Professional Documents
Culture Documents
1. Stratton Company has determined its 2014 and 2015 net income figures to be P1,500,000
and P1,100,000, respectively. In a first time audit of the company’s financial statements, you
determined the following errors:
What is the corrected net income for the year 2015? P1,240,000
What amount should Vinn report as adjusted beginning Accumulated Profits and Losses
on January 1, 2015? P368,000
4. Oakman Company started operations on January 1, 2011. Financial statements for 2014 and
2015 contained the following errors:
Additionally, a fully depreciated equipment was sold for P12,000 on December 31, 2015. The
sale was not recorded until 2016. No corrections have been made for any of the errors. (Ignore
income tax considerations)
How much would be the total effect of the errors in Oakman’s 2015 net income?
Understated by P157,000
2014 2015
Ending inventory:
2014 too high (P55,000) P 55,000
2015 too low 65,000
Depreciation-2014 too high 35,000
Insurance expense-2014 too low ( 25,000) 25,000
Unrecorded gain ________ 12,000
Effect on net income (P45,000) P157,000
As a result, Mazu cost of goods sold for the year ended December 31, 2014 was?
Understated by P60,000
The December 31, 2014 inventory was overstated. Therefore, cost of goods sold for
2014 was understated bu P60,000 (P75,000 / 125%)
6. Star Company’s December 31 year-end financial statements had the following errors:
There was no other errors during the years 2014 or 2015 and no corrections have been made
for any of the errors. (Ignore income tax consideration)
What is the net effect of the errors on Star’s 2015 net income? Overstated by P20,300
Effect on
Net Income December 31, 2015
2014 2015 Accumulated Profits
Ending inventory:
2014-understated P13,500 (P13,500) P 0
2015-overstated - ( 19,800) ( 19,800)
Depreciation-2014 under ( 3,600) - ( 3,600)
Unearned rental-2014 under ( 5,000) 5,000 -
Prepaid insurance-2015 under _______ 8,000 8,000_
Net effect (over) understated P 4,900 (P20,300) (P15,400)
What is the net effect of the errors in Star’s December 31, 2015 accumulated profits
balance? Understated by P8,000
What is the net effect of the errors in Star’s December 31, 2015 working capital?
Overstated by P11,800
Effect on Working
Capital (for 2015)
2015 overstatement of inventory (P19,800)
2015 understatement of prepaid insurance 8,000
Net effect on the working capital (over) (P11,800)
7. Records showed that as of December 31, 2014, accrued salaries payable of P21,000 were not
recorded in Sebby Company’s books. In addition, office supplies on hand of P9,000 at
December 31, 2015 were erroneously treated as expense instead of supplies inventory. Neither
of these errors was discovered nor corrected.
What is the effect of these two errors? 2015 net income is understated by P30,000 and
January 1, 2016 accumulated profits is understated by P9,000.
Accumulated
Net Income Profits
2014 2015 January 1, 2016
Unrecorded accrued salaries in 2014 (P21,000) P21,000 P 0
Office supplies on hand in 2015 charged
to expense ________ 9,000 9,000
Net effect – (overstated) understated (P21,000) P30,000 P9,000
8. Isay Corporation started operations on January 1, 2014. Financial statements for the years
ended December 31, 2014 and 2015 contained the following errors:
2014 2015
Ending inventory P240,000 understated P225,000 overstated
Depreciation expense 90,000 understated
Insurance expense 150,000 overstated 150,000 understated
Prepaid insurance 150,000 understated
Additionally, a fully depreciated equipment was sold for cash of P162,000 on December 31,
2015. The sale was not recorded until 2016. There were no other errors during 2014 or 2015
and no corrections have been made for any of the errors.
What is the total effect of the errors in the amount of the working capital at December 31,
2015? (ignore income taxes) Overstated by P63,000
Working Capital
2014 2015 Dec. 31, 2015
Inventory-2014 under P240,000 (P240,000)
Inventory-2015 over ( 225,000) (P225,000)
Depreciation-2014 under ( 90,000) 0 0
Prepaid insurance under 150,000 ( 150,000) 0
Gain on sale of equipment ________ 162,000 162,000
Net correction P300,000 (P453,000) (P 63,000)
9. While examining the accounts of Yo Mama Company on December 31, 2015, the following
errors were uncovered:
a) Dividends of P100,000 had been declared on December 15, 2015 but was not recorded
in the books.
b) Improvements in buildings and equipment for P480,000 had been debited to expense at
the end of April in 2014. Improvements are estimated to have an estimated life of 8
years.
c) The company failed to record sales commissions payable amounting to P10,500 and
P19,000 at the end of 2014 and 2015, respectively.
d) Supplies on hand amounting to P6,000 and P15,000 were not recognized at the end of
2014 and 2015, respectively.
What is the net effect of the above errors in the 2014 net income? P435,500 under
What is the neteffect of the error in the 2015 net income? P59,500 over
a) Unrecorded dividends No effect No effect
b) Leasehold improvements charged
to expense P480,000 under
understatement of depreciation
2014 (P480,000 / 8 x 8/12) 40,000 over
2015 (P480,000 / 8) P60,000 over
c) Unrecorded sales commissions
2014 10,500 over 10,500 under
2015 19,000 over
d) Unrecorded supplies on hand
2014 6,000 under 6,000 over
2015 _____________ 15,000 under
Net effect P435,500 under P59,500 over
10. The following errors were discovered in the course of examination of the Doodle Company’s
financial records:
What is the net effect of the above errors on the January 1, 2015 accumulated profits?
P65,500 over
Accumulated Profits
Jan. 1, 2015
Under (Over)
Unrecorded wages payable (P34,000)
Accrued vacation pay for 2014 not recorded ( 62,500)
Overcharging of insurance expense during 2014
(P37,200 x 10/12) 31,000
Net effect on the 1/1/15 Accumulated Profits (P65,500)
11. Porpol Company discovered the following errors in its financial records at the beginning of the
year 2015:
a) The physical inventory count on December 31, 2014 excluded a merchandise with a cost
of P38,000 that had been temporarily stored in a public warehouse. Porpol uses the
periodic inventory system.
b) During 2014, a competitor filed a patent infringement suit against Porpol claiming
damages of P440,000. The company’s legal counsel hasindicated that an unfavorable
verdict is probable and a reasonable estimate of the court’s award to the competitor is
P250,000. The company has not reflected or disclosed this situation in the financial
statements.
c) A trademark was acquired at the beginning of 2013 for P100,000. No amortization has
been recorded since acquisition. It is the company’s policy to amortize all intangibles
with a definite life for a maximum of 20 years. At the time of acquisition, the trademark
was estimated to have a definite life of 20 years.
What is the effect of the above errors on the January 1, 2015 accumulated profits?
P222,000 overstated
Accumulated Profits,
January 1, 2015
Under (Over)
a) Company’s inventory, excluded in the physical count P 38,000
b) Failure to recognize a probable & reasonable amount
of estimated loss (250,000)
c) Failure to amortize trademarks (P100,000 / 20 x 2) ( 10,000)
Net effect (P222,000)
12. While examining the December 31, 2014 financial statements of Sunrise Company, you
discovered the following:
What is the corrected net income for the year ended December 31, 2014? P2,980,000
13. Bonjoy Corporation failed to recognize accruals and prepayments since the inception of its
business three years ago. The accruals and prepayments at the end of 2014 are given below:
What is the net effect of the above errors in the 2014 net income? P30,000 overstated
2012 2011
Revenue 1,350,000 1,000,000
Expenses 980,000 650,000
Net income 370,000 350,000
12/31/2012 12/31/2011
Total assets 1,570,000 1,050,000
Total liabilities 500,000 350,000
Total owner’s equity 1,070,000 700,000
Maan failed to record P120,000 of accrued wages at the end of 2011. The wages were recorded
and paid in January 2012. The correct accruals were made on December 31, 2012.
16. What is the correct amount of total liabilities on December 31, 2011? 470,000
17. What is the correct amount of owner’s equity on December 31, 2012? 1,070,000
18. Erich Company manufactures kerosene heaters for home use. The December 31 financial
statements contained the following error:
2010 2011
Ending inventory 200,000 under 300,000 over
Depreciation 50,000 under
An insurance premium of P150,000 was prepaid in 2010 to cover 2010, 2011 and 2012. The
entire amount was charged to expense in 2010. On December 31, 2011, fully depreciated
machinery was sold for P250,000 cash but the sale was not recorded until 2012. There were no
other errors during 2010 and 2011 and no corrections have been made for any of the errors.
Ignoring income tax, what is the net effect of the errors on the retained earnings on
December 31, 2011? 50,000 overstated
19. Bayle Company is in the process of adjusting its books at the end of 2011. Bayle’s records
revealed the following information:
Bayle failed to accrue sales commissions at the end of 200 and 2010 as follows:
2009 220,000
2010 140,000
In each case, the sales commissions were paid and expensed in January of the
following year.
Errors in ending inventory for the last three years were discovered to be as
follows:
The unadjusted retained earnings balance on January 1, 2011 is P12,600,000 and the
unadjusted net income for 2011 was P3,000,000. Dividends of P1,750,000 were declared during
2011.
20. What is the adjusted balance of retained earnings on December 31, 2011? 14,000,000
1. Yord Company reported revenue of P6,000,000 under the cash basis for the year ended 2014.
Additional information was made available:
Under the accrual basis, how much should Yord Company report as revenue for 2014?
P6,125,000
Under the accrued basis of measuring revenues and expenses, how much is the total
purchases for the year ended December 31, 2014? P2,700,000
3. Elsa Company’s professional fees expense account had a balance of P164,000 on December
31, 2014 before considering year-end adjustments relating to the following:
Consultants were hired for a special project at a total fee not to exceed P130,000. Elsa has
recorded P110,000 of this fee based on billings for work performed in 2014
The attorney’s letter requested by the auditors dated January 30, 2014 indicated that legal fees
of P12,000 were billed on January 15, 2015 for work performed in November 2014 and unbilled
fees for December 2014 were P14,000.
What amount of professional fees expense should Elsa report for the year ended
December 31, 2014 profit or loss? P190,000
4. In 2009, Leon Designs Corporation sold a layout design to Laica Inc. and will receive royalties of
20% of future revenues associated with the said layout design. On December 31, 2013, Leon
Designs reported royalties receivables of P75,000 from Laica Inc. during 2014, Leon Designs
received royalty payments of P200,000. Laica Inc. reported revenues of P1,500,000 in 2014
from the layout design.
In its 2014 profit or loss, what amount should Leon Designs report as royalty revenue?
P300,000
5. To maintain sufficient operating cash, Infinity Company frequently borrows from a bank. Below
is the summary of loans granted to Infinity with 12% interest rate. The principal and the related
interest are payable at maturity and Infinity was able to repay the loans on scheduled maturity
date:
Infinity records interest expense when the loans are repaid. Accordingly, interest expense of
P90,000 was recorded in 2014.
6. Polly Company owns an office building and leases the offices under a variety of rental
agreements involving rent paid in advance monthly or annually. Not all tenants make timely
payments of their rent. The following data were taken from the balance sheets of Polly
Company:
Rentals receivable were P96,000 and P124,000 for 2013 and 2014, respectively;
Unearned rentals were P320,000 and P240,000 for 2013 and 2014, respectively
7. Anne Company reported revenue of P3,100,000 in its accrual basis income statement for the
year ended December 31. 2014. Additional information were as follows:
Under the cash basis, how much should Anne report as revenue for 2014? P2,700,000
8. Sol Company reported revenue of P1,980,000 in its income statement for the year ended
December 31, 2014. Additional information was made available:
No uncollectible accounts were written off during 2014. Had the cash basis of accounting been
used instead, how much would have been reported as receipts for 2014 by Sol Company?
P1,845,000
9. Chief Company reported total purchases of P3,200,000 in its accrual basis financial statement
on December 31, 2014. Additional information revealed the following:
What is the amount of purchases under the cash basis on December 31, 2014?
P2,850,000
10. Under the accrual basis, rental income of Pido Company for the calendar year 2014 is
P600,000. Additional information regarding rental income are presented below:
Under the cah basis, how much rental income should be reported by Pido Company in the
year 2014? P615,000
11. Red Boys Corporation acquires copyright from authors, paying advance royalties in some cases
and in others, paying royalties within 30 days of year-end. Red Boys reported royalty expense of
P375,000 for the year ended December 31, 2014. The following data are included in the
corporation’s December 31 balance sheet:
2013 2014
Prepaid royalties P60,000 P50,000
Royalties payable 75,000 90,000
Under the cash basis, what amount of royalty expense should report in its 2014 profit or
loss? P350,000
12. Burn Corporation maintains its accounting records on the cash basis but restates its financial
statements to the accrual method of accounting. Burn had P600,000 in cash-basis pretax
income for 2014. The following information pertains to Burn’s operations for the years ended
December 31, 2014 and 2013:
2014 2013
Accounts receivable P400,000 P200,000
Accounts payable 150,000 300,000
Under the accrual method, what amount of income before taxes should Burn report in its
December 31, 2014 profit or loss? P950,000
13. At December 31, 2014, the advertising expense account of Apo Company had a balance of
P146,000 before any year-end adjustment relating to the following:
14. Greg, a lawyer, maintains his accounting records under the cash basis of accounting. During
2014, Greg collected P200,000 in fees from clients. At December 31, 2014, Greg has accounts
receivable of P40,000. At December 31, 2014, Greg had accounts receivable of P60,000 and
unearned fees of P5,000.
On accrual basis, what was Greg’s service revenue for 2014? P215,000
Collection P200,000
Accounts receivable, December 31, 2014 60,000
Accounts receivable, December 31, 2013 ( 40,000)
Unearned fees, December 31, 2014 ( 5,000)
Service revenue, accrual P215,000
15. Icon Publishers offered a contest in which the winner would receive P1,000,000 payable over 20
years. On December 31, 2014, Icon announced the winner of the contest and signed a note
payable to the winner for P1,000,000, payable in P50,000 installments every January 2. Also,
on December 31, 2014, Icon purchased an annuity for P418,250 to provide the P950,000 prize
monies remaining after the first P50,000 installment, which was paid on January 2, 2014.
In its 2014 profit or loss, what should Icon report as contest prize expense? P468,250
16. Ara started operating a service proprietorship on April 1, 2014 with an initial cash investment of
P120,000. The business provided P38,400 of services in April and received full payment in May.
The business incurred expenses of P18,000 in April which were paid in June. During May, Ara
drew P6,000 against his capital account.
