The Intermediate Accounting Series Volume 2 2016 Empleo Robles Solman PDF

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
Page 1
Chapter 1 – Current Liabilities, Provisions and Contingencies
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
324,000 x 8/12 = 216,000
2016
Apr. 1 Interest Expense 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
3M x 10% = 300,000
3M – 300,000 = 2,700,000

300,000 x 7/12
2016
May 31 Interest expense 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
Page 2
2015
May 1 Equipment 8,304,928
Premium on notes payable 304,928

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
Cash 8,720,000
304,928 – 203,285 = 101,643

Notes payable P8,000,000
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

213,912 x 8/12 = 142,608
8M x 9% x 8/12 = 480,000
2016
Apr. 30 Interest expense 311,304
Cash 8,720,000
213,912 – 142,608 = 71,304

Notes payable P8,000,000
Discount on notes payable (71,304)
Carrying amount at December 31, 2015 P8,408,696
Page 3
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

Page 4
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

Sales 1,280,000

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

Page 5
1-‐19.
Cash 3,000,000

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

Page 6
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

Subscription Revenue 5,000,000
1,200,000 + 2,000,000 + 1,800,000

2015
Cash 7,000,000

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

Page 7
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
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
Page 8
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

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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 P222,222
B to Each Sales Agent = 518,519 x 10/35 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

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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

Page 11
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

Interest Interest Premium Bond
Date Paid Expense Amortization 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

Interest Interest Discount Bond
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
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

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(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
Cash 200,000

Dec. 31 Interest expense (171,903 x 4/6) 114,602
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
Cash 200,000

2-‐3. (a)
2015
Aug. 1 Cash 4,458,429
Discount on bonds payable 708,238
5M x 8% x 5/12 = 166,667
4,458,429 – 166,667 = 4,291,762
5,000,000 – 4,291,762 = 708,238

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
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

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

Page 13
(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
Share warrants outstanding 300,000

(b) Cash (5,000 x 2 x 140) 1,400,000
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

Page 14
(d) Cash (1,000 x 30 x 40) 1,200,000

Ordinary share capital (30,000 x 25) 750,000

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

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
PIC arising from bond conversion privilege 144,240

2016
June 30 Interest expense 222,691
Cash 200,000

2017
Cash 200,000

PIC arising from conversion privilege 86,544
Ordinary share capital 960,000

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

Page 15
2018
Cash 80,000
2019
Cash 80,000
2020
Cash 80,000

Bonds payable 800,000
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.
Interest Interest Discount Bond
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
(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

(c) Interest expense 475,119
Cash 400,000

Ordinary share capital (200 x 40 x 100) 800,000
Share Premium -‐ ordinary 281,098
579,180 x 1/5 = 115,836
Page 16
(d) Interest expense 386,105

Cash 320,000

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

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

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

Page 17
(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) 131,344
June 1-‐August 1, 2018
(5,216,455 x 3/5 x 5% x 2/6) 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.
Interest Interest Premium Bond Carrying
Date Paid Expense Amortization 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
Page 18
2-‐10.
Nominal Effective Discount Bond
Date Interest Interest Amortization 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
Principal Interest Amount
Due Date Due Due 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

Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization 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-‐

Page 19
(c)
2016
Dec. 31 Interest expense 1,088,392
Cash 800,000

Cash 2,000,000
2017
Cash 640,000

Cash 2,000,000

2-‐12.
(a) Issue price of the bonds
Principal Interest Amount
Due Date Due Due 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
Principal Interest Effective Premium Carrying
Due Date Due Due Interest Amortization 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-‐

(c)
2015
Jan. 1 Cash 8,687,544

Cash 960,000

Cash 2,000,000

2016
Cash 720,000

Cash 2,000,000
Page 20
2017
Cash 480,000

Cash 2,000,000
2018
Cash 240,000

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

2016
Mar. 31 Interest expense (625,482 – 469,112) 156,370

2017


Page 21
2018

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:
Accrued interest (416,988 + 663,011) 1,079,999
Total, December 31, 2016 7,802,540

