72 CHAPTER 6 Problem 6-1 Problem 6-2

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CHAPTER 6
Problem 6-1 Problem 6-2
1. C 6. B 1. C 6. A
2. C 7. C 2. D 7. B
3. C 8. B 3. C 8. B
4. A 9. A 4. C 9. B
5. C 10. C 5. B 10. D
Problem 6-3
March 1 Cash 2,000,000
Note payable – bank 2,000,000
April 1 Cash 980,000
Sales discount 20,000
Accounts receivable 1,000,000
June 1 Cash 2,000,000
Sept. 1 Note payable – bank 2,000,000
Interest expense (12% x 2,000,000 x 6/12) 120,000
Cash 2,120,000
Problem 6-4
Requirement 1
2008
Oct. 1 Cash 3,600,000
Discount on note payable (10% x 4,000,000) 400,000
1 Interest expense (400,000 x 3/12) 100,000
Discount on note payable 100,000
2009
Oct. 1 Note payable – bank 4,000,000
Cash 4,000,000
Dec. 31 Interest expense 300,000
Requirement 2
Current liabilities:
Note payable – bank (Note 3) 4,000,000
Discount on note payable ( 300,000)
Carrying value 3,700,000

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Note 3 – Note payable – bank
Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000.
Problem 6-5
May 1 Accounts receivable – assigned 800,000
Accounts receivable 800,000
1 Cash (640,000 – 20,000) 620,000
Service charge 20,000
Note payable – bank 640,000
5 Sales return 30,000
Accounts receivable – assigned 30,000
10 Cash 490,000
Sales discount (2% x 500,000) 10,000
June 1 Note payable – bank 490,000
Interest expense (2% x 640,000) 12,800
Cash 502,800
7 Allowance for doubtful accounts 10,000
20 Cash 200,000
July 1 Note payable – bank (640,000 – 490,000) 150,000
Interest expense (2% x 150,000) 3,000
Cash 153,000
1 Accounts receivable 60,000
Less: Collections 690,000
Sales return 30,000
Worthless accounts 10,000 740,000
Balance 60,000
Problem 6-6
July 1 Accounts receivable – assigned 1,500,000

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July 1 Cash (1,125,000 – 60,000) 1,065,000
Service charge (4% x 1,500,000) 60,000
Aug. 1 Note payable – bank 800,000
1 Interest expense (2% x 1,125,000) 22,500
Cash 22,500
Sept. 1 Cash 168,500
Interest expense 6,500
Collections by bank 500,000
Less: Payment of loan (1,125,000 – 800,000) 325,000
Excess collection 175,000
Less: Interest (2% x 325,000) 6,500
Cash remittance from bank 168,500
Problem 6-7
July 1 Accounts receivable – assigned 500,000
1 Cash (400,000 – 10,000) 390,000
Service charge (2% x 500,000) 10,000
Aug. 1 Cash 330,000
1 Interest expense (1% x 400,000) 4,000
Cash 330,000
Sept. 1 Cash 170,000
1 Interest expense (1% x 74,000) 740
Cash 74,740

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Problem 6-8
Requirement a
Dec. 1 Accounts receivable – assigned 1,500,000
1 Cash 1,250,000
Service charge 50,000
31 Cash 970,000
Accounts receivable – assigned 1,000,000
31 Interest expense (1% x 1,300,000) 13,000
Cash 970,000
Requirement b
The accounts receivable – assigned with a balance of P500,000 should be classified
as current asset and included in trade and other receivables.
The note payable – bank of P343,000 should be classified and presented as a current liability.
The company should disclose the equity in assigned accounts as follows:
Note payable – bank (343,000)
Equity in assigned accounts 157,000
Problem 6-9
July 1 Accounts receivable – assigned 800,000
1 Cash (640,000 – 24,000) 616,000
Service charge (3% x 800,000) 24,000
Aug. 1 Interest expense (1% x 640,000) 6,400
Sept. 1 Cash 91,336

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Bank loan 640,000
August 1 payment 413,600
Balance 226,400
Collections by bank 320,000
Less: Payment of loan 226,400
Interest (1% x 226,400) 2,264 228,664
Remittance from bank 91,336
Problem 6-10
Cash 400,000
Allowance for doubtful accounts 30,000
Loss on factoring 70,000
Problem 6-11
Cash 5,000,000
Receivable from factor 300,000
Allowance for bad debts 250,000
Problem 6-12
Feb. 1 Cash 680,000
Service charge (5% x 800,000) 40,000
Receivable from factor (10% x 800,000) 80,000
15 Sales return and allowances 20,000
28 Cash (80,000 – 20,000) 60,000
Problem 6-13
June 1 Accounts receivable 500,000
Sales 500,000

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June 3 Cash 340,000
Sales discount (2% x 500,000) 10,000
Commission (5% x 500,000) 25,000
9 Sales return and allowances 50,000
Sales discount (2% x 50,000) 1,000
11 No entry
15 Cash (125,000 – 49,000) 76,000
Problem 6-14
July 26 Cash 750,000
Commission (5% x 1,000,000) 50,000
Receivable from factor (20% x 1,000,000) 200,000
July 28 Sales return and allowances 50,000
Aug. 31 Cash 150,000
Problem 6-15
1. Cash 150,000
Service charge (5% x 200,000) 10,000
2. Accounts receivable – assigned 300,000
Cash 225,000
Service charge (5% x 300,000) 15,000
3. Doubtful accounts 35,000
Required allowance (5% x 1,300,000) 65,000
Less: Allowance – January 1 30,000
Doubtful accounts 35,000

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4. The net realizable value of the accounts receivable is included in trade and other
receivables and presented as current asset.
Accounts receivable – unassigned 1,000,000
Total 1,300,000
Less: Allowance for doubtful accounts 65,000
Net realizable value 1,235,000
The receivable from factor of P40,000 is also included in trade and other receivables.
The note payable – bank of P240,000 is classified and presented as current liability.
However, the company should disclose the equity in assigned accounts as follows:
Note payable – bank (240,000)
Equity in assigned accounts 60,000
Problem 6-16
Books of Motorway Company
1. Cash 2,250,000
Gross amount 3,000,000
Holdback (10% x 3,000,000) ( 300,000)
Commission (15% x 3,000,000) ( 450,000)
Cash received 2,250,000
Sales price (3,000,000 x 85%) 2,250,000
Book value of accounts receivable (3,000,000 – 100,000) 2,900,000
Loss on factoring ( 350,000)
2. Cash 250,000
Accounts receivable factored 3,000,000
Collections by factor 2,500,000
Balance – December 31 500,000
Receivable from factor per book 300,000
Required holdback (10% x 500,000) 50,000
Remittance from factor 250,000

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Books of Freeway Company (factor)
1. Accounts receivable 3,000,000
Cash 2,250,000
Clients retainer 300,000
Commission income 450,000
2. Cash 2,500,000
3. Clients retainer 250,000
Cash 250,000
4. Doubtful accounts 20,000
Allowance for doubtful accounts (4% x 500,000) 20,000
Problem 6-17
Jan. 15 Notes receivable 500,000
Sales 500,000
Feb. 15 Cash 496,875
Notes receivable discounted 500,000
Principal 500,000
Interest (500,000 x 12% x 6/12) 30,000
Maturity value 530,000
Discount (530,000 x 15% x 5/12) 33,125
Net proceeds 496,875
July 15 Notes receivable discounted 500,000
Notes receivable 500,000
Problem 6-18
March 14 Accounts receivable 2,050,000
Sales 2,050,000
April 7 Notes receivable 2,000,000
Freight out 50,000
April 20 Cash 2,001,750
Notes receivable discounted 2,000,000
Interest income 1,750

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Principal 2,000,000
Add: Interest (2,000,000 x 12% x 60/360) 40,000
Maturity value 2,040,000
Less: Discount (2,040,000 x 15% x 45/360) 38,250
Net proceeds 2,001,750
June 4 Accounts receivable (2,040,000 + 10,000) 2,050,000
Cash 2,050,000
Notes receivable 2,000,000
July 4 Cash 2,070,000
Interest income (2,000,000 x 12% x 30/360 20,000
Problem 6-19
Requirement a
April 5 Notes receivable 500,000
19 Cash 501,075
Principal 500,000
Add: Interest (500,000 x 12% x 60/360) 10,000
Less: Discount (510,000 x 14% x 45/360) 8,925
May 3 Notes receivable 1,000,000
16 Cash 995,000
Principal 1,000,000
Less: Discount (1,000,000 x 12% x 15/360) 5,000
May 25 Notes receivable 1,500,000

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Principal 1,500,000
Add: Interest (1,500,000 x 12% x 60/360) 30,000
Less: Discount (1,530,000 x 12% x 50/360) 25,500
Net credit 1,504,500
June 7 Accounts receivable (510,000 + 20,000) 530,000
Cash 530,000
15 Notes receivable 800,000
Sales 800,000
June 18 Cash 532,650
Interest income (530,000 x 12% x 15/360) 2,650
Requirement b – Adjustments on June 30
1. Accrued interest receivable 4,000
Accrued interest on D’s note.
2. Notes receivable discounted 1,000,000
To cancel the contingent liability on B’s note. This note matured on May 31.
Since there is no notice of dishonor it is assumed that the said note is paid on
the date of maturity.
Problem 6-20
May 1 Notes receivable 200,000
1 Notes receivable 300,000
July 30 Accounts receivable 206,000
Aug. 1 Cash 306,075
Note receivable discounted 300,000