What was the income for the two months ended May 31, 2014 under the following method
of accounting? Cash Basis – P38,400; Accrual Basis – P20,400
In its profit or loss for the year ended March 31, 2014, what amount should Spike report
as commission expense? P450,000
Sales P15,000,000
x Commission rate x 3%
Commission expense P 450,000
18. On September 1, 2014, Marie began a service proprietorship with an initial investment of
P400,000. Marie provided P800,000 of services during September. Collections were made
except for P200,000 which were paid the following month. Expenses were incurred in the
amount of P400,000, including P100,000 which are to be paid next month. Marie withdrew
P60,000 against the capital account.
19. During 2011, Kaye Company had P200,000 in cash sales and P3,000,000 in credit sales. The
account receivable balances were P4,00,000 and P485,000 at December 31, 2010 and 2011,
respectively. If Kaye desires to prepare a cash basis income statement, what amount should
be reported as sales for 2011? 3,115,000
What amount should Reed report as sales in its income statement for 2011? 1,550,000
1. Under Khayla Company’s job order costing system, manufacturing overhead is applied to work-
in-process using a predetermined annual overhead rate. During January 2013, Khayla’s
transactions included the following:
Khayla had neither beginning nor ending work-in-process inventory. What was the cost of jobs
completed in January 2013? P310,000
2. Bal Corporation manufactures rattan furniture sets for export and uses the job order cost system
in accounting for its costs. You obtained from the corporation’s books and records the following
information for the year ended December 31, 2013:
The work in process inventory on January 1 was 20% less than the work in process
inventory on December 31.
The total manufacturing costs added during 2011 was P900,000 based on actual direct
materials and direct labor but with manufacturing overhead applied on actual direct labor
pesos.
The manufacturing overhead applied to process was 72% of the direct labor pesos, and
it was equal to 25% of the total manufacturing costs.
The cost of goods manufactured, also based on actual direct materials, actual direct
labor and applied manufacturing overhead was P850,000.
The cost of direct materials used and the work-in-process inventory on December 31,
2013: P362,500
3. A company allocates overhead to jobs in process using direct labor costs, raw material costs,
and machine hours. The overhead application rates for the current year are:
What is the total cost that would be charged to the production run? P24,780
If Crown decides to use the actual results from 2013 to determine the 2014 overhead rate, what
will be the 2013 overhead rate be? P1,740
The 2013 overhead rate is calculated as P1.70 / DH (P74,800 , 44,000 DLH). Since
applied factory overhead is a result of actual DLH times the overhead rate, the actual direct
labor hours for 2013 are 45,000 (P76,500 , P1.70). next, the overhead rate for 2014 is P1.74 /
DLH (P78,300 + 45,000 DLH)
5. The PDF Company uses a predetermined overhead rate. PDF prepared the following budget at
the beginning of the year:
During the month of January, the cost sheet of order number 100 indicates P20 of raw
materials, P50 of direct labor, 10 hours of direct labor, and 5 machine hours. Order number 100
consists of 49 units of product. PDF applies overhead based on direct labor cost. What amount
of overhead should be applied to order number 100? 104.7
PDF Company applies overhead based on direct labor cost. Since overhead was
budgeted at P25,000 and direct labor cost at P12,000, the overhead application rate is P2.083
(P25,000 , P12,000). Since 50 of direct labor was incurred, P104.17 of overhead should be
applied (50 x P2.083). alternatively, factory overhead cost is slightly more than twice the direct
labor cost (P25,000 / P12,000) and the overhead on a job with 50 of direct labor cost would be
slightly more than P100, i.e., P104.17
Work-in-process P10,710
Direct materials inventory 48,600
In analyzing the job-order cost sheets, the records disclosed that the composition of the work-in-
process inventory on June 1, 2014 were as follows:
The following manufacturing activity occurred during the month of June 2014:
7. Steady Corporation’s materials purchase during 2014 are P25,590 and materials put into
production are direct and indirect materials, respectively, worth P18,500 and P7,090. The total
factory payroll is P74,000 of which P50,000 represents direct labor. Other factory overhead
costs amount to P32,000. The company applies the actual factory overhead cost to process.
Sales, cost of goods sold, and the cost of goods manufactured, respectively, are P130,000,
P120,000, and P128,000.
By what amount did the company’s closing goods in process inventory exceed its
opening goods in process inventory? P3,590
Increase in goods in process indicates that the closing goods in process is higher than
the opening goods in process. Thus, increase means zero beginning to P3,590 ending.
8. Dan company consumed P450,000 worth of direct materials during May 2014. At the end of the
month, the direct materials inventory was P25,000 lower than the May 1 inventory level. How
much was the direct materials procured during May 2014? P425,000
Direct materials used P 450,000
Less: decrease in inventory 25,000
Direct materials purchased P 425,000
9. Job No. 027 has, at the end of the second week in April, an accumulated total cost of P4,200. In
the third week, P1,010 of direct materials were used on the Job.
Twenty (20) hours of direct labor services were applied to the job at a cost of P5 per hour.
Manufacturing overhead was applied at the basis of P2.50 per direct labor hour for fixed
overhead and P2 per hour for variable overhead.
Job No. 027 was only the job completed during the third week.
10. The XYZ Corporation manufactures one product and accounts for cost by a job-order cost
system. You have obtained the following information for the year ended December 31, 2013
from the corporation’s books and records:
Beginning work in process inventory was 80% of ending work in process inventory.
Compute the cost of direct materials used for the year ended December 31, 2013.
P370,000
11. Red Company incurred the following costs during the month: direct labor, P120,000; factory
overhead, P108,000; and direct materials purchases, P160,000. Inventories show the following
costs:
Beginning Ending
Finished goods P27,000 P30,000
Work in process 61,500 57,500
Direct materials 37,500 43,500
12. Nikkon Company, Ic. Estimated its factory overhead at P510,000 for the year, based on a
normal capacity of 100,000 direct labor hours. Standard direct labor hours for the year totaled
105,000, while the factory overhead control account at the end of the year showed a balance of
P540,000. How much was the underapplied factory overhead for the year? P4,500
Underapplied overhead is the difference between the actual overhead and the applied
overhead. The overhead rate per hour is P5.10 (P510,000 budgeted costs, 100,000 budgeted
hours). The applied overhead was P535,500 (P5.10 x 105,000 actual hours). The actual
overhead incurred of P540,000 less the applied overhead of P535,500 results in P4,500 of
underapplied overhead.
13. Wesley Company has underapplied overhead of P45,000 for the year 2014. Before disposition
of the underapplied overhead, selected year-end balances from Wesley’s accounting records
were:
Sales P1,200,000
Cost of goods sold 720,000
Direct materials inventory 36,000
Work-in-process inventory 54,000
Finished goods inventory 90,000
14. Kho Company manufactures electric drills to the exacting specifications of various customers.
During April 2014, Job 143 for the production of 1,100 drills was completed at the following
costs per unit:
Final inspection of Job 143 disclosed 50 defective units and 100 spoiled units. The defective
drills were reworked at a total cost of P500, and the spoiled drills were sold to a jobber for
P1,500. What would be the unit cost of the good units produced on Job 143? P32
The original production of 1,100 drills cost P33,000 (1,100 drills x P30 per drill). The
reworking of the defective drills (i.e. P500) increased the cost total to P33,500. The P1,500
received from the sale of the 100 defective units should be subtracted from the total cost
incurred in producing the 1,100 drills. Therefore, the total cost for producing 1,000 good drills
equals P32,000 (P33,000 + P500 – P1,500), yielding a unit cost for good drills of P32.
15. Daisy Manufacturing Corporation started 150 units in process on Job Order No.007. The prime
costs placed in process consisted of P30,000 and P18,000 for materials and direct labor,
respectively, and a pre-determined rate was used to charge factory overhead to production at
133-1/3% of the direct labor cost. Upon completion of the job order, units equal to 20% of the
good output were rejected for failing to meet strict quality control requirements.
The company sells rejected units as scrap at only 1/3 of production cost, and bills customers at
150% of production cost.
If the rejected units were ascribed to company failure, the billing price of Job Order No.
0007 would be? P90,000
Units %
Started in process 150 120%
Less: Spoilage ( 25) 20%
Goods output 125 100%
Charged to Work-in-process:
Materials P30,000
Labor 18,000
Overhead (P18,000 x 133 1/3%) 24,000 P72,000
Less: Spoilage Cost (P72,000 , 150 = P480 x 25 units) 12,000
Net Cost of Production P60,000
Multiplied by: Billing Price 150%
Billing Price P90,000
16. Using the same information in No. 14, and if the rejected units were ascribed to customer
action, the billing price of Job Order No. 007 would be? P102,000
17. Hailey Corporation’s Job 123 for the manufacture of 2,200 coats, which was completed during
August at the unit costs presented below. Final inspection of Job 123 disclosed 200 spoiled
coats which were sold to a jobber for P6,000.
Assume that spoilage loss is charged to all production during August. What would be the unit
cost of the good coats produced on Job 123? P 56 /unit
The unit cost of goods produced includes direct materials, direct labor, and factory
overhead. Since the spoilage is included in the calculation of overhead, it must be considered
normal and a product cost. Thus, the unit cost remains at P56 since the amount to be deducted
from the production cost is equivalent to the original cost per unit. The computation is as follows:
Charged to work-in-process:
P56 x 2,200 P123,200
Less: Spoilage cost: P56 x 200 11,200
Net cost of production P112,000
Divided by: Number of good units produced 2,000
P 56/unit
18. Using the same information in #16, assume instead that the spoilage loss is attributable to the
exacting specifications of Job 123 and is charged to the specific job. What would be the unit
cost of the good coats produced on Job 123? P57.50/unit
If the spoilage is charged to this specific job (rather than to factory overhead), the
spoilage allowance should be removed from the factory overhead rate. The overhead
application rate thus drops to P17 because this job’s spoilage is not typical and will not be
averaged with other “typical” jobs. The costs of producing the 2,000 good coats include the
costs incurred in the production of the 2,200 coats, less the P6,000 received for the spoiled
coats. The unit costs is net cost of production divided by the number of good coats produced
(2,000).
19. A company has two service departments (S1 and S2) and two production departments (P1 and
P2). Department data for January were as follows:
S1 S2
Costs incurred: P27,000 P18,000
Service provided to:
S1 - 20%
S2 10% -
P1 50% 30%
P2 40% 50%
What are the total allocated service department costs to P2 if the company uses the
reciprocal method of allocating its service department cost? (Round calculation to the
nearest whole number) 23,051
The reciprocal method allocates service department costs to other service departments
as well as to production departments by means of simultaneous equations, as shown below.
Thus, total service cost allocated to P2 is P23,051 [(40% x P31,224) + (50% x P21,122)].
S1 = P27,000 + .2S2
= P27,000 + [2(P18,000 + 1S1)]
= P27,000 + P3,600 + .02S1
.98S1 = P30,600
S1 = P31,224
S2 = P18,000 + /1(P31.224)
= P18,000 + P3,122
S2 = P21,122
20. A hospital has a P100,000 expected utility bill this year. The janitorial, accounting, and orderlies
department are services functions to the operating, hospital rooms and laboratories
departments. Floor space assigned to each department is
Janitorial 1,000
Accounting 2,000
Orderlies 7,000
Operating 4,000
Hospital Rooms 30,000
Laboratories 6,000
50,000
How much of the P100,000 will eventually become the hospital rooms department total
costs, assuming a direct allocation boased on square footage is used? P75,000
The direct method allocates service department costs without regard to service provided
to other service department. consequently, the P100,000 utility expense will be apportioned
among the three production departments on the basis of square footage. The hospital rooms
department’s share will be P75,000 (P100,000 x [30,000 square feet / (4,000 + 30,000 + 6,000)
total square feet]).
PROCESS COSTING
1. Borge Company computed the flow of physical units completed for Department M for the month
of March 2011 as follows
Units completed:
Material are added at the beginning of the process. The 12,000 units of work in process at
March 31, 2011, were on 80% complete as to convertion costs. The work-in-process at March 1,
2011 was 60% complete as to conversion costs.
Using the FIFO method, the equivalent units for March conversion costs were: 60,600
Work EP-
Quantity Schedule: Actual Done CC
In process, beginning …………... 15,000
Started in process ……………… 57,000
72,000
2. Cost and statistics for Department 2 at a company manufacturing a single product in three
department follows:
Work-in-process, October 1:
Cost in Department 1…………………………….. P11,380
Cost in Department 2
Materials…………………………………….. None
Labor………………………………………… P500
Factory overhead………………………….. 50
Compute the conversion costs per equivalent unit (rounded to nearest centavo)
FIFO: P2.01 Average: P2.00
Work EP-
Quantity Schedule Actual Done CC
In progress, beginning ………….. 500
Received from Prec. Dept …….... 6,700
7,200
3. Earl Company uses process costs system with average costing to account for the production of
its only product. The product is manufactured in two departments. Units are started then
transferred to the Finishing Department, where they are completed. Units are inspected at the
end of the production process in the Forming Department, and the costs of abnormal lost is
charged to Factory Overhead Control account or abnormal spoilage expense depending on
management prerogative. Data related to August operations in the Forming Department are:
10,000
The total costs per unit transferred-out for February of Product x, rounded to the
Nearest peso: P2.78
Materials – 100%
l------------------------------------------------------------------------------------------------------------------------------l
0 50% 75% 100%
FIFO:
In process beg. , F&T
Cost last month: (P12,000 + P2,500
+ 1,000) ………………………………… P15,500
Cost this month:
Materials ……………………………….. -0-
CC: 3,000 x (P5,000 / 15,000) ……..... 1,000 P16,500
Received, F&T: 6,000 x [(P29,000 / 14,000)
+ (P5,500 / 14,000) + (P5,000 / 15,000)] ………………… 16,785
Total Cost transferred ……………………………………………… P33,285
Divided by: F&T ……………………………………………………... . 12,000
Unit Cost transferred ……………………………………………….. P2.77
Average:
Preceding Department: (P12,000 + 29,000) / 20,000 ………….. P2.05
Current/This Department:
Materials (P2,500 + P5,500) / 20,000 ……………………. .40
CC: (P1,000 + P5,000) / 18,000 …………………………... .33
P2.78
5. Department Z of the Cobra Mfg. Corporation had the following data for the month of October,
2011:
The costs of the beginning work in process was P140,000, and the production costs for
The month amounted to P1,172,000.
