Final preboard May 08 reviewer for accounting for special transaction problems PDF

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Problem 1. The following data were taken from the Statement of Affairs of ABC Company:Assets pledged for fully secured liabilities P125,Assets pledged for partially secured liabilities 90, 000Free assets 87,Fully secured liabilities 100,Partially secured liabilities 110,Unsecured liabilities without...

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Problem 1. The following data were taken from the Statement of Affairs of ABC Company: Assets pledged for fully secured liabilities P125,000 Assets pledged for partially secured liabilities 90,000 Free assets 87,000 Fully secured liabilities 100,000 Partially secured liabilities 110,000 Unsecured liabilities without priority 90,000 Unsecured liabilities with priority 13,000 Which of the following is correct? Types of Liabilities Estimated amount to be paid a. Fully secured liabilities P125,000 b. Partially secured liabilities 110,000 c. Unsecured liabilities with priority 11,700 d. Unsecured liabilities without priority 81,000 Solution: Recovery rate = available assets / unsecured creditors available assets = Total free assets - unsecured creditors with priority unsecured creditors = unsecured portion of partially secured creditors + unsecrured creditors w/o priority Recovery rate = available assets = unsecured creditors =

90.00% 99,000 110,000

Fully Secured Creditors= 100% of debt Partially Secured Creditors= 100% of secured portion + ( unsecured portion x recovery rate) Unsecured Creditors w/ Priority= 100% of debt to the extent of Total Free Assets Unsecured Creditors w/o Priority= debt x recovery rate

100,000 108,000 13,000 81,000 ANSWER D

Problem 2. D, E and F formed a joint venture. F is to act as a manager and is designated to record the joint venture transactions in his books. As a manager, he is allowed a salary of P17,000. Remaining profit (loss) is to be divided equally. The following balances appear the end of 2008 before adjustment for venture inventory and profit. Debit Credit Joint venture cash P50,000 D, capital P30,000 E, capital 4,000 The venture is to terminate on December 31, 2008 with unsold merchandise costing P14,100. Assuming the joint venture loss is P7,200, what is the balance of the joint venture account before distribution of profit? a. P6,900 (debit) b. P21,300 (debit) c. P38,300 (debit) d. P6,900 (credit) Solution

answer B

Joint Venture expense income 21,300 14,100 7,200

details not given unsold merchandise credited to set up End Invty balance

Problem 3. During the year 2008, I has been the manager of a joint venture with G and H. It was agreed that on the completion of the joint venture, I will receive a fee of 12% of the venture gain after the deduction of the fee as an expense. The venture is terminated on November 30, 2008. On this date, I’s trial balance contains the following account balances. Debit Credit Joint venture P8,400 G, capital 2,900 H, capital P700 The net profit after the deduction of the fee has been agreed to be divided as follows: 25% to G, 40% to H and 35% to I. Which of the following is not correct? a. The net profit of the venture after the fee to I is P7,500

b. The fee of I is P900 c. Total income earned by H is P2,300 d. Cash settlement received by G is P4,775 35% I Salaries 900 Remainder 1,875 3,000 2,625 Total 1,875 3,000 3,525 Capital 2,900 (700) (10,600) Settlement 4,775 2,300 (7,075) Answer C. The income earned by H is P3,000 and not P2,300 Solution

25% G

40% H

Total 900 =12% x (8,400-F) 7,500 8,400 (8,400) -

Problem 4. J, K and L formed a joint venture in 2008 and agreed to divide profits equally. K is designated to act as the manager. The venture is terminated on December 31, 2008 even though there is still unsold merchandise. On this date, K’s trial balance shows the following account balances before profit or loss distribution. Debit Credit Joint venture cash P45,000 Joint venture P9,000 J, capital 8,000 L, capital 9,000 K receives P7,000 for his share in the venture profit. Furthermore, he agrees to be charged for the unsold merchandise as of December 31, 2008. Determine which of the following is correct a. Cost of unsold merchandise charged to K is P7,000 b. Net profit of the venture is P9,000 c. Amount due to K in the final settlement is P14,000 d. Total income earned by J is P15,000 33% J 8,000

