PROBLEM NO.

1 - Rizal Company
Question No. 1 - A
Unadjusted petty cash fund, 12/31/06 25,000
Unreplenished vouchers, 12/31/06 (P16,000 - P3,000) (13,000)
Adjusted petty cash fund, 12/31/06 12,000

Question No. 2 - C
Question No. 3 - B
Bank Books
Unadjusted balances 310,500 344,250
Add (deduct) adjustments:
Post dated check (40,000)
Undeposited collections (P61,250 - P40,000) 21,250
Bank service charge (1,250)
Outstanding checks (P20,750+P6,000+P8,500) (35,250)
Corrected balances 296,500 303,000
Unlocated difference - cash shortage (6,500) (3)
Adjusted balances, 12/31/06 296,500 296,500 (2)

Question No. 4 - D
Petty cash fund (see no. 1) 12,000
Security Bank checking account (-P37,500+P87,500) 50,000
Allied Bank current account (see no. 2) 296,500
Adjusted cash, 12/31/06 358,500

Question No. 5 - A

AP-07
PROBLEM NO. 2
Bonifacio Company
Proof of Cash
For the month of December, 2006
Beginning Receipts Disb Ending
Unadjusted bank balances 114,750 156,000 76,500 194,250
Add (deduct) adjustments:
Undeposited collections
November 30,000 (30,000)
December 82,350 82,350
Outstanding checks
November (63,750) (63,750)
December 135,735 (135,735)
Erroneous bank debit-November 15,000 (15,000) -
Adjusted bank balances 96,000 193,350 148,485 140,865

Unadjusted book balances 58,950 275,850 152,700 182,100

Add (deduct) adjustments:
Bank service charges
November (450) (450)
December 600 (600)
NSF checks
December 9,000 (9,000)
Customers' note collected by bank
November 37,500 (37,500)
Book errors in December
Uncollected customer's note treated as receipts (45,000) (45,000)
Error in recording a check (SB P1,485, AR P14,850) (13,365) 13,365
Adjusted book balances 96,000 193,350 148,485 140,865
- - - -
(3) (4) (5)
Undeposited collections, December 31:
Deposit in transit, Nov. 30 30,000
Add collections in December:
December book receipts 275,850
Less receipts not representing collections in December:
Customers' note collected by bank, Nov. 30 37,500
Note with the bank treated as receipts 45,000 82,500 193,350
Total 223,350
Less deposits credited by the bank in December:
December bank receipts 156,000
Less receipts not representing deposits:
Erroneous bank debit, Nov.; corrected Dec. 15,000 141,000
82,350 (1)

Outstanding checks, December 31:

Outstanding checks, Nov. 30 63,750

Add checks issued in December:
December book disbursements 152,700
Less disbursements not representing checks for December:
Book error (SB P1,485, AR P14,850) 13,365
Bank service charge, Nov.; recorded Dec. 450 13,815 138,885
Total 202,635
Less checks paid by the bank in December:
December bank disbursements 76,500
Less disbursements not representing checks:
NSF checks, Dec. 9,000
Bank service charge, Dec. 600 9,600 66,900
135,735 (2)

Answers: C, B, D, B, C
 Page 3 of 22

PROBLEM NO. 3 - Del Pilar Company

1A
2B
Bank Books
Unadjusted balances, 12/31/06 778,200 736,800
Add (deduct) adjustments:
Cash in transit 8,640
Outstanding checks (P62,640 - P600) (62,040)
Erroneous bank debit 1,800
Collection charged to Allow. For Doubtful a/cs 4,800
Collection charged to Inventory 3,600
Unrecorded cash receipt 8,760
Unrecorded interest refund 240
Check returned and replaced not yet cancelled 600
Balances 726,600 754,800
Shortage (28,200)
Adjusted balances 726,600 726,600

3B
Accountabilities:
Cash receipts per records (Jan. 2 to Jan. 10) 103,200
Unrecorded collections deposited (Jan. 2 to Jan. 10) 5,040
Unrecorded collections not deposited (Jan. 9) 10,200
Petty cash fund 1,800
Total 120,240
Less 1/1 to 1/10 collections deposited in the bank:
Total deposits per bank statement 91,200
Correction of error in December, 2006 (1,800)
Deposit in transit, 12/31/06 (8,640) 80,760
Cash that should be on hand as of 1/10/07 39,480
Cash and cash items counted 9,000
Cash shortage for the period 1/1/07 to 1/10/07 30,480