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Principal 300,000
Interest (300,000 x 12% x 6/12) 18,000
Less: Discount (318,000 x 15% x 3/12) 11,925
Sept. 1 Notes receivable 132,000
28 Cash 210,120
Oct. 1 Notes receivable 500,000
Sales 500,000
Nov. 1 Accounts receivable (318,000 + 12,000) 330,000
Cash 330,000
Dec. 30 Cash 515,000
Interest income (500,000 x 12% x 90/360 15,000
31 Cash 336,600
Problem 6-21
2008
Jan. 1 Cash 1,000,000
Land 5,000,000
Gain on sale of land 2,000,000
Dec. 31 Accrued interest receivable 720,000
Interest income (12% x 6,000,000) 720,000
2009
Dec. 31 Accrued interest receivable 806,400
2010
Jan. 1 Cash 7,526,400
Accrued interest receivable 1,526,400

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Problem 6-22
Jan. 1 Notes receivable 600,000
Sales 540,000
Unearned interest income 60,000
Dec. 31 Cash 200,000
31 Unearned interest income 30,000
Year Notes receivable Fraction Interest income
2008 600,000 6/12 30,000
2009 400,000 4/12 20,000
2010 200,000 2/12 10,000
1,200,000 60,000
Problem 6-23
Face value 900,000 Present value 720,540
Present value (300,000 x 2.4018) 720,540 Cash received 100,000
Unearned interest income 179,460 Sales price 820,540
Cost of generator 700,000
Gross income 120,540
Jan. 1 Cash 100,000
Sales 820,540
Dec. 31 Cash 300,000
31 Unearned interest income 86,465
Date Collection Interest Principal Present value
Jan. 1, 2008 720,540
Dec. 31, 2008 300,000 86,465 213,535 507,005
Dec. 31, 2009 300,000 60,841 239,159 267,846
Dec. 31, 2010 300,000 32,154 267,846 -

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Problem 6-24
Requirement 1
12/31/2008 Note receivable 2,500,000
Sales (500,000 x 3.99) 1,995,000
12/31/2009 Cash 500,000
Note receivable 500,000
Requirement 2
Note receivable (2,500,000 – 500,000) 2,000,000
Unearned interest income (505,000 – 159,600) ( 345,400)
Book value – 12/31/2009 1,654,600
Requirement 3
Interest income for 2010 (8% x 1,654,600) 132,368
Problem 6-25
Face value of note 400,000 Present value 284,720
Present value (400,000 x .7118) 284,720 Cash received 125,000
Unearned interest income 115,280 Sales price 409,720
Book value 350,000
Gain on sale 59,720
2008
Jan. 1 Cash 125,000
Accumulated depreciation 150,000
Equipment 500,000
Gain on sale of equipment 59,720
Dec. 31 Unearned interest income 34,166
Date Interest income Unearned interest Present value
Jan. 01, 2008 115,280 284,720
Dec. 31, 2008 34,166 81,114 318,886
Dec. 31, 2009 38,266 42,848 357,152
Dec. 31, 2010 42,848 - 400,000
2009

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2010
2011
Jan. 1 Cash 400,000
Problem 6-26
1/1/2008 Note receivable 9,000,000
Loss on sale of land 250,000
Land 7,000,000
Unearned interest income 2,250,000
PV of note (9,000,000 x .75) 6,750,000
Carrying amount of land 7,000,000
Loss on sale ( 250,000)
12/31/2008 Unearned interest income 675,000
Interest income (2,250,000 – 1,417,500) 832,500
1/1/2011 Cash 9,000,000
Note receivable 9,000,000
Problem 6-27 Answer C
Note payable 1,000,000
Discount on note payable (1,000,000 x 10.8%) ( 108,000)
Amortization from August 1 to December 31 (108,000 x 5/12) ( 45,000)
Balance – December 31, 2008 63,000
Note payable 1,000,000
Discount on note payable ( 63,000)
Carrying value 937,000
Problem 6-28
Question 1 – Answer A Question 2 - Answer B

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Problem 6-29 Answer A
Problem 6-30 Answer C Problem 6-31 Answer C
Principal 500,000 Principal 200,000
Add: Interest (500,000 x 8%) 40,000 Less: Discount
Maturity value 540,000 (200,000 x 10% x 6/12) 10,000
Less: Discount Net proceeds 190,000
(540,000 x 10% x 6/12) 27,000
Principal 4,000,000
Interest (4,000,000 x 12% x 90/360) 120,000
Less: Discount (4,120,000 x 15% x 60/360) 103,000
Net proceeds 4,017,000
Principal 4,000,000
Interest revenue 17,000
Problem 6-33 Answer C Problem 6-34 Answer B
Principal 600,000 Note receivable – June 30, 2007 1,500,000
Add: Interest Less: Payment on July 1, 2008 500,000
(600,000 x 10% x 6/12) 30,000 Balance – July 1, 2008 1,000,000
Less: Discount Accrued interest from July 1, 2008
(630,000 x 12% x 4/12) 25,200 to June 30, 2009 (1,000,000 x 8) 80,000
First payment on January 1, 2008 600,000
Present value of remaining six payments (600,000 x 4.36) 2,616,000
Correct sales revenue 3,216,000
Problem 6-37 Answer D Problem 6-38 Answer C
Note receivable 1,000,000 The note receivable is shown at its value on
Unearned interest income ( 435,000) December 31, 2008.
Carrying value equal to present
value (100,000 x 5.65) 565,000 Face value – remaining nine
payments (500,000 x 9) 4,500,000
Present value (500,000 x 6.25) 3,125,000

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Problem 6-39
1. Answer C
Note receivable 6,000,000
Present value of note receivable (6,000,000 x .75) 4,500,000
Interest income:
2008 (10% x 4,500,000) 450,000
2009 (10% x 4,950,000) 495,000
2010 (1,500,000 – 450,000 – 495,000) 555,000
Total 1,500,000
2. Answer D
Present value of note receivable 4,500,000
Carrying amount of equipment 4,800,000
Loss on sale of equipment ( 300,000)
Problem 6-40 Answer B
Present value of note receivable (1,000,000 x .712) 712,000
Book value of equipment 800,000
Interest income for first year (12% x 712,000) 85,440
Problem 6-41 Answer D
NR from Hart 1,000,000
NR from Maxx (1,150,000 x .68) 782,000

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CHAPTER 7
Problem 7-1 Problem 7-2 Problem 7-3 Problem 7-4 Problem 7-5
1. D 1. D 1. B 1. D 1. C
2. B 2. D 2. A 2. C 2. B
3. D 3. A 3. A 3. C 3. A
4. D 4. C 4. C 4. A 4. C
5. D 5. D 5. C 5. A 5. D
6. D 6. A 6. D 6. C 6. D
7. C 7. D 7. C 7. A 7. A
8. A 8. A 8. A 8. C 8. B
9. A 9. A 9. A 9. A 9. B
10. A 10. B 10. D 10. C 10. A
Problem 7-6
Items counted in the bodega 4,000,000
Items included in count specifically segregated per sales contract ( 100,000)
Items returned by customer 50,000
Items ordered and in receiving department 400,000
Items shipped today, FOB destination 150,000
Items for display 200,000
Items on counter for sale 800,000
Damaged and unsalable items included in count ( 50,000)
Items in shipping department 250,000
5,700,000
Problem 7-7
Materials 1,400,000
Goods in process 650,000
Finished goods in factory 2,000,000
Finished goods in company-owned retail store (750,000/150%) 500,000
Finished goods in the hands of consignees (400,000 x 60%) 240,000
Finished goods in transit 250,000
Finished goods out on approval 100,000
Materials in transit (330,000 + 30,000) 360,000
Correct inventory 5,500,000
Problem 7-8
Finished goods 2,000,000
Finished goods held by salesmen 100,000
Goods in process (720,000/80%) 900,000
Materials 1,000,000
Materials returned to suppliers for replacement 100,000
Factory supplies (110,000 + 60,000) 170,000

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Problem 7-9
1. Inventory 50,000
Income summary 50,000
2. Accounts payable 75,000
Purchases 75,000
3. Purchases 30,000
Accounts payable 30,000
Inventory 30,000
4. Income summary 90,000
Inventory 90,000
5. Purchases 140,000
Problem 7-10
1. EXCLUDE – The term of the shipment is FOB destination.
2. EXCLUDE – The goods are held only for consignment.
3. INCLUDE – There is no perfected sale yet as of December 31, 2008.
4. INCLUDE – The term FOB supplier’s warehouse is synonymous with FOB shipping point.
5. EXCLUDE – There is already a constructive delivery since the article was specifically
made according to the customer’s specifications and the article is already
completed on December 31, 2008.
Problem 7-11
Inventory before adjustment 7,600,000
Goods out on consignment 1,000,000
Goods purchased FOB shipping point 250,000
Goods sold FOB shipping point ( 850,000)
Goods sold FOB destination 260,000
Goods sold FOB destination 840,000
Correct December 31 inventory 9,100,000

