New Chapter(1(*((Current(Liabilities,(Provisions(andContingencies( · 2020. 12. 11. ·...

Chapter 1 – Current Liabilities, Provisions and Contingencies

Chapter 1 -‐ Current Liabilities, Provisions and Contingencies

1-‐1. The following shall result in the recognition of liabilities a, c, e, g, h, i, m, n, o 1-‐2. Case 1 – None Case 2 – P800,000 Case 3 – P400,000 Case 4 – P350,000 Case 5 -‐ P100,000 = (1M x 10%) + (200,000 x 30%) – 60,000 Case 6 -‐ None 1-‐3. (a)(1) Gross method Dec. 16 Purchases 66,000 Freight in 1,400 Accounts payable – Intel 67,400 19 Purchases 72,000 Accounts payable – Celeron 72,000 26 Accounts payable – Intel 67,400 Purchase discounts (66,000 X 2%) 1,320 Cash 66,080 31 Accounts payable – Celeron 72,000 Purchase discounts (72,000 X 2%) 1,440 Cash 70,560 (a)(2) Net method Dec. 16 Purchases (66,000 X 98%) 64,680 Freight in 1,400 Accounts payable – Intel 66,080 19 Purchases (72,000 x 97%) 69,840 Accounts payable – Celeron 69,840 26 Accounts payable – Intel 66,080 Cash 66,080 31 Accounts payable – Celeron 69,840 Purchase discounts lost (72,000 x 1%) 720 Cash 70,560 (b) Adjusting entry at December 31 under the net method Dec. 31 Purchase discounts lost 720 Accounts payable – Celeron 720 1-‐4. Reported amount of accounts payable at December 31, 2015 P1,000,000 Adjustments: Unrecorded check written and issued on December 27 (350,000) Unrecorded purchases received on December 28, net (150,000 x 98%) 147,000 Goods purchased FOB shipping point still in transit and not yet recorded at year end 120,000 Debit balance in a supplier’s account netted in the balance 80,000 Correct amount of accounts payable at December 31, 2015 P 997,000


1-‐5. Reported amount of accounts payable at December 31, 2015 P1,500,000 Adjustments: Goods purchased FOB shipping point lost in transit 240,000 Credit memo for goods returned to supplier not recorded at yearend (80,000) Correct amount of accounts payable at December 31, 2015 P1,660,000 1-‐6. (a) 2015 May 1 Automobile 3,600,000 Discount on notes payable 324,000 Notes payable 3,924,000 3,924,000/1.09 = 3,600,000 Dec. 31 Interest expense 216,000 Discount on notes payable 216,000 324,000 x 8/12 = 216,000 2016 Apr. 1 Interest Expense 108,000 Notes payable 3,924,000 Discount on notes payable 108,000 Cash 3,924,000 324,000 – 216,000 = 108,000 (b) Notes payable P3,924,000 Less discount on notes payable 108,000 Net amount, December 31, 2015 P3,816,000 1-‐7. (a) 2015 June 1 Cash 2,700,000 Discount on notes payable 300,000 Notes payable 3,000,000 3M x 10% = 300,000 3M – 300,000 = 2,700,000 Dec. 31 Interest expense 175,000 Discount on notes payable 175,000 300,000 x 7/12 2016 May 31 Interest expense 125,000 Notes payable 3,000,000 Discount on notes payable 125,000 Cash 3,000,000 300,000 – 175,000 = 125,000 (b) Notes payable P3,000,000 Less discount on notes payable 125,000 Net amount, December 31, 2015 P2,875,000 1-‐8. (a) Market rate of interest is 5% Principal P8,000,000 Stated interest (8M x 9%) 720,000 Maturity value P8,720,000 PV factor at 5% for 1 period 0.9524 Present value of note at May 1, 2015 P8,304,928 Face value of note 8,000,000 Premium on notes payable P 304,928


2015 May 1 Equipment 8,304,928 Premium on notes payable 304,928 Notes payable 8,000,000 Dec. 31 Interest expense 276,715 Premium on notes payable 203,285 Interest payable 480,000 304,928 x 8/12 = 203,285 8M x 9% x 8/12 = 480,000 2016 Apr. 30 Interest expense 138,357 Premium on notes payable 101,643 Interest payable 480,000 Notes payable 8,000,000 Cash 8,720,000 304,928 – 203,285 = 101,643

Notes payable P8,000,000 Premium on notes payable 101,643 Interest payable 480,000 Carrying amount at December 31, 2015 P8,581,643

(b) Market rate of interest is 12% Principal P8,000,000 Stated interest (8M x 9%) 720,000 Maturity value P8,720,000 PV factor at 12% for 1 period 0.8929 Present value of note at May 1, 2015 P7,786,088 Face value of note 8,000,000 Discount on notes payable P 213,912 2015 May 1 Equipment 7,786,088 Discount on notes payable 213,912 Notes payable 8,000,000 Dec. 31 Interest expense 622,608 Discount on notes payable 142,608 Interest payable 480,000 213,912 x 8/12 = 142,608 8M x 9% x 8/12 = 480,000 2016 Apr. 30 Interest expense 311,304 Interest payable 480,000 Notes payable 8,000,000 Discount on notes payable 71,304 Cash 8,720,000 213,912 – 142,608 = 71,304

Notes payable P8,000,000 Discount on notes payable (71,304) Interest payable 480,000 Carrying amount at December 31, 2015 P8,408,696


1-‐9. Current Noncurrent Case 1 P 120,000 P2,880,000 Case 2 P2,000,000 P0 Case 3 Situation A P6,000,000 P0 Situation B P0 P6,000,000 Situation C P6,000,000 P0 Situation D P0 P6,000,000 1-‐10. 14% notes payable P2,500,000 Current portion of 16% note payable 1,600,000 Current notes payable at December 31, 2015 P4,100,000 1-‐11. The entire amount of P2,000,000 is reported as current liability because as of December 31,

2015, the company has no unconditional right to defer settlement of the obligation for a period of at least 12 months.

1-‐12. (a) Premium inventory 225,000 Cash/Accounts payable 225,000 (b) Premium expense 100,000 Cash 50,000 Premium inventory 150,000 (c) Premium expense 300,000 Estimated liability for premiums outstanding 300,000 (40% x 1M)/100 = 4,000 (4,000 – 1,000) x P100 1-‐13. (a) Estimated liability for premiums outstanding (300,000 x 30%)/20 = 4,500 premiums (4,500 – 4,000) x P28 P 14,000 (b) Premium expense for 2015 (4,500 premiums x P28 P126,000 1-‐14. (a)

2014 2015 Expected future redemption, beg -‐ (30,000) Coupons redeemed during the year 40,000 90,000 Coupons expected for future redemption, end 30,000 80,000 Total coupons 70,000 140,000 Number of coupons per premium ÷ 5 ÷ 5 Number of premiums 14,000 28,000 Net cost of premium (120 – 50) x P70 x P70 Premium expense P980,000 P1,960,000

(b) Provision for premium claims outstanding at December 31, 2014 (30,000/5) x P70 P420,000 at December 31, 2015 (80,000/5) x P70 P1,120,000


1-‐15. (a) Allocation of original consideration received: Sales revenue (98% x P5,000,000)

P4,900,000

Liability for Customer Loyalty Awards (2% x P5,000,000) P 100,000 Revenue in 2014 as a result of redemption 100,000 x 25/90

P 27,778

Revenue in 2015 as a result of redemption Total accumulated revenue from redemption as of 12/31/15 (100,000 x 60/95)

P 63,158 Less revenue earned in 2014 27,778 Revenue in 2015 as a result of redemption P 35,380

(b)

Liability as of 12/31/14 (100,000 – 27,778) P 72,222 Liability as of 12/31/15 (100,000 – 63,158) P 36,842

1-‐16.

2013 2014 2015 Sale of product

Accts. Receivable/Cash 1,000,000 2,500,000 3,500,000 Sales 1,000,000 2,500,000 3,500,000 Accrual of repairs

Warranty Expense 60,000 150,000 210,000 Warranty Liability 60,000 150,000 210,000 Actual repairs

Warranty Liability 8,000 38,000 112,500 Cash/ AP, etc. 8,000 38,000 112,500

1-‐17.

(a) 2014 2015 Warranty Liability, January 1 P 0 P187,200 Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800 Actual repair costs incurred (148,800) (180,000) Warranty liability, December 31 P187,200 P564,000

(b) On 2014 sales (4,200,000 x 5% x ½) P105,000 On 2015 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400 Predicted warranty liability at December 31, 2015 P557,400

1-‐18.

Cash 2,000,000 Unearned Revenue from Gift Certificates Outstanding 2,000,000 Unearned Revenue from Gift Certificates Outstanding 1,280,000 Sales 1,280,000

Note: The gift certificates estimated to expire is recognized as revenue at the date of actual expiration.


1-‐19. Cash 3,000,000 Unearned Revenue from Gift Certificates Outstanding 3,000,000 Unearned Revenue from Gift Certificates Outstanding 2,750,000 Sales 2,750,000 Unearned Revenue from Gift Certificates Outstanding 150,000 Revenue from Forfeited Gift Certificates 150,000

1-‐20.

Refundable Deposits, January 1, 2015 P250,000 Deposits received during the year 200,000 Deposits refunded during the year (267,000) Deposits forfeited during the year (100,000 – 82,000) (18,000) Refundable Deposits, December 31, 2015 P165,000

1-‐21.

(a) 2014 2015 Cash 720,000 864,000 Unearned Service Contract Revenue 720,000 864,000 Cost of Service Contract 25,000 100,000 Cash, Accounts Payable, etc. 25,000 100,000 Unearned Service Contract Revenue 72,000 266,400 Service Contract Revenue 72,000 266,400 2014: 720,000 x 20% x ½=72,000 2015: 720,000 x 20% x ½=72,000 720,000 x 30% x ½=108,000 864,000 x 20% x ½=86,400 72,000+108,000+86,400=266,400 (b) 2014 2015 Unearned Service Contract Revenue, Jan. 1 -‐-‐-‐-‐-‐ P648,000 Sale of contracts during the year P720,000 864,000 Service contracts earned during the year (72,000) (266,400) Unearned Service Contract Revenue, Dec. 31 P648,000 P1,245,600

Unearned Service Contract Revenue at December 31, 2015 may also be computed as: 720,000 x 65% (30% x ½) + 50% 468,000 864,000 x 90% (20% x ½) + 30% + 50%) 777,600 Total 1,245,600

(c) 2014 2015 Revenue from service contracts P72,000 P266,400 Cost of service contracts 25,000 100,000 Profit from service contracts P47,000 P166,400


1-‐22. (a) Subscriptions sold in 2012 and 2013 (5,000,000 + 4,500,000) P9,500,000 Expired subscriptions in 2012 P1,000,000 2013 (2,800,000 + 1,200,000) 4,000,000 5,000,000 Unearned subscriptions, Jan. 1, 2014 P4,500,000 (b)

2014

Cash 5,500,000 Unearned Subscription Revenue 5,500,000 Unearned Subscription Revenue 5,000,000 Subscription Revenue 5,000,000 1,200,000 + 2,000,000 + 1,800,000

2015 Cash 7,000,000 Unearned Subscription Revenue 7,000,000 Unearned Subscription Revenue 5,700,000 Subscription Revenue 5,700,000 1,300,000 + 2,400,000 + 2,000,000 (c) 2014 2015 Unearned Subscription Revenue, January 1 P4,500,000 P5,000,000 Subscription received during the year 5,500,000 7,000,000 Subscription revenue for the year (5,000,000) (5,700,000) Unearned Subscription Revenue, December 31 P5,000,000 P6,300,000

1-‐23. (a) B = 8,000,000 x 8% = 640,000

(b) B = 8% (8000,000 – B) B = 640,000 -‐ .08B B = 640,000/1.08 = 592,593

(c) B = .08 (8,000,000 – T)

T = .30 (8,000,000 – B) B = .08 {8,000,000 -‐ .30 (8,000,000 – B)} B = .08 {8,000,000 – 2,400,000 + .30B} B = 448,000 + .024B B = 448,000/0.976 = 459,016

(d) B = .08 {8,000,000 – B – T }

T = .30 (8,000,000 – B) B = .08{8,000,000 – B -‐ .30 (8,000,000 – B)} B = .08 {8,000,000 – B – 2,400,000 + .30B} B = 448,000 -‐ .056B B = 448,000/1.056 = 424,242

1-‐24. a. Bonus to sales manager = .08 x 3,000,000 = 240,000

Bonus to each sales agent = .06 x 3,000,000 = 180,000


b. Total Bonus = .36 {3,000,000 – B – T) T = .30 {3,000,000 – B} B = .36 {3,000,000 – B -‐ .30 (3,000,000 – B)} B = .36 {3,000,000 – B – 900,000 + .30B} B = 756,000 -‐ .252B B = 756,000/1.252 = 603,834 (total) B (Each): 603,834 / 3 = 201,278

c. B = .32 {3,000,000 – B}

B = 960,000 -‐ .32B B = 960,000/1.32 = 727,273 (total) B (Sales Manager): 727,273 x 12/32 = 272,727 B (Each Sales Agent): 727,273 x 10/32 = 227,273

1-‐25.

B = .06 {9,000,000 – B – T} T = .30 (9,000,000 – B)

B = .06 (9,000,000 – B -‐ .30 (9,000,000 – B)} B = .06 {9,000,000 – B – 2,700,000 + .30B} B = 378,000 -‐ .042B B = 378,000 / 1.042 = 362,764

T = .30 (9,000,000 – 362,764) T = 2,591,171

1-‐26.

Accounts payable P 270,000 Mortgage notes payable 1,300,000 Current portion of bank notes payable 100,000 Interest payable 7,500 Liability for damages (600,000 + 900,000)/2 750,000 Value added tax payable 288,000 Income tax payable 315,000 SSS premiums payable (45,000 + 50,000) 95,000 Philhealth contributions payable (22,000 + 28,000) 50,000 Pag-‐ibig contributions payable (18,000 + 20,000) 38,000 Withholding tax payable 120,000 Total current liabilities P3,333,500

MULTIPLE CHOICE QUESTIONS Theory MC1 D MC12 B MC2 B MC13 D MC3 C MC14 B MC4 B MC15 B MC5 B MC16 A MC6 A MC17 B MC7 D MC18 A MC8 C MC19 B MC9 B MC20 C MC10 C MC21 D MC11 D MC22 D


Problems MC23 D Reported accounts payable P540,000 Goods in transit shipped FOB shipping point 30,000 Goods lost in transit shipped FOB shipping point 15,000 Adjusted amount of accounts payable P585,000 MC24 A Proceeds = 100% -‐ 10% = 90% ; Effective interest = 10%/90% = 11.11% MC25 D P5,000,000, which is the reasonable estimate MC26 C Given (Kindly note the typographical error in the textbook; amount should be

P5,500,000 instead of P550,000) MC27 A Accrued salaries payable, December 31, 2014 P130,000 Salaries expense during 2015 1,630,000 Salaries paid during 2015 (1,560,000) Accrued salaries payable, December 31, 2015 P200,000 MC28 D Contingent / Additional rent 6% x (4.5M – 2.5M) P120,000 Electricity (8,500 x ½) 4,250 Telephone bill for December 2,500 Accrued liabilities, December 31, 2015 P126,750 MC29 D Unearned service contract revenue, January 1 P1,080,000 Cash receipts from service contracts sold during the year 1,920,000 Service contract revenue recognized during the year (1,560,000) Unearned service contract revenue, December 31 P1,440,000 MC30 C 2013 contracts: 1,400 x 1,500 = 2.1M x 67.5% P1,417,500 2014 contracts: 1,820 x 1,500 = 2.73M x 92.5% 2,525,250 Unearned revenue from service contracts, December 31, 2014 P3,942,750 MC31 C 2013 contracts: 2.1M x {½ x (15% + 35%)} P525,000 2014 contracts: 2.73M x (1/2 x 15%) 204,750 Revenue from service contracts recognized in 2014 P729,750 MC32 A Revenue from service contracts sold in 2014 realized in 2015: ½ x (15% + 35%) x 2.73 M P682,500 MC33 A 2013 contracts: 2.1M x (50% x ½) P 525,000 2014 contracts: 2.73M x {(1/2 x 35%) + 50%} 1,842,750 2015 contracts: 2.475M x {(1/2 x 15%) + 35% + 50%} 2,289,375 Unearned revenue from service contracts, December 31, 2015 P4,657,125 MC34 D Unearned/deferred revenue from gift certificates 1,000 x 750 P750,000 MC35 B Accrued recurring biweekly salaries (1,125,000 x 3/10) P337,500 Accrued overtime pay 63,000 Accrued salaries, July 31 P400,500


MC36 B Estimated coupons to be redeemed (500,000 x 80%) 400,000 Coupons already processed 300,000 Estimated coupons/premiums outstanding 100,000 Net cost per premium (50 + 5 – 40) P15 Liability for unredeemed coupons P1,500,000 MC37 A Estimated total number of premiums (3M x 60%)/10 180,000 Premiums/prizes distributed 42,000 Outstanding premiums 138,000 Cost per premium (40,000/80,000) P0.50 Estimated cost of potential prizes outstanding P69,000 MC38 A Estimated premiums to be distributed (400,000 x 70%)/5 56,000 Premiums already redeemed (100,000/5) 20,000 Estimated outstanding premiums 36,000 Cost per premium P20 Estimated liability for premiums claims outstanding P720,000 MC39 B Estimated cost of redemption (720,000 x 50%) P360,000 Amount disbursed as of December 31, 2015 300,000 Liability for unredeemed coupons P 60,000 MC40 D Units sold 24,000 Estimated warranty costs per unit P300 Warranty expense for the year P7,200,000 MC41 C Total warranty expense for the year P7,200,000 Warranty costs paid 1,700,000 Estimated liability for warranty P5,500,000 MC42 D Warranty expense (1.5M x 4%) P60,000 MC43 C B = 0.45 {2,000,000 – B -‐ .30 (2,000,000 – B}) P479,087 MC44 C Total B = 1% + 10% + 10% = 35%

B = 0.35 {2,000,000 – B}; B = 518,519; B to Sales Manager = 518,519 x 15/35 B to Each Sales Agent = 518,519 x 10/35

P222,222 P148,148

MC45 B B = 0.10 {2,500,000 -‐ .30 (2,500,000 – B)} P180,412 MC46 C Magazine subscriptions collected in advance (600,000 + 900,000 + 400,000) P1,900,000 MC47 A Balance of magazine subscriptions collected in advance before

adjustment

P2,400,000 Correct/required balance, year end 1,900,000 Subscriptions revenue for the year P 500,000 MC48 D Cash payment P3,800,000 Carrying amount of patent transferred 2,000,000 Total consideration P5,800,000 Amount previously accrued in 2014 5,000,000 Decrease in profit P 800,000


MC49 A Current liabilities consist of: Notes payable arising from purchases of goods P472,000 Notes payable from loans from banks 200,000 Employees’ income taxes payable 9,600 Advances from customers on purchase orders 64,000 Accounts payable arising from purchases of goods 380,000 Customers’ accounts with credit balances 26,000 Current portion of mortgage serial bonds (50,000 x 2) 100,000 Bank overdraft 50,000 Estimated liability for damages 24,000 Estimated expenses for guarantee 48,000 Accrued interest on bonds payable 57,500 Total current liabilities P1,431,100

Chapter 2 -‐ Non-‐current Liabilities

Chapter 2 – Noncurrent Liabilities 2-‐1.