4A
5A
PROBLEM NO. 4 - Aguinaldo Company
Question No. 1 - A
Expected cash discounts 300
Divide by percentage of cash discount 2%
Portion of AR that will be granted cash discounts 15,000
Divide by percentage of total AR estimated to take advantage of the discount 10%
Accounts receivable, 12/31/06 150,000

Question No. 2 - B
Allowance for doubtful accounts, 12/31/06
[P150,000 x (P2,000/P50,000) x 150%] 9,000

Question No. 3 - C
Accounts receivable, 12/31/06 150,000
Less: Allowance for doubtful accounts 9,000
Allowance for sales discounts 300 9,300
Net realizable value, 12/31/06 140,700

Question No. 4 - A
Allowance for doubtful accounts, 12/31/06 9,000
Add accounts written off 2,200
Total 11,200
Less: Allowance for doubtful accounts, 12/31/05 2,000
Bad debt recoveries 150 2,150
Doubtful accounts expense for 2006 9,050

Question No. 5 - A
PROBLEM NO. 5 - Mabini Company
Question no. 1
Year Charge sales AR writen-off Recoveries Accounts
uncollectible
2002 600,000 15,300 600 14,700
2003 1,500,000 37,200 2,400 34,800
2004 1,800,000 51,000 3,000 48,000
3,900,000 103,500 6,000 97,500
Uncollectible accounts (2002 to 2004) 97,500
Divide by charge sales (2002 to 2004) 3,900,000
Percentage of uncollectible accounts to charge sales 2.50% A

Questions no. 2 to 4
(A) (B) (C) (D) (E)
(A) x 2.5% (B) - [(C) -(D)]
Year Charge sales Est. doubtful AR Recovery Allowance
Accounts writen-off to be set up

2005 1,950,000 48,750 39,000 3,600 13,350

2006 1,650,000 41,250 8,400 - 32,850
3,600,000 90,000 47,400 3,600 46,200

Recorded doubtful accounts expense (sum of 2006 write-offs) 54,600

Should be balance of doubtful accounts expense for 2006 41,250
Overstatement of doubtful accounts expense 13,350

No. 2 41,250 C
No. 3 13,350 B
No. 4 853,800 B (P900,000 - P46,200)

Adjusting entry:
Bad Debt Recovery 3,600
Retained Earnings (see below) 55,950
Allowance for Doubtful Accounts 46,200
Doubtful Accounts Expense 13,350

2001 2002 2003 2004 Total

Doubtful account exp provided 3,300 15,000 34,800 43,200 96,300
Less recoveries - 600 2,400 3,000 6,000
Net doubtful account exp 3,300 14,400 32,400 40,200 90,300
Should be prov for D/A exp 15,000 37,500 45,000 48,750 146,250
Over (under) (11,700) (23,100) (12,600) (8,550) (55,950)

Question no. 5 - A
PROBLEM NO. 6 - GOMBURZA Company

Question No. 1 - A
Interest receivable, 12/31/06 [(P6,000,000-P2,000,000) x 12% x 9/12] 360,000

Question No. 2 - C
Balance, 12/31/06 2,800,000
Less principal installment due on 7/1/07
Total amount to be received 902,500
Less interest (P2,800,000 x 11%) 308,000 594,500
Noncurrent portion, 12/31/06 2,205,500

Question No. 3 - B
PV of Note (P220,000 x 0.8264) 181,808
Less cost of land 125,000
Gain on sale 56,808

Amortization schedule:
Interest income Carrying amount
Jan. 1, 2006 181,808
Dec. 31, 2006 18,181 199,989
Dec. 31, 2007 20,011 220,000

Question No. 4 - A
Interest income for 2006 (P262,694 x 10%) 26,269

PV of Principal (P300,000 x 0.7513) 225,390

PV of Interest (P300,000 x 5% x 2.4869) 37,304
Consultation service fee revenue 262,694

