Problem No.

2
The following were found in your examination of the interplant accounts between the Home
Office and Esperanza Branch.
a. Transfer of fixed assets from Home Office amounting to P53, 960 was not booked by the
branch.
b. P10,000 covering marketing expenses of another branch was charged by Home Office to
Esperanza.
c. Esperanza recorded a debit note on inventory transfers from Home Office of P75,000
twice.
d. Home Office recorded cash transfer of P65,700 from Esperanza Branch as coming from
Upi Branch.
e. Esperanza reversed a previous debit memo from Cotabato Branch mounting to P10,500.
Home Office debited that this charge is appropriately Upi Branch’s cost.
f. Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650.

1. The net adjustment in the Home Office books related to the Esperanza Branch current
amount is:
a. P75,700
b. 65,700
c. 86,200
d. 94,820

2. The net adjustment in Esperanza’s books related to the Home Office account is:
a. P33,335
b. 31,450
c. 20,950
d. 10,450

3. Before the above discrepancies were given effect, the balance in the Home Office books of
its Esperanza Branch Current account was debit balance of P165, 920. The unadjusted
balance in the Esperanza Branch books of its Home Office Current account must be:
a. P92,336
b. 98,230
c. 104,500
d. 111,170

4. The adjusted balance of the reciprocal account is:

a. P84, 807
b. 90, 220
c. 99, 200
d. 109, 120

Problem No. 3
The following information pertains to Leila Ma’s Flower Shop, a calendar-year sole
proprietorship, which maintained its books on the cash basis during the year.
Leila Ma’s Flower Shop
TRIAL BALANCE
December 31, 2008

Debit Credit
Cash P 102, 400
Accounts receivable 64, 800
Inventory, 12/31/2007 248, 000
Furniture & fixtures 472, 800
Land improvements 180, 000
Accumulated depreciation, 12/31/2007 P 129, 600
Accounts payable, 12/31/2007 68, 000
Leila Mae’s, Drawings
Leila Mae’s, Capital, 12/31/2007 498, 400
Sales 2, 612, 000
Purchases 1, 220, 400
Salaries 696, 000
Payroll taxes 49, 600
Insurance 34, 800
Rent 136, 800
 Utilities 50, 400
Living expenses 52, 000
P3, 308, 000 P3, 309, 000

Leila Mae’s has developed plans to extend into wholesale flower market and is in the process
of negotiating a bank loan to finance the expansion. The bank is requesting 2008 financial
statements prepared on the accrual basis of accounting from Leila Mae’s. During the course
of a review engagement, Marion, Leila Mae’s accountant, obtained the following additional
information.
 Amounts due from customers totaled P128, 000 at December 31, 2008.
 An analysis of the above receivables revealed that an allowance for uncollectible
accounts of P15, 200 should be provided.
 Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at December 31,
2008, and December 31, 2007, respectively.
 The inventory totaled P291, 200 based on a physical count of the goods at December 31,
2008. The inventory was priced at cost, which approximates market value.
 On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive insurance
coverage for 1 year. The premium on the previous policy, which expired on April 30,
2008, was P31, 200.
 On January 2, 2008, Leila Mae entered into 25-year operating lease for the vacant lot
adjacent to Baron’s retail store for use as a parking lot. As agreed in the lease, Leila Mae
paved and fenced in the lot at a cost P180, 000. The improvements were completed on
April 1, 2008, and have an estimated useful life of 15 years. No provision for
depreciation or amortization has been recorded. Depreciation on furniture and fixtures
was P48, 000 for 2008.
 Accrued expenses at December 31, 2007 and 2008, were as follows:
2000 2001
Utilities P3, 600 P 6, 000
Payroll taxes 4, 400 6, 400
P8, 000 P12, 400
 Leila Mae is being sued for P16, 000. The coverage under the comprehensive insurance
policy is limited to P1, 000, 000. Leila Mae’s attorney believes that an unfavorable
outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000.
 The salaries account includes P16, 000 per month paid to the proprietor. Leila Mae also
receives P1, 000 per week for living expenses.

Required: You are to convert the balances of the nine (9) accounts below to the accrual
basis.