How many equivalent production units were completed in October, 2011 using FIFO
Method? 300,000
Work Equivalent
Quantity Schedule: Actual Done Production
6. Grace co., a manufacturer of combs, budgeted sales of 125,000 units for the ,on the of April.
The following additional information is provided:
Number
of units
Actual inventory at April 1
Work-in-process………………………………………… None
Finished goods…………………………………………. 37,500
Budgeted inventory at April 30
Work-in-process (70% processed) ………………….. 8,000
Finished goods ………………………………………… 30,000
How many equivalent units of production did Grace budget for April? 123,500
7. Kirin Corporation’s production cycle starts in the Mixing Department. The following information is
available for April:
Units
WIP, April (50% complete) …………………………………… 40,000
Started in April ………………………………………………… 240,000
WIP, April 30 (60% complete) ………………………………. 25,000
Materials are added at 55% stage of completion in the Mixing Department. What are the
Equivalent units of production for the month of April?
FIFO Average
Materials Conversion Materials Cpnversion
280,000 250,000 280,000 270,000
Materials – 100%
I
I------------------------------------------------------------------------------------------------------------------------------I
0 50% 55% 60% 100%
IP, beg. EUP: M – 100%; CC – 50%
X----------------------------------------------------------------X
IP, end.
EUP: M – 100% ; CC – 60%
X------------------------------------------------------------------------------------------X
8. Department A is the first stage of Brick Company’s production cycle. The following information is
available for conversion costs for the month of April 2011:
Units
Work-in-process, beginning (60% complete) ………………. 20,000
Started in April ………………………………………………….. 340,000
Completed in April and transferred to Department B …….. 320,000
Work-in-process, ending (40% complete) ………………….. 40,000
The equivalent units for the conversion cost calculation are: FIFO Average
324,000 336,000
Work Conversion
Quantity Schedule: Actual Done Cost
In progress, beg. ………… 20,000
Started in process ………. 340,000
360,000
9. Bark Company manufactures compact disks. In June 2011, production for 2,000,000 units were
started. At the end of the month, the following data were gathered:
Completed units ……………………………………………………. 2,700,000
Defective units ……………………………………………………… 400,000
In process ½ complete ……………………………………………. 800,000
How many units were in process at the beginning of the month? 1,900,000
Quantity Schedule:
In progress, beg. (balancing figure) ………………………………. 1,900,000
Started in process ……………………………………………………. 2,000,000
3,900,000
10. The following production information for Dept. B of Joy Products is for the month of May, 2011:
Additional information:
a. No beginning work process
b. Ending work in process is 75% complete
c. May’s production costs total P2,760,000
Dept. B’s unit cost of production for May, 2011 is: P4.80
Work Equivalent
Quantity schedule: Actual Done Production
Received from Department A … 600,000
11. Gayson Company, which had 6,000 units n work-in-process at January 1 that were 60%
complete as to conversion costs. During January 20,000 units were completed. At January 31,
8,000 units remained in WIP which were 40% complete as to conversion costs. Materials are
added at the beginning of the process.
Using the weighted average method, the equivalent units for January for conversion
costs were: 23,200
Work EP –
Quantity Schedule: Actual Done CC
In process, beg. ……………………. 6,000
Started in process (28,000 – 6,000) 22,000
28,000
12. The Norton Company manufactures the famous ticktock watch on an assembly line basis.
January 1, work-in-process consisted of 5,000 units partially completed. During the month an
additional 110,000 units were started and 105,000units were completed, the ending work-in-
process wa 3/5 complete as to conversion cost. Conversion costs are added evenly throughout
the process. The following conversion costs were incurred.
The conversion costs assigned to ending work-in-process totaled P15,360 using the
FIFO method of process costing. What was the percentage of completion, as to
conversion costs on the 5,000 units in BWIP? 80%
Ending work in process is 10,000 (5,000 + 110,00 – 105,000) units which are 3/5 complete
representing 6,000 equivalent units of conversion (10,000 x 3/5). Conversion cost per unit is
P15,360 / 6,000 units which is P2.56 per unit. Total equivalent conversion units for the month is
P273,920 / P2.56/unit = 107,000 units. Total equivalent conversion units are the sum of
equivalent units to finish beginning units, units started and completed, and ending equivalent
units. Assuming that 100,000 units were started this period and completed, the amount of
conversion added to BWIP this period is determent below:
That means BWIP was equal to 4,000 EUP with respect to conversion, or 80% complete (4,000
+ 5,000).
13. During March, Mark Company’s Department Y equivalent unit product costs, computed under
the weighted average method, were as followed:
Materials ……………………………………………………………. P1
Conversion …………………………………………………………. 3
Transferred-in ………………………………………………………. 5
Materials are introduced at the end of the process in Department Y. there were 4,000
Units (40% complete as to conversion costs) in WIP at March 31. The total costs
Assigned to the March 31 WIP inventory should be P24,800
The unit cost of EUP under weighted average are already computed. EWIP consists of 4,000
units 40% complete as to conversion costs (1,600 EUP). Since materials are added at the end
of the process, there is no material cost, only transferred-in cost.
Cost of in-process, March 31:
Cost from preceding dept.: P5 x 400 …………………………………… P20,000
Cost this dept.:
Materials: P1 x 0 ………………………………………………….. 0
CC: P3 x (4,000 x 40%) …………………………………………. 4,800
P24,800
14. Barkley company adds materials at the beginning of the process in Department N. Data
concerning the materials used in March 2011 production are as follows:
Units
Work-in-process at March 1 …………………………………….. 16,000
Started during March …………………………………………….. 34,000
Completed and transferred to next department during March... 36,000
Normal spoilage incurred ……………………………………….. 4,000
Work-in-process at March ………………………………………. 10,000
The equivalent units for the materials unit cost calculation are:
FIFO Average
30,000 46,000
Work EP –
Quantity Schedule: Actual Done Mat.
In process, beginning …………………… 16,000
Started in process ……………………….. 34,000
50,000
15. Materials are added at the start of the process in Ceasar Company’s blending department, the
first stage of the production cycle. The following information is available for July:
Units
Work-in-process, July 1 (60% complete
As to conversion costs) ………………………………. 60,000
Started in July …………………………………………………. 150,000
Transferred to the next department …………………………. 110,000
Lost in production …………………………………………….. 30,000
Work-in-process, J?uly 31 (50% complete
As to conversion costs) …………………………….. 70,000
Under Ceasar’s cost accounting system, the costs incurred on the lost units are
Absorbed by the remaining good units. What are the equivalent units for the
Materials unit cost calculation? FIFO Average
120,000 180,000
Work EP –
Quantity Schedule: Actual Done Mat.
In process, beginning …………………… 60,000
Started in process ……………………….. 150,000
210,000
16. Frank Co. had the following production for the month of June.
Units
Work-in-process at June 1 ……………………………………….. 10,000
Started during June ……………………………………………….. 40,000
Completed and transferred to finished goods during June…. 33,000
Abnormal spoilage incurred ……………………………………… 2,000
Work-in-process during June 30 ………………………………… 15,000
Materials are added of the beginning of the process. As to conversion cost, the
Beginning work-in-process was 70% complete and the ending work-in-process was
60% completed. Spoilage are detected at the end of the process. The equivalent units
For June, with respect to conversion costs, were as follows:
FIFO Average
37,000 44,000
Work EP –
Quantity Schedule: Actual Done CC
In process, beginning ………………….. 10,000
Started in process ……………………… 40,000
50,000
Using the weighted-average cost flow method, which of the following equivalent units
should be used in the calculating of costs for October?
Equivalent Units
Transfer Costs Materials Conversion
108,000 108,000 103,000
Work EP- Work EP-
Quantity Schedule: Actual Done Mat. Done CC
In process, beginning ………….. 9,000
Started in process ……………… 99,000
108,000
Quantity Schedule
Finished and transferred ………. 100,000 100% 100,000 100% 100,000
In process, ending …………….... 8,000 100% 8,000 40% 3,200
108,000 108,000 103,000
18. Information for the month of January concerning Department A, the first stage of Ogden
Corporation’s productive cycle, is as follows:
Materials Conversion
BWIP ……………………………………… P8,000 P6,000
Current costs…………………………….. 40,000 32,000
Total costs ………………………………. P48,000 P38,000
Materials are added at the beginning of the process. the ending work-in-process is 50%
Complete as to conversion costs. How would the total costs accounted for be
distributed, Using the weighted average method?
Goods Ending Work-
Completed -In-Process
P79,200 P6,800
The weighted average method combines the costs in BWIP those for the current period.
Materials are added at the beginning of the process and conversion costs are assumed to be
incurred uniformly. Equivalent unit and average until cost calculations were given.
Completed goods:
Materials (P .48 x 90,000) …………………………………………………….. P43,200
Conversion costs (P. 40 x 90,000) ………………………………………….. 36,000
Cost of completed goods …………………………………………………………….. P79,200
Given that conversion costs for EWIP are 50% complete, there are 5,000 (50% x 10,000)
equivalent units of conversion cost in ending inventory.
19. For the month of May, 2011, the Finishing Dept. of Apple, Inc. had in opening work in process
80% complete units and in ending work in process 50% complete units. Related data for the
month follow:
Units Conversion cost
Work in process, May 1 ………………………….. 50,000 P88,000
Units started, and costs incurred during May … 270,000 572,000
Units completed and transferred during May … 200,000
If the company uses first-in, first-out costing, the conversion cost of the work in process
at the end of May would be: P156,000
Work EP –
Quantity Schedule Actual Done CC
In process, beginning …………………… 50,000
Started in process ……………………….. 270,000
320,000
20. Barnet Company adds materials at the beginning of the process in Department M. Conversion
costs were 75% complete as to the 8,000 units in WIP at May 1 and 50% complete as to the
6,000 units in WIP at May 31. During May 1, 12,000 units were completed and transferred to the
next production activity for May is as follows:
Costs
Materials Conversion
WIP, May 1 ……………………………….. P9,600 P4,800
Costs added in May …………………….. 15,600 14,400
Average:
In process, beginning …… P9,600 P4,800
Cost added during May … 15,600 14,400
Total ………………………. P25,200 P19,200
Divided by: EUP ………… 18,000 15,000 P2.68
JOINT AND BY-PRODUCTS
1. Horse Co. manufactures products A and B from a joint process. During October, 2011. Sales
values at the point of “split-off” were P50.000 for 4,000 units of product A and P100,000 for
12,000 units of product B. Selling prices per unit are P25.00 and P12.50, respectively, for
product A and for product B.
Assume that the joint cost allocated to product A by using the market value method was
P40,000. The production cost of product B would be reported at: P130,000
2. Using the same information in No. 1, and assume that the joint cost allocated to product B by
using the average cost method was P90,000. The production cost of product A would be
reported at: P80,000
3. A company manufactures products X and Y using a joint process. the joint processing costs are
P10,000. Products X and Y can be sold at split-off for P12,000 and P8,000 respectively. After
spilt-off, product X is processed further at a cost of P5,000 and sold for P21,000 whereas
product Y is sold without further processing. If the company uses the net realizable value
method for allocating joint costs, the joint cost allocated to X is 6,000
Under the net realizable value method, joint costs are allocated based on their relative
net realizable value unless sales price quotations are available at split-off. Since split-off
sales price quotations are available, the amount of joint costs allocated to product X can
be computed as follows:
MV at %* Joint
Product Split-off Costs
X P12,000 50% P6,000
Y 8,000 50%
P20,000 P10,000
*P10,000 / P20,000
4. Crank Corporation, which manufactures two products out of a joint process – Compod and
Ultrasene. The joint (common) costs incurred are P250,000 for a standard production run that
generates 120,000 gallons of Compod and 80,000 gallons of Ultrasene. Compod sells for P2.00
per gallon while Ultrasene sells for P3.45 per gallon.
If there are no additional processing costs incurred after the split-off point, the amount of
joint cost of each production run allocated to Compod on a physical-quantity basis is
P150,000
Gallons
Product Produced x Ave. UC* = Joint Costs
Compod 120,000 P1.25 P150,000
Ultrasene 80,000 1.25 100,000
200,000 P250,000
5. Using the same information in No. 4, and if there are no additional processing costs
incurred after the split-off, the amount of joint cost of each production run allocated to
Ultrasene on a realizable value (gross market value) basis is 130,000
Gallons
Product Produced MV at SoPt. Total MV of SoPt. x %* = Joint Costs
Compod 120,000 P2,00 P240,000 50% P
Ultrasene 80.000 3.25 260,000 50% 130,000
P500,000 P250,000
6. Using the information in No. 4 and if additional processing costs beyond the split-off point
are P.10 per gallon for Compod and P1.10 per gallon for Ultrasene, the amount of joint
cost of each production run allocated allocated to Ultrasene on a physical quantity basis
is 100,000
The additional processing costs are irrelevant if the allocation is based on physical
quantities the joint costs allocated to Ultrasene would be P100,000 (80,000 x P1.25 per gallon).
7. Using the information in No. 4 and if additional processing costs beyond the split-off point
are P.10 per gallon for Compod and P1.10 per gallon for Ultrasene, the amount of joint
cost of each production run allocated to Compod on a net realizable value (net market
value) basis is P180,000
Since, in this particular number, further processing costs were given, therefore, it is
presumed that the market value given is the ultimate or final sales price.
8. Earl Corporation, which manufactures a product that gives rise to a by-product called “Zafa”.
The only costs associated with Zafa are selling costs of P1 for each unit sold. Earl accounts for
Zafa sales first by deducting its separable costs from such sales. And then by deducting this net
amount from cost of sales of the major product. This year, 1,000 unit of Zafa were sold at P4
each.
If Earl changes its method of accounting for Zafa sales by showing the net amount as
additional sales revenue, Earl’s gross margin will Be unaffected
The gross margin equals sales minus cost of sales. Before the change, the net amount
was deducted from cost of sales. After the change, the net amount is added to regular sales
with no additional increase in cost of goods sold. Hence, the gross marginwill be the same.
9. Using the same information in No. 8, and Earl changes its method of accounting for Zafa
sales by showing the net amount as other income Earl’s gross margin will decrease by
P3,000
Sales revenue minus cost of goods sold is gross margin. If net revenue from the by-
product is recorded as other income rather than being deducted from cost of goods sold, the
gross margin will decrease by P3,000 [1,000 x (P4 sales – P1 cgs)].
10. Using the same information in No. 8, and Earl records the net realizable value for Zafa as
inventory as it is produced, what will the per unit value be? P3
The NRV is selling price minus cost to complete and cost to dispose. The selling price of
Zala is P4, and the selling costs are P1. Given no completion or additional processing costs,
unit net realizable value is P3.
11. Using the same information in No. 8, and Earl sold 1,000 units of Zafa. Assuming that 1,500
units were produced for the year and that net realizable value is recorded as inventory,
Earl’s net income will increase by: P4,500
If the 1,500 units of the by-product are recognized at the time of production, net income
must increase by P4,500 (P3 unit NRV x 1,500). Ending inventory of Zala reduces cost of sales,
and by-products revenue either decreases costs or increases other income
12. Using the same information in No. 8, and Earl records Zafa inventory at net realizable value
as it is produced this year, what will be the profit recognized next year on as sale of 500
unit? P0
Because NRV is selling price minus completion and disposal cost, there is no profit upon
sale. The sale of 500 units of Zala with an inventory value of P3 per unit will produce no profit
(P4 unit selling price 0 P3 inventory cost – P1 selling cost = P0)
13. The characteristic which is most often used to distinguish a product as either a joint
product or a by-product is the relative sales value of the products produced in the
process.
