INTERMEDIATE ACCOUNTING 1

Mid-Term Examination

PART 1 – THEORY (30 POINTS)

CASH AND CASH EQUIVALENTS (10 points)
1. Petty cash fund is
A. An exemption to imprest system
B. For payment of notes payable
C. An example of the imprest system
D. Solely for purchase of patties

2. Which of the following items would be added to the book balance on a bank reconciliation?
A. Deposit in transit
B. Service charge
C. Correction of an understatement of the accounts receivable due to error in recording check collection by the
heartbroken accountant
D. Correction of an overstatement of the accounts receivable due to error in recording check collection by the
hungry accountant

3. Which of the following items would be deducted from the book balance on a bank reconciliation?
A. Outstanding check
B. Proceeds from a matured time deposit
C. Correction of an understatement of the accounts receivable due to error in recording check collection by the
sleepy accountant
D. Correction of an overstatement of the accounts receivable due to error in recording check collection by the
thirsty accountant

4. Deposits held as compensating balances

A. If legally restricted and held against short-term credit may be included as cash.
B. Usually do not earn interest.
C. If legally restricted and held against long-term credit may be included among current assets.
D. None of these.

5. In reconciling the bank balance with the book cash balance, which of the following would NOT cause the bank
balance shown in the bank statement to be lower than the unadjusted balance?
A. Deposit in transit
B. Cash on hand at the company
C. Interest credited to the account by the bank
D. NSF checks from a customer, as reported on the bank statement

6. Which is NOT a key element of internal control over cash receipts?

A. Cash deposit on a regular basis
B. Daily entry in a voucher register
C. Daily recording of all cash receipts in the accounting records
D. Immediate counting by the person opening the mail or using the cash register

7. Bank overdrafts generally should be

A. reported as a deduction from the current asset section.
B. reported as a deduction from cash.
C. netted against cash and a net cash amount reported.
D. reported as a current liability.

8. Which of the following is not true?

A. The imprest petty cash system in effect adheres to the rule of disbursement by check.
B. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to adjust the
balance if not replenished at year-end.
C. The Petty Cash account is debited when the fund is replenished.
D. All of these are not true.

9. A Cash Over and Short account

a. is not generally accepted.
b. is debited when the petty cash fund proves out over.
c. is debited when the petty cash fund proves out short.
d. is a contra account to Cash.

10. When preparing a bank reconciliation, bank debits are

a. added to the bank statement balance.
b. deducted from the bank statement balance.
c. added to the balance per books.
d. deducted from the balance per books.

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 RECEIVABLES (10 points)

11. Receivables from affiliates are classified as

A. Current asset
B. Noncurrent asset
C. Either as current or noncurrent depending on the expectation of realizing them within one year or not
D. Either as current or noncurrent depending on the expectation of realizing them within the operating cycle or
not

12. When allowance method of recognizing uncollectible accounts is used, the entry to record the writeoff of a specific
account would
a. Decrease both accounts receivable and the allowance for uncollectible accounts
b. Decrease accounts receivable and increase the allowance for uncollectible accounts
c. Increase the allowance for uncollectible accounts and decrease net income
d. Decrease both accounts receivable and net income

13. When origination fees received is less than the direct origination costs incurred, the difference is similar to
a. Discount on Notes Receivable
b. Premium on Notes Receivable
c. Neither discount nor premium
d. Unearned Interest Income

14. All of the following are problems associated with the valuation of accounts receivable, except
A. Returns
B. Cash discounts under the net method
C. Allowances granted
D. Uncollectible accounts

15. Which of the following is an advantage of using the net price method for recording cash discounts on credit sales?
A. It eases communication with customers about their balances
B. It properly reflects current period sales revenue
C. It simplifies recording of sales returns and allowances
D. It requires less record-keeping efforts than the gross method

16. Determine the TRUE statement regarding factoring of Accounts Receivable without recourse
A. The transaction may be accounted for as either secured borrowing or a sale
B. The financing cost should be recognized ratably over the collection period of the receivables
C. The receivables are used as collateral for a promissory note issued to the factory by the owner of AR
D. The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables

17. If there is evidence that an impairment loss on loan receivable has been incurred, the loss is equal to the
A. Excess of the carrying amount of the loan receivable over the present value of the cash flows related to the
loan.
B. Excess of the of cash flows related to the loan over the carrying amount of the loan receivable.
C. Excess of the carrying amount of the loan over the principal amount of the loan.
D. Excess of the principal amount of the loan over its carrying amount.