(a) 8% (b) 12% Bond issue price 5,405,725 4,632,025 Nominal interest for 2015 250,000 250,000 Interest expense (Effective interest) for 2015 216,229 277,922 Premium/discount amortization in 2015 33,771 27,922 Bond carrying value at December 31, 2015 5,371,954 4,659,947 Nominal interest for 2016 500,000 500,000 Interest expense for 2016 428,351 560,970 Premium/discount amortization in 2016 71,649 60,970 Bond carrying value at December 31, 2016 5,300,305 4,720,917

Computations: At 8%: Issue price = (5,000,000 x 0.6756) + (250,000 x 8.1109) = 3,378,000 + 2,027,725 = 5,405,725

Date

Interest Paid

Interest Expense

Premium Amortization

Bond Carrying Value

06/30/15 5,405,725 12/31/15 250,000 216,229 33,771 5,371,954 06/30/16 250,000 214,878 35,122 5,336,832 12/31/16 250,000 213,473 36,527 5,300,305

At 12%: Issue price = (5,000,000 x 0.5584) + (250,000 x 7.3601) = 2,792,000 + 1,840,025 = 4,632,025

Date

Interest Paid

Interest Expense

Discount

Amortization

Bond

Carrying Value 06/30/13 4,632,025 12/31/13 250,000 277,922 27,922 4,659,947 06/30/14 250,000 279,597 29,597 4,689,544 12/31/14 250,000 281,373 31,373 4,720,917

2-‐2. (a) Issue price

Present value of face value (4,000,000 x 0.6756) P2,702,400 Present value of interest payments (200,000 x 8.1109) 1,622,180 Issue price P4,324,580

(b) Amortization Table

Date Interest Paid

Interest Expense


Bond Carrying Value

3/01/15 -‐ -‐ -‐ 4,324,580 8/31/15 200,000 172,983 27,017 4,297,563 2/28/16 200,000 171,903 28,097 4,269,466 8/31/16 200,000 170,779 29,221 4,240,245 2/28/17 200,000 169,610 30,390 4,209,855


(c) 2015 Mar. 1 Cash 4,324,580 Bonds payable 4,000,000 Premium on bonds payable 324,580 Aug. 31 Interest expense 172,983 Premium on bonds payable 27,017 Cash 200,000 Dec. 31 Interest expense (171,903 x 4/6) 114,602 Premium on bonds payable 18,731 Interest payable (320,000 x 4/6) 133,333

2016 Feb. 28 Interest expense (171,903 – 114,602) 57,301 Prem. on bonds payable (28,097–18,731) 9,366 Interest payable 133,333 Cash 200,000

2-‐3. (a) 2015 Aug. 1 Cash 4,458,429 Discount on bonds payable 708,238 Interest payable 166,667 Bonds payable 5,000,000 5M x 8% x 5/12 = 166,667 4,458,429 – 166,667 = 4,291,762 5,000,000 – 4,291,762 = 708,238 Dec. 31 Interest expense 178,823 Interest payable 166,666 Discount on bonds payable 12,157 5M x 8% x 5/12 = 166,666 4,291,762 x 10% x 5/12 = 178,823 178,823 – 166,666 = 12,157 2016 Mar. 1 Interest expense 71,529 Interest payable 333,333 Discount on bonds payable 4,862 Cash 400,000 4,291,762 x 10% x 2/12 = 71,529 5M x 8% x 2/12 = 66,667 71,529 – 66,667 = 4,862 5M x 8% = 400,000 Dec. 31 Interest expense 359,065 Discount on bonds payable 25,732 Interest payable 333,333 4,291,762 + 12,157 + 4,862 = 4,308,781 4,308,781 x 10% x 10/12 = 359,065 5M x 8% x 10/12 = 333,333 359,065 – 333,333 = 25,732


(b) 2015 2016 4,291,761 x 10% x 5/12 178,823 4,291,761 x 10% x 2/12 71,529 4,308,781 x 10% x 10/12 359,065 Interest expense for the year 178,823 430,594 (c) December 31, 2015 December 31, 2016 Bonds payable P5,000,000 P5,000,000 Less discount on bonds payable 696,081 665,487 Carrying amount P4,303,919 P4,334,513 OR COMPUTATIONS MAY BE MADE AFTER A PARTIAL TABLE OF AMORTIZATION IS

COMPLETED AS FOLLOWS: August 1, 2015 4,291,762 March 1, 2016 250,353 233,333 17,020 4,308,782 March 1, 2017 430,878 400,000 30,878 4,339,659 Interest expense for 2015: 250,353 x 5/7 = 178,824 Interest expense for 2016: (250,353 x 2/7) + (430,878 x 10/12) = 430,594 Carrying amount, December 31, 2015: 4,291,762 + (17,020 x 5/7) = 4,303,919 Carrying amount, December 31, 2016: 4,308,782 + (30,878 x 10/12) = 4,334,514 2-‐4. Issue price of bonds and warrants (5,000,000 x 1.08) P5,400,000 MV of bonds without warrants (5,000,000 x 1.02) 5,100,000 Value assigned to warrants P 300,000

(a) Cash 5,400,000 Premium on bonds payable 100,000 Bonds payable 5,000,000 Share warrants outstanding 300,000 (b) Cash (5,000 x 2 x 140) 1,400,000 Share warrants outstanding 300,000 Ordinary shares capital (5,000 x 2 x 100) 1,000,000 Share premium -‐ ordinary 700,000

2-‐5.

(a) Issue price of bonds with warrants (1,000,000 x 1.04) 1,040,000 Bond price without warrants 1,000,000 x 0.3220 322,000 100,000 x 5.6502 565,020 887,020 Value of share warrants 152,980 (b) Interest expense for 2015 (887,020 x 12% x 10/12) 88,702

(c) Bond carrying value, March 1, 2015 887,020 Amortization through December 31, 2015 887,020 x 12% x 10/12 88,702 1,000,000 x 12% x 10/12 83,333 5,369 Bond carrying value, December 31, 2015 892,389


(d) Cash (1,000 x 30 x 40) 1,200,000 Share warrants outstanding 152,980 Ordinary share capital (30,000 x 25) 750,000 Share premium -‐ ordinary 602,980

2-‐6.

(a) Issue price of convertible bonds 2,000,000 Issue price of bonds without conversion privilege 2,000,000 x 0.5674 1,134,800 2M x 10% x 3.6048 720,960 1,855,760 Allocation to equity 144,240


Date

Interest Paid

Interest Expense


Bond Carrying Value

07/01/15 -‐ -‐ -‐ 1,855,760 06/30/16 200,000 222,691 22,691 1,878,451 06/30/17 200,000 225,414 25,414 1,903,865 06/30/18 (1,142,319) 06/30/18 761,546 06/30/18 80,000 91,386 11,386 772,932 06/30/19 80,000 92,572 12,752 785,684 06/30/20 80,000 94,316* 14,316 800,000

*Adjusted; difference is due to rounding off.

(c) 2015 July 1 Cash 2,000,000 Discount on bonds payable 144,240 Bonds payable 2,000,000 PIC arising from bond conversion privilege 144,240 2016 June 30 Interest expense 222,691 Discount on bonds payable 22,691 Cash 200,000 2017

June 30 Interest expense 225,414 Discount on bonds payable 25,414 Cash 200,000 Bonds payable 1,200,000 PIC arising from conversion privilege 86,544 Discount on bonds payable 57,681 Ordinary share capital 960,000 Share premium -‐ ordinary 268,863

Carrying value of bonds converted (1,903,865 x 120/200 1,142,319 Face value of bonds converted 1,200,000 Discount on bonds payable cancelled 57,681 Value of equity converted (144,240 x 120/200) 86,544 Par value of ordinary shares issued (120 x 80 x 100) 960,000


2018 June 30 Interest expense 91,386 Discount on bonds payable 11,386 Cash 80,000 2019 June 30 Interest expense 92,752 Discount on bonds payable 12,752 Cash 80,000 2020 June 30 Interest expense 94,316 Discount on bonds payable 14,316 Cash 80,000 Bonds payable 800,000 PIC arising from bond conversion privilege 57,696 Cash 800,000 PIC from unexercised bond conversion privilege 57,696 (144,240 – 86,544)

2-‐7. Refer to the following table for the amounts included in the journal entries.

Date Interest Paid

Interest Expense

Discount Amortization

Bond Carrying Value

01/02/15 4,620,820 12/31/15 400,000 462,082 62,082 4,682,902 12/31/16 400,000 468,290 68,290 4,751,192 12/31/17 400,000 475,119 75,119 4,826,311 12/31/17 (965,262) 12/31/17 3,861,049 12/31/18 320,000 386,105 66,105 3,927,154 12/31/18 (1,963,577) 12/31/18 1,963,578 12/31/19 160,000 196,422* 36,422* 2,000,000

* Adjusted due to rounding off

(a) Cash 5,200,000 Discount on bonds payable 379,180 Bonds payable 5,000,000 PIC arising from bond conversion privilege 579,180

(5M x .6209) + (400,000 x 3.7908) = 4,620,820 (5M x 1.04) – 4,620,820 = 579,180 5M – 4,620,820 = 379,180

(b) Interest expense 468,290 Cash 400,000 Discount on bonds payable 68,290 (c) Interest expense 475,119 Cash 400,000 Discount on bonds payable 75,119

Bonds payable 1,000,000 PIC arising from bond conversion privilege 115,836 Discount on bonds payable 34,738 Ordinary share capital (200 x 40 x 100) 800,000 Share Premium -‐ ordinary 281,098 579,180 x 1/5 = 115,836


(d) Interest expense 386,105 Cash 320,000 Discount on bonds payable 66,105

Bonds payable 2,000,000 PIC arising from bond conversion privilege 231,672 Discount on bonds payable 36,423 Cash 2,020,000 Gain on retirement of bonds 17,633 PIC from unexercised bond conversion privilege 157,616 Retirement price (2M x 1.01) 2,020,000 Retirement price on account of liability (2,000,000 + 160,000) x .9009 1,945,944 Retirement price on account of equity 74,056 Carrying value of bonds retired Face value 1,963,577 Retirement price of bonds 1,945,944 Gain on retirement of bonds 17,633 Carrying value of equity cancelled

(579,180 x 2/5)

231,672

Retirement price on account of equity 74,056 Gain on cancellation taken to equity 157,616

(e) Interest expense 196,422 Cash 160,000 Discount on bonds payable 36,422

Bonds Payable 2,000,000 Cash 2,000,000

2-‐8. The following table may facilitate the computations required in this problem.

Date

Interest Paid

Interest Expense


Bond Carrying Value

12/01/15 -‐ -‐ -‐ 5,386,072 06/01/16 300,000 269,304 30,696 5,355,376 12/01/16 300,000 267,769 32,231 5,323,145 06/01/17 300,000 266,157 33,843 5,289,302 12/01/17 300,000 264,465 35,535 5,253,767 06/01/18 300,000 262,688 37,312 5,216,455 06/01/18 2,086,582 12/01/18 120,000 104,329 15,671 2,070,911 06/01/19 120,000 103,546 16,454 2,054,457 12/01/19 120,000 102,723 17,277 2,037,180 06/01/20 120,000 101,859 18,141 2,019,039 12/01/20 120,000 100,961* 19,039 2,000,000


(a) Carrying value, December 1, 2016 (see, table) 5,323,145 Amortization for one month (33,843 x 1/6) 5,640 Carrying value, December 31, 2016 5,317,505


(b) January 1-‐June 1, 2016 (269,304 x 5/6) 224,420 June 1-‐December 1, 2016 267,769 December 1-‐31, 2016 (266,157 x 1/6) 44,360 Interest expense for the year 2016 536,549 (c) Carrying value of bonds retired on June 1, 2018 5,216,455 x 3/5 3,129,873 Amortization through August 1, 2018 (23,506 x 2/6 x 3/5) 4,701 Carrying value of bonds retired on August 1, 2018 3,125,172 (d) Carrying value of bonds retired 3,125,172 Redemption price (3M x 1.05) 3,150,000 Loss on redemption of bonds 24,828

(e) Carrying value of remaining bonds, December 1, 2018 2,070,911 Amortization through December 31, 2018 (16,454 x 1/6) 2,742 Carrying value of remaining bonds, December 31, 2018 2,068,169 (f) On bonds redeemed: 2018 2019

January 1-‐June 1, 2018 (262,688 x 3/5 x 5/6) June 1-‐August 1, 2018 (5,216,455 x 3/5 x 5% x 2/6)

131,344

52,165

On remaining bonds January 1-‐June 1, 2018 (262,688 x 2/5 x 5/6) 67,563 June 1-‐December 1, 2018 104,329 December 1-‐31, 2018 (103,546 x 1/6) 17,258 January 1-‐June 1, 2019 (103,546 x 5/6) 86,288 June 1-‐December 1, 2019 102,723 December 1-‐31, 2019 (152,788 x 1/6) 16,977 Interest expense 372,659 205,988

2-‐9.

Date

Interest Paid

Interest Expense


Bond Carrying Value

01/02/15 -‐ -‐ -‐ 12,684,120 12/31/15 1,200,000 1,014,730 185,270 12,498,850 12/31/16 1,200,000 999,908 200,092 12,298,758 12/31/17 1,200,000 983,901 216,099 12,082,659 12/31/18 1,200,000 966,613 233,387 11,849,272 12/31/18 7,109,563 12/31/19 720,000 568,765 151,235 6,958,328 12/31/20 720,000 556,666 163,334 6,794,994

(a) Amortization of premium for 2015 (see table) 185,270 (b) Carrying value of bonds on December 31, 2018 (see table) 11,849,272 (c) Carrying value of bonds called (11,849,272 x 4/10) 4,739,709 Call price/retirement price (4,000,000 x 110%) 4,400,000 Gain on retirement of bonds 339.709 (d) Interest expense for year 2019 (see table) 568,765 (e) Unamortized premium on bonds payable, Dec. 31, 2019 6,958,328 – 6,000,000 958,328


2-‐10.

Date Nominal Interest

Effective Interest


Bond Carrying value

03/01/15 3,926,000 09/01/15 170,000 176,670 6,670 3,932,670 03/01/16 170,000 176,970 6,970 3,939,640 09/01/16 170,000 177,284 7,284 3,946,924 03/01/17 170,000 177,612 7,612 3,954,536 09/01/17 170,000 177,954 7,954 3,962,490 03/01/18 170,000 178,312 8,312 3,970,802 09/01/18 170,000 178,686 8,686 3,979,488 03/01/19 170,000 179,077 9,077 3,988,565

(a) Interest expense recorded on September 1, 2015 176,670 Discount amortization recorded on September 1, 2015 6,670 (b) Carrying amount of the bonds, September 1, 2016 3,946,924 Amortization through December 31, 2016 (7,612 x 4/6) 5,075 Carrying amount of the bonds, December 31, 2016 3,951,999 (c) Retirement price (4M x 1.01) 4,040,000 Accrued interest (4,000,000 x 8.5% x 1/12) 28,333 Amount of cash paid on September 30, 2018 4,068,333 (d) Carrying value, September 1, 2018 (see table) 3,979,488 Amortization through September 30, 2018 (9,077 x 1/6) 1,513 Carrying value, September 30, 2018 3,981,001 Retirement price (4 M x 1.01) 4,040,000 Loss on retirement of bonds 58,999

2-‐11.

(a) Issue price of the bonds

Due Date Principal Due

Interest Due

Amount Due

PV Factor

Present Value

12/31/16 2,000,000 800,000 2,800,000 0.8929 2,500,120 12/31/17 2,000,000 640,000 2,640,000 0.7972 2,104,608 12/31/18 2,000,000 480,000 2,480,000 0.7118 1,765,264 12/31/19 2,000,000 320,000 2,320,000 0.6355 1,474,360 12/31/20 2,000,000 160,000 2,160,000 0.5674 1,225,584 Selling price of bonds P9,069,936



Interest Due

Effective Interest


Carrying Value, end

12/31/15 P9,069,936 12/31/16 2,000,000 800,000 1,088,392 288,392 7,358,328 12/31/17 2,000,000 640,000 882,999 242,999 5,601,327 12/31/18 2,000,000 480,000 672,159 192,159 3,793,486 12/31/17 2,000,000 320,000 455,218 135,218 1,928,704 12/31/18 2,000,000 160,000 231,296 71,296* -‐0-‐ *Adjusted; difference is due to rounding off.


(c) 2016 Dec. 31 Interest expense 1,088,392 Discount on bonds payable 288,392 Cash 800,000 Bonds payable 2,000,000 Cash 2,000,000 2017 Dec. 31 Interest expense 882,999 Discount on bonds payable 242,999 Cash 640,000 Bonds payable 2,000,000 Cash 2,000,000

2-‐12.

(a) Issue price of the bonds


Interest Due

Amount Due

PV Factor

Present Value

12/31/15 2,000,000 960,000 2,960,000 0.9259 2,740,664 12/31/16 2,000,000 720,000 2,720,000 0.8573 2,331,856 12/31/17 2,000,000 480,000 2,480,000 0.7938 1,968,624 12/31/18 2,000,000 120,000 2,240,000 0.7350 1,646,400 Selling price of bonds 8,687,544 (b) Amortization Table


Interest Due

Effective Interest


Carrying Value, end

01/01/15 8,687,544 12/31/15 2,000,000 960,000 695,004 264,996 6,422,548 12/31/16 2,000,000 720,000 513,804 206,196 4,216,352 12/31/17 2,000,000 480,000 337,308 142,692 2,073,660 12/31/18 2,000,000 240,000 166,340* 73,660 -‐0-‐ *Adjusted; difference is due to rounding off.

