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ARTS CPA Review(Academic Review and Training School, Inc.)2F & 3F Crème Bldg., Abella St., Naga CityTel No.: (054) 472-9104; E-mail: [email protected] TOPICSPRACTICAL ACCOUNTING I MICHAEL B.BONGALONTA,CPA,MICB,MBAA. BORROWING COST (PAS 23)Problem 1 (adapted): The following transa...

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ARTS CPA Review (Academic Review and Training School, Inc.) 2F & 3F Crème Bldg., Abella St., Naga City Tel No.: (054) 472-9104; E-mail: [email protected]. CONSOLIDATED TOPICS PRACTICAL ACCOUNTING I BONGALONTA,CPA,MICB,MBA A.

MICHAEL B.

BORROWING COST (PAS 23)

Problem 1 (adapted): The following transaction pertain to the general borrowings made during 2014 by Victory Company in connection with the construction of the company’s new warehouse:

8% bank loan 6% short-term note 8% long-term note

Principal P2,400,000 1,600,000 2,000,000

Borrowing Costs P192,000 96,000 160,000

The construction started on January 1, 2014 and the warehouse was completed on December 31, 2014. Expenditures on the warehouse were as follows: January 1 March 31 June 30 A. B.

P

400,000 1,000,000 1,200,000

September 30 December 31

P1,000,000 400,000

How much is the capitalizable borrowing cost of Victory Company? Compute the cost of the new warehouse.

Answer: Total borrowing costs (192,000 + 96,000 + 160,000) ÷ Total borrowings (2,400,000 + 1,600,000 + 2,000,000) Average capitalization rate Principal Average Date Cost Incurred Rate 01/01 P400,000 x 7.47% 04/01 1,000,000 x 7.47% 07/01 1,200,000 x 7.47% 10/01 1,000,000 x 7.47% 12/31 400,000 x 7.47% Total borrowing cost to be capitalized

P 448,000 6,000,000 7.47%

Time x 12/12 x 09/12 x 06/12 x 03/12 X 00/12

Interest P29,880 56,025 44,820 18,675 0 P149,400

Problem 2 (adapted): Moses Company borrowed P4, 000, 000 on a 10% note payable to finance a new warehouse which the entity is constructing for its own use. The only other debt of Moses’ books is a P6, 000, 000.00, 12% mortgage payable on an office building. At the end of the current year, average accumulated expenditures on the new warehouse totaled P4, 750, 000. What amount should Moses capitalize as interest for the current year?

a. 400, 000 b. 475, 000 c. 490, 000 d. 522, 500 Answer: C

B.

Average expenditures Specific borrowing General borrowing

4, 750, 000 (4, 000, 000) 750, 000

Specific borrowing ( 4, 000, 000x10%) General borrowing (750, 000x12%)

400, 000 90, 000 490, 000

GOVERNMENT GRANT (PAS 20)

On January 2, 2007, Brand Company received a grant of P60,000,000 to compensate it for costs it incurred in plating trees over a period of five years. Brand Company will incur such cost in this manner: Year Costs 2007 P2,000,000 2008 P4,000,000 2009 P6,000,000 2010 P8,000,000 2011 P10,000,000 Problem 3 (adapted):

What amount of income should Brand Company recognize at the end of year 2010? Answer: Year Grant Ratio Income Recognized 2007 P60,000,000 x2/30 = P4,000,000 2008 P60,000,000 x4/30 = P8,000,000 2009 P60,000,000 x6/30 = P12,000,000 2010 P60,000,000 x8/30 = P16,000,000 2011 P60,000,000 x10/30 = P20,000,000 On January 2, 2011, Dumont Company received a consolidated grant of P240,000,000. Three-fourths of the grant is to be utilized to purchase a college building for students from underdeveloped or developing countries. The balance of the grant is for subsidizing the tuition costs of those students for four years from the date of the grant. The expected college life of the building is 10 years and the company uses the straight line method of depreciation.

Problem 4 (adapted):

What amount of the grant is recognized as income for the year ended December 31, 2011? Answer: Grant related to asset P240,000,000 x ¾ = P180,000,000 ÷ 10 years = P18,000,000 Grant related to income P240,000,000 x ¼ = P60,000,000 ÷ 4 years = 15,000,000 Total P33,000,000 C.

WASTING ASSETS(PFRS 6)

Problem 5 (adapted): In January 1, 2011, HUFF MINING COMPANY purchased a mineral mine for P36,000,000 with removal ore estimated by biological survey at P2,160,000 tons. The property has an estimated value of P3,600,000 after the ore has been extracted. Huff incurred P10,800,000 of development cost preparing the property for the extraction of ore. During 2011, P270,000 tons were removed and P240,000 tons were sold. For the year ended December 31, 2011, what amount of depletion should be included in cost of goods sold?