18. Which of the following is not recorded as accounts receivable?

A. Customer’s accounts on which postdated checks are held.
B. Dishonored customer’s note
C. Assigned accounts receivable
D. Deposit on purchase of undelivered merchandise

19. Notes or accounts receivable from officers, employees, or affiliated companies should be reported in the statement
of financial position as
A. Current assets, if collectible within twelve months
B. Noncurrent assets only
C. Trade notes and accounts receivable if they otherwise qualify as current assets
D. Offset to capital

20. What is the effect in accounts receivable if credit sales are not recorded in accounting books during the current
year?
A. Overstated
B. Understated
C. Cannot be determined from the given information
D. No effect

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 INVENTORIES (10 points)

21. Which of the following statements is incorrect regarding LCNRV?

A. Net realizable value is the selling price less estimated costs to complete and estimated costs to make a sale.
B. Entities use an allowance account, the "allowance to reduce inventory to net realizable value."
C. In most situations, entities price inventory on a total inventory basis.
D. One of two methods may be used to record the income effect of valuing inventory at net realizable value.

22. Net realizable value is the general rule for value, which of the following types of inventory?
A. Inventories priced on an item by item basis but not those priced on a total inventory basis.
B. All of the choices are held at NRV
C. Computer components held for sale to manufacturers
D. Commodities held by broker-traders

23. Entities must allocate the cost of goods available for sale between
A. All of the choices are correct
B. The cost goods on hands at the beginning of the period as reported on the statement of financial position
and the cost of assets acquired or produced during the period
C. The income statement and the statement of financial position
D. The cost of goods on hand at the end of the period as reported on the statement of financial position and
the cost of goods acquired or produced during the period

24. Which of the following costs are included in cost of inventory?

A. Storage costs related to merchandise inventory
B. Storage costs related to finished goods
C. Storage costs related to goods in process
D. Storage costs related to materials inventory

25. Costs incurred in bringing the inventory to the present location and condition include
A. Storage costs not necessary in the production process before a further production stage
B. Abnormal amounts of wasted materials
C. Cost of designing product for specific customers
D. Salary of sales staff

26. Freight and other handling charges incurred in the transfer of goods from the consignor to consignee are
A. Expense on the part of the consignor
B. Inventoriable by the consignor
C. Inventoriable by the consignee
D. Expense on the part of the consignee

27. Current loss on purchase commitment would be recognized or appropriate under which of following conditions?
A. When commitments cannot be cancelled.
B. When commitments provide for price adjustments.
C. When hedging transactions prevent losses.
D. All of the above conditions

28. Which of the following statements is correct regarding LCNRV?

I. The Gain on reversal of inventory write-down is presented as an addition to the cost of sales section of
the statement of comprehensive income.
II. The Loss on inventory write-down account is presented as a deduction from the cost of sales section of
the statement of comprehensive income.
III. The allowance method is the most preferred method because the effects of write down and reversal of
write-down are clearly identified in the statement of comprehensive income under the cost of sales
section.

A. I, II and III
B. I and II
C. III only
D. II and III

29. If ending inventory is overstated, what is its effect in current year’s cost of sales and net income?
A. Both cost of sales and net income are understated
B. Both cost of sales and net income are overstated
C. Cost of sales is understated and net income is overstated
D. Cost of sales is overstated and net income is understated

30. Which of the following statements is not correct?

A. The inventory at the end of the accounting period for both FIFO-perpetual and FIFO-periodic are the same.

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 B. If prices are increasing, the cost of inventory at the end of the accounting period under FIFO method is higher
than the weighted average method.
C. When units are identical or interchangable, specific identification method may give an opportunity to profit
manipulation by selecting the particular units for delivery to customers.
D. Ending inventories under LIFO which is no longer acceptable in accounting are reported in terms of most
recent cost.

PART 2 – PROBLEMS (70 POINTS)

CASH AND CASH EQUIVALENTS (24 POINTS)

PROBLEM 1:
On June 30, 2020, the bank statement of Bacon Company had an ending balance of P 3,735,000. The following data
were assembled in the course of reconciling the bank balance:

• The bank erroneously credited Bacon Company for P 21,000 on June 22

• During the month, the bank charged back NSF checks amounting to P23,000 of which P 8,000 had been redeposited
by June 25
• Collection for June 30 totaling P 103,000 was deposited the following month
• Checks-outstanding on June 30 amounted to P302,000
• Note collected by the bank for Bacon Company was P80,000 and the corresponding bank charge was P 5,000

Question No. 1:
What is the unadjusted cash in bank per ledger on June 30,2020?

Solution:
Unadjusted bank balance 3,735,000
Deposit in transit 103,000
Outstanding checks (302,000)
Erroneous bank credit (21,000)
Notes collected, net (75,000)
NSF, net 15,000
Unadjusted book balance/Balance per ledger 3,455,000

PROBLEM 2:
Faye Company prepared the following bank reconciliation on June 30:

Balance per bank 9,800,000

Deposit in transit 400,000
Outstanding checks (1,400,000)
Balance per book 8,800,000

There were total deposits of P6,500,000 and charges for disbursement of P9,000,000 for July per bank statement. All
reconciliation items on June 30 cleared the bank on July 31. Checks outstanding amounted to P1,000,000 on July 31.

