CHAPTER 1

“CASH”

Cash

(PAS 1, par. 66)

To be reported as “cash”, an item must be unrestricted in use. In other terms, cash must be readily available in the payment of
current obligations and not be subject to any restrictions.

Cash on Hand Cash in Bank Cash Fund

 Undeposited Coins and  Demand Deposits – set aside for current purposes
Currencies - Checking accounts  Petty Cash Fund
 Undeposited Negotiable - Saving Deposits  Payroll Fund
Checks  Travel Fund
- Customer’s Check  Interest Fund
- Cashier’s or Manager  Tax Fund
Check  Change Fund
- Traveler’s Check  Sinking Fund
 Bank Drafts – commitment  Preferred Redemption Fund
by banking institution to  Plant Expansion Fund
advance fund by demand of  Insurance Fund
the party. Cash fund for a certain purpose
 Money Order – similar from Cash and CE = IF use in current
bank drafts but generally operation or payment for current
from post office or other obligation.
financial institutions. Long-term Investment = IF it is
for noncurrent purpose of payment of
noncurrent obligation.

Cash fund set aside for acquisition of

noncurrent asset should be classified
as noncurrent asset regardless of the
year of disbursement
.

Cash Equivalent

(PAS 7, par. 6)

Only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents

 3-month BSP Treasury Bill

 BSP Treasury Bill (more than 3 months) purchased 3 months before maturity date
 3-month Time Deposit
 3-month Money Market Instrument
 Preference shares (with specified redemption date) purchased 3 months before redemption date

Equity securities – no maturity date

Presentation
- 1st line item among the current assets.
- Details comprising the cash and cash equivalents should be disclosed in the notes to financial statements.

Financial Statement Classification

Classified as Cash and Cash Equivalent Classified as separate line item
1. Unrestricted/Current Use Restricted/Noncurrent Use
 2. Investment in Time Deposit, Money Market Instrument and Treasury Bills
If term ≤ 3months 3 months < Term ≤ 1-year -> short-term investment
Term > 1-year -> Long-term investment
Note: Time deposit- if the problem is silent, it is classified as CCE. (if may nakalagay, review the month, pag ganito,
usually di na siya kasali)
Treasury bills- if the problem is silent, it is not classified as CCE, because it can be short term investment.
3. General Rule: Bank overdraft (Credit Balance Bank Account) → Current Liability
Exception: It can be an offset against other bank account
4. Informal Compensating Balance Formal Compensating Balance
─ not legally restricted ─ legally restricted

If related loan is short-term → Cash held as compensating balance

If related loan is long-term → Noncurrent Investment

Petty Cash Fund

1. Imprest Fund System
Petty cash expenses are recorded upon replenishment.
Replenishment amount = Petty cash disbursements
2. Fluctuating Fund System

Petty cash expenses are immediately recorded.

Replenishment amount = or > or < Petty cash disbursements

Bank Reconciliation
Book reconciling items (narecord na ni bank, di pa ni book)
1. Credit Memos – deposits credited by the bank; not yet recorded as cash receipts in books
a. Notes receivable collected by the bank in favor of the depositor
b. Proceeds of bank loan credited to depositor’s account
c. Matured time deposits transferred to the depositor’s current account

2. Debit Memos – checks debited by the bank; not yet recorded as cash disbursements in books
a. NSF checks or drawn against insufficient fund checks
b. Technically defective checks (physical defects)
c. Bank service charges
d. Reduction of loan or matured loan

Bank reconciling items

1. Deposits in transit – already recorded as cash receipts in books; not yet credited by the bank
a. Collections already forwarded for deposit but too late to be reflected
b. Undeposited collections or cash on hand awaiting delivery to the bank for deposit

2. Outstanding checks – already recorded as cash disbursements in books; not yet debited by the bank
a. Checks drawn and given to payee but not yet presented for payment
b. Certified checks- one where bank has stamped on its face the word “certified” or “accepted” indicating sufficient
fund.
- should be deducted from the total outstanding checks (if included therein) because they are not outstanding for
bank reconciliation purpose.
Forms
1. Adjusted balance method – book balance and bank balance → correct cash balance
2. Book to bank method
3. Bank to book method

Adjusted Balance Bank to Book Book to Bank

 Book Balance Bank Balance Book Balance
Add: Credit Memo Add: Deposits in Transit Add: Credit Memo
Less: Debit Memos Debit Memos Outstanding Checks
Add/ Less: Adj. for Error/s Less: Outstanding Checks Less: Debit Memos
Adjusted book balance Credit Memos Deposits in Transit
Add/ Less: Adj. for Error/s Add/ Less: Adj. for Error/s
Bank Balance Bank Balance Book Balance
Add: Deposits in Transit
Less: Outstanding Checks
Add/ Less: Adj. for Error/s Adjusted
bank balance

Some errors and their corrections

a. Understatement of cash receipts on depositor’s book: Added to the book balance
Cash in Bank
Accounts Receivable
b. Understatement of checks drawn by the depositor: Deducted from the book balance
Accounts Payable
Cash in Bank
c. Deposit of other entity wrongly credited to the depositor’s account: No Adjustment in Book
d. Check of another entity charged to the depositor’s account: No Adjustment in Book

Proof of cash
- is an expanded reconciliation in that it includes proof of receipts and disbursements.
- two-date bank reconciliation

There are three forms:

a. Adjusted Balance (two separate with same adjusted balances)
b. Book to bank (Normal procedure w/ book reconciling accounts the reverse to bank’s)
c. Bank to book (Normal procedure w/ bank reconciling accounts the reverse to book’s)

Accounts Previous Month Receipts Disbursement Current Month (Pre.

(Cur. Mo. + D-R) (Pre. Mo. – D - Cur. Mo.) (Pre. Mo. + R – Cur. Mo. + R - D)
Mo.)

NOTE:
 Receipts include CMs & Deposit in transit
 Disbursements include DMs and Outstanding checks

Deposit in transit Outstanding checks

DIT, previous month OC, previous month
Add: Cash receipts deposited during the month Add: Check drawn by depositor during the month
xxx xxx
Book debits Book credits
xxx xxx
Less CM of previous month Less DM of previous month
(xxx) xxx (xxx) xxx

Total Total
xxx xxx
Less: Deposits acknowledged by the bank during Less: Checks paid by the bank during the month
the month Bank debits
Bank credits xxx
xxx Less NSF during the month
Less CM for note collected during the (xxx) (xxx)
month (xxx) (xxx) OC, current month
DIT, current month xxx
xxx Note: Only payments are included. DM and NSF are not
 Note: payments by depositor, it is automatically charged to them.
Only deposited are included. CMs are not
included because it is not a deposit.

Problems

#1 (Roque, 2014)
 Data for the ANNABELLE INC. are shown below:

November 30 December 31

Cash account balance P 20, 340 P48,540

Bank statement balance 107, 060 137,820
Deposit in transit 8,200 12,880
Outstanding checks 27,700 30,100
Bank service charges for the month
not shown on company’s books 720 600
NSF checks returned by bank, 
not shown on company’s books 4,300 8,240
Bank collections from company customers, 
not shown on company books 72,240 80,900

Additional information:

1. Deposits and credit memos per bank statement P 249,100

2. Canceled checks and debit memos per bank statement 218, 340
3. Cash receipts per cash book 172,880
4. Checks written per cash book 211, 900

1. What is the total book receipts in December?

Answer:245,120
2. What is the total book disbursements in December?
Answer: 216,920
3. What is the adjusted cash balance on November 30?
Answer: 87,560
4. What is the adjusted cash balance on December 31?
Answer: 120,600
5. What is the adjusted book receipts in December?
Answer:253, 780
6. What is the adjusted bank disbursements in December?
Answer: 220,740

Solution:
1. Cash receipts per cash book 172, 880
Add: November bank collections 72,240
Total book receipts (debits) in December 245,120
2. Checks written per cash book 211,900
Add: Bank service charges in November 720
         NSF checks returned in November  4,300 5,020
Total book disbursements (credits) in December 216,920

3. -6
November Receipts Disbursements December

Unadjusted book balances 20,340 245,120 216,920 48,540

 Bank service charges:
November 30
December 31 (720) (720)
600 (600)

NSF checks:
November 30 (4,300) (4,300)
December 31 8,240 (8,240)

Bank Collections:
November 30 72,240 (72,240)
December 31 80,900 80,900

Adj, book balances 87, 560 253,780 220,740 120,600

November Receipts Disbursements December

Unadjusted bank balances 107,060 249,100 218,340 137,820

Deposit in transit:
November 30 8,200 (8,200)
December 31 12,880 12,880

Outstanding checks:
November 30
December 31 (27,700) (27,700)
30,100 (30,100)

Adj, book balances 87, 560 253,780 220,740 120,600

#2 (Roque, 2014)

Your client, a successful small business, has never given much attention to a sound internal control. In its employ is Alex Coopit,
the company’s cashie-bookkeeper. Alex handles cash receipts, maintains accounting records, and prepares the monthly bank
reconciliation.
The bank statement for the month ended March 31, 2014, shows a cash balance of 590,000. The following checks are outstanding
on March 31:
No. 7163 P 8,623
No. 7284   7,320
No. 7285   10,612
No. 8722   6,322
No. 8724   12, 280
No. 8733     6,200

The company’s general ledger shows a  cash balance of P696,499 on March 31, 2014.
Realizing that being the cashier-accountant of the company, he can easily misappropriate collections and conceal it, Alex
removed all the cash on hand in excess of 127,301, and then prepared the following reconciliation in effort to conceal this theft.

