,000 - ₱4,000) ............. 110,000
Cost of goods available for sale .......... ₱172,000
Sales ..................................... ₱90,000
Gross profit (₱90,000 _ 40%) .............. 36,000
Estimated cost of goods sold .............. (54,000)
Estimated inventory, May 17 ............... ₱118,000
Actual inventory, May 17 .................. (55,000)
Theft loss ................................ ₱ 63,000
2. Solutions:
(1)
Beginning Inventory ................................... ₱147,800

+ Purchases ........................................ 295,000
+ Freight-in ....................................... 8,200
– Purchase returns ................................. 16,600
= Goods available for sale ......................... ₱434,400
– Cost of goods sold (486,400 x .75) ............... 364,800
= Inventory lost in fire ........................... ₱ 69,600
(2)
Beginning Inventory ................................... ₱147,800

+ Purchases ........................................ 295,000
+ Freight-in ....................................... 8,200
– Purchase returns ................................. 16,600
= Goods available for sale ......................... ₱434,400
– Cost of goods sold (486,400 ÷ 1.28) .............. 380,000
= Inventory lost in fire ........................... ₱ 54,400
80
PROBLEM 4: CLASSROOM ACTIVITY
Solution:
Inventory
Jan. 1, 20x1 1,064,352
Purchases 482,016 630,644 COGS*
915,724 Jan. 7, 20x1
*Cost of goods sold is computed as follows:

Total sales (Jan. 1 to Jan. 6) 900,920
Multiply by: 70%
COGS 630,644
Inventory, Jan. 7, 20x1 915,724

Less: Goods in transit (Jan. 6 purchase) (126,516)
Less: Cost of undamaged goods (20,000)
Less: Salvage value of partially damaged goods (354 x 2) (708)
Inventory loss 768,500
81
PROBLEM 5: MULTIPLE CHOICE
1. C
2. C
3. A
4. C
5. A
Solution:
Accounts payable Inventory
- beg. beg. 30,000
Payments Net Net
to suppliers 80,000 90,000 purchases purchases 90,000 120,000 COGS
end. 10,000 - end.
6. A
Solution:
Accounts payable
- beg.
Disbursements 290,000 315,000 Purchases (squeeze)
end. 25,000
Inventory
beg. 10,000
Purchases 315,000 325,000 COGS (squeeze)
- end.
7. B
Solution: Raw materials
beg. 11,000
Purchases 150,000 146,000 DM
15,000 end.
WIP
beg. 20,000
Direct materials 146,000
Direct labor 60,000
Factory overhead:
Indirect factory labor 30,000
Taxes and depn. - factory bldg. 10,000
Utilities (60% x 25,000) 15,000 257,000 COGM
24,000 end.
82
Finished goods
beg. 12,500
COGM 257,000 260,500 COGS
9,000 end.
8. D
Solution:
Raw materials
beg. -
Purchases 215,000 207,500 DM (squeeze)
7,500 end.
WIP
beg. -
DM 207,500
DL 100,000
FOH 150,000 457,500 COGM (squeeze)
- end.
Finished goods
beg. 17,500
COGM 457,500 475,000 COGS (squeeze)
- end.
9. B
10. A [200,000 + 300,000 – (600,000 x 70%)] = 80,000
11. 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
12. B 720,000 ÷ (900,000 + 100,000 – 40,000) = 75%

(900,000 + 100,000 – 40,000 – 680,000) x 75% = 210,000
83
Chapter 6
Receivables – Additional Concepts

1. TRUE
2. TRUE
3. TRUE
4. FALSE
5. FALSE – original effective interest rate
6. TRUE
7. FALSE
8. TRUE
9. TRUE
10. TRUE

1. Solution:
5,000,000 + 100,000 – (5,000,000 x 6%) = 4,800,000
2. B
3. B
4. A
5. Solutions:
July 1, 20x1
July 1, Loan receivable 2,000,000

20x1 Cash 2,000,000
July 1, Impairment loss* 20,000
20x1 Loss allowance 20,000
* Equal to 12-month expected credit losses (2.5% x 800,000)
December 31, 20x1
Dec. 31, Impairment loss 71,000