The difference between joint products and by-products lies in their relative sales values.
Joint products have relative sales values that are significant in relation to each other. By-
products have minor sales values compared with the major product(s).
14. Mace Co. manufactures a major product that gives rise to a by-product called May. May’s only
separable cost is a P1 selling cost when a unit is sold for P4. Mace accounts for May’s sales by
deducting the P3 net amount from the cost of goods sold at the major product. There are no
inventories. If Mace were to change its method of accounting for may from by-product to a
joint product, what would be the effect on Mace’s overall gross margin? Gross margin
increases by P1 for each unit of May sold.
The difference between treating the by-product “May” as a joint product against a by-
product would be under the by-product treatment, the selling cost is netted against “May’s”
selling price, thus, reducing gross profit whereas under joint product accounting, the selling
costs would be deducted below the gross profit like a selling expense.
15. Mann Sawmill manufactures two lumber products from a joint milling process. the two products
developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL).
A standard production run incurs joint costs of P300,000 and results in 60,000 units of MSB and
90,000 units of CBL. Each MSB sells for P2 per unit, and each CBL sells for P4 per unit.
Assuming no further processing work is done after the split-off point, the amount of joint
cost allocated to commercial building lumber (CBL) on a physical quantity allocation
basis would be: P180,000
UNITS
PRODUCT PRODUCED X AVE. U.C. = JOINT COSTS
16. Using the same information in No. 15, and there are no further processing costs incurred
after the spilt-off point, the amount of joint cost allocated to the mine support braces
(MSB) on a relative sales value basis would be: P75,000
17. Mugfield Corporation, which manufactures products C, D, and E from a joint process. joint costs
are allocated on the basis of relative sales value at split-off. Additional information is presented
below:
C D E Total
Units produced ………………… 6,000 4,000 2,000 12,000
Joint costs …………………........ P72,000 ? ? P120,000
Sales value at split off ………... ? ? P30,000 P200,000
Additional costs if processed
Further …………………. P14,000 P10,000 P6,000 P30,000
Sales value if processed further P140,000 P60,000 P40,000 P240,000
How much of the joint costs should Mugfield allocate to product D? P30,000
18. Using the same information in No. 17, and assuming that the 2,000 units of product E were
processed further and sold for P40,000, what was Mugfield’s gross profit on the sale?
P16,000
19. Which of the following components of production are allocable as joint costs when or
single manufacturing process produces several salable products? Materials, Labor and
Overhead
The difference between joint products and by-products lies in their relative sales value
compared to other products being produced. The term joint products is used when the relative
sales values of the individual products are significant in relation to each other. The term by-
products is used when the products hace a minor sales value as compared with the major
product(s).
20. Which of the following is often subject to further processing in order to be salable?
By-products – YES; Scrap – No
Scrap and by-products are usually similar in nature, both physically and from an
accounting point of view. Scrap might even be considered a by-product of a manufacturing
process. however, by-products generally have a greater sales value than scrap. And also, scrap
rarely receives any additional processing in order to be salable. The moment scrap are further
processed, then they are considered as by-products.
PARTNERSHIP
1. The following condensed balance sheet is presented for the partnership of AA, BB, and CC,
who share profits and losses in the ratio of 4:3:3, respectively:
Cash P 90,000
Other assets 830,000
AA, loan 20,000
P 940,000
or, alternately:
Total agreed capital of the new partnership P 875,000
Multiplied by: Capital interest of FF 20%
P 175,000
2. RR and PP share profits after the provision of annual salary allowances of P14,400 and
P13,200, respectively in the ratio of 6:4. However, if partnership’s net income is insufficient to
provide for said allowances in full amount, the net income shall be divided equally between the
partners. In 2014, the following errors were discovered: Depreciation for 2014 is understated by
P2,100 and the inventory on December 31, 2014 is overstated by P11,400. The partnership net
income for 2014 was reported to be P19,500.
3. Hunt, Rob, Turman, and Kelly own a publishing company that that operate as a partnership. The
partnership agreement includes the following:
Hunt P 50,000
Rob 45,000
Turman 20,000
Kelly 47,000
Any remaining profits and losses are to be divided equally among the partners.
Determine how a profit of P105,000 would be allocated among the partners.
Salaries P20,000 P10,000 - - P30,000
Bonus* 3,000 2,000 - - 5,000
10% Interest on Ave. Cap. 5,000 4,500 P 2,000 P 4,700 16,200
Balance (equally) 13,450 13,450 13,450 13,450 53,800
P41,450 P29,950 P15,450 P18,150 P105,000
4. AA and DD created a partnership to own and operate a health-food store. The partnership
agreement provided that AA receive a salary of P10,000 and DD a salary of P5,000 to
recognize their relative time spent in operating the store. Remaining profits and losses were
divided 60:40 to AA and DD, respectively. Income for 2013, the forst year of operations, of
P13,000 was allocated P8,000 to AA and P4,200 to DD.
On January 1, 2014, the partnership agreement was changed to reflect the fact that DD could
no longer devote any time to the store’s operations. The new agreement allows AA a salary of
P18,000, and the remaining profits and losses are divided equally. In 2014 an error was
discovered such that the 2013 reported income was understated by P4,000. The partnership
income of P25,000 for 2013 included the P4,000 related to year 2013.
In the reported net income of P25,000 for the year 2014, AA and DD would have:
AA BB CC
Salary P18,000 P18,000
Balance: Equally 1,500 P 1,500 3,000
Income for year 2014 only P19,500 P 1,500 P21,000
Income for year 2013 (60:40) 2,400 1,600 4,000
Reported income for year 2014 P21,900 P 3,100 P25,000
5. On April 30, 2014, XX, YY and ZZ formed a partnership by combining their separate business
proprietorship. XX contributed cash of P75,000. YY contributed property with a P54,000 carrying
amount, a P60,000 original cost, and P120,000 fair value. The partnership accepted
responsibility for the P52,500 mortgage attached to the property. ZZ contributed equipment with
a P45,000 carrying amount, a P112,500 original cost, and P82,500 fair value. The partnership
agreement specifies that profits and losses are to be shared equally but in silent regarding
capital contributions.
Which partner has the largest April 30, 2014, capital balance?
XX YY ZZ
Cash P75,000
Property P120,000
Equipment P82,500
Less: Mortgage assumed _______ 52,500 _______
Capital balances P75,000 P 67,500 P82,500
6. On December 1, 2013, EE and FF formed a partnership, agreeing to share for profits and losses
in the ratio of 2:3, respectively. EE invested a parcel of land that cost him P25,000. FF invested
P30,000 cash. The land was sold for P50,000 on the same date, three hours after formation of
the partnership.
How much should be the capital balance of EE right after formation? P50,000
In the formation of a partnership, one or more of the partner will contribute noncash assets to
the business such as inventory, land or equipment, etc.. Retaining the recorded cost for such
asset would be inequitable to any partners investing appreciated property. Therefore, the
contribution of noncash assets to a partnership should be recorded based on the fair values. In
this case, the fair value of the land would be measured by its sales price on the date of sale,
P50,000.
7. On August, AA and BB pooled their assets to form a partnership, with the form to take over their
business assets and assume the liabilities. Partners capitals are to be based on net assets
transferred after the following adjustments. (Profit and loss are allocated equally.)
BB’s inventory is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and
P1,500 are to be set up in the books of AA and BB, respectively; and accounts payable of
P4,000 is to be recognized in AA’s books. The individual trial balances on August 1, before
adjustments are as follows:
AA BB
Assets P75,000 P113,000
Liabilities 5,000 34,500
8. The capital accounts of the partnership of NN, VV, and JJ on June 1, 2014 are presented below
with their respective profit and loss ratios:
NN P139,200 1/2
VV 208,800 1/3
JJ 96,000 1/6
On June 1, 2011, LL is admitted to the partnership when LL purchased, for P132,000, a
proportionate interest from NN and JJ in the net assets and profits of the partnership. As a result
of a transaction LL acquired a one-fifth interest in the net assets and profits of the firm.
What is the combined gain realized by NN and JJ upon the sale of a portion of their
interest in the partnership to LL? P43,200
The problem is simpler than it appears at first glance because it states that LL acquired a one-
fifth interest in the firm directly from NN and VV and no goodwill is to be recorded. In other
words, this was a transaction between partners.
9. PP contributed P24,000 and CC contributed P48,000 to form a partnership, and they agreed to
share profits in the ratio of their original capital contributions. During the first year of operations,
they made a profit of P16,290; PP withdrew P5,050 and CC P8,000. At the start of the following
year, they agreed to admit GG into the partnership. He was to receive a one-fourth interest in
the capital and profits upon payment of P30,000 to PP and CC, whose capital accounts were to
be reduced by transfers to GG’s capital account of amounts sufficient to bring them back to their
original capital ratio.
PP CC TOTAL
The bonus method implied that the old partner either receive a bonus from the new partner, or
they pad a bonus to the new partner. In this case, CC, the new partner invested an amount in
excess of the amount credited to CC’s capital account. Accordingly, the excess should be
treated as a bonus to AA and BB. This bonus should be treated as an adjustment to the old
partners’ capital accounts and should be allocated by using AA and BB’s old profit and loss
ratio.
11. Merlin, a partner in the Comelot Partnership, has a 30% participation in partnership profits and
losses. Merlin’s capital account has a net decrease of P1,200,000 during the calendar year
2013. During 2013, Merlin withdrew P2,600,000 (charged against his capital account) and
contributed property valued at P500,000 to the partnership.
What was the net income of the Camelot Pertnership for the year 2013? P3,000,000
Withdrawals P(2,600,000)
Investment 500,000
Share in net income (balancing figure) 900,000
Net (decrease) increase P(1,200,000)
12. X, Y and Z, a partnership formed on January 1, 2013 had the following initial investment:
X - P100,000
Y - 150,000
Z - 225,000
The partnership agreement states that profits and losses are to be shared equally by the
partners after consideration is made for the following:
Salaries allowed to partners: P60,000 for X, P48,000 for Y and P36,000 for Z.
Average partner’s capital balances during the year shall be allowed 10%.
Additional information:
13. Jones and smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P 80,000 P 40,000
Building – cost to Jones 300,000
- Fair value 400,000
Inventory – cost to Smith 200,000
- Fair value 280,000
Mortgage payable 120,000
Accounts payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership.
What is the balance in each partner’s capital account for financial accounting purposes?
Jones Smith
Assets at fair value
Jones: P800,000 + P400,000 P480,000
Smith: P400,000 + P280,000 P320,000
Less: Liabilities assumed 120,000 60,000
Capital P360,000 P260,000
The profit and loss statement of the partnership for the year ended December 31, 2013 is as
follows:
15. A, B, and C are partners in an accounting firm. Their capital account balances at year-end were
A P90,000; B P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the
following special terms:
Assuming a net income of P44,000 for the year, the total profit share of Partner C was:
16. CC and DD are partners who share profits and losses in the ratio of 7:3, respectively. On
October 21, 2013, their respective capital account is as follows:
CC P35,000
DD 30,000
P65,000
On that date they agreed to admit EE as a partner with a one-third interest in the capital and
profits and losses, and upon his investment of P25,000. The new partnership will begin with a
total capital of P90,000. Immediately after EE’s admission, what are the capital balance of
CC, DD and EE, respectively?
Following the admission of EE, the partnership began with a total capital of P90,000, and EE
received a one-third interest; therefore his capital balance must be credited for P30,000
(P90,000 x 1/3). But EE contributes only P25,000, so the P5,000 difference represents bonus
(P30,000 – P25,000) must be debited and allocated to the old partners in the ratio of 7:3:
17. The partners’ capital (income-sharing ratio in parentheses) of Nunn, Owen, Park and Quan LLP
on May 31, 2014 were as follows:
On may 31, 2014, with the consent of Nunn, Owen and Quan:
Sam Park retired from the partnership and was paid P50,000 cash in full
settlement of his interest in the partnership.
Lois Reed was admitted to the partnership with a P20,000 cash investment for a
10% interest in the net assets of Nunn, Owen and Quan.
18. MM, NN and OO are partners with capital balances on December 31, 2013 of P300,000 and
P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that
OO is to take certain equipment with second-hand value of P50,000 and a note for the balance
of OO’s interest. The equipment are carried on the books at P65,000. Brand new equipment
may cost P80,000.
Compute for: (1) OO’s acquisition of the second-hand equipment will result to reduction
in capital; (2) the value of the note that will OO get from the partnership’s liquidation.
19. JJ & KK partnership’s balance sheet at December 31, 2012, reported the following:
On January 2, 2013, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the net
assets was P12,000 more than the carrying amount on the partnership’s books, of which P7,000
was assigned to tangible assets and P5,000 was assigned to goodwill. JJ and KK were each
issued 5,000 shares of the corporation’s P1 par value ordinary share. Immediately following
incorporation, share premium/additional paid-in-capital in excess of par should be
credited for:
20. After operating for five years, the books of the partnership of Bo and By showed the following
balances:
The non-cash assets are realized at book value therefore; there is no gain or loss, in which case
partners are entitled to received an amount equivalent to their capital interest.
INSTALLMENT SALES
On January 1, 2011, Art company sold its idle plant facility to Tony, Inc. for
P1,050,000.On this date, the plant had a depreciated cost of P735,000. Tony paid P150,000
cash on January 1, 2011 and signed a P900,000 note bearing interest at 10%. The note was
payable in three annual installments of P300,000 beginning January 1, 2012. Art appropriately
accounted for the sale under the installment method. Tony made a timely payment of the first
installment on January 1, 2012 of P390,000 which included interest of P90,000 to date of
payment.
At December 31, 2012, Art hast deferred gross profit of: P180,000
2. On October 1, 2011, Rodel Corporation, a real estate developer, sold land to Gerry Company
for P5,000,000. Gerry paid cash of P600,000 and signed a ten year P4,400,00 note bearing
interest at 12%. The carrying amount of the land was P4,000,000 on the date of sale. The note
was payable in forty quarterly principal installments of P110,000 beginning January 2, 2012.
Rodel appropriately accounts for the sale under the cost recovery method. On January 2, 2012,
Gerry paid the first principal installment of P110,000 and interest of P132,000.
