FINANCIAL ACCOUNTING AND REPORTING PMFULGENCIO

CASH FLOW (IAS 7)

Use the following information for questions 1 and 2.

Weimers Company provided the following information on selected transactions during 2018:
Dividends paid to preferred stockholders P 150,000
Loans made to affiliated corporations 750,000
Proceeds from issuing bonds 900,000
Proceeds from issuing preferred stock 1,050,000
Proceeds from sale of equipment 450,000
Purchases of inventories 1,200,000
Purchase of land by issuing bonds 300,000
Purchases of treasury stock 600,000

1. The net cash provided (used) by investing activities during 2018 is

2. The net cash provided (used) by financing activities during 2018 is

3. The net cash provided by operating activities in Otto Company's statement of cash flows for 2018 was P115,000. For 2018,
depreciation on plant assets was P45,000, amortization of patent was P8,000, and cash dividends paid on common stock
was P54,000. Based only on the information given above, Otto’s net income for 2018 was

4. During 2018, Garber Corporation, which uses the allowance method of accounting for doubtful accounts, recorded a
provision for bad debt expense of P25,000 and in addition it wrote off, as uncollectible, accounts receivable of P10,000. As
a result of these transactions, net cash flows from operating activities would be calculated (indirect method) by adjusting
net income with a

For questions 5 to 7

The following is a list of items to be included in the preparation of the 2018 statement of cash flows from the Cube Company:
➢ Gain on retirement of bonds 92,000
➢ Increase in inventory 67,000
➢ Proceeds from sale of investment 85,000
➢ Proceeds from issuance of note 250,000
➢ Depreciation expense 107,000
➢ Decrease in accounts receivable 50,000
➢ Payment for purchase of patent 198,000
➢ Decrease in accounts payable 40,000
➢ Payment of dividends 300,000
➢ Net profit 554,000
➢ Ordinary share exchanged for land 140,000
➢ Payment to retire bonds 370,000
➢ Payment for purchase of equipment 394,000
➢ Loss on sale of investments 48,000
➢ Repurchase of treasury shares 120,000
➢ Proceeds from issuance of preference shs. 528,000
➢ Amort. of discount on held to maturity sec 15,000
5. How much is the net cash flow from operating activities during 2018?

6. How much is the net cash flow from investing activities during 2018?

7. How much is the net cash flow from financing activities during 2018?

EVENTS AFTER REPORTING PERIOD (IAS 10)

1. Republic Company provided the following events that occurred after December 31, 2017:

 1/21/2018 P4,200,000 of accounts receivable was written off due to the bankruptcy of a major customer.

 2/10/2018 A shipping vessel of Republic with carrying amount of P8,770,000 was completely lost at sea because of a hurricane.

 3/14/2018 A court case involving Republic as the defendant was settled and the entity was obligated to pay the plaintiff
P2,280,000. Republic previously has not recognized a liability for the suit because management deemed it possible that the
entity would lose the case.

 3/20/2015 One of Republic’s factories with a carrying amount of P6,120,000 was completely razed by forest fires that erupted in
its vicinity.

The management completed the draft of the financial statements for 2017 on February 8, 2018. On March 25, 2018, the board of
directors authorized the financial statements for issue. Republic announce its profit and other selected information on March 27, 2018.
The financial statements were approved by shareholders on April 5, 2018 and filed with the SEC on April 7, 2018. What total amount
should be reported as adjusting events on December 31, 2017?

2. Richster reported the following events after the reporting period:

 Resolution of a court case after the end of the reporting period 3,290,000
 Discovery of fraud or errors 1,800,000
 Dividends to holders of equity instruments that are proposed or
Declared after the reporting period 2,750,000
 Information that an asset was impaired at the end of the reporting period
Indicating that an asset was impaired at the end of the reporting period 880,000
 The entity announced the discontinuation of its beer manufacturing division
(related assets and liabilities) 10,200,000
 The entity entered into an agreement to purchase from a major supplier
(purchase contract amount) 1,600,000
 Destruction of major plant by a Tsunami (amount of destruction) 30,500,000
 Discovery of miscalculation of the allowance for uncollectible accounts
Resulting in the understatement of trade receivables 340,000

How much is the total adjusting events?