Solution Balance Adjust Asset Net income Sale of Assets Bal b4 settlement Settlement

Cash 45,000

45,000 (45,000) -

Non-Cash = = 12,000 = = (12,000) = = = =

Liabilities -

7,000 -

15,000 (15,000) -

33% K 19,000

33% L 9,000

7,000 7,000 (12,000) 14,000 16,000 (14,000) (16,000) -

Joint Venture 9,000 12,000 (21,000) -

Answer C Joint Venture expenses income 9,000 12,000 unsold merchandise 21,000 the share in income of K divide by his PL ratio is the total income

Problem 5. On December 1, 2008, M company made a credit sale to N company. The amount of sale was 200,000 Korean won. M will collect the account on January 01, 2009. On December 1, the spot rate was 25 Korean won for one Philippine peso. Also on December 1, M entered into a futures contract to sell 200,000 Korean won on January 01, 2009 at a forward rate of 50 Korean won for one Philippine peso. If the spot rate and forward rate for one Philippine peso on December 31, 2008 is 40 Korean won, how much is the foreign exchange gain or loss on hedging instrument – forward contract? a. P3,000 gain b. P3,000 loss c. P1,000 gain d. P1,000 loss Solution Forward Rates 12/1/08 12/31/08 0.02 0.03

Foreign Currency 200,000

FOREX (1,000) loss

answer D

Problem 6. O company purchased merchandise for 150,000 pounds from a vendor in London on November 01, 2008. Payment in British pounds was due on January 30, 2009.

On the same date, O entered into a 90 day futures contract to buy 150,000 pounds from a bank. Exchange rate for pound on different dates are as follows: Nov. 1 Dec. 31 Jan. 31 Spot rate P71.0 P73.0 P72.2 30 day futures 72.0 71.9 73.2 60 day futures 71.8 72.8 72.6 90 day futures 70.9 72.9 73.1 How much is the net forex gain or loss on January 30, 2009? a. P165,000 loss b. P165,000 gain c. P150,000 loss d. P150,000 gain Solution Forward Rates 12/31/08 1/30/09 71.90 72.20

Foreign Currency 150,000

FOREX 45,000

gain

gain because Peso weakened and it's a receivable

Spot rates 12/31/08 1/30/09 73.00 72.20

Foreign Currency 150,000

FOREX 120,000

gain

165,000

gain

gain because Peso strengthened and it's a liability Answer B

Total FOREX

Problem 7. On November 1, 2008, P company sold goods on account to a Thai corporation for 5,000 Baht. The billing date is December 1, 2008 and payment is due on January 30, 2009. Exchange rates were as follows: BID rate OFFER rate Nov. 01, 2008 P38 P36 Dec. 01, 2008 39 38 Dec 31, 2008 42 40 Jan. 30, 2009 41 39 How much is the forex gain or loss to be recognized on December 31, 2008? a. P15,000 gain b. P10,000 gain c. P10,000 loss d. P20,000 gain Solution Spot rates 12/1/08 12/31/08 39.00 42.00

Foreign Currency 5,000

FOREX 15,000 answer A

gain

gain because Peso weakened and it's a receivable

BID = Buying of Banks, which means selling of companies OFFER = Selling of Banks, which means buying of companies

Problem 8. On December 1, Q company took merchandise worth 10,000 Swiss francs. Payment is due on January 30, 2009. On the same date, Q paid P5,000 cash to acquire a 60 day call option for 10,000 Swiss francs. Spot Rate Strike Price Fair value of Option Forward Rate 12/01/08 P23 P23 P 5,000 P24 12/31/08 27 23 8,000 26 01/30/09 25 23 10,000 25 How much is the forex gain or loss upon exercising the call option? (Assume the option was exercised on December 31, 2008) a. P5,000 loss b. P32,000 gain c. P48,000 loss d. P35,000 gain Solution: Cost of Option Contract Gain on Option Contract Answer B