BANK RECONCILIATION
Balance per accounting records 696,499
Add: Outstanding checks
No. 8722 P6, 322
No. 8724 12, 280
No. 8733 6,200 20, 802
Total 717,301
Deduct: Cash on hand (127,301)
Balance per bank statement, March 31 P590,000
 1. How much was taken by the cashier-accountant?
Answer: 30,555
2. What is the amount of cash that should be on hand on November 15, 2014?
Answer: 157, 856

Solution: 

Book Balance

Unadjusted balances 696,499 590,000

Outstanding checks:
            No. 7163 P 8,623
No. 7284   7,320
No. 7285   10,612
No. 8722   6,322
No. 8724 12, 280
No. 8733     6,200
(51,357)

Undeposited collection 127,301

Corrected balances 696,499 665, 944

CASH SHORTAGE (30,555) -

Adjusted balances 665,944 665,944

Cash on hand 127,301

Add: cash shortage 30,555
Cash that should be on hand, Nov.15 157,856

# 3 (Ocampo, 2010)
You were engaged to audit the accounts of Taguig Corporation for the year ended December 31, 2010. In your examination, you
determined that the Cash account represents both cash on hand and cash in bank. You further noted that the company’s internal
control over cash is very poor.
You started the audit on January 15, 2011. Based on your cash count on this date, cash on hand amounted to 19,200. Examination
of the cash book and other evidence of transactions disclosed the following:
a. January collections per duplicate receipts, 75,200.
b. Total duplicate deposit slips, all dated January, 44,000. This amount indicates a deposit representing collections on
December 3.
c. Cash book balance at December 31, 2010 amounted to 186,000, representing both cash on hand and cash in bank.
d. Bank statement for December showed a balance of 170,400.
e. Outstanding checks at December 31:

November checks December checks

No. 280 1,800 No. 331 2,400
290 6,600 339 1,600
345 20,000
353 3,600
364 10,000

f. Undeposited collections at December 31, 2010 amounted to 20,000.

 g. An amount of 4,400 representing proceeds of a clean draft on a customer was credited by the bank, but is not yet taken
up in the company’s books.
h. Bank service charges for December, 400

The company cashier presented to you the following reconciliation statement for December, 2010,
which he has prepared:

Balance per books, December 21, 2010 180,600

Add outstanding checks:
No. 331 2,400
339 1,600
345 20,000
353 3,600
364 1,000 10,600
Total 191,200
Bank service charge (400)
Undeposited collections (20,400)
Balance per bank, December 31, 2010 170,400

Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of December 31, 2010?
Answer: 144,400
2. How much is the cash shortage as of December 31, 2010?
Answer: 45,600
3. How much is the cash shortage for the period January 1 to 15, 2011?
Answer: 32,000

Solution: 

Bank Book
Unadjusted balances 170,400 186,000
Add(deduct) adjustments:
Outstanding checks (46,000)
Undeposited collections 20,000
Unrecorded bank collections 4,400
Bank service charge (400)
Balances 144,400 190,000
Shortage (45,600)
Adjusted balances 144,400 144,400

Collections per records 75,200

Add undeposited collection 20,000
Total cash that should be deposited in January 95,200
Less January deposits 44,000
Undeposited collections, Jan 15 51,200
Less undeposited collections per cash count 19,200
Shortage, Jan. 1 to 15,2011 32,000

#4 (Ocampo, 2010)
You obtained the following information on the current account of Paranaque COmpany during your examination of its financial
statements for the year ended December 31, 2010.
The bank statement on November 30, 2010 showed a balance of 306,000. Among the bank credits in November was a customer's
note for 100,000 collected for the account of the company which the company recognized in December among its receipts.
Included in the bank debits were the cost of checkbooks amounting to 1,200 and a 40,000 check which was charged by the bank
in error against Paranaque Co. account. Also in November, you ascertained that there were deposits in transit amounting to
80,000 and outstanding checks totaling 170,000.
The bank statement for the month of December showed total credits of 416,000 and total charges of 204,000. The
company’s books for December showed total debits of 735,600, total credits of 407,200 and a balance of 485,600. Bank debit
memos for December were: No. 121 for service charges, 1,600 and No. 122 on a customer’s returned check marked “Refer to
Drawer” for 24,000.
On December 31, 2010 the company placed with the bank a customer’s promissory note with a face value of 120,000
for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in
January 2011.
A check for 3,960 was recorded in the company cash payments books in December 39,600.

Based on the application of the necessary audit procedures and appreciation of the above data, you are able to provide the
answers to the following:

1. How much is the undeposited collection as of December 31, 2010?

Answer: 219,600
2. How much is the outstanding checks as of December 31, 2010?
Answer:176,000
3. How much is the adjusted cash balances as of November 30, 2010?
Answer: 256,000
4. How much is the adjusted bank receipts for December?
Answer: 515,600
5. How much is the adjusted book disbursements for December?
Answer: 395,960
6. How much is the adjusted cash balance as of December 31, 2010?
Answer: 375,640

Solution:

Deposit in transit, 11/30/10 80,000

Add: collections in December
December book receipts 735,600
Less: receipts not representing 
Collections in December
Customer’s note collected by bank
In Nov. recorded in Dec 100,000
Uncollected customer’s note
Treated as receipts 120,000 (220,000) 515,600
Total 595,600
Less: deposits credited by bank in Dec
December bank receipts 416,000
Less receipts not representing 
Deposits:
Erroneous bank debit, Nov.;
Corrected Dec. 40,000 (376,000)
Deposits in transits, 12/30/10 219,600

Question #2

Outstanding checks, 11/30/10 170,000

Add: checks issued in December:
December book disbursements 407,200
Less: disbursements not representing
Checks issued in December:
Bank service charge, Nov.;
Recorded Dec. 1,200
Error in recording a check (should be 
3,960, recorded as 39,600 35, 640 (36,840) 370,360

Total 540,360
Less checks paid by the bank in December:
December bank disbursements 204,000
Less: disbursements not representing
 Checks:
Bank service charge, Dec. 1,600
NSF check, Dec 24,000 (25,600) 178,400
Outstanding checks, 12/31/10 361,960

Paranaque Company
Proof of cash
For the month ended December 3, 2010
Beginning Receipts Disbursements Ending
Nov. 30 December December Dec 31

Balance per bank statement 306,000 416,000 204,000 518,000*

DIT
Nov. 30 80,000 (80,000)
Dec 31 219,600 219,600

Outstanding Checks:
Nov 30
De 31 (170,0000) (170,000)
361,960 (361,960)

Erroneous bank debit- November

40,000 (40,000)

Adjusted bank balance 256,000 515,600 395,960 375,640

Balance per books 157,200** 735,600 407,200 485,600

Csutomer’s note collected by bank- November

100,000 100,000

Bank service charge

November
December (1,2000 (1,200)
1,600 (1,600)

NSF check 24,000 (24,000)

December

Book errors-
December
Uncollected customer’s note treated as receipts
Error in recording a check (should be 3,960, recorded as 39,600)

(120,000) (120,000)

(35,640) 35,640

Adjusted book balance 256,000 515,600 395,960 375,640

*(306,000 + 416,000- 204,000)

** (485,600 +407,200 - 735,600)
#5 (Roque, 2014)

FERMIN COMPANY’s check registrar shows the following entries for the month of December:

Date Checks Deposits Balance

2014

Dec  1 Beginning Balance 89,300

         5 Deposit 65,000 154,300
         7 Check #14344 32,500 120,800
        11 Check #14345 14,000 106,800
        26 Deposit 49,000 155,800
        29 Check #14346 8,600 147,200

Fermin’s bank reconciliation for November revealed one outstanding check (No. 14343) for 12,000 (Written on November 28),
and one deposit in transit for 5,550 (made on November 29).

The following is from  Fermin’s bank statement for December 2014:

Date Checks Deposits Balance

2014

Dec  1 Beginning Balance 95,750

         1 Deposit 5,550 101,300
         4 Check No 14344 32,500 68,800
         5 Deposit 56,000 124,800
        14 Check No 14345 14,000 110,800
        15 Loan Proceeds 500,000 610,800
        20 NSF Check 7,600 603,200
        29 Service charge 1,000 602,200
        31 Interest 3,600 605,800

Assume that all errors were committed by the Fermin Company, not the bank.
Based on the preceding information, determine the following:
1. Adjusted cash balance on November 30
Answer: 89,300
2. Outstanding checks on December 31
Answer: 20,600
3. Deposit in transit on December 31
Answer: 49,000
4. Total bank receipts in December
Answer: 565,150
5. Adjusted cash balance on December 31
Answer: 634,200

Solutions:

Bal per bank, Nov 30 95,750

Outstanding check (no. 14343) (12,000)
DIT 5,550
Adjusted bank balance 89,300

Outstanding checks on December 31:

Check no. 14343 12,000
 Check no. 14646 8,600
Total 20,600
DIT on December 31
Dec 26 collection 49,000

Total Ban receipts in December 565,150

The total bank receipts is the total amount credited by the bank during the period.

Book Bank

Unadjusted balances 147,200 605,800

Deposit in transit 49,000

Outstanding checks (see no. 2) (20,600)

Error in recording deposit (9,000)

(65k-56k)

Error in arithmetic for Check no. 14344 1,000

Loan proceeds 500,000

NSF check (7,600)

Interest 3,600

Service charge (1,000)

Adjusted balances 634,200 634,200

#6 (Roque, 2014)
The following table summarizes the cash receipts and disbursements of LOI Company for the last six months of 2014:

Month Receipts Disbursements

July 102,000 60,000
August 70,000 110,000
September 120,000 68,000
October 172,000 92,000
November 260,000 122,000
December 280,000 180,000
964,000 668,000
Additional information:
1. Bank balance, July 1, 2014 200,000
2. Bank Balance, December 31, 2014 524,000
3. Outstanding checks, December 31, 2014 42,000
4. Undeposited receipts, December 31, 2014
(included in the December receipts) 24,000
5. Bank deposits, July 1 through December 31 914,000

What is the total shortage?

