11.

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12. (San Diego Corporation)

Average number of shares outstanding

200,000 + (30,000 x 6/12) – (6,000 x 2/12) 214,000

13. (Bellview Company)

(a) Operating expenses reported P180,000

Depreciation expense (35,000)
Increase in accrued operating expenses (12,000)
Operating expenses paid in 2018 P133,000

(b) Cash paid for operating expenses P(133,000)

Cash paid for merchandise purchases (650,000)
Cash collected from sales 990,000
Cash paid for interest (6,000)
Cash paid for income taxes (90,000)
Net cash provided by operations P111,000

14. (Peso Company)

(a) Indirect method

Cash flows from operating activities

Profit before income tax P220,000
Adjustments for
Depreciation expense 80,000
Operating income before working capital changes P300,000
Decrease in accounts receivable 50,000
Increase in inventories (89,000)
Decrease in accounts payable (46,000)
Increase in salaries payable 24,000
Cash generated from operations P239,000
Income tax paid (66,000 – 12,000) (54,000)
Net cash from operating activities P185,000

(b) Direct method

Cash flows from operating activities

Collections from customers P1,050,000
Payments to trade creditors (715,000)
Payments for salaries (96,000)
Cash generated from operations P 239,000
Income taxes paid 54,000
Net cash from operating activities P185,000

Computations:
Collections: 1,000,000 + 50,000 = 1,050,000
Payments to trade creditors: 580,000 + 89,000 + 46,000 = 715,000
Salaries paid:120,000 - 24,000 = 96,000
Income taxes paid: 66,000 - 12,000 = 54,000
15. Items that would be reported in the Statement of Cash Flows (indirect method)
1. Under operating activities, depreciation expense of P120,000 is added to profit
before income taxes.
2. Under operating activities, net gain of P5,000 from sale of machine is deducted
from profit before income taxes. (Gain of P9,000 from sale of machine A less loss
of P4,000 from sale of machine B).
3. Under investing activities section, P29,000 is reported as a cash inflow of sale of
machine (27,000 from machine A plus P2,000 from machine B).
4. Under investing activities, P250,000 is reported as a cash outflow for purchase of
machine.

16. (Dollar Company)

(Indirect method)

Dollar Company
Statement of Cash Flows
For year ended December 31, 2018

Cash flows from operating activities

Profit before income tax P828,500
Adjustments for
Depreciation expense 290,000
Interest expense 60,000
Operating income before working capital changes P1,178,500
Decrease in accounts receivable 110,000
Increase in inventory (200,000)
Decrease in accounts payable (90,000)
Cash generated from operating activities P998,500
Income taxes paid 223,350
Net cash from operating activities P775,150
Cash flows from investing activities
Purchase of equipment (1,880,000)
Cash flows from financing activities
Issue of ordinary share capital P550,000
Issue of bonds at par 1,000,000
Cash dividends paid (259,950) 1, 290,050
Net increase in cash P185,200
Add cash balance, January 1 42,000
Cash balance, December 31 P227,200

Profit before tax is 828,500, computed as 579,950/70%

Dividends paid is 259,950, computed as 579,950 – 320,000
Income taxes paid is 30% x 828,500 = 248,550 -25,200 = 223,350

17. (Catherine Company)

(a)
Income before interest and income tax P270,000
Adjustments for
Depreciation expense 110,000
Gain on sale of equipment (10,000)
Increase in accounts receivable (40,000)
Increase in inventories (30,000)
Increase in accounts payable 60,000
Cash flow from operations before interest
and income taxes P360,000
Income tax paid (75,000)

2
 Interest paid (20,000)
Net cash flow from operating activities P265,000

(b)
Catherine Company
Statement of Cash Flows
For Year Ended December 31, 2018

Cash flow from operating activities

Income before interest and income tax P270,000
Adjustments for
Depreciation expense 110,000
Gain on sale of equipment (10,000)
Increase in accounts receivable (40,000)
Increase in inventories (30,000)
Increase in accounts payable 60,000
Cash flow from operations before interest
and income taxes P360,000
Income tax paid (75,000)
Interest paid (20,000)
Net cash flow from operating activities P265,000
Cash flow from investing activities
Sale of equipment P100,000
Purchase of equipment (70,000) 30,000
Cash flow from financing activities
Dividends paid (120,000)
Increase in cash during the period P175,000
Cash balance, December 31, 2017 230,000
Cash balance, December 31, 2018 P405,000