(8,000) 40,000 (27-23) x 10,000 32,000 Net gain upon exercise of Call Option

Problem 9. On October 1, 2008, R corporation purchased goods from a U.S. based corporation worth $2,500. Payment is due in 120 days on January 30, 2009. In view of the sale, R corporation enters into a forward contract to buy $2,500 from Philippine National Bank (PNB) in 120 days. The relevant exchange rates are as follows: 10/01/08 12/31/08 01/30/09

Spot Rate P43 P47 P50 Forward Rate 44 46 50 Which of the following is correct? a. Forward Contract Receivable on Dec. 31, 2008 is P110,000 b. Net forex loss on settlement date is P2,500 c. Forex gain on the forward contract on the transaction date is P5,000 d. Forex loss on the purchase transaction on the Balance Sheet date is P10,000 Solution 10/1/08 FOREX BASIC FORWARD C Net

12/31/08 43 44

12/31/08 FOREX BASIC FORWARD C Net

47 46

Foreign Currency 2,500 2,500

50 50

Foreign Currency 2,500 2,500

1/30/09 47 46

FOREX (10,000) loss 5,000 gain (5,000) loss FOREX (7,500) loss 10,000 gain 2,500 gain

answer D

A is wrong because the FCR is P115K = 2,500 x 46 B is wrong because it's 2,500 gain and not loss C is wrong because there's no FOREX yet on Transaction date. The P5k is on B/S Date

Problem 10. On November 1, S company entered into a firm commitment to acquire a machinery. Delivery and passage of title would be on February 28, 2009 at the price of HK$2,000. On the same date, to hedge against unfavorable changes in the exchange rate, S entered into a 120 day forward contract with China bank for HK$2,000. Exchange rate were as follows: Spot Rate Forward Rate Nov. 01, 2008 P26 P24 Dec. 31, 2008 28 26 Feb. 28, 2008 29 29 How much is the forex gain or loss recognized by the S company on the firm commitment? a. P6,000 gain b. P10,000 loss c. P6,000 loss d. P10,000 gain Solution 11/1/08 FORWARD C

12/31/08 24

12/31/08 FORWARD C

26

Foreign Currency 2,000

FOREX (4,000) loss

29

Foreign Currency 2,000

FOREX (6,000) loss

2/28/09 26 answer B

Total FOREX (10,000) loss loss because Peso weakened and it's a liability

Problem 11. The following are taken from the records of T Company, a foreign subsidiary in New Zealand. NZ dollar Total Assets 12/31/08 146,000 Total Liabilities 12/31/08 45,000 Common Stock 12/31/08 60,000 Retained Earnings 01/01/08 29,000 Net Income 2008 15,000 Dividends paid 12/31/08 3,000 Exchange rates: Current rate Historical rate Weighted Average Rate

P10 11 12

The peso balance of retained earnings on December 31, 2007 is P325,000. What amount of Cumulative Translation Adjustment is to be reported in the Consolidated Balance Sheet on December 31, 2008? a. P119,000 debit b. P119,000 credit c. P125,000 debit d. P125,000 credit

Solution Dollar Exch Rate Peso

Assets 146,000 10 1,460,000

= = = =

Liabilities 45,000 10 450,000

C/S and APIC 60,000 11 660,000

R/E 29,000 325,000

Dividends (3,000) 10 (30,000)

I/S 15,000 12 180,000

Squeeze CTA

(125,000) Asnwer C

Problem 12. The approved appropriation of Department U for 2008 is P15,000,000. Eighty five percent of this appropriation was released by the Department of Budget and Management (DBM) accompanied by Notice of Cash allocation (NCA). During the year, the amount of obligations incurred was equivalent to ninety percent of the NCA but only seventy percent of these obligations were paid by checks. Determine which of the following is incorrect a. Department U records the receipt of NCA by debiting an amount equivalent to P12,750,000 b. The receipt of the allotment is recorded by means of a memorandum entry c. At the end of the year, Subsidy Income from National Government would be credited by P6,967,500 d. None of the above Solution