Answer: (66,000)

Solution:

Book bal, July1 (see note 1) 200,000

Add: Total book receipts as corrected (see note 2) 1,004,000
Total 1,204,000
Less: Total book disbursements as corrected (see note 2) 632,000
Corrected book balance, Dec 31 572,000

Bank bal, Dec 31 524,000

Add: Undeposited receipts 24,000
Total 548,000
Less: Outstanding checks 42,000
Adjusted bank balance 506,000
Corrected book balance (accountability) (572,000)
Cash shortage (66,000)

#7( Roque, 2014)

In connection with the audit of the financial statements of JEM Company for the year ended October 31, 2014, you conducted a
surprise count of undeposited receipts on October 31, 2014. It was witnessed by the company’s cashier whose accountability on
October 31 was determined to be 80,000. Your count reveal the following:

Currency and coins 48,840

Unused postage and stamps 440

Checks:
Date Payee Maker
1-22 Cash Cashier 4,000
10-19 Jem Company DWU, Inc. 9,400
10-28 Jem Company PSU Co. 7,840
10-31 CCP Co. Jem Company 3,600
Office supplies paid out of receipts 6,400
Total per count 80,520

1. What is the cash shortage on October 31, 2014?

Answer:7,080

Solution:
Cashier’s accountability 80,000
Accounted for as follows:
Total per count 80,520
Less: Cashier’s stale check 4,000
Unreleased disbursement check 3,600 7,600 72,920
Cash shortage 7,080

#8 (Uberita, 2014)
While checking the cash accounts of Ruler Company on December 31, 2014, you find the following information:

Balance per books 67,760

Balance in checking account ( OC per books of 9,876) 55,323
Deposit in bank closed by BSP 16,000
Deposit in transit 12,345
Currency and coins counted 9,500
Petty cash fund (of which 450 is in the form of paid vouchers) 1,000
Bank charges not yet taken up in the books 58
Bond sinking fund-cash 10,000
Receivables from employees 700
Book error in recording a check, the correct amount as paid by the
Bank is 890 instead of 980 as recorded in the books, or a difference of 90
 1. What is the correct cash in bank balance for Ruler Company on December 31, 2014?
Answer: 67,792

Solution:
Unadjusted book balance 67,760
Error by the company in taking up disbursement
(book is understated) 90
Bank charges not yet taken up by the Company (58)
Adjusted/ Correct cash balance 67,792

Explanation:
 Deposit in banks closed by BSP shall not be part of the cash balance because there is restriction as to its withdrawal.
The date when it may be withdrawn could not be determined by the company; the date when this may be withdrawn
shall be determined by the BSP/PDIC.
 Deposit in transit- this is already taken up in the company books; a reconciling item in the bank statement balance.
 Petty cash fund- this is included as part of cash and cash equivalents. However, this shall not form part of the cash in
bank balance, but cash on hand at the end of the accounting period.
 Bond sinking fund- this shall be shown as long-term investment in the financial statements as the fund is set aside for
non-current purposes.
 Receivables from Employees- shown as a separate account in the balance sheet.

2. What is the correct cash on hand for Ruler Company on December 31, 2014?
Answer: 10,050

Solution: 
Currency and coins counted 9,500
Petty cash fund (net of paid vouchers) 550
Corect cash on hand balance 10,050

#9( Ocampo,2010)
The Valenzuela Corporation was organized on January 15, 2010 and started operation soon thereafter. The company cashier who
acted also as the bookkeeper had kept the accounting records very haphazardly. The manager suspects him of defalcation and
engages you to audit his account to find out the extent of the fraud, if there is any.
On November 15, when you started the examination of the accounts, you found the cash on hand to be 25,700. From
inquiry at the bank, it was ascertained that the balance of the Company’s bank deposit in the current account on the same date
was 131, 640. Verification revealed that the check issued for 9,260 is not yet paid by the bank. The corporation sells at 40%
above cost.
Your examination of the available records disclosed the following information:
Share capital issued at par for cash 1,600,000
Real estate purchase and paid in full 1,000,000
Mortgage liability secured by real estate 400,000
Furniture and fixtures (gross) bought on which there 
Is still balance unpaid of 30,000 145,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780

Based on the above and the result of your audit, compute for the following as of November 15, 2010:

1. Collections from sale

Answer: 1,188,140
2. Payments for purchases
 Answer: 1,391,780
3. Total cash disbursements
Answer : 2,810,560
4. Unadjusted cash balance:
Answer: 537,580
5. Cash shortage
Answer: 389, 500

Solution:
Total sales 1,615,040
Less: Accounts Receivables 11/15 426,900
Collections 1,188,140

Cost of sales ( 1,615,040 * 1.4) 1,153,600

Add: Merchandise inventory, 11/15 469,600
Purchases 1,623,200
Less: Account payable-trade, 11/15 (231,420)
Payment for purchases 1,391,780

Real estate purchase and paid in full 1,000,000

Furniture & Fixtures (145,000-30,000) 115,000
Payment for Purchases 1,391,780
Expenses 303,780
Disbursements 2,810,560

Proceeds from issuance of share capital 1,600,000

Proceeds from mortgage note payable 400,000
Proceeds from notes payable- bank 160,000
Collections from sales (see no. 1) 1,188,140
Total cash receipts 3,348,140
Less: cash disbursements (see no.3 ) (2,810,560)
Unadjusted cash balance 537,580

Cash accountability 537,580

Less: cash accounted (Adjusted cash balance):
Unadjusted bank balance 131,640
Deposit in transit 25, 700
Outstanding checks (9,260) 148,080
Cash shortage 389, 500

#10 (Roque, 2014)

In connection with your audit of the Marcelo Company at December 31, 2014, the following bank reconciliation was
submitted to you by an employee of your client:

Balance per bank  30,534

Deposits in transit 37, 856
68, 390
Outstanding checks 42, 756
Balance per books 25, 634

As part of your verification, you obtained the bank statement and canceled checks from the bank on January 15, 2015.
According to the records of the company, checks issued from January 1 to January 15, amounted to 22,482. Checks returned by
the bank on January 15, 2015, totaled 58, 438. Of the checks outstanding on December 31, 2014, 9600 were not returned by the
bank with the January 15, 2015, bank statement; and of those issued, according to the records of the company, in January 2015, 7,
200 were not returned by the bank.

Based on the above data, calculate the disbursements per company records:
1. The difference between the disbursements per books as computed and as reported is:
Answer: 10,000
Solution:
 Outstanding checks, January 15:
From December or before 9,600
From January 7,200 16,800
Add: disbursements per bank statement 58,438
Total 75,238
Less: Outstanding checks, Dec 31 42,756
Disbursements per books as computed 32,482

Disbursements per book as computed 32, 482

Disbursements per books as reported 22,482
Difference in disbursements 10,000

Explanation:
3 possible explanations for the above difference:
1. The bank disbursements (58, 438) may be overstated by 10,000. Another company check for 10,000 may have been
charged erroneously by the bank against the client’s account.
2. The December 31 outstanding checks may be understated by 10,000. Since the bank reconciliation given in the
problem was prepared by a company employee, there is no assurance that it is correct.
3. The client’s employee may have failed to record check/s issued in January thus understanding the book disbursements
(22,482)
 CHAPTER 2

Receivables

- These are financial assets that represent a contractual right to receive cash or another financial asset from another
entity.
Trade Receivables – these are claims arising from the sale of Nontrade Receivables – represent claims arising from sources
merchandise or services in the ordinary course of business. other than the sale of merchandise or services in the ordinary
These claims are classified as current assets because they course of business. These claims are classified as current
are expected to be realized in cash within the normal assets when they are expected to be realized in cash within
operating cycle or one year, whichever is longer. It includes: one year notwithstanding the length of the operating cycle.
a. Account receivables – are open accounts or those Otherwise, they are classified as noncurrent assets.
not supported by promissory notes. Examples:
b. Notes receivables – those supported by formal 1. Receivables from shareholders, directors, officers
promises to pay in the form of notes. or employees – classified as either current or
noncurrent assets depending on the period of its
collectability.
2. Advances to affiliates – usually treated as
noncurrent assets.
3. Advances to supplier for acquisition of
merchandise – current asset
4. Subscription’s receivable – current assets if
collectible within one year. Otherwise, they are
shown as a deduction from subscribed share
capital.
5. Creditors’ accounts with debit balances – results
from overpayment or returns and allowances.
Classified as current assets. If the debit balances
are not material, an offset against the creditors’
accounts with credit balances may be made and
only the net accounts payable may be presented.
6. Special deposits on contract bids – classified as
either current or noncurrent assets depending on
the period of its collectability.
7. Accrued income (dividends receivable, accrued
rent income, accrued royalties’ income and accrued
interest on bond investment) – current assets.
8. Claims receivable (claims against common carriers
for losses or damages, claim for rebates and tax
refunds, claims from insurance companies) –
current asset
Initial Measurement of Receivables
PFRS 9, paragraph 5.1.1, states that a financial asset shall be recognized initially at fair value plus transaction cost that are
directly attributable to the acquisition.

Short-term receivables Long-term Receivables

Interest bearing Non-interest bearing
Fair value equivalent Face value or original Face Value Present value of all future
invoice amount cash flows discounted using
the prevailing market rate of
interest for similar
receivables.

Initial measurement Subsequent measurement

Face amount or original invoice amount Net realizable value or the amount expected to be collected
or estimated recoverable amount

Net Realizable Value

These deductions are made from initial measurement:

Accounts Receivable
Less: Allowance for Doubtful Accounts
Allowance for Sales Discounts
Allowance for Sales Returns
Allowance for Freight Charge
Net Realizable Value

Estimation of Doubtful accounts

Methods:
Statement of Financial Position Approach
- Computes the ending balance of AFDA.
 Aging of receivables
Involves analysis where the accounts are classified into not due or past due (e.g., not due 100%, 1-30 days- 90%, 31-60 days –
80%) then, total of each classification x the rate or percent of loss experienced by an entity for each category = AFDA
 Percentage of receivables
Certain rate x the open accounts at the end of the period =AFDA
*Certain rate is usually determined from past experience of the entity

Income Statement Approach

- Computes Bad Debts Expense for the period
 Percentage of credit sales
Certain rate x amount of sales for the year= bad debts expense
*Certain rate is computed by dividing the bad debts losses in prior years by the charge sales of prior years

Notes Receivable

Notes Receivable Negotiable Promissory Note Dishonored Notes

are claims supported by formal - an unconditional promise in - promissory notes that

 promise to pay in the form of notes. writing made by one person matured and not yet paid
Notes: Standing alone, notes to another, signed by the *Dishonored notes shall be removed
receivable represents only claims maker, engaging to pay on from notes receivable and transferred to
arising from sale of merchandise or demand or at a fixed accounts payable an amount included, if
service in the ordinary course of determinable future time a any, interests and other charges.
business. sum certain in money to order
or to a bearer or written
contract in which maker
promises to pay payee a
definite sum of money.