20x1 Loss allowance (91K – 20K) 71,000
Lifetime expected credit losses = (3.0% + 10%) x 700,000 = 91,000
84
Dec. 31, Interest receivable 100,000
20x1 Interest income (2M x 10% x 6/12)** 100,000
** Interest revenue is computed on the gross carrying amount because the

loan is not credit-impaired (i.e., Stage 2 rather than Stage 3).
December 31, 20x2
Dec. 31, Loss allowance (91K – 5K) 86,000

20x2 Impairment gain 86,000
12-month expected credit losses = (1% x 500,000) = 5,000

20x2 Interest income (2M x 10% x 6/12) 100,000
6. Solutions:
Requirement (a):
The PV of the remaining cash flows is computed as follows:
Date Cash flows PV of 1 @11% PV factors Present value
1/1/x3 1,000,000 n=0 1 1,000,000
1/1/x4 1,500,000 n=1 0.900900901 1,351,351
1/1/x5 1,500,000 n=2 0.811622433 1,217,434
3,568,785
The carrying amount of the loan is computed as follows:

Face amount 4,000,000
Direct origination costs 364,098
Origination fees (240,000)
Initial carrying amount 4,124,098
Subsequent measurement:
1/1/x1 4,124,098
12/31/x1 480,000 453,651 26,349 4,097,749
12/31/x2 480,000 450,752 29,248 4,068,501
.
The impairment loss is computed as follows:
PV of remaining cash flows 3,568,785
Less: Carrying amount (4,068,501)
Impairment loss (499,716)
85
Requirement (b):
(3,568,785 – 1,000,000) x 11% = 282,566
7. Solution:
Requirement (a):
Date Cash 180,000
Loss on transfer 20,000
Loans receivable 200,000
Requirement (b):
Date Cash 180,000
Liability on repurchase agreement 180,000
Requirement (c):
Date Cash 180,000
Loss on transfer 20,000
Loans receivable (200K – 20K) 180,000
Liability on repurchase agreement 20,000
8. Solution: ₱200,000 – the gross amount. Offsetting is not applicable

because ABC Co. does not intend to settle the accounts receivable and
accounts payable simultaneously.
9. Solution:
(a) Accounts receivable – assigned 900,000

Cash 723,000
Discount on loan payable 27,000
Loans Payable 750,000
(b) Cash 350,000
Sales Discounts 560
Allowance for Doubtful Accounts 530
Accounts Receivable - assigned 351,090
(c) Loans Payable 350,000

Interest Expense 7,500
Cash 357,500
86
(d)
A/R - assigned (900K - 351,090) 548,910
Loan payable (750K - 350K) (400,000)
Equity in assigned receivables 148,910
10. Solutions:
(a) Cash 368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱400,000) 24,000
Accounts Receivable 400,000
(b) Accounts Receivable 400,000

Due to Dexter 8,000
Financing Revenue 24,000
Cash 368,000
(c) Cash 368,000

Due from Factor 8,000
Loss on Sale of Receivables 31,000
Recourse Liability 7,000
11. Solution:
September 1, 2002
Notes Receivable 400,000
October 1, 2002
Cash 405,066
Notes Receivable 400,000
Gain 1,121
MV = 400,000 + (400,000 x 12% x 90/365) = 411,836

D = 411,836 x 10% x 60/365 = 6,770
NP = 411,836 – 6,770 = 405,066
Interest income = 400,000 x 12% x 30/365 = 3,945
PROBLEM 3: EXERCISES – MULTIPLE CHOICE