Answer C

Problem 13. Bank charges per bank statement, P1,500 Interest expense upon receipt of Bill, P2,000 Based on the given information, which of the following is not correct? a. Entry to record the bank charges in the regular agency books would include a credit to Cash – NT – MDS b. Receipt of bill for interest is entered in the RAOFE c. Payment of interest expense would include a credit to Cash – NT –MDS d. Agency enters the obligation for bank charges in the RAOFE Solution

Answer A

Problem 14. Which of the following would be included in an entry to record the remittance of income taxes to the Bureau of Treasury (BTR) collected by the Bureau of Internal Revenue (BIR)? The BIR has no authority to use the collections. a. Debit to Cash – Collecting officer b. Debit to Cash – NT – MDS c. Credit to Cash – Collecting officer d. Credit to Cash – NT – MDS Solution

Answer C

Problem 15. Agency V collected cash of P50,000 for services rendered. The collection was deposited to the Bank of the Philippine Islands (BPI). What is the entry to record the deposit? a. Debit, Cash in Bank –LCCA and Credit, Cash – Disbursing officer for P50,000 b. Debit, Cash - NT - MDS and Credit, Cash – Collecting officer for P50,000 c. Debit, Cash in Bank –LCCA and Credit, Cash – Collecting officer for P50,000 d. Debit, Cash – NT – MDS and Credit, Cash – Disbursing officer for P50,000 Solution

Answer C

Problem 16. During 2008, Agency W transferred cash of P1,000 to Agency X for a land beautification project. Subsequently, Agency W received a report from Agency X about the project. Which of the following is incorrect? a. The obligation of P1,000 is entered in the RAOCO b. Source Agency debits Due from NGA upon transfer of cash c. Receiving Agency credits Cash – NT – MDS upon receipt of cash d. Source Agency credits Cash – NT – MDS upon transfer of cash Solution

Answer C

Problem 17. Y hospital, a Not for Profit hospital affiliated with a religious group, reported the following information for the year ended December 31, 2008: Gross patient service revenue P2,400,000 Bad debts expense 50,000 Contractual adjustments with third party payors 200,000 Charity care 150,000 Allowance for discounts to hospital employees 90,000 Net patient service revenues for Y hospital for the year ended December 31, 2008 is a. P2,250,000 b. P2,110,000 c. P1,960,000 d. P1,910,000 Solution

Answer B

Problem 18. During 2008, Z Hospital purchased medicines for hospital use totaling P1,000,000. Included in the P1,000,000 was an invoice of P100,000 that was canceled in 2008 by the vendor because the vendor wished to donate this medicine to Z. The donation should be recorded as a. An increase of P100,000 to Patient Service Revenue b. An increase of P100,000 to Other Non - Operating Revenue c. An increase of P100,000 to Other Operating Revenue d. A decrease of P100,000 to Other Non – Operating Revenue Solution

Answer C

Problem 19. AA Hospital had the following cash receipts for the year ended December 31, 2008: Collections of Receivables P500,000 Contribution for an establishment of 100,000 term endowment Tuition from nursing school 200,000 Interest received from investment in 35,000 permanent endowments Dividends received from investment in 40,000 term endowments Payment of supporting expenses 150,000 Payment of program expenses 215,000 How much is the net cash provided by operating activities? a. P335,000 b.P510,000 c. P410,000 d. P435,000 Solution

Answer C

Problem 20. D, T and M Partnership became insolvent on December 31, 2008 and is to be liquidated. D, T and M has the following balances respectively, P65,000, (P30,000), (P4,000). After paying their personal liabilities, D has still P10,000 while T has P15,000 of their personal assets. However, M has still unpaid personal liabilities amounting to P40,000 and his personal assets amounted only to P30,000. The partners share profits and losses equally. How much is the maximum amount that D can expect to receive from the partnership? a. P31,000 b. P61,000 c. P35,000 d. P46,000