Multiple choice questions:

a b c d

10. Accounts receivable P64, 800 P63, 200 P128, 000 P192, 800
11. Inventory 291, 200 248, 000 43, 200 334, 400
12. Accounts payable 54, 000 68, 000 122, 000 176, 000
13. Sales 2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 200
14. Purchases 1, 274, 400 1, 220, 400 1, 166, 400 1, 250, 000
15. Salaries 888, 000 696, 000 600, 000 504, 000
16. Payroll taxes 51, 600 47, 600 49, 600 50, 000
17. Insurance 34, 800 33, 600 36, 000 35, 000
18. Utilities 50, 400 48, 000 50, 000 52, 800

CASE 4: J& M CO. (BONDS)

The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747, 280 plus
accrued interest. The bonds were dated July 1, 2001; interest payable semiannually on January 1
and July 1; redeemable after June 30, 2006 to June 30, 2007, at 101, and thereafter until maturity
at 100; and convertible into P10 par value common stock as follows.

 Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond.
 From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each P1, 000 bond.
 After June 30, 2009, at the rate of 4 shares for each P1, 000 bond.
 The bonds mature 10 years from their issue date. The company adjusts its books monthly
and closes its books as of December 31 each year.

The following transactions occur in connection with the bonds:

2007
July 1 P2, 000, 000 of bonds were converted into stock.

2008
Dec. 31 P1, 000, 000 face value of bonds were reacquired
at 99-1/4 plus accrued interest. These were
immediately retired.

2009
July 1 The remaining bonds were called for redemption
and accrued interest was paid. For purposes of obtaining funds for redemption and business
expansion, a P8, 000, 000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2009,
and are due in 20 years.

19. What are the carrying value of bonds payable at December 31, 2001?

a. P5, 747, 280 c. P5, 753, 760

b. P6, 000, 000 d. P5, 749, 440

20. What is the total interest expense for 2001?

a. P128, 520 c. P141, 480

b. P 47, 160 d. P135, 000

21. In recording the bond conversion on July 1, 200, how much should be credited to the
additional paid-in capital account?

a. P1, 796, 320 c. P1, 845, 440

b. P1, 965, 440 d. P1, 865, 440

22. What is the gain or loss on bond conversion on July 1, 2007?

a. P0 c. P1, 865, 440

b. P1, 796, 320 d. P 34, 560

23. What is the carrying value of the bonds reacquired on December 31, 2008?

a. P989, 200 c. P1, 010, 800

b. P957, 880 d. P 981, 700

24. What is the gain (loss) on bond reacquisition on December 31, 2008?

a. P3, 300 c. P34, 620

b. (P3, 300) d. P (P34, 620)

25. What is the carrying value of the bonds retired on July 1, 2009?

a. P3, 000, 000 c. P2, 873, 640

b. P2, 974, 080 d. P3, 025, 920

26. What is the gain (loss) on bond retirement on July1, 2009?

a. (P25, 920) c. (P12, 960)

b. P25, 920 d. P0

CASE 5: BLUE ICE CO. (R/E)

BLUE ICE COMPANY’S stockholders’ equity account balance at December 31, 2008
were as follows:
 Common Stock 800, 000
Additional Paid-in capital 1, 600, 000
Retained Earnings 1, 845, 000

The following 2009 transactions and other information relate to the stockholders’ equity
accounts:

BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which 160, 000 shares
were issued and outstanding.
On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for P10 per share to
hold as treasury stock. The shares were originally issued at P15 per share. BLUE ICE uses the
cost method to account for treasury stock. Treasury stock is permitted in BLUE ICE’s state of
incorporation.
On July 15, 2009, BLUE ICE declared and distributed a property dividend of inventory. The
inventory had a P75, 000 carrying value and a P60, 000 fair market value.
On January 2, 2009, BLUE ICE granted stock options to employees to purchase 20, 000 share of
BLUE ICE’s common stock at P18 per share, which was the market on that date. The option may
be exercised all 20, 000 options when the market value of the stock was P25 per share. BLUE
ICE issued new shares to settle the transaction.
BLUE ICE’s net income for 2009 was P240, 000.

Instruction: Based on the information above and other analysis as necessary, answer the
following question.

27. BLUE ICE’s Common Stock balance at December 31, 2009 is;

a. P1, 160, 000 c. P800, 000

b. P900, 000 d. P1, 300, 000

28. BLUE ICE’s Additional Paid-in capital balance at December 31, 2009 is;

a. P1, 860, 000 c. P2, 000, 000

b. P1, 960, 000 d. P2, 100, 000
29. BLUE ICE’s Retained Earnings balance at December 31, 2009 is;

a. P2, 085, 000 c. P2, 025, 000

b. P2, 010, 000 d. P1, 770, 000

30. BLUE ICE’s Treasury Stock balance at December 31, 2009 is;

a. P50, 000 c. P0
b. P75, 000 d. P125, 000

31. BLUE ICE’s Stockholders’ Equity balance at December 31, 2009 is;

a. P4, 910, 000 c. P4, 720, 000

b. P4, 820, 000 d. P4, 735, 000

CASE 6: LETICIA’S CO. (PPE)

Information pertaining to LETICIA COMPANY’S property, plant and equipment for 2009 is
presented below.