Noncurrent liabilities:
Accrued interest 1,802,680
Total, December 31, 2017 8,752,480

(d)
2015
May 1 Land 6,949,800


2016

2017

2018
Apr. 30 Interest expense (adjusted) 247,520
Interest payable 1,802,680
Cash 9,000,000
Page 22
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-‐

(c)
2015
Apr. 1 Equipment 2,591,760


2016
Mar. 31 Notes payable 800,000
Interest expense 58,314
Cash 800,000
Discount on notes payable (233,258-‐174,944) 58,314


2017
Cash 800,000


2018
Cash 800,000


2019
Cash 800,000

Page 23
2-‐16.
(a) Principal
Date Annual Payment Interest 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


2017
Cash 800,000


2018
Cash 800,000


2019
Cash 800,000

(c) Current portion at December 31, 2016

Noncurrent portion at December 31, 2016
Notes Payable 1,407,270
Page 24
2-‐17.
(a) Notes payable 900,000
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
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

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

(d) Notes payable 3,000,000
Deferred gain on debt restructuring 218,976

Page 25
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:
Premium on restructured notes payable 111,024
Deferred gain on debt restructuring 218,976

Page 26

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) P310.00
Present value of interest (1,000 x 4% x 11.47)= 768.80 458.80
Issue price for each P1,000 bond P768.80

MC25 A Bond issue price (2.0M x 97%) P1,940,000
Accrued interest (2.0M x 10% x 3/12) 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%) P3,880,000
Accrued interest (4.0M x 12% x 3/12) 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

Page 27
MC31 D Carrying amount of bonds converted (1.0M – 30,000) P 970,000

Paid in capital from BCP cancelled due to conversion 50,000
Total P1,020,000
Total par of shares issued upon conversion (40,000 X 20) (800,000)
Expenses incurred in connection with conversion (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 P1,032,880
Amortization of premium
Nominal interest 1.0M x 6% P60,000
Effective interest 51,644 8,356
Carrying amount, December 31, 2015 P1,024,524

MC35 A Carrying value, January 1, 2015 P1,878,000
Amortization of discount
(10% x 1,878,000) -‐ (2,000,000 x 9%) 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 P2,100,000
Amortization of premium for six months
(2,100,000 x 6%) – (2,000,000 x 7%) 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 P1,902,800
Principal payment (400,000)
Amortization of discount
Effective interest 1,902,800 x 10% 190,280
Nominal interest 2.0M x 8% 160,000 30,280
Carrying amount, December 31, 2016 P1,533,080

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

Page 28
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) P6,600,000
Present value of restructured debt
(6M x 0.621) +(6000,000 x 12% x 3.791) 6,455,520
Gain P 144,480
144,480/6,600,000 is less than 10%; No gain is recognized

MC47 C Carrying value of liability (6M + 600,000) P6,600,000
(5M x .6209) + (5M x .12 x 3.7908) 5,378,980
Gain P1,221,020

MC48 B Carrying value of liability (8M + 640,000) P8,640,000
(6M x 0.8573) + (6M x 10% x 1.7833) 6,213,780
Gain P2,426,220

MC49 B Carrying value of liability (10M + 1M) P11,000,000
Market value of shares issued (150,000 x 65) 9,750,000
Gain on restructuring of debt P 1,250,000

Page 29
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

• Land 5,000,000
Building 3,000,000
Share premium -‐ ordinary 1,750,000

• Cash (6,500 x 550) 3,575,000

• 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
12,000 shares x 500

3-‐2.
a. Cash (10,000 x 200) 2,000,000

Share premium-‐ordinary 60,000
Cash 60,000

b. Land (3,500 x 560) 1,960,000

c. Cash 18,000,000
Preference share capital (5,000 x 500) 2,500,000
Share premium – preference 2,000,000
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
Page 30
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

(4) Ordinary share capital 10,000

Page 31
(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
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
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

(b) Preference share capital (10,000 x 20) 200,000
3-‐7.
(a) Retained earnings (10,000 shares x P20) 200,000
Share dividends distributable 100,000


(b) Retained earnings (30,000 x 10) 300,000


(c) Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously issued
and outstanding.