Question No. 2:
What is the amount of cash disbursement per book in July?

Solution:
Disbursements per bank 9,000,000
Less: OC (related to June) (1,400,000)
Add: OC (July) 1,000,000
Disbursements per book 8,600,000

PROBLEM 3:
Ace company provided the following information on December 31,2020:

Petty cash fund 50,000

Current account – First Bank 4,000,000
Current account – Second Bank (250,000)
Money market placement – Third Bank 1,000,000
Time deposit – Fourth Bank 2,000,000

• The petty cash fund included unreplenished December 2020 petty cash expense vouchers for P15,000 and an
employee check for P5,000 dated January 31,2021
• A check for P100,000 was drawn against First Bank current account dated and recorded December 29, 2020 but
delivered to payee on January 15, 2021

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• The Fourth Bank time deposit is set aside for land acquisition in early January 2021

Question No. 3:
What total amount should be reported as cash and cash equivalents on December 31, 2020?

Solution:
Supporting computation
PCF 50,000 – 15,000 – 5,000 30,000
First Bank 4,000,000 + 100,000 4,100,000
Money Market Placement 1,000,000
Total 5,130,000

PROBLEM 4
Oust the Turtle Company had the following account balances on December 31, 2020:

Cash in bank A – rank and file payroll account 200,000

Cash in bank B – savings account 123,456
Cash in bank C – checking account 2,500,555
Cash in bank D – savings account 2,000
Cash in bank E – checking account 676,777
Cash in bank F – managerial payroll account 711,711

Cash in bank E is set aside for plant expansion planned to start on January 15, 2021. Cash in bank C was used on
February 14, 2021 to buy land.

Question No. 4:
How much should be reported as cash on December 31, 2020?

Solution:
Cash in bank A – rank and file payroll account 200,000
Cash in bank B – savings account 123,456
Cash in bank C – checking account 2,500,555
Cash in bank D – savings account 2,000
Cash in bank F – managerial payroll account 711,711
Total cash on December 31, 2020 3,537,722

Notes:
Cash in bank C is not segregated on December 31, 2020, it was just simply used to buy land on February 15, 2021,
which was a future date as of December 31, 2020. Therefore, Company had no intention to use ash in bank C to buy
noncurrent asset on December 31, 2020.

PROBLEM 5
Company A had the following account balances on December 31, 2020:

Cash in bank A – rank and file payroll account 200,000

Cash in bank B – savings account 123,456
Cash in bank C – checking account 2,500,555
Cash in bank D – savings account 2,000
Cash in bank E – checking account 676,777
Cash in bank F – managerial payroll account 711,711

• Cash on bank C is set aside for payment of bonds payable, acquired on October 14, 2014, due on December 31,
2021
• Cash in bank E is segregated for purchase of inventories

Question No. 5:
How much should be reported as cash on December 31, 2020?

Cash in bank A – rank and file payroll account 200,000

Cash in bank B – savings account 123,456
Cash in bank C – checking account (Bonds are current) 2,500,555
Cash in bank D – savings account 2,000
Cash in bank E – checking account (Inventories are current) 676,777
Cash in bank F – managerial payroll account 711,711
4,214,499

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PROBLEM 6
Oust the Turtle Company has the following balances on December 31, 2020:

Cash on hand 4,500.00

Cash in bank A 33,000.00
Cash in bank X 50,000.00
Cash in bank C 822,999.72

• Cash on hand includes $ 3. Exchange rate on balance sheet date is P50.25: $ 1.

• Oust the Turtle Company wrote a check (Cash in bank A) worth ₱ 20,000 dated December 30, 2020 but is still
unreleased as of balance sheet date.
• Oust the Turtle Company released a check (Cash in bank X) dated January 1, 2021 worth ₱ 55,000 on December
20, 2020.
• Oust the Turtle Company wrote a check (Cash in bank C) worth ₱ 2,001.28 dated and released on December 31,
2020.

Question No. 6:
How much is Oust the Turtle Company’s cash on December 31, 2020? (Use two decimal places for centavos)

Solution:
Cash on hand 4,500.00
Cash in bank A 33,000 + 20,000 53,000.00
Cash in bank X 50,000 + 55,000 105,000.00
Cash in bank C 822,999.72
Total cash on December 31, 2020 985,499.72

PROBLEM 7
On December 31, 2020, Oust the Turtle Corporation had the following:

Petty cash fund 200,000

Cash in bank A 123,456
Time deposit acquired on April 1, 2020, maturing on January 1, 2021 2,500,555
Treasury bills maturing on December 31, 2021, acquired on December 31, 2020 2,000
Cash in bank B 676,777
Cash in bank C 711,711

• Cash in bank B is set aside for purchase of vehicles

• Cash in bank A is frozen by the court by virtue of a case filed by the Bureau of Internal Revenue

Question No. 7
How much should be reported as cash on December 31, 2020?