Account balances at January 1, 2009:

Debit Credit
Land 6, 000, 000
Buildings 48, 000, 000
Accum. Depreciation – Bldg. 10, 524, 000
Machinery and equipment 36, 000, 000
Accum. Depreciation – Mach/Equip. 10, 000, 000
Automotive equipment 4, 600, 000
Accum. Depreciation – Auto. Equip. 3, 384, 000
Depreciation data:
Depreciation Useful
Method Life
Building 150% declining balance 25 years
Machinery/Equip. SLM 10 years
Automotive Equip. SYD 4 years
Leasehold improvements SLM -

Depreciation is computed to the nearest month.

Transactions during 2009 and other information are as follows:

• On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and trade-in of a 2-year-
old car with a cost of P720, 000 and a book value of P216, 000. The new car has a cash price of
P960, 000; market value of the trade-in is not known.
• On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on December
31, 2008.
• On July 1, 2009, machinery and equipment were purchased at a total invoice cost of P11, 200,
000; additional costs of P200, 000 for freight and P1, 000, 000 for installation were incurred.
• LETICIA determined that the automotive equipment comprising the P4, 600, 000 balance at
January 1, 2009, would have been depreciated at a total amount of P720, 000 for the year ended
December 31, 2009.

Instruction: Based on the information above and other analysis as necessary, answer the
following question:

32. What is the depreciation on building for 2009?

a. P1, 499, 040 c. P2, 998, 080

b. P2, 880, 000 d. P2, 248, 557

33. What is the book value of the building at December 31, 2009?

a. P34, 596, 000 c. P34, 477, 920

b. P35, 976, 960 d. P35, 227, 393

34. What is the depreciation on machinery and equipment for 2009?

a. P4, 128, 000 c. P4, 220, 000

b. P4, 151, 000 d. P4, 197, 000

35. What is the gain on machine destroyed by fire?

a. P620, 000 c. P160, 000

b. P300, 000 d. P460, 000

36. What is the balance of the accumulated depreciation – machinery and equipment at
December 31, 2009?

a. P13, 231, 000 c. P13, 760, 000

b. P13, 777, 000 d. P13, 691, 000

37. What is the depreciation on automotive equipment for 2009?

a. P1, 104, 000 c. P720, 000

b. P816, 000 d. P960, 000

38. What is the gain (loss) on car traded in?

a. P (240, 000) c. P (56, 000)

b. P240, 000 d. P56, 000
39. What is the depreciation on leasehold improvement for 2009?

a. P756, 000 c. P560, 000

b. P672, 000 d. P630, 000

40. What is the book value of leasehold improvements at December 31, 2009?

a. P6, 160, 000 c. P6, 090, 000

b. P6, 048, 000 d. P5, 964, 000

CASE 7: ST. JOHN AND ST. THERESE

Financial Statements for St. John and St. Therese on December 31, 2009 follows:
Income Statements for the year ended 12/31/02

St. John St. Therese

Sales 750, 000 420, 000

Cost of sales 581, 000 266, 000
Gross Margin 169, 000 154, 000
Depreciation and interest expense 28, 400 16, 200
Other operating expenses 117, 000 128, 400
Net income from operations 23, 600 9, 400
Gain on sale of equipment 3, 000
Gain on bonds
Equity in subsidiary’s income 8, 460 .
Net income 35, 060 9, 400
======== ========
Statement of Retained Earnings for the year ended 12/31/02

01/01/02 Retained Earnings 48, 000 41, 000

Net Income (from above) 35, 060 9, 400
Total 83, 060 50, 400
Dividends (15, 000) (4, 000)
12/31/02 Balance 68, 060 46, 400
========= ========

Balance Sheet as of December 31, 2009

Cash 45, 300 6, 400

Accounts receivable (net) 43, 700 12, 100
Inventories 38, 300 20, 750
Equipment 195, 000 57, 000
Accumulated depreciation (35, 200) (18, 900)
Investment in stock of St. John 125, 460
Investment in bonds of St. Therese 44, 000
Patents . 9, 000
412, 560 130, 350
========= ========

Accounts payable 8, 900 18, 950

Bonds payable 100, 000
Capital Stock 154, 000 50, 000
Additional paid-capital 81, 600 15, 000
Retained earnings (from above) 68, 060 46, 400
412, 560 130, 350
======== =========
page 7

St. John acquired 90% of the common stock of St. Therese for P120, 600 on January 1, 2009.