(c) 2015 Jan. 1 Cash 8,687,544 Bonds payable 8,000,000 Premium on bonds payable 687,544 Dec. 31 Interest expense 695,004 Premium on bonds payable 264,996 Cash 960,000 Bonds payable 2,000,000 Cash 2,000,000 2016 Dec. 31 Interest expense 513,804 Premium on bonds payable 206,196 Cash 720,000 Bonds payable 2,000,000 Cash 2,000,000


2017 Dec. 31 Interest expense 337,308 Premium on bonds payable 142,692 Cash 480,000 Bonds payable 2,000,000 Cash 2,000,000 2018 Dec. 31 Interest expense 166,340 Premium on bonds payable 73,660 Cash 240,000 Bonds payable 2,000,000 Cash 2,000,000

2-‐13.

(a) 6,949,800/9,000,000 = 0.7722 This present value factor for three periods is under the rate of 9% (Table II, Present Value of a Single Payment). Hence, effective interest for this transaction is 9%.

(b) Date Amortization Carrying Value of Note 04/01/15 6,949,800 03/31/16 9% x 6,949,800 = 625,482 7,575,282 03/31/17 9% x 7,575,282 = 681,775 8,257,057 03/31/18 9% x 8,257,057 = 742,943* 9,000,000


(c) Interest expense for 2015 (625,482 x 9/12) 469,112 Carrying value, April 1, 2015 6,949,800 Amortization through December 31, 2015 (625.482 x 9/12 469,112 Carrying value, December 31, 2015 7,418,912

(d) 2015 Apr. 1 Land 6,949,800 Discount on notes payable 2,050,200 Notes payable 9,000,000 Dec. 31 Interest expense 469,112 Discount on notes payable 469,112 2016 Mar. 31 Interest expense (625,482 – 469,112) 156,370 Discount on notes payable 156,370 Dec. 31 Interest expense (681,775 x 9/12) 511,331 Discount on notes payable 511,331 2017 Mar. 31 Interest expense (681,775 – 511,331) 170,444 Discount on notes payable 170,444 Dec. 31 Interest expense (742,943 x 9/12) 557,207 Discount on notes payable 557,207


2018 Mar. 31 Interest expense (742,943 – 557,207) 185,736 Discount on notes payable 185,736 Notes payable 9,000,000 Cash 9,000,000

2-‐14.

(a) 2015 2016 2017 6,949,800 x 9%= 625,482 625,482 x 8/12 416,988 625,482 x 4/12 208,494 6,949,800 x 1.09 = 7,575,282 7,575,282 x 9%= 681,775 681,775 x 8/12 454,517 681,775 x 4/12 227,258 7,575,282 x 1.09 = 8,257,057 8,257,057 x 9%= 743,135 743,135 x 8/12 _______ _______ 495,423 Totals 416,988 663,011 722,681

(b) Notes payable 6,949,800 Accrued interest (416,988 + 663,011) 1,079,999 Total, December 31, 2016 8,029,799

(c) Noncurrent liabilities: Notes payable 6,949,800 Accrued interest (416,988 + 663,011) 1,079,999 Total, December 31, 2016 7,802,540 Noncurrent liabilities: Notes payable 6,949,800 Accrued interest 1,802,680 Total, December 31, 2017 8,752,480

(d) 2015 May 1 Land 6,949,800 Notes payable 6,949,800 Dec. 31 Interest expense 416,988 Interest payable 416,988 2016 Dec. 31 Interest expense 663,011 Interest payable 663,011 2017 Dec. 31 Interest expense 722,681 Interest payable 722,681

2018 Apr. 30 Interest expense (adjusted) 247,520 Interest payable 1,802,680 Notes payable 6,949,800 Cash 9,000,000


2-‐15. (a) Present value of note (800,000 x 3.2397) 2,591,760 (b) Date Principal Due Amortization Carrying Value of Note 4/01/15 2,591,760 3/31/16 800,000 233,258 2,025,018 3/31/17 800,000 182,252 1,407,270 3/31/18 800,000 126,654 733,924 3/31/19 800,000 66,076* -‐0-‐

*Adjusted; difference is due to rounding off. (c) 2015 Apr. 1 Equipment 2,591,760 Discount on notes payable 608,240 Notes payable 3,200,000 Dec. 31 Interest expense (233,258 x 9/12) 174,944 Discount on notes payable 174,944 2016 Mar. 31 Notes payable 800,000 Interest expense 58,314 Cash 800,000 Discount on notes payable (233,258-‐174,944) 58,314 Dec. 31 Interest expense (182,252 x 9/12) 136,689 Discount on notes payable 136,689 2017 Mar. 31 Notes payable 800,000 Interest expense 45,463 Cash 800,000 Discount on notes payable (182,252-‐136,689) 45,563 Dec. 31 Interest expense (126,654 x 9/12) 94,991 Discount on notes payable 94,991 2018 Mar. 31 Notes payable 800,000 Interest expense 31,663 Cash 800,000 Discount on notes payable (126,654-‐94,991) 31,663 Dec. 31 Interest expense (66,076 x 9/12) 49,557 Discount on notes payable 49,557 2019 Mar. 31 Notes payable 800,000 Interest expense 16,519 Cash 800,000 Discount on notes payable (66,076-‐49,557) 16,519


2-‐16. (a) Date

Annual Payment

Interest

Principal Payment

Carrying Value

10/01/15 2,591,760 09/30/16 800,000 233,258 566,742 2,025,018 09/30/17 800,000 182,252 617,748 1,407,270 09/30/18 800,000 126,654 673,346 733,924 09/30/19 800,000 66,076* 733,924 -‐0-‐

*Adjusted

(b) 2015 Oct. 1 Equipment 2,591,760 Notes Payable 2,591,760 Dec. 31 Interest Expense (233,258 x 3/12) 58,315 Interest Payable 58,315 2016 Sept. 30 Interest Payable 58,315 Interest Expense (233,258 – 58,315) 174,943 Notes Payable 566,742 Cash 800,000 Dec. 31 Interest Expense (182,252 x 3/12) 45,563 Interest Payable 45,563 2017 Sept. 30 Interest Payable 45,563 Interest Expense (182,252 – 45,563) 136,689 Notes Payable 617,748 Cash 800,000 Dec. 31 Interest Expense (126,654 x 3/12) 31,663 Interest Payable 31,663 2018 Sept. 30 Interest Payable 31,663 Interest Expense (126,654 – 31,663) 94,991 Notes Payable 673,346 Cash 800,000 Dec. 31 Interest Expense (66,076 x 3/12) 16,519 Interest Payable 16,519 2019 Sept. 30 Interest Payable 16,519 Interest Expense (66,076 – 16,519) 49,557 Notes Payable 733,924 Cash 800,000 (c) Current portion at December 31, 2016 Notes Payable 617,748 Interest Payable 45,563 Noncurrent portion at December 31, 2016 Notes Payable 1,407,270


2-‐17. (a) Notes payable 900,000 Interest payable 90,000 Accumulated depreciation 400,000 Equipment 1,000,000 Gain on disposal of equipment 200,000 Gain on debt restructuring 190,000

(b) Bonds payable 10,000,000 Interest payable 900,000 Ordinary share capital (300,000 x 25) 7,500,000 Share premium – ordinary (300,000 x 3) 900,000 Gain on debt restructuring 2,500,000 (10,900,000 – 8,400,000 = 2,500,000)

(c) Notes payable 10,000,000 Interest payable 1,000,000 Restructured notes payable 7,459,264 Gain on debt restructuring 3,540,736 Present value of future payments at historical

rate (10%)

8,000,000 x 0.8264 6,611,200 8,000,000 x 8% x 1.7355 1,110,720 Total 7,721,920 Carrying value of liability 11,000,000 Difference 3,278,080 3,278,080/11,000,000 = 30%, thus the

restructuring qualifies as a derecognition of the old liability and creation of a new liability. The old liability shall be cancelled; the new liability shall be measured based on the discounted cash flow of the future payments based on the entity’s incremental borrowing rate considering its credit rating:

Present value of future payments at incremental borrowing rate, considering its credit rating (12%):

8,000,000 x 0.7972 6,377,600 8,000,000 x 8% x 1.6901 1,081,664 Total 7,459,264 Carrying value of the old 11,000,000 Gain on debt restructuring 3,540,736 (d) Notes payable 3,000,000 Interest payable 330,000 Restructured notes payable 3,111,024 Deferred gain on debt restructuring 218,976


Present value of future payments 3,000,000 x 0.5935 1,780,500 3,000,000 x 12% x 3.6959 1,330,524 Total 3,111,024 Carrying value of liability 3,330,000 Difference 218,976 218,976/3,330,000 < 10% of 3,330,000.

Thus, the debt restructuring does not qualify for derecognition of the old obligation. No gain shall be recognized and a new effective interest rate shall be computed.

Alternatively, the restructuring may be recorded as: Notes payable 3,000,000 Interest payable 330,000 Premium on restructured notes payable 111,024 Restructured notes payable 3,000,000 Deferred gain on debt restructuring 218,976


MULTIPLE CHOICE QUESTIONS Theory MC1 D MC12 C MC2 D MC13 B MC3 D MC14 B MC4 A MC15 D MC5 A MC16 B MC6 C MC17 D MC7 D MC18 A MC8 D MC19 A MC9 C MC20 A MC10 C MC21 A MC11 C MC22 B Problems MC23 D Present value of maturity value

1.0M x 0.38554

P385,540 Present value of interest payments

1.0M x 8% x 6.14457

491,566 Total issue price P877,106 MC24 B Present value of P1000 face value (1,000 x 0.31)

Present value of interest (1,000 x 4% x 11.47)= 768.80 P310.00 458.80

Issue price for each P1,000 bond P768.80 MC25 A Bond issue price (2.0M x 97%)

Accrued interest (2.0M x 10% x 3/12) P1,940,000

50,000 Net cash received from bond issuance P1,990,000 MC26 B Amount allocated to bonds (2,000 x 1,040) P2,080,000 Face value of bonds 2,000,000 Premium on bonds payable on May 1, 2015 P 80,000 MC27 B Retirement price (4.0M x 97%)

Accrued interest (4.0M x 12% x 3/12) P3,880,000

120,000 Total cash paid for the retirement of bonds P4,000,000 MC28 C Redemption price (96% x 1.0M) P 960,000 Carrying amount of bonds retired (1.0M + 70,000) 1,070,000 Gain on redemption of bonds P110,000 MC29 A Accrued interest (1.0M x 12% x 1/12) P10,000 MC30 B Issue price (1,000,000 x 1.02) – 50,000 P1,020,000 Transaction costs (50,000) Initial carrying amount on February 1, 2015 P 970,000


MC31 D Carrying amount of bonds converted (1.0M – 30,000) Paid in capital from BCP cancelled due to conversion Total

P 970,000 50,000

P1,020,000 Total par of shares issued upon conversion (40,000 X 20)

Expenses incurred in connection with conversion (800,000) (10,000)

Increase in share premium P 210,000 MC32 D P0; No gain or loss is recognized upon conversion of bonds. MC33 C Interest expense from July 1 to December 31, 2015

1,032,880 x 10% x 6/12

P51,644 MC34 A Carrying amount, July 1, 2015

Amortization of premium Nominal interest 1.0M x 6% P60,000 Effective interest 51,644 Carrying amount, December 31, 2015

P1,032,880

8,356 P1,024,524

MC35 A Carrying value, January 1, 2015

Amortization of discount (10% x 1,878,000) -‐ (2,000,000 x 9%)

P1,878,000

7,800 Carrying value, December 31, 2015 P1,885,800 MC36 B Effective interest (10M – 1,145,000) x 6% P531,300 Nominal interest (10M x 5%) 500,000 Increase in carrying amount representing amortization of

discount

P 31,300 MC37 C Interest expense for 6 months ended December 31, 2015

5.0M x 1.136 x 8% x 6/12

P227,200 MC38 A Bond carrying value, June 30, 2014

Amortization of premium for six months (2,100,000 x 6%) – (2,000,000 x 7%)

P2,100,000

14,000 Bond carrying value, June 30, 2015 P2,086,000 Face value 2,000,000 Unamortized premium on bond, June 30, 2015 P 86,000 MC39 D January 1 – June 30 (1,032,880 x 5%) P51,644 July 1 – December 31 1,032,880 – (60,000 – 51,644)

= 1,024,524 x 5%

51,226 Interest expense for the year P102,870 MC40 D Carrying amount, December 31, 2015

Principal payment Amortization of discount Effective interest 1,902,800 x 10% 190,280 Nominal interest 2.0M x 8% 160,000 Carrying amount, December 31, 2016

P1,902,800 (400,000)

30,280 P1,533,080

MC41 B Interest expense for the year (2,400,000 x 12%) P288,000


MC42 D Carrying value, December 31, 2015 (2.4M – 1.0M + 288,000) = P1,688,000

Principal payment P1,000,000 Interest (1,688,000 x 12%) 202,560 Amount applicable to principal due on December 31, 2016 P797,440 MC43 B Discount balance, January 1, 2015 P600,000 Amortization of discount in 2015 288,000 Discount balance, December 31, 2015 P312,000 MC44 B Interest expense for 2015 (49,737 x 10%) P4,974 Notes payable, January 1, 2015 P49,737 Reduction in principal during 2015 (10,000 – 4,974) 5,026 Notes payable, December 15, 2015 P44,711 MC45 D Carrying amount of liability (5.0M + 500,000) P5,500,000 Carrying value of real estate transferred 3,000,000 Total amount recognized in profit P2,500,000 (Includes P1.0M gain on restructuring and P1.5M gain on exchange) MC46 D Carrying value of liability (6M + 600,000)

Present value of restructured debt (6M x 0.621) +(6000,000 x 12% x 3.791) Gain 144,480/6,600,000 is less than 10%; No gain is recognized

P6,600,000

6,455,520 P 144,480

MC47 C Carrying value of liability (6M + 600,000)

Present value of restructured debt (5M x .6209) + (5M x .12 x 3.7908) Gain

P6,600,000

5,378,980 P1,221,020

MC48 B Carrying value of liability (8M + 640,000)

Present value of restructured debt (6M x 0.8573) + (6M x 10% x 1.7833) Gain

P8,640,000

6,213,780 P2,426,220

MC49 B Carrying value of liability (10M + 1M)

Market value of shares issued (150,000 x 65) Gain on restructuring of debt

P11,000,000 9,750,000

P 1,250,000

Chapter 3 – Shareholders’ Equity


3-‐1. • Cash (20,000 x 500) 10,000,000 Ordinary share capital 10,000,000 • Legal expense/Professional fees 150,000 Ordinary share capital (250 x 500) 125,000 Share premium -‐ ordinary 25,000 • Land 5,000,000 Building 3,000,000 Ordinary share capital (12,500 x 500) 6,250,000 Share premium -‐ ordinary 1,750,000 • Cash (6,500 x 550) 3,575,000 Ordinary share capital (6,500 x 500) 3,250,000 Share premium -‐ ordinary 325,000 • Cash (20,000 x 550 x 25%) 2,750,000 Subscription receivable – ordinary (11M x 75%) 8,250,000 Subscribed ordinary share (20,000 x 500) 10,000,000 Share premium – ordinary 1,000,000 • Cash 4,950,000 Subscription receivable – ordinary 4,950,000 12,000 shares x 550 x 75% • Subscribed ordinary share 6,000,000 Ordinary share capital 6,000,000 12,000 shares x 500

3-‐2.

a. Cash (10,000 x 200) 2,000,000 Ordinary share capital (10,000 x 150) 1,500,000 Share premium -‐ ordinary 500,000 Share premium-‐ordinary 60,000 Cash 60,000 b. Land (3,500 x 560) 1,960,000 Ordinary share capital (3,500 x 200) 700,000 Share premium – ordinary 1,260,000 c. Cash 18,000,000 Preference share capital (5,000 x 500) 2,500,000 Ordinary share capital (100,000 x 100) 10,000,000 Share premium – preference 2,000,000 Share premium – ordinary 3,500,000 MV: Pref – 5,000 x 800=4M Ord – 100,000 x 120 = 12M Allocation: Pref: 18M x 4/16 = 4.5M Ord: 18M x 12/16 = 13.5M


d. Cash 150,000 Subscription receivable 450,000 Subscribed ordinary share 500,000 Share premium – ordinary 100,000 e. Land 5,000,000 Cash 40,000 Donated capital 4,960,000

3-‐3.

Contributed capital 10% Preference share capital, cumulative and non-‐participating, P100 par 30,000 shares authorized; 12,000 shares issued and outstanding

P1,200,000

Ordinary share capital, P10 par, 100,000 shares authorized, 40,000 shares issued, 39,000 shares outstanding

400,000

Share premium – preference 300,000 Share premium –ordinary 140,000 Total contributed capital P2,040,000 Retained earnings Appropriated for treasury share P 18,000 Unappropriated 332,000 350,000 Treasury shares, 1,000 ordinary shares, at cost ( 18,000) Total shareholders’ equity P2,372,000

The total amount of P2,372,000 may also be obtained without necessarily preparing the

shareholders’ equity in good format (if not required) as follows: Issue of 30,000 ordinary shares P 380,000 Issue of preference shares in exchange of equipment 1,500,000 Subscriptions for 10,000 ordinary shares at 16 160,000 Purchase of 1,000 treasury shares at 18 (18,000) Retained earnings 350,000 Total shareholders’ equity, December 31, 2013 P 2,372,000 3-‐4.