Question No. 5 - C
Year Principal Interest Total PVF PV
2006 200,000 24,000 224,000 0.8772 196,493
2007 200,000 16,000 216,000 0.7695 166,212
2008 200,000 8,000 208,000 0.6750 140,400
600,000 503,105

PV of Note (see above computation) 503,105

Less cost of land 400,000
Gain on sale 103,105

Amortization schedule:
Eff. Int. Nom. Int. Disc. Amort. Principal Carrying amount
Jan. 1, 2006 503,105
Dec. 31, 2006 70,435 24,000 46,435 200,000 349,540
Dec. 31, 2007 48,936 16,000 32,936 200,000 182,476
Dec. 31, 2008 25,524 8,000 17,524 200,000 -
 Page 7 of 22

PROBLEM NO. 7 - Luna Company

Inventory Accts. Payable Net Sales
Unadjusted balances 1,520,000 1,200,000 8,150,000
Add (deduct) adjustments:
a - - (40,000)
b 71,000 71,000 -
c 30,000 - -
d 32,000 - (47,000)
e 21,000 - -
f 27,000 - -
g - 56,000 -
h 3,000 6,000
Adjusted balances 1,704,000 1,333,000 8,063,000
1 2 3
1 C
2 A
3 D
4 B
5 D
PROBLEM NO. 8 - Jaena Company

Question No. 1 - C
Question No. 2 - A
Question No. 3 - B

Units in
Ending Est.
Inventory Selling Est. Cost to Inventory
Item (FIFO) Cost Total cost Price Sell NRV LCM Total NRV value Allow
Product G 60,000 8.00 480,000 7.20 0.72 6.48 6.48 388,800 388,800 91,200
30,000 6.50 195,000 7.20 0.72 6.48 6.48 194,400 194,400 600
675,000 583,200 583,200 91,800

Product L 50,000 10.50 525,000 9.90 0.99 8.91 8.91 445,500 445,500 79,500

Product J 60,000 1.25 75,000 1.80 0.18 1.62 1.25 97,200 75,000 -
40,000 0.90 36,000 1.80 0.18 1.62 0.90 64,800 36,000 -
111,000 162,000 111,000 -

1,311,000 1,190,700 1,139,700 171,300

(1) (2) (3)
Question No. 4 - D

Units in
Sold
Item (FIFO) Cost Total cost

Product G 100,000 6.00 600,000

110,000 6.50 715,000
210,000 1,315,000

Product L 60,000 10.00 600,000

40,000 10.50 420,000
100,000 1,020,000

Product J 90,000 0.90 81,000

Total cost of sales 2,416,000

Question No. 5 - C
 Page 9 of 22

PROBLEM NO. 9 - Jacinto Company

1D
Sales up to March 31, 2006 2,430,000
Sales for the period April 1 to 21
Accounts receivable, 4.21.06 648,000
Accounts receivable for write-off 144,000
Receipts from customers (P233,100 - P17,100) 216,000
Total 1,008,000
Less Accounts receivable, 3.31.06 720,000 288,000
Sales 1/1/06 to 4/21/06 2,718,000
2C
3A
4A
5C
Inventory, December 31, 2005 1,350,000
Add purchases for the period Jan. 1 to April 21
Purchases up to March 31, 2006 936,000
Payments for April purchases 61,200
Unrecorded obligations for April purchases 190,800
Purchase returns (17,100) 1,170,900 (2)
Total goods available for sale 2,520,900
Less cost of goods sold (P2,718,000 x 55%*) 1,494,900 (3)
Estimated inventory on the date of fire 1,026,000 (4)
Less: Proceeds from sale of salvaged merchandise 63,000
Shipments in transit 41,400 104,400
Inventory fire loss 921,600 (5)

Computation of overall cost ratio:

Inventory, 1/1/04 1,188,000
Add net purchases - 2004 and 2005 (P4,230,000+P5,040,000) 9,270,000
Total goods available for sale 10,458,000
Less inventory, 12/31/05 1,350,000
Cost of sales - 2004 and 2005 9,108,000
Divide by total sales - 2004 and 2005 (P7,020,000+P9,540,000) 16,560,000
Cost ratio 55%
PROBLEM NO. 10 - Dagohoy Company
Question no. 1 - D
Selling price (4,800 shares x P69) 331,200
Less CV of shares sold (P633,900 x 4.8/9.6) 316,950
Gain on sale of Panglao shares 14,250

Note: PAS 39 par. 27 states that on partial derecognition of a financial asset, the
difference between (a) the carrying amount allocated to the part derecognized and
(b) the sum of the consideration received for the part derecognized and any
cumulative gain or loss recognized directly in equity, shall be recognized in profit or
loss.

