REVIEW 2

SET K

PROBLEM 1

In auditing the records of BANTINAN COMPANY for the ear ended December 31, 2019, the following
data are disclosed:

a. Machine A listed at P2,250,000 was acquired on April 1, 2019 in exchange for P2,500,000
face value bonds maturing on April 1, 2029. The accountant recorded the acquisition by a
debit to machinery and a credit to bonds payable for P2,500,000. The bonds are unquoted.
Straight-line depreciation was recorded based on a five-year life and amounted to P300,000
for nine months.

b. Machine B listed at P1,600,000 was purchased on January 1, 2019. The entity paid P250,000
down and P125,000 per month for 12 months. The last payment was made on December 30,
2019. Straight-line depreciation based on a five-year life and no residual value was recorded
at P350,000 for the year. Freight of P75,000 on Machine B was charged to Freight-in account.

c. Machine C was recorded at P1,500,000 which included the carrying amount of P270,000 of a
machine accepted as trade in. the list price of Machine C was P1,305,000 and the trade in
allowance was P75,000. This transaction took place in December 22, 2019.

d. Machine D was acquired on January 10, 2019 in exchange for a past due account receivable
of P2,100,000 on which an allowance of 20% was established at the end of 2018. The fair
value of the machine on January 10, was estimated at P1,650,000. The machine was
recorded by a debit to a Machinery and a credit to Accounts receivable for P2,100,000. No
depreciation was recorded on Machinery D because it was never installed for use. In March,
the machine was exchanged for 30,000 shares of the entity having a market value of P60 per
share. The treasury shares account was debited for P2,100,000, the carrying amount of
Machine D.

1. Machine A is over (under) depreciated by?

2. What is Machine B’s carrying value on December 31, 2019?
3. What amount of loss on exchange should be recognized in connection with the acquisition of
Machine C?
4. What amount of loss on exchange should be recognized in connection with the acquisition of
Machine D?
5. What is the cost of the treasury shares acquired in March?

PROBLEM 2
DELA VEGA COMPANY has been in business for several years. A trial balance prepared by the
company’s accountant for December 31, 2019 is shown below:

DELA VEGA Company

Unadjusted Trial Balance
December 31, 2019

Debit Credit
Cash P 60,000
Accounts Receivable 150,000
Inventory 360,000
Equipment 2,400,000
Accumulated depreciation-equipment P750,000
Buildings 3,600,000
Accumulated depreciation-buildings 1,200,000
Patents 1,650,000
Franchise agreement 285,000
 Organization costs 306,000
Goodwill 1,035,000
Accounts payable 36,000
Accrued wages payable 15,000
Accrued taxes payable 180,000
Bonds payable 1,500,000
Premium on bonds payable 105,000
Preference shares (P100 par value) 300,000
Ordinary shares (P25 par value) 3,300,000
Share premium 660,000
Retained earnings (as of January 1) 1,200,000
Sales 2,700,000
Cost of goods sold 1,200,000
Selling and administrative expenses 900,000

P 11,946,000 P 11,946,000
========== ==========

Your audit of the company’s intangible assets reveals the following information:

Patents

All patents were purchased from another company when DELA VEGA Company started operations
on January 2, 2012. These patents are being amortized over an expected useful life of 14 years.
Improvements made to equipment covered by the patents costing P225,000 were debited to the
account on January 3, 2016. Amortization for the years 2016-2018 included amortization on the
P225,000 for the remaining life of the relevant patent. It is determined that the P225,000 should have
been expensed in 2016. It is further determined on December 31, 2018 that one of the patents has a
remaining life of only 2 years. This patent was originally assigned a cost of P630,000.

Franchise Agreement

A franchise agreement was signed on January 1. 2019. DELA VEGA Company paid P150,000
covering a 5-year period, at the end of which the company may renew the agreement by paying
P150,000. A decision to renew the agreement has not been made on December 31, 2019. The
franchise agreement calls for an annual payment of 5% of revenue. An entry debiting the account for
P135,000 was made at the time of the cash payment of 2019.

Organization Costs

Organization costs include the unamortized portion of amounts paid to promotes for services rendered
at the inception of the company. These fees have been amortized, since inception, over an estimated
40-year life. On December 31, 2019. DELA VEGA Company made a decision to write off the
organization against retained earnings.

Goodwill

The goodwill account includes the following:

P 135,000 Legal fees paid in connection with Incorporation. These were charged to the account
in January 2012.

P 600,000 excess of cost over assigned net asset values of a company acquired in early 2017,
expected to be of value for an indefinite period

P 300,000 Paid to an advertising agency in early 2018 for a major advertising effort expected to
benefit DELA VEGA Company for an indefinite period.
6. What is the corrected balance of Patents on December 31, 2019 (before 2019 amortization)?

7. What is the carrying value of Patents on December 31, 2019?

8. What is the carrying value of Franchise on December 31, 2019?

9. What is the carrying value of Organization costs on December 31, 2019?

10. What is the carrying value of Goodwill on December 31, 2019?