Solution manual financial accounting by valix ch1 5

Total 450,000Problem 2-2 Simple Company Statement of Financial Position LIABILITIES AND SHAREHOLDERS’ EQUITY Serial bonds payable - current portion 500,000... Premium on bonds payable 1

SOLUTION MANUAL Financial Accounting Valix and Peralta Volume One - 2008 Edition

1 CHAPTER 1

1 Systematic and rational allocation 1 Materiality

as a matching process 2 Going concern

2 Comparability or consistency 3 Income recognition principle

4 Income recognition principle 5 Standard of adequate disclosure

5 Time period 6 Comparability

6 Going concern and cost principle 7 Matching principle

7 Accounting entity 8 Cost principle

9 Completeness or standard 10 Time period

of adequate disclosure

10 Conservatism or prudence

Problem 1-15

1 The cost of leasehold improvement should not be recorded as outright expense,but should be amortized as expense over the life of the improvement or life ofthe lease, whichever is shorter This is in conformity with the systematic andrational allocation principle of expense recognition

2 The fact that the customer has not been seen for a year is not a controlling factor

to write off the account If the account is doubtful of collection, an allowanceshould be set up It is only when there is proof of uncollectibility that the accountshould be written off

3 Advertising cost should be treated as outright expense, by reason of theuncertainty of the benefit that may be derived therefrom in the future, inconformity with “immediate recognition principle”

4 The balance of the cash surrender value should not be charged to loss In reality,this is conceived as a prospective receivable if and when the policy is canceledbecause of excessive premium in the early stage of policy The CSV should beclassified as noncurrent investment

5 The cost of obsolete merchandise should not be included as part of inventory butcharged to expense, as a conservative approach

6 The excess payment represents goodwill which should not be amortized butsubject to impairment Conservatism dictates that goodwill should be recognizedwhen paid for

7 The depreciation is not dependent on the amount of profit generated during theyear Depreciation is an allocation of cost and therefore should be providedregardless of the level of earnings

10 The increase in value of land and building should not be taken up in theaccounts The use of revalued amount is permitted only when the revaluation ismade by independent and expert appraiser The expected sales price ofP5,000,000 is not necessarily the revalued amount of the land and building.Moreover, increase in value is not an income until the asset is sold

Problem 1-16

1 Accrual assumption 6 Income recognition principle

2 Going concern assumption 7 Expense recognition principle

3 Asset recognition principle 8 Cause and effect association principle

4 Cost principle 9 Systematic and rational allocation principle

5 Liability recognition principle 10 Immediate recognition principle

Problem 1-17

1 Monetary unit assumption 6 Substance over form

5 Matching principle 10 Adequate disclosure or completeness

Problem 1-18

1 The cost of the asset should be the amount of cash paid No income should berecognized when an asset is purchased at an amount less than its market value.Revenue arises from the act of selling and not from the act of buying

2 The entry should be reversed because the pending lawsuit is a mere contingency.The contingent loss is simply disclosed To be recognized in accordance withconservatism, the contingent loss must be both probable and measurable

3 The new car should be charged against the president and debited to receivablefrom officer, because the car is for personal use

5 CHAPTER 2

Problem 2-1

Easy Company Statement of Financial Position

December 31, 2008

A S S E T S

Trade and other payables (4) 450,000

Noncurrent liabilities:

Shareholders’ equity:

Total liabilities and stockholders’ equity 8,500,000

Note 2 - Property, plant and equipment

Note 3 - Intangible asset

Note 4 - Trade and other payables

Total 450,000

Problem 2-2

Simple Company Statement of Financial Position

LIABILITIES AND SHAREHOLDERS’ EQUITY

Serial bonds payable - current portion 500,000

Note 1 - Trade and other receivables

Problem 2-3

Exemplar Company Statement of Financial Position

December 31, 2008

A S S E T S

Cash and cash equivalents 500,000

Other noncurrent assets (5) 150,000

Premium on bonds payable 1,000,000

Shareholders’ equity:

Total liabilities and shareholders’ equity 12,900,000

Note 3 - Long-term investments

Cash surrender value

Advances to officers, not collectible currently 100,000

Note 7 – Share capital

Note 8 - Reserves

Problem 2-4

Relax Company Statement of Financial Position

Note

Current liabilities:

Mortgage note payable-current portion 400,000

Noncurrent liabilities:

Mortgage note payable, remaining position 1,600,000

Shareholders’ equity:

