PROBLEM NO.

1 - Heats Corporation
Requirement no. 1
Notes payable:
Arising from purchase of goods 304,000
Arising from bank loans, on which marketable securities valued
at P600,000 have pledged as security, due Dec. 31, 2005 500,000
Arising from advances by officers, due June 30, 2005 50,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods (P170,000 + P30,000) 200,000
Customers' account with credit balance 40,000
Cash dividends payable 80,000
Current portion of serial bonds (P50,000 x 2) 100,000
Overdraft with Allied Bank 90,000
Est. damages to be paid as a result of unsatisfactory performance on a contract 160,000
Est. expenses on meeting guarantee for service requirements on mechandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Provision - deficiency income tax assessment 200,000
TOTAL CURRENT LIABILITIES 2,500,000 A

Convertible bonds, due January 31, 2007 1,000,000

Noncurrent portion of serial bonds (P2,000,000 - P100,000) 1,900,000
TOTAL NONCURRENT LIABILITIES 2,900,000 B

TOTAL LIABILITIES (Requirement no. 2) 5,400,000 C

PROBLEM NO. 3 - Pistons Company

Item no. 2 Insurance expense (P24,000/12 x 1/2) 1,000

Prepaid insurance 1,000

Item no. 6 Prepaid dues and subscription 5,000

Dues and subscription exp 5,000

Item no. 8 Vouchers payable 111,500

Inventory 111,500

Item no.10 Legal and professional expense 46,000

Vouchers payable 46,000

Item no.11 Medical expense 25,000

Vouchers payable 25,000

Item no.12 Inventory 55,000

Vouchers payable 55,000

Item no.19 Machinery and equipment 254,000

Vouchers payable 254,000
PROBLEM NO. 2 - Sonic Corporation
1 Accounts payable per general ledger 5,440,000
Debit balances in suppliers' accounts 240,000
Goods in transit on 12/31/05, FOB shipping point 192,000
Unrecorded purchase return (160,000)
Adjusted accounts payable 5,712,000
Accrued janitorial expenses (P144,000 x 2/3) 96,000
Accrued utilities (P67,200 x 15/30) 33,600
Total 5,841,600 D

2 Accrued salaries and wages 776,000

Income taxes withheld 56,000
SSS contributions payable 64,000
Philhealth contributions 16,000
Total 912,000 D

3 Since the outcome is only possible, the matter will only be disclosed. - A

4 B = 10% (P9,600,000 - B - T)
T = 30% (P9,600,000 - B)
T = P2,880,000 - .3B

B = 10% [P9,600,000 - B - (P2,880,000 - .3B)]

B = 10% (P9,600,000 - B - P2,880,000 + .3B)
B = 10% (P6,720,000 - .7B)
B = P672,000 - .07B
1.07B = P672,000
B = P628,000 (rounded off) D

5 Principal amount due, 10/1/06 800,000

Accrued interest payable (P1,600,000 x 18% x 3/12) 72,000
Total 872,000 D

6 Estimated liability on purchase commitment [320,000 x (P5 - P4.40)] 192,000 D

7 Deferred tax assets and liabilities should not be presented as current - D

8 Warranty payable, 12/31/04 416,000

Add warranty expense accrued during 2005 1,504,000
Total 1,920,000
Less payments during 2005 1,408,000
Warranty payable, 12/31/05 512,000 D

9 Estimated coupons to be redeemed (160,000 x 60%) 96,000

Less coupons redeemed 64,000
Coupons outstanding 32,000
Divide by exchange rate 5
Premiums to be issued 6,400
Multiply by net premium cost (P100+P20-P30) 90
Estimated liability for coupons, 12/31/05 576,000 D

10 Advances against accounts receivable assigned are generally classified as

borrowing and treated as current liabilities. 1,280,000 D
PROBLEM NO. 4 - Rockets Company

Requirement no. 1

1) Discount on bonds payable (P10,000,000 - P9,500,000) 500,000

Bonds payable 500,000
To correct the original entry on issuance of 10,000 bonds

Retained earnings (P500,000 x 14/102) 68,627

Interest expense (P500,000 x 12/102) 58,824
Discount on bonds payable 127,451
To record discount amortization for the prior and current years