Question no. 2 - C
Selling price (4,800 shares x P62) 297,600
Unrealized gain on shares sold (P48,000 x 4.8/12) 19,200
Total 316,800
Less CV of shares sold (P756,000 x 4.8/12) 302,400
Realized gain on sale of Pamilacan shares 14,400

Alternative computation:
Selling price (4,800 shares x P62) 297,600
Less cost of shares sold (P708,000 x 4.8/12) 283,200
Realized gain on sale of Pamilacan shares 14,400

Question no. 3 - A
Bohol [(12,000+ 3,600) x P76.60] 1,194,960
Panglao [(9,600 - 4,800) x P68.50] 328,800
Dauis (18,000 x P55.25) 994,500
Balicasag 246,660
Total market value 2,764,920

Question no. 4 - C
Pamilacan Inc. [(12,000 - 4,800) x P61] 439,200
Loboc Unlimited (24,000 x P27) 648,000
Total market value 1,087,200

Question no. 5 - B
Trading securites, 12/31/05 1,773,000
Cost of 3,600 additional Bohol shares, 3/1 275,400
CV of 4,800 Panglao shares sold, 4/15 (316,950)
Cost of 18,000 Dauis shares purchased, 10/30 999,000
Trading securites, 12/31/06 before mark-to-market 2,730,450
Trading securites at market (see no. 3) 2,764,920
Unrealized gain on TS to be reported on the IS 34,470

AFS, 12/31/05 1,416,000

CV of 4,800 Pamilacan shares sold, 5/4 (302,400)
AFS, 12/31/06 before mark-to-market 1,113,600
AFS at market (see no. 4) 1,087,200
Decrease in unrealized gain 26,400
Unrealized gain-AFS, 12/31/06 (P120,000 - P19,200) 100,800
Unrealized gain-AFS, 12/31/06 to be reported under SHE 74,400
PROBLEM NO. 11 - Diego Silang Corporation
Question no. 1 - A
Sales proceeds 152,000
Less CV of shares sold (P288,000 x 8/16) 144,000
Gain on sale of 8,000 Laoag, Inc. shares 8,000

Question no. 2 - C
Sales proceeds (3,200 shares x P15) 48,000
Partial realization of unrealized gain (P320,000 x 3.2/80) 12,800
Total 60,800
Less CV of shares sold (P1,280,000 x 3.2/80) 51,200
Gain on sale of 3,200 Batac, Inc. shares 9,600

Alternative computation:
Sales proceeds (3,200 shares x P15) 48,000
Less cost of shares sold (P960,000 x 3.2/80) 38,400
Gain on sale of 3,200 Batac, Inc. shares 9,600

Question no. 3 - B
Santiago bonds (P200,000 x 10%) 20,000
Ilocos bonds (P1,926,000 x 14%*) 269,640
Total interest income for 2006 289,640

*Computation of effective interest rate:

Carrying value, 12/31/05 1,926,000
Less carrying value, 1/2/05 (Cost) 1,900,000
Discount amortization for 2005 26,000
Add nominal interest (P2,000,000 x 12%) 240,000
Effective interest 266,000
Divide by carrying value, 1/2/05 1,900,000
Effective interest rate 14.00%

Question no. 4 - C
Carrying value, 12/31/05 1,926,000
Add discount amortization in 2006:
Effective interest (P1,926,000 x 14%) 269,640
Nominal interest (P2,000,000 x 12%) 240,000 29,640
Carrying value, 12/31/06 1,955,640
Fair value of Ilocos bonds on 12/31/06 (P2M x 1.01) 2,020,000
Unrealized gain on transfer of securities to be reported under SH 64,360

Question no. 5 - D
Trading securities
Vigan, Inc. (9,600 x P22) 211,200
Laoag, Inc. [(16,000 - 8,000) x P15] 120,000
10% , P200,000 face value , Santiago bonds 151,200
Total market value 482,400