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Problem 7-12
Inventory per book 950,000
Item 3 (18,500 – 1,000 / 140%) 12,500
Item 4 (50,000 + 2,500) 52,500
Item 5 (35,000 / 140% = 25,000 + 2,000) 27,000
Adjusted inventory 1,042,000
Problem 7-13
Requirement a
Periodic System Perpetual System
1. Purchases 800,000 1. Merchandise inventory 800,000
Accounts payable 800,000 Accounts payable 800,000
2. Accounts payable 50,000 2. Accounts payable 50,000
Purchase returns 50,000 Merchandise inventory 50,000
Cash 600,000 Cash 600,000
4. Accounts receivable 1,580,000 4. Accounts receivable 1,580,000
Sales 1,580,000 Sales 1,580,000
5. Sales return 40,000 Cost of sales 790,000
Accounts receivable 40,000 Merchandise inventory 790,000
6. Cash 1,360,000 5. Sales return 40,000
Accounts receivable 1,360,000 Accounts receivable 40,000
7. Inventory-Dec. 31 60,000 Merchandise inventory 20,000
Income summary 60,000 Cost of sales 20,000
(60 x 1,000)
6. Cash 1,360,000
7. Inventory shortage 10,000
Merchandise inventory 10,000
Merchandise inventory per book 70,000
Physical count 60,000
Shortage 10,000
Requirement b
Periodic System Perpetual System
Inventory – January 90,000 Cost of sales recorded
Purchases 800,000 (790,000 – 20,000) 770,000
Purchase returns ( 50,000) 750,000 Inventory shortage 10,000
Goods available for sale 840,000 Adjusted cost of sales 780,000
Less: Inventory – December 31 60,000
Cost of sales 780,000

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Problem 7-14
Company A
List price 500,000
Less: First trade discount (20% x 500,000) 100,000
400,000
Second trade discount (10% x 400,000) 40,000
360,000
Third trade discount (10% x 360,000) 36,000
Invoice price 324,000
Less: Cash discount (2% x 324,000) 6,480
Payment within the discount period 317,520
Company B
List price 500,000
Less: Trade discount (35% x 500,000) 175,000
Less: Cash discount (2% x 325,000) 6,500
Payment within the discount period 318,500
Problem 7-15
Requirement a
Gross method Net method
1. Purchases 4,750,000 1. Purchases 4,655,000
Accounts payable 4,750,000 Accounts payable 4,655,000
2. Freight in 250,000 2. Freight in 250,000
Cash 250,000 Cash 250,000
3. Accounts payable 1,650,000 3. Accounts payable 1,617,000
Cash 1,617,000 Cash 1,617,000
Purchase discount 33,000
Accounts payable 2,100,000 Accounts payable 2,058,000
Cash 2,100,000 Purchase discount lost 42,000
Cash 2,100,000
4. No entry 4. Purchase discount lost 20,000
(1,000,000 x 2%)
5. Inventory 1,000,000 5. Inventory 981,000
Income summary 1,000,000 Income summary 981,000

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Requirement b
Purchases 4,750,000 4,655,000
Freight in 250,000 250,000
Total 5,000,000 4,905,000
Less: Purchase discounts 33,000 -___
Goods available for sale 4,967,000 4,905,000
Less: Inventory – December 31 1,000,000 981,000
Cost of sales 3,967,000 3,924,000
Ending inventory:
Gross (5,000,000/5) 1,000,000
Net (4,905,000/5) 981,000
Problem 7-16
Gross method
Sept. 1 Purchases 650,000
1 Freight in 20,000
7 Accounts payable 10,000
Purchase returns and allowances 10,000
Oct. 1 Accounts payable 660,000
Cash 660,000
Net method
Sept. 1 Purchases 637,000
1 Freight in 20,000
7 Accounts payable (10,000 x 98%) 9,800
Purchase returns and allowances 9,800
Oct. 1 Accounts payable (657,000 – 9,800) 647,200
Purchase discount lost (2% x 640,000) 12,800
Cash 660,000

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Problem 7-17
1. Merchandise inventory 1,000,000 1. Merchandise inventory 980,000
Accounts payable 1,000,000 Accounts payable 980,000
Cash 50,000 Cash 50,000
Cash 784,000 Cash (800,000 x 98%) 784,000
Cost of sales 16,000
Cash 150,000 Purchase discount lost 4,000
Cash 150,000
5. Cash 1,200,000 5. Cash 1,200,000
Sales 1,200,000 Sales 1,200,000
Cost of sales 700,000 Cost of sales 686,000
Merchandise inventory 700,000 Merchandise inventory 686,000
(1,000,000 x 70%) (980,000 x 70%)
Problem 7-18
Units Unit cost Total cost
1. FIFO - periodic
Lot No. 4 500 100 50,000
5 14,500 90 1,305,000
15,000 1,355,000
2. Beginning inventory 10,000 80 800,000
Purchases: Lot No. 1 2,000 100 200,000
2 8,000 110 880,000
3 6,000 120 720,000
4 9,500 100 950,000
5 14,500 90 1,305,000
Goods available for sale 50,000 4,855,000
Weighted average (4,855,000/50,000) 15,000 97.10 1,456,500
3. Specific identification
Lot 3 6,000 120 720,000
4 9,000 100 900,000
15,000 1,620,000
Goods available Inventory-Dec. 31 Cost of sales
FIFO 4,855,000 1,355,000 3,500,000
Weighted average 4,855,000 1,456,500 3,398,500
Specific identification 4,855,000 1,620,000 3,235,000

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Problem 7-19
FIFO
December 17 10,000 45 450,000
22 20,000 43 860,000
30,000 1,310,000
Average method
December 1 10,000 52 520,000
7 30,000 50 1,500,000
17 60,000 45 2,700,000
22 20,000 43 860,000
Available for sale 120,000 5,580,000
Inventory (5,580,000/120,000) 30,000 46.50 1,395,000
FIFO Average
Less: Inventory – December 31 1,310,000 1,395,000
Cost of goods sold 4,270,000 4,185,000
Problem 7-20
The stock cards are not prepared anymore. The end results are simply given.
FIFO
Ending inventory 4,000 210 840,000
Cost of sales 2,700,000
Average method
Ending inventory 4,000 252.50 1,010,000
Problem 7-21
Purchases Sales Inventory increment
2006 5,000 4,000 1,000
2007 9,000 7,000 2,000
2008 15,000 12,000 3,000
Total inventory – December 31, 2008 (units) 6,000
Sales 1,200,000
Cost of sales:
Inventory – December 31, 2007 (3,000 x 60) 180,000
Purchases 1,125,000
Goods available for sale 1,305,000
Less: Inventory – December 31, 2008 (6,000 x 75) 450,000 855,000
Gross income 345,000

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Problem 7-22
FIFO
October 1 15,000 60 900,000
Weighted average – periodic
January 1 10,000 40 400,000
April 1 15,000 50 750,000
October 1 25,000 60 1,500,000
Less: Sales 35,000
Ending inventory 15,000
Weighted average (2,650,000/50,000) 15,000 53 795,000
Moving average – perpetual
January 1 10,000 40 400,000
31 ( 5,000) 40 ( 200,000)
Balance 5,000 40 200,000
April 1 15,000 50 750,000
Total 20,000 47.50 950,000
July 31 (18,000) 47.50 ( 855,000)
Balance 2,000 47.50 95,000
October 1 25,000 60__ 1,500,000
Total 27,000 59.07 1,595,000
December 31 (12,000) 59.07 ( 708,840)
Balance 15,000 59.07 886,160
FIFO Weighted average
Inventory – January 1 400,000 400,000
Purchases 2,250,000 2,250,000
Less: Inventory – December 31 900,000 795,000
Cost of sales 1,750,000 1,855,000
Cost of sales – Weighted average perpetual
January 31 Sale 200,000
July 31 Sale 855,000
December 31 Sale 708,840
Total cost of sales 1,763,840
Problem 7-23
FIFO
October 1 purchase 300 10,000 3,000,000

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Weighted average
January 1 200 7,500 1,500,000
April 5 300 9,000 2,700,000
October 1 500 10,000 5,000,000
Inventory – December 31 (9,200,000/1,000) 300 9,200 2,760,000
FIFO Weighted average
Inventory – January 1 1,500,000 1,500,000
Purchases 7,700,000 7,700,000
Cost of goods sold 6,200,000 6,440,000
Problem 7-24
Sales 6,000,000
Gross profit (2,400,000)
Cost of goods sold 3,600,000
Inventory – July 31 (see below) 928,000
Cost of goods available for sale 4,528,000
Purchases for July (3,174,000)
Inventory – July 1 1,354,000
Quantity Unit cost Total cost
July 12 1,000 60 60,000
25 14,000 62 868,000
FIFO inventory – July 31 15,000 928,000
Problem 7-25
1. Cost of units available for sale for July 1,452,100
Purchases for July (1,042,100)
Cost of inventory – July 1 410,000
Number of units – July 1 (410,000 / P4) 102,500
2. July 1 inventory 102,500
Purchases for July 200,000
Total units available for sale for July 302,500
July 31 inventory ( 60,000)
Units sold during the month of July 242,500
3. Average unit cost (1,452,100 / 302,500) 4.80
Inventory – July 31 (60,000 x 4.80) 288,000
Another computation (1,452,100 – 1,164,100) 288,000