RELATED PARTY TRANSACTIONS (IAS 24)

Etude Company is part of a major industrial group and is known to accurately disclose related party transactions in its financial
statements. Remuneration and other payments made to the entity’s chief executive officer during 2017 were:

Key management personnel compensation 6,200,000

Annual salary 12,000,000
Sales to affiliated entities 17,380,000
Share options and other share based payments 4,090,000
Reimbursement of travel expenses 1,886,000
Contributions to retirement benefit plan 795,000

What total amount should be included as related party disclosures in Etude’s 2017 financial statements?

CHANGE IN ACCOUNTING ESTIMATE (IAS 8)

1. On January 1, 2015, Lynn Corporation acquired equipment at a cost of P600,000. Lynn adopted the double-
declining balance method of depreciation for this equipment and had been recording depreciation over an
estimated life of eight years, with no residual value. At the beginning of 2018, a decision was made to change
to the straight-line method of depreciation for this equipment. Assuming a 30% tax rate, the cumulative effect
of this accounting change on beginning retained earnings, net of tax, is

2. On January 1, 2015, Foley Corporation acquired machinery at a cost of P250,000. Foley adopted the
double-declining balance method of depreciation for this machinery and had been recording depreciation over
an estimated useful life of ten years, with no residual value. At the beginning of 2018, a decision was made to
change to the straight-line method of depreciation for the machinery. The depreciation expense to be recorded
for the machinery in 2018 is (round to the nearest peso)

3. On January 1, 2015, Baden Co., purchased a machine (its only depreciable asset) for P300,000. The
machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for
financial statement reporting and the elective straight-line method for income tax reporting. Effective January
1, 2018, for financial statement reporting, Baden decided to change to the straight-line method for depreciation
of the machine. Assume that Baden can justify the change.
Baden's income before depreciation, before income taxes, and before the cumulative effect of the accounting
change (if any), for the year ended December 31, 2018, is P250,000. The income tax rate for 2018, as well
as for the years 2015-2017, is 30%. What amount should Baden report as net income for the year ended
December 31, 2018?

Use the following information for questions 4 and 5.

Waeglein Corporation purchased machinery on January 1, 2016 for P630,000. The company used the straight-line
method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2018,
Waeglein changed to the sum-of-the-years’-digits depreciation method for this asset. The following facts pertain:
2016 2017
Straight-line P105,000 P105,000
Sum-of-the-years’-digits 180,000 150,000

4. Waeglein is subject to a 30% tax rate. The cumulative effect of this accounting change on beginning retained earnings
is
5. The amount that Waeglein should report for depreciation expense on its 2018 income statement is

6. During 2018, a construction company changed from the completed-contract method to the percentage-of-completion
method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past
three years appear below:
Completed-Contract Percentage-of-Completion
2016 P 475,000 P 800,000
2017 625,000 950,000
2018 700,000 1,050,000
P1,800,000 P2,800,000
Assuming an income tax rate of 30% for all years, the affect of this accounting change on prior periods should
be reported by a credit of (AMOUNT AND ACCOUNT)
Use the following information for questions 7 and 8.

On January 1, 2015, Wintz Corporation acquired machinery at a cost of P600,000. Wintz adopted the straight-line
method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with
no residual value. At the beginning of 2018, a decision was made to change to the double-declining balance method
of depreciation for this machine.

7. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is
8. The amount that Wintz should record as depreciation expense for 2018 is

PROVISIONS, CONTINGENT LIABILITIES AND ASSETS (IAS 37)

1. The balance in Haven Corporation’s accounts payable account at December 31, 2015 was P1,350,000 before any necessary
year-end adjustments relating to the following:

 Goods were in transit to Haven from a vendor on December 31, 2015. The invoice cost was P75,000. The goods were
shipped FOB shipping point on December 29, 2015 and were received on January 2, 2016.
 Goods hipped FOB destination on December 21, 2015, from a vendor to Haven, were received on January 6, 2016. The
invoice cost was P37,500.
 On December 27, 2015, Haven wrote and recorded checks totalling P60,000 which were mailed on January 10, 2016.

In Haven’s December 31, 2015 statement of financial position, how much should be the accounts payable?

