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PROBLEM NO. 1 - Computation of Adjusted Inventory: Required
PROBLEM NO. 1 - Computation of Adjusted Inventory: Required
Ovation Company asks you to review its December 31, 2015 inventory values and prepare the necessary adjustments to
the books. The following information is given to you.
a. Ovation uses the periodic method of recording inventory. A physical count reveals P2,348,900 inventory on hand
at December 31, 2015.
b. Not included in the physical count of inventory is P134,200 of merchandise purchased on December 15 from
Standing. This merchandise was shipped F.O.B shipping point on December 29 and arrived in January. The
invoice arrived and was recorded on December 31.
c. Included in inventory is merchandise sold to Oval on December 30, F.O.B destination. This merchandise was
shipped after it was counted. The invoice was prepared and recorded as a sale on account for P128,000 on
December
31. The merchandise cost P73,500 and Oval received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an invoice price of P156,300.
The merchandise was shipped FOB. destination. The invoice, which has not yet arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries. The merchandise was
received on December 31 after the inventory had been counted. The invoice was received and recorded on
December 30.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment from Ovoid Industries.
g. Included in inventory is merchandise sold to Kemp FOB. shipping point. This merchandise was shipped after it
was counted. The invoice was prepared and recorded as a sale for P189,000 on December 31. The cost of this
merchandise was P105,200 and Kemp received the merchandise on January 5.
h. Excluded from inventory was carton labeled, “Please accept for credit.” This carton contains merchandise costing
P15,000 which had been sold to a customer for P25,000. No entry had been made to the books to reflect the return,
but none of the returned merchandise seemed damaged.
REQUIRED:
SOLUTION:
Unadjusted inventory 2,348,900
Add (deduct) adjustments:
a. Goods held on consignment from Chicago to Bulls amounting to P9,000 were included in the physical count of
goods in Bulls’ warehouse on December 31, 2015, and in accounts payable at December 31, 2015.
b. Retailers were holding P50,000, at cost, of goods on consignment from Bulls, at their stores on December 31,
2015.
c. Included in the physical count were goods billed to a customer FOB shipping point on December 31, 2015. These
goods had a cost of P31,000 and were billed at P40,000. The shipment was on Bulls’ loading dock waiting to be
picked up by the common carrier.
d. P15,000 worth of parts which were purchased from Deng Co. and paid for in December 2015 were sold in the last
week of 2015 and appropriately recorded as sales of P21,000. The parts were included in the physical count on
December 31, 2015 because the parts were on the loading dock waiting to be picked up by the customer.
e. Goods were in transit from a vendor to Bulls on December 31, 2015. The invoice cost was P71,000 and the goods
were shipped FOB shipping point on December 29, 2015.
f. Work in process inventory costing P30,000 was sent to an outside processor for plating on December 30, 2015.
g. Goods returned by customers and held pending inspection in the returned goods area on December 31, 2015 were
not included in the physical count. On January 8, 2016, the tools costing P32,000 were inspected and returned to
inventory. Credit memos totaling P47,000 were issued to the customers on the same date.
h. Goods shipped to a customer FOB destination on December 26, 2015 were in transit at December 31, 2015, and
had a cost of P21,000. Upon notification of receipt by the customer on January 2, 2016, Bulls issued a sales
invoice for P42,000.
i. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31, 2015, were
recorded on a receiving report dated January 2, 2016. The goods were not included in the physical count, but the
invoice was included in accounts payable at December 31, 2015.
j. Goods received from a vendor on December 26, 2015 were included in the physical count. However, the related
P56,000 vendor invoice was not included in accounts payable at December 31, 2015, because the accounts
payable copy of the receiving report was lost.
k. On January 3, 2016, a monthly freight bill in the amount of P6,000 was received. The bill specifically related to
merchandise purchased in December 2015, one-half of which was still in the inventory at December 31, 2015. The
freight charges were not included in either the inventory or accounts payable at December 31, 2015.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Inventory
b. Net Sales
c. Accounts Payable
SOLUTION:
Requirement No. 1
Accts.