(a) (1) Treasury shares 140,000 Cash 140,000 (2) Cash 60,000 Treasury shares 56,000 Paid in capital from treasury share 4,000 (3) Cash 65,000 Paid in capital from treasury shares 4,000 Retained earnings 1,000 Treasury shares 70,000 (4) Ordinary share capital 10,000 Share premium – ordinary 3,000 Retained earnings 1,000 Treasury shares 14,000


(b) Total shareholders’ equity, December 31, 2014 P2,200,000 (1) Purchase of treasury shares (10,000 x 14) (140,000) (2) Sale of treasury shares (4,000 x 15) 60,000 (3) Sale of treasury shares (5,000 x 13) 65,000 Profit for the year 280,000 Dividends declared (200,000) Total shareholders’ equity, December 31, 2015 P2,265,000 The total shareholders’ equity may also be obtained by determining the balance of the shareholders’ equity accounts, as follows:

Ordinary share capital, P10 par (99,000 shares issued and outstanding)P 990,000 Share premium -‐ ordinary 297,000 Retained Earnings 978,000 Total shareholders’ equity P2,265,000 3-‐5.

(a) Preference share capital (4,000 x 20) 80,000 Share premium – preference (4,000 x 1.60) 6,400 PIC from retirement of preference shares 2,400 Cash (4,000 x 21) 84,000 (b) Preference share capital (4,000 x 20) 80,000 Share premium – preference (4,000 x 1.60) 6,400 Retained earnings 17,600 Cash (4,000 x 26) 104,000

Average preference share premium per share: 160,000/100,000 shares = 1.60 3-‐6.

(a) Preference share capital (10,000 x 20) 200,000 Share premium – preference (10,000 x 1.60) 16,000 Retained earnings 84,000 Ordinary share capital (10,000 x 30) 300,000 (b) Preference share capital (10,000 x 20) 200,000 Share premium – preference (10,000 x 1.60) 16,000 Ordinary share capital (5,000 x 30) 150,000 Share premium – ordinary 66,000

3-‐7. (a) Retained earnings (10,000 shares x P20) 200,000 Share dividends distributable 100,000 Share premium -‐ ordinary 100,000 Share dividends distributable 100,000 Ordinary share capital 100,000 (b) Retained earnings (30,000 x 10)

Share dividends distributable 300,000

300,000 Share dividends distributable 300,000 Ordinary share capital 300,000 (c) Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously issued

and outstanding.


3-‐8. Capital structure: Preference Ordinary Number of shares outstanding 20,000 250,000 Total par value P2,000,000 P2,500,000 (a) Preference share is non-‐cumulative and non-‐participating 2013 Preference Ordinary Current preference dividends (9% x 2,000,000 = 180,000; dividends declared were P150,000 only.

P 150,000

P0

Dividend per share P7.50 P0 2014 Preference Ordinary Current preference dividends (9% x 2,000,000) P 180,000 Excess (240,000 – 180,000) P80,000 Dividend per share P9.00 P0.32 2015 Preference Ordinary Current preference dividends (9% x 2,000,000) P 180,000 Excess (540,000 – 180,000) P360,000 Dividend per share P9.00 P1.44 (b) Preference share is cumulative and non-‐participating. 2013 Preference Ordinary Current on preference is P180,000 P150,000 Arrears, end (P180,000 – 150,000 = 30,000) P0 Dividend per share P7.50 P0

2014 Preference Ordinary Arrears, beginning P 30,000 Current year 180,000 Total P210,000 P210,000 Excess to ordinary = 260,000 – 210,000 P50,000 Dividend per share P10.50 P0.20 2015 Preference Ordinary Current year P180,000 Excess – to ordinary = 540,000 – 180,000 P360,000 Dividend per share P9.00 P1.44

(c) Preference share is cumulative and fully participating 2013 Preference Ordinary Current dividends: 9% x 2,000,000 = P180,000 P 150,000 P0 Arrears, end = 180,000 – 150,000 = 30,000 Dividend per share P 7.50 P0


2014 Preference Ordinary Arrears, beginning P 30,000 Current on preference 180,000 P 210,000 To ordinary: initial limit 9% x P2,500,000 = P225,000, but remaining is only

P50,000

Total dividends P210,000 P50,000 Dividend per share P10.50 P 0.20 2015 Preference Ordinary Current dividends: 9% x 2,000,000 P 180,000 9% x 2,500,000 P 225,000 Excess: P135,000 x 2.0/4.5 60,000 135,000 x 2.5/4.5 75,000 Total P240,000 P300,000 Dividend per share P12.00 P1.20

3-‐9.

Capital structure: Preference Ordinary Number of shares outstanding 20,000 250,000 Total par value P2,000,000 P2,500,000

(a) Preference is participating up to 14% (Additional 5%) Preference Ordinary Arrears, January 1 P 50,000 Current dividends: 9% x P2,000,000 180,000 9% x P2,500,000 P225,000 Excess divided by total par 155,000/4,500,000 = 3.44%, which is less than the limit of additional 5%; therefore full excess is prorated. P155,000 x 2M/4.5M P155,000 x 2.5M/4.5M

68,889

86,111 Total P298,889 P311,111 Dividend per share P14.94 P1.24

(b) Preference is participating up to 12% (Additional 3%) Preference Ordinary Arrears, January 1 P 50,000 Current dividends: 9% x P2,000,000 180,000 9% x P2,500,000 P225,000 Excess divided by total par 155,000/4,500,000 = 3.44%, which exceeds the additional limit of 3%; therefore, additional dividend to preference is limited to 3%; entire remainder goes to ordinary 3% x P2,000,000 P155,000 – 60,000

60,000

95,000 Total P290,000 P320,000 Dividend per share P14.50 P1.28


3-‐10. Retained earnings 500,000 Share dividends distributable 500,000 50% x 100,000 x 10 = 500,000

Share dividends distributable 500,000 Ordinary share capital 450,000 Fractional share warrants outstanding 50,000 Fractional share warrants outstanding 50,000 Ordinary share capital (80% x 50,000) 40,000 PIC from unexercised fractional share warrants 10,000

3-‐11. 2015

Oct. 31 Financial assets at FV through profit or loss 10,000 Unrealized gain on financial assets at FVPL 10,000 10,000 shares x (15 – 14) Retained earnings 150,000 Property dividends payable 150,000 10,000 shares x 15 Financial assets at FV through profit or loss 20,000 Unrealized gain on financial assets at FVPL 20,000 10,000 shares x (17 – 15) Retained earnings 20,000 Property dividends payable 20,000 2016 Feb. 28 Retained earnings 30,000 Property dividends payable 30,000 Property dividends payable 200,000 Financial assets at FV through profit or loss 170,000 Gain on disposal of financial assets at FVPL 30,000

3-‐12.

2015 Oct. 1 Depreciation expense 33,750 Accumulated depreciation – equipment 33,750 450,000/10 x 9/12 Retained earnings 190,000 Property dividends payable 190,000 Assets held for distribution 180,000 Accumulated depreciation – equipment 270,000 Equipment 450,000 Cost P450,000 Acc. Deprn 450,000/10 x 6 270,000 Carrying value P180,000 FV (amount is higher) P190,000


Dec. 31 Impairment loss 20,000 Assets held for distribution 20,000 180,000 – 160,000 = 20,000 Property dividends payable 30,000 Retained earnings 30,000 190,000 – 160,000 = 30,000 decrease 2016 Jan. 31 Retained earnings 15,000 Property dividends payable 15,000 175,000 – 160,000 = 15,000 increase Property dividends payable 175,000 Assets held for distribution 160,000 Gain on disposal of assets 15,000

3-‐13.

(a) Number of preference shares issued and outstanding 26,000 (b) Number of ordinary shares issued 200,000 Number of ordinary shares outstanding (200,000 – 12,000) 188,000 (c) Cost of remaining treasury shares acquired by purchase P400,000 (d) Amount of total dividends

(26,000 shares x P200 x 12%) + (188,000 x P1)

P812,000 (e) Total shareholders’ equity, December 31, 2015 P16,294,000

Total shareholders’

equity

Preference shares issued

Ordinary shares issued

Treasury shares Number of

Shares

Cost 12/31/14 balances P16,500,000 30,000 100,000 2015 transactions: a) 4,000 x 280 (1,120,000) (4,000) b) 8,000 x 80 (640,000) 8,000 P640,000 c) 2:1 share split 100,000 8,000 d) 6,000 x 45 270,000 (6,000) (240,000)* e) 4,000 x 46 4,000 f) 2,000 x 48 96,000 (2,000) g) Dividends (812,000) h) Profit 2,000,000 12/31/15 balances P16,294,000 26,000 200,000 12,000 P400,000 *P640,000 x 6,000/16,000 = 240,000

3-‐14. (a)

2015 June 15 Cash 6,000,000 Ordinary share capital 5,000,000 Share premium – ordinary 1,000,000 Sept. 30 Retained earnings (80,000 x 5% x 110) 440,000 Share dividends distributable (4,000x100) 400,000 Share premium – ordinary 40,000


Nov. 10 Share dividends distributable 400,000 Ordinary share capital 400,000 Dec. 31 Income summary 1,175,000 Retained earnings 1,175,000 2016 Mar. 1 Treasury share (3,000 x 95) 285,000 Cash 285,000 May 1 Cash (1,500 x 120) 180,000 Treasury share (1,500 x 95) 142,500 Pain in capital from treasury shares 37,500 Aug. 10 Issued 82,500 rights to shareholders

entitling holders to purchase 2 additional shares for P125 per share.

Sept. 15 Cash (15,000 x 2 x 125) 3,750,000 Ordinary share capital (30,000 x 100) 3,000,000 Share premium – ordinary 750,000 Oct. 31 Cash (40,000 x 2 x 125) 10,000,000 Ordinary share capital (80,000 x 100) 8,000,000 Share premium – ordinary 2,000,000 Dec. 10 Retained earnings 962,500 Dividends payable (192,500 x 5) 962,500

Dec. 20 Ordinary share capital (1,000 x 100) 100,000 Share premium – ordinary (1,000 x 10)* 10,000 Paid in capital from treasury shares 15,000 Treasury share 95,000 *Share premium per share 300,000/30,000 = 10 Dec. 31 Income summary 1,200,000 Retained earnings 1,200,000

(b) Shareholders’ Equity Ordinary share capital, P100 par, 193,000 shares issued; 500 shares in the treasury P19,300,000 Share premium -‐ ordinary 4,080,000 Paid in capital from treasury shares 52,500 Retained earnings 1,422,500 Treasury shares (47,500) Total shareholders’ equity, December 31, 2016 P24,807,500


3-‐15. (a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows:

Securities Market value Allocation Allocated Price

Preference 90 147,000 x 90/100 132,300 Warrant 10 147,000 x 10/100 14,700

Entry Cash 147,000 Preference share capital (1,500 x 30) 45,000 Share premium – preference 87,300 Share warrants outstanding 14,700 (b) Cash (600 x 40) 24,000 Share warrants outstanding 11,760 Ordinary share capital 6,000 Share premium – ordinary 29,760

3-‐16.

(a) Value of each option P8 Number of shares granted x 30,000 Total value assigned to share options P240,000 Required service period ÷ 3years Annual compensation expense P 80,000

(b) 2015 Jan. 1 Memo: Granted share options to selected senior

employees for the purchase of 30,000 ordinary shares at P35 per share, from January 1, 2018 to December 31, 2019.

Dec. 31 Compensation expense 80,000 Share options outstanding 80,000 2016 Dec. 31 Compensation expense 80,000 Share options outstanding 80,000 30,000 x 8 x 1/3 2017 Dec. 31 Compensation expense 80,000 Share options outstanding 80,000

2018 Dec. 31 Share options outstanding (28,000 x 8) 224,000 Cash (28,000 x 35) 980,000 Ordinary share capital (28,000 x 20) 560,000 Share premium -‐ ordinary 644,000

3-‐17. 2015 Jan. 2 Memo: granted 50,000 share options to certain officers for the purchase of the

company’s P100 par ordinary shares at P280 per share.

Dec. 31 Compensation expense 450,000 Share options outstanding 450,000 (45,000 x 30) ÷ 3 years


2016 June Memo: 6,000 share options were cancelled. Dec. 31 Compensation expense 430,000 Share options outstanding 430,000

(50,000-‐6,000) x 30 x 2/3 = 880,000 880,000 – 450,000 = 430,000

2017 August Memo: 1,500 share options were cancelled.

Dec. 31 Compensation expense 395,000 Share options outstanding 395,000 Total accrued compensation expense (44,000 – 1,500) x 30 1,275,000 Less: previously accrued 880,000 Compensation expense-‐2017 395,000

3-‐18.

(a) Compensation expense 2015 Estimated options to vest 200 – 10 – 15 = 175 employees x 100 options) 17,500 Fair value of option P32 Estimated total fair value of options to vest P560,000 Compensation expense for the year (560,000 x 1/3) 186,667 2016 Estimated options to vest 200 – 10 – 12 – 5 = 173 employees x 100 options) 17,300 Fair value of option P32 Estimated total fair value of options to vest P553,600 Compensation expense for the years 2015 and 2016 553,600 x 2/3 = P369,067 Compensation expense previously recognized 186,667 Compensation expense for the year P182,400 2017 Number of options that vested (200 – 10 – 12 – 8) 17,000 Fair value of option P32 Total compensation expense (2015-‐2017) P544,000 Compensation expense previously recognized 369,067 Compensation expense for the year P174,933

(b) 2015 Jan. 1 Granted 100 share options to each of its 200 employees to buy P100 par

ordinary share at P220 per share. The options are exercisable starting January 1, 2011 provided that the employees are still in the service. Options expire on December 31, 2012.

Dec. 31 Compensation expense 186,667 Share options outstanding 186,667

2018 Cash (42,500 x 280) 11,900,000 Share options outstanding (42,500 x 30) 1,275,000 Ordinary share capital (42,500 x 100) 4,250,000 Share premium – ordinary 8,925,000


2016 Dec. 31 Compensation expense 182,400 Share options outstanding 182,400 2017 Dec. 31 Compensation expense 174,933 Share options outstanding 174,933 2018 Cash (140 x 100 x 220) 3,080,000 Share options outstanding (14,000 x 32) 448,000 Ordinary share capital (14,000 x 200) 2,800,000 Share Premium -‐ ordinary 728,000 2019 Cash (10 x 100 x 220) 220,000 Share options outstanding (1,000 x 32) 32,000 Ordinary share capital (1,000 x 200) 200,000 Share premium – ordinary 52,000

Share options outstanding (20 x 100 x 32) 64,000 PIC from forfeited share options 64,000

3-‐19. (a) 2015 Jan. 1 Memo: Granted 10,000 share options for the purchase of P100 par ordinary shares

at P120 per share. The options vest once the market price of ordinary shares reached P200, up to December 31, 2017. Options expire at the end of 2018.

Dec. 31 Compensation expense 66,667 Share options outstanding 66,667 (10,000 x 20) / 3 years 2016 Dec. 31 Compensation expense 133,333 Share options outstanding 133,333 (10,000 x 20) -‐ 66,667 2017 Cash (10,000 x 120) 1,200,000 Share options outstanding 200,000 Ordinary share capital (10,000 x 100) 1,000,000 Share premium-‐ordinary 400,000

(b) 2015 Jan. 1 Memo: Granted 10,000 share options for the purchase of P100 par ordinary shares

at P120 per share. The options vest once the market price of ordinary shares reached P200. Options expire at the end of 2018.

Dec. 31 Compensation expense 66,667 Share options outstanding 66,667 (10,000 x 20) / 3 years 2016 Dec. 31 Compensation expense 66,667 Share options outstanding 66,667 2017 Dec. 31 Compensation expense 66,666 Share options outstanding 66,666


2018 Cash (8,000 x 120) 960,000 Share options outstanding (80% x 200,000) 160,000 Ordinary share capital (8,000 x 100) 800,000 Share premium-‐ordinary 320,000 Share options outstanding (20% x 200,000) 40,000 PIC from forfeited share options 40,000

(c) If the stock price reached P200 by June 2018, the same entries will be made for year

2015 through 2017, as given in (b) The recorded share options, however, will be cancelled at the end of 2018, as the options already expire.

2018 Dec. 31 Share options outstanding 200,000 PIC from forfeited share options 200,000

3-‐20. (a)

2015 Jan. 1 Granted 80 share options to each of 400 employees for the purchase of P100

par ordinary shares at P140 per share. Options shall vest in 2015 if earnings increase by 15% or at the end of 2016 if average annual earnings for 2015 and 2016 increased by an average of 12%.

Dec. 31 Compensation expense 352,000 Share options outstanding 352,000 400 x 80 x 22 = 704,000 704,000/2 = 352,000 2016 Dec. 31 Compensation expense 352,000 Share options outstanding 352,000

2017 Cash (32,000 x 140) 4,480,000 Share options outstanding 704,000 Ordinary share capital (32,000 x 100) 3,200,000 Share premium – ordinary 1,984,000 (b) The full amount of P704,000 is recognized as compensation expense since

the options vest already in 2015.

3-‐21. 2015 Jan. 1 Memo: Issued to its CEO share options for the purchase of ordinary shares at a

strike price of P50. The options are exercisable beginning January 1, 2018 and expire on December 31, 2019. The number of share options will be based on the level of sales for 2017.

Dec. 31 Compensation expense 150,000 Share options outstanding 150,000 15,000 sh x 30 x 1/3 2016 Dec. 31 Compensation expense 150,000 Share Options Outstanding 150,000 15,000 sh x 30 x 2/3 300,000 Less: previously accrued 150,000 Compensation expense 150,000


2017 Dec. 31 Compensation expense 240,000 Share options outstanding 240,000 18,000 sh x 30 x 3/3 540,000 Less: previously accrued 300,000 Compensation expense 240,000

3-‐22. (a)

2015 Dec. 31 Compensation expense 66,667 Share appreciation rights payable 66,667 10,000 x (140 – 120) x 1/3

2016 Dec. 31 Compensation expense 133,333 Share appreciation rights payable 133,333 10,000 x (150 – 120) x 2/3 = 200,000 200,000 – 66,667 = 133,333 2017 Dec. 31 Compensation expense 250,000 Share appreciation rights payable 250,000 10,000 x (165 – 120) = 450,000 450,000 –200,000 = 250,000

(b) (1) Assuming that the rights were exercised on January 1, 2018, when the market price

is P165.

2018 Jan. 1 Share appreciation rights payable 450,000 Cash 450,000

(b) (2) Assuming that the rights were exercised on December 31, 2018, when the market

price is P172.