18. (Plains and Prints)

(a)
Plains and Prints
Statement of Cash Flows
For Year Ended December 31, 2018

Cash flow from operating activities

Collections from customers P4,240,000
Payment to suppliers (2,680,000)
Payment of accrued expenses (880,000)
Cash flow from operations before interest
and income tax P 680,000
Payment of interest (60,000)
Payment of income tax (325,000)
Net cash flow from operating activities P295,000
Cash flow from investing activities
Sale of land P 125,000
Sale of equipment 170,000
Purchase of equipment (830,000) (535,000)
Cash flow from financing activities
Redemption of bonds payable P (200,000)
Issue of shares 800,000
Payment of dividends (275,000) 325,000
Increase in cash during the period P 85,000
Cash balance, December 31, 2017 185,000
Cash balance, December 31, 2018 P270,000

Collections from customers = 4,450,000 + 130,000 – 340,000 = 4,240,000

Payment to suppliers = 2,325,000 + 270,000 + 200,000 – 115,000 = 2,680,000

3
 Payment of accrued expenses = 1,105,000 – 165,000 – 50,000 + 20,000 – 30,000
= 880,000

(b) Profit before interest and income tax P1,010,000

Adjustments for
Depreciation expense 165,000
Loss on sale of equipment 10,000
Increase in trade receivables (210,000)
Increase in inventories (270,000)
Decrease in prepaid expenses 10,000
Decrease in accounts payable (85,000)
Increase in accrued expenses 50,000
Cash flow from operations before interest
and income tax P680,000
Interest paid (60,000)
Income tax paid (325,000)
Net cash flow from operating activities P295,000

19. (Robinson Company)

(a) Sales revenue P18,000,000

Accounts receivable, January 1 1,500,000
Accounts receivable, December 31 (800,000)
Collections from customers P18,700,000

(b) Rent expense P3,100,000

Prepaid rent, January 1 (500,000)
Prepaid rent, December 31 720,000
Payments for rental P3,320,000

(c) Salaries expense P5,400,000

Salaries payable, January 1 50,000
Salaries payable, December 31 (120,000)
Payments for salaries P5,330,000

(d) Commission income P2,000,000

Unearned commission, January 1 (320,000)
Unearned commission, December 31 190,000
Collections from commission revenue P1,870,000

20. (Golden Harvest Corporation)

(a) Collections from sale of merchandise P3,700,000

Dividends received on investments held 90,000
Payments for operating expenses (1,505,000)
Payments for merchandise purchased (2,580,000)
Payments for interest on notes payable (120,000)
Net cash flow from operating activities P (415,000)

(b) Sale of investment property P1,300,000

Purchase of furniture and fixtures (3,400,000)
Net cash flow from investing activities P2,100,000

(c) Sale of share capital P4,200,000

Issue of bonds payable 2,000,000
Purchase of treasury shares (100,000)
Payment of notes payable (1,000,000)
Dividends paid (500,000)

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 Net cash flow from financing activities P4,600,000

(d) Net cash flow from operating activities P (415,000)

Net cash flow from investing activities 2,100,000
Net cash flow from financing activities 4,600,000
Increase in cash during the period P6,285,000
Cash balance, beginning 500,000
Cash balance, ending P6,785,000

21. 1. C 6. C
2. A 7. A
3. C 8. A
4. A 9. A
5. B 10. B

22. (1) Adjusting event. The assignment of a receiver indicates bankruptcy that requires
the recognition of impairment loss in profit or loss and the derecognition of the
related receivable on the statement of financial position.

(2) Adjusting event. The March 31, 2019 event requires that Julie Company
recognizes a liability of P1,900,000 as of December 31, 2018. Thus, the
provision of P2,500,000 previously recognized should be adjusted to the amount
of P1,900,000.

(3) Non-adjusting event. This may be disclosed if the transaction is material and
non-disclosure could influence the economic decisions of users.

(4) Non-adjusting event. This may not be disclosed if not considered significant and
will not affect the evaluation of the user.