2. On July1, 2016, Regency Company started a sales promotional campaign. In each box of cereal sold, Regency inserted a coupon
redeemable for a premium. To receive a premium, each customer must submit five coupons. Regencys cost for each premium
is P6. Regency estimated that 60% of the coupons issued would be redeemed. For the six months ended December 31, 2016,
the following information is available:

Boxes of cereal sold P800,000

Coupons redeemed 200,000

How much should be the estimated liability for premium claims outstanding at December 31, 2016?

3. Provident Company inaugurated a promotional campaign on 1/ 2/2016 to promote the salability of their product. Provident
company placed a coupon redeemable for a premium in each package of cereal sold at P200. Each premium costs P25 and 10
coupons must be presented by a customer to receive a premium. Provident estimated that only 70% of the coupons issued would
be redeemed. For the 6 months ended 7/31/2016, the following transactions occurred:
Packages of cereal sold 120,000
Premium purchased 30,000
Coupons redeemed 54,000
How much should be reported as premium expense and estimated liability for coupons on the fiscal year ended 7/31/2016,
respectively?

4. Bayview Company inaugurated a sales promotion campaign on May 31, 2016, whereby the company placed a coupon in each
package of chocolate sold, the coupons being redeemable for a premium. Each premium costs P50 and the customer to receive
a premium must present 5 coupons. They estimated that only 60% of the coupon issued would be redeemed. For the seven
months ended December 31, 2016, the following info is available:
Packages of chocolate sold 400,000
Premiums purchased 30,000
Coupons redeemed 100,000
How much is the estimated liability for premium claims outstanding at 12/31/2016?

5. To increase sales, Prime Company inaugurated a promotional campaign on June 30, 2016. Prime placed a coupon redeemable
for a premium in each package of product sold. Each premium costs P100. A premium is offered to customers who send in 5
coupons and a remittance of P30. The distribution cost per premium is P20. Prime estimated that only 60% of the coupons issued
will be redeemed .For the six months ended Dec 31, 2016, the following is available:

Packages of product sold P160,000

Premiums purchased 16,000
Coupons redeemed 64,000

Compute for the estimated liability for coupons on Dec 31, 2016.

6. Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit balances in suppliers’ accounts.
The unpaid voucher file included the following items that not had been recorded as of December 31, 2016:

 A company- P224,000 merchandise shipped on Dec 31, 2016, FOB destination; received on Jan 10, 2017.

 B Inc.- P192,000 merchandise shipped on Dec 26, 2016, FOB shipping point; received on Jan 16, 2017.

 C Super services- P144,000 janitorial services for the three-month period ending Jan 31, 2017.

 MERALCO- P67,200 electric bill covering the period Dec 16, 2016 to Jan 15, 2017.

On December 28, 2016, a supplier authorized Codex to return goods billed at P160,000, and shipped on Dec 20, 2016. The
goods were returned by Codex on Dec 28, 2016, but the P160,000 credit memo was not received until Jan 6, 2017.
How much should be reported as current liabilities?
7. Vernon Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the
local residents to be exposed to highly toxic chemicals from its plant. Vernon's lawyer states that it is probable that Vernon will
lose the suit and be found liable for a judgment costing Vernon anywhere from P1,200,000 to P6,000,000. However, the lawyer
states that the most probable cost is P3,600,000. As a result of the above facts, Vernon should accrue
a. a loss contingency of P1,200,000 and disclose an additional contingency of up to P4,800,000.
b. a loss contingency of P3,600,000 and disclose an additional contingency of up to P2,400,000.
c. a loss contingency of P3,600,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of P1,200,000 to P6,000,000.

8. On January 3, 2017, Alton Corp. owned a machine that had cost P200,000. The accumulated depreciation was P120,000,
estimated salvage value was P12,000, and fair market value was P320,000. On January 4, 2017, this machine was irreparably
damaged by Reed Corp. and became worthless. In October 2017, a court awarded damages of P320,000 against Reed in favor
of Alton. At December 31, 2017, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in
the opinion of Alton’s attorney, Reed’s appeal will be denied. At December 31, 2017, what amount should Alton accrue for this
gain contingency?

