DOMALAON, LORIE JAE E.

HW # 3
ACT 123 MAY 1, 2017
INVENTORIES

EASY
1. Bulldog Company incurred the following costs:
Materials 800,000
Storage costs of finished goods 190,000
Irrecoverable purchase taxes 70,000
At what amount should the inventory be measures? P870,000
SOLUTION:
Materials 800,000
Irrecoverable purchase taxes 70,000
Total P 870,000

2. Tiger Company incurred the following costs in relation to a certain product:

Direct materials and labor P 190,000
Variable production overhead 30,000
Factory administrative costs 19,000
Fixed production costs 25,000

What is the correct measurement of the product? P 264,000

SOLUTION:
All costs are innventoriable.

3. Eagle Company provided the following information for the current year.

Merchandise purchased for resale 6,000,000

Freight in 150,000
Freight out 50,000
Purchase returns 28,000
Interest on inventory loan 200,000

What is the inventoriable cost of the purchase? P 6,122,000

SOLUTION:
Merchandise purchased for resale 6,000,000
Freight in 150,000
Purchase returns (28,000)
Inventoriable cost P 6,122,000

MODERATE

The following audited balances pertain to Panda Company.

Accounts payable:
January 1, 2016 P 286,924
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
December 31, 2016 737,824
Inventory balance:
January 1, 2016 815,386
December 31, 2016 488,874
Cost of goods sold 1,859,082

How much was paid by Panda Company to its suppliers in 2016? P 1,081,670
SOLUTION:
COGS 1,859,082
Inventory, end 488,874
Inventory, beg (815,386)
AP, beg 286,924
AP, end (737,824)
Amount paid to suppliers P 1,081,670

HARD

The following information was obtained from the statement of financial position of Pet, Inc.:
December 31, 2016 December 31, 2015
Cash P 706,600 P 200,000
Notes receivable - 50,000
Inventory ? 399,750
Accounts payable ? 150,000
All operating expenses are paid by Pet, Inc. with cash and all purchases of inventory are made
on account. Pet, Inc. sells only one product. All sales are cash sales which are made for P 100
per unit. Pet, Inc. purchases 1,500 units of inventory per month and values its inventory using
FIFO. The unit cost of inventory during January 2016, payments to suppliers totaled P943,400
and operating expenses totaled P440,000. The ending inventory for 2015 was valued at P65.00
per unit.

What is the total amount cost of inventory using FIFO on December 31,2016? P 385,900

SOLUTION:
Cash, beg 200,000
Collection 50,000
Sales(SQUEEZE) 1,840,000 1,890,000
Payments:
OpEx 440,000
AP 943,400 (1,383,400)
Cash, end P706,600
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
Number units sold:
1,840,000/P100 = 18,400 units

Total Purchases units 1,500 X 12 = 18,000 units

Total Inventory using FIFO:

December 1,500 67.40 P101,100

November 1,500 67.20 100,800
October 1,500 67.00 100,500
September(SQUEEZE) 1,250 66.80 83,500
5,750 P385,900

INVESTMENTS

EASY
1. On January 1,2016, Melon Corp. purchased debt securities for cash P 765,540 to be held
as financial assets at amortized cost. The securities have a face value of P 600,000, and
they mature in 15 years. The securities carry fixed interest of 10% that is receivable
semiannually, on June 30 and December 31. The prevailing market interest rate on
these debt securities is 7% compounded semiannually.

The interest income to be reported for 2016 using the effective interest rate method is?
P 53,476

SOLUTION:
January 1 – June 30 (P765,540 X 7% X ½) 26,794
July 1 – December 31 (766,334 X 7% X ½) 26,682
Interest income for 2016 P 53,476

2. Banana Company purchased P 160M of 8% bonds dated January 1, on January 1, 2016,

to be held as financial assets at amortized cost. On the acquisition date, the market yield
of bonds with similar risk and maturity was 10%. The company paid P132M for the price
of the bonds. Interest is received semiannually on June 30 and December 31. Due to
changes in market conditions, the fair value of the bonds at December 31,2016 was
P140M.
The unrealized holding gain or loss to be classified as component of other
comprehensive income at December 31,2016 is? P 0

SOLUTION:
No unrealized holding gain/loss shall be recognized on financial assets measured at
amortized cost.
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
3. On January 1, 2015, Berry Company purchased P2,000,000 face value bonds at a price of
P1,824,800 which will yield an interest rate of 10%. The nominal interest rate on the
bonds is 8% payable annually every December 31. The company’s business model is to
collect contractual cash flows that are solely payments of principal and interest.
On December 31, 2016, Berry Company changed the business model in managing the
bonds from collecting contract cash flows that are solely payments of principal and
interest to realizing short term gains. The market value of the bonds on January 1, 2017
is 105.