(5) Non-adjusting event requiring disclosure of the abnormally large change in asset
prices.

Multiple Choice Questions

Theory

1. B 11. C 21. B 31. C

2. A 12. B 22. C 32. C
3. C 13. D 23. A 33. A
4. C 14. D 24. B 34. D
5. D 15. B 25. A
6. C 16. D 26. A
7. A 17. A 27. D
8. D 18. A 28. D
9. C 19. B 29. A
10. D 20. C 30. C

Problems

35. B Cash on hand and in bank 610,000

Petty cash 6,000
Notes receivable 500,000
Accounts receivable 1,200,000

5
 Merchandise inventory 1,300,000
Prepaid expenses 90,000
Total current assets 3,706,000

36. C Accounts payable 650,000

Notes payable 1,000,000
Accrued expenses 80,000
Total current liabilities 1,730,000

37. C Cash 137,000

Equity investments at FV through P & L (at fair value) 90,000
Notes receivable 92,000
Accounts receivable 129,000
Allowance for uncollectible accounts (6,000)
Merchandise inventory 136,000
Total current assets 578,000

38. B Employees income tax withheld 4,000

Notes payable 120,000
Trade accounts payable 97,000
Bonds payable 50,000
Income tax payable 28,000
Total current liabilities 299,000

39. A Ordinary share capital 360,000

Share premium 480,000
Treasury shares (at cost) (30,000
Cumulative net unrealized loss on equity securities at FV (OCI) (12,000)
Retained earnings appropriated for contingencies 90,000
Unappropriated retained earnings 120,000
Total shareholders’ equity 1,008,000

40. A Accounts receivable 2,160,000

Allowance for bad debts (250,000)
Cash 224,000
Inventory 830,000
Notes receivable (short term) 970,000
Total current assets 3,934,000

41. C Accounts payable 980,000

Wages payable 108,000
Income taxes payable 720,000
Total current liabilities 1,808,000

42. D Accounts receivable (net) 160,000

Debt securities at FV through profit or loss 50,000
Cash 110,000
Merchandise inventory 300,000
Prepaid expenses 10,000
Total current assets 630,000

43. NOTE: QUESTION SHOULD BE NON-CURRENT LIABILITIES

Mortgage payable (1,200,000 – 200,0000 1,000,000
Notes payable 1,500,000
Premium on notes payable 25,000
Total non-current liabilities 2,525,000

6
44. Ordinary share capital, P100 par 1,000,000
Share premium – ordinary 250,000
Preference share capital 450,000
Retained earnings (550,000 + 500,000 – 250,000) 800,000
Total shareholders’ equity 2,500,000

45. B Cash 175,000

Prepaid expenses 136,000
Inventory 820,000
Financial assets at FV through profit or loss 153,000
Accounts receivable 366,000
Total current assets 1,650,000

46. A Wages payable 250,000

Dividends payable 140,000
Taxes payable 228,000
Accounts payable 248,000
Total current liabilities 866,000

47. C Long-term funds 525,000

Financial assets at FV through other comprehensive income 300,000
Investment in associates 1,020,000
Property, plant and equipment 1,200,000
Accumulated depreciation (400,000)
Goodwill 450,000
Total non-current assets 3,095,000

48. A Advertising 150,000

Freight out 80,000
Rent expense (220,000 x ½) 110,000
Sales salaries and commissions 140,000
Total selling expenses 480,000

49. A Legal and audit fees 170,000

Rent expense 120,000
Total general and administrative expenses 290,000

50. Sales 5,800,000

Cost of goods sold (4,800,000 + 650,000 – 550,000) (4,900,000)
Gross profit 900,000
Selling expenses (5% x 900,000) (45,000)
General and administrative expenses (2.5% x 900,000) (22,500)
Profit 832,500

51. D Cost of sales 600,000

Finished goods inventory, January 1 (1,000,000)
Finished goods inventory, December 31 900,000
Cost of goods manufactured 500,000