Solution: Purchase price Development cost

P 36,000,000

Total cost of ore property

P 46,800,000

Residual value Depletable amount

(3,600,000) P 43,200,000

Rate per ton (43,200,000/2,160,000)

20

Depletion for 2011 (270,000x20)

P 5,400,000

Depletion in cost of goods sold (240,000x20)

P 4,800,000

10,800,000

BATON CORPORATION acquires a coal mine at a cost of P5,000,000. Intangible development costs total P1,200,000. After extraction has occurred, Baton must restore the property (estimated fair value of the obligation is P600,000), after which it can be sold for P1,700,000. Baton estimates that P50,000 tons of coal can be extracted. If P9,000 tons were extracted during the first year, which of the following would be included in the journal entry to record depletion? Problem 6 (adapted):

A. Debit to Accumulated Depletion for P918,000 B. Debit to Inventory for P918,000 C. Credit to Inventory for P900,000 D. Credit to Accumulated Depletion for P1,530,000 Solution 34-7 Answer: B Cost of coal mine Development cost Fair value of restoration cost Salvage value Depletable cost ÷ total estimate Depletion per ton X Tons extracted Debit to inventory D.

P5,000,000 1,200,000 600,000 (1,700,000) P5,100,000 50,000 P 102 9,000 P 918,000

REVALUATION AND IMPAIRMENT OF ASSETS (PAS 36)

Problem 7 (adapted): On June 30, 2011, the statement of financial position of Louisiana Company reported the following: Equipment at cost Accumulated depreciation

5,000,000 1,500,000

The equipment was measured using the cost model and depreciated on straight line basis over a 10-year period. On December 31, 2011, the management decided to change the basis of measuring the equipment from cost model to the revaluation model. The equipment was revalued to its fair value of P4,550,000 with remaining useful life of 5 years. Ignoring the income tax, what amount should Louisiana report as revaluation surplus on December 31, 2011?

Solution Answer b Cost – June 30, 2011 Accumulated Depreciation Carrying amount – June 30, 2011 Depreciation from July 1 to December 31, 2011 (5,000,000/10 x 6/12) Carrying amount – December 31, 2011

5,000,000 (1,500,000) 3,500,000 ( 250,000) 3,250,000

Fair value – December 31, 2011 Carrying amount – December 31, 2011 Revaluation surplus – December 31, 2011

4,550,000 3,250,000 1,300,000

The fair value is already the sound value or revalued amount of the equipment. Subsequent annual depreciation for 2011 (4,550,000/5)

910,000

Problem 8 (adapted): A division of Vixen Company has following non-current assets, which are stated at their carrying amounts ate December 31, 2012:

Land and Buildings Plant and machinery Goodwill

P320,000,000 110,000,000 70,000,000

The management of Vixen believes that the value in use of these assets may have become impaired, because a major competitor has developed a superior version of the same product. As a result, sales are expected to fall. The following additional information is relevant: The land and buildings are carried at a valuation. The depreciated historical cost is P265,000,000 at December 31, 2012. All other non-current assets are carried at historical cost. The goodwill does not have a market value. It is estimated that the land and buildings could be sold for P270,000,000 and the plant and machinery could be sold for P50,000,000, net of direct selling costs. The value in use of the assets has been calculated at P385,000,000. What is the impairment loss to be recognized by Vixen Company?

Answer: Fair value less cost to sell (P270,000,000 and P50,000,000) Value in use Recoverable amount ( the higher between the fair value less cost to sell and value in use)

P320,000,000 385,000,000 P385,000,000

Carrying amount Less: Recoverable amount Impairment loss

P500,000,000 385,000,000 P115,000,000

Problem 9 (adapted): Foster Company acquires 80% of the shares of Roster Ltd. on January 2, 2010 for Pj1,600,000. At this date, the identifiable net asset of Roster Ltd. have a fair value of P1,500,000. Roster Ltd. is the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash flows from other assets. Roster Ltd. is a cash-generating-unit. During the year 2010, the amount of depreciation in relation to the identifiable assets of Roster Ltd. is P150,000. At December 31, 2010, Foster Company determines that the recoverable amount of roster Ltd. is P1,000,000. a.

What is the total amount of impairment loss on Roster Ltd?

b.

Answer:850,000 What amount of the impairment loss should be charged agjainst the goodwill of foster Company?

c.

Answer:100,000 What amount of the impairment loss should Foster Company recognize on the identifiable assets of Foster Ltd.? Answer:350,000

Solution: Acquisition cost Net asset acquired (P1,500,000 x 80%) Goodwill

P1,600,000 1,200,000 P 400,000

In order to test Roster Ltd for impairment, the goodwill has to be grossed up. If goodwill of P400,000 relates to 80%, then P500,000 (P400,000/80%) goodwill relates 100%. In other words, the P400,000 goodwill is grossed up to P500,000.

