COMPETENCY EXAM PRACTICE

DIRECTIONS: Read the items carefully and comply all the requirements needed. The trial balance below will
also serve as the chart of account. Use two decimal places on transactions requiring present value and
rounding off.
KAYA COTTO Incorporated
Unadjusted Trial Balance
December 31, 2017
ACCOUNT TITLE DEBIT CREDIT
Petty Cash Fund 60,000
Cash in Bank 1,056,000
Trading Securities 983,640
Accounts Receivable-Trade 3,618,660
Allowance for doubtful accounts 110,360
Notes Receivable 1,300,000
Inventories 2,754,900
Premium-containers
Prepaid Advertising 640,000
Prepaid Insurance 490,000
Prepaid Rent 420,000
Office supplies inventory 361,000
Furniture & fixtures 2,798,400
Accumulated Depreciation-furniture & fixtures 530,000
Equipment 4,270,000
Accumulated depreciation-Equipment 677,500
Machinery
Accumulated depreciation-Machinery
Investment property 3,000,000
Accumulated depreciation-investment property 150,000
Intangible assets 548,000
Accounts payable-trade 1,856,320
Estimated premium liability
Notes payable, 10% 3,300,000
Accrued expenses 169,040
Interest payable 780,000
Interest rate swap payable
bonus payable
deferred grant income
loans payable
Bonds payable, 9% 5,000,000
Premium on bonds payable
Ordinary share capital 5,400,000
Share premium-conversion privilege
Retained Earnings 2,245,660
Unrealized loss-interest rate swap
Sales 13,078,000
Grant Income
Cost of goods sold 7,734,000
Depreciation expense 1,500,000
Research and development cost
Legal expense
Loss on Patent write off
Environmental cost
Marketing expenses 357,000
Interest expense 780,000
Advertising expense 625,280
Bonus expense
Loss on sale
Premium Expense
33,296,880 33,296,880
The following transactions are excluded from the trial balance above.
1. KAYA COTTO Incorporated purchased an investment property on January 1, 2015 for a cost of
3,000,000. The property had a useful life of 40 years and on December 31, 2017 had a fair value of
3,100,000. On December 31, 2017 the property was sold for net proceeds of 2,200,000. The entity
used the cost model to account for the investment property.

2. On January 1, 2017, KAYA COTTO Incorporated borrowed 5,000,000 from a bank at a variable rate of
interest for 5 years. Interest will be paid annually to the bank on December 31. Under the agreement,
the market rate of interest every January 1 resets the variable rate for that period and the amount of
interest to be paid on December 31. In conjunction with the loan, KAYA COTTO Incorporated entered
into a “received variable, pay fixed” interest rate swap agreement with another bank speculator. The
interest rate swap agreement was designated as a cash flow hedge. The market rates of interest are:

January 1, 2017 10%

3. On January 2, 2017, KAYA COTTO Incorporated received a grant of 45,000,000 to compensate it for
costs incurred in planting trees over a period of five years. KAYA COTTO Incorporated will incur such
cost in this manner:
Year Costs
2017 10,000,000
2018 8,000,000
2019 6,000,000
2020 4,000,000
2021 2,000,000
Actual costs incurred in planting the trees showed 10,000,000 in year 2017.

4. On March 31, 2017, KAYA COTTO Incorporated acquired a printing machine for 200,000 paying a
down payment of 75,000 and the balance to be paid in five equal annual installments starting March 31,
2018. A 10% interest rate is considered to be the stated rate for a note of this type.

KAYA COTTO Incorporated incurred 40,000 for installation. In addition, the entity incurred 8,000 in
testing the machine, proceeds of 3,000 was received for selling the items produced from testing. The
company wanted to offset the proceeds from the cost of testing per PAS 16 requirement. KAYA
COTTO Incorporated uses the sum-of-the-years method of depreciation. The machine is expected to
have a useful life of 5 years and a salvage value of 5,000.