52. B Total credits 1,550,000

Total debits 1,100,000
Profit before tax 450,000

7
53. C Sales revenue 5,000,000
Commission income 28,000
Inventory, December 31 520,000
Purchases (net of returns) (2,800,000)
Sales commissions (500,000)
Administrative salaries (720,000)
Office supplies expense (110,000)
Dividend income 16,000
Gain on sale of equipment 100,000
Rent expense (400,000)
Unrealized gain on investments at FV through PL 55,000
Depreciation expense-store equipment (70,000)
Depreciation expense-office equipment (50,000)
Freight in (80,000)
Freight out (120,000)
Profit before finance cost and income tax 419,000

54. D Sales commissions 500,000

Rent expense (60% x 400,000) 240,000
Depreciation-store equipment 70,000
Freight out 120,000
Total selling expenses 930,000

55. C Merchandise inventory, January 1 450,000

Net purchases 2,800,000
Freight in 80,000
Merchandise inventory, December 31 (520,000)
Cost of goods sold 2,810,000

56. B Profit before finance charge and income tax 419,000

Interest expense (180,000)
Profit before income tax 239,000
Income tax (71,700)
Profit 167,300
Unrealized gain on investments at FV through OCI, net of tax 61,600
Total comprehensive income 228,900

57. C Total liabilities 376,000

Total capital (2,000,000 +100,000 – 8,000) 2,092,000
Total assets 2,468,000

58. A Cash (490,000 – 25,000) 465,000

Investments in equity securities held for trading (380,000 – 200,000) 180,000
Accounts receivable (1,250,000 – 500,000) 750,000
Non-trade notes receivable (50,000 x 2) 100,000
Merchandise inventory 900,000
Prepaid expenses 80,000
Total current assets 2,475,000

59. A Receivable from officer 500,000

Cash earmarked for acquisition of equipment 25,000
Non-trade notes receivable (300,000 – 100,000) 200,000
Plant and equipment 3,750,000

8
 Total non-current assets 4,475,000

60. D Cash and cash equivalents (650,000 – 162,500) 487,500

Notes receivable 390,000
Accounts receivable, net of allowance for bad debts 256,750
Inventory, 910,000
Total current assets 2,044,250

61. C Reported total comprehensive income 1,111,500

Adjustment to profits in prior years for errors in depreciation 112,500
Correct total comprehensive income 1,224,000

62. A Financing activities (112,500 – 120,000 - 33,750) (41,250)

Investing activities 40,500
Operating activities (409,500+6,750-187,500-157,500–18,250-9,000) 44,000

CHAPTER 5
CHANGE IN ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATES
AND PRIOR PERIOD ERRORS

Problems
1. (a)
Tuscany Company
Comparative Income Statements
For the Years Ended December 31, 2019 and 2018

2019 2018
Sales P3,000,000 P2,540,000
Cost of goods sold (1,420,000) (1,143,000)
Gross profit 1,580,000 1,397,000
Selling expenses (350,000) (210,000)
General and administrative expenses (260,000) (220,000)
Profit before income tax P970,000 P967,000
Income tax (291,000) (290,100)
Profit P 679,000 P 676,900

Ending inventory, 2018, as reported P 355,000

Cost of goods sold, as reported in 2018 1,140,000
Goods available for sale P1,495,000
Beginning inventory, as reported in 2018 250,000
Purchases in 2018 P1,245,000

Purchases P1,245,000
Inventory, beg (weighted average) 210,000
Inventory, end (weighted average) (312,000)
Restated cost of sales in 2018, weighted average P1,143,000

9
(b)
Tuscany Company
Statement of Changes in Equity
For the Years Ended December 31, 2019 and 2018
Share Retained
Capital Earnings Total
January 1, 2018, balances as previously reported P1,000,000 P 600,000 P1,600,000
Cumulative effect of changing from FIFO to weighted
average method of inventory costing, net of income
tax of P12,000* (28,000) (28,000)
January 1, 2018 balances, as restated P1,000,000 P572,000 P1,572,000
2018 Changes
Profit 676,900 676,900
Dividends (400,000) (400,000)
December 31, 2018 balances P1,000,000 P848,900 P1,848,900
2019 Transactions
Profit 679,000 679,000
Balances, December 31, 2019 P1,000,000 P1,527,900 P2,527,900
* based on 30% income tax rate

Cumulative effect shown on the statement of changes in equity

Difference in beginning inventory of 2018 (250,000-210,000) P40,000
Applicable tax (30% x 40,000) 12,000
Net adjustment (deduction) from retained earnings, January 1, 2018 P28,000

The cumulative effect, however, is taken up in the books during 2017, when the change was decided
upon by the management. The following 2019 entry is made:
Retained earnings 30,100
Income tax payable 12,900
Inventory, beginning (or cost of sales) 43,000
Thus, the retained earnings at December 31, 2019 is P879,000 - 30,100 + 679,000 = P1,527,900.