Page 32
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 = P0
180,000; dividends declared were P150,000 only. P 150,000
Dividend per share P7.50 P0

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

Current preference dividends (9% x 2,000,000) P 180,000
Excess (540,000 – 180,000) P360,000

(b) Preference share is cumulative and non-‐participating.
Current on preference is P180,000 P150,000
Arrears, end (P180,000 – 150,000 = 30,000) P0
Dividend per share P7.50 P0

Arrears, beginning P 30,000
Current year 180,000
Total P210,000 P210,000
Excess to ordinary = 260,000 – 210,000 P50,000


Current year P180,000
Excess – to ordinary = 540,000 – 180,000 P360,000

(c) Preference share is cumulative and fully participating

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

Page 33

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

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

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 68,889
P155,000 x 2.5M/4.5M 86,111
Total P298,889 P311,111

(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 60,000
3% x P2,000,000
P155,000 – 60,000 95,000
Total P290,000 P320,000

Page 34
3-‐10.
50% x 100,000 x 10 = 500,000

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)

Property dividends payable 150,000
10,000 shares x 15

Unrealized gain on financial assets at FVPL 20,000
10,000 shares x (17 – 15)


2016
Feb. 28

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


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
Page 35
Dec. 31 Impairment loss 20,000

180,000 – 160,000 = 20,000

190,000 – 160,000 = 30,000 decrease

2016
Jan. 31 Retained earnings 15,000
175,000 – 160,000 = 15,000 increase

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 Preference Ordinary Treasury shares
shareholders’ shares shares Number of
equity issued issued 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

Sept. 30 Retained earnings (80,000 x 5% x 110) 440,000
Share dividends distributable (4,000x100) 400,000
Page 36
Nov. 10 Share dividends distributable 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

Oct. 31 Cash (40,000 x 2 x 125) 10,000,000

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
Treasury share 95,000
*Share premium per share
300,000/30,000 = 10

Dec. 31 Income summary 1,200,000

(b)
Shareholders’ Equity
Ordinary share capital, P100 par, 193,000 shares
issued; 500 shares in the treasury P19,300,000
Treasury shares (47,500)

Page 37
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

(b) Cash (600 x 40) 24,000

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
30,000 x 8 x 1/3

2017

2018
Dec. 31 Share options outstanding (28,000 x 8) 224,000
Cash (28,000 x 35) 980,000
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.

(45,000 x 30) ÷ 3 years

Page 38
2016
June Memo: 6,000 share options were cancelled.

(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.

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

2018
Cash (42,500 x 280) 11,900,000
Share options outstanding (42,500 x 30) 1,275,000

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
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
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.

Page 39
2016

2017

2018 Cash (140 x 100 x 220) 3,080,000
Share options outstanding (14,000 x 32) 448,000
Share Premium -‐ ordinary 728,000

2019 Cash (10 x 100 x 220) 220,000
Share options outstanding (1,000 x 32) 32,000

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.

(10,000 x 20) / 3 years

2016
(10,000 x 20) -‐ 66,667

2017 Cash (10,000 x 120) 1,200,000
(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.

(10,000 x 20) / 3 years

2016

2017
Page 40

2018 Cash (8,000 x 120) 960,000
Share options outstanding (80% x 200,000) 160,000

Share options outstanding (20% x 200,000) 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

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%.

400 x 80 x 22 = 704,000
704,000/2 = 352,000
2016

2017 Cash (32,000 x 140) 4,480,000

(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.