1. C (200,000 x 12% x 1/12) = 2,000
2. B
Solution:
Principal amount 150,000
87
Direct loan origination costs 4,000
Origination fee (150K x 4%) (6,000)
3. A
Solution:
Principal amount 150,000
Origination fee (150K x 4%) (6,000)
4. C (194,000 x 12.4% x 1/12) = 2,005
5. A Bigco, Inc. has not surrendered control over any amount of

transferred receivables because it is obligated to repurchase
the receivables.
6. D Since the transfer of the bond is used only as security for the
loan, and not as a sale of the bond, Dayco would not recognize
the bond in its books at the time of the transfer. The bond would
be recognized in Dayco's books on the date Rayco defaulted. The
bond is measured at fair value.
7. C
Solution:
Year Expected fees Fractions
1 40,000 40/80
2 30,000 30/80
3 10,000 10/80
80,000
60,000 servicing asset x 40/80 fraction in Year 1 = 30,000

amortization
8. D equal to the face amount
9. C Maturity value = 500,000 + (500,000 x 8%) = 540,000

Discount = 540,000 x 10% x 6/12 = 27,000
Net proceeds = 540,000 – 27,000 = 513,000
10. A
Solution:
NP = MV - D
MV = 10,000 + (10,000 x 60/360 x 6%) = 10,100
D = 10,100 x 9% x 30/360 = 75.75
88
NP = 10,100 – 75.75 = 10,024.25

1. C
2. C
3. Solutions:
July 1, 20x1
July 1, Loan receivable 2,400,000

20x1 Cash 2,400,000
July 1, Impairment loss* 24,000
20x1 Loss allowance 24,000
* Equal to 12-month expected credit losses
December 31, 20x1
Dec. 31, Impairment loss 85,200

20x1 Loss allowance (109.2K** – 24K) 85,200
** Lifetime expected credit losses

20x1 Interest income 144,000
(2.4M x 12% x 6/12)***
*** Interest revenue is computed on the gross carrying amount because the
loan is not credit-impaired (i.e., Stage 2 rather than Stage 3).
December 31, 20x2
Dec. 31, Loss allowance (109.2K – 6K****) 103,200

20x1 Impairment gain 103,200
****12-month expected credit losses

20x1 Interest income 144,000
(2.4M x 12% x 6/12)
89
1. B 6. A 11. D 16. D
2. A 7. A 12. C 17. D
3. B 8. D 13. A 18. A
4. B 9. D 14. B 19. B
5. B 10. C 15. B 20. C
90
Chapter 9
Investments

1. FALSE – both business model and contractual cash flows characteristics
2. TRUE
3. FALSE
4. TRUE
5. TRUE
6. FALSE
7. FALSE
8. FALSE - FVOCI
9. FALSE - P/L
10. FALSE - ₱5

1. D
2. C
3. D
4. B
5. A
6. B
7. Solutions:
Case #1:
Answer: (120 – 35) = 85
Case #2:
The most advantageous market is determined as follows:
Active market #1 Active market #2
Market price 100 120
Transaction costs (5) (5)
Transport costs (10) (35)
Amount received from sale 85 80
Answer: (100 – 10) = 90
91
8. Answer: ₱2.00 level 2 input x 1,000 shares = ₱2,000
9. B
10. B
11. Solutions:
Requirement (a):
1/1/x1
Held for trading securities (12,000 x 3) 36,000
Commission expense 1,800
Cash 37,800
12/31/x1
Held for trading securities [(12,000 x 5) – 36,000] 24,000
1/6/x1
Cash [(12,000 x 8) – 4,800] 91,200
Realized gain 31,200
Requirement (b):
1/1/x1
Cash in bank 37,800
12/31/x1
Fair value adjustment [(12,000 x 5) – 36,000] 24,000
1/6/x1
Cash [(12,000 x 8) – 4,800] 91,200
Fair value adjustment 24,000
Realized gain – P/L 31,200
Requirement (c):
1/1/x1
Investment in FVOCI securities [(12,000 x 3) + 1,800] 37,800
Cash in bank 37,800
12/31/x1
Investment in equity securities - FVOCI 22,200
Unrealized gain – OCI [(12,000 x 5) – 37,800] 22,200
92
1/6/x1
Unrealized gain – OCI 31,200*
*(12,000 x 8) – 4,800 = 91,200 – 60,000 = 31,200
Cash [(12,000 x 8) – 4,800] 91,200