Petty cash fund 200,000

Cash in bank C 711,711
Cash balance, December 31, 2020 911,711

PROBLEM 8
Oust the Turtle Corporation’s petty cash fund, which has an imprest balance of P5,000 showed a composition when
counted as follows:

Bills 1,000
Coins 40
Vouchers – Transportation 1,200
Vouchers – Gasoline 889
Vouchers – Supplies 1,872
Question No. 8:
How much is petty cash fund?

Solution:
Bills 1,000
Coins 40
Overage (Count: P5,001 less Accountability: P5,000) (1)
Petty Cash Fund Balance 1,039

PROBLEM 9
In connection with your audit of Big Brother Corp. for the year ended December 31, 2014, you gathered the
following information:

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 Current account at Bank of the Philippine Islands P6,000,000
Current account at Equitable PCI Bank (300,000)
Payroll account 1,500,000
Foreign bank account – restricted (in USD) ** 60,000
Postage stamps 3,000
Employee’s post-dated check 12,000
IOU from a key officer 30,000
Credit memo from a vendor for a purchase return 60,000
Traveler’s check 150,000
Customer’s not-sufficient-funds check 45,000
Money orders 90,000
Petty cash fund (P12,000 in currency and expense vouchers for P17,500) 30,000
Treasury bills, due 3/31/15 (purchased 12/31/14) 600,000
Treasury bills, due 1/31/15 (purchased 1/1/14) 900,000
Change fund 10,000
Bond sinking fund 1,000,000

**current exchange rate as of December 31, 2014 is at P50 for every USD1.

Question No. 9:
What is the total cash and cash equivalent to be reported by the company in its December 31, 2014 balance sheet?

Solution:
Cash & Cash Noncurrent
Equivalent Asset
Current account at Bank of the Philippine Islands 6,000,000 6,000,000
Current account at Equitable PCI Bank (300,000)
Payroll account 1,500,000 1,500,000
Foreign bank account – restricted (in USD) ** 60,000 3,000,000
Postage stamps 3,000
Employee’s post-dated check 12,000
IOU from a key officer 30,000
Credit memo from a vendor for a purchase return 60,000
Traveler’s check 150,000 150,000
Customer’s not-sufficient-funds check 45,000
Money orders 90,000 90,000
Petty cash fund, currencies only 12,000 12,000
Treasury bills, due 3/31/15 (purchased 12/31/14) 600,000 600,000
Treasury bills, due 1/31/15 (purchased 1/1/14) 900,000
Change fund 10,000 10,000
Bond sinking fund 1,000,000 1,000,000
TOTAL 8,362,000

PROBLEM 10
The BOD of Nancy Inc. authorized the set-up of petty cash fund on December 1, 2020 with an imprest balance of
P30,000. The following transactions occurred in December in relation to the petty cash fund.

Dec. 1 A check amounting to P30,000 was drawn payable to Jo Torres, custodian.

15 Jo Torres presented the following petty cash vouchers with supporting documents for
replenishement. Currencies on hand was at P16,000.
PCV #/Date Particulars Amount
101/ Dec. 5 Utilities P5,000
102/ Dec. 9 Office supplies 4,500
103/ Dec. 13 Advances to employees 3,000

Question No. 10
What is the amount of the replenishment check on December 15?

Solution:
Petty cash fund imprest balance, December 15 30,000
Petty cash fund, per count, December 15
- Currencies on hand (16,000)
Replenishment check, December 15 14,000

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PROBLEM 11
The following information was included in the bank reconciliation for Reason Co. for July:

Checks & charges recorded by bank in July, including a July service charge of P2,800 1,232,600
Service charge made by bank in June and recorded in books in July 1,200
Total credits to cash in all journals in July 1,222,000
Customer’s NSF check returned as a bank charge in July (no entry made in books) 6,000
Customer’s NSF check returned in June, recorded by the company in July 15,000
Outstanding checks in July 31 300,000
Checks issued in July for P20,000 recorded by the company as 2,000
Erroneous bank charge in July 20,000
Erroneous bank credit in June corrected in July 30,000
Erroneous book receipt in June corrected in July 5,000

Question No. 11:

Assume all other reconciling items are listed above, what were the total outstanding checks at the end of June?