2) Bonds payable (P2,100,000 - P2,000,000) 100,000

Premium on bonds payable 100,000
To recognize premium on bonds payable

Premium on bonds payable (P100,000 x 6/82) 7,317

Interest expense 7,317
To record premium amortization for the year

3) Retained earnings (P10,000,000 x 12% x 2/12) 200,000

Interest expense 200,000
To correct interest exp pertaining to year 2004

4) Interest expense (P12,000,000 x 12% x 2/12) 240,000

Accrued interest payable 240,000
To record accrual of interest

Requirement no. 2

a) Bonds payable (P10,000,000 + P2,000,000) 12,000,000

b) Bond discount (P500,000 x 76/102) 372,549

c) Bond premium (P100,000 x 76/82) 92,683

d) Accrued interest (P12,000,000 x 12% x 2/12) 240,000

e) Interest expense
P10,000,000 x 12% 1,200,000
P2,000,000 x 12% x 6/12 120,000
Bond discount amortization (P500,000 x 12/102) 58,824
Bond premium amortization (P100,000 x 6/82) (7,317)
1,371,506
PROBLEM NO. 5 - Wizards Company
Computation of amortization rate
Period covered Amount Percent
Bond year From To Outstanding to total

1st 10.02.03 09.30.04 5,000,000 25%

2nd 10.01.04 09.30.05 5,000,000 25%
3rd 10.01.05 09.30.06 4,000,000 20%
4th 10.01.06 09.30.07 3,000,000 15%
5th 10.01.07 09.30.08 2,000,000 10%
6th 10.01.08 09.30.09 1,000,000 5%
20,000,000 100%

Computation of amortization amount

2003 October to December (P100,000 x 25% x 3/12) 6,250
2004 January to September (P100,000 x 25% X 9/12) 18,750
October to December (P100,000 x 25% x 3/12) 6,250 25,000
2005 January to September (P100,000 x 25% X 9/12) 18,750
October to December (P100,000 x 20% x 3/12) 5,000 23,750
2006 January to September (P100,000 x 20% X 9/12) 15,000
October to December (P100,000 x 15% x 3/12) 3,750 18,750
2007 January to September (P100,000 x 15% X 9/12) 11,250
October to December (P100,000 x 10% x 3/12) 2,500 13,750
2008 January to September (P100,000 x 10% X 9/12) 7,500
October to December (P100,000 x 5% x 3/12) 1,250 8,750
2009 January to September (P100,000 x 5% X 9/12) 3,750
100,000
Requirement no. 1
a) Bonds payable (P5,000,000 - P1,000,000) 4,000,000
b) Bond discount
Original amount 100,000
Amortization : Prior years (2003 and 2004) 31,250
Current year (2005) 23,750 55,000
45,000
c) Accrued interest (P4,000,000 x 5% x 3/12) 50,000
e) Interest expense
P4,000,000 x 5% 200,000
P1,000,000 x 5% x 9/12 37,500
Bond discount amortization (see letter b above) 23,750
261,250

Requirement no. 2
1) Discount on bonds payable 100,000
Bond payable 100,000

2) Retained earnings 31,250

Bond interest expense 23,750
Discount on bonds payable 55,000

3) Accrued interest payable 62,500

Bond interest expense 62,500

4) Bond interest expense 50,000

Accrued interest payable 50,000
PROBLEM NO. 6 - Suns, Inc.