For the year ended December 31, 2012, what total amount of income should Rodel
recognize from the land sale and the financing: P 0
3. Asser Computer Co. began operation at the beginning of 2012. During the year, it had cash
sales of P6,875,000 sales on installment basis of P16,500,000. Asser adds a markup on cost of
25% on cash sales and 50% on installment sales. Installment receivable at the end of 2012 is
P6,600,000.
4. The Molino Furniture Company appropriately used the installment sales method in accounting
for the following installment sale. During 2011, Molin o sold furniture to an individual for P3,000
at a gross profit of P1,200. On June 1, 2011, this installment account receivable had a balance
of P2,200 and it was determined that no further collections would be made . Molino, therefore,
repossessed the merchandise. When reacquired, the merchandise was appraised as being
worth only P1,000. In order to improve its salability, Bengal incurred costs of P100 for
reconditioning. Normal profit on resale is P200.
Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss
on repossession should be: P3,300 loss
6. Fryman Furniture uses the installment-sales method. No further collections could be made on
an account with a balance of P18,000. It was estimated that the repossessed furniture could be
sold as is for P5,400, or for P6,300 if P300 were spent reconditioning it. The gross profit rate on
the original sale was 40%.
21.
Determine the Realized Gross Profit and Interest Income for the year 2012, and
Unrecovered Cost as of December 31, 2012, respectively: P -0-; P -0-; P 17,462
Under the cost recovery method, no income is recognized on a sale until the
cost of the item sold is recovered through cash receipts. All cash receipts, both
interest and principal portions, are applied first to the cost of the items sold.
Then, all subsequent receipts are reported as revenue. Because all costs have
been recovered, the recognized revenue after the cost recovery represents
income (interest and realized gross profit). This method is used only when the
circumstances surrounding a sale are so uncertain that earlier recognition is
impossible.
8. Johnson Enterprises uses the cost recovery method for all installment sales. Complete the
following table:
Installment sales:
Cost of Installments Sales: P68,250 / (100%-35%)…… P105,000
9. Using the same information in No. 9, the collection in 2012 for 2011 sales : P43, 700
Cost of installments sales for 2011 Installments Sales ………… P56, 050
Less: Collections in 2011 for 2011 Installment Sales …………… 22, 800
Collections in 2012 for 2011 Installment Sales
( balancing figure) ………………………………… 43, 700
RGP on Installments Sales in 2012 for 2011
Installment Sales ………………………… ………………… P10,450*
10. Using the same information in No. 9, the realized gross profit on installment sales in
2011: 22, 400
11. Using the same information in No. 9, the realized gross profit on installment sales in
2010: Zero
12. The Precious Appliance Company started business on January 1, 2013. Separate accounts
were established for installment and cash sales.
On installment sales, the contract price is 106% of the cash sale price. A standard installment
contract is used whereby a down payment of ¼ of the installment price is required, with the
balance payable in 15 equal monthly installments. The interest charged per month is 1% of the
unpaid cash sales price equivalent. It is recognized in the period earned.
Installments receivable and installment sales are recorded at the contract price. When contracts
are defaulted, the unpaid balances are charged to Bad Debt Expense. Sales of defaulted
merchandise are credited to Bad Debt Expense.
The following data show the results of transactions in 2013:
Sales:
Cash sales P126,000
Installment sales 265,000
Repossessed sales 230
Merchandise inventory, January 1, 2013 58,060
Purchases 209,300
Merchandise inventory, December 31, 2013:
New merchandise 33,300
Repossessed inventory 180
Cash collections on installment contracts:
Down payments 66,250
Subsequent installment including interest of P9,252.84
(average of six monthly installment on all contracts,
except on defaulted contracts) 79,341
Five contracts totaling to P1060 were defaulted after 3 monthly installment payments.
The gross profit percentage in 2013 based on cash sales price equivalent is: 37.75%
Sales P 126,000
Installment Sales at Cash Sales (P265,000 / 1.06) 250,000
Total Sales at Cash Sales Price P 376,000
Less: Cost of Goods Sold:
Merchandise Inventory, 1/1/13 P 58,060
Add: Purchases 209,300
Cost of goods available for sale P 267,360
Less: Merchandise Inventory, 12/31/13 33,300 234,060
Gross Profit P 141,940
13. The following selected accounts are taken from the trial balance on December 31, 2012 of
Tacloban Company:
Additional information:
a. Gross profit rate on 2010 installment sales was 30% and for 2011, the rate was 32%.
b. Installment sales prices exceed cash sales prices by 24% while charge sales prices
exceed cash sales prices by 20%.
c. The entry for repossessed goods was:
Repossessed merchandise P15,000
Repossession loss 24,000
Installment receivables – 2010 P18,000
Installment receivables – 2011 21,000
d. Merchandise on hand at the end of 2012 (new and repossessed was P70,500.
(1) If all sales were on cash basis, the total sales for 2012, and (2) The cost of goods sold on
installment sales for 2012: (1) 600,000; (2) 234,000
14. Using the same information in No. 14, The cash collections on installment Sales for –
15. The trial balance of LOL Appliance Corporation as of the end of the fiscal year on September
30, 2012 is:
Debit
Accounts receivable P 100,000
Accounts payable P 100,000
Allowance for depreciation 33,750
Capital stock 125,000
Cash 46,250
Deferred gross profit – 2011 50,000
Equipment 112,500
Installment contract receivable – 2011 12,500
Installment contract receivable – 2012 150,000
Installment sales 375,000
Inventory, September 31, 2011 62,500
Loss on repossessions 3,750
Prepaid expenses 3,750
Purchases 435,000
Repossessions 2,000
Retained earnings 30,000
Sales __________ 312,500
Selling and administrative expenses 97,500
Total P1,026,250 P1,026,250
The post-closing trial balance on September 30, 2011 shows the following balances of certain
accounts:
The gross profit percentage on regular sales during the year was 30%.
The accountant made the following entry for a repossession on a sale of 2011 towards the end
of fiscal year:
Repossessions P2,500
Loss in repossessions 3,750
Installment contract receivable – 2011 P6,250
The inventory of new repossessed merchandise on September 30, 2012 amounted to P75,000
The total realized gross profit for the fiscal year September 30, 2012: P235,625
16. Using the same information in No. 16, the correcting entry for repossession made on a sale
of 2011 is:
Correcting Entry:
Deferred gross profit – 2011 3,125
Loss on repossession (P3,750 – P625) 3,125
Entry Made:
Repossessions 2,500
Loss on Repossessions 3,750
Installment contract receivable – 2011 6,250
Correct Entry:
Repossessions 2,500
Deferred gross profit – 2011 3,125
Loss on repossessions 625
Installment contract receivable – 2011 6,250
17. Using the same information in No. 16, compute the net income for the fiscal year September
30, 2012: P137,500
18. Sharon Company uses the installment sales method in accounting for its installment sales. On
January 1, 2013, Sharon Company had an installment accounts receivable from Rowena with a
balance of P18,000. During 2013, P4,000 was collected from Rowena. When no further
collection could be made, the merchandise sold to Rowena was repossessed. The merchandise
had a fair market value of P6,500 after the company spent for P600 for reconditioning of the
merchandise. The merchandise was originally sold with a gross profit rate of 40%.
19. On January 1, 2013, Janette Company sold 20,000 square meters of farmland for P600,000 to
Michelle, taking in exchange a 10% interest bearing note Janette Company purchased the
farmland in 2013 at a cost of P500,000. The note will be paid in three installments of P241,269
including interest each on December 31, 2013, 2014 and 2015. Shortly, after the sale Janette
Company learns distressing news about Michelle’s financial circumstances and because
collection is so uncertain and decides to account for the sale using the cost recovery method.
Determine the Realized Gross Profit and Interest Income for the year 2014, and
Uncovered Cost as of December 31, 2014, respectively.
Activity Based Costing (ABC) and Just in Time Costing System (JIT)
1. Uratex Company manufactures a variety of classroom chairs. Its job-costing system uses an
activity-based approach. There are two direct-cost categories (direct materials and direct labor)
and three indirect cost pools. The cost pools represent three activity areas at the plant.
The direct labor rate is P20 per hour. Assume no beginning or ending inventory.
What are the unit cost of the high school chair and the college chair?
College chair:
Manila company recently sold 50 can packaging machines to Ilocos Company. Each machine
has direct material costs of P3,000 requires 50 component parts, 12 machine-hours, 15
assembly-hours, and 4 inspection hours.
Manila Company’s previous costing system had one direct-cost category (direct materials)and
one indirect-cost category (manufacturing overhead allocated at the rate of P100 per assembly-
hours).
In comparison to the traditional costing system used by Manila Company, the total
manufacturing cost of the machines sold under the ABC is: P114,850 higher
3. Tamiya Corporation has used a traditional costing system to apply quality control costs
uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for its
Product X is P275,000. In an attempt to distribute quality control costs more equitable, Tamiya
is considering activity-based costing (ABC). The June data shown below have been gathered
for Product X.
Activity Cost Driver Cost Rates Quantity
What is the monthly quality control assigned to product X using the ABC?
P5,255 higher than the traditional costing system
ABC:
Material Handling (115 x 12) P 1,380
Inspection (P1.40 x 17,500) 24,500
Product certification (P770 x 25) 19,250 P 45,130
Traditional Costing (P275,000 x 14.5%) 39,875
ABC higher than the traditional costing by P 5,255
4. Malaysia Inc. accumulated the following cost information for its two products, A and B.
Product A Product B
Units Produced 2,000 1,000
Total direct labor hours 5,000 20,000
Set-up cost per batch P 1,000 P 2,000
Batch size 100 50
Total set-up cost incurred P 20,000 P 40,000
Direct labor hour per unit 2 1
A traditional costing system would allocate setup costs on the basis of direct labor hours. An
ABC system would trace costs by spreading the cost per batch over the units in a batch.
What is the setup cost per unit of Product A under each costing system.
5. Believing that its traditional cost system may be providing misleading information. BMW
Company is considering an activity based costing approach. It now employs a full cost system
and has been applying its manufacturing overhead on the basis of machine hours.
The company plans on using 50,000 direct labor hours and 30,000 machine hours in the coming
year. The following data show the manufacturing overhead that is budgeted.
Cost, sales, and production data for one of the company’s product for the coming year are as
follows:
Prime Costs:
Direct material cost per unit P4.40
Direct labor cost per unit, .05 direct
hour@P15 per hour 0.75
Sales and production data:
Expected sales 20,000 units
Batch size 5,000 units
Setups 2 per batch
Total parts per finished unit 5 parts
Machine hours required 80 machine hours per batch
If the company employs an activity-based costing system, the cost per unit for the
product described for the coming year will be: P6.30
Overhead rates:
Material Handling (P720,000 ÷ 6,000,000 parts) P 0.12
Setup costs (P315,000 ÷ 750 setups) 420.00
Machining costs (P540,000 ÷ 30,000 hours) 18.00
Quality control (P225,000 ÷ 500 batches) 450.00
Overhead costs:
Material handling (20,000 units x 5 parts) x P0.12 P 12,000
Setup costs activity (20,000 units/ 5,000 x 2 setups) x P420 3,360
Machining activity (20,000 units/ 5,000 x 80 hrs.) x P18 5,760
Quality Control activity (20,000 units/ 5,000) P450 1,800
Total P22,920
6. Edsa Company has materials cost in the June 1 Raw and in Process account of P10,000.
Materials received during June of P205,000 and materials cost in June 30 Raw and in Process
account of P12,500.
The amount to be backflushed from Raw and In process account to Finished Goods
account at the end of June would be: P202,500
7. The Love Company seeks to streamline the costing system at its Manila plant. It will use a
backflush costing system with three trigger points:
There are no beginning inventories. The following data pertain to April 2014:
Assume no material variances. The balance of RIP account at the end of April 2014 is:
P 30,000
8. The Maganda Manufacturing Company uses a Raw and in process (RIP) Inventory account. At
the end of each month, all inventories are counted, their conversion costs components are
estimated, and inventory account balances are adjusted accordingly. Raw materials cost is
backflushed from RIP account to Finished Goods account. The following data is for the month of
August:
The amount of direct materials and conversion costs to be backflushed to finished goods
are: P676,800 and P5,300 respectively
9. The Action Corporation manufactures electrical meters. For May, there were no beginning
inventories of raw materials and no beginning and ending work in process. Action uses a JIT
manufacturing system and backflush costing with three trigger points for making entries in the
accounting system:
Action’s May standard cost per meter are direct materials, P25; and conversion costs,
P20. The following data apply to May manufacturing:
Raw materials and components purchased P550,000
Conversion costs incurred P440,000
Number of finished units manufactured 21,000
Number of Finished units sold 20,000
The balances of Raw and in Process and Finished Goods inventory accounts at the end
of May are: P25,000 and P45,000 respectively
10. The Malakas Company produces telephones. For June, there were no beginning inventory of
raw materials and no beginning and ending work in process. Malakas uses a JIT manufacturing
system and backflush costing with two trigger points for making entries in its accounting system:
Malakas’ standard cost per unit of telephone in June are direct materials, P26; and conversion
costs, P15. The following data apply to June production:
The balances of Raw and in Process and Cost of Goods Sold accounts at the end of June
are: P308,000 and P7,872,000 respectively
11. Delta Machine Tool Incorporated produces varied product lines without the use of direct labor.
An extensive setup procedure is required. Because no single base for a predetermined
overhead rate will provide Delta with reliable product cost information, overhead is classified into
two cost pools and two predetermined overhead rates are used. For 2014, it is estimated that
total overhead costs will consist of P525,000 of overhead related to setups and P900,000 of
overhead related to machine usage. Total machine usage is expected to be 3,600 hours for the
year, and the total number of setups is expected to be 300.
Job RST required parts and materials costing P56,000, 70 hours of machine time, and four
setups.
Overhead Rates:
Per Machine Hour: P900,000/3,600 machine hours P 250
Per Setup: P525,000/300 setups P 1,750
12. The Hudy Manufacturing Company uses a Raw and In Process (RIP) inventory account and
expensed all conversion costs to the cost of goods sold account. At the end of each month, all
inventories are counted, their conversion cost components are estimated, and inventory account
balances are adjusted accordingly. Raw materials cost is backflushed from RIP to finished
goods. The following information is for the month of April:
What is the amount of materials used to be backflushed from RIP to finished goods:
P365,400
13. The HPI manufacturing Company produces only for customer order and most work is shipped
within thirty-six hours after the receipt of an order. HPI uses a Raw and In Process (RIP)
inventory account and expensed all conversion cost to the cost of goods sold account. At the
end of each month, inventory is counted, its conversion cost component is estimated, and the
RIP account balance is adjusted accordingly. Raw material cost is backflushed from RIP to Cost
of Goods Sold. The following information is for the month of May:
What is the amount of raw materials used to the backflushed from RIP to Cost of Goods
Sold? P247,000
14. Mike Tuazon general manager of a highly automated coffee production plant in Bulacan has
provided the following information for transactions that accured during October. The production
plant uses the JIT costing system.