97
Problem 7-26
Units Average unit cost Total cost
1. Inventory – December 31, 2007
2007 layer 11,000 138 1,518,000
2. Inventory – December 31, 2006 14,000 1,480,000
Purchases – 2007 12,000 138 1,656,000
Materials available 26,000 3,136,000
Less: Inventory – December 31, 2007 11,000 1,518,000
Raw materials used – 2007 15,000 1,168,000
3. Inventory – December 31, 2008
2008 layer 15,000 153 2,295,000
4. Inventory – December 31, 2007 11,000 1,518,000
Purchases – 2008 20,000 153 3,060,000
Materials available 31,000 4,578,000
Less: Inventory – December 31, 2008 15,000 2,295,000
Raw materials used – 2008 16,000 2,283,000
Problem 7-27
Available for sale 42,000
Units sold (2,800,000/100) 28,000
FIFO
September 5 2,000 43.00 86,000
25 12,000 42.50 510,000
14,000 596,000
Weighted average (1,753,500/42,000) 14,000 41.75 584,500
Average FIFO
Available for sale 1,753,500 1,753,500
Less: Ending inventory 584,500 596,000
Cost of sales 1,169,000 1,157,500
(Sch. 1) (Sch. 2)

98
Problem 7-28
2006 2007 2008
Cost of sales – Average 1,500,000 2,000,000 2,400,000
Understatement of ending inventory:
2006 ( 150,000) 150,000
2007 ( 200,000) 200,000
2008 _______ ________ ( 270,000)
Cost of sales – FIFO 1,350,000 1,950,000 2,330,000
2006 2007 2008
Sales 3,000,000 4,000,000 4,800,000
Cost of sales – FIFO 1,350,000 1,950,000 2,330,000
Gross income 1,650,000 2,050,000 2,470,000
Operating expenses 800,000 900,000 1,000,000
Operating income 850,000 1,150,000 1,470,000
Proof
Net income – Average 700,000 1,100,000 1,400,000
Understatement of ending inventory:
2006 150,000 ( 150,000)
2007 200,000 ( 200,000)
2008 _______ _____ 270,000
Net income – FIFO 850,000 1,150,000 1,470,000
Problem 7-29
Lower of
Units cost or NRV Inventory value
Materials:
R 1,000 100 100,000
S 2,000 250 500,000
T 3,000 300 900,000
Goods in process:
X 4,000 480 1,920,000
Y 5,000 620 3,100,000
Finished goods:
A 2,000 790 1,580,000
B 2,000 730 1,460,000
Valuation at lower of cost or NRV 9,560,000

99
Problem 7-30
(Lower of cost or NRV)
Units Unit cost NRV Inventory value
A 1,000 120 150 120,000
B 1,500 110 120 165,000
C 1,200 150 140 168,000
D 1,800 140 160 252,000
E 1,700 130 160 221,000
926,000
Problem 7-31
Product Unit cost NRV Lower of cost or NRV
1 700 650 650
2 475 745 475
3 255 250 250
4 450 740 450
Problem 7-32
Units Unit cost NRV Lower of cost or NRV
Appliances:
A 500 2,500 2,700 1,250,000
B 300 3,700 3,600 1,080,000
Car accessories
C 600 1,400 2,000 840,000
D 800 2,100 2,000 1,600,000
Valuation at lower of cost or NRV 4,770,000
Problem 7-33
1. September 30 (40,000 x 75) 3,000,000
December 31 (10,000 x 90) 900,000
Total FIFO cost 3,900,000
NRV (50,000 x 72) 3,600,000
Loss on inventory writedown 300,000
Inventory – January 1 1,200,000
Purchases 9,400,000
Purchase discount ( 400,000)
Less: Inventory – December 31 3,900,000
Cost of goods sold before inventory writedown 6,300,000
Cost of goods sold after inventory writedown 6,600,000
2. Inventory – December 31 3,900,000
Income summary 3,900,000

100
Allowance for inventory writedown 300,000
Problem 7-34
a. No adjustment is necessary because the market price is higher than the agreed price.
Any gain on purchase commitment is not recognized.
b. No adjustment is necessary because the market price has not declined as of December
31, 2008. The market decline is only a possible loss.
c. Loss on purchase commitment (10,000 x 30) 300,000
Estimated liability for purchase commitment 300,000
d. Purchases (100,000 x 150) 1,500,000
Loss on purchase commitment 200,000
Accounts payable (10,000 x 200) 2,000,000
e. Purchases 2,000,000
Accounts payable 2,000,000
Gain on purchase commitment 300,000
Problem 7-35
12/31/2008 Loss on purchase commitment 500,000
Estimated liability for PC 500,000
03/31/2009 Purchase (100,000 x 54) 5,400,000
Estimated liability for PC 500,000
Accounts payable 5,500,000
Gain on purchase commitment 400,000
Problem 7-36
Purchase price 26,850,000
Improving and subdividing cost 43,500,000
Total cost 70,350,000
Sales price Fraction Cost
Group
1 (20 x 3,000,000) 60,000,000 60/105 40,200,000
2 (10 x 2,500,000) 25,000,000 25/105 16,750,000
3 (10 x 2,000,000) 20,000,000 20/105 13,400,000
105,000,000 70,350,000

101
Cost per lot Unsold Cost
Group
1 (40,200,000/20) 2,010,000 5 10,050,000
2 (16,750,000/10) 1,675,000 4 6,700,000
3 (13,400,000/10) 1,340,000 3 4,020,000
20,770,000
Problem 7-37
Inventory Accounts payable Net sales
Unadjusted 1,750,000 1,200,000 8,500,000
1 - - ( 35,000)
2 50,000 50,000 -
3 20,000 - -
4 26,000 - ( 40,000)
5 25,000 - -
6 30,000 - -
7 - 60,000 -
8 10,000 20,000 -_ __
Adjusted 1,911,000 1,330,000 8,425,000
Problem 7-38
Inventory Accounts payable Net sales
Unadjusted 1,250,000 1,000,000 9,000,000
1 ( 165,000) ( 165,000) -
2 ( 20,000) - -
3 - - ( 40,000)
4 210,000 - -
5 25,000 25,000 - ___
1,300,000 860,000 9,040,000
Problem 7-39
1. Biological asset 600,000
Cash 600,000
Gain from change in fair value 700,000
Gain from change in fair value 100,000
4. Loss from change in fair value 90,000
Biological asset 90,000

102
Problem 7-40
Requirement 1
1. To record the purchase of one animal aged 2.5 years on July 1.
Biological assets 108
Cash 108
2. To record the birth of one animal on July 1 with fair value of P70.
Cash 70
3. To record the change in the fair value:
Cash 222
Fair value of 10 animals on January 1 (10 x P100) 1,000
Newborn animal on July 1 at fair value 70
Acquisition cost of one animal on July 1 108
Total book value of biological assets – December 31 1,178
Fair value of 3-year old animals on December 31 (11 x P120) 1,320
Fair value of 0.5-year old animal on December 31, the newborn (1 x P80) 80
Total fair value – December 31, 2008 1,400
Book value of biological assets – December 31 1,178
Increase in fair value 222
Requirement 2
Statement of financial position :
Biological assets 1,400
Income statement:
Gain from change in fair value (70 + 222) 292
Physical count 1,500,000
Physical count 2,500,000
Merchandise shipped FOB shipping point on December 30, 2008
from a vendor 100,000
Goods shipped FOB shipping point to a customer on January 4, 2009 400,000

103
Markup (40% x 500,000) 200,000
Goods received on consignment 400,000
Total reduction 600,000
Inventory shipped on consignment 600,000
Freight paid 50,000
Consigned inventory 650,000
Reported inventory 2,000,000
Goods sold in transit, FOB destination 200,000
Goods purchased in transit, FOB shipping point 300,000
Correct amount of inventory 2,500,000
Consignment sales revenue (40 x P10,000) 400,000
Sales (900 x 1,000) 900,000
Commission (10% x 900,000) ( 90,000)
Payable to consignor 810,000
List price 900,000
Trade discounts 20% x 900,000 (180,000)
720,000
10% x 720,000 ( 72,000)
Freight 50,000
Cost of purchase 698,000

104
List price 1,000,000
Trade discounts 20% x 1,000,000 ( 200,000)
800,000
10% x 800,000 ( 80,000)
Cash discount (5% x 720,000) ( 36,000)
Net amount 684,000
Freight charge 50,000
Total remittance 734,000
Purchases of IBM compatibles 1,700,000
Purchases of commercial software packages 1,200,000
Total 2,900,000
Less: Purchase return ( 50,000)
Net purchases 2,850,000
Discounts available on purchases (2% x 2,850,000) 57,000
Less: Purchase discount taken 17,000
Purchase discount lost 40,000
Accounts payable per book 2,000,000
Goods lost in transit, FOB shipping point 100,000
Purchase return ( 50,000)
Adjusted balance 2,050,000
Accounts payable per book 900,000
Undelivered checks 400,000
Unrecorded purchases on December 28 (150,000 x 98%) 147,000
Purchase on December 20 (200,000 x 95%) 190,000
1,637,000
Net sales per book 5,000,000
Sales return ( 50,000)
Goods shipped on December 31, 2008 300,000
Goods shipped on January 3, 2009 recorded on December 30, 2008 ( 200,000)
Adjusted balance 5,050,000

105
Gross sales 4,000,000
Estimated sales return (10% x 4,000,000) ( 400,000)
Net sales 3,600,000
January 18 15,000 23 345,000
28 10,000 24 240,000
Total FIFO cost 25,000 585,000
(4,500 x 73.50) 330,750
January 10 2,000 100 200,000
February 8 3,000 110 330,000
5,000 530,000
Weighted average unit cost (530,000/5,000) 106
Cost of inventory (3,000 x 106) 318,000
January 1 40,000 5 200,000
January 17 (35,000) 5 (175,000)
Balance 5,000 5 25,000
January 28 20,000 8 160,000
Balance 25,000 7.40 185,000
Units Total cost
January 1 200 300,000
April 3 300 525,000
October 1 500 1,000,000
Total 1,000 1,825,000
Less: Sales (400 + 400) 800
Ending inventory 200
Average unit cost (1,825,000/1,000) 1,825
Cost of inventory (200 x 1,825) 365,000