Available-for-sale securities
Candon Products (32,000 x P42) 1,344,000
Pagudpud, Inc. (240,000 x P28) 6,720,000
Batac, Inc. [(80,000 - 3,200) x P18] 1,382,400
Ilocos bonds (P2,000,000 x 1.01) 2,020,000
Total market value 11,466,400
PROBLEM NO. 12 - Panday Corporation
Question No. 1 - A
PV of principal (P6,000,000 x 0.5568) 3,340,800
PV of interest [(P6,000,000 x 4%) x 8.8633] 2,127,192
Issue price 5,467,992

Question no. 2 - D
Carrying value, 6/1/05 5,467,992
Add discount amortization, 6/1/05 to 11/30/05
Effective interest (P5,467,992 x 10% x 6/12) 273,400
Nominal interest (P4,000,000 x 8% x 6/12) 240,000 33,400
Carrying value, 12/1/05 5,501,392 a

Add discount amortization, 12/1/05 to 12/31/05

Effective interest (P5,501,392 x 10% x 1/12) 45,845
Nominal interest (P6,000,000 x 8% x 1/12) 40,000 5,845
Carrying value, 12/31/05 5,507,237

Question no. 3 - A
Jan. 1 to May 31 (P5,501,392a x 10% x 5/12) 229,225
June 1 to Nov. 1 (P5,536,462b x 10% x 5/12) 230,686
Total interest income for 2006 459,911

Carrying value, 12/1/05 (see no. 2) 5,501,392

Add discount amortization, 12/1/05 to 5/31/06
Effective interest (P5,501,392 x 10% x 6/12) 275,070
Nominal interest (P6,000,000 x 8% x 6/12) 240,000 35,070
Carrying value, 6/1/06 5,536,462 b

Question no. 4 - C
Total proceeds 5,887,500
Less accrued interest (P6,000,000 x 8% x 5/12) 200,000
Net proceeds 5,687,500
Less carrying value, 11/1/06:
Carrying value, 6/1/06 (see no. 3) 5,536,462
Add discount amortization, 6/1/06 to 11/1/06
Effective interest (P5,536,462 x 10% x 5/12) 230,686
Nominal interest (P6,000,000 x 8% x 5/12) 200,000 30,686 5,567,148
Gain on sale on investment in bonds 120,352

Question no. 5 - C
PROBLEM NO. 13 - Tandang Sora Corporation
Question No. 1 - A
Semitruck No. 2 (fully depreciated as of 7/1/05) -
Semitruck No. 5 (P408,000/5) 81,600
Semitruck No. 6 (P432,000/5) 86,400
Should be depreciation expense for 2006 168,000
Depreciation expense per books 333,600
Overstatement 165,600

Question No. 2 - D
Cost, 12/31/06
Semitruck No. 1 (sold, 1/1/04) -
Semitruck No. 2 (acquired, 7/1/00) 264,000
Semitruck No. 3 (traded-in, 7/1/03) -
Semitruck No. 4 (damaged and sold, 7/1/05 -
Semitruck No. 5 (acquired, 7/1/03) 408,000
Semitruck No. 6 (acquired, 7/1/05) 432,000 1,104,000
Accumulated depreciation, 12/31/06
Semitruck No. 2 (fully depreciated as of 7/1/05) 264,000
Semitruck No. 5 (P408,000 x 3.5/5) 285,600
Semitruck No. 6 (P432,000 x 1.5/5) 129,600 679,200
Carrying amount, 12/31/06 424,800