What is the over-allocated or under-allocated conversion costs for the month? P105,000
15. Using the same information, assuming no adjustment has been made for over-allocated or
under-allocated conversion cost, what is the balance of the cost of goods sold account on
October 31? P1,600,000
16. Basilio Company has a cycle time of 3days, uses a RIP account, and changes all conversion
costs to Cost of Goods Sold. At the end of each month, all inventories are counted, their
conversion costs components are estimated, and inventory account balances are adjusted. Raw
material cost is bachflushed from RIP to Finished Goods. The following information is for June:
17. If Mike Company has material cost of P100,000 in the June 1 RIP inventory account, and
P12,500 in the June 30 RIP inventory account and the amount of raw materials used
backflushed from RIP inventory account on June 30 is P202,500.
What is the amount of raw materials purchased on credit for the month of June?
P205,000
18. A company has identified the following overhead costs and cost drivers for the coming year:
The following information was collected on three jobs that were completed during the year:
Budgeted direct labor cost was P100,000 and budgeted direct material cost was P280,000
If the company uses activity-based costing, how much overhead cost should be
allocated to Job 101? P1,300
ABC allocates overhead costs more precisely than traditional methods. It identifies the
activities associated with the incurrence of costs, determines the cost driver for each activity,
and allocates cost accordingly. Thus the cost per setup is P100 (P20,000 / 200), per inspection
P20 (P130,000 / 6,500), per material move P10 (P80,000 / 8,000), and per engineering hour
P50 (P50,000 / 1,000). The overhead allocated to Job 101 is therefore P1,300 [(1 setup x P100
+ (20 inspections x P20) + (30 material moves x P10) + (10 engineering hours x P50)].
19. Using the same information in No. 18, compute the cost of each unit of Job 102 Activity-
Based Costing: P340
The overhead costs for the activities are P100 per setup, P20 per inspection, P10 per
material move, and P50 per engineering hour. Thus, overhead allocated to Job 102 is P3,000
[(2 setups x P100) + (10 inspections x P20) + (10 material moves x P10) + (50 engineering
hours x P50)]. The production cost of Job 102 is P17,000 (P12,000 DM + P2,000 DL + P3,000
OH), and the cost per unit is P340 (P17,000 / 50).
20. Using the same information in No. 19, assuming the company prices its products at 140%
of cost and the company uses Activity-Based Costing the price of each unit of Job 103
would be: P98
The costs per job for the activities are P100 per setup, P20 per inspection, P10 per
material move, and P50 per engineering hour. Overhead allocated to Job 103 is P2,000 [(4
setups x P100 + (30 inspections x P20) + (50 material moves x P10) + (10 engineering hours x
P50)]. Hence, the production cost of Job 103 is P14,000 (P8,000 DM + P4,000 DL + P2,000
OH), the cost per unit is P70 (P14,000 / 200), and the price is P98 (140% x P70).
FRANCHISE ACCOUNTING
1. On April 1, 2014, Motorola, Inc. entered into a franchise agreement with a local businessman.
The franchisee paid P45,000 and gave a P30,000, 8%, 3 year nots payable with interest due
annually on March 31. Motorola recorded the P75,000 initial franchise fee as revenue on April 1,
2014. On December 30, 2014, the franchisee decided not to open the outlet under Motorola’s
name. Motorola cancelled the franchisee’s note and refunded P24,000 less accrued interest on
the note, of the P45,000 paid on April 1, what entry should Motorola make on December 30,
2014?
Revenue from Franchise Fees 75,000
Interest Income 1,800
Cash 22,200
Notes Receivable 30,000
Revenue from Repossessed Franchise 21,000
Since initial franchise fee of P75,000 was initially recognized as revenue on April 1, then
to cancel the franchise, simply debit the Revenue account.
Interest Income: P30,000 x 8% x 9/12 = P1,800
Cash paid: P24,000 – P1,800 = P22,200
2. On January 1, 2014, Brownie Delight, Inc. entered into a franchise agreement with a company
allowing the company to do business under Brownie Delight’s name. Brownie Delights had
performed substantially all required services by January 1, 2014, and the franchisee paid the
initial franchise fee of P70,000 in full on that date. The franchise agreement specifies that the
franchisee must pay a continuing franchise fee of P6,000 annualy, of wich 20% must be spent
on advertising by Brownie Delight.
What entry should Brownie Delight make on January 1, 2014 to record the receipt of the
initial franchise fee and the continuing franchise fee for 2014?
Cash 76,000
Franchise Fee Revenue 70,000
Revenue from Continuing Franchise Fee 4,800
Unearned Franchise Fee 1,200
3. On September 1, 2014, Cindy Company entered into franchise agreement with two franchisees.
The agreements required an initial fee payment of P700,000 plus four P300,000 payments due
every four (4) months, the first payment due December 31, 2014. The market interest rate is
12%. The initial deposit is refundable until substantial performance has been completed. The
following table describes each agreement:
Services
Performed Total Costs
Probability of by Franchisor Incurred to
Franchisee Full Collection Dec. 31, 2014 Dec. 31, 2014
A Likely Substantially P700,000
B Doubtful 25% N/A
The present and future value tables for four (4) periods were as follows:
What amount of net income to be reported in 2014, assuming P1,000,000 was received
from each franchisee during the year: Franchisee A – P1,132,529; Franchisee B – P43,559
Franchise A:
Franchise Revenue:
Downpayment P 700,000
PV of installment: P300,000 x 3.6299 1,088,970
Total P1,788,970
Less: Cost of Franchise 700,000
Gross profit P1, 088,970
Add: Interest Income (P1,088,970 x 4%) 43,559
Net Income P1,132,529
Franchise B:
4. Saisaki Co. grants a franchise to Mity for an initial franchise fee of P1,000,000. The agreement
provides that Saisaki has the option within one year to acquire franchisee’s business, and it
seems certain that Saisaki will exercise this option.
On Saisaki’s books, how should the initial fee be recorded? Deferred and treated as
reduction inSaisaki investment when the option is exercised.
5. SSR Restaurant Inc., sold a fastfood restaurant franchise to Shar. The sale agreement, signed
on January 2, 2014, called for a P30,000 down payment plus two P10,000 annual payments,
representing the value of initial purchase services rendered by SSR Restaurant. In addition, the
agreement required the franchisee to pay 5% of its gross revenue to the franchisor; this was
deemed sufficient to cover the cost and provide a reasonable profit margin on counting
franchise services to be performed by SSR Restaurant. The restaurant opened early in 2014,
and its sales for the year amounted to P500,000. Assuming a 10% interest rate is
appropriate, SSR Restaurant’s 2014 total revenue will be: (the present value of an annuity
of P1 at 10% for two periods in 1.7355) P74,090
Franchise Revenue:
On December 1, 2013, DJ Builders’ signed a franchising agreement for the U-belt are. By the
end of 2013, it was determined that the substantial performance of the initial services had cost
DJ Builders’ a total of P150,000 and that collection of the balance of the franchise fee has been
reasonably assured.
In its 2013 income statement, DJ Builders’ should repot franchise revenue and net
income of P500,000 and P350,000 respectively.
7. At the beginning of the year, AJD got the franchise of Tony’s, a known steak house of upscale
patronage. The franchise agreement required a P500,000 franchise fee payable P100,000 upon
signing of the franchise and the balance in four annual installments starting the end of the
current year. At present value using 12% as discount rate, the four installments would
approximate P199,650. The fees once paid are refundable. The franchise may be cancelled
subject to the provisions of the agreement. Should there be unpaid franchise fee attributed to
the balance of main fee, same would become due and demandable upon cancellation. Further,
the franchisor is entitled to a 5% fee on gross sales payable monthly within the first ten days of
the following month.
The Credit Investigation Bureau rated AJD as AAA credit rating. The balance of the franchise
fee was guaranteed by a commercial bank.
The first year of operations yielded gross sales of P9,000,000. Tony’s earned franchise
fees for the first year is: P450,000
Since the initial franchise fee is refundable, therefore, no amount from the P500,000
initial franchise fee be considered as revenue. The only revenue to be recognized is continuing
franchise fee of P450,000 (5% x P9,000,000).
8. Ruby Fruits Corporation enters into a franchise agreement with Rodel on June 1, 2011. As per
agreement, Rodel is to pay Ruby an up-front franchise fee of P1,000,000 and subsequent
annual franchise fees of P50,000 over the next four years. Cost of initial franchise services
rendered by Ruby during the year is P250,000 and estimates the cost of subsequent annual
services to be P100,000. Ruby expects a profit of 20% on subsequent services. Rodel paid the
annual fee for 2012 and Ruby rendered annual services for that year.
In its December 31, 2012 income statement, the realized franchise revenue to be reported
by Ruby is: P50,000
Upon receipt of Continuing Franchise Fee for 2011:
Cash 50,000
Revenue from CFF 25,000
Unearned CFF (50% x P50,000) 25,000
9. Nena’s Lechon, Inc. franchiser, entered into franchise agreement with Aling Nena, franchisee.
On Marche 31, 2014. The total franchise fee is P500,000, of which P100,000 is payable upon
signing and the balance in four equal annual installments. The downpayment is refundable n the
event the franchisor fails to render services and none thus far had been rendered.
When Nena’s prepares its financial statements on March 31, 2014, the franchise fee
revenue to be reported is: P 0
The franchise fee revenue should be zero, since, no substantial performance of service
had been performed (and the downpayment is still refundable).
10. Ferragamo’s entered into a franchise agreement with Rusty. As per agreement on July 1, 2014,
Rusty is to pay Ferragamo an up-front franchise fee of P1,000,000 and subsequent annual
franchise fees of P50,000 over the next four years. Cost of initial franchise services rendered by
Ferragamo’s during the year is P250,000 which is substantial, and is estimates the cost of
subsequent annual services to be P10,000. Rusty paid the annual franchises fee for 2015, and
Ferragamo’s rendered the services for the year. In its December 31, 2015 income statement,
the amount of realized franchise fee revenue to be reported by Ferragamo’s is: P50,000
In 2014, the initial franchise fee of P1,000,000 is recognized as revenue. Therefore, in
2015 the only amount of revenue to be recognized is the P50,000, the continuing franchisee
fee.
11. On May 31, 2013 , Kenny received P200,000 from Rogers representing the down payment on
the franchise agreement signed on that date. Rogers issued promissory notes for the balance of
P1,000,000, payable in four equal semi-annual installments. Franchise services are
substantially completed by Kenny on semi-annual installment due on November 20, 2013 at an
aggregate cost of P900,000. The first semi-annual installment due on November 30, 2013 was
appropriately paid by Rogers. Accordingly, Kenny uses the accrual method in recording
franchise revenue. In its December 31, 2013 financial statements, how much would Kenny
report as deferred franchise revenue for the year? P 0
Substantial performance of the services had been rendered, the period of refund has
been expired (problem is silent), and the collectability of the note is reasonably assured
(problem is silent). Therefore, the initial franchisee fee is considered revenue and no amount is
allotted to unearned franchisee revenue.
12. Amy, Inc. enters into an agreement with Ronald’s Co., clothing the later with full authority to
operate as its franchise for a period of ten years. An initial franchise fee of P275,000, among
others, was stipulated in the contract and was promptly paid during the year 2013.
Assuming that Amy was able to perform the initial services during 2013, what is the
franchise revenue to be recognized in its year-end income statement? P275,000
13. On September 31, 2013, Criselda’s Inc. received from Ambo P550,000 representing franchise
fee. Franchise services were immediately started by Criselda’s and these were completed on
October 31, 2013 at cost amounting to P330,000. The franchise fee revenue to be reported
by Criselda’s in its October 31, 2013 income statement is: P550,000
Substantial performance had been rendered in 2013 and the remaining conditions are
assumed to have been met. Therefore, P550,000 is recognized as franchise fee revenue. The
cost P330,000 is not deducted to compute the franchise fee revenue because the requirement
is franchise revenue and not gross profit or net income.
14. PJD Enterprises, a franchisor, charges franchisees a franchise fee of P500,000. Of this amount,
a nonrefundable P200,000 is paid upon the signing of the contract with the balance payable in
three equal installments after each year thereafter starting 2013. PJD will assist in locating a
suitable business site conduct a market study, oversee the construction of facilities, and provide
initial training for employees.
On October 1, 2013, PJD entered into a franchising agreement to cover an entirely new
untested area. By December 31, 2013, PJD had substantially completed and rendered
appropriate services at a total cost of P150,000 but, somehow, has raised some doubts on the
collectability of the balance of the franchise fee. In its 2013 income statement, PJD
Enterprises should recognize profit of: P350,000
Collection in 2013 P200,000
Multiplied by: Gross profit rate
[100% - (P150,000 / P500,000)] 70%
Realized gross profit in 2013 P140,000
16. On December 31, 2013, RR Inc. authorized Fay to operate as a franchisee for an initial
franchise fee of P75,000. Of this amount, P30,000 was received upon signing the agreement,
and the balance, represented by a note, is due in three annual payments of P15,000 each,
beginning December 31, 2014. The present value of December 31, 2013 of the three annual
payments appropriately discounted is P36,000. According to the agreements, the nonrefundable
down payment represents a fair measure of the services already performed by RR, however,
substantial future services are required of RR. Collectability of the note is reasonably certain.
On December 31, 2013. RR should record unearned franchise fees in respect of the Fay
franchise of P36,000
The P30,000 down payment received by RR Inc. represents the earned franchise fee
revenue in 2013 since the problem already stated that the nonrefundable downpayment
represents a fair measure of the services already performed by RR, Inc. the present value of the
three annual payments to be received in the future of P36,000, should be reported as of
December 31, 2013 as unearned franchise fees:
Cash 30,000
Notes Receivable 45,000
Unearned interest income 9,000
Franchise revenue 30,000
Unearned franchise revenue 36,000
17. Ruby Co. charges new franchisees an initial fee of P2,500,000. Of this amount, P1,000,000 is
payable in cash when the agreement is signed, and the remainder is to be paid in three equal
annual installments which are evidenced by interest-bearing promissory notes. In consideration
therefore, Ruby Co. will assist in locating the business site, conduct a market study to estimate
earnings potentials, supervise construction of a building, and provide initial training to
employees.