Initial Subsequent Measurement

Measurement

•Conceptually: present value Long-term Notes Receivable - Amortized Cost using

Present value is the sum of all cash flows discounted using effective interest method
the prevailing market rate of interest for similar notes • Amortized Cost = Initial Recog. + Principal Repayment +
(usually effective interest rate) or - cumulative amortization - reduction for impairment or
• However, short-term NR are measured at Face Value uncollectability
• For long-term noninterest-bearing, AC is the PV + AC
of discount or FV - Unamortized Unearned interest
income

Treatment for 2 kinds:

Initial Subsequent
Interest Bearing Note PV = Face Value AC = FV
(PV upon issuance)
Noninterest-bearing Note PV = Discounted Value of future cash AC = PV + amortization of discount
flows using the effective interest rate or
AC = FV - unamortized unearned
interest income

Loans Receivable

Initial recognition
 Trade- transaction price (PFRS 15)
 Others- FV plus transaction cost (PFRS 9)
Subsequent recognition
 Amortized cost using effective interest method

Fair value of loans and receivables

 Short term= face value/ transaction price
 Long term 
o Interest-bearing:
Realistic/market rate Unrealistic/ Not a market rate:

face value/ transaction price Cash price

PV of cash flows discounted using prevailing IR

o Non-Interest bearing:
 Cash price
  PV of cash flows discounted using prevailing IR

Note: 
Financial Asset/ Financial Liability @ Amortized cost using effective interest method
CA= PV of cash flows
 Cash flows is discounted at original effective rate
 This concept can be used on discussions about notes and bonds
 Ignore subsequent changes in fair value/ interest rate (in the case where there are 2 prevailing market interest rate is
present in the problem, e.g. n% as of January, and n% as of December, since the transaction happened on January, the n
% of January should be followed and ignored the n% of December)

Effective interest= previous CA * ER

Nominal interest = Face value * NR
Discount amortization= EI - NI

Measurement of Impairment
 Amount of the loss is measured as the difference between carrying amount of the loan receivable and the present value
of the estimated future cash flows discounted at the original effective interest rate of the loan.
 Carrying amount of the loan shall be reduced either directly or through the use of an allowance account.
 Amount of impairment loss shall be recognized in profit or loss.

Receivable Financing

- is the financial flexibility or capability of an entity to raise money out of its receivables.

Pledge Assignment Factoring

(AR) (AR) (AR) Discounting

Is usually made when Assignment of accounts receivable It is a sale of accounts To discount the note,
obtaining loans from  Evidenced by a financing receivable, thus, ownership the payee must endorse
banks or any other agreement and a promissory of accounts is transferred. it. Thus, legally, the
lending institution. The note both of which the payee becomes an
pledged receivables shall assignor signs Note: The new owner of endorser and the bank
serve as a collateral  Specific accounts receivable the accounts receivable becomes an endorsee.
security for the payment serve as a collateral security which is usually a bank or
of the loan.  The assignee usually only finance, also called the
Accounting Treatment lends a certain amount in factor, assumes full Terms Related to
 Doesn’t require consideration for the responsibility over the Discounting of Note
necessary entry assigned accounts in order to collection of accounts
in the books. protect itself from factors including risks of non-
Disclosure of that may lead for the -Net proceeds refer to
collection.
such assigned accounts to be not the discounted value of
transaction in fully realized such as sales the note received by the
a. Casual factoring endorser from the
the financial discounts, sales returns and
 Recorded as normal endorsee. Net proceeds
statements is allowances and uncollectible
sale = maturity value minus
enough. amounts
Recognition of loss on discount
 Accounting for  Service or financing fee is
factoring
the loan is done also charge by the assignee
in usual manner for the assignment -Maturity value refers to
as any other agreement. b. Factoring as a the amount due on the
loans. Notification Non-notification continuing note at the date of
basis basis agreement maturity. Maturity value
The customers Customers are  Recorded as normal = principal amount plus
are informed not informed of sale interest
that their the assignment  Recognition of loss on
 accounts had of accounts factoring (Factoring -Maturity date is the
been assigned receivable and fee or commission) date on which the note
and therefore therefore still  Provision of factor’s should be paid.
make their make their holdback*
payments to the payment to the Note: *a predetermined -Principal is the amount
assignee assignor amount for protection appearing on the face of
directly against customer returns the note. Also known as
Accounting Treatment for Assignment and allowances and other face value.
of accounts receivable special adjustments.
 The entry to record the Factor’s holdback is
-Interest = principal X
assignment under each basis actually a receivable from
rate X time
involves reclassification of factor and classified as a
accounts receivable to current asset
-Interest rate is the rate
accounts receivable-
assigned. appearing on the face of
the note.
Presentation
 The accounts receivable
assigned is included in the -Time is the period
carrying number of accounts within which interest
receivable but disclosure is shall accrue. For
necessary. discounting purposes, it
is the period from the
date of note to maturity
date. It is the full term
of the note.

-Discount is the amount

of interest deducted by
the bank in advance.
Discount = maturity
value X discount rate X
discount period

-Discount rate is the

rate used by the bank in
computing the discount.
This is a different rate
from that of interest
rate. If there is no
discount rate given,
then it is safe to assume
that the interest rate is
also the discount rate.

-Discount period is the

period of time from the
date of discounting up
to maturity date. Simply
put, it is the unexpired
period of the note.

Problems

#1 (Roque,2014)
The following information is from GUMAMELA CORP’s first year of operations:
1. Merchandise purchased 450,000
2. Ending merchandise inventory 123,000
3. Collections from customers 150,000
4. All sales are on account and goods sell at 30% above cost.
What is the accounts receivable balance at the end of the company’s first year of operations?

Answer: 275,100

Solution:
Purchases 450,000
Ending inventory (123,000)
COGS 327,000

Sales (327,000* 1.3) 425,100

Collection from customers (150,000)
Accounts Receivable, ending 275,100

#2 (Roque,2014)
CALACHUCHI CORP’s accounts receivable subsidiary ledger shows the following      information:

Customer Account Balance INVOICE INVOICE AMOUNT

Dec 31, 2014 DATE

Aruy, Inc. 35,180 12/06/14 14,000

11/29/14 21,180

Naku, Co. 20,920 09/27/14 12,000

08/20/14 8,920

Syak Corp. 30,600 12/08/14 20,000

10/25/14 10,600

Trip Co. 45,140 11/17/14 23,140

10/09/14 22,000

Uy Co. 31,600 12/12/14 19,200

12/02/14 12,400

Xak Corp. 17,400 09/12/14 17,400

The estimated bad debt rates below are based on Calachuci Corp’s receivable collection experience.
Age of Accounts Rate
0-30 days 1%
31-60 days 1.5%
61-90 days 3%
91-120 days 10%
Over 120 days 50%
The allowance for bad debts account had a debit balance of P 5,500 on December 31, 2014, before adjustment.
1. The company’s account receivable under “61-90” days category should be:
Answer: 32,600

2. The company’s account receivable under “91-120” days category should be:
 Answer:29,400

3. The allowance for bad debts to be reported in the statement of financial position at December 31, 2014, is:
Answer: 9,699

Solution:

Customer Balance 0-30 days 31-60 days 61-90 days 91-120 days Over 120 days
12/31/14

Aruy, Inc. 35,180 14,000 21,180

Naku, Co. 20,920 12,000 8,920

Syak Corp. 30,600 20,000 10,600

Trip Co. 45,140 23,140 22,000

Uy Co. 31,600 31,600

Xak Corp. 17,400 17,400

65,600 44,320 32,600 8,920

29,400

Age of Accounts Rate Accounts Receivable

0-30 days     1% x 65,600 = 656
31-60 days 1.5% x 44,320 = 665
61-90 days 3% x 32,600 = 978
91-120 days 10% x 29,400 = 2,940
Over 120 days 50% x 8,920 = 4,460
Allowance for bad debts 9,699
#3 (Valix, 2019)
Horus Company provided for doubtful accounts expense monthly at 3% credit sales. The balance in the allowance for doubtful
accounts was P 1,000,000 on January 1, 2019.
During 2019, credit sales totaled P20,000,000, interim provisions for doubtful accounts were made at 3% credit sales, P200,000
accounts were written off, and recoveries of accounts previously written off amounted to P 50,000.
An aging of accounts receivables was made on December 31, 2019.
1-60 days 6,000,000 10% uncollectible
61-180 days 2,000,000 20% uncollectible
181-360 days 1,500,000 30% uncollectible
More than one year 500,000 50% uncollectible
Based on the review of the “more than one year” category, additional accounts of P100,000 are to be written off on December 31,
2019.

1. What amount should be reported as doubtful accounts expense for the current year?
Answer: 900,000
2. What is the year-end adjustment to the allowance for doubtful accounts on December 31, 2019?
Answer: 300,000
3. What is the carrying amount of accounts receivable on December 31, 2019?
 Answer: 8,250,000

Solution:

1-60 days 6,000,00 x 10% = 600,000

61-180 days 2,000,000 x 20% = 400,000
181-360 days 1,500,000 x 30% = 450,000
More than one year 500,000-100,000 x 50% = 200,000
Allowance for bad debts 1,650,000

ADA
Dr Cr
200,000 1,000,000
50,000
100,000 900,000- Bad debts
1,650,000- ADA

Correct doubtful accounts 900,000

Recorded doubtful accounts expense (20,000,000*3%) 600,000
Increase in doubtful account expense 300,000

AR- Dec. 31, 2019 (10,000,000-100,000) 9,900,000

ADA, Dec 31, 2019 (1,650,000)
8,250,000
#4 (Ocampo, 2010)
Computation of adjusted trade receivables, allowance for doubtful accounts and doubtful accounts expense. Your audit of
Banayoyo Corporation for the year ended December 31, 2010 revealed that the Accounts Receivable account consists of the
following:
 
Trade accounts receivable (current) P3,440,000
Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers' accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments -
at cost The consignee sold goods costing P96,000 for 
P160,000. A 10% commission was charged by the 
consignee and remitted the balance to Banayoyo.
The cash was received in January, 2011. 320,000
Total P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is estimated that an
allowance should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is bonded. The
company has not provided yet for the 2010 bad debt expense.
Based on the above and the result of your audit, determine the adjusted balance of the following:
1. Trade accounts receivable
Answer:4,464,000
2. Allowance for doubtful accounts
Answer:216,000
3. Doubtful account expense
Answer: 264,000

Solution:
Trade accounts receivable (current) P3,440,000
Past due trade accounts 640,000
Notes receivable dishonored 240,000
Consignment goods already sold (160,000*90*) 144,000
Trade accounts receivable 4,464,000

Adjusted Trade accounts receivable 4,464,000

Less: Due from consignee (144,0000)
Basis of allowance for doubtful accounts 4,320,000
Bad debt rate 5%
Required allowance for doubtful 216,000

Required allowance for doubtful 216,000

Add: Write off uncollectible accounts 128,000
Less: Allowance account before adjustment (80,000)
Doubtful account expense 264,000

#5 ( Roque, 2014)
PITO-PITO Company produces herbal tea and other slimming products that are sold throughout the Philippines. While the
company is experiencing a steady growth in sales, it has become noticeable that collections of accounts receivable from  
customers are no longer as fast as they used to be.
Pito-pito Company’s products are sold on payment terms of 2/10, n/30. In the past, more than 75% of the credit customers have
availed of the discount by paying within the discount period. During the year ended December 31, 2014, there has been an
increase in the number of customers taking the full 30 days to pay. The company estimates that less than 60% of the customers
are taking advantage of the discount. Bad debt losses as a percentage of gross credit sales have increased from 1.5% provided in
prior years to about 4% in the current year.
The deterioration of accounts receivable collections has prompted the company’s controller to prepare the following report. 
ACCOUNTS RECEIVABLE COLLECTION
December 31, 2014
A. It is normal that some receivables will prove uncollectible. In fact, annual bad debt write-offs had been 1.5% of total
credit sales for many years. However, this rate has increased to 4% during the current year.
B. The accounts receivable balance at December 31, 2014 is P3,000,000. The condition of this balance in terms of age and
probability is presented below.
Proportion Age Categories Probability
of total of collection
64% 1 to 10 days 99%
18% 11 to 30 days 97.5%
8% Past due 31 to 60 days 95%
5% Past due 61 to 120 days 80%
3% Pat due 121 to 180 days 65%
2% Past due over 180 days 20%
C. The alliance for bad debts had a credit balance of P54,600 on January 1, 2014
D. The P640,000 bad debt expense provided during the year is based on the assumption that 4% of total credit sales will be
uncollectible.
E. Accounts written-off during the year totaled P585,000.