Question No. 3 - A
Question No. 4 - B
Question No. 5 - B
Net income
over (under)
2003:
Unrecorded loss on trade-in:
Trade-in value (P408,000 - P180,000) 228,000
Carrying value (P360,000 x 3.5/5) 252,000 24,000
Overstatement of depreciation expense:
Semitruck No. 1 (P216,000/5) 43,200
Semitruck No. 2 (P264,000/5) 52,800
Semitruck No. 3 (P360,000/5 x 6/12) 36,000
Semitruck No. 4 (P288,000/5) 57,600
Semitruck No. 5 (P408,000/5 x 6/12) 40,800
Should be depreciation expense 230,400
Depreciation expense per books 243,600 (13,200) 10,800 (3)
2004:
Unrecorded loss on sale:
Sales proceeds 42,000
Carrying value (P216,000 x 1/5) 43,200 1,200
Overstatement of depreciation expense:
Semitruck No. 2 (P264,000/5) 52,800
Semitruck No. 4 (P288,000/5) 57,600
Semitruck No. 5 (P408,000/5) 81,600
Should be depreciation expense 192,000
Depreciation expense per books 253,200 (61,200) (60,000) (4)
2005:
Unrecorded loss on disposal:
Sales proceeds 8,400
Insurance proceeds 30,000
Total 38,400
Carrying value (P288,000 x 2/5) 115,200 76,800
Erroneous credit to Miscellaneous Income 8,400
Overstatement of depreciation expense:
Semitruck No. 2 (P264,000/5 x 6/12) 26,400
Semitruck No. 4 (P288,000/5 x 6/12) 28,800
Semitruck No. 5 (P408,000/5) 81,600
Semitruck No. 6 (P432,000/5 x 6/12) 43,200
Should be depreciation expense 180,000
Depreciation expense per books 293,400 (113,400) (28,200)
2006:
Overstatement of depreciation expense (see no. 1) (165,600)
Net understatement of Retained Earnings as of 12/31/06 (243,000) (5)
PROBLEM NO. 14 - Ponce, Inc.
Question No. 1 - B
Acquisition cost 16,640,000
Less residual value 1,280,000
Depletable cost 15,360,000
Divide by total estimated reserves 12,800,000
Depletion rate 1.20
Tons mined in 2006 1,280,000
Depletion for 2006 1,536,000

Question No. 2 - D
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x 80%] 102,400
Depreciation - Machinery [(P2,560,000-P512,000/4] 512,000
Total 614,400

Question No. 3 - B
Depletion (see no. 1) 1,536,000
Direct labor 1,024,000
Depreciation (see no. 2) 614,400
Miscellaneous mining overhead 204,800
Total available for sale 3,379,200
Divide by tons mined 1,280,000
Cost per ton 2.64
Unsold tons (1,280,000 - 1,024,000) 256,000
Inventory, 12/31/05 675,840

Question No. 4 - A
Cost of sales (1,024,000 tons x P2.64) 2,703,360

Question No. 5 - C
Sales (1,024,000 x P4.4) 4,505,600
Less cost of sales (see no. 4) 2,703,360
Gross profit 1,802,240
Operating expenses (921,600)
Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x 20%] (25,600)
Net income 855,040
Realized depletion (1,024,000 tons x P1.2) 1,228,800
Maximum amount that may be declared as dividends 2,083,840
PROBLEM NO. 15 - Agoncillo Corporation

Journal entries for 2006:

1/2 Organization expenses (P270,000+P149,400) 419,400
Cash 419,400

1/15 Advertising expense (P18,000+P9,000) 27,000

Cash 27,000

4/1 Patents 886,500

Cash 886,500

5/1 Licences (P540,000 x 2/3) 360,000

Trademark 180,000
Common stock (10,800 x P50) 540,000

7/1 Building 2,358,000

Cash 2,358,000

12/31 Research and Development expense 3,150,000

Cash 3,150,000

Question no. 1 - A

See journal entry for April 1.

Note: Cost of internally developed patent includes only the licensing and
other related legal fees in securing the patent rights.

Question no. 2 - B

See journal entry for May 1.

Question no. 3 - C

See journal entry for May 1.

Question no. 4 - C

Cost
Patent 886,500
Licences 360,000
Trademark 180,000 1,426,500
Less amortization
Patent (P886,500/6 x 9/12) 110,813
Licences (P360,000/6 x 8/12) 40,000
Trademark (P180,000/6 x 8/12) 20,000 170,813
Carrying value, 12/31/06 1,255,688

Question no. 5 - C

Organization expenses (Jan. 2 transaction) 419,400

Advertising expense (Jan. 15 transaction) 27,000
R and D expense (Dec. 31 transaction) 3,150,000
Total 3,596,400
PROBLEM NO. 16 - Gregoria Corporation

Question No. 1 - A
Customer list (P396,000/3) 132,000
PAS 38 par. 107 states that an intangible asset with an indefinite useful life shall not be
amortized. Therefore, the trademark and goodwill were not amortized.