15,000 sh x 30 x 1/3
2016
Share Options Outstanding 150,000
15,000 sh x 30 x 2/3 300,000
Compensation expense 150,000
Page 41
2017
18,000 sh x 30 x 3/3 540,000

3-‐22. (a)
2015
Share appreciation rights payable 66,667
10,000 x (140 – 120) x 1/3

2016
10,000 x (150 – 120) x 2/3 = 200,000
200,000 – 66,667 = 133,333
2017
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
10,000 x 26.80 x 1/3
2016
10,000 x 31.20 x 2/3 = 208,000
208,000 – 89,333 = 118,667

2017
10,000 x 39.40 = 394,000
394,000 –208,000 = 186,000
Page 42
2018 Share appreciation rights payable 394,000

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

2017: 3,600 x 168 = 604,800
604,800 – 396,000 208,800
31,200/3 10,400

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.


31 Compensation expense 214,400
2016
2017
Cash 151,200
PIC from unexercised share options 7,800
31,200 / 4 = 7,800
604,800 / 4 =151,200
2018
900 x 3 x (172 – 168)

Page 43

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.
Inventory 300,000

Page 44
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

3-‐28.
(a) Retained earnings 400,000
Current assets 100,000
Building 375,000



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


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

Page 45
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
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
Page 46
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%) P240,000
Ordinary dividends (300,000 – 240,000) 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 2 220,000
Number of shares in the treasury
5,000 – 1,000 = 4,000; 4,000 x 2 8,000
Number of shares outstanding 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

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)

Page 47
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

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) P180,000
Compensation expense per year (180,000/ 2) P 90,000
Compensation expense for 2015 (half year) 90,000 x ½ P 45,000

MC53 D Intrinsic value of options 3,000 x (50-‐20) P90,000
Compensation expense for 2015 (90,000 / 3 years) 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
Number of ordinary shares ÷ 50,000
Book value per ordinary share P51.00

Page 48
MC61 C Total shareholders’ equity (including P1M of retained earnings) P13,500,000
Par value of preference shares (100 x 50,000) P5.0M
Dividends in arrears * 1.0M 6,000,000
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) P13,500,000
Liquidation value of preference shares (106 x 50,000) P5.3M
Dividends in arrears 1.0M 6,300,000
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

Page 49
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
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
2,000,000 x 20%

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)
Depreciation expense 212,000
Rent expense 400,000
Statement of Financial Position
Machinery for lease, net of accum. depreciation 2,048,000
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
Cash 10,000

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
Page 51
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
54,000 x 33/36 = 49,500

31 Depreciation expense 75,000
(1,500,000 / 10) x 6/12

Page 52
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

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
Total Annual Reduction in
Date Payment Interest Expense 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 -‐
(b)
2015
Jan. 1 Leased automobile 1,232,302
Finance lease obligation 1,232,302

1 Finance lease obligation 260,000
Cash 260,000


(1,232,302-‐200,000)/5

2016
Jan. 1 Finance lease obligation 172,493
Cash 260,000



Page 53
(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
Leased automobile 1,232,302
Cash 50,000

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

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

1 Finance Lease Obligation 86,680
Cash 86,680


361,447/5 years
2016
Cash 86,680



Page 54
(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)
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

Cash 135,000

12/31/16 Finance lease obligation 47,316
Cash 135,000

(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

Page 55
(b)

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

Cash 150,000



2016
Cash 150,000


(e)
Accumulated depreciation (49,451 x 5 years) 247,255
Machinery 494,516
Leased machinery 741,771
Cash 240,000
(f)
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
Page 56
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

1 Taxes and insurance expense 50,000
Cash 750,000

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
Cash 750,000

417,277 x 6/12 (see table below)

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

Page 57
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
38,190 x 7/12 = 22,278 (see table)

32,009 x 5/12 (see table)

Partial Amortization Table
Periodic Reduction in Balance of
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

Page 58

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

Cash 137,932


31 Depreciation expense – Leased equipment 165,714
Accum. depr. – Leased equipment 165,714

2016
Cash 137,932


Accum. depr.– Leased equipment 138,095

(b) Books of Jackie Chan
2015
Jan. 1 Finance lease receivable 729,660
137,932 x 5 = 689,660
689,660 + 40,000 = 729,660

Cash 137,932

Dec 31 Unearned interest revenue 46,207

2015
Jan. 1 Cash 137,932


Page 59
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
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