Investment in equity securities - FVOCI (12,000 x 5) 91,200

Retained earnings 53,400
12. Solutions:
Requirement (a):
2001
Dec. 31 Unrealized Loss – P/L 20,000
Held for Trading Securities 20,000

2002
Dec. 31 Held for Trading Securities 4,000
Unrealized Gain – P/L 4,000
Dec. 31 Unrealized loss – OCI 240,000

Investment in equity securities – 240,000
FVOCI
Requirement (b):
Effect on 2001 profit (loss):
Recognized decline in value of held for trading securities ₱(20,000)
Effect on 2002 profit (loss):

Recognized increase in value of held for trading securities ₱ 4,000
93
1. Solutions:
Requirement (a):
1/1/x1
Cash 21,000
12/31/x1
Unrealized loss – P/L [(2,000 x 6) – 20,000] 8,000
Held for trading securities 8,000
1/6/x1
Cash [(2,000 x ½ x 3) – 150] 2,850
Realized loss 3,150
Held for trading securities (2,000 x ½ x 6) 6,000
Requirement (b):
1/1/x1
Cash 21,000
12/31/x1
Unrealized loss – P/L [(2,000 x 6) – 20,000] 8,000
Fair value adjustment 8,000
1/6/x1
Cash [(2,000 x ½ x 3) – 150] 2,850
Fair value adjustment (8,000 x ½) 4,000
Realized loss 3,150
Held for trading securities (2,000 x ½ x 10) 10,000
Requirement (c):
1/1/x1
Investment in equity securities - FVOCI [(2,000 x 10) + 1,000] 21,000
Cash 21,000
12/31/x1
Unrealized loss – OCI [(2,000 x 6) – 21,000] 9,000
1/6/x1
Investment in equity securities - FVOCI 3,150*
* [(2,000 x ½ x 3) – 150] = 2,850 – (1,000 x 6) = 3,150
Cash [(2,000 x ½ x 3) – 150] 2,850

Investment in FVOCI securities 2,850**
94
**[(21,000 - 9,000) x ½] – 3,150 = 2,850

Unrealized loss – OCI 7,650***
*** (9,000 x ½) + 3,150 = 7,650
2. Solutions:
Requirement (a): 10,000 x 13 = 130,000
Requirement (b): (10,000 x 20) – [(10,000 x 15) + 7,500] = 42,500 gain
Requirement (c): [10,000 x (20 – 13)] = 70,000 gain
Requirement (d): 0
Requirement (e): [7,000 x (25 - 1.25)] – (7,000 x 20) = 26,250 gain
3. Solution:
Held for trading securities 7,000
Unrealized Gain on Trading Securities 7,000
95
ACTIVITY #1:
Solution:
Investment in PLDT shares (FVPL) 47,280
(100 sh. x 2,364 closing price) = 236,400 - 189,120 = 47,280
ACTIVITY #2:
Solutions:
Requirement (a):
FVPL – because ABC’s business model is neither “hold to collect” nor “hold
to collect and sell.”
Requirement (b):
Held for trading securities 1,910.10*
Unrealized gain – P/L 1,910.10
* Given on the print screen of the portfolio.
Requirement (c):
SYMBOL SHARES PRICE PAID ACQUISITION COST
GLO 250 2,350.00 587,500.00
JFC 1,000 208.80 208,800.00
BDOPBF:PM 10 1,554.67 15,546.70
ABS 10,000 65.20 652,000.00
SNLFMNY:PM 10,000 1.228 12,280.00
1,476,126.70
Requirement (d):
1,478,036.80 (given on the print screen, “VALUE” column)
Requirement (e):
SYMBOL TYPE
GLO EQUITY
JFC EQUITY
BDOPBF DEBT
ABS EQUITY
SNLFMNY DEBT
96
Requirement (f):
(250 x 2,400 x 95%) net proceeds – (250 x 2,372) carrying amount = (23,000)
loss
ACTIVITY #3:
1. A
2. A
3. D
4. C
5. A
6. C
7. A