Note 1 - Trade accounts receivable

Note 5 - Reserves

Retained earnings appropriated for plant expansion 1,000,000

Problem 2-5

Summa Company Statement of Financial Position

December 31, 2008

A S S E T S

Trade and other receivables (2) 830,000

Note 6 – Share capital

Authorized share capital, 50,000 shares, P100 par

5,000,000

Note 7 - Reserves

Retained earnings appropriated for contingencies 200,000

14

Problem 2-6 (Functional method)

Karla Company Income Statement Year ended December 31, 2008

Note 2 – Cost of sales

Note 3 – Other income

15Note 4 – Selling expenses

Total selling expenses

950,000

Note 5 – Administrative expenses

Note 6 – Other expenses

Natural method

Karla Company Income Statement Year ended December 31, 2008

Note 1 – Net sales revenue

Purchase returns and allowances

Note 6 – Other expenses

17

Problem 2-7

Masay Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008

Less: Raw materials – December 31

Depreciation – machinery 60,0001,120,000

Total manufacturing cost

Masay Company Income Statement Year ended December 31, 2008

Sales returns and allowances ( 50,000)

Note 2 – Cost of goods sold

Note 3 – Other income

Masay Company

Income Statement Year Ended December 31, 2008

Decrease in finished goods

Note 1 – Net sales revenue

Note 2 – Other income

210,000

Note 3 – Decrease in finished goods and goods in process

January 1 December 31 Decrease

Goods in process 240,000 170,000 70,000

20

Note 4 – Raw materials used

Raw materials available for use 3,200,000

Note 5 – Factory overhead

Factory supplies used

Note

21

Note 1 – Net sales revenue

Sales 9,070,000

Note 2 – Cost of goods sold

Note 3 – Selling expenses

Note 5 – Other expense

22

Problem 2-9

Christian Company Statement of Cost of Goods Manufactured Year Ended December 31, 2008

Christian Company Income Statement Year Ended December 31, 2008

Income tax expense

( 170,000)

Note 1 – Cost of goods sold

Note 3 – Administrative expenses

Office supplies expense

Repairs and maintenance 100,000

Factory supplies used (300,000 + 660,000 – 540,000) 420,000

Note

Note 1 – Net sales revenue

Sales returns and allowances

( 140,000)

Note 2 – Cost of goods sold

Note 3 – Other income

25Problem 2-11

Reliable Company Statement of Retained Earnings Year Ended December 31, 2008

Change in accounting policy from FIFO to weighted average

Problem 2-12

Loss on sale of equipment ( 200,000)

Gondola Company Statement of Retained Earnings Year ended December 31, 2008

26 CHAPTER 3

Cash in bank – PCIB (for payroll)

150,000

27

Cash and cash equivalents:

Problem 3-5

4 Cash on hand 400,000

BSP Treasury bill – 60 days

3,000,000

*The BPI Time deposit of P2,000,000 is shown as noncurrent investment because

Cash on hand

100,000

2 Petty cash fund:

3 Philippine Bank current account

5,000,000

Philippine Bank current 70,000

Fluctuating Fund System Imprest Fund System

1 Petty cash fund 10,000 1 Petty cash fund 10,000

Miscellaneous expense 800

3 Petty cash fund 14,000 3 Petty cash fund 5,000

Cash in bank 14,000 Postage 1,500

Supplies 5,500 Transportation 1,200 Miscellaneous expense 800

Cash in bank14,000

Fluctuating Fund System Imprest Fund System

1 Petty cash fund 10,000 1 Petty cash fund 10,000

Fluctuating Fund System Imprest Fund System

Accounts payable 3,000 5 Postage 1,500

Petty cash fund 4,000 Supplies 3,000

Transportation 1,000

5 Petty cash fund 9,000 Miscellaneous expense 500

Cash in bank 9,000 Accounts payable 3,000

7 Petty cash fund 19,000 Supplies 3,000

Cash in bank 19,000 Transportation 4,000

Cash in bank 19,000

Problem 3-10

Fluctuating Fund System Imprest Fund System

Petty cash fund 8,000 Cash in bank

8,000

Petty cash fund 12,000 Cash in bank 12,000

31Problem 3-11

2008

Problem 3-13 Answer B Problem 3-14 Answer C Problem 3-15 Answer A Problem 3-16 Answer A

Undeposited collections 1,100,000 Value added tax account 1,000,000

Problem 3-17 Answer C

CHAPTER 4

Balance per book

110,000 Add: CM for note collected

Adjusted book balance

Adjusted bank balance

Balance per bank

Payment for light and water 245,000

Bank service charge

( 5,000)

NSF check

( 25,000)