SOLUTION:
Bank disbursements 1,232,600
July service charge (2,800)
July NSF (6,000)
Error (20,000)
Error correction (30,000) 1,173,800

Book disbursements 1,222,000

Understatement of disbursements 18,000
June service charge (1,200)
June NSF (15,000)
Error correction (5,000)
Outstanding check, July (300,000) (918,800)
Outstanding check, June 255,000

PROBLEM 12
On December 15, 2020, Mar Company established an imprest cash fund for P 10,000 by writing a check drawn
against its general checking account. On December 31, 2020, the fund was replenished and contained the following;

Currencies and coins 3,000

Receipts for office supplies 4,000
Receipts for postage (P 500 is still unused) 2,000
Receipts for transportation 600

On December 31, the company wrote a check to replenish the fund.

Question No. 12:

What is the petty cash fund balance to be reported in the statement of financial position as of December 31, 2020?

Solution:
The PCF balance to be reported in the statement of financial position as of December 31, 2020 is P 10,000 which is
the amount after replenishment which happened also on the cut-off date of the financial statements.

RECEIVABLES (24 POINTS)

PROBLEM 13
Michael Company provided the following information about accounts receivable on December 31,2020:

0-60 days outstanding 6,000,000 5% uncollectible

61-120 days outstanding 4,500,000 10% uncollectible
Over 120 days outstanding 5,000,000 1,250,000 uncollectible

During 2020, the entity wrote off P700,000 in accounts receivable and recovered P300,000 that had been written off
in prior years. On January 1,2020, the allowance for uncollectible accounts was P500,000.

QUESTION NO. 13:

Under the aging method, what amount of uncollectible accounts expense should be reported for 2020?

SOLUTION:
0-60 days outstanding 6,000,000 x 5% 300,000
61-120 days outstanding 4,500,000 x 10% 450,000
Over 120 days outstanding 1,250,000 1,250,000

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 Total Accounts Receivable 11,750,000
Allowance for DA, ending, required/adjusted 2,000,000

Allowance for DA, beginning 500,000

Recovery 300,000
Write-off (700,000)
Doubtful accounts expense for 2020 (squeeze figure) 1,900,000
Allowance for DA, ending 2,000,000

PROBLEM 14
On December 31,2020, Elisha Company sold a machine in exchange for a noninterest-bearing note requiring ten
annual payments of P400,000. The first payment was made on December 31,2020. The market interest rate for
similar notes at date of issuance was 8%

Period Present value of 1 at 8% Present value of ordinary annuity of 1 at 8%

9 0.50 6.25
10 0.46 6.71

QUESTION NO. 14:

On December 31,2020, what amount should be reported as note receivable?

Solution:
P 400,000 face amount x 6.25 PVF = P 2,500,000

PROBLEM 15
The financial statements of Anne Company included in the following information for 2020:

January 1 December 31
Accounts receivable 1,200,000
Allowance for doubtful accounts 60,000
Sales 8,000,000
Cash collected from customers 7,000,000

The cash collections included a recovery of P10,000 from a customer whose account had been written off as worthless
in 2019. During 2020, it was necessary to recognized doubtful accounts expense of P100,000 and write off worthless
customers’ accounts P30,000. On December 1,2020, a customer settled an account by issuing a 12%, six-month note
for P400,000.

Question No. 15
What is the net realizable value of accounts receivable on December 31,2020?

Solution:
Accounts Receivable 1,200,000
Add: Sales 8,000,000
Less: Collections 7,000,000
Less: Write-off 30,000
Less: Reclassification to Notes 400,000
TOTAL 1,770,000

ADA, beginning 60,000

Add: doubtful Accounts expense 100,000
Less: Write-off 30,000
TOTAL 130,000
NRV 1,640,000

PROBLEM 16
On January 1, 2020, Oust the Turtle Company received a non-interest-bearing note for P400,000. The note is payable
in two equal installments, with the first payment to be made on December 31, 2021 and the next payment a year after.
The effective rate is 10%.

Question No. 16
How much is the present value of the note on January 1, 2020? (Round off present value factor and your answer to
two decimal places.)

Solution:
P200,000 (payable after 2 years, 12/31/21) 0.83 x 200,000 166,000
P200,000 (payable after 3 years, 12/31/22) 0.75 x 200,000 150,000
Present Value of Note 316,000

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PROBLEM 17
On January 1, 2020, Oust the Turtle Company received a non-interest-bearing note for P400,000. The note is payable
in two equal installments, with the first payment to be made on December 31, 2021 and the next payment a year after.
The effective rate is 10%.

Question No. 17
How much is the discount on notes receivable on January 1, 2020? (Round off present value factor and your answer
to two decimal places.)

Solution:
Face of Note 400,000
Present Value of Note (see problem 1) 316,000
Discount on Notes Receivable 84,000

PROBLEM 18
On January 1, 2020, Oust The Turtle Company received a non-interest-bearing note for P400,000. The note is payable
in two equal installments, with the first payment to be made on December 31, 2021 and the next payment a year after.
The effective rate is 10%.

Question No. 18
How much is the interest income on December 31, 2020? (Round off present value factor and your answer to two
decimal places.)