On December 3, 2013, Ruby Co. entered into a franchising agreement with Jade, Inc. by the
end of the year, Ruby Co. has completed about 25% of the initial services at a cost of P150,000
and it has ascertained that collection of the notes is reasonably assured. For 2013, Ruby Co.
should recognized franchise revenue of: P 0
Since 25% completion of initial services is not substantial, therefore, the P2,500,000
initial franchise fee lacks one condition in order to be recognized as revenue.
18. Shake, Inc. granted a franchise to Drake for the greenbelt area. Drake was to pay a franchise
fee of P100,000 payable in five equal annual installments starting with the payment upon
signing of the agreement. The franchisee was to pay monthly 1% of gross sales of the
preceding month. Should the operation of the outlet prove to be unprofitable in the first year of
operations the franchise fee may be cancelled with whatever obligation owing Shake, Inc. in
connection with the P100,000 franchise fee, waived.
On the same year of granting the initial franchise fee, the first year operation generated a gross
sales of P500,000 which is considered to be profitable operations. For the first year, Shake,
Inc. earned franchise fee of: P105,000
19. Tony awarded its Cebu franchise to Jara Co. for a total fee of P100,000. Of the said amount,
P50,000 was payable upon the signing of the agreement and the balance in two equal annual
payments. The contact provided that in the event the first year would result in an operating loss,
the franchising agreement may be cancelled. No services had so far been rendered. The entry
to record the granting of the Cebu franchise by Tony to Jara Co was as follows:
Obviously, at the time of signing the contract, substantial performance of services has
not yet been rendered, unless otherwise stated. So the P100,000 initial franchise fee is not a
revenue but unearned franchise revenue.
20. Swabe, Inc. charges an initial franchise fee of P500,000 for the right to operate as a franchise of
Swabe. Of this amount, P100,000 is payable when the agreement was signed and the balance
is payable in a noninterest bearing note in five annual payments of P80,000 each. In return for
the initial franchise fee, the franchisor will help locate the site, negotiate the lease or purchase of
the site, supervise the construction activity, and provide the book keeping services. The credit
rating of the franchise indicates that money can be borrowed at 8%. The present value of an
ordinary annuity of five annual receipts of P80,000 each discounted at 8% is P319,416.80. the
discount represents the interest revenue to be accrued by the franchisor over the payment
period.
If the probability of refunding the initial franchise fee is extremely low, the amount of
future services to be provided to the franchisee is minimal, collectability of the note is
reasonably assured and substantial performance has accrued: EARNED P419,416.80
Cash P100,000.00
Note at present value 319,416.80
P419,316.80
CONSTRUCTION ACCOUNTING
1. Jenny Construction Co. has two projects for which it reported, as of December 31, 2013 the
following information:
In thousand pesos:
Proj. A Proj.B
Contract price P4,800 P860
2011: Cost incurred P3,400
Percent completed 75%
2012: Cost incurred P1,250 P140
Percent completed 25% 15%
2. Lovely Construction Co. was engaged on October 1, 2013 to construct a building for a contract
price of P8,400,000 payable in 5 installments. 1/5 of the contract price was to be paid upod
completion of each quarter of the work, the final payment being due within 10 days after
acceptance of the completed project.
By December 29, 2013, 3/4 of the building had been completed whereupon the third billing was
made in accordance with the term of the contract (cash had been received on the previous
billings). During 2013, a total of P4,200,000 had been disbursed by Lovely for costs incurred
and, at year-end, outstanding accounts payable for materials purchases totaled P1,000,000.
Lovely expected that an additional P1,800,000 would be required to complete the project.
4. On September 30, 2013, Jojo Co, Inc was awarded the contract to build a 1,000-room hotel for
120 million. Among others, the parties agreed the following:
10% mobilization fee (deductible from “final billing”) payable within ten days from the
signing of the contract;
Retention of 10% on all billings (to be paid with the final billing, upon completion and
acceptance of the project); and
Progress billings are to be paid within 2 weeks upon acceptance.
By the end of 2013, the company had presented one progress billing, corresponding to 10%
completion, which was evaluated and accepted by the client on December 29, 2013 for payment
in January of the next year.
5. Cocaine Builders, Inc. employs the cost-to-cost method in determining the percentage of
completion for revenue recognition. the company’s records show the following information on a
recently completed project for a contract price of P5,000,000.
P2,550,000
60% = ---------------------
T. E. C.
T. E C = P4,250,000
6. In 2011, AJD Construction Co. was contracted to build Village Company’s private road network
for P100 million. The project was estimated to be completed in two years, and the contract
provided for:
5% mobilization fee (to be conducted from the last billing) payable within 15 days after
the signing of the contract,
10% retention provision on all billings, and
Payment of progress billings within 10 days from acceptance.
AJD, which uses the percentage-of completion method of accounting, estimated a 25% gross
margin on the project. By the end of 2011, AJD had presented progress billings corresponding
to 50% completion all of the progress billings presented in 2011 was accepted, except the last
one for 10% which was accepted on January 2, 1012 with the exception of one bill for 8% which
was due on January 7, 2012, all of the billings accepted in 2011 were settled payments made by
Village Company in 2011 amounted to: P33,800,000
8. In 2011, Joey Builders was contracted to build the private road network of Althea Subdivision for
P100 million. The project was expected to be finished in 2 years, and the contract provided for:
o 5% mobilization fee (to be deducted from the last billing), payable within 15 days from
the contract signing.
o A retention provision of 10% on all billings, payable with the final bill after the completed
project is accepted.
o Payment of progress billings within 7 days from acceptance.
Joey Builders, which uses the percentage-of-completion method of accounting for income,
estimated a 25% gross margin on the project. By the end of the year, Joey Builders had
presented progress billings to Althea corresponding to 50% completion. Althea accepted all the
bills presented, except one for 10% which was accepted o January 5 of next year. With the
exception of the second to the last billing for 8% which was due January 3 of next year, all
accepted billings were settled.
In 2011, Joey Builders realized gross profit from the project the amount of: P12,500,000
9. Dasma Corporation entered into a construction agreement in 2012 that called for a contract
price of P9,600,000. At the beginning of 2013, a change order increased the initial contract price
by P480,000. The company uses the percentage-of completion basis of revenue recognition. in
relation to the project, the following are obtained;
2012 2013
Cost incurred to date P4,920,000 P8,640,000
Estimated costs to complete 4,920,000 2,160,000
Billings made 5,280,000 8,520,000
Collection made 4,380,000 7,500,000
2011 2012
Contract price P9,600,000 P10,080,000
10. During 2011, Rizza started work on a P3,000,000 fixed-price construction contract. Any costs
incurred are expected to be recoverable. The accounting records disclosed the following date
for the year ended December 31, 2011;
11. Daryl Construction Company has consistently used the percentage-of-completion method of
recognizing income. During 2011, Daryl entered into a fixed-price contract to construct an office
building for P10,000,000. Information relating to the contract is as follows:
12/31/2011 12/31/2012
Percentage of completion 20% 60%
Estimated total cost at completion P7,500,000 P8,000,000
Income recognized (cumulative) 500,000 1,200,000
12. The October 1, 2010, Neo Corp. enters a contract to build a sport arena which it estimated
would cost P3,120,000. Neo bills its clients at cost plus 20% and recognized construction
revenue on a percentage-of-completion basis. Data on this project for 2010, 2011 and 2012
follow:
2011 2012
Contract Price (P3,120,000 x 120%) P3,744,000 P3,744,000
14. THE Kirby Construction Company has consistently used the cost recovery method –
construction accounting method of recognizing income (zero-profit approach)
In 2011, it began a construction project to erect a building for P3,000,000. The project was
completed during 2012, under this method, the accounting records disclosed the following:
(ANY COST INCURRD ARE EXPECTED TO BE RECOVERABLE)
The company should recognized revenue for the year amount to;
15. The following date relate to a construction job started by Jay Company during 2011:
Any costs incurred are expected to be recoverable. Under the cost recovery method-
construction accounting (zerp-profit approach). What amount should Jay Company
recognize as gross profit for 2011: P0
16. During 2011, Mitch Corporation started a construction job with a total contract price of
P600,000. Any costs incurred are expected to be recoverable. The job was completed on
December 15, 2012. Additional data are as follows;
2011 2012
Actual costs incurred P225,000 255,000
Estimated remaining costs 225,000
Billed to customer 240,000 360,000
Received from customer 225,000 375,000
Under the cost recovery method of construction accounting, what amount should Mitch
recognize as gross profit for 2011 and 2012/
2011 2012
Recognized revenue P225,000 P375,000
Less: Cost of long-term construction contract 225,000 255,000
Recognized gross profit in current year P 0 P120,000
17. Aibee Construction Company has consistently used the percentage-of-completion method. On
January 10, 2011, Aibee began work on a P6,000,000 construction contract. At the inception
date, the estimated cost of construction was P4,500,000. The following data relate to the
progress of the contract:
How much income should Aibee recognize for the year ended December 31, 2012?
300,000
19. Atom Inc. has entered into a very profitable fixed price contract for constructing a high-rise
building over a period of three years. It incurs the following costs relating to the contract during
the first year:
Cost of material = 2.5 million
Site labor cost = 2.0 million
Agreed administrative costs as per contract to be reimbursed by the customer = 1 million
Depreciation of the plant used for the construction = 0.05 million
Marketing costs for selling apartments, when they are ready = 1,0 million
The percentage of completion of this contract at the year-end is: 33 1/3% (=6.0/18.0)
20. IOM Builders, Inc. has consistently used the percentage-of-completion method of accounting for
construction-type contracts. During 2011, IOM started work on a P9,000,000 fixed-price
construction that was completed in 2012, IOM accounting records disclosed the following:
12/31/2011 12/31/2012
Cumulative contract costs incurred 3,900,000 6,300,000
Estimated total costs at completion 7,800,000 8,100,000
How much income would IOM have recognized on this contract for the year ended
December 31, 2012? 100,000
Contract Price 9,000,000 9,000,000
Less: Total Estimated Costs: 7,800,000 8,100,000
Estimated gross profit 1,200,000 900,000
Multiplied by: percentage-of-completion 39/78 63/81
Recognized gross profit to date 600,000 700,000
Less: Recognized gross profit in prior year ________ 600,000
Recognized gross profit each year – 2012 600,000 100,000
CORPORATE LIQUIDATION
1. Philippine National Bank holds a P500,000 note secured by a building owned by Luigi
Software, which has a filled for bankruptcy. If the property has a book value of P600,000
and a fair market value of P450,000, what is the best way to describe the notes held by
Philippine National Bank? The bank has
Answer: c
The 500,000 notes payable to PNB is considered as partially secured liabilities
wherein a property with a fair market value of P450,000 is used as collateral.
Therefore, PNB is secured to receive P450,000 because of the property while the
balance of P50,000 of the notes is unsecured.
2. A and B Inc. owes the Xylo Corporation P60,000 on account, which is secured by
accounts receivable with a book value of P50,000. The unsecured portion is considered
a claim under the bankruptcy law, A and B has filed for bankruptcy. Its statement of
affairs lists the accounts receivable securing the Xylo account with an estimated
realizable value of P45,000. If the dividend to general unsecured creditors is 80%, how
much can Xylo expect to receive?
a. P60,000 c. P57,000
b. 58,000 d. 48,000
Answer: c
The P60,000 owes to Xylo Corp. is considered a partially secured liabilities.
Accounts receivable with a realizable value of P45,000 is pledge to secure the
liability. Therefore, the estimated amount to be paid to Xylo Corp. would be as
follows:
a. P120,000 c. P36,000
b. 60,000 d. 0
Answer: b
Since the P Corp. expect to recover P.30 for every P1 liability. Therefore, the
unsecured liability of S Company that would be paid were as follows:
a. P600,000 c. P108,000
b. 180,000 d. 0
Answer: d
This problem is similar to No. 3 except that the question involves payment for its
investment in S Company. Remember that receivables and payables transacted
between parent and subsidiary still exist on their separate balance sheet. So,
when collection or payment is made, it will still be journalized in the usual
manner, like an ordinary collection or payment of an account which does not
affect at all investment in subsidiary account.
5. Kent Inc. has forced into bankruptcy and has begun to liquidate. Unsecured claims will
be paid at the rate of 40 cents on the peso. Apex Co. holds a non-interest bearing note
receivable from Kent in the amount of P100,000, collateralized by machinery with a
liquidation value of P25,000. The total amount to be realized by Apex on this note
receivable is:
a. P25,000 c. P55,000
b. 40,000 d. 65,000
Answer: c
Apex Co. has a secured claim for the P25,000 liquidation value of the machinery.
The remaining P75,000 (P100,000 note – P25,000) is an unsecured claim. Given
that unsecured claims will be paid at the rate of P.40 cents on the peso,
therefore, Apex will receive:
6. Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and
paying claims. Unsecured claims will be paid at the rate of forty cents on the peso. Hale
holds a P30,000 non-interest bearing note receivable from Seco collateralized by an
asset with a book value of P35,000 and a liquidation value of P5,000. The amount to be
realized by Hale on this note is
a. P5,000 c. P15,000
b. 12,000 d. 17,000
Answer: c
Claims of secured creditors be satisfied before any unsecured claims are paid.
Hale is a secured creditor in the amount of P5,000 (the liquidation value of the
collateral). The remainder of Hale’s claim (P30,000 – P5,000 = P25,000) is an
unsecured claim, because it is not secured by any collateral. Therefore, Hale, will
receive a total of P15,000 on this note:
a. P10,250 c. P8,675
b. 10,000 d. 8,000
Answer: c
Inventory at selling price P 8,000
Add: Portion free assets used to pay the unsecured
amount (P10,250 – P8,000) x 30% 675
P 8,675
8. The trust for Ardolio, Inc. prepares a statement of affairs which shows that unsecured
creditors whose claims total P60,000 may expect to receive approximately P36,000 if
assets are sold for the benefit of creditors.
Answer: d
Michael’s salary is an unsecured with priority, therefore he receives the full
amount. Meldcan: P1,050 x (P36,000 / P60,000)= P630
Compboy: P5,000 + (P6,300 – P5,000) x 60% = P5,780
Serpor: Fully secured creditor, receive P2,650 (P2,500 + P150)
9. Erap Co. filed a voluntary bankruptcy petition on August 15, 2008, and the statement of
affairs reflects the following amounts:
Liabilities:
Liabilities with priority P70,000
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
P1,070,000
Assume that the assets are converted to cash at the estimated current values and the
business is liquidated. What amount of cash will be available to pay unsecured non-
priority claims?
a. P240,000 c. P320,000
b. 280,000 d. 360,000
Answer: d
The total amount to pay all unsecured claims, including priority claims, is the
cash obtained from free assets (P320,000) and any excess cash available from
free assets pledged with fully secured creditors after they are used to satisfy
those claims (P370,000 – P260,000 = P110,000).