1. What is the required allowance balance on December 31, 2014?

Answer: 154,200
2. What year-end adjustment is necessary to bring Pito-Pito Company’s allowance for doubtful accounts to the balance
indicated by the aging analysis?
Answer: Bad debt expense 44,600
Allowance for bad debts 44,600
3. What is the net realizable value of Pito-Pito Company’s account receivable at December 31, 2014?
Answer: 2, 845,800
4. Pito-Pito should report bad debt expense for 2014 of
Answer: 684,600
5. Pito-Pito’s total credit sales for 2014 is
Answer: 16,000,000
Solution:

1.

Category Aging AR Balances Uncollectible Rate Uncollectible 

Ratio Account

1 to 10 days 64% 1,920,000 1% 19,200

11 to 30 days  18% 540,000 2.5% 13,500

Past due 31 to 60 days 8% 240,000 5% 12,000

Past due 61 to 120 days 5% 150,000 20% 30,000

Past due 121 to 180 days 3% 90,000 35% 31,500

Past due over 180 days 2% 60,000 80% 48,000

Total 3,000,000 154, 200

2. Allowance for bad debts, January 1,2014 P 54,600

Add: 2014 bad debt expense 640,000
Total 694,600
Less: Accounts written off (585,000)
Allowance balance before adj, Dec 31, 2014 109,600
Required allowance per aging (154, 200)
Adjustment- increase in allowance P 44,600

3. Accounts receivable P3,000,000

Less: Allowance for bad debts (154,200)
Net realizable value, Dec 31, 2014 P 2, 845,800
4. Allowance for bad debts, Jan 1, 2014 54,600
Accounts written off (585,000)
Bad debt expense ( SQUEEZE) 684,600
Allowance for bad debts, De. 31, 2014 154,200

5. Total credit sales for 2014 (640,000/.04) P 16,000,000

#6 (Uberita,2011)
On December 1, 2011, MM Company assigned on a non-notification basis accounts receivable of 3,000,000 to a bank in
consideration for a loan of 80% of the receivables less a 5% service fee on the accounts assigned. The interest rate of the loan is
12% per annum. The company collected assigned accounts of P2,000,000 and remitted the collections to the bank in partial
payment of the loan. The bank applied first the collection to the interest and the balance to the principal. The interest rate is 1%
per month on the outstanding balance of the loan. In its December 31, 2011 statement of financial position, what amount of the
note payable should MM report as current liability?
Answer: 424,000
Solution:
Total loan (3,000,000 x 80%) P2,400,000
Less: Principal payment
Total payment 2,000,000
 Less: Payment for interest (24k*1%) 24,000 1,976,000
Note payable balance 424,000

#7 (Roque, 2014)
On January 1, 2014, Waling-waling Co. sold its equipment with a carrying value of P 160,000. The company receives a non-
interest-bearing note due in  3 years with a face amount of P 200,000. There is no established market value for the equipment.
The prevailing interest rate for the note of this type is 12%. The following are the present value factors of 1 at 12%.
Present value of 1 for 3 periods 0.71178
Present value of ordinary annuity of 1 for 3 periods 2.40183
a. What is the gain or loss to be recognized on the sale of the equipment
Answer: 17,644
b. What is the discount on note receivable on January 1, 2014?
Answer: 57,644
c. What is the discount amortization at the end of the third year? (using effective interest method)
Answer:21,428
Solution:
a. Sales price/present value of note (200,000 *0.71178) P142,356
Less: Book value of equipment 160,000
Loss on sale of equipment 17,644

b. Face value of note 200,000

Less: Present value of note 142,356
Discount on note receivable 57, 644

c. Present value of note, Jan 1, 2014 142,356

Add: Interest income in 2014 (142, 356*.12) 17, 083
Present value of note, Jan 1, 2015 159,439
Add: Interest income in 2015 (159,439*12) 19,133
Present value of note, Jan 1, 2016 178,572
Face value of note 200,000
Discount amortization at the end of the third year P 21, 428

#8 (Ocampo, 2010)
Candon Company started operations in 2006. The company has no allowance for doubtful accounts. Uncollectible receivables
were expensed as written off and recoveries were credited to income as collected. Data from company’s records for five years is
as follows:

Year Credit Sales Accounts Written off Recovery

2006 3,000,000 30,000 -

2007 4,500,000 76,000 5,400

2008 5,900,000 104,000 5,000

2009 6,600,000 130,000 9,600

2010 8,000,000 166,000 10,000

Balances of accounts receivable are as follows:

As of December 31, 2009 P3,000,000
As of December 31, 2010 3,500,000
On March 1, 2010, right after the 2009 financial statements were released, management realized that the company’s policy
regarding treatment of bad accounts was not correct, and decided that an allowance method must be followed. A policy was
established to set-up an allowance for doubtful accounts based on the company’s historical debt loss percentage applied to year-
end accounts receivable. The historical bad debt loss percentage shall be recomputed each year based on the average of all
available past years up to a maximum of five years.
Questions:
Based on the above and the result of your audit, you are to provide the answers to the following:
1. The amount of allowance for doubtful accounts that should be set-up as of January 1, 2010 ( with corresponding
charged to Retained Earnings) is
Answer: 48,000
2. The average percentage of net doubtful accounts to credit sales that should be used in setting up the 2010 allowance is
Answer: 1.7%
3. The balance of allowance for doubtful accounts as of December 31, 2010 should be
Answer:59,500
4. The doubtful accounts expense for 2010 is:
Answer:167,500
Solution:
2006 3,000,000 30,000 - 30,000

2007 4,500,000 76,000 5,400 70,600

2008 5,900,000 104,000 5,000 99,000

2009 6,600,000 130,000 9,600 120,400

Total 20,000,000 320,000

2010 8,000,000 166,000 10,000 156,000

Total 28,000,000 476,000

Net accounts written off (2006-2009) 320,000

Divide by credit sales (2006-2009) 20,000,000
Percentage of uncollectible accounts to charge sales 1.6%

Allowance for doubtful accounts, 1/1/10 (3,000,000*1.6%) 48,000

Net accounts written off (2006-2010) 476,000

Divide by credit sales (2006-2010) 28,000,000
Percentage of uncollectible accounts to charge sales 1.7%

Allowance for doubtful accounts, 12/31/10 (3,500,000*1.7%) 59,500

Required allowance, 12/31/10 59,500

Account written off in 2010 166,000
Bad debt recoveries in 2010 (10,000)
Allowance for doubtful accounts,1/1/10 (48,000)
Doubtful accounts expense in 2010 167,500
#9 (Roque, 2014)
On January 1,2012, MELON CORP loaned P3,000,000 to Debtor Company. Under the loan agreement, Debtor Company is to
make an annual principal payment of 600,000 for 5 years plus interest at 8%, The first principal and interest payment is due on
January 1, 2013. The required payments were made by the Debtor Company for 2013 and 2014. However, during 2014, Debtor
Company began to face financial difficulties, requiring Melon Corp. to reevaluate the collectibility of the loan. On December 31,
2014, Melon Corp. determined that it will be able to collect the remaining principal, but it is unlikely that the interest will be
collected.
The following present value factors are taken from the table of present values:
 Present value of 1 at 8% for:
1 period 0.92593
2 periods 0.85734
3 periods 0.79383
1. What is the present value of the expected future cash flows as of December 31, 2014?
Answer: 1, 669,962
2. What is the amount of loan impairment on December 31, 2014?
Answer: 130,038
3. Assuming that Melon Corp.’s assessment of the collectibility of the loan has not changed, what amount of interest
income should be recognized for 2015?
Answer: 85,597
Solution:
Present value of expected future cash flows:
January 1, 2015 P600,000
January 1, 2016 (600,000*0.92593) 555,558
January 1, 2017(600,000*0.85734) 514,404
Present value at December 31, 2014 P1, 669,962

Carrying value of loan, December 31, 2014 (600,000*3) 1,800,000

Present value at December 31, 2014 (1, 669,962)
Loan impairment 130,038

Present value of expected future cash flows 1,669,962

Less: Collection of loan payment on Jan 1, 2015 600,000
Carrying value, Jan 1 2015 1,069,962
Multiply by interest rate 8%
Interest income for 2015 85,597

#10 ( Roque, 2014)

During your audit of FOREVER COMPANY for the year ended December 31,2014, you find the following account.

Notes Receivable
Date Debit Credit
Sept. 1 Cornea, 20%, due in 3 months P80,000
Oct.   1 Hunk Co., 24%, due in 2 months 300,000
         1 Discounted Cornea note at 25% P80,000
Nov. 1 Valerie, 24%, due in 13 months 500,000
         30 Cellular Co., no interest, 
due in one year 500,000
         30 Discounted Cellular note at 18% 500,000
Dec. 1 Tictic, 18%, due in 5 months 900,000
         1 O. Reyes, President, 12%,
due in 3 months
(for a cash loan given to O. Reyes) 1,200,000

All notes are trade notes unless otherwise specified. The Cornea note was paid on December 1 as per notification received from
the bank. The Hunk Co. note was dishonored on the due date but the legal department has assured management of its full
collectibility.
The company, with your concurrence, will treat the discounting as a conditional sale of note receivable.