Solution:
Carrying Value 316,000
x Effective Rate 10%
Interest Income 31,600

PROBLEM 19
On June 30, 2020, the entity also discounted a customer’s note with recourse at a bank at a 10% discount rate. The
note is dated May 1, 2020 has a term of 90 days, a face value of P 6,000,000 and an interest rate of 9%. The entity
accounted for this transaction as a secured borrowing. The customer paid the note to the bank on maturity date

Question No. 19
What is the amount of proceeds from discounting the note on June 30, 2020?

SOLUTION:
Maturity value [P 6,000,000+ (P 6,000,000 x 9% x 3/12)] 6,135,000
Less: Discount 51,125
Proceeds 6,083,875

PROBLEM 20
On December 31, 2019, Jan Company sold used equipment with carrying amount of P 2,000,000 in exchange for a
non-interest-bearing note of P 5,000,000 requiring ten annual payments of P 500,000. The first payment was made on
December 31, 2020. The market interest for similar note was 12%. The present value of an ordinary annuity of 1 is
5.65 for ten periods and 5.33 for nine periods.

Question No. 20
What is the carrying amount of notes receivable on December 31, 2020?

Solution:
Carrying amount, 12/31/19 (500,000 x 5.65) 2,825,000
Less: Principal Payment (500,000)
Add: Amortization of discount 339,000
Carrying Amount, 12/31/2020 2,664,000

PROBLEM 21
At the end of its first year of operations, December 31, 2019, Cauayan, Inc. reported the following information:

Accounts receivable, net of allowance for doubtful accounts P 9,500,000

Customer accounts written off as uncollectible during 2019 240,000
Bad debts expense for 2019 840,000

Question No. 21

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What should be the balance in accounts receivable at December 31, 2020, before subtracting the allowance for
doubtful accounts?

Solution:
Bad debt expense for 2019 P 840,000
Customer accounts written off as uncollectible during 2019 (240,000)
Allowance for doubtful accounts, 12/31/2019 P 600,000

Accounts receivable, net of allowance for doubtful accounts P 9,500,000

Allowance for doubtful accounts, 12/31/2019 (See above computation) 600,000
Accounts receivable, before deducting allowance for doubtful accounts P 10,100,000

Notes:
Year 2019 is the first year of operations, therefore, no beginning balance of Allowance for Doubtful accounts.

Allowance for Doubtful Accounts

Debit Credit
Accounts written off in 2019 0 January 1 balance, unadjusted
(Uncollectible accounts) 240,000 840,000 Bad debts expense in 2019 (given)

600,000 December 31, 2019 balance

PROBLEM 22
The following accounts were taken from Cervantes Inc.’s balance sheet at December 31, 2019.

Debit Credit
Accounts receivable P 4,100,000
Allowance for doubtful accounts 100,000
Net credit sales P 7,500,000

Question No. 22
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2019.

Solution:
Accounts receivable P 4,100,000
Percentage 3%
Bad debt expense, before adjustment P 123,000
Allowance for doubtful accounts (debit balance) 100,000
Bad debt expense for 2019 P 223,000

PROBLEM 23
Tender Company accepted from a customer a P 4,000,000, 90-day, 12% note dated August 31, 2019. On September
30, 2019, the entity discounted without recourse the note at 15%. However, the proceeds were not received until
October 1, 2019.

Question No. 23
What amount was received from the note receivable discounting?

SOLUTION:
Face of notes receivable 4,000,000
Interest Income at maturity (P 4,000,000 x 12% x 90/360) 120,000
Maturity Value 4,120,000
Discount (P 4,120,000 x 15% x 60/360) (103,000)
Amount of cash received from the bank 4,017,000

Question No. 24:

What amount should be reported as loss on note receivable discounting?

SOLUTION:
Net Proceeds 4,017,000
Carrying amount:
Principal 4,000,000
Accrued Interest Receivable (P 4,000,000 x 12% x 40,000 (4,040,000)
1/12)
Loss on Notes Receivable Discounting (23,000)

Alternative solution – by Journal Entry:

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Cash 4,017,000
Loss on Notes Receivable Discounting (squeeze figure) 23,000
Interest Income 40,000
Notes Receivable 4,000,000

INVENTORIES (22 POINTS)

PROBLEM 24
Stevenson Company used the retail inventory method to estimate inventory:

COST RETAIL
Beginning inventory 700,000 1,000,000
Purchases 4,100,000 6,300,000
Net markups 700,000
Net markdown 500,000
Sales 6,600,000
Estimated normal shoplifting losses 200,000

Question No. 25:

Under the conventional retail method, what is the estimated cost of ending inventory?