1. D 6. B 11. A 16. D
2. B 7. B 12. C 17. C
3. C 8. D 13. D 18. A
4. C 9. C 14. B 19. C
5. B 10. C 15. A 20. C
97
1. 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.
2. C
Solution:
Market New York London
Quoted Price 103 106
Transaction Costs (1) (5)
Net price 102 101
The “most advantageous” market is New York Stock Exchange and

the quoted price in this market is 103.
3. B (20,000 shares x 27) = 540,000

4. C – the fair value on Dec. 31, 2003
5. C (82K + 132K + 28K) = 242,000 total fair value
6. A
7. C (120K -150K) = (30K); (185K – 225K) = (40K)
8. B
9. B 370,000 cost less 4,000 credit balance in allowance = 366,000 fair
value on December 31, 20x1;
(363,000 fair value on Dec. 31, 20x2 – 366,000) = 3,000 unrealized loss
in P/L
10. B (155,000 – 100,000) = 55,000
11. D 130,000 FV 12/31/03 – 150,000 cost = 20,000
12. D 370,000 cost plus 4,000 debit balance in allowance = 374,000 fair
value on December 31, 20x1;
(363,000 fair value on Dec. 31, 20x2 – 374,000) = 11,000 unrealized
loss in P/L credited to the Market Adjustment - Trading Securities
account
13. A (160,000 - 130,000) = 30,000 unrealized gain
14. B (525,000 – 510,000) = 15,000 decrease in fair value
15. B [(1,000 sh. x 15) – 1,500] = 13,500 net proceeds – 15,300 carrying
amount = 1,800 loss
16. C [(1,000 shares x 25) – 1,200] = 23,800 net proceeds; (45,900 x
1,000/2,000) = 22,950 carrying amount of investment sold; 23,800 –
22,950 = 850 gain
17. D (1,250 – 1,000) x 10 shares = 2,500 x 70% = 1,750. Since the
tax rate is given, the unrealized gain is computed at net of tax.
98
18. A 360K – 320K = 40,000 unrealized loss in P/L for FVPL ; no fair value
change is recognized in P/L for the investment in FVOCI
19. C [(2,000 sh. x 14) – 1,400] = 26,600 net proceeds – 29,500 fair value on
Dec. 31, 20x1 = 2,900 realized loss
20. B (240K fair value Dec. 31, 20x2 – 180K fair value Dec. 31, 20x1 =
60,000 unrealized gain in OCI;
(240K fair value Dec. 31, 20x2 – 200K original cost) = 40K accumulated
OCI
99
Chapter 12
Other Long-term Investments

1. TRUE
2. FALSE
3. FALSE
4. FALSE
5. FALSE

1. D
2. Solution:
Jan. 1, 20x1
Prepaid insurance 50,000
Cash 50,000
Dec. 31, 20x1

Insurance expense 50,000
December 31, 20x3

Cash surrender value 90,000
September 1, 20x4
Cash 3,000
December 31, 20x4

Jan. 1, 20x5
Cash 50,000
July 1, 20x5
Prepaid insurance (50K x 6/12) 25,000
100
Cash 5,000,000
Prepaid insurance (50K x 6/12) 25,000
{110K + [(130K – 110K) x 6/12]}
Gain on life insurance 4,855,000
PROBLEM 3: EXERCISE
Solution:
(a) 1/1/x1
Prepaid Insurance 50,000
Cash 50,000

(b) 12/31/x3
(c) 4/1/x4
Cash 4,000
(d) 12/31/x4
(e) 1/1/x5
Cash 50,000
(f) 3/31/x5
Insurance expense (50,000 x 3/12) 12,500
Cash 1,000,000
Cash surrender value 23,750*
Prepaid Insurance (50K x 9/12) 37,500
Gain on settlement of life insurance 938,750
*21,000 + [(32,000 – 21,000) x 3/12] = 23,750
101
1. Solutions:
Requirement (a):
Year Insurance expense