Question No. 2 - B
Trademark:
Carrying value 540,000
Recoverable amount (P18,000/0.06) 300,000 240,000
Goodwill*:
Carrying value of De Jesus Manufacturing unit
(P4,860,000 + 2,700,000 - 3,240,000) 4,320,000
Recoverable amount (P450,000 x 12.0416) 5,418,720 -
Customer list
Carrying value (P396,000 - P132,000) 264,000
Recoverable amount:
2007: (P216,000 x 0.9434) 203,774
2008: (P144,000 x 0.8900) 128,160 331,934 -
Total impairment loss 240,000

PAS 36 par. 8 states that an asset is impaired when its carrying amount exceeds its recoverable
amount. Carrying amount is the amount at which an asset is recognized after deducting any
accumulated depreciation (amortization) ad accumulated impairment losses thereon.
Recoverable amount of an asset or a cash-generating unit is the higher of its fair value less
costs to sell and its value in use.

The problem did not provide the fair value less costs to sell. PAS 36 par. 20 states that if it is
not possible to determine fair value less costs to sell because there is no basis for making a
reliable estimate of the amount obtainable from the sale of the asset in an arm’s length
transaction between knowledgeable and willing parties, the entity may use the asset’s value in
use as its recoverable amount. Value in use is the present value of the future cash flows
expected to be derived from an asset or cash generating unit.

Since goodwill does not generate cash flows independently from other assets or group of
assets, the recoverable amount of goodwill as an individual asset cannot be determined.
Therefore, the recoverable amount is determined for the cash generating unit to which goodwill
belongs.

Question No. 3 - C
Cost 540,000
Less impairment loss 240,000
Carrying value, 12/31/06 300,000

Question No. 4 - A
Since goodwill is not amortized and is not impaired as of 12/31/05,6
the carrying value is P2,700,000.

Question No. 5 - B
Cost 396,000
Less amortization for 2006 132,000
Carrying value, 12/31/06 264,000
 Page 18 of 22

PROBLEM NO. 17 - Paterno Company

Question No. 1 - B
P300,000 note payable to bank (P300,000 x 8% x 4/12) 8,000
Mortgage note payable – 10% (P600,000 x 10% x 3/12) 15,000
Mortgage note payable – 12% (P1,500,000 x 12% x 8/12) 120,000
Total interest payable, 12/31/06 143,000

Question No. 2 - A
Note payable to bank - payable on demand 300,000

Note: The P500,000 note payable to bank will be classified as noncurrent because it
was refinanced on a long term basis as of December 31, 2006.

Question No. 3 - C
Accounts payable 650,000
Notes payable – trade 190,000
Notes payable – bank (see no. 2) 300,000
Wages and salaries payable 15,000
Interest payable (see no. 16) 143,000
Mortgage note payable – 10% (with breach in loan covenants) 600,000
Mortgage note payable – 12% (P220,000 - P180,000) 40,000
Bonds payable, due 7/1/07 2,000,000
Total current liabilities, 12/31/06 3,938,000

Question No. 4 - D
Notes payable – bank (see no. 2) 500,000
Mortgage note payable – 12% (P1,500,000 - P40,000) 1,460,000
Total noncurrent liabilities, 12/31/06 1,960,000

Question No. 5 - D
PROBLEM NO. 18 - Ricarte Corporation

Question no. 1 - A
% of Est. Estimated
Month Sales Returns Returns
January 6,480,000 8% 518,400
February 5,940,000 8% 475,200
March 7,380,000 8% 590,400
April 5,130,000 8% 410,400
May 3,600,000 10% 360,000
June 3,240,000 10% 324,000
2,678,400
Question no. 2 - C
Warranty expense (P2,678,400 x 75%*) 2,008,800

Computation of loss percentage on returns (in percentage of sales price):

Cost of unit replacement 80%
Freight charges on return and replacement 10%
Salvage value of components returned -15%
Net loss on components returned 75%

Question no. 3 - B
% of Est. Estimated
Returns Returns
Estimated Subsequent to Subsequent to
Month Returns 6/30/05 6/30/05
January 518,400 10% 51,840
February 475,200 20% 95,040
March 590,400 30% 177,120
April 410,400 50% 205,200
May 360,000 80% 288,000
June 324,000 100% 324,000
2,678,400 1,141,200