2018 Dec. 31 Share appreciation rights payable 450,000 Compensation expense 10,000 (172 – 165) 70,000 Cash 10,000 x (172-‐120) 520,000

3-‐23. (a) Liability at December 31, 2015 P 89,333

December 31, 2016 P208,000 December 31, 2017 P394,000 2015 Dec. 31 Compensation expense 89,333 Share appreciation rights payable 89,333 10,000 x 26.80 x 1/3 2016 Dec. 31 Compensation expense 118,667 Share appreciation rights payable 118,667 10,000 x 31.20 x 2/3 = 208,000 208,000 – 89,333 = 118,667 2017 Dec. 31 Compensation expense 186,000 Share appreciation rights payable 186,000 10,000 x 39.40 = 394,000 394,000 –208,000 = 186,000


2018 Share appreciation rights payable 394,000 Compensation expense 56,000 Cash 10,000 x (165-‐120) 450,000

3-‐24.

(a) Fair value of the equity alternative 4,000 shares x 150 600,000 Fair value of debt component 3,600 shares x 158 568,800 Fair value of equity component 1/1/15 31,200 (b) 2015: 3,600 x 160=576,000; 576,000/3 192,000 31,200/3 10,400 Total compensation expense 202,400 2016: 3,600 x 165 x 2/3 = 396,000 396,000 – 192,000 204,000 31,200/3 10,400 Total compensation expense 214,400 2017: 3,600 x 168 = 604,800 604,800 – 396,000 208,800 31,200/3 10,400 Total compensation expense 219,200 2018: 2,700 x (172-‐168) 10,800 (c) 2015 Jan. 1 Granted each of the four executives the right to choose either 1,000 ordinary

shares or to receive cash payment equal to 900 shares, conditional upon the completion of three years of service.

Dec. 31 Compensation expense 202,400 Share options outstanding 10,400 Share appreciation rights payable 192,000 31 Compensation expense 214,400 Share options outstanding 10,400 Share appreciation rights payable 204,000 2016 Dec. 31 Compensation expense 219,200 Share options outstanding 10,400 Share appreciation rights payable 208,800 2017 Dec. 31 Share options outstanding 7,800 Share appreciation rights payable 151,200 Cash 151,200 PIC from unexercised share options 7,800 31,200 / 4 = 7,800

604,800 / 4 =151,200

2018 Dec. 31 Compensation expense 10,800 Share appreciation rights payable 10,800 900 x 3 x (172 – 168)


Dec. 31 Share options outstanding 23,400 Share appreciation rights payable 464,400 Ordinary share capital (3,000 x 100) 300,000 Share premium – ordinary 187,800

7,800 x 3 = 23,400 172 x 2,700 = 464,400 3-‐25.

Appropriated Unappropriated RE, January 1, 2015 P 4,000,000 P9,000,000 2015 Transactions (1) Understated 2014 depreciation, net of tax 200,000 x 70%

(140,000)

(2) Dividends On preference: 200,000 x P100 x 8% (1,600,000) On ordinary: 300,000 x P5 (1,500,000) (3) Retired preference shares at more than original issue price 10,000 (150 – 130)

(200,000)

(4) Release of appropriation for plant expansion (4,000,000) 4,000,000 (5) Small bonus issue (45,000/300,000 = 15%) bonus 45,000 x P150 (6,750,000) (6) Appropriation for bond redemption 2,000,000 (2,000,000) (7) Profit for the year _____________ 3,000,000 Balance, December 31, 2015 P2,000,000 P3,810,000 Total retained earnings, (P2,000,000 unavailable for dividends)

P5,810,000

3-‐26.

Retained earnings balance as of December 31, 2016 3,900,000 – 600,000 – 240,000 P 3,060,000 Total shareholders’ equity as of December 31, 2016 6,000,000 + 8,000,000 + 3,060,000 P17,060,000

(a) Preference Ordinary Par value of preference share P6,000,000 Dividends in arrears (6,000,000 x 9% x 3 yrs.) 1,620,000 Excess to ordinary (17,060,000 – 7,620,000) P9,440,000 Total equity P7,620,000 P9,440,000 Divide by the number of shares outstanding 60,000 800,000 Book value per share P 127 P 11.80

(b) Preference Ordinary Liquidation value (60,000 shares x P105) P6,300,000 Dividends in arrears (P6,000,000 x 9% x 3 yrs.) 1,620,000 Excess to ordinary (17,060,000 – 7,920,000) P9,140,000 Total equity P7,920,000 P9,140,000 Divide by the number of shares outstanding 60,000 800,000 Book value per share P132 P11.425

3-‐27.

Retained earnings 300,000 Inventory 300,000


Land 1,500,000 Buildings 1,875,000 Machinery and equipment 350,000 Accum. depreciation – buildings 875,000 Accum. depreciation – machinery & equipment 150,000 Revaluation surplus 3,700,000

Revaluation surplus 2,300,000 Retained earnings 2,300,000

3-‐28.

(a) Retained earnings 400,000 Accumulated depreciation 75,000 Current assets 100,000 Building 375,000 Ordinary share capital 6,000,000 Ordinary share capital 4,000,000 Share premium -‐ ordinary 2,000,000 Share premium -‐ ordinary 1,400,000 Retained earnings 1,400,000

Skinny Red Company

Statement of Financial Position

Current Assets P 400,000 Liabilities P1,000,000 Land 1,500,000 Ordinary Share 4,000,000 Building 4,625,000 Share Premium 600,000 Accumulated Depreciation ( 925,000) ______________ Total P5,600,000 Total P5,600,000

MULTIPLE CHOICE QUESTIONS Theory MC1 B MC13 A MC2 C MC14 C MC3 D MC15 C MC4 D MC16 A MC5 D MC17 A MC6 C MC18 C MC7 B MC19 E MC8 B MC20 B MC9 B MC21 B MC10 C MC22 A MC11 C MC23 C MC12 C MC24 C


Problems MC25 C Cost of treasury shares sold (3,000 x P36) P108,000 Excess of reissue price over cost credited to share premium

3,000 x (50-‐36)

P 42,000 MC26 C Preference share capital P230,000 Ordinary share capital 525,000 Subscribed ordinary share 5,000 Total legal capital P760,000

MC27 D Amount allocated to preference shares (480,000 x 110/120) P440,000 Par value of preference shares (4,000 x P100) 400,000 Share premium – preference P 40,000

MC28 D MC29 D Outstanding shares, July 1 (60,000 – 5,000) 55,000 Two-‐for-‐one share split x 2 Outstanding ordinary shares, December 31, 2015 110,000

MC30 D Issued ordinary shares, December 31, 2014 125,000 3-‐for-‐1 share split on November 1, 2015 x 3 Issued ordinary shares, December 31, 2015 375,000

MC31 C Issued ordinary shares 375,000 Treasury shares (25,000 – 13,000) x 3 = 36,000; 36,000 + 5,000 (41,000) Outstanding ordinary shares 334,000

MC32 B Large bonus issue (1:1 or 100%) 600,000 x P5 P3,000,000 MC33 B Number of preference shares, December 31, 2014 60,000 Additional issue during the year 10,000 Preference shares reacquired and retired (2,000) Number of preference shares, December 31, 2015 58,000 Par value per preference share P20 Preference share capital, December 31, 2015 P1,160,000

MC34 A Total number of ordinary shares issued (100,000 + 35,000) 135,000 Par value per ordinary share P70 Ordinary share capital, December 31, 2015 P2,450,000

MC35 B Average amount of share premium – preference (400,000/50,000) P8.00 Number of preference shares retired x 2,000 Decrease in share premium from retirement P16,000

MC36 C Par value of ordinary share before share split P70 2-‐for-‐1 share split ÷ 2 Par value or ordinary share after share split P35

MC37 B Remaining treasury shares (5,000 x 2) – 5,000 5,000 Cost per share after share split (80/2) x 40 Total cost of remaining treasury shares P200,000

MC38 B Fractional warrants issued (600 x 10) 6,000 Fractional warrants exercised (6,000 x 60%) 3,600 Fractional warrants expired (6,000 x 40%) 2,400


MC39 D Interest expense for 2015 (100,000 x 10% x 9/12) P7,500 MC40 C Issue price of bonds with warrants P2,120,000 Issue price related to the bonds (2,000 x 1,040) 2,080,000 Issue price recorded as part of equity (warrants) P 40,000

MC41 B Amount of retained earnings to be capitalized (bonus issue) P945,000 Market value per share ÷ P70 Number of shares 13,500 Percentage of bonus issue (13,500/90,000) 15% The answer could also be 21% computed as follows:

945,000/50 = 18,900; 18,900/90,000= 21% (Large dividend). However, this is not among the choices.

MC42 D Preference dividends: 80,000 + (2M x 8%)

Ordinary dividends (300,000 – 240,000) P240,000 P 60,000

MC43 D Total dividends for 2012 and 2015: (3,000,000 x 5% x 2 years) P300,000 Dividends paid in 2015 (100,000) Dividends in arrears, end of 2015 (Note disclosure) P200,000

MC44 B Number of shares issued (110,000 + 10,000) x 2

Number of shares in the treasury 5,000 – 1,000 = 4,000; 4,000 x 2 Number of shares outstanding

220,000

8,000 212,000

MC45 A Preference Ordinary Arrears P24,000 Current (400,000 x 12% 48,000 P24,000 Remainder 12,000 into 4:2 ratio 8,000 4,000 Total dividends P80,000 P28,000 Dividend per share P20.00 P1.40

MC46 A Retained earnings balance, December 31, 2015 before closing P8,000,000 10% bonus issue (10,000 x 70) (700,000) Net loss for the year (1,200,000 Retained earnings balance, December 31, 2015 P6,100,000

MC47 A Par value per share after 5-‐for-‐2 split (15 x 2) / 5 P6.00 MC48 B Ordinary share dividend (25,000 x P40) P1,000,000 Preference share dividend (10% x 2.5M) 250,000 Total amount of dividends P1,250,000

MC49 C Issue of shares (40,000 x 105) P4,200,000 Purchase of its ordinary shares (600 x 110) (66,000) Sale of treasury shares (400 x 95) 38,000 Profit 830,000 Dividends (200,000) Total shareholders’ equity, December 31, 2015 P4,802,000


MC50 C Total shareholders’ equity, December 31, 2014 P5,520,000 4/30 Retirement of preference shares (1,000 x 25) (25,000) 6/15 Purchase of treasury shares (2,000 x 85) (170,000) 6/30 2-‐for-‐1 split -‐ 7/31 Reissue of treasury shares (800 x 50) 40,000 12/31 Profit for 2015 900,000 Total shareholders’ equity, December 31, 2015 P6,265,000

MC51 D Number of remaining treasury shares (2,000 x 2) – 800 3,200 Cost per share (85/2) P42.50 Cost of remaining treasury shares P136,000

MC52 A Fair value of the options (20,000 x P9)

Compensation expense per year (180,000/ 2) Compensation expense for 2015 (half year) 90,000 x ½

P180,000 P 90,000 P 45,000

MC53 D Intrinsic value of options 3,000 x (50-‐20)

Compensation expense for 2015 (90,000 / 3 years) P90,000 P30,000

MC54 C Fair value of options expected to vest (4.5M x 95%) P4,275,000 Compensation expense for 2015 (4,275,000/3 years) P1,425,000

MC55 B Fair value of options expected to vest (4.5M x 94%) P4,230,000 Compensation expense for 2015 and 2016 (4,230,000 x 2/3) P2,820,000 Less amount recognized in 2015 1,425,000 Compensation expense for 2016 P1,395,000

MC56 B Number of options expected to vest (200 x 300) 60,000 Share appreciation (24 -‐ 20) P4.00 Total liability for share appreciation P240,00 Vesting period ÷ 2 years Amount recorded as liability for share appreciation rights P120,000

MC57 D Number of options that vested (90% x 60,000) 54,000 Share appreciation (27 – 20) P7.00 Total P378,000 Amount recognized in 2015 120,000 Compensation expense for 2016 P258,000

MC58 B Total shareholders’ equity P3,600,000 Liquidation value of preference shares (140 x 5,000 shares) 700,000 Equity related to ordinary shares P2,900,000 Number of ordinary shares ÷ 50,000 Book value per ordinary share P58.00

MC59 B Book value per ordinary share (3,150,000/ 50,000) P63.00 MC60 B Total shareholders’ equity P3,150,000 Equity related to preference shares: Liquidation value (120 x 5,000 shares) 600,000 Equity related to ordinary shares P2,550,000 Number of ordinary shares ÷ 50,000 Book value per ordinary share P51.00


MC61 C Total shareholders’ equity (including P1M of retained earnings) Par value of preference shares (100 x 50,000) P5.0M Dividends in arrears * 1.0M Equity related to ordinary shares

P13,500,000

6,000,000 P7,500,000

Book value per ordinary share (7,500,000/750,000 sh) P10.00 *Cumulative dividend in arrears = 5M x 8% x 3 years = P1.2M

but dividends are limited to the extent of RE balance of P1M.

MC62 C Total shareholders’ equity (including P1M of retained earnings)

Liquidation value of preference shares (106 x 50,000) P5.3M Dividends in arrears 1.0M Equity related to ordinary shares

P13,500,000

6,300,000 P7,200,000

Book value per ordinary share (7,200,000/750,000 sh) P9.60 MC63 D Original contributed capital (200,000 x 22) P4,400,000 New par value of shares (200,000 x 15) 3,000,000 Additional paid in capital P1,400,000 Deficit to be eliminated 950,000 Additional paid in capital after the quasi-‐reorganization P 450,000

Chapter 4 -‐ Leases

PROBLEMS 4-‐1.

(a) Lessor’s Books (Hope Manufacturing Co.) 2015 Jan. 1 Machinery for lease 2,200,000 Cash 2,200,000 1 Cash 600,000 Rent revenue 400,000 Unearned rent revenue 200,000 2 M/5 = 400,000

2 M x 30% = 600,000

1 Machinery for lease 60,000 Cash 60,000

Dec. 31 Depreciation expense 212,000 Accumulated depreciation 200,000 Machinery for lease 12,000 (2.2 M – 200,000)/10 200,000 60,000 / 5 years 12,000 Total 212,000 2016 Jan. 1 Cash 400,000 Rent revenue 400,000 2,000,000 x 20% Dec. 31 Depreciation expense 212,000 Accumulated depreciation 200,000 Machinery for lease 12,000

Lessee’s Books (Charity Co.)

2015 Jan. 1 Rent expense 400,000 Prepaid rent 200,000 Cash 600,000 2016 Jan. 1 Rent expense 400,000 Cash 400,00

(b) Statement of Comprehensive Income: Hope Charity (In profit or loss section) Rent revenue 400,000 Depreciation expense 212,000 Rent expense 400,000 Statement of Financial Position Machinery for lease, net of accum. depreciation 2,048,000 Unearned rent revenue 200,000 Prepaid rent 200,000

Chapter 4 – Leases

4-‐2. a. Rentals for 2015 and 2016 (360,000 x 4) P1,440,000 Rentals for 2017 (432,000 x 2) 864,000 Total rentals for three years P2,304,000 Rent expense per year (2,304,000/3 years) P768,000 Rent Expense for 2015 (768,000 x 8/12) P512,000

b. Cumulative rent revenue for 2015 and 2016

2015 P512,000 2016 768,000

P1,280,000 Cumulative collections (360,000 x 4) 1,440,000 Unearned rent, December 31, 2016 P 160,000 Rent Receivable, December 31, 2016 P -‐0-‐

4-‐3.

a. Monthly rental payment 10,000 No. of payments (60-‐6 mos free) x 54 Total payments 540,000 Rent expense for 2015 (540,000 x 4/60) 36,000

or

Monthly rental 10,000 Less lease bonus (60,000/60 mos) (1,000) Rent expense per month 9,000 Rent expense for 2015 (9,000 x 4) 36,000 Rent expense for 2016 (9,000 x 12) 108,000

(b) Faith Company 2015 Dec. 31 Rent expense 36,000 Rent payable 36,000 9,000 x 4 = 36,000 2016 Mar. 1 -‐ Monthly entry Dec. 1 Rent expense 10,000 Cash 10,000

Dec. 31 Rent expense 8,000 Rent payable 8,000 Rent expense for 2016:

540,000 x 12/60 108,000 Payments in 2016 100,000 Increase in rent payable 8,000

Love Corporation

2015 Dec. 31 Rent receivable 36,000 Rent revenue 36,000


2014 Mar. 1 -‐ Monthly entry Dec. 1 Cash 10,000 Rent revenue 10,000

Dec. 31 Rent receivable 8,000 Rent revenue 8,000

Year-‐end adjusting entry 4-‐4.

a. Fixed annual rental 960,000 Additional rent 5% x (6M-‐5M) 50,000 Amortization of lease bonus (125,000/5 years) 25,000 Rent expense for 2015 1,035,000 b. Prepaid rent expense (125,000 – 25,000) 100,000 Security deposit, January 1, 2015 (150,000 x 0.62092) P93,138 Add amortization for 2015 (10% x 93,138) 9,314 Security deposit, December 31, 2015 P102,452

4-‐5.

a. Rent revenue (960,000 x 9/12) 720,000 Depreciation expense

3,500,000/6 = 583,333; 583,333 x 9/12

(437,500) Maintenance and other related costs (50,000) Income before income tax for year 2015 232,500 b. Rent expense for 2015(960,000 x 9/12) 720,000

4-‐6. Lessor’s Books

2015 July 1 Equipment for lease 1,500,000 Cash 1,500,000

Oct. 1 Cash 54,000 Rent revenue 54,000 1 Cash 30,000 Rent revenue 30,000 Nov. 1 Cash 30,000 Rent revenue 30,000 Dec. 1 Cash 30,000 Rent revenue 30,000 31 Rent revenue 49,500 Unearned rent revenue 49,500 54,000 x 33/36 = 49,500 31 Depreciation expense 75,000 Accumulated depreciation 75,000 (1,500,000 / 10) x 6/12


Lessee’s Books 2015 Oct. 1 Rent expense 54,000 Cash 54,000 1 Rent expense 30,000 Cash 30,000 Nov. 1 Rent expense 30,000 Cash 30,000

Dec. 1 Rent expense 30,000 Cash 30,000 31 Prepaid rent 49,500 Rent expense 49,500

4-‐7. Present value of annual payments (260,000 x 4.2397) 1,102,322 Present value of guaranteed residual value (200,000 x 0.6499) 129,980 Total capitalized cost 1,232,302 (a) Amortization Table