106
January 1 8,000 200 1,600,000
8 ( 4,000) 200 ( 800,000)
4,000 200 800,000
20 12,000 240 2,880,000
(3,680,000/16,000 = 230) 16,000 230 3,680,000
Estimated selling price 4,050,000
Cost of disposal ( 200,000)
Net realizable value (lower than cost) 3,850,000
Estimated sales price 4,000,000
Cost to complete (1,200,000)
Net realizable value 2,800,000
FIFO cost (lower than NRV) 2,600,000
Inventory – January 1 700,000
Purchases 3,300,000
Less: Inventory – December 31 600,000
Cost of goods sold before inventory writedown 3,400,000
Cost of goods sold after inventory writedown 3,500,000
Sales price Fraction Allocated cost
A (100 x 240,000) 24,000,000 24/60 6,000,000
B (100 x 160,000) 16,000,000 16/60 4,000,000
C (200 x 100,000) 20,000,000 20/60 5,000,000
60,000,000 15,000,000

107
CHAPTER 8
Problem 8-1 Problem 8-2
1. D 1. D
2. A 2. B
3. B 3. A
4. B 4. C
5. D 5. B
6. C 6. C
7. C 7. A
8. B 8. A
9. D 9. B
10. D 10. A
Purchases 3,200,000
Freight in 50,000
Total 3,250,000
Less: Purchase returns 75,000 3,175,000
Less: Cost of sales (4,500,000 x 60%) 2,700,000
Inventory – March 31 1,125,000
Problem 8-4 Answer B Problem 8-5 Answer D
Inventory – January 1 500,000 Cost of sales (3,640,000/130%) 2,800,000
Purchases 2,500,000
Goods available for sale 3,000,000 Problem 8-7 Answer A
Inventory – December 31 600,000 Inventory – Jan. 1 1,200,000
Less: Physical inventory 500,000 Purchases 2,000,000
Missing inventory 100,000 Goods available for sale 3,200,000
Less: Inventory – Dec. 31 1,100,000
Problem 8-6 Answer D Cost of goods sold 2,100,000
Gross profit 900,000
Cost of sales (7,000,000 – 1,400,000) 5,600,000 Total sales 3,000,000
Multiply by 140% Less: Cash sales 500,000
Sales 7,840,000 Sales on account 2,500,000
Less: Collections 4,000,000 Accounts receivable–Jan. 1 800,000
Accounts receivable 3,840,000 Total 3,300,000
Less: Collections 2,600,000
Accounts receivable-Dec. 31 700,000

108
Problem 8-8 Answer D Problem 8-9 Answer B
Net sales = 1,200,000 x 5 6,000,000 Sales (950,000 x 8) 7,600,000
Cost of sales (1,150,000 x 4) 4,600,000
Inventory – January 1 1,800,000 Gross margin 3,000,000
Purchases 4,500,000
Inventory – December 31 2,700,000
Sales 6,200,000
Less: Sales returns 200,000
Net sales 6,000,000
Cost of sales:
Inventory – January 1 1,000,000
Purchases 5,500,000
Freight in 250,000
Total 5,750,000
Less: Purchase returns, allowances and discounts 150,000 5,600,000
Gross income 1,500,000
Gross profit rate on cost (1,500,000/4,500,000) 33 1/3%
Inventory, January 1 500,000
Purchases 2,000,000
Freight in 100,000
Purchase returns and allowances ( 120,000)
Purchase discounts ( 80,000) 1,900,000
Less: Cost of sales:
Sales 2,200,000
Sales returns ( 100,000)
Net sales 2,100,000
Cost of sales (2,100,000/125%) 1,680,000
Inventory, December 31 720,000
Sales – 2007 6,000,000
Cost of sales:
Net purchases – 2007 5,500,000
Less: Inventory – December 31, 2007 1,000,000 4,500,000

109
Rate in 2007 (1,500,000/6,000,000) 25% Rate in 2008 (25% + 5%) 30%
Inventory – January 1, 2008 1,000,000
Inventory – December 31, 2008 2,200,000
Less: Undamaged merchandise (500,000 x 70%) 350,000
Realizable value of damaged merchandise 10,000 360,000
Fire loss 1,840,000
Sales – 2006 and 2007 7,400,000
Cost of sales:
Inventory – January 1, 2006 850,000
Purchases – 2006 and 2007 5,370,000
Less: Inventory – December 31, 2007 1,040,000 5,180,000
Average rate (2,220,000/7,400,000) 30%
Inventory – January 1, 2008 1,040,000
Purchases – 2008 4,360,000
Less: Goods consigned (300,000 x 70%) 210,000
Goods in transit 190,000 400,000
Fire loss 1,500,000
Average gross profit rate (2,250,000/9,000,000) 25%
Net purchases 4,240,000
Inventory – September 30 700,000
Less: Undamaged goods (60,000 x 75%) 45,000
Realizable value of damaged goods 25,000 70,000
Fire loss 630,000

110
3,200,000
Average rate = ------------------- = 40%
8,000,000
Purchases (1,600,000 + 500,000 – 400,000) 1,700,000
Collections 2,640,000
Accounts receivable – December 31 440,000
Accounts receivable – January 1 ( 480,000)
Sales 2,600,000
Cost of sales (2,600,000 x 60%) 1,560,000
Inventory – December 1 640,000
Less: Goods on consignment (200,000 x 60%) 120,000
Salvage value 20,000 140,000
Fire loss 500,000
Problem 8-17
Question 1 Answer A
Gross profit rate:
2005 (750,000/3,000,000) 25%
2006 (1,050,000/3,500,000) 30%
2007 (1,295,000/3,700,000) 35%
2008 40%
There seems to be a trend in the gross profit rate, which is a yearly increase of 5%. Thus, it can
be safely assumed that the trend continues in 2008.
Net purchases, January 1 – October 15 3,500,000
Sales 3,840,000
Sales return and allowances ( 40,000)
Net sales 3,800,000
Cost of sales (3,800,000 x 60%) 2,280,000
Inventory – October 15 1,720,000
Less: Inventory not destroyed 320,000
Fire loss 1,400,000

111
Question 2 Answer D
Cost of sales (70% x 3,800,000) 2,660,000
Inventory, October 15 1,340,000
Inventory not destroyed 320,000
Fire loss 1,020,000
Net sales in 2007 8,000,000
Less: Cost of sales
Beginning inventory 2,000,000
Net purchases in 2007 4,800,000
Less: Ending inventory 1,200,000 5,600,000
Gross profit 2,400,000
Gross profit rate (2,400,000/8,000,000) 30%
Inventory, January 1, 2008 1,200,000
Less: Cost of sales
Sales 7,880,000
Less: Sales return and allowances 80,000
Net sales 7,800,000
Cost of sales (7,800,000 x 70%) 5,460,000
Estimated value of ending inventory 700,000
Less: Cost of inventory not stolen 100,000
Estimated cost of stolen inventory 600,000

112
Raw materials – January 1 300,000
Purchases 1,000,000
Freight in 100,000 1,100,000
Raw materials available for use 1,400,000
Less: Raw Materials – December 31 600,000
Raw materials used 800,000
Direct labor 800,000
Manufacturing overhead (50% x 800,000) 400,000
Total manufacturing cost 2,000,000
Add: Goods in process – January 1 1,000,000
Total goods in process 3,000,000
Less: Goods in process – December 31 (squeeze) 1,300,000
Cost of goods manufactured 1,700,000
Add: Finished goods – January 1 1,400,000
Less: Finished goods _ December 31 1,000,000
Cost of sales (70% x 3,000,000) 2,100,000
The amount of goods in process on December 31is computed as simply working back.
Problem 8-22
Requirement a
Physical inventory Purchases up to Purchases up to
May 31, 2008 May 31, 2008 June 30, 2008
Balances 950,000 6,750,000 8,000,000
1 - 75,000 -
2 - ( 10,000) ( 15,000)
3 - ( 20,000) ( 20,000)
4 ( 55,000) ( 55,000) -_ __
Adjusted 895,000 6,740,000 7,965,000
Inventory – July 1, 2007 875,000
Purchases up to May 31, 2008 6,740,000
Less: Inventory – May 31, 2008 895,000
Sales up to May 31, 2008 8,400,000
Gross profit 1,680,000
Rate (1,680,000/8,400,000) 20%
Requirement b
Sales for year ended June 30, 2008 9,600,000
Less: Sales for 11 months ended May 31, 2008 8,400,000
Sales for June 1,200,000