5. On July 1, 2017, KAYA COTTO Incorporated developed a patent that reduces the time required to
insert the fortunes into their fortune cookies. Because the process is considered very valuable to the
fortune cookie industry, KAYA COTTO Incorporated had it patented. The following expenses were
incurred in developing and patenting the item:
Legal costs to the patent on product Y. Production of the
invention would not have been undertaken
without the patent 100,000
Special equipment to be used solely for the development of
Product Y. The equipment has no other use and has
an estimated useful life of four years. 60,000
Labor and material costs incurred in producing a prototype model 200,000
Cost of testing the prototype 80,000

6. KAYA COTTO Incorporated purchased a patent on January 2, 2013 for 240,000. On that date the
patent had a remaining legal life of 16 years but a remaining economic life of only 10 years. On July 1,
2014, KAYA COTTO Incorporated spent 81,600 in a successful defense against a patent infringement
suit brought against the company. On January 2, 2016, KAYA COTTO Incorporated revised its
estimate of the patent’s useful life; as of this date the patent is estimated to have a remaining useful life
 of 5 years. On December 31, 2017, management concludes that the patent is now worthless because
of a new process developed by a competitor during the latter of December 2017.

7. The KAYA COTTO Incorporated launched a sales promotional campaign on June 30, 2016. For every
ten empty packs returned to the company, customers will receive an attractive food container. The
company estimates that only 30% of the packs reaching the market will be redeemed. Additional
information are as follows:
Units Amount
Sales of food packs 3,000,000 9,000,000
Food containers purchased 60,000 180,000
Prizes distributed to customers 37,000

8. On January 1, 2017, KAYA COTTO Incorporated issued its 9%, 4-year convertible debt instrument with
a face amount of 4,000,000 for 4,250,000. Interest is payable every December 31 of each year. The
debt instrument is convertible into 80,000 ordinary shares with a par value of 50. When the debt
instruments were issued, the prevailing market rate of interest for similar debt without conversion option
is 8%.

9. KAYA COTTO Incorporated asked your help to compute for the bonus of their sales manager. The
following information were given to you:
Bonus (net income after bonus and tax) 9%
Tax rate 35% of net income after bonus

Requirement:
1. Prepare journal entries to record the transactions above.
2. Complete the working paper below.
3. Prepare statement of financial position.
4. Prepare Income Statement.
 UNADJUSTED TRIAL ADJUSTED TRIAL
BALANCE ADJUSTMENTS BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Petty Cash Fund 60,000
Cash in Bank 1,056,000
Trading Securities 983,640
Accounts Receivable-Trade 3,618,660
Allowance for doubtful accounts 110,360
Notes Receivable 1,300,000
Inventories 2,754,900
Premium-containers
Prepaid Advertising 640,000
Prepaid Insurance 490,000
Prepaid Rent 420,000
Office supplies inventory 361,000
Furniture & fixtures 2,798,400
Accumulated Depreciation-furniture 530,000
Equipment 4,270,000
Accumulated depreciation-Equipment 677,500
Machinery
Accumulated depreciation-Machinery
Investment property 3,000,000
Accumulated depreciation-investment 150,000
Intangible assets 548,000
Accounts payable-trade 1,856,320
Estimated premium liability
Notes payable, 10% 3,300,000
Accrued expenses 169,040
Interest payable 780,000
Interest rate swap payable
bonus payable
deferred grant income
loans payable
Bonds payable, 9% 5,000,000
Premium on bonds payable
Ordinary share capital 5,400,000
Share premium-conversion privilege
Retained Earnings 2,245,660
Unrealized loss-interest rate swap
Sales 13,078,000
Grant Income
Cost of goods sold 7,734,000
Depreciation expense 1,500,000
Research and development cost
Legal expense
Loss on Patent write off
Environmental cost
Marketing expenses 357,000
Interest expense 780,000
Advertising expense 625,280
Bonus expense
Loss on sale
Premium Expense
33