9. Based upon past experience of Manhid Company, the estimated warranty costs related to peso sales are computed as follows:

First year 3%
Second year 5%
Third year 8%

Total sales and actual warranty repairs for 2015, 2016 and 2017 are as follows:
2015 2016 2017
Sales 3,800,000 4,200,000 5,785,000
Actual warranty expenditure 278,000 306,000 612,000

Assuming that the sales and repairs occur evenly throughout the year, how much would be the predicted warranty expense
covering 2015, 2016 and 2017 sales still under warranty at Dec 31, 2017?

Use the following information for questions 10 and 11

Norris Co. has a contract with its president to pay her a 5% bonus for 2016 and 2017. The federal income tax rate is 30% during these
two years.

10. In 2016, income before deductions for the bonus and federal income taxes was P600,000. If the bonus is based on income
before deduction of the bonus but after deduction of income tax, the bonus (to the nearest peso) is

11. In 2017, income before deductions for the bonus and federal income taxes was P800,000. If the bonus is based on income after
deductions for the bonus and income tax, the bonus (to the nearest peso) is

12. Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Milner Frosted Flakes
boxes and P1.00. The company estimates that 60% of the boxtops will be redeemed. In 2017, the company sold 675,000 boxes
of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Milner Company P2.50
each, how much liability for outstanding premiums should be recorded at the end of 2017?

13. During 2016, Venable Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects.
Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6%
in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2016 P 400,000 P 6,000
2017 1,000,000 30,000
2018 1,400,000 90,000
P2,800,000 P126,000
What amount should Venable report as a liability at December 31, 2018?

14. Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or
three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance
of P480,000 at December 31, 2016 before year-end adjustment. Service contract costs are charged as incurred to the service
contract expense account, which had a balance of P120,000 at December 31, 2016. Outstanding service contracts at December
31, 2016 expire as follows:
During 2017 During 2018 During 2019
P100,000 P160,000 P70,000
What amount should be reported as unearned service contract revenues in Dexter's December 31, 2016 balance sheet?

For Problem 15 to 19:

Luigi’s Music Emporium carries a wide variety of music promotion techniques-warranties and premiums-to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor. The estimated warranty
cost, based on past experience is 3% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded music or
sheet music. Customers may exchange 200 an AM/FM radio. Luigi pays P34 for each radio and estimates that 60% of the coupons
given to customers will be redeemed.
Luigi’s total sales for 2016 were P57,600,000 (P43,200,000 from musical instrument and sound reproduction equipment and
P14,400,000 from recorded music and sheet music).Replacement parts and labor for warranty work totaled P1,312,000 during 2016.
A total of 52,000 AM/FM radio used in the premium program were purchased during the year and there were 9,600,000 coupons
redeemed in 2016.
The accrual method is used by Luigi to account for the warranty and premium costs for financial reporting purposes. The balance in
the accounts related to warranties and premiums on Jan 1, 2016, were as shown below:
Inventory of Premium AM/FM radio P319,600

Estimated Premium claims outstanding 358,400

Estimated liability for warranties 1,088,000

Based on the above and determine the amounts that will be shown on the 2016 financial statements for the following:

15. Warranty expense

16. Estimated Liability from warranties
17. Premium Expense
18. Inventory of AM/FM radio
19. Estimated Liability for premiums

20. Moore Company estimates its annual warranty expense as 4% of annual net sales. The following data relate to the calendar
year 2017:
Net sales P1,500,000
Warranty liability account
Balance, Dec. 31, 2017 P10,000 debit before adjustment
Balance, Dec. 31, 2017 50,000 credit after adjustment
Which one of the following entries was made to record the 2017 estimated warranty expense?
a. Warranty Expense ............................................................................................... 60,000
Retained Earnings (prior-period adjustment) .......................................... 10,000
Warranty Liability .................................................................................... 50,000
b. Warranty Expense ............................................................................................... 50,000
Retained Earnings (prior-period adjustment) ........................................................ 10,000
Warranty Liability .................................................................................... 60,000
c. Warranty Expense ............................................................................................... 40,000
Warranty Liability .................................................................................... 40,000
d. Warranty Expense ............................................................................................... 60,000
Warranty Liability .................................................................................... 60,000