113
Cost of goods sold with profit (1,100,000 x 80%) 880,000
Cost of goods sold without profit 100,000
Cost of goods sold during June 2008 980,000
Requirement c
Inventory, July 1, 2007 875,000
Purchases for year ended June 30, 2008 (as adjusted) 7,965,000
Less: Cost of goods sold
Sales with profit (9,500,000 x 80%) 7,600,000
Sales without profit 100,000 7,700,000
Inventory, June 30, 2008 1,140,000
Problem 8-23
1. Accounts receivable – April 30 1,040,000
Writeoff 60,000
Collections (440,000 – 20,000) 420,000
Total 1,520,000
Less: Accounts receivable – March 31 920,000
Sales for April 600,000
Sales up to March 31 3,600,000
Total sales 4,200,000
2. Accounts payable – April 30 for April shipments 340,000
Payment for April merchandise shipments 80,000
Purchases of April 420,000
Purchases up to March 31 1,680,000
Total purchases 2,100,000
3. Inventory – January 1 1,880,000
Purchases 2,100,000
Less: Purchases return 20,000 2,080,000
Inventory – April 30 1,440,000
Less: Goods in transit 100,000
Salvage value 140,000 240,000
Fire loss 1,200,000

114
Cost Retail
Inventory – January 1 280,000 700,000
Purchases 2,480,000 5,160,000
Freight in 75,000
Markup 500,000
Markup cancellation __ __ __ _ ( 60,000)
GAS 2,835,000 6,300,000
Cost ratio (2,835/6,300) 45%
Markdown ( 250,000)
Markdown cancellation _ __ _ 50,000
GAS – Average 2,835,000 6,100,000
Sales (5,000,000)
Shrinkage (2% x 5,000,000) ( 100,000)
Conservative cost (1,000,000 x 45%) 450,000
The “approximate lower of average cost or market” retail is the same as the conservative or
conventional retail.
Cost Retail
Inventory – January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Markup 700,000
Markdown __ _____ ( 500,000)
GAS 4,800,000 7,500,000
Cost ratio (4,800/7,500) 64%
Sales (5,900,000)
Shoplifting losses ( 100,000)
Inventory 1,500,000
Average cost (1,500,000 x 64%) 960,000

115
Problem 8-26 Answer D Problem 8-27 Answer A
Cost Retail Cost Retail
Beginning inventory Beginning inventory 600,000 1,500,000
and purchases 6,000,000 9,200,000 Purchases 3,000,000 5,500,000
Net markup ________ 400,000 Net markups 500,000
GAS 6,000,000 9,600,000 Net markdown __ _____ (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio
(6,000/9,600) = 62.5% Cost ratio
(3,000/5,000) = 60%
Sales (7,800,000)
Net markdown ( 600,000) GAS 3,600,000 6,500,000
Ending inventory 1,200,000 Sales (4,500,000)
Ending inventory 2,000,000
Conservative cost
(1,200,000 x 62.5%) 750,000 FIFO cost
(2,000,000 x 60%) 1,200,000
Less: Ending inventory 750,000
Cost Retail
Inventory – January 1 1,200,000 1,800,000
Purchases 5,600,000 7,200,000
Freight in 400,000
Net markup 1,400,000
Net markdown ________ ( 600,000)
Net purchases (6,000/8,000) 75% 6,000,000 8,000,000
Sales (7,600,000)
FIFO cost (2,200,000 x 75%) 1,650,000
Less: Inventory – December 31 1,650,000
Cost of goods sold 5,550,000
Cost Retail
Available for sale 4,900,000 7,000,000
Markdown ( 100,000)
Sales (5,500,000)
Inventory, December 31 1,400,000
Average cost (1,400,000 x 71%) 994,000
Cost ratio (4,900,000 / 6,900,000) 71%

116
Problem 8-30
Cost Retail
Inventory, January 1 500,000 770,000
Purchases 3,070,000 4,300,000
Transportation in 70,000
Purchases return ( 25,000) ( 40,000)
Purchase discount ( 45,000)
Markup 100,000
Cancelation of markup ________ ( 30,000)
Goods available for sale – conservative 3,570,000 5,100,000
Cost ratio – conservative (357/510) 70%
Markdown ( 350,000)
Cancelation of markdown ________ 10,000
Goods available for sale – average cost 3,570,000 4,760,000
Cost ratio – average cost (357/476) 75%
Less: Sales 4,000,000
Sales return ( 80,000) 3,920,000
Inventory, December 31 at selling price 840,000
Conservative cost (840,000 x 70%) 588,000
Average cost (840,000 x 75%) 630,000
Problem 8-31
Cost Retail
Beginning inventory 340,000 640,000
Purchases 4,500,000 7,300,000
Freight in 100,000
Purchase returns ( 150,000) ( 250,000)
Purchase allowances ( 90,000)
Departmental transfer in 100,000 160,000
Markup ________ 150,000
Goods available for sale – conventional 4,800,000 8,000,000
Cost ratio (4,800/8,000) 60%
Markdown ________ ( 500,000)
Goods available for sale – average 4,800,000 7,500,000
Cost ratio (4,800/7,500) 64%
Employee discount 100,000
Spoilage and breakage 200,000 6,900,000
Average cost (600,000 x 64%) 384,000

117
Problem 8-32
Cost Retail
Beginning inventory 168,000 400,000
Purchases 2,806,000 3,100,000
Freight in 42,000
Markup 300,000
Markup cancellation _______ ( 30,000)
Goods available for sale – conservative 3,016,000 3,770,000
Cost ratio (3,016/3,770) 80%
Markdown ( 150,000)
Markdown cancellation _________ 40,000
Shrinkage (4% x 3,000,000) 120,000 3,120,000
Physical inventory (500,000 x 80%) 400,000
Shortage 32,000
Inventory, December 31 400,000
Inventory shortage 32,000
Problem 8-33
Cost Retail
1. Opening inventory 1,650,000 2,200,000
Purchases 3,700,000 4,950,000
Freight in 200,000
Purchase allowances ( 100,000)
Departmental transfer – credit ( 200,000) ( 300,000)
Additional markup 180,000
Markup cancellation ________ ( 30,000)
Goods available for sale – conventional 5,250,000 7,000,000
Cost ratio (5,250/7,000) 75%
Markdown (500,000 – 400,000) ________ ( 100,000)
Inventory shortage 100,000 4,100,000
Ending inventory at sales price 2,800,000
Ending inventory at cost (2,800,000 x 75%) 2,100,000
2. Goods available for sale 5,250,000
Less: Ending inventory 2,100,000

118
Problem 8-34
Cost Retail
Inventory, January 1 560,000 1,000,000
Purchases 4,000,000 6,200,000
Markup (5,000 x 100) 500,000
Markup cancelation (1,000 x 100) _________ ( 100,000)
Goods available for sale – conservative (60%) 4,560,000 7,600,000
Markdown _________ ( 475,000)
Goods available for sale – average (64%) 4,560,000 7,125,000
Net sales (5,200,000)
Inventory, December 31 1,925,000
Conservative cost (1,925,000 x 60%) 1,155,000
Average cost (1,925,000 x 64%) 1,232,000
Problem 8-35
Cost Retail
Finished goods – January 1 144,000 240,000
Cost of goods manufactured (squeeze 1,200,000 2,000,000
Less: Finished goods – December 31 504,000 840,000
Cost of goods sold 840,000 1,400,000
The amount of goods manufactured at retail is determined by simply working back.
Goods manufactured at cost
Cost ratio = -------------------------------------------------
Goods manufactured at retail
= 1,200,000/2,000,000
= 60%
Finished goods:
January 1 - 240,000 x 60% 144,000 December 31 - 840,000 x 60% 504,000
Problem 8-36
Cost Retail
Inventory – January 1, 2008 556,800 928,000
Purchases 4,576,000 7,028,000
Net markup 42,000
Net markdown ________ ( 30,000)
Net purchases (65%) 4,576,000 7,040,000
Sales (6,840,000)
FIFO inventory (65% x 1,128,000) 733,200 1,128,000

119
Cost Retail
Inventory – January 1, 2009 733,200 1,128,000
Purchases 4,760,000 6,812,000
Net markup 56,000
Net markdown ________ ( 68,000)
Net purchases (70%) 4,760,000 6,800,000
Sales (6,928,000)
FIFO inventory (70% x 1,000,000) 700,000 1,000,000
Problem 8-37
Cost Retail
Inventory, January 1, 2008 420,000 600,000
Purchases adjusted for markup and markdown 72% 5,011,200 6,960,000
Sales – 2008 (6,839,000)
Inventory, December 31, 2008 721,000
FIFO cost (721,000 x 72%) 519,120
Inventory, January 1, 2009 519,120 721,000
Purchases adjusted 70% 4,970,000 7,100,000
Sales – 2009 (7,033,000)
Inventory, December 31, 2009 788,000
FIFO cost (788,800 x 70%) 551,600

120
CHAPTER 9
Problem 9-1 Problem 9-2 Problem 9-3
1. A 6. D 1. A 6. B 1. D
2. C 7. D 2. D 7. A 2. A
3. C 8. B 3. C 8. C 3. C
4. A 9. B 4. B 9. B 4. A
5. A 10. B 5. C 10. D 5. C
Problem 9-4
Cost Market
Red 300,000 250,000
White 500,000 700,000
Blue 1,000,000 1,100,000
Green 2,000,000 1,700,000
Total 3,800,000 3,750,000
1. Trading securities 3,800,000
Cash 3,800,000
2. Unrealized loss – trading securities 50,000
Trading securities (3,800,000 – 3,750,000) 50,000
Problem 9-5
1. Unrealized loss – TS 60,000
Trading securities 60,000
2. Cash 140,000
Loss on sale of trading securities 20,000
3. Trading securities (680,000 – 610,000) 70,000
Unrealized gain – TS 70,000
Carrying amount Market
A Common (4,000 x 80) 300,000 320,000
C Preferred (2,000 x 180) 310,000 360,000
610,000 680,000
Problem 9-6
December 31, 2008:
Unrealized gain - TS (2,500,000 – 2,000,000) 500,000
Unrealized loss – AFS 100,000
Available for sale securities 100,000