Solution:
COST RETAIL Cost Ratio
Beginning inventory 700,000 1,000,000
Purchases 4,100,000 6,300,000
Net markups 700,000
GAS - CONSERVATIVE 4,800,000 8,000,000 60%
Net markdown (500,000)
TOTAL GAS 7,500,000
Sales (6,600,000)
Estimated normal shoplifting losses (200,000)
Total estimated ending inventory at retail 700,000 700,000
Multiply by cost ratio 60%
ESTIMATED ENDING INVENTORY AT COST 420,000

PROBLEM 25
Mary Company reported inventory on December 31,2020 at P1,500,000 based on a physical count priced at cost and
before any necessary adjustment for the following:

• Merchandise costing P90,000, shipped FOB shipping point from a vendor on December 30, 2020 was received and
recorded on January 5,2021
• Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2021.
The goods billed to the customer FOB shipping point on December 30, 2020 had a cost of P120,000

Question No. 26:

What amount should be reported as inventory on December 31,2020?

Solution:
Physical count 1,500,000
Purchases – FOB shipping point 90,000
Sale – FOB shipping point (but not yet shipped) 120,000
Total Inventory, 12/31/2020 1,710,000

PROBLEM 26
Rommel Company included the following in inventory at year-end:

Merchandise out on consignment, at sale price, including 40% markup on selling price 400,000
Goods purchased in transit shipped FOB shipping point 360,000
Goods held on consignment by Rommel Company 270,000

Question No. 27:

By what amount should be the inventory be reduced?

Solution:

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 Merchandise out on consignment (P 400,000 x 60%) 240,000
Goods purchased FOB Shipping Point 360,000
Goods held on Consignment by Rommel -
Should be amount included in inventory 600,000
Vs. Amount included in inventory 1,030,000
SHOULD BE DECREASED IN INVENTORY 430,000

PROBLEM 27
On June 30, 2020, Oust the Turtle Corporation entered into a purchase commitment with Doll O’ Might Company to
provide the corporation 1,000 metric tons of white sand on May 31, 2022 for P600 per metric ton. On December 31,
2020, the price per metric ton of white sand dipped to P590.

Question No. 28:

On December 31, 2021, the white sand retails at P605 per metric ton. How much is the gain recorded in 2021?

Solution:
Loss in 2020 (P10 x 1,000) 10,000
Recovery in 2021 up to extent of loss only 10,000

PROBLEM 28
Oust the Turtle Company records inventory using the perpetual inventory system and follows the allowance method
in accounting for inventory decline. Its ending inventory’s costs and net realizable values on the following dates are:

DATE COST NRV

December 31, 2020 380,000 370,000
December 31, 2021 400,000 385,000
December 31, 2022 200,000 192,000

Question No. 29:

How much is the loss from inventory decline in 2022?

Solution:
Zero, because 2022 resulted in gain on reversal of inventory writedown. Even though, NRV is lower than the cost,
the required allowance should only be P8,000 (P200,000 – P192,000), which is lower than the previous balance of
the allowance of P15,000 (P400,000 – P385,000) hence the recovery of loss instead of recording further loss.

PROBLEM 29
Oust the Turtle Corporation provided the following data as of December 31, 2020:

Items counted in the bodega 4,000,000

Items included in the count specifically segregated per sales contract 100,000
Items in receiving department, returned by customer, in good condition 50,000
Items ordered and in the receiving department, invoice not received 400,000
Items ordered, invoice received but goods not received. Burden of freight is on the buyer. 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently held on consignment and in bodega. 200,000
Items out on consignment. 800,000
Items in receiving department, refused by us because of damage 180,000
Items included in count, damaged. Net realizable value is P45,000. 50,000
Items sold and in the shipping department. Term is FOB Shipping Point. 250,000

Question No. 30:

How much is the amount of inventory?

Solution:
Items Amount Included Explanation
Items counted in the bodega 4,000,000 4,000,000
Items included in the count specifically Seller. Segregated per sales
segregated per sales contract 100,000 (100,000) contract. Assumed included among
the items counted in the bodega.
Items in receiving department, returned by Seller. In good condition, already
customer, in good condition 50,000 50,000 in the receiving department
(returns)

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 Items ordered and in the receiving department, Buyer. Already received by the
invoice not received 400,000 400,000 receiving department
Items ordered, invoice received but goods not Buyer. Term is FOB Shipping Point;
received. Burden of freight is on the buyer. 300,000 300,000 still in transit (not yet received)
Items shipped today, invoice mailed, FOB Seller. Already shipped. Title to
shipping point 250,000 - goods is already with the buyer
Items shipped today, invoice mailed, FOB Seller. Title to goods is still with
destination 150,000 150,000 the seller.
Items currently held on consignment. Included 200,000 (200,000) Assumed counted in bodega.
in the count.
Items out on consignment. 800,000 800,000
Items in receiving department, refused by us Buyer. Refused to accept upon
because of damage 180,000 - delivery. (returns)
Items included in count, damaged. Net 50,000 (5,000) Damaged and should be recorded
realizable value is P45,000 at lower of cost and NRV. Assumed
to be included among the items
counted in the bodega.
Items sold and in the shipping department. Term 250,000 250,000 It is the shipping department and
is FOB Shipping Point. not at the shipping point of the
seaport.
Correct amount of inventory 5,645,000