Cash 80,000

36,778 x 9/12 (see table)

(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
Cash 80,000

33,321 x 9/12


(d) Books of Ben Ten
2014
Apr. 1 Finance lease receivable 720,000
80,000 x 8 = 640,000; 640,000 + 80,000
Page 60
Apr. 1 Cash 80,000



2016
Apr. 1 Cash 80,000

1 Unearned interest revenue 9,194

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
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

Page 61

89,862 x 9/12 (see table)

2016
Jan. 1 Interest revenue 67,397

Apr. 1 Cash 175,000

81,348 x 9/12 (see table)

Partial amortization table
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

1 Cost of sales 940,000
Finished goods inventory 940,000

1 Finance lease receivable 100,000
Cost of sales 46,650

(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
Page 62
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
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

377,956 x 3/12

2016
Oct. 1 Cash 850,365
377,956 – 94,489 = 283,467

321,267 x 3/12

d. Amortization Table for Emerald (Lessee)
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

Page 63
Oct. 1 Finance lease obligation 850,365

Cash 850,365

367,846 x 3/12 (see table)

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
Cash 850,365

Dec.31 Interest expense 77,846
309,944 x 3/12


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

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
Page 64
(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
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
Equipment 800,000
Gain on sale leaseback 50,000
Unearned profit on sale leaseback 40,000


Cash 80,000

Rent expense 40,000

31 Unearned profit on sale leaseback 5,000

Profit on sale leaseback 5,000
(40,000/4) x 6/12
Page 65
(c)
2014
July 1 Cash 400,000
Loss on sale leaseback 50,000
Equipment 800,000

Cash 80,000

Rent expense 40,000
(d)
2015
July 1 Cash 350,000
Deferred loss on sale leaseback 100,000
Equipment 800,000

Cash 80,000

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

Page 66
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
Page 67
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
Page 68
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

Page 69
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

or one compound entry may be made as follows:

Page 70
(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)
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

5-‐4.
(a) Pre tax financial income P2,000,000
Future deductible amount 1,550,000
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
Income tax benefit-‐Deferred 465,000

5-‐5.
Income tax expense – Deferred (Benefit) 415,000
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.
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
Page 71
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)
Tax rate x 30 %
Deferred tax liability (see above) P 240,000

(b) Income tax expense – Current 528,000


(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
Page 72
(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 Expense-‐Deferred 90,000

December 31, 2016
Income tax expense – current 267,000
30% x 890,000

Income tax expense – deferred 30,000
120,000 – 90,000 = 30,000

December 31, 2017
30% x 1.2M

Income tax expense -‐ deferred (benefit) 30,000
90,000 – 120,000 = 30,000 decrease

December 31, 2018
30% x 1.5M

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

Page 73
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 expense-‐deferred 75,000
450,000 – 525,000

Income tax benefit-‐deferred 830,000
570,000 – 1,400,000

5-‐11.
(a) Income tax expense – current 900,000
30% x 3.0M

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%
30% x 1,000,000

Page 74

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
3.0M x 30%
40,000
Deferred tax liability
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
(900,000 – 500,000)

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

Page 75
5-‐13
(a) Income tax expense – current 600,000

(b) Income tax expense – current 700,000

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% P600,000

2019 – 1.0M x 35% 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%) P700,000

Deferred tax liability (500,000 x 30%) + (1.0M x 35%) (500,000)
Net deferred tax asset (all noncurrent) 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%) P140,000
Depreciation expense per books 600,000
Depreciation expense per tax return P740,000
Page 76
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
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
Page 77
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
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
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
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)
Current tax expense P1,440,000

Page 78
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
Page 79

Cash 301,500
Payment of compensated absences

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)
Other
Profit or Comprehensive Benefit
Loss Income 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

Page 80
(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.
Other
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 50,000 50,000
obligation
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

(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

Page 81
6-‐7.
Other
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 (40,000) (40,000)*
Obligation
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
Asset/Liability – OCI 30,000
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

Page 82
(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)
Other
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
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