Estimated Liability for Product Warranty, 6/30/06 (P1,141,200 x 75%*) 855,900

Question no. 4 - A

Warranty Expense 711,450

Estimated Liability for Product Warranty 711,450

Estimated Liability for Product Warranty, 6/30/06 - as adjusted 855,900

Estimated Liability for Product Warranty, 6/30/06 - per books 144,450
Adjustment 711,450

Question no. 5 - D
PROBLEM NO. 19 - Delos Santos, Inc.
Question No. 1 - B
Total proceeds 3,000,000
Less liability component:
Present value of the principal (P3,000,000 x 0.6830) 2,049,000
Present value of the interest [(P3,000,000 x 8% x 3.1699) 760,776 2,809,776
Equity component 190,224

Question no. 2 - D
Carrying value, 1/1/05 (see no. 1) 2,809,776
Add discount amortization for 2005:
Effective interest (P2,809,776 x 10%) 280,978
Nominal interest (P3,000,000 x 8%) 240,000 40,978
Carrying value, 12/31/05 2,850,754

Question no. 3 - D
Effective interest (P2,850,754 x 10%) 285,075

Question no. 4 - A
Bonds Payable 1,500,000
Discount on bonds payable (P1,500,000 - P1,447,915) 52,085
Common stock 900,000
APIC 547,915

Carrying value of bonds converted (P2,895,829* x 1/2) 1,447,915

Par value of common stock received (P1,500,000/P1,000 x 6 x P100) 900,000
Amount to be credited to APIC 547,915
Carrying value, 12/31/05 (see no. 2) 2,850,754
Add discount amortization for 2006:
Effective interest (P2,850,754 x 10%) 285,075
Nominal interest (P3,000,000 x 8%) 240,000 45,075
Carrying value, 12/31/06 2,895,829 *

Question no. 5 - C
Reacquisiton price (P750,000 x 110%) 825,000
Carrying value of bonds reacquired (P2,895,829 x 1/4) 723,957
Loss on bond reacquisition 101,043
PROBLEM NO. 20 - Baltazar Corporation

Preferred Common Retained Treasury

stock stock APIC earnings stock Total
Issuance of CS, 1/2/05 160,000
Issuance of PS, 1/2/05 600,000 48,000
Issuance of CS, 3/2/05 305,100
Issuance of PS and CS for land, 7/10/05 120,000 270,400 9,600
Declared cash dividend-PS and CS, 12/16/06 (147,750)
Net income for 2005 450,000
Balances, 12/31/05 720,000 735,500 57,600 302,250 - 1,815,350
Acquisition of TS, 2/27/06 (228,000)
Resale of TS above cost, 6/17/06 40,000 190,000
Resale of TS below cost, 7/31/06 (2,000) 38,000
Issuance of CS, 7/31/05 231,000
Declared cash dividend-PS and CS, 12/16/06 (121,200)
Net income for 2006 425,000
Balances, 12/31/06 720,000 966,500 95,600 606,050 - 2,388,150
1-C 2-B 3-D 4-B
5-A
PROBLEM NO. 21 - Lapu-Lapu Corporation

Common Retained Treasury

stock APIC earnings stock
Balances, 1/1/05 3,000,000 300,000 450,000 -
Issuance of CS, 6/15/05 5,000,000 1,000,000
Stock dividend, 9/30/05 400,000 40,000 (440,000)
Net income for 2005 475,000
Balances, 12/31/05 8,400,000 1,340,000 485,000 -
Acquisition of TS, 3/1/06 285,000
Sale of TS, 5/31/06 37,500 (142,500)
Exercise of 25,000 stock rights, 9/15/06 5,000,000 1,250,000
Exercise of 40,000 stock rights, 10/31/06 8,000,000 2,000,000
Declared cash dividend, 12/10/06 (425,000)
Retired 1,000 TS, 12/20/06 (100,000) 5,000 (95,000)
Net income for 2006 500,000
Balances, 12/31/06 21,300,000 4,632,500 560,000 47,500
1-B 2-C 3-D 4-B 5-D