20x1 280,000
20x2 280,000
20x3 [280K - (180K ÷ 3)] 220,000
20x4 [280K - 4K - (216K - 180K)] 240,000
20x5 (280K x 9/12) 210,000
Requirement (b):
Cash 10,000,000
Cash surrender value 249,000*
Insurance expense (280K x 3/12) 70,000
Gain on settlement of life insurance 9,681,000
*216,000 + [(260,000 – 216,000) x 9/12] = 249,000

1. C
2. C
3. D
4. C
5. D
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. B (450,000 + 90,000 + 15,000 + 30,000 – 5,000) = 580,000
2. C (1,000,000 ÷ 5.11) = 195,700
3. C [40,000 – (108,000 – 87,000) increase in cash surrender value

taking into account the dividends received] = 19,000
4. B
Solution:
Total annual premiums paid (4,000 x 4 yrs.) 16,000
Total life insurance expense (12,800)
102
Investment in cash surrender value 3,200
5. A
103

Chapter 10 - Inv. in Debt Securities - Ia Part 1a

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Chapter 10 - Inv. in Debt Securities - Ia Part 1a

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Investments in Debt Securities

PROBLEM 1: TRUE OR FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

* [827,135 + (1M x 80%)] = 907,135

Date Collections Interest income Amortization Present value

Requirement (a): Interest receivable

20x1: (100,000 x 10%) = 10,000

12/31/x1: (106,107 – 10,000 interest receivable) = 96,107

Investment in bonds – FVOCI 45,866

Fair value - 12/31/x2 1,020,000

Investment in bonds – FVOCI 9,221

Fair value - 12/31/x3 1,000,000

Unrealized loss – OCI 55,087

Interest Interest Present

Fair value - 7/1/x2 900,000

Unrealized loss – OCI 95,389

*Unrealized gain (loss) - OCI

*(428,567 + 25,000) = 453,567

*[487,656 + (500,000 x 5%)] =512,656

* (1,996,073 + 100,000) = 2,096,073

Interest Interest Present

* (1,996,073 + 100,000) = 2,096,073

Unrealized loss – OCI 27,602

Fair value - 12/31/x2 2,080,000

Investment in bonds – FVOCI 71,888

Fair value - 12/31/x3 2,000,000

Unrealized loss – OCI 44,286

Fair value - 9/30/x2 2,400,000

Investment in bonds – FVOCI 383,916

Date Collections Interest income Amortization Present value

Purchase cost of bonds ₱ 5,170,944

OR, simply the PV of cash flow of ₱5,320,944 because this amount

There is discount. Therefore, the EIR must be higher than 8%.

First trial: @10% per annum (5% semi-annual)

➢ 922,783 = (1,000,000 x PV of 1 @ 5%, n=10) + (40,000 x PV

Therefore, the EIR is 10% (per annum).

If “Interest income” was debited on 7/1/x1:

Carrying amt. 12.31.2000 10,698.85

Carrying amt. of bonds and interest receivable 10,627.91

PROBLEM 5: MULTIPLE CHOICE - THEORY

2. B (500,000 x8% x 6/12) = 20,000

3. A (946,000 – 40,000) = 906,000 acquisition cost.

Face amount 100,000

Trial & Error

There is discount. Therefore, the EIR must be higher than 10%.

➢ 4,639,522 = (5,000,000 x PV of 1 @ 12%, n=5) + (500,000 x PV

Therefore, the EIR is 12% (per annum).

Interest income in 20x1 = (4,639,522 x 12%) = 556,743

PROBLEM 1: TRUE OR FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

3. Solution: (85,000 + 5,000 – 2,000 + 3,000) = 91,000

Requirement (a): Traditional GAAP

Gross method Net method

(₱100,000 x 90%) (₱100,000 x 90% x 97%)

2. Collection is made within the discount period

Requirement (b.1): PFRS 15

Invoice amount 90,000

2. Portion collected within the discount period

3. Portion collected beyond the discount period

Requirement (b.2): PFRS 15

2. Portion collected within the discount period

8. 100,000 x 90% x 97%* = 87,300

(₱200,000 x 80% x 90%) (₱200,000 x 80% x 90% x 95%)