Inventory Payable Sales, net
Requirement No. 2
b) Inventory 50,000
P/L summary (Cost of sales) 50,000
c) Sales 40,000
Acccounts receivable 40,000
e) Inventory 71,000
Accounts payable 71,000
f) Inventory 30,000
P/L summary (Cost of sales) 30,000
g) Inventory 32,000
P/L summary (Cost of sales) 32,000
h) Inventory 21,000
P/L summary (Cost of sales) 21,000
i) Inventory 27,000
P/L summary (Cost of sales) 27,000
k) Inventory 3,000
You are engaged in the regular annual examination of the accounts and records of Valenzuela manufacturing for the year
ended December 31, 2015. To reduce the workload at year end, the company upon your recommendation, took its annual
physical inventory in November 30, 2015. You observed the taking of the inventory and made tests of the inventory count
and inventory records.
The company’s inventory account, which includes raw materials and work in process, is on perpetual basis. Inventories are
valued at cost, FIFO method. There is no finished goods inventory. The company’s physical inventory revealed that the
book inventory of 1,695,960 was understated by 84,000. To avoid delay in completing its monthly financial statements, the
company decided not to adjust the book inventory until year end except for obsolete inventory items.
Your examination disclosed the following information regarding the November 30 inventory
1. Pricing tests showed that the physical inventory was overstated by 61, 600.
2. An understatement of the physical inventory by 4,200 due to errors in footings and extensions.
3.Direct labor included in the inventory amounted to 280,000. Overhead was included at the rate of 200% of direct labor.
You have ascertained that the amount of direct labor was correct and that the overhead rate was proper.
4.The physical inventory included obsolete materials with a total cost of 7,000. During December the obsolete materials
were written off by a charge to cost of sales.
Your audit also disclosed the following information about the December 31 inventory:
REQUIRED
SOLUTION:
Requirement No. 1
Requirement No. 2
Adjusted balance of inventory, 11/30 1,715,560
Purchases 691,600
Direct labor 338,800
Factory overhead (200% of direct labor) 677,600
Total 3,423,560
Less cost of sales:
Requirement No. 3
Purchases 691,600
Total 1,567,160
Less: Materials included in cost of sales
Total 618,800
The accountant of the newly organized Zerg Corporation provided to you the details the company’s Intangible Assets
account as follows:
Date Intangible Assets Description Amount
01/02 Organization costs P 233,000
01/15 Goodwill 15,000
04/01 Patent 490,000
05/01 License and trademark 300,000
07/01 R & D laboratory 1,310,000
12/31 Product development costs 1,750,000
4, 098, 000
Transactions during 2015 included the following:
Jan 2 Paid legal fees of P 150,000 and stock certificate costs of P83,000 to complete organization of the
corporation of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and hand out pamphlets and candy to
create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.
Total 490,000
It is estimated that in 5 years other companies will have developed improved processes, making the Zerg
Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a distinctive trademark to be printed on the
container in exchange for 6, 000, no-par, ordinary shares of Zerg selling for P50 per share. The license is
worth twice as much as the trademark, both of which may be used for 5 years.
Jul.1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed in future
research projects.
Dec. 31 Paid salaries for an engineer and chemist involved in research and development totaling P1,720,000 in 2015.
It is the company’s policy to take full year amortization in the year of acquisition.
REQUIRED:
2. Compute the carrying amount of the Intangible assets as of December 31, 2015.
3. Compute the total amount resulting from the foregoing transactions that should be expensed when incurred.
SOLUTION:
Requirement No. 1
Trademark 100,000
Research and
12/31 development expense 1,750,000
Intangible assets 1,750,000
Requirement No. 2
Cost
Patent 490,000
Licences 200,000
Requirement No. 3
Total 1,998,000
Patent P200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000
The company’s accountant determines the patent has an expected life of 10 years and no expected residual value, and that
it will generate approximately equal benefits each year. The company expects to use the copyright and tradename for the
foreseeable future. The accountant knows that the computer software is used in the company’s 120 sales offices. The
company has replaced the software in 60 offices in 2015, and expects to replace the software in 40 more offices in 2016
and the remainder in 2017.