Date

Total Annual Payment

Interest Expense

Reduction in Principal

Lease Obligation

01/01/15 -‐ -‐ 1,232,302 01/01/15 260,000 -‐ 260,000 972,302 01/01/16 260,000 87,507 172,493 799,809 01/01/17 260,000 71,983 188,017 611,792 01/01/18 260,000 55,061 204,939 406,853 01/01/19 260,000 36,617 223,383 183,470 12/31/19 200,000 16,530* 183,470 -‐

*Adjusted; difference is due to rounding off. (b) 2015 Jan. 1 Leased automobile 1,232,302 Finance lease obligation 1,232,302 1 Finance lease obligation 260,000 Cash 260,000 Dec. 31 Interest expense 87,507 Interest Payable 87,507 31 Depreciation expense 206,460 Accumulated depreciation 206,460 (1,232,302-‐200,000)/5 2016 Jan. 1 Finance lease obligation 172,493 Interest payable 87,507 Cash 260,000 Dec. 31 Interest expense 71,983 Interest payable 71,983 31 Depreciation expense 206,460 Accumulated depreciation 206,460


(c) Dec. 31 Accumulated depreciation (206,460 x 5 years) 1,032,300 Interest expense 16,532* Finance lease obligation 183,470 Leased automobile 1,232,302 *adjusted; balancing figure (d) Dec. 31 Loss on finance lease 50,000 Accumulated depreciation 1,032,300 Interest expense 16,532 Finance lease obligation 183,470 Leased automobile 1,232,302 Cash 50,000

4-‐8. (a) Capitalized cost of the leased asset (86,680 x 4.1699) P361,447 (b) Amortization Table

Date

Total Annual Payment

Interest Expense


Lease Obligation

01/01/15 -‐ -‐ 361,447 01/01/15 86,680 -‐ 86,680 274,767 01/01/16 86,680 27,477 59,203 215,564 01/01/17 86,680 21,556 65,124 150,440 01/01/18 86,680 15,044 71,636 78,804 01/01/19 86,680 7,876* 78,804 -‐


(c) 2015 Jan. 1 Leased machine 361,447 Finance lease obligation 361,447 1 Finance Lease Obligation 86,680 Cash 86,680 Dec. 31 Interest expense 27,477 Interest payable 27,477 31 Depreciation expense 72,289 Accumulated depreciation 72,289 361,447/5 years 2016 Jan. 1 Finance lease obligation 59,203 Interest payable 27,477 Cash 86,680 Dec. 31 Interest expense 21,556 Interest payable 21,556 31 Depreciation expense 72,289 Accumulated depreciation 72,289


(d) Statement of Financial Position 2015 2016 Property, plant and equipment Leased machine 361,447 361,447 Accumulated depreciation 72,289 144,578 Current liabilities Interest payable 27,477 21,556 Finance lease obligation 59,203 65,124 Noncurrent liabilities Finance lease obligation 215,564 150,440 Income Statement Interest expense 27,477 21,556 Depreciation expense 72,289 72,289

4-‐9.

(a) Lessor’s implicit interest rate 1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods

From Table VI across 12 periods, 7.4951 is under 10% interest rate.

(b)

Date Total Annual Payment

Interest Expense


Lease Obligation

12/31/14 -‐ -‐ 1,011,840 12/31/14 135,000 -‐ 135,000 876,840 12/31/15 135,000 87,684 47,316 829,524 12/31/16 135,000 82,952 52,048 777,476

(c) Depreciation expense for 2016 (1,011,840 – 40,000) / 15 years P64,789

(d) 12/31/15 Leased equipment 1,011,840 Finance lease obligation 1,011,840 Finance lease obligation 135,000 Cash 135,000

12/31/16 Finance lease obligation 47,316 Interest expense 87,684 Cash 135,000 Depreciation expense 64,789 Accumulated depreciation 64,789 (1,011,840 – 40,000) / 15

(e) Lease obligation as of December 31, 2015: Current portion P 47,316 Noncurrent portion 829,524

4-‐10. (a) Present value of annual payments (150,000 x 4.0373) P605,595 Present value of bargain purchase option (240,000 x 0.5674) 136,176 Total capitalized cost of the asset P741,771


(b)

Date Total Annual Payment

Interest Expense


Lease Obligation

01/01/15 -‐ -‐ 741,771 01/01/15 150,000 -‐ 150,000 591,771 01/01/16 150,000 71,013 78,987 512,784 01/01/17 150,000 61,534 88,466 424,318 01/01/18 150,000 50,918 99,082 325,236 01/01/19 150,000 39,028 110,972 214,264 12/31/19 240,000 25,736* 214,264 -‐


(c) Depreciation expense for 2015 (741,771 / 15 years) P49,451

(d) 2015 Jan. 1 Leased machinery 741,771 Finance lease obligation 741,771 1 Finance lease obligation 150,000 Cash 150,000 Dec. 31 Interest expense 71,013 Interest payable 71,013

31 Depreciation expense 49,451 Accumulated depreciation 49,451 2016 Jan. 1 Finance lease obligation 78,987 Interest payable 71,013 Cash 150,000

Dec. 31 Interest expense 61,534 Interest payable 61,534 31 Depreciation expense 49,451 Accumulated depreciation 49,451 (e) Dec. 31 Interest expense 25,736 Finance lease obligation 214,264 Accumulated depreciation (49,451 x 5 years) 247,255 Machinery 494,516 Leased machinery 741,771 Cash 240,000 (f) Dec. 31 Interest expense 25,736 Finance lease obligation 214,264 Accumulated depreciation 247,255 Loss on finance lease 254,516 Leased machinery 741,771

Carrying amount of leased asset (741,771 – 247,255) P494,516 Bargain purchase option price 240,000 Loss P254,516


4-‐11. (a) Present value of minimum lease payments 700,000 x 6.3282 P4,429,740 (b) Annual depreciation (4,429,740/10) P 442,974 (c) 2015 July 1 Building 4,429,740 Finance lease obligation 4,429,740

1 Taxes and insurance expense 50,000 Finance lease obligation 700,000 Cash 750,000 Dec. 31 Interest expense 223,784 Interest payable 223,784 447,569 x 6/12 (see table below) 31 Depreciation expense-‐Building 221,487 Accum. Depreciation-‐Building 221,487 4,429,740/10 = 442,974; 442,974 x ½ 31 Prepaid taxes and insurance 25,000 Taxes and insurance expense 25,000 2016 July 1 Taxes and insurance expense 50,000 Interest payable 223,784 Interest expense 223,785 Finance lease obligation 252,431 Cash 750,000 Dec. 31 Interest expense 208,639 Interest payable 208,639 417,277 x 6/12 (see table below) 31 Depreciation expense 442,974 Accum. Depreciation-‐building 442,974

Amortization Table

Periodic Applied to Balance of Date Payment Interest Principal Principal

July 1, 2015 P4,429,740 July 1, 2015 P700,000 -‐ P700,000 3,729,740 July 1, 2016 700,000 P447,569 252,431 3,477,309 July 1, 2017 700,000 417,277 282,723 3,194,586


4-‐12. a.

2015 Aug. 1 Finance lease receivable 605,000 Equipment for lease 480,000 Unearned interest revenue 125,000 1 Unearned interest revenue 1,900 Cash 1,900

1 Cash 100,000 Finance lease receivable 100,000

Dec. 31 Unearned interest revenue 15,912 Interest revenue 15,912 38,190 x 5/12 (see table) 2016 Aug. 1 Cash 100,000 Unearned interest revenue 22,278 Finance lease receivable 100,000 Interest revenue 22,278 38,190 x 7/12 = 22,278 (see table) Dec. 31 Unearned interest revenue 13,337 Interest revenue 13,337 32,009 x 5/12 (see table)

Partial Amortization Table

Date

Periodic Payment

Interest


Balance of Principal

08/01/15 -‐ -‐ 481,900 08/01/15 100,000 -‐ 100,000 381,900 08/01/16 100,000 38,190 61,810 320,090 08/01/17 100,000 32,009 67,991 252,099

(b) As of December 31, 2015: Total Current Non-‐current Finance lease receivable P505,000 P100,000 P405,000 Unearned interest revenue 107,188 22,278 84,910 P397,812 P 77,722 P320,090 Current portion: Principal due in 2016 P 61,810 Accrued interest, 12/31/15 (38,190 x 5/12) 15,912 Total P 77,722 4-‐13. Annual Lease Payment: Fair value of asset P600,000 PV of BPO = 40,000 x .6209 24,836 PV of periodic payment P575,164 PV factor (Annuity due for 5 years at 10%) ÷4.1699 Periodic payment P137,932


Date

Periodic Payment

Interest



Jan. 1, 2015 P600,000 Jan. 1, 2015 P137,932 P137,932 462,068 Jan. 1, 2016 137,932 P46,207 91,725 370,343 Jan. 1, 2017 137,932 37,034 100,898 269,445

2015 Depreciation (600,000 – 20,000) x 6/21 = P165,714 2016 Depreciation (580,000 x 5/21) = 138,095 (a) Books of Chris Tucker 2015 Jan. 1 Leased equipment 600,000 Finance lease obligation 600,000 1 Finance lease obligation 137,932 Cash 137,932 Dec. 31 Interest expense 46,207 Interest payable 46,207 31 Depreciation expense – Leased equipment 165,714 Accum. depr. – Leased equipment 165,714 2016 Jan. 1 Finance lease obligation 91,725 Interest payable 46,207 Cash 137,932 Dec. 31 Interest expense 37,034 Interest payable 37,034 Depreciation expense 138,095 Accum. depr.– Leased equipment 138,095

(b) Books of Jackie Chan 2015 Jan. 1 Finance lease receivable 729,660 Equipment for lease 600,000 Unearned interest revenue 129,660 137,932 x 5 = 689,660 689,660 + 40,000 = 729,660 Cash 137,932 Finance lease receivable 137,932 Dec 31 Unearned interest revenue 46,207 Interest revenue 46,207 2015 Jan. 1 Cash 137,932 Finance lease receivable 137,932 Dec 31 Unearned interest revenue 37,034 Interest revenue 37,034


4-‐14. (a) This is a direct finance lease. The cash price of the asset is the same as its carrying

value; hence, there is no gross profit). (b) The rate is approximately 8%. The PV factor is P539,730/80,000 = 6.7466; in line 9

(which is 8 annual payments of P80,000 + 1 payment for guaranteed residual value of same amount), the corresponding interest rate is 8%.

(c)

Partial amortization table Date

Periodic Payment

Interest



April 1, 2015 P539,730 April 1, 2015 80,000 80,000 459,730 April 1, 2016 80,000 36,778 43,222 416,508 April 1, 2017 80,000 33,321 46,679 369,829

Books of Ironman

2015 Apr. 1 Equipment 539,730 Finance lease obligation 539,730 1 Finance lease obligation 80,000 Cash 80,000 Dec. 31 Interest expense 27,584 Interest payable 27,584 36,778 x 9/12 (see table)

Dec. 31 Depreciation expense 43,100 Accumulated depreciation 43,100 (539,730-‐80,000)/8 = 57,466/year

57,466 x 9/12 = 43,100

2016 Apr. 1 Interest expense (36,778-‐27,584) 9,194 Interest payable 27,584 Finance lease obligation 43,222 Cash 80,000 Dec. 31 Interest expense 24,991 Interest payable 24,991 33,321 x 9/12 31 Depreciation expense 57,466 Accumulated depreciation 57,466

(d) Books of Ben Ten

2014 Apr. 1 Finance lease receivable 720,000 Unearned interest revenue 180,270 Equipment for lease 539,730

80,000 x 8 = 640,000; 640,000 + 80,000


Apr. 1 Cash 80,000 Finance lease receivable 80,000 Dec. 31 Unearned interest revenue 27,584 Interest revenue 27,584

2016 Apr. 1 Cash 80,000 Finance lease receivable 80,000 1 Unearned interest revenue 9,194 Interest revenue 9,194 Dec. 31 Unearned interest revenue 24,991 Interest revenue 24,991 33,321 x 9/12

(e) The asset shall be recorded at P496,512 which is 80,000 x 6.2064. Depreciation for 2015 (496,512/8) x 9/12 = 46,548 (f) No difference in journal entries. To the lessor, under the direct finance lease, it does

not matter whether the residual value is guaranteed or unguaranteed. 4-‐15. (a) Sales price P1,011,840 Cost of machine 784,500 Gross profit P 227,340 (b) Gross investment (135,000 x 12) P1,620,000 Sales 1,011,840 Total financial revenue over the lease term P 608,160

(c) Interest revenue for 2015

(1,011,840 – 135,000) x 10% x 6/12 P 43,842

(d) Finance lease receivable (1,620,000 – 135,000) P1,485,000 Less Unearned interest revenue (608,160 -‐43,842) 564,318 Net finance lease receivable, December 31, 2015 P 920,682 4-‐16. (a)

2015 Apr. 1 Finance lease receivable 1,500,000 Cost of sales 893,350 Unearned interest revenue 426,380 Sales 1,026,970 Finished goods inventory 940,000

175,000 x 8 = 1.4M; 1.4M + 100,000 = 1.5M 940,000 – (100,000 x .4665) = 893,350 (175,00 x 5.8464) + (100,000 x .4665) = 1,073,620 1,500,000 - 1,073,620 = 426,380

1 Cash 175,000 Finance lease receivable 175,000


Dec. 31 Unearned interest revenue 67,397 Interest revenue 67,397 89,862 x 9/12 (see table)

2016 Jan. 1 Interest revenue 67,397 Unearned interest revenue 67,397 Apr. 1 Cash 175,000 Unearned interest revenue 89,862 Finance lease receivable 175,000 Interest revenue 89,862

Dec. 31 Unearned interest revenue 61,011 Interest revenue 61,011 81,348 x 9/12 (see table)

Partial amortization table

Date

Periodic Payment

Interest



April 1, 2015 P1,073,620 April 1, 2015 175,000 175,000 898,620 April 1, 2016 175,000 89,862 85,138 813,482 April 1, 2017 175,000 81,348 93,652 719,830

*April 1 transactions may also be presented as follows: 2015

Apr. 1 Finance lease receivable 1,400,000 Sales 1,026,970 Unearned interest revenue 373,030 1 Cost of sales 940,000 Finished goods inventory 940,000 1 Finance lease receivable 100,000 Cost of sales 46,650 Unearned interest revenue 53,350

(b) (i) Sales 1,026,970 Cost of Sales (940,000 – 46,650) 893,350 Gross profit on sales 133,620 (ii) Interest Revenue for 2015 (see journal entries) 67,397 (c) Sales (1,026,970 + 46,650) 1,073,620 Cost of sales (cost of the asset) 940,000 4-‐17.

a. This is a manufacturer’s or dealer’s lease, because FV exceeds CV. The difference represents gross profit, which characterizes a dealer’s or manufacturer’s lease.

b. Present value of MLP = 850,365 x 4.60478 (Adjusted) P3,915,747

Present value of residual value = 166,300 x .50663 84,253 Total present value P4,000,000


Carrying value of leased asset 3,200,000 Gross Profit P 800,000 Lease arrangement cost ( 85,000) Interest income (377,756 x 3/12) see table 94,439 Total income in 2015 P 809,439

c. Amortization Table

Date

Periodic Payment

Interest



Oct. 1, 2015 4,000,000 Oct. 1, 2015 850,365 850,365 3,149,635 Oct. 1, 2016 850,365 377,956 472,409 2,677,226 Oct. 1, 2017 850,365 321,267 529,098 2,148,490

Books of Ruby (Lessor) 2015 Oct. 1 Finance lease receivable (850,365 x 6) + 166,300 5,268,490 Cost of goods sold (3,200,000 – 84,253) 3,115,747 Inventory 3,200,000 Sales 3,915,747 Unearned interest revenue 1,268,490 1 Selling expense 85,000 Cash 85,000 1 Cash 850,365 Finance lease receivable 850,365 Dec. 31 Unearned interest revenue 94,489 Interest revenue 94,489 377,956 x 3/12 2016 Oct. 1 Cash 850,365 Unearned interest revenue 283,467 Finance lease receivable 850,365 Interest revenue 283,467 377,956 – 94,489 = 283,467 Dec 31 Unearned interest revenue 80,317 Interest revenue 80,317 321,267 x 3/12 d. Amortization Table for Emerald (Lessee)

Date

Periodic Payment

Interest



Oct. 1, 2015 3,915,747 Oct. 1, 2015 850,365 850,365 3,065,382 Oct. 1, 2016 850,365 367,846 482,519 2,582,863 Oct. 1, 2017 850,365 309,944 540,421 2,042,442

2015 Oct. 1 Leased equipment 3,915,747 Finance lease obligation 3,915,747


Oct. 1 Finance lease obligation 850,365 Cash 850,365 Dec. 31 Interest expense 91,962 Interest payable 91,962 367,846 x 3/12 (see table) 31 Depreciation expense 163,156 Accumulated depreciation 163,156 3,915,747/6 = 652,625; 652,625 x 3/12 2016 Oct. 1 Interest payable 91,962 Interest expense (367,846 – 91,962) 275,884 Finance lease obligation 482,519 Cash 850,365 Dec.31 Interest expense 77,846 Interest payable 77,846 309,944 x 3/12 Depreciation expense 652,625 Accumulated depreciation 652,625 4-‐18. (a) Sales = (99,046 x 3.1699) + (80,000 x.6830) P368,606 (b) Sales P368,606 Cost of equipment sold (300,000) Selling expense (15,000) Interest income (368,606 x 10%) 36,861 Total profit from lease P 90,467 (c) Depreciation expense recorded by Western (368,606 – 80,000) / 4 P 72,152 4-‐19. (a) PV of Minimum Lease Payments: PV of Periodic Payments (1,328,622 x 8.1078) P10,772,200 PV of GRV (2,000,000 x .6139) 1,227,800 Total PV P12,000,000 Cost of audio equipment (9,000,000) Commission and other lease costs (100,000) Interest revenue (533,569 + 493,816) 1,027,385 Profit for 2015 P 3,927,385

Date

Periodic Payment

Interest



1/1/2015 12,000,000 1/1/2015 1,328,622 -‐-‐-‐ 1,328,622 10,671,378 7/1/2015 1,328,622 533,569 795,053 9,876,325 1/1/2016 1,328,622 493,816 834,806 9,041,519 7/1/2016 1,328,622 452,076 876,546 8,164,973 1/1/2017 1,328,622 408,249 920,373 7,244,600