Adjusted cash in bank

4,075,000

915,000

Total

4,915,000

Deposit omitted from bank statement 150,000

3 Receivable from cashier 40,000

Bank reconciliation – July 31

b Adjusting entries, July 31

Deposit in transit – June 30

Computation of outstanding checks – July 31

Outstanding checks, June 30

Less: July service charge 1,000 2,499,000

Reconciliation – November 30

Add: Understatement of collection from customer 90,000

Bank balance

930,000

Check of Susan Company charged in error 200,000

390,000

Total

1,320,000

Deposit of Susan Company erroneously credited 100,000

Computation of outstanding checks – October 31

Add: Checks issued by depositor:

Computation of deposit in transit – November 30

Add: Cash receipts deposited during November:

Deposit in transit – November 30 190,000

b Adjusting entries on July 31

1 Cash in bank 1,500,000

Computation of deposit in transit – July 1

Computation of outstanding checks – July 1

45

Problem 4-16

Customer’s note erroneously recorded as cash receipt 100,000 160,000

Cash receipts deposited:

October collections recorded in November ( 45,000)

Customer’s note recorded as cash receipt (100,000) 565,000

Less: Deposits credited by bank:

Correction of bank error ( 10,000) 490,000

Outstanding checks – October 31 125,000Checks issued by depositor:

March 31 Receipts Disbursements April 30

Bank service charge

Adjusted book balance 1,830,000 2,468,000 1,442,0002,856,000

Bank balance 1,890,000 2,090,000 1,080,0002,900,000

Adjusted bank balance 1,830,000 2,468,000 1,442,0002,856,000

NSF check:

Adjusted balance 1,960,000 1,330,000 2,260,0001,030,000

Adjusted balance 1,960,000 1,330,000 2,260,0001,030,000

Adjusting entries on October 31

Balance per bank 2,700,000 5,500,000 5,600,000 2,600,000Deposit in transit

50 Problem 4-23 Answer B

700,000

The adjusted cash in bank can also be computed by starting with the balance perbook

Book error (200,000 – 20,000)

( 180,000)

Adjusted book balance 4,600,000

Checks issued by depositor in June:

Service charge in May recorded in June ( 100,000)8,900,000

Total

11,900,000

Checks paid by bank in June:

Checks and charges by bank in June 8,000,000

Outstanding checks – May 31

Deposit in transit – December

Outstanding checks – June 30

(1,400,000) Outstanding checks – July 31

c The advances to subsidiary should be classified as noncurrent and presented as long-term investment.

The customers’ credit balances and advances from customers should beclassified as current liabilities and included as part of “trade and otherpayables”

Accounts receivable – December 31 1,200,000

The advances to affiliates should be classified as noncurrent and presented aslong-term investment

July 1 Accounts receivable 50,000 July 1 Accounts receivable

Problem 5-11

Doubtful accounts expense 60,000

Requirement c

59Problem 5-14

Required allowance – December 31 (5% x 2,400,000) 120,000

Rate = 100,000/2,000,000 = 5%

Requirement b

Less: Allowance for doubtful accounts 120,000

Allowance for sales discount 10,000

130,000

60Problem 5-15

7 Sales return and allowances 10,000

Accounts receivable – Dec 31 1,250,000

115,000

Problem 5-17

Percent of Required

Amount Uncollectible allowance

1 – 30 days past due 1,200,000 5%

2005 2006 2007 Total

1 Writeoff 26,000 29,000 30,00085,000

Less: Recoveries 2,000 3,000 4,0009,000

Net writeoff 24,000 26,000 26,00076,000

76,000 Percentage to be used in computing the allowance = - = 2%

3,800,000

2 Credit sales for 2008

3,000,000

Provision for doubtful accounts

4 Allowance for doubtful accounts – January 1 20,000

Recovery of accounts written off 10,000 5,010,000

Accounts settled by issuance of note 200,000 4,610,000

2 Allowance for doubtful accounts – December 31, 2007

Interest income400,000

(10%) (12%) Date Interest received Interest income Amortization

Loan receivable4,000,000

Problem 5-25

Cash3,000,000

Cash260,300

(8%) (6%) Date Interest received Interest income Amortization

66

2010

Cash 3,000,000

Loan receivable3,000,000

Interest income (12& x 5,225,000) 627,000

The remaining term of the loan is 4 years Accordingly, the presentvalue

factor for 4 periods is used

Present value of loan 661,500Loan impairment loss

Problem 5-31 Answer A

70

Problem 5-34 Answer D

71Problem 5-41 Answer A