In December 31, 2015, there are no indications of impairment of patent and computer software. The following information
relate to the other intangible assets:
a.) Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.
b.) The tradename is expected to generate cash flows of P15,000 per year.
c.) The goodwill is associated with Terran’s SCV Manufacturing reporting unit. The cash flows expected to be
generated by the SCV Manufacturing reporting unit is P200,000 per year for the next 24 years. The reporting unit
has a carrying amount of P2,100,000.
REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for al
litems is 5%)
SOLUTION:
Requirement No. 1
Requirement No. 2
Impairment loss
Copyright:
Requirement No. 3
Question No. 4 - A
GDI., Inc, had the following noncurrent asset account balances at December 31, 2014
Patent P1,920,000
Accumulated amortization (240,0000)
Deferred tax asset 360,000
Transactions during 2015 and other information relating to the noncurrent assets of GDL, Inc were as follows:
a. The patent was purchased from Grey Company for P1,920,000 on January 1, 2013, at which date the remaining
life was sixteen years. On January 1, 2015, GDL determined that the useful life of the patent was only eight years
from the date of acquisition.
b. On January 3, 2015, in connection with the purchase of a trademark from Cody Corporation, the partie entered
into a noncompetiton agreement and a consulting contract. GDL paid Cody P8,000,000, of which three-quarters
was for trademark and one-quarter was for Cody’s agreement not to compete for a five-year period in the line of
business covered by the trademark. GDI considers the life of the trademark to be indefinite. Under the
consulting contract,
GDL agreed to pay Cody P500,000 annually on January 3 for five years. The first payment was made on January
3,2015
c. Deferred tax asset is provided in recognition of temporary differences between accounting and tax reporting of rent
income and warranty liability. For the year ended December 31, 2015, (1) rent collected in advance decreased by
P200,000, and (2)product warranty liability increased by P150,000. GDL’s income tax rate for 2015 was 35%
REQUIRED:
Based on the above and the result of your audit, determine the following:
1. The total amortization of the intangible assets for the year 2015
SOLUTION:
Requirement No. 1
Requirement No. 2
Requirement No. 3
On December 21, 2015 the accounts receivable control account of Ipil-ipil Co. had a balance of P181,100. An analysis of
the accounts receivable account showed the following:
Total P181,000
REQUIRED:
Determine the trade and other receivables to be reported on the entity’s December 31, 2015 statement of financial position.
SOLUTION:
Items included:
On January 1, 2015, Pedro Company sold land that originally cost P400, 000 to Buyer Company. As payment, Buyer gave
Pedro Company a P600, 000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of
P200, 000 (plus interest on the outstanding balance). The first payment is due on December 31, 2015. The market price of
the land is not reliably determinable =. The prevailing rate of interest for notes of this type is 14% on January 1, 2015 and
15% on December 31, 2015.
Pedro made the following journal entries in relation to the sale of land and the relate note receivable.
January 1, 2015
Notes Receivable P600,000
Land P400,000
Gain on sale of Land 200,000
December 31, 2015
Cash P224,000
Notes receivable P200,000
Interest income 24,000
Pedro reported the notes receivable in its statement of financial position at December 31, 2015 as part of trade and other
receivables.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Correct gain on sale of land
b. Correct interest income
c. Overstatement of profit
d. Correct carrying amount of note receivable
e. Overstatement of working capital
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 2
Adjusting journal entries:
To corect the entrymade to record the sale of land on 1/1/12:
Gain on sale of land 96,895
Discount on notes receivable (FV-PV) 96,895
Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1,2014. The interest rate on the loan
is 10% payable annually starting December 31, 2014. The loan matures in five years on December 31, 2018. Bahrain Bank
incurs P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In addition, Bahrain Banks
charges the borrower a 5-point nonrefundable loan origination fee.