2. (CAESARS PALACE COMPANY)

Caesars Palace Company
Statement of Changes in Equity
For the Years Ended December 31, 2019 and 2018
Share Retained
Capital Earnings Total
January 1, 2018, balances as previously reported P2,000,000 P1,500,000 P3,500,000
Prior period adjustment
2017 expense charged erroneously to Equipment,
net of income tax of P24,000 ___________ (56,000) (56,000)
January 1, 2018 balances, as restated P2,000,000 P1,444,000 P3,444,000
2018 Changes
Profit 514,000* 514,000
Dividends ___________ (200,000) (200,000)
Balances, December 31, 2018 P2,000,000 P1,758,000 P3,758,000
2019 Changes
Profit 750,000 750,000
Dividends ___________ (500,000) (500,000)
Balances, December 31, 2019 P2,000,000 P2,008,000 P4,008,000

10
*2018 Restated profit = P500,000 + depreciation erroneously recognized (20,000 x 70%)
3. (RIVIERA COMPANY)
(a)
Riviera Company
Statement of Comprehensive Income
For Year Ended December 31, 2019 and 2018
(In million pesos)

(a) 2019 2018

Revenue P2,000 P1,800
Raw materials and consumables used (850) (745)
Employee benefit expense (100) (95)
Depreciation and amortization (40) (40)
Other expenses (2) (3)
Income from operations P1,008 P917
Finance costs (4) (5)
Profit before income tax P1,004 P912
Income tax expense (301.2) (273.6)
Profit for the year P702.8 P638.4
Other comprehensive income
Unrealized gains (losses) on investments measured at fair value
through other comprehensive income, net of applicable tax .56 (.84)
Total comprehensive income P703.36 P637.56

Riviera Company
Statement of Changes in Equity
For Year Ended December 31, 2019 and 2018
(In million pesos)

(b) Share Share Retained Unrealized

Capital Premium Earnings GainLoss Total
January 1, 2018 balances P75.0 P22.0 P 30.00 P2.4 P129.40
Prior period adjustment-2017
depreciation expense was
understated, net of P150,000 tax (.35)
Restated January 1, 2018 balances P75.0 P22.0 P29.65 P2.4 P129.05
2018 Changes
Profit for the year 638.40 638.40
Unrealized losses on investments
measured at FV net of tax (.84) (.84)
Dividends declared (25.00) (25.00)
December 31, 2018 balances P75.0 P22.0 P643.05 P1.56 P741.61
2019 Changes
Issue of share capital 8.0 2.8 10.80
Profit for the year 702.80 702.80
Dividends declared (20.00) (20.00)
Unrealized gains on investments
measured at FV net of tax .56 .56
December 31, 2019 balances P83.0 P24.8 P1,325.85 P2.12 P1,435.77

11
 Multiple Choice Questions

1. D 6. C
2. B 7. B
3. B 8. A
4. B 9. B
5. C 10. A

11. C Difference in FIFO and average 2017 ending inventory 90,000

Tax effect 27,000
Amount of adjustment 63,000

12. B Depreciation expense for 2018 (400,000/5) 80,000

13. C 230,000 x 40% = 92,000

(230,000 – 92,000) x 40% 55,200

14. A Reported retained earnings, January 1, 2018 240,000

Correct depreciation for 2017 (230,000 x 40%) 92,000
Recorded depreciation for 2017 (200,000 x 40%) 80,000
Difference, reported as adjustment, net of tax 12,000 (8,400)
Restated amount of retained earnings, January 1, 2018 231,600

15. B Carrying amount, January 1, 2018 (528,000 x 4/8) 264,000

Estimated remaining useful life (6-4) 2 years
Depreciation expense for 2018 132,000

16. A No retrospective adjustment is required as a result of change in

accounting estimate.

12