(b) Interest Expense for 2015 (533,569 + 493,816 P1,027,385


(c ) Carrying value of equipment Cost P12,000,000 Accumulated depreciation (12,000,000 – 2,000,000) x 2/5 (4,000,000) Carrying value, December 31, 2015 P 8,000,000 (d) Interest revenue for 2016 (452,076 + 408,249) P860,325 (e) Current Assets: Finance Lease Receivable, net (834,806 + 876,546) P1,711,352 Interest Receivable 493,816 Non-‐current Assets Finance Lease Receivable, net P8,164,973 4-‐20. (a) Selling price of the machinery (150,000 x 4.0373) P605,595 (b) Deferred gain on January 1, 2015 (605,595 – 411,750) P193,845 (c) Depreciation expense for 2015 (605,595 / 5 years) P121,119 (d) Interest expense for 2015 (605,595 – 150,000) x 12% P 54,671 (e) Gain on sale-‐leaseback for 2015 (193,845 / 5 years) P 38,769 4-‐21. (a)

2015 July 1 Cash 540,000 Accumulated depreciation 350,000 Equipment 800,000 Gain on sale leaseback 90,000

July 1 Rent expense 80,000 Cash 80,000 Dec. 31 Prepaid rent 40,000 Rent expense 40,000

(b) 2014 July 1 Cash 540,000 Accumulated depreciation 350,000 Equipment 800,000 Gain on sale leaseback 50,000 Unearned profit on sale leaseback 40,000

1 Rent expense 80,000 Cash 80,000 Dec. 31 Prepaid rent 40,000 Rent expense 40,000

31 Unearned profit on sale leaseback 5,000 Profit on sale leaseback 5,000 (40,000/4) x 6/12


(c) 2014 July 1 Cash 400,000 Accumulated depreciation 350,000 Loss on sale leaseback 50,000 Equipment 800,000 1 Rent expense 80,000 Cash 80,000 Dec. 31 Prepaid rent 40,000 Rent expense 40,000

(d) 2015 July 1 Cash 350,000 Accumulated depreciation 350,000 Deferred loss on sale leaseback 100,000 Equipment 800,000 1 Rent expense 80,000 Cash 80,000 Dec. 31 Prepaid rent 40,000 Rent expense 40,000 31 Rent expense/Loss on sale leaseback 12,500 Deferred loss on sale leaseback 12,500 100,000/4 = 25,000; 25,000 x 6/12


MULTIPLE CHOICE QUESTIONS Theory MC1 C MC9 C MC17 A MC2 D MC10 C MC18 A MC3 C MC11 D MC19 D MC4 B MC12 D MC20 C MC5 B MC13 B MC21 C MC6 C MC14 A MC22 A MC7 D MC15 C MC23 A MC8 D MC16 C MC24 C MC25 D Problems MC26 C Annual rental P 900,000 Lease bonus amortized over five years (500,000/5) 100,000 Rental revenue for 2015 P1,000,000 MC27 C Rental for first year (six months free) P 40,000 Rental for 2nd to 5th year (125,000 x 4) 500,000 Total rental for five years P540,000 Rent revenue for 2015 (540,000/5) P108,000 MC28 D This is an operating lease; thus, there is no interest expense involved. MC29 D Accrued rent from July 1 to December 31 (240,000 x 6/12) P120,000 MC30 C Total rental payments for three years P3,600,000 Lease term ÷ 3 Rent revenue for fiscal year ended June 30, 2016 P1,200,000 MC31 B Accumulated rent revenue up to June 30, 2017 (1.2M x 2) P2,400,000 Accumulated payments up to June 30, 2017 (600,000 + 900,000) 1,500,000 Rent receivable, June 30, 2017 P 900,000 MC32 B Capitalized cost of leased asset (500,000 x 4.61) P2,305,000 MC33 D Lease liability, December 31, 2015 P2,305,000 1st payment on December 31, 2015 (500,000) 2nd payment on December 31, 2016 500,000 Amount applicable to interest (12% x 1,805,000) 216,600 (283,400) Lease liability, December 31, 2016 P1,521,600 MC34 A Depreciation expense (2,305,000/6 years) P 384,167 MC35 B Lease liability, December 31, 2015, after 1st payment 1,350,000 – 200,000 P1,150,000 Current portion (payable on December 31, 2016) 200,000 – (10% x 1,150,000) P 85,000 MC36 B Capitalized leased asset on May 1, 2015 (400,000 x 5.95) P2,380,000


MC37 D Depreciation is based on the economic life of the asset (2,400,000 – 200,000) / 8 years P275,000 MC38 D Present value of annual rentals (1,742,174 x 3.48685) P6,074,699 Present value of guaranteed residual value (1.2M x 0.68301) 819,612 Capitalized cost of the machine P6,894,311 MC39 C Depreciation is based on the lease term (6,894,311 – 1,200,000) / 4 P1,423,578 MC40 A Present value of annual rentals (1,742,174 x 3.48685) P6,074,699 MC41 D Depreciation is based on the lease term 6,074,699 / 4 P1,518,675 MC42 D Cost of leased asset P6,245,450 Accumulated depreciation (6,245,250 – 80,000) / 6 = 1,027,575 1,027,575 x 4 years 4,110,300 Carrying value, end of lease term P2,135,150 Bargain option price 250,000 Loss from failure to exercise the purchase option P1,885,150 MC43 A Gross lease receivable (100,000 x 6) P600,000 MC44 D Net investment in the lease after 1st payment (100,000 x 4.8) P380,000 Interest revenue for the year 2015 (380,000x 10% x 5/12) P 15,833 MC45 C Selling price P3,520,000 Cost of equipment 2,800,000 Profit on sale P720,000 MC46 A Net investment in the lease after 1st payment (3,520,000– 600,000) P2,920,000 Interest revenue for year 2015 (2,920,000 x 10% x 6/12) P146,000 MC47 B Gross profit on sale (400,000 – 300,000) P100,000 Costs to consummate lease contract (15,000) Interest revenue (400,000 x 10%) 40,000 Profit, inclusive of interest for year 2015 P125,000 MC48 D Net investment in the lease, January 1, 2015 P400,000 Reduction in net investment for 2015 Annual rental, excluding executory costs P108,951 Interest expense (400,000 x 10%) 40,000 68,951 Net investment in the lease, December 31, 2015 P331,049 MC49 A Gross investment in the lease 75,000* x 5 P375,000 *Annual payment 323,400/5 = 75,000 Cost/fair value of asset 323,400 Total interest revenue P 51,600


MC50 D Present value of lease payments (30,000 x 3.1699) 95,097 Present value of guaranteed residual value (5,000 x .683) 3,415 Capitalized cost of asset /Liability, Jan. 1, 2014 98,512 Interest expense for 2014 (98,512 x 10%) 9,851 Liability balance, December 31, 2014 95,097 – (30,000 – 9,851) P78,363 Interest expense/payable, December 31, 2015 (78,363 x 10%) P7,836 MC51 C Depreciation is based on the lease term (98,512 – 5,000) / 4 P23,378 MC52 D Minimum lease payments for the remaining two years

(30,000 x 2)

P60,000 Guaranteed residual value 5,000 Total P65,000 MC53 A Initial direct costs increase the net investment in lease recorded by the lessor.

The terms of the lease already indicated that the residual value is guaranteed; hence, it could not be taken as the reason for the variance. However, if the residual value is unguaranteed, then it could be considered as a reason for the variance.

MC54 A This excess over the limited hours should be accrued by the end of

2016, even if payment would be made at January 1, 2017.

MC55 B Deferred gain, January 1, 2015 (550,000 – 450,000) P100,000 Gain recognized in 2015 (100,000/5 20,000 Deferred gain, December 31, 2015 P80,000 MC56 A Deferred gain (4.8M – 3.6M) P1,200,000 MC57 B Revenue on sale leaseback 1.2M/12 = 100,000; 100,000 x 6/12 P50,000 MC58 B Unearned gain, January 1, 2015 (150,000 – 100,000) P50,000 Recognized gain in 2015 (50,000/10 years) 5,000 Unearned gain, December 31, 2015 P45,000 MC59 B Excess of fair value over carrying value (710,000 – 650,000) P60,000 Excess of sales price over fair value 800,000 – 710,000 = 90,000; 90,000 / 12 = 7,500; 7,500 x 9/12 5,625 Gain from sale leaseback P65,625 MC60 D If selling price is at fair value, full amount of gain is recognized

immediately (800,000 -‐ 650,000)

P150,000 MC61 B Additional information, lease term is 12 years out of total life

of 25 years.

Deferred loss (650,000 – 470,000) P180,000 Amortized loss in 2015 (180,000/12 = 15,000; 15,000 x 9/12 11,250 Deferred loss, December 31, 2015 P168,750

Chapter 5 - Income Taxes

Chapter 5 – Income Taxes

PROBLEMS 5-‐1. 1. C 2. D 3. B 4. B 5. D 6. D 7. C 8. A 9. A 10. C 11. C 12. B 13. D 5-‐2. (a) a. Permanent difference – Non-‐taxable revenue b. Permanent difference – Non-‐deductible expense c. Neither a permanent nor a temporary difference d. Temporary difference – Taxable temporary difference e. Temporary difference – Taxable temporary difference f. Temporary difference – Deductible temporary difference g. Temporary difference – Deductible temporary difference

(b) Pretax financial income P10,000,000 Add Nondeductible expenses (b) 400,000 Less Nontaxable income (a) (2,000,000) Financial income subject to tax P 8,400,000 Add Future deductible amounts (f and g) 1,150,000 Less Future taxable amounts (d and e) (2,500,000) Taxable income P7,050,000

(c) Income tax payable (7,050,000 x 30%) P2,115,000 Deferred tax asset (1,150,000 x 30%) P 345,000 Deferred tax liability ( 2,500,000 x 30%) P 750,000

(d)

Income tax expense – Current 2,115,000 Income tax payable 2,115,000

Income tax expense – Deferred 750,000 Deferred tax liability 750,000

Deferred tax asset 345,000 Income tax expense – Deferred 345,000

or one compound entry may be made as follows:

Income tax expense – Current 2,115,000 Income tax expense – Deferred 405,000 Deferred tax asset 345,000 Income tax payable 2,115,000 Deferred tax liability 750,000


(e) Income tax expense: Current P2,115,000 Deferred (750,000 – 345,000) 405,000 Total income tax expense P2,520,000 5-‐3. (Luzon Corporation) (a) Pretax financial income P3,000,000 Future taxable amount (1,800,000) Taxable income P1,200,000 Income tax expense -‐ current (30% x 1.2M) P 360,000 Deferred tax liability, December 31, 2015 (30% x 1.8M) P 540,000 (b) Income tax expense – Current 360,000 Income tax expense – Deferred 540,000 Income tax payable 360,000 Deferred tax liability 540,000 5-‐4. (a) Pre tax financial income P2,000,000 Future deductible amount 1,550,000 Taxable income P3,550,000 Income tax expense -‐ current (30% x 3,550,000) P1,065,000 Deferred tax asset, December 31, 2015 (30% x 1,550,000) P 465,000 (b) Income tax expense-‐Current 1,065,000 Deferred tax asset 465,000 Income tax payable 1,065,000 Income tax benefit-‐Deferred 465,000 5-‐5. Income tax expense – Current 1,560,000 Deferred tax asset 600,000 Deferred tax liability 185,000 Income tax expense – Deferred (Benefit) 415,000 Income tax payable 1,560,000 30% x 5,200,000 = 1,560,000 30% x 2,000,000 = 600,000 (30% x 500,000) + (35% x 100,000) = 185,000 5-‐6. Income tax expense – Current (30% x 2,000,000) P 600,000 Income tax expense – Deferred (267,000 – 72,000) 195,000 Income tax expense – Total P 795,000 Deferred tax asset (30% x 240,000) P 72,000 Deferred tax liability 30% x (530,000 + 360,000) P 267,000 Income tax payable P 600,000 5-‐7. Taxable income P12,000,000 Future deductible amount: Book depreciation in excess of tax depreciation (430,000) Nontaxable income: Interest on government securities 450,000 Pretax financial income P12,020,000


5-‐8. (a) Schedule of reversal of the temporary differences

2016 140,000 x 32% P 44,800 2017 320,000 x 34% 108,800 2018 240,000 x 36% 86,400 Total P240,000

Pretax financial income P2,200,000 Add nondeductible expenses 400,000 Less nontaxable revenues (140,000) Financial income subject to tax P2,460,000 Future taxable amounts (700,000) Taxable income P1,760,000 Tax rate x 30 % Income tax payable P 528,000 Deferred tax liability (see above) P 240,000 (b) Income tax expense – Current 528,000 Income tax payable 528,000 Income tax expense – Deferred 240,000 Deferred tax liability 240,000 (c) Income from continuing operations before income taxes P2,200,000 Income tax expense Current P528,000 Deferred 240,000 768,000 Profit P1,432,000 5-‐9. (a)

Straight Line SYD Difference 2015 500,000 800,000 (300,000) 2016 500,000 600,000 (100,000) 2017 500,000 400,000 100,000 2018 500,000 200,000 300,000

Carrying Amount Tax Base Difference

December 31, 2015 1,500,000 1,200,000 300,000 December 31, 2016 1,000,000 600,000 400,000 December 31, 2017 500,000 200,000 300,000 December 31, 2018 0 0 0

2015 2016 2017 2018 Taxable income 800,000 890,000 1,200,000 1,500,000 Future taxable amount 300,000 100,000 Additional taxable amount (reversal)

( 100,000)

(300,000)

Pretax accounting profit 1,100,000 990,000 1,100,000 1,200,000 (b) Deferred tax liability at the end of each year is as follows:

2015 300,000 x 30% P 90,000 2016 400,000 x 30% 120,000 2017 300,000 x 30% 90,000 2018 0 0


(c) Journal entries to record income taxes and deferred income taxes December 31, 2015 Income tax expense (30% x 800,000) 240,000 Income tax payable 240,000 Income tax Expense-‐Deferred 90,000 Deferred tax liability 90,000 December 31, 2016 Income tax expense – current 267,000 Income tax payable 267,000 30% x 890,000 Income tax expense – deferred 30,000 Deferred tax liability 30,000 120,000 – 90,000 = 30,000 December 31, 2017 Income tax expense – current 360,000 Income tax payable 360,000 30% x 1.2M Deferred tax liability 30,000 Income tax expense -‐ deferred (benefit) 30,000 90,000 – 120,000 = 30,000 decrease December 31, 2018 Income tax expense – current 450,000 Income tax payable 450,000 30% x 1.5M Deferred tax liability 90,000 Income tax expense-‐Deferred (Benefit) 90,000 0 – 90,000 = 90,000 Decrease (d)

2015 2016 2017 2018 Income tax expense Current P 240,000 P 267,000 P 360,000 P 450,000 Deferred (Benefit) 90,000 30,000 ( 30,000) (90,000) Total income tax expense P 330,000 P 297,000 P 330,000 P 360,000

(e)

2015 2016 2017 2018 Income before income tax P1,100,000 P 990,000 P1,100,000 P1,200,000 Less income tax expense see (d)

330,000

297,000

330,000

360,000

Profit P 770,000 P 693,000 P 770,000 P 840,000 5-‐10. (a) Carrying amount of inventories > Tax Base P 100,000 Carrying amount of building & equipment > Tax Base 1,800,000 Future taxable amount, December 31, 2015 P 1,900,000


Carrying amount of accounts receivable < Tax Base P 200,000 Carrying amount of warranty > Tax Base 800,000 Carrying amount of unearned rent > Tax Base 500,000 Future deductible amount, December 31, 2015 P 1,500,000

(b) Income tax payable (5,000,000 X 30%) P1,500,000 Deferred tax asset (1,500,000 x 30%) P 450,000 Deferred tax liability (1,900,000 x 30%) P 570,000 (c) Income tax expense-‐current 1,500,000 Income tax payable 1,500,000 Income tax expense-‐deferred 75,000 Deferred tax asset 75,000 450,000 – 525,000 Deferred tax liability 830,000 Income tax benefit-‐deferred 830,000 570,000 – 1,400,000

5-‐11. (a) Income tax expense – current 900,000 Income tax payable 900,000 30% x 3.0M Deferred tax asset 90,000 Income tax expense – deferred 60,000 Deferred tax liability 150,000 30% x 800,000 = 240,000 240,000 – 150,000 = 90,000 30% x 1.5M = 450,000 450,000 – 300,000 = 150,000 (b) 1. Current income tax P 900,000 Deferred income tax 60,000 Total income tax expense P 960,000 2. Taxable income P3,000,000 Future taxable amount 1.5M – (300,000/30%) 500,000 Future deductible amount 800,000 – (150,000/30%) (300,000) Accounting profit subject to tax P3,200,000 3. Accounting profit subject to tax P3,200,000 Non-‐taxable revenue 200,000 Non-‐deductible expense (600,000) Accounting profit before income tax P2,800,000 5-‐12. Tax rate = 180,000/600,000 = 30%

Income tax expense – current 300,000 Income tax payable 300,000 30% x 1,000,000


Deferred tax asset 60,000 Income tax benefit – deferred 60,000 DTA, end (30% x 800,000) 240,000 DTA, beginning 180,000 Increase 60,000

5-‐13.

(a) Deferred tax liability, December 31, 2015 2.0M x 30% P600,000 (b) Income tax expense Current P900,000 Deferred (decrease in DTLiability) (40,000) Total income tax expense P860,000

(c) Income tax expense – current 900,000 Income tax payable 900,000 3.0M x 30%

Deferred tax liability 40,000

Income tax expense – deferred 40,000 DTL, beg 640,000

DTL, end revised due to change in tax rate 600,000 Decrease in DTL 40,000

5-‐14.