1. At what amount on the current assets section of the December 31, 2014, statement of financial position will the Notes
receivable-trade be carried?
Answer: 1,500,000
2. What amount of loss on notes receivable discounting should be reported in 2014 income statement of the company?
Answer: 90,833
3. Based on the ledger account presented, what amount of interest income should be accrued on December 31, 2014?
 Answer: P 67,500

Solution:
1. Valerie P 600,000
Tictic   900,000
Total notes receivable trade, December 31, 2014   1,500,000

2. Net proceeds:
Principal P80,000
Interest (80,000*20%*3/12) 4,000
Maturity value 84,000
Discount (84,000*25%*2/12) (3,500) P80,500
Book Value:
Principal 80,000
Accrued interest receivable
(80,000*20%*1/12) 1,333 81,333
Loss on discounting of Cornea note 833

Principal/ Maturity value P 500,000

Discount (500,000*18%*1 year) (90,0000)
Net proceeds 410,000
Book value 500,000
Loss on discounting of Cellular note 90,000

Total loss on discounting (833+90,000) P 90,833

3. Hunk (300,000*24%*3/12) P 18,000

Valerie (600,000*24%*2/12)     24,000
Tictic (900,000*18%*1/12)     13,500
O. Reyes (1,200,000*12%*1/12)     12,000
Total accrued interest receivable, Dec 31, 2014 P 67,500   

CHAPTER 3

Inventories
Are assets:
a. Held for sale in the ordinary course of business;
b. In the process of production for such sale; or
c. In the form of materials or supplies to be consumed in the production process in the rendering of services.

Inventories of a TRADING CONCERN

Buys and sells goods in the same form purchased

“MERCHANDISE INVENTORY”

Inventories of a MANUFACTURING CONCERN

 is one that buys goods which are altered or converted into another form before they are made available for sale

 Finished Goods
 Goods in Process
 Raw Materials
 Factory or manufacturing supplies (indirect material)

Inventory Includes:

 Goods owned and on hand (in warehouse, in display, in receiving area)

 Goods in transit and sold FOB destination
 Goods in transit and purchased FOB shipping point
 Good out on consignment
 Goods in the hands of salesman or agents
 Goods held by customers on approval or on trial
 Freight and insurance of goods purchased FOB shipping point

Initial Measurement Subsequent Measurement

At cost Lower of Cost and Net Realizable Value
1. Cost of Conversion PAS 2, paragraph 9:
 Direct Materials Provides that inventory shall be measured at the lower of cost
 Direct Labor and net realizable value or also known as LCNRV.
 Overhead (Indirect Materials, Indirect Labor, This is done consistent with the view that assets shall not be
Factory Expenses) carried in excess of amounts expected to be realized from
- Fixed their sale or use.
- Variable
2. Other cost incurred in bringing the inventories to
their present location and condition
Cost of Inventories
3. Cost of purchase
 Purchase price
 Import Duties
 Irrecoverable Taxes
 Freight Cost
 Handling Cost
 Others Attributable Cost
- Trade Discounts
- Rebates
 Foreign Exchange Differences
 Interest Expense over the financing period

Net Realizable Value

- the estimated selling price in the ordinary course of business less the estimated cost of completion
and the estimated cost of disposal.
NRV = [Estimated Price – (Estimated cost of Completion+ Estimated cost of Disposal)]
Or
NRV = [Selling price – (Est. Cost to sell + Est. Cost to Complete)]
Or
NRV = Selling price – Cost to complete – Cost to sell

The cost of inventories may not be recoverable under the following circumstances:
a) The inventories are damaged
b) The inventories have become wholly or partially obsolete
c) The selling prices have been declined
d) The estimate cost of completion or the estimated cost of disposal has increased
Consigned Goods Consignment
– method of marketing of goods in which the owner called the consignor transfers physical possession of certain goods to
an agent called the consignee who sells them on the owner’s behalf.
Rule: Consigned goods shall be included in the consignor’s inventory and excluded from the consignee’s inventory. Freight and
other charges on goods out on consignment are part of the cost of goods consigned.

Accounting for Inventories

PERIODIC SYSTEM PERPETUAL METHOD

Calls for the physical counting of goods on hand at the end of Requires the maintenance of records called stock cards that
the accounting period to determine quantities. usually offer a running summary of the inventory inflow or
outflow.
Use when:
 Low value Use when:
 High volume  High value
 Updated only when FS are prepared  Low volume
 W/ stock card
Unique accounts:  Always updated
Purchases
Merchandise inventory-end At least once a year physical count of unit.
Merch. Inv.- beg
Unique account/s:
Merchandise inventory

(Every transaction with relation to inventories have

Merchandise Inventory account)

TRADE DISCOUNT CASH DISCOUNT

 deductions from the list catalog price in order to  deductions from the invoice price when payment is
arrive at the invoice price which is the amount made within the discount period
actually charged to the buyer
 to encourage prompt payment
 to encourage trading or increase sale

Inventory Costing Method

WEIGHTED AVERAGE – perpetual
FIRST IN, FIRST OUT (FIFO) WEIGHTED AVERAGE - periodic (moving average method)
  Goods first purchased are first  The cost of beginning inventory  A new weighted average unit
sold plus the total costs of purchases cost must be computed every
 Inventory is stated at current during the period is divided by after purchase. Such weighted
replacement cost. the total number of units average unit cost is then
 In the period of inflation, FIFO purchased plus those in the multiplied by the units on hand
method would result to the beginning inventory to get the to get the inventory cost.
highest net income. weighted average unit cost. Such
 In a period of deflation or weighted average unit cost is PAS 2, paragraph 27, provides that the
declining prices, FIFO method then multiplied by the units on weighted average may be calculated on
would result to the lowest net hand to derive the inventory a periodic basis or as each additional
income. value. shipment is received depending upon
the circumstances of the entity. Under
Inventory value = ending inventory * Inventory value = (Total Goods this method, a new weighted average
the cost purchases (from latest to Available for Sale/Total units available unit cost must be computed after
former) for sale) *Inventory, end each purchase and purchase return.
Thus, the weighted average unit cost is
Note: Under FIFO-periodic and “moving”.
FIFO-perpetual, the inventory costs
are the same Every after each transaction, average
unit cost is computed.

Weighted average – this method allows the company to mingle the cost of similar
items purchased and use weighted averages to measure inventories held, either in a
periodic basis or as each the shipment is received.

Specific Identification

 The cost of inventory is determined by simply multiplying the units on hand by their actual unit cost.
 PAS 2, paragraph 23, provides that this method is appropriate for inventories that are segregated for a specific project
and inventories that are not ordinarily interchangeable.
 Can be used in either periodic or perpetual

Accounting for Inventory Write-down

DIRECT METHOD (Cost of Goods Sold method) ALLOWANCE METHOD (Loss method)
  Loss on inventory write-down is not accounted for  Loss on inventory write-down is accounted for
separately but buried in the cost of goods sold. separately and credited to “allowance for inventory
write-down.
Inventory, end xxx  The loss on inventory write-down and gain on
Income Summary xxx reversal is included in the computation of COGS

If increase: an additional loss is recognized;

If decrease: a gain on reversal of inventory write down is
recorded. -preferably used in order that the effects of write
down and reversal of write down can be clearly identified.

PAS 2 requires disclosure of the amount of inventory

lockdown and the amount of any reversal of inventory
lockdown.

Loss in Inventory Write down xxx

Allowance on Inventory Write down xxx

Note: Gain on reversal of inventory write-down is limited

only to the extent of the allowance balance

Cost > NRV = With inventory write-down

Cost < NRV = No inventory write-down

Purchase Commitments

- are obligations of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity.

market price = gain on purchase commitment

market price = loss on purchase commitment

Inventory Estimation

Reasons:
 inventory is destroyed by fire and other catastrophe, or theft
 to prove the correctness or reasonableness of physical count
 for interim financial statements

Gross Profit Method Retail Method

This method is based on the assumption that the rate of gross This method is generally employed by department stores,
profit remains approximately the same from period to period supermarkets and other retail concerns where there is a wide
and therefore the ratio of cost of goods sold to net sales is variety of goods because keeping track of unit cost at all
relatively constant from period to period. times is difficult.

1. Gross profit rate “based on sales”

= (Gross Profit/ Net Sales) %

2. Gross profit rate “based on cost”

1. Conservative Cost Approach (conventional or lower of
= (Gross Profit/ CGS) %
average cost or market approach)
 Include mark-up, exclude mark-down
 Note: Sales Allowances and Sales Discounts are ignored in 2. Average Cost Approach
computing the net sales for purposes of using gross profit rate  Mark-up and mark-down are included
method in computing COGS. 3. FIFO Approach
4. LIFO Approach
Note: Sales Allowance and Sales Discount, these are Note: PAS 2 requires either the FIFO or Average Cost
ignored and not deducted from sales. Approach

Cost ratio = Goods available for sale at cost/Goods

available for sale at selling price

Terminologies:

 Initial Mark-up - Original mark-up on the cost of goods

 Original Retail - Sales price at which the goods are first offered for sale
 Additional mark-up - Increase in sales price above the original sales price
 Mark-up Cancelation - Decrease in sales price that does not decrease the sales price below the original sales price
 Net additional mark-up or net mark-up - Mark-up minus mark-up cancelation
 Markdown - Decrease in sales price below the original sales price
 Markdown Cancelation - Increase in sales price that does not increase the sales price above the original sales price
 Net Markdown - Markdown minus markdown cancelation
 Maintained Mark-up or mark-on - Difference between cost and sales price after adjustment for all the above items
Treatment of other items:

 Purchase Discount – deducted from purchases at cost only

 Purchase Return – deducted from purchases at cost and at retail
 Purchase Allowance – deducted from purchases at cost only
 Freight in – addition to purchases at cost only
 Departmental transfer in or debit – addition to purchases at cost and at retail
 Departmental transfer out or credit – deduction from purchases at cost and at retail
 Sales discount and sale allowance – disregarded, meaning, not deducted from sales
 Sales return – deducted from sales. If the account is “sales return and allowances”, the same should be deducted from sales.
 Employee discounts – added to sales.
 Normal shortage, shrinkage, spoilage and breakage – this are deducted from goods available for sale at retail.
 Abnormal shortage, shrinkage, spoilage and breakage – this are deducted from goods available for sale both at cost and at
retail so as not to distort the cost ratio. Any abnormal amount is recorded separately as loss.

Additional Notes:

Inventory Cutoff
For inventory, the general rule is that all items owned by the entity as of the inventory date should be included, regardless of
location. For goods in transit, if they are shipped free on board (fob) destination, ownership does not pass from the seller to the
purchaser until the purchaser receives the goods from the common carrier. For goods shipped fob shipping point, title passes
from the seller to the purchaser once the seller turns the goods over to the common carrier.