PROBLEM 30
Synzer Company has incurred the following costs in connection with its purchase price of inventory:

Purchase price based on vendor’s invoices 1,250,000

Trade discounts on purchases already deducted from vendors’ invoices 125,000
Salaries of accounting department 150,000
Brokerage commission paid to agents for arranging imports 50,000
Sales commission paid to sales agents 75,000
After-sales warranty costs 62,500
Import duties 100,000
Freight and insurances on purchases 250,000
Other handling costs relating to imports 25,000

Question No. 31
What is the total cost of the purchases?

SOLUTION:
Purchase
Items Given Cost Explanation
Purchase price based on vendor’s invoices 1,250,000 1,250,000
Trade discounts on purchases already deducted from vendors’ invoices 125,000 - Already deducted
Salaries of accounting department 150,000 - Administrative cost
Brokerage commission paid to agents for arranging imports 50,000 50,000
Sales commission paid to sales agents 75,000 - Selling expense
After-sales warranty costs 62,500 - Selling expense
Import duties 100,000 100,000
Freight and insurances on purchases 250,000 250,000
Other handling costs relating to imports 25,000 25,000
TOTAL COST OF PURCHASES 1,675,000

PROBLEM 31
Xylen Company purchased inventory for cash. The details thereof were as follows:

Invoice price (no VAT is charged on these goods) 850,000

Rebate offered to the entity by the supplier 10,000

Question No. 32
Assuming the terms of the agreement made it clear that the rebate was a reduction to the invoice price of the
inventory, what is the total amount of inventoriable cost?

SOLUTION:
Inventoriable cost = P 850,000 invoice price – P 10,000 rebates = P 840,000

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PROBLEM 32
On September 30, a fire at Elusive Company’s only warehouse caused a severe damaged to the entire inventory.
Based on recent history, the entity has a gross profit of 30% on cost of goods sold. A physical inventory disclosed
usable damaged goods which can be sold to a jobber for P 100,000.

The following information is available from the records for nine months ended September 30:

Inventory, January 1 1,100,000

Purchases 6,000,000
Net Sales 7,280,000

Question No. 33
What is the estimated amount of fire loss?

SOLUTION:
Inventory, January 1 1,100,000
Add: Purchases 6,000,000
Cost of goods available for sales 7,100,000
Less: Cost of Sales
Net Sales 7,280,000
Divide by sales rate (based on cost) 130% 5,600,000
Estimated inventory at date of fire, 9/30 1,500,000
Less: Usable damaged goods that are salable 100,000
FIRE LOSS, 9/30 1,400,000

PROBLEM 33
Oust The Turtle Company’s inventory at December 31, 2020 was P 360,000 based on a physical count of goods
priced at cost and before any necessary year-end adjustment relating to the following:

• Goods shipped FOB destination on December 28, 2020 from a vendor to Oust The Turtle was received on
January 1, 2021. The invoice cost was P 48,000.
• Included in the physical count were goods billed to a customer FOB shipping point on June 30, 2020. These
goods costing P 18,000 were picked up by the carrier on January 9, 2021.

What amount should Oust The Turtle report as inventory in its December 31, 2020 statement of financial
position?

Question No. 34
P360,000. The first item was correctly excluded since the ownership only passes to Oust The Turtle on January 1,
2021. The second item was still reportable by Oust The Turtle since the goods’ ownership only passed to the
customer when it was shipped on January 9, 2021.

PROBLEM 34
Jailbird Company provided the following data about the inventory for the month of January:

Units Unit Cost Total Cost

January 1 Beginning 16,000 140 2,240,000
5 Purchase 4,000 150 600,000
10 Sales 15,000
15 Purchase 20,000 160 3,200,000
16 Purchase return 1,000 160 160,000
25 Sales 8,000
26 Sale return 4,000
31 Purchase 30,000 150 4,500,000

Question No. 35
What is the moving average cost of the inventory on January 31?

Solution:
Units Unit Cost Total Cost
January 1 Beginning 16,000 140.00 2,240,000
5 Purchase 4,000 150 600,000 20,000 142.00 2,840000
10 Sales 15,000 5,000 142.00 710,000
15 Purchase 20,000 160 3,200,000 25,000 156.40 3,910,000

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16 Purchase return 1,000 160 160,000 24,000 156.25 3,750,000
25 Sales 8,000 16,000 156.25 2,500,000
26 Sale return 4,000 20,000 156.25 3,125,000
31 Purchase 30,000 150 4,500,000 50,000 152.50 7,625,000

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