121
December 31, 2009:
Unrealized loss – TS 300,000
Available for sale securities - AFS 200,000
Unrealized gain – AFS 100,000
Problem 9-7
December 31, 2008:
December 31, 2009:
Available for sale securities – AFS 50,000
Problem 9-8
1. Unrealized loss – AFS 100,000
2. Cash 2,100,000
Loss on sale of AFS securities 400,000
Available for sale securities 2,000,000
3. No entry
Carrying amount Market
XYZ 1,200,000 1,200,000
RST 200,000 200,000
1,400,000 1,400,000
Unrealized loss in 2008 0
Unrealized loss – 12/31/2008 (600,000 – 500,000) ( 100,000)
Cumulative unrealized loss – 12/31/2009 ( 100,000)
Total cost (1,000,000 + 500,000) 1,500,000
Market value 1,400,000
Cumulative unrealized loss 100,000

122
Problem 9-9
2008
1. Trading securities 2,900,000
Cash 6,500,000
2. Unrealized loss – TS 500,000
3. Available for sale securities 400,000
Unrealized gain – AFS (3,600,000 – 4,000,000) 400,000
2009
1. Cash 1,000,000
Trading securities (1/2 x 1,400,000) 700,000
Gain on sale of TS 300,000
2. Cash 1,300,000
Unrealized gain – AFS (1/2 x 500,000) 250,000
Available for sale securities (1/2 x 2,500,000) 1,250,000
Gain on sale of AFS securities 300,000
3. Trading securities 300,000
Unrealized gain – TS (2,000,000 – 1,700,000) 300,000
Carrying value Market
Security One 700,000 900,000
Security Two 1,000,000 1,100,000
1,700,000 2,000,000
4. Available for sale securities 50,000
Security Three 1,500,000 1,600,000
Security Four 1,250,000 1,200,000
2,750,000 2,800,000
Security Three 1,600,000
Security Four (1/2 x 2,000,000) 1,000,000
Total cost 2,600,000
Cumulative unrealized gain – 12/31/2009 200,000
Unrealized gain – AFS 12/31/2008 (400,000 – 250,000) 150,000
Unrealized gain in 2009 50,000
Cumulative unrealized gain – 12/31/2009 200,000

123
Problem 9-10
2008
Jan. 1 Available for sale securities 1,320,000
Cash 1,320,000
Dec. 31 Unrealized loss – AFS 80,000
2009
Dec. 31 Investment equity security 650,000
Unrealized loss – transfer of AFS 70,000
31 Available for sale securities 110,000
Market of W and X – 12/31/2009 700,000
Market of W and X – 12/31/2008 590,000
Increase in value 110,000
Problem 9-11
December 31, 2008
Unrealized loss – TS 400,000
Available for sale securities – AFS 100,000
December 31, 2009
Unrealized gain – TS (5,500,000 – 4,600,000) 900,000
Problem 9-12
01/01/2008 Trading securities 2,000,000
AFS securities 4,000,000
Cash 6,000,000
12/31/2008 Trading securities 500,000
Unrealized gain – TS 500,000

124
12/31/2008 Unrealized loss – AFS 700,000
AFS securities 700,000
12/31/2009 Trading securities 200,000
Unrealized gain - TS 200,000
Impairment loss – AFS 700,000
12/31/2010 Unrealized loss – TS 600,000
AFS securities 900,000
Problem 9-13
2008 Available for sale securities 6,000,000
Cash 6,000,000
Available for sale securities (6,000,000 – 5,700,000) 300,000
2009 Unrealized loss – AFS 500,000
Available for sale securities (5,700,000 – 5,200,000) 500,000
Held to maturity securities 5,200,000
The total unrealized loss of P800,000 (300,000 + 500,000) will still be reported in equity but it will
be subsequently amortized through interest income over the remaining term of the debt
securities.
Problem 9-14
2008
Jan. 1 Held to maturity securities 3,649,600
Cash 3,649,600
Dec. 31 Cash (8% x 4,000,000) 320,000
31 Held to maturity securities 44,960
Interest received 320,000
Amortization 44,960

125
2009
Dec. 31 Cash 320,000
31 Held to maturity securities 49,456
Interest received 320,000
Amortization 49,456
31 Available for sale securities 3,744,016
Held to maturity securities 3,744,016
31 Available for sale securities 455,984
Market value (4,000,000 x 105) 4,200,000
Book value 3,744,016
Unrealized gain 455,984
Problem 9-15
01/01/2008 Available for sale securities 6,500,000
Cash 6,500,000
(6,500,000 – 5,750,000)
(5,750,000 – 5,300,000)
06/30/2009 Held to maturity securities 5,300,000
12/31/2009 No entry is required to recognize the decrease
in value of P400,000 (P5,300,000 – P4,900,000).
The total unrealized loss of P1,200,000 on the reclassification of AFS securities will continue to
be reported as part of equity as a deduction. However, it is amortized through interest
income over the remaining life of the debt security starting June 30, 2009.

126
Cost Market
A common 1,000,000 800,000
B common 1,500,000 1,800,000
C preferred 2,000,000 1,700,000
D preferred 2,500,000 2,600,000
Total 7,000,000 6,900,000
Cost Market
Man 1,000,000 900,000
Kemo 900,000 1,100,000
Penn 1,100,000 800,000
Total 3,000,000 2,800,000
Unrealized loss (3,000,000 – 2,800,000) 200,000
Total market value – December 31, 2008 2,000,000
Unrealized gain 350,000
Unrealized loss in 2008 ( 300,000)
Unrealized loss – December 31, 2007 ( 200,000)
Total unrealized loss – December 31, 2008 ( 500,000)
Market value – December 31, 2008 1,600,000
Unrealized loss – December 31, 2007 ( 200,000)
Net unrealized gain – December 31, 2008 100,000
Problem 9-21
Question 1 – Answer B
Unrealized gain – trading 550,000

127
Question 2 – Answer A
Unrealized loss – December 31, 2007 (1,500,000 – 1,200,000) ( 300,000)
Net unrealized loss – December 31, 2008 ( 200,000)
The unrealized loss of P40,000 on trading securities is shown in the income statement.
However, the unrealized loss of P100,000 on available for sale securities is recognized in
equity.
Unrealized losses 260,000
Unrealized gains 40,000
Net unrealized loss – December 31, 2008 220,000
Net sales price 1,450,000
Unrealized loss related to B ( 150,000)
Net amount 1,300,000
Carrying amount of B (1,550,000)
Net sales price (1,500,000 – 50,000) 1,450,000
Less: Cost of B 1,700,000
Market value – December 31, 2008 850,000
Market value – December 31, 2007 800,000
Unrealized loss – December 31, 2007 (200,000)
Net unrealized loss – December 31, 2008 (150,000)
Available for sale equity securities, at cost 2,200,000
Unrealized loss ( 200,000)

128
12/31/2007 Unrealized loss - AFS 200,000
(2,000,000 – 1,800,000)
12/31/2008 Available for sale securities 50,000
Unrealized loss – AFS (1,850,000 – 1,800,000) 50,000

129
CHAPTER 10
Problem 10-1
1. C 6. D
2. C 7. B
3. A 8. D
4. A 9. A
5. C 10. C
Problem 10-2
Market value Fraction Allocated cost
A (8,000 x 100) 800,000 8/41 600,000
B (16,000 x 150) 2,400,000 24/41 1,800,000
C (1,000,000 x 90%) 900,000 9/41 675,000
4,100,000 3,075,000
Investment in A shares 600,000
Investment in B shares 1,800,000
Investment in C Bonds 675,000
Cash 3,075,000
Problem 10-3
Requirement 1
a. Investment in equity securities 309,000
Cash 309,000
b. Investment in equity securities 1,030,000
Cash 1,030,000
Requirement 2
a. Cash 405,000
Loss on sale of investment 32,750
Investment in equity securities 437,750
Lot No. 1 – 1,000 shares 309,000
Lot No. 2 - 500 shares (500/4,000 x 1,030,000) 128,750
437,750
b. Cash 405,000
Investment in equity securities (1,500/5,000 x 1,339,000) 401,700
Gain on sale of investment 3,300
Problem 10-4
July 15 Cash 25,000
Dividend income (5,000 shares x 5) 25,000

130
Dec. 15 Memo – Received 1,000 shares representing 20%
stock dividend on 5,000 original shares held.
28 Cash (3,000 shares x 60) 180,000
Lot No. 1 (2,400 shares) 100,000
Lot No. 2 (600/3,600 x 198,000) 33,000
Cost of investment sold 133,000
Problem 10-5
1. Investment in XYZ ordinary shares (40,000 x 50) 2,000,000
Cash 2,000,000
2. Memo – Received 200,000 XYZ ordinary shares as a result
of 5 for 1 split of 40,000 original shares.
3. Investment in XYZ preference shares 125,000
Investment in XYZ ordinary shares 125,000
Market value Fraction Cost
Ordinary shares (200,000 x 15) 3,000,000 30/32 1,875,000
Preference shares (20,000 x 10) 200,000 2/32 125,000
3,200,000 2,000,000
4. Investment in ABC ordinary shares 300,000
Dividend income (200,000/4 = 50,000 x 6) 300,000
5. Cash (80,000 x 15) 1,200,000
Investment in XYZ ordinary shares (80,000/200,000 x 1,875,000) 750,000
Problem 10-6
1. Investment in ANA ordinary shares 300,000
Cash 300,000
2. Investment in Benguet ordinary shares 120,000
Dividend income (2,000 x 60) 120,000
3. Investment in ANA ordinary shares 420,000
Cash 420,000
4. Cash 60,000
Dividend income (12% x P200 = 24 x 5,000 x 1/2) 60,000

