PROBLEM 1

Summer Corporation was incorporated in January 1, 2011. The corporation's financial statements
for its first year of operations were not examined by a CPA. You have been engaged to audit the
financial statements for the year ended December 31, 2012 and your work is substantially
completed. A partial trial balance of the company's accounts follows:

Summer Manufacturing Corporation Trial

Balance • December 31, 2012
Debit Credit
Cash P 11.000
Accounts receivable 42.500
Allowance for doubtful accounts P 500
Inventories 38,500
Machinery 75,000
Equipment 29,000
Accumulated depreciation 10.000
Patents (Item 1) 85,000
Leasehold improvements (Item 6) 26,000
Prepaid expenses 10,500
Organization expenses (Item 7) 29,000
Goodwill (Item 5) 24,000
Licensing Agreement - A* (Item-2 & 3) 50,000
Licensing Agreement - B* (Item 2 & 4) 49,000
• An intangible asset representing the right to use a patent.
The following information relate to accounts that may yet require adjustment

Item 1: Patents for Summer's manufacturing process were purchased January 2, 2012. at a cost of
P68.000. An additional PI7.00ft was spent in December 2012 to improve machinery covered by
the patents and charged to the Patents account. The patents had a remaining legal term of 17
years.

Item 2: On January 3, 2011, Summer purchased two licensing agreements; at that time they
were believed to have unlimited useful lives. The balance in the Licensing Agreement - A
account included its purchase price of P48.000 and P2.000 in acquisition expenses. Licensing
Agreement - B also was purchased on January 3, 2011, for P50.000. but it has been reduced by
a credit of P1,000 for the advance collection of revenue from the agreement.

Item 3: In December 2011, an explosion caused a permanent 60 percent reduction in the

expected revenue-producing value of Licensing Agreement - A. and in January 2012, a flood
caused additional damage, which rendered the agreement worthless.

Item 4: A study of Licensing Agreement - B made by Summer in January 2012 revealed that
its estimated remaining life expectancy was only 10 years as of January 1, 2012.
Item 5: The balance in the Goodwill account includes P24.000 paid December 30, 2011. for an
advertising program, which it is estimated will assist in increasing Summer’s sales over a period
of four years following the disbursement.

Item 6: The Leasehold Improvement account includes (a) the P15,000 cost of improvements with
a total estimated useful life of 12 years, which Summer, as tenant, made to leased premises in
January 2011; (b) movable assembly-line equipment costing P8,500, which was installed in the
leased premises in December 2012; and (c) real estate taxes of P2,500 paid by Summer, which
under the terms of the lease, should have been paid by the landlord. Summer paid its rent in full
during 2012. A 10-year nonrenewable lease was signed January 3, 2011, for the leased building
that Summer used in manufacturing operations.

Item 7: The balance in the Organization Expenses account includes pre-operating costs incurred
during the organizational period.

Questions:
1. Patents will have an audited balance as of December 31, 2012 of
a. P85.000
b. P64.000.
c. P66.000.
d. P46.000

2.The adjusted balance of Licensing Agreement - A as of December 31,2012 is

a. P20.000.
b. P0.
c. P10,000.
d. P50.000.

3. The adjusted balance of Licensing Agreement - ß as of December 31, 2012 is

a. P66.000.
b. P85,000.
c. P45.000.
d. P64.000

4.Leasehold improvements, net of amortization, audited balance as of December 31, 2012 is

a. P26,000.
b P15,000.
c. P13.500.
d. P12.000

5.The net adjustment to Retained earnings to reflect all the necessary corrections from Item I to Item 7
will amount to
a. P84,500 debit.
b. P84.500 credit.
C. P83,000 debit
d. P55.400 debit.
PROBLEM 2

In line with Octagon Company’s expansion program, it has become interested in acquiring a plant in
Davao to handle many of its production functions in that area. One prospective seller is Hexagon Co.
whose owners have decided to sell their business if a proper settlement can be obtained. Hexagon
Co.'s balance sheet appears as follows:
Current assets P4,500.000
Investments 1,500,000
Property, plant and equipment (net) 12,000,000
Total assets P18.000.000

Current liabilities P 2,400,000

Noncurrent liabilities 3,000,000
Share capital - ordinary 1,500.000
APIC 5.100,000
Retained earnings 6.000.000
Total equities P18.000.000

Octagon has hired Polygon Appraisal Company to determine the proper price to pay for Hexagon
Co. The appraisal company finds that the investments have a fair value of P4,500,000 and the
inventory is understated by P2,400,000. All other assets and equities arc properly stated. An
examination of the company’s income for the last 4 years indicates that the net income has
steadily increased In 2011, the company had a net operating income of P3,000,000, which is
expected to increase 20% each year over the next 4 years. Octagon believes that a normal return
in this type of business is 18% on net assets. The asset investment in the Davao plant is expected
to stay the same for the next 4 years.

According the Polygon Appraisal Company, the fair value of Hexagon Co. can be estimated in
many different ways. Calculate an estimate of the value of Hexagon Co., assuming that any
goodwill will be computed as:
Questions:
6. The capitalization of the average excess earnings of Hexagon Co. at 18% is
a. P 8,840,000.
b. P36,000,000.
c. P18,286,416.
d. P26,840,000.

7. The purchase of average excess earnings over the next four years is
a. P24,364.800.
b. PI 9,591,200.
c. P 6,364,800.
d. P 8,840,000.