The borrower paid the interred due on December 31, 2014. However during 2015 the borrower began to experience
financial difficulties, requiring the bank to reassess the collectability of the loan. As of December 31, 2015, the bank
expects that only P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is expected to be
collected in two equal installments on December 31,2017 and December 31,2019. The prevailing interest rates for similar
type of note as of December 31, 2014 and 2015 are 15% and 16%, respectively.
REQUIRED:
SOLUTION:
Requirement No.s 1 & 2
Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900
Amortization schedule
Date EI (11%) NI (10%) Disc. Amort. C.A.
1/1/11 9,630,900
12/31/11 1,059,399 1,000,000 59,399 9,690,299
12/31/12 1,065,933 1,000,000 65,933 9,756,232
12/31/13 1,073,186 1,000,000 73,186 9,829,418
12/31/14 1,081,236 1,000,000 81,236 9,910,654
12/31/15 1,089,346 1,000,000 89,346 10,000,000
826
Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032
PROBLEM NO.12- Proof of cash
Celtics Company had the following bank reconciliation on June 30, 2015:
The bank statement for the month of July 2015 showed the following:
Deposits (including P200,000 note collected for Celtics) P9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30,2015 cleared through the bank in july. The
outstanding checks totaled P600,000 and the deposits in transit amounted to
P1,000,000 on July 31, 2015.
REQUIRED:
SOLUTION:
Requirement No. 1
Requirement No. 2
Requirement No. 3
Requirement No. 4
The client, Noel Corporation, obtained bank statements for November 30 and December 31, 2015 and reconciled the
balanced. You obtained directly the statements of January 12,2016 and obtained the necessary confirmation. You have
found that there are no errors in addition or subtraction in the client’s books.
11/30/15 12/31/15
Balance, bank statement P344,420 P275,020
Balance, company records 271,260 226,010
Deposits in transits 35,000 ?
Outstanding checks 88,240 ?
12/1-31/15 1/1-12/16
Receipts, cash records P963,230 P292,500
Credits, bank statement 941,010 321,490
Disbursements, cash records 1,008,480 177,570
Charges, bank statement 1,010,410 230,180
a) Check no. 804 for P340 cleared by the bank in December as P1,340. This was found in proving the bank
statement. The bank made the correction on January 8, 2016.
b) A note of P20,000, sent to the bank for collection on November 15,2015, was collected and credited to the account
on November 28, 2015, net of a collection fee of P80. The note was recorded in the cash receipts on December
21,
2015, at which date the collection fee was entered as a disbursement.
c) The client records returned checks in red in the cash receipts journal. The checks listed in the table were returned
by the bank.
Amount Returned Recorded Redeposited
Co. A P3,270 12/6/15 No entries 12/8/15
Co. B P6,730 12/27/15 1/3/16 1/15/16
d) Two payroll checks for employee’s vactions totalling P5,500 were drawn on January 3, 2016, and cleared the bank
on January 8,2016. Those checks were not entered in the clients records because semi-monthly payroll summaries
are entered only on the 15th and the last day of each month.
REQUIRED:
SOLUTION:
Requirement 1.a
Deposits in transit, Nov. 30 35,000
Add in
collections
December:
December book
receipts 963,230
Customers' note collected by bank in Nov. (20,000) 943,230
Total 978,230
Less deposits credited by the bank in December:
December bank
receipts 941,010
NSF check redeposited (Customer A) (3,270) 937,740
Requirement 1.b
Outstanding checks, Nov.
30 88,240
Add checks issued in December:
Total 1,096,640
Less checks paid by the bank in December:
Requirement 1.c
Total 339,720
Less deposits credited by the bank, Jan. 1-12:
Requirement 1.d
Total 280,300
Less checks paid by the bank, Jan. 1-12:
December
Nov. 30 Receipts Disb