Purchases are recorded in the period of receipt

Sales are recorded in the period of shipment.
Problems
#1 (Roque, 2014)
In testing the sales cut-off for the BIG Love Company in connection with an audit for the year ended
October 31, 2014, you find the following information.
A physical inventory was taken as of the close of business on October 31, 2014. All customers are
within a three-day delivery area of the company’s plant. The unadjusted balances of Sales and
Inventories are 7, 500,000 and 330,000, respectively.
 Invoice Number FOB Terms Date Shipped Date Recorded Sales Cost

6671 Destination Oct 20 Oct 31 3,000 2,700

6672 Shipping Point Oct 31 Nov 2 7,500 6,000

6673 Shipping point Oct 25 Oct 31 5,400 3,600

6674 Destination Oct 31 Oct 29 12,600 9,300

6675 Destination Oct 31 Nov 2 27,600 24,000

6676 Shipping point Nov 2 Oct 23 19,500 15,300

6677 Shipping point Nov 5 Nov 6 22,500 17,400

6678 Destination Oct 25 Nov 3 11,700 6,000

6679 Shipping point Nov 4 Oct 31 25,800 24,600

6680 Destination Nov 5 Nov 2 15,000 12,000

Based on the foregoing information, compute the October 31, 2014 adjusted balances of the
following accounts:
1. Sales
Answer: 7,461,000
2. Inventories
Answer: 363,300

Solution:
Sales Inventories
Unadjusted balances 7,500,000 330,000
6672 7,500 -
6674 (12,600) 9,300
6675 - 24,000
6676 (19,500) -
6678 11,700 -
6679 (25,800)
Adjusted balances 7,461,300 363,300

#2 Ocampo (2010)
Presented below is a list of items that may or may not be reported as inventory in a company’s
December 31 statement of financial position.
1. Goods out on consignment at another company’s store 800,000
2. Goods sold on installment basis 100,000
3. Goods purchased F.O.B. Shipping point that are in transit at Dec 31 120,000
4. Good purchased F.O.B. destination that are in transit at Dec 31 200,000
 5. Goods sold to another company, for which our company
has signed an agreement to repurchase at a set price
that covers all costs related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold F.O.B. shipping point that are in transit Dec 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest costs incurred for inventories that are routinely manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which at the company has started production,
but which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold F.O.B. destination that are in transit at Dec 31 40,000
19. Temporary investment in stocks and bonds that will be resold in
the near future 500,000

1. How much of these items would typically be reported as inventory in the financial
statements?
Answer: 2,300,000
Solution:
Goods out on consignment at another company’s store 800,000
Goods purchased F.O.B. Shipping point that are in transit at Dec 31 120,000 Goods sold to
another company, for which our company
has signed an agreement to repurchase at a set price
that covers all costs related to the inventory 300,000
Freight charges on goods purchased 80,000
Factory labor costs incurred on goods still unsold 50,000
Materials on hand not yet placed into production 350,000
Raw materials on which at the company has started production,
but which are not completely processed 280,000
Factory supplies 20,000
Costs identified with units completed but not yet sold 260,000
Goods sold F.O.B. destination that are in transit at Dec 31 40,000
Total 2,300,000

#3 (Ocampo, 2010) 12
The Mangaldan Merchandising Company is a leading distributor of kitchen wares. The company
uses the first-in, first out method of calculating the cost of goods sold. The following information
concerning two of the company’s products is taken from the month of May:
 Pans Kettles
No. of units Unit Cost No. of units Unit Cost

May 1, beginning inventory 10,000 60 6,000 40

Purchases
May 15 14,000 65 9,000 42
Mat 25 6,000 75

Sales for the month 20,000 10,000

(@80) (@44)

On May 31, Mangaldan’s suppliers reduced their price from the last purchased price by the following
percentages:
Pans…………….25% Kettles…………….20%
Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.
Mangaldan Merchandising Company’s selling costs are calculated at 10% of selling price. Both
products have a normal profit of 30% on sales prices (after selling costs).

Based on the above and the result of your audit, answer the following:
1. Total cost of Pans as of May 31 is
Answer: 710,000
2. Total cost of Kettles as of May 31 is
Answer: 210,000
3. The inventory at May 31 should be valued at
Answer: 780,300
4. The loss on inventory write down for the month of May is
Answer: 137,300
5. The cost of sales, before loss on inventory write down, for the month of May is
Answer: 1,658,000
Solution: 
4,000 units @65 260,000
6,000 units @75 450,000
Total cost of Pans 710,000

Total cost of kettles (5,000@42) 210,000

Items Units Unit cost NRV* Inventory

Amount**

Pans 4,000 65 61.2 244,800

6,000 75 61.2 367,200

Kettles 5,000 42 33.66 168,300

     P780,300
*Estimated Selling Price- Estimated cost to sell
**Lower of cost or NRV
Total cost of inventory (710,000 +210,000) 920,000
Less inventory value 780,300
Required allowance for inventory write down 139,700
Less allowance, May 1(see below) 2400
Loss on inventory write down for May 137,300

Item Units Unit cost NRV* Allowance

Pans 10,000 60 72 -

Kettles 6,000 40 39.6 2,400

      2,400
*The adjustment on selling prices is effective only starting June 1.

Pans:
10,000 units@ 60 600,000
10,000 units@65 650,000 1,250,00
Kettles:
6,000 units @40 240,000
4,000 units @42 168,000 408,000
Total cost of sales 1,658,000

#4 (Roque, 2014) 
The management of PIG, INC. has engaged you to assist in the preparation of year-end (December
31) financial statements. You are told that on November 30, the correct inventory level was 145, 730
units. During the month of December , sales totaled 138, 630 units including 40,000 units shipped on
consignment to AA Corp. A letter received from AA indicates that as of December 31, it had sold
15,200 units and was still trying to sell the remainder.
A review of December purchase orders to various suppliers shows the following:

Purchase Order Invoice Quantity Date Shipped Date  Terms

Date Date In Units Received

12/31/14 01/02/15 4,200 01/02/15 01/05/15 FOB Destination

12/05/14 01/02/15 3,600 12/17/14 12/22/14 FOB Destination

12/06/14 01/03/15 7,900 01/05/15 01/07/15 FOB

Shipping Point

12/18/14 12/20/15 8,000 12/29/14 01/02/15 FOB Shipping Point

12/22/14 01/05/15 4,600 01/04/15 01/06/15 FOB Destination

12/27/14 01/07/15 3,500 01/05/15 01/07/15 FOB Destination

Pig, Inc. uses the “passing of legal title”for inventory recognition.

1. Goods purchased during December totaled

Answer: 11,600
2. How many units were sold during December?
Answer: 113,830
3. How many units should be included in Pig, Inc.’s inventory as of December 31, 2014?
Answer: 43,500

Solution:
Inventory quantity, Nov. 30 145,730
Add: December purchases:
PO Date
12.05.14 Purchased under FOB Destination term;
Received 12.22..14 3,600
12.18.14 Purchased under FOB shipping point term;
Shipped 12.29.14 8,000 11,600
Units available for sale 157,330
Less: Units sold in December
Consignment sales 15,200
Other sales (138,630-40,000) 98,630 113,830
Inventory quantity, December 31 43,500

#5 (Roque, 2014) 8
In your audit of the December 31, 2014, financial statements of CHICKEN, INC., you found the
following inventory-related transactions.
a. Goods costing 50,000 are on consignment with a customer. These goods were not included in
the physical count on December 31, 2014.
b. Goods costing 16,500 were delivered to Chicken, Inc. on January 4 ,2015. The invoice for
these goods was received and recorded on January 10, 2015. The invoice showed the
shipment was made on December 29, 2014, FOB shipping point.
c. Goods costing 21, 640 were shipped, FOB shipping point on December 31, 2014, and were
received by the customer on January 2, 2015. Although the sale was recorded in 2014, these
goods were included in the 2014 ending inventory.
d. Goods costing 8, 640 were shipped to a customer on December 31, 2014, FOB destination.
These goods were delivered to the customer on January 5, 2015, and were not included in the
inventory. The sale was properly taken up in 2015.
e. Goods costing 8,600 shipped by a vendor under FOB destination term, were received on
January 3, 2015, and thus were not included in the physical inventory. Because the related
invoice as a purchase in 2014.
f. Goods valued at 51,000 were received from a vendor under consignment term. These goods
were included in the physical count.
g. Chicken, Inc. recorded as a 2014 sale a 64,300 shipment of goods to a customer on December
31, 2014, FOB destination. This shipment of goods costing 37,500 was received by the
customer on January 5, 2015 and was not included in the ending inventory figure.
Prior to the adjustments, Chicken, Inc.’s ending inventory is valued at 445,000 and the reported net
income for the year is 1,648,000.
1. Chicken’s December 31, 2014, inventory should be increased by 
Answer:40,000
2. Which of the errors described in “a to g” will not affect the company’s net income for 2014?
Answer: In item b, the goods were purchased under FOB Shipping Point term and they
were shipped on December 29,2014. The company’s failure to record the purchase in
2014 will overstate its net income by 16,500. However, since the goods were not included
in the year-end physical count, the client’s ending inventory is understated and the
company’s net income will be understated by 16,500. Hence, the combined effect on
2014 net income is nil. 
3. What is Chicken’s adjusted net income for the year 2014?
Answer: 1,615,800
Solution:

Inventory 2014
Dec 31, 2014 Net Income

Per client 445,000 1,648,000

a. Goods on consignment with a customer
50,000 50,000

b. Goods purchased FOB shipping point 16,500 -

c. Goods sold FOB shipping point (21,640) (21,640)

d. Goods sold FOB destination 8,640 8,640

e. Goods purchased FOB destination - 8,600

f. Gods received on consignment (51,000) (51,000)

g. Goods sold FOB destination 37,500 (26,800)

Per audit 485,000 1,615,800

#6 (Roque, 2014) 11
GAVIAL, INC. sells electric stoves. It uses the perpetual inventory system and allocates cost to
inventory on a first-in , first-out basis.  The company’s reporting date is December 31, 2014,
inventory on hand consisted of 350 stoves at 820 each and 43 stoves at 850 each. During the month
ended December 31, 2014, the following inventory transactions occurred (all purchases and sales
transactions are on credit):