Test of impairment: Identifiable Particulars Goodwill assets Total Gross carrying amount P400,000 P1,500,000 P1,900,000 Accum. Dep. (150,000) (150,000) Carrying amount, 12/31/10 P400,000 P1,350,000 P1,750,000 Minority interest 100,000 100,000 Notionally adjusted carrying value P500,000 P1,350,000 P1,850,000 Less: recoverable amount P1,000,000 Total impairment loss P 850,000 Allocation of Impairment Loss: Particulars Goodwill Gross carrying amount P400,000 Accum. Dep. Carrying amount, 12/31/10 P400,000 Impairment loss 400,000 Carrying amount after impairment -0-

Identifiable assets Total P1,500,000 P1,900,000 (150,000) (150,000) P1,350,000 P1,750,000 350,00 750,000 P1,000,000 P1,000,000

Problem 10 (adapted): Marcus Company operates an oil platform in the sea. Marcus Company has provided the amount of P10,000,000 for the financial costs of the restoration of the seabed, which is the present value of such costs. Marcus Company has received an offer to buy the oil platform for P16,000,000 and the disposal costs would be P2,000,000. The value in use of the oil platform is approximately P24,000,000 before the restoration costs. The carrying value of the oil platform is P20,000,000. What amount of impairment loss should Marcus Company recognize related to the oil platform? a. None b.

P4,000,000

c.

P6,000,000

d.

P8,000,000

Solution 36-5 Answer a Fair value less cost to sell (P16,000,0002,000,000) Value in in use (P24,000,000-10,000,000)

14,000,000 14,000,000

Carrying value (P20,000,000-10,000,000)

10,000,000

Recoverable amount Impairment loss

E.

14,000,000 None

R&D COST AND INTANGIBLE ASSET (PAS38)

Problem 11 (adapted): On December 31, 2011, Kate Conde Company exchanged 100,000 ordinary shares of P50 par value for the following assets: * A trademark valued at P1,500,000. * A building, including land, valued at P6,500,000 (20% of the value is for the land). * A franchise right. No estimate of the value is available at the date of exchange. The ordinary share of Kate Conde Company is selling at P90 at the date of exchange. What amount should be recognized as measurement of the franchise on the date of exchange? a. 1,500,000 b. 1,000,000 c. 2,000,000 d. 0

Solution 37-1 Answer b Fair value of shares issued (100,000 x 90) Fair value of trademark Fair value of land (20% x 6,500,000) Fair value of building (80% x 6,500,000) Measurement of franchise

9,000,000 (1,500,000) (1,300,000) (5,200,000) 1,000,000

Problem 12 (adapted): Rose Anne Company developed a new machine that reduces the time required to insert the fortune into its fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Rose Anne Company patented the machine. The following expenses were incurred in developing and patenting the machine: Research and development laboratory expense Metal used in the construction of the machine Blueprint used to design the machine Legal expenses to obtain patent Wages paid for the employees’ work on the research and development, and building of the machine (60% of the time was spent on actually building the machine) Expense of the drawing required by the patent office to be submitted with the patent application Fee paid to government patent office to process application

500,000 160,000 60,000 240,000

600,000 30,000 50,000

At year end, Rose Anne Company paid P350,000 in legal fees to successfully defend the patent against the infringement suit by another entity. What total amount of the expenditures should be capitalized as cost of patent?

Answer Legal expenses to obtain patent Expense of drawing required by patent office Fee paid to patent office Total cost of patent Metal used Blueprint used to design machine Wages paid (60% x 600,000) Cost of machine Laboratory expense Wages paid (40% x 600,000) R and D expense

240,000 30,000 50,000 320,000 160,000 60,000 360,000 580,000 500,000 240,000 740,000

Problem 13 (adapted): On January 1, 2011, RAM Company purchased MAR Company at a cost that result in recognition of goodwill of P2,000,000. During the first quarter of 2011. RAM spent an additional P800,000 on expenditures designed to develop and maintain goodwill by training and hiring new employees. Due to these expenditures, on December 31, 2011, RAM estimated that the benefit period of goodwill was indefinite. In its December 31, 2011 statement of financial position, what amount should RAM report ass goodwill?

Solution 37-12 Answer c Cost of goodwill – January 1, 2011

2,000,000

Problem 14 (adapted): On January1, 2010, Better Company bought a trademark for P400,000, having a n estimated remaining useful life of 16 years . After16 years revenues expected from this intangible will be zero. In January 2014, Better paid P60,000 for legal fees in a successful defense of trademark. What amount of expenses should better company recognize and charge against income during 2014?