Page 83

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
Fair value of plan assets before actual return P2,960,000
Fair value of plan assets, December 31 3,200,000
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
Fair value of plan assets, December 31 P5,100,000
Page 84
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
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
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

Benefits paid (390,000
Fair value of plan assets before actual return P5,070,000
Fair value of plan assets, ending 5,565,000
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
Page 85
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%

Page 86

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Chapter

1 – Current Liabilities, Provisions and Contingencies

Chapter 1 -­‐ Current Liabilities, Provisions and Contingencies

1-­‐9. Current Noncurrent

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

b. Total Bonus = .36 {3,000,000 – B – T)

MC36 B Estimated coupons to be redeemed (500,000 x 80%) 400,000

MC49 A Current liabilities consist of:

Chapter 2 – Noncurrent Liabilities

(b) 2015 2016

(d) Cash (1,000 x 30 x 40) 1,200,000

(d) Interest expense 386,105

(b) January 1-­‐June 1, 2016 (269,304 x 5/6) 224,420

Present value of future payments

MULTIPLE CHOICE QUESTIONS

MC31 D Carrying amount of bonds converted (1.0M – 30,000) P 970,000

MC42 D Carrying value, December 31, 2015

Chapter 3 – Shareholders’ Equity

(b) Total shareholders’ equity, December 31, 2014 P2,200,000

2014 Preference Ordinary

Dec. 31 Impairment loss 20,000

Nov. 10 Share dividends distributable 400,000

2018 Share appreciation rights payable 394,000

Dec. 31 Share options outstanding 23,400

MC39 D Interest expense for 2015 (100,000 x 10% x 9/12) P7,500

MC50 C Total shareholders’ equity, December 31, 2014 P5,520,000

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

Periodic Reduction in Balance of

Dec. 31 Depreciation expense 43,100

Apr. 1 Cash 80,000

Dec. 31 Unearned interest revenue 67,397

Carrying value of leased asset 3,200,000

Oct. 1 Finance lease obligation 850,365

(c ) Carrying value of equipment

1 Rent expense 80,000

31 Unearned profit on sale leaseback 5,000

MULTIPLE CHOICE QUESTIONS

MC1 C MC9 C MC17 A

MC27 C Rental for first year (six months free) P 40,000

MC30 C Total rental payments for three years P3,600,000

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

MC34 A Depreciation expense (2,305,000/6 years) P 384,167

MC35 B Lease liability, December 31, 2015, after 1st payment

MC38 D Present value of annual rentals (1,742,174 x 3.48685) P6,074,699

MC39 C Depreciation is based on the lease term

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

MC42 D Cost of leased asset P6,245,450

MC43 A Gross lease receivable (100,000 x 6) P600,000

MC45 C Selling price P3,520,000

MC47 B Gross profit on sale (400,000 – 300,000) P100,000

MC49 A Gross investment in the lease 75,000* x 5 P375,000

MC50 D Present value of lease payments (30,000 x 3.1699) 95,097

MC51 C Depreciation is based on the lease term

MC52 D Minimum lease payments for the remaining two years

MC55 B Deferred gain, January 1, 2015 (550,000 – 450,000) P100,000

MC56 A Deferred gain (4.8M – 3.6M) P1,200,000

MC58 B Unearned gain, January 1, 2015 (150,000 – 100,000) P50,000

Chapter 5 – Income Taxes

(c) Income tax payable (7,050,000 x 30%) P2,115,000

(e) Income tax expense:

Carrying amount of accounts receivable < Tax Base P 200,000

Chapter 1 -‐ Current Liabilities, Provisions and Contingencies

1-‐9. Current Noncurrent

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

(b) January 1-‐June 1, 2016 (269,304 x 5/6) 224,420

MC23 B 2016 -‐ 2018 (1.0M + 500,000 + 500,000) x 30% P600,000

MC30 C Deferred tax liability (9.0M x 30%) – all non-‐current P2,700,000

MC32 C Excess of tax depreciation over book depreciation(250,000-‐100,000) P150,000