2014
Dec 1 Sold 300 stoves for 1,200 each
3 Five stoves were returned by customers. They had originally cost 
820 each and were sold for 1,200 each
9 Purchased 55 stoves at 910 each
 10 Purchased 76 stoves at 960 each
15 Sold 86 stoves for 1, 350 each
17 Returned one damaged stove to the supplier. This stove had been purchased
on December 9.
22 Sold 60 stoves for 1, 250 each
26 Purchased 72 stoves at 980 each
1. What is the FIFO cost of Gavial’s inventory on December 31,2014?
Answer: 148,980
2. What is the cost of goods sold on December 31, 2014?
Answer: 367,230
3. What is Gavial’s gross profit in December 31, 2014
Answer: 177,870
4. If the net realizable value of Gavial’s inventory on December 31, 2014, falls to 920, the
inventory value should be reduced by
Answer: 7,300

Purchases Cost of goods sold Balance

Date Details No. of Unit Total No. of Unit Total No. of Unit Total
units Cost cost units Cost cost units Cost cost

Dec Beg Bal 350 820 287k

1 43 850 36.55k

1 Sales 300 820 246k 50 820 41k

43 850 36.55k

3 SR 5 820 4.1k 55 820 45.1k

43 850 36.55k

9 Purchases 55 910 50.05k 55 820 45.1k

43 850 36.55k
55 910 50.05k

10 Purchases
76 960 72.96k 55 820 45.1k
43 850 36.55k
55 910 50.05k
76 960 72.96

15 Sales
55 820 45.1k 12 850 10.2k
31 850 26.35k 55 910 50.05k
76 960 72.96

17 PR 1 910 910 12 850 10.2k

54 910 49.14k
76 960 72.96

22 Sales
12 850 10.2k 6 910 5.46k
48 910 43.68 76 960 72.96k
 26 Purchases
72 980 70.56 6 910 5.46k
76 960 72.96k
72 980 70.56

192.66k 367.23k 154 148.98k

Sales 545,100
Less: COGS 367,230
GP 177,870

Cost of inventory on Dec 148,980

Net Realizable value (920*154) 141,680
Decline in value 7,300
#7 (Ocampo, 2010) 15
On January 1, 2010, Binmaley Corporation changed to the average method from first in, first
out (FIFO)method. The cumulative effect of this change is impracticable to determine. Accordingly,
the ending of 2009 for which the FIFO method was used is also the beginning inventory for 2010 for
the average method.

The following information was available from inventory records for the two most recent years:

TIK TAK

2009 Purchases Units Unit Cost Units Unit Cost

First Quarter 15,000 40 66,000 20

Second Quarter 36,000 45 - -

Third Quarter 51,000 50 55,500 25

Fourth Quarter 30,000 60 - -

2010 Purchases

First Quarter 9,000 70 105,000 30

Second Quarter 36,000 75 - -

Third Quarter 60,000 80 - -

Fourth Quarter - - 91,500 35

Units on hand

Dec 31, 2009 45,000 43,500

 Dec 31, 2010 48,000 60,000

Based on the above and the result of your audit, answer the following:
1. The total inventory as of December 31, 2009 is
Answer: 3,637,500 
2. The inventory of TIK as of Dec 31, 2010 is
Answer: 3,417,600
3. The inventory of TAK as of Dec 31, 2010 is:
Answer: 1,860,000
4. The change from FIFO to average method decreased net income for the year ended
December 31, 2010 by
Answer: 662,400
Solution:
The change in method of valuation of inventories from FIFO method to weighted-average method
should be accounted for as a change in accounting policy and account for it retrospectively.
However, PAS 8 par 24 states that when it is impracticable to determine the period-specific effects of
changing an accounting policy on comparative information for one or more periods presented, the
entity shall apply the new accounting policy to carrying amounts of assets and liabilities as at the
beginning of the earliest period for which retrospective application is practicable, which may be the
current period, and shall make a corresponding adjustment to the opening balance of each affected
component of equity for that period.
Product Units Unit Cost Total cost

TIK 4th quarter 30,000 60 1,800,000

3rd quarter 15,000 50 750,000

TAK 3rd quarter 43,500 50 1,087,500

Inventory, 12/31/09 (using FIFO) 3,637,500

Units Unit Cost Total Cost

Inventory, 1/1/10 45,000 2,550,000

1st quarter 9,000 70 630,000

2nd quarter 36,000 75 2,700,000

3rd quarter 60,000 80 4,800,000

Total 150,000 10,680,000

Ave. unit cost (10,680,000/150,000) 71.2

Inventory of TIK, 12/31/10 (48,000 units *71.20) 3,417,600
 Units Unit Cost Total Cost

Inventory, 1/1/10 43,500 1,087,000

1st quarter 105,000 30 3,150,000

4th quarter 91,500 35 3,202,000

Total 240,000 7,440,000

Ave. unit cost (7,440,000/240,000) 31,000

Inventory of TAK, 12/31/10 (60,000 units *31) 1,860,000

Inventory of TIK, 12/31/10 3,417,600

Inventory of TAK, 12/31/10 1,860,000
Total inventory using average method 5,277,600
Total inventory using FIFO method 5,940,000
Decrease in ending inventory (Decrease in net income) 662,400

Product Units Unit Cost Total Cost

TIK 3rd quarter 48,000 80 3,840,000

TAK 4th quarter 60,000 35 2,100,000

Inventory, 12/31/10  5,940,00

(using FIFO)

#8 (Ocampo, 2010) 18
On March 31, 2010 San Fabian Company had a fire which completely destroyed the factory building
and inventory of goods in process; some of the equipment was saved.
After the fire, a physical inventory was taken. The material was valued at 750,000 and the finished
goods at 620,000. 
The inventories on January 1, 2010 consisted of
Materials 310,000
Goods in process 1,215,000
Finished goods 1,700,000
Total  3,225,000
A review of the accounting records disclosed that the sales and gross profit on sales for the last three
years were:

Sales Gross Profit

2007 8,000,000 2,400,000
2008 7,600,000 2,215,000
2009 5,000,000 1,776,000
The sales for the first three months of 2010 were 3,000,000. Material purchases were 1,250,000,
transportation on purchases was 100,000 and the direct labor cost for the three months was
1,000,000. For the past two years, factory overhead cost has been 80% direct labor cost.

Based on the above and the result of your audit, compute the following:
1. The most likely gross profit rate to be used in estimating the inventory of goods in process
destroyed by fire
Answer: 31.55%
2. Total cost of goods places in process
Answer: 3,925,000
3. Total cost of goods manufactured
Answer: 973,500
4. Inventory of goods in process lost
Answer: 2,951,500

Solution:

2007 2008 2009

Gross profit 2,400,000 2,215,000 1,776,000

Divide by Sales 8,000,000 7,600,000 5,000,000

Gross profit 30% 29.14% 35.52%

Ave. gross profit 31.55%
Raw materials, 1/1/10 310,000
Purchases 1,250,000
Freight-in 100,000
Raw materials available for use 1,660,000
Raw materials, 3/31/10 (750,000)
Raw materials used 910,000
Direct labor 1,000,000
Factory overhead (1,000,000*80%) 800,000
Total manufacturing cost 2,710,000
WIP, 1/1/10 1,215,000
Total cost placed in process 3,925,000 (2)
Less: WIP,3/31/10 (squeeze) (2,951,500) (4)
Cost of goods manufactured 973,500 (3)
Finished goods, 1/1/10 1,700,000
Total goods available for sale 2,673,500
Less finished goods,3/31/10 (620,000)
Cost of goods sold (3,000,000 * 68.45%) 2,053,500

#9 (Roque,2014) 35
A recent fire severely damaged PENGUIN COMPANY’s administration building and destroyed
many of its financial records. You have been contracted by Penguin’s management to reconstruct as
much financial information as possible for the month of July. You learn that Penguin makes a
financial inventory count at the end of each month to determine monthly ending inventory values.
You also find out that the company applies the average cost method.
You are able to gather the following information by examining various documents:
Inventory, 31 150,000 units
Total cost of goods available for sale in July 356,4000
Cost of goods sold during July 297,000
Gross profit on sales for July 303,000
Cost of inventory, July 1 0.35 per unit

The following are Penguin’s July purchases of merchandise:

Date Quantity Unit Cost

July 6 180,000 0.40
12 150,000 0.41
16 120,000 0.42
17 150,000 0.45

Penguin’s management has asked you to provide the following information:

1. Number of units on hand, July 1
Answer: 300,000
2. Units sold during July 1
Answer: 750,000
3. Unit cost of inventory at July 31
Answer: 0.396
4. Value of inventory at July 31
Answer: 59,400

Solution:
Inventory, 07/1 (squeeze) 105,000
Purchases 251,400
Cost of goods available for sale 356,400
Inventory,07/31 (squeeze) (59,400)*
Cost of good sold 297,000

Inventory, 07/01 : 105,000/ 0.35 = 300,000 units

*356,400- 297,000

0.396 = 59,400 /150,000 units

Inventory quantity, 1/1 300,000

Add: Units purchased 600,000
Units available for sale 900,000
Less: inventory quantity, July 31 (150,000)
Units sold during July 750,000 units

#10 (Ocampo, 2010) 21

You obtained the following information in connection with your audit of Labrador Corporation,
which uses FIFO retail inventory method:

2009 Cost  Retail

Beginning inventory 835,200 1,392,000

Purchases 6,864,000 10,542,000
Mark up, net 63,000
Markdown, net 45,000
Sales 10,260,000

2010 Cost  Retail

Purchases 7,140,000 10,218,000

Mark up, net 84,000
Markdown, net 102,000
Sales 10,392,000

Based on the above and the result of your audit, answer the following:
1. The estimated inventory at cost on December 31, 2009 is
Answer: 1,099,800
2. The estimated inventory at cost on December 31, 2010 is
Answer: 1,050,000

Solution:

Cost Retail Ratio

Beginning inventory 835,200 1,392,000

Purchases 6,864,000 10,542,000

Net markup 63,000
Net markdown (45,000)
Net purchases 6,864,000 10,560,000
Goods available for sale 7,699,200 11,952,000 65%

Goods available for sale at retail 11,952,000

Less sales 10,260,000
Inventory, 12/31/09 at retail 1,692,000
Multiply by cost ratio 65%
Inventory, 12/31/09 at cost 1,099,800

Cost Retail Ratio

 Beginning inventory 1,099,800 1,692,000

Purchases 7,140,000 10,218,000

Net markup 84,000
Net markdown (102,000)
Net purchases 7,140,000 10,200,000
Goods available for sale 8,239,800 11,892, 000 70%

Goods available for sale at retail 11,892,000

Less sales 10,392,000
Inventory, 12/31/09 at retail 1,500,000
Multiply by cost ratio 70%
Inventory, 12/31/09 at cost 1,050,000