What is the carrying amount of the bonds on December 31, 2016? P1,872,008
SOLUTION:
Carrying amount Jan. 2016 1,847,280
Effective int. (1,847,280 X 10%) 184,728
Nominal int. (2,000,000 X 8%) 160,000 24,728
Carrying amount December 31,2016 P1,872,008

MODERATE

4. ChocoPie Corp. invested its excess cash in equity securities during 2016. The business
model for these investments is to profit from trading on price changes.
As of December 31,2016, the equity investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

AA 1,000 shares P45,000 P63,000
BB 2,000 120,000 126,000
CC 2,000 216,000 180,000
Total P381,000 P369,000

In the December 31,2016 statement of financial position, what should be reported as

carrying amount of the investments? P 369,000

SOLUTION:
Total FV of the investment P 369,000.

HARD
5. Kitty Company purchased the following non-trading equity securities during 2016:
Security Cost FV December 31,2016
X P 450,000 P 500,000
Y 500,000 800,000
At initial recognition, Kitty classified these securities as at fair value through other
comprehensive income. On July 28,2017, Kitty sold all the shares of Security Y for a total
of P 835,000. As of December 31, 2017 the shares of Security X had a fair value of P
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
200,000. No other activity occurred during 2017 in relation to the non-trading equity
securities portfolio.
What total amount should be credited to retained earnings as a result of the sale of
Security Y in 2017? P335,000
SOLUTION:
Cash proceeds P835,000
CV of Y, December 31,2016 800,000
Unrealized gain (800,000-500,000) 300,000
Total amount to be credited to RE P335,000

PPE

EASY

1. Happy Company acquires a new manufacturing equipment on January 1, 2016, on

installment basis. The deferred payment contract provides for a down payment of P
300,000 and an 8-year note for P 3,104,160. The note is to be paid in 8 equal annual
installments of P 388,020 including 10% interest. The payments are to be made on
December 31, 2016. The equipment has a cash price equivalent of P 2,370,000. Happy’s
financial year end is December 31.
What is the acquisition cost of the equipment? P 2,370,000
SOLUTION: cash price equivalent is the acquisition cost.

2. Sad Corp. has been experiencing a significant increase in customers’ demand for its
product. To expand its production capacity, Sad decided to purchase equipment from
Loner Lagi Company on January 2, 2016. Sad issues a P 2,400,000 5-year, non interest-
bearing note to Loner Lagi for the new equipment when the prevailing market rate of
interest for obligations of this nature is 12%. The company will pay off the note in five P
480,000 installments due at end of each year over the life of the note. Sad’s financial
year-end is December 31. The appropriate present value factor of an ordinary annuity of
1 at 12% for 5 periods is 3.6048.
How much is the discount on note payable? P 669,696

SOLUTION:
Cost of new equipment (480,000 X 3.6048) 1,730,304
Note Payable (2,400,000)
Discount P 669,696

3. Down company incurred the following expenditures in 2016:

Purchase of land P 7,892,000
Land survey 104,000
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
Fees for search of title for land 12,000
Building permit fee 70,000
Temporary quarters for construction crews 215,000
Cost to demolish old building 940,000
Excavation of basement 200,000
Special assessment for street project 40,000
Dividends 100,000
Damages awarded for injuries sustained in construction
(no insurance carried) 168,000
Cost of construction 58,000,000
Cost of paving parking lot adjoining building 800,000
Cost of shrubs, trees and other landscaping 660,000
A portion of the building site had been temporarily used by Down to operate a car park while
the building was being constructed. A total of P 325,000 was earned by Down from this
incidental activity.

What is the cost of land improvements? P 1,460,000

SOLUTION:
Cost of paving parking lot adjoining building 800,000
Cost of shrubs, trees and other landscaping 660,000
Cost of land improvements P 1,460,000

4. On March 1, 2016 Sea exchanged a number of used equipment plus cash for vacant land
adjacent to its plant facility. The land acquired is intended to be used for a parking lot.
The equipment had a combined carrying value of P 1,750,000 as Sea had recorded P
1,000,000 of accumulated depreciation against these assets. The equipment had a fair
market value of P 2,300,000 at the time of the transaction. To complete this transaction,
Sea paid P 950,000 cash for the land.
What is the cost of the land? P 3,250,000
SOLUTION:
FV P2,300,000
Cash paid 950,000
Cost of land P 3,250,000