8.The capitalization of average excess earnings of Hexagon Co. at 24% is

a. P31,500,000.
b. P24,630,000.
c. P18,831,888.
 d. P 6,630,000.
9. The present value of the average excess earnings over the next four years discounted at 15% is (the
present value of an ordinary annuity of I at 15% for 4 periods is 2.85498.)
a. P31,792.979.
b. P35,932,484.
c. P22,542,844.
d. P 4,542,844.

10.If Octagon were to pay P23,100.000 to purchase the assets and assume the liabilities of Hexagon Co.,
how much would be charged to goodwill?
a. P8,840,000.
b. P6,364,800.
c. P0.
d. P5,100,000.

PROBLEM NO. 3
On December 31, 2018, PROBE Corp acquired the following three intangibles:

• A trademark for 300,000. The trader mark has 7 years remaining legal life. It is anticipated that the trademark will be
renewed in the future, indefinitely, without a problem.

•Goodwill for 1,500,000. The goodwill is associated with Probe’s Nexus manufacturing unit.

•A customer list for 220,000. By contract, Probe has exclusive use of the list for 5 years. Because of market
conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2019, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:
a. Because of a decline in the company, the trade mark is now expected to generate cashflows of just 10,000 per
year. The useful life of trademark still extends beyond the foreseeable horizon.

b. The cash flows expected to be generated by the Nexus Manufacturing reporting unit is 250,000 per year for the
next 22 years. Book Values and Fair values of the assets and liabilities of the Nexus Manufacturing reporting unit are
as follows:
Book Values Fair Values
Identifiable Assets 2,700,000 3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c. The cash flow expected to be generated by the customer list are 120,000 in 2020 and 80,000 in 2021.

Required:
Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate
for all items is 6%):

11. Total amortization for the year 2019

A. 73,333
B. 116,190
C. 141,515
D. 86,857

12. Impairment loss for the year 2019

A. 90,476
B. 133,333
C. 179,584
D. 0

13. Carrying amount of Trademark as of December 31, 2019

A. 300,000
B. 257,143
C. 166,667
D. 120,416

14. Carrying amount of Goodwill as of December 31, 2019

A. 1,500,000
B. 1,425,000
C. 1,431,818
D. 1,462,500

15. Carrying amount of Customer list as of December 31, 2019

A. 220,000
B. 146,667
C. 176,000
D. 0

PROBLEM 4
In your examination of the financial statements of Sikatuna Financing Company,, you learn that
its president has a profit-sharing agreement with the corporation. The agreement states that the
president is to receive a bonus consisting of a basic amount equivalent to 10% of the company’s
net income before deduction of bonus but after deduction of corporate income tax. In addition,
the basic bonus will be increased by the company’s tax savings because the total amount of
bonus if deductible in computing the company's taxable income. (The tax savings is the
difference between the income taxes the company would have paid it there were no bonus and
the taxes the company must pay after
Sikatuna Financing Company registered a net income of P100,000 in 2012 before deduction of
the president’s bonus or the corporate income tax. The company is subject to a corporate income
tax rate of 30% of its income after deducting the president’s bonus

16. The total bonus due the president for 2012 is:
A. 7,216.49
B. 7,313.43
C. 9,381.44
D. 10,447.76

17. The corporate income tax for 2012 is:

A. 26, 865.67
B. 27,185.57
C. 27,805.97
D. 27,835.05
18. The total tax savings from the president’s bonus (to be added to his bonus of 10% of net income
after taxes before deduction of bonus) is
A. 0
B. 2,164.95
C. 2,194.03
D. 3,134.33

19. The net income for 2012 after deducting the president’s bonus and the corporate income tax is
A. 62,686.57
B. 63,432.99
C. 64,880.60
D. 64,948.46

Problem 5
Perfection Company (a widely-held corporation) provides a special bonus for its executive officers based
on 15% of its net income before bonus but after income tax. Net income for 2012 before bonus and
income tax was P90.000. Tax rate is 25%.

20. The special bonus due to the executive officers for 2012 amounted to:

a.P10,519.48 c. P13,500 . -

b. P10,125.00 d. None of these

Problem 6
On December 31, 2018, ERITREA CO. signs a 10-year noncancelable lease agreement to lease a storage
building from Storage Company The following information pertains to this lease agreement:

a. The agreement requires equal rental payments of P720.000 beginning on December 31,2018.
b. The fair value of the building on December 31,2018, is P4,400,000.
c. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. Eritrea depreciates similar buildings on the straight-line method.
d. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
e. The interest rate implicit in the lease is 12% per year.

The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197

21. What amount of lease liability should be recognized at the inception of the lease?
A. 4,432,197
B. 4,556,340
C. 4,400,000
D. 3,928,570
22. What is the book value of the leased storage building at December 31, 2019?
A. 3,520,000
B. 3,540,000
C. 3,142,856
D. 3,645,072

23. Which of the following should be shown under current liabilities in the statement of financial
position of Eritrea Company at Dec. 31, 2019?
Lease Liability Interest Payable
A. 280,818 414,477
B. 325,691.41 429,204
C. 280,818 444,565
D. 695,295 444,565

24. What is the noncurrent portion of the lease liability on Dec. 31, 2019?
A. 2,960,213.48
B. 4,400,000.00
C. 3,453,975
D. 3,173,157

25. How much interest expense should be recognized for the year ended Dec. 31,2018?
A. 444,565
B. 414,477
C. 460,360.80
D. 0