Solution of Problem 30-3:  Amortization Expense-original cost (P400,000÷ 16) Cost of litigation Total expense

P25,000 60,000 P85,000

Problem 15 (adapted): An intangible asset costs P300,000 on January 1,2011. On January 1,2012 ,the asset was evaluated to determine if it was impaired. As on January 1,2012, the asst was expected to generate future cash flows of P25,000 per year (at the end of year). The appropriate discount rate is 5%. What total amount should be charged against income in 2012, assuming that the asset had a total useful life at 10 years from date of acquisition?

Answer: C Solution of Problem 30-9:  Amortization expense-2012(P177,696 ÷ 9) Impairment loss (Schedule) Total amount to be charged against income in 2012 Book Value: (P300,000 – P30,000) Estimated fair value: Value in use (P25,000 × 7.10782) Impairment loss

P19,744 92,304 P112,048 P270,000 177,696 P 92,304

Problem 16 (adapted): Sarrah Company is interested in computing the goodwill to be recognized in the purchase of ABC Company in January 2012. The following information was taken from the records of ABC. Net income Net assets 2007 360,000 1,600,000 2008 388,000 1,800,000 2009 288,000 1,900,000 2010 380,000 2,000,000 2011 394,000 2,100,000 1,810,000 9,400,000 It is agreed that goodwill is measured by capitalizing excess earnings at 40% with normal return on average net assets at 10%. What is the “purchase price” of ABC Company?

SOLUTION : Average net assets ( 9,400,000 / 5 ) 1,880,000 Average earnings ( 1,810,000 / 5 ) 362,000 Less: Normal earnings (10% x 1,880,000) 188,000 Excess earnings 174,000 Divide by capitalization rate 40% Goodwill 435,000 Net assets – 2011 2,100,000 Total purchase price 2,535,000 The purchase price or acquisition cost includes the payment for the 2011 net assets and the goodwill. Problem 17 (adapted): Phar-Ti-Ra Company incurred research and development costs in the current year as follows: Equipment acquired for use in various R and D projects 975,000 Depreciation on the above equipment 135,000 Materials used 200,000 Compensation costs personnel 500,000 Outside consulting fees 150,000 Indirect costs appropriately 250,000 What total research and development costs should be recognized as expense for the current year?

Solution 31-1 Answer c Depreciation on the above equipment Materials used Compensation costs personnel Outside consulting fees Indirect costs appropriately Total F.

OTHER RELATES ASSET ACCOUNTS

A.

BIOLOGICAL ASSETS (PAS 40)

135,000 200,000 500,000 150,000 250,000 1,235,000

Fortitude Company purchased cattle at an auction for P 200,000 on July 1, 2014. Cost of transporting the cattle back to the company’s farm was P 2,000 and the company would have to incur cost similar transportation cost if it was to sell the cattle in the auction, in addition an auctioneer’s fee of 2% of sales price.

Problem 18 (adapted):

What amount should the biological assets initially recognized? Answer: Fair value P 200,000 Transportation costs (2,000) Auctioneer’s fee (200,000 x 2%) (4,000) Adjusted fair value P 194,000 Creep Company purchased 100 beef cattle at an account for P 800,000 on July 1, 2014. Transportation costs if it had sold its cattle in the auction. In addition there would be a 2% auctioneer’s fee on the market price of the cattle payable by the seller. Creep Company also incurred P 4,000 veterinary expenses. On December 31, 2014, the fair value of the cattle in the most relevant market increases to P 880,000. On May 2, 2015, Creep Company sold 18 cattle at the auction for P 160,000 and incurred transportation charges of P 1,200. On June 15, 2015, the fair value of the remaining cattle was P 662,560 but on the same day, 42 cattle were slaughtered with total cost of P 33,600. The fair value of the carcasses on that day was P 386,400 and the estimated transportation cost to sell the carcasses is P 3,600. No other selling costs are expected. On June 30, 2015, the fair value of the remaining 40 cattle was P 358,400. The estimated transportation cost is P 3,200. Question 1: What amount should the biological asset should be initially recognized on July 1, 2014? Question 2: What amount should the biological asset be reported on December 31, 2014? Question 3: What amount of gain as a result in the change in value of the biological asset to be reported in the statement of comprehensive income for the year ended December 31, 2014? Question 4: What is the net proceeds from the sale of cattle on May 2, 2015? Question 5: What is the fair value of the inventory (carcasses) on June 15, 2015? Problem 19 (adapted):

Answers: Fair value in most relevant market Transportation costs Auctioneer’s fee (800,000 x 2%) Fair value at point of purchase

P 800,000 ( 8,000) ( 16,000) P 776,000

Fair value in most relevant market Transportation costs Auctioneer’s fee (880,000 x 2%) Fair value at point of purchase

P 800,000 ( 8,000) ( 17,600) P 854,400

Fair value at point of purcha...