Therefore, the amount of cash to pay unsecured non-priority claims:
a. P6,000,000 c. P4,000,000
b. 5,000,000 d. 3,000,000
Answer: b
Car-cadillac, at net realizable value P4,000,000
Add: Portion of free assets used to pay unsecured
Amount; (P6,000,000 – P4,000,000) x 50% 1,000,000
P5,000,000
The journal entry made by trustee to record the assets and liabilities should include an
estate deficit of:
a. P31,500 c. P25,500
b. 31,000 d. 25,000
Answer: c
To compute the estate deficit before the actual realization and liquidation is
simply to formulate the basic accounting equation, i.e. Assets = Liabilities +
Stockholder’s equity. Therefore:
12. Using the same information in Number 11, the statement of affairs prepared by the
trustee at this time should include an estimated deficiency to unsecured creditors of:
a. P45,000 c. P31,500
b. 39,000 d. 25,500
Answer: c
Assets:
Cash P100,000
Approved claims:
Mortgage payable (secured by property
that was sold for P50,000) P 80,000
Accounts payable, unsecured 50,000
Administrative expenses payable,
Unsecured 8,000
Salaries payable, unsecured 2,000
P140,000
The administrative expenses are for trustees and other costs of administering the debtor
corporation’s estate.
How should the P100,000 be distributed to the following creditors?
a. P - P 80,000 P20,000
b. 10,000 80,000 10,000
c. 5,000 65,000 25,000
d. 10,000 65,000 25,000
Answer: d
Cash available P100,000
Less: Mortgage payable secured by property 50,000
Amount available to unsecured creditors P 50,000
Less: Unsecured creditors with priority
Administrative expenses P 8,000
Salaries payable 2,000 10,000
Net free assets or amount available to
Unsecured creditors with priority P 40,000
Expected recovery percentage of unsecured creditors
P40,000 / (P80,000 – P50,000) + P50,000 P .50
14. The following data were taken from the statement of affairs for Liquo Company:
Answer: a
15. Katherine, a CPA, has prepared a statement of affairs. Assets which there are no
claims or liens are expected to produce P70,000, which must be allocated to
unsecured claims of all classes totaling P105,000. The following are some of the
claims outstanding:
Answer: d
Total free assets P 70,000
Less: Unsecured Creditors with Priority:
Administrative expenses – accounting fees P1,500
Unpaid income taxes 3,500 5,000
Net free assets P 65,000
Total Unsecured Creditors without Priority:
Total Unsecured Claims of all classes P105,000
Less: Unsecured Creditors with Priority 5,000
Total Unsecured Creditors without Priority P100,000
% of Recovery; P65,000 / P100,000 = 65%
Estimated payment to partially secured creditors:
Realizable value of A/R (60% x P4,000) P 2,400
Add: Unsecured Portion: 65% (P3,000 – P2,400) 390
Total P 2,790
16. Palubog Co. is insolvent and its statement of affairs shows the following
information:
a. P.30 c. P .57
b. .43 d. .70
Answer: d
Estimated losses on realization of assets
P2,000,000
Less: Estimated gains on realization of assets P1,440,000
Additional assets 1,280,000 2,720,000
Estimated net (gain) or loss in assets realization P
(720,000)
Add: Additional liabilities
960,000
Estimated net (gain) or loss P
240,000
Less: Stockholder’s equity:
Capital Stock P2,000,000
Deficit 1,200,000 800,000
Estimated amount to be recovered by stockholders P
560,000
Therefore, the pro-rate payment on the peso is:
Estimated amount to be recovered by stockholders=P560,000 = P.70
Stockholder’s Equity P800,000
17. Zero Na Corp. has been undergoing liquidation since January 1. As of March 31,
its condensed statement of realization and liquidation is presented below:
Assets:
Assets to be realized P1,375,000
Assets acquired 750,000
Assets realized 1,200,000
Assets not realized 1,375,000
Liabilities:
Liabilities liquidated P1,875,000
Liabilities not liquidated 1,700,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000
The net gain (loss) for the three-month period ending March 31 is:
a. P250,000 c. P425,000
b. (325,000) d. 750,000
Answer: c
Statement of Realization and Liquidation Credits:
Assets realized P1,200,000
Assets not realized 1,375,000
Liabilities to be liquidated 2,250,000
Supplementary credits* 2,800,000
Total credits P9,250,000
*Supplementary credits are revenue or income items such as sales, interest income etc.
**Supplementary debits are cost and expense items such as purchases, expenses, etc.
18. Using the same information on No. 17, compute the ending cash balance of cash
account assuming that common stock and deficit are P1,500,000 and P500,000,
respectively.
a. P425,000 c. P1,325,000
b. P575,000 d. P1,375,000
Answer: c
The solution simply utilize the basic accounting equation of Assets = Liabilities +
Stockholder’s Equity (SHE), thus:
Common Stock P1,500,000
Deficits (500,000)
Stockholder’s Equity (SHE) P1,000,000
Add: Liabilities not liquidated 1,700,000
Total Liabilities and SHE P2,700,000
Less: Assets not realized (or end) 1,375,000
Cash balance, ending P1,325,000
19. The Palubog Company has decided to seek liquidation after previous
restructuring and quasi-reorganization attempts failed. The company has the
following condensed balance sheet as of May 1, 2011:
The equipment loan payable is secured by specific plant assets having a book
value of P300,000 and a realizable value of P350,000. Of the account payable,
P40,000 is secured by inventory which has a cost of P40,000 and a liquidation
value of P44,000. The balance of the inventory has a realizable value of
P32,000. Receivables with a book value and market value of P100,000 and
P80,000 respectively have been pledged as collateral on the business loan
payable. The balance of the receivables have a realizable value of P150,000.
Answer: a
Claims of unsecured creditors must be satisfied to whatever extent possible in
the following order of priority:
1. Expenses to administer the estate
2. Unpaid salaries, etc.
20. The realizable value of assets pledged with fully secured creditors is:
a. P459,000 c. P40,000
b. 44,000 d. 489,000
Answer: b
Of all the assets listed only inventory is classified as an asset pledged to fully
secured creditors with a realizable value of P44,000 (book value of accounts
payable is P40,000).
CASH FLOW
At the beginning of 2012, the entity purchased additional assets at a cost of P5,000,000
on cash basis. Each year, these assets provide additional cash revenue of P5,000,000
and incur cash expenses of P2,000,000. The assets have a 10-year life and the entity
uses the straight line depreciation for all assets. The existing assets produced the same
cash revenue and incur the same expenses as in 2011. The income tax is paid every
April 15 of each year.
What is the net cash provided by operating activities for the current year?
6,500,000
2. The cash balance of Darwin Company on January 1, 2011 was P8,000,000. During
2011, the changes in certain accounts were:
Total sales and cost of goods old were P30,000,000 and P20,000,000 respectively. All
sales and purchases were made on credit. Various expenses of P5,000,000 were paid
in cash. There were no other pertinent transactions.
3. BUMPER Company’s statement of cash flows for the current year shows cash flow from
operations of P1,840,000.
4. Claire Company reported interest expense in 2011 and 2010 of P1,500,000 and
P1,200,000, respectively. The balance in accrued interest payable at the end of 2011,
2010 and 2009 was P600,000, P700,000 and P500,000, respectively. In addition, a note
to Claire Company’s 2011 financial statements included the following:
Interest costs related to construction in progress are capitalized as incurred. The entity
capitalized P300,000 and P250,000 of interest costs during the year 2011 and 2010,
respectively.
What amount of interest was paid in 2011 net of the amount capitalized as
construction in progress? 1,600,000
Lance reported revenue from customers of P7,500,000 for the current year. What
amount of cash was received from the customers? 7,000,000
Sales 7,500,000
Increase in accounts receivable ( 500,000)
Cash received from customer 7,000,000
6. Sarah Company reported bonds payable of P4,700,000 on December 31, 2010 and
P5,000,000 on December 31, 2011. During 2011, Sarah issued P2,000,000 of bonds
payable in exchange for equipment. There was no amortization of premium or discount
during the year.
2011 2010
Retained earnings 3,000,000 2,500,000
Dividend payable 1,200,000 1,800,000
Net income 2,000,000
What amount was paid for dividends during the current year? 2,100,000
10. Dan Company collected the following data for the current year:
12. Jazz Company provided the following for the current year:
Total sales were P12,000,000 for 2011 and P11,000 for 2010. Cash sales were
20% of total sales each year. Cost of goods sold was P8,400,000 for 2011.
Variable general and administrative expenses for 2011 were P1,200,000. They
have varied in proportion to sales, 50% have been paid in the year incurred and
50% the following year. Unpaid G&A expenses are not included in accounts
payable.
Fixed G&A expenses, including P350,000 depreciation and P50,000 bad debt,
totaled P1,000,000 each year. 80% of fixed G&A expenses involving cash were
paid in the year incurred and 20% the following year. Each year there was a
P50,000 bad debt estimate and a P50,000 writeoff. Unpaid G&A expenses are
not included in accounts payable.
2. The December 31, 2011 statement of financial position of Melisa Company showed
shareholder’s equity of P5,000,000. The share capital of P3,000,000 remained
unchanged during the year.
12/31/10 12/31/11
Share capital (P100 par value) 5,000,000 5,500,000
Share premium 1,500,000 2,500,000
Retained earnings 3,000,000 4,500,000
During 2011, the entity declared and paid cash dividend of P1,000,000 and also
declared and issued a stock dividend. There were no other changes in equity during
2011.
Effect on equity
Increase in assets 520,000
Decrease in liabilities 820,000
Net increase in equity 1,340,000
Shareholders’ equity – beginning 2,080,000
Shareholders’ equity – ending 3,420,000
5. Trend Company provided the following information for the current year:
The debt-to-equity ratio (liabilitites over equity) is 50% on December 31. What is the
balance of retained earnings on January 1? 1,300,000
6. Easy Company’s beginning and ending total liabilities were P840,000 and P1,000,000,
respectively. At year-end, owners’ equity was P2,600,000 and total assets were
P200,000 larger than at the beginning of the year. If new share capital issed exceeded
dividends paid by P240,000, what is the net income (loss) for the year? 200,000
loss
Increase
Increase in asset 200,000
Increase in liabilities (1,000,000 – 840,000) (160,000)
Increase in owners’ equity 40,000
Excess of share capital issued over dividends paid (240,000)
Net loss (200,000)
7. The following changes in Vela Company’s account balances occurred during the current
year:
Increase
Assets 8,900,000
Liabilities 2,700,000
Share capital 6,000,000
Share premium 600,000
Except for a P1,300,000 dividend payment and the year’s earnings, there were no
changes in retained earnings for the year. What is the net income for the current
year? P900,000
Increase in assets 8,900,000
Increase in liabilities (2,700,000)
Net increase in equity 6,200,000
Add: dividend 1,300,000
Total 7,500,000
Less: Increase in share capital 6,000,000
Increase in share premium 600,000 6,600,000
Net income 900,000
During the year, Isabel borrowed P4,000,000 in notes from the bank and paid off notes
of P3,000,000 and interest of P240,000. Interest of P100,000 is accrued on December
31. There was no interest payable at the beginning of the year.
In the current year, Isabel transferred certain trading securities to the business and
these were sold for P1,500,000 to finance purchase of merchandise. Isabel made
weekly withdrawals in the current year of P10,000.
Effect on equity
Increase Decrease
Decrease in cash 480,000
Increase in accounts receivable 300,000
Increase in inventory 3,100,000
Increase in accounts payable 420,000
Increase in notes payable (4,000,000 – 3,000,000) 1,000,000
Increase in accrued interest payable ________ 100,000
3,400,0002,000,000
10. The changes in all the account balances of Mac Company for the current year, except
for retained earnings, are as follows:
Increase
(Decrease)
Cash 790,000
Accounts receivable, net 240,000
Inventory 1,270,000
Investments ( 470,000)
Accounts payable ( 380,000)
Bonds payable 820,000
Share capital 1,250,000
Share premium 130,000
There were no entries in the retained earnings account except for net income and a
dividend declaration of P190,000 which was paid in the current year.
11. Daisy Santos started a retail merchandise business on January 1, 2011. During the
fiscal year ended December 31, 2011, the entity paid trade creditors P2,000,000 and
suffered a net loss of P350,000.
The ledger account pre-closing balances on December 31, 2011 include the following:
There were no withdrawals. All sales and purchases were on credit. The merchandise
account is debited for purchases and credited for sales.
Sales 2,050,000
Cost of Sales:
Purchases 2,750,000
Merchandise inventory – 12/31 ( 450,000) 2,300,000
Gross loss ( 250,000)
Expenses ( 100,000)
Net Loss ( 350,000)
14. Complex Company kept very limited records. On January 1, 2011, Complex Company
started business and issued share capital, 60,000 shares with P100 par, for the
following considerations:
Cash 500,000
Building (useful life, 15 years) 4,500,000
Land 1,500,000
6,500,000
An analysis of the bank statements showed total deposits, including the original cash
investment of P3,500,000. The balance in the bank statement on December 31, 2011,
was P250,000, out there were checks amounting to P50,000 dated in December but not
paid by the bank until January of next year. Cash on hand on December 31, 2011 was
P125,000 including customers’ deposit of P75,000.
During the year, Complex Company borrowed P500,000 from the bank and repaid
P125,000 and P25,000 interest. The proceeds of the loan were credited to the bank
account of Complex Company. Disbursements paid in cash during the year were as
follows:
Utilities 100,000
Salaries 100,000
Supplies 175,000
Taxes 25,000
Dividends 150,000
550,000
Sales 4,000,000
Cost of sales:
Purchases 3,055,000
Inventory – December 31, 2011 ( 755,000) 2,300,000
Gross income 1,700,000
Expenses:
Utilities 100,000
Salaries 100,000
Supplies 175,000
Taxes 25,000
Doubtful accounts 50,000
Depreciation – building (4,500,000/15) 300,000
Depreciation – equipment (400,000/5) 80,000
Interest expense (25,000 + 45,000) 70,000 900,000
Net income 800,000
18. What is the amount of total assets on December 31, 2011? 7,950,000
Cash 325,000
Accounts receivable 900,000
Allowance for doubtful accounts ( 50,000)
Inventory 755,000
Land 1,500,000
Building 4,500,000
Accumulated depreciation – building ( 300,000)
Equipment 400,000
Accumulated depreciation – equipment ( 80,000)
Total assets 7,950,000
Liabilities 800,000
Shareholders’ equity 7,150,000
Total liabilities and shareholders’ equity 7,950,000
19. What is the amount of total liabilities on December 31, 2011? 800,000
20. What is the amount of shareholders’ equity on December 31, 2011? 7,150,000