(a) Income tax expense – current 3.0M x 30% P900,000 Previous payment in 2015 500,000 Income tax payable, December 31, 2015 P400,000 (b) Income tax expense – current 400,000 Income tax payable 400,000 (900,000 – 500,000)

Deferred tax liability 30,000 Deferred tax asset 30,000 DTL, Dec. 31, 2015 (400,000 x 30%) 120,000 DTL, Jan. 1, 2015 150,000 Decrease in DTL 30,000 DTA, Dec. 31, 2015 (200,000 x 30%) 60,000 DTA, Jan. 1, 2015 90,000 Decrease in DTA 30,000 (c) Total income tax expense Current P900,000 Deferred -‐0-‐ Total income tax expense P900,000

Pretax profit P2,800,000 Income tax expense 900,000 Profit P1,900,000


5-‐13 (a) Income tax expense – current 600,000 Deferred tax asset 100,000 Income tax payable 700,000 (b) Income tax expense – current 700,000 Income tax payable 700,000

MULTIPLE CHOICE QUESTIONS Theory MC1 C MC6 D MC11 D MC16 C MC2 A MC7 C MC12 C MC17 D MC3 A MC8 D MC13 A MC18 B MC4 A MC9 C MC14 D MC19 B MC5 C MC10 C MC15 C MC20 D Problems MC21 B Future taxable amount (3.6M x 6/12) P1,800,000 Income tax rate after 2015 35% Deferred tax asset P630,000 MC22 B Excess of Book Value > Tax Basis of Equipment P800,000 MC23 B 2016 -‐ 2018 (1.0M + 500,000 + 500,000) x 30%

2019 – 1.0M x 35% P600,000 350,000

Deferred income tax asset, December 31, 2015 P950,000 MC24 D Current income tax expense (10.0M x 30%) P3,000,000 MC25 C 2016 (12M + 1M) x 30% P3,900,000 2017 (20M – 3M) x 35% 5,950,000 Income tax expense – deferred P2,050,000 MC26 B Deferred tax asset (700,000 x 30%) + (1.4M x 35%)

Deferred tax liability (500,000 x 30%) + (1.0M x 35%) Net deferred tax asset (all noncurrent)

P700,000 (500,000) P200,000

MC27 C Excess of taxable income over income per books (1.2M – 750,000) P450,000 Tax rate in 2016 x 35% Net deferred tax asset P157,500 MC28 B Income tax payable, end of 2015 (1.5M x 30%) P450,000 MC29 D Deferred tax asset (6.0M x 30%) P1,800,000 MC30 C Deferred tax liability (9.0M x 30%) – all non-‐current P2,700,000 MC31 D Excess of tax depreciation over book depreciation (42,000/30%)

Depreciation expense per books P140,000 600,000

Depreciation expense per tax return P740,000


MC32 C Excess of tax depreciation over book depreciation(250,000-‐100,000) P150,000 Enacted tax rate x 30% Increase in deferred income tax liability P 45,000 MC33 D Pretax financial income P5,000,000 Non-‐taxable life insurance proceeds (900,000) Warranty expense accrued but not yet paid 1,200,000 Goodwill impairment loss 200,000 Taxable income P5,500,000 Income tax rate x 30% Income tax payable P1,650,000 MC34 C Taxable income for 2015 (200,000 – 40,000) P160,000 Income tax payable (160,000 x 30%) P 48,000 MC35 B Deferred tax liability, December 31, 2015

150,000 x 35% 52,500 150,000 x 35% 52,500 150,000 x 30% 45,000

P150,000 MC36 B Deferred income tax liability (95,000 x 38%) P36,100 MC37 D Current income tax expense for 2015 (6.5M x 30%) P1,950,000 Income tax payments in 2015 900,000 Income tax payable, December 31, 2015 P1,050,000 MC38 C Future taxable amount (profit on installment) P2,600,000 Future deductible amount (bad debt expense) 1,400,000 Net amount P1,200,000 Tax rate in 2016 x 38% Deferred portion of income tax expense P 456,000 MC39 D Given P750,000 MC40 D Income tax expense for 2015 (2M x 30%) P600,000 MC41 C Pretax accounting income P 1,000,000 Future deductible amount (accrued warranty cost) 1,200,000 Future taxable amount (accrual basis profit > cash basis profit (5,000,000) Operating loss carry-‐forward (for tax purposes) P 2,800,000 Income tax expense Increase in deferred tax liability 5,000,000 x 30% P 1,500,000 Less: increase in deferred tax asset (from accrued warranty cost) = 1,200,000 x 30% P 360,000 (from operating loss carry forward)= 2.8M x 30% x 40% 336,000 Total deferred tax asset P 696,000 Income tax expense P 804,000 MC42 C See MC 41 P696,000 MC43 D Excess of tax depreciation over book depreciation (172,500/30%) P 575,000 Book depreciation expense for 2015 3,000,000 Depreciation expense per tax return of 2015 P3,575,000


MC44 D Income before income tax P1,800,000 Tax depreciation in excess of book depreciation (80,000) Income reported for tax purposes in excess of book income 60,000 Taxable income P1,780,000 Income tax rate x 30% Current income tax liability, December 31, 2015 P 534,000 MC45 B Pretax financial income P2,000,000 Future taxable amount (240,000 – 140,000) + (560,000 – 440,000) (220,000) Non-‐deductible expense (insurance premiums; assume company is

the beneficiary)

180,000 Taxable income P1,960,000 Income tax rate x 30% Income tax payable P 588,000 MC46 A Pretax accounting income P5,000,000 Non-‐taxable revenue (500,000) Non-‐deductible expense 200,000 Future taxable amount (10M – 6M) (4,000,000) Future deductible amount (2.8M – 1.0M) 1,800,000 Taxable income P2,500,000 Income tax rate x 30% Income tax payable P 750,000 MC47 A Pretax accounting income P5,000,000 Future deductible amount (write down on manufacturing facility) 400,000 Future taxable amount (unrealized gain on financial assets at FVPL (600,000) Taxable income P4,800,000 Income tax rate x 30% Current tax expense P1,440,000

Chapter 6 – Employee Benefits


PROBLEMS 6–1.

(a) Liability for compensated absences, December 31, 2014 6 x 420 = P2,520

(b) Employee Benefit Expense for Sick Leave and Vacation Leave

Sick Leave 5 x P450 P2,250 10 x 420 4,200 2 x 400 800 2 x 380 760 P8,010

Vacation Leave 12 x P450 P5,400 12 x 420 5,040 2 x 400 800 5 x 380 1,900 13,140 Total P21,150

(c) Liability for Compensated Absences 2,520

Employee Benefit Expense – Compensated Absences 10,280 Cash 12,800

Total amount paid for compensated absences Sick leave (as computed above) 8,010 Vacation leave 7 x 450 3,150 3 x 420 1,260 1 x 380 380 4,790 12,800 (d) Employee Benefit Expense – Compensated Absences 10,870

Liability for Compensated Absences 10,870

Liability for Compensated Absences, 12/31/15 Employee Unused Vacation Days Rate Amount A. B. Santos 12-‐7 = 5 P450 P2,250 C. D. Garcia 12+6 -‐3 = 15 420 6,300 E. F. Cruz 2 = 2 400 800 G. H. Buen 5 – 1 = 4 380 1,520 Total P10,870

6-‐2.

(a) Total payment in 2015 35 x 12 x 450 P189,000 25 x 10 x 450 112,500 P301,500

Liability, beginning of 2015 13-‐10 = 3; 3 x 20 x 450 (27,000) Liability, end of 2015 12-‐10 = 2; 2 x 40 x 450 36,000 Sick leave expense in 2015 P310,500

(b) P36,000 (see above)

(c) Liability for Compensated Absences 27,000 Compensated Absences 27,000 Reversing entry


Compensated Absences 301,500 Cash 301,500 Payment of compensated absences Compensated Absences 36,000 Liability for Compensated Absences 36,000 Year-‐end accrual of liability for compensated absences 6-‐3. (a) Vacation earned for work in 20145 P400,000 Adjustment for 10% salary increase on unused vacation at beginning of year 10% x (500,000 – 300,000) 20,000 Vacation pay expense for year 2015 P420,000 (b) Liability for accumulated vacations, 12/31/14 P500,000 Vacations taken during 2015 (300,000) Vacation pay expense for 2015 420,000 Liability for accumulated vacations, 12/31/15 P620,000 6-‐4.

(a) Retirement Benefit Expense = Required Contribution (P6.0M x 8%) + 5% x (P35.0M -‐ P10.0M) = P1,730,000

(b) 1. Retirement Benefit Expense 1,730,000

Prepaid Retirement Benefit Cost 70,000 Cash 1,800,000

2. Retirement Benefit Expense 1,730,000 Cash 1,500,000 Accrued Retirement Benefit Cost 230,000 6-‐5.

Defined Benefit Cost Benefit Liability (Asset)

Profit or Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets Beginning balances P3,000,000 P2,600,000 Current service cost P1,000,000 1,000,000 Interest cost 10% x 3.0M 300,000 300,000 10% x 2.0M (260,000) 260,000 Actuarial gain or loss Benefit obligation 100,000 100,000 Plan assets 300,000 -‐260,000

(40,000)

40,000

Benefits paid (350,000) (350,000) Contributions 900,000 Ending balances 1,040,000 60,000 4,050,000 3,450,000

(a) Net Prepaid/Accrued Benefit Cost, December 31, 2014 P3,000,000 – P2,600,000 P 400,000 (b) Retirement benefit expense in 2015 P1,040,000


(c) Defined benefit cost taken to OCI P 60,000 (d) Retirement Benefit Expense 1,040,000 Remeasurement of Defined Benefit Asset/ Liability – OCI 60,000 Cash 900,000 Defined Benefit Liability/Asset 200,000 (e) 1. Benefit Obligation P4,050,000 2. Plan Assets P3,450,000 (f) Net defined benefit liability/asset Beginning balance (Liability) P 400,000 Underfunding (see entry d) 200,000 Ending balance (Liability) P 600,000 Reconciled with the memorandum records

Defined benefit obligation P4,050,000 Plan assets 3,450,000 Net liability P 600,000 6-‐6.


Profit or Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets Balances, beginning 1,350,000 1,250,000 Service cost 2,000,000 2,000,000 Interest cost 9% x 1,350,000 121,500 121,500 9% x 1,250,000 (112,500) 112,500 Actuarial loss On benefit obligation

50,000 50,000

On plan assets 2,000 (2,000) Past service cost 300,000 300,000 Benefits paid (120,000) (120,000) Contributions 2,360,000 Balances, end 2,309,000 52,000 3,701,500 3,600,500

(a) Retirement Benefit Expense 2,309,000 Remeasurement of Defined Benefit Liability/Asset 52,000 Cash 2,360,000 Defined Benefit Liability/Asset 1,000

(b) Defined benefit liability, end Beginning balance (1,350,000 – 1,250,000) P100,000 Underfunding 1,000 Defined benefit liability, end P101,000

Or P3,701,500 – P3,600,500 P101,000


6-‐7. Defined Benefit Cost Benefit Liability (Asset)

Profit or Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets Beginning balances 8,200,000 8,500,000 Current service cost 1,200,000 1,200,000 Interest cost 10% x 8,200,000 820,000 820,000 10% x 8,500,000 (850,000) 850,000 Actuarial gain or loss On Benefit Obligation

(40,000) (40,000)*

On Plan Assets 780,000-‐850,000

70,000

(70,000)

Contribution 1,500,000 Ending balances 1,170,000 30,000 10,180,000 10,780,000

*Squeezed

(a) Defined benefit liability/ asset, January 1, 2015 P8,200,000 – P8,500,000 P300,000 asset (b) Actuarial gain or loss (1) On plan assets (780,000 – 850,000) P70,000 loss (2) On benefit obligation (squeezed, see above) P40,000 gain (c) Retirement Benefit Cost taken to Profit or loss P1,170,000 Other comprehensive income P 30,000 (d) Retirement Benefit Expense 1,170,000 Remeasurement of Defined Benefit Asset/Liability – OCI 30,000 Defined Benefit Liability/Asset 300,000 Cash 1,500,000 (e) Defined Benefit Asset Beginning balance P300,000 Overfunding (1,500,000 – 1,200,000) 300,000 Ending balance – asset P600,000 (f) Remeasurement of Defined Benefit Asset/Liability – OCI 50,000 Defined Benefit Asset/Liability 50,000

6-‐8. (a) Fair value of plan asset, ending P4,950,000 Fair value of plan assets, beginning P4,600,000 Contributions to the plan 500,000 Benefits paid (700,000) Balance, before actual return P4,400,000 Actual return on plan assets P 550,000


(b) Actual return P 550,000 Expected return (10% x P4,600,000) 460,000 Actuarial gain taken to OCI P 90,000 6-‐9. (a)


Profit or Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets Beginning balances 9,000,000 8,000,000 Current service cost 1,000,000 1,000,000 Interest cost 10% x 9,000,000 900,000 900,000 10% x 8,000,000 (800,000) 800,000 Actuarial gain/loss Benefit obligation (50,000)* (50,000)* Plan assets (640,000-‐800,000)

160,000

(160,000)

Benefits paid (600,000) (600,000) Contributions 2,000,000 Past service cost 800,000 800,000 Ending balances 1,900,000 110,000 11,050,000 10,040,000

*squeezed (b) Retirement Benefit Expense 1,900,000 Remeasurement of Defined Benefit Liability/Asset – OCI 110,000 Defined Benefit Liability/Asset 2,010,000 Defined Benefit Liability/Asset 2,000,000 Cash 2,000,000

(c) Defined Benefit Liability/Asset, Dec. 31, 2014 Beginning balance (9,000,000 – 8,000,000) P1,000,000 Underfunding (2,010,000 – 2,000,000) 10,000 Defined benefit liability, Dec. 31, 2014 P1,010,000 (d) Or 11,050,000 – 10,040,000 P1,010,000


MULTIPLE CHOICE QUESTIONS Theory MC1 C MC6 D MC11 D MC16 A MC2 A MC7 A MC12 D MC17 B MC3 B MC8 A MC13 A MC18 D MC4 A MC9 A MC14 C MC5 D MC10 A MC15 B

Problems MC19 B Current service cost P140,000 Expected return on plan assets (9% x 3.0M) (270,000) Interest on defined benefit obligation (9% x 3.2M) 288,000 Retirement benefit expense for 2015 P158,000

MC20 D Actuarial loss on plan assets (270,000 – 185,000) P 85,000 Actuarial loss on benefit obligation (given) 20,000 Defined benefit cost taken to other comprehensive income P105,000

MC21 C Total retirement benefit cost (158,000 + 105,000) P263,000 Contributions to the plan 204,000 Underfunding P 59,000 Defined benefit liability, beginning (3.2M – 3.0M) 200,000 Defined benefit liability, December 31, 2015 P259,000

MC22 A Fair value of plan assets, January 1 P2,500,000 Contributions to the fund 800,000 Benefits paid (340,000) Fair value of plan assets before actual return P2,960,000 Fair value of plan assets, December 31 3,200,000 Actual return on plan assets P 240,000

MC23 B Expected return on plan assets (10% x 2.5M) P 250,000 Actual return on plan assets 240,000 Actuarial loss P 10,000

MC24 B Accrued benefit obligation, January 1 P5,000,000 Fair value of plan assets, January 1 3,800,000 Retirement benefit liability, January 1 P1,200,000

MC25 A Full amount of past service cost is recognized as expense P 580,000

MC26 A Actuarial gain or loss is taken to other comprehensive income,

not in profit or loss

Zero MC27 B Current service cost P 600,000 Past service cost 580,000 Net interest cost 12% x (5.0M – 3.8M) 144,000 Retirement benefit expense for 2015 P1,324,000

MC28 C Fair value of plan assets, January 1 P3,800,000 Actual return on plan assets 550,000 Contributions to the fund 750,000 Fair value of plan assets, December 31 P5,100,000


MC29 D Accrued benefit obligation, January 1 P5,000,000 Interest cost (12% x 5M) 600,000 Current service cost 600,000 Past service cost 580,000 Actuarial gain on benefit obligation (70,000) Accrued benefit obligation, December 31 P6,710,000

MC30 B Retirement benefit cost taken to profit or loss P1,324,000 Actuarial gain on benefit obligation (70,000) Actuarial gain on plan assets 12% x 3.8M = 456,000 12% x 3.8M = 456,000; 456,000 – 550,000 (94,000) Total retirement benefit cost P1,160,000 Contributions to the fund 750,000 Underfunding P 410,000

MC31 D Accrued benefit obligation, December 31 (MC29) P6,710,000 Fair value of plan assets, December 31 (MC 28) 5,100,000 Defined benefit liability, December 31, 2015 P1,610,000

MC32 C Accrued benefit obligation, January 1 P4,600,000 Interest cost (10% x 4.6M) 460,000 Benefits paid (390,000) Actuarial gain on benefit obligation Net actuarial gain P32,500 Actuarial loss on plan assets (503,500-‐495,000) 8,500 (41,000) Accrued benefit obligation before current service cost P4,629,000 Accrued benefit obligation, December 31 5,629,000 Service cost for the year P1,000,000

MC33 A Fair value of plan assets, beginning P5,035,000 Contributions to the fund 425,00 Benefits paid (390,000 Fair value of plan assets before actual return P5,070,000 Fair value of plan assets, ending 5,565,000 Actual return on plan assets P 495,000

MC34 A Current service cost P1,000,000 Net interest cost 10% x (5,035,000 – 4,600,000) (43,500) Net actuarial gains (32,500) Total retirement benefit cost for 2015 P924,000

MC35 A Past service cost P600,000 Funding for past service cost 240,000 Underfunding/Defined benefit liability P360,000 Current service cost is fully funded.

MC36 C Defined benefit obligation, January 1 P4,400,000 Current service cost 1,480,000 Actuarial gain (200,000 – 150,000) (50,000) Interest cost (12% x 4.4M) 528,000 Benefits paid to retirees (600,000) Defined benefit obligation, December 31 P5,758,000


MC37 D Total amount to be funded (2.4M + 300,000) P2,700,000 Contributions made 2,500,000 Underfunding (Liability) P 200,000

MC38 C P4.2M – P3.3M = 900,000 asset; however, the asset amount is limited by the

present value of future refunds and reductions in future contributions of P500,000; so the defined benefit asset will be shown at P500,000 only.

MC39 D Current service cost P2,000,000 Past service cost 1,300,000 Interest cost (see MC40) 10% x (12M – 10M) 200,000 Retirement benefit cost taken to profit or loss P3,500,000 MC40 C Discount rate

Actual return on plan assets P1,500,000 Actuarial gain on plan assets 500,000 Expected return P1,000,000 Rate: 1M/10M

10%

New Chapter(1(*((Current(Liabilities,(Provisions(andContingencies( · 2020. 12. 11. ·...

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