Question No. 1 - B
Total proceeds 2,000,000
Less liability component:
Present value of the principal (P2,000,000 x 0.6830) 1,366,000
Present value of the interest [(P2,000,000 x 8% x 3.1699) 507,184 1,873,184
Equity component 126,816

Int. exp. Int. paid Amort. CV

Jan. 1, 2004 1,873,184
Dec. 31. 2004 187,318 160,000 27,318 1,900,502
Dec. 31. 2005 190,050 160,000 30,050 1,930,553
Dec. 31. 2006 193,055 160,000 33,055 1,963,608
Dec. 31. 2007 196,361 160,000 36,361 1,999,969
126,785

Int. exp. Int. paid Amort. CV

Jan. 1, 2004 1,873,184
Dec. 31. 2004 187,318 160,000 27,318 1,900,502
Dec. 31. 2005 190,050 160,000 30,050 1,930,553
965,276
482,638
Dec. 31. 2006 48,264 40,000 8,264 490,902
Dec. 31. 2007 49,090 40,000 9,090 499,992
74,723
Question no. 2 - D
Carrying value, 1/1/04 (see no. 1) 1,873,184
Add discount amortization for 2004:
Effective interest (P1,873,184 x 10%) 187,318
Nominal interest (P2,000,000 x 8%) 160,000 27,318
Carrying value, 12/31/04 1,900,502

Question no. 3 - D
Effective interest (P1,900,502 x 10%) 190,050

Question no. 4 - A
Bonds Payable 1,000,000
Discount on bonds payable (P1,000,000 - P965,276) 34,724
Common stock 600,000
APIC 365,276

Carrying value of bonds converted (P1,930,553* x 1/2) 965,276

Par value of common stock received (P1,000,000/P1,000 x 10 x P100) 600,000
Amount to be credited to APIC 365,276

Carrying value, 12/31/04 (see no. 2) 1,900,502

Add discount amortization for 2005:
Effective interest (P1,900,502 x 10%) 190,050
Nominal interest (P2,000,000 x 8%) 160,000 30,050
Carrying value, 12/31/05 1,930,553 *

Question no. 5 - C
Reacquisiton price (P500,000 x 110%) 550,000
Carrying value of bonds reacquired (P1,930,553 x 1/4) 482,638
Loss on bond reacquisition 67,362
PROBLEM NO. 7 - Ginebra Corporation
Question No. 1 - B
Liability under capital lease
Balance, 1/1/05 430,000
Less principal payment on 12/31/05:
Total payment 100,000
Applicable to interest (P430,000 x 14%) 60,200 39,800
Balance, 12/31/05 390,200

Question No. 2 - D
15% Note payable, bank
Balance, 12/31/05 (P5,600,000 - P1,400,000) 4,200,000
Less installment due on April 1, 2006 1,400,000 2,800,000
Liability under capital lease
Balance, 1/1/05 430,000
Less principal payment on 12/31/05:
Total payment 100,000
Applicable to interest (P430,000 x 14%) 60,200 39,800
Balance, 12/31/05 390,200
Less principal payment due on 12/31/06:
Total payment 100,000
Applicable to interest (P390,200 x 14%) 54,628 45,372 344,828
10% bonds payable due 7/1/2014
Carrying value, 7/1/05 1,774,000
Add discount amortization:
Effective interest (1,774,000 x 12% x 6/12) 106,440
Nominal interest (2,000,000 x 10% x 6/12) 100,000 6,440 1,780,440
Deferred income tax liability
Balance, 1/1/05 700,000
Provision for deferred income tax (P312,500 x 32%) 100,000 800,000
Total noncurrent liabilities, 12/31/05 5,725,268

Question No. 3 - A
Note payable, bank - due 4/1/06 1,400,000
Capital lease liability - principal payment due on 12/31/06 (see no. 1) 45,372
Current portion of long-term liabilities, 12/31/05 1,445,372
Question No. 4 - D
Note payable, bank (P4,200,000 x 12% x 9/12) 378,000
Bonds payable (P2,000,000 x 10% x 6/12) 100,000
Accrued interest payable, 12/31/05 478,000
Question No. 5 - C
Note payable, bank
(P5,600,000 x 12% x 3/12) 168,000
(P4,200,000 x 12% x 9/12) 378,000 546,000
Liability under capital lease (see no. 1) 60,200
Bonds payable
Nominal (P2,000,000 x 10% x 6/12) 100,000
Discount amortization (see no. 2) 6,440 106,440
Total interest expense for 2005 712,640

PROBLEM NO. 8
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