5. On December 1, 2016, Gate purchased several assets of a small company. The lump sum
price of basket price amounted to P 10,500,000 and included the assets listed below:
Book Value Fair Value
Machinery and equipment P 3,000,000 P 2,500,000
Land 2,000,000 4,000,000
Building 3,500,000 6,000,000
Totals P 8,500,000 P 12,500,000
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
During its fiscal year ended May 31, 2017, Gate incurred P 400,000 for interest expense in
connection with the financing of these assets.
Purchase of machinery and equipment, land and buildings?
SOLUTION:
FV Fraction Allocated Cost
Machinery and equipment P 2,500,000 25/125 P2,100,000
Land 4,000,000 40/125 3,360,000
Building 6,000,000 60/125 5,040,000
Totals P 12,500,000 P 10,500,000

6. On June 1, 2016, Halo purchased equipment from Dragon Company under a deferred
payment plan. Halo issued a P 1,000,000 for-year non-interest bearing note to Dragon
for the new equipment. The loan agreement provides that Halo is to pay off the note in
four equal installments due at the end of each of the next four years. On the date of the
acquisition, the prevailing market rate of interest for obligations of this nature was 10%.
The following costs were incurred to complete this transaction:
Freight P 21,250
Installation 25,000
What is the cost of the equipment? P838,725
SOLUTION:
Present value (250,000 X 3.1699) 792,475
Freight 21,250
Installation 25,000
Total P 838,725

MODERATE

7. Choon Company constructs its own buildings. In 2015, a total of P 1,228,500 interest
was included as part of the cost of a new building just being completed.
The following is a summary of construction expenditures in 2016:
Accumulated in 2015, including a capitalized interest P 18,228,500
March 1 7,000,000
September 1 4,000,000
December 1 5,000,000
Total P 34,228,500
Choon has the following outstanding loans at December 31, 2016:
12% note related directly to new building: term,
5 years from beginning of construction P 10,000,000
General borrowings:
10% note issued prior to construction of new building;
term, 10 years 5,000,000
8% note issued prior to construction of new building;
term, 5 years 10,000,000
what is the capitalized rate? 8.67%
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
SOLUTION:
Principal Interest Cost
10 % note 5,000,000 500,000
8% note 10,000,000 800,000
15,000,000 1,300,000
Capitalization rate: 1,300,000/15,000,000 = 8.67%

8. Mandarin Corp. uses different kinds of machines in its manufacturing process. It

constructs this machine itself and acquires others from the manufacturers. The
following is recorded in 2016:
Cash paid for equipment P 250,000
Cost of transporting machine-insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,000
Insurance cost for 2016 4,500
Cost of training for personnel who will use the machine 7,500
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2016 to make it
operate more efficiently 22,500
What is the cost of the machine? P 350,500

SOLUTION:
Cash paid for equipment P 250,000
Cost of transporting machine-insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,000
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2016 to make it
operate more efficiently 22,500
Total cost of the machine? P 350,500

HARD

9. Orange Corp. uses different kinds of machines in its manufacturing process. It constructs
this machine itself and acquires others from the manufacturers. The following is
recorded in 2016:
Cost of materials to construct machine P210,000
Labor cost to construct machine 129,000
Allocated overhead cost 66,000
DOMALAON, LORIE JAE E. HW # 3
ACT 123 MAY 1, 2017
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Profit saved by self-construction 45,000
Safety inspection cost prior to use 12,000
What is the cost of the machine? P 483,000

SOLUTION:
Cost of materials to construct machine P210,000
Labor cost to construct machine 129,000
Allocated overhead cost 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Safety inspection cost prior to use 12,000
Total cost P 483,000

10. Baton Company buys a machine for P 228,600 on January 1, 2013. The maintenance
costs for the years 2013-2016 are as follows:
Year Cost
2013 P13,500
2014 10,800
2015 65,700
2016 18,900
2015 includes P 54,900 for cost of a new motor installed in December.

Baton company recorded the cost of the machine frame in one account at a cost of P 176,400
and the motor was recorded in a second account at a cost of P 52,200. Straight line method of
depreciation is used with a useful life of 10 years for the frame and 4 years for the motor.
Residual values are immaterial and thus ignored in the computation of depreciation charges.

What is the total machine-related expenses in 2013? P 44,190

SOLUTION:
Depreciation expense- frame (176,400/10) P17,640
Depreciation expense- motor(52,200/4) 13,050
Maintenance expense in 2013 13,500
Total expenses in 2013 P 44,190