Solution:

Balance Adj Assets Adj Liabilities NI/NL Sale of Assets Liq. Expenses Pay Creditors Bal B4 Sett'nt Absorb Ins P(Dr) Balance Invest Ins P(Dr) Balance Absorb Ins P(Dr) Balance Settlement Zero

Cash 31,000

Non-cash -

-

-

31,000

-

31,000 15,000 46,000

-

46,000 (46,000) -

-

-

-

= = = = = = = = = = = = = = = = =

Liabilities -

solvent 10K 33% D 65,000

-

solvent 15K 33% T (30,000)

insolvent 33% M (4,000)

-

-

-

65,000 (2,000) 63,000

(30,000) (2,000) (32,000) 15,000 (17,000) 17,000 -

(4,000) 4,000 -

63,000 (17,000) 46,000 (46,000) answer D

-

-

-

Problem 21. The following Balance Sheet for the partnership of C, I and G were taken from the books on October 1, 2008. Assets Liabilities and Capital Cash P100,000 Liabilities P200,000 Other Assets 400,000 C, Capital 120,000 I, Capital 95,000 _________ G, Capital 85,000 Total Assets 500,000 Total Liabilities and Capital 500,000 The partners agreed to distribute profits as follows: 1. Annual salaries to C and I of P5,000 each 2. Annual interest of 5% on beginning capital 3. Bonus of 15% to C based on income after salaries, interest and bonus 4. Remaining profit: 25% to C, 35% to I and 40% to G The partnership began its operations on Oct. 1, 2008 and net income as of Dec. 31, 2008 is P69,500. Which of the following is true? a. The bonus to C is P5,804 b. Net Income after salaries, interest and bonus is P38,696 c. I’s total share in the net income is P21,688 d. G’s share on the profit after salaries, interest and bonus is P13,543 Solution:

Salaries 5% Interest Bonus Remainder Total

25% C 1,250 1,500 8,250 13,750 24,750

35% I 1,250 1,188 19,250 21,688

40% G 1,063 22,000 23,063

100% Total 2,500 3,750 8,250 55,000 69,500

interest should be prorated to the time investe

=15% x ( 69,500-S-I-B)

Answer C

Problem 22. The partnership of Y,E and S provides for 3 : 3: 4 sharing in profits and losses respectively. S is retiring from the partnership and by mutual agreement the assets are to be adjusted to their fair values which is P30,000 higher than their carrying amount. Y and E agree that the partnership will pay P87,000 to S for his partnership interest, exclusive of his loan which is to be paid in full separately. Before the retirement of S, Total Assets, S loan, Y capital, E capital and S capital has the following balances respectively: P200,000, P20,000, P50,000, P60,000 and P70,000. Which of the following is not correct? a. If partial goodwill is recorded, total amount paid to S including his loan is P107,000 b. If no goodwill is recorded, the balance of Y’s capital after S’s retirement is P56,500 c. If partial goodwill is recorded, total assets after retirement is P123,000 d. If no goodwill is recorded, the share of E in the excess payment to S is P2,500

Solution: Partial Goodwill Method

Capital b4 NI Net income/inc in Assets Capital Bonus Partial Goodwill Total Goodwill Partial W-D-A Settlement

3 Y 50,000 9,000 59,000 -

3 E 60,000 9,000 69,000 -

4 S 90,000 12,000 102,000 5,000

59,000

69,000

3 Y 50,000 9,000 59,000 (2,500)

3 E 60,000 9,000 69,000 (2,500)

56,500

66,500

(107,000) -

10 Total 200,000 30,000 230,000 should be zero 5,000 (107,000) 128,000 answer C. P128k not P123k

Bonus Method

Capital b4 NI Net income/inc in Assets Capital Bonus Partial Goodwill Total Goodwill Partial W-D-A Settlement

4 S 90,000 12,000 102,000 5,000

(107,000)...