The following additional information is available in the first year after the acquisition.
1. During 2009, St. John sold merchandise to St. Therese that originally cost St. John P15, 000,
and the sale was made for P20, 000. On December 31, 2008, St. Therese’s inventory included
merchandise purchased from St. John at a cost to St. Therese of P12, 000.

2. Also, during 2009, St. John acquired P18, 000 of merchandise from St. Therese. St. Therese
uses normal markup of 25% above cost. St. John’s ending inventory includes P10, 000 of the
merchandise acquired from St. Therese.

3. St. Therese reduced its intercompany account payable to St. John to a balance of P4, 000 as of
December 31, 2009, by making a payment of P1, 000 on December 30. This P1, 000 payment
was still in transit on December 31, 2009.

4. On January 2, 2009, St. Therese acquired equipment from St. John for P7, 000. The equipment
was originally purchased by St. John for P5, 000 and had a book value of P4, 000 at the date of
sale to ST. Therese. The equipment had an estimated remaining life of 4 years as of January 2,
2009.

5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of the outstanding bonds
issued by St. John. The bonds mature on December 31, 2005, and were originally issued at par.
The bonds pay interest annually on December 31 of each year, and the interest was paid to the
prior investor immediately before St. Therese’s purchase of bonds.

QUESTION:

41. What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by
the subsidiary?
a. Equity in subsidiary’s income 8, 460
Investment in stock of St. Therese 8, 460
b. Equity in subsidiary’s income 8, 460
Dividends declared – St. Therese 3, 600
Investment in stock of St. Therese 4, 860
c. Equity in subsidiary’s income 12, 060
Investment in stock of St. Therese 12, 060
d. No Eliminating Entry

42. What is the eliminating entry for St. Therese’s stockholders’ equity?
a. Capital stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Goodwill 25, 200
Investment in stock of St. Therese 120, 600
b. Capital; stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Investment in stock of St. Therese 95, 400
c. Capital stock – St. Therese 50, 000
Additional paid-in capital 15, 000
Retained earnings – St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460
d. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Investment in stock of St. Therese 111, 400

43. To eliminate the sales made by St. John to St. Therese, the entry is:

a. Sales 20, 000

Inventory – St. Therese (B/S) 3, 000
Purchases 20, 000
Inventory – St. Therese (I/S) 3, 000
b. Sales 20, 000
Cost of sales 17, 000
Inventory – St. Therese 3, 000
c. Sales 20, 000
 Inventory – St. Therese 3, 000
Cost of sales 23, 000
Page 8

d. Retained Earnings 3, 000

Sales 20, 000
Inventory – St. Therese 3, 000
Cost of sales 20, 000

44. To eliminate the entry made by St. Therese to St. John, the entry is: (assume that Equity in
subsidiary income has not been recorded by parent)
a. Sales 18, 000
Inventory 2, 000
Cost of sales 16, 000
b. Sales 18, 000
Investment in stock of St. Therese 1, 600
Retained earnings – St. Therese 400
Cost of sales 18, 000
Inventory 2, 000
c. Sales 18, 000
Retained earnings 2, 000
Cost of sales 18, 000
Inventory 2, 000
d. Sales 18, 000
Inventory 2, 000
Cost of sales 20, 000

45. To record the items in transit and to eliminate the inter-company’s payable/receivable, the
entry is:
a. Accounts payable 4, 000
Accounts receivable 4, 000
b. Accounts receivable 4, 000
Cash 1, 000
Accounts payable 5, 000
c. Cash 1, 000
Accounts payable 3, 000
Accounts receivable 4, 000
d. Cash 1, 000
Accounts payable 4, 000
Accounts receivable 5, 000

46. To eliminate the acquisition made by St. Therese from St. John, the entry is:
a. Equipment 2, 000
Accumulate depreciation 1, 000
Gain on sale of equipment 3, 000
b. Gain on sales of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 250
Depreciation expense 750
c. Gain on sale of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 1, 000
d. Gain on sale of equipment 3, 000
Equipment 2, 000
Depreciation expense 1, 000

47. The depreciation recorded by St. John at December 31, 2009 is:
a. Overstated by P750 c. Overstated by P1, 750
b. Overstated by P250 d. Understated by P1, 000

48. The entry to eliminate the bonds purchased by St. Therese from St. John is:
a. Bonds payable 50, 000
Investment in bonds of St. John 44, 000
Gain on extinguishments of debt 6, 000
b. Investment of St. John 44, 000
 Loss on extinguishments of debt 6, 000
Bonds payable 50, 000
c. Bonds payable 44, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
d. Bonds payable 50, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000