131
5. Memo – Received 20,000 new ANA ordinary shares as a
result of a 2 for 1 split of 10,000 original shares.
6. Cash (680,000 – 34,000) 646,000
Investment in ANA ordinary shares (8,000/20,000 x 720,000) 288,000
Shares Cost
SMC preference share 5,000 1,200,000
Benguet ordinary share 10,000 1,000,000
Benguet ordinary share 2,000 120,000
ANA ordinary share 12,000 432,000
29,000 2,752,000
Problem 10-7
Cash 720,000
2. Memo – Received 2,000 shares as 20% stock dividend on
10,000 original shares. Shares now held, 12,000.
3. Cash (2,000 x 70) 140,000
Investment in ABC ordinary shares (2,000/12,000 x 720,000) 120,000
4. Investment in ABC preference shares (5,000 x 70) 350,000
Investment in ABC ordinary shares (5,000/10,000 x 600,000) 300,000
Gain on exchange 50,000
Cash (5,000 x 20) 100,000
Problem 10-8
a. 2004 Cash 400,000
2005 Cash 400,000
Dividend income 100,000
2006 Cash 400,000
2007 Cash 400,000
Investment in equity securities (1,000,000 – 950,000) 50,000
Gain on investment 150,000

132
2008 Cash 400,000
Gain on investment 150,000
b. The investment account has been totally eliminated as of December 31, 2007 because
the liquidating dividends received exceed the cost of investment. Hence, there is no
more investment account to be reported in the December 31, 2008 statement of
financial position, but such fact should be disclosed in the notes to financial statements
to the effect that the company is still the owner of 10,000 shares with a zero cost.
Problem 10-9
1. Investment in equity securities 1,800,000
Cash 1,800,000
2. 10,000 rights
3. Cost of rights (10/200 x 1,800,000) 90,000
4. Stock rights 90,000
5. Investment in equity securities 390,000
Cash (10,000/5 = 2,000 x 150) 300,000
Stock rights 90,000
6. Cash (10,000 x 10) 100,000
Stock rights 90,000
Gain on sale of rights 10,000
7. Loss on stock rights 90,000
Stock rights 90,000
Problem 10-10
Requirement 1
125 - 100
Theoretical value = --------------------- = 5.00 per right
4 + 1
a. Stock rights (5/125 x 2,100,000) 84,000
b. Investment in equity securities 709,000
Stock rights 84,000
Cash (25,000/4 = 6,250 x 100) 625,000

133
Requirement 2
125 - 100
Theoretical value = --------------------- = 6.25 per right
4
a. Stock rights (6.25/131.25 x 2,100,000) 100,000
b. Investment in equity securities 725,000
Stock rights 100,000
Cash 625,000
Problem 10-11
1. Stock rights (10/100 x 3,000,000) 300,000
Stock rights (30,000/40,000 x 300,000) 225,000
Cash (15,000 shares x 80) 1,200,000
3. Cash (6,000 x 10) 60,000
Stock rights (6,000/40,000 x 300,000) 45,000
4. Loss on stock rights (4,000/40,000 x 300,000) 30,000
Stock rights 30,000
Shares Cost
First acquisition (3,000,000 – 300,000) 40,000 2,700,000
New acquisition 15,000 1,425,000
55,000 4,125,000
Problem 10-12
Cash 3,200,000
2. Memo – Received 20,000 shares as stock dividend on
80,000 original shares. Shares now held, 100,000.
3. Cash (100,000 x 5) 500,000
4. Stock rights (5/40 x 3,200,000) 400,000

134
5. Cash (40,000 x 5) 200,000
Stock rights (40,000/100,000 x 400,000) 160,000
6. Investment in equity securities 600,000
Stock rights (60,000/100,000 x 400,000) 240,000
Cash (60,000/5 = 12,000 x 30) 360,000
7. Cash (80,000 x 35) 2,800,000
Investment in equity securities 2,240,000
(80,000/100,000 x 2,800,000)
Shares Cost
Original acquisition 20,000 560,000
New acquisition 12,000 600,000
32,000 1,160,000
Problem 10-13
2008
Aug. 1 Investment in equity securities 60,000
Cash 60,000
Oct. 1 Investment in equity securities 560,000
Cash 560,000
2009
July 1 Investment in equity securities 480,000
Cash 480,000
Aug. 1 Cash 500,000
Lot 1 (1,000 shares) 60,000
Lot 2 (4,000/8,000 x 560,000) 280,000
Cost of investment sold 340,000
2010
Feb. 1 Received 5,000 shares representing 50% stock dividend on
10,000 remaining shares held. Shares now held, 15,000.
Nov. 1 Stock rights 95,000
Lot 2 – 6,000 rights (10/80 x 280,000) 35,000
Lot 3 – 9,000 rights (10/80 x 480,000) 60,000
Cost of rights received 95,000

135
2010
Dec. 1 Cash (15,000 x 10) 150,000
Stock rights 95,000
Gain on sale of stock rights 55,000
Summary of investments Shares Cost
Lot 2 (280,000 – 35,000) 6,000 245,000
Lot 3 (480,000 – 60,000) 9,000 420,000
Total 15,000 665,000
Problem 10-14
Jan. 2 Investment in King Corporation 700,000
Cash 700,000
Mar. 1 Investment in Plastic Company 660,000
Cash 660,000
Apr. 1 Cash (10,000 x 5) 50,000
July 1 Received 2,000 shares as 20% stock dividend on
10,000 Plastic Company shares originally held.
Shares now held, 12,000.
Aug. 1 Investment in Makati Corporation 500,000
Cash 500,000
Oct. 1 Received 60,000 new shares of Plastic Company
as a result of a 5 for 1 split of 12,000 original shares.
1 Cash (10,000 x 5) 50,000
31 Stock rights (3/33 x 660,000) 60,000
Investment in Plastic Company 60,000
Nov. 15 Investment in Plastic Company 180,000
Cash (6,000 shares x 20) 120,000
Stock rights 60,000
Dec. 1 Cash (66,000 shares x 5) 330,000
15 Cash (10,000 shares x 30) 300,000
Investment in Plastic Company 100,000
(10,000/60,000 x 600,000)

136
Summary of investments Shares Cost
King Corporation common 10,000 700,000
Plastic Company common
Block 1 50,000 500,000
Block 2 6,000 180,000
Makati Corporation common 10,000 500,000
76,000 1,880,000
Of course, the investments will simply be described as “investments in equity
securities” in the balance sheet.
Purchase price (4,000 x P100) 400,000
Brokerage 12,000
Total 412,000
Less: Dividend purchased (4,000 x 5) 20,000
Acquisition cost 392,000
Fair value of asset given (land) 3,000,000
Original shares acquired January 15 50,000
Stock dividend on March 31 (20% x 50,000) 10,000
Total shares 60,000
Dividend income – cash dividend on December 15 (60,000 x 5) 300,000
Dividend income – cash dividend on July 1 100,000
Original shares on March 1 20,000
Stock dividend on December 1 (10% x 20,000) 2,000
Total shares 22,000
Original shares on October 1, 2007 40,000
Stock dividend on November 30, 2008 (10%) 4,000
Total shares 44,000
Shares sold on December 31, 2008 ( 4,000)
Balance 40,000

137
Sales price 1,000,000
Cost of shares sold (4,000/44,000 x 6,600,000) ( 600,000)
Gain on sale 400,000
Shares received as property dividend (5,000/5) 1,000
Cash dividend (10% x 500,000) 50,000
Sales price (80,000 x 30) 2,400,000
Less: Cost of shares sold (80,000 x 40) 3,200,000
Loss on disposal ( 800,000)
June 1 December 1
Original shares 20,000 30,000
Stock dividend – 20% 4,000 6,000
Total shares 24,000 36,000
Sales price (30,000 x 125) 3,750,000
Cost of shares sold:
From June 1 – 24,000 shares 2,000,000
From December 1 – 6,000 shares (6,000 / 36,000 x 3,600,000) 600,000 2,600,000
Gain on sale 1,150,000
Cost of rights (5/100 x 8,000,000) 400,000
Sales price (50,000 x 10) 500,000
Cost of rights sold (10/100 x 3,600,000) 360,000

138
Cost of rights (18/150 x 500,000) 60,000
Cost paid for new shares (2,500 shares x 90) 225,000
Total cost of new investment 285,000
Cost per share (285,000 / 2,500 shares) 114
Cost of 2006 rights (4/100 x 180,000) 7,200
Cost of 2007 rights (4/100 x 330,000) 13,200
Total cost of rights 20,400
900 shares x 5 rights 4,500 rights
Cash paid (900 x 80) 72,000
Cost of rights exercised
2006 – 2,250 rights 7,200
2007 – 2,250 rights (2,250/3,750 x 13,200) 7,920
Total cost of 900 shares 87,120

72 CHAPTER 6 Problem 6-1 Problem 6-2

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72 CHAPTER 6 Problem 6-1 Problem 6-2